Unitil Corp (UTL) 2012 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the third quarter 2012 Unitil earnings conference call. My name is Tawanda and I will be your coordinator for today. At this time all participants are in listen-only mode. Later we will conduct a question-and-answer session.

(Operator Instructions)

As a reminder, this conference is being recorded for replay purposes. I would now like to turn the conference over to Mr. David Chong, Director of Finance. Please proceed, sir.

Good afternoon, and thank you for joining us to discuss Unitil Corporation's third quarter 2012 financial results. With me today are Bob Schoenberger, Chairman, President, and Chief Executive Officer; Tom Meissner, Senior Vice President and Chief Operating Officer; Mark Collin, Senior Vice President, Chief Financial Officer and Treasurer; and Larry Brock, Chief Accounting Officer and Controller. We will discuss financial and other information about our third quarter on this call. As we mentioned in the press release announcing the call, we have posted that information, including a presentation, to the Investor section of our website at www.unitil.com. We will refer to that information during this call.

Before we start please note that comments made on this conference call may contain statements that are commonly referred to as forward-looking statements which are made pursuant to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. These forward-looking statements include statements regarding the company's financial position, results of operations, capital expenditures and other expenses, regulatory environment and strategy, market opportunities, and other plans and objectives. In some cases forward-looking statements can be identified by terminology such as may, will, should, estimate, expect or believe; the negative of such terms or other comparable terminology. These forward-looking statements are neither promises nor guarantees, they involve risks and uncertainties and the company's actual results could differ materially. Those risks and uncertainties include those listed or referred to on slide 1 of the presentation, and those detailed in the company's filings with the Securities and Exchange Commission, including the Company's Form 10-K for the year ended December 31, 2011. Forward-looking statements speak only as of the date they are made. The company undertakes no obligation to update any forward-looking statements.

With that said I'll now turn the call over to Bob.

Thanks, David. I would also like to thank everybody for joining us today. I'll begin by discussing the highlights of our past quarter.

On slide 4 of our presentation, today we announce net income of $500,000 or $0.03 per share for the quarter, which is an improvement of $2.1 million, or $0.18 per share, compared to prior year. The nine-months ended September 30, 2012, we reported net income of $9.1 million, or $0.74 per share, compared to prior year net income of $6.3 million, or $0.58 per share. While gas and electric costs have been declining for our customers because of lower supply rates, the strong year-over-year growth in 2012 continues to reflect a higher natural gas and electric sales margins due to higher distribution rates from our recently completed rate cases, as well as significant new customer growth. Mark will provide some additional details on our financial results in just a few minutes.

On slide 5 we are experiencing an unparalleled demand for natural gas service within our gas service areas. Changing natural gas fundamentals have created significant opportunities for growth within our industry. The emergence of shale gas plays across the United States has created an abundant domestic supply of natural gas. This abundant supply has caused natural gas prices to be near historic lows. Here in New England, the delivered price of natural gas is currently about one-third of the cost of home heating oil, resulting in savings to typical residential customers of up to $2,000 per year, and significantly reducing the cost of energy for businesses and industry. What this means is for every 1,000 customers that we convert to natural gas, we are reducing the out of pocket cost of energy to heat our homes and run our businesses, and freeing up $2 million for other spending needs. In this difficult economy I don't need to tell you how important these real savings on energy is to our customers on the local economy. Natural gas also has significant environmental benefits and can reduce CO2, and other greenhouse gases emissions, by over 40%, compared to other sources of energy.

On slide 6, as you can see, these underlying natural gas fundamentals have caused significant growth in our gas business in terms of customer additions. Since acquiring Northern Utilities in December of 2008, we have added and converted nearly 6,000 customers, which is about 10% of our 2008 gas customer base. We expect to add over 2,000 gas customers this year, which is up over 75% from last year. In addition, we are putting in place a growth plan for 2013 to double our customer addition and conversion activity over this year to a target level of 4,000 customers. These customer additions as well as an improving economy have translated to increased weather-normalized gas sales, which are up 5% in the current quarter compare to last year. We expect customer addition activity to continue to significantly increase our gas sales in the future.

Slide 7 shows the impact of these customer additions on our financial results. Our gas rate-base has steadily grown at an annual rate of 6%, driven by customer additions and our cast iron and bare steel replacement programs across all of our gas service areas. This rate-based growth, combined with recent rate cases at all three of our natural gas utility subsidiaries, has led to natural gas margin growth of 13% annually. In our year-end conference call next quarter we will go into further detail on our gas growth strategy, in which we expect to more than double our gas rate-base in the next four years.

On slide 8 the electric side of our business continues to do well. Our rate-base has grown at an annual rate of 3%, driven by customer additions and capital improvements. We recover a large portion of this growth in rate-base annually. As part of our rate plan in New Hampshire, for example, we have a cost-tracker mechanism which recovers approximately 80% of the change in net plan annually. Our sales margin has grown 9% annually, which reflects the growth in customer base, as well as recent rate cases across both of our utility subsidiaries. Our weather-normalized electric sales are up 1% year-to-date, which is reflective of some signs of an improving economy, as well as customer additions.

Looking forward to next year, we also anticipate filing rate cases next year for Northern Utilities, our gas utility operating in New Hampshire and Maine. These rate cases will reflect recent changes in the utilities capital structure, including a $40 million equity contribution we made with our recent equity offering completed last May. We are also evaluating the need to file rate cases for our other utilities, particularly where we don't already have cost-trackers in place to adjust rates for a growing level of rate-base. In our year-end conference call next quarter we will go into further details on our planned rate case filings.

On slide 9 we look at our non-regulated energy broker subsidiary Usource. Usource continues to execute on its strategic growth plan. Usource reported revenues of $1.5 million and $4.1 million for the three and nine-month periods ending September 30, 2012, on the par with the same periods in 2011. Usource currently manages almost $700 million annually in energy contracts for over 1,200 customers. Usource recently added three strategic hires to focus on sale opportunities in western New York, which is potentially a large and profitable market for us. With natural gas prices remaining favorable and electricity prices lower and more stable, we expect continued strong demand for Usource's services.

Now I'll turn the call over to Mark, who will discuss our financial results for the quarter.

Thanks, Bob. Good afternoon, everyone. Let me begin by discussing our financial results on slide 10. Earnings increased by $2.1 million for the quarter, and by $2.8 million for the nine-months ended September 30, 2012. Results were positively affected by higher natural gas and electric sales margins, due to higher distribution rates and new customer growth, and reflect the effect of sales -- on sales of fluctuations in seasonal weather conditions year-over-year. We estimate that the mild weather in the winter and early spring negatively impacted earnings by about $2 million, or $0.17 per share, in the nine-month period.

For the quarter, natural gas sales margins were up $3 million, reflecting higher distribution rates from recently completed rate cases, new customer growth, and a corresponding increase in gas therm sales of 3%. For the nine-month period, natural gas sale margins were up $8.3 million, again reflecting higher distribution rates from rate cases and new customer growth, but negatively impacted by lower gas therm sales of 8%, primarily due to mild winter weather earlier in the year, in which there were 20% fewer heating degree days compared to prior year. On a weather-normalized basis in the three and nine-month periods we estimate the sales grew 5% and 2% respectively compared to the prior year. The strong growth in our weather-normalized sales, in particular in the third quarter, is reflective of the significant number of the customer additions we are making across our gas territories.

For the quarter, electric sales margins were up $1.3 million, reflecting higher electric distribution rates and an increase in kilowatt hour sales primarily driven by new customer growth and an increase in usage during this summer. For the nine-month period electric sales margins were up $2.9 million, again reflecting higher electric distribution rates and new customer growth, but, like gas, were negatively impacted by lower electric kilowatt hour sales due to the mild winter weather earlier in the year. Weather-normalized electric kilowatt hour sales in the three and nine-month periods were estimated to be approximately 2% lower and 1% higher respectively, compared to prior year.

Usource, our unregulated division, recorded revenues of $1.5 million and $4.1 million for the three and nine-month periods of 2012, on par with the same periods in 2011, as discussed by Bob earlier. Operation and maintenance expenses increased $0.8 million and $4.4 million in the quarter in the first nine months of this year. The increase in the three-month period reflects higher utility operating costs of $1.1 million, and higher employee compensation and benefit costs of $0.1 million, partially offset by lower professional fees of $0.4 million. The increase in O&M expense in the first nine months of 2012, compared to the same period in 2011, reflects lower O&M expenses recorded in the first quarter of 2011, due to the receipt of a $1 million insurance payment. Other changes in O&M expense in the nine-month period include higher utility operating costs of $2.3 million, our employee compensation benefit costs of $1 million, and higher professional fees of $0.1 million. Importantly utility operating costs in the quarter, and first nine months of 2012, include approximately $1 million and $2.5 million, respectively, of spending on new vegetation management and electric reliability enhancement programs. These costs are recovered through cost-tracker rate mechanisms that result in corresponding increases in revenue.

Depreciation and amortization expense increased $2 million and $3.4 million in the quarter, and the first nine months of the year, principally reflecting normal utility plant additions and amortization of regulatory assets. Local property and other taxes increased $0.3 million and $1.2 million in the quarter, and the first nine months of the year, reflecting higher local property taxes on higher levels of utility plant and service. At interest expense decreased $2.2 million and $2.1 million in the quarter, and the first nine months of the year, reflecting a non-recurring pre-tax charge in the third quarter of 2011 against interest income of $1.8 million, to charge-off previously accrued carrying costs that were disallowed for rate recovery in 2011, and lower short-term borrowings and interest rates in 2012 compared to 2011. As we indicated earlier in the year, in May of 2012 we issued 2.76 million shares of common stock in a registered public offering. We used the net proceeds of approximately $65.7 million from this offering to make equity capital contributions to our regulated utility subsidiaries, repay short-term debt, and for general corporate purposes. Overall, our results of operations reflect a higher number of average shares outstanding year-over-year.

Finally, as we indicated in the past, we have long-term capital trackers to place -- in place to recover significant portions of current and future capital spending. During the course of this year we put a number of these trackers in place. On May 1 of this year we implemented a step-increase of approximately $1.5 million in the annual revenues for Unitil Energy, our New Hampshire electric utility and for the Maine Gas Division of Northern Utilities, we implemented a step-increase of $0.85 million in annual revenues. On June 1 of this year we implemented a step-increase of $0.5 million in annual revenues for our Fitchburg Electric Transmission System. Finally, on August 1, we implemented a step-increase of $0.3 million to begin the recovery of capital investments we are making in Granite State Transmission, our interstate pipeline company. We expect the combination of the rate relief we achieved this past year, future annual cost-tracker rate adjustments, and organic sales growth will provide meaningful earnings support going forward. In addition, as Bob indicated earlier, we are in the planning phase of filing new base-rate cases in 2013.

Now this concludes our summary of our financial performance for the period. I will turn the call over to the operator who will coordinate questions from the audience.

(Operator Instructions)

Michael Gaugler, Brean Capital

Just two quick questions. D&A expenses, I've noticed they've been tracking higher since back to the fourth quarter of last year, and as you look forward does that trend continue or has it peaked near term?

Well, the D&A expenses will tend to trend with the growth in our gross plants. So as we're adding plants we'll continue to see a trending of depreciation following that. However, one of the trends that you're seeing in the current period is that we are included in D&A is amortization of storm recovery costs. As a result of that, they're adding to the typical plant utility plant D&A. We don't anticipate having to continue to add significant amounts related to storm recovery, but that will depend on where mother nature takes us in the future.

Okay, and then you had mentioned in your remarks earlier about gas conversions and trying to really step that up, which we're seeing it in some of the other gas ute names as well. I'm wondering if you're doing anything similar to what UIL is doing, where they're partnering with local banks or third parties to help homeowners finance those costs because they can be substantial depending on the heating system in place.

We don't have any of those programs currently being implemented in the jurisdictions we're in. As you know, with UIL, I think that was a program that they're working with state regulators and state officials to implement. To be frank, Mike, right now we're not finding that we need to add those types of incentives and types of programs in order to attract or to get the type of growth we're seeing. That we're able to -- because of the relatively low penetration we have of natural gas, and the corresponding high penetration of heating oil, and the costs competitive differential we have now, we're really able to attract and get customers in all the classes, residential, customer and industrial, wanting natural gas and, based on its pure economics, able to install that and move that forward.

Okay. What is your penetration rate, by the way?

It varies by service territory, but -- and in our lowest penetration tends to be in our Maine jurisdiction, in the state of Maine, and then a little higher down in Massachusetts, but in the areas where we're seeing the highest growth we're under 40% penetration, so it gives us a lot of upward ability to add new customers.

All right. Thanks, guys.

Liam Burke, Janney Capital Markets

You mentioned in your remarks that you've added electric customers. Is it a function of an improving economy, or where are you seeing that customer growth?

I think it's a combination of things. I think it's -- we're seeing housing starting to recover. I wouldn't say it's a recovery yet, but we're starting to see housing recover, as well as you would normally expect about a 1% increase in sales year-over-year just as normal growth. So I would say it's probably the economy has certainly bottomed-out and is starting to improve.

Okay. And you have the numbers here for 2,000 customer additions for 2012, doubling that rate in 2013. Are there any specific plans you have in place to accelerate those customer additions? Or is anything different, I guess, you plan on doing in 2012 versus 2013?

The thing that really kind of controls how many customer additions you're able to add in any given year is the number of crews you can get to help you lay the pipe and to connect customers. Tom, I don't know what the crew complement we're talking about through next year compared to this year would be, but that would be a good way to --

Yes. This year we currently have about 12 to 13 crews devoted to our growth, and next year we're doubling that to 24 to 25 crews devoted exclusively to growth. Year-over-year the only real change is this year we're able to keep those crews fully deployed and fully scheduled without even essentially marketing. Next year we're planning to more aggressively market and we expect to keep all those crews scheduled for the entire year.

Okay. Thank you very much.

(Operator Instructions)

At this time we have no further questions. This concludes today's conference. Thank you for your participation. You may now disconnect and have a great day.