Unitil Corp (UTL) 2013 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Second Quarter 2013 Unitil Corporation Earnings Conference Call. My name is Lisa, and I'll be your coordinator for today.

(Operator Instructions)

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

Good afternoon, and thank you for joining us to discuss Unitil Corporation's second quarter 2013 financial results. With me today are Bob Schoenberger, Chairman, President, and Chief Executive Officer, Mark Collin, Senior Vice President, Chief Financial Officer, and Treasurer, Tom Meissner, Senior Vice President and Chief Operating Officer, and Larry Brock, Chief Accounting Officer and Controller.

We will discuss financial and other information about our second 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 Security Litigation Reform Act of 1995.

These forward-looking statements include statements regarding the Company's financial condition, results of operations, capital expenditures, and other expenses, regulatory environment 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, but involve risks and uncertainties, and the Company's actual results could differ materially. Those risks and uncertainties include those listed to -- listed or referred to on slide one 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 ended December 31, 2012.

Forward-looking statements speak only 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.

Good afternoon, everyone. I'll begin by discussing the highlights of our past quarter. If you turn to slide four of our presentation, this morning, we reported year-to-date earnings of $10.7 million, or a 24% increase over the same period last year. Our earnings continue to reflect the strong growth in our gas customer base, as more and more households and businesses in the areas we serve are choosing natural gas as their preferred source of energy.

Natural gas offers our customers the best choice of value, in terms of its superior efficiency, convenience, and low cost, compared to computing -- competing fuels, such as oil and propane. In addition, our gas and electric sales and margins are up over last year, reflecting the improving economy and more normal weather this year compared to last.

We continue to execute on our core strategies to grow our business, including the rapid expansion of our natural gas distribution system and the ongoing customer service and reliability investments on our electric distribution system. We have several base rate case filings in process; one base rate case in each of our three jurisdictions in the three states in which we operate.

In addition, we are experiencing steady growth in our non-regulated energy brokering subsidiary, Usource. We believe that the combination of our growth strategies offers our shareholders a utility growth investment opportunity, while, at the same time, having confidence in the income generated by our above industry average dividend yield.

We have a unique opportunity to double our gas business in the next few years. If you turn to slide five, which shows the price advantage of natural gas, natural gas prices continue offer a significant price advantage to our customers. We estimate that by switching to natural gas from fuel oil, our customers here in New England can reduce their cost by about half, or $1,500 annually.

In addition to being less expensive, other key attributes of natural gas include greater efficiency and a cleaner energy resource, which provides significant value to our customers, while helping the environment and addressing our long-term energy needs.

Now, please turn to slide six. As we have discussed previously, we are executing on a tremendous opportunity to add and convert customers within our existing gas service areas. Currently, we have 74,000 gas customers, with a combined gas service area penetration rate of only 57%.

We have identified 55,000 potential new customers who are on-the-main, but, at this time, are not currently taking gas service. In addition to the potential new on-the-main customers, there are over 250,000 homes and businesses within our existing service areas that do not have natural gas service.

We are taking advantage of this potential and have a growth plan target to serve a total of 92,000 by 2016, which would increase our gas customer base 25% and result in an overall on-the-main penetration rate of 71%.

On slide seven, we are aggressively adding customers in our gas service areas. Since the acquisition of Northern Utilities in December 2008, we have added and converted nearly 6,500 natural gas customers, which is an increase of about 10% over [a 2008] customer base. In 2012, we added and converted over 2,000 gas customers, which was up 50% from the prior year.

Our target is to double the level of activity in 2013, with 4,000 customer additions and conversions. In this regard, our year-to-date customer additions are about 30% above the same point last year. Moreover, since our construction program doesn't really begin to ramp up until the second half of the year, we are very pleased with this pace, year-to-date, and believe we are currently on track to hit our target this year.

In terms of rate base, we have seen an annual growth rate of 9%, driven by both customer additions and pipe infrastructure replacement programs. Looking forward, we expect growth in our customer additions and utility plant to accelerate over the next few years, resulting in a doubling of our 2008 rate base by 2016.

Turning to slide eight, we are also investing in the growth and the reliability of our electric distribution. Our electric division generates a little under half of our total sales margin and provides a relatively stable source of operating income and cash flow, consistent with the overall profile of our utility business.

We continue to invest in our electric distribution system to meet our customers' growing need for reliable electric energy. Historically, in our electric division, we have seen 9% sales margin growth, primarily driven by our recent rate case results and 3% rate base growth.

On slide nine, we have an update on Usource, our non-regulated energy brokering subsidiary. Usource expanded its operations and sales force in late 2012 to provide new customer growth in key regions of the northeastern United States. We have seen some of the results of this expansion in the first half this year. Usource recorded revenues of $2.9 million for the first half, an increase of 12% over last year.

In addition, Usource has a customer retention rate exceeding 95% this year and an estimated forward book of revenue of $8.2 million at the end of 2012, which represents an estimate of revenues already under contract to be recognized in future periods.

We expect our recent expansion initiative, coupled with our continued focus on our existing core markets, will result in a growing contribution from Usource to our consolidated financial results. Now I will turn the call over to Mark Collin, who will discuss financial results for the quarter. Mark?

Thanks, Bob, and good afternoon. This morning, we reported that our net income increased $0.3 million for the second quarter and $2.1 million for the year-to-date periods compared to prior year. On a per share basis, earnings increased $0.02 for the second quarter and $0.04 for the year-to-date periods compared to the prior year.

As Bob just discussed, for the six-month period, earnings applicable to common shareholders were $10.7 million, or $0.78 per share, up 24% compared to the same six-month period last year.

As a reminder, the 2013 per share results reflect a higher number of average shares outstanding, period over period, from the $70 million common stock offering we completed in May 2012. Our results for the second quarter and year-to-date period were driven primarily by increases in natural gas and electric sales margins and lower borrowing cost, partially offset by higher utility operating cost.

Now, turning to slide ten, natural gas margins were $13.4 million and $43.9 million for the second quarter and the six-month periods, reflecting increases of $0.8 million and $4 million compared to prior year. Natural gas sales margins in 2013 were positively affected by higher therm unit sales, a growing customer base, and higher gas base distribution rates.

Therm sales of natural gas were up over 12% in both the second quarter and the six-month periods compared to prior year, driven by the effect of colder winter weather in 2013, coupled with the strong growth in the number of new residential and C&I customers.

There were 15% more heating degree days in the first six months of 2013 compared to the same period in 2012. Excluding the effect of weather on sales, weather-normalized gas term sales are estimated be up about 5.5% for the first half of this year compared to last year, reflecting a healthy customer growth rate. Despite the colder weather this year, compared to prior year, heating degree were still below normal by about 3%, which we estimate negatively impacted our earnings by about $0.03 per share.

Now, turning to slide 11, we highlight our electric business sales and margin. Electric sales margins were $17.9 million and $36.3 million for the second quarter and the six-month periods, reflecting increases of $0.4 million and $2.7 million compared to prior year.

The increases in electric sales margins reflect higher electric kilowatt-hour sales and year over year increases in electric base distribution rates. Electric sales margin in the six months ended June 30, 2013, also reflect higher recovery of $0.8 million of vegetation management and electric reliability enhancement expenditures, as well as an increase of $0.4 million in the recovery of major storm restoration costs, which are offset by a corresponding increase in operating expenses.

Electric kilowatt-hour sales increased 1.7% and 2.2% for the second quarter and the six-month periods compared to prior year, principally driven by the effect of the colder weather in 2013, compared to last year, and the addition of new residential and C&I customers.

Excluding the effect of weather on sales, weather-normalized kilowatt-hour sales are estimated to be up about 1% in the first half of the year compared to last year. On both slides 10 and 11, the weather normal unit sales increases I have just discussed exclude decoupled sales. Approximately 11% and 27% of gas and electric sales, respectively, are decoupled, and changes in these sales do not affect sales margins.

Now, turning to slide 12, Usource, the Company's non-regulated energy brokering business, recorded revenues of $1.4 million and $2.9 million for the second quarter and the six-month periods, reflecting increases of $0.1 million and $0.3 million compared to prior year. Usource's revenues are primarily driven from fees and charges billed to suppliers as customers take delivery of energy from these suppliers under term contracts brokered by Usource.

Operation and maintenance expenses increased $0.5 million and $2.4 million for the second quarter and the six-month periods compared to prior year. The increase in the second quarter of $0.5 million primarily reflects higher gas system maintenance costs.

The increase in O&M expenses in the six-month period of $2.4 million reflects higher vegetation management and electric reliability enhancement program costs of $0.8 million, higher gas and electric system maintenance costs of $0.8 million, higher professional fees and insurance claims expenses of $1 million, and a decrease in all other O&M expenses, net of $0.2 million.

The increase of $0.8 million in new spending on vegetation management and electric reliability enhancement programs in the first six months of 2013, compared to the same period in 2012, is recovered through cost tracker rate mechanisms that result in a corresponding and offsetting increase in revenue and margin in the period.

Depreciation and amortization expense increased $0.5 million and $1.6 million for the second quarter and the six-month periods compared to prior year. The increase in the second quarter reflects higher depreciation on normal utility plant additions of $0.3 million, higher amortization of major storm restoration costs of $0.1 million, which is offset in revenue, and an increase in all other amortization of $0.1 million.

The increase in the six-month period reflects higher depreciation on normal utility plant additions of $0.9 million, higher amortization of major storm restoration costs of $0.4 million, which is again offset in revenue, and an increase in all other amortization of $0.3 million.

Local property and other taxes increased $0.1 million and $0.2 million for the second quarter and six-month periods, compared to prior year, reflecting higher local property taxes on higher levels of utility plant in service.

Net interest expense in the second quarter was relatively unchanged compared to the prior period. Net interest expense decreased $0.3 million in the first half of this year, compared to the prior period, reflected lower average rates, and lower short-term borrowings.

Now, turning to slide 13, we have provided an update on our financial results at the utility operating company level. The chart shows the last authorized return on equity compared to the actual earned return on equity for each of our utility operating subsidiaries. The chart also reflects recent equity contributions to all our utility subsidiaries, with the proceeds from the common equity offering completed in May 2012.

As we've indicated in the past, we have long-term capital cost trackers in place to recover a significant portion of current and future capital spending. In May of this year, Unitil Energy, our New Hampshire subsidiary, began recovering an increase in annual revenue of approximately $2.8 million, including recovery for about 80% of its 2012 change in net plant and increased vegetation management spending and an increase in its major storm reserve.

Similarly, Granite State, our FERC regulated gas pipeline has an annual rate adjustment in that mechanism, which we expect to result in an increase in revenues of approximately $0.4 million, effective August 1 of this year to recover capital spending on several pipeline upgrade and replacement projects. Both Unitil Energy and Granite State's long-term rate plans extend through 2014.

Now, let me spend a minute discussing our regulatory strategy and bridging the gap between our actual and earned returns on an -- our increasing investment in our gas and electric utilities. Turning to slide 14, over the past few years, we've demonstrated a strong track record of success in achieving base rate relief across all our jurisdictions, with increase to our natural gas [and electric] margins of over 30%.

As part of our ongoing regulatory strategy, we continue to seek recovery of our investments in our utility operations on a timely basis and to provide for a reasonable opportunity to earn our authorized rate of return.

Turning to slide 15, we filed base rate cases in both jurisdictions of Northern Utilities, our natural gas utility in Maine and New Hampshire, for a total request of $9.8 million. Both filings included a requested return on equity of 10% and a 52% equity ratio. Under the regulatory construct in each state, we expect new rates to be effective in Maine by the start of 2014, while the initial temporary rates in New Hampshire already became effective July 1 of this year.

The temporary rate level awarded New Hampshire is $2.5 million on an annual basis, which is the same amount we requested. We expect the final gas rates in New Hampshire to be effective by the second quarter of 2014, which will be trued up to the temporary rates at that time.

Both the Maine and New Hampshire filings include proposals for a comprehensive multiyear rate plan, with a capital tracker mechanism that would allow us to recover additions to our growing rate base in future years without the need and cost of filing a full rate case, much like we have for our other utilities. We have also proposed some rate design changes to increase the portion of our revenues recovered on a fixed charge basis and, thereby, smooth out customer bills throughout the year, reduce the effect that weather has on our gas distribution revenue, and more accurately recover our actual cost to serve.

In Massachusetts, we recently filed a distribution base rate case for Fitchburg's electric division. Recent legislation in Massachusetts has changed from a six-month process to a ten-month process, which will result in new rates effective in the second quarter of 2014.

The total amount of base revenue requested is $6.7 million, which includes $2.1 million for recovery of deferred storm costs and $0.5 million for an enhanced vegetation management program. The filing requests a return on equity of 10.25% and reflects a 48% equity ratio. The filing also includes a proposal for a multiyear rate plan to provide for the recovery of additions to rate base after the rate case.

Separately, consistent with department precedent for other utilities, the filing also proposes to establish a major storm reserve fund of $2.8 million to address the cost of future major storms through a reconciling storm recovery adjustment factor. This request is in addition to the $6.7 million base rate request.

The proposed funding of the major storm reserve would not commence until January 1, 2015, in order to coincide with expected significant reductions in Fitchburg's transition charge, a stranded cost recovery holder -- holdover from industry restructuring. The expected reduction in the transition charge by the end of 2014 is almost $13 million annually and will offset the impact on customer bills of the rate case.

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 for the audience.

(Operator Instructions). Liam Burke, Janney Capital Markets.

Yes, thank you. Good morning, Bob.

(inaudible -- multiple speakers)

Doing fine; thank you. Mark, you touched on the rate cases in the electrical utility businesses. Are there any potential increases in rate cases in anticipation of hardening the network for storm prevention rather than anticipation of damage done on a storm -- by a storm?

Yes, in both -- in Unitil Energy, where we have the capital cost tracker, we actually have a component of that tracker -- a mechanism that allows us to recover incremental spanning -- spending on both reliability investments, from a capital perspective, as well as increases in reliability that is O&M related. And, in addition to that, we also have been successful at getting recovery of expanded vegetation management through that tracker.

So, on that, for our electric business in New Hampshire, we've got very good recovery of additional spending. Both of those, the reliability spending and the vegetation, are intended to be preventive measures for damages of storms and improve the system for resiliency from storms.

In Fitchburg, as I just indicated, we just recently filed our case there, and a component of that case is also -- has additional spending on vegetation management as well as a proposal to allow us to recover additional capital spending, much of which will be related and focused on reliability improvements and system hardening improvements.

In particular, in Massachusetts, they just completed a process looking at grid modernization, and there's been a report issued on that, and there's still more to be done in that area. We expect the department to continue to work in that area and come out with some policy changes relative to grid modernization, but we have made proposals relative to future implementation of grid modernization investments and recovery of that, as well, in our Fitchburg case.

Okay. Just to summarize, though, Mark, [is this -- this] seems to be a trend that's continuing to move upward in terms of upgrading the network in -- or, hardening, if you would, more now than in the past.

Yes, I think there's an increased focus of finding ways to, the term you used, harden the network for storm resiliency. I think one of the key findings that we've had in one of our focuses is that a significant area of focus should be the vegetation management and the increased spending on vegetation management, because that area probably has the most bang for a buck, in terms of increasing or hardening the system from your typical storms or even more major storms.

Liam, I hope we don't jinx ourselves by saying this, but through midyear, we are experiencing the best electric reliability in the Company's history, and I think it's probably largely because of the investments we've made, particularly in vegetation management.

Okay, great. Usource -- it looks like business is building nicely. There's tremendous upside leverage to any type of increase in revenue. Without getting ahead of yourselves, do you see that as a continued ramp, or how should we think -- I mean, we saw a little bit of growth year over year this year. Are you looking at that trend to continue more consistently?

Yes, I do. Clearly, what we're beginning to see this year is the impact of the expansion of our sales force that is bringing in additional business, so, our overall objective of growing the business 10% to 15% a year, I think, is well in place, and I'll think you'll see, by the end of the year, we'll be at the upper range of that forecast, as well as the forward book, which, to me, is really where it really shows you you're building that future annuity.

I think, as you've seen already, we -- our forward book at the end of June was $10.3 million, which is up over 25% to the end of last year, and we expect that trend to continue. So we'll see a significant increase in the forward book, year over year.

Great. Thank you very much.

(Operator Instructions). Shelby Tucker, RBC Capital Markets.

Thank you. Good afternoon. Just picking on Liam's question, the last one. Bob, you said that the -- before book, for the second quarter, was $10.3 million for Usource?

Right. Correct.

Okay. And that's up from $9.4 million in the first quarter.

Correct, and up from $8.2 million in the --

In the year-end.

Right.

Okay. And then, the -- in terms of profitability for Usource -- just looking at the [backlog of] the 10Q, it still shows that from a profitability point of view, it's not gaining as much traction as your revenue. Is it still a factor of the paying up on the commissions relative to the business you're bringing in?

No. The cost of goods sold, which are primarily those commissions you referred to -- I don't think that's the issue. I think the issue is, as you can tell from the forward book, as we forecasted, that you'll begin to see there are really three reasons why we think the business will grow, and grow substantially, over the next three to five years.

One is that the average contract term that we're signing is -- has gone from two to three years, as well as the fact that new business that we bring on, let's say, over the next -- over the last couple years, now becomes renewal business. And renewal business we obviously have a very robust retention rate, and so, you'll see that annuity grow over time as those renewal customers get renewed.

And they normally get renewed, the vast majority of them, at the end of the year, so their impact isn't seen until the -- January 1 of the calendar year. So, you'll begin to start seeing that impact next year -- the next couple of years.

And then, finally, the last thing is new business, and we are -- we're doing very well at bringing in new business. So -- and we don't see anything in the marketplace that tells us that we don't have a real opportunity to continue to grow the business.

Great. Thank you. And then, I guess, looking a little bit ahead, first -- third quarter, so far -- July has had phenomenally good weather, from electric point of view. Would you mind giving us a little bit of a taste for what you've seen so far in the quarter?

As you said, it depends on how you like your weather. We've definitely had two heat spells come through and at temperatures that were in the high 90s for extended periods of time -- four to five days of high 90 temperatures. The New England region -- I think it's -- the peak -- that was in its top three or four of all-time peak for the New England region, and pretty much, we shared in that across our system as well. So, yes, July's been -- in particular, has been a very hot month and somewhat uncomfortable month for some, and we expect that to be reflected in our next quarter results. Yes.

Okay. And then, Mark, the decoupling does not affect weather patterns. It's purely on demand and economic activity.

Yes. In the decoupled are the -- our Massachusetts is decoupled. It isn't as impacted by weather. On the electric side, it's not at all. It's fully decoupled. On the gas side, we do retain incremental revenue associated with new customers and special contracts, so, in the wintertime, there is some upside for colder weather on the gas side of the business, even though we're decoupled. But, as the general rule, we're -- in Massachusetts, those sales are not subject to weather.

Okay. So, it's, I guess, only UES would -- we would see upside from the weather pattern we saw in July.

Yes. And, as we've described, about 27% of our sales are -- on the electric side are decoupled, so --

Right.

The bulk -- about three-quarters are still subject to weather.

Okay. And, I guess, last question [as pressure], that's last quarter. On the slide -- I think it was six that shows the number of customers on-the-main and the potential growth. You -- in essence, if you add up the numbers, you're assuming flat total number of customers on-the-main, from '12 to '16. I guess, first, is that a fair assumption? And second, if not, what is generally the new build rate at which natural gas is -- well, the rate at which natural gas is installed in new homes?

Yes, I'm trying to get my head around your -- is the first part of your analytical. So --

So, the first part of the question is if you look at the two pie charts on slide six, they both add up to 129,000 customers on-the-main. That would imply that there are no -- there's no growth of customers on-the-main, period. I mean, total number of people on-the-main. So, I guess, number one, is it more of a illustrative point you were making here about the mix of customers, or do you actually project no growth in the total number of people on-the-main?

It's the first. It's -- we're -- it's just -- we're just trying to reflect the mix of customers on a static analysis, where we haven't attempted in this to project population growth, household growth --

Okay.

Or business growth on-the-main. Or, for that matter, as we expand out our main, there'll be more and more customers who once were not on-the-main, but will come on to-the-main.

Okay. And, I guess -- okay.

That number to grow as well. Yes.

Okay. And then, I guess, on the new builds, so, therefore, the new customers on-the-main, at what rate is natural gas installed in the homes? Do you know -- get a sense?

Well, the -- again, the projections that we're looking at are to double this year what we did last year and to get to adding approximately 5,000 customers a year, which, I guess, in percentage terms, is customer growth of about 5% a year.

Okay, great. Okay, that's it. Thanks very much, guys.

There are no additional questions. At this time, I would now like to turn the presentation back over to Mr. David Chong for closing remarks.

Thank you very much for joining us for this quarter. We look forward to updating you next quarter. Thank you.

Ladies and gentlemen, this concludes today's presentation. You may now disconnect. Thank you, and have a great day.