Unitil Corp (UTL) 2014 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the fourth-quarter 2014 Unitil earnings conference call. My name is Tony and I will be your moderator 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.

Good afternoon and thank you for joining us to discuss Unitil Corporation's fourth-quarter 2014 financial results. With me today are Bob Schoenberger, Chairman, President and Chief Operating 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 fourth quarter on this call.

As we mentioned in the press release announcing the call, we have posted that information, including a presentation, to the Investors 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 condition, 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 but 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, 2014. 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 will now turn the call over to Bob.

Thanks, David. I would also like to thank everyone for joining us today.

I will give a summary of our year-end financial performance. If you turn to Slide 4 of our presentation, today we announced 2014 net income of $24.7 million, or $1.79 per share, an increase of $3.1 million, or $0.22 per share, compared to 2013. This 14% increase in earnings in 2014 over prior-year was driven by higher natural gas and electric sales margins partially offset by higher net operating expenses.

Turning to Slide 5, the graph shows that our financial results have increased sharply over the past few years. The continued growth of our natural gas business along with recently completed gas and electric rate cases helped the Company to achieve strong financial results in 2014. As we look forward to 2015, the continued expansion of our natural gas utility business and investments in the Company's gas and electric distribution infrastructure will provide a strong foundation for sustained future growth.

On Slide 6, we are benefiting from improved economic activity underlying our service areas. Currently, average unemployment is just above 5% in the three states served by Unitil and signs of an improving economy are everywhere. We estimate that there is approximately $0.5 billion of new commercial construction underway in two of the largest cities we serve, Portland, Maine and Portsmouth, New Hampshire. We are benefiting from this economic growth and our focus on converting more and more of our customers to natural gas.

Since 2010, our weather-normalized gas unit sales have grown annually at 4.7% and in 2014, our gas customer count grew 2.6%.

Slide 7 highlights our historic annual return on equity. Strong customer growth paired with successful base rate cases continues to drive the Company's return on equity. In 2014, we earned a 9.2% return on equity, which is in line with the ROEs allowed by our regulators. As Mark will discuss later, we have long-term capital cost trackers in place to recover a significant portion of current and future capital spending, which we expect will help to maintain the level of earnings across our subsidiaries.

Finally, on Slide 8, as you may have already seen, we recently announced an increase to our quarterly dividend from $0.345 to $0.35 a share. This equates to an annual increase in the dividend of $0.02 per share. We recognize the importance of the dividend to our shareholders. This increase reflects the confidence we have in our business. Going forward, we will continue to assess our dividend level to provide this continuing source of value to our shareholders.

Now I will turn the call over to Tom Meissner, our Chief Operating Officer, to discuss details of our capital budget for 2015 and other operational highlights.

Thanks, Bob. And good afternoon.

As Bob mentioned, we have seen significant growth in our gas distribution business, both in terms of the number of customers served and sales growth as well as the increased level of investment we are making to modernize and expand the reach of our system.

Over the next few slides, I will go through our 2015 capital budget, highlighting our growth spending, infrastructure replacement programs, and our electric substation construction plans.

If you turn to Slide 9, we have divided a more detailed look at our 2015 capital budget and our historical growth in rate base. We plan to spend about $58 million on gas projects, $31 million on electric projects, and $9 million and business systems and supporting technology for a total of $98 million of spending in 2015. Spending on new customer additions will be a significant component of this budget.

In 2015, we plan to spend about $35 million or 36% of our total capital budget on expansion of our gas and electric distribution systems to achieve new customer growth. Of this, $21 million will be spent on expansion of our natural gas delivery system targeting new customers and increased sales, while on the electric side we plan to spend about $14 million on growth and expansion.

Our capital spending plan continues to drive growth in our gas and electric rate base, which has resulted in annual growth rates of 10% and 3%, respectively, since 2009. We expect our gas rate base to continue to grow on the order of 10% in the future, given our system expansion initiatives and infrastructure replacement programs.

Now, turning to Slide 10, this slide highlights our infrastructure replacement programs, which consist primarily of cast-iron and bare steel replacement. We plan to spend about $22 million on infrastructure replacement programs in 2015 and will be replacing about 14 miles of cast-iron and bare steel gas mains annually through 2017. After 2017, our New Hampshire pipe replacement program will be finished and we expect to level out at about 9 miles per year thereafter. As a result of our infrastructure replacement programs, our customers currently enjoy a modern system with over 90% of our gas mains consisting of plastic or protected steel.

Lastly, as a reminder, the majority of our infrastructure replacement projects are recovered under a capital cost recovery tracking mechanism which provides for annual recovery of capital spending.

Slide 11 provides an overview of our current electric distribution substation projects in New Hampshire. Construction began in 2014 on two new substations that will be completed over the next three years. These electric substations will be completed at an estimated cost of $12 million and $11 million, respectively, and will provide the capacity needed for continued load growth on our New Hampshire systems while addressing constraints at existing substations and improving reliability.

Now I will turn the call over to Mark Collin, who will discuss our financial results for the quarter and year end.

Thanks, Tom. Good afternoon. As Bob stated earlier, net income increased by $3.1 million, or 14%, to $24.7 million for this past year ended December 31, 2014. Results were positively affected by higher natural gas and electric sales margins partially offset by higher net operating expenses. For the quarter, net income was $9.4 million or $0.69 per share compared to net income of $10.3 million or $0.75 per share for the same period in 2013. Earnings in the fourth quarter reflect warmer weather than the fourth quarter of the prior year as well as lower gas margins due to an increase in the amount of margin recovered through fixed charges, which results in less seasonality in our gas margins. That is more of our gas margin is now recovered during the non-heating period of the year.

Turning to Slide 12, natural gas sales margins were $97.4 million in 2014, an increase of $12.2 million or 14.3% compared to 2013. Natural gas sales margins in 2014 were positively affected by higher therm unit sales, a growing customer base and recently approved distribution rights. Therm sales of natural gas were up 7.7% in 2014, driven by colder winter weather in the first quarter of 2014 and new customer additions in 2014 compared to 2013.

There were 5.9% more Heating Degree Days in 2014 compared to the prior year, which we estimate positively impacted earnings by about $0.06 per share. Excluding the effect of weather on sales, weather-normalized gas therm sales in 2014 are estimated to be up a very healthy 5.2% compared to the prior year.

Slide 13 highlights our electric business sales and margins. Electric sales margins were $80.8 million in 2014, an increase of $4.6 million or 6% compared to 2013. These increases reflect recently approved electric distribution rates and higher electric kilowatt hour sales and billing demands. Total electric kilowatt hour sales increased 0.6% in 2014 compared to the prior year. Commercial and industrial customer kilowatt hour sales were up 1.4% and billing demands were also up slightly for this customer group year-over-year.

Turning to Slide 14, operation and maintenance expenses increased $4.4 million in 2014 compared to 2013. The change in O&M expenses reflects higher compensation and benefit costs of $2.8 million and higher utility operating costs of $1.6 million. The increase in utility operating costs included $0.7 million in higher electric and natural gas maintenance costs, $0.6 million in higher bad debt expense and higher all other utility operating costs net of $0.3 million.

Depreciation and amortization expense increased $3.6 million in 2014 compared to the prior year, reflecting higher depreciation of $2.2 million on higher utility plant assets in service, higher amortization of major storm restoration costs of $1.3 million, and an increase in all other amortization of $0.1 million. The increase in major storm restoration cost amortization is currently recovered in electric rates.

Taxes other than income taxes increased $2.2 million in 2014 compared to 2013, primarily reflecting higher local property taxes on higher levels of utility plant in service.

Net interest expense increased $2.1 million in 2014 compared to the prior year, reflecting lower interest income on regulatory assets and higher interest on long-term debt related to the issuance of $50 million of new long-term debt in October 2014.

We also announced in December of 2014 that Standard & Poor's assigned a BBB-plus issuer rating to Unitil Corporation and its utility subsidiaries.

Now, turning to Slide 15, we have provided an update on our financial results at the utility operating company level. The chart shows the trailing 12 months actual earned return on equity in each of our regulatory jurisdictions.

Unitil Corporation on a consolidated basis earned a total return on equity of 9.2% in 2014. Also, as we discussed in the past and as shown on the table on the right, we have constructive regulatory rate plans and long-term capital cost trackers in place to recover a significant portion of current and future capital spending, which we expect will help to maintain the level of earnings across our subsidiaries.

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. Thank you.

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

I have a question on the dividend. First of all, congratulations on increasing the dividend. Could you maybe go through your policy on the dividend or how you are thinking about the dividend as you continue to grow your gas business?

Yes. Over the last couple of years, we have been telling our shareholders that as we began to realize the earnings power of the assets that we operate, that it was our intent to return to a dividend policy where we would target a payout ratio of 70% to 75%, and once we had achieved that, it was our intent and desire to begin to implement a dividend policy with regular annual dividend increases. So this $0.02 increase is really a signal that we have full confidence in our business plan, and as we achieve that payout ratio over the next couple years, our intent is to again begin to implement regular annual dividend increases. The board will consider that each year based on our forecast.

So, one of the things about this 2014 was you had the benefit of the first-quarter weather. If that does not repeat, in fact if weather does not go in your favor in 2015, does that change how you look at the dividend, or are you looking at a consistent level year in, year out, irrespective of weather?

Yes. Again, I think we feel very good about 2015. Again, the year, from a weather point of view, January has been cold. As you may have seen, the forecast for the end of January and the beginning of February is very cold. It may not rise to the level of last year, but we expect that that's going to have a positive impact. We will be bringing on a number of large customers that we connected to our system late last year, which we will begin to see the revenues from that.

So, again, we feel good about 2015. And obviously the board will consider on a going-forward basis how the Company is doing compared to its forecast. But again, our goal is to get back to a policy of regular dividend increases. And again, I think we can grow our EPS 6% to 8% a year for the next three to five years, and the policy on our dividends will reflect that.

Great. And then just an update on the storm we just went through, anything we should be aware of on your system?

Yes. Lots of snow, up to 3 feet at my house, but zero outages. We had no outages anywhere in our system. So, we came through the storm with flying colors and again, largely because it was light fluffy snow, but we did have good wins that were forecasted. But again, I think part of what we are seeing is not only the fact that the snow was light and fluffy, but also I think we are beginning to see the benefit of the enhanced tree trimming program that we have been implementing over the last three or four years.

Great. Congratulations, guys.

Dave Parker, Robert W. Baird and Company.

I'll echo Shelby's comments, so congratulations on a good year, a good couple of years.

A couple of questions just on the presentation. Thanks for dialing up for us what the continued opportunity is here to grow earnings. If we look past 2015 -- I hate to put words in your mouth -- but with the pipe replacement program and some of the upgrades you've got going on in the electric system, that this kind of CapEx rate of close to $100 million is probably sustainable for the next couple of years? Is that a fair observation or fair assessment?

Yes. Obviously, you are right about the amount spending in 2015. In that amount, there is probably $50 million, $20 million of one-time items, the two electric substations Tom referred to before and the change-out of our customer information system. So on a going-forward basis beyond 2015, I'd say probably our core -- and correct me if I'm wrong, Mark -- our core capital spend is probably going to be more on the order of $80 million, $85 million. A little higher?

Yes. I'm not sure it's going to drop significantly over the next couple of years until we get through 2017.

Okay, so the same level of spending over the next couple of years.

Okay. All right, good. And then I assume, if economic activity continues to expand obviously post 2017, that's up for grabs. But if your crystal ball is better than mine, please, if you can share with me? But it sounds good enough for me.

With weather being pretty favorable, and obviously you had some benefit for earned ROEs and your trend being for what you earned last year on a combined basis close to the bottom end of the authorized range, do we expected a downdraft, do you think, in 2015 from an earned ROE basis? Or now that you've got rate relief, is it actually -- may we see better earned ROEs in the future?

Yes, I think there's a couple of aspects to that. One is, as we talked about before, the Fitchburg rate cases were completed, on the electric side was completed for rates effective June 1, 2014. So we only got a partial year of that rate case, and that was an important one for us to get the Fitchburg operating subsidiary back up to a more reasonable rate of return. So, we will get a full year of that in 2015. We will also have some additional cost trackers as part of our rate plans in Northern Utilities. And we also have a scheduled filing for our Granite pipeline. So I think, when you bring all that together, our goal is to continue to achieve at or about what our authorized rate of return is. And I think we are in that range. I don't think you're going to see any deterioration of that in the near-term. I think, if anything, we will be trying to improve upon that.

Great. Thanks. Good answer. And on a Granite State, absent that rate filing, any other anticipated rate filings in the next couple of years?

Well, in addition, as I said, we do have the trackers, particularly on the infrastructure replacement. In Northern Utilities, there's a new tracker that we filed for for our gas division in Massachusetts under new legislation there for infrastructure replacement that we expect to be a rate filing that will have regular increases for infrastructure replacement in Massachusetts. And then our rate plan for the electric division in New Hampshire is essentially coming to an end. And we would expect to be looking at going back in, in 2016, relative to our New Hampshire operations to reestablish a longer-term rate plan there because that has worked very well for us and I think it will be good to renew that effort and get on a longer-term plan for that.

Great. Thanks for the update and again, congratulations.

(Operator Instructions). There are no further questions in the queue at the moment.

Thank you for joining us for our fourth-quarter conference call. We look forward to talking to you next quarter. Thank you and good-bye.

Ladies and gentlemen, thank you. That concludes today's presentation. You may now disconnect, and everyone have a great day.