Unitil Corp (UTL) 2015 Q4 法說會逐字稿

Good day ladies and gentlemen. Welcome to the Unitil fourth quarter 2015 Earnings Conference Call. At this time all participants are in a listen-only mode. Later there will be a question-and-answer session, and instructions will follow at the time. (Operator Instructions). As a reminder, today's call is being recorded. I would now like to turn the conference over to David Chong, Director of Finance. Sir, you may begin.

Good afternoon, and thank you for joining us to discuss Unitil Corporation's fourth quarter 2015 financial results. With me today area Bob Schoenberger, Chairman, President and Chief Executive 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 fourth quarter and the full year 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 the 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 a Safe Harbor Provisions of the Private Securities and Litigation Reform Act of 1995. These forward-looking statements include statements regarding the Company's financial condition, results of operation, capital expenditures and other expenses, regulatory and environmental 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 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 year-ended December 31st, 2015.

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, and thank you everyone for joining us today. I will begin by discussing the highlights of our past year. On slide four of the presentation, today we announced net income of $26.3 million, or $1.89 per share for 2015, an increase of $1.6 million, or $0.10 per share compared to 2014. We had another solid year in 2015 as earnings increased by 6% year-over-year. Net income from the fourth quarter was $9.3 million, or $0.67 per share. We continue to experience strong growth in our gas and electric businesses.

Moving on to slide five, the graph shows that our financial results have increased sharply over the past few years, with net income growing at an annual growth rate of 13% since 2012. And EPS of an annual growth rate of about 10% over the same period. Return on equity has also been steadily climbing, as we continue to close the gap between our authorized and actual returns. We invested a record of $104 million of capital in 2015. To match this investment growth, we have benefited from a constructive regulatory environment with nearly $60 million of rate relief awarded since 2010.

Next on slide six we outline our organic initiatives growth initiatives over the next several years that will support revenue and rate-based growth. For our gas division, we will continue to see considerable investment related to increasing market penetration. In particular we continue to look for large anchor loads that will drive our commercial industrial sales, while providing new infill opportunities along newly built mains. In addition, we have considerable investment in cast iron pipe replacement across all three of our operating states, as we modernize and upgrade our distribution system. This pipe replacement activity is expected to continue for a decade in Maine, and two decades in Massachusetts, providing for uninterrupted long-term investment opportunities.

On the electric side of our business, we also have significant investment opportunities. Currently we are building two substation projects, which will enhance reliability and provide capacity to meet forecasted load growth in New Hampshire. Also in Massachusetts we recently filed a grid modernization plan with our regulators. This initiative provides for a 10-year plan outlining enhancements to our electric system to improve reliability, reduce the effects of outages, optimize demand, and expand customer services.

Turning to slide seven, you will see an overview of the results of our gas growth initiatives. Customer growth has contributed significantly to our operating results, with customer additions in the range of 2% to 3% annually over the last three years. In addition, our weather normalized unit sales have grown in the range of 4% to 6% annually over the past few years. And weather-normalized unit sales for commercial industrial customers were up about 8% year-over-year. We attribute this customer and unit sales growth to our ability to increase the penetration of natural gas as a cleaner, convenient, and more affordable energy source for all our customers. We have made prudent investments to upgrade and expand our system in all three states where we have gas operations. Making gas available to an increasing number of households and businesses, and providing them with low cost opportunities to make the switch to natural gas.

For example, we recently received approval in Maine to implement an innovative program to extend our system to targeted communities currently without gas service. It is called the targeted area build-up program or TAB. This program received strong support from our regulators and state and local officials. The TAB program will replace the upfront customer contributions often required to expand into new areas with a rate surcharge mechanism. We expect that offering customers in these areas the ability to avoid an upfront payment will help facilitate customer conversions, and allow us to economically reach those targeted areas by expanding our existing distribution system. Our first pilot under this mechanism is targeted for the city of Saco, Maine, which represents a market size of 1,000 customers and $1 million of potential distribution revenue.

As shown on slide eight, we continue to remain focused on cost efficiency. On an O&M cost per customer basis, our electric and gas divisions remain in the bottom third cost group of our New England peers. In fact, electric and gas O&M cost per customer is 20%, and 15% below the average of our utility peers respectively. The graphs illustrate how we have benefited from, and will continue to leverage our shared services model process improvement, best practices, and enhanced technology. Our enhanced Vegetation Management Program has received national recognition as an industry best practice. And the American Gas Association has also recognized eight distinct areas of our gas business as best practices.

Taking a look at slide nine, you will see that yesterday we announced an increase in the annual dividend from $1.40 to $1.42 per share, or an increase of $0.02 per share. Our annual dividend payout ratio is now 74% on a trailing EPS basis. We will continue to assess our annual dividend payout, as we execute on our strategic plan, and I remind everyone that Unitil has continuously paid quarterly dividends, and has never reduced its dividend rate.

Finally, on slide ten I would like to highlight the success of our non-regulated subsidiary Usource, our energy advisory business, works with over 1,200 customers in 18 states. Usource revenue grew 9% to $6.2 million in 2015. As a reminder Usource has no capital requirements, but generates about 5% of our consolidated net income. Usource remains a significant equity kicker for us. Now I will turn the call over to Mark Collin, our Chief Financial Officer, who will discuss financial results for the year and our capital budget for 2016, and other operational highlights. Mark.

Thanks Bob. Good afternoon everyone. I am going to start on slide 11. Here natural gas utility sales margin was $101.9 million in 2015, an increase of $4.5 million, or 4.6% for the full year 2015 compared to 2014. Natural gas sales margin in 2015 was positively affected by higher therm units sales, a growing customer base, and higher distribution rates. Therm sales of natural gas increased 1.5% compared to 2014. The impact of the growth in the number of customers year-over-year was partially offset by warmer winter weather in 2015. There were 2.3% fewer heating degrees in 2015 compared to 2014. We estimate negatively impacted earnings per share by about $0.03 compared to prior year. However, compared to normal there were 3.7% more Heating Degree Days in 2015, which we estimate positively impacted earnings per share by about $0.03. Estimated weather-normalized gas therm sales excluding the coupled sales were up 4% in 2015 compared to 2014. Led by a year-over-year increase of about 8% in gas therm sales to our largest Commercial & Industrial customers.

Moving to slide 12, we highlight our electric utility sales and margin. Electric sales margin was $85.5 million in 2015, resulting in an increase of $4.7 million, or 5.8% for the full year of 2015. The increase in electric sales margin for 2015 primarily reflects higher electric distribution rates, as kilowatt hour sales of units decreased 0.7% in 2015 compared to the prior year. The decrease in kilowatt hour sales is due to lower average usage per customer per residential customers, which was partially offset by an increase in electric sales to Commercial & Industrial customers.

Next on slide 13, you will see a comparison of the major revenue and expense components driving the year-over-year financial results, including changes in both natural gas and electric sales margins and the other major components. In addition, to the gas and electric sales margins I just discussed, as Bob mentioned Usource revenue was up $0.5 million, or up about 8.8% year-over-year. Now let's look at the expenses. Total Operation and Maintenance expense increased $2.5 million, or 3.9% for the full year of 2015 compared to 2014. The change in O&M expense reflects higher compensation and benefit costs of $3.5 million, partially offset by lower professional fees of $0.3 million, and low all other utility O&M costs net of $0.7 million.

Depreciation and amortization expense increased $3.6 million in 2015 compared to 2014, reflecting higher depreciation of $2.4 million on normal utility plant assets and service, higher atomization of major storm restoration costs of $0.9 million, and an increase in all other amortization of $0.3 million. The increase in major storm restoration cost amortization is currently recovering in electric rates and reflected in electric sales margin. Taxes other than income taxes increased $0.5 million in 2015, primarily reflecting higher local property tax expense. Interest expense net increased $1 million in 2015, reflecting higher levels of long-term debt, and higher interest expense on regulatory liabilities.

Other income or expense net change from an expense of $0.4 million in 2014, and income of $0.5 million in 2015. This change was a result of the recognition of a gain of $0.9 million in the fourth quarter of 2015 on the sale of property. Income taxes increased $1.4 million compared to 2014, reflecting higher pre-tax earnings.

Now turning to Slide 14, capital spending is central to our growth strategy. Capital spending has grown at a compound annual rate of 15% since 2012, and as Bob mentioned, we had record capital investments in 2015. We expect the trend to continue in 2016, and on the slide we provide a more detailed look at our 2016 capital budget. We currently plan to spend $54 million on gas projects, $34 million on electric projects, and $10 million on business systems and supporting technology, for a total of $98 million in 2016. Spending on new customer additions will be a significant component of this budget, in 2016 we plan to spend about $31 million, or 32% of our total capital budget on expansion of gas and electric distribution systems to achieve new customer role. Gas infrastructure replacement is also a significant category of spending with $19 million, or 19% of our total capital budget in this area.

Continuing to slide 15, you can see how our capital spending plan drives growth in our gas and electric rate base which resulted in an annual rate of 7%, and an annual growth rate of 7% since 2012. Further segmenting these results, if you look at our gas division, gas rate base has doubled to $357 million, while gas earnings have almost quadrupled since we acquired Northern Utilities in 2008. We're pleased with these rate results, and we believe we have definite plans that will continue this path for the foreseeable future.

Now turning to slide 16, we have provided an update of our financial results at the utility operating company level. The trailing 12-month actual earned return on equity in each our regulatory jurisdictions. Unitil on a consolidated basis earned a total return on equity of 9.5% in 2015. We have strong record of achieving base rate relief with nearly $60 million granted since 2010 across all of our operating utilities. This amount of rate relief equates it a 50% increase in our utility sales margin since 2010. Much of this rate relief was achieved through cost tracking rate mechanisms, which we have successfully implemented across our jurisdictions, as we have shown in the table at the right.

Now turning to slide 17, we have highlighted here our recent electric and gas rate case filings in Massachusetts. As Bob alluded to earlier, our regulatory strategy is complementary to our investment strategy, and our regulatory success is essential to bridging the gap between our actual and allowing terms. Both filings reflect the 2014 test year, a capital structure with a 53% equity ratio, and a 10.25% requested ROE. The electric division filing reflects a rate base of $57.3 million, a revenue deficiency of $3.8 million, and includes a multi-year rate plan for recovery of future capital additions.

The gas division filing reflects a rate base of $57.5 million, and a revenue deficiency of $3 million, and is complemented by an existing capital tracker rate mechanism, associated with the replacement of aging natural gas pipeline infrastructure. By statute, the Massachusetts Department of Public Utilities has afforded 10 months to act on their request for a rate increase. A decision in these two rate proceedings is expected by the end of April of this year.

Now this concludes our summary of the financial performance for the period. I will turn the call over to the operator, who will coordinate any questions that you may have at this time. Thank you.

Thank you. (Operator Instructions). Our first question is from Shelby Tucker with RBC Capital Markets. You may begin.

Thank you. Good afternoon. Mark, what was the property that you sold in the quarter?

It was an operating center in Portland, Maine, that had we had acquired during the acquisition and we needed a larger facility with more capability and such, and so we moved to a larger facility, given the growth we have seen in the Maine area, and completed that, and sold this property as it was no longer needed.

Okay. And I guess why should we treat that as ongoing earnings?

I would say that is a non-recurring gain on the facility, yes.

Okay. So as we adjust that probably reduces earnings by about $0.04 or so?

If you just look at that one item, I think we have talked to you about the other items including weather, which has a negative effect on the earnings, so if you normalize for weather and such, I think you probably end up fairly close to where we are, or maybe even a little higher than the final reported earning. It doesn't include the normalized numbers.

Got it okay. And Bob, great results at Usource. I'm glad to see that coming through. As we look at the earnings for this year, the $1.4 million, is that a good base to use from what you can grow, or are there items in there that brought the $1.4 million to that level?

Yes. Shelby, thanks for the kind comments. Bottom line is I think Usource, we have kind of reoriented our sales strategy. We saw a very strong December with new sales, and we expect that we can carry that forward, so our objective going forward is to grow our bottom line contribution by 5% to 10% per year.

Got it. Okay. Great. And then last question I have is, has the competitive landscape for gas conversion changed much, given the lower oil prices that we have seen in the market?

Yes. There's no question that the drop in the price of oil has, when we talk about being able to grow unit sales in gas by 46% a year, it probably would move us towards the lower end of that, as long as this drop in the price of oil exists. But on the other hand, we continue to find opportunities such as the TAB program, and I can tell you in that preliminary indications from town officials as well as customers in an industrial park along that strip is, that they're taking a long-term view, so we still think there will be opportunities even without the competitive advantage we had, say a couple of years ago.

Great. Thank you, guys.

Good talking to you.

Thank you.

Thank you. (Operator Instructions). I am showing to further questions at this time. Ladies and gentlemen, this does conclude today's conference. Thanks for your participation, and have a wonderful day.