Unitil Corp (UTL) 2016 Q1 法說會逐字稿

Good day ladies and gentlemen and welcome to the Unitil Q1 2016 earnings conference call.

(Operator Instructions)

As a reminder today's conference is being recorded. I'd now like to introduce your host for today's conference, Mr David Chong, Director of Finance. Sir please go ahead.

Good afternoon and thank you for joining us to discuss Unitil Corporation's first-quarter 2016 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, Chief Operating Officer; and Larry Brock, Chief Accounting Officer and Controller.

We will discuss financial and other information about our first-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 a 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, 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'll now turn the call over to Bob.

Thanks, David. I'll begin by discussing the highlights of our past quarter. Beginning on slide 5 of the presentation, today we announced net income of $10.9 million or $0.78 per share for the first quarter of 2016 a decrease of $2.7 million or $0.20 per share over the first quarter of 2015.

This decrease in earnings for the first three months of 2016 was driven by lower natural gas and electric sales and margins reflecting significantly warmer, winter weather compared to the same period last year. As Mark will discuss later, we estimate that weather impacted our earnings per share negatively by $0.25 in the first quarter.

Turning to slide 6, the graph shows that our financial results have increased over the past few years while maintaining a strong rate of return on our utility investments. Our financial results go hand-in-hand with our strong operating performance. We have met or exceeded all service quality metrics for safety, reliability and customer service, and our customers have seen a almost 50% reduction in outages since 2010.

The continuing investment of both our gas and electric utility distribution systems and the successful execution of our regulatory strategy and our attention to customer service is providing us a platform for sustained growth. Moving on to slide 7, our utility rate base continues to grow as we add new customers and improve both the gas and electric distribution systems.

Over the past four years our combined gas and electric rate base has grown at an annual rate of 7%, driven by customer additions and our infrastructure replacement and improvement programs. On the gas side of our business, our rate base has doubled, and our gas segment profit has nearly quadrupled since acquiring our New Hampshire and Maine Gas businesses. Looking forward we believe we have ample investment opportunities that will allow us to continue to grow around these levels for the foreseeable future.

Slide 8 highlights the growth we have achieved on our natural gas business. Our gas 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 to customer growth 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 and industrial customers were up about 7.4% year-over-year. And while it's still early in the year we are up -- we are ahead of our schedule of last year in terms of customer additions.

Turning to slide 9 we continue to look for opportunities to expand our gas distribution system. For example a recently approved rate surcharge mechanism in Maine allows us to economically extend our gas mains two new targeted service areas.

This rate surcharge mechanism is being piloted in Saco, Maine. It allows customers in a targeted area of Saco the ability to pay a rate surcharge instead of a large upfront payment or capital contribution to connect to our system. This pilot has the potential to add 1000 new customers to our system with roughly $1 million in annual distribution revenue.

We believe that the successful implementation of programs like this will continue to allow us to reach new service areas beyond the current reach of our distribution system in a cost-effective and efficient manner. In fact we have had surrounding towns ask us to be able to participate in this program in the years ahead.

Slide 10 provides an update of our current electric system investment initiatives, construction is continuing on schedule for our two new substation projects in New Hampshire with the first coming online on the second quarter of 2016. These electric distribution substations will provide the capacity needed for continued load growth on our New Hampshire systems while addressing constraints of existing substations and improving reliability.

Another electric initiative we are pursuing is grid modernization in both our Massachusetts and New Hampshire electric subsidiaries. At a high level this program is an effort to improve the reliability resiliency and operational efficiency of the electric grid while empowering customers to use the electricity more efficiently and facilitating the integration of distributed energy resources.

So before I turn it over to Mark to go into more detail, I want to put the first-quarter results in the proper context. If you look at the factors that have contributed to the results we've reported over the last five years, controlling O&M spending, our capital investment program, our regulatory agenda and our gas growth program, they all remain intact going forward. And we are confident that those factors will help us achieve similar growth in the years ahead. So, Mark.

Thanks, Bob. I will begin by discussing the weather impact on our gas and electric sales margin for the first quarter shown on slide 11. This winter including the key heating months of January and February 2016, was one of the warmest on record throughout New England. In contrast, last winter was one of the coldest on record in New England.

The combination of these two winters, extreme cold last year and extreme warmth this year create a cumulative estimated impact to earnings per share of $0.25 year-over-year due to the lower gas and electric margins. Now turning to slide 12, natural gas margin was $35.9 million in the quarter, a decrease of $2.9 million or 7.5% compared to the first quarter of 2015.

Gas sales margin was negatively impacted by lower therm units sales due to the warmer weather partially offset the positive impacts of higher natural gas distribution rates and the growth of the number of customers. There were 23% less Heating Degree Days in the first quarter of 2016 compared to 2015 which we estimate negatively impacted earnings per share by about $0.22 due to the lower gas margins.

Excluding the effect of the weather on sales, weather normalized gas therm sales were up 2% in the first quarter in 2016 compared to the same period in 2015. This weather normalized growth was led by a quarter-over-quarter increase in estimated gas therm sales of 7.4% to large commercial and industrial customers.

Slide 13 highlights our electric business sales and margin. Electric sales margin was $20.1 million in the first quarter of 2016, a decrease of $1.1 million or 5.2% compared to the same period in 2015. As on the gas side, electric sales margin decreases reflect the impact of whether, albeit electric sales are clearly less sensitive to weather than gas.

We estimate that the weather impacted electric sales by about $0.03 in the first quarter of 2016 compared to the first quarter of 2015. Excluding the effect of weather on sales, weather normalized electric sales were led by a 2.9% increase in sales to large commercial and industrial customers.

Turning to slide 14, we have outlined the major expense variances for the quarter. Operation and maintenance expenses increased $0.5 million or 3% in the quarter compared to the same period of 2015.

Depreciation and amortization increased $0.4 million or 3.5% primarily reflecting higher depreciation on normal utility plant additions. Taxes other than income taxes increased $0.1 million or 2% primarily reflecting higher local property tax expense. Net interest decreased $3 million -- $0.3 million reflecting lower levels of long-term debt. Finally, income taxes were down $1.9 million, reflecting lower pretax earnings for the period.

On slide 15 we have provided an update of our financial results at the utility operating company level. The chart shows the trailing 12 month actual earned return on equity in each of our regulatory jurisdictions. Our total return on equity is lower in the last 12 month period ending March 31, 2016, reflecting the unseasonably warm weather in the first quarter that we've been talking about.

Also, as we've discussed in the past, and as shown on the table to the right, we have long-term capital cost trackers in place to recover a significant portion of current and future capital spending. We have some other rate case activity underway which I will summarize shortly. We expect these rate cases will help us to improve our realized rate of return as the year progresses.

Slide 16 highlights our electric and gas rate case filings in Massachusetts. Combined, both filings reflect a revenue deficiency of approximately $6.8 million. We expect a decision in these two rate proceedings by May 1, 2016.

In addition, we recently filed a notice of intent to file a base rate case for our New Hampshire electric subsidiary. We expect to file this rate case later next week with a revenue deficiency of approximately $6 million.

Now this concludes our summary of our financial performance for the period. I'll turn the call over to the operator who will coordinate questions. Thank you.

(Operator Instructions)

Peter Wernau, Wernau Asset Management.

I had a quick question -- we look at the business as an underlying growth of volume versus the weather impacts, it's nice that we had a nice warm season but it doesn't really impact our investment basis. One thing I was hoping you might provide color on, I noticed that you've showed the compounded annual growth rate of the gas business, and we've been modeling that. Is there a comparable metric for electric? Thanks a lot.

Yes, this is Mark. In terms of growth rate, as you said if you get away from the volumetric kilowatt hour sales, the one thing that the weather doesn't impact is our customer growth or our investment growth.

Relative to our customer growth on the electric side of the business, we have been continuing to add customers on that side. It's a little slower than gas. It doesn't have the same high growth rate we're seeing on gas, primarily because electric is just about served everywhere so it grows along with households. We're growing about 0.5% a year in terms of customers.

On the investment side, we've also continue to have investment in rate base on electric and that's tended to grow between 3% and 4% per year in terms of our rate base. In contrast the gas business is growing more at the 8% to 10% range whereas the electric is down in the 3% to 4% range on rate base.

But they're both growing, and they're both continuing to contribute and as we indicated -- I indicated earlier, our planned rate case for our largest electric division here in New Hampshire we will be filing that next week, and we hope that will get us on a path so that we can earn our authorized rate of return on that division and make sure that these investments are returning for us.

This is Bob. Just from an anecdotal point of view, the amount of actual and planned construction both in Maine and the seacoast area of New Hampshire is really robust and growing. So, hopefully that will contribute to the growth rate in the gas as well as the electric business.

Okay. Great. Thanks again. I appreciate the execution in the business. The last couple of years have been very good. Thank you very much.

Thanks, Peter.

(Operator Instructions)

Insoo Kim, RBC Capital Markets.

Good afternoon. First of all, in terms of weather, for Q4 2015 which is I guess last quarter, how much of EPS was impacted by weather compared to normal? In the previous quarter, in the fourth-quarter of last year.

I need to make story understand the periods you're comparing. This last quarter compared to the same quarter a year ago?

No. Just versus normal. I'm just trying to --

Versus normal we're down about $0.09. I think David -- $0.09 in EPS due to -- versus what normal weather would have been.

But that's for the first quarter of -- this past quarter right?

Yes.

What about for the quarter before that, on the fourth-quarter?

Fourth quarter -- I'd have to check that. I don't have the fourth quarter normalized results in front of me right now.

Okay. Obviously the first and fourth quarter being the largest quarters and with a [$0.20-something] year-over-year decline in the first-quarter I'm just trying to have a base level of earnings to compare for the fourth quarter that's going to be coming up in a few quarters. I can check with that off-line.

In terms of the gas penetration rates, do you still see, given where the oil prices are, the [sale of] gas sales to grow at the lower end of that 4% to 6% range that you guys were talking about on a weather normalized basis?

As I was telling you before, again, it's early in the year so it's still early. But we're about 25%, 30% ahead in terms of gross meter adds over last year. The oil price obviously has had some impact but -- anecdotal evidence for example in Saco, Maine there's an industrial park there with 36 businesses. Everyone of them indicated they are interested to converting to natural gas. So to be conservative I'd say on the low side, but we have hopes that it might be better than that.

Understood. And from a commission standpoint. Have there been conversations recently or in the past about whether decoupling mechanisms that and whether they're interested in or you may be interested in implementing something like that in the future, to mitigate some of this volatility in earnings?

As you know in our Massachusetts jurisdiction, our subsidiary Massachusetts we do have both decoupling on the electric and the gas side of the business. And that is complemented by on the gas side -- we have a cost tracker for cast-iron replacement, and we've requested a capital tracker for electric as well. In New Hampshire there is a lot of activity now, particularly around energy efficiency program planning and such and the decoupling concept has come up as one -- as a potential rate making concept to help encourage or support increased energy efficiency spending and basically make the utility indifferent to lost sales from that.

One partial decoupling mechanism that is getting a lot of discussion now is a lost base revenue calculation that essentially decouples the energy sales losses due to energy efficiency from the utilities revenue, and that's gotten a lot of attention.

And then in Maine where we have the gas business up there, the biggest thing that we've moved towards is more of a rate design that allows us to recover a larger percentage of our delivery cost based on fixed charges or charges that are not subject to weather or are not as volatile to weather.

In fact, even this quarter was dampened by the fact that we've been able to move our rates towards higher fixed charges and so the approach there has generally been to move towards higher fixed charges. We haven't had much discussion around decoupling, but it wouldn't surprise me if that comes back up.

Understood. Thank you very much.

Thank you.

Thank you. That concludes today's question and answer session. Ladies and gentlemen, thank you for your participation in today's conference. This concludes the program and you may now disconnect. Everyone, have a great day.