Unitil Corp (UTL) 2016 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Unitil Corporation Q3 2016 earnings conference call. At this time all participants are in a listen-only mode. Later we will conduct a question-and-answer session and instructions will follow at that time. (Operator Instructions) as reminder, this conference call is being recorded. I would now like to introduce your host for today's conference, Mr. David Chong, Director of Finance. Sir, you may begin.

Good afternoon and thank you for joining us to discuss Unitil Corporation's third-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 and Chief Operating Officer; 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 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 2 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. Except as may be required by law, 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. Thank you, everyone, for joining us today. I will begin by discussing the highlights of our past quarter.

Beginning on slide 5 of the presentation, today we announced net income of $3.5 million or $0.25 per share for the third quarter of 2016, an increase of $1.8 million or $0.13 per share over the third quarter of 2015. This increase in earnings was driven by higher electric sales margins, reflecting increased electric sales, new distribution rates and lower operation and maintenance expenses.

For the first nine months of this year, we reported net income of $16.9 million or $1.21 per share, a decrease of $0.1 million or $0.01 per share compared to the prior year. The slight decrease in earnings for the first nine months of 2016 primarily reflects lower natural gas sales and margins, driven by significantly warmer winter weather in 2016 compared to 2015.

Turning to slide 6, we are focused on actively managing our operating cost. This year we have been able to achieve some cost reductions throughout the entire Company to help offset the effects of warmer winter weather in the start of the year. This has led to significant decreases in O&M costs in 2016 compared to 2015.

In fact, according to our benchmarking studies, our O&M costs are in the low third of our New England utility peer group.

Next, on slide 7, we highlight the growth that we had at our gas division, driven by our commitment to investing in our service areas. Since 2008 our gas utility rate base has doubled, and we increased our customer account nearly 15%.

Looking forward, we believe we are in a great position to continue to add a steady stream of new customers, given the relatively low penetration rate in our service areas.

Hi. I'm going to turn to slide 8 now. It provides a look at some of our growth opportunities.

Our customer acquisition strategy is multifaceted. First, we concentrate on adding customers on or near our existing mains. Our customer penetration rate is only 60%, leaving significant potential to add new customers on our existing mains alone. In addition, we pursue cost-effective system expansion projects, which entails main and service extensions to new, larger anchor customers or to groups of customers in areas that we have identified as attractive for investment and growth.

In the last five years we have extended our distribution system by over 20 miles to reach and serve new customers. In addition, this year we implemented an innovative targeted area buildout program, which allows us to economically blanket a targeted area with new mains and services. We are in the first year of the pilot program in Saco, Maine, and are very pleased with the progress we have made to meet our growth targets for this project.

Overall we believe that our multifaceted customer acquisition strategy will continue to allow us to reach new service areas beyond the current reach of our distribution system in Maine and New Hampshire, adding thousands of new customers in a cost-effective and efficient manner.

Lastly, as a reminder, we have extensive cast iron replacement programs throughout our service [tick] areas. These replacement programs provide significant rate base growth and we have cost trackers in place that allow for revenue recovery for a majority of this spending.

Moving to slide 9, we have continued to make investments in the electric division as well. We have significantly improved electric system reliability over the last few years as a result of our investments, including spending on vegetation management programs across our electric operations. We have met or exceeded our service quality metrics for safety, reliability and customer service and our customers have seen average electric system outage duration fall steadily since 2010.

Now turning to slide 10, it provides a look at some of our electric growth investment opportunities. In April we completed construction of our Kingston, New Hampshire substation and continue to work on the completion of the second new substation in New Hampshire, to come online in 2017. Our investment in these electric distribution substations will provide the capacity needed for continued load growth and reliability improvement while addressing constraints on our existing substations.

We recently applied for regulatory preapproval of the Company's first solar generation facility. This proposed 1.3 megawatt facility will be located on our existing property in the city of Pittsburgh, Massachusetts, at a total cost of approximately $3.5 million and allow for better use of a remediated groundfill site while contributing to Massachusetts' energy goals.

We expect this facility to be operational by the end of 2017.

We remain committed to the change in regulatory climate and we are actively participating in grid modernization dockets of both Massachusetts and New Hampshire with orders expected in 2017. We expect these projects to be an important component of the investments and capital spending for the foreseeable future.

Turning to slide 11, natural gas sales margins were down for the nine-month period ended September 30, 2016. As Bob indicated earlier, this past winter was extremely mild and we estimate that this warmer winter weather negatively impacted gas sales margins by approximately $0.22 per share compared to the prior year and $0.12 compared to normal.

However, as Bob just highlighted, the underlying growth profile of our gas utility operations remains intact, where you can see the weather-normalized sales were up 1.9% per year over year, driven by the growth in large commercial and industrial sales of 4.9%.

Turning to slide 12, for our electric business we estimate that the mild winter weather earlier this year was mostly offset by the hotter summer weather in the third quarter. Nevertheless, we continue to see the effect of energy conservation measures on our New Hampshire electric division with weather-normalized sales essentially flat, despite increasing electric customer accounts.

Recently in New Hampshire we successfully achieved a loss-base revenue recovery mechanism associated with our energy efficiency programs, which, beginning in 2017, will help us recover lost days revenues due to energy efficiency incentives. And as a reminder, in Massachusetts we have revenue decoupling, which eliminates the dependency of our distribution revenue on the volume of electricity or natural gas sales.

Turning to slide 13, we have outlined the major expense variances year-to-date. Depreciation and amortization and property tax expenses are higher due to the growth of our investment in utility plant. This will be a continuing theme as we grow our rate base in the future. However, as Bob mentioned earlier, operation and maintenance costs are down year-to-date $1.4 million compared to the last year or 2.8%.

Interest expense also decreased $0.6 million in the first nine months of this year compared to the same period in 2015, due to lower levels of long-term debt. Looking forward, this trend should continue as we have substantial redemptions of high-cost debt of approximately $100 million due over the next five years.

Slide 14 provides a look at the Company's regulatory activity that resulted in an increase in sales margin by approximately 50% since 2010. We have had numerous rate cases and cost tracker filings since 2010 across all our jurisdictions, which have helped us bridge the gap towards earning our authorized returns on a growing gas and electric utility rate base.

Slide 15 serves as a reminder that we continue to see the positive effects of higher distribution rates in Massachusetts that both our gas and electric divisions from our recently completed base rate cases in our period-over-period comparisons. Further, the base rate case for our New Hampshire electric subsidiary is ongoing with an expected final rate decision in the second quarter of 2017.

Finally, turning to slide 16, 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.

I would point out these results are not weather-normalized. Also, as we have discussed in the past and as is shown in the table on the right, we have long-term capital costs trackers in place to recover a significant portion of current and future capital spending. These capital trackers as well as our base rate case proceedings will help us maintain a 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.

(Operator Instructions) Insoo Kim, RBC Capital Markets.

it's actually Shelby here. Just a quick (multiple speakers) got a few questions, one on the solar generation facility that you applied for. What is the rate maintenance structure? How is the cost being recovered?

It's essentially a reconciling rate mechanism where the full cost of the facility is passed through a separate rate mechanism from distribution rate and recovered in those costs or netted against any revenues that we received so that our customers are only -- essentially pay for the net difference between the cost and the revenue.

Got it. And then is this a case or a filing that is almost like a test filing, and depending on how it goes, you have other types of projects like this to pursue? Or is it more of a one-off?

Well, it currently is more of a one-off. But obviously it's our first foray into development of a solar generation project.

In Massachusetts, they passed recent legislation that allowed for utilities to construct and own solar generation. And the approval had to be obtained before the end of 2016 in order to qualify for the treatment under that legislation.

So this project we will get in and we are hoping to obtain the full approval of the Commission before the hand of this year. And then it has to be constructed before the end of 2017. So we will construct it next year and have it in operation before the end of the year.

Whether or not the Commonwealth then extends this opportunity to allow utilities to build additional stations or not is unknown at this time. And whether or not we would develop a plan that would allow us to do more of that is still something that we would be looking at, depending on where the legislation and the regulations go.

Got it. And then just going back to the first question, about the ratemaking, so I should be thinking about the $2.5 million and then thinking of recovery typical with utilities, 50-50 equity-debt and an ROE on that? (Multiple speakers)?

It's about a $3.5 million, just to correct you. You said $2.5 million -- (multiple speakers) $3.5 million investment. And you could treat it much like a rate-based investment, where we would earn our cost of capital on that at our existing weighted cost rates and capital structure.

Got it. And then the second, broader question is on the targeted area buildout program. Are there specific criteria that need to be triggered in order to be eligible for [TAB] program?

Yes, there are. We don't do the TAB program just anywhere, so to speak. What we do look for is higher density areas that are relatively near our existing mains that can be reached and that we can get good cooperation from the town or the localities to allow us to go in and expand and rapidly expand out the gas system to meet, to be able to market to customers and get customers online.

So we have identified various communities throughout our territories that provide -- that are the most attractive and then we go through the process of working with the locals, local officials and such and doing the economic analysis and actually digging down into details before we select a TAB customer.

We have gotten really good local cooperation.

Okay. And then when I look at the current pilot you have, is that the magnitude that you would be -- is that more of a typical magnitude of 1,000 customers, $1 million in revenues? Or are the feature staff-ups going to be different?

Yes. No, I think that's typically -- Saco is a good model town, if you will. And the others that we are looking at our similar in size and nature.

Got it. And then the last question, on TAB, the magnitude of this -- is it something that would be rolled out slowly over time, or can you scale it up quite substantially?

In terms of taking the tab to other communities and towns?

Yes, not only in terms of bringing it around, but can you also concentrate having 20 different reagents at the same time? Or is it something more measured?

I think it's more measured than that. Again, our criteria in terms of the nature of the towns, the relative proximity to our lines, the density, the gas load in those locations does have a screening effect. And so there are more like a handful of towns that provide the greatest opportunity initially.

Now, as we get down this and continue to expand, there may be opportunities to continue to grow the system further and further out. And as you know, that's how we go about the expansion of the system. We start from where we have pipe and then continue to reach out. And I will just point out we complement the TAB. The TAB is a program that we're piloting now that allows us to go into these areas, but we are complementing that with continued main expansion where [we're] appropriate in closer proximity, where we may go after just a fewer number of customers. We also continue an aggressive on-the-main program, as I said earlier. We're only about 60% penetrated, so we still have a lot of -- you know, might arguably save low-hanging fruit on the system to continue to expand as well.

I think the answer is that we will continue to evaluate this program. This is a new program. And if we see the opportunity to increase the size of the program in a rational way, then we will do that.

Got it, okay. Okay, well, thank you very much. Really appreciate it.

(Operator Instructions) I am showing no additional questions from our phone lines. Ladies and gentlemen, thank you for participating in today's conference.

This does conclude the program and you may all disconnect. Everyone have a wonderful day.