Unitil Corp (UTL) 2017 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Q4 2017 Unitil Earnings Conference Call. (Operator Instructions) Also, as a reminder, this conference call is being recorded.

I would now like to turn the call over to your host, David Chong, Director of Finance and Subsidiary Treasurer. Sir, you may begin.

Good afternoon, and thank you for joining us to discuss Unitil Corporation's fourth quarter 2017 financial results. With me today are Bob Schoenberger, Chairman, President and Chief Executive Officer; Tom Meissner, Senior Vice President and Chief Operating Officer; Mark Colleen, 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 year-to-date results 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, as you can see on Slide 2, the comments made today about future operating results or future events are forward-looking statements under the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. Forward-looking statements inherently involve risks and uncertainties that could cause our actual results to differ materially from those predicted. Statements made on this call should be considered together with cautionary statements and other information contained in our most recent annual report on Form 10-K and other documents we have filed with or furnished to the Securities and Exchange Commission. Forward-looking statements speak only as of today, and we assume no duty to update them.

With that said, I will now turn the call over to Bob.

Thanks, David. Good afternoon, everyone.

Beginning on Slide 5. 2017 was another great year for the company. Today, we announced net income of $29 million or $2.06 per share. This represents an increase of $0.12 per share or $1.9 million compared to prior year. Higher revenues, continued customer growth and the strengthening economy contributed to these results.

On Slide 6, we achieved record earnings and sales margin in 2017, which grew annually at a rate of 6% and 4%, respectively. We continue to have very strong customer growth, having added nearly 2,100 customers. And by the way, the environment for the future looks really good for us. With the increase in the price of oil, we currently have about a 25% to 30% competitive advantage over oil. The company continues to benefit from robust economic growth in the communities we serve, and we expect that to continue.

2017 was a very busy year operationally as we completed major construction projects in both the gas and electric divisions. Tom Meissner will elaborate on these investments later on in the call.

Our earnings growth has also been reflective of our successful regulatory initiatives. In 2017 alone, we reached a settlement agreement at our New Hampshire electric utility in April for a base rate increase of $4.1 million. In the middle of the year, we filed for almost $11 million combined base rate relief for our Maine and New Hampshire gas divisions, which Mark will cover in detail.

Finally, this week, the board announced raising our dividend by $0.02 on an annual basis. This is the third consecutive $0.02 increase. So the dividend has risen from $1.44 to $1.46. Given the growth profile that I described before, we expect this trend to continue.

With those overall comments, I'll turn the call over to Tom to talk about our capital spending. Tom?

Thanks, Bob, and good afternoon. As Bob mentioned, 2017 was another excellent year for our utility operations across all jurisdictions.

If you turn to Slide 7, this shows our 2018 capital budget as well as historical rate base growth. Our utility rate base has grown at a strong compound annual rate of 7% since 2014. The company continues to fund a variety of capital spending programs, including infrastructure replacement and gas and electric distribution expansion. Our capital budget for 2018 is projected to be $104 million. Of this amount, about 45% will be recoverable through capital tracker mechanisms, and another 28% will be spent on growth projects that will add new customers and expand our system for future growth.

Slide 8 covers some of the company's key operational highlights. Since 2008, when we acquired Northern Utilities, we have remained focused on growing our gas distribution business. Robust customer growth reflects our relatively low customer penetration of 60% along our existing distribution mains as well as system expansion projects that have added over 170 miles of new distribution mains since 2008.

Similarly, our Targeted Area Buildout or TAB programs continue to progress and are proving to be highly successful in the cities of Saco and Sanford, Maine. Together, the Saco and Sanford TAB programs represent a market potential of approximately 3,000 customers. We continue to evaluate other opportunities across our gas network for additional expansion. We're also developing a fill-in strategy to target key areas within cities we already serve but that are not currently served with natural gas.

Our gas pipe infrastructure replacement and system upgrade programs are making great progress. Our New Hampshire infrastructure replacement program was completed last year in 2017, resulting in a 100% modern gas system with essentially no gas leaks. Our Maine infrastructure replacement program is on schedule to be completed by 2024 while our Massachusetts program, now in its third year, is underway and making good progress. These programs are all supported by strong regulatory policies, and we have established ratemaking mechanisms to provide for timely recovery of the capital spending for these programs. As a result of these infrastructure improvements, our customers are currently served by one of the most modern gas distribution systems in the region.

In 2017, we also completed the second of 2 electric substations in New Hampshire as well as a 1.3-megawatt solar generation facility in Fitchburg, Massachusetts. The substations were a combined multiyear investment of approximately $25 million and will provide added capacity for continued load growth and reliability improvement. The solar generation facility in Fitchburg became operational in the fourth quarter of 2017 at an estimated cost of $3.5 million. We're proud to help contribute to Massachusetts' energy goals, and we also have significant opportunities to continue growing our electric operations by pursuing reliability and grid modernization initiatives in both Massachusetts and New Hampshire, both of which enjoy significant regulatory support.

Now I'll turn the call over to Mark Collin, who will discuss our 2017 financial results as well as our current regulatory proceedings.

Thanks, Tom, and good afternoon, everyone. As Tom and Bob have both illustrated, we had another great year in 2017. The company experienced significant earnings and sales margin growth.

Turning to Slide 9. Natural gas sales margin was $109.7 million in 2017, an increase of $6.1 million compared to 2016, driven by higher natural gas distribution rates of $3.3 million and the positive impact of colder weather and customer growth of $2.8 million. Natural gas therm sales increased 3.9% in 2017 compared to the prior year.

Based on weather data collected in the company's natural gas service areas, there were 5% more Heating Degree Days in 2017, which we estimate positively impacted EPS by about $0.07 per share. However, compared to normal, Heating Degree Days were down 1%, which negatively impacted EPS by about $0.01 per share. I note that residential sales were up 6.9% year-over-year, and the total number of natural gas customers is up approximately 1,400 in the last 12 months.

Now turning to Slide 10. Electric sales margin was $92.2 million in 2017, an increase of $4.1 million compared to 2016. Electric sales margin in 2017 was positively affected by higher electric distribution rates of $5.4 million and customer growth of $1 million, partially offset by lower sales volumes due to the net impact of milder summer weather of $0.5 million and lower transmission revenues of $1.8 million.

Total electric kilowatt-hour sales decreased 0.3% in 2017, reflecting milder summer weather in '17, largely offset by customer growth. Based on weather data collected in the company's electric service areas, there were 21% fewer Cooling Degree Days in 2017 compared to 2016. As of December 31, 2017, the number of electric customers served by Unitil has increased by 700 in the last 12 months.

Now turning to Slide 11. We've outlined the major expense variances year-to-date. Operation and maintenance expenses increased $3.9 million in 2017 compared to the prior year. The change in O&M expenses reflects higher compensation and benefit costs of $2 million and higher utility operating costs of $1.9 million. Utility operating costs include higher pass-through regulatory and vegetation management costs of $1.1 million, which are recovered, on a reconciling basis, in sales margins. Excluding these reconciling expenses, O&M was up 4.2% year-over-year.

Depreciation and amortization expense increased $0.3 million in 2017 compared to '16, reflecting higher depreciation and higher utility plant assets in service, partially offset by lower amortization of deferred major storm costs, which were being amortized for recovery over multiyear periods. Taxes other than income taxes increased $1.5 million in 2017, primarily reflecting higher local property tax rates on higher levels of utility plant assets in service. Net interest expense increased $0.6 million, reflecting interest on higher levels of short-term debt, partially offset by higher net interest income on regulatory assets and repayment of higher-cost, long-term debt. Lastly, income taxes increased $2.1 million for the 12 months ended December 31, 2017, reflecting higher pretax earnings in 2017 compared to prior year.

Turning to Slide 12. We take a look at our historical return on equity and regulation. We have a constructive regulatory environment that is supportive of growth initiatives and investments to provide our customers with safe and reliable service at a reasonable cost. We have long-term rate plans or cost trackers established across all our utility subsidiaries. In 2017, we filed base rate cases for the Maine and New Hampshire divisions of one of our gas utility for a combined rate increase of about $10.7 million. These filings also include proposals for comprehensive long-term rate plans, which will allow for more timely recovery of portions of our capital spending on our gas distribution system.

As we have discussed in the past, in the New Hampshire gas rate case, we were awarded a temporary rate increase of $1.6 million, effective August 1, 2017, which will be reconciled to the permanent rate level, which will be cited in 2000 -- this year. We're currently incorporating the Tax Cuts and Jobs Act into both the Maine and New Hampshire gas base rate cases and expect the final decisions to reflect reductions to the requested revenue deficiencies to reflect a lower tax provision on our distribution revenue.

Now turning to Slide 13. We offer a summary of the impact that recent federal legislation -- tax legislation will have on the company. The Tax Cut and Jobs Act of 2017, which became effective January 1, 2018, reduces the corporate income tax rate from 35% to 21%. Each state public utility commission with jurisdiction over the areas that are served by Unitil's electric and gas subsidiary companies has or is in the process of issuing procedural orders directing how the tax law changes are to be reflected in rates, including requiring companies to provide certain filings and calculations. The company is fully complying with these orders and will make any necessary changes to its rates as directed by the commission.

We expect tax normalization and excess deferred tax flow-back provisions will be reflected in ratemaking. The company does expect its distribution revenue to decrease about $7.5 million across all our regulated entities, offset by an equal amount of tax provision reductions. So there'll be no material effect on net income. Cash flow will be negatively impacted, but our credit metrics are expected to remain strong, particularly in light of the equity offering we recently completed in December 2017.

Slide 14 provides an update of our capitalization and long-term financings. Last year, 3 of our regulated utilities entered into multiple agreements to issue and sell $90 million of senior unsecured notes through a private placement marketing process to institutional investors. These long-term financings were closed and funded in November of 2017. The net proceeds from the offerings were used to refinance higher-cost, long-term debt that matured late in 2017; to repay short-term debt; and for general corporate purposes.

Also, in December of 2017, we raised approximately $31.7 million through a public offering of 690,000 newly issued shares of common stock. The total net proceeds were used to make equity capital contributions to the company's Maine and New Hampshire gas utilities, to repay short-term debt and for general corporate purposes. We continue to strive to achieve a balanced capital structure with strong equity capitalization that is approximately 50% equity and 50% long-term debt.

Now turning to Slide 15. As we do each quarter, we began providing 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. Unitil Corporation, on a consolidated basis, earned a total return on equity of 9.7% in 2017. I would like to point out that these results are not weather-normalized.

Also, as we've discussed in the past and as shown on the table in the right, we have long-term capital trackers in place to recover a significant portion of current and future capital spending. These capital trackers, coupled with sustained customer growth, help us maintain and stabilize the level of earnings and our return on equity across all our utility subsidiaries.

Now this concludes our summary of our financial performance for 2017. We look forward to another year of growth and success in 2018.

At this point, I will turn the call over to the operator. Thank you.

(Operator Instructions) Our first question comes from Julien Dumoulin of Bank of America Merrill Lynch.

This is Josephine. So maybe I just have a few questions here, first of all, on how to think about the O&M moving forward. I know that, historically, you've been talking about 3% to 4% O&M growth. That's been a little bit higher this year. Any guidance on how to think about it moving forward?

Yes. I think that 3% to 4% range is still an appropriate range for us moving forward. We haven't seen any real inflationary pickup to any extent at this point. And I think we continue to believe that the 3% to 4% is a good measure for us.

Got it. And the $2 million of, I think it was, nonutility O&M, were there more like a onetime pickup? Or any color on that?

No. What we are really describing in that area is that there are certain costs that are included and reported in operating and maintenance expense that are reconciling, and they tend to have a more volatile nature. They will go up and down based on regulatory requirements or different needs during the year. But because they're matched dollar for dollar with margin -- changes in margin or essentially, a flow-through cost, we like to pull them out because they -- while they may affect the O&M level or the percent change in O&M, they're really of a different nature because of the reconciling and flow-through.

Got it, got it. Great. And then on the rate base front, I know you had, historically, roughly 7% rate base growth. Now I was wondering, on the -- is there upside to that from tax reform, the -- like loss of bonus depreciation? And then I know that, I think, the grid modernization stuff haven't been in like the base case assumption. So could we see some acceleration there?

Yes. I think we've talked in the past that there are some potential upsides, taking the couple of items you talked about, particularly the grid modernization, reliability investments we've talked about that potentially accelerated some of our CapEx on the electric side. So there is definitely some potential upside on rate base growth there. And on the gas side, we just -- we have very strong growth currently, and I think the upside there is probably more likely be driven by continuing improvements in the economy and the competitive -- I think Bob mentioned upfront the competitive price position we currently have over our main competitor, home heating oil. And so there is some upside potentially on the gas growth as a result of that. And then, lastly, kind of a more technical issue is how the tax act may affect the rate base, and I think about most of our analysis today generally indicates that rate base will be higher than it would have been had the tax act not passed. So in other words, the tax act is going to contribute to a slightly higher rate base growth and higher rate base for ratemaking purposes. So that provides some upside as well.

Is there any -- historically, you had 7%. Like is there any way to quantify it? Is like looking -- are we looking at like 8% now? Or...

Well, we've given a range, typically anywhere from 6% to 8% so -- particularly on the gas growth. So the higher end of our growth range, I think, is a reasonable way to think about -- if all these things and the dominoes fall in the right way with the economy and with the ratemaking, on the taxes and we get approval of our grid modernization reliability plans on electric, I think we're on the higher end of our growth trend.

(Operator Instructions) Our next question comes from Insoo Kim of RBC Capital Markets.

Just, I guess, piggybacking off of the tax reform question as it relates to the rate base growth. Obviously, with the loss of bonus, you do expect that rate base to improve. How do you balance that and the amount of CapEx that you are looking to spend in the next couple of years and balancing that with potential financing, even credit metrics and all that?

Yes. I mean, I think, in general, we don't expect that -- the tax act and its provisions to have a material impact on either our CapEx budget or our overall regulatory plan or our growth plan. We think that we can manage any of the changes that it's going to result in. And I'll -- just pointing out bonus depreciation. For us, we haven't relied significantly on bonus depreciation to drive our strategy or to provide us with additional funding for our CapEx program. In fact, we've relied on basic makers as well as repairs. Tax repairs allowances have actually contributed more to us, and we're currently in a very strong NOL, net operating loss, position for tax. I think it's right around $12 million or so. And so I think, going forward, we expect to -- the NOL to continue to provide us the ability not to have to fund taxes from a cash basis, that we'll continue to receive that benefit. And overall, the implications of the tax act on other components of the company, our rate reductions, there's both a negative and a positive to that, the positive obviously being provide some benefits to customers and lower some rates on that perspective and potentially influences growth in that way. And all the other ratemaking we still need to do in terms of excess deferred taxes, we think that'll be over a longer period of time and won't have any sudden or short-term impacts on our plan. So we're generally -- I think we're neutral on all that act. It does -- as you pointed out, so it does have some impact on cash flow. It's the one area. But again, I think, we can manage that. When we look at the important FFO-to-debt statistic that's been thrown around quite a bit lately, particularly with the rating agencies, we expect to be able to maintain something in between 18 and 20x on that. So that puts us in a good spot relative to the credit rating agencies, and we think we'll be able to maintain where we are in terms of those and aren't vulnerable to any kind of downgrade or anything of that nature.

Got it. And then as regards to the grid mod plans in Massachusetts and New Hampshire, how much of that work do you expect this year and potentially next year?

Insoo, this is Tom. In New Hampshire, I don't think we'll be undertaking it this year. We're still waiting for further direction from the commission. In Massachusetts, it depends on the timing of an order because we have not yet received an order approving our plan. We had expected that in the fourth quarter of last year. I think we're now expecting it in the fourth -- the first quarter of this year, but we don't have any clear direction on when that order will be coming out.

Got it, okay. And then finally on my end, with the dividend increase that you guys had announced yesterday and if we're assuming fairly decent growth over the next couple of years, that payout ratio does start to fall within -- below that 70% to 75% range. Again, is it -- are you guys reiterating that range, pretty specifically to stay within that?

Yes. I mean, our -- we've been consistent in saying that our target is between 70% and 75% payout ratio, and so that hasn't changed.

Our next question comes from Shelby Tucker of RBC Capital Markets.

Just maybe some more minor points. Your CapEx this year was -- or last year, say, was about $120 million. Is that comparable to the $104 million, meaning it's a decline? Or are there other elements in that $119 million in '17?

Yes. The -- there's some other elements. It's all regulated rate base type items, but we had a couple of a lot more lumpier onetime projects this past year. In particular, we constructed a new operating center in Fitchburg, Massachusetts for our Fitchburg operations, both gas and electric, which is a building construction, which, again, you don't do every year. So that added. And then we also went live with and began implementation of our new customer information system. So it was a renewal of our entire back office, customer information system and all the metering systems and work that went with that. And then, thirdly, adding to the somewhat unusual type expenditures, we did also have the solar project in Fitchburg for about $3.5 million. So when you take all those items, that's really what pushed us up this past year. But I think it's more -- when you remove those types of onetime items, it's -- the $104 million is pretty comfortable.

Got it. So the $104 million is also a good base to use going forward?

Yes, yes.

Got it, okay. And then looking at your balance sheet. You had a reduction in deferred income tax, obviously, from the tax reform, of about $15 million. But your deferred liability went up about $45 million. Just wondering -- want to reconcile the difference there.

Well, the net adjustment we needed to -- that we made and then we just talked about in the 10-K was $48.9 million. So the net adjustment we made to the deferred tax accounts was a net of $48.9 million. I'm trying to think what other -- what you're exactly reconciling. As you...

Yes. So that might be from more current liabilities there rather than just in the noncurrent?

Yes. There are other things in there.

Got it, okay. And then maybe the last question. Any color on Usource for the quarter and the progress that you're making there?

Yes. I mean, Usource has remained a steady contributor to the company. I would say, the -- what drives that business is volatility in the markets. We have begun to see volatility in the markets with the price of oil going up. And so they had a good fourth quarter in terms of new business, and they feel really good about the first half of 2018 if that volatility continues.

Our next question comes from Julien Smith of Bank of America Merrill Lynch.

Sorry, just wanted to follow up here really quickly. Could you give any color on the decrease in transmission revenues? What's happening at Granite State?

Yes. Essentially -- and that was actually electric transmission, Josephine. That was on the Fitchburg side. We had a true-up of some of our transmission revenues in 2016. So basically, what you're seeing there in terms of the variance is that 2016 had an unusual revenue source of $1.6 million that didn't repeat itself in '17. So it's not -- our normal transmission revenues from period-to-period are pretty level or the same year-over-year. Really, just because '16 had a onetime true-up, that was a little higher.

Got it. And then on the electric -- on the sales growth there. I know -- I think you had 1.5% weather-normalized. Is that a good assumption to move forward with? Or -- I know that you historically had said it's rather flat than growing. So...

Yes. We're -- we have a very -- one of the largest conservation, energy efficiency programs in the nation on a per-customer basis when you look at how much we spend on energy efficiency, so we're doing a lot to bend that curve down and to reduce electric energy usage. And for that, we have different mechanisms, including decoupling in Massachusetts and then energy efficiency lost revenue type mechanisms in New Hampshire to keep us whole on that. But overall, from a sales perspective, I think from flat to 1% is kind of the range we're going to be in for a while as long as we continue to spend the amount we are on energy efficiency. The one caveat I'll give you, again, is and one of the things we don't talk about -- we often talk a lot about the ratemaking implications of the tax act and the -- all the complexity of that. But there's probably not enough said yet. When you look at the business we're in as a utility and what we do, if the tax act is designed to stimulate and grow the economy, we can only benefit from that. And as our customers grow, we're going to grow.

I show no further questions in the queue. This concludes our Q&A session. Thank you, ladies and gentlemen, for attending today's conference. This concludes the program. You may all disconnect. Good day.