Unitil Corp (UTL) 2018 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Unitil First Quarter 2018 Earnings Conference Call. (Operator Instructions)

As a reminder, this call is being recorded.

I would now like to introduce your host for today's conference, Mr. David Chong. Sir, you may begin.

Good afternoon, and thank you for joining us to discuss Unitil Corporation's first quarter 2018 financial results. With me today are Tom Meissner, 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 first quarter 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 had 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'll now turn the call over to Tom.

Thanks, David, and thanks, everyone, for joining today.

Before we begin the presentation, I did want to just take a minute and say how honored I am to be succeeding Bob as CEO of Unitil. I plan to pursue many of the same endeavors and strategic goals that enabled us to achieve record financial results and total market returns greater than both the S&P 500 and utility indices over the last 5 years. We will also carry on the same performance-oriented culture that Bob has instilled in the company over the last 20 years. And as we look to the future, I'm very optimistic about where we are as a company.

I'm going to begin today's presentation on Slide 4 where today, we announced net income of $15.6 million or $1.06 per share for the first quarter of 2018. This is an increase of $3.2 million or $0.18 per share over the first quarter of 2017. We're pleased with our first quarter results, which benefited from continued customer growth, colder winter weather and our successful regulatory agenda.

Turning to Slide 5. We've highlighted some of our significant recent accomplishments. We're currently generating record earnings while serving a record number of customers. In addition to strong financial results, we continued to focus on superior operational performance to ensure the safe, reliable delivery of electricity and natural gas that our customers expect. We will continue to focus on expanding and upgrading our distribution system to support future growth while delivering exceptional service to our customers.

Turning to Slide 6. We remain committed to exceeding our customers' expectations. We're very pleased that 90% of our customers report being satisfied with our service. Customers rate us particularly high in providing reliable service, being responsive to their needs and being a company they can trust.

Our new state-of-the-art customer information system, which was fully operational at the end of last summer, has transformed our communications capabilities. Our customers are now able to interface with us over a broad suite of digital and social interfaces that are demanded in today's environment.

Finally, we have been recognized for our focus on our customers and on our communities by third-party organizations such as the Red Cross. We are committed to being a responsible corporate partner with the communities we serve.

Moving on to Slide 7. We implement many industry-leading practices in our operations. Our gas emergency response and safety programs are best in class, and we continue to receive recognition for our efforts in those areas. We maintain high safety standards, and we are focused on upgrading and replacing our aging natural gas distribution system. Unitil's natural gas distribution system is currently 91% modernized, which is well ahead of our New England utility peers. On the electric side, we remain focused on reliability, and we've seen our customer average interruption duration decrease by 9% annually since 2010. This decrease is due in part to our industry-leading vegetation management and emergency management programs.

Slide 8 presents our multifaceted strategy that will facilitate growth well into the future. On the gas side of the business, we continue to have extensive growth opportunities. First, we have relatively low customer penetration of 60% along our existing mains, which provides for thousands of potential low-cost customer conversions.

We have also been actively upgrading and expanding our gas system with extension projects that added approximately 100 miles of new distribution mains over the past 5 years.

Our Targeted Area Build-out program, where we focus on expansion into entire towns, continues to be highly successful. We currently have 2 such projects in the cites of Saco and Sanford, Maine, which represent a market potential of our round 3,000 customers.

In terms of infrastructure replacement and safety, we continue to make progress on our cast iron and bare steel replacement programs. Our New Hampshire program was completed last year, resulting in a 100% modernized system in that state. Our Maine infrastructure replacement program is scheduled to be completed by 2024, and our Massachusetts program is a little further out, with anticipated completion in a little over 15 years. All of these programs have been supported by our regulators, and we have established capital tracker recovery mechanisms in each state.

Turning to the electric side of the business. We believe there are significant trends in the industry to modernize the electric grid. Our regulators in both Massachusetts and New Hampshire support grid modernization initiatives for new investments in the electric distribution system. To give you an idea of the scope of this investment, the current 10-year preliminary planned spending is $24 million in Massachusetts alone. While the New Hampshire plan is still under development, it could be over $60 million over the next 10 years if sized comparably to Massachusetts. We continue to be active participants in the proceedings in both states, and we look forward to providing our customers with a more reliable and modern electric grid.

Now I'll turn the call over to Mark Collin, who will discuss our financial results for the quarter.

Thanks, Tom. Good afternoon, everyone. I will review a few of the financial results for the first quarter. If we turn to Slide 9.

Natural gas sales margin was $39.9 million in the 3 months ended March 31, 2018, resulting in an increase of $1.9 million or 5% compared to the same period in 2017. Gas sales margin in the first quarter of 2018 was positively affected by colder weather and customer growth of $1.8 million and higher natural gas distribution rates of $1.6 million, partially offset by lower revenue of $1.5 million to account for the reduction in the corporate income tax rate to 21% under the Tax Cuts and Jobs Act of 2017.

Total therm sales of natural gas increased 9.5% in the 3 months ended March 31, 2018, compared to the same period in 2017. Based on weather data collected in the company's natural gas service areas, there were 10% more heating degree days in the first quarter of 2018 compared to the same period in 2017, which contributed a positive $0.05 to EPS. Compared to normal, heating degree days were relatively flat in the first quarter of 2018, which had a marginal impact on EPS.

Finally, the number of total gas customers served has increased by approximately 1,500 customers in the last 12 months.

Next, on Slide 10. Electric sales margin was $22.3 million in the 3 months ended March 31, 2018, resulting in an increase of $0.3 million or 1.4% compared to the same period in 2017. Electric sales margin in the first quarter of 2018 was positively affected by higher electric distribution rates of $0.9 million as well as colder weather and customer growth of $0.2 million, again partially offset by lower revenue of $0.8 million to account for the reduction in the corporate income tax rate under the Tax Act.

Electric sales for the first quarter of 2018 were up compared to prior year by 5.8%, and the number of electric customers served was up over 500 in the last 12 months.

Turning to Slide 11. We have outlined the major expense variances year-to-date. Operation and maintenance expense increased $1.3 million in the 3 months ended March 31, 2018, compared to the same period in 2017. The change in O&M expenses reflects an increase in compensation and benefit costs of $0.7 million, bad debt expenses of $0.2 million and higher utility operating cost of $0.4 million.

Depreciation and amortization expense decreased $0.2 million in the 3 months ended March 31, 2018, reflecting lower amortization of deferred major storm costs, partially offset by higher utility plant and service and amortization of information systems and software costs.

Taxes other than income taxes increased $0.3 million in the first 3 months of 2018, primarily reflecting higher local property taxes on higher levels of utility plant assets and service.

Net interest expense was essentially unchanged in the 3 months ended March 31, 2018, reflecting higher interest on long-term debt, offset by lower net interest expense on regulatory assets and liabilities and lower levels of short-term debt.

I would also like to point out 2 accounting changes that took effect this quarter. First, we adopted ASU 2017-07 in the first quarter of 2018, which requires the presentation of certain pension costs outside of operating income. These costs are now reflected in the other expense income net line of our income statement and were reflected in both the current and historical periods.

Second, we adopted ASU 2014-09, which affected the presentation of revenues for Usource, our nonregulated energy brokering business, in the current period. This accounting standard requires that payments made by Usource to third parties, or what we call channel partners, for revenue sharing agreements are recognized as a reduction from revenue, where those payments were previously recognized as an operating expense. This classification change is presented only in the current period so that $0.3 million of the $0.4 million variance for the quarter is attributable to this accounting change.

Lastly, income taxes decreased by $2.9 million for the 3 months ended March 31, 2018, reflecting $2.3 million from a lower tax rate on higher pretax earnings and the current tax benefit of $0.6 million related to book tax items that are not previously included in customers' rates.

Looking forward for the remainder of 2018, we expect to maintain a lower effective tax rate of 23% to 24%, that's a combined federal and state tax rate, compared to our combined federal and state statutory tax rate of a little over 27% due to this book tax benefit. In 2019, we expect to return to effective rate closer to our statutory rate.

Slide 12 provides a trailing 12-month actual earned return on equity in each of our regulatory jurisdictions. Unitil, on a consolidated basis, earned a total return on equity of 9.9% in the last 12 months ended March 31, 2018. I'll point out that these results are not weather normalized. 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 plans or trackers established across nearly all our utility subsidiaries.

The chart also provides a summary of the impact of recent federal tax legislation on each of our regulated utilities. Importantly, in our 2 base rate case proceedings filed last year, we incorporated the effect of the Tax Act. We completed the Maine gas division with a $2.1 million increase related to the test year adjusted cost of service and a $2.2 million decrease for the Tax Act for a net reduction of $0.1 million effective March 1, 2018. The rate case all provided -- also provided for lower ongoing depreciation expense of $0.5 million annually.

In our New Hampshire gas division, we recently entered into a settlement agreement, which if approved, will provide for a $2.6 million increase related to the test year adjusted cost of service and a $1.7 million decrease for the Tax Act for a net increase of $0.9 million, which will be reconciled to January 1, 2018. The settlement also includes a capital tracker step increase of $2.3 million for effect May 1, 2018. I'll also point out that settlement is uncontested.

For the remainder of our jurisdiction, we've shown capital tracker rate adjustments as well as the impact of the Tax Act for this year.

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

(Operator Instructions) Our first question comes from Julien Dumoulin-Smith with Bank of America.

So I suppose, first, starting with the grid modernization stuff. Can you talk about the impact on CapEx as you see it just in terms of the delay and how you think about the timeline to kind of true that up? But then secondarily, you talked about the New Hampshire equivalent of the $60 million over 10 years. What's the process there? And when do we start to see some of that ultimately flowing into capital?

In Massachusetts, I think we're currently waiting for an order that we expect imminently and likely within the second quarter, although there's no hard deadline for that. Once we get the order, we already have the plans, so we'll begin the process of essentially firming up and going out to bid on the types of investments that we intend to make.

In New Hampshire, they're following virtually an identical process to Massachusetts, so we expect it to be very similar. But we, at this point, are still waiting for a commission order on the report that was -- that resulted from the stakeholder process in New Hampshire. As soon as we get the order on that, then we'll be putting together our plan in New Hampshire. And it's going to be commensurately larger investments just because of a larger customer base, distribution system and substations.

All right, excellent. Perhaps just following up on the results for the -- of late here. Just with respect to Unitil Energy and the returns on equity seen on a trailing basis, is that more seasonal here? Or is there something about 2018 as you think about it, especially given the forthcoming rate increase in what seems like the May time frame? How does that frame the overall annual expectations for that sub?

We have seen an uptick in the economy, and we have seen some improvement in electric sales. It's a division in New Hampshire that's not decoupled, so it does benefit from the sales increases. And I think that as a result of that, we've seen some improvement in performance. As we go forward, one of the important aspects of our tracker system is it allows us to keep up with the level of capital expenditures we're making. So while we're still going to benefit from a tracker increase, as you said in May of this year, we also are bringing more capital into rate base, more investment, more depreciation, et cetera.

So on an overall basis, I think we expect to continue to be able to earn our overall rate of return on Unitil Energy, which is -- so that's kind of where we're at. And we may have periods of continued overperformance, but overall, I think it'll be around our allowed return.

Excellent. And then can you come back to the Fitchburg side of things? Obviously, there are conversely things on the 8% ZIP code. What's the timing and expectation for improvement there probably via a rate case?

Yes, it's -- there is legislation in Massachusetts that requires electric utilities to file every 5 years, gas utilities every 10 years. Our last test year in Fitchburg was 2014. So arguably, a 5-year from a test year perspective would be a 2019 test year just following the legislation. Now there may be some interpretation there. We're still trying to -- as with all legislation you can interpret, would that be 2019 or 2020? But in any event, sometime in that time frame is going to be required. If we do it earlier, it would just be based on an evaluation that we felt that, that was needed.

On the gas side, it's a little longer. As I said, 10 years. And that'll be dependent upon the particular earnings of the gas. In both those cases that you see on the schedule on Slide 12, Julien, there is new tracker mechanisms that we recently implemented there. And so we do expect that to again help maintain the overall earnings over a longer period of time without the need for rate cases quite as often. And as those cracker -- trackers come in, our goal is to try to manage expenses and manage other areas to try to bring up those returns without the need for a rate filing.

And then last, I'll just mention in Fitchburg because we've talked about this before, we do have some lower expected amortization expenses related to our storm costs falling off, which will also help contribute to the returns in that division.

But to be clear here, I mean, it's only because you -- the delay in filing out to 2019 would only be because you anticipate an uplift that would be sufficient out of the trackers that are pending here?

Yes, yes. Yes, as the trackers in both are our own cost management and, third, as I indicated, the annualization of these costs, the storm-related amortization that they're no longer going to -- they're going to term out basically. But because they're in base rates, the fact they term out, there's no adjustment to rates for them.

Our next question comes from Insoo Kim with RBC Capital Markets.

In terms of the tax items, could you just elaborate a little bit more on the $0.6 million of book tax items that you mentioned that was a benefit this quarter? And is that more of one-time just for this quarter? Or could we see some more of those items in future quarters this year?

Yes, the -- in terms of the EPS impact, the -- it's -- this is a quarterly impact of the -- as we've discussed, the $1.8 million of ADIT revaluation that was done that is essentially being recognized this year. So the -- now being recognized as being recognized ratably over the year, there might be a little bit into 2019, but you can expect an impact every quarter, albeit in the softer quarters or the lower quarters, it'll follow our income. So it'll be a less impact; and where our income quarters are lower, more of an impact. But over the whole period, that whole $1.8 million would be reflected. We've got a pretty good writeup on that on Page 51 on our 10-Q. And hopefully, that lays it out pretty clearly. So -- and just staying on that topic, Insoo, that for the year, our -- we expect our -- as I said in my comments, is that the effective tax rate will be around 24%, I think, for the year. That's a combined federal and state. And next year, it will probably return more to the 27% range.

Got it, okay. And then in terms of your, I guess, customer growth, what was the year-over-year customer growth in the gas and electric businesses? And was the impact of -- the benefit from customer growth somewhat higher than historic levels this quarter?

Not -- no, I think we've seen pretty consistently and have been able to grow fairly consistently the gas business in that range of 1,200 to 1,500 customers a year. And the quarterly impact is if -- as we do a trailing 12-month basis, that's about what it looks like, and we've been able to do that. If anything, we're optimistic that we might see a little more of uptick looking forward on that be on the higher end of that range, if not better, because of the improving economy and particularly in the areas we serve and the amount of development that we're seeing going on in both the commercial and residential sector. And the -- that will tend to follow on, on electric, although we don't expect to see the same robustness for obvious reasons between electric and gas.

The gas, we have a lot of unserved customers sitting along our pipeline that we're still attracting. So -- but again, our gas has grown. I think it was 500 customers in the last trailing period, and I think we've been as high as 800, 900 in certain periods or even a little more. And that will fluctuate a little bit. But again, we're fairly optimistic that looking forward, we expect to see good growth there.

Understood. And then finally from me, on Granite State, I know FERC put out an note for -- to try -- investigating the, I guess, the tax reform impact on rates and whether there are any rates that are unjustified or unfair. Based on what you know and the rates that are -- that's at Granite State, do you see any potential impact as just minor? Or could that be a scenario where the impact is a bit more material for you guys?

Yes. No, we've been -- we were in the middle of a process much like we had rate cases in northern -- in both New Hampshire and Maine that helped us address the Tax Act in a rate case, which is -- if you ideally can do it, that's clearly the best time to do it and the best place to do it. You can get all the items lined up. With Granite -- similarly with Granite, we were in the middle of settlement discussions because of -- our last settlement there have what they call a comeback provision requiring us to file a rate case this year for Granite, and we were getting ready to do that. But in lieu of that, we've been able to work with the parties to address the Tax Act, and we don't expect the act itself to have a material impact on Granite.

(Operator Instructions) And at this time, I'm showing no further questions. Ladies and gentlemen, thank you for your participation in today's conference. This does conclude the program, and you may now disconnect. Everyone, have a great day.