Unitil Corp (UTL) 2018 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Q3 2018 Unitil Corporation Earnings Conference Call. (Operator Instructions) As a reminder, today's conference is being recorded.

I would now like to turn the call over to David Chong, VP, Financial and Regulatory Services. Sir, you may begin.

Good afternoon, and thank you for joining us to discuss Unitil Corporation's Third 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; Larry Brock, Chief Accounting Officer and Controller; and Todd Black, Senior Vice President, External Affairs and Customer Relations.

We will discuss financial and other information about our third 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 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'll now turn the call over to Tom.

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

I'm going to begin on Slide 4, where today we announced net income of $2.8 million or $0.19 a share for the third quarter of 2018, which is an increase of $0.03 per share over the third quarter of 2017.

For the 9 months ended September 30, the company reported net income of $22 million or $1.49 share, an increase of $0.22 per share compared to the same 9-month period in 2017.

The increases in 2018 earnings were driven by higher sales margins, reflecting customer growth, favorable impacts of weather on unit sales and new distribution rates.

Turning to Slide 5. We've provided a look at the significant economic growth we are seeing in our service territories. We have identified over $6.8 billion of new construction investment for office buildings, hotels, condominiums and mixed-use developments that are planned or underway in the years ahead.

In the Greater Portland area, there's $2.4 billion (sic) [$3.4 billion] of new construction either planned or under construction, including 1,000 housing units, which would increase the number of households in that city by 3%. This robust level of growth will generate significant opportunities for the company well into the future.

Turning to Slide 6. I'll focus on some of the recent highlights we've had. Our gas expansion efforts continue to be successful and customer demand for natural gas remained strong. Year-to-date customer contracts are up about 25% relative to last year, and we've already surpassed a number of customers we connected in 2017. This is driven in part by a significant price advantage relative to fuel oil of more than 50% in some cases, depending on location, customer and customer class, with commercial customers seeing the largest differential relative to fuel oil.

As the prior slide highlighted, we are also continuing to see robust development activity in our service areas, which will translate into thousands of new customers over time as those projects are completed.

In Maine, we're in the third year and final year of our Saco Targeted Area Buildout or TAB program and are currently on track to meet 100% of the target for new customer additions. We also started the first year of our buildout of the Sanford TAB and have installed almost 7 miles of new mains in the downtown of that city. We've spent over $10 million on these 2 projects to reach a market potential of approximately 3,000 customers.

In New Hampshire, we were -- we requested franchises in 3 new towns to meet anchor loads and commercial centers in Atkinson, Kingston and Epping. This month, the New Hampshire Public Utilities Commission approved our request to expand our franchise to the towns of Kingston and Atkinson, and we are currently completing mains extensions to reach the anchor customers identified on those requests. A similar franchise request is currently pending for Epping, New Hampshire, and we expect the final decision will be made by our regulators in the first half of 2019. All of this is part of our ongoing growth plan to expand our footprint both within and outside our current franchise areas.

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

Thanks, Tom. Good afternoon, everyone. As Tom just mentioned, we had a good third quarter, partly reflecting higher than average temperatures this past summer. Third quarter earnings per share of $0.19 were up 18.8% over the same period last year. Likewise, through the first 9 months of the year, earnings per share of $1.49 have also reflected this growth trend and are up 17.3% over the same period a year earlier.

Now turning to Slide 7. Natural gas sales margins were $17.6 million and $80.4 million in the 3 and 9 months ended September 30, 2018, respectively, which reflect increases of $0.8 million and $5.1 million compared to the same periods in 2017.

Gas sales margins in the first 9 months of 2018 were positively affected by higher natural gas distribution revenues of $5.9 million, partly offset by lower revenues of $2.9 million to account for the reduction in gas rates due to the lower corporate income tax rate of 21% under the new tax law.

Gas margin in the first 9 months of 2018 also reflects the positive effect of colder winter weather and customer growth on sales volume of $2.1 million. As a reminder, the reduction in revenues related to the tax law changes also reflects a correspondingly lower and offsetting provision for income taxes in the period.

Natural gas therm sales decreased 2.9% and increased 5.5% in the 3- and 9-month periods ended September 30, 2018, respectively, compared to the same periods in 2017. The increase in gas therm sales in the company's service areas in the 9-month period were driven by customer growth and colder winter in 2018 compared to 2017. There were 9% more Heating Degree Days in the first 9 months of 2018 compared to the same period of 2017.

As of September 30, 2018, the number of total natural gas customers served has increased by approximately 1,200 in the last 12 months. New customer connections continues to trend higher and is running about 25% above the pace of connections in the same period last year.

Next, on Slide 8. Electric sales margins were $25.9 million and $70.5 million in the 3- and 9-month periods ending September 30, 2018, which reflect increases of $1.1 million and $0.4 million, respectively, compared to the same periods in 2017. Electric sales margins in the first 9 months of 2018 were positively affected by higher electric distribution revenues of $2.5 million, partially offset by lower revenues of $2.1 million in 2018 to account for the reduction in electric rates due to the lower corporate income tax rate of 21% under the new tax law.

Electric sales margins in the current period were also affected by warmer-than-average summer temperatures and customer growth of $1.4 million. These positive impacts on electric sales margins were partially offset by the absence in the current period of a 1-year, $1.4 million temporary rate reconciliation adjustment which we recognized in 2017 revenue. Again, I would like to point out that the reduction in revenues related to the tax law changes also reflects a lower and offsetting provision for income taxes in the period.

Total electric kilowatt hour sales increased 3.4% and 4.2%, respectively, in the 3- and 9-month periods, reflecting customer growth and favorable impacts of the weather on unit sales and higher energy usage by commercial and industrial customers.

Based on weather data collected in the company's electric service territories, there were 49% more Cooling Degree Days in the third quarter of 2018 compared to the same period in 2017. As of September 30, 2018, the number of total electric customers served has increased by approximately 575 in the last 12 months.

Now turning to Slide 9. Operation and maintenance expenses decreased $0.5 million and increased $2.1 million for the 3- and 9-month periods, respectively. The decrease in the 3-month period reflects lower professional fees of $0.5 million and lower labor costs of $0.3 million, partially offset by higher utility operating costs of $0.3 million. The increase in the 9-month period reflects higher labor costs of $1.5 million and higher utility operating costs of $1.9 million, offset by lower professional fees of $1.3 million. The higher utility operating costs in the 9-month period included nonreoccurring temporary rate adjustment to increase O&M expenses by $1.2 million in the second quarter of 2018, which is offset by a corresponding increase in gas revenue.

Depreciation and amortization expense increased $1.6 million and $2.2 million in the 3 and 9 months ended September 30, 2018, respectively, compared to the same periods in 2017. These increases reflect higher utility plant in service and higher amortization of information technology costs, partially offset by lower amortization of deferred major storm costs, which are being amortized for recovery over multiyear periods.

Taxes other than income taxes increased $0.6 million and $0.9 million in the 3- and 9-month periods, primarily reflecting higher local property rates -- tax rates on higher levels of utility plant assets in service and higher payroll taxes.

Interest expense, net, increased $0.2 million and $0.8 million in the 3- and 9-month periods compared to the same periods in 2017. These increases primarily reflect interest on higher levels of long-term debt.

Lastly, federal and state income taxes decreased by $1 million and $6.1 million for the 3- and 9-month periods ended September 30, 2018. The decrease in the 3-month period reflects the effect of a lower tax rate on pretax earnings from the new tax law changes. The decrease in the 9-month period reflects $5 million from the lower tax rate on pretax earnings in 2018 and the current tax benefit of $1.1 million of book/tax temporary differences turning at the lower tax rate in 2018.

Looking forward for the remainder of 2018, we expect to maintain a lower effective tax rate of approximately 18% compared to our statutory rate of a little over 27% due to this book/tax benefit.

Now turning to Slide 10. This provides the trailing 12 months actual earned return on equity in each of our regulatory jurisdictions. Unitil, on a consolidated basis, earned a total return on equity of 10.3% in the last 12 months ended September 30, 2018, which is in line with authorized returns ranging from 9.5% to 9.8% across our regulatory jurisdictions. As we have discussed in the past, these results are not weather normalized.

We have a very constructive regulatory environment that is supportive of growth initiatives and investments to provide our customers with safe and reliable service. We have long-term plans or cost trackers established across nearly all our utility subsidiaries. These capital trackers, coupled with sustained customer growth, help us maintain and stabilize the level of earnings and our return on equity across our utility subsidiaries.

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

(Operator Instructions) And our first question comes from the line of Shelby Tucker, RBC Capital Markets.

I have a quick question on the level of O&M. Clearly, you've done a very good job this quarter. Would you mind just going to a bit more detail as to what was in that number and what should we expect going forward on a run-rate basis?

Yes, I think the quarter, as you said, was -- we're about $500,000 favorable for the quarter. And there are 2 favorable items in it that resulted in that. One was favorable on -- our professional fees of $500,000 plus we had lower labor costs of around $300,000. The lower professional fees or the favorability in professional fees was driven by a couple of items, Shelby. One was, this year, we did not have expenditures related to our customer information system that we installed last year, and we had a significant amount of temporary help, particularly during the period that, that was being first started up and first implemented, so that amount of temporary help we were able to reduce in the current period. In addition, there is an accounting reclass due to the revenue recognition rules that affects the O&M line as well. Previous to -- in '17, we used to include certain channel partner fees associated with our unregulated operations at Usource down in the O&M line. As a result of the new revenue recognition rules, that is now not included in O&M in the current period in 2018 and is included up in revenue. So it's a -- netted from revenue. So that was about $300,000. So those are a couple of the reasons. The professional fees turned out favorable. The labor also show some favorability, that's generally just timing throughout the year. And then netting against those favorable items was just year-over-year higher utility maintenance cost. On a going-forward basis, I guess the best way to look at it is to look at the trend for the year. And our goal is to generally try to maintain our O&M expenses in line with inflationary expectations. So certainly, from a budgetary or goal perspective, we're shooting for overall annual growth in our O&M accounts of around 3%. That -- different times of year and different periods, we may run a little ahead of that. And hopefully, are able to even run a little behind that. But for planning purposes and certainly for modeling purposes, we continue to think anything in the 3% range. If you want to be conservative, 3.5% to 4% is appropriate.

And then, of course, in -- you used to mention also in the second quarter you had a -- maybe a higher O&M like -- due to additional cost that -- for which you had revenue coming in also. Do we -- how does that factor into our 3.5% to 4% long-term O&M view?

Yes. In the 9-month period, there was a -- essentially an item related to some temporary rates that resulted in us recording an additional O&M of $1.2 million in the -- in '18 that was previously deferred O&M costs from '17. And that was a temporary rate adjustment. And we do not expect that type of thing in our current outlook to reoccur. So for comparison purposes, that $1.2 million essentially should be removed or considered a onetime item in the 9-month period O&M.

Got it. And then on Usource, you seem to be lagging a little bit here relative to last year. Anything we should expect in the fourth quarter to make that up? Or are we kind of trending toward a -- lower results?

Yes. I'd just be a little careful looking at that because we're actually ahead a little bit. But I think that the same thing I talked about, the revenue recognition standard, it resulted in the revenue being reported at a lower level just because those channel partners fees are now netted against revenue. But revenue, once you take into account the channel partner fees, is actually running a little ahead of last year.

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