Unitil Corp (UTL) 2019 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to the Q4 2019 Unitil Corporation Earnings Conference Call. (Operator Instructions) Please be advised that today's conference is being recorded. (Operator Instructions)

I would now like to hand the conference over to your speaker today, Todd Diggins, Director of Finance. Thank you. Please go ahead, sir.

Good afternoon, and thank you for joining us to discuss Unitil Corporation's Fourth Quarter 2019 Financial Results.

With me today are Tom Meissner, Chairman, President and Chief Executive Officer; Christine Vaughan, 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 fourth 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 will now turn the call over to Chairman, President and CEO, Tom Meissner.

Thank you, Todd, and thanks, everyone, for joining us today. We're happy to report that 2019 was another great year for the company. We're going to begin today on Slide 4, where today we announced net income of $11.4 million or $0.77 per share for the fourth quarter of 2019, which was an increase of $0.4 million or $0.03 per share over the fourth quarter of the prior year.

For the year, net income was $44.2 million or $2.97 per share, which was an increase of $11.2 million or $0.74 per share compared to 2018. Excluding the Q1 divestiture of our unregulated energy brokering business Usource, net income was $34.4 million or $2.31 per share, an increase of $1.4 million or $0.08 per share compared to 2018. This increase was largely a result of our continued growth in customer base.

Turning to Slide 5. 2019 was the seventh consecutive year of increasing earnings per share. EPS growth has averaged 7.1% annually since 2012, driven by strong margin growth averaging 5.4% each year over the same time period. Our sales margins continue to grow as the company expands its distribution system to serve new customers and executes on its regulatory strategy.

Our investments in system expansion in infrastructure modernization resulted in a 7.2% increase in net plant compared to prior year. This increase was funded in part by the proceeds from the sale of Usource.

On Slide 6, we've provided some operational highlights for the year. We're proud of the success we had operationally in 2019. It was our best year ever for electric reliability with performance ranking in the top quartile of the industry. This continues our improving trend over the last 10 years.

In fact, over the past 5 years, our customers have experienced about 35% reduction in annual outage time compared to the prior 5 years. The company also continues to emphasize safety and emergency response. In 2019, we again responded to over 99.9% of gas safety calls within 60 minutes.

In addition, the company added 23 miles of new gas mains in conjunction with customer growth initiatives while also replacing and modernizing 12 miles of outdated gas mains in Massachusetts and Maine. I would like to add that these replacements will be recovered through existing accelerated capital recovery mechanisms.

Slide 7 recaps the strong returns we've delivered to our investors as we outpaced both the S&P 500 in the Dow Jones Utility Average over the past 5- and 10-year periods. We're also pleased to have been recognized with an EEI Index award for outstanding stock performance by the Edison Electric Institute. Unitil had the highest total shareholder return in the small-cap category among the EEI Index companies for the 5-year period ending September 30, 2019.

Slide 8 summarizes the key investment themes we offer to our investors. We are a pure-play regulated utility with strong -- customer growth prospects and a significant opportunity for continued investment. We believe this growth potential, combined with our low-risk business profile, offers investors a rare opportunity.

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

Thanks, Tom. Good afternoon, everyone. I'd like to begin by reviewing our gas and electric sales activity. Beginning on Slide 9, our 2019 gas margin is $122.2 million, which is an increase of $5.3 million over 2018. This increase was due to higher natural gas distribution rates of $5.6 million and $0.9 million as a result of higher therm sales, reflecting customer growth and increased average consumption by both residential and C&I customers. This increase was partially offset by the absence of a $1.2 million nonrecurring adjustment in connection with -- to a rate case, which occurred in the second quarter of 2018.

Natural gas therm sales increased 0.4% compared to 2018. Given the milder winter weather in 2019, the company estimates that weather-normalized gas therm sales, excluding decoupled sales, were up 4.2% year-over-year. The increase in gas therm sales was largely driven by customer growth and strong commercial and industrial usage. We are currently serving 1,152 or 1.4% more gas customers than at the same time in 2018.

I'd like to point out that weather-normal unit sales growth is currently outpacing our customer growth rate, and the company partly attributes this to nonheating residential customers transitioning to natural gas as a heating source. Additionally, we see strong C&I usage that correlates to the robust economies within our service area.

Next, on Slide 10. For the year, electric sales margins are $91.9 million, which is flat to 2018. Electric sales margins were positively affected by higher electric distribution rate of $1.6 million but fully offset as a result of lower kilowatt hour sales.

Total electric kilowatt hour sales decreased 4.8% compared to 2018. The milder summer weather compared to 2018 had a significant impact on sales. And when normalizing this weather in both '18 and '19, the customer estimates that weather-normalized sales were down 2.7% in New Hampshire. And this weather-normalized sales is as a result of lower usage per customer, as a result of energy efficiency initiative and somewhat offset by higher customer accounts.

Now just as a reminder, the company is fully decoupled in Massachusetts. And in New Hampshire, the company has regulatory mechanisms in place. And these mechanisms provide recovery for lost kilowatt hour usage due to company-sponsored energy efficiency measures and displaced revenue associated with net metering. And if we excluded the recoverable net metering and company-sponsored energy efficiency decreases, we estimate that weather-normalized sales are down about 1.4% in New Hampshire.

Turning to Slide 11. We provide an earnings variance analysis. I'd like to point out that this layout is slightly different from the Form 10-K, as we isolate the impact of the after-tax gain of the Usource divestiture. As I mentioned previously, gas and electric combined sales margin is higher than 2018 by $5.3 million, offset by $3.8 million of Usource revenue realized in 2018.

Operation and maintenance expenses decreased $2.3 million compared to the same period in 2018. This includes $1.2 million less O&M as a result of a 2018 nonrecurring adjustment to O&M in connection with our New Hampshire rate case. O&M is also lower by $2.4 million as a result of expense not incurred due to the Usource divestiture. Excluding these nonrecurring adjustments, O&M increased $1.3 million or 2%, which is primarily a result of higher labor costs.

Depreciation and amortization trended higher with higher utility plant and service, slightly offset by lower amortization expense. Taxes other than income taxes increased $0.3 million compared to 2018 primarily reflecting higher local property tax rates on higher levels of utility plant assets and service. However, this was partially offset by favorable property tax abatements realized in 2019.

Interest expense was flat due to lower interest on long-term debt, offset by higher short-term borrowings. Other expenses decreased $1 million primarily related to lower retirement benefit costs. And next, we've isolated the $9.8 million related to the after-tax gain on the sale/divestiture of Usource. Excluding the tax associated with the gain on the divestiture, income tax increased $1.8 million as a result of higher pretax income.

Now moving on to Slide 12. In December, Unitil Corporation closed and received funding on 10-year notes with a principal of $30 million and an interest rate of 3.4%. This financing immediately reduced the short-term borrowings and lessened the company's overall exposure to variable short-term interest rates. A portion of these proceeds, in addition to corporate general funds, were invested into the company's regulated subsidiaries. The company is also considering utilizing a prepayment option to pay $20 million of corporate notes in the second quarter of 2020, and these notes are currently carried at an interest rate of 6.33%.

Unitil is well positioned to continue refinancing high-cost long-term debt at lower interest rates in the near future with over $50 million of debt maturing in the next 3 years at an average rate of 6.5%.

Next, on Slide 13. We provide an update to the company's regulatory activity. In December, we filed a gas and electric rate case for our Massachusetts subsidiary. Both filings include a 52.5% equity ratio, and we expect to have new distribution rates to become effective in the fourth quarter of 2020. The as-filed base revenue deficiency on the gas side is $7.3 million and $2.7 million on the electric side. I'd like to note that these base revenue deficiencies include roughly $5 million of combined tracker revenue that's already being recovered via other rates that will shift to base rates after the rate case becomes effective. The electric rate case filing also seeks approval of performance-based rates to take the place of the existing tracker -- capital tracker mechanism.

The Northern Utilities general base rate case filed with the Maine PUC is progressing as planned. The company anticipates new base distribution rates to become effective on April 1, 2020. The company is also monitoring the recent update from FERC on the adoption of a new base rate -- base ROE methodology for transmission rate base. Our exposure is very limited with the electric transmission representing less than 1% of the company's total rate base.

Finally, the company is pleased to announce that we've received regulatory approval for a new long-term pipeline capacity agreement back to Union Storage in Dawn, Ontario, increasing our gas supply by 11% in New Hampshire and Maine through a project called Westbrook Express. And this helps ensure that we have the capacity to serve our growing customer base.

Slide 14 provides the 2019 actual earned return on equity in each of our regulatory jurisdictions. Unitil, on a consolidated basis, earned a total return on equity of 12.2% in the last 12 months. Excluding the onetime gain from Usource divestiture, the company earned a consolidated return on equity of 9.5%.

Finally, on Slide 15, we have provided a summary of our distribution rate relief that affected 2019. We have a precedent for long-term rate plans across trackers, across all our utility subsidiaries. Accelerated cost recovery mechanisms are a focal point of our regulatory strategy as they allow for a smoother margin growth, reduced regulatory lag and help minimize rate shock for customers. We have been awarded over $4 million of rate relief outside of rate cases in 2019.

This concludes a summary of our financial performance for the period. I'll now turn the call back over to Tom to discuss our updated investment program and some other topics.

Great. Thank you, Christine. On Slide 16, we've summarized our current 5-year investment plan. We expect to invest over $680 million in our gas and electric systems over the next 5 years, which is an increase of over 25% compared to the previous 5 years. This investment will continue to fund gas infrastructure modernization, gas system expansion and electric grid modernization. It's worth noting that this outlook does not include any incremental spending for grid modernization in New Hampshire, electric vehicle charging infrastructure or gas supply peaking projects.

Slide 17 highlights our forecast for rate base growth over the same time period. We expect to continue our historical rate base growth of 7.5% to 8.5% over the next 5 years. This growth could be accelerated if significant projects materialize, such as the grid modernization in New Hampshire, electric vehicle infrastructure or gas supply peaking projects. We do not expect our 5-year investment plan to materially alter the investment mix between gas and electric operations, with 2/3 of investment directed towards the gas distribution system. Under the current plan, we expect gas rate base to grow slightly faster than electric.

On Slide 18, we provide detail on the funding sources for our investment program. The primary source of funding will be internally generated cash flow, which is expected to fund approximately 64% of our 5-year investment program. The company has strategically reduced its payout ratio over the past several years and is well positioned to reinvest earnings and reduce external financing requirements. The remaining 36% will consist of external financing through a combination of long-term debt and equity. About 6% of the investment program will be funded by common equity, which includes shares issued under the company's dividend reinvestment in 401(k) programs. Additional common equity offerings will be needed from time to time to maintain a balanced capital structure and support our investment-grade credit metrics.

Finally, on Slide 19, this week we announced that we are increasing our annual dividend by an additional $0.02 to $1.50 per share. This is the sixth consecutive year that we have increased our common dividend even as we've significantly lowered our payout ratio.

In 2019, we achieved the upper end of our targeted dividend payout ratio range of 55% to 65%. As a result, the Board may consider gradually accelerating growth in the dividend beginning next year, even as our payout ratio continues to decline. We will continue to strategically analyze our dividend policy subject to EPS growth and financing needs.

And with that, thank you for attending today's call. I will now turn the call over to the operator, who will coordinate questions from the audience.

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

I just had a question about the financing that you did on the fourth quarter. You mentioned you've made some equity contribution to the utilities. Where do your equity ratio stand now for Fitchburg and Northern Utilities, Maine?

We'll have that in 1 second.

52.8%.

For Northern Maine?

For Northern Maine, yes. And 52.6% for Fitchburg.

Got it. Okay. So you -- actually, you're there for -- relative to where you filed?

Yes.

Correct.

Got it. And then as I look at the 5-year CapEx program, can you remind me kind of how much is kind of known and measurable in the plan versus items that still need to be sought by -- with -- for regulatory recovery?

When you say regulatory recovery, do you mean approved by regulators before we can spend it?

Right. So I'm trying to get a sense of -- especially in the latter part of the year, are these items that are -- have been fully identified? Or is there -- and if so is there upside to that plan? Or are there elements there that may not be -- have not been fully identified yet?

No, the plan itself is pretty well fully identified. And as we indicated, we did not include in the plan items such as grid modernization in New Hampshire, which at this point we don't really know the magnitude of the program or when we're going to get an order. So I would assume that the plan that we identified in our presentation is a pretty solid plan. And if additional things are approved by regulators, it would represent upside to that plan.

And our next question comes from Julien Dumoulin-Smith from Bank of America.

It's Alex Morgan calling in for Julien. I only have one and it's largely about O&M. How should we be thinking about any potential additional cost savings going forward now without Usource?

I would think that O&M will be roughly in line with inflation going forward.

We did isolate out the impact of Usource in the presentation and indicated what the O&M growth would have been had Usource not been reflected.

(Operator Instructions) And our next question comes from Michael Gaugler from Janney Montgomery Scott.

Just one question as well. Looking at that new long-term natural gas capacity agreement you signed, how does that factor into your thinking in terms of any potential peaking projects that were under consideration? Does it push those further off into the future? Or does it make sense to look more towards peaking?

We definitely are looking at peaking and our peaking needs. That is something that came out of our IRP. And we do have the Maine commission and the New Hampshire commission understand that there is a need to look to see if there is any cheaper alternative for our peak area. Right now we're served by Repsol. So that would be in addition. And we're looking at lots of different either internal or external solutions for that peaking need going forward.

And I am showing no further questions. Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.