Unitil Corporation
Q1 2013 Earnings Call Transcript

Published: 24 Apr 2013

[Operator:]

Good day, ladies and gentlemen, and welcome to the Unitil Corporation's first quarter 2013 earnings conference call. (Operator Instructions) I would now like to turn the conference over to your host for today, Mr. David Chong, Director of Finance.

[David Chong:]

Good afternoon and thank you for joining us to discuss Unitil Corporation's first quarter 2013 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 Bach, Chief Accounting Officer and Controller. We will discuss financial and other information about our first quarter on this call. As we mentioned in the press release announcing the call, we have posted that information, including a presentation to the investor 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 mainly 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, and 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 belief, 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 including those listed or referred to on Slide 1 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, 2012. Forward-looking statements speak only as of date they are made. The company undertakes no obligation to update any forward-looking statements. With that said, I'll now turn the call over to Bob.

[Robert Schoenberger:]

Thanks David. And I'd also like to thank everyone for joining us this afternoon. I'll begin by discussing the highlights of our past quarter. You can turn to Slide 4 of the presentation. Today we announced net income of $10.8 million for the first quarter of 2013, an increase of $1.8 million or 20% over the first quarter of 2012. A strong first quarter financial result reflect the combination of colder winter weather in 2013 compared to last year, and the positive effect of gas and electric distribution base rate increases and customer growth. We are executing on our core strategies to continue to grow our business, including the rapid expansion of the natural gas distribution system to serve the increasing demand for natural gas by our customers. Base rate case fillings to bridge the gap between our loud and earned returns on the increasing level of investment we are making in our utilities, and Usource, our non-regulated subsidiary. We believe that the combination of our growth strategies offers our shareholders a rare investment opportunity for growth, while at the same time having confidence in the income generated by our above industry-average dividend yield. We have a unique opportunity to double on of the size of gas business in the next few years. Let me spent a minute describing this opportunity. On Slide 5 which shows, the price of energy of natural gas versus other competing fuel sources, such as home heating oil. Natural gas prices continue to be favorable driven largely by the plentiful availability of shale gas plays across the U.S. We estimate that by switching to natural gas from fuel oil, our customers here in New England can reduce their cost by about half or $1,500 annually. On a larger scale this means that for every 1,000 customers that we convert, we are providing $1.5 million of annual energy savings and a boost to the local economy. In addition to being less expensive, natural gas is more efficient and cleaner compared to other sources of energy, helping to improve our environment and address our long-term energy needs. On Slide 6 shows, we have a significant opportunity to add and covert customers within our existing gas service areas. Currently we have 74,000 gas customers with a combined gas service area penetration rate of only 57%. We have identified 55,000 potential new customers, who are on-the-main, but at this time are not currently taking gas service. In addition, to the potential new and the main customers, there are over 250,000 homes and businesses within our existing service areas that do not have natural gas service. We are taking advantage of this potential and have a growth plan target to serve a total of 92,000 customers by 2016, which would increase our gas customer base 25%, and result in an overall on-the-main penetration rate of 71%, still well below the national average. Turning to Slide 7, we continue to aggressively add customers is in our gas service areas. Since the acquisition of Northern Utilities in December 2008, we have added and converted nearly 6,000 natural gas customers, which is an increase of about 10% over our 2008 customer base. In 2012, we added and converted over 2,000 gas customers, which was up 50% from the prior year. We plan to double our activity in 2013 with the target of 4,000 customer additions and conversions. In terms of rate base, we have seen an annual growth rate of 9% driven by both customer additions and the pipe infrastructure replacement program. Looking forward, we expect growth in customer additions and utility plan to accelerate over the next few years resulting in doubling of our 2008 rate base by 2016. Let me spend a minute now discussing our regulatory strategy and bridging the gap between our actual and earned returns on our increasing investment on our gas and electric utilities. On Slide 8, over the past few years, we have demonstrated a strong track record of success in achieving base rate relief across all of our jurisdictions with an increase to our natural gas and electric sales margins of over 30%. In addition, Unitil Energy, our New Hampshire electric utility subsidiary and Granite State, our interstate translation pipeline continue to have favorable long-term rate plans including cost tracker mechanism resulting in step adjustments to 2014. As a part of our ongoing regulatory strategy, we continue to seek recovery of investments in utility infrastructure and earnings on the equity we contributed to our operating companies last year. We recently filed new gas distribution base rate cases in April of 2013 for northern utilities at both the Maine and New Hampshire natural gas utility divisions. We plan to file a new electric distribution base rate case in Massachusetts for our Pittsburg electric division early in the third quarter of 2013. Now, please turn to Slide 9 for an update on Usource, our non-regulated energy brokering subsidiary. As I've discussed last quarter, Usource expanded its operations in sales force late in 2012 to provide new customer growth in key regions of the northeastern United States. We saw some of the results of this expansion in the first quarter. Usource recorded revenues of $1.5 million in the first quarter of 2013, an increase of 15% over the first quarter of 2012. In addition, Usource has an estimated forward book of revenue of over $9 million, which reflects an all time high. We expect our recent expansion initiative coupled with our continued focus on our existing core markets, will result in a growing contribution from Usource to consolidated financial results. Now, I will turn the call over to Mark, who will discuss our financial results for the quarter.

[Mark Collin:]

Thanks Bob. Good afternoon, everyone. As Bob stated earlier, net income increased by $1.8 million or 20% for this first quarter of 2013. On a per share basis, earnings were $0.79 for the first quarter of 2013 compared to $0.83 in the first quarter of 2012. Earnings per share in the first quarter of 2013 reflect a higher number of average shares outstanding period-over-period, from the $70 million common stock offering we completed in May of 2012. Results were positively affected by the combination of cold and winter weather in 2013 compared to last year, lower borrowing cost, the positive effect of distribution base rate increases and customer growth. Turing to Slide 10. Natural gas sales margins increased $3.2 million or 12% in the first quarter of 2013. Results for the first quarter of the year were driven primarily by higher therm unit sales and higher distribution base rates. Therm sales of natural gas increased by 12% in the first quarter of 2013, reflecting the effect of colder, winter weather and customer growth. Based on weather data collected in the company service areas, there were 10% more heating degree days in the first quarter of 2013 compared to the same period in 2012. Excluding the effect of weather on the change of sales year-over-year, weather normalized gas therm sales are estimated to be 7% higher in the first quarter of 2013 compared to the same period in 2012, reflecting a healthy customer growth rate. Despite the significant colder weather this year compared to prior year, heating degree days were still below normal by about 4%, which we estimate negatively impacted earnings by about $0.03 per share. Now, turning to Slide 11 where we highlight our electric business sales and margin. Electric sales margins increased $2.3 million or 14% in the first quarter of 2013. Results for the first quarter of the year reflect increased kilowatt-hours unit sales and higher distribution base rates. Electric sales margin in 2013 also reflects higher recovery of about 0.9 million of vegetation management and electrical liability enhancement expenditures as well as an increase of about $0.3 million in the recovery of major storm restoration costs, both of which are offset by a corresponding increase in expenses. Electric kilowatt hour sales increased 3% compared to the first quarter of 2012, principally driven by the effect of colder winter weather and customer growth in the first quarter of 2013 compared to 2012. Excluding the effects of weather on the change in the sales year-over-year, weather normalized kilowatt-hour sales are estimated to be 2% higher in the first quarter of 2013 compared with the same period in 2012. On both Slides 10 and 11, the actual and weather normalized unit sales increases, I just discussed, exclude the coupled sales. Approximately 11% and 14% of gas and electric sales respectively are decoupled and changes in these sales do not affect sales margin. Turning to Slide 12, Usource, the company's non-regulated energy brokering business recorded revenues of $1.5 million in the first quarter of 2013, an increase of $0.2 million or 15% compared to the first quarter of 2012. Operation and maintenance expenses increased $1.9 million for the first quarter of 2013 compared to the same period in 2012. The increase in O&M expenses in the first quarter 2013 reflects higher utility operating costs of $1.1 million. Higher professional fess and insurance claims expense of $1 million and lower all other operating cost of about $2.2 million. The increase in utility operating cost in the first quarter of 2013 compared to the same period of 2012 includes an increase of $0.9 million in new spending on vegetation management and electric reliability enhancement program, which is as I discussed earlier is recovered through cost tracker rate mechanisms that result in a corresponding and offsetting increase in electric revenue and margin in the period. Depreciation and amortization expense increased $1.1 million in the first quarter of 2013 compared to the same period of 2012, reflecting higher depreciation on normal utility plan additions of $0.6 million, higher amortization of previously deferred major storm restoration costs of $0.3 million, which is I indicated has offsetted margin and higher all other amortization of $0.2 million. Local property and other taxes increased by $0.1 million in the first quarter of 2013 compared to the same period in 2012 reflecting higher property taxes on higher levels of utility plant and service. Interest expense, net decreased $0.3 million in the first quarter of 2013 compared to the same period in '12 reflecting lower average rates and lower short-term borrowings. Now, turning to Slide 13, we provided an update on our financial results at the utility operating company level. The chart shows the last authorized return on equity compared to the actual earned return on equity. The chart reflects recent equity contributions to all of our utility subsidiaries with the proceeds from the common equity offering we completed in May 2012. As we've indicated in the past, we have a long-term capital cost trackers in place to recover a significant portion of current and future capital spending. In May of this year Unitil Energy, our New Hampshire subsidiary will begin recovering approximately 80% of its 2012 change in net plan in the form of rate adjustment. Granite State, our FERC regulated gas pipeline has an annual rate adjustment to recover capital spending on several pipeline upgrade and replacement projects. Turning to Slide 14, as Bob mentioned earlier, we filed base rate cases in both jurisdictions of Northern Utilities, our natural gas utility in Maine and New Hampshire for a total request of $9.8 million. Both filings include a request to return on equity of 10% and a 52% equity ratio. Under the regulatory construct in each state, we expect new rates to be affected in Maine early in the first quarter of 2014 and the initial temporary rates in New Hampshire to be effect in the third quarter of 2013. We expect the final rates in New Hampshire to be effective by the second quarter of 2014, which will be trued up to the temporary rates at that time. Both the Maine and New Hampshire filings include a comprehensive multi-year plan with the capital tracker mechanism that will allow us to recover additions to our growing rate base in future years without the need and cost of filing a full base rate case. In Massachusetts, we will file a distribution base rate case for Fitchburg's electric division early in the third quarter of 2013. Recent legislation in Massachusetts has changed from a six month process to a 10 month process, which will result in new rates effective in the second quarter of 2014. The recovery of deferred storm costs of approximately $5.1 million related to major storms in 2011 and 2012 will also be included in this filing. 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 from the audience.

[Operator:]

And we'll take our first question comes from Liam Burke with Janney Capital.

[Liam Burke:]

Could you talk a little bit about, I mean you haven't talked where there is a lot of incentive for local governments or environmental purposes, and just general goodwill to encourage the use of natural gas versus other fuels. Could you give us some detail on any willingness of governments to partner with you in any type of projects to speed up the deployment of natural gas facilities?

[Robert Schoenberger:]

Liam, it's a good question. I think it depends on which jurisdiction you're talking about. In the case of Maine, Maine is kind of a special state, and quite frankly I call it the wild, wild west right now, because they are basically encouraging distribution companies to get out and put pipe in the ground everywhere they can as quickly as they can. We obviously tend to do things in an economic way and we think we have an aggressive program now. The state is very happy with what we're doing. The state is not willing to put its credit to find an encouraging faster gas penetration in Maine. Some of the local communities have talked about forming their own municipal to do that or helping a private company, but none of those have come to fruition yet. In New Hampshire, we've had discussions with some of the local communities, and I'd say we're going to know more by the end of this year, since we're working on a couple of what we think are fairly innovative ways to aggregate customers to make projects that otherwise would not be economic, become economic. And Massachusetts has a fairly high penetration rate relative to the other two states. And again, other than the environmental side of the business, we haven't seen any real discussion of incentives.

[Liam Burke:]

And on Usource, percentage wise you saw fairly healthy year-over-year growth rate. Are you comfortable with the growth trajectory they are considering? It does contribute a fair amount of nice margin to the business.

[Robert Schoenberger:]

Yes. I think you're going to see that trend continue over this year and our goal over time is to achieve a 10% to 15% growth rate. So I am comfortable with it.

[Operator:]

And we'll take our next question from Shelby Tucker with RBC Capital Markets.

[Shelby Tucker:]

I guess a couple of questions. I know you formed UES for storm recovery to be effective May 1. That is separate from the annual rate adjustments that you have ongoing at the UES, is that correct?

[Robert Schoenberger:]

The May 1 filing for Unitil Energy that is our annual tracker. So that what we file for May 1 for Unitil Energy is our periodic or annual tracker that we'll have one this year and then another one next year.

[Shelby Tucker:]

So that's under the 2012 storm cost, that's a $2.3 million that you've filed on March 14.

[Robert Schoenberger:]

Yes. That's actually on top of, and to your point Shelby that's on top of our step increase.

[Shelby Tucker:]

So this is actually an additional one. And then what is the process, because I see you're looking for invitation by May 1. What steps you set here to go through, given the short timeframe here?

[Robert Schoenberger:]

Basically, we've already met and had a hearing before the commission on these matters. So the next step is just to have the commission issue an order and allow us to put it in our tariff, and we don't expect any issue with that at this time.

[Shelby Tucker:]

And then, I saw on your 10-Q that there was a gas explosion at Pittsburg. If you could just maybe elaborate on what happened there?

[Robert Schoenberger:]

Why don't we have Tom, our Chief Operating Office fill us on that real quick.

[Thomas Meissner:]

At this point, no official cause has been released in that explosion. So I can only speak to what we actually found in terms of facts. But the night of the explosion, we've been experiencing cold weather here in New England, which effects the depths of the frost on the ground. And upon responding to that scenes, the one thing that our investigators did find immediately was a crack made in the street in front of that location. So that's what we found. The official cause is still under investigation that could be some months before they actually release the official findings from that investigation. But we did in fact find a cracked main that was a result of the frost on the ground at that time.

[Shelby Tucker:]

And I guess investigations are done both of the MDP, but also AAG.

[Tom Meissner:]

Thus far the investigation is really limited to the Mass Department of Public Utilities. They are the only ones that have been a party to it so far. We have answered Discovery in that and the next step is the cast-iron pipe that was involved that was actually sent to an outside metallurgical firm for testing and both ourselves, our investigators in the department will be witnessing those tests in the next couple of weeks.

[Shelby Tucker:]

And then my last question, I guess for Mark, as far as a bump-up in accounts receivable from about $46 million to $61 million, just any color there or it is just more seasonal issue?

[Mark Collin:]

Part of its, obviously, the sales performance that we just discussed in the first quarter were up quite a bit. So from just, a sale to retail customers, there is increase in accounts receivable related to that increase and margin increase in sales. In addition, accounts receivable also does include receivables related to third-party gas marketers that we provide certain services to during the winter period. And that can peak out in the winter period. And so about half of the increase in receivables is not related to retail customers, but is related to third-party gas marketers. And typically duration of those receivables is 30 days or less. And in fact, the large portion of that receivable has already been paid or brought down today as a result of gas marketers paying their portion.

[Shelby Tucker:]

I guess, and one last question, maybe for, Bob, on Usource. Are we seeing continued growth in the forward book? We are seeing some of that. I guess that being reflected in revenues growing too, although, the book seems to be growing faster than revenues. At what point do you start seeing maybe an acceleration in the revenue growth, given the size of the forward book?

[Robert Schoenberger:]

I want to make sure I understand your question, could you give it to me one more time.

[Shelby Tucker:]

Sure. If I look at fourth quarter of last year, I think the forward book for Usource was somewhere around $8.2 million or so.

[Robert Schoenberger:]

Right.

[Shelby Tucker:]

$9 million or $9.3 million, one quarter later, which obviously is as a testament to what you'd be talking about the ability to signing more customers. But the actual revenue increase you're seeing year-over-year is more modest, I think $200,000 or $400,000 somewhere around there. At what point you started seeing the actual revenue reflecting with the progress you're making in the forward book.

[Robert Schoenberger:]

You'll start seeing that this year, I believe. And again, that forward book is revenue that will be recognized in future periods over the next five years, but primarily the next two. So over the next couple of years, you will see that really starting to impact the topline performance, as well as I expected the forward book, going forward will continue to grow at a fairly rapid rate as well.

[Shelby Tucker:]

So you think this year we're kind of starting the quarter, I mean, we're seeing some progress, but you should see the main acceleration of that in the following three quarters.

[Robert Schoenberger:]

Yes. I think I've said before in previous calls, on the fourth quarter call that over the last few years it's been fairly flat revenue year-over-year. This is a year I think we've begin to resume our targeted growth rate.

[Operator:]

And if there is no further questions, I will turn it back over to David for closing remarks.

[David Chong:]

Right. Thank you very much for joining us for our first quarter. If you have any follow-up questions, you can reach me in the office. Thank you.

[Operator:]

Ladies and gentlemen, that will conclude today's conference. Thank you for your participation. And you may now disconnect. Have a wonderful day.