Unitil Corporation (UTL) Q2 2019 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen. And welcome to the Unitil's Second Quarter 2019 Earnings Conference Call [Operator Instructions]. As a reminder, this conference call is being recorded. I would now like to introduce your host for today's conference, Mr. Todd Diggins, Director of Finance. Sir, you may begin.

Good afternoon, and thank you for joining us to discuss Unitil Corporation's Second 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 second 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 Tom.

Thank you, Todd, and thanks, everyone, for joining us today. I'm going to begin on Slide 4, where today we announced net income of $4 million or $0.27 per share for the second quarter of 2019. This is an increase of $0.4 million or $0.03 per share over the second quarter of 2018. For the year-to-date period, net income was $30.5 million or $2.05 per share, an increase of 11.3% or $0.75 per share compared to 2018. As a reminder, in the first quarter, we announced the divestiture of our nonregulated business subsidiary, Usource. That sale generated a net gain of $9.8 million or $0.66 per share. Usource had historically contributed between $0.02 and $0.03 per share to earnings each quarter, so please keep this in mind as we review our results. Excluding this onetime gain, year-to-date net income is up $1.5 million or $0.09 per share compared to 2018, an increase of 7.8%. The increase in net income from our core utility operations is primarily attributed to higher sales margins. Turning to Slide 5. To meet our customers' growing and ever-changing energy needs, the company has developed a robust investment plan. Our capital spending over the next 3 years is forecast to be about 20% higher than the prior 3 years. This increased investment will be used in part to fund the company's gas expansion in infrastructure modernization. Historically, over the past 8 years, our net plant has averaged over 9% annual growth. And with our current investment plan, we should maintain that strong growth into the future. We're currently evaluating our future capital spending needs and we'll provide an update at our year-end earnings call. Moving onto Slide 6. As we've discussed before, our gas distribution system is expanding both within and contiguous to our existing service areas. In the past 5 years, we've installed over 100 miles of new gas mains. In New Hampshire, construction is currently planned or underway in all 3 of our recently approved franchise towns. As illustrated in the graphic, our New Hampshire service area expansion is along major highway routes. This is part of our strategic goal to provide service to commercial and densely populated areas along this thruway. We will continue to evaluate the surrounding areas for new expansion opportunities. Turning to Maine, our Targeted Area Buildout programs, or TAB programs, continue to progress and we are adding customers in both Saco and Sanford. The Saco construction is primarily completed, though we expect additional customers to continue to convert to natural gas. The Sanford gas main extension is still underway and the company expects to reach a potential market of more than 2,000 customers once it is completed. We've also highlighted Kittery, Maine, which borders the New Hampshire seacoast is another strategic service area expansion. The expansion effort here is targeting another major thruway, which runs along the New England seacoast and construction along this route will occur this summer. Turning to Slide 7. In addition to expanding our gas distribution system, the company continues to convert customers within our existing service areas. Our natural gas systems in Maine and New Hampshire continue to have relatively low market penetration rates. And as noted on Slide 7, natural gas is a cleaner burning fuel than number 2, fuel oil and can save residential customers about $400 per year if they switch from oil to gas. The company anticipates that homeowners and business owners will continue to take advantage of the environmental and price benefits of natural gas, which translates into organic customer growth for our company. In these 2 states, we have grown our customer base by an average of 2.1% each year since 2013. Now I will turn the call over to Christine, who will discuss our financial results for the quarter.

Thanks, Tom. Good afternoon, everyone. Beginning on Slide 8, our natural gas sales margins for the quarter of 2019 were $23.3 million, an increase of $0.4 million over 2018. This increase was partially offset by the absence of a $1.2 million nonrecurring adjustment in connection with the rate case, which occurred in the second quarter of 2018. Year-to-date gas margin is $66.8 million, which is an increase of $4 million over 2018. The $4 million increase is a result of higher distribution rate of $3.8 million, higher therm sales of $1.4 million, offset by the $1.2 million 2018 adjustment. Natural gas therm sales have increased 2.2% year-to-date compared to 2018. The increase in gas therm sales was largely driven by customer growth. The customer -- the company estimates that weather-normalized gas therm sales, excluding decoupled sales, were up 5.5% in the first 2 quarters of '19 compared to the same period in 2018. As of June 2019, we are serving 1,455 more gas customers than at the same time in 2018. That's a 1.8% increase. Next on Slide 9, I'll discuss electric units and sales margin. Electric sales margins were $22.4 million in the second quarter, an increase of $0.1 million compared to the same period in 2018. Electric sales margins for the first half of 2019 were $45.5 million, an increase of $0.9 million. Margin was positively affected by higher distribution rates of $1.4 million, partially offset by lower sales as a result of lower average customer usage. Total electric kilowatt hour sales decreased 5.1% through the first half of 2019 compared to 2018. Again, this is largely a result of reduced usage per customer due to energy efficiency initiatives. Turning to Slide 10. We will forward the first half of 2018 net income through year-to-date 2019. And as we read off, I'd like to note that this layout is slightly different than past presentations and the Form 10-Q as we isolated the impact from the Usource divestiture. All divestiture-related year-to-date income statement variances are reflected in the Usource category of this graphic, so that investors can better identify trends. Core operation and maintenance expenses, excluding the impact of Usource, increased $0.2 million in the first half of 2019 compared to the same period in 2018. Excluding a nonrecurring adjustment to O&M that occurred in 2018 in connection with the base rate case, core O&M increased by $1.4 million in the first half of 2019. Depreciation and amortization trended higher with higher utility plant and service, slightly offset by lower amortization expense for a major storm that ended in July 2018. Taxes other than income taxes increased $0.5 million in the 6 months ended June 30, 2019, compared to the same period in 2018, primarily reflecting higher local property taxes on higher levels of utility plant assets in service. This increase was somewhat offset by approximately $0.6 million of tax abatements received in the second quarter of 2019 pertaining to multiple towns in New Hampshire. Interest expense increased as a result of higher borrowings and other expenses decreased $0.4 million, primarily related to lower retirement benefit costs. Isolated $9.2 million related to Usource. This is largely the result of an after-tax divestiture gain of $9.8 million and also contributing to the increase is a $0.9 million reduction of Usource-related O&M expense that was not incurred due to the divestiture. And partially offsetting these increases is a reduction of Usource revenue of $1.5 million. And finally, income taxes excluding the impact of Usource increased as a result of higher pretax income. Next on Slide 11. To help fund our increased capital spending program, Unitil is strategically decreasing our payout ratio into the range of 55% to 65%, and we have successfully lowered our payout ratio about 10%, while also increasing our common dividend for the last 5 years. And the company plans to continue to increase its dividends under the constraints of earnings growth and the target payout ratio. On Slide 12, in June, Northern Utilities filed a general base rate case with the Maine PUC. The filing includes revenue deficiency request of about $7 million with a 10.5% ROE. The equity ratio included in the filing is 52.9% after incorporating an equity infusion of proceeds generated by the Usource divestiture as well as other corporate funds. The filing also includes a request for an alternative accelerated cost recovery mechanism for non-growth investments, which will reduce the regulatory lag. The company anticipates new distribution rates to become effective in the second quarter of 2020. Now onto Slide 13. I'd like to note that in the second quarter of 2019, the Massachusetts DPU granted the company's requested double the annual cash recovery cap on its gas infrastructure replacement program. This will assist the company's credit ratings and reduce interest expense. Company is also pleased with another ruling from the Massachusetts Department of Public Utilities. Due to legislation, Fitchburg is required to enter into long-term contracts for certain qualified clean energy projects. And the DPU recently allowed a ruling, recently issued a ruling, allowing 2.7% remuneration and recovered, recovery of associated administrative costs related to these recently approved contracts. Now contingencies exist within the Clean Energy Connect Project. When these contingencies are satisfied, the contracts will qualify for derivative accounting. And once it does qualify for derivative accounting, the company believes that the power purchase obligations under the long-term contract will have a material impact on both sides of the balance sheet on the contractual obligations and the regulatory assets of Fitchburg. The timing of this is unclear as the project is still currently in the planning and permitting phase. And finally, in the second quarter, both Maine and New Hampshire public utility commissions approved a potential $40 million debt issuance of 30-year notes at Northern Utilities. The transaction was successfully priced in the second quarter with a coupon rate of 4.04%, and we intend to close and fund in the third quarter of 2019. Now on Slide 14, we have long-term rate plans or cost trackers established at nearly all our subsidiaries and are prepared to update and extend these programs through rate cases in other proceedings as appropriate. In the gas and electric divisions, the company has been awarded $3.4 million and $1.2 million, respectively, and rate relief through accelerated cost recovery mechanism. Combined, this is over $4 million of rate relief that will help reduce earnings attrition. Lastly, on Slide 15, it provides the trailing 12-month actual earned return on equity in each of our regulatory jurisdictions. Unitil on a consolidated basis earned a return on equity of 12.3% in the last 12 months ended June 30, 2019, including the onetime gain from the Usource divestiture. As a reminder, Fitchburg Electric is required to file a general rate base, general base rate case by 2020, and the company is already evaluating the need to file for rate relief and is not prohibited from filing earlier. By comparing the common equity balances in each company with what we provided in the first quarter of 2019, you'll notice an increase in both Northern and Fitchburg, the proceeds of approximately $36 million related to the Usource divestiture and other corporate funds have been invested in Northern Utilities and Fitchburg. Finally, in the last quarter, the company was asked the respective Northern Utilities' actual ROE between Maine and New Hampshire. The recent rate case filing with the Maine PUC stated an actual ROE of 7.2%. Northern Utilities in New Hampshire is earning close to their authorized return and is prohibited from filing a rate case before 2021. Now this concludes the summary of our financial performance for the period. I will turn the call over to the operator, who will coordinate questions from the audience.

Thank you [Operator Instructions]. Our first question comes from Michael Gaugler with Janney Montgomery Scott.

I noticed in the deck and in our model, the electricity sales average customer usage is lower. Do you attribute that to weather or is it something else?

The electric is a part due to weather, part due to energy efficiency use and a part due to few customers in New Hampshire had a bit of a production differential, so they reduced the level of production in the second quarter.

For that to kind of carry -- on the commercial side, you look for that to carry through? Or is that like just a retooling phase for manufacturers?

Part of it to carry through and part of it to come back.

And I didn't hear you mention anything about -- anything on grid mod. Just wondering if there's any new developments there?

Mike, this is Tom. There really were no developments in the quarter, which is why we didn't comment on it.

Ladies and gentlemen, thank you for participating in today's conference. This does conclude today's program, and you may all disconnect. Everyone, have a wonderful day.