Unitil Corporation (UTL) Q4 2019 Earnings Report, Transcript and Summary

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 two, 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 turn the call over to Chairman, President and CEO, Tom.

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 four, 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 five, 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 execute on its regulatory strategy. Our investments and 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 six, 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 five years, our customers have experienced about 35% reduction in annual outage time compared to the prior five 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 seven recaps the strong returns we've delivered to our investors, as we outpaced both the S&P 500 and the Dow Jones Utility average over the past five 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 five-year period ending September 30, 2019. Slide eight summarizes the key investment themes we offer to our investors. We are a pure play regulated utility with strong growth 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 nine, 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 is partially offset by the absence of a $1.2 million non-recurring 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 -- milder winter weather in 2019, the company estimates that weather normalized gas their firm 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 non-heating residential customers transitioning to natural gas as the 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 rates 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 2018 and 2019 the customer estimates that weather normalized sales were down 2.7% in New Hampshire. And this weather normalized sales as a result of lowered usage per customer as a result of energy efficiency initiatives, and somewhat offset by higher customer accounts. Just as a reminder, the company is fully decoupled in Massachusetts. And in New Hampshire the company has regulatory mechanism in place. And these mechanisms provide recover for lost kilowatt hour usage to company sponsored energy efficiency measures and displays 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 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 non-recurring adjustment to O&M in connection with the 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 non-recurring adjustments, O&M increased $1.3 million or 2% which is primarily a result of the 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 borrowing. Other expenses decreased $1 million primarily related to lower retirement benefit costs. And next, we've isolated the $9.8 million primarily related to the after-tax gain on the sale of the divestiture of Usource. Excluding the tax associated with the gain on the divestiture, income tax increased $1.8 million as a result of higher pre-tax income. Now moving on to Slide 12, in December Unitil Corporation closed and received funding on 10-year note with a principal of $30 million and an interest rate of 3.4%. This financing immediately reduced the short-term borrowings and lessen 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 pre-payment 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 three 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 gas and electric rate case from a 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 days 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 base 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 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 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 one-time gain from the 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 released at effective 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 smoother margin growth, reduce the regulatory lag and help minimize rate shop for customers. We have been awarded over $4 million of rate relief outside of rate cases in 2019. This concludes our 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 five-year investment plan. We expect to invest over $680 million in our gas and electric systems over the next five years, which is an increase of over 25% compared to the previous five 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 including 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 five 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 five-year investment plan to materially alter the investment mix between gas and electric operations. With two-thirds of investment directed toward 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 five-year investment program. The Company has strategically reduced its payout ratio over the past several years and is well positioned to reinvest earnings and reduced 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 and 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 have 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.

Thank you. [Operator Instructions] And our first question comes from Shelby Tucker from RBC Capital Markets.

Sorry, can you hear me?

Yes. Good afternoon.

Okay. Okay, great. How you are doing. Just had a question about the financing that you did on the fourth quarter, you mentioned you’ve made some in equity contribution to the utilities. Where do your equity ratio stand now for Fitchburg and North Northern Utilities, Maine?

52.8%.

For Northern Maine.

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

Got it, okay. So, you actually year therefore relative to where you filed?

Correct.

And then as I look at the five-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 the -- 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 it, especially in the latter part of the years. 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?

The plant itself is pretty well fully identified and as we indicated, we did not include in the plan, items such as grid modernization and New Hampshire, which at this point we don’0t 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 our approved by regulators that would represent upside to that plan.

Okay, great. Okay, thank you.

Thank you.

Thank you. And our next question comes from Julien Dumoulin-Smith from Bank of America. Your line is now open.

Thank you. Good afternoon. It’s Alex Morgan calling in for Julien.

Yes. Good afternoon, Alex.

Thanks so much for taking my question. 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 at Usource not been reflected.

Okay, thank you so much.

Thank you. [Operator Instructions] And our next question comes from Michael Gaugler from Janney Montgomery Scott. Your line is now open.

Good afternoon, everyone.

Good afternoon, Mike.

Just one question as well. Looking at that new long-term natural gas capacity agreement you signed. How does -- how does that factor into your thinking in terms of any potential peaking projects that were under consideration. Does it push those farther off into the future. Or does it make sense to look more toward 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 commissions understands that there is a need to look to see if there is any cheaper alternatives for our peak area. Right now, we are 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.

Okay, thanks. That's all I had.

Great. Thank you.

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