Unitil Corporation (UTL) Q2 2021 Earnings Report, Transcript and Summary

Good day and thank you for standing by. Welcome to the Q2 2021 Unitil Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers' presentation there will be a question-and-answer session. [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. Please go ahead.

Good morning and thank you for joining us to discuss Unitil Corporation's second quarter 2021 financial results. Speaking on the call today will be Tom Meissner, Chairman, President and Chief Executive Officer; and Bob Hevert, Senior Vice President, Chief Financial Officer and Treasurer. We will discuss financial and other information on this call. As we mentioned in the press release announcing this call, we have posted information, including a presentation to the Investor section of our website at www.unitil.com. We will refer to that information during this call. Moving to Slide 2, the comments made today about future operating results or 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 can cause actual results to differ materially from those predicted. Statements made on the 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 obligation to update them. This presentation contains non-GAAP financial measures. The accompanying supplemental information more fully describes these non-GAAP financial measures and includes a reconciliation to the nearest GAAP financial measures. The company believes these non-GAAP financial measures are useful in evaluating its performance. And, with that, I will turn the call over to Chairman, President and CEO, Tom Meissner.

Thanks, Todd, and good morning everyone. I'm going to begin on Slide 4 today. So, today we're pleased to announce net income of $2.7 million or $0.18 per share for the second quarter of 2021. For the first half of 2021, net income was $21.6 million or $1.44 per share. This represents an increase of $0.21 per share over the same six months period of 2020 and reflects higher Electric and Gas adjusted gross margins. Next, I'd like to quickly review a few high level themes. First, we reiterate our long-term guidance of 5% to 7% growth in earnings per share with 2021 earnings expected to be somewhat above the higher end of the range relative to 2020. Second, the company recently announced a goal of achieving net zero emissions by 2050. This announcement is a major step for the company and reflects our commitment to environmental stewardship and corporate responsibility. Finally, I would also like to note the filing of another strategic rate case in New Hampshire for our gas utility, Northern Utilities. Combined, the pending rate applications for Unitil Energy Systems and Northern Utilities request a nearly $20 million increase in base distribution revenues. Bob will discuss the details of these filings later in the call. Moving to Slide 5, as I noted earlier, on June 21, we announced our goal to reduce companywide direct greenhouse gas emissions by at least 50% by 2030 relative to 2019 levels and to achieve net zero emissions by 2050. These goals are part of our overall commitment to environmental stewardship, sustainability and corporate responsibility. As I've said before, our vision is to transform the way people meet their evolving energy needs to create a clean and sustainable future. We will continue to work with customers, policy makers and industry leaders to reduce emissions from the energy supply delivered to our customers. With that, I'll now pass it over to Bob, who will provide further detail on our financial results.

Thank you, Tom, and good morning everyone. I will begin on Slide 6. As Tom noted today, we announced second quarter earnings per share of $0.18. This represents a year-over-year decrease of $0.4 million or $0.03 per share. On a year-to-date basis, net income increased by $3.3 million or $0.21 per share compared to 2020. Strong year-over-year earnings growth primarily is the result of higher Electric and Gas adjusted gross margins, partially offset by higher operating expenses. As Tom mentioned, we expect full year 2021 earnings to be ahead of our 5% to 7% long-term EPS growth range relative to 2020 earnings of $2.15 per share. Turning to Slide 7, for the six months ended June 30, 2021, Electric adjusted gross margin was $48 million, an increase of $2.5 million or 5.5% relative to 2020. The increase in Electric adjusted gross margin reflects higher residential unit sales of 2.8% and higher commercial and industrial unit sales of 3.1%. Customers increased 0.8% over the first half of 2020. The higher sales volumes reflect customer growth and improving economic conditions. As noted on Slide 8, for the six months ended June 30, 2021, Gas adjusted gross margin was $72.8 million, an increase of $7.5 million or 11.5% compared to 2020. The increase in Gas adjusted gross margin reflects higher rates of $5.1 million and the combined net effect of $2.4 million from the net favorable effect of customer growth, colder winter weather and warmer spring weather. The first half of 2021 was 2.1% colder year-over-year, contributing to higher natural gas therm sales of 4.2%. Higher sales also reflect 1,200 additional customers served compared to the same period in 2020. Moving on to Slide 9, we provide an earnings bridge comparing 2021 results to 2020 for the quarter. As noted earlier, 2021 adjusted gross margin increased $10 million as a result of higher rates and higher unit sales. Operating and maintenance expenses increased $2 million. The current year increase is attributable to higher utility operating costs, higher labor costs and higher professional fees. In the second quarter of 2020, the company realized a benefit from lower labor costs related to the COVID pandemic. As the economies in our service area recover, we have seen that trend reverse, primarily in the area of healthcare. The increase in operating expenses also includes an increase of $0.4 million or roughly $0.02 per share related to a recent decision by the New Hampshire Public Utilities Commission's not to authorize the creation of a regulatory asset for incremental bad debt related to the COVID pandemic. Instead the order states these costs will be addressed in each utilities' next rate case. Unitil is in a unique position in that we have pending both Electric and Gas rate cases in New Hampshire through which we will seek recovery of those costs. I will touch more on those cases later in the presentation. Depreciation and amortization increased by $2.7 million, reflecting higher levels of utility plant in service. Taxes, other than income taxes, decreased by $0.2 million, primarily due to lower payroll taxes, partially offset by higher local property taxes on higher utility plant in service. Interest expense increased by $0.9 million, reflecting interest on higher long-term debt balances, partially offset by lower rates on lower levels of short-term borrowings. Other expense decreased by $0.5 million, largely due to lower retirement benefit and other costs. Lastly, income taxes increased by $1.8 million as a result of higher pre-tax earnings. Turning now to Slide 10, the Unitil Energy rate case, which I've discussed on previous calls, is progressing as expected with temporary rates of $4.5 million becoming effective on June 1. Yesterday, we filed a multiyear rate plan in New Hampshire for our gas utility, Northern Utilities. In that case, we proposed a $7.8 million rate base increase with a $3.2 million temporary rate increase. You may recall that in New Hampshire, it is typical to collect a portion of the revenue deficiency through temporary rates prior to receiving a final order. We anticipate temporary rates for Unitil -- excuse me, for Northern Utilities to become effective in the third quarter of 2021. Temporary rates are reconciled to the final rate case award and the difference is collected or refunded usually over a one-year period. Our filing also includes a full revenue per customer decoupling proposal and a multiyear rate plan to recover certain capital expenses made in 2021, 2022, and 2023. We anticipate that these rate case filings in New Hampshire will support the return on equity at Unitil Energy Systems and Northern Utilities. With that, I will turn it back over to Tom.

Thanks, Bob. Wrapping up with Slide 11, with the first half of 2021 behind us, we're pleased with what the company has accomplished. At this time, we believe our investment plan for 2021 is on track and our regulatory initiatives are proceeding on schedule. We look forward to providing further updates on our next call. Todd?

Great, thanks, Tom. That completes the material in this call. Thank you for attending. I will now turn the call over to the operator, who will coordinate questions.

[Operator Instructions] Your first question comes from the line of Cody Clark with Bank of America.

Hey, good morning, team. It's Julian here, on for Cody. Thank you guys for the opportunity. First, if I can just kick off here on, I know you've spent some time already talking about customer growth and some of the normalized trends that you've seen of late, but can you elaborate a little bit just on the expectations for that to persist here? It's pretty remarkable here both on customer and on just overall normalized trends in terms of recovery. I'd just be curious if you think about that cascading through your forecast. And then I've got a follow-up.

Sure, Julian, this is Tom. I think on the Electric side, what we're seeing is we're seeing the increase in residential sales and in unit sales that resulted from some of the pandemic impacts to persist this year. But we've also now seen a recovery in C&I demands. And so that seems to be continuing. We benefited in Q2 by some very, very hot weather. We had a couple of heat waves. So that certainly benefited Q2, but even in July, when the weather has been much cooler than normal, we're seeing that pattern persist in that overall sales are staying where they were and C&I demands have recovered. On the Gas side, I think we were seeing some trends that -- in Q2 that were not what we had maybe hoped for in terms of normalizing. But now we are seeing signs that they're normalizing in the current quarter. The economic activity continues to be strong. We see evidence of that everywhere. So we're pretty much expecting to see sales on both side of the business to begin normalizing through the remainder of the year and possibly for sales on the Electric side to stay at an elevated level compared to historical norms.

Got it. And how would that reconcile -- how do you think about that juxtapose against your longer-term growth expectations here from -- more from an earnings and investment prospects perspective, if you can at least preliminarily speak to it, if you will?

In terms of investment, we're continuing to see the same trends on the Gas side that we have in the past. There really hasn't been any drop-off or slow down and interest in gas conversions or realistically just interest in gas for new construction. We're seeing signs of a lot of robust construction activity and permitting in large part because the housing market is so hot right now. On the Electric side, I think we're going to probably see an uptick in new connections on the Electric side relative to what we've seen in recent years, again, because of the significant housing market that we're in now and what we're seeing for permitting in new development.

Got it, excellent. And if I can pivot more to the regulatory side of things, just initial expectations as you'd like to set -- establish them with respect to settlement prospects on the cases that's pending and especially if you think about the latest New Hampshire case here, if you can elaborate a little bit on that side of things, if you don't mind, and maybe any feedback going into the case as well.

Sure. Good morning, Julian, this is Bob Hevert. We continue to work through the UES rate case. We've had two technical conferences at this point, which you may know, simply as a form of discovery in New Hampshire. They have gone well we think and we are still in the process of discovery. We will not receive the other parties' testimony until sometime in November. That said, in New Hampshire, there is a -- this precedent and practice for settlements and to the extent we can arrive at a settlement that we find acceptable, we certainly would move in that direction. But for now, the UES rate case is proceeding as we thought and as we hoped it would. The Northern Utilities case, which we filed yesterday, as you can imagine, Julian, is a bit simpler case than the UES case. It principally relates to rate base investments and it relates to the step adjustments that we will put in place if approved, and it of course includes the same type of revenue per customer decoupling structure that we had in the UES case. We are very hopeful that having taken the same approach that we did with the UES case, which is to be sure that we provide as clean and transparent filing as we possibly can, we will be able to move through the case quickly and efficiently as appears to be going on with the UES case right now.

Excellent. Okay. Does that increase, just to perhaps verbalize what I think you were insinuating, the simplicity and the step adjustments, does that increase the chances for settlement? I'll leave it open-ended.

Sure. Look, I think settlement is always a function of a lot of things, including the positions other parties might take. All else being equal, in my experience, a simpler case may lend itself more to settlement more quickly, but we cannot say with any certainty whether or not that will happen. We put together our cases to really express our positions and to defend our positions, regardless of whether the cases are settled or litigated. But again, to the extent these cases can be settled, that is certainly something we'll pursue.

Excellent. All right, well we'll leave it there. Thank you so very much. I really appreciate the time.

Great, thank you.

Thank you, Julian.

[Operator Instructions] There are no further questions. Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.