Unitil Corporation (UTL) Q3 2022 Earnings Report, Transcript and Summary

Good day, and thank you for standing by, and welcome to the Third Quarter 2022 Unitil Earnings Conference Call. At this time all participants’ are in a listen-only mode. After the speakers’ there will be a question-and-answer session. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Todd Diggins, Director of Finance. Please go ahead, sir.

Good morning, and thank you for joining us to discuss Unitil Corporation's third quarter 2022 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 today's call, we have posted information, including a presentation to the Investors section of our website at unitil.com. We will refer to that information during this call. Moving to slide two, 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 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 obligation to update them. This presentation contains non-GAAP financial measures. The company's 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. With that, I will now turn the call over to Chairman, President and CEO, Tom Meissner.

Great. Thanks, Todd. Good morning, everyone, and thanks for being with us today. I'm going to begin on slide four, where today we announced net income of $0.5 million or $0.03 per share for the third quarter of 2022. Through the first nine months of this year, net income was $26.9 million or $1.68 per share. This represents an increase of $0.26 per share over the same nine month period of 2021 and is supported by higher adjusted gross margins and successful New Hampshire rate case outcomes. As noted in prior presentations, we view sustainability as a critical underpinning of our long-term success. And I'm pleased to share that we have recently published our annual sustainability and responsibility report. This report can be found at unitil.com and highlights the progress we have made and the steps we are taking to meet our goals. We remain resolute in achieving what we have pledged and we'll share additional details about our progress later in the call. Our capital spending plan remains on track, and we're excited to announce that we have submitted a utility-scale solar filing to the New Hampshire Public Utilities Commission requesting a public interest determination. I will speak more about that project in a moment. In order to accommodate the company's capital expenditure and growth profile, we have increased our short-term borrowing capacity, securing additional liquidity in the years ahead. The last point I'd like to make on this slide is that we continue to excel in all areas of our business, and I'm proud to note that we were recently recognized as one of New Hampshire's best company work for as part of business New Hampshire Magazine's 2022 annual ranking. Moving now to slide five, we provide some additional information on the utility-scale solar request we filed with the State of New Hampshire. The facility is slated to be a 4.9 megawatt array on a 96 acre property in Kingston, New Hampshire with an estimated capital cost of approximately $14 million. New Hampshire law permits utility-owned solar, up to 6% of the utility's total distribution load. For Unitil, this represents approximately 18 megawatts and offers the potential for additional projects in the future. If approved, this specific site may have further development potential, including pairing the facility with energy storage. We expect this project to provide economic benefits to our customers for many years to come, and hope to receive approval in the near-term so we can get the project underway. We look forward to sharing our progress with you on future calls. Turning now to slide six, as I mentioned previously, in October, we published our annual corporate sustainability and responsibility report and we're pleased that our initiatives remain on track. Before I discuss some of the initiatives and their progress, I'd like to provide a strategic overview of what guides our approach to sustainability. Simply put, our decisions are grounded in the objective of creating long-term sustainable value for our customers, our investors, our employees and the communities we serve. This is a complex objective without one single pathway, but we recognize that a key element will be enabling the transition to a decarbonized energy system. We are pursuing an all-encompassing portfolio approach that manages risks, capitalizes on cost-effective and equitable solutions in ways all available information. Making informed practical decisions to best address the needs and issues of today and the future is what this all comes down to, and we look forward to these transformative years ahead. Moving now to the material on this slide, we've outlined four supporting areas to our strategy, along with specific achievements within each category. Beginning with energy in the environment, we've made significant progress with our fleet by targeting high-use vehicles and phasing in dozens of hybrids, as well as other technologies such as idle reduction. We've also performed energy audits of our buildings and are pursuing projects that will improve efficiency and lower emissions. In addition, last year, we purchased zero emission vacuum and compression units as a means to recapture natural gas and recompress it back into the system during pipe replacement and maintenance. These steps have had an immediate impact as we work towards our emissions reduction goals. With regard to our employees, 90% report being proud to work for Unitil and the average employee has been with the company for over 11-years. These results are closely linked to the welcoming culture and work environment that we continuously strive for. In addition, with our focus on DEI and through ongoing employee education and focus groups, we believe our culture will continue to strengthen. As we often discuss, Unitil is proud to serve our customers and communities. We work diligently to provide excellent service and our customer satisfaction rate of 90%, the best in the Northeast is a testament to that. We stay engaged with our communities and recently held our first drive electric NH event where customers had the opportunity to become informed on electric vehicles and related charging infrastructure. Another partnership that we're proud of is with the University of New Hampshire Shoals Marine Lab. We've partnered for over 16-years with this unique lab, which we located on a small island seven miles off the coast of Maine. Over the course of our partnership, this self-sufficient energy system has seen a 90% reduction in fossil fuels. Finishing with safety and reliability, we pride ourselves on maintaining a safe and resilient system. Currently, 2022 was on track to be a record-setting year both for our gas emergency response time and our electric service interruption time. We are fully committed to limiting our environmental impact, supporting the communities we serve and transforming the way our customers' energy needs are met. We look forward to sharing continued progress and substantial gains in the years ahead. Turning to slide seven, I'm also happy to introduce our newest board member, Dr. Neveen Awad. Neveen is a leader in transformative technology and specializes in data personalization in cybersecurity. Neveen’s extensive experience in technology-driven transformation will bring a wealth of information to the Board, and we're fortunate and excited to have her join the team. Moving to slide eight, the attractiveness of our service areas continues to play an important role in our growth opportunities, which we think sets us apart from many other distribution utilities. New Hampshire is where we have the highest concentration of customers, and we continue to see robust economic growth across our service areas. The State is frequently cited as one of the best States in the country to live and work. And currently, New Hampshire has the second lowest unemployment rate in the country and has had the fifth fastest GDP growth over the last couple of years, followed closely by Maine. There are large new developments underway across all of our service areas, which will drive future customer additions. As I've discussed on previous calls, in Maine and New Hampshire, the predominant heating fuel is oil, which is less clean and less affordable than gas. Our on-the-main penetration rate remains about 60% and we expect this will drive low-cost customer conversions for years to come. In Massachusetts, Unitil is unique in that over 90% of our customers have Unitil as both their electric and gas provider, delivering a natural hedge between the demand for electricity and natural gas service in that State. With the winter heating season upon us, it's also worth drawing attention to the importance of our natural gas infrastructure, as the amount of energy delivered relative to our electric system is 4 times higher on an annual basis and up to 7 times higher during the winter months, despite having 25% fewer customers. This illustrates that the gas system is capable of delivering significant levels of affordability that the electric system without significant investment simply cannot. With that, I'll now turn it over to Bob, who will provide greater detail on the quarterly and year-to-date results.

Thank you, Tom, and good morning, everyone. Beginning on Slide nine, for the third quarter of 2022, earnings per share were $0.03. On a year-to-date basis, net income increased $5.3 million or $0.26 per share, compared to the same period in 2021. This represents an 18% year-over-year increase, driven by higher sales margins supported by successful New Hampshire rate case outcomes, partially offset by higher operating expenses. Contributing to the year-over-year earnings increase was approximately $0.11 per share attributed to recoupment activity with the New Hampshire rate cases. As a reminder, recruitment is a regulatory treatment in which permanent rate case awards are reconciled back to the effective date of the temporary rate award. Turning now to Slide 10, for the nine months ended September 30, 2022, electric adjusted gross margin was $76.6 million, an increase of $3.2 million or 4.4%, compared to the same period of 2021. The increase in electric margin reflects higher distribution rates and customer growth. Commercial and industrial unit sales increased 1.1% and customers increased by 734 reflecting additions in both the residential and commercial customer classes. You may recall our electric division is now fully decoupled, which removes the variability of weather and other factors can have on revenue. Moving to the company's gas operations. For the nine months ended September 30, adjusted gross margin was $100.6 million, an increase of $8.4 million or 9.1%, compared to the same period of 2021. The increase in gas margin reflects higher rates, customer growth and colder winter weather. We added a total of 1,154 gas customers, compared to the same period last year. In Maine, our only non-decoupled service area, weather-normalized unit sales increased 1%. Moving on to Slide 11, we provide an earnings bridge, comparing year-to-date 2022 results to 2021. As noted earlier, year-to-date 2022 adjusted gross margins increased the combined $11.6 million, primarily as a result of higher distribution rates, customer growth and colder winter weather. Operating and maintenance expenses increased $4.3 million, largely due to higher labor costs, professional fees and utility operating costs. Depreciation and amortization increased by $2.4 million reflecting higher levels of utility plant in service and higher amortization of rate case costs. Taxes other than income taxes increased by $1.4 million, reflecting higher local property taxes on higher utility plant in service and higher payroll taxes. Interest expense decreased $0.4 million due to lower interest on long-term debt, partially offset by higher interest on short-term borrowings. Other expense decreased $1.5 million, largely due to lower retirement benefit costs. Lastly, income taxes increased $0.1 million as a result of higher pre-tax earnings, partially offset by the flowback of excess accumulated deferred income taxes under regulatory orders received in New Hampshire. Turning now to Slide 12. We have ample liquidity and a strong balance sheet. As Tom mentioned at the beginning of the call, in September, Unitil amended and extended our credit facility ensuring liquidity through 2027. The limit was resized from $120 million to $200 million to support working capital requirements and the company's ongoing capital investment plan. Our revolving credit agreement represents our only variable rate debt, and we do not have any material debt retirement scheduled until 2026. Lastly, I'd like to point out that our trailing 12-month payout ratio is 60%, squarely within our target range of 55% to 65%. Now that we have successfully brought the payout ratio to our target range, we are able to deliberately accelerate dividend growth going forward. On slide 13, I'd like to highlight the successful rate case outcomes in New Hampshire that we discussed in detail last quarter. As we noted, our gas and electric cases resulted in combined base rate awards of $13.3 million. Since then our $1.6 million step adjustment for Northern Utilities became effective on September 1, that is in addition to the $1.3 million step adjustment for Unitil Energy Services that became effective August 1. And as we have discussed in prior calls about 82% of our total customers are now under decoupled rate structures. Finalizing those cases was a significant achievement that demonstrates Unitil's ability to execute on our financial and strategic plans. And with that, I will turn it back over to Tom.

Great. Thanks, Bob. Ending on slide 14, the first nine months of 2022 are proven to be busy and highly successful for our company. We expect this momentum to carry forward through year-end. We're well positioned operationally and financially to navigate higher energy prices in volatile financial markets. In the year-end earnings call, we will provide additional updates to our outlook, including our five year forecast for capital spending as well as dividend policy. With that, I'll turn it back to Todd.

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

Thank you. [Operator Instructions] I'm not showing any questions in the queue, sir. I will give it one more second. Our question comes from [indiscernible] with Bloomberg. Please proceed. Please check your mute button. Ms. [indiscernible] your line is open. I'm sorry, sir. It seems like there is some technical difficulties on their part. And I'm not showing any further questions, sir.

Okay, that's fine. I appreciate everyone attending the event today, and we look forward to more updates in the future.

Thank you, everyone, for attending. You may now disconnect. Have a wonderful day.