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Edited Transcript of UTL earnings conference call or presentation 24-Oct-19 6:00pm GMT

Q3 2019 Unitil Corp Earnings Call

HAMPTON Nov 5, 2019 (Thomson StreetEvents) -- Edited Transcript of Unitil Corp earnings conference call or presentation Thursday, October 24, 2019 at 6:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Christine L. Vaughan

Unitil Corporation - Senior VP, CFO & Treasurer

* Thomas P. Meissner

Unitil Corporation - Chairman, President & CEO

* Todd R. Diggins

Unitil Corporation - IR Officer

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Conference Call Participants

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* Alex Morgan

BofA Merrill Lynch, Research Division - Analyst

* Shelby Gardner Tucker

RBC Capital Markets, Research Division - MD and Senior Equity Research Analyst

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Presentation

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Operator [1]

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Ladies and gentlemen, thank you for standing by, and welcome to the Q3 2019 Unitil 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. You may begin.

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Todd R. Diggins, Unitil Corporation - IR Officer [2]

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Good afternoon, and thank you for joining us to discuss Unitil Corporation's Third 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 third 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 turn the call over to Tom.

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Thomas P. Meissner, Unitil Corporation - Chairman, President & CEO [3]

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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 $2.3 million or $0.15 per share for the third quarter of 2019, which is a decrease of $0.5 million or $0.04 per share over the third quarter of 2018. The decrease in net income is primarily a result of milder summer weather this year compared to 2018.

Through the first 3 quarters of 2019, net income is $32.8 million or $2.20 per share, which is an increase of $10.8 million or $0.71 per share compared to 2018. As a reminder, in Q1, we announced the divestiture of our unregulated energy brokerage advisory service, Usource. That sale generated a net gain of $9.8 million or $0.66 per share. The proceeds of the divestiture were invested in our regulated subsidiaries and should become accretive in 2020 when the investment is reflected in distribution rates. 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 the results today.

Excluding the onetime Usource gains, our year-to-date net income is up $1 million or $0.05 per share over 2018. The increase in net income from our core utility operations is attributed to higher sales margins.

Next, on Slide 5, as we have discussed before, the strong economy in our service areas is a fundamental driver of customer growth. The graphic provided on this slide illustrates the population growth occurring in our service areas, particularly along the New Hampshire and Southern Maine Sea Coast. This growth is supported by new residential and commercial construction, and we have identified $7.8 billion of planned or ongoing new construction in our service areas, which is an additional $1 billion or 15% more than we had previously identified at this time in 2018. This is an indication of the population growth and economic expansion that is occurring in our territories and that will continue to support customer growth in the years ahead. Approximately, 25% of the new construction is residential or will include a residential component.

On Slide 6, we introduce the primary -- the key priorities of our sustainability goals. In 2019, the company published its inaugural corporate sustainability and responsibility report. This report is designed to communicate our views on the value of sustainability to our shareholders. We define sustainability as our ability to achieve our mission and create value over the long term, and we firmly believe that financial success, environmental stewardship and social responsibility are the hallmarks of a healthy thriving business. Embedding sustainability into our business strategies is essential to achieving our long-term operational and financial goals, and we will provide updates on our corporate sustainability initiatives on an ongoing basis.

Now I will turn the call over to Christine Vaughan, who will discuss our financial results for the quarter. Christine?

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Christine L. Vaughan, Unitil Corporation - Senior VP, CFO & Treasurer [4]

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All right. Thanks, Tom. Good afternoon, everyone. Beginning on Slide 7, our natural gas sales margins for the third quarter of 2019 were $18.7 million, an increase of $1.1 million over 2018. Year-to-date, gas margin is $85.5 million, which is an increase of $5.1 million over 2018. The year-to-date increase was due to higher natural gas distribution rates of $4.6 million and $1.7 million as a result of higher therm sales, reflecting customer growth and increased average consumption by C&I and residential customers. This increase was partially offset by the absence of a $1.2 million nonrecurring adjustment in conjunction -- in connection with a rate case that occurred in the second quarter of 2018.

Natural gas therm sales have increased 2.5% year-to-date compared to 2018. This increase in gas therm sales in the company's service territory was largely driven by customer growth. Given the milder winter weather in 2019, the company estimates that weather-normalized gas therm sales, excluding decoupled sales, were up 5.5% in the first 3 quarters of '19 compared to the same period in 2018. We are currently serving 1,468 more customers or 1.8% more gas customers as than at the same time last year. And I want to point out that our weather-normalized -- weather normal unit sales growth is currently outpacing our customer growth rate. The company attributes this in part to nonheating residential customers that have transitioned to natural gas as a heating source. Additionally, we see strong C&I usage that is representative of our service areas' economic strength that Tom talked to you earlier about.

Next on Slide 8. I'll discuss the electric units and sales margins. Electric sales margins were $25.1 million in the third quarter, a decrease of $0.8 million compared to the same period in 2018. The decrease in electric sales margins in the third quarter was due to lower kilowatt-hour sales, reflecting milder summer weather in 2019 and overall lower average usage, partially offset by customer growth. Year-to-date, electric sales margins were $70.6 million, an increase of $0.1 million compared to last year. Electric sales margins in the first 9 months of 2019 were positively affected by the higher electric distribution rates of $1.4 million, offset by a decrease of $1.3 million from lower kilowatt-hour sales for the reasons we just mentioned. Year-to-date, kilowatt-hour sales decreased 5.2% compared to 2018. The milder summer weather compared to 2018 had a significant impact on sales.

When normalizing weather in both '18 and '19, the company estimates that weather-normalized sales were down 2.7%, and the weather-normalized sales decline is a result of lower usage per customer as a result of energy efficiency initiatives, somewhat offset by higher customer counts. And just as a reminder, the company is fully decoupled in Massachusetts. And while in New Hampshire, the company has regulatory mechanisms in place that provide recovery for lost kilowatt-hour usage due to company-supported energy efficiency measures and displaced revenue associated with net metering.

Turning to Slide 9. We roll forward the first 9 months of 2018 net income through year-to-date 2019. And as we lead off, I'd like to note that this layout is slightly different from the Form 10-Q as we isolate the impact of the after-tax gain of the Usource divestiture.

Gas and electric sales margin is higher than 2018 by $5.2 million, slightly offset by the $2.6 million of discontinued Usource revenue realized in 2018 as a result of the divestiture. Year-to-date, O&M expenses decreased $1.6 million compared to the same period in 2018. This includes $1.2 million less O&M as a result of a 2018 nonreccurring adjustment to O&M in connection with a New Hampshire rate case. O&M is also lower by $1.7 million as a result of expenses not incurred due to the Usource divestiture.

Excluding the nonrecurring 2018 adjustment to O&M and the Usource-related expenses no longer incurred, core utility O&M increased $1.3 million or 2.7%, which is primarily a result of 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 $0.5 million in the 9 months ended September 30, 2019 compared to the same period last year primarily reflecting higher local property tax rates on higher levels of utility plant access and service. Interest expense was flat due to lower interest on long-term debt, offset by higher short-term borrowings. And other expense decreased $0.5 million primarily related to lower retirement benefits.

Next, we've isolated the $9.8 million related to the after-tax gain on the divestiture of Usource. And finally, income taxes increased $1.6 million, excluding the gain on the divestiture as a result of higher pretax income.

On Slide 10, we recap quarterly updates regarding financing and regulatory activity. In September, Northern Utilities closed and received funding for a 30-year note with a principal of $40 million, and this financing was used to pay off short-term borrowings and lessen the company's overall exposure to variable short-term interest rates. Northern Utilities' general base rate case filed with the Maine PUC is progressing as planned. As mentioned last quarter, the filing includes a revenue deficiency request of $7 million with a 10.5% ROE. The equity ratio included in the filing is 52.9% after incorporating an equity infusion of the proceeds generated by the Usource divestiture as well as other corporate funds. And the $40 million debt issuance at Northern will not affect the company's filed equity ratio of 52.9%. The company anticipates new base distribution rates to become effective by the second quarter of next year.

On September 5, Fitchburg submitted with the Massachusetts Department of Utility a letter of intent to file a general increase in base distribution rates for both -- its both -- its gas and electric divisions, and we anticipate filing the full case in the fourth quarter of 2019. And we'll provide more details about the filing in our next year-end call.

On Slide 11, it provides the trailing 12 months actual earned return on each of our regulatory jurisdictions. Unitil, on a consolidated basis, earned a total return on equity of 12.2% in the last 12 months ending September 30, 2019. Excluding the onetime gain from Usource divestiture, the company earned a consolidated return on equity of 9.5%.

Finally, on Slide 12, as we typically do, we have provided a summary of our distribution rate relief. That has not significantly changed since last quarter. We have precedence for long-term rate plans across trackers, across all of our utility subsidiaries. Accelerated cost recovery mechanisms, our focal point of our regulatory strategies, they allow for smoother margin growth and reduce regulatory lag. We've been awarded over $4 million of rate relief outside of rate cases in 2019.

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.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question comes from the line of Julien Dumoulin-Smith with Bank of America.

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Alex Morgan, BofA Merrill Lynch, Research Division - Analyst [2]

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This is Alex Morgan calling in for Julien. I just had one quick question. I was wondering if we could just talk a little bit more in detail about the Fitchburg gas versus electric ROE. I see that you provided the last 12 months' 6.1% blended. But I was wondering if you could break those 2 out for us.

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Christine L. Vaughan, Unitil Corporation - Senior VP, CFO & Treasurer [3]

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Yes. I'll take that. So Alex, we plan on filing for the 2018 test year. In general, the electric division was earned in that test year period about 7.8% ROE. The gas division, 3.9%. That's on a -- about -- a combined rate base about $165 million. A little more on the gas side than the electric, about 54% on gas and 46% on electric.

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Operator [4]

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Our next question comes from the line of Shelby Tucker with RBC Capital Markets.

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Shelby Gardner Tucker, RBC Capital Markets, Research Division - MD and Senior Equity Research Analyst [5]

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Two questions. One for Christine, regarding the -- just the last question you had. Are there any unknown assets that we should be thinking about for the Fitchburg rate case that will be added to rate base?

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Christine L. Vaughan, Unitil Corporation - Senior VP, CFO & Treasurer [6]

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Gave you a pretty good estimation of the rate base, and so that would include those.

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Shelby Gardner Tucker, RBC Capital Markets, Research Division - MD and Senior Equity Research Analyst [7]

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Got it. But none of those are controversial assets? That's what I'm just trying to get a sense of with...

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Christine L. Vaughan, Unitil Corporation - Senior VP, CFO & Treasurer [8]

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In terms of how controversial. I think it's fairly straightforward. I'm pretty confident going forward with that.

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Shelby Gardner Tucker, RBC Capital Markets, Research Division - MD and Senior Equity Research Analyst [9]

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Got it. Okay. And then, Tom, one of the topics that has been quite prevalent over the last 6 months has been the decarbonization and even renewable natural gas. Would you mind sharing with us kind of how you think about that topic? And how it may affect your strategies going forward?

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Thomas P. Meissner, Unitil Corporation - Chairman, President & CEO [10]

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It is a topic that we're spending a lot of time internally discussing and trying to determine our pathways forward. We do recognize that in the areas that we serve, there are policies, the primary one of which is to achieve an 80% reduction by 2050. And in order to achieve that, there's going to have to be deep carbonization throughout both the gas and electric business. The flip side of that is we see gas as being an essential fuel in the areas that we serve, especially in a cold weather climate in Maine and New Hampshire. And to date, gas is still being seen as part of the solution, not part of the problem. So I would anticipate that we're going to develop strategies where conversion to natural gas enables some of the public policy objectives in the states we serve. And I think other policy objectives such as heat pumps or electrifications are going to primarily target fuel oil, propane and other fossil fuels besides natural gas.

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Shelby Gardner Tucker, RBC Capital Markets, Research Division - MD and Senior Equity Research Analyst [11]

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Got it. And one of the trends that we've seen among your larger neighbors in New England has been investing in offshore wind or those type of assets. Any opportunity for you to get involved in that -- those type of investments? Or is it just too large given your balance sheet?

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Thomas P. Meissner, Unitil Corporation - Chairman, President & CEO [12]

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I think the ones to date have been too large for us to participate in. There has been talk about possibly New Hampshire pursuing similar strategies. And depending on where that goes, we would, of course, investigate and see if there's an opportunity for us. But to date, I think it's been probably too large for us to consider.

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Operator [13]

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(Operator Instructions) I am showing no further questions at this time. Ladies and gentlemen, this concludes today's conference. Thank you for participating. You may now disconnect. Everyone, have a wonderful day.