UNITIL (NYSE:UTL) Q1 2020 Earnings Call

0:00 Ladies and gentlemen, thank you for standing by and welcome to the Uniteil Corporation first quarter 2020 earnings conference call. At this time, all participants are on the listening mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you need to press star one on your telephone. As a reminder, this conference may be recorded. If you require any further assistance, please press star zero. I would now like to hand the conference up to you speaker for today, Mr. Todd Diggins, Director of Finance. So you may begin. Good afternoon and thank you for joining us to discuss Uniswil Corporation's first quarter 2020 financial results. With me today are Tom Meissner, Chairman, President, and Chief Executive Officer, Larry Brock, Senior Vice President, Chief Financial Officer and Treasurer, Dan Hurstak, Controller, and Todd Black, Senior Vice President, External Affairs and Customer Relations.

0:52 We will discuss financial and other information about our first 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. 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 in 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.

1:42 Forward-looking statements speak only as of today and we assume no duty to update them. This presentation contains non-GAAP measures. The accompanying supplemental information more fully describes these non-GAAP measures and includes a reconciliation to the nearest GAAP measures. The company believes these non-GAAP measures are useful in evaluating its performance. Moving on to slide three, before we start, I'd like to introduce some recent changes in senior management. Larry Brock was recently appointed as senior vice president, chief financial officer, and treasurer. Larry has been with Unitil for over 25 years, serving most recently as chief accounting officer and controller. Larry has vast experience and ensures strong leadership to guide Unitil forward. Dan Hurstak has also joined the management team as the company's new controller. Dan has nearly 20 years of accounting experience, most recently serving as Vice President, Corporate Accounting for Fidelity Investments.

2:34 Prior to that, Dan worked for 15 years at PricewaterhouseCoopers. I will now turn the call over to Chairman, President, and CEO, Tom Meissner. Thank you, Todd, and thanks, everyone, for joining us today. I'm going to begin on slide five. But first, let me just say that our thoughts and sympathies are with the victims of the coronavirus and their families. This is a very difficult time for our customers and communities, and our highest priority continues to be the safety of our employees and that of our customers. In response to the ongoing pandemic, we implemented our crisis response plan to execute preventative and proactive measures during this unprecedented time. We are pleased that there's been no interruption or degradation in our customer service as a result of this emergency, and no impact on our ability to provide safe and reliable service.

3:27 The gas and electric services we provide are more essential today than they've ever been before for our customers and our communities. To help our customers during this difficult time, we've suspended all service disconnections and late payment fees. In addition, we've created a fund to provide financial assistance to residential customers who've suffered COVID-19 related job loss or reduced wages. In total, we've donated $225,000 to agencies within our service areas to help relief efforts. We also have an employee fundraising campaign ongoing that has raised additional funding for COVID-19 relief efforts. We've seen strong response from our employees. Operationally, the company has continued to provide safe and reliable service throughout this ongoing emergency.

4:18 We quickly adopted protocols to ensure social distancing in the field while ensuring operational continuity. Office workers have seamlessly transitioned from work to home where appropriate, and even with employees working remotely, we continue to answer customer inquiries and have seen no decline in the level of service. On top of the ongoing COVID-19 emergency, we also successfully responded to two storm events that created widespread outages in our service areas, and we were able to do so and restore service quickly following each event. Our employees have risen to this extraordinary challenge, and the company as a whole remains prepared and ready to adapt. Larry will speak to the financial impacts of the COVID-19 situation momentarily.

5:10 Moving to slide 6, today we announced net income of $15.2 million or $1.02 per share for the first quarter of 2020, which was a decrease of $11.3 million or $0.76 per share compared to 2019. In the first quarter of 2019, the company recognized a one-time net gain of $9.8 million or $0.66 in EPS on the company's divestiture of its non-regulated business unit, USource. Adjusting for this divestiture gain, net income was down $1.5 million or $0.10 per share compared to 2019 and reflects warmer winter weather in 2020. The company estimates that the warmer than normal winter weather negatively impacted net income by approximately $3.1 million or $0.20 per share.

6:03 On slide 7, we again summarize our current five-year investment plan. This outlook has not changed from what was reported last quarter and we do not currently anticipate that the COVID-19 emergency will materially impact our 2020 investment plan. We still 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. This investment should maintain our historical rate-based growth of 7.5% to 8.5% over the foreseeable future.

6:50 Finally, on slide 8, we previously announced that we increased our annual dividend to $1.50 per share. We do not currently foresee any change to our current dividend policy as a result of the COVID-19 emergency. However, we will continue to strategically analyze our dividend policy subject to EPS growth and financing needs. Now I'll turn the call over to Larry who will take us through the numbers. Thanks, Tom. Good afternoon. Good afternoon, everyone. I'll begin my remarks on slide nine. Before reviewing our gas electric sales activity, I'd like to briefly warmer winter weather that Tom previously mentioned. To put the warm winter weather into perspective, Quarter one winter weather was 11.5% warmer than 2019 and 13.2% warmer than normal based on the company's degree day analysis.

7:48 This was one of the warmest winters on record in our service areas and unfavorably impacted sales in both the gas and electric divisions. In total, the company estimates that if weather had been closer than normal, net income would have been higher by about 3.1 million or 20 cents per share. Turning to slide 10. Our year-to-date gas adjusted gross margin is 42.4 million, which is a decrease of 1.1 million over 2019. This decrease was primarily driven by the warmer winter weather and lower sales, which had an impact compared to 2019 of 3.2 million. This decrease in margin was partially offset by the positive impacts of higher gas distribution rates in 2020 of 1.4 million and customer growth impact of 0.7 million.

8:48 Natural gas therm sales decreased 6.7% compared to the first quarter of 2019. Given the milder winter weather in 2020, the company estimates that weather normalized gas therm sales Excluding decoupled sales, we're up 1% year over year. We are currently serving 1.3% or about 1,100 more gas customers than at the same time in 2019. Next, on slide 11, our year-to-date electric adjusted gross margin is $23.1 million, which is flat to 2019. Electric sales margins in the period were positively affected by higher electric distribution rates of 0.6 million.

9:39 However, this positive difference was offset by the impact of the warmer winter weather and lower average usage of the same 0.6 million. Total electric kilowatt hour sales increased 0.8% compared to the first quarter of 2019. The increase in sales primarily reflects customer growth and increased usage by two large industrial customers in the company's Massachusetts service area. The company's Massachusetts service area operates under a revenue decoupling mechanism and therefore the increased sales of the two large industrial customers do not impact electric gross margin. We are currently serving 0.7% or about 700 more electric customers and at the same time in 2019.

10:33 Now turning to slide 12. We provide an earnings reconciliation analysis comparing our 2020 first quarter net income to our results for the first quarter of 2019. I'd like to note that this layout is slightly different from the form 10Q as we isolate the impact of the use of divestiture and related revenues and expenses In the supplemental presentation, we have provided a reconciliation to the statement of earnings that was provided in the 10Q. As we previously discussed, our year-to-date gas and electric growth margins were lower than 2019 by $1.1 million, largely due to weather.

11:19 Core operation and maintenance expenses decreased $0.2 million compared to the same period in 2019. This is a 1% decrease in core O&M The decrease was driven by lower utility operating costs of $1 million, partially offset by higher bad debt expenses of $0.6 million, including the provision for COVID-19, and higher professional fees of $0.2 million. Depreciation and amortization was lowered by $0.3 million, reflecting lower amortization of storm expenses and deferred taxes in 2020. Taxes other than income taxes increased 0.1 million compared to 2019, primarily reflecting higher local property tax rates and higher levels of utility plant and service.

12:12 Interest expense net was flat, reflecting higher interest on long-term debt offset by lower interest on lower levels of short-term borrowings at lower rates. Other expense increased $0.2 million due to higher retirement benefit costs in the period. Next, we've isolated the full USOS impact of $10.3 million, which was realized in 2019. This includes the after-tax gain on the divestiture of $9.8 million, in addition to $0.5 million, which is the net income realized from USOS's operations, in the first quarter of 2019 before the divestiture. Lastly, income taxes increased 0.1 million, reflecting the 2020 effective tax rate of 23.5%.

13:05 So that is our reconciliation of our current net income of 15.2 million for the quarter to the 26.5 million we earned in the first quarter of 2019. Now let's turn to slide 13 and I'll discuss the COVID-19 impacts on our business. We are closely monitoring the COVID-19 emergency and its impacts on the financial health of the company. The most significant impact to earnings could be the effect the current economic conditions have on commercial and industrial sales in our non-decoupled service areas. Although this may be slightly offset by higher sales to our residential customers.

13:50 At this point, we are still analyzing the extent and duration to which CNI usage may decline as a result of the emergency. However, we estimate that for every 1% drop in CNI usage, sales margin will be negatively affected approximately $400,000. As a reminder, Approximately half of the company's distribution revenue is generated by CNI customers. Due to the moratorium on service disconnections, the company expects to have higher levels of customer arrears. We'll be tracking that activity, and we are exploring potential options to recover bad debt-related expenses from the emergency with our state regulators.

14:38 I'd also like to point out that energy supply-related bad debt which is historically approximately 45% of all write-off activity is tracked in reconciling mechanisms and does not impact the company's earnings. The company has no intention to alter staffing levels as a result of the COVID-19 emergency to ensure continued safe and reliable service for our customers. Looking at the balance sheet and cash flow The facility has a borrowing limit of $120 million, and we are currently utilizing approximately half of that limit. The facility also allows us the option to increase the limit by $50 million for a combined $170 million limit. The company is not elected to exercise that option at this point.

15:42 In total, the company has about $110 million in short-term liquidity available. I'd also like to remind everyone that the company has investment-grade credit ratings from S&P and Moody's, which allows access to the capital markets as needed. We do not see liquidity being an issue for the company due to the emergency, and as a result, the company will continue as planned with our dividend and investment programs. Moving on to slide 14. We are pleased to announce that our rate cases in Maine and Massachusetts have concluded in the first quarter of 2020. We received an order from the Maine Public Utilities Commission approving an increase to base revenue of 3.6 million or an increase of 3.6% over test year operating revenues.

16:36 These rates became effective April 1, 2020. The order also approved a return on equity of 9.48%. Also in the first quarter of 2020, we received Massachusetts Department of Public Utilities approval for base rate increases in both our gas and electric divisions. Both rate increases were determined by settlements, which were approved with authorized returns on equity of 9.7%. The gas settlement has a total distribution revenue increase of $4.6 million, which will be phased in over two years. We began collecting the majority of this revenue award on March 1, 2020, while $0.9 million will begin on March 1, 2021.

17:27 The electric settlement allows for a distribution rate increase of $1.1 million to become effective this November of 2020. The settlement also allows for the implementation of a new major storm reserve fund, which will help mitigate expense volatility related to storms. In addition, the electric rate settlement also allows for continuation of the electric capital tracker, slightly modified to include recovery of property taxes and also the limit for investments eligible for recovery was more than doubled. I would like to mention that all of these base rate awards reflect the passback of excess deferred income taxes which were created as a result of the Tax Cut and Jobs Act.

18:17 The passback is reflected in lower revenue but is fully offset by lower amortization expense. The total annual passback as a result of these three rate cases is 1.6 million annually. Next we turn to slide 15. where we have provided the summary of significant distribution rate changes in 2020. We have precedent for long-term rate plans or cost trackers across all of our utility subsidiaries. In 2020, we have been awarded over seven million of rate relief. The negative amounts on slide 15 for the Fitchburg Capital trackers reflect the transfer of collections from the tracker mechanisms and into base distribution rates.

19:07 Finally, on slide 16, we provide the last 12 months actual earned return on equity in each of our regulatory jurisdictions. Unitil, on a consolidated basis, earned a total return on equity of 8.7% in the last 12 months. This reflects the unfavorable winter weather in quarter one. The company estimates that normalizing quarter one winter weather The consolidated ROE would have been 9.5%. And with that, we 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.

20:19 Thank you. Again, ladies and gentlemen, if you'd like to ask a question, please press star then 1 on your touchstone telephone. One moment, please. Our first question comes from Julian Smith of Bank of America. Your line is open. Hi, this is Alex Morgan dialing in for Julian. I just had one quick question, but first I definitely wanted to congratulate you, Lawrence and Dan. My question is on the mild weather that you experienced. Thanks for being clear on the negative impact of 20 cents. I was hoping you might be able to talk a little bit about if you plan to mitigate any of that with O&M cost savings in 2020 specifically. Thank you so much.

21:15 Hi, Alex. This is Tom. In terms of the current year, I think, you know, clearly the weather impact is just one of the challenges we're going to face. And then the next impact is going to be from the ongoing shutdowns from the COVID-19 pandemic. There clearly will be some offsets. We've seen you know, reductions in healthcare expenses, certainly travel is down, training is down, other discretionary expenses are down, and we're currently delaying hiring in large part because it's impractical to actually conduct hiring at the moment. So there will be some offsets, but it's difficult to quantify offsets that are, you know, gonna significantly offset the decline that we saw in sales in Q1.

22:10 Thank you. Our next question comes from Shelby Tucker of RBC Capital Markets. Your line is open. Great. Thank you. Good afternoon. And, Larry, congratulations on the promotion. My question is about decoupling. You have that in Massachusetts. To what extent would you be trying to seek maybe some type of decoupling in the other two states, New Hampshire and Maine? And if you were to consider that, What either regulatory or legislative steps would you need to follow to achieve that? Hi, Shelby. This is Tom. In New Hampshire, interestingly enough, we're required to file decoupling proposals by statute as part of our next rate case filings. So we do anticipate filing for decoupling both gas and electric in New Hampshire in our next rate case cycle.

23:03 In Maine, we haven't really discussed whether we will be pursuing that or not though I think we will be giving strong consideration to filing a decoupling proposal in Maine as well especially since we'll be doing so in New Hampshire for Northern and then on the point of whether legislation would be required at all I mean obviously New Hampshire not the case but for Maine not that I'm aware of no I don't believe legislation would be required Great, thank you very much. Thank you. Again, ladies and gentlemen, if you'd like to ask a question, please press star then 1. Our next question comes from Wayne Archibald, Monarch Partners. Your line is open.

23:49 Hi, thank you. Good afternoon. You know, Pittsburgh Electric is certainly a one-off asset of yours within the mix of the Maine and New Hampshire properties. Do you see other properties similar to that in either Massachusetts or any water utilities in New Hampshire or Maine that you'd be interested in acquiring? Is there much available in the marketplace for such unique property, one-off properties, and would you be at all interested in acquiring? Hi Wayne, this is Tom. I wouldn't say that there's an abundance of properties available, but I will say that we're always on the lookout for properties that would fit with our current portfolio of utilities.

24:41 And certainly I think if there was opportunities in the jurisdictions where we already operate, certainly especially with gas and electric not so sure about water but I wouldn't exclude that as a possibility then yes I think that that would be something we would like to consider. Is there much available? Are there many of these one-off local properties out there that are for sale? I don't think there's any currently for sale and for the most part the properties that we would be interested in are subsidiaries of larger companies who may or may not consider divesting of smaller properties up here in New England.

25:28 Would you consider any properties outside of the three-state area? Is there anything available in any of the other states in New England at all? We would certainly consider, I think, states in New England. I think if we were going to go outside of New England, we'd have to think long and hard about that. And I can say that I know there's some gas properties that have come up or will be coming up in other parts of the country. And I think the big concern there is not wanting to acquire gas utilities in warm weather regions that may be subject to moratoriums on gas service. I think we feel pretty comfortable where we operate being a gas and electric company in a cold weather region that we're relatively insulated from some of the movement in that regard.

26:22 In your mind, what sort of borrowing capacity do you feel you have if you were to make any acquisitions? What sort of debt levels are you willing to take on if you were to do something? Would it be funded through cash flow? No, we could certainly finance acquisitions as we have in the past. Certainly, I think anything up to 50% of our current market cap would be reasonable for us. But I can't say that we have a specific level that we've looked at. Thanks, Tom. Thank you. Yep, thank you. Hope you're doing well.

27:10 Yeah, you too. Thank you. I'm showing up for the questions at this time. Ladies and gentlemen, this does conclude today's conference. Thank you for listening. You may have a great day.