UNITIL (NYSE:UTL) Q2 2020 Earnings Call

0:00 Good afternoon, everyone, and welcome to the Unitil Corporation Second Quarter Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session, and instructions will follow at that time. If anyone should require any assistance during the conference, please press star, then zero on your touchstone telephone. And as a reminder, this conference call is being recorded. I would now like to turn the conference over to your host for today, Mr. Todd Diggins. Good afternoon and thank you for joining us to discuss Unitil Corporation's second 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.

0:58 Also in attendance today is Bob Hevert. Bob was recently appointed Senior Vice President, Chief Financial Officer, and Treasurer, effective July 31st, as we will discuss in further detail momentarily. We will discuss financial and other information about our second 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 investor section of our website at www.unital.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 Security 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.

1:48 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. 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. I will now turn the call over to Chairman, President, and CEO, Tom Meissner. Thank you, Todd, and thanks, everyone, for joining us today. Before we start moving to slide three, I'd like to introduce Bob Hevert, who was recently appointed Senior Vice President, Chief Financial Officer, and Treasurer.

2:39 Bob brings over 30 years of industry experience in regulatory matters and corporate finance and has testified in over 300 proceedings as an expert witness. In fact, Bob has testified on behalf of Unitil in each of the states where we operate, including most recently as the cost of equity witness in our recent Ray case in Maine. Bob was previously with Scott Madden as partner and practice area leader of rates regulation and planning. We believe that Bob's proven track record of success in his broad industry experience will be of great value to the company and its shareholders. At this point, I'd like to give Bob the opportunity to just say a few words. Thank you, Tom, and good afternoon, everyone. I have worked with Unitil on a variety of matters for many years, and during that time I became familiar with the company's employees, its culture, and its commitment to excellence, all of which I am sure have proven to be a benefit to both customers and shareholders. I'm very excited to join the Unitil team, and I look forward to helping advance the company's long-term strategies.

3:46 So we're happy to have you on board, Bob. As Todd mentioned earlier, Bob's appointment will become effective on July 31st or tomorrow, at which point Larry Brock will step down as CFO. Larry will continue on with the company as Senior Vice President, working closely with Bob. I'd like to thank Larry for his leadership during his time as CFO and his commitment to working closely with Bob to ensure a smooth transition. With that, I'll now move on to slide five. where today we announced net income of 3.1 million or 21 cents per share for the second quarter of 2020, a decrease of 0.9 million or 6 cents per share compared to 2019.

4:34 The company estimates that the ongoing COVID-19 pandemic unfavorably impacted net income by approximately 0.4 million or 3 cents per share. During the first half of 2020, Thank you for joining us. Net income was down by 2.4 million, or 16 cents per share, compared to 2019, reflecting warmer winter weather in 2020.

5:27 The year-to-date decrease in earnings is primarily due to the warmer-than-normal winter weather in Q1, which unfavorably affected net income by approximately 3.1 million, or 20 cents per share. Reflecting warmer winter weather in 2020. Turning to slide six, Similar to last quarter, I'd like to recap the company's COVID-19 pandemic response. Our highest priority continues to be the safety of our customers and of our employees. In response to the COVID-19 emergency, we implemented our crisis response plan in order to execute preventive and proactive measures during this unprecedented time, and we've also enacted a phased reopening plan.

6:13 The company is currently operating in its limited reopening phase under which most office employees are continuing to work from home when possible. In addition, we continue to require social distancing as well as masks, hygiene, travel limitations, and other measures to protect our employees and prevent the spread of the COVID virus. Operationally, the company has continued to provide safe and reliable service through the COVID-19 emergency. Employees entering customers' homes are being routinely tested to ensure the safety of both our customers and our employees. We are thankful that there are no active COVID-19 cases among our employees. We quickly adapted to social distancing and other recommended guidelines while ensuring operational continuity, and our workforce has seamlessly transitioned to work-from-home standards where appropriate.

7:11 Our employees have risen to this extraordinary challenge while continuing to provide exceptional customer service, and the company as a whole remains prepared to adapt in order to serve our customers and communities. On slide seven, we provide an update of how our states are being impacted by the COVID-19 pandemic. Unfortunately, many parts of the country have experienced an acceleration in the rate of new COVID-19 cases, and consequently reopening plans are being rolled back in some places. However, in New England, we remain cautiously optimistic that testing, tracing, masks, social distancing and other measures have successfully slowed the spread of COVID-19 as the new case counts across our territories appear to have leveled off.

8:01 The percentage of positive COVID-19 tests in our service areas also have stabilized at rates considerably lower than the national average. As the number of new COVID-19 cases has slowed, emergency orders have been moderately relaxed as part of a phased reopening plan in the states where we operate. As outlined on this slide, many businesses including retail, restaurants, and personal services began reopening during Q2. I would also note that most of the major development projects that we have discussed in the past continue to proceed in our service areas, which should contribute to our expanding customer base. On slide eight, we've again summarized our five-year investment plan.

8:49 We have not revised our investment plans as a result of the COVID-19 pandemic. And in fact, through the first half of 2020, our capital spending is more than $10 million higher in comparison to the same period in 2019. On slide nine, as I previously stated, I simply wanted to reaffirm that we do not anticipate any change to our current dividend policy as a result of the pandemic. With that, I'll now turn the call over to Larry to discuss our financial results in greater detail. Thanks, Tom. Good afternoon, everyone. I'll begin the sales and margin discussion on slide 10. In the second quarter of 2020, our gas gross margin was 22.9 million, a decrease of 0.4 million from 2019.

9:44 We estimate that the COVID-19 emergency unfavorably impacted gas margin by 0.8 million due to lower commercial and industrial usage. In addition, the warmer early summer weather impacted gas margin unfavorably Thank you. Thank you. The decline in gas sales units primarily reflects lower CNI usage due to the ongoing COVID-19 emergency as well as the warm early summer weather.

10:40 In total, the company estimates that weather normalized gas therm sales, excluding decouple sales, were down 5.6% in the quarter. Commercial and industrial sales were down 10.7% and residential usage was down 2.1% in the quarter compared to prior year. On a weather normalized basis, excluding the couple sales, the company estimates that C&I sales were down 7.4% and residential sales would have been up 3.2% in the quarter. Moving to slide 11. For the first six months of 2020, Our gas gross margin was 65.3 million, a decrease of 1.5 million from 2019.

11:33 The decrease was primarily driven by the historically warm winter weather in the first quarter of 2020 that I discussed during our last quarter's earnings call. The company estimates that year-to-date sales margin was lower by 2.7 million due to warmer weather. partially offset by customer growth. We also estimate that the COVID-19 emergency unfavorably impacted margin by 0.8 million due to lower CNI usage. These volume variances were partially offset by higher natural gas distribution rates of 2.0 million in 2020.

12:19 Through the first six months of 2020, Natural gas therm sales decreased 7.5% compared to 2019. We attribute the decline in gas sales to the historically warm winter weather in the first quarter of 2020 and the ongoing COVID-19 emergency. The company estimates that weather normalized gas therm sales, excluding decoupled sales, were down 1.2% year over year. Finally, I would note that we are currently serving 1,731, or 2.1%, more gas customers than at the same time in 2019, illustrating our growing customer base.

13:07 Next, on slide 12, we discuss electric margin. In the second quarter of 2020, our electric gross margin was $22.4 million. which is flat to 2019. Electric sales margins were higher by .4 million in the period due to higher electric distribution rates, customer growth, and warmer early summer weather. The ongoing COVID-19 emergency negatively impacted electric margin by a net .4 million due to lower CNI usage of .6 million partially offset by higher residential usage of 0.2 million. Total electric kilowatt-hour sales decreased 2.0% in the second quarter of 2020 compared to the same period in 2019.

14:01 The decline in electric sales units primarily reflects lower CNI usage due to the ongoing COVID-19 emergency and warmer early summer weather, partially offset by increased sales to residential customers Due to the COVID-19 pandemic, stay-at-home orders and the increased use of air conditioning during the warmer early summer period. In total, the company estimates that normal electric kilowatt-hour sales, excluding decouple sales, were down 4.9%. Commercial and industrial sales were down 11.0%, and residential usage was up 12.8% in the quarter. on a weather normalized basis, excluding decoupled sales, the company estimates that C&I sales were down 12.2% and residential sales would have been up 6.4% in the quarter.

15:03 Moving to slide 13. For the first six months of 2020, our electric gross margin was 45.5 million, which is again flat to 2019. In the period, electric sales margins were higher than 2019 by 0.8 million due to higher electric distribution rates, customer growth, and warmer early summer weather. However, these positive differences were offset by the impacts of warmer winter weather in the first quarter of 0.4 million, and as I mentioned last slide, the ongoing COVID-19 emergency also negatively impacted margin by 0.4 million.

15:49 Through the first six months of 2020, electric kilowatt-hour sales decreased 0.5% compared to 2019. We attribute the decline in electric sales principally to the lower average usage by CNI customers as a result of the ongoing COVID-19 emergency and warmer winter weather which adversely impacted the usage of electricity for heating purposes. This was partially offset by increased sales to residential customers due to warmer early summer temperatures and the fact that people spent more time at home than usual during the COVID-19 stay-at-home orders. The company estimates that whether normal electric kilowatt-hour sales excluding decoupled sales were down 1.1% in the period The number of electric customers being served has increased by 755, or 0.7%, compared to the prior year.

16:52 Next, on slide 14, we'll discuss the financial impact on Unitil of the COVID-19 emergency. We are closely monitoring the COVID-19 emergency and its impacts on the financial health of the company. As Tom mentioned earlier, we have estimated that as a result of the COVID-19 emergency, earnings per share were negatively impacted by 3 cents in the second quarter of 2020. As we just discussed, the combined impact on gas and electric sales margin from the COVID-19 emergency was $1.2 million in the second quarter of 2020. However, This was somewhat offset by net lower O&M expenses of approximately 0.6 million that the company identified to be related to the COVID-19 emergency.

17:50 The lower O&M related to the COVID-19 was due to lower employee benefit costs, primarily lower health insurance claims incurred in the second quarter of 1.0 million, partially offset by net 0.4 million and many more. The company is also working closely with our regulators and local utility working groups to develop reporting mechanisms to respond to requests from our regulators about the financial impacts of the COVID-19 emergency.

18:48 Due to the ongoing moratorium on service disconnections, the company expects to incur higher levels of customer arrears, which could translate to higher bad debt expense. will be tracking the activity and we are exploring potential options to recover expenses related to the emergency through the regulatory process. I'd like to point out that supply-related bad debt, which is historically approximately 45% of all write-off activity, is tracked and recovered in reconciling mechanisms and does not impact the company's earnings. Also, as I mentioned last call, The company has no intention to alter staffing levels as a result of the COVID-19 emergency.

19:37 In order to help stakeholders gauge the potential impact of COVID-19 on sales margin, the company has provided sensitivities between usage and margin for the third and fourth quarters of 2020. Turning to the balance sheet. In the second quarter, the company successfully priced Thank you for joining us. With the company's existing credit facility, which has a borrowing limit of $120 million, and the proceeds of the recently priced debt, the company has ample liquidity to execute our growth plans.

20:40 Moving on to slide 15, we provide an earnings bridge analysis comparing 2020 results to 2019 for the six-month period ended June 30th. I'd like to note that this layout is slightly different from the Form 10-Q as we isolate the impact of the 2019 U-Source 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 10-Q this morning. As discussed, 2020 year-to-date gross margin is lower than 2019 by $1.5 million, largely due to the warmer winter weather.

21:28 Core operation and maintenance expenses decreased $1.5 million compared to the same period in 2019. This decrease is primarily driven by lower employee benefit costs of $1.1 million, as well as lower maintenance and storm expenses of $1.0 million partially offset by higher bad debt expense and higher professional fees of a net 0.6 million. Depreciation and amortization was higher by 0.8 million, reflecting higher levels of utility plant and service. Taxes other than income taxes increased by 1.1 million, reflecting higher levels of net plant and service, as well as a non-recurring tax abatement realized in 2019 of $0.6 million.

22:20 Interest expense was flat, reflecting higher interest on long-term debt offset by lower interest on short-term borrowings. Other expense increased $0.3 million due to higher retirement benefit costs. 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 of revenues and expenses realized through useless operations in 2019. Lastly, income taxes decreased $0.3 million, reflecting lower pre-tax earnings in the period.

23:08 So this bridge analysis shows the net changes to reconcile are 2019 net income of 30.5 million to our 2020 earnings of 18.3 million for the first six months of the year. On slide 16, we'll begin our discussion of rate case activity in 2020. As we announced last quarter, our base rate cases in Maine and Massachusetts have concluded We received an order from the Maine PUC approving an increase to base revenue of $3.6 million. In Massachusetts, the gas settlement approved has a total distribution revenue increase of $4.6 million, which will be phased in over two years.

23:59 We began collecting the majority of this revenue award on March 1st of 2020, while $0.9 million of the award will be included in rate starting March 1st of 2021. The gas settlement was lower as a result of 1.8 million lower expenses related to the passback of excess deferred income taxes, lower depreciation, and a removal of retirement costs from base distribution rates. The Massachusetts electric settlement allows for a distribution increase of 0.9 million to become effective November of 2020. The electric settlement was lowered by $1.1 million as a result of lower expenses related to the passback of excess deferred income taxes and the removal of retirement costs from base distribution rates. The electric settlement also allows for the implementation of a new major storm reserve fund, which will help mitigate expense volatility related to future storms.

25:04 The company was planning to file a UES rate case during 2020 with a test year 2019, but we expect to defer the filing until the first half of 2021. I point out that both UES and Northern New Hampshire are required by the New Hampshire PUC to propose revenue decoupling in their next rate case to be filed 2021 or later. Over on slide 17, we have provided a summary of Significant distribution rate changes in 2020. In 2020, we have been awarded over $7 million of rate relief. As I mentioned last slide, the Fitchburg Great Case Awards would have been a combined $2.9 million higher if not for lower depreciation and amortization expenses and the removal of retirement costs from base rates.

26:02 On slide 17, the negative amounts for the Fitchburg Capital Trackers reflect the transfer of collections from the tracker mechanisms and into base distribution rates. Also, we have precedent for long-term rate plans or cost trackers across all of our utility subsidiaries. Finally, on slide 18, we provide the last 12 months actual return on equity in each of our regulatory jurisdictions. Unitil, on a consolidated basis, earned a total return on equity of 8.4% in the last 12 months. The company estimates that after weather normalizing the warm winter weather in the first quarter of 2020, the consolidated return on equity would have been 9.3%.

26:55 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. As a reminder, to ask a question, you will need to press star 1 on your telephone. And to withdraw your question, you may press the pound key. Again, if you have any questions, please press star 1 on your telephone. And first question comes from the line of Shelby Tucker of RBC Capital Markets. Thank you. Good afternoon, and Bob, welcome to the team.

27:40 Looking forward to working with you going forward. A quick question I had was really about switching in your territory from fuel oil to gas. Any impact from either COVID-19 or the persistent lower cost of crude price, I mean, the lower crude prices in the switching rate? Hi, Shelby. This is Tom. For the most part, we have not emphasized marketing for shifting customers from oil to gas during this time. But I would point out that our customer growth continues to be strong year over year, which is primarily driven by organic growth.

28:25 So we have a lot of large projects that continue to come through, including a large one in Salem, New Hampshire, that is preceded as planned. So we don't really expect to see an impact on our customer numbers year over year, although it'll be more driven by organic growth as opposed to switching. And then taking that answer, I'm guessing most of the growth is coming from more commercial or industrial, but mostly commercial. Is there any indications of a slowdown given the COVID-19 crisis? We have not seen any indication of a slowdown. And in fact, we've seen commercial properties, mixed-use development, and hotels continuing construction throughout this emergency.

29:18 Great. Thank you so much. Yep. Thank you. Again, if you have any questions, please press star 1 on your telephone. and there are no further questions at this time. Presenters, you may continue. Thank you for everyone joining. I appreciate the interest that you have in Unitil and everyone have a great day. Thanks. Thank you so much to our presenters and to everyone who participated. This concludes today's conference call. You may now disconnect.

30:04 Have a great day.