David Chong – Director, IR
Bob Schoenberger – President, Chairman and CEO
Tom Meissner – SVP and COO
Mark Collin – SVP and CFO
Liam Burke – Janney Capital Markets
Unitil Corporation (UTL) Q4 2013 Earnings Call January 29, 2014 2:00 PM ET
Good day, ladies and gentlemen, and welcome to the Fourth Quarter 2013 Unitil Earnings Conference Call. My name is Brittney and I will be the operator for today. At this time all participants are in a listen-only mode. Later we will conduct a question-and-answer session. (Operator Instructions). This conference is being recorded for replay purposes.
At this time I would now like to turn the conference over to your host for today, Director of Finance, Mr. David Chong. Please proceed, sir.
Good afternoon, and thank you for joining us to discuss Unitil Corporation’s fourth quarter 2013 financial results. With me today are Bob Schoenberger, Chairman, President and Chief Executive Officer; Mark Collin, Senior Vice President, Chief Financial Officer and Treasurer; Tom Meissner, Senior Vice President and Chief Operating Officer; and Larry Brock, Chief Accounting Officer and Controller.
We will discuss financial and other information about our fourth quarter 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.unitil.com. We will refer to that information during this call.
Before we start please note that comments made on this conference call may contain statements that are commonly referred to as forward-looking statements, which are made pursuant to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. These forward-looking statements include statements regarding the company’s financial condition, results of operations, capital expenditures and other expenses, regulatory environment and strategy, market opportunities and other plans and objectives.
In some cases forward-looking statements can be identified by terminology such as may, will, should, estimate, expect or believe, the negative of such terms or other comparable terminology. These forward-looking statements are neither promises nor guarantees, but involve risks and uncertainties and the company’s actual results could differ materially.
Those risks and uncertainties include those listed or referred to on slide 1 of the presentation and those detailed in the company’s filings with the Securities and Exchange Commission, including the company’s Form 10-K for the year ended December 31, 2013. Forward-looking statements speak only as of the date they are made. The company undertakes no obligation to update any forward-looking statements.
With that said, I’ll now turn the call over to Bob.
Thanks, David. I want to begin by discussing a few highlights of the past quarter and for the full year 2013.
If you turn to slide four of our presentation, today we reported higher net income of $21.6 million, an increase of $3.5 million or 19% compared to last year. Earnings per share for the full year were $1.57 per share, an improvement of $0.14 per share compared to 2012. The continued strong demand for natural gas helped produce excellent financial results in 2013.
The robust growth in our utility businesses is due to several factors including favorable weather, contingent investment in distribution infrastructure and recently approved electric and gas base rates. We believe this provides a strong foundation for the future growth.
On slide five, we achieved significant growth and steadily improved financial performance over the past five years by focusing on our core strategies. In our Natural Gas division we are aggressively targeting new customer growth and investing in the modernization and expansion of our distribution system. Our gas expansion plan has been designed to increase our gas sales by 4% to 6% annually and to reach a doubling of our gas rate base by 2016.
In our Electric division we continue to make system capacity, reliability and customer service-related investments. And as Mark will discuss later we have implemented cost tracker distribution rate adjustments and filed distribution base rate cases for our gas and electric utility businesses. We have finalized a settlement in one of these recent cases for our gas utility in Maine and have been awarded $3.8 million in new rates effective January 1, 2014. Again we believe that the execution of our growth strategies, coupled with new rate approvals will continue to drive the growth in our financial results into the future.
Now if you could turn to slide 6, natural gas fundamentals are driving the market opportunity for Unitil. As I’ve discussed previously with you natural gas continues to offer our customers the best choice of value in terms of its superior efficiency, convenience and low cost compared to competing fuels such as oil and propane. We achieved an industry leading rate of growth of 3% in net new customer additions in 2013, which is triple the New England gas LDC average growth rate of about 1%.
Two of the more populated areas we serve in northern New England, the greater Portland, Maine area and the greater Portsmouth, Dover Rochester area of New Hampshire will continue to provide us with great opportunities to grow our gas sales. We estimate that there is more than a $0.5 billion of new residential and commercial construction currently being planned in these areas. We are ready to make the necessary investments in our gas delivery system to meet the energy needs of a new and expanding customer base.
Now on slide seven we provide an update on Usource, our non-regulated energy brokering subsidiary. Usource has grown its revenues about 8% annually over the last five years. In addition Usource continues to demonstrate high customer retention rates of about 90% and has a forward book of revenue of $8.3 million at the end of 2013.
Just to familiarize ourselves the forward book represent revenues under contract to be recognized in future periods. Historically depending on average contract length Usource realizes approximately 50% to 70% of the prior year forward book as revenues in the following year. We grow our forward book by focusing on client renewals and obtaining new business. We continue to focus on Usource and expect a growing contribution to our consolidated financial results.
Now I will turn the call over to Tom Meissner, our Chief Operating Officer to discuss further details of our Gas Growth plan and our capital budget for 2014 and other operating highlights. Tom?
Thanks Bob. As Bob mentioned we have seen significant growth in gas business both in terms of the number of customers served and sales growth as well as increased investment we’re making to modernize and expand the reach of our system.
Over the next few slides I’ll go through our 2014 capital budget, highlighting our growth spending, pipe replacement programs and our electric substation constructions plans. If you turn to slide eight we’ve provided a more detailed look at our 2014 capital budget and our historical growth in rate base.
We plan to spend about $57 million on gas projects, $27 million on electric projects and $7 million on business systems and supporting technology for a total of $91 million in spending in 2014. Spending on new customer additions will be a significant component of this budget. In 2014 we tend to spend about $35 million or 38% of our capital budget on expansion of our electric and gas distribution systems to achieve new customer growth. Of this $23 million or 40% of our gas budget will be spent on expansion of our natural gas delivery system targeting new customers and increased gas sales.
On the electric side we plan to spend about $12 million or 44% of the electric budget on growth and expansion. Of this roughly $5 million will be spent on multi-year project to construct two electric substations in New Hampshire in order to meet growing electric demand in our territories. Spending on these two substations is expected to total about $23 million over four years.
Another major category of spending is infrastructure replacement, which is primarily replacement of cast iron and bare steel mains and services. We plan to spend about $18 million or 32% of the gas budget on infrastructure replacement in 2014. It’s worth noting that we will complete all of infrastructure replacement in New Hampshire by 2017 after which this category of spending will begin to decline. Our capital spending plan continues to drive growth in our gas and electric rate base which has resulted in annual growth rates of 11% and 3% respectively. We expect to double our gas rate base by 2016 in comparison to what it was in 2008 at the time of our acquisition of Northern Utilities.
Turning to slide nine, this slide highlights our aggressive gas expansion plan. Since acquiring Northern Utilities in December of 2008 we’ve added and converted about 8,200 natural gas customers, an increase of 12% over our 2008 customer base. In 2013 alone our customer growth rate was 3% while Therm sales increased 10.7% partially due to the more normal winter temperatures in 2013. On a weather-normalized basis Therm sales increased by about 4%.
In looking at the customer additions for 2013 it is also worth mentioning that the year-end customer account does not include meters that will be set after the end of the year for work that was completed in 2013. We estimate that an additional 1,200 meters are still to be set as a result of last year’s construction work. Our current on-demand penetration of just under 60% is still well below the regional average allowing for significant growth in customer base along existing main, which is more cost effective than main’s extensions.
Shifting to our infrastructure replacement programs on slide 10 we are replacing about 13 miles of cast iron and bare steel main’s annually through 2017. As I mentioned earlier after 2017 our New Hampshire pipe replacement program will be finished and pipe replacement will level out at about seven miles per year thereafter. Our largest infrastructure replacement project is in Maine where the recently approved Maine rate case settlement allows us for annual recovery of this spending over the next several years.
Turning to slide 11 this slide provides an overview of our upcoming electric substation projects in New Hampshire. Construction this year will begin on the first of two new substations to be completed over the next four years. These substations will be completed at a cost of about $12 million and $11 million respectively and will provide the capacity needed for continued growth on New Hampshire system while also addressing constraints at existing substations and improving reliability.
Now I’ll turn the call over to Mark Collin who will discuss our financial results for the quarter and our current rate case proceedings.
Thanks, Tom. As Bob stated earlier, net income increased by $3.5 million or 19% to $21.6 million for this past year-ended December 31, 2013. Results were positively affected by higher natural gas and electric sales margins due to higher distribution rates, new customer growth and more normal winter weather in 2013.
Turning to slide 12 natural gas sales margins were $85.2 million in 2013, an increase of $9 million or 11.8% compared to 2012. Therm sales of natural gas were up over 10% in 2013, driven by colder winter weather in the year, coupled with strong customer growth. Based on weather data collected in the company service areas there were 16% more heating degree days in 2013 compared to 2012 which we estimate positively impacted earnings per share by about $0.12 compared with the prior year. Heating degree days were about 1% higher than normal. Excluding the effect of weather on sales weather normalized gas therm sales are estimated to be up 4% in 2013, reflecting strong customer growth.
Slide 13 highlights our electric business sales and margin. Electric sales margins were $76.2 million in 2013, an increase of $4.3 million or 6% compared to 2012. Electric sales margins reflect higher electric base distribution rates in 2013 including recovery of $1.3 million of vegetation management and electric reliability enhancement expenditures as well as an increase of $0.7 million in the recovery of major storm restoration costs which are offset by corresponding increase in operating expenses. Electric kilowatt hour sales increased approximately 1% in 2013.
On both slides 12 and 13 the unit sales increases I just discussed exclude the decoupled sales of our Massachusetts combination gas and electric operating utility. Approximately 11% and 27% of our total gas and electric sales respectively are decoupled and changes in these sales do not affect sales margin.
Turning to slide 14, as Bob discussed earlier Usource, the company’s non-regulated energy broking business recorded revenues of $5.8 million in 2013, an increase of $0.3 million compared to 2012. Usource’s revenues are primarily derived from feed billed to suppliers; its customers take delivery of energy from these suppliers under term contracts brokered by Usource.
Operation and maintenance expenses increased $4 million in 2013 compared to the prior year. The change in O&M expenses reflects higher utility operating cost of $1.9 million, higher compensation and benefit cost of $1 million higher professional fees of $0.9 million and higher all other O&M expenses net of about $0.2 million. The increase in utility operating cost in 2013 includes $1.3 million in new spending on vegetation management programs that are recovered through cost tracker rate mechanisms resulting in a corresponding and offsetting increase in revenue and margin in the period.
Depreciation and amortization expense increased $2.6 million in 2013. The increase reflects higher depreciation on our gas and electric utility plan additions of $1.6 million and higher amortization of major storm restoration costs of $0.7 million which again is offset in revenue and an increase in all other amortization of $0.3 million. Local property and other taxes increased $1 million in 2013 compared to 2012, reflecting higher levels of utility plant and service.
Net interest expense increased $0.7 million in 2013. The increase in the year reflects lower net interest income on regulatory assets, partially offset by lower average borrowing rates on lower short term borrowing balances. Federal and state income taxes increased $1.7 million in 2013 due to higher pretax earnings in the year.
Now please turn to slide 15 which shows a quick look at the liquidity profile of Unitil. We recently entered into an amended and restated credit facility in early October of 2013 which increased the size of our credit facility from $60 million to $120 million. The new credit facility provides for a five near term with borrowings at LIBOR plus 1.375% which compares favorably to our old credit facility which is at LIBOR plus 1.75. We believe that our new credit facility provides for ample liquidity for the foreseeable future to execute on our growth strategies.
Cash provided by operating activities was $96.3 million in 2013, an increase of $29.6 million or 44% compared to the same period in 2012. This increase in operating cash flow was driven by higher income, improving regulatory rate relief and cost recovery and the continued realization of income tax benefits available to all our utility subsidiaries, principally through bonus depreciation and the adoption of tangible assets and repairs regulations in the period.
Turning to slide 16 we have provided an update on our financial results at the utility operating company level. Chart shows the trailing 12 months actual earned return on equity in each of our regulatory jurisdictions. As we have indicated in the past we have long term capital cost trackers in place to recover significant portion of current and future capital spending. In May of this year we expect an annual increase in revenue of approximately $1.5 million for our New Hampshire electric operations to recover a substantial portion of last year’s change in that plan.
For our Maine gas operations which I will discuss in more detail on the next slide we expect the annual increase of approximately $0.7 million in May associated with the new capital tracker that was recently approved in Maine. For our New Hampshire gas operations we have requested a long term rate plan that we expect will provide an additional step up in revenue through a capital tracker. Both of these capital tracker increases for our gas operations are above and beyond initial rate relief granted or to be granted in our rate cases.
Finally Unitil’s FERC regulated gas pipeline has an annual rate adjustment mechanism which we project to result in annual increase in revenues of approximately $0.6 million effective August 1st to recover capital spending on several pipeline upgrade and replacement projects.
Slide 17 provides more details on the rate case we just completed in Maine in the fourth quarter of 2013. The rate case reflects an implied authorized ROE of 9.75% and provides for a permanent increase in annual revenue of $3.8 million effective January 1st, 2014. As previously discussed the settlement also includes a capital cost recovery tracking mechanism which will recover costs associated with our system replacement and upgrade program for the next four years which we have estimated in the bottom half of the slide.
Slide 18 presents the snapshot of our two rate cases currently in process. These two cases along with the case recently completed in Maine reflects our regulatory strategy to earn our authorized return on our increasing investment in our gas utilities. In April last year we filed a base rate case for our natural gas utility operations in New Hampshire with the rate request of $5.2 million. Similar to the Maine filing the New Hampshire gas rate case filing includes a proposal for a capital tracker mechanism that would allow us to increase revenues annually without the need to file a full base rate case.
In Massachusetts where our utilities are operating under decoupling we filed a distribution base rate case last year for our electric operations. The total amount of the increase in distribution revenue requested is $6.7 million which includes $2.1 million for recovery of previously deferred storm cost and $0.5 million for enhanced vegetation management program.
In addition to the base rate request consistent with the department precedent and for other utilities the filing also proposes to fund a major storm reserve of $2.8 million for effect January 1, 2015 to address the cost of future major storms through a reconciling storm recovery adjustment. The filing also includes a proposal for a revenue adjustment mechanism to complement our revenue decoupling mechanism by providing for annual adjustments to revenue to reflect future growth and expenses in rate base without the need to file another rate case.
Now this concludes our summary of our financial performance for the period. I will turn the call over to the operator who will coordinate questions. Thank you.
(Operator Instructions). And your first question comes from the line of Liam Burke, representing Janney Capital Markets. Please proceed.
Liam Burke – Janney Capital Markets
Yes, thank you. Good afternoon. Could we go back to the capital budget of $91 million? How – I mean you have infrastructure replacement of $18 million and then IT investment of additional $7 million. Could I interpolate that as your maintenance CapEx for an annual maintenance CapEx number or how would I translate the sections of the pie chart into a maintenance CapEx number?
I am not sure that we intended to categorize it into maintenance CapEx. I think the portion of the pie chart that is shown as other requirements is related to a more normal level of activity and then we highlighted the specific areas that I think tend to be above and beyond that.
Liam Burke – Janney Capital Markets
Okay. So it’s roughly $30 million. I mean roughly, obviously there are these grey areas…
Yeah I think, Liam that’s right. I think as Tom said other requirements really reflect that base maintenance budget in the capital area.
Liam Burke – Janney Capital Markets
Great. And you talked in the electric business that you did have some storm activity. During the first quarter, during the fourth quarter and then during the year-to-date in the first quarter of ‘14 are you seeing normal storm activity or is it higher than usual?
It’s actually been fairly typical of years past, nothing unusual and certainly nothing like we have seen with the storms in the recent years.
Liam Burke – Janney Capital Markets
Great. Thank you very much.
(Operator Instructions). Okay and there are no further questions in the queue at this time.
Okay, this is David Chong. Thank you for attending our call this quarter and this concludes our conference call.
Ladies and gentlemen, that concludes the presentation. You may now all disconnect and have a wonderful day.
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