Unitil Corporation (NYSE:UTL)
Q2 2014 Earnings Call
July 23, 2014 2:00 PM ET
David Chong - Director of Finance
Bob Schoenberger - Chairman, President & CEO
Mark Collin - SVP, CFO & Treasurer
Larry Brock - CAO & Controller
Liam Burke – Janney Capital Markets
Good day, ladies and gentlemen, and welcome to the Second Quarter 2014 Unitil Earnings Conference Call. My name is Lisa and I will be your operator for today. At this time, all participants are in listen-only mode. Later, we will conduct a question-and-answer session. (Operator Instructions). As a reminder, this conference is being recorded for replay purposes.
I would now like to turn the conference over to your host for today, Mr. David Chong, Director of Finance. Please proceed, sir.
Good afternoon. And thank you for joining us to discuss Unitil Corporation's second quarter 2014 financial results. With me today are Bob Schoenberger, Chairman, President and Chief Executive Officer; Mark Collin, Senior Vice President, Chief Financial Officer and Treasurer; and Larry Brock, Chief Accounting Officer and Controller.
We will discuss financial and other information about our second 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 will now turn the call over to Bob.
Thanks, David. And I want to thank everyone for joining us this afternoon. I'll give a brief summary of the highlights of our past quarter.
If you turn to Slide 4 of our presentation, today we announced net income of $1.1 million or $0.08 per share for the second quarter of 2014, an increase of $1.2 million or $0.09 per share compared to second quarter of 2013. For the first half of this year, we reported net income of $13.7 million or $0.99 per share, an increase of $3 million or 28% and $0.21 per share compared to prior year.
The company's earnings for 2014 were primarily driven by increases in natural gas and electric sales margins.
On Slide 5, we have demonstrated significant growth in our financial results over the past few years. In particular, we have had an excellent second quarter and first half of this year. These results reflect increases in revenue from recent rate cases and our robust gas expansion program. Given the continuing demand for natural gas, including in many communities currently without gas service, we expect this growth to continue for years to come.
On Slide 6, we achieved approximately $56 million in rate relief since 2010, which roughly equates to a 50% increase to sales margin since 2010. In 2014 alone, we achieved almost $20 million of rate relief from recently completed rate cases, which Mark will describe in more detail later.
Turning to Slide 7, natural gas fundamentals continue to drive the market opportunity for the company. Natural gas is in abundant supply with estimates ranging up to 100 years of domestic supply driven by the vast amount of shale resources across the United States. The large supply has driven natural gas prices down in recent years offering our natural gas customers the best choice not only in terms of cost compared to competing fuels such as oil and propane, but also in terms of its superior efficiency and convenience.
On Slide 8, the price advantage of natural gas versus other competing fuel choices such as home heating oil. We estimate that by switching to natural gas from fuel oil our customers here in New England can reduce their cost by about half or $1500 annually.
On Slide 9, in our natural gas division, we are aggressively adding new customers and investing in the modernization and expansion of our distribution system. We continue to achieve industry leading growth. Since 2009, we've added nearly 7,000 customers, including many large commercial and industrial customers. Our total gas customer base is growing annually on the order of 3% a year, which compares to our peers at about 1% annually.
On Slide 10, we have significant expansion opportunities both within our existing service areas and in nearby surrounding communities. We are currently expanding our service franchise into two new towns, which are shaded in red on the slide. In addition to this, we have four significant expansion projects within our existing service areas. We have significant running room providing years of above-average growth in both Maine and New Hampshire.
Our gas expansion plan is designed to increase our gas sales by 4% to 6% annually and reach a doubling of our gas rate base by 2016. In the first six months of this year, our weather-normalized therm sales were up 6.4%.
Now, I will turn the call over to Mark Collin who will discuss our financial results for the quarter and also provide a regulatory update. Mark?
Thanks, Bob. Turning to Slide 11, natural gas sales margins were $16.3 million and $52.8 million for the second quarter in the six month periods, reflecting increase of $2.9 million and $8.9 million, up 20% for the year so far compared to the prior year. Natural gas sales margins in 2014 were positively affected by higher therm unit sales, a growing customer base and recently approved distribution rates.
Therm sales of natural gas increased 12.9% in the six months of 2014 compared to 2013, driven by the colder winter weather and new customer additions. There were 12% more heating degree days in the first six months of 2014 compared to the same period in 2013, which we estimate positively impacted earnings per share by about $0.09.
Excluding the effect of weather on sales, weather normalized gas therm sales are estimated to be up 6.4% for the first half of this year compared to last year, reflecting a very healthy customer growth rate.
Slide 12 highlights our electric business sales and margin. Electric sales margins were $18.9 million and $38.1 million for the second quarter in the six month periods, reflecting increases of $1 million and $1.8 million, up about 5% for the year so far compared to prior year. Electric sales margins reflect higher electric kilowatt hour sales and recently approved electric base distribution rates. Electric kilowatt hour sales increased 2% for the six month period compared to prior year, driven by the colder winter weather and the addition of new customers.
Turning to Slide 13, Usource, the company's non-regulated energy brokering business, recorded revenues of $3 million for the six month period, an increase of about $0.1 million compared to the same period in 2013.
Operation and maintenance expenses increased $0.2 million and $2.1 million for the second quarter and a six month period compared to prior year. The increase in O&M expenses in a three and six month periods primarily reflects higher compensation and benefit cost.
Depreciation and amortization increased $0.7 million and $1.4 million for the second quarter in a six month periods, reflecting higher depreciation expense, our normal utility plant additions and amortization of major storm restoration costs.
Taxes other than income taxes increased $0.4 million and $1.2 million for the second in six month periods compared to prior year, primarily reflecting higher local property taxes on higher levels of utility plant and service.
Net interest expense increased $0.7 million and $1.3 million for the second quarter in the six month periods, reflecting lower interest income on regulatory assets.
Now, turning to Slide 14. We provided an update on our financial results at utility operating company level. The chart shows the trailing 12 months actual earned return on equity in each of our regulatory jurisdictions. In addition, while not shown on his chart, Unitil Corporation on a consolidated basis earned a total return on equity of 9.1% in the last 12 month period.
Also, as we have discussed in the past and as shown on the table on the right, we have long-term capital cost trackers in place to recover a significant portion of current and future capital spending. One item we have not discussed in the past is the new infrastructure repair and replacement legislation that was recently passed in Massachusetts and allows companies to request recovery of the cost of system improvements and replacements through an annual tracker. We expect to file our fist request for an estimated annual tracker amount of about $0.5 million later this year for effect May 1, 2015.
Slide 15 summarizes our distribution base rate case filing in Massachusetts that we recently completed in the second quarter. This rate case provides for a permanent increase in annual revenue of $5.6 million. Some of the highlights include a recovery over three years, of $5 million of previously deferred emergency storm repair cost. In addition, the commission approved and expanded Storm Resiliency Vegetation Management Program at an annual funding amount of $0.5 million. The commission also approved a recovery of $0.9 million over a five year period of past due amounts associated with hardship accounts that are protected from shutoff.
This concludes our summary of our financial performance for the period. I will turn the call over to the operator who will coordinate questions at this time.
(Operator Instructions). Your first question comes from the line of Liam Burke with Janney Capital Markets.
Liam Burke - Janney Capital Markets
Thank you. Good afternoon, Bob. Good afternoon, Mark.
Liam Burke - Janney Capital Markets
On the electrical unit business, you had higher revenue but lower kilowatt hour sales. You obviously had some favorable rates reflected in those sales numbers. Do you anticipate that you’ve peaked out in terms of rate increases on the electrical side or do you think you have got more runway there?
Well, the most immediately is the Fitchburg Electric rate case just went into place June 1st of this year. So that we have only really got month of that in the period. We will see an annualization of that going forward. So you will start to see the effect of the Fitchburg rate case on the electric side in the coming months. In addition to that, the [step] [ph] adjustment for our New Hampshire electric operations at Unitil Energy Systems also was put in place on May 1st of the quarter. So it's only partially, it's in really a couple of months although because it’s -- as bills rendered it ends up being only partially in like 45 days in the quarter. So we will get -- again, you will see more of an annualization of those two rate increases going forward as well.
Liam Burke - Janney Capital Markets
Okay. Usource look like there is $1.4 million versus $1.4 a year ago. Is there some seasonality or anything in that business, the growth expectation seems to be a little higher?
Yeah. I fully expect that for the year as we complete the year, Liam, that we will achieve what we have previously told our shareholders between the 10% and 15% increase year-over-year.
Liam Burke - Janney Capital Markets
Okay. Great. And are you still holding firm on your expected capital budget this year?
Liam Burke - Janney Capital Markets
Okay. Thank you very much.
Thank you. Have a good day.
(Operator Instructions). There are no additional questions. At this time, I would like to turn the presentation back over to Mr. David Chong for closing remarks.
Thank you for joining us this quarter. And we look forward to talking to you next quarter. If you have any questions give me a call in the office. Thank you.
Ladies and gentlemen, that concludes today's conference. Thank you for your participation. You may now have a great day. Thank you.
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