Unitil Corp

NYSE:UTL

Earnings Call Transcript 2023-Q1

[Operator]

Good day and thank you for standing by. Welcome to the Q1 2023 Unitil Earnings Conference Call. At this time all participant are in a listen-only mode. After the speakers presentation there will be a question-and-answer session. [Operator Instructions] Please be advised that today's conference is being recorded.

I would now like to hand the conference over to your speaker today, Todd Diggins, Chief Accounting Officer and Controller. Please go ahead.

[Todd Diggins, Chief Accounting Officer and Controller]

Good morning and thank you for joining us to discuss Unitil Corporation's first quarter 2023 financial results. Speaking on the call today will be Tom Meissner, Chairman and Chief Executive Officer; and Dan Hurstak, Senior Vice President, Chief Financial Officer and Treasurer. Also with us today are Bob Hevert, President and Chief Administrative Officer; and Chris Goulding, Vice President, Finance and Regulatory Services.

We will discuss financial and other information on this call. As we mentioned in the press release announcing this call, we have posted information including a presentation to the Investors section of our website at unitil.com. We will refer to that information during this call.

Moving to Slide 2, the comments made today about future operating results or 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 can cause 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 the 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 obligation to update them.

This presentation contains non-GAAP financial measures. The accompanying supplemental information more fully describes these non-GAAP financial measures and includes a reconciliation to the nearest GAAP financial measures. The company believes these non-GAAP financial measures are useful in evaluating its performance.

With that, I will now turn the call over to Chairman and CEO, Tom Meissner.

[Tom Meissner, Chairman, President and Chief Executive Officer]

Great. Thanks, Todd, and good morning, everyone. Thanks for joining us today. Before I begin the presentation, I did want to highlight some recent organizational changes that you probably took note of during Todd's introduction. First, I'm pleased to announce that Bob Hevert has taken on expanded responsibilities within the company and will assume the role of President and Chief Administrative Officer. Stepping into Bob's former role as Senior Vice President, Chief Financial Officer and Treasurer is Dan Hurstak who joins us on the call today. Todd Diggins has been appointed Chief Accounting Officer and Controller, the position formerly held by Dan.

These changes are all part of the company's long-term succession planning and will ensure management continuity well into the future. I'm pleased that we have this well-seasoned management team who will be guiding the company in the years ahead.

Moving on to the presentation. I'm going to begin on Slide 4. Today, we announced strong results for the first quarter of 2023 with net income of $24.1 million or $1.51 per share, which represents an increase of $0.16 per share or 12% over 2022. These results were achieved with higher adjusted gross margins led by customer growth, execution of our regulatory agenda and focused cost control.

As a reminder, with the completion of our New Hampshire rate cases last year, the majority of our customers are now under decoupled rates which stabilizes our revenues and helps offset the effects of weather and changing usage patterns. Operation and maintenance expenses decreased year-over-year, a notable achievement considering the current inflationary environment. We anticipate that for the balance of the year, O&M will remain relatively flat to 2022 levels.

Our regulatory agenda continues to be active. As we'll discuss later in the presentation, yesterday, the New Hampshire Public Utilities Commission found that our proposed Utility Scale Solar project to be in the public interest, and we will now begin construction phase of the project. We're very pleased with the broad-based support the project continues to receive.

Also, yesterday, we filed a comprehensive base rate request in Maine, and we are planning to file both gas and electric rate cases in Massachusetts during the third quarter. Looking forward, we reaffirm our long-term guidance of 5% to 7% growth in earnings per share. We're confident in our investor value proposition of sustainable, competitive, long-term earnings growth with managed risk.

Turning to Slide 5. Superior service has always been fundamental to our strategy and our consistently strong customer satisfaction ratings reflect that commitment. A key pillar of our strategy is creating and providing personalized services, information and rate options, enabling our customers to more effectively manage their energy use. As part of that strategy, we have implemented a redesigned energy bill that is guided by customer feedback, provides concise information and promotes programs and services benefiting our customers.

The new format provides intuitive visual data displaying usage patterns and includes a QR code enabling convenient online payments. This initiative was a multiyear project that is an important step in ensuring our customers have ready and convenient access to relevant information and beneficial products and services.

Moving on to Slide 6. As I mentioned last quarter, 2022 was a record year for both electric service reliability and gas emergency response. That achievement reflects our tireless commitment to safety and reliability. We aim to provide the best possible service and work hard to overcome the many challenges associated with that mission. As one example, in March of this year, a powerful Nor'easter swept across New England, dumping over two feet of heavy wet snow in parts of our service territory. That storm affected roughly one-third of our electric customers, yet we were able to restore service to 99% of affected customers within 48 hours. As always, our employees rose to the occasion and met our customers' reliability expectations.

Slide 7 provides an overview of the key pillars of our sustainability strategy. We are committed to being stewards of the environment, to being an employer sought out by talented and diverse individuals into creating positive change in the communities we serve. Our overall growth strategy is well aligned with these commitments, and we believe our ability to make informed, practical decisions will allow us to best address the opportunities and challenges ahead. We are interested in the evolving energy landscape and look forward to the changes that lie ahead.

Moving now to Slide 8. As I noted earlier, we received an order from the New Hampshire Public Utilities Commission determining that our Kingston Solar project is in the public interest. A letter of support had previously been jointly filed by the Department of Energy, Clean Energy, New Hampshire and the counsel for the Office of Consumer Advocate. This project has a wide range of benefits, including avoided energy cost for customers, stimulation of the local economy and energy generation without emissions.

The company, all interveners and the Commission agreed that this first-of-its-kind project in New Hampshire is good for customers, good for the economy and good for the environment. We are very grateful for the overwhelming support the project has received. Construction is now expected to get underway shortly, and the in-service date is slated for the second half of next year at which point we will see cost recovery through the ratemaking process. We will continue to provide additional updates as this exciting project continues to develop.

With that, I'll pass it over to Dan, who will be taking us through the details of our first quarter results. Dan?

[Daniel Hurstak, Controller and Chief Accounting Officer]

Thank you, Tom. Good morning, everyone. I'll begin on Slide 9. As Tom mentioned, today we announced first quarter earnings per share of $1.51. Net income increased $2.6 million or $0.16 per share compared to the same period in 2022, representing year-over-year earnings growth of 12%. Earnings growth was supported by higher electric and gas adjusted gross margins, partially offset by higher total operating expenses. Operations and maintenance expenses decreased year-over-year, and we expect full year 2023 operations and maintenance expenses to be consistent with 2022.

Turning to Slide 10. I will discuss our electric and gas sales volumes and margin. Electric adjusted gross margin was $26.7 million, an increase of $2.1 million or 8.5% compared to the same period in 2022. The increase in electric margin reflects higher distribution rates compared to the first quarter of 2022. Although unit sales were down for both the residential and the commercial and industrial classes, the income statement effects were offset as the electric divisions are now substantially decoupled. We estimate decoupling supported electric margin by $0.06.

Year-over-year meter growth was slightly lower due to a mass meter conversion that effectively replaced approximately 200 residential meters with a few commercial meters. This mass meter conversion was included in the UES rate case settlement and had no effect on electric distribution revenue. Absent this meter conversion, electric customer growth was largely in line with the historical growth rate.

Moving to gas operations. Gas adjusted gross margin was $54.9 million for the quarter, an increase of $2.9 million or 5.6% compared to the same period of 2022. The increase in gas margin reflects higher distribution rates and customer growth, partially offset by warmer winter weather in 2023. Based on weather data collected in the company's gas service areas, on average, there were approximately 11% fewer effective degree days in the first quarter of 2023 compared to the same period in 2022.

It's worth highlighting that similar to the margin stability decoupling provided for our electric operations, gas decoupling contributed approximately $2.7 million or $0.12 per share to gas margin. We added approximately 800 gas customers compared to the same period in 2022. In Maine, our only non-decoupled service area, weather-normalized unit sales were largely unchanged year-over-year. As a final note on gas margin, new distribution rates recently took effect on May 1 for the company's gas infrastructure replacement programs in both Maine and Massachusetts, providing a combined annualized revenue increase of $3.3 million.

Moving on to Slide 11. We provide an earnings bridge comparing 2023 results to 2022 results. As noted, first quarter adjusted gross margin increased a combined $5 million, primarily as a result of higher distribution rates and customer growth. Operating and maintenance expenses decreased $0.4 million, largely due to lower labor costs and professional fees, partially offset by higher utility operating costs. The lower labor costs primarily reflect lower restricted stock compensation expense.

Depreciation and amortization increased by $1.2 million reflecting higher levels of utility plant in service and higher amortization of rate case costs. Taxes other than income taxes increased by $0.5 million, reflecting higher payroll taxes and local property taxes on higher utility plant in service.

Interest expense increased $0.9 million, reflecting higher interest expense on short-term borrowings, partially offset by lower interest expense on long-term debt and higher interest income on regulatory assets. Other expense decreased by $0.7 million, largely due to lower retirement benefit costs. And lastly, income taxes increased $0.9 million as a result of higher pretax earnings.

Moving to Slide 12. I want to provide an outlook of our projected regulatory agenda. We remain busy with customary filings such as capital tracking mechanisms as well as base rate cases for both our Northern Maine and Fitchburg subsidiaries. Yesterday, we filed with the Maine Public Utilities Commission a request for a base rate increase of approximately $11.8 million, which considers rate base of approximately $320 million, an equity layer of 52% and a return on equity of 10.35%. The filing includes an attrition adjustment which looks to the expected revenue deficiency based on a rate year ended January 2025.

The attrition adjustment includes roll forwards for rate base and changes in revenue and expense levels to afford the company a better opportunity to earn its authorized return on equity when rates take effect. We believe this rate filing balances the needs of all stakeholders, including both customers and investors. We are also preparing comprehensive base rate filings for both Fitchburg divisions which we expect to file in the third quarter of 2023. We will provide additional details in upcoming earnings calls for these base rate filings.

Turning to Slide 13. As Tom mentioned, our investment outlook remains strong with about $820 million total planned investment over the next five years, an increase of approximately 40% compared to the prior five years. Capital spending is tracking well for 2023 and is currently $6.8 million above the same three month period last year. Disciplined and targeted investment in system modernization and supply-side projects such as the Kingston Solar facility will ensure the continued reliability and safety of our existing distribution system, while enabling system growth and advancing our strategic initiatives. We continue to anticipate long-run annual rate base growth to remain in the range of 6.5% to 8.5%.

Moving to Slide 14. Our balance sheet is strong with a balanced capital structure supporting solid cash flow coverage metrics. We continue to expect capital investment to be funded principally through operating cash flow less dividends and we have ample liquidity with our recently expanded credit facility. We primarily rely on our credit facility to fund the construction work in progress and working capital requirements such as purchase power.

Although our borrowings under the credit facility have increased, short-term interest expense is partially offset through the allowance for funds used during construction and interest income generated by various regulatory mechanisms, many of which are in prime rate or our short-term borrowing rate. Together, construction work in progress, regulatory assets and other deferrals with carrying charges offset nearly 90% of our current short-term debt balance.

With that, I will turn it back over to Tom.

[Tom Meissner, Chairman, President and Chief Executive Officer]

Great. Thanks, Dan. Ending now on Slide 15. With the first quarter of 2023 behind us, we continue to deliver results through operational and financial excellence. The company's prospects are strong, and we believe the continued execution of our strategic plan will lead to strong results for many years to come.

With that, I'll turn it back over to Todd.

[Todd Diggins, Chief Accounting Officer and Controller]

Thanks, Tom. That wraps up the material in this call. Thank you for attending. I will now turn the call over to the operator who will coordinate questions.

[Operator]

[Operator Instructions] I'm showing no questions at this time. This concludes today's conference call. Thank you all for participating. You may now disconnect.