Unitil Corp Q3 FY2021 Earnings Call

Good day and thank you for standing by. Welcome to Q3 2021 Unitil Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speaker presentation, there will be a question-and-answer session. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Mr. Todd Diggins, Director of Finance. Thank you and please go ahead.

Good morning and thank you for joining us to discuss Unitil Corporation's third quarter 2021 financial results. Speaking on the call today will be Tom Meissner, Chairman, President and Chief Executive Officer; and Bob Hevert, Senior Vice President, Chief Financial Officer and Treasurer. 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 two, 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 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 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, President and CEO, Tom Meissner.

Thanks, Todd, and good morning, everyone. Thanks for joining us. I'd like to kick off today's discussion on slide three, which provides a brief description of Unitil's business model. We're a pure-play distribution utility in New England, serving attractive areas, including the New Hampshire and Maine Seacoast. We have a diverse customer mix across the three states that we service, with about 25% more electric customers than gas customers. As a pure-play distribution utility, our earnings are not impacted by commodity cost fluctuations, because we recover the cost of energy through commission-approved reconciling recovery mechanisms. Turning to slide four. Today we announced breakeven net income and earnings performance share for the third quarter of 2021 and net income of $21.6 million, or $1.42 per share, through the first nine months of the year. This represents a $0.17 per share or 14% increase over the same period in 2020, reflecting higher adjusted gross margins for both the gas and the electric divisions. I'd also like to touch on a few strategic updates. First, I'd like to reaffirm our long-term earnings guidance of 5% to 7% growth in EPS, with 2021 earnings expected to be above the higher end of that range relative to 2020. Our regulatory initiatives are progressing well, with temporary rates currently in effect in both our New Hampshire electric and gas divisions. Bob will provide additional details about those proceedings later in the call. The company's capital investment plan is advancing as expected, supporting long-term rate base growth in the range of 6.5% to 8.5%. We will provide a refreshed five-year capital investment forecast during our fourth quarter call. We're committed to maintaining a strong balance sheet to support our growth. And in the third quarter, the company raised equity through a public offering resulting in net proceeds of approximately $44.5 million. The net proceeds of this transaction will be used to make equity capital contributions to our regulated utility subsidiaries, to repay debt, and for general corporate purposes. Finally, I'm pleased to share that in October we published our 2021 corporate sustainability and responsibility report, which provides greater clarity into our progress and our developing strategies. Slide five summarizes some of the key points of our corporate sustainability report, which can be found on our website. As I mentioned previously, earlier this year we announced our carbon commitment, which aligns with the Paris Climate Agreement. Maintaining safe and reliable systems and reducing greenhouse gas emissions are central to our vision. We continue to advance our business strategy with a keen focus on those goals. In 2021 we also began company-wide diversity, equity, and inclusion training and an ongoing employee awareness campaign. At Unitil, diversity means having a workforce that is reflective of the people and the communities we serve while also ensuring that people have the resources and opportunities to grow and succeed. This is crucial to successfully realizing our vision of transforming the way people meet their changing energy needs to create a clean and sustainable future. Finally, in addition to discussing our sustainability strategies and goals, the report also provides key metrics and statistics in various industry-specific reporting templates. I encourage you to view the full report at unitil.com. Turning to Slide 6. Converting heating and transportation fuels such as diesel, fuel oil, and gasoline to lower carbon alternatives with the support of electrification and natural gas presents significant opportunities for Unitil. The states where we have the highest dependency on fuel oil for heating in the nation. In addition, across our New Hampshire and Massachusetts service areas, there is considerable overlap between our gas and electric customers. This is particularly noteworthy in Massachusetts, where more than 90% of our customers have Unitil as their electric service provider. Looking forward, we see that diversity as a strategic opportunity as electrification policies continue to develop. I would also like to mention that New Hampshire Senate Bill 86 recently became law and prohibits towns and municipalities from borrowing or restricting the use of any commercially available utility service or heating system, including natural gas. We're confident that the strong economic conditions in our service areas together with the potential for fuel conversion and customer additions will continue to support growth opportunities across our territories. With that, I'll now pass it over to Bob, who will take us through the details of our financial results.

Thank you, Tom, and good morning, everyone. I will begin on Slide 7. As Tom mentioned, we announced breakeven net income and earnings per share for the third quarter. Year-to-date, net income has increased by $3 million or $0.17 per share compared to 2020. This increase reflects our successful common stock offering in the third quarter. We saw year-over-year earnings growth of 14%, mainly due to higher adjusted gross margins, which were somewhat offset by increased operating expenses. As Tom pointed out, we continue to expect full year 2021 earnings to exceed the top end of our long-term EPS growth range of 5% to 7% relative to our 2020 earnings of $2.15 per share. Moving to Slide 8, for the nine months ending September 30, 2021, the electric adjusted gross margin was $73.4 million, which marks a $3.4 million or 4.9% increase compared to 2020, driven by higher rates and customer growth. Our commercial and industrial unit sales rose by 3.2%, reflecting ongoing economic growth in our service areas. On Slide 9, for the nine months ending September 30, 2021, gas adjusted gross margin reached $92.2 million, an increase of $8.9 million or 10.7% compared to 2020. This increase is due to higher rates and customer growth, with $7.5 million from rates and $1.4 million from the favorable impact of colder winter weather. Moving on to Slide 10, we present an earnings bridge comparing our 2021 results to those of 2020. Adjusted gross margin in 2021 increased by $12.3 million primarily due to higher rates and increased unit sales, while operating and maintenance expenses grew by $2.6 million, attributable to higher utility operating and labor costs, only partially offset by lower professional fees. Depreciation and amortization rose by $3.8 million, due to higher levels of utility plant and higher amortization expenses. Other taxes increased by $0.6 million mainly because of higher local property taxes linked to increased utility plant and slightly higher payroll taxes. In the third quarter of 2020, we recognized $0.6 million in payroll credits from the CARES Act. Interest expense increased by $1.8 million because of higher interest on long-term debt, although this was partially offset by lower rates on reduced short-term borrowings. Other expenses fell by $0.6 million, largely due to decreasing retirement benefits and related costs. Finally, income taxes rose by $1.1 million as a result of higher pretax earnings. On Slide 11, both the Unitil Energy and Northern New Hampshire rate cases, which I have discussed on previous calls, are progressing as anticipated. Temporary rates have been approved and are currently in effect for both cases. At UES, a temporary rate award of $4.5 million took effect on June 1, and Northern New Hampshire's temporary rates of $2.6 million started on October 1. Temporary rates will be reconciled against the final rate case award, with the differences being collected or refunded generally over one year. Both filings propose full revenue decoupling and multiyear rate plans to recover certain capital investments from 2021, 2022, and 2023. As mentioned in last quarter's call, the New Hampshire Public Utilities Commission issued an order that allows for addressing the incremental bad debt and late fees due to the COVID pandemic in each utility's next rate case. Accordingly, we have included recovery proposals for these costs in both our electric and gas cases. We have received procedural schedules for both cases, and we look forward to collaborating with all parties to resolve these matters. Now, I will turn it back over to Tom.

Thank you, Bob. Wrapping up now on slide 12, with the first nine months of 2021 behind us, we're pleased with the progress the company has made and look forward to the opportunities ahead. We believe our long-term strategic plan is solid and allows us to continue our growth strategies, pursue our sustainability goals, and maintain excellent service to our customers. In the year-end earnings call, we will provide updates to our outlook, including our capital investment plan and dividend policy. We remain excited about the company's future and growth prospects. We believe we are well positioned to create value for our shareholders. With that, I'll turn it back to Todd.

Great. 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.

Thank you. Our first question comes from Julien Dumoulin-Smith of Bank of America. Your line is now open.

Hey. This is actually Kody Clark on for Julien. Good morning, Tom, and Bob.

Good morning, Kody.

Good morning, Kody.

So to start, there's been a lot of focus on the rising gas price, and especially in New England, where you're kind of the end of the pipe so to speak. So can you speak to this dynamic and the impact to the customer and bills that you're seeing? And also, can you discuss some of the mitigating factors that you have at your disposal?

Hey, Kody, this is Bob Hevert. No, we'd be happy to talk about that. And let me start by talking about, where we are in New Hampshire. As you know, we have rate cases going on in both the electric and the gas side. And we recently have received orders in New Hampshire, one approving our electric default rates and the other approving our gas cost rates. Now Kody, you may recall that in New Hampshire on the electric side customers can select competitive providers, but that is not the case on the natural gas side. So our approach differs slightly between the two. On the electric side, we procured our supplies and we did so to ensure that we captured the market and provided customers with the lowest possible rate for default service. Default service in New Hampshire, as in Massachusetts, is meant to provide market signals by design. The commission reviewed our procurement strategy, found that we properly selected the lowest cost rate, and our rates were approved on October 8. Now, on the natural gas side, last Friday, we received an order approving those rates. And this goes to the second part of your question, Kody, what mitigation factors we have in place. For the Northern Gas Supply portfolio, we effectively fixed about 70% of the variable prices under our pipeline storage and peaking contracts. And by fixing those, the New Hampshire Commission found our approach to be, as they said, commendable. And in fact, we were able to provide benefits to gas customers in New Hampshire. So in both cases, the commission found our approach reasonable, in one case commendable, and in both cases to provide the service we're meant to provide. Now in Massachusetts, we have received orders approving our gas cost rate. And for our electric default service which, as in New Hampshire, is available to all customers. We actually worked with the Attorney General to come up with a stipulation. Our procurement was a little bit unique this year simply because of a procedural issue that came along. But we worked with the Attorney General to mitigate the increased cost for customers. And again the commission found our — Excuse me, the department in Massachusetts found our approach to be very reasonable, appreciated what we had done, and those rates likewise were approved about 1.5 weeks ago. The only area where we're awaiting an order for gas cost rates is in Maine. The commission I believe is deliberating today, and we expect to get an order there fairly shortly. But as in New Hampshire, we hedged again about 70% of the supply portfolio relative to the NYMEX forwards.

Got it. Okay. That's very helpful. So that sort of answers my second question and it's going back to the New Hampshire rate case. And I was just wondering if you're seeing the heightened focus there in light of the environment? And I'm just wondering what the recent conversations have been with stakeholders and regulators around the rate case? Are you still seeing the positive momentum that you spoke to on previous calls and mentioned earlier this morning?

We are. I'll tell you that in the electric case, the UES case, we've gone through 14 rounds of discovery. Nearly 500 questions have been answered. And I think all the parties have been very appreciative of how quickly and thoroughly we've responded to discovery. So things are going along well. The next significant date in that case is November 18 when we receive testimonies from the other parties to the case. But that case has been moving along well. The discovery has been what we expect both in terms of the quantity and the number of parties involved. On the gas side, again I think the parties have been very pleased with our filing again in terms of the transparency and the thoroughness. So far we have only had one round of discovery, only 11 questions, and they were principally related to temporary rates. So we'll see where that goes going forward. But so far both cases are proceeding as we would expect. And as best we can tell, stakeholders have been appreciative of our responses and of our filings.

Got it. Okay. That’s very helpful. That’s all I had. Really appreciate it.

Thanks, Kody.

Thank you.

Thank you. There are no questions coming in at this time. This concludes today's conference call. Thank you for participating. You may now disconnect.