UNITIL Corporation

Q1 2021 Earnings Conference Call

5/4/2021

spk00: Good afternoon, and welcome to the Q1 2021 Unitool 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 assistance during the conference, please press star then zero on your touchtone telephone. As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Todd Diggins, Director of Finance. Please go ahead.
spk01: Good afternoon, and thank you for joining us to discuss Unitil Corporation's first quarter 2021 financial results. Speaking on the call today will be Tom Meissner, Chairman, President, and Chief Executive Officer, and Bob Hebert, 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 investor section of our website at www.unitil.com. We will refer to that information during this call. Moving to 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 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 measures The accompanying supplemental information more fully describes these non-GAAP measures and includes a reconciliation to the nearest GAAP measure. The company believes these non-GAAP measures are useful in evaluating its performance. And with that, I now turn the call over to Chairman, President, and CEO, Tom Eisner.
spk03: Thanks, Todd, and good afternoon, everyone. I'm going to begin on slide four. Today we are pleased to announce net income of $18.9 million, or $1.26 per share, for the first quarter of 2021. This represents an increase of $3.7 million, or $0.24 per share, compared to 2020. I'm also pleased to note that on April 2nd, we filed a strategic multi-year rate plan at our New Hampshire Electric Utility, which, in addition to requesting a base rate increase, includes a number of proposals to support the evolving energy needs of our customers and stakeholders. Bob will discuss the details of this filing later in the call. Looking forward, we're encouraged by signs of economic growth in the states we serve. In fact, as of March, New Hampshire is now home to the two hottest housing markets, as well as two of the top ten emerging housing markets in the nation. Finally, we remain committed to our long-term guidance of five to seven percent growth in earnings per share. Our first quarter results reflect our ongoing operating and regulatory initiatives, as well as sustained customer growth that will help us to achieve strong results in the future. Now, moving on to slide five, I'll provide an update on some of the latest economic conditions in the areas we serve, which we view with growing optimism. It's hard to believe that the onset of this pandemic was just over a year ago, but I want to again mention how pleased I've been with the dedication, resilience, and sheer determination of our employees in responding to this crisis. It's been a trying time, but we're now seeing encouraging signs of an accelerating economic recovery across our service areas. Employment data has improved significantly since the onset of the pandemic, and with the ongoing rollout of vaccines, we expect continued improvement in the labor market. To date, over 60% of residents aged 18 and older in the states we serve have received at least one dose of the vaccine, outpacing the vast majority of states. Now, in the past, we've also talked about robust construction activity in our service areas. We expect this to continue as permitting of new projects accelerates. Construction employment has now almost fully recovered to pre-pandemic levels in the areas we serve. As you'd expect, here in the Northeast, many of us look forward to the summer season, and I expect this year will be no exception. Much of our service area is along the seacoast, and businesses are expecting a great summer. The New Hampshire governor recently announced that business restrictions, including on retail and restaurants, will be lifted as early as May 7th. Given the current outlook, we expect a return to normal within months, if not weeks. Now turning to slide six, on a related note, the pandemic has actually accelerated demand for housing in our service areas. Inventory is now at an all-time low and prices are on the rise, in turn supporting construction of new residential housing. The number of new building permits issued in Maine and New Hampshire have continued to rise with the first quarter of 2021 outpacing 2020, which in turn had outpaced 2019. We serve communities that are very desirable for both households and businesses. We continue to see the attractiveness of our service areas as important to our growth strategy. Now, with that, I'll turn it over to Bob, who will provide further detail on our first quarter results.
spk04: Thank you, Tom, and good afternoon, everyone. I will begin on slide seven. As Tom noted, this morning we announced first quarter earnings per share of $1.26. Net income for the quarter increased by $3.7 million, or 24 cents per share, compared to the same quarter in 2020. Our strong year-over-year earnings growth principally is a result of higher sales margins, which increased as a result of higher distribution rates, colder winter weather, and continued customer growth. As you recall, weather in the first quarter of 2020 was historically warm and affected earnings by an estimated 20 cents per share. By comparison, the winter weather in the first quarter of 2021, although somewhat warmer than normal, was significantly colder than the first quarter of 2020. Turning to slide eight, electric adjusted gross margin for the quarter ended March 31st, 2021. was $23.7 million, an increase of $.6 million, or 2.6% over 2020. The increase in electric margin reflects higher residential unit sales of 7.3%, partially offset by lower commercial and industrial unit sales of 4.1%. Customers increased 0.9% over the first quarter of 2020, reflecting a combination of growth in both the residential and commercial customer classes. As Tom noted earlier, our current expectations are that sales volumes will return to pre-pandemic levels by the end of 2021 as our service area economies continue to recover. Turning now to slide nine, for the quarter ended March 31st, gas adjusted gross margin was $47.8 million, an increase of $5.4 million or 12.7% compared to 2020. The increase in gas margin reflects higher rates of $3.3 million and the combined net effect of $2.1 million from colder winter weather, customer growth, and lower commercial and industrial sales. The first quarter of 2021 was 8.1% colder year over year, contributing to higher natural gas therm sales of 6.1%. Higher sales also reflect 1.9% additional customers served, compared to the same period in 2020. Similar to the electric division, we anticipate gas sales volumes to return to pre-pandemic levels by the end of 2021. Moving on to slide 10, we provide an earnings bridge comparing 2021 results to 2020 for the quarter. As noted earlier, 2021 gross margin increased $6 million, primarily a result of higher rates, colder winter weather, and continued customer growth. Operation and maintenance expenses decreased $0.9 million, primarily attributable to lower labor and professional fees, partially offset by higher utility operating costs. Depreciation and amortization increased by $1.4 million, reflecting higher levels of utility plant and service. Taxes other than income taxes decreased by $0.3 million, primarily due to lower payroll taxes, partially offset by higher local property taxes on higher utility plant and service. Interest expense increased by $0.5 million, reflecting interest on higher long-term debt balances, partially offset by lower rates on lower levels of short-term borrowings. Other expense decreased by $0.2 million, largely due to lower retirement benefit and other costs. Lastly, income taxes increased $1.8 million as a result of higher pre-tax earnings. Turning now to slide 11, our regulatory agenda continues to be active. Here, we provide our regulatory outlook highlighting our rate applications in New Hampshire. As Tom mentioned earlier, just over one month ago, we filed a multi-year rate plan in New Hampshire for our electric utility, Unitil Energy Systems. We also plan to file a general rate case in New Hampshire for northern utilities, our natural gas utility, in the second half of this year. It is typical in New Hampshire to allow temporary rates that collect a portion of the revenue deficiency prior to receiving a final order. We expect temporary rates will be effective in the second half of 2021 for both Unitil energy systems and northern utilities. Temporary rates are reconciled to the final rate case award and the difference is collected or refunded, typically over a one-year period. The company proposed a full decoupling structure in the Unitil Energy Systems rate case, and we intend to propose a similar structure in the Northern Utilities case. Decoupling removes the effect of weather and changing usage patterns from distribution revenue. If those mechanisms are approved in New Hampshire, as we expect they will be, 82% of all our meters served will be under decoupled rate structures. And in a similar vein, with the multi-year structures contemplated in our New Hampshire filings, over three-quarters of Unitil's consolidated non-growth capital investments from 2021 through 2023 will be covered under tracking mechanisms or multi-year rate plans. Slide 12 provides additional detail regarding our Unitil energy systems rate filing. As we stated before, beyond seeking rate relief, this rate application is an important element of our long-term grid modernization strategy. We believe the proposals included in our application support New Hampshire's energy, environmental, and regulatory policies and address our customers' evolving energy needs. The proposed base distribution rate increase is approximately $12 million, largely driven by unrecovered costs associated with capital investments not yet included in distribution rates. The increase is supported by a proposed return on equity of 10 percent and an equity ratio of 52.9 percent. We have proposed temporary rates of $5.8 million to become effective June 1, 2021. As noted earlier, temporary rates will be subject to recoupment or refund based on a reconciliation of the temporary and final rate awards. Our application also includes a series of three-step adjustments comparable to previously approved rate plans to recover costs associated with non-growth-related capital investments for the calendar years 2021, 2022, and 2023. We estimate that non-growth capital represents over 80% of our investments in our New Hampshire electric operations during that three-year period. To support our customers' ability to adopt electric vehicles and better manage their energy costs, we have proposed a suite of time-varying rates, including rates applicable to electric vehicle charging, and an investment plan to support the development of charging stations across our service areas. As the docket progresses, we will continue to provide updates in our quarterly calls. Moving to slide 13, last quarter we provided our projected five-year capital investment plan, which totals approximately $725 million. This investment plan, which remains in place, supports our stated long-term rate-based growth expectations of 6.5% to 8.5%. Our planned capital investments will ensure the safety and reliability of our existing distribution system, enable system growth, advance our grid modernization initiatives, and enhance customer experience. There remains potential upside revisions to this projection for electric vehicles, additional grid advancement, and supply-side projects. We expect about three-fifths of our capital investment will be funded with cash flow from operations, less dividends. The remainder will be funded through a combination of debt and equity in a way that supports the company's balance sheet and credit metrics. We continue to target a long-term dividend payout ratio range of 55 to 65 percent, enabling earnings reinvestment and reducing external financing requirements. And with that, I will turn it back over to Tom.
spk03: Thanks, Bob. Now, wrapping up with slide 14, with the first quarter of 2021 behind us, we're pleased with the company's results as well as the broader economic recovery. The foundation of our business is strong, and we view the future with increasing optimism. Unisil offers long-term sustainable shareholder growth paired with an attractive dividend in robust investment opportunities. As I mentioned earlier, we expect long-term EPS growth of 5% to 7% with near-term earnings growth likely at the higher end of the long-term range relative to our 2020 earnings. Thank you for your participation today. And with that, I'll turn it back to you, Todd.
spk01: 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.
spk00: Thank you, Todd. If you have a question at this time, please press the star, then the number one key on your touchtone telephone. If your question has been answered or you wish to remove yourself from the queue, please press the pound key. We'll pause for just a moment while we compile the roster. Your first question comes from the line of Michael Gagler with Janie Montgomery.
spk02: Good afternoon, everyone. Hi, Mike. Hi, Mike. given your hot housing market, just wondering what your organic growth outlook is going out, let's say, for the next few years.
spk04: Yeah. Hey, Mike. This is Bob Hebert. You know, we're looking at the housing market, and we do think it's very hot. As Tom mentioned, we have in New Hampshire two of the hottest and emerging housing markets in the country. Now, As we're looking at organic growth going forward, we think we're retaining our existing projections. So, we're not really extrapolating what we're seeing right now, Mike, going forward. But that said, as we mentioned earlier, we do see some potential upside in the capital investment plan for issues such as grid modernization, electric vehicles, and there could be also upside potential in the investment plan relating to customer growth. So, As for now, we're maintaining our growth targets, which manifest themselves in the 6.5% to 8.5% rate-based growth. But we certainly do see potential upside, and we'll keep an eye on that as we go forward.
spk02: All right. That's all I had, gentlemen. Thank you. Thank you. Thank you, Mike.
spk00: And once again, if you have a question at this time, please press start in the number one key on your touchtone telephone. If your question has been answered, or you wish to remove yourself from the queue, please press the pound key. Your next question comes from the line of Shelby Tucker with RBC Capital Market.
spk05: Good afternoon. On your rate case for New Hampshire, can you remind me if there is precedence of multi-year decisions?
spk04: Hey, Shelby, it's Bob Hebert. Yes, there is. The last two cases... that we filed in New Hampshire both had multi-year plans, both three years in duration, and both were very comparable to what we've proposed here in terms of the step adjustments reflecting non-growth-related capital investments. So, yes, there is precedent, and we did try to follow that precedent quite closely as we developed our filing in this case.
spk05: And then picking up on Mike's question, if there's a change in pace of build-out, are there adjustments that can be made to the multi-year plan, or are you kind of positioned that way going for the next three years?
spk04: No, that's a great question. No, each year, Shelby, we will propose the step adjustment, and we are not bound by what we expect right now. And in fact, in our current filing, the step adjustments we show are effectively illustrative. They're our best estimate of what the adjustments will be going forward one, two, and three years. But they're not definitive. And as those years come up, as we make those filings, we certainly would reflect the conditions at the time. Got it. Okay. Thank you very much.
spk02: Thank you. Thank you. Yep.
spk00: And once again, for any questions or comments, please press star followed by the number one from your telephone keypad at this time.
Disclaimer

This conference call transcript was computer generated and almost certianly contains errors. This transcript is provided for information purposes only.EarningsCall, LLC makes no representation about the accuracy of the aforementioned transcript, and you are cautioned not to place undue reliance on the information provided by the transcript.

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