UNITIL Corporation

Good day and welcome to the Q2 2022 Unitil's 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. To ask a question during the session, you will need to press star 1-1 on your telephone. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker, Mr. Todd Diggins, Director of Finance. Please go ahead, sir.

Good morning, and thank you for joining us to discuss Unitil Corporation's second quarter 2022 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 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 also 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 Meisner.

Great. Thanks, Todd. Good morning, everyone, and thank you for joining us. Beginning on slide four, today we announced net income of $4.9 million, or 30 cents per share, for the second quarter of 2022. Through the first half of the year, net income was $26.4 million, or $1.65 per share. This represents an increase of 21 cents per share over the same six-month period of 2021, supported by higher adjusted gross margins and successful rate case outcomes. Both our electric and gas operating companies in New Hampshire received orders from the Public Utilities Commission bringing a successful conclusion to the rate case process. These rate cases were an important part of our overall regulatory strategy and achieved favorable results for all stakeholders. The comprehensive settlements that were reached demonstrate the productive relationships we have with all parties involved. With the completion of these rate cases, the majority of our distribution revenues are now decoupled, helping stabilize future results. With that, we once again reaffirm our guidance that EPS growth will be above the upper end of our long-term guidance of 5 to 7 percent, both this year and again in 2023. Moving on, sustainability is a guiding principle for us, and I'd like to note that our company-wide initiatives are progressing well. In New Hampshire, I mean, in addition, in New Hampshire, we recently helped pass legislation that allows up to 5% of our gas supply to be sourced with renewable natural gas, along with the recovery of and return on any associated investment. I'd also like to remind everyone that New Hampshire passed legislation in 2021 that prohibits towns and municipalities from restricting a consumer's choice in how they power and heat their homes, including the use of natural gas and other fuels. This illustrates that legislators in New Hampshire understand that natural gas has an important role to play for many years to come. We're pleased with this progress and look forward to sharing further details as we investigate RNG opportunities. Moving now to slide five, I'd like to provide additional information regarding the rate case outcomes in New Hampshire, which we view as very positive. We introduced these rate case filings and our regulatory objectives over a year ago, and now we believe we've delivered as promised. Despite the significant attention on higher commodity prices and the impact high supply costs might have on utilities' ability to recover costs, We believe that we've successfully navigated those waters and secured awards that will contribute to our success in the coming years. Beginning with UNITO energy systems, a distribution revenue increase of $5.9 million became effective on June 1st with fully decoupled rates. Time of use rate structures were also approved that support our vision for electric vehicle adoption and electrification efforts. Lastly, the first of two step adjustments for recovery of non-growth investments was recently approved in a separate docket. At Northern, a distribution revenue increase of $6.1 million became effective on August 1st with fully decoupled rates. In this case, a return on equity of 9.3% with an equity layer of 52% was agreed to in settlement and approved by the Commission. Similar to Unitil energy systems, recovery of non-growth investments is pending and will be approved in a separate docket. We expect approval of that rate increase shortly. With the completion of these two cases, effectively 100% of our electric customers and 60% of our gas customers are now decoupled. This represents a significant increase in both customer groups and brings the total number of customers under decoupling up to about 82%. We see this increase in decoupling as stabilizing our top line revenues, which will lead to more stable cash flows. This will also benefit our customers who should see less volatility in their bills regardless of changes in use. Turning now to slide six is outlined in last quarter's call we continue to see impressive growth in the Maine and New Hampshire Seacoast regions. That growth is illustrated by New Hampshire's record low unemployment rate of 2%. Billions in construction is currently planned or underway, and this investment is expected to add new jobs, customers, and to spur further economic development. The bulk of this development is occurring in our main service areas with over $5.3 billion in planned investments. This growth is reflected in both construction employment and the number of building permits being issued. Portland, Maine, which is the largest city north of Boston, has about $1.4 billion of planned housing, commercial, and mixed-use development. This development will continue to enhance the area's appeal to both residents and business owners. Two major projects known as Rock Row and The Downs, each sizable project spanning hundreds of acres, are currently underway and will feature community-themed residential and commercial elements that are designed to harmonize and support each other. These projects, which are already under construction, will provide the company with considerable long-term growth opportunities. Similar development is occurring in New Hampshire with a large campus-style project under construction in Salem that will continue to drive customer growth. While these projects are among the largest currently underway, they represent a relatively small portion of long-term growth opportunities we see in our service areas. We are looking forward to supporting that growth for years to come. Turning to slide seven, in addition to economic development, other opportunities continue to play out for our natural gas division as well. As I've discussed in the past, Maine and New Hampshire, the predominant heating fuel is oil, which is both less clean and less affordable than natural gas. With a penetration rate of approximately 60% on our gas mains, we expect the price and environmental advantages of natural gas to drive low-cost customer conversions for years to come. While electric heat pumps provide a great solution in many parts of the country, they are not sufficient to heat most homes during the coldest New England winter days, when their maximum output is dramatically reduced. Natural gas, whether as the sole heating source or in combination with electric air source heat pumps, continues to be the most economical heating source. Another way to think about the importance of our natural gas system is the amount of energy delivered relative to our electric system. Despite having almost 25 percent more electric customers, we deliver about four times more energy through our gas infrastructure than our electric systems on an annual basis, and up to seven times more energy during the winter months. The gas system is fully capable of delivering this amount of energy while maintaining both reliability and affordability. For the electric system to deliver the energy needed for heat pumps or electric vehicles, it is likely that significant investments will be required. With that, I'll now pass it over to Bob, who will provide greater detail on the quarterly and year-to-date results.

Thank you, Tom, and good morning, everyone. I will begin on slide eight. As Tom noted, today we announced second quarter earnings of $4.9 million, or 30 cents per share. On a year-to-date basis, net income increased by $4.8 million, or 21 cents per share, compared to the same period in 2021. That strong growth is the result of higher sales margins, supported by successful New Hampshire rate case results, partially offset by higher operating expenses. As a reminder, in the third quarter of 2021, we reported break-even earnings and expect similar results in the third quarter of 2022. As Tom noted, for the full year, we continue to expect earnings growth above the upper end of our 5% to 7% range. Turning now to slide nine, I will discuss our electric and gas volumes and margins. Starting with electric operations, for the six months ended June 30, 2022, electric adjusted gross margin was $48.2 million, an increase of $0.2 million compared to the same period in 2021. The increase in electric margin reflects higher distribution rates and customer growth, partially offset by cooler early summer weather. Commercial and industrial unit sales increased 1.2%, and customers increased by 490, or one-half percent, over the first half of 2021, reflecting customer growth in both the residential and commercial classes. Moving to gas operations, for the six months ended June 30, 2022, gas adjusted gross margin was $80.2 million, an increase of $7.4 million, or 10.2% relative to the same period of 2021. The increase in gas margin reflects higher rates, customer growth, and colder winter weather. Unit sales were up 3.3% or about 0.9% on a weather normalized basis. Going forward, with a significant portion of sales now under decoupled rates, the effect of weather will be significantly moderated. Moving now to slide 10, we provide an earnings bridge comparing year-to-date 2022 results to 2021. As discussed, year-to-date 2022 adjusted gross margin increased a combined $7.6 million, principally as a result of higher distribution rates, customer growth, and colder winter weather. Operating and maintenance expenses increased $2.4 million, largely due to higher labor costs and professional fees. partially offset by lower utility operating costs. Depreciation and amortization increased by $0.6 million, reflecting higher levels of utility plant and service, partially offset by lower depreciation rates, resulting from the rate case order received for the company's electric distribution subsidiary in New Hampshire. Taxes other than income taxes increased by $1.1 million, reflecting higher local property taxes on higher utility plant and service, and higher payroll taxes. Interest expense decreased $0.5 million due to lower interest on long-term debt, partially offset by higher interest on short-term borrowings. Other expenses decreased by $1.1 million, largely due to lower retirement benefit costs. Lastly, income taxes increased $0.3 million as a result of higher pre-tax earnings in the period partially offset by the flowback of excess accumulated deferred income taxes under regulatory orders received in New Hampshire. Slide 11 provides an overview of our investment outlook, which totals about $755 million over the coming five years. These investments will ensure the safety and reliability of our distribution system, enable system growth, advance our grid modernization initiatives, and enhance our customers' experience. Overall, we anticipate long-run annual rate-based growth in the range of 6.5% to 8.5%, with our investment mix becoming increasingly balanced between gas and electric operations. As we've noted in the past, there remains potential upside to the capital investment forecast. Now turning to slide 12, our dividend increases in 2022 have been greater than prior years, reflecting our confidence in our strategic plan and in our ability to execute the plan. On a trailing 12-month basis, our payout ratio has been 60% squarely within our target range. Looking forward, we will continue to evaluate further accelerating our dividend growth consistent with our target payout range and earnings growth. And with that, I will turn it back over to Tom.

Thanks, Bob. Slide 13 provides a recap of some of the key objectives we had laid out in prior calls and our success in achieving them. We continue to earn well on invested capital and reaffirm our long-term earnings growth of 5% to 7%. In 2022, we are on pace for earnings growth that will exceed the high end of the long-term range. Our target dividend payout ratio remains at 55% to 65%, We have successfully moved our payout ratio into that range, patiently lowering it over the last several years. We filed and settled two rate cases, which addressed many key initiatives, including revenue decoupling. Operationally, our goal is to be an industry leader in customer service, customer and employee safety, and system reliability, and we think we're doing just that. Finally, In 2019, we published our first sustainability report and reaffirmed our commitment to corporate responsibility. Since then, we've followed through with continued status reports, carbon reduction goals, and helped shepherd an RNG bill through the New Hampshire legislative process. Suffice to say, at Unitil, we execute on our goals and strategies with excellence. Ending now on slide 14, it's been a busy and successful year thus far, and we're encouraged with the company's results, and we're excited with what lies ahead. We are better able than ever to execute our plan, strengthen the company, and provide sustainable long-term value for our shareholders. So with that, I'll turn it back over to Tom.

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. As a reminder, to ask a question, you will need to press star 1-1 on your telephone.

Please stand by while we compile the Q&A roster. And today's first question will come from Cody Clark with Bank of America.

Hey, good morning. Thanks for taking my questions. Good morning, Cody.

Hey, Cody.

Hey, good morning. First, wondering if you can talk a little bit more about how you're thinking about RNG legislation in New Hampshire. Can you frame the potential investment opportunity for us? And also just for timing, is there any rulemaking that needs to take place or would you just look for pre-approval on any projects there?

Hey, Cody, this is Bob. Thank you for the question. In terms of the opportunities, we are looking at certain projects They're still in the early stages of review. As we've mentioned in the past, our perspective principally has been one of supply. We're looking at RNG as a means of decarbonizing our supply. And we're very pleased with the legislation because we'll be able to do just that. Now, an important part of the legislation is the ability to include investments in rate base, investments needed to produce, transmit the RNG. Of course, all of that would be subject to regulatory approval. So as we go through the process, we're considering both perspectives, whether we can look at RNG simply as a way of decarbonizing the supply, which of course is very important to us from a sustainability perspective. But we are also looking at whether under the new legislation, whether there are opportunities to make investments and to put those investments in rate-based To the second part of your question, it will go through a regulatory process, any investment that we wish to put in rate base, as well as any supply changes that we wish to make under the legislation. They all are subject to the traditional public interest standards of review, but we're very comfortable with those. And again, given our familiarity and work on the legislation, we feel confident that if we bring both a supply proposal and an investment proposal that will have a very good chance of having them approved.

Got it. Thanks for that, Bob. And on inflation here, can you give us an update on how that ties into both your near-term and long-term outlook, i.e., how do you see it cascading through the capital plan and O&M budget? And also, if you can just speak to a little bit of the cadence on significant contracts or labor arrangements that would be expiring. That would be very helpful.

Thanks. Sure. Cody, this is Tom. In terms of some of the strategic projects that we currently have underway, including RNG, as I think we've mentioned in the past, we don't currently reflect those in our investment outlook. So we will plan to do so once we believe we have committed projects that we're pretty certain will move forward and will gain regulatory approval. So this year or next year, you may start to see some of these projects layered into our capital plan. But in terms of our current outlook, they're not reflected. In terms of the second part of your question, I think you're referring to labor contracts that we may have both this year and in future years. We have, I believe, six labor unions between the three states that we negotiate contracts for. And realistically, there tends to be one almost every year. They're dispersed over time. We try to stagger the term of those projects to make sure that there is only one in any given year. And we did have one that we successfully negotiated this year. I believe it was ratified just a month or two ago. And if you're asking about the impacts in terms of the current labor market and inflation, I believe that contract included three-year annual general wage adjustments over the five-year term, 3%.

Okay, got it. Yeah, and understood on the fact that some of these incremental opportunities are not reflected in the CapEx budget. It was more just a question around core capex inflation and what you're seeing there, but understood there.

Oh, I see. Okay. You know, in terms of that, I think we're seeing what everybody's seeing.

Understood. And just one last question for me. Curious if you can talk on any of the potential implications from the Inflation Reduction Act. The biofuels credit seems intriguing, given some of your earlier commentary around RMG. But I'll try to leave it open-ended there, and you all can take it where you see fit.

Sure. I mean, we're obviously still studying the package and still trying to understand the specific provisions, you know, including any adders and how they might apply to specific projects that we have underway. But based on preliminary analysis or preliminary review, I should say, you know, it appears that the package of incentives for solar, biogas and RNG, energy storage, electric vehicles would all be supportive to many of our ongoing strategies. So while we haven't yet gotten a handle on how everything might apply, we see essentially that those incentives would be beneficial to the economics of the projects that we're already pursuing. So generally we see upside from that package and really don't see any downside.

Got it. Thanks so much for the time, Tom, Bob, and Todd. Talk to you all soon.

Thanks, Cody.

Thank you. As a reminder, if you have a question, please press the star 1-1 key on your touchtone telephone.

I'm showing no further questions at this time. Ladies and gentlemen, this concludes today's conference call.

Thank you for participating. You may now disconnect.