Q3 2020 Unitil Corp Earnings Call
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Mr. Todd begin keep maybe cancer.
Good afternoon, and thank you for joining us to discuss your rental Corporation third quarter 2020 financial results speaking on the call today will be Tom Meissner, Chairman, President and Chief Executive Officer, Bob Hebert, Senior Vice President Chief Financial Officer and Treasurer.
We will discuss financial and other information about our third quarter results on this call as we mentioned in the press release announcing the call we have posted that information, including a presentation to the investors section of our website at www Dot Unitil Dot com.
We will refer to that information during this call.
On 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 could cause our 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 duty to update them.
This presentation contains non-GAAP measures to the accompanying supplemental information more fully describe these non-GAAP measures, including a reconciliation to the nearest GAAP measure. The company believes these non-GAAP measures are useful in evaluating its performance.
Turn to slide four we provide an outline for topics to be covered in today's call. Tom will begin the business and strategy update and Bob will cover financial regulatory update and then Tom will wrap things up with a quick summary, before we turn the call over to the operator for questions.
And with that I will now turn the call over to <unk>, Chairman, President and CEO Tom much.
Thank you Todd good afternoon, everyone.
Beginning on slide five today, we announced net income of 8.3 million or two cents per share for the third quarter of 2020.
The company estimates that the ongoing COVID-19, pandemic and favorably impacted third quarter net income by approximately one cents per share.
Through the first three quarters of 2020, net income is 18.6 million or $1.25 per share.
For comparison purposes recall that in the first quarter of 20019, the company recognized a onetime net gain of 9.8 million or 66 cents per share on the company's divestiture of its nonregulated business subsidiary you source.
Adjusting for this onetime gain net income is down about 4.4 million or 29 cents per share compared to 20019.
The year to date decrease in earnings is primarily due to the warmer than normal winter weather in Q1, which unfavorably affected net income by approximately 3.1 million or 20 cents per share.
In addition to the warmer winter weather, we estimate that net income has been unfavorably impacted by approximately four cents per share due to the cold at 19 pandemic.
Turning to slide six and similar to last quarter I'd like to recap the company's response to the COVID-19 pandemic.
Our highest priority continues to be the safety of our customers and our employees.
In response to the ongoing pandemic, we implemented our crisis response plan.
Execute preventive and proactive measures during which our during this unprecedented time and I've also enacted a phased reopening plan.
The company is currently in its limited reopening phase and it's still requiring all office employees to work remotely wherever possible.
The company also employs a large number of field workers to construct and maintain its energy infrastructure.
These workers have adopted new policies and personal protective equipment to ensure the health and well being of themselves and of our customers.
Operationally the company has continued to provide safe and reliable service throughout the pandemic.
Employees entering customers' homes are being routinely tested to ensure the safety of both our customers and our employees.
We are thankful, but at this point there are no active COVID-19 cases, among our employees.
We quickly adapted to social distancing it other recommended guidelines, while ensuring operational continuity.
And our work [laughter], our workforce as seamlessly transitioned to work from home where appropriate.
Our employees have risen to this extraordinary challenge, while continuing to provide exceptional customer service.
In fact after tropical storm easy if we were able to restore power to all of our customers within a 24 hour period. An example of our best in class Storm restoration system, and our ability to adapt in order to serve our community safely and reliably.
We've also been able to provide mutual aid to support other utilities in there in the region and their restoration efforts seven times this year.
I would also briefly point out that the states, where we operate are managed in the pandemic relatively well in comparison to other regions of the country.
The positive test rates in each of our states rank in the lowest 10 of all 50 states and less than half of the national average.
On slide seven we're pleased to announce that our 2020 corporate sustainability and responsibility report was recently issued on October 22nd.
This report expands on the inaugural the inaugural corporate responsibility report released last year and outlines our vision for sustainability and explain power business strategies, well aligned with the environmental social and economic expectations of our customers and communities.
This report also or the report to be published in the future. We'll also define or objectives and strategies and report on key metrics to track, our progress and illustrate the benefits to stakeholders.
Sustainability is central to our mission and vision. The interactive report can be found on our web site at unit told Dot com.
Turning to slide eight our sustainability goals, primarily fall under three categories.
First we are focused on advancing the grid.
The need to reduce carbon emissions has driven a fundamental transformation within the energy sector as customers adopt new technologies and as clean renewable energy resources are increasingly distributed across the electricity delivery system. The fundamental architecture of the electric grid must advance.
We are actively investing in five key areas that will support our objective of advancing the electric grid and transforming the customer experience.
This includes advanced metering, great intelligence distributed energy customer services and innovative rate design.
These initiatives will provide customers with greater control and visibility into their energy use enabling and will enable distributed energy resources access to the system and advance the system security safety and reliability.
The company also believes that natural gas remains key to a sustainable future is a cleaner and more affordable option for our customers.
We estimate that the impact over the last 10 years from our customers choosing natural gas rather than home heating oil has had the impact of taking roughly 60000 cars off the road.
Nearly two thirds of main households, still rely on fuel oil is their primary energy source for home heating a larger proportion than in any other state in the United States.
In New Hampshire, more than two fifths of households rely on fuel oil the second highest proportion of the nation behind me.
This unusually high penetration of fuel oil present significant opportunities to reduce emissions through continued customer conversions to natural gas.
As we continue to expand the availability of natural gas to more customers. We also will continue to replace outdated infrastructure and modernize our gas system.
As a result, we decreased our future the fugitive emissions from natural gas distribution by 47 metric tons over the last two years lowering our total generation a fugitive greenhouse gas emissions by 9% and 2019 when compared to 2017.
We also continue to look for opportunities to add renewable natural gas to our supply portfolio.
In Q3 of this year, we issued a request for expressions of interest to several parties to identify sources of existing or planned RMG resources.
We will continue to evaluate the viability of adding our entry into our supply.
Another area central to sustainability is creating a sustainable future through our people.
Finding and retaining quality highly motivated employees is critical to our sustainability over the long term.
We are also committed to providing a safe and healthy working environment to our toys.
And our contractors and the public.
In fact, our safety metrics place us in the top one third of our industry peers have and have continued to improve over time.
Not only as an important to keep employees faith in the field, but also to ensure that they are respected in the workplace.
Okay, Unitil, we strive to be an employer of choice for everyone, regardless of race religion color gender or sexual orientation by maintaining an accepting respectful in non discriminatory workplace, where people are encouraged to bring their unique perspective to the table.
We believe the framework we've established for employee relations has been successful as backed by a recent employee survey, where 90% of our employees for port being proud to work for you and that's all.
Our goal is to be the most technologically advanced utility in the region for the utility of the future.
Our vision and mission of grounded us during this historically uncertain time and will guide us to a clean and sustainable energy future as we provide energy for life.
Turning to slide nine.
As I mentioned on last quarter's call our investment forecast still has not changed as a result of the cobot pandemic.
In fact compared to the prior year, we have increased our capital investment by more than 20%.
We anticipate continuing to realize strong rate base growth, given our broad investment opportunities and advancing the grid and supporting and modernizing our gas distribution infrastructure.
To provide one example, where we are facilitating the integration of distributed energy resources and overall system efficiency.
We are installing a two megawatt utility scale battery storage system in our Massachusetts service area.
This energy storage system has the ability to serve over 1300 homes for over two hours and is designed to reduce peak loading on the substation equipment.
This project has a capacity representing over 2% of our system peak in Massachusetts and offers a solution to advanced grid operations control cost variability and aid in the overall system reliability as we support renewable energy solutions.
With that I'll now turn it over to Bob.
Thank you Tom and good afternoon, everyone.
I'll begin with the sales and margin discussion on slide 10.
Year to date 2020, our electric gross margin was $70 million, a decrease of $2.6 million compared to 2019.
The decrease in electric margin reflects lower cnine demand sales related to the economic slowdown caused by the COVID-19 pandemic.
Lower average usage per customer associated with energy efficiency and warmer winter weather we.
We estimate the COVID-19 pandemic unfavorably affected electric margin by approximately $8.7 million.
Through the first nine months of 2020 total electric kilowatt hour sales increased 1.2% relative to 2019.
Residential sales increased 8.2%, primarily reflecting stay at home orders and continuing remote work along with warmer summer weather relative to the prior year seeing.
Cnf sales decreased 3.6%, reflecting lower usage due to the COVID-19 pandemic.
Moving to slide 11.
For the first nine months of 2020, our gross gas margin was $83.3 million a decrease of 2.2 million over 2019.
That decrease was driven principally by the historically warm winter weather in the first quarter, which we've discussed in the past.
The company estimates that year to date, yes margin was lower by 3.2 million due to warmer weather.
We also estimate that the COVID-19 pandemic unfavorably affected gas margin by $1.3 million due to lower commercial and industrial usage.
Those unfavorable variances were partially offset by higher distribution rates and customer growth of $2.3 million.
Through the first nine months of 2020 natural gas therm sales decreased 7.1% compared to 2019.
We attribute the decline in gas sales to the historically warm winter weather and the COVID-19 pandemic.
The company estimates that weather normalized gas therm sales, excluding decoupled sales were down 1.9% year over year.
I also note. We currently are serving 2.9% more gas compressors than in the same time in 2019, illustrating our growing customer base.
Moving on to Slide 12, we provide an earnings bridge analysis, comparing 2020 results to 2019 for the nine month period ending September Thirtyth.
As we provided in the past this layout is slightly different than the form 10-Q, as we isolate the effect of the you source divestiture and related revenues and expenses.
In the supplemental presentation, we have provided a reconciliation to the statement of earnings provided in the 10-Q.
As I noted 2020 year to date gross margin excuse me gross sales margin is lower than 2019 by $2.8 million.
Core operation and maintenance expenses decreased $5.9 million compared to the same period in 2019.
This decrease primarily its due to lower employee benefit costs of $1.2 million as well as lower maintenance expense of $2.3 million, partially offset by higher bad debt expense of point, Fourmillion and higher professional fees of points 2 million.
Depreciation and amortization was higher by $1.7 million, reflecting higher levels of utility plant and service.
Taxes other than income taxes increased $5.9 million, reflecting property taxes associated with higher levels of net plant in service.
The nonrecurring tax abatement realized in 2000 19.6 million.
That increase was partially offset by point $6 million of payroll credits realized in the third quarter associated with the Corona virus aid relief and economic Security Act also known as the cares Act.
Interest expense decreased by $2.2 million, reflecting lower interest rates on short term debt.
Other expense increased $5.4 million due to higher retirement benefit costs.
Next we've isolated the full you source effect of $10.3 million, which was realized in 2019. This.
This includes the after tax gain on the divestiture of $9.8 million and point $5 million, reflecting the net of revenues and expenses realized through you source operations in 2019.
Lastly income taxes decreased $8.8 million, reflecting lower pre tax earnings in the period.
Next on Slide 13, we summarize the effect of the COVID-19 pandemic.
We are closely monitoring the pandemic in any potential effect on the company's financial health.
As Tom mentioned earlier, we estimate that the COVID-19 pandemic affected earnings per share by one cents in the quarter, bringing the year to date effect to four cents per share.
The combined effect on gas and electric sales margin was point $8 million in the third quarter of 2020 and $2 million year to date.
The company has been able to largely offset the decline in revenue with lower expenses, although in some expenses in the third quarter were minimal year to date on him expenses have been favorable by $5.7 million. That's favorable variance was driven principally by lower health insurance claims slightly offset by higher pandemic costs.
It's related to PE supplies and cleaning expenses.
As noted earlier the company was able to lower taxes other than income taxes by point sixmillion by recognizing payroll tax credits associated with the cares Act.
To help stake holders gauge the potential effect of COVID-19 pandemic on sales margin. The company has provided sensitivities between usage in margin for the fourth quarter of 2020.
More detailed information about the status of late fee suspension shut off moratoriums can be found in the appendix of the supplemental presentation.
Now turning to slide 14.
In the third quarter, we received proceeds of $95 million of long term debt the.
The debt was placed at our regulated subsidiaries and carries an average interest rate of 3.72% with a 20 year tenor.
The proceeds were used to refinance existing short term debt and to better match, the long term nature of our utility plant assets.
As a result of the financing we have liquidity of about $161 million, enabling the company to continue executing on our long term plan.
On slide 15, we are pleased to announce that our gas transmission pipeline granite state gas recently filed an uncontested rate settlement with the FERC, providing for an annual revenue increase of $1.3 million with rates to become effective in the fourth quarter of this year we.
We reached that settlement with the New Hampshire in Maine State regulators and agencies. The settlement includes a three year capital tracking mechanism that will accelerate cost recovery for investments made after the test year the.
The settlement illustrates our healthy and productive relationship with state agencies and regulators.
Turning to slide 16, our regulatory outlook in 2021 includes the planned filing a base rate cases in new Hampshire for both Unitil energy, our electric distribution utility and northern utilities, our natural gas utility.
We plan to file decoupling mechanisms in both cases, if those mechanisms are approved the percentage of our decoupled sales to total sales would increase from approximately 25% to 75% and over 80% of our meters would be under decoupled rate structures.
I will turn it back to Tom Great.
Turning to slide 17.
We believe that our long term capital investment goals remain intact with ample investment opportunities in modernizing and expanding our utility system.
We believe we are well positioned to continue executing our growth strategies, while pursuing our sustainability goals all while maintaining excellent service to customers throughout these unprecedented times.
Lastly, we expect to provide any updates to our capital spending plan during our Q, our Q4 earnings call.
Great. Thanks, Tom with that thank you for attending today's call I will now turn the call over to the operator, who will coordinate questions.
Once again, ladies and gentlemen, if you have a question or comment please press star in wine.
And our first question comes from Harry Pollens with Bank of America.
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It appears we now have any further questions in queue.
Our next question comes in Shelby Tucker with RBC capital markets. Your line is now open.
Great. Thank you good afternoon gentlemen.
Quick question about.
Your results your electric.
Volumes were up gross margins were down for the quarter.
I was wondering if.
Some of that could it might also come from from decoupling. So maybe if you could maybe just.
I'll go through the decoupling mechanism, how it works, particularly between residential and see an eye.
Hey, Shelby. This is this is Bob Haver and yes, we do attribute a portion of that to decoupling. The fact that.
The volumes are up in margins not the decoupling mechanism is just what it's intended to do or switches to ensure that revenues are not affected by volumes. It is a a full revenue per customer type.
Type structure. So we were not surprised to see this type of result.
When we looked at the units and then we looked at margins, but you're right. We do attribute a portion of the disconnect between margins and volumes to decoupling.
And is there a separate treatment between residential and Sienna.
No. There is not we would attribute to effectively the same excuse me the same effect to both.
Okay, because it because I see your your overall volumes were.
If you take the two together were up.
I never thought that that was the gross margin would have been somewhat up to the narrative that.
I guess we.
Well, we did correct and partially that was due to decoupling partially it was due to the result, excuse me to a decrease in demand volumes.
Which offset some of the.
The increase in unit volumes so.
The decrease in demand volumes, the effective decoupling to some extent philosophy revenues, we think can be attributed to the difference between increase in volumes and the decrease in margins.
Got it and then as you look at decoupling in New Hampshire.
Would that decoupling mechanism be similar to what you have in Massachusetts or is it somewhat different.
No. We we would look for it to be fundamentally the same although we do not yet have the structure actually finalized in principle. It would be the same will be looking for revenue per customer decoupling structure.
Which would.
Which would be sure that the revenue requirement as filed per customer would be medifast. There. So fundamentally the same.
Got it okay. Thank you so much.
Thank you Shelley Shelley.
Okay.
Next question comes from Harry on the Bank of America. Your line is now open. Please state your question.
Hey can you guys Jeremy.
Yes.
Oh go ahead.
I'm not sure what happened.
Ah yes.
Yeah. So just you.
You guys talked about advancing the greatest towards the beginning of the presentation.
I was wondering if you could elaborate more on the electrification opportunities associated with that advancement of the grid.
Across your desk jurisdictions in which utilities you think you would see the most opportunity in terms of electrification.
Sure. This is Tom Meissner in.
In regards to the last part of your question, probably the greatest opportunity would be in new Hampshire that were currently see here.
And in terms of the opportunity itself, we do expect to advance some proposals to help.
Advanced charging infrastructure in the state.
But I think the real opportunity is going to be the long term opportunity represented by the significant.
Load represented an electrifying what's now.
Fueled by gasoline.
So we're currently incorporating.
The expected increase in demand and sales associated with.
Electric vehicles into our forward looking demand forecasts and overtime I would expect that's going to drive increased investment as we have to.
Prepare for the increased load, we will see on our system over time.
Got it that's helpful.
That makes sense.
Then one other one on.
A similar subject, but on the gas side.
But an R&D see.
You put out.
Wondering what's the size of that.
Would this be incremental to your current capital program.
Hi, Harry this is Bob covered well.
When we're looking at that RFP. It really is for the supplies and I just to be clear, it's a request for expressions of interest so it's fairly preliminary.
But what we're looking for yes, no. That's okay. What we're looking for here is.
Expressions of people, who may be able to provide a.
Renewable natural gas for our supply portfolio, principally in Maine to begin with so at this point, it's not a capital issue its more supply issue, but we.
We are beginning the steps of really learning how to integrate renewable natural gas into our supply portfolio to really green the supply.
And I guess a follow up on that.
Interested in.
Essentially investing and the associated infrastructure and Oh.
Facilities that lend themselves to R&D.
Besides that.
And that kind of thing.
I mean, I think we certainly would look at any investment that makes sense to us. So as we go through the process of evaluating proposals that we see pursuant to the RFP that we set out and as we think and learn more about it we would always keep those options open.
Got it that's really helpful. Thanks, So much guys, taking the question sorry about the technical difficulties earlier.
Great. Thank you.
Thank you and our next question comes from Wayne Archambo with Monarch Partners. Your line is now open.
Hi, Thank you.
Any sense of any in migration.
To.
New Hampshire, our main.
Getting reading more material about people, leaving New York, calling up domain.
Just more affordable quality of life blah, blah blah, given essential that the migration of those two states.
Good afternoon Wayne This is Tom.
To that point, yes, you're quite right. We've we've seen a lot of evidence of that you know overtime I think we've seen in.
Intense competition for existing residential housing inventory.
There has been reports of people.
Making above asking offers sight unseen and I can actually turn it over for a minute to our our new CFO, Bob Haver, who found himself in the position of having to find housing up here. When you accepted the job here units also yeah Wayne It was not easy its.
It's a very very robust market here there we found ourselves competing with a fair number of people or even just apartments in the Hampton Portsmouth areas. So I would agree with you just based on my own experience there does seem to be quite a bit of demand for for housing in this area.
Any sense remained at all.
Anecdotally I think it's a similar situation in Maine to what we're seeing in New Hampshire.
In a lot of it seems to be driven by people who are now working remotely during the pandemic and are essentially getting out of the hotspot areas in the in the urban areas.
In seeking a different place to live at least during the pandemic, we'll see how it.
Translates over time after this pandemic is over.
No.
And then.
Looking at your stock today, and I've owned the stock for quite a few years.
You know the XL, you, which is the utility he has got a 1% than the last year your stock's about 42% pretty much where it was at the beginning of 2016 so.
What this massive underperformance do you have any you or the board have any inclination to initiate a buyback or.
Anything to.
Enhance shareholder value here.
Well well clearly are the underperformance of our stock is certainly something that we're all very aware of and and we're focused very much on in terms of.
I'm trying to return to where we were previously.
I guess I would say that fundamentally our outlook. We see is really unchanged. So we're really looking forward in terms of our fundamental outlook.
Our opportunities for investment our rate base growth and opportunities to improve our earned returns.
And based on that probably a stock buyback.
Would be something that we couldn't consider because we would not then be able to fund our investment program.
So but.
But we are we are looking at all options to try to address the uncertainty and the concern in the market that may be driving the current valuation.
You certainly have a quite a bit of debt capacity on the balance sheet.
We did yes, we do we'll be careful Wayne in terms of how we capitalize the company going forward, but I would agree we've got some capacity.
And I would just think what the cost as a debt being at or near 60 year lows.
And.
Consolidations still continues in the industry public service in New Mexico.
Was taken out.
In the last couple of weeks and you know as you know.
Central Vermont was acquired by the Canadian Company back 76, seven years ago. So I.
I think you might be one of the last public utilities loves the winglet.
So again I I, we got ultimately looking for value creation here and.
Seeing your stock is where it was you know.
Four and a half years ago significantly lagging utility group, it's certainly it's Joe.
Only cause for concern as a long term shareholder.
I understand and I think it's a cause for concern for all of us.
Our last question any of you have any have you been buying stock personally.
Has that.
But any insider buying at all at these levels or.
Not that I'm currently aware of where you are.
I see.
Okay very good thank you.
Thank you and I'm showing no further questions in the queue at this time, ladies and gentlemen, Thank you for your participation on today's conference. This does conclude your program you may now disconnect.
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