Q4 2024 Unitil Corp Earnings Call
Good day, and thank you for standing by.
Speaker Change: Welcome to the fourth quarter 2024 UNITIL earnings conference call. At this time all participants are in a listen-only mode. After the speaker's 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. You will then hear an automated message advising your hand is raised.
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Please be advised that today's conference is being recorded.
Speaker Change: I would now like to hand the conference over to your speaker today, Chris Goulding, Vice President of Finance and Regulatory. Please go ahead.
Speaker Change: Thank you. Good morning and thank you for joining us to discuss Unitil's Corporation's fourth quarter 2024 financial results.
Speaker Change: 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.
Speaker Change: Also with us today are Bob Havert, President and Chief Administrative Officer, and Todd Diggins, Chief Accounting Officer and Controller.
Speaker Change: We will discuss financial and other information on this call. As we mentioned in the press release announcing today's 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.
Speaker Change: 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.
Speaker Change: Forward-looking statements inherently involve risk and uncertainties that can cause actual results to differ materially from those predicted.
Speaker Change: Statements made on this call should be considered together with cautionary statements and other information contained in our most recent annual report on Form 10-10-K and other documents we have filed with or furnished to the Security and Exchange Commission.
Speaker Change: Forward-looking statements speak only as of today, and we assume no obligation to update them.
Speaker Change: 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.
Speaker Change: The company believes these non-GAAP financial measures are useful in evaluating its performance.
Speaker Change: With that, I will now turn the call over to Chairman and CEO, Tom Meissner.
Tom Meissner: Great. Thanks, Chris, and good morning, everyone. Thanks for joining us.
Tom Meissner: I'm going to begin on slide 3, where yesterday we announced another strong year of results with adjusted earnings of $47.8 million, or $2.97 per share, representing an increase of $0.15 per share, or 5.3% over 2016.
Tom Meissner: We fully earned our authorized returns with a consolidated return on equity of 9.4%, representing constructive regulatory outcomes in our focus on cost management.
Tom Meissner: On January 31st, we completed our acquisition of Bangor Natural Gas.
Tom Meissner: We view Bangor as highly complementary to our existing gas operations in Maine and fully expect the transaction to be earnings-decretive over the long run as we move towards cost-of-service rates for Bangor natural gas customers.
Tom Meissner: Operationally, we had another outstanding year with electric reliability, gas safety, and customer service metrics, all comparing favorably to our utility peers.
Tom Meissner: Today we are also reaffirming our guidance for long-term earnings growth, dividend growth, and rate-based growth.
Tom Meissner: We will also provide earnings guidance for 2025 later during this call.
Tom Meissner: Moving on to slide four. As I just mentioned, on January 31st, we completed the acquisition of Bangor Natural Gas with a purchase price of $70.9 million plus approximately $0.3 million for working capital.
Tom Meissner: The transaction was funded with short-term debt, and we intend to recapitalize Bangor Natural Gas with a combination of equity and long-term debt to achieve a capital structure similar to our other operating companies.
Tom Meissner: We're excited to serve the greater Bangor area and look forward to providing our new customers with a high level of service they expect of us.
Tom Meissner: The process of integrating Bangor natural gas into the rest of our operations is well underway.
Tom Meissner: We expect the transaction to be earnings neutral on a fully diluted basis in the near term. And as I mentioned on the previous slide, we expect this transaction will be earnings accretive over the long term after cost of service rates are put in place following a base rate case.
Tom Meissner: Turning to slide five, we pride ourselves on providing exceptional service to our customers. In 2024 was no exception, as 90% of our customers reported being satisfied with the service we provide.
Tom Meissner: We were the highest rated of 23 eastern utilities and garnered high marks in a number of important categories.
Tom Meissner: These strong results are a reflection of the hard work and dedication of our employees.
Tom Meissner: Moving now to slide six, operationally we maintained top quartile electric reliability and had the fifth lowest service interruption time in the past 20 years.
Tom Meissner: Targeted investments combined with aggressive vegetation management programs have supported consistently strong electric reliability performance.
Tom Meissner: Our gas emergency response also remains among the top tier of our peers, and we recently received the Northeast Gas Association's Excellence in Safety Award for the company's implementation of a pipeline safety management system.
Tom Meissner: In 2024, we also completed our gas infrastructure modernization program in Maine, concluding a 14-year program that began in 2011.
Tom Meissner: We've now replaced all cast iron, bare steel, and other aging infrastructure while also increasing system operating pressures and greatly expanding system capacity.
Tom Meissner: In addition to enhancing system safety, modernizing our gas system and reducing fugitive emissions is an important element of our greenhouse gas mitigation strategy.
Tom Meissner: As a reminder, we completed our pipe replacement in New Hampshire in 2017, and pipe replacement efforts are ongoing in Massachusetts.
Tom Meissner: Turning now to slide 7, as discussed during our previous earnings call, we are working through our Advanced Metering Infrastructure Upgrade, or AMI project, that will replace all electric meters in our service areas with new state-of-the-art meters.
Tom Meissner: This is an exciting project and a significant step towards meeting the needs of the clean energy transition.
Tom Meissner: The project is progressing as expected and we have completed all IT integrations, installed new radio frequency equipment, and system testing is underway.
Tom Meissner: We expect the meter replacement at our Massachusetts subsidiary to be complete this year and at our New Hampshire subsidiary by 2027.
Tom Meissner: The estimated cost is approximately $40 million, and in Massachusetts, the costs associated with this project are eligible for accelerated cost recovery.
Tom Meissner: With that, I will now pass it over to Dan, who will provide greater detail on our 2024 financial results.
Thank you, Tom. Good morning, everyone.
I'll begin on slide A.
Tom Meissner: As Tom mentioned, we announced Fiscal Year 2024 Adjusted Net Income of $47.8 million and Adjusted Earnings Per Share of $2.97, representing an increase of $2.6 million in Adjusted Net Income, or $0.15 per share, compared to 2023.
Tom Meissner: These 2024 results were supported by higher distribution rates and customer growth, partially offset by higher operating expenses.
Tom Meissner: We are reporting adjusted earnings that exclude transaction costs related to the acquisition of Bangor Natural Gas, which are not indicative of the company's ongoing costs and operations.
Tom Meissner: Turning to slide 9, I will discuss our electric and gas adjusted gross margins.
I'll begin with our electric operations.
Tom Meissner: Electric adjusted gross margin for the year was $107.3 million, an increase of $3.2 million as compared to 2023.
Tom Meissner: The increase in electric adjusted gross margin reflects higher distribution rates and customer growth.
Tom Meissner: The company added approximately 990 electric customers compared to 2023, and as noted during prior calls, electric distribution revenues are substantially decoupled, which eliminates the dependency of distribution revenue on the volume of electricity sales.
Moving to gas operations.
Tom Meissner: Gas adjusted gross margin for the year was $166.9 million, an increase of $12.4 million compared to 2023.
Tom Meissner: The increase in gas adjusted gross margin reflects higher distribution rates in customer growth, with the company adding approximately 730 new gas customers compared to 2023.
Tom Meissner: At the end of 2024, approximately 60 percent of the company's gas customers were under decoupled rates, and we estimate the decoupling-supported gas-adjusted gross margin by approximately 28 cents per share in 2024.
Tom Meissner: Moving to slide 10, we provide an earnings bridge comparing 2024 results to 2023.
Tom Meissner: As I just mentioned, adjusted gross margin for the year increased by $15.6 million, primarily driven by higher distribution rates and customer growth.
Tom Meissner: Operation and maintenance expenses increased $2 million, or 2.6%, reflecting higher labor costs partially offset by lower utility operating costs.
Tom Meissner: This increase includes approximately $1 million of transaction costs associated with the Bangor Natural Gas acquisition.
Tom Meissner: Excluding these costs, operating and maintenance expenses increased $1 million, or 1.3% compared to 2023.
Tom Meissner: The increase in operation and maintenance expenses, either including or excluding transaction costs, is below the increase in inflation of approximately 2.9% over the same period.
Tom Meissner: Depreciation and amortization increased 8.7 million dollars, reflecting higher depreciation rates approved in recent Maine and Massachusetts rate orders.
Tom Meissner: Higher levels of utility plant and service and higher amortization of rate case and other deferred costs.
Tom Meissner: Taxes other than income taxes increased 1.4 million dollars reflecting higher local property taxes on higher utility plant and service as well as higher payroll taxes.
Tom Meissner: Interest expense increased $0.6 million, reflecting higher interest expense on short-term borrowings and higher levels of long-term debt, partially offset by higher interest income on regulatory assets.
Tom Meissner: Other expenses increased by $0.2 million, largely due to higher retirement benefit costs.
Tom Meissner: And lastly, income taxes increased to $0.8 million, reflecting higher pre-tax earnings.
Turning to slide 11.
Tom Meissner: We are providing Adjusted Earnings Guidance for 2025, which we expect to be in the range of $3.01 to $3.17 per share.
Tom Meissner: Our guidance assumes normal weather for the year and customer growth consistent with recent experience.
Tom Meissner: We also continue to provide a graph of the expected distribution of our quarterly earnings on this slide.
Tom Meissner: and our quarterly results have generally been consistent with this guidance.
Tom Meissner: We are also reaffirming our long-term EPS growth guidance of 5 to 7 percent.
Tom Meissner: From 2022 to 2024, we have grown earnings 7.1%, slightly above the upper end of our long-term guidance.
Moving to slide 12.
Tom Meissner: We have updated our projected five-year investment plan through 2029, which now totals approximately $980 million, which is 46% higher than the prior five years.
Tom Meissner: We expect electric rate-based growth will outpace gas rate-based growth in 2025, driven by electric system modernization and the completion of our main pipe replacement program in 2024.
Tom Meissner: In 2025, we expect capital spending to be approximately $176 million as we continue to make necessary and strategic system investments.
Tom Meissner: Lastly, I would note that this investment plan does not include Bangor Natural Gas, which is expected to average between $3 million and $5 million annually.
primarily supporting customer growth.
Turning to slide 13.
Tom Meissner: We had a busy regulatory agenda in 2024 with orders for our electric and gas rate cases for Fitchburg Gas and Electric in Massachusetts and Granite State Gas Transmission at FERC.
Tom Meissner: On November 25, 2024, FERC approved the Granite State Gas Settlement as filed.
Tom Meissner: As a reminder, the settlement agreement included an annual revenue increase of $3 million, which represents a revenue increase of approximately 30%.
Tom Meissner: The settlement also included three limited Section 4 step filings over the next three years, totaling approximately $30 million to recover eligible capital costs.
Tom Meissner: Looking forward, we intend to file a distribution rate case for Unitil Energy Systems, our New Hampshire Electric subsidiary, in the second quarter of this year.
Tom Meissner: We expect this rate filing will seek recovery of the Kingston Solar Facility, which we expect to be placed in service also in the second quarter.
Tom Meissner: As a reminder, in New Hampshire, we are able to begin recovering a portion of our requested revenue increase.
Tom Meissner: through a temporary rate award within a couple months of the initial rate filing.
Tom Meissner: Temporary rates are fully reconciled to the final rate award with any under-recovery being recouped following the completion of the case.
Tom Meissner: We look forward to providing additional details as this rate case activity gets underway.
Tom Meissner: Moving to slide 14, we have updated our long-term financing plan, where we continue to expect the majority of funding, approximately two-thirds, to be derived from cash flow from operations, less dividends, with additional financing obtained from a balanced mix of debt and equity.
Tom Meissner: Maintaining our strong balance sheet and our investment grade credit ratings remains a top priority.
Tom Meissner: and we continue to generate strong cash flow while prudently managing risk.
Tom Meissner: Looking forward, we expect to maintain our FFO to debt ratio between 17 and 19 percent.
Tom Meissner: In January 2025, we amended our revolving credit facility to increase the borrowing limit from $200 million to $275 million and to extend the maturity of the facility to September 2028.
Tom Meissner: This increase provides financing flexibility and additional liquidity for the company's current investment plan.
Tom Meissner: Turning to slide 15, I'm pleased to announce that our Board of Directors has voted to increase the quarterly dividend by 2.5 cents per share or 10 cents per share on an annualized basis.
Tom Meissner: The increase brings the annual dividend to $1.80 per share in 2025, or a 5.9% increase from 2024.
Tom Meissner: Our payout ratio has been firmly within our target range for several years now, providing the ability to grow our dividend in line with long-term earnings growth.
Tom Meissner: I will now turn the call back over to Tom. Thanks, Dan.
Tom Meissner: These accomplishments are a testament to the hard work and dedication of our employees and the constructive relationships we enjoy with our regulators.
Tom Meissner: As we look ahead to 2025, we are well positioned to continue this success and deliver on our commitments to customers, communities, and shareholders.
With that, I'll pass the call back to Chris.
Tom Meissner: Thanks, Tom. That wraps up the prepared material for this call. Thank you for attending. I will now turn the call over to the operator who will coordinate questions.
Speaker Change: As a reminder, to ask a question, please press star 11 on your telephone and wait for your name to be announced. To withdraw your question, please press star 11 again. Please stand by while we compile the Q&A roster.
Speaker Change: Our first question comes from Char Pereza with Guggenheim Partners. Your line is open.
Hey guys, this is Alex Adforshah.
Good morning.
Good morning.
Speaker Change: Just on the intent to file the distribution rate case at UES, can you just walk through the strategy there and also just get a sense of what the customer bill impact could be? And then also just from a procedural standpoint, you know, anything we should be looking out for in terms of important filing dates?
Speaker Change: Sure. So, customer bill impacts, we won't know until we file the case.
while we're
Assessing the revenue deficiency, we don't have
specific customer bill impacts by class to share just yet.
Thank you very much.
As I mentioned, we are looking to file the case.
Speaker Change: at some point in the second quarter, so whether that's May 1st or June 1st.
Speaker Change: That's when you can expect the timing of the filing of the case. As we highlight in the slide deck, you can see the current earned ROE for...
Speaker Change: UES, which is slightly less than the allowed ROE, which is driving us towards having to file that case in 2025.
Got it. Okay. That's helpful. Thanks.
Speaker Change: And just as a follow-up, just as we think about the five-year capital plan, just on that 13%, you know, coming from equity, sort of how should we think about the timing and the means of which you issue equity? I know some of which will come from the DRIP and internal funds, but is there any way to size that? Thanks.
Speaker Change: Sure, so as I covered we we you know, we do have a strong balance sheet. We do have Strong credit metrics the increase in the revolver does provide us with financing flexibility So as you mentioned to fund the capital plan
Speaker Change: But we have no immediate plans to do that right now.
Great. Thanks. I'll leave it there.
Thank you.
Thank you.
Speaker Change: As a reminder, to ask a question, please press star 11 on your telephone. Again, that is star 11 to ask a question.
Speaker Change: I'm showing no further questions at this time. This concludes today's conference call. Thank you for participating. You may now disconnect.