Q2 2019 Earnings Call
Good day, ladies and gentlemen, and welcome to the units So second quarter 2019 earnings conference call.
At this time, all participants I know 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 call is being recorded.
I would now like to introduce your host for today's conference Mr., Todd dig ins director of Finance, Sir you may begin.
Good afternoon, and thank you for joining us to discuss Unitil Corporation second quarter 2019 financial results with me today are Tom laser Chairman, President and Chief Executive Officer, Christine Bond Senior Vice President and Chief Financial Officer, and Treasurer, Larry Brock, Chief Accounting Officer, and controller, and Todd Black Senior Vice President external affairs and customer relations.
We will discuss financial and other information about our second quarter results on this call as you 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.
Before we start as you can see on slide two the comments made today about future operating results for 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 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 duty to update them.
With that said I will now turn call over to Tom.
Thank you Todd Thanks, everyone for joining us today.
I'm going to begin on slide four where today, we announced net income of $4 million or 27 cents per share for the second quarter of 2019.
This is an increase of $8.4 million or three cents per share over the second quarter of 2008.
Non regulated business subsidiary you source.
That sale generated a net gain of $9.8 million or 66 cents per share.
You source. It historically contributed between two and three cents per share to earnings each quarter. So so please keep this in mind as we review our results.
Excluding this onetime gain.
Year to date net income is up $1.5 million or nine cents per share compared to 2018, an increase of 7.8%.
The increase in net income from our core utility operations is primarily attributed to higher sales margins.
Turning to slide five to meet our customers' growing in ever changing energy needs. The company has developed a robust investment plan.
Our capital spending over the next three years is forecast to be about 20% higher than the prior three years.
This increased investment will be used in part to fund the company's gas expansion in infrastructure modernization.
Historically over the past eight years, our net plant has averaged over 9% annual growth and with our current investment plan, we should maintain that strong growth into the future.
We're currently evaluating our future capital spending needs and will provide an update at our year end earnings call.
Moving on to slide six as we've discussed before our gas distribution system is expanding both within and contiguous to our existing service areas.
In the past five years, we've installed over 100 miles of new gas mains.
In New Hampshire construction is currently planned or underway in all three of our recently approved franchise towns.
As illustrated in the graphic our New Hampshire service area expansion is along major highway routes. This is part of our strategic goal to provide service to commercial in densely populated areas along this through way.
We will continue to evaluate the surrounding areas for new expansion opportunities.
Turning to maintain our targeted area build out programs or PTAB programs continue to progress and we are adding customers in both soco and Sanford.
The soco construction is primarily completed that we expect additional customers to continue to convert to natural gas.
The Sanford gas main extension is still underway and the company expects to reach a potential market of more than 2000 customers. Once it is completed.
We've also highlighted Kittery, Maine, which borders to New Hampshire Seacoast is another strategic service area expansion.
The expansion effort here is targeting another major through way, which runs along the delinquency coast in construction along this route will occur this summer.
Turning to slide seven in addition to expanding our gas distribution system. The company continues to convert customers within our existing service areas.
Our natural gas systems in Maine, and New Hampshire continue to have relatively low market penetration rates and as noted on slide seven natural gas is a cleaner burning fuel the number two fuel oil and can save residential customers about $400 per year, if they switch from oil to gas.
The company anticipates that homeowners and business owners will continue to take advantage of the environmental and price benefits of natural gas, which translates into organic customer growth for our company.
In these two states, we have grown our customer base by an average of 2.1% each year since 2013.
Now I will turn the call over to Christine who will discuss our financial results for the quarter.
Thanks Pat.
Good afternoon, everyone.
Beginning on slide eight our natural gas sales margins in the quarter in 2019 with $23.3 million.
An increase of 5.4 million over 2018. This increase is partially offset but absent that the 1.2 million non recurring adjustment in connection with the rate case, which occurred in the second quarter 2018.
Year to date GAAP margin at $66.8 million, which is an increase of $4 million over 2000 $18 million to $4 million increase as a result of higher distribution rate $3.8 million.
Higher therm sales of 1.4 million offset by the 1.2 million 2018 adjustment.
Actual gas therm sales have increased 2.2% year to date compared to 2018.
The increase in gas therm sales was largely driven by customer growth.
The customer at the company estimate that weather normalized gas then gas therm sales, excluding decouple downs were up 5.5% in the first two quarters of 19 compared to the same period in 2018.
As of June 2019, we are serving 1455 more gas customers that same timing 2018.
At the 1.8% increase.
Next on slide nine I'll discuss electric units and sales margin.
Electric sales margins were at $22.4 million in the second quarter, an increase of $8.1 million compared to the same period in 2018.
Electric sales margins for the first half of 2019 were $45.5 million, an increase of $8.9 million.
Margin was positively affected by higher distribution rate of $1.4 million, partially offset by lower sales as a result of lower average customer usage.
Total electric kilowatt hour sales decreased 5.1% through the first half of 2019 compared to 2018 again. This is largely result of reduced usage per customer due to energy efficiency initiative.
Turning to slide 10.
We roll forward. The first half of 2018 net income through year to year to date 2019.
And as we laid off I would like to note that this layout is slightly different than past presentations and the Form 10-Q , as we isolated the impact from the users divestiture all adverse divestiture related year to date income statement variances are reflected in the U.S source category of this graphic so that investors can better identify trends.
Core operation and maintenance expenses, excluding the impact of Usource increased $2.2 million in the first half of 2019 compared to the same period in 2018.
Excluding a nonrecurring adjustment to open and that occurred in 2018 in conjunction in connection with the base rate case core on an increased by $1.4 million in the first half of 2019.
Depreciation and amortization trended higher with higher utility plant in service slightly offset by lower amortization expense for a major storm that ended in July 2000.
Taxes other than income taxes increased point $5 million in the six months ended 2000 and June Thirtyth 2019, compared to the same period in 2018.
Primarily reflecting higher local property taxes on higher levels of utility plant assets in service.
This increase was somewhat offset by approximately $2.6 million of tax abatements received in the second quarter of 2019 pertaining to multiple towns in New Hampshire.
Interest expense increased as a result of higher borrowings.
And other expenses decreased $2.4 million, primarily related to lower retirement benefit costs.
Isolated $9.2 million related to U.S dollars. This is largely the result of an after tax divestiture gain of $9.8 million and also contributing to the increase is a point $9 million reduction of you source related OEM expense that was not incurred due to the divestiture and partially offsetting these increases is a reduction of usource revenue of $1.5 million.
And finally income taxes, excluding the impact of you source increased as a result of higher pre tax income.
Next on slide 11 to help fund our increased capital spending program Unitil strategically decreasing our payout ratio and to the range of 55% to 65% and we have successfully lowered our payout ratio about 10%, while also increasing our common dividends for the last five years and the company plans to continue to increase as dividends under the constraints of earning growth and the target payout ratio.
On slide 12.
In June Northern utilities filed a general base rate case with the main PC.
The filing includes revenue deficiency request of about $7 million.
With a 10.5% ROI the equity ratio included in the filing is 52.9% after incorporating an equity infusion of proceeds generated by the users divestiture as well as other corporate funds.
The filing also includes a request for an alternative accelerated cost recovery mechanism for non growth investments, which would reduce.
The regulatory lag.
The company anticipates, new distribution rates to become effective in the second quarter of 2020.
Now onto slide 13, I would like to note that in the second quarter of 2019, the Massachusetts DPU granted the company requested double the annual cash recovery cap on his gas infrastructure replacement program. This will assist <expletive> the company's credit ratings and reduce interest expense.
Company is also pleased with another ruling from the Massachusetts Department of public utilities.
Due to legislation Fitchburg is required to enter into long term contracts for certain qualified clean energy projects.
And the deep you recently allowed ruling.
We recently issued a ruling, allowing 2.7% remuneration and recovered recovery of associated administrative costs related to these recent recently approved contracts.
Now contingencies exists within the clean energy connect project when these contingency the satisfied the contracts will qualify for derivative accounting and once it does qualify for derivative accounting the company believes that the power purchase obligations onto the long term contract will have a material impact.
On both sides of the balance sheet on the contractual obligations and the regulatory assets of Pittsburgh.
The timing of this is unclear as the project is still currently in the planning and permitting phase.
And finally in the second quarter, both Maine, and New Hampshire public utility commissions approved a potential 40 million dollar debt issuance of 30 year notes at northern utilities. The transaction was successfully priced in the second quarter with a coupon rate of 4.04% and we intend to close and fund in the third quarter of 2019.
Now on slide 14, we have long term rate plans or cost trackers established nearly all our subsidiaries and are prepared to update and extend these programs through rate cases, and other proceedings as appropriate.
And the gas and electric divisions. The company has been awarded $3.4 million and $1.2 million respectively in rate relief through accelerated cost recovery mechanism. Combined this is over $4 million of rate relief that will help reduce earnings attrition.
Lastly on slide 15 provides to trailing 12 months actual earned return on equity in each of our regulatory jurisdictions.
Unitil on a consolidated basis earned a return on equity of 12.3% in the last 12 months ended June Thirtyth 2019, including the onetime gain from the users divestiture.
As a reminder, fitchburg selective is required to file a general rate base General base rate case by 2020, and the company is always evaluating the need to file for rate relief and adopt provide prohibited from filing earlier.
By comparing the common equity balances in each company with what we provided in the first quarter of 2019, you'll notice an increase in both northern and Fitchburg. The proceeds of approximately $36 million related to the users divestiture and other corporate funds have been invested in northern utilities at Pittsburgh.
Finally on the last quarter. The company was asked their respective northern utilities actual arai between Maine, and New Hampshire. The recent rate a rate case filing with the main PC stated on actual Aro, we have 7.2%.
Northern utilities in New Hampshire is earning close to their authorized return and is prohibited from filing a rate case before 2021.
Now this concludes our summary of our financial performance for the period I will turn the call over to the operator, who will coordinate questions from the audience.
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As a reminder, ladies and gentlemen, that's star then one to ask a question.
Our first question comes from Michael Gaugler with Janney Montgomery Scott. Your line is now open.
Good afternoon, everyone.
Good afternoon, Mike.
Oh I noticed in the dark and in our model.
The electricity sales average customer usage is lower.
Ah you attributed that to weather or is it something else.
[noise].
Hi, I'm the electricity is there's a apart part due to weather part due to.
Energy efficiency use in part due to a few customers in new Hampshire had a bit of a production different differentiate differential so they reduce the level of production in the second quarter.
You look forgot to.
To kind of carry on the.
On the on the commercial side, you look for that to carry through or was that like just a retooling phase for.
For manufacturers.
Part of it to carry through and part of it too.
Come back.
Okay.
I didn't hear you mention anything about.
Anything on on grid Mod, just wondering if theres any new developments there.
Hi, Mike. This is Tom there there really were no developments in the quarter, which is why we didn't comment on it.
Okay.
I had to ask.
All right. That's all I had thank you.
Ill.
Okay. Thank you.
Ladies and gentlemen, thank you for participating in today's conference. This does conclude todays program and you may all disconnect everyone have a wonderful day.
Okay.