Unitil Q3 2023 Earnings Call Transcript

Quartr
Provided by Quartr
November 7, 2023

There are 5 speakers on the call.

Operator

Morning and thank you for joining us to discuss Unisil Corporation's Q3 2023 financial results. Speaking on the call today will be Tom Meissner, Chairman and Chief Executive Officer and Dan Hirsdek, Senior Vice President, Chief Financial Officer and Treasurer. Also with us today is Bob Hebert, President and Chief Administrative Officer. I'm Todd Deggans, Chief Accounting Officer. We will discuss financial and other information on this call.

Operator

As we mentioned in the press release announcing today's call, We have posted information, including a presentation, through the Investors section of our website at unitil.com. We will refer to that information during this call. Moving to Slide 2, 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 entirely 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 ks and other documents we have filed with or furnished to the Securities and Exchange Commission.

Operator

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 to drive these non GAAP financial measures and include 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 and CEO, Tom Meissner.

Speaker 1

Great. Thanks, Todd, and good morning, everyone. Thanks for joining us today. Before I begin, I'd like to start by acknowledging the tragic event that recently took place in Lewiston, Maine. Lewiston is an area that we serve and we are absolutely Heartbroken for those lost and injured as well as their friends and family and for the larger Lewiston community.

Speaker 1

We're going to support the community in any way we can and we recently made $100,000 donation to the Lewiston Auburn Area Response Fund that will directly help those affected. The company will also match any employee contributions to this fund. We recognize that our assistance is only a small step toward helping Lewiston begin to recover from a senseless tragedy. Once again, our hearts go out to those affected by this terrible incident. We look we continue to look to help the community rebuild in any way we can.

Speaker 1

With that, let's move on to Slide 4, where I'll begin today's discussion. We continued our strong year to date performance and today announced net income of $1,400,000 or $0.09 per share for the Q3 of 2023. Through the 1st 9 months of the year, Net income was $29,700,000 or $1.85 per share, representing an increase of $0.17 per share or approximately 10% over the same period in 2022. Earnings growth was achieved through successful execution of our regulatory and a steady focus on cost control. Decoupled rate structures, which now apply to the majority of our customers, provided expected revenue stability through the 1st 9 months of the year.

Speaker 1

Our disciplined approach to cost management has resulted in operation and maintenance expenses that have increased less than 1% compared to for the same 9 months of 2022, a noteworthy accomplishment considering the current inflationary environment. As we will discuss in greater detail later on the call, we remain heavily engaged in our regulatory agenda with base rate case proceedings currently underway for our Fitchburg Electric and Gas divisions and a successful settlement recently approved for our Northern Utilities Main this settlement is another testament to the positive relationships we have with our regulators as it took less than 5 months from the filing date to reach a settlement that was approved by the Maine Public Utilities Commission. Our financial and operational performance remains strong reinforces our investor value proposition of low risk sustainable growth, including our long term earnings guidance of 5% to 7%. Turning now to Slide 5, I'm pleased to announce that our 2023 corporate sustainability report is now available at unitil.com. As we have previously noted, sustainability is central to our strategies and we recognize the opportunities and challenges inherent in the clean energy transition.

Speaker 1

This report provides an update on our progress as we work to achieve a 50% reduction in greenhouse gas emissions by 2,030 and net zero emissions by 2,050. I invite you to read through this report on on our website to learn more about our commitment to sustainability. Maintaining and attracting a talented and diverse work is critical to our success. And for the 2nd consecutive year, we have been recognized as one of the best companies to work for in New Hampshire by Business New Hampshire Magazine. This is a great achievement that we should acknowledge, but one that we cannot take for granted.

Speaker 1

Being an employer of choice in our region is more important than ever. We will continue to embrace diversity and employee well-being. With that, I will now pass it over to Dan, who will provide greater detail on the quarterly and year to date results.

Speaker 2

Thank you, Tom. Good morning, everyone. I'll begin on Slide 6. As Tom mentioned, we announced 3rd quarter earnings per share of $0.09 For the 1st 9 months of the year, net income increased $2,800,000 or $0.17 per share compared to the same period in 2022. This growth is the result of higher sales margins, partially offset by higher operating expenses and higher interest expense.

Speaker 2

Through the 1st 9 months of 2023, our decoupled rate structures in Massachusetts and New Hampshire Have provided expected revenue stability and supported earnings by approximately $0.34 per share. We anticipate full year 2023 earnings will exceed the high end of our guidance range of 7% relative to earnings per share of $2.59 in 2022 due in part to the recent Maine rate case settlement. Turning to Slide 7, I will discuss our electric and gas adjusted gross margins. Starting with electric operations, Electric adjusted gross margin was $80,100,000 for the 9 months ended September 30, 2023, an increase of $3,500,000 compared to the corresponding period in 2022. This increase in electric margin primarily reflects higher distribution rates and customer growth.

Speaker 2

Electric unit sales were down for both residential and commercial and industrial classes as a result of warmer than normal winter weather and lower average usage, partially offset by customer growth. The company's electric distribution revenues are substantially decoupled, which eliminates the dependency of distribution revenue on the volume of electricity sales. Through the 1st 9 months of 2023, we estimate revenue decoupling supported electric margin by $0.14 As we mentioned during the last call, year over year electric meter growth was slightly lower due to a mass meter conversion that effectively replaced approximately 200 residential meters with a few commercial meters. This conversion was included in the Unitil Energy Systems rate case settlement and had no effect on distribution revenue. We serve many seasonal electric customers that discontinue service ahead of the colder winter months.

Speaker 2

And in 2023, We saw more of these seasonal customers turn off service in September than in prior years. We expect that the timing of seasonal customers turning off service, which does not have a significant effect on revenue, is reducing our year over year customer growth and we expect the effect of the timing of seasonal customer shutoffs to normalize during the Q4. We continue to expect future electric customer growth to be consistent with historical annual growth trends of approximately 0.5%. Moving to gas operations. Gas adjusted Gross margin was $106,400,000 for the 9 months ended September 30, 2023, an increase of $5,800,000 compared to the same period in 2022.

Speaker 2

This increase in gas margin reflects higher rates in customer growth, partially offset by the unfavorable effects of warmer winter weather in Maine. Based on weather data collected in the company's gas service areas, On average, there were approximately 9% fewer effective degree days in the 1st 9 months of 2023 compared to the same period in 2022. In Maine, our only non decoupled service area, weather normalized sales increased 3% in the 1st 9 months of 2023 compared to the same period in 2022. We added approximately 800 gas customers compared to the same period in 2022. Through the 1st 9 months of 2023, we estimate that revenue decoupling supported gas margin by approximately $0.20 per share.

Speaker 2

Moving to Slide 8, we provide an earnings bridge comparing year to date 2023 results to 2022. For the 1st 9 months of 2023, adjusted gross margin increased that combined $9,300,000 primarily as a result of higher distribution rates and customer growth, partially offset by warmer winter weather. As a reminder, The results for the 9 months ended September 30, 2022 included the recognition of recoupment amounts related to the company's New Hampshire electric and gas rate case orders, which positively affected margin in 2022. Recoupment is a regulatory treatment in which permanent rate case awards are reconciled back to the effective date of the temporary rate award. Operating and maintenance expenses increased $500,000 largely due to higher operating costs, which are partially offset by lower labor costs.

Speaker 2

The lower labor costs primarily reflect lower retirement benefit service costs and lower restricted stock compensation expense. Depreciation and amortization increased by $3,200,000 Reflecting higher levels of utility plan service and higher amortization of rate case and other deferred costs. Taxes other than income taxes increased by $1,200,000 due to higher property taxes on higher utility plant and service and higher payroll taxes. Interest expense increased $2,000,000 reflecting higher interest expense on short term borrowings, partially offset by lower interest expense on long term debt and higher interest income on regulatory assets. Other expense decreased by $2,000,000 largely due to lower retirement benefit costs.

Speaker 2

And lastly, income taxes increased $1,600,000 reflecting higher pretax earnings in 2023 as well as higher flowback of excess accumulated deferred income taxes in the first half of twenty twenty two as a result of the company's New Hampshire electric and gas rate case orders. Moving to Slide 9. The Maine Public Utilities Commission approved a comprehensive settlement in our gas based rate case proceeding in late September and new rates took effect on October 1. The settlement was based on a forecast to test year, which should reduce earnings attrition and provide a higher likelihood that the company will earn its authorized return on equity. The approved revenue increase is approximately $7,600,000 with an equity layer of 52% and a return on equity of 9.35%.

Speaker 2

The company's accelerated cost recovery mechanism for infrastructure replacement remains in place with our next distribution rate increase expected to take effect in May 2024. We consider this as a successful outcome that results in just and reasonable rates, is beneficial to all stakeholders and highlights the positive relationship we have with our regulators. Turning to Slide 10. Base rate case filings for the Fitchburg Electric and Gas Divisions were submitted on August 17 with requested increases of approximately $6,800,000 for the electric division and $10,900,000 for the gas division. These requested revenue increase amounts include the transfer to base rates of certain revenues that are currently collected through capital investment recovery mechanisms.

Speaker 2

These filings include a requested equity layer of 52.26 percent and a return on equity of 10.5 percent for the electric division and 10.75% for the gas division. These rate cases include proposals for multi year performance based rate making structures with annual inflation based adjustments, which are aligned with department precedent, promoting regulatory efficiency and bill stability. The performance based rate making proposal The electric division includes a capital investment recovery mechanism, which would provide revenue to address the portion of the revenue requirement for capital investments not recovered through the inflation adjustment. For the Gas division, the company's current cost recovery mechanism for infrastructure replacement, the gas system enhancement program remains in place. Public hearings are scheduled for November 9 November 29, and we look forward to working with all stakeholders throughout this proceeding.

Speaker 2

We We'll provide additional updates on these proceedings during our next earnings call. Turning to Slide 11. Our investment outlook remains strong and capital spending has increased by over $12,000,000 in 2023 as compared to 2022. The 2023 capital spending level is consistent with our capital investment plan. Over the past 3 years, Our rate base growth has been approximately 7.4%, near the midpoint of our long run rate base growth guidance of 6.5% to 8.5%.

Speaker 2

I also want to mention that the Kingston solar project is progressing well and we expect to begin site work this winter. In Massachusetts, we recently submitted our draft electric sector modernization plan, which addresses the Commonwealth's pathway to decarbonization and includes investments that we believe need to be made to support the Commonwealth's goals. This plan includes significant investments that are not currently reflected in our capital investment plan. And if approved, We expect this incremental capital spending would positively affect rate based growth. The draft plan is currently under review and our final plan will be submitted early next year.

Speaker 2

Moving to Slide 12, our balance sheet remains strong and our credit metrics continue to for our investment grade credit ratings. In July, we issued $25,000,000 of senior unsecured notes at Fitchburg Gas and Electric, which was used to refinance short term borrowings and for other general corporate purposes. Our capital structure is balanced and cash flow from operations continues to fund the majority of our investment plan. We have no floating rate long term debt and we also do not have any significant long term debt maturities until 2026. We will provide an update to our investment and financing plan during our year end earnings call.

Speaker 2

I will now turn the call back over to Tom.

Speaker 1

Great. Thank you, Dan. I will be ending on Slide 13. Through the 1st 9 months of this year, we have once again highlighted how Unitil delivers continues to deliver on its commitments. We maintain our status as a premium utility.

Speaker 1

We continue to provide long term earnings growth in line with peers while paired with a lower risk profile. We are a fully regulated company that is well diversified as a combination utility operating in 4 regulatory jurisdictions and with decoupled rate structures for majority of our customers. Our service areas not only offer strong economic growth, but lower risk as the areas we serve have fewer severe weather events than most areas of the country. Our distinct growth prospects are stronger than ever, and we believe we will continue to deliver solid and sustainable value for all stakeholders for many We welcome the challenges and opportunities ahead as we play a key role in the clean energy transition. We look forward to providing additional updates on our progress and strategies during our year end earnings call.

Speaker 1

With that, I'll turn it back over to Todd.

Operator

Thanks, Tom. That rests with the material for this call. Thank you for attending. I will now turn the call over to the operator who will coordinate questions.

Speaker 3

Thank Our first question comes from the line of Shar Pourreza of Guggenheim Partners. Your line is now open.

Speaker 4

Hey, guys. Good morning. Good morning, Shar. Good morning. I guess the

Speaker 3

first thing is, How should we sort

Speaker 4

of think about the right base to use going forward for the 5% to 7% to go off of, right? So Should we be growing 5% to 7% off the higher 23% base, which is now north of 7%. I guess how do we sort of think about it in light of the strong results this quarter this year.

Speaker 2

Shahriar, it's a good question. When we look at the 5% to 7% growth rate, the way that we think about the base year is 2022.

Speaker 4

Got it. Okay. That answers that. And then just on the 5% to 7%, which you just obviously reiterated, Can we just get a sense around what you're assuming in plan as we're thinking about earned returns? So are you assuming lag is diminished through the trajectory As well as what are you currently assuming around equity needs as we think about the profile and shape of that 5% to 7%?

Speaker 4

Thank you very much.

Speaker 2

Sure. So I guess, Charles, I'll start with the second question first. On equity needs. We have the financing wheel that's presented in the presentation that looks out over the 5 year plan. And so as we think about funding the capital investment plan over that time, that's the percentage of equity that we would need.

Speaker 2

And we'll Do that as we can over that 5 year period. I forgot the first part of the call.

Speaker 4

Just around regulatory lag and so the 5% to 7%, just trying to figure out what the shape of that 5% to 7% is, So you answered the financing side, but just around should we assume midpoint, is it linear? What's built into that 5% to 7%? Should we assume higher end because the regulatory lag is diminishing through time just getting a sense around that profile.

Speaker 2

Yes. I think that's a good question. I think a midpoint assumption on the further years Probably fair for right now. And then as we mentioned today for 2023, we do expect to be above the higher end of that 5% to 7% range.

Speaker 3

Okay, perfect. That's all

Speaker 4

I had guys. I appreciate the clarity. Thank you.

Speaker 1

Great. Thank you.

Speaker 3

Thank you for your question. This does conclude today's call. Thank you for your participation. You may now disconnect.

Powered by Quartr
Earnings Conference Call
Unitil Q3 2023
00:00 / 00:00