Unitil Q1 2024 Earnings Call Transcript

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May 7, 2024

There are 5 speakers on the call.

Operator

Good day and thank you for standing by. Welcome to the Q1 2024 Unitel Earnings Conference Call. At this time, all participants are in a listen only mode. After the speakers' presentation, there will be a question and answer Please be advised that today's conference is being recorded. I would now like to hand the conference over to your first speaker today, Chris Golding, Vice President of Finance and Regulatory Services.

Operator

Please go ahead.

Speaker 1

Good morning, and thank you for joining us to discuss Unitil Corporation's Q1 2024 Financial Results. Speaking on the call today will be Tom Meissner, Chairman and Chief Executive Officer and Dan Hurstach, Senior Vice President, Chief Financial Officer and Treasurer. Also with us today are Bob Havart, President and Chief Administrative Officer and Todd Diggins, Chief Accounting Officer and Controller. 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 Investors section of our website at unitill.com.

Speaker 1

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 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 10Q and other documents we have filed with or furnished to the Securities and Exchange Commission.

Speaker 1

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 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 and CEO, Tom Eisener.

Speaker 2

Great. Thanks, Chris, and good morning, everyone. Thank you for joining us. Beginning on Slide 3, today we announced strong results for the Q1 of 2024 with net income of $27,200,000 or $1.69 per share, which represents an increase of $0.18 per share or approximately 12% over the Q1 of 2023. We are executing well in all areas of our business, which has allowed us to fully earn our authorized regulatory returns over the last 12 months on a consolidated basis.

Speaker 2

We remain focused on operational efficiency and have continued our disciplined approach to cost management as reflected in the minimal increase in operation and maintenance expenses in the 1st 3 months of 20 20 4 compared to 2023. We are reaffirming our long term guidance of 5% to 7% growth in earnings per share supported by long term rate base growth in the range of 6.5% to 8.5% and a dividend payout ratio between 55% 65%. I'll also mention that corporate sustainability is fully embedded in all of our key initiatives, strategies and values. We were pleased to learn that Unitil was recently honored with the 2024 Climate and Energy Sustainability Award by the New Hampshire Businesses for Social Responsibility. This award is a clear recognition of our commitments to the same sustainability of our company, our communities, our customers and our planet.

Speaker 2

Moving now to Slide 4, I'd like to provide a brief update on our Kingston, New Hampshire solar project. The project received all required permits earlier in the year and construction began in February. Everything is proceeding on schedule and we fully expect the facility to be operational in the first half of twenty twenty five. The project has continued to receive positive recognition from a variety of stakeholders and was recently nominated for the Project of the Year Energy Champion Award by Clean Energy New Hampshire. With that, I'll now pass it over to Dan who will provide greater detail on the first quarter results.

Speaker 2

Dan?

Speaker 3

Thank you, Tom. Good morning, everyone. I'll begin on Slide 5. As Tom mentioned, today we announced 1st quarter net income of $27,200,000 or $1.69 per share. Net income increased $3,100,000 or $0.18 per share compared to the same period in 2023, representing approximately 12% growth in earnings per share.

Speaker 3

In Maine, our only non decoupled service area, weather negatively affected earnings by approximately $0.02 per share compared to 2023 and by approximately $0.10 per share compared to normal weather conditions. Despite the unseasonably warm weather, we are pleased with the earnings growth we achieved, which was largely driven by the successful rate case outcome in Maine and our disciplined approach to cost management. Turning to Slide 6, I will discuss our electric and gas adjusted gross margins. Beginning with electric operations, for the 3 months ended March 31, 2024, electric adjusted gross margin was $27,100,000 an increase of $400,000 or 1.5% compared to the same period in 2023. The increase in electric adjusted gross margin reflects higher distribution rates and customer growth with a year over year increase of approximately 500 customers.

Speaker 3

As a reminder, the company's electric distribution revenues are substantially decoupled, which eliminates the dependency of distribution revenue on the volume of electricity sales. Moving to gas operations. For the 3 months ended March 31, 2024, gas adjusted gross margin was $61,000,000 an increase of $6,100,000 or approximately 11% compared to the same period in 2023. The increase in gas adjusted gross margin reflects higher distribution rates and customer growth, partially offset by warmer winter weather. In Maine, weather normalized unit sales increased 0.3% year over year.

Speaker 3

Based on weather data collected in the company's main service area, this quarter was one of the warmest winter periods over the past 50 years. However, approximately 60% of the company's gas customers are under decoupled rates, which mitigates the effects that lower sales due to warmer weather have on a portion of our gas distribution revenue. Higher gas adjusted gross margin for the 3 months ended March 31, 2024 is in large part due to the recent main rate case and the new rates that took effect on October 1, 2023, as well as a year over year increase of approximately 1100 gas customers. One additional note for gas adjusted gross margin, new distribution rates recently took effect on May 1, 2024 for the company's gas infrastructure replacement programs in both Maine and Massachusetts, providing combined rate relief of approximately $4,300,000 on an annual basis. Moving to Slide 7, we provide an earnings bridge comparing 2024 Q1 results to the same period in 2023.

Speaker 3

As I just discussed, 1st quarter adjusted gross margin increased $6,500,000 primarily as a result of higher distribution rates and customer growth, partially offset by warmer winter weather in 2024. Operation and maintenance expenses increased $100,000 due to higher utility operating costs. This nominal increase in operation and maintenance expenses is well below the increased inflation over the same period. While we did experience storm events in the 1st few months of the year, we have storm recovery mechanisms in both Massachusetts and New Hampshire that mitigate the effect of storm costs on earnings. Depreciation and amortization increased by $1,300,000 reflecting higher levels of utility plant and service and higher amortization of storm and other deferred costs.

Speaker 3

Taxes other than income taxes increased by $400,000 due to higher local property taxes on higher utility plant and service and higher payroll taxes. Interest expense increased $200,000 reflecting higher interest expense on short term borrowings and higher levels of long term debt, partially offset by higher interest income on regulatory assets and higher allowance for funds used during construction. Other expense increased by $300,000 largely due to higher retirement benefit costs. And lastly, income taxes increased $1,100,000 reflecting higher pre tax earnings in 2024. Turning to Slide 8.

Speaker 3

Our Fitchburg Electric and Gas base rate proceedings are progressing as expected and we expect to receive orders in these cases in late June. We concluded evidentiary hearings in the Q1 and we anticipate new base distribution rates will become effective on July 1. The requested gross revenue increase is approximately $6,800,000 for the electric division and $11,200,000 for the gas division. The final revenue increases are expected to be net of certain revenues that are currently collected through capital trackers. We have proposed the inclusion of $2,700,000 $4,200,000 of electric and gas revenues respectively in base rates, which were previously recovered through capital trackers.

Speaker 3

After these amounts, the net revenue increase would be approximately $4,100,000 for the electric division and $7,000,000 for the gas division. As a reminder, we proposed 5 year performance based rate making plans for both the electric and gas divisions. We look forward to providing additional updates regarding these rate cases during our next earnings call. Moving to Slide 9. As noted during our previous earnings call, we recently submitted our electric sector modernization plan in support of Massachusetts climate goals.

Speaker 3

Evidentiary hearings regarding the company's plan and the plans of other Massachusetts utilities recently concluded. Our plan highlights the substantial investments that will be necessary to support the Commonwealth's goals and outline certain projects that represent approximately $43,000,000 in capital spending through 2028, a portion of which would be incremental to our current capital investment plan. Moving to Slide 10. Our capital investment plan for 2024 is progressing as planned. As noted during our prior earnings call, our projected 5 year investment plan totaled $910,000,000 an increase of approximately 47% over the prior 5 years.

Speaker 3

Our thoughtful approach to prudent system investment informs the capital investment plan and we believe that this approach will enable continued stable rate based growth within the range of 6.5% to 8.5%. We continue to expect operating cash flows less dividends to fund the vast majority of our financing plan with the remaining financing needs met through a combination of debt and equity. Our financing plan will maintain our strong balance sheet and support our investment grade credit ratings. Turning to Slide 11. We continue to maintain investment grade credit ratings through our focus on responsibly managing the balance sheet and generating strong cash flows.

Speaker 3

While our current borrowing levels and short term rates were higher than the Q1 of 2023 resulting in approximately $1,000,000 of higher short term and long term interest expense, Net interest expense only increased by $200,000 As you can see from the chart on this slide, approximately 80% of our short term debt balance is offset by carrying charges on construction balances and regulatory deferrals. Later this year, we expect to recapitalize portions of our short term debt with long term debt to reduce interest rate volatility and enhance our liquidity profile by reducing the outstanding balance on our credit facility. Maintaining our strong balance sheet and our investment grade credit ratings remain a top priority and we believe we compare favorably to other utility companies on certain credit metrics such as FFO to debt. I will now turn the call back over to Tom.

Speaker 2

Thanks, Dan. Moving on to Slide 12, our best in class operational performance was on full display in early April as our emergency response organization responded to a major snow and windstorm affecting our New Hampshire service area. During this event, we did not experience any mainline outages, which is a credit to our system hardening investments and storm resiliency efforts, including our vegetation management programs. As a result of being able to restore power quickly to our customers, we were able to provide mutual assistance to neighboring utilities. Our customer satisfaction currently ranks among the top utilities in the Eastern United States and is the best in the Northeast.

Speaker 2

We've achieved these high levels of customer satisfaction and operational excellence while managing O and M expense increases well below broader inflationary metrics. As Dan mentioned earlier, O and M expense was only higher by $100,000 compared to 2023. It was actually $300,000 lower than the Q1 of 2022. I'll also mention that we recently completed a significant upgrade of our customer facing information and billing systems. As part of this upgrade, we introduced new functionality including a mobile application that will enable customers to quickly and easily access their usage data, billing information and to update various profile settings.

Speaker 2

We believe this enhanced functionality will be helpful to customers in managing their energy needs and will continue to enhance the customer experience. Wrapping up on Slide 13, we had a strong start to the year. Looking ahead, we expect full year earnings in 2024 to be consistent with our long term guidance. Our capital investment plan remains on track. Regulatory outcomes remain constructive.

Speaker 2

And as mentioned earlier, we are fully earning our authorized returns. We expect our current dividend payout to remain at the lower end of our target range after increasing the 2024 dividend by $0.08 on an annualized basis, which supports our competitive and stable expected shareholder returns of 8% to 10%. With that, I'll pass the call back to Chris.

Speaker 1

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.

Operator

Thank you. At this time, we will conduct the question and answer session. Our first question comes from Shelby Tucker of RBC. Your line is now open.

Speaker 4

Great. Thank you. Good morning, everyone.

Operator

Good morning,

Speaker 4

Brian. A question on the on your kind of cadence for 2024. Looking at this at the Q1, obviously, a better number than expected despite the storm activity. You've got a rate case in July with Fitchburg. And even if you look at the Q4 of last year, it was not a particularly stellar quarter in terms of being outsized.

Speaker 4

If you start adding that altogether, it looks like you could be trending not just to the upper end of the 5% to 7%, but even above that. Is there anything in the subsequent quarters for this year that we should be thinking about that could bring you more within the 5% to 7%?

Speaker 3

Yes. Shelby, it's Dan. I think interest rates is certainly a consideration. We've been able to effectively navigate the higher rates through the Q1, but I think we'll see the effects of higher interest expense through the rest of the year. We've done a really good job on O and M.

Speaker 3

I still think that for the full year, we would expect that to be under the levels of inflation for the same period, but that may be a little bit higher than just the 0.1% increase we saw in the Q1. So I think you're right. There's a lot of good that we see ahead of us this year for Massachusetts for possibly Grand State as well. But there are a couple of headwinds that we think will keep us squarely in the 5% to 7%.

Speaker 4

Got it. Thanks very much.

Operator

Thank you.

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Earnings Conference Call
Unitil Q1 2024
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