Unitil Q2 2024 Earnings Call Transcript

Quartr
Provided by Quartr
August 6, 2024

Key Takeaways

  • Unitil reported Q2 net income of $4.3 M or $0.27 per share, up $0.02 year-over-year, and reaffirmed its full‐year guidance and long‐term earnings growth target of 5–7%.
  • The company agreed to acquire Bangor Natural Gas for $70.9 M, adding ~8,500 customers in Maine, subject to Maine PUC approval, with closing expected by Q1 2025.
  • Unitil outlined a ~$910 M capital investment plan through 2028 focused on natural gas conversions, electric grid modernization, and a New Hampshire utility‐scale solar project slated for service by mid-2025.
  • A constructive Massachusetts rate case granted Fitchburg electric and gas divisions a 9.4% ROE, maintained revenue decoupling, and approved five-year performance-based rate plans to drive efficiency.
  • Adjusted electric and gas margins rose due to higher distribution rates and customer growth—adding ~750 electric and ~1,100 gas customers in the first half—while operating expense increases remained below inflation.
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Earnings Conference Call
Unitil Q2 2024
00:00 / 00:00

There are 4 speakers on the call.

Operator

Good day, and thank you for standing by. Welcome to the Second Quarter 2024 Unitil Earnings Conference Call. At this time, all participants are in 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, Christopher Golding, Vice President of Finance and Regulatory Service.

Operator

Please go ahead.

Speaker 1

Executive Officer and Dan Harstack, Senior Vice President, Chief Financial Officer and Treasurer. Also with us today are Bob Hebert, 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 unitil.com. We will refer to that information during this call.

Speaker 1

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 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. Forward looking statements speak only as of today, and we assume no obligation to update them.

Speaker 1

The 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 Meissner.

Speaker 2

Great. Thanks, Chris. Good afternoon, everyone, and thank you for joining us. I'm going to begin on Slide 3, where today we announced 2nd quarter net income of $4,300,000 or $0.27 per share, representing an increase of $0.02 per share over the same period of 2023. Through the first half of the year, net income was 31 $500,000 or $1.96 per share, representing an increase of $0.20 per share over the same period in 2023.

Speaker 2

Our results for the quarter were in line with our expectations and we are confident that our full year earnings will be within our long term guidance range. Looking beyond 2024, we reaffirm our long term earnings growth of 5% to 7%, supported by rate base growth in the range of 6.5% to 8.5% and a dividend payout ratio between 55% 65%. We continue to execute on our regulatory agenda, capital investment plan and cost control initiatives and believe that our consolidated GAAP return on equity of 9.8% over the last 12 months reflects these efforts. Our regulatory agenda remains active and we recently received an order in our Fitchburg electric and gas rate cases. We view that order as constructive with many items approved as filed including the company's performance based rate plans.

Speaker 2

Dan will provide additional detail about these rate cases later on the call. As I will outline in greater detail on the next slide, we reached an agreement with Hope Utilities to purchase Bangor Natural Gas Company, a fully regulated natural gas distribution utility. We expect the transaction to close by the end of the Q1 of 2025 subject to approval by the Maine Public Utilities Commission. We view Bangor as a natural complement to our existing operations and believe our shared commitment to affordability, safety and outstanding service will benefit Bangor's customers and communities. Moving now to Slide 4.

Speaker 2

As I've talked about in prior calls, when we evaluate potential acquisitions, we look for opportunities that meet certain criteria. These include utility operations regulatory jurisdictions, proximity to our existing service areas, opportunities in colder climates where natural gas offers a cleaner and more affordable energy choice than other fuels, transactions that are accretive over the long term and opportunities that align with our strategic objectives. Bangor Natural Gas meets all of these criteria. Bangor Natural Gas is a fully regulated gas distribution company that owns and operates approximately 3 50 miles of pipeline throughout the Greater Bangor area of Maine. The Bangor distribution system is relatively new and is constructed of steel and plastic mains with no cast iron or other leak prone pipe.

Speaker 2

The company serves about 8,500 customers and has historically experienced strong customer growth with an average growth rate of roughly 5% annually over the last 5 years. This strong customer growth is supported by the lowest natural gas rates in Maine. In fact, based on recent fuel prices, the cost to heat a home with natural gas in the Bangor area is less than half the cost of heating a home with fuel oil and about a third the cost of heating with propane. Bangor also has an interconnection agreement in place with the renewable natural gas facility capable of delivering meaningful levels of pipeline quality natural gas, which we believe can support Maine's climate policies. The purchase price is $70,900,000 subject to customary adjustments for working capital and transaction expenses.

Speaker 2

The enterprise value represents a multiple of approximately 1.2x estimated rate base as of year end 2023. S and P views the transaction as credit neutral even if it is financed primarily with debt, although we expect to finance this transaction with a balanced mix of equity and debt similar to our other regulated utilities. We look forward to working with other interested parties during the pendency of the approval proceeding before the Maine Public Utilities Commission. Turning now to Slide 5, our capital investment plan through 2028 totals approximately $910,000,000 with opportunities for additional investments. As one example, we previously discussed the high penetration of fuel oil and propane in Maine and the financial and environmental benefits that natural gas can bring to residential customers heating with those fuels.

Speaker 2

We see the Bangor transaction as providing additional opportunities for conversions and expansion. We also believe that further electric system modernization will be required to satisfy the increasing demand for electrification and customer growth and also to enhance grid resilience and to enable smart technologies will provide customers with information to more effectively control their energy use and costs. These requirements may provide further upside to our capital plan. Lastly, I'd like to provide an update on our utility scale solar project here in New Hampshire. Site work is on schedule and is expected to be completed in the Q3 of 2024 with facility construction beginning shortly thereafter.

Speaker 2

We expect the project to be placed in service by the end of the Q2 of 2025. With that, I will now pass it over to Dan who will provide greater detail on the Q2 results. Dan?

Speaker 3

Thank you, Tom. Good afternoon, everyone. I'll begin on Slide 6. As Tom mentioned, today we announced 2nd quarter net income of $4,300,000 or $0.27 per share, an increase of $0.02 per share compared to the same period in 2023. For the 1st 6 months of the year, net income was $31,500,000 an increase of $3,200,000 or $0.20 per share compared to the corresponding period in 2023.

Speaker 3

Earnings growth reflects higher adjusted electric and gas margin, partially offset by higher operating expenses. Our results for the first half of twenty twenty four are consistent with the quarterly earnings per share distribution discussed in the past and provided in the appendix of this presentation. We expect the results for the remainder of 2024 will be largely consistent with this quarterly distribution. Turning to Slide 7. I will discuss our electric and gas adjusted gross margins.

Speaker 3

I will start with our electric operations. Electric adjusted gross margin was $52,000,000 for the 6 months ended June 30, 2024, an increase of $1,100,000 compared to the same period in 2023. This increase in electric adjusted gross margin reflects higher distribution rates and customer growth. The company added approximately 750 new electric customers compared to the same period in 2023. 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.

Speaker 3

Moving to gas operations. Gas adjusted gross margin was $92,300,000 for the 1st 6 months ended June 30, 2024, an increase of $8,100,000 or approximately 10% compared to the same period in 2023. The increase in gas adjusted gross margin reflects higher distribution rates and customer growth. The company added approximately 1100 new gas customers compared to the same period in 2023. Approximately 60% of the company's gas customers are under decoupled rates.

Speaker 3

Moving to Slide 8, we provide an earnings bridge comparing year to date 2024 results to 2023. As I just discussed, adjusted gross margin for the 1st 6 months of the year increased by $9,200,000 primarily driven by higher distribution rates and customer growth. Operation and maintenance expenses increased $400,000 primarily reflecting higher labor costs. This nominal increase of approximately 1.1% is well below broader inflation of about 3% over the same period. Depreciation and amortization increased $2,800,000 reflecting higher levels of utility plan service and higher amortization of storm costs.

Speaker 3

Taxes other income taxes increased $700,000 reflecting higher local property taxes on higher utility plan service as well as higher payroll taxes. Interest expense increased $600,000 reflecting higher interest expense on short term borrowings and higher levels of long term debt, partially offset by higher interest income on regulatory assets. Other expense increased by $500,000 largely due to higher retirement benefit costs. And lastly, income taxes increased $1,000,000 reflecting higher pretax earnings. Turning to Slide 9.

Speaker 3

As Tom noted, we recently received the rate case order for our electric and gas divisions in Massachusetts and new base distribution rates for both divisions took effect on July 1. We believe the order, which approved many of the company's proposals, is constructive for all stakeholders. With our continuing focus on operating efficiency, the order should provide Fitchburg with the opportunity to earn its authorized return on equity over the 5 year term. The order approved a return on equity of 9.4 percent for both the electric and gas divisions and the company's actual capital structure, which includes 52.26 percent common equity. Revenue decoupling remains in place for both divisions with the gas division moving from a revenue per customer model to a revenue target model.

Speaker 3

The rate case order also approved 5 year performance based rate plans, which I will discuss in greater detail on the next slide. The annual distribution rate award for the electric division was $4,700,000 This award includes revenue transfers between capital tracker mechanisms and base rates, which totaled $2,500,000 Net of these revenue transfers, the annualized revenue increase is approximately $2,200,000 The annual distribution rate award for the gas division was $10,100,000 Similar to the Electric division, this amount includes the transfer of revenues from capital tracker mechanisms to base distribution rates. Net of the $4,900,000 transfer for the gas division, the net annualized revenue increase is $5,200,000 The order also approved higher depreciation rates, which will result in an annual depreciation expense increase of about $2,600,000 This increase in gas depreciation expense will not affect earnings as it is offset with higher revenues. Our regulatory agenda remains busy and we expect to file a Granite State gas transmission rate case with FERC before the end of the year. Moving now to Slide 10.

Speaker 3

I would like to provide an overview of the performance based rate plans approved for a 5 year term for Pittsburgh. We believe the performance based rate plans support the clean energy transition while reducing regulatory burden and promoting efficiencies and cost control. Annual rate changes will take effect each July 1st from 2025 through 2028. These annual rate changes include inflation increases tied to the GDP price index with a 0% floor and a 5% cap. If inflation increases exceed 2%, a 25 basis point consumer dividend will be applied.

Speaker 3

Exogenous cost adjustments can be included for certain events if the effect is outside of our control and surpasses $110,000 for the electric division and $60,000 for the gas division. If the return on equity exceeds 100 basis points above the authorized return, an earnings sharing mechanism would be triggered and 75% of excess earnings above 10.4% would be shared with customers. With regards to the electric division, a KBAR mechanism that recovers property taxes and the return on and off capital investment is part of the annual base rate increase and effectively replaces the previous electric capital cost recovery mechanism. The KBAR mechanism contributes to the predictability of electric revenues, while mitigating the regulatory burden to all parties. The grid modernization capital tracker remains in place outside of the electric PBR structure.

Speaker 3

Because the gas infrastructure replacement tracker remains in place, there is no KBAR mechanism for the company's gas operations. Turning to Slide 11. We consider our balance sheet a strategic asset and continue to expect operating cash flows less dividends to fund the vast majority of our capital investment plan with the remaining financing needs met through a combination of debt and equity. We continue to maintain investment grade credit ratings through our focus on responsibly managing the balance sheet and generating strong cash flows. Our financing plan supports our investment grade credit ratings and in 2023, we were 500 basis points above our FFO to debt downgrade threshold.

Speaker 3

Consistent with past practice, 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 revolving credit facility. Maintaining our strong balance sheet and our investment grade credit ratings remain a top priority. I'll now turn the call back over to Tom.

Speaker 2

Thanks, Dan. Wrapping up on Slide 12, we've enjoyed a strong first half of the year and we're currently earning our authorized returns on a consolidated basis. Recent regulatory outcomes remain constructive and our capital investment plan remains on track. Our credit metrics continue to compare favorably to our peers ensuring access to capital to support our growth. I'm excited about the future and look forward to providing additional details about the Bangor acquisition on future calls.

Speaker 2

With that, I'll pass it back to Chris.

Speaker 1

Thanks, Tom. That wraps up the prepared materials for this call. Thank you for attending. I'll now turn the call over to the operator who will coordinate questions.

Operator

Thank you. At this time, we will now conduct the question and answer session.

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