Unitil Company (NYSE:UTL) Q1 2020 Earnings Convention Name April 30, 2020 2:00 PM ET
Todd Diggins – Director of Finance
Tom Meissner – Chairman, President and Chief Govt Officer
Larry Brock – Senior Vice President, Chief Monetary Officer and Treasurer
Dan Hurstak – Controller
Todd Black – Senior Vice President, Exterior Affairs and Buyer Relations
Convention Name Individuals
Alex Morgan – Financial institution of America
Shelby Tucker – RBC Capital Markets
Wayne Archambo – Monarch Companions
Girls and gents, thanks for standing by. And welcome to the Unitil Company First Quarter 2020 Earnings Convention Name. Right now, all contributors are in a listen-only mode. [Operator Instructions]. I’d now like handy the convention over to your speaker for right this moment, Mr. Todd Diggins, Director of Finance. Sir, you could start.
Good afternoon. And thanks for becoming a member of us to debate Unitil Company’s first quarter 2020 monetary outcomes. With me right this moment are Tom Meissner, Chairman, President and Chief Govt Officer; Larry Brock, Senior Vice President, Chief Monetary Officer and Treasurer; Dan Hurstak, Controller; and Todd Black, Senior Vice President, Exterior Affairs and Buyer Relations.
We’ll focus on monetary and different details about our first quarter outcomes on this name. As we talked about within the press launch asserting the decision, we’ve got posted that info together with a presentation to the Buyers part of our web site at www.unitil.com. We’ll confer with that info throughout this name.
On Slide 2, the feedback made right this moment about future working outcomes or future occasions are forward-looking statements underneath the protected harbor provisions of the Non-public Securities Litigation Reform Act of 1995. Ahead-looking statements inherently contain dangers and uncertainties that might trigger our precise outcomes to vary materially from these predicted. Statements made on this name must be thought-about along with cautionary statements and different info contained in our most up-to-date annual report on Type 10-Okay and different paperwork we’ve got filed with or furnished to the Securities and Exchange Fee. Ahead-looking statements converse solely as of right this moment, and we assume no obligation to replace them.
This presentation comprises non-GAAP measures. The accompanying supplemental info extra totally describes these non-GAAP measures and features a reconciliation to the closest GAAP measures. The corporate believes these non-GAAP measures are helpful in evaluating its efficiency.
I am shifting on to Slide 3. Earlier than we begin, I might prefer to introduce some current modifications in senior administration. Larry Brock was lately appointed as Senior Vice President, Chief Monetary Officer and Treasurer. Larry has been with Unitil for over 25 years, serving most lately as Chief Accounting Officer and Controller. Larry’s huge expertise ensures sturdy management to information Unitil ahead.
Dan Hurstak has additionally joined the administration workforce as the corporate’s new Controller. Dan has almost 20 years of accounting expertise, most lately serving as Vice President, Company Accounting for Constancy Investments. Previous to that, Dan labored for 15 years at PricewaterhouseCoopers. I’ll now flip the decision over to Chairman, President and CEO, Tom Meissner.
Thanks, Todd, and thanks, everybody, for becoming a member of us right this moment. I will start on Slide 5. However first, let me simply say that our ideas and sympathies are with the victims of the coronavirus and their households. This can be a very troublesome time for our prospects and communities and our highest precedence continues to be the protection of our workers and that of our prospects.
In response to the continuing pandemic, we carried out our disaster response plan to execute preventative and proactive measures throughout this unprecedented time. We’re happy that there is been no interruption or degradation in our customer support because of this emergency, and no affect on our potential to offer protected and dependable service. The gasoline and electrical providers we offer are extra important right this moment than they’ve ever been earlier than for our prospects and our communities.
To assist our prospects throughout this troublesome time, we have suspended all service disconnections and late fee charges. As well as, we have created a fund to offer monetary help to residential prospects who’ve suffered COVID-19-related job loss or diminished wages. In complete, we have donated $225,00Zero to businesses inside our service areas to assist aid efforts. We even have an worker fundraising marketing campaign ongoing that has raised extra funding for COVID-19 aid efforts, and we have seen sturdy response from our workers.
Operationally, the corporate has continued to offer protected and dependable service all through this ongoing emergency. We rapidly adopted protocols to make sure social distancing within the subject whereas guaranteeing operational continuity. Workplace employees have seamlessly transitioned from work to residence the place acceptable. And even with workers working remotely, we proceed to reply buyer inquiries and have seen no decline within the stage of service.
On high of the continuing COVID-19 emergency, we additionally efficiently responded to 2 storm occasions that created widespread outages in our service areas, and we have been ready to take action and restore service rapidly following every occasion. Our workers have risen to this extraordinary problem, and the corporate as a complete, stays ready and able to adapt. Larry will converse to the monetary impacts of the COVID-19 state of affairs momentarily.
Transferring to Slide 6. Immediately, we introduced web revenue of $15.2 million or $1.02 per share for the primary quarter of 2020, which was a lower of $11.Three million or $0.76 per share in comparison with 2019. Within the first quarter of 2019, the corporate acknowledged a onetime web acquire of $9.Eight million or $0.66 in EPS on the corporate’s divestiture of its nonregulated enterprise unit Usource. Adjusting for this divestiture acquire, web revenue was down $1.5 million or $0.10 per share in comparison with 2019, and displays hotter winter climate in 2020. The corporate estimates that the warmer-than-normal winter climate negatively impacted web revenue by roughly $3.1 million or $0.20 per share.
On Slide 7, we once more summarized our present 5 12 months funding plan. This outlook has not modified from what was reported final quarter, and we don’t presently anticipate that the COVID-19 emergency will materially affect our 2020 funding plan. We nonetheless anticipate to take a position over $680 million in our gasoline and electrical methods over the following 5 years, which is a rise of over 25% in comparison with the earlier 5 years. This funding will proceed to fund gasoline infrastructure modernization, gasoline system enlargement and electrical grid modernization. This funding ought to preserve our historic fee base progress of seven.5% to eight.5% over the foreseeable future.
Lastly, on Slide 8, we beforehand introduced that we elevated our annual dividend to $1.50 per share. We don’t presently foresee any change to our present dividend coverage because of the COVID-19 emergency. Nevertheless, we are going to proceed to strategically analyze our dividend coverage topic to EPS progress and financing wants. Now I am going to flip the decision over to Larry, who will take us by the numbers.
Thanks, Tom. Good afternoon, everybody. I am going to start my remarks on Slide 9. Earlier than reviewing our gasoline and electrical gross sales exercise, I might prefer to briefly speak about hotter winter climate that Tom beforehand talked about. To place the nice and cozy winter climate into perspective, quarter one winter climate was 11.5% hotter than 2019 and 13.2% hotter than regular, primarily based on the corporate’s Diploma Day evaluation. This was one of many warmest winters on document in our service areas, and unfavorably impacted gross sales in each the gasoline and electrical divisions. In complete, the corporate estimates that if climate had been nearer to regular, web revenue would have been larger by about $3.1 million or $0.20 per share.
Turning to Slide 10. Our year-to-date gasoline adjusted gross margin is $42.Four million, which is a lower of $1.1 million over 2019. This lower was primarily pushed by the hotter winter climate and decrease gross sales, which had an affect in comparison with 2019 of $3.2 million. This lower in margin was partially offset by the optimistic impacts of upper gasoline distribution charges in 2020 of $1.Four million and buyer progress affect of $0.7 million.
Pure gasoline therm gross sales decreased 6.7% in comparison with the primary quarter of 2019. Given the milder winter climate in 2020, the corporate estimates that weather-normalized gasoline therm gross sales, excluding decoupled gross sales, have been up 1% year-over-year. We’re presently serving 1.3% or about 1,100 extra gasoline prospects than on the identical time in 2019.
Subsequent, on Slide 11. Our year-to-date electrical adjusted gross margin is $23.1 million, which is flat to 2019. Electrical gross sales margins within the interval have been positively affected by larger electrical distribution charges of $0.6 million. Nevertheless, this optimistic distinction was offset by the affect of the hotter winter climate and decrease common utilization of the identical $0.6 million.
Complete electrical kilowatt hour gross sales elevated 0.8% in comparison with the primary quarter of 2019. The rise in gross sales primarily displays buyer progress and elevated utilization by two massive industrial prospects within the firm’s Massachusetts service space. The corporate’s Massachusetts service space operates underneath a income decoupling mechanism, and due to this fact, the elevated gross sales of the 2 massive industrial prospects don’t affect electrical gross margin. We’re presently serving 0.7% or about 700 extra electrical prospects than on the identical time in 2019.
Now, turning to Slide 12. We offer an earnings reconciliation evaluation evaluating our 2020 first quarter web revenue to our outcomes for the primary quarter of 2019. I might like to notice that this format is barely totally different from the Type 10-Q as we isolate the affect of the Usource divestiture and associated revenues and bills. Within the supplemental presentation we’ve got offered, a reconciliation to the assertion of earnings that was offered within the 10-Q.
As we beforehand mentioned, our year-to-date gasoline and electrical gross margins have been decrease than 2019 by $1.1 million, largely because of climate. Core operation and upkeep bills decreased $0.2 million in comparison with the identical interval in 2019. This can be a 1% lower in core O&M. The lower was pushed by decrease utility working prices of $1 million, partially offset by larger unhealthy debt bills of $0.6 million, together with the supply for COVID-19 and better skilled charges of $0.2 million.
Depreciation and amortization was decrease by $0.Three million, reflecting decrease amortization of storm bills and deferred taxes in 2020. Taxes aside from revenue taxes elevated $0.1 million in comparison with 2019, primarily reflecting larger native property tax charges and better ranges of utility plant and repair. Curiosity expense web was flat, reflecting larger curiosity on long-term debt, offset by decrease curiosity on decrease ranges of short-term borrowings at decrease charges. Different expense elevated $0.2 million because of larger retirement profit prices within the interval.
Subsequent, we have remoted the complete Usource affect of $10.Three million, which was realized in 2019. This consists of the after-tax acquire on the divestiture of $9.Eight million along with $0.5 million, which is the online revenue realized from Usource’s operations within the first quarter of 2019 earlier than the divestiture.
Lastly, revenue taxes elevated $0.1 million, reflecting the 2020 efficient tax fee of 23.5%. So that’s our reconciliation of our present web revenue of $15.2 million for the quarter to the $26.5 million we earned within the first quarter of 2019. Now, let’s flip to Slide 13, and I am going to focus on the COVID-19 impacts on our enterprise. We’re carefully monitoring the COVID-19 emergency and its impacts on the monetary well being of the corporate. Probably the most important affect to earnings could possibly be the impact the present financial circumstances have on industrial and industrial gross sales in our non-decoupled service areas, though this can be barely offset by larger gross sales to our residential prospects.
At this level, we’re nonetheless analyzing the extent and length to which C&I utilization could decline because of the emergency. Nevertheless, we estimate that for each 1% drop in C&I utilization, gross sales margin will likely be negatively affected roughly $400,000. As a reminder, roughly half of the corporate’s distribution income is generated by C&I prospects. As a result of moratorium on service disconnections, the corporate expects to have larger ranges of buyer arrears. We’ll be monitoring that exercise, and we’re exploring potential choices to get better unhealthy debt-related bills from the emergency with our state regulators.
I might additionally prefer to level out that vitality provide associated unhealthy debt, which is traditionally roughly 45% of all write-off exercise is tracked in reconciling mechanisms and doesn’t affect the corporate’s earnings. The corporate has no intention to change staffing ranges because of the COVID-19 emergency to make sure continued, protected and dependable service for our prospects.
Wanting on the steadiness sheet and cash circulation. The corporate is continuing forward with our financing and funding plans right now. We have now ample liquidity accessible to us underneath our present line of credit score facility. The ability has a borrowing restrict of $120 million, and we’re presently using roughly half of that restrict. The ability additionally permits us the choice to extend the restrict by $50 million for a mixed $170 million restrict. The corporate has not elected to train that possibility at this level. In complete, the corporate has about $110 million in short-term liquidity accessible.
I might additionally prefer to remind everybody that the corporate has investment-grade credit score scores from
investment-grade credit score scores from S&P and Moody’s, which permits entry to the capital markets as wanted. We don’t see liquidity being a problem for the corporate as a result of emergency. And in consequence, the corporate will proceed as deliberate with our dividend and funding packages.
Transferring on to Slide 14. We’re happy to announce that our fee instances in Maine and Massachusetts have concluded within the first quarter of 2020. We acquired an order from the Maine Public Utilities Fee, approving a rise to base income of $3.6 million or a rise of three.6% over take a look at 12 months working revenues. These charges turned efficient April 1, 2020. The order additionally permitted a return on fairness of 9.48%. Additionally within the first quarter of 2020, we acquired Massachusetts Division of Public Utilities approval for base fee will increase in each our gasoline and electrical divisions. Each fee will increase have been decided by settlements, which have been permitted with licensed returns on fairness of 9.7%.
The gasoline settlement has a complete distribution income improve of $4.6 million, which will likely be phased in over two years. We started gathering nearly all of this income award on March 1, 2020, whereas $0.9 million will start on March 1, 2021. The electrical settlement permits for a distribution fee improve of $1.1 million to change into efficient this November of 2020. The settlement additionally permits for the implementation of a brand new main storm reserve fund, which can assist mitigate expense volatility associated to storms. As well as, the electrical fee settlement additionally permits for continuation of the electrical capital tracker, barely modified to incorporate restoration of property taxes, and likewise the restrict for investments eligible for restoration was greater than doubled.
I wish to point out that every one of those base fee awards replicate the passback of extra deferred revenue taxes, which have been created because of the Tax Reduce and Jobs Act. The passback is mirrored in decrease income however is totally offset by decrease amortization expense. The full annual passback because of these three fee instances is $1.6 million yearly.
Subsequent, we flip to Slide 15, the place we’ve got offered a abstract of great distribution fee modifications in 2020. We have now precedent for long-term fee plans or price trackers throughout all of our utility subsidiaries. In 2020, we’ve got been awarded over $7 million of fee aid. The damaging quantities on Slide 15 for the Fitchburg capital trackers replicate the switch of collections from the tracker mechanisms and into base distribution charges.
Lastly, on Slide 16, we offer the final 12 months precise earned return on fairness in every of our regulatory jurisdictions. Unitil, on a consolidated foundation, earned a complete return on fairness of 8.7% within the final 12 months. This displays the unfavorable winter climate in quarter one. The corporate estimates that normalizing quarter one winter climate, the consolidated ROE would have been 9.5%.
And with that, we thanks for attending right this moment’s name. I’ll now flip the decision over to the operator who will coordinate questions from the viewers.
[Operator Instructions] Our first query comes from Julien Dumoulin-Smith of Financial institution of America. Your line is open.
That is Alex Morgan dialing-in for Julien. I simply had one fast query. However first, I positively needed to congratulate you, Laurence and Dan. My query is on the delicate climate that you just skilled, thanks for being clear on the damaging affect of $0.20. I hoped you would possibly be capable of discuss a bit bit about in case you plan to mitigate any of that with O&M price financial savings in 2020 particularly? Thanks a lot.
By way of the present 12 months, I believe, clearly, the climate affect is simply one of many challenges we’ll face. After which the following affect goes to be from the continuing shutdowns from COVID-19 pandemic. There clearly will likely be some offsets. We have seen reductions in healthcare bills. Actually, journey is down. Coaching is down. Different discretionary bills are down. And we’re presently delaying hiring largely as a result of it is impractical to truly conduct hiring in the mean time. So, there will likely be some offsets, but it surely’s troublesome to quantify offsets which are going to considerably offset the decline that we noticed in gross sales in Q1.
Thanks. Our subsequent query comes from Shelby Tucker of RBC Capital Markets. Your line is open.
Larry, congratulations on the promotion. My query is about decoupling. You’ve got that in Massachusetts. To what extent would you be attempting to hunt perhaps some kind of decoupling within the different two states, New Hampshire and Maine? And in case you have been to think about that, what both regulatory or legislative steps would you want to comply with to attain that?
Shelby, that is Tom. In New Hampshire, curiously sufficient, we’re required to file decoupling proposals by statute as a part of our subsequent fee case filings. So, we do anticipate submitting for decoupling, each gasoline and electrical in New Hampshire in our subsequent fee case cycle. In Maine, we have not actually mentioned whether or not we will likely be pursuing that or not, although, I believe we will likely be giving sturdy consideration to submitting a decoupling proposal in Maine as properly, particularly since we’ll be doing so in New Hampshire for Northern.
After which on the purpose of whether or not laws can be required in any respect. I imply, clearly, New Hampshire, not the case, however for Maine?
Not that I am conscious of. No, I do not consider laws can be required.
[Operator Instructions] Our subsequent query comes from Wayne Archambo of Monarch Companions. Your line is open.
Fitchburg Electrical is actually a one-off asset of yours throughout the mixture of the Maine and New Hampshire properties. Do you see different properties much like that in both Massachusetts or any water utilities in New Hampshire or Maine that you just’d be interested by buying? Is there a lot accessible within the market for such distinctive property, one-off properties? And would you be in any respect interested by buying?
I would not say that there is an abundance of properties accessible, however I’ll say that we’re all the time looking out for properties that might match with our present portfolio of utilities. And definitely, I believe if there was alternatives within the jurisdictions the place we already function, actually, particularly with gasoline and electrical, not so positive about water, however I would not exclude that as a chance. Then sure, I believe that, that might be one thing we wish to contemplate.
Is there a lot accessible? Are there many of those one-off native properties on the market which are on the market?
I do not assume there’s any presently on the market. And for essentially the most half, the properties that we might be interested by are subsidiaries of bigger corporations, who could or could not contemplate divesting of smaller properties up right here in New England.
Would you contemplate any properties outdoors of the three-state space? Is there something accessible in any of the opposite states in New England in any respect?
We will surely contemplate, I believe, states in New England. I believe if we have been going to go outdoors of New England, we would need to assume lengthy and arduous about that. And I can say that I do know there’s some gasoline properties which have come up or will likely be arising in different components of the nation. And I believe the massive concern there’s not wanting to amass gasoline utilities in heat climate areas that could be topic to moratoriums on gasoline service. I believe we really feel fairly snug the place we function being a gasoline and electrical firm in a chilly climate area that we’re comparatively insulated from a number of the motion in that regard.
In your thoughts, what kind of borrowing capability do you’re feeling you’ve gotten in case you have been to make any acquisitions? What kind of debt ranges are you keen to tackle in case you have been to do one thing? Or would it not be funded by cash circulation?
No, we may actually finance acquisitions and — as we’ve got prior to now. And definitely, I believe something as much as 50% of our present market cap can be cheap for us. However I can not say that we’ve got a selected stage that we checked out.
Thanks. I am not displaying any extra questions. Girls and gents that conclude right this moment’s convention. Thanks in your collaborating. You could have an amazing day.