Apr 25, 2012
Operator
Good day, ladies and gentlemen and welcome to the quarter one 2012 Unitil conference call. My name is Sonia and today I will be your conference coordinator.
[Operator Instructions] I will now turn your call over to today's host David Chong, Director of Finance.
David Chong
Good afternoon and thank you for joining us to discuss Unitil Corporation's first quarter 2012 financial results. I'm David Chong, Unitil's Director of Finance.
With me today are Bob Schoenberger, Chairman, President and Chief Executive Officer; Mark Collin, Senior Vice President, Chief Financial Officer, and Treasurer; and Larry Brock, Chief Accounting Officer and Controller.
David Chong
We will discuss financial and other information about our first quarter on this call. As we mentioned in the press release announcing this call, we have posted that information, including a presentation, to the investors' section of our website at www.unitil.com.
We will refer to that information during this call.
David Chong
Before we start, please note that comments made on this conference call may contain statements that are commonly referred to as forward-looking statements which are made pursuant to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. These forward-looking statements include statements regarding the company's financial condition, results of operations, capital expenditures and other expenses, regulatory environment and strategy, market opportunities, and other plans and objectives.
In some cases forward-looking statements can be identified by terminology such as may, will, should, estimate, expect, or belief, the negative of such terms or other comparable terminology.
David Chong
These forward-looking statements are neither promises nor guarantees but involve risks and uncertainties and the company's actual results could differ materially. Those risks and uncertainties include those that are referred to on Slide One of the presentation and those detailed in the company's filings with the Securities & Exchange Commission including the company's Form 10K for the year ended December 31, 2011.
David Chong
Forward-looking statements speak only as of the date they are made. The company undertakes no obligation to update any forward-looking statements.
With that said, I will now turn the call over to Bob.
Robert Schoenberger
I'd like to thank everyone for joining us today and I'll begin by discussing the highlights of our past quarter. If you could turn to Slide Four of our presentation, today we announced net income of $9 million or $0.83 per share for the first quarter of 2012.
This compares to earnings of $8.7 million or $0.81 per share in the first quarter of 2011. Earnings in the first quarter were up slightly year-over-year reflecting the phase in of new rates but also the abnormally warm winter we experienced.
We estimate that the mild winter weather negatively impacted earnings in the quarter by $1.6 million or $0.15 per share.
Robert Schoenberger
Turning now to Slide Five, we've assembled an update of the six base rate cases we undertook for all of our operating utilities in the last 18 months. Yesterday, we received final approval for our final rate case at the New Hampshire Division of Northern Utilities which will result in an annual base revenue increase of $3.7 million effective May 1, 2012.
With the completion of this rate case, our rates have been reset at all of our distribution utilities providing an increase of approximately 30% to our total distribution revenue.
Robert Schoenberger
Slide Six highlights our gas distribution system expansion. Natural gas prices remain extremely competitive compared to oil.
In fact, the price ratio of oil to natural gas is approaching a historic high of 12 to one on an energy equivalent basis. This competitive price advantage of natural gas is driving steady growth in our natural gas distribution business.
Robert Schoenberger
In 2011, we experienced 7% weather normalized sales growth driven by both increased consumption and a growing customer base. Since our acquisition of Northern Utilities in December of 2008 we have added almost 5,000 gas customers for a 6.5% increase in customer base.
In addition, as we have indicated in past quarters, we have extensive pipeline upgrade and replacement programs across all of our gas service areas.
Robert Schoenberger
The most notable program is in Portland Maine where we are upgrading and replacing the city's gas distribution infrastructure over an approximate 14 year period. These pipeline upgrade and replacement programs provide considerable rate based growth in addition to new customers as a result of the low cost opportunity for customers to switch to natural gas when we are doing this work.
Robert Schoenberger
The combination of our recently completed rate cases, favorable oil to natural gas price ratio, and programs like these will continue to drive growth in our gas distribution business. Now, I'll turn the call over to Mark Collin who will discuss our financial results for the quarter.
Mark Collin
Let me begin by discussing the quarter's results. Our earnings in the first quarter were $9 million.
On a per share basis they were $0.83 per share in the quarter compared to $0.81 per share last year, an increase of $0.02 driven by increased base rates and decoupling revenues from our recently completed rate cases and the growth in new natural gas customers. However, as Bob stated, the warm winter weather significantly affected our sales during this past quarter and we estimate that the mild weather negatively impacted earnings by $1.6 million or $0.15 per share in the first quarter of 2012.
Mark Collin
According to the National Oceanic & Atmospheric Administration, the northeast region of the United States, in which our service territories are located, experienced its warmest first quarter period in 2012 as compared to normal temperatures in the 118 years of record keeping. Based on weather data collected in our service territories, there was 18% fewer heating degree days in the first quarter of 2012 compared to the same period in 2011.
Mark Collin
As a reminder, our financial results reflect the seasonal nature of the natural gas business. Accordingly, results of operations will be positively affected during the first and fourth quarters when the sales of natural gas are typically higher and negatively affected during the second and third quarters when fixed gas operating expenses usually exceed sales margins in those periods.
Mark Collin
Excluding the estimated effect of warmer than normal winter, we estimated that weather normalized therm sales of natural gas were essentially flat in the first quarter of 2012 compared to the first quarter 2011. Similarly, weather normalized electric kilowatt hour sales were also flat in the first quarter.
Despite what appears to be a leveling off of the weather normalized unit sales growth in the first quarter this year, new customer additions, particularly in the gas division, and other signs of an improving economy continue to support our outlook for sales trending higher on a weather normalized basis year-over-year.
Mark Collin
Now, let's turn to Slide Seven to review corresponding variances in our sales margins. Natural gas sales margins increased $2.5 million in the first quarter of 2012.
This increase reflects higher base distribution rates and decoupling revenue from recently completed rate cases and the growth in new natural gas customers. These increases were offset by lower therm unit sales of 11.3% due to the mild winter weather.
Approximately 13% of our total therm sales of natural gas are decoupled and changes in these sales do not affect sales margin.
Mark Collin
Turning to electric sales margin, electric sales margin in the first quarter 2012 was flat compared to the same period last year. The results reflect higher base rates and decoupling revenues from recently completed rate cases offset by lower electric sales of 4.8% as a result of the milder winter weather.
Approximately 27% of total electric kilowatt hour sales are decoupled and changes in these sales do not affect sales margin.
Mark Collin
Usource recorded revenues of $1.3 million in the first quarter of 2012 on par with revenues of $1.3 million in the first quarter of 2011. Operation and maintenance expenses increased $1.2 million for the three months ended March 31, 2012 compared to the same period in 2011.
The increase in O&M expense primarily reflects lower O&M expenses in 2011 due to the receipt of a $1 million insurance payment in the first quarter of 2011.
Mark Collin
Depreciation and amortization expense increased $0.4 million in the quarter reflecting normal utility additions and amortization of previously deferred storm costs partially offset by changes in depreciation rates resulting from our recently completed rate cases. Local property and other taxes increased $0.3 million in the quarter reflecting higher local property taxes on higher levels of utility plants in service.
Net interest expense increased $0.3 million in the quarter reflecting higher short term borrowings.
Mark Collin
Finally, turning to Slide Eight, we've provided an update on our operating results at the utility operating company level. The chart shows the last authorized return on equity compared to the actual return on equity.
With the completion of the rate cases across all of our utility companies, we are bridging the gap between the last authorized and the actual earned return on equity. Looking forward, we have put into place longer term capital cost trackers to recover a significant portion of our future capital spending.
We are currently in the regulatory approval process to implement a cost tracker step increase effective May 1st of approximately $1.5 million in annual revenues for Unitil Energy, our New Hampshire electric utility.
Mark Collin
For the main gas division of Northern, we have an annual step increase of $0.85 million that will also go into effect May 1st. Later this year we'll be implementing a cost tracker step increase to begin the recovery of capital investments we are making in Granite State Transmission, our interstate pipeline company.
We will also file with the FERC by midyear to begin the recovery investments we are making in our electric transmission system. We expect the combination of the rate relief we achieved this past year, future annual cost trackers, rate adjustments, and organic sales growth will provide meaningful earnings support going forward.
We will also continue to evaluate the financial results for each of our operating utilities to determine the need for future rate relief.
Mark Collin
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.
Operator
[Operator Instructions] Your first question comes from Peter Renell [ph].
Unknown Analyst
Just one quick question about O&M going forward, do you guys anticipate O&M to be pretty consistent with historical spends there? We're trying to update our models here.
Mark Collin
Yes, our O&M spend I think you can pick up on the trends in the current quarter if you make the adjustment for the insurance settlement that we talked about, the non-recurring insurance settlement charge in the first quarter. We'd expect O&M trend to be pretty much what you've seen in the last couple of quarters going forward.
Operator
[Operator Instructions] At this time I show no questions in the queue.
David Chong
Thank you everyone for joining our call and we look forward to talking to you next quarter.
Operator
Ladies and gentlemen this concludes today's conference. Thank you for your participation.
Have a wonderful day.