Oct 24, 2012
Operator
Good day, ladies and gentlemen and welcome to the Third Quarter 2012 Unitil Earnings Conference Call. My name is Towanda and I will be your coordinator for today.
Operator Instructions] As a reminder this conference is being recorded for replay purposes. I would now like to turn the conference over to Mr.
David Chong, Director Of Finance.
David Chong
Good afternoon and thank you for joining us to discuss Unitil Corporation's third quarter 2012 financial results. With me today and Bob Schoenberger, Chairman, President, and Chief Executive Officer, Tom Meissner, Senior Vice President, and Chief Operating 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 third quarter on this call. As we mentioned in the press release announcing the call.
We have posted that information including a presentation to the investor section of our website at www.unitil.com. We will refer to that information during this call.
David Chong
Before we start, please note the comments made on this conference call may contain statements that are commonly referred to as forward-looking statements, which remain pursuant to Safe Harbor provisions of the Private Securities Litigations Reform Act of 1995. These forward-looking statements include statements regarding the company's financial condition, results for operations, capital expenditures and other expenses, regulatory environment and strategy, market opportunities, and other plans and objectives.
David Chong
In some cases, forward-looking statements can be identified by terminology such as may, will, should, estimate, expect or believe the negative of such terms or other comparable terminologies. These forward-looking statements are neither need promises not guarantees that involve risks and uncertainties and the company's actual results could differ materially.
Those risks and uncertainties include those listed to or referred to on slide 1 of the presentation and those detailed in company’s filings with the Securities and Exchange Commission including the company's Form 10-K 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'll now turn the call over to Bob.
Bob Schoenberger
Thanks, David. I would also like to thank everybody for joining us today.
I'll begin by discussing the highlights of our past quarter. On Slide 4 of our presentation today, we announced net income of $500,000 or $0.03 per share for the quarter which is an improvement of $2.1 million per $0.18 per share compared to prior year.
For the 9 months ended September 30, 2012 we reported net income of $9.1 million or $0.74 per share compared to prior year net income of $6.3 million or $0.58 per share.
Bob Schoenberger
While gas and electric cost have been declining for our customers because of lower supply rates, the strong year-over-year growth in 2012 continues to reflect a higher natural gas and electric sales margins due to higher distribution rates from our recently completed rate cases as well as significant new customer growth. Mark will provide some additional details on our financial results in just a few minutes.
Bob Schoenberger
On Slide 5, we are experiencing an unparalleled demand for natural gas service within our gas service areas. Changing natural gas fundamental have created significant opportunities for growth within our industry.
The emergence of shale gas plays across United States has created an abundant domestic supply of natural gas. This abundant supply has caused natural gas prices to be near historic lows.
Bob Schoenberger
Here in New England, the delivered price of natural gas is currently about 1/3 of the cost of home heating oil. Resulting in savings to typical residential customers of up to $2,000 per year and significantly reducing the cost of energy for businesses and industry.
What this means is for every thousand customers that we convert to natural gas, we are reducing the out of pocket cost of energy to heat our homes and run our businesses and freeing up $2 million for other spending needs. In this difficult economy I don't need to tell you how important these real savings on energy is to our customers and the local economy.
Bob Schoenberger
Natural gas also has significant environmental benefits and can reduce CO2 and other greenhouse gases emissions by over 40% compared to other sources of energy.
Bob Schoenberger
On Slide 6 as you can see these underlying natural gas fundamentals have caused significant growth on our gas business in terms of customer additions. Since acquiring Northern Utilities in December 2008, we have added and converted nearly 6,000 customers, which is about 10% of 2008 gas customer base.
Bob Schoenberger
We expect to add over 2,000 gas customers this year, which is up over 75% from last year. In addition, we are putting in place a growth plan for 2013 to double our customer addition and conversion activity over this year to a target level of 4,000 customers.
These customer additions as well as an improving economy have translated to increased weather-normalized gas sales, which are up 5% in the current quarter compared to last year. We expect customer addition activity to continue to significantly increase our gas sales in the future.
Bob Schoenberger
Slide 7 shows impact of these customer additions on our financial results. Our gas rate base has steadily grown at an annual rate of 6% driven by customer additions and our cast iron and bare steel replacement programs across all of our gas service areas.
This rate base growth combined with recent rate cases at all 3 of our natural gas utility subsidiaries has led to natural gas margin growth of 13% annually. In our year end conference call next quarter, we will go into further detail on our gas growth strategy in which we expect to more than double our gas rate base in the next 4 years.
Bob Schoenberger
On Slide 8, the electric side of our business continues to do well. Our rate base has grown at an annual rate of 3% driven by customer additions and capital improvements.
We recover a large portion of this growth in rate base annually. As part of our rate plan in New Hampshire for example we have cost tracker mechanism, which recovers approximately 80% of the change in net plan annually.
Our sales margin has grown 9% annually which reflects the growth in customer base as well as recent rate cases across both of our utility subsidiaries.
Bob Schoenberger
A weather-normalized electric sales were up 1% year-to-date which is reflective of some signs of improving economy as well as customer additions.
Bob Schoenberger
Looking forward to next year, we also anticipate filing rate cases next year for Northern Utilities. Our gas utility operating in New Hampshire and Maine.
These rate cases will reflect recent changes in the utility's capital structure including a $40 million equity contributions we made with our recent equity offering completed last May.
Bob Schoenberger
We are also evaluating the need to file rate cases for our other utilities. Particularly where we don't already have cost trackers in place to adjust rates on growing level of rate base.
In our year end conference call next quarter we will go into further details on our planned rate case filings.
Bob Schoenberger
On Slide 9, we look at our non-regulated energy brokering subsidiary Usource. Usource continues to execute on its strategic growth plan.
Usource recorded revenues of $1.5 million and $4.1 million for the 3- and 9-month periods ending September 30th 2012, on par with the same periods in 2011.
Bob Schoenberger
Usource currently manages almost $700 million annually in energy contracts for over 1,200 customers. Usource recently added 3 strategic hires to focus on sales opportunities in Western New York which is a potentially a large and profitable market for us.
With natural gas prices remaining favorable and electricity prices lower and more stable we expect continued strong demands for Usource's services.
Bob Schoenberger
Now I'll turn the call over to Mark who will discuss our financial results for the quarter.
Mark Collin
Thanks, Bob. Good afternoon, everyone.
Let me begin by discussing our financial result on Slide 10. Earnings increased by $2.1 million for the quarter and by $2.8 million for the 9 months ended September 30th 2012.
Results were positively affected by higher natural gas and electric sales margins, due to higher distribution rates and new customer growth and reflect the effect of sales on sales of fluctuations and seasonal weather conditions year over year.
Mark Collin
We estimated the mild weather in the winter and early spring negatively impacted earnings by about $2 million for $0.17 per share in the 9 month period. For the quarter natural gas sales margins are up $3 million reflecting higher distribution rates from recently completed rate cases new customer growth and a corresponding increase in gas therm sales of 3%.
Mark Collin
For the 9-month period natural gas sales margin were up $8.3 million again reflecting higher distribution rates from rate cases and new customer growth. But negatively impacted by lower gas therm sales of 8% primarily due to mild winter weather earlier in the year in which there were 20% fewer heating degree days compared to prior year.
Mark Collin
On a weather-normalized basis in the 3- and 9-months periods we estimate that sales grew 5% and 2% respectively compared to the prior year. The strong growth in our weather-normalized sales in particular in the third quarter is reflective of the significant number of the customer additions we are making across our gas territories.
Mark Collin
For the quarter, electric sales margins were up $1.3 million reflecting higher electric distribution rates and an increase in kilowatt hour sales primarily driven by new customer growth and increase in usage during this summer. For the 9 month period electric sales margins were up $2.9 million again reflecting higher electric distribution rates and new customer growth, but like gas were negatively impacted by lower electric kilowatt hour sales due to mild winter weather earlier in the year.
Mark Collin
Weather normalized electric kilowatt hour sales in the 3- and 9-month periods were estimate to be approximately 2% lower and 1% higher respectively compared to prior year.
Mark Collin
Usource, our unregulated division, recorded revenues of $1.5 million and $4.1 million for the 3- and 9-month periods of 2012. On par with the same periods in 2011 as discussed by Bob earlier.
Mark Collin
Operation and maintenance expenses increased $0.8 million and $4.4 million in the quarter and the first 9 months of this year. The increase in the 3 months period reflects higher utility operating cost of $1.1 million and higher employee compensation and benefit cost of $0.1 million.
Partially offset by lower professional fees of $0.4 million.
Mark Collin
The increase in O&M expense in the first 9 months of 2012 compared to the same period 2011 reflects lower O&M expenses recorded in the first quarter of 2011 due to the receipt of $1 million insurance payment. Other changes in O&M expense in the 9-month period include higher utility operating cost of $2.3 million, higher employee compensation benefit costs of $1 million, and higher professional fees of $0.1 million.
Mark Collin
Importantly, utility operating costs in the quarter and first 9 months of 2012 include approximately $1.0 million and $2.5 million, respectively, of spending on new vegetation management and electric reliability enhancement programs. These costs are recovered through cost tracker rate mechanisms that result in corresponding increases in revenue.
Mark Collin
Depreciation and amortization expense increased $2.0 million and $3.4 million in the quarter and the first 9 months of the year, principally reflecting normal utility plant additions and amortization of the regulatory assets.
Mark Collin
Local property and other taxes increased $0.3 million and $1.2 million quarter in the first 9 months of the year, reflecting higher local property taxes on higher levels of utility plant and service.
Mark Collin
Net interest expense, decreased $2.2 million and $2.1 million in the quarter in first 9 months of the year, reflecting a non-recurring pretax charge, in the third quarter of 2011, against interest income of $1.8 million to charge-off previously accrued carrying costs that were disallowed for rate recovery in 2011, and lower short term borrowings and interest rates in 2012 compared to 2011.
Mark Collin
As we indicated earlier in the year in May of 2012 we issued 2,760,000 shares of common stock in the registered public offering. We used the net proceeds of approximately $65.7 million from this offering to make equity capital contributions to our regulated utility subsidiaries, repaid short term debt and for general corporate purposes.
Overall, our results of operations reflect a higher number of average shares outstanding year-over-year.
Mark Collin
Finally, as we indicated in the past we have long-term capital trackers in place to recover significant portion of current and future capital spending. During the course of this year we put a number of these trackers in place.
On May 1st of this year we implemented a step increase of approximately $1.5 million in annual revenues for Unitil Energy our New Hampshire Electric Utility and for the main gas division of Northern Utilities we implemented a step increase of $0.85 million in annual revenues.
Mark Collin
On June 1st of this year we implemented a step increase of $0.5 million in annual revenues for our Fitchburg electric transmission system. Finally, on August 1st we implemented a step increase of $0.3 million to begin the recovery of capital investments we are making in Granite State Transmission our interstate pipeline company.
Mark Collin
We expect the combination of the rate relief we achieved this past year, future annual cost tracker rate adjustments and organic sales growth will provide meaningful earnings support going forward. In addition as Bob indicated earlier we are in the planning phase of filing new base rate cases in 2013.
Mark Collin
Now this concludes our summary of our financial performance for the period. I will turn the call over to the operator who'll coordinate questions from the audience.
Operator
[Operator Instructions] You have a question from the line of Michael Gaugler, Brean Capital.
Michael Gaugler
Just 2 quick questions. D&A expenses, I noticed, they've been tracking higher since obviously back to the fourth quarter last year and as you look forward does that trend continue or has it peaked near-term?
Mark Collin
Well the D&A expenses will tend to trend with the growth in our gross plant. So as we are adding plant we'll continue to see a trending of depreciation following that.
However, one of the trends that you are seeing in the current period is that we are - included in D&A is amortization of storm recovery cost, as a result of that they are adding to the typical plant, utility plant D&A. We don't anticipate having to continue to add significant amounts related to storm recovery, but that will depend on where mother nature takes us in the future.
Michael Gaugler
Then you had mentioned in your remarks earlier about gas conversions. I am trying to you know really step that up which we are seeing in some of the other gas utility names as well.
I am wondering if you are doing anything somewhere to what UIL is doing, they are partnering with local banks or third parties to help homeowners finance those costs, because they can be substantial depending on the heating system in place.
Mark Collin
We don't have any of those programs currently being implemented in the jurisdictions we're in. As you know with UIL I think that was a program that they are working with state regulators and state officials to implement.
To be frank Mike, right now we're not finding that we need to add those types of incentives and types of programs in order to attract or to get the type of growth we're seeing that we are able to, because of the relatively low penetration we have of natural gas and the corresponding high penetration of heating oil and the cost, the competitive differential we have now. We're really able to attract and get customers in all the classes; residential, commercial and industrial, wanting natural gas and based on its pure economics able to install that, move that forward.
Michael Gaugler
What is your penetration rate by the way?
Mark Collin
It varies by service territory, but and our lowest penetration tends to be in our main jurisdiction in the state of Maine and then a little higher down in Massachusetts, but in the areas where we are seeing the highest growth were under 40% penetration. So it gives us a lot of upward ability to add new customers.
Operator
Your next question comes from the line of Liam Burke with Janney Capital.
Liam Burke
You mentioned in the remarks that you have added electric customers. Is it a function of an improving economy or where are you seeing that customer growth?
Bob Schoenberger
I think it's a combination of things. I think it's, we're seeing housing starting to recover.
I wouldn't say it's a recovery yet, but we are starting to see housing recover, as well as you would have normally expect about 1% increase in sales year-over-year just as normal growth. So I would say as probably the economy has certainly bottomed out and is starting to improve.
Liam Burke
Okay, and you have the numbers here for 2,000 customer additions for 2012, doubling that rate in 2013. Are there any specific plans you have in place to accelerate those customer additions or is anything different I guess you plan on doing 2012 versus 2013?
Bob Schoenberger
The thing that really controls how many customer additions you are able to add in any given years, the number of crews you can get to help you lay the pipe and to connect customers. Tom, I don't know what the true complement we are talking about for next year compared to this year would be, but that would be a good way to...
Tom Meissner
Yes, this year we currently have about 12 to 13 crews devoted to growth and next year we are doubling that to 24 to 25 crews devoted exclusively to growth. Year-over-year the only real change is this year we're able to keep those crews fully deployed and fully scheduled without even essentially marketing.
Next year we are going to - we're planning to more aggressively market and we expect to keep all those crews scheduled for the entire year.
Operator
[Operator Instructions] At this time we have no further questions. This concludes today's conference.
Thank you for your participation. You may now disconnect and have a great day.