Unitil Corporation 10-Q Summary
Business Context and Reporting Period
Unitil Corporation is a regulated utility holding company serving approximately 106,100 electric customers and 83,900 gas customers in New Hampshire, Massachusetts and Maine. Its businesses include electric and gas distribution, an 86-mile interstate gas transmission pipeline, and related services. The filing covers the unaudited three months ended March 31, 2020, filed April 30, 2020.
Utility earnings are seasonal, with gas results generally strongest in the first and fourth quarters. Purchased gas and electricity costs are substantially recovered through reconciling customer rates and therefore generally do not affect earnings.
Financial Performance and Key Metrics
| Metric | Q1 2020 | Q1 2019 | Change |
|---|---|---|---|
| Total operating revenue | $130.4 million | $152.1 million | Down $21.7 million |
| Operating income | $27.6 million | $28.8 million | Down $1.2 million |
| Income before income taxes | $19.9 million | $34.7 million | Down $14.8 million |
| Net income | $15.2 million | $26.5 million | Down $11.3 million |
| Basic and diluted EPS | $1.02 | $1.78 | Down $0.76 |
| Cash flow from operations | $27.9 million | $37.8 million | Down $9.9 million |
| Capital expenditures | $16.8 million | $10.9 million | Up $5.9 million |
- Gas operating revenue was $70.2 million, down 18.8%; gas adjusted gross margin was $42.4 million, down $1.1 million, or 2.5%.
- Electric operating revenue was $60.2 million, down 7.1%; electric adjusted gross margin was $23.1 million, essentially unchanged.
- GAAP gross margin was $52.0 million versus $53.7 million. Operating margin was approximately 21.2% versus 18.9% in the prior-year quarter; net margin was approximately 11.7% versus 17.4%.
- Operation and maintenance expense decreased $0.6 million to $17.9 million. The decrease included lower costs following the Usource divestiture, partly offset by a $0.6 million increase in bad-debt expense, including a COVID-19 provision.
- Net interest expense was $6.2 million in both periods. Income tax expense declined to $4.7 million from $8.2 million.
- Gas therm sales declined 6.7%, while electric kilowatt-hour sales increased 0.8%. Gas customers increased by 1,082 and electric customers by 687 year over year.
Balance Sheet, Debt and Liquidity
| Balance-sheet item | March 31, 2020 | December 31, 2019 |
|---|---|---|
| Cash and cash equivalents | $6.2 million | $5.2 million |
| Total assets | $1.378 billion | $1.371 billion |
| Net utility plant | $1.125 billion | $1.112 billion |
| Short-term debt | $71.6 million | $58.6 million |
| Long-term debt, net of issuance costs | $442.6 million | $457.0 million |
| Total stockholders’ equity | $387.9 million | $376.8 million |
- The $120 million revolving credit facility had $48.3 million of availability at March 31, 2020, after $71.6 million of short-term borrowings and $0.1 million of letters of credit.
- The company reported $74.3 million of gross credit-facility borrowings and $61.3 million of gross repayments during the quarter.
- Unitil was in compliance with its debt covenants, including the funded-debt-to-capitalization limit of 65%.
- Management stated that operating cash flow, borrowing availability and access to long-term debt markets should be sufficient for working capital, operating requirements and planned capital investments.
- Outstanding guarantees on energy and gas-storage management contracts were approximately $6.2 million.
- Credit ratings were BBB+ from Standard & Poor’s; Moody’s ratings were Baa2 for Unitil Corporation and Granite State and Baa1 for the principal distribution utilities.
Material Changes Versus the Prior Comparable Period
- Net income and EPS fell primarily because Q1 2019 included a $13.4 million pretax, $9.8 million after-tax gain from the divestiture of Usource.
- Warmer winter weather reduced first-quarter 2020 gas demand. Effective Degree Days were 11.5% below the prior-year period and 13.2% below normal. Management estimated a negative net-income impact of approximately $3.1 million, or $0.20 per share.
- Gas adjusted gross margin declined despite higher rates and customer growth. Weather-related lower therm sales reduced margin by approximately $3.2 million, partly offset by higher rates of $1.4 million and customer growth of $0.7 million.
- Electric adjusted gross margin was stable, as higher distribution rates of $0.6 million offset the adverse effects of warmer weather and lower average usage.
- Operating cash flow decreased, while capital expenditures increased. Net cash increased $1.0 million to $6.2 million at quarter-end.
- Long-term debt increased from the prior-year quarter because of $30 million of Unitil Corporation notes issued in December 2019 and $40 million of Northern Utilities notes issued in September 2019, partly offset by repayments.
Guidance, Outlook, Risks and Unusual Items
- The filing does not provide specific full-year earnings or revenue guidance. Management stated that first-quarter results are not necessarily indicative of full-year results.
- COVID-19 had not disrupted electric or gas service through the filing date. Unitil implemented crisis-response, work-from-home, social-distancing, employee-protection and cybersecurity measures.
- Management identified potential COVID-19 effects on employee and contractor availability, customer demand, energy supply, bad debt, financial condition, results of operations and cash flows. The ultimate impact remained uncertain.
- Regulatory rate developments included a $3.6 million annual Northern Utilities Maine base-revenue increase effective April 1, 2020; a $1.4 million Maine TIRA increase effective May 1, 2020; a $1.1 million Fitchburg electric distribution increase effective November 1, 2020; and a Fitchburg gas increase of $3.7 million effective March 1, 2020, followed by $0.9 million effective March 1, 2021.
- Fitchburg’s revised GSEP filing remained pending before the Massachusetts Department of Public Utilities. Several FERC transmission return-on-equity proceedings also remained pending, although management did not expect a material adverse impact.
- The company disclosed environmental obligations related primarily to former manufactured-gas-plant sites. It accrued $0.8 million for estimated remaining Rochester, New Hampshire remediation costs and reported no material losses reasonably likely to be incurred beyond recorded amounts.
- Fitchburg’s long-term clean-energy and offshore-wind contracts may have a material effect on contractual obligations and regulatory assets once specified contingencies are satisfied.
- The board declared quarterly dividends of $0.375 per common share, equivalent to an annualized rate of $1.50 per share.
- The company adopted the current expected credit-loss standard on January 1, 2020, with no material impact on the financial statements.
Important Facts for Investors to Verify
- Whether COVID-19-related bad debts, reduced demand, collection restrictions or operational costs materially affect subsequent quarters.
- The sustainability of earnings excluding the nonrecurring Usource gain in the Q1 2019 comparison.
- Progress and final outcomes of pending rate cases, GSEP proceedings, FERC transmission matters and excess deferred-tax-asset flowbacks.
- Credit-facility availability, short-term borrowing levels, debt maturities and compliance with the 65% funded-debt-to-capitalization covenant.
- Actual weather-normalized gas demand and the extent to which rate increases and decoupling mechanisms offset volume volatility.
- Capital-expenditure requirements, pension funding needs and recovery of regulatory assets through future rates.
- Potential obligations from long-term clean-energy and offshore-wind contracts, environmental remediation and the company’s $6.2 million of guarantees.