Unitil Corporation 2019 Q2 Form 10-Q Summary
Business Context and Reporting Period
Unitil Corporation is a regulated utility holding company distributing electricity and natural gas in New Hampshire, Massachusetts and Maine, with an 86-mile interstate natural gas transmission pipeline operated by Granite State Gas Transmission. The filing covers the three and six months ended June 30, 2019; financial statements are unaudited.
- The distribution utilities served approximately 105,600 electric customers and 82,700 natural gas customers.
- Net utility plant was $1,053.5 million at June 30, 2019.
- Unitil completed the divestiture of its non-regulated energy-brokering subsidiary, Usource, on March 1, 2019.
Financial Performance and Key Metrics
| Metric | Q2 2019 | Q2 2018 | Six Months 2019 | Six Months 2018 |
|---|---|---|---|---|
| Total operating revenue | $84.4 million | $84.5 million | $236.5 million | $230.3 million |
| Operating income | $12.3 million | $10.6 million | $41.1 million | $38.7 million |
| Net income | $4.0 million | $3.6 million | $30.5 million | $19.2 million |
| EPS, basic and diluted | $0.27 | $0.24 | $2.05 | $1.30 |
| Operating margin | 14.6% | 12.5% | 17.4% | 16.8% |
- Gas sales margin increased 1.7% to $23.3 million in Q2 and 6.4% to $66.8 million for the six-month period.
- Electric sales margin increased 0.4% to $22.4 million in Q2 and 2.0% to $45.5 million for the six-month period.
- Natural gas therm sales increased 2.3% in Q2 and 2.2% year to date, while weather-normalized gas sales excluding decoupled volumes increased an estimated 5.5% year to date.
- Electric kWh sales declined 6.1% in Q2 and 5.1% year to date, primarily due to lower average usage and reduced industrial production.
- Operation and maintenance expense declined $1.9 million in Q2 and $0.7 million year to date. Excluding a non-recurring 2018 rate-case adjustment, O&M declined $0.7 million in Q2 but increased $0.5 million year to date.
- Net interest expense was $5.9 million in Q2 and $12.1 million year to date, broadly unchanged in Q2 and up $0.2 million year to date.
Cash Flow, Capital Spending, Debt and Liquidity
- Cash provided by operating activities was $72.1 million for the six months ended June 30, 2019, compared with $63.3 million in 2018.
- Capital expenditures were $38.7 million, compared with $37.2 million in the prior-year period.
- Net cash used in investing activities was $25.3 million, including $13.4 million of net proceeds from the Usource divestiture.
- Cash used in financing activities was $49.8 million, including $18.0 million of net short-term debt repayment, $13.4 million of long-term debt repayment and $11.0 million of dividends.
- Cash and cash equivalents were $4.8 million at June 30, 2019, down from $7.8 million at December 31, 2018.
- Short-term borrowings were $64.8 million, leaving $55.2 million available under the $120.0 million revolving credit facility. The facility matures July 25, 2023 and may be increased by up to $50 million under specified conditions.
- Long-term debt was $395.9 million before issuance costs, including $19.5 million classified as current. Long-term debt net of issuance costs was $392.6 million.
- Capitalization was $746.1 million, consisting of $373.1 million of long-term debt excluding current maturities and $373.0 million of stockholders’ equity.
- Unitil was in compliance with its credit-facility covenants, including the requirement that funded debt to capitalization not exceed 65%.
- The company paid off a $13.4 million capital lease during Q2 2019 and had approximately $4.3 million of guarantees outstanding on energy and gas-storage management contracts.
Material Changes Versus the Prior Comparable Period
- Six-month net income increased $11.3 million, primarily because of the $13.4 million pre-tax gain, or $9.8 million after tax, from the Usource divestiture.
- Excluding the Usource gain, utility operations generated six-month net income of $20.7 million, up $1.5 million from 2018.
- Utility earnings benefited from higher gas and electric distribution rates, customer growth and higher gas volumes, partially offset by higher utility operating expenses and lower electric usage.
- Q2 gas revenue decreased $2.1 million despite higher gas margin, largely because lower gas commodity costs are passed through to customers and because the 2018 period included a $1.2 million non-recurring New Hampshire rate-case revenue adjustment.
- Other non-regulated revenue declined to zero in Q2 and $0.9 million year to date after the Usource divestiture.
- The quarterly dividend increased to $0.37 per share from $0.365, producing a stated annualized rate of $1.48 per share.
- Adoption of the new lease accounting standard on January 1, 2019 added approximately $4.2 million of lease assets and liabilities, without a material effect on earnings or cash flow.
Guidance, Outlook, Commentary and Risks
The filing does not provide quantitative earnings or revenue guidance. Management stated that operating cash flows, borrowing availability and access to financial markets should be sufficient for working capital, operating requirements and planned capital investments.
- Northern Utilities filed a Maine base-rate case seeking a $7.0 million annual revenue increase, targeted for April 1, 2020, and proposed a multi-year capital investment recovery mechanism. The filing remains pending.
- Several rate increases became effective May 1, 2019, including Northern Utilities’ Maine and New Hampshire adjustments, Unitil Energy’s final step adjustment and a $1.0 million Fitchburg gas-system enhancement increase.
- Fitchburg’s 2019 filing seeking a waiver of its annual gas-system enhancement cap and a $1.0 million revenue increase remains pending.
- Massachusetts clean-energy and offshore-wind power purchase agreements were approved. Unitil expects related costs to be recoverable from customers, but stated that these contracts could materially affect Fitchburg’s contractual obligations and regulatory assets once contingencies are satisfied.
- Ongoing matters include a Massachusetts gas-system safety examination, a Maine investigation of Northern Utilities’ gas procurement practices and FERC transmission return-on-equity proceedings. Management does not expect these matters to have a material adverse effect, although outcomes remain uncertain.
- Key risks include regulatory decisions and cost recovery, weather variability, energy commodity and transmission prices, interest rates, financing access, pension obligations, severe storms, cybersecurity, environmental compliance, operating hazards and competition.
- Management reported no material changes to the risk factors disclosed in the 2018 Form 10-K, no material subsequent events and no material weaknesses in disclosure controls.
Investor Verification Priorities
- Verify the sustainability of reported earnings after excluding the one-time $9.8 million after-tax Usource gain.
- Monitor pending Maine and Massachusetts rate cases, infrastructure recovery mechanisms and the timing of related cash recovery.
- Assess electric demand weakness, particularly the 5.1% year-to-date decline in kWh sales, against rate increases and customer growth.
- Review debt maturities, variable-rate short-term borrowings, refinancing needs and compliance with the 65% funded-debt-to-capitalization covenant.
- Evaluate the financial exposure from Massachusetts clean-energy and offshore-wind contracts after remaining contingencies are resolved.
- Track pension funding, regulatory asset recovery, environmental obligations and the potential effects of future regulatory or tax-policy changes.