Unitil Corporation 2019 Q1 Form 10-Q Summary
Business Context and Reporting Period
Unitil Corporation is a regulated utility holding company serving approximately 105,600 electric customers and 82,700 natural gas customers in New Hampshire, Massachusetts and Maine. Its businesses include electric and natural gas distribution, an 86-mile interstate natural gas transmission pipeline, and other corporate services. The report covers the unaudited three months ended March 31, 2019, compared with the same period in 2018.
Utility earnings are seasonal and generally strongest in the first and fourth quarters because of natural gas heating demand. Purchased electricity and natural gas costs are generally recovered through customer rates on a fully reconciling, pass-through basis.
Key Financial Metrics
| Metric | Q1 2019 | Q1 2018 | Change |
|---|---|---|---|
| Total operating revenue | $152.1 million | $145.8 million | +$6.3 million |
| Operating income | $28.8 million | $28.1 million | +$0.7 million |
| Operating margin | 18.9% | 19.3% | Down approximately 0.4 percentage points |
| Net income | $26.5 million | $15.6 million | +$10.9 million |
| Basic and diluted EPS | $1.78 | $1.06 | +$0.72 |
| Net margin | 17.4% | 10.7% | Up approximately 6.7 percentage points |
| Cash provided by operating activities | $37.8 million | $28.4 million | +$9.4 million |
| Capital expenditures | $10.9 million | $10.1 million | +$0.8 million |
Gas operating revenue was $86.4 million, down from $87.0 million, while gas sales margin increased 9.0% to $43.5 million. Electric operating revenue increased 12.7% to $64.8 million, and electric sales margin increased 3.6% to $23.1 million. Sales margin is a non-GAAP measure calculated as operating revenue less pass-through energy costs.
Gas therm sales increased 2.1%, and weather-normalized gas therm sales excluding decoupled sales increased an estimated 5.0%. Electric sales declined 4.3%, reflecting a shorter billing cycle, lower average usage and reduced industrial production. Customer counts increased by 1,533 for natural gas and 549 for electricity year over year.
O&M expense increased 6.9% to $18.5 million; depreciation and amortization increased 12.2% to $13.8 million; and taxes other than income taxes increased 10.3% to $6.4 million. Net interest expense increased to $6.2 million from $6.0 million.
Liquidity, Debt and Capitalization
- Cash and cash equivalents were $4.3 million at March 31, 2019, compared with $7.8 million at December 31, 2018 and $9.5 million at March 31, 2018.
- Short-term borrowings were $65.8 million, leaving $54.2 million available under the $120 million revolving credit facility.
- Net long-term debt was $392.5 million, including $19.5 million classified as current. Total stockholders’ equity was $373.9 million.
- The credit facility matures July 25, 2023, subject to potential extensions, and permits up to $50 million of additional capacity under specified conditions. Unitil was in compliance with its debt covenants, including the 65% funded-debt-to-capitalization limit.
- Operating cash flow exceeded capital expenditures by approximately $26.9 million before financing and other cash uses. Financing activities used $43.8 million, including $17.0 million of net short-term debt repayment, $13.4 million of long-term debt repayment and $5.5 million of dividends.
- Credit ratings were BBB+ from Standard & Poor’s for Unitil and its utility subsidiaries; Moody’s ratings were Baa2 for Unitil and Granite State and Baa1 for Fitchburg, Unitil Energy and Northern Utilities.
Material Changes Versus the Prior Comparable Period
- Net income and EPS increased substantially, primarily because of a one-time gain from the divestiture of Usource.
- On March 1, 2019, Unitil sold its non-regulated energy-brokering subsidiary, Usource, recognizing a $13.4 million pre-tax gain and an approximately $9.8 million after-tax gain, or $0.66 per share. Net proceeds were used for general corporate purposes.
- Utility operations net income increased $1.1 million to $16.7 million, or $1.12 per share, excluding the Usource divestiture effect.
- Gas margin benefited from higher distribution rates and customer growth. Electric margin benefited from higher distribution rates but was partly offset by lower electricity usage.
- Utility plant increased to $1,037.8 million net from $972.4 million a year earlier, supporting higher depreciation and property taxes.
- The Company adopted the new lease accounting standard on January 1, 2019, recording approximately $4.2 million of lease assets and liabilities without a material earnings or cash-flow effect.
- The quarterly dividend was increased to $0.37 per share, implying an annualized rate of $1.48 per share.
Guidance, Outlook, Risks and Unusual Items
The filing does not provide specific full-year earnings or revenue guidance. Management stated that operating cash flow, available borrowing capacity and access to financial markets are expected to be sufficient for working capital, operating needs and forecast capital investments.
- Regulatory approvals and rate cases remain important to future earnings and cash recovery. Pending matters include Fitchburg’s 2018 capital filing, Fitchburg’s gas system enhancement request, and Northern Utilities’ New Hampshire step increase request.
- Unitil Energy’s approximately $0.34 million annual step increase and Northern Utilities’ approximately $1.0 million Maine infrastructure adjustment were approved effective May 1, 2019. Northern Utilities’ approximately $1.4 million New Hampshire step increase remained pending.
- Massachusetts offshore wind power purchase agreements were approved in April 2019. The Company expects Fitchburg’s share of these contracts to have a material impact on contractual obligations and regulatory assets.
- Regulatory investigations and proceedings include Massachusetts gas-system safety reviews, Maine gas supply-cost proceedings and FERC transmission return-on-equity matters. Management does not currently expect these matters to have a material adverse effect.
- Key operating risks include regulatory disallowances, weather variability, severe storms, commodity and transmission costs, interest rates, pension funding, cyberattacks, environmental obligations, financing availability and restrictive debt covenants.
- The Company has approximately $4.3 million of guarantees outstanding on energy and natural gas storage management contracts. Environmental obligations totaled approximately $2.0 million at March 31, 2019, principally related to former manufactured gas plant sites.
- Management reported no material changes to the risk factors disclosed in the 2018 Form 10-K and concluded that disclosure controls were effective.
Investor Verification Checklist
- Separate recurring utility earnings from the $9.8 million after-tax Usource divestiture gain.
- Monitor gas and electric sales margins, customer growth, weather-normalized demand and the effect of decoupling mechanisms.
- Verify the status and financial impact of pending rate cases, capital-cost adjustments and regulatory reconciliations.
- Assess short-term borrowing levels, upcoming debt maturities, interest-rate exposure and compliance with the 65% debt-to-capitalization covenant.
- Review the expected obligations and regulatory recovery associated with Fitchburg’s approved offshore wind contracts.
- Track Massachusetts and Maine gas-safety and gas-supply investigations, FERC transmission proceedings and environmental remediation matters.
- Consider the seasonal nature of results and the filing’s statement that first-quarter performance is not necessarily indicative of full-year results.