Unitil Corporation — 2013 Third-Quarter Form 10-Q Summary
Business context and reporting period
Unitil Corporation is a regulated utility holding company serving approximately 101,700 electric customers and 73,700 natural gas customers in New Hampshire, Massachusetts and Maine. Its principal businesses are electric and natural gas distribution, an 86-mile interstate gas transmission pipeline, and non-regulated energy-brokering services through Usource.
This unaudited Form 10-Q covers the three and nine months ended September 30, 2013, compared with the corresponding 2012 periods. Utility results are seasonal, particularly natural gas operations, which generally produce stronger results during the first and fourth quarters.
Financial performance and key metrics
| Metric | Q3 2013 | Q3 2012 | 9M 2013 | 9M 2012 |
|---|---|---|---|---|
| Operating revenue | $72.5 million | $71.3 million | $257.1 million | $254.3 million |
| Operating income | $5.5 million | $5.0 million | $25.6 million | $23.3 million |
| Net income | $0.6 million | $0.5 million | $11.3 million | $9.2 million |
| Earnings per common share | $0.04 | $0.03 | $0.82 | $0.74 |
| Cash flow from operations | Not separately provided | Not separately provided | $84.1 million | $61.9 million |
- Margins: Natural gas sales margin was $12.4 million in Q3 and $56.3 million for nine months, up $1.2 million and $5.2 million, respectively. Electric sales margin was $20.8 million in Q3 and $57.1 million for nine months, up $1.7 million and $4.4 million, respectively.
- Operating margin: Operating income represented approximately 7.6% of revenue in Q3 2013 and approximately 10.0% for the nine-month period; comparable 2012 figures were approximately 7.0% and 9.2%.
- Expenses: Nine-month operation and maintenance expense increased $3.7 million, depreciation and amortization increased $2.3 million, and local property and other taxes increased $0.5 million. Purchased gas and electricity costs are generally recovered through pass-through rate mechanisms and do not directly affect earnings.
- Capital investment: Nine-month capital expenditures were $64.6 million, compared with $47.4 million in 2012. Net utility plant was $647.0 million at September 30, 2013.
- Liquidity: Cash was $12.3 million at September 30, 2013. The existing revolving facility had a $60.0 million limit, $43.6 million outstanding and $16.4 million available at quarter-end.
- Debt and capitalization: Total long-term debt was $287.5 million, including $0.6 million current portion; short-term debt was $43.6 million. Total capitalization was $541.0 million. The company was in compliance with applicable credit covenants.
- Dividend: The quarterly common dividend remained $0.345 per share, or $1.38 annualized.
Material changes versus the prior comparable period
- Nine-month earnings applicable to common shareholders increased 24% to $11.3 million, while EPS rose from $0.74 to $0.82. The comparison is affected by the May 2012 issuance of 2.76 million common shares, which increased the share count.
- Natural gas therm sales increased 10.5% for nine months, supported by colder weather and customer growth. Heating degree days were 15% higher than in 2012; weather-normalized gas sales excluding decoupled volumes increased approximately 5%.
- Electric sales increased 1.1% for nine months but declined 0.7% in Q3 because of milder summer weather. Cooling degree days were 15% lower in the quarter.
- Nine-month operating revenue increased modestly despite lower purchased-energy costs: gas revenue increased $4.6 million, while electric revenue declined $2.1 million because of lower pass-through purchased-electricity costs.
- Operating cash flow increased $22.2 million to $84.1 million, while capital spending increased $17.2 million to $64.6 million.
- Net utility plant increased from $601.2 million at December 31, 2012 to $647.0 million at September 30, 2013. Retirement benefit obligations increased to $107.9 million from $103.7 million at year-end.
Guidance, outlook, regulatory matters and risks
The filing does not provide formal earnings or revenue guidance. Management expects results to remain affected by weather, gas-business seasonality, customer growth, rate proceedings and utility capital requirements.
- Granite State received a FERC-approved $0.4 million annual rate adjustment effective August 1, 2013.
- Unitil Energy implemented a $2.8 million annual step increase effective May 1, 2013.
- Northern Utilities received authorization for temporary New Hampshire rates producing a $2.5 million annualized increase effective July 1, 2013. Final New Hampshire and Maine rate orders were expected in 2014 and by year-end 2013, respectively.
- Fitchburg filed for a $6.7 million annual electric base-revenue increase, including recovery of approximately $2.1 million of extraordinary storm costs. A final order was expected in the second quarter of 2014.
- On October 4, 2013, after quarter-end, Unitil amended its revolving credit facility, extending maturity to October 4, 2018 and increasing the borrowing limit to $120 million, including a $25 million letter-of-credit sublimit.
- Storm-cost recovery remains a regulatory matter. Unitil Energy received approval to recover $2.3 million of Superstorm Sandy costs over five years; Fitchburg’s storm-cost recovery was included in its pending rate case.
- Environmental obligations included $12.0 million for the Fitchburg manufactured-gas-plant site and approximately $2.9 million related to Northern Utilities sites. Corresponding regulatory assets were recorded because recovery through rates was considered probable.
- The company reported approximately $18.5 million of guarantees on energy and gas-storage contracts, with the longest term extending through October 2014. Additional guarantees covered $2.5 million of Unitil Realty debt and $10.0 million of Granite State debt.
- Key risks include regulatory disallowance or delays, weather variability, storm damage, energy prices and supply, interest rates, access to financing, pension obligations, environmental liabilities, operating hazards, competition and customer demand.
- The company stated that there were no material changes to the risk factors disclosed in its 2012 Form 10-K, no material subsequent events affecting the financial statements, and no material commitments or contingencies beyond those disclosed.
Important facts for investors to verify
- Confirm final outcomes and effective dates of the Northern Utilities New Hampshire and Maine rate cases and the Fitchburg electric rate case.
- Assess whether higher capital spending and the $647.0 million net utility-plant balance will be supported by approved rates and future financing.
- Monitor short-term borrowing levels, availability under the amended $120 million credit facility, and compliance with the 65% funded-debt-to-capitalization covenant.
- Evaluate pension and postretirement obligations, which totaled $107.9 million at September 30, 2013, and the potential effect of discount-rate and asset-return assumptions.
- Track recovery of deferred storm, environmental and other regulatory assets, including the $153.9 million of total regulatory assets reported at quarter-end.
- Consider the effect of weather normalization, revenue decoupling, pass-through costs and the increased share count when assessing recurring earnings and valuation.