UTL

UNITIL CORP - 10-Q Summary (Quarter Ended September 30, 2005)

Business Context and Reporting Period

This Form 10-Q covers the quarterly period ended September 30, 2005. Unitil Corporation is a public utility holding company operating regulated retail distribution utilities in New Hampshire (Unitil Energy Systems, Inc.) and Massachusetts (Fitchburg Gas and Electric Light Company). The company also operates an unregulated energy brokering business (Usource).

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Growth: Total operating revenues increased 13.1% in Q3 and 5.8% YTD. Electric revenues rose 13.1% (Q3) and 5.8% (YTD) driven by higher sales volume (8.7% increase in kWh sales) due to warmer weather and higher cooling degree days. Gas revenues increased 10.1% (Q3) and 8.2% (YTD), aided by a new firm therm sales contract with a large industrial customer.
• Profitability: Net income applicable to common shareholders increased $0.4 million in Q3 and $0.2 million YTD. Gross electric sales margin increased $1.1 million (Q3) and $2.0 million (YTD). Gross gas sales margin increased $0.2 million (Q3) and $0.3 million (YTD).
• Expenses: Operation & Maintenance (O&M) expenses increased $0.6 million in both periods, primarily due to higher retiree/employee benefits, salaries, and audit/legal fees (including Sarbanes-Oxley compliance). Depreciation and amortization increased $0.3 million (Q3) and $1.5 million (YTD) due to plant additions and regulatory asset amortization.
• Cash Flow: Operating cash flow decreased $7.6 million YTD, principally due to higher income tax payments ($2.7 million increase) and working capital requirements related to higher energy costs.

Guidance, Outlook, and Risks

• Regulatory Proceedings:
  • Massachusetts (FG&E): A settlement agreement approved by the MDTE allows for the recovery of deferred stranded costs via revised tariffs effective October 1, 2005. The company is also seeking approval for pension/PBOP adjustment factors.
  • New Hampshire (UES): The NHPUC denied a petition to defer pension costs via an accounting order. Consequently, UES intends to file a base rate case on or about November 1, 2005, seeking approximately $4.6 million to recover pension costs and other increases.
• Capital Requirements: The company projects annual capital expenditures of $25.6 million for 2005, including $1.8 million for the initial phase of an Advanced Metering Infrastructure (AMI) project. A subsidiary is seeking to pay down short-term debt with a $15 million long-term note issuance by year-end.
• Risks: Key risks include weather variations, regulatory changes, interest rate fluctuations (short-term debt is variable), and energy commodity price volatility. While commodity costs are generally passed through to customers, there is a risk regulators may require deferral of some costs.
• Environmental: The company is managing remediation at the Sawyer Passway MGP site in Fitchburg, MA. Management believes there are no material losses reasonably possible in excess of recorded amounts.

Investor Verification Checklist

• Regulatory Rate Case Outcome: Verify the approval and timing of the $4.6 million rate increase filing by UES in New Hampshire to recover pension costs.
• Gas Margin Sharing: Monitor the Massachusetts Department of Telecommunications and Energy (MDTE) decision regarding whether margins from the new large industrial gas contract must be shared with other customers.
• Debt Refinancing: Confirm the successful placement of the $15 million long-term note by the subsidiary to reduce variable-rate short-term debt exposure.
• Weather Sensitivity: Assess the impact of seasonal weather variations on future electric sales volumes, given the significant Q3 growth was weather-driven.
• Pension Funding: Review the company's ability to meet minimum pension contributions ($0.7 million required for 2005) and the impact of actuarial assumption changes on future costs.