UTL

UNITIL CORP - Q1 2005 Filing Summary

Business Context and Reporting Period

This Form 10-Q covers the three-month period ended March 31, 2005. Unitil Corporation is a public utility holding company operating regulated retail distribution utilities for electricity and natural gas in New Hampshire (Unitil Energy Systems, Inc. or UES) and Massachusetts (Fitchburg Gas and Electric Light Company or FG&E). The company also operates an unregulated energy brokering subsidiary, Usource.

Key Financial Metrics

Material Changes vs. Prior Period

• Net Income: Decreased by $96,000 (3.4%) to $2.71 million. This decline was driven by higher depreciation and amortization expenses ($0.5 million increase) and higher property/payroll taxes, which offset improvements in gross sales margins and lower operating expenses.
• Electric Operations: Operating revenue decreased 1.3% due to lower purchased electricity costs passed through to customers. However, the gross electric sales margin increased by $0.3 million (1.9%) primarily due to rate increases in New Hampshire to recover postretirement benefit costs.
• Gas Operations: Operating revenue increased 9.0% due to higher gas commodity costs. Gross gas sales margin decreased slightly (less than $0.1 million) due to milder winter weather reducing firm therm sales by 3.7%.
• Cash Flow: Operating cash flow decreased significantly by $6.2 million to $8.8 million. This was largely due to working capital requirements, including increased cash used for accounts payable (higher commodity costs) and accounts receivable (seasonal collection fluctuations).
• Capital Expenditures: Investing cash outflows were relatively stable at $4.4 million. Annual capital expenditure budget for 2005 is $26.3 million, up from $22.9 million in 2004.

Outlook, Risks, and Management Commentary

• Regulatory Developments:
  • FG&E (Massachusetts): A seven-year rate cap expired in February 2005. A settlement agreement was filed in April 2005 to recover deferred stranded costs. An MDTE investigation into affiliate transactions remains pending, though management expects no material adverse effect.
  • UES (New Hampshire): The NHPUC denied a petition to defer pension costs via an accounting order. Consequently, UES intends to file a base rate case in 2005 to recover pension costs and other increases. A 1% rate decrease occurred in February 2005 upon expiration of a restructuring surcharge.
• Market Risks: The company faces interest rate risk on variable-rate short-term debt (average rate 3.05% in Q1 2005). Commodity price risk is mitigated by pass-through rate mechanisms. A 1% change in short-term rates would impact annual interest expense by approximately $250,000.
• Environmental: Remediation continues at the Sawyer Passway MGP site in Massachusetts. Costs are recoverable from customers subject to a 5% cap on annual charges.
• Dividends: The company declared a quarterly dividend of $0.345 per share, maintaining an annual rate of $1.38.

Investor Verification Checklist

• Pension Cost Recovery: Verify the timeline and outcome of the upcoming UES base rate case in New Hampshire, as the denial of the deferral petition may impact near-term earnings if rate increases are delayed.
• FG&E Rate Settlement: Monitor the MDTE's approval status of the settlement agreement regarding deferred stranded costs in Massachusetts.
• Working Capital Trends: Review the sustainability of the $6.2 million decline in operating cash flow, specifically regarding the seasonal nature of accounts receivable and payable fluctuations.
• Short-Term Debt Levels: Assess the impact of increased short-term borrowings ($24.3 million outstanding) on interest expense given the variable rate environment.
• Environmental Liabilities: Confirm that environmental response costs at the Sawyer Passway site remain within the recoverable limits defined by the MDTE agreement.