UTL

UNITIL CORP 10-Q Summary: Quarter Ended September 30, 2004

Business Context and Reporting Period

This Form 10-Q covers the three and nine months ended September 30, 2004, for Unitil Corporation, a public utility holding company. The Company operates regulated retail distribution utilities for electricity and natural gas in New Hampshire (Unitil Energy Systems, Inc.) and Massachusetts (Fitchburg Gas and Electric Light Company). It also maintains an unregulated energy brokering subsidiary, Usource. As of October 27, 2004, there were 5,538,604 shares of common stock outstanding.

Key Financial Metrics

Material Changes vs. Prior Period

• Q3 Net Income Decline: Net income decreased by approximately $0.23 million in Q3 2004 compared to Q3 2003. This was driven by lower sales due to abnormally mild summer weather (33% below normal temperatures) and higher operating expenses.
• Weather Impact: Mild weather reduced electricity usage for cooling, negatively impacting electric sales margins by $0.1 million in the quarter. Gas sales margins also declined slightly due to lower peak demand billings from industrial customers.
• Expense Increases: Operating and Maintenance (O&M) expenses increased by $0.5 million in Q3. This included a $0.2 million reserve for uncollectible amounts from a large customer who filed for bankruptcy in September 2004, and $0.3 million in higher retiree and employee benefit costs.
• Interest Expense: Net interest expense decreased by $0.3 million in Q3 and $0.8 million YTD, primarily due to lower short-term borrowings and increased interest income on regulatory assets.
• YTD Performance: Despite the Q3 decline, Net Income for the first nine months of 2004 increased 3% to $5.68 million compared to the prior year, aided by lower interest costs and increased kWh sales to commercial/industrial customers.

Guidance, Outlook, and Risks

• Regulatory Environment: The Company is subject to significant regulatory oversight by the NHPUC, MDTE, and FERC. Recent approvals allow for the recovery of pension and post-retirement benefit costs through rate adjustments, reducing earnings volatility.
• Forward-Looking Risks: Key risks include variations in weather, changes in the regulatory environment, interest rate fluctuations, and fluctuations in energy commodity prices. The Company notes that forward-looking statements are subject to inherent uncertainties.
• Legal and Environmental: An MDTE investigation into dealings with Enermetrix, Inc. is pending, though management does not expect a material adverse effect. Environmental remediation at the Sawyer Passway MGP site continues, with costs recoverable in gas rates.
• Subsequent Events: On October 15, 2004, the Company redeemed all three series of its Redeemable Cumulative Preferred Stock (approx. $0.9 million) using operating cash.

Investor Verification Checklist

• Weather Sensitivity: Verify the extent to which future earnings may be impacted by seasonal weather variations, particularly regarding cooling and heating demand.
• Regulatory Asset Recovery: Confirm the status of regulatory approvals for the recovery of stranded costs and pension/PBOP expenses, which are critical to maintaining margins.
• Customer Concentration: Assess the risk associated with large industrial customers, evidenced by the recent bankruptcy reserve and declining peak demand billings.
• Debt Structure: Review the Company's reliance on short-term borrowings ($19.75 million) versus long-term debt and the impact of interest rate changes on variable-rate debt.
• Unregulated Segment: Monitor the growth and profitability of the Usource energy brokering business, which showed revenue growth of 33% in Q3.