Unitil Corporation: Q1 2017 Form 10-Q Summary
Business Context and Reporting Period
Unitil Corporation is a regulated utility holding company providing electric and natural gas distribution services in New Hampshire, Massachusetts and Maine, plus interstate natural gas transmission and non-regulated energy brokerage services. The filing covers the three months ended March 31, 2017, with comparisons to the same period in 2016. The company served approximately 104,300 electric and 79,900 natural gas customers and had $890.9 million of net utility plant at March 31, 2017.
Financial Performance and Key Metrics
| Metric | Q1 2017 | Q1 2016 | Change |
|---|---|---|---|
| Total operating revenue | $126.0 million | $125.8 million | +$0.2 million |
| Operating income | $26.1 million | $23.4 million | +$2.7 million |
| Net income | $12.4 million | $10.9 million | +$1.5 million |
| Basic and diluted EPS | $0.88 | $0.78 | +$0.10 |
| Operating cash flow | $37.5 million | $14.2 million | +$23.3 million |
| Capital expenditures | $17.5 million | $11.3 million | +$6.2 million |
- Gas operating revenue was $74.8 million, up 2.3%; gas sales margin increased to $38.0 million from $35.9 million.
- Electric operating revenue was $49.5 million, down 3.1%; electric sales margin increased to $22.0 million from $20.1 million.
- Combined gas and electric sales margin was $60.0 million, compared with $56.0 million in Q1 2016. Sales margin is a non-GAAP measure because purchased energy costs are generally passed through to customers.
- Natural gas therm sales increased 3.6%, supported by 5.4% more heating degree days, higher rates and customer growth. Electric kilowatt-hour sales decreased 1.2%, primarily because of lower commercial and industrial usage.
- O&M expense increased 1.1% to $17.6 million. Depreciation and amortization rose 5.9% to $12.5 million, and taxes other than income taxes increased 10.0% to $5.5 million.
- Net interest expense increased $0.5 million to $6.0 million, reflecting higher short-term debt and lower net interest income on regulatory balances.
- The company declared a quarterly common dividend of $0.36 per share, representing a current annualized rate of $1.44 per share.
Liquidity, Debt and Capitalization
- Cash and cash equivalents were $8.8 million at March 31, 2017, compared with $5.8 million at December 31, 2016.
- Short-term borrowings were $76.6 million, versus $81.9 million at year-end 2016. The $120.0 million revolving credit facility had $42.3 million available after $1.1 million of letters of credit.
- Long-term debt, net of issuance costs, was $333.5 million, including a $30.0 million current portion. Total stockholders’ equity was $301.8 million and total capitalization was $605.3 million.
- Gross short-term borrowings during the quarter were $55.7 million and gross repayments were $61.0 million. The company remained in compliance with its credit facility covenants, including the 65% funded-debt-to-capitalization limit.
- Unitil and its utility subsidiaries were rated BBB+ by Standard & Poor’s. On April 21, 2017, subsidiaries priced $90 million of senior unsecured notes expected to close in the fourth quarter of 2017, primarily to repay short-term debt and for general corporate purposes.
- Operating cash flow exceeded capital expenditures by $20.0 million in Q1 2017. Financing activities used $17.0 million, including $5.1 million of dividends paid.
Material Changes Versus the Prior Comparable Period
- Net income rose 13.8% and EPS increased 12.8%, driven primarily by higher gas and electric sales margins.
- Gas margin benefited from approximately $1.1 million of higher distribution rates, $0.6 million from colder weather and $0.4 million from customer growth.
- Electric margin benefited from approximately $1.6 million of higher distribution rates and $0.3 million from customer growth.
- Operating cash flow improved substantially because of working-capital changes, including accrued revenue and exchange gas receivables.
- Net utility plant increased to $890.9 million from $883.4 million at December 31, 2016 and $813.1 million at March 31, 2016, reflecting continued capital investment.
- Retirement benefit obligations increased to $151.5 million from $149.0 million at year-end 2016 and $126.8 million at March 31, 2016.
Guidance, Outlook, Risks and Unusual Items
- Unitil Energy received an April 20, 2017 final rate order approving a permanent $4.1 million distribution-rate increase and a three-year rate plan, including a $0.9 million step adjustment in May 2017 and future adjustments based on 80% of capital expenditures.
- Northern Utilities issued notices of intent to seek approximately $5.5 million of higher Maine gas distribution rates and approximately $5.0 million of higher New Hampshire gas distribution rates. The Maine filing was announced March 31, 2017; the New Hampshire notice was issued April 24, 2017.
- Northern Utilities’ 2017 targeted infrastructure replacement adjustment was approved at $1.1 million annually effective May 1, 2017. Proposed targeted-area build-out programs in Maine could add approximately 3,000 customers and up to $3.0 million of annual distribution revenue if approved and completed.
- Outstanding guarantees on energy and natural gas storage management contracts totaled approximately $23.9 million at March 31, 2017, with the longest term extending through August 2017.
- Regulatory assets totaled $135.5 million and regulatory liabilities totaled $13.5 million. Recovery depends on continued regulatory approval and the company’s ability to remain subject to regulated-operations accounting.
- Key risks include regulatory decisions and rate recovery, weather, energy commodity and transmission costs, interest rates, access to financing, pension funding, severe storms, operating hazards, environmental requirements, customer demand and competition.
- Pending matters include rate proceedings, energy and grid-modernization proceedings, net-metering issues, clean-energy procurements and FERC transmission return-on-equity proceedings. Management does not expect current legal proceedings to have a material effect on financial position, results or cash flows.
- The company adopted ASU 2016-09 in Q1 2017 with no reported financial statement impact. It expects to adopt the new revenue-recognition standard in Q1 2018 and does not expect a material impact; the impact of new pension-cost and lease guidance was still being evaluated.
Most Important Facts for Investors to Verify
- Verify completion and terms of the planned $90 million subsidiary senior-note financing and whether proceeds reduce short-term borrowings as expected.
- Monitor approval and implementation of Northern Utilities’ Maine and New Hampshire rate cases, Fitchburg’s gas system enhancement filing and the related revenue adjustments.
- Assess whether colder weather, rate increases and customer growth in Q1 are recurring drivers or primarily seasonal effects.
- Review the company’s regulatory asset recovery, pension obligations, environmental liabilities and storm-cost recovery assumptions.
- Track available revolving-credit capacity, refinancing needs, interest-rate exposure and compliance with the 65% debt-to-capitalization covenant.
- Consider the seasonal nature of natural gas earnings; management states that first-quarter results are not necessarily indicative of full-year results.