Unitil Corporation — Q1 2014 Form 10-Q Summary
Business context and reporting period
Unitil is a regulated utility holding company distributing electricity and natural gas in New Hampshire, Massachusetts and Maine, with an 86-mile interstate natural gas transmission pipeline and a non-regulated energy-brokering business. The filing covers the unaudited three months ended March 31, 2014, compared with the same period in 2013. The company served approximately 102,400 electric and 75,900 natural gas customers and had $666.8 million of net utility plant at March 31, 2014.
Key financial metrics
| Metric | Q1 2014 | Q1 2013 | Change |
|---|---|---|---|
| Total operating revenue | $156.1 million | $118.2 million | +$37.9 million |
| Operating income | $25.4 million | $21.9 million | +$3.5 million |
| Net income | $12.6 million | $10.8 million | +17% |
| Basic and diluted EPS | $0.91 | $0.79 | +$0.12 |
| Operating margin | 16.3% | 18.5% | Lower, primarily due to pass-through costs |
| Cash flow from operations | $28.7 million | $40.8 million | -$12.1 million |
| Capital expenditures | $9.2 million | $14.4 million | -$5.2 million |
Gas operating revenue increased 30.8% to $92.6 million, while gas sales margin, a non-GAAP measure, rose 19.7% to $36.5 million. Electric operating revenue increased 34.9% to $61.9 million, while electric sales margin increased 4.3% to $19.2 million. Commodity costs are generally recovered through regulatory pass-through mechanisms and therefore do not directly drive earnings.
Gas therm sales increased 14.9%, and electric kilowatt-hour sales increased 5.0%. Heating degree days were 12% higher than in the prior-year quarter. Weather-normalized gas therm sales, excluding decoupled sales, were estimated to be 6.4% higher. Natural gas customers increased 3.1% and electric customers increased 0.6% year over year.
Operating expenses increased to $130.7 million from $96.3 million. Excluding pass-through energy costs, notable increases included O&M expense of $1.9 million, depreciation and amortization of $0.7 million, taxes other than income taxes of $0.8 million, and net interest expense of $0.6 million. O&M growth reflected higher compensation, employee and retiree benefits, and utility operating costs.
At March 31, 2014, cash and cash equivalents were $14.3 million, total assets were $928.0 million, and common stock equity was $273.8 million. Short-term debt was $59.2 million and total long-term debt was $287.2 million, including the current portion. The $120.0 million revolving credit facility had $60.8 million available. Unitil was in compliance with its debt covenants, including the 65% funded-debt-to-capitalization limit.
The quarterly common dividend was $0.345 per share. The 2014 capital spending budget was $91 million. The company used $14.6 million in financing activities during the quarter, including $4.8 million of dividends and $8.8 million related to exchange-gas financing.
Material changes versus the prior comparable period
- Net income rose $1.8 million, and EPS increased from $0.79 to $0.91.
- Higher gas and electric margins reflected colder weather, customer growth, and recently approved distribution rates.
- Revenue growth substantially exceeded margin growth because purchased gas and electricity costs increased and were passed through to customers.
- Operating cash flow declined because of less favorable working-capital movements, including lower collections of flow-through costs and changes in regulatory charges.
- Short-term debt increased from $32.6 million at March 31, 2013 to $59.2 million, while available revolving credit increased from $27.4 million to $60.8 million.
- Net utility plant increased from $608.3 million to $666.8 million year over year.
Guidance, outlook, risks and unusual items
- Northern Utilities’ Maine division received a permanent annual revenue increase of $3.8 million effective January 1, 2014. Its first $1.3 million TIRA filing was pending approval, with future TIRA increases projected at approximately $1.0 million annually.
- After quarter-end, Northern Utilities’ New Hampshire division received approval for a $4.6 million annual base-revenue increase and a $1.4 million 2014 step adjustment, effective May 1, 2014.
- Unitil Energy filed for a $1.5 million annual step increase effective May 1, 2014, subject to approval. Granite State expected to seek a $0.6 million annual adjustment effective August 1, 2014.
- Fitchburg’s electric rate case sought a $6.7 million annual increase, including recovery of approximately $2.1 million of extraordinary storm costs. A final order was expected in the second quarter of 2014.
- In April 2014, Unitil Service entered a construction financing arrangement of up to $15 million for a customer information system; $4.4 million was funded and used to reduce short-term borrowings.
- Outstanding guarantees on energy and gas-storage contracts totaled approximately $31.0 million, with the longest guarantee extending through April 2015. The company also guaranteed $2.2 million of Unitil Realty notes and $10.0 million of Granite State notes.
- Key risks include regulatory decisions and cost recovery, weather variability, energy commodity and transmission costs, interest rates, access to financing, debt covenants, severe storms, environmental obligations, pension funding, competition and customer demand.
- Pending or ongoing matters include Fitchburg’s electric rate case, environmental remediation at manufactured-gas-plant sites, an investigation of a 2013 Fitchburg gas explosion, and litigation related to the 2008 Fitchburg ice storm. Management did not expect these matters to have a material adverse effect, but outcomes remain uncertain.
- The company noted that first-quarter results are seasonally favorable because of winter natural-gas demand and are not necessarily indicative of full-year results.
Investor verification checklist
- Verify final regulatory outcomes and effective dates for the Northern Utilities, Unitil Energy, Granite State and Fitchburg rate proceedings.
- Assess whether colder weather and first-quarter gas demand are sustainable after normalization.
- Monitor operating cash flow, short-term borrowings, capital spending and compliance with the 65% debt-to-capitalization covenant.
- Review the recoverability of regulatory assets, including $136.2 million of total regulatory assets at March 31, 2014.
- Track storm-cost recovery, environmental remediation estimates and related regulatory approvals.
- Evaluate pension, postretirement and environmental obligations, as well as the company’s guarantees and pending litigation.
- Confirm the effect of the April 2014 customer-information-system financing on future lease obligations and liquidity.