Unitil Corporation: Q3 2012 Form 10-Q Summary
Business Context and Reporting Period
Unitil Corporation is a regulated utility holding company distributing electricity and natural gas in New Hampshire, Massachusetts, and Maine, with an interstate natural gas transmission subsidiary and a non-regulated energy-brokering business. The filing covers the three and nine months ended September 30, 2012; financial statements are unaudited.
- The distribution utilities served approximately 101,400 electric customers and 71,900 natural gas customers.
- Net utility plant was $535.1 million at September 30, 2012.
- Utility revenues include pass-through recovery of approved purchased electricity and natural gas costs, so changes in those costs generally do not directly affect earnings.
Financial Performance and Key Metrics
| Metric | Q3 2012 | Q3 2011 | First nine months 2012 | First nine months 2011 |
|---|---|---|---|---|
| Total operating revenues | $71.3 million | $73.2 million | $254.3 million | $258.1 million |
| Operating income | $5.0 million | $5.2 million | $23.3 million | $22.8 million |
| Net income | $0.5 million | $(1.6) million | $9.2 million | $6.4 million |
| Earnings applicable to common shareholders | $0.5 million | $(1.6) million | $9.1 million | $6.3 million |
| Basic and diluted EPS | $0.03 | $(0.15) | $0.74 | $0.58 |
| Cash provided by operating activities | Not separately provided | Not separately provided | $61.9 million | $49.8 million |
- Natural gas sales margin was $11.2 million in Q3, up $3.0 million, and $51.1 million year to date, up $8.3 million.
- Electric sales margin was $19.1 million in Q3, up $1.3 million, and $52.7 million year to date, up $2.9 million.
- O&M expense increased $0.8 million in Q3 and $4.4 million year to date. Depreciation and amortization increased $2.0 million in Q3 and $3.4 million year to date.
- Net interest expense declined to $4.4 million in Q3 and $13.9 million year to date, compared with $6.6 million and $16.0 million, respectively, in the prior periods.
- Q3 and year-to-date operating margins, calculated as operating income divided by operating revenue, were approximately 7.0% and 9.2%, respectively, compared with approximately 7.1% and 8.8% in the comparable 2011 periods.
- Cash flow from operations exceeded capital spending by $14.5 million during the first nine months of 2012. Capital expenditures were $47.4 million, compared with $42.7 million in 2011.
Liquidity, Capitalization, and Debt
- Cash was $9.5 million at September 30, 2012, compared with $7.5 million at December 31, 2011.
- Total capitalization was $540.4 million, including $250.9 million of common equity, $2.0 million of preferred stock, and $288.0 million of long-term debt.
- Short-term debt declined to $24.1 million from $87.9 million at December 31, 2011.
- The revolving credit facility was reduced to a $60.0 million limit in July 2012; $24.1 million was outstanding and $35.9 million was available at September 30, 2012. The facility expires October 8, 2013.
- The company remained in compliance with its debt covenants, including the requirement that funded debt not exceed 65% of capitalization.
- Unitil issued 2.76 million common shares at $25.25 per share in May 2012, generating approximately $65.7 million of net proceeds. The proceeds were used for utility equity contributions, debt repayment, and general corporate purposes.
- Quarterly common dividends remained $0.345 per share, or $1.38 annualized.
Material Changes Versus the Prior Comparable Period
- Year-to-date common earnings increased $2.8 million, or $0.16 per share, despite a higher average share count following the May equity offering.
- Q3 2012 benefited from higher gas and electric distribution rates, customer growth, stronger summer electric usage, and lower interest expense.
- Natural gas therm sales increased 3.0% in Q3 but decreased 8.0% year to date. Electric kWh sales increased 0.5% in Q3 but decreased 2.3% year to date.
- There were 20% fewer heating degree days in the first nine months of 2012, while Q3 cooling degree days were 19% higher than in Q3 2011.
- Management estimated that mild winter and early-spring weather reduced year-to-date earnings by approximately $2.0 million, or $0.17 per share.
- Q3 2011 included a non-recurring $2.0 million pre-tax charge related to carrying charges disallowed in Massachusetts rate cases, which reduced the comparability of Q3 results.
- Vegetation management and electric reliability spending totaled approximately $1.0 million in Q3 and $2.5 million year to date; these costs are recovered through rate mechanisms.
Guidance, Outlook, Risks, Contingencies, and Unusual Items
- The filing does not provide quantitative full-year earnings guidance. Management cautions that interim results are not necessarily indicative of full-year results because of the seasonal natural gas business.
- Revenue decoupling mechanisms at Fitchburg cover approximately 27% of total electric sales volumes and 13% of total natural gas sales volumes, reducing the effect of weather and usage on related distribution margins.
- Key risks include regulatory decisions affecting rates and cost recovery, weather volatility, severe storms, energy commodity and transmission costs, interest rates, access to financing, debt covenants, pension funding, climate and environmental regulation, operating hazards, customer demand, competition, and Usource contract performance.
- Outstanding guarantees on energy and natural gas storage contracts were approximately $20.6 million at September 30, 2012, with the longest term extending through February 2014.
- Environmental obligations included $12.0 million for the Sawyer Passway former manufactured gas plant site and $2.8 million related to Northern Utilities former manufactured gas plant sites. The company expects recovery of qualifying costs through regulated rates but noted that estimates may change.
- Fitchburg had a pending putative class action related to the December 2008 ice storm. Management believes the lawsuit is without merit and that its ultimate resolution will not materially affect financial position.
- A FERC audit of Unitil and its subsidiaries was ongoing, with the final report expected in the fourth quarter of 2012.
- The company reported no material changes to the risk factors disclosed in its 2011 Form 10-K and no material subsequent events through the filing date.
Important Facts for Investors to Verify
- Verify the sustainability of higher distribution margins after adjusting for rate-case benefits, decoupling, weather, and the non-recurring Q3 2011 charge.
- Monitor the impact of mild weather on gas and electric volumes and the extent to which decoupling offsets volume sensitivity.
- Review the company’s ability to refinance or renew the revolving credit facility before its October 2013 maturity.
- Assess the balance between capital expenditures, pension contributions, dividends, and internally generated cash flow.
- Track regulatory recovery of storm, environmental, pension, and other deferred costs, including the pending or future rate proceedings.
- Confirm the financial impact and resolution of the FERC audit, the Fitchburg ice-storm litigation, and the pending Unitil Energy billing adjustment settlement.