UNITIL CORP quarterly report, Q3 FY2011

Unitil Corporation — 2011 Q3 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 interstate natural gas transmission subsidiary and a non-regulated energy-brokering business, Usource. The filing covers the three and nine months ended September 30, 2011. The company served approximately 100,900 electric and 70,800 natural gas customers and had $499.8 million of net utility plant at quarter-end.

Financial Performance and Key Metrics

Metric	Q3 2011	Q3 2010	9M 2011	9M 2010
Operating revenues	$73.2 million	$76.1 million	$258.1 million	$260.5 million
Operating income	$5.2 million	$4.7 million	$22.8 million	$18.2 million
Net income (loss)	$(1.6) million	$(0.1) million	$6.4 million	$4.4 million
Earnings applicable to common shareholders	$(1.6) million	$(0.1) million	$6.3 million	$4.3 million
EPS	$(0.15)	$(0.01)	$0.58	$0.40
Cash flow from operations	Not separately provided	Not separately provided	$49.8 million	$21.5 million

Operating margins, calculated from reported operating income and revenue, were approximately 7.1% in Q3 and 8.8% for the first nine months, versus approximately 6.2% and 7.0%, respectively, in the comparable periods.
Gas revenue increased 21.8% in Q3 and 9.9% year to date, while gas sales margin increased $0.3 million and $4.3 million, respectively.
Electric revenue decreased 12.2% in Q3 and 8.6% year to date because of lower purchased-power costs and pass-through revenue; electric sales margin nevertheless increased $0.9 million and $5.6 million, respectively, primarily from higher rates.
Natural gas therm sales increased 6.0% in Q3 and 13.1% year to date. Electric kilowatt-hour sales decreased 3.4% in Q3 but increased 0.3% year to date.
O&M expense increased $0.5 million in Q3 and $1.4 million year to date. Depreciation and amortization increased $0.8 million and $2.1 million, respectively.
Net interest expense increased $1.9 million in Q3 and $2.5 million year to date, primarily because of lower interest income on regulatory assets, including a non-recurring charge, and prior long-term debt issuance.
The board declared quarterly common dividends of $0.345 per share, or $1.38 annually, maintaining the historical quarterly dividend record.

Cash Flow, Debt and Liquidity

For the first nine months, operating cash flow of $49.8 million funded $42.7 million of capital expenditures and $11.4 million of dividend payments, resulting in a $1.0 million decline in cash to $7.9 million.
Capital expenditures were $42.7 million through September 30 and were projected at approximately $59.0 million for full-year 2011.
Total long-term debt was $288.5 million, including $0.5 million due within one year. Short-term debt was $65.4 million, leaving $14.6 million available under the then-current $80.0 million revolving credit facility.
The company was in compliance with its debt covenants at quarter-end, including the covenant limiting funded debt to 65% of capitalization.
On October 12, 2011, after quarter-end, the revolving facility was amended to increase maximum borrowings to $115 million and reduce the applicable LIBOR margin from 2.00% to 1.75%.
Outstanding guarantees related to energy and gas-storage contracts totaled $37.2 million; additional guarantees covered $3.5 million of Unitil Realty notes and $10.0 million of Granite State notes.

Material Changes and Unusual Items

Fitchburg’s Massachusetts rate case was resolved effective August 1, 2011, approving annual electric and gas revenue increases of $3.3 million and $3.7 million, revenue decoupling mechanisms, and a 9.2% return on equity.
The Fitchburg order included recovery of $11.4 million of deferred December 2008 ice-storm costs over seven years. Unitil recorded a non-recurring pre-tax charge of $2.0 million, including $1.8 million of previously accrued carrying costs.
Unitil Energy received approval for a permanent $5.2 million annual increase and an additional $5.0 million increase effective May 1, 2011, with further scheduled increases in 2012–2014.
Granite State received an additional approximately $0.5 million of annual revenue effective August 1, 2011, with potential future increases tied to planned capital projects.
Northern Utilities’ New Hampshire rate case received temporary annual revenue relief of approximately $1.7 million effective August 1, 2011. Its Maine case remained subject to regulatory approval, although a settlement contemplated temporary and permanent increases.
Unitil settled a customer billing-error matter involving $1.8 million of overcharges and $0.3 million of interest. Related non-recurring charges were approximately $0.3 million in Q3 and $0.4 million year to date for distribution charges and interest; the company also paid an additional $1.5 million under the related lawsuit settlement.
Fitchburg received approximately $2.0 million from an environmental insurance settlement in the first quarter. Environmental obligations at September 30 included $12.0 million for a former manufactured-gas-plant site and $2.5 million for Northern Utilities’ former sites.

Outlook, Risks and Contingencies

Management expects seasonal results, with natural gas earnings generally stronger in the first and fourth quarters and weaker in the second and third quarters.
Key outlook drivers include rate-case outcomes, approved recovery of capital and storm costs, continued customer growth, weather, energy volumes and regulatory decoupling mechanisms.
Material risks include regulatory disallowance or delayed recovery of costs, severe storms, weather-driven demand changes, interest-rate increases, access to debt or equity financing, restrictive debt covenants, pension obligations, environmental liabilities, commodity-market conditions and competition.
Northern Utilities’ permanent New Hampshire and Maine rate proceedings remained important contingencies. The filing states that management expected final orders by the end of the first quarter of 2012, subject to regulatory action.
Fitchburg’s appeal of the Massachusetts gas-procurement refund order remained pending before the Massachusetts Supreme Judicial Court. The company had previously recorded a $4.9 million pre-tax charge related to the required customer refund.
A putative class action related to the December 2008 ice storm remained pending; management stated that the claims were without merit and that resolution was not expected to materially affect financial position.
Management reported effective disclosure controls and no material changes affecting internal control over financial reporting. No material changes to previously disclosed risk factors were reported.

Investor Verification Checklist

Verify the final regulatory outcomes and effective dates for Northern Utilities’ New Hampshire and Maine rate cases.
Assess whether the $2.0 million Fitchburg storm-related charge and customer billing-error costs are fully non-recurring.
Reconcile reported revenue changes with pass-through purchased-energy costs and focus on sales margins rather than total revenue.
Monitor short-term borrowing needs, revolving-credit availability, covenant headroom and the impact of the October 2011 facility amendment.
Evaluate capital spending, storm-recovery mechanisms and the company’s ability to fund dividends while maintaining liquidity.
Review pension, environmental and regulatory assets, including the $147.4 million of total regulatory assets and $74.1 million of retirement benefit obligations at September 30, 2011.
Follow the Fitchburg gas-procurement appeal, the related regulatory proceedings and the December 2008 ice-storm litigation.