Unitil Corporation: 2021 Q3 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 gas transmission through Granite State Gas Transmission. The filing covers the unaudited three and nine months ended September 30, 2021, compared with the corresponding 2020 periods. The distribution utilities served approximately 107,100 electric and 85,600 gas customers, and net utility plant was $1.237 billion at September 30, 2021.
Financial Performance and Key Metrics
| Metric | Q3 2021 | Q3 2020 | 9M 2021 | 9M 2020 |
|---|---|---|---|---|
| Total operating revenue | $98.1 million | $87.4 million | $333.5 million | $301.7 million |
| Operating income | $7.2 million | $7.4 million | $51.4 million | $46.1 million |
| Net income | Breakeven | $0.3 million | $21.6 million | $18.6 million |
| EPS, basic and diluted | Breakeven | $0.02 | $1.42 | $1.25 |
| Operating cash flow | Not separately provided | Not separately provided | $95.9 million | $74.9 million |
| Capital expenditures | Not separately provided | Not separately provided | $81.5 million | $93.6 million |
- Gas operating revenue increased 18.5% to $32.6 million in Q3 and 15.1% to $151.3 million for the nine-month period. Electric operating revenue increased 9.3% to $65.5 million in Q3 and 7.0% to $182.2 million for nine months. Purchased gas and electric costs are generally recovered through pass-through rate mechanisms and therefore do not directly affect earnings.
- Gas adjusted gross margin, a non-GAAP measure, increased 7.8% to $19.4 million in Q3 and 10.7% to $92.2 million for nine months. Electric adjusted gross margin increased 3.7% to $25.4 million in Q3 and 4.9% to $73.4 million for nine months.
- Total GAAP gross margin was $30.0 million in Q3 2021 versus $28.8 million in Q3 2020, and $121.1 million for nine months versus $112.6 million.
- Q3 operating margin was approximately 7.3%, compared with 8.5% in Q3 2020. The nine-month operating margin was approximately 15.4%, compared with 15.3% in the prior-year period.
- Operating and maintenance expense increased 3.7% in Q3 and 5.4% for nine months. Depreciation and amortization increased 8.0% in Q3 and 9.3% for nine months, primarily due to higher utility plant in service and amortization.
- Net interest expense increased $0.9 million in Q3 and $1.8 million for nine months, primarily because of higher interest on long-term debt.
- Cash provided by operations was $95.9 million, compared with $74.9 million in the prior-year period. Capital expenditures used $81.5 million, and dividends paid were $17.5 million.
Liquidity, Debt and Capitalization
- Cash and cash equivalents were $8.8 million at September 30, 2021, compared with $6.0 million at December 31, 2020.
- Short-term debt was $30.5 million, and current maturities of long-term debt were $10.1 million. Long-term debt, net of issuance costs and excluding the current portion, was $501.3 million.
- Total capitalization was $940.9 million, including $439.6 million of stockholders’ equity and $501.3 million of long-term debt excluding current maturities.
- The $120 million revolving credit facility had $89.5 million of availability at September 30, 2021, with $30.5 million of short-term borrowings outstanding and no letters of credit outstanding. The facility matures July 25, 2023, subject to potential extensions.
- Unitil completed a common-stock offering of 800,000 shares in August 2021 and an additional 120,000 shares in September 2021. Net proceeds were approximately $38.6 million and $5.9 million, respectively, for total proceeds of approximately $44.5 million.
- The company was in compliance with its credit-facility covenants, including the requirement that funded debt to capitalization not exceed 65%. Its principal debt ratings were BBB+ from Standard & Poor’s and Baa2 or Baa1 from Moody’s, depending on the issuing entity.
Material Changes Versus the Prior Comparable Period
- Nine-month net income increased $3.0 million, or approximately 16%, while EPS increased from $1.25 to $1.42. The increase reflected higher gas and electric adjusted gross margins, partly offset by higher operating expenses, depreciation, interest expense and taxes.
- Q3 net income declined $0.3 million to breakeven because higher adjusted margins were more than offset by higher operating expenses, depreciation, interest expense and taxes.
- Gas therm sales increased 5.0% in Q3 and 4.3% for nine months. Electric kWh sales increased 0.2% in Q3 and 2.0% for nine months.
- Gas customers increased by 592 and electric customers by 652 year over year at September 30, 2021.
- Net utility plant increased from $1.193 billion at December 31, 2020 to $1.237 billion at September 30, 2021. Common equity increased from $285.3 million to $331.6 million, primarily reflecting the equity offering.
- The quarterly dividend was increased to $0.38 per share from $0.375 per share in 2020, representing an annualized rate of $1.52 per share.
Guidance, Outlook, Risks and Unusual Items
- The filing does not provide a specific earnings or financial guidance range. Management stated that operating cash flows, available borrowing capacity and access to debt and equity markets should be sufficient to fund working capital and capital investment needs.
- Results are seasonal, particularly because gas demand is concentrated in the heating season. Weather variability may materially affect gas and electric sales, although revenue decoupling and higher fixed billing components reduce this sensitivity for portions of the business.
- COVID-19 had not disrupted utility service through the filing date, but management continued to identify risks related to customer demand, collections, supply, employee and contractor availability, operating costs and regulatory recovery. COVID-related regulatory proceedings remained pending.
- Unitil Energy and Northern Utilities received temporary rate increases effective June 1 and October 1, 2021, respectively, while permanent rate proceedings remained pending. Northern Utilities requested a permanent annual revenue increase of $7.8 million, and Unitil Energy requested $12.0 million.
- Regulatory recovery remains important. Regulatory assets totaled $163.0 million, including $107.0 million related to retirement benefits. Recovery of certain customer information-system costs in Maine remains under investigation, although management does not expect a material adverse outcome.
- Environmental matters include remediation and monitoring at former manufactured-gas-plant sites and investigations at Unitil Energy’s Kensington facility. Recorded environmental obligations totaled $2.4 million at September 30, 2021.
- Fitchburg remains subject to Massachusetts proceedings concerning grid modernization, renewable-energy procurement and the role of gas utilities in achieving 2050 net-zero greenhouse-gas goals. The filing states that certain long-term renewable power purchase obligations could materially affect contractual obligations once specified conditions are met.
- The company identified approximately $0.7 million of guarantees outstanding on energy and gas storage management contracts, generally with durations of less than one year.
Most Important Facts for Investors to Verify
- Progress and final outcomes of the Unitil Energy and Northern Utilities rate cases, including permanent rates and treatment of COVID-related bad debt and waived fees.
- Whether regulatory assets, pension costs, storm costs, environmental expenditures and customer information-system costs remain recoverable through future rates.
- Capital spending requirements, refinancing needs and continued availability of the revolving credit facility before its July 2023 maturity.
- Effects of weather, gas and electric commodity prices, customer demand and the company’s pass-through and decoupling mechanisms on future margins and cash flow.
- Potential obligations and rate impacts from Massachusetts offshore wind, clean-energy contracts and decarbonization requirements.
- Changes in pension obligations, interest rates and credit ratings, which could affect liquidity, financing costs and required contributions.
- The filing reports effective disclosure controls and no material changes to internal control over financial reporting; the filing text states that no material changes occurred to the previously disclosed risk factors.