Business Context and Reporting Period
Unitil Corporation is a regulated utility holding company serving approximately 106,100 electric customers and 83,900 gas customers in New Hampshire, Massachusetts and Maine. Its principal businesses are electric and gas distribution, supported by Granite State Gas Transmission, an 86-mile interstate gas pipeline. This unaudited Form 10-Q covers the three and nine months ended September 30, 2020, compared with the corresponding 2019 periods.
Financial Performance and Key Metrics
| Metric | Q3 2020 | Q3 2019 | 9M 2020 | 9M 2019 |
|---|---|---|---|---|
| Total operating revenue | $87.4 million | $85.3 million | $301.7 million | $321.8 million |
| Operating income | $7.4 million | $10.0 million | $46.1 million | $51.1 million |
| Net income | $0.3 million | $2.3 million | $18.6 million | $32.8 million |
| EPS, basic and diluted | $0.02 | $0.15 | $1.25 | $2.20 |
| Gas adjusted gross margin | $18.0 million | $18.7 million | $83.3 million | $85.5 million |
| Electric adjusted gross margin | $24.5 million | $25.1 million | $70.0 million | $70.6 million |
| Cash provided by operating activities | Not separately provided | Not separately provided | $74.9 million | $92.2 million |
| Capital expenditures | Not separately provided | Not separately provided | $93.6 million | $76.7 million |
GAAP gross margin was $28.8 million in the third quarter and $112.6 million for the first nine months of 2020, compared with $31.0 million and $118.0 million, respectively, in the comparable 2019 periods. Adjusted gross margin excludes depreciation and amortization and is a non-GAAP measure used by management to evaluate utility sales profitability.
- Gas therm sales declined 5.5% in the quarter and 7.1% year to date. Gas adjusted gross margin decreased 3.7% and 2.6%, respectively.
- Total electric kilowatt-hour sales increased 4.3% in the quarter and 1.2% year to date, but electric adjusted gross margin declined 2.4% and 0.8%, respectively, because of weaker commercial and industrial demand.
- Operation and maintenance expense increased $0.6 million in the quarter but decreased $1.3 million year to date. Depreciation and amortization increased $0.9 million in the quarter and $1.7 million year to date.
- Net interest expense decreased $0.2 million in both comparison periods to $5.6 million in the quarter and $17.7 million year to date.
- The company declared quarterly dividends of $0.375 per share, equivalent to a current annualized rate of $1.50 per share.
Liquidity, Debt and Capital Resources
- Cash and cash equivalents were $8.2 million at September 30, 2020, versus $5.2 million at December 31, 2019.
- The $120 million revolving credit facility had $17.3 million of short-term borrowings and $0.1 million of letters of credit outstanding, leaving $102.6 million available. The facility matures in July 2023, subject to extension provisions.
- Total long-term debt was $539.1 million before unamortized issuance costs, compared with $460.5 million at December 31, 2019. Long-term debt, net of issuance costs and excluding the current portion, was $529.0 million.
- In September 2020, subsidiaries issued $95.0 million of long-term debt: $40.0 million by Northern Utilities, $27.5 million by Fitchburg and $27.5 million by Unitil Energy. Proceeds were used primarily to repay short-term debt and for general corporate purposes.
- Operating cash flow of $74.9 million did not fully fund $93.6 million of capital expenditures; financing activities provided $21.7 million, including $95.0 million of long-term debt issuance.
- The company was in compliance with its credit facility covenants, including the quarterly funded-debt-to-capitalization limit of 65%, and management stated that available liquidity and expected operating cash flows should support planned requirements.
Material Changes Versus the Prior Comparable Period
- Year-to-date net income fell $14.2 million, primarily because 2019 included a $13.4 million pretax gain, or approximately $9.8 million after tax, from the divestiture of Usource.
- Excluding that unusual 2019 gain, 2020 earnings were pressured by warmer winter weather, lower commercial and industrial usage associated with the COVID-19 economic slowdown, and higher depreciation and bad-debt expense.
- Warmer-than-normal winter weather reduced estimated year-to-date net income by approximately $3.1 million, or $0.20 per share.
- Residential electric sales benefited from stay-at-home orders and warmer summer weather, while commercial and industrial electric sales declined.
- Net utility plant increased to $1.185 billion from $1.112 billion at year-end 2019, reflecting continued capital investment.
- Retirement benefit obligations increased to $145.0 million from $141.9 million at year-end 2019, while regulatory assets totaled $136.1 million.
Outlook, Management Commentary, Risks and Unusual Items
The filing does not provide formal quantitative earnings guidance. Management reported that electric and gas distribution systems continued to operate without pandemic-related service disruption through the filing date and that it implemented business-continuity, remote-work, physical-security and cybersecurity measures.
- COVID-19 remains a material uncertainty because it may affect employee and contractor availability, customer demand, commodity supply, collections and cash flows. Bad-debt expense included a provision for pandemic effects.
- The company recognized a $0.6 million CARES Act employee-retention credit in the third quarter as a reduction of employment tax expense.
- Regulated purchased gas and electricity costs are generally recovered through pass-through mechanisms, limiting direct commodity-price exposure; earnings remain sensitive to weather, sales volumes, rates, regulatory recovery and operating costs.
- Several rate actions became effective in 2020, including Northern Utilities’ Maine base-rate increase and infrastructure-replacement adjustment and Fitchburg gas and electric rate adjustments. A proposed Granite State settlement would increase annual revenue by approximately $1.3 million beginning November 1, 2020, subject to FERC approval.
- Fitchburg’s preliminary GSEP recovery amount is approximately $2.1 million, to be recovered over 24 months beginning March 1, 2021, and remains pending before the MDPU.
- Outstanding guarantees on certain energy and gas storage management contracts totaled approximately $6.2 million. Environmental obligations totaled $2.2 million at September 30, 2020, including an accrued $0.8 million for the Rochester, New Hampshire site.
- Pending regulatory matters include Massachusetts clean-energy and offshore-wind contracts, FERC transmission return-on-equity proceedings and various rate reconciliation filings. Management does not expect current legal proceedings to have a material adverse effect, but regulatory outcomes could affect future recovery and rates.
- The company had no material changes to previously disclosed risk factors other than the COVID-19 risk. Management concluded that disclosure controls and internal control over financial reporting were effective.
Important Facts for Investors to Verify
- Whether commercial and industrial demand and customer collections recover as COVID-19 effects continue.
- The effect of warmer or colder weather on gas margins and full-year earnings.
- FERC approval and implementation of the Granite State settlement and the timing of related revenue increases.
- Final regulatory treatment and recovery of Fitchburg GSEP balances, clean-energy contracts and transmission-rate proceedings.
- Capital expenditure levels, operating cash flow coverage and the effect of additional debt issuance on leverage and interest expense.
- The recoverability of regulatory assets, including retirement, environmental, storm and energy-supply balances.
- Future pension funding requirements, environmental remediation costs and the $6.2 million of outstanding guarantees.