Unitil Corporation 2020 Q2 Form 10-Q Summary
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 natural-gas distribution, supplemented by Granite State Gas Transmission, an 86-mile interstate pipeline. The filing covers the three and six months ended June 30, 2020, compared with the corresponding 2019 periods.
Results are seasonal, particularly for gas operations, and substantially reflect cost-of-energy pass-through mechanisms. Earnings are primarily generated from returns on regulated utility investment rather than from energy commodity margins.
Financial performance and key metrics
| Metric | Three months ended June 30, 2020 | Three months ended June 30, 2019 | Six months ended June 30, 2020 | Six months ended June 30, 2019 |
|---|---|---|---|---|
| Total operating revenue | $83.9 million | $84.4 million | $214.3 million | $236.5 million |
| Operating income | $11.1 million | $12.3 million | $38.7 million | $41.1 million |
| Net income | $3.1 million | $4.0 million | $18.3 million | $30.5 million |
| Basic and diluted EPS | $0.21 | $0.27 | $1.23 | $2.05 |
| Operating cash flow | Not separately reported for the quarter | Not separately reported for the quarter | $58.3 million | $72.1 million |
| Capital expenditures | Not separately reported in consolidated cash flow for the quarter | Not separately reported in consolidated cash flow for the quarter | $48.8 million | $38.7 million |
Calculated operating margins were approximately 13.2% for the second quarter and 18.1% for the first six months of 2020, compared with approximately 14.6% and 17.4%, respectively, in the comparable 2019 periods. Calculated net margins were approximately 3.7% and 8.5% in 2020.
- Gas adjusted gross margin, a non-GAAP measure, was $22.9 million in the second quarter and $65.3 million for the first six months, down $0.4 million and $1.5 million, respectively.
- Electric adjusted gross margin was $22.4 million in the second quarter and $45.5 million for the first six months, essentially unchanged from 2019.
- Gas therm sales declined 9.0% in the quarter and 7.5% year to date. Electric kilowatt-hour sales declined 2.0% and 0.5%, respectively.
- Operation and maintenance expense decreased $1.3 million in the quarter and $1.9 million year to date, while depreciation and amortization increased $1.1 million and $0.8 million, respectively.
- Taxes other than income taxes increased $1.0 million in the quarter and $1.1 million year to date, primarily due to higher property taxes and the absence of a $0.6 million property-tax abatement recognized in the second quarter of 2019.
Liquidity, debt and capital resources
- Cash and cash equivalents were $4.2 million at June 30, 2020, compared with $5.2 million at December 31, 2019.
- The $120.0 million revolving credit facility had $74.9 million of short-term borrowings and $0.1 million of letters of credit outstanding, leaving $45.0 million available.
- Long-term debt, net of issuance costs, was $442.7 million, including $6.3 million classified as current. Total capitalization was $822.1 million, including $385.7 million of equity.
- The company generated $58.3 million of operating cash flow, used $48.8 million for capital additions and paid $11.3 million in dividends during the first six months.
- Unitil priced $95.0 million of long-term private-placement financing in June 2020, expected to close in the third quarter and intended primarily to repay short-term debt and fund general corporate purposes.
- Management stated that operating cash flow, borrowing availability and access to financial markets should be sufficient for working capital, operating needs and planned capital investments. The company remained in compliance with its debt covenants, including the 65% funded-debt-to-capitalization limit.
Material changes versus the prior comparable period
- Second-quarter net income fell $0.9 million, or $0.06 per share, primarily because of lower gas sales margins and higher operating expenses.
- First-half net income fell $12.2 million, or $0.82 per share. The comparison was heavily affected by the $9.8 million after-tax gain from the Usource divestiture recorded in the first quarter of 2019.
- Warmer weather reduced first-half gas margins; management estimated a negative net-income impact of approximately $3.1 million, or $0.20 per share. Gas service areas experienced 8.4% fewer effective degree days than in 2019 and 8.7% fewer than normal.
- COVID-19 reduced commercial and industrial demand, while stay-at-home behavior increased residential electricity usage. The company continued to provide uninterrupted electric and gas service through the filing date.
- Net utility plant increased to $1.148 billion from $1.112 billion at December 31, 2019, reflecting ongoing capital investment.
- The quarterly dividend increased to $0.375 per share from $0.370 in the comparable 2019 period, implying a current annualized rate of $1.50 per share.
Guidance, outlook, commentary and risks
The filing does not provide formal earnings or financial guidance. Management expects regulated rate mechanisms and planned capital investment to support operations, but results remain sensitive to weather, customer demand, regulatory outcomes and financing conditions.
- COVID-19 may disrupt employees or contractors, reduce electricity and gas demand, increase bad-debt expense, or affect energy supply. The company recorded higher bad-debt expense, including a provision related to the pandemic.
- Recent rate actions include increases for Northern Utilities in Maine, Fitchburg gas and electric operations, and related infrastructure-recovery mechanisms. Fitchburg’s approved settlements generally limit base-rate increases before 2023, subject to specified exceptions.
- A preliminary $2.1 million Fitchburg gas-system-enhancement deferral is expected to be recovered over 24 months beginning March 1, 2021; the matter remained pending before the Massachusetts regulator.
- Regulatory proceedings, including transmission-return-on-equity matters, could require retroactive reconciliation, although management does not expect a material adverse effect from the identified proceedings.
- Other risks include severe storms, weather variability, pension funding, interest rates, cyberattacks, environmental obligations, commodity supply and price volatility, regulatory cost recovery, competition and access to debt or equity markets.
- The company had approximately $6.2 million of guarantees outstanding on energy and gas-storage management contracts. Environmental obligations totaled $2.2 million at June 30, 2020, including estimated remediation costs for former manufactured-gas-plant sites.
Important facts for investors to verify
- Verify the closing and application of the planned $95 million third-quarter long-term financing and the resulting reduction in short-term borrowings.
- Monitor COVID-19 effects on commercial and industrial demand, customer collections, bad-debt expense and operating costs.
- Assess the sustainability of gas margins after unusually warm weather and the potential benefit from approved rate increases.
- Review pending regulatory matters, including Fitchburg’s GSEP recovery, transmission ROE proceedings and Massachusetts offshore-wind contract approval.
- Reconcile earnings trends excluding the nonrecurring Usource gain recognized in 2019.
- Evaluate liquidity against capital expenditures, dividend commitments, debt maturities and the $45.0 million of credit-facility availability at quarter-end.