Unitil Corporation 10-Q Summary
Business context and reporting period
Unitil Corporation is a regulated utility holding company serving approximately 103,300 electric customers and 78,700 natural gas customers in New Hampshire, Massachusetts and Maine. Its principal businesses are regulated electric and natural gas distribution, an 86-mile interstate natural gas transmission pipeline, and non-regulated energy brokering through Usource. This Form 10-Q covers the three and nine months ended September 30, 2016; financial statements are unaudited.
Key financial metrics
| Metric | Q3 2016 | Q3 2015 | 9M 2016 | 9M 2015 |
|---|---|---|---|---|
| Total operating revenue | $78.8 million | $74.7 million | $279.1 million | $324.4 million |
| Operating income | $11.1 million | $7.3 million | $44.0 million | $44.6 million |
| Net income | $3.5 million | $1.7 million | $16.9 million | $17.0 million |
| Basic and diluted EPS | $0.25 | $0.12 | $1.21 | $1.22 |
| Operating margin | 14.1% | 9.8% | 15.8% | 13.8% |
| Cash flow from operations | Not separately reported | Not separately reported | $62.7 million | $110.6 million |
| Capital expenditures | Not separately reported | Not separately reported | $74.4 million | $70.6 million |
Gas sales margin was $16.0 million in the third quarter and $71.7 million for the nine-month period, down $0.2 million and $1.4 million, respectively, year over year. Electric sales margin was $25.6 million in the third quarter and $66.1 million for the nine-month period, up $3.4 million and $2.2 million, respectively. These are non-GAAP measures calculated as operating revenue less pass-through energy supply costs.
At September 30, 2016, cash and cash equivalents were $4.4 million, total current assets were $107.6 million and total current liabilities were $126.3 million. Net utility plant was $861.0 million and total assets were $1.07 billion.
Short-term borrowings were $36.9 million and long-term debt, net of issuance costs, was $352.0 million, including a $17.0 million current portion. The $120.0 million revolving credit facility had $82.0 million available after borrowings and letters of credit. The company complied with its debt covenants, including the 65% funded-debt-to-capitalization limit, and its Standard & Poor’s issuer and utility ratings were BBB+.
The company declared a quarterly common dividend of $0.355 per share, equivalent to a stated annual rate of $1.42 per share. Dividends paid during the first nine months were $15.0 million.
Material changes versus the prior comparable period
- Third-quarter net income increased $1.8 million, or $0.13 per share, primarily because of higher electric sales margins and lower O&M expense.
- Nine-month net income decreased $0.1 million and EPS declined from $1.22 to $1.21. Lower gas margins caused by unusually warm winter weather largely offset higher electric margins and lower O&M costs.
- Natural gas therm sales declined 1.5% in the quarter and 10.5% year to date. Heating degree days were 19% lower in the first nine months, and management estimated that warmer weather reduced gas sales margin by approximately $5.0 million, or $0.22 per share.
- Electric kWh sales increased 1.3% in the quarter, helped by hotter summer weather, but declined 2.8% year to date. Electric customer counts increased by approximately 800 over the prior twelve months; natural gas customers increased by approximately 1,100.
- O&M expense declined $1.3 million in the quarter and $1.4 million year to date, while depreciation and amortization increased $0.2 million and $1.0 million, respectively. Taxes other than income taxes increased $0.4 million and $1.7 million.
- Operating revenue declined $45.3 million year to date, primarily because of lower pass-through gas and electric supply costs and lower usage; these costs generally do not affect earnings.
- Operating cash flow fell $47.9 million year to date, while capital expenditures increased $3.8 million. The company issued $30.0 million of long-term debt in 2016, including 3.70% senior notes due in 2026.
Guidance, outlook, commentary and risks
The filing does not provide formal earnings or financial guidance. Management emphasizes that results are seasonal, with natural gas earnings typically strongest in the first and fourth quarters. Approximately 27% of annual electric sales volumes and 11% of annual gas sales volumes are decoupled from usage, which moderates weather-related margin exposure.
Regulatory developments include a $2.4 million temporary Unitil Energy rate increase effective July 1, 2016, pending resolution of the permanent rate case; approved Fitchburg electric and gas rate increases effective May 1, 2016; a $1.5 million Northern Utilities Maine infrastructure adjustment; and a $0.3 million Granite State transmission rate increase effective August 1, 2016. The Maine targeted-area build-out pilot could add approximately 1,000 customers and about $1.0 million of annual distribution revenue if successful.
Key risks include regulatory decisions affecting rates and cost recovery, weather variability, severe storms, energy commodity prices and transmission capacity, interest rates, access to financing, debt covenants, pension obligations, operating hazards, environmental remediation, customer retention and competition. The company had approximately $21.1 million of guarantees outstanding at September 30, 2016, with the longest term extending through August 2017.
The Massachusetts ice-storm litigation remains pending after class certification was denied in July 2016; management believes the matters are without merit and not material. Environmental obligations totaled $3.0 million at September 30, 2016, with related regulatory recovery mechanisms. Management reported no material subsequent events and no material changes to previously disclosed risk factors.
Facts investors should verify
- Progress and final outcome of the Unitil Energy permanent rate case and other pending regulatory filings.
- Whether weather-normalized gas demand and customer growth offset the earnings effects of volatile heating seasons.
- Capital spending, operating cash flow and the company’s ability to fund investment while maintaining dividends.
- Debt maturities, variable-rate borrowing exposure, credit-facility availability and compliance with the 65% leverage covenant.
- Recovery and timing of regulatory assets, storm and environmental costs, and the remaining gas pipeline refund liability.
- Potential effects of Massachusetts clean-energy, net-metering, grid-modernization and transmission-rate proceedings.