UNITIL CORP quarterly report, Q2 FY2015

Unitil Corporation 10-Q Summary: Second Quarter 2015

Business Context and Reporting Period

Unitil Corporation is a regulated utility holding company distributing electricity and natural gas in New Hampshire, Massachusetts and Maine. Its principal subsidiaries serve approximately 102,700 electric customers and 77,900 natural gas customers. Granite State Gas Transmission operates an 86-mile interstate gas pipeline, while Usource provides non-regulated energy brokerage and advisory services.

This filing covers the three and six months ended June 30, 2015, compared with the corresponding 2014 periods. Results are seasonal, with gas earnings generally strongest in the first and fourth quarters. Net utility plant was $757.0 million at June 30, 2015.

Financial Performance and Key Metrics

Metric	Three Months Ended June 30, 2015	Three Months Ended June 30, 2014	Six Months Ended June 30, 2015	Six Months Ended June 30, 2014
Total operating revenue	$77.5 million	$73.3 million	$249.7 million	$229.4 million
Operating income	$8.9 million	$7.1 million	$37.3 million	$32.5 million
Net income	$1.7 million	$1.1 million	$15.3 million	$13.7 million
Basic and diluted EPS	$0.12	$0.08	$1.10	$0.99
Operating cash flow	Not separately provided	Not separately provided	$90.5 million	$63.6 million

Gas sales margin, a non-GAAP measure, increased 11.0% to $18.1 million in the second quarter and 7.8% to $56.9 million for the first six months.
Electric sales margin increased 8.5% to $20.5 million in the second quarter and 9.4% to $41.7 million for the first six months.
Operating expenses increased to $68.6 million in the second quarter and $212.4 million for the six months. O&M expense increased 6.5% in the quarter and 2.5% year to date; depreciation and amortization increased 10.8% and 11.3%, respectively.
Net interest expense increased $0.7 million in the quarter and $1.3 million for the six months, primarily due to higher long-term debt and lower interest income on regulatory assets.
Gas therm sales decreased 1.3% in the quarter but increased 4.0% year to date. Electric kilowatt-hour sales increased 0.1% in the quarter and 0.2% year to date.
Cash used in investing activities was $38.5 million, principally for utility property additions, compared with $29.1 million in 2014. Management projected 2015 capital spending of $95 million to $100 million.
Cash used in financing activities was $44.3 million, including $29.3 million of net short-term debt repayments and $9.8 million of dividends paid.
Cash and cash equivalents were $16.1 million at June 30, 2015, compared with $8.4 million at December 31, 2014.

Debt, Liquidity and Capitalization

Total long-term debt was $332.7 million at June 30, 2015, including $4.1 million due within one year. Total capitalization was $609.1 million, consisting of long-term debt and $280.5 million of stockholders’ equity.
Unitil had no borrowings outstanding under its $120.0 million revolving credit facility at June 30, 2015; the full $120.0 million was available, subject to a $25.0 million letter-of-credit sublimit.
The credit facility expires October 4, 2018 and includes a funded-debt-to-capitalization covenant of no more than 65%. Unitil reported compliance with its covenants.
In October 2014, Northern Utilities issued $50.0 million of 4.42% senior unsecured notes due 2044. The proceeds were used to repay short-term debt and for general corporate purposes.
Standard & Poor’s assigned Unitil and its principal utility subsidiaries a BBB+ issuer credit rating in December 2014.
The company had approximately $20.1 million of guarantees outstanding at June 30, 2015, with the longest term extending through April 2016.
The quarterly common dividend increased to $0.35 per share, or an effective annual rate of $1.40 per share, from $1.38 previously.

Material Changes Versus the Prior Comparable Period

Six-month net income increased 11.7%, while EPS increased from $0.99 to $1.10.
Revenue growth primarily reflected higher regulated gas and electric distribution rates, increased gas sales, and customer growth. Pass-through energy commodity costs increased revenue and expense but generally did not affect earnings.
Gas therm sales benefited from colder winter weather: heating degree days were 2.7% above 2014 levels and 13.3% above normal during the first six months. Weather-normalized gas therm sales were estimated to have increased 3.2%.
Natural gas customers increased 1.7% over the preceding twelve months, while electric sales remained broadly stable.
Operating cash flow increased $26.9 million, substantially because of a $22.0 million pipeline refund received from Portland Natural Gas Transmission System. The refund is being recorded as a regulatory liability and credited to customers over three years.
Long-term debt increased from $287.1 million at June 30, 2014 to $332.7 million at June 30, 2015, primarily reflecting the Northern Utilities note issuance.
Retirement benefit obligations increased to $123.5 million from $80.8 million at June 30, 2014, while retirement-related regulatory assets were $65.1 million.

Guidance, Outlook, Risks and Unusual Items

Management projected 2015 capital expenditures of $95 million to $100 million. No earnings guidance was provided in the filing.
Fitchburg filed requests for $3.8 million of additional annual electric base revenue and $3.0 million of additional annual gas base revenue. MDPU decisions were expected by the end of April 2016.
Granite State filed for a proposed $0.4 million annual revenue increase beginning August 1, 2015; FERC approval was pending.
Northern Utilities received a $22.0 million PNGTS pipeline refund. The amount is not a recurring earnings benefit because it will be returned to customers through regulatory credits.
Unitil continues to face regulatory risks involving rate recovery, storm costs, environmental remediation, pension costs, infrastructure investment and service-quality requirements.
Key operating risks include weather variability, severe storms, energy commodity prices and supply, interest rates, access to debt or equity financing, restrictive debt covenants, competition and customer demand.
Environmental obligations included approximately $1.7 million accrued for future remediation at an Exeter, New Hampshire site. Fitchburg had estimated remaining work at its Sawyer Passway site at $1.7 million, after $3.8 million had been spent against a $5.5 million total estimate.
A putative class action and a separate action related to the December 2008 Fitchburg ice storm remained pending. Management believes the claims are without merit and does not expect a material adverse impact.
The company reported no material changes to the risk factors in its 2014 Form 10-K, no material subsequent events, and effective disclosure controls as of June 30, 2015.

Important Facts for Investors to Verify

Whether the company sustains gas and electric margin growth after the unusually favorable winter weather in early 2015.
The timing and outcome of Fitchburg’s electric and gas rate cases and Granite State’s proposed rate adjustment.
The customer-crediting schedule and regulatory treatment of the $22.0 million PNGTS refund.
Projected 2015 capital spending, related financing requirements and the effect of higher debt on interest expense.
The magnitude and regulatory recovery of pension, storm-restoration and environmental obligations.
Future liquidity needs, compliance with the 65% debt-to-capitalization covenant and continued availability of the revolving credit facility.
Progress and final cost of the planned customer information system implementation.