Unitil Corporation 2011 Form 10-K Summary
Business Context and Reporting Period
Unitil Corporation is a regulated utility holding company serving approximately 101,400 electric customers and 71,900 natural gas customers in New Hampshire, Massachusetts and Maine. Its principal operations are electric and natural gas distribution, an interstate natural gas transmission pipeline, and a small non-regulated energy-brokering business. The filing covers the fiscal year ended December 31, 2011, including fourth-quarter results.
Substantially all revenue is generated by regulated utility operations. Purchased electricity and natural gas costs are generally recovered through pass-through rate mechanisms, so earnings primarily reflect distribution margins and returns on regulated utility investments.
Key Financial Metrics
| Metric | 2011 | 2010 | Change |
|---|---|---|---|
| Operating revenue | $352.8 million | $358.4 million | Down $5.6 million |
| Operating income | $37.2 million | $28.0 million | Up $9.2 million |
| Net income | $16.4 million | $9.6 million | Up $6.8 million |
| Earnings applicable to common shareholders | $16.3 million | $9.5 million | Up $6.8 million |
| Diluted EPS | $1.50 | $0.88 | Up $0.62 |
| Cash flow from operations | $45.9 million | $25.9 million | Up $20.0 million |
| Capital expenditures | $57.1 million | $49.6 million | Up $7.5 million |
| Operating margin | Approximately 10.5% | Approximately 7.8% | Expanded |
| Net margin | Approximately 4.6% | Approximately 2.7% | Expanded |
Gas revenue was $159.2 million, up 6.1%, while electric revenue was $188.1 million, down 7.7%, primarily because lower commodity costs and greater customer purchases from third-party suppliers reduced pass-through revenue. Other revenue, principally from Usource, was $5.5 million, up 19.6%.
Gas sales margin increased $11.1 million to $67.9 million, and electric sales margin increased $7.6 million to $67.6 million. Natural gas therm sales increased 8.1%, including a 7.0% increase on a weather-normalized basis. Electric sales declined 0.5%, but increased 0.4% on a weather-normalized basis.
Operating expenses included $51.5 million of operation and maintenance expense, $29.3 million of depreciation and amortization, $13.0 million of local property and other taxes, and $10.0 million of federal and state income taxes. Net interest expense was $20.4 million, compared with $18.1 million in 2010.
At December 31, 2011, total assets were $800.2 million, net utility plant was $510.7 million, common equity was $191.7 million, long-term debt was $288.3 million including the current portion, and short-term debt was $87.9 million. Cash was $7.5 million. The revolving credit facility had a $115.0 million borrowing limit, $27.1 million of remaining availability, and a maturity date of October 8, 2013. The company reported compliance with its debt covenants.
Unitil paid common dividends of $1.38 per share during 2011, or $0.345 per quarter. The board declared a quarterly dividend of $0.345 per share in January 2012.
Fourth-Quarter 2011 Results
Fourth-quarter earnings applicable to common shareholders were $10.0 million, or $0.92 per share, compared with $5.2 million, or $0.48 per share, in the fourth quarter of 2010. Fourth-quarter operating revenue was $94.7 million, compared with $97.9 million, while operating income was $14.4 million, compared with $9.8 million.
Fourth-quarter results included a non-recurring $4.7 million pre-tax credit related to the Massachusetts Supreme Judicial Court decision reducing a previously recorded Fitchburg natural gas refund obligation. The credit reduced Purchased Gas expense by $4.5 million and interest expense by $0.2 million.
Material Changes Versus the Prior Comparable Period
- Full-year earnings increased substantially because of higher gas and electric distribution margins, approved rate increases, higher gas volumes and the $4.7 million regulatory credit.
- Gas margin benefited from higher unit sales, colder weather, customer growth, higher distribution rates and recovery of previously charged-off purchased gas costs.
- Electric margin benefited primarily from higher distribution rates despite slightly lower electricity volumes.
- Operation and maintenance expense rose 5.5%, reflecting higher utility operating costs, employee compensation and benefit costs, partially offset by $1.0 million of insurance settlement proceeds.
- Interest expense increased because of lower interest income on regulatory assets and the impact of $40 million of long-term debt issued in 2010.
- Cash flow from operations improved to $45.9 million, but capital spending increased to $57.1 million and exceeded operating cash flow. Management projected approximately $59 million of capital expenditures for 2012.
- Short-term debt increased from $66.8 million to $87.9 million, while long-term debt was broadly unchanged.
- Retirement benefit obligations increased to $91.2 million from $74.0 million, and pension contributions increased to $8.8 million from $4.3 million.
Guidance, Outlook, Commentary and Unusual Items
The filing does not provide formal earnings guidance. Management expects continued seasonal volatility, with natural gas results generally strongest in the first and fourth quarters. Revenue decoupling approved for Fitchburg reduces the sensitivity of a portion of electric and gas distribution revenue to weather and usage volumes.
Rate actions completed in 2011 included annual revenue increases of approximately $10.2 million for Unitil Energy, $3.3 million for Fitchburg electric, $3.7 million for Fitchburg gas, $7.8 million for Northern Utilities Maine, and $2.2 million for Granite State. Additional increases were scheduled under the Unitil Energy rate plan and Granite State’s capital-cost adjustment mechanism. Northern Utilities’ New Hampshire rate case remained pending at year-end.
Fitchburg requested recovery of approximately $4.7 million of storm costs related to Tropical Storm Irene and an October 2011 snowstorm; the request remained pending. Unitil Energy received approval to recover approximately $7.6 million of prior storm costs and established a $400,000 annual major-storm reserve.
Significant contractual cash obligations totaled $823.0 million, including $288.3 million of long-term debt, $264.0 million of long-term debt interest, $252.8 million of gas supply contracts and $12.9 million of power supply obligations. The company also had approximately $37.2 million of guarantees outstanding under energy and gas storage contracts.
Environmental obligations totaled $14.7 million, including estimated remediation liabilities for former manufactured gas plant sites. The company believes material losses beyond recorded amounts are not reasonably likely, but acknowledges uncertainty regarding future remediation costs and regulatory requirements.
Other material matters include an unresolved Fitchburg ice-storm class-action lawsuit, a pending NHPUC review of billing corrections for other Unitil Energy customers, a pending FERC audit expected to conclude by December 31, 2012, and pending regulatory reconciliation proceedings. The company stated that its internal controls over financial reporting were effective, and the independent auditors issued unqualified opinions.
Important Facts for Investors to Verify
- Whether the 2011 earnings increase remains after excluding the non-recurring $4.7 million pre-tax regulatory credit and other unusual items.
- The final outcome of Northern Utilities’ New Hampshire rate case and the timing of associated revenue recovery.
- Regulatory treatment and recovery of Fitchburg’s approximately $4.7 million of 2011 storm costs.
- Available borrowing capacity, refinancing needs and covenant headroom given $87.9 million of short-term debt and projected 2012 capital spending of approximately $59 million.
- The sustainability of gas and electric margin growth after considering weather, customer usage, rate changes and customer migration to third-party energy suppliers.
- Funding requirements for the underfunded pension, PBOP and SERP obligations, including the sensitivity to discount rates and health-care cost assumptions.
- Potential liabilities from environmental remediation, the Fitchburg class action, the FERC audit and pending regulatory proceedings.
- The company’s continued ability to fund its $1.38 annual common dividend from subsidiary distributions and operating cash flow.