UTL

UNITIL CORP 10-Q Summary: Quarter Ended June 30, 2004

Business Context and Reporting Period

This Form 10-Q covers the three and six-month periods ended June 30, 2004, for Unitil Corporation, a public utility holding company. The Company operates regulated retail distribution utilities for electricity and natural gas in New Hampshire (Unitil Energy Systems, Inc.) and Massachusetts (Fitchburg Gas and Electric Light Company), alongside an unregulated energy brokering subsidiary (Usource). The Company is subject to regulation by the SEC, FERC, and state commissions (NHPUC and MDTE).

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue: Total operating revenues decreased 5.5% to $108.1 million for the six months ended June 30, 2004, compared to $114.4 million in 2003. Electric revenues declined 5.3% due to lower commodity prices, while Gas revenues fell 7.8% primarily due to milder weather reducing unit sales.
• Profitability: Net income increased 9.8% to $4.4 million, driven by higher electric sales margins and lower interest expense. Earnings per share decreased to $0.78 from $0.82 due to a significant increase in the number of common shares outstanding (from ~4.75 million to ~5.5 million) following a stock offering in late 2003.
• Volume: Electric kilowatt-hour sales increased 3.1% (residential +2.5%, commercial/industrial +3.4%). Conversely, gas therm sales decreased 7.2% across all customer classes.
• Expenses: Purchased electricity expenses dropped 9.1% and purchased gas expenses dropped 9.6%, reflecting lower commodity costs and lower gas volumes. Operation and Maintenance expenses rose slightly (2.0%) due to higher compensation costs.
• Debt: Short-term debt decreased significantly from $42.5 million to $18.8 million. The Company fully retired the FG&E 8.55% Notes ($3.0 million) during the period.

Guidance, Outlook, and Risks

• Capital Expenditures: Estimated total capital expenditures for 2004 are $21.9 million, equivalent to 2003 levels.
• Regulatory Matters: The Company has secured approval for the recovery of stranded costs and restructuring assets totaling $188 million, to be recovered over 6 to 8 years. Recent rate filings resulted in a 1.8% retail rate decrease in New Hampshire effective May 1, 2004. In Massachusetts, gas rates saw a net average increase of 8.6% following the end of a temporary refund.
• Legal and Environmental: An MDTE investigation into FG&E's dealings with Enermetrix (an affiliated energy auction service) is pending; management does not expect a material adverse effect. Environmental remediation at the Sawyer Passway MGP site continues, with costs recoverable in gas rates.
• Risks: Key risks include weather variations, regulatory changes, interest rate fluctuations, and commodity price volatility. The Company notes that most commodity price risks are mitigated through pass-through rate mechanisms.

Investor Verification Checklist

• Share Count Impact: Verify the dilution effect on EPS caused by the ~16% increase in outstanding shares from the October 2003 capital raise.
• Regulatory Asset Recovery: Confirm the status of the $188 million in regulatory assets and the timeline for their recovery in future rates.
• Weather Sensitivity: Assess the impact of the mild winter on gas sales volumes and the potential for volatility in future heating seasons.
• Debt Structure: Review the reduction in short-term debt and the maturity schedule of long-term notes, particularly the newly issued 6.79% Notes.
• Unregulated Segment: Monitor the growth of the Usource energy brokering business, which contributed to a 26.3% increase in "Other" revenues.