UTL

UNITIL CORPORATION - 2003 Annual Report (10-K) Summary

Business Context and Reporting Period

This Form 10-K covers the fiscal year ended December 31, 2003. Unitil Corporation is a public utility holding company incorporated in New Hampshire. Its principal business is the retail distribution of electricity in New Hampshire and both electricity and natural gas in Massachusetts through its subsidiaries, Unitil Energy Systems, Inc. (UES) and Fitchburg Gas and Electric Light Company (FG&E). The company serves approximately 112,800 customers. In 2003, Unitil completed the final phase of its electric industry restructuring in New Hampshire, transitioning from a vertically integrated utility to a "pipes and wires" distribution business by divesting its long-term power supply contracts.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Growth: Total revenues increased 17.1% to $220.7 million. Electric revenues rose 14.1% and Gas revenues rose 41.1%. Increases were driven by higher base distribution rates implemented in December 2002, higher commodity prices (passed through to customers), and increased sales volumes due to a colder winter heating season.
• Profitability: Net income applicable to common shareholders increased 32.3% to $7.7 million. Earnings per share improved to $1.58, compared to $1.23 in 2002 (which included a $0.20 per share restructuring charge).
• Capital Structure: The company raised $16.9 million through a common stock offering in October 2003 and issued $10.0 million in long-term notes. Short-term debt decreased significantly from $36.0 million to $22.4 million.
• Operational Changes: Unitil Power ceased being the wholesale supplier for UES on May 1, 2003, and divested its power supply portfolio to Mirant. The company also dissolved the Unitil Retiree Trust (URT) in Q4 2003, assuming its obligations.

Guidance, Outlook, Risks, and Unusual Items

• Regulatory Environment: The company has secured approval to recover approximately $203 million in stranded costs over the next 6 to 8 years. However, it faces ongoing regulatory proceedings regarding pension accounting and potential changes in wholesale market structures (RTO formation).
• Legal Proceedings: A significant matter involved Mirant Corporation's Chapter 11 bankruptcy filing in July 2003. Unitil reached a settlement in November 2003, approved by the bankruptcy court in December, ensuring Mirant would continue to fulfill its power supply obligations.
• Environmental Matters: The company completed remediation of a former electric generating station in Q4 2003, with costs fully covered by insurance. It continues to monitor a former manufactured gas plant site in Fitchburg, MA, with costs recoverable from customers.
• Pension Obligations: The company's defined benefit pension plan moved from an overfunded to an underfunded position ($8.0 million deficit) due to market declines and lower discount rates. Regulatory approval was obtained to record the unfunded liability as a regulatory asset.
• Dividends: The annual dividend remained at $1.38 per share, resulting in a payout ratio of 87%.

Investor Verification Checklist

• Regulatory Asset Recovery: Verify the status of the $203 million stranded cost recovery plan and any potential delays in rate reconciliation.
• Pension Funding: Monitor future cash contributions required for the pension plan, given the shift to an underfunded status and the reliance on regulatory asset treatment.
• Mirant Contract Performance: Confirm that Mirant continues to meet its supply obligations under the bankruptcy settlement without disruption.
• Commodity Price Exposure: While costs are passed through, verify the efficiency of the cost recovery mechanisms during periods of extreme price volatility.
• Debt Covenants: Review compliance with debt covenants for subsidiaries UES and FG&E, particularly regarding earnings coverage ratios and capitalization limits.