Unitil Corporation 2015 Form 10-K Summary
Business Context and Reporting Period
Unitil Corporation is a regulated utility holding company serving approximately 182,000 electric and natural gas customers in New Hampshire, Massachusetts and Maine. Its principal businesses are electric distribution, natural gas distribution, an 86-mile natural gas transmission pipeline, and non-regulated energy-brokering services through Usource. The filing covers the fiscal year ended December 31, 2015, and was filed January 28, 2016.
- Electric customers: 103,269; natural gas customers: 78,749.
- Net utility plant: $808.9 million; total utility plant: $1.081 billion.
- Employees: 500, including 159 represented by labor unions.
Financial Performance and Key Metrics
| Metric | 2015 | 2014 | Change |
|---|---|---|---|
| Operating revenue | $426.8 million | $425.8 million | +$1.0 million |
| Operating income | $63.1 million | $60.0 million | +$3.1 million |
| Net income | $26.3 million | $24.7 million | +$1.6 million |
| Diluted EPS | $1.89 | $1.79 | +$0.10 |
| Operating margin | 14.8% | 14.1% | Improved |
| Net margin | 6.2% | 5.8% | Improved |
| Cash from operating activities | $115.1 million | $84.0 million | +$31.1 million |
| Capital expenditures | $103.9 million | $92.6 million | +$11.3 million |
- Gas operating revenue was $202.6 million, with gas sales margin of $101.9 million, up $4.5 million. Gas therm sales increased 1.5%, despite 2.3% fewer heating degree days.
- Electric operating revenue was $218.0 million, while electric sales margin was $85.5 million, up $4.7 million. Electric sales volume declined 0.7%.
- Operation and maintenance expense increased $2.5 million, depreciation and amortization increased $3.6 million, and net interest expense increased $1.0 million.
- Other income included a $0.9 million pretax gain on the sale of property in the fourth quarter.
- Dividends declared increased to $1.40 per share from $1.38 per share. In January 2016, the quarterly dividend was increased to $0.355 per share, or an effective annual rate of $1.42.
Liquidity, Debt and Capital Requirements
- Cash and cash equivalents were $8.7 million at December 31, 2015, compared with $8.4 million at year-end 2014.
- Short-term debt was $42.0 million, compared with $29.3 million; current long-term debt was $17.4 million, compared with $4.0 million.
- Total long-term debt was $325.5 million, including $308.1 million excluding the current portion. Total capitalization was $590.9 million, consisting of 48% common equity and 52% long-term debt excluding the current portion.
- The revolving credit facility has a $120.0 million limit, $42.0 million outstanding and $78.0 million available at year-end. Its maturity was extended to October 2020, and the applicable spread was reduced to one-month LIBOR plus 1.25%.
- The company was in compliance with its debt covenants, including the credit-facility funded-debt-to-capitalization limit of 65%. Standard & Poor’s ratings for Unitil and certain utility subsidiaries were BBB+.
- Cash used in financing activities was $10.9 million. Contractual cash obligations totaled $850.7 million, including $325.5 million of long-term debt, $246.7 million of long-term-debt interest, and $247.7 million of gas-supply commitments.
- Management projected 2016 capital spending of $95 million to $100 million.
Material Changes Versus the Prior Comparable Period
- Net income increased 6.5% and diluted EPS increased 5.6%, primarily from higher gas and electric distribution margins.
- Gas sales margin rose 4.6%, supported by rate increases, customer growth and higher normalized commercial and industrial sales.
- Electric sales margin rose 5.8%, primarily from higher distribution rates, partially offset by lower residential usage.
- Revenue was essentially flat because lower pass-through gas and electric supply costs offset higher distribution-related revenue.
- Operating cash flow increased substantially, driven by higher earnings, non-cash expenses and favorable working-capital and regulatory-liability changes.
- Capital expenditures increased 12.2%, and net utility plant increased from $733.7 million to $808.9 million.
- The company received a $22.0 million Portland Natural Gas Transmission pipeline refund. The refund is to benefit customers and marketers; $7.6 million was recorded as a current regulatory liability and $8.1 million as a noncurrent regulatory liability at year-end.
- The new Maine Distribution Operations Center was completed, and the company recognized a $0.9 million gain on the sale of the former facility.
Guidance, Outlook, Commentary and Risks
- The filing does not provide formal earnings guidance. It identifies projected 2016 capital spending of $95 million to $100 million and expects continued pension and post-retirement benefit contributions consistent with amounts recovered in rates.
- Fitchburg filed for a $3.8 million electric revenue increase and a $3.0 million gas revenue increase. Decisions were expected by the end of April 2016. Fitchburg also sought recovery of gas-system enhancement investments.
- Results are seasonal, with natural gas earnings historically strongest in the first and fourth quarters. Approximately 70% of annual natural gas sales are temperature sensitive.
- Most purchased gas and electricity costs are recovered through regulatory pass-through mechanisms, limiting commodity-price exposure but creating timing and regulatory-recovery risks.
- Key risks include unfavorable rate decisions, delayed recovery of supply, storm, pension or environmental costs, interest-rate increases, refinancing and credit-market access, restrictive debt covenants, weather variability, customer conservation and distributed generation, cyberattacks, operational hazards and environmental liabilities.
- A class-action lawsuit and a separate action related to the December 2008 Fitchburg ice storm remained pending. Management stated that the cases were without merit and were not expected to have a material financial impact.
- Former manufactured-gas-plant remediation continues, although the company believes applicable costs are substantially recoverable through rates or other mechanisms and that no material losses beyond recorded amounts were reasonably likely at year-end.
- Management reported effective disclosure controls and effective internal control over financial reporting. A new customer information system was under development, with implementation dependent on user testing and system acceptance.
Most Important Facts for an Investor to Verify
- Confirm the treatment, timing and customer-crediting obligations associated with the $22.0 million pipeline refund.
- Review pending Fitchburg rate cases and whether requested revenue increases and capital-cost recovery mechanisms were subsequently approved.
- Assess the funding requirements and sensitivity of the $124.4 million retirement-benefit obligation to discount rates, asset returns and health-care costs.
- Evaluate 2016 capital spending against operating cash flow, available credit and scheduled debt maturities, including $17.4 million of long-term debt due in 2016.
- Monitor regulatory proceedings, storm-cost recovery, environmental remediation and the Fitchburg ice-storm litigation.
- Verify the sustainability of the increased $1.42 annual dividend rate relative to earnings, subsidiary distributions and debt covenants.