Unitil Corporation 2019 Q3 Form 10-Q Summary
Business Context and Reporting Period
Unitil Corporation is a regulated utility holding company serving approximately 105,600 electric customers and 82,700 natural gas customers in New Hampshire, Massachusetts and Maine. Its principal operations are electric and natural gas distribution, supplemented by an 86-mile interstate natural gas transmission pipeline operated by Granite State Gas Transmission. The filing covers the three and nine months ended September 30, 2019, compared with the corresponding 2018 periods. Results are seasonal, with natural gas earnings typically strongest in the first and fourth quarters.
Key Financial Metrics
| Metric | Q3 2019 | Q3 2018 | 9M 2019 | 9M 2018 |
|---|---|---|---|---|
| Total operating revenue | $85.3 million | $88.2 million | $321.8 million | $318.5 million |
| Operating income | $10.0 million | $10.3 million | $51.1 million | $49.0 million |
| Net income | $2.3 million | $2.8 million | $32.8 million | $22.0 million |
| Basic and diluted EPS | $0.15 | $0.19 | $2.20 | $1.49 |
| Operating margin | 11.7% | 11.7% | 15.9% | 15.4% |
| Cash flow from operations | Not separately reported | Not separately reported | $92.2 million | $70.0 million |
| Capital expenditures | Not separately reported | Not separately reported | $76.7 million | $76.3 million |
Natural gas sales margin, a non-GAAP measure, increased 6.2% to $18.7 million in the quarter and 6.3% to $85.5 million for the nine months. Electric sales margin decreased 3.1% to $25.1 million in the quarter but increased 0.1% to $70.6 million for the nine months.
- Gas therm sales increased 4.2% in the quarter and 2.5% for the nine months; weather-normalized gas therm sales, excluding decoupled sales, increased an estimated 5.5% for the nine months.
- Electric kilowatt-hour sales decreased 5.3% in the quarter and 5.2% for the nine months. The third-quarter decline reflected 19% fewer cooling degree days and lower average usage.
- Operation and maintenance expense decreased $0.9 million in the quarter and $1.6 million for the nine months. Depreciation and amortization increased $0.4 million and $1.6 million, respectively.
- The current quarterly dividend was $0.37 per share, equivalent to an annualized rate of $1.48 per share.
Balance Sheet, Debt and Liquidity
- At September 30, 2019, total assets were $1.31 billion, net utility plant was $1.08 billion and stockholders’ equity was $370.0 million.
- Long-term debt was $430.4 million net of issuance costs, including $19.5 million of current maturities. Short-term borrowings were $49.2 million.
- The $120 million revolving credit facility had $70.7 million of availability after short-term borrowings and letters of credit. The facility matures July 25, 2023, subject to potential extensions.
- Unitil was in compliance with its credit covenants, including the 65% maximum funded-debt-to-capitalization covenant.
- Cash and cash equivalents were $7.3 million at September 30, 2019. Nine-month operating cash flow of $92.2 million exceeded capital expenditures of $76.7 million before financing and dividend requirements.
- Northern Utilities issued $40 million of 4.04% notes due 2049 in September 2019, primarily to repay short-term debt and for general corporate purposes. The company also paid off a $13.4 million capital lease in the second quarter.
Material Changes Versus the Prior Comparable Period
- Nine-month net income increased $10.8 million, primarily because of a $13.4 million pretax gain, or $9.8 million after tax, from the March 2019 divestiture of Usource.
- Excluding the Usource gain, utility operations net income increased $1.0 million to $23.0 million, supported by higher gas margins and rate increases.
- Third-quarter net income declined $0.5 million because lower electric margins and higher income taxes more than offset higher gas margins and lower operating costs.
- Operating revenue increased $3.3 million for the nine months despite the loss of Usource revenue, reflecting higher electric revenue and rate-related items. Non-regulated revenue declined $2.6 million for the nine months following the divestiture.
- The company adopted the new lease accounting standard on January 1, 2019, recognizing approximately $4.2 million of operating lease assets and liabilities without a material earnings or cash-flow effect.
- Net utility plant increased from $1.04 billion at December 31, 2018 to $1.08 billion at September 30, 2019.
Guidance, Outlook, Commentary and Risks
The filing does not provide a formal earnings or revenue guidance range. Management states that operating cash flows, available borrowing capacity and access to long-term financing should be sufficient for working capital, capital investment and other operating requirements.
- Northern Utilities filed a Maine base-rate case requesting a $7.0 million annual revenue increase, with a proposed April 1, 2020 effective date, and requested a capital investment recovery mechanism. The matter remained pending.
- Fitchburg expected to file electric and gas general base-rate cases during the fourth quarter of 2019. Its 2019 gas system enhancement filing seeking a $1.0 million revenue increase remained pending.
- Regulatory recovery is central to the business model. Purchased gas and electricity costs are generally recovered through pass-through mechanisms, limiting direct commodity-price exposure but leaving earnings dependent on regulatory treatment and rate recovery.
- Key risks include adverse rate decisions, delayed recovery of storm, environmental, pension and infrastructure costs, weather variability, interest-rate increases, access to financing, leverage covenants, cyberattacks, severe storms, operational hazards, climate-related events, competition and customer retention.
- Fitchburg’s long-term clean-energy and offshore-wind contracts could materially affect contractual obligations and regulatory assets once specified conditions and contingencies are satisfied.
- Outstanding guarantees on certain energy and gas-storage contracts were approximately $4.3 million. Environmental obligations totaled $2.8 million at September 30, 2019, principally relating to Northern Utilities manufactured-gas-plant sites.
- Ongoing regulatory matters, including investigations of gas procurement and gas-system safety and FERC transmission-return proceedings, were not expected by management to have a material adverse effect, but could produce future rate or cost changes.
Most Important Facts for Investors to Verify
- Separate recurring utility earnings from the nonrecurring $9.8 million after-tax Usource divestiture gain.
- Track the outcome and timing of Northern Utilities’ Maine rate case and Fitchburg’s anticipated electric and gas rate filings.
- Monitor capital spending, short-term borrowing levels, refinancing needs and compliance with the 65% debt-to-capitalization covenant.
- Assess whether higher gas margins and rate increases offset continued declines in electric usage and seasonal weather variability.
- Review the potential financial impact of clean-energy and offshore-wind purchase commitments, environmental remediation, pension obligations and regulatory proceedings.
- Confirm future dividend sustainability against operating cash flow, capital expenditures and debt-service requirements.