Unitil Corporation Form 10-Q Summary
Business Context and Reporting Period
Unitil Corporation is a regulated utility holding company providing electric and natural gas distribution in New Hampshire, Massachusetts and Maine, plus interstate gas transmission and non-regulated energy brokering. The filing covers the three and six months ended June 30, 2018, compared with the corresponding 2017 periods. The company served approximately 105,000 electric customers and 81,300 natural gas customers and reported net utility plant of $989.8 million at June 30, 2018.
Financial Performance and Key Metrics
| Metric | Three Months Ended June 30 | Six Months Ended June 30 |
|---|---|---|
| Operating revenue | $84.5 million, versus $80.8 million | $230.3 million, versus $206.8 million |
| Operating income | $10.6 million, versus $11.6 million | $38.7 million, versus $39.3 million |
| Net income | $3.6 million, versus $3.1 million | $19.2 million, versus $15.5 million |
| Basic and diluted EPS | $0.24, versus $0.23 | $1.30, versus $1.11 |
| Operating margin | Approximately 12.5%, versus 14.4% | Approximately 16.8%, versus 19.0% |
| Cash from operating activities | Not separately provided | $63.3 million, versus $63.2 million |
Gas sales margin increased to $22.9 million in the second quarter and $62.8 million for the six-month period, up $2.4 million and $4.3 million, respectively. Electric sales margin declined to $22.3 million and $44.6 million, down $1.0 million and $0.7 million, respectively. These are non-GAAP measures defined as operating revenue less pass-through commodity costs.
Gas therm sales increased 2.8% in the quarter and 7.2% year to date. Electric kilowatt-hour sales increased 3.3% and 4.6%, respectively. The company reported 9% more heating degree days in the first six months of 2018 than in the comparable 2017 period.
At June 30, 2018, cash and cash equivalents were $8.5 million. Current assets were $118.1 million and current liabilities were $135.4 million. The company had $37.4 million of short-term borrowings under a $120.0 million revolving credit facility, leaving $82.6 million available. The facility also included a $25 million letter-of-credit sublimit, with no letters of credit outstanding at quarter end.
Long-term debt totaled $392.8 million net of issuance costs, including $29.7 million classified as current. Total capitalization was $710.3 million, consisting of $363.1 million of long-term debt excluding the current portion and $347.2 million of stockholders’ equity. The company remained in compliance with its debt covenants and its principal debt ratings were investment grade.
Six-month investing cash outflows were $37.2 million for property, plant and equipment additions. Financing cash outflows were $26.5 million, including $10.9 million of dividends and $13.5 million of long-term debt repayments. The quarterly dividend was increased to $0.365 per share, or an annualized $1.46 per share.
Material Changes Versus the Prior Comparable Period
- Six-month net income increased $3.7 million, or approximately 24%, while EPS increased $0.19 despite a higher share count following the December 2017 issuance of 690,000 common shares.
- Revenue growth reflected higher gas and electric sales, customer growth, colder winter weather and new distribution rates. Gas revenue increased 14.0% year to date and electric revenue increased 9.6%.
- The federal corporate tax rate reduction under the Tax Cuts and Jobs Act reduced customer rates and reported revenue by approximately $1.7 million in the second quarter and $4.0 million year to date, while also reducing income tax expense.
- Income tax expense declined by $2.2 million in the quarter and $5.1 million year to date, primarily because of the lower federal tax rate and the reversal of temporary differences at the lower rate.
- Operating income declined despite higher revenue because of higher pass-through and operating expenses, increased depreciation, and the absence of a $1.4 million one-time electric rate reconciliation adjustment recognized in the second quarter of 2017.
- Interest expense increased $0.6 million in both the quarter and year-to-date period, primarily because of higher long-term debt levels.
- Unitil adopted revenue recognition and retirement-benefit presentation standards in 2018. Management stated that the changes did not materially affect the consolidated financial statements, although Usource revenue is now presented net of channel-partner payments.
Guidance, Outlook, Commentary, Risks and Unusual Items
The filing does not provide explicit full-year earnings guidance. Management expects results to remain seasonal, with natural gas earnings generally strongest in the first and fourth quarters. The company’s regulated utilities recover approved purchased gas and electricity costs through reconciling rate mechanisms, limiting direct commodity-price exposure but increasing dependence on regulatory recovery.
- The Tax Cuts and Jobs Act generated a regulatory liability of approximately $47.1 million for excess accumulated deferred income taxes expected to be returned to customers over an estimated 15-to-20-year period, subject to regulatory approvals and final guidance.
- Several rate proceedings were resolved during the period, including Northern Utilities’ Maine and New Hampshire cases, Unitil Energy’s New Hampshire step adjustment, Fitchburg rate adjustments, and Granite State’s FERC settlement. Certain recovery and reconciliation matters remain pending.
- Fitchburg received approval for a three-year grid modernization plan with a $4.4 million spending cap and received approval to recover approximately $0.3 million related to its solar facility.
- The company had approximately $5.9 million of guarantees outstanding at June 30, 2018, with the longest guarantee extending through August 2018. It also guaranteed certain Granite State debt, including $3.3 million of principal outstanding on specified notes.
- Environmental obligations totaled approximately $2.1 million at June 30, 2018. Supplemental remediation began at former manufactured gas plant sites in Exeter and Somersworth, with Exeter remediation expected to be completed in the third quarter of 2018.
- The company intends to contribute approximately $15 million to its pension plan during the remainder of 2018. Retirement benefit obligations were $154.7 million at quarter end.
- Key risks include regulatory decisions and rate recovery, weather, storms, customer demand, energy prices and transmission capacity, interest rates, access to financing, pension obligations, environmental compliance, operating hazards, competition and counterparty performance.
- On July 25, 2018, after quarter end, Unitil amended and restated its revolving credit facility. The $120 million borrowing limit was maintained, maturity was extended to July 25, 2023, potential commitments expansion increased to $50 million, and the applicable margin decreased from 1.25% to 1.125%.
Important Facts for Investors to Verify
- Confirm the sustainability of earnings growth after removing favorable weather, rate-case effects, tax-rate benefits and non-recurring adjustments.
- Monitor regulatory treatment of the $47.1 million excess deferred tax liability and the remaining Massachusetts, Maine and New Hampshire rate matters.
- Assess debt refinancing needs, interest-rate sensitivity, pension funding requirements and compliance with the 65% funded-debt-to-capitalization covenant.
- Review capital spending, regulatory asset recovery and the company’s ability to fund dividends while maintaining liquidity.
- Evaluate pending environmental remediation, FERC transmission-rate proceedings, legal claims and renewable-energy procurement obligations.
- Reconcile non-GAAP gas and electric sales margins to GAAP operating income and account for the revised presentation of Usource revenue-sharing payments.