Unitil Corporation — 2018 Form 10-K Summary
Business context and reporting period
Unitil Corporation is a regulated utility holding company serving New Hampshire, Massachusetts, and Maine. Its principal businesses are electric distribution, natural gas distribution, and natural gas transmission, with a smaller non-regulated energy-brokering business, Usource. At December 31, 2018, Unitil served 188,330 customers, including 105,571 electric and 82,759 natural gas customers. The filing covers the fiscal year ended December 31, 2018; fourth-quarter results are included in the annual filing.
Financial performance and key metrics
| Metric | 2018 | 2017 | Change |
|---|---|---|---|
| Operating revenue | $444.1 million | $406.2 million | +9.3% |
| Operating income | $71.2 million | $75.4 million | -5.6% |
| Net income | $33.0 million | $29.0 million | +13.8% |
| diluted EPS | $2.23 | $2.06 | +8.3% |
| Operating margin | 16.0% | 18.6% | Declined |
| Net margin | 7.4% | 7.1% | Improved |
| Cash flow from operations | $78.5 million | $86.2 million | -8.9% |
| Capital expenditures | $102.4 million | $119.3 million | -14.2% |
- Gas operating revenue was $216.1 million and gas sales margin was $116.9 million, up $7.2 million from 2017.
- Electric operating revenue was $223.3 million and electric sales margin was $91.9 million, down $0.3 million from 2017.
- Natural gas therm sales increased 8.1%, driven by customer growth and 12.2% more heating degree days. Electric kWh sales increased 3.2%, supported by customer growth and warmer summer weather.
- Operating expenses increased to $372.9 million from $330.8 million. O&M expense rose $5.0 million, depreciation and amortization rose $3.5 million, and other taxes rose $1.3 million.
- Interest expense, net increased to $24.0 million from $23.1 million. Income taxes declined to $8.4 million from $17.5 million, primarily because of the Tax Cuts and Jobs Act of 2017.
- Year-end total assets were $1.298 billion, including $1.037 billion of net utility plant. Common equity was $351.1 million and total capitalization was $738.7 million.
- Year-end cash was $7.8 million. Short-term debt was $82.8 million, long-term debt was $409.3 million before unamortized issuance costs, and long-term debt net of current maturities was $387.4 million.
- The $120.0 million revolving credit facility had $37.2 million of availability at year-end. Unitil was in compliance with its debt covenants, including the 65% funded-debt-to-capitalization covenant.
- The annual common dividend increased to $1.46 per share in 2018 from $1.44 in 2017. In January 2019, the quarterly dividend was increased to $0.370 per share, or an effective annualized rate of $1.48.
Material changes versus the prior comparable period
- Net income improved despite lower operating income, primarily because the federal corporate tax rate fell to 21% and Unitil recognized related tax benefits.
- Gas margin benefited from higher distribution rates, colder weather, and customer growth. Electric margin was broadly flat because rate increases and weather benefits were offset by the expiration of a $1.4 million temporary rate reconciliation adjustment and lower tax-related rates.
- Customer counts increased by 2,043 year over year, comprising 1,450 additional gas customers and 593 additional electric customers.
- Net utility plant increased from $971.5 million to $1.0368 billion, while capital expenditures declined from $119.3 million to $102.4 million.
- Short-term debt increased from $38.3 million to $82.8 million, partly reflecting seasonal and capital funding needs. Unitil Energy issued $30 million of 4.18% first mortgage bonds due 2048 and used the proceeds partly to repay short-term debt.
- Cash flow from operations declined $7.7 million, principally because of higher retirement-plan contributions and other changes in deferred regulatory and working-capital items.
- Unitil adopted the revenue-recognition standard and pension-cost presentation standard in 2018 without a material effect on consolidated financial statements. The revenue standard changed Usource revenue presentation by reporting channel-partner payments as a reduction of revenue.
Guidance, outlook, commentary, risks, and unusual items
- Management projected 2019 capital spending of approximately $120 million to $130 million.
- The company expects results to remain seasonal, with natural gas earnings historically strongest in the first and fourth quarters. Approximately 70% of annual natural gas sales are temperature sensitive.
- Regulated energy supply costs are generally recovered through pass-through and reconciling mechanisms, limiting direct commodity-price exposure; however, timing of recovery can affect liquidity and cash flow.
- The Tax Cuts and Jobs Act reduced customer rates and created excess accumulated deferred income tax balances. Unitil expected to flow back approximately $47.1 million of protected excess ADIT to customers over an estimated 15-to-20-year period, subject to regulatory treatment.
- Fitchburg was ordered to refund excess ADIT through electric and gas rate credits of $10.1 million and $10.4 million, respectively, amortized over approximately 15 and 14 years beginning February 1, 2019.
- Pending or ongoing regulatory matters included Fitchburg capital-cost and solar recovery proceedings, Massachusetts clean-energy and offshore-wind contract approvals, FERC transmission-return proceedings, and a Massachusetts investigation of gas-distribution-system safety following the Merrimack Valley incident.
- Contractual cash obligations totaled $1.228 billion, including $409.3 million of long-term debt, $303.9 million of related interest, $489.9 million of gas supply contracts, and $14.1 million of electric supply contracts.
- Unitil contributed $16.6 million to its pension plan in 2018, compared with $4.1 million in 2017. Retirement benefit obligations were $121.5 million at year-end, and related regulatory assets were $72.0 million.
- Key risks include regulatory disallowance or delayed cost recovery, weather variability, severe storms and operational incidents, interest-rate and refinancing risk, pension funding requirements, environmental liabilities, cybersecurity and information-system failures, changing energy demand, distributed generation, and union negotiations.
- The company reported no material unresolved legal proceedings or environmental losses beyond recorded amounts. A legacy Fitchburg ice-storm class action was settled in 2018 without a material financial impact.
Most important facts for an investor to verify
- Verify the sustainability of earnings growth after the one-time and tax-related benefits from the TCJA, including the impact of required customer refunds and lower tax-related rates.
- Reconcile reported revenue growth with underlying gas and electric sales margins, given that purchased-energy costs are largely pass-through items.
- Assess liquidity against $82.8 million of short-term debt, only $37.2 million of unused revolver capacity, projected 2019 capital spending of $120 million to $130 million, and seasonal cash-flow needs.
- Review regulatory proceedings and the timing of recovery for capital spending, excess ADIT, storm costs, pension costs, and clean-energy commitments.
- Evaluate pension funding requirements, rate recovery protections, and sensitivity to discount rates and investment performance.
- Confirm debt maturities, covenant headroom, credit ratings, and refinancing requirements, particularly the $18.8 million due in 2019 and $19.8 million due in 2020.
- Monitor weather-normalized demand, customer growth, energy-efficiency programs, distributed generation, and competitive supply switching.