Unitil Corporation 2016 Form 10-K Summary
Business context and reporting period
Unitil Corporation is a regulated utility holding company serving approximately 184,200 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 brokerage through Usource. This filing covers the fiscal year ended December 31, 2016, with quarterly data including the fourth quarter.
Key financial metrics
| Metric | 2016 | 2015 | Change |
|---|---|---|---|
| Operating revenue | $383.4 million | $426.8 million | (10.2%) |
| Operating income | $65.3 million | $63.1 million | +$2.2 million |
| Net income | $27.1 million | $26.3 million | +3.0% |
| Diluted EPS | $1.94 | $1.89 | +$0.05 |
| Operating margin | 17.0% | 14.8% | Improved |
| Net margin | 7.1% | 6.2% | Improved |
| Cash flow from operations | $68.3 million | $115.1 million | (40.7%) |
| Capital expenditures | $98.1 million | $103.9 million | (5.6%) |
| Dividends declared per share | $1.42 | $1.40 | +1.4% |
- Gas revenue was $181.2 million and electric revenue was $196.1 million; these amounts include pass-through energy costs that do not materially affect earnings.
- Gas sales margin, a non-GAAP measure, increased to $103.6 million from $101.9 million. Electric sales margin increased to $88.1 million from $85.5 million.
- Natural gas sales declined 6.2% to 205.7 million therms, while electric sales declined 2.3% to 1,628.8 million kWh.
- Net utility plant increased to $883.4 million from $808.9 million, and total assets increased to $1.128 billion from $1.039 billion.
- Interest expense, net increased to $22.5 million from $21.9 million. Income taxes were $15.4 million, approximately unchanged from 2015.
Liquidity, debt and capital resources
- Cash and cash equivalents were $5.8 million at year-end, compared with $8.7 million in 2015.
- Short-term debt outstanding under the $120 million revolving credit facility was $81.9 million, leaving $37.0 million available after $1.1 million of letters of credit.
- Long-term debt, net of issuance costs, was $333.6 million, including $16.8 million due within one year. Total capitalization was $609.9 million, consisting of 48% common equity and 52% long-term debt.
- Unitil issued $30 million of 3.70% senior unsecured notes due 2026 and used the proceeds primarily to repay short-term debt and for general corporate purposes.
- The company generated $68.3 million of operating cash flow versus $98.1 million of capital spending and paid $20.0 million in dividends. Financing activities provided $26.9 million, including the new long-term debt issuance.
- Standard & Poor’s ratings for Unitil and its principal utility subsidiaries were BBB+. The company was in compliance with its debt covenants, including the credit-facility funded-debt-to-capitalization limit of 65%.
Material changes versus the prior comparable period
- Net income and EPS increased despite a substantial revenue decline because lower wholesale gas and electric supply costs were passed through to customers, while distribution margins increased.
- Warmer winter weather reduced 2016 gas sales margin by approximately $3.3 million, or $0.15 per share. Above-normal summer temperatures partly benefited electric margins.
- Operation and maintenance expense decreased $0.8 million, primarily from lower system maintenance, bad-debt and professional-fee costs, partly offset by higher compensation and benefit costs.
- Depreciation and amortization increased $0.9 million, and taxes other than income taxes increased $1.9 million because of higher utility plant and related property taxes.
- Operating cash flow declined $46.8 million, principally because working capital and regulatory-liability changes were a $20.8 million use of cash in 2016 compared with an $18.5 million source in 2015.
- Fourth-quarter revenue was $104.3 million versus $102.4 million, operating income was $21.3 million versus $18.5 million, and net income was $10.2 million versus $9.3 million.
Guidance, outlook, commentary and unusual items
- Management projected 2017 capital spending of approximately $100 million to $105 million, primarily for electric and gas system additions.
- The board increased the effective annual dividend rate to $1.44 per share from $1.42 per share, subject to future board approval and financial conditions.
- Unitil Energy’s New Hampshire base-rate case sought a $6.3 million increase; a $2.4 million temporary increase became effective July 1, 2016, with final approval expected by the end of April 2017.
- Pending regulatory matters included Fitchburg’s gas-system enhancement recovery request, New Hampshire net-metering and grid-modernization proceedings, and Massachusetts clean-energy and grid-modernization matters.
- A $22.0 million 2015 pipeline refund continues to be credited to customers and marketers; related regulatory liabilities totaled $6.8 million at year-end 2016.
- The company is developing a 1.3 MW Fitchburg solar facility expected to be completed by the end of November 2017. Massachusetts clean-energy procurements may create additional long-term contractual commitments, subject to regulatory approval.
- Contractual cash obligations totaled $958.1 million, including $336.6 million of long-term debt, $353.0 million of gas supply contracts and $235.7 million of long-term debt interest.
- Principal risks include regulatory disallowance or delayed cost recovery, weather variability, interest-rate and refinancing risk, pension funding requirements, environmental liabilities, severe storms, cybersecurity and operational-system failures, competition and reduced energy demand from efficiency, distributed generation or storage.
- The company reported no material unresolved staff comments, no material subsequent events, and no material loss contingencies beyond disclosed commitments and proceedings. Deloitte & Touche issued unqualified opinions on the financial statements and internal control over financial reporting.
Important facts for investors to verify
- Verify the final outcome and rate recovery from Unitil Energy’s pending New Hampshire rate case.
- Monitor 2017 capital spending, funding needs and the reduction in revolving-credit availability to $37.0 million at year-end.
- Assess whether operating cash flow can consistently fund capital expenditures and dividends without increased borrowing.
- Track refinancing requirements, particularly the $17.2 million of long-term debt due in 2017 and additional maturities through 2021.
- Evaluate the sustainability of earnings growth given warmer-weather sensitivity, customer energy conservation and increasing third-party supply participation.
- Review pension and other post-retirement obligations, which totaled $149.0 million at year-end, and the related regulatory recovery assumptions.
- Confirm the status and potential financial impact of environmental remediation, storm-cost recovery, clean-energy procurements and pending legal proceedings.