Unitil Corporation 2015 Q3 Form 10-Q Summary
Business Context and Reporting Period
Unitil Corporation is a regulated utility holding company providing electric and natural gas distribution services in New Hampshire, Massachusetts, and Maine, plus interstate natural gas transmission and non-regulated energy brokerage services. The filing covers the three and nine months ended September 30, 2015. The company served approximately 102,700 electric and 77,900 natural gas customers and had $782.4 million of net utility plant at September 30, 2015.
Financial Performance and Key Metrics
| Metric | Three Months 2015 | Three Months 2014 | Nine Months 2015 | Nine Months 2014 |
|---|---|---|---|---|
| Total operating revenues | $74.7 million | $76.6 million | $324.4 million | $306.0 million |
| Operating income | $7.3 million | $7.4 million | $44.6 million | $39.9 million |
| Net income | $1.7 million | $1.6 million | $17.0 million | $15.3 million |
| Basic and diluted EPS | $0.12 | $0.11 | $1.22 | $1.10 |
| Operating margin | Approximately 9.8% | Approximately 9.7% | Approximately 13.7% | Approximately 13.0% |
| Gas sales margin | $16.2 million | $15.2 million | $73.1 million | $68.0 million |
| Electric sales margin | $22.2 million | $22.6 million | $63.9 million | $60.7 million |
Gas and electric sales margins are non-GAAP measures representing operating revenue less pass-through commodity costs. Natural gas therm sales increased 4.0% in both the quarter and nine-month period. Electric kilowatt-hour sales increased 1.1% in the quarter and 0.5% for the nine-month period.
Operating expenses were $67.4 million in the quarter and $279.8 million for the nine months. Nine-month operating expenses increased primarily because of higher depreciation and amortization, compensation and benefits, and property taxes. Net interest expense increased to $5.5 million in the quarter and $17.3 million for the nine months, reflecting higher long-term debt and lower interest income on regulatory assets.
Cash provided by operating activities was $110.9 million for the nine months, compared with $82.6 million in the prior-year period. Investing cash outflows were $70.9 million, primarily for utility plant additions, and financing cash outflows were $39.5 million. Cash and cash equivalents were $8.9 million at September 30, 2015.
At September 30, 2015, total long-term debt was $332.5 million, including $328.4 million less the current portion on the balance sheet. Short-term debt was $4.1 million. The $120.0 million revolving credit facility had $115.9 million available, and the company was in compliance with its covenants, including the 65% funded-debt-to-capitalization limit. The facility was amended in July 2015 to extend maturity to October 2020 and reduce the applicable LIBOR spread to 1.25%.
Total assets were $1.018 billion, total capitalization was $606.1 million, and stockholders’ equity was $277.7 million. The quarterly common dividend was increased to $0.35 per share, or an effective annual rate of $1.40 per share.
Material Changes Versus the Prior Comparable Period
- Nine-month net income increased 11.1% to $17.0 million, and EPS increased $0.12 to $1.22.
- Nine-month operating revenue increased $18.4 million, or approximately 6.0%, driven by higher gas and electric distribution rates, higher gas volumes, and higher pass-through commodity costs.
- Gas sales margin increased $5.1 million, or 7.5%, due to rate increases and higher volumes resulting from colder weather and customer growth.
- Electric sales margin increased $3.2 million, or 5.3%, for the nine months, although it declined $0.4 million in the third quarter because of lower electric demand sales.
- Depreciation and amortization increased $2.9 million for the nine months, while O&M expense increased $0.7 million.
- The company received a $22.0 million PNGTS pipeline refund. The full amount is being credited to customers and was recorded as regulatory liabilities, including $11.1 million current and $10.9 million noncurrent at September 30, 2015.
- Net utility plant increased from $733.7 million at December 31, 2014 to $782.4 million at September 30, 2015, reflecting continued capital investment.
Guidance, Outlook, Commentary, Risks, and Unusual Items
Management projected 2015 capital spending of $95 million to $100 million; $70.9 million had been spent through September 30. No formal earnings guidance was provided in the filing.
Fitchburg filed for proposed annual base-revenue increases of $3.8 million for electric operations and $3.0 million for gas operations. Decisions were expected by the end of April 2016. Granite State received a $0.4 million rate increase effective August 1, 2015. Fitchburg also received approval for a gas infrastructure replacement program and filed an initial grid modernization plan.
The principal risks include regulatory decisions affecting rates and cost recovery, weather and seasonal demand, energy commodity prices, severe storms, pension funding requirements, interest rates, access to debt and equity financing, restrictive debt covenants, operating hazards, environmental obligations, competition, and performance by energy-brokering customers.
The Bellermann litigation relating to the December 2008 Fitchburg ice storm was certified as a class action by the trial court in July 2015. Unitil appealed, and the Massachusetts Supreme Judicial Court granted direct review in October 2015. A separate Lunenburg action remains in discovery, with trial likely in late 2016. Management believes the suits are without merit.
Environmental remediation obligations totaled $5.5 million at September 30, 2015. The company accrued $1.6 million for Northern Utilities remediation work and estimated Fitchburg’s remaining Sawyer Passway remediation costs at approximately $1.6 million, after $3.9 million had been spent. Management did not expect these matters to have a material adverse effect, but future costs may vary.
Regulated operations depend on continued recovery of regulatory assets, which totaled $125.4 million, and regulatory liabilities, which totaled $39.1 million, at September 30, 2015. Loss of regulated-operations accounting or unfavorable commission decisions could require material charges.
Important Facts for Investors to Verify
- Reconcile reported earnings growth to rate increases, weather-driven gas volumes, customer growth, and higher operating costs.
- Assess the timing and outcome of Fitchburg’s pending electric and gas rate cases and the potential earnings effect of requested increases.
- Confirm the customer-crediting schedule and cash impact of the $22.0 million PNGTS pipeline refund.
- Monitor capital spending, utility plant growth, depreciation, and the company’s ability to finance planned investments.
- Review debt maturities, interest-rate exposure, credit-facility availability, and compliance with the 65% leverage covenant.
- Evaluate pension and postretirement obligations, which totaled $122.0 million at September 30, 2015, and sensitivity to market returns and discount rates.
- Follow the Fitchburg ice-storm litigation, environmental remediation, storm-cost recovery, and other regulatory contingencies.
- Consider seasonality: natural gas earnings are historically strongest in the first and fourth quarters, making third-quarter results less representative of full-year performance.