Business Context and Reporting Period
Unitil Corporation is a regulated utility holding company serving approximately 102,700 electric and 77,900 natural gas customers in New Hampshire, Massachusetts and Maine. Its businesses include electric and natural gas distribution, an 86-mile natural gas transmission pipeline and non-regulated energy brokerage services. This unaudited Form 10-Q covers the three months ended March 31, 2015, compared with the same period in 2014.
Financial Performance and Key Metrics
| Metric | Q1 2015 | Q1 2014 | Change |
|---|---|---|---|
| Operating revenue | $172.2 million | $156.1 million | +$16.1 million |
| Operating income | $28.4 million | $25.4 million | +$3.0 million |
| Net income | $13.6 million | $12.6 million | +$1.0 million |
| Basic and diluted EPS | $0.98 | $0.91 | +$0.07 |
| Operating margin | 16.5% | 16.3% | Improved |
| Operating cash flow | $27.8 million | $28.7 million | -$0.9 million |
| Capital expenditures | $13.1 million | $9.2 million | +$3.9 million |
- Gas operating revenue increased 8.3% to $100.3 million, while gas sales margin increased 6.3% to $38.8 million. Gas therm sales rose 6.5%, supported by colder weather, customer growth and higher distribution rates.
- Electric operating revenue increased 13.6% to $70.3 million, while electric sales margin increased 10.4% to $21.2 million. Electric sales volume increased 0.3%.
- Operating and maintenance expense declined $0.2 million to $16.9 million. Depreciation and amortization increased $1.2 million to $11.4 million, and interest expense, net increased $0.6 million to $5.8 million.
- Net income increased 7.9% year over year. The filing attributes the improvement primarily to higher gas and electric sales margins, partially offset by higher operating expenses, depreciation, taxes and interest expense.
- Cash provided by operations was $27.8 million. Working capital used $7.6 million of cash, principally because accounts receivable increased and used $25.2 million of cash.
- Cash used in investing activities was $13.1 million, entirely reflecting property, plant and equipment additions. Management projected 2015 capital spending of $95 million to $100 million.
- Cash used in financing activities was $11.9 million, including $4.9 million of dividends paid and a $10.5 million decrease in exchange gas financing.
- At March 31, 2015, cash and cash equivalents were $11.2 million, compared with $8.4 million at December 31, 2014.
- Net utility plant was $738.2 million, compared with $733.7 million at December 31, 2014 and $666.8 million at March 31, 2014.
- Total long-term debt was $332.7 million, including $4.0 million current portion. Short-term debt was $32.0 million. Total capitalization was $612.0 million, including $283.3 million of stockholders’ equity.
- The $120.0 million revolving credit facility had $32.0 million outstanding and $88.0 million available at March 31, 2015. Unitil was in compliance with its covenants, including the 65% funded-debt-to-capitalization limit.
- The quarterly dividend was increased to $0.35 per share, producing an effective annual dividend rate of $1.40 per share.
Material Changes Versus the Prior Comparable Period
- Colder weather contributed to 4% more heating degree days than in Q1 2014 and 14% more than normal; weather-normalized gas therm sales increased an estimated 4.6%.
- Gas customer count increased 2.3% over the prior twelve months, supporting higher gas margin.
- Gas and electric margins benefited from distribution-rate increases associated with Northern Utilities’ TIRA and step adjustments, Fitchburg’s rate case and Unitil Energy’s rate plan.
- O&M expense decreased despite higher utility operating, compensation and benefit costs because professional fees declined $0.8 million.
- Depreciation and amortization rose 11.8%, reflecting higher utility plant depreciation and amortization of storm restoration costs.
- Long-term debt increased by approximately $45.5 million from March 31, 2014, primarily reflecting Northern Utilities’ $50.0 million issuance of 4.42% senior unsecured notes due 2044 in October 2014.
- Accounts receivable increased to $85.9 million from $60.7 million at December 31, 2014, contributing to the decline in operating cash flow.
Guidance, Outlook, Risks and Unusual Items
- Management projected 2015 capital expenditures of $95 million to $100 million; the filing does not provide full-year earnings guidance.
- Northern Utilities received a $22.0 million Portland Natural Gas Transmission System pipeline refund on April 15, 2015. The entire amount is expected to be credited to retail customers over three years with interest, subject to regulatory approval. The amount was recorded as both accrued revenue and a regulatory liability at March 31, 2015.
- Northern Utilities’ proposed $1.2 million Maine TIRA increase remained pending. Its New Hampshire $1.8 million step increase was approved on April 15, 2015, subject to the regulatory process.
- Granite State was required to file a FERC Section 4 rate case by June 2015, with rates expected to become effective by January 1, 2016.
- Unitil Energy and Fitchburg continue to pursue recovery of storm-related costs. Unitil Energy incurred approximately $1.7 million of recoverable expense related to the November 2014 snowstorm, subject to regulatory review.
- Fitchburg’s former manufactured gas plant remediation estimate was reduced from $12.0 million to $5.5 million in 2014; $3.7 million had been spent as of March 31, 2015.
- Outstanding guarantees on energy and natural gas storage contracts totaled approximately $37.1 million, with the longest term extending through April 2015. The Company also guaranteed $1.5 million of Unitil Realty notes and $10.0 million of Granite State notes.
- Principal risks include regulatory decisions and cost recovery, weather, energy commodity and transmission prices, severe storms, pension obligations, interest rates, financing availability, debt covenants, environmental liabilities, operating hazards and competition.
- The Company reported no material changes to the risk factors in its 2014 Form 10-K and stated that disclosed legal and environmental matters were not expected to have a material adverse effect, although outcomes remain subject to uncertainty.
Most Important Facts for Investors to Verify
- Verify the regulatory approval and timing of customer credits for the $22.0 million pipeline refund.
- Monitor rate-case outcomes, including Northern Utilities’ Maine TIRA filing, Fitchburg’s gas infrastructure plan and Granite State’s anticipated FERC rate case.
- Assess whether projected 2015 capital spending of $95 million to $100 million can be funded from operating cash flow and available credit.
- Track leverage, refinancing needs and compliance with the 65% funded-debt-to-capitalization covenant.
- Evaluate the sustainability of Q1 margin gains after unusually cold weather and the effect of future weather on gas demand.
- Review regulatory assets of $139.9 million and regulatory liabilities of $39.4 million, including the $22.0 million pipeline refund liability, for recovery or refund risk.
- Follow storm-cost recovery, environmental remediation, the Fitchburg gas explosion-related claims and the Fitchburg ice-storm litigation.