UNITIL CORP annual report, FY2015

Unitil Corporation 2015 Form 10-K Summary

Business Context and Reporting Period

Unitil Corporation is a regulated utility holding company serving approximately 182,000 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-brokering services through Usource. The filing covers the fiscal year ended December 31, 2015, and was filed January 28, 2016.

Electric customers: 103,269; natural gas customers: 78,749.
Net utility plant: $808.9 million; total utility plant: $1.081 billion.
Employees: 500, including 159 represented by labor unions.

Financial Performance and Key Metrics

Metric	2015	2014	Change
Operating revenue	$426.8 million	$425.8 million	+$1.0 million
Operating income	$63.1 million	$60.0 million	+$3.1 million
Net income	$26.3 million	$24.7 million	+$1.6 million
Diluted EPS	$1.89	$1.79	+$0.10
Operating margin	14.8%	14.1%	Improved
Net margin	6.2%	5.8%	Improved
Cash from operating activities	$115.1 million	$84.0 million	+$31.1 million
Capital expenditures	$103.9 million	$92.6 million	+$11.3 million

Gas operating revenue was $202.6 million, with gas sales margin of $101.9 million, up $4.5 million. Gas therm sales increased 1.5%, despite 2.3% fewer heating degree days.
Electric operating revenue was $218.0 million, while electric sales margin was $85.5 million, up $4.7 million. Electric sales volume declined 0.7%.
Operation and maintenance expense increased $2.5 million, depreciation and amortization increased $3.6 million, and net interest expense increased $1.0 million.
Other income included a $0.9 million pretax gain on the sale of property in the fourth quarter.
Dividends declared increased to $1.40 per share from $1.38 per share. In January 2016, the quarterly dividend was increased to $0.355 per share, or an effective annual rate of $1.42.

Liquidity, Debt and Capital Requirements

Cash and cash equivalents were $8.7 million at December 31, 2015, compared with $8.4 million at year-end 2014.
Short-term debt was $42.0 million, compared with $29.3 million; current long-term debt was $17.4 million, compared with $4.0 million.
Total long-term debt was $325.5 million, including $308.1 million excluding the current portion. Total capitalization was $590.9 million, consisting of 48% common equity and 52% long-term debt excluding the current portion.
The revolving credit facility has a $120.0 million limit, $42.0 million outstanding and $78.0 million available at year-end. Its maturity was extended to October 2020, and the applicable spread was reduced to one-month LIBOR plus 1.25%.
The company was in compliance with its debt covenants, including the credit-facility funded-debt-to-capitalization limit of 65%. Standard & Poor’s ratings for Unitil and certain utility subsidiaries were BBB+.
Cash used in financing activities was $10.9 million. Contractual cash obligations totaled $850.7 million, including $325.5 million of long-term debt, $246.7 million of long-term-debt interest, and $247.7 million of gas-supply commitments.
Management projected 2016 capital spending of $95 million to $100 million.

Material Changes Versus the Prior Comparable Period

Net income increased 6.5% and diluted EPS increased 5.6%, primarily from higher gas and electric distribution margins.
Gas sales margin rose 4.6%, supported by rate increases, customer growth and higher normalized commercial and industrial sales.
Electric sales margin rose 5.8%, primarily from higher distribution rates, partially offset by lower residential usage.
Revenue was essentially flat because lower pass-through gas and electric supply costs offset higher distribution-related revenue.
Operating cash flow increased substantially, driven by higher earnings, non-cash expenses and favorable working-capital and regulatory-liability changes.
Capital expenditures increased 12.2%, and net utility plant increased from $733.7 million to $808.9 million.
The company received a $22.0 million Portland Natural Gas Transmission pipeline refund. The refund is to benefit customers and marketers; $7.6 million was recorded as a current regulatory liability and $8.1 million as a noncurrent regulatory liability at year-end.
The new Maine Distribution Operations Center was completed, and the company recognized a $0.9 million gain on the sale of the former facility.

Guidance, Outlook, Commentary and Risks

The filing does not provide formal earnings guidance. It identifies projected 2016 capital spending of $95 million to $100 million and expects continued pension and post-retirement benefit contributions consistent with amounts recovered in rates.
Fitchburg filed for a $3.8 million electric revenue increase and a $3.0 million gas revenue increase. Decisions were expected by the end of April 2016. Fitchburg also sought recovery of gas-system enhancement investments.
Results are seasonal, with natural gas earnings historically strongest in the first and fourth quarters. Approximately 70% of annual natural gas sales are temperature sensitive.
Most purchased gas and electricity costs are recovered through regulatory pass-through mechanisms, limiting commodity-price exposure but creating timing and regulatory-recovery risks.
Key risks include unfavorable rate decisions, delayed recovery of supply, storm, pension or environmental costs, interest-rate increases, refinancing and credit-market access, restrictive debt covenants, weather variability, customer conservation and distributed generation, cyberattacks, operational hazards and environmental liabilities.
A class-action lawsuit and a separate action related to the December 2008 Fitchburg ice storm remained pending. Management stated that the cases were without merit and were not expected to have a material financial impact.
Former manufactured-gas-plant remediation continues, although the company believes applicable costs are substantially recoverable through rates or other mechanisms and that no material losses beyond recorded amounts were reasonably likely at year-end.
Management reported effective disclosure controls and effective internal control over financial reporting. A new customer information system was under development, with implementation dependent on user testing and system acceptance.

Most Important Facts for an Investor to Verify

Confirm the treatment, timing and customer-crediting obligations associated with the $22.0 million pipeline refund.
Review pending Fitchburg rate cases and whether requested revenue increases and capital-cost recovery mechanisms were subsequently approved.
Assess the funding requirements and sensitivity of the $124.4 million retirement-benefit obligation to discount rates, asset returns and health-care costs.
Evaluate 2016 capital spending against operating cash flow, available credit and scheduled debt maturities, including $17.4 million of long-term debt due in 2016.
Monitor regulatory proceedings, storm-cost recovery, environmental remediation and the Fitchburg ice-storm litigation.
Verify the sustainability of the increased $1.42 annual dividend rate relative to earnings, subsidiary distributions and debt covenants.