Unitil Corporation 2014 Form 10-K Summary
Business Context and Reporting Period
Unitil Corporation is a regulated utility holding company serving approximately 180,612 electric and natural gas customers in New Hampshire, Massachusetts and Maine. Its principal businesses are electric distribution, natural gas distribution and interstate natural gas transmission. The filing covers the fiscal year ended December 31, 2014; fourth-quarter results are included in the annual filing.
- Electric customers: 102,752; natural gas customers: 77,860.
- Net utility plant: $733.7 million; total assets: $1.000 billion.
- Operations are seasonal, with natural gas results generally strongest in the first and fourth quarters.
- Utility commodity costs are substantially recovered through regulatory pass-through mechanisms, limiting direct earnings exposure to changes in purchased gas and electricity costs.
Financial Performance and Key Metrics
| Metric | 2014 | 2013 | Change |
|---|---|---|---|
| Operating revenue | $425.8 million | $366.9 million | +$58.9 million, 16.1% |
| Operating income | $60.0 million | $53.5 million | +$6.5 million, 12.1% |
| Net income | $24.7 million | $21.6 million | +$3.1 million, 14.0% |
| Diluted EPS | $1.79 | $1.57 | +$0.22, 14.0% |
| Cash from operating activities | $84.0 million | $96.3 million | -$12.3 million |
| Capital expenditures | $92.6 million | $89.5 million | +$3.1 million |
- Gas revenue was $201.4 million, including a gas sales margin of $97.4 million, up $12.2 million from 2013. Gas therm sales increased 7.7%, supported by colder weather, customer growth and approved rate increases.
- Electric revenue was $218.7 million, including an electric sales margin of $80.8 million, up $4.6 million. Electric sales increased 0.6% to 1,679.0 million kWh.
- Other revenue, principally from Usource energy brokering, was $5.7 million, down $0.1 million.
- Operating margin was approximately 14.1% and net margin was approximately 5.8%, based on reported revenue and income.
- Operation and maintenance expense increased 7.3% to $64.6 million. Depreciation and amortization increased 9.4% to $42.1 million, and taxes other than income taxes increased 14.7% to $17.2 million.
- Net interest expense increased to $20.9 million from $18.8 million, primarily because of the $50 million Northern Utilities debt issuance in October 2014 and lower interest income on regulatory assets.
- Cash declined to $8.4 million from $9.4 million. Operating cash flow was below capital spending, with the difference funded through debt and other financing activities.
Liquidity, Debt and Capitalization
- Long-term debt totaled $332.9 million, including $4.0 million classified as current, compared with $287.3 million at year-end 2013.
- Short-term debt declined to $29.3 million from $60.2 million.
- The $120 million revolving credit facility had $90.7 million available at December 31, 2014 and expires October 4, 2018. The company was in compliance with its covenants, including the 65% funded-debt-to-capitalization limit.
- Northern Utilities issued $50 million of 4.42% senior unsecured notes due October 15, 2044. Proceeds were used to repay short-term debt and for general corporate purposes.
- Total contractual cash obligations were $778.1 million, including $332.9 million of long-term debt, $270.5 million of long-term debt interest, $153.9 million of gas supply contracts and $9.1 million of electric supply contracts.
- Unitil paid $19.2 million of common dividends in 2014, or $1.38 per share. In January 2015, the board increased the quarterly dividend to $0.35, implying an annualized rate of $1.40.
Material Changes Versus the Prior Comparable Period
- Net income and diluted EPS increased 14.0%, driven principally by higher gas and electric sales margins and approved distribution rate increases.
- Gas margins benefited from approximately $7.6 million of higher distribution rates and $4.6 million from higher sales volumes, colder weather and customer additions.
- Electric margins benefited from approximately $4.4 million of higher distribution rates and $0.2 million from customer growth and sales volume.
- Operating cash flow decreased despite higher earnings, primarily because 2013 benefited from larger cash inflows from deferred regulatory and other charges.
- Net utility plant increased from $665.6 million to $733.7 million, reflecting continued infrastructure investment.
- Retirement benefit obligations increased to $118.6 million from $77.3 million, mainly because the discount rate declined from 4.8% to 4.0% and updated actuarial mortality assumptions were adopted.
- Fitchburg’s estimated manufactured-gas-plant remediation liability was reduced from $12.0 million to $5.5 million; $3.6 million had been spent by year-end.
Guidance, Outlook, Risks and Unusual Items
- Management projected 2015 capital spending of approximately $95 million to $100 million. The filing does not provide earnings or revenue guidance.
- Regulatory rate actions effective in 2014 included increases for Northern Utilities, Unitil Energy, Granite State and Fitchburg. Additional Northern Utilities step adjustments were expected in 2015, and Granite State was required to file a FERC Section 4 rate case by June 2015.
- Fitchburg filed a 20-year gas system enhancement plan seeking approximately $0.3 million of 2015 recovery for eligible leak-prone infrastructure; the matter was pending at filing.
- A November 2014 snowstorm caused approximately $2.1 million of Unitil Energy restoration costs and $0.3 million of Fitchburg costs. Fitchburg recorded a $0.2 million pretax charge; Unitil Energy planned to seek recovery of approximately $2.0 million through its storm reserve fund.
- Key risks include regulatory disallowance or delayed recovery of costs, weather-related demand volatility, severe storms, environmental remediation, pension funding requirements, interest-rate and refinancing risk, debt covenants, cybersecurity and information-system failures, customer migration to competitive suppliers, distributed generation and energy efficiency.
- Outstanding guarantees on certain energy and gas storage management contracts totaled approximately $39.1 million, with the longest term extending through April 2015.
- Pending matters include Fitchburg storm-related litigation, an MDPU investigation involving a prior gas explosion, a bad-debt recovery proceeding and grid-modernization requirements. Management did not expect these matters to have a material adverse effect, but ultimate outcomes may differ.
- The independent auditors issued an unqualified opinion and concluded that internal control over financial reporting was effective as of December 31, 2014.
Important Facts for Investors to Verify
- Confirm the sustainability of 2014’s higher gas margins, including the portion attributable to rate increases versus colder weather and customer growth.
- Review the timing and recoverability of regulatory assets, storm costs, environmental costs and retirement benefit obligations.
- Assess whether projected 2015 capital spending can be funded while maintaining the dividend and acceptable leverage.
- Monitor the $50 million long-term debt issuance, short-term credit utilization, refinancing maturities and compliance with debt covenants.
- Track pending rate cases, Fitchburg’s gas-system enhancement plan, grid-modernization investments and related recovery mechanisms.
- Evaluate exposure to severe weather, pension assumptions, environmental remediation, cybersecurity and customer migration to third-party energy suppliers.