UNITIL CORP 10-Q Summary: Quarter Ended June 30, 2009
Business Context and Reporting Period
UNITIL Corporation (Unitil) is a public utility holding company headquartered in Hampton, New Hampshire. Its principal business is the local distribution of electricity and natural gas in New Hampshire, Massachusetts, and Maine. The company operates three wholly-owned distribution utilities: Unitil Energy Systems, Inc., Fitchburg Gas and Electric Light Company, and Northern Utilities, Inc. (acquired December 1, 2008). It also owns Granite State Gas Transmission, Inc., an interstate natural gas pipeline. This report covers the three and six months ended June 30, 2009.
Key Financial Metrics
| Metric | Three Months Ended June 30, 2009 | Six Months Ended June 30, 2009 |
|---|---|---|
| Total Operating Revenues | $71.5 million | $207.1 million |
| Net Income | $0.3 million | $9.4 million |
| Earnings Applicable to Common Shareholders | $0.2 million | $9.3 million |
| Earnings Per Share (Basic & Diluted) | $0.03 | $1.10 |
| Cash Provided by Operating Activities | N/A | $18.7 million |
| Short-Term Debt Outstanding | $30.6 million | $30.6 million |
| Long-Term Debt (Less Current Portion) | $249.1 million | $249.1 million |
| Total Assets | $694.5 million | $694.5 million |
Material Changes vs. Prior Period
- Earnings Volatility: Earnings applicable to common shareholders dropped to $0.2 million in Q2 2009 from $1.6 million in Q2 2008. However, for the six-month period, earnings rose to $9.3 million from $4.9 million in 2008, driven by the inclusion of Northern Utilities and Granite State.
- Gas vs. Electric Performance: Natural gas sales margin increased by $8.4 million (Q2) and $26.5 million (YTD) due to the acquisition of Northern Utilities and a colder winter (6.4% colder than 2008). Conversely, electric sales margin decreased by $1.6 million (Q2) and $0.3 million (YTD) due to lower sales volumes reflecting a regional economic slowdown.
- Operating Expenses: Total Operation & Maintenance (O&M) expenses increased by $5.0 million (Q2) and $10.7 million (YTD). Increases were driven by the acquisitions, higher professional fees related to the December 2008 ice storm, and higher compensation costs.
- Interest Expense: Net interest expense increased by $1.4 million (Q2) and $3.6 million (YTD) primarily due to new long-term debt issued to finance the acquisitions.
- Balance Sheet Growth: Total assets increased by $230.9 million compared to June 30, 2008, primarily due to the acquisitions and capital expenditures.
Guidance, Outlook, Risks, and Unusual Items
- Seasonality Impact: Management expects consolidated results to reflect a greater degree of seasonality due to the natural gas acquisitions. Results are expected to be positively affected in Q1 and Q4, and negatively affected in Q2 and Q3.
- Ice Storm Costs: The company accrued approximately $12.5 million in costs for repairing electric distribution systems damaged by a severe ice storm in December 2008. These costs are deferred as a regulatory asset pending future rate recovery. The company does not believe this will have a material adverse impact.
- Regulatory Proceedings:
- Massachusetts Attorney General: Recommended fines of $4.65 million against Fitchburg for storm response performance; a decision by the MDPU is pending.
- Gas Procurement Investigation: The MDPU is investigating Fitchburg's gas procurement practices. The Attorney General recommended a refund of $863,368 to ratepayers; a decision is expected by year-end.
- Maine Capacity Costs: The Maine Public Utilities Commission (MPUC) denied Northern Utilities' request to recover $2.4 million in unrecovered annual demand gas costs. The company had not recorded a regulatory asset for this, so the denial does not impact financial statements.
- Capital Markets: Between December 2008 and June 2009, the company issued 4,970,000 shares of common stock, raising net proceeds of $93.1 million to repay bridge financing and fund general corporate purposes.
- Risk Factors: Key risks include integration of acquisitions, weather variations, regulatory changes, interest rate fluctuations, and credit market conditions.
Investor Verification Checklist
- Regulatory Cost Recovery: Verify the timeline and likelihood of recovering the $12.5 million in ice storm restoration costs through future rate proceedings.
- MDPU Investigation Outcomes: Monitor the final decisions regarding the $4.65 million fine recommendation and the $863,368 gas procurement refund recommendation in Massachusetts.
- Seasonal Earnings Pattern: Confirm if Q3 and Q4 2009 results align with management's expectation of negative Q2/Q3 and positive Q1/Q4 seasonality due to the gas acquisitions.
- Debt Servicing: Review the impact of increased interest expense ($3.6 million YTD increase) on future cash flows, given the new long-term debt issuances.
- Electric Volume Trends: Assess whether the 5.7% to 6.8% decline in electric sales volumes is a temporary economic effect or a structural shift in customer usage.