UTL

UNITIL CORP - 10-Q Summary (Quarter Ended June 30, 2006)

Business Context and Reporting Period

UNITIL CORPORATION (Unitil) is a public utility holding company providing retail distribution of electricity and natural gas in New Hampshire and Massachusetts through its subsidiaries, Unitil Energy Systems, Inc. (UES) and Fitchburg Gas and Electric Light Company (FG&E). The company also operates an unregulated energy brokering business, Usource. This report covers the three and six months ended June 30, 2006.

Key Financial Metrics

Material Changes vs. Prior Period

• Earnings Decline: Net income applicable to common shareholders decreased by $0.1 million (Q2) and $0.8 million (YTD) compared to 2005. Earnings per share dropped from $0.27 to $0.25 (Q2) and $0.75 to $0.61 (YTD).
• Revenue Growth: Total operating revenues increased 17.1% (Q2) and 17.5% (YTD) driven primarily by higher purchased electricity and gas costs passed through to customers.
• Electric Sales: Total electric sales volume decreased 0.3% (Q2) and 0.8% (YTD) due to milder weather and lower consumption. However, electric operating revenues rose 15.8% (Q2) and 18.3% (YTD) due to higher commodity prices.
• Gas Sales: Total gas sales volume increased 28.9% (Q2) and 7.7% (YTD), largely due to a new contract with a large industrial customer. Without this contract, sales would have declined significantly.
• Expense Increases: Operation and Maintenance (O&M) expenses increased $1.0 million (Q2) and $1.1 million (YTD) due to higher retiree benefits and salaries. Interest expense, net, increased $0.2 million (Q2) and $0.4 million (YTD) due to higher weighted average cost of debt.
• Depreciation: Depreciation and amortization decreased $0.6 million (Q2) and $1.5 million (YTD) primarily due to the full amortization of regulatory assets related to the Seabrook Station investment in late 2005.

Guidance, Outlook, and Risks

• Rate Proceedings: UES filed a base rate increase request of $4.65 million with the New Hampshire Public Utilities Commission (NHPUC). Temporary rate relief was established effective January 1, 2006. Management has recorded an estimated net increase to operating income of $0.7 million for the first six months of 2006 based on this filing. A final order is anticipated before the end of 2006.
• Capital Expenditures: Annual capital expenditures are budgeted at $33.4 million for 2006, compared to $24.4 million in 2005. This includes $6.6 million for Automated Metering Infrastructure projects.
• Financing: UES expects to conclude a $15 million First Mortgage Bond issuance around September 30, 2006, to reduce short-term debt. The company currently has $13.3 million in unused bank lines of credit.
• Risks: Key risks include variations in weather, changes in the regulatory environment, interest rate fluctuations, and energy commodity price volatility. The company notes that while commodity costs are passed through, regulatory commissions may require deferral of some costs.
• Regulatory Assets: The company relies on SFAS No. 71 for regulatory accounting. If the company ceases to meet criteria for regulated accounting, immediate recognition of deferred costs could materially impact financial statements.

Investor Verification Checklist

• Verify the final outcome of the UES base rate case filed with the NHPUC and the retroactive application of any approved rate changes.
• Monitor the approval status of the margin earned on the new large industrial gas contract by the Massachusetts Department of Telecommunications and Energy (MDTE).
• Review the impact of rising short-term interest rates on future interest expense, given the company's variable rate short-term debt.
• Assess the progress of the $15 million First Mortgage Bond issuance scheduled for late 2006.
• Track the status of environmental remediation at the Sawyer Passway MGP site and potential insurance recoveries.