Unitil Corporation 10-Q Summary
Business Context and Reporting Period
Unitil Corporation is a regulated utility holding company providing electric and natural gas distribution in New Hampshire, Massachusetts and Maine, plus interstate natural gas transmission and non-regulated energy-brokering services. The filing covers the unaudited three months ended March 31, 2018, compared with the corresponding 2017 period. The company served approximately 105,000 electric and 81,300 natural gas customers and had $972.4 million of net utility plant at March 31, 2018.
Financial Performance and Key Metrics
| Metric | Q1 2018 | Q1 2017 | Change |
|---|---|---|---|
| Operating revenue | $145.8 million | $126.0 million | 15.7% |
| Operating income | $28.1 million | $27.7 million | 1.4% |
| Net income | $15.6 million | $12.4 million | 25.8% |
| Basic and diluted EPS | $1.06 | $0.88 | $0.18 |
| Operating margin | 19.3% | 22.0% | Down 2.7 percentage points |
| Net margin | 10.7% | 9.8% | Up 0.9 percentage points |
| Cash flow from operations | $28.4 million | $37.5 million | Down $9.1 million |
| Capital expenditures | $10.1 million | $17.5 million | Down $7.4 million |
- Gas revenue was $87.0 million, up 16.3%; gas sales margin increased to $39.9 million from $38.0 million.
- Electric revenue was $57.5 million, up 16.2%; electric sales margin increased to $22.3 million from $22.0 million.
- Natural gas therm sales increased 9.5%, while electric kilowatt-hour sales increased 5.8%. Colder weather contributed to 10% more heating degree days for gas service areas.
- Operation and maintenance expense increased 8.1% to $17.3 million, primarily from compensation and benefits, bad debt expense and higher utility operating costs.
- Interest expense, net remained approximately $6.0 million. Income tax expense declined to $4.8 million from $7.7 million, primarily because of the Tax Cuts and Jobs Act tax-rate reduction and a $0.6 million current tax benefit.
- The quarterly dividend was increased to $0.365 per share from $0.360, representing an annualized rate of $1.46 per share.
Balance Sheet, Debt and Liquidity
- Cash and cash equivalents were $9.5 million at March 31, 2018, compared with $8.9 million at December 31, 2017.
- Total assets were $1.244 billion; total stockholders’ equity was $348.6 million.
- Long-term debt, net of issuance costs, was $392.8 million, including $29.8 million current maturities. Short-term debt was $45.3 million.
- The $120.0 million revolving credit facility had $74.7 million of availability at March 31, 2018. The facility terminates October 4, 2020, and the company was in compliance with its covenants, including the 65% funded-debt-to-capitalization limit.
- Operating cash flow of $28.4 million exceeded capital expenditures of $10.1 million, but financing activities used $17.7 million, including $5.4 million of dividends and $13.4 million of long-term debt repayment.
- Outstanding guarantees on energy and gas-storage management contracts totaled approximately $17.9 million, with the longest term extending through August 2018.
Material Changes Versus the Prior Comparable Period
- Net income and EPS improved substantially, driven by higher gas and electric sales margins, customer growth, colder weather and distribution-rate changes.
- The federal corporate tax rate fell to 21% effective January 1, 2018. Rate reductions related to the Tax Cuts and Jobs Act reduced first-quarter gas and electric revenue by approximately $2.3 million, but lower tax expense more than offset the revenue impact.
- Operating income increased only modestly because higher margins were largely offset by increased operating costs and other expenses.
- Operating cash flow declined despite higher earnings, primarily reflecting working-capital movements and regulatory-related cash items.
- The company adopted the new revenue-recognition standard and retirement-benefit presentation standard. Management reported no material impact on the financial statements; Usource channel-partner payments are now presented net against revenue, reducing reported other revenue and O&M by approximately $0.3 million.
- Long-term debt increased year over year following debt issuances by Northern Utilities, Fitchburg and Granite State in November 2017, although the company used proceeds to refinance debt and repay short-term borrowings.
Guidance, Outlook, Risks and Unusual Items
- No quantitative earnings or revenue guidance is provided in the filing. Management notes that quarterly results are seasonal and that first- and fourth-quarter results are typically strongest because of natural gas heating demand.
- Several rate proceedings remained pending, including Unitil Energy’s proposed net $0.4 million annual revenue decrease, Fitchburg gas-system recovery matters, and Northern Utilities’ New Hampshire settlement proposal for a net $0.9 million annual increase plus a $2.3 million capital step increase, effective May 1, 2018 if approved.
- Northern Utilities’ Maine rate order became effective March 1, 2018 and produced an overall annual revenue decrease of approximately $0.1 million after incorporating the TCJA, while approving a 9.5% return on equity and extending the TIRA mechanism.
- The company expects approximately $47.1 million of excess accumulated deferred income taxes to be flowed back to customers over an estimated 15-to-20-year period, subject to regulatory and IRS guidance. Estimates may change.
- Granite State was required to file a FERC general rate case by April 30, 2018, with rates effective no later than November 1, 2018.
- Key risks include regulatory decisions and cost recovery, weather variability, energy commodity prices and transmission capacity, severe storms, interest rates, access to financing, debt covenants, pension obligations, environmental compliance, customer retention and competition.
- Environmental obligations were $2.1 million at March 31, 2018. Supplemental remediation at two former manufactured-gas-plant sites began in the second quarter of 2018. Management stated that no material losses beyond recorded amounts were reasonably likely as of the filing date.
- The IRS notified Unitil that its 2015 and 2016 federal income tax returns were under examination. Management did not expect a material impact.
Important Facts for Investors to Verify
- Whether pending state and FERC rate proceedings produce the anticipated revenue changes and customer refunds associated with the TCJA.
- The final treatment and timing of the approximately $47.1 million excess deferred-tax regulatory liability.
- Progress and rate impact of Granite State’s required general rate case.
- Whether operating cash flow remains sufficient to fund capital investment, dividends and debt maturities without materially increasing short-term borrowings.
- Actual weather-normalized demand trends, customer growth and the sustainability of gas and electric sales-margin gains.
- Future environmental remediation costs, storm costs, pension funding requirements and potential changes in regulatory cost recovery.