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 gas transmission and non-regulated energy brokering. Its distribution utilities serve approximately 103,300 electric and 78,700 natural gas customers. This unaudited Form 10-Q covers the three and six months ended June 30, 2016, compared with the corresponding 2015 periods.
Financial Performance and Key Metrics
| Metric | Q2 2016 | Q2 2015 | Six Months 2016 | Six Months 2015 |
|---|---|---|---|---|
| Operating revenues | $74.5 million | $77.5 million | $200.3 million | $249.7 million |
| Operating income | $9.5 million | $8.9 million | $32.9 million | $37.3 million |
| Net income | $2.5 million | $1.7 million | $13.4 million | $15.3 million |
| Basic and diluted EPS | $0.18 | $0.12 | $0.96 | $1.10 |
| Operating margin | 12.8% | 11.5% | 16.4% | 14.9% |
| Cash provided by operating activities | Not separately provided | Not separately provided | $40.2 million | $90.4 million |
- Gas sales margin was $19.8 million in the quarter, up $1.7 million, and $55.7 million for the six months, down $1.2 million.
- Electric sales margin was $20.4 million in the quarter, down $0.1 million, and $40.5 million for the six months, down $1.2 million.
- Gas therm sales declined 1.8% in the quarter and 12.1% year to date; electric kilowatt-hour sales declined 2.9% and 5.1%, respectively.
- Weather-normalized gas therm sales, excluding decoupled sales, increased 2.3% year to date, while gas customers grew 1.5% over the prior twelve months.
- Operation and maintenance expense decreased 3.7% in the quarter and 0.3% year to date. Depreciation and amortization increased 3.5% in both periods, and taxes other than income taxes increased 33.3% in the quarter and 15.3% year to date.
- Net interest expense declined $0.3 million in the quarter and $0.6 million year to date, primarily due to lower long-term debt and higher interest income on regulatory assets.
- Capital expenditures were $39.6 million year to date, compared with $38.4 million in 2015.
- Cash and cash equivalents were $7.9 million at June 30, 2016. Net utility plant was $834.6 million and total assets were $1.052 billion.
- Total long-term debt, net of issuance costs, was $322.4 million, including $17.2 million due within one year. Short-term debt was $54.2 million.
- The $120.0 million revolving credit facility had $65.8 million available at June 30, 2016. Unitil was in compliance with its covenants, including the 65% funded-debt-to-capitalization limit.
- Standard & Poor’s ratings for Unitil and specified utility subsidiaries were BBB+.
Material Changes Versus the Prior Comparable Period
- Second-quarter net income increased $0.8 million, or $0.06 per share, primarily because of higher gas sales margins from distribution-rate increases and customer growth.
- Six-month net income decreased $1.9 million, and EPS decreased $0.14, principally because unusually warm winter weather reduced gas and electric sales and margins.
- The company estimated that warmer weather reduced year-to-date gas sales margins by approximately $5.0 million, or $0.22 per share. Heating degree days were 19% lower than in the first six months of 2015.
- Lower commodity costs reduced reported gas and electric revenues, but these costs are generally recovered from customers through pass-through mechanisms and therefore do not directly affect earnings.
- Operating cash flow fell $50.2 million year over year, primarily reflecting changes in regulatory liabilities, working capital and deferred regulatory charges.
- Long-term debt declined from $329.7 million at June 30, 2015 to $322.4 million at June 30, 2016, while short-term debt increased from zero to $54.2 million.
- The quarterly dividend increased to $0.355 per share from $0.350, implying an effective annualized rate of $1.42 per share.
Guidance, Outlook, Commentary, Risks and Unusual Items
- The filing does not provide formal earnings or revenue guidance. Management cautions that quarterly results are seasonal and are not necessarily indicative of full-year results.
- Unitil Energy received approval for a $2.4 million temporary distribution-rate increase effective July 1, 2016, while its request for an approximately $6.3 million permanent increase remained under review.
- Fitchburg received approved electric and gas rate increases effective May 1, 2016, including increases of $2.1 million and $1.6 million, respectively. Northern Utilities received a $1.5 million Maine infrastructure-related increase, and Granite State’s $0.3 million transmission-rate increase was approved effective August 1, 2016.
- Northern Utilities’ $22.0 million pipeline refund is being returned to customers and marketers. Related regulatory liabilities totaled $8.6 million at June 30, 2016, including $5.0 million current and $3.6 million noncurrent.
- Outstanding guarantees on energy and gas-storage contracts totaled approximately $28.9 million, with the longest term extending through April 2017.
- Key risks include regulatory decisions and cost recovery, weather variability, storms and catastrophic events, commodity and transmission costs, interest rates, access to financing, debt covenants, pension funding, environmental obligations, customer retention, competition and performance under energy-brokering contracts.
- Environmental obligations totaled $3.0 million at June 30, 2016. Management reported no material losses reasonably likely to be incurred in excess of recorded amounts but noted that future environmental costs could increase.
- The company is implementing a new customer information system; timing remains subject to user testing and system acceptance.
- Management stated that ordinary-course legal proceedings, including claims related to a 2008 ice storm, are not expected to have a material financial impact. No material changes were reported to the risk factors in the 2015 Form 10-K.
Investor Verification Checklist
- Verify the ultimate resolution and retroactive reconciliation of Unitil Energy’s pending permanent rate case.
- Monitor weather-normalized demand, customer growth and the extent to which decoupling protects distribution margins.
- Assess operating cash-flow conversion, regulatory-account balances and seasonal short-term borrowing needs.
- Review debt maturities, refinancing requirements, interest-rate exposure and compliance with the credit-facility covenants.
- Track recovery of storm, environmental, pension and other regulatory assets, as well as the remaining customer credits for the pipeline refund.
- Evaluate the execution, cost and implementation timing of the new customer information system.
- Confirm dividend sustainability against earnings, capital expenditures and financing requirements.