Unitil Corporation 2014 Q3 Form 10-Q Summary
Business Context and Reporting Period
Unitil Corporation is a regulated utility holding company that distributes electricity and natural gas in New Hampshire, Massachusetts, and Maine. Its subsidiaries serve approximately 102,400 electric customers and 75,900 natural gas customers. Granite State Gas Transmission operates an 86-mile interstate natural gas pipeline, while Usource provides non-regulated energy brokering and advisory services.
This unaudited Form 10-Q covers the three and nine months ended September 30, 2014, compared with the corresponding 2013 periods. Utility commodity costs are generally recovered from customers through reconciling, pass-through rate mechanisms and therefore do not directly drive earnings.
Financial Performance and Key Metrics
| Metric | Q3 2014 | Q3 2013 | 9M 2014 | 9M 2013 |
|---|---|---|---|---|
| Operating revenues | $76.6 million | $72.5 million | $306.0 million | $257.1 million |
| Operating income | $7.4 million | $5.6 million | $39.9 million | $32.0 million |
| Net income | $1.6 million | $0.6 million | $15.3 million | $11.3 million |
| Basic and diluted EPS | $0.11 | $0.04 | $1.10 | $0.82 |
| Operating margin | 9.7% | 7.7% | 13.0% | 12.4% |
| Net margin | 2.1% | 0.8% | 5.0% | 4.4% |
Gas sales margin, a non-GAAP measure, was $15.2 million in the quarter and $68.0 million for the nine months, increases of $2.8 million and $11.7 million, respectively. Electric sales margin was $22.6 million in the quarter and $60.7 million for the nine months, increases of $1.8 million and $3.6 million, respectively. The filing identifies these margins as more useful than operating revenue because commodity costs are passed through to customers.
- Natural gas operating revenue increased 10.6% in Q3 and 24.6% for the nine months. Nine-month therm sales increased 11.2%, supported by colder weather, customer growth, and approved rate increases.
- Electric operating revenue increased 4.0% in Q3 and 15.1% for the nine months. Electric sales declined 2.2% in Q3 because of milder summer weather but increased 0.4% for the nine months.
- O&M expense increased 9.0% in Q3 and 7.6% for the nine months, primarily due to higher compensation, benefits, and utility operating costs.
- Depreciation and amortization increased 10.2% in Q3 and 8.3% for the nine months, reflecting higher utility plant in service and amortization of storm restoration costs.
- Net interest expense increased $0.2 million in Q3 and $1.5 million for the nine months, mainly because of lower interest income on regulatory assets.
Cash Flow, Liquidity, Debt, and Capitalization
| Balance or cash-flow item | September 30, 2014 | December 31, 2013 |
|---|---|---|
| Cash and cash equivalents | $10.1 million | $9.4 million |
| Net utility plant | $706.0 million | $665.6 million |
| Total assets | $916.5 million | $920.6 million |
| Long-term debt, less current portion | $326.7 million | $284.8 million |
| Total stockholders’ equity | $267.9 million | $265.2 million |
| Total capitalization | $594.6 million | $550.0 million |
- Operating cash flow was $82.6 million for the nine months, down from $84.1 million in 2013.
- Capital expenditures were $60.7 million, compared with $64.6 million in the prior-year period. Management projected full-year 2014 capital spending of $91 million to $96 million.
- Financing activities used $21.2 million, compared with $17.0 million in 2013, primarily due to greater short-term debt repayments and increased capital-lease funding.
- The $120.0 million revolving credit facility had $43.7 million outstanding and $76.3 million available at September 30, 2014. The facility matures October 4, 2018 and includes a 65% funded-debt-to-capitalization covenant; the Company was in compliance.
- On October 15, 2014, Northern Utilities issued $50.0 million of 4.42% senior unsecured notes due 2044 and used $42.3 million to repay short-term debt. The September 30 balance sheet was adjusted to reclassify that $42.3 million as long-term debt.
- Unitil declared its regular $0.345-per-share quarterly dividend, representing a stated annualized rate of $1.38 per share.
Material Changes Versus the Prior Comparable Period
- Net income increased 35% for the first nine months, and nine-month EPS rose from $0.82 to $1.10.
- Results benefited from approved distribution-rate increases, including increases for Northern Utilities, Unitil Energy, Granite State, and Fitchburg electric operations.
- Natural gas performance benefited from 12% more heating degree days and an estimated 5.7% increase in weather-normalized gas therm sales, excluding decoupled sales.
- Electric Q3 volume performance was pressured by 21% fewer cooling degree days, although rate increases more than offset the volume impact in sales margin.
- Net utility plant increased to $706.0 million from $665.6 million at year-end 2013, while regulatory assets declined to $109.9 million in total from $143.7 million.
- Environmental obligations declined to $7.3 million from $14.8 million at year-end 2013, principally because the estimated Fitchburg Sawyer Passway remediation cost was reduced from $12.0 million to $5.5 million.
Guidance, Outlook, Commentary, and Risks
The filing provides capital-spending expectations but does not provide formal earnings or revenue guidance. Management expects future TIRA filings for Northern Utilities’ Maine division to produce annual revenue increases of approximately $1.0 million, and a projected Northern Utilities New Hampshire step adjustment of approximately $1.4 million is expected to become effective May 1, 2015.
- Key risks include regulatory decisions affecting allowed rates, cost recovery, return on equity, and regulatory accounting; commodity prices and transmission capacity; weather variability; severe storms; interest rates; access to debt or equity financing; restrictive debt covenants; customer demand and competition.
- The Company had approximately $29.7 million of guarantees outstanding at September 30, 2014, with the longest term extending through April 2015. It also guaranteed specified Unitil Realty and Granite State debt.
- Environmental matters include ongoing or planned remediation of former manufactured-gas-plant sites. Management stated that no material losses were reasonably likely beyond recorded amounts, but future costs may vary.
- A natural gas explosion investigation and several legal proceedings remain pending. Management does not currently expect them to materially affect financial condition or results, but the ultimate outcomes are uncertain.
- Fitchburg’s Massachusetts service-quality rules, electric-grid modernization requirements, gas-leak legislation, and related regulatory proceedings could affect future compliance costs and capital requirements.
- The business is seasonal, with natural gas earnings historically strongest in the first and fourth quarters; third-quarter results are not necessarily indicative of full-year results.
Important Facts for Investors to Verify
- Confirm the effect of the October 2014 $50.0 million Northern Utilities debt issuance and the $42.3 million short-term-debt repayment on subsequent leverage and interest expense.
- Assess whether approved rate increases and infrastructure-related adjustments are sufficient to offset rising O&M, depreciation, pension, storm, and environmental costs.
- Review actual 2014 capital expenditures against the $91 million–$96 million projection and related financing needs.
- Monitor regulatory recovery of storm, environmental, pension, and other regulatory assets, including the continued applicability of regulated-operations accounting.
- Evaluate weather-normalized gas and electric demand separately from reported results, particularly given the favorable winter and unfavorable summer weather comparisons.
- Review pending legal, environmental, service-quality, grid-modernization, and gas-leak matters for changes in exposure or regulatory requirements.