Unitil Corporation 2018 Q3 Form 10-Q Summary
Business context and reporting period
Unitil Corporation is a regulated utility holding company serving approximately 105,000 electric customers and 81,300 natural gas customers in New Hampshire, Massachusetts, and Maine. Its principal businesses are electric and natural gas distribution, an 86-mile interstate natural gas transmission pipeline, and a small non-regulated energy-brokering business.
This unaudited Form 10-Q covers the three and nine months ended September 30, 2018, with comparisons to the corresponding 2017 periods. Utility earnings are seasonal, particularly because of natural gas heating demand. Net utility plant was $1.022 billion at September 30, 2018.
Financial performance and key metrics
| Metric | Q3 2018 | Q3 2017 | 9M 2018 | 9M 2017 |
|---|---|---|---|---|
| Total operating revenue | $88.2 million | $84.0 million | $318.5 million | $290.8 million |
| Operating income | $10.3 million | $10.4 million | $49.0 million | $49.7 million |
| Net income | $2.8 million | $2.3 million | $22.0 million | $17.8 million |
| Diluted earnings per share | $0.19 | $0.16 | $1.49 | $1.27 |
| Gas sales margin | $17.6 million | $16.8 million | $80.4 million | $75.3 million |
| Electric sales margin | $25.9 million | $24.8 million | $70.5 million | $70.1 million |
| Cash provided by operating activities | Not separately provided | Not separately provided | $70.0 million | $74.7 million |
| Capital expenditures | Not separately provided | Not separately provided | $76.3 million | $84.2 million |
Reported operating margins were approximately 11.7% in Q3 2018 and 15.4% for the first nine months of 2018, compared with approximately 12.4% and 17.1%, respectively, in the comparable 2017 periods. Net margins were approximately 3.2% and 6.9%, respectively, versus 2.7% and 6.1% in 2017.
- Gas operating revenue increased 2.4% in Q3 and 11.8% for the first nine months. Gas sales margin increased 4.8% and 6.8%, respectively.
- Electric operating revenue increased 6.8% in Q3 and 8.5% for the first nine months. Electric sales margin increased 4.4% and 0.6%, respectively.
- Natural gas therm sales decreased 2.9% in Q3 but increased 5.5% year to date; electric kilowatt-hour sales increased 3.4% and 4.2%, respectively.
- O&M expense decreased $0.5 million in Q3 but increased $2.1 million year to date. Depreciation and amortization increased $1.6 million in Q3 and $2.2 million year to date.
- Net interest expense increased $0.2 million in Q3 and $0.8 million year to date, primarily because of higher long-term debt.
Liquidity, capital structure, and cash flow
- Cash and cash equivalents were $6.3 million at September 30, 2018, compared with $8.9 million at December 31, 2017.
- Operating cash flow of $70.0 million was below the $76.3 million of capital expenditures, producing a $6.3 million funding gap before financing activities.
- Short-term borrowings were $69.1 million, compared with $38.3 million at December 31, 2017. Long-term debt, net of issuance costs, was $392.9 million, compared with $406.1 million at year-end 2017.
- Total capitalization was $706.1 million, consisting of $361.1 million of long-term debt excluding the current portion and $345.0 million of stockholders’ equity.
- The amended $120 million revolving credit facility extends to July 2023, subject to potential extensions. At September 30, $50.9 million was available, and the company was in compliance with its covenants, including the 65% funded-debt-to-capitalization limit.
- Unitil declared quarterly common dividends of $0.365 per share, representing an annualized rate of $1.46 per share at the time of filing.
Material changes versus the prior comparable period
- Nine-month net income rose $4.2 million, or 23.6%, despite a slight decline in operating income. The increase was primarily supported by higher sales margins and a $6.1 million reduction in income tax expense.
- Results benefited from customer growth, favorable weather, higher distribution rates, and colder winter conditions. At September 30, natural gas customers had increased by approximately 1,200 and electric customers by approximately 575 year over year.
- The federal Tax Cuts and Jobs Act reduced the corporate tax rate to 21%. Unitil recorded lower customer revenues associated with the rate reduction of approximately $1.0 million in Q3 and $5.0 million for the first nine months, partially offset by lower tax expense.
- Unitil recognized a non-recurring $1.2 million increase to both gas revenue and O&M expense in Q2 2018 to reconcile permanent New Hampshire gas rates and deferred costs with temporary rates.
- The company issued 690,000 common shares in December 2017. The higher share count contributed to the difference between net income growth and per-share earnings growth.
- Revenue from the non-regulated Usource business decreased $0.3 million in Q3 and $1.0 million year to date, substantially reflecting the presentation effects of adopting the new revenue-recognition standard. Management stated that the adoption had no material impact on consolidated earnings.
Guidance, outlook, commentary, risks, and unusual items
The filing does not provide formal earnings guidance. Management expects utility performance to remain affected by weather, customer growth, approved rate mechanisms, capital investment, and regulatory decisions.
- Regulatory rate activity included approved increases for Northern Utilities in Maine and New Hampshire, Fitchburg gas system enhancement recovery, Unitil Energy rate-step adjustments, and a Fitchburg grid-modernization plan with a 2018–2020 spending cap of $4.4 million.
- Management believes the effects of the TCJA are substantially resolved and are not expected to have a material impact on financial position, results, or cash flows. The company expects approximately $47.1 million of excess accumulated deferred income taxes to be returned to customers through future rates, subject to regulatory approval, generally over an estimated 15- to 20-year period.
- Risks include regulatory recovery and rate decisions, energy commodity prices and transmission capacity, severe storms, weather variability, climate-related events, pension funding, interest rates, access to financing, debt covenants, operational hazards, competition, and performance under energy-brokering contracts.
- Approximately $5.6 million of guarantees related to energy and gas-storage management contracts were outstanding at September 30, 2018. The company also guaranteed $3.3 million of Granite State notes.
- Pending matters include certain Massachusetts clean-energy and offshore-wind contracts, regulatory proceedings involving transmission returns, Fitchburg compliance filings, and the proposed Epping, New Hampshire franchise extension. Management does not expect currently disclosed legal or regulatory matters to have a material adverse effect, but outcomes remain subject to regulators and other authorities.
- The company reported no material changes to the risk factors in its 2017 Form 10-K and no material subsequent events through the filing date.
Important facts for investors to verify
- Confirm the sustainability of improved earnings after separating favorable weather, rate-case effects, tax-rate benefits, and non-recurring adjustments.
- Monitor regulatory treatment and timing of the approximately $47.1 million excess deferred-tax customer benefit and related Massachusetts proceedings.
- Assess liquidity and refinancing needs given $69.1 million of short-term debt, $31.8 million of current long-term debt, and capital expenditures exceeding operating cash flow year to date.
- Review the effect of higher interest rates and additional long-term debt on future interest expense and coverage ratios.
- Track pending clean-energy procurement, transmission-rate, grid-modernization, franchise, and environmental matters for potential changes in capital requirements or recoverability.
- Verify the company’s ability to maintain its dividend while funding utility investment, pension obligations, and debt maturities.