Unitil Corporation — First-Quarter 2012 Form 10-Q Summary
Business Context and Reporting Period
Unitil Corporation is a regulated utility holding company serving approximately 101,400 electric customers and 71,900 natural gas customers in New Hampshire, Massachusetts and Maine. Its operations include electric and natural gas distribution, an 86-mile interstate gas transmission pipeline, and the non-regulated Usource energy-brokering business. This filing covers the unaudited three months ended March 31, 2012, compared with the three months ended March 31, 2011.
Financial Performance and Key Metrics
- Operating revenue: $114.2 million, down from $115.4 million. Gas revenue was $64.2 million, electric revenue was $48.7 million and other revenue was $1.3 million.
- Operating income: $14.0 million, up from $13.4 million. The implied operating margin was approximately 12.3%, compared with approximately 11.6% in the prior-year quarter.
- Net income and EPS: Net income and earnings applicable to common shareholders were $9.0 million, compared with $8.7 million. Basic and diluted EPS increased to $0.83 from $0.81.
- Sales margins: Gas sales margin increased to $27.3 million from $24.8 million, while electric sales margin was unchanged at $16.1 million. Combined gas and electric sales margin was $43.4 million, compared with $40.9 million.
- Operating expenses: O&M expense increased $1.2 million, depreciation and amortization increased $0.4 million, and local property and other taxes increased $0.4 million. Net interest expense increased $0.3 million to $4.9 million.
- Cash flow: Operating cash flow was $30.4 million, down from $36.4 million. Capital expenditures were $9.1 million, compared with $10.8 million. Financing activities used $20.6 million, including $10.3 million of short-term debt repayment and $3.8 million of dividends.
- Liquidity: Cash was $8.2 million at March 31, 2012. The $115.0 million revolving credit facility had $77.6 million drawn and $37.4 million available; it expires October 8, 2013.
- Debt and capitalization: Long-term debt was $288.2 million, including $287.7 million excluding the current portion. Short-term debt was $77.6 million. Total capitalization was $483.3 million, and the company was in compliance with its debt covenants.
- Asset base: Net utility plant was $512.2 million, up from $476.0 million at March 31, 2011 and $510.7 million at December 31, 2011.
- Dividends: The company declared quarterly dividends of $0.345 per common share, consistent with the prior year.
Material Changes Versus the Prior Comparable Period
- Unusually mild weather resulted in 18% fewer heating degree days. Gas therm sales declined 11.3% and electric kWh sales declined 4.8%, although weather-normalized sales were estimated to be approximately unchanged.
- Higher base rates, revenue decoupling and customer growth increased gas margin by $2.5 million and offset the adverse volume effect of mild weather. Electric margin remained flat because higher rates and decoupling revenues offset lower sales.
- Fitchburg’s approved revenue decoupling mechanisms, effective August 1, 2011, reduced the sensitivity of a portion of electric and gas distribution revenue to sales volumes and weather.
- O&M expense growth primarily reflected the absence of a $1.0 million insurance payment recorded in the first quarter of 2011, higher compensation and benefit costs, and approximately $0.3 million of vegetation-management and reliability spending that is recovered through rate mechanisms.
- Interest expense increased due to higher short-term borrowings. Short-term debt was $77.6 million at March 31, 2012 versus $50.6 million a year earlier, but below $87.9 million at December 31, 2011.
- Regulatory assets were $158.2 million, including $55.1 million related to retirement benefits, $26.8 million of deferred storm charges and $17.1 million of environmental costs.
Guidance, Outlook, Risks and Unusual Items
The filing does not provide formal earnings or revenue guidance. Management expects the business to remain seasonal, with stronger results generally in the first and fourth quarters because of natural gas demand. The company noted that first-quarter 2012 earnings were reduced by an estimated $1.6 million, or $0.15 per share, because of mild weather.
- Regulated cost-recovery mechanisms pass through approved purchased gas and electricity costs, limiting direct earnings exposure to commodity prices; however, recovery depends on regulatory approvals and rate treatment.
- Pending or ongoing regulatory matters include Unitil Energy’s rate adjustment filing, Fitchburg storm-cost recovery, Fitchburg reconciliation proceedings, and the FERC audit expected to conclude with a report in August 2012.
- Unitil Energy received approval after quarter-end to recover approximately $4.4 million of 2011 storm costs over five years with carrying costs. Fitchburg sought recovery of approximately $4.3 million of certain 2011 storm costs; that matter remained pending at the filing date.
- Environmental obligations totaled $14.5 million, including $12.0 million for the Sawyer Passway former manufactured-gas-plant site and $2.5 million for Northern Utilities’ former MGP sites. Management expects recovery of qualifying costs through rates but noted that future estimates may change.
- The company had approximately $31.6 million of guarantees on energy and gas-storage management contracts, with the longest term extending through February 2014. It also guaranteed $3.2 million of Unitil Realty notes and $10.0 million of Granite State notes.
- Key risks include regulatory cost recovery and authorized returns, severe storms, weather variability, interest rates, financing availability, pension obligations, environmental compliance, operating hazards, customer demand and competition.
- A putative class action relating to the December 2008 Fitchburg ice storm remained pending; the company stated that it believes the case is without merit and that ordinary-course claims are not expected to materially affect financial position.
- The company reported no material changes to the risk factors in its 2011 Form 10-K and concluded that disclosure controls and procedures were effective.
Important Facts for Investors to Verify
- Whether pending rate cases and storm-cost proceedings produce the expected recovery, timing and carrying costs.
- The impact of weather normalization and the scope of revenue decoupling on future gas and electric margins.
- Liquidity headroom under the revolving credit facility, short-term borrowing levels and compliance with the 65% funded-debt-to-capitalization covenant.
- Progress and findings from the FERC audit and any resulting regulatory or compliance actions.
- The ultimate cost and rate recovery of environmental remediation, pension obligations and storm-related expenditures.
- The outcome and potential exposure from the Fitchburg ice-storm class action and other regulatory or legal proceedings.
- The sustainability of cash flow relative to capital expenditures, debt maturities and the quarterly dividend.