UTL

UNITIL CORP - 10-Q Filing Summary

Business Context and Reporting Period

Company: UNITIL CORP (Unitil)
Reporting Period: Quarter and Six Months Ended June 30, 2008
Business Overview: Unitil is a public utility holding company operating primarily through two regulated subsidiaries: Unitil Energy Systems Inc. (UES) in New Hampshire and Fitchburg Gas and Electric Light Company (FG&E) in Massachusetts. The company serves approximately 99,400 electric and 15,000 natural gas customers. It also operates a non-regulated energy brokering subsidiary, Usource.

Key Financial Metrics

Material Changes vs. Prior Period

• Earnings: Q2 2008 EPS decreased to $0.28 from $0.30 in Q2 2007, driven by higher operating expenses and depreciation, partially offset by higher gas sales margins and lower interest expense. However, YTD 2008 EPS increased 12% to $0.85 compared to $0.76 in 2007.
• Sales Volume: Electric sales decreased 3.1% (QTD) and 2.2% (YTD) due to a slowing economy and energy conservation. Natural gas sales decreased 4.6% (QTD) and 2.2% (YTD), attributed to a milder winter heating season.
• Margins: Gas sales margin increased significantly ($0.2 million QTD, $1.1 million YTD) due to higher base rates implemented in late 2007. Electric sales margin was flat QTD but decreased $0.4 million YTD due to lower volumes.
• Expenses: Operation and Maintenance (O&M) expenses decreased $1.6 million YTD, largely due to a $2.8 million insurance settlement related to environmental remediation. Depreciation increased YTD due to the amortization of deferred natural gas inventory costs.
• Capital Spending: Capital expenditures dropped significantly YTD ($10.2 million vs. $19.6 million) as the Advanced Metering Infrastructure (AMI) project, which saw heavy funding in 2007, was completed in 2008.

Guidance, Outlook, and Risks

• Acquisition: On February 15, 2008, Unitil agreed to acquire Northern Utilities, Inc. and Granite State Gas Transmission, Inc. for $160 million in cash. The transaction is expected to close in Q4 2008, subject to regulatory approvals. Financing will involve new common stock and debt.
• Dividends: The Board declared a quarterly dividend of $0.345 per share, maintaining an unbroken record of payments. The effective annual rate is $1.38 per share.
• Regulatory Environment: The company faces ongoing regulatory proceedings in Massachusetts regarding revenue decoupling and the "Green Communities Act," which mandates increased investment in energy efficiency and renewable energy. New Hampshire has also passed laws regarding distributed energy resources and carbon emissions (RGGI).
• Risks: Key risks include weather variations, regulatory changes, interest rate fluctuations, and the successful integration and financing of the Northern/Granite acquisition. The company notes that if the acquisition fails, deferred transaction costs ($3.4 million as of June 30) would adversely affect financial condition.

Investor Verification Checklist

• Acquisition Status: Verify the progress of regulatory approvals for the $160 million acquisition of Northern Utilities and Granite State Gas.
• Financing Terms: Monitor the terms of the new debt and equity issuance planned to fund the acquisition.
• Regulatory Orders: Track the implementation of revenue decoupling in Massachusetts and the impact of the Green Communities Act on future capital requirements.
• Weather Sensitivity: Assess the impact of weather patterns on natural gas sales volumes, which showed a 4.6% decline in Q2 2008.
• Debt Levels: Review the increase in short-term debt ($12.8 million) and the company's strategy to refinance with long-term instruments.