Unitil Corporation 10-Q Summary
Business context and reporting period
Unitil Corporation is a regulated utility holding company serving approximately 108,100 electric customers and 87,500 gas customers in New Hampshire, Massachusetts, and Maine. Its principal businesses are electric and natural-gas distribution, supplemented by Granite State Gas Transmission, an 86-mile interstate gas pipeline. This unaudited Form 10-Q covers the three months ended March 31, 2023, compared with the three months ended March 31, 2022.
Earnings are seasonal, generally strongest in the first and fourth quarters because of gas-heating demand. Approximately 108,100 electric and 87,500 gas customers were served at March 31, 2023, with electric customers up approximately 250 and gas customers up approximately 800 year over year.
Financial performance and key metrics
| Metric | Q1 2023 | Q1 2022 | Change |
|---|---|---|---|
| Operating revenue | $220.2 million | $192.6 million | +$27.6 million, or 14.3% |
| Operating income | $39.5 million | $35.8 million | +$3.7 million |
| Income before taxes | $32.4 million | $28.9 million | +$3.5 million |
| Net income | $24.1 million | $21.5 million | +$2.6 million, or 12.1% |
| Basic and diluted EPS | $1.51 | $1.35 | +$0.16 |
| Cash flow from operations | $15.3 million | $29.1 million | -$13.8 million |
| Capital expenditures | $22.2 million | $15.4 million | +$6.8 million |
- Electric operating revenue was $108.2 million, up 21.3%; electric adjusted gross margin, a non-GAAP measure, was $26.7 million, up $2.1 million.
- Gas operating revenue was $112.0 million, up 8.3%; gas adjusted gross margin was $54.9 million, up $2.9 million.
- Total GAAP gross margin was $64.9 million versus $61.1 million. Operating margin was approximately 17.9% versus 18.6% in the prior-year quarter; net margin was approximately 10.9% versus 11.2%.
- Electric kWh sales declined 4.7% and gas therm sales declined 7.6%, primarily because winter weather was warmer. Effective Degree Days were 10.6% lower year over year.
- Weather-normalized gas therm sales, excluding decoupled sales, increased 0.6%.
- Operation and maintenance expense decreased $0.4 million, while depreciation and amortization increased $1.2 million and taxes other than income taxes increased $0.5 million.
- Net interest expense increased $0.9 million to $7.1 million, primarily because of higher short-term borrowing costs. The average short-term borrowing rate rose to 5.9% from 1.4%.
- The effective income tax rate was 26% in both periods.
Balance sheet, debt, liquidity, and cash flow
- Cash and cash equivalents were $6.8 million at March 31, 2023, compared with $9.0 million at December 31, 2022.
- Net utility plant was $1.341 billion, up from $1.332 billion at December 31, 2022 and $1.260 billion at March 31, 2022.
- Short-term debt was $140.2 million, up from $116.0 million at year-end 2022 and $64.0 million at March 31, 2022.
- Long-term debt, net of issuance costs, was $494.7 million, including a $6.7 million current portion. Total capitalization was $974.4 million, including $486.4 million of stockholders’ equity.
- The $200 million revolving credit facility had $59.8 million of availability at March 31, 2023. The facility matures September 29, 2027, subject to potential extensions, and includes a 65% funded-debt-to-capitalization covenant. The Company was in compliance with its covenants.
- Operating cash flow of $15.3 million was below capital expenditures of $22.2 million, resulting in a funding shortfall before financing activities. Net short-term debt proceeds of $24.2 million helped fund investment and other cash needs.
- The Company paid $6.5 million in common dividends during the quarter. The Board declared a quarterly dividend of $0.405 per share, implying an annualized rate of $1.62 per share.
- Credit ratings were BBB+ from S&P for Unitil and its utility subsidiaries and Baa2 for Unitil and Granite State from Moody’s; Fitchburg, Unitil Energy, and Northern Utilities were rated Baa1 by Moody’s.
Material changes versus the prior comparable period
- Net income and EPS increased primarily because of higher electric and gas adjusted gross margins and higher regulated rates.
- Revenue growth included higher pass-through energy costs, which do not directly affect earnings because approved electric and gas supply costs are recovered through rates.
- Warmer weather reduced electric and gas volumes, but the earnings impact was moderated by revenue decoupling. Substantially all electric sales and approximately 43% of annual gas sales were subject to decoupling after the 2022 regulatory changes.
- Interest expense increased as short-term borrowings and market rates rose, partially offset by lower long-term debt interest and higher interest income on regulatory assets.
- Capital expenditures increased 44% year over year, while operating cash flow declined substantially because of working-capital movements and deferred regulatory charges.
- Long-term debt declined from $504.8 million at March 31, 2022 to $494.7 million at March 31, 2023, while short-term debt increased significantly.
Guidance, outlook, risks, contingencies, and unusual items
The filing does not provide formal earnings or financial guidance. Management states that results for the quarter are not necessarily indicative of full-year results.
- Northern Utilities filed a Maine rate case seeking an $11.8 million annual base distribution revenue increase, or 9.4% of test-year operating revenue. The filing remains subject to regulatory review.
- Unitil Energy’s proposed $1.2 million second step adjustment in New Hampshire remained pending. Fitchburg also had a pending $1.0 million grid-modernization cost-recovery filing.
- Unitil Energy received approval on May 1, 2023 to construct and operate a revised 4.88 MW utility-scale solar facility.
- Massachusetts clean-energy and offshore-wind contractual matters remain subject to regulatory and legal developments, including a pending appeal involving Commonwealth Wind and evaluation of a change-in-law request relating to the Hydro-Quebec transmission arrangements.
- Environmental obligations totaled $4.7 million at March 31, 2023. Northern Utilities accrued $2.5 million for anticipated remediation at the Rochester manufactured-gas-plant site; the high end of the reasonably possible cost range was estimated at $5.6 million.
- The Company had approximately $1.0 million of guarantees outstanding on energy and gas-storage management contracts, generally with durations of less than one year.
- Key risks include regulatory and rate-case outcomes, recovery of purchased-energy and storm costs, interest-rate and refinancing risk, severe weather, cyberattacks, operational hazards, environmental compliance, climate-related regulation, customer demand changes, and access to capital.
- Management reported no material changes to the risk factors in the 2022 Form 10-K, no material legal proceedings expected to adversely affect financial condition, and effective disclosure controls as of March 31, 2023.
Important facts for investors to verify
- Confirm the sustainability of earnings growth after separating regulated margin gains from pass-through energy-cost revenue.
- Monitor short-term debt levels, variable-rate exposure, available revolver capacity, and compliance with the 65% leverage covenant.
- Review the timing and outcomes of pending rate cases, step adjustments, grid-modernization filings, and other regulatory recovery mechanisms.
- Assess capital-spending requirements and whether operating cash flow can fund investment and dividends without continued reliance on debt.
- Track environmental remediation estimates, including the Rochester site’s potential $5.6 million high-end cost.
- Evaluate the effect of warmer or more volatile weather on volumes, while considering the extent and limits of revenue decoupling.
- Review offshore-wind, clean-energy, decarbonization, and Massachusetts regulatory developments for potential long-term changes to the gas business model and contractual obligations.