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UTL > SEC Filings for UTL > Form 10-Q on 24-Apr-2013All Recent SEC Filings

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Form 10-Q for UNITIL CORP


24-Apr-2013

Quarterly Report


Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (MD&A)

OVERVIEW

Unitil Corporation (Unitil or the Company) is a public utility holding company headquartered in Hampton, New Hampshire. Unitil is subject to regulation as a holding company system by the Federal Energy Regulatory Commission (FERC) under the Energy Policy Act of 2005.

Unitil's principal business is the local distribution of electricity and natural gas throughout its service territory in the states of New Hampshire, Massachusetts and Maine. Unitil is the parent company of three wholly-owned distribution utilities:

i) Unitil Energy Systems, Inc. (Unitil Energy), which provides electric service in the southeastern seacoast and state capital regions of New Hampshire, including the capital city of Concord;

ii) Fitchburg Gas and Electric Light Company (Fitchburg), which provides both electric and natural gas service in the greater Fitchburg area of north central Massachusetts; and

iii) Northern Utilities, Inc. (Northern Utilities), which provides natural gas service in southeastern New Hampshire and portions of southern and central Maine, including the city of Portland, which is the largest city in northern New England.

Unitil Energy, Fitchburg and Northern Utilities are collectively referred to as the "distribution utilities." Together, the distribution utilities serve approximately 101,700 electric customers and 73,700 natural gas customers in their service territory.

In addition, Unitil is the parent company of Granite State Gas Transmission, Inc. (Granite State) an interstate natural gas transmission pipeline company, operating 86 miles of underground gas transmission pipeline primarily located in Maine and New Hampshire. Granite State provides Northern Utilities with interconnection to major natural gas pipelines and access to domestic natural gas supplies in the south and Canadian natural gas supplies in the north.

Unitil had an investment in Net Utility Plant of $608.3 million at March 31, 2013. Unitil's total operating revenue includes revenue to recover the approved cost of purchased electricity and natural gas in rates on a fully reconciling basis. As a result of this reconciling rate structure, the Company's earnings are not directly affected by changes in the cost of purchased electricity and natural gas. Earnings from Unitil's utility operations are primarily derived from the return on investment in the utility assets of the three distribution utilities and Granite State.

Unitil also conducts non-regulated operations principally through Usource Inc. and Usource L.L.C. (collectively, Usource), which is wholly-owned by Unitil Resources Inc., a wholly-owned subsidiary of Unitil. Usource provides energy brokering and advisory services to large commercial and industrial customers primarily in the northeastern United States. The Company's other subsidiaries include Unitil Service Corp., which provides, at cost, a variety of administrative and professional services to Unitil's


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affiliated companies, Unitil Realty Corp. (Unitil Realty), which owns and manages Unitil's corporate office building and property located in Hampton, New Hampshire and Unitil Power Corp., which formerly functioned as the full requirements wholesale power supply provider for Unitil Energy. Unitil's consolidated net income includes the earnings of the holding company and these subsidiaries.

RATES AND REGULATION

Rate Case Activity

Granite State - Base Rates - Granite State has in place a FERC approved rate settlement agreement under which it is permitted each June to file a limited
Section 4 rate case that includes incremental annual rate adjustments to recover the revenue requirements for certain specified future capital cost additions to transmission plant projects. In June, Granite State will submit to the FERC its next incremental annual rate adjustment with rates to be effective August 1, 2013.

Unitil Energy - Base Rates - On April 26, 2011, the New Hampshire Public Utilities Commission (NHPUC) approved a rate settlement with a permanent increase of $5.2 million in annual revenue effective July 1, 2010, and an additional increase of $5.0 million in annual revenue effective May 1, 2011. The settlement extends through May 1, 2016 and provides for a long-term rate plan and earnings sharing mechanism, with step increases in annual revenue on May 1, 2012, May 1, 2013 and May 1, 2014, to support Unitil Energy's continued capital improvements to its distribution system. Unitil Energy's first step increase was approved as filed, effective May 1, 2012. On February 28, 2013, Unitil Energy filed its second step increase of $2.8 million for effect on May 1, 2013, including rate increases to recover the increased spending for its vegetation management and reliability enhancement programs. This matter remains pending.

Northern Utilities - Base Rates Filed - In April 2013, Northern Utilities filed two separate rate cases, with the NHPUC and Maine Public Utilities Commission (MPUC), requesting approval to increase its natural gas distribution base rates. In New Hampshire, the Company requested an increase of $5.2 million in gas distribution base revenue or approximately 9.4 percent over test year operating revenue. In Maine, the Company requested an increase of $4.6 million in gas distribution base revenue or approximately 6.3 percent over test year operating revenue. Both filings include proposed multi-year rate plans that include cost tracking mechanisms to recover future capital costs associated with Northern's infrastructure replacements and safety and reliability improvements to the natural gas distribution system while avoiding the need to file general rate cases prior to April 2017. In addition, Northern has requested temporary rates in New Hampshire to collect a $2.5 million increase (annualized) in gas distribution revenue, effective July 1, 2013. The rate case filings are subject to regulatory review and approval with final rate orders expected in the first half of 2014.

Regulation

Unitil is subject to comprehensive regulation by federal and state regulatory authorities. Unitil and its subsidiaries are subject to regulation as a holding company system by the FERC under the Energy Policy Act of 2005 with regard to certain bookkeeping, accounting and reporting requirements. Unitil's utility operations related to wholesale and interstate energy business activities are also regulated by the FERC. Unitil's distribution utilities are subject to regulation by the applicable state public utility commissions, with regard to their rates, issuance of securities and other accounting and operational matters: Unitil Energy is subject to regulation by the NHPUC; Fitchburg is subject to regulation by the Massachusetts Department of Public Utilities (MDPU); and Northern Utilities is regulated by the NHPUC and the MPUC. Granite State, Unitil's interstate natural gas transmission pipeline, is subject to regulation by the FERC with regard to its rates and operations. Because Unitil's primary operations are subject to rate regulation, the regulatory treatment of various matters could significantly affect the Company's operations and financial position.

Unitil's distribution utilities deliver electricity and/or natural gas to all customers in their service territory, at rates established under traditional cost of service regulation. Under this regulatory structure, Unitil's distribution utilities recover the cost of providing distribution service to their customers based on a


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historical test year, in addition to earning a return on their capital investment in utility assets. As a result of a restructuring of the utility industry in New Hampshire, Massachusetts and Maine, Unitil's customers, with the exception of Northern Utilities' residential customers, have the opportunity to purchase their electricity or natural gas supplies from third-party energy supply vendors. Most customers, however, continue to purchase such supplies through the distribution utilities under regulated energy rates and tariffs. Unitil's distribution utilities purchase electricity or natural gas from unaffiliated wholesale suppliers and recover the actual approved costs of these supplies on a pass-through basis, as well as certain costs associated with industry restructuring, through reconciling rate mechanisms that are periodically adjusted.

On August 1, 2011, the MDPU issued an order approving revenue decoupling mechanisms (RDM) for the electric and natural gas divisions of Fitchburg. Revenue decoupling is the term given to the elimination of the dependency of a utility's distribution revenue on the volume of electricity or natural gas sales. One of the primary purposes of decoupling is to eliminate the disincentive a utility otherwise has to encourage and promote energy conservation programs designed to reduce energy usage. Under the RDM, the Company will recognize, in its Consolidated Statements of Earnings from August 1, 2011 forward, distribution revenues for Fitchburg based on established revenue targets. The established revenue targets for the gas division may be subject to periodic adjustments to account for customer growth and special contracts, to which RDM does not apply. The difference between distribution revenue amounts billed to customers and the targeted amounts is recognized as an increase or a decrease in Accrued Revenue which form the basis for future reconciliation adjustments in periodically resetting rates for future cash recoveries from, or credits to, customers. The Company estimates that RDM applies to approximately 27% and 11% of Unitil's total annual electric and natural gas sales volumes, respectively. As a result, the sales margins resulting from those sales are no longer sensitive to weather and economic factors. The Company's other electric and natural gas distribution utilities are not subject to RDM.

RESULTS OF OPERATIONS

The following section of MD&A compares the results of operations for each of the two fiscal periods ended March 31, 2013 and March 31, 2012 and should be read in conjunction with the accompanying unaudited Consolidated Financial Statements and the accompanying Notes to unaudited Consolidated Financial Statements included in Part I, Item 1 of this report.

The Company's results of operations are expected to reflect the seasonal nature of the natural gas business. Annual gas revenues are substantially realized during the heating season as a result of higher sales of natural gas due to cold weather. Accordingly, the results of operations are historically most favorable in the first and fourth quarters. Fluctuations in seasonal weather conditions may have a significant effect on the result of operations. Sales of electricity are generally less sensitive to weather than natural gas sales, but may also be affected by the weather conditions in both the winter and summer seasons.

On May 16, 2012, the Company sold 2,760,000 shares of its common stock at a price of $25.25 per share in a registered public offering. The Company used the net proceeds of approximately $65.7 million from this offering to make equity capital contributions to its regulated utility subsidiaries, repay short-term debt and for general corporate purposes. Overall, the results of operations and Earnings reflect the higher number of average shares outstanding year over year.

Earnings Overview

The Company's Earnings Applicable to Common Shareholders (Earnings) were $10.8 million for the first quarter of 2013, an increase of $1.8 million, or 20.0%, over the first quarter of 2012. Earnings per common share (EPS) were $0.79 for the first quarter of 2013, compared to $0.83 per share in the first quarter of 2012. The 2013 first quarter EPS reflects the higher number of average shares outstanding period over period. The Company's results for the first quarter of 2013 as compared to the same period in 2012 reflect higher electric and gas sales margins and lower borrowing costs, partially offset by higher operating costs.

Natural gas sales margin was $30.5 million in the three months ended March 31, 2013, an increase of $3.2 million, or 11.7%, compared to the same period in 2012. In the first quarter of 2013, natural gas


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sales margin was positively affected by higher therm unit sales and higher distribution base rates. Therm sales of natural gas increased 12.3% in the three months ended March 31, 2013 compared to the same period in 2012, principally driven by the effect of colder winter weather and customer growth in the first quarter of 2013 compared to 2012. Based on weather data collected in the Company's service areas, there were 10% more Heating Degree Days in the first quarter of 2013 compared to the same period in 2012. Weather-normalized gas therm sales (excluding decoupled sales) are estimated to 6.6% higher in the first quarter of 2013 compared to the same period in 2012, reflecting healthy customer growth. Approximately 11.0% of the Company's total therm sales of natural gas are decoupled and changes in these sales do not affect sales margin.

Electric sales margin was $18.4 million in the three months ended March 31, 2013, an increase of $2.3 million, or 14.3%, compared to the same period in 2012, reflecting higher electric kilowatt-hour (kWh) sales and higher distribution base rates. Electric sales margin in 2013 also reflects higher recovery of $0.9 million of vegetation management and electric reliability enhancement expenditures as well as an increase of $0.3 million in the recovery of major storm restoration costs, which are offset by a corresponding increase in expenses. Electric kWh sales increased 2.7% compared to the first quarter of 2012, principally driven by the effect of colder winter weather and customer growth in the first quarter of 2013 compared to 2012. Weather-normalized kWh sales (excluding decoupled sales) are estimated to be 1.7% higher in the first quarter of 2013 compared to the same period in 2012. Approximately 27.0% of total electric kWh sales are decoupled and changes in these sales do not affect sales margins.

Operation and Maintenance (O&M) expenses increased $1.9 million in the three months ended March 31, 2013 compared to the same period in 2012. The increase in O&M expenses in the first quarter of 2013 compared to the same period in 2012 reflects higher utility operating costs of $1.1 million, higher professional fees and insurance claims expenses of $1.0 million and a decrease in all other operating costs, net of $0.2 million. The increase in utility operating costs in the first quarter of 2013 compared to same period in 2012 includes an increase of $0.9 million in new spending on vegetation management and electric reliability enhancement programs which is recovered through cost tracker rate mechanisms that result in a corresponding and offsetting increase in revenue and margin in the period.

Depreciation and Amortization expense increased $1.1 million in the three months ended March 31, 2013 compared to the same period in 2012, reflecting higher depreciation on normal utility plant additions of $0.6 million, higher amortization of major storm restoration costs of $0.3 million and an increase in all other amortization of $0.2 million.

Local Property and Other Taxes increased by $0.1 million in the three months ended March 31, 2013 compared to the same period in 2012, reflecting higher property taxes on higher levels of utility plant in service.

Interest Expense, net decreased $0.3 million in the three months ended March 31, 2013 compared to the same period in 2012, reflecting lower average rates and lower short-term borrowings.

Usource, the Company's non-regulated energy brokering business, recorded revenues of $1.5 million in the first quarter of 2013, an increase of $0.2 million compared to the first quarter of 2012.

In 2012, Unitil's annual common dividend was $1.38, continuing an unbroken record of quarterly dividend payments since trading began in Unitil's common stock. At its January, 2013 and March, 2013 meetings, Unitil's Board of Directors declared quarterly dividends on the Company's common stock of $0.345 per share.

A more detailed discussion of the Company's results of operations for the three months ended March 31, 2013 is presented below.

Gas Sales, Revenues and Margin

Therm Sales - Unitil's total therm sales of natural gas increased 12.3% in the three months ended March 31, 2013 compared to the same period in 2012, reflecting increases of 14.1% and 11.7% in sales to Residential and Commercial and Industrial (C&I) customers, respectively. The increase in gas therm


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sales in the Company's utility service territories was principally driven by the effect of colder winter weather in the first quarter of 2013 compared to 2012 and the addition of new Residential and C&I customers. Based on weather data collected in the Company's service areas, there were 10% more Heating Degree Days in the first quarter of 2013 compared to the same period in 2012. Weather-normalized gas therm sales (excluding decoupled sales) are estimated to be 6.6% higher in the first quarter of 2013 compared to the same period in 2012, reflecting healthy customer growth. Approximately 11.0% of the Company's total therm sales of natural gas are decoupled and changes in these sales do not affect sales margin. As discussed above, under revenue decoupling for Fitchburg, distribution revenues, which are included in sales margin, will be recognized in the Company's Consolidated Statements of Earnings from August 1, 2011 forward, on established revenue targets and will no longer be dependent on sales volumes.

The following table details total firm therm sales for the three months ended March 31, 2013 and 2012, by major customer class:

          Therm Sales (millions)
                                            Three Months Ended March 31,
                                    2013         2012       Change       % Change
          Residential                 19.4        17.0          2.4           14.1 %
          Commercial/Industrial       61.9        55.4          6.5           11.7 %

          Total                       81.3        72.4          8.9           12.3 %

Gas Operating Revenues and Sales Margin - The following table details total Gas Operating Revenues and Sales Margin for the three months ended March 31, 2013 and 2012:

Gas Operating Revenues and Sales Margin (millions)

                                                Three Months Ended March 31,
                                                                  $              %
                                        2013         2012       Change       Change(1)
     Gas Operating Revenues:
     Residential                      $   29.4      $ 27.3     $    2.1             3.3 %
     Commercial / Industrial              41.4        36.9          4.5             7.0 %

     Total Gas Operating Revenues     $   70.8      $ 64.2     $    6.6            10.3 %

     Cost of Gas Sales:
     Purchased Gas                    $   39.7      $ 36.5     $    3.2             5.0 %
     Conservation & Load Management        0.6         0.4          0.2             0.3 %

     Total Cost of Gas Sales          $   40.3      $ 36.9     $    3.4             5.3 %

     Gas Sales Margin                 $   30.5      $ 27.3     $    3.2             5.0 %

(1) Represents change as a percent of Total Gas Operating Revenues.

Unitil analyzes operating results using Gas Sales Margin. Gas Sales Margin is calculated as Total Gas Operating Revenues less the associated cost of sales, which are recorded as Purchased Gas and Conservation & Load Management (C&LM) in Operating Expenses. Unitil believes Gas Sales Margin is a better measure to analyze profitability than Total Gas Operating Revenues since the approved cost of sales are tracked costs that are passed through directly to the customer resulting in an equal and offsetting amount reflected in Total Gas Operating Revenues.


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Natural gas sales margin was $30.5 million in the three months ended March 31, 2013, an increase of $3.2 million compared to the same period in 2012. In the first quarter of 2013, natural gas sales margin was positively affected by higher therm unit sales, discussed above, and higher distribution base rates.

The increase in Total Gas Operating Revenues of $6.6 million in the first quarter of 2013 reflects higher gas sales margin of $3.2 million and higher costs of sales of $3.4 million, including higher Purchased Gas costs of $3.2 million and higher C&LM costs of $0.2 million, which are tracked costs that are passed through directly to customers.

Electric Sales, Revenues and Margin

Kilowatt-hour Sales - In the first quarter of 2013, Unitil's total electric kWh sales increased 2.7% compared to the first quarter of 2012. Sales to Residential and C&I customers increased 5.0% and 0.8%, respectively, in the first quarter of 2013 compared to the same period in 2012, principally driven by the effect of colder winter weather and customer growth in the first quarter of 2013 compared to 2012. As discussed above, based on weather data collected in the Company's service areas, there were 10% more Heating Degree Days in the first quarter of 2013 compared to the same period in 2012. Weather-normalized kWh sales (excluding decoupled sales) are estimated to be 1.7% higher in the first quarter of 2013 compared to the same period in 2012. Approximately 27.0% of total electric kWh sales are decoupled and changes in these sales do not affect sales margins. As discussed above, under revenue decoupling for Fitchburg, distribution revenues, which are included in sales margin, will be recognized in the Company's Consolidated Statements of Earnings from August 1, 2011 forward, on established revenue targets and will no longer be dependent on sales volumes.

The following table details total kWh sales for the three months ended March 31, 2013 and 2012 by major customer class:

            kWh Sales (millions)
                                            Three Months Ended March 31,
                                                                            %
                                      2013        2012       Change       Change
            Residential                188.4       179.4         9.0          5.0 %
            Commercial/Industrial      237.3       235.3         2.0          0.8 %

            Total                      425.7       414.7        11.0          2.7 %


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Electric Operating Revenues and Sales Margin - The following table details total Electric Operating Revenues and Sales Margin for the three months ended March 31, 2013 and 2012:

Electric Operating Revenues and Sales Margin (millions)

                                                  Three Months Ended March 31,
                                                                  $              %
                                          2013       2012      Change        Change(1)
     Electric Operating Revenues:
     Residential                         $ 26.2     $ 27.7     $  (1.5 )           (3.1 %)
     Commercial / Industrial               19.7       21.0        (1.3 )           (2.7 %)

     Total Electric Operating Revenues   $ 45.9     $ 48.7     $  (2.8 )           (5.7 %)

     Cost of Electric Sales:
     Purchased Electricity               $ 26.3     $ 31.1     $  (4.8 )           (9.9 %)
     Conservation & Load Management         1.2        1.5        (0.3 )           (0.6 %)

     Total Cost of Electric Sales        $ 27.5     $ 32.6     $  (5.1 )          (10.5 %)

     Electric Sales Margin               $ 18.4     $ 16.1     $   2.3              4.7 %

(1) Represents change as a percent of Total Electric Operating Revenues.

Unitil analyzes operating results using Electric Sales Margin. Electric Sales Margin is calculated as Total Electric Operating Revenues less the associated cost of sales, which are recorded as Purchased Electricity and Conservation & Load Management (C&LM) in Operating Expenses. Unitil believes Electric Sales Margin is a better measure to analyze profitability than Total Electric Operating Revenues since the approved cost of sales are tracked costs that are passed through directly to the customer resulting in an equal and offsetting amount reflected in Total Electric Operating Revenues.

Electric sales margin was $18.4 million in the three months ended March 31, 2013, an increase of $2.3 million compared to the same period in 2012, reflecting higher electric kWh sales, discussed above, and higher distribution base rates. As discussed previously, electric sales margin in 2013 also reflects higher recovery of $0.9 million of vegetation management and electric reliability enhancement expenditures as well as an increase of $0.3 million in the recovery of major storm restoration costs, which are offset by a corresponding increase in expenses.

The decrease in Total Electric Operating Revenues of $2.8 million in the first quarter of 2013 reflects higher electric sales margin of $2.3 million offset by lower costs of sales of $5.1 million, including lower Purchased Electricity costs of $4.8 million and lower C&LM costs of $0.3 million, which are tracked costs that are passed through directly to customers.

Operating Revenue - Other

The following table details total Other Operating Revenue for the three months
ended March 31, 2013 and 2012:



      Other Operating Revenue (Millions)
                                                Three Months Ended March 31,
                                       2013          2012      $ Change       % Change
      Other                           $   1.5       $  1.3     $     0.2           15.4 %

      Total Other Operating Revenue   $   1.5       $  1.3     $     0.2           15.4 %


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Total Other Operating Revenue, which is comprised of revenues from the Company's non-regulated energy brokering business, Usource, increased $0.2 million in the three month period ended March 31, 2013 compared to the same period in 2012. Usource's revenues are primarily derived from fees and charges billed to suppliers as customers take delivery of energy from these suppliers under term contracts brokered by Usource.

Operating Expenses

Purchased Gas - Purchased Gas includes the cost of natural gas purchased and manufactured to supply the Company's total gas supply requirements. Purchased Gas increased $3.2 million, or 8.8%, in the three month period ended March 31, 2013 compared to the same period in 2012. The increase in Purchased Gas reflects higher therm sales of natural gas partially offset by lower wholesale natural gas prices and an increase in the amount of natural gas purchased by customers directly from third-party suppliers. The Company recovers the approved costs of Purchased Gas through reconciling rate mechanisms which track costs and revenues for recovery on a pass-through basis and therefore changes in approved expenses do not affect earnings.

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