Company Quick10K Filing
Quick10K
Unitil
Closing Price ($) Shares Out (MM) Market Cap ($MM)
$56.04 15 $836
10-Q 2019-06-30 Quarter: 2019-06-30
10-Q 2019-03-31 Quarter: 2019-03-31
10-K 2018-12-31 Annual: 2018-12-31
10-Q 2018-09-30 Quarter: 2018-09-30
10-Q 2018-06-30 Quarter: 2018-06-30
10-Q 2018-03-31 Quarter: 2018-03-31
10-K 2017-12-31 Annual: 2017-12-31
10-Q 2017-09-30 Quarter: 2017-09-30
10-Q 2017-06-30 Quarter: 2017-06-30
10-Q 2017-03-31 Quarter: 2017-03-31
10-K 2016-12-31 Annual: 2016-12-31
10-Q 2016-09-30 Quarter: 2016-09-30
10-Q 2016-06-30 Quarter: 2016-06-30
10-Q 2016-03-31 Quarter: 2016-03-31
10-K 2015-12-31 Annual: 2015-12-31
10-Q 2015-09-30 Quarter: 2015-09-30
10-Q 2015-06-30 Quarter: 2015-06-30
10-Q 2015-03-31 Quarter: 2015-03-31
10-K 2014-12-31 Annual: 2014-12-31
10-Q 2014-09-30 Quarter: 2014-09-30
10-Q 2014-06-30 Quarter: 2014-06-30
10-Q 2014-03-31 Quarter: 2014-03-31
10-K 2013-12-31 Annual: 2013-12-31
8-K 2019-06-28 Regulation FD, Exhibits
8-K 2019-06-12 Regulation FD, Exhibits
8-K 2019-05-20 Regulation FD, Exhibits
8-K 2019-05-01 Regulation FD, Exhibits
8-K 2019-04-24 Shareholder Vote
8-K 2019-04-24 Regulation FD, Exhibits
8-K 2019-01-30 Officers, Regulation FD, Other Events, Exhibits
8-K 2019-01-02 Officers, Regulation FD, Exhibits
8-K 2018-11-30 Enter Agreement, Off-BS Arrangement, Exhibits
8-K 2018-10-24 Officers, Regulation FD
8-K 2018-08-30 Other Events
8-K 2018-07-25 Enter Agreement, Off-BS Arrangement, Exhibits
8-K 2018-07-25 Enter Agreement, Officers, Exhibits
8-K 2018-05-18 Regulation FD, Exhibits
8-K 2018-05-02 Regulation FD, Other Events, Exhibits
8-K 2018-04-25 Shareholder Vote, Regulation FD, Other Events, Exhibits
8-K 2018-03-01 Leave Agreement, Officers, Regulation FD, Exhibits
8-K 2018-02-28 Regulation FD, Other Events, Exhibits
8-K 2018-01-30 Regulation FD, Other Events, Exhibits
HTHT Huazhu Group 11,050
BWXT BWX Technologies 4,750
RARE Ultragenyx Pharmaceutical 3,590
SDRL Seadrill 727
CUBI Customers Bancorp 677
FLXN Flexion Therapeutics 439
MTEM Molecular Templates 272
CPST Capstone Systems 58
TMRC Texas Mineral Resources 0
IVFH Innovative Food 0
UTL 2019-06-30
Part I. Financial Information
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
Note 1
Note 2 - Dividends Declared per Share
Note 4
Note 5 - Common Stock and Preferred Stock
Note 6 - Regulatory Matters
Note 7 - Environmental Matters
Note 8: Income Taxes
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Item 4
Part II. Other Information
Item 1. Legal Proceedings
Item 1A. Risk Factors
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Item 5. Other Information
Item 6. Exhibits
EX-10 d761501dex101.htm
EX-11 d761501dex11.htm
EX-31 d761501dex311.htm
EX-31 d761501dex312.htm
EX-31 d761501dex313.htm
EX-32 d761501dex321.htm
EX-99 d761501dex991.htm

Unitil Earnings 2019-06-30

UTL 10Q Quarterly Report

Balance SheetIncome StatementCash Flow

UNITIL CORP
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Table of Contents
  
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM
10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
For the quarterly period ended
June 30, 2019
or
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
For the transition period from 
               
to
                
 Commission File Number
1-8858
 
UNITIL CORP
ORATION
(Exact name of registrant as specified in its charter)
     
New Hampshire
 
02-0381573
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification No.)
     
6 Liberty Lane West
Hampton
,
New Hampshire
 
03842-1720
(Address of principal executive office)
 
(Zip Code)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 Registrant’s telephone number, including area code: (
603
)
772-0775
 
Securities registered pursuant to Section 12(b) of the Act:
         
Title of each class
 
Trading Symbol
 
Name of each exchange of which registered
Common Stock
 
UTL
 
New York Stock Exchange
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Indicate 
by check mark whether the registrant (1) has filed all
reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    
Yes
  
    
No   
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation
 S-T
(§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    
Yes
  
    
No   
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
             
Large accelerated filer
 
 
Accelerated filer
 
             
Non-accelerated filer
 
 
Smaller reporting company
 
           
 
 
Emerging growth company
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act  
 
 
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule
 12b-2
of the Exchange Act).    
Yes
  
    No  
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
     
Class
 
Outstanding at July 22, 2019
Common Stock, No par value
 
14,921,481
Shares
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Table of Contents
UNITIL CORPORATION AND SUBSIDIARY COMPANIES
FORM 10-Q
For the Quarter Ended June 30, 2019
Table of Contents
 
             
 
Page No.
 
Part I. Financial Information
   
 
             
Item 1.
     
 
             
     
20
 
             
     
21-22
 
             
     
23
 
             
     
24-25
 
             
     
26-52
 
             
Item 2.
     
3-19
 
             
Item 3.
     
53
 
             
Item 4.
     
54
 
 
Part II. Other Information
   
 
             
Item 1.
     
54
 
             
Item 1A.
     
54
 
             
Item 2.
     
54
 
             
Item 3.
     
Inapplicable
 
             
Item 4.
     
Inapplicable
 
             
Item 5.
     
55
 
             
Item 6.
     
55
 
             
 
   
57
 
 
 
 
 
 
 
 
 
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Cautionary Statement
This report and the documents incorporated by reference into this report contain statements that constitute “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, Section 21E of the Securities Exchange Act of 1934, as amended, and the Private Securities Litigation Reform Act of 1995. All statements, other than statements of historical fact, included or incorporated by reference into this report, including, without limitation, statements regarding the financial position, business strategy and other plans and objectives for the Company’s future operations, are forward-looking statements.
These statements include declarations regarding the Company’s beliefs and current expectations. In some cases, forward-looking statements can be identified by terminology such as “may,” “will,” “should,” “expects,” “plans,” “anticipates,” “believes,” “estimates,” “predicts,” “potential” or “continue,” or the negative of such terms or other comparable terminology. These forward-looking statements are subject to inherent risks and uncertainties in predicting future results and conditions that could cause the actual results to differ materially from those projected in these forward-looking statements. Some, but not all, of the risks and uncertainties include those described in Item 1A (Risk Factors) and the following:
  the Company’s regulatory environment (including regulations relating to climate change, greenhouse gas emissions and other environmental matters), which could affect the rates the Company is able to charge, the Company’s authorized rate of return and the Company’s ability to recover costs in its rates;
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
  fluctuations in the supply of, demand for, and the prices of energy commodities and transmission capacity and the Company’s ability to recover energy commodity costs in its rates;
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
  customers’ preferred energy sources;
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
  severe storms and the Company’s ability to recover storm costs in its rates;
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
  the potential for disruption to the Company’s operations due to cyber-attacks, computer viruses, human errors, acts of war or terrorism or other reasons;
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
  the Company’s stranded electric generation and generation-related supply costs and the Company’s ability to recover stranded costs in its rates;
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
  declines in the valuation of capital markets, which could require the Company to make substantial cash contributions to cover its pension obligations, and the Company’s ability to recover pension obligation costs in its rates;
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
  general economic conditions, which could adversely affect (i) the Company’s customers and, consequently, the demand for the Company’s distribution services, (ii) the availability of credit and liquidity resources and (iii) certain of the Company’s counterparties’ obligations (including those of its insurers and lenders);
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
  the Company’s ability to obtain debt or equity financing on acceptable terms;
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
  increases in interest rates, which could increase the Company’s interest expense;
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
  restrictive covenants contained in the terms of the Company’s and its subsidiaries’ indebtedness, which restrict certain aspects of the Company’s business operations;
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
  variations in weather, which could decrease demand for the Company’s distribution services;
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
2
 
 
 
 
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  long-term global climate change, which could adversely affect customer demand or cause extreme weather events that could disrupt the Company’s electric and natural gas distribution services;
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
  numerous hazards and operating risks relating to the Company’s electric and natural gas distribution activities, which could result in accidents and other operating risks and costs;
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
  catastrophic events;
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
  the Company’s ability to retain its existing customers and attract new customers; and
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
  increased competition.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Many of these risks are beyond the Company’s control. Any forward-looking statements speak only as of the date of this report, and the Company undertakes no obligation to update any forward-looking statements to reflect events or circumstances after the date on which such statements are made or to reflect the occurrence of unanticipated events. New factors emerge from time to time, and it is not possible for the Company to predict all of these factors, nor can the Company assess the impact of any such factor on its business or the extent to which any factor, or combination of factors, may cause results to differ materially from those contained in any forward-looking statements.
PART I. FINANCIAL INFORMATION
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
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 areas 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, New Hampshire;
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
  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 105,600 electric customers and 82,700 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.
 
3
 
 
 
 
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Unitil had an investment in Net Utility Plant of $1,053.5 million at June 30, 2019. 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 Resources is the Company’s wholly-owned
non-regulated
subsidiary. Usource, Inc. and Usource L.L.C. (collectively, Usource), which the Company divested of in the first quarter of 2019, were wholly-owned subsidiaries of Unitil Resources. Usource provided brokering and advisory services to large commercial and industrial customers in the northeastern United States. See additional discussion of the divestiture of Usource in “Divestiture of
Non-Regulated
Business Subsidiary” in Note 1 to the Consolidated Financial Statements.
The Company’s other subsidiaries include Unitil Service Corp., which provides, at cost, a variety of administrative and professional services to Unitil’s affiliated companies, Unitil Realty Corp., 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
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 New Hampshire Public Utilities Commission (NHPUC); Fitchburg is subject to regulation by the Massachusetts Department of Public Utilities (MDPU); and Northern Utilities is regulated by the NHPUC and the Maine Public Utilities Commission (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 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 historical test year, and earn a return on their capital investment in utility assets. In addition, the Company’s distribution utilities and its natural gas transmission pipeline company may also recover certain base rate costs, including capital project spending and enhanced reliability and vegetation management programs, through annual step adjustments and cost tracker rate mechanisms.
 
4
 
 
 
 
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Fitchburg is subject to revenue decoupling. 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. The difference between distribution revenue amounts billed to customers and the targeted revenue decoupling amounts is recognized as an increase or a decrease in Accrued Revenue which forms the basis for resetting rates for future cash recoveries from, or credits to, customers. These revenue decoupling targets may be adjusted as a result of rate cases and other authorized adjustments that the Company files with the MDPU. The Company estimates that revenue decoupling applies to approximately 27% and 11% of Unitil’s total annual electric and natural gas sales volumes, respectively.
Tax Cuts and Jobs Act of 2017
On December 22, 2017, the Tax Cuts and Jobs Act of 2017 (TCJA) was signed into law. Among other things, the TCJA substantially reduced the corporate income tax rate to 21 percent, effective January 1, 2018. Each state public utility commission, with jurisdiction over the areas that are served by Unitil’s electric and gas subsidiary companies, issued orders directing how the tax law changes were to be reflected in rates. Unitil has complied with these orders and has made the required changes to its rates as directed by the commissions. The FERC has opened a rulemaking proceeding on this matter which has been addressed in a rate settlement filing by Granite State. More recently, on November 15, 2018, the FERC issued a Notice of Proposed Rulemaking and a Policy Statement to address the TCJA’s effects on the Accumulated Deferred Income Taxes (ADIT) on transmission rates. Under the proposed rules all public utilities with transmission formula rates, including Fitchburg, would be required to: (1) include mechanisms to deduct any excess ADIT from or add any deficient ADIT to their rate bases; (2) include mechanisms in those rates that would raise or lower their income tax allowances by any amortized excess or deficient ADIT; and (3) incorporate a new permanent worksheet into their rates that will annually track information related to excess or deficient ADIT. The Company believes that these matters are substantially resolved and will not have a material impact on its financial position, operating results, or cash flows.
Rate Case Activity
Northern Utilities – Base Rates – Maine –
On June 28, 2019, Northern Utilities filed a petition with the MPUC seeking an increase to annual base operating revenues of $7.0 million. If approved as filed, the requested increase will result in a 7 percent increase over the Company’s test-year operating revenues. The intended rate effective date is April 1, 2020. In addition, Northern Utilities is requesting approval to implement a multi-year alternative rate mechanism (“Capital Investment Recovery Adjustment” or “CIRA”) that will allow for future changes to the Company’s distribution rates and mitigate the need to file a general rate case. The CIRA is designed to recover the costs of replacing, relocating and abandoning existing facilities and other operational and safety-related system improvements. The first annual adjustment is proposed for November 1, 2020, to recover the Company’s 2019 investment cost of eligible facilities and improvements. This matter remains pending.
Northern Utilities – Targeted Infrastructure Replacement Adjustment (TIRA) – Maine –
The settlement in Northern Utilities’ Maine division’s 2013 rate case allowed the Company to implement a TIRA rate mechanism to adjust base distribution rates annually to recover the revenue requirements associated with targeted investments in gas distribution system infrastructure replacement and upgrade projects, including the Company’s Cast Iron Replacement Program (CIRP). The TIRA had an initial term of four years and covered targeted capital expenditures in 2013 through 2016. In its Final Order issued on February 28, 2018 for Northern Utilities’ base rate case, the MPUC approved an extension of the TIRA mechanism, for an additional eight-year period, which will allow for annual rate adjustments through the end of the CIRP program. On May 7, 2018, the MPUC approved the Company’s request to increase its annual base rates by 2.4%, or $1.1 million, effective May 1, 2018, to recover the revenue requirements for 2017 eligible facilities. On April 17, 2019, the MPUC approved the Company’s request to increase its annual base rates by 2.1%, or $1.0 million, effective May 1, 2019, to recover the revenue requirements for 2018 eligible facilities.
 
5
 
 
 
 
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Northern Utilities – Base Rates – New Hampshire –
On May 2, 2018, the NHPUC approved a settlement agreement providing for a net annual revenue increase of $3.2 million, incorporating the effect of the TCJA, and an initial step increase to recover post-test year capital investments. The Company’s second step increase of approximately $1.4 million of annual revenue was approved by the NHPUC, effective May 1, 2019, to recover eligible capital investments in 2018. According to the terms of the settlement agreement, Northern Utilities’ next distribution base rate case shall be based on an historic test year of no earlier than twelve months ending December 31, 2020.
Unitil Energy – Base Rates –
On April 20, 2017 the NHPUC issued its final order providing for a permanent increase of $4.1 million, effective May 1, 2017, followed by two annual rate step adjustments to recover the revenue requirements associated with certain capital expenditures. On April 30, 2018, the NHPUC approved Unitil Energy’s first step increase, effective May 1, 2018. On February 28, 2019, Unitil Energy filed its second and final step adjustment seeking a revenue increase of approximately $340,000. On April 22, 2019 this final step adjustment was approved by the NHPUC, effective May 1, 2019.
Fitchburg – Base Rates – Electric –
Fitchburg’s base rates are decoupled, and subject to an annual revenue decoupling adjustment mechanism, which includes a cap on the amount that rates may be increased in any year. In addition, Fitchburg has an annual capital cost recovery mechanism to recover the revenue requirement associated with certain capital additions. On November 1, 2017, Fitchburg filed its cumulative revenue requirement associated with the Company’s 2015 and 2016 capital expenditures, seeking an increase of $0.4 million. The increase was effective January 1, 2018, subject to further review and approval. On April 3, 2019, the MDPU issued a final order approving the 2017 filing. On November 1, 2018, Fitchburg filed its cumulative revenue requirement of $0.9 million associated with the Company’s 2015, 2016 and 2017 capital expenditures. On December 27, 2018, the filing was approved, effective January 1, 2019, subject to further investigation and reconciliation. Final approval of the 2018 filing remains pending.
Fitchburg – Base Rates – Gas –
Pursuant to the Company’s revenue decoupling adjustment clause tariff, as approved in its last base rate case, the Company is allowed to modify, on a semi-annual basis, its base distribution rates to an established revenue per customer target in order to mitigate economic, weather and energy efficiency impacts to the Company’s revenues. The MDPU has consistently found that the Company’s filings are in accord with its approved tariffs, applicable law and precedent, and that they result in just and reasonable rates.
Fitchburg – Gas System Enhancement Program –
Pursuant to statute and MDPU order, Fitchburg has an approved Gas System Enhancement Plan (GSEP) tariff through which it may recover certain gas infrastructure replacement and safety related investment costs, subject to an annual cap. Under the plan, the Company is required to make two annual filings with the MDPU: a forward-looking filing for the subsequent construction year, to be filed on or before October 31 (the “GSEP Filing”); and a filing, submitted on or before May 1, of final project documentation for projects completed during the prior year, demonstrating substantial compliance with its plan in effect for that year and showing that project costs were reasonably and prudently incurred (the “GREC Filing”). The Company considers these to be routine regulatory proceedings and there are no material issues outstanding.
In an Order issued on April 30, 2019, the MDPU approved Fitchburg’s 2018 GSEP Filing and increased the annual cap on recovery. Because the amount approved for recovery, $1.6 million, still exceeded the annual cap, the Order resulted in a revenue increase of $1.0 million that went
 
6
 
 
 
 
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into effect on May 1, 2019, subject to reconciliation. The amount that exceeded the cap, $0.6 million, will be deferred and recovered in a later proceeding. On May 1, 2019, the Company made its 2019 GREC Filing, seeking a waiver of the annual cap and a revenue increase of $1.0 million. This matter remains pending.
Granite State – Base Rates –
On May 2, 2018, Granite State filed an uncontested rate settlement with FERC which provided for no change in rates, and accounted for the effects of a capital step adjustment offset by the effect of the TCJA. The settlement was approved by FERC on June 27, 2018, and complies with the FERC Notice of Proposed Rulemaking concerning the justness and reasonableness of rates in light of the corporate income tax reductions under the TCJA.
RESULTS OF OPERATIONS
The following section of MD&A compares the results of operations for each of the two fiscal periods ended June 30, 2019 and June 30, 2018 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, which are prepared in accordance with accounting principles generally accepted in the United States of America (GAAP).
The Company’s results of operations 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. Also, as a result of recent rate cases, the Company’s natural gas sales margins are derived from a higher percentage of fixed billing components, including customer charges. Therefore, natural gas revenues and margin will be less affected by the seasonal nature of the natural gas business. In addition, as discussed above, approximately 27% and 11% of the Company’s total annual electric and natural gas sales volumes, respectively, are decoupled and changes in sales to existing customers do not affect sales margin.
Earnings Overview
The Company’s Net Income was $4.0 million, or $0.27
in Earnings Per Share (EPS),
for the second quarter of 2019, an increase of $0.4 million, or $0.03 in EPS, compared to the second quarter of 2018. For the six months ended June 30, 2019, the Company reported Net Income of $30.5 million, or $2.05 in EPS, an increase of $11.3 million, or $0.75 in EPS, compared to the same six month period in 2018. In the first quarter of 2019, the Company recognized a
one-time
net gain of $9.8 million, or $0.66 in EPS, on the Company’s divestiture of its
non-regulated
business subsidiary, Usource. In addition, the Company’s earnings in the first six months 2019 were driven by higher natural gas and electric sales margins, partially offset by higher utility operating expenses. Earnings for the Company’s utility operations were Net Income of $20.7 million, or $1.39 in EPS, for the first six months of 2019, an increase of $1.5 million in Net Income, or $0.09 in EPS, compared to the first six months of 2018.
Natural gas sales margins were $23.3 million and $66.8 million in the three and six months ended June 30, 2019, respectively, increases of $0.4 million and $4.0 million, respectively, compared to the same periods in 2018. Gas sales margins in the second quarter of 2019 were positively affected by higher natural gas distribution rates of $1.2 million and $0.4 million from higher therm sales, reflecting customer growth. The positive effect of the higher rates and customer growth was partially offset by the absence in the current period of a $1.2 million
non-recurring
adjustment recognized in the second quarter of 2018 to increase gas revenue in connection with a then ongoing base rate case for the Company’s New Hampshire natural gas utility.
 
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Gas sales margins in the first six months of 2019 were positively affected by higher natural gas distribution rates of $3.8 million and $1.4 million from higher therm sales, reflecting customer growth. The positive effect of the higher rates and customer growth was partially offset by the absence in the current period of the $1.2 million
non-recurring
adjustment recognized in the second quarter of 2018, discussed above.
Natural gas therm sales increased 2.3% and 2.2% in the three and six month periods ended June 30, 2019, respectively, compared to the same periods in 2018, reflecting customer growth. The Company estimates that weather-normalized gas therm sales, excluding decoupled sales, were up 5.5% in the first six months of 2019 compared to the same period in 2018. As of June 30, 2019, the number of total natural gas customers served has increased by 1,457 over the last year.
Electric sales margins were $22.4 million and $45.5 million in the three and six months ended June 30, 2019, respectively, increases of $0.1 million and $0.9 million, respectively, compared to the same periods in 2018. Electric sales margins in the second quarter were positively affected by higher electric distribution rates of $0.2 million, partially offset by a decrease of $0.1 million from lower kWh sales, reflecting overall lower average usage, including reduced usage by industrial customers for production purposes. Electric sales margins in the first six months of 2019 were positively affected by higher electric distribution rates of $1.4 million, partially offset by a decrease of $0.5 million from lower kWh sales, reflecting overall lower average usage, including reduced usage by industrial customers for production purposes.
Total electric kilowatt-hour (kWh) sales decreased 6.1% and 5.1%, respectively in the three and six month periods ended June 30, 2019 compared to the same periods in 2018. These decreases reflect overall lower average usage, including reduced usage by industrial customers for production purposes, partially offset by customer growth. As of June 30, 2019, the number of total electric customers served has increased by 533 over the last year.
Operation and Maintenance (O&M) expenses decreased $1.9 million and $0.7 million in three and six months ended June 30, 2019, respectively, compared to the same periods in 2018. Excluding a
non-recurring
adjustment to increase O&M expenses by $1.2 million in the second quarter of 2018 in connection with a then ongoing base rate case for the Company’s New Hampshire natural gas utility, O&M expenses decreased $0.7 million and increased $0.5 million in the in three and six months ended June 30, 2019, respectively, compared to the same periods in 2018. The decrease in the three month period reflects lower labor costs of $0.6 million and lower utility operating costs of $0.5 million, partially offset by higher professional fees of $0.4 million. The increase in the six month period reflects higher utility operating costs of $0.3 million and higher professional fees of $0.4 million, partially offset by lower labor costs of $0.2 million. Included in the changes in O&M expenses discussed above are lower labor and other costs of $0.5 million and $0.9 million for the three and six month periods ended June 30, 2019 respectively, compared to the same periods in 2018, reflecting the divestiture of the Company’s
non-regulated
business subsidiary, Usource.
Depreciation and Amortization expense decreased $0.3 million and increased $1.2 million in the three and six months ended June 30, 2019, respectively, compared to the same periods in 2018. The decrease in the three month period reflects lower amortization of regulatory asset storm costs, partially offset by increased depreciation on higher levels of utility plant in service. The increase in the six month period reflects increased depreciation on higher levels of utility plant in service, partially offset by lower amortization of storm costs.
 
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Taxes Other Than Income Taxes decreased $0.1 million and increased $0.5 million in the three and six months ended June 30, 2019, respectively, compared to the same periods in 2018. The decrease in the three month period reflects lower payroll taxes and property tax abatements, partially offset by higher local property tax rates on higher levels of utility plant in service. The increase in the six month period reflects higher local property tax rates on higher levels of utility plant in service, partially offset by property tax abatements.
Interest Expense, Net was essentially unchanged in the three months ended June 30, 2019, compared to the same period in 2018. For the six months ended June 30, 2019, Interest Expense, Net increased $0.2 million, compared to the same period in 2018, reflecting increased interest rates on higher levels of short-term debt, partially offset by lower interest on long-term debt.
Other Expense (Income), Net was essentially unchanged for the three months ended June 30, 2019 compared to the same period in 2018. Other Expense (Income), Net changed from an expense of $3.0 million in the first six months of 2018 to income of $10.8 million in the first six months of 2019, a net change of $13.8 million. This change primarily reflects a
pre-tax
gain of $13.4 million on the Company’s divestiture of Usource, discussed above and lower retirement benefit costs in the current period. The Usource divestiture generated a capital gain to the Company and a $3.6 million provision is included in the Company’s income tax expense for the six months ended June 30, 2019.
Federal and State Income Taxes increased by $1.3 million and $4.7 million for the three and six months ended June 30, 2019, respectively, compared to the same periods in 2018, reflecting higher
pre-tax
earnings in the current period and, for the six month period, income taxes associated with the Company’s divestiture of its
non-regulated
business subsidiary, Usource, discussed above.
At its January 2019, April 2019 and July 2019 meetings, the Unitil Corporation Board of Directors declared quarterly dividends on the Company’s common stock of $0.37 per share. These quarterly dividends result in a current effective annualized dividend rate of $1.48 per share, representing an unbroken record of quarterly dividend payments since trading began in Unitil’s common stock.
A more detailed discussion of the Company’s results of operations for the three and six months ended June 30, 2019 is presented below.
Gas Sales, Revenues and Margin
Therm Sales –
Unitil’s total therm sales of natural gas increased 2.3% and 2.2% in the three and six month periods ended June 30, 2019, respectively, compared to the same periods in 2018. In the second quarter of 2019, sales to Residential customers were essentially unchanged and sales to C&I customers increased 2.9%, respectively, compared to the same period in 2018, reflecting customer growth. For the six months ended June 30, 2019, sales to Residential and C&I customers increased 0.6% and 2.7%, respectively, compared to the same period in 2018. The increase in gas therm sales in the Company’s service areas in the six month period was driven by customer growth. The Company estimates that weather-normalized gas therm sales, excluding decoupled sales, were up 5.5% in the first six months of 2019 compared to the same period in 2018. As of June 30, 2019, the number of total natural gas customers served has increased by 1,457 over the last year. As previously discussed, sales margins derived from decoupled unit sales (representing approximately 11% of total annual therm sales volume) are not sensitive to changes in gas therm sales.
 
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The following table details total firm therm sales for the three and six months ended June 30, 2019 and 2018, by major customer class:
                                                                 
Therm Sales (millions)
 
 
Three Months Ended June 30,
   
Six Months Ended June 30,
 
 
2019
   
2018
   
Change
   
% Change
   
2019
   
2018
   
Change
   
% Change
 
Residential
   
9.6
     
9.6
     
—  
     
—  
     
33.6
     
33.4
     
0.2
     
0.6
%
Commercial / Industrial
   
39.2
     
38.1
     
1.1
     
2.9
%    
111.3
     
108.4
     
2.9
     
2.7
%
                                                                 
Total
   
48.8
     
47.7
     
1.1
     
2.3
%    
144.9
     
141.8
     
3.1
     
2.2
%
                                                                 
 
 
 
 
 
 
 
 
 
 
 
 
 
Gas Operating Revenues and Sales Margin –
The following table details total Gas Operating Revenues and Sales Margin for the three and six months ended June 30, 2019 and 2018:
                                                                 
Gas Operating Revenues and Sales Margin (millions)
 
 
Three Months Ended June 30,
   
Six Months Ended June 30,
 
 
2019
   
2018
   
$ Change
   
% Change
   
2019
   
2018
   
$ Change
   
% Change
 
Gas Operating Revenue:
   
     
     
     
     
     
     
     
 
Residential
 
$
13.1
    $
13.9
    $
(0.8
)    
(5.8
%)  
$
48.9
    $
49.7
    $
(0.8
)    
(1.6
%)
Commercial / Industrial
   
19.5
     
20.8
     
(1.3
)    
(6.3
%)    
70.1
     
72.0
     
(1.9
)    
(2.6
%)
                                                                 
Total Gas Operating Revenue
 
$
32.6
    $
34.7
    $
(2.1
)    
(6.1
%)  
$
119.0
    $
121.7
    $
(2.7
)    
(2.2
%)
                                                                 
Cost of Gas Sales
 
$
9.3
    $
11.8
    $
(2.5
)    
(21.2
%)  
$
52.2
    $
58.9
    $
(6.7
)    
(11.4
%)
                                                                 
Gas Sales Margin
 
$
23.3
    $
22.9
    $
0.4
     
1.7
%  
$
66.8
    $
62.8
    $
4.0
     
6.4
%
                                                                 
 
 
 
 
 
 
 
 
 
 
 
 
 
The Company analyzes operating results using Gas Sales Margin, a
non-GAAP
measure. Gas Sales Margin is calculated as Total Gas Operating Revenue (See “Utility Revenue Recognition” in Note 1 to the accompanying Consolidated Financial Statements) less Cost of Gas Sales. The Company believes Gas Sales Margin is an important measure to analyze profitability because the approved cost of sales are tracked and reconciled costs that are passed through directly to the customer, resulting in an equal and offsetting amount reflected in Total Gas Operating Revenue. Sales margin can be reconciled to Operating Income, a GAAP measure, by including Operation and Maintenance, Depreciation and Amortization and Taxes Other Than Income Taxes for each segment in the analysis.
Natural gas sales margins were $23.3 million and $66.8 million in the three and six months ended June 30, 2019, respectively, increases of $0.4 million and $4.0 million, respectively, compared to the same periods in 2018. Gas sales margins in the second quarter of 2019 were positively affected by higher natural gas distribution rates of $1.2 million and $0.4 million from higher therm sales, reflecting customer growth. The positive effect of the higher rates and customer growth was partially offset by the absence in the current period of a $1.2 million
non-recurring
adjustment recognized in the second quarter of 2018 to increase gas revenue in connection with a then ongoing base rate case for the Company’s New Hampshire natural gas utility.
 
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Gas sales margins in the first six months of 2019 were positively affected by higher natural gas distribution rates of $3.8 million and $1.4 million from higher therm sales reflecting customer growth. The positive effect of the higher rates and customer growth was partially offset by the absence in the current period of the $1.2 million
non-recurring
adjustment recognized in the second quarter of 2018, discussed above.
The decreases in Total Gas Operating Revenues of $2.1 million and $2.7 million in the three and six months ended June 30, 2019, respectively, compared to the same periods in 2019, reflect lower cost of gas sales, which are tracked and reconciled costs that are passed through directly to customers, and the
non-recurring
adjustment recognized in the second quarter of 2019, discussed above, partially offset by higher natural gas sales volumes.
Electric Sales, Revenues and Margin
Kilowatt-hour Sales
 – Unitil’s total electric kWh sales decreased 6.1% and 5.1%, respectively in the three and six month periods ended June 30, 2019 compared to the same periods in 2018. Sales to Residential customers decreased 5.8% and 4.6%, respectively, in the three and six month periods ended June 30, 2019 compared to the same periods in 2018. Sales to C&I customers decreased 6.3% and 5.5%, respectively, in the three and six month periods ended June 30, 2019 compared to the same periods in 2018. These decreases reflect overall lower average usage, including reduced usage by industrial customers for production purposes, partially offset by customer growth. As of June 30, 2019, the number of total electric customers served has increased by 533 over the last year. As previously discussed, sales margins derived from decoupled unit sales (representing approximately 27% of total annual kWh sales volume) are not sensitive to changes in electric kWh sales.
The following table details total kWh sales for the three and six months ended June 30, 2019 and 2018 by major customer class:
                                                                 
kWh Sales (millions)
 
 
Three Months Ended June 30,
   
Six Months Ended June 30,
 
 
2019
   
2018
   
Change
   
% Change
   
2019
   
2018
   
Change
   
% Change
 
Residential
   
135.9
     
144.3
     
(8.4
)    
(5.8
%)    
317.4
     
332.8
     
(15.4
)    
(4.6
%)
Commercial / Industrial
   
224.8
     
239.8
     
(15.0
)    
(6.3
%)    
460.8
     
487.6
     
(26.8
)    
(5.5
%)
                                                                 
Total
   
360.7
     
384.1
     
(23.4
)    
(6.1
%)    
778.2
     
820.4
     
(42.2
)    
(5.1
%)
                                                                 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
11
 
 
 
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Electric Operating Revenues and Sales Margin
 – The following table details total Electric Operating Revenues and Sales Margin for the three and six month periods ended June 30, 2019 and 2018:
                                                                 
Electric Operating Revenues and Sales Margin (millions)
 
 
Three Months Ended June 30,
   
Six Months Ended June 30,
 
 
2019
   
2018
   
$ Change
   
% Change
   
2019
   
2018
   
$ Change
   
% Change
 
Electric Operating Revenue:
   
     
     
     
     
     
     
     
 
Residential
 
$
28.7
    $
26.4
    $
2.3
     
8.7
%  
$
67.5
    $
60.2
    $
7.3
     
12.1
%
Commercial / Industrial
   
23.1
     
22.3
     
0.8
     
3.6
%    
49.1
     
46.0
     
3.1
     
6.7
%
                                                                 
Total Electric Operating Revenue
 
$
51.8
    $
48.7
    $
3.1
     
6.4
%  
$
116.6
    $
106.2
    $
10.4
     
9.8
%
                                                                 
Cost of Electric Sales
 
$
29.4
    $
26.4
    $
3.0
     
11.4
%  
$
71.1
    $
61.6
    $
9.5
     
15.4
%
                                                                 
Electric Sales Margin
 
$
22.4
    $
22.3
    $
0.1
     
0.4
%  
$
45.5
    $
44.6
    $
0.9
     
2.0
%
                                                                 
 
 
 
 
 
 
 
 
 
 
 
 
 
The Company analyzes operating results using Electric Sales Margin, a
non-GAAP
measure. Electric Sales Margin is calculated as Total Electric Operating Revenues (See “Utility Revenue Recognition” in Note 1 to the accompanying Consolidated Financial Statements) less Cost of Electric Sales. The Company believes Electric Sales Margin is an important measure to analyze profitability because the approved cost of sales are tracked and reconciled costs that are passed through directly to the customer resulting in an equal and offsetting amount reflected in Total Electric Operating Revenues. Sales margin can be reconciled to Operating Income, a GAAP measure, by including Operation and Maintenance, Depreciation and Amortization and Taxes Other Than Income Taxes for each segment in the analysis.
Electric sales margins were $22.4 million and $45.5 million in the three and six months ended June 30, 2019, respectively, increases of $0.1 million and $0.9 million, respectively, compared to the same periods in 2018. Electric sales margins in the second quarter were positively affected by higher electric distribution rates of $0.2 million, partially offset by a decrease of $0.1 million from lower kWh sales, reflecting overall lower average usage, including reduced usage by industrial customers for production purposes. Electric sales margins in the first six months of 2019 were positively affected by higher electric distribution rates of $1.4 million, partially offset by a decrease of $0.5 million from lower kWh sales, reflecting overall lower average usage, including reduced usage by industrial customers for production purposes.
The increases in Total Electric Operating Revenues of $3.1 million and $10.4 in the three and six months ended June 30, 2019, respectively, compared to the same periods in 2018 reflect higher cost of electric sales, which are tracked and reconciled to costs that are passed through directly to customers, partially offset by lower sales of electricity.
 
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Other Revenue (000’s)
 
 
Three Months Ended June 30,
   
Six Months Ended June 30,
 
 
2019
   
2018
   
$
 
Change
   
% Change
   
2019
   
2018
   
$
 
Change
   
% Change
 
Other
 
$
 —  
    $
1.1
    $
(1.1
)    
N/M
   
$
0.9
    $
2.4
    $
(1.5
)    
(62.5
%)
                                                                 
Total Other Revenue
 
$
—  
    $
1.1
    $
(1.1
)    
N/M
   
$
0.9
    $
2.4
    $
(1.5
)    
(62.5
%)
                                                                 
 
 
 
 
 
 
 
 
 
 
 
Total Other Operating Revenue (See “Other Operating Revenue –
Non-regulated”
in Note 1 to the accompanying Consolidated Financial Statements), which is comprised of revenues from the Company’s
non-regulated
energy brokering business, Usource, decreased $1.1 million and $1.5 million, respectively, in the three and six months ended June 30, 2019, compared to the same periods in 2018, reflecting the Company’s divestiture of Usource in the first quarter of 2019 (See “Divestiture of
Non-Regulated
Business Subsidiary” in Note 1 to the accompanying Consolidated Financial Statements).
Operating Expenses
Cost of Gas Sales
 – Cost of Gas Sales includes the cost of natural gas purchased and manufactured to supply the Company’s total gas supply requirements and spending on energy efficiency programs. Cost of Gas Sales decreased $2.5 million, or 21.2%, and $6.7 million, or 11.4%, in the three and six months ended June 30, 2019, respectively, compared to the same periods in 2018. These decreases reflect lower wholesale natural gas prices, partially offset by higher sales of natural gas. The Company reconciles and recovers the approved Cost of Gas Sales in its rates at cost on a pass-through basis and therefore changes in approved expenses do not affect earnings.
Cost of Electric Sales
 – Cost of Electric Sales includes the cost of electric supply as well as other energy supply related restructuring costs, including power supply buyout costs, and spending on energy efficiency programs. Cost of Electric Sales increased $3.0 million, or 11.4%, and $9.5 million, or 15.4%, in the three and six months ended June 30, 2019, respectively, compared to the same periods in 2018. These increases reflect higher wholesale electricity prices and a decrease in the amount of electricity purchased by customers directly from third-party suppliers, partially offset by lower sales of electricity. The Company reconciles and recovers the approved Cost of Electric Sales in its rates at cost on a pass-through basis and therefore changes in approved expenses do not affect earnings.
Operation and Maintenance (O&M) –
O&M expense includes gas and electric utility operating costs, and the operating cost of the Company’s corporate and other business activities. O&M expense decreased $1.9 million, or 10.7%, and $0.7 million, or 2.0%, in three and six months ended June 30, 2019, respectively, compared to the same periods in 2018. Excluding a
non-recurring
adjustment to increase O&M expenses by $1.2 million in the second quarter of 2018 in connection with a then ongoing base rate case for the Company’s New Hampshire natural gas utility, O&M expenses decreased $0.7 million and increased $0.5 million in the in three and six months ended June 30, 2019, respectively, compared to the same periods in 2018. The decrease in the three month period reflects lower labor costs of $0.6 million and lower utility operating costs of $0.5 million, partially offset by higher professional fees of $0.4 million. The increase in the six month period reflects higher utility operating costs of $0.3 million and higher professional fees of $0.4 million, partially offset by lower labor costs of $0.2 million. Included in
 
13
 
 
 
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the changes in O&M expenses discussed above are lower labor and other costs of $0.5 million and $0.9 million for the three and six month periods ended June 30, 2019 respectively, compared to the same periods in 2018, reflecting the divestiture of the Company’s
non-regulated
business subsidiary, Usource.
Depreciation and Amortization –
Depreciation and Amortization expense decreased $0.3 million, or 2.4%, and increased $1.2 million, or 4.8%, in the three and six months ended June 30, 2019, respectively, compared to the same periods in 2018. The decrease in the three month period reflects lower amortization of regulatory asset storm costs, partially offset by increased depreciation on higher levels of utility plant in service. The increase in the six month period reflects increased depreciation on higher levels of utility plant in service, partially offset by lower amortization of storm costs.
Taxes Other Than Income Taxes
 – Taxes Other Than Income Taxes decreased $0.1 million, or 1.9%, and increased $0.5 million, or 4.6%, in the three and six months ended June 30, 2019, respectively, compared to the same periods in 2018. The decrease in the three month period reflects lower payroll taxes and property tax abatements, partially offset by higher local property tax rates on higher levels of utility plant in service. The increase in the six month period reflects higher local property tax rates on higher levels of utility plant in service, partially offset by property tax abatements.
Other Expense (Income), Net –
Other Expense (Income), Net was essentially unchanged for the three months ended June 30, 2019 compared to the same period in 2018. Other Expense (Income), Net changed from an expense of $3.0 million in the first six months of 2018 to income of $10.8 million in the first six months of 2019, a net change of $13.8 million. This change primarily reflects a
pre-tax
gain of $13.4 million on the Company’s divestiture of Usource, discussed above and lower retirement benefit costs in the current period. The Usource divestiture generated a capital gain to the Company and a $3.6 million provision is included in the Company’s income tax expense for the six months ended June 30, 2019.
Provision for Income Taxes
 – Federal and State Income Taxes increased by $1.3 million and $4.7 million for the three and six months ended June 30, 2019, respectively, compared to the same periods in 2018, reflecting higher
pre-tax
earnings in the current period and, for the six month period, income taxes associated with the Company’s divestiture of its
non-regulated
business subsidiary, Usource, discussed above.
Interest Expense, Net –
Interest expense is presented in the Consolidated Financial Statements net of interest income. Interest expense is mainly comprised of interest on long-term debt and short-term borrowings. In addition, certain reconciling rate mechanisms used by the Company’s distribution operating utilities give rise to regulatory assets and regulatory liabilities on which interest is accrued.
Unitil’s utility subsidiaries operate a number of reconciling rate mechanisms to recover specifically identified costs on a pass through basis. These reconciling rate mechanisms track costs and revenue on a monthly basis. In any given month, this tracking and reconciling process will produce either an under-collected or an over-collected balance of costs. In accordance with the distribution utilities’ rate tariffs, interest is accrued on these balances and will produce either interest income or interest expense. Consistent with regulatory precedent, interest income is recorded on an under-collection of costs which creates a regulatory asset to be recovered in future periods when rates are reset. Interest expense is recorded on an over-collection of costs, which creates a regulatory liability to be refunded in future periods when rates are reset.
 
14
 
 
  
Table of Contents
 
                                                 
Interest Expense, Net (Millions)
 
Three Months Ended
June 30,
   
Six Months Ended
June 30,
 
 
2019
   
2018
   
Change
   
2019
   
2018
   
Change
 
Interest Expense
   
     
     
     
     
     
 
Long-term Debt
 
$
5.6
    $
5.7
    $
(0.1
)  
$
11.2
    $
11.5
    $
(0.3
)
Short-term Debt
   
0.8
     
0.5
     
0.3
     
1.8
     
1.0
     
0.8
 
Regulatory Liabilities
   
0.2
     
0.2
     
—  
     
0.4
     
0.3
     
0.1
 
                                                 
Subtotal Interest Expense
   
6.6
     
6.4
     
0.2
     
13.4
     
12.8
     
0.6
 
                                                 
Interest (Income)
   
     
     
     
     
     
 
Regulatory Assets
   
(0.2
)
   
(0.2
)    
—  
     
(0.4
)
   
(0.4
)    
—  
 
AFUDC
(1)
and Other
   
(0.5
)
   
(0.3
)    
(0.2
)    
(0.9
)
   
(0.5
)    
(0.4
)
                                                 
Subtotal Interest (Income)
   
(0.7
)
   
(0.5
)    
(0.2
)    
(1.3
)
   
(0.9
)    
(0.4
)
                                                 
Total Interest Expense, Net
 
$
5.9
    $
5.9
    $
 —  
   
$
12.1
    $
11.9
    $
0.2
 
                                                 
 
 
 
 
 
 
 
 
 
 
 
(1)
AFUDC – Allowance for Funds Used During Construction.
 
 
 
 
 
 
 
 
 
 
 
Interest Expense, Net was essentially unchanged in the three months ended June 30, 2019, compared to the same period in 2018. For the six months ended June 30, 2019, Interest Expense, Net increased $0.2 million, compared to the same period in 2018, reflecting increased interest rates on higher levels of short-term debt, partially offset by lower interest on long-term debt.
Capital Requirements
Sources of Capital
Unitil requires capital to fund utility plant additions, working capital and other utility expenditures recovered in subsequent periods through regulated rates. The capital necessary to meet these requirements is derived primarily from internally-generated funds, which consist of cash flows from operating activities. The Company initially supplements internally-generated funds through short-term bank borrowings, as needed, under its unsecured revolving Credit Facility. Periodically, the Company replaces portions of its short-term debt with long-term financings more closely matched to the long-term nature of its utility assets. Additionally, from time to time, the Company has accessed the public capital markets through public offerings of equity securities. The Company’s utility operations are seasonal in nature and are therefore subject to seasonal fluctuations in cash flows. The amount, type and timing of any future financing will vary from year to year based on capital needs and maturity or redemptions of securities.
The Company and its subsidiaries are individually and collectively members of the Unitil Cash Pool (the “Cash Pool”). The Cash Pool is the financing vehicle for
day-to-day
cash borrowing and investing. The Cash Pool allows for an efficient exchange of cash among the Company and its subsidiaries. The interest rates charged to the subsidiaries for borrowing from the Cash Pool are based on actual interest costs from lenders under the Company’s revolving Credit Facility (as defined below). At June 30, 2019, June 30, 2018 and December 31, 2018, the Company and all of its subsidiaries were in compliance with the regulatory requirements to participate in the Cash Pool.
 
15
 
 
  
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On July 25, 2018, the Company entered into a Second Amended and Restated Credit Agreement and related documents (collectively, the “Credit Facility”) with a syndicate of lenders, which amended and restated in its entirety the Company’s prior credit facility. The Credit Facility extends to July 25, 2023, subject to two
one-year
extensions under certain circumstances, and has a borrowing limit of $120 million, which includes a $25 million sublimit for the issuance of standby letters of credit. The Credit Facility provides the Company with the ability to elect that borrowings under the Credit Facility bear interest under several options, including at a daily fluctuating rate of interest per annum equal to
one-month
London Interbank Offered Rate plus 1.125%. The Company may increase the borrowing limit under the Credit Facility by up to $50 million under certain circumstances.
The Company utilizes the Credit Facility for cash management purposes related to its short-term operating activities. Total gross borrowings were $131.4 million for the six months ended June 30, 2019. Total gross repayments were $149.4 million for the six months ended June 30, 2019. The following table details the borrowing limits, amounts outstanding and amounts available under the Credit Facility as of June 30, 2019, June 30, 2018 and December 31, 2018:
                         
 
Revolving Credit Facility ($ millions)
 
 
June 30,
   
December 31,
   
 
2019
   
2018
   
2018
 
Limit
 
$
120.0
    $
120.0
    $
120.0
 
Short-Term Borrowings Outstanding
 
$
64.8
    $
37.4
    $
82.8
 
                         
Available
 
$
55.2
    $
82.6
    $
37.2
 
                         
 
 
 
 
 
 
 
 
 
 
 
The Credit Facility contains customary terms and conditions for credit facilities of this type, including affirmative and negative covenants. There are restrictions on, among other things, the Company’s and its subsidiaries’ ability to permit liens or incur indebtedness, and restrictions on the Company’s ability to merge or consolidate with another entity or change its line of business. The affirmative and negative covenants under the Credit Facility shall apply until the Credit Facility terminates and all amounts borrowed under the Credit Facility are paid in full (or with respect to letters of credit, they are cash collateralized). The only financial covenant in the Credit Facility provides that Funded Debt to Capitalization (as each term is defined in the Credit Facility) cannot exceed 65%, tested on a quarterly basis. At June 30, 2019, June 30, 2018 and December 31, 2018, the Company was in compliance with the covenants contained in the Credit Facility in effect on that date. (See also “Credit Arrangements” in Note 4.)
The Company believes the future operating cash flows of the Company, along with its existing borrowing availability and access to financial markets for the issuance of new long-term debt, will be sufficient to meet any working capital and future operating requirements, and capital investment forecast opportunities.
As discussed previously, the Company divested of its
non-regulated
subsidiary business, Usource, in the first quarter of 2019. The Company used the net proceeds of $9.8 million from this divestiture for general corporate purposes.
 
16
 
 
 
 
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On November 30, 2018 Unitil Energy issued $30 million of First Mortgage Bonds due November 30, 2048 at 4.18%. Unitil Energy used the net proceeds from this offering to repay short-term debt and for general corporate purposes. Approximately $0.5 million of costs associated with these issuances have been netted against long-term debt for presentation purposes on the Consolidated Balance Sheets.
In April 2014, Unitil Service Corp. entered into a financing arrangement, structured as a capital lease obligation, for various information systems and technology equipment. Final funding under this capital lease occurred on October 30, 2015, resulting in total funding of $13.4 million. This capital lease was paid in full in the second quarter of 2019.
Unitil Corporation and its utility subsidiaries, Fitchburg, Unitil Energy, Northern Utilities, and Granite State are currently rated “BBB+” by Standard & Poor’s Ratings Services. Unitil Corporation and Granite State are currently rated “Baa2”, and Fitchburg, Unitil Energy and Northern Utilities are currently rated “Baa1” by Moody’s Investors Services.
The continued availability of various methods of financing, as well as the choice of a specific form of security for such financing, will depend on many factors, including, but not limited to: security market conditions; general economic climate; regulatory approvals; the ability to meet covenant issuance restrictions; the level of earnings, cash flows and financial position; and the competitive pricing offered by financing sources.
The Company provides limited guarantees on certain energy and natural gas storage management contracts entered into by the distribution utilities. The Company’s policy is to limit the duration of these guarantees. As of June 30, 2019, there were approximately $4.3 million of guarantees outstanding.
Northern Utilities enters into asset management agreements under which Northern Utilities releases certain natural gas pipeline and storage assets, resells the natural gas storage inventory to an asset manager and subsequently repurchases the inventory over the course of the natural gas heating season at the same price at which it sold the natural gas inventory to the asset manager. There was $5.0 million, $5.3 million and $8.4 million of natural gas storage inventory at June 30, 2019, June 30, 2018 and December 31, 2018, respectively, related to these asset management agreements. The amount of natural gas inventory released in June 2019 and payable in July 2019 is $0.1 million and is recorded in Accounts Payable at June 30, 2019. The amount of natural gas inventory released in June 2018 and payable in July 2018 was $0.1 million and was recorded in Accounts Payable at June 30, 2018. The amount of natural gas inventory released in December 2018 and payable in January 2019 was $0.9 million and was recorded in Accounts Payable at December 31, 2018.
Off-Balance
Sheet Arrangements
The Company and its subsidiaries do not currently use, and are not dependent on the use of,
off-balance
sheet financing arrangements such as securitization of receivables or obtaining access to assets or cash through special purpose entities or variable interest entities. Unitil Corporation’s subsidiaries conduct a portion of their operations in leased facilities and also lease some of their vehicles, machinery and office equipment under both capital and operating lease arrangements. Additionally, as of June 30, 2019, there were approximately $4.3 million of guarantees on certain energy and natural gas storage management contracts entered into by the distribution utilities outstanding. See Note 4 (Debt and Financing Arrangements) to the accompanying Consolidated Financial Statements.
 
17
 
 
  
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Critical Accounting Policies
The preparation of the Company’s financial statements in conformity with generally accepted accounting principles in the United States of America requires the Company to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. In making those estimates and assumptions, the Company is sometimes required to make difficult, subjective and/or complex judgments about the impact of matters that are inherently uncertain and for which different estimates that could reasonably have been used could have resulted in material differences in its financial statements. If actual results were to differ significantly from those estimates, assumptions and judgment, the financial position of the Company could be materially affected and the results of operations of the Company could be materially different than reported. For a complete discussion of the Company’s significant accounting policies, refer to the Note 1 to the Consolidated Financial Statements in the Company’s Annual Report on Form
 10-K,
as filed with the Securities and Exchange Commission on January 31, 2019.
LABOR RELATIONS
As of June 30, 2019, the Company and its subsidiaries had 514 employees. The Company considers its relationship with employees to be good and has not experienced any major labor disruptions.
As of June 30, 2019, a total of 165 employees of certain of the Company’s subsidiaries were represented by labor unions. The following table details by subsidiary the employees covered by a collective bargaining agreement (CBA) as of June 30, 2019:
                 
 
Employees Covered
   
CBA Expiration
 
Fitchburg
   
47
     
05/31/2022
 
Northern Utilities NH Division
   
35
     
06/05/2020
 
Northern Utilities ME Division
   
37
     
03/31/2021
 
Granite State
   
4
     
03/31/2021
 
Unitil Energy
   
38
     
05/31/2023
 
Unitil Service
   
4
     
05/31/2023
 
 
 
 
 
 
 
 
 
 
 
The CBAs provide discrete salary adjustments, established work practices and uniform benefit packages. The Company expects to negotiate new agreements prior to their expiration dates.
INTEREST RATE RISK
As discussed above, Unitil meets its external financing needs by issuing short-term and long-term debt. The majority of debt outstanding represents long-term notes bearing fixed rates of interest. Changes in market interest rates do not affect interest expense resulting from these outstanding long-term debt securities. However, the Company periodically repays its short-term debt borrowings through the issuance of new long-term debt securities. Changes in market interest rates may affect the interest rate and corresponding interest expense on any new issuances of long-term debt securities. In addition, short-term debt borrowings bear a variable rate of interest. As a result, changes in short-term interest rates will increase or decrease interest expense in future periods. For example, if the average amount of short-term debt outstanding was $25 million for the period of one year, a change in interest rates of 1% would result in a change in annual interest expense of approximately $250,000. The average interest rates on the Company’s short-term borrowings and intercompany money pool transactions for the three months ended June 30, 2019 and June 30, 2018 were 3.6% and 3.3%, respectively. The average interest rates on the Company’s short-term borrowings for the six months ended June 30, 2019 and June 30, 2018 were 3.7% and 3.1%, respectively. The average interest rate on the Company’s short-term borrowings for the twelve months ended December 31, 2018 was 3.3%.
 
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COMMODITY PRICE RISK
Although Unitil’s three distribution utilities are subject to commodity price risk as part of their traditional operations, the current regulatory framework within which these companies operate allows for full collection of electric power and natural gas supply costs in rates on a pass-through basis. Consequently, there is limited commodity price risk after consideration of the related rate-making.
Regulatory Matters
Please refer to Note 6 to the Consolidated Financial Statements in Part I, Item 1 of this report for a discussion of Regulatory Matters.
ENVIRONMENTAL MATTERS
Please refer to Note 7 to the Consolidated Financial Statements in Part I, Item 1 of this report for a discussion of Environmental Matters.
 
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UNITIL CORPORATION AND SUBSIDIARY COMPANIES
CONSOLIDATED STATEMENTS OF EARNINGS
(Millions except per share data)
(UNAUDITED)
                                 
 
Three Months Ended
June 30,
   
Six Months Ended
June 30,
 
 
2019
   
2018
   
2019
   
2018
 
Operating Revenues
   
     
     
     
 
Gas
 
$
32.6
    $
34.7
   
$
119.0
    $
121.7
 
Electric
   
51.8
     
48.7
     
116.6
     
106.2
 
Other
   
—  
     
1.1
     
0.9
     
2.4
 
                                 
Total Operating Revenues
   
84.4
     
84.5
     
236.5
     
230.3
 
                                 
Operating Expenses
   
     
     
     
 
Cost of Gas Sales
   
9.3