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 Quarter Ended June 30, 2002
Commission File Number1-8858
UNITIL CORPORATION
(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
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 X 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 August 1, 2002 |
Common Stock, No par value | 4,743,696 Shares |
UNITIL CORPORATION AND SUBSIDIARY COMPANIES
FORM 10-Q
For the Three and Six Months Ended June 30, 2002
Table of Contents
Part I. Financial Information | |
Item 1. Financial Statements | |
Consolidated Statements of Earnings - Three and Six Months Ended June 30, 2002 and 2001 | |
Consolidated Balance Sheets, June 30, 2002, June 30, 2001 and December 31, 2001 | |
Consolidated Statements of Cash Flows - Six Months Ended June 30, 2002 and 2001 | |
Notes to Consolidated Financial Statements | |
Item 2. Management's Discussion and Analysis of Results of Operations and Financial Condition | |
Item 3. Quantitative and Qualitative Disclosures About Market Risk | |
Part II. Other Information | |
Item 1. Legal Proceedings | |
Item 5. Other Information - Certification under Sarbanes-Oxley Act | |
Item 6. Exhibits and Reports on Form 8-K | |
Signatures | |
Exhibit 11 - Computation of Earnings per Average Common Share Outstanding | |
PART 1. FINANCIAL INFORMATION
Item 1. Financial Statements
UNITIL CORPORATION AND SUBSIDIARY COMPANIES
CONSOLIDATED STATEMENTS OF EARNINGS
(000's except common shares and per share data)
(UNAUDITED)
Three Months Ended | Six Months Ended | ||||||||||
2002 | 2001 | 2002 | 2001 | ||||||||
Operating Revenues | |||||||||||
Electric | $ | 41,451 | $ | 41,589 | $ | 78,657 | $ | 94,902 | |||
Gas | 3,901 | 3,952 | 10,756 | 15,034 | |||||||
Other | 165 | 78 | 393 | 173 | |||||||
Total Operating Revenues | 45,517 | 45,619 | 89,806 | 110,109 | |||||||
Operating Expenses | |||||||||||
Fuel and Purchased Power | 28,511 | 29,567 | 53,486 | 69,738 | |||||||
Gas Purchased for Resale | 2,139 | 2,227 | 6,022 | 9,869 | |||||||
Operation and Maintenance | 6,218 | 5,439 | 12,116 | 12,629 | |||||||
Depreciation and Amortization | 3,618 | 3,203 | 7,156 | 6,569 | |||||||
Provisions for Taxes: | |||||||||||
Local Property and Other | 1,105 | 1,289 | 2,385 | 2,676 | |||||||
Federal and State Income | 764 | 678 | 1,794 | 1,681 | |||||||
Total Operating Expenses | 42,355 | 42,403 | 82,959 | 103,162 | |||||||
Operating Income | 3,162 | 3,216 | 6,847 | 6,947 | |||||||
(Gain) on Sale of Non-Utility Investments, net of tax (Note 2) | (82) | ||||||||||
----
(82)
----
Other Non-Operating Expenses
60
42
91
88
Income Before Interest Expense
3,184
3,174
6,838
6,859
Interest Expense, Net
1,831
1,722
3,726
3,401
Net Income
1,353
1,452
3,112
3,458
Less: Dividends on Preferred Stock
63
64
127
131
Net Income Applicable to Common Stock
$
1,290
$
1,388
$
2,985
$
3,327
Average Common Shares Outstanding - Basic
4,743,696
4,743,415
4,743,696
4,740,564
Average Common Shares Outstanding - Diluted
4,774,047
4,762,106
4,767,282
4,758,963
Basic and Diluted Earnings Per Share
$
0.27
$
0.29
$
0.63
$
0.70
Dividends Declared Per Share
of Common Stock (Note 3)
$
0.345
$
0.345
$
1.035
$
1.035
(The accompanying notes are an integral part of these statements.)
UNITIL CORPORATION AND SUBSIDIARY COMPANIES
CONSOLIDATED BALANCE SHEETS(000's)
(UNAUDITED) | (AUDITED) | |||||||
June 30, | December 31, | |||||||
2002 | 2001 | 2001 | ||||||
ASSETS: | ||||||||
Utility Plant: | ||||||||
Electric | $ | 188,581 | $ | 178,719 | $ | 183,795 | ||
Gas | 41,806 | 38,312 | 41,287 | |||||
Common | 28,562 | 22,241 | 28,529 | |||||
Construction Work in Progress | 4,080 | 3,376 | 1,887 | |||||
Total Utility Plant | 263,029 | 242,648 | 255,498 | |||||
Less: Accumulated Depreciation | 81,187 | 74,880 | 77,210 | |||||
Net Utility Plant | 181,842 | 167,768 | 178,288 | |||||
Other Property and Investments | 389 | 5,984 | 2,286 | |||||
Current Assets: | ||||||||
Cash | 3,643 | 5,196 | 6,076 | |||||
Accounts Receivable - Less Allowance for | ||||||||
Doubtful Accounts of$579, $589 and $596 | 15,395 | 21,535 | 17,133 | |||||
Materials and Supplies | 2,182 | 2,803 | 2,804 | |||||
Prepayments | 1,881 | 1,557 | 1,889 | |||||
Accrued Revenue | (84) | 2,142 | 1,330 | |||||
Total Current Assets | 23,017 | 33,233 | 29,232 | |||||
Noncurrent Assets: | ||||||||
Regulatory Assets | 145,932 | 157,465 | 149,672 | |||||
Prepaid Pension Costs | 10,815 | 10,334 | 10,712 | |||||
Debt Issuance Costs | 1,785 | 1,774 | 1,826 | |||||
Other Noncurrent Assets | 4,789 | 7,381 | 2,314 | |||||
Total Noncurrent Assets | 163,321 | 176,954 | 164,524 | |||||
TOTAL | $ | 368,569 | $ | 383,939 | $ | 374,330 | ||
(The accompanying notes are an integral part of these statements.)
UNITIL CORPORATION AND SUBSIDIARY COMPANIES
CONSOLIDATED BALANCE SHEETS (Cont.)(000's)
(UNAUDITED) | (AUDITED) | |||||||
June 30, | December 31, | |||||||
2002 | 2001 | 2001 | ||||||
CAPITALIZATION AND LIABILITIES: | ||||||||
Capitalization: | ||||||||
Common Stock Equity | $ | 73,000 | $ | 78,788 | $ | 74,746 | ||
Preferred Stock, Non-Redeemable, Non-Cumulative | 225 | 225 | 225 | |||||
Preferred Stock, Redeemable, Cumulative | 3,350 | 3,465 | 3,384 | |||||
Long-Term Debt, Less Current Portion | 104,350 | 107,568 | 107,470 | |||||
Total Capitalization | 180,925 | 190,046 | 185,825 | |||||
Current Liabilities: | ||||||||
Long-Term Debt, Current Portion | 3,233 | 3,232 | 3,224 | |||||
Capitalized Leases, Current Portion | 864 | 921 | 988 | |||||
Accounts Payable | 16,750 | 21,120 | 20,084 | |||||
Short-Term Debt | 19,500 | 6,300 | 13,800 | |||||
Dividends Declared and Payable | 1,725 | 1,819 | 109 | |||||
Refundable Customer Deposits | 1,385 | 1,307 | 1,393 | |||||
Taxes Payable / (Refundable) | 451 | (670) | (2,432) | |||||
Interest Payable | 1,311 | 1,375 | 1,375 | |||||
Other Current Liabilities | 3,137 | 6,774 | 6,328 | |||||
Total Current Liabilities | 48,356 | 42,178 | 44,869 | |||||
Deferred Income Taxes | 46,434 | 49,854 | 47,113 | |||||
Noncurrent Liabilities: | ||||||||
Power Supply Contract Obligations | 85,142 | 93,061 | 88,779 | |||||
Capitalized Leases, Less Current Portion | 2,569 | 2,802 | 2,945 | |||||
Other Noncurrent Liabilities | 5,143 | 5,998 | 4,799 | |||||
Total Noncurrent Liabilities | 92,854 | 101,861 | 96,523 | |||||
TOTAL | $ | 368,569 | $ | 383,939 | $ | 374,330 | ||
(The accompanying notes are an integral part of these statements.)
UNITIL CORPORATION AND SUBSIDIARY COMPANIES
CONSOLIDATED STATEMENTS OF CASH FLOWS(000's)
(UNAUDITED)
Six Months Ended June 30, | |||||
2002 | 2001 | ||||
Net Cash Flow from Operating Activities: | |||||
Net Income | $ | 3,112 | $ | 3,458 | |
Adjustments to Reconcile Net Income to Cash | |||||
Provided by Operating Activities: | |||||
Depreciation and Amortization | 7,156 | 6,569 | |||
Deferred Taxes Provision | 31 | 788 | |||
Amortization of Investment Tax Credit | (26) | (76) | |||
Gain on Sale of Investment, net | (82) | ---- | |||
Changes in Current Assets and Liabilities: | |||||
Accounts Receivable | 1,738 | (1,478) | |||
Prepayments and other Current Assets | 3,410 | 783 | |||
Accrued Revenue | 1,414 | 7,161 | |||
Accounts Payable | (3,334) | 2,581 | |||
Interest Payable and Other Current Liabilities | (3,263) | 677 | |||
Other, net | (4,003) | (5,205) | |||
Net Cash Provided by Operating Activities |
| 6,153 |
| 15,258 | |
Net Cash Flows from Investing Activities: | |||||
Acquisition of Property, Plant and Equip. | (8,756) | (9,010) | |||
Proceeds from Sale of Electric Generation Assets | ---- | 342 | |||
Proceeds from Sale of Investment, net | 1,535 | ---- | |||
Acquisition of Other Property and Investments | ---- | (535) | |||
Net Cash Used in Investing Activities | (7,221) | (9,203) | |||
Cash Flows from Financing Activities: | |||||
Net Increase (Decrease) in Short-Term Debt | (5,700) | (26,200) | |||
Proceeds from Issuance of Long-Term Debt | ---- | 29,000 | |||
Repayment of Long-Term Debt | (3,111) | (3,102) | |||
Dividends Paid | (3,420) | (3,427) | |||
Issuance of Common Stock | ---- | 281 | |||
Retirement of Preferred Stock | (34) | ---- | |||
Repayment of Capital Lease Obligations | (500) | (471) | |||
Net Cash Flows (Used in) Financing Activities | (1,365) | (3,919) | |||
Net Increase in Cash | (2,433) | 2,136 | |||
Cash at Beginning of Period | 6,076 | 3,060 | |||
Cash at End of Period | $ | 3,643 | $ | 5,196 | |
Supplemental Cash Flow Information: | |||||
| |||||
Interest Paid | $ | 4,718 | $ | 4,412 | |
State Income Taxes Paid (Received) | $ | (33) | $ | 44 | |
(The accompanying notes are an integral part of these statements.)
UNITIL CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Note 1 - Summary of Significant Accounting Policies
Nature of Operations - Unitil Corporation (Unitil or the Company) is registered with the Securities and Exchange Commission (SEC) as a public utility holding company under the Public Utility Holding Company Act of 1935. The following companies are wholly-owned subsidiaries of Unitil: Concord Electric Company (CECo), Exeter & Hampton Electric Company (E&H), Fitchburg Gas and Electric Light Company (FG&E), Unitil Power Corp. (UPC), Unitil Realty Corp. (URC), Unitil Service Corp. (USC), and its non-regulated business unit Unitil Resources, Inc. (URI). Usource, Inc. and Usource L.L.C. (collectively, Usource) are wholly-owned subsidiaries of Unitil Resources, Inc.
Unitil's principal business is the retail sale and distribution of electricity in New Hampshire and the retail sale and distribution of electricity and gas in Massachusetts through its retail distribution subsidiaries, CECo, E&H, and FG&E. The Company's wholesale electric power subsidiary, UPC, principally provides all the electric power supply requirements to CECo and E&H for resale at retail. URI conducts an energy brokering business, as well as related energy consulting and marketing activities through its subsidiary, Usource. Finally, URC and USC provide centralized facilities and operations and management services to support the Unitil system of companies.
With respect to rates and other business and financial matters, CECo and E&H are subject to regulation by the New Hampshire Public Utilities Commission (NHPUC), FG&E is regulated by the Massachusetts Department of Telecommunications & Energy (MDTE), and UPC, CECo, E&H, and FG&E are regulated by the Federal Energy Regulatory Commission (FERC).
The results of operations for the three and six months ended June 30, 2002 and 2001 are not necessarily indicative of the results to be expected for the full year. In the opinion of the Company, the accompanying unaudited consolidated financial statements contain all adjustments (consisting only of normal recurring accruals) necessary to present fairly the consolidated financial position as of June 30, 2002 and 2001 and December 31, 2001; and results of operations for the three and six months ended June 30, 2002 and 2001; and consolidated statements of cash flows for the six months ended June 30, 2002 and 2001.
Reclassifications- Certain amounts previously reported have been reclassified to conform to current period presentation.
Note 2 - Sale of Equity Stake in Enermetrix
On April 11, 2002, Unitil Corporation sold its equity ownership in Enermetrix.com Inc. for cash and improved commercial terms for use of the Enermetrix Software Network. As a result of the sale, the Company will realize approximately $1.4 million in current tax benefits from capital loss carrybacks.
Note 3 - Dividends Declared Per Share
Declaration | Date | Shareholder of | Dividend |
Date | Paid (Payable) | Record Date | Amount |
06/20/02 | 08/15/02 | 08/01/02 | $ 0.345 |
03/21/02 | 05/15/02 | 05/01/02 | $ 0.345 |
01/17/02 | 02/15/02 | 02/01/02 | $ 0.345 |
09/28/01 | 11/15/01 | 11/01/01 | $ 0.345 |
06/28/01 | 08/15/01 | 08/01/01 | $ 0.345 |
03/15/01 | 05/15/01 | 05/01/01 | $ 0.345 |
01/16/01 | 02/15/01 | 02/01/01 | $ 0.345 |
Note 4 - Common Stock
During the second quarter of 2002, the Company did not sell any additional shares of Common Stock in connection with its Dividend Reinvestment and Stock Purchase Plan.
During the second quarter of 2001, the Company sold 5,622 shares of Common Stock, at an average price of $25.43 per share, in connection with its Dividend Reinvestment and Stock Purchase Plan. Net proceeds of $142,973 were used to reduce short-term borrowings.
Note 5 - Preferred Stock
Details on preferred stock at June 30, 2002, June 30, 2001 and December 31, 2001 are shown below:
(Amounts in Thousands)
June 30, | December 31, | |||||||
2002 | 2001 | 2001 | ||||||
Preferred Stock: | ||||||||
Non-Redeemable, Non-Cumulative, | ||||||||
6%, $100 Par Value | $ | 225 | $ | 225 | $ | 225 | ||
Redeemable, Cumulative, | ||||||||
$100 Par Value: | ||||||||
8.70% Series | 215 | 215 | 215 | |||||
5% Dividend Series | 84 | 91 | 91 | |||||
6% Dividend Series | 168 | 168 | 168 | |||||
8.75% Dividend Series | 333 | 333 | 333 | |||||
8.25% Dividend Series | 385 | 385 | 385 | |||||
5.125% Dividend Series | 947 | 973 | 960 | |||||
8% Dividend Series | 1,218 | 1,300 | 1,232 | |||||
Total Redeemable Preferred Stock | 3,350 | 3,465 | 3,384 | |||||
| ||||||||
Total Preferred Stock | $ | 3,575 | $ | 3,690 | $ | 3,609 | ||
Note 6 - Long-term Debt
Details on long-term debt at June 30, 2002, June 30, 2001 and December 31, 2001 are shown below:
(Amounts in Thousands)
June 30, | December 31, | |||||||
2002 | 2001 | 2001 | ||||||
Concord Electric Company: | ||||||||
First Mortgage Bonds: | ||||||||
Series I, 8.49%, due October 14, 2024 | $ | 6,000 | $ | 6,000 | $ | 6,000 | ||
Series J, 6.96%, due September 1, 2028 | 10,000 | 10,000 | 10,000 | |||||
Series K, 8.00%, due May 1, 2031 | 7,500 | 7,500 | 7,500 | |||||
Exeter & Hampton Electric Company: | ||||||||
First Mortgage Bonds: | ||||||||
Series K, 8.49%, due October 14, 2024 | 9,000 | 9,000 | 9,000 | |||||
Series L, 6.96%, due September 1, 2028 | 10,000 | 10,000 | 10,000 | |||||
Series M, 8.00%, due May 1, 2031 | 7,500 | 7,500 | 7,500 | |||||
Fitchburg Gas and Electric Light Company: | ||||||||
Promissory Notes: | ||||||||
8.55% Notes due March 31, 2004 | 6,000 | 9,000 | 9,000 | |||||
6.75% Notes due November 30, 2023 | 19,000 | 19,000 | 19,000 | |||||
7.37% Notes due January 15, 2029 | 12,000 | 12,000 | 12,000 | |||||
7.98% Notes due June 1, 2031 | 14,000 | 14,000 | 14,000 | |||||
Unitil Realty Corp. | ||||||||
Senior Secured Notes: | ||||||||
8.00% Notes Due August 1, 2017 | 6,583 | 6,800 | 6,694 | |||||
Total | 107,583 | 110,800 | 110,694 | |||||
Less: Installments due within one year | 3,233 | 3,232 | 3,224 | |||||
Total Long-term Debt | $ | 104,350 | $ | 107,568 | $ | 107,470 | ||
Note 7 - Segment Information
The following table provides significant segment financial data for the three and six months ended June 30, 2002 and 2001:
Three Months Ended June 30, 2002(000's) | Electric | Gas | Other | Usource | Eliminations | Total |
Revenues | ||||||
External Customers | $ 41,451 | $ 3,901 | $ 7 | $ 158 | $ 45,517 | |
Intersegment | ---- | ---- | 4,676 | ---- | (4,676) | ---- |
Depreciation and Amortization | 2,615 | 462 | 492 | 49 | 3,618 | |
Interest, net | 1,230 | 434 | 166 | 1 | 1,831 | |
Income Taxes | 1,010 | (236) | 44 | (54) | 764 | |
Segment Profit (Loss) | 1,516 | (265) | 121 | (82) | 1,290 | |
Identifiable Segment Assets | 277,715 | 85,053 | 21,474 | 1,393 | (17,066) | 368,569 |
Capital Expenditures | 4,251 | 1,136 | ---- | ---- | 5,387 | |
Three Months Ended June 30, 2001(000's) | ||||||
Revenues | ||||||
External Customers | $ 41,588 | $ 3,952 | $ 7 | $ 72 | $ 45,619 | |
Intersegment | ---- | ---- | 5,048 | ---- | (5,048) | ---- |
Depreciation and Amortization | 2,391 | 401 | 494 | (83) | 3,203 | |
Interest, net | 1,113 | 394 | 254 | (39) | 1,722 | |
Income Taxes | 685 | 18 | 55 | (80) | 678 | |
Segment Profit (Loss) | 1,699 | (245) | 90 | (156) | 1,388 | |
Identifiable Segment Assets | 292,466 | 88,211 | 25,788 | 1,056 | (23,582) | 383,939 |
Capital Expenditures | 1,189 | 1,369 | 489 | 3,047 | ||
Six Months Ended June 30, 2002(000's) | ||||||
Revenues | ||||||
External Customers | $ 78,657 | $ 10,756 | $ 15 | $ 378 | $ 89,806 | |
Intersegment | ---- | ---- | 9,810 | ---- | (9,810) | ---- |
Depreciation and Amortization | 5,168 | 925 | 963 | 100 | 7,156 | |
Interest, net | 2,490 | 888 | 344 | 4 | 3,726 | |
Income Taxes | 1,890 | (29) | 78 | (145) | 1,794 | |
Segment Profit (Loss) | 2,992 | 50 | 163 | (220) | 2,985 | |
Identifiable Segment Assets | 277,715 | 85,053 | 21,474 | 1,393 | (17,066) | 368,569 |
Capital Expenditures | 7,213 | 1,543 | ---- | ---- | 8,756 | |
Six Months Ended June 30, 2001(000's) | ||||||
Revenues | ||||||
External Customers | $ 94,901 | $ 15,034 | $ 15 | $ 159 | $ 110,109 | |
Intersegment | ---- | ---- | 10,072 | ---- | (10,072) | ---- |
Depreciation and Amortization | 4,803 | 802 | 839 | 125 | 6,569 | |
Interest, net | 2,180 | 775 | 449 | (3) | 3,401 | |
Income Taxes | 1,496 | 455 | 95 | (365) | 1,681 | |
Segment Profit (Loss) | 3,428 | 457 | 141 | (699) | 3,327 | |
Identifiable Segment Assets | 292,466 | 88,211 | 25,788 | 1,056 | (23,582) | 383,939 |
Capital Expenditures | 7,012 | 1,661 | 872 | ---- | 9,545 |
Note 8 - Regulatory Matters
The Unitil Companies are regulated by various federal and state agencies, including the Securities and Exchange Commission (SEC), the Federal Energy Regulatory Commission (FERC), and state regulatory authorities with jurisdiction over the utility industry, including the New Hampshire Public Utilities Commission (NHPUC) and the Massachusetts Department of Telecommunications and Energy (MDTE). In recent years, there has been significant legislative and regulatory activity to restructure the utility industry in order to introduce greater competition in the supply and sale of electricity and gas, while continuing to regulate the distribution operations of Unitil's utility operating subsidiaries.
In New Hampshire,Unitil's electric distribution companies, CECo and E&H, filed a comprehensive restructuring proposal with the NHPUC on January 25, 2002. The restructuring proposal, if approved, will go into effect on or before May 1, 2003. Under the restructuring proposal: the Companies' customers will be allowed to choose a competitive energy supplier while electricity delivery services will continue to be provided by Unitil; Unitil will sell its portfolio of electricity supply contracts and recover the residual stranded costs over a period of years; Unitil will offer customers up to a three-year transition service at specified prices and a permanent default service and these services will be procured from the competitive wholesale market.
As part of the restructuring, Unitil is also proposing to combine CECo, E&H, and the remaining functions of UPC into a single distribution utility, Unitil Energy Systems, Inc. As part of the filing, Unitil filed new consolidated tariff and rate schedules for distribution service in NH and is seeking an increase in base rates for distribution service. Increases to base rates are anticipated to take effect on December 1, 2002. Rate levels and rate components applicable to all Unitil customers will change and, while distribution rates may increase, overall rate levels resulting from restructuring are expected to be below levels in effect at the time of filing.
On May 31, 2002, Unitil and all other parties in the proceeding filed an agreement on the procedures for the Company's sale of its power contract portfolio and purchase of Transition and Default service. The Company and parties are in negotiation relative to the settlement of all other issues.
In Massachusetts, FG&E's third annual electric restructuring reconciliation and rate adjustment filing was filed on December 2, 2001. The filing included a recast of its rates from 1998 through 2001 in compliance with the MDTE's Final Order of October 18, 2001 on FG&E's initial reconciliation filing. On December 27, 2001, the MDTE approved the proposed rates for effect on January 1, 2002, subject to further review. The Massachusetts Attorney General's Office (AG) filed testimony in this proceeding in June raising two issues relating to the return earned on deferred transition costs and certain tax calculations. The Company and the Attorney General's office are in negotiation relative to the settlement of these issues.
Rate Proceedings - Prior to 2002, the last formal regulatory filings initiated by the Company to increase base rates for Unitil's retail electric operating subsidiaries occurred in 1985 for CECo, 1984 for FG&E, and 1981 for E&H. The last distribution base rate increase request for Unitil's retail gas operations occurred in 1998. A majority of the Company's electric and gas operating revenues are collected under various periodic rate adjustment mechanisms including fuel, purchased power, energy efficiency, and restructuring-related cost recovery mechanisms. Industry restructuring will continue to change the methods of how certain costs are recovered through the Company's regulated rates and tariffs.
As part of the electric restructuring proposal for Unitil's New Hampshire operations described above, the Company is requesting an increase in base rates for distribution services. As proposed, under the current schedule for the proceeding, new distribution rates will be effective December 1, 2002, but any increase would be more than offset by decreases in power supply related rate components, resulting in an overall rate decrease to the company's New Hampshire retail customers.
On May 17, 2002, FG&E filed proposed changes to its base rates for both the Gas Division and Electric Division. As discussed further below, these changes are a necessary component of its Performance Based Regulation (PBR) Plans and will serve to set appropriate cast off rates for the plans. Following a statutory six-month review and suspension period, new base rates will take effect December 3, 2002. The MDTE's review of the Company's PBR Plans is currently underway.
Performance Based Regulation - On October 29, 1999, the MDTE initiated a proceeding to establish guidelines for service quality standards to be included in PBR plans for all electric and gas distribution utilities in Massachusetts. PBR is a method of setting regulated distribution rates that provides incentives for utilities to control costs while maintaining a high level of service quality. Under PBR, a company's earnings are tied to performance targets whereby penalties can be imposed for deterioration of service quality. MDTE policy is to implement PBR in the context of a base rate case for each distribution company.
The MDTE issued an Order on June 29, 2001, establishing guidelines for implementation of service-quality measurement programs by gas and electric companies operating under PBR. On October 29, 2001, FG&E filed Service Quality Measurement Plans for its Gas and Electric Divisions as required by the MDTE. On December 5, 2001, FG&E received approval of its Service Quality Measurement Plan for its Electric Division, subject to modification and pending the conclusion of the service quality proceeding. The plan for the Gas Division was approved on April 17, 2002.
On April 16, 2002, FG&E filed PBR plans for both its Gas and Electric Divisions. The filing of a Gas PBR plan had been ordered previously by the MDTE in the context of the Final Order in FG&E's 1998 gas rate case. FG&E chose to file an Electric PBR plan concurrently in anticipation of the electric rate case filing discussed above. The PBR plans will be based on the new cast-off distribution rates established through the traditional base rate case process, and will institute service quality measurement standards and penalties as well as procedures for adjusting retail rates to reflect cost inflation and other factors over the term of the PBR plan. The MDTE has not yet initiated their review of these filings.
Note 9 - Environmental Matters
The Company's past and present operations include activities which are subject to extensive federal and state environmental regulations.
Former Electric Generating Station - The Company is investigating environmental conditions at a former electric generating station located at Sawyer Passway, which FG&E sold to WRW, a general partnership, in 1983. Rockware International Corporation (Rockware), an affiliate of WRW, acquired rights to the electric equipment in the building and intended to remove, recondition and sell this equipment. During 1985, Rockware demolished several exterior walls of the generating station in order to facilitate removal of certain equipment. The demolition of the walls and the removal of generating equipment resulted in damage to asbestos containing insulation materials inside the building, which had been intact and encapsulated at the time of the sale of the structure to WRW.
Due to the continuing deterioration of this former electric generating station and Rockware's continued lack of performance regarding clean up of the site, FG&E, in concert with the Massachusetts Department of Environmental Protection (DEP) and the U.S. Environmental Protection Agency (EPA), conducted further testing and survey work during 2001 to ascertain the environmental status of the building. These recent surveys have revealed continued deterioration of the asbestos containing insulation materials in the building. By letter dated May 1, 2002 the EPA notified the Company that it was a Potentially Responsible Party (a "PRP") for remedial activities related to the former electric station site. The letter also notified the Company of planned remedial activities at the site and invited the Company to perform or finance such activities. These activities include: 1) further site characterization, sampling and analysis, 2) further onsite containment of asbes tos contaminated material as determined necessary, 3) identification and segregation of other hazardous materials, and 4) disposal of contaminated materials at an EPA approved disposal facility. The EPA has also informed the Company that if it does not indicate a willingness to finance or perform such actions, it may order the Company to undertake such actions. The Company responded to the EPA and indicated its willingness to perform the remediation. At this time, the Company is uncertain as to the total cost of the further remedial action that will be required by the EPA. However, the Company has liability insurance policies which provide significant coverage for the costs of these types of clean-up efforts. The Company believes that the ultimate resolution of this matter will not have a material adverse impact on the Company's financial position.
Item 2. Management's Discussion and Analysis of Results of Operations and Financial Condition
SAFE HARBOR CAUTIONARY STATEMENT
This report contains forward-looking statements which are subject to the inherent uncertainties in predicting future results and conditions. Certain factors that could cause the actual results to differ materially from those projected in these forward-looking statements include, but are not limited to; variations in weather, changes in the regulatory environment, customers' preferences on energy sources, general economic conditions, increased competition and other uncertainties, all of which are difficult to predict, and many of which are beyond the control of the Company.
RESULTS OF OPERATIONS
Earnings per share were $0.27 for the second quarter of 2002; down $0.02 compared to the second quarter of 2001. Utility Operations contributed $0.29 per share to consolidated results; a decline of $0.04 from last year, while Usource lost $0.02 per share, an improvement of $0.02 from the same period in 2001.
Sales (000's) | ||||||||||||||
Three Months Ended | Six Months Ended | |||||||||||||
kWh Sales | 06/30/02 | 06/30/01 | Change | 06/30/02 | 06/30/01 | Change | ||||||||
Residential | 135,207 | 134,061 | 0.9% | 297,037 | 301,888 | -1.6% | ||||||||
Commercial/Industrial | 252,002 | 243,746 | 3.4% | 493,848 | 495,037 | -0.2% | ||||||||
Total kWh Sales | 387,209 | 377,807 | 2.5% | 790,885 | 796,925 | -0.8% | ||||||||
Firm Therm Sales | ||||||||||||||
Residential | 2,420 | 2,377 | 1.8% | 7,219 | 8,180 | -11.7% | ||||||||
Commercial/Industrial | 2,217 | 2,280 | -2.8% | 6,908 | 8,246 | -16.2% | ||||||||
Total Firms Therm Sales | 4,637 | 4,657 | -0.4% | 14,127 | 16,426 | -14.0% | ||||||||
Segment Information($000's except per share data) | ||||||||||||||
Three Months Ended- 6/30/02 | Six Months Ended- 6/30/02 | |||||||||||||
Utility | Utility | |||||||||||||
Operations | Usource | Total | Operations | Usource | Total | |||||||||
Revenues | $ 45,359 | $ 158 | $ 45,517 | $ 89,428 | $ 378 | $ 89,806 | ||||||||
Segment Profit | 1,372 | (82) | 1,290 | 3,205 | (220) | 2,985 | ||||||||
Earnings per Share | 0.29 | (0.02) | 0.27 | 0.68 | (0.05) | 0.63 | ||||||||
Three Months Ended - 6/30/01 | Six Months Ended - 6/30/01 | |||||||||||||
Utility | Utility | |||||||||||||
Operations | Usource | Total | Operations | Usource | Total | |||||||||
Revenues | $ 45,547 | $ 72 | $ 45,619 | $ 109,950 | $ 159 | $ 110,109 | ||||||||
Segment Profit | 1,544 | (156) | 1,388 | 4,026 | (699) | 3,327 | ||||||||
Earnings per Share | 0.33 | (0.04) | 0.29 | 0.85 | (0.15) | 0.70 | ||||||||
On a year to date basis, diluted earnings were $0.63 per share, a $0.07 decrease from the same period in 2001. Earnings per share from Utility Operations for the first six-month period of 2001 were $0.17 lower than in the same period of 2001, while the loss related to Usource improved by $0.10. The reduction in Utility Operations earnings primarily reflects the impact from the warmest winter on record in New England, where heating degree-days for the 2002 winter were 20% below the prior year.
Total electric kilowatt-hour (kWh) sales volume increased 2.5% in the second quarter of 2002, due to early summer temperatures and increased industrial sales. Residential kWh sales increased 0.9%, while Commercial and Industrial kWh sales increased 3.4%, compared to the same three-month period last year. Total kWh Sales were flat for the six-month period ended June 30, 2002.
Electric revenues decreased 0.3% and 17.1% for the three- and six-months ended June 30, 2002, respectively, compared to the same periods of 2001. These decreases were due to an 8% electric base rate reduction for Fitchburg Gas and Electric Light Company ordered in the third quarter of 2001 by the Massachusetts Department of Telecommunications and Energy (MDTE), as well as a reduction in wholesale commodity fuel prices. The six-month period was also negatively impacted by mild winter weather.
Total Firm Therm gas sales, while flat for the second quarter, decreased 14.0% in the six-month period ended June 30, 2002. This decrease primarily reflects the milder winter heating season compared to the prior year.
Gas revenues, while also flat for the quarter, decreased 28.5% for the six-month period, reflecting lower unit sales and decreased gas commodity wholesale supply prices, compared to the prior year.
Corresponding to the decline in revenues and wholesale energy prices during the second quarter of 2002, Fuel and Purchased Power and Gas Purchased for Resale expenses decreased 3.6% and 4.0%, respectively, from the prior year. Both electric and gas supply costs are collected from customers through periodic cost recovery mechanisms, and therefore, changes in these costs do not affect the Company's net income.
Operation and Maintenance expenses were 14.3% higher in the three-month period ending June 30, 2002, and 4.1% lower in the six-month period ending June 30, 2002, compared to the prior year. The second quarter increase reflects higher costs related to regulatory proceedings, certain costs previously recovered in flow-through revenues now recorded as base expense due to MDTE orders in the third quarter of 2001, as well as increases in salary and benefits, over the same period in 2001. The six-month reduction is primarily the result of the reorganization of the Company's Usource division in early 2001.
In the six-months ended June 30, 2002, Local Property and Other taxes decreased 10.9%, primarily due to cessation of the NH Franchise Tax, offset by the increase in state and local property tax due to capital additions. The lower Franchise Taxes were credited directly to customers. Therefore, changes in this cost did not affect the Company's net income. Interest expense, net, was 9.6% higher in the second quarter of 2002 than the same period last year, primarily due to higher long-term debt balances and reduced interest income on Regulatory Asset balances.
Second quarter losses from our Usource segment decreased by $0.02 per share compared to the same period in 2001. The reduction in Usource losses reflects the Company's refocused operating plan, which significantly lowered operating expenses from prior year, and increased brokerage sales in the Northeast. In the second quarter of 2002, Usource revenues were $158k, compared to $72k in the second quarter of 2001. Revenues for the six-month period were $378k in 2002 and $158k in 2001.
REGULATORY MATTERS
Regulatory Matters is fully discussed in Note 7 to Consolidated Financial Statements
CAPITAL REQUIREMENTS
Capital expenditures for the six months ended June 30, 2002 were approximately $8.8 million. This compares to $9.5 million during the same period last year. Annual capital expenditures for the year 2002 are estimated to be approximately $19.3 million as compared to $19.9 million for 2001. This projection reflects normal capital expenditures for utility system expansions, replacements and other improvements.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Although Unitil's utility operating companies 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 fuel and gas costs in rates. Consequently, there is limited commodity price risk after consideration of the related rate-making. As the utility industry deregulates, the Company will be divesting its commodity-related energy businesses and therefore will be further reducing its exposure to commodity-related risk. There were no material changes to the Company's exposure to interest rate risk from December 31, 2001.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
The Company is involved in legal and administrative proceedings and claims of various types, which arise in the ordinary course of business. In the opinion of the Company's management, based upon information furnished by counsel and others, the ultimate resolution of these claims will not have a material impact on the Company's financial position.
Item 5. Other Information
Certification Under Sarbanes-Oxley Act
Our chief executive officer, chief financial officer and controller have furnished to the SEC the certification with respect to this Report that is required by Section 906 of the Sarbanes-Oxley Act of 2002.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit No. | Description of Exhibit | Reference |
11 | Computation in Support of | Filed herewith |
Earnings Per Average Common Share | ||
(b) Reports on Form 8-K
During the quarter ended June 30, 2002, the Company did not file any reports on Form 8-K.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
UNITIL CORPORATION | |
(Registrant) |
Date: August 13, 2002 | /s/ Anthony J. Baratta, Jr. |
Anthony J. Baratta, Jr. | |
Chief Financial Officer |
Date: August 13, 2002 | /s/ Mark H. Collin |
Mark H. Collin | |
Treasurer |