| SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES | NOTE 1
– SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of
Operations
The
Company’s earnings are seasonal and are typically higher in
the first and fourth quarters when customers use natural gas for
heating purposes.
Unitil’s principal business is the local distribution of
electricity in the southeastern seacoast and state capital regions
of New Hampshire and the greater Fitchburg area of north central
Massachusetts, and the local distribution of natural gas in
southeastern New Hampshire, portions of southern and central Maine
and in the greater Fitchburg area of north central Massachusetts.
Unitil has three distribution utility subsidiaries, Unitil Energy,
which operates in New Hampshire, Fitchburg, which operates in
Massachusetts and Northern Utilities, which operates in New
Hampshire and Maine (collectively referred to as the distribution
utilities).
Granite State
is a natural gas transportation pipeline, operating 86 miles of
underground gas transmission pipeline primarily located in Maine
and New Hampshire. Granite State provides Northern Utilities with
interconnection to three major natural gas pipelines and access to
domestic natural gas supplies in the south and Canadian natural gas
supplies in the north. Granite State derives its revenues
principally from the transportation services provided to Northern
Utilities and, to a lesser extent, third-party
marketers.
A fifth
utility subsidiary, Unitil Power, formerly functioned as the full
requirements wholesale power supply provider for Unitil Energy. In
connection with the implementation of electric industry
restructuring in New Hampshire, Unitil Power ceased being the
wholesale supplier of Unitil Energy on May 1, 2003 and
divested of its long-term power supply contracts through the sale
of the entitlements to the electricity associated with various
electric power supply contracts it had acquired to serve Unitil
Energy’s customers.
Unitil also
has three other wholly-owned subsidiaries: Unitil Service; Unitil
Realty; and Unitil Resources. Unitil Service provides, at cost, a
variety of administrative and professional services, including
regulatory, financial, accounting, human resources, engineering,
operations, technology, energy management and management services
on a centralized basis to its affiliated Unitil companies. Unitil
Realty owns and manages the Company’s corporate office in
Hampton, New Hampshire and leases this facility to Unitil Service
under a long-term lease arrangement. Unitil Resources is the
Company’s wholly-owned non-regulated subsidiary. Usource,
Inc. and Usource L.L.C. (collectively, Usource) are wholly-owned
subsidiaries of Unitil Resources. Usource provides brokering and
advisory services to large commercial and industrial customers in
the northeastern United States.
Basis of
Presentation –
Income
Taxes –
Provisions
for income taxes are calculated in each of the jurisdictions in
which the Company operates for each period for which a statement of
earnings is presented. The Company accounts for income taxes in
accordance with the FASB Codification guidance on Income Taxes,
which requires an asset and liability approach for the financial
accounting and reporting of income taxes. Significant judgments and
estimates are required in determining the current and deferred tax
assets and liabilities. The Company’s current and deferred
tax assets and liabilities reflect its best assessment of estimated
future taxes to be paid. In accordance with the FASB Codification,
the Company periodically assesses the realization of its deferred
tax assets and liabilities and adjusts the income tax provision,
the current tax liability and deferred taxes in the period in which
the facts and circumstances which gave rise to the revision become
known.
Cash and
Cash Equivalents –
Allowance
for Doubtful Accounts –
The Allowance
for Doubtful Accounts as of March 31,
2017, March 31, 2016 and December 31, 2016, which
are included in Accounts Receivable, net on the accompanying
unaudited consolidated balance sheets, was as follows:
($
millions)
March 31, December 31,
2017 2016 2016
Allowance for Doubtful
Accounts $ 1.0 $ 1.5 $ 1.1
Accrued
Revenue –
March 31, December 31,
Accrued
Revenue ($ millions) 2017 2016 2016
Regulatory Assets –
Current $ 32.0 $ 33.7 $ 37.9
Unbilled
Revenues 9.3 8.4 11.6
Total Accrued
Revenue $ 41.3 $ 42.1 $ 49.5
Exchange
Gas Receivable –
March 31, December 31,
Exchange
Gas Receivable ($ millions) 2017 2016 2016
Northern
Utilities $ 1.9 $ 6.3 $ 7.8
Fitchburg 0.2 0.5 0.5
Total Exchange Gas
Receivable $ 2.1 $ 6.8 $ 8.3
Gas
Inventory
March 31, December 31,
Gas
Inventory ($ millions) 2017 2016 2016
Natural Gas $ — $ 0.1 $ 0.3
Propane 0.2 0.2 0.2
Liquefied Natural Gas
& Other 0.1 0.1 0.1
Total Gas
Inventory $ 0.3 $ 0.4 $ 0.6
Utility
Plant –
Regulatory
Accounting –
March 31, December 31,
Regulatory
Assets consist of the following ($ millions) 2017 2016 2016
Retirement
Benefits $ 75.7 $ 64.4 $ 75.9
Energy Supply &
Other Regulatory Tracker Mechanisms 27.7 28.2 32.7
Deferred Storm
Charges 8.6 13.8 9.6
Environmental 10.7 11.9 10.8
Income Taxes 7.3 8.3 7.3
Other 5.5 5.3 5.7
Total Regulatory
Assets 135.5 131.9 142.0
Less: Current Portion of
Regulatory Assets (1) 32.0 33.7 37.9
Regulatory Assets
– noncurrent $ 103.5 $ 98.2 $ 104.1
(1)
Reflects amounts included in Accrued Revenue, discussed above,
on the Company’s Consolidated Balance Sheets.
March 31, December 31,
Regulatory
Liabilities consist of the following ($ millions) 2017 2016 2016
Regulatory Tracker
Mechanisms $ 9.2 $ 12.0 $ 6.2
Gas Pipeline Refund (Note
6) 4.3 10.1 6.8
Total Regulatory
Liabilities 13.5 22.1 13.0
Less: Current Portion of
Regulatory Liabilities 12.8 18.8 10.4
Regulatory Liabilities
– noncurrent $ 0.7 $ 3.3 $ 2.6
Generally,
the Company receives a return on investment on its regulated assets
for which a cash outflow has been made. Included in Regulatory
Assets as of March 31, 2017 are $2.5 million of deferred storm
charges to be recovered over the next one and a half years and $8.0
million of environmental costs, rate case costs and other
expenditures to be recovered over varying periods in the next seven
years. Regulators have authorized recovery of these expenditures,
but without a return. Regulatory commissions can reach different
conclusions about the recovery of costs, which can have a material
impact on the Company’s Consolidated Financial Statements.
The Company believes it is probable that its regulated distribution
and transmission utilities will recover their investments in
long-lived assets, including regulatory assets. If the Company, or
a portion of its assets or operations, were to cease meeting the
criteria for application of these accounting rules, accounting
standards for businesses in general would become applicable and
immediate recognition of any previously deferred costs, or a
portion of deferred costs, would be required in the year in which
the criteria are no longer met, if such deferred costs were not
recoverable in the portion of the business that continues to meet
the criteria for application of the FASB Codification topic on
Regulated Operations. If unable to continue to apply the FASB
Codification provisions for Regulated Operations, the Company would
be required to apply the provisions for the Discontinuation of
Rate-Regulated Accounting included in the FASB Codification. In the
Company’s opinion, its regulated operations will be subject
to the FASB Codification provisions for Regulated Operations for
the foreseeable future.
Derivatives –
The Company
has a regulatory approved hedging program for Northern Utilities
designed to fix or cap a portion of its gas supply costs for the
coming years of service. The Company purchases call option
contracts on NYMEX natural gas futures contracts for future winter
period months.
Any gains or
losses resulting from the change in the fair value of these
derivatives are passed through to ratepayers directly through
Northern Utilities’ Cost of Gas Clause. The fair value of
these derivatives is determined using Level 2 inputs (valuations
based on quoted prices in markets that are not active or for which
all significant inputs are observable, either directly or
indirectly), specifically based on the NYMEX closing prices for
outstanding contracts as of the balance sheet date. As a result of
the ratemaking process, the Company records gains and losses
resulting from the change in fair value of the derivatives as
regulatory liabilities or assets, then reclassifies these gains or
losses into Cost of Gas Sales when the gains and losses are passed
through to customers through the Cost of Gas Clause.
As of
March 31, 2017, March 31, 2016 and December 31,
2016 the Company had 1.2 billion, 1.8 billion and 2.0 billion cubic
feet (BCF), respectively, outstanding in natural gas futures and
options contracts under its hedging program.
As of
March 31, 2017 and 2016, the Company’s derivatives that
are not designated as hedging instruments under FASB ASC 815-20
have a fair value of $0.3 million and less than $0.1 million,
respectively.
Investments in Marketable Securities
At
March 31, 2017, March 31, 2016 and December 31,
2016, the fair value of the Company’s investments in these
trading securities, which are recorded on the Consolidated Balance
Sheets in Other Assets, were $3.3 million, $0.7 and $1.9 million,
respectively, as shown in the table below. These investments are
valued based on quoted prices from active markets and are
categorized in Level 1 as they are actively traded and no valuation
adjustments have been applied. Changes in the fair value of these
investments are recorded in Other Expense, net.
March 31, December 31,
Fair Value
of Marketable Securities ($ millions) 2017 2016 2016
Equity Funds $ 1.1 $ 0.4 $ 1.1
Fixed Income
Funds 0.9 0.3 0.8
Cash and
Equivalents 1.3 — —
Total Marketable
Securities $ 3.3 $ 0.7 $ 1.9
Energy
Supply Obligations –
March 31, December 31,
Energy
Supply Obligations ($ millions) 2017 2016 2016
Current:
Exchange Gas
Obligation $ 1.9 $ 6.3 $ 7.8
Renewable Energy
Portfolio Standards 6.8 7.3 3.9
Power Supply Contract
Divestitures 0.3 0.3 0.3
Total Energy Supply
Obligations – Current 9.0 13.9 12.0
Long-Term:
Power Supply Contract
Divestitures 1.2 1.5 1.3
Total Energy Supply
Obligations $ 10.2 $ 15.4 $ 13.3
Exchange Gas
Obligation – Northern Utilities enters into gas exchange
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. The gas inventory related to these agreements is recorded
in Exchange Gas Receivable on the Company’s Consolidated
Balance Sheets while the corresponding obligations are recorded in
Energy Supply Obligations.
Renewable
Energy Portfolio Standards – Renewable Energy Portfolio
Standards (RPS) require retail electricity suppliers, including
public utilities, to demonstrate that required percentages of their
sales are met with power generated from certain types of resources
or technologies. Compliance is demonstrated by purchasing and
retiring Renewable Energy Certificates (REC) generated by
facilities approved by the state as qualifying for REC treatment.
Unitil Energy and Fitchburg purchase RECs in compliance with RPS
legislation in New Hampshire and Massachusetts for supply provided
to default service customers. RPS compliance costs are a supply
cost that is recovered in customer default service rates. Unitil
Energy and Fitchburg collect RPS compliance costs from customers
throughout the year and demonstrate compliance for each calendar
year on the following July 1. Due to timing differences
between collection of revenue from customers and payment of REC
costs to suppliers, Unitil Energy and Fitchburg typically maintain
accrued revenue for RPS compliance which is recorded in Accrued
Revenue with a corresponding liability in Energy Supply Obligations
on the Company’s Consolidated Balance Sheets.
Fitchburg has
entered into long-term renewable contracts for electric energy
and/or renewable energy credits pursuant to Massachusetts
legislation, specifically, the Act Relative to Green Communities of
2008 and the Act Relative to Competitively Priced Electricity
(2012) in the Commonwealth, and the MDPU’s regulations
implementing the legislation. The generating facilities associated
with three of these contracts have been constructed and are
operating. A recent round of long-term renewable energy
procurements was conducted during 2016 and several contracts are
expected to be finalized and submitted to MDPU for approval in
2017. Additional procurements are expected in compliance with the
Act to Promote Energy Diversity (2016). Fitchburg recovers the
costs associated with long-term renewable contracts on a fully
reconciling basis through a MDPU-approved cost recovery
mechanism.
Power Supply
Contract Divestitures – Unitil Energy’s and
Fitchburg’s customers are entitled to purchase their electric
or natural gas supplies from third-party suppliers. In connection
with the implementation of retail choice, Unitil Power, which
formerly functioned as the wholesale power supply provider for
Unitil Energy, and Fitchburg divested their long-term power supply
contracts through the sale of the entitlements to the electricity
sold under those contracts. Unitil Energy and Fitchburg recover in
their rates all the costs associated with the divestiture of their
power supply portfolios and have secured regulatory approval from
the NHPUC and MDPU, respectively, for the recovery of power
supply-related stranded costs. The obligations related to these
divestitures are recorded in Energy Supply Obligations (current
portion) and Other Noncurrent Liabilities (noncurrent portion) on
the Company’s Consolidated Balance Sheets with corresponding
regulatory assets recorded in Accrued Revenue (current portion) and
Regulatory Assets (noncurrent portion).
Recently
Issued Pronouncements –
In April and
March 2016, the FASB issued ASU 2016-10 and ASU 2016-08,
respectively. ASU 2016-10 clarifies the implementation guidance on
licensing and the identification of performance obligations
considerations included in ASU 2014-09. ASU 2016-08 provides
amendments to clarify the implementation guidance on principal
versus agent considerations included in ASU 2014-09. In August
2015, the FASB issued ASU 2015-14, which defers the effective date
of ASU 2014-09. ASU 2014-09 outlines a single comprehensive model
for entities to use in accounting for revenue arising from
contracts with customers and supersedes most current revenue
recognition guidance, including industry-specific guidance. The
effective date of this pronouncement is for fiscal years beginning
after December 15, 2017 with early adoption permitted as of
the original effective date. The Company will implement the
standard in the first quarter of 2018 on a modified retrospective
basis and it is not expected to have a material impact on the
Company’s Consolidated Financial Statements.
In March
2016, the FASB issued ASU 2016-09, which provides for improvements
to employee share-based payment accounting. ASU 2016-09 is
effective for fiscal years, and interim periods within those years,
beginning after December 15, 2016. ASU 2016-09 simplifies
several aspects of the accounting for employee share-based payment
transactions, including the accounting for income taxes,
forfeitures, and statutory tax withholding requirements, as well as
classification in the statement of cash flows. The Company adopted
this new guidance in the first quarter of 2017 and it did not have
an impact on the Company’s Consolidated Financial
Statements.
In February
2016, the FASB issued ASU 2016-02, which replaces the existing
guidance in Accounting Standard Codification 840, Leases. ASU
2016-02 is effective for fiscal years, and interim periods within
those years, beginning after December 15, 2018. ASU 2016-02
requires a dual approach for lessee accounting under which a lessee
would account for leases as finance (also referred to as capital)
leases or operating leases. Both finance leases and operating
leases will result in the lessee recognizing a right-of-use asset
and corresponding lease liability. For finance leases the lessee
would recognize interest expense and amortization of the
right-of-use asset and for operating leases the lessee would
recognize straight-line total lease expense. The Company is
evaluating the impact that this new guidance will have on the
Company’s Consolidated Financial Statements.
In January
2016, the FASB issued Accounting Standards Update (ASU) 2016-01
which addresses certain aspects of recognition, measurement,
presentation and disclosure of financial instruments. A financial
instrument is defined as cash, evidence of ownership interest in a
company or other entity, or a contract that both: (i) imposes
on one entity a contractual obligation either to deliver cash or
another financial instrument to a second entity or to exchange
other financial instruments on potentially unfavorable terms with
the second entity and (ii) conveys to that second entity a
contractual right either to receive cash or another financial
instruments from the first entity or to exchange other financial
instruments on potentially favorable terms with the first entity.
This pronouncement is effective for financial statements issued for
annual periods beginning after December 15, 2017 and interim
periods within those annual periods with earlier application
permitted as of the beginning of the fiscal year of adoption. The
Company is evaluating the impact that this new guidance will have
on the Company’s Consolidated Financial
Statements.
Other than
the pronouncements discussed above, there are no recently issued
pronouncements that the Company has not already adopted or that
have a material impact on the Company.
Subsequent
Events –
On
April 21, 2017, Northern Utilities, Fitchburg and Granite
State, priced $90 million collectively of Senior Unsecured Notes
(Notes) through a private placement marketing process to
institutional investors. Northern Utilities priced $20 million of
Notes due 2027 at 3.52% and $30 million of Notes due 2047 at 4.32%.
Fitchburg priced $10 million of Notes due 2027 at 3.52% and $15
million of Notes due 2047 at 4.32%. Granite State priced $15
million of Notes due 2027 at 3.72%.
Northern
Utilities, Fitchburg and Granite State plan to use the net proceeds
from the offering to repay short-term debt and for general
corporate purposes. Northern Utilities, Fitchburg and Granite State
anticipate closing this long-term financing in the fourth quarter
of 2017.
Northern
Utilities, Fitchburg and Granite State have received initial
commitments from the expected purchasers of the
Notes. However, the issuance of the Notes is subject to
execution of the definitive documentation and funding of the
commitments.
The Notes
offered have not been and will not be registered under the
Securities Act of 1933 (Act), or any state securities laws, and may
not be offered or sold in the United States absent registration or
an applicable exemption from the registration requirements of the
Act and applicable state securities laws. |
