[GRAPHIC OMITTED]
April 20, 2006
Mr. James Allegretto
Senior Assistant Chief Accountant
United States Securities and Exchange Commission
Division of Corporate Finance
Washington, D.C. 20549-0404
Re: Unitil Corporation
Form 10-K for the calendar year ended December 31, 2005
Filed February 22, 2006
File No. 001-08858
Dear Mr. Allegretto:
Set forth below are the responses of Unitil Corporation (the
"Registrant", "Unitil" or the "Company") to the letter dated March 31, 2006 (the
"Comment Letter") from the Staff (the "Staff") of the Division of Corporation
Finance of the Securities and Exchange Commission (the "Commission") concerning
the Registrant's Annual Report on Form 10-K (the "Form 10-K"), which was filed
with the Commission on February 22, 2006.
For your convenience, the Staff's comments have been set forth in bold
and the numbered paragraphs contained herein correspond to the numbered
paragraphs in the Comment Letter.
Corporate Office
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6 Liberty Lane West
Hampton, NH 03842-1720
Phone: 603-722-0775
Mr. James Allegretto
U.S. Securities and Exchange Commission
April 20, 2006
Page 2
Item 7 Management's Discussion and Analysis
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1. Therm Sales, page 23
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We note from the table provided on page 23 that firm therm sales decreased
in 2004 compared to 2003. We also note that in 2004 and 2003 revenue per
firm therm was $1.24 and $1.15, an increase of 7.8% when comparing 2004 to
2003. Please explain to us how therm sales decreased and revenue per therm
increased.
Response #1:
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On a revenue per firm therm basis, the increase of 7.8% in 2004 from 2003
is attributable to increases in the following components of Total Firm Gas
Revenue: a) Purchased Gas Revenue, b) Gross Gas Sales Margin, also commonly
referred to as Base Revenue and c) Conservation and Load Management
Revenue. Total Firm Gas Revenue per therm increased in 2004 compared to
2003 due to higher rates billed to customers under each of these revenue
components. These increases in rates more than offset the impact of a
decrease in therm sales volumes in the period as discussed below:
a) Higher Purchased Gas revenue represents 4.9% of the increase in
revenue per therm and is due to an increase in the Cost of Gas
Adjustment Charge rate to recover increased gas commodity prices in
2004 compared to 2003. Gas commodity prices increased 17.9% in 2004
compared to 2003.
b) Higher Gross Gas Sales Margin represents 2.1% of the increase in
revenue per therm and is due to higher average gas Base Rates in 2004
compared to 2003 resulting from an increase in rates authorized by
regulators to recover pension costs and postretirement benefits other
than pension costs, as well as differences in the mix of customer
classes (e.g., residential, commercial, industrial) charged for firm
therm consumption.
c) Higher Conservation and Load Management ("C&LM") revenue represents
0.8% of the increase in revenue per therm and is due to an increase in
the C&LM Adjustment Charge rate to recover higher cost associated with
the development, management and delivery of the Company's energy
efficiency programs in 2004 compared to 2003.
In future Management's Discussion and Analysis disclosures, and with due
attention to critical supporting analyses, Registrant will include
additional disclosure about the components contributing to changes in
revenues in the period.
2. Operating Expense, page 24
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We note from your previous and current Form 10-K that Unitil currently has
approximately 310 employees compared to 317 in 2004. Please explain the
reasons for the $0.6 million increase salaries and the $0.5 million
increase in employee benefit costs in 2004.
Mr. James Allegretto
U.S. Securities and Exchange Commission
April 20, 2006
Page 3
Response #2:
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Management assumes that this question should have read "...employee benefit
costs in 2005," based on the amount of cost increases referenced in the
question.
The number of employees disclosed in the Company's Form 10-K represents the
number of employees at December 31 of each year. During the course of each
year, the number of employees can be higher or lower than the year-end
figures. During 2004, the number of employees, as of each month end, ranged
from 310 to 321. During 2005, the number of employees, as of each month
end, ranged from 308 to 318.
The $0.6 million increase in salaries and compensation expenses in 2005
compared to 2004 is due to normal annual increases in salaries for the
approximately 310-317 employees in 2005 of $0.2 million, which is net of
the expense savings from the lower number of employees on average. Other
increases in compensation in 2005 that do not move in a linear relationship
with number of employees were increased expenses associated with the
Company's Management and Employee Incentive Plans of $0.3 million and an
increase associated with the Company's Restricted Stock Plan of $0.1
million.
The $0.5 million increase in employee benefit costs in 2005 compared to
2004 is due to increases in pension and other post retirement benefit costs
of $0.8 million partially offset by decreases in the costs of health
insurance and other benefits of $0.3 million. These costs are also not
directly correlated to the number of active employees.
In future Management's Discussion and Analysis disclosures, and with due
attention to critical supporting analyses, Registrant will include
additional disclosure about the components contributing to changes in costs
in the period.
3. Interest Expense, net, page 26
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Please explain to us the nature of interest on regulatory liabilities.
Please specifically tell us the regulatory liabilities to which it relates
and the amount. We may have further comment.
Response #3:
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Certain reconciling rate mechanisms used by the Company's distribution
operating utilities give rise to regulatory liabilities (and regulatory
assets) on which interest is calculated. The Company operates 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 monthly tracking and
reconciling process will produce either an under-collected or an
over-collected balance of costs. In accordance with the Company's tariff,
interest is accrued on these balances and will produce either interest
income or interest expense. 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.
Mr. James Allegretto
U.S. Securities and Exchange Commission
April 20, 2006
Page 4
These regulatory interest amounts are combined on the Consolidated
Statements of Earnings and also combined within the Interest Expense table
on page 26 of Unitil's Form 10-K for the year-ended December 31, 2005.
Currently, regulatory assets exceed regulatory liabilities so the net
effect is interest income in the table. The total interest expense on
regulatory liabilities for 2005 was $152K and this amount was combined with
interest income on regulatory assets of $2,677K and disclosed as a net
amount of interest income on regulatory assets of $2,525K in the table on
page 26. The primary regulatory liabilities comprising the $152K of
interest expense in 2005 include: Unitil Energy Systems, Inc. ("UES")
Transition Service - $66K, Fitchburg Gas and Electric Light Company
("FG&E") Energy Efficiency - $42K and FG&E Default Service - $12K and other
of $32K.
In the future, the Company will include a separate disclosure of amounts
and an explanation of interest expense on reconciling rate mechanisms.
Note 2 Equity
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4. Restrictions on Retained Earnings, page 58
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We note your disclosure regarding the restrictions on retained earnings for
subsidiaries UES and FG&E. It appears the restrictions wouId require Unitil
to provide condensed financial information. See Regulation S-X Rule
5-04(c), Schedule 1. If our understanding is incorrect, please explain why
you are not required to provide such information.
Response #4:
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Regulation S-X Rule 5-04(c) requires that, when the restricted net assets
of consolidated subsidiaries exceed 25% of consolidated net assets as of
the end of the most recently completed fiscal year, condensed financial
information of the Registrant be included in the filing.
Management's calculations show that the combined restrictions on the net
assets for Unitil's wholly-owned subsidiaries UES and FG&E represent 24.2%
and 24.7% of Unitil's net assets as of December 31, 2005 and December 31,
2004, respectively. Therefore, in accordance with Regulation S-X Rule
504(c), management believes that Unitil is not required to provide
information regarding restrictions on retained earnings and the related
condensed financial information for these periods because the restricted
amounts do not exceed 25% of the Registrant's net assets. In Note 2 to the
Consolidated Financial Statements of the Company in its Form 10-K for the
year ended December 31, 2005, the Company has elected to disclose the
restrictions on retained earnings for UES and FG&E because management
believes that this information would be useful to the reader of the
financial statements and Notes.
Management agrees that, if in future periods these calculations result in
combined restrictions on retained earnings for UES and FG&E that exceed 25%
of the Registrant's net assets, the Company will provide condensed
financial information for the Registrant for the corresponding period(s).
Mr. James Allegretto
U.S. Securities and Exchange Commission
April 20, 2006
Page 5
Note 3 Long-Term Debt. Credit Arrangements. Leases
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5. Leases, page 60
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We are unclear on how the renegotiated lease terms resulted in a change of
classification from a capital lease to an operating lease. In this regard,
please tell us why such lease originally met the criteria for capital lease
classification. If due to the lease terms exceeding 75% of the economic
life, advise us how your original estimated economic life compares with the
initial 22 year plus anticipated renews ranging from 10-25 years. If due to
the 90% test, show us the calculation of fair value at inception and
whether it factored into the useful life of the asset. If so, tell us the
useful life that was assumed at inception.
Response #5:
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The Company's original lease on its service center used by its
Massachusetts distribution operating utility, FG&E, was accounted for under
Statement of Financial Accounting Standards No. 13, ("FAS 13"), Accounting
for Leases as a capital lease. The original lease met the criteria for a
capital lease under paragraph 7.d. of FAS 13; the 90% test. Under paragraph
7.d., when the present value of the lease payments exceeds 90% of the fair
value of the property at lease inception, the lease is classified as a
capital lease. This was the case when the original lease, 22 years at
annual rents ranging from $184,000 to $537,000, began on February 10, 1981.
The project cost of the building in the original lease was $2,700,000. The
useful life of the building without regard to the lease arrangement would
have been 50 years for book accounting purposes.
When the original lease ended on January 31, 2003; the lessor and lessee
renegotiated and entered into a new lease for 10 years at level monthly
payments of approximately $270,000 annually. In the new lease agreement,
the estimated fair value of the property is $2,640,600. The terms of the
new lease agreement do not meet the criteria for classification as a
capital lease under paragraph 7 of FAS 13. As disclosed, the Registrant
accounts for the new lease as an operating lease.
6. FG&E -Electric Division, page 66
------------------------------------
In regards to the investigation by the Massachusetts Department of
Telecommunications and Energy (MDTE) please provide us with more details as
to the nature of the investigation. Please provide the most recent status
of the case along with a detailed analysis of why you believe the outcome
will not have a material effect on the financial statements.
Response #6:
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The nature of this investigation was originally included in Note #6 -
Commitments and Contingencies of the Registrant's Form 10-K filed with the
Commission for the fiscal year ended December 31, 2003 as follows:
In March 2003, the MDTE opened an investigation into FG&E's dealings with
Enermetrix, Inc. (Enermetrix). Enermetrix provides an internet-based energy
auction service that is used by utilities to post their natural gas and
electric power needs for bids. FG&E used the
Mr. James Allegretto
U.S. Securities and Exchange Commission
April 20, 2006
Page 6
Enermetrix Exchange to post its electric default service solicitations in
September 2001 and March 2002, and Enermetrix earned approximately $19,000
in fees from these transactions. In Management's view, these successful
solicitations ultimately resulted in significant lower default service
costs to FG&E's customers. At the time of these solicitations, FG&E's
parent, Unitil Corporation, had an approximately 9% ownership interest in
Enermetrix. The MDTE is investigating whether FG&E is in compliance with
relevant statutes and regulations pertaining to transactions with
affiliated companies and the MDTE's Order setting forth the requirements
for the pricing and procurement of default service. FG&E and the Attorney
General have completed briefing of the case and an MDTE decision is
pending. Management believes the outcome of this matter will not have a
material adverse effect on the financial position of the Company.
As noted in the more current disclosures (Note #6 - Commitments and
Contingencies) in the Registrant's Form 10-K for the fiscal years ended
December 31, 2004 and 2005, the hearing and briefing of the case were
completed in 2003 and a decision is pending from the Massachusetts
Department of Telecommunications and Energy ("MDTE"). As of the date of
this letter, the MDTE has not issued an Order and there has not been any
active dialogue or correspondence between FG&E, the Attorney General or the
MDTE regarding this matter since 2003.
Management believes the outcome of this matter will not have a material
adverse effect on the financial statements of the Company for the following
reasons:
o A favorable outcome is expected. Management does not believe that FG&E
violated the MDTE affiliate rules because the facts of the case (i.e.,
the level of stock ownership, board seats, etc.) do not support the
Attorney General's assertion that Enermetrix was an affiliated
company.
o Neither FG&E nor the Registrant received any direct financial benefit
from this transaction. As noted in the disclosure from the 2003 Form
10-K, the transaction fees (approximately $19,000) were earned by
Enermetrix.
o FG&E complied with the MDTE's affiliate rules and its customers
benefited from this transaction. In FG&E's reply brief, testimony was
filed with the MDTE that indicated FG&E's customers realized savings
of approximately $900,000 due to the 2001 and 2002 solicitations that
were successfully transacted by Enermetrix. FG&E earns no profit on
energy sales to its customers.
As summarized above, management expects a favorable outcome. However, if
the outcome is unfavorable, management does not believe the facts of the
case support a fine or financial penalty that management would consider
material to the consolidated financial statements of the Company.
7. UES, page 67-8
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We assume your revenue recognition policy is based on currently charged
rates and your pending $4.65 million increase request is not being
reflected in revenues. If our understanding is incorrect, please clarify
it. If so, please advise how you will account for any increase retro-active
to January 1, 2006 in the periodic financial statements covering periods
subsequent to that date.
Mr. James Allegretto
U.S. Securities and Exchange Commission
April 20, 2006
Page 7
Response #7:
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The Staff's understanding is correct. As disclosed in the Management
Discussion and Analysis on page 37 and again in Note 1 on page 51 of the
Company's 2005 Form 10-K, regulated utility revenues are recognized based
on rates approved by state and federal regulatory commissions. The New
Hampshire Public Utilities Commission ("NHPUC") has approved UES' request
in its current base rate case for temporary rate relief and any change in
rates will be retroactive to January 1, 2006. Management is currently
assessing the likelihood of an award of an increase in base rates as a
result of the current base rate case. Management is reviewing the
recognition and disclosure of these revenue effects for purposes of the
Company's Form 10-Q reporting. Management is mindful of its obligation to
present intra-period results in conformity with Commission guidelines and
will follow the guidance outlined in Statement of Financial Accounting
Standards No. 16, ("FAS 16") Prior Period Adjustments and Regulation S-X
Rule 10-01(b)(8) and Accounting Principles Board Opinion 28 for Interim
Financial Reporting.
When the amount of revenue to be recognized as a result of the settlement
of the current rate case is determined or can be reasonably estimated; the
Company will record the appropriate adjustments and provide the required
disclosures for prior period adjustments according to paragraphs 13 and 14
of FAS 16. Specifically, if the net prior period adjustment is material;
the Company will file amended Forms 10-Q for the 2006 interim periods
already reported. If the net adjustment is not material, the Company will
disclose the impact on quarterly results in its footnotes in the Annual
Form 10-K.
Note 8 Pensions and Postretirement Benefit Plans
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8. Defined Benefit Pension Plan, page 72
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Please explain the reconciliation rate adjustment mechanism for deferred
pension costs. Contrast it to an automatic rate adjustment used for fuel
costs. If it is not automatic, tell us why such a mechanism makes the
deferred cost probable of recovery.
Response #8:
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Both FG&E's Pension Adjustment Factor ("PAF") and UES' proposed Pension
Adjustment Clause ("PAC") mechanisms are automatic and operate like
reconciliation mechanisms for fuel costs in that each: a) is based on an
approved formulaic rate, b) is derived from actual elements of cost data
incurred prior to recovery, c) include provisions whereby the cost data is
reconciled annually to actual revenues collected, with an associated
reconciliation adjustment included in the subsequent PAF / PAC recovery
period, d) begin with an (deferred) amount already incurred by the utility,
e) is "evergreen" in the sense that each mechanism is intended to continue
indefinitely until cancelled or modified by regulatory action on the part
of the Company or the MDTE / NHPUC, and f) is annually pre-approved subject
to MDTE / NHPUC review.
Mr. James Allegretto
U.S. Securities and Exchange Commission
April 20, 2006
Page 8
9. Defined Benefit Pension Plan, page 72
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We note from your disclosure that the New Hampshire Public Utility
Commission (NHPUC) issued an order denying UES's petition for an accounting
order allowing a reconciling rate mechanism. If you have recorded a
regulatory asset related to this item, please explain to us how such asset
meets the requirements of paragraph 9 of SFAS No. 71 given the NHPUC's
actions.
Response #9:
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The NHPUC Order did not deny the use of a reconciling rate mechanism for
the recovery of pension costs but rather the NHPUC's decision was a
determination that it would only address this issue in the context of a
full rate case. In its order, the NHPUC indicated that the Company had not
demonstrated, based on the limited evidence presented in the petition for
an accounting order, a clear basis to justify approval. The NHPUC analysis
states: " A full examination of its income and expenses will be undertaken
when Unitil files its next base rate case. However, if Unitil believes its
under earnings are significant, it has the discretion to file before
October, 2007." As disclosed, the Company filed a full base rate case on
November 4, 2005, which included a request for recovery of Pension/PBOP
costs through the reconciling mechanism, the PAC. The totality of UES'
regulatory history with the NHPUC regarding this issue taken together with
ratemaking precedent concerning pension cost recovery leads management to
conclude that the pension costs are "probable of recovery". Management
believes that the NHPUC will continue to consider the Company's request for
pension recovery in a reconciling rate mechanism so long as such request is
made in the context of a full rate case proceeding. In particular, based on
two prior NHPUC orders (Order Nos. 24,107 and 24,269), statements from the
NHPUC regarding the standard for recoverability of pension and PBOP costs,
and the UES full rate case request seeking, among other things, recovery of
pension costs, management has determined that the regulatory assets
recorded for deferred pension and PBOP costs at December 31, 2005 are
"probable of recovery" under the requirements of Paragraph 9 of Statement
of Financial Accounting Standards No. 71 ("FAS 71"), Accounting for the
Effects of Certain Types of Regulation.
10. Note 10 Segment Information, page 81
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In future filings please include all of the disclosure requirements of
paragraph 27 of SFAS No. 131 or explain to us why you do not include them.
Response #10:
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The Registrant will include all of the Statement of Financial Accounting
Standards No. 131 ("FAS 131"), "Disclosures about Segments of an Enterprise
and Related Information" disclosure requirements in the Form 10-K Segment
Footnote in future filings, as applicable. Certain of the disclosure
requirements in paragraph 27 of FAS 131 have typically not been applicable
to the Registrant's business.
Mr. James Allegretto
U.S. Securities and Exchange Commission
April 20, 2006
Page 9
Management believes that the Segment Footnote that is included in the
Registrant's Form 10-Q's meets the disclosure requirements for interim
reporting noted in FAS 131 and therefore no additional disclosures need to
be made to the Segment Footnote in the Company's Form 10-Q's.
As management desires to resolve these comments prior to the filing of
its Form 10-Q for the first quarter of 2006, we would appreciate any efforts
that you and other members of the Staff might undertake to get back to us
promptly. If you have any questions regarding these responses, please direct
them to Mark H. Collin, Senior Vice President, Chief Financial Officer &
Treasurer, at (603) 773-6612, or in his absence, Laurence M. Brock, Controller &
Chief Accounting Officer, at (603) 773-6510. Any questions regarding accounting
issues may be directed to Laurence M. Brock, Controller & Chief Accounting
Officer, at (603) 773-6510.
Very truly yours, Very truly yours,
/s/ Mark H. Collin /s/ Laurence M. Brock
Mark H. Collin Laurence M. Brock
Senior Vice President, Controller & Chief Accounting Officer
Chief Financial Officer &
Treasurer