Item 7. Management’s Discussion and Analysis
Item 7.
Management’s Discussion and Analysis of Financial Condition and Results of Operations (MD&A) (Note references are to the Notes to the Consolidated Financial Statements included in Item 8.)
OVERVIEW
Unitil is a public utility holding company headquartered in Hampton, New Hampshire. Unitil is subject to regulation as a holding company system by the FERC under the Energy Policy Act of 2005.
Unitil’s principal business is the local distribution of electricity and natural gas to 194,275 customers throughout its service territory in the states of New Hampshire, Massachusetts and Maine. Unitil is the parent company of three wholly-owned distribution utilities:
i)
Unitil Energy, which provides electric service in the southeastern seacoast and state capital regions of New Hampshire;
ii)
Fitchburg, which provides both electric and natural gas service in the greater Fitchburg area of north central Massachusetts; and
iii)
Northern Utilities, which provides natural gas service in southeastern New Hampshire and portions of southern and central Maine, including the city of Portland and the Lewiston-Auburn area.
Unitil Energy, Fitchburg and Northern Utilities are collectively referred to as the “distribution utilities.” Together, the distribution utilities serve approximately 107,680 electric customers and 86,595 natural gas customers in their service territories. The distribution utilities are local “wires and pipes” operating companies.
In addition, Unitil is the parent company of Granite State, a natural gas transmission pipeline, regulated by the FERC, 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 North American pipeline supplies.
Unitil had an investment in Net Utility Plant of $1,257.2 million at December 31, 2021. Unitil’s total revenue was $473.3 million in 2021, which 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 affected by changes in the cost of purchased electricity and natural gas. Earnings from Unitil’s utility operations are derived from the return on investment in the three distribution utilities and Granite State.
Unitil previously conducted non-regulated operations principally through Usource, which was wholly-owned by Unitil Resources. The Company divested Usource in the first quarter of 2019. Usource provided energy 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 (Summary of Significant Accounting Policies) to the Consolidated Financial Statements. The Company’s other subsidiaries include Unitil Service, which provides, at cost, a variety of
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administrative and professional services to Unitil’s affiliated companies, and Unitil Realty, which owns and manages Unitil’s corporate office building and property located in Hampton, New Hampshire. Unitil’s consolidated net income includes the earnings of the holding company and these subsidiaries.
Regulation
Unitil is subject to comprehensive regulation by federal and state regulatory authorities. Unitil and its subsidiaries are subject to regulation as a holding company system by the FERC under the Energy Policy Act of 2005 with regard to certain bookkeeping, accounting and reporting requirements. Unitil’s utility operations related to wholesale and interstate energy business activities are also regulated by the FERC. Unitil’s distribution utilities are subject to regulation by the applicable state public utility commissions, with regard to their rates, issuance of securities and other accounting and operational matters: Unitil Energy is subject to regulation by the NHPUC; Fitchburg is subject to regulation by the MDPU; and Northern Utilities is regulated by the NHPUC and 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, financial position, and cash flows.
Unitil’s distribution utilities deliver electricity and/or natural gas to all customers in their service territories, at rates established under traditional cost of service regulation. Under this regulatory structure, Unitil’s distribution utilities are provided the opportunity to 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 also may 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.
Most of Unitil’s customers have the opportunity to purchase their electricity or natural gas supplies from third-party energy suppliers. Many of Unitil’s distribution utilities’ largest C&I customers purchase their electricity or gas supply from third-party suppliers, while most small C&I customers, as well as residential customers, purchase their electricity or gas supply from the distribution utilities under regulated rates and tariffs. Unitil’s distribution utilities purchase electricity or natural gas from unaffiliated wholesale energy suppliers and recover the actual approved costs of these supplies on a pass-through basis, through reconciling rate mechanisms that are periodically adjusted.
Also see Regulatory Matters
in this section and Note 7 (Commitments and Contingencies) to the accompanying Consolidated Financial Statements for additional information on rates and regulation.
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 the current portion of 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 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.
RESULTS OF OPERATIONS
The following discussion of the Company’s financial condition and results of operations should be read in conjunction with the accompanying Consolidated Financial Statements and the accompanying Notes to Consolidated Financial Statements included in Part II, Item 8 of this report.
The Company continues to respond to the coronavirus pandemic by taking steps to mitigate the potential risks posed by its spread. The Company’s electric and gas utility distribution operating systems have continued to provide service to customers without disruption due to the coronavirus pandemic through the date of this filing. The Company has implemented its Crisis Response Plan to address specific aspects of
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the coronavirus pandemic. The Crisis Response Plan guides emergency response, business continuity, and the precautionary measures being taken on behalf of employees and the public. The Company has initiated extra precautions to protect employees who work in the field and for employees who continue to work in operations, distribution and corporate facilities. The Company has implemented social distancing and work from home policies, where appropriate. The Company continues to implement strong physical and cyber-security measures to ensure that its systems remain functional in order to serve both operational needs with a remote workforce and to help ensure uninterrupted service to customers.
The extent to which the coronavirus pandemic affects the Company’s financial condition, results of operations, and cash flows will depend on future developments, that are highly uncertain and cannot be predicted with confidence, including the duration of the outbreak, new information that may emerge concerning the severity of the coronavirus pandemic, and the actions to contain the coronavirus pandemic or treat its effect, among others. In particular, the continued spread of the coronavirus could adversely affect the Company’s business, including (i) by disrupting the Company’s employees and contractors ability to provide ongoing services to the Company, (ii) by reducing customer demand for electricity or gas, or (iii) by reducing the supply of electricity or gas, each of which could have an adverse effect on the Company’s financial condition, results of operations, and cash flows.
The Company’s results of operations reflect the seasonal nature of the gas business. Annual gas revenues are substantially realized during the heating season as a result of higher sales of 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 results of operations. Sales of electricity are generally less sensitive to weather than 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 gas GAAP gross margins and gas adjusted gross margins (a non-GAAP financial measure) are derived from a higher percentage of fixed billing components, including customer charges. Therefore, future gas revenues and gas adjusted gross margin will be less affected by the seasonal nature of the gas business. In addition, approximately 27% and 11% of the Company’s total annual electric and gas sales volumes, respectively, are decoupled and changes in sales to existing customers do not affect GAAP gross margin and adjusted gross margin.
On August 6, 2021, the Company issued and sold 800,000 shares of its common stock at a price of $50.80 per share in a registered public offering (Offering). The Company’s net increase to Common Equity and Cash proceeds from the Offering was approximately $38.6 million. The proceeds were used to make equity capital contributions to the Company’s regulated utility subsidiaries, to repay debt and for other general corporate purposes.
As part of the Offering, the Company granted the underwriters a 30-day option to purchase additional shares. The underwriters exercised the option and purchased an additional 120,000 shares of the Company’s common stock on September 8, 2021. The Company’s net increase to Common Equity and Cash proceeds from the exercise of the option was approximately $5.9 million. The proceeds were used to make equity capital contributions to the Company’s regulated utility subsidiaries, to repay debt and for other general corporate purposes. Overall, the results of operations and earnings for the year ended December 31, 2021 reflect the higher number of average shares outstanding.
The Company analyzes operating results using Electric and Gas Adjusted Gross Margins, which are non-GAAP financial measures. Electric Adjusted Gross Margin is calculated as Total Electric Operating Revenue less Cost of Electric Sales. Gas Adjusted Gross Margin is calculated as Total Gas Operating Revenues less Cost of Gas Sales. The Company’s management believes Electric and Gas Adjusted Gross Margins provide useful information to investors regarding profitability. Also, the Company’s management believes Electric and Gas Adjusted Gross Margins are important financial measures to analyze revenue from the Company’s ongoing operations because the approved cost of electric and gas sales are tracked, reconciled and passed through directly to customers in electric and gas tariff rates, resulting in an equal and offsetting amount reflected in Total Electric and Gas Operating Revenue.
In the following tables the Company has reconciled Electric and Gas Adjusted Gross Margin to GAAP Gross Margin, which we believe to be the most comparable GAAP financial measure. GAAP Gross Margin
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is calculated as Revenue less Cost of Sales, and Depreciation and Amortization. The Company calculates Electric and Gas Adjusted Gross Margin as Revenue less Cost of Sales. The Company believes excluding Depreciation and Amortization, which are period costs and not related to volumetric sales, is a meaningful financial measure to inform investors of the Company’s profitability from electric and gas sales in the period.
Twelve Months Ended December 31, 2021 ($ millions)
Electric
Gas
Non-Regulated
and Other
Total
Total Operating Revenue
$
248.5
$
224.8
$
—
$
473.3
Less: Cost of Sales
(151.1
)
(91.7
)
—
(242.8
)
Less: Depreciation and Amortization
(25.9
)
(32.6
)
(1.0
)
(59.5
)
GAAP Gross Margin
71.5
100.5
(1.0
)
171.0
Depreciation and Amortization
25.9
32.6
1.0
59.5
Adjusted Gross Margin
$
97.4
$
133.1
$
—
$
230.5
Twelve Months Ended December 31, 2020 ($ millions)
Electric
Gas
Non-Regulated
and Other
Total
Total Operating Revenue
$
227.2
$
191.4
$
—
$
418.6
Less: Cost of Sales
(134.3
)
(68.8
)
—
(203.1
)
Less: Depreciation and Amortization
(23.8
)
(29.8
)
(0.9
)
(54.5
)
GAAP Gross Margin
69.1
92.8
(0.9
)
161.0
Depreciation and Amortization
23.8
29.8
0.9
54.5
Adjusted Gross Margin
$
92.9
$
122.6
$
—
$
215.5
Twelve Months Ended December 31, 2019 ($ millions)
Electric
Gas
Non-Regulated
and Other
Total
Total Operating Revenue
$
233.9
$
203.4
$
0.9
$
438.2
Less: Cost of Sales
(142.0
)
(81.2
)
—
(223.2
)
Less: Depreciation and Amortization
(22.6
)
(28.5
)
(0.9
)
(52.0
)
GAAP Gross Margin
69.3
93.7
—
163.0
Depreciation and Amortization
22.6
28.5
0.9
52.0
Adjusted Gross Margin
$
91.9
$
122.2
$
0.9
$
215.0
Electric GAAP Gross Margin was $71.5 million in 2021, an increase of $2.4 million compared to 2020. The increase was driven by higher rates and customer growth of $4.5 million, partially offset by higher depreciation and amortization expense of $2.1 million.
Electric GAAP Gross Margin was $69.1 million in 2020, a decrease of $0.2 million compared to 2019. The decrease reflects an unfavorable effect of $0.8 million attributed to the combined net effect of lower Commercial and Industrial (C&I) sales and higher Residential sales associated with the coronavirus pandemic, and higher depreciation and amortization of $1.2 million, partially offset by higher rates of $1.4 million and the positive combined effect of customer growth and warmer summer weather of $0.4 million.
Gas GAAP Gross Margin was $100.5 million in 2021, an increase of $7.7 million compared to 2020. The increase was driven by higher rates and customer growth of $9.4 million, and $1.1 million from the favorable effect of colder weather during the peak heating season in 2021, which the Company defines as the months of January—April, and November—December, partially offset by higher depreciation and amortization of $2.8 million.
Gas GAAP Gross Margin was $92.8 million in 2020, a decrease of $0.9 million compared to 2019. The decrease was driven by unfavorable effects of $4.4 million from lower sales due to warmer weather in
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2020, $2.1 million attributed to lower sales primarily associated with the economic slowdown caused by the coronavirus pandemic, and higher depreciation and amortization of $1.3 million. These decreases were partially offset by higher rates of $5.1 million and customer growth of $1.8 million.
Net Income and EPS Overview
2021 Compared to 2020
—
The Company’s Net Income was $36.1 million, or $2.35 in Earnings Per Share (EPS), for the year ended December 31, 2021, an increase of $3.9 million in Net Income, or $0.20 in EPS, compared to 2020. The Company’s earnings in 2021 reflect higher Electric and Gas Adjusted Gross Margins (a non-GAAP financial measure), partially offset by higher operating expenses. Also, EPS in 2021 reflects the sale of 920,000 common shares in the third quarter of 2021.
Electric Adjusted Gross Margin (a non-GAAP financial measure) was $97.4 million in 2021, an increase of $4.5 million compared with 2020. The increase was driven by higher rates and customer growth of $4.5 million.
Electric kilowatt-hour (kWh) sales increased 2.2% in 2021 compared to 2020. Sales to Residential customers increased 0.5% and sales to C&I customers increased 3.5% in 2021 compared to 2020. The increase in sales to Residential customers principally reflects positive customer growth. The increase in sales to C&I customers reflects customer growth and increased usage due to improving economic conditions. As of December 31, 2021, the number of electric customers served increased by approximately 600 over the previous year.
Gas Adjusted Gross Margin (a non-GAAP financial measure) was $133.1 million in 2021, an increase of $10.5 million compared to 2020. The increase was driven by higher rates and customer growth of $9.4 million, and $1.1 million from the favorable effect of colder weather during the peak heating season in 2021.
Gas therm sales increased 3.3% in 2021 compared to 2020. Sales to Residential customers decreased 0.7% and sales to C&I customers increased 4.4% in 2021 compared to 2020. The overall increase in gas therm sales reflects customer growth and colder weather in the peak heating season. As of December 31, 2021, the number of gas customers served increased by approximately 1,000, including seasonal accounts, over the previous year. Based on weather data collected in the Company’s gas service areas, on average there were 0.4% fewer Effective Degree Days (EDD) in 2021 compared to 2020 and 8.2% fewer EDD compared to normal. However, there were 3.4% more EDD in the peak heating season in 2021 compared to the same period in 2020. The Company estimates that weather-normalized gas therm sales, excluding decoupled sales, were 2.8% higher in 2021 compared to 2020.
Operation and Maintenance (O&M) expenses increased $3.0 million in 2021 compared to 2020, reflecting higher labor costs of $1.6 million and higher utility operating costs of $1.4 million.
Depreciation and Amortization expense increased $5.0 million in 2021 compared to 2020, reflecting additional depreciation associated with higher levels of utility plant in service and higher amortization.
Taxes Other Than Income Taxes increased $0.6 million in 2021 compared to 2020, reflecting higher payroll taxes and higher local property taxes on higher utility plant in service.
Interest Expense, Net increased $1.8 million in 2021 compared to 2020 primarily reflecting higher interest on long-term debt and lower interest income, partially offset by lower rates on lower levels of short-term debt.
Other Expense (Income), Net decreased $0.6 million in 2021 compared to 2020, reflecting lower retirement benefit and other costs.
Federal and State Income Taxes increased $1.3 million in 2021 compared to 2020, reflecting higher pre-tax earnings in the current period.
In 2021, Unitil’s annual common dividend was $1.52 per share, representing an unbroken record of quarterly dividend payments since trading began in Unitil’s common stock. At its January 2022 meeting, the
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Unitil Corporation Board of Directors declared a quarterly dividend on the Company’s common stock of $0.39 per share, an increase of $0.01 per share on a quarterly basis, resulting in an increase in the effective annualized dividend rate to $1.56 per share from $1.52 per share.
2020 Compared to 2019
—
The Company’s Net Income was $32.2 million, or $2.15 in Earnings Per Share, for the year ended December 31, 2020, a decrease of $12.0 million, or $0.82 per share, compared to 2019. In the first quarter of 2019, the Company recognized a one-time net gain of $9.8 million, or $0.66 per share, on the Company’s divestiture of its non-regulated business subsidiary, Usource. The Company’s earnings in 2020 reflect higher Electric and Gas Adjusted Gross Margins (a non-GAAP financial measure) and higher operating expenses. The Company estimates that warmer than normal weather negatively affected Net Income by approximately $3.1 million, or $0.20 per share, in 2020. Additionally, the Company estimates that the coronavirus pandemic negatively affected Net Income by approximately $1.4 million, or $0.09 per share, in 2020.
Electric Sales, Revenues and Adjusted Gross Margin
Kilowatt-hour Sales
—
Unitil’s total electric kWh sales increased 2.2% in 2021 compared to 2020. Sales to Residential customers increased 0.5% and sales to C&I customers increased 3.5% in 2021 compared to 2020. The increase in sales to Residential customers principally reflects positive customer growth. The increase in sales to C&I customers reflects customer growth and increased usage due to improving economic conditions. As of December 31, 2021, the number of electric customers served increased by approximately 600 over the previous year. Sales margins derived from decoupled unit sales (representing approximately 27% of total annual sales volume) are not sensitive to changes in kWh sales.
Unitil’s total electric kWh sales in 2020 were essentially on par with 2019. Sales to Residential customers increased 6.5% and sales to C&I customers decreased 4.5% in 2020 compared to 2019. The increase in sales to Residential customers reflects higher consumption by Residential customers due to the coronavirus pandemic and warmer summer weather in 2020 compared to 2019, which resulted in higher use of air conditioning, and customer growth. As of December 31, 2020, the number of electric customers served increased by 948 over the previous year. These positive effects on 2020 electric kWh sales were partially offset by the warmer winter weather in 2020 which adversely affected the usage of electricity for heating purposes. The decrease in sales to C&I customers reflects lower usage as a result of the economic slowdown caused by the coronavirus pandemic, and the warmer winter weather in 2020, partially offset by customer growth. Based on weather data collected in the Company’s electric service areas, there were 37.9% more CDD in 2020, on average, compared to 2019.
The following table details total kWh sales for the last three years by major customer class:
kWh Sales (millions)
Change
2021 vs. 2020
2020 vs. 2019
2021
2020
2019
kWh
%
kWh
%
Residential
694.2
690.6
648.2
3.6
0.5
%
42.4
6.5
%
Commercial & Industrial
936.8
905.3
947.5
31.5
3.5
%
(42.2
)
(4.5
%)
Total kWh Sales
1,631.0
1,595.9
1,595.7
35.1
2.2
%
0.2
—
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Electric Operating Revenues and Electric Adjusted Gross Margin
—The following table details Total Electric Operating Revenue and Electric Adjusted Gross Margin for the last three years by major customer class:
Electric Operating Revenues and Electric Adjusted Gross Margin
(millions)
Change
2021 vs. 2020
2020 vs. 2019
2021
2020
2019
$
%
$
%
Electric Operating Revenue:
Residential
$
140.8
$
134.7
$
133.8
$
6.1
4.5
%
$
0.9
0.7%
Commercial & Industrial
107.7
92.5
100.1
15.2
16.4
%
(7.6
)
(7.6%)
Total Electric Operating Revenue
$
248.5
$
227.2
$
233.9
$
21.3
9.4
%
$
(6.7
)
(2.9%)
Cost of Electric Sales
$
151.1
$
134.3
$
142.0
$
16.8
12.5
%
$
(7.7
)
(5.4%)
Electric Adjusted Gross Margin
$
97.4
$
92.9
$
91.9
$
4.5
4.8
%
$
1.0
1.1%
Electric Adjusted Gross Margin (a non-GAAP financial measure) was $97.4 million in 2021, an increase of $4.5 million compared with 2020. The increase was driven by higher rates and customer growth of $4.5 million.
The increase in Total Electric Operating Revenue of $21.3 million, or 9.4%, in 2021 compared to 2020 reflects higher cost of electric sales, which are tracked and reconciled costs as a pass-through to customers, and higher sales of electricity.
Electric Adjusted Gross Margin (a non-GAAP financial measure) was $92.9 million in 2020, an increase of $1.0 million compared with 2019. The increase reflects higher rates of $1.4 million and the positive combined effect of customer growth and warmer summer weather of $0.4 million, partially offset by an unfavorable effect of $0.8 million attributed to the combined net effect of lower C&I sales and higher Residential sales associated with the coronavirus pandemic.
The decrease in Total Electric Operating Revenue of $6.7 million, or 2.9%, in 2020 compared to 2019 reflects lower cost of electric sales, which are tracked and reconciled costs as a pass-through to customers, partially offset by higher sales of electricity.
Gas Sales, Revenues and Adjusted Gross Margin
Therm Sales
—Unitil’s total gas therm sales increased 3.3% in 2021 compared to 2020. Sales to Residential customers decreased 0.7% and sales to C&I customers increased 4.4% in 2021 compared to 2020. The overall increase in gas therm sales reflects customer growth and colder weather in the peak heating season. As of December 31, 2021, the number of gas customers served increased by approximately 1,000, including seasonal accounts, over the previous year. Based on weather data collected in the Company’s gas service areas, on average there were 0.4% fewer EDD in 2021 compared to 2020 and 8.2% fewer EDD compared to normal. However, there were 3.4% more EDD in the peak heating season in 2021 compared to the same period in 2020. The Company estimates that weather-normalized gas therm sales, excluding decoupled sales, were 2.8% higher in 2021 compared to 2020. Sales margin derived from decoupled unit sales (representing approximately 11% of total annual therm sales volume) is not sensitive to changes in gas therm sales.
Unitil’s total therm sales of natural gas decreased 7.5% in 2020 compared to 2019. Sales to Residential and C&I customers decreased 6.9% and 7.6%, respectively in 2020 compared to 2019. The decrease in overall gas therm sales in the Company’s service areas reflects warmer weather in 2020 compared to 2019, as well as lower sales to C&I customers, primarily in the second, third and fourth quarters, due to the economic slowdown caused by the coronavirus pandemic. These negative effects on 2020 gas therm sales were partially offset by customer growth. As of December 31, 2020, the number of gas customers served increased by 1,663, including seasonal accounts, over the previous year. Based on weather data collected in the Company’s gas service areas, there were 8.2% fewer EDD in 2020, on average, compared to 2019 and 8.0% fewer EDD compared to normal. The Company estimates that weather-normalized gas therm sales, excluding decoupled sales, were 1.6% lower in 2020 compared to 2019.
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The following table details total therm sales for the last three years, by major customer class:
Therm Sales (millions)
Change
2021 vs. 2020
2020 vs. 2019
2021
2020
2019
Therms
%
Therms
%
Residential
44.4
44.7
48.0
(0.3
)
(0.7
%)
(3.3
)
(6.9
%)
Commercial & Industrial
177.5
170.1
184.1
7.4
4.4
%
(14.0
)
(7.6
%)
Total Therm Sales
221.9
214.8
232.1
7.1
3.3
%
(17.3
)
(7.5
%)
Gas Operating Revenues and Adjusted Gross Margin
—
The following table details total Gas Operating Revenue and Gas Adjusted Gross Margin for the last three years by major customer class:
Gas Operating Revenues and Gas Adjusted Gross Margin
(millions)
Change
2021 vs. 2020
2020 vs. 2019
2021
2020
2019
$
%
$
%
Gas Operating Revenue:
Residential
$
90.6
$
78.0
$
81.2
$
12.6
16.2
%
$
(3.2
)
(3.9%)
Commercial & Industrial
134.2
113.4
122.2
20.8
18.3
%
(8.8
)
(7.2%)
Total Gas Operating Revenue
$
224.8
$
191.4
$
203.4
$
33.4
17.5
%
$
(12.0
)
(5.9%)
Cost of Gas Sales
$
91.7
$
68.8
$
81.2
$
22.9
33.3
%
$
(12.4
)
(15.3%)
Gas Adjusted Gross Margin
$
133.1
$
122.6
$
122.2
$
10.5
8.6
%
$
0.4
0.3%
Gas Adjusted Gross Margin (a non-GAAP financial measure) was $133.1 million in 2021, an increase of $10.5 million compared to 2020. The increase was driven by higher rates and customer growth of $9.4 million, and $1.1 million from the favorable effect of colder weather during the peak heating season in 2021.
The increase in Total Gas Operating Revenues of $33.4 million, or 17.5%, in 2021 compared to 2020 reflects higher cost of gas sales, which are tracked and reconciled costs as a pass-through to customers, and higher gas sales volumes.
Gas Adjusted Gross Margin (a non-GAAP financial measure) was $122.6 million in 2020, an increase of $0.4 million compared to 2019. The increase was driven by higher rates of $5.1 million and customer growth of $1.8 million, largely offset by unfavorable effects of $4.4 million from lower sales due to warmer weather in 2020, and $2.1 million attributed to lower sales primarily associated with the economic slowdown caused by the coronavirus pandemic.
The decrease in Total Gas Operating Revenues of $12.0 million, or 5.9%, in 2020 compared to 2019 reflects lower cost of gas sales, which are tracked and reconciled costs as a pass-through to customers, and lower sales volumes.
Operating Revenue—Other
Total Other Operating Revenue (See “Other Operating Revenue—Non-regulated” in Note 1 to the accompanying Consolidated Financial Statements) is comprised of revenues from the Company’s non-regulated energy brokering business, Usource, which was divested in the first quarter of 2019 (See “Divestiture of Non-Regulated Business Subsidiary” in Note 1 to the accompanying Consolidated Financial Statements). Usource’s revenues were primarily derived from fees and charges billed to suppliers as customers take delivery of energy from those suppliers under term contracts brokered by Usource. Usource’s revenues were $0.9 million in 2019.
Operating Expenses
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
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efficiency programs. Cost of Electric Sales increased $16.8 million, or 12.5%, in 2021 compared to 2020. This increase reflects higher sales of electricity and higher wholesale electricity prices, partially offset by an increase in the amount of electricity purchased by customers directly from third-party suppliers. 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.
In 2020, Cost of Electric Sales decreased $7.7 million, or 5.4%, compared to 2019. This decrease reflects lower wholesale electricity prices, partially offset by slightly higher sales of electricity and a decrease in the amount of electricity purchased by customers directly from third-party suppliers.
Cost of Gas Sales
—
Cost of Gas Sales includes the cost of natural gas purchased to supply the Company’s total gas supply requirements and spending on energy efficiency programs. Cost of Gas Sales increased $22.9 million, or 33.3%, in 2021 compared to 2020. This increase reflects higher gas sales and higher wholesale gas commodity prices, partially offset by an increase in the amount of gas purchased by customers directly from third-party suppliers. 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.
In 2020, Cost of Gas decreased $12.4 million, or 15.3%, compared to 2019. This decrease reflects lower wholesale gas commodity prices and lower gas sales, partially offset by a decrease in the amount of gas purchased by customers directly from third-party suppliers.
Operation and Maintenance
—
O&M expense includes electric and gas utility operating costs, and the operating costs of the Company’s non-regulated business activities. Total O&M expenses increased $3.0 million, or 4.6% in 2021 compared to 2020, reflecting higher labor costs of $1.6 million and higher utility operating costs of $1.4 million.
In 2020, total O&M expenses decreased $1.5 million, or 2.2% compared to 2019. The decrease includes $0.4 million of lower operating costs attributed to Usource operations incurred in the first quarter of 2019. The change in O&M expenses also reflects lower labor costs of $1.3 million, partially offset by higher utility operating costs of $0.2 million. The lower labor costs reflect lower employee benefit costs.
Depreciation and Amortization
—
Depreciation and Amortization expense increased $5.0 million, or 9.2%, in 2021 compared to 2020, reflecting additional depreciation associated with higher levels of utility plant in service and higher amortization.
In 2020, Depreciation and Amortization expense increased $2.5 million, or 4.8%, compared to 2019, reflecting increased depreciation on higher levels of utility plant in service and higher amortization.
Taxes Other Than Income Taxes—
Taxes Other Than Income Taxes increased $0.6 million, or 2.5%, in 2021 compared to 2020, reflecting higher payroll taxes and higher local property taxes on higher utility plant in service.
In 2020, Taxes Other Than Income Taxes increased $1.2 million, or 5.3%, compared to 2019, reflecting higher local property taxes on higher utility plant in service of $1.2 million as well as the absence in 2020 of $0.6 million in property tax abatements recognized in 2019. This increase was partially offset by lower payroll taxes in 2020 reflecting the recognition of $0.6 million of payroll tax credits associated with the CARES Act in 2020.
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 (See Note 4 (Debt and Financing Arrangements) to the accompanying Consolidated Financial Statements). Certain reconciling rate mechanisms used by the Company’s distribution utilities give rise to regulatory assets and regulatory liabilities on which interest is calculated.
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Interest Expense, Net increased $1.8 million, or 7.6%, in 2021 compared to 2020 primarily reflecting higher interest on long-term debt and lower interest income, partially offset by lower rates on lower levels of short-term debt.
Interest Expense, Net increased $0.1 million, or 0.4%, in 2020 compared to 2019 reflecting higher levels of long-term debt, largely offset by lower rates on short-term debt and lower interest expense on regulatory liabilities.
Other (Income) Expense, Net
Other Expense (Income), Net decreased $0.6 million, or 11.5% in 2021 compared to 2020, reflecting lower retirement benefit and other costs.
Other Expense (Income), Net changed from income of $8.6 million in 2019 to expense of $5.2 million in 2020, 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 in the first quarter of 2019 and $0.4 million of other costs in 2020.
Provision for Income Taxes
Federal and State Income Taxes increased $1.3 million in 2021 compared to 2020, reflecting higher pre-tax earnings in the current period.
Federal and State Income Taxes decreased $3.6 million in 2020 compared to 2019, primarily reflecting lower pre-tax earnings in the current period.
LIQUIDITY, COMMITMENTS AND 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.
On August 6, 2021, the Company issued and sold 800,000 shares of its common stock at a price of $50.80 per share in a registered public offering (Offering). The Company’s net increase to Common Equity and Cash proceeds from the Offering was approximately $38.6 million and was used to make equity capital contributions to the Company’s regulated utility subsidiaries, to repay debt and for other general corporate purposes.
As part of the Offering, the Company granted the underwriters a 30-day over-allotment option to purchase additional shares. The underwriters exercised the over-allotment option and purchased an additional 120,000 shares of the Company’s common stock on September 8, 2021. The Company’s net increase to Common Equity and Cash proceeds from the over-allotment sales was approximately $5.9 million and was used to make equity capital contributions to the Company’s regulated utility subsidiaries, to repay debt and for other general corporate purposes.
The Company and its subsidiaries are individually and collectively members of the Unitil Cash Pool (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. At December 31, 2021 and December 31, 2020, the Company and all of its subsidiaries were in compliance with the regulatory requirements governing participation in the Cash Pool.
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On July 25, 2018, the Company entered into a Second Amended and Restated Credit Agreement (Credit Facility) with a syndicate of lenders, which amended and restated in its entirety the Company’s prior credit agreement, dated as of October 4, 2013, as amended. The Credit Facility extends to July 25, 2023, subject to two one-year extensions 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 (LIBOR) plus 1.125%. The terms of the current credit facility allow for a comparable successor rate to be used if the one-month LIBOR rate becomes unavailable. The Company believes that a change to a new rate will not have a material effect on its financial position, operating results, or cash flows. Provided there is no event of default, the Company may increase the borrowing limit under the Credit Facility by up to $50 million.
The Company utilizes the Credit Facility for cash management purposes related to its short-term operating activities. Total gross borrowings were $239.1 million and $248.9 million for the years ended December 31, 2021 and December 31, 2020, respectively. Total gross repayments were $229.7 million and $252.8 million for the years ended December 31, 2021 and December 31, 2020, respectively. The following table details the borrowing limits, amounts outstanding and amounts available under the revolving Credit Facility as of December 31, 2021 and December 31, 2020:
Revolving Credit Facility (millions)
December 31,
2021
2020
Limit
$
120.0
$
120.0
Short-Term Borrowings Outstanding
$
64.1
$
54.7
Letters of Credit Outstanding
$
—
$
0.1
Available
$
55.9
$
65.2
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, Unitil’s and its subsidiaries’ ability to permit liens or incur indebtedness, and restrictions on Unitil’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 to Unitil 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 Company is monitoring the coronavirus pandemic, and does not believe the pandemic will adversely affect its access to capital and funding sources, or its planned capital expenditures. The Company believes its future operating cash flows, its available borrowing capacity, and its access to private and public capital markets for the issuance of long-term debt and equity securities will be sufficient to meet its working capital and capital investment needs.
The only financial covenant in the Credit Facility provides that Unitil’s Funded Debt to Capitalization (as each term is defined in the Credit Facility) cannot exceed 65%, tested on a quarterly basis. At December 31, 2021 and December 31, 2020, 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 (Debt and Financing Arrangements.)
Issuance of Long-Term Debt
—On December 18, 2020, Unitil Realty Corp. entered into a loan agreement in the amount of $4.7 million at 2.64%, with a maturity date of December 18, 2030. Less than $0.1 million of costs associated with this loan have been recorded as a reduction to the proceeds. Unitil Realty Corp. used the net proceeds from this loan for general corporate purposes.
On September 15, 2020, Northern Utilities issued $40 million of Notes due 2040 at 3.78%. Fitchburg issued $27.5 million of Notes due 2040 at 3.78%. Unitil Energy issued $27.5 million of Bonds due 2040 at 3.58%. Northern Utilities, Fitchburg and Unitil Energy used the net proceeds from these offerings to repay short-term debt and for general corporate purposes. Approximately $0.5 million of costs associated with these issuances have been recorded as a reduction to Long-Term Debt for presentation purposes on the Consolidated Balance Sheets.
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On December 18, 2019, Unitil Corporation issued $30 million of Notes due 2029 at 3.43%. Unitil Corporation used the net proceeds from this offering to repay short-term debt and for general corporate purposes. Approximately $0.2 million of costs associated with these issuances have been recorded as a reduction to Long-Term Debt for presentation purposes on the Consolidated Balance Sheets.
On September 12, 2019, Northern Utilities issued $40 million of Notes due 2049 at 4.04%. Northern Utilities used the net proceeds from this offering to repay short-term debt and for general corporate purposes. Approximately $0.2 million of costs associated with these issuances have recorded as a reduction to against Long-Term Debt for presentation purposes on the Consolidated Balance Sheets.
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 believes it has sufficient sources of working capital to fund its operations.
Contractual Obligations
The Company and its subsidiaries have material obligations for payment of principal and interest on its long-term debt as well as for operating and capital leases that are discussed in Note 4 (Debt and Financing Arrangements).
The Company and its subsidiaries have material energy supply commitments that are discussed in Note 6 (Energy Supply) and Note 7 (Commitments and Contingencies) to the accompanying Consolidated Financial Statements. Cash outlays for the purchase of electricity and natural gas to serve customers are subject to reconciling recovery through periodic changes in rates, with carrying charges on deferred balances. From year to year, there are likely to be timing differences associated with the cash recovery of such costs, creating under- or over-recovery situations at any point in time. Rate recovery mechanisms are typically designed to collect the under-recovered cash or refund the over-collected cash over subsequent periods of less than one year.
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 December 31, 2021, there were approximately $ 0.7 million of guarantees outstanding with a duration of less than one year.
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 $8.3 million and $5.4 million of natural gas storage inventory at December 31, 2021 and 2020, respectively, related to these asset management agreements. The amount of natural gas inventory released in December 2021, which was payable in January 2022, was $1.6 million and was recorded in Accounts Payable at December 31, 2021. The amount of natural gas inventory released in December 2020, which was payable in January 2021, was $1.0 million and was recorded in Accounts Payable at December 31, 2020.
Benefit Plan Funding
The Company, along with its subsidiaries, made cash contributions to its Pension Plan in the amounts of $4.1 million and $4.7 million in 2021 and 2020, respectively. The Company, along with its subsidiaries, contributed $8.9 million and $4.2 million to Voluntary Employee Benefit Trusts (VEBTs) in 2021 and 2020, respectively. The Company, along with its subsidiaries, expects to continue to make contributions to
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its Pension Plan and the VEBTs in 2022 and future years at least at minimum required amounts. The Company may also make additional discretionary contributions. See Note 9 (Retirement Benefit Plans) to the accompanying Consolidated Financial Statements.
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. As of December 31, 2021, there were approximately $0.7 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.
Cash Flows
Unitil’s utility operations, taken as a whole, are seasonal in nature and subject to seasonal fluctuations in cash flows. The tables below summarize the major sources and uses of cash (in millions) for 2021 and 2020.
2021
2020
Cash Provided by Operating Activities
$
107.8
$
75.7
Cash Provided by Operating Activities
—
Cash Provided by Operating Activities was $107.8 million in 2021, an increase of $32.1 million compared to 2020.
Cash flow from Net Income, adjusted for the total of non-cash charges was $106.4 million in 2021 compared to $96.0 million in 2020, an increase of $10.4 million. The change to Net Income is primarily attributable to increases in natural electric and gas sales margin and customer growth. The increase in depreciation and amortization of $5.0 million in 2021 compared to 2020 reflects higher depreciation on higher utility plant in service. The increase in the deferred tax provision of $1.5 million in 2021 compared to 2020 is primarily driven by higher tax repairs and tax depreciation.
Changes in working capital items resulted in a $6.2 million source of cash in 2021 compared to a ($15.3) million use of cash in 2020, representing an increase of $21.5 million. The change in working capital in 2021 compared to 2020 is primarily related to the change in accounts payable and accrued revenue and is reflective of the effect of the current macroeconomic environment on business and operating conditions.
Deferred Regulatory and Other Charges increased by $6.6 million in 2021 compared to 2020, primarily driven by changes in Regulatory Assets and Liabilities, and the change in Other, net in 2021 compared to 2020 was ($6.4) million.
2021
2020
Cash Used in Investing Activities
$
(115.0
)
$
(122.6
)
Cash Used in Investing Activities
—
Cash Used in Investing Activities was ($115.0) million in 2021 compared to ($122.6) million in 2020, a decrease of $7.6 million. The lower spending in 2021 is primarily related to the timing of normal utility capital expenditures for electric and gas utility system additions. The Company’s projected capital spending range for 2022 is $135 million to $145 million.
2021
2020
Cash Provided by Financing Activities
$
7.7
$
47.7
Cash Provided by Financing Activities
—
Cash Provided by Financing Activities was $7.7 million in 2021 compared to cash provided of $47.7 million in 2020. The lower cash provided from financing activities in 2021 compared to 2020 of ($40.0) million is primarily attributable to the higher proceeds from
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the issuance of common stock, net of $44.4 million, and short-term debt of $13.3 million, and lower proceeds from long-term debt of ($99.7) million. Other changes in financing activities in 2021 total a source of $2.0 million.
FINANCIAL COVENANTS AND RESTRICTIONS
The agreements under which the Company and its subsidiaries issue long-term debt contain various covenants and restrictions. These agreements do not contain any covenants or restrictions pertaining to the maintenance of financial ratios or the issuance of short-term debt. These agreements do contain covenants relating to, among other things, the issuance of additional long-term debt, cross-default provisions, business combinations and covenants restricting the ability to (i) pay dividends, (ii) incur indebtedness and liens, (iii) merge or consolidate with another entity or (iv) sell, lease or otherwise dispose of all or substantially all assets. See Note 4 (Debt and Financing Arrangements) to the accompanying Consolidated Financial Statements.
Unitil’s 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, Unitil’s and its subsidiaries’ ability to permit liens or incur indebtedness, and restrictions on Unitil’s ability to merge or consolidate with another entity or change its line of business. The affirmative and negative covenants under the Credit Facility apply to Unitil 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 Unitil’s Funded Debt to Capitalization (as each term is defined in the Credit Facility) cannot exceed 65%, tested on a quarterly basis. At December 31, 2021 and December 31, 2020, the Company was in compliance with the covenants contained in the Credit Facility in effect on that date.
The Company and its subsidiaries are currently in compliance with all such covenants in these debt instruments.
DIVIDENDS
Unitil’s annual common dividend was $1.52 per common share in 2021, $1.50 per common share in 2020, and $1.48 per share in 2019. Unitil’s dividend policy is reviewed periodically by the Board of Directors. Unitil has maintained an unbroken record of quarterly dividend payments since trading began in Unitil’s common stock. At its January 2022 meeting, the Unitil Corporation Board of Directors declared a quarterly dividend on the Company’s common stock of $0.39 per share, an increase of $.01 per share on a quarterly basis, resulting in an increase in the effective annualized dividend rate to $1.56 from $1.52. The amount and timing of all dividend payments are subject to the discretion of the Board of Directors and will depend upon business conditions, results of operations, financial conditions and other factors. In addition, the ability of the Company’s subsidiaries to pay dividends or make distributions to Unitil, and, therefore, Unitil’s ability to pay dividends, depends on, among other things:
•
the actual and projected earnings and cash flow, capital requirements and general financial condition of the Company’s subsidiaries;
•
the prior rights of holders of existing and future preferred stock, mortgage bonds, long-term notes and other debt issued by the Company’s subsidiaries;
•
the restrictions on the payment of dividends contained in the existing loan agreements of the Company’s subsidiaries and that may be contained in future debt agreements of the Company’s subsidiaries, if any; and
•
limitations that may be imposed by New Hampshire, Massachusetts and Maine state regulatory agencies.
In addition, before the Company can pay dividends on its common stock, it must satisfy its debt obligations and comply with any statutory or contractual limitations. See Financial Covenants and Restrictions
in this report, as well as Note 4 (Debt and Financing Arrangements) to the accompanying Consolidated Financial Statements.
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LEGAL PROCEEDINGS
The Company is involved in legal and administrative proceedings and claims of various types, including those which arise in the ordinary course of business. The Company believes, based upon information furnished by counsel and others, that the ultimate resolution of these claims will not have a material effect on its financial position, operating results or cash flows. Refer to “Legal Proceedings” in Note 7 (Commitments and Contingencies) of the Consolidated Financial Statements for a discussion of legal proceedings.
REGULATORY MATTERS
See Note 7 (Commitments and Contingencies) to the Consolidated Financial Statements.
CRITICAL ACCOUNTING POLICIES
The preparation of the Company’s Consolidated 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 subjective and/or complex judgments about the effect 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. The following is a summary of the Company’s most critical accounting policies, which are defined as those policies where judgments or uncertainties could materially affect the application of those policies. For a complete discussion of the Company’s significant accounting policies, refer to the financial statements and Note 1 (Summary of Significant Accounting Policies).
Regulatory Accounting
—
The Company’s principal business is the distribution of electricity and natural gas by the three distribution utilities: Unitil Energy, Fitchburg and Northern Utilities. Unitil Energy and Fitchburg are subject to regulation by the FERC. Fitchburg is also regulated by the MDPU, Unitil Energy is regulated by the NHPUC, and Northern Utilities is regulated by the MPUC and NHPUC. Granite State, the Company’s natural gas transmission pipeline, is regulated by the FERC. Accordingly, the Company uses the Regulated Operations guidance as set forth in the Financial Accounting Standards Board Accounting Standards Codification (FASB Codification). In accordance with the FASB Codification, the Company has recorded Regulatory Assets and Regulatory Liabilities which will be recovered from customers, or applied for customer benefit, in accordance with rate provisions approved by the applicable public utility regulatory commission.
The FASB Codification specifies the economic effects that result from the cause and effect relationship of costs and revenues in the rate-regulated environment and the related accounting for a regulated enterprise. Revenues intended to cover certain costs may be recorded either before or after the costs are incurred. If regulation provides assurance that incurred costs will be recovered in the future, these costs would be recorded as deferred charges or “regulatory assets.” If revenues are recorded for costs that are expected to be incurred in the future, these revenues would be recorded as deferred credits or “regulatory liabilities.”
The Company’s principal regulatory assets and liabilities are included on the Company’s Consolidated Balance Sheet and a summary of the Company’s Regulatory Assets is provided in Note 1 (Summary of Significant Accounting Policies) to the consolidated financial statements. Generally, the Company receives a return on investment on its regulated assets for which a cash outflow has been made. Regulatory commissions can reach different conclusions about the recovery of costs, which can have a material effect 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
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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.
Utility Revenue Recognition
—
Utility revenues are recognized according to regulations and are based on rates and charges approved by federal and state regulatory commissions. Revenues related to the sale of electric and gas service are recorded when service is rendered or energy is delivered to customers. However, the determination of energy sales to individual customers is based on the reading of their meters, which occurs on a systematic basis throughout the month. At the end of each calendar month, amounts of energy delivered to customers since the date of the last meter reading are estimated and the corresponding unbilled revenues are calculated. These unbilled revenues are estimated each month based on estimated customer usage by class and applicable customer rates, taking into account current and historical weather data, assumptions pertaining to metering patterns, billing cycle statistics, and other estimates and assumptions.
Retirement Benefit Obligations
—
The Company sponsors the Unitil Corporation Retirement Plan (Pension Plan), which is a defined benefit pension plan. Effective January 1, 2010, the Pension Plan was closed to new non-union employees. For union employees, the Pension Plan was closed on various dates between December 31, 2010 and June 1, 2013, depending on the various Collective Bargaining Agreements of each union. The Company also sponsors a non-qualified retirement plan, the Unitil Corporation Supplemental Executive Retirement Plan (SERP), covering certain executives of the Company, and an employee 401(k) savings plan. Additionally, the Company sponsors the Unitil Employee Health and Welfare Benefits Plan (PBOP Plan), primarily to provide health care and life insurance benefits to retired employees.
The FASB Codification requires companies to record on their balance sheets as an asset or liability the overfunded or underfunded status of their retirement benefit obligations (RBO) based on the projected benefit obligation. The Company has recognized a corresponding Regulatory Asset, to recognize the future collection of these obligations in electric and gas rates. The Company’s RBO and reported costs of providing retirement benefits are dependent upon numerous factors resulting from actual plan experience and assumptions of future experience. The Company has made critical estimates related to actuarial assumptions, including assumptions of expected returns on plan assets, future compensation, health care cost trends, and appropriate discount rates. The Company’s RBO is affected by actual employee demographics, the level of contributions made to the plans, earnings on plan assets, and health care cost trends. Changes made to the provisions of these plans may also affect current and future costs. If these assumptions were changed, the resulting change in benefit obligations, fair values of plan assets, funded status and net periodic benefit costs could have a material effect on the Company’s financial statements. The discount rate assumptions used in determining retirement plan costs and retirement plan obligations are based on an assessment of current market conditions using high quality corporate bond interest rate indices and pension yield curves. For the year ended December 31, 2021, a change in the discount rate of 0.25% would have resulted in an increase or decrease of approximately $679,000 in the Net Periodic Benefit Cost for the Pension Plan. Similarly, a change of 0.50% in the expected long-term rate of return on plan assets would have resulted in an increase or decrease of approximately $646,000 in the Net Periodic Benefit Cost for the Pension Plan. (See Note 9 (Retirement Benefit Plans) to the accompanying Consolidated Financial Statements.)
Income Taxes
—
The Company is subject to Federal and State income taxes as well as various other business taxes. This process involves estimating the Company’s current tax liabilities as well as assessing temporary and permanent differences resulting from the timing of the deductions of expenses and recognition of taxable income for tax and book accounting purposes. These temporary differences result in deferred tax assets and liabilities, which are included in the Company’s Consolidated Balance Sheets. The Company accounts for income tax assets, liabilities and expenses in accordance with the FASB Codification
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guidance on Income Taxes. The Company classifies penalties and interest expense related to income tax liabilities as income tax expense and interest expense, respectively, in the Consolidated Statements of Earnings.
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 deferred tax assets and liabilities reflect its best assessment of estimated future taxes to be paid. The Company 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 that gave rise to the revision become known.
Commitments and Contingencies
—
The Company’s accounting policy is to record and/or disclose commitments and contingencies in accordance with the FASB Codification as it applies to an existing condition, situation, or set of circumstances involving uncertainty as to possible loss that will ultimately be resolved when one or more future events occur or fail to occur. As of December 31, 2021, the Company is not aware of any material commitments or contingencies other than those disclosed in the Significant Contractual Obligations table in the “Contractual Obligations” section and the Commitments and Contingencies footnote to the Company’s consolidated financial statements.
Refer to “Recently Issued Pronouncements” in Note 1 of the Notes of Consolidated Financial Statements for information regarding recently issued accounting standards.
For additional information regarding the foregoing matters, see Note 1 (Summary of Significant Accounting Policies), Note 6 (Energy Supply), Note 7 (Commitments and Contingencies), Note 8 (Income Taxes), and Note 9 (Retirement Benefit Plans) to the Consolidated Financial Statements.