NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Operations
Unitil Corporation (Unitil or the Company) is a public
utility holding company. Unitil and its subsidiaries are subject to regulation as a holding company system by the Federal Energy Regulatory Commission (FERC) under the Energy Policy Act of 2005. The following companies are wholly-owned subsidiaries
of Unitil: Unitil Energy Systems, Inc. (Unitil Energy), Fitchburg Gas and Electric Light Company (Fitchburg), Northern Utilities, Inc. (Northern Utilities), Granite State Gas Transmission, Inc. (Granite State), Unitil Power Corp. (Unitil Power),
Unitil Realty Corp. (Unitil Realty), Unitil Service Corp. (Unitil Service) and its non-regulated business unit Unitil Resources, Inc. (Unitil Resources). Usource Inc. and Usource L.L.C. are subsidiaries of Unitil Resources.
The Companys earnings are seasonal and are typically higher in the first and fourth quarters when customers use natural gas for heating purposes.
Unitils 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 Energys 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 Companys corporate office in Hampton, New Hampshire and leases this facility to Unitil Service
under a long-term lease arrangement. Unitil Resources is the Companys 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
The
accompanying unaudited Consolidated Financial Statements of Unitil have been prepared in accordance with the instructions to Form 10-Q and include all of the information and footnotes required by generally accepted accounting principles. In the
opinion of
24
management, all adjustments considered necessary for a fair presentation have been included and are of a normal and recurring nature. The results of operations for the three and nine months ended
September 30, 2016 are not necessarily indicative of results to be expected for the year ending December 31, 2016. For further information, please refer to Note 1 of Part II to the Consolidated Financial Statements Summary of
Significant Accounting Policies of the Companys Form 10-K for the year ended December 31, 2015, as filed with the Securities and Exchange Commission (SEC) on January 28, 2016, for a description of the Companys Basis of
Presentation. Certain reclassifications of prior year data were made in the accompanying financial statements. These reclassifications were made to conform to the current year presentation.
Income Taxes
The Company is subject to Federal and State income taxes as well as various other business taxes. This process involves estimating the Companys 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 Companys Consolidated Balance Sheets. The Company accounts for income tax assets, liabilities and expenses in accordance with the FASB Codification guidance on Income Taxes. The Company classifies penalty
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 Companys 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.
In the first quarter of 2016, the Company adopted ASU 2015-17 which simplifies the presentation of deferred income taxes in a classified
statement of financial position. Current generally accepted accounting principles (GAAP) require an entity to separate deferred income tax liabilities and assets into current and noncurrent amounts in a classified statement of financial position.
ASU 2015-17 amends current GAAP to require that deferred tax liabilities and assets be classified as noncurrent in a classified statement of financial position.
For all periods presented in this Form 10-Q for the quarter ended September 30, 2016, deferred income taxes are reported as Deferred Income Taxes in the Noncurrent Liabilities
section on the Consolidated Balance Sheets. Prior to adoption, the Company reported deferred income taxes in either the Current Assets or Current Liabilities and Other Noncurrent Assets or Noncurrent
Liabilities sections on the Consolidated Balance Sheets, depending on whether the net current deferred income taxes and net noncurrent deferred income taxes were in an asset or liability position, respectively. The change in presentation for
the quarter ended September 30, 2016 resulted in a reduction of both Current Assets and Noncurrent Liabilities for all prior periods presented.
Cash and Cash Equivalents
Cash and Cash Equivalents includes all cash and cash equivalents to which the Company has legal title. Cash equivalents include short-term investments with original
maturities of three months or less and interest bearing deposits. The Companys cash and cash equivalents are held at financial institutions and at times may exceed federally insured limits. The Company has not experienced any losses in such
accounts. Under the Independent System OperatorNew England (ISO-NE) Financial Assurance Policy (Policy),
25
Unitils subsidiaries Unitil Energy, Fitchburg and Unitil Power are required to provide assurance of their ability to satisfy their obligations to ISO-NE. Under this Policy, Unitils
subsidiaries provide cash deposits covering approximately 2-1/2 months of outstanding obligations, less credit amounts that are based on the Companys credit rating. As of September 30, 2016, September 30, 2015 and
December 31, 2015, the Unitil subsidiaries had deposited $3.5 million, $2.9 million and $2.3 million, respectively to satisfy their ISO-NE obligations.
Allowance for Doubtful Accounts
The Company recognizes a provision for doubtful accounts each month based upon the Companys experience in collecting electric and gas utility service
accounts receivable in prior years. At the end of each month, an analysis of the delinquent receivables is performed which takes into account an assumption about the cash recovery of delinquent receivables. The analysis also calculates the amount of
written-off receivables that are recoverable through regulatory rate reconciling mechanisms. The Companys distribution utilities are authorized by regulators to recover the costs of their energy commodity portion of bad debts through rate
mechanisms. Also, the electric and gas divisions of Fitchburg are authorized to recover through rates past due amounts associated with hardship accounts that are protected from shut-off. Evaluating the adequacy of the Allowance for Doubtful
Accounts requires judgment about the assumptions used in the analysis, including the level of customers enrolling in payment plans with the Company. It has been the Companys experience that the assumptions it has used in evaluating the
adequacy of the Allowance for Doubtful Accounts have proven to be reasonably accurate.
The Allowance for Doubtful Accounts as of
September 30, 2016, September 30, 2015 and December 31, 2015, which is included in Accounts Receivable, net on the accompanying unaudited consolidated balance sheets, was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
($ millions)
|
|
|
|
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2016
|
|
|
2015
|
|
|
2015
|
|
Allowance for Doubtful Accounts
|
|
$
|
1.2
|
|
|
$
|
2.0
|
|
|
$
|
1.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accrued Revenue
Accrued Revenue includes the current portion of Regulatory Assets and unbilled revenues.
The following table shows the components of Accrued Revenue as of September 30, 2016, September 30, 2015 and December 31, 2015.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
December 31,
|
|
Accrued Revenue ($ millions)
|
|
2016
|
|
|
2015
|
|
|
2015
|
|
Regulatory Assets Current
|
|
$
|
28.0
|
|
|
$
|
22.6
|
|
|
$
|
26.8
|
|
Unbilled Revenues
|
|
|
7.5
|
|
|
|
6.2
|
|
|
|
11.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Accrued Revenue
|
|
$
|
35.5
|
|
|
$
|
28.8
|
|
|
$
|
38.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exchange Gas Receivable
Northern Utilities and Fitchburg have gas exchange and storage agreements whereby
natural gas purchases during the months of April through October are delivered to a third party. The third party delivers natural gas back to the Company during the months of November through March. The exchange and storage gas volumes are recorded
at weighted average cost. The following table shows the components of Exchange Gas Receivable as of September 30, 2016, September 30, 2015 and December 31, 2015.
26
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
December 31,
|
|
Exchange Gas Receivable ($ millions)
|
|
2016
|
|
|
2015
|
|
|
2015
|
|
Northern Utilities
|
|
$
|
9.3
|
|
|
$
|
9.9
|
|
|
$
|
10.3
|
|
Fitchburg
|
|
|
0.5
|
|
|
|
0.7
|
|
|
|
0.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Exchange Gas Receivable
|
|
$
|
9.8
|
|
|
$
|
10.6
|
|
|
$
|
11.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gas Inventory
The Company uses the weighted average cost methodology to value natural gas inventory. The
following table shows the components of Gas Inventory as of September 30, 2016, September 30, 2015 and December 31, 2015.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
December 31,
|
|
Gas Inventory ($ millions)
|
|
2016
|
|
|
2015
|
|
|
2015
|
|
Natural Gas
|
|
$
|
0.3
|
|
|
$
|
0.3
|
|
|
$
|
0.3
|
|
Propane
|
|
|
0.2
|
|
|
|
0.2
|
|
|
|
0.3
|
|
Liquefied Natural Gas & Other
|
|
|
0.1
|
|
|
|
0.1
|
|
|
|
0.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Gas Inventory
|
|
$
|
0.6
|
|
|
$
|
0.6
|
|
|
$
|
0.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Utility Plant
The cost of additions to Utility Plant and the cost of renewals and betterments are
capitalized. Cost consists of labor, materials, services and certain indirect construction costs, including an allowance for funds used during construction (AFUDC). The costs of current repairs and minor replacements are charged to appropriate
operating expense accounts. The original cost of utility plant retired or otherwise disposed of is charged to the accumulated provision for depreciation. The Company includes in its mass asset depreciation rates, which are periodically reviewed as
part of its ratemaking proceedings, cost of removal amounts to provide for future negative salvage value. At September 30, 2016, September 30, 2015 and December 31, 2015, the Company estimates that the cost of removal amounts,
which are recorded on the Consolidated Balance Sheets in Cost of Removal Obligations are $77.4 million, $69.9 million, and $70.1 million, respectively.
Regulatory Accounting
The Companys principal business is the distribution of electricity and natural gas by the three distribution utilities: Unitil Energy, Fitchburg and Northern
Utilities. Unitil Energy and Fitchburg are subject to regulation by the FERC. Fitchburg is also regulated by the Massachusetts Department of Public Utilities (MDPU), Unitil Energy is regulated by the New Hampshire Public Utilities Commission (NHPUC)
and Northern Utilities is regulated by the Maine Public Utilities Commission (MPUC) and NHPUC. Granite State, the Companys natural gas transmission pipeline, is regulated by the FERC. Accordingly, the Company uses the Regulated Operations
guidance as set forth in the FASB Codification. The Company has recorded Regulatory Assets and Regulatory Liabilities which will be recovered from customers, or applied for customer benefit, in accordance with rate provisions approved by the
applicable public utility regulatory commission.
27
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
December 31,
|
|
Regulatory Assets consist of the following ($ millions)
|
|
2016
|
|
|
2015
|
|
|
2015
|
|
Retirement Benefits
|
|
$
|
64.6
|
|
|
$
|
65.3
|
|
|
$
|
64.7
|
|
Energy Supply & Tracker Mechanisms
|
|
|
23.2
|
|
|
|
17.4
|
|
|
|
21.3
|
|
Deferred Storm Charges
|
|
|
11.0
|
|
|
|
16.9
|
|
|
|
15.4
|
|
Environmental
|
|
|
12.2
|
|
|
|
11.1
|
|
|
|
11.2
|
|
Income Taxes
|
|
|
7.7
|
|
|
|
8.9
|
|
|
|
8.5
|
|
Other
|
|
|
5.8
|
|
|
|
5.8
|
|
|
|
5.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Regulatory Assets
|
|
$
|
124.5
|
|
|
$
|
125.4
|
|
|
$
|
126.4
|
|
Less: Current Portion of Regulatory Assets
(1)
|
|
|
28.0
|
|
|
|
22.6
|
|
|
|
26.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Regulatory Assets noncurrent
|
|
$
|
96.5
|
|
|
$
|
102.8
|
|
|
$
|
99.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Reflects amounts included in Accrued Revenue, discussed above, on the Companys Consolidated Balance Sheets.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
December 31,
|
|
Regulatory Liabilities consist of the following ($ millions)
|
|
2016
|
|
|
2015
|
|
|
2015
|
|
Tracker Mechanisms
|
|
$
|
8.5
|
|
|
$
|
17.1
|
|
|
$
|
8.0
|
|
Gas Pipeline Refund (Note 6)
|
|
|
8.4
|
|
|
|
22.0
|
|
|
|
15.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Regulatory Liabilities
|
|
|
16.9
|
|
|
|
39.1
|
|
|
|
23.7
|
|
Less: Current Portion of Regulatory Liabilities
|
|
|
13.2
|
|
|
|
28.1
|
|
|
|
15.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Regulatory Liabilities noncurrent
|
|
$
|
3.7
|
|
|
$
|
11.0
|
|
|
$
|
8.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 September 30, 2016 are $4.1 million of deferred storm charges to be recovered over the next two and a half years and $8.4 million of environmental costs, rate case costs and other expenditures to be recovered
over varying periods in the next seven and a half 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 Companys 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 Companys opinion, its regulated operations will be subject to the FASB Codification provisions for Regulated Operations for the foreseeable future.
Derivatives
The Companys regulated energy subsidiaries enter into energy supply contracts to serve their electric and gas customers.
The Company follows a procedure for determining
28
whether each contract qualifies as a derivative instrument under the guidance provided by the FASB Codification on Derivatives and Hedging. For each contract, the Company reviews and documents
the key terms of the contract. Based on those terms and any additional relevant components of the contract, the Company determines and documents whether the contract qualifies as a derivative instrument as defined in the FASB Codification. The
Company has determined that none of its energy supply contracts, other than the regulatory approved hedging program, described below, qualifies as a derivative instrument under the guidance set forth in the FASB Codification.
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 September 30, 2016, September 30, 2015
and December 31, 2015 the Company had 2.9 billion, 3.7 billion and 2.5 billion cubic feet (BCF), respectively, outstanding in natural gas futures and options contracts under its hedging program.
As of September 30, 2016, September 30, 2015 and December 31, 2015, the Companys derivatives that are not designated as hedging
instruments under FASB ASC 815-20 have a fair value of $0.2 million, $0.1 million and less than $0.1 million, respectively.
Investments in
Marketable Securities
In 2015, the Company established a trust through which it invests in a variety of equity and fixed income mutual funds. These funds are intended to satisfy obligations under the Companys Supplemental Executive
Retirement Plan (SERP) (See further discussion of the SERP in Note 9.
At September 30, 2016, September 30, 2015
and December 31, 2015, the fair value of the Companys investments in these trading securities, which are recorded on the Consolidated Balance Sheets in Other Assets, were $1.9 million, $0.7 million and $0.7 million, respectively, as shown
in the table below. These investments are valued based on quoted prices from active markets and are categorized in Level 1 as they are actively traded and no valuation adjustments have been applied. Changes in the fair value of these investments are
recorded in Other Expense, net.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
December 31,
|
|
Fair Value of Marketable Securities ($ millions)
|
|
2016
|
|
|
2015
|
|
|
2015
|
|
Equity Funds
|
|
$
|
1.1
|
|
|
$
|
0.4
|
|
|
$
|
0.4
|
|
Fixed Income Funds
|
|
|
0.8
|
|
|
|
0.3
|
|
|
|
0.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Marketable Securities
|
|
$
|
1.9
|
|
|
$
|
0.7
|
|
|
$
|
0.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
29
Energy Supply Obligations
The following discussion and table summarize the nature and amounts
of the items recorded as current and noncurrent Energy Supply Obligations on the Companys Consolidated Balance Sheets.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
December 31,
|
|
Energy Supply Obligations ($ millions)
|
|
2016
|
|
|
2015
|
|
|
2015
|
|
Current:
|
|
|
|
|
|
|
|
|
|
|
|
|
Exchange Gas Obligation
|
|
$
|
9.3
|
|
|
$
|
9.9
|
|
|
$
|
10.3
|
|
Renewable Energy Portfolio Standards
|
|
|
3.6
|
|
|
|
5.5
|
|
|
|
4.0
|
|
Power Supply Contract Divestitures
|
|
|
0.3
|
|
|
|
0.4
|
|
|
|
0.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Energy Supply Obligations Current
|
|
|
13.2
|
|
|
|
15.8
|
|
|
|
14.6
|
|
Long-Term:
|
|
|
|
|
|
|
|
|
|
|
|
|
Power Supply Contract Divestitures
|
|
|
1.4
|
|
|
|
1.7
|
|
|
|
1.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Energy Supply Obligations
|
|
$
|
14.6
|
|
|
$
|
17.5
|
|
|
$
|
16.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 Companys 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 Companys Consolidated Balance Sheets.
In compliance with the
Massachusetts Green Communities Act, discussed below in Note 6, Regulatory Matters, Fitchburg has entered into long-term renewable contracts for electric energy and/or renewable energy credits. The generating facilities associated with two of these
contracts have been constructed and are operating. Another contract has been approved by the MDPU and is pending facility construction and operation, which is anticipated to begin by the end of 2016. Fitchburg will recover its costs under this
contract through a regulatory approved cost tracker rate mechanism.
Power Supply Contract Divestitures As a result of the
restructuring of the utility industry in New Hampshire and Massachusetts, Unitil Energys and Fitchburgs customers have the opportunity to purchase their electric or natural gas supplies from third-party suppliers. In connection with the
30
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 on the Companys Consolidated Balance Sheets with
corresponding regulatory assets recorded in Accrued Revenue (current portion) and Regulatory Assets (long-term portion).
Debt Issuance
Costs
In the first quarter of 2016, the Company adopted Accounting Standards Update (ASU) 2015-03, which requires entities to present debt issuance costs related to a debt liability as a direct deduction from the carrying amount of that
debt liability on the balance sheet as opposed to being presented as a deferred charge, and ASU 2015-15, which adds paragraphs to ASU 2015-03 indicating that the SEC staff would not object to an entity deferring and presenting debt issuance costs
related to line of credit arrangements as an asset and subsequently amortizing the deferred debt issuance costs ratably over the term of the line of credit arrangement, regardless of whether there are any outstanding borrowings on the line of credit
arrangement.
For all periods presented in this Form 10-Q for the quarter ended September 30, 2016, unamortized debt issuance costs
related to the Companys long-term debt are reported on the Consolidated Balance Sheets as a reduction of the carrying value of the related debt. Prior to adoption, the Company reported the unamortized debt issuance costs in Other
Assets on the Consolidated Balance Sheets. The change in presentation resulted in a reduction of Other Assets and Long-Term Debt of $3.0 million and $2.9 million as of September 30, 2015 and December 31, 2015,
respectively.
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 is evaluating the impact that this new guidance will have on the Companys 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 is evaluating the impact that this new guidance will have on the Companys 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
31
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 Companys 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
The Company has evaluated all events or transactions through the date of this filing. During this period the Company did not have any material subsequent events that
impacted its unaudited consolidated financial statements.
NOTE 2 DIVIDENDS DECLARED PER SHARE
|
|
|
|
|
|
|
Declaration
Date
|
|
Date
Paid (Payable)
|
|
Shareholder of
Record Date
|
|
Dividend
Amount
|
10/19/16
|
|
11/28/16
|
|
11/14/16
|
|
$ 0.355
|
07/20/16
|
|
08/26/16
|
|
08/12/16
|
|
$ 0.355
|
04/20/16
|
|
05/27/16
|
|
05/13/16
|
|
$ 0.355
|
01/27/16
|
|
02/26/16
|
|
02/12/16
|
|
$ 0.355
|
|
|
|
|
10/21/15
|
|
11/27/15
|
|
11/13/15
|
|
$ 0.350
|
07/22/15
|
|
08/28/15
|
|
08/14/15
|
|
$ 0.350
|
04/22/15
|
|
05/28/15
|
|
05/14/15
|
|
$ 0.350
|
01/26/15
|
|
02/27/15
|
|
02/13/15
|
|
$ 0.350
|
32
NOTE 3 SEGMENT INFORMATION
The following table provides significant segment financial data for the three and nine months ended September 30, 2016 and September 30, 2015 and as of December 31, 2015 (millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30, 2016
|
|
Gas
|
|
|
Electric
|
|
|
Non-
Regulated
|
|
|
Other
|
|
|
Total
|
|
Revenues
|
|
$
|
22.1
|
|
|
$
|
55.2
|
|
|
$
|
1.5
|
|
|
$
|
|
|
|
$
|
78.8
|
|
Segment Profit (Loss)
|
|
|
(2.2
|
)
|
|
|
5.3
|
|
|
|
0.3
|
|
|
|
0.1
|
|
|
|
3.5
|
|
Capital Expenditures
|
|
|
22.9
|
|
|
|
8.8
|
|
|
|
|
|
|
|
3.1
|
|
|
|
34.8
|
|
|
|
|
|
|
|
Three Months Ended September 30, 2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
21.7
|
|
|
$
|
51.4
|
|
|
$
|
1.6
|
|
|
$
|
|
|
|
$
|
74.7
|
|
Segment Profit (Loss)
|
|
|
(1.4
|
)
|
|
|
2.5
|
|
|
|
0.3
|
|
|
|
0.3
|
|
|
|
1.7
|
|
Capital Expenditures
|
|
|
22.2
|
|
|
|
7.8
|
|
|
|
|
|
|
|
2.1
|
|
|
|
32.1
|
|
|
|
|
|
|
|
Nine Months Ended September 30, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
124.1
|
|
|
$
|
150.4
|
|
|
$
|
4.6
|
|
|
$
|
|
|
|
$
|
279.1
|
|
Segment Profit
|
|
|
7.2
|
|
|
|
8.7
|
|
|
|
0.9
|
|
|
|
0.1
|
|
|
|
16.9
|
|
Capital Expenditures
|
|
|
44.8
|
|
|
|
21.8
|
|
|
|
|
|
|
|
7.8
|
|
|
|
74.4
|
|
Segment Assets
|
|
|
610.3
|
|
|
|
425.4
|
|
|
|
7.2
|
|
|
|
29.5
|
|
|
|
1,072.4
|
|
|
|
|
|
|
|
Nine Months Ended September 30, 2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
149.6
|
|
|
$
|
170.1
|
|
|
$
|
4.7
|
|
|
$
|
|
|
|
$
|
324.4
|
|
Segment Profit
|
|
|
9.5
|
|
|
|
6.2
|
|
|
|
0.9
|
|
|
|
0.4
|
|
|
|
17.0
|
|
Capital Expenditures
|
|
|
45.1
|
|
|
|
19.5
|
|
|
|
0.1
|
|
|
|
5.9
|
|
|
|
70.6
|
|
Segment Assets
|
|
|
573.2
|
|
|
|
409.5
|
|
|
|
6.4
|
|
|
|
13.4
|
|
|
|
1,002.5
|
|
|
|
|
|
|
|
As of December 31, 2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment Assets
|
|
$
|
590.9
|
|
|
$
|
415.1
|
|
|
$
|
6.5
|
|
|
$
|
26.3
|
|
|
$
|
1,038.8
|
|
33
NOTE 4 DEBT AND FINANCING ARRANGEMENTS
Details on long-term debt at September 30, 2016, September 30, 2015 and December 31, 2015 are shown below:
|
|
|
|
|
|
|
|
|
|
|
|
|
($ millions)
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2016
|
|
|
2015
|
|
|
2015
|
|
Unitil Corporation Senior Notes:
|
|
|
|
|
|
|
|
|
|
|
|
|
6.33% Notes, Due May 1, 2022
|
|
$
|
20.0
|
|
|
$
|
20.0
|
|
|
$
|
20.0
|
|
3.70% Notes, Due August 1, 2026
|
|
|
30.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unitil Energy Systems, Inc.:
|
|
|
|
|
|
|
|
|
|
|
|
|
First Mortgage Bonds:
|
|
|
|
|
|
|
|
|
|
|
|
|
5.24% Series, Due March 2, 2020
|
|
|
15.0
|
|
|
|
15.0
|
|
|
|
15.0
|
|
8.49% Series, Due October 14, 2024
|
|
|
12.0
|
|
|
|
15.0
|
|
|
|
12.0
|
|
6.96% Series, Due September 1, 2028
|
|
|
20.0
|
|
|
|
20.0
|
|
|
|
20.0
|
|
8.00% Series, Due May 1, 2031
|
|
|
15.0
|
|
|
|
15.0
|
|
|
|
15.0
|
|
6.32% Series, Due September 15, 2036
|
|
|
15.0
|
|
|
|
15.0
|
|
|
|
15.0
|
|
|
|
|
|
Fitchburg Gas and Electric Light Company:
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-Term Notes:
|
|
|
|
|
|
|
|
|
|
|
|
|
6.75% Notes, Due November 30, 2023
|
|
|
11.4
|
|
|
|
15.2
|
|
|
|
11.4
|
|
7.37% Notes, Due January 15, 2029
|
|
|
12.0
|
|
|
|
12.0
|
|
|
|
12.0
|
|
7.98% Notes, Due June 1, 2031
|
|
|
14.0
|
|
|
|
14.0
|
|
|
|
14.0
|
|
6.79% Notes, Due October 15, 2025
|
|
|
10.0
|
|
|
|
10.0
|
|
|
|
10.0
|
|
5.90% Notes, Due December 15, 2030
|
|
|
15.0
|
|
|
|
15.0
|
|
|
|
15.0
|
|
|
|
|
|
Northern Utilities Senior Notes:
|
|
|
|
|
|
|
|
|
|
|
|
|
6.95% Senior Notes, Series A, Due December 3, 2018
|
|
|
30.0
|
|
|
|
30.0
|
|
|
|
30.0
|
|
5.29% Senior Notes, Due March 2, 2020
|
|
|
25.0
|
|
|
|
25.0
|
|
|
|
25.0
|
|
7.72% Senior Notes, Series B, Due December 3, 2038
|
|
|
50.0
|
|
|
|
50.0
|
|
|
|
50.0
|
|
4.42% Senior Notes, Due October 15, 2044
|
|
|
50.0
|
|
|
|
50.0
|
|
|
|
50.0
|
|
|
|
|
|
Granite State Senior Notes:
|
|
|
|
|
|
|
|
|
|
|
|
|
7.15% Senior Notes, Due December 15, 2018
|
|
|
10.0
|
|
|
|
10.0
|
|
|
|
10.0
|
|
|
|
|
|
Unitil Realty Corp.:
|
|
|
|
|
|
|
|
|
|
|
|
|
Senior Secured Notes:
|
|
|
|
|
|
|
|
|
|
|
|
|
8.00% Notes, Due Through August 1, 2017
|
|
|
0.6
|
|
|
|
1.3
|
|
|
|
1.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Long-Term Debt
|
|
|
355.0
|
|
|
|
332.5
|
|
|
|
325.5
|
|
Less: Unamortized Debt Issuance Costs
|
|
|
3.0
|
|
|
|
3.0
|
|
|
|
2.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Long-Term Debt, net of Unamortized Debt Issuance Costs
|
|
|
352.0
|
|
|
|
329.5
|
|
|
|
322.6
|
|
Less: Current Portion
|
|
|
17.0
|
|
|
|
3.8
|
|
|
|
17.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Long-term Debt, Less Current Portion
|
|
$
|
335.0
|
|
|
$
|
325.7
|
|
|
$
|
305.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
34
Fair Value of Long-Term Debt
Currently, the Company believes that there is no active market in
the Companys debt securities, which have all been sold through private placements. If there were an active market for the Companys debt securities, the fair value of the Companys long-term debt would be estimated based on the
quoted market prices for the same or similar issues, or on the current rates offered to the Company for debt of the same remaining maturities. The fair value of the Companys long-term debt is estimated using Level 2 inputs (valuations based on
quoted prices available in active markets for similar assets or liabilities, quoted prices for identical or similar assets or liabilities in inactive markets, inputs other than quoted prices that are directly observable, and inputs derived
principally from market data.) In estimating the fair value of the Companys long-term debt, the assumed market yield reflects the Moodys Baa Utility Bond Average Yield. Costs, including prepayment costs, associated with the early
settlement of long-term debt are not taken into consideration in determining fair value.
|
|
|
|
|
|
|
|
|
|
|
|
|
($ millions)
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2016
|
|
|
2015
|
|
|
2015
|
|
Estimated Fair Value of Long-Term Debt
|
|
$
|
405.8
|
|
|
$
|
356.7
|
|
|
$
|
345.2
|
|
Credit Arrangements
On October 4, 2013, the Company entered into an Amended and Restated Credit Agreement (as further amended, restated, amended and restated, modified or supplemented from time to time, the Credit
Facility). The Credit Facility terminates October 4, 2020 and provides for a borrowing limit of $120 million which includes a $25 million sublimit for the issuance of standby letters of credit. The Credit Facility provides Unitil 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 1.25%. Provided there is no
event of default under the Credit Facility, the Company may on a one-time basis request an increase in the aggregate commitments under the Credit Facility by an aggregate additional amount of up to $30 million.
The Company utilizes the Credit Facility for cash management purposes related to its short-term operating activities. Total gross borrowings were $148.3
million and $77.1 million for the nine months ended September 30, 2016 and September 30, 2015, respectively. Total gross repayments were $153.4 million and $102.3 million for the nine months ended September 30, 2016 and
September 30, 2015, respectively. In the third quarter of 2016, the Company issued a standby letter of credit for $1.1 million. The following table details the borrowing limits, amounts outstanding and amounts available under the revolving
Credit Facility as of September 30, 2016, September 30, 2015 and December 31, 2015:
35
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revolving Credit Facility ($ millions)
|
|
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2016
|
|
|
2015
|
|
|
2015
|
|
Limit
|
|
$
|
120.0
|
|
|
$
|
120.0
|
|
|
$
|
120.0
|
|
Short-Term Borrowings Outstanding
|
|
$
|
36.9
|
|
|
$
|
4.1
|
|
|
$
|
42.0
|
|
Letters of Credit Outstanding
|
|
$
|
1.1
|
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available
|
|
$
|
82.0
|
|
|
$
|
115.9
|
|
|
$
|
78.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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, Unitils and its subsidiaries ability to permit liens or incur indebtedness, and restrictions on Unitils 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 only financial covenant in the Credit Facility provides that Unitils Funded Debt to Capitalization (as each term is defined in the Credit Facility) cannot exceed 65%, tested on a quarterly basis.
At September 30, 2016, September 30, 2015 and December 31, 2015, the Company was in compliance with the covenants contained in the Credit Facility in effect on that date. (See also Credit Arrangements in Note 5.)
The weighted average interest rates on all short-term borrowings were 1.7% and 1.6% for the nine months ended September 30, 2016 and
September 30, 2015, respectively. The weighted average interest rate on all short-term borrowings for the twelve months ended December 31, 2015 was 1.5%.
Unitil Corporation and its utility subsidiaries, Fitchburg, Unitil Energy, Northern Utilities, and Granite State are currently rated BBB+ by Standard & Poors Ratings Services.
In April 2014, Unitil Service Corp. entered into a financing arrangement, structured as a capital lease obligation, for various information
systems and technology equipment. Final funding under this capital lease occurred on October 30, 2015, resulting in total funding of $13.4 million. The capital lease matures on September 30, 2020. As of September 30, 2016, there are
$2.6 million of current and $8.4 million of noncurrent obligations under this capital lease on the Companys Consolidated Balance Sheets.
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
$9.3 million, $9.9 million and $10.8 million of natural gas storage inventory at September 30, 2016, September 30, 2015 and December 31, 2015, respectively, related to these asset management agreements. The amount of natural gas
inventory released in September 2016 and payable in October 2016 is $0.1 million and is recorded in Accounts Payable at September 30, 2016. The amount of natural gas inventory released in September 2015 and payable in October 2015 was $0.1
million and is recorded in Accounts Payable at September 30, 2015. The amount of natural gas inventory released in December 2015 and payable in January 2016 was $0.6 million and was recorded in Accounts Payable at December 31, 2015.
36
Guarantees
The Company provides limited guarantees on certain energy and natural gas storage management contracts entered into by the distribution utilities. The Companys policy is to limit the duration of
these guarantees. As of September 30, 2016, there were approximately $21.1 million of guarantees outstanding and the longest term guarantee extends through August 2017.
The Company also guarantees the payment of principal, interest and other amounts payable on the notes issued by Unitil Realty and Granite State. As of September 30, 2016, the principal amount
outstanding for the 8% Unitil Realty notes was $0.6 million, and the principal amount outstanding for the 7.15% Granite State notes was $10.0 million.
NOTE 5 COMMON STOCK AND PREFERRED STOCK
Common Stock
The Companys common stock trades on the New York Stock Exchange under the symbol, UTL.
The Company had 13,982,941, 13,991,430 and 14,060,147 shares of common stock outstanding at September 30, 2015, December 31, 2015 and
September 30, 2016, respectively.
Dividend Reinvestment and Stock Purchase Plan
During the first nine months of 2016, the
Company sold 24,697 shares of its common stock, at an average price of $39.88 per share, in connection with its Dividend Reinvestment and Stock Purchase Plan (DRP) and its 401(k) plans resulting in net proceeds of approximately $985,000. The DRP
provides participants in the plan a method for investing cash dividends on the Companys common stock and cash payments in additional shares of the Companys common stock.
Stock Plan
The Company maintains the Unitil Corporation Second Amended and Restated 2003 Stock Plan (the Stock Plan). Participants in the Stock Plan are selected by the Compensation
Committee of the Board of Directors to receive awards under the Stock Plan, including awards of restricted shares (Restricted Shares), or of restricted stock units (Restricted Stock Units). The Compensation Committee has the authority to determine
the sizes of awards; determine the terms and conditions of awards in a manner consistent with the Stock Plan; construe and interpret the Stock Plan and any agreement or instrument entered into under the Stock Plan as they apply to participants;
establish, amend, or waive rules and regulations for the Stock Plans administration as they apply to participants; and, subject to the provisions of the Stock Plan, amend the terms and conditions of any outstanding award to the extent such
terms and conditions are within the discretion of the Compensation Committee as provided for in the Stock Plan. On April 19, 2012, the Companys shareholders approved an amendment to the Stock Plan to, among other things, increase the
maximum number of shares of common stock available for awards to plan participants.
The maximum number of shares available for awards to
participants under the Stock Plan is 677,500. The maximum number of shares that may be awarded in any one calendar year to any one participant is 20,000. In the event of any change in capitalization of the Company, the Compensation Committee is
authorized to make an equitable adjustment to the number and kind of shares of common stock that may be delivered under the Stock Plan and, in addition, may authorize and make an equitable adjustment to the Stock Plans annual individual award
limit.
37
Restricted Shares
Outstanding awards of Restricted Shares fully vest over a period of four years at a rate of 25% each year. During the vesting period, dividends on Restricted Shares underlying the award may be credited to
a participants account. The Company may deduct or withhold, or require a participant to remit to the Company, an amount sufficient to satisfy any taxes required by federal, state, or local law or regulation to be withheld with respect to any
taxable event arising in connection with an Award. For purposes of compensation expense, Restricted Shares vest immediately upon a participant becoming eligible for retirement, as defined in the Stock Plan. Prior to the end of the vesting period,
the restricted shares are subject to forfeiture if the participant ceases to be employed by the Company other than due to the participants death.
On January 26, 2016, 43,220 Restricted Shares were issued in conjunction with the Stock Plan with an aggregate market value at the date of issuance of approximately $1.6 million. On April 19,
2016, 800 Restricted Shares were issued in conjunction with the Stock Plan with an aggregate market value at the date of issuance of less than $0.1 million. There were 95,506 and 80,588 non-vested shares under the Stock Plan as of September 30,
2016 and 2015, respectively. The weighted average grant date fair value of these shares was $35.30 and $33.14, respectively. The compensation expense associated with the issuance of shares under the Stock Plan is being recognized over the vesting
period and was $2.0 million and $1.6 million for the nine months ended September 30, 2016 and 2015, respectively. At September 30, 2016, there was approximately $1.4 million of total unrecognized compensation cost under the Stock Plan
which is expected to be recognized over approximately 2.6 years. There were no forfeitures or cancellations under the Stock Plan during the nine months ended September 30, 2016.
Restricted Stock Units
Restricted Stock Units earn dividend equivalents and will generally
be settled by payment to each Director as soon as practicable following the Directors separation from service to the Company. The Restricted Stock Units will be paid such that the Director will receive (i) 70% of the shares of the
Companys common stock underlying the restricted stock units and (ii) cash in an amount equal to the fair market value of 30% of the shares of the Companys common stock underlying the Restricted Stock Units. The equity portion of
Restricted Stock Units activity during the nine months ended September 30, 2016 in conjunction with the Stock Plan are presented in the following table:
|
|
|
|
|
|
|
|
|
Restricted Stock Units (Equity
Portion)
|
|
|
|
Units
|
|
|
Weighted
Average
Stock
Price
|
|
Restricted Stock Units as of December 31, 2015
|
|
|
33,588
|
|
|
$
|
31.83
|
|
Restricted Stock Units Granted
|
|
|
|
|
|
|
|
|
Dividend Equivalents Earned
|
|
|
910
|
|
|
$
|
39.64
|
|
Restricted Stock Units Settled
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restricted Stock Units as of September 30, 2016
|
|
|
34,498
|
|
|
$
|
32.03
|
|
|
|
|
|
|
|
|
|
|
There were 24,294 Restricted Stock Units outstanding as of September 30, 2015 with a weighted average stock price of
$30.04. On October 3, 2016, there were 12,150 fully-vested Restricted Stock Units issued to members of the Companys Board of Directors. Included in Other Noncurrent Liabilities on the Companys Consolidated Balance Sheets as of
September 30, 2016, September 30, 2015 and December 31, 2015 is $0.6 million, $0.4 million and $0.5 million, respectively, representing the fair value of liabilities associated with the portion of fully vested Restricted Stock
Units that will be settled in cash.
38
Preferred Stock
There was $0.2 million, or 1,893 shares, and $0.2 million, or 1,898 shares, of Unitil Energys 6.00% Series Preferred Stock outstanding as of September 30, 2016 and December 31, 2015,
respectively. There was $0.2 million, or 2,009 shares, of Unitil Energys 6.00% Series Preferred Stock outstanding as of September 30, 2015. There were less than $0.1 million of total dividends declared on Preferred Stock in each of the
three and nine month periods ended September 30, 2016 and September 30, 2015, respectively.
NOTE 6 REGULATORY MATTERS
UNITILS REGULATORY MATTERS ARE DESCRIBED IN NOTE 8 TO THE FINANCIAL STATEMENTS IN ITEM 8 OF PART II OF UNITIL
CORPORATIONS FORM 10-K FOR DECEMBER 31, 2015 AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JANUARY 28, 2016.
Rate
Case Activity
Unitil Energy Base Rates
On April 29, 2016 Unitil Energy filed for an increase in distribution
base rates with the NHPUC. The Company is seeking an increase in base rates of approximately $6.3 million or 3.6 percent above present rates. The Company also requested a long-term rate plan for the annual recovery in future years of the costs
associated with certain plant additions. On June 28, 2016 the NHPUC approved a settlement agreement between the Company, Commission Staff and the Officer of Consumer Advocate on a $2.4 million temporary rate increase effective July 1,
2016. The temporary rate increase will remain in effect until a permanent rate increase decision is issued. Once a permanent rate is decided, it will be reconciled back to the effective date of the temporary rate increase. The remaining issues in
the rate case are pending investigation and decision by the NHPUC.
Fitchburg Base Rates Electric
On June 16,
2015, Fitchburg filed for a $3.8 million increase in its electric base revenue decoupling target, which represented a 5.6 percent increase over 2014 test year operating electric revenues. The filing included a request for approval of a capital cost
recovery mechanism to recover additions to utility plant on an annual basis. An Order was issued on April 29, 2016 approving a $2.1 million increase effective May 1, 2016. The MDPU also approved a capital cost recovery mechanism. On
July 1, 2016, Fitchburg made its first capital cost adjustment filing documenting its capital investments for calendar year 2015 and presenting the associated revenue requirements for recovery beginning January 1, 2017. This filing is
under MDPU review.
Fitchburg Electric Operations
On November 17, 2015, Fitchburg submitted its 2015 annual
reconciliation of costs and revenues for transition and transmission under its restructuring plan, including the reconciliation of costs and revenues for a number of other surcharges and cost factors, for review and approval by the MDPU. All of the
rates were given final approval by the MDPU on December 29, 2015, effective January 1, 2016.
Fitchburg Base Rates
Gas
On June 16, 2015, Fitchburg filed for a $3.0 million increase in its gas base revenue decoupling target, which represents an 8.3 percent increase over 2014 test year total gas operating revenues. Hearings were completed and
briefs filed. An Order was issued on April 29, 2016 approving a $1.6 million increase effective May 1, 2016.
39
Fitchburg Gas Operations
On October 31, 2015, Fitchburg submitted its second
annual filing to recover the estimated costs to be incurred in calendar year 2016 under its approved 20 year gas system enhancement plan program. The plan was established pursuant to legislation that provided for the establishment of comprehensive
replacement programs to address aging natural gas pipeline infrastructure. On April 29, 2016, the MDPU approved the Companys request to collect in rates $0.9 million for the estimated costs of its cumulative capital investments for 2015
and 2016, effective May 1, 2016. Also on April 29, 2016, Fitchburg submitted its cost filing which documents the Companys actual capital costs and final revenue requirement under the program for calendar year 2015. Any over or
under-recovery of the Companys 2015 revenue requirement will be reconciled in rates effective November 1, 2016. This matter remains pending.
Northern Utilities Base Rates Maine
The rate case settlement in Northern Utilities Maine divisions last rate case allowed the Company to implement a Targeted
Infrastructure Replacement Adjustment (TIRA) rate mechanism to adjust base distribution rates annually to recover the revenue requirements associated with targeted investments in gas distribution system infrastructure replacement and upgrade
projects. The TIRA has an initial term of four years and covers targeted capital expenditures in 2013 through 2016. The 2016 TIRA, for 2015 expenditures, was filed on February 29, 2016, provides for an annual increase in base distribution
revenue of $1.5 million, effective May 1, 2016, and was approved by the MPUC on April 28, 2016.
Northern Utilities
Targeted Area Build-out Program Maine
On December 22, 2015 the MPUC approved a new Targeted Area Build-out program and associated rate surcharge mechanism. This program is designed to allow the economic extension of natural
gas mains to new, targeted service areas in Maine and is being initially piloted in the City of Saco. It allows customers in the targeted area the ability to pay a rate surcharge, instead of a large upfront payment or capital contribution to connect
to the natural gas delivery system. This pilot program is planned to be built out over the next three years and has the potential to add 1,000 new customers and approximately $1 million in annual distribution revenue in the Saco pilot area. The
Company will continue to evaluate the success of the program and ways to economically reach new targeted service areas.
Northern Utilities
Base Rates New Hampshire
Northern Utilities New Hampshire divisions last rate case resulted in a settlement agreement providing for an increase of $4.6 million in distribution base revenue and an additional step
increase in revenue of $1.4 million for investments in gas mains extensions and infrastructure replacement projects, effective May 1, 2014, and a step adjustment that provided for an annual increase of $1.8 million in revenue effective
May 1, 2015.
Northern Utilities Pipeline Refund
On February 19, 2015, the FERC issued Opinion No. 524-A,
the final order in Portland Natural Gas Transmissions (PNGTS) Section 4 rate case, requiring PNGTS to issue refunds to shippers. Northern Utilities received a pipeline refund of $22.0 million on April 15, 2015. As a gas
supply-related refund, the entire amount refunded will be credited to Northern Utilities customers and marketers. In New Hampshire, the refund is being credited to all customers over a three year period as directed by the NHPUC. In Maine, the
refund has been divided into two parts, as directed by the MPUC. Maine retail customers who purchase their gas directly from Northern Utilities are being credited their portion of the refund over a three year period. The second part of the refund
was paid on October 5, 2015 as a one-time lump sum payment directly to marketers who transport gas on Northern Utilities distribution system. The Company has recorded current and noncurrent Regulatory Liabilities of $5.0 million and $3.5
million, respectively, on its Consolidated Balance Sheets as of September 30, 2016.
Granite State Base Rates
Granite State has in place a FERC-approved second amended settlement agreement under which it is permitted each June to file for a rate adjustment to recover the revenue requirements associated with specified capital investments in gas
transmission projects up to a specific cost cap. On June 24, 2016 Granite State filed for an annual revenue and rate increase under this provision of $0.3 million, effective August 1, 2016. This filing was approved by the FERC on
July 13, 2016.
40
Other Matters
NHPUC Energy Efficiency Resource Standard Proceeding
In May 2015 the NHPUC opened a proceeding to establish an Energy Efficiency Resource Standard (EERS), an energy efficiency
policy with specific targets or goals for energy savings that New Hampshire electric and gas utilities must meet. On April 27, 2016, a comprehensive settlement agreement was filed by the parties, including Unitil Energy and Northern Utilities,
which was approved by the NHPUC on August 2, 2016. The settlement provides for: extending the 2014-2016 Core program an additional year (through 2017); establishing an EERS; establishing a recovery mechanism to compensate the utilities for
lost-revenue related to the EERS programs; and approving the performance incentives and processes for stakeholder involvement, evaluation, measurement and verification, and oversight of the EERS programs.
Unitil Energy Other
In July 2015, the NHPUC opened an investigation into Grid Modernization to address a variety of issues related
to Distribution System Planning, Customer Engagement with Distributed Energy Resources, and Utility Cost Recovery and Financial Incentives. The NHPUC has engaged a consultant to direct a Working Group to investigate these issues over the next year
and to prepare a final report with recommendations for the Commission. Unitil Energy is an active participant in the Working Group. This matter remains pending.
Pursuant to legislation that became effective in May 2016, the NHPUC has opened a proceeding to consider alternatives to the net metering tariffs currently in place. The legislation requires that a
decision on this matter must be issued by the NHPUC by March 2, 2017. Unitil Energy is an active participant in this proceeding.
Fitchburg Service Quality
On March 1, 2016, Fitchburg submitted its 2015 Service Quality Reports for both its gas and electric
divisions. Fitchburg reported that it met or exceeded its benchmarks for service quality performance in all metrics for both its gas and electric divisions. Fitchburgs annual gas and electric divisions Service Quality Reports for the
periods up through 2014 have all been approved by the MDPU. On September 30, 2016, the MDPU approved Fitchburgs 2015 electric division Service Quality Report as filed. Fitchburgs 2015 gas division Service Quality Report remains
pending.
MDPU Service Quality Guidelines
In December 2015, the MDPU issued its final order adopting new and revised Service
Quality Guidelines. The Company has generally been able to meet or exceed the performance metrics of the previous Service Quality Guidelines and believes that it will continue to meet or exceed the performance metrics under the new and revised
Guidelines.
Fitchburg Solar Generation
On August 19, 2016, Fitchburg filed a petition with the MDPU seeking
approval to develop a 1.3 MW solar generation facility pursuant to G.L. c. 164, § 1A(f), as amended by Chapter 75 of the Acts of 2016. The facility would be located on Company property in Fitchburg, Massachusetts. The proposal includes a cost
recovery mechanism that would share the costs and benefits of the project among all Fitchburg customers. The MDPU is expected to issue a decision on the petition by the end of 2016, and construction of facilities is expected to be completed by the
end of November 2017.
Fitchburg Energy Diversity
Governor Baker signed into law H4568 An Act to Promote Energy
Diversity on August 8, 2016. Among many sections in the bill, the primary provision adds new sections 83c and 83d to the 2008 Green Communities Act. Section 83c requires every
41
electric distribution company (EDC) to jointly and competitively solicit proposals for at least 400 MWs of offshore wind energy generation by June 30, 2017, as part of a total of 1,600
MW of offshore wind the EDCs are directed to procure by June 30, 2027. The procurement requirement is subject to a determination by the MDPU that the proposed long-term contracts are cost-effective. Section 83d further requires the EDCs to
jointly seek proposals for cost effective clean energy (hydro and other) long-term contracts via one or more staggered solicitations, the first of which shall be issued not later than April 1, 2017, for a total of 9,450,000 megawatt-hours by
December 31, 2022.
Fitchburg Clean Energy RFP
Pursuant to Section 83a of the Green Communities Act in
Massachusetts and similar clean energy directives established in Connecticut and Rhode Island, state agencies and the electric distribution companies in the three states, including Fitchburg, issued an RFP for clean energy resources (including Class
I renewable generation and large hydroelectric generation) in November 2015. The RFP sought proposals for clean energy and transmission projects that can deliver new renewable energy to the three states. Project proposals were received in January
2016 and joint evaluation activities are ongoing. Selection of contracts is expected during the fourth quarter of 2016. Fitchburgs final contracts will be subject to review and approval of the MDPU.
Fitchburg Other
On September 23, 2016, the Massachusetts Department of Energy Resources (DOER) presented its Solar
Incentive Straw Proposal in accordance with Chapter 75 of the Acts of 2016 which directed the DOER to develop a statewide solar incentive program to encourage the continued development of solar renewable energy generating sources by residential,
commercial, governmental and industrial electricity customers throughout the commonwealth. The program would replace the states expiring solar incentive program, which uses solar renewable energy credits (SRECs) and is known as
SREC-2, with a tariff program. The tariff would provide for incentive payments which would be net of energy value (i.e., total tariff rate minus value of energy). The program also includes a variety of tariff adders, including incentives for
location, such as landfill site, for off-takers, such as a community aggregation program, and for other technologies, such as behind-the-meter storage. Cost recovery of tariff payments and administrative costs may be made through a fixed,
non-bypassable monthly charge to all distribution customers. Comments on the straw proposal are due October 28, 2016. The DOERs implementation schedule includes filing emergency regulations by the end of the year, conducting a rulemaking
during winter 2017 to permanently promulgate emergency regulation, MDPU review of model tariffs in spring 2017, and final program implementation in summer 2017.
On May 11, 2016, the MDPU issued an Order commencing a rulemaking proceeding to adopt emergency regulations amending 220 C.M.R. § 18.00 et seq. (Net Metering Regulations).
Specifically, the MDPU amended its Net Metering Regulations to implement the net metering provisions of An Act Relative to Solar Energy, St. 2016, c. 75, §§ 3-9, and to make additional clerical changes to the Net Metering Regulations. On
July 15, 2016, the MDPU issued an order approving Final Net Metering Regulations. The distribution companies were required to submit draft net metering tariffs to comply with the new regulations, which they did on September 1, 2016. On
August 23, 2016 the MDPU held a technical session to discuss its straw proposal for a monthly minimum reliability contribution (MMRC). The purpose of the MMRC is for all distribution company customers to contribute to the fixed
costs that ensure the reliability, proper maintenance, and safety of the electric distribution system. Parties in the proceeding are scheduled to file alternative proposals on October 11, 2016. These matters remain pending.
In December 2013, the MDPU opened an investigation into Modernization of the Electric Grid. The stated objective of the Grid Modernization
proceeding is to ensure that the electric distribution companies adopt grid modernization policies and practices. In June 2014, the MDPU issued its first Grid Modernization order, setting forth a requirement that each electric
42
distribution company submit a ten-year strategic Grid Modernization Plan (GMP). As part of the GMP, each company must include a five-year Short-Term Investment Plan (STIP), which must include an
approach to achieving advanced metering functionality within five years of the Departments approval of the GMP. The filing of a GMP is a recurring obligation and must be updated as part of subsequent base distribution rate cases, which by
statute must occur no less often than every five years. Capital investments contained in the STIP are eligible for pre-authorization, meaning that the MDPU will not revisit in later filings whether the Company should have proceeded with these
investments. Fitchburg and the Commonwealths three other electric distribution companies filed their initial GMPs on August 19, 2015. These filings are currently under MDPU review and remain pending.
On January 28, 2016 the MDPU approved Fitchburgs Three-Year Energy Efficiency Plan for 2016-2018, subject to limited modifications and
directives in the Order. The Department found that the savings goals included in each Three-Year Plan are reasonable and are consistent with the achievement of all available cost-effective energy efficiency; approved each Program
Administrators program implementation cost budget for the Three-Year Plans; approved the performance incentive pool, mechanism, and payout rates; found that all proposed energy efficiency programs are cost-effective; found that funding sources
are reasonable and that each Program Administrator may recover the funds to implement its energy efficiency plan through its EES; and found that each Program Administrators Three-Year Plan is consistent with the Green Communities Act, the
Guidelines, and Department precedent.
FERC Transmission Formula Rate Proceeding
On December 28, 2015, FERC issued an
order, pursuant to Section 206 of the Federal Power Act, instituting a proceeding concerning the justness and reasonableness of ISO-New England, Inc. Participating Transmission Owners Regional Network Service and Local Network Service
formula rates and to develop formula rate protocols for these rates. Fitchburg and Unitil Energy are Participating Transmission Owners, although Unitil Energy does not own transmission plant. To the extent that this proceeding results in any changes
to the rates being charged, a refund period will begin as of January 4, 2016. The Company does not believe this investigation will have a material adverse impact on the Companys financial condition or results of operations.
Legal Proceedings
The Company is
involved in legal and administrative proceedings and claims of various types, 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 impact on its financial position, operating results or cash flows.
In early 2009, a putative class action complaint
was filed against Unitils Massachusetts based utility, Fitchburg, in Massachusetts Worcester Superior Court (the Court), (captioned Bellermann et al v. Fitchburg Gas and Electric Light Company). The Complaint seeks an
unspecified amount of damages, including the cost of temporary housing and alternative fuel sources, emotional and physical pain and suffering and property damages allegedly incurred by customers in connection with the loss of electric service
during the ice storm in Fitchburgs service territory in December 2008. The Massachusetts Supreme Judicial Court issued an order denying class certification status in July 2016, though the plaintiffs individual claims remain pending. The
Town of Lunenburg has filed a separate action in the Court arising out of the December 2008 ice storm. The Company continues to believe that both of these suits are without merit and will continue to defend itself vigorously. The Company believes,
based upon information furnished by counsel and others, that the ultimate resolution of these suits will not have a material impact on its financial position, operating results or cash flows.
43
NOTE 7 ENVIRONMENTAL MATTERS
UNITILS ENVIRONMENTAL MATTERS ARE DESCRIBED IN NOTE 8 TO THE FINANCIAL STATEMENTS IN ITEM 8 OF PART II OF UNITIL CORPORATIONS FORM 10-K FOR DECEMBER 31, 2015 AS FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION ON JANUARY 28, 2016.