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
23
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 six months ended
June 30, 2017 are not necessarily indicative of results to be expected for the year ending December 31, 2017. 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, 2016, as filed with the Securities and Exchange Commission (SEC) on February 2, 2017, for a description of the Companys Basis of
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 Financial Accounting Standards Board (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.
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 Operator New England
(ISO-NE) Financial Assurance Policy (Policy), 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 June 30, 2017, June 30, 2016 and December 31, 2016,
the Unitil subsidiaries had deposited $2.0 million, $1.7 million and $2.8 million, respectively to satisfy their ISO-NE obligations. In addition, Northern Utilities has cash margin deposits to satisfy requirements for its natural gas hedging
program. There were no cash margin deposits at Northern Utilities as of June 30, 2017, June 30, 2016 and December 31, 2016.
Allowance for Doubtful Accounts
The Company recognizes a provision for doubtful accounts each month based upon the Companys
experience in collecting electric and gas utility service accounts receivable in prior years. At the end of each month, an analysis of the delinquent receivables is performed which takes into account an assumption about the cash recovery of
delinquent receivables. The analysis also calculates the amount of written-off receivables that are recoverable through regulatory rate reconciling mechanisms. The Companys distribution utilities are authorized by regulators to recover the
costs of their energy commodity portion of bad debts through rate mechanisms. Also, the electric and gas divisions of Fitchburg are authorized to
24
recover through rates past due amounts associated with hardship accounts that are protected from shut-off. Evaluating the adequacy of the Allowance for Doubtful Accounts requires judgment
about the assumptions used in the analysis, including the level of customers enrolling in payment plans with the Company. It has been the Companys experience that the assumptions it has used in evaluating the adequacy of the Allowance for
Doubtful Accounts have proven to be reasonably accurate.
The Allowance for Doubtful Accounts as of June 30, 2017, June 30,
2016 and December 31, 2016, which is included in Accounts Receivable, net on the accompanying unaudited consolidated balance sheets, was as follows:
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($ millions)
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|
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June 30,
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December 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
2016
|
|
Allowance for Doubtful Accounts
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$
|
1.4
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|
|
$
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1.5
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|
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$
|
1.1
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|
|
|
|
|
|
|
|
|
|
|
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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 June 30, 2017, June 30, 2016 and December 31, 2016.
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June 30,
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December 31,
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Accrued Revenue ($ millions)
|
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2017
|
|
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2016
|
|
|
2016
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Regulatory Assets Current
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$
|
29.1
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|
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$
|
25.2
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$
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37.9
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Unbilled Revenues
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7.5
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|
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6.7
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11.6
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|
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|
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|
|
|
|
|
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|
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Total Accrued Revenue
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$
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36.6
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|
|
$
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31.9
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$
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49.5
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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 June 30, 2017, June 30, 2016 and December 31, 2016.
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June 30,
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December 31,
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Exchange Gas Receivable ($ millions)
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2017
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2016
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|
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2016
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Northern Utilities
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$
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5.5
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$
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7.6
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$
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7.8
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Fitchburg
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0.4
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0.4
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0.5
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|
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Total Exchange Gas Receivable
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$
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5.9
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|
|
$
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8.0
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|
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$
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8.3
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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 June 30, 2017, June 30, 2016 and December 31, 2016.
25
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June 30,
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December 31,
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Gas Inventory ($ millions)
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2017
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|
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2016
|
|
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2016
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Natural Gas
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$
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0.2
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|
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$
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0.1
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|
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$
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0.3
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Propane
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0.2
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|
|
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0.2
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|
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0.2
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Liquefied Natural Gas & Other
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|
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0.1
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|
|
|
0.1
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|
|
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0.1
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|
|
|
|
|
|
|
|
|
|
|
|
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Total Gas Inventory
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$
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0.5
|
|
|
$
|
0.4
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|
|
$
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0.6
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|
|
|
|
|
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|
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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 June 30, 2017, June 30, 2016 and December 31, 2016, the Company estimates that the cost of removal amounts, which are
recorded on the Consolidated Balance Sheets in Cost of Removal Obligations are $82.3 million, $74.9 million, and $77.0 million, respectively.
Regulatory Accounting
The Companys principal business is the distribution of electricity and natural gas by the three distribution
utilities: Unitil Energy, Fitchburg and Northern Utilities. Unitil Energy and Fitchburg are subject to regulation by the FERC. Fitchburg is also regulated by the Massachusetts Department of Public Utilities (MDPU), Unitil Energy is regulated by the
New Hampshire Public Utilities Commission (NHPUC) and Northern Utilities is regulated by the Maine Public Utilities Commission (MPUC) and NHPUC. Granite State, the Companys natural gas transmission pipeline, is regulated by the FERC.
Accordingly, the Company uses the Regulated Operations guidance as set forth in the FASB Codification. The Company has recorded Regulatory Assets and Regulatory Liabilities which will be recovered from customers, or applied for customer benefit, in
accordance with rate provisions approved by the applicable public utility regulatory commission.
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June 30,
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December 31,
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Regulatory Assets consist of the following ($ millions)
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2017
|
|
|
2016
|
|
|
2016
|
|
Retirement Benefits
|
|
$
|
75.9
|
|
|
$
|
64.5
|
|
|
$
|
75.9
|
|
Energy Supply & Other Regulatory Tracker Mechanisms
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|
|
25.4
|
|
|
|
19.7
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|
|
|
32.7
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|
Deferred Storm Charges
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|
|
7.7
|
|
|
|
12.5
|
|
|
|
9.6
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|
Environmental
|
|
|
10.2
|
|
|
|
12.3
|
|
|
|
10.8
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|
Income Taxes
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|
|
7.0
|
|
|
|
7.9
|
|
|
|
7.3
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Other
|
|
|
5.8
|
|
|
|
6.4
|
|
|
|
5.7
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
Total Regulatory Assets
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$
|
132.0
|
|
|
$
|
123.3
|
|
|
$
|
142.0
|
|
Less: Current Portion of Regulatory Assets
(1)
|
|
|
29.1
|
|
|
|
25.2
|
|
|
|
37.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Regulatory Assets noncurrent
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|
$
|
102.9
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|
|
$
|
98.1
|
|
|
$
|
104.1
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|
|
|
|
|
|
|
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|
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(1)
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Reflects amounts included in Accrued Revenue, discussed above, on the Companys Consolidated Balance Sheets.
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26
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|
June 30,
|
|
|
December 31,
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|
Regulatory Liabilities consist of the following ($ millions)
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|
2017
|
|
|
2016
|
|
|
2016
|
|
Regulatory Tracker Mechanisms
|
|
$
|
13.1
|
|
|
$
|
11.0
|
|
|
$
|
6.2
|
|
Gas Pipeline Refund (Note 6)
|
|
|
3.5
|
|
|
|
8.6
|
|
|
|
6.8
|
|
|
|
|
|
|
|
|
|
|
|
|
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Total Regulatory Liabilities
|
|
|
16.6
|
|
|
|
19.6
|
|
|
|
13.0
|
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Less: Current Portion of Regulatory Liabilities
|
|
|
16.6
|
|
|
|
15.9
|
|
|
|
10.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Regulatory Liabilities noncurrent
|
|
$
|
|
|
|
$
|
3.7
|
|
|
$
|
2.6
|
|
|
|
|
|
|
|
|
|
|
|
|
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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 June 30, 2017 are $1.8 million of deferred storm charges to be recovered over the next year and $7.9 million of environmental costs, rate case costs and other expenditures to be recovered over varying periods
in the next seven years. Regulators have authorized recovery of these expenditures, but without a return. Regulatory commissions can reach different conclusions about the recovery of costs, which can have a material impact on the 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
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.
27
As of June 30, 2017, June 30, 2016 and December 31, 2016 the Company had 1.2 billion,
2.4 billion and 2.0 billion cubic feet (BCF), respectively, outstanding in natural gas futures and options contracts under its hedging program.
As of June 30, 2017, June 30, 2016 and December 31, 2016, the Companys derivatives that are not designated as hedging
instruments under FASB ASC 815-20 have a fair value of $0.1 million, $0.2 million and $0.4 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 June 30, 2017, June 30, 2016 and
December 31, 2016, the fair value of the Companys investments in these trading securities, which are recorded on the Consolidated Balance Sheets in Other Assets, were $3.4 million, $1.9 million and $1.9 million, respectively, as shown in
the table below. These investments are valued based on quoted prices from active markets and are categorized in Level 1 as they are actively traded and no valuation adjustments have been applied. Changes in the fair value of these investments are
recorded in Other Expense, net.
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|
|
|
|
|
|
|
June 30,
|
|
|
December 31,
|
|
Fair Value of Marketable Securities ($ millions)
|
|
2017
|
|
|
2016
|
|
|
2016
|
|
Equity Funds
|
|
$
|
1.9
|
|
|
$
|
1.1
|
|
|
$
|
1.1
|
|
Fixed Income Funds
|
|
|
1.5
|
|
|
|
0.8
|
|
|
|
0.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Marketable Securities
|
|
$
|
3.4
|
|
|
$
|
1.9
|
|
|
$
|
1.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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.
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|
|
|
|
|
|
|
|
|
|
June 30,
|
|
|
December 31,
|
|
Energy Supply Obligations ($ millions)
|
|
2017
|
|
|
2016
|
|
|
2016
|
|
Current:
|
|
|
|
|
|
|
|
|
|
|
|
|
Exchange Gas Obligation
|
|
$
|
5.5
|
|
|
$
|
7.6
|
|
|
$
|
7.8
|
|
Renewable Energy Portfolio Standards
|
|
|
4.5
|
|
|
|
4.9
|
|
|
|
3.9
|
|
Power Supply Contract Divestitures
|
|
|
0.3
|
|
|
|
0.3
|
|
|
|
0.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Energy Supply Obligations Current
|
|
|
10.3
|
|
|
|
12.8
|
|
|
|
12.0
|
|
Noncurrent:
|
|
|
|
|
|
|
|
|
|
|
|
|
Power Supply Contract Divestitures
|
|
|
1.1
|
|
|
|
1.4
|
|
|
|
1.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Energy Supply Obligations
|
|
$
|
11.4
|
|
|
$
|
14.2
|
|
|
$
|
13.3
|
|
|
|
|
|
|
|
|
|
|
|
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28
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.
Fitchburg has entered
into long-term renewable contracts for electric energy and/or renewable energy credits pursuant to Massachusetts legislation, specifically, the Act Relative to Green Communities of 2008 and the Act Relative to Competitively Priced Electricity
(2012) in the Commonwealth, and the MDPUs regulations implementing the legislation. The generating facilities associated with three of these contracts have been constructed and are operating. A recent round of long-term renewable energy
procurements was conducted during 2016 and several contracts are expected to be finalized and submitted to MDPU for approval in 2017. Additional procurements are expected in compliance with the Act to Promote Energy Diversity (2016). Fitchburg
recovers the costs associated with long-term renewable contracts on a fully reconciling basis through a MDPU-approved cost recovery mechanism.
Power Supply Contract Divestitures 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 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).
Recently Issued Pronouncements
In May 2017, the FASB issued Accounting Standards Update (ASU) No. 2017-09, Compensation
Stock Compensation (Topic 718) Scope of Modification Accounting, to clarify when to account for a change to the terms or conditions of a share-based payment award as a modification. Under the new standard, modification is required only
if the fair value, the vesting conditions, or the classification of an award as equity or liability changes as a result of the change in terms or conditions. The amendments are effective for all entities for annual periods beginning after
December 15, 2017, including interim periods within those annual periods, and will be applied prospectively. Early adoption is permitted. The Company adopted this new guidance and it did not have a material impact on the Companys
Consolidated Financial Statements.
29
In March 2017, the FASB issued ASU No. 2017-07, Compensation Retirement Benefits (Topic
715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost. The ASU requires an employer to report the service cost component in the same line item or items as other compensation costs arising
from services rendered by the pertinent employees during the period. The other components of net benefit cost are required to be presented in the income statement separately from the service cost component and outside a subtotal of income from
operations, if one is presented. If a separate line item or items are used to present the other components of net benefit cost, that line item or items must be appropriately described. If a separate line item or items are not used, the line item or
items used in the income statement to present the other components of net benefit cost must be disclosed. The amendments also allow only the service cost component to be eligible for capitalization when applicable. The amendments are effective for
public business entities for annual periods beginning after December 15, 2017, including interim periods within those annual periods. The Company is evaluating the impact that this new guidance will have on the Companys Consolidated
Financial Statements.
In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers, Topic 606, which provides a
new framework for the recognition of revenue. The Company expects its adoption will result in increased disclosures regarding revenue and obligations related to arrangements with customers, as well as separate presentation of alternative
revenue programs. The Company has not yet fully determined the impacts of adoption for several aspects of the standard, including a determination whether and how much an evaluation of the collectability of regulated electric and gas revenues
will impact the amounts of revenue recognized upon delivery. The Company currently expects to implement the standard on a full retrospective basis, which requires restatement of all prior periods presented to conform to the new standard.
In March 2016, the FASB issued ASU 2016-09, which provides for improvements to employee share-based payment accounting. ASU 2016-09 is
effective for fiscal years, and interim periods within those years, beginning after December 15, 2016. ASU 2016-09 simplifies several aspects of the accounting for employee share-based payment transactions, including the accounting for income
taxes, forfeitures, and statutory tax withholding requirements, as well as classification in the statement of cash flows. The Company adopted this new guidance in the first quarter of 2017 and it did not have an impact on the Companys
Consolidated Financial Statements.
In February 2016, the FASB issued ASU 2016-02, Leases, Topic 842, which for lessees requires balance sheet
recognition of right-of-use assets and lease liabilities for most leases. This guidance will be effective for interim and annual reporting periods beginning after Dec. 15, 2018. The Company has not yet fully determined the impacts of
implementation. However, adoption is expected to occur on Jan. 1, 2019 utilizing the practical expedients provided by the standard. As such, agreements entered into prior to Jan. 1, 2017 that are currently considered leases are expected to
be recognized on the consolidated balance sheet, including contracts for use of office space and equipment. The Company expects that similar agreements entered into after December 31, 2016 will generally qualify as leases under the new
standard, but has not yet completed its evaluation of certain other contracts, including arrangements for the secondary use of assets, such as land easements.
In January 2016, the FASB issued Accounting Standards Update (ASU) 2016-01 which addresses certain aspects of recognition, measurement, presentation and disclosure of financial instruments. A financial
instrument is defined as cash, evidence of ownership interest in a company or other entity, or a contract that both: (i) imposes on one entity a contractual obligation either to deliver cash or another financial instrument to a second entity or
to exchange other
30
financial instruments on potentially unfavorable terms with the second entity and (ii) conveys to that second entity a contractual right either to receive cash or another financial
instruments from the first entity or to exchange other financial instruments on potentially favorable terms with the first entity. This pronouncement is effective for financial statements issued for annual periods beginning after December 15,
2017 and interim periods within those annual periods with earlier application permitted as of the beginning of the fiscal year of adoption. The Company is evaluating the impact that this new guidance will have on the 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, other than entering into debt agreements, as discussed below, that impacted its unaudited consolidated financial
statements.
On July 14, 2017, Northern Utilities, Fitchburg and Granite State, entered into agreements to issue and sell $90 million
collectively of Senior Unsecured Notes (Notes) through a private placement marketing process to institutional investors. These financings are expected to close and fund on November 1, 2017.
Northern Utilities priced $20 million of Notes due 2027 at 3.52% and $30 million of Notes due 2047 at 4.32%. Fitchburg priced $10 million of Notes due
2027 at 3.52% and $15 million of Notes due 2047 at 4.32%. Granite State priced $15 million of Notes due 2027 at 3.72%.
Northern
Utilities, Fitchburg and Granite State plan to use the net proceeds from the offering to repay short-term debt and for general corporate purposes. Northern Utilities, Fitchburg and Granite State anticipate closing and funding this long-term
financing on November 1, 2017. However, the issuance of the Notes is subject to customary closing conditions for a transaction of this type.
The Notes offered have not been and will not be registered under the Securities Act of 1933 (Act), or any state securities laws, and may not be offered or sold in the United States absent registration or
an applicable exemption from the registration requirements of the Act and applicable state securities laws.
NOTE 2 DIVIDENDS
DECLARED PER SHARE
|
|
|
|
|
|
|
Declaration
Date
|
|
Date
Paid (Payable)
|
|
Shareholder of
Record Date
|
|
Dividend
Amount
|
07/25/17
|
|
08/29/17
|
|
08/15/17
|
|
$ 0.360
|
04/26/17
|
|
05/30/17
|
|
05/16/17
|
|
$ 0.360
|
01/25/17
|
|
02/28/17
|
|
02/14/17
|
|
$ 0.360
|
|
|
|
|
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
|
31
NOTE 3 SEGMENT INFORMATION
The following table provides significant segment financial data for the three and six months ended June 30, 2017 and June 30, 2016 and as of December 31, 2016 (millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30, 2017
|
|
Gas
|
|
|
Electric
|
|
|
Non-
Regulated
|
|
|
Other
|
|
|
Total
|
|
Revenues
|
|
$
|
32.0
|
|
|
$
|
47.4
|
|
|
$
|
1.4
|
|
|
$
|
|
|
|
$
|
80.8
|
|
Segment Profit (Loss)
|
|
|
0.1
|
|
|
|
3.1
|
|
|
|
0.1
|
|
|
|
(0.2
|
)
|
|
|
3.1
|
|
Capital Expenditures
|
|
|
17.0
|
|
|
|
5.5
|
|
|
|
|
|
|
|
4.9
|
|
|
|
27.4
|
|
|
|
|
|
|
|
Three Months Ended June 30, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
28.9
|
|
|
$
|
44.1
|
|
|
$
|
1.5
|
|
|
$
|
|
|
|
$
|
74.5
|
|
Segment Profit (Loss)
|
|
|
|
|
|
|
2.1
|
|
|
|
0.3
|
|
|
|
0.1
|
|
|
|
2.5
|
|
Capital Expenditures
|
|
|
18.8
|
|
|
|
7.3
|
|
|
|
|
|
|
|
2.2
|
|
|
|
28.3
|
|
|
|
|
|
|
|
Six Months Ended June 30, 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
106.8
|
|
|
$
|
96.9
|
|
|
$
|
3.1
|
|
|
$
|
|
|
|
$
|
206.8
|
|
Segment Profit
|
|
|
10.0
|
|
|
|
5.2
|
|
|
|
0.5
|
|
|
|
(0.2
|
)
|
|
|
15.5
|
|
Capital Expenditures
|
|
|
22.7
|
|
|
|
13.8
|
|
|
|
|
|
|
|
8.4
|
|
|
|
44.9
|
|
Segment Assets
|
|
|
637.0
|
|
|
|
446.4
|
|
|
|
7.1
|
|
|
|
47.2
|
|
|
|
1,137.7
|
|
|
|
|
|
|
|
Six Months Ended June 30, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
102.0
|
|
|
$
|
95.2
|
|
|
$
|
3.1
|
|
|
$
|
|
|
|
$
|
200.3
|
|
Segment Profit
|
|
|
9.4
|
|
|
|
3.4
|
|
|
|
0.6
|
|
|
|
|
|
|
|
13.4
|
|
Capital Expenditures
|
|
|
21.9
|
|
|
|
13.0
|
|
|
|
|
|
|
|
4.7
|
|
|
|
39.6
|
|
Segment Assets
|
|
|
593.8
|
|
|
|
419.4
|
|
|
|
7.0
|
|
|
|
31.5
|
|
|
|
1,051.7
|
|
|
|
|
|
|
|
As of December 31, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment Assets
|
|
$
|
645.2
|
|
|
$
|
441.1
|
|
|
$
|
6.8
|
|
|
$
|
35.1
|
|
|
$
|
1,128.2
|
|
32
NOTE 4 DEBT AND FINANCING ARRANGEMENTS
Details on long-term debt at June 30, 2017, June 30, 2016 and December 31, 2016 are shown below:
|
|
|
|
|
|
|
|
|
|
|
|
|
($ millions)
|
|
June 30,
|
|
|
December 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
2016
|
|
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
|
|
|
|
|
|
|
|
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
|
|
|
9.0
|
|
|
|
12.0
|
|
|
|
9.0
|
|
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
|
|
|
9.5
|
|
|
|
11.4
|
|
|
|
9.5
|
|
6.79% Notes, Due October 15, 2025
|
|
|
10.0
|
|
|
|
10.0
|
|
|
|
10.0
|
|
7.37% Notes, Due January 15, 2029
|
|
|
12.0
|
|
|
|
12.0
|
|
|
|
12.0
|
|
5.90% Notes, Due December 15, 2030
|
|
|
15.0
|
|
|
|
15.0
|
|
|
|
15.0
|
|
7.98% Notes, Due June 1, 2031
|
|
|
14.0
|
|
|
|
14.0
|
|
|
|
14.0
|
|
Northern Utilities Senior Notes:
|
|
|
|
|
|
|
|
|
|
|
|
|
6.95% Senior Notes, Series A, Due December 3, 2018
|
|
|
20.0
|
|
|
|
30.0
|
|
|
|
20.0
|
|
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
|
|
|
6.7
|
|
|
|
10.0
|
|
|
|
6.7
|
|
Unitil Realty Corp.:
|
|
|
|
|
|
|
|
|
|
|
|
|
Senior Secured Notes:
|
|
|
|
|
|
|
|
|
|
|
|
|
8.00% Notes, Due Through August 1, 2017
|
|
|
|
|
|
|
0.8
|
|
|
|
0.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Long-Term Debt
|
|
|
336.2
|
|
|
|
325.2
|
|
|
|
336.6
|
|
Less: Unamortized Debt Issuance Costs
|
|
|
2.8
|
|
|
|
2.8
|
|
|
|
3.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Long-Term Debt, net of Unamortized Debt Issuance Costs
|
|
|
333.4
|
|
|
|
322.4
|
|
|
|
333.6
|
|
Less: Current Portion
|
|
|
29.9
|
|
|
|
17.2
|
|
|
|
16.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Long-term Debt, Less Current Portion
|
|
$
|
303.5
|
|
|
$
|
305.2
|
|
|
$
|
316.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
33
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)
|
|
June 30,
|
|
|
December 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
2016
|
|
Estimated Fair Value of Long-Term Debt
|
|
$
|
381.5
|
|
|
$
|
372.8
|
|
|
$
|
370.3
|
|
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 $107.9
million for the six months ended June 30, 2017. Total gross repayments were $110.6 million for the six months ended June 30, 2017. The following table details the borrowing limits, amounts outstanding and amounts available under the
revolving Credit Facility as of June 30, 2017, June 30, 2016 and December 31, 2016:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revolving Credit Facility ($ millions)
|
|
|
|
June 30,
|
|
|
December 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
2016
|
|
Limit
|
|
$
|
120.0
|
|
|
$
|
120.0
|
|
|
$
|
120.0
|
|
Short-Term Borrowings Outstanding
|
|
$
|
79.2
|
|
|
$
|
54.2
|
|
|
$
|
81.9
|
|
Letters of Credit Outstanding
|
|
$
|
1.1
|
|
|
$
|
|
|
|
$
|
1.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available
|
|
$
|
39.7
|
|
|
$
|
65.8
|
|
|
$
|
37.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
34
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 June 30, 2017, June 30, 2016 and December 31, 2016, the Company was in compliance with the covenants contained in the Credit Facility in effect on that date.
The weighted average interest rates on all short-term borrowings and intercompany money pool transactions were 2.2% and 1.7% for the six months ended
June 30, 2017 and June 30, 2016, respectively. The weighted average interest rate on all short-term borrowings for the twelve months ended December 31, 2016 was 1.8%.
Unitil Corporation and its utility subsidiaries, Fitchburg, Unitil Energy, Northern Utilities, and Granite State are currently rated BBB+ by Standard & Poors Ratings Services.
On July 14, 2017, Northern Utilities, Fitchburg and Granite State, entered into agreements to issue and sell $90 million collectively of
Senior Unsecured Notes (Notes) through a private placement marketing process to institutional investors. These financings are expected to close and fund on November 1, 2017. (See also Subsequent Events in Note 1.)
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 June 30, 2017, there are $2.7 million of
current and $6.4 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 $5.6 million, $7.6 million and $9.9 million of natural gas storage inventory at June 30, 2017, June
30, 2016 and December 31, 2016, respectively, related to these asset management agreements. The amount of natural gas inventory released in June 2017 and payable in July 2017 is $0.1 million and is recorded in Accounts Payable at June 30,
2017. The amount of natural gas inventory released in June 2016 2016 and payable in July 2016 was less than $0.1 million and is recorded in Accounts Payable at June 30, 2016. The amount of natural gas inventory released in December 2016 and
payable in January 2017 was $2.1 million and was recorded in Accounts Payable at December 31, 2016.
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 June 30, 2017, there were approximately $23.9 million of guarantees outstanding and the longest term guarantee extends through April 2018.
35
The Company also guarantees the payment of principal, interest and other amounts payable on the notes issued
by Granite State and Unitil Realty. As of June 30, 2017, the principal amount outstanding for the 7.15% Granite State notes was $6.7 million and was less than $0.1 million for the 8% Unitil Realty notes. The 8% Unitil Realty notes will be fully
paid in August 2017 and the guarantee associated with those notes will terminate.
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 14,052,096,14,065,230 and
14,114,551 shares of common stock outstanding at June 30, 2016, December 31, 2016 and June 30, 2017, respectively.
Dividend Reinvestment and Stock Purchase Plan
During the first six months of 2017, the Company sold 14,391 shares of its common stock, at
an average price of $45.87 per share, in connection with its Dividend Reinvestment and Stock Purchase Plan (DRP) and its 401(k) plans resulting in net proceeds of approximately $660,200. 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.
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.
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On January 30, 2017, 34,930 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. There were 89,705 and 95,506 non-vested shares under the Stock Plan as of June 30, 2017 and 2016, respectively. The weighted average grant date fair value of these
shares was $39.55 and $35.30, 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 $1.8 million for the six months ended June 30,
2017 and 2016, respectively. At June 30, 2017, there was approximately $1.6 million of total unrecognized compensation cost under the Stock Plan which is expected to be recognized over approximately 2.6 years. There were no forfeitures or
cancellations under the Stock Plan during the six months ended June 30, 2017.
Restricted Stock Units
Non-management members of the Companys Board of Directors (Directors) may elect to receive the equity portion of their annual retainer in the form
of Restricted Stock Units. Restricted Stock Units earn dividend equivalents and will generally be settled by payment to each Director as soon as practicable following the Directors separation from service to the Company. The Restricted Stock
Units will be paid such that the Director will receive (i) 70% of the shares of the Companys common stock underlying the restricted stock units and (ii) cash in an amount equal to the fair market value of 30% of the shares of the
Companys common stock underlying the Restricted Stock Units. The equity portion of Restricted Stock Units activity during the six months ended June 30, 2016 in conjunction with the Stock Plan are presented in the following table:
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Restricted Stock Units (Equity
Portion)
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Units
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Weighted
Average
Stock
Price
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Restricted Stock Units as of December 31, 2016
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43,345
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$
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33.40
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Restricted Stock Units Granted
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Dividend Equivalents Earned
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683
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$
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45.92
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Restricted Stock Units Settled
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Restricted Stock Units as of June 30, 2017
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44,028
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$
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33.60
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|
|
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There were 34,192 Restricted Stock Units outstanding as of June 30, 2016 with a weighted average stock price of
$31.97. Included in Other Noncurrent Liabilities on the Companys Consolidated Balance Sheets as of June 30, 2017, June 30, 2016 and December 31, 2016 is $0.9 million, $0.6 million and $0.8 million, respectively,
representing the fair value of liabilities associated with the portion of fully vested RSUs that will be settled in cash.
Preferred Stock
There was $0.2 million, or 1,893 shares, of Unitil Energys 6.00% Series Preferred Stock outstanding as of June 30, 2017 and
December 31, 2016. There was $0.2 million, or 1,898 shares, of Unitil Energys 6.00% Series Preferred Stock outstanding as of June 30, 2016. There were less than $0.1 million of total dividends declared on Preferred Stock in each of
the three and six month periods ended June 30, 2017 and June 30, 2016, 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, 2016 AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON FEBRUARY 2, 2017.
37
Rate Case Activity
Unitil Energy Base Rates
On April 20, 2017 the NHPUC issued its final order approving a settlement between Unitil Energy, Commission Staff and the Office of Consumer Advocate
providing for a permanent increase of $4.1 million, and a three year rate plan with an additional rate step adjustment in May 2017 of $0.9 million, followed by two rate step adjustments in May of 2018 and 2019 to recover the revenue requirements
associated with annual capital expenditures as defined under the rate plan.
Fitchburg Base Rates Electric
On
April 29, 2016 the MDPU issued an order approving a $2.1 million increase in Fitchburgs electric base revenue decoupling target, effective May 1, 2016. As part of its order, the MDPU approved, with modifications,
Fitchburgs request for an annual capital cost recovery mechanism, which allows for increases to target revenues to recover the revenue requirement associated with annual capital additions as defined under the mechanism. In 2016, Fitchburg made
its first capital cost adjustment filing for calendar year 2015 capital investments, and received MDPU approval to increase revenues by approximately $0.5 million, subject to further investigation and reconciliation. On June 29, 2017, Fitchburg
filed its compliance report on capital investments for calendar year 2016, which forms the basis for the next filing to adjust target revenues to be made with the MDPU in November 2017. These matters remain pending.
Fitchburg Base Rates Gas
On April 29, 2016, the MDPU issued an order approving a $1.6 million increase in
Fitchburgs gas base revenue decoupling target, effective May 1, 2016.
Fitchburg Gas Operations
On
October 31, 2016, Fitchburg submitted its annual filing under its gas system enhancement program to recover the revenue requirements associated with capital additions in 2017 as defined under the program. The filing sought approval to collect
an additional $0.9 million of annual revenues. On April 28, 2017, the MDPU approved recovery of 2017 costs, subject to a revenue cap of 1.5%, resulting in an additional $0.5 million of annual revenues effective May 1, 2017. The
remaining $0.4 million of annual revenues the Company sought approval to collect has been deferred for recovery in future periods under the program. The Company has requested that the MDPU waive the 1.5% revenue requirement cap on deferred amounts.
This matter remains pending.
Northern Utilities Base Rates Maine
On May 31, 2017, Northern Utilities filed a
base rate case with the MPUC seeking to increase annual revenues by $6.0 million. Following an extensive regulatory review and investigation process, a final order from the MPUC on Northern Utilities request is expected by the end of February
2018.
In addition to the distribution base rate increase, Northern Utilities is requesting to extend its Targeted Infrastructure Replacement
Adjustment mechanism (TIRA). The TIRA is a capital cost recovery mechanism designed to recover the annual revenue requirements associated with targeted investments in gas distribution system infrastructure replacement and upgrade projects, including
the Companys Cast Iron Replacement Program (CIRP). This matter remains pending.
Northern Utilities Targeted Infrastructure
Replacement Adjustment
The 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 had an initial term of four years and covers targeted capital expenditures
in 2013 through 2016 as defined under the mechanism. The 2017 TIRA, for 2016 expenditures, approved by the MPUC on April 25, 2017, provided for an annual increase in distribution base revenue of $1.1 million, effective May 1, 2017.
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Northern Utilities Targeted Area Build-out Program Maine
On December 22,
2015, the MPUC approved a Targeted Area Build-out (TAB) 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. 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. The initial pilot of the TAB program was approved for the City of Saco, and is being
built out over a period of three years, with the potential to add 1,000 new customers and approximately $1 million in annual distribution revenue in the Saco area. The second TAB program was approved for the Town of Sanford, and has the
potential to add 2,000 new customers and approximately $2 million in annual distribution revenue in the Sanford area.
Northern Utilities
Base Rates New Hampshire
On June 5, 2017, Northern Utilities filed for a base rate increase with the NHPUC seeking to increase annual revenues by $4.7 million. On June 15, 2017, the Commission suspended the
Companys proposed permanent rates tariffs while the filing is under extensive regulatory review and investigation over the next several months. A final order from the NHPUC on Northern Utilities request is expected by the end of April
2018.
Northern Utilities has reached a settlement agreement on temporary rates to produce an increase in annual revenues of approximately
$1.6 million, effective with service rendered on and after August 1, 2017, and until a final, non-appealable order on permanent rates is issued. Once a final decision on permanent rates is issued, it will be reconciled back to the date that
temporary rates were implemented. The settlement agreement will be filed for Commission approval.
In its initial petition, Northern Utilities
is also requesting approval to implement a multi-year rate plan, including a capital cost recovery mechanism, which will allow for recovery of the revenue requirements associated with future annual capital expenditures as defined under the plan
through changes, or step adjustments, to Northern Utilities distribution rates without the need to file a general rate case prior to January 2021. This matter remains pending.
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 over three years as directed by the NHPUC and MPUC. The Company has recorded current Regulatory Liabilities related to these refunds of $3.5 million on its Consolidated Balance Sheets as of
June 30, 2017.
Granite State Base Rates
Granite State has in place a FERC-approved second amended settlement
agreement under which it is permitted to file annually, each June, for a rate adjustment to recover the revenue requirements associated with specified capital investments in gas transmission projects up to a specific cap on expenditures. On
June 21, 2017 Granite State filed for an annual revenue increase under this provision of $0.2 million, effective August 1, 2017. This filing remains pending before the FERC.
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
39
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 Electric Grid Modernization
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 engaged a consultant to direct a Working Group to investigate these issues and to prepare a final report with
recommendations for the Commission. The final report was filed on March 20, 2017. This matter remains pending.
Unitil Energy
Net Metering
Pursuant to legislation that became effective in May 2016, the NHPUC opened a proceeding to consider alternatives to the net metering tariffs currently in place. The NHPUC issued an Order on June 23, 2017. The Order
removes the cap on the total amount of generation capacity which may be owned or operated by customer-generators eligible for net metering. The order also adopts an alternative net metering tariff for small customer-generators (those with renewable
energy systems of 100 kW or less) which will remain in effect for a period of years while further data is collected and analyzed, time-of-use and other pilot programs are implemented, and a distributed energy resource valuation study is conducted.
Systems that are installed or queued during this period will have their net metering rate structure grandfathered until December 31, 2040. The Company does not believe that this proceeding will have a material adverse impact on the
Companys financial condition.
Fitchburg Electric Operations
On November 17, 2016, Fitchburg submitted its
2016 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, 2016, effective January 1, 2017.
Fitchburg Service
Quality
On February 28, 2017, Fitchburg submitted its 2016 Service Quality Reports for both its gas and electric divisions in accordance with new Service Quality Guidelines issued by the MDPU in December 2015. Fitchburg reported that
it met or exceeded its benchmarks for service quality performance in all metrics for both its gas and electric divisions. This matter remains pending.
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 located on Company property
in Fitchburg, Massachusetts, including a cost recovery mechanism to share the costs and benefits of the project among all Fitchburg customers. On November 9, 2016, the MDPU approved a Settlement Agreement supporting the proposal, which was
reached among the Company, the Attorney General of Massachusetts, and the Low-Income Weatherization and Fuel Assistance Program Network. Construction of the solar generating facility 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 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
40
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. Emergency regulations
implementing these new provisions, 220 C.M.R. § 23.00 et seq. and 220 C.M.R. § 24.00 et seq. were adopted by the MDPU on December 29, 2016, and adopted as final regulations on March 8, 2017. On February 2, 2017, the EDCs
filed for approval of the RFP process pursuant to Section 83d, which was approved by the MDPU on March 27, 2017. On March 31, 2017, the EDCs issued the RFP for Long-Term Contracts for Clean Energy Projects, pursuant to
Section 83d. On June 29, 2017, the EDCs issued the RFP pursuant to Section 83c.
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. Selection of contracts concluded during the fourth quarter of 2016 and contract negotiations concluded during the second quarter of 2017. The electric distribution
companies are working to finalize the regulatory approval filing. Fitchburgs final contracts will be subject to review and approval of the MDPU.
Fitchburg Other
On June 5, 2017, the Massachusetts Department of Energy Resources (DOER) filed an emergency regulation with the Secretary of the Commonwealths
office to implement the Solar Massachusetts Renewable Target (SMART) Program. This regulation is promulgated pursuant to Chapter 75 of the Acts of 2016, which requires the DOER to establish a new solar incentive program. The regulation is designed
to support the continued development of an additional 1,600 MW of solar renewable energy generating sources via a declining block compensation mechanism, and is the product of an extensive stakeholder process that began last spring and involved over
40 public meetings and two written public comment periods. While the emergency regulation takes effect immediately, it can only remain in effect for three months pending a full rulemaking proceeding conducted by the DOER, at which time final rules
will be promulgated. Additionally, the full implementation of the SMART Program will also require approval from the MDPU of tariffs filed by the Massachusetts Electric Distribution Companies. As such, the SMART program will not be in effect until
this occurs, and no MDPU proceeding can commence prior to the conclusion of the DOERs rulemaking process. In the interim, the current program for solar renewable energy credits, known as SREC-II, remains in effect for all eligible solar
facilities.
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. Fitchburgs tariff, filed in compliance with the new regulations, was approved on
February 7, 2017.
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 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
41
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 Energy Efficiency Surcharge; 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 Proceedings
Pursuant to Section 206 of the Federal Power Act, there are several pending proceedings before the FERC concerning the justness and reasonableness of the Return on Equity (ROE) component of the ISO-New England, Inc.
Participating Transmission Owners Regional Network Service and Local Network Service formula rates. On April 14, 2017, the U.S. Court of Appeals for the D.C. Circuit issued an opinion vacating a decision of the FERC with respect to these
formula rates, and remanded it for further proceedings. The FERC had found that the Transmission Owners existing ROE was unlawful, and had set a new ROE. The Court found that the FERC had failed to articulate a satisfactory explanation for its
orders. It is not certain at this time whether the remand of the decision by the Court will result in the setting by FERC of a new ROE at a level higher, lower or equal to the existing ROE. Fitchburg and Unitil Energy are Participating Transmission
Owners, although Unitil Energy does not own transmission plant. To the extent that these proceedings result in any changes to the rates being charged, a retroactive reconciliation may be required. The Company does not believe that these proceedings
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 Company continues to believe that this suit is without merit and will continue to defend itself vigorously. The
Town of Lunenburg filed a separate action in the Court arising out of the December 2008 ice storm. The Court granted the Companys Motion for Summary Judgment
42
on all counts in December 2016 and dismissed the Towns complaint. The Courts decision remains subject to a potential motion for reconsideration and appeal. 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.
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, 2016 AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON FEBRUARY 2, 2017.