Unitil Corporation - 10-Q quarterly report FY

SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For Quarter Ended September 30, 2002

Commission File Number 1-8858

Registrant's telephone number, including area code: (603) 772-0775

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes  X      No      

Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date.

UNITIL CORPORATION AND SUBSIDIARY COMPANIES
FORM 10-Q
For the Three and Nine Months Ended September 30, 2002

Table of Contents

Note 1 - Summary of Significant Accounting Policies

Nature of Operations

Unitil's principal business is the retail sale and distribution of electricity in New Hampshire and the retail sale and distribution of electricity and gas in Massachusetts through its retail distribution subsidiaries, CECo, E&H, and FG&E. The Company's wholesale electric power subsidiary, UPC, principally provides all the electric power supply requirements to CECo and E&H for resale at retail. URI conducts an energy brokering business, as well as related energy consulting and marketing activities through its subsidiary, Usource. Finally, URC and USC provide centralized facilities and operations and management services to support the Unitil system of companies.

With respect to rates and other business and financial matters, CECo and E&H are subject to regulation by the New Hampshire Public Utilities Commission (NHPUC), FG&E is regulated by the Massachusetts Department of Telecommunications & Energy (MDTE), and UPC, CECo, E&H, and FG&E are regulated by the Federal Energy Regulatory Commission (FERC).

The results of operations for the three and nine months ended September 30, 2002 and 2001 are not necessarily indicative of the results to be expected for the full year. In the opinion of the Company, the accompanying unaudited consolidated financial statements contain all adjustments (consisting only of normal recurring accruals) necessary to present fairly the consolidated financial position as of September 30, 2002 and 2001 and December 31, 2001; and results of operations for the three and nine months ended September 30, 2002 and 2001; and consolidated statements of cash flows for the nine months ended September 30, 2002 and 2001.

Reclassifications - Certain amounts previously reported have been reclassified to conform to current period presentation.

Newly Issued Pronouncements - In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets." SFAS No. 144 retains the requirements of SFAS No. 121 whereby an impairment loss should be recognized if the carrying value of the asset is not recoverable from its undiscounted cash flows and develops one accounting model for long-lived assets that are to be disposed of by sales. The Statement became effective for the Company on January 1, 2002. The Company reviews its assets each quarter to determine if an impairment loss exists. At September 30, 2002, the Company has determined that there is no impairment loss applicable to any of its assets; therefore, the adoption of this Statement did not have any impact on the Company's financial position or results of operations.

Note 2 - Sale of Equity Stake in Enermetrix

On April 11, 2002, Unitil Corporation sold its equity ownership in Enermetrix.com Inc. for cash and improved commercial terms for use of the Enermetrix Software Network. As a result of the sale, the Company will realize approximately $1.4 million in current tax benefits from capital loss carrybacks.

Note 3 - Dividends Declared Per Share

Note 4 - Common Stock

During the third quarters of 2002 and 2001, the Company did not sell any additional shares of Common Stock in connection with its Dividend Reinvestment and Stock Purchase Plan.

At the end of the third quarter of 2001, the Company instituted an interim Common Stock repurchase program during the temporary suspension of certain conditions of Rule 10b-18, as modified by the SEC's emergency order, following the tragic events of September 11, 2001. As a result, the Company repurchased 2,500 shares of its Common Stock at market price during this temporary interim period.

Note 5 - Preferred Stock

Details on preferred stock at September 30, 2002, September 30, 2001 and December 31, 2001 are shown below:

(Amounts in Thousands)

Note 8 - Regulatory Matters

The Unitil Companies are regulated by various federal and state agencies, including the Securities and Exchange Commission (SEC), the Federal Energy Regulatory Commission (FERC), and state regulatory authorities with jurisdiction over the utility industry, including the New Hampshire Public Utilities Commission (NHPUC) and the Massachusetts Department of Telecommunications and Energy (MDTE). In recent years, there has been significant legislative and regulatory activity to restructure the utility industry in order to introduce greater competition in the supply and sale of electricity and gas, while continuing to regulate the distribution operations of Unitil's utility operating subsidiaries.

New Hampshire Restructuring - On January 25, 2002 the Company's New Hampshire electric utility subsidiaries, CECo, E&H, and UPC filed a comprehensive restructuring proposal with the NHPUC. This proposal included the introduction of customer choice consistent with the New Hampshire restructuring law, the divestiture of UPC's power supply portfolio, the recovery of stranded costs, the combination of CECo and E&H into a planned successor, Unitil Energy System's, Inc. (UES), and new distribution rates for UES. On October 25, 2002, the NHPUC approved a multiparty settlement on all major issues in the proceeding. Under Unitil's approved restructuring plan, Unitil will divest of its existing power supply portfolio and conduct a solicitation for new power supplies from which to meet its ongoing transition and default service energy obligations. In early 2003, Unitil will file for final NHPUC approval of the executed agreements resulting from these divestiture and solicitation proce sses, including final tariffs for stranded cost recovery and transition and default services. The implementation of customer choice is targeted for May 1, 2003.

Rate Proceedings - Prior to 2002, the last formal regulatory filings initiated by the Company to increase base rates for Unitil's retail electric operating subsidiaries occurred in 1985 for CECo, 1984 for FG&E, and 1981 for E&H. The last distribution base rate increase request for Unitil's retail gas operations occurred in 1998. A majority of the Company's electric and gas operating revenues are collected under various periodic rate adjustment mechanisms including fuel, purchased power, energy efficiency, and restructuring-related cost recovery mechanisms. Industry restructuring will continue to change the methods of how certain costs are recovered through the Company's regulated rates and tariffs.

On October 25, 2002, as part of the electric restructuring settlement for Unitil's New Hampshire utility operations described above, the Company received approval from the NHPUC for an increase of approximately $2.0 million in annual distribution revenues effective December 1, 2002.

On May 17, 2002, the Company's Massachusetts combination electric and gas distribution utility, FG&E, filed revised rates and charges designed to increase annual base distribution revenues by approximately $3.2 million for the Electric Division and $3.4 million for the Gas Division. FG&E also proposed Performance Based Regulation (PBR) Plans with the Massachusetts Department of Telecommunications and Energy (MDTE) in conjunction with this rate filing, consistent with MDTE policy to implement PBR in the context of base rate cases. The MDTE completed hearings on the rate filings in September, and a final order is due on or before December 3, 2002. The PBR portion of the filing is pending review by the MDTE.

On October 15, 2002, the MDTE issued an order approving a settlement agreement filed jointly by FG&E and the Massachusetts Attorney General (AG) regarding the Company's transition charge reconciliation mechanism, which provides for the rate recovery of FG&E's restructuring-related stranded costs. The settlement resolves issues raised by the AG concerning FG&E's compliance with the Massachusetts Electric Restructuring Act and related MDTE orders. Under the approved settlement agreement FG&E has agreed to reduce the carrying charge on deferred transition costs, which will be recovered from customers in future years. This change does not effect current electric rates, but will reduce the total amount of transition costs, including carrying costs, in future years.

The Company's past and present operations include activities which are subject to extensive federal and state environmental regulations.

Note 10 - Extraordinary Item

In November 1997, the Massachusetts Legislature enacted landmark electric industry restructuring legislation (the

The MDTE conditionally approved FG&E's Plan in February 1998, and started an investigation and evidentiary hearings into FG&E's proposed recovery of regulatory assets related to stranded generation asset costs and expenses related to the formulation and implementation of its Plan. In January 1999, the MDTE approved FG&E's Plan, which included provisions for the recovery of stranded costs through a Transition Charge in the Company's electric rates. In September 1999, FG&E filed its first annual reconciliation of stranded generation asset costs and expenses and associated Transition Charge revenues and the MDTE initiated a lengthy investigation and hearing process in docket DTE 99-110.

During October 2001, the MDTE issued a series of regulatory orders in several long-pending cases involving FG&E. These orders complete the review and disposition of issues related to the Company's recovery of transition costs due to the restructuring of the electric industry in Massachusetts, which was mandated by the state legislature in November 1997. The orders determined the final treatment of regulatory assets that FG&E has sought to recover, in its original Restructuring Plan, from its Massachusetts electric customers over the multi-year transition period that began in 1998. FG&E has now been authorized to recover approximately $150 million of regulatory assets attributable to stranded generation assets, purchased power costs, and related expenses.

As a result of the industry restructuring-related Orders, FG&E recorded a non-cash adjustment to regulatory assets of $5.3 million, which resulted in the recognition of an extraordinary charge of $3.9 million after taxes. The Company recognized the extraordinary charge of $0.82 per share as of September 2001 as a subsequent event.

As a result of all of these orders, the Company has been granted recovery of substantially all of its stranded costs, less the amount noted above.

SAFE HARBOR CAUTIONARY STATEMENT

This report contains forward-looking statements, which are subject to the inherent uncertainties in predicting future results and conditions. Certain factors that could cause the actual results to differ materially from those projected in these forward-looking statements include, but are not limited to; variations in weather, changes in the regulatory environment, customers' preferences on energy sources, general economic conditions, increased competition and other uncertainties, all of which are difficult to predict, and many of which are beyond the control of the Company.

RESULTS OF OPERATIONS

Unitil's earnings were $0.29 per share for the third quarter of 2002, an improvement of $0.01 compared to the third quarter of 2001, before the Extraordinary Item. Higher electric sales primarily due to a series of heat waves this summer, and lower operating expenses, led to this earnings improvement.

Electric kilowatt-hour (kWh) Sales were 9.5% higher in the third quarter of 2002 versus prior year, due in part to higher-than-usual temperatures. Our service territories experienced 23 days of over-90-degree temperatures this quarter. As a result, electric sales to residential customers were 9.3% higher than last year, and sales to commercial and industrial customers were up almost 10% over prior year.

Third quarter gas Firm Therm Sales were up 1.4% compared to the prior year. Year to date, gas Firm Therm Sales were 12.4% lower than last year, due to extremely mild winter weather in the first quarter of 2002.

Electric revenues were lower by 3.7% and 12.7% for the three and nine months ended September 30, 2002, compared to the same periods of 2001. These decreases were due to a reduction in wholesale commodity fuel prices and lower distribution rates in our Massachusetts service territory.

Gas revenues increased in the third quarter by 8.2% over prior year. Year-to-date, gas revenues are lower than prior year by 23.2%, reflecting lower sales volume and decreased wholesale gas commodity prices.

Combined Fuel and Purchased Power and Gas Purchased for Resale expenses decreased 4.9% and 19.0% for the three- and nine-month periods, due to lower wholesale commodity prices. Both electric and gas supply costs are collected from customers through periodic cost recovery mechanisms, and therefore, changes in these costs do not affect the Company's net income.

Operation and Maintenance (O&M) expenses were 5.9% and 4.7% lower in the three- and nine-month periods, due to lower distribution utility O&M expenses, which were partially offset by higher expenditures for electric industry restructuring in New Hampshire. Depreciation and Amortization expense was higher than last year for the three- and nine-month periods, due to an increased level of utility plant additions placed in service.

In the nine months ended September 30, 2002, Local Property and Other taxes decreased 3.6%, primarily due to cessation of the NH Franchise Tax. On a year-to-date basis, Income Tax expense was flat, reflecting lower pre-tax income in 2002, offset by increases in state income taxes. Interest expense, net, was 5.8% higher for the nine-month period, compared to the same period last year, primarily due to higher borrowings to support capital expenditure programs and reduced interest income on Regulatory Asset balances.

In the third quarter of 2002, Usource revenues were $147k, compared to $56k in the third quarter of 2001. Revenues for the nine-month period improved to $525k in 2002 from $215k in 2001. Losses for the third quarter from our Usource segment were higher by $0.01 per share compared to the same period in 2001, due to higher operating expenses.

For the 12 months ended September 30, 2002, earnings from operations were $0.95 per share versus $1.42 for the 12 months trailing September 30, 2001. The most recent 12-month period reflects the impact of a $0.50 per share write-down in the market value of non-utility investments taken by the Company in the fourth quarter of 2001.

As a result of declining interest rates and the recent sharp declines in equity markets, the Company - in accordance with requirements of SFAS #87 "Employers' Accounting for Pensions" - may be required to record a significant reduction to equity as a component of comprehensive income at the end of the fourth quarter. This non-cash, non-income-related adjustment could occur if the fair market value of pension assets is less than the accumulated pension benefit obligations at the annual measurement date of December 31, 2002. This accounting requirement would have no effect on income.

Regulatory Matters are fully discussed in Note 8 to Consolidated Financial Statements

CAPITAL REQUIREMENTS

Capital expenditures for the nine months ended September 30, 2002 were approximately $14.4 million. This compares to $14.2 million during the same period last year. Annual capital expenditures for the year 2002 are estimated to be approximately $20.6 million as compared to $19.9 million for 2001. This projection reflects normal capital expenditures for utility system expansions, replacements and other improvements.

Although Unitil's utility operating companies are subject to commodity price risk as part of their traditional operations, the current regulatory framework within which these companies operate allows for full collection of fuel and gas costs in rates. Consequently, there is limited commodity price risk after consideration of the related rate-making. As the utility industry deregulates, the Company will be divesting its commodity-related energy businesses and therefore will be further reducing its exposure to commodity-related risk. There were no material changes to the Company's exposure to interest rate risk from December 31, 2001.

Within the 90 days prior to the date of this report, the Company carried out an evaluation, under the supervision and with the participation of the Company's management, including the Company's Chief Executive Officer, Chief Financial Officer and Controller, of the effectiveness of the design and operation of the Company's disclosure controls and procedures pursuant to Rule 13a-14 under the Securities Exchange Act of 1934, as amended. Based upon that evaluation, the Chief Executive Officer, Chief Financial Officer and Controller concluded that the Company's disclosure controls and procedures are effective in timely alerting them to material information relating to the Company required to be included in the Company's periodic SEC filings.

There have been no significant changes in the Company's internal controls or in other factors, which could significantly affect internal controls subsequent to the date the Company carried out its evaluation.

(a)  Exhibits

(b)    Reports on Form 8-K

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

I, Anthony J. Baratta, Jr., certify that:

1. I have reviewed this quarterly report on Form 10-Q of Unitil Corporation;
2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:

I, Mark H. Collin, certify that:

1. I have reviewed this quarterly report on Form 10-Q of Unitil Corporation;
2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:

I, Laurence M. Brock, certify that:

EXHIBIT 11.

UNITIL CORPORATION AND SUBSIDIARY COMPANIES

COMPUTATION OF EARNINGS PER AVERAGE COMMON SHARE OUTSTANDING
(000's except for per share data)
(UNAUDITED)