SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
x | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended December 31, 2003
OR
¨ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
Commission file number 1-8858
UNITIL CORPORATION
(Exact name of registrant as specified in its charter)
New Hampshire | 02-0381573 | |
(State or other jurisdiction of incorporation or organization) |
(I.R.S. Employer Identification No.) | |
6 Liberty Lane West, Hampton, New Hampshire | 03842-1720 | |
(Address of principal executive offices) | (Zip Code) |
Registrants telephone number, including area code: (603) 772-0775
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class |
Name of Exchange on Which Registered | |
Common Stock, No Par Value | American Stock Exchange |
Securities registered pursuant to Section 12(g) of the Act: NONE
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 by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrants knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendments to this Form 10-K x
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes x No ¨
Based on the closing price of June 30, 2003, the aggregate market value of common stock held by non-affiliates of the registrant was $112,473,808.
The number of common shares outstanding of the registrant was 5,507,880 as of February 24, 2004.
Documents Incorporated by Reference:
Portions of the Proxy Statement relating to the Annual Meeting of Shareholders to be held April 15, 2004, are incorporated by reference into Part III of this Report.
FORM 10-K
For the Fiscal Year Ended December 31, 2003
Table of Contents
Item |
Description |
Page | ||
PART I | ||||
1. |
||||
2 | ||||
3 | ||||
4 | ||||
5 | ||||
7 | ||||
7 | ||||
8 | ||||
9 | ||||
9 | ||||
11 | ||||
2. |
Properties | 12 | ||
3. |
Legal Proceedings | 13 | ||
4. |
Submission of Matters to a Vote of Securities Holders | 13 | ||
PART II | ||||
5. |
Market for Registrants Common Equity and Related Shareholder Matters |
14 | ||
6. |
15 | |||
7. |
Managements Discussion and Analysis of Financial Condition and Results of Operations |
16 | ||
7A. |
37 | |||
8. |
38 | |||
9. |
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure |
77 | ||
9A. |
77 | |||
PART III | ||||
10. |
78 | |||
11. |
78 | |||
12. |
Security Ownership of Certain Beneficial Owners and Management |
78 | ||
13. |
78 | |||
14. |
78 | |||
PART IV | ||||
15. |
Exhibits, Financial Statement Schedules and Reports on Form 8-K |
79 | ||
82 |
Exhibit 4.7 |
Fitchburg Gas and Electric Light Company Note Agreement dated October 15, 2003 for the 6.79% Notes due October 15, 2025. | |
Exhibit 11.1 |
Computation in Support of Earnings per Share | |
Exhibit 12.1 |
Computation in Support of Ratio of Earnings to Fixed Charges | |
Exhibit 21.1 |
Subsidiaries of Registrant | |
Exhibit 23.1 |
Consent of Independent Certified Public Accountants | |
Exhibit 31.1 |
Certifications of Chief Executive Officer, Chief Financial Officer and Controller Pursuant to Rule 13a-14 of the Exchange Act, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | |
Exhibit 32.1 |
Certifications of Chief Executive Officer, Chief Financial Officer and Controller Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
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Unitil Corporation (Unitil or the Company) was incorporated under the laws of the State of New Hampshire in 1984. Unitil is a registered public utility holding company under the Public Utility Holding Company Act of 1935 (PUHCA). The following companies are wholly-owned subsidiaries of Unitil:
Unitil Corporation Subsidiaries |
State and Year of |
Principal Type of Business | ||
Unitil Energy Systems, Inc. (UES) | NH -1901 | Retail Electric Distribution Utility | ||
Fitchburg Gas and Electric Light Company (FG&E) | MA -1852 | Retail Electric & Gas Distribution Utility | ||
Unitil Power Corp. (Unitil Power) | NH -1984 | Wholesale Electric Power Utility | ||
Unitil Service Corp. (Unitil Service) | NH -1984 | Service Company | ||
Unitil Realty Corp. (Unitil Realty) | NH -1986 | Real Estate Management | ||
Unitil Resources, Inc. and subsidiaries (Unitil Resources) | NH -1993 | Non-utility, unregulated Energy Services | ||
Usource Inc., Usource L.L.C. (Usource) | NH -2000 | Energy Brokering and Advisory Services |
In December 2002, Exeter & Hampton Electric Company (E&H), a wholly-owned subsidiary of Until, was merged with and into Concord Electric Company (CECo), also a wholly-owned subsidiary of Unitil. CECo changed its name to Unitil Energy Systems, Inc. (UES) immediately following the merger.
Unitils principal business is the retail distribution of electricity in the southeastern seacoast and capital city areas of New Hampshire and the retail distribution of both electricity and natural gas in the greater Fitchburg area of north central Massachusetts, through our two utility subsidiaries, UES and FG&E, collectively referred to as the retail distribution utilities. Unitils retail distribution utilities serve approximately 112,800 electric and natural gas customers in their franchise areas. Unitils utility subsidiaries have effectively divested their ownership interest in electric generating facilities and do not own or operate major transmission facilities. Rather, the retail distribution companies are local pipes and wires electric and natural gas distribution companies with a combined investment in net utility plant of $195.1 million at December 31, 2003. Unitils total revenues were $220.7 million in 2003. Net income applicable to common shareholders for 2003 was $7.7 million. Substantially all of Unitils revenues and net income are derived from regulated utility operations.
A third utility subsidiary, Unitil Power, formerly functioned as the full requirements wholesale power supply provider for UES. In connection with the implementation of electric industry restructuring in New Hampshire, Unitil Power ceased being the wholesale supplier of UES 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 UES 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 and management services on a centralized basis to its affiliated Unitil companies. Unitil Realty owns and manages the Companys corporate office building and property located in Hampton, New Hampshire and leases this facility to Unitil Service under a long-term lease arrangement. Unitil Resources is the Companys wholly-owned unregulated subsidiary that provides energy brokering, consulting and management related services. Usource, Inc. and Usource L.L.C. (collectively, Usource) are wholly-owned subsidiaries of Unitil Resources. Usource provides energy brokering services, as well as various energy consulting services to large commercial and industrial customers in the northeastern United States.
2
Electric Utility Operations
Unitils electric utility operations are conducted through the retail distribution utilities, UES and FG&E. Revenues from Unitils electric utility operations were $190.9 million for 2003. Earnings from electric utility operations were $7.0 million for the same 12-month period.
The primary business of the Companys electric utility operations is the local distribution of electricity to customers in the retail distribution utilities franchise areas. As a result of the implementation of retail choice in New Hampshire and Massachusetts, Unitils customers are free to contract for their supply of electricity with third-party suppliers. Both UES and FG&E supply electricity to those customers who do not obtain their supply from third-party suppliers, with the costs associated with electricity supplied by the Company being recovered on a pass-through basis under periodically-adjusted rates.
UES is engaged principally in the retail distribution of electricity to approximately 70,000 customers in New Hampshire in the capital city of Concord as well as 12 surrounding towns and all or part of 16 towns in the southeastern and seacoast regions of New Hampshire, including the towns of Hampton, Exeter, Atkinson and Plaistow. UESs franchise areas consist of approximately 408 square miles.
The state capital of New Hampshire is located within UESs franchise areas, and includes the executive, legislative and judicial branches and offices and facilities for all major state government services as well as several federal government facilities. In addition, UESs franchise areas are retail trading and recreation centers for the north central and southeastern parts of the state. These areas serve diversified commercial and industrial businesses, including manufacturing firms engaged in the production of electronic components, wires and plastics. UES franchise areas include popular resort areas and beaches along the Atlantic Ocean. UESs 2003 retail electric operating revenues were $130.4 million, of which approximately 42% were derived from residential sales and 58% from commercial/industrial sales. UESs earnings for the same 12-month period were $3.7 million.
FG&E is engaged in the retail distribution of both electricity and natural gas in the city of Fitchburg and several surrounding communities. FG&Es franchise area encompasses approximately 170 square miles. Electricity is supplied and distributed by FG&E to approximately 27,000 customers in the communities of Fitchburg, Ashby, Townsend and Lunenburg. FG&Es industrial customers include paper manufacturing and paper products companies, rubber and plastics manufacturers, chemical products companies and printing, publishing and allied industries. FG&Es 2003 retail electric operating revenues were $60.5 million, of which approximately 38% were derived from residential sales and 62% from commercial/industrial sales. FG&Es earnings from electric utility operations were $3.3 million in 2003.
Gas Utility Operations
Natural gas is supplied and distributed by FG&E to approximately 15,000 retail customers in the communities of Fitchburg, Lunenburg, Townsend, Ashby, Gardner and Westminster, all located in Massachusetts. Revenues from FG&Es gas utility operations were $28.6 million in 2003. Earnings from FG&Es gas utility operations were $1.1 million for the same 12-month period.
As a result of the introduction of retail choice for all natural gas customers in Massachusetts, FG&Es customers are free to contract for their supply of natural gas with third-party suppliers. FG&E continues to provide natural gas supply services to those customers who do not obtain their supply from third-party suppliers, with the actual costs associated with natural gas supplied by FG&E being recovered on a pass-through basis under periodically-adjusted rates.
FG&Es 2003 gas operating revenues were $28.6 million, of which approximately 55% was derived from residential firm sales, 44% from commercial/industrial firm sales and 1% from interruptible sales.
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Seasonality
Natural gas sales in New England are seasonal, and the Companys results of operations reflect this seasonal nature. Accordingly, results of operations are typically positively impacted by gas operations during the five heating season months, from November through March. Electric sales in New England are far less seasonal than natural gas sales; however, the highest usage typically occurs in both the summer and winter months due to air cooling and heating requirements, respectively.
Non-Utility, Unregulated Operations and Other
Unitils non-utility, unregulated operations are comprised of Unitil Resources and its subsidiaries, which are collectively referred to as Usource. Unitil Resources provides energy brokering services, through Usource, as well as various energy consulting services to large commercial and industrial customers in the northeastern United States. Revenues from Unitils unregulated operations were $1.1 million and $0.8 million in 2003 and 2002, respectively. Non-utility, unregulated operations recorded accounting book losses of $0.6 million in 2003.
Unitils other subsidiaries include Unitil Service and Unitil Realty, which provide centralized facilities, management and administrative services to Unitils affiliated companies. Unitils consolidated net income includes the earnings of the holding company and these subsidiaries. The earnings of these subsidiaries are principally derived from income earned on short-term investments and real property owned for Unitils and its subsidiaries use and is reported in Other segment income. Other segment earnings for 2003 were approximately $254,000.
(For details on Unitils Results of Operations, see Part II, Item 7 herein.)
(For segment information, see Part II, Item 8, Note 11 herein.)
As a registered holding company under PUHCA, Unitil and its subsidiaries are regulated by the Securities and Exchange Commission (SEC) with respect to various matters, including: the issuance of securities, capital structure and certain acquisitions and dispositions of assets. UES and FG&E are subject to regulation by the New Hampshire Public Utilities Commission (NHPUC) and the Massachusetts Department of Telecommunications and Energy (MDTE), respectively, with respect to their rates, issuance of securities and other accounting and operational matters. Certain aspects of the Companys utility operations as they relate to wholesale and interstate business activities are also regulated by the Federal Energy Regulatory Commission (FERC). In the past several years, the Company has completed the restructuring of its electric and natural gas operations resulting from the implementation of retail choice as mandated by the States of New Hampshire and Massachusetts.
Unitils retail distribution utilities have franchises to deliver electricity and/or natural gas to all customers in their franchise areas, at rates established under traditional cost of service regulation. Under this regulatory structure, through their distribution charges, UES and FG&E recover the cost of providing distribution service to their customers based on a historical test year, in addition to earning a return on their capital investment in utility assets. In 2002, the retail distribution utilities completed rate proceedings and were authorized by the NHPUC and MDTE to implement increased rates for electric and natural gas distribution operations beginning in December of that year. UES and FG&E also recover the actual cost of any electricity or natural gas they supply to their customers, as well as certain costs associated with industry restructuring, through periodically-adjusted rates.
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 natural gas, while continuing to regulate the distribution operations of Unitils retail distribution utilities. Unitil implemented the restructuring of its electric and gas operations in Massachusetts in 1998 and 2000, respectively and implemented the final phase
4
of a restructuring settlement for its New Hampshire electric operations on May 1, 2003. Following electric industry restructuring, Unitils retail distribution utilities have a continuing obligation to submit filings in both states that demonstrate their compliance with legislative and regulatory mandates and provide for timely recovery of costs in accordance with their approved restructuring plans.
In connection with industry restructuring and the implementation of retail choice for our customers in New Hampshire and Massachusetts, Unitil Power divested of its long-term power supply contracts and FG&E divested of its long-term power supply contracts and owned generation assets. Unitil Power divested its long-term power supply contracts to a subsidiary of Mirant Corporation (Mirant) and FG&E divested its owned generation assets and long-term power supply contracts to Select Energy, Inc. (Select Energy), a subsidiary of Northeast Utilities, Inc. Unitil Powers and FG&Es long-term power supply contracts were divested through the sale of the entitlements to the electricity associated with those contracts and owned generation assets. UES and FG&E recover in their rates all the costs associated with the divestiture of their power supply portfolios as a result of electric industry restructuring.
Unitils customers in both New Hampshire and Massachusetts now have the opportunity to purchase their electric supply from third party vendors, though most customers continue to purchase such supplies through Unitil as the provider of last resort. Accordingly, UES and FG&E contract with wholesale power suppliers for the electricity necessary to meet their regulated energy supply obligations. Similarly, FG&Es natural gas customers have the option to contract for their natural gas supply with third-party suppliers and FG&E remains the default service provider for these natural gas customers. The costs associated with the acquisition of such wholesale electric and natural gas supplies for customers who do not contract with third-party suppliers are recovered from those customers through periodic rate and cost recovery reconciliation mechanisms with no profit margin to UES or FG&E.
The Company has secured regulatory approval from both New Hampshire and Massachusetts state regulators for the recovery of approximately $203 million of power supply-related stranded costs principally over the next 6 to 8 years. Also, the Company has implemented comprehensive customer and financial information systems to accommodate the transition to competitive energy markets and retail choice. Unitils utility customers in Massachusetts have had the ability to choose their electric or gas supplier since March 1, 1998 and November 1, 2000, respectively and retail choice became available to the Companys electric customers in New Hampshire on May 1, 2003.
FG&E and UES contract directly for their electric supply with various wholesale suppliers. The wholesale power markets are conducted under the auspices of the New England Power Pool (NEPOOL) and the Independent System OperatorNew England (ISO-NE).
FG&E, Unitil Power, and UES are members of NEPOOL. NEPOOL was formed in 1971 to assure reliable operation of the bulk power system in the most economic manner for the region. NEPOOL is governed by an agreement (NEPOOL Agreement) that is filed with and subject to the jurisdiction of the FERC. Under the NEPOOL Agreement and the NEPOOL Open Access Transmission Tariff (OATT), to which virtually all New England electric utilities are parties, substantially all operation and dispatching of electric generation and bulk transmission capacity in New England is performed on a regional basis. The NEPOOL Agreement and the OATT impose generating capacity and reserve obligations and provide for the use of major transmission facilities and support payments associated therewith. The most notable benefits of NEPOOL are coordinated power system operation in a reliable manner and a supportive business environment for the development of a competitive electric marketplace. The regional bulk power system is operated by an independent corporate entity, the ISO-NE, in order to avoid any opportunity for conflicting financial interests between the system operator and the market-driven participants.
There continue to be ongoing legislative and regulatory initiatives that are primarily focused on the deregulation of the generation and supply of electricity and the corresponding development of a competitive
5
market place from which customers choose their electric energy supplier. As a result, the NEPOOL Agreement continues to be restructured. NEPOOLs membership provisions have been broadened to cover all entities engaged in the electricity business in New England, including power marketers and brokers, independent power producers, load aggregators and retail customers in states that have enacted retail access statutes. Various energy and capacity products are traded in open markets, with transmission access and pricing subject to the regional OATT designed to promote competition among power suppliers. On March 1, 2003, ISO-NE implemented a Standard Market Design (SMD) that is intended to improve the ability to trade power between New England and other regions throughout the northeast. On October 31, 2003, ISO-NE and the major transmission owners in New England filed with the FERC to form a Regional Transmission Organization (RTO) with a proposed effective date not earlier than March 1, 2004. The implementation of the RTO, which is being contested at FERC, will further revise the conduct of wholesale markets in New England. The filing also proposes to eliminate NEPOOL as an organization and require all current NEPOOL members to be part of the RTO system. SMD, the formation of an RTO and other wholesale market changes are not expected to have a material impact on Unitils results of operations because of cost recovery mechanisms for wholesale energy costs approved by state regulators.
Energy ResourcesIn connection with industry restructuring and the implementation of retail choice in New Hampshire and Massachusetts, FG&E and Unitil Power have effectively divested their long-term power supply contracts and the owned generation assets of FG&E. Unitil Power divested its long-term power supply contracts to a subsidiary of Mirant Corporation, Mirant Americas Energy Marketing, LP (Mirant), which was approved by the NHPUC on March 14, 2003. The NHPUC Order completed the state approval process for Unitils restructuring plan under which UES implemented customer choice for its customers on May 1, 2003.
FG&E divested its owned generation assets and long-term power supply contracts to Select Energy, a subsidiary of Northeast Utilities. Under the Select Energy contract, which was approved by the MDTE in January 2000, and went into effect February 1, 2000, FG&E began selling the entire output from its remaining long-term power supply contracts and the output of its two joint ownership units to Select Energy. Upon the sale of FG&Es share of Millstone Unit 3 in 2001, this portion of the contract sale ceased.
Unitils customers in both New Hampshire and Massachusetts now have the opportunity to purchase their electric supply from third-party vendors, though most customers continue to purchase such supplies through Unitil as the provider of last resort. Accordingly, UES and FG&E contract with wholesale power suppliers for the electricity necessary to meet their regulated energy supply obligations which are provided through Standard Offer Service and Default Service in Massachusetts and Transition Service and Default Service in New Hampshire. The costs associated with the acquisition of such regulated wholesale electric supplies are recovered on a pass-through basis from customers through periodically-adjusted rates.
FG&E has a contract for Standard Offer Service with Constellation Power Source through the end of the Standard Offer Service period in Massachusetts in February 2005. Beginning December 1, 2000, through December 1, 2003, FG&E procured Default Service through a bid process every six months. Effective December 1, 2003, as a result of revised regulatory requirements ordered by the MDTE, FG&E procures 50% of its Small Customer Default Service requirements semi-annually, for twelve-month terms. FG&E procures 100% of its Large Customer Default Service requirements for a three-month period.
Under the agreement whereby Mirant purchased the entitlements to Unitil Powers long-term purchase power supply portfolio, it provides UES Transition and Default Service through April 30, 2006 for Small Customers and through April 30, 2005 for Large Customers at fixed prices.
Since April 1, 1998, each electric utility has been required to carry an allocated share of the NEPOOL capability responsibility under the NEPOOL Agreement. FG&Es Standard Offer Service supplier, Constellation Power Source, and FG&Es periodic Default Service suppliers are responsible for serving FG&Es load obligations and associated capability responsibility under their respective contracts. Similarly, under the agreement between Unitil Power, UES and Mirant, whereby Mirant provides wholesale power to UES for
6
Transition and Default Service, Mirant is also responsible for serving UES load obligations and associated capability responsibility. Unitil Power no longer has any load serving obligations in NEPOOL.
Unitils customers in Massachusetts now have the opportunity to purchase their gas supply from third party vendors, though most customers continue to purchase such supplies through Unitil as the provider of last resort. The costs associated with the acquisition of such wholesale natural gas supplies for customers who do not contract with third-party suppliers are recovered through periodically-adjusted rates.
FG&E distributes natural gas purchased from domestic and Canadian suppliers under long-term contracts as well as gas purchased from producers and marketers on the spot market. The following tables summarize actual gas purchases by source of supply and the cost of gas sold for the years 2000 through 2003.
Sources of Gas Supply
(Expressed as percent of total MMBtu of gas purchased)
2003 |
2002 |
2001 |
|||||||
Natural Gas: |
|||||||||
Domestic firm |
94.0 | % | 73.9 | % | 76.2 | % | |||
Canadian firm |
1.3 | % | 8.4 | % | 8.0 | % | |||
Domestic spot market |
1.3 | % | 16.2 | % | 14.5 | % | |||
Total natural gas |
96.6 | % | 98.5 | % | 98.7 | % | |||
Supplemental gas |
3.4 | % | 1.5 | % | 1.3 | % | |||
Total gas purchases |
100.0 | % | 100.0 | % | 100.0 | % |
Cost of Gas Sold
2003 |
2002 |
2001 |
||||||||||
Cost of gas purchased and sold per MMBtu |
$ | 7.14 | $ | 4.96 | $ | 7.13 | ||||||
Percent Increase (Decrease) from prior year |
43.9 | % | (30.4 | %) | 37.3 | % |
As a supplement to pipeline natural gas, FG&E owns a propane air gas plant and a liquefied natural gas (LNG) storage and vaporization facility. These plants are used principally during peak load periods to augment the supply of pipeline natural gas.
The Companys past and present operations include activities that are generally subject to extensive federal and state environmental laws and regulations. The Company is in general compliance with all applicable environmental and safety laws and regulations, and Management believes that as of December 31, 2003, there are no material losses reasonably possible in excess of recorded amounts. However, there can be no assurance that significant costs and liabilities will not be incurred in the future. It is possible that other developments, such as increasingly stringent federal, state or local environmental laws and regulations could result in increased environmental compliance costs.
Sawyer Passway MGP SiteThe Company continues to work with environmental regulatory agencies to identify and assess environmental issues at the former manufactured gas plant (MGP) site at Sawyer Passway, located in Fitchburg, Massachusetts. FG&E proceeded with site remediation work as specified on the Tier 1B
7
permit issued by the Massachusetts Department of Environmental Protection (DEP), which allows FG&E to work towards temporary remediation of the site. Work performed in 2002 was associated with the five-year review of the Temporary Solution submittal (Class C Response Action Outcome) under the Massachusetts Contingency Plan that was filed for the site in 1997. Completion of this work has confirmed the Temporary Solution status of the site for an additional five years. A status of temporary closure requires FG&E to monitor the site until a feasible permanent remediation alternative can be developed and completed.
Since 1991, FG&E has recovered the environmental response costs incurred at this former MGP site pursuant to a MDTE approved Settlement Agreement (Agreement). The Agreement allows FG&E to amortize and recover from gas customers, over succeeding seven-year periods, the environmental response costs incurred each year. Environmental response costs are defined to include liabilities related to manufactured gas sites, waste disposal sites or other sites onto which hazardous material may have migrated as a result of the operation or decommissioning of Massachusetts gas manufacturing facilities from 1882 through 1978. In addition, any recovery that FG&E receives from insurance or third parties with respect to environmental response costs, net of the unrecovered costs associated therewith, are split equally between FG&E and its gas customers. The total annual charge for such costs assessed to gas customers cannot exceed five percent of FG&Es total revenue for firm gas sales during the preceding year. Costs in excess of five percent will be deferred for recovery in subsequent years.
Former Electric Generating StationFG&E has remediated environmental conditions at a former electric generating station also located at Sawyer Passway in Fitchburg, Massachusetts, which FG&E sold in 1983 to a general partnership, Rockware, who demolished several exterior walls of the generating station in order to facilitate removal of certain equipment. The demolition of the walls and the removal of generating equipment resulted in damage to asbestos-containing insulation materials inside the building, which had been intact and encapsulated at the time of the sale of the structure.
When Rockware encountered financial difficulties and failed to respond adequately to Orders of the environmental regulators to remedy the situation, FG&E agreed to take steps at that time and obtained DEP approval to temporarily enclose, secure and stabilize the facility. Based on that approval, between September and December 1989, contractors retained by FG&E stabilized the facility and secured the building. This work did not permanently resolve the problems caused by Rockware, but was deemed sufficient for the then foreseeable future.
Due to the continuing deterioration of this former electric generating station and Rockwares continued lack of performance, FG&E, in concert with the DEP and the U.S. Environmental Protection Agency (EPA), conducted further testing and survey work during 2001 to ascertain the environmental status of the building. Those surveys revealed continued deterioration of the asbestos-containing insulation materials in the building.
By letter dated May 1, 2002, the EPA notified FG&E that it was a Potentially Responsible Party for planned remedial activities at the site and invited FG&E to perform or finance such activities. FG&E and the EPA entered into an Agreement on Consent, whereby FG&E, without an admission of liability, conducted environmental remedial action to abate and remove asbestos-containing and other hazardous materials. This project was completed during the fourth quarter of 2003. FG&E received complete coverage from its insurance carrier for this remediation project and the resolution of this matter did not have a material adverse impact on the Companys financial position.
As of December 31, 2003, the Company and its subsidiaries had 322 full-time and part-time employees. Management considers the Companys relationship with employees to be good and has not experienced any major labor disruptions since the early 1960s.
8
There are approximately 100 employees represented by labor unions. In 2000, UES predecessor companies, E&H and CECo, entered into five-year pacts with their employees covered by collective bargaining agreements, which expire May 31, 2005. In 2000, FG&E reached a five-year pact with its employees covered by a collective bargaining agreement, which also expires May 31, 2005. The agreements provided discreet salary adjustments, established work practices and provided uniform benefit packages. The Company expects to successfully negotiate new agreements prior to the expiration dates of these contracts.
Unitils Internet address is www.unitil.com. There the Company makes available, free of charge, its SEC fillings, including annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and other reports as well as amendments to those reports. These reports are made available through the Investors section of Unitils website via a direct link to the section of the SECs website which contains Unitils SEC filings.
The Companys current Code of Ethics was approved by Unitils Board of Directors on January 15, 2004. This Code of Ethics, along with any amendments or waivers, is also available on Unitils website.
Unitils common stock is listed on the American Stock Exchange under the ticker symbol UTL.
The following table provides information about our directors and senior management as of February 27, 2004:
Name |
Age |
Position | ||
Robert G. Schoenberger | 53 | Chairman of the Board, Chief Executive Officer and President | ||
Mark H. Collin | 45 | Senior Vice President and Chief Financial Officer | ||
Thomas P. Meissner, Jr. | 41 | Senior Vice President, Operations | ||
George R. Gantz | 52 | Senior Vice President, Customer Services and Communications | ||
George E. Long, Jr. | 47 | Vice President, Administration | ||
Raymond J. Morrissey | 56 | Vice President, Information Systems | ||
Todd R. Black | 39 | Vice President, Usource | ||
Laurence M. Brock | 50 | Vice President and Controller | ||
David K. Foote |
56 | Vice President, Energy Contracts | ||
Sandra L. Whitney | 40 | Corporate Secretary | ||
David P. Brownell | 60 | Director | ||
Michael J. Dalton | 63 | Director | ||
Albert H. Elfner, III | 59 | Director | ||
Ross B. George | 71 | Director | ||
Edward F. Godfrey | 54 | Director | ||
Michael B. Green | 54 | Director | ||
Eben S. Moulton | 57 | Director | ||
M. Brian OShaughnessy | 61 | Director | ||
Charles H. Tenney, III | 56 | Director | ||
Dr. Sarah P. Voll | 61 | Director |
Robert G. Schoenberger has been Unitils Chairman of the Board and Chief Executive Officer since 1997 and Unitils President since 2003. Prior to his employment with Unitil, he was President and Chief Executive Officer of the New York Power Authority (a state owned public power enterprise) from 1993 until 1997. He is also a Director of the Greater Seacoast (NH) United Way, Director of Southwest Power Pool, Inc. and Director and Vice Chairman of Exeter Health Resources.
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Mark H. Collin was appointed Unitils Senior Vice President and Chief Financial Officer in February 2003. Mr. Collin has served as Unitils Treasurer since 1998. Since 1992, he has been Treasurer of UES and FG&E. Mr. Collin joined Unitil in 1988.
Thomas P. Meissner, Jr. has been Unitils Senior Vice President, Operations since February 2003. Mr. Meissner joined Unitil in 1994 and served as Unitils Director of Engineering from 1998 to 2003. From 1985 to 1994, he was employed by the Public Service Company of New Hampshire.
George R. Gantz has been Unitils Senior Vice President, Customer Services and Communications since January 2003. Mr. Gantz previously served as Unitils Senior Vice President, Communication and Regulation from 1994 to 2003. Mr. Gantz joined Unitil in 1983.
George E. Long, Jr. has been Unitils Vice President, Administration since February 2003. Mr. Long joined Unitil in 1994 and was Director, Human Resources from 1998 to 2003. Prior to his employment with Unitil, Mr. Long was the Director of Compensation and Benefits at Monarch Life Insurance Company from 1985 to 1994.
Raymond J. Morrissey has been Unitils Vice President, Information Systems since February 2003. From 1992 to 2003, he served as Unitils Vice President of Customer Service, and from 1991 to 1992, he was the General Manager of Unitils subsidiary, FG&E. Mr. Morrissey joined Unitil in 1985.
Todd R. Black has been Unitils Vice President, Usource since January 2003. He served as Vice President, Sales and Marketing for Usource from 1998 to 2003. Prior to his employment with Unitil, he served as Vice President, Services Delivery for Energy USA, the unregulated subsidiary of Bay State Gas Company, from 1988 until 1998.
Laurence M. Brock, Unitils Vice President and Controller, joined Unitil in 1995 and is a Certified Public Accountant in the State of New Hampshire. Prior to his employment with Unitil, Mr. Brock served as a Corporate Controller with a group of diversified financial services and manufacturing companies. Mr. Brock gained his public accounting experience with Coopers & Lybrand in Boston, Massachusetts.
David K. Foote has been Unitils Vice President, Energy Contracts since 1984. Mr. Foote previously served as Senior Vice President of Unitils subsidiary, FG&E, where he began working for the Company in 1968.
Sandra L. Whitney has been Unitils Corporate Secretary and Secretary of the Board since February 2003. Ms. Whitney has been the Corporate Secretary of Unitils subsidiary companies, FG&E, UES, Unitil Power, Unitil Realty and Unitil Service since 1994. Ms. Whitney joined Unitil in 1990.
David P. Brownell was a Senior Vice President of Tyco International Ltd. from 1995 to 2003. He had been with Tyco since 1984. Mr. Brownell is also Vice Chairman of the University of New Hampshire Foundation.
Michael J. Dalton was Unitils President and Chief Operating Officer from 1984 to 2003. Mr. Dalton is a member of the Advisory Board of the University of New Hampshire College of Engineering and Physical Sciences.
Albert H. Elfner, III was the Chairman, from 1994, and Chief Executive Officer, from 1995, of Evergreen Investment Management Company until his retirement in 1999. Mr. Elfner is also a Director of NGM Insurance Company and Optimum Q Funds.
Ross B. George is the Chairman of the Board of Five G Management, LLC. He resigned as a Director of Simonds Industries, Inc. in August 2003 and served as their Chairman of the Board from 1999-2001 and their Chief Executive Officer from 1995 to 1999.
Edward F. Godfrey was the Executive Vice President and Chief Operating Officer of Keystone Investments, Incorporated from 1997 until his retirement in 1998. While at Keystone Investments, he was also a Senior Vice President, Chief Financial Officer and Treasurer from 1988 to 1996. Mr. Godfrey is also a Director of Reilly Mortgage Group.
10
Michael B. Green has been the President and Chief Executive Officer of Capital Region Health Care and Concord Hospital since 1992. He serves as an adjunct faculty member of Dartmouth Medical School. He also serves as Chairman of the Board of the Foundation for Healthy Communities and as a Director on the Board of Merrimack County Savings Bank.
Eben S. Moulton has been the Managing Partner of Seacoast Capital Corporation since 1995. Mr. Moulton is also a Director of IEC Electronics, a Director of six private companies and a Trustee of Colorado College.
M. Brian OShaughnessy has been the Chairman of the Board, Chief Executive Officer and President of Revere Copper Products, Inc. since 1988. Mr. OShaughnessy also serves on the Board of Directors of the National Association of Manufacturers, the International Copper Association, the Copper Development Association and the Copper and Brass Fabricators Council. He also serves in New York State as Chairman of the Industrial Energy Consumer Coalition, and as a member of the Board of Directors of the Multiple Intervenors and the Economic Development Growth Enterprise.
Charles H. Tenney, III has been Director of Operations for Brainshift.com, Inc. since 2002. He served as a financial advisor for H&R Block Financial Advisors from 2001 to 2002 and as the Director of Corporate Services for Log On America, Inc. from 1999 to 2000. From 1997 to 1999, he served as the Secretary of both Northern Utilities, Inc. and Granite State Gas Transmission, Inc. From 1991 to 1999, he served as the Clerk of Bay State Gas Company, a subsidiary of NiSource, Inc.
Dr. Sarah P. Voll has been the Vice President, National Economic Research Associates, Inc. (NERA) since 1999. Dr. Voll was also a Senior Consultant at NERA from 1996 to 1999.
Annual Meeting
The annual meeting of shareholders is scheduled to be held at the offices of the Company, 6 Liberty Lane West, Hampton, New Hampshire, on Thursday, April 15, 2004, at 10:30 a.m.
Transfer Agent
The Companys transfer agent, EquiServe, is responsible for shareholder records, issuance of stock certificates, and the distribution of Unitils dividends and IRS Form 1099-DIV. Shareholders may contact EquiServe at:
Mail: EquiServe, P.O. Box 43010, Providence, RI 02940-3010
Telephone: 800-736-3001 (Outside MA); 781-575-3100 (Within MA)
Investor Information
For information about the Company and your investment, you may call the Company directly, toll-free, at: 800-999-6501 and ask for the Investor Relations Representative; visit the Investor page at www.unitil.com; or contact the transfer agent, EquiServe, at the number listed above.
Special Services & Shareholder Programs Available
| Internet Account Access is now available at www.equiserve.com. |
| Dividend Reinvestment Plan: |
To enroll, please contact the Companys Investor Relations Representative at 800-999-6501.
11
| Dividend Direct Deposit Service: |
To enroll, please contact the Companys Investor Relations Representative at 800-999-6501.
| Direct Registration: |
For information, please contact EquiServe at the number listed above or the Companys Investor Relations Representative at 800-999-6501.
As of December 31, 2003, Unitil owned, through its retail distribution utilities: two operation centers, approximately 2,113 pole miles of local transmission and distribution overhead electric lines and 371 conduit bank miles of underground electric distribution lines, along with 48 electric substations, including three mobile electric substations. FG&Es natural gas operations property includes a liquid propane gas plant, a liquid natural gas plant and 311 miles of underground gas mains. In addition, Unitils real estate subsidiary, Unitil Realty, owns the Companys corporate headquarters building and the 12 acres on which it is located.
UES owns and maintains distribution operations centers in Concord, New Hampshire and Kensington, New Hampshire. UESs 31 electric distribution substations, including a 5,000 kilovolt ampere (kVA) mobile substation, constitute 224,237 kVA of capacity (includes spares and mobile) for the transformation of electric energy from the 34.5 kV subtransmission voltage to other primary distribution voltage levels. The electric substations are located on land owned by UES or occupied by UES pursuant to a perpetual easement.
UES has a total of approximately 1,567 pole miles of local transmission and distribution overhead electric lines and a total of 204 conduit bank miles of underground electric distribution lines. The electric distribution lines are located in, on or under public highways or private lands pursuant to lease, easement, permit, municipal consent, tariff conditions, agreement or license, expressed or implied through use by UES without objection by the owners. In the case of certain distribution lines, UES owns only a part interest in the poles upon which its wires are installed, the remaining interest being owned by telephone companies.
Additionally, UES owns 137.7 acres of non-utility property located on the east bank of the Merrimack River in Concord, New Hampshire. Of the total acreage, 81.2 acres are located within an industrial park zone.
The physical utility properties of UES, with certain exceptions, and its franchises are pledged as security under its indenture of mortgage and deed of trust under which the respective series of first mortgage bonds of UES are outstanding.
FG&Es electric properties consist principally of 546 pole miles of local transmission and distribution overhead electric lines, 167 conduit bank miles of underground electric distribution lines and 17 transmission and distribution stations including two mobile electric substations. The capacity of these substations totals 562,650 kVA.
FG&E owns a liquid propane gas plant and a liquid natural gas plant and the land on which they are located. FG&E also has 311 miles of underground steel, cast iron and plastic gas mains.
FG&Es electric substations, with minor exceptions, are located on land owned by FG&E or occupied by FG&E pursuant to a perpetual easement. FG&Es electric distribution lines and gas mains are located in, on or under public highways or private lands pursuant to lease, easement, permit, municipal consent, tariff conditions, agreement or license, expressed or implied through use by FG&E without objection by the owners. FG&E leases its distribution operations center located in Fitchburg, Massachusetts.
Management believes that the Companys facilities are currently adequate for their intended uses.
12
On January 25, 2002, Unitil Power and UES predecessor companies, CECo and E&H, filed a proposal with the NHPUC to comprehensively restructure the operations of CECo and E&H (forming UES), to provide for the full recovery of stranded costs by UES and permit retail choice to their customers in order to comply with the New Hampshire restructuring law. On October 25, 2002, the NHPUC approved a multiparty settlement on all major issues in the proceeding, including a procedure under which Unitil Power would divest its existing power supply portfolio and UES would conduct a solicitation for new power supplies from which to meet its ongoing transition and default service energy obligations. On March 14, 2003, the NHPUC approved an agreement between Unitil Power, UES and Mirant Americas Energy Marketing, L.P., under which Mirant will purchase the entitlements to Unitil Powers Supply portfolio and provide transition and default service to the customers of UES (Mirant Agreement). The March, 2003, NHPUC Order completed the state approval process for Unitils restructuring plan. On May 1, 2003, UES implemented customer choice and Mirant began providing transition and default service to the customers of UES. UESs new tariffs, effective May 1, 2003, include the recovery of certain restructuring related costs through several surcharges that are subject to reconciliation, or future audit and review, by the NHPUC. On May 6, 2003, the Company withdrew, with prejudice its challenge to the Final Plan in U.S. District Court . We refer you to the NHPUCs orders in DE 01-247 and the U.S. District Courts orders in Civil Docket No. 97-1216 for further information.
On July 14, 2003, Mirant and most of its subsidiaries, including MAEM, filed for bankruptcy under Chapter 11 of the Bankruptcy Code in the United States Bankruptcy Court for the Northern District of Texas. The pre-petition amount owed, and not paid, by MAEM under the Mirant Agreement was approximately $5.3 million. UES and Unitil Power elected to hold back pre-petition amounts due to Mirant of approximately $5.3 million against the amount owed by MAEM, and MAEM disputed UES and Unitil Powers withholding of such payments. In September, 2003, Unitil Power and UES filed a motion with the Bankruptcy Court requesting that MAEM be required to assume or reject the Mirant Agreement by December 1, 2003. On November 14, 2003, MAEM, Unitil Power and UES filed a settlement with the Bankruptcy Court under which MAEM agreed to assume and cure all pre-petition obligations, and to settle certain other disputes. UES and Unitil Power agreed to accelerate the payment of amounts held back from MAEM. On December 10, 2003, the settlement was approved by the federal bankruptcy court and MAEM is continuing to fulfill its obligations under the Mirant Agreement.
The Company is involved in legal and administrative proceedings and claims of various types, which arise in the ordinary course of business. In the opinion of Management, based upon information furnished by counsel and others, the ultimate resolution of these claims will not have a material impact on the Companys financial position.
Item 4. Submission of Matters to a Vote of Security Holders
None
13
Item 5. Market for Registrants Common Equity and Related Shareholder Matters
The Registrants Common Stock is traded on the American Stock Exchange. As of December 31, 2003, there were 1,946 Common Shareholders of record.
Common Stock Data
Dividends per Common Share |
2003 |
2002 | ||||
1st Quarter |
$ | 0.345 | $ | 0.345 | ||
2nd Quarter |
0.345 | 0.345 | ||||
3rd Quarter |
0.345 | 0.345 | ||||
4th Quarter |
0.345 | 0.345 | ||||
Total for Year |
$ | 1.38 | $ | 1.38 | ||
2003 |
2002 | |||||||||||
Price Range of Common Stock |
High/Ask |
Low/Bid |
High/Ask |
Low/Bid | ||||||||
1st Quarter |
$ | 26.34 | $ | 23.31 | $ | 26.80 | $ | 22.82 | ||||
2nd Quarter |
$ | 26.00 | $ | 22.92 | $ | 31.40 | $ | 26.10 | ||||
3rd Quarter |
$ | 26.04 | $ | 24.17 | $ | 29.22 | $ | 25.31 | ||||
4th Quarter |
$ | 26.00 | $ | 24.40 | $ | 26.99 | $ | 24.80 |
Information regarding Securities Authorized for Issuance Under Equity Compensation Plans is set forth in the table below.
EQUITY COMPENSATION PLAN BENEFIT INFORMATION
(a) | (b) | (c) | |||||
Plan Category |
Number of securities to be issued upon exercise of outstanding options, warrants and rights |
Weighted-average exercise price of outstanding options, warrants and rights |
Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a)) | ||||
Equity compensation plans approved by security holders |
|||||||
KESOP (1) |
34,495 | $ | 13.17 | 29,101 | |||
Restricted Stock Plan (2) |
| N/A | 166,900 | ||||
Equity compensation plans not approved by security holders |
|||||||
1998 Option Plan (3) |
107,000 | $ | 27.13 | | |||
Total |
141,495 | $ | 23.73 | 196,101 | |||
NOTES: (also see Note 3 to the Consolidated Financial Statements)
(1) | The KESOP was approved by shareholders in July 1989. Options were granted between January 1989 and November 1997. |
(2) | The Restricted Stock Plan was approved by shareholders in April 2003. 10,600 shares of restricted stock were awarded to Plan participants in May 2003. |
(3) | The 1998 Option Plan was adopted by the Board of Directors of the Company in December 1998. At the time of adoption, the 1998 Option Plan was not required, under American Stock Exchange rules, to obtain shareholder approval. Options were granted in March 1999, January 2000, and January 2001. On January 16, 2003, the Board of Directors terminated the Option Plan upon the recommendation of the Compensation Committee. The Option Plan will remain in effect solely for the purposes of the continued administration of all options currently outstanding under the Option Plan. No further grants of options will be made thereunder. |
14
Item 6. Selected Financial Data
2003 |
2002 |
2001 |
2000 |
1999 |
||||||||||||||||
Consolidated Statements of Earnings: (all data in thousands except % and per share data) |
||||||||||||||||||||
Operating Revenues |
$ | 220,654 | $ | 188,386 | $ | 207,022 | $ | 182,941 | $ | 172,373 | ||||||||||
Operating Income |
15,449 | 13,248 | 14,394 | 14,280 | 15,408 | |||||||||||||||
(Gain) Loss on Non-Utility Investments, net of tax |
| (82 | ) | 2,400 | | | ||||||||||||||
Other Non-operating Expense |
(40 | ) | 185 | 170 | 244 | 51 | ||||||||||||||
Income Before Interest Expense and Extraordinary Item |
15,489 | 13,145 | 11,824 | 14,036 | 15,357 | |||||||||||||||
Interest Expense, net |
7,531 | 7,057 | 6,797 | 6,820 | 6,919 | |||||||||||||||
Income before Extraordinary Item |
7,958 | 6,088 | 5,027 | 7,216 | 8,438 | |||||||||||||||
Extraordinary Item, net of tax |
| | 3,937 | | | |||||||||||||||
Net Income |
7,958 | 6,088 | 1,090 | 7,216 | 8,438 | |||||||||||||||
Dividends on Preferred Stock |
236 | 253 | 257 | 263 | 268 | |||||||||||||||
Earnings Applicable to Common Shareholders |
$ | 7,722 | $ | 5,835 | $ | 833 | $ | 6,953 | $ | 8,170 | ||||||||||
Balance Sheet Data: |
||||||||||||||||||||
Utility Plant (Original Cost) |
$ | 288,657 | $ | 272,402 | $ | 255,498 | $ | 238,023 | $ | 219,838 | ||||||||||
Total Assets |
$ | 483,877 | $ | 481,702 | $ | 376,762 | $ | 382,967 | $ | 363,527 | ||||||||||
Capitalization: |
||||||||||||||||||||
Common Stock Equity |
$ | 92,805 | $ | 74,350 | $ | 74,746 | $ | 79,935 | $ | 78,675 | ||||||||||
Preferred Stock |
3,269 | 3,322 | 3,609 | 3,690 | 3,757 | |||||||||||||||
Long-Term Debt |
110,961 | 104,226 | 107,470 | 81,695 | 86,157 | |||||||||||||||
Total Capitalization |
$ | 207,035 | $ | 181,898 | $ | 185,825 | $ | 165,320 | $ | 168,589 | ||||||||||
Short-term Debt |
$ | 22,410 | $ | 35,990 | $ | 13,800 | $ | 32,500 | $ | 10,500 | ||||||||||
Capital Structure Ratios: |
||||||||||||||||||||
Common Stock Equity |
40 | % | 34 | % | 37 | % | 40 | % | 44 | % | ||||||||||
Preferred Stock |
2 | % | 2 | % | 2 | % | 2 | % | 2 | % | ||||||||||
Long-Term Debt |
48 | % | 48 | % | 54 | % | 41 | % | 48 | % | ||||||||||
Short-Term Debt |
10 | % | 16 | % | 7 | % | 17 | % | 6 | % | ||||||||||
Earnings Per Share Data: |
||||||||||||||||||||
Earnings Per Average Share |
$ | 1.58 | $ | 1.23 | $ | 0.18 | $ | 1.47 | $ | 1.74 | ||||||||||
Common Stock Data: |
||||||||||||||||||||
Shares of Common Stock (Year-End) |
5,501 | 4,744 | 4,744 | 4,735 | 4,712 | |||||||||||||||
Shares of Common Stock (Average) |
4,878 | 4,744 | 4,744 | 4,723 | 4,682 | |||||||||||||||
Dividends Paid Per Share |
$ | 1.38 | $ | 1.38 | $ | 1.38 | $ | 1.38 | $ | 1.38 | ||||||||||
Book Value Per Share (Year-End) |
$ | 16.87 | $ | 15.67 | $ | 15.76 | $ | 16.88 | $ | 16.70 | ||||||||||
Electric and Gas Sales: |
||||||||||||||||||||
Electric Distribution Sales (kWh) |
1,717,664 | 1,659,136 | 1,596,390 | 1,587,536 | 1,608,824 | |||||||||||||||
Firm Gas Distribution Sales (Therms) |
24,592 | 22,480 | 23,067 | 23,992 | 22,136 |
15
Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations (Note references are to Notes to the Consolidated Financial Statements in Item 8.)
EARNINGS & DIVIDENDS
Unitils Net Income Applicable to Common Shareholders for 2003 was $7.7 million.
Earnings per Share was $1.58 for 2003; reflecting an improvement of $0.15, or 10%, measured with comparable earnings of $1.43 per share in 2002. Comparable results for 2002 exclude the restructuring charge of $0.20 per share for our management reorganization.
Contributing positively to the Companys earnings performance were higher electric and gas sales margins driven by higher utility rates and electric and gas sales volumes in 2003, and operating expense and capital overhead savings achieved as a result of a management restructuring at the beginning of the year. 2003 marked the first full year of revenues earned by Unitils electric and gas utilities at their new higher base distribution rates, which went into effect on December 1, 2002. Partially offsetting these positive contributors were higher operating and maintenance expenses relating to employee benefits, uncollectible accounts expenses and collection costs, and higher system maintenance and regulatory compliance expenditures. Depreciation, Taxes and Interest expenses were also higher in 2003 supporting the higher utility investments and customer growth.
In 2003, the Company completed an unprecedented restructuring process brought about by the deregulation of the natural gas and electric industries in New Hampshire and Massachusetts. As a result of this process, Unitils retail distribution utilities have divested their entire generation and power supply portfolio, transforming the Companys vertically integrated utility operations into principally a pipes-and-wires business providing natural gas and electric delivery services. The Company implemented the final phase of its electric industry restructuring in New Hampshire on May 1, 2003. Unitil had previously implemented state mandated restructuring of its electric and gas operations in Massachusetts in 1998 and 2000, respectively. Unitils customers in both New Hampshire and Massachusetts now have the opportunity to purchase their electricity or natural gas supply from third party vendors, though most customers continue to purchase such supplies through Unitil as the provider of last resort.
Diluted earnings per average common share were $1.58 for the year ended December 31, 2003, compared to $1.43 and $1.51, before other items, for 2002 and 2001 respectively. The return on average common equity (ROE) was 9.9% for 2003. Unitils annual common dividend was $1.38 in 2003, resulting in a payout ratio of 87%. At its January, 2004 meeting, the Unitil Board of Directors declared a regular quarterly dividend on the Companys common stock of $0.345 per share, maintaining the Companys continued commitment to a regular quarterly dividend.
Earnings & Dividends Data |
2003 |
2002 |
2001 |
||||||||
Earnings per Share Before Other Items (non-GAAP) |
$ | 1.58 | $ | 1.43 | $ | 1.51 | |||||
Other Items, net of tax: |
|||||||||||
Restructuring Charge |
| (0.20 | ) | | |||||||
Investment Write-down |
| | (0.50 | ) | |||||||
Extraordinary Item |
| | (0.83 | ) | |||||||
Earnings per Share |
$ | 1.58 | $ | 1.23 | $ | 0.18 | |||||
Annual Dividend Rate |
$ | 1.38 | $ | 1.38 | $ | 1.38 |
The presentation of earnings per share data in the table above includes a line item identified as Earnings per Share Before Other Items. Though this measurement is based on Generally Accepted Accounting Principles (GAAP) consistently applied, the measurement itself is not specifically defined under GAAP and is therefore required to be presented as a non-GAAP measure. Earnings per Share Before Other Items is a non-GAAP measure and may not be comparable to other non-GAAP measures of earnings per share used by other
16
companies. Management believes this measure is useful to investors because it includes the same company-specific information that is used by Management to assess the Companys financial performance.
In 2002, Unitil recorded a Restructuring Charge of $1.6 million before taxes, or ($0.20) per share, related to the elimination of 19 management and administrative positions. In 2001, as a result of industry restructuring-related regulatory orders, Unitil recognized an Extraordinary Item to reduce Regulatory Assets by $3.9 million after tax, or ($0.83) per share. Also in 2001, Unitil recognized an Investment Write-down of $2.4 million after-tax, or ($0.50) per share, to recognize a decrease in the fair value of a non-utility energy technology investment.
A more detailed discussion of the Companys 2003 Results of Operations and a year-to-year comparison of changes in financial position for the three-year period 2001 through 2003 are presented below.
RESULTS OF OPERATIONS
Operating RevenuesElectric
Electric Operating RevenuesElectric Operating Revenues, which represent approximately 87% of Unitils total Operating Revenues, increased by $23.5 million, or 14.1%, in 2003 compared to 2002. Electric Operating Revenues include the recovery of cost of electric sales, which are recorded as Purchased Electricity and Conservation & Load Management in Operating Expenses. Approximately 90% of the Conservation & Load Management expenses are related to electric operations. Electric operating revenues increase or decrease annually due to changes in Purchased Electricity expenses, Conservation & Load Management expenses and electric sales margin (Electric Operating Revenues less Purchased Electricity and Conservation & Load Management). Purchased Electricity expenses include the cost of electric supply as well as the other energy supply related restructuring costs including power supply buyout costs. Conservation and Load Management expenses are expenses associated with the development, management, and delivery of the Companys energy efficiency programs.
The Purchased Electricity cost of sales component increased $17.2 million in 2003 compared to 2002. Approximately 75% of this increase reflects higher electric commodity prices while the remainder reflects an increase of approximately 3.5% in electric unit sales volume. Conservation & Load Management expenses related to electric operations increased $2.2 million, or 121.9% in 2003 compared to 2002 reflecting seven new energy efficiency programs that were implemented during the year. The Company recovers the costs of Purchased Electricity and Conservation & Load Management in its rates at cost and therefore changes in these revenues do not impact net income.
Electric sales margin was $52.7 million in 2003, an increase of $4.3 million over 2002. Approximately 60% of this increase reflects the impact of 2002 base rate cases, which resulted in higher base distribution rates for the Companys electric retail distribution utilities as of December 2002. The remainder of the increase in electric sales margin is due to a 3.5% increase in electric unit sales in 2003 compared to 2002.
In 2002, Electric Operating Revenues decreased by $16.5 million, or 9.0% compared to 2001, primarily reflecting a decrease in Purchased Electricity due to lower electric commodity prices overall as well as lower electric distribution rates, partially offset by an increase in unit sales. Electric sales margin increased $0.7 million, or 1.5% in 2002 compared to 2001, reflecting the increase in unit sales.
17
The following table details total Electric Operating Revenue and Sales Margin for the last three years by major customer class:
Electric Operating Revenue and Sales Margin (000s) |
|||||||||||||||
% Change |
|||||||||||||||
2003 |
2002 |
2001 |
2003 vs. 2002 |
2002 vs. 2001 |
|||||||||||
Electric Operating Revenue: |
|||||||||||||||
Residential |
$ | 76,893 | $ | 65,746 | $ | 71,960 | 17.1 | % | (8.6 | %) | |||||
Commercial/Industrial |
113,971 | 101,571 | 111,820 | 12.2 | % | (9.2 | %) | ||||||||
Total Electric Operating Revenue |
$ | 190,864 | $ | 167,317 | $ | 183,780 | 14.1 | % | (9.0 | %) | |||||
Purchased Electricity |
$ | 134,575 | $ | 117,409 | $ | 134,660 | 14.6 | % | (12.8 | %) | |||||
Conservation & Load Management |
3,644 | 1,603 | 1,547 | 127.3 | % | 3.6 | % | ||||||||
Electric Sales Margin |
$ | 52,645 | $ | 48,305 | $ | 47,573 | 9.0 | % | 1.5 | % | |||||
Kilowatt-hour SalesUnitils total electric kilowatt-hour (kWh) sales increased 3.5% in 2003 compared to 2002. This increase reflects growth in sales to residential and commercial and industrial customer classes driven by a colder winter heating season and consistent customer growth year over year.
Sales to residential customers increased 4.2% in 2003 compared to 2002. The increase in energy sales reflects an increase in the number of residential customers as well as higher usage per customer, due to the colder winter heating season. Commercial and industrial sales of electricity increased 3.1% in 2003 compared to 2002, also reflecting an increase in the number of customers as well as the impact of the colder winter heating season.
Unitils total electric kilowatt-hour (kWh) sales increased by 3.9% in 2002 compared to 2001. This increase reflected growth in sales to residential and commercial and industrial customer classes driven by higher average summer temperatures, as well as increased sales to Industrial customers.
The following table details total kWh sales for the last three years by major customer class:
kWh Sales (000s) |
% Change |
|||||||||||
2003 |
2002 |
2001 |
2003 vs. 2002 |
2002 vs. 2001 |
||||||||
Residential |
645,711 | 619,756 | 596,378 | 4.2 | % | 3.9 | % | |||||
Commercial/Industrial |
1,071,953 | 1,039,380 | 1,000,012 | 3.1 | % | 3.9 | % | |||||
Total |
1,717,664 | 1,659,136 | 1,596,390 | 3.5 | % | 3.9 | % | |||||
Operating RevenuesGas
Gas Operating RevenuesGas Operating Revenues, which represent approximately 13% of Unitils total Operating Revenues, increased $8.3 million, or 41.1%, in 2003 compared to 2002. Gas Operating Revenues include the recovery of cost of sales, which are recorded as Purchased Gas, and Conservation & Load Management in Operating Expenses. Approximately 10% of the Companys total Conservation & Load Management expenses are related to Gas operations. Gas Operating revenues increase or decrease annually due to changes in Purchased Gas costs, Conservation & Load Management costs and gas sales margin (Gas Operating Revenues less Purchased Gas and Conservation & Load Management). Purchased Gas costs include the cost of gas supply as well as the other energy supply related costs. Conservation and Load Management expenses are expenses associated with the development, management, and delivery of the companys energy efficiency programs.
Purchased Gas increased $5.1 million, or 41.6%, in 2003 compared to 2002. Approximately 77% of this increase reflects higher natural gas commodity prices while the remainder reflects an increase of approximately
18
9.4% in gas unit sales. Conservation & Load Management expenses related to gas operations increased $0.1 million in 2003 compared to 2002. The Company recovers the costs of Purchased Gas and Conservation & Load Management in its rates at cost and therefore changes in these revenues do not impact net income.
Gas sales margin was $10.9 million in 2003, an increase of $3.1 million over 2002. Approximately 76% of this increase reflects the impact of 2002 base rate cases, which resulted in higher base distribution rates for the Companys gas retail distribution utility as of December 2002. The remainder of the increase in gas sales margin is due to higher gas unit sales in 2003 compared to 2002.
In 2002, Gas Operating Revenue decreased by $2.5 million, or 11.1%, compared to 2001. This was attributable to lower unit sales, reflecting a warmer than normal winter heating season combined with a decrease in wholesale natural gas commodity prices.
The following table details total Gas Operating Revenue and Margin for the last three years by major customer class:
Gas Operating Revenue and Sales Margin (000s) |
|||||||||||||||
% Change |
|||||||||||||||
2003 |
2002 |
2001 |
2003 vs. 2002 |
2002 vs. 2001 |
|||||||||||
Gas Operating Revenue: |
|||||||||||||||
Residential |
$ | 16,267 | $ | 10,871 | $ | 12,779 | 49.6 | % | (14.9 | %) | |||||
Commercial/Industrial |
11,979 | 8,007 | 9,505 | 49.6 | % | (15.8 | %) | ||||||||
Total Firm Gas Revenue |
$ | 28,246 | $ | 18,878 | $ | 22,284 | 49.6 | % | (15.3 | %) | |||||
Interruptible Gas Revenue |
366 | 1,405 | 544 | (74.0 | %) | 158.3 | % | ||||||||
Total Gas Operating Revenue |
$ | 28,612 | $ | 20,283 | $ | 22,828 | 41.1 | % | (11.1 | %) | |||||
Purchased Gas |
$ | 17,421 | $ | 12,304 | $ | 15,184 | 41.6 | % | (19.0 | %) | |||||
Conservation & Load Management |
286 | 168 | 182 | 70.2 | % | (7.7 | %) | ||||||||
Gas Sales Margin |
$ | 10,905 | $ | 7,811 | $ | 7,462 | 39.6 | % | 4.7 | % | |||||
Therm SalesUnitils total firm therm sales of natural gas increased 9.4% in 2003 compared to 2002, due to a colder winter heating season in early 2003. Sales to residential customers increased 10.5% and sales to commercial and industrial customers increased 8.3% in 2003 compared to 2002.
In 2002, total firm therm sales decreased 2.5% compared to 2001, primarily due to a warmer winter heating season compared to the prior year.
The following table details total firm therm sales for the last three years, by major customer class:
Firm Therm Sales (000s) |
% Change |
|||||||||||
2003 |
2002 |
2001 |
2003 vs. 2002 |
2002 vs. 2001 |
||||||||
Residential |
12,181 | 11,022 | 11,175 | 10.5 | % | (1.4 | %) | |||||
Commercial/Industrial |
12,411 | 11,458 | 11,892 | 8.3 | % | (3.6 | %) | |||||
Total |
24,592 | 22,480 | 23,067 | 9.4 | % | (2.5 | %) | |||||
Operating RevenueOther
Total Other Revenues increased $0.4 million, or 51.9%, in 2003 compared to 2002 and by $0.4 million, or 89.9%, in 2002 compared to 2001. This was the result of growth in revenues from the Companys unregulated energy brokering business, Usource.
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The following table details total Other Revenue for the last three years:
Other Revenue (000s) |
|||||||||||||||
% Change |
|||||||||||||||
2003 |
2002 |
2001 |
2003 vs. 2002 |
2002 vs. 2001 |
|||||||||||
Usource |
$ | 1,148 | $ | 756 | $ | 384 | 51.9 | % | 96.9 | % | |||||
Other |
30 | 30 | 30 | | | ||||||||||
Total Other Revenue |
$ | 1,178 | $ | 786 | $ | 414 | 49.9 | % | 89.9 | % | |||||
Operating Expenses
Purchased ElectricityPurchased Electricity expenses include the cost of electric supply as well as the other energy supply related restructuring costs, including power supply buyout costs. Purchased Electricity expenses, recoverable from customers through periodic cost recovery adjustment mechanisms increased $17.2 million in 2003 compared to 2002. Approximately 75% of this increase reflects higher electric commodity prices while the remainder reflects an increase of approximately 3.5% in electric unit sales during the period. The Company recovers the costs of Purchased Electricity in its rates at cost and therefore changes in these expenses do not impact net income.
In 2002, Purchased Electricity expenses decreased $17.3 million, or 12.8%, compared to 2001. This change was mainly due to a decrease in electric commodity prices compared to the prior year.
Purchased GasPurchased Gas expenses includes the cost of gas purchased and manufactured to supply the Companys total gas energy requirements. Gas supply costs are recoverable from customers through the Cost of Gas Adjustment mechanism. Purchased Gas expenses increased by $5.1 million, or 41.6% in 2003 compared to 2002. Approximately 77% of this increase reflects higher gas commodity prices while the remainder reflects an increase of approximately 9.4% in gas unit sales during the period. The Company recovers the costs of Purchased Gas in its rates at cost and therefore changes in these expenses do not impact net income.
In 2002, Purchased Gas decreased by $2.9 million, or 19.0%, compared to 2001, due to a decrease in gas commodity prices and lower gas unit sales, compared to 2001.
Operation and Maintenance (O&M)O&M expense includes electric and gas utility operating costs, and the operating cost of the Companys unregulated business activities. Total O&M expense increased $2.2 million, or 11.2%, in 2003 compared to 2002.
This increase reflects higher pension, insurance and employee medical benefit costs ($1.0 million) incurred in 2003 as well as annual increases in salaries and compensation expenses ($0.5 million). The Company also experienced higher uncollectible accounts expenses ($0.5 million) and higher legal and regulatory compliance costs ($0.4 million) in 2003. In addition, other utility operating and maintenance costs ($0.3 million) rose in 2003 due to the colder winter weather, as well as planned increases in distribution system maintenance programs. These increases were partially offset by operating expense savings of approximately $1.0 million achieved as a result of the management reorganization at the beginning of 2003.
Additionally, O&M expenses in 2003 reflect higher operating lease rent expense ($0.5 million) which, in prior years, was recognized under a capital lease and reflected in Depreciation and Amortization and Interest Expense, net. This change in accounting classification did not affect net income as the increase in O&M expense in 2003 was offset by a corresponding reduction in Depreciation and Amortization expense and Interest Expense, net. The change in classification was the result of a renegotiation of the lease terms in 2003.
In 2002, total O&M expense decreased $0.3 million, or 1.4%, compared to 2001.
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Conservation & Load ManagementConservation and Load Management expenses are expenses associated with the development, management, and delivery of the Companys energy efficiency programs. Energy Efficiency programs are designed, in conformity to state regulatory requirements, to help consumers use natural gas and electricity more efficiently and thereby decrease their energy costs. Programs are tailored to residential, small business and large business customer groups and provide educational materials, technical assistance, and rebates that contribute toward the cost of purchasing and installing approved measures. Approximately 90% of these costs are related to electric operations and 10% to gas operations.
Total Conservation & Load Management expenses increased $2.1 million, or 121.9%, in 2003 compared to 2002 reflecting seven new Energy Efficiency programs that were implemented during the year. These costs are collected from customers on a fully reconciling basis and therefore, fluctuations in program costs have no impact on earnings.
In 2002, total Conservation & Load Management expenses increased less than $0.1 million, or 2.4%, compared to 2001.
Depreciation, Amortization and Taxes
Depreciation and AmortizationDepreciation and Amortization expense increased $3.8 million, or 25.8%, in 2003 compared to 2002, due mainly to higher utility depreciation rates, which were included as a component of the new rates implemented by our retail distribution utilities in December 2002, together with an increased investment in utility plant additions.
In 2002, Depreciation and Amortization expense increased $2.1 million, or 16.8%, compared to 2001, due to a higher level of utility plant investments and the accelerated amortization of restructuring-related Regulatory Assets.
Local Property and Other TaxesLocal Property and Other Taxes increased $0.1 million, or 1.6%, in 2003 compared to 2002 and by $0.1 million, or 1.4%, in 2002 compared to 2001. These increases were related to higher levels of utility plant in service.
Federal and State Income TaxesFederal and State Income Taxes increased $1.1 million, or 42.8%, in 2003 compared to 2002, principally due to higher pre-tax operating income in 2003.
In 2002, Federal and State Income Taxes decreased $0.9 million, or 27.2%, compared to 2001, due to lower pre-tax operating income in 2002 and the amortization in 2002 of deferred tax liabilities related to the accelerated write-off of Regulatory Assets.
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Interest Expense, net
Interest expense is presented in the financial statements net of interest income. Interest expense is mainly comprised of interest on long-term debt and interest on regulatory liabilities. Interest income is mainly derived from carrying charges on restructuring related stranded costs and other deferred costs recorded as regulatory assets by the Companys retail distribution utilities as approved by regulators in New Hampshire and Massachusetts. Over the long run, as deferred costs are recovered through rates, the interest costs associated with these deferrals are expected to decrease together with a decrease in interest income. A summary of interest expense and interest income is provided in the following table:
Interest Expense, net |
2003 |
2002 |
2001 |
|||||||||
Interest Expense |
||||||||||||
Long-term Debt |
$ | 8,170 | $ | 8,336 | $ | 7,708 | ||||||
Short-term Debt |
1,071 | 1,037 | 1,484 | |||||||||
Subtotal Interest Expense |
9,241 | 9,373 | 9,192 | |||||||||
Interest Income |
||||||||||||
Regulatory Assets |
(1,657 | ) | (2,090 | ) | (1,952 | ) | ||||||
AFUDC |
(46 | ) | (52 | ) | (61 | ) | ||||||
Other |
(7 | ) | (174 | ) | (382 | ) | ||||||
Subtotal Interest Income |
(1,710 | ) | (2,316 | ) | (2,395 | ) | ||||||
Total Interest Expense, net |
$ | 7,531 | $ | 7,057 | $ | 6,797 | ||||||
In 2003, Interest Expense, net, increased by $0.5 million over 2002. This increase was driven by lower interest income on regulatory assets, which decreased $0.4 million in 2003 compared with 2002 due mainly to lower carrying charges applicable to regulatory asset balances. In addition, interest expense declined $0.1 million compared with 2002.
In 2002, Interest Expense, net, increased $0.3 million compared with 2001. Interest expense associated with long-term debt increased $0.6 million. Short-term interest expense decreased by $0.4 million due to lower interest short-term interest rates applicable to short-term debt balances outstanding. Interest income was lower in 2002 compared to 2001 by $0.1 million.
Other Items
2002 Restructuring ChargeIn the fourth quarter of 2002, the Company recognized a pre-tax Restructuring Charge of $1.6 million. The after-tax effect of the Restructuring Charge was a reduction of $0.20 in Earnings Per Common Share, assuming full dilution.
In December 2002, the Company undertook a strategic review of its business operations and committed to a formal transition and reorganization plan (the Reorganization Plan) to streamline its management structure, in order to improve operating efficiency and to align the organization to meet ongoing business requirements. The Reorganization Plan resulted in the elimination of 19 management and administrative positions. As a result of the elimination of these positions, and consistent with existing Company policy, certain benefits were extended to the employees whose positions were eliminated. On January 8, 2003, the Company implemented the remainder of the Reorganization Plan. The Company estimates that the result of this management restructuring process will be an annual cash savings of approximately $2.3 million in operating expenses and construction project overheads.
Investment Write-down and Sale of Equity Stake in Enermetrix2001Beginning in 1998, Unitil invested $5.5 million in Enermetrix, Inc. (Enermetrix), an energy technology start-up enterprise. In accordance with SFAS No. 115, Accounting for Certain Investments in Debt and Equity Securities, the Company recorded a non-cash charge of $3.7 million, or $2.4 million, net of tax, in the fourth quarter of 2001 to recognize the decrease in fair value of its non-utility investment in Enermetrix.
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On April 11, 2002, the Company sold its equity ownership in Enermetrix for $1.5 million in cash and improved commercial terms for use of the Enermetrix Software Network. As a result of the sale, in 2002, the Company recognized the benefit of approximately $1.3 million from this capital loss as a carryback against capital gains in its 2002 tax return and recorded a gain, net of transaction costs, on the final disposition of $82 thousand, net of tax. In total, the final book loss on the investment was $2.3 million, net of tax.
Extraordinary Item2001In November 1997, the Massachusetts Legislature enacted the Massachusetts Electric Restructuring Act of 1997 (the Restructuring Act). The Restructuring Act required all electric utilities to file a restructuring plan with the MDTE by December 31, 1997. Among other things, the Restructuring Act resulted in the divestiture of electric generation assets and purchase power contracts, along with the restructuring of utility operations by all Massachusetts utilities to provide direct retail access to their customers by all qualified third-party energy suppliers.
The MDTE conditionally approved FG&Es Restructuring Plan (the Plan) in February 1998, and started an investigation and evidentiary hearings into FG&Es proposed recovery of Regulatory Assets related to stranded generation asset costs and power supply expenses related to the formulation and implementation of its Plan. In January 1999, the MDTE approved FG&Es Plan, which included provisions for the recovery of stranded costs through a transition charge in FG&Es 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.
On October 18 and 19, 2001, the MDTE issued a series of regulatory orders in several pending cases involving FG&E, including a final order on FG&Es initial reconciliation filing. Those orders included the review and disposition of issues related to FG&Es recovery of transition costs due to the restructuring of the electric industry in Massachusetts, as well as certain costs associated with gas industry restructuring and preparation and litigation of performance based rate proceedings initiated by the MDTE. The orders determined the final treatment of Regulatory Assets that FG&E had sought to recover from its Massachusetts electric customers over a multi-year transition period that began in 1998.
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, net of taxes. The Company recognized the extraordinary charge of $0.83 per share, as of September 30, 2001.
As a result of all of these orders, the Company has been allowed recovery of its Massachusetts industry restructuring transition costs, estimated at $150 million after reconciliation, including the above-market or stranded generation and power supply related costs via a non-bypassable uniform transition charge. FG&E has been, and will continue to be, subject to annual MDTE investigation and review in order to reconcile the costs and revenues associated with the collection of transition charges from its customers over the next six to eight years.
Capital Requirements and Liquidity
Unitil requires capital to fund utility plant additions, working capital and other utility expenditures recovered in subsequent and future periods through regulated rates. The capital necessary to meet these requirements is derived primarily from internally-generated funds, which consist of cash flows from operating activities, exclusive of payments of current dividends. The Company initially supplements internally generated funds through bank borrowings under unsecured short-term bank lines. Periodically, the Company replaces portions of its short-term debt with long-term financings more closely matched to the long-term lives of its utility assets.
At December 31, 2003, Unitil had an aggregate of $52.0 million in unsecured revolving lines of credit through three banks. On January 1, 2004, the Company reduced its aggregate unsecured short-term bank lines to
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$45.0 million. The Company anticipates that it will be able to secure renewal or replacement of some or all of its revolving lines of credit, in accordance with projected requirements. Average short-term borrowings in 2003 were $39.1 million, an increase of $14.1 million over the average short-term debt outstanding in 2002. At December 31, 2003, the Company had available $29.6 million of unused bank lines of credit and had outstanding bank borrowings of $22.4 million. In addition, Unitil had $3.8 million in cash on hand as of December 31, 2003.
The maximum amount of short-term borrowings that may be incurred by Unitil and its subsidiaries is subject to periodic approval by the SEC under the Public Utility Holding Company Act of 1935 (PUHCA) and state regulators of the Companys retail distribution utilities, FG&E and UES. At December 31, 2003, Unitil had regulatory authorization to incur total short-term borrowings up to a maximum of $55 million, and FG&E and UES had regulatory authorizations to borrow up to a maximum of $35 million and $22 million, respectively. UES short-term debt authorization is scheduled to be reduced to $16 million on May 1, 2004, reflecting reduced borrowing requirements. In 2003, UES and FG&E had average short-term debt outstanding of $9.4 million and $23.8 million, respectively. At December 31, 2003, UES and FG&E had short-term debt outstanding of $7.8 million and $14.6 million, respectively.
The Unitil Companies are individually and collectively members of the Unitil Cash Pool. The Cash Pool is the financing vehicle for day-to-day cash borrowing and investing by each of the Unitil companies. The Cash Pool Agreement allows an efficient exchange of cash among the Unitil companies. The Cash Pool Agreement and its transactions are strictly monitored by the SEC under PUHCA. The interest rates charged to the subsidiaries for borrowing from the Cash Pool are based on Unitil Corporations actual interest costs from its banks under the revolving lines of credit. In addition, Unitil, UES and FG&E are required by the SEC to maintain a minimum 30% common equity ratio, including short-term debt, in order to utilize the Cash Pool resources. At December 31, 2003, all Unitil subsidiaries were in compliance with the requirements to participate in the Cash Pool.
The Company periodically repays its short-term borrowings with internally generated funds and through the issuance of long-term financings. The Company issued two long-term financings in 2003 in the form of Unitil Corporation Common Stock and FG&E Long-term Notes. The Common Stock offering provided net proceeds of $16.9 million which were used to make capital contributions of $6.0 million each to UES and FG&E (see Note 3) and for general corporate purposes. FG&E issued $10.0 million in Long-term Notes under a debenture note structure (see Note 4). The Company expects to continue to be able to satisfy its external financing needs by utilizing additional short-term bank borrowings and additional long-term financings in the form of first mortgage bonds, debentures and/or equity. The continued availability of these methods of financing, as well as the Companys choice of a specific form of security, will depend on many factors, including: security market conditions; general economic climate; regulatory approvals; the ability to meet covenant issuance restrictions, if any; the level of the Companys net income, cash flows and financial position; and the competitive pricing offered by the financing source.
In 2003, the Company and its subsidiaries made cash contributions to their pension plans in the amount of $1.2 million. If the actual return on plan assets continues to be significantly below the expected returns, the Company may elect to fund the pension plans in future periods. Post-retirement benefits for employees of the Company and its subsidiaries were funded through contributions to the Unitil Retiree Trust (URT) in 2003. In January 2004, Unitil established Voluntary Employee Benefit Trusts (VEBT) to provide post-retirement benefits. Unitil expects to continue to make contributions to the VEBTs in future years in amounts consistent with the amounts recovered in retail distribution utility rates for these benefit costs.
The Company does not currently use, and is not dependent on the use of off-balance sheet financing arrangements, such as securitization of receivables or obtaining access to assets or cash through special purpose entities. We do have material energy supply commitments that are discussed in Note 5. Cash outlays for the purchase of electricity and natural gas to serve our customers are subject to full recovery through periodic changes in rates, with carrying charges on deferred balances. From year to year, there are likely to be timing
24
differences associated with the cash recovery of such costs, creating under- or over-recovery situations at any point in time. Rate recovery mechanisms are typically designed to collect the under-recovered cash or refund the over collected cash over subsequent 6-12 month periods.
The table below lists the Companys significant contractual obligations as of December 31, 2003.
Payments Due by Period | |||||||||||||||
Significant Contractual Obligations (000s) as of December 31, 2003 |
Total |
2004 |
2005- 2006 |
2007- 2008 |
2009 & Beyond | ||||||||||
Long-term Debt |
$ | 114,224 | $ | 3,264 | $ | 596 | $ | 700 | $ | 109,664 | |||||
Capital Lease |
1,050 | 616 | 408 | 18 | 8 | ||||||||||
Operating Leases |
2,452 | 270 | 540 | 540 | 1,102 | ||||||||||
Power Supply Contract ObligationsMA |
73,441 | 7,717 | 15,737 | 16,137 | 33,850 | ||||||||||
Power Supply Contract ObligationsNH |
93,900 | 19,176 | 31,555 | 23,807 | 19,362 | ||||||||||
Gas Supply Contracts |
18,622 | 8,706 | 7,279 | 2,637 | | ||||||||||
Total Contractual Cash Obligations |
$ | 303,689 | $ | 39,749 | $ | 56,115 | $ | 43,839 | $ | 163,986 | |||||
The Company also provides limited guarantees on certain energy contracts entered into by its regulated subsidiary companies. The Companys policy is to limit these guarantees to two years or less. As of December 31, 2003 there are $2.0 million of guarantees outstanding and these guarantees extend through October 21, 2005.
Financial Covenants and Restrictions
The agreements under which the long-term debt of Unitils two principal subsidiaries, UES and FG&E, were issued contain various covenants and restrictions. These agreements do not contain any covenants or restrictions pertaining to the maintenance of financial ratios or the issuance of short-term debt. These agreements do contain covenants relating to, among other things, the issuance of additional long-term debt, cross-default provisions and business combinations, as described below.
UES utilizes a First Mortgage Bond (FMB) structure of long-term debt. In order to issue new FMB securities, the customary covenants of the existing UES Indenture Agreement must be met, including that UES have sufficient available net bondable plant to issue the securities and projected earnings available for interest charges equal to at least two times the annual interest requirement. The UES agreements further require that if UES defaults on any UES FMB securities, it would constitute a default for all UES FMB securities. The UES default provisions are not triggered by the actions or defaults of other companies in the Unitil System.
FG&E utilizes a debenture structure of long-term debt. Accordingly, in order for FG&E to issue new long-term debt, the covenants of the existing long-term agreements must be satisfied, including that FG&E have total funded indebtedness less than 65% of total capitalization and earnings available for interest equal to at least two times the interest charges for funded indebtedness. As with the UES agreements, FG&E agreements require that if FG&E defaults on any FG&E long-term debt agreement, it would constitute a default under all FG&E long-term debt agreements. The FG&E default provisions are not triggered by the actions or defaults of other companies in the Unitil System.
Both the UES and FG&E instruments and agreements contain covenants restricting the ability of each company to incur liens and to enter into sale and leaseback transactions, and restricting the ability of each company to consolidate with, to merge with or into or to sell or otherwise dispose of all or substantially all of its assets.
In addition, the UES and FG&E long-term debt instruments and agreements contain certain restrictions on the payment of common dividends from Retained Earnings. On December 31, 2003, UES and FG&E had unrestricted Retained Earnings of $11,354,000 and $ 6,081,000, respectively, available for the payment of
25
Common dividends. (See Note 3). UES and FG&E pay dividends to their sole shareholder, Unitil Corporation, and these dividends are the primary source of cash for the payment of dividends to Unitil shareholders.
Sinking fund and principal payments on long-term debt will be required in 2004 in the amount of $3.3 million. This includes a final $3 million sinking fund payment due on FG&Es 8.55% Long-Term Notes, which will retire the issue.
Unitil Corporation has no long-term debt outstanding. The long-term debt and preferred stock of UES and FG&E are privately held, and the Company does not issue commercial paper. For these reasons, these securities of Unitil and its subsidiaries are not publicly rated.
Results of OperationsCash Flows
Cash Provided by Operating ActivitiesOperating cash flows of $15.6 million in 2003 reflect an increase of $6.1 million over 2002 operating cash flow of $9.6 million. This increase is attributable to higher earnings in 2003, which when adjusted for depreciation and amortization and deferred taxes, provided $33.1 million in operating cash flow as compared to $21.9 million in 2002 and $13.2 million in 2001. The year over year change in depreciation and amortization primarily reflects the full year impact of higher book depreciation rates used by the Companys retail distribution utilities in 2003 compared to 2002 and 2001, as well as higher plant in service year to year. These higher depreciation rates took effect on December 1, 2002, as a component of the Companys retail distribution utilities new electric and gas base distribution rate increases. The change in deferred income taxes primarily reflects deferred tax impacts associated with a change in regulatory energy supply related cost deferrals year to year and a change in federal tax laws that allows for an additional 30% acceleration of tax depreciation on capital additions placed in service in 2003. Together with the normal accelerated tax depreciation on utility capital additions these factors resulted in an increase in the deferred tax provision. Also impacting operating cash flows in 2003 was a decrease in operating cash flow of $1.6 million due to the net change in current assets and liabilities. Changes in current assets and liabilities reflect cash timing differences generally of a shorter duration which taken together comprise the Companys working capital requirements (excluding short term borrowings and current portion of long term debt). A decrease in accounts receivable, lower electric and gas supply payables to wholesale suppliers and higher refundable income taxes, which positively impact estimated income tax payments, improved operating cash flow by $14.6 million in 2003 compared to 2002. These increases in operating cash flow were offset by higher accrued revenues, reflecting an increase of $3.3 million in the deferred rate recovery of energy supply related costs expended in 2003, as well as an increase in prepayments of $4.6 million, primarily related to payments to wholesale electricity suppliers. Another use of cash reflects the expenditure of insurance proceeds received by the Company in 2002 for the completion of an environmental remediation project in 2003 which was recorded in Other Current Liabilities. Other changes impacting operating cash flows in 2003 included an increase in deferred restructuring charges of $6 million. Deferred restructuring charges reflect unrecovered industry restructuring related costs which are recorded as regulatory assets and earn carrying charges until there subsequent recovery in future periods.
2003 |
2002 |
2001 | |||||||
Cash Provided by Operating Activities ($000s) |
$ | 15,621 | $ | 9,568 | $ | 23,178 | |||
Cash Used in Investing ActivitiesCash flows used in investing activities were $21.9 million in 2003. Cash used in investing activities is primarily for capital expenditures related to electric and gas distribution system additions. In 2002, the Company also received $1.5 million of proceeds from the sale of it ownership interest in a non-utility investment. In addition, in 2001, the Company received $0.3 million in proceeds from the sale of its ownership interest in Millstone Nuclear Generating Unit No. 3.
26
Capital expenditures are projected to be $21.9 million in 2004 reflecting normal electric and gas utility system additions.
2003 |
2002 |
2001 |
||||||||||
Cash Used in Investing Activities ($000s) |
$ | (21,939 | ) | $ | (19,290 | ) | $ | (19,548 | ) | |||
Cash Provided by (Used in) Financing ActivitiesCash flow from financing activities in 2003 of $2.9 million primarily reflects financing proceeds of $27.7 million from the issuance of common stock equity and new long term debt, partially offset by the repayment of short-term borrowings of $13.6 million, long term debt sinking fund payments of $3.2 million and common and preferred stock dividends paid of $7.1 million.
On October 29, 2003, the Company raised approximately $16.9 million (after deducting underwriting discounts and commissions and the expenses of the offering) through the sale of 717,600 shares of its common stock at a price of $25.40 per share in a registered public offering. The offering was increased from an original 520,000 shares to reflect a 20% upsizing of the transaction (104,000 shares) and the exercise of a 15% underwriters over-allotment (93,600 shares). The Company used $12.0 million of the proceeds from this offering to make capital contributions of $6.0 million to UES and $6.0 million to FG&E.
On October 28, 2003, FG&E completed a $10 million private placement of long-term unsecured notes with a major insurance company. The notes have a term of 22 years and a coupon rate of 6.79%. The net proceeds were used to repay short-term borrowings.
2003 |
2002 |
2001 |
||||||||
Cash Provided by (Used in) Financing Activities ($000s) |
$ | 2,924 | $ | 10,806 | $ | (614 | ) | |||
Dividends
The Company is currently paying a dividend at an annual rate of $1.38 per common share.
The Companys dividend policy is reviewed annually by the Board of Directors. The amount and timing of all dividend payments is subject to the discretion of the Board of Directors and will depend upon business conditions, results of operations, financial conditions and other factors.
Interest Rate Risk
As discussed above, the Company meets its external financing needs by issuing short-term and long-term debt. The majority of the Companys debt outstanding represents long-term notes bearing fixed rates of interest. Changes in market interest rates do not affect interest expense resulting from these outstanding long-term debt securities. However, the Company periodically repays its short-term debt borrowings through the issuance of new long-term debt securities. Changes in market interest rates may affect the interest rate and corresponding interest expense on any new long-term debt securities issued by the Company. In addition, the Companys short-term debt borrowings bear a variable rate of interest. As a result, changes in short-term interest rates will increase or decrease the Companys interest expense in future periods. For example, if the Company had an average amount of short-term debt outstanding of $25 million for the period of one year, a change in interest rates of 1% would result in a change in annual interest expense of approximately $250,000. The average interest rate on the Companys short-term borrowings was 1.78%, 2.18% and 4.78% during 2003, 2002 and 2001, respectively.
Market Risk
Although Unitils 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
27
power and gas costs in rates on a pass-through basis. Consequently, there is limited commodity price risk after consideration of the related rate-making. Additionally, as discussed above and below in Regulatory Matters, the Company has divested its commodity-related contracts and therefore, has further reduced its exposure to commodity risk.
Regulatory Matters
As a registered holding company under PUHCA, Unitil and its subsidiaries are regulated by the Securities and Exchange Commission (SEC) with respect to various matters, including: the issuance of securities, capital structure and certain acquisitions and dispositions of assets. UES and FG&E are subject to regulation by the New Hampshire Public Utilities Commission (NHPUC) and the Massachusetts Department of Telecommunications and Energy (MDTE), respectively, with respect to their rates, issuance of securities and other accounting and operational matters. Certain aspects of the Companys utility operations as they relate to wholesale and interstate business activities are also regulated by the Federal Energy Regulatory Commission (FERC). In the past several years, the Company has completed the restructuring of its electric and natural gas operations resulting from the implementation of retail choice as mandated by the States of New Hampshire and Massachusetts.
Unitils retail distribution utilities have the franchise to deliver electricity and/or natural gas to all customers in their franchise areas, at rates established under traditional cost of service regulation. Under this regulatory structure, through their distribution charges, UES and FG&E recover the cost of providing distribution service to their customers based on a historical test year, in addition to earning a return on their capital investment in utility assets. In 2002, the retail distribution utilities completed rate proceedings and were authorized by the NHPUC and MDTE to implement increased rates for electric and natural gas distribution operations beginning in December of that year. UES and FG&E also recover the actual cost of any electricity or natural gas they supply to their customers, as well as certain costs associated with industry restructuring, through periodically adjusted rates.
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 natural gas, while continuing to regulate the distribution operations of Unitils retail distribution utilities. Unitil implemented the restructuring of its electric and gas operations in Massachusetts in 1998 and 2000, respectively, and implemented the final phase of a restructuring settlement for its New Hampshire electric operations on May 1, 2003. Following electric industry restructuring, Unitils retail distribution companies have a continuing obligation to submit filings in both states that demonstrate their compliance with regulatory mandates and provide for timely recovery of costs in accordance with their approved restructuring plans.
In connection with industry restructuring and the implementation of retail choice for customers in New Hampshire and Massachusetts, Unitil Power divested of its long-term power supply contracts and FG&E divested of its long-term power supply contracts and owned generation assets. Unitil Power divested its long-term power supply contracts to a subsidiary of Mirant Corporation (Mirant) and FG&E divested its owned generation assets and long-term power supply contracts to Select Energy, Inc. (Select Energy). Unitil Powers and FG&Es long-term power supply contracts were divested through the sale of the entitlements to the electricity associated with those contracts. UES and FG&E recover in their rates all the costs associated with the divestiture of their power supply portfolios as a result of electric industry restructuring.
Unitils customers in both New Hampshire and Massachusetts now have the opportunity to purchase their electric supply from third party vendors, though most customers continue to purchase such supplies through Unitil as the provider of last resort. Accordingly, UES and FG&E contract with wholesale power suppliers for the electricity necessary to meet their regulated default service energy supply obligations. Similarly, FG&Es natural gas customers have the option to contract for their natural gas supply with third-party suppliers and FG&E remains the default service provider for these natural gas customers. The costs associated with the acquisition of
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such wholesale electric and natural gas supplies for customers who do not contract with third-party suppliers are recovered from those customers through periodic rate and cost recovery reconciliation mechanisms.
We have secured regulatory approval from both New Hampshire and Massachusetts state regulators for the recovery of approximately $203 million of power supply-related stranded costs principally over the next 6 to 8 years. Also, we have implemented comprehensive customer and financial information systems to accommodate the transition to competitive energy markets and retail choice.
Massachusetts Electric Operations RestructuringBeginning March 1, 1998, FG&E implemented its Restructuring Plan under the Massachusetts Electric Utility Restructuring Act of 1997 (Restructuring Act). FG&E completed the divestiture of its entire regulated power supply business in 2000 in accordance with the Restructuring Plan. FG&Es rates provide for the recovery of stranded costs associated with the divestiture of FG&Es power portfolio including stranded, previously-owned generation assets. The Regulatory Assets that are being recovered in FG&Es rates have been approved by the MDTE as part of FG&Es Restructuring Plan and are reviewed each year as part of FG&Es annual rate reconciliation filings.
The Restructuring Act also requires FG&E to purchase and provide power as the default service provider, through either Standard Offer Service (SOS) or Default Service, for retail customers who choose not to buy, or are unable to purchase, energy from a competitive supplier. FG&E must provide SOS through February 2005 at rate levels which provide rate reductions as required by the Restructuring Act. New distribution customers and customers no longer eligible for SOS are eligible to receive Default Service at prices set periodically based on market solicitations as approved by regulators. As of December 31, 2003, competitive suppliers were serving approximately 37% of FG&Es load, primarily for FG&Es largest customers, although much of the load has since reverted back to FG&Es regulated Default Service.
As a result of the restructuring and the divestiture of FG&Es owned generation assets, FG&E recorded stranded generation-related costs as Regulatory Assets. These stranded generation-related Regulatory Assets are being amortized and recovered through the year 2009. FG&E earns carrying charges on the unamortized balance of these stranded generation-related Regulatory Assets. In addition, as a result of restructuring legislation in Massachusetts, the total rate FG&E may charge for the combination of distribution service, stranded costs and purchase power costs is subject to an inflation adjusted total rate cap for a seven year period, which began in March 1998. Any unrecovered balance of purchased power costs and stranded costs as a result of the total rate cap is deferred for future rate recovery as a Regulatory Asset. These deferred costs also earn carrying charges until their subsequent recovery in future periods. The value of FG&Es generation-related Regulatory Assets and deferred cost Regulatory Assets was approximately $31.7 million and $28.9 million, respectively at December 31, 2003, and are expected to be recovered in FG&Es rates principally over the next 6 to 8 years. In addition, as of December 31, 2003, FG&E had recorded on its balance sheets $73.4 million as Power Supply Buyout Obligations and corresponding Regulatory Assets associated with the divestiture of its long-term purchase power contracts. FG&E does not earn a carrying charge on this power supply component of Regulatory Assets as there is no significant difference between the time periods when payments are made to satisfy these purchase power contract obligations and their recovery in rates from FG&Es customers.
Massachusetts Gas Operations RestructuringFollowing a three year state-wide collaborative process on the unbundling, or separation, of discrete services offered by natural gas local distribution companies (LDCs), the MDTE approved regulations and tariffs for FG&E and other LDCs operating in the Commonwealth to provide full customer choice effective November 1, 2000. The MDTE ruled that LDCs would continue to have an obligation to provide gas supply and delivery services for a five-year transition period, with a review after three years. The MDTE also required mandatory assignment of LDCs pipeline capacity to competitive marketers supplying customers during the transition period. This mandatory capacity assignment protects LDCs from exposure to certain stranded gas supply costs during the transition period. In January 2004, the MDTE opened an investigation seeking comment on whether the mandatory assignment of pipeline capacity should be continued. This proceeding is pending.
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New Hampshire RestructuringIn 2002, UES predecessor companies, Concord Electric Company (CECo) and Exeter & Hampton Electric Company (E&H), received approval for a comprehensive restructuring proposal from the NHPUC. This approved proposal included the merger of E&H with and into CECo. CECo changed its name to Unitil Energy Systems, Inc. (UES) immediately following the merger. Under the New Hampshire restructuring plan, Unitil Power agreed to divest its existing long-term power supply portfolio and conduct a solicitation for new power supplies from which to meet UES ongoing default service Transition and Default Service obligations in order to implement customer choice for UES customers May 1, 2003. In March 2003, the NHPUC approved the contract among Unitil Power, UES and Mirant Americas Energy Marketing, LP (MAEM), under which MAEM purchased the entitlements to Unitil Powers long-term power supply portfolio and provided Transition and Default Service to the customers of UES. The NHPUC also approved final tariffs for UES for stranded cost recovery and Transition and Default Service, including certain surcharges that are subject to future reconciliation or review. As of December 31, 2003, UES had recorded on its balance sheets $93.9 million as Power Supply Contract Obligations and corresponding Regulatory Assets associated with these long-term purchase power stranded costs, which are expected to be recovered principally over a period of approximately 8 years. UES does not earn carrying charges on these Power Supply Regulatory Assets as there is no significant difference between the time periods when payments are made to satisfy these purchase power buyout obligations and their recovery in rates from UESs customers.
In July 2003, MAEM and its parent, Mirant Corporation (Mirant), filed for reorganization under Chapter 11 of the bankruptcy code. Under the contract with UES and Unitil Power discussed above, Mirant guaranteed the performance by MAEM. Unitil Power and UES filed a motion with the Bankruptcy Court in September, 2003, requesting that MAEM be required to make a decision to assume or reject the contract by December 1, 2003. On November 14, 2003, MAEM, Unitil Power and UES filed a Settlement with the bankruptcy court. Under the terms of the Settlement, MAEM agreed to assume and continue to fulfill its power purchase and sale obligations under the contract, to cure all pre-petition obligations, and to settle certain other disputes. UES and Unitil Power agreed to accelerate the payment of amounts held back from MAEM. On December 10, 2003, the settlement was approved by the federal bankruptcy court and MAEM is continuing to fulfill its obligations under the Mirant Agreement.
Wholesale Power Market RestructuringFG&E, Unitil Power, and UES are members of the New England Power Pool (NEPOOL). NEPOOL was formed in 1971 to assure reliable operation of the bulk power system in the most economic manner for the region. NEPOOL is governed by an agreement (NEPOOL Agreement) that is filed with and subject to the jurisdiction of the FERC. Under the NEPOOL Agreement and the NEPOOL Open Access Transmission Tariff (OATT), to which virtually all New England electric utilities are parties, substantially all operation and dispatching of electric generation and bulk transmission capacity in New England is performed on a regional basis. The NEPOOL Agreement and the OATT impose generating capacity and reserve obligations, and provide for the use of major transmission facilities and support payments associated therewith. The most notable benefits of NEPOOL are coordinated power system operation in a reliable manner and a supportive business environment for the development of a competitive electric marketplace. The regional bulk power system is operated by an independent corporate entity, the Independent System Operator-New England (ISO-NE), in order to avoid any opportunity for conflicting financial interests between the system operator and the market-driven participants.
There continue to be ongoing legislative and regulatory initiatives that are primarily focused on the deregulation of the generation and supply of electricity and the corresponding development of a competitive market place from which customers choose their electric energy supplier. As a result, the NEPOOL Agreement continues to be restructured. NEPOOLs membership provisions have been broadened to cover all entities engaged in the electricity business in New England, including power marketers and brokers, independent power producers, load aggregators and retail customers in states that have enacted retail access statutes. Various energy and capacity products are traded in open markets, with transmission access and pricing subject to the regional OATT designed to promote competition among power suppliers. On March 1, 2003, ISO-NE implemented a Standard Market Design (SMD) that is intended to improve the ability to trade power between New England and
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other regions throughout the northeast. On October 31, 2003, ISO-NE and the major transmission owners in New England filed with the FERC to form a Regional Transmission Organization (RTO) with a proposed effective date not earlier than March 1, 2004. The implementation of the RTO, which is being contested at FERC, will further revise the conduct of wholesale markets in New England. The filing also proposes to eliminate NEPOOL as an organization and require all current NEPOOL members to be part of the RTO system. SMD, the formation of an RTO and other wholesale market changes are not expected to have a material impact on Unitils results of operations because of cost recovery mechanisms for wholesale energy costs approved by state regulators.
Other Regulatory ProceedingsBetween December 2002 and January 2003, FG&E and UES received approval from their respective state regulatory commissions for accounting orders to mitigate certain accounting requirements related to pension plan assets, which have been triggered by the substantial decline in the capital markets. These approvals allowed FG&E and UES to treat the additional minimum pension liability as Regulatory Assets and avoided the reduction in equity that would otherwise be required. These regulatory orders did not pre-approve the amount of pension expense to be recovered in future rates, which recovery will be determined in future proceedings. Based on these approvals, FG&Es and UES additional minimum pension liabilities are included in Regulatory Assets on the Companys balance sheet.
On December 15, 2003, FG&E filed a request to defer and record, as a regulatory asset or liability, the difference between the level of pension and Post Retirement Benefits Other than Pension (PBOP) expenses that are included in its base rates and the amounts that are required to be booked in accordance with SFAS No. 87 and SFAS No. 106, since the effective date of its last base rate change. The MDTE issued an order on January 30, 2004 approving FG&Es request for this accounting order to defer these costs.
On December 19, 2003, UES filed with the NHPUC a Petition for Deferral of its PBOP expenses not recovered in base rates. On January 30, 2004 the NHPUC issued an order approving UESs request for this accounting order to defer these costs.
On January 30, 2004 the MDTE granted FG&Es request to voluntarily decrease its Cost of Gas Adjustment Clause (CGAC) during the remainder of the 2004 winter period by accelerating the payment of a multi-year refund that was ordered by the MDTE in May 2001, based upon a finding that FG&E had over-collected certain fuel inventory finance charges. In January, 2004, the Massachusetts Supreme Judicial Court (SJC) affirmed the MDTEs May 2001 Order requiring the refund, which Order FG&E had appealed. The MDTE subsequently approved FG&Es request to prepay the balance of the refund outstanding of approximately $1.2 million by reducing the CGAC in February through April, 2004. The MDTE also approved FG&Es request to amortize these charges against future revenues.
In March 2003, the MDTE opened an investigation into FG&Es dealings with Enermetrix, Inc. (Enermetrix). Enermetrix provides an internet-based energy auction service that is used by utilities to post their natural gas and electric power needs for bids. FG&E used the Enermetrix Exchange to post its electric default service solicitations in September 2001 and March 2002, and Enermetrix earned approximately $19,000 in fees from these transactions. In Managements view, these successful solicitations ultimately resulted in significant lower default service costs to FG&Es customers. At the time of these solicitations, FG&Es parent, Unitil Corporation, had an approximately 9% ownership interest in Enermetrix. The MDTE is investigating whether FG&E is in compliance with relevant statutes and regulations pertaining to transactions with affiliated companies and the MDTEs Order setting forth the requirements for the pricing and procurement of default service. FG&E and the Attorney General have completed briefing of the case and an MDTE decision is pending. Management believes the outcome of this matter will not have a material adverse effect on the financial position of the company.
In August 2003, Northeast Utilities (NU) filed with FERC to revise its comprehensive network service transmission rates to establish and implement a formula based rate, replacing a fixed rate tariff. As filed, the proposed rate change would increase UES external transmission costs paid under the NU tariff for
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comprehensive network service by about $600 thousand per year. The Company has filed a Motion to Intervene and Limited Protest in this FERC proceeding, and has claimed that certain provisions of NUs filing are contrary to a settlement reached in 1997 with NU for comprehensive network transmission service. The FERC set NUs filing for settlement discussions and approved the new tariff effective October 28, 2003, subject to refund. On January 22, 2004, the Settlement Judge formally terminated the settlement discussions. The Company continues to have informal settlement discussions with NU. Further action on the NU filing is currently pending before FERC. Management cannot predict the outcome of this proceeding but believes it will not have a material impact on results of operations because of rate reconciling cost recovery mechanisms approved by state regulators.
Environmental Matters
The Companys past and present operations include activities that are generally subject to extensive federal and state environmental laws and regulations. The Company is in general compliance with all applicable environmental and safety laws and regulations, and Management believes that as of December 31, 2003, there are no material losses reasonably possible in excess of recorded amounts. However, there can be no assurance that significant costs and liabilities will not be incurred in the future. It is possible that other developments, such as increasingly stringent federal, state or local environmental laws and regulations could result in increased environmental compliance costs.
Sawyer Passway MGP SiteThe Company continues to work with environmental regulatory agencies to identify and assess environmental issues at the former manufactured gas plant (MGP) site at Sawyer Passway, located in Fitchburg, Massachusetts. FG&E proceeded with site remediation work as specified on the Tier 1B permit issued by the Massachusetts Department of Environmental Protection (DEP), which allows the Company to work towards temporary remediation of the site. Work performed in 2002 was associated with the five-year review of the Temporary Solution submittal (Class C Response Action Outcome) under the Massachusetts Contingency Plan that was filed for the site in 1997. Completion of this work has confirmed the Temporary Solution status of the site for an additional five years. A status of temporary closure requires FG&E to monitor the site until a feasible permanent remediation alternative can be developed and completed.
Since 1991, FG&E has recovered the environmental response costs incurred at this former MGP site pursuant to an MDTE approved settlement agreement between the Massachusetts Attorney General and the natural gas utilities of the Commonwealth of Massachusetts (Agreement). The Agreement allows FG&E to amortize and recover from gas customers over succeeding seven-year periods the environmental response costs incurred each year. Environmental response costs are defined to include liabilities related to manufactured gas sites, waste disposal sites or other sites onto which hazardous material may have migrated as a result of the operation or decommissioning of Massachusetts gas manufacturing facilities from 1882 through 1978. In addition, any recovery that FG&E receives from insurance or third parties with respect to environmental response costs, net of the unrecovered costs associated therewith, are split equally between FG&E and its gas customers. The total annual charge for such costs assessed to gas customers cannot exceed five percent of FG&Es total revenue for firm gas sales during the preceding year. Costs in excess of five percent will be deferred for recovery in subsequent years.
Former Electric Generating StationFG&E has remediated environmental conditions at a former electric generating station also located at Sawyer Passway in Fitchburg, Massachusetts, which FG&E sold in 1983 to a general partnership, Rockware, who demolished several exterior walls of the generating station in order to facilitate removal of certain equipment. The demolition of the walls and the removal of generating equipment resulted in damage to asbestos-containing insulation materials inside the building, which had been intact and encapsulated at the time of the sale of the structure.
When Rockware encountered financial difficulties and failed to respond adequately to Orders of the environmental regulators to remedy the situation, FG&E agreed to take steps at that time and obtained DEP approval to temporarily enclose, secure and stabilize the facility. Based on that approval, between September and
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December 1989, contractors retained by FG&E stabilized the facility and secured the building. This work did not permanently resolve the asbestos problems caused by Rockware, but was deemed sufficient for the then foreseeable future.
Due to the continuing deterioration of this former electric generating station and Rockwares continued lack of performance, FG&E, in concert with the DEP and the U.S. Environmental Protection Agency (EPA), conducted further testing and survey work during 2001 to ascertain the environmental status of the building. Those surveys revealed continued deterioration of the asbestos-containing insulation materials in the building.
By letter dated May 1, 2002, the EPA notified FG&E that it was a Potentially Responsible Party for planned remedial activities at the site and invited FG&E to perform or finance such activities. FG&E and the EPA entered into an Agreement on Consent, whereby FG&E, without an admission of liability, conducted environmental remedial action to abate and remove asbestos-containing and other hazardous materials. This project was completed during the fourth quarter of 2003. FG&E received complete coverage from its insurance carrier for these costs and the resolution of this matter did not have a material adverse impact on the Companys financial position.
Critical Accounting Policies
The preparation of the Companys financial statements in conformity with generally accepted accounting principles in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. In making those estimates and assumptions, management is sometimes required to make difficult, subjective and/or complex judgments about the impact of matters that are inherently uncertain and for which different estimates that could reasonably have been used could have resulted in material differences in its financial statements. If actual results were to differ significantly from those estimates, assumptions and judgment; the financial position of the Company could be materially affected and the results of operations of the Company could be materially different than reported. The following is a summary of the Companys most critical accounting policies, which are defined as those policies where judgments or uncertainties could materially affect the application of those policies. For a complete discussion of the Companys significant accounting policies, refer to the financial statements and Note 1: Summary of Significant Accounting Policies.
Regulatory AccountingThe Companys principal business is the distribution of electricity and natural gas in the Company-owned retail distribution utilities: Fitchburg Gas and Electric Light Company (FG&E), and Unitil Energy Systems, Inc. (UES). Both FG&E and UES are subject to regulation by the Federal Energy Regulatory Commission (FERC) and FG&E is regulated by the Massachusetts Department of Telecommunications and Energy (MDTE) and UES is regulated by the New Hampshire Public Utilities Commission (NHPUC). Accordingly, the Company uses the provisions of SFAS No. 71, Accounting for the Effects of Certain Types of Regulation. In accordance with SFAS No. 71, the Company has recorded Regulatory Assets and Regulatory Liabilities which will be recovered or refunded in future electric and gas retail rates.
SFAS No. 71 specifies the economic effects that result from the cause and effect relationship of costs and revenues in the rate-regulated environment and how these effects are to be accounted for by a regulated enterprise. Revenues intended to cover some costs may be recorded either before or after the costs are incurred. If regulation provides assurance that incurred costs will be recovered in the future, these costs would be recorded as deferred charges or regulatory assets under SFAS No. 71. If revenues are recorded for costs that are expected to be incurred in the future, these revenues would be recorded as deferred credits or regulatory liabilities under SFAS No. 71.
The Companys principal regulatory assets and liabilities are detailed on the Companys Consolidated Balance Sheet. The Company is currently receiving or being credited with a return on all of its regulatory assets
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for which a cash outflow has been made. The Company is currently paying or being charged with a return on all of its regulatory liabilities for which a cash inflow has been received. The Companys regulatory assets and liabilities will be recovered from customers, or applied for customer benefit, in accordance with rate provisions approved by the applicable public utility regulatory commission.
The application of SFAS No. 71 results in the deferral of costs as regulatory assets that, in some cases, have not yet been approved for recovery by the applicable regulatory commission. Management must conclude that any costs deferred as regulatory assets are probable of future recovery in rates. However, regulatory commissions can reach different conclusions about the recovery of costs, which can have a material impact on the Companys consolidated financial statements. Management believes it is probable that the Companys regulated utility companies will recover their investments in long-lived assets, including regulatory assets. The Company also has commitments under long-term contracts for the purchase of electricity from various suppliers. The annual costs under these contracts are included in Purchased Electricity and Purchased Gas in the Consolidated Statements of Earnings and these costs are recoverable in current and future rates under various orders issued by the FERC, MDTE and NHPUC.
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 SFAS No. 71. If unable to continue to apply the provisions of SFAS No. 71, the Company would be required to apply the provisions of SFAS No. 101, Regulated EnterprisesAccounting for the Discontinuation of Application of Financial Accounting Standards Board Statement No. 71. In managements opinion, the Companys regulated subsidiaries will be subject to SFAS No. 71 for the foreseeable future.
ConsolidationIn accordance with current accounting pronouncements, the Companys consolidated financial statements include the accounts of Unitil and all of its wholly-owned subsidiaries and all intercompany transactions are eliminated in consolidation. During 2003, the Company assumed the obligations of the former Unitil Retiree Trust (URT). URT was an organization of retirees, that became effective in 1993 and operated under the direction of an independent board of trustees, whose voting members were comprised of former employees of the Company. URT was dissolved in the fourth quarter of 2003, by a vote of its trustees. URT met the classification criteria as a variable interest entity (VIE) under Financial Accounting Standards Board (FASB) Interpretation No. 46 (FIN 46), Consolidation of Variable Interest Entities, which requires companies to consolidate the results of entities over which it has significant control with its own results, whether or not there is a majority controlling ownership standard that is met. The Company determined it had a variable interest in URT. Further, under FIN 46, the Company is required to consolidate all entities that are considered to have a non-independent relationship with the Company and the Company is required to disclose those relationships and associated transactions in its financial statements. The Company has reviewed its investments and affiliations and, with the dissolution of URT and the assumption of the obligations of the former URT by the Company, there are no other entities identified by the Company that qualify as VIEs under FIN 46.
Utility Revenue RecognitionRegulated utility revenues are based on rates approved by state and federal regulatory commissions. These regulated rates are applied to customers accounts based on their actual or estimated use of energy. Energy sales to customers are based on the reading of their meters, which occurs on a systematic basis throughout the month. At the end of each calendar month, amounts of energy delivered to customers since the date of the last meter reading are estimated and the corresponding unbilled revenue is estimated. This unbilled revenue is estimated each month based on estimated customer usage by class and applicable customer rates.
Allowance for Uncollectible AccountsThe Company recognizes a Provision for Uncollectible Accounts as a percent of revenues each month. The amount of the monthly Provision is based upon the Companys
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experience in collecting electric and gas utility service accounts receivable in prior years. Account write-offs, net of recoveries, are processed monthly. At the end of each month, an analysis of the delinquent receivables is performed and the adequacy of the Allowance for Uncollectible Accounts is reviewed. The analysis takes into account an assumption about the cash recovery of delinquent receivables and also uses calculations related to customers who have chosen payment plans to resolve their arrears. The analysis also calculates the amount of written-off receivables that are recoverable through regulatory rate reconciling mechanisms. Evaluating the adequacy of the Allowance for Uncollectible Accounts requires judgment about the assumptions used in the analysis. Also, the Company has experienced periods when State regulators have extended the periods during which certain standard credit and collection activities of utility companies are suspended. In periods when account write-offs exceed estimated levels, the Company adjusts the Provision for Uncollectible Accounts to maintain an adequate Allowance for Uncollectible Accounts balance.
Pension and Postretirement Benefit ObligationsThe Company has a defined benefit pension plan covering substantially all its employees and also provides certain other post-retirement benefits (OPEB), primarily medical and life insurance benefits to retired employees. The Company also has a Supplemental Executive Retirement Plan (SERP) covering certain executives of the Company. The Company accounts for these benefits in accordance with SFAS No. 87, Employers Accounting for Pensions and SFAS No. 106, Employers Accounting for Postretirement Benefits other than Pensions. In applying these accounting policies, the Company has made critical estimates related to actuarial assumptions, including assumptions of expected returns on plan assets, future compensation, health care cost trends, and appropriate discount rates. For each of these plans, the development of the benefit obligation, fair value of plan assets, funded status and net periodic benefit cost is based on several significant assumptions. The Companys reported costs of providing pension and OPEB benefits are dependent upon numerous factors resulting from actual plan experience and assumptions of future experience. The Companys health care cost trend assumptions are developed based on historical cost data, the near-term outlook and an assessment of likely long-term trends. Pension and OPEB costs (collectively postretirement costs) are affected by actual employee demographics, the level of contributions made to the plans, earnings on plan assets, and health care cost trends. Changes made to the provisions of these plans may also affect current and future postretirement costs. Postretirement costs may also be significantly affected by changes in key actuarial assumptions, including, anticipated rates of return on plan assets and the discount rates used in determining the postretirement costs and benefit obligations. If these assumptions were changed, the resultant change in benefit obligations, fair values of plan assets, funded status and net periodic benefit costs could have a material impact on the Companys consolidated financial statements. Approximately 40% of the Companys net pension expense is capitalized as capital additions to utility plant.
Pension income is calculated based upon a number of actuarial assumptions, including an expected long-term rate of return on Plan assets of 8.75% for 2003 and 9.25% for 2002 and 2001. In developing the expected long-term rate of return assumption, the Company evaluated input from actuaries, bankers and investment managers. The Companys expected long-term rate of return on Plan assets is based on target asset allocation assumptions of 60% in United States equities and 40% in fixed income securities. The combination of these target allocations and expected returns resulted in the overall assumed long-term rate of return of 8.75% for 2003. The Company will continue to evaluate the actuarial assumptions, including the expected rate of return, at least annually, and will adjust the appropriate assumptions as necessary.
The Company bases the actuarial determination of pension expense on a market-related valuation of assets, which reduces year-to-year volatility. This market-related valuation recognizes investment gains or losses over a three-year period from the year in which they occur. Investment gains or losses for this purpose are the difference between the expected return calculated using the market-related value of assets and the actual return based on the fair value of assets. Since the market-related value of assets recognizes gains or losses over a three-year period, the future value of the market-related assets will be impacted as previously deferred gains or losses are recognized. The Companys pension expense (income) for the years 2003, 2002 and 2001 was $1,106,827, ($166,472) and ($716,411), respectively. Had the Company used the fair value of assets instead of the market-related value, pension expense (income) for the years 2003, 2002 and 2001 would have been $2,332,699, $614,685 and ($376,777), respectively.
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The discount rate that is utilized in determining future pension obligations is based on a basket of long-term bonds that receive one of the two highest ratings given by a recognized rating agency. The discount rates used for the 2003, 2002 and 2001 fiscal years were 7.00%, 7.25% and 7.75%, respectively. For 2003, a change in the discount rate of 0.25% would have resulted in an increase or decrease of approximately $150 thousand in the Net Periodic Pension Cost. Similarly, for 2001 and 2002, a change in the discount rate of 0.25% would have resulted in an increase or decrease of approximately $50 thousand in the Net Periodic Pension Cost. The effect of a change in discount rates for 2003 would have been greater than for 2001 and 2002 because of the significant market declines that affected 2003 pension costs. The compensation increase assumption used for 2001, 2002 and 2003 was 4% based on the expected increase in payroll for personnel covered by the Plan.
The value of the Plan assets has decreased from $40.9 million at December 31, 2001 to $39.3 million at December 31, 2003. The investment performance returns and declining discount rates have reduced the funded status of the Plan on a projected benefit obligation (PBO) basis from an over funded position of $2.0 million at December 31, 2001 to an under funded position of $8.0 million at December 31, 2003. The PBO includes expectations of future employee service and compensation increases. The Company contributed $1.2 million to the Plan in 2003. Future funding requirements are heavily dependent on actual return on plan assets. Therefore, if the actual return on plan assets continues to be significantly below the expected returns, we may elect to fund the pension plans in future periods. The accumulated benefit obligation (ABO) of the Plan was $1.3 million higher than Plan assets at December 31, 2003. The ABO is the obligation for employee service provided through December 31, 2003. The significant deterioration in the funded position of the Plan will likely result in Plan contributions sooner than previously expected. This deterioration has also led to the requirement under defined benefit plan accounting to record an additional minimum liability of $1.3 million.
The Company has been allowed by its State regulators to record a regulatory asset for $1.3 million to cover the unfunded ABO because the recording of pension expense and the collection of those expenses in rates occurs in different time periods. SFAS 71 allows for the deferral of expenses and income on the consolidated balance sheet as regulatory assets and liabilities when it is probable that those expenses and income will be allowed in the rate setting process in a period different from the period in which they would have been reflected in the consolidated statements of income. These deferred regulatory assets and liabilities are then recognized in the consolidated statement of income in the period in which the amounts are reflected in rates.
Income TaxesIncome tax expense is calculated in each of the jurisdictions in which the Company operates for each period for which a statement of income is presented. This process involves estimating the Companys actual current tax liabilities as well as assessing temporary differences resulting from differing treatment of items, such as timing of the deduction of expenses for tax and book accounting purposes. These differences result in deferred tax assets and liabilities, which are included in the consolidated balance sheets. The Company must also assess the likelihood that the deferred tax assets will be recovered from future taxable income, and to the extent that recovery is not likely, a valuation allowance must be established. Significant management judgment is required in determining income tax expense, deferred tax assets and liabilities and valuation allowances. The Company accounts for deferred taxes under SFAS No. 109, Accounting for Income Taxes. The Company does not currently have any valuation allowances against its recorded deferred tax amounts.
DepreciationDepreciation expense is calculated based on an assets useful life, and judgment is involved when estimating the useful lives of certain assets. A change in the estimated useful lives of these assets could have a material impact on the Companys consolidated financial statements. The Company conducts independent depreciation studies on a periodic basis as part of the regulatory ratemaking process and considers the results presented in these studies in determining the useful lives of the Companys fixed assets.
Commitments and ContingenciesThe Companys accounting policy is to record and/or disclose commitments and contingencies in accordance with SFAS No. 5, Accounting for Contingencies. SFAS No. 5 applies to an existing condition, situation, or set of circumstances involving uncertainty as to possible loss that
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will ultimately be resolved when one or more future events occur or fail to occur. As of December 31, 2003, the Company is not aware of any material commitments or contingencies other than those disclosed in the Significant Contractual Obligations table in the Capital Requirements and Liquidity section above and the Commitments and Contingencies footnote to the Companys consolidated financial statements below.
Refer to Recently Issued Accounting Pronouncements in Note 1 of the Notes of Consolidated Financial Statements for information regarding recently issued accounting standards.
For further information regarding these types of activities, see Note 1, Summary of Significant Accounting Policies, Note 8, Income Taxes, Note 5, Energy Supply, Note 9, Benefit Plans, and Note 6, Commitment and Contingencies, to the consolidated financial statements.
Forward-Looking Information
This report and the documents we incorporate by reference into this report contain statements that constitute forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, Section 21E of the Securities Exchange Act of 1934 and the Private Securities Litigation Reform Act of 1995. All statements, other than statements of historical fact, included or incorporated by reference into this report, including, without limitation, statements regarding the financial position, business strategy and other plans and objectives for the Companys future operations, are forward-looking statements.
These statements include declarations regarding Managements beliefs and current expectations. In some cases, forward-looking statements can be identified by terminology such as may, will, should, expects, plans, anticipates, believes, estimates, predicts, potential or continue or the negative of such terms or other comparable terminology. These forward-looking statements are subject to inherent risks and uncertainties in predicting future results and conditions that could cause the actual results to differ materially from those projected in these forward-looking statements. Some, but not all, of the risks and uncertainties include the following:
| Variations in weather; |
| Changes in the regulatory environment; |
| Customers preferences on energy sources; |
| Interest rate fluctuation and credit market concerns; |
| General economic conditions; |
| Increased competition; and |
| Fluctuations in supply, demand, transmission capacity and prices for energy commodities. |
Many of these risks are beyond the Companys control. Any forward-looking statements speak only as of the date of this report, and the Company undertakes no obligation to update any forward-looking statements to reflect events or circumstances after the date on which such statements are made or to reflect the occurrence of unanticipated events. New factors emerge from time to time, and it is not possible for the Company to predict all of these factors, nor can the Company assess the impact of any such factor on its business or the extent to which any factor, or combination of factors, may cause results to differ materially from those contained in any forward-looking statements.
Item 7A. Quantitative and Qualitative Disclosures about Market Risk
Reference is made to the Interest Rate Risk and Market Risk sections of Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations (above).
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Item 8. Financial Statements and Supplementary Data
Report of Independent Certified Public Accountants
To the Shareholders of Unitil Corporation:
We have audited the accompanying consolidated balance sheets and consolidated statements of capitalization of Unitil Corporation and subsidiaries as of December 31, 2003 and 2002, and the related consolidated statements of earnings, cash flows and changes in common stock equity for each of the three years in the period ended December 31, 2003. These financial statements are the responsibility of the Companys management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Unitil Corporation and subsidiaries as of December 31, 2003 and 2002, and the consolidated results of their operations and their consolidated cash flows for each of the three years in the period ended December 31, 2003, in conformity with accounting principles generally accepted in the United States of America.
/s/ GRANT THORNTON LLP
Boston, Massachusetts
February 6, 2004
38
CONSOLIDATED STATEMENTS OF EARNINGS
(000s, except common shares and per share data)
Year Ended December 31, |
2003 |
2002 |
2001 |
|||||||||
Operating Revenues: |
||||||||||||
Electric |
$ | 190,864 | $ | 167,317 | $ | 183,780 | ||||||
Gas |
28,612 | 20,283 | 22,828 | |||||||||
Other |
1,178 | 786 | 414 | |||||||||
Total Operating Revenues |
220,654 | 188,386 | 207,022 | |||||||||
Operating Expenses: |
||||||||||||
Purchased Electricity |
134,575 | 117,409 | 134,660 | |||||||||
Purchased Gas |
17,421 | 12,304 | 15,184 | |||||||||
Operation and Maintenance |
22,167 | 19,924 | 20,201 | |||||||||
Conservation & Load Management |
3,930 | 1,771 | 1,729 | |||||||||
Restructuring Charge |
| 1,598 | | |||||||||
Depreciation and Amortization |
18,756 | 14,911 | 12,767 | |||||||||
Provisions for Taxes: |
||||||||||||
Local Property and Other |
4,805 | 4,731 | 4,666 | |||||||||
Federal and State Income |
3,551 | 2,490 | 3,421 | |||||||||
Total Operating Expenses |
205,205 | 175,138 | 192,628 | |||||||||
Operating Income |
15,449 | 13,248 | 14,394 | |||||||||
Sale of Non-Utility Investments, net of tax |
| (82 | ) | 2,400 | ||||||||
Other Non-Operating Expenses |
(40 | ) | 185 | 170 | ||||||||
Income Before Interest Expense and Extraordinary Item |
15,489 | 13,145 | 11,824 | |||||||||
Interest Expense, net |
7,531 | 7,057 | 6,797 | |||||||||
Income before Extraordinary Item |
7,958 | 6,088 | 5,027 | |||||||||
Extraordinary Item, net of tax |
| | 3,937 | |||||||||
Net Income |
7,958 | 6,088 | 1,090 | |||||||||
Less Dividends on Preferred Stock |
236 | 253 | 257 | |||||||||
Earnings Applicable to Common Shareholders |
$ | 7,722 | $ | 5,835 | $ | 833 | ||||||
Average Common Shares OutstandingBasic |
4,877,933 | 4,743,696 | 4,743,576 | |||||||||
Average Common Shares OutstandingDiluted |
4,899,488 | 4,762,166 | 4,759,822 | |||||||||
Earnings per Common Share |
||||||||||||
Income before Extraordinary Item |
$ | 1.58 | $ | 1.23 | $ | 1.01 | ||||||
Extraordinary Item, net of tax |
| | (0.83 | ) | ||||||||
Net Income |
$ | 1.58 | $ | 1.23 | $ | 0.18 | ||||||
(The accompanying Notes are an integral part of these financial statements.)
39
CONSOLIDATED BALANCE SHEETS (000S)
ASSETS
December 31, |
2003 |
2002 | ||||
Utility Plant: |
||||||
Electric |
$ | 209,288 | $ | 193,152 | ||
Gas |
48,700 | 44,796 | ||||
Common |
27,441 | 28,796 | ||||
Construction Work in Progress |
3,228 | 5,658 | ||||
Utility Plant |
288,657 | 272,402 | ||||
Less: Accumulated Depreciation |
93,592 | 83,201 | ||||
Net Utility Plant |
195,065 | 189,201 | ||||
Current Assets: |
||||||
Cash |
3,766 | 7,160 | ||||
Accounts ReceivableNet of Allowance for Doubtful Accounts of $541 and $434 |
17,461 | 19,513 | ||||
Accrued Revenue |
10,029 | 4,842 | ||||
Refundable Taxes |
3,816 | 4,851 | ||||
Material and Supplies |
2,861 | 2,323 | ||||
Prepayments and Other |
6,146 | 1,735 | ||||
Total Current Assets |
44,079 | 40,424 | ||||
Noncurrent Assets: |
||||||
Regulatory Assets |
227,528 | 234,051 | ||||
Prepaid Pension |
10,972 | 10,879 | ||||
Debt Issuance Costs, net |
1,844 | 1,755 | ||||
Other Noncurrent Assets |
4,389 | 5,392 | ||||
Total Noncurrent Assets |
244,733 | 252,077 | ||||
TOTAL |
$ | 483,877 | $ | 481,702 | ||
(The accompanying Notes are an integral part of these financial statements.)
40
CONSOLIDATED BALANCE SHEETS (cont.) (000S)
CAPITALIZATION AND LIABILITIES
December 31, |
2003 |
2002 | ||||
Capitalization: |
||||||
Common Stock Equity |
$ | 92,805 | $ | 74,350 | ||
Preferred Stock, Non-Redeemable, Non-Cumulative |
225 | 225 | ||||
Preferred Stock, Redeemable, Cumulative |
3,044 | 3,097 | ||||
Long-Term Debt, Less Current Portion |
110,961 | 104,226 | ||||
Total Capitalization |
207,035 | 181,898 | ||||
Current Liabilities: |
||||||
Long-Term Debt, Current Portion |
3,263 | 3,243 | ||||
Capitalized Leases, Current Portion |
567 | 800 | ||||
Accounts Payable |
15,024 | 14,221 | ||||
Short-Term Debt |
22,410 | 35,990 | ||||
Dividends Declared and Payable |
70 | 77 | ||||
Refundable Customer Deposits |
1,429 | 1,336 | ||||
Interest Payable |
1,356 | 1,311 | ||||
Other Current Liabilities |
4,254 | 9,062 | ||||
Total Current Liabilities |
48,373 | 66,040 | ||||
Deferred Income Taxes |
56,900 | 52,294 | ||||
Noncurrent Liabilities: |
||||||
Power Supply Contract Obligations |
167,341 | 175,657 | ||||
Capitalized Leases, Less Current Portion |
403 | 2,534 | ||||
Other Noncurrent Liabilities |
3,825 | 3,279 | ||||
Total Noncurrent Liabilities |
171,569 | 181,470 | ||||
TOTAL |
$ | 483,877 | $ | 481,702 | ||
(The accompanying Notes are an integral part of these financial statements.)
41
CONSOLIDATED STATEMENTS OF CAPITALIZATION
(000s except number of shares and par value)
December 31, |
2003 |
2002 | ||||
Common Stock Equity |
||||||
Common Stock, No Par Value (Authorized8,000,000 shares; Outstanding5,500,610 and 4,743,696 shares) |
$ | 58,848 | $ | 41,220 | ||
Stock Compensation Plans |
908 | 990 | ||||
Retained Earnings |
33,049 | 32,140 | ||||
Total Common Stock Equity |
92,805 | 74,350 | ||||
Preferred Stock |
||||||
UES Preferred Stock, Non-Redeemable, Non-Cumulative: |
||||||
6.00% Series, $100 Par Value |
225 | 225 | ||||
UES Preferred Stock, Redeemable, Cumulative: |
||||||
8.70% Series, $100 Par Value |
215 | 215 | ||||
8.75% Series, $100 Par Value |
314 | 333 | ||||
8.25% Series, $100 Par Value |
375 | 385 | ||||
FG&E Preferred Stock, Redeemable, Cumulative: |
||||||
5.125% Series, $100 Par Value |
922 | 946 | ||||
8.00% Series, $100 Par Value |
1,218 | 1,218 | ||||
Total Preferred Stock |
3,269 | 3,322 | ||||
Long-Term Debt |
||||||
UES First Mortgage Bonds: |
||||||
8.49% Series, Due October 14, 2024 |
15,000 | 15,000 | ||||
6.96% Series, Due September 1, 2028 |
20,000 | 20,000 | ||||
8.00% Series, Due May 1, 2031 |
15,000 | 15,000 | ||||
FG&E Long-Term Notes: |
||||||
8.55% Notes, Due March 31, 2004 |
3,000 | 6,000 | ||||
6.75% Notes, Due November 30, 2023 |
19,000 | 19,000 | ||||
7.37% Notes, Due January 15, 2029 |
12,000 | 12,000 | ||||
7.98% Notes, Due June 1, 2031 |
14,000 | 14,000 | ||||
6.79% Notes, Due October 15, 2025 |
10,000 | | ||||
Unitil Realty Corp. Senior Secured Notes: |
||||||
8.00% Notes, Due August 1, 2017 |
6,224 | 6,469 | ||||
Total Long-Term Debt |
114,224 | 107,469 | ||||
Less: Long-Term Debt, Current Portion |
3,263 | 3,243 | ||||
Total Long-Term Debt, Less Current Portion |
110,961 | 104,226 | ||||
Total Capitalization |
$ | 207,035 | $ | 181,898 | ||
(The accompanying Notes are an integral part of these financial statements.)
42
CONSOLIDATED STATEMENTS OF CASH FLOWS (000s)
Year Ended December 31, |
2003 |
2002 |
2001 |
|||||||||
Operating Activities: |
||||||||||||
Net Income |
$ | 7,958 | $ | 6,088 | $ | 1,090 | ||||||
Adjustments to Reconcile Net Income to Cash Provided by Operating Activities: |
||||||||||||
Depreciation and Amortization |
18,756 | 14,911 | 12,767 | |||||||||
Deferred Tax Provision |
6,375 | 856 | (607 | ) | ||||||||
(Gain) Loss on Sale of Investments, net |
| (82 | ) | 2,400 | ||||||||
Changes in Current Assets and Liabilities: |
||||||||||||
Accounts Receivable |
2,052 | (2,380 | ) | 2,924 | ||||||||
Accrued Revenue |
(6,795 | ) | (3,512 | ) | 7,973 | |||||||
Refundable Taxes |
1,035 | (2,419 | ) | (452 | ) | |||||||
Materials and Supplies |
(538 | ) | 481 | 50 | ||||||||
Prepayments and Other |
(4,411 | ) | 154 | (572 | ) | |||||||
Accounts Payable |
803 | (5,863 | ) | 1,545 | ||||||||
Refundable Customer Deposits |
93 | (57 | ) | 141 | ||||||||
Interest Payable |
45 | (64 | ) | 225 | ||||||||
Other Current Liabilities |
(4,808 | ) | 2,734 | (49 | ) | |||||||
Deferred Restructuring Charges |
(6,058 | ) | (4,523 | ) | (1,101 | ) | ||||||
Other, net |
1,114 | 3,244 | (3,156 | ) | ||||||||
Cash Provided by Operating Activities |
15,621 | 9,568 | 23,178 | |||||||||
Investing Activities: |
||||||||||||
Property, Plant and Equipment Additions |
(21,939 | ) | (20,825 | ) | (19,890 | ) | ||||||
Proceeds from the Sale of Electric Generation Assets |
| | 342 | |||||||||
Proceeds from the Sale of Investments |
| 1,535 | | |||||||||
Cash Used In Investing Activities |
(21,939 | ) | (19,290 | ) | (19,548 | ) | ||||||
Financing Activities: |
||||||||||||
Proceeds from (Repayment of) Short-Term Debt |
(13,580 | ) | 22,190 | (18,700 | ) | |||||||
Issuance of Long-Term Debt |
10,000 | | 29,000 | |||||||||
Repayment of Long-Term Debt |
(3,244 | ) | (3,225 | ) | (3,208 | ) | ||||||
Retirement of Preferred Stock |
(53 | ) | (293 | ) | (81 | ) | ||||||
Dividends Paid |
(7,056 | ) | (6,831 | ) | (6,902 | ) | ||||||
Issuance of Common Stock |
17,628 | | 229 | |||||||||
Repayment of Capital Lease Obligations |
(771 | ) | (1,035 | ) | (952 | ) | ||||||
Cash Provided by (Used In) Financing Activities |
2,924 | 10,806 | (614 | ) | ||||||||
Net Increase (Decrease) in Cash |
(3,394 | ) | 1,084 | 3,016 | ||||||||
Cash at Beginning of Year |
7,160 | 6,076 | 3,060 | |||||||||
Cash at End of Year |
$ | 3,766 | $ | 7,160 | $ | 6,076 | ||||||
Supplemental Information: |
||||||||||||
Interest Paid |
$ | 9,113 | $ | 9,356 | $ | 8,988 | ||||||
Income Taxes Paid (Refunded) |
$ | (2,541 | ) | $ | 2,351 | $ | 4,265 | |||||
Supplemental Schedule of Noncash Activities: |
||||||||||||
Capital Leases Incurred |
$ | 109 | $ | 436 | $ | 691 |
(The accompanying Notes are an integral part of these financial statements.)
43
CONSOLIDATED STATEMENTS OF
CHANGES IN COMMON STOCK EQUITY
(000s except number of shares)
Common Shares |
Stock Compensation Plans |
Retained Earnings |
Total |
|||||||||||||
Balance at January 1, 2001 |
$ | 40,991 | $ | 376 | $ | 38,568 | $ | 79,935 | ||||||||
Net Income after Extraordinary Item for 2001 |
1,090 | 1,090 | ||||||||||||||
Dividends on Preferred Shares |
(257 | ) | (257 | ) | ||||||||||||
Dividends on Common Shares |
(6,544 | ) | (6,544 | ) | ||||||||||||
Stock Compensation Plans |
293 | 293 | ||||||||||||||
Issuance of 11,279 Common Shares |
287 | 287 | ||||||||||||||
Re-acquired and Retired Common Shares |
(58 | ) | (58 | ) | ||||||||||||
Balance at December 31, 2001 |
41,220 | 669 | 32,857 | 74,746 | ||||||||||||
Net Income for 2002 |
6,088 | 6,088 | ||||||||||||||
Dividends on Preferred Shares |
(253 | ) | (253 | ) | ||||||||||||
Dividends on Common Shares |
(6,546 | ) | (6,546 | ) | ||||||||||||
Stock Compensation Plans |
321 | 321 | ||||||||||||||
Redemption Premium on Preferred Shares |
(6 | ) | (6 | ) | ||||||||||||
Balance at December 31, 2002 |
41,220 | 990 | 32,140 | 74,350 | ||||||||||||
Net Income for 2003 |
7,958 | 7,958 | ||||||||||||||
Dividends on Preferred Shares |
(236 | ) | (236 | ) | ||||||||||||
Dividends on Common Shares |
(6,813 | ) | (6,813 | ) | ||||||||||||
Stock Compensation Plans |
(82 | ) | (82 | ) | ||||||||||||
Common Stock Offering717,600 Shares |
16,911 | 16,911 | ||||||||||||||
Issuance of 28,714 Common Shares |
717 | 717 | ||||||||||||||
Balance at December 31, 2003 |
$ | 58,848 | $ | 908 | $ | 33,049 | $ | 92,805 | ||||||||
(The accompanying Notes are an integral part of these financial statements.)
44
Note 1: Summary of Significant Accounting Policies
Nature of OperationsUnitil Corporation (Unitil or the Company) is registered with the Securities and Exchange Commission (SEC) as a public utility holding company under the Public Utility Holding Company Act of 1935 (PUCHA). The following companies are wholly-owned subsidiaries of Unitil: Unitil Energy Systems, Inc. (UES) (formed in 2002 by the combination and merger of Unitils former utility subsidiaries Concord Electric Company (CECo) and Exeter & Hampton Electric Company (E&H)), Fitchburg Gas and Electric Light Company (FG&E), 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.
Unitils principal business is the retail distribution of electricity in the southeastern seacoast and capital city areas of New Hampshire and the retail distribution of both electricity and natural gas in the greater Fitchburg area of north central Massachusetts, through the Companys two wholly-owned subsidiaries, UES and FG&E, collectively referred to as the retail distribution utilities.
A third utility subsidiary, Unitil Power, formerly functioned as the full requirements wholesale power supply provider for UES. In connection with the implementation of electric industry restructuring in New Hampshire, Unitil Power ceased being the wholesale supplier of UES 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 UES customers.
Unitil also has three wholly-owned subsidiaries: Unitil Service, Unitil Realty and Unitil Resources. Unitil Realty owns and manages the Companys corporate office building and property located in Hampton, New Hampshire and leases this facility to Unitil Service under a long-term lease arrangement. Unitil Service provides, at cost, a variety of administrative and professional services, including regulatory, financial, accounting, human resources, engineering, operations, technology and management services on a centralized basis to its affiliated Unitil companies. Unitil Resources is the Companys wholly-owned unregulated subsidiary that provides energy brokering, consulting and management related services. Usource, Inc. and Usource L.L.C. (collectively, Usource) are wholly-owned subsidiaries of Unitil Resources. Usource provides energy brokering services, as well as various energy consulting services to large commercial and industrial customers in the northeastern United States.
Basis of Presentation
Principles of ConsolidationIn accordance with current accounting pronouncements, the Companys consolidated financial statements include the accounts of Unitil and all of its wholly-owned subsidiaries and all intercompany transactions are eliminated in consolidation. During 2003, the Company assumed the obligations of the former Unitil Retiree Trust (URT). URT was an organization of retirees, that became effective in 1993 and operated under the direction of an independent board of trustees, whose voting members were comprised of former employees of the Company. URT was dissolved in the fourth quarter of 2003, by a vote of its trustees. URT met the classification criteria as a variable interest entity (VIE) under Financial Accounting Standards Board (FASB) Interpretation No. 46 (FIN 46), Consolidation of Variable Interest Entities, which requires companies to consolidate the results of entities over which it has significant control with its own results, whether or not there is a majority controlling ownership standard that is met. The Company determined it had a variable interest in URT. Further, under FIN 46, the Company is required to consolidate all entities that are considered to have a non-independent relationship with the Company and the Company is required to disclose those relationships and associated transactions in its financial statements. The Company has reviewed its investments and affiliations and, with the dissolution of URT and the assumption of the obligations of the former URT by the Company, there are no other entities identified by the Company that qualify as VIEs under FIN 46.
45
Regulatory AccountingThe Companys principal business is the distribution of electricity and natural gas in the Company-owned retail distribution utilities: FG&E and UES. Both FG&E and UES are subject to regulation by the Federal Energy Regulatory Commission (FERC) and FG&E is regulated by the Massachusetts Department of Telecommunications and Energy (MDTE) and UES is regulated by the New Hampshire Public Utilities Commission (NHPUC). Accordingly, the Company uses the provisions of SFAS No. 71, Accounting for the Effects of Certain Types of Regulation. In accordance with SFAS No. 71, the Company has recorded Regulatory Assets and Regulatory Liabilities which will be recovered in future electric and gas retail rates.
SFAS No. 71 specifies the economic effects that result from the cause and effect relationship of costs and revenues in the rate-regulated environment and how these effects are to be accounted for by a regulated enterprise. Revenues intended to cover some costs may be recorded either before or after the costs are incurred. If regulation provides assurance that incurred costs will be recovered in the future, these costs would be recorded as deferred charges or regulatory assets under SFAS No. 71. If revenues are recorded for costs that are expected to be incurred in the future, these revenues would be recorded as deferred credits or regulatory liabilities under SFAS No. 71.
The Companys principal regulatory assets and liabilities are detailed on the Companys Consolidated Balance Sheet and a summary of the Companys Regulatory Assets is provided below. The Company is currently receiving or being credited with a return on all of its regulatory assets for which a cash outflow has been made. The Company is currently paying or being charged with a return on all of its regulatory liabilities for which a cash inflow has been received. The Companys regulatory assets and liabilities will be recovered from customers, or applied for customer benefit, in accordance with rate provisions approved by the applicable public utility regulatory commission.
The application of SFAS No. 71 results in the deferral of costs as regulatory assets that, in some cases, have not yet been approved for recovery by the applicable regulatory commission. Management must conclude that any costs deferred as regulatory assets are probable of future recovery in rates. However, regulatory commissions can reach different conclusions about the recovery of costs, which can have a material impact on the Companys consolidated financial statements. Management believes it is probable that the Companys regulated utility companies will recover their investments in long-lived assets, including regulatory assets. The Company also has commitments under long-term contracts for the purchase of electricity from various suppliers. The annual costs under these contracts are included in Purchased Electricity and Purchased Gas in the Consolidated Statements of Earnings and these costs are recoverable in current and future rates under various orders issued by the FERC, MDTE and NHPUC.
December 31, | ||||||
Regulatory Assets consist of the following (000s) |
2003 |
2002 | ||||
Power Supply Buyout Obligations |
$ | 167,341 | $ | 175,657 | ||
Income Taxes |
22,507 | 24,799 | ||||
Recoverable Deferred Charges |
28,311 | 22,253 | ||||
Recoverable Generation-related Assets |
7,291 | 9,327 | ||||
Pension / Post-retirement Benefits Other than Pension |
2,078 | 2,015 | ||||
Total Regulatory Assets |
$ | 227,528 | $ | 234,051 | ||
Massachusetts and New Hampshire have both passed utility industry restructuring legislation and the Company has filed and implemented its restructuring plans in both states. In Massachusetts, the Company is allowed to recover certain types of costs through ongoing assessments to be included in future regulated service rates. The Company is also deferring the recovery of certain restructuring related costs in order to meet the retail rate cap imposed under the Massachusetts restructuring legislation. Based on the recovery mechanism that allows recovery of all of its stranded costs and deferred costs related to restructuring, the Company has recorded regulatory assets that it expects to fully recover in future periods. The Company expects to continue to meet the criteria for the application of SFAS No. 71 for the distribution portion of its assets and operations for the
46
foreseeable future. If a change in accounting were to occur to the distribution portion of the Companys operations, it could have a material adverse effect on the Companys earnings and retained earnings in that year and could have a material adverse effect on the Companys ongoing financial condition as well.
On January 25, 2002, the Companys New Hampshire electric utility subsidiaries, CECo, E&H and Unitil Power, 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 Unitil Powers power supply portfolio, the recovery of stranded costs, the combination of CECo and E&H into a planned successor, UES, and new distribution rates for UES. On October 25, 2002, the NHPUC approved a multi-party settlement on all major issues in the proceeding. Under Unitils approved restructuring plan, Unitil divested its existing New Hampshire power supply portfolio and conducted a solicitation for new power supplies from which to meet its ongoing transition and default service energy obligations. In early 2003, Unitil filed for final NHPUC approval of the executed agreements resulting from these divestiture and solicitation processes, including final tariffs for stranded cost recovery and transition and default services. The implementation of customer choice occurred on May 1, 2003.
Upon receipt of all requested approvals in the proceeding by the NHPUC, and the expiration of all periods of appeal with respect thereto, UES implemented retail choice and Unitil withdrew its intervention in a pending federal court action, with prejudice. In June 1997, Unitil and other utilities in NH intervened as plaintiffs in a suit filed in U.S. District Court by Northeast Utilities affiliate Public Service Company of New Hampshire for protection from the NHPUC Final Plan to restructure the New Hampshire electric utility industry. Although the NHPUC found that UES predecessor companies, CECo and E&H, were entitled to full interim stranded costs recovery, the NHPUC also made certain legal rulings that, if implemented, could affect the Companys long-term ability to recover all of their stranded costs. The Unitil Settlement approved in October 2002, provides for full stranded cost recovery by UES, and otherwise resolves all of the issues in the federal court action.
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 SFAS No. 71. If unable to continue to apply the provisions of SFAS No. 71, the Company would be required to apply the provisions of SFAS No. 101, Regulated EnterprisesAccounting for the Discontinuation of Application of Financial Accounting Standards Board Statement No. 71. In managements opinion, the Companys regulated subsidiaries will be subject to SFAS No. 71 for the foreseeable future.
CashCash 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.
Goodwill and Intangible AssetsThe Company does not have any goodwill recorded on its balance sheet as of December 31, 2003. There are no significant intangible assets recorded by the Company at December 31, 2003. Therefore, the Company is not currently involved in making estimates or seeking valuations of these items.
Off-Balance Sheet ArrangementsAs of December 31, 2003, the Company does not have any significant arrangements that would be classified as Off-Balance Sheet Arrangements. In the ordinary course of business, the Company does contract for certain office and other equipment under operating leases and, in managements opinion, the amount of these transactions is not material.
Investments and Trading ActivitiesDuring the year, the Company does invest in U.S. Treasuries and short-term investments which traditionally have very little fluctuation in fair value. The Company does not engage in investing or trading activities involving non-exchange traded contracts or other instruments where a periodic analysis of fair value would be required for book accounting purposes.
Utility Revenue RecognitionRegulated utility revenues are based on rates approved by federal and state regulatory commissions. These regulated rates are applied to customers accounts based on their actual or
47
estimated use of energy. Energy sales to customers are based on the reading of their meters, which occurs on a systematic basis throughout the month. At the end of each calendar month, amounts of energy delivered to customers since the date of the last meter reading are estimated and the corresponding unbilled revenue is estimated. This unbilled revenue is estimated each month based on estimated customer usage by class and applicable customer rates.
Revenue RecognitionNon-regulated OperationsUsource, Unitils competitive energy brokering subsidiary, records energy brokering revenues based upon the estimated amount of electricity and gas delivered to customers through the end of the accounting period.
Allowance for Uncollectible AccountsThe Company recognizes a Provision for Uncollectible Accounts as a percent of revenues each month. The amount of the monthly Provision is based upon the Companys experience in collecting electric and gas utility service accounts receivable in prior years. Account write-offs, net of recoveries, are processed monthly. At the end of each month, an analysis of the delinquent receivables is performed and the adequacy of the Allowance for Uncollectible Accounts is reviewed. The analysis takes into account an assumption about the cash recovery of delinquent receivables and also uses calculations related to customers who have chosen payment plans to resolve their arrears. The analysis also calculates the amount of written-off receivables that are recoverable through regulatory rate reconciling mechanisms. Evaluating the adequacy of the Allowance for Uncollectible Accounts requires judgment about the assumptions used in the analysis. Also, the Company has experienced periods when State regulators have extended the periods during which certain standard credit and collection activities of utility companies are suspended. In periods when account write-offs exceed estimated levels, the Company adjusts the Provision for Uncollectible Accounts to maintain an adequate Allowance for Uncollectible Accounts balance.
Pension and Postretirement Benefit ObligationsThe Company has a defined benefit pension plan covering substantially all its employees and also provides certain other post-retirement benefits (OPEB), primarily medical and life insurance benefits to retired employees. The Company also has a Supplemental Executive Retirement Plan (SERP) covering certain executives of the Company. The Company accounts for these benefits in accordance with SFAS No. 87, Employers Accounting for Pensions and SFAS No. 106, Employers Accounting for Postretirement Benefits other than Pensions. In applying these accounting policies, the Company has made critical estimates related to actuarial assumptions, including assumptions of expected returns on plan assets, future compensation, health care cost trends, and appropriate discount rates. For each of these plans, the development of the benefit obligation, fair value of plan assets, funded status and net periodic benefit cost is based on several significant assumptions. The Companys reported costs of providing pension and OPEB benefits are dependent upon numerous factors resulting from actual plan experience and assumptions of future experience. The Companys health care cost trend assumptions are developed based on historical cost data, the near-term outlook and an assessment of likely long-term trends. Pension and OPEB costs (collectively postretirement costs) are affected by actual employee demographics, the level of contributions made to the plans, earnings on plan assets, and health care cost trends. Changes made to the provisions of these plans may also affect current and future postretirement costs. Postretirement costs may also be significantly affected by changes in key actuarial assumptions, including, anticipated rates of return on plan assets and the discount rates used in determining the postretirement costs and benefit obligations. If these assumptions were changed, the resultant change in benefit obligations, fair values of plan assets, funded status and net periodic benefit costs could have a material impact on the Companys consolidated financial statements. Approximately 40% of the Companys net pension expense is capitalized as capital additions to utility plant.
Pension income is calculated based upon a number of actuarial assumptions, including an expected long-term rate of return on Plan assets of 8.75% for 2003 and 9.25% for 2002 and 2001. In developing the expected long-term rate of return assumption, the Company evaluated input from actuaries, bankers and investment managers. The Companys expected long-term rate of return on Plan assets is based on target asset allocation assumptions of 60% in United States equities and 40% in fixed income securities. The combination of these
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target allocations and expected returns resulted in the overall assumed long-term rate of return of 8.75% for 2003. The Company will continue to evaluate the actuarial assumptions, including the expected rate of return, at least annually, and will adjust the appropriate assumptions as necessary.
The Company bases the actuarial determination of pension expense on a market-related valuation of assets, which reduces year-to-year volatility. This market-related valuation recognizes investment gains or losses over a three-year period from the year in which they occur. Investment gains or losses for this purpose are the difference between the expected return calculated using the market-related value of assets and the actual return based on the fair value of assets. Since the market-related value of assets recognizes gains or losses over a three-year period, the future value of the market-related assets will be impacted as previously deferred gains or losses are recognized. The Companys pension expense (income) for the years 2003, 2002 and 2001 was $1,106,827, ($166,472) and ($716,411), respectively. Had the Company used the fair value of assets instead of the market-related value, pension expense (income) for the years 2003, 2002 and 2001 would have been $2,332,699, $614,685 and ($376,777), respectively.
The discount rate that is utilized in determining future pension obligations is based on a basket of long-term bonds that receive one of the two highest ratings given by a recognized rating agency. The discount rates used for the 2003, 2002 and 2001 fiscal years were 7.00%, 7.25% and 7.75%, respectively. For 2003, a change in the discount rate of 0.25% would have resulted in an increase or decrease of approximately $150 thousand in the Net Periodic Pension Cost. Similarly, for 2001 and 2002, a change in the discount rate of 0.25% would have resulted in an increase or decrease of approximately $50 thousand in the Net Periodic Pension Cost. The effect of a change in discount rates for 2003 would have been greater than for 2001 and 2002 because of the significant market declines that affected 2003 pension costs. The compensation increase assumption used for 2001, 2002 and 2003 was 4% based on the expected increase in payroll for personnel covered by the Plan.
The value of the Plan assets has decreased from $40.9 million at December 31, 2001 to $39.3 million at December 31, 2003. The investment performance returns and declining discount rates have reduced the funded status of the Plan on a projected benefit obligation (PBO) basis from an over funded position of $2.0 million at December 31, 2001 to an under funded position of $8.0 million at December 31, 2003. The PBO includes expectations of future employee service and compensation increases. The Company contributed $1.2 million to the Plan in 2003. Future funding requirements are heavily dependent on the actual return on plan assets. Therefore, if the actual return on plan assets continues to be significantly below the expected returns, we may elect to fund the pension plans in future periods. The accumulated benefit obligation (ABO) of the Plan was $1.3 million higher than Plan assets at December 31, 2003. The ABO is the obligation for employee service provided through December 31, 2003. The significant deterioration in the funded position of the Plan will likely result in Plan contributions sooner than previously expected. This deterioration has also led to the requirement under defined benefit plan accounting to record an additional minimum liability of $1.3 million.
The Company has been allowed by its State regulators to record a regulatory asset for $1.3 million to cover the unfunded ABO because the recording of pension expense and the collection of those expenses in rates occurs in different time periods. SFAS 71 allows for the deferral of expenses and income on the consolidated balance sheet as regulatory assets and liabilities when it is probable that those expenses and income will be allowed in the rate setting process in a period different from the period in which they would have been reflected in the consolidated statements of income. These deferred regulatory assets and liabilities are then recognized in the consolidated statement of income in the period in which the amounts are reflected in rates.
Use of EstimatesThe preparation of financial statements in conformity with generally accepted accounting principles in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, and requires disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
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Commitments and ContingenciesThe Companys accounting policy is to record and/or disclose commitments and contingencies in accordance with SFAS No. 5, Accounting for Contingencies. SFAS No. 5 applies to an existing condition, situation, or set of circumstances involving uncertainty as to possible loss that will ultimately be resolved when one or more future events occur or fail to occur. As of December 31, 2003, the Company is not aware of any material commitments or contingencies other than those disclosed in the Significant Contractual Obligations table in the Capital Requirements and Liquidity section above and the Commitments and Contingencies footnote to the Companys consolidated financial statements below.
Utility PlantThe 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 average interest rates applied to AFUDC were 2.14%, 3.48% and 5.37% in 2003, 2002 and 2001, respectively. 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 and the cost of removal, less salvage, are charged to the accumulated provision for depreciation. The Company does not account separately for negative salvage, or cost of retirement obligations as defined in SFAS No. 143, Accounting for Asset Retirement Obligations, discussed in more detail below in Recently Issued Pronouncements. The Company includes in its mass asset depreciation rates, which are periodically reviewed as part of its ratemaking proceedings, depreciation amounts to provide for future negative salvage value. At December 31, 2003 and December 31, 2002, the Company estimates that the negative salvage value of future retirements recorded on the balance sheet in Accumulated Depreciation is $12.2 million and $11.2 million, respectively.
Depreciation and AmortizationDepreciation expense is calculated based on an assets useful life, and judgment is involved when estimating the useful lives of certain assets. A change in the estimated useful lives of these assets could have a material impact on the Companys consolidated financial statements. The Company conducts independent depreciation studies on a periodic basis as part of the regulatory ratemaking process and considers the results presented in these studies in determining the useful lives of the Companys fixed assets.
Depreciation provisions for Unitils utility operating subsidiaries are determined on a group straight-line basis. Provisions for depreciation were equivalent to the following composite rates, based on the average depreciable property balances at the beginning and end of each year: 20034.73%, 20023.79% and 20013.75%.
Amortization provisions include the recovery of a portion of FG&Es former investment in Seabrook Station, a nuclear generating unit, in rates to its customers through the Seabrook Amortization Surcharge as ordered by the MDTE. In addition, FG&E is amortizing the balance of its unrecovered electric generating related assets, which are recorded as Regulatory Assets, in accordance with its electric restructuring plan approved by the MDTE (See Note 6).
Environmental MattersThe Companys past and present operations include activities that are generally subject to extensive federal and state environmental laws and regulations. The Company has recently performed work on two environmental remediation projects, the Sawyer Passway MGP Site and the Former Electric Generating Station. The Company has or will recover substantially all of the cost of the work performed to date from customers or from its insurance carriers. The Company is in general compliance with all applicable environmental and safety laws and regulations, and management believes that as of December 31, 2003, there are no material losses that would require additional liability reserves to be recorded. Changes in future environmental compliance regulations or in future cost estimates of environmental remediation costs could have a material effect on the Companys financial position if those amounts are not recoverable in regulatory rate mechanisms.
Stock-based Employee CompensationUnitil accounts for stock-based employee compensation currently using the fair value based method (See Note 3).
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Income TaxesIncome tax expense is calculated in each of the jurisdictions in which the Company operates for each period for which a statement of income is presented. This process involves estimating the Companys actual current tax liabilities as well as assessing temporary differences resulting from differing treatment of items, such as timing of the deduction of expenses for tax and book accounting purposes. These differences result in deferred tax assets and liabilities, which are included in the consolidated balance sheets. The Company must also assess the likelihood that the deferred tax assets will be recovered from future taxable income, and to the extent that recovery is not likely, a valuation allowance must be established. Significant management judgment is required in determining income tax expense, deferred tax assets and liabilities and valuation allowances. The Company accounts for deferred taxes under SFAS No. 109, Accounting for Income Taxes. The Company does not currently have any valuation allowances against its recorded deferred tax amounts.
DividendsThe Company is currently paying a dividend at an annual rate of $1.38 per common share. The Companys dividend policy is reviewed annually by the Board of Directors. The amount and timing of all dividend payments is subject to the discretion of the Board of Directors and will depend upon business conditions, results of operations, financial conditions and other factors.
Recently Issued PronouncementsIn July 2001, the FASB issued SFAS No. 143, Accounting for Asset Retirement Obligations, which establishes new accounting and reporting standards for legal obligations associated with retiring tangible long-lived assets. The fair value of a liability for an asset retirement obligation must be recorded in the period in which it is incurred, with the cost capitalized as part of the related long-lived asset and depreciated over the assets useful life. The Company currently accounts for all of the costs of its long lived-assets, including the cost of removal to replace these assets, in accordance with guidelines published by the FERC for Utility plant accounting. The original cost of utility plant retired or otherwise disposed of and the cost of removal, less salvage, are charged to the accumulated provision for depreciation. Consistent with regulatory utility accounting guidance, the Company does not account separately for negative salvage, or cost of retirement obligations as defined in SFAS No. 143. The Company includes in its mass asset depreciation rates, which are periodically reviewed as part of its ratemaking proceedings, depreciation amounts to provide for future negative salvage value.
The Company owns and maintains local utility distribution systems and assets. The Company has not identified any material legal obligations associated with the operational retirement and replacement of its distribution property, plant and equipment which would require recording a liability for an Asset Retirement Obligation as defined in SFAS No. 143. The cost of removal that the Company is allowed to recover in its rates relates to removal cost estimates used for mass asset accounting for the various functional components of its local distribution system. Those removal costs are not asset specific and do not rise to the level of legal obligations as defined in SFAS No. 143. The Company has effectively divested of its ownership interest in generation facilities and has no ownership interest in nuclear power plants, and has no decommissioning obligations. At December 31, 2003 and December 31, 2002, Management estimates that the negative salvage value of future retirements recorded on the balance sheet in Accumulated Depreciation is $12.2 million and $11.2 million, respectively.
In June 2002, the FASB issued SFAS No. 146, Accounting for Costs Associated with Exit or Disposal Activities. The provisions of SFAS No. 146 are effective for exit or disposal activities that are initiated after December 31, 2002. The Company initiated a reorganization of management and administrative positions in the fourth quarter of 2002 and recognized a Restructuring Charge, discussed below, under the provisions of Emerging Issues Task Force (EITF) Issue No. 94-3, the predecessor standard to SFAS 146.
In December 2002, the FASB issued SFAS No. 148, Accounting for Stock-Based Compensation-Transition and Disclosure. SFAS No. 148 amends SFAS No. 123, Accounting for Stock-Based Compensation to provide alternative methods of transition for a voluntary change to the fair value-based method of accounting for stock-based employee compensation. In addition, SFAS No. 148 amends the disclosure requirements of
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SFAS No. 123 to require prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method on reported results. The Company recognizes compensation cost at fair value at the date of grant.
In January 2003, the Financial Accounting Standards Board (FASB) issued Interpretation No. 46 (FIN 46), Consolidation of Variable Interest Entities and in December 2003 issued a revised FIN 46. This interpretation clarifies the application of Accounting Research Bulletin No. 51, Consolidated Financial Statements, and replaces the current accounting guidance relating to the consolidation of certain special purpose entities (SPEs). FIN 46 requires identification of the Companys participation in variable interest entities (VIEs) established on the basis of contractual, ownership or other monetary interests. A VIE is defined as an entity in which the equity investors do not have a controlling interest and the equity investment at risk is insufficient to fund future activities to permit the VIE to operate on a stand alone basis without receiving additional financial support.
For entities identified as VIEs, FIN 46 sets forth a model to evaluate potential consolidation based on an assessment of which party to the VIE bears a majority of the risk to the VIEs expected losses, or stands to gain from a majority of the expected returns of the VIE. The party with the majority variable interest is considered to be the Primary Beneficiary of the VIE. As a result, entities that are deemed to be VIEs in which the Company is identified as the Primary Beneficiary were required to be consolidated beginning in July 2003. At its Board meeting on October 8, 2003, the FASB decided to defer implementation of this requirement until the fourth quarter of 2003.
The Company reviewed its investments and affiliations and determined that it had a variable interest in the Unitil Retiree Trust (URT), a special purpose entity established January 1993. URT was an organization of retirees, incorporated in 1993 to provide social, health and welfare benefits to its members, who are eligible former employees of the Company. URT was under the direction of an independent Board of Trustees whose voting members were comprised of former employees of the Company, elected by and from the membership of URT.
In the fourth quarter of 2003, URT was dissolved by a vote of its trustees and the Company assumed the obligations of URT as of October 1, 2003. At October 1, 2003, the Transition Obligation for benefits previously provided by URT was $29.2 million and this obligation is being recognized on a delayed basis over the average remaining service period of active participants, not to exceed 20 years. In addition, the Company made payments of $1.3 million, $1.2 million and $1.0 million in 2003, 2002 and 2001 respectively, to the Unitil Retiree Trust. There are no other entities identified by the Company that qualify as VIEs under FIN 46. See Note 9 for additional discussion regarding FIN 46 and the Companys accounting for Postretirement Benefits other than Pension.
In April 2003, the FASB issued Statement No. 149 (SFAS 149), Amendment of Statement 133 on Derivative Instruments and Hedging Activities. SFAS 149 amends and clarifies financial accounting and reporting requirements for derivative instruments, including derivative instruments embedded in other contracts, and for hedging activities under FASB Statement No. 133, Accounting for Derivative Instruments and Hedging Activities. In general, SFAS 149 is effective for contracts entered into or modified after June 30, 2003 and for hedging relationships designated after June 30, 2003. The Company has determined that adoption of this statement will not have a material impact on the Companys financial position or results of operations.
In May 2003, the FASB issued Statement No. 150 (SFAS 150), Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity. SFAS 150 establishes standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity. It requires that an issuer classify a financial instrument that is within its scope as a liability, or in certain instances, as an asset. SFAS 150 is effective for financial instruments entered into or modified after May 31, 2003, otherwise SFAS 150 is generally effective with interim periods beginning after June 15, 2003. The Companys adoption of this statement does not have a material impact on the Companys financial position or results of operations.
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In December 2003, the FASB issued Statement No. 132(R) (SFAS 132(R)), a revision of its original Statement No. 132, Employers Disclosures about Pensions and Other Postretirement Benefits (SFAS 132). SFAS 132(R) revises employers disclosures about pension plans and other postretirement benefit plans. It does not change the measurement or recognition of those plans required by FASB Statements No. 87, Employers Accounting for Pensions, No. 88, Employers Accounting for Settlements and Curtailments of Defined Benefit Pension Plans and for Termination Benefits and No. 106, Employers Accounting for Postretirement Benefits Other Than Pensions. SFAS 132(R) retains the disclosure requirements contained in SFAS 132 and requires additional disclosures about the assets, obligations, cash flows and net periodic benefit cost of defined benefit pension plans and other defined benefit postretirement plans. The Company has adopted this statement for the year ended December 31, 2003.
ReclassificationsCertain amounts previously reported have been reclassified to conform to current year presentation. Most significant has been the reclassification of certain expenses between Purchased Electricity, Purchased Gas and Operation and Maintenance Expenses.
Note 2: Other Items
Restructuring Charge2002
In the fourth quarter of 2002, Unitil recognized a pre-tax Restructuring Charge of $1.6 million.
In December 2002, the Company undertook a strategic review of its business operations and committed to a formal transition and reorganization plan (the Reorganization Plan) to streamline its management structure, in order to improve operating efficiency and to align the organization to meet ongoing business requirements. The Reorganization Plan resulted in the elimination of 19 management and administrative positions. As a result of the elimination of these positions, and consistent with existing Company policy, certain benefits are extended to the employees whose positions were eliminated. On January 8, 2003, the Company implemented the Reorganization Plan. The $1.6 million pre-tax Restructuring Charge established a liability at December 31, 2002, to cover the disbursement of severance and employee benefits and related costs committed to under the Reorganization Plan, substantially all of which were paid in fiscal 2003.
Extraordinary Item2001
In November 1997, the Massachusetts Legislature enacted the Massachusetts Electric Restructuring Act of 1997 (the Restructuring Act). The Restructuring Act required all electric utilities to file a restructuring plan with the MDTE by December 31, 1997. Among other things, the Restructuring Act resulted in the divestiture of electric generation assets and purchase power contracts, along with the restructuring of utility operations by all Massachusetts utilities to provide direct retail access to their customers by all qualified third-party energy suppliers.
The MDTE conditionally approved FG&Es Restructuring Plan (the Plan) in February 1998, and started an investigation and evidentiary hearings into FG&Es 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&Es Plan, which included provisions for the recovery of stranded costs through a transition charge in FG&Es 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.
On October 18 and 19, 2001, the MDTE issued a series of regulatory orders in several pending cases involving FG&E, including a final order on FG&Es initial reconciliation filing. Those orders included the review and disposition of issues related to FG&Es recovery of transition costs due to the restructuring of the electric industry in Massachusetts, as well as certain costs associated with gas industry restructuring and preparation and litigation of performance based rate proceedings initiated by the MDTE. The orders determined the final treatment of Regulatory Assets that FG&E had sought to recover from its Massachusetts electric customers over a multi-year transition period that began in 1998.
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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, net of taxes. The Company recognized the extraordinary charge of $0.83 per share, as of September 30, 2001.
As a result of all of these orders, the Company has been allowed recovery of its Massachusetts industry restructuring transition costs, estimated at $150 million, after reconciliation, including the above-market or stranded generation and power supply related costs via a non-bypassable uniform transition charge. FG&E has been and will continue to be subject to annual MDTE investigation and review in order to reconcile the costs and revenues associated with the collection of transition charges from its customers over the next six to eight years.
Investment Write-down and Sale of Equity Stake in Enermetrix2001
Beginning in 1998, Unitil invested $5.5 million in Enermetrix, Inc. (Enermetrix), an energy technology start-up enterprise. In accordance with SFAS No. 115, Accounting for Certain Investments in Debt and Equity Securities, the Company recorded a non-cash charge of $3.7 million, or $2.4 million, net of tax, in the fourth quarter of 2001 to recognize the decrease in fair value of its non-utility investment in Enermetrix.
On April 11, 2002, the Company sold its equity ownership in Enermetrix for $1.5 million in cash and improved commercial terms for use of the Enermetrix Software Network. As a result of the sale, in 2002, the Company recognized the benefit of approximately $1.3 million from this capital loss as a carryback against capital gains in its 2002 tax return and recorded a gain, net of transaction costs, on the final disposition of $82 thousand, net of tax. In total, the final book loss on the investment was $2.3 million, net of tax.
Note 3: Equity
The Company has both common and preferred stock outstanding. Details regarding these forms of capitalization follow below.
Common Stock
New Shares IssuedOn October 29, 2003, the Company raised approximately $16.9 million (after deducting underwriting discounts and commissions and the estimated expenses of the offering) through the sale of 717,600 shares of its common stock at a price of $25.40 per share in a registered public offering. The offering was increased from an original 520,000 shares to reflect a 20% upsizing of the transaction (104,000 shares) and the exercise of a 15% underwriters over-allotment (93,600 shares). The Company used the proceeds from this offering to make capital contributions of $6 million to UES and $6 million to FG&E and other general corporate purposes.
During 2003, the Company sold 28,714 shares of its Common Stock, at an average price of $24.97 per share, in connection with its Dividend Reinvestment and Stock Purchase Plan (DRP) and its 401(k) plans. Net proceeds of $716,936 were used to reduce short-term borrowings. 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. During 2002, the Company did not issue any additional shares of its Common Stock. During 2001, the Company raised $287,142 of additional common equity through the issuance of 11,279 shares of its common stock in connection with the DRP.
Restricted Stock PlanOn April 17, 2003, the Companys shareholders ratified and approved a Restricted Stock Plan (the Plan) which had been approved by the Companys Board of Directors at its January 16, 2003 meeting. Participants in the Plan are selected by the Compensation Committee of the Board of Directors from the eligible Participants to receive an annual award of restricted shares of Company Common Stock. The Compensation Committee has the power to determine the sizes of awards; determine the terms and conditions of awards in a manner consistent with the Plan; construe and interpret the Plan and any agreement or instrument entered into under the Plan as they apply to participants; establish, amend, or waive rules and regulations for the Plans administration as they apply to participants; and, subject to the provisions of the Plan, amend the terms
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and conditions of any outstanding award to the extent such terms and conditions are within the discretion of the Compensation Committee as provided in the Plan. Awards 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 the participants account. Awards may be grossed up to offset the participants tax obligations in connection with the Award. 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. The maximum number of shares of Restricted Stock available for awards to participants under the Plan is 177,500. The maximum aggregate number of shares of Restricted Stock 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 proportionate adjustments to prevent dilution or enlargement of rights, including, without limitation, an adjustment in the maximum number and kinds of shares available for awards and in the annual award limit. On May 12, 2003, 10,600 restricted shares were issued in conjunction with the Plan. The aggregate market value of the restricted stock at the date of issuance was $259,170. The compensation expense associated with the issuance of shares under the Plan is being accrued on a monthly basis over the vesting period and was $50,000 in 2003. Issuances of shares under the Plan are subject to the prior approval of the Securities and Exchange Commission under the Public Utility Holding Company Act of 1935. The Company has applied for such approval, which it expects to obtain prior to the initial vesting of awards made in 2003, which occurs in May of 2004.
Shares Repurchased, Cancelled and RetiredDuring 2003 and 2002, Unitil did not repurchase, cancel and retire any of its common stock. During 2001, in conjunction with the SECs Emergency Orders of September 14 and 21, 2001, which suspended the applicability of certain of the conditions contained in its Rule 10b-18, the Company implemented an interim Common Stock repurchase program. Under this program, the Company used its cash on hand to repurchase, cancel and retire 2,500 shares of its outstanding Common Stock at a total cost of $58,500. The SEC has since lifted its suspension of the aforementioned conditions and accordingly, the Companys interim Common Stock repurchase program is no longer in effect.
Stock-Based Compensation PlansUnitil maintains two stock option plans, which provided for the granting of options to key employees. Details of the plan are as follows:
Unitil Corporation Key Employee Stock Option PlanThe Unitil Corporation Key Employee Stock Option Plan was a 10-year plan which began in March 1989. The number of shares granted under this plan, as well as the terms and conditions of each grant, were determined by the Key Employee Stock Option Plan Committee of the Board of Directors, subject to plan limitations. At December 31, 2003, 29,101 shares had been approved and were available for future issuance as dividend equivalents earned under the plan. All options granted under this plan vested upon grant. The 10-year period in which options could be granted under this plan expired in March 1999. The expiration date of the remaining outstanding options is November 3, 2007. The plan provides dividend equivalents on options granted, which are recorded at fair value as compensation expense. The total compensation expenses recorded by the Company with respect to this plan were $46,000, $43,000 and $42,000 for the years ended December 31, 2003, 2002 and 2001, respectively.
Share Option Activity of the Unitil Corporation Key Employee Stock Option Plan is presented in the following table:
2003 |
2002 |
2001 | |||||||
Beginning Options Outstanding and Exercisable |
25,000 | 25,000 | 25,000 | ||||||
Dividend Equivalents EarnedPrior Years |
7,645 | 5,996 | 4,358 | ||||||
Dividend Equivalents EarnedCurrent Year |
1,850 | 1,649 | 1,638 | ||||||
Options Exercised |
| | | ||||||
Ending Options Outstanding and Exercisable |
34,495 | 32,645 | 30,996 | ||||||
Weighted Average Exercise Price per Share |
$13.17 | $13.91 | $14.66 | ||||||
Range of Option Exercise Price per Share |
$ | 12.11-$18.28 | $ | 12.11-$18.28 | $ | 12.11-$18.28 | |||
Weighted Average Remaining Contractual Life |
3.9 years | 4.9 years | 5.9 years |
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Unitil Corporation 1998 Stock Option PlanThe Unitil Corporation 1998 Stock Option Plan became effective on December 11, 1998. The number of shares granted under this plan, as well as the terms and conditions of each grant, are determined by the Compensation Committee of the Board of Directors, subject to plan limitations. All options granted under this plan vest over a three-year period from the date of the grant, with 25% vesting on the first anniversary of the grant, 25% vesting on the second anniversary, and 50% vesting on the third anniversary. Under the terms of this plan, key employees may be granted options to purchase the Companys Common Stock at no less than 100% of the market price on the date the option is granted. All options must be exercised no later than 10 years after the date on which they were granted. The total compensation expenses recorded by the Company with respect to this plan were ($178,000), $278,000 and $251,000 for the years ended December 31, 2003, 2002 and 2001, respectively. 2003 reflects a reversal of prior compensation expense due to stock option forfeitures. This plan was terminated on January 16, 2003. The plan will remain in effect solely for the purposes of the continued administration of all options currently outstanding under the plan. No further grants of option will be made under this plan.
2003 |
2002 |
2001 | |||||||||||||||
Number of Shares |
Average Exercise Price |
Number of Shares |
Average Exercise Price |
Number of Shares |
Average Exercise Price | ||||||||||||
Beginning Options Outstanding |
172,500 | $ | 26.99 | 172,500 | $ | 26.99 | 113,500 | $ | 27.64 | ||||||||
Options Granted |
| | | | 60,000 | $ | 25.88 | ||||||||||
Options Forfeited |
(65,500 | ) | $ | 26.77 | | | (1,000 | ) | $ | 33.56 | |||||||
Ending Options Outstanding |
107,000 | $ | 27.13 | 172,500 | $ | 26.99 | 172,500 | $ | 26.99 | ||||||||
Options Vested and Exercisable-end of year |
107,000 | $ | 27.13 | 100,500 | $ | 26.11 | 42,750 | $ | 26.15 |
The Company has adopted SFAS No. 123, Accounting for Stock Based Compensation, and recognizes compensation costs at fair value at the date of grant.
The following summarizes certain data for options outstanding at December 31, 2003:
Range of Exercise Prices |
Options Vested, Exercisable and |
Weighted Average Exercise Price |
Remaining Contractual Life | ||||
$20.00-$24.99 |
34,500 | $ | 23.38 | 5.2 years | |||
$25.00-$29.99 |
37,500 | $ | 25.88 | 7.1 years | |||
$30.00-$34.99 |
35,000 | $ | 32.17 | 6.1 years | |||
107,000 | |||||||
There were no options granted during 2003 and 2002. The weighted average fair value per share of options granted during 2001 was $4.66. The fair value of options at the date of grant was estimated using the Black-Scholes model with the following weighted average assumptions:
2003 |
2002 |
2001 |
|||||
Expected Life (years) |
N/A | N/A | 10.0 | ||||
Interest Rate |
N/A | N/A | 5.8 | % | |||
Volatility |
N/A | N/A | 23.6 | % | |||
Dividend Yield |
N/A | N/A | 5.3 | % |
Restrictions on Retained EarningsUnitil Corporation has no restriction on the payment of common dividends from retained earnings.
Its two retail distribution subsidiaries, UES and FG&E, do have restrictions. Under the terms of the First Mortgage Bond Indentures, UES had $11,354,000 available for the payment of cash dividends on its Common
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Stock at December 31, 2003. Under the terms of long-term debt purchase agreements, FG&E had $6,081,000 of retained earnings available for the payment of cash dividends on its Common Stock at December 31, 2003. Common dividends declared by UES and FG&E are paid exclusively to Unitil Corporation.
Preferred Stock
Unitils two distribution operating subsidiaries, UES and FG&E, have Redeemable Cumulative Preferred Stock outstanding and one subsidiary, UES, has a Non-Redeemable, Non-Cumulative Preferred Stock issue outstanding. These subsidiaries are required to offer to redeem annually a given number of shares of each series of Redeemable Cumulative Preferred Stock and to purchase such shares that shall have been tendered by holders of the respective stock. In addition, UES and FG&E may opt to redeem the Redeemable Cumulative Preferred Stock at a given redemption price, plus accrued dividends.
The aggregate purchases of Redeemable Cumulative Preferred Stock during 2003, 2002 and 2001 related to the annual redemption offer were $53,400, $34,500 and $81,000, respectively. The aggregate amount of sinking fund requirements of the Redeemable Cumulative Preferred Stock for each of the five years following 2003 are $192,000 per year.
Also, during 2002, in conjunction with the merger of E&H into CECo to form UES, the 5% and 6% series of Redeemable Cumulative Preferred Stock were fully-redeemed at par plus premiums of 2% and 3%, respectively. These redemptions and related premiums resulted in an aggregate expenditure of $258,720.
Note 4: Long-Term Debt, Credit Arrangements, Leases and Guarantees
The Company funds a portion of its operations through the issuance of long-term debt and through short-term borrowing arrangements. The Companys subsidiaries conduct a portion of their operations in leased facilities and also lease some of their machinery and office equipment. Details regarding long-term debt, short-term debt and leases follows below.
Long-Term Debt and Interest Expense
Substantially all the property of Unitils New Hampshire utility operating subsidiary, UES, is subject to liens of indenture under which First Mortgage bonds have been issued. All of the long-term debt of Unitils Massachusetts utility operating subsidiary, FG&E, is issued under Unsecured Promissory Notes with negative pledge provisions. Each issue of FG&Es long-term debt ranks pari passu with its other senior unsecured long-term debt. The long-term debts negative pledge provisions contain restrictions which, among other things, limit the incursion of additional long-term debt.
Total aggregate amount of sinking fund payments relating to bond issues and normal scheduled long-term debt repayments amounted to $3,244,156, $3,225,444 and $3,208,000 in 2003, 2002 and 2001, respectively.
The aggregate amount of bond sinking fund requirements and normal scheduled long-term debt repayments for each of the five years following 2003 is: 2004$3,264,421, 2005$286,368, 2006$310,136, 2007$335,877 and 2008$363,755.
On October 28, 2003, FG&E completed a $10 million private placement of long-term unsecured notes with a major insurance company. The notes have a term of 22 years and a coupon rate of 6.79%. The net proceeds were used to replace short-term indebtedness.
The fair value of the Companys long-term debt is 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. In managements opinion, the carrying value of the debt approximated its fair value at December 31, 2003 and 2002.
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The Company also provides limited guarantees on certain energy contracts entered into by its regulated subsidiary companies. The Companys policy is to limit these guarantees to two years or less. As of December 31, 2003, there are $2.0 million of guarantees outstanding and these guarantees extend through October 21, 2005.
The agreements under which the long-term debt of Unitils two principal subsidiaries, UES and FG&E, were issued contain various covenants and restrictions. These agreements do not contain any covenants or restrictions pertaining to the maintenance of financial ratios or the issuance of short-term debt. These agreements do contain covenants relating to, among other things, the issuance of additional long-term debt, cross-default provisions and business combinations, as described below.
UES utilizes a First Mortgage Bond (FMB) structure of long-term debt. In order to issue new FMB securities, the customary covenants of the existing UES Indenture Agreement must be met, including that UES have sufficient available net bondable plant to issue the securities and projected earnings available for interest charges equal to at least two times the annual interest requirement. The UES agreements further require that if UES defaults on any UES FMB securities, it would constitute a default for all UES FMB securities. The UES default provisions are not triggered by the actions or defaults of other companies in the Unitil System.
FG&E utilizes a debenture structure of long-term debt. Accordingly, in order for FG&E to issue new long-term debt, the covenants of the existing long-term agreements must be satisfied, including that FG&E have total funded indebtedness less than 65% of total capitalization and earnings available for interest equal to at least two times the interest charges for funded indebtedness. As with the UES agreements, FG&E agreements require that if FG&E defaults on any FG&E long-term debt agreement, it would constitute a default under all FG&E long-term debt agreements. The FG&E default provisions are not triggered by the actions or defaults of other companies in the Unitil System.
Both the UES and FG&E instruments and agreements contain covenants restricting the ability of each company to incur liens and to enter into sale and leaseback transactions, and restricting the ability of each company to consolidate with, to merge with or into or to sell or otherwise dispose of all or substantially all of its assets.
Interest Expense, netInterest expense is presented in the financial statements net of interest income. Interest expense is mainly comprised of interest paid on long-term debt and interest paid on regulatory liabilities. Interest income is mainly derived from carrying charges on restructuring related stranded costs and other deferred costs recorded as regulatory assets by the Companys retail distribution utilities as approved by regulators in New Hampshire and Massachusetts. Over the long run, as deferred costs are recovered through rates, the interest costs associated with these deferrals are expected to decrease together with a decrease in interest income. A summary of interest expense and interest income is provided in the following table:
Interest Expense, net (000s) |
2003 |
2002 |
2001 |
|||||||||
Interest Expense |
||||||||||||
Long-term Debt |
$ | 8,170 | $ | 8,336 | $ | 7,708 | ||||||
Short-term Debt |
1,071 | 1,037 | 1,484 | |||||||||
Subtotal Interest Expense |
9,241 | 9,373 | 9,192 | |||||||||
Interest Income |
||||||||||||
Regulatory Assets |
(1,657 | ) | (2,090 | ) | (1,952 | ) | ||||||
AFUDC |
(46 | ) | (52 | ) | (61 | ) | ||||||
Other |
(7 | ) | (174 | ) | (382 | ) | ||||||
Subtotal Interest Income |
(1,710 | ) | (2,316 | ) | (2,395 | ) | ||||||
Total Interest Expense, net |
$ | 7,531 | $ | 7,057 | $ | 6,797 | ||||||
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Credit Arrangements
At December 31, 2003, Unitil had unsecured committed bank lines for short-term debt in the aggregate amount of $52.0 million with three banks for which it pays commitment fees. The weighted average interest rates on all short-term borrowings were 1.78%, 2.18% and 4.78% during 2003, 2002 and 2001, respectively.
Leases
Unitils subsidiaries conduct a portion of their operations in leased facilities and also lease some of their machinery and office equipment. FG&E had a 22-year facility lease in which the Primary Term was scheduled to end on January 31, 2003. On February 1, 2003, a 10-year Extended Term commenced extending the lease term through January 31, 2013. Furthermore, the amended lease agreement allows for three additional five-year renewal periods at the option of FG&E. This lease, as well as other leases for equipment used by Unitils subsidiaries, is recorded as an operating lease. In prior years, this lease was classified as a capital lease. The change in classification was the result of the renegotiation of the lease terms described above.
The following is a schedule of the leased property under capital leases by major classes:
Asset Balances at December 31, | ||||||
Classes of Utility Plant (000s) |
2003 |
2002 | ||||
Common Plant |
$ | 3,443 | $ | 7,095 | ||
Less: Accumulated Depreciation |
2,507 | 3,761 | ||||
Net Plant |
$ | 936 | $ | 3,334 | ||
The following is a schedule by years of future minimum lease payments and present value of net minimum lease payments under capital leases, as of December 31, 2003:
Year Ending December 31 (000s) |
|||
2004 |
$ | 616 | |
2005 |
355 | ||
2006 |
53 | ||
2007 |
10 | ||
2008 |
8 | ||
2009-2013 |
8 | ||
Total Minimum Lease Payments |
$ | 1,050 | |
Less: Amount Representing Interest |
114 | ||
Present Value of Net Minimum Lease Payments |
$ | 936 | |
Total rental expense charged to operations for the years ended December 31, 2003, 2002 and 2001 amounted to $294,000, $4,000 and $12,000, respectively.
The following is a schedule by years of material future operating lease payment obligations as of December 31, 2003:
Year Ending December 31 (000s) |
|||
2004 |
$ | 270 | |
2005 |
270 | ||
2006 |
270 | ||
2007 |
270 | ||
2008 |
270 | ||
2009-2013 |
1,102 | ||
Total Material Future Operating Lease Payments |
$ | 2,452 | |
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Guarantees
The Company also provides limited guarantees on certain energy contracts entered into by its regulated subsidiary companies. The Companys policy is to limit these guarantees to two years or less. As of December 31, 2003 there are $2.0 million of guarantees outstanding and these guarantees extend through October 21, 2005.
Note 5: Energy Supply
Electricity Supply:
Wyman Unit No. IVFG&E continues to have a 0.1822% non-operating ownership interest in the Wyman Unit No. IV, an oil-fired electric generating station located in Yarmouth, Maine (Wyman IV). The lead operating owner of Wyman IV is FPL Energy Wyman IV, LLC. In accordance with the Massachusetts Restructuring Act, and pursuant to the generation assets and power supply divestiture process discussed below, FG&E effectively divested its economic interest in Wyman IV when it entered into an agreement to, among other things, sell its entire entitlement in the output from Wyman IV over the expected remaining operating life of the unit. Kilowatt-hour generation and operating expenses associated with Wyman IV are divided on the same basis as ownership. FG&Es proportionate ownership costs in Wyman IV are reflected in the Consolidated Statements of Earnings. Revenues from the entitlement sale of Wyman IV reflect a matching and collection of these costs. Accordingly, the cost associated with FG&Es ownership in Wyman IV does not have a material impact on net income.
Information with respect to FG&Es ownership in Wyman Unit No. IV, at December 31, 2003, is shown below:
Joint Ownership Unit |
State |
Proportionate Ownership |
Share of Total MW |
Companys Net Book Value (000s) | ||||||
Wyman Unit No. IV |
ME | 0.1822 | % | 1.13 | $ | 61 |
Energy ResourcesIn connection with industry restructuring and the implementation of retail choice in New Hampshire and Massachusetts, FG&E and Unitil Power have effectively divested their long-term power supply contracts and the owned generation assets of FG&E. Unitil Power divested its long-term power supply contracts to a subsidiary of Mirant Corporation, Mirant Americas Energy Marketing, LP (Mirant), which was approved by the NHPUC on March 14, 2003. The NHPUC Order completed the state approval process for Unitils restructuring plan under which UES implemented customer choice for its customers on May 1, 2003. Total annual costs under these contracts are included in Purchased Electricity Supply in the Consolidated Statements of Earnings.
FG&E divested its owned generation assets and long-term power supply contracts to Select Energy, Inc. (Select Energy), a subsidiary of Northeast Utilities. Under the Select Energy contract, which was approved by the MDTE in January 2000, and went into effect February 1, 2000, FG&E began selling the entire output from its remaining long-term power supply contracts and the output of its two joint ownership units to Select Energy. Upon the sale of FG&Es share of Millstone Unit 3 in 2001, this portion of the contract sale ceased.
Although UESs and FG&Es electric customers have the option of contracting directly for their electricity needs with third-party suppliers, both companies remain the default service provider for their respective customers. Accordingly, UES and FG&E contract with wholesale power suppliers for the electricity necessary to meet their regulated energy supply obligations, which are provided through Standard Offer Service and Default Service in Massachusetts and Transition Service and Default Service in New Hampshire. The costs associated with the acquisition of such regulated wholesale electric supplies are recovered on a pass-through basis from customers through periodically-adjusted rates.
FG&E has a contract for Standard Offer Service from Constellation Power Source through the end of the Standard Offer Service period in Massachusetts in February 2005. Beginning December 1, 2000, through
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December 1, 2003, FG&E procured Default Service through a bid process every six months. Effective December 1, 2003, as a result of revised regulatory requirements ordered by the MDTE, FG&E procures 50% of its Small Customer Default Service requirements semi-annually, for twelve-month terms. FG&E procures 100% of its Large Customer Default Service requirements for a three-month period.
Under the agreement whereby Mirant purchased the entitlements to Unitil Powers long-term purchase power supply portfolio, it provides UES Transition and Default Service through April 30, 2006 for Small Customers and April 30, 2005 for Large Customers at fixed prices.
Since April 1, 1998, each electric utility has been required to carry an allocated share of the NEPOOL capability responsibility under the NEPOOL Agreement. FG&Es Standard Offer Service supplier, Constellation Power Source, and FG&Es periodic Default Service suppliers are responsible for serving FG&Es load obligations and associated capability responsibility under their respective contracts. Similarly, under the agreement between Unitil Power, UES and Mirant, whereby Mirant provides wholesale power to UES for Transition and Default Service, Mirant is also responsible for serving UES load obligations and associated capability responsibility. Unitil Power no longer has any load serving obligations in NEPOOL.
Gas Supply:
FG&Es natural gas customers now have the opportunity to purchase their natural gas supply from third-party vendors, though most customers continue to purchase such supplies through FG&E as the provider of last resort. The costs associated with the acquisition of such wholesale natural gas supplies for customers who do not contract with third-party suppliers are recovered through periodically-adjusted rates and are included in Purchased Gas in the Consolidated Statements of Earnings.
FG&E distributes natural gas purchased from domestic and Canadian suppliers under long-term contracts as well as gas purchased from producers and marketers on the spot market. The following tables summarize actual gas purchases by source of supply and the cost of gas sold for the years 2000 through 2003.
Sources of Gas Supply
(Expressed as percent of total MMBtu of gas purchased)
2003 |
2002 |
2001 |
|||||||
Natural Gas: |
|||||||||
Domestic firm |
94.0 | % | 73.9 | % | 76.2 | % | |||
Canadian firm |
1.3 | % | 8.4 | % | 8.0 | % | |||
Domestic spot market |
1.3 | % | 16.2 | % | 14.5 | % | |||
Total natural gas |
96.6 | % | 98.5 | % | 98.7 | % | |||
Supplemental gas |
3.4 | % | 1.5 | % | 1.3 | % | |||
Total gas purchases |
100.0 | % | 100.0 | % | 100.0 | % |
Cost of Gas Sold
2003 |
2002 |
2001 |
||||||||||
Cost of gas purchased and sold per MMBtu |
$ | 7.14 | $ | 4.96 | $ | 7.13 | ||||||
Percent Increase (Decrease) from prior year |
43.9 | % | (30.4 | %) | 37.3 | % |
As a supplement to pipeline natural gas, FG&E owns a propane air gas plant and a liquefied natural gas (LNG) storage and vaporization facility. These plants are used principally during peak load periods to augment the supply of pipeline natural gas.
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Note 6: Commitments and Contingencies
Regulatory MattersAs a registered holding company under PUHCA, Unitil and its subsidiaries are regulated by the Securities and Exchange Commission (SEC) with respect to various matters, including: the issuance of securities, our capital structure and certain acquisitions and dispositions of assets. UES and FG&E are subject to regulation by the New Hampshire Public Utilities Commission (NHPUC) and the Massachusetts Department of Telecommunications and Energy (MDTE), respectively, with respect to their rates, issuance of securities and other accounting and operational matters. Certain aspects of the Companys utility operations as they relate to wholesale and interstate business activities are also regulated by the Federal Energy Regulatory Commission (FERC). In the past several years, the Company has completed the restructuring of its electric and natural gas operations resulting from the implementation of retail choice as mandated by the States of New Hampshire and Massachusetts.
Unitils retail distribution utilities have the franchise to deliver electricity and/or natural gas to all customers in our franchise areas, at rates established under traditional cost of service regulation. Under this regulatory structure, through their distribution charges, UES and FG&E recover the cost of providing distribution service to their customers based on a historical test year, in addition to earning a return on their capital investment in utility assets. In 2002, the retail distribution utilities completed rate proceedings and were authorized by the NHPUC and MDTE to implement increased rates for electric and natural gas distribution operations beginning in December of that year. UES and FG&E also recover the actual cost of any electricity or natural gas they supply to their customers, as well as certain costs associated with industry restructuring, through periodically adjusted rates.
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 natural gas, while continuing to regulate the distribution operations of Unitils retail distribution utilities. Unitil implemented the restructuring of its electric and gas operations in Massachusetts in 1998 and 2000, respectively, and implemented the final phase of a restructuring settlement for its New Hampshire electric operations on May 1, 2003. Following electric industry restructuring, Unitils retail distribution companies have a continuing obligation to submit filings in both states that demonstrate their compliance with regulatory mandates and provide for timely recovery of costs in accordance with their approved restructuring plans.
In connection with industry restructuring and the implementation of retail choice for our customers in New Hampshire and Massachusetts, Unitil Power divested of its long-term power supply contracts and FG&E divested of its long-term power supply contracts and owned generation assets. Unitil Power divested its long-term power supply contracts to a subsidiary of Mirant Corporation (Mirant) and FG&E divested its owned generation assets and long-term power supply contracts to Select Energy, Inc. (Select Energy). Unitil Powers and FG&Es long-term power supply contracts were divested through the sale of the entitlements to the electricity associated with those contracts. UES and FG&E recover in their rates all the costs associated with the divestiture of their power supply portfolios as a result of electric industry restructuring.
Unitils customers in both New Hampshire and Massachusetts now have the opportunity to purchase their electric supply from third party vendors, though most customers continue to purchase such supplies through Unitil as the provider of last resort. Accordingly, UES and FG&E contract with wholesale power suppliers for the electricity necessary to meet their regulated default service energy supply obligations. Similarly, FG&Es natural gas customers have the option to contract for their natural gas supply with third-party suppliers and FG&E remains the default service provider for these natural gas customers. The costs associated with the acquisition of such wholesale electric and natural gas supplies for customers who do not contract with third-party suppliers are recovered from those customers through periodic rate and cost recovery reconciliation mechanisms.
UES and FG&E have secured regulatory approval from both New Hampshire and Massachusetts state regulators for the recovery of approximately $203 million of power supply-related stranded costs principally over the next 6 to 8 years. Also, we have implemented comprehensive customer and financial information systems to accommodate the transition to competitive energy markets and retail choice.
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Massachusetts Electric Operations RestructuringBeginning March 1, 1998, FG&E implemented its Restructuring Plan under the Massachusetts Electric Utility Restructuring Act of 1997 (Restructuring Act). FG&E completed the divestiture of its entire regulated power supply business in 2000 in accordance with the Restructuring Plan. FG&Es rates provide for the recovery of stranded costs associated with the divestiture of FG&Es power portfolio including stranded, previously-owned generation assets. The Regulatory Assets that are being recovered in FG&Es rates have been approved by the MDTE as part of FG&Es Restructuring Plan and are reviewed each year as part of FG&Es annual rate reconciliation filings.
The Restructuring Act also requires FG&E to purchase and provide power as the default service provider, through either Standard Offer Service (SOS) or Default Service, for retail customers who choose not to buy, or are unable to purchase, energy from a competitive supplier. FG&E must provide SOS through February 2005 at rate levels which provide rate reductions as required by the Restructuring Act. New distribution customers and customers no longer eligible for SOS are eligible to receive Default Service at prices set periodically based on market solicitations as approved by regulators. As of December 31, 2003, competitive suppliers were serving approximately 37% of FG&Es load, primarily for FG&Es largest customers, although much of the load has since reverted back to FG&Es regulated Default Service.
As a result of the restructuring and the divestiture of FG&Es owned generation assets, FG&E recorded stranded generation-related costs as Regulatory Assets. These stranded generation-related Regulatory Assets are being amortized and recovered through the year 2009. FG&E earns carrying charges on the unamortized balance of these stranded generation-related Regulatory Assets. In addition, as a result of restructuring legislation in Massachusetts, the total rate FG&E may charge for the combination of distribution service, stranded costs and purchase power costs is subject to an inflation adjusted total rate cap for a seven year period, which began in March 1998. Any unrecovered balance of purchased power costs and stranded costs as a result of the total rate cap is deferred for future rate recovery as a Regulatory Asset. These deferred costs also earn carrying charges until their subsequent recovery in future periods. The value of FG&Es generation-related Regulatory Assets and deferred cost Regulatory Assets was approximately $31.7 million and $28.9 million, respectively at December 31, 2003, and are expected to be recovered in FG&Es rates principally over the next 6 to 8 years. In addition, as of December 31, 2003, FG&E had recorded on its balance sheets $73.4 million as Power Supply Buyout Obligations and corresponding Regulatory Assets associated with the divestiture of its long-term purchase power contracts. FG&E does not earn a carrying charge on this power supply component of Regulatory Assets as there is no significant difference between the time periods when payments are made to satisfy these purchase power contract obligations and their recovery in rates from FG&Es customers.
Massachusetts Gas Operations RestructuringFollowing a three year state-wide collaborative process on the unbundling, or separation, of discrete services offered by natural gas local distribution companies (LDCs), the MDTE approved regulations and tariffs for FG&E and other LDCs operating in the Commonwealth to provide full customer choice effective November 1, 2000. The MDTE ruled that LDCs would continue to have an obligation to provide gas supply and delivery services for a five-year transition period, with a review after three years. The MDTE also required mandatory assignment of LDCs pipeline capacity to competitive marketers supplying customers during the transition period. This mandatory capacity assignment protects LDCs from exposure to certain stranded gas supply costs during the transition period. In January 2004, the MDTE opened an investigation seeking comment on whether the mandatory assignment of pipeline capacity should be continued. This proceeding is pending.
New Hampshire RestructuringIn 2002, UES predecessor companies, Concord Electric Company (CECo) and Exeter & Hampton Electric Company (E&H), received approval for a comprehensive restructuring proposal from the NHPUC. This approved proposal included the merger of E&H with and into CECo. CECo changed its name to Unitil Energy Systems, Inc. (UES) immediately following the merger. Under the New Hampshire restructuring plan, Unitil Power agreed to divest its existing long-term power supply portfolio and conduct a solicitation for new power supplies from which to meet UES ongoing default service Transition and Default Service obligations in order to implement customer choice for UES customers May 1, 2003. In
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March 2003, the NHPUC approved the contract among Unitil Power, UES and Mirant Americas Energy Marketing, LP (MAEM), under which MAEM purchased the entitlements to Unitil Powers long-term power supply portfolio and provided Transition and Default Service to the customers of UES. The NHPUC also approved final tariffs for UES for stranded cost recovery and Transition and Default Service, including certain surcharges that are subject to future reconciliation or review. As of December 31, 2003, UES had recorded on its balance sheets $93.9 million as Power Supply Contract Obligations and corresponding Regulatory Assets associated with these long-term purchase power stranded costs, which are expected to be recovered principally over a period of approximately 8 years. UES does not earn carrying charges on these Power Supply Regulatory Assets as there is no significant difference between the time periods when payments are made to satisfy these purchase power buyout obligations and their recovery in rates from UESs customers.
In July 2003, MAEM and its parent, Mirant Corporation (Mirant), filed for reorganization under Chapter 11 of the bankruptcy code. Under the contract with UES and Unitil Power discussed above, Mirant guaranteed the performance by MAEM. Unitil Power and UES filed a motion with the Bankruptcy Court in September, 2003, requesting that MAEM be required to make a decision to assume or reject the contract by December 1, 2003. On November 14, 2003, MAEM, Unitil Power and UES filed a Settlement with the bankruptcy court. Under the terms of the Settlement, MAEM agreed to assume and continue to fulfill its power purchase and sale obligations under the contract, to cure all pre-petition obligations, and to settle certain other disputes. UES and Unitil Power agreed to accelerate the payment of amounts held back from MAEM. On December 10, 2003, the settlement was approved by the federal bankruptcy court and MAEM is continuing to fulfill its obligations under the Mirant Agreement.
Wholesale Power Market RestructuringFG&E, Unitil Power, and UES are members of NEPOOL. NEPOOL was formed in 1971 to assure reliable operation of the bulk power system in the most economic manner for the region. NEPOOL is governed by an agreement (NEPOOL Agreement) that is filed with and subject to the jurisdiction of the FERC. Under the NEPOOL Agreement and the NEPOOL Open Access Transmission Tariff (OATT), to which virtually all New England electric utilities are parties, substantially all operation and dispatching of electric generation and bulk transmission capacity in New England is performed on a regional basis. The NEPOOL Agreement and the OATT impose generating capacity and reserve obligations, and provide for the use of major transmission facilities and support payments associated therewith. The most notable benefits of NEPOOL are coordinated power system operation in a reliable manner and a supportive business environment for the development of a competitive electric marketplace. The regional bulk power system is operated by an independent corporate entity, the ISO-NE, in order to avoid any opportunity for conflicting financial interests between the system operator and the market-driven participants.
There continue to be ongoing legislative and regulatory initiatives that are primarily focused on the deregulation of the generation and supply of electricity and the corresponding development of a competitive market place from which customers choose their electric energy supplier. As a result, the NEPOOL Agreement continues to be restructured. NEPOOLs membership provisions have been broadened to cover all entities engaged in the electricity business in New England, including power marketers and brokers, independent power producers, load aggregators and retail customers in states that have enacted retail access statutes. Various energy and capacity products are traded in open markets, with transmission access and pricing subject to the regional OATT designed to promote competition among power suppliers. On March 1, 2003, ISO-NE implemented a Standard Market Design (SMD) that is intended to improve the ability to trade power between New England and other regions throughout the northeast. On October 31, 2003, ISO-NE and the major transmission owners in New England filed with the FERC to form a Regional Transmission Organization (RTO) with a proposed effective date not earlier than March 1, 2004. The implementation of the RTO, which is being contested at FERC, will further revise the conduct of wholesale markets in New England. The filing also proposes to eliminate NEPOOL as an organization and require all current NEPOOL members to be part of the RTO system. SMD, the formation of an RTO and other wholesale market changes are not expected to have a material impact on Unitils results of operations because of cost recovery mechanisms for wholesale energy costs approved by state regulators.
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Other Regulatory ProceedingsBetween December 2002 and January 2003, FG&E and UES received approval from their respective state regulatory commissions for accounting orders to mitigate certain accounting requirements related to pension plan assets, which have been triggered by the substantial decline in the capital markets. These approvals allowed FG&E and UES to treat the additional minimum pension liability as Regulatory Assets and avoided the reduction in equity that would otherwise be required. These regulatory orders did not pre-approve the amount of pension expense to be recovered in future rates, which recovery will be determined in future proceedings. Based on these approvals, FG&Es and UES additional minimum pension liabilities are included in Regulatory Assets on the Companys balance sheet.
On December 15, 2003, FG&E filed a request to defer and record, as a regulatory asset or liability, the difference between the level of pension and Post Retirement Benefits Other than Pension (PBOP) expenses that are included in its base rates and the amounts that are required to be booked in accordance with SFAS No. 87 and SFAS No. 106, since the effective date of its last base rate change. The MDTE issued an order on January 30, 2004 approving FG&Es request for this accounting order to defer these costs.
On December 19, 2003, UES filed with the NHPUC a Petition for Deferral of its PBOP expenses not recovered in base rates. On January 30, 2004 the NHPUC issued an order approving UESs request for this accounting order to defer these costs.
On January 30, 2004 the MDTE granted FG&Es request to voluntarily decrease its Cost of Gas Adjustment Clause (CGAC) during the remainder of the 2004 winter period by accelerating the payment of a multi-year refund that was ordered by the MDTE in May 2001, based upon a finding that FG&E had over-collected certain fuel inventory finance charges. In January, 2004, the Massachusetts Supreme Judicial Court (SJC) affirmed the MDTEs May 2001 Order requiring the refund, which Order FG&E had appealed. The MDTE subsequently approved FG&Es request to prepay the balance of the refund outstanding of approximately $1.2 million by reducing the CGAC in February through April, 2004. The MDTE also approved FG&Es request to amortize these charges against future revenues.
In March 2003, the MDTE opened an investigation into FG&Es dealings with Enermetrix, Inc. (Enermetrix). Enermetrix provides an internet-based energy auction service that is used by utilities to post their natural gas and electric power needs for bids. FG&E used the Enermetrix Exchange to post its electric default service solicitations in September 2001 and March 2002, and Enermetrix earned approximately $19,000 in fees from these transactions. In Managements view, these successful solicitations ultimately resulted in significant lower default service costs to FG&Es customers. At the time of these solicitations, FG&Es parent, Unitil Corporation, had an approximately 9% ownership interest in Enermetrix. The MDTE is investigating whether FG&E is in compliance with relevant statutes and regulations pertaining to transactions with affiliated companies and the MDTEs Order setting forth the requirements for the pricing and procurement of default service. FG&E and the Attorney General have completed briefing of the case and an MDTE decision is pending. Management believes the outcome of this matter will not have a material adverse effect on the financial position of the company.
In August 2003, Northeast Utilities (NU) filed with FERC to revise its comprehensive network service transmission rates to establish and implement a formula based rate, replacing a fixed rate tariff. As filed, the proposed rate change would increase UES external transmission costs paid under the NU tariff for comprehensive network service by about $600 thousand per year. The Company has filed a Motion to Intervene and Limited Protest in this FERC proceeding, and has claimed that certain provisions of NUs filing are contrary to a settlement reached in 1997 with NU for comprehensive network transmission service. The FERC set NUs filing for settlement discussions and approved the new tariff effective October 28, 2003, subject to refund. On January 22, 2004, the Settlement Judge formally terminated the settlement discussions. The Company continues to have informal settlement discussions with NU. Further action on the NU filing is currently pending before FERC. Management cannot predict the outcome of this proceeding but believes it will not have a material impact on results of operations because of rate reconciling cost recovery mechanisms approved by state regulators.
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Environmental Matters
The Companys past and present operations include activities that are generally subject to extensive federal and state environmental laws and regulations. The Company is in general compliance with all applicable environmental and safety laws and regulations, and Management believes that as of December 31, 2003, there are no material losses reasonably possible in excess of recorded amounts. However, there can be no assurance that significant costs and liabilities will not be incurred in the future. It is possible that other developments, such as increasingly stringent federal, state or local environmental laws and regulations could result in increased environmental compliance costs.
Sawyer Passway MGP SiteThe Company continues to work with environmental regulatory agencies to identify and assess environmental issues at the former manufactured gas plant (MGP) site at Sawyer Passway, located in Fitchburg, Massachusetts. FG&E proceeded with site remediation work as specified on the Tier 1B permit issued by the Massachusetts Department of Environmental Protection (DEP), which allows the Company to work towards temporary remediation of the site. Work performed in 2002 was associated with the five-year review of the Temporary Solution submittal (Class C Response Action Outcome) under the Massachusetts Contingency Plan that was filed for the site in 1997. Completion of this work has confirmed the Temporary Solution status of the site for an additional five years. A status of temporary closure requires FG&E to monitor the site until a feasible permanent remediation alternative can be developed and completed.
Since 1991, FG&E has recovered the environmental response costs incurred at this former MGP site pursuant to an MDTE approved settlement agreement between the Massachusetts Attorney General and the natural gas utilities of the Commonwealth of Massachusetts (Agreement). The Agreement allows FG&E to amortize and recover from gas customers over succeeding seven-year periods the environmental response costs incurred each year. Environmental response costs are defined to include liabilities related to manufactured gas sites, waste disposal sites or other sites onto which hazardous material may have migrated as a result of the operation or decommissioning of Massachusetts gas manufacturing facilities from 1882 through 1978. In addition, any recovery that FG&E receives from insurance or third parties with respect to environmental response costs, net of the unrecovered costs associated therewith, are split equally between FG&E and its gas customers. The total annual charge for such costs assessed to gas customers cannot exceed five percent of FG&Es total revenue for firm gas sales during the preceding year. Costs in excess of five percent will be deferred for recovery in subsequent years.
Former Electric Generating StationThe Company has remediated environmental conditions at a former electric generating station located at Sawyer Passway, which FG&E sold to WRW, a general partnership, in 1983. Rockware International Corporation (Rockware), an affiliate of WRW, acquired rights to the electric equipment in the building and intended to remove, recondition and sell this equipment. During 1985, Rockware demolished several exterior walls of the generating station in order to facilitate removal of certain equipment. The demolition of the walls and the removal of generating equipment resulted in damage to asbestos-containing insulation materials inside the building, which had been intact and encapsulated at the time of the sale of the structure to WRW.
When Rockware and WRW encountered financial difficulties and failed to respond adequately to Orders of the environmental regulators to remedy the situation, FG&E agreed to take steps at that time and obtained DEP approval to temporarily enclose, secure and stabilize the facility. Based on that approval, between September and December 1989, contractors retained by FG&E stabilized the facility and secured the building. This work did not permanently resolve the asbestos problems caused by Rockware, but was deemed sufficient for the then foreseeable future.
Due to the continuing deterioration of this former electric generating station and Rockwares continued lack of performance, FG&E, in concert with the DEP and the U.S. Environmental Protection Agency (EPA), conducted further testing and survey work during 2001 to ascertain the environmental status of the building. Those surveys revealed continued deterioration of the asbestos-containing insulation materials in the building.
66
By letter dated May 1, 2002, the EPA notified FG&E that it was a Potentially Responsible Party for planned remedial activities at the site and invited FG&E to perform or finance such activities. FG&E and the EPA entered into an Agreement on Consent, whereby FG&E, without an admission of liability, conducted environmental remedial action to abate and remove asbestos-containing and other hazardous materials. This project was completed during the fourth quarter of 2003. FG&E received complete coverage from its insurance carrier and the resolution of this matter did not have a material adverse impact on the Companys financial position.
Note 7: Bad Debts
The Company recognizes a Provision for Uncollectible Accounts as a percent of revenues each month. The amount of the monthly Provision is based upon the Companys experience in collecting electric and gas utility service accounts receivable in prior years. Account write-offs, net of recoveries, are processed monthly. At the end of each month, an analysis of the delinquent receivables is performed and the adequacy of the Allowance for Uncollectible Accounts is reviewed. The analysis takes into account an assumption about the cash recovery of delinquent receivables and also uses calculations related to customers who have chosen payment plans to resolve their arrears. The analysis also calculates the amount of written-off receivables that are recoverable through regulatory rate reconciling mechanisms. Evaluating the adequacy of the Allowance for Uncollectible Accounts requires judgment about the assumptions used in the analysis. Also, the Company has experienced periods when State regulators have extended the periods during which certain standard credit and collection activities of utility companies are suspended. In periods when account write-offs exceed estimated levels, the Company adjusts the Provision for Uncollectible Accounts to maintain an adequate Allowance for Uncollectible Accounts balance. The following table shows the balances and activity in the Companys Allowance for Uncollectible Accounts for 20012003.
ALLOWANCE FOR UNCOLLECTIBLE ACCOUNTS
Balance at Beginning of Period |
Additions |
Accounts Written Off |
Balance at End of Period | ||||||||||||
(A) Provision |
Recoveries |
||||||||||||||
Year Ended December 31, 2003 |
|||||||||||||||
Electric |
$ | 271,679 | $ | 719,761 | $ | 87,922 | $ | 683,930 | $ | 395,432 | |||||
Gas |
100,300 | 609,037 | 67,398 | 643,771 | 132,964 | ||||||||||
Other |
61,630 | 90,000 | | 138,550 | 13,080 | ||||||||||
$ | 433,609 | $ | 1,418,798 | $ | 155,320 | $ | 1,466,251 | $ | 541,476 | ||||||
Year Ended December 31, 2002 |
|||||||||||||||
Electric |
$ | 456,850 | $ | 323,401 | $ | 138,010 | $ | 646,582 | $ | 271,679 | |||||
Gas |
142,843 | 294,051 | 64,570 | 401,164 | 100,300 | ||||||||||
Other |
| 61,630 | | | 61,630 | ||||||||||
$ | 599,693 | $ | 679,082 | $ | 202,580 | $ | 1,047,746 | $ | 433,609 | ||||||
Year Ended December 31, 2001 |
|||||||||||||||
Electric |
$ | 452,872 | $ | 940,590 | $ | 86,161 | $ | 1,022,773 | $ | 456,850 | |||||
Gas |
142,810 | 656,953 | 54,162 | 711,082 | 142,843 | ||||||||||
Other |
| | | | | ||||||||||
$ | 595,682 | $ | 1,597,543 | $ | 140,323 | $ | 1,733,855 | $ | 599,693 | ||||||
(A) | The amounts charged to the Provision for Uncollectible Accounts include amounts related to the energy commodity portion of accounts receivable which are recovered through rate reconciling mechanisms. |
67
Note 8: Income Taxes
Federal Income Taxes were provided for the following items for the years ended December 31, 2003, 2002 and 2001, respectively:
2003 |
2002 |
2001 |
||||||||||
Current Federal Tax Provision (000s): |
||||||||||||
Operating Income |
$ | (2,898 | ) | $ | 1,960 | $ | 3,566 | |||||
Amortization of Investment Tax Credits |
| (51 | ) | (153 | ) | |||||||
Total Current Federal Tax Provision |
(2,898 | ) | 1,909 | 3,413 | ||||||||
Deferred Federal Tax Provision (000s) |
||||||||||||
Accelerated Tax Depreciation |
3,329 | 68 | (401 | ) | ||||||||
Abandoned Properties |
(778 | ) | (705 | ) | (767 | ) | ||||||
Accrued Revenue |
2,034 | 1,118 | 691 | |||||||||
Allowance for Funds Used During Construction |
(23 | ) | (32 | ) | (42 | ) | ||||||
Post Retirement Benefits Other Than Pensions |
(217 | ) | (38 | ) | (34 | ) | ||||||
Deferred Pensions |
55 | 86 | 89 | |||||||||
Regulatory Assets and Liabilities |
146 | 70 | 37 | |||||||||
Insurance Proceeds |
1,172 | | | |||||||||
Contributions in Aid of Construction |
(201 | ) | (231 | ) | (251 | ) | ||||||
Other, net |
51 | (47 | ) | 115 | ||||||||
Total Deferred Federal Tax Provision |
5,568 | 289 | (563 | ) | ||||||||
Total Federal Tax Provision |
$ | 2,670 | $ | 2,198 | $ | 2,850 | ||||||
The components of the Federal and State income tax provisions reflected as operating expenses in the accompanying consolidated statements of earnings for the years ended December 31, 2003, 2002 and 2001 were as follows:
Federal and State Tax Provisions (000s) |
2003 |
2002 |
2001 |
|||||||||
Federal |
||||||||||||
Current |
$ | (2,898 | ) | $ | 1,960 | $ | 3,566 | |||||
Deferred |
5,568 | 289 | (563 | ) | ||||||||
Amortization of Investment Tax Credits |
| (51 | ) | (153 | ) | |||||||
Total Federal Tax Provision |
2,670 | 2,198 | 2,850 | |||||||||
State |
||||||||||||
Current |
74 | (275 | ) | 615 | ||||||||
Deferred |
807 | 567 | (44 | ) | ||||||||
Total State Tax Provision |
881 | 292 | 571 | |||||||||
Total Provision for Federal and State Income Taxes |
$ | 3,551 | $ | 2,490 | $ | 3,421 | ||||||
In 2001, the Company provided for a deferred tax benefit of $1.3 million on the capital loss from the write-down of its investment in Enermetrix. The Company recognized the benefit in 2002 of this capital loss as a carryback against capital gains in its tax return. Also in the third quarter of 2001, the Company recorded a deferred tax benefit of $1.4 million as adjustments to deferred taxes recognized when the Company recorded the extraordinary item.
68
The differences between the Companys provisions for Income Taxes and the provisions calculated at the statutory federal tax rate, expressed in percentages, are shown below:
2003 |
2002 |
2001 |
|||||||
Statutory Federal Income Tax Rate |
34 | % | 34 | % | 34 | % | |||
Income Tax Effects of: |
|||||||||
State Income Taxes, Net of Federal Benefit |
5 | 2 | 4 | ||||||
Investment Tax Credit Amortization |
| (1 | ) | (1 | ) | ||||
Abandoned Property |
(7 | ) | (8 | ) | (6 | ) | |||
Other, Net |
(1 | ) | 2 | (1 | ) | ||||
Effective Income Tax Rate |
31 | % | 29 | % | 30 | % | |||
Temporary differences which gave rise to deferred tax assets and liabilities are shown below:
Deferred Income Taxes (000s) |
2003 |
2002 |
||||||
Accelerated Depreciation |
$ | 26,118 | $ | 24,140 | ||||
Deferred Restructuring Charges |
10,070 | 7,820 | ||||||
Regulatory Assets and Liabilities |
12,750 | 12,049 | ||||||
Employee Benefit Plan |
3,546 | 3,624 | ||||||
Contributions in Aid to Construction |
(3,901 | ) | (3,654 | ) | ||||
Retirement Loss |
3,613 | 2,924 | ||||||
Abandoned Property |
1,783 | 2,547 | ||||||
Percentage Repair Allowance |
2,407 | 2,038 | ||||||
Other |
514 | 806 | ||||||
Total Deferred Income Tax Liabilities |
$ | 56,900 | $ | 52,294 | ||||
Note 9: Pension and Postretirement Benefit Plans
The Company provides certain pension and postretirement benefit plans for its retirees and current employees including defined benefit plans, postretirement health and welfare plans, a supplemental executive retirement plan and an employee 401(k) savings plan.
Defined Benefit Pension PlanThe Company sponsors the Unitil Corporation Retirement Plan (the Plan), a defined benefit pension plan covering substantially all its employees. Under the Plan retirement benefits are based upon an employees level of compensation and length of service. The Company records annual expense and accounts for its defined benefit pension plan in accordance with SFAS No. 87, Employers Accounting for Pensions.
The following table represents information on the Plans Projected Benefit Obligation (PBO), fair value of plan assets and the Plans funded status. The PBO includes expectations of future employee service and compensation increases.
Change in PBO (000s) |
2003 |
2002 |
||||||
PBO at Beginning of Year |
$ | 42,745 | $ | 38,922 | ||||
Service Cost |
1,151 | 1,116 | ||||||
Interest Cost |
2,940 | 2,797 | ||||||
Plan Amendments |
| 77 | ||||||
Benefits Paid |
(2,270 | ) | (2,165 | ) | ||||
Actuarial (Gain) or Loss |
2,734 | 1,998 | ||||||
PBO at End of Year |
$ | 47,300 | $ | 42,745 | ||||
69
Change in Plan Assets (000s): |
2003 |
2002 |
||||||
Fair Value of Plan Assets at Beginning of Year |
$ | 34,244 | $ | 40,943 | ||||
Actual Return on Plan Assets |
6,163 | (4,534 | ) | |||||
Employer Contributions |
1,200 | | ||||||
Benefits Paid |
(2,270 | ) | (2,165 | ) | ||||
Fair Value of Plan Assets at End of Year |
$ | 39,337 | $ | 34,244 | ||||
PBO and Funded Status (000s): |
2003 |
2002 |
||||||
Fair Value of Plan Assets |
$ | 39,337 | $ | 34,244 | ||||
PBO |
47,300 | 42,745 | ||||||
Funded Status |
(7,963 | ) | (8,501 | ) | ||||
Unrecognized Net (Gain) Loss |
18,118 | 18,461 | ||||||
Unrecognized Transition (Asset) Obligation |
| | ||||||
Unrecognized Prior Service Cost |
817 | 919 | ||||||
Net Amount Recognized as Prepaid Pension Asset |
$ | 10,972 | $ | 10,879 | ||||
The following table represents information on the Plans Accumulated Benefit Obligation (ABO), its funded status, the Companys Additional Minimum Liability (AML) and associated Regulatory Assets. The ABO is the Plans obligation for employee service provided through December 31, 2003. An unfunded ABO represents an amount to be recognized as an additional minimum liability.
ABO and Funded Status (000s): |
2003 |
2002 |
||||||
ABO |
$ | 40,609 | $ | 36,259 | ||||
Fair Value of Plan Assets |
(39,337 | ) | (34,244 | ) | ||||
Unfunded ABO/AML (Recognized as Regulatory Asset) |
$ | 1,272 | $ | 2,015 | ||||
In December 2003 and 2002, FG&E and UES filed requests with their respective state regulatory commissions for approval of an accounting order to mitigate certain accounting requirements related to pension plan assets which had been triggered by the substantial decline in the capital markets. FG&E and UES were granted approval of this regulatory accounting treatment in January 2003 and 2004. As a result of these approvals, the Company has recorded as a Regulatory Asset the amount of the Plans unfunded ABO plus one dollar. These approvals allow FG&E and UES to treat its AML as Regulatory Assets under SFAS No. 71 and avoid the reduction in equity through comprehensive income that would otherwise be required by SFAS No. 87. These regulatory Orders do not pre-approve the amount of pension expense to be recovered in future rates. Such recovery will be subject to review and approval in future rate proceedings.
The following tables show the components of net periodic pension cost (income), (NPPC), as well as key actuarial assumptions used in determining the various pension plan values:
Components of NPPC (000s) |
2003 |
2002 |
2001 |
|||||||||
Service Cost |
$ | 1,151 | $ | 1,116 | $ | 914 | ||||||
Interest Cost |
2,940 | 2,797 | 2,639 | |||||||||
Expected Return on Plan Assets |
(3,573 | ) | (4,181 | ) | (4,439 | ) | ||||||
Amortization of Prior Service Cost |
102 | 102 | 96 | |||||||||
Amortization of Transition (Asset) Obligation |
| | 84 | |||||||||
Amortization of Net (Gain) Loss |
487 | | (10 | ) | ||||||||
Subtotal NPPC |
1,107 | (166 | ) | (716 | ) | |||||||
Amounts Capitalized and Deferred |
(758 | ) | 98 | (24 | ) | |||||||
NPPC Recognized |
$ | 349 | $ | (68 | ) | $ | (740 | ) | ||||
70
Included in the 2003 amount above for Amounts Capitalized and Deferred is $350 thousand deferred and recorded as a Regulatory Asset on the Companys Balance Sheet. The remaining amount in 2003 and the amounts in 2002 and 2001 represent amounts capitalized to construction overheads.
Key Assumptions (Weighted Average) |
2003 |
2002 |
2001 |
||||||
Used to Determine Benefit Obligations at December 31: |
|||||||||
Discount Rate |
6.50 | % | 7.00 | % | 7.25 | % | |||
Rate of Compensation Increase |
3.50 | % | 4.00 | % | 4.00 | % | |||
Used to Determine NPPC for years ended December 31: |
|||||||||
Discount Rate |
7.00 | % | 7.25 | % | 7.75 | % | |||
Expected Long-Term Rate of Return on Plan Assets |
8.75 | % | 9.25 | % | 9.25 | % | |||
Rate of Compensation Increase |
4.00 | % | 4.00 | % | 4.00 | % |
The following table represents the Plans weighted-average investment asset allocations at December 31:
Target 2004 |
Actual Allocation at December 31 |
||||||||||
2003 |
2002 |
2001 |
|||||||||
Equity Securities |
58-62% | 61 | % | 58 | % | 61 | % | ||||
Debt Securities |
38-42% | 39 | % | 42 | % | 39 | % | ||||
Real Estate |
0-2% | 0 | % | 0 | % | 0 | % | ||||
Other |
0-2% | 0 | % | 0 | % | 0 | % | ||||
Total |
100 | % | 100 | % | 100 | % | |||||
The desired investment objective is a long-term rate of return on assets that is approximately 6% greater than the assumed rate of inflation as measured by the Consumer Price Index. The target rate of return for the Plan has been based upon an analysis of historical returns supplemented with an economic and structural review for each asset class.
The following tables represent Plan contributions and benefit payments (000s):
2003 |
2002 |
2001 | |||||||
Employer Contributions |
$ | 1,200 | $ | | $ | | |||
Participant Contributions |
$ | | $ | | $ | | |||
Benefit Payments |
$ | 2,270 | $ | 2,165 | $ | 2,152 |
Estimated Future Benefit Payments | ||||||||||
2004 |
2005 |
2006 |
2007 |
2008 |
2009-2013 | |||||
$2,289 | $2,352 | $2,380 | $2,457 | $2,616 | $15,017 |
Postretirement BenefitsPostretirement BenefitsPrior to October 1, 2003, the Company funded certain postretirement benefits through the Unitil Retiree Trust (URT). URT was an organization of retirees, incorporated in 1993 to provide social, health and welfare benefits to its members, who are eligible former employees of the Company. URT was under the direction of an independent Board of Trustees whose voting members were comprised of former employees of the Company, elected by and from the membership of URT.
URT was determined to be a Variable Interest Entity (VIE) under Financial Interpretation No. 46 (FIN 46) as discussed above in Note 1. In the fourth quarter of 2003, URT was dissolved by a vote of its trustees and the Company assumed the obligations of URT as of October 1, 2003. At October 1, 2003, the Transition Obligation for benefits previously provided by URT was $29.2 million and this obligation is being recognized on a delayed basis over the average remaining service period of active participants, not to exceed 20 years. In addition, the Company made payments of $1.3 million, $1.2 million and $1.0 million in 2003, 2002 and 2001 respectively, to the Unitil Retiree Trust.
71
The Company also sponsors the Unitil Employee Health and Welfare Benefits Plan to provide health care and life insurance benefits to active employees. Effective January 1, 2004, this plan was amended to provide certain healthcare and life insurance benefits to Company retirees following their retirement (PBOP Plan).
The Company has established Voluntary Employee Benefit Trusts, into which it intends to fund contributions to the PBOP Plan beginning in the first quarter of 2004. The Company expects to recover these amounts as part of normal operating expenses in utility rates. In January 2004, FG&E and UES received approval in their respective jurisdictions from their regulators to defer the amount of current PBOP cost above that which is currently recovered in rates until the Company can complete the necessary filings for retail rate cost recovery. The Company expects to complete these filings in 2004.
The following table represents information on the PBOP Plans fair value of plan assets and the PBOP Plans funded status. The PBO includes expectations of future employee service and compensation increases.
Change in PBO (000s) |
2003 |
2002 |
||||||
PBO at Beginning of Year |
$ | 837 | $ | 644 | ||||
Service Cost |
246 | 51 | ||||||
Interest Cost |
558 | 46 | ||||||
Plan Amendments |
29,165 | | ||||||
Benefits Paid |
(331 | ) | (13 | ) | ||||
Actuarial (Gain) or Loss |
1,516 | 109 | ||||||
PBO at End of Year |
$ | 31,991 | $ | 837 | ||||
Change in Plan Assets (000s): |
||||||||
Fair Value of Plan Assets at Beginning of Year |
$ | | $ | | ||||
Actual Return on Plan Assets |
| | ||||||
Employer Contributions |
331 | 13 | ||||||
Benefits Paid |
(331 | ) | (13 | ) | ||||
Fair Value of Plan Assets at End of Year |
$ | | $ | | ||||
Obligation and Funded Status (000s): |
||||||||
Fair Value of Plan Assets |
$ | | $ | | ||||
PBO |
31,991 | 837 | ||||||
Funded Status |
(31,991 | ) | (837 | ) | ||||
Unrecognized Net (Gain) Loss |
1,633 | 118 | ||||||
Unrecognized Transition (Asset) Obligation |
193 | 214 | ||||||
Unrecognized Prior Service Cost |
28,799 | | ||||||
Net Amount Recognized |
$ | (1,366 | ) | $ | (505 | ) | ||
The components of net periodic postretirement benefit cost (NPPBC) are as follows:
Components of NPPBC (000s) |
2003 |
2002 |
||||||
Service Cost |
$ | 246 | $ | 51 | ||||
Interest Cost |
558 | 46 | ||||||
Expected Return on Plan Assets |
| | ||||||
Amortization of Prior Service Cost |
365 | | ||||||
Amortization of Transition (Asset) Obligation |
21 | 22 | ||||||
Amortization of Net (Gain) Loss |
2 | | ||||||
Subtotal NPPBC |
1,192 | 119 | ||||||
Amounts Capitalized and Deferred |
(942 | ) | (44 | ) | ||||
NPPBC Recognized |
$ | 250 | $ | 75 | ||||
72
Included in the 2003 amount above for Amounts Capitalized and Deferred is $457 thousand deferred and recorded as a Regulatory Asset on the Companys Balance Sheet. The remaining amount in 2003 and the amounts in 2002 and 2001 represent amounts capitalized to construction overheads.
In addition to the amounts shown above, the Company also recorded expense for payments to URT of $1.3 million and $1.2 million in 2003 and 2002, respectively.
The following table includes assumptions used in determining the various PBOP values.
Weighted-Average Assumptions |
2003 |
2002 |
||||
Used to Determine Benefit Obligations at December 31: |
||||||
Discount Rate |
6.50 | % | 7.00 | % | ||
Rate of Compensation Increase |
N/A | N/A | ||||
Health Care Cost Trend Rate Assumed for Next Year |
9.00 | % | 10.00 | % | ||
Ultimate Health Care Cost Trend Rate |
4.00 | % | 4.00 | % | ||
Year That the Health Care Cost Trend Rate Reaches the Ultimate Trend Rate |
2013 | 2013 | ||||
Used to Determine NPPBC for years ended December 31: |
||||||
Discount Rate |
7.00 | % | 7.25 | % | ||
Expected Long-Term Rate of Return on Plan Assets |
N/A | N/A | ||||
Rate of Compensation Increase |
N/A | N/A | ||||
Health Care Cost Trend Rate Assumed for Next Year |
10.00 | % | 11.00 | % | ||
Ultimate Health Care Cost Trend Rate |
4.00 | % | 4.00 | % | ||
Year That the Health Care Cost Trend Rate Reaches the Ultimate Trend Rate |
2013 | 2019 |
Assumed health care cost trend rates have a significant effect on the amounts reported. A one-percentage-point change in the assumed health care cost trend rates would have the following effects:
1-Percentage Point Increase (000s) |
2003 |
2002 |
||||||
Effect on Total of Service and Interest Cost |
$ | 150 | $ | 14 | ||||
Effect on Postretirement Benefit Obligation |
$ | 4,968 | $ | 95 | ||||
1-Percentage Point Decrease (000s) |
||||||||
Effect on Total of Service and Interest Cost |
$ | (118 | ) | $ | (12 | ) | ||
Effect on Postretirement Benefit Obligation |
$ | (4,007 | ) | $ | (83 | ) |
The following tables represent PBOP contributions and benefit payments made in 2002-2003 and estimated future benefit payments. The employer contributions and benefit payments listed below reflect the Companys assumptions of the URT obligations, effective October 1, 2003:
(000s) |
Expected 2004 |
2003 |
2002 | ||||||
Employer Contributions |
$ | 1,348 | $ | 331 | $ | 13 | |||
Participant Contributions |
$ | | $ | | $ | |
2003 |
2002 | |||||
Benefit Payments |
$ | 331 | $ | 13 |
Estimated Future Benefit Payments | ||||||||||
2004 |
2005 |
2006 |
2007 |
2008 |
2009-2013 | |||||
$1,348 | $1,428 | $1,504 | $1,589 | $1,687 | $9,904 |
Supplemental Executive Retirement PlanThe Company also sponsors an unfunded retirement plan, the Unitil Corporation Supplemental Executive Retirement Plan (the SERP), with participation limited to executives selected by the Board of Directors. The cost associated with the SERP amounted to approximately $140,000, $137,000 and $136,000 for the years ended December 31, 2003, 2001 and 2000, respectively.
73
The following table represents information on the SERPs Projected Benefit Obligation (PBO), fair value of plan assets and the plans funded status. The PBO includes expectations of future employee service and compensation increases.
Change in PBO (000s) |
2003 |
2002 |
||||||
PBO Obligation at Beginning of Year |
$ | 1,029 | $ | 935 | ||||
Service Cost |
59 | 64 | ||||||
Interest Cost |
69 | 59 | ||||||
Plan Amendments |
40 | | ||||||
Benefits Paid |
(64 | ) | (38 | ) | ||||
Actuarial (Gain) or Loss |
60 | 9 | ||||||
PBO at End of Year |
$ | 1,193 | $ | 1,029 | ||||
Change in Plan Assets (000s): |
||||||||
Fair Value of Plan Assets at Beginning of Year |
$ | | $ | | ||||
Actual Return on Plan Assets |
| | ||||||
Employer Contributions |
64 | 38 | ||||||
Benefits Paid |
(64 | ) | (38 | ) | ||||
Fair Value of Plan Assets at End of Year |
$ | | $ | | ||||
Obligation and Funded Status (000s): |
||||||||
Fair Value of Plan Assets |
$ | | $ | | ||||
PBO |
1,193 | 1,029 | ||||||
Funded Status |
(1,193 | ) | (1,029 | ) | ||||
Unrecognized Net (Gain) Loss |
213 | 157 | ||||||
Unrecognized Transition (Asset) Obligation |
51 | 68 | ||||||
Unrecognized Prior Service Cost |
17 | (25 | ) | |||||
Net Amount Recognized |
$ | (912 | ) | $ | (829 | ) | ||
The components of net periodic SERP cost are as follows:
Components of Net Periodic SERP Cost (000s) |
2003 |
2002 |
2001 |
|||||||||
Service Cost |
$ | 59 | $ | 64 | $ | 61 | ||||||
Interest Cost |
69 | 59 | 60 | |||||||||
Expected Return on Plan Assets |
| | | |||||||||
Amortization of Prior Service Cost |
(5 | ) | (3 | ) | (4 | ) | ||||||
Amortization of Transition Obligation |
17 | 17 | 17 | |||||||||
Amortization of Net Loss |
| | 2 | |||||||||
Net Periodic SERP Cost |
$ | 140 | $ | 137 | $ | 136 | ||||||
The following table includes information regarding Unitils SERP costs as well as key actuarial assumptions:
Additional Information (000s): |
2003 |
2002 |
2001 |
|||||||||
Accumulated Benefit Obligation |
$ | 675 | $ | 752 | $ | 704 | ||||||
Weighted-Average Assumptions |
||||||||||||
Used to Determine Benefit Obligations at December 31: |
||||||||||||
Discount Rate |
6.50 | % | 7.00 | % | 7.25 | % | ||||||
Rate of Compensation Increase |
3.50 | % | 4.00 | % | 4.00 | % | ||||||
Used to Determine Net Periodic SERP Cost for years ended December 31 |
||||||||||||
Discount Rate |
7.00 | % | 7.25 | % | 7.75 | % | ||||||
Expected Long-Term Rate of Return on Plan Assets |
N/A | N/A | N/A | |||||||||
Rate of Compensation Increase |
4.00 | % | 4.00 | % | 4.00 | % |
74
The following tables represent SERP contributions and benefit payments made in 2001 2003 and estimated future benefit payments (000s):
2003 |
2002 |
2001 | |||||||
Employer Contributions |
$ | 64 | $ | 38 | $ | 38 | |||
Participant Contributions |
$ | | $ | | $ | | |||
2003 |
2002 |
2001 | |||||||
Benefit Payments |
$ | 64 | $ | 38 | $ | 38 |
Estimated Future Benefit Payments | ||||||||||
2004 |
2005 |
2006 |
2007 |
2008 |
2009-2013 | |||||
$70 | $68 | $66 | $64 | $62 | $471 |
Employee 401(k) Tax Deferred Savings PlanThe Company sponsors the Unitil Corporation Tax Deferred Savings and Investment Plan (the 401(k)) under Section 401(k) of the Internal Revenue Code, covering substantially all of the Companys employees. Participants may elect to defer current compensation by contributing to the plan. The Company matches contributions, with a maximum matching contribution of 3% of current compensation. Employees may direct, at their sole discretion, the investment of their savings plan balances (both the employer and employee portions) into a variety of investment options, including a Company Common Stock fund. Participants are 100% vested in contributions made on their behalf, once they have completed three years of service. The Companys share of contributions to the plan was $487,000, $483,000, and $446,000 for the years ended December 31, 2003, 2002, and 2001, respectively.
Note 10: Earnings Per Share
The following table reconciles basic and diluted earnings per share, assuming all dilutive outstanding stock options were converted to common shares per SFAS No. 128, Earnings per Share.
(000s except share and per share data) |
2003 |
2002 |
2001 |
|||||||
Income before Extraordinary Item |
$ | 7,722 | $ | 5,835 | $ | 4,770 | ||||
Extraordinary Item, net of tax |
| | (3,937 | ) | ||||||
Earnings Available to Common Shareholders |
$ | 7,722 | $ | 5,835 | $ | 833 | ||||
Weighted Average Common Shares OutstandingBasic |
4,877,933 | 4,743,696 | 4,743,576 | |||||||
Plus: Diluted Effect of Incremental Sharesfrom Assumed Conversion |
21,555 | 18,470 | 16,246 | |||||||
Weighted Average Common Shares OutstandingDiluted |
4,899,488 | 4,762,166 | 4,759,822 | |||||||
Earnings per Share: |
||||||||||
Income before Extraordinary Item |
$ | 1.58 | $ | 1.23 | $ | 1.01 | ||||
Extraordinary Item, net of tax |
| $ | | $ | (0.83 | ) | ||||
Earnings Available to Common Shareholders |
$ | 1.58 | $ | 1.23 | $ | 0.18 | ||||
Weighted average options to purchase 72,500, 54,000 and 114,000 shares of Common Stock were outstanding during 2003, 2002 and 2001, respectively, but were not included in the computation of Weighted Average Common Shares Outstanding for purposes of computing diluted earnings per share, because the effect would have been antidilutive.
75
Note 11: Segment Information
Unitil reported four segments: utility electric operations, utility gas operations, other, and non-regulated. Unitil is engaged principally in the retail sale and distribution of electricity in New Hampshire and both electricity and natural gas service in Massachusetts through its retail distribution subsidiaries UES and FG&E. Unitil Resources provides an energy brokering service, through Usource, as well as various energy consulting activities. Unitil Realty and Unitil Service provide centralized facilities, operations and administrative services to support the affiliated Unitil companies.
Unitil Realty and Unitil Service are included in the Other column of the table below. Unitil Service provides centralized management and administrative services, including information systems management and financial record keeping. Unitil Realty owns certain real estate, principally the Companys corporate headquarters. Unitil Resources and Usource are included in the Non-Regulated column below.
The segments follow the same accounting policies as described in the Summary of Significant Accounting Policies. Intersegment sales take place at cost and the effects of all intersegment and/or intercompany transactions are eliminated in the consolidated financial statements. Segment profit or loss is based on profit or loss from operations after income taxes. Expenses used to determine operating income before taxes are charged directly to each segment or are allocated based on factors under PUHCA rules and contained in cost-of-service studies, which were included in rate applications approved by the NHPUC and MDTE. Assets allocated to each segment are based upon specific identification of such assets provided by Company records.
The following table provides significant segment financial data for the years ended December 31, 2003, 2002 and 2001:
Year Ended December 31, 2003 (000s) |
Electric |
Gas |
Other |
Non- Utility |
Eliminations |
Total |
|||||||||||||||||
Revenues |
$ | 190,864 | $ | 28,612 | $ | 30 | $ | 1,148 | $ | 220,654 | |||||||||||||
Segment Profit (Loss) |
6,998 | 1,102 | 254 | (632 | ) | 7,722 | |||||||||||||||||
Identifiable Segment Assets |
388,683 | 84,441 | 26,335 | 1,777 | (17,359 | ) | 483,877 | ||||||||||||||||
Capital Expenditures |
17,318 | 4,083 | 519 | 19 | 21,939 | ||||||||||||||||||
Year Ended December 31, 2002 (000s) |
|||||||||||||||||||||||
Revenues |
$ | 167,317 | $ | 20,283 | $ | 30 | $ | 756 | $ | 188,386 | |||||||||||||
Segment Profit (Loss) |
6,249 | (206 | ) | 456 | (664 | ) | 5,835 | ||||||||||||||||
Identifiable Segment Assets |
385,293 | 85,703 | 24,651 | 1,958 | (15,903 | ) | 481,702 | ||||||||||||||||
Capital Expenditures |
16,676 | 3,859 | 290 | | 20,825 | ||||||||||||||||||
Year Ended December 31, 2001 (000s) |
|||||||||||||||||||||||
Revenues |
$ | 183,780 | $ | 22,828 | $ | 30 | $ | 384 | $ | 207,022 | |||||||||||||
Segment Profit (Loss) |
8,771 | (771 | ) | 172 | (1,002 | ) | 7,170 | ||||||||||||||||
Investment Write-down, net of tax |
| | (2,400 | ) | | (2,400 | ) | ||||||||||||||||
Extraordinary Item, net of tax |
(3,937 | ) | | | | (3,937 | ) | ||||||||||||||||
Identifiable Segment Assets |
288,013 | 87,851 | 23,679 | 834 | (23,615 | ) | 376,762 | ||||||||||||||||
Capital Expenditures |
14,328 | 4,817 | 745 | | 19,890 |
76
Note 12: Quarterly Financial Information (unaudited; 000s except per share data)
Quarterly earnings per share may not agree with the annual amounts due to rounding. Basic and Diluted Earnings per Share are the same for the periods presented.
Three Months Ended | ||||||||||||||||||||||||
March 31, |
June 30, |
September 30, |
December 31, | |||||||||||||||||||||
2003 |
2002 |
2003 |
2002 |
2003 |
2002 |
2003 |
2002 | |||||||||||||||||
Total Operating Revenues |
$ | 64,807 | $ | 44,289 | $ | 49,624 | $ | 45,117 | $ | 52,892 | $ | 48,007 | $ | 53,331 | $ | 50,573 | ||||||||
Operating Income |
$ | 4,672 | $ | 3,685 | $ | 3,372 | $ | 3,162 | $ | 3,352 | $ | 3,310 | $ | 4,054 | $ | 3,091 | ||||||||
Net Income Applicable to Common |
$ | 2,479 | $ | 1,695 | $ | 1,498 | $ | 1,290 | $ | 1,438 | $ | 1,378 | $ | 2,388 | $ | 1,472 | ||||||||
Per Share Data: | ||||||||||||||||||||||||
Earnings Per Common Share |
$ | 0.52 | $ | 0.36 | $ | 0.30 | $ | 0.27 | $ | 0.30 | $ | 0.29 | $ | 0.46 | $ | 0.31 | ||||||||
Dividends Paid Per Common Share |
$ | 0.345 | $ | 0.345 | $ | 0.345 | $ | 0.345 | $ | 0.345 | $ | 0.345 | $ | 0.345 | $ | 0.345 |
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None
Item 9A. Controls and Procedures
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 Companys management, including the Companys Chief Executive Officer, Chief Financial Officer and Controller, of the effectiveness of the design and operation of the Companys 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 Companys disclosure controls and procedures are effective in timely alerting them to material information relating to the Company required to be included in the Companys periodic SEC filings.
There have been no significant changes in the Companys internal controls or in other factors, which could significantly affect internal controls subsequent to the date the Company carried out its evaluation.
77
Item 10. Directors and Executive Officers of the Registrant
Information required by this Item is set forth in the Information About Directors section of the 2003 Proxy Statement as filed with the Securities and Exchange Commission on February 27, 2004. Information regarding the Companys Code of Ethics is set forth in the Corporate Governance and Policies of the Board section of the 2003 Proxy Statement as filed with the Securities and Exchange Commission on February 27, 2004.
Item 11. Executive Compensation
Information required by this Item is set forth in the Report of the Compensation Committee section of the 2003 Proxy Statement as filed with the Securities and Exchange Commission on February 27, 2004.
Item 12. Security Ownership of Certain Beneficial Owners and Management
Information required by this Item is set forth in the Information About Directors section of the 2003 Proxy Statement as filed with the Securities and Exchange Commission on February 27, 2004 as well as the Equity Compensation Plan Benefit Information table in Part II, Item 5 of this Form 10-K.
Item 13. Certain Relationships and Related Transactions
None
Item 14. Principal Accountant Fees and Services
Information required by this Item is set forth in the Report of the Audit Committee section of the 2003 Proxy Statement as filed with the Securities and Exchange Commission on February 27, 2004.
78
Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a) (1) and (2) LIST OF FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES
The following financial statements are included herein under Part II, Item 8, Financial Statements and Supplementary Data:
| Report of Independent Certified Public Accountants |
| Consolidated Balance SheetsDecember 31, 2003 and 2002 |
| Consolidated Statements of Earnings for the years ended December 31, 2003, 2002, and 2001 |
| Consolidated Statements of CapitalizationDecember 31, 2003 and 2002 |
| Consolidated Statements of Cash Flows for the years ended December 31, 2003, 2002, and 2001 |
| Consolidated Statements of Changes in Common Stock Equity for the years ended December 31, 2003, 2002, and 2001 |
| Notes to Consolidated Financial Statements |
All other schedules for which provision is made in the applicable accounting regulation of the Securities and Exchange Commission are not required under the related instructions, are not applicable, or information required is included in the financial statements or notes thereto and, therefore, have been omitted.
(3) LIST OF EXHIBITS
Exhibit Number |
Description of Exhibit |
Reference* | ||
3.1 | Articles of Incorporation of the Company. | Exhibit 3.1 to Form S-14 Registration Statement 2-93769 | ||
3.2 | Articles of Amendment to the Articles of Incorporation Filed on March 4, 1992 and April 30, 1992. | Exhibit 3.2 to Form 10-K for 1991 | ||
3.3 | By-laws of the Company. | Exhibit 3.2 to Form S-14 Registration Statement 2-93769 | ||
3.4 | Articles of Exchange of Concord Electric Company (CECo), Exeter & Hampton Electric Company (E&H) and the Company. | Exhibit 3.3 to 10-K for 1984 | ||
3.5 | Articles of Exchange of CECo, E&H, and the CompanyStipulation of the Parties Relative to Recordation and Effective Date. | Exhibit 3.4 to Form 10-K for 1984 | ||
3.6 | The Agreement and Plan of Merger dated March 1, 1989 among the Company, Fitchburg Gas and Electric Light Company (FG&E) and UMC Electric Co., Inc. (UMC). | Exhibit 25(b) to Form 8-K dated March 1, 1989 | ||
3.7 | Amendment No. 1 to The Agreement and Plan of Merger dated March 1, 1989 among the Company, FG&E and UMC. | Exhibit 28(b) to Form 8-K dated December 14, 1989 |
79
Exhibit Number |
Description of Exhibit |
Reference* | ||
4.1 | Twelfth Supplemental Indenture of Unitil Energy Systems, Inc., successor to Concord Electric Company, dated as of December 2, 2002, amending and restating the Concord Electric Company Indenture of Mortgage and Deed of Trust dated as of July 15, 1958. | Exhibit 4.1 to Form 10-K for 2002 | ||
4.2 | FG&E Purchase Agreement dated March 20, 1992 for the 8.55% Senior Notes due March 31, 2004. | Exhibit 4.18 to Form 10-K for 1993 | ||
4.3 | FG&E Note Agreement dated November 30, 1993 for the 6.75% Notes due November 23, 2023. | Exhibit 4.18 to Form 10-K for 1993 | ||
4.4 | FG&E Note Agreement dated January 26, 1999 for the 7.37% Notes due January 15, 2028. | Exhibit 4.25 to Form 10-K for 1999 | ||
4.5 | FG&E Note Agreement dated June 1, 2001 for the 7.98% Notes due June 1, 2031. | Exhibit 4.6 to Form 10-Q for June 30, 2001 | ||
4.6 | Unitil Realty Corp. Note Purchase Agreement dated July 1, 1997 for the 8.00% Senior Secured Notes due August 1, 2017. | Exhibit 4.22 to Form 10-K for 1997 | ||
4.7 | FG&E Note Agreement dated October 15, 2003 for the 6.79% Notes due October 15, 2025. | Filed herewith | ||
10.1 | Unitil System Agreement dated June 19, 1986 providing that Unitil Power will supply wholesale requirements electric service to CECo and E&H. | Exhibit 10.9 to Form 10-K for 1986 | ||
10.2 | Supplement No. 1 to Unitil System Agreement providing that Unitil Power will supply wholesale requirements electric service to CECo and E&H. | Exhibit 10.8 to Form 10-K for 1987 | ||
10.3 | Transmission Agreement between Unitil Power Corp. and Public Service Company of New Hampshire, effective November 11, 1992. | Exhibit 10.6 to Form 10-K for 1993 | ||
10.4 | Form of Severance Agreement between the Company and the persons listed at the end of such Agreement. | Exhibit 10.1 to Form 10-Q for September 30, 2003 | ||
10.5 | Form of Severance Agreement between the Company and the persons listed at the end of such Agreement. | Exhibit 10.2 to Form 10-Q for September 30, 2003 | ||
10.6 | Key Employee Stock Option Plan effective January 17, 1989. | Exhibit 10.56 to Form 8 dated April 12, 1989 | ||
10.7 | Unitil Corporation Key Employee Stock Option Plan Award Agreement. | Exhibit 10.63 to Form 10-K for 1989 | ||
10.8 | Unitil Corporation Management Performance Compensation Plan. | Exhibit 10.94 to Form 10-K/A for 1993 | ||
10.9 | Unitil Corporation Supplemental Executive Retirement Plan effective as of January 1, 1987. | Exhibit 10.95 to Form 10-K/A for 1993 | ||
10.10 | Unitil Corporation 1998 Stock Option Plan. | Exhibit 10.12 to Form 10-K for 1998 | ||
10.11 | Unitil Corporation Management Incentive Plan. | Exhibit 10.13 to Form 10-K for 1998 |
80
Exhibit Number |
Description of Exhibit |
Reference* | ||
10.12 | Entitlement Sale and Administrative Service Agreement with Select Energy. | Exhibit 10.14 to Form 10-K for 1999 | ||
10.13 | Purchase and Sale Agreement For New Haven Harbor. | Exhibit 10.15 to Form 10-K for 1999 | ||
10.14 | Labor Agreement effective June 1, 2000 between CECo and The International Brotherhood of Electrical Workers, Local Union No. 1837. | Exhibit 10.13 to Form 10-K for 2000 | ||
10.15 | Labor Agreement effective June 1, 2000 between E&H and The International Brotherhood of Electrical Workers, Local Union No. 1837. | Exhibit 10.14 to Form 10-K for 2000 | ||
10.16 | Labor Agreement effective June 1, 2000 between FG&E and The Utility Workers of America, AFL-CIO., Local Union No. B340, The Brotherhood of Utility Workers Council. | Exhibit 10.15 to Form 10-K for 2000 | ||
10.17 | Unitil Corporation 2003 Restricted Stock Plan. | Exhibit 10.16 to Form 10-K for 2002 | ||
10.18 | Portfolio Sale and Assignment and Transition Service and Default Service Supply Agreement By and Among Unitil Power Corp., Unitil Energy Systems, Inc. and Mirant Americas Energy Marketing, LP. | Exhibit 10.17 to Form 10-K for 2002 | ||
11.1 | Statement Re: Computation in Support of Earnings per Share For the Company. | Filed herewith | ||
12.1 | Statement Re: Computation in Support of Ratio of Earnings to Fixed Charges for the Company. | Filed herewith | ||
21.1 | Statement Re: Subsidiaries of Registrant. | Filed herewith | ||
23.1 | Consent of Independent Certified Public Accountants. | Filed herewith | ||
31.1 | Certification of Chief Executive Officer Pursuant to Rule 13a-14 of the Exchange Act, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | Filed herewith | ||
31.2 | Certification of Chief Financial Officer Pursuant to Rule 13a-14 of the Exchange Act, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | Filed herewith | ||
31.3 | Certification of Controller Pursuant to Rule 13a-14 of the Exchange Act, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | Filed herewith | ||
32.1 | Certifications of Chief Executive Officer, Chief Financial Officer and Controller Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. | Filed herewith |
* | The exhibits referred to in this column by specific designations and dates have heretofore been filed with the Securities and Exchange Commission under such designations and are hereby incorporated by reference. |
(b) Report on Form 8-K
On December 11, 2003, Unitil Corporation filed a Current Report on Form 8-K announcing that the Federal Bankruptcy Court presiding over the Mirant (MIRKQ) bankruptcy proceeding approved the settlement between Unitils New Hampshire based utility subsidiaries, Unitil Energy Systems, Inc. (UES) and Unitil Power Corp. (UPC), and Mirants subsidiary Mirant Americas Energy Marketing, L.P. (Mirant Americas).
81
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
UNITIL CORPORATION | ||||
Date February 27, 2004 |
By |
/s/ ROBERT G. SCHOENBERGER | ||
Robert G. Schoenberger Chairman of the Board Directors, Chief Executive Officer and President |
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
Signature |
Capacity |
Date | ||
/s/ ROBERT G. SCHOENBERGER Robert G. Schoenberger |
Principal Executive Officer; Director |
February 27, 2004 | ||
/s/ MARK H. COLLIN Mark H. Collin |
Principal Financial Officer |
February 27, 2004 | ||
/s/ MICHAEL J. DALTON Michael J. Dalton |
Director |
February 27, 2004 | ||
/s/ ALBERT H. ELFNER, III Albert H. Elfner, III |
Director |
February 27, 2004 | ||
/s/ ROSS B. GEORGE Ross B. George |
Director |
February 27, 2004 | ||
/s/ M. BRIAN OSHAUGHNESSY M. Brian OShaughnessy |
Director |
February 27, 2004 | ||
/s/ CHARLES H. TENNEY, III Charles H. Tenney, III |
Director |
February 27, 2004 | ||
/s/ DR. SARAH P. VOLL Dr. Sarah P. Voll |
Director |
February 27, 2004 | ||
/s/ EBEN S. MOULTON Eben S. Moulton |
Director |
February 27, 2004 | ||
/s/ DAVID P. BROWNELL David P. Brownell |
Director |
February 27, 2004 | ||
/s/ EDWARD F. GODFREY Edward F. Godfrey |
Director |
February 27, 2004 | ||
/s/ MICHAEL B. GREEN Michael B. Green |
Director |
February 27, 2004 |
82
CONFORMED COPY
Exhibit 4.7
FITCHBURG GAS AND ELECTRIC LIGHT COMPANY
$10,000,000 Aggregate Principal Amount of 6.79% Notes
due October 15, 2025
NOTE AGREEMENT
Dated as of October 15, 2003
TABLE OF CONTENTS
SECTION |
HEADING |
Page | ||
SECTION 1. |
AUTHORIZATION OF NOTES. |
1 | ||
SECTION 2. |
SALE AND PURCHASE OF NOTES. |
1 | ||
SECTION 3. |
CLOSING. |
1 | ||
SECTION 4. |
CONDITIONS TO CLOSING. |
2 | ||
Section 4.1. |
Representations and Warranties |
2 | ||
Section 4.2. |
Performance; No Default |
2 | ||
Section 4.3. |
Compliance Certificate |
2 | ||
Section 4.4. |
Regulatory Approvals |
2 | ||
Section 4.5. |
Legal Opinions |
2 | ||
Section 4.6. |
Proceedings and Documents |
2 | ||
Section 4.7. |
Private Placement Number |
2 | ||
Section 4.8. |
Payment of Special Counsel Fees. |
2 | ||
SECTION 5. |
REPRESENTATIONS AND WARRANTIES OF THE COMPANY. |
3 | ||
Section 5.1. |
Organization, Standing, Due Authorization |
3 | ||
Section 5.2. |
Capitalization |
3 | ||
Section 5.3. |
Subsidiaries |
3 | ||
Section 5.4. |
Qualification |
3 | ||
Section 5.5. |
Periodic Reports |
3 | ||
Section 5.6. |
Franchises; Etc |
4 | ||
Section 5.7. |
Financial Statements |
4 | ||
Section 5.8. |
Changes; Etc |
4 | ||
Section 5.9. |
Tax Returns and Payments |
5 | ||
Section 5.10. |
Title to Properties |
5 | ||
Section 5.11. |
Litigation; Etc |
5 | ||
Section 5.12. |
Compliance with Other Instruments, Etc |
5 | ||
Section 5.13. |
ERISA |
6 | ||
Section 5.14. |
Regulatory Jurisdiction and Approvals |
6 | ||
Section 5.15. |
Patents; Trademarks; Etc |
7 | ||
Section 5.16. |
Offer of Notes |
7 | ||
Section 5.17. |
Investment Company Act Status |
7 | ||
Section 5.18. |
Federal Reserve Regulations |
7 | ||
Section 5.19. |
Foreign Credit Restraints |
7 | ||
Section 5.20. |
Disclosure |
8 | ||
Section 5.21. |
Funded Indebtedness |
8 | ||
Section 5.22. |
Sale is Legal and Authorized |
8 | ||
Section 5.23. |
No Defaults |
8 |
-i-
Section 5.24. |
Compliance with Environmental Laws |
8 | ||
Section 5.25. |
Foreign Assets Control Regulations, Etc |
9 | ||
SECTION 6. |
USE OF PROCEEDS. |
9 | ||
SECTION 7. |
PURCHASERS REPRESENTATIONS. |
9 | ||
SECTION 8. |
REGISTRATION, TRANSFER AND SUBSTITUTION OF NOTES. |
11 | ||
Section 8.1. |
Note Register; Ownership of Notes |
11 | ||
Section 8.2. |
Transfer and Exchange of Notes |
11 | ||
Section 8.3. |
Replacement of Notes |
11 | ||
SECTION 9. |
PAYMENT ON NOTES |
12 | ||
SECTION 10. |
REDEMPTION OF NOTES |
12 | ||
Section 10.1. |
Sinking Fund Redemptions |
12 | ||
Section 10.2. |
Optional Redemption |
13 | ||
Section 10.3. |
Notice of Optional Redemptions |
13 | ||
Section 10.4. |
Selection of Notes for Redemption |
13 | ||
Section 10.5. |
Maturity; Surrender; Etc |
13 | ||
Section 10.6. |
Repurchase of Notes |
13 | ||
SECTION 11. |
COVENANTS |
14 | ||
Section 11.1. |
Punctual Payment |
14 | ||
Section 11.2. |
Prompt Payment of Taxes and Indebtedness |
14 | ||
Section 11.3. |
Limitation on Liens |
14 | ||
Section 11.4. |
Limitation on Funded Indebtedness |
16 | ||
Section 11.5. |
Limitation on Subsidiary Indebtedness |
18 | ||
Section 11.6. |
Restriction on Dividends |
18 | ||
Section 11.7. |
Nature of Business |
18 | ||
Section 11.8. |
Corporate Existence, Etc |
18 | ||
Section 11.9. |
Maintenance of Insurance |
19 | ||
Section 11.10. |
Maintenance of Properties; Etc |
19 | ||
Section 11.11. |
Merger or Consolidation; Sale or Transfer of Assets |
19 | ||
Section 11.12. |
Books of Account and Reports |
20 | ||
Section 11.13. |
Transactions with Affiliates |
20 | ||
Section 11.14. |
Compliance with Laws |
20 | ||
SECTION 12. |
INFORMATION AS TO THE COMPANY |
20 | ||
Section 12.1. |
Accounting; Financial Statements and Other Information |
20 | ||
Section 12.2. |
Inspection |
22 | ||
SECTION 13. |
DEFAULTS |
23 |
-ii-
Section 13.1. |
Events of Default; Acceleration |
23 | ||
Section 13.2. |
Remedies on Default; Etc |
25 | ||
Section 13.3. |
Rescission of Acceleration |
25 | ||
SECTION 14. |
DEFINITIONS; ACCOUNTING PRINCIPLES |
26 | ||
Section 14.1. |
Definitions |
26 | ||
Section 14.2. |
Accounting Principles |
31 | ||
SECTION 15. |
EXPENSES; ETC |
31 | ||
SECTION 16. |
SURVIVAL OF AGREEMENTS; ETC |
31 | ||
SECTION 17. |
AMENDMENTS AND WAIVERS |
31 | ||
SECTION 18. |
NOTICES; ETC |
32 | ||
SECTION 19. |
FURTHER ASSURANCES |
32 | ||
SECTION 20. |
MISCELLANEOUS |
32 | ||
SECTION 21. |
SEVERABILITY |
33 | ||
Signature Page |
34 |
Schedules and Exhibits: | ||||
Schedule I |
| Name and Address of Purchaser | ||
Schedule II |
| Funded Indebtedness Outstanding | ||
Exhibit A |
| Form of Note | ||
Exhibit B |
| Form of Opinion of Special Counsel for the Purchaser | ||
Exhibit C |
| Form of Opinion of Counsel for the Company |
-iii-
FITCHBURG GAS AND ELECTRIC LIGHT COMPANY
6 Liberty Lane West
Hampton, New Hampshire 03842
Dated as of October 15, 2003
To the Purchaser named in Schedule I attached hereto
FITCHBURG GAS AND ELECTRIC LIGHT COMPANY (the Company), a Massachusetts corporation, agrees with the Purchaser named on Schedule I of this Agreement (the Purchaser) as follows:
SECTION 1. AUTHORIZATION OF NOTES.
The Company has authorized the issue and sale of $10,000,000 principal amount of its 6.79% Notes due October 15, 2025 (the Notes, such term to include any such notes issued in substitution therefor pursuant to Section 8 hereof), interest to be payable semiannually on October 15 and April 15 in each year (commencing on April 15, 2004), such Notes to be substantially in the form of Exhibit A attached hereto, with such changes therein, if any, as may be approved by the Purchaser and the Company. Certain capitalized terms used herein are defined in Section 14 hereof.
SECTION 2. SALE AND PURCHASE OF NOTES; COMMITMENT. The Company will issue and sell to the Purchaser and, subject to the terms and conditions hereof, the Purchaser will purchase from the Company, Notes at a purchase price of 100% of the principal amount thereof set forth opposite such Purchasers name on Schedule I hereto, on the Closing Date hereinafter defined.
SECTION 3. CLOSING.
The closing of the sale and purchase of the Notes (the Closing) shall take place at the offices of Chapman and Cutler LLP, 111 West Monroe Street, Chicago, Illinois 60603 at 10:00 a.m., Chicago time on October 28, 2003 or on such other business day not later than October 31, 2003 as may be mutually agreed upon by the Purchaser and the Company (the Closing Date). At the Closing the Company will deliver to the Purchaser six separate Notes in denominations specified on Schedule I, in the form of Exhibit A attached hereto dated the Closing Date for the full amount of the purchase price and registered in such Purchasers name or in the name of such Purchasers nominee, all as such Purchaser may specify at any time prior to the date fixed for delivery, against receipt of the purchase price payable by wire transfer of immediately available funds to be wired as follows: Fleet Bank of Massachusetts, ABA No. 011 000 138, Account No. 0050834594, Account Name: Fitchburg Gas and Electric Light Company, Reference: Long Term Note Proceeds. If at the Closing the Company shall fail to tender such Notes as provided herein, or if at the Closing any of the conditions specified in Section 4 shall not have been fulfilled, the Purchaser shall, at its election, be relieved of all further obligations to purchase Notes under this
Agreement, without thereby waiving any other rights it may have by reason of such failure or such nonfulfillment.
SECTION 4. CONDITIONS TO CLOSING.
The obligation of the Purchaser to purchase the Notes to be sold to it at the Closing is subject to the fulfillment, prior to or at the Closing, of the following conditions:
Section 4.1. Representations and Warranties. The representations and warranties of the Company in Section 5 shall be correct when made and at the time of the Closing.
Section 4.2. Performance; No Default. The Company shall have performed and complied with all agreements and conditions contained herein required to be performed or complied with by it prior to or at the Closing, and at the time of the Closing no condition or event shall exist which constitutes or which, after notice or lapse of time or both, would constitute an Event of Default (as defined in Section 13.1 hereof).
Section 4.3. Compliance Certificate. The Company shall have delivered to the Purchaser an Officers Certificate, dated the date of the Closing, certifying that the conditions specified in Sections 4.1 and 4.2 hereof have been fulfilled.
Section 4.4. Regulatory Approvals. The issue and sale of the Notes shall have been duly authorized by order of the Massachusetts Department of Telecommunications and Energy (the MDTE) and such order shall be in full force and effect at the time of the Closing and the appeal period applicable to such order shall have expired.
Section 4.5. Legal Opinions. The Purchaser shall have received from Chapman and Cutler LLP, who is acting as special counsel to the Purchaser in this transaction and from LeBoeuf, Lamb, Greene & MacRae, L.L.P., counsel for the Company, their respective opinions, dated the Closing Date, substantially in the form of Exhibits B and C attached hereto.
Section 4.6. Proceedings and Documents. All corporate and other proceedings in connection with the transactions contemplated hereby and all documents and instruments incident to such transactions shall be satisfactory in substance and form to the Purchaser and its special counsel, and the Purchaser and its special counsel shall have received all such counterpart originals or certified or other copies of such documents as they may reasonably request.
Section 4.7. Private Placement Number. Purchasers special counsel shall have obtained from Standard & Poors Corporation and provided to such Purchaser a Private Placement Number for the Notes.
Section 4.8. Payment of Special Counsel Fees. The Company shall have paid, on or before the Closing Date, the reasonable fees, charges and disbursements of the Purchasers special counsel to the extent reflected in a statement of such counsel rendered to the Company at least one business day prior to the Closing Date.
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SECTION 5. REPRESENTATIONS AND WARRANTIES OF THE COMPANY.
The Company represents and warrants that:
Section 5.1. Organization, Standing, Due Authorization. The Company is a corporation duly organized, validly existing and in good standing under the laws of the Commonwealth of Massachusetts and has all requisite corporate power and authority to own and operate its Properties, to carry on its business as now conducted, to enter into this Agreement, to issue and sell the Notes and to carry out the terms hereof and thereof. The execution and delivery of this Agreement and the consummation of the transactions contemplated hereby have been duly authorized by the Companys Board of Directors, and no approval of the stockholders of the Company is required in connection therewith.
Section 5.2. Capitalization. The Companys authorized and outstanding capital stock is as follows:
TITLE OF CLASS |
SHARES AUTHORIZED |
SHARES OUTSTANDING | ||
Common Stock, $10 par value |
2,000,000 | 1,244,629 | ||
Cumulative Preferred Stock, $100 par value |
99,820 | |||
5 1/8% Series |
9,223 | |||
8% Series |
12,175 |
All of the Companys outstanding capital stock is validly issued, fully paid and non-assessable.
Section 5.3. Subsidiaries. Other than holdings of capital stock which, individually and in the aggregate, are immaterial to the business and financial condition of the Company, the Company does not own any shares of capital stock or shares of beneficial interest of any corporation or other entity except Fitchburg Energy Development Company, a wholly-owned Subsidiary, which is a corporation duly organized, validly existing and in good standing under the laws of the State of Delaware and which is currently an inactive Subsidiary.
Section 5.4. Qualification. In all jurisdictions where the Company owns real Property or maintains any place of business, it is either qualified to do business and in good standing or such qualification can readily be obtained without substantial penalty and the failure to qualify in jurisdictions where the Company has not done so will not have a material adverse effect on the business or condition of the Company and its Subsidiary, taken as a whole, financial or otherwise.
Section 5.5. Periodic Reports. The Company has delivered to the Purchaser the Annual Report on Form 10-K Report filed by Unitil with the Securities and Exchange Commission (the SEC) for the fiscal year ended December 31, 2002, including such Exhibits thereto as the Purchaser has requested (the 10-K Report), the Quarterly Reports on Form 10-Q by Unitil
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filed with the SEC for the fiscal quarters ended March 31, 2003 and June 30, 2003 (the 10-Q Reports), the Form 8-K filed by Unitil with the SEC on January 17, 2003, the Form 8-K filed by Unitil with the SEC on February 12, 2003, the Form 8-K filed by Unitil with the SEC on April 17, 2003 and the Form 8-K filed by Unitil with the SEC on August 29, 2003 (collectively, the 8-K Reports). There is no fact known to the Company which materially and adversely affects, or which in the future may (so far as the Company can now foresee) materially and adversely affect, the business, Properties, operations or condition, financial or otherwise, of the Company and its Subsidiary taken as a whole, which has not been set forth in the 10-K Report, the 10-Q Reports, the 8-K Reports, this Agreement, the Notes or in the other written documents, certificates and statements already furnished to the Purchaser by or on behalf of the Company in connection with the transactions contemplated hereby.
Section 5.6. Franchises; Etc. The Company has all franchises, certificates of convenience and necessity, operating rights, licenses, permits, consents, approvals, authorizations and orders of governmental bodies, political subdivisions and regulatory authorities, free from unduly burdensome restrictions, as are reasonably necessary for the ownership of the Properties now owned and operated by it, the maintenance and operation of the Properties now operated by it and the conduct of the business now conducted by it.
Section 5.7. Financial Statements. The Company has furnished to the Purchaser:
(a) the Companys financial statements for each of its fiscal years ended December 31, 2000, 2001 and 2002 (the Annual Reports), containing balance sheets, on a consolidated basis, of the Company and its Subsidiary as at the end of such fiscal years and the related statements of earnings, retained earnings and cash flows of the Company on a consolidated basis for such fiscal years, as certified by Grant Thornton L.L.P., independent certified public accountants; and
(b) unaudited consolidated financial statements of the Company and its Subsidiary for the six months ending June 30, 2003, including a consolidated balance sheet as at such date and statements of earnings and retained earnings for such period (together with the Annual Reports, the Company Reports).
Subject to any qualifications set forth in the accompanying reports of independent certified public accountants, all such financial statements are complete and correct (subject, in the case of such unaudited financial statements, to year-end and audit adjustments) and have been prepared in accordance with generally accepted accounting principles applied on a consistent basis throughout the periods covered thereby. Such balance sheets (together with the pertinent notes thereto) fairly present the financial condition of the Company and its Subsidiary as at the respective dates indicated, and in each case reflect all known liabilities, contingent or otherwise, at such dates, all in accordance with generally accepted accounting principles, and such statements of earnings, retained earnings and cash flows fairly present the results of the operations of the Company and its Subsidiary for the respective periods indicated.
Section 5.8. Changes; Etc. Since December 31, 2002: (a) except as disclosed in the 10-K Report, the 10-Q Reports, the 8-K Reports or the Company Reports, there has been no
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material adverse change in the assets, liabilities or financial condition of the Company and its Subsidiary, taken as a whole, from that reflected in the balance sheet as at December 31, 2002 referred to in Section 5.7 or otherwise previously disclosed in writing, other than changes in the ordinary course of business; (b) neither the business, operations or affairs of the Company and its Subsidiary nor any of their Properties or assets, taken as a whole, have been materially adversely affected by any occurrence or development (whether or not insured against) except as disclosed in the 10-K Report, the 10-Q Reports, the 8-K Reports, or the Company Reports or otherwise previously disclosed in writing; and (c) the Company has not, prior to the Closing Date, directly or indirectly, declared, paid or made any dividend or distribution on or on account of any shares of capital stock of the Company or any redemption, retirement, purchase or other acquisition of any shares of capital stock of the Company, or agreed to do so, except for the payment of regular cash dividends on its common stock and its Cumulative Preferred Stock and purchases of Cumulative Preferred Stock under applicable sinking fund provisions.
Section 5.9. Tax Returns and Payments. All tax returns of the Company and its Subsidiary required by law to be filed have been duly filed, and all taxes, assessments, fees and other governmental charges upon the Company or its Subsidiary shown to be due on such returns have been paid. The federal income tax liability of the Company and its Subsidiary has been finally determined by the Internal Revenue Service and satisfied through the fiscal year ended December 31, 1993. The charges, accruals and reserves on the books of the Company and its Subsidiary in respect of income taxes for all fiscal periods are adequate in the opinion of the Company and, except as disclosed in the 10-K Report, the 10-Q Reports, the 8-K Reports or the Company Reports, the Company knows of no unpaid assessment for additional income taxes for any fiscal period or of any basis therefor.
Section 5.10. Title to Properties. Each of the Company and its Subsidiary has good and marketable title to all the real Property and a good and valid ownership interest in all the other assets reflected in the most recent balance sheet referred to in Section 5.7 or subsequently acquired, other than real Property and other assets subsequently sold or otherwise disposed of in the ordinary course of business, subject in each case only to Liens permitted by Section 11.3.
Section 5.11. Litigation; Etc. There is no action, proceeding or investigation pending or, to the Companys knowledge, threatened (or any basis therefor known to the Company) which questions the validity of this Agreement or the Notes or any action taken or to be taken pursuant hereto or thereto, nor, except as disclosed in the 10-K Report, the 10-Q Reports, the 8-K Reports or the Company Reports, is there any action, proceeding or investigation pending or, to the Companys knowledge, threatened (or any basis therefor known to the Company) which might result, either in any case or in the aggregate, in any material adverse change in the business, operations, affairs or condition of the Company and its Subsidiary or their Properties and assets taken as a whole or in any material liability on the part of the Company or its Subsidiary.
Section 5.12. Compliance with Other Instruments, Etc. Except as set forth in the 10-K Report, the 10-Q Reports, the 8-K Reports or the Company Reports, the Company is not in violation of any term of its Articles of Organization or By-Laws, or, to the Companys knowledge, in violation of any term of any franchise, license, permit, agreement, indenture, instrument, judgment, decree, order, statute, or governmental rule or regulation applicable to it so
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as to materially and adversely affect, either individually or in the aggregate, its financial condition; and the execution, delivery and performance of this Agreement and the Notes will not result in any such violation or be in conflict with or constitute a default under any term of any of the foregoing and will not result in the creation of any mortgage, lien, charge or encumbrance upon any of the Properties or assets of the Company or its Subsidiary pursuant to any such term.
Section 5.13. ERISA. (a) The Company and each ERISA Affiliate have operated and administered each Plan in compliance with all applicable laws except for such instances of noncompliance as have not resulted in and could not reasonably be expected to result in a Material Adverse Effect. Neither the Company nor any ERISA Affiliate has incurred any liability pursuant to Title I or IV of ERISA or the penalty or excise tax provisions of the Code relating to employee benefit plans (as defined in Section 3 of ERISA), and no event, transaction or condition has occurred or exists that could reasonably be expected to result in the incurrence of any such liability by the Company or any ERISA Affiliate, or in the imposition of any lien on any of the rights, properties or assets of the Company or any ERISA Affiliate, in either case pursuant to Title I or IV of ERISA or to such penalty or excise tax provisions or to Section 401(a)(29) or 412 of the Code, other than such liabilities or liens as would not be individually or in the aggregate Material.
(b) The present value of the aggregate benefit liabilities under each of the Plans (other than Multiemployer Plans), determined as of the end of such Plans most recently ended plan year on the basis of the actuarial assumptions specified for funding purposes in such Plans most recent actuarial valuation report, did not exceed the aggregate current value of the assets of such Plan allocable to such benefit liabilities. The term benefit liabilities has the meaning specified in Section 4001 of ERISA and the terms current value and present value have the meaning specified in Section 3 of ERISA.
(c) The Company and its ERISA Affiliates have not incurred withdrawal liabilities (and are not subject to contingent withdrawal liabilities) under section 4201 or 4204 of ERISA in respect of Multiemployer Plans that individually or in the aggregate are Material.
(d) The expected post-retirement benefit obligation (determined as of the last day of the Companys most recently ended fiscal year in accordance with Financial Accounting Standards Board Statement No. 106, without regard to liabilities attributable to continuation coverage mandated by section 4980B of the Code) of the Company and its Subsidiary is not Material.
(e) The execution and delivery of this Agreement and the issuance and sale of the Notes hereunder will not involve any transaction that is subject to the prohibitions of section 406 of ERISA or in connection with which a tax could be imposed pursuant to section 4975(c)(1)(A)-(D) of the Code. The representation by the Company in the first sentence of this Section 5.13(e) is made in reliance upon and subject to the accuracy of the Purchasers representation in Section 7(b) as to the sources of the funds used to pay the purchase price of the Notes.
Section 5.14. Regulatory Jurisdiction and Approvals. The Company is subject to regulation by the MDTE with respect to retail rates, adequacy of service, issuance of securities,
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accounting and other matters. The issuance and sale of the Notes has been authorized by an order of the MDTE which has become final and the applicable appeal period has expired. The Company is exempt from registration of the Notes with the SEC pursuant to Regulation 250.52(a) promulgated under the Public Utility Holding Company Act of 1935, as amended. Although a post-sale filing with the SEC on Form U-6B-2 is required, the issuance and sale of the Notes is not subject to the prior approval of the SEC under the Holding Company Act. No order, consent, approval or authorization of, or any declaration or filing with, any other governmental agency or authority is required as a condition precedent to the valid offering, issue, sale and delivery of the Notes by the Company and the consummation by the Company of the transactions contemplated hereby.
Section 5.15. Patents; Trademarks; Etc. The Company owns or possesses all of the patents, trademarks, service marks, trade names and copyrights, and all rights of use with respect to the foregoing, necessary for the conduct of its business as now conducted, without any known conflict with the rights of others.
Section 5.16. Offer of Notes. Neither the Company nor anyone authorized to act on its behalf has directly or indirectly offered or will offer the Notes or any part thereof or any similar securities for issue or sale to, or solicited or will solicit any offer to acquire any of the same from, or has otherwise approached or negotiated or will approach or negotiate in respect thereof with not more than 125 institutional investors, including the Purchaser. Neither the Company nor anyone authorized to act on its behalf has taken or will take any action which will subject the issuance and sale of the Notes to the provisions of Section 5 of the Securities Act of 1933, as amended (the Securities Act).
Section 5.17. Investment Company Act Status. Neither the Company nor its Subsidiary is an investment company or a company controlled by an investment company, as such terms are defined in the Investment Company Act of 1940, as amended.
Section 5.18. Federal Reserve Regulations. Neither the Company nor its Subsidiary owns or has any present intention of acquiring any margin security within the meaning of Regulation U (12 CFR Part 207) of the Board of Governors of the Federal Reserve System (herein called a margin security). The proceeds of the sale of the Notes will be applied as provided in Section 6. None of such proceeds will be used, directly or indirectly, for the purpose of purchasing or carrying any margin security or for the purpose of reducing or retiring any indebtedness which was originally incurred to purchase or carry a margin security or for any other purpose which might constitute the transactions contemplated hereby a purpose credit within the meaning of said Regulation U, or cause this Agreement to violate Regulation U, Regulation T, Regulation X, or any other regulation of the Board of Governors of the Federal Reserve System or Section 7 of the Securities Exchange Act of 1934 (the Exchange Act), each now in effect.
Section 5.19. Foreign Credit Restraints. Neither the consummation of the transactions contemplated by this Agreement nor the use of the proceeds of the sale of the Notes will violate any provision of any applicable statute, regulation or order of, or any restriction imposed by, the United States of America or any authorized official, board, department, instrumentality or agency thereof relating to the control of foreign or overseas lending or investment.
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Section 5.20. Disclosure. Neither this Agreement, the financial statements referred to in Section 5.7, the 10-K Report, the 10-Q Reports, the 8-K Reports, the Company Reports, nor any other document, certificate or written statement furnished to the Purchaser by or on behalf of the Company in connection with the negotiation of the sale of the Notes, contains any untrue statement of a material fact or omits to state a material fact necessary in order to make the statements contained herein and therein not misleading. There is no fact known to the Company which materially adversely affects or in the future may (so far as the Company can now foresee) materially adversely affect the business, operations, affairs or condition of the Company and its Subsidiary, taken as a whole, or their Properties or assets, taken as a whole, which has not been set forth in this Agreement or in the other documents, certificates, the 10-K Report, the 10-Q Reports, the 8-K Reports, the Company Reports and written statements furnished to the Purchaser by or on behalf of the Company prior to the date of this Agreement in connection with the transactions contemplated hereby.
Section 5.21. Funded Indebtedness. Schedule II attached hereto correctly describes all Funded Indebtedness of the Company and its Subsidiary outstanding on September 30, 2003.
Section 5.22. Sale is Legal and Authorized. The sale of the Notes and compliance by the Company with all of the provisions of the Agreement and the Notes
(a) are within the corporate powers of the Company; and
(b) have been duly authorized by proper corporate action on the part of the Company (no action by the stockholders of the Company being required by law, by the Articles of Organization or By-laws of the Company or otherwise); this Agreement and, when executed and delivered in accordance with the terms hereof, the Notes, have been or will have been, as the case may be, duly executed and delivered on behalf of the Company by duly authorized officers thereof, and this Agreement and, when executed and delivered in accordance with the terms hereof, the Notes constitute or will constitute, as the case may be, the legal, valid and binding obligations, contracts and agreements of the Company enforceable in accordance with their respective terms.
Section 5.23. No Defaults. No Default or Event of Default has occurred and is continuing. The Company is not in default in the payment of principal or interest on any Indebtedness and is not in default under any instrument or instruments or agreements under and subject to which any Indebtedness has been issued and no event has occurred and is continuing under the provisions of any such instrument or agreement which with the lapse of time or the giving of notice, or both, would constitute an event of default thereunder.
Section 5.24. Compliance with Environmental Laws. Except as disclosed in the 10-K Report, the 10-Q Reports, the 8-K Reports or the Company Reports, the Company is not in violation of any applicable Federal, state, or local laws, statutes, rules, regulations or ordinances relating to public health, safety or the environment, including, without limitation, relating to
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releases, discharges, emissions or disposals to air, water, land or ground water, to the withdrawal or use of ground water, to the use, handling or disposal of polychlorinated biphenyls (PCBs), asbestos or urea formaldehyde, to the treatment, storage, disposal or management of hazardous substances (including, without limitation, petroleum, crude oil or any fraction thereof, or other hydrocarbons), pollutants or contaminants, to exposure to toxic, hazardous or other controlled, prohibited or regulated substances which violation could have a material adverse effect on the business, prospects, profits, properties or condition (financial or otherwise) of the Company and its Subsidiary, taken as a whole. Except as disclosed in the 10-K Report, the 10-Q Reports, the 8-K Reports or the Company Reports, the Company does not know of any liability or class of liability of the Company or its Subsidiary under the Comprehensive Environmental Response, Compensation and Liability Act of 1980, as amended (42 U.S.C. Section 9601 et seq.), or the Resource Conservation and Recovery Act of 1976, as amended (42 U.S.C. Section 6901 et seq.).
Section 5.25. Foreign Assets Control Regulations, Etc. Neither the sale of the Notes by the Company hereunder nor its use of the proceeds thereof will violate the Trading with the Enemy Act, as amended, or any of the foreign assets control regulations of the United States Treasury Department (31 CFR, Subtitle B, Chapter V, as amended) or any enabling legislation or executive order relating thereto. Without limiting the foregoing, neither the Company nor its Subsidiary (a) is a person whose property or interests in property are blocked pursuant to Section 1 of Executive Order 13224 of September 23, 2001 Blocking Property and Prohibiting Transactions With Persons Who Commit, Threaten to Commit, or Support Terrorism (66 Fed. Reg. 49079 (2001)) or (b) engages in any Material dealings or transactions, or is otherwise associated, with any such person.
The Company and its Subsidiary are in compliance in all material respects with the Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism (USA Patriot Act of 2001). No part of the proceeds from the sale of the Notes hereunder will be used, directly or indirectly, for any payment to any governmental official or employee, political party, official of a political party, candidate for political office or anyone else acting in an official capacity, in order to obtain, retain or direct business, in violation of the United States Foreign Corrupt Practices Act of 1977, as amended.
SECTION 6. USE OF PROCEEDS.
The proceeds of the sale of the Notes will be applied by the Company to refinance existing short-term debt and for general corporate purposes.
SECTION 7. PURCHASERS REPRESENTATIONS.
(a) The Purchaser represents that the Purchaser is purchasing the Notes for its own account for investment and not with a view to the distribution thereof and has no present intention of selling, negotiating, or otherwise disposing of the Notes, provided that the disposition of the Purchasers Property shall at all times be within its control. The acquisition of any of the Notes by the Purchaser shall constitute the Purchasers reaffirmation of such representation, and it is understood that in making the representations contained in Sections 5.13(e) and 5.16, the Company is relying, to the extent applicable, on the Purchasers representation in this Section 7.
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(b) The Purchaser represents that at least one of the following statements is an accurate representation as to each source of funds (a Source) to be used by the Purchaser to pay the purchase price of the Notes to be purchased by the Purchaser hereunder:
(i) the source is an insurance company general account and there is no employee benefit plan with respect to which the amount, if any, of such general accounts reserves and liabilities for all contracts held by or on behalf of such plan and all other plans maintained by the same employer or its affiliates or by the same employee organization exceeds 10% of the total of all reserves and liabilities of such general account at the date of purchase (all as determined under Prohibited Transaction Class Exemption (PTE) 95-60 (issued July 12, 1995)); or
(ii) the Source is either (A) an insurance company pooled separate account, within the meaning of PTE 90-1 (issued January 29, 1990), or (B) a bank collective investment fund, within the meaning of the PTE 91-38 (issued July 12, 1991) and, except as the Purchaser has disclosed to the Company in writing pursuant to this paragraph (b)(ii)), no employee benefit plan or group of plans maintained by the same employer or employee organization beneficially owns more than 10% of all assets allocated to such pooled separate account or collective investment fund; or
(iii) the Source constitutes assets of an investment fund (within the meaning of Part V of the QPAM Exemption) managed by a qualified professional asset manager or QPAM (within the meaning of Part V of the QPAM Exemption), no employee benefit plans assets that are included in such investment fund, when combined with the assets of all other employee benefit plans established or maintained by the same employer or by an affiliate (within the meaning of Section V(c)(1) of the QPAM Exemption) of such employer or by the same employee organization and managed by such QPAM, exceed 20% of the total client assets managed by such QPAM, the conditions of Part I(c) and (g) of the QPAM Exemption are satisfied, neither the QPAM nor a Person controlling or controlled by the QPAM (applying the definition of control in Section V(e) of the QPAM Exemption) owns a 5% or more interest in the Company and (A) the identity of such QPAM and (B) the names of all employee benefit plans whose assets are included in such investment fund have been disclosed to the Company in writing pursuant to this paragraph (b)(iii); or
(iv) the Source is a governmental plan; or
(v) the Source does not include assets of any employee benefit plan, other than a plan exempt from the coverage of ERlSA; or
(vi) the Source is one or more employee benefit plans, or a separate account, general account or trust fund comprised of one or more employee benefit plans, each of which has been identified to the Company in writing pursuant to this paragraph (b)(vi).
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As used in this paragraph (b), the terms employee benefit plan, governmental plan, party in interest and separate account shall have the respective meanings assigned to such terms in Section 3 of ERISA.
SECTION 8. REGISTRATION, TRANSFER AND SUBSTITUTION OF NOTES.
Section 8.1. Note Register; Ownership of Notes. The Company will keep at its office located at 6 Liberty Lane West, Hampton, New Hampshire, or such other address of which the Company may hereafter notify the holders of the Notes from time to time, a register in which the Company will provide for the registration of Notes and the registration of transfers of Notes. The Company may treat the Person in whose name any Note is registered on such register as the owner thereof for the purpose of receiving payment of the principal of and interest on such Note and for all other purposes, whether or not such Note shall be overdue, and the Company shall not be affected by any notice to the contrary except for a properly presented request by such owner to transfer such Note to another Person. All references in this Agreement to a holder of any Note shall mean the Person in whose name such Note is at the time registered on such register.
Section 8.2. Transfer and Exchange of Notes. Upon surrender of any Note by the holder or transferee thereof for registration or transfer or for exchange at the principal office of the Company, the Company at its expense will execute and deliver in exchange therefor a new Note or Notes in denominations of not less than $100,000 (amounts in excess thereof to be in $10,000 increments, unless the entire principal balance of a Note is being transferred or exchanged, in which case the denomination may be made in increments of less than $10,000 if such Note being transferred or exchanged is in an amount that does not represent $10,000 increments) requested by the holder or transferee which aggregate the unpaid principal amount of such surrendered Note, registered as such holder or transferee may request, dated so that there will be no loss of interest on such surrendered Note and otherwise of like tenor.
Section 8.3. Replacement of Notes. Upon receipt of evidence reasonably satisfactory to the Company of the loss, theft, destruction or mutilation of any Note and, in the case of any such loss, theft or destruction upon delivery of indemnity reasonably satisfactory to the Company in form and amount, or, in the case of any such mutilation, upon the surrender of such Note for cancellation at the principal office of the Company, the Company at its expense will execute and deliver, in lieu thereof, a new Note of like tenor, dated so that there will be no loss of interest on such lost, stolen, destroyed or mutilated Note. If the Purchaser or any subsequent Institutional Holder is the owner of any such lost, stolen or destroyed Note, then the affidavit of an authorized officer of such owner, setting forth the fact of loss, theft or destruction and of its ownership of such Note at the time of such loss, theft or destruction shall be accepted as satisfactory evidence thereof and no further indemnity shall be required as a condition to the execution and delivery of a new Note other than the written agreement of such owner to indemnify the Company. Any Note in lieu of which any such new Note has been so executed and delivered by the Company shall not be deemed to be an outstanding Note for any purpose of this Agreement.
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SECTION 9. PAYMENT ON NOTES.
The Company will pay all sums becoming due on each Note (including redemptions, whether for principal or interest) by check mailed to the holder of such Note at the registered address of such holder as set forth in the register kept by the Company at its principal office as provided in Section 8.1, without the presentation or surrender of such Note or the making of any notation thereon, except that any Note paid or prepaid in full shall be surrendered to the Company at its office for cancellation, provided that, in the case of any Note with respect to which the Purchaser or any subsequent Institutional Holder is the registered owner, and with respect to which any such subsequent Institutional Holder has given written notice to the Company requesting that the provisions of this Section 9 shall apply, the Company will punctually pay when due the principal thereof, interest thereon and premium, if any, due with respect to said principal, without any presentment thereof, directly to such Purchaser or to such subsequent Institutional Holder at such Purchasers address set forth in Schedule I hereto or such other address as such Purchaser or such subsequent Institutional Holder may from time to time designate in writing to the Company or, if a bank account with a United States bank is designated for such Purchaser on Schedule I hereto or in any written notice to the Company from the Purchaser or from any such subsequent Institutional Holder, the Company will make such payments in immediately available funds to such bank account, marked for attention as indicated, or in such other manner or to such other account in any United States bank as such Purchaser or any such subsequent Institutional Holder may from time to time direct in writing. The Company will not be liable for failure to make payment on the Notes so long as the Company acts in accordance with any written instructions given by the Purchaser or any such Institutional Holder under Section 9. Prior to any sale or other disposition of any Note, the holder thereof will, at its election, either endorse thereon the amount of principal paid thereon and the last date to which interest has been paid thereon, or make such Note available to the Company at its principal office for the purpose of making such endorsement thereon.
SECTION 10. REDEMPTION OF NOTES.
Section 10.1. Sinking Fund Redemptions. The Company agrees that on October 15 in each year commencing October 15, 2021 and ending October 15, 2025, it will redeem and there shall become due and payable on the principal indebtedness evidenced by the Notes an amount equal to the lesser of (i) $2,000,000 or (ii) the principal amount of the Notes then outstanding (each such redemption being a required sinking fund payment). At the same time the Company makes a required sinking fund payment, the Company shall have the option (which shall be non-cumulative) to redeem an additional principal amount of the Notes outstanding of $2,000,000 (an optional sinking fund payment); provided, that the cumulative amount of such optional sinking fund payments may not exceed $4,000,000 in principal amount of Notes. Notes, or principal amounts thereof, will be selected for redemption in the manner set forth in Section 10.4 hereof. For purposes of this Section 10.1, any redemption of less than all of the outstanding Notes pursuant to an optional sinking fund payment or pursuant to Section 10.2 shall be deemed to be applied first, to the amount of principal scheduled to be paid on October 15, 2025, and then to the remaining scheduled required sinking payments in inverse chronological order.
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Section 10.2. Optional Redemption. The Company may at its option, upon notice as provided in Section 10.3, redeem at any time on or prior to October 15, 2023, all or, from time to time, any part of the Notes aggregating at least $100,000 in aggregate principal amount, in each case by payment of the principal amount of the Notes, or portion thereof to be redeemed and accrued interest thereon to the date of such redemption, together with a premium equal to the Make-Whole Premium, determined as of five business days prior to the date of such prepayment pursuant to this Section 10.2. In addition to the foregoing, on any date after October 15, 2023, all of the Notes, or any part of the principal amount thereof aggregating at least $100,000 in aggregate principal amount, shall be subject to redemption, at the option of the Company, by payment of the interest accrued on the principal amount of the Notes optionally to be redeemed to the date of such redemption plus 100% of the principal amount thereof.
Section 10.3. Notice of Optional Redemptions. The Company will give each holder of any Notes written notice of each optional redemption under Section 10.2 not less than fifteen (15) days and not more than forty-five (45) days prior to the date fixed for such optional redemption, specifying (i) such date, (ii) the aggregate principal amount of the Notes to be redeemed on such date, (iii) the principal amount of each Note held by such holder to be redeemed on such date, (iv) whether a premium may be payable, (v) the date when any such premium will be calculated, (vi) if a premium may be payable, the estimated premium, and (vii) the accrued interest applicable to the redemption. Such notice of redemption shall also certify all facts, if any, which are conditions precedent to any such redemption. Not later than two business days prior to the redemption date specified in such notice, the Company shall provide each holder of a Note written notice of the premium, if any, payable in connection with such redemption and, whether or not any premium is payable, a reasonably detailed computation of the Make-Whole Premium.
Section 10.4. Selection of Notes for Redemption. Redemptions pursuant to this Section 10 shall be made in units of $1,000 principal amount and integral multiples thereof and the Notes then held by each holder shall be redeemed in proportion, as nearly as may be, to the aggregate principal amount of Notes then outstanding.
Section 10.5. Maturity; Surrender; Etc. In the case of each redemption, the principal amount of each Note to be redeemed and the premium, if any, payable with respect thereto shall become due and payable on the date fixed for such redemption by the written notice referred to in Section 10.3, together with interest on such principal amount accrued to such date. From and after such date, unless the Company shall fail to pay such principal amount when so due and payable, together with the interest to the date of redemption, interest on such principal amount shall cease to accrue. Any Note redeemed in full shall be surrendered to the Company and cancelled and shall not be reissued, and no Note shall be issued in lieu of any prepaid principal amount of any Note.
Section 10.6. Repurchase of Notes. The Company will not, nor will it permit any Affiliate to, directly or indirectly repurchase or make any offer to repurchase any Notes unless the Company or any such Affiliate has offered to repurchase Notes, pro rata, from all holders of the Notes at the time outstanding upon the same terms. In case the Company or any such Affiliate repurchases any Notes, such Notes shall thereafter be cancelled and no Notes shall be
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issued in substitution therefor. Without limiting the foregoing, upon the repurchase or other acquisition of any Notes by the Company or any Affiliate, such Notes shall no longer be outstanding for purposes of any section of this Agreement relating to the taking by the holders of the Notes of any actions with respect hereto, including, without limitation, Sections 13.1, 13.3 and 17.
SECTION 11. COVENANTS.
The Company covenants that, from and after the date of this Agreement and until none of the Notes shall be outstanding:
Section 11.1. Punctual Payment. The Company will duly and punctually pay the principal, premium, if any, and interest on the Notes in accordance with the terms of this Agreement and of the Notes.
Section 11.2. Prompt Payment of Taxes and Indebtedness. The Company will promptly pay and discharge, and will cause each Subsidiary to pay and discharge, all lawful taxes, assessments and governmental charges or levies imposed upon the Company or Subsidiary or upon its income or profits, or upon any Property belonging to it; provided, however, that the Company and its Subsidiary shall not be required to pay any such tax, assessment, charge or levy if the same shall not at the time be due and payable or can be paid thereafter without additional liability, or if the validity or amount thereof shall then be contested in good faith by appropriate proceedings and if the Company shall have set aside on its books adequate reserves with respect thereto in accordance with generally accepted accounting principles; and provided, further, that the Company and its Subsidiaries will pay all such taxes, assessments, charges or levies when and as necessary to prevent foreclosure of any Lien which may have attached as security therefor or to prevent the forfeiture or sale of the property subject to the Lien of such assessment, charge or levy or any material interference with the use thereof by the Company or any Subsidiary. The Company will promptly pay when due, or in conformance with customary trade terms, all other indebtedness incident to operations and dividends declared, other than disputed claims which are being contested in good faith and for which the Company has set aside on its books adequate reserves in accordance with generally accepted accounting principles.
Section 11.3. Limitation on Liens. Except as hereinafter in this Section expressly permitted, the Company will not at any time, nor will it permit any Subsidiary to, directly or indirectly, create, assume or suffer to exist, except in favor of the Company or any Subsidiary, any Lien upon any of its Properties or assets, real or personal, whether now owned or hereafter acquired, or of or upon any income or profits therefrom, without making effective provision, and the Company covenants that in any such case it will make or cause to be made effective provision, whereby the Notes then outstanding shall be secured by such Lien equally and ratably with any and all other Indebtedness to be secured thereby, so long as any such other Indebtedness shall be so secured.
Nothing in this Section shall be construed to prevent the Company or a Subsidiary from creating, assuming or suffering to exist, and the Company and its Subsidiaries are hereby expressly permitted to create, assume or suffer to exist, without securing the Notes as hereinabove provided, Liens of the following character:
(a) Liens existing on the date hereof;
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(b) Liens, in addition to those otherwise permitted by this Section 11.3, securing Indebtedness which does not exceed in the aggregate $5,000,000 at any one time outstanding; provided that all such Indebtedness shall have been incurred within the applicable limitations provided in Sections 11.4 and 11.5;
(c) any purchase money mortgage or other Lien existing on any Property of the Company or a Subsidiary at the time of acquisition, whether or not assumed, or created contemporaneously with the acquisition or construction of Property, to secure or provide for the payment of the purchase or construction price of such Property, and any conditional sales agreement or other title retention agreement with respect to any Property hereafter acquired; provided, however, that (i) the aggregate principal amount of the Indebtedness secured by all such mortgages and other liens on a particular parcel of Property shall not exceed 100% of the lesser of the total cost or fair market value at the time of the acquisition or construction of such Property, including the improvements thereon (as determined in good faith by the Board of Directors of the Company) and (ii) all such Indebtedness shall have been incurred within the applicable limitations provided in Sections 11.4 and 11.5;
(d) refundings or extensions of any Lien permitted by this Section 11.3 for amounts not exceeding the principal amount of the Indebtedness so refunded or extended at the time of the refunding or extension thereof, and covering only the same Property theretofore securing the same;
(e) deposits, Liens or pledges to enable the Company or a Subsidiary to exercise any privilege or license, or to secure payment of workers compensation, unemployment insurance, old age pensions or other social security, or to secure the performance of bids, tenders, contracts or leases to which the Company or a Subsidiary is a party, or to secure public or statutory obligations of the Company or a Subsidiary, or to secure surety, stay or appeal bonds to which the Company or a Subsidiary is a party; or other similar deposits or pledges made in the ordinary course of business;
(f) mechanics, workmens, repairmens, materialmens or carriers liens or other similar Liens arising in the ordinary course of business; or deposits or pledges to obtain the release of any such Liens;
(g) Liens arising out of judgments or awards against the Company or a Subsidiary with respect to which the Company or a Subsidiary shall in good faith be prosecuting an appeal or proceedings for review and in respect of which a stay of execution pending such appeal or proceeding for review shall have been secured; or Liens incurred by the Company or a Subsidiary for the purpose of obtaining a stay or discharge in the course of any legal proceeding to which the Company or a Subsidiary is a party;
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(h) Liens for taxes (x) not yet subject to penalties for non-payment or (y) being contested provided, payment thereof is not required by Section 11.2; or minor survey exceptions, or minor encumbrances, easements or reservations of, or rights of others for, rights of way, sewers, electric lines, telegraph and telephone lines and other similar purposes, or zoning or other restrictions as to the use of real Properties, which encumbrances, easements, reservations, rights and restrictions do not in the aggregate materially detract from the value of said Properties or materially impair their use in the operation of the business of the Company or a Subsidiary;
(i) pledges, assignments and other security devices entered into in connection with the financing or refinancing of customers conditional sales contracts;
(j) Liens incurred in connection with the lease of conversion burners and water heaters to customers;
(k) Liens incurred in connection with agreements for the financing of gas, nuclear and other fuel inventories and cushion gas;
(l) Liens on Property acquired through the merger or consolidation of another utility company with or into, or the purchase of all or substantially all of the assets of another utility company by, the Company or a Subsidiary, provided that such Lien does not extend to other Property of the Company or a Subsidiary; and
(m) Security interests in, and pledges of, the Companys rights and benefits under contracts which have been or may be entered into by the Company and other New England utility companies in connection with participation by the Company and such other utilities in the Hydro-Quebec Interconnection Support Agreements.
If at any time the Company or a Subsidiary shall create or assume any Lien not permitted by this Section, to which the covenant in the first paragraph of this Section 11.3 is applicable, the Company will promptly deliver to each holder of record of the Notes then outstanding:
(a) an Officers Certificate stating that the covenant of the Company contained in the first paragraph of this Section 11.3 has been complied with; and
(b) an Opinion of Counsel addressed to such holders to the effect that such covenant has been complied with, and that any instruments executed by the Company in the performance of such covenant comply with the requirements of such covenant.
Section 11.4. Limitation on Funded Indebtedness. The Company will not, nor will it permit any Subsidiary to, create, incur or assume any Funded Indebtedness other than:
(a) Funded Indebtedness evidenced by the Notes;
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(b) Funded Indebtedness outstanding on the date hereof which is described on Schedule II hereto; and
(c) additional Funded Indebtedness so long as (i) the aggregate outstanding principal amount of such Funded Indebtedness, after giving effect to the application of the proceeds thereof (subject to the proviso set forth hereafter) and when added to all other Funded Indebtedness of the Company and its Subsidiaries then outstanding, does not exceed 65% of the Total Capitalization; provided, that in giving effect to the application of such proceeds, only applications which are substantially contemporaneous with the incurrence of such additional Funded Indebtedness shall be given such effect, except that if the application of such proceeds involves the redemption of other securities of the Company, and such redemption cannot be made substantially contemporaneously with the incurrence of such additional Funded Indebtedness, then such intended redemption shall nevertheless be given effect for purposes hereof if either (1) the Company shall have given irrevocable written notice of redemption of such other securities to the holders thereof at or prior to the time of the incurrence of such additional Funded Indebtedness and such redemption is thereafter made in accordance with the terms of such notice, or (2) if such notice was not permitted to be given at or prior to the time of the incurrence of such additional Funded Indebtedness and the redemption will occur within 180 days after such incurrence, then (A) the proceeds of such Funded Indebtedness to be used for such redemption shall have been set aside in an escrow or trust account with a United States bank or other financial institution having capital and surplus of at least $35,000,000, together with written instructions to the escrow agent or trustee to send notice of redemption of such securities provided by the Company to the holders thereof in accordance with the terms of such securities and thereafter to use such proceeds for such redemption in accordance with the terms of such notice, such escrow or trust account to also provide (x) that the funds set aside therein are not to be released to or for the benefit of the Company except for the purpose of accomplishing the redemption contemplated thereby, or with the prior written consent of all holders of Notes then outstanding, and (y) that if the funds set aside therein are invested in securities by such bank or financial institution, they shall be invested only in direct obligations of the United States of America maturing in not more than 180 days, and (B) unless otherwise agreed to in writing by all of the holders of Notes then outstanding, the redemptions to be funded from such escrow or trust account is actually made in accordance with the terms under which such escrow or trust account is established; and (ii) Earnings Available for Interest of the Company and its Subsidiaries shall equal or exceed, for at least twelve (12) consecutive calendar months out of the fifteen (15) months immediately preceding the proposed creation, incurrence or assumption of such Funded Indebtedness, two times all amounts of interest for which the Company and its Subsidiaries will, for the twelve month period immediately following the date of such creation, incurrence or assumption, be obligated on account of all Funded Indebtedness to be outstanding immediately thereafter, in each case after giving effect to the application of the proceeds of such Funded Indebtedness (subject to the proviso set forth in clause (i) of this subdivision (c) of this Section 11.4) and (iii) in the case of additional Subsidiary Indebtedness, the Subsidiary shall be in compliance with Section 11.5.
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Any corporation which becomes a Subsidiary after the date hereof shall for all purposes of this Section 11.4 be deemed to have created, assumed or incurred at the time it becomes a Subsidiary all Funded Indebtedness of such corporation existing immediately after it becomes a Subsidiary.
Section 11.5. Limitation on Subsidiary Indebtedness. In addition to the limitations contained in Section 11.4, no Subsidiary shall create, incur, assume or become liable for or have outstanding, or permit its Property to be subject to a lien securing any Funded Indebtedness if, after giving effect thereto and to any concurrent transaction, the aggregate amount of all Funded Indebtedness of all Subsidiaries would exceed 20% of the aggregate amount of total common stock equity, preference stock and preferred stock of the Company as presented in accordance with generally accepted accounting principles on a consolidated balance sheet of the Company as of such date.
Section 11.6. Restriction on Dividends. Other than dividends payable solely in shares of its own common stock, the Company will not declare or pay any dividend or make any other distribution on any shares of its common stock or apply any of its Property or assets (other than amounts equal to net proceeds received from the sale of common stock of the Company subsequent to the date of this Agreement) to the purchase or retirement of, or make any other distribution, through reduction of capital or otherwise, in respect of any shares of its common stock (which dividends, distributions, purchases and retirements are hereinafter referred to as distributions) if, after giving effect to such distribution, the aggregate of all such distributions declared, paid, made or applied subsequent to December 31, 2002, plus the amount of all regular dividends declared on any class of preferred stock of the Company subsequent to December 31, 2002 and all amounts charged to retained earnings after December 31, 2002 in connection with the purchase or retirement of any shares of preferred stock or preference stock of the Company, would exceed an amount equal to the sum of $5,100,000 plus (or minus in the event of a deficit) Net Income (Deficit) accumulated after December 31, 2002.
For the purposes of this Section 11.6, the amount of any distribution declared, paid or distributed in Property shall be deemed to be the fair market value (as determined in good faith by the Board of Directors of the Company) of such Property at the time of the making of the distribution in question.
Section 11.7. Nature of Business. Neither the Company nor any Subsidiary will engage in any business if, as a result, the general nature of the business, taken on a consolidated basis, which would then be engaged in by the Company and its Subsidiaries would be substantially changed from the general nature of the business engaged in by the Company and its Subsidiaries on the date of this Agreement; provided, that any sale or other disposition of the Companys natural gas distribution business shall not be deemed to be a change in the general nature of the business of the Company and its Subsidiaries.
Section 11.8. Corporate Existence, Etc. The Company will preserve and keep in full force and effect, and will cause each Subsidiary to preserve and keep in full force and effect, its corporate existence and all licenses and permits necessary to the proper conduct of its business; provided, however, that the foregoing shall not prevent any transaction permitted by
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Section 11.11 nor shall the foregoing prevent any transaction involving the liquidation or dissolution of any Subsidiary of the Company so long as such liquidation or dissolution would not have a material impact on the Company and its Subsidiaries taken as a whole.
Section 11.9. Maintenance of Insurance. The Company will insure and keep insured, and will cause every Subsidiary to insure and keep insured, to a reasonable amount with reputable insurance companies, so much of their respective Properties as companies engaged in a similar business and to the extent such companies in accordance with good business practice customarily insure Properties of a similar character against loss by fire and from other causes or, in lieu thereof, in the case of itself or its Subsidiaries, the Company will maintain or cause to be maintained a system or systems of self-insurance which will accord with the approved practices of companies owning or operating Properties of a similar character and maintaining such systems, and of a size similar to that of the Companys ultimate corporate parent, including the Company and all other direct and indirect subsidiaries of such ultimate corporate parent on a consolidated basis.
Section 11.10. Maintenance of Properties; Etc. The Company will, and will cause every Subsidiary to, maintain, preserve, protect and keep its Properties in good repair, working order and condition, and from time to time make all needful and proper repairs, renewals, replacements, additions and improvements thereto so that its business and every portion thereof may be properly and advantageously conducted at all times.
Section 11.11. Merger or Consolidation; Sale or Transfer of Assets. The Company will not (a) consolidate with or be a party to a merger with any other corporation or (b) sell, lease or otherwise dispose of all or substantially all of the assets of the Company and its Subsidiaries; provided, however, that the Company may consolidate or merge with any other corporation, or sell, lease or otherwise dispose of all or substantially all of the assets of the Company and its Subsidiaries, if (i) the corporation which results from such consolidation or merger or the corporation to which the Company sells, leases or otherwise disposes of all or substantially all of its and its Subsidiaries assets (in either case, the surviving corporation) is either the Company (in the case of a merger or consolidation), or, if not, is organized under the laws of any State of the United States or the District of Columbia, (ii) if the surviving corporation is not the Company, the obligations of the Company under this Agreement and the Notes are expressly assumed in writing by the surviving corporation and the surviving corporation shall furnish the holders of the Notes an opinion of counsel satisfactory to such holders to the effect that the instrument of assumption has been duly authorized, executed and delivered and constitutes the legal, valid and binding contract and agreement of the surviving corporation enforceable in accordance with its terms, except as enforcement of such terms may be limited by bankruptcy, insolvency, reorganization, moratorium or similar laws affecting the enforcement of creditors rights generally and by general equitable principles, and (iii) at the time of such consolidation or merger or sale, lease or other disposition of all or substantially all of the Companys and its Subsidiaries assets, and immediately after giving effect thereto, no Default or Event of Default shall have occurred and be continuing and the Company or the surviving corporation, as the case may be, could incur at least $1.00 of additional Funded Indebtedness pursuant to Section 11.4.; provided, further that the Company will be permitted to sell its generating assets and power purchase entitlements without the consent of the Purchaser, pursuant to the Companys restructuring plan filed with the MDTE on December 31, 1997.
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Section 11.12. Books of Account and Reports. The Company will keep true records and books of account in which full, true and correct entries will be made of all dealings or transactions in relation to the business and affairs of the Company and its Subsidiaries, in accordance with such system of accounts and orders as shall be prescribed by governmental authorities having jurisdiction in the premises, or, in the absence thereof, in accordance with generally accepted accounting principles, and will file such reports and documents with such Federal and state governmental authorities as may be required by law.
Section 11.13. Transactions with Affiliates. Neither the Company nor any Subsidiary will enter into any transaction, including, without limitation, the purchase, sale or exchange of Property or the rendering of any service, with any Affiliate except in the ordinary course of and pursuant to the reasonable requirements of the Companys or such Subsidiarys business and upon fair and reasonable terms no less favorable to the Company or such Subsidiary than would obtain in a comparable arms-length transaction with a Person not an Affiliate, except as may be necessary in order for the Company to comply with requirements of any applicable state or federal statute or regulation; provided, however, that if it is not possible to identify what terms would apply to a comparable arms-length transaction with a Person not an Affiliate, such transaction shall be upon such terms as shall be fair and reasonable under the circumstances.
Section 11.14. Compliance with Laws. The Company will promptly comply in all material respects, and will cause each Subsidiary to comply in all material respects, with all laws, ordinances or governmental rules and regulations to which it is subject including, without limitation, the Occupational Safety and Health Act of 1970, as amended, ERISA and all laws, ordinances, governmental rules and regulations relating to environmental protection in all applicable jurisdictions, the violation of which would materially and adversely affect the properties, business, prospects, or financial condition of the Company and its Subsidiaries taken as a whole or would result in any Lien not permitted under Section 11.3.
SECTION 12. INFORMATION AS TO THE COMPANY.
Section 12.1. Accounting; Financial Statements and Other Information. The Company will deliver (in duplicate) to the Purchaser, so long as it is the holder of any Notes, and to each Institutional Holder of at least 5% in principal amount of the Notes at the time outstanding:
(a) as soon as available but in any event within ninety (90) days after the end of each of the first three quarterly fiscal periods in each year of the Company, a consolidated balance sheet of the Company and its Subsidiaries at the end of such period, and a consolidated statement of earnings and retained earnings of the Company and its Subsidiaries for such period and for the portion of the fiscal year ending with such period, together with a statement of cash flows for the portion of the fiscal year ending with such period, in each case setting forth in comparative form figures for the corresponding period of the previous year, all in reasonable detail and certified, subject to changes resulting from year-end and audit adjustments, by the Treasurer or an Assistant Treasurer of the Company;
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(b) as soon as available but in any event within one hundred twenty (120) days after the end of each fiscal year of the Company, a consolidated balance sheet of the Company and its Subsidiaries as at the end of such year, and a consolidated statement of earnings and retained earnings and cash flows of the Company and its Subsidiaries, in each case setting forth in comparative form the figures for the previous fiscal year, all in reasonable detail and accompanied by a report thereon of Grant Thornton L.L.P. or other independent public accountants of recognized national standing selected by the Company to the effect that such financial statements have been prepared in accordance with generally accepted accounting principles applied on a basis consistent with the prior fiscal year (except for such changes, if any, as may be specified in such opinion) and fairly present, in all material respects, the consolidated financial position of the Company and its Subsidiaries as of the end of such year and the consolidated results of operations for such year, and that the examination by such accountants in connection with such financial statements has been made in accordance with generally accepted auditing standards;
(c) as soon as available but in any event within ninety (90) days after the end of each of the first three quarterly fiscal periods in each year of Unitil, a balance sheet of Unitil at the end of such period, and a statement of earnings and retained earnings of Unitil for such period and for the portion of the fiscal year ending with such period, together with a statement of cash flows for the portion of the fiscal year ending with such period, in each case setting forth in comparative form figures for the corresponding period of the previous year, all in reasonable detail and certified, subject to changes resulting from year-end and audit adjustments, by the Treasurer, an Assistant Treasurer or any Vice President of Unitil;
(d) as soon as available but in any event within one hundred twenty (120) days after the end of the fiscal year of Unitil, a balance sheet of Unitil as at the end of such year, and a consolidated statement of earnings and retained earnings and cash flows of Unitil, in each case setting forth in comparative form the figures for the previous fiscal year, all in reasonable detail and accompanied by a report thereon of Grant Thornton or other independent public accountants of recognized national standing selected by Unitil to the effect that such financial statements have been prepared in accordance with generally accepted accounting principles applied on a basis consistent with the prior fiscal year (except for such changes, if any, as may be specified in such opinion) and fairly present, in all material respects, the financial position of Unitil as of the end of such year and the results of operations for such year, and that the examination by such accountants in connection with such financial statements has been made in accordance with generally accepted auditing standards;
(e) concurrently with delivery of the documents provided for in Sections 12.1(a) and (b), an Officers Certificate, stating that the officer providing the certificate has reviewed the provisions of this Agreement and setting forth whether there
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existed as of the date of such financial statements and whether, to the best of such officers knowledge, there exists on the date of the certificate or existed at any time during the period covered by such financial statements any Default or Event of Default and, if any such condition or event exists on the date of the certificate, specifying the nature and period of existence thereof and the action the Company is taking and proposes to take with respect thereto;
(f) promptly after the same are available, copies of all proxy statements, financial statements and reports as the Company or its parent shall send to its public stockholders, and copies of all reports which the Company or its parent may file with the SEC or any governmental authority at any time substituted therefor; and
(g) such other information relating to the affairs of the Company as the Purchaser or any such holder reasonably may request from time to time, including, without limitation, written verification (including computations) of compliance by the Company with the requirements of Section 11.3 through 11.4.
Section 12.2. Inspection. The Company will permit any authorized representatives designated by the Purchaser, so long as it is the holder of any Notes, or by each Institutional Holder which holds at least 50% in principal amount of the Notes then outstanding, at such Purchasers or such Institutional Holders expense, to visit and inspect any of the Properties of the Company or any Subsidiary including its books of account, to make copies and take extracts therefrom and to discuss their respective affairs, finances and accounts with their respective officers and independent public accountants (and by this provision the Company authorizes such accountants to discuss with such Purchaser or any such other Institutional Holder the finances and affairs of the Company or any Subsidiary in the presence of an officer of the Company), all at such reasonable times during customary business hours and as often as may reasonably be requested; provided, that such Purchaser agrees and any such Institutional Holder by its acquisition of any Notes shall be deemed to agree to keep confidential any nonpublic information received as a result of the rights granted in this Section 12.2, except that each such holder of the Notes reserves the right to disclose such information (i) as may be appropriate in connection with enforcing compliance with the terms and conditions of this Agreement, (ii) as may be required to governmental agencies, courts or other agencies to whose regulation such holder may be subject but only to the extent that such agencies or courts are authorized by or have apparent authority under applicable law, regulation, court order or other regulatory authority to request such information and (iii) as may be necessary to furnish to a prospective bona fide purchaser of any of the Notes, any of such information which, in the reasonable opinion of the holder of such Notes, is a material fact regarding the Company, provided, that disclosure of any such information may be made to no more than two such prospective purchasers in any thirty day period, each such prospective purchaser must be eligible to be an Institutional Holder should it purchase Notes, and the amount of Notes which would be involved in a sale to any such prospective purchaser is at least 5% of the then-outstanding Notes.
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SECTION 13. DEFAULTS.
Section 13.1. Events of Default; Acceleration. If any one or more of the following conditions or events (Events of Default) shall occur:
(a) default shall occur in the payment of interest on any Note when the same becomes due and payable, and such default shall have continued for more than five (5) days; or
(b) default shall occur in the making of any required redemption of any of the Notes as provided in Section 10.1, or in the making of any other payment of principal of any Note or the premium thereon at the expressed or any accelerated maturity date or at any date fixed for redemption; or
(c) the Company shall default in the performance of or compliance with any term contained in Sections 11.3, 11.4, 11.5, 11.6 or 11.11; or
(d) the Company shall default in the performance of or compliance with any term contained herein other than those referred to above in this Section 13 and such default shall not have been remedied within thirty (30) days after the earlier of (i) the day on which the President, Treasurer or a Senior or Executive Vice President first obtains knowledge of such default or (ii) the date on which written notice thereof shall have been given to the Company by any holder of any Note; or
(e) any representation or warranty made in writing by or on behalf of the Company herein or pursuant hereto or in connection with the consummation of the issuance and delivery of the Notes shall have been false or incorrect in any material respect at the time as of which made; or
(f) the Company or any Subsidiary shall default (as principal or guarantor or other surety) in the payment of any principal of or premium, if any, or interest on any Indebtedness for borrowed money (other than the Notes) the aggregate outstanding principal balance of which shall then exceed $5,000,000 and such default shall continue for more than the period of grace, if any, specified therein and shall not have been waived pursuant thereto; or the Company or any Subsidiary shall default in the performance of or compliance with any term of any evidence of such Indebtedness for borrowed money or of any mortgage, indenture or any other agreement relating thereto and the effect of such default is to permit the acceleration of the maturity of such Indebtedness for borrowed money prior to its stated maturity or prior to its regularly scheduled dates of payment; or
(g) the Company or any Subsidiary shall commence a voluntary case under the federal bankruptcy laws or take advantage of any insolvency law, or shall admit in writing its insolvency or its inability to pay its debts as they become due, or shall make an assignment for the benefit of creditors, or shall apply for, consent to or acquiesce in the appointment of, or taking possession by, a trustee, receiver, custodian or similar official or agent for itself or any substantial part of its Property, or shall take any corporate action authorizing or seeking to effect any of the foregoing, or shall generally not pay its debts as they become due; or
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(h) a trustee, receiver, custodian or similar official or agent shall be appointed for the Company or any Subsidiary by a court or other governmental authority or agency having jurisdiction in the premises or for any substantial part of its Property, and is not discharged for a period of thirty (30) days from the date of its entry, or all or any substantial part of the Property of the Company or any Subsidiary is condemned by eminent domain, seized or otherwise appropriated by any such governmental authority; or
(i) the Company or any Subsidiary shall have a court order or decree for relief in any involuntary case under the federal bankruptcy laws entered against it, and such court order or decree shall remain undismissed and unstayed for sixty (60) days, or a petition seeking reorganization, readjustment, arrangement, composition, or other similar relief as to it under the federal bankruptcy laws or any similar law for the relief of debtors shall be brought against it and shall be consented to by it or shall remain undismissed and unstayed for sixty (60) days; or
(j) one or more final judgments for payment of money exceeding in the aggregate $5,000,000 (in excess of insurance available therefor) shall be rendered against the Company or any Subsidiary and shall remain undischarged for a period of sixty (60) days during which execution shall not be effectively stayed;
then, and in the event that any Event of Default described in subdivisions (a) through (f), (h) or (j) has occurred and is continuing, any holder or holders of at least 25% in principal amount of the Notes at the time outstanding may at any time (unless all defaults shall theretofore have been remedied) at its or their option, by written notice or notices to the Company, declare all of the Notes to be due and payable, whereupon the same shall forthwith mature and become due and payable, together with premium, if any, and interest accrued thereon, without presentment, demand, protest or notice, all of which are hereby waived, provided that during the existence of an Event of Default described in subdivision (a) or (b) of this Section 13.1, and irrespective of whether the holder or holders of at least 25% in principal amount of Notes then outstanding have declared all the Notes to be due and payable, any holder of Notes which has not consented to any waiver with respect to such Event of Default may, at its option, by written notice to the Company, declare the Notes then held by such holder to be due and payable, whereupon the same shall forthwith become due and payable, together with premium, if any, and interest accrued thereon, without presentment, demand, protest or notice, all of which are hereby waived. When any Event of Default described in subdivisions (g) or (i) of Section 13.1 has occurred, then all outstanding Notes shall immediately become due and payable without presentment, demand or notice of any kind. Upon the Notes becoming due and payable as a result of any Event of Default as aforesaid, the Company will forthwith pay to the holders of the Notes the entire principal and interest accrued on the Notes and, to the extent not prohibited by applicable law, an amount as liquidated damages for the loss of the bargain evidenced hereby (and not as a penalty) equal to the Make-Whole Premium determined as of the date on which the Notes shall so become due and payable. No course of dealing on the part of the holder or holders of any Notes nor any delay or failure on the part of any holder of Notes to exercise any right shall operate as a
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waiver of such right or otherwise prejudice such holders rights, powers and remedies. If any holder of any Note shall give any notice or take any other action with respect to a claimed default under this Agreement, or if any Person shall give notice to the Company or take any other action with respect to a claimed default of the type referred to in subdivision (f) of this Section 13.1, the Company will forthwith give written notice thereof to all holders of the Notes at the time outstanding, describing the notice or action and the nature of the claimed default.
Section 13.2. Remedies on Default; Etc. In case any one or more Events of Default shall occur and be continuing, the holder of any Note at the time outstanding may proceed to protect and enforce the rights of such holder by an action at law, suit in equity or other appropriate proceeding, whether for the specific performance of any agreement contained herein or in such Note, or for an injunction against a violation of any of the terms hereof or thereof, or in aid of the exercise of any power granted hereby or thereby by law. The Company further agrees, to the extent permitted by law, to pay to the holder or holders of the Notes all reasonable costs and expenses incurred by them in the collection of any Notes upon any default hereunder or thereon, including reasonable compensation to such holders or holders attorneys for all services rendered in connection therewith. No course of dealing and no delay on the part of any holder of any Note in exercising any right shall operate as a waiver thereof or otherwise prejudice such holders rights, powers or remedies. No right, power or remedy conferred by this Agreement or by any Note upon any holder thereof shall be exclusive of any other right, power or remedy referred to herein or therein or now or hereafter available at law, in equity, by statute or otherwise.
Section 13.3. Rescission of Acceleration. The provisions of Section 13.1 are subject to the condition that if the principal of and accrued interest on all or any outstanding Notes have been declared immediately due and payable by reason of the occurrence of any Event of Default described in subdivisions (a) through (f), (h) or (j) of Section 13.1, the holders of 66 2/3% in aggregate principal amount of the Notes then outstanding may, by written instrument filed with the Company, rescind and annul such declaration and the consequences thereof, provided that at the time such declaration is annulled and rescinded:
(a) no judgment or decree has been entered for the payment of any monies due pursuant to the Notes or this Agreement;
(b) all arrears of interest upon all the Notes and all other sums payable under the Notes and under this Agreement (except any principal, interest or premium on the Notes which has become due and payable solely by reason of such declaration under Section 13.1) shall have been duly paid; and
(c) each and every other Default and Event of Default shall have been made good, cured or waived pursuant to Section 17;
and provided further, that no such rescission and annulment shall extend to or affect any subsequent Default or Event of Default or impair any right consequent thereto.
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SECTION 14. DEFINITIONS; ACCOUNTING PRINCIPLES.
Section 14.1. Definitions. As used in this Agreement the following terms have the following respective meanings:
Affiliate: Any director, officer or employee of the Company and any other Person directly or indirectly controlling or controlled by or under direct or indirect common control with the Company. The term control means the possession, directly or indirectly, of the power to direct or cause the direction of the management and policies of any Person, whether through the ownership of voting securities, by contract or otherwise.
Code: The Internal Revenue Code of 1986, as amended from time to time and the rules and regulations promulgated thereunder from time to time.
Company Reports: The meaning specified in Section 5.7.
Default: Any event or condition the occurrence of which would, with the lapse of time or the giving of notice, or both, constitute an Event of Default.
Earnings Available For Interest: Of any Person for a period, shall mean the excess of the operating revenues of such Person received in the ordinary course of business for such period, together with an allowance for funds used during construction in accordance with generally accepted accounting principles, and net non-operating income (loss), over the sum of all operating expenses, including taxes and adequate and reasonable allowances for maintenance, depreciation and retirement of Properties as charged by such Person, and provision for depletion, obsolescence or amortization of Properties, but excluding, however, any allowance for Federal and state taxes on income or portions thereof for the period for which earnings are being computed.
ERISA: The Employee Retirement Income Security Act of 1974, as amended, and any successor statute of similar import, together with the regulations thereunder, in each case as in effect from time to time. References to sections of ERISA shall be construed to also refer to any successor sections.
ERISA Affiliate: Any trade or business (whether or not incorporated) that is treated as a single employer together with the Company under Section 414 of the Code.
Event of Default: The meaning specified in Section 13.
Funded Indebtedness: Of any Person as of any date as of which the amount thereof is to be determined, shall mean (i) all Indebtedness of such Person required to be paid more than one year from the date as of which Funded Indebtedness is being determined and all Indebtedness required to be paid within such year which may be renewed or extended beyond such year pursuant to the terms of the agreement or instrument under which such Indebtedness was incurred, but there shall be excluded sinking fund, serial maturity, periodic installment and amortization payments on account of Indebtedness which are required to be made within such year and (ii) all guaranties of Funded Indebtedness of others described in clause (i) of this definition.
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Hydro-Quebec Interconnection Support Agreements: The agreements pursuant to which the Company and approximately sixty other members of the New England Power Pool have agreed to support the high voltage direct current transmission lines and associated conversions and supporting alternating current transmission facilities to allow for the import and export of power between New England and Quebec.
Indebtedness: Of any Person as of any date as of which the amount thereof is to be determined, shall mean all (i) obligations of such Person for borrowed money, (ii) obligations secured by any Lien upon Property or assets owned by such Person, even though such Person has not assumed or become liable for the payment of such obligations, and (iii) obligations created or arising under any conditional sale or other title retention agreement with respect to Property acquired by such Person, notwithstanding the fact that the rights and remedies of the seller, lender or lessor under such agreement in the event of default are limited to repossession or sale of Property; provided, that notwithstanding anything to the contrary in the foregoing, Indebtedness of the Company shall not include (A) its obligations under contracts for the purchase by it of gas (including propane and liquefied natural gas) or electric energy or capacity, including transmission charges, (B) obligations not in excess of $6,000,000 in the aggregate at any time outstanding incurred in connection with agreements for the financing of gas, nuclear and other fuel inventories and cushion gas, (C) Lease obligations of the Company or any Subsidiary, (D) pension and other obligations of the Company or any Subsidiary with respect to benefits provided to employees of the Company and its Subsidiaries, regardless of whether such obligations are absolute or contingent or included, in accordance with generally accepted accounting principles, in determining total liabilities as shown on the liability side of a balance sheet of the Company, and (E) obligations relating to the sale of generating assets and power purchase entitlements as provided for in the Companys restructuring plan filed with the Massachusetts Department of Telecommunications and Energy on December 31, 1997.
Institutional Holder: Any insurance company, bank, savings and loan association, trust company, investment company, charitable foundation, employee benefit plan (as defined in ERISA) or other institutional investor or financial institution.
Lease: As applied to any Person shall mean any lease of any Property (whether real, personal or mixed) by that Person as lessee which would, in conformity with generally accepted accounting principles, be required to be accounted for as a capital lease or an operating lease on the financial statements of that Person.
Lien: (i) Any interest in Property (whether real, personal or mixed and whether tangible or intangible) which secures an obligation owed to, or a claim by, a Person other than the owner of such Property, whether such interest is based on the common law, statute or contract, including, without limitation, any such interest arising from a mortgage, charge, pledge, security agreement, conditional sale or trust receipt, or arising from a lease, consignment or bailment given for security purposes, (ii) any encumbrance upon such Property which does not secure an obligation and (iii) any exception to or defect in the title to or ownership interest in such
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Property, including, without limitation, reservations, rights of entry, possibilities of reverter, encroachments, easements, rights of way, restrictive covenants, leases, licenses and profits a prendre. For purposes of this Agreement, the Company or a Subsidiary shall be deemed to be the owner of any Property which it has acquired or holds subject to a conditional sales agreement or other arrangement pursuant to which title to the Property has been retained by or vested in some other Person for security purposes.
Make-Whole Premium: In connection with any redemption or acceleration of the Notes the excess, if any, of (i) the aggregate present value as of the date of such redemption or acceleration of each dollar of principal being prepaid (taking into account the application of each redemption required by Section 10.1) and the amount of interest (exclusive of interest accrued to the date of redemption) that would have been payable in respect of each dollar if such redemption had not been made, determined by discounting such amounts at the Reinvestment Rate from the respective dates on which they would have been payable to the date of such redemption or acceleration, over (ii) 100% of the principal amount of the outstanding Notes being redeemed. If the Reinvestment Rate is equal to or higher than 6.79%, the Make-Whole Premium shall be zero. For purposes of any determination of the Make-Whole Premium:
Reinvestment Rate shall mean (1) the sum of 0.50%, plus the yield reported on page USD of the Bloomberg Financial Markets Services Screen (or, if not available, any other nationally recognized trading screen reporting on-line intraday trading in United States Government Securities at 11:00 a.m. (New York City time) for the United States Government Securities having a maturity (rounded to the nearest month) corresponding to the Weighted Average Life to Maturity of the principal being redeemed (taking into account the application of each redemption required by Section 10.1) or (2) in the event that no nationally recognized trading screen reporting on-line intraday trading in the United States Government Securities is available, Reinvestment Rate shall mean the sum of 0.50% plus the arithmetic mean of the yields for the two columns under the heading Week Ending published in the Statistical Release under the caption Treasury Constant Maturities for the maturity (rounded to the nearest month) corresponding to the Weighted Average Life to Maturity of the principal being redeemed (taking into account the application of each redemption required by Section 10.1). If no maturity exactly corresponds to such Weighted Average Life to Maturity, yields for the published maturity next longer than the Weighted Average Life to Maturity and for the published maturity next shorter than the Weighted Average Life to Maturity shall be calculated pursuant to the immediately preceding sentence and the Reinvestment Rate shall be interpolated from such yields on a straight-line basis, rounding in each of such relevant periods to the nearest month. For the purposes of calculating the Reinvestment Rate, the most recent Statistical Release published prior to the date of determination of the Make-Whole Premium shall be used.
Statistical Release shall mean the then most recently published statistical release designated H.15(519) or any successor publication which is published weekly by the Federal Reserve System and which establishes yields on actively traded U.S. Government Securities adjusted to constant maturities or, if such statistical release is not published at the time of any determination hereunder, then such other reasonably comparable index which shall be designated by the holders of 66 2/3% in aggregate principal amount of the outstanding Notes.
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Weighted Average Life to Maturity of the principal amount of the Notes being redeemed shall mean, as of the time of any determination thereof, the number of years obtained by dividing the then Remaining Dollar-Years of such principal by the aggregate amount of such principal. The term Remaining Dollar-Years of such principal shall mean the amount obtained by (i) multiplying (x) the remainder of (1) the amount of principal that would have become due on each scheduled payment date if such redemption had not been made, less (2) the amount of principal on the Notes scheduled to become due on such date after giving effect to such redemption and the application thereof in accordance with the provisions of Section 10.1, by (y) the number of years (calculated to the nearest one-twelfth) which will elapse between the date of determination and such scheduled payment date, and (ii) totalling the products obtained in (i).
Material: Material in relation to the business, operations, affairs, financial condition, assets, or properties of the Company and its Subsidiaries taken as a whole.
Material Adverse Effect: A material adverse effect on (a) the business, operations, affairs, financial condition, assets or properties of the Company and its Subsidiaries taken as a whole, or (b) the ability of the Company to perform its obligations under this Agreement and the Notes, or (c) the validity or enforceability of this Agreement or the Notes.
MDTE: The meaning specified in Section 4.4.
Multiemployer Plan: Any Plan that is a multiemployer plan (as such term is defined in Section 4001(a)(3) of ERISA).
Net Income (Deficit): The amount of net income (or if such Net Income is a deficit, the amount of such deficit) of the Company and its Subsidiaries for the period in question (taken as a cumulative whole), as determined in accordance with generally accepted accounting principles; provided, however, that any gain or loss from sales or other dispositions (i) of generating assets and power purchase entitlements as provided for in the Companys restructuring plan filed with the Massachusetts Department of Telecommunications and Energy on December 31, 1997, shall be excluded from the calculation of Net Income (Deficit) and (ii) of any other Property which was previously used in the business of the Company and its Subsidiaries, which sales or dispositions occurred during the twelve month period immediately preceding the date as of which Net Income (Deficit) is being determined, the book value of which Property represents in the aggregate more than 10% of Tangible Assets (determined as of the end of the immediately preceding fiscal year of the Company), shall be excluded from the calculation of Net Income (Deficit); and provided, further, that the foregoing proviso shall create no implication that gain or loss from the sale or other disposition of Property of the Company and its Subsidiaries shall be included in determining Net Income (Deficit), unless such inclusion is otherwise in accordance with generally accepted accounting principles.
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Officers Certificate: A certificate signed by the Chairman of the Board of Directors, the President or any Vice President and by the Treasurer, any Assistant Treasurer, the Clerk or an Assistant Clerk of the Company.
Opinion of Counsel: An opinion in writing signed by legal counsel, who shall be reasonably satisfactory to the Purchaser and to the holders of at least 50% of the aggregate principal amount of the Notes then outstanding, and who may be counsel to the Company.
PBGC: The Pension Benefit Guaranty Corporation referred to and defined in ERISA or any successor thereto.
Person: An individual, an association, a corporation, a partnership, a trust or estate, a government, foreign or domestic, and any agency or political subdivision thereof, or any other entity, including the Company and any Subsidiary.
Plan: An employee benefit plan (as defined in section 3(3) of ERISA) that is or, within the preceding five years, has been established or maintained, or to which contributions are or, within the preceding five years, have been made or required to be made, by the Company or any ERISA Affiliate or with respect to which the Company or any ERISA Affiliate may have any liability.
Property: Any kind of property or asset, whether real, personal or mixed, or tangible or intangible.
Subsidiary: Any corporation or other entity at least a majority of the outstanding voting shares of which is at the time owned (either alone or through Subsidiaries or together with Subsidiaries) by the Company or another Subsidiary.
Tangible Assets: As of the date of any determination thereof the total amount of all assets of the Company and its Subsidiaries (less depreciation, depletion and other properly deductible valuation reserves) after deducting good will, patents, trade names, trade marks, copyrights, experimental expense, and the excess of cost of shares acquired over book value of related assets.
Total Capitalization: At any date means the sum of (x) Funded Indebtedness of the Company and its Subsidiaries, and (y) the aggregate amount for total common stock equity, preference stock and preferred stock as presented in accordance with generally accepted accounting principles on a consolidated balance sheet of the Company as of such date; provided, however, that any securities or Funded Indebtedness to be redeemed from the proceeds of the incurrence of Funded Indebtedness as provided for in Section 11.4(c) hereof, which have not yet been so redeemed, shall not be included in the determination of Total Capitalization. Such Total Capitalization shall be exclusive of accumulated Other Comprehensive Income derived from pension and benefit obligations.
Unitil shall mean Unitil Corporation, owner of all of the outstanding stock of the Company.
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Section 14.2. Accounting Principles. Where the character or amount of any asset or liability or item of income or expense is required to be determined or any consolidation or other accounting computation is required to be made for the purposes of this Agreement, the same shall be done in accordance with generally accepted accounting principles then in effect, to the extent applicable, except where such principles are inconsistent with the requirements of this Agreement.
SECTION 15. EXPENSES; ETC.
Whether or not the transactions contemplated hereby shall be consummated, the Company will pay all reasonable expenses in connection with such transactions and in connection with any amendments or waivers (whether or not the same become effective) under or in respect of this Agreement or the Notes, including, without limitation: (a) the cost and expenses of reproducing this Agreement, of the reproducing and issue of the Notes, of furnishing all opinions of counsel for the Company and all certificates on behalf of the Company, and of the Companys performance of and compliance with all agreements and conditions contained herein on its part to be performed or complied with; (b) the cost of delivering to the principal office of the Purchaser, insured to its satisfaction, any Notes delivered to it upon any substitution of Notes pursuant to Section 8 and of the Purchasers delivering any Notes, insured to its satisfaction, upon any such substitution; (c) the reasonable fees, expenses and disbursements of Chapman and Cutler LLP, special counsel for the Purchaser, in connection with such transactions and any such amendments or waivers; and (d) the reasonable out-of-pocket expenses incurred by the Purchaser in connection with such transactions and any such amendments or waivers. The Company will indemnify and hold the Purchaser harmless from and against all claims in respect of the fees, if any, of brokers and finders payable in connection with the execution and delivery of this Agreement or the carrying out of the transactions contemplated hereby. The Company will also pay, and will save the Purchaser and each holder of any Notes harmless from, any and all liabilities with respect to any taxes (including interest and penalties) which may be payable in respect of the execution and delivery of this Agreement, the issue of the Notes and any amendment or waiver under or in respect of this Agreement or the Notes.
SECTION 16. SURVIVAL OF AGREEMENTS; ETC.
All agreements contained herein and all representations and warranties made in writing by or on behalf of the Company herein or pursuant hereto shall survive the execution and delivery of this Agreement, any investigation at any time made by the Purchaser or on its behalf, the purchase of the Notes by the Purchaser hereunder, and any disposition or payment of the Notes. All statements contained in any certificate or other instrument delivered by or on behalf of the Company pursuant hereto or in connection with the transactions contemplated hereby shall be deemed representations and warranties made by the Company hereunder.
SECTION 17. AMENDMENTS AND WAIVERS.
Any term of this Agreement or of the Notes may be amended and the observance of any term hereof or thereof may be waived (either generally or in a particular instance and either
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retroactively or prospectively) only with the written consent of the Company and the holders of at least 66 2/3% in principal amount of the Notes at the time outstanding, provided that, without the prior written consent of the holders of all the Notes at the time outstanding, no such amendment or waiver shall (a) change the time of payment (including any prepayment required by Section 10.1) of the principal of or the interest on any Note or change the principal amount thereof or change the rate of interest thereon, or (b) change any of the provisions with respect to optional prepayments, or (c) reduce the aforesaid percentage of the principal amount of the Notes the holders of which are required to consent to any such amendment or waiver, or (d) change the provisions of Section 13 giving each holder of any Note the right, without joining any other such holders of the Notes, to declare the Notes held by such holder due and payable as provided in Section 13. Any amendment or waiver effected in accordance with this Section 17 shall be binding upon each holder of any Note at the time outstanding, each future holder of any Note and the Company. Notes directly or indirectly held by the Company or any Affiliate of the Company shall not be deemed outstanding for purposes of determining whether any amendment or waiver has been effected in accordance with this Section 17.
SECTION 18. NOTICES; ETC.
All notices and other communications hereunder shall be in writing and shall be mailed by certified mail, return receipt requested or overnight courier, (a) if to the Purchaser, addressed to the address of such Purchaser designated as the Purchasers address on Schedule I attached hereto, or at such other address as such Purchaser shall have furnished to the Company in writing, except that payments on any Note and notices in respect thereof shall be made and sent as provided in Section 9, or at such other address as such Purchaser shall have furnished to the Company for such purpose, or (b) if to any other holder of any Note, at the registered address of such holder as set forth in the register kept by the Company as provided in Section 8, or (c) if to the Company, to 6 Liberty Lane West, Hampton, New Hampshire 03842, Attention: Treasurer, or at such other address as the Company shall have furnished to the Purchaser and each such other holder in writing.
SECTION 19. FURTHER ASSURANCES.
The Company will execute and deliver all such instruments and take all such action as the Purchaser from time to time may reasonably request in order to further effectuate the purposes and carry out the terms of this Agreement and the Notes.
SECTION 20. MISCELLANEOUS.
This Agreement shall be binding upon and inure to the benefit of and be enforceable by the respective successors and assigns of the parties hereto, whether so expressed or not, and, in particular, shall inure to the benefit of and be enforceable by any holder or holders at the time of the Notes or any part thereof. This Agreement embodies the entire agreement and understanding between the Purchaser and the Company and supersedes all prior agreements and understandings relating to the subject matter hereof. This Agreement and the Notes shall be construed and enforced in accordance with and governed by the laws of the Commonwealth of Massachusetts.
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The headings in this Agreement are for purposes of reference only and shall not limit or otherwise affect the meaning hereof. This Agreement may be executed in any number of counterparts, each of which shall be an original, but all of which together shall constitute one instrument.
SECTION 21. SEVERABILITY.
Should any part of this Agreement for any reason be declared invalid or unenforceable, such decision shall not affect the validity or enforceability of any remaining portion, which remaining portion shall remain in force and effect as if this Agreement had been executed with the invalid or unenforceable portion thereof eliminated and it is hereby declared the intention of the parties hereto that they would have executed the remaining portion of this Agreement without including therein any such part, parts or portion which may, for any reason, be hereafter declared invalid or unenforceable.
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The execution by the Purchaser shall constitute a contract among the Company and the Purchaser for the uses and purposes hereinabove set forth. This Agreement may be executed in any number of counterparts, each executed counterpart constituting an original but all together only one agreement.
FITCHBURG GAS AND ELECTRIC LIGHT COMPANY | ||
By |
/s/ Mark H. Collin | |
Title: Treasurer |
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Accepted as of October 15, 2003:
PACIFIC LIFE INSURANCE COMPANY | ||
(nominee: Mac & Co.) | ||
By |
/s/ Lori Johnston | |
Title: Assistant Vice President | ||
By |
/s/ Cathy Schwartz | |
Title: Assistant Secretary |
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INFORMATION RELATING TO PURCHASER
NAME AND ADDRESS OF PURCHASER |
PRINCIPAL AMOUNT OF NOTES TO BE PURCHASED | |
PACIFIC LIFE INSURANCE COMPANY | $10,000,000 to be | |
Attn: Securities Department |
issued in six separate | |
700 Newport Center Drive |
Notes as follows: | |
Newport Beach, CA 92660-6397 |
||
Fax: (949) 219-5406 |
No. R-1 $5,000,000 | |
No. R-2 $1,000,000 | ||
No. R-3 $1,000,000 | ||
No. R-4 $1,000,000 | ||
No. R-5 $1,000,000 | ||
No. R-6 $1,000,000 |
For Payment of Principal and Interest
All payments on or in respect of the Notes to be by bank wire transfer of Federal or other immediately available funds, identifying the breakdown of principal and interest and the payment date to:
Boston Safe Deposit and Trust Company
ABA# 0110-0123-4/BOS SAFE DEP
DDA 125261
Attn: MBS Income CC: 1253
A/C Name: Pacific Life General Account/PLCF1810132
Regarding: Fitchburg Gas and Electric Light Company, 6.79% Notes due October 15, 2025, PPN:338135 D@ 2
All Notices of Payments and Written Confirmations of such Wire Transfers to:
Mellon Trust
Attn: Pacific Life Accounting Team
Three Mellon Bank Center
AIM # 153-3610
Pittsburgh, PA 15259
Fax: (412) 236-7529
SCHEDULE I
(to Note Agreement)
with a copy to:
Pacific Life Insurance Company
Attn: Securities Administration Cash Team
700 Newport Center Drive
Newport Beach, CA 92660-6397
Fax: (949) 640-4013
Address for All Other Notices to be Addressed as First Provided Above.
Name of Nominee in which Notes are to be issued: Mac & Co.
Taxpayer I.D. Number: Mac & Co.: 95-1079000
I-2
FITCHBURG GAS AND ELECTRIC LIGHT COMPANY
Funded Indebtedness Outstanding
as of September 30, 2003
Issue |
Total Amount Outstanding | ||
8.55% Notes due March 31, 2004 |
$ | 3,000,000 | |
6.75% Notes due November 30, 2023 |
$ | 19,000,000 | |
7.37% Notes due January 15, 2029 |
$ | 12,000,000 | |
7.98% Notes due June 1, 2031 |
$ | 14,000,000 | |
Total Funded Indebtedness |
$ | 48,000,000 | |
SCHEDULE II
(to Note Agreement)
FITCHBURG GAS AND ELECTRIC LIGHT COMPANY
6.79% Note due October 15, 2025
$ |
PPN: 338135 D@ 2 |
|||
No. |
October , 2003 |
FITCHBURG GAS AND ELECTRIC LIGHT COMPANY (the Company), a Massachusetts corporation, for value received, hereby promises to pay to or registered assigns the principal sum of Dollars ($ ) on October 15, 2025; and to pay interest (computed on the basis of a 360-day year of twelve 30-day months) on the unpaid principal balance hereof from the date of this Note at the rate of 6.79% per annum, semi-annually on the fifteenth day of October and April in each year, commencing with April 15, 2004, until the principal amount hereof shall become due and payable. The Company agrees to pay interest on overdue principal (including any overdue required or optional prepayment of principal) and premium, if any, and (to the extent legally enforceable) on any overdue installment of interest, at the rate of 8.79% per annum after the due date, whether by acceleration or otherwise, until paid.
Payments of principal, premium, if any, and interest shall be made in such coin or currency of the United States of America as at the time of payment is legal tender for the payment of public and private debts by check mailed and addressed to the registered holder hereof at the address shown in the register maintained by the Company for such purpose, or, at the option of the holder hereof, in such manner and at such other place in the United States of America as the holder hereof shall have designated to the Company in writing.
This Note is one of the 6.79% Notes due October 15, 2025 of the Company issued in an aggregate principal amount limited to $10,000,000 pursuant to the Companys Note Agreement with the Purchaser named therein dated as of October 15, 2003, and this Note and the holder hereof are entitled equally and ratably with the holders of all other Notes outstanding under the Note Agreement to all the benefits provided for thereby or referred to therein. Reference is hereby made to the Note Agreement for a statement of such rights and benefits.
This Note and the other Notes outstanding under the Note Agreement may be declared due prior to their expressed maturity dates and certain prepayments are required to be made thereon, all in the events, on the terms and in the manner and amounts as provided in the Note Agreement.
The Notes are subject to prepayment or redemption at the option of the Company prior to their expressed maturity dates only on the terms and conditions and in the amounts and with the premium, if any, set forth in the Note Agreement.
This Note is a registered Note and is transferable only by surrender thereof at the principal office of the Company, duly endorsed or accompanied by a written instrument of transfer duly executed by the registered holder of this Note or his attorney duly authorized in writing.
EXHIBIT A
(to Note Agreement)
Under certain circumstances, as specified in said Agreement, the principal of this Note may be declared due and payable in the manner and with the effect provided in said Agreement.
This Note and said Agreement are governed by and construed in accordance with the Massachusetts law.
FITCHBURG GAS AND ELECTRIC LIGHT COMPANY | ||
By |
| |
Name: | ||
Title: |
A-2
OPINION OF SPECIAL COUNSEL FOR THE PURCHASER
October , 2003
Pacific Life Insurance Company
700 Newport Center Drive
Newport Beach, California 92660-6397
Re: | 6.79% Notes of Fitchburg Gas and Electric Light Company |
Due October 15, 2025 (the Notes)
Ladies and Gentlemen:
This opinion is being furnished to you pursuant to Section 4.5 of the Note Agreement dated as of October 15, 2003 (the Note Agreement) among Fitchburg Gas and Electric Light Company (the Company) and you relating to the issue and sale of $10,000,000 principal amount of the Notes. We have acted as your special counsel in connection with the foregoing matter and are, therefore, familiar with the proceedings taken in connection therewith. This opinion is being delivered concurrently with the delivery of payment for the Notes in accordance with the Note Agreement. Capitalized terms defined in the Note Agreement, when used herein, have the meanings so defined.
In connection herewith, we have examined originals (or copies certified or otherwise identified to our satisfaction) of
(i) the Note Agreement;
(ii) the form of the Notes;
(iii) the records of corporate proceedings of the Company in connection with the authorization of the execution and delivery of the Note Agreement and the Notes and the consummation of the transactions contemplated by the Note Agreement;
(iv) the Articles of Organization of the Company, including all amendments thereto, certified by the Clerk of the Company;
(v) Certificate of Good Standing with respect to the Company executed by the Secretary of the Commonwealth of Massachusetts;
(vi) the order of the Massachusetts Department of Telecommunications and Energy dated September 25, 2003, authorizing the issuance and sale of the Notes;
EXHIBIT B
(to Note Agreement)
(vii) 10-K Report, 10-Q Reports and the 8-K Reports; and
(viii) such other instruments, certificates, documents, contracts and records of the Company as we have deemed necessary or appropriate for the purposes of the opinion rendered hereby.
As to any facts material to our opinion, we have, when relevant facts were not independently established, relied upon the aforesaid instruments, certificates, documents, contracts and records. We believe that the opinion of LeBoeuf, Lamb, Greene & McRae, L.L.P., responsive to the Note Agreement, delivered to you herewith and dated the date hereof, is satisfactory in scope and form and that you are justified in relying thereon. Our opinion as to matters referred to in paragraph 1 below is based solely upon an examination of the Articles of Organization certified by, and a certificate of good standing of the Company from, the Secretary of the Commonwealth of Massachusetts and by By-laws of the Company. In rendering our opinion below, we have relied upon the opinion of LeBoeuf, Lamb, Greene & McRae, L.L.P. with respect to matters of Massachusetts law.
Based upon and subject to the foregoing, we are of the opinion that:
(1) The Company is a corporation, validly existing and in good standing under the laws of the Commonwealth of Massachusetts, has corporate power and authority to carry on its business and own its Property and is duly authorized to enter into and perform the Note Agreement and to issue the Notes and incur the Indebtedness to be evidenced thereby.
(2) The Note Agreement has been duly authorized, executed and delivered by the Company and constitutes the legal, valid and binding agreement of the Company enforceable in accordance with its terms, except as enforcement thereof may be limited by the effect of any applicable bankruptcy, insolvency, fraudulent conveyance, reorganization, moratorium or similar laws affecting the rights of creditors generally from time to time in effect, and general principles of equity (regardless of whether such enforceability is considered in equity or at law).
(3) The Notes have been duly authorized by proper corporate action on the part of the Company, have been duly executed and delivered by authorized officers of the Company and constitute the legal, valid and binding obligations of the Company enforceable in accordance with its terms, except as enforcement thereof may be limited by the effect of any applicable bankruptcy, insolvency, fraudulent conveyance, reorganization, moratorium or similar laws affecting the rights of creditors generally from time to time in effect, and general principles of equity (regardless of whether such enforceability is considered in equity or at law).
(4) The issuance, sale and delivery of the Notes under the circumstances contemplated by the Note Agreement are exempt from the registration requirements of the Securities Act of 1933, as amended, and do not under existing law require the
B-2
registration of the Notes under the Securities Act of 1933, as amended, or the qualification of an indenture in respect thereof under the Trust Indenture Act of 1939.
Very truly yours,
B-3
OPINION OF COUNSEL FOR THE COMPANY
October , 2003
Pacific Life Insurance Company
700 Newport Center Drive
Newport Beach, California 92660-6397
Re: | 6.79% Notes of Fitchburg Gas and Electric Light Company |
Due October 15, 2025 (the Notes)
Ladies and Gentlemen:
This opinion is being furnished to you pursuant to Section 4.5 of the Note Agreement dated as of October 15, 2003 (the Note Agreement) among Fitchburg Gas and Electric Light Company, a Massachusetts corporation (the Company) and you relating to the issue and sale of $10,000,000 aggregate principal amount of the Notes. We have acted as counsel for the Company, in connection with the foregoing matter and are, therefore, familiar with the proceedings taken in connection therewith. This opinion is being delivered concurrently with the delivery of payment for the Notes in accordance with the Note Agreement. Capitalized terms defined in the Note Agreement, when used herein, have the meanings so defined.
In connection herewith, we have examined originals (or copies certified or otherwise identified to our satisfaction) of
(i) the Note Agreement;
(ii) the Notes;
(iii) the records of corporate proceedings of the Company in connection with the authorization of the execution and delivery of the Note Agreement and the Notes and the consummation of the transactions contemplated by the Note Agreement;
(iv) the Articles of Organization and By-Laws of the Company, including all amendments thereto, certified by the Clerk of the Company;
(v) a Certificate of Good Standing with respect to the Company executed by the Secretary of the Commonwealth of Massachusetts dated October 14, 2003;
EXHIBIT C
(to Note Agreement)
(vi) the order of the Massachusetts Department of Telecommunications and Energy (MDTE) dated September 25, 2003 authorizing the issuance and sale of the Notes;
(vii) the Annual Report on Form 10-K of Unitil Corporation, a New Hampshire Corporation (Unitil), Unitils Quarterly Reports on Form 10-Q for the fiscal quarters ended March 31, 2003 and June 30, 2003 and Unitils Current Reports on Form 8-K filed on January 17, 2003, February 12, 2003, April 17, 2003 and August 29, 2003 (collectively, the SEC Reports); and
(viii) such other instruments, certificates, documents, contracts and records of the Company as we have deemed necessary or appropriate for the purposes of the opinion rendered hereby.
In such examination, we have assumed the genuineness of all signatures (other than the signatures of Company officers), the authenticity of all documents submitted to us as originals, the conformity to the original documents of all documents submitted to us as copies, the authenticity of the originals of such latter documents and the legal capacity of all parties to such documents except the Company. As to questions of fact material to the opinions set forth herein, we have relied, without independent investigation, upon statements by or certificates of officers and other representatives and agents of the Company, public officials and others and have examined the representations and warranties contained in the Note Agreement and have relied upon, without independent verification, the relevant facts stated therein.
We also have assumed that you have all requisite power and authority and have taken all necessary corporate or other action to execute and deliver the Note Agreement, to purchase and to hold the Notes and to effect the transactions contemplated by the Note Agreement.
Based upon and subject to the foregoing and the other qualifications and limitations set forth herein, we are of the opinion that:
(1) The Company is a corporation, validly existing and in good standing under the laws of the Commonwealth of Massachusetts, has corporate power and authority to carry on its business and own its Property and is duly authorized to enter into and perform the Note Agreement and to issue the Notes and incur the Indebtedness to be evidenced thereby.
(2) The Note Agreement has been duly authorized, executed and delivered by the Company and constitutes the legal, valid and binding agreement of the Company enforceable in accordance with its terms, except as enforcement thereof may be limited by the effect of any applicable bankruptcy, insolvency, fraudulent conveyance, reorganization, moratorium or similar laws affecting the rights of creditors generally from time to time in effect, and general principles of equity (regardless of whether such enforceability is considered in equity or at law).
C-2
(3) The Notes have been duly authorized by proper corporate action on the part of the Company, have been duly executed and delivered by authorized officers of the Company and constitute the legal, valid and binding obligations of the Company enforceable in accordance with their terms, except as enforcement thereof may be limited by the effect of any applicable bankruptcy, insolvency, fraudulent conveyance, reorganization, moratorium or similar laws affecting the rights of creditors generally from time to time in effect, and general principles of equity (regardless of whether such enforceability is considered in equity or at law).
(4) The issuance, sale and delivery of the Notes under the circumstances contemplated by the Note Agreement are exempt from the registration requirements of the Securities Act of 1933, as amended, and do not under existing law require the qualification of an indenture in respect thereof under the Trust Indenture Act of 1939.
(5) To our knowledge, the Company is duly licensed or qualified and is in good standing as a foreign corporation in each jurisdiction in which the character of the properties owned or leased by it or the nature of the business transacted by it makes such licensing or qualification necessary except where the failure so to qualify does not have a material adverse effect on the condition (financial or other), business, properties, net worth or results of operations of the Company taken as a whole.
(6) To our knowledge, the issuance and sale of the Notes and the execution, delivery and performance by the Company of the Note Agreement do not conflict with or result in any breach of any of the provisions of, or constitute a default under or result in the creation or imposition of any lien upon any of the Property of the Company, under the provisions of the Articles of Organization or By-Laws of the Company or any agreement or other instrument to which the Company is a party or by which the Company is bound that is an exhibit to any of the SEC Reports or is known to us after reasonable inquiry.
(7) The issue and sale of the Notes have to the extent required by law been duly authorized by an order of the MDTE, such order is in full force and effect, the applicable appeal period with respect to the MDTE order has expired and no other consent, exemption, approval or authorization by any other governmental authority is required in connection with the execution and delivery of the Note Agreement or the issue, sale and delivery of the Notes.
(8) Assuming that the proceeds of the sale of the Notes will be used only for the purposes set forth in Section 6 of the Note Agreement, none of the transactions contemplated in the Note Agreement (including, without limitation thereof, the use of the proceeds from the sale of the Notes) will violate or result in a violation of Section 7 of the Securities Exchange Act of 1934, as amended, or any regulations issued pursuant thereto, including, without limitation, Regulations U, T and X of the Board of Governors of the Federal Reserve System, 12 C.F.R., Chapter II.
(9) To our knowledge, without conducting a search of any dockets, other than as described in the SEC Reports (including all exhibits and schedules thereto), there are
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no actions, suits, investigations or proceedings to which the Company is a party in any court or before any governmental authority which involve the possibility of materially and adversely affecting the business or condition of the Company or the ability of the Company to perform its obligations under the Note Agreement or the Notes; and the Company is not, to our knowledge, in default with respect to any order, judgment or decree of any court or governmental authority.
(10) The Company is subject to the jurisdiction of (i) the MDTE and (ii) the SEC under the Public Utility Holding Company Act of 1935, as amended.
With respect to our opinions herein rendered to our knowledge, we have based such opinions on a certificate of an officer of the Company, due inquiry of such officer and other officers of the Company and review of such of the Companys records as may be identified as relevant in the officers certificate. We have not undertaken to review all agreements to which the Company may be a party.
We express no opinion herein as to the laws of any jurisdiction other than the Commonwealth of Massachusetts and the federal law of the United States of America.
This opinion is furnished by us as counsel to the Company and is solely for the benefit of you, your successors and assigns and your special counsel, Chapman and Cutler, LLP in connection with the issue and sale of the Notes, and may not be relied on by you, your successors and assigns or your special counsel for any other purpose or used, circulated, quoted or referred to in any manner or for any purpose by any other person, nor may copies be delivered to any other persons without our express written consent.
Very truly yours,
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Exhibit 11.1
UNITIL CORPORATION
COMPUTATION IN SUPPORT OF EARNINGS PER SHARE
Year Ended December 31, |
||||||||||
2003 |
2002 |
2001 |
||||||||
EARNINGS PER SHARE (000s, except per share data) |
||||||||||
Net Income before Extraordinary Item |
$ | 7,958 | $ | 6,088 | $ | 5,027 | ||||
Extraordinary Item, net |
| | (3,937 | ) | ||||||
Net Income |
7,958 | 6,088 | 1,090 | |||||||
Less: Dividend Requirements on Preferred Stock |
236 | 253 | 257 | |||||||
Net Income Applicable to Common Stock |
$ | 7,722 | $ | 5,835 | $ | 833 | ||||
Average Number of Common Shares OutstandingBasic |
4,878 | 4,744 | 4,744 | |||||||
Dilutive Effect of Stock Options* and Restricted Stock |
21 | 18 | 16 | |||||||
Average Number of Common Shares OutstandingDiluted |
4,899 | 4,762 | 4,760 | |||||||
Earnings Per ShareBasic |
$ | 1.58 | $ | 1.23 | $ | 0.18 | ||||
Earnings Per ShareDiluted |
$ | 1.58 | $ | 1.23 | $ | 0.18 |
* | Assumes all options were converted to common shares per SFAS 128. |
Exhibit 12.1
UNITIL CORPORATION
COMPUTATION IN SUPPORT OF RATIO OF EARNINGS TO FIXED CHARGES
Year Ended December 31, | ||||||||||||||||
2003 |
2002 |
2001 |
2000 |
1999 | ||||||||||||
Earnings (000s, except ratios): |
||||||||||||||||
Net Income before Extraordinary Item |
$ | 7,958 | $ | 6,088 | $ | 5,027 | $ | 7,216 | $ | 8,438 | ||||||
Extraordinary Item, net |
| | (3,937 | ) | | | ||||||||||
Net Income, per Consolidated Statement of Earnings |
7,958 | 6,088 | 1,090 | 7,216 | 8,438 | |||||||||||
Federal and State Income Taxes included in: |
||||||||||||||||
Operations |
3,551 | 2,490 | 3,421 | 3,413 | 4,047 | |||||||||||
Investment Write-down |
| | 1,236 | | | |||||||||||
Extraordinary Item |
| | 1,388 | | | |||||||||||
Interest on Long-Term Debt |
8,088 | 8,254 | 7,637 | 6,440 | 6,477 | |||||||||||
Amortization of Debt Discount Expense |
82 | 81 | 72 | 60 | 60 | |||||||||||
Other Interest |
1,070 | 1,038 | 1,895 | 2,105 | 1,091 | |||||||||||
Total |
$ | 20,749 | $ | 17,951 | $ | 16,739 | $ | 19,234 | $ | 20,113 | ||||||
Fixed Charges: |
||||||||||||||||
Interest of Long-Term Debt |
$ | 8,088 | $ | 8,254 | $ | 7,637 | $ | 6,440 | $ | 6,477 | ||||||
Amortization of Debt Discount Expense |
82 | 81 | 72 | 60 | 60 | |||||||||||
Other Interest |
1,070 | 1,038 | 1,895 | 2,105 | 1,091 | |||||||||||
Pre-tax Preferred Stock Dividend Requirements |
391 | 419 | 417 | 398 | 406 | |||||||||||
Total |
$ | 9,631 | $ | 9,792 | $ | 10,021 | $ | 9,003 | $ | 8,034 | ||||||
Ratio of Earnings to Fixed Charges |
2.15 | 1.83 | 1.67 | 2.14 | 2.50 | |||||||||||
Exhibit 21.1
Subsidiaries of Registrant
The Company or the registrant has six wholly-owned subsidiaries, five of which are corporations organized under the laws of the State of New Hampshire: Unitil Energy Systems, Inc., Unitil Power Corp., Unitil Realty Corp., Unitil Resources, Inc. and Unitil Service Corp. The sixth, Fitchburg Gas and Electric Light Company, is organized under the laws of the State of Massachusetts. Usource, Inc., which is a corporation organized under the laws of the State of Delaware, is a wholly-owned subsidiary of Unitil Resources, Inc. Usource L.L.C., which is a corporation organized under the laws of the State of Delaware, is a wholly-owned subsidiary of Usource, Inc.
Exhibit 23.1
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
We have issued our report dated February 6, 2004, accompanying the consolidated financial statements included in the Annual Report of Unitil Corporation and subsidiaries on Form 10-K for the year ended December 31, 2003. We hereby consent to the incorporation by reference of said report in the Registration Statements of Unitil Corporation and subsidiaries on Form S-3 (File No. 333-42264 filed on July 26, 2000) and on Form S-8 (File No. 333-42266 filed on July 26, 2000).
/s/ GRANT THORNTON LLP
Boston, Massachusetts
February 6, 2004
Exhibit 31.1
CERTIFICATION UNDER SECTION 302 OF THE SARBANES-OXLEY ACT
I, Robert G. Schoenberger, certify that:
1) I have reviewed this annual report on Form 10-K of Unitil Corporation;
2) Based on my knowledge, this 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 report;
3) Based on my knowledge, the financial statements, and other financial information included in this 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 report;
4) The registrants other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:
a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b) Evaluated the effectiveness of the registrants disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
c) Disclosed in this report any changes in the registrants internal control over financial reporting that occurred during the registrants most recent fiscal quarter (the registrants fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonable likely to materially affect, the registrants internal controls over financial reporting; and
5) The registrants other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrants auditors and the audit committee of the registrants board of directors (or persons performing the equivalent functions):
a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrants ability to record, process, summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrants internal control over financial reporting.
Date: February 24, 2004
/s/ ROBERT G. SCHOENBERGER |
Robert G. Schoenberger Chief Executive Officer and President |
Exhibit 31.2
CERTIFICATION UNDER SECTION 302 OF THE SARBANES-OXLEY ACT
I, Mark H. Collin, certify that:
1) I have reviewed this annual report on Form 10-K of Unitil Corporation;
2) Based on my knowledge, this 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 report;
3) Based on my knowledge, the financial statements, and other financial information included in this 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 report;
4) The registrants other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:
a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b) Evaluated the effectiveness of the registrants disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
c) Disclosed in this report any changes in the registrants internal control over financial reporting that occurred during the registrants most recent fiscal quarter (the registrants fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonable likely to materially affect, the registrants internal controls over financial reporting; and
5) The registrants other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrants auditors and the audit committee of the registrants board of directors (or persons performing the equivalent functions):
a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrants ability to record, process, summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrants internal control over financial reporting.
Date: February 24, 2004
/s/ MARK H. COLLIN |
Mark H. Collin Chief Financial Officer |
Exhibit 31.3
CERTIFICATION UNDER SECTION 302 OF THE SARBANES-OXLEY ACT
I, Laurence M. Brock, certify that:
1) I have reviewed this annual report on Form 10-K of Unitil Corporation;
2) Based on my knowledge, this 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 report;
3) Based on my knowledge, the financial statements, and other financial information included in this 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 report;
4) The registrants other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:
a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b) Evaluated the effectiveness of the registrants disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
c) Disclosed in this report any changes in the registrants internal control over financial reporting that occurred during the registrants most recent fiscal quarter (the registrants fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonable likely to materially affect, the registrants internal controls over financial reporting; and
5) The registrants other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrants auditors and the audit committee of the registrants board of directors (or persons performing the equivalent functions):
a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrants ability to record, process, summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrants internal control over financial reporting.
Date: February 24, 2004
/s/ LAURENCE M. BROCK |
Laurence M. Brock Controller |
Exhibit 32.1
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Annual Report of Unitil Corporation (the Company) on Form 10-K for the year ending December 31, 2003 as filed with the Securities and Exchange Commission on the date hereof (the Report), each of the undersigned Robert G. Schoenberger, Chief Executive Officer and President, Mark H. Collin, Chief Financial Officer and Laurence M. Brock, Controller, certifies, to the best knowledge and belief of the signatory, pursuant to 18 U.S.C. section 1350, as adopted pursuant to section 906 of the Sarbanes-Oxley Act of 2002, that:
(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
Signature |
Capacity |
Date | ||
/s/ ROBERT G. SCHOENBERGER Robert G. Schoenberger |
Chief Executive Officer and President |
February 24, 2004 | ||
/s/ MARK H. COLLIN Mark H. Collin |
Chief Financial Officer |
February 24, 2004 | ||
/s/ LAURENCE M. BROCK Laurence M. Brock |
Controller |
February 24, 2004 |