Business Context and Reporting Period
Company: Chesapeake Utilities Corporation (CPK)
Filing Type: Form 10-K (Annual Report)
Period Ended: December 31, 2010
Overview: Chesapeake is a diversified utility company operating in regulated energy (natural gas and electric distribution/transmission), unregulated energy (natural gas marketing, propane distribution/wholesale), and other businesses (advanced information services). A significant event in the reporting period was the full-year consolidation of Florida Public Utilities Company (FPU), acquired via merger on October 28, 2009.
Key Financial Metrics
| Metric | 2010 | 2009 | Change |
|---|---|---|---|
| Total Operating Revenues | $427.5 million | $268.8 million | +59.1% |
| Operating Income | $51.9 million | $33.7 million | +53.9% |
| Net Income | $26.1 million | $15.9 million | +63.9% |
| Diluted EPS | $2.73 | $2.15 | +27.0% |
| Operating Cash Flow | $61.0 million | $45.8 million | +33.2% |
| Capital Expenditures | $47.0 million | $26.3 million | +78.7% |
| Total Assets | $671.0 million | $615.8 million | +9.0% |
| Long-Term Debt (net of current) | $89.6 million | $98.8 million | -9.3% |
| Short-Term Debt | $64.0 million | $30.0 million | +113.3% |
Note: 2009 figures include FPU results only from the merger date (Oct 28, 2009) through year-end.
Material Changes vs. Prior Period
- Merger Impact: The primary driver of growth was the inclusion of a full year of FPU results. FPU contributed $9.3 million to net income in 2010 compared to $1.8 million in 2009. Legacy Chesapeake businesses (excluding FPU and merger costs) saw net income increase by $1.9 million (11% growth) year-over-year.
- Regulated Energy Segment: Operating income surged $16.6 million (62%) to $43.5 million. This was driven by rate increases in Florida (effective Jan 2010), colder weather in Florida and the Delmarva Peninsula, and customer growth.
- Unregulated Energy Segment: Operating income decreased slightly by $0.25 million (3%) to $7.9 million. While propane distribution margins improved due to volume growth, natural gas marketing margins declined due to the absence of opportunistic spot sales that occurred in 2009.
- Interest Expense: Increased by $2.1 million (29%) to $9.1 million, primarily due to interest on FPU's long-term debt and a new short-term term loan used to redeem FPU bonds.
Guidance, Outlook, and Risks
Management Commentary & Outlook
- Capital Plan: The company budgeted $51.7 million for capital expenditures in 2011, focusing on natural gas distribution ($25.4M), transmission ($12.5M), and electric distribution ($5.7M).
- ESNG Expansion: Eastern Shore Natural Gas Company (ESNG) completed an interconnection with the TETLP pipeline in December 2010. New services commenced in January 2011, expected to generate annualized margins of $2.4 million in 2011, rising to $4.3 million thereafter.
- Dividends: The company has paid dividends for 50 consecutive years. Total dividends declared in 2010 were $1.305 per share.
Key Risks and Contingencies
- Regulatory Recovery (FPU Merger): Chesapeake is seeking regulatory approval to recover approximately $34.9 million in purchase premium and $2.2 million in merger-related costs through Florida rates. A "come-back" filing is due to the Florida PSC by April 29, 2011. Management recorded a $750,000 accrual in 2010 for regulatory risk associated with this recovery.
- Environmental Liabilities: Significant exposure exists at former Manufactured Gas Plant (MGP) sites, particularly in West Palm Beach, Florida. Estimated remediation costs for the West Palm Beach site range from $5.1 million to $13.3 million. Total environmental liabilities recorded were approximately $12.0 million as of year-end.
- Weather Sensitivity: Revenues for natural gas and propane distribution are highly sensitive to heating degree-days (HDD). Colder winters increase volume and revenue, while warmer winters reduce them.
- Commodity Price Volatility: Unregulated propane wholesale marketing (Xeron) and propane distribution face risks from price fluctuations. The company uses derivatives to hedge inventory risk.
- Legal Proceedings: The City of Marianna, Florida, filed a declaratory action in March 2011 alleging FPU breached its franchise agreement regarding time-of-use rates, potentially seeking to purchase FPU's electric assets in that city.
Investor Verification Checklist
- Merger Cost Recovery: Verify the outcome of the Florida PSC "come-back" filing regarding the recovery of the $34.9 million purchase premium and merger costs.
- Environmental Remediation: Monitor the final remediation plan and cost estimates for the West Palm Beach MGP site, as actual costs could exceed the current $13.3 million upper estimate.
- Debt Refinancing: Track the execution of the planned refinancing of FPU's secured first mortgage bonds with unsecured senior notes to reduce interest costs.
- ESNG Rate Case: Review the settlement of the ESNG base rate proceeding filed in December 2010, which proposes a 13.5% return on equity.
- Marianna Franchise Litigation: Follow the status of the City of Marianna's lawsuit against FPU regarding the electric franchise and potential asset purchase.