Chesapeake Utilities Corporation — Form 10-Q Summary
Business Context and Reporting Period
Chesapeake Utilities is a diversified energy company operating regulated natural gas and electric distribution and transmission businesses, unregulated natural gas marketing, propane, energy generation and related services. Its principal markets include the Delmarva Peninsula, Florida, Pennsylvania and Ohio. This unaudited Form 10-Q covers the three and six months ended June 30, 2019, compared with the corresponding 2018 periods.
Results are seasonal, with earnings generally higher during the first and fourth quarters because of colder-weather energy consumption.
Financial Results and Key Metrics
| Metric | Three Months Ended June 30 | Six Months Ended June 30 |
|---|---|---|
| Operating revenue | $130.9 million, versus $136.7 million | $358.5 million, versus $376.0 million |
| Operating income | $17.4 million, versus $13.2 million | $61.4 million, versus $53.7 million |
| Net income | $8.3 million, versus $6.4 million | $37.0 million, versus $33.2 million |
| Diluted EPS | $0.50, versus $0.39 | $2.25, versus $2.03 |
| Gross margin | Approximately $70.2 million, versus $67.4 million | Approximately $171.5 million, versus $159.1 million |
| Interest charges | $5.7 million, versus $3.9 million | $11.4 million, versus $7.5 million |
| Effective tax rate | 27.6%, versus 29.9% | 25.6%, versus 27.6% |
Regulated Energy operating income increased to $18.8 million in the second quarter and $47.8 million for the six-month period. Unregulated Energy operating income was a $1.3 million loss in the second quarter and $13.6 million of income for the six months, primarily reflecting weaker PESCO results.
Six-month cash flow from operating activities was $74.6 million, down from $108.4 million in 2018. Capital expenditures were $90.4 million, compared with $126.8 million, producing net investing cash outflow of $90.9 million. Financing activities provided $17.5 million. Cash increased by $1.2 million to $7.3 million at June 30, 2019.
At June 30, 2019, stockholders’ equity was $544.4 million. Long-term debt, including current maturities, was $351.5 million, short-term borrowings were $301.2 million, and total capitalization including short-term debt was $1.20 billion. The company reported $220.0 million of available unsecured bank credit facilities and a $150.0 million revolving credit facility. Remaining borrowing capacity under shelf agreements was $250.0 million, subject to commitments and lender approval.
The company forecast 2019 capital expenditures of $177.8 million, including $136.9 million for Regulated Energy and $31.2 million for Unregulated Energy.
Material Changes Versus the Prior Comparable Period
- Second-quarter net income increased $1.9 million, or 30%, while diluted EPS increased $0.11.
- Six-month net income increased $3.7 million, or 11%, while diluted EPS increased $0.22.
- Operating income benefited from pipeline expansion projects, natural gas customer growth, Florida GRIP investment recovery, retained Florida tax savings and contributions from the Marlin Gas Services and Ohl acquisitions.
- Second-quarter gross margin increased $2.8 million, or 4.2%, despite warmer weather and lower customer consumption.
- Six-month gross margin increased $12.9 million, or 8.2%. The improvement included approximately $8.1 million from Eastern Shore and Peninsula Pipeline expansions and $2.3 million from natural gas customer growth.
- PESCO’s second-quarter operating income declined $1.8 million to a $1.1 million loss. The decline reflected higher supply costs, the absence of nonrecurring 2018 margin, and unfavorable mark-to-market activity.
- Interest expense increased $1.8 million in the quarter and $3.8 million for the six months due to higher short-term borrowings and rates, additional long-term debt, and lower capitalization of interest.
- Operating expenses rose primarily because of growth-related depreciation, asset removal and property taxes, personnel costs, and costs associated with the recently acquired businesses.
Guidance, Outlook, Commentary, Risks and Unusual Items
- Management expects Eastern Shore’s 2017 system expansion to generate approximately $16.2 million of gross margin in 2019 and approximately $15.8 million annually from 2020 through 2022. Two remaining project segments were expected to enter service in the third quarter of 2019.
- The Del-Mar Energy Pathway project is expected to be fully in service by mid-2021, contingent on FERC authorization. The project is intended to add 14,300 dekatherms per day of firm service.
- The Callahan Intrastate Pipeline is expected to enter service in the third quarter of 2020, subject to project execution and approvals.
- Hurricane Michael restoration costs exceeded $65 million through June 30, 2019. The company financed the restoration with two $30 million unsecured term loans and filed for regulatory recovery, including eligible financing costs, on August 7, 2019. Recovery remains subject to regulatory approval.
- The company recorded a $1.3 million reversal of Florida customer-refund reserves in the first quarter of 2019 after Florida PSC orders allowed certain tax savings to be retained. Additional 2019 tax savings contributed to earnings.
- Warmer weather reduced gross margin by approximately $2.1 million in the second quarter and $4.3 million for the first six months versus 2018. Weather, commodity prices, interest rates, customer demand, and PESCO mark-to-market activity remain important earnings variables.
- Environmental liabilities for former manufactured gas plant sites were approximately $8.5 million at June 30, 2019. One Cambridge, Maryland site could not yet be estimated; management expects eligible remediation costs to be recoverable through rates, but some matters remain subject to regulatory and environmental processes.
- Corporate guarantees for subsidiary commodity purchases totaled approximately $68.1 million, and outstanding letters of credit totaled approximately $7.0 million. No letters of credit had been drawn.
- Management identified risks related to regulatory approvals and rate recovery, environmental and legal matters, hurricanes and other weather events, commodity and interest-rate volatility, counterparty credit, cybersecurity, capital financing, competition and integration of acquisitions.
- The company adopted lease accounting guidance on January 1, 2019, recognizing $12.4 million of operating lease right-of-use assets and $12.4 million of operating lease liabilities at June 30, 2019. Management stated that the adoption did not materially affect results.
Most Important Facts for Investors to Verify
- Whether regulatory recovery is approved for Hurricane Michael restoration and financing costs, and the timing of that recovery.
- Actual performance of PESCO, including exposure to commodity prices, mark-to-market volatility and supply-cost risk.
- Execution, approval and in-service timing for Eastern Shore, Del-Mar, Palm Beach and Callahan pipeline projects.
- Whether the $177.8 million capital expenditure forecast can be funded while reducing leverage toward management’s targeted 50%–60% equity-to-total-capitalization range; the reported ratio was 45.5% including Hurricane Michael expenditures.
- Cash generation relative to capital spending, scheduled debt maturities of $75.6 million within one year, and the company’s ability to refinance or permanently fund short-term borrowings.
- Regulatory treatment of TCJA-related tax savings and customer refunds across the company’s jurisdictions.
- Environmental remediation estimates, insurance and rate recovery for former manufactured gas plant sites, particularly the currently unquantified Cambridge, Maryland matter.
- Weather-normalized demand trends and whether customer growth and infrastructure projects offset weaker consumption in warmer periods.