Chesapeake Utilities Corporation — Form 10-Q Summary
Business context and reporting period
Chesapeake Utilities Corporation is a diversified energy company operating regulated natural gas distribution, natural gas transmission and electric distribution businesses, alongside unregulated propane, natural gas marketing and other services. This unaudited Form 10-Q covers the three and nine months ended September 30, 2014, compared primarily with the corresponding 2013 periods. Results are seasonal, with typically higher energy consumption and earnings in the first and fourth quarters.
Financial performance and key metrics
| Metric | Q3 2014 | Q3 2013 | 9M 2014 | 9M 2013 |
|---|---|---|---|---|
| Operating revenue | $91.6 million | $86.5 million | $378.5 million | $321.4 million |
| Operating income | $7.8 million | $8.7 million | $49.9 million | $44.4 million |
| Income before taxes | $5.3 million | $6.8 million | $43.3 million | $38.7 million |
| Net income | $3.2 million | $3.9 million | $26.0 million | $23.1 million |
| Diluted EPS | $0.22 | $0.27 | $1.78 | $1.59 |
| Operating margin | 8.5% | 10.1% | 13.2% | 13.8% |
| Net margin | 3.5% | 4.5% | 6.9% | 7.2% |
Regulated Energy generated operating income of $9.2 million in the quarter, down $1.0 million year over year, and $41.0 million for the nine months, up $4.8 million. Unregulated Energy reported a third-quarter operating loss of $2.0 million, compared with a $1.8 million loss, but nine-month operating income increased to $8.8 million from $8.0 million. Other segment operating income was $0.6 million in the quarter and $25,000 year to date.
Quarterly revenue increased 5.9%, while nine-month revenue increased 17.7%. The nine-month improvement reflected the Sandpiper acquisition, service expansions, Florida GRIP surcharge recovery, customer growth, colder weather and higher wholesale propane sales. Quarterly earnings declined because higher gross margin was more than offset by increased operating expenses and interest charges.
Cash flow, liquidity and capitalization
- Cash provided by operating activities was $64.4 million for the first nine months of 2014, compared with $66.4 million in 2013.
- Capital expenditures were $69.0 million through September 30, compared with $68.6 million in the prior-year period. Management projected full-year 2014 capital expenditures of approximately $112.3 million.
- Investing activities used $68.6 million, compared with $85.8 million in 2013, largely because 2013 included $19.4 million of acquisition spending.
- Financing activities provided $3.2 million. The company issued $50.0 million of Series B Notes in May 2014 and used proceeds primarily to repay short-term borrowings and fund capital expenditures.
- Cash and cash equivalents were $2.3 million at September 30, 2014, compared with $3.4 million at December 31, 2013.
- Short-term borrowings were $71.2 million, down from $105.7 million at year-end. The company had $165.0 million of short-term credit facilities, including $85.0 million of committed lines.
- Long-term debt, including current maturities, was $176.2 million, versus $128.9 million at December 31, 2013. Long-term debt represented 36% of capitalization excluding short-term debt; total debt including short-term borrowings represented approximately 45% of total capitalization including short-term debt.
- Stockholders’ equity increased to $296.2 million from $278.8 million. The quarterly dividend was $0.270 per share and the nine-month declared dividend was $0.797 per share, both presented after the three-for-two stock split.
Material changes versus the prior comparable period
- Q3 net income fell $0.7 million, or 18%, and diluted EPS fell $0.05. Nine-month net income rose $2.9 million, or 13%, and diluted EPS increased $0.19.
- Quarterly gross margin benefited from service expansions, natural gas growth, GRIP recovery, interim Florida electric rates and higher BravePoint revenue. These benefits were offset by lower propane wholesale marketing margins and increased payroll, depreciation, maintenance, safety, incentive and other costs.
- The 2013 comparison included a $1.9 million regulatory recovery of litigation-related costs and a $0.7 million accrual for additional taxes other than income. Their absence or reversal affected the 2014 comparison.
- Nine-month results benefited from approximately $2.3 million of favorable weather-related pre-tax impact, the Sandpiper acquisition, service expansions and higher propane wholesale sales. These benefits were partly offset by higher payroll, acquisition, depreciation, benefit, maintenance and incentive costs.
- On July 2, 2014, the company approved a three-for-two stock split effected as a stock dividend, distributed September 8, 2014. Historical share and per-share information was restated.
- The company early adopted the revised discontinued-operations guidance and consequently did not present BravePoint as a discontinued operation.
Guidance, outlook, commentary and unusual items
- Management expected 2014 capital expenditures of approximately $112.3 million, funded through operating cash flow, short-term borrowings and other financing sources.
- FPU’s Florida electric rate settlement provides approximately $3.8 million of annual base-rate relief and a 10.25% return on common equity, with permanent rates effective for meter readings on or after November 1, 2014.
- The completed White Oak lateral project began service October 1, 2014 and was expected to generate annual gross margin of approximately $1.2 million to $1.8 million.
- The Eight Flags combined heat and power project was expected to begin construction in early 2015 and commercial operation in July 2016, subject to approvals and other conditions. Management estimated consolidated annual gross margin of approximately $7.3 million once operational.
- After quarter-end, Chesapeake sold BravePoint for approximately $12.0 million in cash and expected to record a pre-tax gain of approximately $6.5 million to $7.0 million, or approximately $4.0 million after tax, in the fourth quarter of 2014. Proceeds were expected to be reinvested in energy businesses.
- Approximately $6.4 million had been capitalized for a new customer billing system. Management was reviewing the project’s strategy, future funding, alternatives and potential regulatory recovery.
- Environmental liabilities totaled approximately $10.2 million for FPU’s Florida manufactured-gas-plant sites and $0.4 million for other Chesapeake sites. Management expected costs to be recoverable through insurance or customer rates, but outcomes at certain sites remain uncertain.
- FPU disputed potential liability beyond its $650,000 contribution for the Sanford environmental site. No claim exceeding that amount had been made as of September 30, 2014.
- Key risks include regulatory and rate outcomes, weather, commodity prices, interest rates, counterparty credit, environmental remediation, pension funding, financing access, execution of acquisitions and projects, competition, information technology and cybersecurity.
Important facts for investors to verify
- Whether the expected fourth-quarter BravePoint gain was recognized at the projected amount and how sale proceeds were redeployed.
- Actual 2014 capital expenditures versus the $112.3 million projection and the resulting effect on short-term borrowings and liquidity.
- The sustainability of earnings growth after adjusting for favorable weather, acquisitions, regulatory recoveries and other unusual items.
- Implementation and regulatory recovery status of the customer billing system, including the $6.4 million capitalized balance.
- Progress, cost, approvals and contractual commitments associated with the Eight Flags CHP project and related power purchase agreement.
- Resolution and recoverability of environmental liabilities, particularly the Sanford, West Palm Beach, Winter Haven, Cambridge and Seaford matters.
- Changes in propane margins and wholesale trading results, which are sensitive to commodity prices and market volatility.