Chesapeake Utilities Corporation — 2018 Q1 Form 10-Q Summary
Reporting period: Three months ended March 31, 2018; comparative period was the three months ended March 31, 2017. The company operates regulated and unregulated natural gas, electric, propane, transmission, generation, and energy-services businesses primarily in the Mid-Atlantic, Florida, Pennsylvania, and Ohio. Results are seasonal, with typically higher revenue and earnings in the first and fourth quarters.
Financial Performance and Position
| Metric | Q1 2018 | Q1 2017 | Change |
|---|---|---|---|
| Total operating revenue | $239.4 million | $185.2 million | 29.3% increase |
| Operating income | $40.4 million | $35.1 million | 15.1% increase |
| Income before taxes | $36.8 million | $31.7 million | 16.3% increase |
| Net income | $26.9 million | $19.1 million | 40.3% increase |
| Diluted EPS | $1.64 | $1.17 | $0.47 increase |
| Cash dividend declared per share | $0.3250 | $0.3050 | 6.6% increase |
| Cash flow from operations | $66.7 million | $60.0 million | $6.7 million increase |
| Capital expenditures | $63.1 million | $42.2 million | $20.9 million increase |
- Revenue mix: Regulated Energy revenue was $109.4 million, compared with $97.7 million; Unregulated Energy and other revenue was $130.0 million, compared with $87.5 million. The increase in unregulated revenue was primarily volume- and commodity-related.
- Margins: Total gross margin, as defined by management, increased $7.1 million, or 8.5%, to approximately $91.3 million. Operating margin was approximately 16.9%, compared with 19.0% in the prior-year quarter, reflecting the substantially higher cost of sales in the unregulated business mix.
- Segment operating income: Regulated Energy increased to $26.7 million from $23.4 million; Unregulated Energy increased to $13.7 million from $11.6 million.
- Tax rate: Effective income tax rate declined to 27.0% from 39.5%, primarily due to the Tax Cuts and Jobs Act of 2017.
- Liquidity: Cash and cash equivalents were $6.0 million at March 31, 2018, compared with $5.6 million at December 31, 2017. The company had $229.1 million of short-term borrowings and $231.4 million of total long-term debt, including current maturities.
- Capitalization: Stockholders’ equity was $505.2 million. Including short-term debt, debt represented approximately 48% of total capitalization and equity represented approximately 52%.
Material Changes Versus the Prior Comparable Period
- Net income benefited from higher gross margin, more favorable weather, customer growth, new and revised regulated rates, and the lower federal income tax rate.
- Gross margin increased $3.9 million from weather-related improvement versus the unusually warm first quarter of 2017, although first-quarter 2018 weather remained warmer than normal.
- Eastern Shore’s rate case contributed approximately $2.8 million of first-quarter gross margin. The settlement provides for an annual base-rate increase of approximately $9.8 million before the TCJA impact and approximately $6.6 million after reflecting the lower tax rate.
- Propane operations benefited from colder weather, customer growth, higher volumes, and improved wholesale margins.
- PESCO gross margin declined $2.3 million because of higher gas supply costs, capacity constraints and unusual costs associated with the January 2018 Bomb Cyclone, the expiration of a supplier agreement, and $0.3 million of unfavorable derivative mark-to-market effects.
- Xeron’s wind-down resulted in approximately $0.7 million of lower operating expenses compared with the prior year.
- Interest expense increased $0.9 million because of higher long-term and short-term borrowings.
- The company adopted ASC 606 using the modified retrospective method. The adoption reduced beginning retained earnings by $1.5 million and reduced reported first-quarter 2018 net income by approximately $0.3 million versus amounts that would have been reported without adoption.
Cash Flow, Debt, and Capital Program
- Operating cash flow of $66.7 million funded most of the $63.1 million of capital expenditures; financing activities used $3.3 million, and cash increased $0.4 million.
- The company budgeted $181.6 million of 2018 capital expenditures, including $154.4 million for regulated energy projects and $17.1 million for unregulated energy projects.
- In January 2018, the company borrowed an additional $25.0 million under its Revolver and classified the borrowing as long-term debt. The Revolver matures October 8, 2020, and carried an interest rate of 2.88% at March 31, 2018.
- Five unsecured bank credit facilities provided $220.0 million of available credit, and the $150.0 million Revolver was available through October 2020. The company reported $230.0 million of additional potential borrowing capacity under the Prudential and MetLife shelf agreements.
- Management expects the proceeds from $100.0 million of NYL Shelf Notes scheduled for issuance in 2018 to reduce borrowings and/or fund capital expenditures.
Outlook, Guidance, Risks, and Unusual Items
- The filing does not provide a formal consolidated earnings or revenue guidance range. Management identifies growth opportunities and project-level gross-margin estimates, including estimated 2018 gross margin of $38.6 million from listed major projects and $50.1 million for 2019.
- Major projects include the Eastern Shore pipeline expansion, expected to require approximately $117.0 million of investment in 2018 and generate approximately $15.8 million of gross margin in its first full year; the Northwest Florida Expansion Project, with estimated annual gross margin of $6.0 million; and the Belvedere project, with estimated annual gross margin of approximately $1.1 million.
- FPU requested recovery of hurricane and tropical-storm restoration costs and replenishment of its storm reserve, which had a deficit of approximately $0.8 million. The requested surcharge was $1.82 per kilowatt-hour for two years; no approval date had been scheduled at the filing date.
- Regulatory treatment of the TCJA may reduce customer rates and require refunds or regulatory liabilities. The company generally expects the ultimate effects of these proceedings not to be material, but outcomes remain subject to regulatory approval.
- Environmental liabilities related to former manufactured gas plant sites were approximately $9.6 million at March 31, 2018. The company expects recovery of remediation costs through insurance and customer rates, although the Cambridge, Maryland site could not be estimated.
- Corporate guarantees for subsidiary commodity purchases totaled approximately $72.7 million, and outstanding letters of credit totaled approximately $5.0 million. No letters of credit had been drawn.
- Commodity and derivative risk remains concentrated in the unregulated businesses, particularly PESCO, propane operations, and Aspire Energy. Total derivative liabilities were $2.4 million at March 31, 2018.
- Key risks include weather, commodity prices, pipeline capacity constraints, regulatory and rate outcomes, environmental obligations, capital project execution, interest rates, financing availability, counterparty credit, cybersecurity, and seasonal working-capital requirements.
Important Facts for Investors to Verify
- Whether the Eastern Shore rate settlement and TCJA-related rate reductions and refunds produce the expected annual margin and cash-flow effects.
- Progress, timing, and final costs of the Eastern Shore, Northwest Florida, Belvedere, and New Smyrna Beach projects.
- Whether PESCO’s unusual Bomb Cyclone-related costs and derivative volatility normalize in subsequent periods.
- Execution of the planned NYL Shelf Note issuances and the resulting reduction in short-term borrowings.
- Regulatory approval and recovery of FPU storm costs and the treatment of TCJA-related regulatory liabilities.
- Changes in environmental remediation estimates, particularly for the West Palm Beach and Cambridge MGP sites.
- Whether the $181.6 million capital expenditure budget can be funded while maintaining the company’s target equity-to-total-capitalization ratio of 50% to 60%.