Chesapeake Utilities Corporation 2018 Form 10-K Summary
Business context and reporting period
Chesapeake Utilities Corporation is a diversified energy delivery company operating primarily in the Mid-Atlantic, Florida, Pennsylvania and Ohio. Its businesses include regulated natural gas and electric distribution and transmission, propane distribution, natural gas marketing, energy generation and mobile compressed natural gas services. The filing covers the fiscal year ended December 31, 2018; fourth-quarter figures are included but the primary comparison is full-year 2018 versus 2017.
The company reports two segments: Regulated Energy and Unregulated Energy. Regulated operations represented the principal earnings base, while Unregulated Energy included propane, Aspire Energy, Eight Flags, PESCO and the newly acquired Marlin Gas Services operations.
Key financial metrics
| Metric | 2018 | 2017 | Change |
|---|---|---|---|
| Operating revenues | $717.5 million | $617.6 million | +$99.9 million |
| Operating income | $94.6 million | $87.4 million | +$7.2 million |
| Net income | $56.6 million | $58.1 million | -$1.5 million |
| Diluted EPS | $3.45 | $3.55 | -$0.10 |
| Operating cash flow | $146.8 million | $110.1 million | +$36.7 million |
| Capital expenditures | $283.0 million | $191.1 million | +$91.9 million |
| Net property, plant and equipment | $1.384 billion | $1.126 billion | +$257.9 million |
| Cash and cash equivalents | $6.1 million | $5.6 million | +$0.5 million |
Regulated Energy revenue was $345.3 million and operating income was $79.2 million, up 5.9% and 6.2%, respectively. Unregulated Energy revenue was $420.6 million and operating income was $16.9 million, up 29.6% and 33.8%, respectively.
Regulated Energy gross margin was $223.5 million, or approximately 64.7% of segment revenue. Unregulated Energy gross margin was $83.8 million, or approximately 19.9% of segment revenue. Consolidated operating margin was approximately 13.2% in 2018 versus 14.2% in 2017. Net margin was approximately 7.9% versus 9.4%, primarily reflecting the absence of the 2017 tax reform benefit.
Income tax expense increased to $21.0 million from $14.3 million. The 2017 result included a $14.3 million one-time deferred tax revaluation benefit related to the Tax Cuts and Jobs Act. The effective tax rate was 27.1% in 2018 versus 19.8% in 2017.
Liquidity, debt and capital structure
- Short-term borrowings were $294.5 million at year-end, compared with $251.0 million in 2017, at a weighted-average rate of 3.44% versus 2.42%.
- Long-term debt, including current maturities, was $328.0 million, compared with $206.8 million in 2017. Long-term debt, net of current maturities, was $316.0 million.
- Total capitalization including short-term borrowings increased to $1.141 billion from $944.1 million. Equity represented 45% of this capitalization, below the company’s 50%–60% target range; excluding Hurricane Michael restoration spending, management estimated the ratio at approximately 48%.
- The company had $220.0 million of available credit under five unsecured bank facilities and a $150.0 million revolving credit facility. Shelf agreements provided $250.0 million of remaining borrowing capacity, subject to lender commitments.
- Operating cash flow funded approximately 52% of capital expenditures. Investing cash use was $286.3 million and financing cash inflow was $140.0 million.
- The 2019 capital expenditure budget was $168.2 million, including $136.9 million for Regulated Energy.
- The company declared $1.4350 per share of dividends in 2018, up from $1.2800 in 2017, and reported 58 consecutive years of cash dividend payments.
Material changes versus the prior comparable period
- Regulated Energy operating income increased $4.6 million. Growth was driven by Eastern Shore and Peninsula Pipeline expansions, new Eastern Shore rates, natural gas customer and consumption growth, colder weather, Florida reliability investments and the Florida GRIP program.
- Regulated gross margin benefited from $25.5 million of underlying increases, partly offset by $9.6 million of refunds, reserves and rate reductions passed through to customers because of the TCJA. Management stated that the tax pass-through had no material net income impact because of the corresponding reduction in income tax expense.
- Unregulated Energy operating income increased $4.3 million. Propane operations and Aspire Energy benefited from customer growth, higher consumption and colder weather. PESCO’s gross margin improved by $4.4 million, although PESCO continued to report an operating loss of approximately $1.4 million.
- PESCO’s results included a $10.4 million net favorable mark-to-market impact, offset by $5.5 million of costs and losses associated with the January 2018 Bomb Cyclone, pipeline capacity constraints and warm February weather. PESCO also incurred $2.7 million of additional staffing, infrastructure and risk-management costs.
- Interest expense increased $3.8 million to $16.4 million, primarily because of higher short-term borrowings, higher short-term rates and additional long-term debt.
- The company adopted ASC 606 in 2018. The filing states that adoption reduced 2018 net income by approximately $295,000 and retained earnings by approximately $1.8 million at year-end.
Guidance, outlook, management commentary and unusual items
- Management estimated 2019 gross margin of approximately $58.2 million from listed projects, including Eastern Shore expansion, Florida GRIP, Western Palm Beach County expansion, Marlin Gas Services and the Ohl propane acquisition.
- Eastern Shore’s completed expansion increased capacity by 26% and was expected to generate approximately $15.7 million of gross margin in 2019, with lower annual amounts thereafter.
- The Del-Mar Energy Pathway project was pending FERC authorization and was expected to provide 14,300 Dts/day of additional capacity and approximately $5.1 million of annual gross margin. The filing assumed potential in-service timing in the third quarter of 2020 if authorization was received by August 2019.
- In October 2018, Hurricane Michael caused all FPU electric customers in the affected Northwest Florida territory to lose service. Restoration spending exceeded $60 million and was financed partly through two $30 million, 13-month unsecured term loans. Management expected to seek recovery through regulatory rates; the filing states that the storm did not materially affect 2018 earnings.
- In December 2018, the company acquired Marlin Gas Transport operating assets and Ohl propane assets for approximately $18.4 million. Their 2018 revenue and net income contribution was immaterial because of the timing of the acquisitions.
- The company had approximately $759.5 million of contractual obligations, including $327.2 million of long-term debt principal, $404.8 million of natural gas, electric and propane purchase obligations, and $101.8 million of expected long-term debt interest payments.
- Environmental liabilities related to former manufactured gas plant sites were approximately $9.1 million. Management expected recovery of remediation costs through insurance and customer rates, but recovery remains subject to regulatory treatment.
- Forward-looking results remain sensitive to regulatory approvals and rate recovery, weather, commodity prices, interest rates, construction costs and timing, customer growth, competition, cybersecurity, severe weather and counterparty credit risk.
Fourth-quarter 2018 snapshot
| Metric | Q4 2018 | Q4 2017 |
|---|---|---|
| Operating revenues | $201.2 million | $180.4 million |
| Operating income | $28.9 million | $23.6 million |
| Net income | $17.8 million | $26.1 million |
| Diluted EPS | $1.08 | $1.59 |
Fourth-quarter net income declined despite higher revenue and operating income, primarily because the prior-year quarter included the benefit of the TCJA deferred tax revaluation and other unusual items.
Most important facts for investors to verify
- Whether regulatory authorities approve recovery of Hurricane Michael restoration costs and replenishment of FPU’s storm reserve.
- The timing, cost and regulatory approval of the Del-Mar Energy Pathway and other pipeline expansion projects.
- The sustainability of PESCO’s improved results given mark-to-market volatility, commodity exposure, capacity constraints and continuing operating investments.
- Whether leverage and the 45% equity-to-total-capitalization ratio improve toward management’s 50%–60% target while funding the capital program.
- The final regulatory treatment and customer refunds or rate reductions associated with excess deferred taxes from the TCJA.
- Potential environmental remediation costs, particularly for the Cambridge, Maryland manufactured gas plant site where the filing states that costs cannot yet be estimated.
- Compliance with debt covenants, refinancing needs and the expiration or renewal of short-term credit facilities and vendor guarantees during 2019.
- Weather-normalized earnings and the extent to which 2018 growth benefited from colder-than-2017 conditions.