Chesapeake Utilities Corporation — Q1 2014 Form 10-Q Summary
Business context and reporting period
Chesapeake Utilities Corporation is a diversified energy company with regulated natural gas distribution, natural gas transmission and electric distribution operations, unregulated propane and natural gas marketing businesses, and other services. This unaudited Form 10-Q covers the three months ended March 31, 2014, compared with the three months ended March 31, 2013. Results are seasonally stronger in the first and fourth quarters because of winter energy demand.
Financial performance and liquidity
| Metric | Q1 2014 | Q1 2013 | Change |
|---|---|---|---|
| Operating revenue | $186.3 million | $140.7 million | +32.4% |
| Operating income | $31.6 million | $26.6 million | +19.1% |
| Net income | $17.7 million | $14.9 million | +18.9% |
| Diluted EPS | $1.82 | $1.54 | +$0.28 |
| Operating margin | 17.0% | 18.9% | Lower |
| Operating cash flow | $46.0 million | $35.2 million | +$10.8 million |
| Capital expenditures | $18.5 million | $16.4 million | +$2.1 million |
Regulated Energy operating income increased 22% to $21.1 million, while Unregulated Energy operating income increased 16% to $10.9 million. Gross margin rose to $71.0 million from $59.0 million, but higher operating expenses, including acquisition-related costs, payroll, incentive compensation, depreciation, property taxes and benefits, moderated the margin conversion.
Cash and cash equivalents were $4.8 million at March 31, 2014, compared with $3.4 million at December 31, 2013. Net cash used in investing activities was $18.5 million, and net cash used in financing activities was $26.1 million, including $21.7 million of net repayments under credit lines. The company had $83.5 million of short-term borrowings, down from $105.7 million at year-end, and $128.2 million of total long-term debt, including current maturities.
Stockholders’ equity increased to $293.3 million from $278.8 million at December 31, 2013. The quarterly dividend was increased to $0.385 per share from $0.365 per share in the prior-year quarter.
Material changes versus the prior comparable period
- Revenue growth was driven by higher regulated energy revenue, increased unregulated energy activity, colder weather and the contribution from acquisitions.
- The 2013 Eastern Shore Gas Company asset acquisition contributed approximately $10.3 million of revenue and $1.7 million of net income in Q1 2014. Sandpiper generated $4.3 million of gross margin but incurred $1.4 million of operating expenses.
- Service expansions generated $1.4 million of additional regulated-energy gross margin, including new transmission and distribution services.
- Colder weather contributed approximately $2.7 million of incremental gross margin versus Q1 2013. Delmarva heating degree-days were 2,717 versus 2,407, and Florida heating degree-days were 557 versus 468.
- Wholesale propane sales and propane marketing added approximately $1.0 million and $0.9 million of gross margin, respectively. Lower retail propane margins reduced gross margin by $0.5 million.
- Income tax expense increased to $11.8 million from $9.9 million; the effective tax rate remained approximately 40%.
- Convertible debentures were fully eliminated by March 1, 2014 through conversions and cash redemptions.
Guidance, outlook, commentary and risks
- Management budgeted $110.9 million of 2014 capital expenditures, including $85.0 million for regulated energy, $15.7 million for unregulated energy and $10.2 million for other activities.
- The company expected to issue $50.0 million of Series B unsecured senior notes on May 15, 2014, at a stated rate of 3.88%. Proceeds were expected to reduce short-term borrowings and fund capital expenditures.
- The White Oak lateral project was under construction, with an estimated cost of $11.2 million, expected service commencement in January 2015 and projected annual gross margin of approximately $1.2 million to $1.8 million.
- Eastern Shore entered into a one-year contract beginning April 2014 expected to generate approximately $1.9 million of 2014 gross margin.
- FPU filed for electric base-rate relief of approximately $2.4 million on an interim basis and $5.9 million on a final basis. Interim relief was expected in Q2 2014 and final relief in Q4 2014; interim increases would be subject to refund.
- Key risks include regulatory and rate outcomes, environmental remediation, weather, commodity prices, interest rates, financing access, counterparty credit, competition, construction costs, acquisitions, pension funding, information technology and cyber risks.
- Environmental liabilities totaled approximately $10.2 million for FPU’s Florida manufactured-gas-plant sites and $0.5 million for Chesapeake’s other MGP sites. Potential additional costs at the Winter Haven site and unresolved matters in Sanford, Cambridge and Seaford create uncertainty; some remediation costs are expected to be recoverable through rates.
- Corporate guarantees totaled $31.6 million at March 31, 2014. The company also maintained letters of credit, including $2.3 million related to TETLP. No letters of credit had been drawn.
- The filing states that disclosure controls and procedures were effective as of March 31, 2014, with no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether Q1 earnings growth is sustainable after adjusting for unusually cold weather, acquisition contributions and propane-market volatility.
- The timing, cost and projected returns of the $110.9 million capital program and the White Oak lateral project.
- Completion and use of the planned $50.0 million Series B debt issuance, including its effect on short-term borrowings and interest expense.
- Outcomes of the Florida electric rate case, Maryland depreciation study and other regulatory proceedings.
- Potential exposure from environmental remediation, particularly Winter Haven sediment issues and the unresolved Sanford liability dispute.
- Liquidity and refinancing capacity given seasonal working-capital needs, short-term borrowings and commodity purchase commitments totaling $42.3 million.