CHESAPEAKE UTILITIES CORP quarterly report, Q3 FY2013

Chesapeake Utilities Corporation: Q3 2013 Form 10-Q Summary

Business context and reporting period

Chesapeake Utilities Corporation is a diversified energy company with regulated natural gas distribution, electric distribution and natural gas transmission operations; unregulated natural gas marketing, propane distribution and propane wholesale marketing; and advanced information services. This unaudited Form 10-Q covers the three and nine months ended September 30, 2013, compared with the respective 2012 periods. Results are seasonal, with typically higher revenue and earnings during the first and fourth quarters.

Financial performance and key metrics

Metric	Q3 2013	Q3 2012	9M 2013	9M 2012
Operating revenue	$86.5 million	$78.2 million	$321.4 million	$283.0 million
Operating income	$8.7 million	$7.6 million	$44.4 million	$38.1 million
Income before taxes	$6.8 million	$5.3 million	$38.7 million	$31.6 million
Net income	$3.9 million	$3.2 million	$23.1 million	$19.0 million
Diluted EPS	$0.40	$0.33	$2.39	$1.97
Cash dividends declared per share	$0.385	$0.365	$1.135	$1.080

Q3 revenue increased 10.7%, operating income increased 15.3%, and net income increased 20.5% year over year. Nine-month revenue increased 13.6%, operating income increased 16.6%, and net income increased 21.6%.
Q3 operating margin was approximately 10.1%, compared with 9.7% in 2012. Nine-month operating margin was approximately 13.8%, compared with 13.5% in 2012. Net margin was approximately 4.5% in Q3 and 7.2% for the first nine months.
Regulated Energy operating income increased to $10.2 million in Q3 from $7.8 million and to $36.2 million for nine months from $33.2 million. Unregulated Energy reported a Q3 operating loss of $1.8 million, compared with a $0.7 million loss, but nine-month operating income rose to $8.0 million from $4.0 million.
Gross margin, a non-GAAP measure used by management, increased in Regulated Energy to $33.1 million in Q3 from $30.1 million and to $106.1 million for nine months from $98.8 million. Unregulated Energy gross margin increased to $6.8 million in Q3 from $6.2 million and to $32.1 million for nine months from $24.7 million.

Cash flow, liquidity and capitalization

Nine-month operating cash flow was $66.4 million, compared with $64.5 million in 2012.
Investing cash use increased to $85.8 million from $49.5 million, including $68.6 million of property, plant and equipment expenditures and $19.4 million for acquisitions.
Financing activities provided $17.8 million, principally reflecting $32.8 million of net borrowings under credit lines, partly offset by $9.7 million of dividends and $8.6 million of long-term debt repayments.
Cash and cash equivalents declined to $1.8 million at September 30, 2013, from $3.4 million at December 31, 2012.
Short-term borrowings increased to $91.3 million from $61.2 million. Total long-term debt, including current maturities and the Sandpiper capital lease, was $115.6 million; long-term debt, net of current maturities, was $107.3 million.
Total capitalization including short-term debt was $476.7 million, consisting of 57% equity, 24% long-term debt and 19% short-term debt.
Total credit facilities were $165.0 million at September 30, 2013. The company entered into an agreement to issue $20.0 million of Series A notes in December 2013 at 3.73% and $50.0 million of Series B notes in May 2014 at 3.88%, with proceeds intended to reduce short-term borrowings and fund capital expenditures.

Material changes versus the prior comparable periods

Growth reflected natural gas customer additions and expansion projects, new transmission services for NRG and PBF Energy, and the May 2013 acquisition of Eastern Shore Gas Company operating assets. Sandpiper added approximately 11,000 underground propane distribution customers and 500 bulk propane customers in Worcester County, Maryland.
The company acquired Glades propane assets in February 2013 for approximately $2.9 million and Austin Cox Home Services assets in June 2013 for approximately $0.6 million. The ESG transaction cost approximately $16.5 million at closing and was financed with short-term debt.
More normal weather increased nine-month gross margin by approximately $3.9 million compared with the unusually warm 2012 period. Delmarva heating degree-days increased 27% and Florida heating degree-days increased 40% year over year.
Nine-month propane retail margins benefited from lower wholesale propane costs, adding approximately $3.3 million of gross margin. Conversely, lower wholesale propane price volatility reduced Xeron gross margin by $0.5 million in Q3 and $1.5 million for nine months.
Q3 and nine-month results included regulatory recovery of approximately $1.9 million and $1.5 million, respectively, related to City of Marianna litigation costs. The company established a regulatory asset of approximately $1.9 million after Florida PSC approval.
Q3 included a $698,000 accrual for taxes other than income, of which $424,000 was recorded net of tax. The accrual related to prior years and reduced Q3 and nine-month earnings.
Capital expenditures through September increased to $68.6 million from $51.4 million. The 2013 capital expenditure projection was raised to $126.8 million from the original $112.3 million budget.

Guidance, outlook, risks and unusual items

Management did not provide a formal consolidated earnings guidance range in the filing. It expects continued investment in natural gas distribution and transmission expansion, customer conversions, propane growth and strategic acquisitions.
The NRG and PBF projects were expected to transition from short-term services to longer-term firm transportation services in late 2013. Management estimated annualized gross margin of approximately $2.4 million to $2.8 million for the NRG service and $1.6 million for the PBF service once facilities were completed.
Eastern Shore expected to begin construction of the White Oak lateral for Calpine, subject to FERC authorization, with projected service in January 2015 and estimated annual gross margin of $1.2 million to $1.8 million.
Key risks include regulatory decisions and rate recovery, weather, commodity prices and volatility, competition from alternative fuels, financing availability and interest rates, acquisition integration, environmental remediation, pension funding, counterparty creditworthiness, construction costs and execution of expansion projects.
Environmental liabilities totaled approximately $10.3 million for FPU manufactured-gas-plant sites and $0.1 million for Chesapeake sites. Management expects recovery through rates or other arrangements, but some matters remain uncertain, including potential additional Winter Haven sediment remediation and the Cambridge, Maryland site.
Corporate guarantees to subsidiary vendors totaled $31.1 million, with expirations through September 2014. Letters of credit included $1.0 million, $1.1 million, $0.3 million and $2.3 million arrangements; no draws had occurred.
Propane and wholesale marketing activities remain exposed to commodity-price and trading volatility. Outstanding Xeron forward contracts covered 1.682 million gallons of sales and purchases, with all contracts expiring by the end of Q1 2014.
Management concluded that disclosure controls and procedures were effective as of September 30, 2013, and reported no material change in internal control over financial reporting.

Most important facts for investors to verify

Whether the planned $70.0 million senior-note issuances were completed on the disclosed dates and used as intended to reduce short-term borrowings and fund capital expenditures.
The sustainability of earnings growth after adjusting for favorable weather, regulatory litigation-cost recovery and the tax contingency accrual.
Actual contribution, costs and rate recovery from the ESG/Sandpiper acquisition and the economics of potential propane-to-natural-gas conversions.
Progress, final costs, regulatory approvals and contracted margins for the NRG, PBF and Calpine transmission projects.
Future short-term borrowing levels, liquidity and funding needs relative to the $126.8 million 2013 capital expenditure projection.
Developments in environmental remediation, tax contingencies, pension obligations and other regulatory or legal matters that could exceed recorded liabilities or expected rate recovery.