Chesapeake Utilities Corporation 10-Q Summary
Business context and reporting period
Chesapeake Utilities Corporation filed an unaudited Form 10-Q for the three months ended March 31, 2013. The company operates regulated natural gas and electric distribution and natural gas transmission businesses, unregulated natural gas marketing and propane businesses, and an advanced information services business. Results are seasonal, with typically higher revenue and earnings in the first and fourth quarters because of energy demand.
Key financial metrics
| Metric | Q1 2013 | Q1 2012 | Change |
|---|---|---|---|
| Operating revenue | $140.7 million | $120.9 million | +$19.8 million |
| Operating income | $26.6 million | $20.1 million | +$6.5 million |
| Income before taxes | $24.8 million | $18.0 million | +$6.8 million |
| Net income | $14.9 million | $10.7 million | +$4.1 million |
| Diluted EPS | $1.54 | $1.11 | +$0.43 |
| Operating cash flow | $35.0 million | $34.6 million | +$0.4 million |
| Capital expenditures | $16.2 million | $14.7 million | +$1.5 million |
| Cash and equivalents at period end | $2.6 million | $2.0 million | Compared with March 31, 2012 |
| Long-term debt, including current maturities | $110.0 million | $110.1 million at December 31, 2012 | Broadly stable |
| Short-term borrowings | $47.6 million | $61.2 million at December 31, 2012 | -$13.6 million |
Gross margin, a non-GAAP measure used by management, was $39.95 million for Regulated Energy versus $36.62 million in the prior-year quarter, and $17.18 million for Unregulated Energy versus $12.16 million. Regulated Energy operating income increased 17% to $17.3 million; Unregulated Energy operating income increased 82% to $9.4 million. The consolidated effective income tax rate was 40.0%, compared with 40.3% in Q1 2012.
Stockholders’ equity was $267.8 million at March 31, 2013, compared with $256.6 million at December 31, 2012. The company declared a quarterly dividend of $0.365 per share, compared with $0.345 per share in the prior-year quarter.
Material changes versus the prior comparable period
- Revenue increased 16%, primarily from higher regulated and unregulated energy activity.
- Net income increased 39%, while diluted EPS increased 39%.
- Colder weather substantially increased energy consumption versus the unusually warm first quarter of 2012. Weather contributed approximately $3.2 million of additional gross margin.
- Natural gas growth and expansion initiatives contributed approximately $1.6 million of additional gross margin, including new transmission and distribution services and customer growth.
- Propane retail margins improved by approximately $2.1 million because propane costs declined faster than retail prices. Propane volume and customer additions also contributed to growth.
- Operating expenses increased, including payroll and benefits, maintenance, depreciation, asset removal, property taxes, and costs supporting growth and system integrity.
- Interest expense declined $219,000, partially offset by higher short-term borrowing costs.
- Cash flow from operations was broadly stable despite working-capital changes. Investing cash use increased because of higher capital expenditures and the Glades propane acquisition.
- In February 2013, the company acquired Glades Gas propane assets for approximately $2.9 million, adding about 3,000 customers.
Guidance, outlook, commentary, risks and unusual items
- Management budgeted approximately $112.3 million of 2013 capital expenditures, primarily for regulated natural gas distribution and transmission projects. The program is expected to be funded with operating cash flow, short-term borrowings and other sources.
- The company expected to complete the approximately $16.5 million acquisition of Eastern Shore Gas Company’s propane assets in mid-2013, subject to regulatory and other closing conditions. The acquisition serves approximately 11,000 customers and was expected to be accretive to EPS in the first full year. Management expected to finance it with unsecured short-term debt.
- New or expanding transmission projects were expected to generate additional annualized gross margin of approximately $4.84 million to $5.24 million once fully operational, including services for NRG, the Delaware City refinery and a Florida utility. These projections are subject to construction, contracting, regulatory and demand risks.
- Eastern Shore received FERC approval for a $16.3 million mainline expansion and a $12.1 million Daleville compressor station project. The latter was expected to support service beginning in November 2013.
- The Delaware PSC was expected to decide by July 2013 on proposed natural gas expansion offerings and a related rate matter. The Maryland PSC was expected to decide by June 2013 on the Eastern Shore Gas acquisition.
- The Marianna, Florida dispute was resolved. A referendum held April 9, 2013 rejected municipal purchase of FPU’s facilities, eliminating the related contingency and extending FPU’s franchise by 10 years.
- Environmental liabilities totaled approximately $10.5 million for FPU’s Florida manufactured-gas-plant sites and $153,000 for Chesapeake’s other MGP sites. Management expects recovery through rates or other arrangements, but certain matters remain uncertain and unrecorded liabilities may arise.
- Corporate guarantees totaled $30.7 million at March 31, 2013, with additional letters of credit outstanding. FPU was in compliance with the financial requirements of its electric fuel supply contracts.
- Key risks include regulatory and rate outcomes, environmental remediation, weather, commodity prices, competition, counterparty credit, financing availability, construction costs, pension funding, acquisitions and changes in energy or environmental regulation.
- Management stated that disclosure controls were effective as of March 31, 2013 and that no material change occurred in internal control over financial reporting.
Most important facts for an investor to verify
- Whether the earnings increase is sustainable after adjusting for favorable weather versus the unusually warm Q1 2012 and for strong propane margins.
- Progress, final regulatory approval, financing and expected returns from the Eastern Shore Gas acquisition.
- Actual spending against the $112.3 million 2013 capital expenditure budget and the resulting effect on short-term debt.
- Regulatory decisions affecting Delaware expansion offerings, gas service rates and Maryland operations.
- Construction timing, customer commitments and realized margins for the NRG, Delaware City refinery and Florida transmission projects.
- Potential changes to environmental liabilities and the extent to which remediation costs remain recoverable through rates or third parties.
- Commodity-price exposure, propane inventory margins, forward-contract valuations and counterparty obligations.
- The company’s ability to maintain liquidity given only $2.6 million of cash, seasonal working-capital needs, planned acquisitions and capital expenditures.