Chesapeake Utilities Corporation — Form 10-Q Summary
Business context and reporting period
Chesapeake Utilities Corporation is a diversified utility company with regulated natural gas distribution, electric distribution and natural gas transmission operations; unregulated natural gas marketing and propane businesses; and an advanced information services subsidiary, BravePoint. This unaudited Form 10-Q covers the three and six months ended June 30, 2012. Results are seasonal, with typically higher energy consumption and earnings in the first and fourth quarters.
Financial performance and condition
| Metric | Three months ended June 30 | Six months ended June 30 |
|---|---|---|
| Operating revenues | $83.9 million, down 3.4% | $204.8 million, down 12.3% |
| Operating income | $10.5 million, up 34.5% | $30.5 million, down 6.4% |
| Net income | $5.1 million, up 43.8% | $15.8 million, down 8.6% |
| Diluted EPS | $0.52, versus $0.37 | $1.63, versus $1.79 |
| Operating margin | 12.5%, versus 9.0% | 14.9%, versus 14.0% |
| Cash dividends declared per share | $0.365, versus $0.345 | $0.710, versus $0.675 |
Six-month net cash provided by operating activities was $60.5 million, essentially unchanged from $60.1 million in the prior-year period. Capital expenditures were $34.1 million, compared with $21.2 million, and investing cash outflow was $32.2 million. Financing cash outflow was $29.2 million, including $6.0 million of dividends and $19.0 million of net repayments under credit lines. Cash and cash equivalents declined to $1.7 million from $2.6 million at December 31, 2011.
At June 30, 2012, total debt was $130.5 million, comprising $117.0 million of long-term debt including current maturities and $13.6 million of short-term borrowings. Long-term debt had a carrying value of $117.0 million and estimated fair value of $140.2 million. Stockholders’ equity was $250.4 million. The company reported $78.6 million of current assets and $112.1 million of current liabilities, indicating reliance on operating cash flow and available credit facilities for liquidity.
Material changes versus the prior comparable period
- Second-quarter earnings improved principally because regulated energy operating income increased $2.7 million, supported by new transmission services, customer growth, an accrued-revenue adjustment and lower operating costs.
- Six-month earnings declined despite a $1.3 million increase in regulated energy operating income. Unregulated energy operating income fell $3.9 million because of warmer weather, lower propane margins and reduced propane trading activity.
- First-half 2012 weather was materially warmer than the prior year and normal conditions, reducing gross margin by approximately $3.9 million versus the prior year and approximately $3.5 million versus normal weather.
- Regulated energy gross margin increased $2.6 million for the first six months, while unregulated energy gross margin decreased $4.4 million.
- Depreciation and amortization increased by $1.7 million for the first six months, including $1.2 million of amortization related to the Florida Public Utilities acquisition adjustment and merger-related costs.
- BravePoint improved from a prior-year operating loss to operating income of $238,000 for the quarter and $245,000 for the six-month period.
Guidance, outlook, commentary, risks and unusual items
- Management increased its 2012 capital expenditure projection from $88.5 million to $90.8 million, including $77.7 million for regulated energy, $3.6 million for unregulated energy and $9.5 million for other operations.
- The company expects to complete its acquisition of the Eastern Shore Gas Company and affiliates in the fourth quarter of 2012, subject to regulatory and other approvals. The assets serve approximately 11,000 residential and commercial propane customers and more than 500 bulk-delivery customers. The acquisition is expected to be financed with unsecured short-term debt and to be accretive to EPS in 2013 and thereafter.
- Growth initiatives include natural gas expansions in Delaware, Maryland and Florida. Management expects specified new transmission and distribution initiatives to generate additional 2012 and annualized gross margin, but these estimates depend on construction, regulatory approvals, customer conversions and demand.
- A new $40 million unsecured revolving credit facility was entered into in June 2012, increasing total short-term borrowing capacity available from lenders to $140 million, although the Board’s aggregate borrowing authorization remained $85 million.
- The Florida PSC approved recovery in rates of a $34.2 million acquisition adjustment and $2.2 million of merger-related costs. The related amortization is expected to be $2.4 million in 2012 and 2013, with additional amortization continuing through 2039. Recovery could be impaired if the Florida PSC later determines that supporting cost savings no longer exist.
- The City of Marianna litigation remains pending and seeks a potential purchase of FPU’s electric distribution assets in the city. Trial was scheduled for October 29, 2012. Chesapeake had expensed approximately $978,000 of related legal costs, including approximately $440,000 in 2012.
- Environmental liabilities totaled approximately $11.1 million at June 30, 2012, primarily related to former manufactured gas plant sites. Management expects recovery through rates or other arrangements, but certain matters remain uncertain and unaccrued.
- Corporate guarantees totaled $27.7 million, and outstanding letters of credit included $1.0 million, $656,000, $725,000 and $2.5 million arrangements. No draws had occurred as of June 30, 2012.
- The company had commodity purchase obligations of $30.2 million and forward propane sale contracts totaling approximately $5.1 million. Commodity prices, weather, competition, regulatory decisions, interest rates, counterparty credit and capital-market access remain key risks.
- Unusual items affecting comparability included the prior-year $549,000 severance charge, prior-year pension settlement and severance charges totaling $787,000, a prior-year $575,000 antitrust settlement gain, propane inventory write-downs of $338,000 in the quarter and $465,000 year-to-date, and a $568,000 accrued-revenue adjustment in the second quarter.
Important facts for investors to verify
- Whether regulated growth and new transmission projects offset continued weather sensitivity and weaker unregulated propane results.
- The timing, approval status, financing and expected purchase price of the Eastern Shore Gas acquisition.
- Progress and resolution of the Marianna litigation and the potential effect of any forced asset sale or settlement.
- Whether Florida and other regulators approve pending rate riders, infrastructure recovery requests and proposed regulatory liabilities.
- The company’s ability to fund the $90.8 million capital program while maintaining low cash balances and managing seasonal working-capital needs.
- Whether environmental remediation estimates remain recoverable through rates and whether additional liabilities arise at the Cambridge, Maryland and other former MGP sites.
- Actual weather, propane prices, trading activity and customer growth relative to management’s projections.