Chesapeake Utilities Corporation — 2012 Form 10-K Summary
Reporting period: Fiscal year ended December 31, 2012, with unaudited quarterly data for the quarter ended December 31, 2012. The company operates regulated natural gas distribution and transmission, Florida electric distribution, unregulated propane and natural gas marketing businesses, and advanced information services.
Financial performance and key metrics
| Metric | 2012 | 2011 | Change |
|---|---|---|---|
| Operating revenue | $392.5 million | $418.0 million | Down $25.5 million |
| Operating income | $56.6 million | $53.7 million | Up $2.9 million |
| Net income | $28.9 million | $27.6 million | Up $1.2 million |
| Diluted EPS | $2.99 | $2.87 | Up $0.12 |
| Operating margin | 14.4% | 12.8% | Improved |
| Net margin | 7.4% | 6.6% | Improved |
| Operating cash flow | $65.9 million | $71.1 million | Down $5.2 million |
| Capital expenditures | $78.2 million | $44.4 million | Up $33.8 million |
| Cash and equivalents | $3.4 million | $2.6 million | Up $0.7 million |
Regulated Energy generated $47.0 million of operating income, or 83% of the consolidated total, and represented 90% of net property, plant and equipment. Unregulated Energy generated $8.4 million of operating income, down from $9.6 million, while Other generated $1.3 million, up from $0.2 million.
Regulated Energy gross margin increased to $134.8 million from $128.1 million. Growth from natural gas transmission and distribution expansions, customer additions, rate changes and higher transmission services more than offset warmer weather. Unregulated Energy gross margin declined to $35.9 million from $37.2 million, primarily because of lower propane consumption and the absence of a 2011 litigation-settlement gain.
Quarter ended December 31, 2012
Fourth-quarter operating revenue was $109.5 million, operating income was $18.5 million, net income was $9.9 million, and diluted EPS was $1.02, compared with fourth-quarter 2011 revenue of $104.0 million, operating income of $15.5 million, net income of $8.0 million, and diluted EPS of $0.83.
Balance sheet, debt and liquidity
- Total assets were $733.7 million, including $541.8 million of net property, plant and equipment.
- Stockholders’ equity was $256.6 million; long-term debt, including current maturities, was $110.1 million; and short-term debt was $61.2 million, compared with $34.7 million at year-end 2011.
- Debt represented 28% of capitalization excluding short-term debt and 26% of total capitalization including current maturities. Equity represented 60% of capitalization including short-term debt.
- The company had $140.0 million of short-term credit facilities, including $60.0 million of committed revolving facilities, and was authorized to borrow up to $100.0 million under its short-term lines. Availability was subject to facility terms and covenant compliance.
- Management reported compliance with all debt covenants, including minimum equity and fixed-charge coverage requirements.
- Long-term debt fair value was $133.2 million versus a carrying value of $110.1 million. Annual principal maturities include $8.2 million in 2013, $12.1 million in 2014 and $9.1 million in 2015.
Cash flow, investment and dividends
Operating cash flow of $65.9 million did not fully fund $69.8 million of investing outflows, including $72.0 million of property, plant and equipment expenditures. Financing activities provided $4.7 million, primarily through increased short-term borrowings. Cash dividends paid were $12.3 million, and dividends declared increased to $1.440 per share from $1.365 per share.
The company budgeted $112.3 million of capital expenditures for 2013, including $100.6 million for Regulated Energy. Management expects to fund the program through operating cash flow, short-term borrowings and other financing sources.
Material changes and unusual items
- Warmer-than-normal weather reduced 2012 gross margin by approximately $5.1 million versus normal weather and by approximately $3.6 million versus 2011.
- Natural gas growth contributed approximately $6.3 million of incremental pre-tax income, including major expansion initiatives in Delaware, Maryland and Florida.
- Higher propane retail margins contributed approximately $2.7 million of pre-tax income, while lower propane consumption and the loss of a $575,000 2011 litigation gain reduced results.
- BravePoint improved to $828,000 of operating income from a $270,000 operating loss, supported by ProfitZoom and Application Evolution products, but incurred higher staffing costs.
- Florida regulators approved recovery of a $34.2 million FPU acquisition adjustment and $2.2 million of merger-related costs. Related amortization expense was $2.4 million in 2012 and is expected to continue through 2039; the recovery is expected to provide positive cash flow despite the non-cash expense.
- A $684,000 amortization credit was recorded for a Florida regulatory liability related to a pre-merger tax contingency gain.
- Capital expenditures rose substantially because of system expansions, Florida infrastructure replacement, electric reliability projects and technology initiatives.
Outlook, contingencies and principal risks
- The company expects continued growth from natural gas transmission and distribution expansions. Projects expected to begin or ramp in 2013 could provide estimated annualized gross margin of approximately $4.8 million to $5.2 million, subject to construction, regulatory and customer conditions.
- Chesapeake agreed to acquire Eastern Shore Gas Company operating assets for approximately $16.5 million, serving approximately 11,000 customers. Closing was expected in 2013, subject to Maryland PSC and other approvals, and was expected to be financed with short-term debt.
- Florida’s GRIP surcharge was approved effective January 1, 2013, supporting an estimated $75.0 million, 10-year gas infrastructure replacement program.
- The company is exposed to weather, commodity prices, supplier concentration, counterparty credit, interest rates, pension funding, regulatory approvals, environmental remediation, competition, cybersecurity and construction-cost risks.
- Environmental liabilities were approximately $10.5 million for FPU sites and $170,000 for Chesapeake sites. Certain future remediation costs were expected to be recoverable through rates, but recovery is not guaranteed. Potential additional costs at the Winter Haven site and unresolved Cambridge, Maryland and Fernandina Beach matters were not fully determinable.
- The Marianna, Florida franchise dispute was dismissed with prejudice on February 11, 2013 following an agreement in principle. A formal settlement, possible facility sale and referendum remained subject to approvals. Litigation expense was approximately $1.4 million through December 31, 2012.
- Corporate guarantees for subsidiary commodity purchases totaled $29.7 million at year-end, with various expirations through December 2013. Additional letters of credit and a $2.3 million letter of credit related to TETLP were outstanding.
Investor verification items
- Verify the sustainability of earnings growth after adjusting for weather, regulatory credits, propane margins and other unusual items.
- Review whether the $112.3 million 2013 capital program and the proposed ESG acquisition increase short-term borrowing and refinancing needs.
- Track regulatory approval and execution of the ESG acquisition, Delaware expansion filings, Florida GRIP recovery and Eastern Shore expansion projects.
- Assess exposure to environmental remediation costs, particularly Winter Haven, Cambridge and Fernandina Beach, and the recoverability of related regulatory assets.
- Monitor the Marianna settlement, potential sale or continued operation of the approximately 3,000 affected customers, and any related rate recovery.
- Reconcile debt maturities, available committed liquidity, covenant headroom and the company’s ability to maintain dividends while funding growth.