Chesapeake Utilities Corporation — Form 10-Q Summary
Business context and reporting period
Chesapeake Utilities Corporation is a diversified utility with regulated natural gas distribution, electric distribution and natural gas transmission operations, unregulated natural gas marketing and propane businesses, and an advanced information services business. This unaudited Form 10-Q covers the three and nine months ended September 30, 2011, compared with the corresponding 2010 periods. Results are seasonal, with typically higher energy consumption and earnings in the first and fourth quarters.
Financial performance and position
| Metric | Q3 2011 | Q3 2010 | 9M 2011 | 9M 2010 |
|---|---|---|---|---|
| Operating revenues | $80.6 million | $76.5 million | $314.0 million | $309.8 million |
| Operating income | $5.6 million | $4.6 million | $38.2 million | $37.7 million |
| Net income | $2.4 million | $1.6 million | $19.7 million | $18.9 million |
| Diluted EPS | $0.25 | $0.17 | $2.04 | $1.98 |
| Operating margin | 6.9% | 6.0% | 12.2% | 12.2% |
| Approximate gross margin | 42.8% | 41.6% | 40.2% | 40.1% |
| Cash dividends declared per share | $0.345 | $0.330 | $1.020 | $0.975 |
For the first nine months, regulated energy revenue declined 2.4% to $193.1 million, while unregulated energy revenue increased 7.8% to $112.2 million. Regulated energy operating income declined 4% to $31.2 million, while unregulated energy operating income increased 49% to $7.0 million. The unregulated segment nevertheless reported a third-quarter operating loss of $1.5 million.
Net cash provided by operating activities was $52.8 million for the first nine months, compared with $54.8 million in 2010. Capital expenditures were $33.4 million versus $26.2 million, and cash used in investing activities was $33.3 million. Ending cash was $1.8 million, compared with $2.7 million at September 30, 2010.
At September 30, 2011, total assets were $657.5 million, stockholders’ equity was $237.5 million, long-term debt including current maturities was $126.3 million, and short-term borrowings were $26.6 million. Total capitalization including short-term debt was $390.4 million. The company had $100.0 million of bank lines of credit, of which $60.0 million were committed, and was authorized to borrow up to $85.0 million.
Material changes versus the prior comparable periods
- Third-quarter net income rose $769,000, or 47%, primarily from higher regulated and unregulated gross margins, a $553,000 gain on the sale of an unused Internet Protocol address, and the absence of 2010 charges related to Florida regulatory risk and a propane class-action settlement.
- Nine-month net income increased $722,000, or 4%, despite warmer weather that reduced gross margin by approximately $2.5 million. Benefits included stronger propane margins, higher propane trading activity, customer growth and new Eastern Shore transportation services.
- Nine-month regulated energy operating income fell $1.2 million because a $2.8 million gross-margin increase was more than offset by $4.0 million of higher operating expenses, including pipeline integrity, depreciation, regulatory costs, Marianna litigation costs, severance and pension charges.
- Unregulated energy performance improved from higher propane margins, a $575,000 antitrust settlement gain, increased Xeron trading activity and the absence of the 2010 propane settlement charge.
- The company issued $29.0 million of 5.68% unsecured senior notes in June 2011. Proceeds permanently financed the redemption of FPU mortgage bonds and reduced short-term borrowing. Long-term debt increased from $98.9 million at year-end 2010 to $126.3 million.
- Capital expenditures increased year over year, and management raised its 2011 capital spending projection from $51.7 million to $53.6 million.
Guidance, outlook, commentary and risks
- Management expects 2011 capital expenditures of $53.6 million, including $45.0 million for regulated energy, $2.8 million for unregulated energy and $5.8 million for other operations. Funding is expected from operating cash flow, short-term borrowing and other sources.
- Eastern Shore reached a rate settlement in principle providing an annual rate increase of approximately $805,000 and a 13.9% pre-tax return. The settlement remained subject to filing and FERC approval; $911,000 of incremental billed revenue was reserved as a regulatory liability pending resolution.
- The Florida PSC was expected to consider recovery of approximately $34.2 million of acquisition adjustment and $2.2 million of merger-related costs. Approval could support future rate base and cash flow, but amortization could reduce earnings by as much as $1.6 million annually through 2014 and $1.1 million annually thereafter. The company maintained a $750,000 accrual for related regulatory risk.
- The City of Marianna, Florida, sought to exercise an option to purchase FPU’s electric distribution assets serving approximately 3,000 customers. Litigation was pending, and FPU intended to oppose the purchase. The company incurred approximately $145,000 of related costs in the third quarter and $439,000 in the first nine months.
- Environmental liabilities included approximately $11.1 million for FPU’s Florida manufactured-gas-plant sites and $284,000 for Chesapeake’s Maryland and Florida sites. West Palm Beach remediation estimates ranged from $4.7 million to $15.8 million; the company expected recovery through customer rates. Potential additional Winter Haven sediment remediation costs of up to $1.0 million had not been accrued.
- The company had $26.7 million of corporate guarantees, a $2.5 million letter of credit related to the TETLP expansion, and additional letters of credit totaling $2.381 million. A potential reimbursement obligation under the TETLP agreement could be approximately $3.8 million if terminated before construction completion and as much as approximately $50 million after completion, although management considered termination unlikely.
- Key ongoing risks include regulatory recovery and rate decisions, weather, commodity prices, counterparty credit, environmental matters, competition, litigation, financing conditions, pension funding requirements and the possible loss of customers or assets through governmental action.
Important facts for investors to verify
- Confirm final FERC action on the Eastern Shore rate settlement and the treatment of the $911,000 regulatory liability.
- Monitor the Florida PSC decision on the $36.4 million acquisition-adjustment and merger-cost recovery request and related earnings effects.
- Track the Marianna litigation and any referendum or attempted municipal acquisition of FPU assets.
- Evaluate whether the $53.6 million capital program and planned Eastern Shore expansions remain on schedule and within budget.
- Assess seasonal cash-flow requirements, available committed credit capacity, short-term borrowing and the maturity of the $1.0 million note due January 2012.
- Review environmental cost estimates, rate-recovery assumptions and potential unaccrued liabilities, particularly at West Palm Beach, Winter Haven and Sanford.
- Separate recurring operating performance from unusual items, including the $553,000 asset-sale gain, $575,000 antitrust settlement gain, pension and severance charges, and prior-period regulatory and litigation charges.