Business Context and Reporting Period
Company: Chesapeake Utilities Corporation
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: June 30, 2009
Business Overview: A diversified utility company engaged in natural gas distribution, transmission, and marketing; propane distribution and wholesale marketing; and advanced information services. The company operates primarily in Delaware, Maryland, and Florida.
Key Financial Metrics
For the Three Months Ended June 30, 2009 (in thousands, except per share data):
- Operating Revenues: $40,834
- Operating Income: $2,856
- Net Income: $806
- Earnings Per Share (Diluted): $0.12
- Cash Dividends Declared Per Share: $0.315
For the Six Months Ended June 30, 2009 (in thousands, except per share data):
- Operating Revenues: $145,313
- Operating Income: $18,822
- Net Income: $9,399
- Earnings Per Share (Diluted): $1.36
- Net Cash Provided by Operating Activities: $46,821
- Net Cash Used by Investing Activities: $(11,976)
- Net Cash Used by Financing Activities: $(34,842)
Balance Sheet Highlights (June 30, 2009, in thousands):
- Total Assets: $350,289
- Total Liabilities: $220,262 (Calculated as Total Assets minus Stockholders' Equity)
- Long-term Debt (net of current maturities): $86,313
- Short-term Borrowing: $2,000
- Stockholders' Equity: $130,027
- Cash and Cash Equivalents: $1,614
Material Changes Versus Prior Period
Quarterly Comparison (Q2 2009 vs. Q2 2008):
- Net Income: Decreased by $1.0 million (56%) to $806,000. The decline was driven by a $1.5 million decrease in operating income, primarily due to seasonal effects, economic slowdown reducing energy usage, and higher operating expenses.
- Operating Revenues: Decreased by $28.2 million (41%) to $40.8 million, largely due to lower commodity costs passed through to customers and reduced consumption.
- Segment Performance:
- Natural Gas: Operating income decreased $978,000. Gross margin increased slightly, but was offset by higher operating expenses including allowance for uncollectible accounts and depreciation.
- Propane: Operating loss increased to $(561,000) from $(352,000) due to lower gross margin in wholesale marketing operations caused by reduced price volatility.
- Advanced Information Services: Operating loss of $(240,000) compared to income of $202,000, driven by a 36% decline in billable hours due to reduced IT spending by clients.
Six-Month Comparison (YTD 2009 vs. YTD 2008):
- Net Income: Remained relatively flat, increasing by only $6,000 to $9.4 million.
- Operating Income: Increased by $452,000 (2.5%) to $18.8 million.
- Cash Flow: Net cash provided by operating activities surged by $37.2 million to $46.8 million, primarily due to changes in working capital (accounts receivable/payable) and lower commodity prices.
Guidance, Outlook, Risks, and Unusual Items
Pending Merger: On April 20, 2009, Chesapeake announced a definitive merger agreement with Florida Public Utilities Company (FPU). FPU will become a wholly-owned subsidiary. The transaction is expected to close in the fourth quarter of 2009. Management expects the merger to be earnings neutral or slightly accretive in 2010 and meaningfully accretive in 2011. Transaction costs of approximately $1.2 million were expensed in 2009.
Regulatory Matters:
- Florida: Filed a petition for a rate increase of approximately $3.0 million (25% base rate increase) on July 17, 2009.
- Delaware: Settled a Gas Sales Service Rates application; expects a net margin reduction of approximately $8,000 per year starting November 2009.
- ESNG (Transmission): Commenced construction on system expansion facilities expected to be in service by November 2009, adding annualized gross margin of approximately $1.0 million.
Risks and Contingencies:
- Legal Proceedings: A putative class action lawsuit was filed on May 8, 2009, by FPU shareholders challenging the merger, alleging breach of fiduciary duties. The company intends to defend vigorously.
- Environmental: Ongoing remediation at two former manufactured gas plant sites (Salisbury, MD and Winter Haven, FL). A third site in Cambridge, MD is under discussion. The company believes future costs will be recoverable in rates.
- Market Risk: Exposure to commodity price fluctuations in propane and natural gas. The company uses derivative contracts to manage risk but noted reduced trading opportunities in the first half of 2009.
Capital Expenditures: The company budgeted $34.8 million for capital expenditures in 2009 (reduced by $3.4 million from prior projections due to economic slowdown). As of June 30, 2009, $11.9 million had been invested.
Important Facts for Investor Verification
- Merger Status: Verify the timeline and regulatory approval status of the FPU merger, including the resolution of the shareholder class action lawsuit filed in May 2009.
- Florida Rate Case: Monitor the outcome of the Florida Public Service Commission's review of the $3.0 million rate increase petition filed in July 2009.
- Seasonality and Weather: Assess the impact of heating degree-days (HDD) on Q3 and Q4 results, as the company's earnings are highly seasonal and weather-dependent.
- Advanced Information Services Turnaround: Evaluate the effectiveness of cost-containment measures (layoffs) implemented in Q1 2009 to offset the decline in IT consulting revenues.
- Debt and Liquidity: Note the significant reduction in short-term borrowings ($31 million net repayment in H1 2009) and the company's reliance on operating cash flow to fund capital expenditures.