Chesapeake Utilities Corporation — 2017 Q2 Form 10-Q Summary
Business context and reporting period
Chesapeake Utilities is a diversified domestic energy company with regulated natural gas distribution, natural gas transmission and electric distribution operations, and unregulated propane distribution, natural gas marketing, gathering, processing, transportation, supply, and combined heat and power activities. This unaudited Form 10-Q covers the three and six months ended June 30, 2017. Results are seasonal, with typically higher revenue and earnings in the first and fourth quarters.
Key financial metrics
| Metric | Three months ended June 30 | Six months ended June 30 | ||
|---|---|---|---|---|
| 2017 | 2016 | 2017 | 2016 | |
| Total operating revenue | $125.1 million | $102.3 million | $310.2 million | $248.6 million |
| Gross margin | $60.6 million | $57.8 million | $144.8 million | $135.2 million |
| Gross margin percentage | 48.4% | 56.5% | 46.7% | 54.4% |
| Operating income | $13.7 million | $15.7 million | $48.3 million | $52.1 million |
| Operating margin | 10.9% | 15.4% | 15.6% | 21.0% |
| Net income | $6.0 million | $8.0 million | $25.2 million | $28.4 million |
| Diluted EPS | $0.37 | $0.52 | $1.54 | $1.85 |
| Operating cash flow | Not separately provided | Not separately provided | $96.4 million | $77.7 million |
Gross margin is a non-GAAP measure defined by the company as operating revenue less cost of sales. Percentages above are calculated from reported figures.
- Regulated Energy revenue increased to $71.0 million in the quarter and $168.7 million year to date; segment operating income declined to $13.7 million and $36.7 million, respectively.
- Unregulated Energy revenue increased to $63.0 million in the quarter and $155.8 million year to date; segment operating income was a $38,000 loss in the quarter and $11.5 million year to date.
- Capital expenditures were $88.6 million in investing cash flows for the six months, including $82.7 million of reported capital expenditures in management’s discussion.
- Cash and cash equivalents were $2.4 million at June 30, 2017, compared with $4.2 million at December 31, 2016.
- Long-term debt, including current maturities, was $213.7 million; short-term borrowings were $145.6 million. Total debt therefore approximated $359.3 million.
- Stockholders’ equity was $461.7 million, and total capitalization including short-term debt was $821.0 million. Equity represented 56% of that capitalization.
- The quarterly dividend was $0.3250 per share; dividends declared for the first six months totaled $0.6300 per share.
Material changes versus the prior comparable period
- Second-quarter net income declined $2.0 million, or 25%, and diluted EPS declined $0.15. Six-month net income declined $3.2 million, or 11%, and diluted EPS declined $0.31.
- Revenue grew substantially, particularly in unregulated energy, but cost of sales and operating expenses increased faster. Second-quarter operating expenses rose $24.8 million, including $17.6 million of higher unregulated energy cost of sales, while operations, depreciation and other taxes also increased.
- Operating income declined $2.1 million in the quarter and $3.8 million year to date. Higher gross margin from Eight Flags, GRIP, service expansions, customer growth and the Delaware rate increase was more than offset by higher depreciation, staffing, maintenance, regulatory and Eight Flags operating costs.
- Warmer weather reduced gross margin by approximately $675,000 in the quarter and $1.4 million year to date versus 2016. Weather versus normal reduced gross margin by approximately $1.1 million and $4.3 million, respectively.
- Eight Flags’ combined heat and power plant contributed approximately $2.1 million of incremental gross margin in the quarter and $3.9 million year to date, but also added approximately $1.3 million and $2.5 million of operating expenses.
- PESCO’s second-quarter gross margin declined $450,000 following expiration of a Columbia Gas supplier agreement on March 31, 2017. For the six-month period, PESCO gross margin increased $1.7 million, primarily from that agreement and additional Florida customers.
- Xeron wound down operations shortly after the first quarter. The company recorded pre-tax Xeron losses of $522,000 in the quarter and $1.1 million year to date, primarily for severance and lease termination costs, and does not expect further material wind-down costs.
- Interest expense increased $449,000 in the quarter and $537,000 year to date, largely due to higher debt and the April 2017 issuance of $70.0 million of 3.25% Prudential Shelf Notes.
- Operating cash flow increased $18.7 million year to date, but investing cash requirements increased $15.7 million. Financing activities included $69.8 million of long-term debt proceeds and net repayments of approximately $67.1 million under line-of-credit arrangements.
Guidance, outlook, commentary and risks
- Management projects approximately $208.0 million of 2017 capital expenditures, reduced from an original $260.3 million budget. The forecast includes $185.5 million for regulated energy, led by natural gas transmission.
- The 2017 Eastern Shore Expansion Project has an estimated investment of $98.6 million and is expected to generate approximately $15.8 million of gross margin in the first full year after service begins, subject to regulatory approvals and construction execution.
- The Northwest Florida Expansion Project has estimated annual gross margin of approximately $5.1 million once in service. The Eastern Shore System Reliability Project was placed in service in the second quarter and is expected to generate approximately $4.5 million of annual gross margin once new rates become effective.
- Eastern Shore requested an $18.9 million revenue increase in its FERC rate case and filed notice to implement interim rates effective August 1, 2017. Proposed rates remain subject to refund, protests and settlement or final FERC resolution.
- FPU filed a Florida electric limited proceeding in July 2017 seeking rate-base treatment for capital projects, including modernization and the electric interconnect project. The filing followed withdrawal of a proposed temporary surcharge.
- Environmental liabilities related to Florida manufactured gas plant sites were approximately $9.8 million at June 30, 2017. Estimated future remediation costs vary by site, and certain liabilities or recoveries remain subject to regulatory, environmental and legal outcomes.
- Corporate guarantees for subsidiary vendor obligations totaled approximately $57.2 million, and outstanding letters of credit totaled approximately $5.8 million. No letters of credit had been drawn.
- Management identifies risks from regulation and rate recovery, capital-project approvals and execution, weather, commodity prices, competition, counterparty credit, interest rates, environmental matters, financing access, pension costs, cybersecurity and changes in tax rules.
- The company expects ASC 606 revenue recognition adoption in 2018 to have no material overall impact based on its current assessment, although approximately $407,000 of revenue associated with one long-term contract is expected to be deferred in 2018. The assessment was not finalized at quarter-end.
Most important facts for investors to verify
- Progress, final outcome and refund exposure of the Eastern Shore FERC rate case and the timing of recovery for the System Reliability Project.
- Actual spending, permitting, construction completion and customer commitments for the 2017 Eastern Shore and Northwest Florida expansion projects.
- Whether regulated margin growth can offset rising depreciation, staffing, maintenance, regulatory and Eight Flags operating costs.
- Weather-normalized demand trends, propane margins and the sustainability of PESCO and Aspire Energy margins after contract changes.
- Liquidity headroom under the $180.0 million of unsecured bank facilities and $150.0 million Revolver, given the capital program and only $2.4 million of cash.
- Environmental remediation costs, regulatory recovery and potential exposure at the Sanford, West Palm Beach, Winter Haven, Seaford and Cambridge sites.
- The final impact of ASC 606 and other pending accounting standards, including leases and cash-flow presentation.