Chesapeake Utilities Corporation: Q3 2015 Form 10-Q Summary
Business Context and Reporting Period
Chesapeake Utilities Corporation is a diversified energy company with regulated natural gas distribution, transmission and electric operations, plus unregulated propane, natural gas marketing and midstream businesses. This unaudited Form 10-Q covers the three and nine months ended September 30, 2015, compared with the corresponding 2014 periods. Results are seasonal, with typically higher energy consumption and earnings in the first and fourth quarters.
Key Financial Metrics
| Metric | Q3 2015 | Q3 2014 | 9M 2015 | 9M 2014 |
|---|---|---|---|---|
| Operating revenue | $91.9 million | $91.6 million | $354.7 million | $378.5 million |
| Operating income | $10.9 million | $7.8 million | $61.6 million | $49.9 million |
| Net income | $5.1 million | $3.2 million | $32.5 million | $26.0 million |
| Diluted EPS | $0.33 | $0.22 | $2.16 | $1.78 |
| Operating margin | Approximately 11.9% | Approximately 8.5% | Approximately 17.4% | Approximately 13.2% |
| Cash dividends declared per share | $0.2875 | $0.2700 | $0.8450 | $0.7967 |
- Regulated Energy operating income increased 28.5% in Q3 to $11.8 million and 16.1% for the nine-month period to $47.6 million.
- Unregulated Energy improved from a $2.0 million operating loss in Q3 2014 to a $1.0 million operating loss in Q3 2015; nine-month operating income increased 54.5% to $13.7 million.
- Net cash provided by operating activities was $98.7 million for the first nine months, compared with $65.0 million in 2014.
- Capital expenditures were $102.1 million and acquisition spending was $20.9 million, producing net investing cash outflows of $123.0 million.
- Cash and cash equivalents were $3.8 million at September 30, 2015, versus $4.6 million at December 31, 2014.
- Short-term borrowings increased to $127.1 million from $88.2 million at year-end 2014. Long-term debt, including current maturities, was $165.0 million versus $167.6 million.
- Stockholders’ equity increased to $353.3 million from $300.3 million, principally reflecting earnings and shares issued for the Gatherco acquisition.
Material Changes Versus the Prior Comparable Period
- Nine-month revenue declined 6.3%, primarily because lower natural gas and propane commodity prices reduced pass-through revenue in unregulated activities. Gross margin and earnings nevertheless increased.
- Growth was driven by regulated service expansions, Florida’s GRIP infrastructure program, natural gas customer growth, a Florida electric base-rate increase and stronger retail propane margins.
- On April 1, 2015, Chesapeake acquired Gatherco, which became Aspire Energy of Ohio. Consideration included $30.2 million of Chesapeake common stock, $27.5 million of cash and assumed debt of $1.7 million, partially offset by $6.8 million of acquired cash. The transaction added $11.0 million of revenue but a $133,000 net loss for the first nine months.
- The acquisition added 592,970 shares and resulted in approximately $0.06 of nine-month EPS dilution, according to management’s variance analysis.
- Q3 and nine-month results benefited from higher retail propane margins. Management stated that the first nine months’ retail propane margins were not typical and were excluded from long-term financial plans.
- Operating expenses increased due to growth-related payroll and benefits, depreciation, property taxes, maintenance, incentive compensation and Aspire Energy operating costs.
Guidance, Outlook, Risks and Unusual Items
- Management forecast 2015 capital expenditures of $130 million to $160 million, excluding the Gatherco acquisition, compared with an original budget of $223.4 million. The reduction primarily reflects expenditures shifted into 2016.
- Management expected to increase borrowings to fund capital expenditures. On October 8, 2015, Chesapeake entered into a five-year $150 million revolving credit facility and a Shelf Agreement permitting requests for up to $150 million of senior notes; on October 19, 2015, it borrowed $25 million under the revolver.
- Planned projects include the White Oak Mainline Expansion, the Eastern Shore System Reliability Project, the TETLP capacity expansion and the Eight Flags combined heat and power plant. Management estimated approximately $19.3 million of annualized gross margin from these projects when fully operational, subject to approvals, construction and operating conditions.
- The company recorded a $1.5 million pretax gain from a vendor settlement concerning a customer billing-system implementation. It had recorded a $6.5 million pretax non-cash impairment related to the system at December 31, 2014. Up to $750,000 of additional consideration may be received, contingent on future vendor services.
- Environmental liabilities totaled approximately $10.4 million at September 30, 2015, primarily related to former manufactured-gas-plant sites. Potential West Palm Beach remediation costs were estimated at $4.5 million to $15.4 million.
- FPU has paid $650,000 under the Sanford remediation agreement but could face a claim exceeding that amount; management stated that no such claim had been made as of September 30, 2015.
- Corporate guarantees totaled $36.1 million, with additional letters of credit outstanding. No letters of credit had been drawn as of September 30, 2015.
- Key risks include regulatory and rate outcomes, environmental and legal matters, weather, commodity prices, interest rates, financing availability, counterparty credit, project execution, competition, acquisitions and information-technology or cyber risks.
- Disclosure controls and procedures were evaluated as effective, and no material change in internal control over financial reporting was reported during the quarter.
Investor Verification Checklist
- Verify the sustainability of the unusually strong retail propane margins and their effect on future earnings.
- Assess the funding requirements and leverage impact of the $130 million to $160 million capital program and planned projects.
- Review the terms, covenants and subsequent utilization of the $150 million revolver and Shelf Agreement.
- Evaluate Aspire Energy’s operating performance, preliminary purchase-price allocation, contingent consideration and expected 2016 accretion.
- Monitor FERC, state PSC and other approvals for the White Oak, System Reliability, TETLP and Eight Flags projects.
- Assess potential environmental remediation costs and the unresolved Sanford and Cambridge contingencies.
- Consider the seasonal nature of earnings and the impact of weather, commodity prices and trading volatility on reported results.