Chesapeake Utilities Corporation — Form 10-Q Summary
Business Context and Reporting Period
Chesapeake Utilities Corporation is a diversified utility company 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 six months ended June 30, 2011, compared primarily with the corresponding 2010 periods. Results are seasonal, with higher revenue and earnings generally expected in the first and fourth quarters.
Financial Performance and Position
| Metric | Three months ended June 30, 2011 | Three months ended June 30, 2010 | Six months ended June 30, 2011 | Six months ended June 30, 2010 |
|---|---|---|---|---|
| Operating revenue | $86.8 million | $80.1 million | $233.4 million | $233.3 million |
| Operating income | $7.8 million | $7.8 million | $32.6 million | $33.2 million |
| Net income | $3.5 million | $3.3 million | $17.3 million | $17.3 million |
| Diluted EPS | $0.37 | $0.35 | $1.79 | $1.82 |
| Cash dividends declared per share | $0.345 | $0.330 | $0.675 | $0.645 |
- Second-quarter gross margin was approximately $37.5 million, or 43.2% of revenue, compared with approximately $35.1 million, or 43.8%, in the prior-year quarter.
- Six-month gross margin was approximately $91.8 million, or 39.3% of revenue, compared with approximately $88.8 million, or 38.1%, in the prior-year period.
- Operating margin was approximately 9.0% in the second quarter and 14.0% for the first six months, versus approximately 9.7% and 14.2%, respectively, in the comparable 2010 periods.
- Six-month cash flow from operating activities increased to $60.1 million from $57.0 million. Capital expenditures were $21.2 million versus $13.6 million.
- Cash and cash equivalents were $1.8 million at June 30, 2011, compared with $1.6 million at December 31, 2010.
- Total long-term debt, including current maturities, was $126.3 million at June 30, 2011, versus $98.9 million at year-end 2010. Short-term borrowings declined substantially to $4.2 million from $64.0 million.
- On June 23, 2011, the company issued $29.0 million of 5.68% unsecured senior notes, using the proceeds to repay short-term financing associated with earlier FPU bond redemptions.
- Stockholders’ equity increased to $238.0 million from $226.2 million at December 31, 2010.
Material Changes Versus the Prior Comparable Period
- Second-quarter revenue increased 8.5%, while net income increased 5.4% and diluted EPS increased $0.02. Operating income was essentially unchanged because higher gross margin was largely offset by higher operating expenses.
- For the first six months, revenue was essentially flat, net income declined slightly by $47,000, and diluted EPS decreased from $1.82 to $1.79.
- Regulated Energy operating income declined $445,000 in the quarter and $1.7 million year to date. Customer growth and new Eastern Shore transportation services increased gross margin, but higher regulatory, legal, pipeline integrity, depreciation and workforce-reduction costs more than offset the gains.
- Unregulated Energy operating income improved to $4,000 from a $791,000 loss in the quarter and increased 22% year to date to $8.5 million. The improvement reflected stronger propane margins, higher Xeron trading activity and favorable PESCO imbalance resolutions.
- The Other segment moved to an operating loss of $91,000 in the quarter and $74,000 year to date, primarily because BravePoint incurred costs for the ProfitZoom product rollout. BravePoint reported a second-quarter operating loss of $188,000 versus income of $230,000 in 2010.
- Warmer weather reduced first-half natural gas and electric consumption and decreased gross margin by approximately $2.4 million. This was partially offset by customer growth, propane margin improvement and new transmission services.
- Other operating expenses included approximately $808,000 of second-quarter non-recurring charges and approximately $1.2 million of first-half non-recurring charges, including ProfitZoom development, Florida workforce-reduction costs and a pension settlement.
Guidance, Outlook, Risks and Unusual Items
- Management increased its estimated 2011 capital expenditure program from $51.7 million to $62.6 million, including $54.3 million for regulated energy, $2.9 million for unregulated energy and $5.4 million for Other. Funding is expected from operating cash flow, short-term borrowings and other sources.
- Eastern Shore’s new transportation services are expected to generate gross margin of approximately $2.4 million in 2011, $3.9 million in 2012 and $4.3 million annually thereafter as capacity phases in.
- The company expects approximately $550,000 of additional interest expense in the second half of 2011 from replacing short-term financing with the new 5.68% senior notes.
- A Florida PSC decision on recovery of approximately $34.2 million of acquisition adjustment and $2.2 million of merger-related costs was expected in the fourth quarter of 2011. The company maintained a $750,000 accrual for related regulatory and earnings risk. Failure to obtain recovery could adversely affect future earnings and potentially require rate reductions.
- Eastern Shore’s FERC base-rate proceeding was ongoing and expected to be resolved in 2011. The Delaware capacity-release dispute remained subject to appeal, with a potential historical refund estimated at approximately $700,000; no liability had been accrued.
- The City of Marianna continued to contest FPU’s electric franchise and sought the right to purchase FPU’s local distribution assets. Loss of approximately 3,000 customers could negatively affect future earnings.
- Environmental liabilities were approximately $11.2 million for FPU’s Florida manufactured-gas-plant sites and $284,000 for Chesapeake’s Maryland and Florida sites. Estimated West Palm Beach remediation costs ranged from $4.9 million to $13.1 million, and potential Lake Shipp sediment remediation of up to $1.0 million had not been accrued because the outcome was uncertain.
- The company had $25.6 million of corporate guarantees, letters of credit totaling at least $3.7 million for insurance-related obligations, and a $2.5 million letter of credit under the TETLP precedent agreement.
- Key ongoing risks include regulatory and rate recovery outcomes, weather, commodity prices, interest rates, environmental obligations, litigation, customer and counterparty credit, competition, construction costs and access to capital.
Important Facts for Investors to Verify
- Whether Florida PSC approval was obtained for recovery of the FPU acquisition adjustment and merger-related costs and how rates, earnings and regulatory assets were affected.
- The final outcome of the Eastern Shore FERC rate case and the Delaware capacity-release appeal.
- Progress and economics of Eastern Shore and TETLP expansion projects, including the potential termination reimbursement exposure under the TETLP agreement.
- Whether the Marianna litigation resulted in a purchase election, referendum or loss of FPU assets and customers.
- Actual 2011 capital expenditures, financing needs and compliance with debt and fuel-supply covenants.
- Whether ProfitZoom generated sufficient revenue to offset BravePoint’s initial development and implementation costs.
- Changes in environmental remediation estimates, insurance or rate recovery, particularly for West Palm Beach, Winter Haven and Sanford.
- The sustainability of unregulated energy earnings, including propane margins, trading results and favorable imbalance resolutions that management states are not predictable.