Chesapeake Utilities Corporation — Q1 2019 Form 10-Q Summary
Business Context and Reporting Period
Chesapeake Utilities Corporation is a diversified energy company operating regulated natural gas and electric distribution and transmission businesses, unregulated propane, natural gas marketing, energy generation and related services. Operations are concentrated on the Delmarva Peninsula, in Florida, Pennsylvania and Ohio. The filing covers the three months ended March 31, 2019; results are unaudited and seasonally weighted toward the first and fourth quarters.
Financial Performance and Position
| Metric | Q1 2019 | Q1 2018 | Change |
|---|---|---|---|
| Total operating revenue | $227.6 million | $239.4 million | Down $11.7 million |
| Gross margin | $101.5 million | $91.5 million | Up $10.1 million, or 11.1% |
| Operating income | $44.0 million | $40.4 million | Up $3.6 million, or 8.9% |
| Income before taxes | $38.2 million | $36.8 million | Up $1.4 million |
| Net income | $28.7 million | $26.9 million | Up $1.8 million, or 6.7% |
| Diluted EPS | $1.74 | $1.64 | Up $0.10 |
| Net cash from operating activities | $40.5 million | $66.7 million | Down $26.2 million |
| Capital expenditures | $43.2 million | $63.1 million | Down $19.9 million |
Gross margin increased to approximately 44.6% of revenue from 38.2%. Operating margin increased to approximately 19.3% from 16.9%, while net margin increased to approximately 12.6% from 11.2%. Regulated Energy operating income rose to $29.7 million from $26.7 million, and Unregulated Energy operating income rose to $15.1 million from $13.7 million.
Cash and cash equivalents were $8.0 million at March 31, 2019, compared with $6.1 million at December 31, 2018. Current assets were $153.6 million and current liabilities were $508.6 million. Short-term borrowings were $276.4 million, and long-term debt including current maturities was $357.5 million. Total stockholders’ equity was $543.7 million.
Total capitalization including short-term debt was $1.18 billion, consisting of 46% equity, 30% long-term debt and 24% short-term debt. Management’s stated target equity ratio including short-term borrowings is 50% to 60%; the reported ratio was reduced by financing for Hurricane Michael restoration.
Material Changes Versus the Prior Comparable Period
- Revenue declined primarily because lower commodity costs reduced reported revenue in energy marketing and propane operations, although gross margin improved.
- Gross margin benefited from Eastern Shore and Peninsula Pipeline expansions, customer growth, the Marlin Gas Services and Ohl acquisitions, higher propane retail margins, Aspire Energy rate increases and the absence of 2018 Bomb Cyclone-related costs.
- Florida weather was approximately 26% warmer than in Q1 2018, reducing customer consumption and gross margin. The 2018 Bomb Cyclone also created an unfavorable comparison for propane and certain natural gas activities.
- A Florida PSC order permitted certain Florida natural gas operations to retain TCJA-related tax savings, resulting in a $1.3 million reversal of customer-refund reserves recorded in 2018.
- Interest expense increased $2.0 million to $5.7 million, mainly because of higher short-term borrowings and debt issued to finance Hurricane Michael restoration.
- Operating expenses increased because of growth-related depreciation, property taxes, incentive compensation, staffing, employee costs and expenses associated with the acquired businesses.
- PESCO’s operating loss improved to $0.5 million from $0.8 million, but its results included a negative $5.6 million mark-to-market impact.
Cash Flow, Debt and Liquidity
Operating cash flow of $40.5 million was insufficient to fund $43.2 million of capital expenditures before financing activities. Financing activities provided $4.8 million, including $30.0 million of term-note proceeds, partly offset by repayments and $5.9 million of dividends. Cash increased $1.9 million during the quarter.
The company issued a $30.0 million unsecured term note in January 2019, in addition to a $30.0 million term note issued in December 2018. Both mature in 2020 and bear interest at approximately LIBOR plus 75 basis points. Five unsecured bank credit facilities provided $220.0 million of available credit, and the company had a $150.0 million revolving credit facility available through October 2020. Shelf agreements provided $250.0 million of remaining borrowing capacity, including a $100.0 million unfunded Prudential commitment.
The 2019 capital expenditure budget was $168.2 million, including $136.9 million for regulated energy businesses. Management stated that actual expenditures may vary based on regulatory approvals, permitting, customer growth, acquisitions and financing availability.
Guidance, Outlook, Commentary and Unusual Items
- Management did not provide consolidated earnings guidance in the filing. It provided project-level gross-margin expectations totaling approximately $47.7 million for 2019 and $54.7 million for 2020 for identified projects and initiatives.
- The 2017 Eastern Shore expansion is expected to produce approximately $16.2 million of gross margin in 2019 and $15.8 million annually through 2022.
- Marlin Gas Services is expected to generate approximately $5.1 million of gross margin in 2019 and $6.0 million annually thereafter. The Ohl acquisition is expected to generate approximately $1.2 million in 2019.
- The Del-Mar Energy Pathway project would add 14,300 dekatherms per day of firm capacity. Final FERC authorization remained pending, and projected economics depend on regulatory approval and construction timing.
- Hurricane Michael restoration costs exceeded $65 million through March 31, 2019. The company is seeking regulatory recovery of restoration and related financing costs; the ultimate regulatory treatment remains a contingency.
- Delaware rate changes reflecting TCJA impacts became effective March 1, 2019, with customer refunds retroactive to February 2018 expected by June 30, 2019.
- Environmental liabilities for former manufactured gas plant sites were approximately $8.9 million. The Cambridge, Maryland site remained under discussion with regulators and could not be estimated clearly.
- The company adopted lease accounting standard ASC 842 on January 1, 2019, recognizing $12.5 million of operating lease right-of-use assets and $12.5 million of operating lease liabilities at March 31, 2019. Prior periods were not restated.
- Management identified regulatory, environmental, weather, commodity-price, interest-rate, cybersecurity, counterparty, capital-market and execution risks. The company also had $77.3 million of corporate guarantees and $7.0 million of letters of credit outstanding, with no reported draws on the letters of credit.
Most Important Facts for Investors to Verify
- Whether regulatory authorities approve recovery of Hurricane Michael restoration and financing costs, and the timing of that recovery.
- Whether the company can reduce leverage toward its 50% to 60% equity capitalization target while funding the $168.2 million capital program.
- The sustainability of margin growth after excluding the $1.3 million Florida TCJA reserve reversal and other unusual items.
- PESCO’s mark-to-market exposure, risk-management performance and ability to return to consistent profitability.
- FERC authorization, construction timing and customer commitments for the Del-Mar Energy Pathway project.
- Actual customer demand, weather normalization, commodity prices and propane margins during the remainder of 2019.
- Potential costs and regulatory recovery associated with environmental remediation, particularly the unresolved Cambridge site.
- Near-term debt maturities, variable-rate borrowing costs and availability under bank facilities and shelf agreements.