Chesapeake Utilities Corporation 2017 Form 10-K Summary
Business context and reporting period
Chesapeake Utilities Corporation is a diversified energy company operating primarily in Delaware, Maryland, Florida, Pennsylvania and Ohio. Its businesses include regulated natural gas distribution and transmission, electric distribution, propane distribution, natural gas marketing and infrastructure services, and electricity and steam generation.
The filing covers the fiscal year ended December 31, 2017. The fourth-quarter results were reported within the annual filing and are unaudited quarterly data.
Financial performance and key metrics
| Metric | 2017 | 2016 | Change |
|---|---|---|---|
| Operating revenue | $617.6 million | $498.9 million | 24% |
| Operating income | $85.8 million | $84.1 million | 2% |
| Net income | $58.1 million | $44.7 million | 30% |
| Diluted EPS | $3.55 | $2.86 | 24% |
| Operating margin | 13.9% | 16.9% | Down |
| Net margin | 9.4% | 9.0% | Up |
| Cash flow from operations | $110.1 million | $104.1 million | Up $6.0 million |
| Capital expenditures | $191.1 million | $169.4 million | Up $21.7 million |
- Segment results: Regulated Energy revenue was $326.3 million and operating income was $73.2 million, up $3.3 million. Unregulated Energy revenue was $324.6 million and operating income was $12.5 million, down $1.4 million.
- Fourth quarter: Revenue was $180.4 million versus $141.9 million in the prior-year quarter; net income was $26.1 million versus $11.9 million; diluted EPS was $1.59 versus $0.73.
- Tax rate: Income tax expense declined to $14.3 million from $28.3 million. The 2017 effective tax rate was 19.75%, including a $14.3 million benefit from revaluing deferred taxes under the Tax Cuts and Jobs Act. Excluding tax reform, management reported an effective rate of approximately 39.5%.
- Liquidity and debt: Cash and cash equivalents were $5.6 million. Short-term borrowings were $251.0 million, compared with $209.9 million at year-end 2016. Long-term debt, including current maturities, was $206.8 million, compared with $149.1 million.
- Capital structure: Stockholders’ equity was $486.3 million. Equity represented 52% of capitalization including short-term borrowings, within management’s 50%–60% target range. Available short-term credit capacity was approximately $129.3 million at year-end, before considering other financing arrangements and facility conditions.
- Dividends: Cash dividends declared were $1.28 per share, compared with $1.2025 in 2016. The company reported 57 consecutive years of cash dividends.
Material changes versus the prior comparable period
- Regulated Energy operating income increased 4.7%, supported by Eastern Shore rate implementation, customer growth, service expansions, Florida GRIP investments and Delaware rate increases. These benefits were partly offset by higher payroll, depreciation, property tax and regulatory costs.
- Unregulated Energy operating income decreased 9.9% despite a $7.6 million increase in gross margin, because operating expenses increased $9.0 million. Excluding a $5.8 million unrealized mark-to-market loss at PESCO, segment operating income increased approximately 31.9%.
- Eight Flags’ combined heat and power plant contributed its first full year of operations, generating approximately $4.4 million of incremental unregulated gross margin and $15.0 million of electricity revenue plus $2.1 million of steam revenue.
- PESCO recorded a $5.8 million unrealized mark-to-market loss on derivatives associated with expected 2018 natural gas deliveries. Management expects the related economic margin to be realized when the contracts settle.
- Xeron’s propane and crude-oil trading operations were wound down during the second quarter of 2017. Management does not expect additional material wind-down costs.
- Natural gas distribution customers increased to 153,537 from 149,179; electric distribution customers increased to 32,026 from 31,695; propane distribution customers declined modestly to 54,760 from 54,947.
- Net property, plant and equipment increased to $1.126 billion from $986.7 million, reflecting substantial infrastructure investment.
Outlook, commentary, risks and unusual items
- 2018 investment plan: Management budgeted $181.6 million of capital expenditures, including $154.4 million for regulated operations and $17.1 million for unregulated operations. Actual spending may vary based on regulatory approvals, customer growth, permitting, financing and acquisition opportunities.
- Growth projects: The approximately $117 million Eastern Shore 2017 Expansion Project is expected to enter service in phases during the second through fourth quarters of 2018 and is expected to generate approximately $15.8 million of gross margin in its first full year. Northwest Florida and Palm Beach County pipeline projects are also expected to enter service in 2018.
- Rate proceedings: FERC approved Eastern Shore’s settlement agreement on February 28, 2018, subject to the expiration of the rehearing period. The settlement provides for an annual base-rate increase of approximately $9.8 million before tax-reform adjustments. FPU’s electric proceeding provided an annualized rate increase of approximately $1.6 million beginning in January 2018.
- Tax reform: The corporate federal tax rate falls to 21% beginning in 2018. Regulated deferred-tax revaluation of $98.5 million was recorded as a regulatory liability, while the $14.3 million unregulated benefit increased 2017 net income. The company expects an approximately 27.5% effective tax rate in 2018, but future rate reductions or customer refunds may reduce regulated cash flows and earnings.
- Principal risks: The filing highlights regulatory and rate-recovery risk, extensive capital requirements, short-term debt and interest-rate exposure, weather variability, commodity-price and derivative volatility, counterparty credit risk, competition, supply and pipeline capacity constraints, environmental remediation, pension funding, cyberattacks, severe weather and operational incidents.
- Environmental contingencies: The company has exposures at seven former manufactured-gas-plant sites. Environmental liabilities related to FPU sites were approximately $9.6 million at year-end, with some costs expected to be recovered through insurance and customer rates. Costs for a Cambridge, Maryland site could not be estimated.
- Commitments and guarantees: Total contractual obligations were approximately $699.9 million. Corporate guarantees totaled $72.0 million, primarily for subsidiary natural gas purchases, and letters of credit totaled approximately $5.0 million. No letters of credit had been drawn.
- Accounting changes: The company planned to adopt the new revenue-recognition standard in the first quarter of 2018 using the modified retrospective method, with an estimated $1.5 million reduction to retained earnings and an expected delay of approximately $407,000 of revenue recognition.
Important facts for investors to verify
- Reconcile reported 2017 EPS growth with the $14.3 million one-time tax benefit from the TCJA and assess normalized earnings.
- Monitor the settlement, refund and tax-rate consequences of Eastern Shore and other regulatory proceedings.
- Verify the timing, final cost and customer commitments for the Eastern Shore, Northwest Florida and Palm Beach pipeline projects.
- Assess refinancing requirements for $251.0 million of short-term borrowings and the availability and terms of planned 2018 shelf-note issuances.
- Track PESCO’s derivative settlements and determine whether the $5.8 million unrealized loss reverses as expected.
- Review environmental remediation estimates, regulatory recovery mechanisms and the unquantified Cambridge, Maryland exposure.
- Evaluate sensitivity to weather, propane and natural gas prices, interest rates, counterparty credit and regulatory changes.