Chesapeake Utilities Corporation — Form 10-Q Summary
Reporting period: Quarter and nine months ended September 30, 2016. The company operates regulated natural gas and electric distribution and transmission businesses, as well as unregulated propane, natural gas marketing, gathering, processing, transportation, electricity and steam-generation businesses. Results are seasonal, with earnings generally higher in the first and fourth quarters.
Financial performance and position
| Metric | Three months ended Sept. 30 | Nine months ended Sept. 30 |
|---|---|---|
| Total operating revenue | $108.3 million, up $16.4 million | $357.0 million, up $2.3 million |
| Operating income | $10.2 million, down $0.8 million | $62.3 million, up $0.7 million |
| Net income | $4.4 million, down $0.7 million | $32.8 million, up $0.3 million |
| Diluted EPS | $0.29, versus $0.33 | $2.14, versus $2.16 |
| Operating cash flow | Not separately provided for the quarter | $82.2 million, versus $93.9 million |
| Capital expenditures | Not separately provided for the quarter | $106.3 million |
Third-quarter gross margin increased $4.7 million, but operating expenses increased $5.5 million, reflecting personnel, outside services, facilities, depreciation, asset-removal and property-tax costs associated with growth. Regulated Energy operating income increased 10.9% to $13.1 million. Unregulated Energy reported a $3.1 million operating loss, compared with a $1.0 million loss in the prior-year quarter.
For the first nine months, Regulated Energy operating income rose 10.6% to $52.7 million, while Unregulated Energy operating income declined 32.2% to $9.3 million. The effective income tax rate was 40.4% for the quarter and 39.5% year to date.
At September 30, 2016, total assets were $1.14 billion and stockholders’ equity was $438.3 million. Long-term debt, including current maturities, was $155.6 million, and short-term borrowing was $154.5 million. Cash and cash equivalents were $1.5 million. The company had a $150.0 million five-year revolving credit facility, with $50.0 million outstanding, and four unsecured bank facilities totaling $170.0 million of available credit.
Operating cash flow funded a portion of the $107.0 million of investing outflows. Financing activities provided $23.4 million, including approximately $57.3 million of net proceeds from a September common-stock offering. The proceeds were used primarily to repay short-term debt. The quarterly dividend was $0.3050 per share; dividends declared for the first nine months totaled $0.8975 per share.
Material changes versus the prior comparable periods
- Third-quarter net income declined 13.7%, while revenue increased 17.9%. The earnings decline primarily reflected higher operating costs and interest expense.
- Nine-month net income increased modestly, but diluted EPS declined because of higher weighted-average shares and the September equity offering.
- Warmer weather, primarily during the first quarter, reduced year-to-date gross margin by approximately $7.5 million and reduced year-to-date EPS by approximately $0.31 compared with 2015.
- The prior-year period included a $1.5 million customer billing-system settlement gain; 2016 included only a $130,000 additional settlement-related gain.
- Eight Flags’ combined heat and power plant began operations in June 2016 and contributed approximately $2.0 million of third-quarter gross margin and $2.6 million year to date, before related operating expenses.
- Aspire Energy contributed $4.5 million of incremental year-to-date gross margin, partly because the 2015 comparable period included only six months of operations.
- Retail propane margins declined as unusually strong 2015 margins normalized, reducing year-to-date gross margin by approximately $2.2 million.
- Property, plant and equipment increased to $1.12 billion from $1.01 billion at December 31, 2015, reflecting substantial infrastructure investment.
Guidance, outlook, risks and unusual items
- Management projected 2016 capital expenditures of $150 million to $170 million, including regulated distribution and transmission expansion, Florida GRIP investments, Eight Flags, system reliability projects and information-technology investments.
- Eastern Shore’s White Oak Mainline and System Reliability projects received FERC authorization and were under construction. The 2017 Expansion Project was expected to provide 61,162 Dts/d of additional firm transportation deliverability and approximately $15.7 million of first-full-year revenue after services begin.
- The Delaware rate case proposed approximately $4.7 million of annual revenue-requirement relief. Interim rates produced $1.4 million of incremental revenue during the first nine months, but amounts collected before a final decision are subject to refund. A final decision was expected in the first quarter of 2017.
- The company expected to issue $70.0 million of 3.25% Shelf Notes on or before April 28, 2017, subject to the Shelf Agreement. The proceeds were expected to reduce short-term borrowing and/or fund capital expenditures.
- Environmental liabilities totaled approximately $9.9 million for FPU’s Florida manufactured-gas-plant sites, plus additional liabilities for other sites. West Palm Beach remediation estimates ranged from $4.5 million to $15.4 million; the company stated that ultimate costs and regulatory recovery could vary.
- Corporate guarantees totaled approximately $53.9 million and letters of credit totaled approximately $8.4 million. No letters of credit had been drawn. FPU was in compliance with its fuel-supply financial covenants.
- Key risks include weather, commodity prices, interest rates, regulatory approvals and rate recovery, construction costs and timing, environmental obligations, counterparty credit, pension costs, competition, cyberattacks and access to capital.
- The filing states that management believes pending legal and regulatory proceedings will not materially affect consolidated financial position, results of operations or cash flows, but outcomes of rate, environmental and other proceedings remain uncertain.
Important facts for investors to verify
- Whether final Delaware rate-case relief supports recovery of interim rates and avoids material refunds.
- Completion timing, cost, regulatory treatment and contracted margins for Eastern Shore’s White Oak, System Reliability and 2017 Expansion projects.
- Whether Eight Flags achieves its projected approximately $8.2 million of annual gross margin in 2017, given operating costs and plant utilization.
- The sustainability of normalized propane margins and the performance of Aspire Energy and other unregulated operations.
- Funding requirements for the $150 million to $170 million capital program and the timing and terms of the planned $70 million Shelf Note issuance.
- Exposure to environmental remediation costs, particularly the range of potential West Palm Beach costs and unresolved Cambridge and Sanford matters.
- The effect of seasonal weather, commodity prices, short-term borrowing costs and working-capital requirements on cash flow and liquidity.