Chesapeake Utilities Corporation — Q3 2012 Form 10-Q Summary
Business context and reporting period
Chesapeake Utilities Corporation is a diversified utility company with regulated natural gas, electric and transmission operations; unregulated natural gas marketing and propane businesses; and an advanced information services subsidiary. This unaudited Form 10-Q covers the three and nine months ended September 30, 2012, compared with the corresponding 2011 periods. Results are seasonal, with earnings generally higher in the first and fourth quarters.
Financial performance and key metrics
| Metric | Q3 2012 | Q3 2011 | Change |
|---|---|---|---|
| Operating revenues | $78.2 million | $80.6 million | Down 3.0% |
| Gross margin | $38.5 million | $34.5 million | Up 11.5% |
| Gross margin percentage | 49.2% | 42.8% | Up 6.4 percentage points |
| Operating income | $7.6 million | $5.6 million | Up 35.2% |
| Net income | $3.2 million | $2.4 million | Up 34.3% |
| Diluted EPS | $0.33 | $0.25 | Up $0.08 |
| Cash dividend declared per share | $0.365 | $0.345 | Up 5.8% |
| Metric | Nine months 2012 | Nine months 2011 | Change |
|---|---|---|---|
| Operating revenues | $283.0 million | $314.0 million | Down 9.9% |
| Gross margin | $129.7 million | $126.3 million | Up 2.7% |
| Operating income | $38.1 million | $38.2 million | Down 0.3% |
| Net income | $19.0 million | $19.7 million | Down 3.3% |
| Diluted EPS | $1.97 | $2.04 | Down $0.07 |
| Cash dividend declared per share | $1.080 | $1.020 | Up 5.9% |
Q3 regulated energy operating income increased to $7.8 million from $6.9 million, while unregulated energy remained loss-making but improved to a $0.7 million operating loss from a $1.4 million loss. The “Other” segment, primarily BravePoint, generated $0.4 million of operating income versus $43,000. BravePoint operating income was $312,000 in Q3 and $557,000 for the nine-month period, compared with losses in the prior-year periods.
For the nine months, regulated energy operating income rose 7.1% to $33.2 million, but unregulated energy operating income fell 44.4% to $4.0 million. The decline in consolidated revenue largely reflected lower commodity prices and volumes in unregulated energy businesses rather than a comparable decline in gross margin.
Cash flow, liquidity, capital structure and debt
- Net cash provided by operating activities was $64.1 million for the first nine months of 2012, up from $52.8 million in 2011.
- Capital expenditures were $51.0 million, compared with $33.4 million in the prior-year period. Management increased its 2012 capital expenditure estimate from $88.5 million to $93.2 million, including $81.8 million for regulated energy.
- Net cash used in investing activities was $49.2 million. Net cash used in financing activities was approximately $15.5 million.
- Cash and cash equivalents were $2.0 million at September 30, 2012, compared with $2.6 million at December 31, 2011.
- Short-term borrowings were $30.8 million, versus $34.7 million at year-end 2011. The company had $100.0 million of existing unsecured bank lines and entered into an additional $40.0 million unsecured revolving facility maturing June 1, 2013.
- Long-term debt, including current maturities, was $116.9 million; stockholders’ equity was $250.5 million. Including short-term debt, capitalization totaled $398.2 million, consisting of 63% equity, 29% long-term debt and 8% short-term debt.
- The carrying value of long-term debt was $116.9 million, compared with an estimated fair value of $140.5 million, reflecting market interest rates below the fixed contractual rates on portions of the debt.
Material changes versus the prior comparable period
- Natural gas transmission and distribution growth increased Q3 gross margin by approximately $2.8 million, including contributions from Sussex County, Delaware; Worcester County, Maryland; and Nassau County, Florida.
- Regulated energy benefited from customer growth and new transmission services. Average regulated residential customers increased by 2,191 in Q3 and 1,825 for the nine-month period.
- Warm weather reduced first-nine-month gross margin by approximately $4.0 million. Delmarva heating degree-days were 17% warmer than the prior-year period, while Florida heating degree-days were 35% warmer.
- Florida propane margins and Xeron wholesale trading margins improved in Q3. However, first-nine-month unregulated energy gross margin decreased $3.3 million, primarily because of warmer weather, lower Delmarva propane margins, a $465,000 propane inventory write-down and the absence of a $575,000 prior-year propane litigation settlement gain.
- Depreciation and amortization increased by $2.5 million for the nine-month period, including $1.8 million of amortization related to the Florida Public Utilities acquisition adjustment and merger-related costs approved for recovery by the Florida PSC.
- BravePoint improved materially because of ProfitZoom, Application Evolution, consulting and product sales. The filing states that related contracts were expected to generate approximately $1.0 million of additional revenue over the following 12 months.
Guidance, outlook, risks and unusual items
- Management expects the approximately $16.5 million acquisition of The Eastern Shore Gas Company propane assets, serving approximately 11,000 customers in Worcester County, Maryland, to close in 2013 and to be accretive to EPS in 2013 and thereafter. The acquisition remains subject to regulatory and other closing approvals and is expected to be financed with unsecured short-term debt.
- Management expects approximately $75 million of Florida gas infrastructure replacement spending over 10 years. A Florida GRIP surcharge mechanism becomes effective January 1, 2013 to recover eligible investment and related returns.
- Eastern Shore had pending or approved expansion projects, including a proposed $16.3 million mainline expansion and a $12.1 million Daleville compressor and emissions-control project, with anticipated service from the latter project in November 2013.
- The City of Marianna litigation remains pending and seeks the right to purchase FPU’s electric distribution assets in Marianna. Trial was rescheduled for February 2013. Litigation expense could reach approximately $1.4 million by the end of 2012; management intends to defend the matter vigorously.
- Environmental liabilities totaled approximately $10.7 million for FPU’s Florida manufactured-gas-plant sites and $207,000 for other Chesapeake MGP sites. Management expects recovery through rates, insurance or other responsible parties, but certain exposures remain uncertain, including potential sediment remediation at Winter Haven and a Cambridge, Maryland site for which no liability was recorded.
- Corporate guarantees totaled $28.5 million at September 30, 2012. Outstanding letters of credit included $1.0 million, $656,000, $304,000 and $2.5 million arrangements; none had been drawn as of the reporting date.
- Principal risks include regulatory recovery and rate decisions, weather, commodity prices, competition, financing availability, environmental and litigation outcomes, pension funding requirements, construction costs, counterparty credit and execution of acquisitions and expansion projects.
- The company states that disclosure controls and procedures were effective as of September 30, 2012, with no material change in internal control over financial reporting during the quarter.
Most important facts for an investor to verify
- Whether Q3 gross-margin growth from new natural gas transmission and distribution projects is sustainable after the current expansion and construction cycle.
- The sensitivity of earnings and cash flow to unusually warm or cold weather, particularly the $4.0 million first-nine-month weather impact disclosed by management.
- The funding plan and regulatory approvals for the $16.5 million Eastern Shore Gas acquisition and the planned increase in short-term borrowing.
- The timing and recoverability of Florida acquisition-adjustment amortization, GRIP investments, environmental costs and Marianna litigation expenses.
- Whether the $93.2 million 2012 capital-spending projection and related debt requirements remain consistent with operating cash flow and liquidity.
- The effect of propane prices, inventory valuation, wholesale trading activity and forward contracts on unregulated energy results.