Chesapeake Utilities Corporation — FY2011 Form 10-K
Reporting period: Fiscal year ended December 31, 2011. The filing also provides unaudited fourth-quarter data. Chesapeake is a diversified utility with regulated natural gas distribution, electric distribution and natural gas transmission businesses; unregulated natural gas marketing and propane businesses; and an advanced information services subsidiary.
Financial performance and key metrics
| Metric | FY2011 | FY2010 | Change |
|---|---|---|---|
| Operating revenue | $418.0 million | $427.5 million | Down $9.5 million |
| Operating income | $53.7 million | $51.9 million | Up $1.8 million |
| Net income | $27.6 million | $26.1 million | Up $1.6 million |
| Diluted EPS | $2.87 | $2.73 | Up $0.14 |
| Operating margin | 12.8% | 12.1% | Improved |
| Net margin | 6.6% | 6.1% | Improved |
| Cash flow from operations | $71.1 million | $61.1 million | Up $10.0 million |
| Capital expenditures | $44.4 million | $47.0 million | Down $2.5 million |
- Segment operating income: Regulated Energy $44.2 million, Unregulated Energy $9.3 million, and Other $0.2 million. Regulated Energy generated 83% of total segment operating income.
- Quarterly results: Fourth-quarter revenue was $104.0 million, operating income was $15.5 million, net income was $8.0 million, and diluted EPS was $0.83, compared with $117.8 million, $14.2 million, $7.1 million, and $0.74, respectively, in fourth-quarter 2010.
- Balance sheet: Total assets were $709.1 million; stockholders’ equity was $240.8 million; net long-term debt was $110.3 million; current long-term debt was $8.2 million; and short-term borrowings were $34.7 million.
- Liquidity: The company had $2.6 million of cash and four unsecured bank lines totaling $100 million, including $60 million of committed facilities. Outstanding short-term borrowings carried a weighted-average rate of 1.57% at year-end.
- Capital structure: Equity represented 68.6% of capitalization excluding short-term debt and 61.1% including short-term financing. The company reported compliance with all debt covenants.
- Dividends: Dividends declared totaled $1.365 per share, up from $1.305 in 2010. The company had paid dividends for 51 consecutive years.
Material changes versus the prior comparable period
- Revenue declined 2.2%, primarily because warmer weather reduced customer energy consumption and regulated fuel-related revenue. Delmarva heating degree-days fell 13% and Florida heating degree-days fell 50% versus 2010.
- Gross margin increased despite the weather impact: regulated energy gross margin rose $3.9 million and unregulated energy gross margin rose $1.1 million.
- New Eastern Shore transportation services added approximately $3.0 million of gross margin, including service on an eight-mile extension connecting to Texas Eastern Transmission.
- Natural gas customer growth added approximately $2.7 million of gross margin, while higher propane retail margins added approximately $2.2 million.
- Operating expenses increased, including higher depreciation, pipeline integrity costs, legal expenses and approximately $1.3 million of severance and pension settlement charges.
- BravePoint operating income declined $858,000 because of costs associated with launching the ProfitZoom product.
- Interest expense decreased slightly to $9.0 million, despite the issuance of $29.0 million of 5.68% unsecured senior notes in June 2011, which refinanced short-term debt used for the FPU bond redemption.
- Operating cash flow benefited from bonus depreciation and favorable timing of trading receivables, customer deposits and tax payments.
Guidance, outlook, risks and unusual items
- Capital program: Management budgeted $88.5 million of 2012 capital expenditures, including $75.9 million for regulated energy, $3.1 million for unregulated energy and $9.5 million for Other. Funding is expected from operating cash flow, short-term borrowings and other sources.
- Growth projects: Eastern Shore projects were expected to enter service in the first half of 2012. A proposed NRG transportation project required estimated investment of $12.5 million to $15.0 million and was projected to begin service in May 2013, subject to approvals and construction.
- Regulatory developments: The Florida PSC approved recovery of $34.2 million of FPU acquisition adjustment and $2.2 million of merger-related costs. The company expected approximately $2.4 million of annual amortization expense in 2012 and 2013, partly offset by regulatory recovery and with a positive long-term cash-flow effect.
- Environmental matters: Environmental liabilities totaled approximately $11.3 million, with approximately $6.7 million of related regulatory and other assets. West Palm Beach remediation costs were estimated at $4.7 million to $15.8 million, with recovery through rates expected but not guaranteed.
- Legal contingency: The City of Marianna sought to purchase FPU’s electric distribution assets serving approximately 3,000 customers. The litigation was pending, with summary judgment and trial dates scheduled in 2012. Management could not assure the outcome.
- Contractual and off-balance-sheet exposure: Total contractual obligations were approximately $491.2 million. Corporate guarantees totaled $27.6 million and letters of credit included a $2.5 million obligation related to the Texas Eastern precedent agreement.
- Supply commitment risk: Termination of the Texas Eastern precedent agreement could have exposed the company to approximately $6.1 million of pre-service costs at year-end, potentially rising to approximately $50 million after construction; management considered termination unlikely.
- Core risks: Weather, commodity-price volatility, regulatory cost recovery, customer and supplier credit, interest rates, pension funding, environmental obligations, pipeline and electric reliability, competition, capital-market access and franchise renewals.
- Unusual items: 2011 results included a $750,000 reversal of a regulatory reserve, a $575,000 propane antitrust settlement gain, a $553,000 gain on sale of an unused Internet Protocol address asset, and severance and pension settlement charges.
Most important facts for investors to verify
- Whether 2012 earnings and cash flow can absorb the planned $88.5 million capital program without materially increasing short-term borrowings.
- The final outcome and potential customer or asset-loss implications of the Marianna franchise litigation.
- Whether environmental remediation costs, particularly at West Palm Beach and Winter Haven, remain recoverable through rates or third-party contributions.
- The timing, cost and regulatory approval of Eastern Shore, Texas Eastern and Florida pipeline expansion projects.
- The sustainability of 2011 margin gains from propane pricing, new transportation services and favorable one-time items.
- The effect of warmer or colder weather, commodity prices and customer consumption on seasonal earnings and working capital.
- The funded status and future contribution requirements of the company’s pension plans, which had approximately $23.1 million of unrecognized benefit costs at year-end.
- Debt maturities, covenant compliance and the availability of committed versus discretionary credit facilities.