Business Context and Reporting Period
Chesapeake Utilities Corporation filed this unaudited Form 10-Q for the three and nine months ended September 30, 2017. The company operates regulated natural gas and electric distribution and transmission businesses, as well as unregulated propane distribution, natural gas marketing, gathering, processing, transportation, supply, and combined heat and power operations, primarily in the Mid-Atlantic, Florida, Pennsylvania, and Ohio.
Results are seasonal, with earnings generally higher in the first and fourth quarters because of heating demand.
Financial Performance and Key Metrics
| Metric | Three months ended September 30 | Nine months ended September 30 |
|---|---|---|
| Operating revenue | $126.9 million, up 17.2% | $437.2 million, up 22.5% |
| Operating income | $14.2 million, up 40.2% | $62.6 million, up 0.5% |
| Net income | $6.8 million, up 54.7% | $32.0 million, down 2.4% |
| Diluted EPS | $0.42, versus $0.29 | $1.96, versus $2.14 |
| Operating margin | 11.2%, versus 9.4% | 14.3%, versus 17.4% |
| Net margin | 5.4%, versus 4.1% | 7.3%, versus 9.2% |
| Cash dividends declared per share | $0.3250 | $0.9550 |
- Regulated Energy operating income was $15.2 million in the third quarter, up $2.1 million, but $51.9 million for the nine-month period, down $0.7 million.
- Unregulated Energy generated a third-quarter operating loss of $1.0 million, improved from a $3.1 million loss, and nine-month operating income of $10.5 million, up $1.2 million.
- Cash provided by operating activities was $98.4 million, compared with $85.7 million in the prior-year period.
- Cash used in investing activities was $141.5 million, including $130.1 million of property, plant and equipment expenditures and $11.7 million for acquisitions.
- Financing activities provided $42.3 million, including $69.8 million of long-term debt proceeds, partially offset by $14.8 million of dividends and debt repayments.
- Cash and cash equivalents declined to $3.4 million at September 30, 2017, from $4.2 million at December 31, 2016.
- Total assets were $1.35 billion, compared with $1.23 billion at year-end 2016. Stockholders’ equity was $463.8 million.
- Long-term debt, including current maturities, was $213.4 million, versus $149.1 million at December 31, 2016. Short-term borrowings were $203.1 million, compared with $209.9 million.
- Total capitalization including short-term debt was $880.3 million; equity represented 53% of that amount, within management’s stated 50% to 60% target range.
Material Changes Versus the Prior Comparable Period
- Third-quarter revenue increased primarily from higher unregulated energy revenue, the Eastern Shore rate implementation, Florida GRIP recovery, customer growth, propane margins, and the Eight Flags CHP plant.
- Third-quarter net income benefited from the absence of Xeron’s prior-year loss, stronger customer consumption and margins, and lower outside services and maintenance costs. These benefits were partly offset by higher depreciation, payroll, interest, and other operating costs.
- Nine-month revenue rose substantially, but net income and diluted EPS declined because warmer weather reduced demand, operating expenses increased, interest expense rose, and the 2016 common-stock offering increased the share count.
- Interest expense increased by $0.6 million in the third quarter and $1.1 million year to date, primarily because of higher borrowings and the April 2017 issuance of $70.0 million of 3.25% Prudential Shelf Notes.
- Xeron wound down its operations during the second quarter of 2017 and is not expected to generate further operating results or material wind-down costs.
- In August 2017, PESCO acquired certain ARM natural gas marketing assets and Flo-gas acquired certain Chipola propane assets. The acquisitions were not material to reported revenue or net income through September 30, 2017.
Guidance, Outlook, Risks, Contingencies, and Unusual Items
- Management projected approximately $214.7 million of 2017 capital expenditures, compared with an original budget of $260.3 million. Nine-month capital expenditures were $132.4 million.
- The 2017 Eastern Shore Expansion Project received FERC authorization in October 2017. Estimated project cost is approximately $115.0 million, with expected gross margin of approximately $15.8 million in the first full year after services begin. Completion is expected in 2018, with some facilities targeted for service by year-end 2017.
- Eastern Shore implemented new rates in August 2017 subject to refund. It recorded approximately $1.0 million of incremental revenue and established a regulatory liability pending resolution of the rate case. The company requested an overall revenue increase of approximately $18.9 million.
- Environmental liabilities for Florida manufactured-gas-plant sites were approximately $9.7 million. Management expects environmental remediation costs, including currently unapproved costs, to be recoverable through customer rates, but recovery is subject to regulatory approval.
- Corporate guarantees for subsidiary natural gas and propane purchases totaled approximately $71.9 million and expire at various dates through September 2018. Letters of credit totaled approximately $5.8 million; none had been drawn.
- The company had commodity purchase obligations of $48.8 million and long-term debt obligations of approximately $211.4 million, excluding certain capital lease and debt issuance adjustments.
- Key risks include regulatory and rate-case outcomes, potential refunds, environmental remediation, weather, commodity prices, interest rates, counterparty credit, access to financing, project execution and permitting, acquisitions, cybersecurity, and pension funding requirements.
- No explicit full-year earnings or EPS guidance was provided in the filing. The filing states that interim results are not necessarily indicative of full-year performance.
- The company expects to adopt the new revenue recognition standard in 2018 using the modified retrospective method and currently expects no material overall effect, except for an estimated $407,000 delay in recognizing revenue under one long-term contract.
Most Important Facts for an Investor to Verify
- Whether Eastern Shore’s pending rate case results in refunds or a materially different revenue recovery than recorded.
- Actual 2017 capital spending, financing needs, and the effect of continued high short-term borrowings on interest expense and liquidity.
- Progress, cost, timing, and customer commitments for the $115.0 million Eastern Shore Expansion Project and other Florida pipeline projects.
- Whether weather normalization, customer growth, GRIP recovery, propane margins, and Eight Flags contributions can offset higher depreciation, payroll, regulatory, and benefit costs.
- The ultimate cost and regulatory recovery of manufactured-gas-plant environmental remediation.
- Integration and performance of the ARM and Chipola acquisitions, including the $2.5 million contingent consideration liability associated with ARM.
- Compliance with FPU fuel-supply financial covenants and the company’s ability to renew or replace guarantees, letters of credit, and short-term financing facilities.