Chesapeake Utilities Corporation — Q1 2012 Form 10-Q Summary
Business context and reporting period
Chesapeake Utilities Corporation is a diversified utility with regulated energy operations, unregulated energy businesses, and advanced information services. The filing covers the three months ended March 31, 2012, compared primarily with the three months ended March 31, 2011. Results are seasonal, with generally higher energy consumption and earnings in the first and fourth quarters.
Financial performance and position
| Metric | Q1 2012 | Q1 2011 | Change |
|---|---|---|---|
| Operating revenues | $120.9 million | $146.6 million | Down $25.7 million |
| Operating income | $20.1 million | $24.8 million | Down $4.8 million |
| Net income | $10.7 million | $13.7 million | Down $3.0 million |
| Diluted EPS | $1.11 | $1.43 | Down $0.32 |
| Operating margin | 16.6% | 16.9% | Down approximately 0.3 percentage points |
| Net margin | 8.9% | 9.4% | Down approximately 0.5 percentage points |
| Cash flow from operations | $34.6 million | $34.3 million | Up $0.3 million |
| Capital expenditures | $14.7 million | $8.4 million | Up $6.4 million |
| Cash and cash equivalents at period end | $2.0 million | $2.0 million | Comparable prior-year period-end balance |
Gross margin, a non-GAAP measure used by management, was $50.6 million, down from $54.3 million. Regulated Energy operating income was $14.8 million, down 9%; Unregulated Energy operating income was $5.2 million, down 40%; and Other operating income was $121,000, compared with $15,000.
At March 31, 2012, total assets were $693.1 million and stockholders’ equity was $248.1 million. Long-term debt, including current maturities, was $118.4 million, and short-term borrowings were $15.7 million, down from $34.7 million at December 31, 2011. Total capitalization, including short-term debt, was $382.2 million, consisting of approximately 65% equity, 31% long-term debt, and 4% short-term debt.
The quarterly dividend declared was $0.345 per share, compared with $0.330 per share in the prior-year quarter. Cash dividends paid were $3.0 million.
Material changes versus the prior comparable period
- Warmer weather reduced customer energy consumption and gross margin by approximately $4.0 million versus Q1 2011. Delmarva heating degree-days declined 23%, while Florida heating degree-days declined 36%; management characterized the quarter as the warmest first quarter in the prior 10 years in both regions.
- Regulated Energy gross margin declined only $256,000 because customer growth and new transportation services partly offset the weather impact. New natural gas distribution customers contributed $562,000 of additional gross margin, and new transportation services contributed $553,000.
- Regulated Energy expenses increased by $1.2 million, including $588,000 of amortization related to Florida acquisition adjustment and merger-related regulatory assets, $243,000 of additional legal costs, and higher depreciation and asset-removal costs.
- Unregulated Energy gross margin fell $3.8 million. Delmarva propane distribution was affected by warmer weather, lower deliveries, and the absence of a $575,000 antitrust settlement benefit recognized in Q1 2011. Xeron’s gross margin declined $536,000 as trading activity fell 34%.
- Other operating income improved by $106,000, primarily from increased consulting activity at BravePoint.
- Interest expense increased $141,000, mainly because of the $29.0 million of 5.68% senior notes issued in June 2011.
- Cash flow from operations remained broadly stable despite lower earnings, while capital expenditures increased substantially and debt repayments reduced short-term borrowings.
Guidance, outlook, commentary, risks, and unusual items
- Management budgeted $88.5 million of 2012 capital expenditures: $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.
- Management expects additional 2012 growth from natural gas distribution and transmission expansions, including new services in Delaware, Maryland, and Florida. Peninsula Pipeline’s Nassau County service began in April 2012 and is expected to generate approximately $1.5 million of 2012 gross margin.
- Eastern Shore’s planned service to an NRG electric generation plant is projected to begin in May 2013, requiring estimated investment of $12.5 million to $15.0 million and expected annual gross margin of $2.4 million to $2.8 million.
- The Florida PSC approved recovery of a $34.2 million acquisition adjustment and $2.2 million of merger-related costs. The Company recorded $588,000 of related amortization in Q1 2012 and expects $2.4 million of amortization expense in 2012 and 2013. Future disallowance remains possible if regulatory authorities determine that supporting cost savings no longer exist.
- The City of Marianna’s litigation and related appeal seek to allow the City to purchase FPU’s electric distribution assets serving approximately 3,000 customers. The matter was pending as of the filing date; mediation was scheduled for May 2012 and trial for July 2012.
- Environmental liabilities totaled approximately $11.0 million for FPU’s Florida MGP sites and $246,000 for Chesapeake’s other MGP sites. Certain remediation costs are expected to be recovered through rates, insurance, or responsible-party contributions, but some matters remain uncertain.
- Corporate guarantees totaled $28.6 million at March 31, 2012. Outstanding letters of credit included $2.5 million related to the TETLP agreement and other letters totaling approximately $2.4 million. The Company reported no draws and did not expect the letters to be drawn.
- The Company had $100.0 million of unsecured bank lines of credit, including $60.0 million of committed facilities, and was authorized to borrow up to $85.0 million under those lines.
- Key risks include weather variability, regulatory and rate-case outcomes, environmental remediation, legal proceedings, commodity prices, counterparty credit, competition, financing conditions, construction costs, and potential loss of customers or utility assets.
- Disclosure controls and procedures were assessed as effective as of March 31, 2012, with no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether the unusually warm weather was temporary and how normalized weather affects full-year earnings and cash flow.
- The status and financial implications of the Marianna litigation, appeal, and any potential sale of FPU assets.
- Implementation of Delaware gas rates and the final outcomes of pending Florida regulatory filings.
- Progress, cost, and customer commitments for Eastern Shore, Peninsula Pipeline, TETLP, and other planned infrastructure projects.
- Whether Florida regulatory recovery of acquisition and merger-related assets remains supported by expected cost savings.
- Environmental remediation estimates, particularly the unresolved Winter Haven sediment issue and Cambridge, Maryland site.
- Funding capacity for the $88.5 million capital program while maintaining dividends and managing seasonal working-capital needs.