Chesapeake Utilities Corporation — Form 10-Q Summary
Business context and reporting period
Chesapeake Utilities Corporation is a diversified energy company with regulated natural gas distribution, natural gas transmission and electric distribution operations; unregulated propane, natural gas marketing and energy services; and an advanced information services business. This unaudited Form 10-Q covers the three and six months ended June 30, 2014, compared with the corresponding 2013 periods. Results are seasonal, with generally higher revenue and earnings in the first and fourth quarters.
Key financial metrics
| Metric | Q2 2014 | Q2 2013 | Six months 2014 | Six months 2013 |
|---|---|---|---|---|
| Operating revenue | $100.5 million | $94.1 million | $286.8 million | $234.9 million |
| Operating income | $10.5 million | $9.2 million | $42.1 million | $35.7 million |
| Net income | $5.1 million | $4.4 million | $22.8 million | $19.2 million |
| Diluted EPS | $0.53 | $0.45 | $2.35 | $1.99 |
| Operating margin | 10.4% | 9.7% | 14.7% | 15.2% |
| Net margin | 5.1% | 4.6% | 8.0% | 8.2% |
| Cash flow from operations | Not separately provided | Not separately provided | $58.2 million | $54.1 million |
| Capital expenditures | Not separately provided | Not separately provided | $42.8 million | $41.2 million |
For the six months, cash used in investing activities was $42.4 million and cash used in financing activities was $16.7 million, producing a net decrease in cash of $0.8 million. Cash and cash equivalents were $2.5 million at June 30, 2014, compared with $3.4 million at December 31, 2013.
At June 30, 2014, total long-term debt was $176.5 million, including $11.1 million of current maturities, and short-term borrowings were $47.9 million. Total capitalization including short-term debt was $520.6 million, consisting of 57% equity, 34% long-term debt and 9% short-term debt. The company had $165.0 million of short-term credit facilities, including $85.0 million of committed lines.
The quarterly dividend declared was $0.405 per share, compared with $0.385 in the prior-year quarter. The six-month dividend declared was $0.790 per share.
Material changes versus the prior comparable period
- Second-quarter revenue increased 6.7%, operating income increased 14.3% and net income increased 17.9%. Six-month revenue increased 22.1%, operating income increased 17.9% and net income increased 18.7%.
- Regulated Energy operating income increased to $10.7 million in the quarter and $31.8 million for the six months, driven by service expansions, the Sandpiper acquisition, Florida GRIP surcharge recovery and natural gas customer growth.
- Unregulated Energy operating income declined to a $43,000 loss in the quarter, despite a $210,000 gross-margin increase, because operating expenses rose $700,000. Six-month operating income increased 10.2% to $10.8 million, helped by colder weather, higher wholesale propane sales and propane trading margins.
- The Other segment reported an operating loss of $211,000 in the quarter and $538,000 for the six months, primarily due to increased sales resources and benefits costs at BravePoint.
- Colder weather during the first quarter contributed approximately $2.3 million of pretax income for the six-month comparison. Weather was not a significant factor in the second quarter.
- Operating expenses increased due to higher payroll, benefits, depreciation, asset-removal and property-tax costs, as well as expenses associated with acquired operations. These increases were partly offset by the absence of a $759,000 one-time sales-tax expense recorded in the second quarter of 2013 in connection with the ESG acquisition.
- The company issued $50.0 million of 3.88% Series B Notes in May 2014. Proceeds were used to repay short-term borrowings and fund capital expenditures. Short-term borrowings declined from $105.7 million at December 31, 2013 to $47.9 million at June 30, 2014.
- All outstanding convertible debentures were converted or redeemed by March 1, 2014.
- On July 2, 2014, the board approved a three-for-two stock split in the form of a stock dividend, payable September 8, 2014 to shareholders of record August 13, 2014.
Guidance, outlook, commentary and risks
- Management projected 2014 capital expenditures of approximately $145.9 million, increased from the original $110.9 million budget. The largest allocations were $64.0 million for natural gas distribution and $51.4 million for natural gas transmission.
- The company expects to fund capital expenditures through operating cash flow, short-term borrowings and other financing sources. It also expects approximately $12.4 million of additional GRIP investment during the second half of 2014.
- The White Oak lateral project is expected to enter service in 2015; management estimated project cost at approximately $11.5 million and expected annual gross margin of $1.2 million to $1.8 million after completion.
- FPU received approval for approximately $2.2 million of annual interim electric rate relief effective for meter readings on or after August 10, 2014. The relief may be subject to refund, and final rates were expected to be determined in late 2014 and become effective in January 2015.
- A Maryland proceeding concerning Sandpiper depreciation rates and accumulated depreciation was pending. The parties were discussing a potential settlement before an August 2014 evidentiary hearing.
- Environmental liabilities totaled approximately $10.2 million for FPU’s Florida manufactured-gas-plant sites and $454,000 for Chesapeake’s Maryland and Florida sites. Management expects these costs to be recoverable through customer rates, but outcomes at certain sites remain uncertain.
- FPU disputed potential responsibility for Sanford remediation costs exceeding its $650,000 contractual contribution. No additional claim had been made as of June 30, 2014.
- The company had $31.6 million of corporate guarantees outstanding, plus letters of credit, and had purchase obligations totaling $61.7 million for commodities and propane. No letters of credit had been drawn as of June 30, 2014.
- Principal risks include regulatory and rate-case outcomes, environmental remediation, weather, commodity-price volatility, counterparty credit, access to capital, interest rates, construction execution, pension obligations, competition, cybersecurity and technology changes.
Facts investors should verify
- Whether the elevated six-month earnings benefit from colder weather and propane trading persists through the remainder of 2014.
- Progress and final cost of the expanded $145.9 million capital program, including GRIP and the White Oak lateral.
- Final outcomes of the Florida electric rate case and the Maryland Sandpiper depreciation proceeding, including any refund exposure.
- Liquidity under the company’s short-term credit facilities and the effect of continued capital spending on borrowing levels.
- Environmental remediation developments, particularly at the West Palm Beach, Winter Haven, Cambridge, Seaford and Sanford sites.
- The contribution and operating-cost trajectory of Sandpiper and other acquired businesses.
- The impact of the September 2014 stock split on per-share data and dividend presentation in subsequent filings.