CHESAPEAKE UTILITIES CORP annual report, FY2014

Chesapeake Utilities Corporation — 2014 Form 10-K Summary

Business context and reporting period

Annual report for the fiscal year ended December 31, 2014; the filing also provides unaudited fourth-quarter data. Chesapeake is a diversified energy company operating primarily on the Delmarva Peninsula and in Florida through regulated natural gas distribution, natural gas transmission and electric distribution businesses, plus unregulated propane distribution, propane and natural gas marketing, and related services.

Operations are organized into Regulated Energy, Unregulated Energy and Other segments. Regulated Energy generated 81% of 2014 operating income and represented 88% of total assets. The Company sold its advanced information services subsidiary, BravePoint, on October 1, 2014.

Financial performance and key metrics

Metric	2014	2013	Change
Operating revenues	$498.8 million	$444.3 million	+12.3%
Operating income	$62.3 million	$62.7 million	-0.7%
Net income	$36.1 million	$32.8 million	+10.1%
Diluted EPS	$2.47	$2.26	+$0.21
Operating cash flow	$79.3 million	$72.9 million	+$6.4 million
Capital expenditures	$98.1 million	$108.0 million	-$10.0 million
Total assets	$904.5 million	$837.5 million	+8.0%

Operating income was essentially flat because higher gross margins were offset by increased operating expenses and a $6.9 million pre-tax impairment charge. Pre-tax income increased to $60.0 million from $54.9 million, aided by $7.1 million of gains from business sales. The effective tax rate was 39.9%, compared with 40.2% in 2013.

Regulated Energy revenue increased to $300.4 million and operating income increased modestly to $50.5 million. Gross margin rose 14% to $165.9 million, driven by the Sandpiper acquisition, service expansions, Florida’s GRIP surcharge, customer growth, colder weather and new Florida electric rates. Excluding the billing-system impairment, regulated operating income increased approximately $6.8 million.

Unregulated Energy revenue increased to $185.0 million and gross margin increased to $47.9 million, but operating income declined to $11.7 million from $12.4 million. Higher weather-related consumption and wholesale propane sales were offset by lower Delmarva propane margins, impairment charges and higher operating expenses.

Fourth-quarter 2014 revenue was $120.4 million, operating income was $12.4 million, net income was $10.1 million and diluted EPS was $0.69, compared with fourth-quarter 2013 revenue of $122.9 million, operating income of $18.3 million, net income of $9.7 million and diluted EPS of $0.67.

Cash flow, margins, debt and liquidity

Net cash provided by operations was $79.3 million. Investing activities used $86.6 million, while financing activities provided $8.5 million. Year-end cash was $4.6 million.
Stockholders’ equity was $300.3 million. Long-term debt, including current maturities, was $167.6 million, and short-term borrowings were $88.2 million.
Debt increased primarily because the Company issued $50.0 million of 3.88% Series B senior notes in May 2014. Proceeds were used to reduce short-term borrowings and fund capital expenditures.
Total credit facilities were $210.0 million, with $123.96 million available at year-end before considering other availability conditions. Outstanding borrowings under the facilities were $86.0 million, excluding $2.2 million of book overdrafts.
Equity represented 54% of total capitalization including short-term borrowings. Management targets an equity-to-total-capitalization ratio of 50% to 60%.
Capital expenditures were $98.1 million in 2014. The 2015 capital budget was $223.4 million, including $176.1 million for Regulated Energy and $39.3 million for Unregulated Energy.
The Company declared $1.067 per share of dividends in 2014, compared with $1.013 in 2013, and reported 54 consecutive years of cash dividend payments.

Material changes versus the prior comparable period

Net income increased $3.3 million, or 10.1%, despite nearly flat operating income.
Colder weather increased 2014 gross margin by approximately $2.8 million versus 2013. Delmarva heating degree-days were 4,826 versus 4,638 in 2013; Florida heating degree-days were 888 versus 671.
The Sandpiper business contributed $5.5 million of additional gross margin in 2014 from a full year of operations following the 2013 acquisition of Eastern Shore Gas assets. Sandpiper contributed $24.3 million of revenue and $2.5 million of net income in 2014.
Florida’s electric rate settlement increased annual base rates by approximately $3.75 million, with new rates effective November 1, 2014.
The Company completed the sale of BravePoint for approximately $12.0 million in cash and recorded a pre-tax gain of approximately $6.7 million, or approximately $4.0 million after tax.
Operating expenses increased due to higher payroll and benefits, acquisition-related costs, depreciation, maintenance and incentive compensation.
On March 1, 2014, all outstanding 8.25% convertible debentures were eliminated through conversions and cash redemption.
The Company completed a three-for-two stock split in September 2014; all share and per-share data in the filing are presented on a post-split basis.

Guidance, outlook, commentary, risks and unusual items

Management did not provide formal consolidated earnings guidance in the filing. Its strategy emphasizes organic infrastructure investment, regulated rate-base growth, service expansion, acquisitions and complementary unregulated businesses.

Eastern Shore expected the White Oak expansion to provide at least $5.8 million of annual gross margin after targeted service commencement in the fourth quarter of 2015, subject to regulatory approval and construction.
The Eight Flags combined heat and power project was expected to begin commercial operation in July 2016 and was estimated to generate approximately $7.3 million of annual consolidated gross margin, subject to permits, approvals and construction conditions.
The Company expected to invest an additional $20.0 million under Florida’s GRIP program in 2015.
On January 30, 2015, Chesapeake agreed to acquire Gatherco for expected consideration of $29.9 million in stock, $27.6 million in cash and assumed debt estimated at $1.7 million. Closing was expected in the second quarter of 2015, subject to shareholder approval.
A $6.5 million non-cash pre-tax impairment charge was recorded for a customer billing-system project. Management was negotiating with the vendor and evaluating regulatory recovery, but the outcome was uncertain.
A $412,000 non-cash pre-tax impairment charge was recorded for Austin Cox goodwill and intangible assets. Propane inventory was reduced by $681,000 under lower-of-cost-or-market accounting.
Environmental liabilities were approximately $10.5 million at year-end, principally related to former manufactured-gas-plant sites. West Palm Beach remediation costs were estimated at $4.5 million to $15.4 million; additional potential Seaford costs were estimated at $273,000 to $465,000.
Principal risks include weather volatility, commodity-price and propane-margin fluctuations, counterparty and credit exposure, access to capital, interest rates, debt covenants, regulatory and rate-recovery risk, environmental liabilities, pipeline and system reliability, construction execution, pension funding and cybersecurity.
Contractual obligations totaled approximately $569.5 million, including debt, leases, transmission capacity, storage, commodity and electric supply commitments, and benefit obligations. Corporate guarantees for subsidiary commodity purchases totaled $31.6 million at year-end.

Most important facts for investors to verify

Whether 2014 earnings growth remains after removing the $7.1 million business-sale gains and considering the $6.9 million impairment charges.
Execution, timing, permitting and financing for the $223.4 million 2015 capital program, the White Oak expansion, the Eight Flags project and the proposed Gatherco acquisition.
Available liquidity after funding planned capital expenditures, the $27.6 million Gatherco cash consideration and seasonal working-capital needs.
Future regulatory recovery of environmental remediation, billing-system costs and other regulatory assets totaling $87.1 million at year-end.
Exposure to colder or warmer weather, propane-price volatility, inventory valuation adjustments, derivative losses and wholesale marketing results.
Debt covenant compliance, refinancing requirements, interest-rate exposure and the potential effect of increased 2015 borrowings on the targeted capital structure.
Funding requirements for underfunded pension plans and the resolution of environmental and other contingencies.
The filing reports unqualified audit opinions and effective internal control over financial reporting as of December 31, 2014.