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, transmission and electric operations, plus unregulated propane, natural gas marketing, gathering, processing and other energy services. The filing covers the quarter and six months ended June 30, 2016. Results are seasonal, with typically higher revenue and earnings during the first and fourth quarters because of heating demand.
Financial performance and key metrics
| Metric | Three months ended June 30 | Six months ended June 30 |
|---|---|---|
| Operating revenue | $102.3 million, up from $92.7 million | $248.6 million, down from $262.8 million |
| Operating income | $15.7 million, up from $13.2 million | $52.1 million, up from $50.7 million |
| Net income | $8.0 million, up from $6.3 million | $28.4 million, up from $27.4 million |
| Diluted EPS | $0.52, up from $0.41 | $1.85, up from $1.83 |
| Operating margin | 15.4%, compared with 14.2% | 21.0%, compared with 19.3% |
| Dividend declared per share | $0.3050, compared with $0.2875 | $0.5925, compared with $0.5575 |
- Regulated Energy operating income increased 11.9% in the quarter to $15.2 million and 10.5% for the six months to $39.5 million.
- Unregulated Energy operating income improved to $412,000 from a $540,000 loss in the quarter, but declined to $12.3 million from $14.7 million for the six months.
- Six-month operating cash flow was $74.2 million, down from $80.4 million. Capital expenditures were approximately $70.3 million, compared with $57.4 million of cash property, plant and equipment expenditures in the prior-year period.
- Cash and cash equivalents were $3.3 million at June 30, 2016, compared with $2.9 million at December 31, 2015.
- Stockholders’ equity was $379.6 million, compared with $358.1 million at year-end 2015. Total assets were $1.10 billion.
- Long-term debt, including current maturities, was $155.9 million; short-term borrowing was $180.0 million. The company had $40.0 million outstanding under its $150.0 million revolving credit facility.
- The company requested and received acceptance for $70.0 million of 3.25% Shelf Notes, with issuance expected by April 28, 2017. The Shelf Agreement permits up to $150.0 million of notes, subject to the lender’s obligation and transaction terms.
Material changes versus the prior comparable period
- Second-quarter net income increased $1.7 million, primarily from higher regulated gross margin generated by service expansions, Florida GRIP investment recovery, customer growth, Delaware interim rates and the Eight Flags project.
- The second quarter benefited from $1.6 million of additional gross margin from short-term OPT ≤ 90 natural gas transportation service, $1.0 million from GRIP and $555,000 from Delaware interim rates.
- The 2015 second quarter included a $1.5 million gain from a customer billing-system settlement. In 2016, the company recorded a $130,000 settlement-related gain, making the underlying operating improvement greater than the reported increase.
- For the six months, warmer weather reduced customer consumption and gross margin by approximately $6.6 million versus 2015, including a $2.5 million reduction in regulated gross margin and a $3.9 million reduction in unregulated gross margin.
- Six-month unregulated results were also pressured by a $1.9 million decline in retail propane margins as margins normalized from unusually strong 2015 levels, partly offset by $4.9 million of additional Aspire Energy gross margin.
- Aspire Energy contributed $4.8 million of second-quarter revenue and $28,000 of net income, and $12.8 million of revenue and $1.7 million of net income for the six months.
- Eight Flags substantially completed its natural-gas-fired combined heat and power plant in June 2016. Power sales to FPU began June 13, 2016, and steam sales to an industrial customer began July 1, 2016.
Guidance, outlook, commentary and risks
- Management projected 2016 capital expenditures of approximately $179.3 million, including $147.8 million for regulated energy and $24.6 million for unregulated energy. The forecast includes $30.0 million for projects in early development.
- The White Oak Mainline Expansion and System Reliability Project received FERC authorization on July 21, 2016. Management estimates potential annual gross margin of approximately $5.8 million from White Oak and $4.5 million from the System Reliability Project, assuming required construction and rate recovery.
- Eastern Shore’s proposed 2017 Expansion Project is expected to provide up to 86,437 Dts/d of additional firm capacity; the company anticipated filing a certificate application in November 2016.
- The Delaware rate case seeks an approximately $4.7 million annual revenue requirement increase. Interim rates were revised to a $4.7 million annualized level effective August 1, 2016, but collections are subject to refund and the final decision was expected in the first quarter of 2017.
- Sandpiper’s Maryland rate case seeks a $950,000 increase; settlement discussions were continuing and a decision was expected in the third quarter of 2016.
- Environmental liabilities totaled approximately $9.9 million for FPU’s Florida manufactured-gas-plant sites and $314,000 for Chesapeake’s Salisbury and Winter Haven sites. West Palm Beach remediation estimates range from approximately $4.5 million to $15.4 million.
- FPU’s potential obligations relating to the Sanford, Florida site remain uncertain beyond the $650,000 already funded; no additional claim had been made as of June 30, 2016.
- Corporate guarantees totaled approximately $53.6 million and letters of credit totaled approximately $8.1 million. No letters of credit had been drawn.
- Key risks include regulatory decisions and rate refunds, environmental remediation, weather-driven demand, commodity-price volatility, interest rates, financing availability, counterparty credit, construction execution, pension obligations, competition, cyberattacks and integration of acquisitions.
- Management stated that interim results are not necessarily indicative of full-year results because of seasonality. Favorable natural gas marketing and hedging results are not considered predictable and are excluded from long-term plans and forecasts.
Important facts for investors to verify
- Verify the final outcomes and timing of the Delaware and Maryland rate cases, including any required refunds.
- Track the closing and use of proceeds of the planned $70.0 million Shelf Note issuance and the company’s reliance on short-term borrowings.
- Assess whether the $179.3 million 2016 capital-expenditure forecast is funded adequately by operating cash flow and available credit.
- Monitor FERC construction, environmental and rate-treatment requirements for the White Oak and System Reliability projects.
- Evaluate the sustainability of Aspire Energy contributions, Eight Flags’ projected gross margin and natural gas marketing gains.
- Review weather-normalized demand, propane margins and commodity-hedging exposure when assessing recurring earnings.
- Assess environmental cost ranges and the extent to which remediation expenditures will ultimately be recovered through insurance or customer rates.