Chesapeake Utilities Corporation: Q1 2015 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, plus unregulated propane distribution, wholesale marketing, natural gas marketing and related energy services. This unaudited Form 10-Q covers the three months ended March 31, 2015. Results are seasonal, with typically higher earnings in the first and fourth quarters due to colder-weather energy demand.
Following the October 2014 sale of BravePoint, the company reports two operating segments: Regulated Energy and Unregulated Energy. Prior-year amounts were reclassified to conform to the current presentation.
Financial performance and key metrics
| Metric | Q1 2015 | Q1 2014 | Change |
|---|---|---|---|
| Operating revenue | $170.1 million | $186.3 million | Down $16.3 million |
| Operating income | $37.5 million | $31.6 million | Up $5.9 million, or 18.6% |
| Income before taxes | $35.2 million | $29.5 million | Up $5.7 million |
| Net income | $21.1 million | $17.7 million | Up $3.4 million, or 19.4% |
| Diluted EPS | $1.44 | $1.22 | Up $0.22, or 18.0% |
| Cash dividends declared per share | $0.270 | $0.257 | Up $0.013 |
- Operating margin was approximately 22.1% of revenue, compared with approximately 17.0% in the prior-year quarter.
- Regulated Energy operating income increased 5.2% to $22.2 million, supported by service expansions, customer growth, the Florida electric base-rate increase and higher GRIP recovery.
- Unregulated Energy operating income increased 40.3% to $15.2 million. Gross margin benefited substantially from higher retail propane margins, partially offset by weaker wholesale propane marketing results.
- Income tax expense was $14.1 million, with an unchanged effective tax rate of approximately 40.0%.
- Net cash provided by operating activities was $64.0 million, versus $46.1 million in Q1 2014. The increase included benefits from regulatory asset and liability changes and a tax refund related to 2014 bonus depreciation.
- Capital expenditures were $27.5 million, compared with $18.5 million in the prior-year quarter. Net cash used in investing activities was $27.4 million.
- Net cash used in financing activities was $25.1 million, including $19.3 million of net line-of-credit repayments and $3.6 million of dividends. Cash increased to $16.2 million from $4.6 million at December 31, 2014.
Financial position, debt and liquidity
- Total assets were $913.7 million at March 31, 2015, compared with $904.5 million at year-end 2014.
- Stockholders’ equity was $317.7 million. Long-term debt, including current maturities, was $167.2 million; short-term borrowings were $66.8 million, down from $88.2 million at year-end.
- Including short-term borrowings, equity represented 58% of total capitalization at March 31, 2015, compared with 54% at December 31, 2014.
- The company had six unsecured bank credit facilities totaling $210.0 million, including $120.0 million of committed facilities, plus a $50.0 million short-term revolving credit note. Board authorization permitted up to $200.0 million of short-term borrowings.
- Long-term debt, excluding a capital lease obligation, had a carrying value of $161.4 million and estimated fair value of $182.2 million.
Material changes versus the prior comparable period
- Revenue declined because lower natural gas and propane commodity prices reduced the reported value of commodity sales. The decline was more than offset by improved gross margins.
- Retail propane margins increased gross margin by approximately $5.0 million, but management stated that the Q1 margin level was not typical and was excluded from long-term plans and forecasts.
- Wholesale propane marketing gross margin decreased approximately $1.0 million because of lower price volatility and a 44% reduction in trading activity.
- Regulated Energy gross margin increased $4.6 million, driven by service expansions, customer growth, the Florida electric rate increase and GRIP investment recovery. Related operating expenses increased $3.5 million.
- Interest expense increased approximately $293,000, principally because of the $50.0 million of notes issued in May 2014.
- The company completed the Gatherco merger on April 1, 2015, immediately after the reporting period. Consideration included $30.2 million of Chesapeake stock and $27.6 million of cash; $6.7 million of Gatherco cash was acquired and $1.7 million of debt was assumed and subsequently repaid.
Guidance, outlook, commentary and risks
- Management budgeted approximately $223.4 million of 2015 capital expenditures, substantially above the $94.8 million average annual spending level of the prior three years. Management expects increased borrowing and may issue equity to fund the program.
- Major planned investments include the Eight Flags combined heat and power plant, estimated at approximately $40.0 million, and the Eastern Shore White Oak expansion, estimated at approximately $30.0 million.
- The Eight Flags project is expected to be operational in mid-2016 and is projected to generate approximately $7.3 million of annual gross margin. The White Oak project is targeted for service in late Q1 or early Q2 2016 and is expected to generate at least $5.8 million of annual gross margin, subject to FERC authorization and construction.
- Management expects the Gatherco acquisition to have minimal 2015 EPS impact because it closed after the first quarter, but expects it to be accretive in the first full year of operations. The purchase price allocation was not yet finalized.
- Environmental liabilities totaled approximately $10.5 million across disclosed MGP sites, including approximately $10.1 million related to FPU sites. West Palm Beach remediation estimates ranged from approximately $4.5 million to $15.4 million.
- FPU disputes potential responsibility for Sanford remediation costs above its $650,000 contractual contribution. No additional claim had been made as of March 31, 2015, but the ultimate exposure could not be determined with reasonable certainty.
- Corporate guarantees totaled $31.1 million, with additional letters of credit outstanding. Commodity purchase and forward contract obligations totaled approximately $42.0 million.
- Key risks include weather, commodity-price volatility, regulatory and rate decisions, environmental and legal matters, acquisition integration, capital-market access, construction costs, counterparty credit, pension funding, competition and cybersecurity. Management stated that interim results are not necessarily indicative of full-year performance.
- Disclosure controls and procedures were evaluated as effective, and no material change in internal control over financial reporting was reported.
Important facts for investors to verify
- Whether unusually high Q1 retail propane margins normalize and how that affects full-year earnings.
- The final purchase-price allocation, goodwill and operating contribution from the Gatherco acquisition.
- FERC approval, construction costs and timing for the White Oak expansion.
- Capital-spending execution, incremental borrowing needs and the timing and dilution impact of any equity issuance.
- Progress and ultimate cost recovery for environmental remediation, particularly West Palm Beach, Sanford and Seaford.
- Whether the company maintains its targeted 50% to 60% equity ratio as its capital program expands.
- Seasonal weather, propane and natural gas prices, wholesale trading volatility and regulatory recovery mechanisms that may materially affect results.