Chesapeake Utilities Corp (CPK) 2010 Q4 法說會逐字稿

Good morning, my name is Michelle and I will be your conference operator today. At this time, I would like to welcome everyone to the Chesapeake Utilities 2010 earnings conference call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question-and-answer session. (Operator Instructions)Thank you. Miss Cooper, you may begin your conference.

Thank you, Michelle. Good morning, everyone. Welcome to the Chesapeake Utilities 2010 year-end conference call. Before we begin, let me remind you that matters discussed in this conference call may include Forward-looking statements that involve risks and uncertainties. Actual results may differ materially from those in the Forward-looking statements. Please refer to the Safe Harbor for Forward-looking statements in the Company's most recent report on Form 10-K for further information on the risks and uncertainties related to the Company's Forward-looking statements. Additionally I would like to point out that all references to per share amounts are presented on a diluted basis. Now I will turn the call over to Mike McMasters, President and Chief Executive Officer.

Thanks, Beth and good morning, everyone. 2010 was an exceptional year for Chesapeake Utilities. We are proud to report record net income of $26.1 million and earnings per share of $2.73, up 64% and 27% representatively from 2009. These results reflect continued strong growth in our legacy businesses as well as successful integration of a merger with Florida Public Utilities. For 2010, the legacy businesses generated an increase in net income of $1.9 million, or $0.24 per share. When we announced the FPU merger, we estimated an earnings per share would be neutral or slightly accretive in 2010, the first full year of operation. I'm pleased to report that for 2010, the merger contributed an additional net income of $7.5 million or $0.22 per share (technical difficulty) that exceeded our expectations. In addition, the merger is also creating opportunities for future growth in Florida.

Lastly, 2010 results also benefited from a $0.12 per share decrease in merger-related costs. The successful integration of the merger and continued growth in our businesses allowed us to increase the dividend in 2010 by $0.06 per share or 4.8%. The dividend, combined with price appreciation for the year, produced a total return to shareholders of approximately 35%, well above our industry peers and the general equity market. Over the long term, whether measured in terms of three years, five years or ten years, we have delivered average annual shareholder returns of 10% to 14%.

Before I go into more detail on the operational results, I'd like to highlight some of the key strategic issues and opportunities that we see for the Company going forward. First, the Company continues to benefit from growth in the use of natural gas both on the Delmarva Peninsula and in Florida. While our service territories in both Florida and in Delmarva have been impacted by the economy, we are finding ways to grow. We have been aggressive in our efforts to promote the pricing advantage, and environmentally friendly features of natural gas. While decline in housing starts have reduced the rate of Residential customer growth, we have successfully added new Commercial and Industrial customers with larger incremental margins to offset the lower Residential and small Commercial customer growth.

The growth in our Delmarva natural gas Distribution business has also created increased demand for pipeline capacity at Eastern Shore Natural Gas, our natural gas transmission subsidiary. Growth in the Distribution business on the Delmarva Peninsula leads to growth in the pipeline. In addition, increased pipeline capacity allows for growth on the Delmarva natural gas in our distribution business. The customer additions in the distribution operations and the pipeline capacity additions made in 2010 will contribute to results in 2011 and beyond. We will continue to seek and create opportunities to expand both businesses.

Our Propane business is also well positioned. We have the reputation in the markets we serve and the capital to continue to grow this business. Our community gas system strategy has demonstrated success once again in 2010 and we believe it will continue to contribute to growth going forward. In addition to the community gas systems strategy, we have designed a variety of pricing programs based upon our Propane customers' needs and preferences and these pricing programs are providing us with an advantage. Our propane operation gives us a foothold in energy markets that we would not otherwise have and creates opportunities for future growth in our natural gas distribution business. Finally, our propane supply expertise, coupled with our investment in storage assets, gives us a competitive advantage.

In 2010, BravePoint weathered the economic storm and returned to its normal levels of profitability, reporting operating income of $759,000 for 2010 as compared to an operating loss of $229,000 in 2009. In addition to growth through new services, BravePoint completed development of a new product, ProfitZoom, in support of the successful integration of Chesapeake's and FPU's systems. A 7% increase in bill-able consulting hours and higher revenue from BravePoint's professional database monitoring, support solution services and product sales were key drivers in the improved results. Finally, our integration of the merger with FPU exceeded our expectations, thanks to the hard work and skill of our employees and management team.

Our expectation, when we announced the merger, was to produce earnings neutral or slightly accretive in the first year after the merger. We are proud of the fact that we delivered significant accretion in 2010, well above our internal expectations. Additionally, we are uncovering opportunities to grow our integrated Florida operations. The combination of our operations and the new leadership we have put in place positions us to succeed.

Over the next few months, we will be seeking Public Service Commission approval for recovery of the acquisition premium in rates. If the Commission approves recovery, we will begin amortizing $34.9 million over 30 years. The income tax regulations will treat this as a non-deductible for tax purposes. I will provide more details about this as the process moves forward. As you can see, the outlook for our Company is very encouraging. We expect continued growth and merger integration to produce further improved financial results and we remain committed to providing excellent service to our customers and solid returns to our shareholders. Now I will turn the call over to Beth Cooper, Senior Vice President, Chief Financial Officer, to provide additional details on the financial performance for the quarter.

Thanks, Mike. As Mike indicated, fourth quarter and 2010 full-year financial results for Chesapeake were very strong. For the quarter, consolidated operating income increased by $1.5 million or 12% to $14.2 million. The primary drivers of the increase were continued growth in our legacy utility operations and the results of our newest subsidiary, FPU. Fourth quarter 2009 results included only two months of review. Earning per share for the quarter were $0.74 per share, representing an increase of $0.03 per share over the fourth quarter of 2009. Chesapeake's Legacy businesses generated net income of $5.4 million or $0.77 per share in the fourth quarter of 2010, compared to $5.1 million or $0.73 per share in 2009, representing a 5% growth in earnings per share. The stronger performance for the quarter also reflected lower merger-related expenses of $0.04 per share.

FPU generated net income of $2 million in the fourth quarter of 2010 compared to $1.8 million in earnings for 2009, representing an 11% increase in earnings. FPU's results for the fourth quarter of 2010 include a $250,000 accrual for the regulatory risk associated with FPU's natural gas earnings and recovery of the purchase premium. The additional accrual during the fourth quarter brings the total accrual, included in 2010's results, to $750,000. Interest expense decreased by approximately $108,000 or 4.7% in the fourth quarter of 2010 compared to the fourth quarter of 2009, due to lower balances of both long term and short-term debt. We have provided a detailed discussion of the factors contributing to our improved results for the quarter and our Press Release which was issued last night. But I would like to highlight some of the key factors driving the improvement in net income for the quarter.

First, operating income increased by $884,000 for the Delmarva Propane distribution operations as a result of colder than normal weather, the timing of deliveries and increased retail margins. Gross margin of Chesapeake's Florida division increased by $470,000 as a result of the rate increase which became effective in January of 2010. The addition of new Residential and Commercial and industrial customers for the Delmarva natural gas distribution operation generated $115,000 and $186,000, respectively, and additional gross margin in the fourth quarter 2010. Eastern Shore Natural Gas Company generated an additional gross margin of $140,000 from new transportation services commencing in late 2009 and during 2010. The improvement in results at BravePoint continued in the fourth quarter as BravePoint generated slightly higher operating income for the quarter.

Now I would like to highlight results for the full year. As Mike indicated, the Company reported record net income of $26.1 million or $2.73 per share for 2010. Driving this increase in net income was increased operating income. For the year, operating income increased by $18.2 million, or 54%, from $33.7 million in 2009 to $51.9 million in 2010. Excluding the impact of the FPU merger and merger-related costs, operating income from Chesapeake's legacy businesses increased by $2.5 million, or 8%, to $34.2 million in 2010 from $31.7 million in 2009. FPU's 2010 operating income was $18.4 million compared to $3.5 million in 2009, as only two months of FPU results were included in 2009, given the merger closing at the end of October. Operating income also increased as merger-related costs declined by approximately $818,000. A complete discussion of the factors impacting full year's results can be found in our earnings release.

Capital expenditures for 2010 totaled $47 million as compared to our original capital budget of $55 million. Given the continued growth and expansion opportunities we see, we have budgeted $51.7 million of capital expenditures for 2011. Our forecast calls for these expenditures to be covered initially by cash flow from operations and short term borrowings, later followed by a long-term debt financing. We believe we have access to competitively priced capital to refinance these expenditures over the long term.

Interest expense increased in 2010 by $2.1 million or 29% over 2009. The increase principally reflects the assumption of debt as part of the merger with FPU. The components of the increase are as follows; a $1.3 million increase in long-term interest expense associated with interest on FPU's first mortgage fund; $491,000 in additional short-term interest from a new term loan facility that was executed in January 2010; and $730,000 in interest on deposits from FPU's customers.

We redeemed two series of FPU bonds to 4.9% and 6.85% series and then re-financed these bonds using $29.1 million of the new short-term loan facility, thereby reducing the amount of FPU's secured long-term debt and also ensuring compliance with the covenants in our unsecured senior notes. Chesapeake has entered into an arrangement with an existing unsecured note holder to refinance the new short-term loan facility as Chesapeake unsecured senior notes. If this facility is re-financed prior to July 8, 2011, these new unsecured senior notes will be issued at 5.68% and result in annual long term interest expense of $1.7 million, representing an additional interest of $1.2 million over 2010's interest of $491,000.

Offsetting the increased interest expense from FPU was lower interest expense on Chesapeake's unsecured senior note and lower additional short term interest expense due to the timing of our capital expenditures and reduced working capital requirements, partially as a result of the increased bonus depreciation in 2010. In summary, Chesapeake recorded -- reported a record year of financial results and is well positioned for future growth based on the fundamentals of our operating segments, our strong financial position and our unwavering commitment to our financial discipline. Now I will turn the call back over to Mike to discuss some the key drivers for growth in 2011 and beyond.

Thanks, Beth. Our large Commercial and Industrial customer additions during 2010 are expected to generate an estimated annual margin of $748,000, of which $196,000 was reflected in 2010's results. Additionally, we continue to see excellent opportunities for growth on our Delmarva natural gas Distribution and Transmission business. While residential customer additions have declined, we continue to see significant opportunities to add large Commercial and Industrial customers. This will enable the Company to further extend the Delmarva Natural Gas distribution and transmission infrastructure.

Likewise, we continue to see growth in our Transmission business. And the additions we made in 2009 and 2010 impacted both 2010 results and are expected to contribute to 2011's earnings. The new transportation services will generate estimated annual margin of $1.6 million. We recognized $1.2 million in 2010. Additionally, Eastern Shore completed an eight-mile mainline extension in December 2010 to interconnect with Texas Eastern Transmission pipeline. Eastern Shore commenced new transportation services to the Company's Delaware and Maryland Divisions of January of 2011. These new services will generate gross margin of $2.4 million in 2011, $3.9 million in 2012 and $4.3 million annually thereafter. Eastern Shore's interconnection provides Delmarva natural gas distribution operation with increased reliability and access to new sources of natural gas supply. These new services also provide additional upstream transportation capacity to meet future customer demands and ensure additional supply options.

On December 30, 2010, Eastern Shore filed a base rate case with the Federal Energy Regulatory Commission. This filing was made in accordance with the terms of the settlement agreement and its prior rate case proceeding in 2008. Eastern Shore expects to complete the regulatory process in 2011. The Company's required to detail all known benefits, synergies, cost savings and cost increases resulting from the FPU merger and present the information in a come-back filing in 2011. These filings are required to be filed with the Florida PSC by April 29. We are currently in discussions with the Office of People -- of the Public Counsel and the Florida PSC staff regarding the recovery of $34.9 million in purchase premium and $2.2 million in merger-related costs.

In Florida, we also see opportunities for growth in our Natural Gas Distribution and Transmission businesses. We are in negotiations with several, potential commercial industrial customers that could result in expansions of our natural gas systems into other areas and within the state. In our Propane distribution operations in 2011, we expect to see continued growth of our newest distribution Propane offices in Cecil County, Maryland. Our Propane distribution operation in Florida will also recognize a full year of earnings from the year-end 2010 expansion we completed at our Propane terminal in Lantana, Florida. We were also proud of BravePoint's improvement in 2010 in the face of difficult economic and industry conditions. We're optimistic about its ability to continue to grow revenues going forward while managing operating expenses. We are also pleased with the initial interest expressed in ProfitZoom.

Chesapeake remains well positioned to capitalize on the opportunities within our service territories. We're also well positioned to execute on the opportunities such as the FPU merger, transmission system expansions, the new commercial and industrial growth opportunities and our community gas system initiative. We believe natural gas is the cleanest, most abundant and lowest cost energy option available today for meeting the nation's energy needs. The competitive advantage of natural gas are creating profitable opportunities for growth. We are committed to capitalizing on these opportunities and producing solid returns for our shareholders. Operator, we are now ready for questions.

(Operator Instructions)We'll wait just a moment to compile the Q&A roster.Our first question comes from John Hanson from Praesidis. Your line is open.

Good morning.

Morning John.

Just one question there about the amortization -- you made the tax comment in the opening. So, it's not deductible for tax purposes. Will there be a deferred tax taken against that or not?

If the 1 point at the -- I guess the 34 --

The amortization.

Yes. The $34.9 million level of gross cost, that does not have any gross up for deferred taxes. So, ultimately we may end up amortizing -- we may end up grossing it up and amortizing it and then showing the tax deduction, so the -- really the amortization of $34.9 million will result in an after-tax charge of what roughly $1 million a year -- over $1 million a year.

Okay. And again, just so I understand you are seeking recognition of that in rates though in some way, right? Or some kind of regulatory recognition?

Yes.

Okay.

How that actually works, in Florida, they have a, I guess, what I would consider a proactive policy in Florida as it relates to acquisition premiums. What they do is they first make sure that we are improving the quality of service, et cetera, and assuming that we meet certain conditions, if we can implement synergies that, in effect, would self-fund the cost of the premium, we are able to recover those costs. But it's not through a rate increase, if you will. It will be through recouping or retaining some of the savings that we've implemented.

Okay, good. Thank you very much.

(Operator Instructions)Ms. Cooper, I have no further questions at this time. I turn the call back over to you.

Thank you everyone for participating in today's conference call. We will be filing our 10K later today and that will have more information regarding what's already been included in the earnings release.Thank you and we look forward to talking to you again. Good-bye.

Thank you.

This concludes today's conference call. You may now disconnect.