Chesapeake Utilities Corp (CPK) 2011 Q1 法說會逐字稿

Good morning. My name is Amanda and I will be your conference operator for today. At this time, I would like to welcome everyone to the Chesapeake Utilities First Quarter 2011 Earnings Call. (OPERATOR INSTRUCTIONS) Thank you. I will now turn the call over to your host, Beth Cooper.

Good morning, everyone, and welcome to the Chesapeake Utilities First Quarter 2011 Earnings 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 2010 Annual Report on Form 10-K for further information on the risks and uncertainties related to the Company's forward-looking statements.

Now I'll turn the call over to Mike McMasters, President and Chief Executive Officer.

Thanks, Beth, and good morning, everyone. As detailed in our press release issued yesterday, Chesapeake Utilities reported net income of $13.7 million and diluted earnings per share was $1.43 for the first quarter of 2011. These results are down slightly from the prior year, 2% in terms of net income and 3% for diluted earnings per share.

Continued growth in our natural gas business, improved results from our propane operations, and lower interest rates were offset by the impact of warmer weather in both Florida and on the Delmarva Peninsula. The warmer weather during the first quarter accounted for a $2.1 million decrease in gross margin compared to the prior year's first quarter. We estimate that when compared to normal weather, as opposed to last year's, the warmer temperatures reduced gross margins by $369,000.

Before I turn the call over to Beth, I would like to highlight some of the key growth opportunities that we see for the Company going forward. First, growth in our natural gas transmission and distribution businesses remain strong as we continue our aggressive efforts to extend natural gas service to areas where it's not previously been available. Natural gas's pricing advantage, its environmentally friendly features, coupled with the abundance of domestic supply are all attractive to our customers.

During the first quarter of 2011, Eastern Shore generated $645,000 of higher gross margin from new transportation services initiated over the last 12 months. These new services are expected to generate annual gross margin of $3 million in 2011, or $2.8 million more than was reflected in 2010 results.

In addition, over the second half of 2010, we initiated service to 12 new commercial and industrial customers that generated $249,000 of incremental gross margin in the first quarter of 2011. Over the next nine months, these customers are expected to generate an additional $561,000 over last year's margins.

Additionally, the Company is continuing its efforts to get a franchise to service Lewes, Delaware. The franchise will allow us to extend service to two large customers for the fourth quarter of this year. We entered into some contracts to serve these customers during the first quarter and expect them to contribute gross margin equivalents of approximately 1,000 residential heating customers.

In terms of residential and small commercial growth, our Delmarva natural gas operation added 1,129 residential customers since the first quarter of 2010. These customers contributed additional gross margin of approximately $166,000 during the first quarter of 2011.

We also added 1,246 customers in Florida since the first quarter of 2010. These customers contributed approximately $200,000 of additional gross margin during the first quarter.

In addition to the extension to service to Lewes, Delaware, meeting our goal to reach the beach will open up new opportunities for growth in that area.

Finally, the Company is also pursuing an extension of natural gas service to Worcester County, Maryland, which will further increase our growth opportunities.

On the regulatory side, Eastern Shore filed a base rate proceeding with the Federal Energy Regulatory Commission in December, which is still underway. Eastern Shore expects this proceeding to be completed in 2011.

In Florida, the Company recently made a comeback filing with the Public Service Commission which provides details of the known benefits and cost savings resulting from the merger with FPU. As we've indicated in our previous disclosures, our integration of the FPU merger continues to proceed smoothly and we're proud of the fact that we've produced significant accretion during the first year.

In its filing, the Company has requested the commission include approximately $34.2 million in acquisition adjustment and $2.2 million in merger-related costs when establishing the rates for if Florida natural gas operations.

The request did not include a request for higher rates. I will talk a little bit more about this in a moment. Let me first talk about the process. The Florida Public Service Commission requires a company seeking inclusion of an acquisition adjustment and merger-related costs to demonstrate that its customers will benefit from the acquisition. They use a five-factor test in that determination. The five factors are -- (1) increased quality of service; (2) lower operating costs; (3) increased ability to attract capital for improvements; (4) overall lower cost of capital; and (5) more professional and experienced managerial, financial, technical, and operating resources.

With respect to lower costs, the Florida PSC effectively requires that the synergies be sufficient to offset the rate impact of the recovery of the acquisition adjustment and the merger-related costs. If the PSC does not allow recovery of the acquisition adjustment and merger-related costs, we believe that there will be some risk that the Company would have to reduce rates in the state of Florida. If this occurs, it could reduce earnings. If the Florida PSC does allow recovery of the acquisition adjustment and merger-related costs, earnings may also be reduced going forward.

We expect that if recovery is approved, we would begin recording $1.6 million of noncash amortization expense annually. Approximately $1.3 million of this expense is not tax deductible.

Longer term, the inclusion of the acquisition adjustment in the Company's rate base and the recovery of the purchase premium and merger-related costs through amortization expense will increase the Company's earnings and cash flows above the levels that would have otherwise been achieved.

Currently, the Company has accrued $750,000 based on management's assessment of FPU's earnings and regulatory risks of its earnings associated with the possible Florida PSC action related to the comeback filing. We expect the final outcome of this proceeding by the end of 2011. We will provide more details about this as this process moves forward.

Moving on to propane. Our propane business is also well positioned. We have a reputation and the capital to continue to grow this business. In 2011, we expect our Cecil County, Maryland, startup to gain momentum and aggressively pursue the growth that's occurring in that area.

We expect our BravePoint subsidiary to complete the development and beta-testing of its latest product, ProfitZoom, during the second quarter. ProfitZoom is an integrated information system designed specifically for the fire suppression and specialty contracting industries. The system includes financial, job costing, and service management modules. Initial feedback from the product has been promising.

The underlying fundamentals for the Company remain strong. We expect continued growth to produce further improved financial results. We remain committed to providing excellent service to our customers and superior returns to our shareholders. Now I'll turn the call over to Beth to provide additional details on the financial performance for the quarter.

Thanks, Mike. As Mike indicated, operating fundamentals and growth opportunities for the Company's natural gas distribution and transmission, electric distribution, and propane operations remain strong. Growth from these operations nearly offset the impact of significantly warmer weather than the same period last year across our service territories.

For the quarter, consolidated operating income decreased by $559,000, or 2%, to $24.8 million. The decline principally reflected higher operating expenses of $971,000, which were not fully offset by the gross margin increase of $412,000 due to significantly warmer weather compared to the prior year.

Diluted earnings per share for the quarter fell 3%, from $1.47 to $1.43.

Chesapeake's regulated energy businesses generated operating income of $16.3 million for the first quarter of 2011, compared to $17.5 million for the first quarter of 2010. As Mike indicated, the decline reflected the impact of warmer weather, partially offset by Delmarva and Florida customer growth as well as Eastern Shore's recent system expansion.

Unregulated energy operating income improved for the quarter by $755,000, or 10%, to $8.5 million. The improvement reflected improved margins per gallon in the Delmarva propane distribution business as margins returned to a more normal level. In addition, a higher contribution from our propane wholesale marketing business, as well as a one-time gain from a litigation settlement, contributed to the increased results.

Operating income from other operations for the first quarter of 2011 was $15,000, down $107,000 from the same period in 2010. The results reflect increased payroll and benefit costs for BravePoint in addition to increased amortization expense associated with BravePoint's new product, ProfitZoom. The increase in expenses were incurred in preparation for the rollout of the ProfitZoom product and to pursue the growth opportunities in BravePoint's other practices.

We have provided a detailed discussion of the factors contributing to the results for the quarter in our press release, but I would like to highlight some of the key factors driving the change in net income for the quarter.

Warmer weather decreased gross margin of our natural gas and propane distribution operations by $2.1 million compared to the first quarter of 2011 [sic]. The addition of new residential and commercial and industrial customers in the Delmarva natural gas distribution operation generated $166,000 and $289,000, respectively, in additional gross margin in the first quarter of 2011.

The Florida natural gas operations generated 2% customer growth that contributed additional margin of $200,000.

Eastern Shore generated additional gross margin of $685,000 during the first quarter of 2011 from new transportation services commencing in May and November 2010 as well as in January 2011. These increases were partially offset by the loss of $40,000 in margins from expiring transportation contracts.

And additional $248,000 in margin in the first quarter of 2011 was generated by the August 2010 purchase of the assets of Florida-based Indiantown Gas Company as well as other miscellaneous items.

Propane distribution operations generated additional gross margin of $969,000 during the first quarter of 2011 as margins per gallon returned to normal levels and a $575,000 increase in margin due to a litigation settlement with a propane supplier.

Improved results from the Company's wholesale propane marketing subsidiary, Xeron, led to a $97,000 increase in gross margin during the first quarter of 2011.

BravePoint reported an operating loss of $95,000 for the first quarter of 2011 compared to operating income of $35,000 in the same period in 2010. Gross margin from BravePoint increased by $64,000, which was more than offset by an increase in operating expenses of $194,000. We previously discussed the reasons for the increase in expenses.

Capital expenditures for the first quarter of 2011 totaled $8.4 million. For the year, we have budgeted to spend a total of $51.7 million. We are also currently working on natural gas expansions that could require us to invest an additional $30 million of capital expenditures. We expect these expenditures to be financed initially by cash flow from operations and short-term borrowing, later followed by long-term debt financing. We believe we have access to competitively priced capital to refinance these expenditures over the long term.

Interest expense for the quarter decreased by approximately $213,000, or 9%, due primarily to a lower level of long-term debt. 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 refinanced prior to July 2011, these new unsecured senior notes will be issued at 5.68% and result in an increase in interest expense of $549,000 over the current short-term interest costs in the second half of 2011.

In summary, Chesapeake reported another quarter of strong financial results and is well positioned for future growth based on the fundamentals of our operating segments and our strong financial position.

Now I will turn the call back over to Mike to discuss some of the key drivers for growth in 2011 and beyond

Thanks, Beth. As I mentioned earlier, we continue to see excellent opportunities for growth in our natural gas distribution transmission businesses. While residential customer growth has not returned to the highs we saw prior to 2008, we are still achieving residential small commercial customer growth that exceeds industry averages.

We also continue to see significant opportunities at large commercial and industrial customers in both our current service territories as well as in some adjoining areas. Incremental margin from new customers continues to grow at a healthy rate. In addition, these large customers additions enable the Company to further expand our natural gas distribution transmission systems. These expansions will bring cost-effective environmentally friendly natural gas to new areas and create still more opportunities for future growth.

Our large commercial and industrial customer additions to our late 2010 and early 2011 are expected to generate an estimated annual margin of $1 million, or $800,000 more than those reflected in 2010 results.

Likewise, we continue to see growth in our natural gas transmission business. The additions we made last year and so far this year are expected to contribute to this year's earnings. The new transportation services associated with our interconnection with Texas Eastern Transmission pipeline system will generate an estimated annual margin of $2.4 million in 2011, $3.9 million in 2012, and $4.3 million annually thereafter.

We continue to seek and find new opportunities to grow our businesses and create value for our shareholders. We are committed to translating these opportunities to profitable growth and to producing solid returns for our shareholders. Thank you.

Operator, we're now ready for questions.

(OPERATOR INSTRUCTIONS) Dave Parker, Robert W. Baird. Mr. Parker? Your line is open.

I'm sorry -- can you hear me now?

Yes.

We can hear you, Dave.

Okay, all right. Congratulations on a good start. I already had, like, five paragraphs in my speech, and I apologize; I had the mute on. (Laughter) You made good progress on locking in additional industrial load, and kudos there.

Just wondering -- how should we look at each one of these agreements? Is it to fill the existing pipeline, so to speak, I guess pun intended? And if that is the case, then as we look at incremental work that you achieve along those lines, when do we look for additional expansion of your pipe system, and what does that mean for the long term?

If you look at Eastern Shore -- let's talk Delmarva first, Dave. With respect to Eastern Shore Natural Gas Company, every time we, I guess, add an industrial customer -- I'm not going to say every time -- but every year, I guess I should say, we have expansion plans in place.

Right now we have two different filings in front of the FERC dealing with these expansions opportunities, one for Cecil County and one for Worcester County. There are some contingencies in our preceding agreements relative to getting certain permits from the customers' perspective, from the distribution [LBCs'] perspective. So we do have right now two pipeline expansions on file with the FERC.

The Texas Eastern projects -- there is minimal facilities required, I believe, to serve those. So they're -- but that is also on the existing pipeline. I don't know if I've answered your question or not, Dave.

No, I think so. And I guess then my second, or follow-up, question is, you talked about, in your prepared remarks, that you're aggressively going to go after good customers. And I assume that that's partly fueled by the fact that natural gas -- and propane, I guess -- is a pretty attractive price and most people expect it will be forever. Is that the key benefit, here, Mike, that you're going after higher fuel sources and replacing with natural gas? Or is this sort of just a change in strategy, strategic outlook, for you?

It's actually as a result of all the shale gas. As you know, it's basically kept natural gas prices significantly below that of oil. So this industrial growth is really driven by that price differential plus the increased focus on the environment and global warming.

Okay. And then, one additional question -- as we look at that new shale gas, and it's sort of in your back yard, are there other opportunities like Eastern, do you think, that may be out there, or is that a big stretch? Like to add interstate pipeline?

At this stage of the game, Dave, we have not identified any additional opportunities that we could participate in at this stage of the game, but that is something that there are preliminary discussions ongoing. That's something we need to be looking at.

Okay, great. Thanks for that.

Erik Anderson, Praesidis.

This is John Hanson.

Hi John, good morning.

Hi, just make sure I get [cooped] up here. Two questions -- one is just the FPU, the Florida business, in terms of the -- can you explain what the timeline, or at least a little bit of -- are we kind of over the probe that's going on there? Or what's our situation with that?

Okay. What was happening, I guess, we last year entered into discussions with the public counsel in Florida in an effort to try to, I guess, come to an agreement on this process before we filed.

We were unable to do that and so we made a filing in April that we were required to make as the result of a settlement from both a Florida Public Utilities and a [testing] utilities rate case, rate cases going back in 2008 -- one of them might have been '07.

But in any event, once we filed, that process is expected to take five months to bring to conclusion. So absent an earlier settlement, we would expect that will be done in five months. Now, the Florida policy is to get recovery of the costs and so we're cautiously optimistic. The burden's just on us to show that we've implemented these synergies and that -- there might be some question as to whether the synergies are permanent or temporary, so we may have to answer or be able to respond to that and demonstrate that they are, in fact, permanent.

But anyway, so we made their filing, we feel like we have a good case. But we need to let the commission staff take a look at the filing and be responsive to their questions. And ultimately the burden is on us to support it.

And one outcome is rates are left the same; is that right?

That's correct. This docket, this case, should not trigger a rate reduction but it could if there was the potential for -- it's a settlement, there might be some rate reduction. But if we don't get recovery, then they might take a look and say, okay, are we over-earning because of the [synfused] -- the lower costs that we're incurring, are we now over-earning? So that's what could trigger a rate reduction.

Okay, good. I think one question is with the consulting business and the BravePoint, the new product that you have there. Just to make sure I understood, it sounds like we're kind of in a start-up mode with that. What are the prospects for -- we're amortizing on the cost of that now; what are the prospects for revenues to come against that here in the next few months or years?

Well, I think the key there -- we feel like the prospects are -- I don't think I can really quantify it, or should at this early stage. But we feel that we've got a lot of interest expressed in the product but what we have to do is get past this beta-testing phase so that we can satisfy those prospects that this product, in fact, will work as advertised. And I think that will give us a better feel, once we get past this beta testing.

Now, we currently have customers in the markets that this product was designed to serve. This is basically a rebuild -- maybe that's even understating it. But this is -- maybe it's a ground-up reconstruction of a product where there's an alternative product that we're currently selling and providing services around. So we have existing customers in this market, we have new prospects in this market. So we are -- just a matter now of executing on this beta testing and then also executing on the sales and delivery of the services thereafter.

Great; thanks.

(OPERATOR INSTRUCTIONS) There are no further questions in queue.

Well thanks, everyone, for joining us and I guess we'll be talking to you next quarter.

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