Chesapeake Utilities Corp (CPK) 2011 Q3 法說會逐字稿

Good afternoon, ladies and gentlemen. My name is Martina and I will be your conference operator today. At this time I would like to welcome everyone to the Chesapeake Utilities third quarter earnings conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks there will be a question-and-answer session. (Operator Instructions). I would now like to turn the call over to Ms. Cooper, Senior Vice President and Chief Financial Officer. You may begin your conference.

Thank you. Good afternoon, and welcome to the Chesapeake Utilities Corporation third quarter 2011 earnings conference call. Joining me on the call today is Mike McMasters, President and Chief Executive Officer.

On today's call, we are going to discuss the results of the third quarter and the nine months ended September 30, 2011. We encourage you to read our earnings release filed yesterday and our Form 10-Q to be filed later today for more details.

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 will turn the call over to Mike for an overview of the results of the quarter and year-to-date.

Thanks, Beth. Good afternoon, everyone. We are pleased to announce that Chesapeake Utilities reported net income of $2.4 million and earnings per share of $0.25 for the third quarter of 2011. These represent increases of $800,000, and $0.08 per share over reported net income of $1.6 million and earnings per share of $0.17 for the third quarter of 2010. The improvement in results was generated from growth and expansion of our natural gas distribution and transmission operations, improved margins in the propane distribution and wholesale marketing operations and the net gain from several non-recurring items.

For the first nine months of 2011, net income was $19.7 million or $2.04 per share compared to $18.9 million or $1.98 per share for the same period in 2010. Year-to-date results reflect the positive factors previously mentioned, partially offset by warmer weather in the first quarter of this year.

Beth will provide a more detailed discussion of the financial results after I highlight some of the key opportunities that we see for the Company going forward.

The Company's commitment to expand our natural gas systems to new customers and communities is continuing to generate growth and opportunities for future growth. Our gas transmission and distribution operations are working together to capitalize on these opportunities. We continue to aggressively promote the economic and environmental advance in natural gas and then to identify and develop opportunities for growth in both natural gas transmission and distribution.

In January of this year, Eastern Shore completed an 8-mile mainline extension and interconnect Texas Eastern Transmission's pipeline system. The strategic extension provides access to new sources of natural gas, including shale gas production areas. New transportation services of 20,000 Dts per day associated with this extension commenced in January of 2011 and will generate annual margin of $1.9 million.

Additional transportation capacity will be added in 2011 and 2012 increasing to 35,000 Dts per day in November of '11 and then to 40,000 per day in November of '12. The new services that are going to affect in November of '12 will generate additional gross margin of $263,000.

One of the factors contributing to past, present and future growth in transmission business has been our Delmarva natural gas distribution business growth. During the third quarter, Eastern Shore began construction of new facilities to the extent natural gas further into Southern Delaware and into Worcester and Cecil Counties in Maryland. The expansions are primarily for our Delaware and Maryland divisions. Once completed, Eastern Shore will provide an additional firm service of 6,250 Dts per day and generate additional gross margin of $1.6 million in 2012 and $1.8 million annually thereafter.

As a result of changes in the market conditions over the last couple of years, we have adjusted our growth strategy to focus on conversion of large commercial and industrial customers in areas where natural gas was not previously available. From June of 2010 to the end of this year, we expect to have add 21 new commercial and industrial customers. Service to these customers generated $334,000 in additional gross margin during the third quarter and is expected to generate annual gross margin of $1.2 million in 2011.

The mainline extension is necessary to serve these customers, provide future opportunities to convert smaller commercial establishments and homes from higher cost energy sources to natural gas. Included in the 21 customers above are (inaudible) Lewes, Delaware, which combined will add margin equivalent to 1,000 residential customers. We expect service to these two customers to begin prior to the end of the year.

Not included in the group discussed above is another existing customer that have signed two new agreements for natural gas service to two of its facilities located in the Southern Delaware. These new services are expected to begin in the first quarter of 2012 and generate annual gross margin equivalent to 415 residential customers. Residential customer growth on the Delmarva Peninsula distribution business has been about 2% so far in 2011. We expect this level of growth to be sustained absent any significant changes of economic conditions.

Our foreign natural gas distribution operations are also contributing to our growth. So far in 2011, we have seen commercial growth of approximately 2%, which is generating additional margin of $464,000 in 2011. Our purchase of operating assets of Indiantown Gas Company has generated $367,000 additional of gross margin during the first nine months of 2011.

Our service territories are spread out across the State of Florida. This provides numerous opportunities for us to identify new commercial and industrial customers for possible conversion to natural gas. In many cases, this will require new mainline extensions that in turn could provide additional opportunities for future growth. As it relates to residential growth, [do not see] any significant increase until the economic conditions improve.

On the regulatory side, Eastern Shore Natural Gas filed a base rate increase with the FERC in December of 2010. Recently settlement conferences involving Eastern Shore, the FERC's staff and other interested parties have resulted in a settlement principles. The proposed settlement provides for an annual rate increase of approximately $805,000 effective July 29, 2011. The settlement also includes a rate reduction effective November 1, 2011, that effectively eliminates the revenue increases from the $15,000 dekatherms per day of new transportation services associated with the Texas Eastern Transmission pipeline interconnection.

All of the Company's investment in that extension are reflecting our rates. Under the terms of the proposed settlement, there will be a five-year rate moratorium with certain exceptions. Eastern Shore expects to finalize the settlement with the parties this month and submit it to the FERC for approval. A FERC decision is expected by late 2011 or early 2012.

In Florida, on April 29, the Company submitted its Come-Back filing with the Public Service Commission detailing the benefits, cost savings and increases resulting from the merger with FPU. In its filing, the Company requested recovery of approximately $34.2 million in acquisition adjustment and $2.2 million in merger related costs. If the Florida PSC allows recovery of the acquisition adjustment and the merger related cost, earnings may be adversely impacted by $1.6 million annually until 2014 and $1.1 million thereafter until 2039. This adverse impact will be mitigated by any additional cost savings generated through our merger integration and performance improvement efforts.

Over the long term, the inclusion of the acquisition adjustment of the Company's rate base and recovery of the acquisition adjustment and merger-related cost through amortization expense will increase the Company's earnings and cash flows above those levels that would have otherwise been achievable. Our agenda conference regarding the Company's request for recovery of the acquisition adjustment and merger related costs is scheduled for later this month. We will provide more details about this as the process moves forward.

Results from non-regulated businesses have improved significantly for the quarter and nine months ended September 2011. Results from our propane distribution business were positively impacted by improvements in per gallon margins. The price differential between propane wholesale prices, and the average cost of inventory and market conditions all contribute to the increase. Results for the propane wholesale marketing operation also improved due to increased trading activities.

Our propane business is well positioned and is providing excellent returns to our shareholders and has been a strong source of cash flow. Additionally, providing propane service in the areas around our natural gas service territories provides us with market intelligence that supports our strategy of expanding natural gas service into our surrounding communities.

Finally, year-to-date results for BravePoint our information technology business have been lower due to product improvement and release cost necessary to launch ProfitZoom. During the third quarter three customers successfully implemented ProfitZoom and two additional customers have executed sales contracts with implementations scheduled for December and January.

The results for the quarter and 2011 to-date, and the opportunities we see going forward for our Company are very encouraging. We expect continued growth to produce further improved financial results and we remain committed to providing excellent service to our customers and superior returns to our shareholders.

Now, I'll turn the call back over to Beth, to provide additional details on the financial performance for the quarter.

Thanks, Mike. Financial results and operating fundamentals for the Company's regulated and unregulated energy operations remained strong. Earnings growth has been led by growth in our regulated operations and improved margins from our propane businesses.

In the most recent quarter and year-to-date non-recurring gains have offset operating costs associated with increased depreciation as a result of growth, the ongoing electric franchise dispute cost, increased regulatory cost to comply with pipeline integrity requirements and cost associated with the release of ProfitZoom.

For the quarter, consolidated operating income increased from $4.6 million to $5.6 million as a $2.5 million increase in gross margin was partially offset by $1.5 million of higher operating expenses, which I just mentioned. The net difference in non-recurring gains and losses for the quarter added $0.07 per share or $673,000 to earnings.

For the nine months ended September 2011, operating income increased by $467,000 reflecting a $5.4 million increase in gross margin, which was offset in part by a $4.9 million increase in operating expenses. On a year-to-date basis, growth has overcome the impact of the warmer weather.

Net non-recurring items accounted for $253,000 of the increase in operating income for the nine month. We are pleased with the results to-date as they demonstrate the strong fundamentals of our regulated and non-regulated businesses.

Chesapeake's regulated energy businesses, which include our natural gas transmission and distribution and electric distribution operations generated operating income of $7 million for the third quarter of 2011 compared to $6.5 million for the third quarter of 2010.

Growth in margins of $1.8 million, primarily from customer additions and new Eastern Shore transportation services more than offset a $1.3 million increase in operating expenses. The increase in operating expenses for the regulated energy segment reflected higher pension and depreciation expense, additional spending on pipeline integrity maintenance as well as higher regulatory, legal, and customer service related costs in Florida.

Pipeline integrity and maintenance cost are expected to remain at these levels through 2012 as we complete the first full cycle of testing and ensure compliance with the integrity mandates. Cost related to the Marianna, Florida franchise dispute discussions are also likely to be ongoing into 2012.

For the first nine months of 2011, operating income for the regulated energy segment decreased by $1.2 million as a $4 million increase in operating expenses more than offset a $2.8 million increase in gross margin. The increase in gross margin was reduced by approximately $2.1 million due to warmer weather during the nine months.

The $4 million increase in operating expenses included, in addition to the items mentioned previously, approximately $837,000 in non-recurring severance and pension related charges.

Operating results for the third quarter for the unregulated energy segment improved by $765,000 resulting in an operating loss of $1.5 million. This compares to a loss of $2.2 million for the third quarter of 2010.

Historically the third quarter's results have the greatest seasonal decline. Increased margin per gallon from propane sales and higher contributions from the propane wholesale and natural gas marketing operations more than offset an increase in operating expenses of $86,000.

Operating income for the unregulated energy operations increased by $2.3 million during the nine months ended September 2011, compared to the nine months ended September 2010, a $2.1 million increase in gross margin, principally reflecting higher margins per gallon of propane and an additional $809,000 from improved natural gas and propane wholesale marketing results was offset by an increase of $344,000 in operating expenses and $926,000 due to decreased consumption in part as a result of warmer weather. Unregulated energy operations also benefited from a $575,000 gain from an antitrust litigation settlement with a major propane supplier.

The other segment reported operating income of $43,000 for the third quarter of 2011 compared to operating income of $284,000 for the third quarter of 2010. The decline reflects $274,000 in additional costs related to BravePoint's ProfitZoom launch as well as higher benefit costs. For the nine months ended September 2011, the other segment reported a loss of $32,000 compared to operating income of $650,000 for the same period in 2010. The decrease in operating results reflects lower operating income of $860,000 from BravePoint as well as increased benefit costs.

Capital expenditures for the first nine months of 2011 totaled $33.4 million. For the year we expect to spend a total of $53.6 million. Our forecast calls for these expenditures to be financed on an interim basis with short-term debt. We are currently finalizing our 2012 capital budget, but we believe we will have access to competitively priced capital to finance these expenditures on both an interim basis and over the long-term.

Interest expense for the first nine months of 2011 decreased by approximately $270,000 or 4% compared to the first nine months of 2010 due to lower levels of both long term and short term debt.

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

Now, Mike and I would be happy to answer your questions.

(Operator Instructions). Michael Gaugler, Brean Murray, Carret.

Good afternoon, everyone.

Good afternoon.

Hello.

Mike, just one question on the Florida Come-Back. I know you said that there is going to be some meetings later this month. Maybe you could give us an estimate or refresh us on the timeline for when you would expect a decision there?

Actually the agenda conference would be -- a commission agenda conference, so that would be where they would make the decision. And it was actually originally scheduled to be in October, it was pushed back to November, right now still on the calendar of November. (technical difficulty).

Okay. That's all I had. Thanks guy.

You're welcome.

Thank you.

(Operator Instructions). John Hanson, Praesidis Asset Management.

Yes, good afternoon.

Good afternoon.

Good afternoon.

On the BravePoint new software you have, I just wanted to check, I see you got a board there where you talk about that you are getting some contracts and some implementations going. With those right now -- and what does that look like, are we going to be getting to the point where the -- we're getting closer to a break-even on that, for that part of the business here in the next quarter or two?

Yes, I mean don't -- and I think probably the fourth quarter still is going to be a repeat possibly. So I don't expect a whole lot of -- so there's going to be some improvement I would I think in the fourth quarter, but not a lot. And next year really should be the year when BravePoint gets back on track. There have been some success of building the pipeline. But it's a matter of, as you know getting a contract signed and implementation rolling. So --

Okay, great, great. I'm glad to hear that's coming up. And I missed a little bit at the beginning, but you were talking about a settlement that you had in a five year freeze, that's in the Delmarva area there?

Yes. That was a Eastern Shore Natural Gas. It was a FERC settlement.

Okay. So that's just on the FERC, your part of the jurisdiction there.

That is correct.

Okay, all right. That's fairly okay, I don't need to pursue that. Thank you.

Okay.

(Operator instructions). [Peter Hark, ZLP].

Thanks. Hey, Mike, hey Beth, how are you?

Very good. How about yourself?

Good. Thank you. The first is a housekeeping item on the quarter. I was taking a $0.25, but I wasn't adjusting out a full [seven]. I thought when I read the Q that, there was a gain on the sale of Internet Protocol address. But then you took a charge for a pension accrual.

So I thought, if I netted those, that was really a $0.03 reduction to get to an operating number of say, $0.21 or $0.22 for the third quarter. And I think maybe the confusion was in reconciling quarter-over-quarter, it was a $0.07 increase from 3Q '10 to 3Q '11. But that's because, I thought you had taken a charge in third of '10 that should have been added back in that quarter. So, I'm trying to get my math right on the quarters, is actually the first question. So if you can clarify those one time items.

Of course. There are several things that occurred in the third quarter of 2010, Peter, that you are correct in including and offsetting the impact of what happened in '11. In 2010 there were two things. The first was the recognition or the recording of $500,000 for the regulatory reserve that happened in the third quarter of 2010 as well as there were some cost related to a class action suit on the propane side and that was approximately $278,000.

This year the two non-recurring items that we have -- that are occurring in the third quarter are the two that you mentioned. Both the IP address sale as well as the pension charge, both of which were disclosed.

Okay. So, it's more -- is it more like a $0.21 versus $0.21 comparison on an operating basis or somewhere, maybe my taxes are wrong, but does that sound about right?

Let me just take a look (technical difficulty).

Yes, are you talking, when you said operating basis, you're talking pre-tax.

Yes, on an adjusted basis, Mike. Even on an after-tax, I'm trying to get to an after-tax EPS adjusted number. Yes.

For the two items that you have, Peter, for 2011, basically the impact of those is $334,000. The two items that I mentioned on a pre-tax basis. And then the two from 2010 are $778,000.

On a pre-tax basis also.

That is correct.

Okay, great. And then thank you very much. The second had to do, I just want to make sure I understand, again, the Come Back filing in Florida. I thought there was a chance that the delay by a month from October to November was to allow you guys to settle the issue. Is that the right way to think about it, Mike, or not?

Actually what happened was the Public Service Commission staff wanted to issue some more data request and they submitted another data request and we responded. And they have been looking at that data request. And that request I guess, I would classify that as more of a confirmation of some of the numbers that we have provided earlier. So it was more of the just an administrative, I'd say, delay than anything else, but it's a pretty big decision for the commission and also require some pretty detailed analysis by the staff. So, it's not unexpected that sometimes it could delay like that, but it was [not sort of] negotiations.

I see. Then could you run through the math again quickly for us and why would have an ongoing impact beyond say the '11, '12 time period, absent you're finding additional cost reductions to offset the impact, can you run through that math again?

Yes. It's the amortization expense or both the acquisition adjustment or the premium over book value and the amortization expense of the merger related costs that are driving the cost. And the reason that number changes in the out years is the merger related cost that will be amortized over five years and it really goes back to the beginning of the -- or when the acquisition occurred or the merger occurred. So, there will be about three years of that and another roughly [27] of the premium itself, the acquisition adjustment.

All right.

So the acquisition adjustment is $34 million amortized over 30 years and the merger related costs are $2.2 million over five years.

Over five years but there are two years that are in the books already, so is it like a catch-up entry to kind of account for the two years that have already gone by?

As it relates to the merger-related costs, we have already taken the charge for those.

Right.

Through the end of '11, so there will be no catch-up entry for that and on the premium itself. Our current thinking is that it will not -- that that will depend upon the actual order that comes out from the commission. So we'll have to see what that order says. Again, we don't expect that it will, but we'll have to look at that order.

Okay. And the amortization schedule here are the ones that you are filing for to be treated that way. Has the staff issued testimony yet on how they think it should be handled?

They have not. In this particular type of proceeding, they will be issuing a recommendation to the commission and then the commission will discuss it at the agenda conference and typically we will have an opportunity to speak there, but there would not be a full blown hearing.

I see. Is the staff recommendation a public item or is it something that's done behind closed doors and then they issue their order?

The recommendation will be public. And at this stage of the game, it is not out as it should be.

I see, okay.

(Technical difficulty) next couple of weeks obviously.

Okay, okay, well, good luck. Well, thanks very much for your time.

Okay, thank you.

There are no further questions in the queue. Ms. Cooper, I'll turn the call back over to you.

Mike and I would like to thank you all for joining us today and we look forward to talking with you at the end of the fourth

quarter.

Thanks a lot.

Thank you.

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