Chesapeake Utilities Corp (CPK) 2012 Q1 法說會逐字稿

Good morning. My name is Stephanie and I will be your conference operator today. At this time I would like to welcome everyone to the Chesapeake Utilities first quarter 2012 earnings conference call. All lines have been placed on mute to avoid any background noise. After the speakers' remarks there will be a question and answer session. (Operator Instructions). Ms. Cooper, you may begin your conference.

Thanks, Stephanie. Good morning everyone, and welcome to the Chesapeake Utilities first quarter 2012 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 most recent report on Form 10-K as amended 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 McMasters, President and Chief Executive Officer.

Thanks, Beth. And good morning everyone. On Wednesday, we announced first quarter results including net income of $10.7 million, and earnings per share of $1.11. These results reflect the impact of weather that was 23% warmer in the Delmarva Peninsula, and 36% warmer in Florida than 2011. We estimate that warmer weather reduced net income during the first quarter when compared to the first quarter of 2011 by $2.4 million, or $0.25 per share.

The first quarter was the warmest in the last ten years. It also was the second warmest quarter in the last 40 years on the Delmarva Peninsula, and the third warmest in the last 40 years in Florida. While the results are lower because of the weather, the underlying fundamentals of the Company remain strong. Inherent in our first quarter results was growth of $0.07 per share from our natural gas distribution and transmission businesses. The $0.07 a share increase from growth demonstrates the success we continue to achieve in executing our growth strategy.

In this regard I want to thank our employees for their continued hard work in identifying growth opportunities in and around the territories we serve, and then translating these opportunities into savings for our customers and communities and earnings growth for our investors. Also on Wednesday our Board of Directors approved an $0.08 per share or 5.8% increase in our annual dividend. This marks the ninth straight year of dividend increase, and was only approved after a careful analysis and review to ensure that the $0.08 per share increase is sustainable based upon our expected earnings growth. Of course, all future dividends are subject to review and approval by the Board.

As we said in our Annual Report our growth and our financial performance is the result of an employee sustained team efforts. Each and every employee matters each and every day. Beth Cooper will provide a more detailed discussion on the financial results after I highlight some of the growth opportunities that we see developing for the Company, and how we see the Company performing going forward. We continue to take a long-term view toward customer additions and extending our natural gas systems to new customers and communities. This approach underlies the growth that we have generated over the last several years. We believe it will lead to continued growth and position us well for the future.

Our strategy in the natural gas distribution business has been to aggressively pursue new commercial and industrial customers that are using different forms of energy to meet their relatively large requirements. The significant cost differential between natural gas and our potential customers other energy options creates opportunities for us to save them money while reducing their environmental footprint.

On the Delmarva Peninsula most of the increased margin we have been generating over the past couple of years has been due to the addition of these relatively large commercial and industrial customers. In addition the extension of facilities to serve these new customers positions us to convert residential and other commercial customers. We are working on new programs and reorganizing our distribution operations on Delmarva to facilitate these new conversion opportunities.

In December of 2011 we commenced service to two industrial customers in Lewes, Delaware. These customers are expected to generate $391,000 in margin in 2012. In response to the distribution expansion into Lewes, Eastern Shore increased its main line transportation capacity by 3,250 dekatherms per day. This service is expected to generate $935,000 in margin in 2012. The Delmarva gas distribution operation is now pursuing additional customers in the Lewes area to enhance growth. In March 2012 we commenced service to an additional facility of an existing industrial customer in eastern Sussex County, Delaware.

We expect to initiate service to another facility for the same customer in the second quarter of 2012. These two facilities are expected to generate annual margin equivalent to 415 residential customers. Based upon the expected in-service dates we expect the 2012 margin impact to be $114,000. On an annual basis these facilities will generate $154,000 in margin. Service to these customers is facilitating the expansion of our system to serve Worcester County, Maryland, and opening up additional opportunities for growth along the route.

Once service is commenced in Worcester County we expect to generate approximately $837,000 in annualized margin from new transportation services, of which $497,000 we recognized in 2012. We will be aggressive in seeking out additional customers to serve in both eastern Sussex County, Delaware, and Worcester County, Maryland.

We also expect to begin service to Cecil County, Maryland in the second half of this year. Eastern Shore is working on the main line expansion that will provide 4,070 dekatherms per day to this area with an estimated annualized margin of $882,000, of which $294,000 will be recognized in 2012. Again, we are actively pursuing additional opportunities to add customers in this area to take advantage of the new facilities and further enhance growth. We also signed to proceed an agreement with NRG Energy Center of Dover late last year to provide transportation to NRG's electric generation facility in Dover, Delaware.

Eastern Shore will invest $12.5 million to $15 million to serve this plant. In return, Eastern Shore and NRG will sign a 15-year firm transportation agreement to deliver up to 13,440 dekatherms per day. This service is expected to begin in May 2013. We estimate annual margin of $2.4 million to $2.8 million. We are currently seeking the necessary approvals to move forward on this project. We are pursuing a similar growth strategy in Florida. We are pursuing large commercial industrial customers for conversion, which will result in additional distribution and transmission system expansions to serve these customers and provide future opportunities to convert other potential customers in the new areas.

In April we received approval from the Florida Public Service Commission for a pipeline subsidiary to provide firm transportation service to Florida Public Utilities to initiate natural gas service to Nassau County, Florida. This expansion is expected to generate $2.1 million in annualized margin. We initiated service to Nassau County in April. Our team is hard at work in cultivating additional growth made possible by this expansion. We continue in our efforts to develop growth in our natural gas distribution transmission businesses, and have many additional opportunities that we are pursuing to deliver clean, reliable energy throughout our service areas, and to ensure that we continue to deliver superior value to our shareholders.

While residential growth has slowed in our service territories, we have found other ways to profitably grow. Natural gas is a clean alternative that is cheaper than other forms of energy, and we plan to continue to capitalize on this competitive position, and our ability to deliver it safely and efficiently to our customers. The warm weather during the first quarter of 2012 also had a significant impact on our unregulated energy operations. Our propane distribution units were impacted by delivery of fewer gallons of propane while our propane wholesale marketing operations impacted by lower trading volumes. While the results reflect this impact, our strategy to improve and expand our distribution operations produced results during the quarter.

We added 1,180 customers through the acquisition of two propane companies in Florida. We also continue to make progress in the refinement of our retail pricing strategy in our Florida markets to more accurately reflect local market conditions. Changes in pricing accounted for $628,000 in additional margin during the quarter. We continue to believe that our propane operations complement our regulated energy business.

While earnings are more sensitive to weather in this business, for years it has provided excellent returns to our shareholders and has been a strong source of cash flow. Over the last five years, the operating income of this business has increased over 150%. Additionally, the use of propane gas in areas surrounding our service territory complements our strategy of expanding natural gas service over time into the surrounding communities.

Finally BravePoint's results showed improvement during the first quarter with a slight profit for the quarter. Managed services and consulting activity increased revenues during the quarter. BravePoint also recently signed an agreement which may potentially generate $1 million more in consulting services from a large customer. BravePoint has now successfully implemented ProfitZoom for four customers, and has signed contracts for two more implementations. Application evolution which is a component of ProfitZoom has been successfully marketed and has been installed in eight customers, and one more under contract. Sales for these two products are expected to be $839,000 in 2012, compared to $572,000 in 2011.

We are optimistic that additional contracts will add to this revenue stream. We expect continued growth across our businesses to produce further improvements in financial results, remain committed to providing excellent service for our customers and superior returns to our shareholders. Now I will turn the call over to Beth Cooper, Senior Vice President and Chief Financial Officer to provide details on our financial performance for the quarter. Beth?

Thanks, Mike. For the quarter ended March 2012 consolidated net income decreased by $3 million to $10.7 million, or $0.32 per share, to $1.11 in diluted earnings per share. This is due largely to an average 25% decrease in heating degree days across the entire company as compared to the first quarter of 2011.

As Mike mentioned, the impact of weather masked the benefits of system expansions, customer growth, improved margins in the propane business, and higher performance from BravePoint. Detailed discussions of the changes in gross margin and operating expense by segment for the quarter ended March 2012 are provided in our press release and 10-Q, which were issued Wednesday and Thursday respectively. However, I will highlight the key accomplishments and results for the business units during the first quarter of 2012.

Chesapeake's regulated energy businesses, which include our natural gas transmission and distribution and electric distribution operations, generated operating income of $14.8 million for the first quarter of 2012, compared to $16.2 million for 2011. Lower margin due to reduced consumption as a result of extremely warm weather was partially offset by additional margin generated by growth in residential, commercial and industrial customers, for both the Delmarva and Florida Natural Gas distribution operations, and continued expansion of our transmission system and additional transportation services.

We commenced natural gas service to two industrial customers in Lewes, Delaware, and one new facility of an existing customer in eastern Sussex County, Delaware in December 2011 and March 2012. These three customers generated $147,000 in gross margin during the first quarter of 2012. We also generated an additional $158,000 in margin primarily from the addition of nine other large commercial and industrial customers on the Delmarva Peninsula since the beginning of 2011, and $116,000 from a 1% growth in commercial and industrial customers in Florida.

We continue to generate additional margin from residential customer growth on the Delmarva Peninsula as well. 2% growth in residential customers generated $141,000 in additional margin during the quarter. Eastern Shore generated $553,000 in additional margin from transmission system expansions and new transportation services. Eastern Shore is expanding its transmission system in response to our Lewes and Worcester County distribution system expansion. The additional services commenced in November 2011 and March 2012, and generated $249,000 of additional margin in the quarter. Eastern Shore also generated $343,000 as a result of new transportation services which commenced in 2011 associated with a facility expansion of an existing industrial customer.

Operating expenses for the regulated energy segment increased by $1.2 million during the first quarter of 2012. The increase in operating expenses reflected amortization of the FPU acquisition adjustment, higher legal costs associated with an electric franchise dispute, and increased depreciation from continued capital investment. Absent these increases, operating expenses increased by 1% for the quarter. As you might recall, in January 2012 we reported the successful outcome of our comeback filing with the Florida Public Service Commission. The Commission approved the recovery of $34.2 million in acquisition adjustment, and $2.2 million in merger-related costs.

The acquisition adjustment and merger-related costs will be amortized over 30 years and 5 years respectively. Based upon the effective date and outcome of the order, the Company recorded a $588,000 noncash charge for amortization expense during the first quarter of 2012. The Company will record $1.4 million after tax and amortization expense related to these assets in 2012, 2013 and 2014, and $1.1 million after tax annually thereafter until 2039.

It is important to note that the inclusion of the acquisition adjustment in the Company's rate base and the recovery of the acquisition adjustment and merger-related costs through amortization expense, increased the Company's earnings and cash flows above the levels that would otherwise have been achievable. These charges will be noncash and the net effect of the recovery will be positive on cash flow. Operating income for the unregulated energy operations was $5.2 million, as compared to $8.6 million during the first quarter of 2011. The reduction in operating income reflected a $3.8 million decrease in gross margin, partially offset by a $395,000 decrease in operating expenses.

The impact of weather on propane distribution sales and lower trading volumes for the propane distribution and wholesale marketing operations respectively, were the most significant factors impacting margins. The absence of $575,000 in gross margin recorded in 2011 related to proceeds received from an antitrust litigation settlement, also resulted in a quarter-over-quarter decrease in gross margin during the period.

On the positive side, we saw improvement in the retail margins per gallon of propane sold and an increase in sales due to additional propane customers in Florida. The improvement in operating expenses was primarily due to lower incentive compensation and payroll expenses. For the quarter ended March 2012 the Other segment reported operating income of $121,000, compared to operating income of $15,000 for the same quarter of 2011. The increase in operating results reflects higher operating income from BravePoint. Again, I would remind you that we have provided a detailed discussion of the factors contributing to the results for the quarter and full year in our press release which was issued yesterday.

Capital expenditures for the first quarter of 2012 totaled $14.7 million, and we have budgeted capital expenditures for 2012 of $88.5 million. Capital required for these investments is available from cash flow from operations and borrowing capacity. We believe we have access to competitively priced capital to finance our capital expenditures over the long-term, and maintain a solid growing dividend to our shareholders. Future dividends are subject to the discretion of the Company's Board of Directors. Interest expense for the first quarter of 2012 increased by $141,000 compared to the first quarter of 2011. The higher interest expense reflects interest on the $29 million long-term unsecured senior notes we issued last year, as compared to the interest on the short-term debt they replaced. Interest expense will increase as we fund new investments but our effective cost of debt remains attractive given the current interest rate environment.

In summary, Chesapeake Utilities remains fundamentally strong, and growth in our regulated and nonregulated earnings capacity continues. Our balance sheet is also very strong, and we are pleased to be able to increase the dividend by 5.8%. We think the outlook remains bright given our prospect for future growth in earnings and dividends. Now Mike and I would be happy to answer your questions.

(Operator Instructions). Your first question comes from Spencer Joyce with Hilliard Lyons. Your line is open.

Good morning, Mike, good morning, Beth.

Good morning.

First question I have, I want to talk about the propane for a second. Mike, I just missed part of it, but you mentioned a statistic about I believe the operating income had increased 150% for propane. What exactly was that figure?

It was 150%. And that is, a big chunk of that came as a result of the merger with Florida Public Utilities, and actually the resulting of the subsequent increase in the performance of that unit.

Okay. Got you. So a big chunk of that was the merger. Also on the propane side it looks like we did two small acquisitions in Florida that added some customers, but we he also I guess there is a line there that says it was partially offset by a decline in existing customers. What were some of the drivers there? Are you seeing a secular decline, or is it something exogenous there?

We are experiencing a little bit of the continued small commercial growth. There is also there can be in some of the markets some residential turnover, particularly in Florida. But nothing that really stands out, Spencer.

Okay. Got you. Also a question, I saw the trading revenues or gross margin were down considerably, and that was sort of opposite of the retail margins. I guess generally when I think of higher and more volatile prices, the wholesale generally corresponds with the retail. Is it typical to see a disconnect there, or was there something maybe the weather that I guess allowed the retail margin to come up for us, and then I guess still hurt the trading side?

And actually, what you have there on the trading side, the prices were actually less volatile during the first quarter, and I just had a conversation with them yesterday about that, and they have seen some pickup in volatility in April surprisingly enough. In any event during the first quarter there was less volatility, and what you are seeing in our retail margins is something that relates to Florida focusing on the current market conditions, and the markets they are serving down there, and enhancing those margins to bring them into I guess closer to market conditions. And so we didn't see that same expansion on the Delmarva Peninsula.

Okay. And the expansion in the retail margins year-over-year this quarter, I know last year was generally pretty positive in that sense as well. Were we still in this quarter coming off a bit of a low base in Q1 2011, or was it relatively normalized?

Yes, in Florida it was a relatively low base.

Okay. Got you. Also to switch gears here for a second. I know there wasn't a whole lot about it in the press release, but any kind of color you guys can give on the nat gas marketing segment. I know it has had a couple of good news items there. Not a big change in operating results this quarter, but I guess what is kind of your outlook into the future when we may see some incremental EPS from those businesses?

Well, the natural gas marketing business we are in both, Florida, probably larger in Florida than we are in Delmarva, and we are seeing I am going to say growth there I don't want to say consistent growth there, but we don't see a dramatic increase in that growth looking forward. Now there are some initiatives that they are working on which could generate growth, but it is going to take some time before we can project whether that is going to turn out to be significant or not.

Okay. Got you. Alright. Well, I think that is all I had. I look forward to meeting you guys here in a couple of days.

Sure thing. Thanks Spencer.

Thanks.

(Operator Instructions). Your next question comes from Michael Gaugler with Brean Murray Caret. Your line is open.

Good morning, everyone.

Good morning, Michael.

Good morning.

Just two questions. The first one just wondering how you are thinking about the new proposed Commonwealth pipeline, and how that could potentially impact Chesapeake on a go-forward basis?

Well, we are looking at that as an opportunity. We haven't finished our analysis of that, Michael, but we are investigating that potential.

Okay. And then now that you are kind of spread out between the Delmarva Peninsula and Florida, just wondering how the acquisition landscape looks in those two areas, and maybe you could put a little color around that, if you are seeing opportunities, or if you are kind of focused elsewhere in terms of looking to grow the business?

Well, you can tell like for the most recent quarter we talked a little about those two relatively small propane acquisitions in Florida. So we are still, we look at acquisitions all of the time, and we are pretty disciplined when we are evaluating those. So that is always a hard thing to predict. So again as you can see there has been some activity there.

Okay. That is all I had. Thanks.

Alright. You are welcome.

There are no further questions at this time. Mr. McMasters, I turn the call over to you.

Well, thanks everyone for listening in, and hope you have a nice weekend. And we will be talking to you I guess next quarter. Thanks.

Thank you.

Bye.

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