Chesapeake Utilities Corp (CPK) 2012 Q2 法說會逐字稿

Good morning; my name is Sanita and I will be your conference operator today. At this time, I would like to welcome everyone to the Chesapeake Utilities Second 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)

Thank you. Beth Cooper, Senior Vice President and Chief Financial Officer, you may begin your conference.

Thank you. Good morning, everyone, and welcome to the Chesapeake Utilities Second 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 annual report on Form 10-K. The annual report on Form 10-K provides 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. Yesterday we announced record-setting earnings for the second quarter of 2012 -- net income of $5.1 million and earnings per share of $0.52.

These results represent an increase of $1.5 million in net income and $0.15 in earnings per share from the second quarter of 2011. $0.52 in earnings per share for the second quarter of 2012 was an increase of 43% over the second quarter of last year.

The single greatest factor contributing to this increase was $1 million of additional net income generated from the expansion of natural gas services on Delmarva and in Florida.

Second quarter results reflect our employees' continuous efforts over the last two or three years to identify opportunities to expand our service to new areas and then turn those opportunities into real projects that generate tangible benefits for our customers, the communities we serve, and our shareholders. We are continuing to develop the ideas and the opportunities while looking for still more.

Now is a great time to be in the natural gas transmission distribution business. It is clean-burning, environmentally friendly, and domestically abundant. But ultimately it's our employees' relentless pursuit of these and other opportunities coupled with the quality of service that they provide that makes a difference.

Beth will provide a more detailed discussion on the financial results after I highlight some of the profitable growth opportunities that we see for the Company going forward. We take a long-term strategic approach toward extending our natural gas systems to customers and communities. This strategy has enabled us to successfully cultivate growth opportunities in the past and we believe it will lead to continued growth in the future.

Our strategy in the natural gas distribution business includes aggressively pursuing new commercial and industrial customers that are using different forms of energy to meet their fuel requirements. By obtaining initial commitments from large customers in these targeted areas, we can then economically extend our service to other potential customers in that area.

On Delmarva, the growth of our distribution business also generates the need for added capacity on Eastern Shore Natural Gas Company, our interstate pipeline subsidiary. This in turn generates growth for our transmission operation.

Let me highlight some of the key accomplishments that are driving growth in 2012. In December 2011, we initiated service to two industrial customers in Lewes, Delaware. These customers are expected to generate approximately $1.4 million gross margin in 2012, including $462,000 from our distribution operations and $935,000 for transportation margin for Eastern Shore Natural Gas. The infrastructure built to serve these two customers positions us to add additional customers in the area and continue the development of our natural gas distribution system.

In March of this year, we commenced service to a second facility of an industrial customer in southern Sussex County. We will add a third facility for that customer in the third quarter of 2012. Based upon expected in-service dates, the 2012 distribution margin impact will be $90,000. On an annual basis, these facilities will generate $154,000 to margins.

Eastern Shore Natural Gas has expanded its system to meet this distribution growth and expects to generate $446,000 in annualized margin when completed, $334,000 of which will be recognized in 2012.

The expansion of service to these facilities is being done in conjunction with the expansion of the transmission system to Worcester County, Maryland, and providing additional opportunities for growth along the route.

Eastern Shore Natural Gas expects to generate approximately $391,000 in annualized margin from transmission services, of which $137,000 will be recognized in 2012.

Similar to southern Sussex County, our distribution opportunities will be aggressively pursuing additional customers to serve in Worcester County.

In June, we announced we have entered into an agreement to purchase the assets of Eastern Shore Gas Company and its affiliates. We believe this acquisition will enable us to grow our natural gas distribution business to Worcester County more quickly. Currently, Eastern Shore Gas provides propane distribution service to approximately 11,000 customers through underground propane distribution systems and 500 customers via bulk delivery service throughout Worcester County. We are evaluating opportunities to convert the underground distribution service to natural gas as a result of our expansion into this area.

We expect this acquisition to close later this year and to be accretive to earnings per share in 2013 and thereafter.

To facilitate future residential and commercial customer conversions and growth in these new areas, we've filed an application with the Delaware Public Service Commission in June. The filing includes several new service offerings, including a monthly fixed charge into the up-front contributions to extend the distribution system, and optional service offerings to assist in the process of converting to natural gas.

A similar strategy to facilitate conversions in Worcester County is being formulated and will be a component of our regulatory filing in Maryland when we seek approval of the Eastern Shore Gas acquisition.

Looking forward, beyond the expansion opportunities I've previously discussed, we expect to begin service in Cecil County, Maryland, the second half of this year. Eastern Shore Natural Gas is working on a transmission expansion that, once completed, will generate an estimated annualized margin of $882,000, $294,000 of which will be recognized in 2012. Again, we are actively pursing additional opportunities to add customers in this area.

We also signed a precedent agreement with NRG Energy Center, Dover, late last year to provide transmission service to NRG's generating facility in Dover, Delaware. Eastern Shore Natural Gas will build new facilities at an estimated cost of $12.5 million to $15 million in service plan. Upon meeting certain conditions, Eastern Shore Natural Gas and NRG will sign a 15-year firm transportation agreement to deliver up to 13,440 megatherms per day.

We expect to begin service in May 2013. Estimated annualized margin from this expansion is between $2.4 million and $2.8 million. We are currently seeking the necessary approvals to initiate construction of the facilities.

We also recently signed a precedent agreement with a refinery in Delaware City to increase service to their facilities. The new contract is for 15,000 megatherms per day, which replaces an existing contract to supply 9,514 megatherms per day and is expected to generate incremental annualized margin of approximately $600,000 beginning November 2013.

We are pursuing similar growth strategies in Florida. In April, we received approval from the Florida PSC for our pipeline subsidiary to provide (inaudible) transportation service to Nassau County, Florida. The new transportation service enables FPU to initiate distribution service in that area and is expected to generate $2.1 million in margin and (inaudible).

Our natural gas distribution and transmission operations are strong and well positioned for growth going forward.

Second quarter results in our unregulated energy operations were down slightly. Decreased consumption, principally due to weather; lower retail margins in the propane business on Delmarva; and lower contribution from the natural gas marketing business accounted for the reduction in operating income.

While the bottom-line results in this segment reflected the warmer weather, our efforts in Florida to adjust our retail prices to reflect current market conditions accounted for an increase in margin of $452,000 during the quarter.

We continue to believe that our propane operations did well within our regulated energy business. While its earnings are more sensitive to weather, this provided solid returns to our shareholders and has been a strong source of cash flow. Additionally, the use of propane gas in areas surrounding our service territory complements our strategy of expanding natural gas service over time into surrounding communities.

We are also pleased to see the improvement in BravePoint's results during our second quarter. The increased results reflect a growth that we're seeing in several areas. Over all, second quarter revenues are up 40%, gross margin is up 58% (ph) over the second quarter of last year.

Recall that last year was a tough year as we were finalizing the development and initiating the rollout of profits. In this regard, the ProfitZoom related business revenues were up approximately 167% during second quarter. ProfitZoom is an important part, but still only a part of the story. BravePoint's core consulting and product revenues were up $1 million, or 34%, for the quarter.

To continue the growth at our current pace, we will be increasing our resources to both execute on current opportunities and identify new opportunities to fuel future growth.

We are at the early stages of several natural gas expansions on the Delmarva Peninsula. These expansions will not only require the construction or conversion of distribution facilities but also require the conversion of customers' appliances or equipment inside their homes.

To facilitate this growth, we have reorganized our Delmarva natural gas operations and are increasing staffing levels.

Secondly, as a result of BravePoint's growth over the last several quarters, we are continuing to adjust staffing levels to drive increased revenues there.

Finally, we'll be adding resources in several key functional areas to increase our capacity for future growth. These areas include, among others, human resources, communications, and strategic business development functions.

We expect continued growth in all our business units to further improve financial results, which will allow us to provide shareholders superior growth in both earnings per share and dividends. We remain committed to providing excellent service to our customers and a great work environment for our employees and superior returns to our shareholders.

Now I'll turn the call over to Beth Cooper, Senior Vice President and Chief Financial Officer, to provide details on the financial performance.

Thanks, Mike. As Mike indicated, the results from the second quarter of 2012 demonstrate the growth potential that we have in our businesses. The Company's net income for the quarter was $5.1 million, or $0.52 per share. This represents an increase of $1.5 million, or $0.15 per share, compared to the second quarter of 2011. These quarter-over-quarter increases represent 44% and 43% growth in terms of net income and earnings per share growth, respectively.

For the quarter ended June 2012, consolidated operating income increased by $2.7 million to $10.5 million, largely due to growth in the Company's natural gas transmission and distribution businesses and increased revenues from BravePoint, the Company's advanced information services subsidiary.

These improvements were partially offset by lower operating income from the unregulated energy segment, which was impacted by lower Delmarva propane volume sold in retail margins per gallon.

Detailed discussions of the changes in gross margin and operating expenses by business segment for the quarter and six months ended June 2012 are provided in our press release and Form 10-Q, which were issued yesterday. However, I will highlight the key accomplishments and results for the business segments during the second quarter of 2012.

Chesapeake's regulated energy businesses, which include our natural gas transmission and distribution and electric distribution operations, generated operating income of $10.5 million for the second quarter of 2012, up from $7.8 million in 2011.

Higher margin due to new gas transmission services generated $1.1 million in additional margin during the second quarter. This increased margin is a result of system expansions to bring natural gas to Lewes and southern Delaware, Worcester County, Maryland, and Nassau County, Florida, as well as new transmission services for an existing industrial customer.

Gross margin from distribution service to new large commercial and industrial customers as a result of these expansions represented $139,000 during the second quarter of 2012.

Mike highlighted our major expansion projects. Margin from these additions is expected to total approximately $3.5 million for 2012 and generate annualized margin of approximately $4.5 million going forward.

Additionally, the Company has executed contracts or precedent agreements for additional natural gas transmission services that could generate nearly $5 million to $5.5 million in annualized margins beginning in 2014.

In addition to the margin from the new services added in 2012, the Company benefited from increased margin of $161,000 during the second quarter resulting from services added to serve 10 other large Delmarva commercial and industrial customers in 2011. These new services will contribute an additional $370,000 in margin over 2011 during the remainder of 2012 and should generate annualized margin of $960,000.

In Florida, growth in commercial and industrial customers generated $241,000 in additional gross margin.

Increased margin from higher consumption and an adjustment to accrued revenue, primarily in Florida, and new rates implemented by Eastern Shore Natural Gas Company pursuant to a rate change settlement, accounted for the remainder of the increase in margins.

Operating expenses for the regulated energy segment increased by $91,000 in the second quarter of 2012 as a result of the amortization expense associated with the FPU acquisition adjustment and merger-related costs and higher depreciation expense due to increased capital investments made during 2011.

These costs were largely offset by lower payroll costs resulting from the merger integration.

As you can see, there is tremendous growth from our natural gas business.

The unregulated energy operations reported an operating loss of $401,000 for the second quarter of 2012, compared to operating income of $80,000 for the second quarter of 2011. The change in results reflects a $546,000 reduction in gross margin, principally due to lower consumption from warmer weather, a decrease in retail propane margins per gallon on the Delmarva Peninsula, and slightly lower operating income from our natural gas marketing subsidiary.

The lower margin was partially offset by a $73,000 decrease in operating expenses.

On the positive side, in Florida we saw improvement in the retail margin per gallon of propane sold and an increase in margin due to the addition of propane customers from the acquisitions we completed in late 2011 and early 2012.

Xeron also generated an increase in gross margin as a result of higher margins in trading activity.

For the quarter ended June 2012, the other segment reported operating income of $351,000, compared to an operating loss of $91,000 in the same period of 2011. The increase in operating results was attributable to higher operating income from BravePoint. BravePoint reported operating income of $238,000 in the second quarter of 2012, compared to a loss of $188,000 in 2011, or an increase of $426,000.

BravePoint generated increased sales for its ProfitZoom and Application Evolution products and associated services during the quarter as well as increased consulting revenues and product sales from its other lines of business. Revenues for the ProfitZoom and Application Evolution products and associated services increased 167% over the second quarter of 2011.

BravePoint continues to aggressively market ProfitZoom and Application Evolution to customers in the fire suppression industry as well as to other industries.

For 2012, we are projecting to generate total sales from these products of more than $1.2 million.

Again, I would remind you that we have provided a detailed discussion of the factors contributing to the results for the quarter and six months ended in our press release, which was issued yesterday.

Capital expenditures totaled $19 million for the second quarter of 2012, and $34 million year to date. We expect capital expenditures for the year to be approximately $90 million, although we recognize that actual capital expenditures typically lag our forecasts.

Capital required for these investments is available from cash flow from operations and borrowing capacity. In June, we executed a one-year $40 million incremental line of credit facility with an existing commercial lender to ensure financial flexibility over the next 12 months.

We believe we have access to competitively priced capital to finance our capital expenditures over the long term.

Interest expense for the second quarter of 2012 increased by approximately $127,000, compared to 2011. The higher interest expense reflects the higher interest rate on the $29 million unsecured senior notes we issued last year, as compared to the short-term debt they replaced. This increase in interest was offset by lower interest expense from principal repayments on our other long-term debt.

Given our recent earnings and cash flow, our Board of Directors increased the annualized dividend by $0.08 per share, or 5.8%, in May of this year. With our expectation for continued earnings growth, the Board felt that this increase in the dividend was both justified based on our past performance and sustainable given our future prospects for growth.

In summary, we are positioned to achieve another year of strong performance despite the challenging weather experienced early in the year. Chesapeake remains fundamentally strong and growth should continue in both regulated and nonregulated earnings.

We believe that our superior potential for earnings and dividend growth makes our Company an excellent investment opportunity.

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

(Operator Instructions) John Hanson, Praesidis.

Sorry; good morning.

Good morning, John.

Just to follow up on the financing -- lots of good projects, lots of opportunities there. Just to make sure I heard it correctly -- sounded like you're looking to do most of that expansion with debt and existing cash flow. Is that correct -- rather than new equity any time in the near future?

Yes John, as our balance sheet shows, we're pretty strong on the equity side right now and so we believe our cash flow from operations coupled with our short-term debt, and then at some point potentially a long-term debt financing, will be the route that we'll choose to go.

Okay, perfect. Thank you very much.

We have no further questions at this time. I'll turn the call back over to the presenters.

Well thanks, everyone, for listening in and we'll look forward to talking to you next quarter. Thank you; bye.

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