Chesapeake Utilities Corporation — 2023 Q2 Form 10-Q Summary
Business context and reporting period
Chesapeake Utilities is a diversified energy company providing regulated natural gas and electric distribution, natural gas transmission, propane distribution, electricity and steam generation, compressed natural gas services, and other energy-related services, primarily on the U.S. East Coast. This unaudited Form 10-Q covers the three and six months ended June 30, 2023, compared with the corresponding 2022 periods. Results are seasonal, with generally higher revenue and earnings in the first and fourth quarters.
Financial performance and position
| Metric | Three months ended June 30, 2023 | Three months ended June 30, 2022 | Six months ended June 30, 2023 | Six months ended June 30, 2022 |
|---|---|---|---|---|
| Operating revenue | $135.6 million | $139.5 million | $353.7 million | $362.4 million |
| Operating income | $28.3 million | $26.5 million | $83.3 million | $81.3 million |
| Net income | $16.1 million | $17.1 million | $52.5 million | $54.0 million |
| Diluted EPS | $0.90 | $0.96 | $2.94 | $3.04 |
| Operating cash flow | Not separately presented | Not separately presented | $149.0 million | $123.8 million |
| Capital expenditures | Not separately presented | Not separately presented | $90.3 million | $65.1 million |
Revenue declined 2.8% in the quarter and 2.4% year to date. Operating income increased 7.1% in the quarter and 2.4% year to date. Net income decreased 5.4% in the quarter and 2.8% year to date. Diluted EPS decreased by $0.06 in the quarter and $0.10 year to date. Calculated operating margins were approximately 20.9% in the quarter and 23.5% year to date, compared with approximately 19.0% and 22.4%, respectively, in the prior-year periods.
Second-quarter adjusted gross margin, a non-GAAP measure, was $99.8 million, up from $92.4 million. Six-month adjusted gross margin was $229.3 million, up from $218.1 million. Regulated Energy adjusted gross margin increased to $77.3 million in the quarter and $164.2 million year to date. Unregulated Energy adjusted gross margin increased slightly to $22.6 million in the quarter and $65.2 million year to date.
At June 30, 2023, total assets were $2.20 billion and stockholders’ equity was $864.2 million. Long-term debt, including current maturities, was $665.7 million, short-term borrowings were $95.8 million, and cash and cash equivalents were $4.2 million. The company reported $298.3 million of available Revolver credit and $255.0 million of remaining capacity under its Prudential and MetLife shelf agreements.
Net cash provided by operating activities increased to $149.0 million, primarily from net income and noncash adjustments, regulatory asset and liability changes, working-capital benefits, and deferred taxes. Investing cash use increased to $89.0 million, principally due to capital expenditures. Financing cash use was $62.0 million, including $104.2 million of net Revolver repayments, $19.0 million of dividends, and $65.8 million of net long-term debt borrowings.
Material changes versus the prior comparable period
- Regulated Energy operating income increased $3.5 million, or 13.4%, in the quarter and $6.4 million, or 10.5%, year to date.
- Unregulated Energy operating income declined $1.6 million in the quarter and $4.4 million year to date, despite broadly stable adjusted gross margin, due primarily to higher employee, facilities, maintenance, depreciation, and property-tax costs.
- The Florida natural gas rate proceeding contributed approximately $3.9 million of second-quarter adjusted gross margin and $8.0 million for the first six months. Permanent rates became effective March 1, 2023, following approval of approximately $17.2 million of annual rate relief.
- Warmer weather reduced adjusted gross margin by approximately $1.1 million in the second quarter and $9.1 million for the first six months compared with the prior-year periods. Management stated that first-half northern service-territory temperatures were more than 20% warmer than historical averages.
- Interest charges increased $1.1 million in the quarter and $3.0 million year to date because of higher borrowing rates and additional long-term debt. The average Revolver borrowing rate was 5.25% in the quarter and 5.18% year to date, versus 1.52% and 1.12% in the respective 2022 periods.
- Second-quarter and year-to-date 2022 results included a nonrecurring after-tax gain of approximately $1.4 million from a building sale. Six-month 2023 results included a $1.3 million tax benefit from a Pennsylvania state tax-rate reduction.
- On March 14, 2023, the company issued $80.0 million of 5.43% senior notes due 2038, using proceeds to repay Revolver borrowings and fund capital expenditures.
Guidance, outlook, commentary, risks, and unusual items
Management forecasts 2023 capital expenditures of $200 million to $230 million, excluding acquisitions, including $152 million to $175 million for Regulated Energy and $46 million to $52 million for Unregulated Energy and other activities. Management expects capital spending to support pipeline expansions, distribution-system growth, regulatory programs, information technology enhancements, and strategic investments.
Key projects include the Southern Expansion, Wildlight, St. Cloud/Twin Lakes, Clean Energy, Lake Wales, Newberry, and other pipeline initiatives. The company expects the Southern Expansion to enter service in the fourth quarter of 2023, St. Cloud/Twin Lakes and Clean Energy projects in the third quarter of 2023, and first RNG injection at the Full Circle Dairy project in the first half of 2024.
The Florida GUARD program was approved in August 2023, after the reporting period, with approximately $205 million of projected capital expenditures over ten years; reliability projects valued at approximately $10 million were excluded. The company expects the GUARD program to generate less than $0.1 million of 2023 adjusted gross margin and approximately $1.4 million in 2024.
The 364-day Revolver tranche was scheduled to expire in August 2023, and management expected renewal. The five-year tranche expires in August 2026. The company was in compliance with its Revolver covenant requiring a funded indebtedness ratio of no more than 65% at fiscal year-end.
Principal risks include regulatory approval and rate recovery, environmental remediation, weather variability, commodity prices, interest rates, counterparty credit, construction timing and costs, cybersecurity, operational hazards, competition, access to capital, customer demand, labor availability, and climate-related regulation. Environmental liabilities associated with former manufactured gas plant sites were approximately $3.4 million at June 30, 2023. Management expects remediation costs, including currently unrecovered costs, to be recoverable from customers through rates.
The company had $14.2 million of subsidiary guarantees, $4.0 million of specific-purpose guarantees, and $5.9 million of letters of credit outstanding at June 30, 2023. None had been drawn, and management did not expect counterparties to draw on them. Management stated that pending legal and regulatory proceedings were not expected to materially affect consolidated financial position, results of operations, or cash flows.
Most important facts for investors to verify
- Whether Florida rate relief and other regulatory programs deliver the projected adjusted gross margin and capital recovery.
- The timing, cost, and regulatory status of major pipeline, clean-energy, GUARD, and storm-protection projects.
- Exposure to higher SOFR-based borrowing costs and the August 2023 Revolver renewal.
- Whether warmer-than-normal weather, propane-to-natural-gas conversions, and customer consumption trends persist.
- Progress toward the $200 million to $230 million 2023 capital-expenditure forecast and the associated financing requirements.
- Environmental remediation estimates and the continued recoverability of related costs through rates.
- The effect of the nonrecurring 2022 building-sale gain and 2023 tax benefit when assessing underlying earnings trends.
- Reconciliation of adjusted gross margin to GAAP gross margin, because adjusted gross margin is a non-GAAP measure that may not be comparable with other companies.