Business Context and Reporting Period
Chesapeake Utilities Corporation is a diversified energy delivery company operating primarily in the Mid-Atlantic, Florida and Ohio. Its businesses include regulated natural-gas distribution and transmission, electric distribution, propane, energy transmission and supply, combined heat and power generation, and mobile compressed-natural-gas services.
This Form 10-K covers the fiscal year ended December 31, 2019. The filing also provides unaudited fourth-quarter information. Chesapeake reports two segments: Regulated Energy and Unregulated Energy.
Key Financial Metrics
| Metric | 2019 | 2018 | Change |
|---|---|---|---|
| Operating revenues | $479.6 million | $490.3 million | Down $10.7 million |
| Operating income | $106.3 million | $94.8 million | Up $11.4 million |
| Income from continuing operations | $61.1 million | $56.9 million | Up $4.3 million |
| Net income | $65.2 million | $56.6 million | Up $8.6 million |
| Diluted EPS | $3.96 | $3.45 | Up $0.51 |
| Cash flow from operations | $103.0 million | $117.4 million | Down $14.4 million |
| Capital expenditures | $199.0 million | $282.9 million | Down $83.9 million |
- Consolidated gross margin, calculated as revenue less cost of sales, was approximately $325.1 million, compared with approximately $299.1 million in 2018. Gross margin is a non-GAAP measure.
- Operating margin was approximately 22.2%; net margin was approximately 13.6%, including the gain on the PESCO divestiture. Continuing-operations net margin was approximately 12.7%.
- Regulated Energy operating income was $86.6 million, up 9.3%; Unregulated Energy operating income was $19.9 million, up 16.4%.
- Net property, plant and equipment increased to $1.464 billion from $1.354 billion. Total assets were $1.783 billion.
- Cash and cash equivalents were $7.0 million at year-end. Net cash used in investing activities was $186.6 million, while financing activities provided $84.5 million.
- Long-term debt, including current maturities, was $485.8 million; short-term borrowings were $247.4 million. Total debt was approximately $733.1 million, compared with $622.4 million at December 31, 2018.
- Equity was $561.6 million. Equity represented 43% of total capitalization including short-term borrowings, below the Company’s stated 50% to 60% target range; management attributed part of the pressure to Hurricane Michael restoration spending.
- The Company declared $1.585 per share of dividends in 2019 and reported 59 consecutive years of dividend payments.
Material Changes Versus the Prior Comparable Period
- Revenue declined primarily because PESCO’s historical results were classified as discontinued operations and because of lower weather-related consumption and propane volumes. Lower commodity costs also reduced reported revenue but benefited margins.
- Operating income increased due to $16.8 million of higher Regulated Energy gross margin and $8.1 million of higher Unregulated Energy gross margin, partially offset by higher operating expenses, depreciation, insurance, employee costs and interest expense.
- Weather was warmer than 2018, reducing gross margin by approximately $4.9 million year over year and approximately $3.4 million versus normal temperatures.
- Eastern Shore and Peninsula Pipeline expansions contributed approximately $12.6 million of incremental gross margin. Natural-gas customer growth contributed approximately $4.7 million.
- Unregulated margin benefited from the 2018 Marlin Gas Services acquisition, the Ohl propane acquisition, favorable retail propane margins and the December 2019 Boulden propane acquisition.
- Interest expense increased $6.1 million to $22.2 million, primarily due to higher long-term debt, reduced capitalization of interest and higher short-term borrowings.
- The effective tax rate on continuing operations decreased to 25.65% from 27.19%.
Guidance, Outlook, Commentary and Unusual Items
- Management expects 2020 capital expenditures, excluding acquisitions, of approximately $185 million to $215 million, including $160 million to $186 million for Regulated Energy.
- Expected growth projects include Del-Mar Energy Pathway, the Callahan pipeline, Western Palm Beach County expansion, Florida GRIP investments, natural-gas infrastructure improvements and the Guernsey Power Station project.
- Management estimated total gross-margin contribution from identified expansions, acquisitions and regulatory initiatives of approximately $61.7 million in 2020 and $69.9 million in 2021. These are project estimates, not consolidated earnings guidance.
- The Company entered into an agreement to acquire Elkton Gas Company, serving approximately 7,000 customers. Closing is expected in the second half of 2020, subject to Maryland PSC approval.
- FPU incurred more than $65 million of Hurricane Michael restoration costs. Interim rate increases became effective in January 2020, with a final Florida PSC ruling expected in the second half of 2020. Recovery remains subject to regulatory approval and interim rates are subject to refund.
- In the fourth quarter, Chesapeake completed the sale of PESCO’s assets and contracts, exited the natural-gas marketing business and received $22.9 million of cash consideration. The Company recorded a $7.3 million pretax gain, or $5.4 million after tax. PESCO also generated a $1.4 million after-tax loss from discontinued operations in 2019.
- Chesapeake acquired Boulden propane assets for approximately $24.6 million, adding approximately 5,200 customers. The acquisition generated approximately $0.3 million of 2019 gross margin and is expected to generate approximately $4.0 million in 2020.
- The Company executed a pension-plan de-risking strategy. Approximately $0.7 million of related settlement expense was charged to earnings because it was allocated to unregulated operations or deemed unrecoverable through rates.
- At December 31, 2019, the Company was in compliance with its debt covenants. It had $125.8 million of available capacity under short-term credit facilities and $250 million of remaining shelf-agreement capacity, subject to lender commitments and conditions.
- Principal risks include regulatory recovery and rate decisions, capital-market access, leverage and interest rates, weather, commodity prices, customer demand, severe storms, pipeline and operational safety, cybersecurity, environmental remediation, pension funding, competition and acquisition execution.
Most Important Facts for Investors to Verify
- Whether FPU receives full and timely regulatory recovery for Hurricane Michael restoration costs and whether any interim rates are refunded.
- The timing, final purchase price and regulatory approval of the Elkton Gas acquisition.
- Execution, cost and customer commitments for Del-Mar Energy Pathway, Callahan, Palm Beach and other major capital projects.
- The effect of warmer or colder weather, propane prices and customer consumption on future gross margin.
- Progress in reducing short-term borrowings and restoring the equity ratio toward the 50% to 60% target.
- Compliance with debt covenants and refinancing of 2020 maturities and expiring credit facilities.
- Environmental remediation costs and the continued recoverability of related regulatory assets.
- The sustainability of dividend growth given capital requirements, debt levels and regulatory restrictions.