Business Context and Reporting Period
Chesapeake Utilities Corporation filed its Annual Report on Form 10-K for the fiscal year ended December 31, 2022. The company operates primarily in the Mid-Atlantic, Florida, North Carolina, South Carolina and Ohio and delivers natural gas, electricity and propane; provides natural gas transmission, CNG/LNG/RNG transportation, electricity and steam generation, and related services.
The company reports two segments: Regulated Energy, comprising natural gas and electric distribution and natural gas transmission, and Unregulated Energy, comprising propane, energy transmission and supply, energy generation, mobile CNG services and renewable-energy investments.
Key Financial Metrics
| Metric | 2022 | 2021 | Change |
|---|---|---|---|
| Operating revenue | $680.7 million | $570.0 million | +19.4% |
| Operating income | $142.9 million | $131.1 million | +9.0% |
| Net income | $89.8 million | $83.5 million | +7.6% |
| Diluted EPS | $5.04 | $4.73 | +6.6% |
| Operating margin | 21.0% | 23.0% | Down 2.0 percentage points |
| Cash flow from operations | $158.9 million | $150.5 million | +5.6% |
| Capital expenditures | $140.7 million | $227.8 million | Down 38.2% |
Regulated Energy revenue increased to $429.4 million and operating income increased to $115.3 million. Unregulated Energy revenue increased to $280.8 million and operating income increased to $27.4 million.
GAAP gross margin was $285.9 million, compared with $263.6 million in 2021. Management's non-GAAP adjusted gross margin was $420.2 million, compared with $383.0 million. Adjusted gross margin represented approximately 61.7% of operating revenue; the filing cautions that this measure is not equivalent to GAAP gross margin.
Income from continuing operations before taxes was $123.6 million, and income tax expense was $33.8 million, producing a 27.3% effective tax rate versus 25.9% in 2021. Interest charges increased to $24.4 million from $20.1 million, primarily because of higher Revolver rates and additional long-term debt.
Liquidity, Capitalization and Cash Flow
- Operating cash flow was $158.9 million. Investing cash outflow was $136.4 million, including $128.3 million of cash capital expenditures and $11.8 million for acquisitions.
- Financing cash outflow was $21.2 million, including $35.1 million of dividends, $20.6 million of net repayments under credit lines, and $31.9 million of net long-term debt proceeds.
- Cash and cash equivalents were $6.2 million at December 31, 2022.
- Long-term debt, including current maturities, was $599.9 million; short-term borrowings were $202.2 million. Total debt was approximately $802.0 million.
- Stockholders' equity was $832.8 million. Debt represented approximately 49% of total capitalization including short-term borrowings, while equity represented approximately 51%.
- The $400.0 million Revolver had $192.0 million of available credit at year-end, after considering outstanding borrowings and $5.8 million of letters of credit.
- The company was in compliance with all debt covenants, including the Revolver funded-indebtedness covenant of no more than 65%.
- Quarterly dividends totaled $2.085 per share in 2022, and the company reported 62 consecutive years of cash dividends.
Material Changes Versus the Prior Comparable Period
- Revenue growth was driven by higher regulated infrastructure and transmission contributions, customer growth and consumption, interim Florida rate relief, propane acquisitions and margins, and increased CNG/RNG/LNG demand.
- Regulated Energy adjusted gross margin increased $19.1 million, including contributions from transmission expansions of $4.4 million, regulated infrastructure programs of $3.9 million, natural gas customer growth of $3.7 million and Florida interim rates of $2.5 million.
- Unregulated Energy adjusted gross margin increased $18.1 million. Propane acquisitions contributed $10.2 million, higher propane margins and fees contributed $3.6 million, and CNG/RNG/LNG demand contributed $3.5 million.
- Operating expenses increased due to acquired-business costs, higher depreciation and property taxes, labor costs, facilities and maintenance expenses, and vehicle fuel costs.
- The company acquired Davenport Energy's Siler City propane assets for approximately $2.0 million and Planet Found Energy Development for $9.5 million during 2022. Planet Found's 2022 revenue and operating income were not material.
- Interest expense increased by $4.2 million, and the company transitioned its Revolver benchmark from LIBOR to SOFR plus a 10-basis-point adjustment.
- Weather was more favorable to earnings than in 2021, contributing approximately $1.5 million of additional adjusted gross margin.
Guidance, Outlook, Risks and Unusual Items
Management forecast 2023 capital expenditures of $200 million to $230 million, excluding potential acquisitions. The forecast includes pipeline expansions, Florida GRIP and storm-protection investments, the Elkton STRIDE program, information technology enhancements and other strategic investments.
In January 2023, the Florida PSC approved approximately $17.2 million of annual permanent rate relief for the company's Florida natural gas distribution businesses. Final rates became effective March 1, 2023. The company had previously received approximately $7.7 million of annualized interim rates effective in September 2022.
Management estimated adjusted gross margin contributions in 2023 from major initiatives of approximately $83.1 million, compared with $61.9 million in 2022. These estimates are not GAAP earnings guidance and depend on project timing, regulatory approvals, construction and customer demand.
- Key financial risks include rising interest rates, access to debt and equity markets, debt covenant compliance, inflation, supply-chain constraints and pension funding requirements.
- Operating risks include severe weather, hurricanes, pipeline leaks or outages, supply interruptions, cybersecurity incidents, labor availability, construction delays, customer losses and integration of acquisitions.
- Regulatory and legal risks include rate-case outcomes, pipeline-safety requirements, environmental remediation, climate-related regulation, tax matters and the potential inability to recover costs through customer rates.
- Environmental liabilities for former manufactured-gas-plant sites were approximately $4.3 million at year-end. The estimated remaining cleanup cost for three sites was $0.3 million to $0.9 million, while the West Palm Beach site was estimated at $3.3 million to $14.2 million.
- The company had approximately $1.0 billion of contractual obligations, including $600.8 million of long-term debt principal, $382.4 million of natural gas, electric and propane supply obligations, and $288.6 million of transmission-capacity commitments.
- Unusual items affecting comparability included the absence of 2021 CARES Act tax benefits, the 2021 regulatory deferral of COVID-19 expenses, gains on asset sales and 2022 interest income related to a federal tax refund.
Important Facts for Investors to Verify
- Verify the timing and realized earnings impact of the $17.2 million Florida rate relief and other planned regulatory initiatives.
- Assess whether the planned $200 million to $230 million of 2023 capital spending can be funded while maintaining target leverage and dividend capacity.
- Review Revolver maturity and refinancing exposure, particularly the 364-day tranche expiring in August 2023 and the planned $80.0 million Senior Notes issuance.
- Reconcile management's adjusted gross margin and project contribution estimates to GAAP results and evaluate sensitivity to weather, commodity prices and customer demand.
- Monitor propane acquisition integration, unregulated margin sustainability and the contribution from CNG/RNG/LNG and renewable-energy projects.
- Evaluate environmental remediation estimates, regulatory recovery assumptions, pension funding exposure and contingent guarantees.
- Review the audited financial statements and notes for detailed regulatory assets and liabilities, debt covenants, derivatives, commitments and contingencies.