Chesapeake Utilities Corporation — 2020 First-Quarter Form 10-Q Summary
Business Context and Reporting Period
Chesapeake Utilities is a diversified energy delivery company operating regulated natural gas and electric distribution and transmission businesses, unregulated propane and energy services, and electricity and steam generation operations, primarily in the Mid-Atlantic, Florida, Pennsylvania and Ohio. This unaudited Form 10-Q covers the three months ended March 31, 2020, compared with the three months ended March 31, 2019.
The company completed the sale of PESCO’s assets and contracts in the fourth quarter of 2019 and exited the natural gas marketing business. PESCO is presented as discontinued operations for all periods shown. Chesapeake also acquired certain propane assets of Boulden in December 2019.
Key Financial Metrics
| Metric | Q1 2020 | Q1 2019 | Change |
|---|---|---|---|
| Operating revenues | $152.7 million | $160.5 million | Down $7.8 million |
| Gross margin | $99.8 million | $99.5 million | Up $0.3 million |
| Operating income | $42.1 million | $44.1 million | Down $2.0 million |
| Income from continuing operations | $29.0 million | $28.8 million | Up $0.2 million |
| Net income | $28.9 million | $28.7 million | Up $0.3 million |
| Diluted EPS | $1.76 | $1.74 | Up $0.02 |
| Cash provided by operating activities | $58.8 million | $40.5 million | Up $18.3 million |
| Capital expenditures paid | $35.2 million | $43.2 million | Down $8.0 million |
Gross margin was approximately 65.4% of operating revenue, compared with approximately 62.0% in the prior-year quarter. Operating margin was approximately 27.6%, compared with 27.5%, while net margin was approximately 18.9%, compared with 17.9%.
At March 31, 2020, cash and cash equivalents were $4.0 million, compared with $7.0 million at December 31, 2019. Short-term borrowings were $254.3 million, long-term debt including current maturities was $455.8 million, and stockholders’ equity was $584.1 million. Total capitalization including short-term debt was $1.294 billion, with equity representing 45% of total capitalization versus the company’s 50% to 60% target range.
Net cash used in financing activities was $30.3 million, including repayment of a $30.0 million term note, $6.5 million of dividends and $11.7 million of net borrowing under lines of credit. The company had $117.1 million of available capacity under short-term credit facilities at March 31, 2020.
Material Changes Versus the Prior Comparable Period
- Revenue declined primarily because PESCO’s large natural gas marketing revenues were reclassified to discontinued operations and because of lower unregulated energy revenue. Regulated energy revenue was broadly stable.
- Warmer weather reduced customer consumption and gross margin by approximately $4.2 million versus the first quarter of 2019 and by approximately $5.1 million versus normal weather. Delmarva and Ohio weather was approximately 20% and 17% warmer, respectively.
- Gross margin benefited from $1.9 million from the Boulden propane acquisition, $1.2 million from higher retail propane margins, $1.1 million from natural gas distribution customer growth and $1.0 million from Peninsula Pipeline expansions.
- Operating income declined despite higher gross margin because operating expenses increased by $3.7 million, including higher depreciation, insurance, facilities and employee-related costs. A $3.2 million gain from the sale of two properties partially offset the decline.
- Other income increased by $3.4 million, primarily from the property-sale gains. Interest expense increased by $0.2 million because of additional long-term debt, partly offset by lower short-term borrowing costs.
- The effective income tax rate increased to 26.7% from 25.0%, partly because the first quarter of 2019 included Florida tax savings related to the Tax Cuts and Jobs Act.
- The company adopted the current expected credit loss standard on January 1, 2020, recording an immaterial $30,000 cumulative reduction to retained earnings.
Guidance, Outlook, Commentary and Risks
The filing does not provide formal earnings or EPS guidance. Management expects 2020 capital expenditures, excluding acquisitions, of approximately $185 million to $215 million. The program includes pipeline expansions, Florida GRIP investments, natural gas infrastructure, information technology and other strategic projects. Management cautions that actual spending may vary because of economic conditions, regulatory matters, customer growth, financing availability and COVID-19-related delays.
Management expects the Elkton Gas acquisition, serving approximately 7,000 customers in Maryland, to close in the third quarter of 2020, subject to Maryland PSC approval. The company expects Boulden to contribute approximately $3.8 million of gross margin in 2020 and $4.2 million in 2021, while the Elkton contribution remains to be determined.
COVID-19 had an immaterial effect on first-quarter results and financial position, but the future effect on operations, liquidity and financial condition could not be estimated. Chesapeake was classified as an essential business and continued operations and construction with remote work, protective equipment and social-distancing measures. Customer disconnections for non-payment were temporarily suspended, and the company is tracking incremental pandemic costs for possible regulatory recovery. Maryland authorized regulatory-asset treatment for prudently incurred COVID-19 costs beginning March 16, 2020.
To strengthen liquidity, the company obtained commitments in April 2020 for an additional $50.0 million of short-term capacity and agreed to terms for another $45.0 million expected to be finalized in May. It also arranged proposed long-term debt issuances of $50.0 million with Prudential and $40.0 million with New York Life, and agreed to commercial terms for a new $150.0 million MetLife shelf facility. As of May 5, 2020, reported remaining shelf capacity was $310.0 million, including subsequent amendments and renewals.
Significant risks include the duration and severity of COVID-19, reduced energy demand, customer credit losses, supply-chain disruption, regulatory recovery and rate-case outcomes, weather, commodity prices, interest rates, environmental remediation, construction costs and delays, cyber risks, access to capital markets, and integration or approval of acquisitions. The company had $17.9 million of corporate guarantees and $5.4 million of letters of credit outstanding at March 31, 2020; no letters of credit had been drawn.
Other notable contingencies include the Hurricane Michael regulatory proceeding in Florida, with a decision scheduled for September 2020, and environmental liabilities of approximately $7.6 million related to FPU manufactured-gas-plant sites. Management states that pending legal and regulatory matters are not expected to have a material effect, although outcomes remain subject to regulatory and other uncertainties.
Important Facts for Investors to Verify
- Whether COVID-19 materially affects demand, collections, operating costs, capital projects or regulatory recovery after the first quarter.
- The closing, purchase price, financing and earnings contribution of the Elkton Gas acquisition.
- The final outcome of the Hurricane Michael proceeding and the treatment of interim Florida rate increases, including potential refunds.
- The timing and completion of the proposed Prudential, New York Life and MetLife debt transactions and the refinancing of short-term borrowings.
- Progress, cost and expected returns from the Del-Mar Energy Pathway, Callahan Pipeline, Western Palm Beach and other capital projects.
- Whether the 45% equity-to-total-capitalization ratio improves toward management’s 50% to 60% target.
- The effect of warmer-than-normal weather, propane prices, customer demand and unregulated margin volatility on full-year results.
- Changes in the company’s allowance for credit losses and customer payment behavior as economic conditions develop.