CHESAPEAKE UTILITIES CORP quarterly report, Q2 FY2022

Chesapeake Utilities Corporation — Q2 2022 Form 10-Q Summary

Business context and reporting period

Chesapeake Utilities is a diversified energy company providing regulated natural gas and electric distribution and transmission, propane distribution, electricity and steam generation, compressed natural gas services, and related energy services, primarily in the eastern United States. This unaudited Form 10-Q covers the three and six months ended June 30, 2022, compared with the comparable 2021 periods.

Results are seasonal, with revenue and earnings generally higher in the first and fourth quarters because of colder-weather energy demand. COVID-19 restrictions were predominantly lifted in the company’s service territories by June 30, 2022.

Financial performance and key metrics

Metric	Three months ended June 30, 2022	Three months ended June 30, 2021	Six months ended June 30, 2022	Six months ended June 30, 2021
Operating revenue	$139.5 million	$111.1 million	$362.4 million	$302.3 million
Operating income	$26.5 million	$22.6 million	$81.3 million	$74.2 million
Income before taxes	$23.2 million	$19.0 million	$73.7 million	$65.8 million
Net income	$17.1 million	$13.8 million	$54.0 million	$48.3 million
Diluted EPS	$0.96	$0.78	$3.04	$2.75
Adjusted gross margin	$92.4 million	$84.4 million	$218.1 million	$201.3 million

Second-quarter revenue increased 25.6% and net income increased 23.5% year over year. For the first six months, revenue increased 19.9% and net income increased 11.8%. Operating income increased 17.2% in the quarter and 9.7% year to date.

The filing does not present a consolidated GAAP operating margin explicitly. Based on reported figures, operating income as a percentage of revenue was approximately 19.0% in the second quarter and 22.4% for the first six months, compared with 20.3% and 24.5%, respectively, in the prior-year periods. Adjusted gross margin was approximately 66.2% of revenue in the quarter and 60.2% year to date, versus 76.0% and 66.6% in the comparable periods; these percentages are affected by the company’s non-GAAP definition and segment mix.

Segment performance and material changes

Regulated Energy: Second-quarter revenue was $92.2 million and operating income was $25.8 million, compared with $80.9 million and $22.8 million in 2021. Six-month operating income increased to $60.5 million from $55.5 million. Growth reflected pipeline expansions, Florida GRIP and other infrastructure programs, customer growth, increased consumption, and the Escambia Meter Station acquisition.
Unregulated Energy: Second-quarter revenue was $53.5 million and operating income was $0.6 million, compared with revenue of $34.8 million and an operating loss of $0.5 million in 2021. Six-month operating income rose to $20.6 million from $18.6 million. Results benefited from the Diversified Energy propane acquisition, higher propane margins and service fees, increased CNG demand, and improved Aspire Energy performance, partly offset by acquisition-related expenses, higher fuel costs, and depreciation.
Acquisitions: Sharp Energy acquired Davenport Energy’s Siler City propane assets on June 13, 2022, for approximately $2.0 million, adding about 850 customers and expected annual propane distribution of approximately 0.4 million gallons. The 2021 Diversified Energy acquisition added approximately 19,000 customers and continued to contribute to 2022 results.
Other items: Other income increased primarily because of gains on asset sales. Six-month results also included approximately $2.0 million of net unrealized investment losses, compared with a net unrealized investment gain of approximately $1.0 million in the prior-year period.

Cash flow, balance sheet, debt, and liquidity

Operating cash flow for the first six months was $123.8 million, down from $134.2 million in 2021.
Capital expenditures were approximately $65.1 million in the cash flow statement, while management separately described capital expenditures of approximately $61.0 million for the first six months. Investing cash flow was an outflow of $64.2 million.
Financing cash flow was an outflow of $60.4 million, including $83.4 million of net repayments under lines of credit, $10.5 million of long-term debt repayments, $16.6 million of dividends, and $49.9 million of long-term debt proceeds.
Cash and cash equivalents were $4.2 million at June 30, 2022, compared with $5.0 million at December 31, 2021.
Long-term debt, including current maturities, was $607.3 million; short-term borrowings were $137.0 million, down from $221.6 million at year-end 2021. Short-term borrowings had a weighted-average interest rate of 2.38% at June 30, 2022, compared with 0.83% at year-end.
Total available credit under the $400.0 million revolving facility was $257.7 million at June 30, 2022. The company was in compliance with its funded-indebtedness covenant, which requires a ratio of no more than 65% at each fiscal year-end.
Stockholders’ equity was $815.7 million, and equity represented 52% of total capitalization including short-term debt, within management’s 50% to 60% target range.

Guidance, outlook, risks, contingencies, and unusual items

Management reduced its 2022 capital expenditure forecast to $140 million to $175 million, excluding acquisitions, because of regulatory delays and supply-chain disruptions. Management expects the timing delays to be temporary.
Major growth initiatives include pipeline expansions, Florida GRIP, the Elkton STRIDE program, CNG/RNG/LNG transportation, and propane acquisitions. Management estimated 2022 adjusted gross margin contributions of approximately $56.8 million from identified major projects, rising to approximately $63.3 million in 2023.
The Florida natural gas businesses filed a rate case seeking approximately $24.1 million of permanent annual rate relief effective January 1, 2023, and interim relief. In August 2022, interim rates of approximately $7.7 million annualized were approved, subject to refund; the final outcome remained pending.
The 364-day revolver tranche was scheduled to expire in August 2022, and the company was negotiating renewal. Borrowings were expected to transition from LIBOR to SOFR. Rising interest rates increased revolver pricing and interest expense; additional rate increases could further increase costs.
Environmental liabilities for former manufactured gas plant sites were approximately $4.8 million at June 30, 2022. Remaining cleanup estimates included $0.3 million to $0.9 million for three sites and $3.3 million to $14.2 million for the West Palm Beach site. Management expects costs to be recoverable through insurance and customer rates, although some recovery remains subject to regulatory approval.
The company had approximately $11.4 million of subsidiary guarantees, $2.0 million of specific-purpose guarantees, and $5.3 million of outstanding letters of credit. In July 2022, it entered into an additional $7.1 million guarantee related to the Florida rate case.
Key risks include regulatory and rate-case outcomes, cost recovery, environmental obligations, weather, commodity prices, interest rates, supply-chain disruptions, project approvals and construction costs, cybersecurity, counterparty credit, competition, and the ability to access debt and equity markets.
Management stated that pending legal and regulatory matters are not expected to have a material effect on consolidated financial position, results of operations, or cash flows, but actual outcomes may differ from current estimates.

Most important facts for investors to verify

Final resolution and effective timing of the Florida natural gas rate case, including potential refunds and requested permanent relief.
Renewal and pricing of the 364-day revolver tranche and the company’s exposure to higher interest rates following the LIBOR-to-SOFR transition.
Progress, approvals, costs, and in-service dates for pipeline expansion and other capital projects, particularly given supply-chain and regulatory delays.
Sustainability of propane margins, acquisition contributions, customer demand, and seasonal performance in the Unregulated Energy segment.
Actual 2022 capital expenditures compared with the revised $140 million to $175 million forecast and the resulting financing requirements.
Environmental remediation costs, insurance and regulatory recovery, and the status of former manufactured gas plant liabilities.
Cash generation, short-term borrowing levels, covenant compliance, and dividend funding as capital spending and interest costs increase.