Chesapeake Utilities Corporation — 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 related energy services primarily in the Mid-Atlantic, Florida, Pennsylvania, and Ohio. This unaudited Form 10-Q covers the three and six months ended June 30, 2021, compared with the corresponding 2020 periods.
Results are seasonal, with typically higher revenue and earnings in the first and fourth quarters due to colder-weather energy consumption. The company remained an essential business during the COVID-19 pandemic, while continuing to monitor variants, supply chains, customer collections, and operating costs.
Financial Performance and Key Metrics
| Metric | Three Months Ended June 30 | Six Months Ended June 30 |
|---|---|---|
| Operating revenue | $111.1 million, versus $97.1 million | $302.3 million, versus $249.7 million |
| Operating income | $22.6 million, versus $18.0 million | $74.2 million, versus $60.1 million |
| Income from continuing operations | $13.8 million, versus $10.7 million | $48.3 million, versus $39.7 million |
| Net income | $13.8 million, versus $11.0 million | $48.3 million, versus $39.9 million |
| Diluted EPS from continuing operations | $0.78, versus $0.64 | $2.75, versus $2.41 |
| Gross margin | $84.4 million, versus $74.1 million | $201.3 million, versus $173.9 million |
Revenue increased 14.5% in the second quarter and 21.0% year to date. Operating income increased 25.6% and 23.4%, respectively. Gross margin increased 13.9% in the quarter and 15.7% year to date. Regulated Energy generated $22.8 million of second-quarter operating income and $55.7 million year to date; Unregulated Energy generated a second-quarter operating loss of $0.4 million but operating income of $18.7 million year to date.
The six-month effective tax rate was 26.7%, compared with 24.1% in 2020. The 2020 rate benefited from a favorable CARES Act tax impact; the second quarter of 2021 did not include a comparable benefit.
Cash Flow, Capital Structure, and Liquidity
- Operating cash flow was $134.2 million for the first six months of 2021, compared with $91.7 million in 2020.
- Capital expenditures were $104.6 million through June 30, 2021, compared with $82.8 million in the prior-year period.
- Investing cash outflow was $104.5 million; financing cash outflow was $28.2 million.
- Cash increased by $1.5 million from year-end 2020 to $5.0 million at June 30, 2021.
- Long-term debt, including current maturities, was $512.1 million; short-term borrowings were $169.3 million at a weighted-average rate of 1.11%.
- Stockholders’ equity was $741.6 million. Equity represented 52% of capitalization including short-term debt, within management’s stated 50% to 60% target range.
- The $375.0 million revolving credit facility had $200.9 million of available credit at June 30, 2021, after borrowings and letters of credit. The facility was scheduled to expire September 29, 2021.
- The company had $310.0 million of remaining borrowing capacity under its Shelf Agreements, although counterparties were not obligated to purchase debt.
- Cash dividends paid during the first six months were $15.0 million. The company issued less than 0.1 million shares under its DRIP and received approximately $4.5 million of net proceeds.
Material Changes Versus the Prior Comparable Period
- Growth was driven by pipeline expansion projects, customer consumption returning toward pre-pandemic levels, colder weather during the first half, natural gas customer growth, Florida GRIP investment, improved propane margins, and contributions from the Elkton Gas and Western Natural Gas acquisitions.
- The Hurricane Michael regulatory settlement contributed $3.1 million of gross margin and $1.2 million of net income in the second quarter, and $5.7 million of gross margin and $2.1 million of net income for the first six months. Management stated that the full-year year-over-year impact is expected to be negligible.
- COVID-19-related costs declined by approximately $2.8 million year to date, while regulatory deferrals partially offset operating expenses.
- Depreciation, amortization, property taxes, payroll, maintenance, outside services, and acquisition-related expenses increased as a result of capital investment, growth, and normalization of operating activity.
- Unregulated Energy second-quarter operating income declined $0.7 million, primarily because of higher expenses and lower demand for Marlin Gas Services’ CNG hold and emergency services. Year-to-date Unregulated Energy operating income increased $4.5 million.
- Net income benefited from higher operating income, but the comparison was affected by lower gains on asset sales and the absence of the 2020 CARES Act tax benefit.
Guidance, Outlook, Risks, and Unusual Items
Management forecast 2021 capital expenditures of $175 million to $200 million, excluding potential acquisitions. The program includes regulated distribution and transmission projects, Florida GRIP, pipeline expansions, CNG, RNG and LNG transportation, information technology, renewable energy, and other strategic investments.
- Management estimated 2021 gross margin of approximately $16.8 million from Florida GRIP, $17.0 million from listed pipeline expansions, $7.9 million from CNG transportation, $6.6 million from 2021 acquisition contributions, and $29.1 million from listed regulatory initiatives. These are management estimates, not GAAP earnings guidance.
- The Del-Mar Energy Pathway project was expected to be fully in service by the beginning of the fourth quarter of 2021 and provide approximately 14,300 Dts/d of firm service.
- The West Palm Beach expansion was expected to be completed in phases through the fourth quarter of 2021. The Beachside Pipeline Expansion was expected to generate approximately $2.5 million of annual gross margin beginning in 2023.
- Elkton Gas reached a settlement on its STRIDE plan; a final Maryland PSC order was expected in August 2021. The plan is intended to accelerate Aldyl-A pipeline replacement and recover costs through a surcharge.
- Florida regulated businesses established a $2.1 million COVID-19 regulatory asset under a June 2021 settlement, subject to amortization and recovery beginning in 2022. Total COVID-19 regulatory assets were $1.6 million at June 30, 2021.
- Environmental liabilities for four former manufactured-gas-plant sites were approximately $5.6 million. Estimated remaining remediation costs for certain sites ranged from $0.3 million to $0.9 million, while the West Palm Beach site had estimated cleanup costs of $3.3 million to $14.2 million.
- The company had $8.0 million of corporate guarantees and $4.8 million of letters of credit outstanding. Management did not expect the letters of credit to be drawn.
- Key risks include regulatory cost recovery and rate decisions, environmental remediation, project permitting and construction costs, commodity prices, interest rates, weather and hurricanes, customer and counterparty credit, cybersecurity, competition, access to capital, acquisitions, pensions, and the continuing effects of COVID-19.
- The company uses propane and interest-rate derivatives. It expected to reclassify approximately $5.4 million of commodity hedge gains and less than $0.1 million of interest-rate hedge amounts into earnings during the following 12 months.
- Management stated that disclosure controls and procedures were effective as of June 30, 2021, and that no material change in internal control over financial reporting occurred during the quarter.
Most Important Facts for Investors to Verify
- Confirm the September 29, 2021 revolving-credit expiration was refinanced, renewed, or otherwise resolved after the reporting date.
- Assess whether the $175 million to $200 million 2021 capital-expenditure plan and major pipeline projects remain on schedule and within budget.
- Evaluate the durability of earnings growth after adjusting for Hurricane Michael settlement effects, weather, acquisitions, COVID-19 deferrals, and other unusual items.
- Monitor regulatory approval and recovery of COVID-19 assets, the Elkton STRIDE plan, environmental costs, and other rate-related assets and liabilities.
- Review leverage, short-term borrowing needs, interest-rate exposure, available shelf capacity, and compliance with the revolving-credit funded-indebtedness covenant.
- Track customer demand, propane margins, CNG services, RNG project timing, and the effect of commodity and weather volatility on unregulated earnings.