Chesapeake Utilities Corporation — Q2 2020 Form 10-Q Summary
Business context and reporting period
Chesapeake Utilities Corporation is a diversified energy delivery company operating regulated natural gas and electric distribution and transmission businesses, propane operations, energy generation and related services primarily in the Mid-Atlantic, Florida, Pennsylvania and Ohio. This unaudited Form 10-Q covers the three and six months ended June 30, 2020. Results are seasonal, with generally higher energy consumption and earnings in the first and fourth quarters.
The company completed the sale of PESCO’s assets and contracts in the fourth quarter of 2019 and now reports PESCO as discontinued operations. The company remained an essential business during the COVID-19 pandemic.
Key financial metrics
| Metric | Three months ended June 30, 2020 | Three months ended June 30, 2019 | Six months ended June 30, 2020 | Six months ended June 30, 2019 |
|---|---|---|---|---|
| Total operating revenues | $97.1 million | $94.5 million | $249.7 million | $255.0 million |
| Gross margin | $74.1 million | $69.4 million | $173.9 million | $168.9 million |
| Operating income | $18.0 million | $18.2 million | $60.1 million | $62.3 million |
| Income from continuing operations | $10.7 million | $8.9 million | $39.7 million | $37.7 million |
| Net income | $11.0 million | $8.3 million | $39.9 million | $37.0 million |
| Diluted EPS | $0.66 | $0.50 | $2.42 | $2.25 |
| Net cash provided by operating activities | Not separately provided | Not separately provided | $91.7 million | $74.6 million |
Gross margin, a non-GAAP measure defined by the company as operating revenues less cost of sales, increased 6.8% in the quarter and 3.0% for the six-month period. Operating income declined 1.0% in the quarter and 3.5% year to date. Net income increased 31.9% in the quarter and 7.9% year to date.
At June 30, 2020, total assets were $1.82 billion and stockholders’ equity was $593.3 million. Long-term debt, including current maturities, was $445.7 million, short-term borrowings were $286.4 million, and cash and cash equivalents were $3.6 million. Equity represented 45% of capitalization including short-term debt, below the company’s 50% to 60% target range.
Capital expenditures were $82.8 million for the first six months. Management expects 2020 capital expenditures of approximately $185 million to $215 million. The company paid $13.0 million of common stock dividends during the first six months.
Material changes versus the prior comparable period
- Second-quarter revenue increased $2.5 million, while six-month revenue decreased $5.3 million, primarily reflecting the exit from PESCO’s natural gas marketing business and changes in energy consumption.
- Second-quarter gross margin increased $4.7 million, driven by pipeline expansion projects, colder weather, natural gas customer growth, higher propane margins, Marlin Gas Services demand and the Boulden acquisition.
- COVID-19 reduced second-quarter earnings by an estimated $0.9 million and six-month earnings by $1.1 million, primarily through lower commercial and industrial consumption, incremental pandemic-response costs and higher bad-debt expense.
- Operating income was substantially offset by higher operating expenses, depreciation, asset-removal costs, property taxes, insurance, payroll and Boulden-related expenses.
- The CARES Act reduced income tax expense by approximately $1.7 million in the second quarter and increased net income by approximately $1.7 million.
- The company entered into $100.0 million of interest-rate swaps covering short-term borrowings through October 2020. Short-term borrowings increased to $286.4 million from $247.4 million at December 31, 2019, although the weighted-average rate declined to 1.05% from 2.62%.
- Operating cash flow increased $17.1 million year to date, while investing cash outflows declined to $80.3 million from $90.9 million. Financing activities used $14.8 million, compared with $17.5 million provided in the prior-year period.
Guidance, outlook, management commentary, risks and unusual items
- Management did not provide formal earnings guidance in the filing. It expects continued growth from pipeline expansions, Florida GRIP investments, natural gas customer additions, Marlin Gas Services, propane operations and acquisitions.
- The Elkton Gas acquisition closed in July 2020 for approximately $15.0 million and adds approximately 7,000 residential and commercial customers. Management estimates gross margin of approximately $1.2 million in 2020 and $4.0 million in 2021.
- Key project expectations include 2020 gross margin of approximately $4.1 million from the West Palm Beach expansion, $2.4 million from the Del-Mar Energy Pathway, $4.0 million from the Callahan Intrastate Pipeline and $15.2 million from Florida GRIP. These are gross-margin estimates, not GAAP earnings guidance.
- The Del-Mar Energy Pathway is expected to be fully in service by the beginning of the fourth quarter of 2021 and is designed to provide an additional 14,300 dekatherms per day of firm service. The Callahan pipeline entered service in the second quarter of 2020.
- COVID-19 remains an ongoing risk. Delaware and Maryland authorized regulatory-asset treatment for certain incremental COVID-19 costs, but the company had not deferred such costs as of June 30, 2020. Florida requires a formal petition for regulatory-asset treatment.
- FPU’s Hurricane Michael recovery proceeding and electric depreciation-rate case were scheduled for Florida PSC consideration in September 2020. Interim rate increases related to storm recovery were fully reserved pending final resolution.
- Environmental liabilities related to FPU manufactured-gas-plant sites were approximately $6.1 million at June 30, 2020. The company expects environmental remediation costs to be recoverable through insurance and customer rates, but recovery remains subject to regulatory approval and estimates.
- Corporate guarantees totaled approximately $11.2 million, with additional authorized guarantee and letter-of-credit capacity. Letters of credit outstanding totaled approximately $4.4 million, with no draws reported.
- The company faces regulatory, environmental, weather, commodity-price, interest-rate, credit, cybersecurity, capital-market, acquisition-integration and pandemic risks. It was in compliance with its debt covenants at June 30, 2020.
Most important facts for investors to verify
- Whether COVID-19 effects persist or worsen, including customer consumption, collections, bad-debt expense and the ability to recover incremental costs through rates.
- Availability and refinancing of short-term facilities maturing or expiring in October 2020, as well as the planned July and August 2020 shelf-note issuances.
- Final regulatory treatment and recovery of Hurricane Michael and Dorian costs, interim rates and electric depreciation changes.
- Actual capital spending compared with the $185 million to $215 million 2020 range and the resulting effect on leverage and liquidity.
- Execution, timing and realized returns from the West Palm Beach, Del-Mar, Callahan, GRIP and other pipeline projects.
- Integration and performance of the Boulden acquisition and the newly completed Elkton Gas acquisition.
- Environmental remediation costs, rate recovery assumptions and the status of the remaining manufactured-gas-plant sites.
- The sustainability of earnings growth excluding the $1.7 million CARES Act tax benefit, discontinued-operations effects, favorable weather and other unusual items.