Chesapeake Utilities Corporation — 2021 First-Quarter Form 10-Q
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 across the Delmarva Peninsula, Florida, Pennsylvania, and Ohio. This unaudited Form 10-Q covers the three months ended March 31, 2021, compared with the three months ended March 31, 2020.
Results are seasonal, with revenue and earnings generally higher in the first and fourth quarters because of winter energy consumption. Chesapeake continued operating as an essential business during the COVID-19 pandemic.
Financial performance and liquidity
| Metric | Q1 2021 | Q1 2020 | Change |
|---|---|---|---|
| Operating revenues | $191.2 million | $152.7 million | +$38.5 million, 25.2% |
| Gross margin | $116.9 million | $99.8 million | +$17.1 million, 17.1% |
| Operating income | $51.6 million | $42.1 million | +$9.5 million, 22.5% |
| Income from continuing operations | $34.5 million | $29.0 million | +$5.4 million, 18.7% |
| Net income | $34.5 million | $28.9 million | +$5.5 million, 19.1% |
| Diluted EPS | $1.96 | $1.76 | +$0.20, 11.4% |
| Cash flow from operating activities | $80.4 million | $58.8 million | +$21.6 million |
| Capital expenditures | $52.0 million | $35.2 million | +$16.8 million |
Gross margin represented approximately 61.1% of operating revenue, compared with approximately 65.4% in the prior-year quarter. Operating margin was approximately 27.0%, compared with 27.6% in Q1 2020. The lower gross margin percentage primarily reflects the greater proportion of lower-margin commodity-related revenue in the period.
Regulated Energy operating income increased to $32.9 million from $27.9 million. Unregulated Energy operating income increased to $19.1 million from $13.9 million. The company reported a $6,000 loss from discontinued operations in Q1 2021 versus a $111,000 loss in Q1 2020.
At March 31, 2021, Chesapeake had $5.6 million of cash and cash equivalents, $156.1 million of short-term borrowings, and $522.1 million of long-term debt including current maturities. The $375.0 million unsecured revolving credit facility had $214.1 million of available credit after borrowings and letters of credit. The company was in compliance with its funded-indebtedness covenant and had an equity-to-total-capitalization ratio, including short-term debt, of 52%.
Net cash used in investing activities was $51.8 million, while net cash used in financing activities was $26.5 million. Cash increased by $2.1 million during the quarter to $5.6 million. The company paid $7.5 million of common dividends and issued less than 0.1 million shares under its dividend reinvestment plan for net proceeds of approximately $1.9 million.
Material changes versus the prior comparable period
- Revenue growth reflected higher regulated and unregulated energy activity, including increased customer consumption, pipeline expansion contributions, propane operations, and the 2020 acquisitions of Elkton Gas and Western Natural Gas.
- Weather was more favorable than in Q1 2020: heating degree-days increased 13.8% in the Delmarva and Ohio markets, while Q1 2020 was 20.4% warmer than normal. Weather contributed approximately $6.4 million of incremental gross margin year over year.
- Pipeline expansion projects contributed approximately $2.7 million of incremental gross margin, including the Western Palm Beach County, Callahan, and Del-Mar Energy Pathway projects.
- The Hurricane Michael regulatory settlement contributed approximately $2.6 million of gross margin. Related depreciation and amortization expenses increased, partially offsetting the benefit.
- Elkton Gas and Western Natural Gas contributed approximately $1.9 million of incremental gross margin in aggregate.
- Retail propane margin per gallon increased by approximately $1.3 million because of favorable supply costs and market conditions; propane results remain sensitive to commodity prices and competition.
- Operating expenses increased $7.7 million excluding cost of sales, driven by employee-related costs, depreciation and amortization, capital investment, facilities and maintenance, and acquisition-related expenses.
- Other income, net declined by $2.9 million, primarily because Q1 2020 included gains on two property sales. Interest charges decreased by $0.7 million because of lower revolving-credit borrowings and a Hurricane Michael-related regulatory liability amortization credit.
Guidance, outlook, management commentary, risks, and unusual items
Management did not provide consolidated earnings guidance in the filing. It forecast 2021 capital expenditures of $175 million to $200 million, excluding potential acquisitions. The forecast includes investments in regulated distribution and transmission, Florida GRIP infrastructure, pipeline expansions, Marlin Gas Services, renewable natural gas and liquefied natural gas initiatives, information technology, and other strategic projects.
Management expects several projects to contribute to future gross margin, including approximately $17.2 million from pipeline expansions in 2021, $7.9 million from CNG transportation, $5.8 million from the Elkton Gas and Western Natural Gas acquisitions, and $29.1 million from identified regulatory initiatives. These are project-level estimates, not consolidated earnings guidance.
The West Palm Beach expansion is expected to be completed in phases through the third quarter of 2021. 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 Guernsey Power Station project is expected to enter service in the fourth quarter of 2021.
COVID-19 reduced commercial and industrial energy consumption, increased bad-debt expense, and generated incremental costs such as personal protective equipment and premium pay. Regulatory assets have been established in Delaware, Maryland, and Florida for certain pandemic-related costs, but Florida’s authorization was being challenged in a protest with a hearing scheduled for June 16, 2021.
Other material matters include a proposed five-year STRIDE surcharge filed by Elkton Gas to accelerate replacement of Aldyl-A pipelines, environmental liabilities of approximately $5.7 million for certain manufactured-gas-plant sites, and estimated West Palm Beach remediation costs ranging from $3.3 million to $14.2 million. Management stated that pending legal and regulatory proceedings are not expected to have a material effect on consolidated financial position, results of operations, or cash flows.
Key risks identified by management include regulatory recovery and rate decisions, environmental obligations, extreme weather and hurricanes, commodity and interest-rate volatility, cybersecurity, supply-chain disruption, economic conditions, customer and market growth, competition and alternative energy, access to capital, acquisition integration, pension obligations, and the continuing effects of COVID-19. The $375 million revolving facility expires September 29, 2021, and the NYL shelf agreement expires in November 2021.
Most important facts for investors to verify
- Whether the strong Q1 earnings increase is sustainable after adjusting for colder weather, acquisitions, Hurricane Michael settlement benefits, and other project-related contributions.
- The renewal or replacement of the revolving credit facility before its September 2021 expiration and the company’s ability to fund planned capital expenditures.
- Progress, cost, regulatory approval, and in-service timing for the Del-Mar Energy Pathway, West Palm Beach, Callahan, Guernsey, GRIP, and renewable-energy projects.
- The outcome of the Florida protest concerning COVID-19 regulatory assets and the recoverability of pandemic-related costs.
- The final purchase-price allocations and integration results for Elkton Gas and Western Natural Gas.
- Potential changes in propane prices, customer demand, weather, interest rates, and regulated cost-recovery mechanisms.
- Environmental remediation costs and the extent to which remaining costs are recoverable through insurance or customer rates.