CHESAPEAKE UTILITIES CORP annual report, FY2020

Chesapeake Utilities Corporation 2020 Form 10-K Summary

Reporting period: Fiscal year ended December 31, 2020. The filing is an annual Form 10-K, although the request metadata references 2020 Q4. Chesapeake Utilities is a diversified energy delivery company operating regulated natural gas and electric utilities, natural gas transmission, propane distribution, energy generation, and CNG/LNG/RNG services primarily in the Mid-Atlantic, Florida, and Ohio.

Financial Performance and Position

Metric	2020	2019	Change
Operating revenues	$488.2 million	$479.6 million	+1.8%
Operating income	$112.7 million	$106.3 million	+6.1%
Income from continuing operations	$70.6 million	$61.1 million	+15.6%
Net income	$71.5 million	$65.2 million	+9.7%
Diluted EPS	$4.26	$3.96	+7.6%
Operating cash flow	$158.9 million	$103.0 million	+$55.9 million
Capital expenditures	$195.9 million	$199.0 million	-1.6%

• Regulated Energy revenue was $352.7 million and operating income was $92.1 million, up 6.4% year over year. Unregulated Energy revenue was $152.5 million and operating income was $20.7 million, up 3.6%.
• Segment gross margin increased to $350.5 million from $325.5 million. Regulated Energy gross margin rose $20.5 million to $260.8 million; Unregulated Energy gross margin rose $4.5 million to $89.7 million.
• Approximate consolidated operating margin was 23.1%, compared with 22.2% in 2019. Net margin was approximately 14.6%, compared with 13.6%.
• Cash and cash equivalents were $3.5 million at year-end, compared with $7.0 million in 2019. Cash flow was seasonal and supported by operating cash generation, short-term borrowings, and debt and equity financing.
• Net property, plant and equipment increased to $1.60 billion from $1.46 billion. Total assets increased to $1.93 billion from $1.78 billion.
• Long-term debt, including current maturities, was $522.1 million; short-term borrowings were $175.6 million. Total capitalization including short-term borrowings was $1.39 billion, with equity representing 50.0%.
• The company paid $27.2 million in dividends and declared $1.725 per share for 2020. It reported 60 consecutive years of cash dividends.

Material Changes Versus 2019

• The Florida Public Utilities Hurricane Michael settlement generated $10.9 million of incremental gross margin and $3.8 million of net income in 2020. The settlement authorized recovery of $45.8 million of storm-related regulatory assets, a $7.7 million annual surcharge, and a $3.3 million annual base-rate increase.
• Eastern Shore and Peninsula Pipeline expansion projects added $8.0 million of gross margin, including the Callahan pipeline, Western Palm Beach County expansion, Auburndale, and the Del-Mar Energy Pathway.
• Customer growth and natural gas conversions added $3.4 million of gross margin. Average natural gas customers increased to 178,220 from 164,134; electric customers increased to 32,326 from 31,818; and propane customers increased to 67,034 from 59,671.
• Acquisitions contributed to growth: Elkton Gas was acquired in July 2020 for approximately $15.6 million and Western Natural Gas propane assets were acquired in October 2020 for approximately $6.7 million. Boulden propane assets, acquired in December 2019, contributed for a full year in 2020.
• Unregulated Energy benefited from higher retail propane margins, stronger CNG demand, and Aspire Energy rate increases, partially offset by warmer weather and COVID-19-related lower consumption.
• COVID-19 reduced 2020 earnings by approximately $1.0 million overall, according to management, while the detailed continuing-operations analysis identified approximately $5.9 million of unfavorable pre-tax impacts before offsets. Impacts included lower commercial and industrial consumption, higher bad debt expense, protective equipment, and premium pay. The company established $1.9 million of regulatory assets for eligible COVID-19 costs.
• PESCO’s natural gas marketing business was fully divested in 2019 and is reported as discontinued operations. Discontinued operations contributed $0.9 million after tax in 2020, compared with $4.1 million in 2019, including a $5.4 million after-tax sale gain in 2019.
• The company issued approximately 1.0 million common shares through its ATM and dividend reinvestment programs, generating approximately $83.0 million of net proceeds.

Liquidity, Debt, Guidance, and Outlook

• Operating cash flow of $158.9 million funded a substantial portion of $165.5 million of cash property, plant, and equipment expenditures, while acquisitions used $22.2 million. Net cash used in investing activities was $181.6 million.
• In September 2020, the company entered into a new $375.0 million syndicated revolving credit facility. Available credit at December 31, 2020 was $196.9 million after outstanding borrowings and $4.8 million of letters of credit. The facility expires September 29, 2021.
• Remaining shelf borrowing capacity was $310.0 million under Prudential, MetLife, and NYL agreements. The company issued $50.0 million of 3.00% Prudential Shelf Notes and $40.0 million of 2.96% NYL Shelf Notes during 2020.
• Management forecast 2021 capital expenditures of $175 million to $200 million, excluding acquisitions, including regulated distribution and transmission projects, Florida GRIP investments, RNG initiatives, and CNG/LNG infrastructure.
• Management estimated gross margin from identified projects of $66.3 million in 2021 and $73.4 million in 2022, compared with $50.1 million generated in 2020. Key contributors include pipeline expansions, CNG transportation, acquisitions, Florida GRIP, Hurricane Michael recovery, and RNG transportation.
• Expected 2021 project milestones include completion of the Western Palm Beach County expansion, continued construction of the Del-Mar Energy Pathway, and initiation of Aspire Energy Express facilities serving the Guernsey Power Station. The filing does not provide consolidated EPS or revenue guidance.

Risks, Contingencies, and Unusual Items

• Key risks include regulatory approval and cost recovery, access to debt and equity markets, interest-rate changes, weather variability, propane commodity prices, competition, capital-project delays, pipeline and utility safety, cybersecurity, environmental remediation, pension funding, and COVID-19-related operating and credit effects.
• The company had $974.5 million of contractual obligations at December 31, 2020, including $523.0 million of long-term debt principal, $327.4 million of transmission-capacity commitments, $422.2 million of natural gas, electric, and propane purchase obligations, and $13.4 million of operating lease payments. These categories overlap in the filing’s separate presentations and should not be added together without reconciliation.
• Environmental liabilities were approximately $5.9 million for certain Florida former manufactured-gas-plant sites. Estimated cleanup costs for identified sites range from immaterial amounts to $14.2 million, with management expecting recovery through insurance and/or regulated rates.
• The company had $5.7 million of corporate guarantees and $4.8 million of letters of credit outstanding; no letters of credit had been drawn.
• Goodwill totaled $38.7 million, including $31.1 million in the Unregulated Energy segment. Annual impairment testing identified no impairment, but the valuation depends on forecasts, margins, discount rates, and other assumptions.
• The company redeemed FPU’s 9.08% secured first mortgage bonds in December 2020, recognizing approximately $1.0 million of expense related to the early extinguishment. FPU properties were no longer subject to that lien after redemption.
• The Florida Public Counsel protested the Florida PSC order permitting deferral of COVID-19 costs as regulatory assets; no hearing date had been established as of the filing.
• Baker Tilly US, LLP issued unqualified opinions on the consolidated financial statements and internal control over financial reporting. Management and the auditor concluded that internal controls were effective as of December 31, 2020.

Facts Investors Should Verify

• Whether the $175 million to $200 million 2021 capital-expenditure range remains achievable and how projects are financed.
• The renewal or replacement terms of the $375 million revolving credit facility before its September 2021 expiration.
• The timing and final cost of the Del-Mar Energy Pathway, Western Palm Beach County, Guernsey Power Station, and RNG projects.
• The sustainability of Hurricane Michael surcharge and base-rate benefits after storm regulatory-asset amortization.
• The collectability and regulatory recovery of COVID-19 costs and the outcome of the Florida Public Counsel protest.
• The effect of warmer or colder weather, propane prices, customer consumption, and commercial and industrial demand on margins.
• Potential changes in environmental remediation costs, rate recovery, pension funding requirements, and debt covenant headroom.
• The extent to which 2020 earnings growth reflects recurring operations versus acquisitions, regulatory settlements, tax benefits, asset-sale gains, and other unusual items.