Chesapeake Utilities Corporation — 2023 Q3 Form 10-Q Summary
Business context and reporting period
Chesapeake Utilities is a diversified energy company operating primarily on the U.S. East Coast. Its businesses include regulated natural gas and electric distribution, natural gas transmission, electricity and steam generation, propane distribution, compressed natural gas services, and sustainable-energy initiatives. This unaudited Form 10-Q covers the three and nine months ended September 30, 2023. Results are seasonal, with earnings generally higher in the first and fourth quarters because of colder-weather energy demand.
Financial performance and key metrics
| Metric | Three months ended Sept. 30 | Nine months ended Sept. 30 |
|---|---|---|
| Operating revenue | $131.5 million, versus $131.1 million | $485.3 million, versus $493.4 million |
| Operating income | $20.2 million, versus $18.6 million | $103.5 million, versus $100.0 million |
| Net income | $9.4 million, versus $9.7 million | $61.9 million, versus $63.6 million |
| Diluted EPS | $0.53, versus $0.54 | $3.47, versus $3.58 |
| Adjusted net income | $12.2 million, versus $9.7 million | $64.8 million, versus $63.6 million |
| Adjusted diluted EPS | $0.69, versus $0.54 | $3.63, versus $3.58 |
| Net cash from operating activities | Not provided for the quarter | $183.3 million, versus $136.0 million |
Operating margins were approximately 15.4% in the third quarter and 21.3% for the first nine months, compared with approximately 14.2% and 20.3%, respectively, in the prior-year periods. Net margins were approximately 7.2% and 12.8%, compared with 7.4% and 12.9%.
Third-quarter regulated-energy revenue increased 12.6% to $102.4 million, while unregulated-energy revenue declined to $29.1 million from $40.1 million. Nine-month regulated-energy revenue rose 11.2% to $345.8 million, while unregulated-energy revenue declined 23.5% to $139.4 million.
Adjusted gross margin increased to $94.5 million in the third quarter from $86.8 million and to $323.8 million for the nine months from $304.9 million. Regulated Energy generated $75.9 million of third-quarter adjusted gross margin and $240.1 million for the nine months. Unregulated Energy generated $18.6 million and $83.8 million, respectively.
Liquidity, capital structure, and debt
- Cash and cash equivalents were $1.8 million at September 30, 2023, compared with $6.2 million at December 31, 2022.
- Operating cash flow of $183.3 million exceeded investing cash uses of $135.7 million, primarily reflecting $137.7 million of capital expenditures. Financing activities used $52.0 million, including $29.5 million of dividends and $81.7 million of net Revolver repayments.
- Long-term debt, net of current maturities, was $643.8 million, compared with $578.4 million at year-end 2022. Short-term borrowings were $118.6 million, down from $202.2 million.
- The company issued $80.0 million of 5.43% senior notes due 2038 and used proceeds to reduce Revolver borrowings and fund capital expenditures.
- Revolver availability was $250.5 million, and the company was in compliance with its funded-indebtedness covenant. Equity represented 53% of total capitalization including short-term debt, within the stated 50%–60% target range.
- Remaining borrowing capacity under Prudential and MetLife shelf agreements totaled $255.0 million, subject to lender commitments and applicable terms.
Material changes versus the prior comparable period
- Regulated Energy adjusted gross margin increased $6.2 million in the quarter and $17.3 million year to date, driven by Florida rate relief, customer growth, pipeline expansions, and infrastructure programs.
- The Florida natural gas rate proceeding contributed approximately $3.5 million of third-quarter and $11.4 million of nine-month adjusted gross margin. Permanent rates became effective March 1, 2023.
- Unregulated Energy adjusted gross margin increased $1.4 million in the quarter and $1.6 million year to date, but nine-month operating income declined $4.0 million because of higher employee, depreciation, property-tax, facilities, maintenance, and outside-service costs.
- Revenue declined year to date despite higher margins, principally because of lower commodity prices and warmer weather affecting propane and other unregulated businesses. Customer consumption reduced nine-month adjusted gross margin by approximately $9.8 million across the company, according to management.
- Interest expense increased $0.8 million in the quarter and $3.9 million year to date because of higher borrowing rates and additional long-term debt. The weighted-average Revolver borrowing rate was 5.5% in the quarter and 5.27% year to date, versus 3.0% and 1.71%, respectively, in the prior-year periods.
- GAAP earnings included $3.9 million of transaction-related expenses in the first nine months associated with the planned Florida City Gas acquisition. Prior-year earnings benefited from a building-sale gain and federal tax-refund interest income.
Guidance, outlook, commentary, risks, and unusual items
In September 2023, Chesapeake entered into an agreement to acquire Florida City Gas from NextEra Energy for approximately $923.0 million in cash, subject to adjustments, regulatory approvals, and other closing conditions. Closing was expected by the end of the fourth quarter of 2023. Florida City Gas serves approximately 120,000 customers and has approximately 3,800 miles of distribution main and 80 miles of transmission pipe.
The company obtained a 364-day Bridge Facility commitment of up to $965.0 million to support the acquisition. The transaction is expected to materially increase financing needs and was excluded from the 2023 capital-expenditure forecast.
Excluding acquisitions, 2023 capital expenditures were forecast at $200 million to $230 million. Management also announced five-year capital-expenditure guidance of $1.5 billion to $1.8 billion through 2028, reflecting legacy-business growth and the planned Florida City Gas acquisition.
Growth initiatives include Florida’s $205.0 million, ten-year GUARD program; pipeline expansions; regulated infrastructure and storm-protection programs; and CNG, RNG, and LNG transportation projects. Management estimated 2024 adjusted gross margin of approximately $50.5 million from identified major projects and initiatives, excluding the Florida City Gas acquisition.
Key risks include regulatory approval and rate recovery, acquisition financing and integration, higher interest rates, weather-driven demand volatility, commodity prices, environmental remediation, construction delays and costs, cybersecurity, safety incidents, counterparty creditworthiness, access to capital markets, labor availability, and competition from alternative energy sources. Environmental liabilities for former manufactured-gas-plant sites were approximately $3.5 million at September 30, 2023. Management stated that pending legal and regulatory proceedings are not expected to have a material effect on consolidated financial position, results, or cash flows.
Most important facts for investors to verify
- Whether the Florida City Gas acquisition closed as expected, the final purchase price, regulatory conditions, financing mix, and resulting leverage.
- Post-acquisition debt levels, Bridge Facility usage, refinancing plans, covenant compliance, and interest-rate exposure.
- Whether the announced $1.5 billion–$1.8 billion five-year capital plan remains achievable and adequately funded.
- The durability of Florida rate-case benefits, GUARD program recovery, storm-protection recovery, and other regulatory mechanisms.
- Whether warmer-weather impacts, propane-to-natural-gas conversions, and lower virtual-pipeline demand continue to pressure unregulated earnings.
- Actual project completion dates, regulatory approvals, costs, and realized adjusted gross margin versus management estimates.
- Environmental remediation costs and the extent to which future costs remain recoverable from customers or insurance.