CHESAPEAKE UTILITIES CORP annual report, FY2023

Chesapeake Utilities Corporation 2023 Form 10-K Summary

Reporting period: Fiscal year ended December 31, 2023. The filing is an annual Form 10-K rather than a standalone fourth-quarter report. Chesapeake Utilities operates regulated natural gas and electric distribution and transmission businesses, unregulated propane, natural gas transmission, generation, CNG/LNG/RNG services, and sustainable energy investments across the Mid-Atlantic, Florida, North Carolina, South Carolina and Ohio.

Key Financial Metrics

Metric	2023	2022	Change
Operating revenue	$670.6 million	$680.7 million	Down $10.1 million, 1.5%
Operating income	$150.8 million	$142.9 million	Up $7.9 million, 5.5%
Net income	$87.2 million	$89.8 million	Down $2.6 million, 2.9%
Diluted EPS	$4.73	$5.04	Down $0.31
Adjusted net income	$97.8 million	$89.8 million	Up 9.0%
Adjusted diluted EPS	$5.31	$5.04	Up $0.27
Net cash from operations	$203.5 million	$158.9 million	Up $44.6 million
Capital expenditures and acquisitions	$1.14 billion	$140.7 million	Primarily the FCG acquisition

Reported operating margin was approximately 22.5% and net margin was approximately 13.0%. Adjusted gross margin, a non-GAAP measure, increased to $454.1 million from $420.2 million. Regulated Energy adjusted gross margin rose 10.4% to $333.6 million, while Unregulated Energy adjusted gross margin increased 2.2% to $120.7 million.

Business and Material Changes

On November 30, 2023, Chesapeake acquired Florida City Gas for $923.4 million in cash. FCG contributed $12.1 million of revenue and a $3.3 million net loss from the acquisition date through year-end, including transaction costs.
FCG serves approximately 120,000 Florida natural gas customers and has approximately 3,800 miles of distribution main and 80 miles of transmission pipe. The acquisition added approximately $461.2 million of goodwill and increased total assets to $3.30 billion from $2.22 billion.
The acquisition was financed with $366.4 million of net equity proceeds, $550.0 million of senior notes, and Revolver borrowings. The Company issued approximately 4.4 million common shares, increasing diluted weighted-average shares by approximately 3.5%.
Regulated Energy operating income increased 9.4% to $126.2 million, or 18.4% excluding $10.4 million of FCG transaction-related operating expenses.
Unregulated Energy operating income declined 10.7% to $24.4 million despite slightly higher adjusted gross margin, primarily because of warmer weather, lower propane consumption, customer conversions to natural gas, and higher operating expenses.
Warmer-than-normal weather reduced adjusted gross margin by approximately $13.6 million versus 2022, including a $5.1 million impact in Regulated Energy and an $8.2 million impact on propane operations.
Florida Natural Gas rate changes contributed $13.4 million of adjusted gross margin, while FCG contributed $8.7 million. Natural gas customer growth and transmission expansions also provided meaningful increases.

Cash Flow, Debt and Liquidity

Operating cash flow was $203.5 million. Investing cash use was $1.11 billion, including $925.0 million for acquisitions and $188.6 million for property, plant and equipment expenditures.
Financing cash inflow was $906.6 million, driven by $627.0 million of long-term debt issuance and $366.4 million of common stock issuance, partially offset by $40.0 million of dividends and $22.5 million of Revolver repayments.
Long-term debt, net of current maturities, increased to $1.19 billion from $578.4 million. Short-term borrowings were $179.9 million at December 31, 2023, compared with $202.2 million a year earlier.
Total capitalization, including short-term borrowings, was $2.63 billion, consisting of 47% equity, 46% long-term debt including current maturities, and 7% short-term debt. Management’s target equity-to-total-capitalization range is 50% to 60%.
The Company had $188.1 million of available Revolver credit at year-end, after $7.0 million of letters of credit. The Revolver has a $375.0 million authorized borrowing capacity; the 364-day tranche expires in August 2024 and the five-year tranche expires in August 2026.
Chesapeake was in compliance with all debt covenants at year-end. A $965.0 million acquisition Bridge Facility was terminated without being drawn.
Cash and cash equivalents were $4.9 million at year-end, down from $6.2 million. The Company paid $40.0 million of common dividends and declared $2.305 per share in 2023, extending its dividend payment record to 63 consecutive years.

Guidance, Outlook and Management Commentary

2024 capital expenditure guidance is $300 million to $360 million, excluding potential acquisitions. The five-year capital expenditure outlook through 2028 is $1.5 billion to $1.8 billion.
Management projects continued adjusted gross margin contributions from pipeline expansions, regulated infrastructure programs, CNG/RNG/LNG transportation, the Florida rate case, and the GUARD and FCG SAFE programs.
The Company estimates 2024 adjusted gross margin of approximately $12.5 million from CNG/RNG/LNG transportation and infrastructure activities and approximately $17.2 million from the Florida Natural Gas rate case.
The Full Circle Dairy renewable natural gas facility had $19.3 million of capital expenditures through year-end, with first RNG injection projected for the first half of 2024.
In January 2024, Maryland natural gas businesses filed for approximately $6.9 million of permanent rate relief and related tariff and technology-cost recovery. The filing remains subject to Maryland PSC approval.
FCG’s Florida PSC rate order, including the $25.0 million reserve surplus amortization mechanism, is subject to an appeal by the Florida Office of Public Counsel. The appeal was pending as of the filing date.

Risks, Contingencies and Unusual Items

Results are exposed to weather, customer consumption, propane prices, interest rates, commodity markets, inflation, supply-chain constraints and labor costs. Warmer weather materially reduced 2023 consumption.
The Company’s capital-intensive growth strategy requires continued access to debt and equity markets. Higher interest rates and the post-acquisition increase in leverage may pressure earnings, cash flow and financing costs.
Regulated operations depend on timely rate relief and recovery of regulatory assets, storm costs, environmental costs and infrastructure investments. Loss of probable recovery under regulatory accounting could materially affect earnings.
The Company has environmental liabilities associated with seven former manufactured gas plant sites. Total MGP environmental liabilities were approximately $3.6 million at year-end, with estimated remaining costs for specified sites ranging from $2.2 million to $4.1 million.
Contractual obligations totaled approximately $1.66 billion, excluding expected long-term debt interest of approximately $432.2 million. The obligations include debt, leases, transmission and storage capacity, commodities, electric supply and employee benefits.
Corporate guarantees totaled approximately $24.3 million, with additional specific-purpose guarantees of $4.0 million. Letters of credit totaled approximately $7.0 million; none had been drawn.
No cybersecurity incident had materially affected the Company’s business, results or financial condition as of the filing date, but cybersecurity and critical-infrastructure risks remain significant.
Goodwill impairment testing identified no impairment. Total goodwill was $508.2 million, including $461.2 million related to FCG; the Aspire Energy goodwill valuation was identified as a critical audit matter.
Auditor Baker Tilly issued an unqualified opinion on the financial statements and internal control over financial reporting. FCG was excluded from management’s and the auditor’s internal-control assessment because it was acquired during 2023.

Investor Verification Checklist

Verify the final purchase-price allocation for FCG, including goodwill, regulatory assets and liabilities, and any post-closing working-capital adjustments.
Track FCG integration costs, operating performance, rate-case benefits, RSAM treatment and the pending Florida OPC appeal.
Assess leverage, interest expense, Revolver usage and the August 2024 expiration of the 364-day Revolver tranche relative to the Company’s 50% to 60% equity capitalization target.
Compare 2024 capital spending with the $300 million to $360 million forecast and monitor funding needs for the $1.5 billion to $1.8 billion five-year plan.
Monitor Maryland rate-case proceedings seeking approximately $6.9 million of relief and the related depreciation and technology-cost filings.
Evaluate sensitivity to weather-normalized demand, propane margins, interest rates, commodity prices and customer conversions from propane to natural gas.
Review environmental remediation estimates, regulatory recovery assumptions, debt covenants, contractual commitments and contingent guarantees.