Chesapeake Utilities Corporation — Form 10-Q Summary
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, primarily on the U.S. East Coast. This unaudited filing covers the three and nine months ended September 30, 2022, compared with the corresponding 2021 periods.
Financial performance and liquidity
| Metric | Q3 2022 | Q3 2021 | 9M 2022 | 9M 2021 |
|---|---|---|---|---|
| Operating revenue | $131.1 million | $107.3 million | $493.4 million | $409.6 million |
| Operating income | $18.6 million | $20.1 million | $100.0 million | $94.3 million |
| Net income | $9.7 million | $12.5 million | $63.6 million | $60.8 million |
| Diluted EPS | $0.54 | $0.71 | $3.58 | $3.45 |
| Operating cash flow | Not separately provided | Not separately provided | $136.0 million | $152.8 million |
- Q3 revenue increased 22.1%, while nine-month revenue increased 20.5%, primarily from regulated infrastructure and transmission growth, propane acquisitions, higher propane margins, and increased CNG/RNG/LNG demand.
- Q3 operating margin, calculated from reported operating income and revenue, was approximately 14.2%, compared with 18.7% in Q3 2021. The nine-month operating margin was approximately 20.3%, compared with 23.0% in the prior-year period.
- Adjusted Gross Margin, a company-defined non-GAAP measure, increased to $86.8 million in Q3 from $80.0 million and to $304.9 million for nine months from $281.2 million.
- Regulated Energy Q3 operating income increased 1.3% to $23.7 million; Unregulated Energy reported a $5.1 million operating loss, compared with a $3.0 million loss in Q3 2021. The unregulated segment is seasonally weaker in the second and third quarters.
- Net income increased 4.8% for the first nine months, but declined 22.5% in Q3. Q3 results were affected by higher operating expenses, increased interest charges, the absence of prior-year COVID-19 cost deferrals, and a higher effective tax rate of 27.7% versus 19.3%.
- Cash flow from operations was $136.0 million. Capital expenditures were approximately $98.0 million in the cash flow statement, and management separately reported $95.5 million of capital expenditures for the first nine months.
- Cash and cash equivalents were $2.5 million at September 30, 2022, down from $5.0 million at December 31, 2021.
- Short-term borrowings were $167.3 million, down from $221.6 million, while long-term debt including current maturities was $605.3 million, up from $567.9 million. Total available Revolver capacity was $227.4 million.
- Equity represented 51% of capitalization including short-term debt, within the company’s stated 50% to 60% target range. The company was in compliance with its Revolver funded-indebtedness covenant.
Material changes versus the prior comparable period
- Revenue growth included $7.0 million of nine-month Adjusted Gross Margin from the Diversified Energy and Davenport Energy propane acquisitions, higher transmission service contributions, and increased demand for CNG/RNG/LNG services.
- Q3 2021 benefited from a $2.1 million reduction in operating expenses through COVID-19 regulatory deferrals. Excluding that benefit, Q3 2022 operating income would have increased approximately $0.6 million, or 3.1%.
- Nine-month operating income increased 6.0%; excluding the prior-year $2.5 million COVID-19 regulatory deferral benefit, management stated that the increase was approximately 8.7%.
- Interest charges increased $1.3 million in Q3 and $2.3 million for nine months, reflecting higher Revolver rates and additional long-term debt. The Revolver was amended in August 2022 to use SOFR plus a 10-basis-point adjustment instead of LIBOR.
- In March 2022, the company issued $50.0 million of 2.95% senior notes due 2042. It also agreed in September 2022 to issue $80.0 million of 5.43% senior notes due 2038, expected on or before March 14, 2023.
- In October 2022, after the reporting date, the company acquired Planet Found Energy Development for $9.5 million. The acquisition is expected to be included in fourth-quarter 2022 results.
Guidance, outlook, commentary, risks, and unusual items
- Management reduced 2022 capital expenditure guidance to $140 million-$175 million, excluding acquisitions, because of regulatory delays and supply-chain disruptions. The company expects the delays to be temporary.
- Management estimates 2022 Adjusted Gross Margin of approximately $57.8 million from listed major projects and approximately $63.4 million in 2023, although these are project-level estimates rather than consolidated earnings guidance.
- The Florida natural gas rate case seeks approximately $24.1 million of permanent annual rate relief effective January 1, 2023. Interim rates of approximately $7.7 million annualized became effective in September 2022 and remain subject to refund pending the final regulatory decision.
- Major growth projects include the Beachside Pipeline, Southern Expansion, North Ocean City Connector, St. Cloud/Twin Lakes Expansion, Florida GRIP, and the Elkton Gas STRIDE program. Timing depends on regulatory approvals, permitting, construction, customer growth, and supply availability.
- Environmental liabilities related to former manufactured gas plant sites totaled approximately $4.6 million. Estimated remaining remediation costs for specified sites range from $0.3 million to $0.9 million, with West Palm Beach remediation costs estimated at $3.3 million-$14.2 million.
- Outstanding guarantees totaled approximately $12.0 million, specific-purpose guarantees totaled $11.1 million, and letters of credit totaled approximately $5.3 million. Management stated that no letters of credit had been drawn.
- Key risks include regulatory cost recovery and rate-case outcomes, interest-rate and commodity-price volatility, weather, environmental obligations, supply-chain and construction delays, access to capital markets, cyberattacks, operational hazards, competition, counterparty credit risk, and integration of acquisitions.
- Results are seasonal; earnings and revenue are generally higher in the first and fourth quarters because of colder-weather energy demand. The filing provides no consolidated full-year earnings or revenue guidance.
Important facts for investors to verify
- Final resolution of the Florida natural gas rate case, including permanent relief, refund exposure, tariff changes, and the proposed environmental remediation surcharge.
- Whether the planned $80.0 million senior-note issuance occurs by March 14, 2023 and how proceeds affect Revolver borrowings and interest expense.
- Actual 2022 capital expenditures versus the revised $140 million-$175 million range and the effect of regulatory and supply-chain delays on project completion.
- Profitability and cash generation of the expanded propane business after the seasonal third-quarter operating loss in the Unregulated Energy segment.
- Progress, required investment, and earnings contribution from the Beachside, Southern Expansion, St. Cloud/Twin Lakes, RNG, and Planet Found projects.
- Exposure to rising SOFR and other interest rates, given $167.3 million of short-term borrowings and increased 2022 interest expense.
- Updated environmental remediation estimates and the extent to which future costs are recoverable through insurance or customer rates.