Chesapeake Utilities Corporation — 2021 Form 10-K Summary
Reporting period: Fiscal year ended December 31, 2021. The filing was dated February 23, 2022. Chesapeake Utilities is a diversified energy delivery company operating regulated natural gas distribution, natural gas transmission, electric distribution, propane, unregulated natural gas transmission and supply, combined heat and power generation, and mobile CNG/LNG/RNG services across the Mid-Atlantic, Florida, North Carolina, South Carolina and Ohio.
Business Context
- Reportable segments are Regulated Energy and Unregulated Energy; remaining activities are reported as other businesses and eliminations.
- Regulated operations are subject primarily to state public service commission or FERC oversight, with fuel-cost recovery and infrastructure surcharge mechanisms supporting recovery of eligible costs.
- The Company’s strategy emphasizes organic growth, pipeline expansions, regulated infrastructure investment, propane acquisitions, CNG transportation and renewable natural gas initiatives.
Financial Performance and Key Metrics
| Metric | 2021 | 2020 | Change |
|---|
| Operating revenues | $570.0 million | $488.2 million | +16.8% |
| Operating income | $131.1 million | $112.7 million | +16.3% |
| Income from continuing operations | $83.5 million | $70.6 million | +18.2% |
| Net income | $83.5 million | $71.5 million | +16.7% |
| Diluted EPS from continuing operations | $4.73 | $4.21 | +$0.52 |
| Diluted EPS | $4.73 | $4.26 | +$0.47 |
| Net cash provided by operating activities | $150.5 million | $158.9 million | -$8.4 million |
| Capital expenditures | $227.8 million | $195.9 million | +16.3% |
- Operating margin: approximately 23.0% in 2021 versus 23.1% in 2020. Net margin: approximately 14.6% versus 14.6%.
- Adjusted gross margin, a non-GAAP measure: $383.0 million, up from $350.3 million. Regulated Energy contributed $283.2 million and Unregulated Energy contributed $100.0 million.
- Segment operating income: Regulated Energy generated $106.1 million, up 15.1%; Unregulated Energy generated $24.4 million, up 18.0%.
- Cash flow from operations covered approximately 66% of reported capital expenditures. Investing cash outflows were $223.0 million, while financing activities provided $74.0 million.
- Cash and cash equivalents were $5.0 million at year-end, compared with $3.5 million in 2020.
Liquidity, Debt and Capitalization
| Balance-sheet metric at December 31 | 2021 | 2020 |
|---|
| Long-term debt, net of current maturities | $549.9 million | $508.5 million |
| Current portion of long-term debt | $18.0 million | $13.6 million |
| Short-term borrowings | $221.6 million | $175.6 million |
| Stockholders’ equity | $774.1 million | $697.1 million |
| Total assets | $2.115 billion | $1.932 billion |
- Debt and equity represented approximately 50% and 50%, respectively, of capitalization including short-term borrowings; management’s target equity ratio is 50% to 60%.
- The $400.0 million unsecured revolving credit facility had $173.1 million of available credit at year-end, after outstanding borrowings and $5.3 million of letters of credit.
- Average short-term borrowings were $182.3 million at a weighted average rate of 1.03% in 2021. The Company was in compliance with all debt covenants.
- The Company agreed to issue $50.0 million of 2.95% senior notes due 2042 on or before March 15, 2022, with proceeds expected to reduce revolver borrowings and/or fund capital expenditures.
- Quarterly dividends totaled $1.880 per share in 2021, compared with $1.725 in 2020. The Company reported 61 consecutive years of cash dividend payments.
Material Changes Versus the Prior Comparable Period
- Revenue increased primarily from pipeline expansions, organic customer growth, higher customer consumption as activity returned toward pre-pandemic levels, colder weather, acquisitions and higher propane margins.
- Regulated Energy adjusted gross margin increased $22.4 million. Key contributors included Eastern Shore and Peninsula Pipeline expansions, natural gas customer growth, Florida GRIP investments, acquisitions and improved electric operations.
- Unregulated Energy adjusted gross margin increased $10.2 million, driven by higher propane margins and consumption, Western Natural Gas and Diversified Energy contributions, higher CNG demand and improved Aspire Energy results.
- Depreciation and amortization increased to $62.7 million from $58.1 million, reflecting recent capital investments and acquisitions. Operating expenses also increased as the Company expanded and resumed more normal operating activity.
- On December 15, 2021, Sharp Energy acquired Diversified Energy propane assets for approximately $37.5 million net of cash, adding approximately 19,000 customers and approximately 10.0 million annual propane gallons. The acquisition contributed $0.6 million of 2021 adjusted gross margin.
- The Company completed the Del-Mar Energy Pathway and related Somerset County expansion, completed Aspire Energy Express facilities serving Guernsey Power Station, and completed the remaining Western Palm Beach County expansion.
- The Chesapeake Utilities Pension Plan was formally terminated in the fourth quarter of 2021. The Company recorded $0.6 million of pension settlement expense that was not recoverable through regulation.
- Goodwill testing indicated no impairment in 2021. Goodwill increased to $44.7 million, including $5.9 million associated with Diversified Energy.
Guidance, Outlook, Commentary and Unusual Items
- Management forecast 2022 capital expenditures, excluding acquisitions, of $175 million to $200 million, including regulated distribution and transmission expansion, Florida GRIP, Elkton STRIDE, technology and other strategic investments.
- Management’s project estimates indicate 2022 adjusted gross margin of approximately $82.7 million from identified pipeline expansions, CNG transportation, RNG transportation, acquisitions and regulatory initiatives, increasing to approximately $89.9 million in 2023. These are project-level estimates, not consolidated earnings guidance.
- Identified growth initiatives include the Southern Expansion, Winter Haven and Beachside pipeline projects, Guernsey Power Station service, additional CNG transportation, RNG transportation and propane acquisition integration.
- COVID-19 did not have a material overall effect on the Company in 2021, although the Company experienced reduced commercial and industrial consumption, higher bad-debt expense and incremental operating costs. Florida regulated businesses established a $2.1 million regulatory asset, and total COVID-19 regulatory assets were $2.3 million at year-end.
- Hurricane Michael recovery generated $11.5 million of adjusted gross margin and $4.1 million of net income in 2021. Related storm costs are being recovered through regulatory mechanisms, including a surcharge and amortization of regulatory assets.
- Environmental liabilities related to seven former manufactured gas plant sites were approximately $5.2 million. Estimated cleanup costs for the West Palm Beach site were $3.3 million to $14.2 million, with management expecting recovery through rates.
- Principal risks include regulatory approval and cost recovery, access to capital, interest-rate increases, weather variability, propane and other commodity-price volatility, pipeline and operational hazards, cybersecurity, severe weather, environmental remediation, labor availability, acquisitions and climate-related regulation.
- The filing does not provide a consolidated earnings or revenue outlook for 2022.
Most Important Facts for an Investor to Verify
- Verify the sustainability of 2021 earnings growth after separating recurring regulated margin from colder weather, propane-margin benefits, acquisitions and other unusual items.
- Monitor the Company’s substantial capital program relative to operating cash flow, including the $175 million to $200 million 2022 capital expenditure forecast.
- Track short-term borrowing levels, the August 2022 revolver tranche expiration, the planned $50 million senior-note issuance and compliance with debt covenants.
- Assess regulatory recovery and amortization of storm, COVID-19, environmental, pension and other regulatory assets.
- Confirm execution, approvals, timing and customer commitments for the Southern Expansion, Winter Haven, Beachside, RNG and other growth projects.
- Evaluate acquisition integration and expected contribution from Diversified Energy, including the preliminary purchase accounting and seller-related liability.
- Review weather sensitivity, propane hedging exposure and the potential effect of higher interest rates and commodity prices.
- Review environmental contingencies, cybersecurity controls, insurance coverage, labor agreements expiring in 2022 and the status of pending regulatory or legal matters.
- The independent auditor reported an unqualified opinion and concluded that internal control over financial reporting was effective as of December 31, 2021.
