Business Context and Reporting Period
Chesapeake Utilities Corporation filed this unaudited Form 10-Q for the quarter and nine months ended September 30, 2021. The company operates regulated natural gas and electric distribution and transmission businesses, as well as unregulated propane, energy transmission, electricity and steam generation, compressed natural gas, and related energy services across the Mid-Atlantic, Florida, Ohio and Pennsylvania.
Results are seasonal, with generally higher revenue and earnings in the first and fourth quarters because of colder-weather energy demand. Chesapeake continued operating as an essential business during the COVID-19 pandemic.
Key Financial Metrics
| Metric | Three months ended September 30 | Nine months ended September 30 |
|---|---|---|
| Operating revenues | $107.3 million, compared with $101.4 million | $409.6 million, compared with $351.2 million |
| Operating income | $20.1 million, compared with $17.4 million | $94.3 million, compared with $77.5 million |
| Income from continuing operations | $12.5 million, compared with $9.3 million | $60.8 million, compared with $49.0 million |
| Net income | $12.5 million, compared with $9.3 million | $60.8 million, compared with $49.1 million |
| Diluted EPS | $0.71, compared with $0.56 | $3.45, compared with $2.97 |
| Gross margin | $80.0 million, compared with $79.5 million | $281.2 million, compared with $253.4 million |
| Net cash provided by operating activities | Not separately provided for the quarter | $152.8 million, compared with $115.9 million |
Operating margins were approximately 18.7% for the quarter and 23.0% for the nine-month period, compared with approximately 17.2% and 22.1%, respectively, in the prior-year periods. Gross margin is a non-GAAP measure defined by the company as operating revenues less cost of sales.
- Regulated Energy operating income was $23.5 million in the quarter and $79.2 million for the nine months.
- Unregulated Energy operating income was a loss of $2.9 million in the quarter and income of $15.8 million for the nine months.
- Cash used in investing activities was $148.1 million for the nine months, including $148.2 million of capital expenditures.
- Cash used in financing activities was $2.3 million, including $23.3 million of dividends and $10.1 million of long-term debt repayments.
- Cash and cash equivalents were $5.9 million at September 30, 2021, versus $3.5 million at December 31, 2020.
- Long-term debt, including current maturities, was $521.7 million; short-term borrowings were $192.0 million.
- Total capitalization including short-term debt was $1.46 billion, consisting of 51% equity, 36% long-term debt and 13% short-term debt.
Material Changes Versus the Prior Comparable Period
- Third-quarter revenue increased 5.8%, while nine-month revenue increased 16.6%, primarily from higher unregulated energy revenue, pipeline expansions, acquisitions, customer growth and higher consumption.
- Third-quarter net income increased 34.7%, and nine-month net income increased 23.6%. Diluted EPS increased $0.15 for the quarter and $0.48 for the nine months.
- Nine-month gross margin increased $27.8 million. Contributions included $6.0 million from Eastern Shore and Peninsula Pipeline expansions, $3.9 million from acquisitions, $2.7 million from propane margins, $2.3 million from natural gas customer growth and $1.4 million from Florida GRIP.
- Third-quarter regulated gross margin declined $1.4 million because the 2020 period included a cumulative Hurricane Michael settlement benefit. Excluding that timing effect, management reported a $4.6 million increase in operating income year over year.
- Operating expenses increased due to new capital investments, depreciation, property taxes, payroll and benefits, acquisitions and the return toward pre-pandemic activity. These increases were partly offset by lower COVID-19 costs and regulatory deferrals.
- The effective tax rate was 19.3% in the third quarter, compared with 27.4% in the prior-year quarter, partly due to a $0.9 million favorable CARES Act-related tax adjustment. The nine-month effective tax rate was 25.3%, compared with 24.7%.
- Operating cash flow increased $36.9 million year over year, primarily from higher earnings and favorable changes in receivables, payables and taxes. Capital expenditures increased $24.8 million.
Guidance, Outlook, Commentary, Risks and Unusual Items
Outlook and Growth Initiatives
- Management did not provide explicit earnings or revenue guidance in the filing.
- Forecasted 2021 capital expenditures were updated to a range of $185 million to $200 million, excluding potential acquisitions.
- Growth priorities include regulated distribution and pipeline expansion, Florida GRIP, propane acquisitions, compressed natural gas services, renewable natural gas and liquefied natural gas transportation, and other renewable energy projects.
- The company expects the West Palm Beach expansion to be completed in phases through the fourth quarter of 2021. The Beachside Pipeline Expansion is expected to enter service in December 2022 and is expected to generate approximately $2.5 million of annual gross margin beginning in 2023.
- Elkton Gas's STRIDE plan was approved, with a surcharge effective September 4, 2021, to accelerate replacement of Aldyl-A pipelines by 2023.
- Eastern Shore completed the Somerset County portion of the Del-Mar Energy Pathway project in the third quarter of 2021. The Noble Road Landfill renewable natural gas pipeline was completed in October 2021.
Financing and Liquidity
- The company amended its $400 million revolving facility into a $200 million 364-day tranche and a $200 million five-year tranche. Available credit was $203.4 million at September 30, 2021, after borrowings and letters of credit.
- Chesapeake entered into an agreement to issue $50 million of 2.49% senior notes on January 25, 2022, with proceeds intended to reduce short-term borrowings and fund capital expenditures.
- It also issued or arranged $9.6 million of 2.46% sustainability-linked equipment financing for Marlin Gas Services.
- The company was in compliance with its revolving-credit funded-indebtedness covenant, which requires a ratio no greater than 65% at fiscal year-end.
Risks, Contingencies and Unusual Items
- COVID-19 variants, employee vaccination or testing mandates, workforce attrition, supply-chain disruptions and higher bad debt or operating costs could affect results.
- Regulatory recovery of COVID-19 costs, storm costs and environmental remediation costs depends on applicable regulatory processes. The COVID-19 regulatory asset balance was $2.3 million at September 30, 2021.
- Environmental liabilities related to former manufactured gas plant sites were approximately $5.4 million. Estimated remaining cleanup costs for certain sites were $0.3 million to $0.9 million, while the West Palm Beach site estimate ranged from $3.3 million to $14.2 million.
- The company had approximately $8.0 million of corporate guarantees and $4.6 million of letters of credit outstanding; none had been drawn as of September 30, 2021.
- Commodity price, interest rate, weather, regulatory, environmental, cyber, climate-related, construction and counterparty risks remain material. Propane derivative contracts had a net fair value of approximately $10.2 million at September 30, 2021.
- Management expects to complete termination of the Chesapeake Pension Plan in the fourth quarter of 2021 and recognize the associated expense, but the filing does not provide a clear estimate of that expense.
Most Important Facts for Investors to Verify
- Whether earnings growth remains durable after adjusting for Hurricane Michael settlement timing, CARES Act tax benefits and COVID-19 regulatory deferrals.
- The pace and final cost of the $185 million to $200 million 2021 capital program and its effect on short-term borrowings and future financing needs.
- Completion dates, regulatory approvals and realized margins from the West Palm Beach, Winter Haven, Beachside, Del-Mar and Guernsey projects.
- The timing and economics of the $50 million senior-note issuance and the company’s ability to reduce short-term debt.
- Recovery and amortization of COVID-19, Hurricane Michael and environmental regulatory assets, including the effect on future customer rates.
- Exposure to propane and natural gas commodity prices, weather variability, interest rates, labor availability, cyber incidents and evolving COVID-19 requirements.
- Any pension-plan termination expense recognized after September 30, 2021 and any subsequent changes to the company’s 2021 outlook.