Chesapeake Utilities Corporation: Q1 2022 Form 10-Q Summary
Business context and reporting period
Chesapeake Utilities is a diversified energy company providing regulated natural gas and electric distribution, natural gas transmission, propane distribution, electricity and steam generation, compressed natural gas services, and related energy services, primarily on the U.S. East Coast. This unaudited Form 10-Q covers the three months ended March 31, 2022, compared with the three months ended March 31, 2021. Results are seasonal, with earnings generally higher in the first and fourth quarters.
Key financial metrics
| Metric | Q1 2022 | Q1 2021 | Change |
|---|---|---|---|
| Operating revenue | $222.9 million | $191.2 million | +$31.7 million, or 16.6% |
| Operating income | $54.9 million | $51.6 million | +$3.3 million, or 6.3% |
| Net income | $36.9 million | $34.5 million | +$2.5 million, or 7.2% |
| Diluted EPS | $2.08 | $1.96 | +$0.12, or 6.1% |
| Adjusted gross margin | $125.7 million | $116.9 million | +$8.8 million, or 7.5% |
| Net cash from operating activities | $69.1 million | $80.4 million | -$11.3 million |
| Capital expenditures | $29.9 million | $52.0 million | -$22.1 million |
Operating margin was approximately 24.6% in Q1 2022 versus 27.0% in Q1 2021. Adjusted gross margin increased in both segments: Regulated Energy rose to $82.4 million from $78.2 million, while Unregulated Energy rose to $43.3 million from $38.8 million.
At March 31, 2022, cash and cash equivalents were $5.2 million. Long-term debt, including current maturities, was $617.6 million, short-term borrowings were $140.9 million, and stockholders’ equity was $805.5 million. Equity represented 52% of capitalization including short-term debt, within management’s stated 50% to 60% target range. Revolver availability was $256.3 million, and the company was in compliance with its funded-indebtedness covenant.
Material changes versus the prior comparable period
- Revenue growth was driven primarily by the December 2021 Diversified Energy propane acquisition, pipeline expansions, natural gas customer growth, higher Aspire Energy results, regulated infrastructure programs, and increased propane margins and service fees.
- Diversified Energy contributed $10.4 million of revenue, $1.5 million of operating income, and approximately $4.0 million of adjusted gross margin in the quarter. The acquisition added approximately 19,000 customers and expected annual propane distribution of approximately 10.0 million gallons.
- Operating expenses increased due to acquisition-related costs, higher depreciation and amortization, property taxes, payroll and benefits, employee-related costs, and vehicle expenses. Higher costs partially offset margin growth.
- Weather-related lower customer consumption reduced adjusted gross margin by approximately $0.4 million year over year, primarily affecting propane operations.
- The company issued $50.0 million of 2.95% senior notes due March 15, 2042. Proceeds were used to reduce revolver borrowings and fund capital expenditures.
- The quarterly dividend declared increased to $0.480 per share from $0.440 per share in the comparable 2021 period.
Guidance, outlook, commentary, risks and unusual items
Management did not provide consolidated earnings guidance in the filing. It forecast 2022 capital expenditures, excluding acquisitions, of $175 million to $200 million, including $154 million to $171 million for Regulated Energy and $19 million to $25 million for Unregulated Energy.
- Management expects continued growth from pipeline expansions, Florida GRIP, Eastern Shore surcharge programs, the Elkton Gas STRIDE plan, propane operations, virtual pipeline services, and renewable natural gas initiatives.
- The company expects to file a consolidated Florida natural gas base rate case after May 24, 2022, seeking an estimated $18 million to $21 million revenue requirement increase and new rates effective January 1, 2023. The ultimate outcome is uncertain.
- Key projects include Eastern Shore’s Southern Expansion, the Winter Haven and Beachside pipeline expansions, and the North Ocean City Connector. Timing remains subject to regulatory approvals, permits, construction execution, customer growth, and capital availability.
- COVID-19 restrictions were largely lifted, but the company retained a $2.0 million COVID-19 regulatory asset at March 31, 2022. The filing states that the ability to defer additional pandemic-related costs for regulatory consideration has ended.
- Environmental liabilities related to former manufactured gas plant sites were approximately $4.9 million. Estimated remaining remediation costs for certain sites ranged from $0.3 million to $0.9 million, while the West Palm Beach site estimate ranged from $3.3 million to $14.2 million, including potential relocation and redevelopment-related costs.
- Commodity price risk remains concentrated in propane and Aspire Energy operations. The company had propane derivative assets of $7.5 million and derivative liabilities of $0.5 million at quarter-end, and expected to reclassify approximately $4.3 million from accumulated other comprehensive income to earnings over the following 12 months.
- Interest-rate exposure increased after the company’s interest-rate swaps expired at December 31, 2021. Management stated that additional Federal Reserve rate increases would increase revolver borrowing costs.
- Other risks include regulatory and rate-case outcomes, environmental obligations, weather, commodity prices, interest rates, cyberattacks, supply and labor constraints, credit-market access, competition, and the ability to execute and integrate acquisitions and capital projects.
Investor verification points
- Verify the earnings contribution and integration progress of Diversified Energy and whether forecast adjusted gross margin is achieved.
- Monitor the Florida consolidated base rate proceeding, requested revenue increase, interim relief, and potential customer or regulatory responses.
- Compare actual 2022 capital expenditures and project in-service dates with the $175 million to $200 million forecast.
- Track revolver utilization, refinancing of the 364-day tranche expiring in August 2022, interest-rate increases, and remaining shelf capacity of $250 million.
- Assess the sustainability of propane margins, derivative gains, weather normalization, and customer conversion from propane to natural gas.
- Review environmental remediation estimates, regulatory recovery assumptions, guarantees of $13.1 million, and outstanding letters of credit of approximately $5.3 million.
- Reconcile non-GAAP adjusted gross margin with GAAP gross margin and confirm that management’s calculation remains consistent over time.