Chesapeake Utilities Corporation — Q1 2023 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 businesses primarily on the U.S. East Coast. This unaudited Form 10-Q covers the three months ended March 31, 2023. Results are seasonal, with generally higher revenue and earnings in the first and fourth quarters.
Key financial metrics
| Metric | Q1 2023 | Q1 2022 | Change |
|---|---|---|---|
| Operating revenue | $218.1 million | $222.9 million | Down $4.8 million |
| Operating income | $54.9 million | $54.9 million | Essentially flat |
| Income before taxes | $48.0 million | $50.4 million | Down $2.5 million |
| Net income | $36.3 million | $36.9 million | Down $0.6 million |
| Diluted EPS | $2.04 | $2.08 | Down $0.04 |
| Adjusted gross margin | $129.5 million | $125.7 million | Up $3.8 million |
| Cash flow from operations | $81.7 million | $69.1 million | Up $12.5 million |
| Capital expenditures | $42.4 million | $29.9 million | Up $12.5 million |
Operating revenue from Regulated Energy increased to $142.3 million from $127.9 million, while Unregulated Energy revenue declined to $83.2 million from $101.3 million. Regulated Energy operating income increased 8.5% to $37.6 million; Unregulated Energy operating income declined 14.0% to $17.2 million.
Net margin was approximately 16.7% of revenue, compared with approximately 16.6% in the prior-year quarter. Operating margin was approximately 25.2%, compared with approximately 24.6% in Q1 2022.
Liquidity, debt and capital resources
- Cash and cash equivalents were $3.1 million at March 31, 2023, compared with $6.2 million at December 31, 2022.
- Short-term borrowings were $94.1 million, down from $202.2 million at year-end 2022. The weighted-average rate was 5.17%.
- Total long-term debt, including current maturities, was $677.8 million, compared with $599.9 million at December 31, 2022.
- Chesapeake issued $80.0 million of 5.43% senior notes due 2038 and used the proceeds primarily to repay Revolver borrowings and fund capital expenditures.
- Revolver availability was $300.1 million at quarter-end; the 364-day tranche expires in August 2023 and the five-year tranche expires in August 2026.
- Remaining borrowing capacity under the Prudential and MetLife shelf agreements was $255.0 million, with both agreements expiring in February 2026.
- Equity represented 53% of total capitalization including short-term debt, within management’s 50% to 60% target range. The company was in compliance with its Revolver financial covenant.
- Management forecasts 2023 capital expenditures of $200 million to $230 million, excluding acquisitions.
Material changes versus the prior comparable period
- Significantly warmer weather reduced customer consumption and lowered adjusted gross margin by approximately $6.9 million year over year. Management stated that temperatures in northern service territories were more than 20% above historical averages.
- The Florida natural gas base rate proceeding contributed approximately $4.1 million of adjusted gross margin in Q1 2023. Permanent rates became effective March 1, 2023, with approximately $17.2 million of annual permanent rate relief approved.
- Regulated Energy adjusted gross margin increased $4.5 million, supported by Florida rate relief, customer growth, infrastructure programs and pipeline expansions.
- Unregulated Energy adjusted gross margin decreased $0.7 million. Lower weather-related propane and Aspire Energy consumption and higher operating costs offset improved propane margins and higher CNG, RNG and LNG demand.
- Interest charges increased $1.9 million, primarily because Revolver rates rose materially from the prior year and additional long-term debt was outstanding.
- Income tax expense declined to $11.6 million from $13.5 million. Q1 2023 included a $1.3 million deferred tax benefit from a Pennsylvania state tax-rate reduction; excluding that item, the effective tax rate was 26.9%.
- Operating cash flow increased, principally due to changes in regulatory assets and liabilities, income taxes payable and other working capital items.
Outlook, management commentary, risks and unusual items
Management continues to pursue growth through regulated distribution investments, pipeline expansions, propane acquisitions, CNG/RNG/LNG transportation and sustainable-energy projects. Reported project estimates indicate approximately $39.6 million of 2023 adjusted gross margin from listed major projects and initiatives, including $16.3 million from the Florida rate case, $12.5 million from CNG/RNG/LNG transportation and infrastructure, and $6.3 million from pipeline expansions.
Projects under construction or development include the Southern Expansion, Beachside, Wildlight, St. Cloud/Twin Lakes, Clean Energy, Lake Wales and Full Circle Dairy RNG projects. Timing and returns remain subject to regulatory approvals, construction execution, customer growth and capital availability.
- Key risks include regulatory recovery and rate-case outcomes, environmental remediation, weather variability, commodity prices, interest rates, construction delays, supply-chain and labor constraints, cybersecurity, operational hazards, counterparty creditworthiness and access to capital markets.
- Environmental liabilities related to former manufactured-gas-plant sites were approximately $3.5 million at March 31, 2023. Remaining remediation costs for three identified sites were estimated at $0.3 million to $0.9 million, with management expecting recovery through insurance or customer rates where applicable.
- The company had approximately $14.2 million of subsidiary guarantees, $4.0 million of specific-purpose guarantees and $5.8 million of letters of credit outstanding. None had been drawn.
- The company maintains a $50.0 million interest-rate swap through September 2025 and propane commodity hedges with expirations through 2025.
- Management reported that legal and regulatory proceedings were not expected to have a material effect on consolidated financial position, results or cash flows, but outcomes remain subject to regulatory and environmental uncertainty.
- Disclosure controls and procedures were effective as of March 31, 2023, and no material change in internal control over financial reporting was reported.
Important facts for investors to verify
- Whether Florida rate relief and other regulatory programs produce the projected recurring margins and whether additional rate cases are approved on schedule.
- The refinancing or renewal plan for the $400 million Revolver, particularly the 364-day tranche expiring in August 2023.
- The effect of higher interest rates on future interest expense and the company’s ability to fund $200 million to $230 million of planned 2023 capital expenditures.
- Whether warmer-than-normal weather, commodity prices and propane demand continue to affect Unregulated Energy results.
- Actual project completion dates, costs and customer commitments for the Southern Expansion, Beachside, Wildlight, Lake Wales, CNG/RNG/LNG and other growth initiatives.
- The remaining cost and regulatory recovery status of manufactured-gas-plant remediation and other environmental obligations.
- The composition and sustainability of the increase in operating cash flow, including the extent to which it reflects temporary regulatory and working-capital changes.