Chesapeake Utilities(CPK) - 2020 Q3 - Quarterly Report

PART I—FINANCIAL INFORMATION Financial Statements Chesapeake Utilities reported strong financial performance in Q3 and the first nine months of 2020, with net income and assets significantly increasing, and operating cash flow improving Condensed Consolidated Statements of Income The company achieved substantial year-over-year growth in Q3 and the first nine months of 2020, with net income and diluted EPS significantly increasing Financial Metric | Financial Metric (in thousands, except EPS) | Three Months Ended Sep 30, 2020 | Three Months Ended Sep 30, 2019 | Nine Months Ended Sep 30, 2020 | Nine Months Ended Sep 30, 2019 | | :--- | :--- | :--- | :--- | :--- | | Total Operating Revenues | $101,419 | $92,626 | $351,160 | $347,630 | | Operating Income | $17,406 | $14,357 | $77,518 | $76,645 | | Income from Continuing Operations | $9,280 | $6,251 | $48,981 | $43,977 | | Net Income | $9,261 | $5,621 | $49,146 | $42,589 | | Diluted EPS from Continuing Operations | $0.56 | $0.38 | $2.96 | $2.67 | | Diluted EPS | $0.56 | $0.34 | $2.97 | $2.59 | Condensed Consolidated Balance Sheets Total assets expanded to $1.888 billion by September 30, 2020, driven by increased property, plant, and equipment, alongside growth in stockholders' equity and long-term debt Balance Sheet Item | Balance Sheet Item (in thousands) | September 30, 2020 | December 31, 2019 | | :--- | :--- | :--- | | Total Assets | $1,888,088 | $1,783,198 | | Net property, plant and equipment | $1,567,350 | $1,463,797 | | Total Liabilities | $1,271,398 | $1,221,621 | | Long-term debt, net | $519,971 | $440,168 | | Total Stockholders' Equity | $616,690 | $561,577 | | Total Capitalization and Liabilities | $1,888,088 | $1,783,198 | Condensed Consolidated Statements of Cash Flows Operating cash flow increased to $115.9 million for the nine months ended September 30, 2020, while investing and financing cash flows saw notable shifts Cash Flow Activity | Cash Flow Activity (in thousands) | Nine Months Ended Sep 30, 2020 | Nine Months Ended Sep 30, 2019 | | :--- | :--- | :--- | | Net cash provided by operating activities | $115,880 | $103,939 | | Net cash used in investing activities | ($136,551) | ($139,913) | | Net cash provided by financing activities | $16,742 | $34,205 | | Net Decrease in Cash and Cash Equivalents | ($3,929) | ($1,769) | Notes to Condensed Consolidated Financial Statements The notes provide details on accounting policies, the impact of COVID-19, significant acquisitions and divestitures, regulatory authorizations, and financial instruments - The company acquired Elkton Gas in July 2020 for approximately $15.6 million, adding 7,000 natural gas customers in Cecil County, Maryland. The acquisition resulted in the recording of $4.3 million in goodwill[53][54] - The company divested its natural gas marketing business, PESCO, in Q4 2019. PESCO's historical financial results are now reflected as discontinued operations in the financial statements[40][56] - The company has received authorization from the Delaware, Maryland, and Florida Public Service Commissions (PSCs) to establish regulatory assets to record prudently incurred incremental costs related to the COVID-19 pandemic, facilitating future cost recovery[94][95][96] - In September 2020, the company entered into a new $375.0 million syndicated revolving credit facility (Revolver), which expires in September 2021. This replaced all previously existing bilateral lines of credit[172] Management's Discussion and Analysis of Financial Condition and Results of Operations (MD&A) Strong Q3 2020 performance was driven by the Hurricane Michael settlement and organic growth, despite COVID-19 impacts, with the company maintaining a sound capital structure and executing strategic investments Results of Operations Operating income significantly increased in Q3 2020, primarily due to the Hurricane Michael settlement and gross margin growth, despite COVID-19 and weather impacts over nine months - The settlement of the Hurricane Michael regulatory proceeding was a primary driver of performance, improving operating income by $2.9 million in Q3 2020. This included recognizing $1.9 million in operating income that was previously billed under interim rates during the first half of 2020[192] - For the nine months ended September 30, 2020, the estimated unfavorable impact of COVID-19 on earnings was approximately $1.9 million, primarily from reduced commercial/industrial consumption, higher bad debt, and incremental pandemic-related expenses[191] Gross Margin Drivers | Gross Margin Drivers (in thousands) | Q3 2020 vs Q3 2019 | Nine Months 2020 vs 2019 | | :--- | :--- | :--- | | Hurricane Michael regulatory settlement | $8,261 | $8,261 | | Pipeline Expansions (Eastern Shore & Peninsula) | $2,677 | $5,485 | | Acquisitions (Boulden & Elkton Gas) | $684 | $3,120 | | Florida GRIP | $685 | $678 | | Increased demand for CNG services | $599 | $694 | | Decreased consumption (weather related) | ($1,005) | ($3,090) | Financial Position, Liquidity and Capital Resources The company maintains a strong financial position and liquidity, supported by operating cash flow, a new credit facility, and capital market access, with a 2020 capital expenditure forecast of $195-$215 million 2020 Expected Capital Expenditures | 2020 Expected Capital Expenditures (in thousands) | Low | High | | :--- | :--- | :--- | | Regulated Energy | $150,000 | $164,000 | | Unregulated Energy | $43,000 | $48,000 | | Other | $2,000 | $3,000 | | Total | $195,000 | $215,000 | - The company's target equity to total capitalization ratio (including short-term debt) is 50-60%. The ratio was 45% at September 30, 2020, and rose to ~50% by October 31, 2020, after equity issuances[291][292] - As of September 30, 2020, the company had $310 million in remaining borrowing capacity under its shelf agreements with Prudential, MetLife, and NYL[295] Quantitative and Qualitative Disclosures about Market Risk The company manages interest rate risk through fixed-rate debt and mitigates commodity price risk in regulated and unregulated segments via recovery mechanisms and hedging strategies - The company's regulated energy businesses have limited commodity price risk exposure due to fuel cost recovery mechanisms authorized by Public Service Commissions, which allow for the recovery of prudently incurred fuel costs[315] - Unregulated propane operations are exposed to commodity price risk, which is mitigated by storing up to 8.0 million gallons of propane and using fair value hedges, cash flow hedges, or other economic hedges[316] Controls and Procedures The CEO and CFO affirmed the effectiveness of disclosure controls and procedures as of September 30, 2020, with recent operational changes not materially impacting internal controls - Based on their evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the company's disclosure controls and procedures were effective as of September 30, 2020[321] - Changes during the quarter, including a new fixed asset tracking system and a pandemic response plan for remote work, did not materially affect the company's internal control over financial reporting[322] PART II—OTHER INFORMATION Legal Proceedings Management believes ongoing legal proceedings and claims will not materially affect the company's financial position, results of operations, or cash flows - In the opinion of management, the ultimate disposition of ongoing legal proceedings and claims will not have a material effect on the company's consolidated financial position, results of operations, or cash flows[330] Risk Factors No material changes to previously disclosed risk factors were reported in the current period - The report refers to the risk factors described in the 2019 Annual Report on Form 10-K and the Q1 2020 Form 10-Q, indicating no material updates in the current period[331] Unregistered Sales of Equity Securities and Use of Proceeds In Q3 2020, the company purchased 556 shares for its Non-Qualified Deferred Compensation Plan's Rabbi Trust, with no other public repurchase plans - In July 2020, the company purchased 556 shares at an average price of $84.77 per share for its Non-Qualified Deferred Compensation Plan's Rabbi Trust[329][332] Exhibits This section lists exhibits filed with the Form 10-Q, including key agreements, certifications, and XBRL data files