Chesapeake Utilities(CPK) - 2021 Q4 - Annual Report

Part I Item 1. Business Chesapeake Utilities is a diversified energy delivery company, balancing stable regulated operations with higher-return unregulated and sustainable energy ventures - The Company's core strategy is to grow earnings from its stable regulated energy foundation and invest in related non-regulated businesses that offer opportunities for higher returns[18] - Key growth platforms include optimizing existing businesses, pursuing pipeline expansions, growing Marlin Gas Services' CNG/LNG/RNG transport business, strategic propane acquisitions, and participating in sustainable energy opportunities[19] Regulated Energy The Regulated Energy segment, encompassing natural gas and electric distribution and transmission, provides stable earnings and growth through regulated rates and infrastructure programs Regulated Energy Operations - 2021 Financials | Operations | Areas Served | Net Income (in thousands) | Total Assets (in thousands) | | :--- | :--- | :--- | :--- | | Natural Gas Distribution | | | | | Delmarva Natural Gas | Delaware/Maryland | $12,283 | $350,196 | | Florida Natural Gas | Florida | $16,040 | $481,573 | | Natural Gas Transmission | | | | | Eastern Shore | Delaware/Maryland/Pennsylvania | $21,369 | $482,161 | | Peninsula Pipeline | Florida | $10,898 | $140,494 | | Aspire Energy Express | Ohio | $119 | $7,503 | | Electric Distribution | | | | | FPU | Florida | $5,441 | $167,264 | | Total Regulated Energy | | $66,150 | $1,629,191 | - The cost of natural gas or electricity is passed through to customers via PSC-approved fuel cost recovery mechanisms, meaning the company's adjusted gross margin is generally not impacted by fluctuations in commodity costs[22] - The company utilizes various PSC-approved surcharge mechanisms, such as Florida's Gas Reliability Infrastructure Program (GRIP), to achieve accelerated recovery of costs for system improvements and expansions[32][33] Unregulated Energy The Unregulated Energy segment, including propane, transmission, generation, and mobile gas services, offers higher returns through diverse operations across the Eastern U.S Unregulated Energy Operations - 2021 Financials | Operations | Area Served | Net Income (in thousands) | Total Assets (in thousands) | | :--- | :--- | :--- | :--- | | Propane Operations | DE, MD, VA, PA, NC, SC, FL | $11,651 | $197,340 | | Energy Transmission (Aspire Energy) | Ohio | $3,060 | $141,473 | | Energy Generation (Eight Flags) | Florida | $1,900 | $38,060 | | Marlin Gas Services | The Eastern U.S. | $370 | $61,567 | | Total | | $16,981 | $438,440 | - Propane operations sold 68.4 million gallons to approximately 69,000 customers in 2021, competing with other distributors on price and service[49][50] - Aspire Energy in Ohio derives most of its revenue from long-term supply agreements, serving over 22,000 end-use customers, and recently completed a pipeline project to transport Renewable Natural Gas (RNG) from a landfill[53] - Marlin Gas Services provides mobile CNG, LNG, and RNG transport and virtual pipeline solutions, serving utilities and pipelines across the eastern U.S[57] Human Capital Initiatives The company prioritizes human capital through a strong culture of equity, diversity, and inclusion, comprehensive safety programs, and board-level ESG oversight - As of December 31, 2021, the company had 1,007 employees, with 110 represented by two labor unions[62] - The company has established an Equity, Diversity and Inclusion (EDI) Council and supports multiple Employee Resource Groups (ERGs) to build a more diverse and inclusive workforce[64][65] - Chesapeake Utilities is designated as an "essential business," allowing continued operations during the COVID-19 pandemic under a formal response plan[66] - The company emphasizes workplace safety, highlighted by the completion of its 'Safety Town' training facility in Delaware, with plans for a second facility in Florida[72] Item 1A. Risk Factors The company faces diverse financial, operational, regulatory, and environmental risks, including market access, commodity price volatility, weather sensitivity, cybersecurity, and compliance costs - Financial Risks: Instability in financial markets could impact access to capital for growth projects. Fluctuations in propane prices could negatively affect results if costs cannot be fully passed on to customers[82][83] - Operational Risks: The business is sensitive to weather, as warmer winters reduce demand for natural gas and propane. It also faces competition from other energy suppliers and alternative fuels. Cybersecurity attacks pose a significant threat to operating systems and data security[91][94][99] - Regulatory, Legal, and Environmental Risks: The company's utility operations are subject to regulation by PSCs and FERC, which can impact rates and cost recovery. Compliance with environmental laws, particularly for remediation of former Manufactured Gas Plant (MGP) sites, may be significant. Climate change presents risks through potential regulation of greenhouse gas emissions and more severe weather events[121][124][129] Item 2. Properties The company's properties include extensive infrastructure across its service territories, comprising thousands of miles of regulated pipelines and unregulated propane storage and gathering facilities Regulated Energy Infrastructure (Miles) | Operations | Miles | | :--- | :--- | | Natural Gas Distribution | | | Delmarva Natural Gas (Natural gas pipelines) | 1,934 | | Central Florida Gas and FPU (Natural gas pipelines) | 3,030 | | Natural Gas Transmission | | | Eastern Shore | 516 | | Peninsula Pipeline | 144 | | Electric Distribution | | | FPU | 906 | | Total | 6,562 | Unregulated Energy Infrastructure | Operations | Gallons or miles | | :--- | :--- | | Propane distribution | | | Propane storage capacity (gallons in millions) | 8.9 | | Underground propane distribution mains (miles) | 198 | | Unregulated Energy Transmission (Aspire Energy) | | | Natural gas pipelines (miles) | 2,800 | Part II Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities Chesapeake Utilities' common stock (CPK) trades on the NYSE, boasts a 61-year dividend history, and has significantly outperformed market indices over five years - The company has paid a cash dividend to its common stock stockholders for 61 consecutive years[148] Dividends Per Share | Year | Dividends Per Share | | :--- | :--- | | 2021 | $1.880 | | 2020 | $1.725 | - A $100 investment on December 31, 2016, would have grown to $237 by December 31, 2021, compared to $160 for the industry index and $233 for the S&P 500 Index[153] Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations (MD&A) Chesapeake Utilities reported significant net income and EPS growth in 2021, driven by pipeline expansions, organic growth, acquisitions, and increased consumption, supported by substantial capital investments Consolidated Financial Highlights (from Continuing Operations) | Metric (in thousands, except EPS) | 2021 | 2020 | Change | | :--- | :--- | :--- | :--- | | Operating Income | $131,112 | $112,723 | $18,389 | | Income from Continuing Operations | $83,467 | $70,642 | $12,825 | | Diluted EPS from Continuing Operations | $4.73 | $4.21 | $0.52 | Adjusted Gross Margin (Non-GAAP) by Segment (in thousands) | Segment | 2021 | 2020 | Change | | :--- | :--- | :--- | :--- | | Regulated Energy | $283,183 | $260,752 | $22,431 | | Unregulated Energy | $99,969 | $89,746 | $10,223 | | Total | $383,017 | $350,260 | $32,757 | - Key drivers for the $0.52 increase in diluted EPS from continuing operations included contributions from pipeline expansions, organic customer growth, recent acquisitions, and increased consumption, partially offset by higher operating expenses and the dilutive effect of equity offerings[175] Summary of Key Factors and Major Projects The company's growth is driven by major pipeline expansions, Renewable Natural Gas (RNG) projects, strategic acquisitions, and regulatory initiatives contributing to adjusted gross margin Projected Adjusted Gross Margin from Major Projects (in thousands) | Initiative Type | 2021 (Actual) | 2022 (Estimate) | | :--- | :--- | :--- | | Pipeline Expansions | $17,064 | $22,383 | | CNG Transportation | $7,566 | $8,500 | | RNG Transportation | $0 | $1,000 | | Acquisitions | $6,506 | $18,021 | | Regulatory Initiatives | $29,712 | $32,802 | | Total | $60,848 | $82,706 | - The acquisition of Diversified Energy in December 2021 is expected to add $11.3 million in adjusted gross margin in 2022, expanding the company's propane footprint into North and South Carolina[193] - The company is engaged in multiple Renewable Natural Gas (RNG) projects, including transporting RNG from landfills and poultry waste, which are expected to generate $1.0 million in adjusted gross margin in 2022[188][189][192] Liquidity and Capital Resources The company maintains a sound capital structure, funding its capital-intensive business through operations, debt, and equity, supported by a substantial revolving credit facility Capital Expenditures (in thousands) | Year | Amount | | :--- | :--- | | 2021 (Actual) | $227,809 | | 2022 (Forecast) | $175,000 - $200,000 | - The company's target ratio of equity to total capitalization (including short-term debt) is between 50% and 60%, with the ratio approximately 50% as of December 31, 2021[247] - The company has a $400 million unsecured revolving credit facility, amended in August 2021, consisting of a $200 million 364-day tranche and a $200 million five-year tranche[253] Item 7A. Quantitative and Qualitative Disclosures About Market Risk The company manages interest rate risk through debt refinancing and swaps, while commodity price risk is mitigated by fuel cost recovery mechanisms in regulated operations and derivatives in unregulated propane - Regulated energy operations have limited commodity price risk due to PSC-authorized fuel cost recovery mechanisms that pass prudently incurred costs to customers[288] - Unregulated propane operations are exposed to commodity price risk and use storage (8.9 million gallons capacity) and derivative instruments to hedge price fluctuations[289] Item 8. Financial Statements and Supplementary Data This section presents the audited consolidated financial statements and the independent auditor's unqualified opinion, highlighting the goodwill impairment assessment as a critical audit matter - The independent auditor, Baker Tilly US, LLP, issued an unqualified opinion, stating the financial statements are presented fairly in all material respects and that the company maintained effective internal control over financial reporting as of December 31, 2021[296] - The auditor identified the goodwill impairment assessment for the Energy Transmission and Supply Services (Aspire Energy), Mid-Atlantic Propane, Florida Propane, and Marlin Gas Services reporting units as a critical audit matter due to the significant judgments and assumptions required by management[304][305] Key Financial Statement Data (Year Ended Dec 31, 2021, in thousands) | Metric | Amount | | :--- | :--- | | Total Operating Revenues | $569,968 | | Operating Income | $131,112 | | Net Income | $83,466 | | Total Assets | $2,114,869 | | Total Stockholders' Equity | $774,130 | | Net Cash from Operating Activities | $150,504 | Item 9A. Controls and Procedures The CEO and CFO concluded that the company's disclosure controls and internal control over financial reporting were effective as of December 31, 2021, with no material changes during the quarter - Management, including the CEO and CFO, concluded that the company's disclosure controls and procedures and its internal control over financial reporting were effective as of December 31, 2021[557][560] - No changes in internal control over financial reporting occurred during the quarter ended December 31, 2021, that materially affected, or are reasonably likely to materially affect, internal control over financial reporting[558] Part III Items 10-14 Information for Items 10-14, covering governance, compensation, and security ownership, is incorporated by reference from the company's 2022 Proxy Statement - Information regarding Directors, Executive Officers, and Corporate Governance (Item 10) is incorporated by reference from the 2022 Proxy Statement[566] - Details on Executive Compensation (Item 11) are incorporated by reference from the 2022 Proxy Statement[566] - Security ownership details (Item 12) and information on related transactions and director independence (Item 13) are incorporated by reference from the 2022 Proxy Statement[567] Part IV Item 15. Exhibits, Financial Statement Schedules This section lists all financial statements, schedules, and exhibits filed with the Form 10-K, including key agreements, bylaws, and CEO/CFO certifications - This item lists all financial statements, schedules, and exhibits filed with the annual report, including key debt agreements, compensation plans, and required CEO/CFO certifications[568][572] Item 16. Form 10-K Summary No summary is provided for this item - No summary is provided for Item 16[580]