Chesapeake Utilities(US:CPK)2023-05-02 16:00PART I—FINANCIAL INFORMATION Item 1. Financial Statements This section presents the unaudited condensed consolidated financial statements for Chesapeake Utilities Corporation for Q1 2023 and 2022, including income, comprehensive income, balance sheets, cash flows, and stockholders' equity, with detailed notes Notes to Condensed Consolidated Financial Statements The notes detail accounting policies and financial results, covering acquisitions, revenue breakdowns, regulatory updates, segment performance, debt, equity, and derivative instruments * Acquired Davenport Energy's Siler City, North Carolina propane assets for approximately $2.0 million, adding 850 customers and 0.4 million gallons of annual propane distribution180181 * Acquired Planet Found Energy Development, LLC for $9.5 million to accelerate efforts in converting poultry waste to renewable natural gas (RNG)203231 Operating Revenues by Segment (Q1 2023 vs Q1 2022) | (in thousands) | Three Months Ended March 31, 2023 | Three Months Ended March 31, 2022 | | :--- | :--- | :--- | | Regulated Energy | $142,270 | $127,891 | | Unregulated Energy | $83,166 | $101,292 | | Other and Eliminations | ($7,307) | ($6,303) | | Total Operating Revenues | $218,129 | $222,880 | * In February 2023, Shelf Agreements with Prudential and MetLife were amended, expanding total borrowing capacity to $605.0 million and extending the term for three years36334 Condensed Consolidated Statements of Income (Unaudited) | (in thousands, except per share data) | Three Months Ended March 31, 2023 | Three Months Ended March 31, 2022 | | :--- | :--- | :--- | | Total Operating Revenues | $218,129 | $222,880 | | Operating Income | $54,915 | $54,865 | | Net Income | $36,344 | $36,933 | | Diluted Earnings Per Share | $2.04 | $2.08 | Condensed Consolidated Balance Sheet Highlights (Unaudited) | (in thousands) | March 31, 2023 | December 31, 2022 | | :--- | :--- | :--- | | Total Assets | $2,197,551 | $2,215,037 | | Net property, plant and equipment | $1,836,695 | $1,810,473 | | Total current assets | $159,504 | $193,976 | | Total Capitalization and Liabilities | $2,197,551 | $2,215,037 | | Total stockholders' equity | $858,588 | $832,801 | | Long-term debt, net | $656,284 | $578,388 | | Short-term borrowing | $94,079 | $202,157 | Condensed Consolidated Statements of Cash Flows Highlights (Unaudited) | (in thousands) | Three Months Ended March 31, 2023 | Three Months Ended March 31, 2022 | | :--- | :--- | :--- | | Net cash provided by operating activities | $81,667 | $69,120 | | Net cash used in investing activities | ($42,654) | ($29,935) | | Net cash used in financing activities | ($42,152) | ($38,953) | | Net (Decrease) Increase in Cash | ($3,139) | $232 | Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Management reports Q1 2023 net income of $36.3 million ($2.04 per share), a slight decrease from Q1 2022, with stable operating income despite warmer weather, driven by rate cases, higher propane margins, and expansion projects, offset by increased expenses and interest charges * The company's strategy focuses on growing earnings from its stable regulated energy base while investing in related, higher-return unregulated businesses, emphasizing midstream and downstream opportunities, including sustainable energy initiatives44 Adjusted Gross Margin Reconciliation (Non-GAAP) | (in thousands) | Q1 2023 | Q1 2022 | | :--- | :--- | :--- | | Gross Margin (GAAP) | $94,599 | $93,083 | | Operations & maintenance expense | $17,758 | $15,640 | | Depreciation & amortization | $17,183 | $16,977 | | Adjusted Gross Margin (Non-GAAP) | $129,540 | $125,700 | * Lower consumption, primarily due to weather more than 20% warmer than historical averages in northern service territories, resulted in a $6.9 million decrease in adjusted gross margin compared to Q1 202291 Results of Operations For Q1 2023, operating income remained flat at $54.9 million, with adjusted gross margin increasing by $3.8 million due to the Florida rate case, higher propane margins, and customer growth, largely offset by a $6.9 million weather impact and increased operating expenses and interest charges Key Drivers of Adjusted Gross Margin Change (Q1 2023 vs Q1 2022) | (in thousands) | Pre-tax Income Impact | EPS Impact | | :--- | :--- | :--- | | Customer consumption (weather) | ($5,241) | ($0.29) | | Florida natural gas base rate proceeding | $3,104 | $0.17 | | Increased propane margins and fees | $2,322 | $0.13 | | Natural gas growth | $1,153 | $0.06 | | Increased demand for CNG/RNG/LNG services | $976 | $0.05 | * Interest charges increased by $1.9 million year-over-year, primarily due to the weighted-average interest rate on Revolver borrowings rising from 1.17% in Q1 2022 to 5.17% in Q1 2023397 * The effective income tax rate was 24.2% in Q1 2023, down from 26.8% in Q1 2022, mainly due to a $1.3 million benefit from a reduction in the Pennsylvania state income tax rate398 Segment Results The Regulated Energy segment's operating income grew 8.5% to $37.6 million, driven by rate relief and customer growth, while the Unregulated Energy segment's operating income fell by $2.8 million to $17.2 million due to warmer weather impacts Regulated Energy Segment Performance (Q1 2023 vs Q1 2022) | (in thousands) | Q1 2023 | Q1 2022 | Change | | :--- | :--- | :--- | :--- | | Revenue | $142,270 | $127,891 | $14,379 | | Adjusted gross margin | $86,982 | $82,449 | $4,533 | | Operating income | $37,625 | $34,681 | $2,944 | Unregulated Energy Segment Performance (Q1 2023 vs Q1 2022) | (in thousands) | Q1 2023 | Q1 2022 | Change | | :--- | :--- | :--- | :--- | | Revenue | $83,165 | $101,292 | ($18,127) | | Adjusted gross margin | $42,594 | $43,284 | ($690) | | Operating Income | $17,245 | $20,046 | ($2,801) | Liquidity and Capital Resources The company maintains strong liquidity with $81.7 million in Q1 2023 operating cash flow, $41.8 million in capital expenditures, and a full-year forecast of $200-$230 million, reducing short-term borrowings by $107.8 million through an $80.0 million Senior Notes issuance, maintaining a 53% equity to total capitalization ratio 2023 Forecasted Capital Expenditures | (in thousands) | Low | High | | :--- | :--- | :--- | | Total Regulated Energy | $152,000 | $175,000 | | Total Unregulated Energy | $46,000 | $52,000 | | Corporate and other | $2,000 | $3,000 | | Total 2023 Forecast | $200,000 | $230,000 | * The company's target equity to total capitalization ratio (including short-term debt) is 50-60%, with the ratio standing at 53% as of March 31, 2023424 * In Q1 2023, the company issued $80.0 million of 5.43% Senior Notes due 2038 and used proceeds to reduce short-term borrowings under its Revolver credit facility57368 Item 3. Quantitative and Qualitative Disclosures about Market Risk The company manages interest rate risk through swaps and limits commodity price risk for regulated operations via fuel cost recovery mechanisms, while unregulated propane operations mitigate price fluctuations using storage, forward contracts, and derivatives * The company is exposed to interest rate risk on its debt, which is mitigated using interest rate swap agreements to manage potential increases in costs for new debt and variable-rate borrowings374458 * Regulated energy distribution operations have limited commodity price risk due to authorized fuel cost recovery mechanisms459 * Unregulated propane operations are exposed to commodity price risk, which is mitigated through storage, forward supply contracts, and the use of financial derivatives (fair value and cash flow hedges)386437 Item 4. Controls and Procedures Management, including the CEO and CFO, concluded that the company's disclosure controls and procedures were effective as of March 31, 2023, with no material changes to internal control over financial reporting during the quarter * The CEO and CFO concluded that the company's disclosure controls and procedures were effective as of March 31, 2023463 * No changes in internal control over financial reporting occurred during the quarter that have materially affected, or are reasonably likely to materially affect, these controls441 PART II—OTHER INFORMATION Item 1. Legal Proceedings The company is involved in legal actions, claims, and regulatory proceedings in the normal course of business, which management believes will not materially affect its financial position, results of operations, or cash flows * The company is involved in legal and regulatory proceedings in the normal course of business, but management does not expect them to have a material financial impact391 Item 1A. Risk Factors There have been no material changes to the risk factors previously disclosed in the company's Annual Report on Form 10-K for the year ended December 31, 2022, and investors are advised to consider those factors * Refers to the risk factors described in the company's 2022 Annual Report on Form 10-K, indicating no material changes during the quarter465 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds During Q1 2023, the company purchased 503 shares of its common stock on the open market at an average price of $114.94 per share for dividend reinvestment in the Rabbi Trust for the Non-Qualified Deferred Compensation Plan, not as part of a publicly announced repurchase program Share Repurchases (Q1 2023) | Period | Number of Shares Purchased | Average Price Paid per Share | | :--- | :--- | :--- | | Jan 1 - Jan 31, 2023 | 503 | $114.94 | | Feb 1 - Feb 28, 2023 | — | — | | Mar 1 - Mar 31, 2023 | — | — | | Total | 503 | $114.94 | * Share purchases were made for the Rabbi Trust related to the Non-Qualified Deferred Compensation Plan and not as part of a formal buyback plan396