Chesapeake Utilities Corporation (NYSE:CPK) is a diversified energy company that has consistently delivered strong financial performance and shareholder returns. With a focus on regulated energy distribution and transmission, as well as strategic investments in unregulated energy services, Chesapeake Utilities has established itself as a leader in the industry.
Business Overview
Chesapeake Utilities operates primarily on the east coast of the United States, providing natural gas distribution and transmission, electric distribution and generation, propane gas distribution, mobile compressed natural gas services, steam generation, and other energy-related services. The company's strategy is centered on growing earnings from a stable regulated energy delivery foundation, while also investing in related businesses and services that provide opportunities for returns greater than traditional utility returns.The company's regulated energy segment, which includes natural gas and electric distribution and transmission operations, accounted for approximately 68% of the company's total operating revenues of $670.6 million in the fiscal year 2023. The unregulated energy segment, which includes propane distribution, energy transmission, and energy generation, contributed the remaining 32% of operating revenues.
Financials
Chesapeake Utilities delivered strong financial results in fiscal year 2023, with annual net income of $87.2 million and annual operating cash flow of $203.5 million. The company's annual free cash flow was $14.9 million, reflecting its disciplined approach to capital allocation and investment.In the first quarter of 2024, Chesapeake Utilities reported adjusted earnings per share (EPS) of $2.10, a 6% increase compared to the same period in the prior year. Adjusted gross margin for the quarter was $164.5 million, a 27% increase year-over-year, driven by the company's recent acquisition of Florida City Gas (FCG) and continued growth in its legacy businesses.
The company's regulated energy segment generated $118.5 million in adjusted gross margin in the first quarter of 2024, a 36% increase compared to the same period in 2023. This was primarily due to the contribution from the FCG acquisition, organic growth in the company's natural gas distribution businesses, and continued pipeline expansion projects. The unregulated energy segment delivered $46.0 million in adjusted gross margin, an 8% increase year-over-year, driven by higher propane consumption, increased propane margins and service fees, and improved performance from the company's Aspire Energy operations.
Acquisition of Florida City Gas
In November 2023, Chesapeake Utilities completed the $922.8 million acquisition of Florida City Gas (FCG), a natural gas distribution utility serving approximately 120,000 residential and commercial customers across eight counties in Florida. The acquisition has significantly expanded the company's footprint in the state and provided opportunities for growth and operational synergies.During the first quarter of 2024, FCG contributed $25 million in adjusted gross margin to Chesapeake Utilities' results. The integration of FCG is progressing well, with the company focused on seamlessly onboarding employees, aligning processes and systems, and leveraging the combined expertise and resources to drive operational efficiencies and accelerate growth initiatives.
Regulatory Initiatives and Infrastructure Investments
Chesapeake Utilities remains focused on proactively managing its regulatory agenda to support the approval and cost recovery of its capital projects. The company has several major regulatory initiatives and infrastructure investment programs underway, which are expected to drive future earnings growth.In Florida, the company has filed 11 pipeline projects with the Florida Public Service Commission, representing approximately $152 million in capital investment. Seven of these projects have been approved, and four are currently under review, with decisions expected in the summer of 2024. These projects are designed to meet growing customer demand and enhance the safety and reliability of the company's natural gas distribution and transmission systems.
Chesapeake Utilities is also making significant investments in its GUARD and SAFE programs in Florida, which are designed to enhance the safety, reliability, and accessibility of its natural gas distribution infrastructure. The company has projected capital expenditures of $460 million over the next 10 years for these programs.
In Maryland, the company filed a joint application for a natural gas rate case with the Maryland Public Service Commission in January 2024, seeking approval for permanent rate relief, tariff changes, and the establishment of a rider for the recovery of costs associated with new technology systems.
Outlook
Chesapeake Utilities is confident in its ability to deliver strong financial performance and shareholder value. The company has reiterated its 2024 adjusted EPS guidance of $5.33 to $5.45, its 2025 guidance of $6.15 to $6.35 per share, and its 2028 guidance of $7.75 to $8.00 per share.The company's growth strategy is focused on continued investment and expansion of its regulated operations, as well as strategic investments in related non-regulated businesses and services, including sustainable energy initiatives. Chesapeake Utilities is well-positioned to capitalize on the significant growth opportunities across its expanded footprint, particularly in Florida, and to deliver consistent, top-quartile earnings performance for its shareholders.
Liquidity
Chesapeake Utilities maintains a strong balance sheet and liquidity position to support its growth plans. As of March 31, 2024, the company had an equity-to-total capitalization ratio of 48%, which is below its target range of 50% to 60%. The company's access to capital markets, including its Shelf Agreements with Prudential and MetLife, provides it with the flexibility to fund its capital expenditures and strategic initiatives.In the first quarter of 2024, Chesapeake Utilities generated $97.3 million in net cash from operating activities and invested $75.5 million in capital expenditures. The company's free cash flow of $14.9 million in fiscal year 2023 demonstrates its ability to generate sufficient cash to fund its growth initiatives while also supporting its dividend payments.
Risks and Challenges
While Chesapeake Utilities has a strong track record of performance, the company faces several risks and challenges that investors should consider. These include regulatory risks, such as the potential for unfavorable rate decisions or changes in regulatory policies, as well as operational risks, such as the impact of extreme weather events on its infrastructure and the potential for supply chain disruptions.The company also faces competition from alternative energy sources and the potential for disruptive technologies to impact its business model. Additionally, the company's growth strategy, which includes strategic acquisitions, carries integration and execution risks that must be carefully managed.