Chesapeake Utilities Corporation Reports Third Quarter Earnings

DOVER, Del., Nov. 6, 2014 /PRNewswire/ --

• Third quarter net income totaled $3.2 million, or $0.22 per share
• Quarter-over-quarter earnings per share remained unchanged, excluding non-recurring items
• Natural gas system expansions and other customer growth generated $1.9 million in additional gross margin during the quarter
• Year-to-date net income increased by $2.9 million to $26.0 million, representing $0.19 incremental earnings per share

Chesapeake Utilities Corporation CPK today reported third quarter and nine months financial results. The Company's net income for the three months ended September 30, 2014 was $3.2 million, or $0.22 per share. This represents a decrease of $699,000, or $0.05 per share, over the same quarter in 2013, due principally to the net impact of two non-recurring items in the third quarter of 2013.  These two non-recurring items related to recovery of previously expensed litigation costs of $1.9 million, which was offset by an accrual of additional taxes other than income of $698,000.  The net of these two items contributed $697,000 of net income, or $0.05 per share, to last year's third quarter.  Absent these non-recurring items, the Company's net income remained unchanged quarter-over-quarter.

For the nine months ended September 30, 2014, the Company reported net income of $26.0 million, or $1.78 per share. This represents an increase of $2.9 million, or $0.19 per share, compared to the same period in 2013.

"Our results for the most recent quarter and the first nine months of 2014 continue to reflect the profitable growth opportunities that we have successfully cultivated in our regulated and unregulated energy businesses," stated Michael P. McMasters, President and Chief Executive Officer of Chesapeake Utilities Corporation.  "In addition to the positive results, we have recently announced the construction of a combined heat and power plant in Florida and a $3.75 million electric rate increase in Florida, which are expected to contribute additional earnings in 2015 and future years.  We also consummated the sale of BravePoint on October 1, 2014.  Our employees' creativity and hard work continue to transform new opportunities into initiatives that will contribute to meeting our earnings growth objectives."

A more detailed discussion and analysis of the Company's results for each segment are provided in the following pages.

Comparative Results for the Quarters Ended September 30, 2014 and 2013

The Company's operating income for the three months ended September 30, 2014 was $7.8 million, a decrease of $928,000 over the same quarter in 2013.  Gross margin increased by $3.5 million, which was more than offset by an increase of $4.4 million in other operating expenses. The decrease in operating income is due primarily to two non-recurring items recorded in other operating expenses in the third quarter of 2013.  These items related to recovery of previously expensed litigation costs of approximately $1.9 million ($376,000 of $1.9 million was incurred during 2013), which was partially offset by an accrual of additional taxes other than income of $698,000.  Additional details on key variances in gross margin and other operating expenses are provided in the Financial Summary Highlights section later in this release. 

Regulated Energy

Operating income for the regulated energy segment decreased by $1.0 million to $9.2 million for the quarter ended September 30, 2014, compared to the same quarter in 2013.  Additional gross margin of $3.2 million was more than offset by a $4.3 million increase in other operating expenses. The significant components of the gross margin increase included:

• $1.2 million of new gross margin generated from major natural gas service expansions completed in 2013 and 2014;
• $690,000 generated as a result of other customer growth in natural gas distribution and transmission services;
• $671,000 generated by the Florida Gas Reliability Infrastructure Program ("GRIP"); and
• $348,000 generated by the Florida Public Utilities Company ("FPU") electric operation as a result of implementing interim rates as part of its base rate case filing.

The increase in other operating expenses was due primarily to: (a) the absence of a one-time credit of $1.9 million associated with the City of Marianna litigation cost recovery in the third quarter of 2013 ($376,000 of $1.9 million was incurred during 2013); (b) $634,000 in higher depreciation, amortization, asset removal and property tax costs associated with capital investments to support growth and maintain system integrity; (c) $558,000 in higher payroll costs incurred primarily to support recent growth and expand the Company's capabilities to cultivate future growth; (d) $362,000 in higher safety and related customer communications activities; (e) $257,000 in increased accruals for incentive bonuses as a result of strong year-to-date financial performance; and (f) $246,000 in higher costs associated with facility maintenance.

Unregulated Energy

The unregulated energy segment reported an operating loss of $2.0 million for the quarter ended September 30, 2014, compared to an operating loss of $1.8 million in the same quarter of 2013. Due to the seasonal nature of the propane distribution operations, the unregulated energy segment typically reports an operating loss in the third quarter.  Gross margin decreased by $330,000 due primarily to lower profit from Xeron, Inc. ("Xeron"), the Company's propane wholesale marketing subsidiary, as a result of low volatility in wholesale propane prices during the current quarter.  Other operating expenses decreased by $161,000, due to the non-recurrence of an accrual of $698,000 recorded in 2013 related to a contingency for taxes other than income; this decrease was partially offset by $375,000 of higher payroll costs principally attributable to resources added to support growth.

Other

The "Other" segment, which consisted primarily of BravePoint, reported operating income of $562,000 for the quarter ended September 30, 2014, compared to $280,000 in the same quarter in 2013. A gross margin increase of $588,000 due to higher consulting and product sale revenues was partially offset by a $306,000 increase in other operating expenses due primarily to the addition of sales resources.  As indicated in the Financial Summary Highlights section in this release, the sale of BravePoint was completed on October 1, 2014.

Comparative Results for the Nine Months Ended September 30, 2014 and 2013

The Company's operating income for the nine months ended September 30, 2014 was $49.9 million, an increase of $5.5 million over the same period in 2013. Gross margin increased by $19.3 million, which was partially offset by an increase of $13.8 million in other operating expenses. Acquisitions completed in 2013 generated $2.6 million in additional operating income ($5.7 million of additional gross margin, partially offset by $3.1 million of additional other operating expenses) during the nine months ended September 30, 2014. Higher natural gas and propane usage due to colder temperatures on the Delmarva Peninsula generated $2.3 million of additional gross margin.  Additional details on key variances in gross margin and other operating expenses are provided in the Financial Summary Highlights section later in this release. 

Regulated Energy

Operating income for the regulated energy segment increased by $4.8 million to $41.0 million for the nine months ended September 30, 2014, compared to the same period in 2013.  A gross margin increase of $15.0 million was partially offset by a $10.2 million increase in other operating expenses. The significant components of the gross margin increase included:

• $5.4 million generated by Sandpiper as a result of the May 2013 acquisition of the operating assets of Eastern Shore Gas and its affiliates ("ESG"), which are not related to, or affiliated with, the Company's interstate natural gas transmission subsidiary, Eastern Shore Natural Gas Company ("Eastern Shore");
• $4.2 million generated from major natural gas service expansions completed in 2013 and 2014;
• $2.0 million generated by the Florida GRIP;
• $1.8 million from other customer growth in natural gas distribution and transmission services; and
• $669,000 from higher customer consumption due to colder temperatures.

The increase in other operating expenses was due primarily to: (a) $2.2 million in higher depreciation, amortization, asset removal and property tax costs associated with capital investments to support growth and maintain system integrity; (b) $2.2 million in other operating expenses associated with Sandpiper's operations; (c) $2.0 million in higher payroll costs to support recent and future growth and from a change in vacation policy in 2013; (d) the absence of a one-time credit of $1.5 million associated with the City of Marianna litigation cost recovery in 2013; (e) $1.1 million in higher benefits costs as a result of healthcare costs and other employee-related expenses; (f) $748,000 in higher costs associated with facilities maintenance; and (g) $727,000 in increased accruals for incentive bonuses as a result of strong year-to-date financial performance.  These increases in other operating expenses were partially offset by the non-recurrence of a sales tax expense of $726,000 in 2013 directly related to the ESG acquisition.

Unregulated Energy

Operating income for the unregulated energy segment increased by $830,000 to $8.8 million for the nine months ended September 30, 2014, compared to the same period in 2013.  A $3.5 million increase in gross margin was partially offset by a $2.7 million increase in other operating expenses. The significant components of the gross margin increase included:

• $1.7 million in higher margin as a result of higher consumption by retail propane customers due to colder temperatures;
• $1.4 million in increased wholesale propane sales, primarily to an affiliate of ESG; and
• $572,000 in higher profit from Xeron, as higher volatility in wholesale propane prices resulted in higher profit on trading activity.

The increase in other operating expenses was due primarily to: (a) $1.2 million in higher payroll expense due to increased seasonal overtime and additional resources to support growth; (b) $728,000 in additional expenses incurred by the entities acquired in 2013; and (c) the non-recurrence of an accrual of $698,000 recorded in 2013 related to a contingency for taxes other than income.

Other

The "Other" segment reported operating income of $25,000 and $240,000 for the nine months ended September 30, 2014 and 2013, respectively. BravePoint's gross margin increased by $821,000 as a result of higher consulting revenues, while its other operating expenses increased by $1.0 million as a result of higher payroll due primarily to the addition of sales resources and benefits expenses.

Matters discussed in this release may include forward-looking statements that involve risks and uncertainties. Actual results may differ materially from those in the forward-looking statements. Please refer to the Safe Harbor for Forward-Looking Statements in the Company's most recent report on Form 10-K for further information on the risks and uncertainties related to the Company's forward-looking statements.

The discussions of the results use the term "gross margin," a non-Generally Accepted Accounting Principles ("GAAP") financial measure, which management uses to evaluate the performance of the Company's business segments. For an explanation of the calculation of "gross margin," see the footnote to the Financial Summary.

Share and per share amounts for all periods presented reflect the three-for-two stock split declared on July 2, 2014, effected in the form of a stock dividend, and distributed on September 8, 2014.  Unless otherwise noted, earnings per share information is presented on a diluted basis.

Conference Call

Chesapeake Utilities Corporation will host a conference call on November 7, 2014 at 10:00 a.m. Eastern Time to discuss the Company's financial results for the quarter ended September 30, 2014. To participate in this call, dial 866.821.5457 and reference Chesapeake Utilities Corporation's 2014 Third Quarter Financial Results Conference Call. To access the replay recording of this call, please visit the Company's website at http://investor.chpk.com/results.cfm or download the replay on your mobile device by accessing the Audiocast section of the Company's IR App.

About Chesapeake Utilities Corporation

Chesapeake Utilities Corporation is a diversified energy company engaged in natural gas distribution, transmission and marketing, electricity distribution, propane gas distribution and wholesale marketing, and other related services. Information about Chesapeake Utilities Corporation and the Chesapeake family of businesses is available at http://www.chpk.com or through its IR App.

For more information, contact:
Beth W. Cooper
Senior Vice President & Chief Financial Officer
302.734.6799

 

 

 

 

 

 

 

 

 

The following information highlights certain key factors contributing to the Company's results for the quarter and nine months ended September 30, 2014:

Major Projects

Acquisition

In May 2013, the Company completed the purchase of the operating assets of ESG.  Approximately 11,000 residential and commercial underground propane distribution system customers acquired in this transaction are now being served by Sandpiper under the tariff approved by the Maryland Public Service Commission ("PSC"). The Company has begun to convert some of the former ESG customers to natural gas distribution service and is evaluating the potential conversion of others.  This acquisition was accretive to earnings per share in the first full year of operations, generating $0.15 in additional earnings per share to the Company.  The Company generated $141,000 and $5.4 million, in additional gross margin from Sandpiper for the three and nine months ended September 30, 2014, respectively, and incurred $22,000 and $2.2 million in additional other operating expenses for the same periods, respectively. Additionally, in the second quarter of 2013, the Company recorded $726,000 in a one-time sales tax expense associated with the acquisition of ESG.

Service Expansions

During 2013, Eastern Shore commenced new natural gas transmission services to local distribution utilities and industrial customers in Delaware and Maryland. These new services generated additional gross margin of $504,000 and $2.5 million for the three and nine months ended September 30, 2014, respectively, compared to the same periods in 2013.

Eastern Shore also executed a one-year contract with another industrial customer to provide 50,000 dekatherms per day ("Dts/d") of additional transmission service from April 2014 to April 2015.  This short-term contract generated $657,000 and $1.3 million for the three and nine months ended September 30, 2014, and is expected to generate $1.9 million and $767,000 of gross margin in 2014 and 2015, respectively.

In August 2013, Peninsula Pipeline Company, Inc., the Company's intrastate natural gas transmission subsidiary, commenced a new firm transportation service in Florida for an unaffiliated utility. This new service generated $70,000 and $490,000 in gross margin for the three and nine months ended September 30, 2014, respectively, compared to the same periods in 2013.

On October 1, 2014, Eastern Shore commenced a new service to an industrial customer facility in Kent County, Delaware. This new service is expected to generate annual gross margin of approximately $1.2 million to $1.8 million.  During the fourth quarter of 2014, the Company expects to generate $463,000 in additional gross margin from this new service, which required construction of new facilities, including approximately 5.5 miles of pipeline lateral and metering facilities, extending from Eastern Shore's mainline to the new industrial customer facility.

Future New Service

Eight Flags Energy, LLC ("Eight Flags"), one of the Company's unregulated energy subsidiaries, is engaged in the development and construction of a combined heat and power ("CHP'') plant in Nassau County, Florida.  This CHP plant, which will consist of a natural-gas-fired turbine and associated electric generator, is designed to generate approximately 20 megawatts of base load power and will include a heat recovery system generator capable of providing approximately 75,000 pounds per hour of unfired steam.  Eight Flags will sell the power generated from the CHP plant to FPU for distribution to its retail electric customers pursuant to a 20-year power purchase agreement. It will also sell the steam to an industrial customer pursuant to a separate 20-year contract.  FPU and Peninsula Pipeline Company, the Company's intrastate pipeline subsidiary, will transport natural gas through their distribution and transmission systems, respectively, to Eight Flags' plant to produce power and steam. On a consolidated basis, this project is expected to generate approximately $7.3 million in annual gross margin, which could fluctuate based upon various factors, including, but not limited to, the quantity of steam delivered and the CHP plant's hours of operations.  Construction of the CHP plant and associated transactions are subject to various conditions, including obtaining necessary governmental approvals, environmental and regulatory permits and completion and execution of various agreements. If all conditions are satisfied, construction of the CHP plant is currently scheduled to commence in early 2015 with commercial operation expected to commence in July 2016.

GRIP

In August 2012, the Florida PSC approved the GRIP, which is designed to recover capital and other program-related-costs, inclusive of a return on investment, to replace older pipes in the Company's Florida service territories. The Company received approval to invest $75.0 million to replace qualifying distribution mains and services (any material other than coated steel or plastic). Since the program's inception in August 2012, the Company has invested $35.9 million.  During the first nine months of 2014, the Company invested $16.1 million and expects to invest an additional $5.4 million during the remainder of 2014.  These investments generated additional gross margin of $671,000 and $2.0 million for the three and nine months ended September 30, 2014, respectively, compared to the same periods in 2013.

Investing in Growth

The Company has continued to expand its resources and capabilities to support growth. The Company's Delmarva natural gas distribution operation has initiated natural gas distribution expansions in Sussex County, Delaware, and Worcester and Cecil Counties in Maryland, which require the construction and conversion of distribution facilities, as well as the conversion of residential customers' appliances and equipment. To support this growth as well as future expansions, our Delmarva natural gas distribution operation has increased staffing. Resources have also been added in the Company's corporate shared services departments to increase the Company's overall capabilities to support sustained future growth. The additional staffing to support growth increased payroll expenses of the Company's Regulated Energy segment by $484,000 and $1.3 million for the three and nine months ended September 30, 2014, respectively, compared to the same periods in 2013.  The Company expects to make additional investments in personnel, as needed, to further develop our capability to capitalize on future growth opportunities.

Weather and Consumption

Weather was not a significant factor in the third quarter. However, temperatures on the Delmarva Peninsula and in Florida during the first quarter of 2014 were significantly colder than the first quarter of 2013, which positively affected the Company's year-to-date results in 2014.  The following tables highlight the heating degree-day ("HDD") and cooling degree-day ("CDD") information for the three and nine months ended September 30, 2014 and 2013 and the gross margin variance resulting from weather fluctuations in those periods.

 

 

 

 

 

Propane

During 2014, retail propane margins on the Delmarva Peninsula began to decline to more normal levels as a significant increase in wholesale prices in late 2013 and early 2014 increased our average propane inventory cost.  This reduced our Delmarva gross margin by $292,000 and $1.2 million for the three and nine months ended September 30, 2014, respectively. In Florida, higher retail propane margins as a result of local market conditions increased gross margin by $514,000 and $1.2 million for the three and nine months ended September 30, 2014.

Wholesale propane sales increased, generating additional gross margin of $71,000 and $1.4 million, for the three and nine months ended September 30, 2014, respectively, due primarily to sales to an affiliate of ESG.

Xeron, which benefits from wholesale price volatility by entering into trading transactions, experienced a quarter-over-quarter gross margin decrease of $357,000 for the three months ended September 30, 2014 due to lower wholesale price volatility. On a year-to-date basis, Xeron generated an increase in gross margin of $572,000, compared to the same period in 2013. This increase was due to higher wholesale price volatility, primarily during the winter heating season, which resulted in increased trading activity and higher profits on executed trades.

Florida Electric Rate Case

On September 15, 2014, the Florida PSC approved a settlement agreement between FPU and the Florida Office of Public Counsel in FPU's base rate case filing, which provides, among other things, an increase in FPU's annual revenue requirement of approximately $3.8 million and a rate of common equity return of 10.25 percent for FPU's electric distribution operation. The new rates will be effective for all meter reads on or after November 1, 2014.  Previously, the Florida PSC approved interim rate relief, effective for meter readings on or after August 10, 2014, which generated $348,000 in additional gross margin for FPU's electric operation for the quarter and nine months ended September 30, 2014.

Other Developments

Subsequent to the end of the third quarter of 2014, the Company completed the sale of BravePoint for approximately $12.0 million in cash.  The Company expects to record a gain of approximately $6.5 million to $7.0 million (approximately $4.0 million after-tax) from this sale in the fourth quarter of 2014.  The Company plans to reinvest the proceeds from this sale in its regulated and unregulated energy businesses. 

The Company has been working on implementation of a new customer billing system for its natural gas and electric distribution operations.  As of September 30, 2014, approximately $6.4 million of the cost associated with this implementation project has been capitalized.  The Company is currently reviewing the status of this project to determine its future strategy and implementation plan, which include the allocation of future capital and resources, evaluation of strategic alternatives and assessment of regulatory recovery with respect to this project.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

SOURCE Chesapeake Utilities Corporation