Chesapeake Utilities Corporation Reports Third Quarter Results

DOVER, Del., Nov. 9, 2017 /PRNewswire/ -- Chesapeake Utilities Corporation (NYSE: CPK) ("Chesapeake Utilities" or the "Company") today reported third quarter financial results. The Company's net income for the quarter ended September 30, 2017 was $6.8 million, compared to $4.4 million for the same quarter of 2016. Earnings per share ("EPS") for the quarter ended September 30, 2017 were $0.42 per share, compared to $0.29 per share for the same quarter of 2016. The increase in net income reflected margin growth across business units for both the Regulated Energy and Unregulated Energy segments, as well as lower operating and maintenance expenses for the quarter.

For the nine months ended September 30, 2017, the Company reported net income of $32.0 million, or $1.96 per share. This represents a decrease of $789,000, or $0.18 per share, compared to the same period in 2016. Higher margins from the Eight Flags Energy, LLC ("Eight Flags") combined heat and power ("CHP") plant, Peninsula Energy Services Company, Inc. ("PESCO"), and Aspire Energy of Ohio, LLC ("Aspire Energy"), new services and customer growth in the natural gas transmission and distribution operations in Florida and on the Delmarva Peninsula, and new rates for Eastern Shore Natural Gas Company ("Eastern Shore") offset the increase in higher expenses to generate and support growth and the impact of warmer weather.  An increase in outstanding shares as a result of the equity issuance in September 2016 lowered earnings per share by approximately $0.12 per share for the nine months ended September 30, 2017.

"Our solid results for the third quarter reflect the diverse sources of new gross margin throughout our Company," stated Michael P. McMasters, President and Chief Executive Officer.  "Recently completed growth projects are adding value for our stockholders. In the near term, we will commence construction of Eastern Shore's largest ever expansion project, expected to be completed in early 2018, as well other projects that will cultivate future growth," he added.  "Investments in system expansion, acquisitions, new service offerings and unique projects like Eight Flags, enhance the continued growth in customers and deliveries in our natural gas distribution and transmission businesses. Our employees continue to excel in identifying new opportunities for growth, and profitably managing current growth.  We are also maintaining operating efficiency while providing safe, reliable service to our customers," he concluded.

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

Comparative Results for the Quarters Ended September 30, 2017 and 2016

Operating income for the third quarter increased by $4.1 million to $14.2 million, compared to the same period in 2016, driven by higher retail propane sales volumes and margins, implementation of new rates for Eastern Shore (subject to refund), additional margin from the Gas Reliability Infrastructure Program ("GRIP"), and continued growth from the Company's Delmarva and Florida natural gas distribution operations. Gross margin increased by $4.6 million, or 8.2 percent, which was offset by an increase in other operating expenses of $473,000, or 1.0 percent.

Regulated Energy Segment

Operating income for the Regulated Energy segment increased by $2.1 million, or 15.7 percent, compared to the same period in 2016. Higher operating income resulted from increased gross margin of $1.5 million during the quarter, or 3.4 percent, and a decrease in other operating expenses of $519,000.

The significant components of the $1.5 million gross margin increase included:

• $1.0 million of incremental revenue from the implementation of new rates for Eastern Shore, which were effective August 1, 2017.
• $406,000 generated from additional GRIP investments in the Florida natural gas distribution operations; and
• $566,000 increase from customer growth in the natural gas distribution businesses (excluding service expansions) which was partially offset by a $219,000 decrease in interruptible margin from Eastern Shore.

The significant factors contributing to the net decrease of $519,000 in other operating expenses included:

• $1.6 million in lower outside services and facilities and maintenance costs, due primarily to lower consulting and service contractor costs;
• $437,000 in lower benefits and employee-related costs in 2017 (since the Company is self-insured for healthcare, benefits costs fluctuate depending upon claims filed);
• $1.4 million in higher depreciation, asset removal and property tax costs associated with recent capital investments.

Unregulated Energy Segment

Operating income for the Unregulated Energy segment increased by $2.1 million, or 67.9 percent, compared to the same period in 2016. Gross margin increased by $3.1 million, or 30.1 percent, which was offset by an increase of $1.0 million, or 7.4 percent, in other operating expenses.

The significant components of the $3.1 million gross margin increase were as follows:

• $1.2 million of additional gross margin from increased sales volumes of propane to wholesale and retail customers on the Delmarva Peninsula and in Florida as well as higher sales of natural gas by Aspire Energy;
• $440,000 and $271,000 of additional gross margin from retail and wholesale propane margins, respectively, due primarily to favorable supply management activities;
• $297,000 of additional gross margin from Eight Flags operations, which was fully on-line in the third quarter of 2017;
• $291,000 of additional gross margin from Aspire Energy as a result of pricing amendments to long-term sales agreements; and
• $233,000 in increased gross margin due to the absence of the loss for Xeron recorded in the third quarter of 2016.

The principal components of the $1.0 million increase in other operating expenses were: $730,000 in higher staffing and associated costs for additional personnel to support growth, $293,000 in expenses associated with the incremental margin from Eight Flags, and $347,000 in higher depreciation, amortization and property tax costs due to increased capital investments and amortization of intangible assets acquired through acquisitions in 2017. 

Comparative Results for the Nine Months Ended September 30, 2017 and 2016

Operating income for the nine months ended September 30, 2017 increased by $303,000 to $62.6 million, compared to $62.3 million for the same period in 2016. Gross margin increased by $14.0 million, or 7.3 percent, net of the negative impact of weather, which reduced margin by approximately $1.8 million for the first nine months. Other operating expenses increased by $13.7 million, or 10.7 percent, due primarily to a $4.3 million increase in depreciation, amortization and property taxes and a $9.4 million increase in other operating expenses to support growth.

Regulated Energy Segment

Operating income for the Regulated Energy segment decreased by $745,000, or 1.4 percent, compared to the same period in 2016, due principally to weather and the level and timing of costs associated with growth. Gross margin increased by $5.7 million, despite the impact of weather, which reduced margin by approximately $850,000 for the nine months ended September 30, 2017. The $3.5 million increase in depreciation, amortization and taxes and $3.0 million increase in other operating expenses largely reflect costs associated with recently completed and planned growth projects. Of the total $6.4 million increase in other operating expenses, $4.7 million is associated with Eastern Shore's recently completed projects as well as initiatives that are currently underway.

The significant components of the $5.7 million gross margin increase included:

• $1.6 million generated by additional GRIP investments in the Florida natural gas distribution operations;
• $1.6 million from growth in natural gas distribution and transmission services (excluding service expansions);
• $1.4 million generated from recently completed natural gas transmission expansions, which are more fully discussed in the "Major Projects and Initiatives" section later in this press release;
• $1.0 million from the implementation of Eastern Shore's new rates, as discussed previously;
• $534,000 from new natural gas transmission and distribution services provided to Eight Flags' CHP plant; and
• $249,000 generated as a result of the rate case settlement by the Company's Delaware natural gas distribution operations.

The foregoing increases were offset by a decrease in gross margin of $1.2 million from lower customer consumption of energy for the Company's distribution operations in Florida and on the Delmarva Peninsula, due primarily to weather, particularly warmer weather during the first quarter.

The significant components of the $6.4 million increase in other operating expenses included:

• $3.5 million in higher depreciation, asset removal and property tax costs associated with recent capital investments;
• $1.6 million in higher payroll costs for additional personnel to support growth;
• $855,000 in increased regulatory expenses, due primarily to Eastern Shore's rate case; and
• $722,000 in higher benefits and employee-related costs in 2017 (since the Company is self-insured for healthcare, benefits costs fluctuate depending upon filed claims).

Unregulated Energy Segment

Operating income for the Unregulated Energy segment for the nine months ended September 30, 2017 was $10.5 million, an increase of $1.2 million, or 13.3 percent, compared to the same period in 2016. Gross margin increased by $8.4 million, or 18.6 percent, which was offset by an increase of $7.2 million, or 20.0 percent, in operating expenses for the nine months ended September 30, 2017.

The significant components of the $8.4 million gross margin increase were as follows:

• $4.2 million of additional gross margin from Eight Flags' CHP plant, which commenced operations in June 2016;
• $1.8 million from PESCO, due to an increase in the number of contracts and customers served as well as additional revenue in the first quarter from providing natural gas to a customer in Ohio under a supplier agreement, which expired on March 31, 2017;
• $1.1 million of additional gross margin from Aspire Energy as a result of pricing amendments to long-term gas sales agreements;
• $728,000 of additional gross margin from wholesale propane sales, due primarily to favorable supply management activities; and
• $168,000 of additional gross margin, due primarily to higher sales of propane in Florida, a portion of which was associated with the timing of deliveries due partially to weather conditions in the third quarter of 2017, offset by the impact of warmer weather during the first six months of 2017.

The significant components of the $7.2 million increase in other operating expenses included:

• $2.8 million in higher operating expenses by Eight Flags' CHP plant in support of the margin generated;
• $1.5 million in higher payroll costs for additional personnel to support growth;
• $950,000 in higher benefits and employee-related costs in 2017 (since the Company is self-insured for healthcare, benefits costs fluctuate depending upon claims filed);
• $800,000 in higher depreciation expense, of which $424,000 relates to a credit adjustment in 2016 recorded in conjunction with the final valuation for Aspire Energy; and
• $350,000 in higher outside services costs associated primarily with growth and ongoing compliance activities.

The Company also incurred $367,000 in non-operating expenses to complete the wind-down of Xeron's operations.

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 2016 Annual 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.

Unless otherwise noted, earnings per share are presented on a diluted basis.

Conference Call

Chesapeake Utilities will host a conference call on Friday, November 10, 2017, at 10:30 a.m. Eastern Time to discuss the Company's financial results for the quarter and nine months ended September 30, 2017. To participate in this call, dial 855.801.6270 and reference Chesapeake Utilities' 2017 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 Audio cast section of the Company's IR App.

About Chesapeake Utilities Corporation

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

Please note that Chesapeake Utilities Corporation is not affiliated with Chesapeake Energy, an oil and natural gas exploration company headquartered in Oklahoma City, Oklahoma.

For more information, contact:

Beth W. Cooper
Senior Vice President & Chief Financial Officer
302.734.6799

Key variances, between the nine months ended September 30, 2016 and 2017, included:

Major Projects and Initiatives

The following table summarizes gross margin for the Company's major projects and initiatives recently completed and initiatives currently underway, but which will be completed in the future. Gross margin reflects operating revenue less cost of sales, excluding depreciation, amortization and accretion (dollars in thousands):

Major Projects and Initiatives Recently Completed

The following table summarizes gross margin generated from the Company's major projects and initiatives recently completed (dollars in thousands):

Service Expansions

In August 2014, Eastern Shore entered into a precedent agreement with an electric power generator in Kent County, Delaware, to provide a 20-year OPT 90≤ natural gas transmission service for 45,000 dekatherms per day ("Dts/d") deliverable to the lateral serving the customer's facility. In July 2016, the FERC authorized Eastern Shore to construct and operate the project, which consists of 5.4 miles of 16-inch pipeline looping and new compression capability in Delaware. Eastern Shore provided interim services to this customer pending construction of facilities. Construction of the project was completed, and long-term service commenced in March 2017. This service generated an additional gross margin of $106,000 during the nine months ended September 30, 2017 compared to the same period in 2016. There was no incremental margin change during the third quarter as the margin generated from the permanent services equated to the margin generated from providing interim services during the third quarter of 2016. This service is expected to generate gross margin of $7.0 million for 2017 and between $5.8 million and $7.8 million annually through the remaining term of the agreement.

In October 2015, Eastern Shore submitted an application to the FERC to make certain meter tube and control valve replacements and related improvements at its Texas Eastern Transmission, LP ("TETLP") interconnect facilities to increase natural gas receipts from TETLP by 53,000 Dts/d, for a total capacity of 160,000 Dts/d. In December 2015, the FERC authorized Eastern Shore to proceed with this project, which was completed and placed in service in March 2016. Approximately 35 percent of the increased capacity has been subscribed on a short-term firm service basis through October 2017. This service generated an additional gross margin of $80,000 and $1.3 million for the three and nine months ended September 30, 2017, respectively, compared to the same periods in 2016. The remaining capacity is available for firm or interruptible service.

System Reliability Project: In July 2016, the FERC authorized Eastern Shore to construct and operate the proposed System Reliability Project, which consisted of approximately 10.1 miles of 16-inch pipeline looping and auxiliary facilities in New Castle and Kent Counties, Delaware, and a new compressor at its existing Bridgeville compressor station in Sussex County, Delaware. A 2.5 mile looping segment was completed and placed into service in December 2016. The remaining looping and the new compressor were completed and placed into service in the second quarter of 2017. This project was included in Eastern Shore's January 2017 base rate case filing with the FERC. The Company has assumed recovery of this project's costs in August 2017, coinciding with the proposed effectiveness of new rates, subject to refund pending final resolution of the base rate case.

GRIP

GRIP is a natural gas pipe replacement program approved by the Florida Public Service Commission ("PSC"), designed to expedite the replacement of qualifying distribution mains and services (any material other than coated steel or plastic) to enhance the reliability and integrity of the Company's Florida natural gas distribution systems. This program allows recovery, through regulated rates, of capital and other program-related costs, inclusive of a return on investment, associated with the replacement of the mains and services. Since the program's inception in August 2012, the Company has invested $110.5 million to replace 240 miles of qualifying distribution mains, including $7.6 million during the first nine months of 2017. The increased investment in GRIP generated additional gross margin of $406,000 and $1.6 million for the three and nine months ended September 30, 2017, respectively, compared to the same periods in 2016.

Eight Flags' CHP plant

In June 2016, Eight Flags completed construction of a CHP plant on Amelia Island, Florida. This CHP plant, which consists of a natural-gas-fired turbine and associated electric generator, produces approximately 20 megawatts of base load power and includes a heat recovery steam generator capable of providing approximately 75,000 pounds per hour of residual steam. In June 2016, Eight Flags began selling power generated from the CHP plant to Florida Public Utilities Company ("FPU"), the Company's wholly-owned subsidiary, pursuant to a 20-year power purchase agreement for distribution to FPU's retail electric customers. In July 2016, it also started selling steam to the industrial customer that owns the property on which Eight Flags' CHP plant is located, pursuant to a separate 20-year contract.

The CHP plant is powered by natural gas transported by FPU through its distribution system and by Peninsula Pipeline Company, Inc. ("Peninsula Pipeline"), the Company's wholly-owned Florida intrastate pipeline subsidiary. For the three and nine months ended September 30, 2017, Eight Flags and other affiliates of the Company generated $304,000 and  $4.7 million, respectively, in additional gross margin as a result of these services that began in June 2016. This amount includes gross margin of $7,000 and $534,000, for the three and nine months ended September 30, 2017, respectively,  attributable to natural gas distribution and transportation services provided to the CHP plant by the Company's regulated affiliates.

Major Projects and Initiatives Currently Underway

Northwest Florida Expansion Project:  Peninsula Pipeline and the Company's Florida natural gas division are constructing a pipeline in Escambia County, Florida that will interconnect with the Florida Gas Transmission Company ("FGT") interstate pipeline. The project consists of 33 miles of 12-inch transmission line from the FGT interconnect that will be operated by Peninsula Pipeline and 8 miles of 8-inch lateral distribution lines that will be operated by the Company's Florida natural gas division. The Company has signed agreements to serve two large customers and is marketing to other customers close to the facilities. The estimated annual gross margin associated with this project, once in service, is approximately $5.1 million.

New Smyrna Beach, Florida Project: Peninsula Pipeline is constructing a pipeline in Volusia County, Florida that will interconnect with FGT's pipeline. The project consists of 14 miles of transmission line from the FGT interconnect that will be operated by Peninsula Pipeline. The Company entered into an agreement to serve FPU customers. The estimated annual gross margin associated with this project, once in service, is approximately $1.4 million.

2017 Expansion Project: In May 2016, Eastern Shore submitted a request to the FERC to initiate the FERC's pre-filing process for its proposed 2017 Expansion Project. This project, which will expand Eastern Shore's firm service capacity by 26 percent, will provide 61,162 Dts/d of additional firm natural gas transportation service on Eastern Shore's pipeline system with an additional 52,500 Dts/d of firm transportation service at certain Eastern Shore receipt facilities pursuant to precedent agreements Eastern Shore entered into with existing customers. We expect to invest approximately $115.0 million in this expansion project and for the project to generate approximately $15.8 million of gross margin in the first full year after the new transportation services go into effect. On October 4, 2017, FERC issued a Certificate of Public Convenience and Necessity authorizing Eastern Shore to construct and operate the proposed 2017 Expansion Project.

Other major factors influencing gross margin

Weather and Consumption
Temperature variation in 2017 negatively impacted the Company's earnings. Compared to the prior year, cooler temperatures in Florida during the third quarter of 2017, reduced gross margin by $333,000, and warmer temperatures in all of the Company's service territories during the first nine months of 2017, reduced gross margin by $1.8 million, respectively. Warmer than normal temperatures for the quarter and nine months ended September 30, 2017, reduced gross margin by $193,000 and $4.3 million, respectively. The following table summarizes heating degree-day ("HDD") and cooling degree-day ("CDD") variances from the 10-year average HDD/CDD ("Normal") for the three and nine months ended September 30, 2017 and 2016.

Propane Operations
The Company's Florida and Delmarva propane distribution operations added $2.0 million and $1.4 million, in incremental margin for the three and nine months ended September 30, 2017, respectively, compared to the same periods in 2016.  Higher volumes sold to retail customers and improved margins due to effective supply management activities generated $905,000 and $440,000, in incremental margin, for the three months ended September 30, 2017, respectively, compared to the same period in 2016 and higher service revenue added $187,000 in additional margin, during the quarter.

For the nine months ended September 2017, higher volumes sold to retail customers and improved margins due to effective supply management activities generated $142,000 and $121,000, in incremental margin, respectively, compared to the same period in 2016 and higher service revenue added $244,000, in additional margin during the period.

Wholesale propane margins increased, generating additional gross margin of $271,000 and $728,000 for the three and nine months ended September 30, 2017, respectively, due primarily to higher volumes sold and improved margins resulting from supply management activities.

PESCO
PESCO provides natural gas supply and supply management services to residential, commercial, industrial and wholesale customers in Florida, on the Delmarva Peninsula, in Ohio, and, as a result of the recent acquisition of certain operating assets of ARM Energy Management, LLC, in western Pennsylvania. PESCO competes with regulated utilities and other unregulated third-party marketers to sell natural gas supplies directly to residential, commercial and industrial customers through competitively-priced contracts. PESCO does not currently own or operate any natural gas transmission or distribution assets but sells gas that is delivered to retail, commercial  or wholesale customers through affiliated and non-affiliated local distribution company systems and transmission pipelines.  The Company's Delmarva natural gas distribution operations entered into asset management agreements with PESCO to manage a portion of their natural gas pipeline and storage capacity for three years beginning on April 1, 2017.

For the three months ended September 30, 2017, PESCO's gross margin increased by $56,000.  For the nine months ended September 30, 2017, PESCO generated additional gross margin of $1.8 million compared to the same period in 2016, largely as a result of revenues from a natural gas supplier agreement with a customer in Ohio which expired on March 31, 2017, as well as additional customers in Florida, partially offset by lower margin in the Mid-Atlantic region, primarily during the first quarter of 2017.

Xeron
As disclosed previously, Xeron's operations were wound down during the second quarter of 2017.  As a result, Xeron did not generate an operating loss during the third quarter of 2017 and will not report operating results during the fourth quarter of 2017 or subsequent years.  During the third quarter of 2016, Xeron generated a pre-tax loss of $486,000. On a year-to-date basis, Xeron's pre-tax operating loss increased by $375,000, compared to the same period in 2016, driven primarily by non-recurring employee severance costs and costs associated with the termination of leased office space in Houston, Texas. The Company does not anticipate incurring any additional costs that will have a material impact associated with winding down Xeron's operations.

Other Natural Gas Growth - Distribution Operations
In addition to service expansions, the Company's natural gas distribution operations on the Delmarva Peninsula generated $379,000 and $1.0 million in additional gross margin for the three and nine months ended September 30, 2017, respectively, compared to the same periods in 2016, due to an increase in residential, commercial and industrial customers served. The average number of residential customers on the Delmarva Peninsula increased by 3.7 percent and 3.8 percent during the three and nine months ended September 30, 2017, respectively, compared to the same periods in 2016. The Company's natural gas distribution operations in Florida generated $187,000 and $1.2 million in additional gross margin for the three and nine months ended September 30, 2017, respectively, compared to the same periods in 2016, due primarily to an increase in commercial and industrial customers in Florida.

Regulatory Proceedings

Delaware Division Rate Case
In December 2016, the Delaware PSC approved a settlement agreement, which, among other things, provided for an increase in the Company's Delaware division revenue requirement of $2.25 million and a rate of return on common equity of 9.75 percent. The new authorized rates went into effect on January 1, 2017. For the three months ended September 30, 2017, compared to the same period in 2016, revenue decreased by $38,000, reflecting the variance between settled and interim rates. For the nine months ended September 30, 2017, compared to the same period in 2016, the Company recorded incremental revenue of approximately $249,000 related to the rate case.  Any amounts collected through 2016 interim rates in excess of the respective portion of the $2.25 million were refunded to the ratepayers in March 2017.

Eastern Shore Rate Case

In January 2017, Eastern Shore filed a base rate proceeding with the FERC, as required by the terms of its 2012 rate case settlement agreement. Eastern Shore's proposed rates were based on a cost of service of approximately $60 million, resulting in an overall requested revenue increase of approximately $18.9 million and a requested rate of return on common equity of 13.75 percent. The filing includes incremental rates for the White Oak Mainline Expansion project, which benefits a single customer. Eastern Shore also proposed a revision to its depreciation rates and negative salvage rate based on the results of independent, third-party depreciation and negative salvage value studies. In March 2017, the FERC issued an order suspending the effectiveness of the proposed tariff rates for the usual five-month period.

On August 1, 2017, Eastern Shore implemented new rates, subject to refund based upon the outcome of the rate proceeding.  Eastern Shore recorded incremental revenue of approximately $1.0 million for the three and nine months ended September 30, 2017, and established a regulatory liability to reserve a portion of the total incremental revenues generated by the new rates until resolution of the rate case.  Settlement discussions continue with the other parties to the case.

Investing for Future Growth
To support and continue its growth, the Company has expanded, and will continue to expand, its resources and capabilities. Eastern Shore has expanded, and has announced significant additional expansions to, its transmission system, and is, therefore, increasing its staffing. The Company requested recovery of most of Eastern Shore's increased staffing costs in its 2017 rate case filing. Growth in non-regulated energy businesses, including Aspire Energy, PESCO and Eight Flags, requires additional staff as well as corporate resources to support the increased level of business operations. Finally, to allow the Company to continue to identify and move growth initiatives forward and to assist in developing additional initiatives, resources have been added in the Company's corporate shared services departments. In the three and nine months ended September 30, 2017, the Company's staffing and associated costs increased by $617,000 and $4.7 million, or three percent and nine percent, respectively, compared to the same periods in 2016.  The Company is prudently managing the pace and magnitude of the investments being made, while ensuring that it appropriately expands its human resources and systems capabilities to capitalize on future growth opportunities.