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Chesapeake Utilities Corporation Reports Second Quarter 2018 Results
- Second quarter net income rose 5.6 percent to $6.4 million or $0.39 per share
- Profitable growth in the natural gas, electric and propane distribution and natural gas transmission businesses continued to drive increased earnings for the quarter and year-to-date
- The Company has paid or reserved a total of $5.4 million in refunds to regulated energy customers from the pass-through of lower Federal income taxes
- The Northwest Florida Pipeline expansion project was completed and placed into service during the quarter
- Eastern Shore Natural Gas Company's ("Eastern Shore") $117 million pipeline expansion project and associated earnings remains on track
- The 2018 capital spending forecast has been increased from $181.6 million to $216.4 million based on additional profitable opportunities identified across the Company

DOVER, Del., Aug. 9, 2018 /PRNewswire/ -- Chesapeake Utilities Corporation (NYSE: CPK) ("Chesapeake Utilities" or the "Company") today announced second quarter financial results. The Company's net income for the quarter ended June 30, 2018 was $6.4 million, compared to $6.0 million for the same quarter of 2017. Earnings per share ("EPS") for the quarter ended June 30, 2018 were $0.39, compared to $0.37 per share for the same quarter of 2017. For the six months ended June 30, 2018, the Company reported net income of $33.2 million, or $2.03 per share. This represents an increase of $8.1 million or $0.49 per share compared to the same period in 2017.  The second quarter of 2018 and year-to-date EPS reflect the impact of a $0.09 charge for nonrecurring separation expenses associated with a former executive.  Absent that charge, earnings for the quarter and six months ended June 30, 2018 would have been $0.48 and $2.12, respectively.

Higher quarterly and year-to-date earnings reflect the benefits of investments in system expansions and reliability and continued growth in regulated natural gas and electric operations, as well as enhanced profitability and growth from the Company's propane operations and the benefit of the lower effective tax rate from the Tax Cuts and Jobs Act ("TCJA") on Unregulated Energy earnings.   The results also reflect more normal weather during the quarter and six months ended June 30, 2018.  Weather during the first half of 2018 was 1.8 percent warmer than normal compared to 22.2 percent warmer than normal during the first six months of 2017. A detailed discussion of operating results begins on page 3.

"Results for the second quarter and year-to-date highlight the strong leadership team we have built at Chesapeake Utilities and the dedication of our employees to achieving our earnings, capital investment and return targets," stated Michael P. McMasters, President and Chief Executive Officer of Chesapeake Utilities Corporation. "Our business units continue to execute on our growth and expansion initiatives including the completion of the Northwest Florida Pipeline expansion project, significant progress on the construction of Eastern Shore's largest ever expansion project, as well as several other projects that support attainment of our strategic growth targets in future years," Mr. McMasters added. "I am very excited about the potential growth opportunities we have in front of us, the leadership we have in place to accomplish our strategic plan and our energized employees' ability to turn these opportunities into executable projects that will continue to drive our future earnings growth and further increase shareholder value," he concluded.

Significant Items Impacting Earnings
Results for the three and six months ended June 30, 2018 were impacted by the following significant items:

For the period ended June 30,

Second quarter


Year-to-date


Net Income


EPS


Net Income


EPS

(in thousands, except per share data)








Reported (GAAP) Earnings

$

6,387



$

0.39



$

33,241



$

2.03


Less: Realized Mark-to-Market ("MTM") gain





(4,008)



(0.24)


Add: Nonrecurring separation expenses associated with
a former executive

1,421



0.09



1,421



0.09


Adjusted (Non-GAAP) Earnings*

$

7,808



$

0.48



$

30,654



$

1.88


Excluding the one-time separation expenses for a former executive, earnings for the second quarter of 2018 would have been $0.48 per share, an increase of 29.7 percent over EPS for the same quarter in 2017.  Excluding both the one-time separation expenses and the realized MTM gain recorded by Peninsula Energy Services Company, Inc. ("PESCO") during the first quarter, EPS for the six months ended June 30, 2018 would have been $1.88, an increase of 22.1 percent over EPS of $1.54 for the six months ended June 30, 2017.

*This press release includes references to non-Generally Accepted Accounting Principles ("GAAP") financial measures, including gross margin, adjusted earnings and Adjusted EPS.  A "non-GAAP financial measure" is generally defined as a numerical measure of a company's historical or future performance that includes or excludes amounts, or that is subject to adjustments, so as to be different from the most directly comparable measure calculated or presented in accordance with GAAP.  Our management believes certain non-GAAP financial measures, when considered together with GAAP financial measures, provide information that is useful to investors in understanding period-over-period operating results separate and apart from items that may, or could, have a disproportionately positive or negative impact on results in any particular period.

The Company calculates "gross margin" by deducting the cost of sales from operating revenue.  Cost of sales includes the purchased fuel cost for natural gas, electricity and propane, and the cost of labor spent on direct revenue-producing activities and excludes depreciation, amortization and accretion.  Other companies may calculate gross margin in a different manner. Gross margin should not be considered an alternative to operating income or net income, both of which are determined in accordance with GAAP.  The Company believes that gross margin, although a non-GAAP measure, is useful and meaningful to investors as a basis for making investment decisions.  It provides investors with information that demonstrates the profitability achieved by the Company under its allowed rates for regulated operations and under its competitive pricing structures for unregulated businesses.  The Company's management uses gross margin in measuring its business units' performance. This press release also includes gross margin that excludes the impact of unusual items, such as one-time impact from the enactment of the TCJA. The Company calculates "adjusted earnings" by adjusting reported (GAAP) earnings to exclude the impact of certain significant non-cash items, including the impact of realized MTM gains (losses) and one-time charges, such as severance charges, and calculates "adjusted EPS" by dividing adjusted earnings by the weighted average common shares outstanding.

Operating Results for the Quarters Ended June 30, 2018 and 2017

Consolidated Results


Three Months Ended





(in thousands)

June 30,
2018


June 30,
2017


Change


Percent
Change

Gross margin before the TCJA impact

$

69,545



$

60,411



$

9,134



15.1

%

Impact of the TCJA reserves for customer refunds

(2,284)





(2,284)



N/A


Gross margin

67,261



60,411



6,850



11.3

%

Depreciation, amortization and property taxes

13,749



12,752



997



7.8

%

Nonrecurring separation expenses

1,548





1,548



N/A


Other operating expenses

38,716



33,598



5,118



15.2

%

Operating income

$

13,248



$

14,061



$

(813)



(5.8)

%

Operating income during the second quarter of 2018 decreased by $813,000, or 5.8 percent, compared to the same period in 2017.  The most significant driver of the decrease was the pass-through of lower tax rates to regulated energy customers as a result of the TCJA.  While the pass-through reduced margin and operating income by approximately $2.3 million, it was offset by an equal reduction in income taxes.  Excluding the impact of the pass-through of refunds, operating income increased by $1.5 million, or 10.5 percent, driven by higher gross margin of $9.1 million, or 15.1 percent.

Regulated Energy Segment


Three Months Ended





(in thousands)

June 30,
2018


June 30,
2017


Change


Percent
Change

Gross margin before the TCJA impact

$

52,778



$

46,829



$

5,949



12.7

%

Impact of the TCJA reserves for customer refunds

(2,284)





(2,284)



N/A


Gross margin

50,494



46,829



3,665



7.8

%

Depreciation, amortization and property taxes

11,161



10,438



723



6.9

%

Other operating expenses

25,029



22,305



2,724



12.2

%

Operating income

$

14,304



$

14,086



$

218



1.5

%

As a result of the implementation of settled rates for Eastern Shore, continued system expansions, customer growth across the Company's regulated operations and more normal weather conditions, operating income for the Regulated Energy segment increased by $218,000, or 1.5 percent, in the second quarter of 2018 compared to the same period in 2017. This increase was driven by a $5.9 million increase in gross margin, before the impact of the TCJA reserve discussed above, offset by $3.4 million in higher depreciation and other operating expenses associated with the margin growth.  As discussed above, second quarter gross margin and operating income were also impacted by customer refunds of $2.3 million, associated with the TCJA, which were offset by an equal reduction in income tax expenses. Excluding the estimated customer refunds associated with the TCJA, operating income increased by $2.5 million, or 17.8 percent.

The significant components of the increase in gross margin are shown below:

(in thousands)

Margin Impact

Implementation of Eastern Shore settled rates

$

2,365


Service expansions

1,652


Natural gas growth (including customer and consumption growth but excluding service expansions)

1,575


Return to more normal weather

359


Florida electric reliability/modernization program

352


Gas Reliability and Infrastructure Program ("GRIP") in Florida

306


Other

(660)


Total

5,949


Less: TCJA reserve impact for regulated entities*

(2,284)


Quarter over quarter increase in gross margin

$

3,665



*As a result of the TCJA, an estimated amount of $2.3 million was reserved or refunded to customers during the second quarter of 2018 to reflect the impact of lower tax rates on the Company's regulated businesses. In some jurisdictions, refunds have been made to customers, while in other jurisdictions, the Company has established reserves until final agreements are approved and permanent changes are made to customer rates.  The reserves and lower customer rates are equal to the estimated reduction in Federal income taxes due to the TCJA and have no material impact on after-tax earnings from the Regulated Energy segment.

The significant components of the increase in other operating expenses are as follows:

(in thousands)

Other
Operating
Expenses

Higher outside services, facilities and maintenance costs due to growth

$

1,166


Higher payroll expense (increased staffing and annual salary increases)

1,019


Higher depreciation, amortization and property taxes associated with recent capital projects

722


Higher incentive compensation costs (based on period-over-period results)

384


Other

156


Quarter over quarter increase in other operating expenses

$

3,447


At the present time, we expect the current expense run rate to continue for the remainder of the year.

Unregulated Energy Segment


Three Months Ended





(in thousands)

June 30,
2018


June 30,
2017


Change


Percent
Change

Gross margin

$

16,915



$

13,736



$

3,179



23.1

%

Depreciation, amortization and property taxes

2,553



2,272



281



12.4

%

Other operating expenses

13,872



11,462



2,410



21.0

%

Operating income

$

490



$

2



$

488



N.M.


Operating income for the Unregulated Energy segment increased by $488,000 for the three months ended June 30, 2018, compared to the same period in 2017. The increase was driven by a $3.2 million, or 23.1 percent, increase in gross margin, which was partially offset by $2.7 million in higher operating expenses associated with growth.  The improvement in operating income is largely a result of continued growth and colder weather at the propane operations and higher margins at PESCO.

The significant components of the increase in gross margin are shown below:

(in thousands)

Margin Impact

Nonrecurring margin increase for PESCO (see the discussion included later for the margin
drivers)

$

1,092


Propane delivery operations - additional customer consumption related to weather

806


Incremental margin from PESCO operations (see the discussion included later for the
margin drivers)

592


Propane delivery operations - increased margin driven by growth and other factors

536


Aspire Energy of Ohio LLC ("Aspire Energy") - increased margins largely due to higher
commodity pricing on natural gas liquid sales

207


Other

(54)


Quarter over quarter increase in gross margin

$

3,179


The significant components of the increase in other operating expenses are as follows:

(in thousands)

Other
Operating
Expenses

Incremental operating expenses for PESCO

$

764


Higher payroll expense (increased staffing and annual salary increases)(1)

515


Higher outside services, facilities and maintenance costs due to growth(1)

475


Higher incentive compensation costs (based on period-over-period results)(1)

427


Higher benefit and other employee-related expenses(1)

173


Higher depreciation, asset removal and property tax costs due to new capital investments(1)

131


Other(1)

206


Quarter over quarter increase in other operating expenses

$

2,691



 (1) Excluding incremental operating expenses at PESCO.

At the present time, we expect the current expense run rate to continue for the remainder of the year.

Operating Results for the Six Months Ended June 30, 2018 and 2017

Consolidated Results


Six Months Ended





(in thousands)

June 30,
2018


June 30,
2017


Change


Percent
Change

Gross margin before the TCJA impact

$

163,981



$

144,573



$

19,408



13.4

%

Impact of the TCJA reserves for customer refunds

(5,421)





(5,421)



N/A


Gross margin

158,560



144,573



13,987



9.7

%

Depreciation, amortization and property taxes

27,447



25,235



2,212



8.8

%

Nonrecurring separation expenses

1,548





1,548



N/A


Other operating expenses

75,911



70,178



5,733



8.2

%

Operating income

$

53,654



$

49,160



$

4,494



9.1

%

Operating income, during the six months ended June 30, 2018, increased by $4.5 million, or 9.1 percent, compared to the same period in 2017.  This increase was driven by a $19.4 million, or 13.4 percent, increase in gross margin before the TCJA impact, which was partially offset by a $2.2 million increase in depreciation, amortization and property taxes and a $5.7 million increase in other operating expenses. Gross margin and operating income for the six months ended June 30, 2018, were also impacted by customer refunds of $5.4 million, associated with the TCJA, which were offset by an equivalent reduction in income tax expenses for the Regulated Energy segment. Excluding the estimated customer refunds associated with the TCJA, operating income increased by $9.9 million, or 20.2 percent.

Regulated Energy Segment


Six Months Ended





(in thousands)

June 30,
2018


June 30,
2017


Change


Percent
Change

Gross margin before the TCJA impact

$

117,077



$

104,239



$

12,838



12.3

%

Impact of the TCJA reserves for customer refunds

(5,421)





(5,421)



N/A


Gross margin

111,656



104,239



7,417



7.1

%

Depreciation, amortization and property taxes

22,317



20,629



1,688



8.2

%

Other operating expenses

48,324



46,129



2,195



4.8

%

Operating income

$

41,015



$

37,481



$

3,534



9.4

%

As a result of the implementation of settled rates for Eastern Shore, continued system expansions, customer growth across the Company's regulated operations and more normal weather conditions, operating income for the Regulated Energy segment increased by $3.5 million, or 9.4 percent, in the six months ended June 30, 2018 compared to the same period in 2017. This increase was driven by a $12.8 million increase in gross margin before the impact of the TCJA reserve discussed above, which was partially offset by $3.9 million in higher depreciation and other operating expenses associated with the margin growth.  Excluding the estimated customer refunds associated with the TCJA, operating income increased by $9.0 million, or 23.9 percent.

The significant components of the increase in gross margin are shown below:

(in thousands)

Margin Impact

Implementation of Eastern Shore settled rates

$

5,095


Natural gas growth (including customer and consumption growth but excluding service expansions)

3,342


Service expansions

2,316


Return to more normal weather

1,314


Florida electric reliability/modernization program

767


Florida GRIP

602


Other

(598)


Total

12,838


Less: TCJA reserve impact for regulated entities*

(5,421)


Period over period increase in gross margin

$

7,417



*As a result of the TCJA, an estimated amount of $5.4 million was reserved or refunded to customers during the first six months of 2018 to reflect the impact of lower tax rates on the Company's regulated businesses. In some jurisdictions, refunds have been made to customers, while in other jurisdictions, the Company has established reserves until final agreements are approved and permanent changes are made to customer rates.  The reserves and lower customer rates are equal to the estimated reduction in Federal income taxes due to the TCJA and have no material impact on after-tax earnings from the Regulated Energy segment.

The significant components of the increase in other operating expenses are as follows:

(in thousands)

Other Operating
Expenses

Higher depreciation, amortization and property taxes associated with recent capital projects

$

1,688


Higher payroll expense (increased staffing and annual salary increases)

1,399


Higher facilities and maintenance costs largely as a result of growth

1,149


Lower regulatory and outside services expenses as there were various regulatory
proceedings (including Eastern Shore's rate case) in 2017

(1,056)


Higher incentive compensation costs (based on period-over-period results)

592


Other

111


Period over period increase in other operating expenses

$

3,883


Unregulated Energy Segment


Six Months Ended





(in thousands)

June 30,
2018


June 30,
2017


Change


Percent
Change

Gross margin

$

47,216



$

40,555



$

6,661



16.4

%

Depreciation, amortization and property taxes

5,059



4,524



535



11.8

%

Other operating expenses

27,983



24,454



3,529



14.4

%

Operating income

$

14,174



$

11,577



$

2,597



22.4

%

Operating income for the Unregulated Energy segment increased by $2.6 million for the six months ended June 30, 2018, compared to the same period in 2017. The increase was driven by a $6.7 million, or 16.4 percent, increase in gross margin, which was partially offset by $4.1 million in higher operating expenses associated with growth.  The improvements in gross margin and operating income were driven primarily by more normal weather and continued growth within the Company's propane operations and at Aspire Energy.

The significant components of the increase in gross margin are shown below:

(in thousands)

Margin Impact

Propane delivery operations - additional customer consumption - weather

$

2,923


Propane delivery operations - increased margin driven by growth and other factors

1,789


Nonrecurring margin decrease at PESCO

(863)


Aspire Energy - customer consumption - weather

921


Aspire Energy - increased margin driven by growth and other factors

585


Growth in wholesale propane margins and sales

333


Incremental margin from PESCO operations

255


Other

718


Period over period increase in gross margin

$

6,661


The significant components of the increase in other operating expenses are as follows:

(in thousands)

Other
Operating
Expenses

Incremental operating expenses for PESCO

$

1,715


Higher payroll expense (increased staffing and annual salary increases)(1)

996


Absence of Xeron Inc. ("Xeron") 2017 wind-down costs(1)

(870)


Higher vehicle, sales and advertising, other taxes and credit collections costs, largely driven by
growth(1)

646


Higher incentive compensation costs (based on period-over-period results)(1)

594


Higher facilities and maintenance costs due to growth(1)

443


Higher depreciation, amortization and property taxes associated with recent capital investments(1)

266


Higher benefits and employee-related costs(1)

214


Other(1)

60


Period over period increase in other operating expenses

$

4,064



(1) Excluding incremental operating expenses at PESCO.

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 2017 Annual Report on Form 10-K for further information on the risks and uncertainties related to the Company's forward-looking statements.

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

Conference Call

Chesapeake Utilities will host a conference call on Friday, August 10, 2018 at 10:30 a.m. Eastern Time to discuss the Company's financial results for the quarter ended June 30, 2018.  To participate in this call, dial 855.801.6270 and reference Chesapeake Utilities' 2018 Second Quarter Results Conference Call.  To access the replay recording of this call, the accompanying transcript, and other pertinent quarterly information, use the link CPK - Conference Call Audio Replay, or visit the Investors/Events and Presentations section of Company's website at www.chpk.com.

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

 

Financial Summary

(in thousands, except per share data)



Three Months Ended


Six Months Ended


June 30,


June 30,


2018


2017


2018


2017

Gross Margin








  Regulated Energy segment

$

50,494



$

46,829



$

111,656



$

104,239


  Unregulated Energy segment

16,915



13,736



47,216



40,555


  Other businesses and eliminations

(148)



(154)



(312)



(221)


 Total Gross Margin

$

67,261



$

60,411



$

158,560



$

144,573










Operating Income








   Regulated Energy segment

$

14,304



$

14,086



$

41,015



$

37,481


   Unregulated Energy segment

490



2



14,174



11,577


   Other businesses and eliminations

(1,546)



(27)



(1,535)



102


 Total Operating Income

13,248



14,061



53,654



49,160










Other Expense, net

(262)



(1,002)



(194)



(1,703)


Interest Charges

3,881



3,073



7,545



5,811


Pre-tax Income

9,105



9,986



45,915



41,646


Income Taxes

2,718



3,940



12,674



16,456


 Net Income

$

6,387



$

6,046



$

33,241



$

25,190










Earnings Per Share of Common Stock








Basic

$

0.39



$

0.37



$

2.03



$

1.54


Diluted

$

0.39



$

0.37



$

2.03



$

1.54


 

Financial Summary Highlights

Key variances, between the three months ended June 30, 2017 and 2018, included:

(in thousands, except per share data)


Pre-tax
Income


Net
Income


Earnings
Per Share

Second Quarter of 2017 Reported Results


$

9,986



$

6,046



$

0.37


Adjusting for unusual items:







One-time separation expenses associated with a former executive


(1,548)



(1,421)



(0.09)


Absence of Xeron expenses, including 2017 wind-down expenses


173



122



0.01




(1,375)



(1,299)



(0.08)









Increased Gross Margins:







Implementation of Eastern Shore settled rates* (1)


2,365



1,659



0.10


TCJA impact - refunds and reserves for future refunds to ratepayers(2)


(2,284)



(1,602)



(0.10)


Service expansions*


1,652



1,158



0.07


Natural gas growth (including customer and consumption growth but excluding service expansions)


1,575



1,105



0.07


Return to normal weather


1,108



778



0.05


Nonrecurring margin increase at PESCO


1,092



766



0.05


Incremental margin from PESCO operations


592



415



0.03


Unregulated Energy growth excluding PESCO


503



353



0.02


Florida electric reliability/modernization program*


352



247



0.02


GRIP*


306



215



0.01




7,261



5,094



0.32









 Decreased (Increased) Other Operating Expenses:







 Higher outside services and facilities maintenance costs (3)


(1,602)



(1,124)



(0.07)


 Higher payroll expense (increased staffing and annual salary increases) (3)


(1,534)



(1,076)



(0.07)


 Higher depreciation, asset removal and property tax costs due to new capital
 investments (3)


(848)



(595)



(0.04)


 Higher incentive compensation costs (based on period-over-period results) (3)


(811)



(569)



(0.03)


 Incremental operating expenses for PESCO


(764)



(536)



(0.03)


 Higher benefit and other employee-related expenses (3)


(365)



(256)



(0.02)




(5,924)



(4,156)



(0.26)









Interest charges


(808)



(567)



(0.03)


Income taxes - including TCJA impact - decreased effective tax rate




1,295



0.08


Net other changes


(35)



(26)



(0.01)




(843)



702



0.04









Second Quarter of 2018 Reported Results


$

9,105



$

6,387



$

0.39



(1) Excluding amounts refunded to customers associated with the TCJA, which are broken out separately and discussed in footnote 2.

(2) "TCJA impact - refunds and reserves for future refunds to ratepayers" represents the amounts that have already been refunded to customers or reserves established for future refunds to customers in the second quarter of 2018 as a result of lower taxes due to the TCJA. Refunds made to customers are offset by the corresponding decrease in federal income taxes and are expected to have no net impact on net income.

(3) Excluding incremental operating expenses at PESCO.

 *See the Major Projects and Initiatives table later in this press release.

Key variances, between the six months ended June 30, 2017 and 2018, included:

(in thousands, except per share data)


Pre-tax
Income


Net
Income


Earnings
Per Share

Six Months Ended June 30, 2017 Reported Results


$

41,646



$

25,190



$

1.54


Adjusting for unusual items:







One-time separation expenses associated with a former executive


(1,548)



(1,421)



(0.09)


Absence of Xeron expenses, including 2017 wind-down expenses


870



630



0.04




(678)



(791)



(0.05)









Increased Gross Margins:







TCJA impact - refunds and reserves for future refunds to ratepayers(2)


(5,421)



(3,925)



(0.24)


Return to normal weather


5,159



3,735



0.23


Implementation of Eastern Shore settled rates* (1)


5,095



3,689



0.22


Natural gas growth (including customer and consumption growth but excluding service expansions)


3,342



2,420



0.15


Service expansions*


2,316



1,677



0.10


Unregulated Energy growth excluding PESCO


2,044



1,480



0.09


Nonrecurring margin decrease at PESCO


(863)



(625)



(0.04)


Florida electric reliability/modernization program*


767



555



0.03


GRIP*


602



436



0.03


Incremental margin from PESCO operations


255



185



0.01




13,296



9,627



0.58









 Decreased (Increased) Other Operating Expenses:







 Higher payroll expense (increased staffing and  annual salary increases) (3)


(2,395)



(1,734)



(0.11)


 Higher depreciation, asset removal and property tax costs due to new capital
 investments (3)


(1,949)



(1,411)



(0.09)


 Incremental operating expenses for PESCO


(1,715)



(1,242)



(0.08)


 Higher facilities maintenance costs (3)


(1,554)



(1,125)



(0.07)


 Lower regulatory and outside services costs (3)


1,298



940



0.06


 Higher incentive compensation costs (based on period-over-period results) (3)


(1,187)



(859)



(0.05)




(7,502)



(5,431)



(0.34)









Interest charges


(1,734)



(1,255)



(0.08)


Income taxes - including TCJA impact - decreased effective tax rate




5,262



0.32


Net other changes


887



639



0.06




(847)



4,646



0.30









Six Months Ended June 30, 2018 Reported Results


$

45,915



$

33,241



$

2.03



(1) Excluding amounts refunded to customers associated with the TCJA, which are broken out separately and discussed in footnote 2.

(2) "TCJA impact - refunds and reserves for future refunds to ratepayers" represents amounts that have already been refunded to customers or reserves established for future refunds to customers in the first six months of 2018 as a result of lower taxes due to the TCJA. Refunds made to customers are offset by the corresponding decrease in federal income taxes and are expected to have no net impact on net income.

(3) Excluding incremental operating expenses at PESCO.

*See the Major Projects and Initiatives table later in this press release.

Recently Completed and Ongoing Major Projects and Initiatives
The Company constantly seeks and develops additional projects and initiatives in order to further increase shareholder value and serve its customers. The following represent the major projects recently completed and currently underway. In the future, the Company will add new projects to this table as projects are initiated.


Gross Margin for the Period


Three Months Ended


Six Months Ended


Year Ended


Estimate for


June 30,


June 30,


December 31,


Fiscal

in thousands

2018


2017


2018


2017


2017


2018


2019

Florida GRIP

$

3,647



$

3,341



$

7,211



$

6,609



$

13,454



$

14,287



$

14,370


Eastern Shore Rate Case (1)

2,365





5,095





3,693



9,800



9,800


Florida Electric Reliability/Modernization Pilot
Program (1)

352





767





94



1,558



1,558


New Smyrna Beach, Florida Project (1)

352





704





235



1,409



1,409


2017 Eastern Shore System Expansion Project - 
including interim services (1)

859





1,995





433



8,101



15,799


Northwest Florida Expansion Project (1)

870





870







3,484



6,500


(Palm Beach County) Belvedere, Florida Project (1)











635



1,131


Total

$

8,445



$

3,341



$

16,642



$

6,609



$

17,909



$

39,274



$

50,567



(1) Gross margin amounts included in this table have not been adjusted to reflect the impact of the TCJA.  Any refunds and/or rate reductions implemented in the Company's regulated businesses will be offset by lower Federal income taxes due to the TCJA.

Ongoing Growth Initiatives

GRIP
GRIP is a natural gas pipe replacement program approved by the Florida PSC that allows automatic recovery in rates of capital related costs and a return on investment, associated with the replacement of mains and services. Since the program's inception in August 2012, we have invested $120.1 million to replace 250 miles of qualifying distribution mains, including $6.4 million during the first six months of 2018. GRIP generated additional gross margin of $306,000 and $602,000 for the three and six months ended June 30, 2018 compared to the same periods in 2017.

Regulatory Proceedings

Eastern Shore Rate Case/Settled Rates

Eastern Shore's rate case settlement agreement became final on April 1, 2018. The final agreement increases Eastern Shore's operating income by $6.6 million consisting of $9.8 million from increased rates and offset by the $3.2 million in lower federal income taxes. For the three and six months ended June 30, 2018, Eastern Shore recognized incremental gross margin of approximately $2.4 million and $5.1 million, respectively.  As of June 30, 2018, Eastern Shore refunded its customers a total of $1.7 million related to the decrease in federal income taxes as a result of the TCJA.  The settlement rates were effective January 1, 2018.

Florida Electric Reliability/Modernization Program
In December 2017, the Florida PSC approved a $1.6 million annualized rate increase, effective January 2018, for the recovery of a limited number of investments and costs related to reliability, safety and modernization for the Florida Public Utilities Company's ("FPU") electric distribution system. This increase will continue through at least the last billing cycle of December 2019. For the three and six months ended June 30, 2018, additional margin of $352,000 and $767,000, respectively, was generated.

Major Projects and Initiatives Currently Underway

New Smyrna Beach, Florida Project
In the fourth quarter of 2017, the Company commenced construction of a 14-mile gas transmission pipeline to provide additional capacity to serve current and planned customer growth in the Company's New Smyrna Beach service area. The project was partially placed into service at the end of 2017 and is expected to be fully in service in September 2018.  For the three and six months ended June 30, 2018, the project generated incremental gross margin of approximately $352,000 and $704,000, respectively.

2017 Eastern Shore System Expansion Project
In November 2017, Eastern Shore began construction of a $117.0 million system expansion that will increase its capacity by 26 percent once completed. The Company has invested $89.6 million through June 30, 2018 and expects to invest approximately $24.8 million during the remainder of 2018 to substantially complete the project. The first phase of the project was placed into service in December 2017, and generated $859,000 and $2.0 million in incremental gross margin, including margin from interim services, during the three and six months ended June 30, 2018, respectively.  With the exception of some minor facilities, the remaining segments are scheduled to be completed and begin generating margin during the second half of 2018. The project is expected to produce approximately $15.8 million in gross margin in its first full year of service.

Northwest Florida Expansion Project
Peninsula Pipeline Company, Inc. ("Peninsula Pipeline"), has completed construction of transmission lines and the Company's Florida natural gas division has completed construction of lateral distribution lines to serve two large customers and other customers close to these facilities. This is the Company's first expansion of natural gas service into Northwest Florida. The project was placed into service in May 2018 and generated incremental gross margin of $870,000 for the three and six months ended June 30, 2018.  The estimated annual gross margin from this project is $6.5 million.

(Palm Beach County) Belvedere, Florida Project
Peninsula Pipeline is constructing a pipeline to bring gas directly to the Company's natural gas distribution system in West Palm Beach, Florida. The Company expects to complete this project by the end of the third quarter of 2018 and expects the project to generate $1.1 million in annual gross margin.

Other major factors influencing gross margin

Weather and Consumption
Gross margin increased by $1.1 million and $5.2 million in the three and six months ended June 30, 2018, respectively, as a result of colder temperatures, compared to the extremely warm temperatures experienced during the same period in 2017.  While temperatures during the first half of 2018 were colder than 2017, temperatures were still warmer than normal, as shown in the table below. The Company estimates that it would have generated an additional $2.4 million in gross margin if temperatures for the six months ended June 30, 2018 had been normal.  The following table summarizes heating degree-days ("HDD") and cooling degree-days ("CDD") variances from the 10-year average HDD/CDD ("Normal") for the three and six months ended June 30, 2018 and 2017.

HDD and CDD Information


Three Months Ended




Six Months Ended




June 30,




June 30,




2018


2017


Variance


2018


2017


Variance

Delmarva












Actual HDD

424



288



136



2,719



2,246



473


10-Year Average HDD ("Delmarva Normal")

423



429



(6)



2,785



2,783



2


Variance from Delmarva Normal

1



(141)





(66)



(537)




Florida












Actual HDD

17



13



4



507



298



209


10-Year Average HDD ("Florida Normal")

16



19



(3)



533



555



(22)


Variance from Florida Normal

1



(6)





(26)



(257)




Ohio












Actual HDD

662



508



154



3,652



2,992



660


10-Year Average HDD ("Ohio Normal")

614



637



(23)



3,683



3,774



(91)


Variance from Ohio Normal

48



(129)





(31)



(782)




Florida












Actual CDD

952



935



17



1,091



1,080



11


10-Year Average CDD ("Florida CDD Normal")

969



955



14



1,058



1,037



21


Variance from Florida CDD Normal

(17)



(20)





33



43




Natural Gas Distribution Customer and Consumption Growth
The Company's natural gas distribution operations generated $1.6 million and $3.3 million of additional margin for the three and six months ended June 30, 2018, respectively.  The breakdown of the increased margin is as follows:



Three Months Ended


Six Months Ended

In thousands


June 30, 2018


June 30, 2018

Customer growth:





Residential


$

351



$

864


Commercial and industrial excluding new service in Northwest Florida


303



604


New service in Northwest Florida


276



305


Total customer growth


930



1,773







Volume growth:





Residential


151



855


Commercial and industrial


387



1,026


Other  - including unbilled revenue


107



(312)


Total volume growth


645



1,569







Total natural gas distribution growth


$

1,575



$

3,342


Customer growth for the Company's Delmarva Peninsula and Florida natural gas distribution operations generated $930,000 and $1.8 million in additional gross margin for the three and six months ended June 30, 2018, respectively, compared to the same periods in 2017.  The additional margin was generated from an approximately 3.8 percent increase in the average number of residential customers as well as growth in commercial and industrial customers on the Delmarva Peninsula in the second quarter and first six months of 2018, compared to the corresponding periods in 2017. Residential customer growth on the Delaware Peninsula has averaged 3.0 percent over the past five years. The Company's Florida natural gas distribution operations generated additional gross margin for the three and six months ended June 30, 2018, due to growth in all customer classes and new service to customers in Northwest Florida.

The Company's Delmarva Peninsula and Florida natural gas distribution operations generated $645,000 and $1.6 million in additional gross margin for the three and six months ended June 30, 2018, respectively, compared to the same periods in 2017 from higher sales to residential and commercial customers.

Propane Operations

The Company's Florida and Delmarva Peninsula propane operations generated $1.6 million and $5.7 million in incremental margin for the three and six months ended June 30, 2018, respectively, compared to the same periods in 2017. A return to more normal temperatures accounted for $806,000 and $2.9 million of the margin increase during the three and six months ended June 30, 2018, respectively.  The balance of the increase reflects increased customer consumption driven by growth and other factors, higher sales and revenues from service contracts and increased wholesale sales activities.

PESCO

For the three and six months ended June 30, 2018, PESCO recorded a series of adjustments, MTM gains and recognized extraordinary costs, which impacted reported results.  Excluding the impact of these items, PESCO's gross margin increased by $592,000 and $255,000 in the three and six months ended June 30, 2018, respectively, compared to the same periods in 2017.  The total of the adjustments increased gross margin by $1.1 million and reduced gross margin by $863,000 for the three and six months ended June 30, 2018, respectively, compared to the same periods in 2017, respectively.  The following table summarizes the changes in PESCO'S year-over-year margin for the three and six months ended June 30, 2018:


Three Months Ended


Six Months Ended


June 30, 2018


June 30, 2018

(in thousands)




Three and Six Months Ended June 30, 2017 Reported Results

$

921



$

4,389


Incremental Margin from Growth and ARM Acquisition in 2017

592



255


Nonrecurring Margin factors - non-renewal of Supply Agreement, MTM and Other Adjustments

1,092



(863)


2018 Margin

$

2,605



$

3,781


A more detailed discussion of PESCO's results is provided in the Company's Form 10-Q for the quarter ended June 30, 2018.

The following table compares the margin, operating expenses and operating income from PESCO for the three and six months ended June 30, 2018 and 2017:


Three Months Ended


Six Months Ended


June 30,


June 30,

in thousands

2018


2017


2018


2017

Total Gross Margin

$

2,606



$

921



$

3,781



$

4,389


Operating Expense

(1,918)



(1,154)



(3,857)



(2,143)


Operating Income

$

688



$

(233)



$

(76)



$

2,246


Operating income for PESCO improved to $688,000 for the three months ended June 30, 2018, from a loss of $233,000 during the prior year period.  The improvement reflects the benefit of several nonrecurring margin adjustments in the business, growth in margins from existing operations as well as the addition of margin from the business purchased from ARM during the third quarter of 2017.   This was partially offset by a $764,000 increase in operating expenses, including $262,000 associated with the ARM margins previously mentioned, as well as $501,000 in increased staffing, infrastructure and risk management system costs to ensure the profitable future growth of this business.

For the six months ended June 30, 2018, PESCO reported an operating loss of $76,000, compared to income of $2.2 million during the prior year period.  The decline primarily reflects increased expenses incurred to build out the staff, infrastructure and risk management systems necessary for the success of this business, as well as the impact of several nonrecurring margin adjustments, largely during the first quarter of 2018.

Xeron

Xeron's operations were wound down during the second quarter of 2017.  Operating income for the three and six months ended June 30, 2018, improved by $173,000 and $870,000, respectively, due to the absence of wind-down expenses and the absence of operating losses for Xeron in 2018.

Capital Investment Growth and Financing Plan

The Company's capital expenditures were $134.7 million for the six months ended June 30, 2018. The Company originally budgeted $181.6 million for capital expenditures in 2018 and is currently projecting capital expenditures of approximately $216.4 million in 2018.  The Company's current forecast by segment and by business line is shown below:


2018

(dollars in thousands)


Regulated Energy:


Natural gas distribution

$

65,594


Natural gas transmission

110,813


Electric distribution

8,930


Total Regulated Energy

185,337


Unregulated Energy:


Propane distribution

13,359


Other unregulated energy

7,413


Total Unregulated Energy

20,772


Other:


Corporate and other businesses

10,289


Total Other

10,289


Total 2018 Forecasted Capital Expenditures

$

216,398


Chesapeake Utilities' target ratio of equity to total capitalization, including short-term borrowings, is between 50 and 60 percent.  This target capital structure ensures that the Company maintains a strong balance sheet to support continued growth.  Over the past several years, the Company has been deploying increased amounts of capital on new projects, many of which have longer construction periods.  The Company seeks to align the permanent financing of these capital projects with the in-service dates to the extent feasible.

In 2017, the Company refinanced $70.0 million of short-term debt as 3.25 percent senior notes.  The refinancing will result in increased annual interest expense of $2.3 million during 2018, a portion of which impacted the second quarter and year-to-date results; however, the Company locked in a low interest rate for 15 years. The Company previously executed a shelf agreement with New York Life and subsequently issued $50.0 million of unsecured senior notes in May 2018 and will issue an additional tranche by November 2018 at an average interest rate of 3.53 percent for 20 years.  The Company expects to access additional permanent capital to align the financing with new investments and to maintain a solid balance sheet to support future capital deployment.

Chesapeake Utilities Corporation and Subsidiaries

Condensed Consolidated Statements of Income (Unaudited)

(in thousands, except shares and per share data)



Three Months Ended


Six Months Ended


June 30,


June 30,


2018


2017


2018


2017

Operating Revenues








Regulated Energy

$

70,504



$

70,996



$

179,897



$

168,650


Unregulated Energy and other

66,160



54,088



196,123



141,594


Total Operating Revenues

136,664



125,084



376,020



310,244


Operating Expenses








Regulated Energy cost of sales

20,010



24,167



68,241



64,411


Unregulated Energy and other cost of sales

49,393



40,505



149,219



101,260


Operations

36,281



30,013



68,983



62,502


Maintenance

3,619



3,403



7,211



6,634


Gain from a settlement

(130)



(130)



(130)



(130)


Depreciation and amortization

9,839



9,094



19,543



17,906


Other taxes

4,404



3,971



9,299



8,501


Total operating expenses

123,416



111,023



322,366



261,084


Operating Income

13,248



14,061



53,654



49,160


Other expense, net

(262)



(1,002)



(194)



(1,703)


Interest charges

3,881



3,073



7,545



5,811


Income Before Income Taxes

9,105



9,986



45,915



41,646


Income taxes

2,718



3,940



12,674



16,456


Net Income

$

6,387



$

6,046



$

33,241



$

25,190


Weighted Average Common Shares Outstanding:








Basic

16,369,641



16,340,665



16,360,540



16,329,009


Diluted

16,417,082



16,382,207



16,410,061



16,373,038


Earnings Per Share of Common Stock:








Basic

$

0.39



$

0.37



$

2.03



$

1.54


Diluted

$

0.39



$

0.37



$

2.03



$

1.54


 

 

Chesapeake Utilities Corporation and Subsidiaries

Condensed Consolidated Balance Sheets (Unaudited)


Assets


June 30, 2018


December 31, 2017

(in thousands, except shares and per share data)





 Property, Plant and Equipment





  Regulated Energy


$

1,174,407



$

1,073,736


  Unregulated Energy


216,125



210,682


  Other businesses and eliminations


30,170



27,699


 Total property, plant and equipment


1,420,702



1,312,117


 Less:  Accumulated depreciation and amortization


(287,942)



(270,599)


 Plus:  Construction work in progress


101,904



84,509


 Net property, plant and equipment


1,234,664



1,126,027


 Current Assets





  Cash and cash equivalents


4,512



5,614


  Trade and other receivables (less allowance for uncollectible accounts of $1,076
  and $936, respectively)


53,419



77,223


  Accrued revenue


12,353



22,279


  Propane inventory, at average cost


6,597



8,324


  Other inventory, at average cost


4,791



12,022


  Regulatory assets


13,330



10,930


  Storage gas prepayments


4,365



5,250


  Income taxes receivable


6,420



14,778


  Prepaid expenses


5,162



13,621


  Mark-to-market energy assets


534



1,286


  Other current assets


4,560



7,260


    Total current assets


116,043



178,587


  Deferred Charges and Other Assets





  Goodwill


19,604



19,604


  Other intangible assets, net


4,277



4,686


  Investments, at fair value


7,486



6,756


  Regulatory assets


76,427



75,575


  Other assets


4,440



3,699


     Total deferred charges and other assets


112,234



110,320


Total Assets


$

1,462,941



$

1,414,934


 

 

Chesapeake Utilities Corporation and Subsidiaries

Condensed Consolidated Balance Sheets (Unaudited)


Capitalization and Liabilities


June 30, 2018


December 31, 2017

(in thousands, except shares and per share data)





 Capitalization





 Stockholders' equity





  Preferred stock, par value $0.01 per share (authorized 2,000,000 shares), no
  shares issued and outstanding


$



$


  Common stock, par value $0.4867 per share (authorized 50,000,000 shares)


7,971



7,955


    Additional paid-in capital


255,356



253,470


    Retained earnings


250,377



229,141


    Accumulated other comprehensive loss


(5,718)



(4,272)


    Deferred compensation obligation


3,782



3,395


    Treasury stock


(3,782)



(3,395)


 Total stockholders' equity


507,986



486,294


 Long-term debt, net of current maturities


241,596



197,395


 Total capitalization


749,582



683,689


 Current Liabilities





  Current portion of long-term debt


9,977



9,421


  Short-term borrowing


235,288



250,969


  Accounts payable


60,769



74,688


  Customer deposits and refunds


32,018



34,751


  Accrued interest


1,891



1,742


  Dividends payable


6,060



5,312


  Accrued compensation


7,953



13,112


  Regulatory liabilities


22,194



6,485


  Mark-to-market energy liabilities


886



6,247


  Other accrued liabilities


11,495



10,273


 Total current liabilities


388,531



413,000


 Deferred Credits and Other Liabilities





  Deferred income taxes


143,147



135,850


  Regulatory liabilities


141,499



140,978


  Environmental liabilities


8,090



8,263


  Other pension and benefit costs


28,996



29,699


  Deferred investment tax credits and other liabilities


3,096



3,455


 Total deferred credits and other liabilities


324,828



318,245


Total Capitalization and Liabilities


$

1,462,941



$

1,414,934


 


 

Chesapeake Utilities Corporation and Subsidiaries

Distribution Utility Statistical Data (Unaudited)




For the Three Months Ended June 30, 2018


For the Three Months Ended June 30, 2017



Delmarva NG
Distribution


Chesapeake
Utilities Florida
NG Division


FPU NG
Distribution


FPU Electric
Distribution


Delmarva NG
Distribution


Chesapeake
Utilities Florida
NG Division


FPU NG
Distribution


FPU Electric
Distribution

Operating Revenues

(in thousands)















  Residential


$

14,007



$

1,459



$

7,713



$

9,814



$

11,096



$

1,365



$

7,633



$

10,477


  Commercial


7,752



1,524



6,809



9,709



6,424



1,395



7,449



10,075


  Industrial


1,987



2,854



5,218



371



1,849



1,577



4,775



733


  Other (1)


(3,496)



480



(1,459)



(1,532)



(3,136)



966



(1,271)



(207)


Total Operating
Revenues


$

20,250



$

6,317



$

18,281



$

18,362



$

16,233



$

5,303



$

18,586



$

21,078



















Volume (in Dts for natural gas and MWHs for electric)













  Residential


759,202



85,526



329,284



66,682



583,108



76,365



304,669



69,298


  Commercial


711,690



1,134,555



432,192



73,276



614,311



2,710,729



459,354



74,766


  Industrial


1,308,129



7,024,154



1,245,950



3,540



1,206,698



1,501,779



1,100,430



4,750


  Other


17,759





463,846



1,907



20,216





459,201



1,874


Total


2,796,780



8,244,235



2,471,272



145,405



2,424,333



4,288,873



2,323,654



150,688



















Average Customers















  Residential


71,038



16,391



55,580



24,714



68,442



15,786



54,352



24,582


  Commercial(2)


6,994



1,517



3,932



7,493



6,836



1,430



4,072



7,429


  Industrial(2)


155



16



2,284



2



144



78



2,055



2


  Other


4





11





7








Total


78,191



17,924



61,807



32,209



75,429



17,294



60,479



32,013



















 

 

Chesapeake Utilities Corporation and Subsidiaries

Distribution Utility Statistical Data (Unaudited)