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Chesapeake Utilities Corporation Reports Higher Earnings For The Second Quarter

August 6, 2015 at 6:30 AM EDT

DOVER, Del., Aug. 6, 2015 /PRNewswire/ -- Chesapeake Utilities Corporation (NYSE: CPK) today reported second quarter financial results. The Company's net income for the three months ended June 30, 2015 was $6.3 million, or $0.41 per share. This represents an increase of $1.2 million, or $0.06 per share, over the same quarter in 2014.  Included in the Company's results for the current quarter was a non-recurring $1.5 million pre-tax gain ($900,000 after-tax gain, or $0.06 per share), related to cash received from a settlement with a vendor in connection with a customer billing system implementation.

For the six months ended June 30, 2015, the Company reported net income of $27.4 million or $1.83 per share. This represents an increase of $4.6 million or $0.26 per share, compared to the same period in 2014.

"Our quarterly and year-to-date performance remains strong, driven by additional gross margin generated from our regulated and unregulated energy businesses," stated Michael P. McMasters, President and Chief Executive Officer of Chesapeake Utilities Corporation.

"Across the Company, our employees continue to develop attractive growth opportunities both within and beyond our current markets.  In April, we completed the merger of Gatherco, Inc. ("Gatherco"), a natural gas infrastructure company providing midstream services in Central and Eastern Ohio, into our wholly-owned subsidiary, Aspire Energy of Ohio, LLC ("Aspire Energy of Ohio").  We have begun re-branding as Aspire Energy of Ohio, are pleased with the progress made in our overall transition plan and remain excited about the growth potential of this business.  In our other energy operations, we are on schedule to complete several large projects in our robust capital expenditures program.  The key to our success has been, and will continue to be, our employees' aspirations to grow our businesses, provide superior service in the Chesapeake tradition and generate higher earnings and dividend growth," Mr. McMasters added.

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 June 30, 2015 and June 30, 2014

The Company's operating income for the three months ended June 30, 2015 was $13.2 million, an increase of $2.7 million over the same quarter in 2014.  A gain from a settlement with a vendor regarding the implementation of a customer billing system contributed $1.5 million to operating income in the current quarter.  The increase in operating income was also driven by a $3.9 million increase in gross margin, which was partially offset by an increase of $2.7 million in other operating expenses to support growth.  Additional details on key variances in gross margin and other operating expenses are provided in the Financial Summary Highlights section later in this release.  As a result of the sale of BravePoint, Inc. ("BravePoint") in October 2014, the Company no longer reports the Other segment.

Regulated Energy Segment

Operating income for the Regulated Energy segment increased by $2.9 million to $13.6 million for the quarter ended June 30, 2015, compared to the same quarter in 2014.  The increased operating income reflects a gain of $1.5 million received in connection with the billing system settlement as well as additional gross margin of $4.0 million, partially offset by a $2.6 million increase in other operating expenses. The significant components of the gross margin increase included:

  • $1.3 million from customer growth in natural gas distribution and transmission services beyond recent service expansions;
  • $1.1 million generated by additional Gas Reliability Infrastructure Program ("GRIP") investments by the Florida natural gas distribution operations;
  • $919,000 generated from natural gas service expansions completed in 2014 and 2015, as more fully discussed in the Major Projects Section below; and
  • $731,000 from a base rate increase in the Florida electric distribution operation that was approved by the Florida Public Service Commission ("PSC") in September 2014.

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

  • $614,000 in higher payroll and benefits costs as a result of additional personnel to support growth;
  • $426,000 in higher depreciation, asset removal and property tax costs associated with recent capital investments to support growth;
  • $417,000 in legal and consulting costs associated with the billing system settlement and other initiatives;
  • $374,000 in higher accruals for incentive compensation as a result of the higher quarterly results; and
  • $187,000 in additional amortization expense due to a change in the amortization of regulatory assets and liabilities, primarily in the Florida electric distribution operation.

Unregulated Energy Segment

The Unregulated Energy segment reported an operating loss of $540,000 for the quarter ended June 30, 2015, compared to an operating loss of $43,000 for the same quarter in 2014.  The Unregulated Energy segment typically reports an operating loss, or modest operating income, in the second quarter due to the seasonal nature of the propane distribution operations, which represents a large portion of this segment.  The results for the second quarter include gross margin of $1.6 million and other operating expenses of $1.9 million from Aspire Energy of Ohio, following the acquisition of Gatherco.  Historically, Gatherco also reported the lowest volumes delivered and revenue in the second quarter due to the seasonality of its business.  Excluding Aspire Energy of Ohio, gross margin increased by $478,000, which was offset by a $704,000 increase in other operating expenses.

Comparative Results for the Six Months Ended June 30, 2015 and June 30, 2014

The Company's operating income for the six months ended June 30, 2015 was $50.7 million, an increase of $8.6 million over the same period in 2014.  A gain from the billing system settlement contributed $1.5 million to operating income in the year-to-date results.  The remainder of the increase in 2015 operating income was driven by an increase in gross margin of $10.9 million, which was offset by an increase of $3.8 million in other operating expenses necessary to support growth.  As mentioned previously, as a result of the BravePoint sale in October 2014, the Company no longer reports the Other segment.

Regulated Energy Segment

Operating income for the Regulated Energy segment increased by $4.0 million to $35.8 million for the six months ended June 30, 2015, compared to the same period in 2014. The increased operating income reflects a $1.5 million gain from the billing system settlement.  The remainder of the increase in operating income was due to an increase in gross margin of $8.6 million, partially offset by a $6.1 million increase in other operating expenses. The significant components of the gross margin increase included:

  • $2.4 million in customer growth in natural gas distribution and transmission services beyond recent service expansions;
  • $2.4 million generated from natural gas service expansions completed in 2014 and 2015, as more fully discussed in the Major Projects section below;
  • $1.8 million generated by the Florida GRIP; and
  • $1.7 million from a base rate increase for the Florida electric distribution operation.

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

  • $1.2 million in higher payroll and benefit costs as a result of additional personnel to support growth and increased overtime on the Delmarva Peninsula in early 2015 due to colder weather;
  • $987,000 in legal and consulting costs associated with the billing system settlement and other transactions;
  • $837,000 in higher service contractor and other consulting costs;
  • $805,000 in higher depreciation, asset removal and property tax costs associated with recent capital investments to support growth;
  • $601,000 in higher accruals for incentive compensation as a result of year-to-date performance;
  • $404,000 in additional costs for facility maintenance; and
  • $332,000 in additional amortization expense due to a change in the amortization of regulatory assets and liabilities, primarily in the Florida electric distribution operation.

Unregulated Energy Segment

Operating income for the Unregulated Energy segment increased by $3.9 million to $14.7 million for the six months ended June 30, 2015, compared to the same period in 2014. Excluding the impact generated by Aspire Energy of Ohio as a result of the Gatherco acquisition ($1.6 million in gross margin and $1.9 million of other operating expenses), the increased operating income was driven by a $5.0 million increase in gross margin, which was partially offset by an $838,000 increase in other operating expenses.  The significant components of the gross margin increase included:

  • $5.7 million generated from higher retail propane margins per gallon due to the retail pricing strategy, guided by local market conditions, and lower propane inventory costs as a result of favorable supply management and hedging activities; and
  • $984,000 in decreased trading margin for Xeron due to lower volatility in wholesale propane prices.

Other operating expenses increased by $2.7 million due primarily to $1.9 million of other operating expenses incurred by Aspire Energy of Ohio.  The remaining increase in other operating expenses was due primarily to:

  • $588,000 in higher payroll and benefits expense due to increased seasonal overtime and additional resources to support growth;
  • $253,000 in additional costs for facility maintenance;
  • $240,000 in increased accruals for incentive compensation as a result of year-to-date financial results in 2015; and
  • $269,000 in lower expenses for credit and collections activities, which partially offset these increases in 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 2014 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.

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 Friday, August 7, 2015 at 10:30 a.m. Eastern Time to discuss the Company's financial results for the quarter ended June 30, 2015. To participate in this call, dial 866.821.5457 and reference Chesapeake Utilities Corporation's 2015 Second 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 Corporation is a diversified energy company engaged in natural gas distribution, transmission, gathering and processing, 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

 

Financial Summary

(in thousands, except per share)



Three Months Ended


Six Months Ended


June 30,


June 30,


2015


2014


2015


2014

Gross Margin (1)








  Regulated Energy segment

$

40,936



$

36,974



$

93,389



$

84,832


  Unregulated Energy segment

10,403



8,301



35,722



29,115


  Other businesses and eliminations

(53)



2,108



(108)



4,141


 Total Gross Margin

$

51,286



$

47,383



$

129,003



$

118,088










Operating Income (Loss)








   Regulated Energy segment

$

13,605



$

10,711



$

35,788



$

31,802


   Unregulated Energy segment

(540)



(43)



14,689



10,815


   Other businesses and eliminations

105



(211)



201



(538)


 Total Operating Income

13,170



10,457



50,678



42,079










Other Income (Loss), net of Other Expenses

(171)



405



(38)



413


Interest Charges

2,485



2,303



4,933



4,459


Pre-tax Income

10,514



8,559



45,707



38,033


Income Taxes

4,220



3,425



18,304



15,218


 Net Income

$

6,294



$

5,134



$

27,403



$

22,815










Earnings Per Share of Common Stock








Basic

$

0.41



$

0.35



$

1.84



$

1.57


Diluted

$

0.41



$

0.35



$

1.83



$

1.57


 

(1)"Gross margin" is determined 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. Gross margin should not be considered an alternative to operating income or net income, which are determined in accordance with GAAP. Chesapeake 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 structure for non-regulated segments. Chesapeake's management uses gross margin in measuring its business units' performance and has historically analyzed and reported gross margin information publicly. Other companies may calculate gross margin in a different manner.

 

Financial Summary Highlights


Key variances for the three months ended June 30, 2015 included:


(in thousands, except per share)


Pre-tax

Income


Net

Income


Earnings

Per Share

Second Quarter of 2014 Reported Results


$

8,559



$

5,134



$

0.35


Adjusting for Unusual Items:







Gain from a settlement


1,500



900



0.06


Gain on sale of business, recorded in 2014


(397)



(238)



(0.02)


Absence of BravePoint, which was sold in October 2014


319



191



0.01




1,422



853



0.05


Increased (Decreased) Gross Margins:







Contribution from Aspire Energy of Ohio


1,624



974



0.07


Natural gas growth (excluding service expansions)


1,347



808



0.06


GRIP


1,067



640



0.04


Service expansions (See Major Projects Highlights table)


919



551



0.04


FPU Electric base rate increase


731



439



0.03


Higher retail propane margins


649



389



0.03


Decrease in customer consumption


(203)



(122)



(0.01)




6,134



3,679



0.26


Increased Other Operating Expenses:







Expenses from Aspire Energy of Ohio


(1,895)



(1,137)



(0.08)


Higher payroll and benefits costs


(802)



(481)



(0.03)


Increased accrual for incentive compensation


(606)



(364)



(0.02)


Higher depreciation, asset removal and property tax costs due to recent capital investments


(495)



(297)



(0.02)


Costs associated with billing system settlement and other initiatives


(465)



(279)



(0.02)


Higher facility maintenance


(194)



(116)



(0.01)


  Higher amortization expense


(172)



(103)



(0.01)




(4,629)



(2,777)



(0.19)


Interest Charges


(182)



(109)



(0.01)


Net Other Changes (1)


(790)



(486)



(0.05)


Second Quarter of 2015 Reported Results


$

10,514



$

6,294



$

0.41



(1) The earnings per share impact net of other changes shown above includes $(0.02) of dilution from the issuance of 592,970 shares of Chesapeake's common stock in conjunction with the merger of Gatherco into Aspire Energy of Ohio on April 1, 2015.

 

 

Key variances for the six months ended June 30, 2015 included:


(in thousands, except per share)


Pre-tax

Income


Net

Income


Earnings

Per Share

Six months ended June 30, 2014 Reported Results


$

38,033



$

22,815



$

1.57


Adjusting for Unusual Items:







Gain from a settlement


1,500



900



0.06


Absence of BravePoint, which was sold in October 2014


757



454



0.03


Gain on sale of business, recorded in 2014


(397)



(238)



(0.02)


Weather impact


320



192



0.01




2,180



1,308



0.08


Increased (Decreased) Gross Margins:







Higher retail propane margins


5,650



3,387



0.23


Natural gas growth (excluding service expansions)


2,378



1,426



0.10


Service expansions (See Major Projects Highlights table)


2,377



1,425



0.10


GRIP


1,822



1,092



0.07


FPU Electric base rate increase


1,693



1,015



0.07


Contribution from Aspire Energy of Ohio


1,624



974



0.07


Propane wholesale marketing


(984)



(590)



(0.04)


Increase in customer consumption


408



245



0.02




14,968



8,974



0.62


Increased Other Operating Expenses:







Expenses from Aspire Energy of Ohio


(1,895)



(1,136)



(0.08)


Higher payroll and benefits costs


(1,654)



(992)



(0.07)


Costs associated with billing system settlement and other transactions


(1,081)



(648)



(0.04)


Higher depreciation, asset removal costs and property tax costs due to recent capital investments


(944)



(566)



(0.04)


Higher service contractor and other consulting costs


(853)



(511)



(0.04)


Increased accruals for incentive compensation


(837)



(502)



(0.03)


Higher facility maintenance


(657)



(394)



(0.03)


Higher amortization expense


(302)



(181)



(0.01)




(8,223)



(4,930)



(0.34)


Interest Charges


(474)



(284)



(0.02)


Net Other Changes (1)


(777)



(480)



(0.08)


Six months ended June 30, 2015 Reported Results


$

45,707



$

27,403



$

1.83



(1) The earnings per share impact net of other changes shown above includes $(0.04) of dilution from the issuance of 592,970 shares of Chesapeake's common stock in conjunction with the merger of Gatherco into Aspire Energy of Ohio on April 1, 2015.

Major Projects

Service Expansions
During 2014, Eastern Shore Natural Gas Company, ("Eastern Shore"), the Company's interstate pipeline subsidiary, executed a one-year contract with an industrial customer in New Castle County, Delaware to provide 50,000 dekatherms per day ("Dts/d") of additional transmission service from April 2014 to April 2015. This contract was subsequently amended to provide 55,580 Dts/d of transmission service at a lower reservation rate through August 2020. This contract, including the impact of the extension, generated additional gross margin of $111,000 and $842,000 for the three and six months ended June 30, 2015, respectively.  The lower rate decreased gross margin by $183,000 for the three and six months ended June 30, 2015 compared to the same periods in 2014, and will reduce the gross margin generated by this contract by $409,000 in the second half of 2015. The extension of the contract, net of the impact from the lower rate, generated additional gross margin of $659,000, for the six months ended June 30, 2015.

In December 2014, Eastern Shore executed another short-term contract with the same customer in New Castle County, Delaware to provide an additional 10,000 Dts/d of Off Peak ≤ 90 firm transportation service ("OPT ≤ 90 Service") from December 2014 to March 2015.  The OPT ≤ 90 Service is a new firm transportation service that allows Eastern Shore not to schedule service for up to 90 days during the peak months of November through April each year. This short-term contract generated additional gross margin of $233,000 for the six months ended June 30, 2015.

On October 1, 2014, Eastern Shore commenced a new lateral service to an industrial customer facility in Kent County, Delaware. This service commenced after 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.  This service generated $463,000 and $926,000, of gross margin for the three and six months ended June 30, 2015, respectively.  On an annual basis, this service will generate $1.8 million of gross margin in 2015 and annual gross margin of approximately $1.2 million to $1.8 million during the 37-year service period.

In April 2015, Eastern Shore commenced interruptible service to the same industrial customer in Kent County, Delaware and generated additional gross margin of $398,000 for the three and six months ended June 30, 2015. The interruptible service is expected to generate $2.5 million of gross margin in 2015, and it is expected to be replaced by the new OPT ≤ 90 Service beginning late first quarter or early second quarter of 2016. (See the Future Service Expansion Initiatives section later in the release).

On January 16, 2015, the Florida PSC approved a firm transportation agreement between Peninsula Pipeline and Chesapeake's Florida natural gas distribution division.  Under this agreement, Peninsula Pipeline provides natural gas transmission service to support Chesapeake's expansion of natural gas distribution service in Polk County, Florida at an annual rate of $1.6 million.  Peninsula Pipeline began the initial phase of its service to Chesapeake in March 2015, which generated $134,000 and $161,000 of additional gross margin for the three and six months ended June 30, 2015, respectively.  All phases of this service will generate $1.6 million of estimated annual gross margin.

The following Major Project Highlights table summarizes our major projects initiated since 2014 (dollars in thousands):


Gross Margin for the Period (1)


Three Months Ended




Six Months Ended




Estimate


Total


June 30,




June 30,




for


2014


2015


2014


Variance


2015


2014


Variance


2015


Margin

Acquisition:
















Aspire Energy of Ohio (formerly Gatherco) (2)

$

1,624



$



$

1,624



$

1,624



$



$

1,624



$

8,797



$


Service Expansions
















Natural Gas Transmission:
















Short-term
















New Castle County, Delaware

$

523



$

599



$

(76)



$

1,491



$

599



$

892



$

2,505



$

2,026


Kent County, Delaware(3)

398





398



398





398



2,516




Total short-term

921



599



322



1,889



599



1,290



5,021



2,026


Long-term
















Kent County, Delaware

463





463



926





926



1,844



463


Polk County, Florida

134





134



161





161



908




Total long-term

$

597



$



$

597



$

1,087



$



$

1,087



$

2,752



$

463


Total Service Expansions

$

1,518



$

599



$

919



$

2,976



$

599



$

2,377



$

7,773



$

2,489


Total Major Projects

$

3,142



$

599



$

2,543



$

4,600



$

599



$

4,001



$

16,570



$

2,489



(1) Gross margin of $4.5 million and $11.8 million for the three and six months ended June 30, 2014, and $21.8 million for the year ended December 31, 2014, respectively, related to projects initiated prior to 2014. These projects were previously disclosed and are excluded from the above table as they no longer result in period-over-period variances.

(2) During the three and six months ended June 30, 2015, we incurred $1.9 million, in other operating expenses related to Aspire Energy of Ohio's operation. We expect to incur a total of $6.7 million in other operating expenses for all of 2015.

(3) The gross margin is attributable to interruptible service Eastern Shore provided to an industrial customer beginning in April 2015. The interruptible service will be replaced by the OPT ≤ 90 Service beginning in late first quarter or early second quarter of 2016.

Future Service Expansion Initiatives
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 will transport natural gas through its distribution system to Eight Flags' CHP plant, which will 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. Eight Flags' CHP plant is expected to be operational in the third quarter of 2016. Chesapeake's total projected investment, by Eight Flags and other Chesapeake affiliates, to construct the CHP plant and associated facilities is approximately $40.0 million.

In December 2014, Eastern Shore entered into a precedent agreement with an industrial customer in Kent County, Delaware, whereby Eastern Shore committed to provide a 20-year natural gas transmission service for 45,000 Dts/d for the customer's new facility, upon the satisfaction of certain conditions.  This new service will be provided as OPT ≤ 90 Service and is expected to generate at least $5.8 million in annual gross margin.  In November 2014, Eastern Shore requested the Federal Energy Regulatory Commission's ("FERC") authorization to construct 7.2 miles of 16-inch pipeline looping and 3,550 horsepower of new compression in Delaware to provide this service. The cost of these new facilities is estimated to be approximately $30.0 million. Eastern Shore anticipates receiving the FERC's authorization in 2015, with service targeted to commence in the late first quarter or early second quarter of 2016, following construction of the new facilities. As previously discussed, during the second quarter of 2015, we generated $398,000 in additional gross margin by providing interruptible service to this customer.

The following table summarizes our future major expansion initiatives and opportunities with executed contracts (dollars in thousands):

Project


Estimated In Service

Date


Projected Capital Cost


Estimated
Annualized
Margin

20-year OPT ≤ 90 Service to an industrial customer in Kent County, Delaware


Late first quarter or early second quarter of 2016


$30.0 million


$5.8 million

Eight Flags CHP plant in Nassau County, Florida


Third quarter of 2016


$40.0 million


$7.3 million

Other Natural Gas Growth - Distribution Operations
In addition to these service expansions, the natural gas distribution operations on the Delmarva Peninsula generated $395,000 and $845,000, respectively, in additional gross margin for the three and six months ended June 30, 2015 compared to the same periods in 2014, due to an increase in residential, commercial and industrial customers served. The number of residential customers on the Delmarva Peninsula increased by 2.6 percent in the second quarter of 2015, compared to the same quarter in 2014.  The natural gas distribution operations in Florida generated $660,000 and $1.1 million, respectively, in additional gross margin for the three and six months ended June 30, 2015 compared to the same periods in 2014, due primarily to an increase in commercial and industrial customers in Florida.

Gatherco Acquisition
On April 1, 2015, we completed the merger with Gatherco, pursuant to which Gatherco merged with and into Aspire Energy of Ohio, a newly formed, wholly-owned subsidiary of Chesapeake. At closing, we issued 592,970 shares of the Company's common stock, valued at $30.2 million based on the closing price of the Company's common stock as reported on the New York Stock Exchange on April 1, 2015, and paid $27.5 million in cash. We also acquired $6.8 million of Gatherco's cash at the time of the closing and assumed $1.7 million of Gatherco's debt, which was paid off on the same day. As a result of this merger, Aspire Energy of Ohio provides unregulated natural gas midstream services including natural gas gathering services and natural gas liquid processing services to over 300 producers through 16 gathering systems and over 2,000 miles of pipelines in Central and Eastern Ohio, and supplies natural gas to over 6,000 customers in Ohio through the Consumers Gas Cooperative, an independent entity, which Aspire Energy of Ohio manages under an operating agreement.

The Company's results for the three and six months ended June 30, 2015 included $1.6 million of gross margin and $1.9 million of other operating expenses from Aspire Energy of Ohio as a result of the acquisition of Gatherco. The results of Aspire Energy of Ohio are projected to have a minimal impact on the Company's earnings per share in 2015, since the merger was completed after the first quarter, which has historically produced a significant portion of Gatherco's annual earnings. This acquisition is expected to be accretive to the Company's earnings in the first full year of operations, which will include the first quarter of 2016.

Weather and Consumption

Weather was not a significant factor in the second quarter as the negative impact of warmer temperatures on the Delmarva Peninsula on the natural gas and propane distribution operations was offset by the positive impact of warmer temperatures in Florida on the electric distribution operation. Since the first quarter of 2015 and 2014 were both significantly colder than normal (10-year average weather) on the Delmarva Peninsula, weather was not a significant factor in the period-over-period variance. The following tables highlight the heating degree-day ("HDD") and cooling degree-day ("CDD") information for the three and six months ended June 30, 2015 and 2014 and the gross margin variance resulting from weather fluctuations in those periods.

HDD and CDD Information


Three Months Ended




Six Months Ended




June 30,




June 30,




2015


2014


Variance


2015


2014


Variance

Delmarva












Actual HDD

386



456



(70)



3,208



3,173



35


10-Year Average HDD ("Normal")

443



459



(16)



2,843



2,820



23


Variance from Normal

(57)



(3)





365



353




Florida












Actual HDD



17



(17)



501



574



(73)


10-Year Average HDD ("Normal")

24



26



(2)



557



555



2


Variance from Normal

(24)



(9)





(56)



19




Florida












Actual CDD

1,114



928



186



1,236



970



266


10-Year Average CDD ("Normal")

909



908



1



982



982




Variance from Normal

205



20





254



(12)




Gross Margin Variance attributed to Weather

(in thousands)

Q2 2015 vs. Q2 2014


Q2 2015 vs. Normal


YTD 2015 vs. YTD 2014


YTD 2015 vs. Normal

Delmarva








Regulated Energy segment

$

(138)



$

(182)



$

185



$

906


Unregulated Energy segment

(253)



2



77



978


Florida








Regulated Energy segment

151



229



68



(199)


Unregulated Energy segment





(10)



122


Total

$

(240)



$

49



$

320



$

1,807


Propane prices

Higher retail margins per gallon generated $427,000 and $5.0 million in additional gross margin by the Delmarva propane distribution operation for the three and six months ended June 30, 2015, respectively, compared to the same periods in 2014.  A large decline in propane prices in the first quarter of 2015, compared to the same quarter in 2014, had a significant impact on the amount of revenue and cost of sales associated with the Company's propane distribution operations. Based on the Mont Belvieu wholesale propane index, propane prices in the first quarter of 2015 were approximately 59 percent lower than prices in the same quarter in 2014. As a result of favorable supply management and hedging activities, the Delmarva propane distribution operation experienced a decrease in its average propane inventory cost in addition to the decrease in wholesale prices, which generated increased retail margins per gallon.  During the second quarter of 2015, wholesale propane prices continued to remain significantly lower than prices in the same quarter of 2014; however, retail margins per gallon reverted to more normal levels as a result of local market conditions.  These market conditions, which include competition with other propane suppliers as well as the availability and price of alternative energy sources, may fluctuate based on changes in demand, supply and other energy commodity prices. The level of retail margins generated during the first six months of 2015 is not typical and, therefore, is not included in the Company's long-term financial plans or forecasts.

Xeron, which benefits from wholesale price volatility by entering into trading transactions, did not have a significant quarter-over-quarter variance for the three months ended June 30, 2015. On a year-to-date basis, Xeron experienced a gross margin decrease of $984,000, compared to the same period in 2014, due to lower wholesale price volatility.

Regulatory Initiatives

GRIP

GRIP is a natural gas pipe replacement program approved by the Florida PSC, designed to expedite the replacement of qualifying distribution mains and services (any material other than coated steel or plastic) to enhance reliability and integrity of natural gas distribution systems.  This program allows recovery through 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's Florida natural gas distribution operations have invested $61.0 million to replace 141 miles of qualifying distribution mains, $17.0 million of which was invested during the first six months of 2015.  The Company expects to invest an additional $11.9 million in this program through the end of 2015.  The increased investment in GRIP generated additional gross margin of $1.1 million and $1.8 million, for the three and six months ended June 30, 2015, respectively, compared to the same periods in 2014.

Florida Electric Rate Case

On September 15, 2014, the Florida PSC approved a settlement agreement between Florida Public Utilities Company ("FPU") and the Florida Office of Public Counsel in FPU's base rate case filing for its electric operation, which included, among other things, an increase in FPU's annual revenue requirement of approximately $3.8 million and a 10.25 percent rate of return on common equity.  The new rates became 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. The higher base rates in FPU's electric operation generated $731,000 and $1.7 million in additional gross margin for the three and six months ended June 30, 2015, respectively.

Capital Expenditures

The Company forecasts its capital expenditures in 2015, excluding amounts expended to acquire Gatherco, to be in the range of $160.0 million to $190.0 million, a significant increase over the average level of capital expenditures during the past three years, which equaled $94.8 million. The change from the original budget of $223.4 million, which also excluded amounts expended to acquire Gatherco, primarily reflects a shift in the timing of certain capital expenditures from 2015 to 2016.  Major projects currently underway, such as the Eight Flags' CHP plant and associated facilities, anticipated new facilities to serve an industrial customer in Kent County, Delaware under the OPT ≤ 90 Service, and additional GRIP investments projected in 2015, account for approximately $99.0 million of the capital expenditures forecast for 2015. Eastern Shore is also seeking approval from the FERC for a $32.1 million project to construct additional facilities that will improve the overall reliability and flexibility of its pipeline system for the benefit of all customers. Other expansions of natural gas distribution and transmission systems, additional infrastructure and facility improvements and other strategic initiatives and investments, account for the remainder of the 2015 capital budget. Capital expenditures are subject to continuous review and modification by the Company's management and Board of Directors, and some anticipated capital expenditures are subject to approval by the applicable regulators.  Actual capital requirements may vary from the above estimates due to a number of factors, including changing economic conditions, changes in customer expectations or service needs, customer growth in existing areas, regulation, new growth or acquisition opportunities and availability of capital.  Historically, actual capital expenditures have typically lagged behind the budgeted amounts.  In the past three years, the Company's actual capital expenditures were between 82 percent and 88 percent of the originally budgeted amounts.

In order to fund the 2015 capital expenditures currently budgeted, the Company expects to increase the level of borrowings during 2015 to supplement cash provided by operating activities.  The Company will look at other financing options as needed.  The Company's target ratio of equity to total capitalization, including short-term borrowings, is between 50 and 60 percent, and it has maintained equity between 54 and 60 percent of total capitalization, including short-term borrowings, in the past three years.  If the Company increases the level of debt during 2015 to fund the budgeted capital expenditures, the ratio of equity to total capitalization, including short-term borrowings, will temporarily decline until the Company issues equity.  The timing of any equity issuance(s) will be based on market conditions.  The Company will seek to align, as much as feasible, any such equity issuance(s) with the commencement of service, and associated earnings, for larger revenue generating projects.


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,


2015


2014


2015


2014

Operating Revenues








Regulated Energy

$

62,060



$

61,646



$

171,642



$

163,812


Unregulated Energy and other

30,622



38,851



91,121



123,022


Total Operating Revenues

92,682



100,497



262,763



286,834


Operating Expenses








Regulated Energy cost of sales

21,124



24,672



78,253



78,979


Unregulated Energy and other cost of sales

20,272



28,442



55,507



89,766


   Operations

26,190



24,615



53,133



51,242


   Maintenance

2,727



2,457



5,431



4,606


Gain from a settlement

(1,500)





(1,500)




   Depreciation and amortization

7,543



6,736



14,518



13,371


   Other taxes

3,156



3,118



6,743



6,791


Total operating expenses

79,512



90,040



212,085



244,755


Operating Income

13,170



10,457



50,678



42,079


Other income (loss), net of other expenses

(171)



405



(38)



413


Interest charges

2,485



2,303



4,933



4,459


Income Before Income Taxes

10,514



8,559



45,707



38,033


Income taxes

4,220



3,425



18,304



15,218


Net Income

$

6,294



$

5,134



$

27,403



$

22,815


Weighted Average Common Shares Outstanding:








Basic

15,235,860



14,556,242



14,922,094



14,522,133


Diluted

15,280,657



14,606,779



14,970,190



14,573,643


Earnings Per Share of Common Stock:








Basic

$

0.41



$

0.35



$

1.84



$

1.57


Diluted

$

0.41



$

0.35



$

1.83



$

1.57


 

 

Chesapeake Utilities Corporation and Subsidiaries

 

Condensed Consolidated Balance Sheets (Unaudited)

Assets


June 30, 2015


December 31, 2014

(in thousands, except shares)





 Property, Plant and Equipment





Regulated Energy


$

795,331



$

766,855


Unregulated Energy


139,174



84,773


Other businesses and eliminations


19,051



18,497


 Total property, plant and equipment


953,556



870,125


 Less:  Accumulated depreciation and amortization


(205,030)



(193,369)


 Plus:  Construction work in progress


41,923



13,006


 Net property, plant and equipment


790,449



689,762


 Current Assets





 Cash and cash equivalents


2,104



4,574


Accounts receivable (less allowance for uncollectible accounts of $1,146 and $1,120, respectively)


42,270



53,300


Accrued revenue


8,091



13,617


Propane inventory, at average cost


4,151



7,250


Other inventory, at average cost


4,305



3,699


Regulatory assets


7,587



8,967


Storage gas prepayments


2,498



4,258


Income taxes receivable


2,518



18,806


Deferred income taxes


128




Prepaid expenses


4,223



6,652


Mark-to-market energy assets


358



1,055


Other current assets


285



195


 Total current assets


78,518



122,373


 Deferred Charges and Other Assets





Goodwill


16,048



4,952


Other intangible assets, net


2,415



2,404


Investments, at fair value


3,665



3,678


Regulatory assets


77,657



78,136


Receivables and other deferred charges


1,884



3,164


 Total deferred charges and other assets


101,669



92,334


Total Assets


$

970,636



$

904,469


 

 

Chesapeake Utilities Corporation and Subsidiaries

 

Condensed Consolidated Balance Sheets (Unaudited)


Capitalization and Liabilities


June 30, 2015


December 31, 2014

(in thousands, except shares and per share data)





 Capitalization





 Stockholders' equity





 Common stock, par value $0.4867 per share





(authorized 25,000,000 shares)


$

7,419



$

7,100


 Additional paid-in capital


187,903



156,581


 Retained earnings


161,333



142,317


 Accumulated other comprehensive loss


(5,479)



(5,676)


 Deferred compensation obligation


1,843



1,258


 Treasury stock


(1,843)



(1,258)


 Total stockholders' equity


351,176



300,322


 Long-term debt, net of current maturities


156,247



158,486


 Total capitalization


507,423



458,808


 Current Liabilities





Current portion of long-term debt


9,127



9,109


Short-term borrowing


94,713



88,231


Accounts payable


38,173



44,610


Customer deposits and refunds


21,449



25,197


Accrued interest


1,256



1,352


Dividends payable


4,382



3,939


Deferred income taxes




832


Accrued compensation


6,500



10,076


Regulatory liabilities


15,205



3,268


Mark-to-market energy liabilities


47



1,018


Other accrued liabilities


8,756



6,603


 Total current liabilities


199,608



194,235


 Deferred Credits and Other Liabilities





Deferred income taxes


173,821



160,232


Regulatory liabilities


43,307



43,419


Environmental liabilities


9,043



8,923


Other pension and benefit costs


33,614



35,027


Deferred investment tax credits and other liabilities


3,820



3,825


 Total deferred credits and other liabilities


263,605



251,426


Total Capitalization and Liabilities


$

970,636



$

904,469


 


Chesapeake Utilities Corporation and Subsidiaries

Distribution Utility Statistical Data (Unaudited)



For the Three Months Ended June 30, 2015


For the Three Months Ended June 30, 2014


Delmarva NG Distribution

Chesapeake Florida NG Division

FPU NG Distribution

FPU Electric Distribution


Delmarva NG Distribution

Chesapeake Florida NG Division

FPU NG Distribution

FPU Electric Distribution

Operating Revenues

(in thousands)












  Residential

$

11,600


$

1,175


$

4,929


$

10,263



$

12,113


$

1,144


$

5,756


$

8,961


  Commercial

6,544


1,135


6,026


10,262



7,103


1,069


8,333


8,855


  Industrial

1,636


1,561


4,112


567



1,468


1,266


3,224


1,001


  Other (1)

(4,357)


767


407


(2,308)



(3,972)


739


(1,670)


(281)


Total Operating Revenues

$

15,423


$

4,638


$

15,474


$

18,784



$

16,712


$

4,218


$

15,643


$

18,536












Volume (in Dts/MWHs)












  Residential

609,797


66,072


258,428


66,636



619,752


72,960


280,610


65,100


  Commercial

675,668


1,373,449


580,233


73,849



690,650


323,371


621,159


74,619


  Industrial

1,059,440


2,848,051


1,024,294


2,140



998,147


3,302,814


1,016,923


7,240


  Other

18,089



(27,076)


10,128



19,524



(53,204)


6,351


Total

2,362,994


4,287,572


1,835,879


152,753



2,328,073


3,699,145


1,865,488


153,310












Average Customers












  Residential

63,686


14,833


51,973


24,045



62,055


14,387


50,939


23,894


  Commercial

6,629


1,343


4,264


7,390



6,540


1,363


4,392


7,412


  Industrial

117


67


1,608


2



108


59


1,273


2


  Other

6






7





Total

70,438


16,243


57,845


31,437



68,710


15,809


56,604


31,308












 

Chesapeake Utilities Corporation and Subsidiaries

Distribution Utility Statistical Data (Unaudited)



For the Six Months Ended June 30, 2015


For the Six Months Ended June 30, 2014


Delmarva NG Distribution

Chesapeake Florida NG Division

FPU NG Distribution

FPU Electric Distribution


Delmarva NG Distribution

Chesapeake Florida NG Division

FPU NG Distribution

FPU Electric Distribution

Operating Revenues

(in thousands)












  Residential

$

48,206


$

2,685


$

13,570


$

22,673



$

45,841


$

2,581


$

13,742


$

20,514


  Commercial

22,983


2,493


15,543


19,939



22,751


2,302


17,896


17,466


  Industrial

3,767


3,058


8,486


1,549



3,004


2,560


6,667


2,433


  Other (1)

(3,728)


1,531


(1,515)


(4,959)



(3,682)


1,575


(1,015)


(3,569)


Total Operating Revenues

$

71,228


$

9,767


$

36,084


$

39,202



$

67,914


$

9,018


$

37,290


$

36,844












Volume (in Dts/MWHs)












  Residential

2,951,229


206,792


773,393


147,488



2,778,338


209,616


764,767


149,590


  Commercial

2,493,359


2,764,538


1,417,065


144,573



2,380,520


729,069


1,421,313


146,423


  Industrial

2,329,581


5,683,848


2,154,061


9,650



2,172,339


7,030,959


2,145,937


16,870


  Other

28,432



(108,633)


5,348



26,052



(83,207)


(6,016)


Total

7,802,601


8,655,178


4,235,886


307,059



7,357,249


7,969,644


4,248,810


306,867












Average Customers












  Residential

64,056


14,814


51,811


23,981



62,379


14,368


50,826


23,855


  Commercial

6,670


1,349


4,276


7,380



6,572


1,354


4,403


7,414


  Industrial

116


67


1,577


2



107


60


1,247


2


  Other

6






7





Total

70,848


16,230


57,664


31,363



69,065


15,782


56,476


31,271












(1) Operating Revenues from "Other" sources include unbilled revenue, under (over) recoveries of fuel cost, conservation revenue, other miscellaneous charges, fees for billing services provided to third parties and adjustments for pass-through taxes.

 

 

 

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SOURCE Chesapeake Utilities Corporation

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