Chesapeake Utilities Corporation Reports Second Quarter Results
DOVER, Del., Aug. 3, 2017 /PRNewswire/ -- Chesapeake Utilities Corporation (NYSE: CPK) ("Chesapeake Utilities" or the "Company") today reported second quarter financial results. The Company's net income for the quarter ended June 30, 2017 was $6.0 million, compared to $8.0 million in the same quarter of 2016. Earnings per share ("EPS") for the quarter ended June 30, 2017 were $0.37 per share, compared to $0.52 for the same quarter of 2016. The decline in net income reflected expenses incurred and investments to generate and support growth as well as the impact of weather on the Delmarva Peninsula that was 41 percent warmer than the prior quarter. These factors were partially offset by higher margins from natural gas transmission and distribution operations in Florida and on the Delmarva Peninsula, the Eight Flags Energy LLC ("Eight Flags") combined heat and power ("CHP") plant and Aspire Energy of Ohio, LLC ("Aspire Energy").
For the six months ended June 30, 2017, the Company reported net income of $25.2 million, or $1.54 per share. This represents a decrease of $3.2 million, or $0.31 per share, compared to the same period in 2016. Similar to the second quarter of 2017, the decline in net income for the first six months of 2017 principally reflected higher expenses incurred and investments to generate and support growth, as well as the impact of warmer weather. These factors were partially offset by higher margins from the Eight Flags CHP plant, natural gas transmission and distribution operations in Florida and on the Delmarva Peninsula, Aspire Energy, and the Company's natural gas marketing operation, Peninsula Energy Services Company, Inc. ("PESCO"). An increase in outstanding shares as a result of the equity issuance in September 2016 lowered EPS by approximately $0.10 per share for the six months ended June 30, 2017.
"Growth in our businesses will drive our future earnings. We have continued to expand our internal capabilities to manage and cultivate growth, while aggressively pursuing opportunities that will position the Company for future growth," stated Michael P. McMasters, President and Chief Executive Officer of Chesapeake Utilities Corporation. "Earnings growth and costs incurred to support business growth do not always move in tandem. Our results for the second quarter and year-to-date should be viewed in the context of the major growth projects and initiatives recently completed and those currently underway, in addition to the negative impact of warmer weather. Our employees have completed several significant projects in 2017 and are laying the groundwork to commence Eastern Shore Natural Gas Company's ("Eastern Shore") largest ever expansion project in addition to several other key projects and initiatives that are also scheduled to go into service in 2018," he 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, 2017 and 2016
Operating income for the second quarter decreased by $2.1 million to $13.7 million compared to the same period in 2016, as higher expenses to support growth exceeded increased gross margins for the quarter. Gross margin increased by $2.6 million during the quarter, despite the negative impact of warmer weather, which reduced margin by approximately $675,000. The $1.3 million increase in depreciation, amortization and property taxes and $3.4 million increase in other operating expenses largely reflect higher expenses to support growth of the Company's businesses and costs associated with pursuing additional growth initiatives. Costs such as depreciation and employee costs are recognized evenly over the four quarters of each year, while gross margin from most of the Company's businesses is driven by deliveries, which are concentrated in the first and fourth quarters.
Regulated Energy Segment
Operating income for the Regulated Energy segment decreased by $1.5 million, or 9.8 percent, compared to the same period in 2016, due principally to warmer weather and the level and timing of costs associated with growth. Gross margin increased by $1.1 million during the quarter, despite the impact of warmer weather, which reduced gross margin by approximately $354,000 for the three months. The $1.2 million increase in depreciation, amortization and property taxes and $1.4 million increase in other operating expenses, largely reflect costs associated with recently completed and planned growth projects. Specifically, of the total $2.6 million increase in costs, $1.5 million is associated with Eastern Shore's recently completed projects as well as initiatives underway.
The significant components of the $1.1 million gross margin increase included:
-- $532,000 generated from additional GRIP investments in the Florida
natural gas distribution operations;
-- $478,000 generated from recently completed natural gas transmission
expansions, which are more fully discussed in the "Major Projects and
Initiatives" section later in this press release; and
-- $325,000 from customer growth in natural gas distribution and
transmission services over and above recent service expansions.
The foregoing increases were offset by $354,000 from lower customer consumption of energy for the Company's regulated energy distribution operations in Florida and on the Delmarva Peninsula.
The significant components of the increase in other operating expenses included:
-- $1.2 million in higher depreciation, asset removal and property tax
costs associated with recent capital investments;
-- $358,000 in higher outside services to support growth and higher
facility maintenance costs to maintain system integrity;
-- $295,000 in increased regulatory expenses, due primarily to costs
associated with Eastern Shore's rate case filing in 2017; and
-- $255,000 in higher benefits and employee-related costs, while payroll
costs remained flat in the second quarter of 2017. As the Company is
self-insured, benefits costs will fluctuate depending upon actual claims
experience.
Unregulated Energy Segment
Operating income for the Unregulated Energy segment decreased $450,000 compared to the same period in 2016, as increased operating income from Eight Flags and Aspire Energy were offset by lower results from PESCO and the propane distribution businesses. Gross margin increased by $1.7 million, despite the impact of warmer weather, which reduced margin by approximately $321,000 for the three months. The $2.1 million increase in other operating expenses, largely reflects operating costs for Eight Flags and higher expenses to support growth initiatives.
The significant components of the $1.7 million gross margin increase were as follows:
-- $2.1 million of additional gross margin from Eight Flags' CHP plant,
which commenced operations in June 2016; and
-- $271,000 of additional gross margin from Aspire Energy as a result of
pricing amendments to long-term gas sales agreements.
The above gross margin increases were offset by the following factors:
-- $450,000 of lower margin from PESCO, due primarily to a customer supply
agreement that expired on March 31, 2017; and
-- $368,000 from lower customer consumption of energy for the Company's
propane distribution operations in Florida and on the Delmarva
Peninsula.
The significant components of the increase in other operating expenses included:
-- $1.3 million incurred by Eight Flags' CHP plant, which commenced
operations in June 2016; and
-- $645,000 in higher staffing and associated costs for additional
personnel to support growth. As the Company is self-insured, benefits
costs will fluctuate depending upon actual claims experience.
The Company also incurred $346,000 in non-operating expenses to complete the wind-down of Xeron's operations.
Comparative Results for the Six Months Ended June 30, 2017 and 2016
Operating income for the six months ended June 30, 2017 decreased by $3.8 million to $48.3 million compared to the same period in 2016. Gross margin increased by $9.4 million, or 7.0 percent, net of the negative impact of warmer weather, which reduced margin by approximately $1.4 million for the first six months. The $2.7 million increase in depreciation, amortization and property taxes and $10.5 million increase in other operating expenses reflects, higher expenses to support growth of the Company's businesses, costs associated with the wind-down of Xeron's operations and costs associated with pursuing additional growth initiatives.
Regulated Energy Segment
Operating income for the Regulated Energy segment decreased by $2.8 million, or 7.1 percent, compared to the same period in 2016 due principally to warmer weather and the level and timing of costs associated with growth. Gross margin increased by $4.2 million, despite the impact of warmer weather, which reduced margin by approximately $452,000 for the six months ended June 30, 2017. The $2.1 million increase in depreciation, amortization and taxes and $4.9 million increase in other operating expenses largely reflects costs associated with recently completed and planned growth projects. Of the total $7.0 million increase in other operating expenses, $3.8 million is associated with Eastern Shore's recently completed projects as well as initiatives underway.
The significant components of the $4.2 million gross margin increase included:
-- $1.2 million generated from recently completed natural gas transmission
expansions, which are more fully discussed in the "Major Projects and
Initiatives" section later in this press release;
-- $1.2 million generated by additional GRIP investments in the Florida
natural gas distribution operations;
-- $1.1 million from customer growth in natural gas distribution and
transmission services over and above the growth attributable to recent
service expansions;
-- $535,000 from new natural gas transmission and distribution services
provided to Eight Flags' CHP plant; and
-- $417,000 generated as a result of the settlement of the Company's
Delaware division's rate case.
The foregoing increases were offset by $797,000 from lower customer consumption of energy for the Company's distribution operations in Florida and on the Delmarva Peninsula, due primarily to warmer weather, particularly during the first quarter, which was the third warmest first quarter on the Delmarva Peninsula in the past fifty years.
The significant components of the increase in other operating expenses included:
-- $2.1 million in higher depreciation, asset removal and property tax
costs associated with recent capital investments;
-- $1.5 million in higher outside services to support growth and higher
facility maintenance costs to maintain system integrity;
-- $1.3 million in higher payroll costs for additional personnel to support
growth;
-- $1.2 million in higher benefits and employee-related costs in 2017 (as
the Company is self-insured, benefits costs will fluctuate depending
upon actual claims experience); and
-- $664,000 in increased regulatory expenses, due primarily to costs
associated with Eastern Shore's rate case filing in 2017.
Unregulated Energy Segment
Operating income for the Unregulated Energy segment for the six months ended June 30, 2017 was $11.5 million, a decrease of $855,000 compared to the same period in 2016, as contributions from Eight Flags, Aspire Energy, and PESCO, were exceeded by the impact of warmer weather, lower retail propane margins per gallon and higher expenses associated with recent and future growth. Gross margin increased by $5.4 million, net of the impact of warmer weather, which reduced margins by $912,000 for the six months ended June 30, 2017.
The significant components of the $5.4 million gross margin increase were as follows:
-- $3.9 million of additional gross margin from Eight Flags' CHP plant,
which commenced operations in June 2016;
-- $1.7 million from PESCO, due to an increase in the number of contracts
and customers served as well as additional revenue from providing
natural gas to a customer in Ohio under a supplier agreement, which
expired on March 31, 2017; and
-- $844,000 of additional gross margin from Aspire Energy as a result of
pricing amendments to long-term gas sales agreements.
The above gross margin increases were offset by the following:
-- $836,000 of lower gross margin due to warmer than normal temperatures in
Ohio and on the Delmarva Peninsula, resulting in less consumption of
propane and lower sales of natural gas by Aspire Energy; and
-- $305,000 of lower gross margin from the Company's propane distribution
operations as propane retail margins per gallon were slightly lower than
2016 levels.
The significant components of the increase in other operating expenses included:
-- $2.5 million incurred by Eight Flags' CHP plant, which commenced
operations in June 2016;
-- $935,000 in higher payroll costs for additional personnel to support
growth;
-- $809,000 in higher benefits and employee-related costs in 2017 (as the
Company is self-insured, benefits costs will fluctuate depending upon
actual claims experience);
-- $609,000 in higher depreciation expense, of which $382,000 relates to a
credit adjustment in 2016 recorded in conjunction with the final
valuation for Aspire Energy;
-- $514,000 in higher outside services costs associated primarily with
growth and ongoing compliance activities; and
-- $355,000 in higher operating expenses associated with the wind-down of
Xeron's operations.
The Company also incurred $346,000 in non-operating expenses to complete the wind-down of Xeron's operations.
Matters discussed in this release may include forward-looking statements that involve risks and uncertainties. Actual results may differ materially from those in the forward-looking statements. Please refer to the Safe Harbor for Forward-Looking Statements in the Company's 2016 Annual Report on Form 10-K for further information on the risks and uncertainties related to the Company's forward-looking statements.
The discussions of the results use the term "gross margin," a non-Generally Accepted Accounting Principles ("GAAP") financial measure, which management uses to evaluate the performance of the Company's business segments. For an explanation of the calculation of "gross margin," see the footnote to the Financial Summary.
Unless otherwise noted, earnings per share are presented on a diluted basis.
Conference Call
Chesapeake Utilities will host a conference call on Friday, August 4, 2017, at 10:30 a.m. Eastern Time to discuss the Company's financial results for the quarter and six months ended June 30, 2017. To participate in this call, dial 855.801.6270 and reference Chesapeake Utilities' 2017 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 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,
2017 2016 2017 2016
---- ---- ---- ----
Gross Margin (1)
Regulated
Energy segment $46,829 $45,760 $104,239 $100,071
Unregulated
Energy segment 13,736 12,077 40,555 35,178
Other
businesses and
eliminations (154) (64) (221) (109)
---- --- ---- ----
Total Gross
Margin $60,411 $57,773 $144,573 $135,140
======= ======= ======== ========
Operating Income
Regulated
Energy segment $13,730 $15,226 $36,747 $39,545
Unregulated
Energy segment (38) 412 11,492 12,347
Other
businesses and
eliminations (26) 104 102 230
--- --- ---
Total Operating
Income 13,666 15,742 48,341 52,122
------ ------ ------ ------
Other Expense,
net (607) (8) (884) (42)
Interest
Charges 3,073 2,624 5,811 5,274
----- ----- ----- -----
Pre-tax Income 9,986 13,110 41,646 46,806
Income Taxes 3,940 5,081 16,456 18,410
-----
Net Income $6,046 $8,029 $25,190 $28,396
====== ====== ======= =======
Earnings Per Share of Common
Stock
Basic $0.37 $0.52 $1.54 $1.86
Diluted $0.37 $0.52 $1.54 $1.85
((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 and excludes depreciation, amortization and accretion. Gross margin should not be considered an alternative to operating income or net income, which are determined in accordance with GAAP. Chesapeake Utilities 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 Chesapeake Utilities under its allowed rates for regulated operations and under its competitive pricing structure for non-regulated segments. Chesapeake Utilities' management uses gross margin in measuring its business units' performance. Other companies may calculate gross margin in a different manner.
Financial Summary Highlights
Key variances between the three months ended June 30, 2016 and 2017 included:
(in thousands, except
per share data) Pre-tax Net Earnings
Income Income Per Share
------ ------ ---------
Second Quarter of 2016
Reported Results $13,110 $8,029 $0.52
------- ------ -----
Adjusting for unusual
items:
Weather impact (675) (409) (0.03)
Wind-down of Xeron
operations (351) (213) (0.01)
---- ---- -----
(1,026) (622) (0.04)
------ ---- -----
Increased (Decreased)
Gross Margins:
Eight Flags' CHP
plant* 2,128 1,289 0.08
GRIP* 532 322 0.02
Service expansions* 478 289 0.02
Natural gas marketing (450) (272) (0.02)
Natural gas growth
(excluding service
expansions) 325 197 0.01
Pricing amendments to
Aspire Energy's long-
term agreements 271 164 0.01
3,284 1,989 0.12
----- ----- ----
Increased Other
Operating Expenses:
Higher depreciation,
asset removal and
property tax costs
due to new capital
investments (1,337) (810) (0.05)
Eight Flags' operating
expenses (1,260) (763) (0.05)
Higher staffing and
associated costs (976) (591) (0.04)
Higher outside
services and
facilities
maintenance costs (335) (203) (0.01)
Higher regulatory
expenses (295) (179) (0.01)
---- ---- -----
(4,203) (2,546) (0.16)
------ ------ -----
Interest charges (449) (272) (0.02)
Change in other
expense (253) (153) (0.01)
Net other changes (477) (379) (0.02)
---- ---- -----
(1,179) (804) (0.05)
EPS impact of increase
in outstanding shares
due to September 2016
offering - - (0.02)
--- --- -----
Second Quarter of 2017
Reported Results $9,986 $6,046 $0.37
====== ====== =====
*See the Major Projects and Initiatives table later in this press release.
Key variances between the six months ended June 30, 2016 and 2017 included:
(in thousands, except per
share data) Pre-tax Net Earnings
Income Income Per Share
------ ------ ---------
Six Months Ended June 30,
2016 Reported Results $46,806 $28,396 $1.85
------- ------- -----
Adjusting for unusual
items:
Weather impact (1,363) (825) (0.05)
Wind-down of Xeron
operations (886) (536) (0.03)
---- ---- -----
(2,249) (1,361) (0.08)
------ ------ -----
Increased (Decreased)
Gross Margins:
Eight Flags' CHP plant* 4,424 2,676 0.17
Natural gas marketing 1,704 1,031 0.07
Service expansions* 1,237 748 0.05
GRIP* 1,213 734 0.05
Natural gas growth
(excluding service
expansions) 1,130 683 0.04
Pricing amendments to
Aspire Energy's long-
term agreements 844 510 0.03
Implementation of
Delaware Division new
rates* 417 252 0.02
Lower retail propane
margins (305) (184) (0.01)
---- ---- -----
10,664 6,450 0.42
------ ----- ----
Increased Other Operating
Expenses:
Higher depreciation,
asset removal and
property tax costs due
to new capital
investments (2,696) (1,631) (0.11)
Eight Flags' operating
expenses (2,528) (1,529) (0.10)
Higher payroll expense (2,219) (1,342) (0.09)
Higher outside services
and facilities
maintenance costs (2,054) (1,243) (0.08)
Higher benefits and other
employee-related
expenses (1,966) (1,189) (0.08)
Higher regulatory
expenses (664) (401) (0.03)
---- ---- -----
(12,127) (7,335) (0.49)
------- ------ -----
Interest charges (537) (325) (0.02)
Change in other expense (476) (288) (0.02)
Net other changes (435) (347) (0.02)
---- ---- -----
(1,448) (960) (0.06)
EPS impact of increase in
outstanding shares due
to September 2016
offering - - (0.10)
--- --- -----
Six Months Ended June 30,
2017 Reported Results $41,646 $25,190 $1.54
======= ======= =====
*See the Major Projects and Initiatives table later in this press release.
Major Projects and Initiatives
The following table summarizes gross margin for the Company's major projects and initiatives recently completed and initiatives currently underway, but which will be completed in the future. Gross margin reflects operating revenue less cost of sales, excluding depreciation, amortization and accretion (dollars in thousands):
Gross Margin for the Period
Three Months Ended Six Months Ended Year Ended
June 30, June 30, December 31, Estimate for
2017 2016 Variance 2017 2016 Variance 2016 2017 2018 2019
---- ---- ---- ---- -------- ---- ---- ---- ----
Major Projects and
Initiatives
Recently
Completed
Capital Investment
Projects $9,601 $6,463 $3,138 $18,922 $12,049 $6,873 $29,819 $35,393 $32,125 $33,035
Settled Delaware
Division Rate
Case 425 555 (130) 1,295 878 417 1,487 2,250 2,250 2,250
--- --- ----- --- ----- ----- ----- -----
Total Major
Projects and
Initiatives
Recently
Completed 10,026 7,018 3,008 20,217 12,927 7,290 31,306 37,643 34,375 35,285
------ ----- ----- ------ ------ ----- ------ ------ ------ ------
Future Major
Projects and
Initiatives
Capital Investment
Projects
2017 Eastern Shore
System Expansion - - - - - - - 126 9,313 15,799
Northwest Florida
Expansion - - - - - - - - 3,970 5,100
Eastern Shore
System
Reliability (1) - - - - - - - 1,875 4,500 4,500
--- --- --- ----- ----- -----
Total Future Major
Projects and
Initiatives - - - - - - - 2,001 17,783 25,399
--- --- --- --- --- --- --- ----- ------ ------
Total $10,026 $7,018 $3,008 $20,217 $12,927 $7,290 $31,306 $39,644 $52,158 $60,684
======= ====== ====== ======= ======= ====== ======= ======= ======= =======
((1)) In January 2017, Eastern Shore, filed a rate case with the Federal Energy Regulatory Commission ("FERC"). The outcome of the rate case is not known at this time. This table assumes recovery in the rate case of the costs of the System Reliability Project only, as further discussed below.
Major Projects and Initiatives Recently Completed
The following table summarizes gross margin generated from the Company's major projects and initiatives recently completed (dollars in thousands):
Gross Margin for the Period (1)
Three Months Ended Six Months Ended Year Ended
June 30, June 30, December 31, Estimate for
2017 2016 Variance 2017 2016 Variance 2016 2017 2018 2019
---- ---- -------- ---- ---- -------- ---- ---- ---- ----
Capital Investment
Projects:
------------------
Service Expansions:
Short-term contracts
(Delaware) $1,194 $2,648 $(1,454) $3,857 $5,191 $(1,334) $11,454 $5,689 $1,407 $1,407
Long-term contracts
(Delaware) 2,387 455 1,932 3,481 911 2,570 1,815 7,611 7,605 7,583
----- ----- --- -----
Total Service Expansions 3,581 3,103 478 $7,338 $6,102 $1,236 13,269 13,300 9,012 8,990
----- ----- --- ------ ------ ------ ------ ------ ----- -----
Florida GRIP 3,341 2,809 532 6,609 5,396 1,213 11,552 13,727 14,407 15,085
Eight Flags' CHP Plant 2,679 551 2,128 4,975 551 4,424 4,998 8,366 8,706 8,960
----- --- ----- ----- --- ----- ----- ----- ----- -----
Total Capital Investment
Projects 9,601 6,463 3,138 18,922 12,049 6,873 29,819 35,393 32,125 33,035
----- ----- ----- ------ ------ ----- ------ ------ ------ ------
Settled Delaware Division
Rate Case 425 555 (130) 1,295 878 417 1,487 2,250 2,250 2,250
--- --- ---- ----- --- --- ----- ----- ----- -----
Total Major Projects and
Initiatives Recently
Completed $10,026 $7,018 $3,008 $20,217 $12,927 $7,290 $31,306 $37,643 $34,375 $35,285
======= ====== ====== ======= ======= ====== ======= ======= ======= =======
((1) )Does not include gross margin of $3.5 million and $9.3 million for the three and six months ended June 30, 2017, respectively, and $13.9 million for the year ended December 31, 2016, which consists primarily of gross margin attributable to Aspire Energy for those periods. The acquisition of Aspire Energy was previously disclosed as a major project; however, the gross margin attributable to Aspire Energy is now being excluded from this table.
Service Expansions
In August 2014, Eastern Shore entered into a precedent agreement with an electric power generator in Kent County, Delaware, to provide, upon the satisfaction of certain conditions, a 20-year natural gas transmission service for 45,000 dekatherms per day ("Dts/d") deliverable to the lateral serving the customer's facility. In July 2016, the FERC authorized Eastern Shore to construct and operate the proposed project, which consists of 5.4 miles of 16-inch pipeline looping and new compression capability in Delaware. Eastern Shore provided interim services to this customer pending construction of facilities. Construction of the project is complete, and long-term service commenced on March 1, 2017, pursuant to a 20-year OPT 90 <= service agreement. This service generated an additional gross margin of $106,000 during the six months ended June 30, 2017 compared to the same period in 2016. There was no incremental margin change during the second quarter as the margin generated from the permanent services equated to the margin generated from providing interim services during the second quarter of 2016. This service is expected to generate gross margin of $7.0 million for 2017 and between $5.8 million and $7.8 million annually through the remaining term of the agreement.
In October 2015, Eastern Shore submitted an application to the FERC to make certain meter tube and control valve replacements and related improvements at its Texas Eastern Transmission, LP ("TETLP") interconnect facilities, which would enable Eastern Shore to increase natural gas receipts from TETLP by 53,000 Dts/d, for a total capacity of 160,000 Dts/d. In December 2015, the FERC authorized Eastern Shore to proceed with this project, which was completed and placed in service in March 2016. Approximately 35 percent of the increased capacity has been subscribed on a short-term firm service basis through October 2017. This service generated an additional gross margin of $540,000 and $1.2 million for the three and six months ended June 30, 2017, respectively, compared to the same periods in 2016. The remaining capacity is available for firm or interruptible service.
GRIP
GRIP is a natural gas pipe replacement program approved by the Florida Public Service Commission ("PSC"), designed to expedite the replacement of qualifying distribution mains and services (any material other than coated steel or plastic) to enhance the reliability and integrity of the Company's Florida natural gas distribution systems. This program allows recovery, through regulated rates, of capital and other program-related costs, inclusive of a return on investment, associated with the replacement of the mains and services. Since the program's inception in August 2012, the Company has invested $108.1 million to replace 240 miles of qualifying distribution mains, including $5.2 million during the first six months of 2017. The increased investment in GRIP generated additional gross margin of $532,000 and $1.2 million for the three and six months ended June 30, 2017, respectively, compared to the same periods in 2016.
Eight Flags' CHP plant
In June 2016, Eight Flags completed construction of a CHP plant on Amelia Island, Florida. This CHP plant, which consists of a natural-gas-fired turbine and associated electric generator, produces approximately 20 megawatts of base load power and includes a heat recovery steam generator capable of providing approximately 75,000 pounds per hour of residual steam. In June 2016, Eight Flags began selling power generated from the CHP plant to Florida Public Utilities Company ("FPU"), the Company's wholly-owned subsidiary, pursuant to a 20-year power purchase agreement for distribution to FPU's retail electric customers. In July 2016, it also started selling steam to the industrial customer that owns the property on which Eight Flags' CHP plant is located, pursuant to a separate 20-year contract.
The CHP plant is powered by natural gas transported by FPU through its distribution system and by Peninsula Pipeline Company, Inc. ("Peninsula Pipeline"), the Company's wholly-owned Florida intrastate pipeline subsidiary. For the three and six months ended June 30, 2017, Eight Flags and other affiliates of Chesapeake Utilities generated $2.1 million and $4.4 million, respectively, in additional gross margin as a result of these services that began in June 2016. This amount includes gross margin of $43,000 and $535,000 for the three and six months ended June 30, 2017, respectively, attributable to natural gas distribution and transportation services provided to the CHP plant by the Company's regulated affiliates.
Major Projects and Initiatives Currently Underway
Northwest Florida Expansion Project: Peninsula Pipeline and the Company's Florida natural gas division are constructing a pipeline in Escambia County, Florida that will interconnect with Florida Gas Transmission Company's ("FGT") pipeline. The project consists of 33 miles of 12-inch transmission line from the FGT interconnect that will be operated by Peninsula Pipeline and 8 miles of 8-inch lateral distribution lines that will be operated by the Company's Florida natural gas division. The Company has signed agreements to serve two industrial customers. The estimated annual gross margin associated with this project, once in service, is approximately $5.1 million.
2017 Expansion Project: In May 2016, Eastern Shore submitted a request to the FERC to initiate the FERC's pre-filing process for its proposed 2017 expansion project. This project, which will expand Eastern Shore's firm service capacity by 26 percent, will provide 61,162 Dts/d of additional firm natural gas transportation service on Eastern Shore's pipeline system with an additional 52,500 Dts/d of firm transportation service at certain Eastern Shore receipt facilities pursuant to precedent agreements Eastern Shore entered into with seven existing customers including three affiliates of the Company. Facilities required to provide this new service will consist of: (i) approximately 23 miles of pipeline looping in Pennsylvania, Maryland and Delaware; (ii) upgrades to existing metering facilities in Lancaster County, Pennsylvania; (iii) installation of an additional 3,750-horsepower compressor unit at Eastern Shore's existing Daleville compressor station in Chester County, Pennsylvania; and (iv) approximately 17 miles of new mainline extension and two pressure control stations in Sussex County, Delaware. The project will generate approximately $15.8 million of gross margin in the first full year after the new transportation services go into effect. The estimated investment in this expansion project is $98.6 million.
System Reliability Project: In July 2016, the FERC authorized Eastern Shore to construct and operate its proposed System Reliability Project, which will consist of approximately 10.1 miles of 16-inch pipeline looping and auxiliary facilities in New Castle and Kent Counties, Delaware, and a new compressor at its existing Bridgeville compressor station in Sussex County, Delaware. A 2.5 mile looping segment was completed and placed into service in December 2016. The remaining looping and the new compressor were completed and placed in service in the second quarter of 2017. This project was included in Eastern Shore's January 2017 base rate case filing with the FERC. We have assumed recovery of this project's costs beginning in August 2017, coinciding with the proposed effectiveness of new rates, subject to refund pending final resolution of the base rate case. The Company expects to generate approximately $4.5 million in annual gross margin once new rates go into effect.
Other major factors influencing gross margin
Weather and Consumption
Warmer temperatures in 2017 had a negative impact on the Company's earnings. As compared to the prior year, warmer temperatures during 2017 reduced gross margin for the quarter and six months ended June 30, 2017 by $675,000 and $1.4 million, respectively, compared to the same periods in 2016. Warmer than normal temperatures for the quarter and six months ended June 30, 2017, reduced gross margin by $1.1 million and $4.3 million, respectively, compared to the same periods in 2016. The following table summarizes heating degree-day ("HDD") and cooling degree-day ("CDD") variances from the 10-year average HDD/CDD ("Normal") for the three and six months ended June 30, 2017 and 2016.
HDD and CDD Information
Three Months Ended Six months ended
June 30, June 30,
2017 2016 Variance 2017 2016 Variance
---- ---- -------- ---- ---- --------
Delmarva
Actual HDD 288 485 (197) 2,246 2,579 (333)
10-Year Average
HDD ("Delmarva
Normal") 429 452 (23) 2,783 2,854 (71)
-----
Variance from
Delmarva Normal (141) 33 (537) (275)
---- --- ---- ----
Florida
Actual HDD 13 9 4 298 514 (216)
10-Year Average
HDD ("Florida
Normal") 19 19 - 602 553 49
--- --- ---
Variance from
Florida Normal (6) (10) (304) (39)
--- --- ---- ---
Ohio
Actual HDD 508 766 (258) 2,992 3,557 (565)
10-Year Average
HDD ("Ohio
Normal") 637 630 7 3,774 3,762 12
--- -----
Variance from Ohio
Normal (129) 136 (782) (205)
---- --- ---- ----
Florida
Actual CDD 935 986 (51) 1,080 1,113 (33)
10-Year Average
CDD ("Florida CDD
Normal") 955 948 7 1,037 1,025 12
--- -----
Variance from
Florida CDD
Normal (20) 38 43 88
--- --- --- ---
Propane prices
Lower retail propane margins per gallon for the Company's Delmarva and Florida propane distribution operations decreased gross margin by $23,000 and $305,000 for the three and six months ended June 30, 2017, respectively, of which $8,000 and $204,000 is associated with the Company's Delmarva operations. The Company continues to assume normal levels of margins in its long-term financial plans and forecasts.
PESCO
PESCO provides natural gas supply and supply management services to residential, commercial, industrial and wholesale customers. PESCO operates primarily in Florida, on the Delmarva Peninsula, and in Ohio. PESCO competes with regulated utilities and other unregulated third-party marketers to manage natural gas supplies directly to residential, commercial and industrial customers through competitively-priced contracts. PESCO does not currently own or operate any natural gas transmission or distribution assets but sells gas that is delivered to retail or wholesale customers through affiliated and non-affiliated local distribution company systems and transmission pipelines.
In 2017, the Company's Delmarva natural gas distribution operations entered into asset management agreements with PESCO to manage a portion of their natural gas transportation and storage capacity. The asset management agreements were effective April 1, 2017, and each has a three-year term, expiring on March 31, 2020. As a result of these agreements, PESCO manages capacity on regional pipelines as well as third-party storage contracts for the Company's Delmarva natural gas distribution operations in conjunction with PESCO's asset management services.
For the three months ended June 30, 2017 PESCO's gross margin decreased by $450,000, due primarily to the absence of a supplier agreement that expired on March 31, 2017 and was not renewed due to lower margin expectations. For the six months ended June 30, 2017, PESCO generated additional gross margin of $1.7 million, compared to the same period in 2016 as a result of revenues from the supplier agreement as well as additional customers in Florida partially offset by lower margin in the Mid-Atlantic region. Under the supplier agreement, PESCO delivered the highest volumes during the first quarter of 2017, while fixed storage and pipeline fees were paid over the entire twelve-month period from April 1, 2016 to March 31, 2017.
Xeron
As disclosed previously, the Company's management determined that there was no viable strategy to restore Xeron to profitability in the near term and, accordingly, wound down Xeron's operations shortly after the first quarter. The Company recorded $522,000 and $1.1 million in pre-tax losses from Xeron in the three and six months ended June 30 2017, respectively, driven primarily by non-recurring employee severance costs and costs associated with termination of leased office space in Houston, Texas. The Company does not anticipate incurring any additional costs that will have a material impact associated with winding down Xeron's operations. With the wind-down of Xeron, the operating loss generated in the latter half of 2016 will be avoided later this year.
Other Natural Gas Growth - Distribution Operations
In addition to service expansions, the Company's natural gas distribution operations on the Delmarva Peninsula generated $128,000 and $649,000 in additional gross margin for the three and six months ended June 30, 2017, respectively, compared to the same periods in 2016, due to an increase in residential, commercial and industrial customers served. The average number of residential customers on the Delmarva Peninsula increased by 3.6 percent and 3.8 percent, respectively, during the three and six months ended June 30, 2017 compared to the same periods in 2016. The Company's natural gas distribution operations in Florida generated $328,000 and $804,000 in additional gross margin for the three and six months ended June 30, 2017, respectively, compared to the same periods in 2016, due primarily to an increase in commercial and industrial customers in Florida.
Regulatory Proceedings
Delaware Division Rate Case
In December 2016, the Delaware PSC approved a settlement agreement as recommended by the Hearing Examiner's report. The settlement agreement, among other things, provided for an increase in the Company's Delaware division revenue requirement of $2.25 million and a rate of return on common equity of 9.75 percent. The new authorized rates went into effect on January 1, 2017. Any amounts collected through 2016 interim rates in excess of the respective portion of the $2.25 million were refunded to the ratepayers in March 2017.
Eastern Shore Rate Case
In January 2017, Eastern Shore filed a base rate proceeding with the FERC, as required by the terms of its 2012 rate case settlement agreement. Eastern Shore's proposed rates were based on a cost of service of approximately $60 million, resulting in an overall requested revenue increase of approximately $18.9 million and a requested rate of return on common equity of 13.75 percent. The FERC issued a notice of the filing in January 2017, and the comment period ended in February 2017. Fourteen parties intervened in the proceeding, with six of those parties filing protests of some aspect of the rate filing. The FERC issued an order suspending the effectiveness of the proposed tariff rates for the usual five-month period. A settlement conference was held on July 27, 2017, in which the parties reviewed the latest proposals and further discussed their positions. Another settlement conference is scheduled for August 30 and 31, 2017. Eastern Shore has filed the requisite notice with the FERC to implement interim rates effective August 1, 2017.
Investing for Future Growth
To support and continue its growth, the Company has expanded, and will continue to expand, its resources and capabilities. Eastern Shore has expanded, and has announced significant additional expansions to, its transmission system, and is therefore increasing its staffing. We requested recovery of most of Eastern Shore's increased staffing costs in its 2017 rate case. Growth in non-regulated energy businesses, including Aspire Energy, PESCO and Eight Flags, requires additional staff as well as corporate resources to support the increased level of business operations. Finally, to allow the Company to continue to identify and move growth initiatives forward and to assist in developing additional initiatives, resources have been added in the Company's corporate shared services departments. In the three and six months ended June 30, 2017, the Company's staffing and associated costs increased by $976,000 and $4.2 million, or five percent and 12 percent, respectively, compared to the same period in 2016. The Company is prudently managing the pace and magnitude of the investments being made while ensuring that it appropriately expands its human resources and systems capabilities to capitalize on future growth opportunities.
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,
2017 2016 2017 2016
---- ---- ---- ----
Operating Revenues
Regulated Energy $70,996 $67,395 $168,650 $156,611
Unregulated Energy
and other 54,088 34,947 141,594 92,027
Total Operating
Revenues 125,084 102,342 310,244 248,638
------- ------- ------- -------
Operating Expenses
Regulated Energy
cost of sales 24,167 21,635 64,411 56,540
Unregulated Energy
and other cost of
sales 40,505 22,934 101,260 56,958
Operations 30,408 28,087 63,321 55,246
Maintenance 3,403 2,904 6,634 5,383
Gain from a
settlement (130) (130) (130) (130)
Depreciation and
amortization 9,094 7,780 17,906 15,283
Other taxes 3,971 3,390 8,501 7,236
Total operating
expenses 111,418 86,600 261,903 196,516
------- ------ ------- -------
Operating Income 13,666 15,742 48,341 52,122
Other expense, net (607) (8) (884) (42)
Interest charges 3,073 2,624 5,811 5,274
Income Before Income
Taxes 9,986 13,110 41,646 46,806
Income taxes 3,940 5,081 16,456 18,410
-----
Net Income $6,046 $8,029 $25,190 $28,396
====== ====== ======= =======
Weighted Average Common Shares
Outstanding:
Basic 16,340,665 15,315,020 16,329,009 15,300,931
Diluted 16,382,207 15,352,702 16,373,038 15,342,287
Earnings Per Share of Common Stock:
Basic $0.37 $0.52 $1.54 $1.86
Diluted $0.37 $0.52 $1.54 $1.85
Chesapeake Utilities Corporation and Subsidiaries
Condensed Consolidated Balance Sheets (Unaudited)
Assets June 30, 2017 December 31, 2016
------------- -----------------
(in thousands, except shares
and per share data)
Property, Plant and
Equipment
Regulated Energy $1,038,929 $957,681
Unregulated Energy 202,707 196,800
Other businesses and
eliminations 25,623 21,114
Total property, plant and
equipment 1,267,259 1,175,595
Less: Accumulated
depreciation and
amortization (260,428) (245,207)
Plus: Construction work in
progress 44,556 56,276
Net property, plant and
equipment 1,051,387 986,664
--------- -------
Current Assets
Cash and cash equivalents 2,419 4,178
Accounts receivable (less
allowance for uncollectible
accounts of $862 and $909,
respectively) 41,113 62,803
Accrued revenue 11,812 16,986
Propane inventory, at
average cost 4,649 6,457
Other inventory, at average
cost 9,996 4,576
Regulatory assets 7,167 7,694
Storage gas prepayments 4,415 5,484
Income taxes receivable 14,409 22,888
Prepaid expenses 3,939 6,792
Mark-to-market energy assets 229 823
Other current assets 2,287 2,470
----- -----
Total current assets 102,435 141,151
------- -------
Deferred Charges and Other
Assets
Goodwill 15,070 15,070
Other intangible assets, net 1,664 1,843
Investments, at fair value 5,952 4,902
Regulatory assets 76,128 76,803
Receivables and other
deferred charges 4,352 2,786
----- -----
Total deferred charges and
other assets 103,166 101,404
------- -------
Total Assets $1,256,988 $1,229,219
========== ==========
Chesapeake Utilities Corporation and Subsidiaries
Condensed Consolidated Balance Sheets (Unaudited)
Capitalization and Liabilities June 30, 2017 December 31, 2016
------------- -----------------
(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 25,000,000
shares) 7,955 7,935
Additional paid-in capital 252,071 250,967
Retained earnings 206,896 192,062
Accumulated other comprehensive
loss (5,244) (4,878)
Deferred compensation obligation 3,336 2,416
Treasury stock (3,336) (2,416)
------ ------
Total stockholders' equity 461,678 446,086
Long-term debt, net of current
maturities 201,590 136,954
Total capitalization 663,268 583,040
------- -------
Current Liabilities
Current portion of long-term debt 12,124 12,099
Short-term borrowing 145,591 209,871
Accounts payable 52,101 56,935
Customer deposits and refunds 30,725 29,238
Accrued interest 1,637 1,312
Dividends payable 5,312 4,973
Accrued compensation 6,683 10,496
Regulatory liabilities 5,609 1,291
Mark-to-market energy liabilities 188 773
Other accrued liabilities 12,084 7,063
------ -----
Total current liabilities 272,054 334,051
------- -------
Deferred Credits and Other
Liabilities
Deferred income taxes 234,716 222,894
Regulatory liabilities 42,427 43,064
Environmental liabilities 8,457 8,592
Other pension and benefit costs 31,920 32,828
Deferred investment tax credits
and other liabilities 4,146 4,750
----- -----
Total deferred credits and other
liabilities 321,666 312,128
------- -------
Total Capitalization and
Liabilities $1,256,988 $1,229,219
========== ==========
Chesapeake Utilities Corporation and Subsidiaries
Distribution Utility Statistical Data (Unaudited)
For the Three Months Ended June 30, 2017 For the Three Months Ended June 30, 2016
----------------------------------------
Delmarva NG Chesapeake FPU NG FPU Electric Delmarva NG Chesapeake FPU NG FPU Electric
Distribution Distribution Distribution Distribution Distribution Distribution
Utilities Utilities
Florida Florida
NG Division NG Division
----------- -----------
Operating Revenues
(in thousands)
Residential $11,096 $1,365 $7,633 $10,477 $10,480 $1,267 $6,294 $10,418
Commercial 6,424 1,395 7,449 10,075 5,779 1,230 6,926 10,280
Industrial 1,849 1,577 4,775 733 1,658 1,590 5,041 661
Other (1) (3,136) 966 (1,271) (207) (1,740) 840 (1,578) (1,471)
-------- ------ --- ------ ---- ------ --- ------ ------
Total Operating
Revenues $16,233 $5,303 $18,586 $21,078 $16,177 $4,927 $16,683 $19,888
Volume (in Dts/MWHs)
Residential 583,108 76,365 304,669 69,298 612,620 74,658 290,174 67,872
Commercial 614,311 2,710,729 459,354 74,766 670,593 1,356,421 532,434 75,071
Industrial 1,206,698 1,501,779 1,100,430 4,750 1,175,665 2,797,836 1,004,336 4,900
Other 20,216 - (23,024) 1,874 26,581 - (16,406) 1,961
----- ------ --- ------- ----- ------ --- ------- -----
Total 2,424,333 4,288,873 1,841,429 150,688 2,485,459 4,228,915 1,810,538 149,804
Average Customers
Residential 68,442 15,786 54,352 24,582 66,085 15,328 53,286 24,268
Commercial 6,836 1,430 4,072 7,429 6,745 1,388 4,265 7,410
Industrial 144 78 2,055 2 122 72 1,749 2
Other 7 - - 4 - -
----- --- --- --- --- --- ---
Total 75,429 17,294 60,479 32,013 72,956 16,788 59,300 31,680
----- ------ ------ ------ ------ ------ ------ ------ ------
Chesapeake Utilities Corporation and Subsidiaries
Distribution Utility Statistical Data (Unaudited)
For the Six Months Ended June 30, 2017 For the Six Months Ended June 30, 2016
--------------------------------------
Delmarva NG Chesapeake FPU NG FPU Electric Delmarva NG Chesapeake FPU NG FPU Electric
Distribution Distribution Distribution Distribution Distribution Distribution
Utilities Utilities
Florida Florida
NG Division NG Division
----------- -----------
Operating Revenues
(in thousands)
Residential $36,806 $2,917 $18,401 $19,804 $31,747 $2,838 $15,582 $21,725
Commercial 17,836 2,918 17,043 19,489 15,440 2,646 15,160 19,822
Industrial 3,683 3,336 10,702 1,204 3,579 3,227 10,573 1,478
Other (1) (1,678) 1,866 (4,054) (1,796) (1,088) 1,757 (3,411) (3,604)
-------- ------ ----- ------ ------ ------ ----- ------ ------
Total Operating
Revenues $56,647 $11,037 $42,092 $38,701 $49,678 $10,468 $37,904 $39,421
Volume (in Dts/MWHs)
Residential 2,391,008 199,640 775,480 130,624 2,318,217 213,130 797,086 141,795
Commercial 1,995,719 5,668,445 1,060,557 140,628 2,069,483 2,804,168 1,224,765 143,186
Industrial 2,580,496 3,269,209 2,289,693 7,910 2,545,306 6,091,648 2,130,091 11,580
Other 30,754 - (15,876) 3,747 40,085 - 23,976 4,599
----- ------ --- ------- ----- ------ --- ------ -----
Total 6,997,977 9,137,294 4,109,854 282,909 6,973,091 9,108,946 4,175,918 301,160
Average Customers
Residential 68,572 15,725 54,196 24,510 66,084 15,285 53,165 24,218
Commercial 6,874 1,420 4,123 7,438 6,771 1,383 4,263 7,398
Industrial 143 77 1,997 2 121 72 1,732 2
Other 6 - - 4 - -
----- --- --- --- --- --- ---
Total 75,595 17,222 60,316 31,950 72,980 16,740 59,160 31,618
----- ------ ------ ------ ------ ------ ------ ------ ------
((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
