Chesapeake Utilities Corporation Reports Second Quarter 2018 Results
DOVER, Del., Aug. 9, 2018 /PRNewswire/ -- Chesapeake Utilities Corporation (NYSE: CPK) ("Chesapeake Utilities" or the "Company") today announced second quarter financial results. The Company's net income for the quarter ended June 30, 2018 was $6.4 million, compared to $6.0 million for the same quarter of 2017. Earnings per share ("EPS") for the quarter ended June 30, 2018 were $0.39, compared to $0.37 per share for the same quarter of 2017. For the six months ended June 30, 2018, the Company reported net income of $33.2 million, or $2.03 per share. This represents an increase of $8.1 million or $0.49 per share compared to the same period in 2017. The second quarter of 2018 and year-to-date EPS reflect the impact of a $0.09 charge for nonrecurring separation expenses associated with a former executive. Absent that charge, earnings for the quarter and six months ended June 30, 2018 would have been $0.48 and $2.12, respectively.
Higher quarterly and year-to-date earnings reflect the benefits of investments in system expansions and reliability and continued growth in regulated natural gas and electric operations, as well as enhanced profitability and growth from the Company's propane operations and the benefit of the lower effective tax rate from the Tax Cuts and Jobs Act ("TCJA") on Unregulated Energy earnings. The results also reflect more normal weather during the quarter and six months ended June 30, 2018. Weather during the first half of 2018 was 1.8 percent warmer than normal compared to 22.2 percent warmer than normal during the first six months of 2017. A detailed discussion of operating results begins on page 3.
"Results for the second quarter and year-to-date highlight the strong leadership team we have built at Chesapeake Utilities and the dedication of our employees to achieving our earnings, capital investment and return targets," stated Michael P. McMasters, President and Chief Executive Officer of Chesapeake Utilities Corporation. "Our business units continue to execute on our growth and expansion initiatives including the completion of the Northwest Florida Pipeline expansion project, significant progress on the construction of Eastern Shore's largest ever expansion project, as well as several other projects that support attainment of our strategic growth targets in future years," Mr. McMasters added. "I am very excited about the potential growth opportunities we have in front of us, the leadership we have in place to accomplish our strategic plan and our energized employees' ability to turn these opportunities into executable projects that will continue to drive our future earnings growth and further increase shareholder value," he concluded.
Significant Items Impacting Earnings
Results for the three and six months ended June 30, 2018 were impacted by the following significant items:
For the period ended June 30, Second quarter Year-to-date
------------
Net Income EPS Net Income EPS
---------- --- ---------- ---
(in thousands, except per share data)
Reported (GAAP) Earnings $6,387 $0.39 $33,241 $2.03
Less: Realized Mark-to-Market ("MTM") gain - - (4,008) (0.24)
Add: Nonrecurring separation expenses associated with 1,421 0.09 1,421 0.09
a former executive
Adjusted (Non-GAAP) Earnings* $7,808 $0.48 $30,654 $1.88
====== ===== ======= =====
Excluding the one-time separation expenses for a former executive, earnings for the second quarter of 2018 would have been $0.48 per share, an increase of 29.7 percent over EPS for the same quarter in 2017. Excluding both the one-time separation expenses and the realized MTM gain recorded by Peninsula Energy Services Company, Inc. ("PESCO") during the first quarter, EPS for the six months ended June 30, 2018 would have been $1.88, an increase of 22.1 percent over EPS of $1.54 for the six months ended June 30, 2017.
*This press release includes references to non-Generally Accepted Accounting Principles ("GAAP") financial measures, including gross margin, adjusted earnings and Adjusted EPS. A "non-GAAP financial measure" is generally defined as a numerical measure of a company's historical or future performance that includes or excludes amounts, or that is subject to adjustments, so as to be different from the most directly comparable measure calculated or presented in accordance with GAAP. Our management believes certain non-GAAP financial measures, when considered together with GAAP financial measures, provide information that is useful to investors in understanding period-over-period operating results separate and apart from items that may, or could, have a disproportionately positive or negative impact on results in any particular period.
The Company calculates "gross margin" by deducting the cost of sales from operating revenue. Cost of sales includes the purchased fuel cost for natural gas, electricity and propane, and the cost of labor spent on direct revenue-producing activities and excludes depreciation, amortization and accretion. Other companies may calculate gross margin in a different manner. Gross margin should not be considered an alternative to operating income or net income, both of which are determined in accordance with GAAP. The Company believes that gross margin, although a non-GAAP measure, is useful and meaningful to investors as a basis for making investment decisions. It provides investors with information that demonstrates the profitability achieved by the Company under its allowed rates for regulated operations and under its competitive pricing structures for unregulated businesses. The Company's management uses gross margin in measuring its business units' performance. This press release also includes gross margin that excludes the impact of unusual items, such as one-time impact from the enactment of the TCJA. The Company calculates "adjusted earnings" by adjusting reported (GAAP) earnings to exclude the impact of certain significant non-cash items, including the impact of realized MTM gains (losses) and one-time charges, such as severance charges, and calculates "adjusted EPS" by dividing adjusted earnings by the weighted average common shares outstanding.
Operating Results for the Quarters Ended June 30, 2018 and 2017
Consolidated Results
Three Months Ended
(in thousands) June 30, June 30, Change Percent
2018 2017 Change
---- ---- ------
Gross margin before the TCJA impact $69,545 $60,411 $9,134 15.1%
Impact of the TCJA reserves for customer refunds (2,284) - (2,284) N/A
------ --- ------ ---
Gross margin 67,261 60,411 6,850 11.3%
Depreciation, amortization and property taxes 13,749 12,752 997 7.8%
Nonrecurring separation expenses 1,548 - 1,548 N/A
Other operating expenses 38,716 33,598 5,118 15.2%
Operating income $13,248 $14,061 $(813) (5.8)%
======= ======= ===== =====
Operating income during the second quarter of 2018 decreased by $813,000, or 5.8 percent, compared to the same period in 2017. The most significant driver of the decrease was the pass-through of lower tax rates to regulated energy customers as a result of the TCJA. While the pass-through reduced margin and operating income by approximately $2.3 million, it was offset by an equal reduction in income taxes. Excluding the impact of the pass-through of refunds, operating income increased by $1.5 million, or 10.5 percent, driven by higher gross margin of $9.1 million, or 15.1 percent.
Regulated Energy Segment
Three Months Ended
(in thousands) June 30, June 30, Change Percent
2018 2017 Change
---- ---- ------
Gross margin before the TCJA impact $52,778 $46,829 $5,949 12.7%
Impact of the TCJA reserves for customer refunds (2,284) - (2,284) N/A
------ --- ------ ---
Gross margin 50,494 46,829 3,665 7.8%
Depreciation, amortization and property taxes 11,161 10,438 723 6.9%
Other operating expenses 25,029 22,305 2,724 12.2%
Operating income $14,304 $14,086 $218 1.5%
======= ======= ==== ===
As a result of the implementation of settled rates for Eastern Shore, continued system expansions, customer growth across the Company's regulated operations and more normal weather conditions, operating income for the Regulated Energy segment increased by $218,000, or 1.5 percent, in the second quarter of 2018 compared to the same period in 2017. This increase was driven by a $5.9 million increase in gross margin, before the impact of the TCJA reserve discussed above, offset by $3.4 million in higher depreciation and other operating expenses associated with the margin growth. As discussed above, second quarter gross margin and operating income were also impacted by customer refunds of $2.3 million, associated with the TCJA, which were offset by an equal reduction in income tax expenses. Excluding the estimated customer refunds associated with the TCJA, operating income increased by $2.5 million, or 17.8 percent.
The significant components of the increase in gross margin are shown below:
(in thousands) Margin Impact
-------------
Implementation of Eastern Shore
settled rates $2,365
Service expansions 1,652
Natural gas growth (including
customer and consumption
growth but excluding service
expansions) 1,575
Return to more normal weather 359
Florida electric reliability/
modernization program 352
Gas Reliability and
Infrastructure Program
("GRIP") in Florida 306
Other (660)
----
Total 5,949
Less: TCJA reserve impact for
regulated entities* (2,284)
Quarter over quarter increase
in gross margin $3,665
======
*As a result of the TCJA, an estimated amount of $2.3 million was
reserved or refunded to customers during the second quarter of 2018
to reflect the impact of lower tax rates on the Company's regulated
businesses. In some jurisdictions, refunds have been made to
customers, while in other jurisdictions, the Company has established
reserves until final agreements are approved and permanent changes
are made to customer rates. The reserves and lower customer rates
are equal to the estimated reduction in Federal income taxes due to
the TCJA and have no material impact on after-tax earnings from the
Regulated Energy segment.
The significant components of the increase in other operating expenses are as follows:
(in thousands) Other
Operating
Expenses
--------
Higher outside services, facilities
and maintenance costs due to
growth $1,166
Higher payroll expense (increased
staffing and annual salary
increases) 1,019
Higher depreciation, amortization
and property taxes associated with
recent capital projects 722
Higher incentive compensation costs
(based on period-over-period
results) 384
Other 156
Quarter over quarter increase in
other operating expenses $3,447
======
At the present time, we expect the current expense run rate to continue for the remainder of the year.
Unregulated Energy Segment
Three Months Ended
(in thousands) June 30, June 30, Change Percent
2018 2017 Change
---- ---- ------
Gross margin $16,915 $13,736 $3,179 23.1%
Depreciation, amortization and property taxes 2,553 2,272 281 12.4%
Other operating expenses 13,872 11,462 2,410 21.0%
Operating income $490 $2 $488 N.M.
==== === ==== ====
Operating income for the Unregulated Energy segment increased by $488,000 for the three months ended June 30, 2018, compared to the same period in 2017. The increase was driven by a $3.2 million, or 23.1 percent, increase in gross margin, which was partially offset by $2.7 million in higher operating expenses associated with growth. The improvement in operating income is largely a result of continued growth and colder weather at the propane operations and higher margins at PESCO.
The significant components of the increase in gross margin are shown below:
(in thousands) Margin Impact
-------------
Nonrecurring margin increase for PESCO (see the discussion included later for the margin $1,092
drivers)
Propane delivery operations - additional customer consumption related to weather 806
Incremental margin from PESCO operations (see the discussion included later for the 592
margin drivers)
Propane delivery operations - increased margin driven by growth and other factors 536
Aspire Energy of Ohio LLC ("Aspire Energy") - increased margins largely due to higher 207
commodity pricing on natural gas liquid sales
Other (54)
Quarter over quarter increase in gross margin $3,179
======
The significant components of the increase in other operating expenses are as follows:
(in thousands) Other
Operating
Expenses
--------
Incremental operating expenses for
PESCO $764
Higher payroll expense (increased
staffing and annual salary
increases)(1) 515
Higher outside services, facilities
and maintenance costs due to
growth(1) 475
Higher incentive compensation costs
(based on period-over-period
results)(1) 427
Higher benefit and other employee-
related expenses(1) 173
Higher depreciation, asset removal
and property tax costs due to new
capital investments(1) 131
Other(1) 206
Quarter over quarter increase in
other operating expenses $2,691
======
(1) Excluding incremental operating expenses at PESCO.
At the present time, we expect the current expense run rate to continue for the remainder of the year.
Operating Results for the Six Months Ended June 30, 2018 and 2017
Consolidated Results
Six Months Ended
(in thousands) June 30, June 30, Change Percent
2018 2017 Change
---- ---- ------
Gross margin before the TCJA impact $163,981 $144,573 $19,408 13.4%
Impact of the TCJA reserves for customer refunds (5,421) - (5,421) N/A
------ --- ------ ---
Gross margin 158,560 144,573 13,987 9.7%
Depreciation, amortization and property taxes 27,447 25,235 2,212 8.8%
Nonrecurring separation expenses 1,548 - 1,548 N/A
Other operating expenses 75,911 70,178 5,733 8.2%
Operating income $53,654 $49,160 $4,494 9.1%
======= ======= ====== ===
Operating income, during the six months ended June 30, 2018, increased by $4.5 million, or 9.1 percent, compared to the same period in 2017. This increase was driven by a $19.4 million, or 13.4 percent, increase in gross margin before the TCJA impact, which was partially offset by a $2.2 million increase in depreciation, amortization and property taxes and a $5.7 million increase in other operating expenses. Gross margin and operating income for the six months ended June 30, 2018, were also impacted by customer refunds of $5.4 million, associated with the TCJA, which were offset by an equivalent reduction in income tax expenses for the Regulated Energy segment. Excluding the estimated customer refunds associated with the TCJA, operating income increased by $9.9 million, or 20.2 percent.
Regulated Energy Segment
Six Months Ended
(in thousands) June 30, June 30, Change Percent
2018 2017 Change
---- ---- ------
Gross margin before the TCJA impact $117,077 $104,239 $12,838 12.3%
Impact of the TCJA reserves for customer refunds (5,421) - (5,421) N/A
------ --- ------ ---
Gross margin 111,656 104,239 7,417 7.1%
Depreciation, amortization and property taxes 22,317 20,629 1,688 8.2%
Other operating expenses 48,324 46,129 2,195 4.8%
Operating income $41,015 $37,481 $3,534 9.4%
======= ======= ====== ===
As a result of the implementation of settled rates for Eastern Shore, continued system expansions, customer growth across the Company's regulated operations and more normal weather conditions, operating income for the Regulated Energy segment increased by $3.5 million, or 9.4 percent, in the six months ended June 30, 2018 compared to the same period in 2017. This increase was driven by a $12.8 million increase in gross margin before the impact of the TCJA reserve discussed above, which was partially offset by $3.9 million in higher depreciation and other operating expenses associated with the margin growth. Excluding the estimated customer refunds associated with the TCJA, operating income increased by $9.0 million, or 23.9 percent.
The significant components of the increase in gross margin are shown below:
(in thousands) Margin Impact
-------------
Implementation of Eastern
Shore settled rates $5,095
Natural gas growth (including
customer and consumption
growth but excluding service
expansions) 3,342
Service expansions 2,316
Return to more normal weather 1,314
Florida electric reliability/
modernization program 767
Florida GRIP 602
Other (598)
----
Total 12,838
Less: TCJA reserve impact for
regulated entities* (5,421)
Period over period increase in
gross margin $7,417
======
*As a result of the TCJA, an estimated amount of $5.4 million was
reserved or refunded to customers during the first six months of
2018 to reflect the impact of lower tax rates on the Company's
regulated businesses. In some jurisdictions, refunds have been made
to customers, while in other jurisdictions, the Company has
established reserves until final agreements are approved and
permanent changes are made to customer rates. The reserves and
lower customer rates are equal to the estimated reduction in Federal
income taxes due to the TCJA and have no material impact on after-
tax earnings from the Regulated Energy segment.
The significant components of the increase in other operating expenses are as follows:
(in thousands) Other Operating
Expenses
--------
Higher depreciation, amortization and property taxes associated with recent capital projects $1,688
Higher payroll expense (increased staffing and annual salary increases) 1,399
Higher facilities and maintenance costs largely as a result of growth 1,149
Lower regulatory and outside services expenses as there were various regulatory (1,056)
proceedings (including Eastern Shore's rate case) in 2017
Higher incentive compensation costs (based on period-over-period results) 592
Other 111
Period over period increase in other operating expenses $3,883
======
Unregulated Energy Segment
Six Months Ended
(in thousands) June 30, June 30, Change Percent
2018 2017 Change
---- ---- ------
Gross margin $47,216 $40,555 $6,661 16.4%
Depreciation, amortization and property taxes 5,059 4,524 535 11.8%
Other operating expenses 27,983 24,454 3,529 14.4%
Operating income $14,174 $11,577 $2,597 22.4%
======= ======= ====== ====
Operating income for the Unregulated Energy segment increased by $2.6 million for the six months ended June 30, 2018, compared to the same period in 2017. The increase was driven by a $6.7 million, or 16.4 percent, increase in gross margin, which was partially offset by $4.1 million in higher operating expenses associated with growth. The improvements in gross margin and operating income were driven primarily by more normal weather and continued growth within the Company's propane operations and at Aspire Energy.
The significant components of the increase in gross margin are shown below:
(in thousands) Margin Impact
Propane delivery operations -
additional customer consumption
-weather $2,923
Propane delivery operations -
increased margin driven by
growth and other factors 1,789
Nonrecurring margin decrease at
PESCO (863)
Aspire Energy -customer
consumption -weather 921
Aspire Energy -increased margin
driven by growth and other
factors 585
Growth in wholesale propane
margins and sales 333
Incremental margin from PESCO
operations 255
Other 718
Period over period increase in
gross margin $6,661
======
The significant components of the increase in other operating expenses are as follows:
(in thousands) Other
Operating
Expenses
--------
Incremental operating expenses for PESCO $1,715
Higher payroll expense (increased staffing and annual salary increases)(1) 996
Absence of Xeron Inc. ("Xeron") 2017 wind-down costs(1) (870)
Higher vehicle, sales and advertising, other taxes and credit collections costs, largely driven by 646
growth(1)
Higher incentive compensation costs (based on period-over-period results)(1) 594
Higher facilities and maintenance costs due to growth(1) 443
Higher depreciation, amortization and property taxes associated with recent capital investments(1) 266
Higher benefits and employee-related costs(1) 214
Other(1) 60
Period over period increase in other operating expenses $4,064
======
(1) Excluding incremental operating expenses at PESCO.
Matters discussed in this release may include forward-looking statements that involve risks and uncertainties. Actual results may differ materially from those in the forward-looking statements. Please refer to the Safe Harbor for Forward-Looking Statements in the Company's 2017 Annual Report on Form 10-K for further information on the risks and uncertainties related to the Company's forward-looking statements.
Unless otherwise noted, earnings per share are presented on a diluted basis.
Conference Call
Chesapeake Utilities will host a conference call on Friday, August 10, 2018 at 10:30 a.m. Eastern Time to discuss the Company's financial results for the quarter ended June 30, 2018. To participate in this call, dial 855.801.6270 and reference Chesapeake Utilities' 2018 Second Quarter Results Conference Call. To access the replay recording of this call, the accompanying transcript, and other pertinent quarterly information, use the link CPK - Conference Call Audio Replay, or visit the Investors/Events and Presentations section of Company's website at www.chpk.com.
About Chesapeake Utilities Corporation
Chesapeake Utilities is a diversified energy company engaged in natural gas distribution, transmission, gathering and processing, and marketing; electricity generation and distribution; propane gas distribution; and other businesses. Information about Chesapeake Utilities and its family of businesses is available at http://www.chpk.com or through its IR App.
Please note that Chesapeake Utilities Corporation is not affiliated with Chesapeake Energy, an oil and natural gas exploration company headquartered in Oklahoma City, Oklahoma.
For more information, contact:
Beth W. Cooper
Senior Vice President & Chief Financial Officer
302.734.6799
Financial Summary
-----------------
(in thousands, except per share data)
Three Months Ended Six Months Ended
June 30, June 30,
2018 2017 2018 2017
---- ---- ---- ----
Gross Margin
Regulated Energy segment $50,494 $46,829 $111,656 $104,239
Unregulated Energy segment 16,915 13,736 47,216 40,555
Other businesses and eliminations (148) (154) (312) (221)
---- ---- ---- ----
Total Gross Margin $67,261 $60,411 $158,560 $144,573
======= ======= ======== ========
Operating Income
Regulated Energy segment $14,304 $14,086 $41,015 $37,481
Unregulated Energy segment 490 2 14,174 11,577
Other businesses and eliminations (1,546) (27) (1,535) 102
------ ------ ---
Total Operating Income 13,248 14,061 53,654 49,160
------ ------ ------ ------
Other Expense, net (262) (1,002) (194) (1,703)
Interest Charges 3,881 3,073 7,545 5,811
----- ----- ----- -----
Pre-tax Income 9,105 9,986 45,915 41,646
Income Taxes 2,718 3,940 12,674 16,456
-----
Net Income $6,387 $6,046 $33,241 $25,190
====== ====== ======= =======
Earnings Per Share of Common Stock
Basic $0.39 $0.37 $2.03 $1.54
Diluted $0.39 $0.37 $2.03 $1.54
Financial Summary Highlights
Key variances, between the three months ended June 30, 2017 and 2018, included:
(in thousands, except per share data) Pre-tax Net Earnings
Income Income Per Share
------ ------ ---------
Second Quarter of 2017 Reported Results $9,986 $6,046 $0.37
------ ------ -----
Adjusting for unusual items:
One-time separation expenses associated with a former executive (1,548) (1,421) (0.09)
Absence of Xeron expenses, including 2017 wind-down expenses 173 122 0.01
(1,375) (1,299) (0.08)
------ ------ -----
Increased Gross Margins:
Implementation of Eastern Shore settled rates* (1) 2,365 1,659 0.10
TCJA impact - refunds and reserves for future refunds to ratepayers(2) (2,284) (1,602) (0.10)
Service expansions* 1,652 1,158 0.07
Natural gas growth (including customer and consumption growth but excluding service expansions) 1,575 1,105 0.07
Return to normal weather 1,108 778 0.05
Nonrecurring margin increase at PESCO 1,092 766 0.05
Incremental margin from PESCO operations 592 415 0.03
Unregulated Energy growth excluding PESCO 503 353 0.02
Florida electric reliability/modernization program* 352 247 0.02
GRIP* 306 215 0.01
7,261 5,094 0.32
----- ----- ----
Decreased (Increased) Other Operating Expenses:
Higher outside services and facilities maintenance costs (3) (1,602) (1,124) (0.07)
Higher payroll expense (increased staffing and annual salary increases) (3) (1,534) (1,076) (0.07)
Higher depreciation, asset removal and property tax costs due to new capital (848) (595) (0.04)
investments (3)
Higher incentive compensation costs (based on period-over-period results) (3) (811) (569) (0.03)
Incremental operating expenses for PESCO (764) (536) (0.03)
Higher benefit and other employee-related expenses (3) (365) (256) (0.02)
(5,924) (4,156) (0.26)
------ ------ -----
Interest charges (808) (567) (0.03)
Income taxes - including TCJA impact - decreased effective tax rate - 1,295 0.08
Net other changes (35) (26) (0.01)
--- --- -----
(843) 702 0.04
Second Quarter of 2018 Reported Results $9,105 $6,387 $0.39
====== ====== =====
(1) Excluding amounts refunded to customers associated with the TCJA, which are broken out separately and discussed in footnote 2.
(2) "TCJA impact -refunds and reserves for future refunds to ratepayers" represents the amounts that have already been refunded to customers or reserves established for future refunds to customers in the second quarter of 2018 as a result of lower taxes due to the TCJA. Refunds made to customers
are offset by the corresponding decrease in federal income taxes and are expected to have no net impact on net income.
(3) Excluding incremental operating expenses at PESCO.
*See the Major Projects and Initiatives table later in this press release.
Key variances, between the six months ended June 30, 2017 and 2018, included:
(in thousands, except per share data) Pre-tax Net Earnings
Income Income Per Share
------ ------ ---------
Six Months Ended June 30, 2017 Reported Results $41,646 $25,190 $1.54
------- ------- -----
Adjusting for unusual items:
One-time separation expenses associated with a former executive (1,548) (1,421) (0.09)
Absence of Xeron expenses, including 2017 wind-down expenses 870 630 0.04
(678) (791) (0.05)
---- ---- -----
Increased Gross Margins:
TCJA impact - refunds and reserves for future refunds to ratepayers(2) (5,421) (3,925) (0.24)
Return to normal weather 5,159 3,735 0.23
Implementation of Eastern Shore settled rates* (1) 5,095 3,689 0.22
Natural gas growth (including customer and consumption growth but excluding service expansions) 3,342 2,420 0.15
Service expansions* 2,316 1,677 0.10
Unregulated Energy growth excluding PESCO 2,044 1,480 0.09
Nonrecurring margin decrease at PESCO (863) (625) (0.04)
Florida electric reliability/modernization program* 767 555 0.03
GRIP* 602 436 0.03
Incremental margin from PESCO operations 255 185 0.01
13,296 9,627 0.58
------ ----- ----
Decreased (Increased) Other Operating Expenses:
Higher payroll expense (increased staffing and annual salary increases) (3) (2,395) (1,734) (0.11)
Higher depreciation, asset removal and property tax costs due to new capital (1,949) (1,411) (0.09)
investments (3)
Incremental operating expenses for PESCO (1,715) (1,242) (0.08)
Higher facilities maintenance costs (3) (1,554) (1,125) (0.07)
Lower regulatory and outside services costs (3) 1,298 940 0.06
Higher incentive compensation costs (based on period-over-period results) (3) (1,187) (859) (0.05)
(7,502) (5,431) (0.34)
------ ------ -----
Interest charges (1,734) (1,255) (0.08)
Income taxes - including TCJA impact - decreased effective tax rate - 5,262 0.32
Net other changes 887 639 0.06
--- --- ----
(847) 4,646 0.30
Six Months Ended June 30, 2018 Reported Results $45,915 $33,241 $2.03
======= ======= =====
(1) Excluding amounts refunded to customers associated with the TCJA, which are broken out separately and discussed in footnote 2.
(2) "TCJA impact -refunds and reserves for future refunds to ratepayers" represents amounts that have already been refunded to customers or reserves established for future refunds to customers in the first six months of 2018 as a result of lower taxes due to the TCJA. Refunds made to customers are
offset by the corresponding decrease in federal income taxes and are expected to have no net impact on net income.
(3) Excluding incremental operating expenses at PESCO.
*See the Major Projects and Initiatives table later in this press release.
Recently Completed and Ongoing Major Projects and Initiatives
The Company constantly seeks and develops additional projects and initiatives in order to further increase shareholder value and serve its customers. The following represent the major projects recently completed and currently underway. In the future, the Company will add new projects to this table as projects are initiated.
Gross Margin for the Period
Three Months Ended Six Months Ended Year Ended Estimate for
------------------ ---------------- ---------- ------------
June 30, June 30, December 31, Fiscal
in thousands 2018 2017 2018 2017 2017 2018 2019
---- ---- ---- ---- ---- ---- ----
Florida GRIP $3,647 $3,341 $7,211 $6,609 $13,454 $14,287 $14,370
Eastern Shore Rate Case (1) 2,365 - 5,095 - 3,693 9,800 9,800
Florida Electric Reliability/Modernization Pilot 352 - 767 - 94 1,558 1,558
Program (1)
New Smyrna Beach, Florida Project (1) 352 - 704 - 235 1,409 1,409
2017 Eastern Shore System Expansion Project - 859 - 1,995 - 433 8,101 15,799
including interim services (1)
Northwest Florida Expansion Project (1) 870 - 870 - - 3,484 6,500
(Palm Beach County) Belvedere, Florida Project (1) - - - - - 635 1,131
Total $8,445 $3,341 $16,642 $6,609 $17,909 $39,274 $50,567
====== ====== ======= ====== ======= ======= =======
(1) Gross margin amounts included in this table have not been adjusted to reflect the impact of the TCJA. Any refunds and/or rate reductions implemented in the Company's regulated businesses will be offset by lower Federal income taxes due to the TCJA.
Ongoing Growth Initiatives
GRIP
GRIP is a natural gas pipe replacement program approved by the Florida PSC that allows automatic recovery in rates of capital related costs and a return on investment, associated with the replacement of mains and services. Since the program's inception in August 2012, we have invested $120.1 million to replace 250 miles of qualifying distribution mains, including $6.4 million during the first six months of 2018. GRIP generated additional gross margin of $306,000 and $602,000 for the three and six months ended June 30, 2018 compared to the same periods in 2017.
Regulatory Proceedings
Eastern Shore Rate Case/Settled Rates
Eastern Shore's rate case settlement agreement became final on April 1, 2018. The final agreement increases Eastern Shore's operating income by $6.6 million consisting of $9.8 million from increased rates and offset by the $3.2 million in lower federal income taxes. For the three and six months ended June 30, 2018, Eastern Shore recognized incremental gross margin of approximately $2.4 million and $5.1 million, respectively. As of June 30, 2018, Eastern Shore refunded its customers a total of $1.7 million related to the decrease in federal income taxes as a result of the TCJA. The settlement rates were effective January 1, 2018.
Florida Electric Reliability/Modernization Program
In December 2017, the Florida PSC approved a $1.6 million annualized rate increase, effective January 2018, for the recovery of a limited number of investments and costs related to reliability, safety and modernization for the Florida Public Utilities Company's ("FPU") electric distribution system. This increase will continue through at least the last billing cycle of December 2019. For the three and six months ended June 30, 2018, additional margin of $352,000 and $767,000, respectively, was generated.
Major Projects and Initiatives Currently Underway
New Smyrna Beach, Florida Project
In the fourth quarter of 2017, the Company commenced construction of a 14-mile gas transmission pipeline to provide additional capacity to serve current and planned customer growth in the Company's New Smyrna Beach service area. The project was partially placed into service at the end of 2017 and is expected to be fully in service in September 2018. For the three and six months ended June 30, 2018, the project generated incremental gross margin of approximately $352,000 and $704,000, respectively.
2017 Eastern Shore System Expansion Project
In November 2017, Eastern Shore began construction of a $117.0 million system expansion that will increase its capacity by 26 percent once completed. The Company has invested $89.6 million through June 30, 2018 and expects to invest approximately $24.8 million during the remainder of 2018 to substantially complete the project. The first phase of the project was placed into service in December 2017, and generated $859,000 and $2.0 million in incremental gross margin, including margin from interim services, during the three and six months ended June 30, 2018, respectively. With the exception of some minor facilities, the remaining segments are scheduled to be completed and begin generating margin during the second half of 2018. The project is expected to produce approximately $15.8 million in gross margin in its first full year of service.
Northwest Florida Expansion Project
Peninsula Pipeline Company, Inc. ("Peninsula Pipeline"), has completed construction of transmission lines and the Company's Florida natural gas division has completed construction of lateral distribution lines to serve two large customers and other customers close to these facilities. This is the Company's first expansion of natural gas service into Northwest Florida. The project was placed into service in May 2018 and generated incremental gross margin of $870,000 for the three and six months ended June 30, 2018. The estimated annual gross margin from this project is $6.5 million.
(Palm Beach County) Belvedere, Florida Project
Peninsula Pipeline is constructing a pipeline to bring gas directly to the Company's natural gas distribution system in West Palm Beach, Florida. The Company expects to complete this project by the end of the third quarter of 2018 and expects the project to generate $1.1 million in annual gross margin.
Other major factors influencing gross margin
Weather and Consumption
Gross margin increased by $1.1 million and $5.2 million in the three and six months ended June 30, 2018, respectively, as a result of colder temperatures, compared to the extremely warm temperatures experienced during the same period in 2017. While temperatures during the first half of 2018 were colder than 2017, temperatures were still warmer than normal, as shown in the table below. The Company estimates that it would have generated an additional $2.4 million in gross margin if temperatures for the six months ended June 30, 2018 had been normal. The following table summarizes heating degree-days ("HDD") and cooling degree-days ("CDD") variances from the 10-year average HDD/CDD ("Normal") for the three and six months ended June 30, 2018 and 2017.
HDD and CDD Information
Three Months Ended Six Months Ended
June 30, June 30,
2018 2017 Variance 2018 2017 Variance
---- ---- -------- ---- ---- --------
Delmarva
Actual HDD 424 288 136 2,719 2,246 473
10-Year Average HDD ("Delmarva Normal") 423 429 (6) 2,785 2,783 2
-----
Variance from Delmarva Normal 1 (141) (66) (537)
--- ---- --- ----
Florida
Actual HDD 17 13 4 507 298 209
10-Year Average HDD ("Florida Normal") 16 19 (3) 533 555 (22)
--- --- ---
Variance from Florida Normal 1 (6) (26) (257)
--- --- --- ----
Ohio
Actual HDD 662 508 154 3,652 2,992 660
10-Year Average HDD ("Ohio Normal") 614 637 (23) 3,683 3,774 (91)
--- -----
Variance from Ohio Normal 48 (129) (31) (782)
--- ---- --- ----
Florida
Actual CDD 952 935 17 1,091 1,080 11
10-Year Average CDD ("Florida CDD Normal") 969 955 14 1,058 1,037 21
--- -----
Variance from Florida CDD Normal (17) (20) 33 43
--- --- --- ---
Natural Gas Distribution Customer and Consumption Growth
The Company's natural gas distribution operations generated $1.6 million and $3.3 million of additional margin for the three and six months ended June 30, 2018, respectively. The breakdown of the increased margin is as follows:
Three Months Ended Six Months Ended
In thousands June 30, 2018 June 30, 2018
------------- -------------
Customer growth:
Residential $351 $864
Commercial and industrial excluding new service in Northwest Florida 303 604
New service in Northwest Florida 276 305
--- ---
Total customer growth 930 1,773
Volume growth:
Residential 151 855
Commercial and industrial 387 1,026
Other - including unbilled revenue 107 (312)
--- ----
Total volume growth 645 1,569
Total natural gas distribution growth $1,575 $3,342
====== ======
Customer growth for the Company's Delmarva Peninsula and Florida natural gas distribution operations generated $930,000 and $1.8 million in additional gross margin for the three and six months ended June 30, 2018, respectively, compared to the same periods in 2017. The additional margin was generated from an approximately 3.8 percent increase in the average number of residential customers as well as growth in commercial and industrial customers on the Delmarva Peninsula in the second quarter and first six months of 2018, compared to the corresponding periods in 2017. Residential customer growth on the Delaware Peninsula has averaged 3.0 percent over the past five years. The Company's Florida natural gas distribution operations generated additional gross margin for the three and six months ended June 30, 2018, due to growth in all customer classes and new service to customers in Northwest Florida.
The Company's Delmarva Peninsula and Florida natural gas distribution operations generated $645,000 and $1.6 million in additional gross margin for the three and six months ended June 30, 2018, respectively, compared to the same periods in 2017 from higher sales to residential and commercial customers.
Propane Operations
The Company's Florida and Delmarva Peninsula propane operations generated $1.6 million and $5.7 million in incremental margin for the three and six months ended June 30, 2018, respectively, compared to the same periods in 2017. A return to more normal temperatures accounted for $806,000 and $2.9 million of the margin increase during the three and six months ended June 30, 2018, respectively. The balance of the increase reflects increased customer consumption driven by growth and other factors, higher sales and revenues from service contracts and increased wholesale sales activities.
PESCO
For the three and six months ended June 30, 2018, PESCO recorded a series of adjustments, MTM gains and recognized extraordinary costs, which impacted reported results. Excluding the impact of these items, PESCO's gross margin increased by $592,000 and $255,000 in the three and six months ended June 30, 2018, respectively, compared to the same periods in 2017. The total of the adjustments increased gross margin by $1.1 million and reduced gross margin by $863,000 for the three and six months ended June 30, 2018, respectively, compared to the same periods in 2017, respectively. The following table summarizes the changes in PESCO'S year-over-year margin for the three and six months ended June 30, 2018:
Three Months Ended Six Months Ended
June 30, 2018 June 30, 2018
------------- -------------
(in thousands)
Three and Six Months Ended June 30, 2017 Reported Results $921 $4,389
Incremental Margin from Growth and ARM Acquisition in 2017 592 255
Nonrecurring Margin factors - non-renewal of Supply Agreement, MTM and Other Adjustments 1,092 (863)
----
2018 Margin $2,605 $3,781
====== ======
A more detailed discussion of PESCO's results is provided in the Company's Form 10-Q for the quarter ended June 30, 2018.
The following table compares the margin, operating expenses and operating income from PESCO for the three and six months ended June 30, 2018 and 2017:
Three Months Ended Six Months Ended
June 30, June 30,
in
thousands 2018 2017 2018 2017
Total
Gross
Margin $2,606 $921 $3,781 $4,389
Operating
Expense (1,918) (1,154) (3,857) (2,143)
Operating
Income $688 $(233) $(76) $2,246
==== ===== ==== ======
Operating income for PESCO improved to $688,000 for the three months ended June 30, 2018, from a loss of $233,000 during the prior year period. The improvement reflects the benefit of several nonrecurring margin adjustments in the business, growth in margins from existing operations as well as the addition of margin from the business purchased from ARM during the third quarter of 2017. This was partially offset by a $764,000 increase in operating expenses, including $262,000 associated with the ARM margins previously mentioned, as well as $501,000 in increased staffing, infrastructure and risk management system costs to ensure the profitable future growth of this business.
For the six months ended June 30, 2018, PESCO reported an operating loss of $76,000, compared to income of $2.2 million during the prior year period. The decline primarily reflects increased expenses incurred to build out the staff, infrastructure and risk management systems necessary for the success of this business, as well as the impact of several nonrecurring margin adjustments, largely during the first quarter of 2018.
Xeron
Xeron's operations were wound down during the second quarter of 2017. Operating income for the three and six months ended June 30, 2018, improved by $173,000 and $870,000, respectively, due to the absence of wind-down expenses and the absence of operating losses for Xeron in 2018.
Capital Investment Growth and Financing Plan
The Company's capital expenditures were $134.7 million for the six months ended June 30, 2018. The Company originally budgeted $181.6 million for capital expenditures in 2018 and is currently projecting capital expenditures of approximately $216.4 million in 2018. The Company's current forecast by segment and by business line is shown below:
2018
----
(dollars in thousands)
Regulated Energy:
Natural gas distribution $65,594
Natural gas transmission 110,813
Electric distribution 8,930
-----
Total Regulated Energy 185,337
Unregulated Energy:
Propane distribution 13,359
Other unregulated energy 7,413
-----
Total Unregulated Energy 20,772
Other:
Corporate and other businesses 10,289
Total Other 10,289
------
Total 2018 Forecasted Capital Expenditures $216,398
========
Chesapeake Utilities' target ratio of equity to total capitalization, including short-term borrowings, is between 50 and 60 percent. This target capital structure ensures that the Company maintains a strong balance sheet to support continued growth. Over the past several years, the Company has been deploying increased amounts of capital on new projects, many of which have longer construction periods. The Company seeks to align the permanent financing of these capital projects with the in-service dates to the extent feasible.
In 2017, the Company refinanced $70.0 million of short-term debt as 3.25 percent senior notes. The refinancing will result in increased annual interest expense of $2.3 million during 2018, a portion of which impacted the second quarter and year-to-date results; however, the Company locked in a low interest rate for 15 years. The Company previously executed a shelf agreement with New York Life and subsequently issued $50.0 million of unsecured senior notes in May 2018 and will issue an additional tranche by November 2018 at an average interest rate of 3.53 percent for 20 years. The Company expects to access additional permanent capital to align the financing with new investments and to maintain a solid balance sheet to support future capital deployment.
Chesapeake Utilities Corporation and Subsidiaries
Condensed Consolidated Statements of Income (Unaudited)
(in thousands, except shares and per share data)
Three Months Ended Six Months Ended
------------------ ----------------
June 30, June 30,
2018 2017 2018 2017
---- ---- ---- ----
Operating Revenues
Regulated Energy $70,504 $70,996 $179,897 $168,650
Unregulated Energy and other 66,160 54,088 196,123 141,594
Total Operating Revenues 136,664 125,084 376,020 310,244
------- ------- ------- -------
Operating Expenses
Regulated Energy cost of sales 20,010 24,167 68,241 64,411
Unregulated Energy and other cost of sales 49,393 40,505 149,219 101,260
Operations 36,281 30,013 68,983 62,502
Maintenance 3,619 3,403 7,211 6,634
Gain from a settlement (130) (130) (130) (130)
Depreciation and amortization 9,839 9,094 19,543 17,906
Other taxes 4,404 3,971 9,299 8,501
Total operating expenses 123,416 111,023 322,366 261,084
------- ------- ------- -------
Operating Income 13,248 14,061 53,654 49,160
Other expense, net (262) (1,002) (194) (1,703)
Interest charges 3,881 3,073 7,545 5,811
Income Before Income Taxes 9,105 9,986 45,915 41,646
Income taxes 2,718 3,940 12,674 16,456
-----
Net Income $6,387 $6,046 $33,241 $25,190
====== ====== ======= =======
Weighted Average Common Shares Outstanding:
Basic 16,369,641 16,340,665 16,360,540 16,329,009
Diluted 16,417,082 16,382,207 16,410,061 16,373,038
Earnings Per Share of Common Stock:
Basic $0.39 $0.37 $2.03 $1.54
Diluted $0.39 $0.37 $2.03 $1.54
Chesapeake Utilities Corporation and Subsidiaries
Condensed Consolidated Balance Sheets (Unaudited)
Assets June 30, 2018 December 31, 2017
------------- -----------------
(in thousands, except shares and per share data)
Property, Plant and Equipment
Regulated Energy $1,174,407 $1,073,736
Unregulated Energy 216,125 210,682
Other businesses and eliminations 30,170 27,699
Total property, plant and equipment 1,420,702 1,312,117
Less: Accumulated depreciation and amortization (287,942) (270,599)
Plus: Construction work in progress 101,904 84,509
Net property, plant and equipment 1,234,664 1,126,027
--------- ---------
Current Assets
Cash and cash equivalents 4,512 5,614
Trade and other receivables (less allowance for uncollectible accounts of $1,076 53,419 77,223
and $936, respectively)
Accrued revenue 12,353 22,279
Propane inventory, at average cost 6,597 8,324
Other inventory, at average cost 4,791 12,022
Regulatory assets 13,330 10,930
Storage gas prepayments 4,365 5,250
Income taxes receivable 6,420 14,778
Prepaid expenses 5,162 13,621
Mark-to-market energy assets 534 1,286
Other current assets 4,560 7,260
----- -----
Total current assets 116,043 178,587
------- -------
Deferred Charges and Other Assets
Goodwill 19,604 19,604
Other intangible assets, net 4,277 4,686
Investments, at fair value 7,486 6,756
Regulatory assets 76,427 75,575
Other assets 4,440 3,699
----- -----
Total deferred charges and other assets 112,234 110,320
------- -------
Total Assets $1,462,941 $1,414,934
========== ==========
Chesapeake Utilities Corporation and Subsidiaries
Condensed Consolidated Balance Sheets (Unaudited)
Capitalization and Liabilities June 30, 2018 December 31, 2017
------------- -----------------
(in thousands, except shares and per share data)
Capitalization
Stockholders' equity
Preferred stock, par value $0.01 per share (authorized 2,000,000 shares), no $ - $ -
shares issued and outstanding
Common stock, par value $0.4867 per share (authorized 50,000,000 shares) 7,971 7,955
Additional paid-in capital 255,356 253,470
Retained earnings 250,377 229,141
Accumulated other comprehensive loss (5,718) (4,272)
Deferred compensation obligation 3,782 3,395
Treasury stock (3,782) (3,395)
------ ------
Total stockholders' equity 507,986 486,294
Long-term debt, net of current maturities 241,596 197,395
Total capitalization 749,582 683,689
------- -------
Current Liabilities
Current portion of long-term debt 9,977 9,421
Short-term borrowing 235,288 250,969
Accounts payable 60,769 74,688
Customer deposits and refunds 32,018 34,751
Accrued interest 1,891 1,742
Dividends payable 6,060 5,312
Accrued compensation 7,953 13,112
Regulatory liabilities 22,194 6,485
Mark-to-market energy liabilities 886 6,247
Other accrued liabilities 11,495 10,273
------ ------
Total current liabilities 388,531 413,000
------- -------
Deferred Credits and Other Liabilities
Deferred income taxes 143,147 135,850
Regulatory liabilities 141,499 140,978
Environmental liabilities 8,090 8,263
Other pension and benefit costs 28,996 29,699
Deferred investment tax credits and other liabilities 3,096 3,455
----- -----
Total deferred credits and other liabilities 324,828 318,245
------- -------
Total Capitalization and Liabilities $1,462,941 $1,414,934
========== ==========
Chesapeake Utilities Corporation and Subsidiaries
Distribution Utility Statistical Data (Unaudited)
For the Three Months Ended June 30, 2018 For the Three Months Ended June 30, 2017
----------------------------------------
Delmarva NG Chesapeake FPU NG FPU Electric Delmarva NG Chesapeake FPU NG FPU Electric
Distribution Utilities Distribution Distribution Distribution Utilities
Florida Florida Distribution Distribution
NG Division NG Division
----------- -----------
Operating Revenues
(in thousands)
Residential $14,007 $1,459 $7,713 $9,814 $11,096 $1,365 $7,633 $10,477
Commercial 7,752 1,524 6,809 9,709 6,424 1,395 7,449 10,075
Industrial 1,987 2,854 5,218 371 1,849 1,577 4,775 733
Other (1) (3,496) 480 (1,459) (1,532) (3,136) 966 (1,271) (207)
-------- ------ --- ------ ------ ------ --- ------ ----
Total Operating $20,250 $6,317 $18,281 $18,362 $16,233 $5,303 $18,586 $21,078
Revenues
Volume (in Dts for natural gas and MWHs for electric)
Residential 759,202 85,526 329,284 66,682 583,108 76,365 304,669 69,298
Commercial 711,690 1,134,555 432,192 73,276 614,311 2,710,729 459,354 74,766
Industrial 1,308,129 7,024,154 1,245,950 3,540 1,206,698 1,501,779 1,100,430 4,750
Other 17,759 - 463,846 1,907 20,216 - 459,201 1,874
----- ------ --- ------- ----- ------ --- ------- -----
Total 2,796,780 8,244,235 2,471,272 145,405 2,424,333 4,288,873 2,323,654 150,688
Average Customers
Residential 71,038 16,391 55,580 24,714 68,442 15,786 54,352 24,582
Commercial(2) 6,994 1,517 3,932 7,493 6,836 1,430 4,072 7,429
Industrial(2) 155 16 2,284 2 144 78 2,055 2
Other 4 - 11 - 7 - - -
----- --- --- --- --- --- --- --- ---
Total 78,191 17,924 61,807 32,209 75,429 17,294 60,479 32,013
----- ------ ------ ------ ------ ------ ------ ------ ------
Chesapeake Utilities Corporation and Subsidiaries
Distribution Utility Statistical Data (Unaudited)
For the Six Months Ended June 30, 2018 For the Six Months Ended June 30, 2017
--------------------------------------
Delmarva NG Chesapeake FPU NG FPU Electric Delmarva NG Chesapeake FPU NG FPU Electric
Distribution Utilities Distribution Distribution Distribution Utilities
Florida Florida Distribution Distribution
NG Division NG Division
----------- -----------
Operating Revenues
(in thousands)
Residential $49,321 $3,219 $18,888 $21,346 $36,806 $2,917 $18,401 $19,804
Commercial 23,582 3,246 15,135 18,866 17,836 2,918 17,043 19,489
Industrial 4,293 4,725 11,590 771 3,683 3,336 10,702 1,204
Other (1) (5,239) 990 (4,119) (3,880) (1,678) 1,866 (4,054) (1,796)
-------- ------ --- ------ ------ ------ ----- ------ ------
Total Operating $71,957 $12,180 $41,494 $37,103 $56,647 $11,037 $42,092 $38,701
Revenues
Volume (in Dts for natural gas and MWHs for electric)
Residential 2,999,757 226,285 852,346 145,210 2,391,008 199,640 775,480 130,624
Commercial 2,417,116 2,374,462 967,736 141,015 1,995,719 5,668,445 1,060,557 140,628
Industrial 2,817,168 10,089,859 2,550,480 8,060 2,580,496 3,269,209 2,289,693 7,910
Other 30,292 - 984,353 3,803 30,754 - 947,111 3,747
----- ------ --- ------- ----- ------ --- ------- -----
Total 8,264,333 12,690,606 5,354,915 298,088 6,997,977 9,137,294 5,072,841 282,909
Average Customers
Residential 71,136 16,307 55,430 24,679 68,572 15,725 54,196 24,510
Commercial(2) 7,009 1,509 3,930 7,487 6,874 1,420 4,123 7,438
Industrial(2) 154 16 2,268 2 143 77 1,997 2
Other 5 - 14 - 6 - - -
----- --- --- --- --- --- --- --- ---
Total 78,304 17,832 61,642 32,168 75,595 17,222 60,316 31,950
----- ------ ------ ------ ------ ------ ------ ------ ------
(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 or
changes in taxes, such as the
TCJA, which are passed through to
customers. This amount also
includes the reserve for estimated
customer refunds associated with
the TCJA.
(2) Certain commercial and industrial
customers have been reclassified
when compared to the prior year.
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SOURCE Chesapeake Utilities Corporation
