Chesapeake Utilities Corporation Announces Increased Second Quarter Earnings

DOVER, Del., Aug. 4, 2011 /PRNewswire/ --

• Net income was $3.5 million, or $0.37 per share, for the quarter ended June 30, 2011, compared to $3.3 million, or $0.35 per share, for the quarter ended June 30, 2010.
• Customer growth in the natural gas distribution operations and continued expansion of its transmission system generated $1.6 million of additional gross margin.
• Improved margins from the propane distribution and wholesale marketing operations added $972,000 to gross margin.

Chesapeake Utilities Corporation (NYSE: CPK) today announced increased financial results for the quarter ended June 30, 2011.  The Company's net income for the quarter ended June 30, 2011 was $3.5 million, or $0.37 per share, an increase in net income of $200,000, or $0.02 per share, over net income of $3.3 million, or $0.35 per share, for the quarter ended June 30, 2010. The higher earnings for the second quarter of 2011 reflect additional margins generated from continued growth of the Company's natural gas distribution and transmission operations on the Delmarva Peninsula and in Florida and increased margins in its propane distribution and wholesale marketing operations.  These increases more than offset one-time charges associated with a voluntary workforce reduction in Florida of $549,000 and $341,000 in additional costs related to the roll-out and initial implementations of a new product, ProfitZoom™, by the Company's advanced information services subsidiary.    

On a year-to-date basis, the Company reported net income of $17.3 million for the six months ended June 30, 2011, or $1.79 per share.  The year-to-date net income in 2011 decreased slightly by $47,000, compared to the same period in 2010, and earnings per share declined by $0.03 per share due to additional shares outstanding in 2011.  The combined effect of continued growth and expansion of the Company's natural gas business, increased margins per gallon in its propane distribution operations, a one-time gain related to proceeds from a propane supply litigation settlement, and lower interest expense largely offset the effects of warmer temperatures during the recent heating season both on the Delmarva Peninsula and in Florida. These warmer temperatures reduced customer consumption of natural gas and propane, as compared to the previous heating season.  

“Our strong performance in the second quarter of 2011 reflects our ongoing commitment to serve new markets safely, reliably and cost effectively while maintaining operational excellence in our regulated operations and successfully executing our business plans in our unregulated energy segment,” stated Michael P. McMasters, President and Chief Executive Officer of Chesapeake Utilities Corporation. “Our continuing commitment to further extend our natural gas systems to customers and communities seeking such service has positioned us well for future growth in spite of the challenging economic conditions we face.  We are moving forward on the Delmarva Peninsula to extend our services to southern Delaware and Cecil and Worcester Counties in Maryland. We are also pursuing multiple growth opportunities throughout our Florida energy operations and are working diligently to transform these opportunities into value added services.   We have taken steps to further integrate our Florida operations and expect to see additional cost savings there in the second half of the year.  We have substantially completed the development of the ProfitZoom™ product and are excited about its sales prospects. All of these opportunities position our Company for continued long-term growth.”  

The discussions of the results for the periods ended June 30, 2011 and 2010, 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 Supplemental Income Statement Data chart.

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

Highlights for the second quarter of 2011 included:  

• Eastern Shore Natural Gas Company ("Eastern Shore"), the Company's natural gas transmission subsidiary, generated gross margin of $542,000 in the second quarter of 2011 from new transportation services associated with its eight-mile mainline extension to interconnect with Texas Eastern Transmission's pipeline system.  These services commenced in January 2011 and have a three-year phase-in from 19,324 Mcfs per day to 38,647 Mcfs per day, and an estimated gross margin of $2.4 million in 2011, $3.9 million in 2012 and $4.3 million annually thereafter.
• 14 large commercial and industrial customers added by the Delmarva natural gas distribution operation since July 2010 generated $261,000 in additional gross margin during the second quarter of 2011.  These new customers are expected to generate annual margin of $1.1 million in 2011, compared to $196,000 of gross margin generated from these customers in 2010.  
• Three percent growth in Delmarva natural gas distribution residential customers generated additional gross margin of $105,000 for the second quarter of 2011.  
• The Florida natural gas distribution operation generated additional gross margin of $376,000 from one-percent growth in residential customers and three-percent growth in commercial customers in the second quarter of 2011, compared to the same quarter in 2010. In addition, 700 new customers, added as a result of the purchase of the operating assets of Indiantown Gas Company in August 2010, generated $142,000 of additional gross margin during the current quarter.  
• Gross margin from the propane distribution operations for the second quarter of 2011 increased by $658,000 compared to the same quarter in 2010, due primarily to margins per gallon returning to more normal levels on the Delmarva Peninsula and improved margins per gallon in Florida as the Florida propane distribution operation continued to adjust its retail pricing in response to market opportunities.  
• The Company recorded $549,000 in one-time charges in May 2011 associated with the voluntary workforce reduction of 31 employees Florida, which is expected to generate approximately $500,000 in cost savings in 2011 and $900,000 in annual savings thereafter.
• In July 2011, BravePoint, Inc. ("BravePoint"), the Company's advanced information services subsidiary, completed the first successful implementation of its new product, ProfitZoom™.  At present, BravePoint has three customers, which have implemented, or are in the process of implementing, this new product and has several outstanding sales proposals under consideration by other potential customers.

Comparative results for the quarters ended June 30, 2011 and 2010

Operating income for each of the quarters ended June 30, 2011 and 2010 was $7.8 million.  An increase in gross margin of $2.5 million for the quarter ended June 30, 2011 was almost fully offset by an increase in other operating expenses.  The Company's operating results for the current quarter included non-recurring costs of $549,000 in one-time charges associated with the voluntary workforce reduction in Florida and $341,000 in additional costs related to the roll-out and initial implementations of ProfitZoom™.  Also contributing to the increase in other operating expenses were increased regulatory, legal and other costs for the regulated energy businesses, including $316,000 of additional costs associated with the electric franchise dispute in Marianna, Florida and $83,000 in costs with respect to the "Come-Back" filing in Florida and the rate case proceeding for Eastern Shore.  The Company is working diligently to resolve the electric franchise dispute in Marianna, Florida.  Both the "Come-Back" filing and the Eastern Shore rate case proceeding are expected to be resolved in 2011.

Regulated Energy

Operating income for the regulated energy segment for the quarter ended June 30, 2011 was $7.9 million, a decrease of $445,000, or five percent, compared to the same quarter in 2010.  This decrease resulted from an increase in gross margin of $1.3 million being offset by an increase in other operating expenses of $1.8 million, as detailed further below.  The increase in operating expenses included one-time charges of $481,000 associated with the voluntary workforce reduction in Florida.  Items contributing to the period-over-period increase in gross margin are listed in the following table:

• Gross margin from commercial and industrial customers for the Delmarva natural gas distribution operation increased by $295,000 in the second quarter of 2011, due primarily to the addition of 14 large commercial and industrial customers since July 2010.  These 14 new customers, which generated $261,000 of gross margin in the second quarter of 2011, are expected to generate annual margin of $1.1 million in 2011, compared to $196,000 of gross margin in 2010.  Three-percent growth in residential customers generated an additional $105,000 for the Delmarva natural gas distribution operation.

The Company's Florida natural gas distribution operations generated $376,000 of additional gross margin from one-percent growth in residential customers and three-percent growth in commercial customers. In addition, 700 new customers, added as a result of the Company's purchase of the operating assets of Indiantown Gas Company in August 2010, generated $142,000 of gross margin during the second quarter of 2011.  

• In January 2011, Eastern Shore commenced new transportation services associated with its eight-mile mainline extension to interconnect with Texas Eastern Transmission's pipeline system.  These services generated gross margin of $542,000 in the second quarter of 2011 and have a three-year phase-in from 19,324 Mcfs per day to 38,647 Mcfs per day, and an estimated gross margin of $2.4 million in 2011, $3.9 million in 2012 and $4.3 million annually thereafter.  

Also generating additional gross margin of $103,000 in the second quarter of 2011 were new transportation services that commenced in May and November 2010, as a result of Eastern Shore's system expansion projects.  These expansions added 2,666 Mcfs of capacity per day with estimated annual gross margin of $574,000 in 2011, of which $143,000 was recorded in the second quarter of 2011.  These projects generated $216,000 of gross margin in 2010 ($40,000 in the second quarter of 2010).

Eastern Shore entered into two additional transportation services agreements with an existing industrial customer, one for the period of May 2011 through April 2021 for an additional 3,290 Mcfs per day and the other one for the period of November 2011 through October 2012 for an additional 9,212 Mcfs per day.  These additional services, which are a result of a system expansion, generated additional gross margin of $61,000 in the second quarter of 2011 and are expected to generate additional gross margin of $356,000 in 2011, $1.2 million in 2012 and $369,000 annually thereafter.

• Lower customer consumption in the Florida natural gas operations decreased gross margin by $377,000 during the second quarter of 2011, compared to the same quarter in 2010.  This decrease was offset partially by increased non-weather-related consumption by residential customers in Delaware and commercial and industrial customers in Maryland.

Other operating expenses for the regulated energy segment increased by $1.8 million, or nine percent, in the second quarter of 2011, compared to the same quarter in 2010, due largely to the following factors:

• One-time charges of $481,000 associated with the voluntary workforce reduction in Florida;
• Increased regulatory, legal and other costs, including $316,000 of additional costs associated with the electric franchise dispute in Marianna, Florida and $83,000 in costs associated with the "Come-Back" filing in Florida and the rate case proceeding for Eastern Shore;
• $258,000 in higher depreciation expense and asset removal costs from capital investments made since the second half of 2010;
• $153,000 in additional expenses related to pipeline integrity projects for Eastern Shore to comply with increased pipeline regulatory requirements; and
• $79,000 of other operating expenses associated with the purchase of the operating assets of Indiantown Gas Company in August 2010.  

Unregulated Energy

Operating income for the unregulated energy segment for the quarter ended June 30, 2011 was $4,000, compared to a loss of $791,000 for same quarter in 2010.  An increase in gross margin of $1.3 million was partially offset by an increase in other operating expenses of $501,000.  Items contributing to the period-over-period increase in gross margin are listed in the following table:

• The propane distribution operations generated additional gross margin of $658,000 due to higher margins per gallon in the second quarter of 2011, compared to the same quarter in 2010.  During the current quarter, margins per gallon returned to more normal levels on the Delmarva Peninsula.  Significantly colder temperatures in early 2010 increased customer consumption and led to the propane distribution operations having to purchase spot propane supply at higher costs, resulting in lower margins per gallon during the second quarter of 2010.  More normal temperatures during 2011 and fewer spot purchases during the peak heating season resulted in margins per gallon returning to more normal and historical levels in the second quarter of 2011.  Also contributing to the gross margin increase were improved margins per gallon in Florida as the Florida propane distribution operation continued to adjust its retail pricing in response to market conditions.
• Xeron, Inc. ("Xeron"), the Company's propane wholesale marketing subsidiary, generated a $314,000 increase in gross margin during the second quarter of 2011, compared to the same quarter in 2010, due primarily to a 56-percent increase in trading activity.  
• The Company's natural gas marketing subsidiary, Peninsula Energy Services Company, Inc. ("PESCO"), generated higher gross margin of $291,000 during the second quarter of 2011 resulting primarily from favorable imbalance resolutions with third-party intra-state pipelines, with which PESCO contracts supply.  Such imbalance resolutions are not predictable and therefore, are not included in the Company's long-term financial plans or forecasts.    

Other operating expenses for the unregulated energy segment increased by $501,000 for the second quarter of 2011, compared to the same period in 2010, due primarily to the following factors: (a) increased payroll and benefit costs of $344,000, attributable primarily to higher accruals for performance incentive compensation; (b) increased vehicle expenses of $108,000 resulting from an increase in fuel prices; and (c) one-time charges of $67,000 associated with the voluntary workforce reduction in Florida mentioned previously.

Other

The other segment reported an operating loss of $91,000 for the quarter ended June 30, 2011, compared to operating income of $244,000 for the same quarter in 2010.  The decrease of $335,000 in operating results was attributable primarily to lower operating income of $418,000 from BravePoint, offset partially by the absence in 2011 of $92,000 in merger-related transition costs in the second quarter of 2010.    

BravePoint reported an operating loss of $188,000 in the second quarter of 2011, compared to operating income of $230,000 in the same quarter in 2010. During the second quarter of 2011, BravePoint incurred $341,000 in additional costs associated with the roll-out and initial implementations of ProfitZoom™.  Also contributing to the decreased operating results was $116,000 in increased benefit costs, as Chesapeake adopted a safe harbor 401(k) plan design on January 1, 2011, which resulted in an increased 401(k) benefit for BravePoint employees in 2011.

ProfitZoom™ is an integrated system designed specifically for the fire suppression and specialty contracting industries, which includes financial, job costing and service management modules.  ProfitZoom™ is a successor product to another software solution that BravePoint previously marketed and supported for companies in the fire protection industry.  Understanding the needs of the industry and utilizing its technology expertise, BravePoint began developing the ProfitZoom™ product in 2009.  

Interest Expense

Interest expense for the quarter ended June 30, 2011 decreased by approximately $191,000, or eight percent, compared to the same quarter in 2010, due primarily to lower interest expense on short-term borrowings and long-term debt. Short-term interest expense decreased by $42,000, largely attributable to lower rates on the $29.1 million term loan credit facility used to temporarily refinance the redemption of the 6.85 percent and 4.90 percent series of Florida Public Utilities Company ("FPU") first mortgage bonds in January 2010.  Long-term interest expense decreased by $135,000 due to lower long-term debt as a result of scheduled principal payments.

On June 23, 2011, the Company issued $29 million of 5.68 percent unsecured senior notes to Metropolitan Life Insurance Company and New England Life Insurance Company, pursuant to an agreement executed in June 2010.  The Company used the proceeds to permanently refinance the redemption of the 6.85 percent and 4.90 percent series of FPU first mortgage bonds, which were temporarily refinanced using a short-term loan credit facility.  Compared to interest expense incurred under the short-term loan credit facility during the first half of 2011, issuance of these senior notes will result in an increase in interest expense of $550,000 in the second half of 2011.

Comparative results for the six months ended June 30, 2011 and 2010

Operating income decreased by $544,000, or two percent, to $32.6 million for the six months ended June 30, 2011, compared to $33.2 million for the same period in 2010, reflecting the impact of warmer temperatures and one-time charges.  An increase in gross margin of $2.9 million and an increase in other operating expenses of $3.5 million resulted in the decrease in operating income.   Included in operating results for the six months ended June 30, 2011 was approximately $2.4 million in decreased gross margin associated with lower customer consumption of natural gas, electricity and propane, due primarily to warmer temperatures on the Delmarva Peninsula and in Florida during 2011, compared to 2010.  Also included in the operating results for the first six months of 2011 were one-time charges of $788,000 associated with the voluntary workforce reduction in Florida and a pension settlement, as well as $549,000 in additional costs related to the roll-out and initial  implementations of ProfitZoom™.  Also contributing to the increase in other operating expenses were increased regulatory, legal and other costs related to the regulated energy businesses, including $316,000 of additional costs associated with the electric franchise dispute in Marianna, Florida and $137,000 in costs with respect to the "Come-Back" filing in Florida and the rate case proceeding for Eastern Shore.  The Company is working diligently to resolve the electric franchise dispute in Marianna, Florida.  Both the "Come-Back" filing and the Eastern Shore rate case proceeding are expected to be resolved in 2011.

Regulated Energy

Operating income for the regulated energy segment for the six months ended June 30, 2011 was $24.2  million, a decrease of $1.7 million, or six percent, compared to the same period in 2010.  An increase in gross margin of $979,000 offset by an increase in other operating expenses of $2.6 million resulted in the decrease in operating income. Items contributing to the period-over-period increase in gross margin are listed in the following table:

• Customer consumption of natural gas and electricity decreased both on the Delmarva Peninsula and in Florida during the first six months of 2011, compared to the same period in 2010.  The decline in consumption is due primarily to significantly warmer weather during the heating season, resulting in a period-over-period decrease of $2.0 million in gross margin.  Heating degree-days decreased by five percent, or 144 heating degree-days, on the Delmarva Peninsula and by 43 percent, or 408 heating degree-days, in Florida during the first six months of 2011, compared to the same period in 2010.  
• Gross margin from commercial and industrial customers for the Delmarva natural gas distribution operation increased by $584,000 in the first six months of 2011, due primarily to the addition of 14 large commercial and industrial customers since July 2010.  These 14 new customers, which generated $509,000 of gross margin in the first half of 2011, are expected to generate annual margin of $1.1 million in 2011, $509,000 of which has been reflected in the year-to-date results.  The same customers generated $196,000 of gross margin in the second half of 2010.  Two-percent growth in residential customers generated an additional $271,000 in gross margin for the Delmarva natural gas distribution operation.  

The Florida natural gas distribution operations generated $576,000 of additional gross margin from one-percent growth in residential customers and three-percent growth in commercial customers.  In addition, 700 new customers, added as a result of the Company's purchase of the operating assets of Indiantown Gas Company in August 2010, generated $325,000 of gross margin during the first six months of 2011.  

• In January 2011, Eastern Shore commenced new transportation services associated with its eight-mile mainline extension to interconnect with Texas Eastern Transmission's pipeline system.  These new services generated gross margin of $1.1 million in the first six months of 2011 and have a three-year phase-in from 19,324 Mcfs per day to 38,647 Mcfs per day and an estimated gross margin of $2.4 million in 2011, $3.9 million in 2012 and $4.3 million annually thereafter.  

Also generating additional gross margin of $247,000 in the first six months of 2011 were new transportation services that commenced in May 2010 and November 2010, as a result of Eastern Shore's system expansion projects.  These expansions added 2,666 Mcfs of capacity per day and an estimated annual gross margin of $574,000 in 2011, $287,000 of which was recorded in the first six months of 2011.  These projects generated $216,000 of gross margin in 2010 ($40,000 in the first six months of 2010).

Eastern Shore entered into two additional transportation services agreements with an existing industrial customer, one for the period of May 2011 through April 2021 for an additional 3,290 Mcfs per day and the other one for the period of November 2011 through October 2012 for an additional 9,212 Mcfs per day.  These additional services, which are a result of a system expansion, generated additional gross margin of $61,000 in the second quarter of 2011 and are expected to generate additional gross margin of $356,000 in 2011, $1.2 million in 2012 and $369,000 annually thereafter.

Partially offsetting these margin increases were decreased margins of $40,000 from transportation service contracts, which expired in April 2010.  

Other operating expenses for the regulated energy segment increased by $2.6 million in the six months ended June 30, 2011, due largely to the following factors:

• One-time charges totaling $651,000 associated with the voluntary workforce reduction in Florida and a pension settlement;
• Increased regulatory, legal and other costs, including $316,000 of additional costs associated with the electric franchise dispute in Marianna Florida and $137,000 in costs with respect to the "Come-Back" filing in Florida and the rate case proceeding for Eastern Shore;
• $559,000 in higher depreciation expense and asset removal costs from capital investments made since the second half of 2010;
• $416,000 in additional expenses related to pipeline integrity projects for Eastern Shore to comply with increased pipeline regulatory requirements; and
• $147,000 of other operating expenses during the first half of 2011 associated with the purchase of the operating assets of Indiantown Gas Company in August 2010.  

Unregulated Energy

Operating income for the unregulated energy segment for the six months ended June 30, 2011 was $8.5 million, an increase of $1.5 million, or 22 percent, compared to the same period in 2010.  An increase in gross margin of $2.0 million was partially offset by an increase in other operating expenses of $430,000.  Items contributing to the period-over-period increase in gross margin are listed in the following table:

• The propane distribution operations generated additional gross margin of $1.5 million due to higher margins per gallon in the first six months of 2011, compared to the same period in 2010.  During the first half of 2011, margins per gallon returned to more normal levels on the Delmarva Peninsula.  Significantly colder temperatures in early 2010 increased customer consumption and led to the propane distribution operations having to purchase spot propane supply at higher costs, resulting in lower margins per gallon during that period.  More normal temperatures during 2011 and fewer spot purchases during the peak heating season resulted in margins per gallon in the first half of 2011 returning to levels more consistent with prior years.  Also contributing to the gross margin increase were higher margins per gallon in Florida as the Florida propane distribution operation continued to adjust its retail pricing in response to market conditions.
• A decrease in heating degree-days in the first six months of 2011, compared to the same period in 2010, and a decrease in propane deliveries to bulk customers due to the timing of deliveries, resulted in decreased gross margin of $934,000.  
• The Company recorded a one-time gain of $575,000 in the first quarter of 2011 related to the Company's share of proceeds received from an antitrust litigation settlement with a major propane supplier.
• Xeron, the Company's propane wholesale marketing subsidiary, generated a $412,000 increase in gross margin during the first six months of 2011, compared to the same period in 2010, due primarily to a 50-percent increase in trading activity.  
• Gross margin generated by PESCO increased $301,000 in the first six months of 2011, compared to the same period in 2010.  This increase resulted primarily from favorable imbalance resolutions with third-party intra-state pipelines, with which PESCO contracts supply.  Such imbalance resolutions are not predictable and therefore, are not included in the Company's long-term financial plans or forecasts.  

Other operating expenses for the unregulated energy segment increased by $430,000 for the first half of 2011, compared to the same period in 2010, due primarily to the following factors: (a) increased payroll and benefit costs of $347,000, attributable primarily to higher accruals for performance incentive compensation; (b) increased vehicle expenses of $202,000 resulting from an increase in fuel prices; and (c) one-time charges of $67,000 associated with the voluntary workforce reduction in Florida as we continued to integrate the Florida operations.

Other

The other segment reported an operating loss of $74,000 for the six months ended June 30, 2011, compared to operating income of $366,000 for the same period in 2010.  The decrease in operating results of $440,000 was attributable primarily to lower operating income of $548,000 from BravePoint, offset partially by the absence in 2011 of $111,000 in merger-related transition costs in the first half of 2010.    

BravePoint reported an operating loss of $282,000 in the first six months of 2011, compared to operating income of $265,000 in the same period in 2010. During the first six months of 2011, BravePoint incurred $549,000 in additional costs associated with the roll-out and initial  implementations of ProfitZoom™.  Also contributing to the decreased operating results was $249,000 in increased benefit costs, as Chesapeake adopted a safe harbor 401(k) plan design on January 1, 2011, which resulted in an increased 401(k) benefit for BravePoint employees in 2011.

Interest Expense

Interest expense for the six months ended June 30, 2011 decreased by approximately $403,000, or nine percent, compared to the same period in 2010, due primarily to a decrease of $424,000 in long-term interest expense as scheduled repayments decreased the outstanding principal balance.  

Other Information

Chesapeake will host a conference call on Friday, August 5, 2011, at 10:30 a.m. Eastern Time to discuss the Company's financial results for the second quarter of 2011.  To participate in this call, dial 866.821.5457 and reference Chesapeake Utilities Corporation's 2011 Second Quarter Financial Results Conference Call.  To access the replay recording of this call, please visit the Company's website at http://www.chpk.com/conferencecalls.

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 most recent report on Form 10-Q for further information on the risks and uncertainties related to the Company's forward-looking statements.

Chesapeake Utilities Corporation is a diversified utility company engaged in natural gas distribution, transmission and marketing, electric distribution, propane gas distribution and wholesale marketing, advanced information services and other related services. Information about Chesapeake's businesses is available at www.chpk.com.

For more information, contact:
Beth W. Cooper
Senior Vice President & Chief Financial Officer
302.734.6799

SOURCE Chesapeake Utilities Corporation