Chesapeake Utilities Corporation Reports a 32-Percent Increase in Third Quarter Earnings Per Share

DOVER, Del., Nov. 7, 2012 /PRNewswire/ -- Chesapeake Utilities Corporation (NYSE: CPK) today announced financial results for the third quarter of 2012.  The Company's net income for the quarter ended September 30, 2012 was $3.2 million, or $0.33 per share.  This represents an increase of $822,000, or $0.08 per share, compared to the same quarter in 2011, and quarter-over-quarter increases of 34 percent and 32 percent for net income and earnings per share, respectively. 

For the nine months ended September 30, 2012, the Company reported net income of $19.0 million, or $1.97 per share.  This represents a decrease of $658,000 in net income, or $0.07 per share, compared to the same period in 2011.  Warmer temperatures in 2012, primarily during the first three months of the year, resulted in lower net income of $2.4 million, or $0.25 per share, compared to 2011.   

"We are pleased to announce strong third quarter results, representing a 32-percent increase in quarterly earnings per share," stated Michael P. McMasters, President and Chief Executive Officer of Chesapeake Utilities Corporation.  "These quarterly results demonstrate our employees' continued success in identifying opportunities in all of our businesses and transforming them into growth for the Company and value to our customers and shareholders.  Our latest effort to expand natural gas service on the Delmarva Peninsula includes the proposed increase in our natural gas service offerings in the southern part of Delaware and the pending purchase of the propane distribution assets of The Eastern Shore Gas Company and its affiliates (collectively, "ESG").  In our application for the approval of the ESG purchase filed in August with the Maryland Public Service Commission ("PSC"), we also requested approval of a new tariff governing service to all customers in Worcester County, Maryland.  Our proposed service offerings in Maryland are aimed at providing energy savings to Worcester County customers, including approximately 11,000 underground propane gas distribution system customers currently served by ESG, regardless of when and if they are actually converted from propane to natural gas service.  Also in August, the Florida PSC approved our natural gas infrastructure replacement program. This program provides real-time recovery and return on our investment to replace any aging natural gas infrastructure and to ensure continued safe delivery of natural gas in the future.  Our unregulated businesses including BravePoint®, Inc. ("BravePoint") continue to identify innovative solutions to provide high-quality service to existing and potential customers.  Combined with the major expansion initiatives already underway on the Delmarva Peninsula and in Florida, these opportunities provide a positive outlook for our future performance."

The Company's operating income for the third quarter of 2012 was $7.6 million, an increase of $2.0 million, compared to the same quarter in 2011.  Gross margin increased by $4.0 million, or 12 percent, in the third quarter of 2012, compared to the same quarter in 2011.  All of the Company's segments contributed to this increase.  The regulated energy segment generated $2.3 million of this increase, due primarily to growth in the Company's natural gas transmission and distribution operations.  This included $1.0 million in additional gross margin generated by new natural gas transmission and distribution services associated with  expansion initiatives in Sussex County, Delaware; Worcester County, Maryland; and Nassau County, Florida.  Other customer growth in our natural gas transmission and distribution operations generated $718,000 in additional gross margin.  The unregulated energy segment generated $1.1 million of the gross margin increase, due primarily to higher margins from the Florida propane distribution operation and Xeron, Inc. ("Xeron"), the Company's propane wholesale marketing subsidiary.  BravePoint, the Company's advanced information services subsidiary, generated $594,000 in additional gross margin, $188,000 of which represents increased margin from ProfitZoom™ and Application Evolution™ sales and related services.  The remaining increase from BravePoint was generated from higher consulting revenues and other product sales in its core business. 

Other operating expenses for the third quarter of 2012 were $30.9 million, an increase of $2.0 million, compared to the same quarter in 2011.  Additional costs of $208,000 associated with BravePoint's growth and $397,000 related to acquisition-related efforts and increased capacity for future growth increased other operating expenses during the quarter.  Amortization expense related to the recovery of the acquisition adjustment and merger-related costs associated with the acquisition of Florida Public Utilities Company ("FPU") increased expenses by $589,000.  Higher depreciation and asset removal costs associated with capital investments also added $339,000 in other operating expenses.

The Company's operating income for the nine months ended September 30, 2012 was $38.1 million, a decrease of $117,000, or 0.3 percent, compared to the same period in 2011.  Gross margin increased by $3.4 million, or three percent, for the nine months ended September 30, 2012, compared to the same period in 2011, due largely to $4.6 million in additional gross margin generated by our natural gas transmission and distribution operations from the recent expansion initiatives, new customer growth and additional transmission services provided to an existing industrial customer.  Higher retail margins per gallon on propane sales increased gross margin by $922,000 and Eastern Shore Natural Gas Company, Inc. ("Eastern Shore") generated additional gross margin of $729,000 as a result of new rates implemented in 2011, pursuant to its rate case settlement.  BravePoint also generated $1.9 million in additional gross margin, $464,000 of which represents increased margin from ProfitZoom™ and Application Evolution™ sales and related services.  The remaining increase from BravePoint was generated from higher consulting revenues and other product sales.  These increases more than offset a reduction of: (a) $4.0 million in gross margin from lower customer energy consumption directly attributable to a decrease in heating degree-days of 17 percent and 35 percent on the Delmarva Peninsula and in Florida, respectively; and (b) $575,000 due to the absence of a one-time gain recorded in the first quarter of 2011 related to the proceeds received in an antitrust litigation settlement with a major propane supplier. 

Other operating expenses for the nine months ended September 30, 2012 were $91.6 million, an increase of $3.5 million, compared to the same period in 2011.  $1.8 million of the increase represented amortization expense related to the recovery of the FPU acquisition adjustment and merger-related costs. BravePoint's other operating expenses increased by $937,000, due primarily to higher employee-related costs to support increased services.  Higher depreciation and asset removal costs associated with capital investments also added $900,000 in other operating expenses. 

Matters discussed in this release may include forward-looking statements that involve risks and uncertainties. Actual results may differ materially from those in the forward-looking statements. Please refer to the Safe Harbor for Forward-Looking Statements in the Company's most recent report on Form 10-K, as amended, and 10-Q 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 information is presented on a diluted basis. 

Chesapeake Utilities Corporation will host a conference call on November 8, 2012, at 10:30 a.m. Eastern Time to discuss the Company's financial results for the third quarter ended September 30, 2012.  To participate in this call, dial 866.821.5457 and reference Chesapeake Utilities Corporation's 2012 Third 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.

About Chesapeake Utilities Corporation

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

The strong third-quarter performance in 2012 was due primarily to increased gross margin generated our by natural gas transmission and distribution operations, higher revenues from BravePoint product sales and consulting activities and higher margins generated from propane retail sales in Florida and wholesale marketing activities.  These gross margin increases more than offset amortization expense related to the recovery of the FPU acquisition adjustment and merger-related costs, higher costs associated with growth initiatives and capital investments and the absence of the one-time gain recorded in 2011 from the sale of a non-operating Internet Protocol asset. 

Key variances for the nine months ended September 30, 2012 include:

The Company's results for the nine months ended September 30, 2012 reflected a reduction of $4.0 million in gross margin due to the warm weather, primarily during the first three months of 2012, and amortization expense of $1.8 million related to the recovery of the FPU acquisition adjustment and merger-related costs.  The negative weather impact was more than fully offset by additional gross margin generated by: (a) the natural gas transmission and distribution operations as a result of the major expansion initiatives in Sussex County, Delaware; Worcester County, Maryland; and Nassau County, Florida; (b) additional customer growth; and (c) additional transmission services provided to an existing industrial customer.  Increased product sales and consulting activities by BravePoint and higher propane retail margins per gallon in Florida also generated additional gross margin.  These increases offset higher costs associated with growth initiatives and capital investments.

The following information highlights certain key factors contributing to the Company's results for the quarter and nine months ended September 30, 2012:

Growth

New natural gas transmission services and growth in natural gas distribution customers generated $1.1 million and $615,000, respectively, in additional gross margin for the third quarter of 2012, compared to the same period in 2011.  New natural gas transmission services and growth in natural gas distribution customers generated $2.8 million and $1.8 million, respectively, in additional gross margin for the first nine months of 2012, compared to the same period in 2011.  Most of these increases in gross margin were related to the continued execution of the Company's strategic plan, including expansion of natural gas service to  new areas and  conversion of several large commercial and industrial customers to natural gas. New services are being initiated by the Company's natural gas transmission subsidiaries in response to increased demand for natural gas service on the Delmarva Peninsula and in Florida, both from the Company's natural gas distribution operations and other unaffiliated customers directly connected to the transmission systems. 

Major Expansion Initiatives and Customer Growth Reflected in Results 
In late 2011 and during the first nine months of 2012, the Company expanded natural gas transmission and distribution services to Sussex County, Delaware and Nassau County, Florida and also initiated natural gas transmission service in Worcester County, Maryland.  These major expansion initiatives increased the Company's natural gas footprint, delivering natural gas service to areas where it was not previously available.  These initiatives generated $903,000 of additional gross margin for the natural gas transmission operations during the third quarter of 2012.  Natural gas distribution service to two large industrial customers in Lewes, Delaware and two industrial facilities of an existing customer in southeastern Sussex County, Delaware generated $110,000 of additional gross margin for the third quarter.  For the first nine months of 2012, these initiatives generated $2.0 million and $396,000 of additional gross margin for the natural gas transmission and distribution operations, respectively.

In addition to the recent expansion initiatives, the Delmarva natural gas distribution operation has added another 10 new large industrial and commercial customers since the beginning of 2011, which generated $122,000 in additional gross margin in the third quarter of 2012 and $468,000 in the first nine months of 2012, compared to the same periods in 2011, respectively.  These 10 new customers are expected to generate $950,000 of gross margin in 2012, compared to $429,000 generated in 2011.  Customer growth in Florida, primarily from commercial and industrial customers, also generated $351,000 and $686,000 in additional gross margin in the third quarter and first nine months of 2012, respectively. 

Future Major Expansion Initiatives and Opportunities 
Although not affecting results in the third quarter and first nine months of 2012, the Company is continuing its effort to extend natural gas service to Cecil County, Maryland, with the transmission service expected to commence in November 2012.  Eastern Shore executed precedent agreements with NRG Energy Center Dover LLC ("NRG") and PBF Energy Inc. ("Delaware City Refinery") to further expand its transmission system to provide additional capacity to these customers.  Firm transportation service agreements are expected to be executed by NRG and Delaware City Refinery with Eastern Shore upon satisfaction of certain conditions pursuant to the respective precedent agreements.  These additional services are expected to be initiated in mid-to-late 2013.

As the Company expands its natural gas service to new areas, first through transmission service and distribution service to large industrial customers, its natural gas distribution operations continue to pursue additional opportunities to provide service to residential and other commercial and industrial customers in those areas.  In an effort to increase the availability of natural gas within the Company's Delaware service areas, the Company's Delaware natural gas distribution division filed an application with the Delaware PSC in June 2012 to add several natural gas expansion service offerings.  These offerings include a monthly fixed charge in lieu of upfront contributions from customers to extend the distribution system and optional service offerings to assist customers in the process of converting to natural gas.  The goal of these new offerings is to meet the energy needs of residents, communities and businesses throughout the Company's service territory, specifically in areas of southeastern Sussex County, where natural gas will now be available.

Additional information highlighting the major expansion initiatives is provided in the "Major Expansion Initiative Highlights (Unaudited)" table later in this release.

Acquisition
In June 2012, the Company entered into an agreement to purchase the operating assets of ESG for approximately $16.5 million.  These assets are currently used to provide propane distribution service to approximately 11,000 residential and commercial customers in Worcester County, Maryland, primarily through underground propane gas distribution systems.  The Company is evaluating the potential conversion of some of these underground propane distribution systems to natural gas where it is economical and feasible.  The Company filed an application for approval of the transaction by the Maryland PSC in August 2012.  The transaction, which is also subject to the receipt of consents of certain local jurisdictions to the assignment of certain franchise agreements and satisfaction of other closing conditions, is expected to be completed in 2013.  The Company expects to finance the acquisition using unsecured short-term debt.  The acquisition is expected to be accretive to earnings per share in 2013 and thereafter.

Investing in Growth 
To continue its growth, the Company is expanding its resources and capabilities.  The Company is in the early stages of several natural gas expansions on the Delmarva Peninsula.  These include expansions into Sussex County, Delaware, and Worcester and Cecil Counties in Maryland.  These expansions will require not only the construction or conversion of distribution facilities, but also the conversion of customers' appliances or equipment inside their homes.  The Company is currently in the process of reorganizing its Delmarva natural gas distribution operation and expects to increase its staffing to support these expansions.  Secondly, as a result of BravePoint's growth over the last several quarters, BravePoint is continuing to add staff.  During the quarter and nine months ended September 30, 2012, BravePoint's other operating expenses increased by $208,000 and $937,000, respectively, compared to the same periods in 2011, due primarily to the additional staff.  Finally, to increase the Company's capacity for future growth, resources will be added in several key functional areas, including, but not limited to, Human Resources, Communications and Strategic Business Development.  For the quarter and nine months ended September 30, 2012, the Company incurred $105,000 and $429,000, respectively, of acquisition-related costs and $292,000 and $314,000, respectively, associated with increased capacity for future growth.  The Company expects additional increases in costs associated with these key functional areas in the future.

Weather and Consumption

Although weather was not a significant factor in the second and third quarters, warmer temperatures during the first three months of the year, compared to temperatures in 2011, had a significant impact on the Company's earnings.  Lower customer energy consumption directly attributable to warmer temperatures in the nine months ended September 30, 2012, compared to temperatures in the same period in 2011, reduced gross margin by $4.0 million.  Temperatures on the Delmarva Peninsula in the first nine months of 2012 were 17 percent (501 heating degree-days) warmer than the same period in 2011 and 18 percent (524 heating degree-days) warmer than normal temperatures, based on the 10-year historic average of heating degree-days.  Temperatures in Florida in the first nine months of 2012 were 35 percent (187 heating degree-days) warmer than the same period in 2011 and 41 percent (240 heating degree-days) warmer than normal temperatures.  The Company estimates that this variance reduced gross margin for the first nine months of 2012 by approximately $3.9 million, compared to gross margin under normal temperatures.

Recovery of Acquisition Premium and Merger-related Costs

In January 2012, the Florida PSC issued an order approving the recovery of $34.2 million in acquisition adjustment and $2.2 million in merger-related costs in connection with the Company's acquisition of FPU in 2009.  The inclusion of the acquisition adjustment and merger-related costs in the Company's rate base and the recovery of these assets through amortization expense will increase the Company's earnings and cash flows above what it would have achieved absent the regulatory approval.  The acquisition adjustment and merger-related costs are amortized over 30 years and five years, respectively, beginning in November 2009.  Based upon the effective date and outcome of the order, the Company recorded the amortization as an expense beginning in 2012, which resulted in an increase in amortization expense of $589,000 and $1.8 million in the third quarter and first nine months of 2012, respectively.  The Company expects to record $2.4 million ($1.4 million, net of tax) in amortization expense in 2012 and 2013, $2.3 million ($1.4 million, net of tax) in 2014, and $1.8 million ($1.1 million, net of tax) annually thereafter until 2039.    

A more detailed discussion and analysis of the Company's results for each segment are provided in the following pages. 

Comparative Results for the Quarters Ended September 30, 2012 and 2011

Regulated Energy

Operating income for the regulated energy segment for the third quarter of 2012 was $7.8 million, an increase of $905,000, or 13 percent, compared to the same quarter in 2011.  An increase in gross margin of $2.3 million was partially offset by an increase in operating expenses of $1.4 million.  Items contributing to the quarter-over-quarter increase in gross margin are listed in the following table:  

Major Expansion Initiatives 
Major expansion initiatives in Sussex County, Delaware, Worcester County, Maryland, and Nassau County, Florida generated $1.0 million in additional gross margin in the third quarter of 2012.  In Sussex County, Delaware, the Company initiated both new transmission service by Eastern Shore and distribution service to two large industrial customers by the Delmarva natural gas distribution operation in Lewes, Delaware during the fourth quarter of 2011.  These services generated $234,000 and $91,000, respectively, of additional gross margin in the quarter.  The Company also began new transmission service by Eastern Shore and distribution service to two industrial facilities of an existing customer by the Delmarva natural gas distribution operation in the southeastern part of Sussex County, generating $111,000 and $19,000, respectively, of additional gross margin in the quarter.  The Worcester County, Maryland expansion generated $29,000 in additional transmission gross margin for Eastern Shore.  Eastern Shore expects to commence additional transmission service in Worcester County, Maryland by the end of the year.  The Nassau County, Florida expansion generated $529,000 in additional transmission gross margin for Peninsula Pipeline Company, Inc. ("Peninsula Pipeline").  Additional information highlighting the major expansion initiatives is provided in a table later in this release, "Major Expansion Initiative Highlights (Unaudited)."

The Florida natural gas distribution operation generated $352,000 of additional gross margin in the third quarter of 2012, compared to the same quarter in 2011, primarily as a result of growth in commercial and industrial customers. 

The Delmarva natural gas distribution operation generated $154,000 of additional gross margin in the third quarter of 2012, compared to the same quarter in 2011, due primarily to the addition of another 10 new large commercial and industrial customers since the beginning of 2011 and two-percent growth in residential customers. 

Increased Customer Consumption – Weather and Other 
An increase in customer consumption of natural gas due to weather and other factors generated $490,000 in additional gross margin primarily for the natural gas distribution operations.  This increase was partially offset by a decrease of $166,000 in electric customer consumption in Florida.

Eastern Shore Rate Case Settlement 
Eastern Shore generated $241,000 in additional gross margin as a result of new rates that became effective July 2011.  Eastern Shore did not record the additional margin from the base rate increase until November 2011, when the rate case settlement was finalized by Eastern Shore, the FERC Staff and other interested parties and submitted for approval.  The rate case settlement was approved without any modification by the FERC in January 2012.

Other New Services – Natural Gas Transmission 
Eastern Shore also generated additional gross margin of $213,000 in the third quarter of 2012, due primarily to a new transmission service agreement with an existing industrial customer for a one-year period from November 2011 to October 2012 for an additional 9,514 dekatherms per day ("Dts/d").  This additional service, which is the result of a system expansion, is expected to generate additional gross margin of $84,000 during the fourth quarter of 2012. 

Other operating expenses for the regulated energy segment increased by $1.4 million in the third quarter of 2012, compared to the same quarter in 2011, due largely to $589,000 in increased amortization expense associated with the recovery of the FPU acquisition adjustment and merger-related costs, $314,000 in increased costs associated with investing in growth and $249,000 in higher depreciation expense and asset removal costs associated with capital investments made during 2011 and early 2012. 

Unregulated Energy

The unregulated energy segment reported an operating loss of $709,000 in the third quarter of 2012, an improvement of $683,000, compared to the third quarter of 2011.  An increase in gross margin of $1.1 million, partially offset by an increase in operating expenses of $444,000, resulted in improved operating results. Items contributing to the quarter-over-quarter increase in gross margin are listed in the following table:

Increase in Retail Margins per Gallon 
Sustained retail pricing in Florida in response to local market conditions and lower average propane inventory cost increased retail margins per gallon and generated additional gross margin of $524,000.  Offsetting this increase was a slight decline in retail margins per gallon on the Delmarva Peninsula.

Propane Wholesale Marketing 
Xeron generated an increase in gross margin of $481,000 in the third quarter of 2012, compared to the same quarter in 2011, as a result of higher margins in its trading activity.  Xeron executed trades with higher margins during the third quarter of 2012 as the market presented opportunities resulting from the market fluctuation in wholesale propane prices. 

Natural Gas Marketing 
Gross margin from Peninsula Energy Services Company, Inc. ("PESCO"), the Company's natural gas marketing subsidiary decreased by $28,000 during the third quarter of 2012, compared to the same quarter in 2011.  Additional gross margin generated by new customers and contracts was fully offset by a quarter-over-quarter decrease in imbalance resolutions.

Other operating expenses for the unregulated energy segment increased by $444,000 in the third quarter of 2012, compared to the same quarter in 2011.  This increase was due largely to increased payroll and benefits costs in the Florida propane operation, resulting from resources added to serve new territories, and increased costs associated with investing in growth. 

Other  
Operating income for the other segment for the quarter ended September 30, 2012 was $425,000, an increase of $382,000, compared to the same quarter in 2011.  The increase in operating income was attributable to higher operating income from BravePoint. 

BravePoint, which reported operating income of $312,000 in the third quarter of 2012, compared to an operating loss of $74,000 for the same quarter in 2011, generated increased gross margin of $594,000, $188,000 of which represents increased margin from ProfitZoom™ and Application Evolution™ sales and related services.  The remaining increase was generated from higher consulting revenues and other product sales.  This increase in gross margin was partially offset by $208,000 of increased operating expenses as a result of resources added to support these services.

BravePoint continues to market its new products, ProfitZoom™ and Application Evolution™.  BravePoint generated $324,000 and $900,000 in revenue from the sale of these two products and related services during the third quarter and first nine months of 2012, respectively.  To date, BravePoint has successfully implemented or is currently implementing ProfitZoom™ for eight customers in the fire suppression industry.  Application Evolution™, which is a component of ProfitZoom™, is being marketed to customers both in the fire suppression industry and other unrelated businesses.  Nine customers are currently utilizing this product.  These ProfitZoom™ and Application Evolution™ contracts are expected to generate approximately $1.0 million in additional revenue over the next 12 months.  Additional sales proposals are under consideration by both existing and potential new customers.  

Interest Expense

Total interest expense for the quarter ended September 30, 2012 decreased by approximately $263,000, or 11 percent, compared to the same quarter in 2011.  The decrease in interest expense is attributable primarily to decreases of $168,000 in other long-term interest expense due to scheduled repayments reducing the outstanding principal balance and $141,000 in interest on deposits from FPU's customers due to a lower interest rate applied to those deposits.  Partially offsetting this decrease was an increase of $46,000 in short-term interest expense due to slightly increased short-term borrowings and rates in 2012 compared to the same quarter in 2011.

Comparative Results for the Nine Months Ended September 30, 2012 and 2011

Regulated Energy

Operating income for the regulated energy segment for the nine months ended September 30, 2012 was $33.2 million, an increase of $2.2 million, or seven percent, compared to the same period in 2011.  An increase in gross margin of $4.8 million was partially offset by an increase in operating expenses of $2.6 million.  Items contributing to the period-over-period increase in gross margin are listed in the following table:          

Major Expansion Initiatives 
Major expansion initiatives in Sussex County, Delaware, Worcester County, Maryland, and Nassau County, Florida generated $2.4 million in additional gross margin in the first nine months of 2012.  In Sussex County, Delaware, the Company initiated both new transmission service by Eastern Shore and distribution service to two large industrial customers by the Delmarva natural gas distribution operation in Lewes, Delaware during the fourth quarter of 2011.  These services generated $701,000 and $357,000, respectively, of additional gross margin in the period.  The Company also began new transmission service by Eastern Shore and distribution service to two industrial facilities of an existing customer by the Delmarva natural gas distribution operation in the southeastern part of Sussex County, generated $223,000 and $39,000, respectively, of additional gross margin in the period.  The Worcester County, Maryland expansion generated $39,000 in additional transmission gross margin for Eastern Shore.  Eastern Shore expects to commence additional transmission service in Worcester County, Maryland by the end of the year. The Nassau County, Florida expansion generated $1.1 million in additional transmission gross margin for Peninsula Pipeline.  Additional information highlighting the major expansion initiatives is provided in a table later in this release, "Major Expansion Initiative Highlights (Unaudited)."

Other Customer Growth – Natural Gas Distribution
The Delmarva natural gas distribution operation generated $760,000 of additional gross margin in the first nine months of 2012, compared to the same period in 2011.  Gross margin from commercial and industrial customers for the Delmarva natural gas distribution operation increased by $468,000 in the first nine months of 2012, due primarily to the addition of another 10 new large commercial and industrial customers since the beginning of 2011.  A two-percent growth in residential customers generated an additional $291,000 in gross margin for the Delmarva natural gas distribution operation.

The Florida natural gas distribution operation generated $686,000 of additional gross margin in the first nine months of 2012, compared to the same period in 2011, primarily as a result of growth in commercial and industrial customers. 

Other New Services – Natural Gas Transmission
Eastern Shore generated additional gross margin of $762,000 in the first nine months of 2012, due primarily to two new transmission service agreements with an existing industrial customer; one for the period from May 2011 to April 2021 for an additional 3,405 Dts/d and the second for a one-year period from November 2011 to October 2012 for an additional 9,514 Dts/d.  These new services generated $117,000 and $758,000, respectively, of additional gross margin in the first nine months of 2012.  The service associated with the one-year transmission service agreement is expected to generate additional gross margin of $84,000 during the fourth quarter of 2012.  The increases from new services were partially offset by a decrease of $173,000 from transmission service contracts, which expired in November 2011 and April 2012.

Eastern Shore Rate Case Settlement
Eastern Shore generated $729,000 in additional gross margin as a result of new rates that became effective July 2011. Eastern Shore did not record the additional margin from the base rate increase until November 2011, when the rate case settlement was finalized by Eastern Shore, the FERC Staff and other interested parties and submitted for approval.  The rate case settlement was approved without any modification by the FERC in January 2012.

Decreased Customer Consumption – Weather and Other
Customer consumption of natural gas and electricity decreased, both on the Delmarva Peninsula and in Florida during the first nine months of 2012, compared to the same period in 2011.  Consumption of energy is normally highest during the first and fourth quarters due to colder temperatures; however, the first quarter of 2012 was the warmest first quarter in the past 10 years.  The Company estimates that significantly warmer weather in 2012, primarily during the first three months of 2012, resulted in a period-over-period decrease of approximately $1.2 million in gross margin, most of which occurred during the first three months of the year.  Measured against normal heating degree-days (10-year historical average) in 2012, the Company estimates that weather reduced gross margin of the regulated energy segment by approximately $1.2 million in the first nine months of 2012.  This decrease was partially offset by other volume increases, primarily in Florida.

Other operating expenses for the regulated energy segment increased by $2.6 million for the first nine months of 2012 due largely to: (a) $1.8 million in increased amortization expense associated with the recovery of the FPU acquisition adjustment and merger-related costs, (b) $725,000 in higher depreciation expense and asset removal costs associated with capital investments, (c) $587,000 in increased costs associated with investing in growth; (d) $334,000 in higher legal costs associated with an electric franchise dispute; and (e) $255,000 in increased costs related to pipeline integrity requirements. These increases in expense were partially offset by one-time charges totaling $836,000 in the first nine months of 2011 as a result of the voluntary workforce reduction in Florida and pension settlements, and $780,000 in reduced payroll and benefits, primarily in Florida because of the reduction in the workforce in 2011. 

Operating income for the unregulated energy segment for the nine months ended September 30, 2012 was $4.0 million, representing a decrease of $3.2 million, or 44 percent, compared to the same period in 2011.  A decrease in gross margin of $3.3 million, slightly offset by a decrease in operating expenses of $28,000, resulted in decreased operating income. Items contributing to the period-over-period decrease in gross margin are listed in the following table:

Decreased Customer Consumption – Weather and Other 
Significantly warmer weather resulted in decreased gross margin of $2.8 million during the first nine months of 2012, compared to the same period in 2011.  Additionally, propane sales to bulk-delivery customers declined beyond the estimated weather impact due to the timing of deliveries, conservation and other factors, which further reduced gross margin by $951,000. 

These decreases were partially offset by $244,000 in additional gross margin generated from 1,180 customers acquired in late 2011 and early 2012, following the purchase of the operating assets of several small propane distribution companies in Florida.

Increase in Retail Margins per Gallon
Higher retail margins per gallon in the Florida propane distribution operation generated $1.6 million in additional gross margin.  Sustained retail pricing in response to local market conditions and lower average propane inventory costs contributed to the higher retail margins per gallon. 

Gross margin for the Delmarva propane distribution operation decreased by $299,000 due to lower retail margins per gallon during the first nine months of 2012, compared to the same period in 2011.  This decrease was attributable to a significant decline in wholesale propane prices during the first half of 2012, which resulted in a write-down of $465,000 in the inventory value for the Delmarva propane distribution operation. 

Gain from Litigation Settlement – Recorded in 2011
A non-recurring gain of $575,000 was recorded in 2011 related to the Company's share of proceeds received from an antitrust litigation settlement with a major propane supplier and is reflected as a period-over-period decrease in gross margin.

Other 
Lower gross margin of $214,000 from merchandise sales in Florida, as the Company transitions from a merchandise goods business to a services business, contributed to this decrease.

Propane Wholesale Marketing
Xeron's gross margin increased by $231,000 in the first nine months of 2012, compared to the same period in 2011, as a result of higher margins from its trading activity.  Xeron executed trades with higher margins in 2012 as the market presented opportunities resulting from market fluctuations in wholesale propane prices.

Natural Gas Marketing 
Gross margin from PESCO decreased by $185,000 during the first nine months of 2012, compared to the same period in 2011.  PESCO's gross margin in the first nine months of 2011 benefited from unusually large favorable imbalance resolutions with third-party intrastate pipelines, with which PESCO contracts for supply.  Imbalance resolutions are not predictable and, therefore, are not included in our long-term financial plans or forecasts.  Lower gross margin from imbalance resolutions was partially offset by additional gross margin generated by new customers and contracts.

Other operating expenses for the unregulated energy segment were $20.6 million for the first nine months of 2012, which is consistent with the same period in 2011.

Other 
Operating income for the other segment for the nine months ended September 30, 2012 was $897,000, an increase of $928,000 from an operating loss of $31,000 for the same period in 2011.  The increase in operating income was attributable to higher operating income from BravePoint. 

BravePoint, which reported operating income of $557,000 in the first nine months of 2012, compared to an operating loss of $356,000 in the same period in 2011, generated increased gross margin of $1.9 million, $464,000 of which represents increased margin from ProfitZoom™ and Application Evolution™ sales and related services.  The remaining increase was generated from higher consulting revenues and other product sales.  This increase in gross margin was partially offset by $937,000 of increased operating expenses as a result of resources added to support these services. 

Interest Expense

Total interest expense for the nine months ended September 30, 2012 remained unchanged from the same period in 2011.  An increase in long-term interest expense of $294,000, which includes interest related to the $29 million long-term debt issuance in June 2011, was offset by decreases of $139,000 in short-term interest expense and $152,000 in interest on deposits from FPU's customers.  These decreases were a result of lower short-term borrowings and a lower interest rate applied to those deposits.

SOURCE Chesapeake Utilities Corporation