Chesapeake Utilities Corporation Reports Eighth Consecutive Year Of Record Earnings

DOVER, Del., March 5, 2015 /PRNewswire/ --  

• Earnings per share increased by 9.3 percent to $2.47 per share
• Net income increased by $3.3 million to $36.1 million
• Growth in the natural gas businesses generated $8.3 million in additional gross margin
• Acquisitions completed in 2013 generated $2.4 million in additional operating income
• Colder temperatures added $2.8 million to gross margin

Chesapeake Utilities Corporation (NYSE: CPK) today announced financial results for both the year and the fourth quarter ended December 31, 2014.  The Company's net income for the year ended December 31, 2014 was $36.1 million, or $2.47 per share, which represents an increase of $3.3 million, or $0.21 per share, compared to 2013.  Included in the Company's 2014 results were two non-recurring items -- an after-tax gain of $4.0 million from the sale of BravePoint, Inc. ("BravePoint"), the Company's advanced information services subsidiary, and a non-cash, after-tax impairment charge of $3.9 million related to uncertainty around the implementation of a customer billing system. Both of these items were recorded in the fourth quarter of 2014. 

For the fourth quarter of 2014, the Company reported net income of $10.1 million, or $0.69 per share.  This represents an increase of $414,000, or $0.02 per share, compared to the same quarter in 2013. 

"In 2014, our Company generated record earnings for the eighth consecutive year," stated Michael P. McMasters, President and Chief Executive Officer of Chesapeake Utilities Corporation.  "Thanks to our employees' continued efforts to transform opportunities into profitable growth, we achieved top quartile performance in 16 of 20 financial benchmarks compared to our peers.  We also met key 2014 objectives in our strategic plan and advanced several projects described in this release, such as Eight Flags Energy's combined heat and power plant ("CHP") to provide new services in Nassau County, Florida and our interstate pipeline's development of new services on the Delmarva Peninsula."

"We are starting 2015 strong as well," continued Mr. McMasters.  "In February 2015, we announced the acquisition of Gatherco, Inc. ("Gatherco"), a natural gas infrastructure company providing midstream services in Eastern Ohio.  We expect to close this transaction in the second quarter of 2015, and believe that in addition to being accretive during its first full year of operation, this acquisition and our subsequent capital investments will generate increased earnings growth."

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

Operating Results for the Years Ended December 31, 2014 and 2013

The Company reported operating income of $62.3 million for 2014, compared to $62.7 million in 2013.  During 2014, the Company recorded a non-cash, pre-tax impairment charge of $6.5 million related to uncertainty around the implementation of a customer billing system.  The impairment charge recorded represents all of the capitalized costs associated with this project.  The Company is considering several options to recover these costs, but the outcome of such efforts cannot be predicted at this time.  The Company also recorded a non-cash, pre-tax impairment charge of $412,000 related to the assessment of goodwill and intangible assets associated with the 2013 acquisition of certain assets by Austin Cox Home Services, Inc. ("Austin Cox").  Both of these impairment charges decreased the Company's operating income for the year.  

Excluding the impact of the impairment charges, the Company's operating income increased by $6.4 million in 2014, compared to 2013, as the Regulated Energy and Unregulated Energy segments generated $22.6 million in higher gross margin, which was partially offset by an increase of $14.8 million in other operating expenses.  Additional details on key variances in gross margin and other operating expenses are provided in the Financial Summary Highlights section later in this release.

Regulated Energy

Operating income for the Regulated Energy segment increased by $367,000 to $50.5 million for 2014, compared to 2013.  The increase in gross margin of $20.1 million was partially offset by the $6.4 million asset impairment charge in 2014 associated with uncertainty around the implementation of a customer billing system and an increase in other operating expenses of $13.3 million. Excluding the impairment charge, operating income increased by $6.8 million.  The significant components of the gross margin increase included:

• $5.5 million from Sandpiper Energy, Inc. ("Sandpiper") due to the inclusion of a full year of operations in 2014 (the acquisition of the operating assets of Eastern Shore Gas Company and its affiliates ("ESG") by Sandpiper occurred in late May 2013);
• $5.6 million due to natural gas service expansions initiated in 2013 and 2014;
• $2.9 million generated by the Florida Gas Reliability Infrastructure Program ("GRIP");
• $2.7 million in other growth in natural gas distribution and transmission services;
• $1.3 million generated by the FPU electric distribution operation as a result of a base rate increase; and
• $1.1 million from increased energy consumption, due primarily to colder temperatures in 2014, compared to the prior year. 

The increase in other operating expenses, excluding impairment charges, was due primarily to: (a) $3.3 million in higher payroll and benefits costs to support growth, and a change in vacation policy in 2013; (b) $2.5 million in other operating expenses associated with Sandpiper's operations; (c) $2.6 million in higher depreciation, amortization, asset removal costs and property taxes associated with capital investments to support growth and maintain system integrity; (d) $2.2 million in higher costs associated with facilities maintenance and service contractors; (e) the absence in 2014 of a one-time credit of $1.5 million in 2013 associated with the City of Marianna litigation cost recovery; and (f) $1.0 million of increased accruals for incentive bonuses as a result of strong financial performance.  These increases in other operating expenses were partially offset by the non-recurrence of a sales tax expense of $726,000 in 2013 recorded in conjunction with the ESG acquisition.

Unregulated Energy

Operating income for the Unregulated Energy segment was $11.7 million, a decrease of $630,000 compared to 2013.  An increase in gross margin of $2.5 million was more than offset by $432,000 in asset impairment charges for goodwill and intangible assets related to the 2013 acquisition by Austin Cox and an increase in other operating expenses of $2.7 million.  The significant components of the gross margin increase included: (a) $1.7 million in higher propane sales, compared to the prior year, due primarily to higher consumption caused by colder temperatures and (b) $1.4 million generated by an increase in wholesale propane sales due primarily to a supply agreement entered into in May 2013 in conjunction with an acquisition.  These increases were partially offset by $356,000 in lower retail propane margins due primarily to a decline in retail margins on the Delmarva Peninsula. 

The increase in other operating expenses, excluding impairment charges, was due primarily to: (a) $1.9 million in higher payroll and benefits costs due to increased seasonal overtime and additional resources to support growth; (b) $897,000 in additional expenses associated with serving newly acquired customers; and (c) $540,000 in higher costs associated with facilities maintenance.  These increases were partially offset by the non-recurrence of an accrual of $990,000 in 2013 related to taxes other than income.  

Other

The "Other" segment, reported operating income of $105,000 for 2014, compared to $297,000 in 2013.  The decrease in operating income is due to BravePoint's lower operating results prior to the sale on October 1, 2014.  The sale of BravePoint produced a pre-tax gain of $6.7 million, which has been reflected as non-operating income.

Operating Results for the Quarters Ended December 31, 2014 and 2013

The Company's operating income for the quarter ended December 31, 2014 was $12.4 million, a decrease of $5.9 million, compared to the same quarter in 2013. The decrease in operating income is due primarily to the aforementioned two non-cash, pre-tax asset impairment charges totaling $6.9 million recorded in other operating expenses in the fourth quarter of 2014. Additional details on key variances in gross margin and other operating expenses are provided in the Financial Summary Highlights section later in this release.

Regulated Energy

Operating income for the Regulated Energy segment decreased by $4.5 million to $9.4 million for the fourth quarter of 2014, compared to the same quarter in 2013. An increase in gross margin of $5.1 million was more than offset by the $6.4 million asset impairment charge and an increase of $3.1 million in other operating expenses. Excluding the impairment charge, operating income increased by $2.0 million quarter-over-quarter.  The significant components of the gross margin increase included:

• $1.4 million due to natural gas service expansions;
• $933,000 in other growth in natural gas distribution and transmission services;
• $922,000 generated by the FPU electric distribution operation as a result of a base rate increase;
• $882,000 generated by the Florida GRIP; and
• $441,000 in increased consumption by natural gas customers, due primarily to colder temperatures in Florida during the quarter, compared to the same quarter in 2013.

The increase in other operating expenses, excluding impairment charges, was due primarily to: (a) $1.1 million in higher costs associated with facilities maintenance and service contractors; (b) $922,000 in higher payroll costs to support growth; (c) $656,000 in transaction costs allocated to this segment; (d) $145,000 in increased accruals for incentive bonuses as a result of strong financial performance; and (e) $403,000 in higher depreciation expense, amortization, asset removal and property tax costs associated with capital investments to support growth and maintain system integrity.  These increases were partially offset by $431,000 in lower benefits costs due primarily to lower health benefits claims during the fourth quarter of 2014.

Unregulated Energy

Operating income for the Unregulated Energy segment for the fourth quarter of 2014 was $2.9 million, a decrease of $1.5 million compared to operating income for the same quarter in 2013.  Gross margin decreased by $1.0 million due primarily to $437,000 in lower profit from Xeron, Inc. ("Xeron"), the Company's propane wholesale marketing subsidiary, as a result of low volatility in wholesale propane prices during the quarter, and $325,000 in lower retail propane margins per gallon in the Company's propane distribution businesses.  Other operating expenses increased by $458,000, due primarily to $432,000 in asset impairment charges related to the Austin Cox acquisition recorded in the current quarter.

Other

The "Other" segment, reported operating income of $81,000 for the fourth quarter of 2014, as compared to $56,000 in the same quarter in 2013.  As a result of the sale of BravePoint on October 1, 2014, the other segment no longer includes results from BravePoint.

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 Annual Report on Form 10-K for further information on the risks and uncertainties related to the Company's forward-looking statements.

The discussions of the results use the term "gross margin," a non-Generally Accepted Accounting Principles ("GAAP") financial measure, which management uses to evaluate the performance of the Company's business segments. For an explanation of the calculation of "gross margin," see the footnote to the Financial Summary.

Shares and per share amounts for all periods presented reflect the three-for-two stock split declared on July 2, 2014, which was effected in the form of a stock dividend, and distributed on September 8, 2014.  Unless otherwise noted, earnings per share information is presented on a diluted basis.

Conference Call

Chesapeake Utilities Corporation will host a conference call on March 6, 2015 at 10:30 a.m. Eastern Time to discuss the Company's financial results for the quarter and year ended December 31, 2014. To participate in this call, dial 866.821.5457 and reference Chesapeake Utilities Corporation's 2014 Financial Results Conference Call. To access the replay recording of this call, please visit the Company's website at http://investor.chpk.com/results.cfm or download the replay on your mobile device by accessing the Audiocast section of the Company's IR App.

About Chesapeake Utilities Corporation

Chesapeake Utilities Corporation is a diversified energy company engaged in natural gas distribution, transmission and marketing, electricity distribution, propane gas distribution and wholesale marketing, 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 following information highlights certain key factors contributing to the Company's results for the quarter and year ended December 31, 2014:

Major Projects

Acquisition
In May 2013, the Company completed the purchase of the operating assets of ESG.  Approximately 11,000 residential and commercial underground propane distribution system customers acquired in this transaction are now being served by Sandpiper under the tariff approved by the Maryland Public Service Commission ("PSC"). The Company has begun to convert some of the former ESG customers to natural gas distribution service and is evaluating the potential conversion of others.  This acquisition was accretive to earnings per share in the first full year of operations, generating $0.20 in additional earnings per share to the Company.  The Company generated $5.5 million in additional gross margin from Sandpiper for the year ended December 31, 2014 and incurred $2.5 million in additional other operating expenses for the same period. Additionally, in the second quarter of 2013, the Company recorded $726,000 in a one-time sales tax expense associated with the acquisition of ESG.

Service Expansions
During 2013, Eastern Shore, the Company's interstate pipeline subsidiary, commenced new natural gas transmission services to local distribution utilities and industrial customers in Delaware and Maryland. These new services generated additional gross margin of $2.7 million and $288,000 for the year and three months ended December 31, 2014, respectively, compared to the same periods in 2013.

On October 1, 2014, Eastern Shore commenced a new lateral service to an industrial customer facility in Kent County, Delaware.  This service commenced after construction of new facilities, including approximately 5.5 miles of pipeline lateral and metering facilities, extending from Eastern Shore's mainline to the new industrial customer facility. This new service, which generated $463,000 of gross margin for the year and three months ended December 31, 2014, is expected to generate $1.8 million of gross margin in 2015 and annual gross margin of approximately $1.2 million to $1.8 million during the 37-year service period.

During 2014, Eastern Shore executed a one-year contract with another industrial customer in New Castle County, Delaware to provide 50,000 dekatherms per day ("Dts/d") of additional transmission service from April 2014 to April 2015, which was subsequently amended to provide 55,580 Dts/d of service to August 2017.  This contract generated gross margin of $1.9 million and $657,000 for the year and three months ended December 31, 2014, and is expected to generate $2.2 million of gross margin in 2015.

In August 2013, Peninsula Pipeline Company, Inc., the Company's intrastate natural gas transmission subsidiary, commenced a new firm transportation service in Indian River County, Florida for an unaffiliated utility. This new service generated $490,000 of additional gross margin for the year ended December 31, 2014, compared to 2013.

Other Natural Gas Growth
In addition to these service expansions, the natural gas distribution operations on the Delmarva Peninsula and in Florida generated $2.8 million and $808,000 in additional gross margin in the year  and three months ended December 31, 2014, respectively, compared to the same periods in 2013, due to increases in the number of residential, commercial and industrial customers served. These increases are due primarily to a three-percent increase in residential customers on the Delmarva Peninsula, excluding customers added as a part of the Sandpiper acquisition, and an increase in commercial and industrial customers in Florida.

Future Service Expansion Initiatives
Eight Flags, one of the Company's unregulated energy subsidiaries, is engaged in the development and construction of a CHP plant in Nassau County, Florida.  This CHP plant, which will consist of a natural-gas-fired turbine and associated electric generator, is designed to generate approximately 20 megawatts of base load power and will include a heat recovery system generator capable of providing approximately 75,000 pounds per hour of unfired steam.  Eight Flags will sell the power generated from the CHP plant to FPU for distribution to its retail electric customers pursuant to a 20-year power purchase agreement. It will also sell the steam to an industrial customer pursuant to a separate 20-year contract.  FPU will transport natural gas through its distribution system to Eight Flags' CHP plant, which will produce power and steam. On a consolidated basis, this project is expected to generate approximately $7.3 million in annual gross margin, which could fluctuate based upon various factors, including, but not limited to, the quantity of steam delivered and the CHP plant's hours of operations.  Construction of the CHP plant and associated transactions are subject to various conditions, including obtaining necessary governmental approvals, environmental and regulatory permits and completion and execution of various agreements. If all conditions are satisfied, construction of the CHP plant is currently scheduled to commence in early 2015 with commercial operation expected to commence in July 2016.

In December 2014, Eastern Shore entered into a precedent agreement with an industrial customer in Kent County, Delaware, whereby the customer is committed to enter into a 20-year natural gas transmission service for 45,000 Dts/d for its new facility, upon the satisfaction of certain conditions.  This new service will be provided as Off Peak ≤90 Firm Transportation ("OPT") service and is expected to generate at least $5.8 million of annual gross margin.  In November 2014, Eastern Shore requested Federal Energy Regulatory Commission ("FERC") authorization to construct 7.2 miles of 16-inch pipeline looping and 3,550 horsepower of new compression in Delaware, which are estimated to cost approximately $30 million, to provide this new service.  Eastern Shore anticipates receiving FERC's authorization in 2015, with the service targeted to commence in the fourth quarter of 2015, following construction of the new facilities.

GRIP
In August 2012, the Florida PSC approved the GRIP, which is designed to recover capital and other program-related-costs, inclusive of a return on investment, related to the replacement of older pipes in the Company's Florida service territories. The Company received approval to invest $75.0 million to replace qualifying distribution mains and services (any material other than coated steel or plastic). Since the program's inception in August 2012, the Company has invested $42.8 million, $24.3 million of which was invested during 2014. These investments generated additional gross margin of $2.9 million and $882,000 for the year and three months ended December 31, 2014, respectively, compared to the same periods in 2013. The Company expects to invest an additional $20.0 million through the GRIP in 2015.

Investing in Growth
The Company has continued to expand its resources and capabilities to support growth. The Company's Delmarva natural gas distribution operation has initiated natural gas distribution expansions in Sussex County, Delaware, and Worcester and Cecil Counties in Maryland, which require the construction and conversion of distribution facilities, as well as the conversion of residential customers' appliances and equipment. To support this growth as well as future expansions, our Delmarva natural gas distribution operation has increased staffing. Resources have also been added in the Company's corporate shared services departments to increase the Company's overall capabilities to support sustained future growth. The additional staffing to support growth increased payroll expenses of the Company's Regulated Energy segment by $2.0 million and $480,000 for the year and three months ended December 31, 2014, respectively, compared to the same periods in 2013.  The Company expects to make additional investments in personnel, as needed, to further develop our capability to capitalize on future growth opportunities. 

Weather and Consumption

Temperatures on the Delmarva Peninsula and in Florida during 2014 were colder than 2013, which positively affected the Company's results in 2014. Temperatures in Florida during the fourth quarter of 2014 were colder than 2013, while temperatures on the Delmarva Peninsula did not have a significant variance from the same quarter in 2013. The following tables highlight the heating degree-day ("HDD") and cooling degree-day ("CDD") information for the quarters and years ended December 31, 2014 and 2013 and the gross margin variance resulting from weather fluctuations in those periods.

Propane Prices

During 2014, lower retail propane margins on the Delmarva Peninsula decreased gross margin by $2.3 million compared to 2013.  A significant increase in wholesale prices in late 2013 and early 2014 increased the Delmarva average propane inventory cost in 2014.  Retail propane margins on the Delmarva Peninsula reverted to more normal levels during the first three quarters of 2014, compared to unusually high margins experienced in 2013. In addition, a rapid decline in wholesale prices in late 2014 resulted in lower margins as the Company recorded a lower-of-cost-or-market propane inventory valuation adjustment.  The Company discontinued hedge accounting on swap agreements to recognize the expected losses of those hedges in current year's earnings. Both the propane inventory valuation adjustment and discontinuation of hedge accounting were designed to reflect the value of the Company's inventory and future purchase commitments at the current market value at year-end in order to avoid any expected losses in future periods.  For the three months ended December 31, 2014, retail propane margins on the Delmarva Peninsula decreased by $1.4 million, compared to the same quarter in 2013, due primarily to these two adjustments.

Retail propane margins in Florida continued to increase during 2014 as local market conditions enabled the Florida propane distribution operation to maintain strong margins on its sales despite volatility in propane supply costs.  Higher retail propane margins in Florida generated $1.9 million and $792,000 of additional gross margin for the year and three months ended December 31, 2014, compared to the same periods in 2013.

Wholesale propane sales increased, generating additional gross margin of $1.4 million for the year ended December 31, 2014, compared to 2013, due primarily to sales to an affiliate of ESG. Wholesale propane sales did not result in a significant variance for the fourth quarter.

The trading profit from Xeron, which benefits from wholesale price volatility by entering into trading transactions, remained unchanged in 2014, compared to 2013.  Xeron reported higher trading profit in early 2014, as a result of higher wholesale price volatility during the winter heating season, which increased trading activity and generated higher profits on executed trades.  This was offset by lower profit during the second half of 2014 as a result of less price volatility. For the three months ended December 31, 2014, Xeron's trading profit decreased by $437,000, compared to the same quarter in 2013 due to this decline in volatility.

Florida Electric Rate Case

On September 15, 2014, the Florida PSC approved a settlement agreement between FPU and the Florida Office of Public Counsel in FPU's base rate case filing, which provides, among other things, an increase in FPU's annual revenue requirement of $3.75 million and a rate of common equity return of 10.25 percent for FPU's electric distribution operation. The new rates are effective for all meter readings on or after November 1, 2014.  Previously, the Florida PSC approved interim rate relief, effective for meter readings on or after August 10, 2014.  The higher base rates in FPU's electric operation generated $1.3 million and $922,000 of additional gross margin for the year and three months ended December 31, 2014, respectively.

Other Developments

On October 1, 2014, the Company completed the sale of BravePoint for approximately $12.0 million in cash.  The Company recorded a pre-tax gain of approximately $6.7 million ($4.0 million after-tax) from this sale in the fourth quarter of 2014.  The Company plans to reinvest the proceeds from this sale in its regulated and unregulated energy businesses. 

At December 31, 2014, the Company recorded a non-cash, pre-tax impairment charge of $6.5 million related to uncertainty around the implementation of a customer billing system.  This impairment charge represents the entire amount of the capitalized costs associated with this project. The Company is engaged in negotiations with the system vendor regarding the implementation, and is considering several options to recover these costs including regulatory proceedings.  The outcome cannot be predicted at this time. The Company will record a gain contingency if and when any recovery from the vendor is realizable or establish a regulatory asset when future recovery through rates is probable.  The Company also recorded non-cash pre-tax impairment charges of $412,000 related to the impairment of goodwill and intangible assets associated with the 2013 acquisition by Austin Cox.

Subsequent Event

On January 30, 2015, the Company entered into a merger agreement to acquire Gatherco.  Upon consummation of the transaction, Gatherco will merge into Aspire Energy of Ohio, LLC, a newly formed, wholly-owned subsidiary of Chesapeake.  At closing, the Company expects to issue 593,005 shares of its common stock, valued at $29.9 million, pay $27.6 million in cash and assume Gatherco's debt estimated to be $1.7 million.  The Company expects to pay off this debt shortly after closing.  Gatherco is a natural gas infrastructure company providing natural gas midstream services. Gatherco's assets include 16 gathering systems and over 2,000 miles of pipelines in Central and Eastern Ohio. Gatherco provides natural gas gathering services and natural gas liquid processing services to over 300 producers and supplies natural gas to over 6,000 customers in Ohio through the Consumers Gas Cooperative, an independent entity which Gatherco manages under an operating agreement.  The transaction is subject to approval by Gatherco's shareholders and is expected to close in the second quarter of 2015.

SOURCE Chesapeake Utilities Corporation

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