Exhibit 99.1
FOR IMMEDIATE RELEASE
August 9, 2013
NYSE Symbol: CPK
CHESAPEAKE UTILITIES CORPORATION REPORTS
SECOND QUARTER PERFORMANCE
• | Net income of $4.4 million or $0.45 per share |
• | Higher retail propane margins per gallon generated $1.2 million in additional gross margin |
• | Growth from the natural gas businesses generated $1.1 million in additional gross margin |
Dover, Delaware — Chesapeake Utilities Corporation (NYSE: CPK) today reported second quarter financial results. The Company's net income for the quarter ended June 30, 2013 was $4.4 million, or $0.45 per share. This represents a decrease of $704,000, or $0.07 per share, compared to the same quarter in 2012.
For the six months ended June 30, 2013, the Company reported net income of $19.2 million, or $1.99 per share. This represents an increase of $3.4 million or $0.36 per share, compared to the same period in 2012.
The decrease in net income in the second quarter of 2013, compared to the same quarter in 2012, was due primarily to the impact of two non-recurring adjustments: (a) a one-time sales tax expense of $759,000 related to the acquisition of assets in Maryland, as further explained in the Financial Summary Highlights section, and (b) a non-recurring increase in gross margin of $568,000 in the second quarter of 2012, related to prior period accrued revenues. Absent these non-recurring adjustments, net income for the current quarter would have increased by $99,000 compared to the same period in 2012.
“Our financial results for the second quarter reflect both continued growth and continued investment in our businesses," stated Michael P. McMasters, President and Chief Executive Officer of Chesapeake Utilities Corporation. "In 2012, we extended natural gas transmission service to Worcester County, Maryland, and in May 2013, we completed the purchase of the operating assets of Eastern Shore Gas Company ("ESG") and its affiliates in Maryland. Through our new wholly-owned subsidiary, Sandpiper Energy, Inc. ("Sandpiper"), we began serving approximately 11,000 residential and commercial underground propane system customers acquired in this transaction using new tariff rates approved by the Maryland Public Service Commission," Mr. McMasters noted.
"In May 2013, Eastern Shore Natural Gas Company ("Eastern Shore"), our interstate pipeline subsidiary, commenced new services to a Dover electric generation plant owned by NRG Energy Center Dover LLC ("NRG") and additional services to the PBF Energy Inc. ("PBF Energy") refinery in Delaware City. Additionally, although there is no financial impact in the current quarterly results, in June 2013, Eastern Shore filed an application with the Federal Energy Regulatory Commission ("FERC") seeking approval to construct a pipeline lateral to the electric generation plant owned by Calpine Energy Services, L.P. ("Calpine") and currently under construction in Dover. Our second quarter's results include additional gross margin generated from recent investments we have made to grow our business as well as increased costs associated with strengthening various corporate functions that support our continued growth. We are continuing to identify future opportunities like those described previously and believe these investments in corporate resources are important to further develop our capability to capitalize on future growth opportunities both within and beyond our existing footprint. We expect to incur additional costs as we continue to expand this capability," Mr. McMasters added.
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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 June 30, 2013 and 2012
The Company’s operating income for the three months ended June 30, 2013 was $9.2 million, a decrease of $1.3 million, compared to the same quarter in 2012. Gross margin increased by $2.7 million in the second quarter of 2013, compared to the same quarter in 2012. The quarter-over-quarter increase in gross margin was negatively impacted by a non-recurring increase of $568,000 in the second quarter of 2012 related to prior period accrued revenues. Other operating expenses increased by $4.0 million in the second quarter of 2013, compared to the same quarter in 2012. Included in other operating expenses in the second quarter of 2013 was a one-time sales tax expense of $759,000 related to the purchase of the operating assets of ESG.
Regulated Energy
Operating income for the regulated energy segment decreased by $1.9 million to $8.6 million for the quarter ended June 30, 2013, compared to the same quarter in 2012. An increase in gross margin of $981,000 was offset by an increase of $2.9 million in other operating expenses. The significant components of the gross margin increase included:
• | $1.1 million of increased gross margin due to natural gas growth from: (a) major service expansions initiated in 2012 and 2013, including $474,000 in additional gross margin generated from the new and additional transmission services commenced in May 2013 to the NRG Dover electric generation plant and the PBF Energy refinery in Delaware City; and (b) additional residential, commercial and industrial customer growth on the Delmarva Peninsula and in Florida; |
• | $538,000 in additional gross margin generated from approximately 11,000 customers acquired from ESG in late May, which are now served by the Company's new subsidiary, Sandpiper; and |
• | $568,000 of a non-recurring increase in gross margin in the second quarter of 2012 to adjust prior period accrued revenues, which offset the above increases. |
Included in other operating expenses for the second quarter of 2013 were: (a) a one-time sales tax expense of $759,000 related to the purchase of the ESG operating assets, (b) $463,000 in other operating expenses associated with Sandpiper's operation, (c) an increase of $685,000 in the accrual for incentive bonuses as a result of the timing of bonus recognition, increased participation in the bonus program, and the Company's financial performance on a year-to-date-basis, (d) $395,000 in increased administrative costs, such as accounting, information technology and insurance costs, and (e) $301,000 in additional investments in corporate resources to further develop the Company's capability to capitalize on future growth opportunities.
Unregulated Energy
Operating income for the unregulated energy segment for the quarter ended June 30, 2013 was $447,000, an increase of $848,000 over the operating loss of $401,000 for the same quarter in 2012. An increase in gross margin of $1.8 million was partially offset by an increase in other operating expenses of $954,000. The significant components of the gross margin increase included:
• | $1.2 million in increased gross margin generated from higher retail propane margins as a significant decrease in the average wholesale market price of propane, which lowered the Company's cost of propane sales and resulted in an increase in retail margins per gallon (retail margins remained strong through the second quarter of 2013, as a decline in the Company's propane costs from lower propane wholesale prices outpaced the decline in retail prices); |
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• | $816,000 in increased gross margin generated from additional gallons sold, including $341,000 in additional gross margin generated from service to approximately 3,000 residential and commercial propane distribution customers in Florida obtained in the acquisition of the operating assets of Glades Gas Co., Inc. (“Glades”) in February 2013; and |
• | $770,000 in lower gross margin generated by Xeron, Inc. ("Xeron"), the Company's propane wholesale marketing subsidiary, as lower volatility in wholesale propane prices resulted in fewer opportunities for trading activity. |
The increase in other operating expenses was due primarily to additional expenses associated with serving the customers acquired from Glades as well as higher costs related to propane tank and vehicle maintenance activities.
Other
The “other” segment, which consists primarily of BravePoint®, Inc. (“BravePoint”), the Company’s advanced information services subsidiary, reported an operating income decline of $265,000 to $86,000 for the quarter ended June 30, 2013, compared to the same quarter in 2012. Gross margin was $2.1 million and $2.2 million for the second quarters of 2013 and 2012, respectively. Other operating expenses increased by $137,000.
Comparative Results for the Six Months Ended June 30, 2013 and 2012
The Company’s operating income for the six months ended June 30, 2013 was $35.7 million, an increase of $5.2 million, compared to the same period in 2012. Gross margin increased by $11.0 million in the six months ended June 30, 2013, compared to the same period in 2012. Approximately $3.7 million of the gross margin increase was the result of colder weather during 2013 on the Delmarva Peninsula and in Florida, compared to 2012. Other operating expenses increased by $5.9 million in the six months ended June 30, 2013, compared to the same period in 2012.
Regulated Energy
Operating income for the regulated energy segment increased by $622,000 to $25.9 million for the six months ended June 30, 2013, compared to the same period in 2012. An increase in gross margin of $4.3 million was partially offset by an increase in other operating expenses of $3.7 million. The significant components of the gross margin increase included:
• | $2.7 million due to natural gas growth resulting from: (a) major service expansions initiated in 2012 and 2013; and (b) additional residential, commercial and industrial customer growth on the Delmarva Peninsula and in Florida; |
• | $1.0 million as a result of higher consumption by natural gas and electric customers due to temperatures in 2013 that returned to more normal levels (primarily during the first quarter); and |
• | $538,000 in gross margin generated from approximately 11,000 customers acquired from ESG in late May, which are now served by Sandpiper. |
Included in other operating expenses for the six months ended June 30, 2013 were (a) a one-time sales tax expense of $759,000 related to the purchase of the ESG operating assets, (b) $463,000 in other operating expenses associated with Sandpiper's operation, (c) an increase of $917,000 in the accrual for incentive bonuses as a result of the timing of bonus recognition, increased participation in the bonus program, and the Company's financial performance on a year-to-date-basis, (d) $616,000 in increased administrative costs, such as accounting, information technology and insurance costs, and (e) $699,000 in additional investments in corporate resources to further develop the Company's capability to capitalize on future growth opportunities.
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Unregulated Energy
Operating income for the unregulated energy segment increased by $5.1 million to $9.8 million for the six months ended June 30, 2013, compared to the same period in 2012. An increase in gross margin of $6.8 million was partially offset by an increase in other operating expenses of $1.8 million. The significant components of the gross margin increase included:
• | $3.3 million in increased gross margin generated from higher retail propane margins from a significant decrease in the average wholesale market price of propane, which lowered the Company's cost of propane sales; |
• | $2.7 million in additional gross margin due to temperatures that returned to more normal levels causing higher consumption by propane customers (primarily during the first quarter); |
• | $967,000 in increased gross margins generated from higher propane sales volume, including $561,000 in additional gross margin generated from serving the customers acquired from Glades; and |
• | $936,000 in lower gross margin generated by Xeron, as lower volatility in wholesale propane prices resulted in fewer opportunities for trading activity. |
The increase in other operating expenses was due primarily to additional expenses associated with serving the new Glades customers, an increase in the accrual for incentive bonuses as a result of the strong 2013 year-to-date financial performance of the unregulated business segment and increased costs related to propane tank and vehicle maintenance activities.
Other
The “other” segment, which consists primarily of BravePoint, reported an operating loss of $39,000 for the six months ended June 30, 2013, compared to operating income of $472,000 in the same period in 2012. Gross margin was $4.0 million and $4.1 million for the six months ended June 30, 2013 and 2012, respectively. Other operating expenses increased by $408,000 to $4.0 million in the six months ended June 30, 2013 due primarily to higher payroll and related costs associated with 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 report on Form 10-K for further information on the risks and uncertainties related to the Company’s forward-looking statements.
The discussions of the results use the term “gross margin,” a non-Generally Accepted Accounting Principles (“GAAP”) financial measure, which management uses to evaluate the performance of the Company’s business segments. For an explanation of the calculation of “gross margin,” see the footnote to the Financial Summary.
Unless otherwise noted, earnings per share information is presented on a diluted basis.
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Conference Call
Chesapeake Utilities Corporation will host a conference call on August 12, 2013, at 10:30 a.m. Eastern Time to discuss the Company’s financial results for the quarter ended June 30, 2013. To participate in this call, dial 866.821.5457 and reference Chesapeake Utilities Corporation’s second quarter 2013 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
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Financial Summary
(in thousands, except per-share and degree-day data)
Second Quarter | Year to Date | |||||||||||
Chesapeake and Subsidiaries | 2013 | 2012 | 2013 | 2012 | ||||||||
Gross Margin (1) | ||||||||||||
Regulated Energy | $ | 33,101 | 32,120 | 73,052 | 68,744 | |||||||
Unregulated Energy | 8,091 | 6,289 | 25,275 | 18,451 | ||||||||
Other | 2,066 | 2,194 | 3,955 | 4,058 | ||||||||
Total Gross Margin | $ | 43,258 | $ | 40,603 | $ | 102,282 | $ | 91,253 | ||||
Operating Income (Loss) | ||||||||||||
Regulated Energy | $ | 8,619 | $ | 10,505 | $ | 25,925 | $ | 25,303 | ||||
Unregulated Energy | 447 | (401 | ) | 9,816 | 4,753 | |||||||
Other | 86 | 351 | (39 | ) | 472 | |||||||
Total Operating Income | 9,152 | 10,455 | 35,702 | 30,528 | ||||||||
Other Income, net of other expenses | 24 | 153 | 312 | 349 | ||||||||
Interest Charges | 2,016 | 2,241 | 4,088 | 4,532 | ||||||||
Income Taxes | 2,804 | 3,307 | 12,701 | 10,558 | ||||||||
Net Income | $ | 4,356 | $ | 5,060 | $ | 19,225 | $ | 15,787 | ||||
Earnings Per Share of Common Stock | ||||||||||||
Basic | $ | 0.45 | $ | 0.53 | $ | 2.00 | $ | 1.65 | ||||
Diluted | $ | 0.45 | $ | 0.52 | $ | 1.99 | $ | 1.63 | ||||
Heating Degree-Days — Delmarva Peninsula | ||||||||||||
Actual | 490 | 416 | 2,897 | 2,296 | ||||||||
10-year average (normal) | 473 | 476 | 2,850 | 2,852 | ||||||||
Heating Degree-Days — Florida | ||||||||||||
Actual | 19 | 12 | 487 | 347 | ||||||||
10-year average (normal) | 29 | 28 | 570 | 587 | ||||||||
Cooling Degree-Days — Florida | ||||||||||||
Actual | 865 | 960 | 946 | 1,144 | ||||||||
10-year average (normal) | 911 | 914 | 985 | 980 | ||||||||
(1) “Gross margin” is determined by deducting the cost of sales from operating revenue. Cost of sales includes the purchased fuel cost for natural gas, electricity and propane and the cost of labor spent on direct revenue-producing activities. Gross margin should not be considered an alternative to operating income or net income, which is determined in accordance with GAAP. Chesapeake believes that gross margin, although a non-GAAP measure, is useful and meaningful to investors as a basis for making investment decisions. It provides investors with information that demonstrates the profitability achieved by the Company under its allowed rates for regulated operations and under its competitive pricing structure for non-regulated segments. Chesapeake’s management uses gross margin in measuring its business units’ performance and has historically analyzed and reported gross margin information publicly. Other companies may calculate gross margin in a different manner.
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Financial Summary Highlights
Key variances for the three months ended June 30, 2013 included:
(in thousands, except per share) | Pre-tax Income | Net Income | Earnings Per Share | |||||||||
Second Quarter of 2012 Reported Results | $ | 8,367 | $ | 5,060 | $ | 0.52 | ||||||
Adjusting for unusual items: | ||||||||||||
Contribution from New Acquisitions | 150 | 90 | 0.01 | |||||||||
Non-recurring adjustment to accrued revenues in 2012 | (568 | ) | (344 | ) | (0.03 | ) | ||||||
One-time sales tax expense associated with the ESG acquisition | (759 | ) | (459 | ) | (0.05 | ) | ||||||
Weather impact | 547 | 330 | 0.03 | |||||||||
(630 | ) | (383 | ) | (0.04 | ) | |||||||
Increased (Decreased) Gross Margins: | ||||||||||||
Natural gas growth | 1,149 | 693 | 0.07 | |||||||||
Higher propane retail margins per gallon | 1,154 | 698 | 0.07 | |||||||||
Propane wholesale marketing | (770 | ) | (466 | ) | (0.05 | ) | ||||||
1,533 | 925 | 0.09 | ||||||||||
Increased Other Operating Expenses: | ||||||||||||
Larger accrual for incentive bonuses | (699 | ) | (423 | ) | (0.04 | ) | ||||||
Increased administrative costs (accounting, information technology and insurance) | (421 | ) | (255 | ) | (0.03 | ) | ||||||
Additional investments in corporate resources to capitalize on future growth opportunities | (263 | ) | (159 | ) | (0.02 | ) | ||||||
(1,383 | ) | (837 | ) | (0.09 | ) | |||||||
Net Other Changes | (727 | ) | (409 | ) | (0.03 | ) | ||||||
Second Quarter of 2013 Reported Results | $ | 7,160 | $ | 4,356 | $ | 0.45 | ||||||
The Company's results in the second quarter of 2013 reflected a one-time sales tax expense of $759,000 related to the acquisition of the ESG operating assets. The Company's results in the second quarter of 2012 reflected a non-recurring increase in gross margin of $568,000 related to prior period accrued revenues. These two items resulted in a quarter-over-quarter decrease in pre-tax income of $1.3 million ($803,000 in net income, or $0.08 per share). Absent these non-recurring adjustments, net income for the current quarter would have increased by $99,000.
The Company's results also reflected additional gross margin generated by:
(a) new services and customer growth in natural gas transmission and distribution operations as a result of major expansion initiatives completed in 2012 and 2013;
(b) new and additional transmission services provided to the NRG Dover electric generation plant and the PBF Energy refinery in Delaware City, Delaware, which commenced in May 2013;
(c) residential, commercial and industrial natural gas distribution customer growth on the Delmarva Peninsula and in Florida;
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(d) strong retail propane margins per gallon during the second quarter of 2013, as the significant decrease in the average wholesale market price of propane lowered the cost of propane sales (retail margins remained strong through the second quarter of 2013, as a decline in the Company's propane costs from lower propane wholesale prices outpaced the decline in retail prices); and
(e) temperatures on the Delmarva Peninsula returning to more normal levels during the second quarter of 2013, compared to the same quarter in 2012, resulting in higher propane sales.
These increases were offset by lower gross margin generated by Xeron, the Company's propane wholesale marketing subsidiary, as lower volatility in wholesale propane prices resulted in fewer trading opportunities.
Other operating expenses partially offset the gross margin increase as a result of:
(a) increased accruals for incentive bonuses due to the timing of bonus recognition, increased participation in the bonus program and the Company's financial performance on a year-to-date basis;
(b) increased costs associated with administrative functions, such as accounting, information technology and insurance; and
(c) additional investments in corporate resources to further develop the Company's capability to capitalize on future growth opportunities.
Key variances for the six months ended June 30, 2013 included:
(in thousands, except per share) | Pre-tax Income | Net Income | Earnings Per Share | |||||||||
Six months ended June 30, 2012 Reported Results | $ | 26,345 | $ | 15,787 | $ | 1.63 | ||||||
Adjusting for unusual items: | ||||||||||||
Contribution from New Acquisitions | 216 | 129 | 0.01 | |||||||||
Non-recurring adjustment to accrued revenues in 2012 | (128 | ) | (77 | ) | (0.01 | ) | ||||||
One-time sales tax expense associated with the ESG acquisition | (759 | ) | (455 | ) | (0.05 | ) | ||||||
Weather impact (due primarily to significantly warmer-than-normal weather in 2012) | 3,739 | 2,240 | 0.23 | |||||||||
3,068 | 1,837 | 0.18 | ||||||||||
Increased (Decreased) Gross Margins: | ||||||||||||
Natural gas growth | 2,725 | 1,632 | 0.18 | |||||||||
Higher propane retail margins per gallon | 3,297 | 1,976 | 0.20 | |||||||||
Propane wholesale marketing | (936 | ) | (561 | ) | (0.06 | ) | ||||||
5,086 | 3,047 | 0.32 | ||||||||||
Increased Other Operating Expenses: | ||||||||||||
Larger accrual for incentive bonuses | (1,430 | ) | (857 | ) | (0.09 | ) | ||||||
Increased administrative costs (accounting, information technology and insurance) | (582 | ) | (349 | ) | (0.04 | ) | ||||||
Additional investments in corporate resources to capitalize on future growth opportunities | (712 | ) | (427 | ) | (0.04 | ) | ||||||
(2,724 | ) | (1,633 | ) | (0.17 | ) | |||||||
Net Other Changes | 151 | 187 | 0.03 | |||||||||
Six months ended June 30, 2013 Reported Results | $ | 31,926 | $ | 19,225 | $ | 1.99 | ||||||
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The Company's results in the first six months of 2013 reflected additional gross margin generated by:
(a) temperatures on the Delmarva Peninsula returning to more normal levels during the first six months of 2013 (primarily during the heating season), compared to the same period in 2012;
(b) new services and customer growth in the natural gas transmission and distribution operations as a result of major expansion initiatives completed in 2012 and 2013;
(c) new and additional transmission services to the NRG Dover electric generation plant, Delaware and the PBF Energy refinery in Delaware City, Delaware, which commenced in May 2013; and
(d) strong retail propane margins per gallon through the first six months of 2013 due to the significant decrease in the average wholesale market price of propane, which lowered the Company's cost of propane sales.
These increases in gross margin were partially offset by:
(a) decreased gross margins for the Company's propane wholesale marketing subsidiary as lower price volatility during the current period resulted in lower-than-usual trading volume and profitability;
(b) increased accruals for incentive bonuses due to the timing of bonus recognition, increased participation in the bonus program, and the Company's financial performance on a year-to-date basis;
(c) one-time sales tax expense related to the acquisition of the ESG assets in Maryland;
(d) increased costs associated with administrative functions, such as accounting, information technology and insurance; and
(e) additional investments in corporate resources to further develop the Company's capability to capitalize on future growth opportunities.
The following information highlights certain key factors contributing to the Company’s results for the quarter ended and six months ended June 30, 2013:
Growth
New natural gas transmission services and growth in natural gas distribution customers generated $1.1 million and $2.7 million, respectively, in additional gross margin during the three and six months ended June 30, 2013. These growth initiatives are further explained in the following section.
The Company continues to see growth in the natural gas businesses as a result of its strategic initiatives over the past several years to expand its delivery of clean-burning, environmentally friendly natural gas to customers on the Delmarva Peninsula and in Florida. In 2012 and 2013, the Company expanded natural gas transmission and distribution services in Sussex County, Delaware, Worcester County, Maryland, and Nassau County, Florida, where natural gas was not previously available. The Company also initiated natural gas transmission service in Cecil County, Maryland. The Company continues to pursue several opportunities on the Delmarva Peninsula to expand transmission facilities to meet increased demand for natural gas by industrial customers, including electric power generation plants in Dover, Delaware and a refinery in Delaware City, Delaware.
Major Service Expansions and Customer Growth Reflected in Results
Expansion of natural gas transmission and distribution services in Sussex County, Delaware, Cecil and Worcester Counties, Maryland, and Nassau County, Florida, which commenced during the period from March 2012 to January 2013, generated additional gross margin of $163,000 and $958,000 in the three and six months ended June 30, 2013, compared to the same periods in 2012, respectively.
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In May 2013, Eastern Shore commenced new transmission service to the NRG Dover electric generation plant. This new service, which generated $386,000 in additional gross margin in the second quarter of 2013, is part of Eastern Shore's current system expansion to provide 13,440 dekatherms per day ("Dts/d") of firm transportation service to this plant. Eastern Shore and NRG entered into a precedent agreement in the first quarter of 2012, and Eastern Shore received approval from the FERC in February 2013 to construct the new facilities required for this service. In advance of completion of the construction, which is anticipated in November 2013, Eastern Shore began providing the service using existing system capacity in May 2013 under a short-term contract. Once the facilities are constructed for the NRG Dover plant, the long-term firm service will replace the short-term contract and generate $2.4 million to $2.8 million of annual gross margin.
Also in May 2013, Eastern Shore commenced additional services to the PBF Energy refinery located in Delaware City, Delaware. These new services, which generated $88,000 in gross margin in the second quarter of 2013, are also part of Eastern Shore's current system expansion to provide 15,000 Dts/d of firm transportation service to this existing customer. Eastern Shore and PBF Energy entered into a precedent agreement in the first quarter of 2012, and Eastern Shore received necessary approval from the FERC in March 2013 to construct the new facilities required for this service. Once the additional facilities to serve the PBF Energy Delaware City refinery are constructed, the incremental service is expected to generate annual gross margin of $1.6 million. This long-term firm service contract with PBF Energy will replace the 10,000 Dts/d contract that expired in November 2012. Eastern Shore provided additional interruptible service for the three and six months ended June 30, 2013, which generated $179,000 and $445,000, respectively, of additional gross margin. This interruptible service will be partially displaced by 5,000 Dts/d of short-term firm service under a contract for the period from May to October 2013, which will generate $264,000 of gross margin, and then ultimately by a new long-term firm service contract for 15,000 Dts/d, commencing in December 2013.
In addition to these service expansions, the natural gas distribution operations on the Delmarva Peninsula and in Florida have generated $493,000 and $1.1 million in additional gross margin in the three and six months ended June 30, 2013, respectively, compared to the same periods in 2012, due to increases in the number of residential, commercial and industrial customers served. These increases are due primarily to a two percent increase in residential customers on the Delmarva Peninsula, excluding the impact of the acquisition in Worcester County, Maryland, and increases in commercial and industrial customers in Florida.
Future Major Expansion Initiatives and Opportunities
Peninsula Pipeline, the Company's intrastate natural gas transmission subsidiary, entered into a firm transportation agreement in Florida with an unaffiliated utility, which will generate estimated annual gross margin of approximately $840,000. This service is expected to commence in the third quarter of 2013 upon completion of the construction of a new natural gas transmission pipeline.
In June 2013, Eastern Shore filed an application with the FERC seeking approval to construct a pipeline lateral to the Calpine electric power plant under construction in Dover, Delaware. Eastern Shore and Calpine entered into a precedent agreement in February 2013 for this expansion of facilities and service. Upon obtaining approval from the FERC and completing construction of the required facilities, this new service is expected to generate annual gross margin of approximately $1.2 million to $1.8 million. The new facilities include approximately 5.5 miles of lateral pipeline and metering facilities and extend from Eastern Shore's mainline. The construction of this lateral will not increase the overall capacity of Eastern Shore's mainline system. Service is projected to commence in October 2014 although this is dependent on the timing of receipt of the necessary regulatory approval.
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As the Company expands its natural gas service to new areas, initially through transmission and distribution service to large industrial customers, the 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 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, including areas of southeastern Sussex County. The Company expects the Delaware PSC to render a final decision by September 2013.
Acquisition
In late 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 PSC. The Company is evaluating the potential conversion of some of these systems to natural gas and will pursue such conversion where it is both feasible and economical. This acquisition is expected to be accretive to earnings per share in the first full year of operations. We generated $538,000 in additional gross margin and incurred $463,000 in other operating expenses for the six months ended June 30, 2013.
Investing in Growth
The Company continues to expand its resources and capabilities to support growth. The Company's Delmarva natural gas distribution operation is in the early stages of natural gas distribution expansions in Sussex County, Delaware, and Worcester and Cecil Counties, Maryland. These expansions will require not only the construction or conversion of distribution facilities, but also the conversion of residential customers’ appliances or equipment. The Company has begun the process of reorganizing our Delmarva natural gas distribution operation and expects to increase staffing to support future expansions. Eastern Shore is currently working on construction of new facilities to provide additional services to NRG and the Delaware City Refinery as well as developing other opportunities to further expand its transmission system. As Eastern Shore continues to expand its facilities and service, it also expects to increase its staffing. Finally, to increase our overall capabilities to move growth initiatives forward and to assist in developing additional strategic initiatives for sustained future growth, resources have been, and continue to be, added in several key functional areas, including, but not limited to, Human Resources, Communications and Strategic Business Development. The Company expects to make additional investments in corporate resources to further develop its capability to capitalize on future growth opportunities.
Weather and Consumption
Weather was not a significant factor in the second quarter. For the six months ended June 30, 2013, temperatures on the Delmarva Peninsula and in Florida returned to more normal levels and generated $3.7 million of additional gross margin due to higher energy consumption. Temperatures on the Delmarva Peninsula and in Florida in the first six months of 2013 were 26 percent (601 HDD) and 40 percent (140 HDD), respectively, colder than the same period in 2012.
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Propane Prices
The Company's propane distribution operation generated additional gross margins of $1.2 million and $3.3 million during the first three and six months of 2013, compared to the same periods in 2012, respectively, due to higher retail margins per gallon. Retail margins remained strong through the first six months of 2013, as the 25 percent decline in propane costs from lower propane wholesale prices in late 2012 and early 2013 outpaced the slight decline in retail prices. The propane retail price per gallon is subject to various market conditions, including competition with other propane suppliers and the availability and price of alternative energy sources, and may fluctuate based on changes in demand, supply and other energy commodity prices.
Xeron, the Company's propane wholesale marketing subsidiary, benefits from price volatility in the propane wholesale market by entering into trading transactions. Xeron experienced a decrease in gross margin of $770,000 and $936,000 for the three and six months ended June 30, 2013, respectively, compared to the same periods in 2012. Lower propane wholesale price volatility during the current periods resulted in lower-than-usual trading volume and profitability.
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Chesapeake Utilities Corporation and Subsidiaries Major Expansion Initiative Highlights (Unaudited) | ||||||||||||||||||
Major Service Expansions Initiated in 2012 and 2013 (dollars in thousands): | ||||||||||||||||||
Project | Date of New Service | Q2 2013 Margin | YTD 2013 Margin | Estimated 2013 Margin | Estimated Annualized Margin | |||||||||||||
Sussex County, DE expansion | ||||||||||||||||||
Transmission (for southeastern part) 1,550 Dts/d(1) | Mar-12 to May-12 | $ | 112 | $ | 223 | $ | 446 | $ | 446 | |||||||||
Distribution - Two facilities of an existing customer in the southeastern part of Sussex County(2) | Mar-12 to Aug-12 | 48 | 101 | 151 | 154 | |||||||||||||
$ | 160 | $ | 324 | $ | 597 | $ | 600 | |||||||||||
Cecil County, MD expansion | ||||||||||||||||||
Transmission - 4,070 Dts/d(3) | Nov-12 | $ | 220 | $ | 441 | $ | 882 | $ | 882 | |||||||||
Worcester County, MD expansion | ||||||||||||||||||
Transmission - 1,450 Dts/d(4) | Jun-12 to Jan-13 | $ | 98 | $ | 195 | $ | 391 | $ | 391 | |||||||||
Nassau County, FL expansion | ||||||||||||||||||
Transmission - A new fixed annual rate service(5) | Apr-12 | $ | 333 | $ | 665 | $ | 1,300 | $ | 1,300 | |||||||||
Service to NRG's Dover, DE electric generation plant | ||||||||||||||||||
Short-term contract - 13,440 Dts/d(6) | May-13 to Oct-13 | $ | 386 | $ | 386 | $ | 1,158 | $ | — | |||||||||
Transmission - 13,440 Dts/d (7) | Starting in Nov-13 | — | — | $400 to $467 | $2,400 to $2,800 | |||||||||||||
PBF Energy's Delaware City, DE refinery expansion | ||||||||||||||||||
Short-term contract - 5,000 Dts/d(6) | May-13 to Oct-13 | $ | 88 | $ | 88 | $ | 264 | $ | — | |||||||||
Transmission - 15,000 Dts/d (6) (7) (8) | Starting in Dec-13 | $ | — | $ | — | $ | 133 | $ | 1,600 | |||||||||
$ | 1,285 | $ | 2,099 | $5,125 to $5,192 | $7,173 to $7,573 | |||||||||||||
2012 margin | $ | 648 | $ | 667 | $ | 2,197 | ||||||||||||
Incremental margin in 2013 over 2012 | $ | 637 | $ | 1,432 | $2,928 to $2,995 | |||||||||||||
Total by Geographic Location of the Project: | ||||||||||||||||||
Delmarva Natural Gas Distribution | $ | 48 | $ | 101 | $ | 151 | $ | 154 | ||||||||||
Delmarva Natural Gas Transmission | 904 | 1,333 | $3,674 to $3,741 | $5,719 to $6,119 | ||||||||||||||
Florida Natural Gas Transmission | 333 | 665 | 1,300 | 1,300 | ||||||||||||||
$ | 1,285 | $ | 2,099 | $5,125 to $5,192 | $7,173 to $7,573 | |||||||||||||
(1) These services generated $96,000 and $111,000 in gross margin for the three and six months ended June 30, 2012, respectively. These services also generated $334,000 in gross margin for the year ended December 31, 2012.
(2) These services generated $16,000 and $20,000 in gross margin for the three and six months ended June 30, 2012, respectively.These services also generated $89,000 in gross margin for the year ended December 31, 2012.
(3) These services generated $147,000 in gross margin for the year ended December 31, 2012.
(4) These services generated $10,000 in gross margin for the three and six months ended June 30, 2012. These services also generated $90,000 in gross margin for the year ended December 31, 2012.
(5) These services generated $526,000 in gross margin for the three and six months ended June 30, 2012.These services also generated $1.5 million in gross margin for the year ended December 31, 2012.
(6) Prior to commencing the new service using new facilities, Eastern Shore agreed to provide a short-term service utilizing the existing system capacity from May 2013 to October 2013. During the three and six months ended June 30, 2013, Eastern Shore provided interruptible service to the Delaware City Refinery that generated $179,000 and $445,000, in additional gross margin, respectively.
(7) A precedent agreement has been entered into by the parties for these services. The figures provided represent the estimated gross margin pursuant to the respective precedent agreement. A firm transportation service agreement will be entered into by the parties upon satisfying certain conditions.
(8) This contract is expected to replace the 10,000 Dts/d contract with annualized gross margin of $1.1 million, which expired in November 2012.
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Chesapeake Utilities Corporation and Subsidiaries Major Expansion Initiative Highlights (Unaudited) | ||||||
Upcoming Major Expansion Initiatives with Executed Contracts (dollars in thousands): | ||||||
Project | Estimated Date of New Service | Estimated 2013 Margin | Estimated Annualized Margin | |||
Service to an unaffiliated Florida utility (1) | Starting in Aug-13 | $350 | $840 | |||
Service to Calpine's Dover, DE proposed electric generation plant | ||||||
Transmission - 55,200 Dts/d (2) | Starting in Jan-15 | — | $1,200 to $1,800 | |||
$350 | $2,040 to $2,640 | |||||
(1) Estimated annual margin is based on a fixed monthly reservation charge agreed to by the customer.
(2) A precedent agreement has been entered into by the parties for these services. These services require construction of a lateral pipeline from the Company's mainline to this facility. The construction of this lateral will not increase the overall capacity of the Company's mainline system. The estimated gross margin is based upon the precedent agreement. A firm transportation service agreement will be entered into by the parties upon satisfying certain conditions.
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Chesapeake Utilities Corporation and Subsidiaries Condensed Consolidated Statements of Income (Unaudited) For the Periods Ended June 30, 2013 and 2012 (in thousands, except shares and per share data) | |||||||||||||||
Second Quarter | Year to Date | ||||||||||||||
2013 | 2012 | 2013 | 2012 | ||||||||||||
Operating Revenues | |||||||||||||||
Regulated Energy | $ | 55,216 | $ | 55,553 | $ | 136,783 | $ | 127,849 | |||||||
Unregulated Energy | 36,025 | 25,176 | 91,016 | 70,063 | |||||||||||
Other | 2,905 | 3,168 | 7,075 | 6,899 | |||||||||||
Total Operating Revenues | 94,146 | 83,897 | 234,874 | 204,811 | |||||||||||
Operating Expenses | |||||||||||||||
Regulated energy cost of sales | 22,115 | 23,433 | 63,730 | 59,105 | |||||||||||
Unregulated energy and other cost of sales | 28,773 | 19,861 | 68,861 | 54,453 | |||||||||||
Operations | 22,822 | 20,071 | 44,577 | 40,027 | |||||||||||
Maintenance | 1,820 | 1,858 | 3,542 | 3,834 | |||||||||||
Depreciation and amortization | 5,977 | 5,885 | 11,797 | 11,646 | |||||||||||
Other taxes | 3,487 | 2,334 | 6,665 | 5,218 | |||||||||||
Total operating expenses | 84,994 | 73,442 | 199,172 | 174,283 | |||||||||||
Operating Income | 9,152 | 10,455 | 35,702 | 30,528 | |||||||||||
Other income, net of other expenses | 24 | 153 | 312 | 349 | |||||||||||
Interest charges | 2,016 | 2,241 | 4,088 | 4,532 | |||||||||||
Income Before Income Taxes | 7,160 | 8,367 | 31,926 | 26,345 | |||||||||||
Income taxes | 2,804 | 3,307 | 12,701 | 10,558 | |||||||||||
Net Income | $ | 4,356 | $ | 5,060 | $ | 19,225 | $ | 15,787 | |||||||
Weighted Average Common Shares Outstanding: | |||||||||||||||
Basic | 9,621,580 | 9,586,159 | 9,611,610 | 9,578,715 | |||||||||||
Diluted | 9,695,470 | 9,681,597 | 9,687,253 | 9,674,240 | |||||||||||
Earnings Per Share of Common Stock: | |||||||||||||||
Basic | $ | 0.45 | $ | 0.53 | $ | 2.00 | $ | 1.65 | |||||||
Diluted | $ | 0.45 | $ | 0.52 | $ | 1.99 | $ | 1.63 | |||||||
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Chesapeake Utilities Corporation and Subsidiaries Condensed Consolidated Balance Sheets (Unaudited) | ||||||||
Assets | June 30, 2013 | December 31, 2012 | ||||||
(in thousands, except shares and per share data) | ||||||||
Property, Plant and Equipment | ||||||||
Regulated energy | $ | 622,895 | $ | 585,429 | ||||
Unregulated energy | 72,877 | 70,218 | ||||||
Other | 20,660 | 20,067 | ||||||
Total property, plant and equipment | 716,432 | 675,714 | ||||||
Less: Accumulated depreciation and amortization | (165,646 | ) | (155,378 | ) | ||||
Plus: Construction work in progress | 42,421 | 21,445 | ||||||
Net property, plant and equipment | 593,207 | 541,781 | ||||||
Current Assets | ||||||||
Cash and cash equivalents | 2,210 | 3,361 | ||||||
Accounts receivable (less allowance for uncollectible accounts of $1,125 and $826, respectively) | 66,933 | 53,787 | ||||||
Accrued revenue | 7,188 | 11,688 | ||||||
Propane inventory, at average cost | 6,375 | 7,612 | ||||||
Other inventory, at average cost | 3,361 | 5,841 | ||||||
Regulatory assets | 1,084 | 2,736 | ||||||
Storage gas prepayments | 3,262 | 3,716 | ||||||
Income taxes receivable | — | 4,703 | ||||||
Deferred income taxes | 919 | 791 | ||||||
Prepaid expenses | 3,798 | 6,020 | ||||||
Mark-to-market energy assets | 248 | 210 | ||||||
Other current assets | 165 | 132 | ||||||
Total current assets | 95,543 | 100,597 | ||||||
Deferred Charges and Other Assets | ||||||||
Goodwill | 4,716 | 4,090 | ||||||
Other intangible assets, net | 3,175 | 2,798 | ||||||
Investments, at fair value | 4,917 | 4,168 | ||||||
Regulatory assets | 75,331 | 77,408 | ||||||
Receivables and other deferred charges | 2,769 | 2,904 | ||||||
Total deferred charges and other assets | 90,908 | 91,368 | ||||||
Total Assets | $ | 779,658 | $ | 733,746 | ||||
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Chesapeake Utilities Corporation and Subsidiaries Condensed Consolidated Balance Sheets (Unaudited) | ||||||||
Capitalization and Liabilities | June 30, 2013 | December 31, 2012 | ||||||
(in thousands, except shares and per share data) | ||||||||
Capitalization | ||||||||
Stockholders' equity | ||||||||
Common stock, par value $0.4867 per share | ||||||||
(authorized 25,000,000 shares) | $ | 4,684 | $ | 4,671 | ||||
Additional paid-in capital | 151,391 | 150,750 | ||||||
Retained earnings | 118,187 | 106,239 | ||||||
Accumulated other comprehensive loss | (4,958 | ) | (5,062 | ) | ||||
Deferred compensation obligation | 1,096 | 982 | ||||||
Treasury stock | (1,096 | ) | (982 | ) | ||||
Total stockholders' equity | 269,304 | 256,598 | ||||||
Long-term debt, net of current maturities | 107,674 | 101,907 | ||||||
Total capitalization | 376,978 | 358,505 | ||||||
Current Liabilities | ||||||||
Current portion of long-term debt | 7,996 | 8,196 | ||||||
Short-term borrowing | 75,491 | 61,199 | ||||||
Accounts payable | 45,789 | 41,992 | ||||||
Customer deposits and refunds | 25,532 | 29,271 | ||||||
Accrued interest | 1,121 | 1,437 | ||||||
Dividends payable | 3,706 | 3,502 | ||||||
Income taxes payable | 1,896 | — | ||||||
Accrued compensation | 5,437 | 7,435 | ||||||
Regulatory liabilities | 5,329 | 1,577 | ||||||
Mark-to-market energy liabilities | 74 | 331 | ||||||
Other accrued liabilities | 9,126 | 7,226 | ||||||
Total current liabilities | 181,497 | 162,166 | ||||||
Deferred Credits and Other Liabilities | ||||||||
Deferred income taxes | 131,199 | 125,205 | ||||||
Deferred investment tax credits | 93 | 113 | ||||||
Regulatory liabilities | 6,947 | 5,454 | ||||||
Environmental liabilities | 8,905 | 9,114 | ||||||
Other pension and benefit costs | 33,491 | 33,535 | ||||||
Accrued asset removal cost - Regulatory liability | 38,923 | 38,096 | ||||||
Other liabilities | 1,625 | 1,558 | ||||||
Total deferred credits and other liabilities | 221,183 | 213,075 | ||||||
Total Capitalization and Liabilities | $ | 779,658 | $ | 733,746 | ||||
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Chesapeake Utilities Corporation and Subsidiaries Distribution Utility Statistical Data (Unaudited) | |||||||||||||||||||||||||
For the Three Months Ended June 30, 2013 | For the Three Months Ended June 30, 2012 | ||||||||||||||||||||||||
Delmarva NG Distribution(2) | Chesapeake Florida NG Division | FPU NG Distribution | FPU Electric Distribution | Delmarva NG Distribution | Chesapeake Florida NG Division | FPU NG Distribution | FPU Electric Distribution | ||||||||||||||||||
Operating Revenues (in thousands) | |||||||||||||||||||||||||
Residential | $ | 9,971 | $ | 1,112 | $ | 5,523 | $ | 9,584 | $ | 7,515 | $ | 1,065 | $ | 4,538 | $ | 9,053 | |||||||||
Commercial | 5,290 | 1,045 | 8,519 | 9,552 | 3,547 | 890 | 6,208 | 9,014 | |||||||||||||||||
Industrial | 1,278 | 1,237 | 2,890 | 662 | 1,231 | 1,222 | 2,692 | 3,423 | |||||||||||||||||
Other (1) | (2,960 | ) | 504 | (1,528 | ) | (2,498 | ) | (1,338 | ) | 610 | 680 | 661 | |||||||||||||
Total Operating Revenues | $ | 13,579 | $ | 3,898 | $ | 15,404 | $ | 17,300 | $ | 10,955 | $ | 3,787 | $ | 14,118 | $ | 22,151 | |||||||||
Volume (in Dts/MWHs) | |||||||||||||||||||||||||
Residential | 554,330 | 71,861 | 295,806 | 66,856 | 364,749 | 66,766 | 276,413 | 64,734 | |||||||||||||||||
Commercial | 609,478 | 321,809 | 719,091 | 77,213 | 474,161 | 301,506 | 661,044 | 74,418 | |||||||||||||||||
Industrial | 883,848 | 3,719,309 | 842,859 | 5,560 | 887,342 | 3,585,157 | 898,482 | 23,530 | |||||||||||||||||
Other | 17,096 | — | (118,579 | ) | 8,548 | 41,138 | — | 119,150 | 16,837 | ||||||||||||||||
Total | 2,064,752 | 4,112,979 | 1,739,177 | 158,177 | 1,767,390 | 3,953,429 | 1,955,089 | 179,519 | |||||||||||||||||
Average Customers | |||||||||||||||||||||||||
Residential | 60,581 | 13,974 | 49,556 | 23,835 | 49,445 | 13,800 | 48,682 | 23,670 | |||||||||||||||||
Commercial | 6,447 | 1,294 | 4,627 | 7,415 | 5,198 | 1,244 | 4,553 | 7,393 | |||||||||||||||||
Industrial | 113 | 55 | 914 | 2 | 101 | 54 | 819 | 2 | |||||||||||||||||
Other | 6 | — | — | — | 4 | — | — | — | |||||||||||||||||
Total | 67,147 | 15,323 | 55,097 | 31,252 | 54,748 | 15,098 | 54,054 | 31,065 | |||||||||||||||||
For the Six Months Ended June 30, 2013 | For the Six Months Ended June 30, 2012 | ||||||||||||||||||||||||
Delmarva NG Distribution(2) | Chesapeake Florida NG Division | FPU NG Distribution | FPU Electric Distribution | Delmarva NG Distribution | Chesapeake Florida NG Division | FPU NG Distribution | FPU Electric Distribution | ||||||||||||||||||
Operating Revenues (in thousands) | |||||||||||||||||||||||||
Residential | $ | 33,163 | $ | 2,448 | $ | 12,779 | $ | 19,564 | $ | 26,792 | $ | 2,327 | $ | 11,354 | $ | 18,133 | |||||||||
Commercial | 15,337 | 2,240 | 17,905 | 18,005 | 11,657 | 1,949 | 15,463 | 17,378 | |||||||||||||||||
Industrial | 3,038 | 2,515 | 6,185 | 2,390 | 2,743 | 2,499 | 5,168 | 5,079 | |||||||||||||||||
Other (1) | (2,739 | ) | 1,137 | (3,202 | ) | (4,133 | ) | (2,408 | ) | 1,309 | (1,869 | ) | 284 | ||||||||||||
Total Operating Revenues | $ | 48,799 | $ | 8,340 | $ | 33,667 | $ | 35,826 | $ | 38,784 | $ | 8,084 | $ | 30,116 | $ | 40,874 | |||||||||
Volume (in Dts/MWHs) | |||||||||||||||||||||||||
Residential | 2,204,103 | 198,694 | 743,023 | 136,631 | 1,658,780 | 183,445 | 700,540 | 128,563 | |||||||||||||||||
Commercial | 1,990,161 | 730,773 | 1,551,074 | 144,124 | 1,566,492 | 663,831 | 1,507,878 | 136,660 | |||||||||||||||||
Industrial | 2,014,389 | 7,635,992 | 2,046,649 | 16,780 | 1,859,756 | 7,767,064 | 1,676,000 | 36,690 | |||||||||||||||||
Other | 22,748 | — | (152,894 | ) | 11,289 | 49,587 | — | 71,541 | 22,076 | ||||||||||||||||
Total | 6,231,401 | 8,565,459 | 4,187,852 | 308,824 | 5,134,615 | 8,614,340 | 3,955,959 | 323,989 | |||||||||||||||||
Average Customers | |||||||||||||||||||||||||
Residential | 60,825 | 13,967 | 49,368 | 23,751 | 49,809 | 13,822 | 48,546 | 23,643 | |||||||||||||||||
Commercial | 6,477 | 1,284 | 4,629 | 7,403 | 5,259 | 1,242 | 4,566 | 7,388 | |||||||||||||||||
Industrial | 113 | 57 | 880 | 2 | 100 | 54 | 769 | 2 | |||||||||||||||||
Other | 5 | — | — | — | 4 | — | 1 | — | |||||||||||||||||
Total | 67,420 | 15,308 | 54,877 | 31,156 | 55,172 | 15,118 | 53,882 | 31,033 | |||||||||||||||||
(1) Operating Revenues from "Other" sources include unbilled revenue, under (over) recoveries of fuel cost, conservation revenue, other miscellaneous charges, fees for billing services provided to third parties and adjustments for pass-through taxes.
(2) Worcester County NG Distribution (Sandpiper) is now included within the Delmarva NG Distribution results, which also includes the Delaware and Maryland Divisions.
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