Dover, Delaware — Chesapeake Utilities Corporation (NYSE: CPK) today announced financial results for the three months ended September 30, 2009. The Company generated net income of $308,000, or $0.04 per share (diluted), for the third quarter of 2009, compared to a net loss of $198,000, or $0.03 per share (diluted), for the third quarter of 2008. The Company’s Delmarva natural gas distribution and propane distribution operations typically experience seasonal losses or reduced earnings during the third quarter because customers do not require natural gas or propane for heating purposes during the summer months. The results for the third quarter of 2009 included the effect of deferring as a regulatory asset certain merger-related transaction costs, which the Company will seek to recover in subsequent rate proceedings. Absent the effects of the merger-related costs and related income taxes, the Company would have generated net income of $78,000, or $0.01 per share (diluted), for the quarter ended September 30, 2009. The improved period-over-period results primarily reflect customer growth and new transportation services on the Delmarva Peninsula, implementation of new rate structures in Delaware that reduce seasonal fluctuations on gross margin, and lower cost of propane for the propane distribution operations from the absence of inventory valuation adjustments, including a loss on a propane swap agreement, recorded during the third quarter of 2008 and which did not recur in 2009.
The Company generated net income of $9.7 million for the nine months ended September 30, 2009, or $1.40 per share (diluted), compared to net income of $9.2 million, or $1.34 per share (diluted) for the same period in 2008. The results for the nine months ended September 30, 2009 and 2008 include $530,000 and $1.2 million in merger-related costs that are not subject to recovery through future rates. Excluding the effects of merger-related costs and related income taxes, net income for the nine months ended September 30, 2009, would have been $10.2 million, or $1.46 per share (diluted), compared to $9.9 million, or $1.44 per share (diluted), for the same period in 2008. The increased year-to-date earnings primarily reflects customer growth, new transportation services on the Delmarva Peninsula, increased retail margins by the propane distribution operations, spot sale opportunities executed by the natural gas marketing operations and weather on the Delmarva Peninsula that was eight percent colder in 2009. These positive achievements were partially offset by reductions in gross margin in the advanced information services and propane wholesale marketing operations, resulting from lower demand and adverse market conditions.
“Continued customer growth, expansion of services, and lower cost of propane on the Delmarva Peninsula helped us deliver improved results for the quarter, despite a challenging economy in Florida and difficult market conditions for the advanced information services segment. With the improved performance of our Delmarva businesses, together with our effort towards the completion of our Florida rate proceedings and the additional cost containment measures for our advanced information services segment, we are well-positioned to complete another successful year,” stated John R. Schimkaitis, President and Chief Executive Officer of Chesapeake Utilities Corporation. “We are excited about the closing of our merger with Florida Public Utilities Company and look forward to further strengthening our Florida operations as a result.”
Highlights for the quarter and the subsequent period included:
- On October 22, 2009, shareholders of both Chesapeake and Florida Public Utilities Company (“FPU”) approved the merger, which became effective on October 28, 2009. Total consideration paid by Chesapeake is valued at approximately $75.7 million.
- On August 18, 2009, the Florida Public Service Commission approved the Company’s request for an interim rate increase of $418,000 for the natural gas distribution operation in Florida, which was included in its petition for a permanent annual rate increase of $2.97 million. The Florida division started billing customers the approved interim rates on September 17, 2009, subject to refund, and anticipates a final decision on its request for a permanent rate increase by the end of 2009.
- The Company’s natural gas transmission operation, Eastern Shore Natural Gas Company (“ESNG”), increased gross margin by $442,000 as a result of the implementation of new transportation services in late 2008 and early 2009. In addition, ESNG received approval from the Federal Energy Regulatory Commission on October 30, 2009 to commence service on new expansion facilities, which will provide 7,200 dekatherms per day of additional firm service on the Delmarva Peninsula and additional annualized gross margin of approximately $1.0 million.
- The natural gas distribution operations in Delaware and Maryland experienced growth in residential, commercial and industrial customers, contributing an additional $300,000 to gross margin, in spite of the continued slowdown in the new housing market and reduced industrial growth in the region.
- Margins from the Delmarva propane distribution operations increased by $779,000 as a result of the absence of inventory valuation adjustments, including a mark-to-market loss on a price swap agreement, totaling $975,000 caused by the sharp decline in propane prices during the third quarter of 2008.
The discussions of the results for the periods ended September 30, 2009 and 2008, use the term “gross margin,” which is a non-Generally Accepted Accounting Principle (“GAAP”) financial measure that management uses to evaluate the performance of the Company’s business segments. For an explanation of the calculation of “gross margin,” see the footnote to the Supplemental Income Statement Data chart below. In addition, certain information is presented, which excludes for comparison purposes, all merger-related transaction costs incurred in connection with the FPU merger. Although the non-GAAP measures are not intended to replace the GAAP measures for evaluation of Chesapeake’s performance, Chesapeake believes that the portions of the presentation which exclude the merger-related transaction costs are helpful on a comparative basis for investors to understand Chesapeake’s performance.
Comparative results for the quarters ended September 30, 2009 and 2008
Operating income increased by $1.1 million, or 93 percent, to $2.3 million for the third quarter of 2009, compared to $1.2 million for the same period in 2008. Operating income for the quarter ended September 30, 2009, included the effect of deferring as a regulatory asset, a portion of merger-related transaction costs, which the Company will seek to recover through future rates. Some of these costs were previously recorded as expense in the first and second quarters of 2009. Absent the effects of all merger-related costs, operating income for the third quarter of 2009 would have been $1.6 million. The increased operating results, net of the costs related to the merger, reflected increased gross margin, partially offset with increased other operating expenses.
Natural Gas Operations
Operating income for the natural gas segment increased by $243,000 in the third quarter of 2009, compared to the same period in 2008, as higher gross margin of $1.1 million exceeded an $811,000 increase in other operating expenses. Factors contributing to the period-over-period increase in gross margin are described in the following table:
(in thousands)
Gross margin for the three months ended September 30, 2008 – $12,492
Factors contributing to the gross margin increase for the three months ended September 30, 2009:
New transportation services – 508
Changes in rate structures – 563
Net customer growth – 209
Natural gas marketing – (205)
Other – (21)
Gross margin for the three months ended September 30, 2009 $13,546
- New transportation services implemented by the natural gas transmission operations on the Delmarva Peninsula and in Florida, which became effective in late 2008 and in early 2009, contributed $508,000 to gross margin. Revenues from these new transportation services and an expansion project completed in the fourth quarter of 2009, net of amounts from other transportation services that are expiring, are expected to contribute additional gross margin of $828,000 in the fourth quarter of 2009 and $3.4 million of additional annual gross margin for 2010.
- New rate structures for the Delaware natural gas distribution operation and the natural gas transmission operations generated $563,000 of gross margin. The new rate structure for the Delaware natural gas distribution operation, implemented in October of 2008, allows a greater portion of the annual revenue requirements to be collected through non-volume-based charges, which reduces the impact of weather volatility on gross margin. This change contributed $323,000 to the increase in gross margin for the third quarter of 2009. The new rate structure also allows collection of miscellaneous service fees, including $74,000 during the third quarter of 2009, which, although not representing additional revenue, had previously been offset against operating expenses. In addition, ESNG changed its rates effective April 2009, to recover specified project costs in accordance with the terms of precedent agreements with certain customers. These rates generated $129,000 in gross margin for the third quarter of 2009 and will contribute $387,000 of annualized gross margin in 2009.
- Despite the continued slowdown in the new housing market and industrial growth in the region, the natural gas distribution operations in Delaware and Maryland experienced growth in residential, commercial and industrial customers, contributing an additional $300,000 to gross margin. The natural gas distribution operation in Florida experienced a decline in gross margin of $91,000, due primarily to the loss of three industrial customers to either bankruptcy or plant closings.
- Partially offsetting the aforementioned increases in gross margin was a decrease of $205,000 from the Company’s natural gas marketing operation as prior year’s gross margin included favorable imbalance resolutions with interstate pipelines that did not recur during the third quarter of 2009 and a four percent decrease in customer consumption in the current quarter.
