Chesapeake Utilities Corporation Reports Fourth Quarter And Fiscal Year 2017 Results

DOVER, Del., Feb. 28, 2018 /PRNewswire/ -- Chesapeake Utilities Corporation (NYSE: CPK) ("Chesapeake Utilities" or the "Company") today announced financial results for the year and the fourth quarter ended December 31, 2017. The Company's net income for the year was $58.1 million, or $3.55 per share, an increase of $13.4 million, or $0.69 per share, compared to 2016.  The higher net income and earnings per share ("EPS") reflected continued customer growth in the Company's natural gas and propane distribution operations and expansion of its gas transmission operations, full year contributions from Eight Flags Energy LLC's ("Eight Flags") Combined Heat and Power ("CHP") plant, increased profitability for the propane operations and for Aspire Energy of Ohio, LLC ("Aspire Energy"), a partial year's impact of new base rates for Eastern Shore Natural Gas Company ("Eastern Shore"),  and the favorable impact of Federal tax law changes on the revaluation of net deferred tax assets and liabilities of the Company's unregulated businesses.   A detailed discussion of operating results begins on page 3.

"2017 was an exceptional year for the Company," stated Michael P. McMasters, President and Chief Executive Officer. "Recently completed growth projects, in addition to numerous other strategic growth initiatives across all of our businesses, generated our eleventh record year of earnings. Construction of Eastern Shore's largest ever expansion project is underway with expected completion in phases throughout 2018, and in Florida construction is underway on several pipeline and distribution projects to serve growth in new and existing market areas," he added.  "Our employees continue to identify and evaluate new growth opportunities while profitably managing current projects, maintaining operating efficiency and providing safe, reliable service to our customers.  Changing regulatory and energy environments and customer energy options create new challenges and opportunities that our team recognizes and embraces. We continually refine our strategic focus to harvest benefits from the challenges of accelerating change and to increase our portfolio of growth opportunities and profitable capital investments in 2018 and beyond," he concluded.

Significant Items Impacting Earnings

Results for the year and fourth quarter of 2017 were impacted by the following significant items:

 

Excluding the tax reform impact and the unrealized MTM loss, earnings for the year and fourth quarter would have been $2.89 and $0.93 per share, respectively.

As a result of the TCJA, the Company's 2017 annual and fourth quarter EPS included a $0.87 per share non-cash benefit from the revaluation of the Company's net deferred tax assets and liabilities associated with the Company's unregulated businesses.  We are awaiting formal notice from the federal and state commissions that regulate our gas and electric distribution and transmission businesses on the applicability and timing of the implementation of the tax law changes in regard to customer rates as well as the applicability, timing, and treatment of net deferred tax assets and liabilities. We will provide updates as we receive formal notices and rate orders from the regulatory authorities. The Company estimates that, beginning in 2018, the TCJA corporate federal income tax rate will increase annual EPS between $0.10 and $0.15, primarily from unregulated businesses, assuming normal weather and business conditions, and absent the impact of fair value MTM accounting.

Peninsula Energy Services Company, Inc. ("PESCO") utilizes financial derivatives contracts to lock in the gross margin associated with physical gas purchased and pipeline capacity used for meeting expected demand under PESCO's various contracts, including its asset management contracts.  Whenever possible, PESCO utilizes hedge accounting to better match hedged items and hedging instruments. However, in those situations where hedge accounting is not appropriate, the Company utilizes MTM accounting.  As a result of the significant regional natural gas price movement at the end of the year, PESCO recognized an unrealized MTM loss of $0.21 per share that reflected the fair value of the financial derivative contracts on December 31, 2017. Derivatives accounting has no impact on the economic gain or loss from PESCO's purchase or sale contracts, even though MTM accounting may create mismatched gains or losses in different reporting periods.

For the fourth quarter of 2017, the Company reported net income of $26.1 million, or $1.59 per share, an increase of $14.2 million, or $0.86 per share, compared to the same quarter in 2016. Fourth quarter 2017 results also included the $0.87 gain from the tax law changes and the $0.21 charge for PESCO's unrealized MTM loss.

*This press release includes references to non-Generally Accepted Accounting Principles ("GAAP") financial measures, including gross margin and Adjusted EPS.  A "non-GAAP financial measure" is generally defined as a numerical measure of a company's historical or future performance that includes or excludes amounts, or that is subject to adjustments, so as to be different from the most directly comparable measure calculated or presented in accordance with GAAP.  Our management believes certain non-GAAP financial measures, when considered together with GAAP financial measures, provide information that is useful to investors in understanding period-over-period operating results separate and apart from items that may, or could, have a disproportionately positive or negative impact on results in any particular period.

The Company calculates "gross margin" 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 and excludes depreciation, amortization and accretion.  Other companies may calculate gross margin in a different manner. Gross margin should not be considered an alternative to operating income or net income, both of which are determined in accordance with GAAP.  The Company 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 structures for unregulated businesses.  The Company's management uses gross margin in measuring its business units' performance. The Company believes that gross margin is a useful and meaningful measure for investors as it excludes the impact of several unusual items, including fair value accounting, timing adjustments associated with energy-related transactions and the impact of tax reform, which will not impact future results in the same magnitude. The Company calculates Adjusted EPS by excluding the impact of certain significant new non-cash items, including the impact of the revaluation of the Company's unregulated energy segment's deferred assets and liabilities, due to the TCJA changes, and the timing related to the unrealized MTM loss.

Operating Results for the Years Ended December 31, 2017 and 2016

Operating income increased by $1.7 million to $85.8 million for 2017. This increase was driven by an $18.9 million, or seven percent, increase in gross margin, which was partially offset by a $17.2 million increase in operating expenses, due to a $5.1 million increase in depreciation, asset removal, amortization and property taxes and a $12.0 million increase in other operating expenses to support growth. Excluding the unrealized MTM loss, gross margin grew by $24.6 million, or nine percent, and operating income rose $7.5 million, or nine percent, for 2017 versus 2016.

Regulated Energy
Operating income for the Regulated Energy segment increased by $3.3 million in 2017 compared to 2016. This increase was driven by an $11.5 million increase in gross margin, which was partially offset by $8.2 million in higher operating expenses associated with the margin growth. The significant components of the gross margin increase included:

• $3.7 million of incremental revenue from the implementation of new base rates for Eastern Shore, which were effective August 1, 2017;
• $2.8 million in additional margin from customer growth in the Company's natural gas distribution businesses (excluding service expansions);
• $2.1 million generated from recently completed natural gas transmission expansions, which are more fully discussed in the "Major Projects and Initiatives" section later in this press release;
• $1.9 million generated from additional GRIP investments in the Florida natural gas distribution operations;
• $831,000 generated as a result of the rate case settlement by the Company's Delaware natural gas distribution operations; and
• $537,000 from new natural gas transmission and distribution services provided to Eight Flags' CHP plant.

The significant drivers of the $8.2 million increase in operating expenses included:

• $4.1 million in higher depreciation, asset removal and property tax costs associated with recent capital investments;
• $3.6 million in higher payroll expenses for additional personnel to support growth;
• $1.0 million in regulatory expenses, due primarily to costs associated with Eastern Shore's rate case filing in 2017; partially offset by
• $529,000 in reduced credit, collection and customer services expenses.

Unregulated Energy
Operating income for the Unregulated Energy segment for 2017 was $12.5 million, a decrease of $1.4 million, or ten percent, compared to the same period in 2016. The decreased operating income was the net result of increased growth in all the unregulated energy businesses, which was more than offset by PESCO's unrealized MTM loss. Excluding the impact of the unrealized MTM loss, gross margin grew by $13.4 million, or 20.6 percent, and operating income rose by $4.4 million, or 31.9 percent, during 2017 compared to 2016.  In particular, PESCO's gross margin and operating income, exclusive of the unrealized MTM loss, grew by $3.4 million, or 72.7 percent, and $772,000, or 41.4 percent, respectively. 

The significant components of the gross margin increase included:

• $4.4 million in additional margin from Eight Flags' CHP plant, reflecting a full year of operations in 2017 compared to slightly more than six months in 2016;
• $3.4 million in margin growth for PESCO, generated primarily from natural gas sales to end users within one Columbia Gas of Ohio customer pool under a supplier agreement, which expired on March 31, 2017, as well as increased margin from commercial and industrial customers served in Florida;
• $2.8 million in additional margin from the propane distribution operations, composed of:
• $951,000 from higher propane sales, due to colder weather in December;
• $678,000 of additional gross margin from wholesale propane sales, due to increased volumes and favorable supply management activities by the Company's Delmarva propane operations and higher throughput margins from the Florida propane operations; and
• $645,000 of additional retail gross margin, also attributable to favorable supply management activities.
• $2.3 million of additional margin from Aspire Energy as a result of:
• $1.2 million associated with higher volumes, primarily as a result of customer growth for the local distribution companies served and colder temperatures in December; and
• $1.1 million of additional gross margin as a result of pricing amendments to long-term gas sales agreements.
• $658,000 of gross margin due to the absence of Xeron Inc.'s ("Xeron") operating loss recorded in 2016; partially offset by
• $5.8 million associated with PESCO's unrealized MTM loss, which was based upon fair value accounting at year end. A more detailed discussion of the unrealized MTM loss is provided in the Major Projects and Initiatives Section under "PESCO".

The significant components of the $9.0 million increase in operating expenses included:

• $2.9 million in higher operating expenses for Eight Flags' CHP plant in support of the higher margin generated;
• $2.9 million in higher payroll costs for additional personnel to support growth; 
• $1.0 million in higher depreciation, amortization and property taxes  expense, of which $476,000 relates to lower depreciation recorded in 2016 as a result of the final accounting valuation for Aspire Energy;
• $1.0 million in higher benefits and employee-related costs in 2017; and
• $594,000 in higher taxes other than property and income taxes.

Operating Results for the Quarters Ended December 31, 2017 and 2016

The Company's operating income for the fourth quarter of 2017 was $23.3 million, an increase of $1.4 million, or 6.6 percent, compared to the same quarter in 2016.  Excluding PESCO's unrealized MTM loss, gross margin grew by $10.6 million, or 15.1 percent, and operating income rose by $7.2 million, or approximately 33.0 percent, for the fourth quarter of 2017 versus the same quarter in 2016.

Regulated Energy Segment
Operating income for the Regulated Energy segment increased by $4.1 million to $21.2 million for the fourth quarter of 2017, compared to the same quarter in 2016. The increased operating income resulted from a $5.8 million increase in gross margin, partially offset by a $1.7 million increase in operating expenses. The significant components of the gross margin increase included:

• $2.7 million generated from implementation of new base rates for Eastern Shore;
• $840,000 in increased customer consumption of energy as a result of colder weather experienced during the fourth quarter of 2017;
• $791,000 in additional margin from customer growth in our natural gas distribution businesses (excluding service expansions);
• $639,000 generated from recently completed natural gas transmission expansions;
• $413,000 in margin recognized from the settled Delaware division rate case and the absence of the associated rate refund reserve recorded in the fourth quarter of 2016; and
• $283,000 generated by additional GRIP investments in the Florida natural gas distribution operations.

The significant components of the $1.7 million increase in operating expenses included:

• $2.0 million in higher staffing and associated costs for additional personnel to support growth;
• $649,000 in higher depreciation expense, amortization, asset removal and property tax costs associated with capital investments; offset by
• $459,000 in lower outside services expenses; and
• $254,000 in lower benefits and employee-related costs during the quarter.

Unregulated Energy Segment
Operating income for the Unregulated Energy segment for the fourth quarter of 2017 was $2.0 million, a decrease of $2.6 million compared to operating income for the same quarter in 2016. The decreased operating income reflects an $837,000 decrease in gross margin and a $1.8 million increase in operating expenses. Excluding the unrealized MTM loss previously mentioned, gross margin grew by $4.9 million, or 25.2 percent, and operating income increased by $3.2 million, or 69.1 percent, during the fourth quarter of 2017 compared to the same quarter in 2016.

Significant sources of higher gross margin included:

• $1.6 million in margin growth from PESCO, generated primarily from sales in the Appalachian Basin;
• $1.4 million in higher gross margin from the propane operations, consisting primarily of:
• $694,000 from higher customer consumption of propane due to colder temperatures; and
• $527,000 in higher gross margin from retail propane sales, due primarily to favorable supply management activities.
• $1.2 million from Aspire Energy, primarily as a result of:
• $750,000 in higher volumes of natural gas delivered due to colder temperatures in December 2017; and
• $351,000 in additional gross margin as a result of pricing amendments to long-term gas sales agreements and additional management fees.
• $590,000 of gross margin due to the absence of Xeron's operating loss recorded in the fourth quarter of 2016; offset by
• $5.8 million for PESCO's unrealized MTM loss, based upon fair value accounting at year end.

The significant components of the $1.8 million increase in operating expenses included:

• $1.5 million in higher staffing and associated costs for additional personnel to support growth; and
• $353,000 in higher depreciation, amortization and property tax costs due to increased capital investments and amortization of intangible assets acquired as part of acquisitions consummated in 2017.

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 2017 Annual Report on Form 10-K for further information on the risks and uncertainties related to the Company's forward-looking statements.

Conference Call

Chesapeake Utilities Corporation will host a conference call on March 2, 2018 at 10:30 a.m. Eastern Time to discuss the Company's financial results for the year and quarter ended December 31, 2017. To participate in this call, dial 855.801.6270 and reference Chesapeake Utilities' 2017 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 is a diversified energy company engaged in natural gas distribution, transmission, gathering and processing, and marketing; electricity generation and distribution; propane gas distribution; and other businesses. Information about Chesapeake Utilities and its family of businesses is available at http://www.chpk.com or through its IR App.

Please note that Chesapeake Utilities Corporation is not affiliated with Chesapeake Energy, an oil and natural gas exploration company headquartered in Oklahoma City, Oklahoma.

For more information, contact:

Beth W. Cooper
Senior Vice President & Chief Financial Officer
302.734.6799