Chesapeake Utilities Corporation Reports Fourth Quarter And Fiscal Year 2018 Results

DOVER, Del., Feb. 26, 2019 /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, 2018.

Reported net income for 2018 was $56.6 million, or $3.45 per share compared to $58.1 million, or $3.55 per share for 2017.  Adjusted 2018 net income increased to $54.3 million, or $3.31 per share, from $47.3 million, or $2.89 per share in 2017.  Continued growth across the Company's businesses, key regulatory initiatives and colder weather were the most significant contributors to higher earnings in 2018.

Fourth quarter 2018 GAAP net income was $17.8 million, or $1.08 per share compared to $26.1 million, or $1.59 per share in 2017.  Adjusted fourth quarter 2018 net income increased to $18.2 million, or $1.10 per share, from $15.3 million, or $0.93 per share in 2017. Higher 2018 fourth quarter adjusted earnings reflect continued growth across the Company's businesses.   A detailed discussion of operating results begins on page 3.

"Just two short months ago, I was appointed President and CEO of this very special company.  I continue to be energized by everything I see, including the results discussed herein, our employees which drive our success, our commitment to providing safe, clean, reliable energy services to existing and new communities, and other potential growth opportunities," stated Jeffry M. Householder, President and Chief Executive Officer. "2018 was another remarkable year by any measure.  2018 EPS exceeded our guidance of 17 percent growth over 2017 adjusted earnings.  Earnings were driven by our highest ever increase in gross margin, which reflected strong growth across our regulated and unregulated energy businesses.  Given the opportunities in our existing businesses and ongoing projects and initiatives, we are well positioned for future growth. It is an exciting time to lead this Company forward," Mr. Householder added.

Significant Items Impacting Earnings

Results for the year and fourth quarter of 2018 and 2017 were impacted by the following significant items:

The Company's reported EPS was $3.45 for 2018 compared to $3.55 in 2017. 2018 adjusted (non-GAAP) EPS totaled $3.31, representing 14.5 percent growth over 2017 adjusted (non-GAAP) EPS of $2.89.  Fourth quarter 2018 adjusted (non-GAAP) EPS of $1.10 reflects growth of 18.3 percent over fourth quarter adjusted (non-GAAP) EPS of $0.93 in 2017.

Hurricane Michael Update
In October 2018, Hurricane Michael passed through Florida Public Utilities Company's ("FPU") electric distribution operation's service territory in Northwest Florida. The hurricane caused widespread and severe damage to FPU's infrastructure resulting in 100 percent of its customers losing electrical service. FPU has restored service to those customers who were able to accept power following Hurricane Michael after a significant hurricane restoration effort.   In conjunction with restoring these services, FPU expended over $60 million to restore service, which has been recorded as new plant and equipment or charged against FPU's accumulated depreciation and storm reserve.  The Company has begun preparing the necessary regulatory filings to seek recovery for the costs incurred, including replenishment of the Company's storm reserve.  In conjunction with the hurricane-related expenditures, the Company executed two 13-month unsecured term loans as temporary financing, each in the amount of $30 million.  The interest cost associated with these loans is LIBOR plus 75 basis points.  One of the term loans was executed in December of 2018 and the other was executed on January 31, 2019. The storm did not have a material impact on the Company's financial results in 2018 as services were restored to a majority of its customers, and is not expected to have a significant impact going forward as the Company will be seeking recovery of the storm costs through rates.

*This press release includes references to non-Generally Accepted Accounting Principles ("GAAP") financial measures, including gross margin, adjusted earnings 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 revenues.  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. This press release also includes gross margin that excludes the impact of unusual items, such as the pass-through to customers of lower federal income taxes resulting from TCJA. The Company calculates "adjusted earnings" by adjusting reported (GAAP) earnings to exclude the impact of certain significant non-cash items, including the impact of realized MTM gains (losses), and one-time charges, such as severance charges.  "Adjusted EPS" is calculated by dividing adjusted earnings by the weighted average common shares outstanding.

**Unless otherwise noted, earnings per share information is presented on a diluted basis.

Operating Results for the Years Ended December 31, 2018 and 2017

Consolidated Results

Operating income, for the year ended December 31, 2018, increased by $7.2 million, or 8.2 percent, compared to the same period in 2017.  This increase was driven by a $27.1 million, or 9.7 percent, increase in gross margin, which is net of $9.6 million of estimated customer refunds for lower taxes associated with the TCJA.  The increased margin was partially offset by a $5.2 million increase in depreciation, amortization and property taxes and a $13.2 million increase in other operating expenses.  The pass-through of lower taxes to customers is completely offset by an equivalent reduction in income tax expenses for the Regulated Energy segment. Excluding the estimated pass-through of lower taxes to customers, gross margin and operating income increased by $36.6 million (13.1 percent) and $16.8 million (19.2 percent), respectively.

Regulated Energy Segment

Operating income for the Regulated Energy segment increased by $4.6 million, or 6.2 percent, for the year ended December 31, 2018 compared to the same period in 2017. This increase was driven by a $25.5 million increase in gross margin before the impact of the TCJA, which was partially offset by $4.2 million in higher depreciation and $7.1 million in other operating expenses associated with gross margin growth.  Excluding the estimated pass-through of lower taxes to customers, operating income increased by $14.2 million, or 19.0 percent.

The key components of the increase in gross margin are shown below:

The major components of the increase in other operating expenses are as follows:

Unregulated Energy Segment

Given the impact of MTM activity and increased infrastructure and risk management system costs, Peninsula Energy Services Company, Inc. ("PESCO")'s results continue to be reported separate from the rest of the Unregulated Energy segment:

Operating income for the Unregulated Energy segment, excluding PESCO, increased by $2.5 million in 2018 compared to 2017. Gross margin increased by $6.8 million, or 9.7 percent, due primarily to higher performance from the propane operations and at Aspire Energy, as well as more normal weather. Other operating expenses increased by $3.7 million, and depreciation, amortization and property taxes increased by $597,000 as a result of the margin growth.

The major components of the increase in gross margin (excluding PESCO results) are shown below:

The key components of the increase in other operating expenses (excluding PESCO expenses) are as follows:

PESCO's operating results in 2018 improved by $1.7 million compared to 2017 due primarily to MTM gains recorded in 2018 compared to MTM losses recorded in 2017, partially offset by the extraordinary costs of meeting demand requirements in the Mid-Atlantic region during the first quarter associated with the 2018 Bomb Cyclone, capacity constraints and other market conditions. PESCO's other operating expenses increased by $2.3 million compared to the same period in 2017, reflecting increased staffing, infrastructure and risk management systems to support PESCO's growth.  See a more detailed discussion later in the press release (page 19) and in the Company's 2018 Annual Report on Form 10-K.

Operating Results for the Quarters Ended December 31, 2018 and 2017

Consolidated Results

Operating income during the fourth quarter of 2018 increased by $5.3 million, or 22.4 percent, compared to the same period in 2017. Pass-through of lower taxes to regulated energy customers, as a result of the TCJA, reduced margin and operating income by approximately $2.0 million, and were offset by an equal reduction in income taxes.  Gross margin before the effect of the TCJA increased by $12.0 million, or 16.0 percent, and operating income increased by $7.3 million, or 30.8 percent.  Depreciation expense increased by $1.4 million, and other operating expenses increased by $3.3 million, reflecting increased investment and costs to support growth.

Regulated Energy Segment

Operating income for the Regulated Energy segment increased by $705,000, or 3.3 percent, in the fourth quarter of 2018 compared to the same period in 2017. This increase was driven by a $4.1 million increase in gross margin, offset by $3.4 million in higher depreciation and other operating expenses associated with the margin growth. Fourth quarter gross margin and operating income were also impacted by customer refunds of $2.0 million, due to the pass-through of lower taxes to regulated energy customers as a result of the TCJA. The decrease in gross margin and operating income from the customer refunds was completely offset by an equal reduction in income tax expense. Excluding the estimated pass-through to customers of lower taxes, operating income increased by $2.7 million, or 12.4 percent. This increase in operating income reflects continued growth in the natural gas distribution operations and expansions at Peninsula Pipeline and Eastern Shore, as shown in the table that follows.

The key components of the increase in gross margin are shown below:

The major components of the increase in other operating expenses are as follows:

Unregulated Energy Segment

As with full year results, PESCO's quarterly results are shown separate from the rest of the Unregulated Energy Segment.

Operating income for the Unregulated Energy segment, excluding PESCO, decreased by $473,000 for the three months ended December 31, 2018, compared to the same period in 2017. The decrease in operating income reflects a $278,000 increase in gross margin, offset by $562,000 in higher other operating expenses.

The major components of the increase in gross margin, excluding PESCO results, are shown below:

Other operating expenses were higher as a result of additional personnel, and outside services to support growth in these businesses, offset by lower incentive compensation costs as a result of actual results relative to pre-established targets and the timing of associated accruals.

The major components of the increase in other operating expenses are as follows:

For the three months ended December 31, 2018, PESCO's gross margin improved by $5.6 million, compared to the same period in 2017, due primarily to the absence of the unrealized MTM loss recorded in the fourth quarter of 2017.  PESCO's operating expenses increased by $498,000, compared to the same period in 2017, reflecting increased planned expenses for staff, infrastructure and risk management systems to keep pace with growth.  A more detailed discussion of PESCO's results for the fourth quarters of 2018 and 2017 is provided later in this release (page 19) and in the Company's 2018 Annual Report on Form 10-K.

Safe Harbor for Forward-Looking Statements
The Company makes statements in this Press Release that does not directly or exclusively relate to historical facts. Such statements are "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933, as amended, Section 21E of the Securities Exchange Act of 1934, as amended, and the Private Securities Litigation Reform Act of 1995. One can typically identify forward-looking statements by the use of forward-looking words, such as "project," "believe," "expect," "anticipate," "intend," "plan," "estimate," "continue," "potential," "forecast" or other similar words, or future or conditional verbs such as "may," "will," "should," "would" or "could." These statements represent the Company's intentions, plans, expectations, assumptions and beliefs about future financial performance, business strategy, projected plans and objectives of the Company. Forward-looking statements speak only as of the date they are made or as of the date indicated and we do not undertake any obligation to update forward-looking statements as a result of new information, future events or otherwise.  These statements are subject to many risks and uncertainties.  In addition to the risk factors described under Item 1A, Risk Factors, in the Company's 2018 Annual Report on Form 10-K,  the following important factors, among others, could cause actual future results to differ materially from those expressed in the forward-looking statements:

• state and federal legislative and regulatory initiatives that affect cost and investment recovery, have an impact on rate structures, and affect the speed and the degree to which competition enters the electric and natural gas industries;
• the outcomes of regulatory, environmental and legal matters, including whether pending matters are resolved within current estimates and whether the related costs are adequately covered by insurance or recoverable in rates;
• the impact of significant changes to current tax regulations and rates;
• the timing of certification authorizations associated with new capital projects and the ability to construct facilities at or below estimated costs;
• changes in environmental and other laws and regulations to which we are subject and environmental conditions of property that we now, or may in the future, own or operate;
• possible increased federal, state and local regulation of the safety of our operations;
• the economy in our service territories or markets, the nation, and worldwide, including the impact of economic conditions (which we do not control ) on demand for electricity, natural gas, propane or other fuels;
• risks related to cyber-attacks or cyber-terrorism that could disrupt our business operations or result in failure of information technology systems;
• the weather and other natural phenomena, including the economic, operational and other effects of hurricanes, ice storms and other damaging weather events;
• customers' preferred energy sources;
• industrial, commercial and residential growth or contraction in our markets or service territories;
• the effect of competition on our businesses;
• the timing and extent of changes in commodity prices and interest rates;
• the effect of spot, forward and future market prices on our various energy businesses;
• the extent of our success in connecting natural gas and electric supplies to transmission systems, establishing and maintaining key supply sources; and expanding natural gas and electric markets;
• the creditworthiness of counterparties with which we are engaged in transactions;
• the capital-intensive nature of our regulated energy businesses;
• the results of financing efforts, including our ability to obtain financing on favorable terms, which can be affected by various factors, including credit ratings and general economic conditions;
• the ability to successfully execute, manage and integrate a merger, acquisition or divestiture of assets or businesses and the related regulatory or other conditions associated with the merger, acquisition or divestiture;
• the impact on our costs and funding obligations, under our pension and other post-retirement benefit plans, of potential downturns in the financial markets, lower discount rates, and costs associated with health care legislation and regulation;
• the ability to continue to hire, train and retain appropriately qualified personnel; and
• the effect of accounting pronouncements issued periodically by accounting standard-setting bodies.

Conference Call

Chesapeake Utilities Corporation will host a conference call on March 1, 2019 at 10:30 a.m. Eastern Time to discuss the Company's financial results for the year and quarter ended December 31, 2018. To participate in this call, dial 855.801.6270 and reference Chesapeake Utilities' 2018 Financial Results Conference Call. To access the replay recording of this call, please visit the Company's website at CPK Earnings Results or download the replay on your mobile device by accessing the Audiocast section of the Company's Investor Relations 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 operations; and other businesses. Information about Chesapeake Utilities and its family of businesses is available at http://www.chpk.com or through its Investor Relations 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
Executive Vice President & Chief Financial Officer
302.734.6799

* See the Major Projects and Initiatives table later in this press release.

Key variances for the quarter ended December 31, 2018 included:

* See the Major Projects and Initiatives table later in this press release.

The following information highlights certain key factors contributing to the Company's results for the year and quarter ended December 31, 2018:

Recently Completed and Ongoing Major Projects and Initiatives

The Company constantly seeks and develops additional projects and initiatives to provide solutions for our customers and further increase shareholder value. The following represent the major projects and initiatives recently completed and currently underway. In the future, the Company will add new projects to this table when such projects are initiated.

Ongoing Growth Initiatives

Florida GRIP
GRIP is a natural gas pipe replacement program approved by the Florida Public Service Commission ("PSC"). Since the program's inception in August 2012, we have invested $127.0 million to replace 268 miles of qualifying distribution mains, including $13.3 million and $10.8 million during 2018 and 2017, respectively. GRIP generated additional gross margin of $1.3 million and $346,000 for the year and quarter ended December 31, 2018, respectively, compared to the same periods in 2017.  There are approximately 79 remaining miles of main that will be replaced under this program, at an estimated cost of $35.0 million.

Regulatory Proceedings

Eastern Shore Rate Case
Eastern Shore's rate case settlement agreement became final on April 1, 2018, with settlement rates effective January 1, 2018. The final agreement increases Eastern Shore's annual operating income by $6.6 million, representing an estimated $9.8 million in additional margin from base rates, offset by the pass-through of an estimated $3.2 million in lower federal income tax expense for Eastern Shore resulting from the TCJA.  For the year ended December 31, 2018, Eastern Shore recognized incremental gross margin of approximately $5.8 million. As of December 31, 2018, Eastern Shore has provided rate reductions to its customers totaling approximately $3.3 million as a result of the new rates.  Annual margin from the new rates in future years is estimated to be $9.8 million.

Florida Electric Reliability/Modernization Pilot Program
In December 2017, the Florida PSC approved a $1.6 million annualized rate increase effective January 2018, for the recovery of a limited number of investments and costs related to reliability, safety and modernization for our Florida electric distribution system. This increase will continue through at least the last billing cycle of December 2019.  For the year and quarter ended December 31, 2018, additional margin of $1.5 million and $285,000, respectively, was generated by this program.

Major Projects and Initiatives Currently Underway

New Smyrna Beach, Florida Project
In the fourth quarter of 2017, we commenced construction of a 14-mile natural gas transmission pipeline to serve current and planned customer growth in the New Smyrna Beach service area. The project was partially placed into service at the end of 2017 and was fully placed into service during the fourth quarter of 2018.  For the year and quarter ended December 31, 2018, the project generated incremental gross margin of approximately $1.2 million and $117,000 compared to the same periods in 2017.  The project is expected to generate $1.4 million in annual gross margin going forward.

2017 Eastern Shore System Expansion Project
From November 2017 to December 2018, Eastern Shore substantially completed the construction of a system expansion that increased its capacity by 26 percent. The first phase of the project was placed into service in December 2017.  For the quarter and year ended December 31, 2018, the project generated $3.1 million and $7.5 million, respectively, of incremental gross margin, including margin from interim services, compared to 2017.  The project is expected to produce total annual margin of approximately $15.7 million in 2019, $15.8 million from 2020 through 2022, and $13.2 million thereafter.

Northwest Florida Expansion Project
Peninsula Pipeline completed construction of transmission lines, and the Company's Florida natural gas division completed construction of lateral distribution lines, to serve customers in Northwest Florida. The project was placed into service in May 2018, generating gross margin of $1.3 million and $3.5 million for the quarter and year ended December 31, 2018, respectively, and is expected to generate estimated annual gross margin of $6.5 million thereafter.

Western Palm Beach County, Florida Project
Peninsula Pipeline is constructing transmission lines to bring natural gas to our natural gas distribution system in West Palm Beach, Florida. The first phase of this project was placed into service in December 2018 and generated gross margin of $54,000 for the year and quarter ended December 31, 2018. The Company expects to complete this project in phases through early 2020 and estimates gross margin of $1.3 million for 2019 and annual gross margin of approximately $5.4 million, once the project is fully in service.

Marlin Gas Services
In December 2018, the Company acquired certain operating assets of Marlin Gas Transport, Inc., a supplier of mobile compressed natural gas utility and pipeline solutions, and a new subsidiary was created named Marlin Gas Services.  The acquisition will enable us to offer solutions to address customer supply interruption scenarios and tailor other alternatives where pipeline supplies are not available. Results generated in 2018 were immaterial given the date of acquisition.  The Company estimates that this acquisition will generate gross margin of approximately $4.5 million in 2019, with potential for additional growth in future years.

Ohl Propane Acquisition
In December 2018, Sharp acquired certain propane customers and operating assets of R. F. Ohl Fuel Oil, Inc. ("Ohl").  Ohl provided propane delivery service to approximately 2,500 residential and commercial customers in Pennsylvania, between two of Sharp's existing districts.  The acquired customers and assets have been assimilated into Sharp.  Results generated in 2018 were immaterial, given the date of acquisition.  The Company estimates that this acquisition will generate gross margin of approximately $1.2 million in 2019, with potential for additional growth in future years.

Future Projects not included in the Table above

Del-Mar Energy Pathway Project
In September 2018, Eastern Shore filed for FERC authorization to construct the Del-Mar Energy Pathway project to provide an additional 14,300 Dts/d of capacity to four customers. The benefits of this project include additional natural gas transmission pipeline infrastructure in eastern Sussex County, Delaware, and the initial extension of Eastern Shore's pipeline system into Somerset County, Maryland. The estimated annual gross margin from this project is $5.1 million.  Eastern Shore anticipates that this project would be fully in-service by the third quarter of 2020 contingent upon FERC issuing authorization for the project by August 2019.

Weather and Consumption
The impact of colder temperatures on customer consumption during 2018 contributed $5.0 million in incremental gross margin compared to 2017.  While 2018 was colder than 2017, it was still 1.1 percent warmer than normal (average across our service territories).  Normal weather during 2018 would have generated $4.0 million in additional gross margin.

For the quarter ended December 31, 2018, warmer weather on the Delmarva Peninsula lowered gross margin by $351,000 compared to the same period in 2017.  Normal weather during the fourth quarter would have generated $1.5 million in additional gross margin.  The following table summarizes the heating degree-days ('HDD") and cooling degree-days ("CDD") information for the years and quarters ended December 31, 2018 and 2017 and shows variances between actual and "Normal" (10-year average) HDD and CDD for those periods.

HDD and CDD Information

Note: The Company continually refines and updates its weather calculations. These refinements may result in the annual impact varying from the aggregate of the quarterly variances previously disclosed.

Natural Gas Distribution Customer and Consumption Growth
Customer growth for the Company's natural gas distribution operations generated $3.9 million and $1.1 million in additional gross margin for the year and quarter ended December 31, 2018, respectively, compared to the same periods in 2017.  The additional margin was generated from an increase of approximately 3.3 percent in the average number of residential customers served, growth in volumes delivered to commercial and industrial customers on the Delmarva Peninsula and in Florida, and new service initiated to customers in Northwest Florida.

Higher residential and commercial customer consumption increased gross margin by $2.0 million and $501,000 for the year and quarter ended December 31, 2018, respectively, compared to the same periods in 2017.

Propane Operations
The Company's Florida and Mid-Atlantic propane distribution operations continue to pursue a multi-pronged growth plan, which includes: targeting retail and wholesale customer growth in existing markets, both organically as well as through acquisitions; incremental growth from recent and planned start-ups in new markets; targeting new community gas systems in high growth areas; further build-out of the Company's propane vehicular platform through AutoGas fueling stations; and optimization of its supply portfolio to generate incremental margin opportunities. Our propane operations and AutoGas segment install and support propane vehicle conversion systems for vehicle fleets, including converting fleets to bi-fuel propane-powered engines and providing on-site fueling infrastructure.

These operations generated $4.9 million and $68,000 in incremental margin for the year and quarter ended December 31, 2018, respectively, compared to the same periods in 2017. For the year ended December 31, 2018, $2.2 million of the margin increase reflected the impact of colder temperatures.  The balance of the gross margin increase for the year reflected the impact of the growth strategies discussed above, including generating approximately a four percent increase in customers.  Supply management initiatives have also increased retail propane margins from many customer classes and margin from wholesale propane sales.

PESCO
PESCO's gross margin for the year and quarter ended December 31, 2018 increased by $4.4 million and $5.6 million, respectively, compared to the same periods in 2017. The following table summarizes the changes in PESCO'S year-over-year margin for the year and quarter ended December 31, 2018: