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Chesapeake Utilities Corporation Reports Third Quarter Results

DOVER, Del., Nov. 9, 2017 /PRNewswire/ -- Chesapeake Utilities Corporation (NYSE: CPK) ("Chesapeake Utilities" or the "Company") today reported third quarter financial results. The Company's net income for the quarter ended September 30, 2017 was $6.8 million, compared to $4.4 million for the same quarter of 2016. Earnings per share ("EPS") for the quarter ended September 30, 2017 were $0.42 per share, compared to $0.29 per share for the same quarter of 2016. The increase in net income reflected margin growth across business units for both the Regulated Energy and Unregulated Energy segments, as well as lower operating and maintenance expenses for the quarter.

For the nine months ended September 30, 2017, the Company reported net income of $32.0 million, or $1.96 per share. This represents a decrease of $789,000, or $0.18 per share, compared to the same period in 2016. Higher margins from the Eight Flags Energy, LLC ("Eight Flags") combined heat and power ("CHP") plant, Peninsula Energy Services Company, Inc. ("PESCO"), and Aspire Energy of Ohio, LLC ("Aspire Energy"), new services and customer growth in the natural gas transmission and distribution operations in Florida and on the Delmarva Peninsula, and new rates for Eastern Shore Natural Gas Company ("Eastern Shore") offset the increase in higher expenses to generate and support growth and the impact of warmer weather. An increase in outstanding shares as a result of the equity issuance in September 2016 lowered earnings per share by approximately $0.12 per share for the nine months ended September 30, 2017.

"Our solid results for the third quarter reflect the diverse sources of new gross margin throughout our Company," stated Michael P. McMasters, President and Chief Executive Officer. "Recently completed growth projects are adding value for our stockholders. In the near term, we will commence construction of Eastern Shore's largest ever expansion project, expected to be completed in early 2018, as well other projects that will cultivate future growth," he added. "Investments in system expansion, acquisitions, new service offerings and unique projects like Eight Flags, enhance the continued growth in customers and deliveries in our natural gas distribution and transmission businesses. Our employees continue to excel in identifying new opportunities for growth, and profitably managing current growth. We are also maintaining operating efficiency while providing safe, reliable service to our customers," he concluded.

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

Comparative Results for the Quarters Ended September 30, 2017 and 2016

Operating income for the third quarter increased by $4.1 million to $14.2 million, compared to the same period in 2016, driven by higher retail propane sales volumes and margins, implementation of new rates for Eastern Shore (subject to refund), additional margin from the Gas Reliability Infrastructure Program ("GRIP"), and continued growth from the Company's Delmarva and Florida natural gas distribution operations. Gross margin increased by $4.6 million, or 8.2 percent, which was offset by an increase in other operating expenses of $473,000, or 1.0 percent.

Regulated Energy Segment

Operating income for the Regulated Energy segment increased by $2.1 million, or 15.7 percent, compared to the same period in 2016. Higher operating income resulted from increased gross margin of $1.5 million during the quarter, or 3.4 percent, and a decrease in other operating expenses of $519,000.

The significant components of the $1.5 million gross margin increase included:

  • $1.0 million of incremental revenue from the implementation of new rates for Eastern Shore, which were effective August 1, 2017.
  • $406,000 generated from additional GRIP investments in the Florida natural gas distribution operations; and
  • $566,000 increase from customer growth in the natural gas distribution businesses (excluding service expansions) which was partially offset by a $219,000 decrease in interruptible margin from Eastern Shore.

The significant factors contributing to the net decrease of $519,000 in other operating expenses included:

  • $1.6 million in lower outside services and facilities and maintenance costs, due primarily to lower consulting and service contractor costs;
  • $437,000 in lower benefits and employee-related costs in 2017 (since the Company is self-insured for healthcare, benefits costs fluctuate depending upon claims filed);
  • $1.4 million in higher depreciation, asset removal and property tax costs associated with recent capital investments.

Unregulated Energy Segment

Operating income for the Unregulated Energy segment increased by $2.1 million, or 67.9 percent, compared to the same period in 2016. Gross margin increased by $3.1 million, or 30.1 percent, which was offset by an increase of $1.0 million, or 7.4 percent, in other operating expenses.

The significant components of the $3.1 million gross margin increase were as follows:

  • $1.2 million of additional gross margin from increased sales volumes of propane to wholesale and retail customers on the Delmarva Peninsula and in Florida as well as higher sales of natural gas by Aspire Energy;
  • $440,000 and $271,000 of additional gross margin from retail and wholesale propane margins, respectively, due primarily to favorable supply management activities;
  • $297,000 of additional gross margin from Eight Flags operations, which was fully on-line in the third quarter of 2017;
  • $291,000 of additional gross margin from Aspire Energy as a result of pricing amendments to long-term sales agreements; and
  • $233,000 in increased gross margin due to the absence of the loss for Xeron recorded in the third quarter of 2016.

The principal components of the $1.0 million increase in other operating expenses were: $730,000 in higher staffing and associated costs for additional personnel to support growth, $293,000 in expenses associated with the incremental margin from Eight Flags, and $347,000 in higher depreciation, amortization and property tax costs due to increased capital investments and amortization of intangible assets acquired through acquisitions in 2017.

Comparative Results for the Nine Months Ended September 30, 2017 and 2016

Operating income for the nine months ended September 30, 2017 increased by $303,000 to $62.6 million, compared to $62.3 million for the same period in 2016. Gross margin increased by $14.0 million, or 7.3 percent, net of the negative impact of weather, which reduced margin by approximately $1.8 million for the first nine months. Other operating expenses increased by $13.7 million, or 10.7 percent, due primarily to a $4.3 million increase in depreciation, amortization and property taxes and a $9.4 million increase in other operating expenses to support growth.

Regulated Energy Segment

Operating income for the Regulated Energy segment decreased by $745,000, or 1.4 percent, compared to the same period in 2016, due principally to weather and the level and timing of costs associated with growth. Gross margin increased by $5.7 million, despite the impact of weather, which reduced margin by approximately $850,000 for the nine months ended September 30, 2017. The $3.5 million increase in depreciation, amortization and taxes and $3.0 million increase in other operating expenses largely reflect costs associated with recently completed and planned growth projects. Of the total $6.4 million increase in other operating expenses, $4.7 million is associated with Eastern Shore's recently completed projects as well as initiatives that are currently underway.

The significant components of the $5.7 million gross margin increase included:

  • $1.6 million generated by additional GRIP investments in the Florida natural gas distribution operations;
  • $1.6 million from growth in natural gas distribution and transmission services (excluding service expansions);
  • $1.4 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;
  • $1.0 million from the implementation of Eastern Shore's new rates, as discussed previously;
  • $534,000 from new natural gas transmission and distribution services provided to Eight Flags' CHP plant; and
  • $249,000 generated as a result of the rate case settlement by the Company's Delaware natural gas distribution operations.

The foregoing increases were offset by a decrease in gross margin of $1.2 million from lower customer consumption of energy for the Company's distribution operations in Florida and on the Delmarva Peninsula, due primarily to weather, particularly warmer weather during the first quarter.

The significant components of the $6.4 million increase in other operating expenses included:

  • $3.5 million in higher depreciation, asset removal and property tax costs associated with recent capital investments;
  • $1.6 million in higher payroll costs for additional personnel to support growth;
  • $855,000 in increased regulatory expenses, due primarily to Eastern Shore's rate case; and
  • $722,000 in higher benefits and employee-related costs in 2017 (since the Company is self-insured for healthcare, benefits costs fluctuate depending upon filed claims).

Unregulated Energy Segment

Operating income for the Unregulated Energy segment for the nine months ended September 30, 2017 was $10.5 million, an increase of $1.2 million, or 13.3 percent, compared to the same period in 2016. Gross margin increased by $8.4 million, or 18.6 percent, which was offset by an increase of $7.2 million, or 20.0 percent, in operating expenses for the nine months ended September 30, 2017.

The significant components of the $8.4 million gross margin increase were as follows:

  • $4.2 million of additional gross margin from Eight Flags' CHP plant, which commenced operations in June 2016;
  • $1.8 million from PESCO, due to an increase in the number of contracts and customers served as well as additional revenue in the first quarter from providing natural gas to a customer in Ohio under a supplier agreement, which expired on March 31, 2017;
  • $1.1 million of additional gross margin from Aspire Energy as a result of pricing amendments to long-term gas sales agreements;
  • $728,000 of additional gross margin from wholesale propane sales, due primarily to favorable supply management activities; and
  • $168,000 of additional gross margin, due primarily to higher sales of propane in Florida, a portion of which was associated with the timing of deliveries due partially to weather conditions in the third quarter of 2017, offset by the impact of warmer weather during the first six months of 2017.

The significant components of the $7.2 million increase in other operating expenses included:

  • $2.8 million in higher operating expenses by Eight Flags' CHP plant in support of the margin generated;
  • $1.5 million in higher payroll costs for additional personnel to support growth;
  • $950,000 in higher benefits and employee-related costs in 2017 (since the Company is self-insured for healthcare, benefits costs fluctuate depending upon claims filed);
  • $800,000 in higher depreciation expense, of which $424,000 relates to a credit adjustment in 2016 recorded in conjunction with the final valuation for Aspire Energy; and
  • $350,000 in higher outside services costs associated primarily with growth and ongoing compliance activities.

The Company also incurred $367,000 in non-operating expenses to complete the wind-down of Xeron's operations.

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 2016 Annual Report on Form 10-K for further information on the risks and uncertainties related to the Company's forward-looking statements.

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

Unless otherwise noted, earnings per share are presented on a diluted basis.

Conference Call

Chesapeake Utilities will host a conference call on Friday, November 10, 2017, at 10:30 a.m. Eastern Time to discuss the Company's financial results for the quarter and nine months ended September 30, 2017. To participate in this call, dial 855.801.6270 and reference Chesapeake Utilities' 2017 Third Quarter 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 Audio cast 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


Financial Summary

(in thousands, except per share data)







Three Months Ended


Nine Months Ended


September 30,


September 30,


2017


2016


2017


2016

Gross Margin (1)








Regulated Energy segment

$

46,909



$

45,375



$

151,147



$

145,446


Unregulated Energy segment

13,272



10,202



53,827



45,380


Other businesses and eliminations

(105)



(57)



(325)



(166)


Total Gross Margin

$

60,076



$

55,520



$

204,649



$

190,660










Operating Income








Regulated Energy segment

$

15,168



$

13,115



$

51,915



$

52,660


Unregulated Energy segment

(989)



(3,080)



10,504



9,267


Other businesses and eliminations

60



121



161



350


Total Operating Income

14,239



10,156



62,580



62,277










Other Income (Expense), net

239



(28)



(643)



(68)


Interest Charges

3,321



2,722



9,133



7,996


Pre-tax Income

11,157



7,406



52,804



54,213


Income Taxes

4,324



2,990



20,781



21,401


Net Income

$

6,833



$

4,416



$

32,023



$

32,812










Earnings Per Share of Common Stock








Basic

$

0.42



$

0.29



$

1.96



$

2.14


Diluted

$

0.42



$

0.29



$

1.96



$

2.14


















(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 and excludes depreciation, amortization and accretion. Gross margin should not be considered an alternative to operating income or net income, 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 structure for non-regulated segments. The Company's management uses gross margin in measuring its business units' performance. Other companies may calculate gross margin in a different manner.


Financial Summary Highlights

Key variances, between the three months ended September 30, 2016 and 2017, included:








(in thousands, except per share data)


Pre-tax
Income


Net
Income


Earnings
Per Share

Third Quarter of 2016 Reported Results


$

7,406



$

4,416



$

0.29









Adjusting for unusual items:







Absence of Xeron's third quarter 2016 loss


545



334



0.02


Weather impact


(333)



(204)



(0.01)




212



130



0.01


Increased Gross Margins:







Customer consumption (non-weather)


1,166



714



0.05


Implementation of new rates for Eastern Shore*


1,020



625



0.04


Retail propane margins


440



270



0.02


GRIP*


406



249



0.02


Natural gas growth (excluding service expansions)


347



213



0.01


Eight Flags' CHP plant


304



186



0.01


Pricing amendments to Aspire Energy's long-term agreements


291



178



0.01


Higher wholesale propane volumes and margins


271



166



0.01




4,245



2,601



0.17


Decreased (Increased) Other Operating Expenses:







Higher depreciation, asset removal and property tax costs due to new capital
investments


(1,710)



(1,047)



(0.07)


Lower outside services and facilities maintenance costs


1,678



1,028



0.07


Higher payroll expense


(913)



(559)



(0.04)


Lower benefit and other employee-related expenses


295



181



0.01


Eight Flags' operating expenses


293



179



0.01




(357)



(218)



(0.02)









Net other changes


(349)



(96)



(0.01)




(349)



(96)



(0.01)









EPS impact of increase in outstanding shares due to September 2016 offering






(0.02)


Third Quarter of 2017 Reported Results


$

11,157



$

6,833



$

0.42















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

Key variances, between the nine months ended September 30, 2016 and 2017, included:








(in thousands, except per share data)


Pre-tax
Income


Net
Income


Earnings
Per Share

Nine Months Ended September 30, 2016 Reported Results


$

54,213



$

32,812



$

2.14









Adjusting for unusual items:







Weather impact


(1,782)



(1,081)



(0.07)


Wind-down and absence of loss from Xeron operations


(341)



(207)



(0.01)




(2,123)



(1,288)



(0.08)


Increased Gross Margins:







Eight Flags' CHP plant


4,721



2,863



0.19


Natural gas marketing


1,760



1,067



0.07


GRIP*


1,619



982



0.06


Natural gas growth (excluding service expansions)


1,574



955



0.06


Service expansions*


1,371



831



0.05


Pricing amendments to Aspire Energy's long-term agreements


1,143



693



0.04


Implementation of new rates for Eastern Shore*


1,020



619



0.04


Wholesale propane margins


728



441



0.03


Customer consumption (non-weather)


700



425



0.03


Implementation of Delaware Division settled rates


249



151



0.01




14,885



9,027



0.58


Increased Other Operating Expenses:







Higher depreciation, asset removal and property tax costs due to new capital
investments


(4,251)



(2,578)



(0.17)


Higher payroll expense


(3,074)



(1,864)



(0.12)


Eight Flags' operating expenses


(2,821)



(1,711)



(0.11)


Higher benefit and other employee-related expenses


(1,669)



(1,012)



(0.07)


Higher regulatory expenses associated with rate filings


(855)



(519)



(0.03)


Higher outside services and facilities maintenance costs


(318)



(193)



(0.01)




(12,988)



(7,877)



(0.51)









Interest charges


(1,136)



(689)



(0.04)


Net other changes


(47)



38



(0.01)




(1,183)



(651)



(0.05)









EPS impact of increase in outstanding shares due to September 2016 offering






(0.12)


Nine Months Ended September 30, 2017 Reported Results


$

52,804



$

32,023



$

1.96















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


Major Projects and Initiatives

The following table summarizes gross margin for the Company's major projects and initiatives recently completed and initiatives currently underway, but which will be completed in the future. Gross margin reflects operating revenue less cost of sales, excluding depreciation, amortization and accretion (dollars in thousands):


Gross Margin for the Period


Three Months Ended

Nine Months Ended

Year Ended







September 30,

September 30,

December 31,

Estimate for


2017


2016


Variance

2017


2016


Variance

2016

2017


2018


2019

Major Projects and Initiatives
Recently Completed
















Capital Investment Projects

$

9,807


$

8,963


$

844

$

29,533


$

21,822


$

7,711

$

29,819

$

35,346


$

31,814


$

32,724

Eastern Shore Rate Case (1)

1,020



1,020

1,020



1,020

TBD


TBD


TBD

Settled Delaware Division Rate Case

431


469


(38)

1,596


1,347


249

1,487

2,250


2,250


2,250

Total Major Projects and Initiatives Recently Completed

11,258


9,432


1,826

32,149


23,169


8,980

31,306

37,596


34,064


34,974

Future Major Projects and Initiatives

















Capital Investment Projects

















2017 Eastern Shore System Expansion





126


9,313


15,799

Northwest Florida Expansion






3,484


5,127

Other Florida Pipeline Expansions






2,044


2,542

Total Future Major Projects and Initiatives





126


14,841


23,468

Total

$

11,258


$

9,432


$

1,826

$

32,149


$

23,169


$

8,980

$

31,306

$

37,722


$

48,905


$

58,442











































































(1) In January 2017, Eastern Shore filed a rate case with the FERC to recover the costs of the 2016 System Reliability Project and other investments and expenses
associated with the expansion, reliability and safety initiatives completed by ESNG since its last rate settlement in 2012. Settlement discussions among Eastern Shore,
intervenors and the FERC Staff are ongoing and future margin contributions will be provided once a settlement is finalized. For the third quarter of 2017, a portion of the
increase in rates, implemented subject to refund in August 2017, has been recorded as revenue and the remainder has been reserved pending the settlement.

Major Projects and Initiatives Recently Completed

The following table summarizes gross margin generated from the Company's major projects and initiatives recently completed (dollars in thousands):


Gross Margin for the Period


Three Months Ended

Nine Months Ended

Year Ended








September 30,

September 30,

December 31,


Estimate for


2017


2016


Variance

2017


2016


Variance

2016


2017


2018


2019

Capital Investment Projects:


















Service Expansions:


















Short-term contracts (Delaware)

$

1,283


$

3,080


$

(1,797)


$

5,140


$

8,271


$

(3,131)

$

11,454


$

5,642


$

1,096


$

1,096

Long-term contracts (Delaware)

2,793


862


1,931


7,089


2,587


4,502

1,815


7,611


7,605


7,583

Total Service Expansions

4,076


3,942


134


12,229


10,858


1,371

13,269


13,253


8,701


8,679

Florida GRIP

3,393


2,987


406


10,002


8,383


1,619

11,552


13,727


14,407


15,085

Eight Flags' CHP Plant

2,338


2,034


304


7,302


2,581


4,721

4,998


8,366


8,706


8,960

Total Capital Investment Projects

9,807


8,963


844


29,533


21,822


7,711

29,819


35,346


31,814


32,724

Eastern Shore Rate Case (1)

1,020



1,020


1,020



1,020


TBD


TBD


TBD

Settled Delaware Division Rate Case

431


469


(38)


1,596


1,347


249

1,487


2,250


2,250


2,250

Total Major Projects and Initiatives Recently Completed

$

11,258


$

9,432


$

1,826


$

32,149


$

23,169


$

8,980

$

31,306


$

37,596


$

34,064


$

34,974






























(1) In January 2017, Eastern Shore filed a rate case with the FERC to recover the costs of the 2016 System Reliability Project and other investments and expenses associated with the expansion, reliability and safety initiatives completed by ESNG since its last rate settlement in 2012. Settlement discussions among Eastern Shore, intervenors and the FERC Staff are ongoing and future margin contributions will be provided once a settlement is finalized. For the third quarter of 2017, a portion of the increase in rates, implemented subject to refund in August 2017, has been recorded as revenue and the remainder has been reserved pending the settlement.

Service Expansions

In August 2014, Eastern Shore entered into a precedent agreement with an electric power generator in Kent County, Delaware, to provide a 20-year OPT 90≤ natural gas transmission service for 45,000 dekatherms per day ("Dts/d") deliverable to the lateral serving the customer's facility. In July 2016, the FERC authorized Eastern Shore to construct and operate the project, which consists of 5.4 miles of 16-inch pipeline looping and new compression capability in Delaware. Eastern Shore provided interim services to this customer pending construction of facilities. Construction of the project was completed, and long-term service commenced in March 2017. This service generated an additional gross margin of $106,000 during the nine months ended September 30, 2017 compared to the same period in 2016. There was no incremental margin change during the third quarter as the margin generated from the permanent services equated to the margin generated from providing interim services during the third quarter of 2016. This service is expected to generate gross margin of $7.0 million for 2017 and between $5.8 million and $7.8 million annually through the remaining term of the agreement.

In October 2015, Eastern Shore submitted an application to the FERC to make certain meter tube and control valve replacements and related improvements at its Texas Eastern Transmission, LP ("TETLP") interconnect facilities to increase natural gas receipts from TETLP by 53,000 Dts/d, for a total capacity of 160,000 Dts/d. In December 2015, the FERC authorized Eastern Shore to proceed with this project, which was completed and placed in service in March 2016. Approximately 35 percent of the increased capacity has been subscribed on a short-term firm service basis through October 2017. This service generated an additional gross margin of $80,000 and $1.3 million for the three and nine months ended September 30, 2017, respectively, compared to the same periods in 2016. The remaining capacity is available for firm or interruptible service.

System Reliability Project: In July 2016, the FERC authorized Eastern Shore to construct and operate the proposed System Reliability Project, which consisted of approximately 10.1 miles of 16-inch pipeline looping and auxiliary facilities in New Castle and Kent Counties, Delaware, and a new compressor at its existing Bridgeville compressor station in Sussex County, Delaware. A 2.5 mile looping segment was completed and placed into service in December 2016. The remaining looping and the new compressor were completed and placed into service in the second quarter of 2017. This project was included in Eastern Shore's January 2017 base rate case filing with the FERC. The Company has assumed recovery of this project's costs in August 2017, coinciding with the proposed effectiveness of new rates, subject to refund pending final resolution of the base rate case.

GRIP

GRIP is a natural gas pipe replacement program approved by the Florida Public Service Commission ("PSC"), designed to expedite the replacement of qualifying distribution mains and services (any material other than coated steel or plastic) to enhance the reliability and integrity of the Company's Florida natural gas distribution systems. This program allows recovery, through regulated rates, of capital and other program-related costs, inclusive of a return on investment, associated with the replacement of the mains and services. Since the program's inception in August 2012, the Company has invested $110.5 million to replace 240 miles of qualifying distribution mains, including $7.6 million during the first nine months of 2017. The increased investment in GRIP generated additional gross margin of $406,000 and $1.6 million for the three and nine months ended September 30, 2017, respectively, compared to the same periods in 2016.

Eight Flags' CHP plant

In June 2016, Eight Flags completed construction of a CHP plant on Amelia Island, Florida. This CHP plant, which consists of a natural-gas-fired turbine and associated electric generator, produces approximately 20 megawatts of base load power and includes a heat recovery steam generator capable of providing approximately 75,000 pounds per hour of residual steam. In June 2016, Eight Flags began selling power generated from the CHP plant to Florida Public Utilities Company ("FPU"), the Company's wholly-owned subsidiary, pursuant to a 20-year power purchase agreement for distribution to FPU's retail electric customers. In July 2016, it also started selling steam to the industrial customer that owns the property on which Eight Flags' CHP plant is located, pursuant to a separate 20-year contract.

The CHP plant is powered by natural gas transported by FPU through its distribution system and by Peninsula Pipeline Company, Inc. ("Peninsula Pipeline"), the Company's wholly-owned Florida intrastate pipeline subsidiary. For the three and nine months ended September 30, 2017, Eight Flags and other affiliates of the Company generated $304,000 and $4.7 million, respectively, in additional gross margin as a result of these services that began in June 2016. This amount includes gross margin of $7,000 and $534,000, for the three and nine months ended September 30, 2017, respectively, attributable to natural gas distribution and transportation services provided to the CHP plant by the Company's regulated affiliates.

Major Projects and Initiatives Currently Underway

Northwest Florida Expansion Project: Peninsula Pipeline and the Company's Florida natural gas division are constructing a pipeline in Escambia County, Florida that will interconnect with the Florida Gas Transmission Company ("FGT") interstate pipeline. The project consists of 33 miles of 12-inch transmission line from the FGT interconnect that will be operated by Peninsula Pipeline and 8 miles of 8-inch lateral distribution lines that will be operated by the Company's Florida natural gas division. The Company has signed agreements to serve two large customers and is marketing to other customers close to the facilities. The estimated annual gross margin associated with this project, once in service, is approximately $5.1 million.

New Smyrna Beach, Florida Project: Peninsula Pipeline is constructing a pipeline in Volusia County, Florida that will interconnect with FGT's pipeline. The project consists of 14 miles of transmission line from the FGT interconnect that will be operated by Peninsula Pipeline. The Company entered into an agreement to serve FPU customers. The estimated annual gross margin associated with this project, once in service, is approximately $1.4 million.

2017 Expansion Project: In May 2016, Eastern Shore submitted a request to the FERC to initiate the FERC's pre-filing process for its proposed 2017 Expansion Project. This project, which will expand Eastern Shore's firm service capacity by 26 percent, will provide 61,162 Dts/d of additional firm natural gas transportation service on Eastern Shore's pipeline system with an additional 52,500 Dts/d of firm transportation service at certain Eastern Shore receipt facilities pursuant to precedent agreements Eastern Shore entered into with existing customers. We expect to invest approximately $115.0 million in this expansion project and for the project to generate approximately $15.8 million of gross margin in the first full year after the new transportation services go into effect. On October 4, 2017, FERC issued a Certificate of Public Convenience and Necessity authorizing Eastern Shore to construct and operate the proposed 2017 Expansion Project.

Other major factors influencing gross margin

Weather and Consumption
Temperature variation in 2017 negatively impacted the Company's earnings. Compared to the prior year, cooler temperatures in Florida during the third quarter of 2017, reduced gross margin by $333,000, and warmer temperatures in all of the Company's service territories during the first nine months of 2017, reduced gross margin by $1.8 million, respectively. Warmer than normal temperatures for the quarter and nine months ended September 30, 2017, reduced gross margin by $193,000 and $4.3 million, respectively. The following table summarizes heating degree-day ("HDD") and cooling degree-day ("CDD") variances from the 10-year average HDD/CDD ("Normal") for the three and nine months ended September 30, 2017 and 2016.

HDD and CDD Information










Three Months Ended




Nine Months Ended




September 30,




September 30,




2017


2016


Variance


2017


2016


Variance

Delmarva












Actual HDD

16



11



5



2,262



2,590



(328)


10-Year Average HDD ("Delmarva Normal")

62



65



(3)



2,845



2,919



(74)


Variance from Delmarva Normal

(46)



(54)





(583)



(329)




Florida












Actual HDD







298



514



(216)


10-Year Average HDD ("Florida Normal")







602



553



49


Variance from Florida Normal







(304)



(39)




Ohio












Actual HDD

80



39



41



3,072



3,596



(524)


10-Year Average HDD ("Ohio Normal")

92



103



(11)



3,866



3,865



1


Variance from Ohio Normal

(12)



(64)





(794)



(269)




Florida












Actual CDD

1,526



1,679



(153)



2,606



2,792



(186)


10-Year Average CDD ("Florida CDD Normal")

1,542



1,523



19



2,579



2,548



31


Variance from Florida CDD Normal

(16)



156





27



244




Propane Operations
The Company's Florida and Delmarva propane distribution operations added $2.0 million and $1.4 million, in incremental margin for the three and nine months ended September 30, 2017, respectively, compared to the same periods in 2016. Higher volumes sold to retail customers and improved margins due to effective supply management activities generated $905,000 and $440,000, in incremental margin, for the three months ended September 30, 2017, respectively, compared to the same period in 2016 and higher service revenue added $187,000 in additional margin, during the quarter.

For the nine months ended September 2017, higher volumes sold to retail customers and improved margins due to effective supply management activities generated $142,000 and $121,000, in incremental margin, respectively, compared to the same period in 2016 and higher service revenue added $244,000, in additional margin during the period.

Wholesale propane margins increased, generating additional gross margin of $271,000 and $728,000 for the three and nine months ended September 30, 2017, respectively, due primarily to higher volumes sold and improved margins resulting from supply management activities.

PESCO
PESCO provides natural gas supply and supply management services to residential, commercial, industrial and wholesale customers in Florida, on the Delmarva Peninsula, in Ohio, and, as a result of the recent acquisition of certain operating assets of ARM Energy Management, LLC, in western Pennsylvania. PESCO competes with regulated utilities and other unregulated third-party marketers to sell natural gas supplies directly to residential, commercial and industrial customers through competitively-priced contracts. PESCO does not currently own or operate any natural gas transmission or distribution assets but sells gas that is delivered to retail, commercial or wholesale customers through affiliated and non-affiliated local distribution company systems and transmission pipelines. The Company's Delmarva natural gas distribution operations entered into asset management agreements with PESCO to manage a portion of their natural gas pipeline and storage capacity for three years beginning on April 1, 2017.

For the three months ended September 30, 2017, PESCO's gross margin increased by $56,000. For the nine months ended September 30, 2017, PESCO generated additional gross margin of $1.8 million compared to the same period in 2016, largely as a result of revenues from a natural gas supplier agreement with a customer in Ohio which expired on March 31, 2017, as well as additional customers in Florida, partially offset by lower margin in the Mid-Atlantic region, primarily during the first quarter of 2017.

Xeron
As disclosed previously, Xeron's operations were wound down during the second quarter of 2017. As a result, Xeron did not generate an operating loss during the third quarter of 2017 and will not report operating results during the fourth quarter of 2017 or subsequent years. During the third quarter of 2016, Xeron generated a pre-tax loss of $486,000. On a year-to-date basis, Xeron's pre-tax operating loss increased by $375,000, compared to the same period in 2016, driven primarily by non-recurring employee severance costs and costs associated with the termination of leased office space in Houston, Texas. The Company does not anticipate incurring any additional costs that will have a material impact associated with winding down Xeron's operations.

Other Natural Gas Growth - Distribution Operations
In addition to service expansions, the Company's natural gas distribution operations on the Delmarva Peninsula generated $379,000 and $1.0 million in additional gross margin for the three and nine months ended September 30, 2017, respectively, compared to the same periods in 2016, due to an increase in residential, commercial and industrial customers served. The average number of residential customers on the Delmarva Peninsula increased by 3.7 percent and 3.8 percent during the three and nine months ended September 30, 2017, respectively, compared to the same periods in 2016. The Company's natural gas distribution operations in Florida generated $187,000 and $1.2 million in additional gross margin for the three and nine months ended September 30, 2017, respectively, compared to the same periods in 2016, due primarily to an increase in commercial and industrial customers in Florida.

Regulatory Proceedings

Delaware Division Rate Case
In December 2016, the Delaware PSC approved a settlement agreement, which, among other things, provided for an increase in the Company's Delaware division revenue requirement of $2.25 million and a rate of return on common equity of 9.75 percent. The new authorized rates went into effect on January 1, 2017. For the three months ended September 30, 2017, compared to the same period in 2016, revenue decreased by $38,000, reflecting the variance between settled and interim rates. For the nine months ended September 30, 2017, compared to the same period in 2016, the Company recorded incremental revenue of approximately $249,000 related to the rate case. Any amounts collected through 2016 interim rates in excess of the respective portion of the $2.25 million were refunded to the ratepayers in March 2017.

Eastern Shore Rate Case

In January 2017, Eastern Shore filed a base rate proceeding with the FERC, as required by the terms of its 2012 rate case settlement agreement. Eastern Shore's proposed rates were based on a cost of service of approximately $60 million, resulting in an overall requested revenue increase of approximately $18.9 million and a requested rate of return on common equity of 13.75 percent. The filing includes incremental rates for the White Oak Mainline Expansion project, which benefits a single customer. Eastern Shore also proposed a revision to its depreciation rates and negative salvage rate based on the results of independent, third-party depreciation and negative salvage value studies. In March 2017, the FERC issued an order suspending the effectiveness of the proposed tariff rates for the usual five-month period.

On August 1, 2017, Eastern Shore implemented new rates, subject to refund based upon the outcome of the rate proceeding. Eastern Shore recorded incremental revenue of approximately $1.0 million for the three and nine months ended September 30, 2017, and established a regulatory liability to reserve a portion of the total incremental revenues generated by the new rates until resolution of the rate case. Settlement discussions continue with the other parties to the case.

Investing for Future Growth
To support and continue its growth, the Company has expanded, and will continue to expand, its resources and capabilities. Eastern Shore has expanded, and has announced significant additional expansions to, its transmission system, and is, therefore, increasing its staffing. The Company requested recovery of most of Eastern Shore's increased staffing costs in its 2017 rate case filing. Growth in non-regulated energy businesses, including Aspire Energy, PESCO and Eight Flags, requires additional staff as well as corporate resources to support the increased level of business operations. Finally, to allow the Company to continue to identify and move growth initiatives forward and to assist in developing additional initiatives, resources have been added in the Company's corporate shared services departments. In the three and nine months ended September 30, 2017, the Company's staffing and associated costs increased by $617,000 and $4.7 million, or three percent and nine percent, respectively, compared to the same periods in 2016. The Company is prudently managing the pace and magnitude of the investments being made, while ensuring that it appropriately expands its human resources and systems capabilities to capitalize on future growth opportunities.


Chesapeake Utilities Corporation and Subsidiaries

Condensed Consolidated Statements of Income (Unaudited)

(in thousands, except shares and per share data)



Three Months Ended


Nine Months Ended


September 30,


September 30,


2017


2016


2017


2016

Operating Revenues








Regulated Energy

$

69,703



$

70,019



$

238,353



$

226,630


Unregulated Energy and other

57,233



38,329



198,827



130,356


Total Operating Revenues

126,936



108,348



437,180



356,986


Operating Expenses








Regulated Energy cost of sales

22,794



24,644



87,206



81,184


Unregulated Energy and other cost of sales

44,066



28,183



145,325



85,142


Operations

29,667



30,126



92,990



85,370


Maintenance

2,737



3,542



9,370



8,925


Gain from a settlement





(130)



(130)


Depreciation and amortization

9,362



8,209



27,267



23,493


Other taxes

4,071



3,488



12,572



10,725


Total operating expenses

112,697



98,192



374,600



294,709


Operating Income

14,239



10,156



62,580



62,277


Other income (expense), net

239



(28)



(643)



(68)


Interest charges

3,321



2,722



9,133



7,996


Income Before Income Taxes

11,157



7,406



52,804



54,213


Income taxes

4,324



2,990



20,781



21,401


Net Income

$

6,833



$

4,416



$

32,023



$

32,812


Weighted Average Common Shares Outstanding:








Basic

16,344,442



15,372,413



16,334,210



15,324,932


Diluted

16,389,635



15,412,783



16,378,633



15,365,955


Earnings Per Share of Common Stock:








Basic

$

0.42



$

0.29



$

1.96



$

2.14


Diluted

$

0.42



$

0.29



$

1.96



$

2.14


Chesapeake Utilities Corporation and Subsidiaries

Condensed Consolidated Balance Sheets (Unaudited)

Assets


September 30, 2017


December 31, 2016

(in thousands, except shares and per share data)





Property, Plant and Equipment





Regulated Energy


$

1,050,332



$

957,681


Unregulated Energy


207,331



196,800


Other businesses and eliminations


26,061



21,114


Total property, plant and equipment


1,283,724



1,175,595


Less: Accumulated depreciation and amortization


(267,138)



(245,207)


Plus: Construction work in progress


69,053



56,276


Net property, plant and equipment


1,085,639



986,664


Current Assets





Cash and cash equivalents


3,386



4,178


Accounts receivable (less allowance for uncollectible accounts of $912 and $909, respectively)


52,775



62,803


Accrued revenue


14,307



16,986


Propane inventory, at average cost


5,226



6,457


Other inventory, at average cost


12,711



4,576


Regulatory assets


9,761



7,694


Storage gas prepayments


6,876



5,484


Income taxes receivable


26,741



22,888


Prepaid expenses


10,899



6,792


Mark-to-market energy assets


1,526



823


Other current assets


4,797



2,470


Total current assets


149,005



141,151


Deferred Charges and Other Assets





Goodwill


21,944



15,070


Other intangible assets, net


4,608



1,843


Investments, at fair value


6,380



4,902


Regulatory assets


75,793



76,803


Receivables and other deferred charges


3,381



2,786


Total deferred charges and other assets


112,106



101,404


Total Assets


$

1,346,750



$

1,229,219


Chesapeake Utilities Corporation and Subsidiaries

Condensed Consolidated Balance Sheets (Unaudited)

Capitalization and Liabilities


September 30, 2017


December 31, 2016

(in thousands, except shares and per share data)





Capitalization





Stockholders' equity





Preferred stock, par value $0.01 per share (authorized 2,000,000 shares), no
shares issued and outstanding


$



$


Common stock, par value $0.4867 per share (authorized 25,000,000 shares)


7,955



7,935


Additional paid-in capital


252,722



250,967


Retained earnings


208,402



192,062


Accumulated other comprehensive loss


(5,259)



(4,878)


Deferred compensation obligation


3,366



2,416


Treasury stock


(3,366)



(2,416)


Total stockholders' equity


463,820



446,086


Long-term debt, net of current maturities


201,248



136,954


Total capitalization


665,068



583,040


Current Liabilities





Current portion of long-term debt


12,136



12,099


Short-term borrowing


203,098



209,871


Accounts payable


53,284



56,935


Customer deposits and refunds


32,493



29,238


Accrued interest


3,361



1,312


Dividends payable


5,312



4,973


Accrued compensation


8,544



10,496


Regulatory liabilities


5,338



1,291


Mark-to-market energy liabilities


1,732



773


Other accrued liabilities


13,972



7,063


Total current liabilities


339,270



334,051


Deferred Credits and Other Liabilities





Deferred income taxes


252,273



222,894


Regulatory liabilities


42,915



43,064


Environmental liabilities


8,382



8,592


Other pension and benefit costs


32,059



32,828


Deferred investment tax credits and other liabilities


6,783



4,750


Total deferred credits and other liabilities


342,412



312,128


Total Capitalization and Liabilities


$

1,346,750



$

1,229,219



Chesapeake Utilities Corporation and Subsidiaries

Distribution Utility Statistical Data (Unaudited)




For the Three Months Ended September 30, 2017


For the Three Months Ended September 30, 2016



Delmarva NG Distribution


Chesapeake
Utilities Florida
NG Division


FPU NG Distribution


FPU Electric Distribution


Delmarva NG Distribution


Chesapeake
Utilities Florida
NG Division


FPU NG Distribution


FPU Electric Distribution

Operating Revenues

(in thousands)















Residential


$

5,705



$

1,247



$

6,544



$

14,112



$

5,327



$

1,139



$

5,016



$

15,186


Commercial


5,888



1,344



6,070



11,701



5,136



1,201



5,752



11,991


Industrial


1,700



1,524



5,025



748



1,695



1,581



4,825



676


Other (1)


92



954



(854)



(2,481)



(76)



908



797



(1,805)


Total Operating Revenues


$

13,385



$

5,069



$

16,785



$

24,080



$

12,082



$

4,829



$

16,390



$

26,048



















Volume (in Dts/MWHs)















Residential


184,993



53,228



247,118



93,889



176,886



47,274



196,831



99,896


Commercial


449,543



1,172,625



366,318



88,917



469,921



1,313,963



409,155



90,013


Industrial


1,169,465



2,393,709



1,082,701



4,340



1,135,077



2,313,776



1,029,165



5,890


Other


35,519





(46,834)



1,880



28,208





601



1,979


Total


1,839,520



3,619,562



1,649,303



189,026



1,810,092



3,675,013



1,635,752



197,778



















Average Customers















Residential


68,118



15,782



54,543



24,628



65,663



15,337



53,314



24,367


Commercial


6,782



1,425



4,007



7,455



6,695



1,408



4,216



7,401


Industrial


145



78



2,132



2



125



74



1,814



2


Other


3









6








Total


75,048



17,285



60,682



32,085



72,489



16,819



59,344



31,770



















Chesapeake Utilities Corporation and Subsidiaries

Distribution Utility Statistical Data (Unaudited)



For the Nine Months Ended September 30, 2017


For the Nine Months Ended September 30, 2016



Delmarva NG Distribution


Chesapeake
Utilities Florida
NG Division


FPU NG Distribution


FPU Electric Distribution


Delmarva NG Distribution


Chesapeake
Utilities Florida
NG Division


FPU NG Distribution


FPU Electric Distribution

Operating Revenues

(in thousands)















Residential


$

42,511



$

4,165



$

24,945



$

33,915



$

37,074



$

3,977



$

20,597



$

36,911


Commercial


23,724



4,262



23,114



31,190



20,576



3,847



20,912



31,814


Industrial


5,383



4,860



15,727



1,952



5,274



4,808



15,399



2,154


Other (1)


(1,586)



2,819



(4,909)



(4,277)



(1,164)



2,665



(2,615)



(5,410)


Total Operating
Revenues


$

70,032



$

16,106



$

58,877



$

62,780



$

61,760



$

15,297



$

54,293



$

65,469



















Volume (in Dts/MWHs)















Residential


2,576,001



253,888



1,022,598



224,513



2,495,103



260,404



993,917



241,691


Commercial


2,445,262



3,991,244



1,426,875



229,545



2,539,404



4,118,131



1,633,920



233,199


Industrial


3,749,961



8,519,221



3,372,394



12,250



3,680,383



8,405,424



3,188,556



17,470


Other


66,273





(62,710)



5,627



68,293





(4,723)



6,577


Total


8,837,497



12,764,353



5,759,157



471,935



8,783,183



12,783,959



5,811,670



498,937



















Average Customers















Residential


68,419



15,739



54,312



24,549



65,943



15,303



53,215



24,268


Commercial


6,843



1,417



4,084



7,443



6,745



1,391



4,247



7,399


Industrial


145



78



2,042



2



123



72



1,760



2


Other


6









5








Total


75,413



17,234



60,438



31,994



72,816



16,766



59,222



31,669


















(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.

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SOURCE Chesapeake Utilities Corporation