Chesapeake Utilities Corporation Reports Record Results For Fiscal Year 2019 And Updates Earnings Guidance

DOVER, Del., Feb. 26, 2020 /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, 2019.  Net income for 2019 was $65.2 million, or $3.96 per share compared to $56.6 million, or $3.45 per share for 2018.   Fourth quarter 2019 net income was $22.6 million, or $1.37 per share compared to $17.8 million, or $1.08 per share in 2018.

In the fourth quarter of 2019, the Company completed the previously announced sales of the assets and contracts of its natural gas marketing subsidiary, Peninsula Energy Services Company, Inc. (PESCO) and recorded a pre-tax gain of $7.3 million ($5.4 million after tax). As a result, PESCO's results for all periods presented have been separately reported as discontinued operations and its assets and liabilities have been reclassified as held for sale where applicable.  There are no other items included in discontinued operations.  Additional details on the transactions to sell PESCO's assets and contracts are included on page 7 of this press release.

The Company's net income from continuing operations for 2019 was $61.1 million, or $3.72 per share. This represents an increase of $4.3 million or $0.25 per share compared to 2018. Higher earnings for 2019 reflect increased gross margin from recently completed and ongoing pipeline expansion projects, incremental margin from the acquisition of certain assets of Marlin Gas Transport, Inc. ("Marlin Gas Transport"), R. F. Ohl Fuel Oil, Inc. ("Ohl") and Boulden Inc. ("Boulden"), organic growth in the natural gas distribution operations and higher retail propane margins. A Florida Public Service Commission ("PSC") regulatory order that enabled the Company to retain tax savings associated with lower federal tax rates resulting from the United States Tax Cuts and Jobs Act ("TCJA") in several natural gas distribution operations and continued growth in gross margin from Aspire Energy of Ohio ("Aspire Energy") also contributed to higher earnings growth in 2019. These increases were partially offset by higher operating expenses and interest expense to support the Company's growth initiatives, a one-time pension settlement expense of $0.5 million associated with de-risking the Chesapeake Utilities Corporation Pension Plan (included with Other expense, net on the condensed consolidated statement of income) as well as $4.9 million in lower gross margin due to a decline in customer consumption as a result of warmer weather in 2019 compared to 2018.

The Company's net income from continuing operations for the quarter ended December 31, 2019 was $17.2 million, compared to $17.8 million for the same quarter of 2018. Earnings from continuing operations for the quarter ended December 31, 2019 were $1.04 per share compared to $1.08 per share for the same quarter of 2018. Slightly lower earnings for the fourth quarter of 2019 were largely the result of higher interest, increased stock compensation expense associated with leadership transitions during 2019, increased insurance expense and the pension settlement expense mentioned above.

"2019 was a remarkable year, whether measured by our record earnings and superior growth, the initiatives we completed, those we set into motion or by how effectively our employee team worked together to drive efficiency, increase collaboration and achieve continuous improvement across the organization," stated Jeffry M. Householder, President and Chief Executive Officer.  "When I stepped into the role of CEO at the beginning of 2019, I was energized by the Company's prospects and our employees' commitment to our shareholders, customers and the communities we serve.  My excitement grew over 2019 given the effort and accomplishments of our team.  We reported record earnings on operating income that exceeded $100 million for the first time in our history, and compound annual growth in earnings has exceeded 8.5% for multiple trailing periods including the 10 years ended 2019.  Strategically, we successfully and profitably exited the natural gas marketing business, completed seamless integrations of Marlin Gas Transport and Ohl, while acquiring Boulden and announcing the purchase of Elkton Gas - all while continuing to harvest organic growth, expanding our pipeline and distribution service capacity and ensuring safe, reliable and clean energy service to our customers.  In recognition of our team's success, we have updated our financial guidance and increased our expectations for earnings through 2022."

Increasing Earnings Guidance

The Company previously provided guidance that its EPS should grow at an average annual rate of 7.75 percent to 9.50 percent through 2022, from a base level of $2.89 per share (2017 adjusted, diluted EPS).  That guidance suggested 2022 EPS of $4.20 to $4.55.  Given the investments already made, those underway and the growth prospects included in the Company's strategic growth plan, Management is updating EPS guidance and increasing the forecasted range for 2022 to $4.70 to $4.90 per share.  The Company has historically achieved an average earnings growth at or above this range and therefore continues to view its long-term growth prospects as comparable to its historical growth.

*Unless otherwise noted, EPS information is presented on a diluted basis.

**This press release includes references to non-Generally Accepted Accounting Principles ("GAAP") financial measures, including gross margin.  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.

Operating Results for the Years Ended December 31, 2019 and 2018

Consolidated Results

Operating income, for the year ended December 31, 2019 increased by $11.4 million, or 12.1 percent, compared to the same period in 2018. The increase in operating income reflects higher earnings across the Company generated by recent expansion investments, additional earnings from acquisitions completed in 2018 and 2019, organic growth within existing businesses, higher retail propane margins, regulatory initiatives and rate/pricing mechanisms, and the absence of a one-time non-recurring severance charge recorded in 2018. These increases were partially offset by higher operating expenses to support the Company's growth initiatives and lower gross margin due to a decline in customer consumption as a result of warmer weather in 2019 compared to 2018.

Regulated Energy Segment

Operating income for the Regulated Energy segment increased by $7.4 million, or 9.3 percent, for the year ended December 31, 2019 compared to the same period in 2018. Higher operating income resulted from increased gross margin of $16.8 million, offset by $5.2 million in higher depreciation, amortization and property taxes and $4.2 million in higher other operating expenses. In February 2019, the Florida PSC issued a final order regarding the treatment of the TCJA impact, allowing us to retain the savings associated with lower federal tax rates for certain of our natural gas distribution operations.  As a result, $1.3 million in reserves for customer refunds, recorded in 2018, were reversed in the first quarter of 2019.  Excluding the impact of the reversal, gross margin and operating income for 2019 increased by $15.5 million and $6.1 million, or 6.9 percent and 7.7 percent, respectively.

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

Operating income for the Unregulated Energy segment increased by $2.8 million in 2019 compared to 2018. Gross margin increased by $8.1 million, or 10.5 percent, partially offset by other operating expenses increasing by $3.4 million and an increase of $1.9 million in depreciation, amortization and property taxes.

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

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

Operating Results for the Quarters Ended December 31, 2019 and 2018

Consolidated Results

Operating income during the fourth quarter of 2019 increased by $0.8 million, or 2.7 percent, compared to the same period in 2018.  The increase in operating income reflects a $5.9 million increase in gross margin, offset by $1.3 million in higher depreciation, amortization and property taxes and $3.8 million in higher other operating expenses to support the Company's growth initiatives and recognition of stock compensation expense associated with leadership transitions during 2019.

Regulated Energy Segment

Operating income for the Regulated Energy segment decreased by $1.0 million in the fourth quarter of 2019 compared to the same period in 2018. This decrease was driven by a $2.7 million increase in other operating expenses which were impacted by the recognition during the quarter of stock compensation expense associated with leadership transitions that occurred during 2019, higher insurance (non-health) expenses and a $0.9 million increase in depreciation, amortization and property taxes.  Higher expenses during the quarter offset a $2.5 million increase in gross margin.

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

Operating income for the Unregulated Energy segment increased by $2.0 million for the three months ended December 31, 2019, compared to the same period in 2018. The increase in operating income reflects a $3.4 million increase in gross margin offset by $0.8 million in higher other operating expenses and $0.6 million in higher depreciation, amortization and property taxes.

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

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

Divestiture of PESCO

During the fourth quarter of 2019, the Company sold PESCO's assets and contracts in four separate transactions and accordingly, has exited the natural gas marketing business. As a result of the sales agreements, the Company began to report PESCO as discontinued operations during the third quarter of 2019 and excluded PESCO's performance from continuing operations for all periods presented and classified its assets and liabilities as held for sale where applicable.

The Company received a total of $22.9 million in cash consideration from the buyers inclusive of working capital of $8.0 million. The Company recognized a pre-tax gain of $7.3 million ($5.4 million after tax) in connection with the closing of these transactions during the fourth quarter of 2019. The final working capital true up, and the sale of certain contracts, is expected to be completed in the first quarter of 2020.

Conference Call

Chesapeake Utilities will host a conference call on Thursday, February 27, 2020 at 4:15 p.m. Eastern Time to discuss the Company's financial results for the year and quarter ended December 31, 2019.   To participate in this call, dial 855.801.6270 and reference Chesapeake Utilities Corporation's 2019 Financial Results Conference Call.  To access the replay recording of this call, the accompanying transcript, and other pertinent quarterly information, use the link CPK - Conference Call Audio Replay, or visit the Investors/Events and Presentations section of Company's website at www.chpk.com.

About Chesapeake Utilities Corporation

Chesapeake Utilities is a diversified energy company engaged in natural gas distribution and transmission; electricity generation and distribution; propane gas operations; and other businesses. Information about Chesapeake Utilities and its family of businesses is available at 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, and Assistant Corporate Secretary
302.734.6799

The following information highlights certain key factors contributing to the Company's results for the year and quarter ended December 31, 2019:

Recently Completed and Ongoing Major Projects and Initiatives
The Company constantly pursues and develops additional projects and initiatives to serve existing and new customers, and to further grow its businesses and earnings, with the intention of increasing shareholder value. The following represent the major projects/initiatives recently completed and currently underway. In the future, the Company will add new projects and initiatives to this table once substantially finalized and the associated earnings can be estimated.

Detailed Discussion of Major Projects and Initiatives

Expansions

2017 Eastern Shore System Expansion
Eastern Shore has completed the construction of a system expansion project that increased its capacity by 26 percent. The project generated $7.3 million in incremental gross margin for the year ended December 31, 2019 compared 2018. The project is expected to produce gross margin of approximately $15.8 million annually, from 2020 through 2022; and $13.2 million annually thereafter based on current customer capacity commitments.

Northwest Florida Expansion
In May 2018, 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 generated incremental gross margin of $2.2 million for the year ended December 31, 2019 compared to 2018. The estimated annual gross margin from this project is $6.5 million for 2020 and beyond, with the opportunity for additional margin as the remaining capacity is sold.

Western Palm Beach County, Florida Expansion
Peninsula Pipeline is constructing four transmission lines to bring additional natural gas to the Company's distribution system in West Palm Beach, Florida. The first phase of this project was placed into service in December 2018 and generated incremental gross margin of $2.1 million for the year ended December 31, 2019 compared to 2018.  The Company expects to complete the remainder of the project in phases through early 2020, and estimates that the project will generate gross margin of $5.0 million in 2020 and $5.2 million annually thereafter.

Del-Mar Energy Pathway
In December 2019, the FERC issued an order approving the construction of the Del-Mar Energy Pathway project. Eastern Shore anticipates that this project will be fully in-service by the beginning of the fourth quarter of 2021. The new facilities will provide an additional 14,300 Dekatherms per day ("Dts/d") of firm service to four customers, will provide additional natural gas transmission pipeline infrastructure in eastern Sussex County, Delaware, and will represent the first extension of Eastern Shore's pipeline system into Somerset County, Maryland. Interim services in advance of this project generated gross margin of $0.7 million for the year ended December 31, 2019.  The estimated annual gross margin from this project is approximately $2.5 million in 2020, $4.1 million in 2021 and $5.1 million annually thereafter.

Auburndale
In August 2019, the Florida PSC approved Peninsula Pipeline's Transportation Service Agreement with the Florida Division of Chesapeake Utilities.  Peninsula Pipeline purchased an existing pipeline owned by the Florida Division of Chesapeake Utilities and Calpine and constructed pipeline facilities in Polk County, Florida. Peninsula Pipeline will provide transportation service to the Florida Division of Chesapeake Utilities increasing both delivery capacity and downstream pressure as well as introducing a secondary source of natural gas for the Florida Division of Chesapeake Utilities' distribution system. Peninsula Pipeline generated gross margin from this project of $0.3 million for the year ended December 31, 2019 and expects to generate annual gross margin of $0.7 million in 2020 and beyond.

Callahan Intrastate Pipeline
In May 2018, Peninsula Pipeline announced a plan to construct a jointly owned intrastate transmission pipeline in Nassau County, Florida with Seacoast Gas Transmission.  The 26-mile pipeline, having an initial capacity of 148,000 Dts/d, will serve growing demand in both Nassau and Duval Counties, Florida.  The project is expected to be placed in-service during the third quarter of 2020 and is expected to generate gross margin for Peninsula Pipeline of $3.2 million in 2020 and $6.4 million annually thereafter.

Guernsey Power Station
Guernsey Power Station, LLC ("Guernsey Power Station") and the Company's affiliate, Aspire Energy Express, LLC ("Aspire Energy Express"), entered into a precedent firm transportation capacity agreement whereby Guernsey Power Station will construct a power generation facility and Aspire Energy Express will provide natural gas transportation service to this facility.  Guernsey Power Station, LLC commenced construction of the project in October 2019.  Aspire Energy Express is expected to commence construction of the gas transmission facilities to provide the firm transportation service to the power generation facility in the third quarter of 2020. This project is expected to produce gross margin of approximately $1.4 million annually once placed into service in the first quarter of 2021.

Acquisitions

Marlin Gas Services
In December 2018, Marlin Gas Services, the Company's wholly-owned subsidiary, acquired certain operating assets of Marlin Gas Transport, a supplier of mobile compressed natural gas and pipeline solutions, primarily to utilities and pipelines.  Marlin Gas Services provides temporary hold services, pipeline integrity services, emergency services for damaged pipelines and specialized gas services for customers who have unique requirements. Marlin Gas Services generated incremental gross margin of $5.3 million for the year ended December 31, 2019 compared to 2018.  The Company estimates that Marlin Gas Services will generate annual gross margin of approximately $6.4 million in 2020 and $7.0 million in 2021 and beyond.  Marlin Gas Services continues to actively expand the territories it serves, as well as leverage its patented technology to serve liquefied natural gas transportation needs and to aid in the transportation of renewable natural gas from the supply sources to various pipeline interconnection points.

Ohl Propane
In December 2018, Sharp Energy, Inc. ("Sharp") acquired 2,500 residential and commercial propane customers and operating assets located between two of Sharp's existing districts in Pennsylvania from Ohl.   These customers and assets have been assimilated into Sharp and generated $1.2 million of incremental gross margin for the year ended December 31, 2019 compared to 2018.

Boulden Propane
In December 2019, Sharp acquired certain propane customers and operating assets of Boulden which provides propane distribution service to approximately 5,200 customers in Delaware, Maryland and Pennsylvania. The customers and assets acquired from Boulden have been assimilated into Sharp. The operations acquired from Boulden generated $0.3 million of incremental gross margin for the year ended December 31, 2019.  The Company estimates that this acquisition will generate additional gross margin of approximately $4.0 million in 2020, and $4.2 million in 2021, with the potential for additional growth in future years.

Elkton Gas Company
In December 2019, the Company entered into an agreement with South Jersey Industries, Inc., to acquire Elkton Gas Company, which provides natural gas distribution service to approximately 7,000 residential and commercial customers in Cecil County, Maryland contiguous to Chesapeake's existing franchise territory in Cecil County.  The acquisition is expected to close in the second half of 2020, subject to approval by the Maryland PSC.

Regulatory Initiatives

Florida GRIP
Florida GRIP is a natural gas pipe replacement program approved by the Florida PSC that allows automatic recovery, through rates, of costs associated with the replacement of mains and services. Since the program's inception in August 2012, the Company has invested $143.9 million of capital expenditures to replace 303 miles of qualifying distribution mains, including $16.7 million and $13.3 million of new pipes during 2019 and 2018, respectively.  GRIP generated additional gross margin of $0.5 million for the year ended 2019 compared to 2018.

For the year ended December 31, 2019, the Company recorded a reduction in depreciation expense totaling $1.3 million as a result of a Florida PSC approved depreciation study that lowered annual depreciation rates. For the year ended December 31, 2019, the Company also recorded $0.6 million in lower GRIP margin due to a concurrent reduction in surcharges collected from customers as a result of the reduced depreciation rates.

Florida Tax Savings Related to the TCJA
In February 2019, the Florida PSC issued orders authorizing certain of the Company's natural gas distribution operations to retain a portion of the tax savings associated with the lower federal tax rates resulting from the TCJA.  In accordance with the PSC orders, the Company recognized $1.3 million in margin during the first quarter of 2019, reflecting the reversal of reserves recorded during 2018. The Company expects the annual savings beginning in 2019 to continue in future years, and recognized additional margin of $1.0 million for the year ended December 31, 2019.

Hurricane Michael
In October 2018, Hurricane Michael passed through Florida Public Utilities Company's ("FPU") electric distribution service territory in Northwest Florida.  The hurricane caused widespread and severe damage to FPU's infrastructure resulting in 100 percent of its customers in the Northwest Florida service territory losing electrical service. FPU expended more than $65.0 million to restore service as quickly as possible, which has been recorded as new plant and equipment, charged against FPU's accumulated depreciation or charged against FPU's storm reserve. Additionally, amounts currently being reviewed by the Florida PSC for regulatory asset treatment have been recorded as receivables and other deferred charges.

In August 2019, FPU filed a limited proceeding requesting recovery of storm-related costs associated with Hurricane Michael (plant investment and expenses) through a change in base rates. FPU also requested treatment and recovery of certain storm-related costs as a regulatory asset for items currently not allowed to be recovered through the storm reserve as well as the recovery of plant investment replaced as a result of the storm. The Company has proposed an overall return component on both the plant additions and regulatory assets. In the fourth quarter of 2019, FPU along with the Office of Public Counsel in Florida, filed a joint motion with the Florida PSC to approve an interim rate increase, subject to refund, pending the final ruling on the recovery of the restoration costs incurred. The petition was approved by the Florida PSC in November 2019 and interim rate increases were implemented effective January 2020.  FPU continues to work with the Florida PSC and expects to reach a final ruling in the second half of 2020.

Weather and Consumption
Weather did not have a material impact on fourth quarter 2019 results, compared to the fourth quarter of 2018. For the full year, weather conditions accounted for decreased gross margin of $4.9 million in 2019 compared to 2018 and $3.4 million compared to Normal temperatures as defined below.  The following table summarizes heating degree day ("HDD") and cooling degree day ("CDD") variances from the 10-year average HDD/CDD ("Normal") for the year and quarter ended December 31, 2019 compared to the same periods in 2018.

HDD and CDD Information

Natural Gas Distribution Growth
New customer growth for the Company's natural gas distribution operations generated $4.7 million of additional margin for the year ended December 31, 2019 compared to 2018.  The average number of residential customers served on the Delmarva Peninsula and in Florida increased by approximately 3.7 percent during 2019.  Growth in commercial and industrial customers also contributed additional margin during 2019. The details are provided in the following table:

Capital Investment Growth and Associated Financing Plans

The Company's capital expenditures were $199.0 million (including the purchase of certain propane assets of Boulden) for 2019.  The following table shows total capital expenditures for the year ended December 31, 2019 by segment and by business line:

The following table shows a range of the expected 2020 capital expenditures by segment and by business line:

The capital expenditure projection is subject to continuous review and modification. Actual capital requirements may vary from the above estimates due to a number of factors, including changing economic conditions, customer growth in existing areas, regulation, new growth or acquisition opportunities and availability of capital. Historically, actual capital expenditures have typically lagged behind the budgeted amounts.

Management reaffirms its capital expenditure guidance of $750 million to $1 billion for 2018 to 2022. Through the first two years of the five-year forecast period, the Company has invested $482 million in new capital expenditures.

The Company's target ratio of equity to total capitalization, including short-term borrowings, is between 50 and 60 percent. The Company's equity to total capitalization ratio, including short term borrowings, was 43 percent as of December 31, 2019. The Company seeks to align permanent financing with the in-service dates of its capital projects.  The Company may utilize more temporary short-term debt, when the financing cost is attractive, as a bridge to the permanent long-term financing.