Chesapeake Utilities Corporation Announces Continued Strong Performance for the Second Quarter Ended June 30, 2010

DOVER, Del., Aug. 5 /PRNewswire-FirstCall/ -- Chesapeake Utilities Corporation (NYSE: CPK) today announced increased financial results for the quarter ended June 30, 2010.  The Company's net income for the quarter ended June 30, 2010 was $3.3 million, or $0.35 per share (diluted), an increase of $2.5 million, or $0.23 per share (diluted), compared to $806,000, or $0.12 per share (diluted), for the quarter ended June 30, 2009. The increased results for the second quarter of 2010 included $1.8 million of net income recorded by the Company's new subsidiary, Florida Public Utilities Company ("FPU"), as a result of the merger on October 28, 2009.  Additionally, the results for the second quarter of 2010 reflected a decrease in merger-related costs of $1.0 million ($599,000 net of tax), compared to the second quarter of 2009.  Quarterly results for Chesapeake's legacy businesses reflect continued growth and expansion of the natural gas distribution and transmission operations on the Delmarva Peninsula, a rate increase in Chesapeake's Florida division and improved results from the advanced information services business.  These increases were partially offset by a decline in volumes and margins from the propane businesses.  

The Company's net income for the six months ended June 30, 2010 was $17.3 million, or $1.82 per share (diluted), an increase of $7.9 million, or $0.46 per share (diluted), compared to $9.4 million, or $1.36 per share (diluted), for the same period in 2009.  The increased results for the six months ended June 30, 2010 included $6.2 million of net income recorded by FPU.  Also, the results for the six months ended June 30, 2010 reflected a decrease in merger-related costs of $1.1 million ($655,000 net of tax), compared to the same period in 2009.  The year-to-date results from Chesapeake's legacy businesses reflect the strong performance by the regulated energy businesses as a result of continued growth and expansion on the Delmarva Peninsula, the benefits of the Florida division rate increase and improved results from the advanced information services business.  

"Our strong results in the second quarter and year-to-date reflect both the success of our team in integrating the Chesapeake-FPU merger, as well as the significant growth in our Delmarva natural gas distribution and transmission businesses," stated John R. Schimkaitis, Vice Chairman and Chief Executive Officer of Chesapeake Utilities Corporation.  "We remain optimistic about achieving and exceeding our goal of accretion from the merger in the first year after closing.  Additionally, we remain excited about the potential for future growth given the continued integration and the opportunities for growth across our lines of business."

The discussions of the results for the periods ended June 30, 2010 and 2009, 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 Supplemental Income Statement Data chart below. In addition, certain information is presented, which, for comparison purposes, includes only FPU's results of operations for the periods ended June 30, 2010 and, in some cases, FPU's results for the same periods in 2009, which was prior to the merger.  Certain other information is presented, which, for comparison purposes, excludes results of operations of FPU from the consolidated results of operations and all merger-related costs incurred in connection with the FPU merger for the periods presented. Although non-GAAP measures are not intended to replace the GAAP measures for evaluation of Chesapeake's performance, Chesapeake believes that the portions of the presentation which include only the FPU results, or which exclude the FPU results for the post-merger period and merger-related costs, provide helpful comparisons for an investor's evaluation purposes.

Highlights for the second quarter of 2010 included:

• Successful integration between Chesapeake and FPU continued during the quarter, and the merger is expected to be accretive in 2010 – the first year of operation after the merger.  During the second quarter, the Company completed the integration of the Florida propane operations and the billing and customer service functions.

• In June 2010, Jeff Householder joined FPU as president, bringing his extensive knowledge and experience of the Florida energy market to FPU.  

• The rate increase for Chesapeake's Florida division approved in December 2009 contributed approximately $574,000 to gross margin for the quarter ended June 30, 2010.  

• The rate increase for FPU's natural gas distribution operation contributed approximately $1.3 million to gross margin for the quarter ended June 30, 2010.

• Eastern Shore Natural Gas Company ("ESNG"), the Company's natural gas transmission subsidiary, generated additional gross margin of $370,000 from new transportation services.

• Growth in residential, commercial and industrial customers for the Delmarva natural gas distribution operations contributed to a period-over-period increase in gross margin of $256,000.  

• The Delmarva natural gas distribution operations entered into agreements to provide natural gas service to two industrial customers located in southern Delaware.  The anticipated annual margin from these services equates to approximately 1,575 average residential heating customers once the services begin in the fourth quarter of 2010 and early 2011.  These services further extend the Delmarva natural gas distribution and transmission infrastructure, bringing cost-effective and environmentally friendly natural gas to new areas on the Delmarva Peninsula and creating additional opportunities for growth.

• The Company's advanced information services subsidiary, BravePoint, generated operating income of $230,000 in the second quarter of 2010, compared to an operating loss of $240,000 in the same period in 2009, due to increased billable consulting hours and lower operating costs.

• A lower retail margin per gallon during the second quarter of 2010 compared to the same period in 2009 decreased the gross margin of the Delmarva propane distribution operation by $290,000.  Retail margins for the first half of 2009 benefited from the $939,000 loss recorded in late 2008 on a swap agreement for the 2008/2009 winter Pro-Cap (propane price cap) program.  This loss lowered the propane inventory costs and, therefore, increased retail margins during the first half of 2009.  Retail margins for the first half of 2010 returned to more normal levels.  

• Xeron, the Company's propane wholesale marketing subsidiary, experienced a quarter-over-quarter decrease in its gross margin of $225,000 as a result of decreased trading activity.  Lower trading volumes from lower demand in the wholesale propane market have led to greater uncertainty in propane wholesale prices, reducing Xeron's trading activity.

• ESNG received the American Gas Association's Safety Achievement Award for the seventh consecutive year.

As a result of the merger with FPU, the Company changed its operating segments in the fourth quarter of 2009 to better reflect how the chief operating decision maker (the Company's Chief Executive Officer) reviews the various operations of the Company.  The discussions of operating results below reflect the Company's revised segments.  The regulated energy segment is composed of the Company's natural gas distribution, electric distribution and natural gas transmission operations.  The unregulated energy segment is composed of the Company's natural gas marketing, propane distribution and propane wholesale marketing operations.  The "other" segment is composed of the Company's advanced information services operation, other subsidiaries that own property which is leased to other affiliates, unallocated corporate costs and eliminations.

Comparative results for the quarters ended June 30, 2010 and 2009

Operating income increased by $4.9 million, or 172 percent, from $2.9 million to $7.8 million for the current quarter.  Operating income for the Company included $3.7 million in operating income from FPU for the period.  

Regulated Energy

Operating income for the regulated energy segment for the second quarter of 2010 was $8.3 million, an increase of $4.2 million, or 103 percent, compared to the same period in 2009.  An increase in gross margin of $13.7 million was partially offset by an increase in operating expenses of $9.5 million.  Items contributing to the period-over-period increase in gross margin are listed in the following table:

• FPU's natural gas and electric distribution operations generated $8.3 million and $4.5 million, respectively, in gross margin for the period.  Gross margin from FPU's natural gas distribution operation in the quarter was positively affected by a rate increase of approximately $8.0 million approved by the Florida Public Service Commission ("Florida PSC") in 2009.

• A rate increase of approximately $2.5 million approved by the Florida PSC in 2009 increased gross margin for Chesapeake's Florida natural gas distribution division by $574,000.  

There was also a $100,000 net increase in margins from changes in customers' rates and rate classifications, primarily for certain commercial and industrial customers with negotiated rates.  

• The Delmarva natural gas distribution operation experienced growth in residential, commercial and industrial customers, which contributed $256,000 to the gross margin.  

Chesapeake's natural gas distribution operation in Florida experienced a decline in gross margin of $25,000 due primarily to the loss of several large industrial customers as a result of plant closings in 2009.

• New transportation services implemented by ESNG in November 2009 as a result of the completion of its latest expansion program generated additional gross margin of $254,000 for the quarter.  A new expansion project completed in May 2010 also generated additional gross margin of $40,000 for the quarter and is expected to generate annualized gross margin of $343,000.  New firm transportation service for an industrial customer for the period from November 2009 to October 2012 generated additional gross margin of $76,000 for the quarter.  

ESNG's gross margin in the second quarter of 2009 included $106,000 attributable to a temporary increase in service to one industrial customer, which did not recur in 2010.  Also offsetting these margin increases were decreased margins of $103,000 in the quarter resulting from expired transportation service contracts in November 2009 and April 2010.  

• Non-weather-related customer consumption for the Delmarva natural gas distribution operation and Chesapeake's Florida division decreased gross margin by $63,000 and $44,000, respectively.  

Other operating expenses for the regulated energy segment increased by $9.5 million in the second quarter of 2010.  Other operating expenses of FPU's regulated energy operations for the period were $9.6 million, which was the primary factor contributing to the increase for the segment.  

Unregulated Energy

Operating loss for the unregulated energy segment for the second quarter of 2010 was $791,000, compared to an operating income of $2,000 for the same period in 2009.  An increase in gross margin of $860,000 was more than fully offset by a $1.7 million increase in operating expenses.  Items contributing to the period-over-period increase in gross margin are listed in the following table:

• FPU's unregulated energy operation, which is primarily its propane distribution operation, recorded $2.2 million to gross margin for the period, which includes approximately $310,000 of gross margin generated from customers previously served by Chesapeake's Florida propane distribution operation.

• The addition of 454 community gas system customers since the second quarter of 2009 and 1,000 additional customers acquired in February 2010 as part of the purchase of the operating assets of a propane distributor serving Northampton and Accomack counties in Virginia contributed $35,000 and $26,000 to gross margin, respectively.

• The Company's natural gas marketing subsidiary, Peninsula Energy Services Company, Inc. ("PESCO"), experienced a decrease in gross margin of $89,000, due primarily to decreased spot sales to one industrial customer on the Delmarva Peninsula.  Spot sales are not predictable and therefore, are not included in the Company's long-term financial plans or forecasts.

• The nine-percent warmer temperatures on the Delmarva Peninsula in the second quarter of 2010 compared to the same period in 2009, resulted in a decrease of $140,000 in propane gross margin.

• Xeron experienced a $225,000 decrease in gross margin for the second quarter of 2010 as a result of decreased trading activity.  Lower trading volumes in the wholesale propane market have led to greater uncertainty, reducing Xeron's trading activity.

• A lower retail margin per gallon during the second quarter of 2010 compared to the same period in 2009 decreased gross margin of the Delmarva propane distribution operation by $290,000.  Retail margins for the first half of 2009 benefited from the $939,000 loss recorded in late 2008 on a swap agreement for the 2008/2009 winter Pro-Cap (propane price cap) program.  This loss lowered the propane inventory costs and, therefore, increased retail margins during the first half of 2009.  Retail margins for the first half of 2010 returned to more normal levels.

• Non-weather-related propane volumes sold in the second quarter of 2010 decreased by 709,000 gallons, or 15 percent, and provided for a decrease in gross margin of $343,000.  The decrease in non-weather-related volumes was primarily related to lower consumption and the timing of propane deliveries based on propane prices and weather.

Other operating expenses for the unregulated energy segment increased by $1.7 million in the second quarter of 2010.  Other operating expenses of FPU's unregulated energy operations for the period were $1.8 million, which was the primary factor contributing to the increase for the segment.  

Other

Operating income for the "other" segment for the second quarter of 2010 was $244,000, compared to an operating loss of $1.2 million for the same period in 2009.  During the second quarter of 2010, gross margin increased by $294,000, primarily from BravePoint, and operating expenses decreased by $1.2 million, due primarily to lower merger-related transaction costs.

BravePoint reported a profitable second quarter in 2010, with an increase in gross margin of $278,000 and a decrease in other operating expenses of $192,000, compared to the same period in 2009.  Gross margin for BravePoint increased as a result of a 20-percent increase in the number of billable consulting hours and an increase in revenue and gross margin from its professional database monitoring and support solution services. A decrease in other operating expenses for the "other" segment was attributable to lower merger-related costs expensed in the second quarter and cost containment actions, including layoffs and compensation adjustments, implemented in 2009 by BravePoint.

Interest Expense

Interest expense for the second quarter of 2010 increased by approximately $732,000, or 47 percent, compared to the same period in 2009. The primary drivers of the increased interest expense are related to FPU, including:

• An increase in long-term interest expense of $467,000 is related to interest on FPU's first mortgage bonds.
• Interest expense from a new term loan facility was $162,000 for the second quarter of 2010.  Two series of the FPU bonds, 4.9 percent and 6.85 percent, were redeemed at the end of January 2010 using this new term loan facility.  
• Additional interest expense of $190,000 is related to interest on deposits from FPU's customers.

Offsetting the increased interest expense from FPU was lower non-FPU-related interest expense from Chesapeake's unsecured senior notes, as the principal balances decreased from scheduled repayments, the absence of any additional short-term interest expense as a result of the timing of our capital expenditures and the increased cash flow generated from ordinary operating activities.

On June 29, 2010, the Company entered into an agreement with a lender to issue up to $36 million in uncollateralized senior notes.  The Company will issue $29 million of the uncollateralized senior notes prior to July 2012 to permanently finance the redemption of two series of the FPU bonds.  The remaining $7 million will be issued prior to May 2013.

Comparative results for the six months ended June 30, 2010 and 2009

Operating income increased by $14.3 million, or 76 percent, to $33.2 million for the first six months of 2010, compared to the same period in 2009.  Operating income for the Company included $11.7 million in operating income from FPU for the period.  

Regulated Energy

Operating income for the regulated energy segment for the first six months of 2010 was $25.8 million, an increase of $12.2 million, or 90 percent, compared to the same period in 2009.  An increase in gross margin of $31.9 million was offset by an increase in operating expenses of $19.7 million.  Items contributing to the period-over-period increase in gross margin are listed in the following table:

• FPU's natural gas and electric distribution operations generated $20.2 million and $9.1 million, respectively, in gross margin for the period.  Gross margin from FPU's natural gas distribution operation for the six months ended June 30, 2010 was positively affected by a rate increase of approximately $8.0 million approved by the Florida PSC in 2009 and colder weather during the first quarter of 2010.

• Gross margin for Chesapeake's Florida division also experienced an increase in gross margin of $1.2 million from a rate increase of approximately $2.5 million approved by the Florida PSC in 2009.  Changes in other customer rates, primarily related to the Company's natural gas transmission operation, increased gross margin by $125,000.

• The Delmarva natural gas distribution operation experienced growth in residential, commercial and industrial customers, which contributed $699,000 to the gross margin increase. Residential, commercial and industrial growth by the Delaware division contributed $360,000, $119,000 and $114,000, respectively, to the gross margin increase, and $106,000 of the gross margin increase was generated from overall customer growth in the Maryland division. The Delmarva natural gas distribution operation experienced a two-percent increase in average residential customers since the first half of 2009.  

Chesapeake's natural gas distribution operation in Florida experienced a decline in gross margin of $43,000 due primarily to the loss of several large industrial customers as a result of plant closings in 2009.

• Colder weather on the Delmarva Peninsula generated an additional $311,000 of gross margin as heating degree-days increased by two percent for the first six months of 2010 compared to the same period in 2009.  Colder weather during the first quarter of 2010 contributed to an increase in gross margin of $246,000 by Chesapeake's Florida division.

• New transportation services implemented by ESNG in November 2009 as a result of the completion of its latest expansion program generated additional gross margin of $508,000 for the first six months of 2010.  A new expansion project completed in May 2010 also contributed additional gross margin of $40,000 for the period and is expected to generate annualized gross margin of $343,000.  New transportation service for an industrial customer for the period from November 2009 to October 2012 generated additional gross margin of $228,000 for the six months ended June 30, 2010.

ESNG's gross margin in the first half of 2010 included $107,000 attributable to a temporary increase in service from one industrial customer during the second quarter of 2009, which did not recur in 2010.  Also offsetting these margin increases were decreased margins of $186,000 in the first half of 2010, resulting from expired transportation service contracts in November 2009 and April 2010.  

• Non-weather-related customer consumption for the Delmarva natural gas distribution operation and Chesapeake's Florida division decreased gross margin by $298,000 and $27,000, respectively.  

Other operating expenses for the regulated energy segment increased by $19.7 million in the six months ended June 30, 2010, $19.3 million of which was related to other operating expenses of FPU's regulated energy operations for the period, which was the primary factor contributing to the increase for the segment.  

Unregulated Energy

Operating income for the unregulated energy segment for the first six months of 2010 was $7.0 million, an increase of $375,000, or six percent, compared to the same period in 2009. An increase in gross margin of $3.9 million was partially offset by a $3.5 million increase in operating expenses. Items contributing to the period-over-period increase in gross margin are listed in the following table:

• FPU's unregulated energy operation, which is primarily its propane distribution operation, recorded $5.7 million to gross margin for the period, which included approximately $800,000 of gross margin generated from customers previously served by Chesapeake's Florida propane distribution operation.

• The addition of 422 community gas system customers since the first half of 2009 generated $125,000 of additional gross margin. In February 2010, Sharp Energy acquired the operating assets of a propane distributor in Virginia, including approximately 1,000 customers.  These new customers contributed approximately $114,000 in gross margin during the first six months of 2010.  

• Xeron experienced a $179,000 increase in gross margin during the first six months of 2010 compared to the same period in 2009.  Xeron benefited from increased propane price fluctuations in early 2010.  

• Other fees increased by $128,000 in the first six months of 2010, due primarily to continued growth and successful implementation of various customer loyalty programs by the Delmarva propane distribution operation.

• Spot sales decreased during the first half of 2010 compared to the same period in 2009 due primarily to one industrial customer on the Delmarva Peninsula, reducing gross margin by $688,000. Spot sales are not predictable and, therefore, are not included in our long-term financial plans or forecasts.

• A lower retail margin per gallon during the first half of 2010 compared to the same period in 2009 contributed to decreased gross margin of $872,000.  Retail margins for the first half of 2009 benefited from the $939,000 loss recorded in late 2008 on a swap agreement for the 2008/2009 winter Pro-Cap (propane price cap) program.  This loss lowered the propane inventory costs and, therefore, increased retail margins during the first half of 2009.  Retail margins for the first half of 2010 returned to more normal levels.

Other operating expenses for the unregulated energy segment increased by $3.5 million in the first six months of 2010.   Other operating expenses of FPU's unregulated energy operations were $3.9 million, which was the primary factor contributing to the increase for the segment.

Other

Operating income for the "other" segment for the first six months of 2010 was $366,000, compared to an operating loss of $1.4 million for the same period in 2009.  Increased operating income of $610,000 from BravePoint and decreased merger-related transition costs of $1.1 million contributed to this increase.

BravePoint reported an increase in gross margin of $267,000 due primarily to increased billable consulting hours and higher sales from its professional database monitoring and support solution services.  Other operating expenses decreased by $1.5 million as a result of lower merger-related costs expensed in the six months ended June 30, 2010 compared to the same period in 2009 and a decrease in BravePoint's operating expenses due to cost containment actions implemented in 2009.

Interest Expense

Interest expense for the first six months of 2010 increased by approximately $1.5 million, or 45 percent, compared to the same period in 2009.  The primary drivers of the increased interest expense are related to FPU, including:

• An increase in long-term interest expense of $1.1 million is related to interest on FPU's first mortgage bonds.
• Interest expense from a new term loan facility was $216,000 for the first half of 2010. Two series of the FPU bonds, 4.9 percent and 6.85 percent, were redeemed at the end of January 2010 using this new term loan facility.  
• Additional interest expense of $370,000 is related to interest on deposits from FPU's customers.

Offsetting the increased interest expense from FPU was lower non-FPU-related interest expense from Chesapeake's unsecured senior notes, as the principal balances decreased from scheduled repayments, the absence of any additional short-term interest expense as a result of the timing of our capital expenditures and the increased cash flow generated from ordinary operating activities.

On June 29, 2010, the Company entered into an agreement with a lender to issue up to $36 million in uncollateralized senior notes.  The Company will issue $29 million of the uncollateralized senior notes prior to July 2012 to permanently finance the redemption of two series of the FPU bonds.  The remaining $7 million will be issued prior to May 2013.

The following presents FPU's results of operations for the three and six months ended June 30, 2010, included in Chesapeake's consolidated results. The information presented below is for comparison purposes and is not intended to replace the GAAP measures for evaluation of Chesapeake's performance.

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 most recent report on Form 10-Q for further information on the risks and uncertainties related to the Company's forward-looking statements.

Chesapeake Utilities Corporation is a diversified utility company engaged in natural gas distribution, transmission and marketing, electric distribution, propane gas distribution and wholesale marketing, advanced information services and other related services. Information about Chesapeake's businesses is available at www.chpk.com.

SOURCE Chesapeake Utilities Corporation