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Chesapeake Utilities Corporation Reports Increased Results for 2010


News provided by

Chesapeake Utilities Corporation

Mar 07, 2011, 07:16 ET

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DOVER, Del., March 7, 2011 /PRNewswire/ --

  • A record-high net income of $26.1 million, or $2.73 per share, in 2010, compared to $15.9 million and $2.15 per share in 2009.
  • Excluding the impact of the FPU merger and merger-related costs, Chesapeake's legacy businesses generated net income of $17.2 million, or $2.44 per share, in 2010, compared to $15.3 million, or $2.20 per share, in 2009.  The $0.24 per share increase generated by Chesapeake's legacy businesses in 2010 represents an 11-percent growth in earnings per share.
  • FPU's net income increased by $7.5 million as a result of the inclusion of a full year's results and improved performance, generating an increase of $0.22 per share in 2010.
  • The decrease in merger-related costs added $0.12 per share in 2010.

Chesapeake Utilities Corporation (NYSE: CPK) today announced increased financial results for both the year and quarter ended December 31, 2010.  The Company's net income for the year ended December 31, 2010 was $26.1 million, or $2.73 per share, an increase of $10.2 million, or $0.58 per share, compared to $15.9 million, or $2.15 per share, for the year ended December 31, 2009. Excluding the impact of the FPU merger and merger-related costs, Chesapeake's legacy businesses continued to experience strong earnings growth and generated net income of $17.2 million, or $2.44 per share, in 2010, compared to $15.3 million, or $2.20 per share, in 2009, representing an 11-percent growth in earnings per share.  Chesapeake's legacy businesses generated 41 percent of the increase in consolidated earnings per share for the year.  The results of the legacy businesses reflect continued growth and expansions of the natural gas distribution and transmission systems on the Delmarva Peninsula, a rate increase for the Company's Central Florida Gas division, favorable weather impacts and improved performance in the advanced information services business.  These increases were partially offset by a decline in earnings from the natural gas marketing and propane wholesale marketing businesses.   Florida Public Utilities Company ("FPU") added $0.22 per share to the increase in the Company's overall results in 2010 due to the inclusion of a full year's results and improved performance.  FPU's results have been included in the Company's consolidated results since the completion of the merger on October 28, 2009.  The decrease in merger-related costs also added $0.12 per share to the increase in 2010.

The Company's net income for the quarter ended December 31, 2010 was $7.1 million, or $0.74 per share, an increase of $923,000, or $0.03 per share, compared to $6.2 million, or $0.71 per share, for the same period in 2009.  Excluding the impact of the FPU merger and merger-related costs, Chesapeake's legacy businesses generated net income of $5.4 million, or $0.77 per share, in the fourth quarter of 2010, compared to $5.1 million, or $0.73 per share, for the same period in 2009, representing a five-percent growth in diluted earnings per share.  Strong performance by the Delmarva propane distribution operation based on higher volume and retail margins, a rate increase for the Company's Central Florida Gas division and favorable weather impacts all contributed to the increase generated by Chesapeake's legacy businesses.  FPU's results for the fourth quarter of 2010, which include an additional accrual of $250,000 for the regulatory risk associated with FPU's natural gas earnings and recovery of the purchase premium, decreased the earnings per share by $0.05 per share.  Discussions with the Florida Office of Public Counsel ("Florida OPC") and the Florida Public Service Commission ("Florida PSC") staff regarding such matters are ongoing.  Offsetting this decrease in earnings were lower merger-related costs expensed in the fourth quarter of 2010, compared to the same period in 2009, which added $0.04 per share.

"2010 was an exceptional year for Chesapeake," stated Michael P. McMasters, President and Chief Executive Officer of Chesapeake Utilities Corporation.  "We achieved significant growth on the Delmarva Peninsula with our continued efforts to expand the use of natural gas by very aggressively promoting the pricing advantage and environmentally-friendly features of natural gas.  We also exceeded our goal to produce earnings accretion in the first year after the FPU merger as a result of cost savings and capitalizing on new integration opportunities in Florida.  We are excited about the opportunities to further expand our business, both on the Delmarva Peninsula and in Florida, to ensure continued growth for both our customers and shareholders."

Highlights for the fourth quarter of 2010 included:

  • Operating income from the Delmarva propane distribution operations for the fourth quarter of 2010 increased by $884,000, compared to the same period in 2009, due primarily to higher volumes from the colder-than-normal weather, the timing of deliveries and increased retail margins.
  • The rate increase for Chesapeake's Florida division, effective in January 2010, contributed approximately $470,000 to gross margin for the quarter ended December 31, 2010.  
  • Three-percent growth in residential customers for the Delmarva natural gas distribution operation generated $115,000 in additional gross margin in the fourth quarter of 2010, compared to the same period in 2009.  Gross margin from commercial and industrial customers for the Delmarva natural gas distribution operation also increased by $186,000 in the fourth quarter of 2010, due primarily to the addition of 10 large commercial and industrial customers.  Combined with the other new large commercial and industrial customers added during the first three quarters of the year, these new large commercial and industrial customers will generate an estimated annual margin of $748,000, of which $196,000 has been reflected in 2010's results.  The customer additions enable the Company to 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 future growth.
  • Colder temperatures on the Delmarva Peninsula and in Florida during the fourth quarter and year ended 2010, compared to the same periods in 2009, contributed additional gross margin of $472,000 and $927,000 respectively.  Additionally, given that only two months of FPU's results were included in Chesapeake's consolidated 2009 gross margin, the appropriate comparison for 2010 for the weather impact on FPU is also normal weather. Higher-than-normal heating and cooling degree-days contributed $3.0 million in margin in 2010.  The Company uses historical results as the normal weather for this analysis.
  • Eastern Shore Natural Gas Company ("ESNG"), the Company's natural gas transmission subsidiary, generated additional gross margin of $140,000 from new transportation services commencing in late 2009 and during 2010.  The new transportation services in 2010 will generate estimated annual margin of $332,000, of which $56,000 has been recognized in 2010.  

Although not affecting the Company's results in 2010, ESNG completed the eight-mile mainline extension in December 2010 to interconnect with the Texas Eastern Transmission, LP ("TETLP") pipeline. ESNG commenced its new transportation services to the Company's Delaware and Maryland Divisions in January 2011.  These new services will generate gross margin of $2.4 million in 2011, $3.9 million in 2012 and $4.3 million annually thereafter.  ESNG's interconnection will provide the Delmarva natural gas distribution operation with access to new sources of natural gas supply from other natural gas production regions, including the Appalachian production region, thereby providing increased reliability and diversity of supply.  This new service will also provide the Delaware and Maryland divisions additional upstream transportation capacity to meet current customer demands and to increase their supply options as these divisions plan for sustainable growth.

  • On December 30, 2010, ESNG filed a base rate proceeding with the Federal Regulatory Energy Commission in accordance with the terms of the settlement agreement from its prior base rate base proceeding in 2008.  ESNG expects the base rate proceeding to be completed in 2011.
  • Included in FPU's results for the fourth quarter of 2010 is an additional accrual of $250,000 for the regulatory risk associated with FPU's natural gas earnings, merger benefits and recovery of the purchase premium.  The Company is required to detail known benefits, synergies, cost savings and cost increases resulting from the FPU merger and present the information in a "come-back" filing to the Florida PSC by April 29, 2011 (within 18 months of the merger).  We are currently in discussions with the Florida OPC and the Florida PSC Staff regarding the benefits and cost savings of the merger, current and expected earnings levels as well as the recovery of approximately $34.9 million in purchase premium and $2.2 million in merger-related costs.  The additional accrual during the fourth quarter, which brings the total accrual to $750,000, was recorded based on management's assessment of FPU's current earnings, the regulatory environment in Florida and progress of the current discussions.

The discussions of the results for the periods ended December 31, 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. In addition, certain information is presented, which, for comparison purposes, includes only FPU's results of operations for the periods ended December 31, 2010 and, in some cases, FPU's results for the same periods in 2009, which were 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.

Unless otherwise noted, earnings per share information is presented on a diluted basis.  Earnings per share information for Chesapeake's legacy businesses excluding the impact of the FPU merger and merger-related costs is calculated based on weighted average common shares outstanding, which excludes the shares issued in the FPU merger.

Comparative results for the years ended December 31, 2010 and 2009

Operating income increased by $18.2 million, or 54 percent, from $33.7 million to $51.9 million for the year ended December 31, 2010 compared to 2009.  Included in operating income for the years ended December 31, 2010 and 2009 were $18.4 million and $3.5 million in operating income from FPU, respectively.  FPU's results have been included in the Company's consolidated results since the completion of the merger on October 28, 2009.  Also included in operating income for the years ended December 31, 2010 and 2009 were $660,000 and $1.5 million, respectively, in merger-related costs.  Excluding the impact of the FPU merger and merger-related costs, operating income from Chesapeake's legacy businesses increased by $2.5 million, or eight percent, to $34.2 million for the year ended December 31, 2010, compared to $31.7 million for the year ended December 31, 2009.

Regulated Energy

Operating income for the regulated energy segment for the year ended 2010 was $43.5 million, an increase of $16.6 million, or 62 percent, compared to the same period in 2009.  An increase in gross margin of $51.4 million was partially offset by an increase in other operating expenses of $34.8 million.  Items contributing to the period-over-period increase in gross margin are listed in the following table:

(in thousands)



Gross margin for the year ended December 31, 2009


$74,296




Factors contributing to the gross margin increase for the year ended December 31, 2010:






Margin from FPU operations


46,239

Change in rates


2,244

Net customer growth


1,116

New transportation services


995

Favorable weather


612

Other


215

Gross margin for the year ended December 31, 2010


$125,717

  • FPU's natural gas and electric distribution operations generated $37.1 million and $18.4 million, respectively, in gross margin for the year ended December 31, 2010.  Gross margin from FPU's natural gas and electric distribution operations included in the Company's results in 2009 were $6.4 million and $2.8 million, respectively.  Gross margin for FPU's natural gas distribution operation in 2010 includes a $750,000 accrual for the regulatory risk associated with FPU's natural gas earnings, merger benefits and recovery of the purchase premium previously described and the impact of the $8.0 million rate increase from the rate settlement in 2009.  Gross margin for FPU's natural gas distribution operation in 2010 also includes $148,000 generated from the 700 new customers added by the purchase of the operating assets of Indiantown Gas Company.
  • An annual rate increase of approximately $2.5 million for Chesapeake's Florida natural gas distribution operation was approved by the Florida PSC in December 2009 and became effective in January 2010.  The rate increase in 2010, net of the impact from the interim rate increase in 2009, generated additional gross margin of $2.2 million for the year.  
  • Net customer growth of $1.1 million in 2010 is due primarily to two-percent growth in residential customers on the Delmarva Peninsula, which generated $512,000 in additional gross margin, and $587,000 in gross margin generated from new commercial and industrial customers added on the Delmarva Peninsula.  In 2010, the Delmarva natural gas distribution operations added 10 large commercial and industrial customers with total expected annual margin of $748,000, of which $196,000 was recognized in 2010.  The addition of certain commercial and industrial customers in 2010 also positioned us to further extend our natural gas distribution and transmission infrastructure in southern Delaware to serve other potential customers in the same area.
  • New transportation services implemented by ESNG in November 2009, May 2010 and November 2010 as a result of system expansion projects generated an additional $1.1 million in gross margin in 2010 compared to 2009.  These expansion projects added 9,623 Mcfs of firm service per day with estimated annualized gross margin of $1.6 million, of which $1.2 million has been reflected in 2010's results. New transportation service for an industrial customer for the period from November 2009 to October 2012 generated additional gross margin of $329,000 in 2010. Offsetting these margin increases were decreased margins of $341,000 for the year resulting from transportation service contracts, which expired in November 2009 and April 2010, and a decrease in interruptible service to an industrial customer.  
  • Colder weather on the Delmarva Peninsula generated an additional $365,000 in gross margin for the Delaware division, as heating degree-days increased by 102, or two percent, compared to 2009. Residential heating rates for our Maryland division are weather-normalized, and we typically do not experience an impact on gross margin from the weather for our residential customers in Maryland.  Colder weather in Florida also increased gross margin for Chesapeake's Florida natural gas distribution division by $247,000 in 2010.  

Other operating expenses for the regulated energy segment increased by $34.8 million for 2010, largely due to the inclusion of $32.4 million in other operating expenses from FPU's regulated energy operations for the period.  The remaining increase of $2.4 million, or a five-percent increase over operating expenses in 2009, exclusive of other operating expenses of FPU, is attributable to (i) increased payroll and benefits of $705,000 due primarily to annual salary increases and incentive pay; (ii) increased depreciation and asset removal costs of $518,000 from capital investments made in 2010 and 2009; (iii) increased regulatory expenses of $349,000 associated with ESNG's recent rate case filing and ongoing regulatory discussions involving the merger impact and recovery of the purchase premium in Florida; and (iv) increased non-income-taxes of $63,000 due primarily to increased gross-receipt taxes.

Unregulated Energy

Operating income for the unregulated energy segment for 2010 was $7.9 million, a decrease of $250,000, or three percent, compared to 2009. An increase in gross margin of $6.5 million was offset by an increase in other operating expenses of $6.8 million. A decline in operating income for the unregulated energy segment is largely attributable to the natural gas marketing business, which experienced a decrease in gross margin in 2010 due primarily to the absence of spot sales to one industrial customer. Items contributing to a period-over-period increase in gross margin are listed in the following table:

(in thousands)



Gross margin for the year ended December 31, 2009


$29,565




Factors contributing to the gross margin increase for the year ended December 31, 2010:






Margin from FPU operations


7,001

Volume increase - weather and other


1,077

Natural gas marketing


(1,030)

Propane wholesale marketing


(441)

Decreases in retail margin per gallon


(399)

Miscellaneous fees and other


340

Gross margin for the year ended December 31, 2010


$36,113

  • FPU's unregulated energy operation, which is primarily its propane distribution operation, generated $10.0 million in gross margin in 2010.  Gross margin from FPU's unregulated energy operation and Chesapeake's Florida propane distribution operation in 2009 was $3.0 million.  All of Chesapeake's Florida propane distribution operations were transferred to FPU after the merger.
  • Increased gross margin from the addition of 436 community gas system customers in 2010 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 $170,000 and $235,000 to 2010 gross margin, respectively. Also contributing to the increase in gross margin was two-percent colder weather on the Delmarva Peninsula in 2010, as compared to 2009, as well as the timing of propane deliveries to bulk customers.  The cumulative impact of the colder weather and the timing of deliveries resulted in increased gross margin of $672,000.
  • In 2010, gross margin for the Company's unregulated natural gas marketing subsidiary, PESCO, decreased by $1.0 million. Spot sales decreased from 2009, due primarily to the absence of spot sales to one industrial customer. Spot sales are not predictable and, therefore, are not included in our long-term financial plans or forecasts.
  • The Company's propane wholesale marketing subsidiary, Xeron, experienced a $441,000 decrease in gross margin in 2010 as a result of a 13-percent decrease in trading volume.  
  • Inventory and swap adjustments for the 2008/2009 winter Pro Cap program of $1.8 million as a result of a sharp decline in inventory prices in late 2008, lowered the propane inventory cost of our Delmarva propane distribution operation during the first half of 2009 and generated higher retail margins during this period. During 2010, the retail margins returned to more normal levels, resulting in a lower retail margin per gallon, and decreasing gross margin by $399,000 for the Delmarva propane distribution operation.
  • Other fees increased by $340,000 in 2010, due primarily to continued growth and increased customer participation in various customer pricing programs offered by the Delmarva propane distribution operation.

Other operating expenses for the unregulated energy segment increased by $6.8 million in 2010 due primarily to an increase of $6.0 million associated with the inclusion of FPU's unregulated energy business. The remaining increase of $771,000 in other operating expenses over 2009, or a four-percent increase, exclusive of Florida operations, was attributable to (i) increased payroll and benefit costs of $446,000; (ii) increased non-income-related taxes of $315,000 due primarily to increased sales tax; and (iii) increased vehicle fuel costs of $166,000 due to increased propane deliveries and higher fuel costs.  These increases were partially offset by a decrease in bad debt expense of $245,000 for the natural gas marketing operation as a result of expanded credit and collection initiatives.

Other

Operating income for the "Other" segment for the year ended December 31, 2010 was $513,000, compared to an operating loss of $1.3 million for the same period in 2009.  This increase in operating income of $1.8 million resulted from an increase in gross margin of $747,000 primarily from BravePoint, the Company's advanced information services subsidiary, and a decline in other operating expenses of $1.1 million, primarily due to lower merger-related costs expensed in 2010 compared to 2009.

BravePoint reported operating income of $759,000 for 2010, compared to an operating loss of $229,000 for 2009.  Gross margin from BravePoint increased by $801,000 due to a seven-percent increase in billable consulting hours and higher revenue from its professional database monitoring, support solution services and product sales.

Other operating expenses decreased by $1.1 million in 2010 compared to 2009. The decrease in other operating expenses was attributable primarily to lower merger-related costs expensed in 2010 compared to 2009, and cost containment actions, including layoffs and compensation adjustments, implemented by BravePoint in 2009.  

Interest Expense

Interest expense for the year ended December 31, 2010 increased by approximately $2.1 million, or 29 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 $1.3 million is related to interest on FPU's first mortgage bonds.
  • Interest expense from a new term loan facility was $491,000 for the year.  In January 2010, we redeemed two series of FPU bonds, the 4.9 percent and 6.85 percent series, by using $29.1 million of this new short-term loan facility to reduce the amount of the FPU secured long-term debt and to maintain compliance with the covenants in our unsecured senior notes.
  • Additional interest expense of $730,000 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 a result of scheduled repayments, and lower additional short-term interest expense due to the timing of capital expenditures and reduced working capital requirements, partially as a result of the increased bonus depreciation in 2010.

Chesapeake has entered into an arrangement with an existing unsecured note holder to refinance the new short-term loan facility as Chesapeake unsecured senior notes.  If this facility is refinanced prior to July 8, 2011, these new unsecured senior notes will be issued at 5.68 percent and result in annual long-term interest expense of $1.7 million, representing additional interest of $1.2 million, compared to the interest expense of $491,000 on the new short-term loan facility in 2010.

Comparative results for the quarters ended December 31, 2010 and 2009

Operating income increased by $1.5 million, or 12 percent, to $14.2 million for the fourth quarter of 2010, compared to $12.7 million for the same period in 2009.  Included in operating income for the quarters ended December 31, 2010 and 2009 were $4.2 million and $3.5 million, respectively, in operating income from FPU.  FPU's results have been included in the Company's consolidated results since the completion of the merger on October 28, 2009. Also included in operating income for the fourth quarter of 2010 and 2009 were $481,000 and $948,000 in merger-related costs, respectively.  Excluding the impact of the FPU merger and merger-related costs, operating income from Chesapeake's legacy businesses increased by $385,000, or four percent, to $10.4 million from $10.1 million for the quarter ended December 31, 2010 compared to 2009.

Regulated Energy

Operating income for the regulated energy segment for the fourth quarter of 2010 was $11.1 million, an increase of $803,000, or eight percent, compared to the same period in 2009.  An increase in gross margin of $6.2 million was offset by an increase in other operating expenses of $5.4 million.  Items contributing to the period-over-period increase in gross margin are listed in the following table:

(in thousands)



Gross margin for the three months ended December 31, 2009


$27,017




Factors contributing to the gross margin increase for the three months ended December 31, 2010:






Margin from FPU operations


4,958

Increased customer consumption


332

Net customer growth


326

Change in rates


325

Favorable weather


212

New transportation services


112

Other


(21)

Gross margin for the three months ended December 31, 2010


$33,261

  • FPU's natural gas and electric distribution operations generated gross margin of $9.8 million and $4.4 million, respectively, for the quarter ended December 31, 2010.  Gross margin from FPU's natural gas and electric distribution operations included in the Company's results in the fourth quarter of 2009 were $6.4 million and $2.8 million, respectively.  Colder temperatures in Florida in November and December 2010, compared to the same period in 2009, generated $422,000 in additional gross margin.  Gross margin for  FPU's natural gas  distribution operation  in the fourth  quarter of 2010 also includes $99,000 generated from the 700 new customers added in conjunction with the purchase of the operating assets of Indiantown Gas Company.  Gross margin for FPU's natural gas distribution operation in the fourth quarter of 2010 reflects the additional accrual of $250,000 recorded for the regulatory risk associated with FPU's natural gas earnings, merger benefits and recovery of the purchase premium previously described.  
  • Increased consumption, particularly by commercial and industrial customers on both the Delmarva Peninsula and in Florida, generated additional gross margin of $332,000 for the quarter.
  • Three-percent growth in residential customers for the Delmarva natural gas distribution operation generated $115,000 in additional gross margin in the fourth quarter of 2010, compared to the same period in 2009.  Gross margin from commercial and industrial customers for the Delmarva natural gas distribution operation also increased by $186,000 in the fourth quarter of 2010, due primarily to the addition of 10 large commercial and industrial customers.  Combined with other new large commercial and industrial customers added during the first three quarters of the year, these new large commercial and industrial customers will generate an estimated annual margin of $748,000, of which $196,000 has been reflected in 2010's results.  Also contributing to this increase is $25,000 in additional gross margin generated from customer growth in Chesapeake's Florida natural gas distribution division.
  • Gross margin for Chesapeake's Florida division increased by $470,000 in the fourth quarter of 2010, compared to the same period in 2009, from an annual rate increase of approximately $2.5 million approved by the Florida PSC in 2009 (effective in January 2010).  Changes in customers' rates and rate classifications, primarily for certain Delmarva natural gas distribution commercial and industrial customers with negotiated rates, lowered gross margin by $150,000 in the fourth quarter of 2010.
  • New transportation services implemented by ESNG in November 2009, May 2010 and November 2010 as a result of its system expansion projects generated an additional $200,000 to gross margin in the fourth quarter of 2010 compared to the same period in 2009.  These expansion projects added 9,623 Mcfs of service per day with estimated annual gross margin of $1.6 million. New transportation service for an industrial customer for the period from November 2009 to October 2012 generated additional gross margin of $25,000 in the fourth quarter of 2010, compared to the same period in 2009. Offsetting these margin increases were decreased margins of $58,000 for the year resulting from transportation service contracts, which expired in November 2009 and April 2010, and a decrease in interruptible service to an industrial customer.  
  • Colder weather on the Delmarva Peninsula generated an additional $146,000 of gross margin as heating degree-days increased by five percent for the fourth quarter of 2010 compared to the same period in 2009.  Colder weather during the fourth quarter of 2010 contributed to an increase in gross margin of $66,000 by Chesapeake's Florida division.

Other operating expenses for the regulated energy segment increased by $5.4 million in the fourth quarter ended December 31, 2010, largely due to the increase of $4.1 million in other operating expenses from FPU's regulated energy operations for the period.  Other operating expenses from FPU's regulated energy operations for the fourth quarter of 2010 include increased non-income-related taxes, due primarily to the $265,000 accrual for sales tax.  The remaining increase of $1.3 million, or a 13-percent increase from operating expenses in 2009, exclusive of other operating expenses of FPU, is attributable to (i) increased payroll and benefits by $255,000 due primarily to annual salary increases and incentive pay; (ii) increased depreciation and asset removal costs by $123,000 from capital investments made in 2010 and 2009; (iii) increased regulatory expenses by $257,000 associated with ESNG's recent rate case filing and ongoing regulatory discussions involving the merger impact and recovery of purchase premium in Florida; (iv) increased costs related to pipeline integrity of $192,000; (v) increased non-income-related taxes of $170,000  associated with increased gross-receipt taxes; and (vi) increased bad debt expense of $58,000.

Unregulated Energy

The unregulated energy segment reported operating income for the fourth quarter of 2010 of $3.2 million, compared to operating income of $2.9 million for the same period in 2009.  An increase in gross margin of $1.6 million was partially offset by a $1.3 million increase in other operating expenses.  Items contributing to the period-over-period increase in gross margin are listed in the following table:

(in thousands)



Gross margin for the three months ended December 31, 2009


$9,272




Factors contributing to the gross margin increase for the three months ended December 31, 2010:






Volume increase - weather and other


853

Margin from FPU operations


648

Increase in retail margin per gallon


630

Natural gas marketing


(451)

Propane wholesale marketing


(292)

Miscellaneous fees and other


175

Gross margin for the three months ended December 31, 2010


$10,835

  • Increased gross margin for the Delmarva propane distribution operation resulted from the addition of 444 community gas system customers and approximately 1,000 customers added by the acquisition of the operating assets of a propane distributor in Virginia in February 2010, which generated $38,000 and $91,000 in gross margin for the fourth quarter, respectively.  Five-percent colder weather on the Delmarva Peninsula, as well as the timing of propane deliveries to bulk customers, further increased gross margin by $718,000.
  • FPU's unregulated energy operation, which is primarily its propane distribution operation, generated $2.6 million in gross margin in the fourth quarter of 2010.  Gross margin from FPU's unregulated energy operation and Chesapeake's Florida propane distribution operation in the fourth quarter of 2009 was $1.9 million.  All of Chesapeake's Florida propane distribution operation was transferred to FPU after the merger.
  • Higher retail margins per gallon during the fourth quarter of 2010 generated additional gross margin of $630,000.
  • In the fourth quarter of 2009, PESCO benefited from increased spot sales to customers on the Delmarva Peninsula. The absence of spot sales to one industrial customer on the Delmarva Peninsula decreased PESCO's gross margin by $451,000 during the quarter. Spot sales are not predictable and, therefore, are not included in our long-term financial plans or forecasts.
  • Xeron experienced a $292,000 decrease in gross margin during the fourth quarter of 2010 compared to the same period in 2009.  Xeron's trading volumes decreased by 10 percent in the fourth quarter of 2010 compared to the same period in 2009.  
  • Other fees increased by $175,000 in the fourth quarter of 2010, due primarily to continued growth and increased customer participation in various customer pricing programs offered by the Delmarva propane distribution operation.

Other operating expenses for the unregulated energy segment increased by $1.3 million in the fourth quarter of 2010, due primarily to $728,000 of other operating expenses associated with the inclusion of FPU's unregulated energy business. The remaining increase of $585,000 in other operating expenses, or a 11-percent increase from other operating expenses, exclusive of Florida operations, was attributable to (i) increased payroll and benefit costs of $333,000 due primarily to increased bonuses; (ii) increased non-income-related taxes of $202,000 associated with increased sales tax; and (iii) increased vehicle fuel costs of $61,000 resulting from increased propane deliveries and higher fuel costs.  

Other

Operating loss for the "other" segment for the fourth quarter of 2010 was $138,000, compared to $613,000 for the same period in 2009.  The reduction in operating loss of $475,000 resulted from an increase of $123,000 in gross margin, primarily from BravePoint, and lower operating expenses of $337,000, as a result of lower merger-related costs in 2010.

BravePoint reported operating income of $236,000 in the fourth quarter of 2010, compared to operating income of $219,000 in the same period in 2009. Gross margin from BravePoint increased by $160,000 due to a two-percent increase in billable consulting hours and higher revenue from its professional database monitoring and support solution services, which was partially offset by higher operating expenses of $142,000.  

Merger-related costs, net of costs previously deferred, decreased by $447,000 due to lower merger-related costs expensed in the fourth quarter of 2010 compared to the same period in 2009.

Interest Expense

Interest expense for the fourth quarter of 2010 decreased by approximately $108,000, or 4.7 percent, compared to the same period in 2009. The lower interest expense resulted from the lower principal balance of long-term debt and lower short-term borrowings due to the timing of capital expenditures and reduced working capital requirements, partially as a result of the increased bonus depreciation in 2010.

Partially offsetting the decrease in long-term interest expense for 2010 are increased expenses of $175,000 associated with interest on deposits from FPU's customers and $135,000 in interest expense for the quarter from a new short-term term loan facility.  In January 2010, we redeemed two series of FPU bonds, the 4.9 percent and 6.85 percent series, by using $29.1 million of this new short-term loan facility to reduce the amount of the FPU secured long-term debt and to maintain compliance with the covenants in our unsecured senior notes.

Chesapeake Utilities Corporation and Subsidiaries

Condensed Consolidated Statements of Income (Unaudited)

For the Periods Ended December 31, 2010 and 2009

(in thousands, except shares and per share data)










Fourth Quarter


Year to Date








2010

2009


2010

2009

Operating Revenues







Regulated energy


$72,155

$52,677


$269,934

$139,099

Unregulated energy


42,775

36,737


146,793

119,973

Other


2,829

2,301


10,819

9,713

Total Operating Revenues


117,759

91,715


427,546

268,785








Operating Expenses







Regulated energy cost of sales


38,894

25,660


144,217

64,803

Unregulated energy and other cost of sales


33,386

28,506


116,098

95,467

  Operations


20,486

15,886


75,335

50,706

  Transaction-related costs


481

948


660

1,478

  Maintenance


2,096

1,498


7,484

3,430

  Depreciation and amortization


5,040

4,353


20,758

11,588

  Other taxes


3,188

2,206


11,064

7,577

Total operating expenses


103,571

79,057


375,616

235,049

Operating Income


14,188

12,658


51,930

33,736

Other income (loss), net of other expenses


(12)

144


195

165

Interest charges


2,222

2,330


9,146

7,086

Income Before Income Taxes


11,954

10,472


42,979

26,815

Income tax expenses


4,841

4,282


16,923

10,918

Net Income


$7,113

$6,190


$26,056

$15,897








Weighted Average Shares Outstanding:







Basic


9,516,370

8,659,935


9,474,554

7,313,320

Diluted


9,622,832

8,755,998


9,582,374

7,440,201








Earnings Per Share of Common Stock:







Basic


$0.75

$0.71


$2.75

$2.17

Diluted


$0.74

$0.71


$2.73

$2.15

Chesapeake Utilities Corporation and Subsidiaries

Supplemental Income Statement Data (Unaudited)

For the Periods Ended December 31, 2010 and 2009

(in thousands, except degree-day data)







Fourth Quarter


Year to Date






Chesapeake and Subsidiaries


2010

2009


2010

2009

Gross Margin (1)







 Regulated Energy


$33,261

$27,017


$125,717

$74,296

 Unregulated Energy


10,835

9,272


36,113

29,565

 Other


1,383

1,260


5,401

4,654

Total Gross Margin


$45,479

$37,549


$167,231

$108,515








Operating Income (Loss)







  Regulated Energy


$11,149

$10,346


$43,509

$26,900

  Unregulated Energy


3,176

2,925


7,908

8,158

  Other


(137)

(613)


513

(1,322)

Total Operating Income


$14,188

$12,658


$51,930

$33,736








Heating Degree-Days — Delmarva Peninsula







Actual


1,810

1,726


4,831

4,729

10-year average (normal)


1,605

1,573


4,528

4,462








Heating Degree-Days — Florida







Actual


558

297


1,501

911

10-year average (normal)


325

316


919

863








Cooling Degree-Days — Florida







Actual


166

336


2,859

2,770

10-year average (normal)


275

276


2,718

2,694








(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. Gross margin should not be considered an alternative to operating income or net income, which is determined in accordance with Generally Accepted Accounting Principles ("GAAP"). Chesapeake 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. Chesapeake's management uses gross margin in measuring its business units' performance and has historically analyzed and reported gross margin information publicly. Other companies may calculate gross margin in a different manner.


Chesapeake Utilities Corporation and Subsidiaries

Supplemental Income Statement Data (Unaudited)


The following presents FPU's results of operations for the three months and year ended December 31, 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 the evaluation of Chesapeake's performance.






(in thousands)


Fourth Quarter


Year to Date

FPU Stand-alone


2010


2010

Gross Margin (1)





Regulated Energy





 Natural Gas


$9,802


$37,057

 Electric


4,364


18,390

Unregulated Energy





 Propane and other


2,575


9,968

Total Gross Margin


$16,741


$65,415






Operating Income





Regulated Energy





 Natural Gas


$3,296


$12,323

 Electric


557


4,475

Unregulated Energy





 Propane and other


368


1,573

Total Operating Income


$4,221


$18,371






(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. Gross margin should not be considered an alternative to operating income or net income, which is determined in accordance with Generally Accepted Accounting Principles (“GAAP”). Chesapeake 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. Chesapeake’s management uses gross margin in measuring its business units’ performance and has historically analyzed and reported gross margin information publicly. Other companies may calculate gross margin in a different manner.

Chesapeake Utilities Corporation and Subsidiaries

Distribution Utility Statistical Data (Unaudited)












For the Three Months Ended December 31, 2010


For the Three Months Ended December 31, 2009


Delmarva NG
Distribution

Chesapeake
Florida NG
Division

FPU NG
Distribution

FPU Electric
Distribution


Delmarva NG
Distribution

Chesapeake
Florida NG
Division

FPU NG
Distribution (2)

FPU Electric
Distribution (2)

Operating Revenues
(in thousands)










 Residential

$11,571

$1,155

$5,197

$10,990


$10,398

$888

$4,172

$13,559

 Commercial

7,654

971

7,883

11,156


6,911

792

6,568

11,198

 Industrial

1,144

1,082

2,109

1,708


1,140

1,016

1,898

2,361

 Other (1)

5,292

563

2,225

(2,263)


3,869

421

(1,498)

(2,241)

Total Operating Revenues

$25,661

$3,771

$17,414

$21,591


$22,318

$3,117

$11,140

$24,877











Volume (in Mcfs/MWHs)










 Residential

684,329

97,507

311,130

73,363


586,870

66,075

237,500

70,959

 Commercial

559,230

341,672

784,158

81,512


502,352

300,450

682,423

79,269

 Industrial

1,000,019

3,206,128

510,577

13,770


815,685

2,912,077

440,797

13,130

 Other

31,940

-

192,229

(7,175)


106,105

-

172,722

(3,631)

Total

2,275,518

3,645,307

1,798,094

161,470


2,011,012

3,278,602

1,533,442

159,727











Average customers










 Residential

48,027

13,439

47,525

23,644


46,582

13,197

46,461

23,600

 Commercial

5,036

1,166

4,532

7,366


5,011

1,116

4,448

7,423

 Industrial

181

59

658

3


149

61

564

3

 Other

4

-

-

-


8

-

2

-

Total

53,248

14,664

52,715

31,013


51,750

14,374

51,475

31,026











(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 .

(2) Operating revenue, volume and average customer information for FPU-Natural Gas Distribution and FPU-Electric Distribution are presented for

     comparative purposes only.  They represent the FPU results from the period prior to the merger with Chesapeake, which are not

     included in Chesapeake's consolidated results.  

Chesapeake Utilities Corporation and Subsidiaries

Distribution Utility Statistical Data (Unaudited)












For the Twelve Months Ended December 31, 2010


For the Twelve Months Ended December 31, 2009


Delmarva NG
Distribution

Chesapeake
Florida NG
Division

FPU NG
Distribution

FPU Electric
Distribution


Delmarva NG
Distribution

Chesapeake
Florida NG
Division

FPU NG
Distribution (2)

FPU Electric
Distribution (2)

Operating Revenues
(in thousands)










 Residential

$46,041

$4,716

$23,026

$51,498


$51,309

$3,682

$20,248

$43,805

 Commercial

27,896

3,726

35,280

45,332


31,943

3,043

30,293

39,139

 Industrial

3,766

4,610

8,433

7,705


3,696

4,260

6,600

7,555

 Other (1)

3,162

1,847

(1,240)

(10,452)


2,268

1,376

(2,789)

(8,335)

Total Operating Revenues

$80,865

$14,899

$65,499

$94,083


$89,216

$12,361

$54,352

$82,164











Volume (in Mcfs/MWHs)










 Residential

2,881,073

392,845

1,329,598

347,040


2,747,162

318,417

1,157,074

316,306

 Commercial

2,145,143

1,314,146

3,156,894

332,323


2,073,884

1,157,931

2,942,812

316,412

 Industrial

3,020,907

13,490,494

2,066,605

66,580


2,446,993

13,264,646

1,795,756

64,950

 Other

232,653

-

12,723

(6,287)


373,825

-

28,641

6,250

Total

8,279,776

15,197,485

6,565,820

739,656


7,641,864

14,740,994

5,924,283

703,918











Average customers










 Residential

47,638

13,427

47,626

23,589


46,717

13,267

46,781

23,679

 Commercial

5,048

1,135

4,498

7,374


5,019

1,114

4,466

7,405

 Industrial

172

59

622

3


143

62

539

2

 Other

5

-

-

-


10

-

-

-

Total

52,863

14,621

52,746

30,966


51,889

14,443

51,786

31,086











(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 .

(2) Operating revenue, volume and average customer information for FPU-Natural Gas Distribution and FPU-Electric Distribution are presented for

     comparative purposes only.  They represent the FPU results from the period prior to the merger with Chesapeake and, therefore, they are not

     included in Chesapeake's consolidated results.  

Chesapeake Utilities Corporation and Subsidiaries


Condensed Consolidated Balance Sheets  (Unaudited)


Assets

December 31, 2010

December 31, 2009

(in thousands, except shares and per share data)




Property, Plant and Equipment



Regulated energy

$500,689

$462,061

Unregulated energy

61,313

61,334

Other  

16,989

16,049

Total property, plant and equipment

578,991

539,444

Less:  Accumulated depreciation and amortization

(121,628)

(107,318)

Plus:  Construction work in progress

5,394

4,461

Net property, plant and equipment

462,757

436,587




Investments, at fair value

4,036

1,959




Current Assets



Cash and cash equivalents

1,643

2,818

Accounts receivable (less allowance for uncollectible



   accounts of $1,194 and $1,609, respectively)

88,074

69,773

Accrued revenue

14,978

12,838

Propane inventory, at average cost

8,876

7,901

Other inventory, at average cost

3,084

3,149

Regulatory assets

51

448

Storage gas prepayments

5,084

6,144

Income taxes receivable

6,748

2,614

Deferred income taxes

2,191

724

Prepaid expenses

4,613

5,853

Mark-to-market energy assets

1,642

2,379

Other current assets

245

147

Total current assets

137,229

114,788




Deferred Charges and Other Assets



Goodwill

35,613

34,095

Other intangible assets, net

3,459

3,951

Long-term receivables

155

440

Regulatory assets

23,884

20,100

Other deferred charges

3,860

3,891

Total deferred charges and other assets

66,971

62,477




Total Assets

$670,993

$615,811

Chesapeake Utilities Corporation and Subsidiaries


Condensed Consolidated Balance Sheets  (Unaudited)




Capitalization and Liabilities

December 31,
2010

December 31,
2009

(in thousands, except shares and per share data)




Capitalization



Stockholders' equity



Common stock, par value $0.4867 per share



(authorized 25,000,000 and 12,000,000 shares, respectively)  

$4,635

$4,572

Additional paid-in capital

148,159

144,502

Retained earnings

76,805

63,231

Accumulated other comprehensive loss

(3,360)

(2,524)

Deferred compensation obligation

777

739

Treasury stock

(777)

(739)

Total stockholders' equity

226,239

209,781




Long-term debt, net of current maturities

89,642

98,814

Total capitalization

315,881

308,595




Current Liabilities



Current portion of long-term debt

9,216

35,299

Short-term borrowing

63,958

30,023

Accounts payable

65,541

51,462

Customer deposits and refunds

26,317

25,046

Accrued interest

1,789

1,887

Dividends payable

3,143

2,959

Accrued compensation

6,784

5,341

Regulatory liabilities

9,009

8,295

Mark-to-market energy liabilities

1,492

2,514

Other accrued liabilities

10,393

7,017

Total current liabilities

197,642

169,843




Deferred Credits and Other Liabilities



Deferred income taxes  

80,031

66,008

Deferred investment tax credits

243

335

Regulatory liabilities

3,734

4,393

Environmental liabilities

10,587

11,104

Other pension and benefit costs

18,199

15,088

Accrued asset removal cost - Regulatory liability

35,092

33,214

Other liabilities

9,584

7,231

Total deferred credits and other liabilities

157,470

137,373




Total Capitalization and Liabilities

$670,993

$615,811

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 report on Form 10-K 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.

For more information, contact:

Beth W. Cooper

Senior Vice President & Chief Financial Officer

302.734.6799

SOURCE Chesapeake Utilities Corporation

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