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Chesapeake Utilities Corporation Announces Increased Earnings for the Quarter Ended March 31, 2009

Posted on: Monday, 4 May 2009, 05:30 CDT

- The Company reports a 13-percent increase in net income for the quarter

- Strong cash flow leads to $23.2 million reduction in short-term debt

DOVER, Del., May 4 /PRNewswire-FirstCall/ -- Chesapeake Utilities Corporation (NYSE: CPK) today announced a 13-percent increase in net income for the quarter ended March 31, 2009, compared to the same period in 2008. Net income for the quarter ended March 31, 2009, was $8.6 million, or $1.24 per share (diluted), an increase of $1.0 million, or $0.14 per share (diluted), compared to $7.6 million, or $1.10 per share (diluted), for the same period in 2008. The increased earnings reflect the improved financial performance of the propane distribution and natural gas marketing subsidiaries, customer growth, and the impact of colder weather on the Delmarva Peninsula.

The discussions of the results for the periods ended March 31, 2009 and 2008, use the term "gross margin," which is a non-Generally Accepted Accounting Principle financial measure that 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.

"Our first quarter results reflect the continued strong performance of our core business segments, as the operating and financial performance of our propane and natural gas operations remained strong and provided cash flow to allow us to pay down $23.2 million in short-term debt," stated John R. Schimkaitis, President and Chief Executive Officer of Chesapeake Utilities Corporation. "As the year proceeds, we look forward to completing our merger with Florida Public Utilities Company and using this combination to supplement the solid fundamentals of our existing core gas distribution and propane operations."

Highlights for the first quarter and year-to-date 2009 included:

• On April 20, 2009, the Company announced a definitive merger agreement with Florida Public Utilities Company. The merger, which is subject to various regulatory and shareholder approvals, is expected to close before the end of 2009, and is projected to be neutral to slightly accretive to earnings in 2010 and meaningfully accretive in 2011.
• The Company's propane distribution operations increased gross margin by $1.4 million over the same period last year, benefiting from a lower inventory price per gallon, which was attributable to the decline in propane prices coupled with propane inventory write-downs of $800,000 in the second-half of 2008.
• Colder weather on the Delmarva Peninsula contributed approximately $1.0 million in additional gross margin during the current quarter compared to the same period in 2008.
• Increased margins from spot sales on the Delmarva Peninsula and enhancements in sales contract terms for the Company's natural gas marketing subsidiary provided for a period-over-period increase of $913,000 in its gross margin.
• In February 2009, the Company's natural gas transmission subsidiary, Eastern Shore Natural Gas Company ("ESNG"), entered into two separate firm transportation service agreements with an industrial customer that will provide such service through October 31, 2012. The Company estimates that it will recognize an additional gross margin of $754,000 in 2009, of which $118,000 was recognized during the first quarter, and annualized gross margin of approximately $1.1 million through the term of these agreements.
• On March 13, 2009, the Federal Energy Regulatory Commission authorized ESNG to construct the remaining facilities of its multi-year system expansion project. These facilities, which are expected to be placed into service on November 1, 2009, will provide 7,200 dekatherms ("Dts") of additional, fully-subscribed, long-term, firm service capacity and will permit ESNG to earn additional annualized gross margin of approximately $1.0 million.
• Strong operating cash flow during the quarter enabled the Company to reduce short-term debt by $23.2 million to $9.8 million, while also investing $4.1 million in property, plant and equipment to support current and future customer growth.

Comparative results for the quarters ended March 31, 2009 and 2008

Operating income increased by $1.9 million, or 14 percent, to $16.0 million for the first quarter of 2009, compared to $14.1 million for the same period in 2008, as gross margin increased by $4.0 million, or 14 percent, compared to the first quarter of 2008. The increases in operating income and gross margin were driven primarily by improved results for the natural gas and propane segments, partially offset by lower operating results for the advanced information services segment.

Natural Gas Operations

For the first quarter of 2009, natural gas operating income rose by $48,000 over the same period in 2008. Gross margin for the first quarter of 2009 grew by $1.7 million over 2008, but this increase was almost completely offset with higher operating expenses. Factors contributing to the period-over-period increase in gross margin included:

(in thousands) -------------------------------------- ------- Gross margin for the three months ended March 31, 2008 $19,611 -------------------------------------- ------- Items impacting gross margin for the three months ended March 31, 2009: Natural gas marketing 913 Increased transportation services and customer growth 767 Weather 455 Increased customer consumption 105 Other 94 Changes in rate structures (398) Decreased interruptible services, net of margin sharing (264) -------------------------------------- ------- Gross margin for the three months ended March 31, 2009 $21,283 ====================================== =======

• The natural gas marketing subsidiary experienced an increase of $913,000 in gross margin due to increased spot sales on the Delmarva Peninsula and enhanced sales contract terms. Spot sales are opportunistic transactions, the future availability of which are dependent upon market conditions.
• The natural gas segment realized strong customer growth and secured additional firm transportation service contracts, which added $767,000 to gross margin during the first quarter of 2009 compared to the same quarter in 2008. This growth was partially due to additional long-term transportation contracts implemented by ESNG in November 2008 and February 2009, which contributed $365,000 to gross margin. The natural gas distribution operations also experienced growth as an increase in the number of customers served contributed $335,000 to gross margin.
• Weather contributed to the increase in gross margin in the first quarter of 2009, as temperatures on the Delmarva Peninsula were 10 percent colder compared to the same period in 2008. The Company estimates that these colder temperatures contributed approximately $455,000 to gross margin.
• The Company estimates that customer consumption, which increased in the first quarter of 2009 compared to the same period in 2008, contributed $105,000 to gross margin.
• Gross margin on firm customers for the Delaware Division decreased in the first quarter by approximately $398,000, compared to the same period in 2008, as a result of the new rate structure approved by the Delaware Public Service Commission in the third quarter of 2008. The new rate structure allows a greater portion of the revenue requirements to be collected through non-volume based charges and provides less volatility in gross margin based on weather. Compared to the previous rate structure, this resulted in a reduction in margin during the first quarter of 2009, but will represent an increase in margin during non-heating periods.
• Interruptible margins decreased by $264,000 in the first quarter of 2009, mainly as a result of the reduced prices of alternative fuels and the switch to firm service by a majority of the Delaware Division's interruptible customers in 2008 following the conclusion of the Delaware Division's base rate case.

Other operating expenses for the natural gas segment increased by $1.6 million, or 18 percent, in the first quarter of 2009. This increase is attributed to the following: (1) higher depreciation expense, asset removal costs and property taxes associated with the Company's continued capital investments; (2) higher payroll and benefits costs due primarily to salary adjustments that became effective January 1, 2009 as a result of a compensation survey completed in the fourth quarter of 2008, annual salary increases, and additional staffing levels to support continued growth; and (3) a higher allowance for uncollectible accounts in response to overall economic conditions.

Propane Operations

The propane segment's operating income for the quarter increased by $2.0 million, or 59 percent, as a $2.6 million increase in gross margin was partially offset by an increase in operating expenses of $583,000 compared to the same period in the prior year. Factors contributing to the period-over-period increase in gross margin included:

(in thousands) ------------------------------------------ ------- Gross margin for the three months ended March 31, 2008 $8,087 ------------------------------------------ ------- Items impacting gross margin for the three months ended March 31, 2009: Increases in margin per retail gallon 1,363 Increased volumes 670 Weather 584 Wholesale propane sales 126 Miscellaneous fees 54 Other 23 Wholesale marketing and sales (216) ------------------------------------------ ------- Gross margin for the three months ended March 31, 2009 $10,691 ========================================== =======

• Gross margin increased by $1.4 million in the first quarter of 2009, compared to the same period in 2008, because of higher retail unit margins resulting from a sharp decline in propane costs. Gross margin in the first quarter of 2009 was aided by propane inventory write-downs of approximately $800,000 during the second-half of 2008, which resulted in a lower inventory price per gallon.
• The Company's propane distribution operations experienced higher non-weather-related volumes sold during the first quarter of 2009, which expanded gross margin by $670,000. Factors contributing to the increase in gallons sold were the timing of propane deliveries to certain customers and approximately 380 additional Community Gas Systems customers.
• The Company estimates that colder weather during the first quarter of 2009 contributed an additional $584,000 in gross margin for the Delmarva propane distribution operation.
• Wholesale volumes increased by 1.2 million gallons in the first quarter of 2009, which resulted in a gross margin increase of $126,000.
• Decreased price volatility in the propane wholesale market during the period resulted in fewer market opportunities for the Company's wholesale marketing operation, which led to a $216,000 gross margin decrease compared to the first quarter of 2008.

Operating expenses for the propane segment increased by $583,000, or 13 percent, for the first quarter of 2009 compared to the first quarter of 2008. The higher costs were due primarily to higher incentive compensation related to increased earnings, payroll and benefit costs, and a higher allowance for uncollectible accounts associated with increased revenues and the overall economic conditions.

Advanced Information Services

The advanced information services segment experienced an operating loss of $112,000 in the first quarter of 2009, compared to operating income of $38,000 during the first quarter of 2008. The period-over-period decrease reflects lower consulting revenues as the operation experienced a 27-percent reduction in the number of billable hours, attributable to the current economic conditions. On March 16, 2009, the Company instituted layoffs and other cost-containment actions that are estimated to offset the decline in revenues and reduce costs by $851,000 for the remainder of 2009.

Interest Expense

Interest expense for the first quarter of 2009 increased by $49,000, or three percent, compared to the same period in 2008. The higher interest expense was due primarily to an increase of approximately $23.2 million in average outstanding long-term debt, partially offset by a decrease of $13.9 million in the Company's average short-term borrowing coupled with a reduction of 2.3 percent in weighted average interest rates on such borrowings.

Chesapeake Utilities Corporation and Subsidiaries Condensed Consolidated Statements of Income (Unaudited) (in Thousands, Except Shares and Per Share Data) For the Three Months Ended March 31, 2009 2008 --------------------------------------- ---- ---- Operating Revenues $104,479 $100,274 Operating Expenses Cost of sales, excluding costs below 71,222 70,981 Operations 12,359 10,769 Maintenance 615 485 Depreciation and amortization 2,384 2,203 Other taxes 1,933 1,795 --------------------------------------- ------ ------ Total operating expenses 88,513 86,233 --------------------------------------- ------ ------ Operating Income 15,966 14,041 Other income, net of other expenses 33 17 Interest charges 1,642 1,593 --------------------------------------- ------ ------ Income Before Income Taxes 14,357 12,465 Income taxes 5,764 4,891 --------------------------------------- ------ ------ Net Income $8,593 $7,574 ======================================= ====== ====== Weighted-average common shares outstanding: Basic $6,832,675 $6,795,309 Diluted 6,943,129 6,907,124 Earnings Per Share of Common Stock: Basic $1.26 $1.11 Diluted $1.24 $1.10 Chesapeake Utilities Corporation and Subsidiaries Supplemental Income Statement Data Unaudited) (in Thousands, Except Heating Degree Data) ------------------------------------ ------- ------- For the Three Months Ended March 31, 2009 2008 ------------------------------------ ------- ------- Gross Margin (1) Natural Gas $21,283 $19,611 Propane 10,691 8,087 Advanced Information Services 1,434 1,710 Other (151) (115) ------------------------------------ ------- ------- Total Gross Margin $33,257 $29,293 ==================================== ======= ======= Operating Income Natural Gas $10,517 $10,469 Propane 5,465 3,444 Advanced Information Services (112) 38 Other 96 90 ------------------------------------ ------- ------- Total Operating Income $15,966 $14,041 ==================================== ======= ======= Heating Degree-Days - Delmarva Peninsula Actual 2,453 2,222 10-year average (normal) 2,306 2,270 ------------------------------------ ------- ------- (1) "Gross margin" is determined by deducting the cost of sales from operating revenue. Cost of sales includes the purchased gas cost for natural gas 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 Condensed Consolidated Balance Sheets (Unaudited) (in Thousands, Except Shares and Per Share Data) ----------------------------------------- ---------- ------------- March 31, December 31, Assets 2009 2008 ----------------------------------------- ---------- ------------- Property, Plant and Equipment Natural gas $317,954 $316,125 Propane 52,144 51,827 Advanced information services 1,454 1,439 Other plant 10,875 10,816 ----------------------------------------- -------- -------- Total property, plant and equipment 382,427 380,207 Less: Accumulated depreciation and amortization (103,606) (101,018) Plus: Construction work in progress 2,602 1,482 ----------------------------------------- -------- -------- Net property, plant and equipment 281,423 280,671 ----------------------------------------- -------- -------- Investments 1,473 1,601 ----------------------------------------- -------- -------- Current Assets Cash and cash equivalents 3,277 1,611 Accounts receivable (less allowance for uncollectible accounts of $1,324 and $1,159, respectively) 43,103 52,905 Accrued revenue 5,754 5,168 Propane inventory, at average cost 3,388 5,711 Other inventory, at average cost 1,447 1,479 Regulatory assets 295 826 Storage gas prepayments 3,320 9,492 Income taxes receivable 1,098 7,443 Deferred income taxes 3,836 1,578 Prepaid expenses 3,272 4,679 Mark-to-market energy assets 453 4,482 Other current assets 146 147 ----------------------------------------- -------- -------- Total current assets 69,389 95,521 ----------------------------------------- -------- -------- Deferred Charges and Other Assets Goodwill 674 674 Other intangible assets, net 161 164 Pension 0 0 Long-term receivables 480 533 Regulatory assets 2,716 2,806 Other deferred charges 3,854 3,825 ----------------------------------------- -------- -------- Total deferred charges and other assets 7,885 8,002 ----------------------------------------- -------- -------- Total Assets $360,170 $385,795 ========================================= ======== ======== Chesapeake Utilities Corporation and Subsidiaries Condensed Consolidated Balance Sheets (Unaudited) (in Thousands, Except Shares and Per Share Data) ----------------------------------------- ---------- ------------- March 31, December 31, Capitalization and Liabilities 2009 2008 ----------------------------------------- ---------- ------------- Capitalization Stockholders' equity Common Stock, par value $0.4867 per share (authorized 12,000,000 shares) $3,329 $3,323 Additional paid-in capital 67,198 66,681 Retained earnings 63,319 56,817 Accumulated other comprehensive loss (3,674) (3,748) Deferred compensation obligation 1,567 1,549 Treasury stock (1,567) (1,549) ----------------------------------------- -------- -------- Total stockholders' equity 130,172 123,073 Long-term debt, net of current maturities 86,358 86,422 ----------------------------------------- -------- -------- Total capitalization 216,530 209,495 ----------------------------------------- -------- -------- Current Liabilities Current portion of long-term debt 6,656 6,656 Short-term borrowing 9,800 33,000 Accounts payable 28,537 40,202 Customer deposits and refunds 7,681 9,534 Accrued interest 2,163 1,024 Dividends payable 2,086 2,082 Accrued compensation 1,702 3,305 Regulatory liabilities 8,615 3,227 Mark-to-market energy liabilities 317 3,052 Other accrued liabilities 3,108 2,969 ----------------------------------------- -------- -------- Total current liabilities 70,665 105,051 ----------------------------------------- -------- -------- Deferred Credits and Other Liabilities Deferred income taxes 39,237 37,720 Deferred investment tax credits 225 235 Regulatory liabilities 844 875 Environmental liabilities 486 511 Other pension and benefit costs 7,418 7,335 Accrued asset removal cost 20,901 20,641 Other liabilities 3,864 3,932 ----------------------------------------- -------- -------- Total deferred credits and other liabilities 72,975 71,249 ----------------------------------------- -------- -------- Total Capitalization and Liabilities $360,170 $385,795 ========================================= ======== ========

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 Cautionary Statement 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, propane gas distribution and wholesale marketing, advanced information services and other related services. Information about Chesapeake's businesses is available on the World Wide Web at www.chpk.com.

For more information, contact: Beth W. Cooper Senior Vice President & Chief Financial Officer 302.734.6799

SOURCE Chesapeake Utilities Corporation

Source: PR Newswire

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