Chesapeake Utilities Corporation Reports Third Quarter 2020 Results

DOVER, Del., Nov. 4, 2020 /PRNewswire/ -- Chesapeake Utilities Corporation (NYSE: CPK) ("Chesapeake Utilities" or the "Company") today announced its financial results for the third quarter of 2020. The Company's net income for the quarter ended September 30, 2020 was $9.3 million, or $0.56 per share, compared to $5.6 million or $0.34 per share, for the same quarter of 2019. Net income for the nine months ended September 30, 2020 was $49.1 million, or $2.97 per share, compared to $42.6 million, or $2.59 per share, for the same period in 2019, representing an increase of 14.7 percent. In terms of continuing operations, the Company's EPS for the quarter ended September 30, 2020 totaled $0.56 per share, an increase of $0.18 per share over the same quarter of 2019. For the nine months ended September 30, 2020, EPS from continuing operations totaled $2.96 per share, an increase of $0.29 per share or 10.9 percent, over the same period in 2019.

Earnings for the third quarter of 2020 reflect increased earnings from the approval of the Hurricane Michael regulatory settlement by the Florida Public Service Commission ("PSC"), pipeline expansion projects, organic growth in the natural gas distribution operations and increased margin from Marlin Gas Services, LLC ("Marlin Gas Services"). These increases were offset by lower customer consumption driven primarily by weather and the unfavorable net impact of the coronavirus ("COVID-19") pandemic.

Year-to-date earnings were impacted by the factors noted above as well as higher retail propane margins, and contributions from the acquisitions of Boulden, Inc. ("Boulden") and Elkton Gas Company ("Elkton Gas") and by gains from two property sales totaling $2.3 million on an after tax basis. The property sales were made possible due to changes in the consolidation of certain operations. 

In March 2020, the U.S. Centers for Disease Control and Prevention ("CDC") declared a national emergency due to the rapidly growing outbreak of COVID-19. In response to this declaration and the rapid spread of COVID-19 within the United States, federal, state and local governments throughout the country imposed varying degrees of restrictions on social and commercial activity to promote social distancing in an effort to slow the spread of the illness. These restrictions have continued to significantly impact economic conditions in the United States. Chesapeake Utilities is considered an "essential business," which allows the Company to continue its operational activities and construction projects while the social distancing restrictions remain in place. In response to the COVID-19 pandemic and related restrictions, the Company implemented its pandemic response plan, which includes having all employees who can work remotely do so in order to promote social distancing and providing personal protective equipment to field employees and others to reduce the spread of COVID-19. For the three and nine months ended September 30, 2020, the estimated impacts that COVID-19 had on the Company's earnings were approximately $0.7 million and $1.9 million, respectively, primarily driven by reduced consumption of energy largely in the commercial and industrial sectors, higher bad debt expenses and incremental expenses associated with COVID-19, including personal protective equipment and premium pay for field personnel. The additional operating expenses the Company has incurred support the ongoing delivery of our essential services during these unprecedented times. As the COVID-19 pandemic is still ongoing, the Company is continuing to assess recoverability and to date, has not established regulatory assets associated with the incremental net expense impacts, as currently authorized by the Delaware, Maryland and Florida PSCs. The Company is committed to communicating timely updates and will continue to monitor developments affecting its employees, customers, suppliers, and stockholders and take additional precautions as warranted to operate safely and to comply with the CDC, Occupational Safety and Health Administration, state and local requirements in order to protect its employees, customers and the communities.

"Our Company delivered strong third quarter results and is well positioned to achieve solid performance for the year, despite the challenges created by the COVID-19 pandemic.  We also remain on track to achieve results within our stated 2022 EPS guidance range.  The Company's performance to date has been driven by a myriad of growth initiatives across the enterprise.  Since our second quarter earnings release, we have announced several key accomplishments, most notably the settlement of the Hurricane Michael regulatory proceeding, which had a significant impact on our third quarter and year-to-date results.  The purchase of Elkton Gas at the end of July immediately created a solid foundation for our growing footprint in the Cecil County, Maryland area," stated Jeffrey Householder, President and Chief Executive Officer of Chesapeake Utilities Corporation.  "Across all businesses, our dedicated team continued to execute, generating additional margin growth from expansions of our pipelines and Marlin Gas Services' suite of services, organic growth, key regulatory initiatives, and further integration of our strategic acquisitions.  Just recently, we announced several new projects that will add to our earnings trajectory in 2021 and beyond, including several renewable natural gas projects and the acquisition of Western Natural Gas Company, a propane company in a growing market adjacent to our northern Florida service territory.  Because of new growth opportunities like these, Chesapeake Utilities remains poised to further expand our delivery of essential services that our customers expect from us and to drive increased shareholder value over the coming years."

Capital Expenditures Forecast and Earnings Guidance Update

In February 2020, the Company reaffirmed its capital expenditures projection of $750 million - $1 billion of capital expenditures from 2018-2022.  Additionally, the Company updated its previous EPS guidance by increasing the forecasted range for 2022 to $4.70 to $4.90 given the investments already made, those underway and the growth prospects included in the Company's strategic growth plan. The Company expects EPS to grow at an average annual rate of 7.75 percent to 9.50 percent.

The Company has continued to review its projections and remains supportive of this guidance, after taking into consideration its strategic plan, the expected impact of COVID-19 and the anticipated regulatory relief and opportunities for continued collaboration across the enterprise. The Company has historically achieved an average earnings growth at or above this range, and continues to view its long-term growth prospects as comparable to its historical growth.

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

**This press release includes references to non-Generally Accepted Accounting Principles ("GAAP") financial measures, including gross margin. A "non-GAAP financial measure" is generally defined as a numerical measure of a company's historical or future performance that includes or excludes amounts, or that is subject to adjustments, so as to be different from the most directly comparable measure calculated or presented in accordance with GAAP. Our management believes certain non-GAAP financial measures, when considered together with GAAP financial measures, provide information that is useful to investors in understanding period-over-period operating results separate and apart from items that may, or could, have a disproportionately positive or negative impact on results in any particular period.

The Company calculates "gross margin" by deducting the cost of sales from operating revenue. Cost of sales includes the purchased fuel cost for natural gas, electricity and propane, and the cost of labor spent on direct revenue-producing activities and excludes depreciation, amortization and accretion. Other companies may calculate gross margin in a different manner. Gross margin should not be considered an alternative to operating income or net income, both of which are determined in accordance with GAAP. The Company believes that gross margin, although a non-GAAP measure, is useful and meaningful to investors as a basis for making investment decisions. It provides investors with information that demonstrates the profitability achieved by the Company under its allowed rates for regulated operations and under its competitive pricing structures for unregulated businesses. The Company's management uses gross margin in measuring its business units' performance.

Operating Results for the Quarters Ended September 30, 2020 and 2019

Consolidated Results

Operating income for the three months ended September 30, 2020 increased by $3.0 million, or 21.2 percent, compared to the same period in 2019. The increase in operating income was largely driven by the settlement of the Hurricane Michael regulatory proceeding which improved operating income by $2.9 million, including $1.9 million in operating income that was previously billed under interim rates during the first half of 2020.  Operating income for the quarter was also reduced by an estimated $1.9 million due to unfavorable impacts of COVID-19. For additional details on the Hurricane Michael regulatory proceeding, see the Major Projects and Initiatives discussion below. 

Further contributing to the improved performance for the quarter was margin growth from the Company's organic growth projects, increased margins from investments in Florida Gas Reliability Infrastructure Program ("GRIP") and increased demand for Marlin Gas Services' compressed natural gas ("CNG") transportation services. These increases were partially offset by higher operating expenses related to growth initiatives.

Regulated Energy Segment

Operating income for the Regulated Energy segment increased by $2.9 million for the three months ended September 30, 2020 compared to 2019, or 16.8 percent.  Higher operating income was a result of the settlement of the Hurricane Michael regulatory proceeding, which included recognizing the first and second quarter rate impacts associated with the settlement, expansion projects completed and underway by Eastern Shore Natural Gas Company ("Eastern Shore") and Peninsula Pipeline Company, Inc. ("Peninsula Pipeline"), organic growth in the Company's natural gas distribution businesses and margin from increased investments in the Florida GRIP. These increases were partially offset by higher depreciation, amortization and property taxes including amortization of the regulatory asset associated with the Hurricane Michael regulatory proceeding settlement and higher other operating expenses. Operating income for the quarter was reduced by an estimated $1.5 million due to unfavorable impacts of COVID-19, which included an increase in bad debt expense of $1.3 million compared to the third quarter 2019.

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

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

Unregulated Energy Segment

Operating results for the Unregulated Energy segment increased by $0.1 million for the third quarter, as compared to the third quarter of 2019.  Excluding the estimated COVID-19 impacts of $0.3 million, operating income increased by $0.4 million driven by margin growth from Marlin Gas Services and incremental margin from the Boulden assets. These increases were partially offset by higher depreciation, amortization and property taxes and higher other operating expenses.

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

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

Operating Results for the Nine Months Ended September 30, 2020 and 2019

Consolidated Results

Operating income for the nine months ended September 30, 2020 increased by $0.9 million compared to the same period in 2019. Operating income for the period was reduced by an estimated $6.7 million due to unfavorable impacts of COVID-19, inclusive of an increase in bad debt expense of $1.9 million compared to the same period in 2019.  Excluding this impact, operating income for the period increased by $7.6 million which included operating income of $2.9 million from the settlement of the Hurricane Michael regulatory proceeding, higher operating income from organic growth projects, gross margin contributions from the Boulden and Elkton Gas asset acquisitions completed in December 2019 and July 2020, respectively, and higher retail propane margins per gallon, partially offset by decreased margin from customer consumption associated with milder weather during 2020.

Regulated Energy Segment

Operating income for the Regulated Energy segment for the nine months ended September 30, 2020 was $66.4 million, an increase of $1.1 million, compared to the same period in 2019. Excluding the estimated unfavorable COVID-19 impacts of $4.8 million, which included an increase in bad debt expense of $1.9 million, operating income increased $5.9 million as a result of the Hurricane Michael regulatory proceeding settlement, higher gross margin from expansion projects completed by Eastern Shore and Peninsula Pipeline and organic growth in the Company's natural gas distribution businesses. These increases were offset by higher depreciation, amortization and property taxes, including amortization of the regulatory asset associated with the Hurricane Michael regulatory proceeding settlement and higher other operating expenses.

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

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

Unregulated Energy Segment