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Form 8-K CHESAPEAKE UTILITIES For: Mar 05

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March 5, 2015 12:29 PM EST


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
 
 
FORM 8-K
 
 
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
Date of Report (Date of earliest event reported): March 5, 2015
  
CHESAPEAKE UTILITIES CORPORATION
(Exact name of registrant as specified in its charter)
 
 
 
 
 
 
 
Delaware
 
001-11590
 
51-0064146
(State or other jurisdiction of
 
(Commission
 
(I.R.S. Employer
incorporation or organization)
 
File Number)
 
Identification No.)
909 Silver Lake Boulevard, Dover, Delaware 19904
(Address of principal executive offices, including Zip Code)
(302) 734-6799
(Registrant's Telephone Number, including Area Code)
 
(Former name, former address and former fiscal year, if changed since last report.)
 
 
Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions (see General Instruction A.2. below):
 
 
Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)
 
Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)
 
 
Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))
 
 
Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c))
 







Item 2.02. Results of Operations and Financial Condition.
On March 5, 2015, Chesapeake Utilities Corporation issued a press release announcing its financial results for the quarter and year ended December 31, 2014. A copy of the press release is attached as Exhibit 99.1 hereto and is incorporated by reference herein.
Item 9.01. Financial Statements and Exhibits.
(d)   Exhibit 99.1 - Press Release of Chesapeake Utilities Corporation, dated March 5, 2015.

SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned hereunto duly authorized.
 
 
CHESAPEAKE UTILITIES CORPORATION
 
/s/ Beth W. Cooper
Beth W. Cooper
Senior Vice President and Chief Financial Officer
 
Date: March 5, 2015




                                                        

                

FOR IMMEDIATE RELEASE
March 5, 2015
NYSE Symbol: CPK

CHESAPEAKE UTILITIES CORPORATION REPORTS
EIGHTH CONSECUTIVE YEAR OF RECORD EARNINGS

•
Earnings per share increased by 9.3 percent to $2.47 per share
•
Net income increased by $3.3 million to $36.1 million
•
Growth in the natural gas businesses generated $8.3 million in additional gross margin
•
Acquisitions completed in 2013 generated $2.4 million in additional operating income
•
Colder temperatures added $2.8 million to gross margin


Dover, Delaware — Chesapeake Utilities Corporation (NYSE: CPK) today announced financial results for both the year and the fourth quarter ended December 31, 2014. The Company's net income for the year ended December 31, 2014 was $36.1 million, or $2.47 per share, which represents an increase of $3.3 million, or $0.21 per share, compared to 2013. Included in the Company's 2014 results were two non-recurring items -- an after-tax gain of $4.0 million from the sale of BravePoint, Inc. ("BravePoint"), the Company's advanced information services subsidiary, and a non-cash, after-tax impairment charge of $3.9 million related to uncertainty around the implementation of a customer billing system. Both of these items were recorded in the fourth quarter of 2014.

For the fourth quarter of 2014, the Company reported net income of $10.1 million, or $0.69 per share. This represents an increase of $414,000, or $0.02 per share, compared to the same quarter in 2013.

"In 2014, our Company generated record earnings for the eighth consecutive year," stated Michael P. McMasters, President and Chief Executive Officer of Chesapeake Utilities Corporation. "Thanks to our employees' continued efforts to transform opportunities into profitable growth, we achieved top quartile performance in 16 of 20 financial benchmarks compared to our peers. We also met key 2014 objectives in our strategic plan and advanced several projects described in this release, such as Eight Flags Energy's combined heat and power plant ("CHP") to provide new services in Nassau County, Florida and our interstate pipeline's development of new services on the Delmarva Peninsula.”
“We are starting 2015 strong as well," continued Mr. McMasters. "In February 2015, we announced the acquisition of Gatherco, Inc. (“Gatherco”), a natural gas infrastructure company providing midstream services in Eastern Ohio. We expect to close this transaction in the second quarter of 2015, and believe that in addition to being accretive during its first full year of operation, this acquisition and our subsequent capital investments will generate increased earnings growth.”


  


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A more detailed discussion and analysis of the Company's results for each segment are provided in the following pages.

Operating Results for the Years Ended December 31, 2014 and 2013

The Company reported operating income of $62.3 million for 2014, compared to $62.7 million in 2013. During 2014, the Company recorded a non-cash, pre-tax impairment charge of $6.5 million related to uncertainty around the implementation of a customer billing system. The impairment charge recorded represents all of the capitalized costs associated with this project. The Company is considering several options to recover these costs, but the outcome of such efforts cannot be predicted at this time. The Company also recorded a non-cash, pre-tax impairment charge of $412,000 related to the assessment of goodwill and intangible assets associated with the 2013 acquisition of certain assets by Austin Cox Home Services, Inc. ("Austin Cox"). Both of these impairment charges decreased the Company's operating income for the year.

Excluding the impact of the impairment charges, the Company’s operating income increased by $6.4 million in 2014, compared to 2013, as the Regulated Energy and Unregulated Energy segments generated $22.6 million in higher gross margin, which was partially offset by an increase of $14.8 million in other operating expenses. Additional details on key variances in gross margin and other operating expenses are provided in the Financial Summary Highlights section later in this release.

Regulated Energy

Operating income for the Regulated Energy segment increased by $367,000 to $50.5 million for 2014, compared to 2013. The increase in gross margin of $20.1 million was partially offset by the $6.4 million asset impairment charge in 2014 associated with uncertainty around the implementation of a customer billing system and an increase in other operating expenses of $13.3 million. Excluding the impairment charge, operating income increased by $6.8 million. The significant components of the gross margin increase included:

•
$5.5 million from Sandpiper Energy, Inc. ("Sandpiper") due to the inclusion of a full year of operations in 2014 (the acquisition of the operating assets of Eastern Shore Gas Company and its affiliates ("ESG") by Sandpiper occurred in late May 2013);
•
$5.6 million due to natural gas service expansions initiated in 2013 and 2014;
•
$2.9 million generated by the Florida Gas Reliability Infrastructure Program ("GRIP");
•
$2.7 million in other growth in natural gas distribution and transmission services;
•
$1.3 million generated by the FPU electric distribution operation as a result of a base rate increase; and
•
$1.1 million from increased energy consumption, due primarily to colder temperatures in 2014, compared to the prior year.

The increase in other operating expenses, excluding impairment charges, was due primarily to: (a) $3.3 million in higher payroll and benefits costs to support growth, and a change in vacation policy in 2013; (b) $2.5 million in other operating expenses associated with Sandpiper's operations; (c) $2.6 million in higher depreciation, amortization, asset removal costs and property taxes associated with capital investments to support growth and maintain system integrity; (d) $2.2 million in higher costs associated with facilities maintenance and service contractors; (e) the absence in 2014 of a one-time credit of $1.5 million in 2013 associated with the City of Marianna litigation cost recovery; and (f) $1.0 million of increased accruals for incentive bonuses as a result of strong financial performance. These increases in other operating expenses were partially offset by the non-recurrence of a sales tax expense of $726,000 in 2013 recorded in conjunction with the ESG acquisition.




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Unregulated Energy

Operating income for the Unregulated Energy segment was $11.7 million, a decrease of $630,000 compared to 2013. An increase in gross margin of $2.5 million was more than offset by $432,000 in asset impairment charges for goodwill and intangible assets related to the 2013 acquisition by Austin Cox and an increase in other operating expenses of $2.7 million. The significant components of the gross margin increase included: (a) $1.7 million in higher propane sales, compared to the prior year, due primarily to higher consumption caused by colder temperatures and (b) $1.4 million generated by an increase in wholesale propane sales due primarily to a supply agreement entered into in May 2013 in conjunction with an acquisition. These increases were partially offset by $356,000 in lower retail propane margins due primarily to a decline in retail margins on the Delmarva Peninsula.

The increase in other operating expenses, excluding impairment charges, was due primarily to: (a) $1.9 million in higher payroll and benefits costs due to increased seasonal overtime and additional resources to support growth; (b) $897,000 in additional expenses associated with serving newly acquired customers; and (c) $540,000 in higher costs associated with facilities maintenance. These increases were partially offset by the non-recurrence of an accrual of $990,000 in 2013 related to taxes other than income.

Other

The “Other” segment, reported operating income of $105,000 for 2014, compared to $297,000 in 2013. The decrease in operating income is due to BravePoint's lower operating results prior to the sale on October 1, 2014. The sale of BravePoint produced a pre-tax gain of $6.7 million, which has been reflected as non-operating income.


Operating Results for the Quarters Ended December 31, 2014 and 2013

The Company’s operating income for the quarter ended December 31, 2014 was $12.4 million, a decrease of $5.9 million, compared to the same quarter in 2013. The decrease in operating income is due primarily to the aforementioned two non-cash, pre-tax asset impairment charges totaling $6.9 million recorded in other operating expenses in the fourth quarter of 2014. Additional details on key variances in gross margin and other operating expenses are provided in the Financial Summary Highlights section later in this release.

Regulated Energy

Operating income for the Regulated Energy segment decreased by $4.5 million to $9.4 million for the fourth quarter of 2014, compared to the same quarter in 2013. An increase in gross margin of $5.1 million was more than offset by the $6.4 million asset impairment charge and an increase of $3.1 million in other operating expenses. Excluding the impairment charge, operating income increased by $2.0 million quarter-over-quarter. The significant components of the gross margin increase included:

•
$1.4 million due to natural gas service expansions;
•
$933,000 in other growth in natural gas distribution and transmission services;
•
$922,000 generated by the FPU electric distribution operation as a result of a base rate increase;
•
$882,000 generated by the Florida GRIP; and
•
$441,000 in increased consumption by natural gas customers, due primarily to colder temperatures in Florida during the quarter, compared to the same quarter in 2013.

The increase in other operating expenses, excluding impairment charges, was due primarily to: (a) $1.1 million in higher costs associated with facilities maintenance and service contractors; (b) $922,000 in higher payroll costs to support growth; (c) $656,000 in transaction costs allocated to this segment; (d) $145,000 in

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increased accruals for incentive bonuses as a result of strong financial performance; and (e) $403,000 in higher depreciation expense, amortization, asset removal and property tax costs associated with capital investments to support growth and maintain system integrity. These increases were partially offset by $431,000 in lower benefits costs due primarily to lower health benefits claims during the fourth quarter of 2014.

Unregulated Energy

Operating income for the Unregulated Energy segment for the fourth quarter of 2014 was $2.9 million, a decrease of $1.5 million compared to operating income for the same quarter in 2013. Gross margin decreased by $1.0 million due primarily to $437,000 in lower profit from Xeron, Inc. ("Xeron"), the Company's propane wholesale marketing subsidiary, as a result of low volatility in wholesale propane prices during the quarter, and $325,000 in lower retail propane margins per gallon in the Company's propane distribution businesses. Other operating expenses increased by $458,000, due primarily to $432,000 in asset impairment charges related to the Austin Cox acquisition recorded in the current quarter.

Other

The “Other” segment, reported operating income of $81,000 for the fourth quarter of 2014, as compared to $56,000 in the same quarter in 2013. As a result of the sale of BravePoint on October 1, 2014, the other segment no longer includes results from BravePoint.


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 Annual Report on Form 10-K for further information on the risks and uncertainties related to the Company’s forward-looking statements.

The discussions of the results 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 Financial Summary.

Shares and per share amounts for all periods presented reflect the three-for-two stock split declared on July 2, 2014, which was effected in the form of a stock dividend, and distributed on September 8, 2014. Unless otherwise noted, earnings per share information is presented on a diluted basis.
  




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Conference Call
Chesapeake Utilities Corporation will host a conference call on March 6, 2015 at 10:30 a.m. Eastern Time to discuss the Company’s financial results for the quarter and year ended December 31, 2014. To participate in this call, dial 866.821.5457 and reference Chesapeake Utilities Corporation’s 2014 Financial Results Conference Call. To access the replay recording of this call, please visit the Company’s website at http://investor.chpk.com/results.cfm or download the replay on your mobile device by accessing the Audiocast section of the Company's IR App.
About Chesapeake Utilities Corporation
Chesapeake Utilities Corporation is a diversified energy company engaged in natural gas distribution, transmission and marketing, electricity distribution, propane gas distribution and wholesale marketing, 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




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Financial Summary
(in thousands, except per-share data)
 
 
Year to Date
 
Fourth Quarter
For the Periods Ended December 31,
 
2014
 
2013
 
2014
 
2013
Gross Margin (1)
 
 
 
 
 
 
 
 
  Regulated Energy
 
$
165,882

 
$
145,820

 
$
44,734

 
$
39,678

  Unregulated Energy
 
47,880

 
45,375

 
12,317

 
13,321

  Other
 
6,956

 
8,276

 
(64
)

2,031

 Total Gross Margin
 
$
220,718

 
$
199,471

 
$
56,987

 
$
55,030

 
 
 
 
 
 
 
 
 
Operating Income
 
 
 
 
 
 
 
 
   Regulated Energy
 
$
50,451

 
$
50,084

 
$
9,448

 
$
13,916

   Unregulated Energy
 
11,723

 
12,353

 
2,879

 
4,340

   Other
 
105

 
297

 
81

 
56

 Total Operating Income
 
62,279

 
62,734

 
12,408

 
18,312

 
 
 
 
 
 
 
 
 
Gains from sale of businesses
 
7,139

 
—

 
6,742

 
—

Other Income (loss), net of other expenses
 
101

 
372

 
117

 
(41
)
Interest Charges
 
9,482

 
8,234

 
2,528

 
2,120

Income Taxes
 
23,945

 
22,085

 
6,642

 
6,468

 Net Income
 
$
36,092

 
$
32,787

 
$
10,097

 
$
9,683

 
 
 
 
 
 
 
 
 
Earnings Per Share of Common Stock
 
 
 
 
 
 
 
 
Basic
 
$
2.48

 
$
2.27

 
$
0.69

 
$
0.67

Diluted
 
$
2.47

 
$
2.26

 
$
0.69

 
$
0.67


(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 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.



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Financial Summary Highlights

Key variances for the year ended December 31, 2014 included:

(in thousands, except per share)
 
Pre-tax
Income
 
Net
Income
 
Earnings
Per Share
Year ended December 31, 2013 Reported Results
 
$
54,872

 
$
32,787

 
$
2.26

Adjusting for unusual items:
 
 
 
 
 
 
Gains on sale of businesses
 
7,139

 
4,266

 
0.29

Asset impairment charges
 
(6,880
)
 
(4,111
)
 
(0.28
)
Weather impact
 
2,799

 
1,672

 
0.11

Regulatory recovery of litigation-related costs in 2013
 
(1,494
)
 
(893
)
 
(0.06
)
Accrual for additional taxes other than income in 2013
 
990

 
592

 
0.04

One-time sales tax expense recorded by Sandpiper in conjunction with the 2013 ESG acquisition
 
726

 
434

 
0.03

 
 
3,280

 
1,960

 
0.13

Increased (Decreased) Gross Margins:
 
 
 
 
 
 
Major projects (see Major Project Highlights table)
 
 
 
 
 
 
Service expansions
 
5,591

 
3,341

 
0.23

Contribution from Sandpiper
 
5,544

 
3,313

 
0.23

GRIP
 
2,862

 
1,710

 
0.12

Other natural gas growth
 
2,671

 
1,596

 
0.11

Increased wholesale propane sales
 
1,391

 
831

 
0.06

FPU electric base rate increase
 
1,269

 
758

 
0.05

 
 
19,328

 
11,549

 
0.80

Increased Other Operating Expenses:
 
 
 
 
 
 
Higher payroll and benefits costs
 
(5,164
)
 
(3,085
)
 
(0.21
)
Expenses from acquisitions
 
(3,526
)
 
(2,107
)
 
(0.14
)
Higher depreciation, asset removal and property tax costs due to new capital investments
 
(2,842
)
 
(1,698
)
 
(0.12
)
Higher facility maintenance and service contractor costs
 
(2,735
)
 
(1,634
)
 
(0.11
)
Larger accruals for incentive bonuses
 
(1,356
)
 
(810
)
 
(0.06
)
Transaction costs
 
(760
)
 
(454
)
 
(0.03
)
 
 
(16,383
)
 
(9,788
)
 
(0.67
)
Interest Charges
 
(1,247
)
 
(745
)
 
(0.05
)
Net Other Changes
 
187

 
329

 
—

Year ended December 31, 2014 Reported Results
 
$
60,037

 
$
36,092

 
$
2.47


 







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Key variances for the quarter ended December 31, 2014 included:

(in thousands, except per share)
 
Pre-tax
Income
 
Net
Income
 
Earnings
Per Share
Fourth Quarter of 2013 Reported Results
 
$
16,151

 
$
9,683

 
$
0.67

Adjusting for unusual items:
 
 
 
 
 
 
Asset impairment charges
 
(6,880
)
 
(4,125
)
 
(0.28
)
Gains on sale of businesses
 
6,742

 
4,043

 
0.28

Weather impact
 
562

 
337

 
0.02

Accrual for additional taxes other than income in 2013
 
292

 
175

 
0.01

 
 
716

 
430

 
0.03

Increased Gross Margins:
 
 
 
 
 
 
Service expansions
 
1,411

 
846

 
0.06

Other natural gas growth
 
933

 
559

 
0.04

FPU Electric base rate increase
 
922

 
553

 
0.04

GRIP
 
882

 
529

 
0.04

Propane wholesale marketing
 
(437
)
 
(262
)
 
(0.02
)
Lower retail propane margins
 
(325
)
 
(195
)
 
(0.01
)
 
 
3,386

 
2,030

 
0.15

Increased Other Operating Expenses:
 
 
 
 
 
 
Higher facility maintenance and service contractor costs
 
(1,424
)
 
(854
)
 
(0.06
)
Higher payroll costs
 
(1,197
)
 
(718
)
 
(0.05
)
Transaction costs
 
(732
)
 
(439
)
 
(0.03
)
Lower benefits costs
 
554

 
332

 
0.02

Higher depreciation, asset removal and property tax costs due to new capital investments
 
(529
)
 
(317
)
 
(0.02
)
 
 
(3,328
)
 
(1,996
)
 
(0.14
)
Interest Charges
 
(408
)
 
(245
)
 
(0.02
)
Net Other Changes
 
222

 
195

 
—

Fourth Quarter of 2014 Reported Results
 
$
16,739

 
$
10,097

 
$
0.69


The following information highlights certain key factors contributing to the Company’s results for the quarter and year ended December 31, 2014:

Major Projects

Acquisition
In May 2013, the Company completed the purchase of the operating assets of ESG. Approximately 11,000 residential and commercial underground propane distribution system customers acquired in this transaction are now being served by Sandpiper under the tariff approved by the Maryland Public Service Commission (“PSC”). The Company has begun to convert some of the former ESG customers to natural gas distribution service and is evaluating the potential conversion of others. This acquisition was accretive to earnings per share in the first full year of operations, generating $0.20 in additional earnings per share to the Company. The Company generated $5.5 million in additional gross margin from Sandpiper for the year ended December 31, 2014 and incurred $2.5 million in additional other operating expenses for the same period. Additionally, in the second quarter of 2013, the Company recorded $726,000 in a one-time sales tax expense associated with the acquisition of ESG.

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Service Expansions
During 2013, Eastern Shore, the Company’s interstate pipeline subsidiary, commenced new natural gas transmission services to local distribution utilities and industrial customers in Delaware and Maryland. These new services generated additional gross margin of $2.7 million and $288,000 for the year and three months ended December 31, 2014, respectively, compared to the same periods in 2013.
On October 1, 2014, Eastern Shore commenced a new lateral service to an industrial customer facility in Kent County, Delaware. This service commenced after construction of new facilities, including approximately 5.5 miles of pipeline lateral and metering facilities, extending from Eastern Shore's mainline to the new industrial customer facility. This new service, which generated $463,000 of gross margin for the year and three months ended December 31, 2014, is expected to generate $1.8 million of gross margin in 2015 and annual gross margin of approximately $1.2 million to $1.8 million during the 37-year service period.
During 2014, Eastern Shore executed a one-year contract with another industrial customer in New Castle County, Delaware to provide 50,000 dekatherms per day ("Dts/d") of additional transmission service from April 2014 to April 2015, which was subsequently amended to provide 55,580 Dts/d of service to August 2017. This contract generated gross margin of $1.9 million and $657,000 for the year and three months ended December 31, 2014, and is expected to generate $2.2 million of gross margin in 2015.
In August 2013, Peninsula Pipeline Company, Inc., the Company's intrastate natural gas transmission subsidiary, commenced a new firm transportation service in Indian River County, Florida for an unaffiliated utility. This new service generated $490,000 of additional gross margin for the year ended December 31, 2014, compared to 2013.
Other Natural Gas Growth
In addition to these service expansions, the natural gas distribution operations on the Delmarva Peninsula and in Florida generated $2.8 million and $808,000 in additional gross margin in the year and three months ended December 31, 2014, respectively, compared to the same periods in 2013, due to increases in the number of residential, commercial and industrial customers served. These increases are due primarily to a three-percent increase in residential customers on the Delmarva Peninsula, excluding customers added as a part of the Sandpiper acquisition, and an increase in commercial and industrial customers in Florida.

Future Service Expansion Initiatives
Eight Flags, one of the Company's unregulated energy subsidiaries, is engaged in the development and construction of a CHP plant in Nassau County, Florida. This CHP plant, which will consist of a natural-gas-fired turbine and associated electric generator, is designed to generate approximately 20 megawatts of base load power and will include a heat recovery system generator capable of providing approximately 75,000 pounds per hour of unfired steam. Eight Flags will sell the power generated from the CHP plant to FPU for distribution to its retail electric customers pursuant to a 20-year power purchase agreement. It will also sell the steam to an industrial customer pursuant to a separate 20-year contract. FPU will transport natural gas through its distribution system to Eight Flags’ CHP plant, which will produce power and steam. On a consolidated basis, this project is expected to generate approximately $7.3 million in annual gross margin, which could fluctuate based upon various factors, including, but not limited to, the quantity of steam delivered and the CHP plant’s hours of operations. Construction of the CHP plant and associated transactions are subject to various conditions, including obtaining necessary governmental approvals, environmental and regulatory permits and completion and execution of various agreements. If all conditions are satisfied, construction of the CHP plant is currently scheduled to commence in early 2015 with commercial operation expected to commence in July 2016.
In December 2014, Eastern Shore entered into a precedent agreement with an industrial customer in Kent County, Delaware, whereby the customer is committed to enter into a 20-year natural gas transmission service for 45,000 Dts/d for its new facility, upon the satisfaction of certain conditions. This new service will be provided as Off Peak ≤90 Firm Transportation ("OPT") service and is expected to generate at least $5.8 million of annual gross margin. In November 2014, Eastern Shore requested Federal Energy Regulatory Commission ("FERC") authorization to construct 7.2 miles of 16-inch pipeline looping and 3,550 horsepower

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of new compression in Delaware, which are estimated to cost approximately $30 million, to provide this new service. Eastern Shore anticipates receiving FERC’s authorization in 2015, with the service targeted to commence in the fourth quarter of 2015, following construction of the new facilities.

GRIP
In August 2012, the Florida PSC approved the GRIP, which is designed to recover capital and other program-related-costs, inclusive of a return on investment, related to the replacement of older pipes in the Company's Florida service territories. The Company received approval to invest $75.0 million to replace qualifying distribution mains and services (any material other than coated steel or plastic). Since the program's inception in August 2012, the Company has invested $42.8 million, $24.3 million of which was invested during 2014. These investments generated additional gross margin of $2.9 million and $882,000 for the year and three months ended December 31, 2014, respectively, compared to the same periods in 2013. The Company expects to invest an additional $20.0 million through the GRIP in 2015.

Investing in Growth
The Company has continued to expand its resources and capabilities to support growth. The Company's Delmarva natural gas distribution operation has initiated natural gas distribution expansions in Sussex County, Delaware, and Worcester and Cecil Counties in Maryland, which require the construction and conversion of distribution facilities, as well as the conversion of residential customers’ appliances and equipment. To support this growth as well as future expansions, our Delmarva natural gas distribution operation has increased staffing. Resources have also been added in the Company's corporate shared services departments to increase the Company’s overall capabilities to support sustained future growth. The additional staffing to support growth increased payroll expenses of the Company's Regulated Energy segment by $2.0 million and $480,000 for the year and three months ended December 31, 2014, respectively, compared to the same periods in 2013. The Company expects to make additional investments in personnel, as needed, to further develop our capability to capitalize on future growth opportunities.


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Weather and Consumption
Temperatures on the Delmarva Peninsula and in Florida during 2014 were colder than 2013, which positively affected the Company’s results in 2014. Temperatures in Florida during the fourth quarter of 2014 were colder than 2013, while temperatures on the Delmarva Peninsula did not have a significant variance from the same quarter in 2013. The following tables highlight the heating degree-day ("HDD") and cooling degree-day ("CDD") information for the quarters and years ended December 31, 2014 and 2013 and the gross margin variance resulting from weather fluctuations in those periods.
 
Year to Date
 
Fourth Quarter
For the Periods Ended December 31,
2014
 
2013
 
Variance from prior year
 
Q4 2014
 
Q4 2013
 
Variance from prior year
Delmarva
 
 
 
 
 
 
 
 
 
 
 
Actual HDD
4,826

 
4,638

 
188

 
1,564

 
1,612

 
(48
)
10-Year Average HDD ("Normal")
4,483

 
4,454

 
29

 
1,590

 
1,582

 
8

Variance from Normal
343

 
184

 
 
 
(26
)
 
30

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Florida
 
 
 
 
 
 
 
 
 
 
 
Actual HDD
888

 
671

 
217

 
314

 
184

 
130

10-Year Average HDD ("Normal")
856

 
885

 
(29
)
 
301

 
316

 
(15
)
Variance from Normal
32

 
(214
)
 
 
 
13

 
(132
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Florida
 
 
 
 
 
 
 
 
 
 
 
Actual CDD
2,705

 
2,750

 
(45
)
 
207

 
329

 
(122
)
10-Year Average CDD ("Normal")
2,768

 
2,750

 
18

 
267

 
260

 
7

Variance from Normal
(63
)
 
—

 
 
 
(60
)
 
69

 
 
Gross Margin Variance attributed to Weather
(in thousands)
Year to Date
 
Fourth Quarter
For the Periods Ended December 31,
2014 vs. 2013
 
2014 vs. Normal
 
2014 vs. 2013
 
2014 vs. Normal
Delmarva
 
 
 
 
 
 
 
Regulated Energy
$
232

 
$
765

 
$
(35
)
 
$
(38
)
Unregulated Energy
1,398

 
1,344

 
(125
)
 
344

Florida
 
 
 
 
 
 
 
Regulated Energy
877

 
145

 
477

 
42

Unregulated Energy
292

 
485

 
245

 
404

Total
$
2,799

 
$
2,739

 
$
562

 
$
752


Propane Prices
During 2014, lower retail propane margins on the Delmarva Peninsula decreased gross margin by $2.3 million compared to 2013. A significant increase in wholesale prices in late 2013 and early 2014 increased the Delmarva average propane inventory cost in 2014. Retail propane margins on the Delmarva Peninsula reverted to more normal levels during the first three quarters of 2014, compared to unusually high margins experienced in 2013. In addition, a rapid decline in wholesale prices in late 2014 resulted in lower margins as the Company recorded a lower-of-cost-or-market propane inventory valuation adjustment. The Company

--more--

12-12-12-12

discontinued hedge accounting on swap agreements to recognize the expected losses of those hedges in current year’s earnings. Both the propane inventory valuation adjustment and discontinuation of hedge accounting were designed to reflect the value of the Company’s inventory and future purchase commitments at the current market value at year-end in order to avoid any expected losses in future periods. For the three months ended December 31, 2014, retail propane margins on the Delmarva Peninsula decreased by $1.4 million, compared to the same quarter in 2013, due primarily to these two adjustments.
Retail propane margins in Florida continued to increase during 2014 as local market conditions enabled the Florida propane distribution operation to maintain strong margins on its sales despite volatility in propane supply costs. Higher retail propane margins in Florida generated $1.9 million and $792,000 of additional gross margin for the year and three months ended December 31, 2014, compared to the same periods in 2013.
Wholesale propane sales increased, generating additional gross margin of $1.4 million for the year ended December 31, 2014, compared to 2013, due primarily to sales to an affiliate of ESG. Wholesale propane sales did not result in a significant variance for the fourth quarter.
The trading profit from Xeron, which benefits from wholesale price volatility by entering into trading transactions, remained unchanged in 2014, compared to 2013. Xeron reported higher trading profit in early 2014, as a result of higher wholesale price volatility during the winter heating season, which increased trading activity and generated higher profits on executed trades. This was offset by lower profit during the second half of 2014 as a result of less price volatility. For the three months ended December 31, 2014, Xeron’s trading profit decreased by $437,000, compared to the same quarter in 2013 due to this decline in volatility.
Florida Electric Rate Case
On September 15, 2014, the Florida PSC approved a settlement agreement between FPU and the Florida Office of Public Counsel in FPU's base rate case filing, which provides, among other things, an increase in FPU's annual revenue requirement of $3.75 million and a rate of common equity return of 10.25 percent for FPU’s electric distribution operation. The new rates are effective for all meter readings on or after November 1, 2014. Previously, the Florida PSC approved interim rate relief, effective for meter readings on or after August 10, 2014. The higher base rates in FPU’s electric operation generated $1.3 million and $922,000 of additional gross margin for the year and three months ended December 31, 2014, respectively.
Other Developments
On October 1, 2014, the Company completed the sale of BravePoint for approximately $12.0 million in cash. The Company recorded a pre-tax gain of approximately $6.7 million ($4.0 million after-tax) from this sale in the fourth quarter of 2014. The Company plans to reinvest the proceeds from this sale in its regulated and unregulated energy businesses.
At December 31, 2014, the Company recorded a non-cash, pre-tax impairment charge of $6.5 million related to uncertainty around the implementation of a customer billing system. This impairment charge represents the entire amount of the capitalized costs associated with this project. The Company is engaged in negotiations with the system vendor regarding the implementation, and is considering several options to recover these costs including regulatory proceedings. The outcome cannot be predicted at this time. The Company will record a gain contingency if and when any recovery from the vendor is realizable or establish a regulatory asset when future recovery through rates is probable. The Company also recorded non-cash pre-tax impairment charges of $412,000 related to the impairment of goodwill and intangible assets associated with the 2013 acquisition by Austin Cox.


--more--

13-13-13-13

Subsequent Event
On January 30, 2015, the Company entered into a merger agreement to acquire Gatherco. Upon consummation of the transaction, Gatherco will merge into Aspire Energy of Ohio, LLC, a newly formed, wholly-owned subsidiary of Chesapeake. At closing, the Company expects to issue 593,005 shares of its common stock, valued at $29.9 million, pay $27.6 million in cash and assume Gatherco’s debt estimated to be $1.7 million. The Company expects to pay off this debt shortly after closing. Gatherco is a natural gas infrastructure company providing natural gas midstream services. Gatherco’s assets include 16 gathering systems and over 2,000 miles of pipelines in Central and Eastern Ohio. Gatherco provides natural gas gathering services and natural gas liquid processing services to over 300 producers and supplies natural gas to over 6,000 customers in Ohio through the Consumers Gas Cooperative, an independent entity which Gatherco manages under an operating agreement. The transaction is subject to approval by Gatherco's shareholders and is expected to close in the second quarter of 2015.







--more--

14-14-14-14

Chesapeake Utilities Corporation and Subsidiaries
Major Project Highlights (Unaudited)
Major Projects Initiated (dollars in thousands):
 
 
 
 
 
 
Gross Margin for the Period
 
 
 
Year Ended
Estimate for
 
Three Months Ended
 
 
December 31,
for
 
December 31,
 
 
2014
2013
 
2015
 
2014
2013
Acquisition:
 
 
 
 
 
 
 
 
ESG acquisition being served by Sandpiper in Worcester County, Maryland (1)
 
$
9,976

$
4,432

 
$
10,402

 
$
2,382

$
2,234

Service Expansions
 
 
 
 
 
 
 
 
Natural Gas Distribution:
 
 
 
 
 
 
 
 
Long-term
 
 
 
 
 
 
 
 
Sussex County, Delaware
 
$
656

$
670

 
$
674

 
$
176

$
179

Natural Gas Transmission:
 
 
 
 
 
 
 
 
Short-term
 
 
 
 
 
 
 
 
New Castle County, Delaware
 
$
2,026

$
398

 
$
2,418

 
$
770

$
58

Kent County, Delaware
 
—

1,158

 
—

 
—

193

Total Short-term
 
$
2,026

$
1,556

 
$
2,418

 
$
770

$
251

Long-term
 
 
 
 
 
 
 
 
Sussex County, Delaware
 
$
1,725

$
1,437

 
$
1,725

 
$
431

$
402

New Castle County, Delaware
 
2,964

1,637

 
2,964

 
741

608

Nassau County, Florida
 
1,308

1,314

 
1,310

 
326

321

Worcester County, Maryland
 
547

417

 
547

 
137

124

Cecil County, Maryland
 
1,147

926

 
1,147

 
287

265

Indian River, Florida
 
840

350

 
840

 
210

210

Kent County, Delaware
 
3,122

437

 
4,504

 
1,128

437

Total Long-term
 
$
11,653

$
6,518

 
$
13,037

 
$
3,260

$
2,367

 
 
 
 
 
 
 
 
 
Total Service Expansions
 
$
14,335

$
8,744

 
$
16,129


$
4,206

$
2,797

 
 
 
 
 
 
 
 
 
Total Major Projects
 
$
24,311

$
13,176

 
$
26,531

 
$
6,588

$
5,031


(1) During the year and three months ended December 31, 2014, the Company incurred $5.6 million and $1.6 million, respectively, in other operating expenses related to Sandpiper. During the year and three months ended December 31, 2013, the Company incurred $3.1 million and $1.3 million, respectively, in other operating expenses related to Sandpiper.

The following table summarizes our estimated annualized margin from two future major expansion initiatives with executed contracts:
Project
 
Estimated Date of New Service
 
Estimated
Annualized
Margin
20-year OPT natural gas transmission service to an industrial customer in Kent County, Delaware
 
Fourth quarter of 2015
 
$5.8 million
Eight Flags CHP plant in Nassau County, Florida
 
Third quarter of 2016
 
$7.3 million




--more--

15-15-15-15

Chesapeake Utilities Corporation and Subsidiaries
Condensed Consolidated Statements of Income (Unaudited)
For the Periods Ended December 31, 2014 and 2013
(in thousands, except shares and per share data)
 
 
Year to Date
Fourth Quarter
 
 
2014
 
2013
2014
 
2013
Operating Revenues
 
 
 
 
 
 
 
  Regulated Energy
 
$
300,442

 
$
264,637

$
77,274

 
$
72,174

  Unregulated Energy
 
184,961

 
166,723

43,596

 
47,445

  Other
 
13,431

 
12,946

(490
)
 
3,268

Total Operating Revenues
 
498,834

 
444,306

120,380

 
122,887

Operating Expenses
 
 
 
 
 
 
 
Regulated energy cost of sales
 
134,560

 
118,818

32,540

 
32,497

Unregulated energy and other cost of sales
 
143,556

 
126,017

30,854

 
35,360

   Operations
 
102,197

 
91,452

25,590

 
25,576

   Maintenance
 
9,706

 
7,509

2,539

 
1,821

Asset impairment charges
 
6,881

 
—

6,881

 
—

   Depreciation and amortization
 
26,316

 
23,965

6,171

 
5,894

   Other taxes
 
13,339

 
13,811

3,397

 
3,427

 Total operating expenses
 
436,555

 
381,572

107,972

 
104,575

Operating Income
 
62,279

 
62,734

12,408

 
18,312

Gains from sale of businesses
 
7,139

 
—

6,742

 
—

Other income (loss), net of other expenses
 
101

 
372

117

 
(41
)
Interest charges
 
9,482

 
8,234

2,528

 
2,120

Income Before Income Taxes
 
60,037

 
54,872

16,739

 
16,151

Income taxes
 
23,945

 
22,085

6,642

 
6,468

Net Income
 
$
36,092

 
$
32,787

$
10,097

 
$
9,683

 
 
 
 
 
 
 
 
Weighted Average Common Shares Outstanding:
 
 
 
 
 
 
 
Basic
 
14,551,308

 
14,430,962

14,585,336

 
14,450,423

Diluted
 
14,604,944

 
14,543,446

14,643,069

 
14,558,131

 
 
 
 
 
 
 
 
Earnings Per Share of Common Stock:
 
 
 
 
 
 
 
Basic
 
$
2.48

 
$
2.27

$
0.69

 
$
0.67

Diluted
 
$
2.47

 
$
2.26

$
0.69

 
$
0.67


--more--

16-16-16-16


Chesapeake Utilities Corporation and Subsidiaries

Consolidated Balance Sheets (Unaudited)
 
 
As of December 31,
Assets
 
2014
 
2013
(in thousands, except shares and per share data)
 
 
 
 
 Property, Plant and Equipment
 
 
 
 
 Regulated energy
 
$
766,855

 
$
691,522

 Unregulated energy
 
84,773

 
76,267

 Other
 
18,497

 
21,002

 Total property, plant and equipment
 
870,125

 
788,791

Less: Accumulated depreciation and amortization
 
(193,369
)
 
(174,148
)
 Plus: Construction work in progress
 
13,006

 
16,603

 Net property, plant and equipment
 
689,762

 
631,246

 Current Assets
 
 
 
 
 Cash and cash equivalents
 
4,574

 
3,356

Accounts receivable (less allowance for uncollectible accounts of $1,120 and $1,635, respectively)
 
53,300

 
75,293

 Accrued revenue
 
13,617

 
13,910

 Propane inventory, at average cost
 
7,250

 
10,456

 Other inventory, at average cost
 
3,699

 
4,880

 Regulatory assets
 
8,967

 
2,436

 Storage gas prepayments
 
4,258

 
4,318

 Income taxes receivable
 
18,806

 
2,609

 Deferred income taxes
 
—

 
1,696

 Prepaid expenses
 
6,652

 
6,910

 Mark-to-market energy assets
 
1,055

 
385

 Other current assets
 
195

 
160

 Total current assets
 
122,373

 
126,409

 Deferred Charges and Other Assets
 
 
 
 
 Goodwill
 
4,952

 
4,354

 Other intangible assets, net
 
2,404

 
2,975

 Investments, at fair value
 
3,678

 
3,098

 Regulatory assets
 
78,136

 
66,584

 Receivables and other deferred charges
 
3,164

 
2,856

 Total deferred charges and other assets
 
92,334

 
79,867

Total Assets
 
$
904,469

 
$
837,522





--more--

17-17-17-17

Chesapeake Utilities Corporation and Subsidiaries

 Consolidated Balance Sheets (Unaudited)
 
 
As of December 31,
Capitalization and Liabilities
 
2014
 
2013
(in thousands, except shares and per share data)
 
 
 
 
 Capitalization
 
 
 
 
 Stockholders' equity
 
 
 
 
 Common stock, par value $0.4867 per share
 
 
 
 
(authorized 25,000,000 shares)
 
$
7,100

 
$
4,691

 Additional paid-in capital
 
156,581

 
152,341

 Retained earnings
 
142,317

 
124,274

 Accumulated other comprehensive loss
 
(5,676
)
 
(2,533
)
 Deferred compensation obligation
 
1,258

 
1,124

 Treasury stock
 
(1,258
)
 
(1,124
)
 Total stockholders' equity
 
300,322

 
278,773

 Long-term debt, net of current maturities
 
158,486

 
117,592

 Total capitalization
 
458,808

 
396,365

 Current Liabilities
 
 
 
 
 Current portion of long-term debt
 
9,109

 
11,353

 Short-term borrowing
 
88,231

 
105,666

 Accounts payable
 
44,610

 
53,482

 Customer deposits and refunds
 
25,197

 
26,140

 Accrued interest
 
1,352

 
1,235

 Dividends payable
 
3,939

 
3,710

 Deferred income taxes
 
832

 
—

 Accrued compensation
 
10,076

 
8,394

 Regulatory liabilities
 
3,268

 
4,157

 Mark-to-market energy liabilities
 
1,018

 
127

 Other accrued liabilities
 
6,603

 
7,678

 Total current liabilities
 
194,235

 
221,942

 Deferred Credits and Other Liabilities
 
 
 
 
Deferred income taxes
 
160,232

 
142,597

Regulatory liabilities
 
43,419

 
43,912

Environmental liabilities
 
8,923

 
9,155

Other pension and benefit costs
 
35,027

 
21,000

Deferred investment tax credits and Other liabilities
 
3,825

 
2,551

 Total deferred credits and other liabilities
 
251,426

 
219,215

Total Capitalization and Liabilities
 
$
904,469

 
$
837,522



--more--

18-18-18-18

Chesapeake Utilities Corporation and Subsidiaries
Distribution Utility Statistical Data (Unaudited)
 
For the Three Months Ended December 31, 2014
 
For the Three Months Ended December 31, 2013
 
Delmarva
NG Distribution(2)
Chesapeake Florida NG Division
FPU NG Distribution
FPU Electric Distribution
 
Delmarva NG Distribution
Chesapeake Florida NG Division
FPU NG Distribution
FPU Electric Distribution
Operating Revenues
(in thousands)
 
 
 
 
 
 
 
 
  Residential
$
14,941

$
1,227

$
6,103

$
9,416

 
$
14,545

$
1,119

$
5,147

$
9,037

  Commercial
8,148

1,192

8,082

9,191

 
8,108

1,090

7,605

9,271

  Industrial
2,235

1,278

3,454

658

 
1,785

1,223

2,822

785

  Other (1)
4,367

970

994

(2,460
)
 
4,004

417

1,109

(1,938
)
Total Operating Revenues
$
29,691

$
4,667

$
18,633

$
16,805

 
$
28,442

$
3,849

$
16,683

$
17,155

 
 
 
 
 
 
 
 
 
 
Volume (in Dts for natural gas and MWHs for electric)
 
 
 
 
 
 
 
  Residential
807,734

88,072

324,189

65,587

 
813,727

72,363

285,637

62,699

  Commercial
932,574

697,141

656,874

73,680

 
936,143

347,032

664,851

74,205

  Industrial
1,289,318

2,757,284

911,174

5,130

 
1,182,605

2,999,359

928,778

7,940

  Other
18,029

—

132,403

(4,224
)
 
19,119

—

96,718

4,538

Total
3,047,655

3,542,497

2,024,640

140,173

 
2,951,594

3,418,754

1,975,984

149,382

 
 
 
 
 
 
 
 
 
 
Average Customers
 
 
 
 
 
 
 
 
  Residential
62,780

14,555

50,997

23,856

 
61,170

14,027

50,114

23,697

  Commercial
6,542

1,362

4,322

7,382

 
6,451

1,323

4,407

7,405

  Industrial
115

63

1,443

2

 
108

60

1,173

2

  Other
8

—

—

—

 
6

—

—

—

Total
69,445

15,980

56,762

31,240

 
67,735

15,410

55,694

31,104

 
 
 
 
 
 
 
 
 
 


 
For the Year Ended December 31, 2014
 
For the Year Ended December 31, 2013
 
Delmarva
NG Distribution(2)
Chesapeake Florida NG Division
FPU NG Distribution
FPU Electric Distribution
 
Delmarva NG Distribution
Chesapeake Florida NG Division
FPU NG Distribution
FPU Electric Distribution
Operating Revenues
(in thousands)
 
 
 
 
 
 
 
 
  Residential
$
65,958

$
4,844

$
24,502

$
43,023

 
$
52,594

$
4,576

$
21,967

$
41,349

  Commercial
36,452

4,504

33,063

37,553

 
28,445

4,332

32,259

38,430

  Industrial
6,912

5,072

12,808

3,569

 
6,349

4,919

11,278

4,088

  Other (1)
1,244

3,331

(753
)
(8,611
)
 
1,869

2,175

(2,730
)
(8,917
)
Total Operating Revenues
$
110,566

$
17,751

$
69,620

$
75,534

 
$
89,257

$
16,002

$
62,774

$
74,950

 
 
 
 
 
 
 
 
 
 
Volume (in Dts for natural gas and MWHs for electric)
 
 
 
 
 
 
 
  Residential
3,761,034

342,684

1,281,619

310,218

 
3,189,000

324,873

1,217,859

289,745

  Commercial
3,783,741

1,717,111

2,596,547

312,557

 
3,378,707

1,370,408

2,762,780

309,813

  Industrial
4,453,053

12,618,508

3,841,935

29,090

 
4,169,615

13,454,749

3,688,787

31,120

  Other
75,117

—

34,450

(8,533
)
 
69,090

—

(81,723
)
18,347

Total
12,072,945

14,678,303

7,754,551

643,332

 
10,806,412

15,150,030

7,587,703

649,025

 
 
 
 
 
 
 
 
 
 
Average Customers
 
 
 
 
 
 
 
 
  Residential
62,216

14,412

50,835

23,865

 
60,685

13,970

50,086

23,742

  Commercial
6,534

1,363

4,368

7,405

 
6,445

1,299

4,605

7,407

  Industrial
111

60

1,321

2

 
110

58

947

2

  Other
7

—

—

—

 
5

—

—

—

Total
68,868

15,835

56,524

31,272

 
67,245

15,327

55,638

31,151

 
 
 
 
 
 
 
 
 
 
(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) Worcester County NG Distribution (Sandpiper) is now included within the Delmarva NG Distribution results, which also includes the Delaware and Maryland Divisions.


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