Chesapeake Utilities Corporation is a utility company engaged in natural gas distribution and transmission propane distribution and marketing advanced information services and other related businesses.Chesapeake's three natural gas distribution divisions serve residential commercial and industrial customers in southern Delaware Maryland's Eastern Shore and Florida. The Company's natural gas transmission subsidiary operates an interstate pipeline system that transports gas from various points in Pennsylvania to Delaware and Maryland distribution divisions. Chesapeake Utilities Corp. has a market cap of $222.5 million; its shares were traded at around $32.32 with a P/E ratio of 15.6 and P/S ratio of 0.7. The dividend yield of Chesapeake Utilities Corp. stocks is 3.9%. Chesapeake Utilities Corp. had an annual average earning growth of 3.8% over the past 10 years.
Highlight of Business Operations:FPU distributes natural gas, propane and electricity to residential, commercial and industrial customers in Florida. FPU also sells merchandise and other service-related products as a complement to its natural gas and propane operations. FPU serves approximately 96,000 customers and employs 348 people. The merger will create a combined energy company serving approximately 200,000 customers (117,000 natural gas, 48,000 propane and 31,000 electric customers) in the Mid-Atlantic and Florida markets with assets totaling $595 million. The Company and FPU recognized $291.4 million and $168.5 million in revenues, respectively, and $13.6 million and $3.5 million in net income, respectively, for 2008. Chesapeakes management expects the transaction to be earnings neutral or slightly accretive in 2010 and meaningfully accretive in 2011.
The Companys net income for the quarter ended September 30, 2009 was $308,000, or $0.04 per share (diluted). This represents an increase of $506,000, compared to a net loss of $198,000, or $0.03 per share (diluted), reported in the same period in 2008. The Companys Delmarva natural gas distribution and propane distribution operations typically experience seasonal losses or reduced earnings during the third quarter, because customers do not require natural gas or propane for heating purposes during the summer months. Net income for the quarter ended September 30, 2009, included the effect of deferring as a regulatory asset certain merger-related transaction costs, which the Company will seek to recover in subsequent rate proceedings. Absent the effects of the merger-related costs and related income taxes, the Company would have generated net income of $78,000, or $0.01 per share (diluted), for the quarter ended September 30, 2009.
The increase of $208,000 in other operating expenses includes the effects of a credit of $939,000 associated with the deferral of previously expensed merger-related costs and additional merger-related costs, of $265,000 in the third quarter of 2009, which are not subject to recovery through rates. Exclusive of the net effects of merger-related transaction costs, the increase in other operating expenses was $883,000, which is due to: (i) increased compensation costs of $608,000, attributable primarily to payroll adjustments that commenced on January 1, 2009, pursuant to the results of a salary survey conducted during the fourth quarter of 2008; (ii) increased accruals for incentive compensation due to improved non-merger related operating results; and (iii) increased pension costs of $195,000 due to the decline in the value of pension plan assets in 2008.
Operating income for the natural gas segment increased by $243,000 as the result of a gross margin increase of $1.1 million, or eight percent, which was partially offset by increased other operating expenses of $811,000, or eight percent, for the third quarter in 2009 compared to the same period in 2008.
Gross margin increases of $707,000 for the natural gas transmission operation and $552,000 for the natural gas distribution operations were partially offset by decreased gross margin of $205,000 for the natural gas marketing operations.
The natural gas distribution operations for the Delmarva Peninsula generated an increase in gross margin of $682,000 for the third quarter of 2009, compared to the same period in 2008. The new rate structure in Delaware, implemented in October of 2008, contributed $323,000 of the increased gross margin. This new rate structure allows a greater portion of the revenue requirements to be collected through non-volume-based charges and reduces volatility in gross margin based on weather changes. The new rate structure also allows collection of miscellaneous service fees of $74,000, which, although not representing additional revenue, had previously been offset against other operating expenses. Despite the continued slowdown in the new housing market and industrial growth in the region, the Delmarva natural gas distribution operations experienced growth in residential, commercial, and industrial customers, which contributed $300,000 to the increased gross margin. The aforementioned increases to gross margin overcame the negative impact of decreased interruptible sales to industrial customers, due to a reduction in the price of alternative fuels, which reduced gross margin by $133,000.
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