UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
|
| |
☒ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended: June 30, 2019March 31, 2020
OR
|
| |
☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission File Number: 001-11590
|
| | |
| | |
CHESAPEAKE UTILITIES CORPORATION (Exact name of registrant as specified in its charter) |
| | |
|
| | |
Delaware | | 51-0064146 |
(State or other jurisdiction of incorporation or organization) | | (I.R.S. Employer 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)
Securities registered pursuant to Section 12(b) of the Act:
|
| | |
Title of each class | Trading Symbol(s) | Name of each exchange on which registered |
Common Stock - par value per share $0.4867 | CPK | New York Stock Exchange, Inc. |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act.
|
| | | | | | |
Large accelerated filer | | ☒ | | Accelerated filer | | ☐ |
| | | |
Non-accelerated filer | | ☐ | | Smaller reporting company | | ☐ |
| | | | | | |
| | | | Emerging growth company | | ☐ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
Common Stock, par value $0.4867 — 16,403,77616,435,835 shares outstanding as of July 31, 2019.April 30, 2020.
Table of Contents
|
| | |
| | |
| |
| | |
ITEM 1. | | |
| | |
ITEM 2. | | |
| | |
ITEM 3. | | |
| | |
ITEM 4. | | |
| |
| |
| | |
ITEM 1. | | |
| | |
ITEM 1A. | | |
| | |
ITEM 2. | | |
| | |
ITEM 3. | | |
| | |
ITEM 5. | | |
| | |
ITEM 6. | | |
| |
| |
GLOSSARY OF DEFINITIONS
ASC: Accounting Standards Codification issued by the FASB
Aspire Energy: Aspire Energy of Ohio, LLC
ASU: Accounting Standards Update issued by the FASB
Boulden: Boulden, Inc., an entity from whom we acquired certain propane operating assets
CDC: U.S. Centers for Disease Control and Prevention
CDD: Cooling Degree-Day
CGS: Community Gas Systems
Chesapeake or Chesapeake Utilities: Chesapeake Utilities Corporation, and its direct and indirect subsidiaries, as appropriate in the context of the disclosure
CHP: Combined heat and power plant
Company: Chesapeake Utilities Corporation, and its direct and indirect subsidiaries, as appropriate in the context of the disclosure
COVID-19: An infectious disease caused by a newly discovered coronavirus
Degree-Day: A degree-day is the measure of the variation in the weather based on the extent to which the average daily temperature (from 10:00 am to 10:00 am) falls above (CDD) or below (HDD) 65 degrees Fahrenheit
Delmarva Peninsula: A peninsula on the east coast of the U. S.U.S. occupied by Delaware and portions of Maryland and Virginia
Dt(s): Dekatherm(s), which is a natural gas unit of measurement that includes a standard measure for heating value
Dts/d: Dekatherms per day
Eastern Shore: Eastern Shore Natural Gas Company, a wholly-owned subsidiary of Chesapeake Utilities
Eight Flags: Eight Flags Energy, LLC, a subsidiary of Chesapeake OnSight Services, LLC
Elkton Gas: Elkton Gas Company, a subsidiary of SJI that we entered into an agreement to acquire in December 2019
FASB: Financial Accounting Standards Board
FERC: Federal Energy Regulatory Commission
FPU: Florida Public Utilities Company, a wholly-owned subsidiary of Chesapeake Utilities
GAAP: Accounting principles generally accepted in the United States of America
GRIP: Gas Reliability Infrastructure Program
Gross Margin: a non-GAAP measure defined as operating revenues less the cost of sales. The Company's cost of sales includes 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
Gulfstream: Gulfstream Natural Gas System, LLC, an unaffiliated pipeline network that supplies natural gas to FPU
HDD: Heating Degree-Day
Marlin Gas Services: Marlin Gas Services, LLC, a wholly-owned subsidiary of Chesapeake Utilities that acquired certain operating assets of Marlin Gas Transport, Inc.
Marlin Gas Transport: Marlin Gas Transport, Inc.,a former supplier of mobile compressed natural gas distribution and pipeline solutions
MetLife: MetLife Investment Advisors, an institutional debt investment management firm, with which we entered intohave previously issued Senior Notes and which is a party to the current MetLife Shelf Agreement, as amended
MGP: Manufactured gas plant, which is a site where coal was previously used to manufacture gaseous fuel for industrial, commercial and residential use
NYL: New York Life Investors LLC, an institutional debt investment management firm, with which Chesapeake Utilities entered into a Shelf Agreement and issued Shelf Notes
Peninsula Pipeline: Peninsula Pipeline Company, Inc., a wholly-owned subsidiary of Chesapeake Utilities
PESCO: Peninsula Energy Services Company, Inc., a wholly-owned subsidiary of Chesapeake Utilities
Prudential: Prudential Investment Management Inc., an institutional investment management firm, with which Chesapeake Utilities has entered into a previous Shelf Agreement, which has been subsequently amended, and issued Shelf Notes
PSC: Public Service Commission, which is the state agency that regulates utility rates and/or services in certain of our jurisdictions
Retirement Savings Plan: A qualified 401(k) retirement savings plan sponsored by Chesapeake Utilities
Revolver: Our unsecured revolving credit facility with certain lenders
Sandpiper:Sandpiper Energy: Sandpiper Energy, Inc., a wholly-owned subsidiary of Chesapeake Utilities
SEC: U.S. Securities and Exchange Commission
Senior Notes: Our unsecured long-term debt issued primarily to insurance companies on various dates
Sharp: Sharp Energy, Inc., a wholly-owned subsidiary of Chesapeake Utilities
Shelf Agreement: An agreement entered into by Chesapeake Utilities and a counterparty pursuant to which Chesapeake Utilities may request that the counterparty purchase our unsecured senior debt with a fixed interest rate and a maturity date not to exceed 20 years from the date of issuance
Shelf Notes: Unsecured senior promissory notes issuable under the Shelf Agreement executed with various counterparties
SICP: 2013 Stock and Incentive Compensation Plan
SJI: South Jersey Industries, Inc.
TCJA: Tax Cuts and Jobs Act enacted on December 22, 2017
TETLP: Texas Eastern Transmission, LP, an interstate pipeline interconnected with Eastern Shore's pipeline
Uncollateralized Senior Notes: Our unsecured long-term debt issued primarily to insurance companies on various dates
U.S.: The United States of America
PART I—FINANCIAL INFORMATION
Item 1. Financial Statements
Chesapeake Utilities Corporation and Subsidiaries
Condensed Consolidated Statements of Income (Unaudited)
| | | | Three Months Ended | | Six Months Ended | | | Three Months Ended |
| | June 30, | | June 30, | | | March 31, |
| | 2019 | | 2018 | | 2019 | | 2018 | | | 2020 | | 2019 |
(in thousands, except shares and per share data) | | | | | | | | | | | | | |
Operating Revenues | | | | | | | | | | | | | |
Regulated Energy | | $ | 73,403 |
| | $ | 70,504 |
| | $ | 177,021 |
| | $ | 179,897 |
| | | $ | 102,955 |
| | $ | 103,618 |
|
Unregulated Energy and other | | 57,500 |
| | 66,160 |
| | 181,498 |
| | 196,123 |
| | | 49,755 |
| | 56,846 |
|
Total Operating Revenues | | 130,903 |
| | 136,664 |
| | 358,519 |
| | 376,020 |
| | | 152,710 |
| | 160,464 |
|
Operating Expenses | | | | | | | | | | | | | |
Regulated Energy cost of sales | | 18,317 |
| | 20,010 |
| | 54,833 |
| | 68,241 |
| | | 34,832 |
| | 36,516 |
|
Unregulated Energy and other cost of sales | | 42,476 |
| | 49,393 |
| | 132,179 |
| | 149,219 |
| | | 18,036 |
| | 24,411 |
|
Operations | | 32,696 |
| | 36,281 |
| | 69,839 |
| | 68,983 |
| | | 35,992 |
| | 35,413 |
|
Maintenance | | 3,600 |
| | 3,619 |
| | 7,280 |
| | 7,211 |
| | | 3,836 |
| | 3,680 |
|
Gain from a settlement | | (130 | ) | | (130 | ) | | (130 | ) | | (130 | ) | | |
Depreciation and amortization | | 11,609 |
| | 9,839 |
| | 22,684 |
| | 19,543 |
| | | 12,252 |
| | 10,928 |
|
Other taxes | | 4,899 |
| | 4,404 |
| | 10,405 |
| | 9,299 |
| | | 5,649 |
| | 5,392 |
|
Total Operating Expenses | | 113,467 |
| | 123,416 |
| | 297,090 |
| | 322,366 |
| | | 110,597 |
| | 116,340 |
|
Operating Income | | 17,436 |
| | 13,248 |
| | 61,429 |
| | 53,654 |
| | | 42,113 |
| | 44,124 |
|
Other expense, net | | (316 | ) | | (262 | ) | | (361 | ) | | (194 | ) | | |
Other income (expense), net | | | 3,318 |
| | (57 | ) |
Interest charges | | 5,655 |
| | 3,881 |
| | 11,365 |
| | 7,545 |
| | | 5,814 |
| | 5,628 |
|
Income Before Income Taxes | | 11,465 |
| | 9,105 |
| | 49,703 |
|
| 45,915 |
| | |
Income taxes | | 3,161 |
| | 2,718 |
| | 12,735 |
| | 12,674 |
| | |
Income from Continuing Operations Before Income Taxes | | | 39,617 |
| | 38,439 |
|
Income Taxes on Continuing Operations | | | 10,591 |
| | 9,625 |
|
Income from Continuing Operations | | | 29,026 |
| | 28,814 |
|
Loss from Discontinued Operations, Net of Tax | | | (96 | ) | | (150 | ) |
Net Income | | $ | 8,304 |
| | $ | 6,387 |
| | $ | 36,968 |
|
| $ | 33,241 |
| | | $ | 28,930 |
| | $ | 28,664 |
|
Weighted Average Common Shares Outstanding: | | | | | | | | | | | | | |
Basic | | 16,401,028 |
| | 16,369,641 |
| | 16,393,022 |
| | 16,360,540 |
| | | 16,414,773 |
| | 16,384,927 |
|
Diluted | | 16,445,743 |
| | 16,417,082 |
| | 16,439,333 |
| | 16,410,061 |
| | | 16,471,827 |
| | 16,432,852 |
|
Earnings Per Share of Common Stock: | | | | | | | | | | |
Basic | | $ | 0.51 |
| | $ | 0.39 |
| | $ | 2.26 |
| | $ | 2.03 |
| | |
Diluted | | $ | 0.50 |
| | $ | 0.39 |
| | $ | 2.25 |
| | $ | 2.03 |
| | |
| | | | | |
Basic Earnings Per Share of Common Stock: | | | | | |
Earnings from Continuing Operations | | | $ | 1.77 |
| | $ | 1.76 |
|
Loss from Discontinued Operations | | | (0.01 | ) | | (0.01 | ) |
Basic Earnings Per Share of Common Stock | | | $ | 1.76 |
| | $ | 1.75 |
|
| | | | | |
Diluted Earnings Per Share of Common Stock: | | | | | |
Earnings from Continuing Operations | | | $ | 1.77 |
| | $ | 1.75 |
|
Loss from Discontinued Operations | | | (0.01 | ) | | (0.01 | ) |
Diluted Earnings Per Share of Common Stock | | | $ | 1.76 |
| | $ | 1.74 |
|
The accompanying notes are an integral part of these financial statements.
Chesapeake Utilities Corporation and Subsidiaries
Condensed Consolidated Statements of Comprehensive Income (Unaudited)
| | | | Three Months Ended | | Six Months Ended | | Three Months Ended |
| | June 30, | | June 30, | | March 31, |
| | 2019 | | 2018 | | 2019 | | 2018 | | 2020 | | 2019 |
(in thousands) | | | | | | | | | | | | |
Net Income | | $ | 8,304 |
| | $ | 6,387 |
| | $ | 36,968 |
| | $ | 33,241 |
| | $ | 28,930 |
| | $ | 28,664 |
|
Other Comprehensive Income (Loss), net of tax: | | | | | | | | | | | | |
Employee Benefits, net of tax: | | | | | | | | | | | | |
Amortization of prior service cost, net of tax of $(5), $(5), $(10) and $(11), respectively | | (14 | ) | | (14 | ) | | (29 | ) | | (28 | ) | |
Net gain, net of tax of $42, $41, $86 and $80, respectively | | 121 |
| | 108 |
| | 242 |
| | 217 |
| |
Amortization of prior service cost, net of tax of $(5), and $(5), respectively | | | (14 | ) | | (14 | ) |
Net gain, net of tax of $28, and $42, respectively | | | 80 |
| | 121 |
|
Cash Flow Hedges, net of tax: | | | | | | | | | | | | |
Unrealized gain (loss) on commodity contract cash flow hedges, net of tax of $(850), $429, $343 and $(327), respectively | | (2,115 | ) | | 1,061 |
| | 868 |
| | (728 | ) | |
Total Other Comprehensive Income (Loss), net of tax | | (2,008 | ) | | 1,155 |
| | 1,081 |
| | (539 | ) | |
Unrealized gain on commodity contract cash flow hedges, net of tax of $2, and $1,194, respectively | | | 7 |
| | 2,982 |
|
Total Other Comprehensive Income, net of tax | | | 73 |
| | 3,089 |
|
Comprehensive Income | | $ | 6,296 |
| | $ | 7,542 |
| | $ | 38,049 |
| | $ | 32,702 |
| | $ | 29,003 |
| | $ | 31,753 |
|
The accompanying notes are an integral part of these financial statements.
Chesapeake Utilities Corporation and Subsidiaries
Condensed Consolidated Balance Sheets (Unaudited)
| | Assets | | June 30, 2019 | | December 31, 2018 | | March 31, 2020 | | December 31, 2019 |
(in thousands, except shares and per share data) | | | | | | | | |
Property, Plant and Equipment | | | | | | | | |
Regulated Energy | | $ | 1,380,591 |
| | $ | 1,297,416 |
| | $ | 1,447,089 |
| | $ | 1,441,473 |
|
Unregulated Energy | | 245,738 |
| | 237,682 |
| | 274,970 |
| | 265,209 |
|
Other businesses and eliminations | | 30,347 |
| | 34,585 |
| | 39,370 |
| | 39,850 |
|
Total property, plant and equipment | | 1,656,676 |
| | 1,569,683 |
| | 1,761,429 |
| | 1,746,532 |
|
Less: Accumulated depreciation and amortization | | (321,284 | ) | | (294,295 | ) | | (345,206 | ) | | (336,876 | ) |
Plus: Construction work in progress | | 85,630 |
| | 108,584 |
| | 75,510 |
| | 54,141 |
|
Net property, plant and equipment | | 1,421,022 |
| | 1,383,972 |
| | 1,491,733 |
| | 1,463,797 |
|
Current Assets | | | | | | | | |
Cash and cash equivalents | | 7,254 |
| | 6,089 |
| | 3,982 |
| | 6,985 |
|
Trade and other receivables (less allowance for uncollectible accounts of $1,190 and $1,108, respectively) | | 48,908 |
| | 85,404 |
| |
Trade and other receivables | | | 46,730 |
| | 50,899 |
|
Less: Allowance for credit losses | | | (1,421 | ) | | (1,337 | ) |
Trade receivables, net | | | 45,309 |
| | 49,562 |
|
Accrued revenue | | 12,724 |
| | 27,499 |
| | 16,931 |
| | 20,846 |
|
Propane inventory, at average cost | | 5,143 |
| | 9,791 |
| | 5,136 |
| | 5,824 |
|
Other inventory, at average cost | | 7,778 |
| | 7,127 |
| | 5,621 |
| | 6,067 |
|
Regulatory assets | | 6,842 |
| | 4,796 |
| | 4,441 |
| | 5,144 |
|
Storage gas prepayments | | 4,143 |
| | 6,603 |
| | 753 |
| | 3,541 |
|
Income taxes receivable | | 10,984 |
| | 15,300 |
| | 15,230 |
| | 20,050 |
|
Prepaid expenses | | 5,873 |
| | 10,079 |
| | 10,707 |
| | 13,928 |
|
Derivative assets, at fair value | | 10,571 |
| | 13,165 |
| | 151 |
| | — |
|
Other current assets | | 4,022 |
| | 5,684 |
| | 3,666 |
| | 2,879 |
|
Total current assets | | 124,242 |
| | 191,537 |
| | 111,927 |
|
| 134,826 |
|
Deferred Charges and Other Assets | | | | | | | | |
Goodwill | | 25,785 |
| | 25,837 |
| | 32,668 |
| | 32,668 |
|
Other intangible assets, net | | 5,611 |
| | 6,207 |
| | 7,824 |
| | 8,129 |
|
Investments, at fair value | | 8,821 |
| | 6,711 |
| | 7,217 |
| | 9,229 |
|
Operating lease right-of-use assets (refer to Note 15) | | 12,404 |
| | — |
| |
Operating lease right-of-use assets | | | 11,696 |
| | 11,563 |
|
Regulatory assets | | 76,945 |
| | 72,422 |
| | 73,552 |
| | 73,407 |
|
Other assets | | 6,212 |
| | 6,985 |
| |
Receivables and other deferred charges | | | 51,602 |
| | 49,579 |
|
Total deferred charges and other assets | | 135,778 |
| | 118,162 |
| | 184,559 |
| | 184,575 |
|
Total Assets | | $ | 1,681,042 |
| | $ | 1,693,671 |
| | $ | 1,788,219 |
| | $ | 1,783,198 |
|
The accompanying notes are an integral part of these financial statements.
Chesapeake Utilities Corporation and Subsidiaries
Condensed Consolidated Balance Sheets (Unaudited)
| | Capitalization and Liabilities | | June 30, 2019 | | December 31, 2018 | | March 31, 2020 | | December 31, 2019 |
(in thousands, except shares and per share data) | | | | | | | | |
Capitalization | | | | | | | | |
Stockholders’ equity | | | | | | | | |
Preferred stock, par value $0.01 per share (authorized 2,000,000 shares), no shares issued and outstanding | | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
|
Common stock, par value $0.4867 per share (authorized 50,000,000 shares) | | 7,984 |
| | 7,971 |
| | 7,998 |
| | 7,984 |
|
Additional paid-in capital | | 256,385 |
| | 255,651 |
| | 259,521 |
| | 259,253 |
|
Retained earnings | | 285,762 |
| | 261,530 |
| | 322,804 |
| | 300,607 |
|
Accumulated other comprehensive loss | | (5,747 | ) | | (6,713 | ) | | (6,194 | ) | | (6,267 | ) |
Deferred compensation obligation | | 4,694 |
| | 3,854 |
| | 5,468 |
| | 4,543 |
|
Treasury stock | | (4,694 | ) | | (3,854 | ) | | (5,468 | ) | | (4,543 | ) |
Total stockholders’ equity | | 544,384 |
| | 518,439 |
| | 584,129 |
| | 561,577 |
|
Long-term debt, net of current maturities | | 275,924 |
| | 316,020 |
| | 440,183 |
| | 440,168 |
|
Total capitalization | | 820,308 |
| | 834,459 |
| | 1,024,312 |
| | 1,001,745 |
|
Current Liabilities | | | | | | | | |
Current portion of long-term debt | | 75,600 |
| | 11,935 |
| | 15,600 |
| | 45,600 |
|
Short-term borrowing | | 301,226 |
| | 294,458 |
| | 254,339 |
| | 247,371 |
|
Accounts payable | | 50,645 |
| | 129,804 |
| | 52,568 |
| | 54,068 |
|
Customer deposits and refunds | | 29,839 |
| | 34,155 |
| | 29,122 |
| | 30,939 |
|
Accrued interest | | 2,073 |
| | 2,317 |
| | 5,014 |
| | 2,554 |
|
Dividends payable | | 6,644 |
| | 6,060 |
| | 6,655 |
| | 6,644 |
|
Accrued compensation | | 8,699 |
| | 13,923 |
| | 7,518 |
| | 16,236 |
|
Regulatory liabilities | | 10,168 |
| | 7,883 |
| | 13,524 |
| | 5,991 |
|
Derivative liabilities, at fair value | | 10,994 |
| | 14,871 |
| | 1,986 |
| | 1,844 |
|
Other accrued liabilities | | 16,527 |
| | 12,828 |
| | 16,170 |
| | 12,077 |
|
Total current liabilities | | 512,415 |
| | 528,234 |
| | 402,496 |
| | 423,324 |
|
Deferred Credits and Other Liabilities | | | | | | | | |
Deferred income taxes | | 164,421 |
| | 156,820 |
| | 186,431 |
| | 180,656 |
|
Regulatory liabilities | | 133,858 |
| | 135,039 |
| | 128,027 |
| | 127,744 |
|
Environmental liabilities | | 6,994 |
| | 7,638 |
| | 6,046 |
| | 6,468 |
|
Other pension and benefit costs | | 29,675 |
| | 28,513 |
| | 28,043 |
| | 30,569 |
|
Operating lease - liabilities (refer to Note 15) | | 10,710 |
| | — |
| |
Operating lease liabilities | | | 10,165 |
| | 9,896 |
|
Deferred investment tax credits and other liabilities | | 2,661 |
| | 2,968 |
| | 2,699 |
| | 2,796 |
|
Total deferred credits and other liabilities | | 348,319 |
| | 330,978 |
| | 361,411 |
| | 358,129 |
|
Environmental and other commitments and contingencies (Notes 5 and 6) | |
| |
| |
Environmental and other commitments and contingencies (Notes 6 and 7) | | |
| |
|
Total Capitalization and Liabilities | | $ | 1,681,042 |
| | $ | 1,693,671 |
| | $ | 1,788,219 |
| | $ | 1,783,198 |
|
The accompanying notes are an integral part of these financial statements.
Chesapeake Utilities Corporation and Subsidiaries
Condensed Consolidated Statements of Cash Flows (Unaudited)
| | | | Six Months Ended | | Three Months Ended |
| | June 30, | | March 31, |
| | 2019 | | 2018 | | 2020 | | 2019 |
(in thousands) | | | | | | | | |
Operating Activities | | | | | | | | |
Net income | | $ | 36,968 |
| | $ | 33,241 |
| | $ | 28,930 |
| | $ | 28,664 |
|
Adjustments to reconcile net income to net cash provided by operating activities: | | | | | | | | |
Depreciation and amortization | | 22,684 |
| | 19,543 |
| | 12,252 |
| | 11,074 |
|
Depreciation and accretion included in other costs | | 4,322 |
| | 4,428 |
| | 2,361 |
| | 2,135 |
|
Deferred income taxes | | 7,746 |
| | 7,668 |
| | 5,738 |
| | 3,430 |
|
Realized (gain) loss on commodity contracts/sale of assets/investments | | (572 | ) | | 3,857 |
| |
Unrealized gain on investments/commodity contracts | | (1,089 | ) | | (114 | ) | |
Realized gain on commodity contracts and sale of assets | | | (4,458 | ) | | (363 | ) |
Unrealized loss (gain) on investments and commodity contracts | | | 1,511 |
| | (721 | ) |
Employee benefits and compensation | | 764 |
| | 456 |
| | 11 |
| | 382 |
|
Share-based compensation | | 1,095 |
| | 2,247 |
| | 1,056 |
| | 487 |
|
Other, net | | — |
| | (23 | ) | |
Changes in assets and liabilities: | | | | | | | | |
Accounts receivable and accrued revenue | | 51,362 |
| | 32,230 |
| | 8,139 |
| | 18,147 |
|
Propane inventory, storage gas and other inventory | | 6,458 |
| | 9,844 |
| | 3,921 |
| | 7,207 |
|
Regulatory assets/liabilities, net | | (1,610 | ) | | 11,035 |
| | 7,309 |
| | 3,121 |
|
Prepaid expenses and other current assets | | 9,660 |
| | 11,523 |
| | 3,359 |
| | 11,873 |
|
Accounts payable and other accrued liabilities | | (56,902 | ) | | (26,152 | ) | | (4,243 | ) | | (44,783 | ) |
Income taxes receivable | | 4,316 |
| | 8,358 |
| | 4,820 |
| | 6,241 |
|
Customer deposits and refunds | | (4,316 | ) | | (2,733 | ) | | (1,817 | ) | | (4,445 | ) |
Accrued compensation | | (5,365 | ) | | (5,196 | ) | | (8,766 | ) | | (5,548 | ) |
Other assets and liabilities, net | | (946 | ) | | (1,860 | ) | | (1,315 | ) | | 3,585 |
|
Net cash provided by operating activities | | 74,575 |
| | 108,352 |
| | 58,808 |
| | 40,486 |
|
Investing Activities | | | | | | | | |
Property, plant and equipment expenditures | | (90,443 | ) | | (126,811 | ) | | (35,182 | ) | | (43,216 | ) |
Proceeds from sales of assets | | 207 |
| | 323 |
| |
Proceeds from sale of assets | | | 4,106 |
| | 115 |
|
Environmental expenditures | | (644 | ) | | (173 | ) | | (422 | ) | | (268 | ) |
Net cash used in investing activities | | (90,880 | ) | | (126,661 | ) | | (31,498 | ) | | (43,369 | ) |
Financing Activities | | | | | | | | |
Common stock dividends | | (11,759 | ) | | (10,301 | ) | | (6,483 | ) | | (5,877 | ) |
Issuance of stock under the Dividend Reinvestment Plan | | (368 | ) | | (328 | ) | |
Issuance (repurchase) of stock under the Dividend Reinvestment Plan | | | 192 |
| | (183 | ) |
Tax withholding payments related to net settled stock compensation | | (692 | ) | | (1,210 | ) | | (977 | ) | | (692 | ) |
Change in cash overdrafts due to outstanding checks | | 548 |
| | 632 |
| | (4,727 | ) | | 84 |
|
Net borrowings (repayments) under line of credit agreements | | 6,220 |
| | (16,313 | ) | | 11,695 |
| | (18,149 | ) |
Proceeds from long-term debt | | 29,956 |
| | 74,916 |
| |
Repayment of long-term debt, long-term borrowing under the Revolver and capital lease obligation | | (6,435 | ) | | (30,189 | ) | |
Net cash provided by financing activities | | 17,470 |
| | 17,207 |
| |
Proceeds from issuance of long-term debt, net of offering fees | | | (13 | ) | | 30,000 |
|
Repayment of long-term debt and capital lease obligation | | | (30,000 | ) | | (414 | ) |
Net cash (used) provided by financing activities | | | (30,313 | ) | | 4,769 |
|
Net Increase (Decrease) in Cash and Cash Equivalents | | 1,165 |
| | (1,102 | ) | | (3,003 | ) | | 1,886 |
|
Cash and Cash Equivalents—Beginning of Period | | 6,089 |
| | 5,614 |
| | 6,985 |
| | 6,089 |
|
Cash and Cash Equivalents—End of Period | | $ | 7,254 |
| | $ | 4,512 |
| | $ | 3,982 |
| | $ | 7,975 |
|
The accompanying notes are an integral part of these financial statements.
Chesapeake Utilities Corporation and Subsidiaries
Condensed Consolidated Statements of Stockholders’ Equity (Unaudited)
| | | Common Stock (1) | | | | | | | | | | | | | Common Stock (1) | | | | | | | | | | | | |
(in thousands, except shares and per share data) | Number of Shares(2) | | Par Value | | Additional Paid-In Capital | | Retained Earnings | | Accumulated Other Comprehensive Loss | | Deferred Compensation | | Treasury Stock | | Total | Number of Shares(2) | | Par Value | | Additional Paid-In Capital | | Retained Earnings | | Accumulated Other Comprehensive Loss | | Deferred Compensation | | Treasury Stock | | Total |
Balance at December 31, 2017 | 16,344,442 |
| | $ | 7,955 |
| | $ | 253,470 |
| | $ | 229,141 |
| | $ | (4,272 | ) | | $ | 3,395 |
| | $ | (3,395 | ) | | $ | 486,294 |
| |
Net income | — |
| | — |
| | — |
| | 26,854 |
| | — |
| | — |
| | — |
| | 26,854 |
| |
Cumulative effect of the adoption of ASU 2014-09 | — |
| | — |
| | — |
| | (1,498 | ) | | — |
| | — |
| | — |
| | (1,498 | ) | |
Reclassification upon the adoption of ASU 2018-02 | — |
| | — |
| | — |
| | 907 |
| | (907 | ) | | — |
| | — |
| | — |
| |
Other comprehensive loss | — |
| | — |
| | — |
| | — |
| | (1,694 | ) | | — |
| | — |
| | (1,694 | ) | |
Dividend declared ($0.3250 per share) | — |
| | — |
| | — |
| | (5,380 | ) | | — |
| | — |
| | — |
| | (5,380 | ) | |
Dividend reinvestment plan | — |
| | — |
| | (1 | ) | | — |
| | — |
| | — |
| | — |
| | (1 | ) | |
Share-based compensation and tax benefit (3)(4) | 19,350 |
| | 9 |
| | 657 |
| | — |
| | — |
| | — |
| | — |
| | 666 |
| |
Treasury stock activities | — |
| | — |
| | — |
| | — |
| | — |
| | 178 |
| | (178 | ) | | — |
| |
Balance at March 31, 2018 | 16,363,792 |
| | 7,964 |
| | 254,126 |
| | 250,024 |
| | (6,873 | ) | | 3,573 |
| | (3,573 | ) | | 505,241 |
| |
Net income | — |
| | — |
| | — |
| | 6,387 |
| | — |
| | — |
| | — |
| | 6,387 |
| |
Other comprehensive income | — |
| | — |
| | — |
| | — |
| | 1,155 |
| | — |
| | — |
| | 1,155 |
| |
Dividend declared ($0.3700 per share) | — |
| | — |
| | — |
| | (6,034 | ) | | — |
| | — |
| | — |
| | (6,034 | ) | |
Dividend reinvestment plan | — |
| | — |
| | (1 | ) | | — |
| | — |
| | — |
| | — |
| | (1 | ) | |
Share-based compensation and tax benefit (3)(4) | 14,753 |
| | 7 |
| | 1,231 |
| | — |
| | — |
| | — |
| | — |
| | 1,238 |
| |
Treasury stock activities | — |
| | — |
| | — |
| | — |
| | — |
| | 209 |
| | (209 | ) | | — |
| |
Balance at June 30, 2018 | 16,378,545 |
| | $ | 7,971 |
| | $ | 255,356 |
| | $ | 250,377 |
| | $ | (5,718 | ) | | $ | 3,782 |
| | $ | (3,782 | ) | | $ | 507,986 |
| |
| | | | | | | | | | | | | | | | |
Balance at December 31, 2018 | 16,378,545 |
| | $ | 7,971 |
| | $ | 255,651 |
| | $ | 261,530 |
| | $ | (6,713 | ) | | $ | 3,854 |
| | $ | (3,854 | ) | | $ | 518,439 |
| 16,378,545 |
| | $ | 7,971 |
| | $ | 255,651 |
| | $ | 261,530 |
| | $ | (6,713 | ) | | $ | 3,854 |
| | $ | (3,854 | ) | | $ | 518,439 |
|
Net income | — |
| | — |
| | — |
| | 28,664 |
| | — |
| | — |
| | — |
| | 28,664 |
| — |
| | — |
| | — |
| | 28,664 |
| | — |
| | — |
| | — |
| | 28,664 |
|
Prior period reclassification | — |
| | — |
| | — |
| | 115 |
| | (115 | ) | | — |
| | — |
| | — |
| — |
| | — |
| | — |
| | 115 |
| | (115 | ) | | — |
| | — |
| | — |
|
Other comprehensive income | — |
| | — |
| | — |
| | — |
| | 3,089 |
| | — |
| | — |
| | 3,089 |
| — |
| | — |
| | — |
| | — |
| | 3,089 |
| | — |
| | — |
| | 3,089 |
|
Dividend declared ($0.3700 per share) | — |
| | — |
| | — |
| | (6,198 | ) | | — |
| | — |
| | — |
| | (6,198 | ) | — |
| | — |
| | — |
| | (6,198 | ) | | — |
| | — |
| | — |
| | (6,198 | ) |
Dividend reinvestment plan | — |
| | — |
| | (1 | ) | | — |
| | — |
| | — |
| | — |
| | (1 | ) | — |
| | — |
| | (1 | ) | | — |
| | — |
| | — |
| | — |
| | (1 | ) |
Share-based compensation and tax benefit (3) (4) | 18,472 |
| | 9 |
| | (343 | ) | | — |
| | — |
| | — |
| | — |
| | (334 | ) | |
Share-based compensation and tax benefit (3)(4) | | 18,472 |
| | 9 |
| | (343 | ) | | — |
| | — |
| | — |
| | — |
| | (334 | ) |
Treasury stock activities | — |
| | — |
| | — |
| | — |
| | — |
| | 522 |
| | (522 | ) | | — |
| — |
| | — |
| | — |
| | — |
| | — |
| | 522 |
| | (522 | ) | | — |
|
Balance at March 31, 2019 | 16,397,017 |
| | 7,980 |
| | 255,307 |
| | 284,111 |
| | (3,739 | ) | | 4,376 |
| | (4,376 | ) | | 543,659 |
| 16,397,017 |
| | $ | 7,980 |
| | $ | 255,307 |
| | $ | 284,111 |
| | $ | (3,739 | ) | | $ | 4,376 |
| | $ | (4,376 | ) | | $ | 543,659 |
|
| | | | | | | | | | | | | | | | |
Balance at December 31, 2019 | | 16,403,776 |
| | $ | 7,984 |
| | $ | 259,253 |
| | $ | 300,607 |
| | $ | (6,267 | ) | | $ | 4,543 |
| | $ | (4,543 | ) | | $ | 561,577 |
|
Net income | — |
| | — |
| | — |
| | 8,304 |
| | — |
| | — |
| | — |
| | 8,304 |
| — |
| | — |
| | — |
| | 28,930 |
| | — |
| | — |
| | — |
| | 28,930 |
|
Other comprehensive loss | — |
| | — |
| | — |
| | — |
| | (2,008 | ) | | — |
| | — |
| | (2,008 | ) | |
Other comprehensive income | | — |
| | — |
| | — |
| | — |
| | 73 |
| | — |
| | — |
| | 73 |
|
Dividend declared ($0.4050 per share) | — |
| | — |
| | — |
| | (6,653 | ) | | — |
| | — |
| | — |
| | (6,653 | ) | — |
| | — |
| | — |
| | (6,703 | ) | | — |
| | — |
| | — |
| | (6,703 | ) |
Dividend reinvestment plan | — |
| | — |
| | (1 | ) | | — |
| | — |
| | — |
| | — |
| | (1 | ) | 3,743 |
| | 2 |
| | 352 |
| | — |
| | — |
| | — |
| | — |
| | 354 |
|
Share-based compensation and tax benefit (3) (4) | 6,759 |
| | 4 |
| | 1,079 |
| | — |
| | — |
| | — |
| | — |
| | 1,083 |
| 25,586 |
| | 12 |
| | (84 | ) | | — |
| | — |
| | — |
| | — |
| | (72 | ) |
Treasury stock activities | — |
| | — |
| | — |
| | — |
| | — |
| | 318 |
| | (318 | ) | | — |
| — |
| | — |
| | — |
| | — |
| | — |
| | 925 |
| | (925 | ) | | — |
|
Balance at June 30, 2019 | 16,403,776 |
| | $ | 7,984 |
| | $ | 256,385 |
| | $ | 285,762 |
| | $ | (5,747 | ) | | $ | 4,694 |
| | $ | (4,694 | ) | | $ | 544,384 |
| |
Cumulative effect of the adoption of ASU 2016-13 | | — |
| | — |
| | — |
| | (30 | ) | | — |
| | — |
| | — |
| | (30 | ) |
Balance at March 31, 2020 | | 16,433,105 |
| | $ | 7,998 |
| | $ | 259,521 |
| | $ | 322,804 |
| | $ | (6,194 | ) | | $ | 5,468 |
| | $ | (5,468 | ) | | $ | 584,129 |
|
| |
(1) | 2,000,000 shares of preferred stock at $0.01 par value have been authorized. No shares have been issued or are outstanding; accordingly, no information has been included in the statements of stockholders’ equity. |
| |
(2) | Includes 105,409104,871 shares at June 30, 2019, 97,053March 31, 2020, and 95,329 shares at December 31, 20182019, 96,204 shares at June 30, 2018 and 90,961 shares at December 31, 2017, respectively, held in a Rabbi Trust related to our Non-Qualified Deferred Compensation Plan. |
| |
(3) | Includes amounts for shares issued for directors’ compensation. |
| |
(4) | The shares issued under the SICP are net of shares withheld for employee taxes. For the three months ended June 30, 2018, March 31, 2020 and 2019, we withheld 6,482 shares for employee taxes. We did not withhold any shares for employee taxes for the three months ended June 30, 2019. For the six months ended June 30, 201910,319 and 2018, we withheld 7,635 and 16,918 shares, respectively, for employee taxes. |
The accompanying notes are an integral part of these financial statements.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
1. Summary of Accounting Policies
Basis of Presentation
References in this document to the “Company,” “Chesapeake Utilities,” “we,” “us” and “our” are intended to mean Chesapeake Utilities Corporation, its divisions and/or its subsidiaries, as appropriate in the context of the disclosure.
The accompanying unaudited condensed consolidated financial statements have been prepared in compliance with the rules and regulations of the SEC and GAAP. In accordance with these rules and regulations, certain information and disclosures normally required for audited financial statements have been condensed or omitted. These financial statements should be read in conjunction with the consolidated financial statements and notes thereto, included in our latest Annual Report on Form 10-K for the year ended December 31, 2018.2019. In the opinion of management, these financial statements reflect normal recurringall adjustments that are necessary for a fair presentation of our results of operations, financial position and cash flows for the interim periods presented.
Where necessary to improve comparability, prior period amounts have been changed to conform to current period presentation.
Due to the seasonality ofon our business, results for interim periods are not necessarily indicative of results for the entire fiscal year. Revenue and earnings are typically greater during the first and fourth quarters, when consumption of energy is highest due to colder temperatures.
Where necessaryBeginning in the third quarter of 2019, our management began executing a strategy to improve comparability, prior period amounts have been changed to conform to current period presentation.
Marlin Gas Transport and Ohl Fuel Oil Acquisitions
In December 2018, Marlin Gas Services acquired certain operating assets of Marlin Gas Transport. The acquisition allows us to offer solutions to supply interruption scenarios and other situations where pipeline supplies are unavailable or inadequate to meet customer requirements.
In December 2018, Sharp acquired certain propane operating assets and customers of R. F. Ohl Fuel Oil, Inc. ("Ohl"), which provides propane distribution service to approximately 2,500 residential and commercial customers in Pennsylvania.
We initially accounted for the purchases ofsell the operating assets of Marlin Gas TransportPESCO. In connection with this strategy, during the third and Ohl, which totaled approximately $18.4 million, as business combinations within our Unregulated Energy segment. Goodwill of $4.8 million, related to the Marlin Gas Transport acquisition, and $1.5 million, associated with the Ohl acquisition, were initially recorded at the close of these transactions. In the secondfourth quarter of 2019, we recordedreached agreements with four entities to sell PESCO's assets and contracts. These transactions closed during the fourth quarter of 2019. As a reductionresult of the sale, we have fully exited the natural gas marketing business, which provided natural gas management and supply services to commercial and industrial customers in Florida, Delaware, Maryland, Pennsylvania, Ohio and other states. Accordingly, PESCO’s historical financial results are reflected in our condensed consolidated financial statements as discontinued operations, which required retrospective application to financial information for all periods presented. Refer to Note 3, Acquisitions and Divestitures for further information.
Effects of COVID-19
On March 13, 2020, the CDC declared a national emergency due to the purchase price for Ohlrapidly growing outbreak of $0.2 million upon completing our inspectionCOVID-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 have imposed varying degrees of restrictions on social and commercial activity to promote social distancing in an effort to slow the spread of the assets purchased. The purchase price adjustment was recordedillness. These restrictions have significantly impacted economic conditions in the United States, and the economic impact is expected to continue as a reductionlong as the social distancing restrictions remain in our property, plantplace. We are considered an “essential business,” which allows us to continue operational activities and equipment balance. The amounts recordedconstruction projects while the social distancing restrictions remain in conjunction with these acquisitions are preliminary and subject to adjustment based on additional valuations performed during the measurement period. Dueplace. In response to the timingCOVID-19 pandemic and related restrictions, we have implemented our 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 to reduce the spread of these acquisitions, the revenue and operating income from these acquisitions in 2018 were immaterial.COVID-19. For the first quarter of 2020, the COVID-19 impact on our results of operations or financial position was immaterial. Any future impact on our results of operations, liquidity or financial position from COVID-19, particularly from continued social distancing and six months ended June 30, 2019, these acquisitions generatedother restrictions recommended or required by federal, state and local authorities, cannot be estimated at this time. We are committed to communicating timely updates and will continue to monitor developments affecting our employees, customers, suppliers and shareholders and take additional precautions as warranted to operate safely and to comply with the following operating revenueCDC, state and income:local requirements in order to protect our employees, customers and the communities we serve.
|
| | | | | | | | | | | | | | | |
| Three Months Ended June 30, 2019 | | Six Months Ended June 30, 2019 |
| Operating Revenue | | Operating Income | | Operating Revenue | | Operating Income |
(in thousands) | | | | | | | |
Marlin Gas Services | $ | 1,108 |
| | $ | 48 |
| | $ | 3,541 |
| | $ | 1,423 |
|
Ohl propane acquisition | $ | 174 |
| | $ | (61 | ) | | $ | 997 |
| | $ | 212 |
|
FASB Statements and Other Authoritative Pronouncements
Recently Adopted Accounting Standards
Leases (ASC 842) - In February 2016, the FASB issued ASU 2016-02, Leases, which requires lessees to recognize leases on the balance sheet and disclose key information about leasing arrangements. The standard establishes a right of use model that requires a lessee to recognize a right of use asset and lease liability for all leases with a term greater than 12 months. The update also expands the required quantitative and qualitative disclosures surrounding leases. ASC 842 was subsequently amended by ASU No. 2018-01, Land Easement Practical Expedient for Transition to Topic 842; ASU No. 2018-10, Codification Improvements to Topic 842, Leases; ASU No. 2018-11, Targeted Improvements; and ASU No. 2019-01, Codification Improvements. We adopted ASU 2016-02 and the related amendments on January 1, 2019, and used
the optional transition method for all existing leases. The optional transition method enabled us to adopt the new standard as of the beginning of the period of adoption and did not require restatement of prior period financial information. As a result, prior period financial information was not recast and continues to be reported under the accounting guidance effective during those periods.
At adoption, we elected the following practical expedients: (1) the ‘package of practical expedients,’ pursuant to which we did not need to reassess our prior conclusions about lease identification, lease classification and initial direct costs, (2) the ‘use-of-hindsight’ practical expedient, which allowed us to use hindsight in assessing impairment of our existing land easements, (3) the creation of an accounting policy for short-term leases resulting in lease payments being recorded as an expense on a straight-line basis over the lease term, and (4) the aggregation, rather than separation, of the lease and non-lease components for all leases.
See Note 15, Leases, for additional information with respect to the impact of the adoption of the lease accounting guidance and the disclosures required by ASU 2016-02 and the related amendments.
Compensation - Stock Compensation (ASC 718) - In June 2018, the FASB issued ASU 2018-07, Improvements to Nonemployee Share-Based Payment Accounting, which expands the scope of Topic 718 to include share-based payment transactions for acquiring goods and services from nonemployees. We adopted ASU 2018-07 on January 1, 2019. Implementation of this new standard did not have a material impact on our financial position or results of operations.
Recent Accounting Standards Yet to be Adopted
Financial Instruments - Credit Losses (ASC 326) - In June 2016, the FASB issued ASU 2016-13, Measurement of Credit Losses on Financial Instruments, which changes how an entity accountsentities account for credit losses for most financial assets and certain other instruments, and subsequent guidance which served to clarify or amend the original standard. ASU 2016-13 and the related amendments require entities to estimate lifetime expected credit losses for trade receivables and to provide additional disclosure related to credit losses. We adopted ASU 2016-13 will be effective for our annual and interim financial statements beginning inon January 1, 2020 and isrecorded an immaterial cumulative effect in retained earnings as of that date. As a result, prior period financial information has not expectedbeen recast and continues to have a material impact on our financial position or results of operations.be reported under the accounting guidance that was effective during those periods.
Our estimate for expected credit losses has been developed by analyzing our portfolio of financial assets that present potential credit exposure risk. These assets consist solely of our trade receivables from customers and contract assets. The estimate is based on five years of historical collections experience, a review of current economic and operating conditions in our service territories, and an examination of economic indicators which provide a reasonable and supportable basis of potential future activity. Those indicators include metrics which we believe provide insight into the FASB issued ASU 2017-04, Simplifyingfuture collectability of our trade receivables such as unemployment rates and economic growth statistics in our service territories.
When determining estimated credit losses we analyzed the Testbalance of our trade receivables based on the underlying service line they pertain to. This resulted in an examination of trade receivables from our energy distribution, energy transmission, energy delivery services and propane operations service lines. Our energy distribution service line consists of all our regulated distribution utility operations on the Delmarva Peninsula and throughout Florida. These business units have the ability to recover their costs through the rate making process, which can include consideration for Goodwill Impairment,amounts historically written off as a component of their rate base. Therefore, they possess a mechanism to recover credit losses which simplifies howwe believe reduces their exposure to credit risk. Our energy transmission and energy delivery service business units consist of our natural gas pipelines and our mobile CNG delivery operations. The majority of the customer base these business units serve are regulated distribution utilities who also have the ability to recover their costs. We believe this cost recovery mechanism significantly reduces the amount of credit risk they present. Our propane operations are unregulated and do not have the same ability to recover their costs as our regulated operations. However, historically our propane operations have not had material write offs relative to the amounts of revenues earned.
Our estimate of expected credit losses reflects our anticipated losses associated with our trade receivables as a result of non-payment from our customers beginning the day the trade receivable is established. We believe the risk of loss associated with trade receivables classified as current presents the least amount of credit exposure risk and therefore, we assign a lower estimate to our current trade receivables. As our trade receivables age outside of their expected due date, our estimate increases. Our allowance for credit losses relative to the balance of our trade receivables has historically been immaterial as a result of on time payment activity from our customers.
During the first quarter of 2020, the COVID-19 virus began to rapidly spread within the United States. Federal, state and local governments throughout the country imposed restrictions to promote social distancing to slow the spread of the virus, which has also had the effect of limiting commercial activity. These measures have resulted in significant job loss and a slowing of economic activity across the United States and in the areas that we serve. At this time it is unclear as to when these restrictions might be eased or lifted, and the timing and extent to which they are lifted or eased may be determined by the state and local authorities with guidance from the CDC. We have been identified as an entity is“essential business” which allows us to continue operational activity and construction projects with social distancing restrictions in place. We considered the impact of the COVID-19 virus for the first quarter of 2020 and will continue to monitor developments which impact our customers’ ability to pay and revise our estimates as new information becomes available.
Our prior estimates for expected credit losses had not included an evaluation of current conditions or forward-looking economic indicators as we were not required to test goodwillconsider those factors under the previous incurred loss accounting guidance. The below table provides a reconciliation of our allowance for impairment by eliminating Step 2 from the goodwill impairment test. ASU 2017-04 will be effective for our annual and interim financial statements beginning January 1, 2020, although early adoption is permitted. The amendments included in this ASU are to be applied prospectively. We believe that implementation of this new standard will not have a material impact on our financial position or results of operations.credit losses at March 31, 2020:
|
| | | |
(in thousands) | |
Balance at December 31, 2019 | $ | 1,337 |
|
Additions: | |
Provision for credit losses | 273 |
|
Recoveries | 84 |
|
Deductions: | |
Write offs | (273 | ) |
Balance at March 31, 2020 | $ | 1,421 |
|
Fair Value Measurement (ASC 820) - In August 2018, the FASB issued ASU 2018-13, Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement, which removes, modifies and adds certain disclosure requirements on fair value measurements in ASC 820. We adopted ASU 2018-13 will be effective for our annual and interim financial statements beginning January 1, 2020 and, since the changes only impactimpacted disclosures, willits adoption did not have a material impact on our financial position or results of operations.
Intangibles - Goodwill (ASC 350) - In January 2017, the FASB issued ASU 2017-04, Simplifying the Test for Goodwill Impairment, which simplifies how an entity is required to test goodwill for impairment by eliminating Step 2 from the goodwill impairment test. ASU 2017-04 was effective for our annual and interim financial statements beginning January 1, 2020. The amendments included in this ASU are to be applied prospectively, and are not expected to have a material impact on our financial position or results of operations.
| |
2. | Calculation of Earnings Per Share |
| | | | Three Months Ended | | Six Months Ended | | Three Months Ended |
| | June 30, | | June 30, | | March 31, |
| | 2019 | | 2018 | | 2019 | | 2018 | | 2020 | | 2019 |
(in thousands, except shares and per share data) | | | | | | | | | | | | |
Calculation of Basic Earnings Per Share: | | | | | | | | | | | | |
Income from Continuing Operations | | | $ | 29,026 |
| | $ | 28,814 |
|
Loss from Discontinued Operations | | | (96 | ) | | (150 | ) |
Net Income | | | $ | 28,930 |
| | $ | 28,664 |
|
| | | | | | | | | | | | |
Net Income | | $ | 8,304 |
| | $ | 6,387 |
| | $ | 36,968 |
| | $ | 33,241 |
| |
Weighted average shares outstanding | | 16,401,028 |
| | 16,369,641 |
| | 16,393,022 |
| | 16,360,540 |
| | 16,414,773 |
| | 16,384,927 |
|
| | | | | |
Basic Earnings Per Share from Continuing Operations | | | $ | 1.77 |
| | $ | 1.76 |
|
Basic Loss Per Share from Discontinued Operations | | | (0.01 | ) | | (0.01 | ) |
Basic Earnings Per Share | | $ | 0.51 |
| | $ | 0.39 |
| | $ | 2.26 |
| | $ | 2.03 |
| | $ | 1.76 |
| | $ | 1.75 |
|
| | | | | | | | | | | | |
Calculation of Diluted Earnings Per Share: | | | | | | | | | | | | |
Reconciliation of Numerator: | | | | | | | | | |
Net Income | | $ | 8,304 |
| | $ | 6,387 |
| | $ | 36,968 |
| | $ | 33,241 |
| |
Reconciliation of Denominator: | | | | | | | | | | | | |
Weighted shares outstanding—Basic | | 16,401,028 |
| | 16,369,641 |
| | 16,393,022 |
| | 16,360,540 |
| | 16,414,773 |
| | 16,384,927 |
|
Effect of dilutive securities—Share-based compensation | | 44,715 |
| | 47,441 |
| | 46,311 |
| | 49,521 |
| | 57,054 |
| | 47,925 |
|
Adjusted denominator—Diluted | | 16,445,743 |
| | 16,417,082 |
| | 16,439,333 |
| | 16,410,061 |
| | 16,471,827 |
| | 16,432,852 |
|
| | | | | |
Diluted Earnings Per Share from Continuing Operations | | | $ | 1.77 |
| | $ | 1.75 |
|
Diluted Loss Per Share from Discontinued Operations | | | (0.01 | ) | | (0.01 | ) |
Diluted Earnings Per Share | | $ | 0.50 |
| | $ | 0.39 |
| | $ | 2.25 |
| | $ | 2.03 |
| | $ | 1.76 |
| | $ | 1.74 |
|
| |
3. | Acquisitions and Divestitures |
3.
Acquisition of Elkton Gas
In December 2019, we entered into an agreement with SJI to acquire its subsidiary, Elkton Gas which provides natural gas distribution service to approximately 7,000 residential and commercial customers within a franchised area of Cecil County, Maryland. Upon completion of the transaction, Elkton Gas will become our wholly-owned subsidiary. The acquisition, which is expected to close in the third quarter of 2020, is subject to approval by the Maryland PSC. Elkton Gas’ territory is contiguous to our franchised service territory in Cecil County, Maryland. Elkton Gas will continue to operate out of its existing office with the same local personnel who are also expected to serve our existing franchised service territory in Cecil County.
Acquisition of Boulden
In December 2019, Sharp acquired certain propane operating assets of Boulden which provides propane distribution service to approximately 5,200 customers in Delaware, Maryland and Pennsylvania, for approximately $24.6 million, net of cash acquired. Additionally, the purchase price included $0.2 million of working capital. We recorded contingent consideration of $0.6 million related to the seller's adherence to various provisions contained in the contract through the first anniversary of the transaction closing. We accounted for the purchase of the operating assets of Boulden as a business combination and integrated the business into our Sharp operation. There are multiple strategic benefits to this acquisition
including it: (i) overlays with the Elkton Gas acquisition to establish an integrated energy delivery platform in Cecil County, Maryland; (ii) includes an established customer base with opportunities for future growth; (iii) enables operational synergies, including supply, for the northern Delmarva Peninsula; and (iv) provides opportunities to market additional services and pricing programs to these customers.
In connection with this acquisition, we recorded $8.3 million in property, plant and equipment, $5.1 million in intangible assets associated with customer relationships and non-compete agreements and $11.2 million in goodwill, all of which is deductible for income tax purposes. The amounts recorded in conjunction with the acquisition are preliminary, and subject to adjustment based on contractual provisions and will be finalized in the fourth quarter of 2020. For the quarter ended March 31, 2020, Boulden generated operating revenue and income of $2.8 million and $1.4 million respectively.
Divestiture of PESCO
During the fourth quarter of 2019, we sold PESCO's assets and contracts in 4 separate transactions and exited the natural gas marketing business. As a result of the sales agreements, we began to report PESCO as discontinued operations during the third quarter of 2019 and excluded PESCO's performance from continuing operations for all periods presented and classified its assets and liabilities as held for sale where applicable.
We received a total of $22.9 million in cash consideration from the buyers, inclusive of working capital of $8.0 million. We recognized a pre-tax gain of $7.3 million ($5.4 million after tax) in connection with the closing of these transactions during the fourth quarter of 2019.
Operating revenues and costs of sales from the previous reporting periods, which were previously eliminated in consolidation, have been grossed up and are now reflected as a component of operating revenues and costs of sales for the three months ended March 31, 2019. We recast these amounts because, upon completion of the sales transactions, we continued to provide and receive services from the buyers through the remainder of the contractual terms.
A summary of discontinued operations presented in the condensed consolidated statements of income includes the following: |
| | | | | | | | |
| | Three Months Ended |
| | March 31, |
(in thousands) | | 2020 | | 2019 |
Operating revenues(1) | | $ | — |
| | $ | 77,022 |
|
Cost of sales(1) | | (9 | ) | | 75,162 |
|
Other operating expenses | | 116 |
| | 1,991 |
|
Operating loss | | (107 | ) |
| (131 | ) |
Interest and other expense | | (24 | ) | | (70 | ) |
Loss from Discontinued Operations before income taxes | | (131 | ) |
| (201 | ) |
Income tax benefit | | (35 | ) | | (51 | ) |
Loss from Discontinued Operations, Net of Tax | | $ | (96 | ) | | $ | (150 | ) |
(1) Included in operating revenues and cost of sales for the three months ended March 31, 2019, is $9.9 million representing amounts which had been previously eliminated in consolidation related to intercompany activity that will continue with the buyers after the disposition of the assets of PESCO.
Since the disposition of the assets and contracts of PESCO was completed in the fourth quarter 2019, there were no assets or liabilities classified as held for sale at March 31, 2020 and December 31, 2019.
We have elected not to separately disclose discontinued operations on the condensed consolidated statements of cash flows. The following table summarizes significant statements of cash flows data related to the discontinued operations of PESCO:
|
| | | | |
(in thousands) | | Three Months Ended March 31, 2019 |
Depreciation and amortization | | $ | 146 |
|
Deferred income taxes | | $ | 1,396 |
|
Realized loss on commodity contracts | | $ | 584 |
|
Our Delmarva Peninsula natural gas distribution operations had asset management agreements with PESCO to manage their natural gas transportation and storage capacity. The agreements were effective as of April 1, 2017, and expired on March 31, 2020. As a result of the sale of the assets of PESCO, effective October 1, 2019, these agreements were managed by New Jersey Resource Energy Services Company through the remainder of the contract term. In March 2020, our Delmarva Peninsula natural gas distribution operations entered into asset management agreements with a third party to manage their natural gas transportation and storage capacity. The agreements were effective as of April 1, 2020, and expire on March 31, 2023. In addition to the asset management agreements, Eastern Shore had several firm transportation and capacity arrangements with PESCO which were included in the assets sold to United Energy Trading, LLC. Eastern Shore will continue to fulfill these arrangements throughout the remainder of their contractual term. These agreements currently have expiration dates of November 30, 2021.
4. Revenue Recognition
We recognize revenue when our performance obligations under contracts with customers have been satisfied, which generally occurs when our businesses have delivered or transported natural gas, electricity or propane to customers. We exclude sales taxes and other similar taxes from the transaction price. Typically, our customers pay for the goods and/or services we provide in the month following the satisfaction of our performance obligation.
The revenues in the following tables exclude operating revenues from PESCO that are now reflected as discontinued operations. The following table displays our revenue from continuing operations by major source based on product and service type for the three months ended June 30, 2019March 31, 2020 and 2018:2019:
| | | | Three months ended June 30, 2019 | | Three Months Ended June 30, 2018 | | Three months ended March 31, 2020 | | Three Months Ended March 31, 2019 |
(in thousands) | | Regulated Energy | | Unregulated Energy | | Other and Eliminations | | Total | | Regulated Energy | | Unregulated Energy | | Other and Eliminations | | Total | | Regulated Energy | | Unregulated Energy | | Other and Eliminations | | Total | | Regulated Energy | | Unregulated Energy | | Other and Eliminations | | Total |
Energy distribution | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Delaware natural gas division | | $ | 8,256 |
| | $ | — |
| | $ | — |
| | $ | 8,256 |
| | $ | 11,882 |
| | $ | — |
| | $ | — |
| | $ | 11,882 |
| | $ | 26,567 |
| | $ | — |
| | $ | — |
| | $ | 26,567 |
| | $ | 27,549 |
| | $ | — |
| | $ | — |
| | $ | 27,549 |
|
Florida natural gas division | | 7,015 |
| | — |
| | — |
| | 7,015 |
| | 6,317 |
| | — |
| | — |
| | 6,317 |
| | 8,477 |
| | — |
| | — |
| | 8,477 |
| | 7,900 |
| | — |
| | — |
| | 7,900 |
|
FPU electric distribution | | 20,464 |
| | — |
| | — |
| | 20,464 |
| | 18,362 |
| | — |
| | — |
| | 18,362 |
| | 14,219 |
| | — |
| | — |
| | 14,219 |
| | 14,378 |
| | — |
| | — |
| | 14,378 |
|
FPU natural gas distribution | | 18,663 |
| | — |
| | — |
| | 18,663 |
| | 18,281 |
| | — |
| | — |
| | 18,281 |
| | 25,444 |
| | — |
| | — |
| | 25,444 |
| | 23,786 |
| | — |
| | — |
| | 23,786 |
|
Maryland natural gas division | | 3,186 |
| | — |
| | — |
| | 3,186 |
| | 4,001 |
| | — |
| | — |
| | 4,001 |
| | 9,138 |
| | — |
| | — |
| | 9,138 |
| | 10,047 |
| | — |
| | — |
| | 10,047 |
|
Sandpiper natural gas/propane operations | | 3,482 |
| | — |
| | — |
| | 3,482 |
| | 4,367 |
| | — |
| | — |
| | 4,367 |
| |
Sandpiper Energy natural gas/propane operations | | | 6,292 |
| | — |
| | — |
| | 6,292 |
| | 7,082 |
| | — |
| | — |
| | 7,082 |
|
Total energy distribution | | 61,066 |
| | — |
| | — |
| | 61,066 |
| | 63,210 |
|
| — |
|
| — |
|
| 63,210 |
| | 90,137 |
| | — |
| | — |
| | 90,137 |
| | 90,742 |
|
| — |
|
| — |
|
| 90,742 |
|
| | | | | | | |
| | | | | | | | | | | | | | | |
| | | | | | | | |
Energy transmission | | | | | | | |
| | | | | | | | | | | | | | | |
| | | | | | | | |
Aspire Energy | | — |
| | 5,421 |
| | — |
| | 5,421 |
| | — |
| | 5,854 |
| | — |
| | 5,854 |
| | — |
| | 9,781 |
| | — |
| | 9,781 |
| | — |
| | 13,470 |
| | — |
| | 13,470 |
|
Eastern Shore | | 17,740 |
| | — |
| | — |
| | 17,740 |
| | 14,502 |
| | — |
| | — |
| | 14,502 |
| | 19,279 |
| | — |
| | — |
| | 19,279 |
| | 19,056 |
| | — |
| | — |
| | 19,056 |
|
Peninsula Pipeline | | 3,565 |
| | — |
| | — |
| | 3,565 |
| | 2,968 |
| | — |
| | — |
| | 2,968 |
| | 4,824 |
| | — |
| | — |
| | 4,824 |
| | 3,565 |
| | — |
| | — |
| | 3,565 |
|
Total energy transmission | | 21,305 |
| | 5,421 |
| | — |
| | 26,726 |
|
| 17,470 |
|
| 5,854 |
|
| — |
|
| 23,324 |
| | 24,103 |
| | 9,781 |
| | — |
| | 33,884 |
|
| 22,621 |
|
| 13,470 |
|
| — |
|
| 36,091 |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Energy generation | | | | | | | |
| | | | | | | | | | | | | | | |
| | | | | | | | |
Eight Flags | | — |
| | 4,235 |
| | — |
| | 4,235 |
| | — |
| | 4,230 |
| | — |
| | 4,230 |
| | — |
| | 4,323 |
| | — |
| | 4,323 |
| | — |
| | 4,142 |
| | — |
| | 4,142 |
|
| | | | | | | |
| | | | | | | | | | | | | | | |
| | | | | | | | |
Propane operations | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Propane delivery operations | | — |
| | 17,018 |
| | — |
| | 17,018 |
| | — |
| | 20,206 |
| | — |
| | 20,206 |
| | — |
| | 38,282 |
| | — |
| | 38,282 |
| | — |
| | 46,125 |
| | — |
| | 46,125 |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Energy services | | | | | | | | | | | | | | | | | |
Energy delivery services | | | | | | | | | | | | | | | | | |
Marlin Gas Services | | — |
| | 1,108 |
| | — |
| | 1,108 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 1,309 |
| | — |
| | 1,309 |
| | — |
| | 2,434 |
| | — |
| | 2,434 |
|
PESCO - Natural Gas Marketing | | — |
| | 41,280 |
| | — |
| | 41,280 |
| | — |
| | 48,798 |
| | — |
| | 48,798 |
| |
Total energy services | | — |
| | 42,388 |
| | — |
| | 42,388 |
| | — |
| | 48,798 |
| | — |
| | 48,798 |
| |
Other | | | — |
| | 20 |
| | — |
| | 20 |
| | — |
| | — |
| | — |
| | — |
|
Total energy delivery services | | | — |
| | 1,329 |
| | — |
| | 1,329 |
| | — |
| | 2,434 |
| | — |
| | 2,434 |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Other and eliminations | | | | | | | |
| | | | | | | | | | | | | | | |
| | | | | | | | |
Eliminations | | (8,968 | ) | | (2,628 | ) | | (9,536 | ) | | (21,132 | ) | | (10,176 | ) | | (3,248 | ) | | (10,379 | ) | | (23,803 | ) | | (11,285 | ) | | (25 | ) | | (4,409 | ) | | (15,719 | ) | | (9,745 | ) | | (5,496 | ) | | (4,366 | ) | | (19,607 | ) |
Other | | — |
| | 470 |
| | 132 |
| | 602 |
| | — |
| | 505 |
| | 194 |
| | 699 |
| | — |
| | 341 |
| | 133 |
| | 474 |
| | — |
| | 405 |
| | 132 |
| | 537 |
|
Total other and eliminations | | (8,968 | ) | | (2,158 | ) | | (9,404 | ) | | (20,530 | ) | | (10,176 | ) | | (2,743 | ) | | (10,185 | ) | | (23,104 | ) | | (11,285 | ) | | 316 |
| | (4,276 | ) | | (15,245 | ) | | (9,745 | ) | | (5,091 | ) | | (4,234 | ) | | (19,070 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Total operating revenues (1) | | $ | 73,403 |
|
| $ | 66,904 |
|
| $ | (9,404 | ) |
| $ | 130,903 |
| | $ | 70,504 |
| | $ | 76,345 |
| | $ | (10,185 | ) | | $ | 136,664 |
| | $ | 102,955 |
|
| $ | 54,031 |
|
| $ | (4,276 | ) |
| $ | 152,710 |
| | $ | 103,618 |
| | $ | 61,080 |
| | $ | (4,234 | ) | | $ | 160,464 |
|
(1) Total operating revenues for the three months ended June 30, 2019,March 31, 2020, include other revenue (revenues from sources other than contracts with customers) of $(0.3)$0.7 million and $0.1 million for our Regulated and Unregulated Energy segments, respectively, and $(0.4)$0.1 million and $0.1 million for our Regulated and Unregulated Energy segments, respectively, for the three months ended June 30, 2018.March 31, 2019. The sources of other revenues include revenue from alternative revenue programs related to revenue normalization for the Maryland division and Sandpiper and late fees.fees
The following table displays our revenue by major source based on product and service type for the six months ended June 30, 2019 and 2018:
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Six months ended June 30, 2019 | | Six months ended June 30, 2018 |
(in thousands) | | Regulated Energy | | Unregulated Energy | | Other and Eliminations | | Total | | Regulated Energy | | Unregulated Energy | | Other and Eliminations | | Total |
Energy distribution | | | | | | | | | | | | | | | | |
Delaware natural gas division | | $ | 35,805 |
| | $ | — |
| | $ | — |
| | $ | 35,805 |
| | $ | 43,954 |
| | $ | — |
| | $ | — |
| | $ | 43,954 |
|
Florida natural gas division | | 14,915 |
| | — |
| | — |
| | 14,915 |
| | 12,180 |
| | — |
| | — |
| | 12,180 |
|
FPU electric distribution | | 34,842 |
| | — |
| | — |
| | 34,842 |
| | 37,103 |
| | — |
| | — |
| | 37,103 |
|
FPU natural gas distribution | | 42,449 |
| | — |
| | — |
| | 42,449 |
| | 41,494 |
| | — |
| | — |
| | 41,494 |
|
Maryland natural gas division | | 13,233 |
| | — |
| | — |
| | 13,233 |
| | 14,673 |
| | — |
| | — |
| | 14,673 |
|
Sandpiper natural gas/propane operations | | 10,564 |
| | — |
| | — |
| | 10,564 |
| | 13,331 |
| | — |
| | — |
| | 13,331 |
|
Total energy distribution | | 151,808 |
| | — |
| | — |
| | 151,808 |
| | 162,735 |
|
| — |
|
| — |
|
| 162,735 |
|
| | | | | | | |
| | | | | | | | |
Energy transmission | | | | | | | |
| | | | | | | | |
Aspire Energy | | — |
| | 18,892 |
| | — |
| | 18,892 |
| | — |
| | 17,931 |
| | — |
| | 17,931 |
|
Eastern Shore | | 36,796 |
| | — |
| | — |
| | 36,796 |
| | 30,100 |
| | — |
| | — |
| | 30,100 |
|
Peninsula Pipeline | | 7,131 |
| | — |
| | — |
| | 7,131 |
| | 5,065 |
| | — |
| | — |
| | 5,065 |
|
Total energy transmission | | 43,927 |
| | 18,892 |
| | — |
| | 62,819 |
|
| 35,165 |
|
| 17,931 |
|
| — |
|
| 53,096 |
|
| | | | | | | | | | | | | | | | |
Energy generation | | | | | | | |
| | | | | | | | |
Eight Flags | | — |
| | 8,377 |
| | — |
| | 8,377 |
| | — |
| | 8,608 |
| | — |
| | 8,608 |
|
| | | | | | | |
| | | | | | | | |
Propane operations | | | | | | | | | | | | | | | | |
Propane delivery operations | | — |
| | 63,143 |
| | — |
| | 63,143 |
| | — |
| | 72,311 |
| | — |
| | 72,311 |
|
| | | | | | | | | | | | | | | | |
Energy services | | | | | | | | | | | | | | | | |
Marlin Gas Services | | — |
| | 3,541 |
| | — |
| | 3,541 |
| | — |
| | — |
| | — |
| | — |
|
PESCO - Natural Gas Marketing | | — |
| | 118,302 |
| | — |
| | 118,302 |
| | | | 130,357 |
| | — |
| | 130,357 |
|
Total energy services | | — |
| | 121,843 |
| | — |
| | 121,843 |
| | — |
| | 130,357 |
| | — |
| | 130,357 |
|
| | | | | | | | | | | | | | | | |
Other and eliminations | | | | | | | |
| | | | | | | | |
Eliminations | | (18,714 | ) | | (8,123 | ) | | (23,773 | ) | | (50,610 | ) | | (18,003 | ) | | (8,494 | ) | | (25,976 | ) | | (52,473 | ) |
Other | | — |
| | 875 |
| | 264 |
| | 1,139 |
| | — |
| | 999 |
| | 387 |
| | 1,386 |
|
Total other and eliminations | | (18,714 | ) | | (7,248 | ) | | (23,509 | ) | | (49,471 | ) | | (18,003 | ) | | (7,495 | ) | | (25,589 | ) | | (51,087 | ) |
| | | | | | | | | | | | | | | | |
Total operating revenues (1) | | $ | 177,021 |
|
| $ | 205,007 |
|
| $ | (23,509 | ) |
| $ | 358,519 |
| | $ | 179,897 |
| | $ | 221,712 |
| | $ | (25,589 | ) | | $ | 376,020 |
|
(1)Total operating revenues for the six months ended June 30, 2019, include other revenue (revenues from sources other than contracts with customers) of $(0.2) million and $0.2 million for our Regulated and Unregulated Energy segments, respectively, and $(0.9) million and $0.2 million for our Regulated and Unregulated Energy segments, respectively, for the six months ended June 30, 2018. The sources of other revenues include revenue from alternative revenue programs related to revenue normalization for the Maryland division and Sandpiper and late fees.
Contract balances
The timing of revenue recognition, customer billings and cash collections results in trade receivables, unbilled receivables (contract assets), and customer advances (contract liabilities) in our condensed consolidated balance sheets. The balances of our trade receivables, contract assets, and contract liabilities as of March 31, 2020 and December 31, 2018 and June 30, 2019 were as follows:
|
| | | | | | | | | | | | | | | | |
| | Trade Receivables | | Contract Assets (Current) | | Contract Assets (Non-current) | | Contract Liabilities (Current) |
(in thousands) | | | | | | | | |
Balance at 12/31/2018 | | $ | 83,214 |
| | — |
| | $ | 2,614 |
| | $ | 480 |
|
Balance at 6/30/2019 | | 47,254 |
| | 18 |
| | 3,051 |
| | 316 |
|
Increase (decrease) | | $ | (35,960 | ) | | $ | 18 |
| | $ | 437 |
| | $ | (164 | ) |
Table of Contents
|
| | | | | | | | | | | | | | | | |
| | Trade Receivables | | Contract Assets (Current) | | Contract Assets (Non-current) | | Contract Liabilities (Current) |
(in thousands) | | | | | | | | |
Balance at 12/31/2019 | | $ | 47,430 |
| | $ | 18 |
| | $ | 3,465 |
| | $ | 589 |
|
Balance at 3/31/2020 | | 43,614 |
| | 18 |
| | 4,098 |
| | 428 |
|
Increase (decrease) | | $ | (3,816 | ) | | $ | — |
| | $ | 633 |
| | $ | (161 | ) |
Our trade receivables are included in trade and other receivables in the condensed consolidated balance sheets. Our current contract assets are included in other current assets in the condensed consolidated balance sheet.sheets. Our non-current contract assets are included in receivables and other assetsdeferred charges in the condensed consolidated balance sheetsheets and primarily relate to operations and maintenance costs incurred by Eight Flags that have not yet been recovered through rates for the sale of electricity to our electric distribution operation pursuant to a long-term service agreement.
At times, we receive advances or deposits from our customers before we satisfy our performance obligation, resulting in contract liabilities. Contract liabilities are included in other accrued liabilities in the condensed consolidated balance sheetsheets and relate to non-refundable prepaid fixed fees for our Delmarva PeninsulaMid-Atlantic propane delivery operation's retail offerings. Our performance obligation is satisfied over the term of the respective retail offering plan on a ratable basis. For the three months ended June 30,March 31, 2020 and 2019, and 2018, we recognized revenue of $0.2 million and $0.1 million, respectively. For the six months ended June 30, 2019 and 2018, we recognized revenue of $0.5$0.4 million and $0.3 million, respectively.
Remaining performance obligations
Our businesses have long-term fixed fee contracts with customers in which revenues are recognized when performance obligations are satisfied over the contract term. Revenue for these businesses for the remaining performance obligations, at June 30, 2019,March 31, 2020, are expected to be recognized as follows:
| | (in thousands) | 2019 | | 2020 | | 2021 | | 2022 | | 2023 | | 2024 | | 2025 and thereafter | 2020 | | 2021 | | 2022 | | 2023 | | 2024 | | 2025 | | 2026 and thereafter |
Eastern Shore and Peninsula Pipeline | $ | 19,210 |
| | $ | 36,835 |
| | $ | 33,519 |
| | $ | 26,575 |
| | $ | 21,148 |
| | $ | 18,969 |
| | $ | 193,651 |
| $ | 28,084 |
| | $ | 34,404 |
| | $ | 27,249 |
| | $ | 21,795 |
| | $ | 19,548 |
| | $ | 18,699 |
| | $ | 177,607 |
|
Natural gas distribution operations | 2,007 |
| | 3,624 |
| | 3,403 |
| | 3,369 |
| | 2,971 |
| | 2,957 |
| | 27,941 |
| 2,992 |
| | 4,124 |
| | 5,167 |
| | 4,936 |
| | 4,699 |
| | 4,166 |
| | 32,996 |
|
PESCO - Natural Gas Marketing | 2,903 |
| | 7,529 |
| | 1,925 |
| | 23 |
| | — |
| | — |
| | — |
| |
FPU electric distribution | 149 |
| | 297 |
| | 297 |
| | 109 |
| | — |
| | — |
| | — |
| 424 |
| | 566 |
| | 566 |
| | 566 |
| | 566 |
| | 275 |
| | 825 |
|
Total revenue contracts with remaining performance obligations | $ | 24,269 |
| | $ | 48,285 |
| | $ | 39,144 |
| | $ | 30,076 |
| | $ | 24,119 |
| | $ | 21,926 |
| | $ | 221,592 |
| $ | 31,500 |
| | $ | 39,094 |
| | $ | 32,982 |
| | $ | 27,297 |
| | $ | 24,813 |
| | $ | 23,140 |
| | $ | 211,428 |
|
| |
4.5. | Rates and Other Regulatory Activities |
Our natural gas and electric distribution operations in Delaware, Maryland and Florida are subject to regulation by their respective PSC; Eastern Shore, our natural gas transmission subsidiary, is subject to regulation by the FERC; and Peninsula Pipeline, our intrastate pipeline subsidiary, is subject to regulation (excluding cost of service) by the Florida PSC.
Delaware
EffectCGS: In August 2019, we filed with the Delaware PSC an application seeking an order that will establish the regulatory accounting treatment and valuation methodology for the acquisition of propane CGS owned by our affiliate, Sharp, and the conversion of the TCJA on Customers: On January 31,CGS to natural gas service. We propose to acquire each CGS one at a time and to pay replacement cost for each CGS system. In addition, we are requesting authorization to pay for and capitalize the CGS residents’ behind-the-meter conversion costs. Our existing natural gas customers will be protected against subsidizing the acquisitions and conversions of the CGS systems because we will complete only those systems that meet our economic test. In September 2019, the Delaware PSC approvedissued an order to open a docket for the as-filed Delaware Division Delivery Service Rates reflectingpurpose of reviewing our application and to conduct evidentiary hearings on the impactmatter. A final order is anticipated in the second quarter of 2020.
Maryland
Approval of the TCJA. The new rates wentElkton Gas Acquisition:In December 2019, we entered into effect March 1, 2019. The refunds,an agreement with SJI to acquire its subsidiary, Elkton Gas, which were retroactiveprovides natural gas distribution service to February 2018, were completed prior to the mandated deadlineapproximately 7,000 residential and commercial customers within a franchised area of June 30, 2019. The order also provided for a line item billing credit that went into effect on April 1, 2019, for the returnCecil County, Maryland. Upon completion of the excess accumulatedtransaction, Elkton Gas will become our
deferred income taxes ("ADIT"). Additional information on the TCJA impactwholly-owned subsidiary. The acquisition, which is includedexpected to close in the table atthird quarter of 2020, is subject to approval by the endMaryland PSC. Elkton Gas territory is contiguous to our franchised service territory in Cecil County, Maryland. We expect Elkton Gas will continue to operate out of this Note 4,its existing office with the same local personnel.
Application for Authority to Exercise a Franchise: Rates and Other Regulatory Activities.
Weather Normalization Adjustment:In January 2019,March 2020, we filed with the DelawareMaryland PSC an application requestingseeking approval to implementexercise a weather normalization adjustment. The proposed weather normalization adjustment would have provided either a billing credit (during colder than normal weather) or surcharge (during warmer than normal weather) designedfranchise granted to produce natural gas bills for customers that reflect normal temperatures. The weather normalization adjustment would have ensured we did not over or under-collect Delaware PSC authorized levels of distribution revenues due to weather variability. The Delaware PSC issued an order on March 19, 2019 to open a docket. In July 2019, the Delaware Division withdrew the petition and is planning, as proposedus by the DelawareBoard of County Commissioners of Somerset County, Maryland dated December 2019. We are anticipating a decision by the Maryland PSC to include a weather normalization adjustment in its next rate case.the second quarter of 2020.
Florida
Electric Limited Proceeding-Storm Recovery:Recovery (Pre-Hurricane Michael): In February 2018, FPU filed a petition with the Florida PSC, requesting recovery of incremental storm restoration costs related to several hurricanes and tropical storms, along with the replenishment of the storm reserve to its pre-storm level of $1.5 million. As a result of these hurricanes and tropical storms, FPU’s storm reserve was depleted and, at the time of this filing the petition, had a deficit of $0.8 million. This matter went to hearing in December 2018 and was subsequently approved at the March 5, 2019 Agenda with the Final Order issued on March 25, 2019. FPU received approval to includebegin a surcharge of $1.54 per 1,000-kilowatt hour on customer bills for two years beginning in April 2019, to recover storm-related costs and replenish the storm reserve.
Hurricane Michael: In October 2018, Hurricane Michael passed through FPU's electric distribution operation's service territory in Northwest Florida. The hurricane caused widespread and severe damage to FPU's infrastructure resulting in the loss of electric service to 100 percent of its customers in the Northwest Florida service territory losing electrical service.territory. FPU, after exerting extraordinary hurricane restoration efforts, restored service to those customers who were able to accept it. FPU expended more than $65$65.0 million to restore service, which has beenwas recorded as new plant and equipment, charged against FPU’s accumulated depreciation or charged against FPU’s storm reserve. Additionally, amounts currently being reviewed by the Florida PSC for regulatory asset treatment have been recorded as receivables and other deferred charges.
In conjunction with the hurricane-related expenditures, we executed two 13-month unsecured term loans as temporary financing, each in the amountAugust 2019, FPU filed a limited proceeding requesting recovery of $30 million. The interest coststorm-related costs associated with these loans is one-month LIBOR rate plus 75 points. OneHurricane Michael (capital and expenses) through a change in base rates. FPU also requested treatment and recovery of certain storm-related costs as regulatory assets for items currently not allowed to be recovered through the storm reserve as well as the recovery of capital replaced as a result of the term loans was executed in December 2018;storm. Recovery of these costs includes a component of an overall return on capital additions and regulatory assets. In the other was executed in January 2019. While there is a short-term negative impact, the storm is not expected to have a significant impact on our financial results going forward, assuming recovery is granted through the regulatory process. We expect to file the necessary regulatory filings in the thirdfourth quarter of 2019, FPU along with the Office of Public Counsel in Florida, filed a joint motion with the Florida PSC to seekapprove an interim rate increase, subject to refund, pending the final ruling on the recovery of the restoration costs incurred, including eligible financing costs.
Effect of the TCJA on Customers: In February 2018, the Florida PSC opened dockets to consider the impacts associated with the TCJA. In May 2018, FPU’s natural gas divisions filed petitions and supporting testimony regarding the disposition of the related impacts of the TCJA. Hearings on this matter took place in November 2018, and the staff's recommendation was approved by the Florida PSC at the February 5, 2019 Agenda. Final orders were issued on February 25, 2019. Staff’s recommendations are summarized in the table at the end of this Note 4, Rates and Other Regulatory Activities.
Imbalance Petition: In February 2019, FPU filed a petition, with the Florida PSC, to modify the pool manager cash out tiers and respective cash out rates. With this petition, FPU further facilitates consistency across the Florida business units and eliminates the unintentional arbitrage opportunity created by the tariff.incurred. The petition does not have a financial impact for FPU, and it will benefit customers by lowering costs. This petition was approved by the Florida PSC in November 2019 and temporary rate increases were implemented effective January 2020. The Company has fully reserved these interim rates, pending a final resolution and settlement of the limited proceeding.
In March 2020, we filed an update to our original filing to account for actual charges incurred through December 2019, revised the amortization period of the storm-related costs from 30 years as originally requested to 10 years, and included costs related to Hurricane Dorian of approximately $1.2 million in this filing. We continue to work with the Florida PSC and the petition is currently on the schedule for approval at the April 2, 2019 Agenda.Florida PSC Agenda in September 2020.
Natural GasElectric Depreciation Study: In MarchSeptember 2019, FPU filed a petition, with the Florida PSC, for approval of its Consolidated Natural Gasconsolidated electric depreciation rates. IfOnce approved, we expect the new rates will decrease expense approximately $0.3 million annually andto be retroactively effective retro-actively to January 2019.1, 2020. The petition is currently on the Florida PSC's September 2019 Agendaschedule for approval.
Auburndale Project: In June 2019, Peninsula Pipeline filed withapproval at the Florida PSC for approval of its Transportation Service Agreement with the Florida Division of Chesapeake Utilities. Peninsula Pipeline will purchase existing pipeline owned by the Florida Division of Chesapeake Utilities and Calpine and construct pipelineagenda in Polk County, Florida. Peninsula Pipeline will provide transportation service to the Florida Division of Chesapeake Utilities increasing both delivery capacity and downstream pressure as well as introducing a secondary source of natural gas for the Florida Division of Chesapeake Utilities' distribution system. The petition is on the Florida PSC's August 2019 Agenda for approval.September 2020.
Western Palm Beach Expansion Project: In June 2019, Peninsula Pipeline filed with the Florida PSC for approval of its Transportation Service Agreement with FPU. Peninsula Pipeline will construct several new interconnection points and pipeline expansions in Palm Beach County, Florida, which will enable FPU to serve an industrial research park and several new residential developments. Peninsula Pipeline will provide transportation service to FPU, increasing reliability, system
pressure as well as introducing diversity in fuel source for natural gas to serve the increased demand in these areas. The petition is onwas approved by the Florida PSC'sPSC at the August 6, 2019 AgendaAgenda. Interim services began in the fourth quarter of 2019. The Company expects to complete the remainder of the project in phases through the third quarter of 2020.
Callahan Pipeline, Nassau County: In July 2019, Peninsula Pipeline filed a petition for approval.approval of the firm transportation service agreement with FPU and the restructuring of the business and operational agreements between Peoples Gas, FPU and Seacoast Gas Transmission. This petition was approved by the Florida PSC at the December 10, 2019 Agenda. Peninsula Pipeline and Seacoast Gas Transmission are constructing a jointly owned 26-mile, 16-inch steel pipeline that interconnects to the Cypress Pipeline interstate system in western Nassau County in order to serve growing demand in both Nassau and Duval counties, Florida. The Callahan pipeline will terminate into the existing Peninsula Pipeline-Peoples Gas jointly owned pipeline, which serves Amelia Island and the Peoples Gas distribution system. The Callahan Pipeline will enhance FPU’s ability to expand service into Nassau County and will enable Peoples Gas to enhance its
system pressure and Sandpiper
There were no material regulatory mattersthe reliability of its service in Duval County. The project is expected to be placed in-service during the quarter.third quarter of 2020.
Eastern Shore
Del-Mar Energy Pathway Project: In September 2018, Eastern Shore filed a Certificate Application withDecember 2019, the FERC requesting authorization to construct and operateissued an order approving the construction of the Del-Mar Energy Pathway project,project. The order, which was applied for in September 2018 by Eastern Shore, approved the construction and operation of new facilities that will provide an additional 14,300 Dts/d of firm service to four4 customers. Facilities to be constructed include six6 miles of pipeline looping in Delaware; 13 miles of new mainline extension in Sussex County, Delaware and Wicomico and Somerset County,Counties in Maryland; and new pressure control and delivery stations in these counties. The benefits of this project include: (i) additional natural gas transmission pipeline infrastructure in eastern Sussex County, Delaware, and (ii) extension of Eastern Shore’s pipeline system, for the first time, into Somerset County, Maryland. DuringConstruction on the fourth quarter of 2018, the FERC held a full project area scoping meetingbegan in Sussex County, DelawareJanuary 2020, and issued a Notice of Schedule for Environmental Review. The Environmental Assessment for the Del-Mar Energy Pathway project was issued in April 2019; however, final FERC authorization is still pending. Eastern Shore anticipates that this project will be fully in-service by mid-2021, contingent uponthe beginning of the fourth quarter of 2021.
Capital Cost Surcharge: In December 2019, the FERC issuing authorizationapproved Eastern Shore’s proposed capital cost surcharge to become effective January 1, 2020. The surcharge, an approved item in the settlement of Eastern Shore’s last general rate case, allows Eastern Shore to recover capital costs associated with mandated highway or railroad relocation projects that required the replacement of existing Eastern Shore facilities. Eastern Shore expects to recover $0.5 million in capital cost surcharges on an annual basis.
Renewable Natural Gas Tariff: In October 2019, Eastern Shore filed an application with the FERC to include renewable natural gas (biogas) utilization and standards in its tariff. Eastern Shore had proposed changes to its gas quality specifications that would enable it to accommodate renewable natural gas at various receipt points on its system. Changes to the gas quality specifications would ensure interchangeability of renewable natural gas with the natural gas currently delivered to Eastern Shore. The tariffs became effective in November 2019.
COVID-19 Impact
We are monitoring the global outbreak of COVID-19 and taking steps to mitigate the potential risks posed by its spread. We provide an “essential service” to our customers which means that it is paramount that we keep our employees who operate our business safe and informed. We have taken and are continuously monitoring and updating precautions and protocols to ensure the safety of our employees and customers. As an “essential business” we are allowed to continue operational activity and construction projects with appropriate safety precautions, personal protective equipment and social distancing restrictions in place. We have taken steps to assure our customers that disconnections for non-payment will be temporarily suspended. We are also working with our suppliers to understand the potential impacts to our supply chain; if material negative impacts are identified, we will work to mitigate them. This is a rapidly evolving situation, and could lead to extended disruption of economic activity in our markets. We will continue to monitor developments affecting our employees, customers, suppliers and shareholders, and will take additional precautions as warranted to comply with the CDC, state and local requirements and recommendations to protect our employees, customers and the communities we serve.
As a result of these measures, we are incurring costs associated with crisis management and the pandemic response including restrictions put in place by the state PSCs on utility disconnects for non-payment, technology costs incurred to expand work from home capabilities, additional sanitation and cleaning costs and costs of acquiring personal protective equipment as well as other expenses. We are tracking and analyzing whether these costs qualify for cost recovery and could be classified as regulatory assets.
In April 2020, the Maryland PSC issued an order that authorized utilities to establish a regulatory asset to record prudently incurred incremental costs related to COVID-19, for the projectperiod beginning on March 16, 2020. The Maryland PSC found that the creation of a regulatory asset for COVID-19 related expenses will facilitate the recovery of those costs prudently incurred to serve customers during this period, and that the deferral of such costs is appropriate because the current catastrophic health emergency is outside the control of the utility and is a non-recurring event. We will continue to monitor similar orders issued by the FERC or the respective PSCs in the third quarterour service territories to identify additional relief which could be available to our regulated businesses.
Summary TCJA Table
The following table summarizes the TCJA impact on our regulated businesses:businesses as of March 31, 2020:
|
| | | | | |
| | Regulatory Liabilities related to ADITAccumulated Deferred Income Taxes ("ADIT") | | |
Operation and Regulatory Jurisdiction | | Amount (in thousands) | Status | | Status of Customer Rate impact related to lower federal corporate income tax rate |
Eastern Shore (FERC) | | $34,190 | Will be addressed in Eastern Shore's next rate case filing. | | Implemented one-time bill credit (totaling $0.9 million) in April 2018. Customer rates were adjusted in April 2018. |
Delaware Division (Delaware PSC) | | $12,90612,818 | PSC approved amortization of ADIT in January 2019. | | Implemented one-time bill credit (totaling $1.5 million) in April 2019. Customer rates were adjusted in March 2019. |
Maryland Division (Maryland PSC) | | $4,1434,058 | PSC approved amortization of ADIT in May 2018. | | Implemented one-time bill credit (totaling $0.4 million) in July 2018. Customer rates were adjusted effectivein May 1, 2018. |
Sandpiper Energy (Maryland PSC) | | $3,7903,752 | PSC approved amortization of ADIT in May 2018. | | Implemented one-time bill credit (totaling $0.6 million) in July 2018 -2018. Customer rates were adjusted effectivein May 1, 2018. |
Chesapeake Florida Gas Division/Central Florida Gas (Florida PSC) | | $8,3188,274 | PSC issued order authorizing amortization and retention of net ADIT liability by the Company in February 2019. | | Florida PSC's final order was issued in February 2019. Excluding GRIP, tax savings arising from the TCJA rate reduction will be retained by the Company.
GRIP: Tax savings for 2018 will be refunded to customers in 2020 through the annual GRIP cost recovery mechanism. Future customer GRIP surcharges will be adjusted to reflect tax savings associated with TCJA.
|
FPU Natural Gas (excludes Fort Meade and Indiantown) (Florida PSC) | | $19,173 | Same treatment on a net basis as Chesapeake Florida Gas Division (above).
| | Same treatment on a net basis as Chesapeake Florida Gas Division (above).
|
FPU Fort Meade and Indiantown Divisions | | $29819,209 | Same treatment on a net basis as Chesapeake Florida Gas Division (above). | | Same treatment on a net basis as Chesapeake Florida Gas Division (above). |
FPU Fort Meade and Indiantown Divisions | | $291 | Same treatment on a net basis as Chesapeake Florida Gas Division (above). | | Tax rate reduction: The impact was immaterial for the divisions.
GRIP (Applicable to Fort Meade division only): Same treatment as Chesapeake Florida Gas Division (above).
|
FPU Electric (Florida PSC) | | $5,8585,704 | In January 2019, PSC issued order approving amortization of ADIT through purchased power cost recovery, storm reserve and rates. | | TCJA benefit will flow backis provided to its customers through a combination of reductions to the fuel cost recovery rate, base rates, as well as application to the storm reserve over the next several years. |
5.6. Environmental Commitments and Contingencies
We are subject to federal, state and local laws and regulations governing environmental quality and pollution control. These laws and regulations require us to remove or remediate, at current and former operating sites, the effect on the environment of the disposal or release of specified substances.
MGP Sites
We have participated in the investigation, assessment or remediation of, and have exposures at, seven7 former MGP sites. We have received approval for recovery of clean-up costs in rates for sites located in Salisbury, Maryland; Seaford, Delaware; and Winter Haven, Key West, Pensacola, Sanford and West Palm Beach, Florida. We are also in discussions with the Maryland Department of Environment ("MDE") regarding another former MGP site located in Cambridge, Maryland.
As of June 30, 2019March 31, 2020 and December 31, 2018,2019, we had approximately $8.5$7.6 million and $9.1$8.0 million, respectively, in environmental liabilities related to FPU’s MGP sites in Key West, Pensacola, Sanford and West Palm Beach. FPU has approval to recover, from insurance and from customers through customer rates, up to $14.0 million of its environmental costs related to its MGP sites. As of June 30, 2019March 31, 2020 and December 31, 2018,2019, we had recovered approximately $11.7$12.1 million and $11.5$11.9 million, respectively, leaving approximately $2.3$1.9 million and $2.5$2.1 million, respectively, in regulatory assets for future recovery of environmental costs from FPU’s customers.
Environmental liabilities for our MGP sites are recorded on an undiscounted basis based on the estimate of future costs provided by independent consultants. We continue to expect that all costs related to environmental remediation and related activities, including any potential future remediation costs for which we do not currently have approval for regulatory recovery, will be recoverable from customers through rates.
The following is a summary of our remediation status and estimated costs to implement clean-up of our key MGP sites:
|
| | |
MGP Site (Jurisdiction) | Status | Estimated Cost to Clean up (Expect to Recover through Rates with Customers) |
West Palm Beach (Florida) | Remedial actions approved by the Florida Department of Environmental Protection have been implemented on the east parcel of the site. We expect to implement similar remedial actions on other remaining portions, including the anticipated demolition of buildings on the site's west parcel in 2019.2020. | Between $4.5 million to $15.4 million, including costs associated with the relocation of FPU’s operations at this site, which is necessary to implement the remedial plan, and any potential costs associated with future redevelopment of the properties. |
Sanford (Florida) | In March 2018, the United States Environmental Protection Agency ("EPA") approved a "site-wide ready for anticipated use" status, which is the final step before delisting a site. Construction has been completed and restrictive covenants are in place to ensure protection of human health. The only remaining activity is long-term groundwater monitoring. | FPU's remaining remediation expenses, including attorneys' fees and costs, are anticipated to be immaterial. |
Winter Haven (Florida) | Remediation is ongoing. | Not expected to exceed $0.4 million, which includes costs of implementing institutional controls at the site.million. |
Seaford (Delaware) | Conducted investigations of on-site and off-site impacts in the vicinity of the site, from 2014 through 2018, and submitted the findings to Delaware Department of Natural Resources and Environmental Control ("DNREC") in a March 2019 report. An interim action involving air-sparging/vapor extraction to mitigate on-site impact will beis being implemented, afterin accordance with the DNREC-approved Work Plan submitted in June 2019 is approved by DNREC.Plan. | Between $0.2 million and $0.5 million. |
Cambridge (Maryland) | Currently in discussions with the MDE. | Unable to estimate. |
| |
6.7. | Other Commitments and Contingencies |
Natural Gas and Electric
OurIn March 2020, our Delmarva Peninsula natural gas distribution operations haveentered into asset management agreements with a third party to manage their natural gas transportation and storage capacity. The agreements are effective as of April 1, 2020 and expire on March 31, 2023. Previously, our Delmarva Peninsula natural gas distribution operations had asset management agreements with PESCO to manage their natural gas transportation and storage capacity. The agreements were effective asSee Note 3, Acquisitions and Divestitures for additional details regarding the sale of April 1, 2017,PESCO's assets and each has a three-year term, expiring on March 31, 2020.contracts.
In May 2019, FPUour natural gas distribution operations and Eight Flags entered into separate asset management agreements with Emera Energy Services, Inc. to manage their natural gas transportation capacity. The parties entered into short-term agreements for a one-year term beginning July 2019 through July 2020. The parties also entered into long-term agreements for a 10-year term that will commence on or aboutin July 2020, and each has a 10-year term.2020.
Chesapeake Utilities' Florida Division has firm transportation service contracts with Florida Gas Transmission Company ("FGT") and Gulfstream.Gulfstream Natural Gas System, LLC ("Gulfstream"). Pursuant to a capacity release program approved by the Florida PSC, all of the capacity under these agreements has been released to various third parties, including PESCO.parties. Under the terms of these capacity release agreements, Chesapeake Utilities is contingently liable to FGT and Gulfstream should any party, that acquired the capacity through release, fail to pay the capacity charge. To date, Chesapeake Utilities has not been required to make a payment resulting from this contingency.
FPU’s electric supply contracts require FPU to maintain an acceptable standard of creditworthiness based on specific financial ratios. FPU’s agreement with Florida Power & Light Company requires FPU to meet or exceed a debt service coverage ratio of 1.25 times based on the results of the prior 12 months. If FPU fails to meet this ratio, it must provide an irrevocable letter of credit or pay all amounts outstanding under the agreement within five business days. FPU’s electric supply agreement with Gulf Power requires FPU to meet the following ratios based on the average of the prior six6 quarters: (a) funds from operations interest coverage ratio (minimum of two2 times), and (b) total debt to total capital (maximum of 65 percent). If FPU fails to meet the requirements, it has to provide the supplier a written explanation of actions taken, or proposed to be taken, to become compliant. Failure to comply with the ratios specified in the Gulf Power agreement could also result in FPU having to provide an irrevocable letter of credit. As of June 30, 2019,March 31, 2020, FPU was in compliance with all of the requirements of its fuel supply contracts.
Eight Flags provides electricity and steam generation services through its CHP plant located on Amelia Island, Florida. In June 2016, Eight Flags began selling power generated from the CHP plant to FPU pursuant to a 20-year power purchase agreement for distribution to our electric customers. In July 2016, Eight Flags also started selling steam, pursuant to a separate 20-year contract, to the landowner on which the CHP plant is located. The CHP plant is powered by natural gas transported by FPU through its distribution system and Peninsula Pipeline through its intrastate pipeline.
Corporate Guarantees
We have issuedThe Board of Directors has authorized us to issue corporate guarantees to certain vendorssecuring obligations of our subsidiaries primarily PESCO. These corporateand to obtain letters of credit securing our subsidiaries' obligations. The maximum authorized liability under such guarantees provide for the paymentand letters of natural gas purchases in the event that PESCO defaults. PESCO has never defaulted on its obligations to pay its suppliers. The liabilities for these purchases are recorded when incurred.credit as of March 31, 2020 was $37.0 million. The aggregate amount guaranteed at June 30, 2019March 31, 2020 was approximately $68.1$17.9 million with the guarantees expiring on various dates through December 31,March 2, 2021. The amounts related to PESCO were $6.8 million and are expected to be terminated or transferred in the second quarter of 2020. See Note 3, Acquisitions and Divestitures, for additional details on the sale of assets and contracts for PESCO.
Chesapeake Utilities also guarantees the payment of FPU’s first mortgage bonds. The maximum exposure under this guarantee is the outstanding principal plus accrued interest balances. The outstanding principal balances of FPU’s first mortgage bonds approximate their carrying values (see Note 1415, Long-Term Debt, for further details).
As of June 30, 2019,March 31, 2020, we have issued letters of credit totaling approximately $7.0$5.4 million related to the electric transmission services for FPU's electric division, the firm transportation service agreement between TETLP and our Delaware and Maryland divisions the payment of natural gas purchases for PESCO, and to our current and previous primary insurance carriers. These letters of credit have various expiration dates through April 5,October 22, 2020. There have been no draws on these letters of credit as of June 30, 2019.March 31, 2020. We do not anticipate that the counterparties will draw upon these letters of credit, and we expect that they will be renewed to the extent necessary in the future.
The outstanding letters of credit as of March 31, 2020 also included those issued to support the operations of our divested subsidiary, PESCO. As a result of the sale of assets and contracts for PESCO, letters of credit associated with PESCO are expected to be terminated or transferred in the second quarter of 2020.
We use the management approach to identify operating segments. We organize our business around differences in regulatory environment and/or products or services, and the operating results of each segment are regularly reviewed by the chief operating decision maker (our Chief Executive Officer) in order to make decisions about resources and to assess performance.
Our operations are entirely domestic and are comprised of two2 reportable segments:
| |
• | Regulated Energy. Includes energy distribution and transmission services (natural gas distribution, natural gas transmission and electric distribution operations). All operations in this segment are regulated, as to their rates and services, by the PSC having jurisdiction in each operating territory or by the FERC in the case of Eastern Shore. |
| |
• | Unregulated Energy. Includes energy transmission, energy generation (the operations of our Eight Flags' CHP plant), propane operations, the newand our mobile compressed natural gas distribution and pipeline solutions subsidiary, and other energy services (natural gas marketing and related services). These operations are unregulated as to their rates and services.subsidiary. Also included in this segment are other unregulated energy services, such as energy-related merchandise sales and heating, ventilation and air conditioning, plumbing and electrical services. These operations are unregulated as to their rates and services. Effective in the third quarter of 2019, the natural gas marketing and related services subsidiary (PESCO), previously reported in the Unregulated Energy segment, are reflected in discontinued operations. See Note 3, Acquisitions and Divestitures for additional details of the sale of PESCO. |
The remainder of our operations are presented as “Other businesses and eliminations,” which consists of unregulated subsidiaries that own real estate leased to Chesapeake Utilities, as well as certain corporate costs not allocated to other operations.
The following table presents financial information about our reportable segments:
| | | | Three Months Ended | | Six Months Ended | | Three Months Ended |
| | June 30, | | June 30, | | March 31, |
| | 2019 | | 2018 | | 2019 | | 2018 | | 2020 | | 2019 |
(in thousands) | | | | | | | | | | | | |
Operating Revenues, Unaffiliated Customers | | | | | | | | | | | | |
Regulated Energy | | $ | 70,719 |
| | $ | 67,731 |
| | $ | 171,458 |
| | $ | 173,685 |
| | $ | 102,494 |
| | $ | 103,071 |
|
Unregulated Energy | | 60,184 |
| | 68,933 |
| | 187,061 |
| | 202,335 |
| | 50,216 |
| | 57,393 |
|
Total operating revenues, unaffiliated customers | | $ | 130,903 |
| | $ | 136,664 |
| | $ | 358,519 |
| | $ | 376,020 |
| | $ | 152,710 |
| | $ | 160,464 |
|
Intersegment Revenues (1) | | | | | | | | | | | | |
Regulated Energy | | $ | 2,684 |
| | $ | 2,773 |
| | $ | 5,563 |
| | $ | 6,212 |
| | $ | 461 |
| | $ | 547 |
|
Unregulated Energy | | 6,720 |
| | 7,412 |
| | 17,946 |
| | 19,377 |
| | 3,815 |
| | 3,687 |
|
Other businesses | | 132 |
| | 194 |
| | 264 |
| | 387 |
| | 132 |
| | 132 |
|
Total intersegment revenues | | $ | 9,536 |
| | $ | 10,379 |
| | $ | 23,773 |
| | $ | 25,976 |
| | $ | 4,408 |
| | $ | 4,366 |
|
Operating Income | | | | | | | | | | | | |
Regulated Energy | | $ | 18,752 |
| | $ | 14,304 |
| | $ | 47,769 |
| | $ | 41,015 |
| | $ | 27,888 |
| | $ | 29,741 |
|
Unregulated Energy | | (1,348 | ) | | 490 |
| | 13,628 |
| | 14,174 |
| | 13,841 |
| | 15,258 |
|
Other businesses and eliminations | | 32 |
| | (1,546 | ) | | 32 |
| | (1,535 | ) | | 384 |
| | (875 | ) |
Operating income | | 17,436 |
| | 13,248 |
| | 61,429 |
| | 53,654 |
| | 42,113 |
| | 44,124 |
|
Other expense, net | | (316 | ) | | (262 | ) | | (361 | ) | | (194 | ) | |
Other income (expense), net | | | 3,318 |
| | (57 | ) |
Interest charges | | 5,655 |
| | 3,881 |
| | 11,365 |
| | 7,545 |
| | 5,814 |
| | 5,628 |
|
Income before Income Taxes | | 11,465 |
| | 9,105 |
| | 49,703 |
|
| 45,915 |
| |
Income taxes | | 3,161 |
| | 2,718 |
| | 12,735 |
| | 12,674 |
| |
Income from Continuing Operations before Income Taxes | | | 39,617 |
| | 38,439 |
|
Income Taxes on Continuing Operations | | | 10,591 |
| | 9,625 |
|
Income from Continuing Operations | | | 29,026 |
| | 28,814 |
|
Loss from Discontinued Operations, net of tax | | | (96 | ) | | (150 | ) |
Net Income | | $ | 8,304 |
| | $ | 6,387 |
| | $ | 36,968 |
|
| $ | 33,241 |
| | $ | 28,930 |
| | $ | 28,664 |
|
| | | | | |
(1) All significant intersegment revenues are billed at market rates and have been eliminated from consolidated operating revenues.
| | (in thousands) | | June 30, 2019 | | December 31, 2018 | | March 31, 2020 | | December 31, 2019 |
Identifiable Assets | | | | | | | | |
Regulated Energy segment | | $ | 1,349,422 |
| | $ | 1,345,805 |
| | $ | 1,448,114 |
| | $ | 1,434,066 |
|
Unregulated Energy segment | | 284,888 |
| | 306,045 |
| | 295,470 |
| | 296,810 |
|
Other businesses and eliminations | | 46,732 |
| | 41,821 |
| | 44,635 |
| | 52,322 |
|
Total identifiable assets | | $ | 1,681,042 |
| | $ | 1,693,671 |
| | $ | 1,788,219 |
| | $ | 1,783,198 |
|
Accumulated Other Comprehensive Loss
Defined benefit pension and postretirement plan items, unrealized gains (losses) of our propane swap agreements and natural gas swaps and futures contracts, designated as commodity contracts cash flow hedges, are the components of our accumulated other comprehensive loss. The following tables present the changes in the balance of accumulated other comprehensive (loss)/income as of June 30, 2019March 31, 2020 and 2018.2019. All amounts except the stranded tax reclassification are presented net of tax.
|
| | | | | | | | | | | | |
| | Defined Benefit | | Commodity | | |
| | Pension and | | Contracts | | |
| | Postretirement | | Cash Flow | | |
| | Plan Items | | Hedges | | Total |
(in thousands) | | | | | | |
As of December 31, 2018 | | $ | (5,928 | ) | | $ | (785 | ) | | $ | (6,713 | ) |
Other comprehensive income before reclassifications | | — |
| | 1,000 |
| | 1,000 |
|
Amounts reclassified from accumulated other comprehensive income/(loss) | | 213 |
| | (132 | ) | | 81 |
|
Net current-period other comprehensive income | | 213 |
| | 868 |
| | 1,081 |
|
Prior-year reclassification | | — |
| | (115 | ) | | (115 | ) |
As of June 30, 2019 | | $ | (5,715 | ) | | $ | (32 | ) | | $ | (5,747 | ) |
|
| | | | | | | | | | | | |
| | Defined Benefit | | Commodity | | |
| | Pension and | | Contract | | |
| | Postretirement | | Cash Flow | | |
| | Plan Items | | Hedges | | Total |
(in thousands) | | | | | | |
As of December 31, 2019 | | $ | (4,933 | ) | | $ | (1,334 | ) | | $ | (6,267 | ) |
Other comprehensive income before reclassifications | | — |
| | 895 |
| | 895 |
|
Amounts reclassified from accumulated other comprehensive income (loss) | | 66 |
| | (888 | ) | | (822 | ) |
Net current-period other comprehensive income | | 66 |
| | 7 |
| | 73 |
|
As of March 31, 2020 | | $ | (4,867 | ) | | $ | (1,327 | ) | | $ | (6,194 | ) |
|
| | | | | | | | | | | | |
(in thousands) | | | | | | |
As of December 31, 2017 | | $ | (4,743 | ) | | $ | 471 |
| | $ | (4,272 | ) |
Other comprehensive loss before reclassifications | | — |
| | (1,440 | ) | | (1,440 | ) |
Amounts reclassified from accumulated other comprehensive income/(loss) | | 189 |
| | 712 |
| | 901 |
|
Net prior-period other comprehensive income/(loss) | | 189 |
| | (728 | ) | | (539 | ) |
Stranded tax reclassification to retained earnings | | (1,022 | ) | | 115 |
| | (907 | ) |
As of June 30, 2018 | | $ | (5,576 | ) | | $ | (142 | ) | | $ | (5,718 | ) |
|
| | | | | | | | | | | | |
(in thousands) | | | | | | |
As of December 31, 2018 | | $ | (5,928 | ) | | $ | (785 | ) | | $ | (6,713 | ) |
Other comprehensive income before reclassifications | | — |
| | 3,021 |
| | 3,021 |
|
Amounts reclassified from accumulated other comprehensive income | | 107 |
| | (39 | ) | | 68 |
|
Net prior-period other comprehensive income | | 107 |
| | 2,982 |
| | 3,089 |
|
Prior-year reclassification | |
|
| | (115 | ) | | (115 | ) |
As of March 31, 2019 | | $ | (5,821 | ) | | $ | 2,082 |
| | $ | (3,739 | ) |
The following table presents amounts reclassified out of accumulated other comprehensive loss for the three and six months ended June 30, 2019March 31, 2020 and 2018.2019. Deferred gains or losses for our commodity contractscontract cash flow hedges are recognized in earnings upon settlement.
| | | | Three Months Ended | | Six Months Ended | | Three Months Ended |
| | June 30, | | June 30, | | March 31, |
| | 2019 | | 2018 | | 2019 | | 2018 | | 2020 | | 2019 |
(in thousands) | | | | | | | | | | | | |
Amortization of defined benefit pension and postretirement plan items: | | | | | | | | | | | | |
Prior service credit (1) | | $ | 19 |
| | $ | 19 |
| | $ | 39 |
| | $ | 39 |
| | $ | 19 |
| | $ | 19 |
|
Net loss(1) | | (163 | ) | | (149 | ) | | (328 | ) | | (297 | ) | | (108 | ) | | (163 | ) |
Total before income taxes | | (144 | ) |
| (130 | ) | | (289 | ) |
| (258 | ) | | (89 | ) |
| (144 | ) |
Income tax benefit | | 37 |
| | 36 |
| | 76 |
| | 69 |
| | 23 |
| | 37 |
|
Net of tax | | $ | (107 | ) | | $ | (94 | ) | | $ | (213 | ) |
| $ | (189 | ) | | $ | (66 | ) | | $ | (107 | ) |
Gains and losses on commodity contracts cash flow hedges: | | | | | | | | | | | | |
Propane swap agreements (2) | | $ | 252 |
| | $ | (181 | ) | | $ | 858 |
| | $ | (645 | ) | | $ | 1,227 |
| | $ | 606 |
|
Natural gas swaps (2)(3) | | — |
| | (31 | ) | | 11 |
| | (481 | ) | | — |
| | 11 |
|
Natural gas futures (2)(3) | | (125 | ) | | (161 | ) | | (698 | ) | | 137 |
| | — |
| | (573 | ) |
Total before income taxes | | 127 |
| | (373 | ) | | 171 |
|
| (989 | ) | | 1,227 |
| | 44 |
|
Income tax benefit (expense) | | (34 | ) | | 105 |
| | (39 | ) | | 277 |
| | (339 | ) | | (5 | ) |
Net of tax | | 93 |
| | (268 | ) |
| 132 |
| | (712 | ) | | 888 |
| | 39 |
|
Total reclassifications for the period | | $ | (14 | ) | | $ | (362 | ) |
| $ | (81 | ) | | $ | (901 | ) | | $ | 822 |
| | $ | (68 | ) |
(1) These amounts are included in the computation of net periodic costs (benefits). See Note 910, Employee Benefit Plans, for additional details.
(2) These amounts are included in the effects of gains and losses from derivative instruments. See Note 12,13, Derivative Instruments, for additional details.
(3) PESCO's results for the first quarter of 2019 are reflected as discontinued operations in our condensed consolidated statements of income.
Amortization of defined benefit pension and postretirement plan items is included in other expense, net gains and losses on propane swap agreements, call options and natural gas futures contracts are included in cost of sales in the accompanying condensed consolidated statements of income. The income tax benefit is included in income tax expense in the accompanying condensed consolidated statements of income.
| |
9.10. | Employee Benefit Plans |
Net periodic benefit costs for our pension and post-retirement benefits plans for the three and six months ended June 30,March 31, 2020 and 2019 and 2018 are set forth in the following tables:
| | | | Chesapeake Pension Plan | | FPU Pension Plan | | Chesapeake SERP | | Chesapeake Postretirement Plan | | FPU Medical Plan | | Chesapeake Pension Plan | | FPU Pension Plan | | Chesapeake SERP | | Chesapeake Postretirement Plan | | FPU Medical Plan |
For the Three Months Ended June 30, | | 2019 | | 2018 | | 2019 | | 2018 | | 2019 | | 2018 | | 2019 | | 2018 | | 2019 | | 2018 | |
For the Three Months Ended March 31, | | | 2020 | | 2019 | | 2020 | | 2019 | | 2020 | | 2019 | | 2020 | | 2019 | | 2020 | | 2019 |
(in thousands) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Interest cost | | $ | 104 |
| | $ | 98 |
| | $ | 615 |
| | $ | 592 |
| | $ | 21 |
| | $ | 21 |
| | $ | 9 |
| | $ | 9 |
| | $ | 12 |
| | $ | 13 |
| | $ | 46 |
| | $ | 105 |
| | $ | 518 |
| | $ | 615 |
| | $ | 16 |
| | $ | 21 |
| | $ | 8 |
| | $ | 10 |
| | $ | 10 |
| | $ | 12 |
|
Expected return on plan assets | | (127 | ) | | (138 | ) | | (693 | ) | | (774 | ) | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (42 | ) | | (127 | ) | | (745 | ) | | (693 | ) | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
Amortization of prior service credit | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (19 | ) | | (19 | ) | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (19 | ) | | (19 | ) | | — |
| | — |
|
Amortization of net loss | | 101 |
| | 88 |
| | 129 |
| | 108 |
| | 26 |
| | 25 |
| | 12 |
| | 15 |
| | — |
| | — |
| | 65 |
| | 101 |
| | 135 |
| | 129 |
| | 5 |
| | 26 |
| | 12 |
| | 12 |
| | — |
| | — |
|
Net periodic cost (benefit) | | 78 |
| | 48 |
| | 51 |
| | (74 | ) | | 47 |
| | 46 |
| | 2 |
| | 5 |
| | 12 |
| | 13 |
| | 69 |
| | 79 |
| | (92 | ) | | 51 |
| | 21 |
| | 47 |
| | 1 |
| | 3 |
| | 10 |
| | 12 |
|
Amortization of pre-merger regulatory asset | | — |
| | — |
| | 191 |
| | 191 |
| | — |
| | — |
| | — |
| | — |
| | 2 |
| | 2 |
| | — |
| | — |
| | — |
| | 190 |
| | — |
| | — |
| | — |
| | — |
| | 2 |
| | 2 |
|
Total periodic cost | | $ | 78 |
| | $ | 48 |
| | $ | 242 |
| | $ | 117 |
| | $ | 47 |
| | $ | 46 |
| | $ | 2 |
| | $ | 5 |
|
| $ | 14 |
| | $ | 15 |
| | $ | 69 |
| | $ | 79 |
| | $ | (92 | ) | | $ | 241 |
| | $ | 21 |
| | $ | 47 |
| | $ | 1 |
| | $ | 3 |
|
| $ | 12 |
| | $ | 14 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Chesapeake Pension Plan | | FPU Pension Plan | | Chesapeake SERP | | Chesapeake Postretirement Plan | | FPU Medical Plan |
For the Six Months Ended June 30, | | 2019 | | 2018 | | 2019 | | 2018 | | 2019 | | 2018 | | 2019 | | 2018 | | 2019 | | 2018 |
(in thousands) | | | | | | | | | | | | | | | | | | | | |
Interest cost | | $ | 209 |
| | $ | 195 |
| | $ | 1,230 |
| | $ | 1,184 |
| | $ | 42 |
| | $ | 42 |
| | $ | 19 |
| | $ | 19 |
| | $ | 24 |
| | $ | 26 |
|
Expected return on plan assets | | (254 | ) | | (276 | ) | | (1,386 | ) | | (1,549 | ) | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
Amortization of prior service credit | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (39 | ) | | (39 | ) | | — |
| | — |
|
Amortization of net loss | | 203 |
| | 176 |
| | 258 |
| | 217 |
| | 52 |
| | 50 |
| | 24 |
| | 30 |
| | — |
| | — |
|
Net periodic cost (benefit) | | 158 |
| | 95 |
| | 102 |
| | (148 | ) | | 94 |
| | 92 |
| | 4 |
| | 10 |
| | 24 |
| | 26 |
|
Amortization of pre-merger regulatory asset | | — |
| | — |
| | 381 |
| | 381 |
| | — |
| | — |
| | — |
| | — |
| | 4 |
| | 4 |
|
Total periodic cost | | $ | 158 |
| | $ | 95 |
| | $ | 483 |
| | $ | 233 |
| | $ | 94 |
| | $ | 92 |
| | $ | 4 |
| | $ | 10 |
| | $ | 28 |
| | $ | 30 |
|
We expect to record immaterial pension and postretirement benefit costs of approximately $1.3 million for 2019. Included in these costs is approximately $0.6 million related to continued amortization of the FPU pension regulatory asset, which represents the portion attributable to FPU’s regulated energy operations for the changes in funded status that occurred, but were not recognized, as part of net periodic benefit costs prior to the FPU merger in 2009. This was deferred as a regulatory asset by FPU prior to the merger, to be recovered through rates pursuant to a previous order by the Florida PSC.2020. The unamortized balance of this regulatory asset was approximately $0.2 million and approximately $0.6 million at June 30, 2019 and December 31, 2018, respectively. Excluding the service cost component, the other components of theour net periodic costs have been recorded or reclassified to other expense, net in the condensed consolidated statements of income.
Pursuant to a Florida PSC order, FPU continues to record, as a regulatory asset, a portion of the unrecognized pension and postretirement benefit costs related to its regulated operations after the FPU merger. The portion of the unrecognized pension and postretirement benefit costs related to FPU’s unregulated operations and Chesapeake Utilities' operations is recorded to accumulated other comprehensive loss.
The following tables present the amounts included in the regulatory asset and accumulated other comprehensive loss that were recognized as components of net periodic benefit cost during the three and six months ended June 30, 2019March 31, 2020 and 2018:2019:
| | For the Three Months Ended June 30, 2019 | | Chesapeake Pension Plan | | FPU Pension Plan | | Chesapeake SERP | | Chesapeake Postretirement Plan | | FPU Medical Plan | | Total | |
For the Three Months Ended March 31, 2020 | | | Chesapeake Pension Plan | | FPU Pension Plan | | Chesapeake SERP | | Chesapeake Postretirement Plan | | FPU Medical Plan | | Total |
(in thousands) | | | | | | | | | | | | | | | | | | | | | | | | |
Prior service credit | | $ | — |
| | $ | — |
| | $ | — |
| | $ | (19 | ) | | $ | — |
| | $ | (19 | ) | | $ | — |
| | $ | — |
| | $ | — |
| | $ | (19 | ) | | $ | — |
| | $ | (19 | ) |
Net loss | | 101 |
| | 129 |
| | 26 |
| | 12 |
| | — |
| | 268 |
| | 65 |
| | 135 |
| | 5 |
| | 12 |
| | — |
| | 217 |
|
Total recognized in net periodic benefit cost | | 101 |
| | 129 |
| | 26 |
| | (7 | ) | | — |
| | 249 |
| | 65 |
| | 135 |
| | 5 |
| | (7 | ) | | — |
| | 198 |
|
Recognized from accumulated other comprehensive loss (1) | | 101 |
| | 24 |
| | 26 |
| | (7 | ) | | — |
| | 144 |
| |
| | | | | | | | | | | | | |
Recognized from accumulated other comprehensive loss/(gain) (1) | | | 65 |
| | 26 |
| | 5 |
| | (7 | ) | | — |
| | 89 |
|
Recognized from regulatory asset | | — |
| | 105 |
| | — |
| | — |
| | — |
| | 105 |
| | — |
| | 109 |
| | — |
| | — |
| | — |
| | 109 |
|
Total | | $ | 101 |
| | $ | 129 |
| | $ | 26 |
| | $ | (7 | ) | | $ | — |
| | $ | 249 |
| | $ | 65 |
| | $ | 135 |
| | $ | 5 |
| | $ | (7 | ) | | $ | — |
| | $ | 198 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | | |
For the Three Months Ended June 30, 2018 | | Chesapeake Pension Plan | | FPU Pension Plan | | Chesapeake SERP | | Chesapeake Postretirement Plan | | FPU Medical Plan | | Total |
(in thousands) | | | | | | | | | | | | |
Prior service credit | | $ | — |
| | $ | — |
| | $ | — |
| | $ | (19 | ) | | $ | — |
| | $ | (19 | ) |
Net loss | | 88 |
| | 108 |
| | 25 |
| | 15 |
| | — |
| | 236 |
|
Total recognized in net periodic benefit cost | | 88 |
| | 108 |
| | 25 |
| | (4 | ) | | — |
| | 217 |
|
Recognized from accumulated other comprehensive loss (1) | | 88 |
| | 21 |
| | 25 |
| | (4 | ) | | — |
| | 130 |
|
Recognized from regulatory asset | | — |
| | 87 |
| | — |
| | — |
| | — |
| | 87 |
|
Total | | $ | 88 |
| | $ | 108 |
| | $ | 25 |
|
| $ | (4 | ) |
| $ | — |
|
| $ | 217 |
|
| | For the Six Months Ended June 30, 2019 | | Chesapeake Pension Plan | | FPU Pension Plan | | Chesapeake SERP | | Chesapeake Postretirement Plan | | FPU Medical Plan | | Total | |
For the Three Months Ended March 31, 2019 | | | Chesapeake Pension Plan | | FPU Pension Plan | | Chesapeake SERP | | Chesapeake Postretirement Plan | | FPU Medical Plan | | Total |
(in thousands) | | | | | | | | | | | | | | | | | | | | | | | | |
Prior service credit | | — |
| | — |
| | — |
| | (39 | ) | | — |
| | (39 | ) | | $ | — |
| | $ | — |
| | $ | — |
| | $ | (19 | ) | | $ | — |
| | $ | (19 | ) |
Net loss | | 203 |
| | 258 |
| | 52 |
| | 24 |
| | — |
| | 537 |
| | 101 |
| | 129 |
| | 26 |
| | 12 |
| | — |
| | 268 |
|
Total recognized in net periodic benefit cost | | 203 |
| | 258 |
| | 52 |
| | (15 | ) | | — |
| | 498 |
| | 101 |
| | 129 |
| | 26 |
| | (7 | ) | | — |
| | 249 |
|
Recognized from accumulated other comprehensive loss (1) | | 203 |
| | 49 |
| | 52 |
| | (15 | ) | | — |
| | 289 |
| |
| | | | | | | | | | | | | |
Recognized from accumulated other comprehensive loss/(gain) (1) | | | 101 |
| | 24 |
| | 26 |
| | (7 | ) | | — |
| | 144 |
|
Recognized from regulatory asset | | — |
| | 209 |
| | — |
| | — |
| | — |
| | 209 |
| | — |
| | 105 |
| | — |
| | — |
| | — |
| | 105 |
|
Total | | $ | 203 |
| | $ | 258 |
| | $ | 52 |
| | $ | (15 | ) | | $ | — |
| | $ | 498 |
| | $ | 101 |
| | $ | 129 |
| | $ | 26 |
|
| $ | (7 | ) |
| $ | — |
|
| $ | 249 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | | |
For the Six Months Ended June 30, 2018 | | Chesapeake Pension Plan | | FPU Pension Plan | | Chesapeake SERP | | Chesapeake Postretirement Plan | | FPU Medical Plan | | Total |
(in thousands) | | | | | | | | | | | | |
Prior service credit | | $ | — |
| | $ | — |
| | $ | — |
| | $ | (39 | ) | | $ | — |
| | $ | (39 | ) |
Net loss | | 176 |
| | 217 |
| | 50 |
| | 30 |
| | — |
| | 473 |
|
Total recognized in net periodic benefit cost | | 176 |
| | 217 |
| | 50 |
| | (9 | ) | | — |
| | 434 |
|
Recognized from accumulated other comprehensive loss (1) | | 176 |
| | 41 |
| | 50 |
| | (9 | ) | | — |
| | 258 |
|
Recognized from regulatory asset | | — |
| | 176 |
| | — |
| | — |
| | — |
| | 176 |
|
Total | | $ | 176 |
| | $ | 217 |
| | $ | 50 |
| | $ | (9 | ) | | $ | — |
| | $ | 434 |
|
(1) See Note 89, Stockholder's Equity.
During the three and six months ended June 30, 2019,March 31, 2020, we contributed approximately $0.1$0.3 million to the FPU Pension Plan. Our contribution to the Chesapeake Pension Plan and approximately $0.4 million and $0.6 million, respectively, to the FPU Pension Plan.was immaterial. We expect to contribute a total of approximately $0.2$0.3 million and approximately $1.2$3.2 million to the Chesapeake Pension Plan and FPU Pension Plan,Plans, respectively, during 2019,2020, which represents the minimum annual contribution payments required. A provision in the Coronavirus Aid, Relief, and Economy Stimulus Act, which was passed by Congress and signed into law by President Trump in March 2020, authorized the deferral of 2020 pension contributions to January 1, 2021. Despite this authorization, we will not defer any of our pension plan contributions to 2021.
The Chesapeake SERP, the Chesapeake Postretirement Plan and the FPU Medical Plan are unfunded and are expected to be paid out of our general funds. Cash benefits paid under the Chesapeake SERP for the six months ended June 30, 2019 were $0.1 million. There were immaterial cash benefits paid for the three months ended June 30, 2019.March 31, 2020 were immaterial. We expect to pay total cash benefits of approximately $0.4$0.2 million under the Chesapeake SERP in 2019.2020. Cash benefits paid under the Chesapeake Postretirement Plan, primarily for medical claims for the sixthree months ended June 30, 2019,March 31, 2020 were immaterial and no cash benefits were paid for medical claims during the second quarter of 2019.immaterial. We estimate that approximately $0.1 million will be paid for such benefits under the Chesapeake Postretirement Plan in 2019.2020. Cash benefits paid under the FPU Medical Plan, primarily for medical claims for the three and six months ended June 30, 2019,March 31, 2020 were immaterial for each period.immaterial. We estimate that approximately $0.1 million will be paid for such benefits under the FPU Medical Plan in 2019.2020.
The investment balances at June 30, 2019March 31, 2020 and December 31, 2018,2019, consisted of the following:
| | (in thousands) | June 30, 2019 | | December 31, 2018 | March 31, 2020 | | December 31, 2019 |
Rabbi trust (associated with the Non-Qualified Deferred Compensation Plan) | $ | 8,795 |
| | $ | 6,689 |
| $ | 7,194 |
| | $ | 9,202 |
|
Investments in equity securities | 26 |
| | 22 |
| 23 |
| | 27 |
|
Total | $ | 8,821 |
| | $ | 6,711 |
| $ | 7,217 |
| | $ | 9,229 |
|
We classify these investments as trading securities and report them at their fair value. For the three months ended June 30,March 31, 2020 and 2019, and 2018, we recorded a net unrealized loss of approximately $1.5 million and a net unrealized gain of approximately $0.4 million and a net unrealized loss of approximately $0.2 million, respectively, in other expense, net in the condensed consolidated statements of income related to these investments. For the six months ended June 30, 2019 and 2018, we recorded a net unrealized gain of approximately $1.1 million and a net unrealized loss of approximately $0.1$0.7 million, respectively, in other expense, net in the condensed consolidated statements of income related to these investments. For the investment in the Rabbi Trust, we also have recorded an associated liability, which is included in other pension and benefit costs in the condensed consolidated balance sheets and is adjusted each period for the gains and losses incurred by the investments in the Rabbi Trust.
| |
11.12. | Share-Based Compensation |
Our non-employee directors and key employees are granted share-based awards through our SICP. We record these share-based awards as compensation costs over the respective service period for which services are received in exchange for an award of equity or equity-based compensation. The compensation cost is based primarily on the fair value of the shares awarded, using the estimated fair value of each share on the date it was granted and the number of shares to be issued at the end of the service period.
The table below presents the amounts included in net income related to share-based compensation expense for the three and six months ended June 30, 2019March 31, 2020 and 2018:2019:
| | | | Three Months Ended | | Six Months Ended | | Three Months Ended |
| | June 30, | | June 30, | | March 31, |
| | 2019 | | 2018 | | 2019 | | 2018 | | 2020 | | 2019 |
(in thousands) | | | | | | | | | | | | |
Awards to non-employee directors | | $ | 157 |
| | $ | 135 |
| | $ | 305 |
| | $ | 269 |
| | $ | 176 |
| | $ | 149 |
|
Awards to key employees | | 452 |
| | 1,190 |
| | 790 |
| | 2,575 |
| | 880 |
| | 338 |
|
Total compensation expense | | 609 |
| | 1,325 |
| | 1,095 |
| | 2,844 |
| | 1,056 |
| | 487 |
|
Less: tax benefit | | (158 | ) | | (363 | ) | | (285 | ) | | (779 | ) | | (276 | ) | | (127 | ) |
Share-based compensation amounts included in net income | | $ | 451 |
| | $ | 962 |
| | $ | 810 |
| | $ | 2,065 |
| | $ | 780 |
| | $ | 360 |
|
Non-employee Directors
Shares granted to non-employee directors are issued in advance of the directors’ service periods and are fully vested as of the date of the grant. We record a deferred expense equal to the fair value of the shares issued and amortize the expense equally over a service period of one year. In May 2019, after the most recent election of directors, each of our continuing non-employee directors received an annual retainer of 751 shares of common stock under the SICP for service as a director through the 2020 Annual Meeting of Stockholders; accordingly, 6,759 shares, with a weighted average fair value of $93.14 per share, were issued and vested in 2019.
In January 2020, a newly appointed member of the Board of Directors received a pro-rated retainer of 254 shares of common stock under the SICP to serve as a non-employee director through the 2020 Annual Meeting of Stockholders. The shares awarded to the non-employee director immediately vested upon issuance in January 2020, had a weighted average fair value of $95.83 per share, and the expense will be recognized over the remaining service period ending on the date of the 2020 Annual Meeting of Stockholders.
|
| | | | | | | |
| | Number of Shares | | Weighted Average Fair Value |
Outstanding—December 31, 2018 | | — |
| | $ | — |
|
Granted | | 6,759 |
| | $ | 93.14 |
|
Vested | | (6,759 | ) | | $ | 93.14 |
|
Outstanding—June 30, 2019 | | — |
| | $ | — |
|
At June 30, 2019,March 31, 2020, there was approximately $0.5$0.1 million of unrecognized compensation expense related to shares granted to non-employee directors. This expense will be recognized over the remaining service period ending April 30, 2020. See Note 1, Summary of Accounting Policies, for additional information regarding ASU 2018-07 and its impact on the accounting for non-employee share-based payments.
Our former President and Chief Executive Officer, Michael P. McMasters, retired as an executive officer on December 31, 2018 but continued as a memberdate of the Board of Directors until the 20192020 Annual Meeting of Stockholders. Mr. McMasters received a pro-rated grant of 276 shares of common stock under the SICP for service as a non-employee director from January 1, 2019 through May 8, 2019. These shares awarded to Mr. McMasters immediately vested upon issuance in January 2019, had a weighted average fair value of $75.70 per share, and were fully expensed as of April 30, 2019.
Key Employees
The table below presents the summary of the stock activity for awards to key employees for the sixthree months ended June 30, 2019:March 31, 2020:
| | | | Number of Shares | | Weighted Average Fair Value | | Number of Shares | | Weighted Average Fair Value |
Outstanding—December 31, 2018 | | 131,741 |
| | $ | 67.24 |
| |
Outstanding—December 31, 2019 | | | 157,817 |
| | $ | 80.28 |
|
Granted | | 45,016 |
| | $ | 91.19 |
| | 65,775 |
| | $ | 92.78 |
|
Vested | | (25,831 | ) | | $ | 67.08 |
| | (35,651 | ) | | $ | 66.48 |
|
Expired | | (15,086 | ) | | $ | 69.28 |
| | (5,302 | ) | | $ | 65.32 |
|
Outstanding—June 30, 2019 | | 135,840 |
| | $ | 74.05 |
| |
Outstanding—March 31, 2020 | | | 182,639 |
| | $ | 87.01 |
|
In June 2018, the Company and a former executive officer entered into a separation agreement and release (the "Separation Agreement"). Pursuant to the Separation Agreement, three awards, representing a total of 14,107 shares of common stock
previously granted to the executive officer under the SICP, immediately vested at the time of separation; 2,569 shares were forfeited, and we recognized $1.1 million as share-based compensation expense.
In February 2019,2020, our Board of Directors granted awards of 45,01665,775 shares of common stock to key employees under the SICP. The shares granted are multi-year awards that will vest at the end of the three-year service period ending December 31, 2021.2022. All of these stock awards are earned based upon the successful achievement of long-term financial results, which comprise market-based and performance-based conditions or targets. The fair value of each performance-based condition or target is equal to the market price of our common stock on the grant date of each award. For the market-based conditions, we used the Black-Scholes pricing modelMonte Carlo valuation to estimate the fair value of each market-based award granted.
In March 2019,2020, upon the election of certain of our executive officers, we withheld shares with a value at least equivalent to each such executive officer’s minimum statutory obligation for applicable income and other employment taxes related to shares that we awarded in February 20192020 for the performance period ended December 31, 2018,2019, remitted the cash to the appropriate taxing authorities, and paid the balance of such awarded shares to each such executive officer. We withheld 7,63510,319 shares, based on the value of the shares on their award date, determined by the average of the high and low prices of our common stock.date. Total combined payments for the employees’ tax obligations to the taxing authorities were approximately $0.7$1.0 million.
At June 30, 2019,March 31, 2020, the aggregate intrinsic value of the SICP awards granted to key employees was approximately $12.9$15.7 million. At June 30, 2019,March 31, 2020, there was approximately $3.8$6.7 million of unrecognized compensation cost related to these awards, which is expected to be recognized as expense from July 1, 2019the remainder of 2020 through December 31, 2021.2022.
Stock Options
We did not have anyThere were no stock options outstanding at June 30, 2019 or 2018, nor were any stock options issued during these periods.the three months ended March 31, 2020 and 2019.
| |
12. | Derivative Instruments |
13. Derivative Instruments
We use derivative and non-derivative contracts to manage risks related to obtaining adequate supplies and the price fluctuations of natural gas, electricity and propane. Our natural gas, electric and propane distribution operations have entered into agreements with suppliers to purchase natural gas, electricity and propane for resale to our customers. Aspire Energy has entered into contracts with producers to secure natural gas to meet its obligations. Purchases under these
contracts typically either do not meet the definition of derivatives or are considered “normal purchases and normal sales” and are accounted for on an accrual basis. Both ourOur propane distribution and natural gas marketing operations may also enter into fair value hedges of their inventory or cash flow hedges of their future purchase commitments in order to mitigate the impact of wholesale price fluctuations. As of June 30, 2019,March 31, 2020, our natural gas and electric distribution operations did not have any outstanding derivative contracts.
PESCO's Derivative Instruments
As discussed in Note 3, Acquisitions and Divestitures, during the fourth quarter of 2019, we sold PESCO's assets and contracts, and therefore, no longer have natural gas futures and contracts recorded in our condensed consolidated financial statements.
Volume of Derivative Activity
As of June 30, 2019,March 31, 2020, the volume of our open commodity derivative contracts were as follows:
|
| | | | | | | | |
Business unit | | Commodity | | Quantity hedged (in millions) | | Designation | | Longest Expiration date of hedge |
PESCO | | Natural gas (Dts) | | 30.6 | | Cash flows hedges | | October 2023 |
PESCO | | Natural gas (Dts) | | 5.6 | | Not designated | | October 2022 |
Sharp | | Propane (gallons) | | 12.115.9 | | Cash flows hedges | | June 2022 |
PESCO entered into natural gas futures contracts associated with the purchase and sale of natural gas to specific customers. We designated and accounted for them as cash flow hedges. The change in fair value of the natural gas futures contracts is recorded as unrealized gain (loss) in other comprehensive income (loss) and later recognized in the statement of income in the same period and in the same line item as the hedged transaction. We expect to reclassify approximately $0.5 million from accumulated other comprehensive loss to earnings during the next 12-month period ended June 30, 2020.
Sharp entered into futures and swap agreements to mitigate the risk of fluctuations in wholesale propane index prices associated with the propane volumes expected to be purchased during the heating season. Under the futures and swap agreements, Sharp will receive the difference between: (i) the index prices (Mont Belvieu prices in August 2018for March 2020 through March 2023)2024), and (ii) the per gallon propane swap prices, to the extent the index prices exceed the contracted prices. If the index prices are lower than the swap prices, Sharp will pay the difference. We designated and accounted for propane swaps as cash flows hedges. The change in the fair value of the swap agreements is recorded as unrealized gain (loss) in
other comprehensive income (loss) and later recognized in the statement of income in the same period and in the same line item as the hedged transaction. We expect to reclassify approximately $1.0$1.5 million from accumulated other comprehensive income (loss)loss to earnings during the next 12-month period ended June 30, 2020.
Balance Sheet Offsetting
PESCO has entered into master netting agreements with counterparties that enable it to net the counterparties' outstanding accounts receivable and payable, which are presented on a net basis in the condensed consolidated balance sheets. The following table summarizes the accounts receivable and payable on a gross and net basis at June 30, 2019 and DecemberMarch 31, 2018:
|
| | | | | | | | | | | | |
| | At June 30, 2019 |
(in thousands) | | Gross amounts | | Amounts offset | | Net amounts |
Accounts receivable | | $ | 2,964 |
| | $ | 927 |
| | $ | 2,037 |
|
Accounts payable | | $ | 10,418 |
| | $ | 927 |
| | $ | 9,491 |
|
|
| | | | | | | | | | | | |
| | At December 31, 2018 |
(in thousands) | | Gross amounts | | Amounts offset | | Net amounts |
Accounts receivable | | $ | 12,368 |
| | $ | 3,834 |
| | $ | 8,534 |
|
Accounts payable | | $ | 24,741 |
| | $ | 3,834 |
| | $ | 20,907 |
|
2021.Broker Margin
Futures exchanges have contract specific margin requirements that require the posting of cash or cash equivalents relating to traded contracts. Margin requirements consist of initial margin that is posted upon the initiation of a position, maintenance margin that is usually expressed as a percent of initial margin, and variation margin that fluctuates based on the daily MTMmark-to-market relative to maintenance margin requirements. We currently maintain separatea broker margin accountsaccount for Sharp, and PESCO. Thewith the balance related to the margin accounts areaccount is as follows:
| | (in thousands) | Balance Sheet Location | | At June 30, 2019 | | At December 31, 2018 | Balance Sheet Location | | March 31, 2020 | | December 31, 2019 |
Sharp | Other Current Assets | | $ | 1,841 |
| | $ | 2,170 |
| Other Current Assets | | $ | 3,111 |
| | $ | 2,317 |
|
PESCO | Other Current Assets | | $ | 1,592 |
| | $ | 2,810 |
| |
Financial Statements Presentation
The following tables present information about the fair value and related gains and losses of our derivative contracts. We did not have any derivative contracts with a credit-risk-related contingency.
As of March 31, 2020 and December 31, 2019, we did not have material fair value hedges. The fair values of the derivative contracts recorded in the condensed consolidated balance sheets as of June 30, 2019March 31, 2020 and December 31, 2018,2019, are as follows:
|
| | | | | | | | | | |
| | Derivative Assets |
| | | | Fair Value As Of |
(in thousands) | | Balance Sheet Location | | June 30, 2019 | | December 31, 2018 |
Derivatives not designated as hedging instruments | | | | | | |
Natural gas futures contracts | | Derivative assets, at fair value | | $ | 2,747 |
| | $ | 4,024 |
|
Derivatives designated as fair value hedges | | | | | | |
Propane put options | | Derivative assets, at fair value | | — |
| | 71 |
|
Derivatives designated as cash flow hedges | | | | | | |
Natural gas futures contracts | | Derivative assets, at fair value | | 7,715 |
| | 9,059 |
|
Propane swap agreements | | Derivative assets, at fair value | | 109 |
| | 11 |
|
Total asset derivatives | | | | $ | 10,571 |
| | $ | 13,165 |
|
|
| | | | | | | | | | |
| | Derivative Assets |
| | | | Fair Value As Of |
(in thousands) | | Balance Sheet Location | | March 31, 2020 | | December 31, 2019 |
Derivatives designated as cash flow hedges | | | | | | |
Propane swap agreements | | Derivative assets, at fair value | | $ | 151 |
| | $ | — |
|
Total asset derivatives | | | | $ | 151 |
| | $ | — |
|
|
| | | | | | | | | | |
| | Liability Derivatives |
| | | | Fair Value As Of |
(in thousands) | | Balance Sheet Location | | June 30, 2019 | | December 31, 2018 |
Derivatives not designated as hedging instruments | | | | | | |
Natural gas futures contracts | | Derivative liabilities, at fair value | | $ | 3,144 |
| | $ | 4,562 |
|
Derivatives designated as cash flow hedges | | | | | | |
Natural gas futures contracts | | Derivative liabilities, at fair value | | 6,663 |
| | 8,705 |
|
Propane swap agreements | | Derivative liabilities, at fair value | | 1,187 |
| | 1,604 |
|
Total liability derivatives | | | | $ | 10,994 |
| | $ | 14,871 |
|
|
| | | | | | | | | | |
| | Derivative Liabilities |
| | | | Fair Value As Of |
(in thousands) | | Balance Sheet Location | | March 31, 2020 | | December 31, 2019 |
Derivatives designated as cash flow hedges | | | | | | |
Propane swap agreements | | Derivative liabilities, at fair value | | $ | 1,986 |
| | $ | 1,844 |
|
Total liability derivatives | | | | $ | 1,986 |
| | $ | 1,844 |
|
The effects of gains and losses from derivative instruments on the condensed consolidated financial statements are as follows: | | | | | | Amount of Gain (Loss) on Derivatives: | | | | Amount of Gain (Loss) on Derivatives: |
| | Location of Gain | | For the Three Months Ended June 30, | | For the Six Months Ended June 30, | | Location of Gain | | For the Three Months Ended March 31, |
(in thousands) | | (Loss) on Derivatives | | 2019 | | 2018 | | 2019 | | 2018 | | (Loss) on Derivatives | | 2020 | | 2019 |
Derivatives not designated as hedging instruments | | | | | | | | | | | |
Natural gas futures contracts | | Cost of sales | | $ | 28 |
| | $ | (128 | ) | | $ | 6 |
| | $ | (2,963 | ) | |
Propane swap agreements | | Cost of sales | | — |
| | (4 | ) | | — |
| | (13 | ) | |
Derivatives designated as cash flow hedges | | | | | | | | | | | | |
Propane swap agreements | | Cost of sales | | 252 |
| | (181 | ) | | 858 |
| | (645 | ) | | Cost of sales | | $ | 1,227 |
| | $ | 606 |
|
Propane swap agreements | | Other comprehensive income (loss) | | (494 | ) | | 106 |
| | 515 |
| | (886 | ) | | Other comprehensive income | | 9 |
| | 1,009 |
|
Natural gas futures contracts | | Cost of sales | | (125 | ) | | (161 | ) | | (698 | ) | | 137 |
| |
Natural gas swap contracts | | Cost of sales | | — |
| | (31 | ) | | 11 |
| | (481 | ) | |
Natural gas swap contracts | | Other comprehensive income (loss) | | (2,463 | ) | | 523 |
| | 763 |
| | 588 |
| | Other comprehensive loss | | — |
| | (59 | ) |
Natural gas futures contracts | | Other comprehensive income (loss) | | (8 | ) | | 861 |
| | (67 | ) | | (871 | ) | | Other comprehensive income | | — |
| | 3,226 |
|
Total | | $ | (2,810 | ) | | $ | 985 |
| | $ | 1,388 |
| | $ | (5,134 | ) | | $ | 1,236 |
| | $ | 4,782 |
|
As of June 30, 2019, the following amounts were recorded in the condensed consolidated balance sheets related to fair value hedges:
|
| | | | | | | | | | | | | |
(in thousands) | | Carrying Amount of Hedged Item | Cumulative Adjustment Included in Carrying Amount of Hedged Item |
Balance Sheet Location of Hedged Items | | At June 30, 2019 | At December 31, 2018 | At June 30, 2019 | At December 31, 2018 |
Inventory | | $ | — |
| $ | 212 |
| $ | — |
| $ | — |
|
| |
13.14. | Fair Value of Financial Instruments |
GAAP establishes a fair value hierarchy that prioritizes the inputs to valuation methods used to measure fair value. The three levels of the fair value hierarchy are the following:
|
| | |
Fair Value Hierarchy | Description of Fair Value Level | Fair Value Technique Utilized |
Level 1 | Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities | Investments - equity securities - The fair values of these trading securities are recorded at fair value based on unadjusted quoted prices in active markets for identical securities.
Investments - mutual funds and other - The fair values of these investments, comprised of money market and mutual funds, are recorded at fair value based on quoted net asset values of the shares.
|
Level 2 | Quoted prices in markets that are not active, or inputs which are observable, either directly or indirectly, for substantially the full term of the asset or liability | Derivative assets and liabilities - - The fair values of forward contracts are measured using market transactions in either the listed or over-the-counter markets. The fair value of the propane put/call options and swap agreements and natural gas futures contracts are measured using market transactions for similar assets and liabilities in either the listed or over-the-counter markets.
|
Level 3 | Prices or valuation techniques requiring inputs that are both significant to the fair value measurement and unobservable (i.e. supported by little or no market activity) | Investments - guaranteed income fund - The fair values of these investments are recorded at the contract value, which approximates their fair value.
|
Financial Assets and Liabilities Measured at Fair Value
The following tables summarize our financial assets and liabilities that are measured at fair value on a recurring basis and the fair value measurements, by level, within the fair value hierarchy as of June 30, 2019March 31, 2020 and December 31, 2018:2019:
| | | | | | Fair Value Measurements Using: | | | | Fair Value Measurements Using: |
As of June 30, 2019 | | Fair Value | | Quoted Prices in Active Markets (Level 1) | | Significant Other Observable Inputs (Level 2) | | Significant Unobservable Inputs (Level 3) | |
As of March 31, 2020 | | | Fair Value | | Quoted Prices in Active Markets (Level 1) | | Significant Other Observable Inputs (Level 2) | | Significant Unobservable Inputs (Level 3) |
(in thousands) | | | | | | | | | | | | | | | | |
Assets: | | | | | | | | | | | | | | | | |
Investments—equity securities | | $ | 26 |
| | $ | 26 |
| | $ | — |
| | $ | — |
| | $ | 23 |
| | $ | 23 |
| | $ | — |
| | $ | — |
|
Investments—guaranteed income fund | | 791 |
| | — |
| | — |
| | 791 |
| | 835 |
| | — |
| | — |
| | 835 |
|
Investments—mutual funds and other | | 8,004 |
| | 8,004 |
| | — |
| | — |
| | 6,359 |
| | 6,359 |
| | — |
| | — |
|
Total investments | | 8,821 |
| | 8,030 |
|
| — |
|
| 791 |
| | 7,217 |
| | 6,382 |
|
| — |
|
| 835 |
|
Derivative assets | | 10,571 |
| | — |
| | 10,571 |
| | — |
| | 151 |
| | — |
| | 151 |
| | — |
|
Total assets | | $ | 19,392 |
|
| $ | 8,030 |
|
| $ | 10,571 |
|
| $ | 791 |
| | $ | 7,368 |
|
| $ | 6,382 |
|
| $ | 151 |
|
| $ | 835 |
|
Liabilities: | | | | | | | | | | | | | | | | |
Derivative liabilities | | $ | 10,994 |
| | $ | — |
| | $ | 10,994 |
| | $ | — |
| | $ | 1,986 |
| | $ | — |
| | $ | 1,986 |
| | $ | — |
|
| | | | | | Fair Value Measurements Using: | | | | Fair Value Measurements Using: |
As of December 31, 2018 | | Fair Value | | Quoted Prices in Active Markets (Level 1) | | Significant Other Observable Inputs (Level 2) | | Significant Unobservable Inputs (Level 3) | |
As of December 31, 2019 | | | Fair Value | | Quoted Prices in Active Markets (Level 1) | | Significant Other Observable Inputs (Level 2) | | Significant Unobservable Inputs (Level 3) |
(in thousands) | | | | | | | | | | | | | | | | |
Assets: | | | | | | | | | | | | | | | | |
Investments—equity securities | | $ | 22 |
| | $ | 22 |
| | $ | — |
| | $ | — |
| | $ | 27 |
| | $ | 27 |
| | $ | — |
| | $ | — |
|
Investments—guaranteed income fund | | 686 |
| | — |
| | — |
| | 686 |
| | 803 |
| | — |
| | — |
| | 803 |
|
Investments—mutual funds and other | | 6,003 |
| | 6,003 |
| | — |
| | — |
| | 8,399 |
| | 8,399 |
| | — |
| | — |
|
Total investments | | 6,711 |
| | 6,025 |
|
| — |
|
| 686 |
| | 9,229 |
| | 8,426 |
|
| — |
|
| 803 |
|
Derivative assets | | 13,165 |
| | — |
| | 13,165 |
| | — |
| | — |
| | — |
| | — |
| | — |
|
Total assets | | $ | 19,876 |
|
| $ | 6,025 |
|
| $ | 13,165 |
|
| $ | 686 |
| | $ | 9,229 |
|
| $ | 8,426 |
|
| $ | — |
|
| $ | 803 |
|
Liabilities: | | | | | | | | | | | | | | | | |
Derivative liabilities | | $ | 14,871 |
| | $ | — |
| | $ | 14,871 |
| | $ | — |
| | $ | 1,844 |
| | $ | — |
| | $ | 1,844 |
| | $ | — |
|
The following table sets forth the summary of the changes in the fair value of Level 3 investments for the sixthree months ended June 30, 2019March 31, 2020 and 2018:2019:
| | | Six Months Ended June 30, | Three Months Ended March 31, |
| 2019 | | 2018 | 2020 | | 2019 |
(in thousands) | | | | | | |
Beginning Balance | $ | 686 |
| | $ | 648 |
| $ | 803 |
| | $ | 686 |
|
Purchases and adjustments | 110 |
| | 54 |
| 9 |
| | 6 |
|
Transfers | — |
| | (24 | ) | 57 |
| | — |
|
Distribution | (12 | ) | | (12 | ) | (38 | ) | | — |
|
Investment income | 7 |
| | 5 |
| 4 |
| | 3 |
|
Ending Balance | $ | 791 |
| | $ | 671 |
| $ | 835 |
| | $ | 695 |
|
Investment income from the Level 3 investments is reflected in other expense, (net) in the condensed consolidated statements of income.
At June 30, 2019,March 31, 2020, there were no non-financial assets or liabilities required to be reported at fair value. We review our non-financial assets for impairment at least on an annual basis, as required.
Other Financial Assets and Liabilities
Financial assets with carrying values approximating fair value include cash and cash equivalents and accounts receivable. Financial liabilities with carrying values approximating fair value include accounts payable and other accrued liabilities and short-term debt. The fair value of cash and cash equivalents is measured using the comparable value in the active market and approximates its carrying value (Level 1 measurement). The fair value of short-term debt approximates the carrying value due to its shortnear-term maturities and because interest rates approximate current market rates (Level 3 measurement).
At June 30, 2019March 31, 2020, long-term debt which includes current maturities had a carrying value of approximately $352.1 million, compared to the estimated fair value of $363.4 million. At December 31, 2018, long-term debt, which includes the current maturities but excluded finance lease obligations andexcludes debt issuance costs, had a carrying value of approximately $327.2$456.6 million, compared to the estimated fair value of $447.8 million. At December 31, 2019, long-term debt, which includes the current maturities but excludes debt issuance costs, had a carrying value of approximately $486.6 million, compared to a fair value of approximately $323.8$505.0 million. The fair value was calculated using a discounted cash flow methodology that incorporates a market interest rate based on published corporate borrowing rates for debt instruments with similar terms and average maturities, and with adjustments for duration, optionality, and risk profile. The valuation technique used to estimate the fair value of long-term debt would be considered a Level 3 measurement.
Our outstanding long-term debt is shown below:
| | | | June 30, | | December 31, | | March 31, | | December 31, |
(in thousands) | | 2019 | | 2018 | | 2020 | | 2019 |
FPU secured first mortgage bonds (1) : | | | | | | | | |
9.08% bond, due June 1, 2022 | | $ | 7,988 |
| | $ | 7,986 |
| | $ | 7,991 |
| | $ | 7,990 |
|
Uncollateralized senior notes: | | | | | | | | |
5.50% note, due October 12, 2020 | | 4,000 |
| | 4,000 |
| | 2,000 |
| | 2,000 |
|
5.93% note, due October 31, 2023 | | 13,500 |
| | 15,000 |
| | 12,000 |
| | 12,000 |
|
5.68% note, due June 30, 2026 | | 20,300 |
| | 23,200 |
| | 20,300 |
| | 20,300 |
|
6.43% note, due May 2, 2028 | | 6,300 |
| | 7,000 |
| | 6,300 |
| | 6,300 |
|
3.73% note, due December 16, 2028 | | 20,000 |
| | 20,000 |
| | 18,000 |
| | 18,000 |
|
3.88% note, due May 15, 2029 | | 50,000 |
| | 50,000 |
| | 50,000 |
| | 50,000 |
|
3.25% note, due April 30, 2032 | | 70,000 |
| | 70,000 |
| | 70,000 |
| | 70,000 |
|
3.48% note, due May 31, 2038 | | 50,000 |
| | 50,000 |
| | 50,000 |
| | 50,000 |
|
3.58% note, due November 30, 2038 | | 50,000 |
| | 50,000 |
| | 50,000 |
| | 50,000 |
|
Term Note due January 21, 2020 | | 30,000 |
| | 30,000 |
| |
3.98% note, due August 20, 2039 | | | 100,000 |
| | 100,000 |
|
2.98% note, due December 20, 2034 | | | 70,000 |
| | 70,000 |
|
Term Note due February 28, 2020 | | 30,000 |
| | — |
| | — |
| | 30,000 |
|
Promissory notes | | — |
| | 26 |
| |
Finance lease obligation | | — |
| | 1,310 |
| |
Less: debt issuance costs | | (564 | ) | | (567 | ) | | (808 | ) | | (822 | ) |
Total long-term debt | | 351,524 |
| | 327,955 |
| | 455,783 |
| | 485,768 |
|
Less: current maturities | | (75,600 | ) | | (11,935 | ) | | (15,600 | ) | | (45,600 | ) |
Total long-term debt, net of current maturities | | $ | 275,924 |
|
| $ | 316,020 |
| | $ | 440,183 |
|
| $ | 440,168 |
|
(1) FPU secured first mortgage bonds are guaranteed by Chesapeake Utilities.
Term Notes
In December 2018, we issued a $30.0 million unsecured term note through PNC Bank N.A. with a maturity date of January 21, 2020. The interest rate at June 30, 2019 and December 31, 2018 was 3.13% and 3.23%, respectively, which equals one-month LIBOR rate plus 75 basis points. In January 2019, we issued a $30.0 million unsecured term note through Branch Banking and Trust Company, with a maturity date of February 28, 2020. The interest rate, at June 30, 2019,This note was 3.19%, which equals the one-month LIBOR rate plus 75 basis points. As of June 30, 2019, these term notes totaling $60.0 million are includedpaid in the current maturities of long-term debt.full in February 2020 utilizing our short-term borrowing facilities.
Shelf Agreements
We have entered into Shelf Agreements with Prudential, MetLife and NYL, whom arewith no party under noany obligation to purchase any unsecured debt. We entered into theThe Prudential Shelf Agreement totaling $150.0 million was entered into in October 2015 and we issued $70.0 million of 3.25%3.25 percent unsecured debt in April 2017. The Prudential Shelf Agreement was then amended in September 2018 to increase the borrowing capacity back up to $150.0 million, and in August 2019, we issued $100.0 million of 3.98 percent unsecured debt. In January 2020, we submitted a request for Prudential accepted our request to purchase $50.0 million of our unsecured debt of $100.0 millionwhich was accepted and confirmed by Prudential. The Shelf Notes will bear interest at an interestthe rate of 3.98%3.00 percent per annum and the proceeds received from the issuance will be used to reduce short-term borrowings under our revolving credit facility, lines of credit and/or to fund capital expenditures. The closing of the issuance of the Shelf Notes is expected to occur on or before August 20, 2019. We entered intoJuly 15, 2020. In April 2020, the Prudential Shelf Agreement was amended to reinstate and increase the available borrowing capacity back to $150.0 million.
The NYL Shelf Agreement totaling $100.0 million was entered into in March 2017 and we issued unsecured debt totaling $100.0 million during 2018. The NYL Shelf Agreement was amended in November 2018 to add incrementalprovide additional borrowing capacity of $50.0 million. In February 2020, we submitted a request for NYL to purchase $40.0 million of our unsecured debt which was accepted and confirmed by NYL. The Shelf Notes will bear interest at the rate of 2.96 percent per annum and the proceeds received from the issuance will be used to reduce short-term borrowings under our revolving credit facility, lines of credit and/or to fund capital expenditures. The closing of the issuance of the Shelf Notes is expected to occur on or before August 14, 2020.
The MetLife Shelf Agreement was entered into in March 2017 and it expired in March 2020. As of June 30, 2019,March 31, 2020, we had not requested that MetLife purchase unsecured senior debt under the MetLife Shelf Agreement, whichAgreement. In April 2020, we entered into in March 2017. The following table summarizes the borrowing information under our Shelf Agreements at June 30, 2019:
agreed to commercial terms with MetLife to provide a new $150.0 million MetLife Shelf Agreement for a three-year term ending March 31, 2023. The MetLife Shelf Agreement will be finalized in May 2020.
|
| | | | | | | | | | | | | | | | |
| | Total Borrowing Capacity | | Less: Amount of Debt Issued | | Less: Unfunded Commitments | | Remaining Borrowing Capacity |
(in thousands) | | | | | | | | |
Shelf Agreement | | | | | | | | |
Prudential Shelf Agreement | | $ | 220,000 |
| | $ | (70,000 | ) | | $ | (100,000 | ) | | $ | 50,000 |
|
MetLife Shelf Agreement | | 150,000 |
| | — |
| | — |
| | 150,000 |
|
NYL Shelf Agreement | | 150,000 |
| | (100,000 | ) | | — |
| | 50,000 |
|
Total | | $ | 520,000 |
| | $ | (170,000 | ) | | $ | (100,000 | ) | | $ | 250,000 |
|
The following table summarizes the available borrowing capacity under our Shelf Agreements and is reflective of activity that occurred subsequent to March 31, 2020:
|
| | | | | | | | | | | | | | | | |
(in thousands) | | Total Borrowing Capacity | | Less: Amount of Debt Issued | | Less: Unfunded Commitments | | Remaining Borrowing Capacity |
Shelf Agreement | | | | | | | | |
Prudential Shelf Agreement (1) | | $ | 220,000 |
| | $ | (170,000 | ) | | $ | (50,000 | ) | | $ | — |
|
NYL Shelf Agreement (2) | | 150,000 |
| | (100,000 | ) | | (40,000 | ) | | 10,000 |
|
Total Shelf Agreements as of March 31, 2020 | | 370,000 |
| | (270,000 | ) | | (90,000 | ) | | 10,000 |
|
| | | | | | | | |
Subsequent amendments / renewals: | | | | | | | | |
Prudential Shelf Agreement (3) | | 150,000 |
| | — |
| | — |
| | 150,000 |
|
MetLife Shelf Agreement (4) | | 150,000 |
| | — |
| | — |
| | 150,000 |
|
Total Shelf Agreements added after March 31, 2020 | | 300,000 |
| | — |
| | — |
| | 300,000 |
|
Total Shelf Agreements as of May 5, 2020 | | $ | 670,000 |
| | $ | (270,000 | ) | | $ | (90,000 | ) | | $ | 310,000 |
|
(1) In January 2020, we requested and Prudential accepted our request to purchase $50.0 million of our unsecured debt.
(2) In February 2020, we requested and NYL accepted our request to purchase $40.0 million of our unsecured debt.
(3) In April 2020, the Prudential Shelf Agreement was amended to reinstate and increase the available borrowing capacity back to $150.0 million.
(4) In April 2020, we agreed to commercial terms with MetLife to provide a new $150.0 million MetLife Shelf Agreement for a three-year term ending March 31, 2023. The MetLife Shelf Agreement will be finalized in May 2020.
The Uncollateralized Senior Notes, Shelf Agreements or Shelf Notes set forth certain business covenants to which we are subject when any note is outstanding, including covenants that limit or restrict our ability, and the ability of our subsidiaries, to incur indebtedness, or place or permit liens and encumbrances on any of our property or the property of our subsidiaries.
| |
15.16. | Short-Term Borrowings |
We are authorized by our Board of Directors to borrow up to $400.0 million of short-term debt, as required, from among our various short-term debt facilities. These facilities are available to provide funds for our short-term cash needs to meet seasonal working capital requirements and to temporarily fund portions of our capital expenditures.
At March 31, 2020 and December 31, 2019, we had $254.3 million and $247.4 million, respectively, of short-term borrowings outstanding at the weighted average interest rates of 2.30 percent and 2.62 percent, respectively. We have an aggregate of $370.0 million in credit lines comprised of 4 unsecured bank credit facilities with 4 financial institutions, with $220.0 million in total available credit, and a Revolver with 5 participating Lenders totaling $150.0 million. All of these facilities expire in October 2020. The following table summarizes our short-term borrowing facilities information at March 31, 2020 and December 31, 2019:
|
| | | | | | | | | | | | | | | | | |
| | | | | Outstanding borrowings at | | |
(in thousands) | Total Facility | | LIBOR Based Interest Rate | | March 31, 2020 | | December 31, 2019 | | Available at March 31, 2020 |
Bank Credit Facility | | | | | | | | | |
Committed revolving credit facility A | $ | 55,000 |
| | plus 0.75 percent | | $ | 55,000 |
| | $ | 55,000 |
| | $ | — |
|
Committed revolving credit facility B | 80,000 |
| | plus 0.75 percent | | 72,389 |
| | 57,150 |
| | 7,611 |
|
Committed revolving credit facility C | 45,000 |
| | plus 0.75 percent | | 35,515 |
| | 42,040 |
| | 9,485 |
|
Committed revolving credit facility D | 40,000 |
| | plus 0.85 percent | | 40,000 |
| | 40,000 |
| | — |
|
Committed revolving credit facility E(2) | 150,000 |
| | plus 1.125 percent | | 50,000 |
| | 50,000 |
| | 100,000 |
|
Total short term credit facilities | $ | 370,000 |
| | | | 252,904 |
| | 244,190 |
| | $ | 117,096 |
|
Book overdrafts(1) | | | | | 1,435 |
| | 3,181 |
| | |
Total short-term borrowing | | | | | $ | 254,339 |
| | $ | 247,371 |
| | |
(1) If presented, these book overdrafts would be funded through the bank revolving credit facilities.
(2) This committed revolving credit facility includes a restriction that our short-term borrowings, excluding any borrowings under the committed revolving credit facility, shall not exceed $350.0 million.
As a result of the uncertainty regarding the length of and depth of the impacts of the COVID-19 pandemic, in April 2020, we received commitments for an additional $50.0 million of short-term debt capacity through two credit facilities that mature on October 31, 2020. These facilities have a commitment fee of 35 basis points with an interest rate of 175 basis points over LIBOR, to the extent we borrow under these facilities. Additionally, we have also agreed to commercial terms for 2 additional short-term credit facilities totaling $45.0 million that mature on October 31, 2020. These credit facilities are expected to be finalized in May 2020.
The availability of funds under our credit facilities is subject to conditions specified in the respective credit agreements, all of which we currently satisfy. These conditions include our compliance with financial covenants and the continued accuracy of representations and warranties contained in these agreements. We are required by the financial covenants in our revolving credit facilities to maintain, at the end of each fiscal year, a funded indebtedness ratio of no greater than 65 percent. As of March 31, 2020, we are in compliance with all of our debt covenants.
In April 2020, we entered into interest rate swaps with notional amounts totaling $70.0 million associated with 2 of our short-term lines of credit for a six-month term beginning April 2020 and terminating in October 2020. The interest rate swaps were entered to hedge the variability in cash flows attributable to changes in the short-term borrowing rates during this period. The respective fixed swap rates will be 0.3875 and 0.275 percent for the period. Our short-term borrowing will be based on the 30-day LIBOR rate. The interest swap will be cash settled monthly as the counter-party will pay us the 30-day LIBOR rate less the fixed rate.
We have entered into lease arrangements for office space, land, equipment, pipeline facilities and warehouses. These leases have been entered into to betterlease arrangements enable us to better conduct our business operations in the regions in which we operate. Office space is leased to provide adequate workspace for all our employees in several locations throughout the Mid-Atlantic, Mid-West and in Florida. We lease land at various locations throughout our service territories to enable us to inject natural gas into underground storage and distribution systems, for bulk storage capacity, for our propane operations and for storage of equipment used in repairs and maintenance of our infrastructure. We lease natural gas compressors to ensure timely and reliable transportation of natural gas to our customers. Additionally, we lease a pipeline to deliver natural gas to an industrial customer in Polk County, Florida. We also lease warehouses to store equipment and materials used in repairs and maintenance for our businesses.
Some of our leases are subject to annual changes in the Consumer Price Index (“CPI”). While lease liabilities are not re-measured as a result of changes to the CPI, changes to the CPI are treated as variable lease payments and recognized in the period in which the obligation for those payments was incurred. A 100-basis-point increase in CPI would not have resulted in immaterialmaterial additional annual lease costs.
Most of our leases include options to renew, with renewal terms that
can extend the lease term from one1 to 25 years or more. The exercise of lease renewal options is at our sole discretion. The amounts disclosed in our condensed consolidated balance sheet at June 30, 2019,March 31, 2020 pertaining to the right of useright-of-use assets and lease liabilities, are measured based on our current expectations of exercising our available renewal options.
Our existing leases are not subject to any restrictions or covenants which preclude our ability to pay dividends, obtain financing or enter into additional leases.
We utilize our incremental borrowing rate, as the basis to calculate the present value of future lease payments, at lease commencement. Our incremental borrowing rate represents the rate that we would have to pay to borrow funds on a collateralized basis over a similar term and in a similar economic environment.
Leases with an initial term of 12 months or less are not recorded on our balance sheet; we recognize lease expense for these leases on a straight-line basis over the lease term.
We have elected not to separate non-lease components from all classes of our existing leases. Non-lease components have been accounted for as part of the single lease component to which they are related.
As of June 30, 2019,March 31, 2020, we have not entered into any leases, which have not yet commenced, that would entitle us to significant rights or create additional obligations. The following table presents information related to our total lease cost included in our condensed consolidated statements of income:
| | | | | | Three Months Ended | | Six Months Ended | | | | Three Months Ended |
| | June 30, | | June 30, | | March 31, |
( in thousands) | | Classification | | 2019 | | 2018 | | 2019 | | 2018 | | Classification | | 2020 | | 2019 |
Operating lease cost (1) | | Operations expense | | $ | 654 |
| | $ | 698 |
| | $ | 1,288 |
| | $ | 1,805 |
| | Operations expense | | $ | 626 |
| | $ | 635 |
|
Finance lease cost: | | | | | | | | | | | | | | | | |
Amortization of lease assets | | Depreciation and amortization | | 249 |
| | 361 |
| | 650 |
| | 719 |
| | Depreciation and amortization | | — |
| | 401 |
|
Interest on lease liabilities | | Interest expense | | 1 |
| | 14 |
| | 5 |
| | 31 |
| | Interest expense | | — |
| | 4 |
|
Net lease cost | | | | $ | 904 |
| | $ | 1,073 |
| | $ | 1,943 |
| | $ | 2,555 |
| | | | $ | 626 |
| | $ | 1,040 |
|
(1) Includes short-term leases and variable lease costs, which are immaterialimmaterial.
The following table presents the balance and classifications of our right of use assets and lease liabilities included in our condensed consolidated balance sheet at June 30,March 31, 2020 and December 31, 2019: | | (in thousands) | | Balance sheet classification | | Amount | | Balance sheet classification | | March 31, 2020 | | December 31, 2019 |
Assets | | | | | | | | | | |
Operating lease assets | | Operating lease right-of-use assets | | $ | 12,404 |
| | Operating lease right-of-use assets | | $ | 11,696 |
| | $ | 11,563 |
|
Total lease assets | | $ | 12,404 |
| | $ | 11,696 |
| | $ | 11,563 |
|
Liabilities | | | | | | |
Current | | | | | | |
Operating lease liabilities | | Other accrued liabilities | | $ | 1,704 |
| | Other accrued liabilities | | $ | 1,608 |
| | $ | 1,705 |
|
Noncurrent | | | | | | |
Operating lease liabilities | | Operating lease - liabilities | | 10,710 |
| | Operating lease - liabilities | | 10,165 |
| | 9,896 |
|
Total lease liabilities | | | | $ | 12,414 |
| | | | $ | 11,773 |
| | $ | 11,601 |
|
The following table presents our weighted-average remaining lease terms and weighted-average discount rates for our operating and financing leases at June 30,March 31, 2020 and December 31, 2019: |
| | | |
| | At June 30, 2019 |
Weighted-average remaining lease term (in years)
| | |
Operating leases | | 9.13 |
|
Weighted-average discount rate | | |
Operating leases | | 3.8 | % |
|
| | | | | | |
| | March 31, 2020 | | December 31, 2019 |
Weighted-average remaining lease term (in years) | | | | |
Operating leases | | 8.75 |
| | 8.88 |
|
Weighted-average discount rate | | | | |
Operating leases | | 3.8 | % | | 3.8 | % |
The following table presents additional information related to cash paid for amounts included in the measurement of lease liabilities included in our condensed consolidated statements of cash flows as of June 30, 2019March 31, 2020 and June 30, 2018:2019:
| | | | Six Months Ended | | Three Months Ended |
| | June 30, | | March 31, |
(in thousands) | | 2019 | | 2018 | | 2020 | | 2019 |
Operating cash flows from operating leases | | $ | 1,100 |
| | $ | 1,715 |
| | $ | 527 |
| | $ | 537 |
|
Operating cash flows from finance leases | | $ | 5 |
| | $ | 31 |
| | $ | — |
| | $ | 4 |
|
Financing cash flows from finance leases | | $ | 650 |
| | $ | 719 |
| | $ | — |
| | $ | 401 |
|
The following table presents the future undiscounted maturities of our operating and financing leases at June 30, 2019March 31, 2020 and for each of the next five years and thereafter:
| | (in thousands) | | Operating Leases (1) | | Finance Leases | | Total | | Operating Leases (1) |
Remainder of 2019 | | $ | 1,089 |
| | $ | — |
| | $ | 1,089 |
| |
2020 | | 2,091 |
| | — |
| | 2,091 |
| |
Remainder of 2020 | | | $ | 1,545 |
|
2021 | | 1,852 |
| | — |
| | 1,852 |
| | 2,010 |
|
2022 | | 1,691 |
| | — |
| | 1,691 |
| | 1,916 |
|
2023 | | 1,695 |
| | — |
| | 1,695 |
| | 1,852 |
|
2024 | | 1,451 |
| | — |
| | 1,451 |
| | 1,597 |
|
2025 | | | 1,363 |
|
Thereafter | | 4,916 |
| | — |
| | 4,916 |
| | 3,787 |
|
Total lease payments | | $ | 14,785 |
| | $ | — |
| | $ | 14,785 |
| | $ | 14,070 |
|
Less: Interest | | 2,371 |
| | — |
| | 2,371 |
| | 2,297 |
|
Present value of lease liabilities | | $ | 12,414 |
| | $ | — |
| | 12,414 |
| | $ | 11,773 |
|
(1) Operating lease payments include $3.9$4.1 million related to options to extend lease terms that are reasonably certain of being exercised.
The following table presents future minimum lease payments for our operating leases at December 31, 2018 under ASC 840 and is being presented for comparative purposes:
|
| | | | | | | | | | | | | | |
Year(s) | | 2019 | | 2020 | | 2021 | | 2022 | | 2023 | | Thereafter | | Total |
(in thousands) | | | | | | | | | | | | | | |
Expected payments | | $2,349 | | $1,998 | | $1,761 | | $1,689 | | $1,642 | | $5,398 | | $14,837 |
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Management’s Discussion and Analysis of Financial Condition and Results of Operations is designed to provide a reader of the financial statements with a narrative report on our financial condition, results of operations and liquidity. This discussion and analysis should be read in conjunction with the attached unaudited condensed consolidated financial statements and notes thereto and our Annual Report on Form 10-K for the year ended December 31, 2018,2019, including the audited consolidated financial statements and notes thereto.
Safe Harbor for Forward-Looking Statements
We make statements in this Quarterly Report on Form 10-Q that do not directly or exclusively relate to historical facts. Such statements are “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. One can typically identify forward-looking statements by the use of forward-looking words, such as “project,” “believe,” “expect,” “anticipate,” “intend,” “plan,” “estimate,” “continue,” “potential,” “forecast” or other similar words, or future or conditional verbs such as “may,” “will,” “should,” “would” or “could.” These statements represent our intentions, plans, expectations, assumptions and beliefs about future financial performance, business strategy, projected plans and objectives of the Company. Forward-looking statements speak only as of the date they are made or as of the date indicated and we do not undertake any obligation to update forward-looking statements as a result of new information, future events or otherwise. These statements are subject to many risks, uncertainties and other important factors that could cause actual future results to differ materially from those expressed in the forward-looking statements. In addition to the risk factors described under Item 1A, Risk Factors in our 20182019 Annual Report on Form 10-K, and Item 1A, Risk Factors, in this Quarterly Report on Form 10-Q, such factors include, but are not limited to:
• state and federal legislative and regulatory initiatives that affect cost and investment recovery, have an impact on rate structures, and affect the speed and the degree to which competition enters the electric and natural gas industries;
• the outcomes of regulatory, environmental and legal matters, including whether pending matters are resolved within current estimates and whether the related costs are adequately covered by insurance or recoverable in rates;
• the impact of climate change, including the impact of greenhouse gas emissions or other legislation or regulations intended to address climate change;
the impact of significant changes to current tax regulations and rates;
• the timing of certification authorizations associated with new capital projects and the ability to construct facilities at or below estimated costs;
• changes in environmental and other laws and regulations to which we are subject and environmental conditions of property that we now, or may in the future, own or operate;
• possible increased federal, state and local regulation of the safety of our operations;
• the inherent hazards and risks involved in transporting and distributing natural gas and electricity;
the economy in our service territories or markets, the nation, and worldwide, including the impact of economic conditions (which we do not control)control ) on demand for electricity, natural gas, propane or other fuels;
• risks related to cyber-attacks or cyber-terrorism that could disrupt our business operations or result in failure of information technology systems;systems or result in the loss or exposure of confidential or sensitive customer, employee or Company information;
• theadverse weather and other natural phenomena,conditions, including the economic, operational and other effects of hurricanes, ice storms and other damaging weather events;
• customers' preferred energy sources;
• industrial, commercial and residential growth or contraction in our markets or service territories;
• the effect of competition on our businesses;businesses from other energy suppliers and alternative forms of energy;
• the timing and extent of changes in commodity prices and interest rates;
• the effect of spot, forward and future market prices on our various energy businesses;
• the extent of our success in connecting natural gas and electric supplies to transmission systems, establishing and maintaining key supply sources; and expanding natural gas and electric markets;
• the creditworthiness of counterparties with which we are engaged in transactions;
• the capital-intensive nature of our regulated energy businesses;
•our ability to access the results of financing efforts,credit and capital markets to execute our business strategy, including our ability to obtain financing on favorable terms, which can be affected by various factors, including credit ratings and general economic conditions;
• the ability to successfully execute, manage and integrate a merger, acquisition or divestiture of assets or businesses and the related regulatory or other conditions associated with the merger, acquisition or divestiture;
• the impact on our costs and funding obligations, under our pension and other post-retirement benefit plans, of potential downturns in the financial markets, lower discount rates, and costs associated with health care legislation and regulation;
• the ability to continue to hire, train and retain appropriately qualified personnel; and
• the effect of accounting pronouncements issued periodically by accounting standard-setting bodies.bodies; and
risks related to the outbreak of a pandemic, including the duration and scope of the pandemic and the corresponding impact on our supply chains, our personnel, our contract counterparties, general economic conditions and growth, and the financial markets.
Introduction
We are an energy delivery company engaged in the distribution of natural gas, propane and electricity; the transmission of natural gas; the generation of electricity and steam, and in providing related services to our customers.
Our strategy is focused on growing earnings from a stable utility foundation and investing in related businesses and services that provide opportunities for returns greater than traditional utility returns. We are focused on identifying and developing opportunities across the energy value chain, with emphasis on midstream and downstream investments that are accretive to earnings per share and consistent with our long-term growth strategy.
|
|
Our strategy is to consistently produce industry-leadingindustry leading total shareholder returnsreturn by profitably investing capital into opportunities that leverage our skills and expertise in energy distribution and transmission to achieve high levels of service and growth. The key elements of our strategy include: • capital investment in growth opportunities that generate our target returns;• expanding our energy distribution and transmission operations within our existing service areas as well as into new geographic areas;• providing new services in our current service areas;• expanding our footprint in potential growth markets through strategic acquisitions;acquisitions that complement our businesses;• entering new energy markets and businesses that complement our existing operations and growth strategy; and• operating as a customer-centric full-service energy supplier/partner/provider, ofwhile providing safe and reliable service.Our employees strive to build meaningful connections that generate opportunities to grow our businesses, develop new markets, and enrich the communities in which we live, work and serve.
|
Due to the seasonality of our business, results for interim periods are not necessarily indicative of results for the entire fiscal year. Revenue and earnings are typically greater during the first and fourth quarters, when consumption of energy is normally highest due to colder temperatures.
The following discussions and those later in the document on operating income and segment results include the use of the term “gross margin," which is determined by deducting the cost of sales from operating revenue. Cost of sales includes the purchased cost of natural gas, electricity and propane and the cost of labor spent on direct revenue-producing activities, and excludes depreciation, amortization and accretion. Gross margin should not be considered an alternative to operating income or net income, which are determined in accordance with GAAP. We believe 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 us under our allowed rates for regulated energy operations and under our competitive pricing structures for unregulated energy operations. Our management uses gross margin in measuring our business units’ performance and has historically analyzed and reported gross margin information publicly. Other companies may calculate gross margin in a different manner.
Earnings per share information is presented for continuing operations on a diluted basis, unless otherwise noted.
Results of Operations for the Three and Six Months Ended June 30, 2019March 31, 2020
Overview
Chesapeake Utilities is a Delaware corporation formed in 1947. We are a diversified energy company engaged, through our operating divisions and subsidiaries, in regulated energy, unregulated energy and other businesses. We operate primarily on the Delmarva Peninsula and in Florida, Pennsylvania and Ohio and provide natural gas distribution transmission, and marketing;transmission; electric distribution and generation; propane operations; steam generation; and other energy-related services.
In the fourth quarter of 2019, we completed the sale of the assets and contracts of PESCO. As a result, PESCO’s results for all periods presented have been separately reported as discontinued operations.
On March 13, 2020, the 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 have 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 significantly impacted economic conditions in the United States, and the economic impact is expected to continue as long as the social distancing restrictions remain in place. We are considered an “essential business,” which allows us to continue operational activities and construction projects while the social distancing restrictions remain in place. In response to the COVID-19 pandemic and related restrictions, we have implemented our 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 to reduce the spread of COVID-19. For the first quarter of 2020, the COVID-19 impact on our results of operations or financial position was immaterial. Any future impact on our results of operations, liquidity, or financial position from COVID-19, particularly from continued social distancing and other restrictions recommended or required by federal, state and local authorities, cannot be estimated at this time. We are committed to communicating timely updates and will continue to monitor developments affecting our employees, customers, suppliers and shareholders and take additional precautions as warranted to operate safely and to comply with the CDC, state and local requirements in order to protect our employees, customers and the communities we serve.
Operational Highlights
Our net income for the quarter ended June 30, 2019March 31, 2020 was $8.3$28.9 million, or $0.50compared to $28.7 million for the same quarter of 2019. Our earnings per share. This represents an increase of $1.9 million, or $0.11share for the quarter ended March 31, 2020 increased $0.02 to $1.76 per share, compared to netthe same quarter of 2019.
Our income of $6.4from continuing operations for the quarter ended March 31, 2020 was $29.0 million, or $0.39 per share, reportedcompared to $28.8 million for the same quarter in 2018.of 2019. Our earnings per share from continuing operations for the quarter ended March 31, 2020 increased $0.02 to $1.77 per share, compared to the same quarter of 2019. Operating income increaseddecreased by $4.2$2.0 million for the three monthsquarter ended June 30, 2019,March 31, 2020, compared to the same period in the prior year, as margin increasedyear. Weather during the first quarter of 2020, was 20 and 17 percent warmer than the first quarter of 2019, on the Delmarva Peninsula and in Ohio, respectively, which was a significant driver of lower consumption and reduced operating income by $2.8 million, or 4.2 percent,$4.2 million. This decrease was largely offset by growth in earnings from our organic growth projects and operating expenses decreased by $1.4 million. The higher earnings for the second quarter primarily reflect contributions from recently completed and ongoing pipeline expansion projects, organic growththe December 2019 acquisition of certain propane assets of Boulden. The decrease in the natural gas distribution operations and lower operating expenses, partially offset by lower results from PESCO and higher interest expense. The benefit of the absence of a one-time non-recurring severance charge recorded in the second quarter of 2018,income was offset by a $3.2 million gain from the impactsale of warmer weathertwo properties as we consolidate our facilities in the second quartersupport of 2019.our strategic initiatives.
Our net income for the quarter was impacted by an increase in interest charges
| | | | Three Months Ended | | | | Three Months Ended | | |
| | June 30, | | Increase | | March 31, | | Increase |
| | 2019 | | 2018 | | (decrease) | | 2020 | | 2019 | | (decrease) |
(in thousands except per share) | | | | | | | | | | | | |
Business Segment: | | | | | | | |
Gross Margin | | | | | | | |
Regulated Energy segment | | $ | 18,752 |
| | $ | 14,304 |
| | $ | 4,448 |
| | $ | 68,123 |
| | $ | 67,102 |
| | $ | 1,021 |
|
Unregulated Energy segment | | (1,348 | ) | | 490 |
| | (1,838 | ) | | 31,803 |
| | 32,542 |
| | (739 | ) |
Other businesses and eliminations | | 32 |
| | (1,546 | ) | | 1,578 |
| | (85 | ) | | (107 | ) | | 22 |
|
Total Gross Margin | | | $ | 99,841 |
| | $ | 99,537 |
| | $ | 304 |
|
| | | | | | | |
Operating Income | | $ | 17,436 |
| | $ | 13,248 |
| | $ | 4,188 |
| | | | | | |
Other expense, net | | (316 | ) | | (262 | ) | | (54 | ) | |
Regulated Energy segment | | | $ | 27,888 |
| | $ | 29,741 |
| | $ | (1,853 | ) |
Unregulated Energy segment | | | 13,841 |
| | 15,258 |
| | (1,417 | ) |
Other businesses and eliminations | | | 384 |
| | (875 | ) | | 1,259 |
|
Total Operating Income | | | 42,113 |
| | 44,124 |
| | (2,011 | ) |
Other income (expense), net | | | 3,318 |
| | (57 | ) | | 3,375 |
|
Interest charges | | 5,655 |
| | 3,881 |
| | 1,774 |
| | 5,814 |
| | 5,628 |
| | 186 |
|
Pre-tax Income | | 11,465 |
| | 9,105 |
| | 2,360 |
| |
Income taxes | | 3,161 |
| | 2,718 |
| | 443 |
| |
Income from Continuing Operations Before Income Taxes | | | 39,617 |
| | 38,439 |
| | 1,178 |
|
Income Taxes on Continuing Operations | | | 10,591 |
| | 9,625 |
| | 966 |
|
Income from Continuing operations | | | 29,026 |
| | 28,814 |
| | 212 |
|
Loss from Discontinued Operations | | | (96 | ) | | (150 | ) | | 54 |
|
Net Income | | $ | 8,304 |
| | $ | 6,387 |
| | $ | 1,917 |
| | $ | 28,930 |
| | $ | 28,664 |
| | $ | 266 |
|
Earnings Per Share of Common Stock | | | | | | | |
Basic | | $ | 0.51 |
| | $ | 0.39 |
| | $ | 0.12 |
| |
Diluted | | $ | 0.50 |
| | $ | 0.39 |
| | $ | 0.11 |
| |
Basic Earnings Per Share of Common Stock | | | | | | | |
Earnings from Continuing Operations | | | $ | 1.77 |
| | $ | 1.76 |
| | $ | 0.01 |
|
Loss from Discontinued Operations | | | (0.01 | ) | | (0.01 | ) | | — |
|
Basic Earnings Per Share of Common Stock | | | $ | 1.76 |
| | $ | 1.75 |
| | $ | 0.01 |
|
| | | | | | | |
Diluted Earnings Per Share of Common Stock | | | | | | | |
Earnings from Continuing Operations | | | $ | 1.77 |
| | $ | 1.75 |
| | $ | 0.02 |
|
Loss from Discontinued Operations | | | (0.01 | ) | | (0.01 | ) | | — |
|
Diluted Earnings Per Share of Common Stock | | | $ | 1.76 |
| | $ | 1.74 |
| | $ | 0.02 |
|
Key variances in continuing operations, between the secondfirst quarter of 2020 and the first quarter of 2019, and the second quarter of 2018, included:
|
| | | | | | | | | | | | |
(in thousands, except per share data) | | Pre-tax Income | | Net Income | | Earnings Per Share |
Second Quarter of 2018 Reported Results | | $ | 9,105 |
| | $ | 6,387 |
| | $ | 0.39 |
|
| | | | | | |
Adjusting for Unusual Items: | | | | | | |
Nonrecurring separation expenses associated with a former executive | | 1,548 |
| | 1,421 |
| | 0.09 |
|
Decreased customer consumption - primarily due to warmer weather | | (2,081 | ) | | (1,507 | ) | | (0.09 | ) |
Net impact of PESCO's MTM activity | | (302 | ) | | (210 | ) | | (0.02 | ) |
| | (835 | ) | | (296 | ) | | (0.02 | ) |
| | | | | | |
Increased (Decreased) Gross Margins: | | | | | | |
Eastern Shore and Peninsula Pipeline service expansions (including related Florida natural gas distribution operation expansions)* | | 3,680 |
| | 2,666 |
| | 0.16 |
|
Margin contribution from Marlin Gas Services (acquired assets of Marlin Gas Transport in December 2018) and Ohl acquisition (assets acquired in December 2018)* | | 1,142 |
| | 827 |
| | 0.05 |
|
Natural gas distribution growth (excluding service expansions) | | 867 |
| | 628 |
| | 0.04 |
|
Florida GRIP* | | 310 |
| | 225 |
| | 0.01 |
|
TCJA impact - primarily from the 2019 retained tax savings for certain Florida natural gas operations* | | 255 |
| | 185 |
| | 0.01 |
|
Sandpiper's margin from natural gas conversions | | 231 |
| | 167 |
| | 0.01 |
|
Aspire Energy rate increases | | 203 |
| | 147 |
| | 0.01 |
|
Other margin change for PESCO operations | | (1,563 | ) | | (1,132 | ) | | (0.07 | ) |
| | 5,125 |
| | 3,713 |
| | 0.22 |
|
| | | | | | |
(Increased) Decreased Operating Expenses (Excluding Cost of Sales): | | | | | | |
Depreciation, asset removal and property tax costs due to growth investments | | (2,055 | ) | | (1,488 | ) | | (0.09 | ) |
Operating expenses for Marlin Gas Services and Ohl (Assets acquired in December 2018) including costs to expand the future growth prospects for the businesses | | (1,155 | ) | | (837 | ) | | (0.05 | ) |
Outside services, regulatory, and facilities maintenance costs | | 1,866 |
| | 1,351 |
| | 0.08 |
|
Payroll, benefits and other employee-related expenses | | 678 |
| | 491 |
| | 0.03 |
|
Incentive compensation costs (including timing of accruals) | | 512 |
| | 371 |
| | 0.03 |
|
| | (154 | ) | | (112 | ) | | — |
|
| | | | | | |
Change in effective tax rate | | — |
| | (100 | ) | | (0.01 | ) |
Interest charges | | (1,774 | ) | | (1,285 | ) | | (0.08 | ) |
Net other changes | | (2 | ) | | (3 | ) | | — |
|
| | (1,776 | ) | | (1,388 | ) | | (0.09 | ) |
| | | | | | |
Second Quarter of 2019 Reported Results | | $ | 11,465 |
| | $ | 8,304 |
| | $ | 0.50 |
|
*See the Major Projects and Initiatives table.
Our net income for the six months ended June 30, 2019 was $37.0 million, or $2.25 per share. This represents an increase of $3.7 million, or $0.22 per share, compared to net income of $33.2 million, or $2.03 per share, reported for the same period in 2018. Operating income increased by $7.8 million for the six months ended June 30, 2019, compared to the same period in the prior year, as margin increased by $12.9 million, or 8.2 percent, and was offset by a $4.2 million increase in growth-related depreciation, amortization and property taxes and a $1.0 million increase in other operating expenses. In addition, a final order
by the Florida PSC allowing us to retain TCJA tax savings associated with lower federal income tax rates resulted in the reversal, during the first quarter of 2019, of $1.3 million in reserves for customer refunds recorded in 2018.
Our net income for the six months ended June 30, 2019 was impacted by an increase in interest charges of $3.8 million, compared to the same period in 2018. The increase was attributable, primarily to an increase of $1.8 million in interest expense on higher levels of short-term borrowings as well as higher interest rates, and an increase of $1.3 million in interest expense on long-term debt, largely as a result of the issuance of the NYL Shelf Notes in May and November 2018 and term notes issued in December 2018 and January 2019 to finance the restoration of service to customers who lost service due to the impact of Hurricane Michael.
|
| | | | | | | | | | | | |
| | Six Months Ended | | |
| | June 30, | | Increase |
| | 2019 | | 2018 | | (decrease) |
(in thousands except per share) | | | | | | |
Business Segment: | | | | | | |
Regulated Energy segment | | $ | 47,769 |
| | $ | 41,015 |
| | $ | 6,754 |
|
Unregulated Energy segment | | 13,628 |
| | 14,174 |
| | (546 | ) |
Other businesses and eliminations | | 32 |
| | (1,535 | ) | | 1,567 |
|
Operating Income | | $ | 61,429 |
| | $ | 53,654 |
| | $ | 7,775 |
|
Other expense, net | | (361 | ) | | (194 | ) | | (167 | ) |
Interest charges | | 11,365 |
| | 7,545 |
| | 3,820 |
|
Pre-tax Income | | 49,703 |
| | 45,915 |
| | 3,788 |
|
Income taxes | | 12,735 |
| | 12,674 |
| | 61 |
|
Net Income | | $ | 36,968 |
| | $ | 33,241 |
| | $ | 3,727 |
|
Earnings Per Share of Common Stock | | | | | | |
Basic | | $ | 2.26 |
| | $ | 2.03 |
| | $ | 0.23 |
|
Diluted | | $ | 2.25 |
| | $ | 2.03 |
| | $ | 0.22 |
|
Key variances, between the six months ended 2019 and the six months ended 2018, included:
|
| | | | | | | | | | | | |
(in thousands, except per share data) | | Pre-tax Income | | Net Income | | Earnings Per Share |
Six Month Ended June 30, 2018 Reported Results | | $ | 45,915 |
| | $ | 33,241 |
| | $ | 2.03 |
|
| | | | | | |
Adjusting for Unusual Items: | | | | | | |
Nonrecurring separation expenses associated with a former executive | | 1,548 |
| | 1,421 |
| | 0.09 |
|
2018 retained tax savings for certain Florida natural gas operations* | | 1,321 |
| | 990 |
| | 0.06 |
|
Net impact of PESCO's MTM activity | | (5,892 | ) | | (4,267 | ) | | (0.26 | ) |
Decreased customer consumption - primarily due to warmer weather | | (4,264 | ) | | (3,171 | ) | | (0.19 | ) |
| | (7,287 | ) | | (5,027 | ) | | (0.30 | ) |
| | | | | | |
Increased (Decreased) Gross Margins: | | | | | | |
Eastern Shore and Peninsula Pipeline service expansions (including new service in Northwest Florida for related Florida natural gas distribution operations)* | | 8,140 |
| | 6,055 |
| | 0.37 |
|
Absence of the 2018 Bomb Cyclone and capacity constraints cost for PESCO | | 5,545 |
| | 4,124 |
| | 0.25 |
|
Margin contribution from Marlin Gas Services (acquired assets of Marlin Gas Transport) and Ohl acquisition (assets acquired in December 2018)* | | 3,947 |
| | 2,936 |
| | 0.18 |
|
Natural gas distribution growth (excluding service expansions) | | 2,253 |
| | 1,675 |
| | 0.10 |
|
Higher propane retail margins per gallon | | 1,159 |
| | 862 |
| | 0.05 |
|
Aspire Energy rate increases | | 892 |
| | 664 |
| | 0.04 |
|
TCJA impact - primarily from the 2019 retained tax savings for certain Florida natural gas operations* | | 810 |
| | 602 |
| | 0.04 |
|
Sandpiper's margin from natural gas conversions | | 614 |
| | 456 |
| | 0.03 |
|
Florida GRIP* | | 534 |
| | 397 |
| | 0.02 |
|
Other margin change for PESCO operations | | (832 | ) | | (619 | ) | | (0.04 | ) |
Wholesale propane margins and sales | | (534 | ) | | (398 | ) | | (0.02 | ) |
| | 22,528 |
| | 16,754 |
| | 1.02 |
|
| | | | | | |
(Increased) Decreased Operating Expenses (Excluding Cost of Sales): | | | | | | |
Depreciation, asset removal and property tax costs due to new capital investments | | (3,559 | ) | | (2,647 | ) | | (0.16 | ) |
Operating expenses for Marlin Gas Services and Ohl (Assets acquired in December 2018) including costs to expand the future growth prospects for the businesses | | (2,312 | ) | | (1,720 | ) | | (0.10 | ) |
Payroll, benefits and other employee-related expenses | | (1,568 | ) | | (1,166 | ) | | (0.07 | ) |
Incentive compensation costs (including timing of accruals) | | (578 | ) | | (430 | ) | | (0.03 | ) |
Operating expenses to support PESCO | | (349 | ) | | (259 | ) | | (0.02 | ) |
Facilities maintenance costs | | 1,201 |
| | 893 |
| | 0.05 |
|
Outside services and regulatory costs | | 952 |
| | 708 |
| | 0.04 |
|
| | (6,213 | ) | | (4,621 | ) | | (0.29 | ) |
| | | | | | |
Change in effective tax rate | | — |
| | 516 |
| | 0.03 |
|
Interest Charges | | (3,820 | ) | | (2,841 | ) | | (0.17 | ) |
Net other changes | | (1,420 | ) | | (1,054 | ) | | (0.07 | ) |
| | (5,240 | ) | | (3,379 | ) | | (0.21 | ) |
| | | | | | |
Six Month Ended June 30, 2019 Reported Results | | $ | 49,703 |
| | $ | 36,968 |
| | $ | 2.25 |
|
|
| | | | | | | | | | | | |
(in thousands, except per share data) | | Pre-tax Income | | Net Income | | Earnings Per Share |
First Quarter of 2019 Reported Results from Continuing Operations | | $ | 38,439 |
| | $ | 28,814 |
| | $ | 1.75 |
|
| | | | | | |
Adjusting for Unusual Items: | | | | | | |
Decreased customer consumption primarily due to warmer weather | | (4,220 | ) | | (3,092 | ) | | (0.19 | ) |
Absence of Florida tax savings (net of GRIP refunds) recorded in Q1 2019 for 2018 | | (910 | ) | | (667 | ) | | (0.04 | ) |
Gains from sales of assets | | 3,162 |
| | 2,317 |
| | 0.14 |
|
| | (1,968 | ) |
| (1,442 | ) |
| (0.09 | ) |
| | | | | | |
Increased (Decreased) Gross Margins: | | | | | | |
Margin contribution from Boulden acquisition (completed December 2019)* | | 1,888 |
| | 1,383 |
| | 0.08 |
|
Increased retail propane margins per gallon | | 1,217 |
| | 892 |
| | 0.05 |
|
Natural gas distribution growth (excluding service expansions) | | 1,096 |
| | 803 |
| | 0.05 |
|
Peninsula Pipeline service expansions* | | 1,039 |
| | 761 |
| | 0.05 |
|
Higher Aspire Energy margins from negotiated rate increases | | 388 |
| | 284 |
| | 0.02 |
|
Marlin Gas Services - higher level of pipeline integrity services for existing customers in 2019* | | (982 | ) | | (720 | ) | | (0.04 | ) |
| | 4,646 |
| | 3,403 |
| | 0.21 |
|
| | | | | | |
(Increased) Decreased Operating Expenses (Excluding Cost of Sales): | | | | | | |
Depreciation, amortization and property tax costs due to new capital investments | | (1,347 | ) | | (987 | ) | | (0.06 | ) |
Insurance expense (non-health) - both insured and self-insured | | (1,028 | ) | | (753 | ) | | (0.05 | ) |
Operating expenses from Boulden acquisition (completed December 2019) | | (535 | ) | | (392 | ) | | (0.02 | ) |
Facilities maintenance costs and outside services | | (462 | ) | | (338 | ) | | (0.02 | ) |
Payroll, Benefits and other employee-related expenses | | 1,293 |
| | 947 |
| | 0.06 |
|
| | (2,079 | ) | | (1,523 | ) | | (0.09 | ) |
| | | | | | |
Interest Charges | | (186 | ) | | (136 | ) | | (0.01 | ) |
Other income tax effects | | — |
| | (651 | ) | | (0.04 | ) |
Net other changes | | 765 |
| | 561 |
| | 0.04 |
|
| | 579 |
| | (226 | ) | | (0.01 | ) |
| | | | | | |
First Quarter of 2020 Reported Results from Continuing Operations | | $ | 39,617 |
| | $ | 29,026 |
| | $ | 1.77 |
|
*See the Major Projects and Initiatives table.
Summary of Key Factors
Recently Completed and Ongoing Major Projects and Initiatives
We constantly pursue and develop additional projects and initiatives to serve existing and new customers, further grow our businesses and earnings, with the intention to increase shareholder value. The following represent the major projects/initiatives recently completed and currently underway. Major projects/initiatives that have generated consistent year-over-year margin contributions are removed from the table. In the future, we will add new projects and initiatives to this table once negotiations are substantially final and the associated earnings can be estimated.
| | | Gross Margin for the Period | | Gross Margin for the Period |
| Three Months Ended | | Six Months Ended | | Year Ended | | Estimate for | | Three Months Ended | | Year Ended | | Estimate for |
| June 30, | | June 30, | | December 31, | | Fiscal | | March 31, | | December 31, | | Fiscal |
in thousands | 2019 | | 2018 | | 2019 | | 2018 | | 2018 | | 2019 | | 2020 | | 2020 | | 2019 | | 2019 | | 2020 | | 2021 |
Expansions: | | | | | | | | | | | |
Western Palm Beach County, Florida Expansion - including interim services | | | $ | 1,000 |
| | $ | 131 |
| | $ | 2,139 |
| | $ | 5,227 |
| | $ | 5,227 |
|
Del-Mar Energy Pathway - including interim services | | | 189 |
| | 165 |
| | 731 |
| | 2,512 |
| | 4,100 |
|
Auburndale | | | 170 |
| | — |
| | 283 |
| | 679 |
| | 679 |
|
Callahan Intrastate Pipeline | | | — |
| | — |
| | — |
| | 3,219 |
| | 6,400 |
|
Guernsey Power Station | | | — |
| | — |
| | — |
| | — |
| | 700 |
|
Marlin Gas Services | | | 1,347 |
| | 2,329 |
| | 5,410 |
| | 6,400 |
| | 7,000 |
|
Total Expansions | | | 2,706 |
| | 2,625 |
| | 8,563 |
| | 18,037 |
| | 24,106 |
|
Acquisitions: | | | | | | | | | | | |
Boulden Propane | | | 1,888 |
| | — |
| | 329 |
| | 3,800 |
| | 4,200 |
|
Elkton Gas | | | — |
| | — |
| | — |
| | TBD |
| | TBD |
|
Total Acquisitions | | | 1,888 |
| | — |
| | 329 |
| | 3,800 |
| | 4,200 |
|
Regulatory Initiatives | | | | | | | | | | | |
Florida GRIP (1) | $ | 3,530 |
| | $ | 3,220 |
| | $ | 6,904 |
| | $ | 6,370 |
| | $ | 13,323 |
| | $ | 14,172 |
| | $ | 15,491 |
| | 3,695 |
| | 3,782 |
| | 13,528 |
| | 14,858 |
| | 15,831 |
|
2017 Eastern Shore System Expansion - including interim services | 3,645 |
| | 859 |
| | 8,445 |
| | 3,117 |
| | 9,103 |
| | 16,183 |
| | 15,799 |
| |
Northwest Florida Expansion (including related natural gas distribution services) | 1,691 |
| | 1,147 |
| | 3,289 |
| | 1,152 |
| | 4,350 |
| | 6,500 |
| | 6,500 |
| |
Western Palm Beach County, Florida Expansion | 161 |
| | — |
| | 322 |
| | — |
| | 54 |
| | 676 |
| | 4,581 |
| |
Marlin Gas Services | 1,030 |
| | — |
| | 3,359 |
| | — |
| | 110 |
| | 5,400 |
| | 6,300 |
| |
Ohl Propane Acquisition | 112 |
| | — |
| | 588 |
| | — |
| | — |
| | 1,200 |
| | 1,236 |
| |
Del-Mar Energy Pathway - including interim services | 189 |
| | — |
| | 353 |
| | — |
| | — |
| | 725 |
| | 3,039 |
| |
Callahan Intrastate Pipeline | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 2,250 |
| |
Tax benefit retained by certain Florida entities(2) | 249 |
| | — |
| | 2,329 |
| | — |
| | — |
| | 3,039 |
| | 1,879 |
| |
Hurricane Michael regulatory proceeding | | | — |
| | — |
| | — |
| | TBD |
| | TBD |
|
Total Regulatory Initiatives | | | 3,695 |
| | 3,782 |
| | 13,528 |
| | 14,858 |
| | 15,831 |
|
| | | | | | | | | | | |
Total | $ | 10,607 |
| | $ | 5,226 |
| | $ | 25,589 |
| | $ | 10,639 |
| | $ | 26,940 |
| | $ | 47,895 |
| | $ | 57,075 |
| | $ | 8,289 |
| | $ | 6,407 |
| | $ | 22,420 |
| | $ | 36,695 |
| | $ | 44,137 |
|
(1) All periods shown have been adjustedIn the first quarter of 2020, we recorded a reduction in depreciation expense totaling $0.3 million, as a result of a Florida PSC approved depreciation study that lowered annual depreciation rates. We also recorded $0.2 million in lower GRIP margin due to reflecta concurrent reduction in the lower customer ratessurcharge collected from customers as a result of the TCJA. Lower customerreduced depreciation rates are offset by the corresponding decrease in federal income tax expense and have no negative impact on net income.
(2) The amount disclosed for the six months ended 2019 includes tax savings of $1.3 million for the year ended December 31, 2018. The tax savings were recorded induring the first quarter of 2020.
Detailed Discussion of Major Projects and Initiatives
Expansions
Western Palm Beach County, Florida Expansion
Peninsula Pipeline is constructing four transmission lines to bring additional natural gas to our distribution system in West Palm Beach, Florida. The first phase of this project was placed into service in December 2018 and generated incremental gross margin of $0.9 million, including interim services, for the three months ended March 31, 2020 compared to 2019. We expect to complete the remainder of the project in phases through the third quarter of 2020, and estimate that the project will generate gross margin of $5.2 million in 2020 and beyond.
Del-Mar Energy Pathway
In December 2019, due tothe FERC issued an order approving the construction of the Del-Mar Energy Pathway project. Eastern Shore anticipates that this project will be fully in-service by the Florida PSC allowing reversalbeginning of a TCJA refund reserve, recordedthe fourth quarter of 2021. The new facilities will provide: (i) an additional 14,300 Dts/d of firm service to four customers, (ii) additional natural gas transmission pipeline infrastructure in 2018, which increasedeastern Sussex County, Delaware, and (iii) represent the first extension of Eastern Shore’s pipeline system into Somerset County, Maryland. Construction of the project began in January 2020, and interim services in advance of this project generated $0.2 million gross margin for the sixthree months ended by that amount.March 31, 2020. The estimated gross margin from this project is approximately $2.5 million in 2020, $4.1 million in 2021 and $5.1 million annually thereafter.
Major ProjectsAuburndale
In August 2019, the Florida PSC approved Peninsula Pipeline's Transportation Service Agreement with the Florida Division of Chesapeake Utilities. Peninsula Pipeline purchased an existing pipeline owned by the Florida Division of Chesapeake Utilities and Calpine and has completed the construction of pipeline facilities in Polk County, Florida. Peninsula Pipeline provides transportation service to the Florida Division of Chesapeake Utilities increasing both delivery capacity and downstream pressure as well as introducing a secondary source of natural gas for the Florida Division of Chesapeake Utilities' distribution system. Peninsula Pipeline generated gross margin from this project of $0.2 million for the three months ended March 31, 2020 and expects to generate annual gross margin of $0.7 million in 2020 and beyond.
Callahan Intrastate Pipeline
In May 2018, Peninsula Pipeline announced a plan to construct a jointly owned intrastate transmission pipeline in Nassau County, Florida with Seacoast Gas Transmission. The 26-mile pipeline, having an initial capacity of 148,000 Dts/d, will serve growing demand in both Nassau and Duval Counties, Florida. Construction of the project is currently ongoing and it is expected to be placed in-service during the third quarter of 2020. Peninsula Pipeline expects to generate gross margin of $3.2 million in 2020 and $6.4 million annually thereafter.
Guernsey Power Station
Guernsey Power Station, LLC ("Guernsey Power Station") and our affiliate, Aspire Energy Express, LLC ("Aspire Energy Express"), entered into a precedent firm transportation capacity agreement whereby Guernsey Power Station will construct a power generation facility and Aspire Energy Express will provide natural gas transportation service to this facility. Guernsey Power Station commenced construction of the project in October 2019. Aspire Energy Express is expected to commence construction of the gas transmission facilities to provide the firm transportation service to the power generation facility in the second quarter of 2021. This project is expected to produce gross margin of approximately $0.7 million in 2021 and $1.5 million in 2022.
Marlin Gas Services
Marlin Gas Services provides temporary hold services, pipeline integrity services, emergency services for damaged pipelines and specialized gas services for customers who have unique requirements. We estimate that Marlin Gas Services will generate annual gross margin of approximately $6.4 million in 2020 and $7.0 million in 2021 and beyond. Marlin Gas Services continues to actively expand the territories it serves, as well as leverage its patented technology to serve liquefied natural gas transportation needs and to aid in the transportation of renewable natural gas from the supply sources to various pipeline interconnection points.
Acquisitions
Boulden Propane
In December 2019, Sharp acquired certain propane customers and operating assets of Boulden which provides propane distribution service to approximately 5,200 customers in Delaware, Maryland and Pennsylvania. The customers and assets acquired from Boulden have been assimilated into Sharp. The operations acquired from Boulden generated $1.9 million of incremental gross margin for the three months ended March 31, 2020. We estimate that this acquisition will generate annual gross margin of approximately $3.8 million in 2020, and $4.2 million in 2021, with the potential for additional growth in future years.
Elkton Gas
In December 2019, we entered into an agreement with SJI to acquire Elkton Gas, which provides natural gas distribution service to approximately 7,000 residential and commercial customers in Cecil County, Maryland contiguous to our existing franchise territory in Cecil County. The acquisition is expected to close in third quarter of 2020, subject to approval by the Maryland PSC.
Regulatory Initiatives
Florida GRIP
Florida GRIP is a natural gas pipe replacement program approved by the Florida PSC that allows automatic recovery, through rates, of costs associated with the replacement of mains and services. Since the program's inception in August 2012, we have invested $135.2$148.7 million of capital expenditures to replace 298303 miles of qualifying distribution mains, including $7.9$4.8 million of new pipes during the first sixthree months of 2019.2020. GRIP generated additional gross margin of $0.3 million and $0.5increased by $0.1 million for the three and six months ended June 30, 2019, respectively,March 31, 2020 compared to the same period in 2018.
2017 Eastern Shore System Expansion
Eastern Shore has substantially completed the construction of2019, on a system expansion project that increased its capacity by 26 percent. Two remaining segments are expected to be placed into service during the third quarter of 2019. The project generated $2.8 million and $5.3 million in incremental gross margin during the three and six months ended June 30, 2019, compared to the same periods in 2018, respectively. The project is expected to produce gross margin of approximately $16.2 million in 2019; $15.8 million annually, from 2020 through 2022; and $13.2 million annually thereafter based on current customer capacity commitments.
Northwest Florida Expansion
In May 2018, Peninsula Pipeline completed construction of transmission lines, and our Florida natural gas division completed construction of lateral distribution lines, to serve customers in Northwest Florida. The project generated incremental gross margin of $0.5 million and $2.1 million for the three and six months ended June 30, 2019, respectively, compared to the same periods in 2018. The estimated annual gross margin from this project is $6.5 million for 2019 and beyond, with the opportunity for additional margin as the remaining capacity is sold.basis.
Western Palm Beach County,In the first quarter of 2020, we recorded a reduction in depreciation expense totaling $0.3 million, as a result of a Florida Expansion
Peninsula Pipeline is constructing four transmission lines to bring natural gas to our distribution system in West Palm Beach, Florida. The first phase of this project was placed into service in December 2018 and generatedPSC approved depreciation study that lowered annual depreciation rates. We also recorded $0.2 million and $0.3 million in additional grosslower GRIP margin fordue to a concurrent reduction in the three and six months ended June 30, 2019, respectively. We expect to completesurcharge collected from customers as a result of the remainder ofreduced depreciation rates during the first
the project in phases through early 2020, and estimate that the project will generatequarter of 2020. Including this impact, gross margin of $0.7 million in 2019 and $4.6 million annually thereafter.
Marlin Gas Services
In December 2018, Marlin Gas Services, our wholly-owned subsidiary, acquired certain operating assets of Marlin Gas Transport, a supplier of mobile compressed natural gas distribution and pipeline solutions. The acquisition will allow us to offer solutions to supply interruption scenarios and provide other unique applications where pipeline supplies are unavailable or inadequate to meet customer requirements. Marlin Gas Services generated $1.0 million and $3.4 million of gross marginfrom Florida GRIP for the three and six months ended June 30, 2019, respectively. We estimate that Marlin Gas Services will generate additional gross margin of approximately $5.4 million in 2019 and $6.3 million in 2020, and expect gross margin to grow beyond 2020 as Marlin Gas Services continues to actively expand the territories it serves as well as leverages its patented technology to potentially serve liquefied natural gas transportation needs.
Ohl Propane Acquisition
In December 2018, Sharp acquired certain propane customers and operating assets of Ohl. Located between two of Sharp's existing districts, Ohl provided propane distribution service to approximately 2,500 residential and commercial customers in Pennsylvania. The customers and assets acquired from Ohl have been assimilated into Sharp. The operations acquired from Ohl generated $0.1 million and $0.6 million of incremental gross margin for the three and six months ended June 30, 2019 compared to the same periods in 2018, respectively. We estimate that this acquisition will generate additional gross margin of approximately $1.2 million for Sharp in 2019, with the potential for additional growth in future years.
Del-Mar Energy Pathway
In September 2018, Eastern Shore filed for FERC authorization to construct the Del-Mar Energy Pathway project to provide an additional 14,300 dts/d of capacity to four customers. The project will provide additional natural gas transmission pipeline infrastructure in eastern Sussex County, Delaware, and it will represent the first extension of Eastern Shore’s pipeline system into Somerset County, Maryland. Interim services in advance of this project generated $0.2 million and $0.4 million for the three and six months ended June 30, 2019, respectively. The estimated annual gross margin from this project is approximately $0.7 million in 2019, $3.0 million in 2020, $4.6 million in 2021 and $5.1 million annually thereafter. Eastern Shore anticipates that this project will be fully in-service by mid-2021, contingent upon FERC issuing authorization for the project in the third quarter of 2019.
Callahan Intrastate Pipeline
In May 2018, Peninsula Pipeline announced its plan to construct a jointly owned intrastate transmission pipeline with Seacoast Gas Transmission in Nassau County, Florida. The 26-mile pipeline, having an initial capacity of 148,000 dts/d, will serve growing demand in both Nassau and Duval counties, Florida. The project is expected to be placed in-service during the third quarter of 2020 and will generate gross margin for Peninsula Pipeline of $2.3 million in 2020 and $6.0 million annually thereafter.
Regulatory Initiatives
Florida Tax Savings Related to the TCJA
In February 2019, the Florida PSC issued orders authorizing certain of our natural gas distribution operations to retain a portion of the tax savings associated with the lower federal tax rates resulting from the TCJA. In accordance with the PSC orders, we recognized $1.3 million in margin during the first quarter of 2019, reflecting the reversal of reserves recorded during 2018. We recognized additional margin of $0.2 million and $1.0 million during the three and six months ended June 30, 2019, respectively, and expect the annual savings beginning in 2019 to continue in future years.2020 decreased on a net basis by $0.1 million.
Other major factors influencing gross margin
Weather and Consumption
Weather conditions accounted for a $2.1 million decrease in gross margin during the second quarter of 2019, compared to the same period in 2018. For the second quarter period-over-period HDD declined 42 percent on the Delmarva Peninsula and 19 percent in our Ohio service territory. For the six months ended June 30, 2019, weather conditions accounted for a $4.3 million decrease in gross margin. Lower period-over-period HDD's in all of our service territories and extreme conditions due to the absence of the "Bomb Cyclone" in early 2018 reduced consumption in the first six months of 2019 compared to the same period in 2018 and impacted both our Regulated and Unregulated Energy segments. The following table summarizes HDD and CDD variances from the 10-year average HDD/CDD ("Normal") for the three and six months ended June 30, 2019 and 2018.
|
| | | | | | | | | | | | | | | | | |
| Three Months Ended | | | | Six Months Ended | | |
| June 30, | | | | June 30, | | |
| 2019 | | 2018 | | Variance | | 2019 | | 2018 | | Variance |
Delmarva | | | | | | | | | | | |
Actual HDD | 247 |
| | 424 |
| | (177 | ) | | 2,569 |
| | 2,719 |
| | (150 | ) |
10-Year Average HDD ("Normal") | 400 |
| | 423 |
| | (23 | ) | | 2,749 |
| | 2,785 |
| | (36 | ) |
Variance from Normal | (153 | ) | | 1 |
| | | | (180 | ) | | (66 | ) | | |
Florida | | | | | | | | | | | |
Actual HDD | 18 |
| | 17 |
| | 1 |
| | 379 |
| | 507 |
| | (128 | ) |
10-Year Average HDD ("Normal") | 14 |
| | 16 |
| | (2 | ) | | 532 |
| | 533 |
| | (1 | ) |
Variance from Normal | 4 |
| | 1 |
| |
| | (153 | ) | | (26 | ) | |
|
Ohio | | | | |
| | | | | |
|
Actual HDD | 535 |
| | 662 |
| | (127 | ) | | 3,531 |
| | 3,652 |
| | (121 | ) |
10-Year Average HDD ("Normal") | 607 |
| | 614 |
| | (7 | ) | | 3,652 |
| | 3,683 |
| | (31 | ) |
Variance from Normal | (72 | ) | | 48 |
| | | | (121 | ) | | (31 | ) | | |
Florida | | | | | | | | | | | |
Actual CDD | 1,086 |
| | 952 |
| | 134 |
| | 1,220 |
| | 1,091 |
| | 129 |
|
10-Year Average CDD ("Normal") | 975 |
| | 969 |
| | 6 |
| | 1,072 |
| | 1,058 |
| | 14 |
|
Variance from Normal | 111 |
| | (17 | ) | | | | 148 |
| | 33 |
| | |
Natural Gas Distribution Margin Growth
New customer growth for our natural gas distribution operations generated $0.9 million and $2.3 million of additional margin for the three and six months ended June 30, 2019, respectively. The details for the three and six months ended June 30, 2019 are provided in the following table:
|
| | | | | | | | |
| | Three Months Ended | | Six Months Ended |
(in thousands) | | June 30, 2019 | | June 30, 2019 |
Customer Growth: | | | | |
Residential | | $ | 446 |
| | $ | 1,085 |
|
Commercial and industrial | | 421 |
| | 1,168 |
|
Total Customer Growth | | $ | 867 |
| | $ | 2,253 |
|
For the three and six months ended June 30, 2019, the additional margin from new customers reflects an increase (i) of approximately 3.7 percent and 3.8 percent, respectively, in the average number of residential customers served on the Delmarva Peninsula, (ii) approximately 3.8 percent and 3.5 percent growth, respectively, in new residential customers served in Florida, and (iii) an increase in the number of commercial and industrial customers served.
Impact of Hurricane Michael
In October 2018, Hurricane Michael passed through FPU's electric distribution operation's service territory in Northwest Florida. The hurricane caused widespread and severe damage to FPU's infrastructure resulting in 100 percent of its customers in the Northwest Florida customersservice territory losing electrical service. FPU after exerting extraordinary hurricane restoration efforts, restored service to those customers who were able to accept it. Through June 30, 2019, FPU incurred approximatelyexpended more than $65.0 million to restore service as quickly as possible, which has been recorded as new plant and equipment, or charged against FPU’s accumulated depreciation andor charged against FPU’s storm reserve. Additionally, amounts currently being reviewed by the Florida PSC for regulatory asset treatment have been recorded as receivables and other deferred charges.
In conjunctionAugust 2019, FPU filed a limited proceeding requesting recovery of storm-related costs associated with Hurricane Michael (plant investment and expenses) through a change in base rates. FPU also requested treatment and recovery of certain storm-related costs as a regulatory asset for items currently not allowed to be recovered through the storm reserve as well as the recovery of plant investment replaced as a result of the storm. FPU has proposed an overall return component on both the plant additions and the proposed regulatory assets. In the fourth quarter of 2019, FPU along with the hurricane-related expenditures, we executed two 13-month unsecured term loans as temporary financing, eachOffice of Public Counsel in Florida, filed a joint motion with the amount of $30.0 million. The interest cost associated with these loans is one-month LIBORFlorida PSC to approve an interim rate plus 75 basis points. One term loan was executed in December 2018;increase, subject to refund, pending the other was executed in January 2019. While there was a short-term negative impact,final ruling on the storm is not expected to have a significant impact going forward, assuming recovery is granted through the regulatory process. On August 7, 2019, we filed the necessary regulatory filings seeking recovery of the restoration costs incurred, including eligible financing costs. FPU's resultsincurred. The petition was approved by the Florida PSC in November 2019 and interim rate increases were implemented effective January 2020. At this time, the Company has recorded a reserve for the sixinterim rate increases, pending a final resolution of the proceeding.
In March 2020, FPU filed an update to the original filing to account for actual charges incurred through December 2019, revised the amortization period of the storm-related costs from 30 years as originally requested to 10 years, and included costs related to Hurricane Dorian of approximately $1.2 million in this filing. FPU continues to work with the Florida PSC and the petition is currently on the schedule for approval at the Florida PSC Agenda in September 2020.
Other major factors influencing gross margin
Weather and Consumption
Significantly warmer temperatures during the three months ended June 30,March 31, 2020, had a negative impact on gross margin for the quarter. Lower customer consumption, directly attributable to warmer than normal temperatures during the three months ended March 31, 2020, reduced gross margin by $4.2 million compared to the same quarter in 2019 included interest expenseand $5.1 million compared to normal temperatures as defined below. The following table summarizes heating degree day ("HDD") and cooling degree day (“CDD”) variances from the 10-year average HDD/CDD ("Normal") for the three months ended March 31, 2020 and 2019.
|
| | | | | | | | |
| Three Months Ended | | |
| March 31, | | |
| 2020 | | 2019 | | Variance |
Delmarva | | | | | |
Actual HDD | 1,859 |
| | 2,322 |
| | (463 | ) |
10-Year Average HDD ("Normal") | 2,349 |
| | 2,362 |
| | (13 | ) |
Variance from Normal | (490 | ) | | (40 | ) | | |
Florida | | | | | |
Actual HDD | 334 |
| | 361 |
| | (27 | ) |
10-Year Average HDD ("Normal") | 495 |
| | 518 |
| | (23 | ) |
Variance from Normal | (161 | ) | | (157 | ) | |
|
Ohio | | | | |
|
Actual HDD | 2,496 |
| | 2,996 |
| | (500 | ) |
10-Year Average HDD ("Normal") | 3,019 |
| | 3,045 |
| | (26 | ) |
Variance from Normal | (523 | ) | | (49 | ) | | |
Florida | | | | | |
Actual CDD | 226 |
| | 134 |
| | 92 |
|
10-Year Average CDD ("Normal") | 105 |
| | 97 |
| | 8 |
|
Variance from Normal | 121 |
| | 37 |
| | |
Natural Gas Distribution Margin Growth
Customer growth for our natural gas distribution operations, as a result of the addition of new customers and the conversion of customers from alternative fuel sources to natural gas service, generated $1.1 million or $0.4 millionof additional margin for the three months ended March 31, 2020 compared to 2019. The average number of residential customers served on an after-tax basis, associated with the intermediate term loans discussed above.Delmarva Peninsula and in Florida increased by 3.9 percent and 3.8 percent, respectively, during the first quarter of 2020. Growth in commercial and industrial customers also contributed additional margin during 2020. The details are provided in the following table:
|
| | | | | | | | |
| | Gross Margin Increase |
| | Three Months Ended March 31, 2020 |
Customer growth: | | Delmarva Peninsula | | Florida |
Residential | | $ | 441 |
| | $ | 223 |
|
Commercial and industrial | | 154 |
| | 278 |
|
Total customer growth | | $ | 595 |
| | $ | 501 |
|
Regulated Energy Segment
For the quarter ended June 30, 2019,March 31, 2020, compared to the quarter ended June 30, 2018:March 31, 2019:
| | | | Three Months Ended | | | | Three Months Ended | | |
| | June 30, | | Increase | | March 31, | | Increase |
| | 2019 | | 2018 | | (decrease) | | 2020 | | 2019 | | (decrease) |
(in thousands) | | | | | | | | | | | | |
Revenue | | $ | 73,403 |
| | $ | 70,504 |
| | $ | 2,899 |
| | $ | 102,955 |
| | $ | 103,618 |
| | $ | (663 | ) |
Cost of sales | | 18,317 |
| | 20,010 |
| | (1,693 | ) | | 34,832 |
| | 36,516 |
| | (1,684 | ) |
Gross margin | | 55,086 |
| | 50,494 |
| | 4,592 |
| | 68,123 |
| | 67,102 |
| | 1,021 |
|
Operations & maintenance | | 23,425 |
| | 25,022 |
| | (1,597 | ) | | 26,241 |
| | 24,548 |
| | 1,693 |
|
Depreciation & amortization | | 8,969 |
| | 7,620 |
| | 1,349 |
| | 9,319 |
| | 8,446 |
| | 873 |
|
Other taxes | | 3,940 |
| | 3,548 |
| | 392 |
| | 4,675 |
| | 4,367 |
| | 308 |
|
Other operating expenses | | 36,334 |
| | 36,190 |
| | 144 |
| |
Total operating expenses | | | 40,235 |
| | 37,361 |
| | 2,874 |
|
Operating income | | $ | 18,752 |
| | $ | 14,304 |
| | $ | 4,448 |
| | $ | 27,888 |
| | $ | 29,741 |
| | $ | (1,853 | ) |
Operating income for the Regulated Energy segment for the three months ended June 30, 2019March 31, 2020 was $18.8$27.9 million, an increasea decrease of $4.4$1.9 million compared to the same period in 2018.2019. The increaseddecreased operating income resulted from increased gross margin of $4.6$1.0 million and $1.6 million in lower operations and maintenance expense, which were partially offset by $1.7$2.9 million in higher depreciation, amortization and other taxes.operating expenses.
Gross Margin
Items contributing to the quarter-over-quarter increase in gross margin are listed in the following table:
| | (in thousands) | Margin Impact | Margin Impact |
Eastern Shore and Peninsula Pipeline service expansions (including related Florida natural gas distribution operation expansions) | $ | 3,680 |
| |
Natural gas distribution growth (excluding service expansions) | 867 |
| $ | 1,096 |
|
Electric operations consumption growth | 316 |
| |
Florida GRIP | 310 |
| |
TCJA impact - primarily from the 2019 retained tax savings for certain Florida natural gas operations | 255 |
| |
Sandpiper's margin from natural gas conversions | 231 |
| |
Peninsula Pipeline service expansions | | 1,039 |
|
Tax savings (net of GRIP refunds) recorded in Q1 2019 for 2018 associated with lower federal tax rates for certain Florida natural gas distribution operations | | (910 | ) |
Decreased customer consumption - primarily due to warmer weather | (1,159 | ) | (521 | ) |
Other variances | 92 |
| 317 |
|
Quarter-over-quarter increase in gross margin | $ | 4,592 |
| $ | 1,021 |
|
The following is a narrative discussion of the significant items in the foregoing table, which we believe is necessary to understand the information disclosed in the table.
Eastern Shore and Peninsula Pipeline Service Expansions (including new natural gas distribution service in Northwest Florida)
We generated additional gross margin of $3.7 million, primarily from the following natural gas service expansions:
$2.8 million from Eastern Shore's 2017 System Expansion Project.
$0.2 million generated from Eastern Shore's Del-Mar Energy Pathway Project.
$0.6 million generated by Peninsula Pipeline from the Western Palm Beach County Pipeline and Northwest Pipeline Expansion Projects.
$0.1 million from new service in Northwest Florida provided by our Florida natural gas distribution operations.
Natural Gas Distribution Customer Growth
We generated additional gross margin of $0.9$1.1 million from natural gas distribution customer growth. Gross margin increased by $0.5 million in Florida and $0.4$0.6 million on the Delmarva Peninsula and $0.5 million in Florida for the three months ended June 30, 2019,March 31, 2020, as compared to the same period in 2018, due primarily to2019. These increases were the result of residential customer growth of 3.83.9 percent and 3.73.8 percent in Florida and on the Delmarva Peninsula and in Florida, respectively, as well as increases in the number of commercial and industrial customers served.
Electric Operations Consumption GrowthPeninsula Pipeline Service Expansions
Gross margin increased by $0.3 million as a result of increased customer consumption for our Florida electric operations for the second quarter of 2019 compared to 2018.
Florida GRIP
Continued investment in the Florida GRIPWe generated additional gross margin of $0.3$1.0 million from Peninsula Pipeline's Western Palm Beach County and Auburndale Projects.
Absence of Florida Tax Savings Recorded in the First Quarter of 2019
Gross margin decreased by $0.9 million for the three months ended June 30, 2019,March 31, 2020, as compared to the same period in 2018.
TCJA Impact
We generated additional gross margin of $0.3 million for the three months ended June 30, 2019, as compared to the same period in 2018, related to the tax savings we retained in 2019 as compared to reserving for those taxes in 2018. See Note 4, Rates and Other Regulatory Activities, for additional information.
Sandpiper's Margin from Natural Gas Conversions
Gross margin increased by $0.2 million in the second quarter of 2019, as compared to the same period in 2018, due primarily to the continuing conversion ofTCJA related tax savings from 2018 that the Sandpiper system from propane serviceFlorida PSC allowed us to natural gas service.
Impact of Weather on Customer Consumption
Gross margin decreased by $1.2 million due to weather-related usage as weather onretain during the Delmarva Peninsula was approximately 42 percent warmer in the secondfirst quarter of 2019, compared to the same period in 2018, leading to lower consumption. This decrease was partially offset by increased consumption by our Florida electric distribution operations due to a 14 percent increase in CDD for our Florida electric operations in the second quarter of 2019, compared to the same period in 2018.
Other Operating Expenses
Items contributing to the quarter-over-quarter increase in other operating expenses are listed in the following table:
|
| | | |
(in thousands) |
|
Depreciation, asset removal and property tax costs due to growth investments | $ | 1,926 |
|
Outside services, regulatory, facilities and maintenance costs | (1,466 | ) |
Incentive compensation costs (including timing of accruals) | (328 | ) |
Payroll, benefits and other employee-related expenses(1) | (257 | ) |
Other variances | 269 |
|
Quarter-over-quarter increase in other operating expenses | $ | 144 |
|
(1) Since we self-insure for healthcare costs, benefits costs fluctuate depending upon filed claims.
For the six months ended June 30, 2019, compared to the six months ended June 30, 2018:
|
| | | | | | | | | | | | |
| | Six Months Ended | | |
| | June 30, | | Increase |
| | 2019 | | 2018 | | (decrease) |
(in thousands) | | | | | | |
Revenue | | $ | 177,021 |
| | $ | 179,897 |
| | $ | (2,876 | ) |
Cost of sales | | 54,833 |
| | 68,241 |
| | (13,408 | ) |
Gross margin | | 122,188 |
| | 111,656 |
| | 10,532 |
|
Operations & maintenance | | 48,697 |
| | 48,169 |
| | 528 |
|
Depreciation & amortization | | 17,415 |
| | 15,136 |
| | 2,279 |
|
Other taxes | | 8,307 |
| | 7,336 |
| | 971 |
|
Other operating expenses | | 74,419 |
| | 70,641 |
| | 3,778 |
|
Operating income | | $ | 47,769 |
| | $ | 41,015 |
| | $ | 6,754 |
|
Operating income for the Regulated Energy segment for the six months ended June 30, 2019 was $47.8 million, an increase of $6.8 million or 16.5%, compared to the same period in 2018. The increased operating income resulted from increased gross margin of $10.5 million, offset by $3.3 million in higher depreciation and property taxes and a $0.5 million increase in other operating expenses.2019. In February 2019, the Florida PSC issued a final order regarding the treatment of the TCJA impact, allowing us to retain the savings associated with lower federal tax rates for certain of our natural gas distribution operations. As a result, $1.3 million inrefunds to GRIP customers and reserves for customer refunds, recorded in 2018 were reversed in the first quarter of 2019. Excluding
Decreased Customer Consumption - Primarily Due to Warmer Weather
Gross margin decreased by $0.5 million due to lower weather-related usage as weather on the Delmarva Peninsula and in Florida
was approximately 20 percent and 7 percent, respectively, warmer for the three months ended March 31, 2020, compared to the same period in 2019.
Other Operating Expenses
Items contributing to the quarter-over-quarter increase in other operating expenses are listed in the following table:
|
| | | |
(in thousands) |
|
Depreciation, amortization and property tax costs due to growth investments | $ | 1,227 |
|
Insurance expense (non-health) - both insured and self-insured components | 834 |
|
Outside services, regulatory, and facilities maintenance costs | 540 |
|
Payroll, benefits and other employee-related expenses | 200 |
|
Other variances | 73 |
|
Quarter-over-quarter increase in other operating expenses | $ | 2,874 |
|
Unregulated Energy Segment
For the quarter ended March 31, 2020, compared to the quarter ended March 31, 2019:
|
| | | | | | | | | | | | |
| | Three Months Ended | | |
| | March 31, | | Increase |
| | 2020 | | 2019 | | (decrease) |
(in thousands) | | | | | | |
Revenue | | $ | 54,031 |
| | $ | 61,081 |
| | $ | (7,050 | ) |
Cost of sales | | 22,228 |
| | 28,539 |
| | (6,311 | ) |
Gross margin | | 31,803 |
| | 32,542 |
| | (739 | ) |
Operations & maintenance | | 14,076 |
| | 13,823 |
| | 253 |
|
Depreciation & amortization | | 2,918 |
| | 2,465 |
| | 453 |
|
Other taxes | | 968 |
| | 996 |
| | (28 | ) |
Total operating expenses | | 17,962 |
| | 17,284 |
| | 678 |
|
Operating income | | $ | 13,841 |
| | $ | 15,258 |
| | $ | (1,417 | ) |
Operating income for the Unregulated Energy segment for the first quarter of 2020 was $13.8 million a 9.3 percent decrease over the same period in 2019. The decreased operating income reflects $3.7 million in lower gross margin primarily due to the impact of warmer weather during the reversal, grossfirst quarter of 2020. These decreases were partially offset by the incremental margin from the Boulden assets and operating income for the six months ended June 30, 2019 increased by $9.2 million and $5.4 million, or 8.2 percent and 13.2 percent, respectively.higher propane retail margins per gallon.
Gross Margin
Items contributing to the period-over-period increasequarter-over-quarter decrease in gross margin are listed in the following table:
|
| | | |
(in thousands) | Margin Impact |
Eastern Shore and Peninsula Pipeline service expansions (including related Florida natural gas distribution operation expansions) | $ | 8,140 |
|
Natural gas distribution - customer growth (excluding service expansions) | 2,253 |
|
2018 retained tax savings for certain Florida natural gas distribution operations | 1,321 |
|
TCJA impact - primarily from the 2019 retained tax savings for certain Florida natural gas operations | 810 |
|
Sandpiper's margin from natural gas conversions | 614 |
|
Florida GRIP | 534 |
|
Decreased customer consumption - primarily due to warmer weather | (2,841 | ) |
Other variances | (299 | ) |
Period-over-period increase in gross margin | $ | 10,532 |
|
|
| | | | |
(in thousands) | | Margin Impact |
Propane Operations | | |
Decrease in customer consumption - primarily due to warmer weather | | $ | (2,799 | ) |
Boulden acquisition (assets acquired in December 2019) | | 1,888 |
|
Increased retail propane margins per gallon driven by favorable market conditions and supply management | | 1,217 |
|
Aspire Energy | | |
Decrease in customer consumption - primarily due to warmer weather | | (900 | ) |
Higher margins from negotiated rate increases | | 388 |
|
Marlin Gas Services - higher level of pipeline integrity services for existing customers in 2019 | | (982 | ) |
Other variances | | 449 |
|
Quarter-over-quarter decrease in gross margin | | $ | (739 | ) |
The following is a narrative discussion of the significant items in the foregoing table, which we believe is necessary to understand the information disclosed in the table.
Eastern Shore and Peninsula Pipeline Service Expansions (including new natural gas distribution servicePropane Operations
| |
• | Decreased Customer Consumption Primarily Driven by Weather - Gross margin decreased by $2.7 million for the Mid-Atlantic propane operations and by $0.1 million in Florida as weather on the Delmarva Peninsula and in Florida was approximately 20 and 7 percent, respectively, warmer for the three months ended March 31, 2020 compared to the same period in 2019. |
| |
• | Propane Operations - Boulden - Gross margin increased by $1.9 million due to the inclusion of operating results from Boulden, which was acquired by Sharp in December 2019. |
| |
• | Increased Retail Propane Margins - Gross Margin increased by $1.2 million, in the first quarter of 2020, as compared to the same period in the prior year, due to lower propane inventory costs and favorable market conditions. These market conditions, which include competition with other propane suppliers, as well as the availability and price of alternative energy sources, may fluctuate based on changes in demand, supply and other energy commodity prices. |
Aspire Energy
| |
• | Decreased Customer Consumption Primarily Driven by Weather - Gross margin decreased by $0.9 million due to decreased consumption as weather in Ohio was approximately 17 percent warmer for the three months ended March 31, 2020 compared to the same period in 2019. |
| |
• | Increased Margin Driven by Changes in Rates - Gross margin increased by $0.4 million in the first quarter of 2020, as compared to the same period in the prior year, due primarily to higher margins from negotiated rate increases. |
Marlin Gas Services
Gross margin decreased by $1.0 million in Northwest Florida)
We generated additionalthe first quarter of 2020, as compared to the same period in the prior year. First quarter 2019 results included gross margin from existing customers for a higher level of $8.1 million, primarily from the following natural gas service expansions:
$5.3 million from Eastern Shore's services in conjunction with its 2017 System Expansion Project.
$0.4 million generated from Eastern Shore's Del-Mar Energy Pathway Project.
$2.0 million generated by Peninsula Pipeline from the Western Palm Beach County Pipeline and Northwest Pipeline Expansion Projects.
$0.4 million for new services in Northwest Florida provided by our Florida natural gas distribution operations.pipeline integrity services.
Natural Gas Customer Growth
We generated additional gross margin of $2.3 million from natural gas customer growth. Gross margin increased by $1.2 million in Florida and $1.1 million on the Delmarva Peninsula for the six months ended June 30, 2019, as compared to the same period in 2018, due primarily to residential customer growth of 3.5 percent and 3.8 percent in Florida and on the Delmarva Peninsula, respectively, as well as increases in the number of commercial and industrial customers served.
2018 Retained Tax Savings for Florida Natural Gas Operations
We generated additional gross margin of $1.3 million for the six months ended June 30, 2019, as compared to the prior period, due to a final order from the Florida PSC allowing us to retain the tax savings associated with TCJA. Pursuant to the order, refund reserves recorded by our Florida natural gas businesses in 2018, were reversed in 2019. See Note 4, Rates and Other Regulatory Activities, for additional information.
Tax Reform Impact
We generated additional gross margin of $0.8 million for the six months ended June 30, 2019, as compared to the prior period, related to the tax savings we retained in 2019 as compared to reserving for those taxes in 2018. See Note 4, Rates and Other Regulatory Activities, for additional information.
Sandpiper's Margin from Natural Gas Conversions
Gross margin increased by $0.6 million for the six months ended June 30, 2019, as compared to the prior period, due primarily to the continuing conversion of the Sandpiper system from propane service to natural gas service.
Florida GRIP
Continued investment in the Florida GRIP generated additional gross margin of $0.5 million for the six months ended June 30, 2019, compared to the same period in 2018.
Impact of Weather on Customer Consumption
Gross margin decreased by $2.8 million due to the impact of warmer weather during the first six months of 2019 compared to the same period in 2018. Warmer weather reduced consumption, which negatively impacted gross margin from Delmarva gas distribution operations by approximately $1.5 million and gross margin from our Florida natural gas and electric operations by approximately $1.3 million.
Other Operating Expenses
Items contributing to the period-over-period increase in other operating expenses are listed in the following table:
|
| | | |
(in thousands) |
|
Depreciation, asset removal and property tax costs due to new capital investments | $ | 3,301 |
|
Payroll, benefits and other employee-related expenses(1) | 1,619 |
|
Incentive compensation costs (including timing of accruals) | 331 |
|
Outside services and regulatory costs | (1,070 | ) |
Facilities maintenance costs | (1,005 | ) |
Other variances | 602 |
|
Period-over-period increase in other operating expenses | $ | 3,778 |
|
(1) Since we self-insure for healthcare costs, benefits costs fluctuate depending upon filed claims.
Unregulated Energy Segment
For the quarter ended June 30, 2019, compared to the quarter ended June 30, 2018:
|
| | | | | | | | | | | | |
| | Three Months Ended | | |
| | June 30, | | Increase |
| | 2019 | | 2018 | | (decrease) |
(in thousands) | | | | | | |
Revenue | | $ | 66,904 |
| | $ | 76,345 |
| | $ | (9,441 | ) |
Cost of sales | | 51,783 |
| | 59,430 |
| | (7,647 | ) |
Gross margin | | 15,121 |
| | 16,915 |
| | (1,794 | ) |
Operations & maintenance | | 12,891 |
| | 13,406 |
| | (515 | ) |
Depreciation & amortization | | 2,623 |
| | 2,198 |
| | 425 |
|
Other taxes | | 955 |
| | 821 |
| | 134 |
|
Total operating expenses | | 16,469 |
| | 16,425 |
| | 44 |
|
Operating (loss) income | | $ | (1,348 | ) | | $ | 490 |
| | $ | (1,838 | ) |
The Unregulated Energy segment had an operating loss of $1.3 million and operating income of $0.5 million for the three months ended June 30, 2019 and 2018, respectively. The decrease in operating income of approximately $1.8 million was principally due to lower operating income from PESCO.
We have elected to show the results of the Unregulated Energy segment separate from PESCO given its recent performance.
Unregulated Energy, excluding PESCO
|
| | | | | | | | | | | |
| | | | | Increase |
For the Three Months Ended June 30, | 2019 | | 2018 | | (decrease) |
(in thousands) | | | | | |
Gross margin | $ | 14,380 |
| | $ | 14,309 |
| | $ | 71 |
|
Depreciation, amortization and property taxes | 2,850 |
| | 2,399 |
| | 451 |
|
Other operating expenses | 11,805 |
| | 12,108 |
| | (303 | ) |
Operating Loss | $ | (275 | ) | | $ | (198 | ) | | $ | (77 | ) |
Excluding PESCO, operating loss for the Unregulated Energy segment increased by $0.1 million for the three months ended June 30, 2019, compared to the same period in 2018. The increased operating loss was driven by $0.5 million in higher depreciation amortization and property taxes, partially offset by a $0.1 million increase in gross margin and $0.3 million in lower other operating expenses. While Marlin Gas Services generated an additional $1.0 million of gross margin for the segment, this was largely offset by warmer weather during the quarter.
Gross Margin
Items contributing to the quarter-over-quarter increase in gross margin are listed in the following table:
|
| | | | |
(in thousands) | | Margin Impact |
Marlin Gas Services (acquired assets of Marlin Gas Transport in December 2018) | | $ | 1,030 |
|
Propane Operations | | |
Ohl acquisition (assets acquired in December 2018) | | 112 |
|
Decreased customer consumption - primarily due to warmer weather | | (818 | ) |
Decrease in retail and wholesale propane margins | | (166 | ) |
Aspire Energy | | |
Rate increases | | 203 |
|
Decreased customer consumption - primarily due to warmer weather | | (104 | ) |
Other variances | | (186 | ) |
Quarter-over-quarter increase in gross margin | | $ | 71 |
|
The following is a narrative discussion of the significant items in the foregoing table, which we believe is necessary to understand the information disclosed in the table.
Marlin Gas Services
Gross margin increased by $1.0 million in the second quarter of 2019, as compared to the same period in the prior year, as a result of the acquisition of certain assets of Marlin Gas Transport in December 2018.
Propane Operations - Ohl Asset Acquisition
Gross margin increased by $0.1 million in the second quarter of 2019, as compared to the same period in the prior year, as a result of the acquisition of certain assets of Ohl by Sharp in December 2018.
Propane Operations - Decreased Customer Consumption - (Weather)
Gross margin decreased by $0.8 million for the Mid-Atlantic propane operations in the second quarter of 2019, as compared to the same period in the prior year. Weather in the Mid-Atlantic region was approximately 42 percent warmer in the second quarter of 2019 which reduced consumption by propane distribution customers and decreased gross margin, compared to the same period in 2018.
Propane Operations - Decreased Retail and Wholesale Propane Margins
Gross Margin decreased by $0.2 million, in the second quarter of 2019, as compared to the same period in the prior year, due primarily to lower margins per gallon and a physical inventory adjustment in the Mid-Atlantic propane operations.
Aspire Energy - Increased Margin Driven by Changes in Rates
Gross margin increased by $0.2 million in the second quarter of 2019, as compared to the same period in the prior year, due primarily to changes in customer rates during the quarter.
Aspire Energy - Decreased Customer Consumption - (Weather)
Gross margin decreased by $0.1 million in the second quarter of 2019, as compared to the same period in the prior year, due primarily to changes in customer consumption because of weather that was approximately 19 percent warmer in the second quarter of 2019 compared to the same period in 2018.
Other Operating Expenses
Items contributing to the quarter-over-quarter increase in other operating expenses are listed in the following table:
|
| | | |
(in thousands) | |
Operating expenses for Boulden (assets acquired in December 2019) | $ | 342 |
|
Depreciation, amortization and property taxes due to new capital investments | 448 |
|
Insurance expense (non-health) - both insured and self-insured components | 194 |
|
Payroll, benefits and other employee-related expenses | (292 | ) |
Other variances | (14 | ) |
Quarter-over-quarter increase in other operating expenses | $ | 678 |
|
Divestiture of Contents
|
| | | |
(in thousands) | |
Operating expenses for Marlin Gas Services and Ohl (Assets acquired in December 2018) including costs to expand the future growth prospects for the businesses (1) | $ | 835 |
|
Outside services and facilities maintenance costs | (469 | ) |
Payroll, benefits and other employee-related expenses | (361 | ) |
Incentive compensation costs (including timing of accruals) | (239 | ) |
Depreciation, asset removal and property tax costs due to new capital investments | 130 |
|
Other variances | 252 |
|
Quarter-over-quarter increase in other operating expenses | $ | 148 |
|
PESCO(1)As discussed in Note 3, Acquisitions and DivestituresThe Ohl, during the fourth quarter of 2019, we sold PESCO's assets and Marlin Gas Services expensescontracts and accordingly have been aggregated and are excluded fromexited the expense changes shownnatural gas marketing business. This was done in an effort to enable us to focus on the remainder of the table.
PESCO
|
| | | | | | | | | | | |
| | | | | Increase |
For the Three Months Ended June 30, | 2019 | | 2018 | | (decrease) |
(in thousands) | | | | | |
Gross margin | $ | 741 |
| | $ | 2,606 |
| | $ | (1,865 | ) |
Depreciation, amortization and property taxes | 153 |
| | 154 |
| | (1 | ) |
Other operating expenses | 1,661 |
| | 1,764 |
| | (103 | ) |
Operating Income | $ | (1,073 | ) | | $ | 688 |
| | $ | (1,761 | ) |
Operating income for PESCO decreased by $1.8 million for the three months ended June 30, 2019 compared to the same period in 2018. The decline in operating income was driven by a $1.9 million decrease in PESCO's gross margin compared to the same period in 2018 resulting from the following:
|
| | | |
(in thousands) | Margin Impact |
Increased supply costs | $ | (742 | ) |
Absence of nonrecurring margin in 2018 associated with the Southeast portfolio | (642 | ) |
Net impact of PESCO's MTM activity | (302 | ) |
Other variances | (179 | ) |
Quarter-over-quarter decrease in gross margin for PESCO | $ | (1,865 | ) |
For the six months ended June 30, 2019, compared to the six months ended June 30, 2018:
|
| | | | | | | | | | | | |
| | Six Months Ended | | |
| | June 30, | | Increase |
| | 2019 | | 2018 | | (decrease) |
(in thousands) | | | | | | |
Revenue | | $ | 205,007 |
| | $ | 221,712 |
| | $ | (16,705 | ) |
Cost of sales | | 155,484 |
| | 174,496 |
| | (19,012 | ) |
Gross margin | | 49,523 |
| | 47,216 |
| | 2,307 |
|
Operations & maintenance | | 28,597 |
| | 26,766 |
| | 1,831 |
|
Depreciation & amortization | | 5,234 |
| | 4,364 |
| | 870 |
|
Other taxes | | 2,064 |
| | 1,912 |
| | 152 |
|
Total operating expenses | | 35,895 |
| | 33,042 |
| | 2,853 |
|
Operating income | | $ | 13,628 |
| | $ | 14,174 |
| | $ | (546 | ) |
The Unregulated Energy segment had operating income of $13.6 million and $14.2 million for the six months ended June 30, 2019 and 2018, respectively. The decreased operating income of approximately $0.5 million was due to an increase in gross margin of $2.3 million, offset by a $2.9 million increase in operating expenses.
We have elected to show the results of the Unregulated Energy segment separate from PESCO given its recent performance.
Unregulated Energy, excluding PESCO
|
| | | | | | | | | | | |
| | | | | Increase |
For the Six Months Ended June 30, | 2019 | | 2018 | | (decrease) |
(in thousands) | | | | | |
Gross margin | $ | 46,922 |
| | $ | 43,435 |
| | $ | 3,487 |
|
Depreciation, amortization and property taxes | 5,641 |
| | 4,757 |
| | 884 |
|
Other operating expenses | 26,048 |
| | 24,428 |
| | 1,620 |
|
Operating Income | $ | 15,233 |
| | $ | 14,250 |
| | $ | 983 |
|
Excluding PESCO, operating income for the Unregulated Energy segment increased by $1.0 million for the six months ended June 30, 2019, compared to the same period in 2018. The increased operating income was driven by a $3.5 million increase in gross margin, partially offset by $1.6 million in higher operating expenses and $0.9 million in higher depreciation, amortization and property taxes.
Gross Margin
Items contributing to the period-over-period increase in gross margin are listed in the following table:
|
| | | | |
(in thousands) | | |
Marlin Gas Services (acquired assets of Marlin Gas Transport in December 2018) | | $ | 3,359 |
|
Propane Operations | | |
Increased retail margins per gallon | | 1,159 |
|
Ohl acquisition (assets acquired in December 2018) | | 588 |
|
Decrease in customer consumption due to the absence of the 2018 Bomb Cyclone and warmer weather in 2019 | | (1,623 | ) |
Lower wholesale propane margins and sales | | (534 | ) |
Aspire Energy | | |
Rate increases | | 892 |
|
Customer consumption growth | | 200 |
|
Other variances | | (554 | ) |
Period-over-period increase in gross margin | | $ | 3,487 |
|
The following is a narrative discussion of the significant items in the foregoing table, which we believe is necessary to understand the information disclosed in the table.
Marlin Gas Services
Gross margin increased by $3.4 million for the six months ended June 30, 2019, as compared to the prior year period, asstrategies that support our core energy delivery business. As a result, of the acquisition of certain assets of Marlin Gas Transport in December 2018.
Propane Operations - Increased Retail Margins Per Gallon
Gross margin increased by $1.2 million, duewe began to lower propane costs during the first six months of 2019, compared to the same period in 2018. Our retail pricing strategy, guided by local market conditions, further increased margins in the first six months of 2019. These market conditions, which include competition with other propane suppliers,report PESCO as well as the availability and price of alternative energy sources, may fluctuate based on changes in demand, supply and other energy commodity prices.
Propane Operations - Ohl Asset Acquisition
Gross margin increased by $0.6 million as a result of the acquisition of certain assets of Ohl by Sharp in December 2018, which was rolled into Sharp.
Propane Operations - Decreased Customer Consumption - (Weather)
The absence of extreme conditions during the January 2018 "Bomb Cyclone," drove weather-related consumption in the first six months of 2018 compared to the same period in 2019 and, along with warmer weather in the Mid-Atlantic region during 2019, reduced gross margin by $1.3 million for the Mid-Atlantic propanediscontinued operations during the six months ended June 30, 2019, compared to the same period of the prior year period. Weather in Florida was approximately 25 percent warmer in the first six monthsthird quarter of 2019 reducing consumption by propane distribution customers and decreasing gross margin by approximately $0.3 million, compared to the same period in 2018.
Propane Operations - Wholesale Propane Margins
Gross margin decreased by $0.5 million in 2019 due to a lower margin per gallonexcluded PESCO's performance from continuing operations for all periods presented and a decrease in volumes deliveredclassified its assets and liabilities as held for the Mid-Atlantic propane operations.
Aspire Energy - Increased Margin Driven by Changes in Rates
Gross margin increased by $0.9 million during the six months ended June 30, 2019, compared to the same period of the prior year period, due primarily to changes in customer rates on various dates during 2018.
Aspire Energy - Customer Consumption Growth
Gross margin increased by $0.2 million during the six months ended June 30, 2019, compared to the same period in 2018, due to higher volumes delivered to customers.
Other Operating Expenses
Items contributing to the period-over-period increase in other operating expenses are listed in the following table:
|
| | | |
(in thousands) | |
Operating expenses for Marlin Gas Services and Ohl (Asset acquisitions in December 2018) including costs to expand the future growth prospects for the businesses (1) | $ | 1,689 |
|
Depreciation, asset removal and property tax costs due to new capital investments | 261 |
|
Incentive compensation costs (including timing of accruals) | 255 |
|
Outside services | 117 |
|
Facilities maintenance costs | (336 | ) |
Payroll, benefits and other employee-related expenses(2) | (39 | ) |
Other variances | 557 |
|
Period-over-period increase in other operating expenses | $ | 2,504 |
|
(1)sale, where applicable.The Ohl and Marlin Gas Services expenses have been aggregated and are excluded from the expense changes shown in the remainder of the table
(2) Since the Company self-insures for healthcare costs, benefits costs fluctuate depending upon filed claims.
|
| | | | | | | | | | | |
| | | | | Increase |
For the Six Months Ended June 30, | 2019 | | 2018 | | (decrease) |
(in thousands) | | | | | |
Gross margin | $ | 2,601 |
| | $ | 3,781 |
| | $ | (1,180 | ) |
Depreciation, amortization and property taxes | 301 |
| | 302 |
| | (1 | ) |
Other operating expenses | 3,905 |
| | 3,555 |
| | 350 |
|
Operating Income | $ | (1,605 | ) | | $ | (76 | ) | | $ | (1,529 | ) |
For the six months ended June 30, 2019, PESCO's gross margin decreased by $1.2 million compared to the same period in 2018. Lower gross margin from PESCO for the six months ended June 30, 2019 resulted from the following:
|
| | | |
(in thousands) | |
Net impact of extraordinary costs associated with the 2018 Bomb Cyclone for the Mid-Atlantic wholesale portfolio (1) | $ | 5,545 |
|
Net impact of PESCO's MTM activity | (5,892 | ) |
Absence of nonrecurring margin in 2018 associated with the Southeast portfolio | (642 | ) |
Other variances | (191 | ) |
Period-over-period increase in gross margin for PESCO | $ | (1,180 | ) |
(1)The 2018 Bomb Cyclone refers to the high-intensity winter storms in early January 2018 that impacted the Mid-Atlantic region and had a residual impact on our businesses through the month of February. The exceedingly high demand and associated impacts on pipeline capacity and gas supply in the Mid-Atlantic region created significant, unusual costs for PESCO. While such concerted impacts are not expected to occur frequently, our management revisited and refined its risk management strategies and implemented additional controls.
Operating expenses increased by $0.3 million, reflecting increased staffing, infrastructure and risk management systems necessary to support growth. Overall, PESCO’s period-over-period performance decreased by $1.5 million.
OTHER EXPENSE,INCOME (EXPENSE), NET
For the quarter ended June 30, 2019March 31, 2020 compared to the quarter ended June 30, 2018March 31, 2019
Other expense,income (expense), net, which includes non-operating investment income (expense), interest income, late fees charged to customers, gains or losses from the sale of assets and pension and other benefits expense, decreasedincreased by an immaterial amount$3.4 million in the secondfirst quarter of 2019,2020, compared to the same period in 2018.
For the six months ended June 30, 2019 compared2019. The increase was primarily due to the six months ended June 30, 2018
Other expense, net, which includes non-operating investment income (expense), interest income, late fees charged to customers, gains or losses from the sale of assetstwo properties. The property sales related to operations which, have been consolidated into our state-of-the-art Energy Lane campus and pension and other benefits expense, decreased by $0.2 million forthrough the first six monthscompletion of 2019, comparedthe conversion of the piped propane system in Ocean City, Maryland to the same period in 2018.
natural gas service.
INTEREST CHARGES
For the quarter ended June 30, 2019March 31, 2020 compared to the quarter ended June 30, 2018March 31, 2019
Interest charges for the three monthsquarter ended June 30, 2019March 31, 2020 increased by $1.8$0.2 million, compared to the same period in 2018,2019, attributable primarily to: (1)to an increase of $0.6$1.4 million in interest expense on long-term debt largely as a result of the issuance of the NYL$100.0 million of Prudential Shelf Notes in MayAugust 2019 and November 2018 and the issuance$70.0 million of termuncollateralized senior notes issued in December 2018 and January 2019 to finance the restoration2019; offset by a decrease of service to customers who lost service due to the impact of Hurricane Michael, (2) an increase of $0.8$1.0 million in interest expense primarily on higherlower levels ofoutstanding under our revolving credit facilities and lower rates on short-term borrowings coupled with higher rates related to those borrowings; and (3) an increase of $0.4$0.2 million in other interest due primarily to lowerhigher capitalization of interest associated with Eastern Shore's pipeline construction projects which are now fully completed.
For the six months ended June 30, 2019 compared to the six months ended June 30, 2018
Interest charges for the six months ended June 30, 2019 increased by $3.8 million, compared to the same perioda completed building in 2018, attributable primarily to an increase of $1.3 million in interest on long-term debt and an increase of $1.8 million in interest on higher levels of short-term borrowings coupled with higher interest rates related to those borrowings, largely as a result of the issuance of the NYL Shelf Notes in May and November 2018 and term notes issued in December 2018 and January 2019 to finance the restoration of service to customers who lost service due to the impact of Hurricane Michael. In addition, other interest increased by $0.7 million due primarily to lower capitalization of interest associated with Eastern Shore's pipeline construction projects, which are now fully completed.
Florida.
INCOME TAXES
For the quarter ended June 30, 2019March 31, 2020 compared to the quarter ended June 30, 2018March 31, 2019
Income tax expense was $3.2$10.6 million and $9.6 million for the three monthsquarters ended June 30,March 31, 2020 and 2019, compared to $2.7 million in the same period in 2018. The increase in income tax expense was attributed to higher taxable income.respectively. Our effective income tax rate was 27.6 percent and 29.926.7 percent for the three months ended June 30, 2019 and 2018, respectively.
ForMarch 31, 2020, compared to 25.0 percent for the sixthree months ended June 30,March 31, 2019. The lower effective tax rate for the first quarter of 2019 compared to the six months ended June 30, 2018
Income tax expense was $12.7 million for both of the six months ended June 30, 2019, and 2018. Income tax expense remained flatprincipally due to the amortizationimpact of the deferred taxa gross up in deferred taxes associated with TCJA. In effect, the lower income tax rate in 2019, coupled with the amortizationTCJA for certain of the deferred tax gross up, generated a tax expense largely equal to the income tax expenses in 2018 based upon the higher income tax rate. Our effective income tax rate was 25.6 percent and 27.6 percent for the six months ended June 30, 2019 and 2018, respectively.our Florida natural gas distribution operations.
FINANCIAL POSITION, LIQUIDITY AND CAPITAL RESOURCES
Our capital requirements reflect the capital-intensive and seasonal nature of our business and are principally attributable to investment in new plant and equipment, retirement of outstanding debt and seasonal variability in working capital. We rely on cash generated from operations, short-term borrowings, and other sources to meet normal working capital requirements and to temporarily finance capital expenditures. We may also issue long-term debt and equity to fund capital expenditures and to more closely align our capital structure with our target capital structure. We maintain an effective shelf registration statement with the SEC for the issuance of shares under our Dividend Reinvestment and Direct Stock Purchase Plan (the “DRIP”). Depending on our capital needs and subject to market conditions, in addition to other possible debt and equity offerings, we may consider issuing additional shares under the direct share purchase component of the DRIP.
Our energy businesses are weather-sensitive and seasonal. We normally generate a large portion of our annual net income and subsequent increases in our accounts receivable in the first and fourth quarters of each year due to significant volumes of natural gas, electricity, and propane delivered by our distribution operations, and our natural gas transmission operations to customers during the peak heating season. In addition, our natural gas and propane inventories, which usually peak in the fall months, are largely drawn down in the heating season and provide a source of cash as the inventory is used to satisfy winter sales demand.
Capital expenditures for investments in new or acquired plant and equipment are our largest capital requirements. Our capital expenditures were $72.9$41.2 million for the sixthree months ended June 30, 2019.March 31, 2020. The following table shows a range of the 2019expected 2020 capital expenditure forecast of $177.8 millionexpenditures by segment and by business line:
| | | 2019 | 2020 |
(dollars in thousands) | | Low | | High |
Regulated Energy: | | | | |
Natural gas distribution | $ | 64,143 |
| $ | 72,000 |
| | $ | 83,000 |
|
Natural gas transmission | 66,787 |
| 83,000 |
| | 96,000 |
|
Electric distribution | 5,949 |
| 5,000 |
| | 7,000 |
|
Total Regulated Energy | 136,879 |
| 160,000 |
| | 186,000 |
|
Unregulated Energy: | | | | |
Propane distribution | 11,870 |
| 10,000 |
| | 11,000 |
|
Energy transmission | 8,345 |
| 6,000 |
| | 6,000 |
|
Other unregulated energy | 11,000 |
| 6,000 |
| | 8,000 |
|
Total Unregulated Energy | 31,215 |
| 22,000 |
| | 25,000 |
|
Other: | | | | |
Corporate and other businesses | 9,705 |
| 3,000 |
| | 4,000 |
|
Total Other | 9,705 |
| 3,000 |
| | 4,000 |
|
Total 2019 Projected Capital Expenditures | $ | 177,799 |
| |
Total 2020 Expected Capital Expenditures | | $ | 185,000 |
| | $ | 215,000 |
|
The 2019 forecast,2020 budget, excluding acquisitions, includes: Eastern Shore's 2017 System Expansion and Del-Mar Energy Pathway Project, Florida's Callahan and Palm Beach County Western Expansion Callahan Intrastate Pipeline and other potential pipeline projects, continued expenditures under Florida GRIP, further expansions of our natural gas distribution and transmission systems, continued natural gas infrastructure improvement activities, information technology systems, new buildings and facilities, and other strategic initiatives and investments.
The capital expenditure projection is subject to continuous review and modification. Actual capital requirements may vary from the above estimates due to a number of factors, including changing economic conditions, capital delays because of COVID-19 that are greater than currently anticipated, customer growth in existing areas, regulation, new growth or acquisition opportunities and availability of capital. Historically, actual capital expenditures have typically lagged behind the budgeted amounts.
The timing of capital expenditures can vary based on delays in regulatory approvals, securing environmental approvals and other permits. The regulatory application and approval process has lengthened in the past few years, and we expect this trend to continue.
Capital Structure
We are committed to maintaining a sound capital structure and strong credit ratings to provide the financial flexibility needed to access capital markets when required. This commitment, along with adequate and timely rate relief for our regulated energy operations, is intended to ensure our ability to attract capital from outside sources at a reasonable cost, which will benefit our customers, creditors, employees and stockholders.
The following table presents our capitalization, excluding and including short-term borrowings, as of June 30, 2019March 31, 2020 and December 31, 2018:2019:
|
| | | | | | | | | | | | | | |
| | June 30, 2019 | | December 31, 2018 |
(in thousands) | | | | | | | | |
Long-term debt, net of current maturities | | $ | 275,924 |
| | 34 | % | | $ | 316,020 |
| | 38 | % |
Stockholders’ equity | | 544,384 |
| | 66 | % | | 518,439 |
| | 62 | % |
Total capitalization, excluding short-term debt | | $ | 820,308 |
| | 100 | % | | $ | 834,459 |
| | 100 | % |
| | | | | | | | |
| | June 30, 2019 | | December 31, 2018 |
(in thousands) | | | | | | | | |
Short-term debt | | $ | 301,226 |
| | 26 | % | | $ | 294,458 |
| | 26 | % |
Long-term debt, including current maturities | | 351,524 |
| | 29 | % | | 327,955 |
| | 29 | % |
Stockholders’ equity | | 544,384 |
| | 45 | % | | 518,439 |
| | 45 | % |
Total capitalization, including short-term debt | | $ | 1,197,134 |
| | 100 | % | | $ | 1,140,852 |
| | 100 | % |
Included in the long-term debt balances at December 31, 2018, were finance lease obligations for Sandpiper and Sharp. Sandpiper entered into a capacity, supply and operating agreement which expired in May 2019. The capacity portion of this agreement was accounted for as a finance lease. At December 31, 2018, the remaining balance of $0.6 million was included in current maturities.
Sharp had previously entered into an agreement to rent property in Anne Arundel County, Maryland, which it subsequently acquired in April 2019 (at December 31, 2018, $0.7 million of current maturities). |
| | | | | | | | | | | | | | |
| | March 31, 2020 | | December 31, 2019 |
(in thousands) | | | | | | | | |
Long-term debt, net of current maturities | | $ | 440,183 |
| | 43 | % | | $ | 440,168 |
| | 44 | % |
Stockholders’ equity | | 584,129 |
| | 57 | % | | 561,577 |
| | 56 | % |
Total capitalization, excluding short-term debt | | $ | 1,024,312 |
| | 100 | % | | $ | 1,001,745 |
| | 100 | % |
| | | | | | | | |
| | March 31, 2020 | | December 31, 2019 |
(in thousands) | | | | | | | | |
Short-term debt | | $ | 254,339 |
| | 20 | % | | $ | 247,371 |
| | 19 | % |
Long-term debt, including current maturities | | 455,783 |
| | 35 | % | | 485,768 |
| | 38 | % |
Stockholders’ equity | | 584,129 |
| | 45 | % | | 561,577 |
| | 43 | % |
Total capitalization, including short-term debt | | $ | 1,294,251 |
| | 100 | % | | $ | 1,294,716 |
| | 100 | % |
Our target ratio of equity to total capitalization, including short-term borrowings, is between 50 and 60 percent. Including the funds expended specifically related to the impact of Hurricane Michael, ourOur equity to total capitalization ratio, including short-term borrowings, was 45.545 percent as of June 30, 2019. Excluding the funds expended for Hurricane Michael restoration activities, our equity to total capitalization ratio, including short-term borrowings, would have been approximately 47.9 percent.March 31, 2020. We seek to align permanent financing with the in-service dates of itsour capital projects. We may utilize more temporary short-term debt when the financing cost is attractive as a bridge to the permanent long-term financing.financing or if the equity markets are volatile.
Term Notes
In December 2018, we issued a $30.0 million unsecured term note through PNC Bank N.A. with a maturity date of January 21, 2020. The interest rate at June 30, 2019 and December 31, 2018 was 3.13% and 3.23%, respectively, which equals the one-month LIBOR rate plus 75 basis points. In January 2019, we issued a $30.0 million unsecured term note through Branch Banking and Trust Company, with a maturity date of February 28, 2020. The interest rate at June 30, 2019This note was 3.19% which equals the one-month LIBOR rate plus 75 basis points. These term notes totaling $60.0 million are includedpaid in the current maturities of long-term debt as of June 30, 2019.full in February 2020 utilizing our short-term borrowing facilities.
Shelf Agreements
We have entered into Shelf Agreements with Prudential, MetLife and NYL, who arewith no party under noany obligation to purchase any unsecured debt. The proceeds received from the issuances of these shelf notes was used to reduce borrowings under the Revolver and/or lines of credit and/or to fund capital expenditures. We entered into the Prudential Shelf Agreement totaling $150.0 million was entered into in October 2015 and we issued $70.0 million of 3.25%3.25 percent unsecured debt in April 2017. The Prudential Shelf Agreement was then amended in September 2018 to increase the borrowing capacity back up to $150.0 million, and in August 2019, we issued $100.0 million of 3.98 percent unsecured debt. In January 2020, we submitted a request for Prudential accepted our request to purchase $50.0 million of our unsecured debt of $100.0 millionwhich was accepted and confirmed by Prudential. The Shelf Notes will bear interest at an interestthe rate of 3.98%3.00 percent per annum and the proceeds received from the issuance will be used to reduce short-term borrowings under our revolving credit facility, lines of credit and/or to fund capital expenditures. The closing of the issuance of the Shelf Notes is expected to occur on or before August 20, 2019. We entered intoJuly 15, 2020. In April 2020, the Prudential Shelf Agreement was amended to reinstate and increase the available borrowing capacity back to $150.0 million.
The NYL Shelf Agreement totaling $100.0 million was entered into in March 2017 and we issued unsecured debt totaling $100.0 million during 2018. The NYL Shelf Agreement was amended in November 2018 to add incrementalprovide additional borrowing capacity of $50.0 million. In February 2020, we submitted a request for NYL to purchase $40.0 million of our unsecured debt which was accepted and confirmed by NYL. The Shelf Notes will bear interest at the rate of 2.96 percent per annum and the proceeds received from the issuance will be used to reduce short-term borrowings under our revolving credit facility, lines of credit and/or to fund capital expenditures. The closing of the issuance of the Shelf Notes is expected to occur on or before August 14, 2020.
The MetLife Shelf Agreement was entered into in March 2017 and it expired in March 2020. As of June 30, 2019,March 31, 2020, we had not requested that MetLife purchase unsecured senior debt under the MetLife Shelf Agreement. In April 2020, we agreed to commercial terms with MetLife to provide a new $150.0 million MetLife Shelf Agreement which we entered intofor a three-year term ending March 31, 2023. The MetLife Shelf Agreement will be finalized in March 2017. The following table summarizes our shelf agreements borrowing information at June 30, 2019:May 2020.
The following table summarizes the available borrowing capacity under our Shelf Agreements and is reflective of activity that occurred subsequent to March 31, 2020:
|
| | | | | | | | | | | | | | | | |
| | Total Borrowing Capacity | | Less: Amount of Debt Issued | | Less: Unfunded Commitments | | Remaining Borrowing Capacity |
(in thousands) | | | | | | | | |
Shelf Agreement | | | | | | | | |
Prudential Shelf Agreement | | $ | 220,000 |
| | $ | (70,000 | ) | | $ | (100,000 | ) | | $ | 50,000 |
|
MetLife Shelf Agreement | | 150,000 |
| | — |
| | — |
| | 150,000 |
|
NYL Shelf Agreement | | 150,000 |
| | (100,000 | ) | | — |
| | 50,000 |
|
Total | | $ | 520,000 |
| | $ | (170,000 | ) | | $ | (100,000 | ) | | $ | 250,000 |
|
|
| | | | | | | | | | | | | | | | |
(in thousands) | | Total Borrowing Capacity | | Less: Amount of Debt Issued | | Less: Unfunded Commitments | | Remaining Borrowing Capacity |
Shelf Agreement | | | | | | | | |
Prudential Shelf Agreement (1) | | $ | 220,000 |
| | $ | (170,000 | ) | | $ | (50,000 | ) | | $ | — |
|
NYL Shelf Agreement (2) | | 150,000 |
| | (100,000 | ) | | (40,000 | ) | | 10,000 |
|
Total Shelf Agreements as of March 31, 2020 | | 370,000 |
| | (270,000 | ) | | (90,000 | ) | | 10,000 |
|
| | | | | | | | |
Subsequent amendments / renewals: | | | | | | | | |
Prudential Shelf Agreement (3) | | 150,000 |
| | — |
| | — |
| | 150,000 |
|
MetLife Shelf Agreement (4) | | 150,000 |
| | — |
| | — |
| | 150,000 |
|
Total Shelf Agreements added after March 31, 2020 | | 300,000 |
| | — |
| | — |
| | 300,000 |
|
Total Shelf Agreements as of May 5, 2020 | | $ | 670,000 |
| | $ | (270,000 | ) | | $ | (90,000 | ) | | $ | 310,000 |
|
(1) In January 2020, we requested and Prudential accepted our request to purchase $50.0 million of our unsecured debt.
(2) In February 2020, we requested and NYL accepted our request to purchase $40.0 million of our unsecured debt.
(3) In April 2020, the Prudential Shelf Agreement was amended to reinstate and increase the available borrowing capacity back to $150.0 million.
(4) In April 2020, we agreed to commercial terms with MetLife to provide a new $150.0 million MetLife Shelf Agreement for a three-year term ending March 31, 2023. The MetLife Shelf Agreement will be finalized in the May 2020.
The Uncollateralized Senior Notes, Shelf Agreements or Shelf Notes set forth certain business covenants to which we are subject when any note is outstanding, including covenants that limit or restrict our ability, and the ability of our subsidiaries, to incur indebtedness, or place or permit liens and encumbrances on any of our property or the property of our subsidiaries.
Short-term Borrowings
Our outstanding short-term borrowings at June 30, 2019 and December 31, 2018 were $301.2 million and $294.5 million at weighted average interest rates of 3.40 percent and 3.44 percent, respectively. Our current short-term borrowing limit,We are authorized by our Board of Directors isto borrow up to $400.0 million.
million of short-term debt, as required, from among our various short-term debt facilities. We utilize bank lines of credit to provide funds for our short-term cash needs to meet seasonal working capital requirements and to temporarily fund portions of the capital expenditure program.
As of June 30, 2019,March 31, 2020, we had five unsecured bank credit facilities with four financial institutions totaling $220.0 million in available credit. In addition, we have a $150.0 million Revolver under which borrowings can be designated as short-term debt. The terms of the Revolver are further described below. None of the unsecured bank lines of credit requires compensating balances. Our outstanding short-term borrowings at March 31, 2020 and December 31, 2019 were $254.3 million and $247.4 million at weighted average interest rates of 2.30 percent and 2.62 percent, respectively.
The $150.0 million Revolver is available through October 8, 2020 and is subject to the terms and conditions set forth in the credit agreement among us and the lenders related to the Revolver ("Credit Agreement"). Borrowings under the Revolver will be used for general corporate purposes, including repayments of short-term borrowings, working capital requirements and capital expenditures. Borrowings under the Revolver will bear interest at: (i) the LIBOR rate plus an applicable margin of 1.251.125 percent or less, with such margin based on total indebtedness as a percentage of total capitalization, both as defined by the Credit Agreement, or (ii) the base rate plus 0.250.125 percent or less. Interest is payable quarterly, and the Revolver is subject to a commitment fee on the unused portion of the facility. We have the right, under certain circumstances, to extend the expiration date for up to two years on any anniversary date of the Revolver, with such extension subject to the lenders' approval. We may also request the lenders to increase the Revolver to $200.0 million, with any increase at the sole discretion of each lender.
As a result of the uncertainty regarding the length of and depth of the impacts of the COVID-19 pandemic, in April 2020, we received commitments for an additional $50.0 million of short-term debt capacity through two credit facilities that mature on October 31, 2020. These facilities have a commitment fee of 35 basis points with an interest rate of 175 basis points over LIBOR, to the extent we borrow under these facilities. Additionally, we have also agreed to commercial terms for two additional short-term credit facilities totaling $45.0 million that mature on October 31, 2020. These credit facilities are expected to be finalized in May 2020.
In April 2020, we entered into interest rate swaps with notional amounts totaling $70.0 million associated with two of our short-term lines of credit for a six-month term beginning April 2020 and terminating in October 2020. The interest rate swaps were entered to hedge the variability in cash flows attributable to changes in the short-term borrowing rates during this period. The respective fixed swap rates will be 0.3875 and 0.275 percent for the period. Our short-term borrowing will be based on the 30-day LIBOR rate. The interest swap will be cash settled monthly as the counter-party will pay us the 30-day LIBOR rate less the fixed rate.
Cash Flows
The following table provides a summary of our operating, investing and financing cash flows for the sixthree months ended June 30, 2019March 31, 2020 and 2018:2019:
| | | | Six Months Ended | | Three Months Ended |
| | June 30, | | March 31, |
| | 2019 | | 2018 | | 2020 | | 2019 |
(in thousands) | | | | | | | | |
Net cash provided by (used in): | | | | | | | | |
Operating activities | | $ | 74,575 |
| | $ | 108,352 |
| | $ | 58,808 |
| | $ | 40,486 |
|
Investing activities | | (90,880 | ) | | (126,661 | ) | | (31,498 | ) | | (43,369 | ) |
Financing activities | | 17,470 |
| | 17,207 |
| | (30,313 | ) | | 4,769 |
|
Net increase (decrease) in cash and cash equivalents | | 1,165 |
| | (1,102 | ) | | (3,003 | ) | | 1,886 |
|
Cash and cash equivalents—beginning of period | | 6,089 |
| | 5,614 |
| | 6,985 |
| | 6,089 |
|
Cash and cash equivalents—end of period | | $ | 7,254 |
| | $ | 4,512 |
| | $ | 3,982 |
| | $ | 7,975 |
|
Cash Flows Provided By Operating Activities
Changes in our cash flows from operating activities are attributable primarily to changes in net income, adjusted for non-cash items such as depreciation and changes in deferred income taxes, and working capital. Changes in working capital are determined
by a variety of factors, including weather, the prices of natural gas, electricity and propane, the timing of customer collections, payments for purchases of natural gas, electricity and propane, and deferred fuel cost recoveries.
During the sixthree months ended June 30,March 31, 2020 and 2019, and 2018, net cash provided by operating activities was $74.6$58.8 million and $108.4$40.5 million, respectively, resulting in a decreasean increase in cash flows of $33.8$18.3 million. Significant operating activities generating the cash flows change were as follows:
Changes in net accounts receivable and accrued revenue and accounts payable and accrued liabilities increased cash flows by $30.5 million, due in part to the timing and receipt of payments and the absence of PESCO, whose assets and contracts we sold in the fourth quarter of 2019;
Changes in net regulatory assets and liabilities decreasedincreased cash flows by $12.6$4.2 million due primarily to the change in fuel costs collected through the various cost recovery mechanisms.mechanisms;
Net income, adjusted for reconciling activities, increased cash flows by $2.3 million, due primarily to deferred income taxes, unrealized loss from investments and commodity contracts and depreciation and amortization, offset by realized gain from property sales due to consolidation of facilities in line with our strategic initiatives;
Changes in net accounts receivableprepaid expenses and other current assets, accrued revenuecompensation and accounts payableother assets and accrued liabilities, net decreased cash flows by $11.6 million, due primarily to the timing$16.6 million; and receipt of payments.
Net cash flows from income taxes receivable decreased by $4.0 million due primarily to the absence of tax refunds associated with lower corporate tax rates implemented in the prior year as a component of the TCJA.
Net cash flows from changes in propane inventory, storage gas and other inventories decreased by approximately $3.4 million due primarily to lower levels of our inventory during 2018; and
Net cash flows from changes in customer deposits, prepaid expenses and other assets decreased by approximately $3.4$3.3 million.
Cash Flows Used in Investing Activities
Net cash used in investing activities totaled $90.9$31.5 million and $126.7$43.4 million during the sixthree months ended June 30,March 31, 2020 and 2019, and 2018, respectively, resulting in an increase in cash flows of $35.8$11.9 million. Proceeds from sale of assets increased by $4.0 million due primarily to the sale of two properties in the first quarter of 2020. Cash paid for capital expenditures was $90.4$35.2 million for the first sixthree months of 2019,2020, compared to $126.8$43.2 million for the same period in 2018,2019, resulting in increased cash flows of $36.4$8.0 million.
Cash Flows Provided by Financing Activities
Net cash providedused by financing activities totaled $17.5$30.3 million during the sixthree months ended June 30, 2019March 31, 2020 compared to net cash provided of $17.2$4.8 million used in financing activities during the prior year period resulting in an increasedecrease in cash flows of $0.3$35.1 million. The increasedecrease in net cash provided by financing activities resulted primarily from the following:
Increased cash flows from lower repayments of long-term debt of $23.8 million.
Decreased cash flows of $44.9$59.6 million associated withfrom repayments of term notes of $29.6 million during the issuance of long-term debt. For the sixthree months ended June 30, 2019 we receivedMarch 31, 2020 and decreased cash flows of $30.0 million from the issuance of term notes to finance the restoration of service to customers who lost service due to the impact of Hurricane Michael. For the six months ended June 30, 2018, we had received $74.9 million in net cash proceeds from the Revolver and the issuance of the NYL Shelf Notes (Series A).January 2019;
Increased cash flows from lower repayments of short-term borrowing of $22.5$29.8 million under our line of credit arrangements and;arrangements; and
Cash dividends of $11.8$6.5 million paid during the sixthree months ended June 30, 2019,March 31, 2020, compared to $10.3$5.9 million for the sixthree months ended June 30, 2018.March 31, 2019.
Off-Balance Sheet Arrangements
We have issued corporate guarantees to certain vendors of our subsidiaries that provide for the payment of propane and natural gas purchases in the event of the subsidiary’s default. The liabilities for these purchases are recorded in our financial statements when incurred. The aggregate amount guaranteed at June 30, 2019March 31, 2020 was $68.1$17.9 million, with the guarantees expiring on various dates through DecemberMarch 2, 2021.
The amounts related to PESCO were $6.8 million and are expected to be terminated or transferred in the second quarter of 2020. See Note 3, Acquisitions and Divestitures, for additional details on the sale of assets and contracts for PESCO.
As of March 31, 2020.
We2020, we have issued letters of credit totaling $7.0approximately $5.4 million related to the electric transmission services for FPU's northwest electric division, the firm transportation service agreement between TETLP and our Delaware and Maryland divisions, and to our current and previous primary insurance carriers withas well as PESCO. These letters of credit have various expiration dates extending through April 5,October 22, 2020. There werehave been no draws on these letters of credit as of June 30, 2019.March 31, 2020. We do not anticipate that the counterparties will draw upon these letters of credit, will be drawn upon by the counterparties, and we expect that the letters of creditthey will be renewed to the extent necessary in the future. Additional information is presented in Note 67, Other Commitments and Contingencies in the condensed consolidated financial statements.
, for additional details on the sale of PESCO.
Contractual Obligations
There has been no material change in the contractual obligations presented in our 20182019 Annual Report on Form 10-K, except for long-term debt and commodity purchase obligations entered into in the ordinary course of our business. The following table summarizes long-term debt and commodity purchase contract obligations at June 30, 2019:March 31, 2020:
| | | | Payments Due by Period | | Payments Due by Period |
| | Less than 1 year | | 1 - 3 years | | 3 - 5 years | | More than 5 years | | Total | | Less than 1 year | | 1 - 3 years | | 3 - 5 years | | More than 5 years | | Total |
(in thousands) | | | | | | | | | | | | | | | | | | | | |
Long-term debt (1) | | $ | 75,600 |
| | $ | 40,700 |
| | $ | 39,700 |
| | $ | 196,100 |
| | $ | 352,100 |
| |
Purchase obligations - Commodity (2) | | 104,916 |
| | 32,899 |
| | 13,123 |
| | 9,680 |
| | 160,618 |
| |
Purchase obligations - Commodity (1) | | | 8,276 |
| | 6,402 |
| | — |
| | — |
| | 14,678 |
|
Total | | $ | 180,516 |
| | $ | 73,599 |
| | $ | 52,823 |
| | $ | 205,780 |
| | $ | 512,718 |
| | $ | 8,276 |
| | $ | 6,402 |
| | $ | — |
| | $ | — |
| | $ | 14,678 |
|
(1) Excludes finance lease obligation, debt issuance costs and an unamortized discount of $0.6 million.
(2) In addition to the obligations noted above, we have agreements with commodity suppliers that have provisions with no minimum purchase requirements. There are no monetary penalties for reducing the amounts purchased; however, the propane contracts allow the suppliers to reduce the amounts available in the winter season if we do not purchase specified amounts during the summer season. Under these contracts, the commodity prices will fluctuate as market prices fluctuate.
Rates and Regulatory Matters
Our natural gas distribution operations in Delaware, Maryland and Florida and electric distribution operation in Florida are subject to regulation by the respective state PSC; Eastern Shore is subject to regulation by the FERC; and Peninsula Pipeline is subject to regulation by the Florida PSC. At June 30, 2019,March 31, 2020, we were involved in regulatory matters in each of the jurisdictions in which we operate. Our significant regulatory matters are fully described in Note 45, Rates and Other Regulatory Activities, to the condensed consolidated financial statements in this Quarterly Report on Form 10-Q.
Recent Authoritative Pronouncements on Financial Reporting and Accounting
Recent accounting developments applicable to us and their impact on our financial position, results of operations and cash flows are described in Note 1, Summary of Accounting Policies, to the condensed consolidated financial statements in this Quarterly Report on Form 10-Q.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
INTEREST RATE RISK
Long-term debt is subject to potential losses based on changes in interest rates. Our long-term debt at June 30, 2019,March 31, 2020, consists of fixed-rate Senior Notes and $8.0 million of fixed-rate secured debt. We evaluate whether to refinance existing debt or permanently refinance existing short-term borrowings based in part on the fluctuation in interest rates. Additional information about our long-term debt is disclosed in Note 14,15, Long-term Debt, in the condensed consolidated financial statements.
COMMODITY PRICE RISK
Regulated Energy Segment
We have entered into agreements with various wholesale suppliers to purchase natural gas and electricity for resale to our customers. Our regulated energy distribution businesses that sell natural gas or electricity to end-use customers have fuel cost recovery mechanisms authorized by the PSCs that allow us to recover all of the costs prudently incurred in purchasing natural gas and electricity for our customers. Therefore, our regulated energy distribution operations have limited commodity price risk exposure.
Unregulated Energy Segment
Our propane operations are exposed to commodity price risk as a result of the competitive nature of retail pricing offered to our customers. In order to mitigate this risk, we utilize propane storage activities and forward contracts for supply.
We can store up to approximately 78.0 million gallons of propane (including leased storage and rail cars) during the winter season to meet our customers’ peak requirements and to serve metered customers. Decreases in the wholesale price of propane may cause the value of stored propane to decline, particularly if we utilize fixed price forward contracts for supply. To mitigate the risk of propane commodity price fluctuations on the inventory valuation, we have adopted a Risk Management Policy that allows our propane distribution operation to enter into fair value hedges, cash flow hedges or other economic hedges of our inventory.
Aspire Energy is exposed to commodity price risk, primarily during the winter season, to the extent we are not successful in balancing our natural gas purchases and sales and have to secure natural gas from alternative sources at higher spot prices. In order to mitigate this risk, we procure firm capacity that meets our estimated volume requirements and we continue to seek out new producers in order to fulfill our natural gas purchase requirements.
PESCO is a party to natural gas swap and futures contracts, which provide us the right to purchase natural gas at a fixed price at future dates. Upon expiration, the contracts can be settled financially without taking delivery of natural gas, or PESCO can procure natural gas and deliver it to its customers. PESCO is subject to commodity price risk on its open positions to the extent that market prices for natural gas liquids and natural gas deviate from fixed contract settlement prices. Market risk associated with the trading of futures and forward contracts is monitored daily for compliance with our Risk Management Policy, which includes volumetric limits for open positions. To manage exposures to changing market prices, open positions are marked up or down to market prices and reviewed daily by our oversight officials. In addition, the Risk Management Committee reviews periodic reports on markets, approves any exceptions to the Risk Management Policy (within limits established by the Board of Directors) and authorizes the use of any new types of contracts.
The following table reflects the changes in the fair market value of financial derivatives contracts related to natural gas and propane purchases and sales from December 31, 20182019 to June 30, 2019:March 31, 2020:
| | (in thousands) | Balance at December 31, 2018 | | Increase (Decrease) in Fair Market Value | | Less Amounts Settled | | Balance at June 30, 2019 | Balance at December 31, 2019 | | Increase (Decrease) in Fair Market Value | | Less Amounts Settled | | Balance at March 31, 2020 |
PESCO | $ | (184 | ) | | $ | 1,673 |
| | $ | (834 | ) | | $ | 655 |
| |
Sharp | (1,522 | ) | | (392 | ) | | 836 |
| | (1,078 | ) | $ | (1,844 | ) | | $ | (1,218 | ) | | $ | 1,227 |
| | $ | (1,835 | ) |
Total | $ | (1,706 | ) | | $ | 1,281 |
| | $ | 2 |
| | $ | (423 | ) | $ | (1,844 | ) | | $ | (1,218 | ) | | $ | 1,227 |
| | $ | (1,835 | ) |
There were no changes in methods of valuations during the sixthree months ended June 30, 2019.March 31, 2020.
The following is a summary of fair market value of financial derivatives as of June 30, 2019,March 31, 2020, by method of valuation and by maturity for each fiscal year period.
| | (in thousands) | 2019 | | 2020 | | 2021 | | 2022 | | 2023 | | Total Fair Value | 2020 | | 2021 | | 2022 | | 2023 | | 2024 | | Total Fair Value |
Price based on ICE - PESCO | $ | (889 | ) | | $ | 1,096 |
| | $ | 524 |
| | $ | (68 | ) | | $ | (8 | ) | | $ | 655 |
| |
Price based on Mont Belvieu - Sharp | (481 | ) | | (546 | ) | | (45 | ) | | (6 | ) | | — |
| | (1,078 | ) | $ | (1,083 | ) | | $ | (681 | ) | | $ | (71 | ) | | $ | — |
| | $ | — |
| | $ | (1,835 | ) |
Total | $ | (1,370 | ) | | $ | 550 |
| | $ | 479 |
| | $ | (74 | ) | | $ | (8 | ) | | $ | (423 | ) | $ | (1,083 | ) | | $ | (681 | ) | | $ | (71 | ) | | $ | — |
| | $ | — |
| | $ | (1,835 | ) |
WHOLESALE CREDIT RISK
The Risk Management Committee reviews credit risks associated with counterparties to commodity derivative contracts prior to such contracts being approved.
Additional information about our derivative instruments is disclosed in Note 12,13, Derivative Instruments, in the condensed consolidated financial statements.
INFLATION
Inflation affects the cost of supply, labor, products and services required for operations, maintenance and capital improvements. To help cope with the effects of inflation on our capital investments and returns, we periodically seek rate increases from regulatory commissions for our regulated operations and closely monitor the returns of our unregulated energy business operations. To compensate for fluctuations in propane gas prices, we adjust propane sales prices to the extent allowed by the market.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
The Chief Executive Officer and Chief Financial Officer of Chesapeake Utilities, with the participation of other Company officials, have evaluated our “disclosure controls and procedures” (as such term is defined under Rules 13a-15(e) and 15d-15(e), promulgated under the Securities Exchange Act of 1934, as amended) as of June 30, 2019.March 31, 2020. Based upon their evaluation, the Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of June 30, 2019.
March 31, 2020.
Changes in Internal Control over Financial Reporting
Beginning January 1, 2019, we adopted ASU 2016-02, Leases. The impacts of the adoption are discussed in detail in Note 1, Summary of Accounting Policies, and Note 15, Leases, in the notesIn response to the condensed consolidated financial statements within this Form 10-Q. In conjunction with this adoption,COVID-19 pandemic and the current social distancing restrictions that have been established in our service territories, we have implemented changesour pandemic response plan, which includes having office staff work remotely to our controls relatedpromote social distancing in efforts to leases, which were not material to our internal controls over financial reporting. These includedreduce the developmentspread of new policies for the identification of leases and other ongoing monitoring activities. These controls were designed to provide assurance, at a reasonable level, of the fair presentation of our condensed consolidated financial statements and related disclosures.COVID-19. During the quarter ended June 30, 2019, there was noMarch 31, 2020, the implementation of our pandemic response plan did not result in a change in the design or operations of our internal controlcontrols over financial reporting that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
PART II—OTHER INFORMATION
Item 1. Legal Proceedings
As disclosed in Note 67, Other Commitments and Contingencies, of the condensed consolidated financial statements in this Quarterly Report on Form 10-Q, we are involved in certain legal actions and claims arising in the normal course of business. We are also involved in certain legal and administrative proceedings before various governmental or regulatory agencies concerning rates and other regulatory actions. In the opinion of management, the ultimate disposition of these proceedings and claims will not have a material effect on our condensed consolidated financial position, results of operations or cash flows.
Item 1A. Risk Factors
Our business, operations, and financial condition are subject to various risks and uncertainties. The risk factors described in Part I, “Item 1A. Risk Factors” in our Annual Report on Form 10-K, for the year ended December 31, 2018,2019, should be carefully considered, together with the other information contained or incorporated by reference in this Quarterly Report on Form 10-Q and in our other filings with the SEC in connection with evaluating Chesapeake Utilities, our business and the forward-looking statements contained in this Quarterly Report on Form 10-Q.
We could be negatively impacted by the recent outbreak of COVID-19.
The outbreak of COVID-19 poses a health and financial crisis in the United States and globally, and related government restrictions and requirements and private sector responses could adversely affect our business operations. It is impossible to predict the effect and ultimate impact of COVID-19 pandemic as the situation is rapidly evolving. We are responding to COVID-19 by taking steps to mitigate the potential risks to us posed by its spread. We provide a critical service to our customers, which means that it is paramount that we keep our employees who operate our businesses safe and minimize unnecessary risk of exposure to COVID-19. We have a Pandemic Response Plan that dates back to 2007. As soon as there were indications that the virus was spreading from China to other countries, we updated this plan, and continue to modify and adapt given the fluid situation. This plan guides our emergency response, business continuity, and the precautionary measures we are taking on behalf of our employees, our customer and the communities we serve. We have taken extra precautions for our employees who work in the field and for employees who continue to work in our facilities, and we have implemented work from home policies where appropriate. We have canceled travel plans, stopped movement between offices, transitioned to virtual, or on-line meetings and events, and instituted “social distancing” as directed by the CDC and state and local governments in the areas we serve. We temporarily suspended walk-in customer access to our natural gas, propane and electric offices, and reminded customers of our on-line and direct mail payment options. We also established critical teams and task forces to guide us through key aspects of this pandemic. This is a rapidly evolving situation that could lead to extended disruption of economic activity in our markets. We have instituted measures to ensure our supply chains remain open to us; however, there could be global shortages that will impact our maintenance and capital programs that we currently cannot anticipate. We will continue to monitor developments affecting our workforce, our customers and our suppliers, and we will take additional precautions that we determine are necessary in order to mitigate the impacts. We continue to implement measures to ensure that our systems remain functional in order to both serve our operational needs with a remote workforce and keep them running to ensure uninterrupted service to our customers. We currently cannot estimate the potential impacts to our financial position, results of operations, and cash flows.
Although it is not possible to reliably estimate the duration or severity of the pandemic and, hence, its financial impact on the Company, the extent to which COVID-19 impacts our results, financial position and liquidity will depend on future developments, which are highly uncertain and cannot be predicted, including new information, which may emerge concerning the severity and duration of the pandemic, the actions mandated by governmental authorities to contain COVID-19 and the availability for vaccines or therapies to treat its impact, among others.
Additional risks and uncertainties not known to us at present, or that we currently deem immaterial, also may affect Chesapeake Utilities. The occurrence of any of these known or unknown risks could have a material adverse impact on our business, financial condition and results of operations.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
|
| | | | | | | | | | | | | |
| | Total Number of Shares | | Average Price Paid | | Total Number of Shares Purchased as Part of Publicly Announced Plans | | Maximum Number of Shares That May Yet Be Purchased Under the Plans |
Period | | Purchased | | per Share | | or Programs (2) | | or Programs (2) |
April 1, 2019 through April 30, 2019 (1) | | 407 |
| | $ | 92.58 |
| | — |
| | — |
|
May 1, 2019 through May 31, 2019 | | — |
| | — |
| | — |
| | — |
|
June 1, 2019 through June 30, 2019 | | — |
| | — |
| | — |
| | — |
|
Total | | 407 |
| | $ | 92.58 |
| | — |
| | — |
|
|
| | | | | | | | | | | | | |
| | Total Number of Shares | | Average Price Paid | | Total Number of Shares Purchased as Part of Publicly Announced Plans | | Maximum Number of Shares That May Yet Be Purchased Under the Plans |
Period | | Purchased | | per Share | | or Programs (2) | | or Programs (2) |
January 1, 2020 through January 31, 2020 (1) | | 411 |
| | $ | 93.41 |
| | — |
| | — |
|
February 1, 2020 through February 29, 2020 | | — |
| | — |
| | — |
| | — |
|
March 1, 2020 through March 31, 2020 | | — |
| | — |
| | — |
| | — |
|
Total | | 411 |
| | $ | 93.41 |
| | — |
| | — |
|
(1) Chesapeake Utilities purchased shares of common stock on the open market for the purpose of reinvesting the dividend on shares held in the Rabbi Trust accounts for certain directors and senior executives under the Non-Qualified Deferred Compensation Plan. The Non-Qualified Deferred Compensation Plan is discussed in detail in Item 8 under the heading “Notes to the Consolidated Financial Statements—Note 9, Employee Benefit Plans” in our latest Annual Report on Form 10-K for the year ended December 31, 20182019. During the quarter ended June 30, 2019, 407March 31, 2020, 411 shares were purchased through the reinvestment of dividends on deferred stock units.
(2) Except for the purposes described in Footnote (1), Chesapeake Utilities has no publicly announced plans or programs to repurchase its shares.
Item 3. Defaults upon Senior Securities
None.
Item 5. Other Information
None.
|
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
101.INS* | | XBRL Instance Document. |
| |
101.SCH* | | XBRL Taxonomy Extension Schema Document. |
| |
101.CAL* | | XBRL Taxonomy Extension Calculation Linkbase Document. |
| |
101.DEF* | | XBRL Taxonomy Extension Definition Linkbase Document. |
| |
101.LAB* | | XBRL Taxonomy Extension Label Linkbase Document. |
| |
101.PRE* | | XBRL Taxonomy Extension Presentation Linkbase Document. |
*Filed herewith
SIGNATURES
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, thereunto duly authorized.
|
|
CHESAPEAKE UTILITIES CORPORATION |
|
/S/ BETH W. COOPER |
Beth W. Cooper Executive Vice President, Chief Financial Officer, and Assistant Corporate Secretary |
Date: August 8, 2019May 6, 2020