Attached files
| file | filename |
|---|---|
| EX-32.2 - EXHIBIT 32.2 - CHESAPEAKE UTILITIES CORP | cpk3312018ex-322.htm |
| EX-32.1 - EXHIBIT 32.1 - CHESAPEAKE UTILITIES CORP | cpk3312018ex-321.htm |
| EX-31.2 - EXHIBIT 31.2 - CHESAPEAKE UTILITIES CORP | cpk3312018ex-312.htm |
| EX-31.1 - EXHIBIT 31.1 - CHESAPEAKE UTILITIES CORP | cpk3312018ex-311.htm |
| EX-10.1 - EXHIBIT 10.1 - CHESAPEAKE UTILITIES CORP | cpk3312018exhibit101.htm |
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q | ||
x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended: March 31, 2018
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)
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 x No ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post such files). Yes x 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. (Check one):
Large accelerated filer | x | 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 x
Common Stock, par value $0.4867 — 16,363,792 shares outstanding as of April 30, 2018.
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
ARM: ARM Energy Management, LLC, a natural gas supply and supply management company servicing commercial and industrial customers in Western Pennsylvania, which sold certain natural gas marketing assets to PESCO in August 2017
ASC: Accounting Standards Codification issued by the FASB
Aspire Energy: Aspire Energy of Ohio, LLC, a wholly-owned subsidiary of Chesapeake Utilities
ASU: Accounting Standards Update issued by the FASB
AutoGas: Alliance AutoGas, a national consortium of companies providing an industry-leading complete program for fleets interested in shifting from gasoline to clean-burning propane, of which Sharp is a member
CDD: Cooling degree-day, which is a measure of the variation in weather based on the extent to which the daily average temperature (from 10:00 am to 10:00 am) is above 65 degrees Fahrenheit
Central Gas: Central Gas Company of Okeechobee, Incorporated, a propane distribution provider in Southeast Florida, which sold certain assets to Flo-gas in December 2017
CGC: Consumer Gas Cooperative, an Ohio natural gas cooperative
Chesapeake or Chesapeake Utilities: Chesapeake Utilities Corporation, and its direct and indirect subsidiaries, as appropriate in the context of the disclosure
Chesapeake Pension Plan: A defined benefit pension plan sponsored by Chesapeake Utilities
Chesapeake Postretirement Plan: An unfunded postretirement health care and life insurance plan sponsored by Chesapeake Utilities
Chesapeake SERP: An unfunded supplemental executive retirement pension plan sponsored by Chesapeake Utilities
Chipola: Chipola Propane Gas Company, Inc., a propane distribution service provider in Northwest Florida, which sold certain assets to Flo-gas in August 2017
CHP: Combined heat and power plant
CIAC: Contributions from customers that are used to construct facilities
Columbia Gas: Columbia Gas of Ohio, an unaffiliated local distribution company based in Ohio
Company: Chesapeake Utilities Corporation, and its direct and indirect subsidiaries, as appropriate in the context of the disclosure
CP: Certificate of Public Convenience and Necessity
Credit Agreement: The Credit Agreement dated October 8, 2015, among Chesapeake Utilities and the Lenders related to the Revolver
Deferred Compensation Plan: A non-qualified, deferred compensation arrangement under which certain of our executives and members of the Board of Directors are able to defer payment of all or a part of certain specified types of compensation, including executive salaries and cash bonuses, executive performance shares, and directors’ retainers
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 or below 65 degrees Fahrenheit
Delaware Division: Chesapeake Utilities' natural gas distribution operation serving customers in Delaware
Delmarva Peninsula: A peninsula on the east coast of the United States of America occupied by Delaware and portions of Maryland and Virginia
DNREC: Delaware Department of Natural Resources and Environmental Control
DSR: Delivery Service Rate
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 natural gas transmission subsidiary of Chesapeake Utilities
EGWIC: Eastern Gas & Water Investment Company, LLC, an affiliate of ESG
Eight Flags: Eight Flags Energy, LLC, a subsidiary of Chesapeake OnSight Services, LLC, which owns and operates a CHP plant on Amelia Island, Florida, that supplies electricity to FPU and industrial steam to Rayonier
EPA: United States Environmental Protection Agency
ESG: Eastern Shore Gas Company and its affiliates
FASB: Financial Accounting Standards Board
FDEP: Florida Department of Environmental Protection
FERC: Federal Energy Regulatory Commission, an independent agency of the United States government that regulates the interstate transmission of electricity, natural gas, and oil
FGT: Florida Gas Transmission Company
Flo-gas: Flo-gas Corporation, a wholly-owned subsidiary of FPU
FPL: Florida Power & Light Company, an unaffiliated electric company that supplies electricity to FPU
FPU: Florida Public Utilities Company, a wholly-owned subsidiary of Chesapeake Utilities
FPU Medical Plan: A separate unfunded postretirement medical plan for FPU sponsored by Chesapeake Utilities
FPU Pension Plan: A separate defined benefit pension plan for FPU sponsored by Chesapeake Utilities
GAAP: Accounting principles generally accepted in the United States of America
GRIP: The Gas Reliability Infrastructure Program, a natural gas pipeline replacement program in Florida pursuant to which we collect a surcharge from certain of our customers to recover capital and other program-related costs associated with the replacement of qualifying distribution mains and services
Gulf Power: Gulf Power Company, an unaffiliated electric company that supplies electricity to FPU
Gulfstream: Gulfstream Natural Gas System, LLC, an unaffiliated pipeline network that supplies natural gas to FPU
HDD: Heating degree-day, which is a measure of the variation in weather based on the extent to which the daily average temperature (from 10:00 am to 10:00 am) is below 65 degrees Fahrenheit
JEA: The unaffiliated community-owned utility located in Jacksonville, Florida, formerly known as Jacksonville Electric Authority
Lenders: PNC, Bank of America N.A., Citizens Bank N.A., Royal Bank of Canada, and Wells Fargo Bank, National Association, which are collectively the lenders that entered into the Credit Agreement with Chesapeake Utilities
MDE: Maryland Department of Environment
MetLife: MetLife Investment Advisors, an institutional debt investment management firm, with which we entered into the MetLife Shelf Agreement
MetLife Shelf Agreement: An agreement entered into by Chesapeake Utilities and MetLife in March 2017 pursuant to which Chesapeake Utilities may request that MetLife purchase, through March 2, 2020, up to $150.0 million of unsecured senior debt at a fixed interest rate and with a maturity date not to exceed 20 years from the date of issuance
MetLife Shelf Notes: Unsecured senior promissory notes issuable under the MetLife Shelf Agreement
MGP: Manufactured gas plant, which is a site where coal was previously used to manufacture gaseous fuel for industrial, commercial and residential use
MTM: Fair value (mark-to-market) accounting required for derivatives in accordance with ASC 815, Derivatives and Hedging
MW: Megawatts, which is a unit of measurement for electric base load power and capacity
NYL: New York Life Investors LLC, an institutional debt investment management firm, with which we entered into the NYL Shelf Agreement
NYL Shelf Agreement: An agreement entered into by Chesapeake Utilities and NYL pursuant to which Chesapeake Utilities may request that NYL purchase, through March 2, 2020, up to $100.0 million of unsecured senior debt at a fixed interest rate and with a maturity date not to exceed 20 years from the date of issuance
NYL Shelf Notes: Unsecured senior promissory notes issuable under the NYL Shelf Agreement
OPT Service: Off Peak ≤ 30 or ≤ 90 Firm Transportation Service, a tariff associated with Eastern Shore's firm transportation service that allows Eastern Shore to not schedule service for up to 30 or 90 days during the peak months of November through April each year
OTC: Over-the-counter
Peninsula Pipeline: Peninsula Pipeline Company, Inc., Chesapeake Utilities' wholly-owned Florida intrastate pipeline subsidiary
PESCO: Peninsula Energy Services Company, Inc., Chesapeake Utilities' wholly-owned natural gas marketing subsidiary
PNC: PNC Bank, National Association, the administrative agent and primary lender for our Revolver
Prudential: Prudential Investment Management Inc., an institutional investment management firm, with which we have entered into the Prudential Shelf Agreement
Prudential Shelf Agreement: An agreement entered into by Chesapeake Utilities and Prudential pursuant to which Chesapeake Utilities may request that Prudential purchase, through October 7, 2018, up to $150.0 million of Prudential Shelf Notes at a fixed interest rate and with a maturity date not to exceed 20 years from the date of issuance
Prudential Shelf Notes: Unsecured senior promissory notes issuable under the Prudential Shelf Agreement
PSC: Public Service Commission, which is the state agency that regulates the rates and services provided by Chesapeake Utilities’ natural gas and electric distribution operations in Delaware, Maryland and Florida and Peninsula Pipeline in Florida
RAP: Remedial Action Plan, which is a plan that outlines the procedures taken or being considered in removing contaminants from a MGP formerly owned by Chesapeake Utilities or FPU
Rayonier: Rayonier Performance Fibers, LLC, the company that owns the property on which Eight Flags' CHP plant is located, and a customer of the steam generated by the CHP plant
Retirement Savings Plan: Chesapeake Utilities' qualified 401(k) retirement savings plan
Revolver: Our unsecured revolving credit facility with the Lenders
Sandpiper: Sandpiper Energy, Inc., Chesapeake Utilities' wholly-owned subsidiary, which provides a tariff-based distribution service to customers in Worcester County, Maryland
Sanford Group: FPU and other responsible parties involved with the Sanford MGP site
SEC: Securities and Exchange Commission
Senior Notes: Our unsecured long-term debt issued primarily to insurance companies on various dates
Sharp: Sharp Energy, Inc., Chesapeake Utilities' wholly-owned propane distribution subsidiary
SICP: 2013 Stock and Incentive Compensation Plan
SIR: A system improvement rate adder designed to fund system expansion costs within the city limits of Ocean City, Maryland
TCJA: The Tax Cuts and Jobs Act of 2017, which is legislation passed by Congress and signed into law by the President on December 22, 2017, and which, among other things, reduced the corporate income tax rate from 35 percent to 21 percent, effective January 1, 2018
TETLP: Texas Eastern Transmission, LP, an interstate pipeline interconnected with Eastern Shore's pipeline
Xeron: Xeron, Inc., an inactive subsidiary of Chesapeake Utilities, which previously engaged in propane and crude oil trading
PART I—FINANCIAL INFORMATION
Item 1. Financial Statements
Chesapeake Utilities Corporation and Subsidiaries
Condensed Consolidated Statements of Income (Unaudited)
Three Months Ended | ||||||||
March 31, | ||||||||
2018 | 2017 | |||||||
(in thousands, except shares and per share data) | ||||||||
Operating Revenues | ||||||||
Regulated Energy | $ | 109,393 | $ | 97,654 | ||||
Unregulated Energy and other | 129,963 | 87,506 | ||||||
Total Operating Revenues | 239,356 | 185,160 | ||||||
Operating Expenses | ||||||||
Regulated Energy cost of sales | 48,231 | 40,244 | ||||||
Unregulated Energy and other cost of sales | 99,826 | 60,754 | ||||||
Operations | 32,702 | 32,490 | ||||||
Maintenance | 3,593 | 3,231 | ||||||
Depreciation and amortization | 9,704 | 8,812 | ||||||
Other taxes | 4,894 | 4,530 | ||||||
Total Operating Expenses | 198,950 | 150,061 | ||||||
Operating Income | 40,406 | 35,099 | ||||||
Other income (expense), net | 68 | (700 | ) | |||||
Interest charges | 3,664 | 2,739 | ||||||
Income Before Income Taxes | 36,810 | 31,660 | ||||||
Income taxes | 9,955 | 12,516 | ||||||
Net Income | $ | 26,855 | $ | 19,144 | ||||
Weighted Average Common Shares Outstanding: | ||||||||
Basic | 16,351,338 | 16,317,224 | ||||||
Diluted | 16,402,985 | 16,363,796 | ||||||
Earnings Per Share of Common Stock: | ||||||||
Basic | $ | 1.64 | $ | 1.17 | ||||
Diluted | $ | 1.64 | $ | 1.17 | ||||
Cash Dividends Declared Per Share of Common Stock | $ | 0.3250 | $ | 0.3050 | ||||
The accompanying notes are an integral part of these financial statements.
- 1
Chesapeake Utilities Corporation and Subsidiaries
Condensed Consolidated Statements of Comprehensive Income (Unaudited)
Three Months Ended | ||||||||
March 31, | ||||||||
2018 | 2017 | |||||||
(in thousands) | ||||||||
Net Income | $ | 26,855 | $ | 19,144 | ||||
Other Comprehensive (Loss) Income, net of tax: | ||||||||
Employee Benefits, net of tax: | ||||||||
Amortization of prior service cost, net of tax of $(5) and $(8), respectively | (14 | ) | (11 | ) | ||||
Net gain, net of tax of $41 and $77, respectively | 108 | 93 | ||||||
Cash Flow Hedges, net of tax: | ||||||||
Unrealized (loss)/gain on commodity contract cash flow hedges, net of tax of ($756) and $192, respectively | (1,788 | ) | 338 | |||||
Total Other Comprehensive (Loss) Income, net of tax | (1,694 | ) | 420 | |||||
Comprehensive Income | $ | 25,161 | $ | 19,564 | ||||
The accompanying notes are an integral part of these financial statements.
- 2
Chesapeake Utilities Corporation and Subsidiaries
Condensed Consolidated Balance Sheets (Unaudited)
Assets | March 31, 2018 | December 31, 2017 | ||||||
(in thousands, except shares and per share data) | ||||||||
Property, Plant and Equipment | ||||||||
Regulated Energy | $ | 1,083,004 | $ | 1,073,736 | ||||
Unregulated Energy | 213,803 | 210,682 | ||||||
Other businesses and eliminations | 27,892 | 27,699 | ||||||
Total property, plant and equipment | 1,324,699 | 1,312,117 | ||||||
Less: Accumulated depreciation and amortization | (279,802 | ) | (270,599 | ) | ||||
Plus: Construction work in progress | 131,640 | 84,509 | ||||||
Net property, plant and equipment | 1,176,537 | 1,126,027 | ||||||
Current Assets | ||||||||
Cash and cash equivalents | 5,996 | 5,614 | ||||||
Trade and other receivables (less allowance for uncollectible accounts of $901 and $936, respectively) | 69,447 | 77,223 | ||||||
Accrued revenue | 18,907 | 22,279 | ||||||
Propane inventory, at average cost | 7,345 | 8,324 | ||||||
Other inventory, at average cost | 4,607 | 12,022 | ||||||
Regulatory assets | 10,833 | 10,930 | ||||||
Storage gas prepayments | 1,197 | 5,250 | ||||||
Income taxes receivable | 4,378 | 14,778 | ||||||
Prepaid expenses | 8,199 | 13,621 | ||||||
Derivative assets, at fair value | 208 | 1,286 | ||||||
Other current assets | 6,717 | 7,260 | ||||||
Total current assets | 137,834 | 178,587 | ||||||
Deferred Charges and Other Assets | ||||||||
Goodwill | 22,104 | 22,104 | ||||||
Other intangible assets, net | 4,482 | 4,686 | ||||||
Investments, at fair value | 6,641 | 6,756 | ||||||
Regulatory assets | 75,536 | 75,575 | ||||||
Other assets | 4,316 | 3,699 | ||||||
Total deferred charges and other assets | 113,079 | 112,820 | ||||||
Total Assets | $ | 1,427,450 | $ | 1,417,434 | ||||
The accompanying notes are an integral part of these financial statements.
- 3
Chesapeake Utilities Corporation and Subsidiaries
Condensed Consolidated Balance Sheets (Unaudited)
Capitalization and Liabilities | March 31, 2018 | December 31, 2017 | ||||||
(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) | 7,964 | 7,955 | ||||||
Additional paid-in capital | 254,126 | 253,470 | ||||||
Retained earnings | 250,024 | 229,141 | ||||||
Accumulated other comprehensive loss | (6,873 | ) | (4,272 | ) | ||||
Deferred compensation obligation | 3,573 | 3,395 | ||||||
Treasury stock | (3,573 | ) | (3,395 | ) | ||||
Total stockholders’ equity | 505,241 | 486,294 | ||||||
Long-term debt, net of current maturities | 222,014 | 197,395 | ||||||
Total capitalization | 727,255 | 683,689 | ||||||
Current Liabilities | ||||||||
Current portion of long-term debt | 9,389 | 9,421 | ||||||
Short-term borrowing | 229,108 | 250,969 | ||||||
Accounts payable | 57,457 | 74,688 | ||||||
Customer deposits and refunds | 34,795 | 34,751 | ||||||
Accrued interest | 3,256 | 1,742 | ||||||
Dividends payable | 5,318 | 5,312 | ||||||
Accrued compensation | 5,444 | 13,112 | ||||||
Regulatory liabilities | 18,503 | 6,485 | ||||||
Derivative liabilities, at fair value | 2,359 | 6,247 | ||||||
Other accrued liabilities | 8,694 | 10,273 | ||||||
Total current liabilities | 374,323 | 413,000 | ||||||
Deferred Credits and Other Liabilities | ||||||||
Deferred income taxes | 141,484 | 135,850 | ||||||
Regulatory liabilities | 141,346 | 140,978 | ||||||
Environmental liabilities | 8,215 | 8,263 | ||||||
Other pension and benefit costs | 28,981 | 29,699 | ||||||
Deferred investment tax credits and other liabilities | 5,846 | 5,955 | ||||||
Total deferred credits and other liabilities | 325,872 | 320,745 | ||||||
Environmental and other commitments and contingencies (Note 5 and 6) | ||||||||
Total Capitalization and Liabilities | $ | 1,427,450 | $ | 1,417,434 | ||||
The accompanying notes are an integral part of these financial statements.
- 4
Chesapeake Utilities Corporation and Subsidiaries
Condensed Consolidated Statements of Cash Flows (Unaudited)
Three Months Ended | ||||||||
March 31, | ||||||||
2018 | 2017 | |||||||
(in thousands) | ||||||||
Operating Activities | ||||||||
Net income | $ | 26,855 | $ | 19,144 | ||||
Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||
Depreciation and amortization | 9,704 | 8,812 | ||||||
Depreciation and accretion included in other costs | 2,276 | 1,939 | ||||||
Deferred income taxes | 6,469 | 7,849 | ||||||
Realized gain on commodity contracts/sale of assets/investments | 3,416 | 1,330 | ||||||
Unrealized loss on investments/commodity contracts | 44 | 132 | ||||||
Employee benefits and compensation | 228 | 423 | ||||||
Share-based compensation | 1,520 | 639 | ||||||
Other, net | (12 | ) | (4 | ) | ||||
Changes in assets and liabilities: | ||||||||
Accounts receivable and accrued revenue | 9,649 | 5,095 | ||||||
Propane inventory, storage gas and other inventory | 12,448 | 6,688 | ||||||
Regulatory assets/liabilities, net | 11,511 | 6,103 | ||||||
Prepaid expenses and other current assets | 8,095 | 1,136 | ||||||
Accounts payable and other accrued liabilities | (26,932 | ) | (5,897 | ) | ||||
Income taxes receivable | 8,741 | 9,500 | ||||||
Customer deposits and refunds | 44 | 400 | ||||||
Accrued compensation | (7,731 | ) | (4,966 | ) | ||||
Other assets and liabilities, net | 347 | 1,631 | ||||||
Net cash provided by operating activities | 66,672 | 59,954 | ||||||
Investing Activities | ||||||||
Property, plant and equipment expenditures | (63,116 | ) | (42,172 | ) | ||||
Proceeds from sales of assets | 193 | 36 | ||||||
Environmental expenditures | (48 | ) | (57 | ) | ||||
Net cash used in investing activities | (62,971 | ) | (42,193 | ) | ||||
Financing Activities | ||||||||
Common stock dividends | (5,147 | ) | (4,815 | ) | ||||
(Purchase) issuance of stock under the Dividend Reinvestment Plan | (164 | ) | 222 | |||||
Tax withholding payments related to net settled stock compensation | (719 | ) | (692 | ) | ||||
Change in cash overdrafts due to outstanding checks | 2,352 | 587 | ||||||
Net repayment under line of credit agreements and short-term borrowing under the Revolver | (24,213 | ) | (11,125 | ) | ||||
Proceeds from long-term debt under the Revolver | 25,000 | — | ||||||
Repayment of long term debt and capital lease obligation | (428 | ) | (416 | ) | ||||
Net cash used in financing activities | (3,319 | ) | (16,239 | ) | ||||
Net Increase in Cash and Cash Equivalents | 382 | 1,522 | ||||||
Cash and Cash Equivalents—Beginning of Period | 5,614 | 4,178 | ||||||
Cash and Cash Equivalents—End of Period | $ | 5,996 | $ | 5,700 | ||||
The accompanying notes are an integral part of these financial statements.
- 5
Chesapeake Utilities Corporation and Subsidiaries
Condensed Consolidated Statements of Stockholders’ Equity (Unaudited)
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 | ||||||||||||||||||||||
Balance at December 31, 2016 | 16,303,499 | $ | 7,935 | $ | 250,967 | $ | 192,062 | $ | (4,878 | ) | $ | 2,416 | $ | (2,416 | ) | $ | 446,086 | |||||||||||||
Net income | — | — | — | 58,124 | — | — | — | 58,124 | ||||||||||||||||||||||
Other comprehensive income | — | — | — | — | 606 | — | — | 606 | ||||||||||||||||||||||
Dividend declared ($1.28 per share) | — | — | — | (21,045 | ) | — | — | — | (21,045 | ) | ||||||||||||||||||||
Dividend reinvestment plan | 10,771 | 5 | 730 | — | — | — | — | 735 | ||||||||||||||||||||||
Stock issuance | — | — | (10 | ) | — | — | — | — | (10 | ) | ||||||||||||||||||||
Share-based compensation and tax benefit (3)(4) | 30,172 | 15 | 1,783 | — | — | — | — | 1,798 | ||||||||||||||||||||||
Treasury stock activities | — | — | — | — | — | 979 | (979 | ) | — | |||||||||||||||||||||
Balance at December 31, 2017 | 16,344,442 | 7,955 | 253,470 | 229,141 | (4,272 | ) | 3,395 | (3,395 | ) | 486,294 | ||||||||||||||||||||
Net income | — | — | — | 26,855 | — | — | — | 26,855 | ||||||||||||||||||||||
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) | — | — | — | (5,381 | ) | — | — | — | (5,381 | ) | ||||||||||||||||||||
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 | |||||||||||||
(1) | 2,000,000 shares of preferred stock at $0.01 par value have been authorized. None has been issued or is outstanding; accordingly, no information has been included in the statements of stockholders’ equity. |
(2) | Includes 93,422 and 90,961 shares at March 31, 2018 and December 31, 2017, respectively, held in a Rabbi Trust related to our 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 March 31, 2018, and for the year ended December 31, 2017, we withheld 10,436 and 10,269 shares, respectively, for taxes. |
The accompanying notes are an integral part of these financial statements.
- 6
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, 2017. In the opinion of management, these financial statements reflect normal recurring adjustments that are necessary for a fair presentation of our results of operations, financial position and cash flows for the interim periods presented.
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 highest due to colder temperatures.
ARM, Chipola and Central Gas Asset Acquisitions
In August 2017, PESCO acquired certain natural gas marketing assets of ARM. We have accounted for the purchase of these assets as a business combination and recorded goodwill of $6.8 million, which is included in the Unregulated Energy segment. The acquired assets complement PESCO’s current asset portfolio and expanded our regional footprint and retail demand in a market where we had existing pipeline capacity and wholesale liquidity. In connection with the acquisition, we recorded a contingent liability of $2.5 million, which represents the expected future payment of additional consideration to ARM based on the achievement of certain performance targets. The payment, which is expected to be paid in 2019, is contingent upon the achievement of certain gross margin targets during the 2018 calendar year. The recorded liability is based upon our most recent gross margin projections for the acquired assets and is subject to change based on actual performance or changes in our gross margin projections.
In August 2017, Flo-gas acquired certain operating assets of Chipola, which provides propane distribution service to approximately 800 residential and commercial customers in Bay, Calhoun, Gadsden, Jackson, Liberty, and Washington Counties, Florida.
In December 2017, Flo-gas acquired certain operating assets of Central Gas, which provides propane distribution service to approximately 325 residential and commercial customers in Glades, Highlands, Martin, Okeechobee, and St. Lucie Counties, Florida.
The revenue and net income from these acquisitions that were included in our condensed consolidated statements of income for the three months ended March 31, 2018, were not material. The amounts recorded in conjunction with our acquisitions are preliminary and subject to adjustment based on additional valuations performed during the measurement period.
FASB Statements and Other Authoritative Pronouncements
Recently Adopted Accounting Standards
Revenue from Contracts with Customers (ASC 606) - On January 1, 2018, we adopted ASU 2014-09, Revenue from Contracts with Customers, and all the related amendments using the modified retrospective method. We recognized the cumulative effect of initially applying the new revenue standard to all of our contracts as an adjustment to the beginning balance of retained earnings. The comparative information has not been restated and continues to be reported under the accounting standards in effect for those periods. We expect the impact of the adoption of the new revenue standard to be immaterial to our net income on an ongoing basis.
This standard requires entities to recognize revenue when control of the promised goods or services is transferred to customers at an amount that reflects the consideration to which the entity expects to receive in exchange for those goods or services. The guidance also requires a number of disclosures regarding the nature, amount, timing, and uncertainty of revenue and the related cash flows. See Note 3, Revenue Recognition, for additional information.
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The following highlights the impact of the adoption of ASC 606 on our condensed consolidated income statement and condensed consolidated balance sheet for the three months ended March 31, 2018:
Three months ended March 31, 2018 | ||||||||||||
Income statement | As Reported | Without Adoption of ASC 606 | Effect of Change Higher (Lower) | |||||||||
(in thousands) | ||||||||||||
Regulated Energy operating revenues | $ | 109,393 | $ | 110,357 | $ | (964 | ) | |||||
Regulated Energy cost of sales | $ | 48,231 | $ | 48,803 | $ | (572 | ) | |||||
Depreciation and amortization | $ | 9,704 | $ | 9,689 | $ | 15 | ||||||
Income before income taxes | $ | 36,810 | $ | 37,217 | $ | (407 | ) | |||||
Income taxes | $ | 9,955 | $ | 10,077 | $ | (122 | ) | |||||
Net income | $ | 26,855 | $ | 27,140 | $ | (285 | ) | |||||
As of March 31, 2018 | ||||||||||||
Balance sheet | As Reported | Without Adoption of ASC 606 | Effect of Change Higher (Lower) | |||||||||
(in thousands) | ||||||||||||
Assets | ||||||||||||
Accrued revenues | $ | 18,907 | $ | 20,213 | $ | (1,306 | ) | |||||
Other assets | $ | 4,316 | $ | 4,508 | $ | (192 | ) | |||||
Capitalization | ||||||||||||
Retained earnings | $ | 250,024 | $ | 251,522 | $ | (1,498 | ) | |||||
The primary impact of the adoption of ASC 606 on our income statement was the delayed recognition of approximately $407,000 in annual revenue from 2018 to future years and a cumulative adjustment that decreased retained earnings and other assets by $1.5 million, associated with a long-term firm transmission contract with an industrial customer.
Compensation-Retirement Benefits (ASC 715) - In March 2017, the FASB issued ASU 2017-07, Improving the Presentation of Net Periodic Pension Cost and Net Periodic Post Retirement Benefit Cost. Under this guidance, employers are required to report the service cost component in the same line item or items as other compensation costs arising from services rendered by the pertinent employees during the period. The other components of net benefit costs are required to be presented in the income statement separately from the service cost component and outside a subtotal of income from operations. The update allows for capitalization of the service cost component when applicable. We adopted ASU 2017-07 on January 1, 2018 and applied the changes in the presentation of the service cost and other components of net benefit costs, retrospectively. Aside from changes in presentation, the implementation of this standard did not have a material impact on our financial position or results of operations.
Statement of Cash Flows (ASC 230) - In August 2016, the FASB issued ASU 2016-15, Classification of Certain Cash Receipts and Cash Payments, which clarifies how certain transactions are classified in the statement of cash flows. We adopted ASU 2016-15 on January 1, 2018. The implementation of this new standard did not have a material impact on our condensed consolidated statement of cash flows.
Compensation - Stock Compensation (ASC 718) - In May 2017, the FASB issued ASU 2017-09, Scope of Modification Accounting, to clarify when to account for a change in the terms or conditions of a share-based payment award as a modification. Under this guidance, modification accounting is required only if the fair value, the vesting conditions or the award classification (equity or liability) changes because of a change in the terms or conditions of the award. We adopted ASU 2017-09, prospectively, on January 1, 2018. The implementation of this new standard did not have a material impact on our financial position or results of operations.
Income Statement - Reporting Comprehensive Income (ASC 220) - In February 2018, the FASB issued ASU 2018-02, Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income, which allows a reclassification from accumulated other comprehensive income to retained earnings for stranded tax effects resulting from the TCJA. We elected to early adopt ASU 2018-02 on January 1, 2018 and reclassified stranded tax effects from accumulated other comprehensive loss related to our employee benefit plans and commodity contracts cash flows hedges. The implementation
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of this new standard did not have a material impact on our financial position and results of operations. See Note 8, Stockholders' Equity, for additional information.
Recent Accounting Standards Yet to be Adopted
Leases (ASC 842) - In February 2016, the FASB issued ASU 2016-02, Leases, which provides updated guidance regarding accounting for leases. This update requires a lessee to recognize a lease liability and a lease asset for all leases, including operating leases, with a term greater than 12 months on its balance sheet. The update also expands the required quantitative and qualitative disclosures surrounding leases. ASU 2016-02 will be effective for our annual and interim financial statements beginning January 1, 2019, although early adoption is permitted.
The FASB allows companies to elect several practical expedients, in order to simplify the transition to the new standard. The following three expedients must all be elected together:
• | An entity need not reassess whether any expired or existing contracts are or contain leases. |
• | An entity need not reassess the lease classification for any expired or existing leases (that is, all existing leases that were classified as operating leases in accordance with Topic 840 will continue to be classified as operating leases, and all existing leases that were classified as capital leases in accordance with Topic 840 will continue to be classified as capital leases). |
•An entity need not reassess initial direct costs for any existing leases.
Other practical expedients that can be elected individually are:
• | An entity may elect to use hindsight in determining the lease term and in assessing impairment of the entity’s right-of-use assets. |
• | An entity may elect to apply the provisions of the new lease guidance at the effective date, without adjusting the comparative periods presented. |
We expect to use the practical expedients to assist in implementation of this standard. We have assessed all of our leases and have concluded that we may have some operating leases that qualify for the short-term lease exception. Upon adoption, we will record the right-of-use assets and the lease liabilities related to our operating leases with a lease term in excess of one year. We do not believe that this will have a material impact on our financial position, results of operations or cash flows.
In January 2018, the FASB issued ASU 2018-01, Land Easement Practical Expedient for Transition to Topic 842, which provides a practical expedient under Topic 842 to not evaluate existing or expired land easements that were not previously accounted for as leases. We plan to utilize the provided practical expedient for existing and expired land easements and will assess all new or modified land easements and right-of-way agreements, under the guidance of ASU 2016-02, following its adoption.
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 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 the implementation of this new standard will not have a material impact on our financial position or results of operations.
Derivatives and Hedging (ASC 815) - In August 2017, the FASB issued ASU 2017-12, Targeted Improvements to Accounting for Hedging Activities, to better align an entity’s risk management activities and financial reporting for hedging relationships through changes to both the designation and measurement guidance for qualifying hedging relationships and the presentation of hedge results. Among other changes to hedge designation, ASU 2017-12 expands the risks that can be designated as hedged risks in cash flow hedges to include cash flow variability from contractually specified components of forecasted purchases or sales of non-financial assets. ASU 2017-12 requires the entire change in fair value of a hedging instrument included in the assessment of hedge effectiveness to be presented in the same income statement line that is used to present the earnings effects of the hedged item for fair value hedges and in other comprehensive income for cash flow hedges. For disclosures, ASU 2017-12 requires a tabular presentation of the income statement effect of fair value and cash flow hedges, and it eliminates the requirement to disclose the ineffective portion of the change in fair value of hedging instruments. ASU 2017-12 will be effective for our annual and interim financial statements beginning January 1, 2019, although early adoption is permitted. We intend to adopt the updated hedge accounting standard in 2018, which we expect will reduce the MTM volatility in PESCO’s results due to better alignment of risk management activities and financial reporting, risk component hedging and certain other simplifications of hedge accounting guidance.
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2. | Calculation of Earnings Per Share |
Three Months Ended | ||||||||
March 31, | ||||||||
2018 | 2017 | |||||||
(in thousands, except shares and per share data) | ||||||||
Calculation of Basic Earnings Per Share: | ||||||||
Net Income | $ | 26,855 | $ | 19,144 | ||||
Weighted average shares outstanding | 16,351,338 | 16,317,224 | ||||||
Basic Earnings Per Share | $ | 1.64 | $ | 1.17 | ||||
Calculation of Diluted Earnings Per Share: | ||||||||
Reconciliation of Numerator: | ||||||||
Net Income | $ | 26,855 | $ | 19,144 | ||||
Reconciliation of Denominator: | ||||||||
Weighted shares outstanding—Basic | 16,351,338 | 16,317,224 | ||||||
Effect of dilutive securities—Share-based compensation | 51,647 | 46,572 | ||||||
Adjusted denominator—Diluted | 16,402,985 | 16,363,796 | ||||||
Diluted Earnings Per Share | $ | 1.64 | $ | 1.17 | ||||
3. 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 subsequent month following the satisfaction of our performance obligation.
The following table is a breakdown of our revenue by major source based on product and service type for the three months ended March 31, 2018:
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Regulated Energy | Unregulated Energy | Other and Eliminations | Total | |||||||||||||
Energy distribution | ||||||||||||||||
Florida natural gas division | $ | 5,864 | $ | — | $ | — | $ | 5,864 | ||||||||
Delaware natural gas division | 32,072 | — | — | 32,072 | ||||||||||||
FPU electric distribution | 18,741 | — | — | 18,741 | ||||||||||||
FPU natural gas distribution | 23,213 | — | — | 23,213 | ||||||||||||
Maryland natural gas division | 10,672 | — | — | 10,672 | ||||||||||||
Sandpiper | 8,964 | — | — | 8,964 | ||||||||||||
Total energy distribution | 99,526 | — | — | 99,526 | ||||||||||||
Energy transmission | ||||||||||||||||
Aspire Energy | — | 12,077 | — | 12,077 | ||||||||||||
Eastern Shore | 15,597 | — | — | 15,597 | ||||||||||||
Peninsula Pipeline | 2,098 | — | — | 2,098 | ||||||||||||
Total energy transmission | 17,695 | 12,077 | — | 29,772 | ||||||||||||
Energy generation | ||||||||||||||||
Eight Flags | — | 4,378 | — | 4,378 | ||||||||||||
Propane delivery | ||||||||||||||||
Delmarva Peninsula propane delivery | — | 45,470 | — | 45,470 | ||||||||||||
Florida propane delivery | — | 6,634 | — | 6,634 | ||||||||||||
Total propane delivery | — | 52,104 | — | 52,104 | ||||||||||||
Energy services | ||||||||||||||||
PESCO | — | 81,559 | — | 81,559 | ||||||||||||
Other and eliminations | ||||||||||||||||
Eliminations | (7,828 | ) | (5,245 | ) | (15,598 | ) | (28,671 | ) | ||||||||
Other | — | 494 | 194 | 688 | ||||||||||||
Total other and eliminations | (7,828 | ) | (4,751 | ) | (15,404 | ) | (27,983 | ) | ||||||||
Total operating revenues (1) | $ | 109,393 | $ | 145,367 | $ | (15,404 | ) | $ | 239,356 | |||||||
(1) Includes other revenue (revenues from sources other than contracts with customers) of $(589,000) and $73,000 for our Regulated and Unregulated Energy segments, respectively. The sources of other revenues include revenue from alternative revenue programs related to weather normalization for Maryland division and Sandpiper and late fees.
Regulated Energy segment
Our businesses within the Regulated Energy segment are regulated utilities whose operations and customer contracts are subject to tariff rates approved by the state regulators or the FERC.
Our energy distribution operations deliver natural gas or electricity to customers and we bill the customers for both the delivery of natural gas or electricity and the related commodity, where applicable. In most jurisdictions, our customers are also required to purchase the commodity from us, although certain customers in some jurisdictions may purchase the commodity from a third party retailer (in which case we only provide delivery service). We consider the delivery of natural gas or electricity and/or the related commodity sale as one performance obligation because the commodity and its delivery are highly interrelated with two-way dependency on one another. Our performance obligation is satisfied over time as natural gas or electricity is delivered and consumed by the customer. We recognize revenues based on monthly meter readings, which are based on quantity of natural gas or electricity used and the approved rates. We accrue unbilled revenues for natural gas and electricity that have been delivered, but not yet billed, at the end of an accounting period to the extent that billing and delivery do not coincide.
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Revenues for Eastern Shore are based on rates approved by the FERC. The FERC has also authorized Eastern Shore to negotiate rates above or below the FERC-approved maximum rates, which customers can elect as an alternative to negotiated rates. Eastern Shore's services can be firm or interruptible. Firm services are offered on a guaranteed basis and are available at all times unless prevented by force majeure or other permitted curtailments. Interruptible customers only receive service when there is available capacity or supply. Our performance obligation is satisfied over time as we deliver natural gas to the customers' locations. We recognize revenues based on meter readings at the end of the month, which are based on capacity used or reserved and the fixed monthly charge.
Peninsula Pipeline is engaged in natural gas intra-state transmission to third-party customers and certain affiliates in the state of Florida. Our performance obligation is satisfied over time as the natural gas is transported to customers. We recognize revenue based on rates approved by the Florida PSC and the capacity used or reserved. Since we bill customers at the end of each month, we do not have any unbilled revenue.
Unregulated Energy segment
Revenues generated from the Unregulated Energy segment are not subject to any federal, state, or local pricing regulations. Aspire Energy primarily sources gas from hundreds of conventional producers and performs gathering and processing functions to maintain the quality and reliability of its gas for its wholesale customers. Aspire Energy's performance obligation is satisfied over time as natural gas is delivered to its customers. Aspire Energy recognizes revenue based on the deliveries of natural gas at contractually agreed upon rates (which are based upon an index price that is established monthly and a monthly operating fee, as applicable). For natural gas customers, we accrue unbilled revenues for natural gas that has been delivered, but not yet billed, at the end of an accounting period to the extent that billing and delivery do not coincide with the end of the accounting period.
Eight Flags' CHP plant, which is located on land leased from Rayonier, produces three sources of energy: electricity, steam and heated water. Rayonier purchases the steam (unfired and fired) and heated water, which is used in Rayonier’s production facility. Our electric distribution operation purchases the electricity generated by the CHP plant for distribution to its customers. Eight Flags' performance obligation is satisfied over time as deliveries of heated water, steam and electricity occur. Eight Flags recognizes revenues over time based on the amount of heated water, steam and electricity generated and delivered to its customers.
For our propane delivery operations, we recognize revenue based upon customer type and service offered. Generally, for propane bulk delivery customers (customers without meters) and wholesale sales, our performance obligation is satisfied when we deliver propane to the customers' locations (point-in-time basis). We recognize revenue from these customers based on the number of gallons delivered and the price per gallon at the point-in-time of delivery. For our propane delivery customers with meters, we satisfy our performance obligation over time when we deliver propane to customers. We recognize revenue over time based on the amount of propane consumed and the applicable price per unit. For propane delivery metered customers, we accrue unbilled revenues for propane that has been delivered, but not yet billed, at the end of an accounting period to the extent that billing and delivery do not coincide with the end of the accounting period.
PESCO provides natural gas supply and asset management services to customers (including Chesapeake Utilities affiliates) located primarily in Florida, the Delmarva Peninsula, and the Appalachian Basin. PESCO's performance obligation is satisfied over time as natural gas is delivered to its customers. PESCO recognizes revenue over time based on customer meter readings, on a monthly basis. We accrue unbilled revenues for natural gas that has been delivered, but not yet billed, at the end of an accounting period to the extent that billing and delivery do not coincide with the end of the accounting period.
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 consolidated balance sheets. The opening and closing balances of our trade receivables, contract assets, and contract liability are as follows:
Trade Receivables | Contract Assets (Non-current) | Contract Liability (Current) | ||||||||||
in thousands | ||||||||||||
Balance at 12/31/2017 | $ | 74,962 | $ | 1,270 | $ | 407 | ||||||
Balance at 3/31/2018 | 67,828 | 1,305 | 244 | |||||||||
Increase (decrease) | $ | (7,134 | ) | $ | 35 | $ | (163 | ) | ||||
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Our trade receivables are included in trade and other receivables in the condensed consolidated balance sheets. Our non-current contract assets are included in other assets in the condensed consolidated balance sheet and relate to operations and maintenance costs 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. At March 31, 2018 and December 31, 2017, we had a contract liability, which was included in other accrued liabilities in the condensed consolidated balance sheet, of $244,000 and $407,000, respectively, and which relates to non-refundable prepaid fixed fees for our Delmarva Peninsula 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 March 31, 2018, we recognized revenue of $251,000.
Practical expedients
For our businesses with agreements that contain variable consideration, we use the invoice practical expedient method. We determined that the amounts invoiced to customers correspond directly with the value to our customers and our performance to date.
For our long-term contracts, the revenue we recognize corresponds directly to the amount we have the right to invoice, which corresponds directly to our performance obligation. Our performance obligations under our long-term contracts are satisfied over time. As a practical expedient, we do not disclose information about remaining, or unsatisfied, performance obligations for these long-term contracts since the revenue recognized corresponds to the amount we have the right to invoice.
4. | 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 by the Florida PSC. Chesapeake Utilities' Florida natural gas distribution division and FPU’s natural gas and electric distribution operations continue to be subject to regulation, as separate entities, by the Florida PSC.
Delaware
Effect of the TCJA on ratepayers: As result of the enactment of the TCJA, the Delaware PSC issued an order requiring all rate-regulated utilities to file estimates of the impact of the TCJA on their cost of service for the most recent test year available (including new rate schedules). The order also required utilities to propose procedures for changing rates to reflect those impacts on or before March 31, 2018. Our Delaware Division filed the requisite reports with the Delaware PSC on March 30, 2018. If, after reviewing our report, the Delaware PSC determines to reduce our rates, it will open a new docket and establish a procedural schedule for conducting an evidentiary hearing regarding the impacts of the TCJA on our operations and existing rates. We believe that the ultimate resolution of this matter will not have a material impact on our financial position or results of operations.
In addition, on February 1, 2018, the Delaware PSC issued an order requiring Delaware rate-regulated public utilities to accrue regulatory liabilities to reflect the impacts of the Delaware jurisdictional revenue requirement in light of the changes to the federal corporate income tax laws. In compliance with this order, we have established a regulatory liability to reflect the estimated impacts of the changes in the federal corporate income tax rate.
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Maryland Division and Sandpiper
Effect of the TCJA on ratepayers: The Maryland PSC issued an order requiring all Maryland public utilities whose rates are explicitly grossed-up for income taxes to track the impacts of the TCJA beginning January 1, 2018. The order required utilities to: (a) apply regulatory accounting treatment, which includes the use of regulatory assets and liabilities for all impacts of the TCJA; (b) file, on or before February 15, 2018, an explanation of the expected effects of the TCJA on their expenses and revenues; and (c) explain when and how they expect to pass on to their customers the net results of those effects. We established a regulatory liability to reflect the estimated impacts of the changes in the federal corporate income tax rate in compliance with the Maryland PSC’s order. In addition, on February 15, 2018, our Maryland natural gas division and Sandpiper filed preliminary estimates of the annual impact of the change in the statutory federal income tax rate from 35 percent to 21 percent and requested that the Maryland PSC grant us additional time to finalize our calculations. In March 2018, our Maryland natural gas division and Sandpiper supplemented their initial filings to include, among other items, an explanation of when and how they propose to pass the tax impacts on to their customers. In April 2018, the Maryland PSC issued orders directing our Maryland natural gas division and Sandpiper to: (1) file tariff pages reflective of the Maryland PSC's recommended rates with an effective date of May 1, 2018; (2) implement a one-time bill credit for the regulatory liability established for refunds; and, (3) make an informational filing within 60 days after the distribution of the one-time refunds. The orders further directed that, if any additional tax savings are later identified by either our natural gas divisions, we make a filing with the Maryland PSC to return those savings to customers as soon as possible.
Florida
Florida Electric Reliability/Modernization Pilot Program: In July 2017, FPU’s electric division filed a petition with the Florida PSC, requesting approval to include $15.2 million of certain capital project expenditures in its rate base and to adjust its base rates accordingly. These expenditures are designed to improve the stability and safety of the electric system, while enhancing the capability of FPU’s electrical grid. An interconnection project with FPL, which enables FPU to mitigate fuel costs for its electric customers, was included in the $15.2 million capital project expenditures. In December 2017, the Florida PSC approved this petition, effective January 1, 2018. The settlement agreement prescribed the methodology for adjusting the new rates based on the lower federal income tax rate and the process and methodology regarding the refund of deferred income taxes, reclassified as a regulatory liability, as a result of the TCJA. We have established a regulatory liability to reflect the impacts of the changes in the federal corporate income tax rate in compliance with the settlement agreement.
Electric Limited Proceeding-Storm Recovery: In February 2018, FPU’s electric division 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 FPU’s 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 is currently at a deficit of $779,000. FPU is requesting approval of a surcharge of $1.82 per kilowatt per hour for two years to recover and replenish storm-related costs. At this time, no date for approval of this petition has been scheduled by the Florida PSC.
Effect of the TCJA on ratepayers: The Office of Public Counsel filed a petition requesting that the Florida PSC establish a general docket to investigate and adjust rates for all investor-owned utilities related to the passage of the TCJA. The Florida PSC issued a Memorandum with a recommendation that, if utilities do not agree to a January 1, 2018 effective date, then the effective date should be February 6, 2018. On January 30, 2018, the Florida PSC scheduled informal meetings between its staff and interested persons to discuss the impact of the TCJA. Meetings to discuss the impact for natural gas utilities, electric utilities and water and wastewater utilities were held in mid-February 2018. In December 2017, the Florida PSC issued an order regarding the limited proceeding for FPU's electric division, which prescribes the applicability, timing and treatment of the implications of the TCJA. We established a regulatory liability to reflect the impacts of the changes in the federal corporate income tax rate in compliance with the settlement agreement. We believe that the ultimate resolution of this matter will not have a material impact on our financial position or results of operations.
Eastern Shore
2017 Expansion Project: In May 2016, the FERC approved Eastern Shore's request to initiate the pre-filing review process for its 2017 Expansion Project. The 2017 Expansion Project's facilities include approximately 23 miles of pipeline looping in Pennsylvania, Maryland and Delaware; upgrades to existing metering facilities in Lancaster County, Pennsylvania; installation of an additional compressor unit at Eastern Shore’s existing Daleville compressor station in Chester County, Pennsylvania; and approximately 17 miles of new mainline extension and two pressure control stations in Sussex County, Delaware. Eastern Shore entered into precedent agreements with seven existing customers, including three affiliates of Chesapeake Utilities, for a total of 61,162 Dts/d of additional firm natural gas transportation service on Eastern Shore’s pipeline system with an additional 52,500 Dts/d of firm transportation service at certain Eastern Shore receipt facilities.
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In December 2016, Eastern Shore submitted an application for a CP authorizing construction of the expansion facilities, which the FERC issued in October 2017. The estimated cost of the 2017 Expansion Project is approximately $117.0 million. Eastern Shore submitted its Implementation Plan in October 2017 addressing the actions Eastern Shore will undertake to meet the environmental conditions set forth in the FERC's order.
In December 2017, the TETLP interconnect upgrade was placed into service, as Eastern Shore requested. The remaining segments of the 2017 Expansion Project are expected to be placed into service in various phases during the remainder of 2018.
2017 Rate Case Filing: In January 2017, Eastern Shore filed a base rate proceeding with the FERC, as required by the terms of its 2012 rate case settlement agreement. Eastern Shore's proposed rates were based on the mainline cost of service of approximately $60.0 million resulting in an overall requested revenue increase of approximately $18.9 million and a requested rate of return on common equity of 13.75 percent. In March 2017, the FERC issued an order suspending the tariff rates for the usual five-month period.
In August 2017, Eastern Shore implemented new rates, subject to refund, based upon the outcome of the rate proceeding. Eastern Shore recorded incremental revenue of approximately $3.7 million for the year ended December 31, 2017, and established a regulatory liability to reserve a portion of the total incremental revenues generated by the new rates until the rate case settlement is approved by the FERC and customers receive refunds according to the terms of the settlement agreement. Eastern Shore filed an uncontested settlement agreement and a motion to place interim settlement rates into effect beginning on January 1, 2018, which interim settlement rates were approved by the FERC in December 2017. The settlement agreement was approved by the FERC in February 2018, and became final in March 2018. Eastern Shore will recover the costs of its 2016 System Reliability Project, along with the cost of investments and expenses associated with various expansion, reliability and safety initiatives. Not considering the effects of the TCJA, base rates will increase, on an annual basis, by approximately $9.8 million.
Effect of the TCJA on ratepayers: In March 2018, Eastern Shore filed with the FERC its revised base rates, reflecting the change in its federal corporate income tax rate. These adjusted base rates became effective April 1, 2018 and will generate approximately $6.6 million, on an annual basis. Any excess accumulated deferred income tax balances will flow back to customers over the period determined in the next rate case, absent any transition rule included in the TCJA or other statutes or rules that would govern the flow-back period. In April 2018, Eastern Shore refunded its customers, with interest, the difference between the proposed rates and the settlement rates. The refund to customers also reflected the difference in rates due to the impact of TCJA.
In March 2018, the FERC issued a Notice of Proposed Rulemaking proposing a process that will allow it to determine which jurisdictional natural gas pipelines may be collecting unjust and unreasonable rates in light of the recent reduction in the corporate income tax rate in the TCJA and changes to the FERC’s income tax allowance policies following the United Airlines, Inc. v. FERC decision. The Notice of Proposed Rulemaking proposed requiring interstate natural gas pipelines to provide an informational filing to allow the FERC to evaluate the impact of the TCJA on the pipelines’ revenue requirement. In April 2018, Eastern Shore filed comments in this proceeding requesting confirmation that Eastern Shore is not required to provide an informational filing because it has already implemented lower rates based on the 21 percent tax rate in accordance with the settlement agreement in its 2017 rate case approved by the FERC. We believe that the ultimate resolution of this matter will not have a material impact on our financial position or results of operations.
5. 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.
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MGP Sites
We have participated in the investigation, assessment or remediation of, and have exposures at, seven former MGP sites. Those sites are located in Salisbury, Maryland; Seaford, Delaware; and Winter Haven, Key West, Pensacola, Sanford and West Palm Beach, Florida. We have also been in discussions with the MDE regarding another former MGP site located in Cambridge, Maryland.
As of March 31, 2018, we had approximately $9.6 million in environmental liabilities related to FPU’s MGP sites in Florida, which include the Key West, Pensacola, Sanford and West Palm Beach sites. FPU has approval to recover, from insurance and from customers through rates, up to $14.0 million of its environmental costs related to its MGP sites. Approximately $11.1 million has been recovered as of March 31, 2018, leaving approximately $2.9 million 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:
Jurisdiction | MGP Site | Status | Cost to Clean up | Recovery through Rates |
Florida | West Palm Beach | Remedial actions approved by the FDEP have been implemented on the east parcel of the site. Similar remedial actions expected to be implemented on other remaining portions. | 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. | Yes |
Florida | Sanford | In March 2018, the 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. It is unlikely that FPU will incur any significant future costs associated with the site. | FPU's remaining remediation expenses, including attorneys' fees and costs, are anticipated to be less than $10,000. | Yes |
Florida | Winter Haven | Remediation is ongoing. | Not expected to exceed $425,000, which includes costs of implementing institutional controls at the site. | Yes |
Delaware | Seaford | Proposed plan for implementation approved by the DNREC in July 2017. | Between $273,000 and $465,000. | Yes |
Maryland | Cambridge | Currently in discussions with the MDE. | Unable to estimate. | N/A |
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6. | Other Commitments and Contingencies |
Natural Gas, Electric and Propane Supply
We have entered into contractual commitments to purchase natural gas, electricity and propane from various suppliers. The contracts have various expiration dates. In 2017, our Delmarva Peninsula natural gas distribution operations entered into asset management agreements with PESCO to manage their natural gas transportation and storage capacity. The agreements were effective as of April 1, 2017, and each has a three-year term, expiring on March 31, 2020. Previously, the Delaware PSC approved PESCO to serve as an asset manager with respect to our Delaware Division.
In May 2013, Sandpiper entered into a capacity, supply and operating agreement with EGWIC to purchase propane over a six-year term ending in May 2019. Sandpiper's current annual commitment is approximately 2.5 million gallons. Sandpiper has the option to enter into either a fixed per-gallon price for some or all of the propane purchases or a market-based price utilizing one of two local propane pricing indices.
Also in May 2013, Sharp entered into a separate supply and operating agreement with EGWIC. Under this agreement, Sharp has a commitment to supply propane to EGWIC over a six-year term ending in May 2019. Sharp's current annual commitment is approximately 2.5 million gallons. The agreement between Sharp and EGWIC is separate from the agreement between Sandpiper and EGWIC, and neither agreement permits the parties to set off the rights and obligations specified in one agreement against those specified in the other agreement.
Chesapeake Utilities' Florida Division has firm transportation service contracts with FGT and 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. 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.
FPU’s electric fuel supply contracts require FPU to maintain an acceptable standard of creditworthiness based on specific financial ratios. FPU’s agreement with FPL 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 this ratio is not met by FPU, it must provide an irrevocable letter of credit or pay all amounts outstanding under the agreement within five business days. FPU’s electric fuel supply agreement with Gulf Power requires FPU to meet the following ratios based on the average of the prior six quarters: (a) funds from operations interest coverage ratio (minimum of 2 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 March 31, 2018, 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 its retail electric customers. In July 2016, Eight Flags also started selling steam, pursuant to a separate 20-year contract, to Rayonier, 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 issued corporate guarantees to certain vendors of our subsidiaries, primarily PESCO. These corporate guarantees provide for the payment 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. The aggregate amount guaranteed at March 31, 2018 was approximately $72.7 million, with the guarantees expiring on various dates through March 2019.
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 14, Long-Term Debt, for further details).
Letters of Credit
As of March 31, 2018, we have issued letters of credit totaling approximately $5.0 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 December 2019. There have been
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no draws on these letters of credit as of March 31, 2018. We do not anticipate that the counterparties will draw upon these letters of credit, and we expect that the letters of credit will be renewed to the extent necessary in the future.
Other
We are involved in certain other legal actions and claims arising in the normal course of business. We are also involved in certain legal and administrative proceedings before various governmental agencies concerning rates. In the opinion of management, the ultimate disposition of these proceedings will not have a material effect on our consolidated financial position, results of operations or cash flows.
7. | Segment Information |
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 comprised of two 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, propane delivery, and other energy services (propane distribution, the operations of our Eight Flags' CHP plant, as well as natural gas marketing, gathering, processing, transportation and supply). These operations are unregulated as to their rates and services. Through March 2017, this segment also included the operations of Xeron, our propane and crude oil trading subsidiary that wound down its operations shortly after the first quarter of 2017. 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. |
The remainder of our operations is 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.
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The following table presents financial information about our reportable segments:
Three Months Ended | ||||||||
March 31, | ||||||||
2018 | 2017 | |||||||
(in thousands) | ||||||||
Operating Revenues, Unaffiliated Customers | ||||||||
Regulated Energy segment | $ | 105,954 | $ | 96,446 | ||||
Unregulated Energy segment and other businesses | 133,402 | 88,714 | ||||||
Total operating revenues, unaffiliated customers | $ | 239,356 | $ | 185,160 | ||||
Intersegment Revenues (1) | ||||||||
Regulated Energy segment | $ | 3,439 | $ | 1,208 | ||||
Unregulated Energy segment | 11,965 | 4,011 | ||||||
Other businesses | 194 | 228 | ||||||
Total intersegment revenues | $ | 15,598 | $ | 5,447 | ||||
Operating Income | ||||||||
Regulated Energy segment | $ | 26,711 | $ | 23,395 | ||||
Unregulated Energy segment | 13,684 | 11,575 | ||||||
Other businesses and eliminations | 11 | 129 | ||||||
Total operating income | 40,406 | 35,099 | ||||||
Other income (expense), net | 68 | (700 | ) | |||||
Interest charges | 3,664 | 2,739 | ||||||
Income before Income Taxes | 36,810 | 31,660 | ||||||
Income taxes | 9,955 | 12,516 | ||||||
Net Income | $ | 26,855 | $ | 19,144 | ||||
(1) | All significant intersegment revenues are billed at market rates and have been eliminated from consolidated operating revenues. |
(in thousands) | March 31, 2018 | December 31, 2017 | ||||||
Identifiable Assets | ||||||||
Regulated Energy segment | $ | 1,148,635 | $ | 1,121,673 | ||||
Unregulated Energy segment | 246,230 | 261,541 | ||||||
Other businesses and eliminations | 32,585 | 34,220 | ||||||
Total identifiable assets | $ | 1,427,450 | $ | 1,417,434 | ||||
Our operations are entirely domestic.
8. | Stockholder's Equity |
Preferred Stock
We had 2,000,000 authorized and unissued shares of preferred stock, $0.01 par value per share, as of March 31, 2018 and December 31, 2017. Shares of preferred stock may be issued from time to time, by authorization of our Board of Directors and without the necessity of further action or authorization by stockholders, in one or more series and with such voting powers, designations, preferences and relative, participating, optional or other special rights and qualifications as the Board of Directors may, in its discretion, determine.
Accumulated Other Comprehensive Loss
Defined benefit pension and postretirement plan items, unrealized gains (losses) of our propane swap agreements, call options and natural gas futures contracts, designated as commodity contracts cash flow hedges, are the components of our accumulated other comprehensive loss. During the first quarter of 2018, we elected to early adopt ASU 2018-02, Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income. Accordingly, we reclassified
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stranded tax effects resulting from the TCJA from accumulated other comprehensive loss to retained earnings, related to our employee benefit plans and commodity contracts cash flows hedges.
The following tables present the changes in the balance of accumulated other comprehensive (loss)/income for the three months ended March 31, 2018 and 2017. All amounts except the stranded tax reclassification are presented net of tax.
Defined Benefit | Commodity | |||||||||||
Pension and | Contracts | |||||||||||
Postretirement | Cash Flows | |||||||||||
Plan Items | Hedges | Total | ||||||||||
(in thousands) | ||||||||||||
As of December 31, 2017 | $ | (4,743 | ) | $ | 471 | $ | (4,272 | ) | ||||
Other comprehensive loss before reclassifications | — | (2,232 | ) | (2,232 | ) | |||||||
Amounts reclassified from accumulated other comprehensive income | 94 | 444 | 538 | |||||||||
Net current-period other comprehensive income/(loss) | 94 | (1,788 | ) | (1,694 | ) | |||||||
Stranded tax reclassification to retained earnings | (1,022 | ) | 115 | (907 | ) | |||||||
As of March 31, 2018 | $ | (5,671 | ) | $ | (1,202 | ) | $ | (6,873 | ) | |||
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Defined Benefit | Commodity | |||||||||||
Pension and | Contracts | |||||||||||
Postretirement | Cash Flows | |||||||||||
Plan Items | Hedges | Total | ||||||||||
(in thousands) | ||||||||||||
As of December 31, 2016 | $ | (5,360 | ) | $ | 482 | $ | (4,878 | ) | ||||
Other comprehensive income/(loss) before reclassifications | (9 | ) | 1,278 | 1,269 | ||||||||
Amounts reclassified from accumulated other comprehensive income/(loss) | 91 | (940 | ) | (849 | ) | |||||||
Net prior-period other comprehensive income | 82 | 338 | 420 | |||||||||
As of March 31, 2017 | $ | (5,278 | ) | $ | 820 | $ | (4,458 | ) | ||||
The following table presents amounts reclassified out of accumulated other comprehensive loss for the three months ended March 31, 2018 and 2017. Deferred gains or losses for our commodity contracts cash flows hedges are recognized in earnings upon settlement.
Three Months Ended | ||||||||
March 31, | ||||||||
2018 | 2017 | |||||||
(in thousands) | ||||||||
Amortization of defined benefit pension and postretirement plan items: | ||||||||
Prior service credit (1) | $ | 19 | $ | 19 | ||||
Net loss(1) | (149 | ) | (170 | ) | ||||
Total before income taxes | (130 | ) | (151 | ) | ||||
Income tax benefit | 36 | 60 | ||||||
Net of tax | $ | (94 | ) | $ | (91 | ) | ||
Gains and losses on commodity contracts cash flow hedges: | ||||||||
Propane swap agreements (2) | $ | (464 | ) | $ | 388 | |||
Natural gas swaps (2) | (450 | ) | — | |||||
Natural gas futures (2) | 298 | 1,150 | ||||||
Total before income taxes | (616 | ) | 1,538 | |||||
Income tax benefit (expense) | 172 | (598 | ) | |||||
Net of tax | (444 | ) | 940 | |||||
Total reclassifications for the period | $ | (538 | ) | $ | 849 | |||
(1) These amounts are included in the computation of net periodic costs (benefits). See Note 9, Employee Benefit Plans, for additional details.
(2) These amounts are included in the effects of gains and losses from derivative instruments. See Note 12, Derivative Instruments, for additional details.
Amortization of defined benefit pension and postretirement plan items is included in operations expense, and gains and losses on propane swap agreements, call options and natural gas futures contracts are included in cost of sales in the accompanying consolidated statements of income. The income tax benefit is included in income tax expense in the accompanying consolidated statements of income.
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9. | Employee Benefit Plans |
Net periodic benefit costs for our pension and post-retirement benefits plans for the three months ended March 31, 2018 and 2017 are set forth in the following tables:
Chesapeake Pension Plan | FPU Pension Plan | Chesapeake SERP | Chesapeake Postretirement Plan | FPU Medical Plan | ||||||||||||||||||||||||||||||||||||
For the Three Months Ended March 31, | 2018 | 2017 | 2018 | 2017 | 2018 | 2017 | 2018 | 2017 | 2018 | 2017 | ||||||||||||||||||||||||||||||
(in thousands) | ||||||||||||||||||||||||||||||||||||||||
Interest cost | $ | 97 | $ | 103 | $ | 592 | $ | 623 | $ | 21 | $ | 22 | $ | 10 | $ | 10 | $ | 12 | $ | 13 | ||||||||||||||||||||
Expected return on plan assets | (138 | ) | (127 | ) | (774 | ) | (699 | ) | — | — | — | — | — | — | ||||||||||||||||||||||||||
Amortization of prior service credit | — | — | — | — | — | — | (19 | ) | (19 | ) | — | — | ||||||||||||||||||||||||||||
Amortization of net loss | 88 | 107 | 109 | 131 | 25 | 22 | 15 | 16 | — | — | ||||||||||||||||||||||||||||||
Net periodic cost (benefit) (1) | 47 | 83 | (73 | ) | 55 | 46 | 44 | 6 | 7 | 12 | 13 | |||||||||||||||||||||||||||||
Amortization of pre-merger regulatory asset | — | — | 191 | 191 | — | — | — | — | 2 | 2 | ||||||||||||||||||||||||||||||
Total periodic cost | $ | 47 | $ | 83 | $ | 118 | $ | 246 | $ | 46 | $ | 44 | $ | 6 | $ | 7 | $ | 14 | $ | 15 | ||||||||||||||||||||
(1)As a result of our adoption of ASU 2017-07 on January 1, 2018, the "other than service" cost components of net periodic costs have been recorded or reclassified to other income (expense), net in the condensed consolidated statements of income.
We expect to record pension and postretirement benefit costs of approximately $913,000 for 2018. Included in these costs is approximately $769,000 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. The unamortized balance of this regulatory asset was approximately $1.1 million and approximately $1.3 million at March 31, 2018 and December 31, 2017, respectively.
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 months ended March 31, 2018 and 2017:
For the Three Months Ended March 31, 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 | 109 | 25 | 15 | — | 237 | ||||||||||||||||||
Total recognized in net periodic benefit cost | 88 | 109 | 25 | (4 | ) | — | 218 | |||||||||||||||||
Recognized from accumulated other comprehensive loss (1) | 88 | 21 | 25 | (4 | ) | — | 130 | |||||||||||||||||
Recognized from regulatory asset | — | 88 | — | — | — | 88 | ||||||||||||||||||
Total | $ | 88 | $ | 109 | $ | 25 | $ | (4 | ) | $ | — | $ | 218 | |||||||||||
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For the Three Months Ended March 31, 2017 | Chesapeake Pension Plan | FPU Pension Plan | Chesapeake SERP | Chesapeake Postretirement Plan | FPU Medical Plan | Total | ||||||||||||||||||
(in thousands) | ||||||||||||||||||||||||
Prior service credit | $ | — | $ | — | $ | — | $ | (19 | ) | $ | — | $ | (19 | ) | ||||||||||
Net loss | 107 | 131 | 22 | 16 | — | 276 | ||||||||||||||||||
Total recognized in net periodic benefit cost | 107 | 131 | 22 | (3 | ) | — | 257 | |||||||||||||||||
Recognized from accumulated other comprehensive loss (1) | 107 | 25 | 22 | (3 | ) | — | 151 | |||||||||||||||||
Recognized from regulatory asset | — | 106 | — | — | — | 106 | ||||||||||||||||||
Total | $ | 107 | $ | 131 | $ | 22 | $ | (3 | ) | $ | — | $ | 257 | |||||||||||
(1) See Note 8, Stockholder's Equity.
During the three months ended March 31, 2018, we contributed approximately $72,000 to the Chesapeake Pension Plan and approximately $309,000 to the FPU Pension Plan. We expect to contribute a total of approximately $359,000 and approximately $1.5 million to the Chesapeake Pension Plan and FPU Pension Plan, respectively, during 2018, which represents the minimum annual contribution payments required.
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 three months ended March 31, 2018, were approximately $38,000. We expect to pay total cash benefits of approximately $151,000 under the Chesapeake SERP in 2018. Cash benefits paid under the Chesapeake Postretirement Plan, primarily for medical claims for the three months ended March 31, 2018, were approximately $12,000. We estimate that approximately $97,000 will be paid for such benefits under the Chesapeake Postretirement Plan in 2018. Cash benefits paid under the FPU Medical Plan, primarily for medical claims for the three months ended March 31, 2018, were approximately $11,000. We estimate that approximately $88,000 will be paid for such benefits under the FPU Medical Plan in 2018.
10. | Investments |
The investment balances at March 31, 2018 and December 31, 2017, consisted of the following:
(in thousands) | March 31, 2018 | December 31, 2017 | |||||
Rabbi trust (associated with the Deferred Compensation Plan) | $ | 6,621 | $ | 6,734 | |||
Investments in equity securities | 20 | 22 | |||||
Total | $ | 6,641 | 6,756 | ||||
We classify these investments as trading securities and report them at their fair value. For the three months ended March 31, 2018 and 2017, we recorded a net unrealized loss of approximately $44,000 and a net unrealized gain of approximately $252,000, 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 consolidated balance sheets and is adjusted each period for the gains and losses incurred by the investments in the Rabbi Trust.
11. | Share-Based Compensation |