Attached files
| file | filename |
|---|---|
| EX-32.2 - EXHIBIT 32.2 - CHESAPEAKE UTILITIES CORP | cpk9302018ex-322.htm |
| EX-32.1 - EXHIBIT 32.1 - CHESAPEAKE UTILITIES CORP | cpk9302018ex-321.htm |
| EX-31.2 - EXHIBIT 31.2 - CHESAPEAKE UTILITIES CORP | cpk9302018ex-312.htm |
| EX-31.1 - EXHIBIT 31.1 - CHESAPEAKE UTILITIES CORP | cpk9302018ex-311.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: September 30, 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 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 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.
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 — 16,378,545 shares outstanding as of October 31, 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, of which Sharp is a member, providing an industry-leading complete program for fleets interested in shifting from gasoline to clean-burning propane
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
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
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
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
Del-Mar Energy Pathway Project - A project for the construction of pipeline looping in Kent County, Delaware, and additional mainline extension in Sussex County, Delaware. The project also upgrades an existing pressure control facility, which includes a portion of mainline extension in Sussex County, Delaware, as well as in Somerset County, Maryland.
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
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
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
NOPR: Notice of Proposed Rulemaking
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 in March 2017 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: PGIM, Inc., formerly known as 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 in October 2015 pursuant to which Chesapeake Utilities could 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, as subsequently amended in September 2018, pursuant to which we may request that Prudential purchase up to $150.0 million of our unsecured debt over a three-year period, expiring in August 2021
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
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: A qualified 401(k) retirement savings plan sponsored by Chesapeake Utilities
Revolver: Our unsecured revolving credit facility with the Lenders
ROU: Right of use
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: 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., Chesapeake Utilities' wholly-owned propane distribution subsidiary
SICP: Chesapeake Utilities' 2013 Stock and Incentive Compensation Plan
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 | Nine Months Ended | ||||||||||||||||
September 30, | September 30, | ||||||||||||||||
2018 | 2017 | 2018 | 2017 | ||||||||||||||
(in thousands, except shares and per share data) | |||||||||||||||||
Operating Revenues | |||||||||||||||||
Regulated Energy | $ | 72,770 | $ | 69,703 | $ | 252,667 | $ | 238,353 | |||||||||
Unregulated Energy and other | 67,509 | 57,233 | 263,632 | 198,827 | |||||||||||||
Total Operating Revenues | 140,279 | 126,936 | 516,299 | 437,180 | |||||||||||||
Operating Expenses | |||||||||||||||||
Regulated Energy cost of sales | 21,501 | 22,794 | 89,741 | 87,206 | |||||||||||||
Unregulated Energy and other cost of sales | 55,660 | 44,066 | 204,880 | 145,325 | |||||||||||||
Operations | 32,821 | 29,274 | 101,804 | 91,778 | |||||||||||||
Maintenance | 3,208 | 2,737 | 10,419 | 9,370 | |||||||||||||
Gain from a settlement | — | — | (130 | ) | (130 | ) | |||||||||||
Depreciation and amortization | 10,633 | 9,362 | 30,176 | 27,267 | |||||||||||||
Other taxes | 4,420 | 4,071 | 13,719 | 12,572 | |||||||||||||
Total Operating Expenses | 128,243 | 112,304 | 450,609 | 373,388 | |||||||||||||
Operating Income | 12,036 | 14,632 | 65,690 | 63,792 | |||||||||||||
Other expense, net | (11 | ) | (154 | ) | (204 | ) | (1,855 | ) | |||||||||
Interest charges | 4,430 | 3,321 | 11,976 | 9,133 | |||||||||||||
Income Before Income Taxes | 7,595 | 11,157 | 53,510 | 52,804 | |||||||||||||
Income taxes | 2,057 | 4,324 | 14,731 | 20,781 | |||||||||||||
Net Income | $ | 5,538 | $ | 6,833 | $ | 38,779 | $ | 32,023 | |||||||||
Weighted Average Common Shares Outstanding: | |||||||||||||||||
Basic | 16,378,545 | 16,344,442 | 16,366,608 | 16,334,210 | |||||||||||||
Diluted | 16,428,439 | 16,389,635 | 16,416,255 | 16,378,633 | |||||||||||||
Earnings Per Share of Common Stock: | |||||||||||||||||
Basic | $ | 0.34 | $ | 0.42 | $ | 2.37 | $ | 1.96 | |||||||||
Diluted | $ | 0.34 | $ | 0.42 | $ | 2.36 | $ | 1.96 | |||||||||
Cash Dividends Declared Per Share of Common Stock | $ | 0.3700 | $ | 0.3250 | $ | 1.0650 | $ | 0.9550 | |||||||||
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 | Nine Months Ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
2018 | 2017 | 2018 | 2017 | |||||||||||||
(in thousands) | ||||||||||||||||
Net Income | $ | 5,538 | $ | 6,833 | $ | 38,779 | $ | 32,023 | ||||||||
Other Comprehensive Income (Loss), net of tax: | ||||||||||||||||
Employee Benefits, net of tax: | ||||||||||||||||
Amortization of prior service cost, net of tax of $(5), $(8), $(16) and $(23), respectively | (14 | ) | (11 | ) | (42 | ) | (35 | ) | ||||||||
Net gain, net of tax of $38, $69, $118 and $212, respectively | 100 | 102 | 317 | 297 | ||||||||||||
Cash Flow Hedges, net of tax: | ||||||||||||||||
Unrealized gain (loss) on commodity contract cash flow hedges, net of tax of $257, $(15), $(70) and $(376), respectively | 644 | (104 | ) | (83 | ) | (643 | ) | |||||||||
Total Other Comprehensive Income (Loss), net of tax | 730 | (13 | ) | 192 | (381 | ) | ||||||||||
Comprehensive Income | $ | 6,268 | $ | 6,820 | $ | 38,971 | $ | 31,642 | ||||||||
The accompanying notes are an integral part of these financial statements.
- 2
Chesapeake Utilities Corporation and Subsidiaries
Condensed Consolidated Balance Sheets (Unaudited)
Assets | September 30, 2018 | December 31, 2017 | ||||||
(in thousands, except shares and per share data) | ||||||||
Property, Plant and Equipment | ||||||||
Regulated Energy | $ | 1,242,840 | $ | 1,073,736 | ||||
Unregulated Energy | 220,721 | 210,682 | ||||||
Other businesses and eliminations | 34,975 | 27,699 | ||||||
Total property, plant and equipment | 1,498,536 | 1,312,117 | ||||||
Less: Accumulated depreciation and amortization | (295,449 | ) | (270,599 | ) | ||||
Plus: Construction work in progress | 60,243 | 84,509 | ||||||
Net property, plant and equipment | 1,263,330 | 1,126,027 | ||||||
Current Assets | ||||||||
Cash and cash equivalents | 6,215 | 5,614 | ||||||
Trade and other receivables (less allowance for uncollectible accounts of $987 and $936, respectively) | 52,660 | 77,223 | ||||||
Accrued revenue | 12,352 | 22,279 | ||||||
Propane inventory, at average cost | 7,444 | 8,324 | ||||||
Other inventory, at average cost | 4,786 | 12,022 | ||||||
Regulatory assets | 6,891 | 10,930 | ||||||
Storage gas prepayments | 6,989 | 5,250 | ||||||
Income taxes receivable | 8,725 | 14,778 | ||||||
Prepaid expenses | 9,775 | 13,621 | ||||||
Derivative assets, at fair value | 10,568 | 1,286 | ||||||
Other current assets | 2,557 | 7,260 | ||||||
Total current assets | 128,962 | 178,587 | ||||||
Deferred Charges and Other Assets | ||||||||
Goodwill | 19,604 | 19,604 | ||||||
Other intangible assets, net | 4,073 | 4,686 | ||||||
Investments, at fair value | 7,951 | 6,756 | ||||||
Regulatory assets | 76,343 | 75,575 | ||||||
Other assets | 5,293 | 3,699 | ||||||
Total deferred charges and other assets | 113,264 | 110,320 | ||||||
Total Assets | $ | 1,505,556 | $ | 1,414,934 | ||||
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 | September 30, 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) | 7,971 | 7,955 | ||||||
Additional paid-in capital | 255,509 | 253,470 | ||||||
Retained earnings | 249,805 | 229,141 | ||||||
Accumulated other comprehensive loss | (4,987 | ) | (4,272 | ) | ||||
Deferred compensation obligation | 3,818 | 3,395 | ||||||
Treasury stock | (3,818 | ) | (3,395 | ) | ||||
Total stockholders’ equity | 508,298 | 486,294 | ||||||
Long-term debt, net of current maturities | 241,597 | 197,395 | ||||||
Total capitalization | 749,895 | 683,689 | ||||||
Current Liabilities | ||||||||
Current portion of long-term debt | 9,613 | 9,421 | ||||||
Short-term borrowing | 268,293 | 250,969 | ||||||
Accounts payable | 60,228 | 74,688 | ||||||
Customer deposits and refunds | 34,887 | 34,751 | ||||||
Accrued interest | 3,969 | 1,742 | ||||||
Dividends payable | 6,060 | 5,312 | ||||||
Accrued compensation | 10,396 | 13,112 | ||||||
Regulatory liabilities | 9,099 | 6,485 | ||||||
Derivative liabilities, at fair value | 9,774 | 6,247 | ||||||
Other accrued liabilities | 14,819 | 10,273 | ||||||
Total current liabilities | 427,138 | 413,000 | ||||||
Deferred Credits and Other Liabilities | ||||||||
Deferred income taxes | 146,814 | 135,850 | ||||||
Regulatory liabilities | 141,840 | 140,978 | ||||||
Environmental liabilities | 7,941 | 8,263 | ||||||
Other pension and benefit costs | 28,839 | 29,699 | ||||||
Deferred investment tax credits and other liabilities | 3,089 | 3,455 | ||||||
Total deferred credits and other liabilities | 328,523 | 318,245 | ||||||
Environmental and other commitments and contingencies (Notes 5 and 6) | ||||||||
Total Capitalization and Liabilities | $ | 1,505,556 | $ | 1,414,934 | ||||
The accompanying notes are an integral part of these financial statements.
- 4
Chesapeake Utilities Corporation and Subsidiaries
Condensed Consolidated Statements of Cash Flows (Unaudited)
Nine Months Ended | ||||||||
September 30, | ||||||||
2018 | 2017 | |||||||
(in thousands) | ||||||||
Operating Activities | ||||||||
Net income | $ | 38,779 | $ | 32,023 | ||||
Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||
Depreciation and amortization | 30,176 | 27,267 | ||||||
Depreciation and accretion included in other costs | 6,464 | 5,989 | ||||||
Deferred income taxes | 11,047 | 29,520 | ||||||
Realized loss (gain) on commodity contracts/sale of assets/investments | 4,015 | (2,817 | ) | |||||
Unrealized gain on investments/commodity contracts | (427 | ) | (695 | ) | ||||
Employee benefits and compensation | 456 | 1,212 | ||||||
Share-based compensation | 2,535 | 1,608 | ||||||
Other, net | (35 | ) | (39 | ) | ||||
Changes in assets and liabilities: | ||||||||
Accounts receivable and accrued revenue | 32,988 | 12,912 | ||||||
Propane inventory, storage gas and other inventory | 6,379 | (8,256 | ) | |||||
Regulatory assets/liabilities, net | 3,899 | 927 | ||||||
Prepaid expenses and other current assets | (1,533 | ) | (2,860 | ) | ||||
Accounts payable and other accrued liabilities | (9,590 | ) | 4,515 | |||||
Income taxes receivable | 6,053 | (3,810 | ) | |||||
Customer deposits and refunds | 136 | 3,255 | ||||||
Accrued compensation | (2,804 | ) | (2,030 | ) | ||||
Other assets and liabilities, net | (542 | ) | (349 | ) | ||||
Net cash provided by operating activities | 127,996 | 98,372 | ||||||
Investing Activities | ||||||||
Property, plant and equipment expenditures | (171,410 | ) | (130,137 | ) | ||||
Proceeds from sales of assets | 565 | 601 | ||||||
Acquisitions, net of cash acquired | — | (11,707 | ) | |||||
Environmental expenditures | (322 | ) | (210 | ) | ||||
Net cash used in investing activities | (171,167 | ) | (141,453 | ) | ||||
Financing Activities | ||||||||
Common stock dividends | (16,171 | ) | (14,780 | ) | ||||
(Purchase) issuance of stock under the Dividend Reinvestment Plan | (518 | ) | 254 | |||||
Stock issuance | — | (10 | ) | |||||
Tax withholding payments related to net settled stock compensation | (1,210 | ) | (692 | ) | ||||
Change in cash overdrafts due to outstanding checks | 712 | (3,013 | ) | |||||
Net borrowing (repayment) under line of credit agreements and short-term borrowing under the Revolver | 16,612 | (3,760 | ) | |||||
Proceeds from long-term debt and long-term borrowing under the Revolver | 74,901 | 69,800 | ||||||
Repayment of long-term debt, long-term borrowing under the Revolver and capital lease obligation | (30,554 | ) | (5,510 | ) | ||||
Net cash provided in financing activities | 43,772 | 42,289 | ||||||
Net Increase (Decrease) in Cash and Cash Equivalents | 601 | (792 | ) | |||||
Cash and Cash Equivalents—Beginning of Period | 5,614 | 4,178 | ||||||
Cash and Cash Equivalents—End of Period | $ | 6,215 | $ | 3,386 | ||||
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 | — | — | — | 38,779 | — | — | — | 38,779 | ||||||||||||||||||||||
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 income | — | — | — | — | 192 | — | — | 192 | ||||||||||||||||||||||
Dividend declared ($1.065 per share) | — | — | — | (17,524 | ) | — | — | — | (17,524 | ) | ||||||||||||||||||||
Dividend reinvestment plan | — | — | (2 | ) | — | — | — | — | (2 | ) | ||||||||||||||||||||
Share-based compensation and tax benefit (3) (4) | 34,103 | 16 | 2,041 | — | — | — | — | 2,057 | ||||||||||||||||||||||
Treasury stock activities | — | — | — | — | — | 423 | (423 | ) | — | |||||||||||||||||||||
Balance at September 30, 2018 | 16,378,545 | $ | 7,971 | $ | 255,509 | $ | 249,805 | $ | (4,987 | ) | $ | 3,818 | $ | (3,818 | ) | $ | 508,298 | |||||||||||||
(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 96,622 and 90,961 shares at September 30, 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 nine months ended September 30, 2018, and for the year ended December 31, 2017, we withheld 16,918 and 10,269 shares, respectively, for taxes. |
The accompanying notes are an integral part of these financial statements.
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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. The acquired assets complemented PESCO’s existing asset portfolio and expanded our regional footprint and retail demand in a market where we had existing pipeline capacity and wholesale liquidity. We accounted for the purchase of these assets as a business combination and initially recorded goodwill of $6.8 million within our Unregulated Energy segment. In connection with the acquisition, we initially recorded a contingent consideration liability of $2.5 million, based on our preliminary analysis projecting that the acquired business would achieve at least a certain gross margin target in 2018. During the second quarter of 2018, we identified certain known information as of the acquisition date that was not considered in our original analysis and would have resulted in no contingent consideration liability being initially recorded. Therefore, we reversed the originally-recorded contingent liability and reduced goodwill by $2.5 million. We similarly revised the condensed consolidated balance sheet as of December 31, 2017. These revisions are considered immaterial to our condensed consolidated financial statements. The need for a contingent consideration liability will be re-evaluated in the final reporting period in 2018. However, our current assessment is that no contingent consideration will be paid.
In August 2017, Flo-gas acquired certain operating assets of Chipola, which provided 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, which were included in our condensed consolidated statements of income for the three and nine months ended September 30, 2018, were not material. The acquisition accounting amounts recorded in conjunction with the ARM and Chipola acquisitions are now final although the amounts associated with the Central Gas acquisition 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. The impact of adoption of the new revenue standard was immaterial to our net income.
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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 that 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.
The following highlights the impact of the adoption of ASC 606 on our condensed consolidated income statements for the three and nine months ended September 30, 2018 and condensed consolidated balance sheet as of September 30, 2018:
Three Months Ended September 30, 2018 | Nine Months Ended September 30, 2018 | |||||||||||||||||||||||
Income statement | As Reported | Without Adoption of ASC 606 | Effect of Change Higher (Lower) | As Reported | Without Adoption of ASC 606 | Effect of Change Higher (Lower) | ||||||||||||||||||
(in thousands) | ||||||||||||||||||||||||
Regulated Energy operating revenues | $ | 72,770 | $ | 72,879 | $ | (109 | ) | $ | 252,667 | $ | 253,659 | $ | (992 | ) | ||||||||||
Regulated Energy cost of sales | 21,501 | 21,512 | (11 | ) | 89,741 | 90,454 | (713 | ) | ||||||||||||||||
Depreciation and amortization | 10,633 | 10,629 | 4 | 30,176 | 30,150 | 26 | ||||||||||||||||||
Income before income taxes | 7,595 | 7,697 | (102 | ) | 53,510 | 53,815 | (305 | ) | ||||||||||||||||
Income taxes | 2,057 | 2,086 | (29 | ) | 14,731 | 14,819 | (88 | ) | ||||||||||||||||
Net income | 5,538 | 5,611 | (73 | ) | 38,779 | 38,996 | (217 | ) | ||||||||||||||||
As of September 30, 2018 | ||||||||||||
Balance sheet | As Reported | Without Adoption of ASC 606 | Effect of Change Higher (Lower) | |||||||||
(in thousands) | ||||||||||||
Assets | ||||||||||||
Accrued revenues | $ | 12,352 | $ | 13,658 | $ | (1,306 | ) | |||||
Other assets | $ | 5,293 | $ | 5,702 | $ | (409 | ) | |||||
Capitalization | ||||||||||||
Retained earnings | $ | 249,805 | $ | 251,520 | $ | (1,715 | ) | |||||
The primary impact of the adoption of ASC 606 on our income statement was the delayed recognition of approximately $305,000 in revenue in the first nine months of 2018 to future years and a cumulative adjustment that decreased retained earnings and other assets by $1.7 million at September 30, 2018, 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 should not be included operating expenses. 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, 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. 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) change because of a change in the terms or conditions of the award. We adopted
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ASU 2017-09, prospectively, on January 1, 2018. 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 adopted 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 contract cash flows hedges. Implementation 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.
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. 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 that is 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. ASU 2017-12 requires a tabular presentation of the income statement effect of fair value and cash flow hedges and 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 adopted ASU 2017-12 effective July 1, 2018, with no material impact on our financial statements. See Note 12, Derivative Instruments, for additional information with respect to the disclosures required by ASU 2017-12.
Recent Accounting Standards Yet to be Adopted
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 ROU model that requires a lessee to recognize a ROU 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; and ASU No. 2018-11, Targeted Improvements. ASU 2016-02 will be effective for our annual and interim financial statements, beginning January 1, 2019, although early adoption is permitted. We expect to adopt ASU 2016-02 effective January 1, 2019 and use the modified retrospective transition approach to all existing leases.
The new standard permits companies to elect several practical expedients. We expect to elect: (1) the ‘package of practical expedients,’ pursuant to which we do not need to reassess our prior conclusions about lease identification, lease classification and initial direct costs and (2) the ‘use-of-hindsight’ practical expedient, which allows us to use hindsight in assessing impairment of our existing land easements. We also intend to aggregate all non-lease components with the lease components to which they relate.
The most significant effect of ASC 842 will be recognition of ROU assets and lease liabilities on our balance sheet for our operating leases and providing significant new disclosures about our leasing activities. We currently expect that upon adoption, we will recognize lease liabilities ranging from $4.0 million to $5.0 million, with corresponding ROU of the same amount based on the present value of the remaining minimum rental payments for existing operating leases.
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 implementation of this new standard will not have a material impact on our financial position or results of operations.
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. ASU 2018-07 will be effective for our annual and interim financial statements beginning January 1, 2019, although early adoption is permitted. We believe that implementation of this new standard will not have a material impact on our financial position or results of operations.
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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. ASU 2018-13 will be effective for our annual and interim financial statements beginning January 1, 2020 and, since the changes only impact disclosures, will not have a material impact on our financial position or results of operations.
Compensation - Retirement Benefits - Defined Benefit Plans - General (ASC 715-20) - In August 2018, the FASB issued ASU 2018-14, Disclosure Framework - Changes to the Disclosure Requirements for Defined Benefit Plans, which removes, clarifies and adds certain disclosure requirements in ASC 715-20 related to defined benefit pension and other postretirement plans. ASU 2018-14 will be effective for our annual and interim financial statements, on a retrospective basis, beginning January 1, 2021 and, since the changes only impact disclosures, will not have a material impact on our financial position or results of operations.
2. | Calculation of Earnings Per Share |
Three Months Ended | Nine Months Ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
2018 | 2017 | 2018 | 2017 | |||||||||||||
(in thousands, except shares and per share data) | ||||||||||||||||
Calculation of Basic Earnings Per Share: | ||||||||||||||||
Net Income | $ | 5,538 | $ | 6,833 | $ | 38,779 | $ | 32,023 | ||||||||
Weighted average shares outstanding | 16,378,545 | 16,344,442 | 16,366,608 | 16,334,210 | ||||||||||||
Basic Earnings Per Share | $ | 0.34 | $ | 0.42 | $ | 2.37 | $ | 1.96 | ||||||||
Calculation of Diluted Earnings Per Share: | ||||||||||||||||
Reconciliation of Numerator: | ||||||||||||||||
Net Income | $ | 5,538 | $ | 6,833 | $ | 38,779 | $ | 32,023 | ||||||||
Reconciliation of Denominator: | ||||||||||||||||
Weighted shares outstanding—Basic | 16,378,545 | 16,344,442 | 16,366,608 | 16,334,210 | ||||||||||||
Effect of dilutive securities—Share-based compensation | 49,894 | 45,193 | 49,647 | 44,423 | ||||||||||||
Adjusted denominator—Diluted | 16,428,439 | 16,389,635 | 16,416,255 | 16,378,633 | ||||||||||||
Diluted Earnings Per Share | $ | 0.34 | $ | 0.42 | $ | 2.36 | $ | 1.96 | ||||||||
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 month following the satisfaction of our performance obligation.
The following table displays our revenue by major source based on product and service type for the three months ended September 30, 2018:
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(in thousands) | Regulated Energy | Unregulated Energy | Other and Eliminations | Total | ||||||||||||
Energy distribution | ||||||||||||||||
Florida natural gas division | $ | 6,282 | $ | — | $ | — | $ | 6,282 | ||||||||
Delaware natural gas division | 7,010 | — | — | 7,010 | ||||||||||||
FPU electric distribution | 23,830 | — | — | 23,830 | ||||||||||||
FPU natural gas distribution | 17,390 | — | — | 17,390 | ||||||||||||
Maryland natural gas division | 2,463 | — | — | 2,463 | ||||||||||||
Sandpiper | 3,561 | — | — | 3,561 | ||||||||||||
Total energy distribution | 60,536 | — | — | 60,536 | ||||||||||||
Energy transmission | ||||||||||||||||
Aspire Energy | — | 5,750 | — | 5,750 | ||||||||||||
Eastern Shore | 16,189 | — | — | 16,189 | ||||||||||||
Peninsula Pipeline | 3,404 | — | — | 3,404 | ||||||||||||
Total energy transmission | 19,593 | 5,750 | — | 25,343 | ||||||||||||
Energy generation | ||||||||||||||||
Eight Flags | — | 4,044 | — | 4,044 | ||||||||||||
Propane delivery | ||||||||||||||||
Delmarva Peninsula propane delivery | — | 13,172 | — | 13,172 | ||||||||||||
Florida propane delivery | — | 4,166 | — | 4,166 | ||||||||||||
Total propane delivery | — | 17,338 | — | 17,338 | ||||||||||||
Energy services | ||||||||||||||||
PESCO | — | 51,619 | — | 51,619 | ||||||||||||
Other and eliminations | ||||||||||||||||
Eliminations | (7,359 | ) | (3,185 | ) | (8,668 | ) | (19,212 | ) | ||||||||
Other | — | 476 | 135 | 611 | ||||||||||||
Total other and eliminations | (7,359 | ) | (2,709 | ) | (8,533 | ) | (18,601 | ) | ||||||||
Total operating revenues (1) | $ | 72,770 | $ | 76,042 | $ | (8,533 | ) | $ | 140,279 | |||||||
(1) Includes other revenue (revenues from sources other than contracts with customers) of $546,000 and $91,000 for our Regulated and Unregulated Energy segments, respectively. The sources of other revenues include revenue from alternative revenue programs related to revenue normalization for Maryland division and Sandpiper and late fees.
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The following table displays our revenue by major source based on product and service type for the nine months ended September 30, 2018:
(in thousands) | Regulated Energy | Unregulated Energy | Other and Eliminations | Total | ||||||||||||
Energy distribution | ||||||||||||||||
Florida natural gas division | $ | 18,462 | $ | — | $ | — | $ | 18,462 | ||||||||
Delaware natural gas division | 50,963 | — | — | 50,963 | ||||||||||||
FPU electric distribution | 60,933 | — | — | 60,933 | ||||||||||||
FPU natural gas distribution | 58,885 | — | — | 58,885 | ||||||||||||
Maryland natural gas division | 17,136 | — | — | 17,136 | ||||||||||||
Sandpiper | 16,892 | — | — | 16,892 | ||||||||||||
Total energy distribution | 223,271 | — | — | 223,271 | ||||||||||||
Energy transmission | ||||||||||||||||
Aspire Energy | — | 23,682 | — | 23,682 | ||||||||||||
Eastern Shore | 46,289 | — | — | 46,289 | ||||||||||||
Peninsula Pipeline | 8,469 | — | — | 8,469 | ||||||||||||
Total energy transmission | 54,758 | 23,682 | — | 78,440 | ||||||||||||
Energy generation | ||||||||||||||||
Eight Flags | — | 12,652 | — | 12,652 | ||||||||||||
Propane delivery | ||||||||||||||||
Delmarva Peninsula propane delivery | — | 73,907 | — | 73,907 | ||||||||||||
Florida propane delivery | — | 15,741 | — | 15,741 | ||||||||||||
Total propane delivery | — | 89,648 | — | 89,648 | ||||||||||||
Energy services | ||||||||||||||||
PESCO | — | 181,976 | — | 181,976 | ||||||||||||
Other and eliminations | ||||||||||||||||
Eliminations | (25,362 | ) | (11,679 | ) | (34,643 | ) | (71,684 | ) | ||||||||
Other | — | 1,475 | 521 | 1,996 | ||||||||||||
Total other and eliminations | (25,362 | ) | (10,204 | ) | (34,122 | ) | (69,688 | ) | ||||||||
Total operating revenues (1) | $ | 252,667 | $ | 297,754 | $ | (34,122 | ) | $ | 516,299 | |||||||
(1) Includes other revenue (revenues from sources other than contracts with customers) of $(399,000) and $246,000 for our Regulated and Unregulated Energy segments, respectively. The sources of other revenues include revenue from alternative revenue programs related to revenue normalization for Maryland division and Sandpiper and late fees.
Regulated Energy segment
The businesses within our Regulated Energy segment are regulated utilities whose operations and customer contracts are subject to rates approved by the respective state PSC 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 provide delivery service only). 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
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meter readings, which are based on the 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.
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 the FERC-approved maximum 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 receive service only 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 capacity used or reserved and the fixed monthly charge.
Peninsula Pipeline is engaged in natural gas intrastate 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. We accrue unbilled revenues for transportation services provided and not yet billed at the end of an accounting period.
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 established monthly index price 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 affiliates of Chesapeake Utilities) 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 balances of our trade receivables, contract assets, and contract liabilities as of December 31, 2017 and September 30, 2018 were as follows:
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Trade Receivables | Contract Assets (Non-current) | Contract Liabilities (Current) | ||||||||||
(in thousands) | ||||||||||||
Balance at 12/31/2017 | $ | 74,962 | $ | 1,270 | $ | 407 | ||||||
Balance at 9/30/2018 | 50,937 | 2,331 | 583 | |||||||||
Increase (decrease) | $ | (24,025 | ) | $ | 1,061 | $ | 176 | |||||
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 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. At September 30, 2018 and December 31, 2017, we had a contract liability of $583,000 and $407,000, respectively, which was included in other accrued liabilities in the condensed consolidated balance sheet, 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 and nine months ended September 30, 2018, we recognized revenue of $48,000 and $384,000, respectively.
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 customers: 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. Subsequently, the Delaware Division filed an updated report reflecting the impact of the TCJA on May 31, 2018. If, after reviewing the required filing, 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.
In addition, on February 1, 2018, the Delaware PSC issued an order requiring Delaware rate-regulated public utilities to accrue regulatory liabilities reflecting the impacts of changes in the federal corporate income tax laws. In compliance with the Delaware PSC order, we have established a regulatory liability to reflect the estimated impacts of the changes in the federal corporate income tax rate. We believe that the reduction in rates charged by our Delaware Division because of the lower federal income taxes resulting from the TCJA will not have a material effect on our financial position or results of operations, because the reduction will be offset by an equal reduction in income tax expense.
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Underserved Area Rates: In December 2017, we filed an application requesting authorization to utilize existing expansion area tariff rates to serve customers located outside of the current Sussex County, Delaware expansion area boundaries that cannot be economically served under the regular tariff rates. In June 2018, we reached a settlement agreement with the relevant parties, which allows us to utilize higher rates for areas outside of our existing expansion area. The Delaware PSC unanimously approved the settlement at its public meeting on July 10, 2018. The new rate schedule became effective on August 1, 2018.
CGS: In June 2018, we filed with the Delaware PSC an application requesting approval of the acquisition and subsequent conversion of propane to natural gas for certain CGS located within our territory. We requested the establishment of regulatory accounting treatment and valuation of the acquisition of certain CGS, approval of a methodology to set new distribution rates for CGS customers and approval of a new system-wide tariff rate that will recover CGS conversion costs. The Delaware PSC has not reached a decision as of the date of this filing.
Maryland Division and Sandpiper
Effect of the TCJA on customers: The Maryland PSC issued an order requiring all Maryland public utilities with rates 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 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 impacts of the changes in the federal corporate income tax rate in compliance with the Maryland PSC’s order and made compliance filings that included preliminary estimates of the annual impact of the change in the statutory federal income tax rate. In April 2018, the Maryland PSC ordered both the Maryland Division and Sandpiper to implement reduced rates effective May 1, 2018, reflecting the impact of the TCJA. We implemented a one-time bill credit for the regulatory liability established for the refunds and issued the refunds to customers in July 2018. We submitted an informational filing to the Maryland PSC within the requisite 60 days of completing the refund payments. Additionally, if in the future the Maryland Division or Sandpiper identify any additional tax savings, we must submit an additional filing to the Maryland PSC in order to return those savings to customers as soon as possible. We believe that the reduction in rates charged by our Maryland Division and Sandpiper because of the lower federal income taxes resulting from the TCJA will not have a material effect on our financial position or results of operations, because the reduction is offset by an equal reduction in income tax expense.
Florida
Florida Electric Reliability/Modernization Pilot Program: In July 2017, our Florida electric operations 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 our electrical grid. An interconnection project with FPL, which enables us to mitigate fuel costs for our 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, our Florida electric operations 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 storm reserve to its pre-storm level of $1.5 million. As a result of these hurricanes and tropical storms, our Florida electric operation’s storm reserve was depleted and is currently at a deficit of $779,000. We have requested approval of a surcharge of $1.82 per kilowatt per hour for two years to recover and replenish storm-related costs. This matter is scheduled for review at the Florida PSC’s meeting in the fourth quarter of 2018.
Effect of the TCJA on customers: 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. Hearings for Florida’s electric utilities are tentatively scheduled for the first quarter of 2019, and hearings for the natural gas utilities are tentatively scheduled for the fourth quarter of 2018.
In December 2017, the Florida PSC issued an order regarding the limited proceeding for our Florida electric operations, which prescribes the applicability, timing and treatment of the impacts of the TCJA, as discussed above. In June, our
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Florida natural gas operations filed petitions and testimony in support of the disposition of the impacts created by the TCJA. We believe that the reduction in rates charged by our Florida electric and natural gas operations because of the lower federal income taxes resulting from the TCJA will not have a material effect on our financial position or results of operations, because the reduction is offset by an equal reduction in income tax expense.
In October 18, 2018, our electric distribution operation reached a settlement agreement with the Office of Public Counsel. This settlement agreement was filed for approval with the Florida PSC on October 19, 2018 and hearing in this action is expected to be held in December 2018. This agreement proposes that our electric distribution operation will flow benefit associated with the TCJA back 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.
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.
In October 2017, the FERC issued a CP authorizing Eastern Shore to construct the expansion facilities. 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. In June 2018, the Fair Hill Loop in Chester County, Pennsylvania and Cecil County, Maryland was placed into service. With the exception of some minor facilities, the remaining segments of the 2017 Expansion Project are expected to be placed into service in various phases during the fourth quarter 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 based its proposed rates on the mainline cost of service of approximately $60.0 million resulting in an overall requested annual 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 on 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 pending FERC approval of the settlement and refunds to customers according to the terms of the settlement agreement. The FERC approved the settlement agreement in February 2018, and it became final in March 2018. Exclusive of the TCJA impact, base rates would have increased, on an annual basis, by approximately $9.8 million.
Effect of the TCJA on customers: 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 in incremental margin, 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 to 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 the TCJA.
In March 2018, the FERC issued a NOPR that proposed a process to determine which 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 NOPR 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 in accordance with the settlement agreement in its 2017 rate case approved by the FERC. In July 2018, the FERC issued a final rule, which largely adopted the process proposed in the NOPR, requiring all interstate natural gas companies to file an informational filing for the purpose of evaluating the impact of the TCJA and the United
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Airlines, Inc. v. FERC decision on interstate natural gas pipelines’ revenue requirements. The final rule provides that an individual pipeline has the option to request a waiver if the pre-March 2018 settlement justifies not adjusting its rates at this time. In September 2018, Eastern Shore requested that the FERC grant it a waiver of the requirement. In October 2018, the FERC issued an order granting the waiver.
Del-Mar Energy Pathway Project: In September 2018, Eastern Shore filed a Certificate Application for the Del-Mar Energy Pathway project with the FERC. The proposed project would provide an additional 14,300 Dts/d of capacity to four customers. Facilities to be constructed include six miles of pipeline looping in Delaware, 13 miles of new mainline extension in Sussex County, Delaware and Somerset County, Maryland as well as new pressure control and delivery stations in these counties. The benefits of this project include (i) further natural gas transmission pipeline infrastructure in eastern Sussex County, Delaware and (ii) first extension of Eastern Shore’s pipeline system into Somerset County, Maryland.
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.
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 are also in discussions with the MDE regarding another former MGP site located in Cambridge, Maryland.
As of September 30, 2018, we had approximately $9.4 million 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 rates, up to $14.0 million of its environmental costs related to its MGP sites. As of September 30, 2018 we have recovered approximately $11.4 million, leaving approximately $2.6 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:
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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. We expect to implement similar remedial actions on other remaining portions, including the anticipated demolition of buildings on the site's west parcel in 2018. | 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. Site assessment is ongoing. | Between $273,000 and $465,000. | Yes |
Maryland | Cambridge | Currently in discussions with the MDE. | Unable to estimate. | N/A |
6. | Other Commitments and Contingencies |
Natural Gas, Electric and Propane Supply
We have entered into contractual commitments, with various expiration dates, to purchase natural gas, electricity and propane from various suppliers. 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 1.8 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 1.8 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.
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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 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 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 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 September 30, 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 our 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 September 30, 2018 was approximately $73.9 million, with the guarantees expiring on various dates through September 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 September 30, 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 no draws on these letters of credit as of September 30, 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 |
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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.
The following table presents financial information about our reportable segments:
Three Months Ended | Nine Months Ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
2018 | 2017 | 2018 | 2017 | |||||||||||||
(in thousands) | ||||||||||||||||
Operating Revenues, Unaffiliated Customers | ||||||||||||||||
Regulated Energy segment | $ | 69,697 | $ | 67,257 | $ | 243,382 | $ | 232,519 | ||||||||
Unregulated Energy segment and other businesses | 70,582 | 59,679 | 272,917 | 204,661 | ||||||||||||
Total operating revenues, unaffiliated customers | $ | 140,279 | $ | 126,936 | $ | 516,299 | $ | 437,180 | ||||||||
Intersegment Revenues (1) | ||||||||||||||||
Regulated Energy segment | $ | 3,073 | $ | 2,446 | $ | 9,285 | $ | 5,834 | ||||||||
Unregulated Energy segment | 5,460 | 5,009 | 24,837 | 15,801 | ||||||||||||
Other businesses | 135 | 194 | 521 | 581 | ||||||||||||
Total intersegment revenues | $ | 8,668 | $ | 7,649 | $ | 34,643 | $ | 22,216 | ||||||||
Operating Income | ||||||||||||||||
Regulated Energy segment | $ | 15,915 | $ | 15,523 | $ | 56,930 | $ | 53,004 | ||||||||
Unregulated Energy segment | (3,933 | ) | (951 | ) | 10,241 | 10,626 | ||||||||||
Other businesses and eliminations | 54 | 60 | (1,481 | ) | 162 | |||||||||||
Total operating income | 12,036 | 14,632 | 65,690 | 63,792 | ||||||||||||
Other expense, net | (11 | ) | (154 | ) | (204 | ) | (1,855 | ) | ||||||||
Interest charges | 4,430 | 3,321 | 11,976 | 9,133 | ||||||||||||
Income before Income Taxes | 7,595 | 11,157 | 53,510 | 52,804 | ||||||||||||
Income taxes | 2,057 | 4,324 | 14,731 | 20,781 | ||||||||||||
Net Income | $ | 5,538 | $ | 6,833 | $ | 38,779 | $ | 32,023 | ||||||||
(1) | All significant intersegment revenues are billed at market rates and have been eliminated from consolidated operating revenues. |
(in thousands) | September 30, 2018 | December 31, 2017 | ||||||
Identifiable Assets | ||||||||
Regulated Energy segment | $ | 1,223,537 | $ | 1,121,673 | ||||
Unregulated Energy segment | 244,390 | 259,041 | ||||||
Other businesses and eliminations | 37,629 | 34,220 | ||||||
Total identifiable assets | $ | 1,505,556 | $ | 1,414,934 | ||||
Our operations are entirely domestic.
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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 September 30, 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 early adoption of ASU 2018-02, Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income. Accordingly, we reclassified 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 flow hedges.
The following tables present the changes in the balance of accumulated other comprehensive (loss)/income as of September 30, 2018 and 2017. 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, 2017 | $ | (4,743 | ) | $ | 471 | $ | (4,272 | ) | ||||
Other comprehensive loss before reclassifications | ||||||||||||