R
EPORT
OF
I
NDEPENDENT
R
EGISTERED
P
UBLIC
A
CCOUNTING
F
IRM
To the Board of Directors and Stockholders of
Chesapeake Utilities Corporation
We have audited the accompanying consolidated balance sheets of Chesapeake Utilities Corporation (the “Company”) as of December 31, 2016 and 2015, and the related consolidated statements of income, comprehensive income, stockholders’ equity, and cash flows for each of the years in the three-year period ended December 31, 2016. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2016 and 2015, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2016, in conformity with accounting principles generally accepted in the United States of America.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the Company’s internal control over financial reporting as of December 31, 2016, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework), and our report dated
February 27, 2017
expressed an unqualified opinion.
/s/ Baker Tilly Virchow Krause, LLP
Philadelphia, Pennsylvania
February 27, 2017
Chesapeake Utilities Corporation 2016 Form 10-K Page
53
Chesapeake Utilities Corporation and Subsidiaries
Consolidated Statements of Income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31,
|
|
2016
|
|
2015
|
|
2014
|
(in thousands, except shares and per share data)
|
|
|
|
|
|
Operating Revenues
|
|
|
|
|
|
Regulated Energy
|
$
|
305,689
|
|
|
$
|
301,902
|
|
|
$
|
300,442
|
|
Unregulated Energy
|
203,778
|
|
|
162,108
|
|
|
184,961
|
|
Other businesses and eliminations
|
(10,607
|
)
|
|
(4,766
|
)
|
|
13,431
|
|
Total operating revenues
|
498,860
|
|
|
459,244
|
|
|
498,834
|
|
Operating Expenses
|
|
|
|
|
|
Regulated energy cost of sales
|
109,609
|
|
|
122,814
|
|
|
134,560
|
|
Unregulated energy and other cost of sales
|
128,434
|
|
|
97,228
|
|
|
143,556
|
|
Operations
|
117,571
|
|
|
107,562
|
|
|
102,197
|
|
Maintenance
|
12,391
|
|
|
11,803
|
|
|
9,706
|
|
(Gain from a settlement)/asset impairment charges
|
(130
|
)
|
|
(1,500
|
)
|
|
6,881
|
|
Depreciation and amortization
|
32,159
|
|
|
29,972
|
|
|
26,316
|
|
Other taxes
|
14,730
|
|
|
13,607
|
|
|
13,339
|
|
Total operating expenses
|
414,764
|
|
|
381,486
|
|
|
436,555
|
|
Operating Income
|
84,096
|
|
|
77,758
|
|
|
62,279
|
|
Gains from sales of businesses
|
—
|
|
|
—
|
|
|
7,139
|
|
Other (expense) income
|
(441
|
)
|
|
293
|
|
|
101
|
|
Interest charges
|
10,639
|
|
|
10,006
|
|
|
9,482
|
|
Income Before Income Taxes
|
73,016
|
|
|
68,045
|
|
|
60,037
|
|
Income taxes
|
28,341
|
|
|
26,905
|
|
|
23,945
|
|
Net Income
|
$
|
44,675
|
|
|
$
|
41,140
|
|
|
$
|
36,092
|
|
|
|
|
|
|
|
Weighted Average Common Shares Outstanding:
|
|
|
|
|
|
Basic
|
15,570,539
|
|
|
15,094,423
|
|
|
14,551,308
|
|
Diluted
|
15,613,091
|
|
|
15,143,373
|
|
|
14,604,944
|
|
Earnings Per Share of Common Stock:
|
|
|
|
|
|
Basic
|
$
|
2.87
|
|
|
$
|
2.73
|
|
|
$
|
2.48
|
|
Diluted
|
$
|
2.86
|
|
|
$
|
2.72
|
|
|
$
|
2.47
|
|
Cash Dividends Declared Per Share of Common Stock
|
$
|
1.2025
|
|
|
$
|
1.1325
|
|
|
$
|
1.0667
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of the financial statements.
Chesapeake Utilities Corporation 2016 Form 10-K Page
54
Chesapeake Utilities Corporation and Subsidiaries
Consolidated Statements of Comprehensive Income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31,
|
|
2016
|
|
2015
|
|
2014
|
(in thousands)
|
|
|
|
|
|
Net Income
|
$
|
44,675
|
|
|
$
|
41,140
|
|
|
$
|
36,092
|
|
Other Comprehensive Income (Loss), net of tax:
|
|
|
|
|
|
Employee Benefits, net of tax:
|
|
|
|
|
|
Amortization of prior service cost, net of tax of ($29), $(27) and $(24), respectively
|
(48
|
)
|
|
(40
|
)
|
|
(34
|
)
|
Net gain (loss), net of tax of $178, $73, and $(1,997), respectively
|
268
|
|
|
103
|
|
|
(3,076
|
)
|
Cash Flow Hedges, net of tax:
|
|
|
|
|
|
Unrealized gain (loss) on commodity contract cash flow hedges, net of tax of $496, $(150) and $(22), respectively
|
742
|
|
|
(227
|
)
|
|
(33
|
)
|
Total Other Comprehensive Income (Loss)
|
962
|
|
|
(164
|
)
|
|
(3,143
|
)
|
Comprehensive Income
|
$
|
45,637
|
|
|
$
|
40,976
|
|
|
$
|
32,949
|
|
The accompanying notes are an integral part of the financial statements.
Chesapeake Utilities Corporation 2016 Form 10-K Page
55
Chesapeake Utilities Corporation and Subsidiaries
Consolidated Balance Sheets
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
Assets
|
2016
|
|
2015
|
(in thousands, except shares and per share data)
|
|
|
|
Property, Plant and Equipment
|
|
|
|
Regulated energy
|
$
|
957,681
|
|
|
$
|
842,756
|
|
Unregulated energy
|
196,800
|
|
|
145,734
|
|
Other businesses and eliminations
|
21,114
|
|
|
18,999
|
|
Total property, plant and equipment
|
1,175,595
|
|
|
1,007,489
|
|
Less: Accumulated depreciation and amortization
|
(245,207
|
)
|
|
(215,313
|
)
|
Plus: Construction work in progress
|
56,276
|
|
|
62,774
|
|
Net property, plant and equipment
|
986,664
|
|
|
854,950
|
|
Current Assets
|
|
|
|
Cash and cash equivalents
|
4,178
|
|
|
2,855
|
|
Accounts receivable (less allowance for uncollectible accounts of $909 for 2016 and 2015)
|
62,803
|
|
|
41,007
|
|
Accrued revenue
|
16,986
|
|
|
12,452
|
|
Propane inventory, at average cost
|
6,457
|
|
|
6,619
|
|
Other inventory, at average cost
|
4,576
|
|
|
3,803
|
|
Regulatory assets
|
7,694
|
|
|
8,268
|
|
Storage gas prepayments
|
5,484
|
|
|
3,410
|
|
Income taxes receivable
|
22,888
|
|
|
24,950
|
|
Prepaid expenses
|
6,792
|
|
|
7,146
|
|
Mark-to-market energy assets
|
823
|
|
|
153
|
|
Other current assets
|
2,470
|
|
|
1,044
|
|
Total current assets
|
141,151
|
|
|
111,707
|
|
Deferred Charges and Other Non-Current Assets
|
|
|
|
Goodwill
|
15,070
|
|
|
14,548
|
|
Other intangible assets, net
|
1,843
|
|
|
2,222
|
|
Investments, at fair value
|
4,902
|
|
|
3,644
|
|
Regulatory assets
|
76,803
|
|
|
77,519
|
|
Receivables and other deferred charges
|
2,786
|
|
|
2,831
|
|
Total deferred charges and other non-current assets
|
101,404
|
|
|
100,764
|
|
Total Assets
|
$
|
1,229,219
|
|
|
$
|
1,067,421
|
|
The accompanying notes are an integral part of the financial statements.
Chesapeake Utilities Corporation 2016 Form 10-K Page
56
Chesapeake Utilities Corporation and Subsidiaries
Consolidated Balance Sheets
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
Capitalization and Liabilities
|
2016
|
|
2015
|
(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 25,000,000 shares)
|
7,935
|
|
|
7,432
|
|
Additional paid-in capital
|
250,967
|
|
|
190,311
|
|
Retained earnings
|
192,062
|
|
|
166,235
|
|
Accumulated other comprehensive loss
|
(4,878
|
)
|
|
(5,840
|
)
|
Deferred compensation obligation
|
2,416
|
|
|
1,883
|
|
Treasury stock
|
(2,416
|
)
|
|
(1,883
|
)
|
Total stockholders’ equity
|
446,086
|
|
|
358,138
|
|
Long-term debt, net of current maturities
|
136,954
|
|
|
149,006
|
|
Total capitalization
|
583,040
|
|
|
507,144
|
|
Current Liabilities
|
|
|
|
Current portion of long-term debt
|
12,099
|
|
|
9,151
|
|
Short-term borrowing
|
209,871
|
|
|
173,397
|
|
Accounts payable
|
56,935
|
|
|
39,300
|
|
Customer deposits and refunds
|
29,238
|
|
|
27,173
|
|
Accrued interest
|
1,312
|
|
|
1,311
|
|
Dividends payable
|
4,973
|
|
|
4,390
|
|
Accrued compensation
|
10,496
|
|
|
10,014
|
|
Regulatory liabilities
|
1,291
|
|
|
7,365
|
|
Mark-to-market energy liabilities
|
773
|
|
|
433
|
|
Other accrued liabilities
|
7,063
|
|
|
7,059
|
|
Total current liabilities
|
334,051
|
|
|
279,593
|
|
Deferred Credits and Other Liabilities
|
|
|
|
Deferred income taxes
|
222,894
|
|
|
192,600
|
|
Regulatory liabilities
|
43,064
|
|
|
43,064
|
|
Environmental liabilities
|
8,592
|
|
|
8,942
|
|
Other pension and benefit costs
|
32,828
|
|
|
33,481
|
|
Deferred investment tax credits and other liabilities
|
4,750
|
|
|
2,597
|
|
Total deferred credits and other liabilities
|
312,128
|
|
|
280,684
|
|
Other commitments and contingencies (Note 19 and 20)
|
|
|
|
|
|
Total Capitalization and Liabilities
|
$
|
1,229,219
|
|
|
$
|
1,067,421
|
|
The accompanying notes are an integral part of the financial statements.
Chesapeake Utilities Corporation 2016 Form 10-K Page
57
Chesapeake Utilities Corporation and Subsidiaries
Consolidated Statements of Cash Flows
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31,
|
|
2016
|
|
2015
|
|
2014
|
(in thousands)
|
|
|
|
|
|
Operating Activities
|
|
|
|
|
|
Net Income
|
$
|
44,675
|
|
|
$
|
41,140
|
|
|
$
|
36,092
|
|
Adjustments to reconcile net income to net operating cash:
|
|
|
|
|
|
Goodwill & long-lived asset impairment
|
—
|
|
|
—
|
|
|
6,881
|
|
Depreciation and amortization
|
32,159
|
|
|
29,972
|
|
|
26,316
|
|
Depreciation and accretion included in other costs
|
7,334
|
|
|
6,978
|
|
|
6,577
|
|
Deferred income taxes, net
|
31,257
|
|
|
20,520
|
|
|
22,235
|
|
Realized loss (gain) on sale of assets/investments
|
695
|
|
|
(340
|
)
|
|
(7,293
|
)
|
Unrealized (gain) loss on investments/commodity contracts
|
(385
|
)
|
|
96
|
|
|
501
|
|
Employee benefits and compensation
|
1,887
|
|
|
1,235
|
|
|
684
|
|
Share-based compensation
|
2,367
|
|
|
1,937
|
|
|
1,958
|
|
Other, net
|
(79
|
)
|
|
47
|
|
|
3
|
|
Changes in assets and liabilities:
|
|
|
|
|
|
Accounts receivable and accrued revenue
|
(27,013
|
)
|
|
17,097
|
|
|
20,683
|
|
Propane inventory, storage gas and other inventory
|
(2,531
|
)
|
|
1,527
|
|
|
4,177
|
|
Regulatory assets/liabilities, net
|
(7,523
|
)
|
|
3,883
|
|
|
(11,014
|
)
|
Prepaid expenses and other current assets
|
(1,387
|
)
|
|
(759
|
)
|
|
(699
|
)
|
Accounts payable and other accrued liabilities
|
18,829
|
|
|
(11,916
|
)
|
|
(13,623
|
)
|
Income taxes receivable
|
2,466
|
|
|
(4,967
|
)
|
|
(15,936
|
)
|
Customer deposits and refunds
|
2,065
|
|
|
1,976
|
|
|
(927
|
)
|
Accrued compensation
|
358
|
|
|
(331
|
)
|
|
37
|
|
Other assets and liabilities, net
|
(1,803
|
)
|
|
(3,972
|
)
|
|
(2,944
|
)
|
Net cash provided by operating activities
|
103,371
|
|
|
104,123
|
|
|
73,708
|
|
Investing Activities
|
|
|
|
|
|
Property, plant and equipment expenditures
|
(169,861
|
)
|
|
(143,599
|
)
|
|
(91,588
|
)
|
Change in intangibles
|
—
|
|
|
—
|
|
|
14
|
|
Proceeds from sale of assets
|
174
|
|
|
164
|
|
|
10,797
|
|
Acquisitions, net of cash acquired
|
—
|
|
|
(20,930
|
)
|
|
—
|
|
Environmental expenditures
|
(350
|
)
|
|
(174
|
)
|
|
(233
|
)
|
Net cash used by investing activities
|
(170,037
|
)
|
|
(164,539
|
)
|
|
(81,010
|
)
|
Financing Activities
|
|
|
|
|
|
Common stock dividends
|
(17,482
|
)
|
|
(15,924
|
)
|
|
(13,887
|
)
|
Issuance (Purchase) of stock for Dividend Reinvestment Plan
|
811
|
|
|
813
|
|
|
(165
|
)
|
Proceeds from issuance of common stock, net of expenses
|
57,360
|
|
|
—
|
|
|
—
|
|
Change in cash overdrafts due to outstanding checks
|
3,920
|
|
|
2,450
|
|
|
(921
|
)
|
Net borrowing (repayment) under line of credit agreements
|
32,526
|
|
|
82,178
|
|
|
(16,513
|
)
|
Proceeds from issuance of long-term debt
|
—
|
|
|
—
|
|
|
49,975
|
|
Repayment of long-term debt and capital lease obligation
|
(9,146
|
)
|
|
(10,820
|
)
|
|
(9,969
|
)
|
Net cash provided by financing activities
|
67,989
|
|
|
58,697
|
|
|
8,520
|
|
Net Increase (Decrease) in Cash and Cash Equivalents
|
1,323
|
|
|
(1,719
|
)
|
|
1,218
|
|
Cash and Cash Equivalents — Beginning of Period
|
2,855
|
|
|
4,574
|
|
|
3,356
|
|
Cash and Cash Equivalents — End of Period
|
$
|
4,178
|
|
|
$
|
2,855
|
|
|
$
|
4,574
|
|
Supplemental Cash Flow Disclosures (see Note 6)
The accompanying notes are an integral part of the financial statements.
Chesapeake Utilities Corporation 2016 Form 10-K Page
58
Chesapeake Utilities Corporation and Subsidiaries
Consolidated Statements of Stockholders' Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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, 2013
|
14,457,345
|
|
|
$
|
4,691
|
|
|
$
|
152,341
|
|
|
$
|
124,274
|
|
|
$
|
(2,533
|
)
|
|
$
|
1,124
|
|
|
$
|
(1,124
|
)
|
|
$
|
278,773
|
|
Net Income
|
—
|
|
|
—
|
|
|
—
|
|
|
36,092
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
36,092
|
|
Other comprehensive income
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(3,143
|
)
|
|
—
|
|
|
—
|
|
|
(3,143
|
)
|
Dividends declared ($1.0667 per share)
|
—
|
|
|
—
|
|
|
—
|
|
|
(15,675
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(15,675
|
)
|
Retirement savings plan and dividend reinvestment plan
|
43,367
|
|
|
16
|
|
|
1,844
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
1,860
|
|
Conversion of Debentures
|
47,313
|
|
|
15
|
|
|
520
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
535
|
|
Share-based compensation and tax benefit
(4) (5)
|
40,686
|
|
|
13
|
|
|
1,876
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
1,889
|
|
Stock split in the form of stock dividend
|
—
|
|
|
2,365
|
|
|
—
|
|
|
(2,374
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(9
|
)
|
Treasury stock activities
(2)
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
134
|
|
|
(134
|
)
|
|
—
|
|
Balance at December 31, 2014
|
14,588,711
|
|
|
7,100
|
|
|
156,581
|
|
|
142,317
|
|
|
(5,676
|
)
|
|
1,258
|
|
|
(1,258
|
)
|
|
300,322
|
|
Net Income
|
—
|
|
|
—
|
|
|
—
|
|
|
41,140
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
41,140
|
|
Other comprehensive loss
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(164
|
)
|
|
—
|
|
|
—
|
|
|
(164
|
)
|
Dividends declared ($1.1325 per share)
|
—
|
|
|
—
|
|
|
—
|
|
|
(17,222
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(17,222
|
)
|
Retirement savings plan and dividend reinvestment plan
|
43,275
|
|
|
21
|
|
|
2,214
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
2,235
|
|
Common stock issued in acquisition
|
592,970
|
|
|
289
|
|
|
29,876
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
30,165
|
|
Share-based compensation and tax benefit
(4) (5)
|
45,703
|
|
|
22
|
|
|
1,640
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
1,662
|
|
Treasury stock activities
(2)
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
625
|
|
|
(625
|
)
|
|
—
|
|
Balance at December 31, 2015
|
15,270,659
|
|
|
7,432
|
|
|
190,311
|
|
|
166,235
|
|
|
(5,840
|
)
|
|
1,883
|
|
|
(1,883
|
)
|
|
358,138
|
|
Net Income
|
—
|
|
|
—
|
|
|
—
|
|
|
44,675
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
44,675
|
|
Other comprehensive income
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
962
|
|
|
—
|
|
|
—
|
|
|
962
|
|
Dividends declared ($1.2025 per share)
|
—
|
|
|
—
|
|
|
—
|
|
|
(18,848
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(18,848
|
)
|
Retirement savings plan and dividend reinvestment plan
|
36,253
|
|
|
17
|
|
|
2,225
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
2,242
|
|
Stock issuance
(3)
|
960,488
|
|
|
467
|
|
|
56,893
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
57,360
|
|
Share-based compensation and tax benefit
(4) (5)
|
36,099
|
|
|
19
|
|
|
1,538
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
1,557
|
|
Treasury stock activities
(2)
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
533
|
|
|
(533
|
)
|
|
—
|
|
Balance at December 31, 2016
|
16,303,499
|
|
|
$
|
7,935
|
|
|
$
|
250,967
|
|
|
$
|
192,062
|
|
|
$
|
(4,878
|
)
|
|
$
|
2,416
|
|
|
$
|
(2,416
|
)
|
|
$
|
446,086
|
|
|
|
(1)
|
2,000,000
shares of preferred stock at
$0.01
par value per share have been authorized. No shares have been issued or are outstanding; accordingly, no information has been included in the Statements of Stockholders’ Equity.
|
|
|
(2)
|
Includes
76,745
,
70,631
and
57,382
shares at December 31, 2016, 2015 and 2014, respectively, held in a Rabbi Trust related to our Non-Qualified Deferred Compensation Plan.
|
|
|
(3)
|
On September 22, 2016, we completed a public offering of
960,488
shares of our common stock at a price per share of
$62.26
. The net proceeds from the sale of common stock, after deducting underwriting commissions and expenses, were approximately
$57.4 million
.
|
|
|
(4)
|
Includes amounts for shares issued for directors’ compensation.
|
|
|
(5)
|
The shares issued under the SICP are net of shares withheld for employee taxes. For 2016, 2015 and 2014, we withheld
12,031
,
12,620
and
12,687
shares, respectively, for taxes.
|
The accompanying notes are an integral part of the financial statements.
Chesapeake Utilities Corporation 2016 Form 10-K Page
59
Notes to the Consolidated Financial Statements
1. O
RGANIZATION
AND
B
ASIS
OF
P
RESENTATION
Chesapeake Utilities, incorporated in 1947 in Delaware, is a diversified energy company engaged in regulated and unregulated energy businesses.
Our regulated energy businesses consist of: (a) regulated natural gas distribution operations in central and southern Delaware, Maryland’s eastern shore and Florida; (b) regulated natural gas transmission operations on the Delmarva Peninsula, in Pennsylvania and in Florida; and (c) regulated electric distribution operations serving customers in northeast and northwest Florida.
Our unregulated energy businesses primarily include: (a) propane distribution operations in Delaware, Maryland and the eastern shore of Virginia, southeastern Pennsylvania and Florida; (b) our propane and crude oil wholesale marketing operation, which markets propane and crude oil to major independent oil and petrochemical companies, wholesale resellers and retail propane companies located primarily in the southeastern United States; (c) our natural gas marketing operation providing natural gas supplies directly to commercial and industrial customers in Florida, Delaware, Maryland, Ohio and other states; (d) our natural gas supply, gathering and processing operation in central and eastern Ohio; and (e) our CHP plant in Florida that generates electricity and steam.
Our consolidated financial statements include the accounts of Chesapeake Utilities and its wholly-owned subsidiaries. We do not have any ownership interest in investments accounted for using the equity method or any interest in a variable interest entity. All intercompany accounts and transactions have been eliminated in consolidation. We have assessed and, if applicable, reported on subsequent events through the date of issuance of these consolidated financial statements.
We reclassified certain amounts in the consolidated balance sheets as of December 31, 2015 to conform to the current year's presentation. We have also revised the consolidated statements of cash flows for the years ended December 31, 2015 and 2014 to reflect only property, plant and equipment expenditures paid in cash within the Investing Activities section. The non-cash expenditures previously included in that section have now been included in the change in accounts payable and other accrued liabilities amount within the Operating Activities section. These revisions are considered immaterial to the overall presentation of our consolidated financial statements.
Previously reported share and per share amounts have been restated in the accompanying consolidated financial statements and related notes to reflect the stock split effected in the form of a stock dividend in September 2014.
2. S
UMMARY
OF
S
IGNIFICANT
A
CCOUNTING
P
OLICIES
Use of Estimates
The preparation of the consolidated financial statements in conformity with GAAP requires management to make estimates in measuring assets and liabilities and related revenues and expenses. These estimates involve judgments with respect to, among other things, various future economic factors that are difficult to predict and are beyond our control; therefore, actual results could differ from these estimates.
Property, Plant and Equipment
Property, plant and equipment are stated at original cost less accumulated depreciation or fair value, if impaired. Costs include direct labor, materials and third-party construction contractor costs, AFUDC, and certain indirect costs related to equipment and employees engaged in construction. The costs of repairs and minor replacements are charged to expense as incurred, and the costs of major renewals and betterments are capitalized. Upon retirement or disposition of property within the regulated businesses, the gain or loss, net of salvage value, is charged to accumulated depreciation. Upon retirement or disposition of property owned by the unregulated businesses, the gain or loss, net of salvage value, is charged to income. A summary of property, plant and equipment by classification as of
December 31, 2016
and
2015
is provided in the following table:
Chesapeake Utilities Corporation 2016 Form 10-K Page
60
Notes to the Consolidated Financial Statements
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
(in thousands)
|
2016
|
|
2015
|
Property, plant and equipment
|
|
|
|
Regulated Energy
|
|
|
|
Natural gas distribution – Delmarva
|
$
|
220,083
|
|
|
$
|
207,127
|
|
Natural gas distribution – Florida
|
331,281
|
|
|
286,538
|
|
Natural gas transmission – Delmarva
|
285,746
|
|
|
249,274
|
|
Natural gas transmission – Florida
|
27,018
|
|
|
20,291
|
|
Electric distribution – Florida
|
93,553
|
|
|
79,526
|
|
Unregulated Energy
|
|
|
|
Propane distribution – Delmarva
|
73,686
|
|
|
66,403
|
|
Propane distribution – Florida
|
26,359
|
|
|
24,589
|
|
Other Unregulated natural gas services – Ohio
|
61,383
|
|
|
54,607
|
|
CHP - Florida
|
35,237
|
|
|
—
|
|
Other unregulated energy
|
135
|
|
|
135
|
|
Other
|
21,114
|
|
|
18,999
|
|
Total property, plant and equipment
|
1,175,595
|
|
|
1,007,489
|
|
Less: Accumulated depreciation and amortization
|
(245,207
|
)
|
|
(215,313
|
)
|
Plus: Construction work in progress
|
56,276
|
|
|
62,774
|
|
Net property, plant and equipment
|
$
|
986,664
|
|
|
$
|
854,950
|
|
Contributions or Advances in Aid of Construction
Customer contributions or advances in aid of construction reduce property, plant and equipment, unless the amounts are refundable to customers. Contributions or advances may be refundable to customers after a number of years based on the amount of revenues generated from the customers or the duration of the service provided to the customers. Refundable contributions or advances are recorded initially as liabilities. The amounts that are determined to be non-refundable reduce property, plant and equipment at the time of such determination. During the years ended
December 31, 2016
and
2015
, there were $
1.0 million
and
$1.7 million
, respectively, of non-refundable contributions or advances that reduced property, plant and equipment.
Allowance for Funds Used During Construction
Some of the additions to our regulated property, plant and equipment include AFUDC, which represents the estimated cost of funds, from both debt and equity sources, used to finance the construction of major projects. AFUDC is capitalized in the applicable rate base for rate making purposes when the completed projects are placed in service. During the years ended
December 31, 2016
,
2015
and 2014, AFUDC, which was reflected as a reduction of interest charges, was not material.
Assets Used in Leases
Property, plant and equipment for the Florida natural gas transmission operation included
$1.4 million
of assets, at
December 31, 2016
and
2015
, consisting primarily of mains, measuring equipment and regulation station equipment used by Peninsula Pipeline to provide natural gas transmission service pursuant to a contract with a third party. This contract is accounted for as an operating lease due to the exclusive use of the assets by the customer. The service under this contract commenced in January 2009 and generates
$264,000
in annual revenue for a term of
20
years. Accumulated depreciation for these assets totaled
$580,000
and
$507,000
at
December 31, 2016
and
2015
, respectively.
Chesapeake Utilities Corporation 2016 Form 10-K Page
61
Notes to the Consolidated Financial Statements
Capital Lease Asset
Property, plant and equipment for our Delmarva natural gas distribution operation included a capital lease asset of
$3.5 million
and
$4.8 million
, net of accumulated amortization, at
December 31, 2016
and
2015
, respectively, related to Sandpiper's capacity, supply and operating agreement. The original fair value of this asset was
$7.1 million
. See Note 20
, Other Commitments and Contingencies,
for additional information. At
December 31, 2016
and
2015
, accumulated amortization for this capital lease asset was
$3.7 million
and
$2.3 million
, respectively. For the years ended
December 31, 2016
and
2015
, we recorded
$1.4 million
and
$1.3 million
, respectively, in amortization of this capital lease asset, which was included in our fuel cost recovery mechanisms.
Jointly-owned Pipeline
Property, plant and equipment for the Florida natural gas transmission operation also included
$6.7 million
of assets, at
December 31, 2016
and
2015
, which consists of the
16
-mile pipeline from the Duval/Nassau County line to Amelia Island in Nassau County, Florida, jointly owned by Peninsula Pipeline and Peoples Gas. The amount included in property, plant and equipment represents Peninsula Pipeline’s
45
-percent ownership of this pipeline. Each party was responsible for financing its portion of the jointly-owned pipeline. This
16
-mile pipeline was placed in service in December 2012. Accumulated depreciation for this pipeline totaled
$1.0 million
and
$806,000
, at
December 31, 2016
and
2015
, respectively.
Asset Impairment Evaluations
We periodically evaluate whether events or circumstances have occurred, which indicate that other long-lived assets may not be fully recoverable. When such events or circumstances are present, we record an impairment loss equal to the excess of the assets' carrying value over its fair value, if any.
In May 2015, we entered into a settlement agreement with a vendor related to the implementation of a customer billing system. Pursuant to the agreement, we received
$1.5 million
in cash, which is reflected as "Gain from a settlement" in the accompanying consolidated statements of income. Previously, at December 31, 2014, we recorded a
$6.5 million
pre-tax, non-cash impairment loss related to the same billing system implementation. We recorded
$6.4 million
of this impairment loss in the Regulated Energy segment, with the balance included in the Unregulated Energy segment. In May 2016, we received
$650,000
in cash, however, the retention of this amount is contingent upon engaging this vendor to provide agreed-upon services through May 2020.
Depreciation and Accretion Included in Operations Expenses
We compute depreciation expense for our regulated operations by applying composite, annual rates, as approved by the respective regulatory bodies. The following table shows the average depreciation rates used for regulated operations during the years ended
December 31, 2016
,
2015
and
2014
:
|
|
|
|
|
|
|
|
2016
|
|
2015
|
|
2014
|
Natural gas distribution – Delmarva
|
2.5%
|
|
2.4%
|
|
2.5%
|
Natural gas distribution – Florida
|
2.9%
|
|
2.9%
|
|
2.9%
|
Natural gas transmission – Delmarva
|
2.7%
|
|
2.7%
|
|
2.7%
|
Natural gas transmission – Florida
|
3.9%
|
|
4.0%
|
|
4.0%
|
Electric distribution – Florida
|
3.5%
|
|
3.5%
|
|
3.8%
|
Chesapeake Utilities Corporation 2016 Form 10-K Page
62
Notes to the Consolidated Financial Statements
For our unregulated operations, we compute depreciation expense on a straight line basis over the following estimated useful lives of the assets:
|
|
|
Asset Description
|
Useful Life
|
Propane distribution mains
|
10-37 years
|
Propane bulk plants and tanks
|
10-40 years
|
Propane equipment
|
5-33 years
|
Meters and meter installations
|
5-33 years
|
Measuring and regulating station equipment
|
5-37 years
|
Natural gas pipelines
|
45 years
|
Natural gas right of ways
|
Perpetual
|
CHP plant
|
30 years
|
Natural gas processing equipment
|
20-25 years
|
Office furniture and equipment
|
3-10 years
|
Transportation equipment
|
4-20 years
|
Structures and improvements
|
5-45 years
|
Other
|
Various
|
We report certain depreciation and accretion in operations expense, rather than as a depreciation and amortization expense, in the accompanying consolidated statements of income in accordance with industry practice and regulatory requirements. Depreciation and accretion included in operations expense consists of the accretion of the costs of removal for future retirements of utility assets, vehicle depreciation, computer software and hardware depreciation, and other minor amounts of depreciation expense. For the years ended
December 31, 2016
,
2015
and
2014
, we reported
$7.3 million
,
$7.0 million
and
$6.6 million
, respectively, of depreciation and accretion in operations expenses.
Regulated Operations
We account for our regulated operations in accordance with ASC Topic 980,
Regulated Operations,
which includes accounting principles for companies whose rates are determined by independent third-party regulators. When setting rates, regulators often make decisions, the economics of which require companies to defer costs or revenues in different periods than may be appropriate for unregulated enterprises. When this situation occurs, a regulated company defers the associated costs as regulatory assets on the balance sheet and records them as expense on the income statement as it collects revenues. Further, regulators can also impose liabilities upon a regulated company, for amounts previously collected from customers and for recovery of costs that are expected to be incurred in the future, as regulatory liabilities. If we were required to terminate the application of these regulatory provisions to our regulated operations, all such deferred amounts would be recognized in the statement of income at that time, which could have a material impact on our financial position, results of operations and cash flows.
We monitor our regulatory and competitive environments to determine whether the recovery of our regulatory assets continues to be probable. If we were to determine that recovery of these assets is no longer probable, we would write off the assets against earnings. We believe that the provisions of ASC Topic 980,
Regulated Operations,
continue to apply to our regulated operations and that the recovery of our regulatory assets is probable.
Revenue Recognition
Revenues for our natural gas and electric distribution operations are based on rates approved by the PSC in each state in which they operate. Eastern Shore’s revenues are based on rates approved by the FERC. Customers’ base rates may not be changed without formal approval by these commissions. The PSCs, however, have authorized our regulated operations to negotiate rates, based on approved methodologies, with customers that have competitive alternatives. 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.
For regulated deliveries of natural gas and electricity, we read meters and bill customers on monthly cycles that do not coincide with the accounting periods used for financial reporting purposes. 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 they do not coincide. We estimate the amount of the unbilled revenue by jurisdiction and customer class. A similar computation is made to accrue unbilled revenues for propane customers with meters and natural gas marketing customers, whose billing cycles do not coincide with our accounting periods.
Chesapeake Utilities Corporation 2016 Form 10-K Page
63
Notes to the Consolidated Financial Statements
Our Ohio natural gas supply operation recognizes revenues based on actual volumes of natural gas shipped using contractual rates, which are based upon index prices that are published monthly.
The propane wholesale marketing operation records trading activity for open contracts on a net mark-to-market basis in our consolidated statements of income. For propane bulk delivery customers without meters, we record revenue in the period the products are delivered and/or services are rendered.
Eight Flags records revenues based on the amount of electricity and steam generated and sold to its customers.
All of our natural gas and electric distribution operations, except for two utilities that do not sell natural gas to end-use customers as a result of deregulation, have fuel cost recovery mechanisms. These mechanisms provide a method of adjusting the billing rates to reflect changes in the cost of purchased fuel. The difference between the current cost of fuel purchased and the cost of fuel recovered in billed rates is deferred and accounted for as either unrecovered fuel cost or amounts payable to customers. Generally, these deferred amounts are recovered or refunded within
one year
. Chesapeake Utilities' Florida natural gas distribution division and FPU's Indiantown division provide unbundled delivery service to their customers, whereby the customers are permitted to purchase their gas requirements directly from competitive natural gas marketers.
We charge flexible rates to our natural gas distribution industrial interruptible customers to compete with prices of alternative fuels which these customers are able to use. Neither we nor our interruptible customers are contractually obligated to deliver or receive natural gas on a firm service basis.
We report revenue taxes, such as gross receipts taxes, franchise taxes, and sales taxes, on a net basis.
Cost of Sales
Cost of sales includes the direct costs attributable to the products sold or services provided to our customers. These costs include primarily the variable cost of natural gas, electricity and propane commodities, pipeline capacity costs needed to transport and store natural gas, transmission costs for electricity, gathering and processing gas costs, transportation costs to transport propane purchases to our storage facilities, steam and electricity generation costs, and for the period prior to the sale of BravePoint, the direct cost of labor for our former advanced information services subsidiary. Depreciation expense is not included in our cost of sales.
Operations and Maintenance Expenses
Operations and maintenance expenses include operations and maintenance salaries and benefits, materials and supplies, usage of vehicles, tools and equipment, payments to contractors, utility plant maintenance, customer service, professional fees and other outside services, insurance expense, minor amounts of depreciation, accretion of cost of removal for future retirements of utility assets and other administrative expenses.
Cash and Cash Equivalents
Our policy is to invest cash in excess of operating requirements in overnight income-producing accounts. Such amounts are stated at cost, which approximates fair value. Investments with an original maturity of
three
months or less when purchased are considered cash equivalents.
Accounts Receivable and Allowance for Doubtful Accounts
Accounts receivable consist primarily of amounts due for distribution sales of natural gas, electricity and propane and transportation services to customers. An allowance for doubtful accounts is recorded against amounts due to reduce the receivables balance to the amount we reasonably expect to collect based upon our collections experiences and our assessment of customers’ inability or reluctance to pay. If circumstances change, our estimates of recoverable accounts receivable may also change. Circumstances which could affect such estimates include, but are not limited to, customer credit issues, the level of natural gas, electricity and propane prices and general economic conditions. Accounts are written off when they are deemed to be uncollectible.
Inventories
We use the average cost method to value propane, materials and supplies, and other merchandise inventory. If market prices drop below cost, inventory balances that are subject to price risk are adjusted to market values. There was no lower-of-cost-or-market adjustment during 2016 and 2015.
Chesapeake Utilities Corporation 2016 Form 10-K Page
64
Notes to the Consolidated Financial Statements
Goodwill and Other Intangible Assets
Goodwill is not amortized but is tested for impairment at least annually. Goodwill of a reporting unit is tested for impairment between annual tests if an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying value. We use a present value technique based on discounted cash flows to estimate the fair value of our reporting units. An impairment charge is recognized if the carrying value of a reporting unit’s goodwill exceeds its fair value. The testing of goodwill for 2016 and 2015 indicated no goodwill impairment.
Other intangible assets are amortized on a straight-line basis over their estimated economic useful lives.
Other Deferred Charges
Other deferred charges primarily include issuance costs associated with short-term borrowings. These charges are amortized over the life of the related short-term debt borrowings.
Asset Removal Cost
As authorized by the appropriate PSC, we accrue future asset removal costs associated with utility property, plant and equipment even if a legal obligation does not exist. Such accruals are provided for through depreciation expense and are recorded with corresponding credits to regulatory liabilities or assets. When we retire depreciable utility plant and equipment, we charge the associated original costs to accumulated depreciation and amortization, and any related removal costs incurred are charged to regulatory liabilities or assets. The difference between removal costs recognized in depreciation rates and the accretion expense and depreciation expense recognized for financial reporting purposes is a timing difference between recovery of these costs in rates and their recognition for financial reporting purposes. Accordingly, these differences are deferred as regulatory liabilities or assets. In the rate setting process, the regulatory liability or asset is excluded from the rate base upon which those utilities have the opportunity to earn their allowed rates of return. The costs associated with our asset retirement obligations are either currently being recovered in rates or are probable of recovery in future rates.
Pension and Other Postretirement Plans
Pension and other postretirement plan costs and liabilities are determined on an actuarial basis and are affected by numerous assumptions and estimates, including the fair value of plan assets, estimates of the expected returns on plan assets, assumed discount rates, the level of contributions made to the plans, and current demographic and actuarial mortality data. We review annually the estimates and assumptions underlying our pension and other postretirement plan costs and liabilities with the assistance of third-party actuarial firms. The assumed discount rates, expected returns on plan assets and the mortality assumption are the factors that generally have the most significant impact on our pension costs and liabilities. The assumed discount rates, health care cost trend rates and rates of retirement generally have the most significant impact on our postretirement plan costs and liabilities.
The discount rates are utilized principally in calculating the actuarial present value of our pension and postretirement obligations and net pension and postretirement costs. When estimating our discount rates, we consider high quality corporate bond rates, such as the Prudential curve index and the Citigroup yield curve, changes in those rates from the prior year and other pertinent factors, including the expected life of each of our plans and their respective payment options.
The expected long-term rates of return on assets are utilized in calculating the expected returns on the plan assets component of our annual pension plan costs. We estimate the expected returns on plan assets of each of our plans by evaluating expected bond returns, asset allocations, the effects of active plan management, the impact of periodic plan asset rebalancing and historical performance. We also consider the guidance from our investment advisors in making a final determination of our expected rates of return on assets.
We estimate the health care cost trend rates used in determining our postretirement net expense based upon actual health care cost experience, the effects of recently enacted legislation and general economic conditions. Our assumed rate of retirement is estimated based upon our annual reviews of participant census information as of the measurement date.
The mortality assumption used for our pension and postretirement plans is based on the actuarial table that is most reflective of the expected mortality of the plan participants and reviewed periodically.
Actual changes in the fair value of plan assets and the differences between the actual and expected return on plan assets could have a material effect on the amount of pension and postretirement benefit costs that we ultimately recognize. A
0.25 percent
decrease in the discount rate could increase our annual pension and postretirement costs by approximately
$15,000
, and a
0.25 percent
increase could decrease our annual pension and postretirement costs by approximately
$14,000
. A
0.25 percent
change in the rate of return could change our annual pension cost by approximately
$129,000
and would not have an impact on the postretirement and supplemental executive retirement plans because these plans are not funded.
Chesapeake Utilities Corporation 2016 Form 10-K Page
65
Notes to the Consolidated Financial Statements
Income Taxes, Investment Tax Credit Adjustments and Tax-Related Contingency
Deferred tax assets and liabilities are recorded for the income tax effect of temporary differences between the financial statement basis and tax basis of assets and liabilities and are measured using the enacted income tax rates in effect in the years in which the differences are expected to reverse. Deferred tax assets are recorded net of any valuation allowance when it is more likely than not that such income tax benefits will be realized. Investment tax credits on utility property have been deferred and are allocated to income ratably over the lives of the subject property.
We account for uncertainty in income taxes in the financial statements only if it is more likely than not that an uncertain tax position is sustainable based on technical merits. Recognizable tax positions are then measured to determine the amount of benefit recognized in the financial statements. We recognize penalties and interest related to unrecognized tax benefits as a component of other income.
We account for contingencies associated with taxes other than income when the likelihood of a loss is both probable and estimable. In assessing the likelihood of a loss, we do not consider the existence of current inquiries, or the likelihood of future inquiries, by tax authorities as a factor. Our assessment is based solely on our application of the appropriate statutes and the likelihood of a loss assuming the proper inquiries are made by tax authorities.
Financial Instruments
Xeron engages in trading activities using forward and futures contracts, which have been accounted for using the mark-to-market method of accounting. Under mark-to-market accounting, our trading contracts are recorded at fair value as mark-to-market energy assets and liabilities. The changes in fair value of the contracts are recognized as gains or losses in revenues in the consolidated statements of income in the period of change.
Our natural gas, electric and propane distribution operations and natural gas marketing operations enter into agreements with suppliers to purchase natural gas, electricity, and propane for resale to our respective customers. Purchases under these contracts, as well as distribution and marketing operations sales agreements with counterparties or customers, either do not meet the definition of a derivative, or qualify for “normal purchases and sales” treatment under ASC Topic 815
Derivatives and Hedging
, and are accounted for on an accrual basis.
Our propane distribution operations may enter into derivative transactions, such as swaps, put options and call options in order to mitigate the impact of wholesale price fluctuations on inventory valuation and future purchase commitments.
Our natural gas marketing operation enters into natural gas futures contracts to mitigate any price risk associated with the purchase and/or sale of natural gas sales to specific customers.
These transactions may be designated as fair value hedges or cash flow hedges, if they meet all of the accounting requirements pursuant to ASC Topic 815,
Derivatives and Hedging,
and we elect to designate the instruments as hedges. If designated as a fair value hedge, the value of the hedging instrument, such as a swap, future, or put option, is recorded at fair value, with the effective portion of the gain or loss of the hedging instrument effectively reducing or increasing the value of the hedged item. If designated as a cash flow hedge, the value of the hedging instrument, such as a swap, call option or natural gas futures contract, is recorded at fair value with the effective portion of the gain or loss of the hedging instrument being recorded in comprehensive income. The ineffective portion of the gain or loss of a hedge is recorded in earnings. If the instrument is not designated as a fair value or cash flow hedge, or it does not meet the accounting requirements of a hedge under ASC Topic 815,
Derivatives and Hedging
, it is recorded at fair value with all gains or losses being recorded directly in earnings.
FASB Statements
Recently Adopted Accounting Standards
Interest - Imputation of Interest (ASC 835-30) - In April 2015, the FASB issued ASU 2015-03,
Simplifying the
Presentation of Debt Issuance Costs
. This standard requires debt issuance costs to be presented in the balance sheet as a direct deduction from the carrying value of the associated debt liability, consistent with the presentation of a debt discount. ASU 2015-03 became effective for us on January 1, 2016, and we applied the provisions of this standard on a retrospective basis. As a result of the adoption of this standard, debt issuance costs totaling
$291,000
and
$333,000
at December 31, 2016 and 2015, respectively, previously treated as other deferred charges, a non-current asset, are now deducted from long-term debt, net of current maturities in the accompanying consolidated balance sheet.
Intangibles-Goodwill and Other-Internal-Use Software (ASC 350-40) - In April 2015, the FASB issued ASU 2015-05,
Customer's Accounting for Fees Paid in a Cloud Computing Arrangement.
Under the new standard, unless a software arrangement includes specific elements enabling customers to possess and operate software on platforms other than that offered by the cloud-based
Chesapeake Utilities Corporation 2016 Form 10-K Page
66
Notes to the Consolidated Financial Statements
provider, the cost of such arrangements is to be accounted for as an operating expense in the period incurred. ASU 2015-05 became effective for us on January 1, 2016, and has been applied on a prospective basis. The application of this standard did not have a material impact on our financial position or results of operations.
Fair Value Measurement (ASC 820) - In May 2015, the FASB issued ASU No. 2015-07,
Disclosures for Investments in Certain Entities That Calculate Net Asset Value per Share (or Its Equivalent)
. ASU 2015-07 removes the requirement to include investments in the fair value hierarchy for which fair value is measured using the net asset value practical expedient in ASC 820. We adopted ASU 2015-07 on January 1, 2016 on a retrospective basis, by excluding such investments from the fair value hierarchy table for pension plan assets. See Note 16,
Employee Benefit Plans,
for fair value measurement information related to our pension plan assets.
Interest-Imputation of Interest (ASC 835-30) - In August 2015, the FASB issued ASU 2015-15,
Presentation and Subsequent Measurement of Debt Issuance Costs Associated with Line-of-Credit Arrangements
. This standard clarifies treatment of debt issuance costs associated with line-of-credit arrangements that were not specifically addressed in ASU 2015-03. Issuance costs incurred in connection with line-of-credit arrangements may be treated as an asset and amortized over the term of the line-of-credit arrangement. ASU 2015-15 became effective for us on January 1, 2016. The adoption of the standard did not have a material impact on our financial position or results of operations.
Business Combinations (ASC 805) - In September 2015, the FASB issued ASU 2015-16,
Simplifying the Accounting for Measurement-Period Adjustments
. The standard eliminates the requirement to restate prior period financial statements for measurement period adjustments and requires that the cumulative impact of measurement-period adjustments (including the impact of prior periods) be recognized in the reporting period in which the adjustment is identified. ASU 2015-16 was effective for our interim and annual financial statements issued after January 1, 2016 and was adopted on a prospective basis. Adoption of this standard did not have a material impact on our financial position or results of operations.
Income Taxes (ASC 740) - In November 2015, the FASB issued ASU 2015-17,
Balance Sheet Classification of Deferred Taxes,
which requires all deferred assets and liabilities along with any related valuation allowance to be classified as noncurrent on the balance sheet for our annual financial statements beginning January 1, 2017 and for our interim financial statements beginning January 1, 2018; however, early adoption is permitted. We adopted this standard in the first quarter of 2016 on a retrospective basis and adjusted the December 31, 2015 consolidated balance sheet.
Compensation-Stock Compensation (ASC 718) - In March 2016, the FASB issued ASU 2016-09,
Improvements to Employee Share-Based Payment Accounting,
which simplifies several aspects of accounting for employee share-based payment transactions, including accounting for income taxes, forfeitures, and statutory tax withholding requirements, and classification in the statement of cash flows. Most significantly, entities are required to recognize all excess tax benefits and deficiencies related to the exercise or vesting of stock compensation as income tax expense or benefit in the income statement. ASU 2016-09 will be effective for our annual and interim financial statements beginning January 1, 2017; however, we have elected early adoption. Effective December 31, 2016, on a prospective basis, we recognized excess tax benefits related to the exercise and vesting of stock compensation as income expense rather than in additional paid-in capital. We do not have any previously unrecognized excess tax benefits which require a cumulative effect adjustment upon adoption. The adoption of the standard did not have a material impact on our financial position or results of operations.
Recent Accounting Standards Yet to be Adopted
Revenue from Contracts with Customers (ASC 606) - In May 2014, the FASB issued ASU 2014-09,
Revenue from Contracts with Customers
. This standard provides a single comprehensive revenue recognition model for all contracts with customers to improve comparability within industries, as well as across industries and capital markets. The standard contains principles that entities will apply to determine the measurement of revenue and when it is recognized. In March 2016, FASB issued ASU 2016-08,
Principal versus Agent Considerations (Reporting Revenue Gross versus Net)
, to clarify the implementation guidance on principal versus agent considerations. For public entities, this standard is effective for our interim and annual financial statements issued beginning January 1, 2018.
In preparation for the adoption of this standard, we have analyzed our existing businesses and revenue streams and have prepared a preliminary gap analysis between our current revenue policies and the requirements under the new revenue recognition standard. We are in the process of evaluating each revenue stream under the new standard, expanding the contract sampling, creating new policies and evaluating the enhanced disclosure requirements. We will provide additional training to our employees and develop processes and system changes associated with the implementation of the new standard, and we will then implement the standard. We plan to utilize the Modified Retrospective Transition Method upon adoption of this standard.
Based on our assessment, we do not believe the new standard will impact the recognition of revenue from a majority of our customers. However, we have just begun to evaluate our long term special contracts, and may find facts and circumstances in
Chesapeake Utilities Corporation 2016 Form 10-K Page
67
Notes to the Consolidated Financial Statements
those contracts that could impact the timing of the recognition of revenue. As we continue to execute our plan related to this standard, we will be in a better position to quantify the full impact of this standard.
Inventory (ASC 330) - In July 2015, the FASB issued ASU 2015-11,
Simplifying the Measurement of Inventory.
Under this guidance, inventories are required to be measured at the lower of cost or net realizable value. Net realizable value represents the estimated selling price less costs associated with completion, disposal and transportation. ASU 2015-11 will be effective for our interim and annual financial statements issued beginning January 1, 2017 although early adoption is permitted. The standard is to be adopted on a prospective basis. We are assessing the impact this standard may have on our financial position and results of operations.
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. This update will be applied using a modified retrospective transition approach for leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements. We are evaluating the effect this update may have on our financial position and results of operations.
Statement of Cash Flows (ASC 230) -In August, 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. ASU 2016-15 will be effective for our annual and interim financial statements beginning January 1, 2018, although early adoption is permitted. We are assessing the impact of the adoption of this ASU on our statements of cash flows.
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 update are to be applied prospectively. We are evaluating the effect of this update on our financial position and results of operations.
Chesapeake Utilities Corporation 2016 Form 10-K Page
68
Notes to the Consolidated Financial Statements
3. E
ARNINGS
P
ER
S
HARE
The following table presents the calculation of the Company’s basic and diluted earnings per share for the years ended December 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31,
|
|
2016
|
|
2015
|
|
2014
|
(in thousands, except shares and per share data)
|
|
|
|
|
|
Calculation of Basic Earnings Per Share:
|
|
|
|
|
|
Net Income
|
$
|
44,675
|
|
|
$
|
41,140
|
|
|
$
|
36,092
|
|
Weighted average shares outstanding
|
15,570,539
|
|
|
15,094,423
|
|
|
14,551,308
|
|
Basic Earnings Per Share
|
$
|
2.87
|
|
|
$
|
2.73
|
|
|
$
|
2.48
|
|
|
|
|
|
|
|
Calculation of Diluted Earnings Per Share:
|
|
|
|
|
|
Net Income
|
$
|
44,675
|
|
|
$
|
41,140
|
|
|
$
|
36,092
|
|
Reconciliation of Denominator:
|
|
|
|
|
|
Weighted average shares outstanding — Basic
|
15,570,539
|
|
|
15,094,423
|
|
|
14,551,308
|
|
Effect of dilutive securities — Share-based compensation
|
42,552
|
|
|
48,950
|
|
|
53,636
|
|
Adjusted denominator — Diluted
|
15,613,091
|
|
|
15,143,373
|
|
|
14,604,944
|
|
Diluted Earnings Per Share
|
$
|
2.86
|
|
|
$
|
2.72
|
|
|
$
|
2.47
|
|
4. A
CQUISITION AND
D
ISPOSITION
Gatherco
Merger
On April 1, 2015, we completed the merger with Gatherco, in which Gatherco merged with and into Aspire Energy, our then newly formed, wholly-owned subsidiary.
At closing, we issued
592,970
shares of our common stock, valued at
$30.2 million
based on the closing price of our common stock as reported on the NYSE on April 1, 2015. In addition, we paid
$27.5 million
in cash and assumed
$1.7 million
of existing outstanding debt, which we paid off on the same date. We also acquired
$6.8 million
of cash on hand at closing.
|
|
|
|
|
(in thousands)
|
Net Purchase Price
|
|
Chesapeake Utilities common stock issued
|
$
|
30,164
|
|
Cash
|
27,494
|
|
Acquired debt
|
1,696
|
|
Aggregate amount paid in the acquisition
|
59,354
|
|
Less: cash acquired
|
(6,806
|
)
|
Net amount paid in the acquisition
|
$
|
52,548
|
|
The merger agreement provided for additional contingent cash consideration to Gatherco's shareholders of up to
$15.0 million
based on a percentage of revenue generated from potential new gathering opportunities during the
five years
following the closing. As of December 31, 2016, there have been no related gathering opportunities developed; therefore, no contingent consideration liability has been recorded. We are unable to estimate the range of future undiscounted contingent liability outcomes at this time. However, a liability for additional contingent cash consideration may be recorded prior to April 2020 as additional information becomes available.
We incurred
$1.3 million
in transaction costs associated with this merger, of which
$514,000
and
$786,000
were expensed during the years ended December 31, 2015 and 2014, respectively. Transaction costs were included in operations expense in the accompanying consolidated statements of income. The revenues and net income from this acquisition for the years ended December 31, 2016 and 2015, included in our consolidated statements of income, were
$26.6 million
and
$2.1 million
, respectively, for 2016 and
$16.7 million
and
$312,000
, respectively, for 2015.
Chesapeake Utilities Corporation 2016 Form 10-K Page
69
Notes to the Consolidated Financial Statements
The purchase price allocation of the Gatherco acquisition is as follows:
|
|
|
|
|
(in thousands)
|
Purchase Price Allocation
|
Purchase price
|
$
|
57,658
|
|
|
|
Property plant and equipment
|
53,203
|
|
Cash
|
6,806
|
|
Accounts receivable
|
3,629
|
|
Income taxes receivable
|
3,163
|
|
Other assets
|
425
|
|
Total assets acquired
|
67,226
|
|
|
|
Long-term debt
|
1,696
|
|
Deferred income taxes
|
13,409
|
|
Accounts payable
|
3,837
|
|
Other current liabilities
|
745
|
|
Total liabilities assumed
|
19,687
|
|
Net identifiable assets acquired
|
47,539
|
|
Goodwill
|
$
|
10,119
|
|
The goodwill reflects the value paid primarily for opportunities for growth in a new and strategic geographic area. All of the goodwill from this acquisition was recorded in the Unregulated Energy segment and is not deductible for income tax purposes. The allocation of the purchase price and valuation of assets is final.
Disposition of BravePoint
On October 1, 2014, we completed the sale of BravePoint, our former advanced information services subsidiary, for approximately
$12.0 million
in cash. We reinvested the proceeds from this sale in our regulated and unregulated energy businesses. We recorded a pre-tax gain of
$6.7 million
(approximately
$4.0 million
after-tax) from this sale, which included the effect of certain costs and expenses associated with the sale. Our consolidated statement of income for the year ended
December 31,
2014
, included
$15.1 million
of revenue and
$232,000
of net loss from BravePoint's operations.
5. S
EGMENT
I
NFORMATION
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 comprise two reportable segments:
|
|
•
|
Regulated Energy
. Includes 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 propane distribution, propane and crude oil wholesale marketing and natural gas marketing operations, which are unregulated as to their rates and services. Effective April 2015, this segment includes Aspire Energy, whose services include natural gas gathering, processing, transportation and supply (See Note 4,
Acquisitions and Dispositions
, regarding the merger with Gatherco). Effective June 2016, this segment also includes electricity and steam generation through Eight Flags' CHP plant. 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. We had previously identified "Other" as a separate reportable segment, which consisted primarily of BravePoint, our former advanced information services subsidiary. As a result of the sale of that subsidiary in October 2014, "Other" is no longer a separate reportable segment.
Chesapeake Utilities Corporation 2016 Form 10-K Page
70
Notes to the Consolidated Financial Statements
The following table presents information about our reportable segments.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31,
|
|
2016
|
|
2015
|
|
2014
|
(in thousands)
|
|
|
|
|
|
Operating Revenues, Unaffiliated Customers
|
|
|
|
|
|
Regulated Energy
|
$
|
302,402
|
|
|
$
|
300,674
|
|
|
$
|
299,345
|
|
Unregulated Energy
|
196,458
|
|
|
158,570
|
|
|
184,557
|
|
Other businesses and eliminations
|
—
|
|
|
—
|
|
|
14,932
|
|
Total operating revenues, unaffiliated customers
|
$
|
498,860
|
|
|
$
|
459,244
|
|
|
$
|
498,834
|
|
Intersegment Revenues
(1)
|
|
|
|
|
|
Regulated Energy
|
$
|
3,287
|
|
|
$
|
1,228
|
|
|
$
|
1,097
|
|
Unregulated Energy
|
7,321
|
|
|
3,537
|
|
|
404
|
|
Other businesses
|
880
|
|
|
880
|
|
|
979
|
|
Total intersegment revenues
|
$
|
11,488
|
|
|
$
|
5,645
|
|
|
$
|
2,480
|
|
Operating Income
|
|
|
|
|
|
Regulated Energy
|
$
|
69,851
|
|
|
$
|
60,985
|
|
|
$
|
50,451
|
|
Unregulated Energy
|
13,844
|
|
|
16,355
|
|
|
11,723
|
|
Other businesses and eliminations
|
401
|
|
|
418
|
|
|
105
|
|
Operating Income
|
84,096
|
|
|
77,758
|
|
|
62,279
|
|
Gains from sales of businesses
|
—
|
|
|
—
|
|
|
7,139
|
|
Other (expense) income
|
(441
|
)
|
|
293
|
|
|
101
|
|
Interest charges
|
10,639
|
|
|
10,006
|
|
|
9,482
|
|
Income Before Income taxes
|
73,016
|
|
|
68,045
|
|
|
60,037
|
|
Income taxes
|
28,341
|
|
|
26,905
|
|
|
23,945
|
|
Net Income
|
$
|
44,675
|
|
|
$
|
41,140
|
|
|
$
|
36,092
|
|
Depreciation and Amortization
|
|
|
|
|
|
Regulated Energy
|
$
|
25,677
|
|
|
$
|
24,195
|
|
|
$
|
21,915
|
|
Unregulated Energy
|
6,386
|
|
|
5,679
|
|
|
3,994
|
|
Other businesses and eliminations
|
96
|
|
|
98
|
|
|
407
|
|
Total depreciation and amortization
|
$
|
32,159
|
|
|
$
|
29,972
|
|
|
$
|
26,316
|
|
Capital Expenditures
|
|
|
|
|
|
Regulated Energy
|
$
|
139,994
|
|
|
$
|
98,372
|
|
|
$
|
84,959
|
|
Unregulated Energy
|
23,984
|
|
|
38,347
|
|
|
9,648
|
|
Other businesses
|
5,398
|
|
|
5,994
|
|
|
3,450
|
|
Total capital expenditures
|
$
|
169,376
|
|
|
$
|
142,713
|
|
|
$
|
98,057
|
|
|
|
(1)
|
All significant intersegment revenues are billed at market rates and have been eliminated from consolidated revenues.
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
2016
|
|
2015
|
Identifiable Assets
|
|
|
|
Regulated Energy
|
$
|
986,752
|
|
|
$
|
872,065
|
|
Unregulated Energy
|
226,368
|
|
|
171,840
|
|
Other businesses
|
16,099
|
|
|
23,516
|
|
Total identifiable assets
|
$
|
1,229,219
|
|
|
$
|
1,067,421
|
|
Our operations are now entirely domestic. Previously, BravePoint, our formerly owned advanced information services subsidiary, had infrequent transactions in foreign countries, which were denominated and paid primarily in U.S. dollars. These transactions were immaterial to our consolidated revenues.
Chesapeake Utilities Corporation 2016 Form 10-K Page
71
Notes to the Consolidated Financial Statements
6. S
UPPLEMENTAL
C
ASH
F
LOW
D
ISCLOSURES
Cash paid for interest and income taxes during the years ended
December 31, 2016
,
2015
and
2014
were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31,
|
|
2016
|
|
2015
|
|
2014
|
(in thousands)
|
|
|
|
|
|
Cash paid for interest
|
$
|
10,315
|
|
|
$
|
9,497
|
|
|
$
|
8,870
|
|
Cash paid for income taxes, net of refunds
|
$
|
(5,308
|
)
|
|
$
|
11,076
|
|
|
$
|
17,588
|
|
Non-cash investing and financing activities during the years ended
December 31, 2016
,
2015
, and
2014
were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31,
|
|
2016
|
|
2015
|
|
2014
|
(in thousands)
|
|
|
|
|
|
Capital property and equipment acquired on account, but not paid for as of December 31
|
$
|
9,791
|
|
|
$
|
10,268
|
|
|
$
|
7,040
|
|
Common stock issued for the Retirement Savings Plan
|
$
|
777
|
|
|
$
|
690
|
|
|
$
|
602
|
|
Common stock issued for the conversion of debentures
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
535
|
|
Common stock issued under the SICP
|
$
|
1,027
|
|
|
$
|
1,594
|
|
|
$
|
1,533
|
|
Capital lease obligation
|
$
|
3,471
|
|
|
$
|
4,824
|
|
|
$
|
6,130
|
|
Common stock issued in acquisition
|
$
|
—
|
|
|
$
|
30,164
|
|
|
$
|
—
|
|
7. D
ERIVATIVE
I
NSTRUMENTS
We use derivative and non-derivative contracts to engage in trading activities and manage risks related to obtaining adequate supplies and the price fluctuations of natural gas, electricity and propane. Our natural gas, electric and propane distribution operations have entered into agreements with suppliers to purchase natural gas, electricity and propane for resale to our customers. Aspire Energy has entered into contracts with producers to secure natural gas to meet its obligations. Purchases under these contracts typically either do not meet the definition of derivatives or are considered “normal purchases and sales” and are accounted for on an accrual basis. Our propane distribution and natural gas marketing operations may also enter into fair value hedges of their inventory or cash flow hedges of their future purchase commitments in order to mitigate the impact of wholesale price fluctuations. As of
December 31, 2016
, our natural gas and electric distribution operations did not have any outstanding derivative contracts.
Hedging Activities in 2016
In 2016, Sharp entered into swap agreements to mitigate the risk of fluctuations in wholesale propane index prices associated with
4.8 million
gallons expected to be purchased through September 2017, of which
4.1 million
gallons were outstanding at
December 31, 2016
. Under the swap agreements, Sharp will receive the difference between the index prices (Mont Belvieu prices in October 2016 through September 2017) and the swap prices, which range between
$0.5225
and
$0.5650
per gallon, to the extent the index prices exceed the swap prices. If the index prices are lower than the swap price, Sharp will pay the difference. The swap agreement essentially fixed the price of the
4.8 million
gallons that we expect to purchase through September 2017. We accounted for these swap agreements as cash flow hedges, and there is no ineffective portion of these hedges. At
December 31, 2016
, the outstanding swap agreements had a fair value of approximately
$693,000
. The change in the fair value of the swap agreements is recorded as unrealized gain/loss in other comprehensive income (loss).
In December 2016, Sharp paid a total of
$33,000
to purchase a put option to protect against a decline in propane prices and related potential inventory losses associated with
630,000
gallons for its propane price cap program in the 2016-2017 heating season. The put option is exercised if propane prices fall below the strike price of
$0.5650
per gallon in December 2016, January 2017, and February 2017. If exercised, we will receive the difference between the market price and the strike price during those months. We accounted for the put option as a fair value hedge, and there is no ineffective portion of this hedge. As of
December 31, 2016
, the put option had a fair value of
$9,000
. The change in fair value of the put option effectively reduced our propane inventory balance.
In January 2016, PESCO entered into a SCO supplier agreement with Columbia Gas of Ohio to provide natural gas supply for one of its local distribution customer pools. PESCO also assumed the obligation to store natural gas inventory to satisfy its obligations under the SCO supplier agreement, which terminates on March 31, 2017.
Chesapeake Utilities Corporation 2016 Form 10-K Page
72
Notes to the Consolidated Financial Statements
In conjunction with the SCO supplier agreement, PESCO entered into natural gas futures contracts during the second quarter of 2016 in order to protect its natural gas inventory against market price fluctuations. The contracts expire by March 31, 2017. We had previously accounted for these contracts as fair value hedges with any ineffective portion being reported directly in earnings and offset by any associated gain (loss) on the inventory value being hedged. During the third quarter of 2016, we de-designated the hedges as they were no longer deemed to be highly effective. We are now accounting for them as derivatives on a mark-to-market basis, with the change in fair value reflected as unrealized gain (loss) in current period earnings, and these are no longer offset by any associated gain (loss) in the value of the inventory previously hedged. As of
December 31, 2016
, we had a total of
1.3 million
Dts in natural gas futures contracts with a mark-to-market liability of
$773,000
.
Beginning in October 2015, PESCO entered into natural gas futures contracts associated with the purchase and sale of natural gas to other specific customers. These contracts expire within two years, and we have accounted for them as cash flow hedges. There is no ineffective portion of these hedges. At
December 31, 2016
, PESCO had a total of
3.7 million
Dts hedged under natural gas futures contracts, with an asset fair value of approximately
$113,000
. The change in fair value of the natural gas futures contracts is recorded as unrealized gain (loss) in other comprehensive income (loss).
Fair Value Hedges
The impact of our natural gas futures commodity contracts previously designated as fair value hedges and the related hedged item on our consolidated income statement for the year ended December 31, 2016, is presented below:
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
(in thousands)
|
|
|
December 31, 2016
(1)
|
|
Commodity contracts
|
|
$
|
(233
|
)
|
|
Fair value adjustment for natural gas inventory designated as the hedged item
|
|
681
|
|
|
Total increase in purchased gas cost
|
|
$
|
448
|
|
|
|
|
|
|
|
The increase in purchased gas cost is comprised of the following:
|
|
|
|
Basis ineffectiveness
|
|
$
|
(83
|
)
|
|
Timing ineffectiveness
|
|
531
|
|
|
Total ineffectiveness
|
|
$
|
448
|
|
|
|
|
(1)
|
There were no natural gas futures commodity contracts designated as fair value hedges in 2015 or 2014.
|
Basis ineffectiveness arises from natural gas market price differences between the locations of the hedged inventory and the delivery location specified in the hedging instruments. Timing ineffectiveness arises due to changes in the difference between the spot price and the futures price, as well as the difference between the timing of the settlement of the futures and the valuation of the underlying physical commodity. As the commodity contract nears the settlement date, spot-to-forward price differences should converge, which should reduce or eliminate the impact of this ineffectiveness on purchased gas cost. To the extent that our natural gas inventory does not qualify as a hedged item in a fair-value hedge, or has not been designated as such, the natural gas inventory is valued at the lower of cost or market.
Hedging Activities in 2015
In March, May and June 2015, Sharp paid a total of
$143,000
to purchase put options to protect against a decline in propane prices and related potential inventory losses associated with
2.5 million
gallons for the propane price cap program in the 2015-2016 heating season. We exercised the put options as propane prices fell below the strike prices of
$0.4950
,
$0.4888
and
$0.4500
per gallon in December 2015 through February 2016 and
$0.4200
per gallon in January through March 2016. We received approximately
$239,000
, which represented the difference between the market prices and the strike prices during those months. We accounted for the put options as fair value hedges.
In March, May and June 2015, Sharp entered into swap agreements to mitigate the risk of fluctuations in wholesale propane index prices associated with
2.5 million
gallons expected to be purchased for the 2015-2016 heating season. Under these swap agreements, Sharp would have received the difference between the index prices (Mont Belvieu prices in December 2015 through March 2016) and the swap prices, which ranged from
$0.5200
to
$0.5950
per gallon, for each swap agreement, to the extent the index prices exceeded the swap prices. If the index prices were lower than the swap prices, Sharp would have paid the difference. These swap agreements essentially fixed the price of the
2.5 million
gallons that we purchased during this period. We accounted for the swap agreements as cash flow hedges. Sharp paid approximately
$484,000
, which represented the difference between the index prices and swap prices during the months of December 2015 through March 2016.
Chesapeake Utilities Corporation 2016 Form 10-K Page
73
Notes to the Consolidated Financial Statements
Hedging Activities in 2014
In August and October 2014, Sharp entered into call options to protect against an increase in propane prices associated with
1.3 million
gallons purchased at market-based prices to supply the demands of our propane price cap program customers. The retail price that we charged those customers during the heating season was capped at a pre-determined level. We would have exercised the call options if the propane prices had risen above the strike price of
$1.0875
per gallon in December 2014 through February of 2015, and
$1.0650
per gallon in January through March 2015. We paid
$98,000
to purchase the call options, which expired without exercise as the market prices were below the strike prices. We accounted for the call options as cash flow hedges.
In May 2014, Sharp entered into swap agreements to mitigate the risk of fluctuations in wholesale propane index prices associated with
630,000
gallons purchased in December 2014 through February 2015. Under these swap agreements, Sharp would have received the difference between the index prices (Mont Belvieu prices in December 2014 through February 2015) and the swap prices of
$1.1350
,
$1.0975
and
$1.0475
per gallon for each swap agreement, to the extent the index prices exceeded the swap prices. If the index prices were lower than the swap prices, Sharp would have paid the difference. These swap agreements essentially fixed the price of the
630,000
gallons purchased during this period. We had initially accounted for them as cash flow hedges as the swap agreements met all the requirements. We paid
$1.1 million
, representing the difference between the market prices and strike prices during the months of December 2014 through February 2015. At
December 31, 2015
, we elected to discontinue hedge accounting on the swap agreements and reclassified
$735,000
of unrealized loss from other comprehensive loss to propane cost of sales. Subsequently, we accounted for them as derivative instruments on a mark-to-market basis with the change in fair value reflected in current period earnings.
In May 2014, Sharp entered into put options to protect against declines in propane prices and related potential inventory losses associated with
630,000
gallons purchased for the propane price cap program in December 2014 through February 2015. We exercised the put options because propane prices fell below the strike prices of
$1.0350
,
$0.9975
and
$0.9475
per gallon, for each option agreement in December 2014 through February 2015, respectively. We paid
$128,000
to purchase the put options and received
$868,000
from the exercise of the options, representing the difference between the market prices and strike prices during those months. We accounted for them as fair value hedges.
Commodity Contracts for Trading Activities
Xeron engages in trading activities using forward and futures contracts for propane and crude oil. These contracts are considered derivatives and have been accounted for using the mark-to-market method of accounting. Under this method, the trading contracts are recorded at fair value, and the changes in fair value of those contracts are recognized as unrealized gains or losses in the statements of income for the period of change. As of
December 31, 2016
and 2015, Xeron had no outstanding contracts that were accounted for as derivatives.
Xeron entered into master netting agreements with
two
counterparties to mitigate exposure to counterparty credit risk. The master netting agreements enable Xeron to net these
two
counterparties' outstanding accounts receivable and payable, which are presented on a gross basis in the accompanying consolidated balance sheets. At
December 31, 2016
, Xeron had no accounts receivable or accounts payable balances to offset with these
two
counterparties. At December 31, 2015, Xeron had a right to offset
$431,000
of accounts payable, but did not have outstanding accounts receivable, with these
two
counterparties.
Chesapeake Utilities Corporation 2016 Form 10-K Page
74
Notes to the Consolidated Financial Statements
The following tables present information about the fair value and related gains and losses of our derivative contracts. We did not have any derivative contracts with a credit-risk-related contingency.
Fair values of the derivative contracts recorded in the consolidated balance sheets as of
December 31, 2016
and
2015
, are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
Asset Derivatives
|
|
|
|
Fair Value As Of
|
(in thousands)
|
Balance Sheet Location
|
|
December 31, 2016
|
|
December 31, 2015
|
Derivatives not designated as hedging instruments
|
|
|
|
|
|
Forward contracts
|
Mark-to-market energy assets
|
|
$
|
—
|
|
|
$
|
1
|
|
Propane swap agreements
|
Mark-to-market energy assets
|
|
8
|
|
|
—
|
|
Derivatives designated as fair value hedges
|
|
|
|
|
|
Put options
|
Mark-to-market energy assets
|
|
9
|
|
|
152
|
|
Derivatives designated as cash flow hedges
|
|
|
|
|
|
Natural gas futures contracts
|
Mark-to-market energy assets
|
|
113
|
|
|
—
|
|
Propane swap agreements
|
Mark-to-market energy assets
|
|
693
|
|
|
—
|
|
Total asset derivatives
|
|
|
$
|
823
|
|
|
$
|
153
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liability Derivatives
|
|
|
|
Fair Value As Of
|
(in thousands)
|
Balance Sheet Location
|
|
December 31, 2016
|
|
December 31, 2015
|
Derivatives not designated as hedging instruments
|
|
|
|
|
|
Forward contracts
|
Mark-to-market energy liabilities
|
|
$
|
—
|
|
|
$
|
1
|
|
Natural gas futures contracts
|
Mark-to-market energy liabilities
|
|
773
|
|
|
—
|
|
Derivatives designated as cash flow hedges
|
|
|
|
|
|
Propane swap agreements
|
Mark-to-market energy liabilities
|
|
—
|
|
|
323
|
|
Natural gas futures contracts
|
Mark-to-market energy liabilities
|
|
—
|
|
|
109
|
|
Total liability derivatives
|
|
|
$
|
773
|
|
|
$
|
433
|
|
Chesapeake Utilities Corporation 2016 Form 10-K Page
75
Notes to the Consolidated Financial Statements
The effects of gains and losses from derivative instruments are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount of Gain (Loss) on Derivatives:
|
|
Location of Gain
(Loss) on Derivatives
|
|
For the Year Ended December 31,
|
(in thousands)
|
2016
|
|
2015
|
|
2014
|
Derivatives not designated as hedging instruments:
|
|
|
|
|
|
|
|
Realized (loss) gain on forward contracts and options
(1)
|
Revenue
|
|
$
|
(546
|
)
|
|
$
|
426
|
|
|
$
|
1,423
|
|
Unrealized (loss) gain on forward contracts
(1)
|
Revenue
|
|
—
|
|
|
(126
|
)
|
|
57
|
|
Natural gas futures contracts
|
Cost of sales
|
|
(541
|
)
|
|
—
|
|
|
—
|
|
Propane swap agreements
|
Cost of sales
|
|
7
|
|
|
18
|
|
|
(735
|
)
|
Derivatives designated as fair value hedges:
|
|
|
|
|
|
|
|
Put/Call option
|
Cost of Sales
|
|
49
|
|
|
528
|
|
|
235
|
|
Put/Call option
(2)
|
Propane Inventory
|
|
—
|
|
|
43
|
|
|
517
|
|
Natural gas futures contracts
|
Natural Gas Inventory
|
|
(233
|
)
|
|
—
|
|
|
—
|
|
Derivatives designated as cash flow hedges
|
|
|
|
|
|
|
|
Propane swap agreements
|
Cost of Sales
|
|
(364
|
)
|
|
(120
|
)
|
|
(341
|
)
|
Propane swap agreements
|
Other Comprehensive Income
|
|
1,016
|
|
|
(323
|
)
|
|
—
|
|
Call options
|
Cost of Sales
|
|
—
|
|
|
(81
|
)
|
|
(17
|
)
|
Call options
|
Other Comprehensive Income
|
|
—
|
|
|
—
|
|
|
(55
|
)
|
Natural gas futures contracts
|
Cost of sales
|
|
345
|
|
|
—
|
|
|
—
|
|
Natural gas futures contracts
|
Other Comprehensive Income
|
|
222
|
|
|
109
|
|
|
—
|
|
Total
|
|
|
$
|
(45
|
)
|
|
$
|
474
|
|
|
$
|
1,084
|
|
|
|
(1)
|
All of the realized and unrealized gain (loss) on forward contracts represents the effect of trading activities on our consolidated statements of income.
|
|
|
(2)
|
As a fair value hedge with no ineffective portion, the unrealized gains and losses associated with this call option are recorded in cost of sales, offset by the corresponding change in the value of propane inventory (hedged item), which is also recorded in cost of sales. The amounts in cost of sales offset to zero and the unrealized gains and losses of this call option effectively changed the value of propane inventory.
|
8. F
AIR
V
ALUE
OF
F
INANCIAL
I
NSTRUMENTS
GAAP establishes a fair value hierarchy that prioritizes the inputs to valuation methods used to measure fair value. The three levels of the fair value hierarchy are the following:
Level 1: Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities;
Level 2: Quoted prices in markets that are not active, or inputs which are observable, either directly or indirectly, for substantially the full term of the asset or liability; and
Level 3: Prices or valuation techniques requiring inputs that are both significant to the fair value measurement and unobservable (i.e. supported by little or no market activity).
Chesapeake Utilities Corporation 2016 Form 10-K Page
76
Notes to the Consolidated Financial Statements
Financial Assets and Liabilities Measured at Fair Value
The following tables summarize our financial assets and liabilities that are measured at fair value on a recurring basis and the fair value measurements, by level, within the fair value hierarchy as of
December 31, 2016
and
2015
, respectively:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements Using:
|
As of December 31, 2016
|
Fair Value
|
|
Quoted Prices in
Active Markets
(Level 1)
|
|
Significant Other
Observable
Inputs
(Level 2)
|
|
Significant
Unobservable
Inputs
(Level 3)
|
(in thousands)
|
|
|
|
|
|
|
|
Assets:
|
|
|
|
|
|
|
|
Investments—equity securities
|
$
|
21
|
|
|
$
|
21
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Investments—guaranteed income fund
|
$
|
561
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
561
|
|
Investments—mutual funds and other
|
$
|
4,320
|
|
|
$
|
4,320
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Mark-to-market energy assets, including put options
|
$
|
823
|
|
|
$
|
—
|
|
|
$
|
823
|
|
|
$
|
—
|
|
Liabilities:
|
|
|
|
|
|
|
|
Mark-to-market energy liabilities, including swap agreements and natural gas futures contracts
|
$
|
773
|
|
|
$
|
—
|
|
|
$
|
773
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements Using:
|
As of December 31, 2015
|
Fair Value
|
|
Quoted Prices in Active Markets (Level 1)
|
|
Significant Other
Observable
Inputs
(Level 2)
|
|
Significant
Unobservable
Inputs
(Level 3)
|
(in thousands)
|
|
|
|
|
|
|
|
Assets:
|
|
|
|
|
|
|
|
Investments—equity securities
|
$
|
18
|
|
|
$
|
18
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Investments—guaranteed income fund
|
$
|
279
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
279
|
|
Investments—mutual funds and other
|
$
|
3,347
|
|
|
$
|
3,347
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Mark-to-market energy assets, including put options
|
$
|
153
|
|
|
$
|
—
|
|
|
$
|
153
|
|
|
$
|
—
|
|
Liabilities:
|
|
|
|
|
|
|
|
Mark-to-market energy liabilities, including swap agreements and natural gas futures contracts
|
$
|
433
|
|
|
$
|
—
|
|
|
$
|
433
|
|
|
$
|
—
|
|
The following valuation techniques were used to measure fair value assets on a recurring basis as of
December 31, 2016
and
2015
:
Level 1 Fair Value Measurements:
Investments - equity securities
— The fair values of these trading securities are recorded at fair value based on unadjusted quoted prices in active markets for identical securities.
Investments - mutual funds and other
— The fair values of these investments, comprised of money market and mutual funds, are recorded at fair value based on quoted net asset values of the shares.
Level 2 Fair Value Measurements:
Mark-to-market energy assets and liabilities —
These forward contracts are valued using market transactions in either the listed or OTC markets.
Propane put/call options, swap agreements and natural gas futures contracts —
The fair value of the propane put/call options, swap agreements and natural gas futures contracts are measured using market transactions for similar assets and liabilities in either the listed or OTC markets.
Investments measured at net asset value —
The fair value is based on net asset value per unit of investments, which uses significant observable inputs. However, these investments were not traded publicly and did not have quoted market prices in active markets.
Chesapeake Utilities Corporation 2016 Form 10-K Page
77
Notes to the Consolidated Financial Statements
Level 3 Fair Value Measurements:
Investments - guaranteed income fund
— The fair values of these investments are recorded at the contract value, which approximates their fair value.
The following table sets forth the summary of the changes in the fair value of Level 3 investments for the years ended
December 31, 2016
and
2015
:
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31,
|
|
2016
|
|
2015
|
(in thousands)
|
|
|
|
Beginning Balance
|
$
|
279
|
|
|
$
|
287
|
|
Purchases and adjustments
|
123
|
|
|
69
|
|
Transfers/disbursements
|
151
|
|
|
(82
|
)
|
Investment income
|
8
|
|
|
5
|
|
Ending Balance
|
$
|
561
|
|
|
$
|
279
|
|
Investment income from the Level 3 investments is reflected in other (expense) income in the accompanying consolidated statements of income.
At
December 31, 2016
and
2015
, there were no non-financial assets or liabilities required to be reported at fair value. We review our non-financial assets for impairment at least on an annual basis, as required.
Other Financial Assets and Liabilities
Financial assets with carrying values approximating fair value include cash and cash equivalents and accounts receivable. Financial liabilities with carrying values approximating fair value include accounts payable and other accrued liabilities and short-term debt. The fair value of cash and cash equivalents is measured using the comparable value in the active market and approximates its carrying value (Level 1 measurement). The fair value of short-term debt approximates the carrying value due to its short maturities and because interest rates approximate current market rates (Level 3 measurement).
At
December 31, 2016
, long-term debt, which includes the current maturities but excludes a capital lease obligation, had a carrying value of
$145.9 million
, compared to a fair value of
$161.5 million
, using a discounted cash flow methodology that incorporates a market interest rate based on published corporate borrowing rates for debt instruments with similar terms and average maturities, adjusted for duration, optionality and risk profile. At
December 31, 2015
, long-term debt, which includes the current maturities but excludes a capital lease obligation, had a carrying value of
$153.7 million
compared to the estimated fair value of
$165.1 million
. The valuation technique used to estimate the fair value of long-term debt would be considered a Level 3 measurement.
See Note 16,
Employee Benefit Plans,
for fair value measurement information related to our pension plan assets.
Chesapeake Utilities Corporation 2016 Form 10-K Page
78
Notes to the Consolidated Financial Statements
9. I
NVESTMENTS
The investment balances at
December 31, 2016
and
2015
, consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
December 31,
2016
|
|
December 31,
2015
|
Rabbi trust (associated with the Non-qualified Deferred Compensation Plan)
|
$
|
4,881
|
|
|
$
|
3,626
|
|
Investments in equity securities
|
21
|
|
|
18
|
|
Total
|
$
|
4,902
|
|
|
$
|
3,644
|
|
We classify these investments as trading securities and report them at their fair value. For the years ended
December 31, 2016
,
2015
and
2014
, we recorded net unrealized gains of
$379,000
,
$7,000
and
$237,000
, respectively, in other income (expense) in the 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 month for the gains and losses incurred by the investments in the Rabbi Trust.
10. G
OODWILL
AND
O
THER
I
NTANGIBLE
A
SSETS
The carrying value of goodwill as of
December 31, 2016
and
2015
was as follows:
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
(in thousands)
|
2016
|
|
2015
|
Regulated Energy
|
$
|
3,353
|
|
|
$
|
3,353
|
|
Unregulated Energy
|
11,717
|
|
|
11,195
|
|
Total
|
$
|
15,070
|
|
|
$
|
14,548
|
|
As of
December 31, 2016
, goodwill in our Regulated Energy segment is comprised of approximately
$2.5 million
from the FPU merger in October 2009,
$170,000
from the purchase of operating assets from IGC in August 2010 and
$714,000
from the purchase of Fort Meade in December 2013. As of
December 31, 2016
, goodwill in our Unregulated Energy segment is comprised of
$10.1 million
from the acquisition of Gatherco in April 2015 and
$1.6 million
from the acquisition of the operating assets of several companies. The annual impairment testing for
2016
indicated no impairment of goodwill.
The carrying value and accumulated amortization of intangible assets subject to amortization as of
December 31, 2016
and
2015
are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
2016
|
|
2015
|
(in thousands)
|
Gross
Carrying
Amount
|
|
Accumulated
Amortization
|
|
Gross
Carrying
Amount
|
|
Accumulated
Amortization
|
Customer lists
|
$
|
4,012
|
|
|
$
|
2,379
|
|
|
$
|
4,012
|
|
|
$
|
2,048
|
|
Non-Compete agreements
|
270
|
|
|
146
|
|
|
270
|
|
|
103
|
|
Other
|
270
|
|
|
184
|
|
|
270
|
|
|
179
|
|
Total
|
$
|
4,552
|
|
|
$
|
2,709
|
|
|
$
|
4,552
|
|
|
$
|
2,330
|
|
The customer lists acquired in the purchases of the operating assets of several companies are being amortized over
seven
to
12
years. The non-compete agreements acquired in the purchase of the operating assets of several companies are being amortized over a
six
-year or
seven
-year period. The other intangible assets consist of acquisition costs from our propane distribution acquisitions in the late 1980s and 1990s and are being amortized over
40 years
.
For the years ended
December 31, 2016
,
2015
and
2014
, amortization expense of intangible assets was
$380,000
,
$367,000
, and
$396,000
, respectively. Amortization expense of intangible assets is expected to be
$366,000
for 2017,
$353,000
for 2018,
$353,000
for 2019,
$353,000
for 2020 and
$288,000
for 2021.
Chesapeake Utilities Corporation 2016 Form 10-K Page
79
Notes to the Consolidated Financial Statements
11. I
NCOME
T
AXES
We file a consolidated federal income tax return. Income tax expense allocated to our subsidiaries is based upon their respective taxable incomes and tax credits. State income tax returns are filed on a separate company basis in most states where we have operations and/or are required to file. Our returns for tax years after 2012 are subject to examination.
We had a net operating loss for federal income tax purposes as of
December 31, 2016
of
$14.0 million
which we will carry back two years and none as of
December 31, 2015
. We had state net operating losses of
$19.6 million
and
$25.7 million
and in various states as of
December 31, 2016
and 2015, respectively, and almost all of these will expire in 2034. We have recorded a deferred tax asset of
$893,000
and
$884,000
related to state net operating loss carry-forwards at
December 31, 2016
and
2015
, respectively, but have not recorded a valuation allowance to reduce the future benefit of the tax net operating losses because we believe they will be fully utilized.
The following tables provide: (a) the components of income tax expense in
2016
,
2015
, and
2014
; (b) the reconciliation between the statutory federal income tax rate and the effective income tax rate for
2016
,
2015
, and
2014
; and (c) the components of accumulated deferred income tax assets and liabilities at December 31,
2016
and
2015
.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31,
|
|
2016
|
|
2015
|
|
2014
|
(in thousands)
|
|
|
|
|
|
Current Income Tax Expense
|
|
|
|
|
|
Federal
|
$
|
(4,898
|
)
|
|
$
|
4,875
|
|
|
$
|
434
|
|
State
|
2,053
|
|
|
1,533
|
|
|
1,311
|
|
Other
|
(71
|
)
|
|
(23
|
)
|
|
(35
|
)
|
Total current income tax expense
|
(2,916
|
)
|
|
6,385
|
|
|
1,710
|
|
Deferred Income Tax Expense
(1)
|
|
|
|
|
|
Property, plant and equipment
|
31,062
|
|
|
21,205
|
|
|
20,382
|
|
Deferred gas costs
|
1,163
|
|
|
(1,539
|
)
|
|
1,614
|
|
Pensions and other employee benefits
|
237
|
|
|
(84
|
)
|
|
537
|
|
FPU merger related premium cost and deferred gain
|
(572
|
)
|
|
(556
|
)
|
|
(802
|
)
|
Net operating loss carryforwards
|
(9
|
)
|
|
2,078
|
|
|
(112
|
)
|
Other
|
(624
|
)
|
|
(584
|
)
|
|
616
|
|
Total deferred income tax expense
|
31,257
|
|
|
20,520
|
|
|
22,235
|
|
Total Income Tax Expense
|
$
|
28,341
|
|
|
$
|
26,905
|
|
|
$
|
23,945
|
|
(1)
Includes
$2.1 million
,
$2.1 million
and
$2.6 million
of deferred state income taxes for the years
2016
,
2015
and
2014
, respectively.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31,
|
|
2016
|
|
2015
|
|
2014
|
(in thousands)
|
|
|
|
|
|
Reconciliation of Effective Income Tax Rates
|
|
|
|
|
|
Continuing Operations
|
|
|
|
|
|
Federal income tax expense
(1)
|
$
|
22,759
|
|
|
$
|
23,865
|
|
|
$
|
21,121
|
|
State income taxes, net of federal benefit
|
3,422
|
|
|
3,062
|
|
|
2,946
|
|
ESOP dividend deduction
|
(264
|
)
|
|
(263
|
)
|
|
(267
|
)
|
Other
|
2,424
|
|
|
241
|
|
|
145
|
|
Total Income Tax Expense
|
$
|
28,341
|
|
|
$
|
26,905
|
|
|
$
|
23,945
|
|
Effective Income Tax Rate
|
38.81
|
%
|
|
39.54
|
%
|
|
39.88
|
%
|
|
|
(1)
|
Federal income taxes were calculated at
35%
for each year represented.
|
Chesapeake Utilities Corporation 2016 Form 10-K Page
80
Notes to the Consolidated Financial Statements
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
2016
|
|
2015
|
(in thousands)
|
|
|
|
Deferred Income Taxes
|
|
|
|
Deferred income tax liabilities:
|
|
|
|
Property, plant and equipment
|
$
|
218,074
|
|
|
$
|
185,448
|
|
Acquisition adjustment
|
14,840
|
|
|
15,490
|
|
Loss on reacquired debt
|
442
|
|
|
485
|
|
Deferred gas costs
|
1,846
|
|
|
683
|
|
Other
|
6,375
|
|
|
5,961
|
|
Total deferred income tax liabilities
|
241,577
|
|
|
208,067
|
|
Deferred income tax assets:
|
|
|
|
Pension and other employee benefits
|
6,230
|
|
|
6,570
|
|
Environmental costs
|
2,592
|
|
|
2,445
|
|
Net operating loss carryforwards
|
952
|
|
|
943
|
|
Investment tax credit carryforwards
|
2,643
|
|
|
—
|
|
Self insurance
|
189
|
|
|
278
|
|
Storm reserve liability
|
1,131
|
|
|
1,153
|
|
Other
|
4,946
|
|
|
4,078
|
|
Total deferred income tax assets
|
18,683
|
|
|
15,467
|
|
Deferred Income Taxes Per Consolidated Balance Sheets
|
$
|
222,894
|
|
|
$
|
192,600
|
|
12. L
ONG
-
TERM
D
EBT
Our outstanding long-term debt is shown below:
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
(in thousands)
|
2016
|
|
2015
|
FPU secured first mortgage bonds:
|
|
|
|
9.08% bond, due June 1, 2022
|
$
|
7,978
|
|
|
$
|
7,973
|
|
Uncollateralized Senior Notes:
|
|
|
|
6.64% note, due October 31, 2017
|
2,727
|
|
|
5,455
|
|
5.50% note, due October 12, 2020
|
8,000
|
|
|
10,000
|
|
5.93% note, due October 31, 2023
|
21,000
|
|
|
24,000
|
|
5.68% note, due June 30, 2026
|
29,000
|
|
|
29,000
|
|
6.43% note, due May 2, 2028
|
7,000
|
|
|
7,000
|
|
3.73% note, due December 16, 2028
|
20,000
|
|
|
20,000
|
|
3.88% note, due May 15, 2029
|
50,000
|
|
|
50,000
|
|
Promissory notes
|
168
|
|
|
238
|
|
Capital lease obligation
|
3,471
|
|
|
4,824
|
|
Less: debt issuance costs
|
(291
|
)
|
|
(333
|
)
|
Total long-term debt
|
149,053
|
|
|
158,157
|
|
Less: current maturities
|
(12,099
|
)
|
|
(9,151
|
)
|
Total long-term debt, net of current maturities
|
$
|
136,954
|
|
|
$
|
149,006
|
|
Annual maturities and principal repayments of long-term debt, excluding the capital lease obligation, are as follows:
$12,099
for 2017;
$9,421
for 2018;
$11,245
for 2019;
$15,600
for 2020;
$13,600
for 2021 and
$87,400
thereafter. See Note 14,
Lease Obligations,
for future payments related to the capital lease obligation.
Chesapeake Utilities Corporation 2016 Form 10-K Page
81
Notes to the Consolidated Financial Statements
Shelf Agreement
In October 2015, we entered into a Shelf Agreement with Prudential. Under the terms of the Shelf Agreement, we may request that Prudential purchase, through October 2018, up to
$150.0 million
of our Shelf Notes at a fixed interest rate and with a maturity date not to exceed
twenty years
from the date of issuance. Prudential is under no obligation to purchase any of the Shelf Notes. The interest rate and terms of payment of any series of Shelf Notes will be determined at the time of purchase. We currently anticipate the proceeds from the sale of any series of Shelf Notes will be used for general corporate purposes, including refinancing of short-term borrowing and/or repayment of outstanding indebtedness and financing capital expenditures on future projects; however, actual use of such proceeds will be determined at the time of a purchase and each request for purchase with respect to a series of Shelf Notes will specify the exact use of the proceeds.
The Shelf Agreement sets forth certain business covenants to which we are subject when any Shelf Note is outstanding, including covenants that limit or restrict us and our subsidiaries from incurring indebtedness and incurring liens and encumbrances on any of our property.
In May 2016, we submitted a request that Prudential purchase
$70.0 million
of
3.25 percent
Shelf Notes under the Shelf Agreement, which was accepted and confirmed by Prudential. The proceeds received from the issuances of the Shelf Notes will be used to reduce short-term borrowings under our revolving credit facility, lines of credit and/or to fund capital expenditures. The closing of the sale and issuance of the Shelf Notes is expected to occur on or before April 28, 2017.
Secured First Mortgage Bonds
We guaranteed FPU’s first mortgage bonds, which are secured by a lien covering all of FPU’s property. FPU’s first mortgage bonds contain a restriction that limits the payment of dividends by FPU. It provides that FPU cannot make dividends or other restricted payments in excess of the sum of
$2.5 million
plus FPU’s consolidated net income accrued on and after January 1, 1992. As of
December 31, 2016
, FPU’s cumulative net income base was
$128.5 million
, offset by restricted payments of
$37.6 million
, leaving
$90.9 million
of cumulative net income for FPU free of restrictions pursuant to this covenant.
The dividend restrictions by FPU’s first mortgage bonds resulted in approximately
$45.0 million
of the net assets of our consolidated subsidiaries being restricted at
December 31, 2016
. This represents approximately
10 percent
of our consolidated net assets. Other than the dividend restrictions by FPU’s first mortgage bonds, there are no legal, contractual or regulatory restrictions on the net assets of our subsidiaries.
Uncollateralized Senior Notes
All of our uncollateralized Senior Notes require periodic principal and interest payments as specified in each note. They also contain various restrictions. The most stringent restrictions state that we must maintain equity of at least
40 percent
of total capitalization, and the fixed charge coverage ratio must be at least
1.2
times. The most recent Senior Notes issued in December 2013 also contain a restriction that we must maintain an aggregate net book value in our regulated business assets of at least
50 percent
of our consolidated total assets. Failure to comply with those covenants could result in accelerated due dates and/or termination of the Senior Note agreements.
Certain Chesapeake Utilities' uncollateralized Senior Notes contain a “restricted payments” covenant as defined in the respective note agreements. The most restrictive covenants of this type are included within the
6.64 percent
,
5.50 percent
and
5.93 percent
Senior Notes, due October 31, 2017, October 12, 2020 and October 31, 2023, respectively. The covenant provides that we cannot pay or declare any dividends or make any other restricted payments in excess of the sum of
$10.0 million
, plus our consolidated net income accrued on and after January 1, 2003. As of
December 31, 2016
, the cumulative consolidated net income base was
$329.4 million
, offset by restricted payments of
$157.1 million
, leaving
$172.3 million
of cumulative net income free of restrictions.
As of
December 31, 2016
, we are in compliance with all of our debt covenants.
13. S
HORT
-
TERM
B
ORROWINGS
At
December 31, 2016
and
2015
, we had
$209.9 million
and
$173.4 million
, respectively, of short-term borrowings outstanding. In October 2015, we entered into a Credit Agreement with the Lenders for a
$150.0 million
Revolver for a term of
five years
subject to the terms and conditions as specified. We now have an aggregate of
$320.0 million
in available credit lines:
four
unsecured bank credit facilities with
three
financial institutions with
$170.0 million
in total available credit and a Revolver with
five
participating Lenders totaling
$150.0 million
. The annual weighted average interest rates on our short-term borrowings were
1.43 percent
and
1.30 percent
for
2016
and
2015
, respectively. We incurred commitment fees of
$145,000
and
$106,000
in
2016
and
2015
, respectively.
Chesapeake Utilities Corporation 2016 Form 10-K Page
82
Notes to the Consolidated Financial Statements
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding borrowings at
|
|
(in thousands)
|
Total Facility
|
Interest Rate
|
Expiration Date
|
December 31, 2016
|
December 31, 2015
|
Available at December 31, 2016
|
Bank Credit Facility
|
|
|
|
|
|
|
Committed revolving credit facility A
|
$
|
55,000
|
|
LIBOR plus 1.00 percent
(1)
|
October 29, 2017
|
$
|
45,000
|
|
$
|
30,000
|
|
$
|
10,000
|
|
Committed revolving credit facility B
|
30,000
|
|
LIBOR plus 1.00 percent
(1)
|
October 31, 2017
|
21,311
|
|
23,757
|
|
8,689
|
|
Short-term revolving credit Note C
|
50,000
|
|
LIBOR plus 0.80 percent
(2)
|
October 31, 2017
|
50,000
|
|
50,000
|
|
—
|
|
Committed revolving credit facility D
|
35,000
|
|
LIBOR plus 0.85 percent
(3)
|
December 19, 2017
|
35,000
|
|
30,000
|
|
—
|
|
Committed revolving credit facility E
|
150,000
|
|
LIBOR plus 1.00 percent
(1)
|
October 8, 2020
|
50,000
|
|
35,000
|
|
100,000
|
|
Total short term credit facilities
|
$
|
320,000
|
|
|
|
$
|
201,311
|
|
$
|
168,757
|
|
$
|
118,689
|
|
Book overdrafts
(4)
|
|
|
|
8,560
|
|
4,640
|
|
|
Total short-term borrowing
|
|
|
|
$
|
209,871
|
|
$
|
173,397
|
|
|
(1)
This facility bears interest at LIBOR for the applicable period plus up to
1.00
percent, based on Total Indebtedness as a percentage of Total Capitalization.
(2)
At our discretion, the borrowings under this facility can bear interest at the lender's base rate plus
0.80
percent.
(3)
At our discretion, the borrowing under this facility can bear interest at the lender's base rate plus
0.85
percent.
(4)
If presented, these book overdrafts would be funded through the bank revolving credit facilities.
These bank credit facilities are available to provide funds for our short-term cash needs to meet seasonal working capital requirements and to temporarily fund portions of our capital expenditures. We are authorized by our Board of Directors to borrow up to
$275.0 million
of short-term debt, as required, from these short-term lines of credit.
The availability of funds under our credit facilities is subject to conditions specified in the respective credit agreements, all of which we currently satisfy. These conditions include our compliance with financial covenants and the continued accuracy of representations and warranties contained in these agreements. We are required by the financial covenants in our revolving credit facilities to maintain, at the end of each fiscal year, a funded indebtedness ratio of no greater than
65 percent
. We are in compliance with all of our debt covenants.
14. L
EASE
O
BLIGATIONS
We have entered into several operating lease arrangements for office space, equipment and pipeline facilities. Rent expense related to these leases for
2016
,
2015
and
2014
was
$2.5 million
,
$1.7 million
and
$1.8 million
, respectively. Future minimum payments under our current lease agreements for the years 2017 through 2021 are
$1.4 million
,
$1.1 million
,
$848,000
,
$688,000
, and
$462,000
, respectively, and approximately
$2.3 million
thereafter, with an aggregate total of approximately
$6.8 million
.
For each of the years ended December 31,
2016
and
2015
, we paid
$1.5 million
and for the year ended December 31,
2014
, we paid
$1.1 million
, for a capital lease arrangement related to Sandpiper's capacity, supply and operating agreement. Future minimum payments under this lease arrangement are
$1.5 million
per year for both 2017 and 2018 and
$625,000
in 2019, with an aggregate total of
$3.6 million
.
15. S
TOCKHOLDERS'
E
QUITY
Preferred Stock
We have
2,000,000
authorized and unissued shares of
$0.01
par value preferred stock as of December 31, 2016 and 2015. 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.
Common Stock Public Offering
In September 2016, we completed a public offering of
960,488
shares of our common stock at a public offering price per share of
$62.26
. The net proceeds from the sale of common stock, after deducting underwriting commissions and expenses, were approximately
$57.4 million
, which were added to our general funds and used primarily to repay a portion of our short-term debt under unsecured lines of credit.
Chesapeake Utilities Corporation 2016 Form 10-K Page
83
Notes to the Consolidated Financial Statements
Shareholders' Rights
Our Board of Directors has adopted a Rights Plan by declaring a dividend of one preferred stock purchase right (each, a "Right," and, collectively, the "Rights") for each outstanding share of our common stock held of record on September 3, 1999, as adjusted for our stock split in September of 2014, and for additional shares of common stock issued since that time. Unless exercised, the Rights trade with our common stock and are evidenced by the common stock certificate. In general, each Right will become exercisable and trade independently from our common stock upon a person or entity acquiring a beneficial ownership of
15 percent
or more of our outstanding common stock.
Each Right, if it becomes exercisable, initially entitles the holder to purchase one fiftieth of a share of our Series A Participating Cumulative Preferred Stock, par value
$0.01
per share, at a price of
$70
per unit, subject to anti-dilution adjustments. Upon a person or entity becoming an Acquiring Person, each Right (other than the Rights held by the Acquiring Person) will become exercisable to purchase a number of shares of our common stock having a market value equal to two times the exercise price of the Right. The Rights expire on August 20, 2019 unless they are redeemed earlier by us at the redemption price of
$0.01
per Right. We may redeem the Rights at any time before they become exercisable and thereafter only in limited circumstances.
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 comprehensive income (loss). The following table presents the changes in the balance of accumulated other comprehensive loss for the years ended
December 31, 2016
and
2015
. All amounts in the following table are presented net of tax.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Defined Benefit Pension and Postretirement Plan Items
|
|
Commodity Contract Cash Flow Hedges
|
|
Total
|
(in thousands)
|
|
|
|
|
|
|
As of December 31, 2015
|
|
$
|
(5,580
|
)
|
|
$
|
(260
|
)
|
|
$
|
(5,840
|
)
|
Other comprehensive (loss)/income before reclassifications
|
|
(254
|
)
|
|
762
|
|
|
508
|
|
Amounts reclassified from accumulated other comprehensive loss
|
|
474
|
|
|
(20
|
)
|
|
454
|
|
Net current-period other comprehensive income
|
|
220
|
|
|
742
|
|
|
962
|
|
As of December 31, 2016
|
|
$
|
(5,360
|
)
|
|
$
|
482
|
|
|
$
|
(4,878
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Defined Benefit Pension and Postretirement Plan Items
|
|
Commodity Contracts Cash Flow Hedges
|
|
Total
|
(in thousands)
|
|
|
|
|
|
|
As of December 31, 2014
|
|
$
|
(5,643
|
)
|
|
$
|
(33
|
)
|
|
$
|
(5,676
|
)
|
Other comprehensive loss before reclassifications
|
|
(286
|
)
|
|
(350
|
)
|
|
(636
|
)
|
Amounts reclassified from accumulated other comprehensive loss
|
|
349
|
|
|
123
|
|
|
472
|
|
Net current-period other comprehensive income/(loss)
|
|
63
|
|
|
(227
|
)
|
|
(164
|
)
|
As of December 31, 2015
|
|
$
|
(5,580
|
)
|
|
$
|
(260
|
)
|
|
$
|
(5,840
|
)
|
Chesapeake Utilities Corporation 2016 Form 10-K Page
84
Notes to the Consolidated Financial Statements
The following table presents amounts reclassified out of accumulated other comprehensive loss for the years ended
December 31, 2016
and
2015
. Deferred gains and losses of our commodity contracts cash flow hedges are recognized in earnings upon settlement.
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31,
|
(in thousands)
|
|
2016
|
|
2015
|
Amortization of defined benefit pension and postretirement plan items:
|
|
|
|
|
Prior service cost
(1)
|
|
$
|
77
|
|
|
$
|
68
|
|
Net gain
(1)
|
|
(871
|
)
|
|
(650
|
)
|
Total before income taxes
|
|
(794
|
)
|
|
(582
|
)
|
Income tax benefit
|
|
320
|
|
|
233
|
|
Net of tax
|
|
$
|
(474
|
)
|
|
$
|
(349
|
)
|
|
|
|
|
|
Gains and losses on commodity contracts cash flow hedges
|
|
|
|
|
Propane swap agreements
(2)
|
|
$
|
(322
|
)
|
|
$
|
(120
|
)
|
Call options
(2)
|
|
—
|
|
|
(55
|
)
|
Natural gas futures
(2)
|
|
345
|
|
|
(31
|
)
|
Total before income taxes
|
|
23
|
|
|
(206
|
)
|
Income tax impact
|
|
(3
|
)
|
|
83
|
|
Net of tax
|
|
$
|
20
|
|
|
$
|
(123
|
)
|
|
|
|
|
|
Total reclassifications for the period
|
|
$
|
(454
|
)
|
|
$
|
(472
|
)
|
|
|
(1)
|
These amounts are included in the computation of net periodic benefits. See Note 16
, Employee Benefit Plans
, for additional details.
|
|
|
(2)
|
These amounts are included in the effects of gains and losses from derivative instruments. See Note 7,
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.
16. E
MPLOYEE
B
ENEFIT
P
LANS
We measure the assets and obligations of the defined benefit pension plans and other postretirement benefits plans to determine the plans’ funded status as of the end of the year as an asset or a liability on our consolidated balance sheets. We record as a component of other comprehensive income/loss or a regulatory asset the changes in funded status that occurred during the year that are not recognized as part of net periodic benefit costs.
Defined Benefit Pension Plans
We sponsor
three
defined benefit pension plans: the Chesapeake Pension Plan, the FPU Pension Plan and the Chesapeake SERP.
The Chesapeake Pension Plan was closed to new participants, effective January 1, 1999, and was frozen with respect to additional years of service and additional compensation, effective January 1, 2005. Benefits under the Chesapeake Pension Plan were based on each participant’s years of service and highest average compensation, prior to the freezing of the plan. Active participants on the date the Chesapeake Pension Plan was frozen were credited with
two
additional years of service. The unfunded liability for the Chesapeake Pension Plan of approximately
$2.7 million
at December 31, 2016 and 2015, is included in the other pension and benefit costs liability in our consolidated balance sheets.
The FPU Pension Plan covers eligible FPU non-union employees hired before January 1, 2005 and union employees hired before the respective union contract expiration dates in 2005 and 2006. Prior to the FPU merger, the FPU Pension Plan was frozen with respect to additional years of service and additional compensation, effective December 31, 2009. The unfunded liability for the FPU Pension Plan of approximately
$20.6 million
and
$22.2 million
at December 31, 2016 and 2015, respectively, is included in the other pension and benefit costs liability in our consolidated balance sheets.
The Chesapeake SERP was frozen with respect to additional years of service and additional compensation as of December 31, 2004. Benefits under the Chesapeake SERP were based on each participant’s years of service and highest average compensation,
Chesapeake Utilities Corporation 2016 Form 10-K Page
85
Notes to the Consolidated Financial Statements
prior to the freezing of the plan. Active participants on the date the Chesapeake SERP was frozen were credited with
two
additional years of service. The unfunded liability for the Chesapeake SERP of approximately
$2.4 million
and
$2.5 million
at December 31, 2016 and 2015, respectively, is included in the Other pension and benefit costs liability in our consolidated balance sheets.
The following schedule sets forth the funded status at
December 31, 2016
and
2015
and the net periodic cost for the years ended
December 31, 2016
,
2015
and
2014
for the Chesapeake and FPU Pension Plans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Chesapeake
Pension Plan
|
|
FPU
Pension Plan
|
At December 31,
|
2016
|
|
2015
|
|
2016
|
|
2015
|
(in thousands)
|
|
|
|
|
|
|
|
Change in benefit obligation:
|
|
|
|
|
|
|
|
Benefit obligation — beginning of year
|
$
|
11,501
|
|
|
$
|
11,981
|
|
|
$
|
64,435
|
|
|
$
|
68,173
|
|
Interest cost
|
421
|
|
|
407
|
|
|
2,525
|
|
|
2,504
|
|
Actuarial loss (gain)
|
330
|
|
|
(401
|
)
|
|
(216
|
)
|
|
(3,374
|
)
|
Effect of settlement
|
(433
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
Benefits paid
|
(464
|
)
|
|
(486
|
)
|
|
(2,912
|
)
|
|
(2,868
|
)
|
Benefit obligation — end of year
|
11,355
|
|
|
11,501
|
|
|
63,832
|
|
|
64,435
|
|
Change in plan assets:
|
|
|
|
|
|
|
|
Fair value of plan assets — beginning of year
|
8,752
|
|
|
9,078
|
|
|
42,207
|
|
|
45,077
|
|
Actual return on plan assets
|
424
|
|
|
(289
|
)
|
|
2,343
|
|
|
(1,464
|
)
|
Employer contributions
|
389
|
|
|
449
|
|
|
1,634
|
|
|
1,462
|
|
Benefits paid
|
(464
|
)
|
|
(486
|
)
|
|
(2,912
|
)
|
|
(2,868
|
)
|
Effect of settlement
|
(433
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
Fair value of plan assets — end of year
|
8,668
|
|
|
8,752
|
|
|
43,272
|
|
|
42,207
|
|
Reconciliation:
|
|
|
|
|
|
|
|
Funded status
|
(2,687
|
)
|
|
(2,749
|
)
|
|
(20,560
|
)
|
|
(22,228
|
)
|
Accrued pension cost
|
$
|
(2,687
|
)
|
|
$
|
(2,749
|
)
|
|
$
|
(20,560
|
)
|
|
$
|
(22,228
|
)
|
Assumptions:
|
|
|
|
|
|
|
|
Discount rate
|
3.75
|
%
|
|
3.75
|
%
|
|
4.00
|
%
|
|
4.00
|
%
|
Expected return on plan assets
|
6.00
|
%
|
|
6.00
|
%
|
|
6.50
|
%
|
|
7.00
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Chesapeake
Pension Plan
|
|
FPU
Pension Plan
|
For the Years Ended December 31,
|
2016
|
|
2015
|
|
2014
|
|
2016
|
|
2015
|
|
2014
|
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
Components of net periodic pension cost:
|
|
|
|
|
|
|
|
|
|
|
|
Interest cost
|
$
|
421
|
|
|
$
|
407
|
|
|
$
|
425
|
|
|
$
|
2,525
|
|
|
$
|
2,504
|
|
|
$
|
2,613
|
|
Expected return on assets
|
(501
|
)
|
|
(530
|
)
|
|
(516
|
)
|
|
(2,702
|
)
|
|
(3,107
|
)
|
|
(3,089
|
)
|
Amortization of actuarial loss
|
459
|
|
|
392
|
|
|
176
|
|
|
519
|
|
|
456
|
|
|
8
|
|
Settlement expense
|
161
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Net periodic pension cost
|
540
|
|
|
269
|
|
|
85
|
|
|
342
|
|
|
(147
|
)
|
|
(468
|
)
|
Amortization of pre-merger regulatory asset
|
—
|
|
|
—
|
|
|
—
|
|
|
761
|
|
|
761
|
|
|
761
|
|
Total periodic cost
|
$
|
540
|
|
|
$
|
269
|
|
|
$
|
85
|
|
|
$
|
1,103
|
|
|
$
|
614
|
|
|
$
|
293
|
|
Assumptions:
|
|
|
|
|
|
|
|
|
|
|
|
Discount rate
|
3.75
|
%
|
|
3.50
|
%
|
|
4.25
|
%
|
|
4.00
|
%
|
|
3.75
|
%
|
|
4.75
|
%
|
Expected return on plan assets
|
6.00
|
%
|
|
6.00
|
%
|
|
6.00
|
%
|
|
6.50
|
%
|
|
7.00
|
%
|
|
7.00
|
%
|
Chesapeake Utilities Corporation 2016 Form 10-K Page
86
Notes to the Consolidated Financial Statements
Included in the net periodic costs for the FPU Pension Plan is continued amortization of the FPU pension regulatory asset, which represents the portion attributable to FPU's regulated operations for the changes in funded status that occurred, but were not recognized as part of net periodic cost, prior to the merger with Chesapeake Utilities in October 2009. This was previously deferred as a regulatory asset by FPU prior to the merger to be recovered through rates pursuant to an order by the Florida PSC. The unamortized balance of this regulatory asset was
$2.1 million
and
$2.8 million
at
December 31, 2016
and
2015
, respectively.
The following sets forth the funded status at
December 31, 2016
and
2015
and the net periodic cost for the years ended
December 31, 2016
,
2015
and
2014
for the Chesapeake SERP:
|
|
|
|
|
|
|
|
|
At December 31,
|
2016
|
|
2015
|
(in thousands)
|
|
|
|
Change in benefit obligation:
|
|
|
|
Benefit obligation — beginning of year
|
$
|
2,510
|
|
|
$
|
2,650
|
|
Interest cost
|
91
|
|
|
91
|
|
Actuarial gain
|
(21
|
)
|
|
(85
|
)
|
Benefits paid
|
(152
|
)
|
|
(146
|
)
|
Benefit obligation — end of year
|
2,428
|
|
|
2,510
|
|
Change in plan assets:
|
|
|
|
Fair value of plan assets — beginning of year
|
—
|
|
|
—
|
|
Employer contributions
|
152
|
|
|
146
|
|
Benefits paid
|
(152
|
)
|
|
(146
|
)
|
Fair value of plan assets — end of year
|
—
|
|
|
—
|
|
Reconciliation:
|
|
|
|
Funded status
|
(2,428
|
)
|
|
(2,510
|
)
|
Accrued pension cost
|
$
|
(2,428
|
)
|
|
$
|
(2,510
|
)
|
Assumptions:
|
|
|
|
Discount rate
|
3.75
|
%
|
|
3.75
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended December 31,
|
2016
|
|
2015
|
|
2014
|
(in thousands)
|
|
|
|
|
|
Components of net periodic pension cost:
|
|
|
|
|
|
Interest cost
|
$
|
91
|
|
|
$
|
91
|
|
|
$
|
92
|
|
Amortization of prior service cost
|
—
|
|
|
9
|
|
|
19
|
|
Amortization of actuarial loss
|
87
|
|
|
99
|
|
|
47
|
|
Net periodic pension cost
|
$
|
178
|
|
|
$
|
199
|
|
|
$
|
158
|
|
Assumptions:
|
|
|
|
|
|
Discount rate
|
3.75
|
%
|
|
3.50
|
%
|
|
4.25
|
%
|
Our funding policy provides that payments to the trustee of each qualified plan shall be equal to at least the minimum funding requirements of the Employee Retirement Income Security Act of 1974. The following schedule summarizes the assets of the Chesapeake Pension Plan and the FPU Pension Plan, by investment type, at
December 31, 2016
,
2015
and
2014
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Chesapeake
Pension Plan
|
|
FPU
Pension Plan
|
At December 31,
|
2016
|
|
2015
|
|
2014
|
|
2016
|
|
2015
|
|
2014
|
Asset Category
|
|
|
|
|
|
|
|
|
|
|
|
Equity securities
|
52.93
|
%
|
|
48.01
|
%
|
|
51.42
|
%
|
|
53.18
|
%
|
|
48.56
|
%
|
|
52.62
|
%
|
Debt securities
|
37.64
|
%
|
|
39.62
|
%
|
|
37.31
|
%
|
|
37.74
|
%
|
|
41.74
|
%
|
|
37.69
|
%
|
Other
|
9.43
|
%
|
|
12.37
|
%
|
|
11.27
|
%
|
|
9.08
|
%
|
|
9.70
|
%
|
|
9.69
|
%
|
Total
|
100.00
|
%
|
|
100.00
|
%
|
|
100.00
|
%
|
|
100.00
|
%
|
|
100.00
|
%
|
|
100.00
|
%
|
The investment policy of both the Chesapeake and FPU Pension Plans is designed to provide the capital assets necessary to meet the financial obligations of the plans. The investment goals and objectives are to achieve investment returns that, together with
Chesapeake Utilities Corporation 2016 Form 10-K Page
87
Notes to the Consolidated Financial Statements
contributions, will provide funds adequate to pay promised benefits to present and future beneficiaries of the plans, earn a long-term investment return in excess of the growth of the plans’ retirement liabilities, minimize pension expense and cumulative contributions resulting from liability measurement and asset performance, and maintain a diversified portfolio to reduce the risk of large losses.
The following allocation range of asset classes is intended to produce a rate of return sufficient to meet the plans’ goals and objectives:
|
|
|
|
|
|
|
Asset Allocation Strategy
|
Asset Class
|
Minimum
Allocation
Percentage
|
|
Maximum
Allocation
Percentage
|
Domestic Equities (Large Cap, Mid Cap and Small Cap)
|
14
|
%
|
|
32
|
%
|
Foreign Equities (Developed and Emerging Markets)
|
13
|
%
|
|
25
|
%
|
Fixed Income (Inflation Bond and Taxable Fixed)
|
26
|
%
|
|
40
|
%
|
Alternative Strategies (Long/Short Equity and Hedge Fund of Funds)
|
6
|
%
|
|
14
|
%
|
Diversifying Assets (High Yield Fixed Income, Commodities, and Real Estate)
|
7
|
%
|
|
19
|
%
|
Cash
|
0
|
%
|
|
5
|
%
|
Due to periodic contributions and different asset classes producing varying returns, the actual asset values may temporarily move outside of the intended ranges. The investments are monitored on a quarterly basis, at a minimum, for asset allocation and performance.
At
December 31, 2016
and 2015, the assets of the Chesapeake Pension Plan and the FPU Pension Plan were comprised of the following investments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurement Hierarchy
|
|
|
|
|
|
December 31, 2016
|
|
December 31, 2015
|
Asset Category
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mutual Funds - Equity securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Large Cap
(1)
|
$
|
4,031
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
4,031
|
|
|
$
|
3,641
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
3,641
|
|
U.S. Mid Cap
(1)
|
1,677
|
|
|
—
|
|
|
—
|
|
|
1,677
|
|
|
1,577
|
|
|
—
|
|
|
—
|
|
|
1,577
|
|
U.S. Small Cap
(1)
|
845
|
|
|
—
|
|
|
—
|
|
|
845
|
|
|
865
|
|
|
—
|
|
|
—
|
|
|
865
|
|
International
(2)
|
9,574
|
|
|
—
|
|
|
—
|
|
|
9,574
|
|
|
9,416
|
|
|
—
|
|
|
—
|
|
|
9,416
|
|
Alternative Strategies
(3)
|
5,238
|
|
|
—
|
|
|
—
|
|
|
5,238
|
|
|
2,737
|
|
|
—
|
|
|
—
|
|
|
2,737
|
|
|
21,365
|
|
|
—
|
|
|
—
|
|
|
21,365
|
|
|
18,236
|
|
|
—
|
|
|
—
|
|
|
18,236
|
|
Mutual Funds - Debt securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed income
(4)
|
16,958
|
|
|
—
|
|
|
—
|
|
|
16,958
|
|
|
18,565
|
|
|
—
|
|
|
—
|
|
|
18,565
|
|
High Yield
(4)
|
2,636
|
|
|
—
|
|
|
—
|
|
|
2,636
|
|
|
2,521
|
|
|
—
|
|
|
—
|
|
|
2,521
|
|
|
19,594
|
|
|
—
|
|
|
—
|
|
|
19,594
|
|
|
21,086
|
|
|
—
|
|
|
—
|
|
|
21,086
|
|
Mutual Funds - Other
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commodities
(5)
|
2,134
|
|
|
—
|
|
|
—
|
|
|
2,134
|
|
|
1,365
|
|
|
—
|
|
|
—
|
|
|
1,365
|
|
Real Estate
(6)
|
2,116
|
|
|
—
|
|
|
—
|
|
|
2,116
|
|
|
2,529
|
|
|
—
|
|
|
—
|
|
|
2,529
|
|
Guaranteed deposit
(7)
|
—
|
|
|
—
|
|
|
498
|
|
|
498
|
|
|
—
|
|
|
—
|
|
|
1,286
|
|
|
1,286
|
|
|
4,250
|
|
|
—
|
|
|
498
|
|
|
4,748
|
|
|
3,894
|
|
|
—
|
|
|
1,286
|
|
|
5,180
|
|
Total Pension Plan Assets in fair value hierarchy
|
$
|
45,209
|
|
|
$
|
—
|
|
|
$
|
498
|
|
|
45,707
|
|
|
$
|
43,216
|
|
|
$
|
—
|
|
|
$
|
1,286
|
|
|
44,502
|
|
Investments measured at net asset value
(8)
|
|
|
|
|
|
|
6,233
|
|
|
|
|
|
|
|
|
6,457
|
|
Total Pension Plan Assets
|
|
|
|
|
|
|
$
|
51,940
|
|
|
|
|
|
|
|
|
$
|
50,959
|
|
Chesapeake Utilities Corporation 2016 Form 10-K Page
88
Notes to the Consolidated Financial Statements
|
|
(1)
|
Includes funds that invest primarily in United States common stocks.
|
|
|
(2)
|
Includes funds that invest primarily in foreign equities and emerging markets equities.
|
|
|
(3)
|
Includes funds that actively invest in both equity and debt securities, funds that sell short securities and funds that provide long-term capital appreciation. The funds may invest in debt securities below investment grade.
|
|
|
(4)
|
Includes funds that invest in investment grade and fixed income securities.
|
|
|
(5)
|
Includes funds that invest primarily in commodity-linked derivative instruments and fixed income securities.
|
|
|
(6)
|
Includes funds that invest primarily in real estate.
|
|
|
(7)
|
Includes investment in a group annuity product issued by an insurance company.
|
|
|
(8)
|
Certain investments that were measured at net asset value per share have not been classified in the fair value hierarchy. These amounts are presented to reconcile to total pension plan assets.
|
At
December 31, 2016
and
2015
, all of the investments were classified under the same fair value measurement hierarchy (Level 1 through Level 3) described under Note 8
, Fair Value of Financial Instruments
. The Level 3 investments were recorded at fair value based on the contract value of annuity products underlining guaranteed deposit accounts, which was calculated using discounted cash flow models. The contract value of these products represented deposits made to the contract, plus earnings at guaranteed crediting rates, less withdrawals and fees. The following table sets forth the summary of the changes in the fair value of Level 3 investments for the years ended
December 31, 2016
and
2015
:
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31,
|
|
2016
|
|
2015
|
(in thousands)
|
|
|
|
Balance, beginning of year
|
$
|
1,286
|
|
|
$
|
1,144
|
|
Purchases
|
2,023
|
|
|
1,926
|
|
Transfers in
|
1,435
|
|
|
1,900
|
|
Disbursements
|
(4,268
|
)
|
|
(3,688
|
)
|
Investment income
|
22
|
|
|
4
|
|
Balance, end of year
|
$
|
498
|
|
|
$
|
1,286
|
|
Other Postretirement Benefits Plans
We sponsor
two
defined benefit plans: the Chesapeake Postretirement Plan and the FPU Medical Plan. The following table sets forth the funded status at
December 31, 2016
and
2015
and the net periodic cost for the years ended
December 31, 2016
,
2015
, and
2014
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Chesapeake
Postretirement Plan
|
|
FPU
Medical Plan
|
At December 31,
|
2016
|
|
2015
|
|
2016
|
|
2015
|
(in thousands)
|
|
|
|
|
|
|
|
Change in benefit obligation:
|
|
|
|
|
|
|
|
Benefit obligation — beginning of year
|
$
|
1,153
|
|
|
$
|
1,238
|
|
|
$
|
1,444
|
|
|
$
|
1,712
|
|
Interest cost
|
43
|
|
|
42
|
|
|
55
|
|
|
57
|
|
Plan participants contributions
|
90
|
|
|
108
|
|
|
64
|
|
|
75
|
|
Actuarial loss (gain)
|
20
|
|
|
(58
|
)
|
|
(41
|
)
|
|
(132
|
)
|
Benefits paid
|
(174
|
)
|
|
(177
|
)
|
|
(173
|
)
|
|
(268
|
)
|
Benefit obligation — end of year
|
1,132
|
|
|
1,153
|
|
|
1,349
|
|
|
1,444
|
|
Change in plan assets:
|
|
|
|
|
|
|
|
Fair value of plan assets — beginning of year
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Employer contributions
(1)
|
84
|
|
|
69
|
|
|
109
|
|
|
193
|
|
Plan participants contributions
|
90
|
|
|
108
|
|
|
64
|
|
|
75
|
|
Benefits paid
|
(174
|
)
|
|
(177
|
)
|
|
(173
|
)
|
|
(268
|
)
|
Fair value of plan assets — end of year
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Reconciliation:
|
|
|
|
|
|
|
|
Funded status
|
(1,132
|
)
|
|
(1,153
|
)
|
|
(1,349
|
)
|
|
(1,444
|
)
|
Accrued postretirement cost
|
$
|
(1,132
|
)
|
|
$
|
(1,153
|
)
|
|
$
|
(1,349
|
)
|
|
$
|
(1,444
|
)
|
Assumptions:
|
|
|
|
|
|
|
|
Discount rate
|
3.75
|
%
|
|
3.75
|
%
|
|
4.00
|
%
|
|
4.00
|
%
|
Chesapeake Utilities Corporation 2016 Form 10-K Page
89
Notes to the Consolidated Financial Statements
|
|
(1)
|
The Chesapeake Postretirement Plan does not receive a Medicare Part-D subsidy. The FPU Medical Plan did not receive a significant subsidy for the post-merger period.
|
Net periodic postretirement benefit costs for
2016
,
2015
, and
2014
include the following components:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Chesapeake
Postretirement Plan
|
|
FPU
Medical Plan
|
For the Years Ended December 31,
|
2016
|
|
2015
|
|
2014
|
|
2016
|
|
2015
|
|
2014
|
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
Components of net periodic postretirement cost:
|
|
|
|
|
|
|
|
|
|
|
|
Interest cost
|
$
|
43
|
|
|
$
|
42
|
|
|
$
|
39
|
|
|
$
|
55
|
|
|
$
|
57
|
|
|
$
|
69
|
|
Amortization of:
|
|
|
|
|
|
|
|
|
|
|
|
Actuarial loss
|
64
|
|
|
72
|
|
|
55
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Prior service cost
|
(77
|
)
|
|
(77
|
)
|
|
(77
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
Net periodic cost
|
30
|
|
|
37
|
|
|
17
|
|
|
55
|
|
|
57
|
|
|
69
|
|
Amortization of pre-merger regulatory asset
|
—
|
|
|
—
|
|
|
—
|
|
|
8
|
|
|
8
|
|
|
8
|
|
Net periodic cost
|
$
|
30
|
|
|
$
|
37
|
|
|
$
|
17
|
|
|
$
|
63
|
|
|
$
|
65
|
|
|
$
|
77
|
|
Assumptions
|
|
|
|
|
|
|
|
|
|
|
|
Discount rate
|
3.75
|
%
|
|
3.50
|
%
|
|
4.25
|
%
|
|
4.00
|
%
|
|
3.75
|
%
|
|
4.75
|
%
|
Similar to the FPU Pension Plan, continued amortization of the FPU Medical Plan regulatory asset related to the unrecognized cost prior to the merger with Chesapeake Utilities was included in the net periodic cost. The unamortized balance of this regulatory asset was
$30,000
and
$38,000
at
December 31, 2016
and
2015
, respectively.
The following table presents the amounts not yet reflected in net periodic benefit cost and included in accumulated other comprehensive loss or as a regulatory asset as of
December 31, 2016
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
Chesapeake
Pension
Plan
|
|
FPU
Pension
Plan
|
|
Chesapeake
SERP
|
|
Chesapeake
Postretirement
Plan
|
|
FPU
Medical
Plan
|
|
Total
|
Prior service cost (credit)
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
(678
|
)
|
|
$
|
—
|
|
|
$
|
(678
|
)
|
Net loss
|
4,223
|
|
|
20,043
|
|
|
757
|
|
|
748
|
|
|
58
|
|
|
25,829
|
|
Total
|
$
|
4,223
|
|
|
$
|
20,043
|
|
|
$
|
757
|
|
|
$
|
70
|
|
|
$
|
58
|
|
|
$
|
25,151
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated other comprehensive loss pre-tax
(1)
|
$
|
4,223
|
|
|
$
|
3,808
|
|
|
$
|
757
|
|
|
$
|
70
|
|
|
$
|
11
|
|
|
$
|
8,869
|
|
Post-merger regulatory asset
|
—
|
|
|
16,235
|
|
|
—
|
|
|
—
|
|
|
47
|
|
|
16,282
|
|
Subtotal
|
4,223
|
|
|
20,043
|
|
|
757
|
|
|
70
|
|
|
58
|
|
|
25,151
|
|
Pre-merger regulatory asset
|
—
|
|
|
2,065
|
|
|
—
|
|
|
—
|
|
|
30
|
|
|
2,095
|
|
Total unrecognized cost
|
$
|
4,223
|
|
|
$
|
22,108
|
|
|
$
|
757
|
|
|
$
|
70
|
|
|
$
|
88
|
|
|
$
|
27,246
|
|
|
|
(1)
|
The total amount of accumulated other comprehensive loss recorded on our consolidated balance sheet as of
December 31, 2016
is net of income tax benefits of
$3.5 million
.
|
Chesapeake Utilities Corporation 2016 Form 10-K Page
90
Notes to the Consolidated Financial Statements
Pursuant to a Florida PSC order, FPU continues to record as a regulatory asset a portion of the unrecognized pension and postretirement benefit costs after the merger with Chesapeake Utilities related to its regulated operations, which is included in the above table as a post-merger regulatory asset. FPU also continues to maintain and amortize a portion of the unrecognized pension and postretirement benefit costs prior to the merger with Chesapeake Utilities related to its regulated operations, which is shown as a pre-merger regulatory asset.
The amounts in accumulated other comprehensive loss and recorded as a regulatory asset for our pension and postretirement benefits plans that are expected to be recognized as a component of net periodic benefit cost in 2017 are set forth in the following table:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
Chesapeake
Pension
Plan
|
|
FPU
Pension
Plan
|
|
Chesapeake
SERP
|
|
Chesapeake
Postretirement
Plan
|
|
FPU
Medical
Plan
|
|
Total
|
Prior service cost (credit)
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
(77
|
)
|
|
$
|
—
|
|
|
$
|
(77
|
)
|
Net loss
|
$
|
426
|
|
|
$
|
523
|
|
|
$
|
87
|
|
|
$
|
65
|
|
|
$
|
—
|
|
|
$
|
1,101
|
|
Amortization of pre-merger regulatory asset
|
$
|
—
|
|
|
$
|
761
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
8
|
|
|
$
|
769
|
|
Assumptions
The assumptions used for the discount rate to calculate the benefit obligations of all the plans were based on the interest rates of high-quality bonds in 2016, reflecting the expected lives of the plans. In determining the average expected return on plan assets for each applicable plan, various factors, such as historical long-term return experience, investment policy and current and expected allocation, were considered. Since Chesapeake Utilities' plans and FPU’s plans have different expected plan lives, particularly in light of the lump-sum-payment option provided in the Chesapeake Pension Plan, different assumptions regarding discount rate and expected return on plan assets were selected for Chesapeake Utilities' and FPU’s plans. Since both pension plans are frozen with respect to additional years of service and compensation, the rate of assumed compensation increases is not applicable.
The health care inflation rate for
2016
used to calculate the benefit obligation is
5.0 percent
for medical and
6.0 percent
for prescription drugs for the Chesapeake Postretirement Plan; and
5.0 percent
for both medical and prescription drugs for the FPU Medical Plan. A
one
-percentage point increase in the health care inflation rate from the assumed rate would increase the accumulated postretirement benefit obligation by approximately
$321,000
as of
December 31, 2016
, and would increase the aggregate of the service cost and interest cost components of the net periodic postretirement benefit cost for
2016
by approximately
$12,000
. A one-percentage point decrease in the health care inflation rate from the assumed rate would decrease the accumulated postretirement benefit obligation by approximately
$257,000
as of
December 31, 2016
, and would decrease the aggregate of the service cost and interest cost components of the net periodic postretirement benefit cost for
2016
by approximately
$10,000
.
Estimated Future Benefit Payments
In 2017, we expect to contribute
$323,000
and
$2.6 million
to the Chesapeake Pension Plan and FPU Pension Plan, respectively, and
$151,000
to the Chesapeake SERP. We also expect to contribute
$83,000
and
$129,000
to the Chesapeake Postretirement Plan and FPU Medical Plan, respectively, in 2017. The schedule below shows the estimated future benefit payments for each of the plans previously described:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Chesapeake Pension
Plan
(1)
|
|
FPU Pension
Plan
(1)
|
|
Chesapeake
SERP
(2)
|
|
Chesapeake
Postretirement
Plan
(2)
|
|
FPU
Medical
Plan
(2)
|
(in thousands)
|
|
|
|
|
|
|
|
|
|
2017
|
$
|
746
|
|
|
$
|
3,041
|
|
|
$
|
151
|
|
|
$
|
83
|
|
|
$
|
129
|
|
2018
|
$
|
664
|
|
|
$
|
3,128
|
|
|
$
|
150
|
|
|
$
|
82
|
|
|
$
|
93
|
|
2019
|
$
|
713
|
|
|
$
|
3,235
|
|
|
$
|
149
|
|
|
$
|
82
|
|
|
$
|
99
|
|
2020
|
$
|
649
|
|
|
$
|
3,319
|
|
|
$
|
148
|
|
|
$
|
76
|
|
|
$
|
93
|
|
2021
|
$
|
902
|
|
|
$
|
3,370
|
|
|
$
|
376
|
|
|
$
|
72
|
|
|
$
|
95
|
|
Years 2022 through 2026
|
$
|
5,020
|
|
|
$
|
18,447
|
|
|
$
|
732
|
|
|
$
|
319
|
|
|
$
|
405
|
|
|
|
(1)
|
The pension plan is funded; therefore, benefit payments are expected to be paid out of the plan assets.
|
|
|
(2)
|
Benefit payments are expected to be paid out of our general funds.
|
Chesapeake Utilities Corporation 2016 Form 10-K Page
91
Notes to the Consolidated Financial Statements
Retirement Savings Plan
For the years ended December 31, 2016, 2015 and 2014, we sponsored a 401(k) Retirement Savings Plan. This Plan is offered to all eligible employees who have completed
3
months of service, except for employees represented by a collective bargaining agreement that does not specifically provide for participation in the plan, non-resident aliens with no U.S. source income and individuals classified as consultants, independent contractors or leased employees. We match
100 percent
of eligible participants’ pre-tax contributions to the Retirement Savings Plan up to a maximum of
six percent
of eligible compensation. The employer matching contribution is made in cash and is invested based on a participant’s investment directions. In addition, we may make a discretionary supplemental contribution to participants in the plan, without regard to whether or not they make pre-tax contributions. Any supplemental employer contribution is generally made in our common stock. With respect to the employer match and supplemental employer contribution, employees are
100 percent
vested after
two
years of service or upon reaching
55
years of age while still employed by us. Employees with
one
year of service are
20 percent
vested and will become
100 percent
vested after
two
years of service. Employees who do not make an election to contribute or do not opt out of the Retirement Savings Plan will be automatically enrolled at a deferral rate of
three percent
, and the automatic deferral rate will increase by
one percent
per year up to a maximum of
six percent
. All contributions and matched funds can be invested among the mutual funds available for investment.
Employer contributions to our retirement savings plan totaled
$4.5 million
for the year ended
December 31, 2016
, and
$4.1 million
for the years ended December 31,
2015
and
2014
, respectively. As of
December 31, 2016
, there were
831,183
shares of our common stock reserved to fund future contributions to the Retirement Savings Plan.
Non-Qualified Deferred Compensation Plan
Members of our Board of Directors, and executive officers designated by the Compensation Committee, are eligible to participate in the Non-Qualified Deferred Compensation Plan. Directors can elect to defer any portion of their cash or stock compensation and executive officers can defer up to
80 percent
of their base compensation, cash bonuses or any amount of their stock bonuses (net of required withholdings). Executive officers may receive a matching contribution on their cash compensation deferrals up to
six percent
of their compensation, provided it does not duplicate a match they receive in the Retirement Savings Plan. Stock bonuses are not eligible for matching contributions. Participants are able to elect the payment of benefits to begin on a specified future date, after the election is made, in the form of a lump sum or annual installments for up to
15 years
.
All obligations arising under the Non-Qualified Deferred Compensation Plan are payable from our general assets, although we have established a Rabbi Trust to informally fund the plan. Deferrals of cash compensation may be invested by the participants in various mutual funds (the same options that are available in the 401(k) Retirement Savings Plan). The participants are credited with gains or losses on those investments. Deferred stock compensation may not be diversified. The participants are credited with dividends on our common stock in the same amount that is received by all other stockholders. Such dividends are reinvested into our common stock. Assets held in the Rabbi Trust had a fair value of
$4.9 million
and
$3.6 million
at
December 31, 2016
and
2015
, respectively. (See
Note 9, Investments
, for further details). The assets of the Rabbi Trust are at all times subject to the claims of our general creditors.
Deferrals of executive base compensation and cash bonuses and directors’ retainers and fees are paid in cash. All deferrals of executive performance shares, which represent deferred stock units, and directors’ stock retainers are paid in shares of our common stock, except that cash is paid in lieu of fractional shares. The value of our stock held in the Rabbi Trust is classified within the stockholders’ equity section of the consolidated balance sheets and has been accounted for in a manner similar to treasury stock. The amounts recorded under the Non-Qualified Deferred Compensation Plan totaled
$2.4 million
and
$1.9 million
at
December 31, 2016
and
2015
, respectively.
Chesapeake Utilities Corporation 2016 Form 10-K Page
92
Notes to the Consolidated Financial Statements
17. S
HARE
-B
ASED
C
OMPENSATION
P
LANS
Our non-employee directors and key employees have been granted share-based awards through our SICP. We record these share-based awards as compensation costs over the respective service period for which services are received in exchange for an award of equity or equity-based compensation. The compensation cost is based primarily on the fair value of the shares awarded, using the estimated fair value of each share on the date it was granted and the number of shares to be issued at the end of the service period. We have
539,374
shares of common stock reserved for issuance under the SICP.
The table below presents the amounts included in net income related to share-based compensation expense for the awards granted under the SICP for the years ended
December 31, 2016
,
2015
and
2014
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31,
|
|
2016
|
|
2015
|
|
2014
|
(in thousands)
|
|
|
|
|
|
Awards to non-employee directors
|
$
|
580
|
|
|
$
|
640
|
|
|
$
|
540
|
|
Awards to key employees
|
1,787
|
|
|
1,297
|
|
|
1,418
|
|
Total compensation expense
|
2,367
|
|
|
1,937
|
|
|
1,958
|
|
Less: tax benefit
|
(952
|
)
|
|
(780
|
)
|
|
(790
|
)
|
Share-based compensation amounts included in net income
|
$
|
1,415
|
|
|
$
|
1,157
|
|
|
$
|
1,168
|
|
Stock Options
We did not have any stock options outstanding at
December 31, 2016
or
2015
, nor were any stock options issued during the years 2014 through 2016.
Non-employee Directors
Shares granted to non-employee directors are issued in advance of these directors’ service periods and are fully vested as of the date of the grant. We record a prepaid expense equal to the fair value of the shares issued and amortize the expense equally over a service period of
one year
. In May 2016, each of our non-employee directors received an annual retainer of
953
shares of common stock under the SICP for board service through the 2017 Annual Meeting of Stockholders. A summary of stock activity for our non-employee directors for the years ended December 31,
2016
and
2015
is presented below:
|
|
|
|
|
|
|
|
|
Number of
Shares
|
|
Weighted Average
Grant Date Fair Value
|
Outstanding — December 31, 2014
|
—
|
|
|
$
|
—
|
|
Granted
|
14,484
|
|
|
$
|
45.54
|
|
Vested
|
(14,484
|
)
|
|
$
|
45.54
|
|
Outstanding — December 31, 2015
|
—
|
|
|
$
|
—
|
|
Granted
|
8,577
|
|
|
$
|
62.90
|
|
Vested
|
(8,577
|
)
|
|
$
|
62.90
|
|
Outstanding — December 31, 2016
|
—
|
|
|
$
|
—
|
|
The weighted average grant date fair value of shares granted to our non-employee directors during 2016, 2015 and 2014 was
$62.90
,
$45.54
and
$41.60
per share, respectively. The intrinsic values of the shares granted to our non-employee directors are equal to the fair value of these awards on the date of grant. At
December 31, 2016
, there was
$180,000
of unrecognized compensation expense related to these awards. This expense will be fully recognized by April 2017, which approximates the expected remaining service period of those directors.
Key Employees
Our Compensation Committee is authorized to grant our key employees the right to receive awards of shares of our common stock, contingent upon the achievement of established performance goals. These awards are subject to certain post-vesting transfer restrictions.
We currently have outstanding several multi-year performance plans, which are based upon the successful achievement of long-term goals, growth and financial results which comprise both market-based and performance-based conditions or targets. The fair value of each share of stock, tied to a performance-based condition or target, is equal to the market price of our common stock on
Chesapeake Utilities Corporation 2016 Form 10-K Page
93
Notes to the Consolidated Financial Statements
the date of the grant. For the market-based conditions, we used the Black-Scholes pricing model to estimate the fair value of each share of market-based award granted.
The table below presents the summary of the stock activity for awards to key employees:
|
|
|
|
|
|
|
|
|
Number of
Shares
|
|
Weighted Average
Fair Value
|
Outstanding — December 31, 2014
|
123,038
|
|
|
$
|
32.60
|
|
Granted
|
33,719
|
|
|
$
|
47.65
|
|
Vested
|
(43,839
|
)
|
|
$
|
28.01
|
|
Expired
|
(2,520
|
)
|
|
$
|
28.83
|
|
Outstanding — December 31, 2015
|
110,398
|
|
|
$
|
38.34
|
|
Granted
|
46,571
|
|
|
$
|
67.90
|
|
Vested
|
(39,553
|
)
|
|
$
|
31.79
|
|
Expired
|
(2,325
|
)
|
|
$
|
42.25
|
|
Outstanding — December 31, 2016
|
115,091
|
|
|
$
|
51.85
|
|
In
2016
,
2015
and
2014
, we withheld shares with a value at least equivalent to the employees’ minimum statutory obligation for the applicable income and other employment taxes, and remitted the cash to the appropriate taxing authorities with the executives electing to receive the net shares. The total number of shares withheld of
12,031
,
12,620
and
12,687
for
2016
,
2015
and
2014
, respectively, was based on the value of the shares on their award date, determined by the average of the high and low prices of our common stock. Total payments for the employees’ tax obligations to the taxing authorities were approximately
$770,000
,
$592,000
and
$503,000
, in 2016, 2015 and 2014, respectively. The tax benefits associated with these obligations for
2016
,
2015
and
2014
are
$285,000
,
$297,000
, and
$398,000
, respectively, and was recorded in additional paid-in capital in the consolidated statements of stockholders' equity for 2015 and 2014. The tax benefit for 2016 is included in the statements of income due to the adoption of new accounting guidance.
The weighted average grant-date fair value of shares granted to key employees during
2016
,
2015
and
2014
was $
67.90
,
$47.65
and
$39.99
per share, respectively. The intrinsic value of these awards was
$7.7 million
,
$6.3 million
and
$6.1 million
in
2016
,
2015
and
2014
, respectively. At
December 31, 2016
, there was
$2.2 million
of unrecognized compensation cost related to these awards, which is expected to be recognized during 2017 through 2018.
Chesapeake Utilities Corporation 2016 Form 10-K Page
94
Notes to the Consolidated Financial Statements
18. R
ATES
AND
O
THER
R
EGULATORY
A
CTIVITIES
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 by the Florida PSC as separate entities.
Delaware
Rate Case Filing:
In December 2015, our Delaware Division filed an application with the Delaware PSC for a base rate increase and certain other changes to its tariff. The Delaware Division, Delaware PSC Staff, the Division of the Public Advocate and other intervenors met and reached a settlement agreement in November 2016. The terms of the settlement agreement include an annual increase of
$2.25 million
in base rates. The order became final in December 2016, and the new rates became effective January 1, 2017. Amounts collected through interim rates in excess of
$2.25 million
have been accrued for refund as of December 31, 2016 and will be distributed to ratepayers beginning in the first quarter of 2017. We recognized incremental revenue of approximately
$1.5 million
(
$897,000
net of tax) in 2016.
Maryland
Sandpiper Rate Case Filing:
In May 2013, the Maryland PSC approved our application to acquire ESG operating assets and the transfer of the ESG franchise to Sandpiper. As part of this application, the Maryland PSC directed that Sandpiper file a base rate proceeding within
two years, six months
. As a result, in December 2015, Sandpiper filed an application with the Maryland PSC for a base rate increase and certain other changes to its tariff. The parties reached a settlement agreement, which Sandpiper filed with the Maryland PSC in August 2016. The terms of the agreement include revenue neutral rates for the first year, followed by a schedule of rate reductions in subsequent years based upon the projected rate of propane to natural gas conversions. A revenue normalization mechanism and stratification of rate classes were also included in the settlement agreement. The order became final in October 2016 with the new rates effective December 1, 2016.
Florida
In September 2015, FPU’s electric division filed to recover the cost of the proposed Florida Power & Light Company interconnect project through FPU's annual Fuel and Purchased Power Cost Recovery Clause filing. The interconnect project will enable FPU's electric division to negotiate a new power purchase agreement that will mitigate fuel costs for its Northeast division. This action was approved by the Florida PSC at its Agenda Conference held in December 2015. In January 2016, the Office of Public Counsel filed an appeal of the Florida PSC's decision with the Florida Supreme Court. Legal briefs were filed by the Florida PSC, FPU, and the Office of Public Counsel and oral arguments were heard by the Florida Supreme Court in November 2016. To date, the Court has not issued a decision.
In February 2016, FPU’s natural gas division filed a petition with the Florida PSC for approval of an amendment to its existing transportation agreement with the City of Lake Worth, located in Palm Beach County, Florida. The amendment allows the city to resell natural gas distributed by FPU to the city’s compressed natural gas station. The city will then resell the natural gas, after compression, to its customers. The amendment to the transportation agreement was approved by the Florida PSC at its Agenda Conference held in April 2016.
In April 2016, FPU’s natural gas divisions and Chesapeake Utilities' Florida division filed a joint petition for approval to allow FPU and Chesapeake Utilities to expand the cost allocation of the intrastate and unreleased capacity-related components currently embedded in the purchased gas adjustment and operational balancing account, which is currently allocated to a limited number of customers. The expanded allocation of these costs includes additional customers, primarily transportation customers, benefiting from these costs but not currently paying for them. This petition was approved by the Florida PSC at its Agenda Conference in September 2016.
In July 2016, Chesapeake Utilities' Florida division filed for approval of the final environmental true-up relating to expected future remediation costs at our former MGP site in Winter Haven, Florida. This petition was approved by the Florida PSC in December 2016.
In February, 2017, FPU’s electric division filed a petition with the Florida PSC, requesting a temporary surcharge mechanism to recover costs, inclusive of an appropriate return on investment, associated with an essential reliability and modernization project on its electric distribution system. We are seeking approval to invest approximately
$59.8 million
, over a
five
-year period associated with this project. In February, 2017, the Office of Public Counsel intervened in this petition. The outcome of our petition is not known at this time.
Chesapeake Utilities Corporation 2016 Form 10-K Page
95
Notes to the Consolidated Financial Statements
Eastern Shore
White Oak Mainline Expansion Project:
In November 2014, Eastern Shore submitted an application to the FERC seeking authorization to construct, own and operate certain expansion facilities designed to provide
45,000
Dts/d of firm transportation service to an industrial customer in Kent County, Delaware. Eastern Shore proposed to construct approximately
7.2
miles of
16
-inch diameter pipeline looping in Chester County, Pennsylvania and
3,550
horsepower of additional compression at Eastern Shore’s existing Delaware City Compressor Station in New Castle County, Delaware.
In November 2015, Eastern Shore filed an amendment to this application, which indicated the preferred pipeline route and shortened the total miles of the proposed pipeline to
5.4
miles.
In July 2016, the FERC authorized Eastern Shore to construct and operate the proposed White Oak Mainline Project. The FERC denied Eastern Shore’s request for a pre-determination of rolled-in rate treatment in the certificate proceeding. However, FERC’s determination is without prejudice to Eastern Shore filing rolled-in rate treatment of these project facilities in a future general rate case. The certificate required Eastern Shore to comply with
19
environmental conditions.
In July 2016, Eastern Shore accepted the certificate of public convenience and necessity and, in August 2016, filed its Implementation Plan to comply with each environmental condition and to request approval to begin construction. In August 2016, the FERC issued a “Notice to Proceed,” and Eastern Shore commenced construction during August 2016.
In December 2016, Eastern Shore filed a request to place the pipeline looping located in Chester County, Pennsylvania into service. The FERC granted approval to place the Daleville and Kemblesville Loops into operation in December 2016. Construction is continuing on the remaining component of the project, the Delaware City Compressor Station, which is expected to be completed and in service in March 2017. The entire project, when completed, is expected to cost
$39.8 million
. Eastern Shore continues to file weekly status reports with the FERC in compliance with the environmental conditions.
System Reliability Project:
In May 2015, Eastern Shore submitted an application to the FERC seeking authorization to construct, own and operate approximately
10.1
miles of
16
-inch pipeline looping and auxiliary facilities in New Castle and Kent Counties, Delaware, and a new compressor at its existing Bridgeville compressor station in Sussex County, Delaware. Eastern Shore further proposed to reinforce critical points on its pipeline system. Since the project is intended to improve system reliability, Eastern Shore requested a predetermination of rolled-in rate treatment for the costs of the project. In July 2016, the FERC ordered that Eastern Shore’s request for a determination of rolled-in rate treatment may be addressed in its next rate base proceeding and required Eastern Shore to comply with
19
environmental conditions.
In September 2016, the FERC granted approval to start construction on all phases of the project. Construction commenced on the Bridgeville Compressor Station and the Porter Road Loop in August 2016 and on the Dover Loop in September 2016.
In December 2016, Eastern Shore filed a request to place the pipeline looping located in New Castle County, Delaware into service. The FERC granted approval to place the Porter Road Loop into service in December 2016. The remaining components of the project, the Bridgeville Compressor Station and the Dover Loop, are anticipated to be completed by the end of April 2017. Eastern Shore continues to file weekly status reports with the FERC in compliance with the environmental conditions. The estimated cost of the project is
$36.0
million.
2017 Expansion Project: I
n May 2016, Eastern Shore submitted a request to the FERC to initiate the FERC’s pre-filing review procedures for Eastern Shore's 2017 expansion project. The 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
3,550
horsepower 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. In May 2016, the FERC approved Eastern Shore’s request to commence the pre-filing review process. Eastern Shore entered into Precedent Agreements with
four
existing customers as well as Chesapeake affiliates, 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 December 2016, Eastern Shore submitted an application for a certificate of public convenience and necessity seeking authorization to construct the expansion facilities. Interventions or comments were accepted through February 1, 2017.
Six
of Eastern Shore's existing customers have intervened to become parties to the docket, and comments have been submitted by
two
landowners. FERC has issued two sets of data requests to assist in its evaluation of the project. Eastern Shore submitted responses to both data request sets on February 14, 2017. Upon receipt and evaluation of the environmental-related responses, FERC will be able to establish a schedule for completing its environmental assessment on the project. The estimated cost of this expansion project is
$98.6 million
.
Chesapeake Utilities Corporation 2016 Form 10-K Page
96
Notes to the Consolidated Financial Statements
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 are based on the mainline cost of service of approximately
$60 million
resulting in an overall revenue increase of approximately
$18.9 million
and a rate of return on common equity of
13.75
percent. In addition to the mainline cost of service, the filing includes incremental rates for the White Oak Mainline Expansion and Lateral projects. Eastern Shore is also proposing to revise its depreciation rates and negative salvage rate based on the results of independent, third party depreciation and negative salvage value studies. The FERC issued a notice of the filing in January 2017, and the comment period ended in February 2017.
Fourteen
parties intervened in the proceeding with
six
of those parties filing protests. New rates are proposed to be effective on March 1, 2017, however, the FERC typically suspends the rates for a period of
five months
. At the end of the suspension period, Eastern Shore will file a motion to implement new rates, subject to refund, effective August 1, 2017.
At
December 31, 2016
and
2015
, the regulated utility operations had recorded the following regulatory assets and liabilities included in our consolidated balance sheets. These assets and liabilities will be recognized as revenues and expenses in future periods as they are reflected in customers’ rates.
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
2016
|
|
2015
|
(in thousands)
|
|
|
|
Regulatory Assets
|
|
|
|
Under-recovered purchased fuel and conservation cost recovery
(1)
|
$
|
5,703
|
|
|
$
|
4,598
|
|
Under-recovered GRIP revenue
(2)
|
1,469
|
|
|
3,091
|
|
Deferred postretirement benefits
(3)
|
18,379
|
|
|
19,479
|
|
Deferred conversion and development costs
(1)
|
8,051
|
|
|
5,729
|
|
Environmental regulatory assets and expenditures
(4)
|
3,694
|
|
|
4,158
|
|
Acquisition adjustment
(5)
|
41,864
|
|
|
43,735
|
|
Loss on reacquired debt
(6)
|
1,145
|
|
|
1,259
|
|
Other
|
4,192
|
|
|
3,738
|
|
Total Regulatory Assets
|
$
|
84,497
|
|
|
$
|
85,787
|
|
|
|
|
|
|
|
|
|
Regulatory Liabilities
|
|
|
|
Self-insurance
(7)
|
$
|
987
|
|
|
$
|
1,031
|
|
Over-recovered purchased fuel and conservation cost recovery
(1)
|
808
|
|
|
6,994
|
|
Storm reserve
(7)
|
2,310
|
|
|
2,973
|
|
Accrued asset removal cost
(8)
|
39,826
|
|
|
39,206
|
|
Other
|
424
|
|
|
225
|
|
Total Regulatory Liabilities
|
$
|
44,355
|
|
|
$
|
50,429
|
|
|
|
|
|
|
|
(1)
|
We are allowed to recover the asset or are required to pay the liability in rates. We do not earn an overall rate of return on these assets.
|
|
|
(2)
|
The Florida PSC allowed us to recover through a surcharge, capital and other program-related-costs, inclusive of an appropriate return on investment, associated with accelerating the replacement of qualifying distribution mains and services (defined as any material other than coated steel or plastic) in FPU’s natural gas distribution, Fort Meade and Chesapeake’s Florida division. We are allowed to recover the asset or are required to pay the liability in rates related to GRIP.
|
|
|
(3)
|
The Florida PSC allowed FPU to treat as a regulatory asset the portion of the unrecognized costs pursuant to ASC Topic 715
, Compensation - Retirement Benefits
, related to its regulated operations. See Note 16
, Employee Benefit Plans,
for additional information.
|
|
|
(4)
|
All of our environmental expenditures incurred to date and our current estimate of future environmental expenditures have been approved by various PSCs for recovery. See Note 19
, Environmental Commitments and Contingencies
, for additional information on our environmental contingencies.
|
|
|
(5)
|
We are allowed to include the premiums paid in various natural gas utility acquisitions in Florida in our rate bases and recover them over a specific time period pursuant to the Florida PSC approvals. Included in these amounts are
$1.3 million
of the premium paid by FPU,
$34.2 million
of the premium paid by us in 2009, including the gross up of the amount for income tax, because it is not tax deductible, and
$746,000
of the premium paid by FPU in 2010.
|
|
|
(6)
|
Gains and losses resulting from the reacquisition of long-term debt are amortized over future periods as adjustments to interest expense in accordance with established regulatory practice.
|
|
|
(7)
|
We have self-insurance and storm reserves in our Florida regulated energy operations that allow us to collect through rates amounts to be used against general claims, storm restoration costs and other losses as they are incurred.
|
|
|
(8)
|
See Note 1
, Summary of Significant Accounting Policies,
for additional information on our asset removal cost policies.
|
Chesapeake Utilities Corporation 2016 Form 10-K Page
97
Notes to the Consolidated Financial Statements
19. E
NVIRONMENTAL
C
OMMITMENTS
AND
C
ONTINGENCIES
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, 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
December 31, 2016
, we had accrued approximately
$9.8 million
in environmental liabilities related to all of 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 all of its MGP sites. Approximately
$10.6 million
of this amount has been recovered as of
December 31, 2016
, leaving approximately
$3.4 million
in regulatory assets for future recovery of environmental costs from FPU’s customers.
Environmental liabilities for all of 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.
West Palm Beach, Florida
Remedial options are being evaluated to respond to environmental impacts to soil and groundwater at and in the immediate vicinity of a parcel of property owned by FPU in West Palm Beach, Florida, where FPU previously operated a MGP. FPU is implementing a remedial plan approved by the FDEP for the east parcel of the West Palm Beach site, which includes installation of monitoring test wells, sparging of air into the groundwater system and extraction of vapors from the subsurface. On January 12, 2016, FDEP conducted a facility inspection and found no problems or deficiencies.
We expect that similar remedial actions will ultimately be implemented for other portions of the site. Estimated costs of remediation for the West Palm Beach site range from approximately
$4.5 million
to
$15.4 million
, including costs associated with the relocation of FPU’s operations at this site, which is necessary to implement the remedial plan, and any potential costs associated with future redevelopment of the properties.
Sanford, Florida
FPU is the current owner of property in Sanford, Florida, which was a former MGP site that was operated by several other entities before FPU acquired the property. FPU was never an owner or an operator of the MGP at this site. In January 2007, FPU and the Sanford Group signed a Third Participation Agreement, which provides for the funding of the final remedy approved by the EPA for the site. FPU’s share of remediation costs under the Third Participation Agreement is set at
five percent
of a maximum of
$13.0 million
, or
$650,000
. As of
December 31, 2016
, FPU has paid
$650,000
to the Sanford Group escrow account for its entire share of the funding requirements.
In December 2014, the EPA issued a preliminary close-out report, documenting the completion of all physical remedial construction activities at the Sanford site. Groundwater monitoring and statutory five-year reviews to ensure performance of the approved remedy will continue on this site. The total cost of the final remedy is estimated to be over
$20.0 million
, which includes long-term monitoring and the settlement of claims asserted by
two
adjacent property owners to resolve damages that the property owners allege they have incurred and will incur as a result of the implementation of the EPA-approved remediation. In settlement of these claims, members of the Sanford Group, which in this instance does not include FPU, have agreed to pay specified sums of money to the parties. FPU has refused to participate in the funding of the third-party settlement agreements based on its contention that it did not contribute to the release of hazardous substances at the site giving rise to the third-party claims. FPU has advised the other members of the Sanford Group that it is unwilling at this time to agree to pay any sum in excess of the
$650,000
committed and paid by FPU in the Third Participation Agreement. The Sanford Group has not requested that FPU contribute to costs beyond the originally agreed upon
$650,000
contribution.
As of
December 31, 2016
, FPU’s remaining remediation expenses, including attorneys’ fees and costs, are estimated to be
$24,000
. However, we are unable to determine, to a reasonable degree of certainty, whether the other members of the Sanford Group will accept FPU’s asserted defense to liability for costs exceeding
$13.0 million
to implement the final remedy for this site, as provided in the Third Participation Agreement, or will pursue a claim against FPU for a sum in excess of the
$650,000
that FPU has paid under the Third Participation Agreement. No such claims have been made as of
December 31, 2016
.
Chesapeake Utilities Corporation 2016 Form 10-K Page
98
Notes to the Consolidated Financial Statements
Winter Haven, Florida
The Winter Haven site is located on the eastern shoreline of Lake Shipp, in Winter Haven, Florida. Pursuant to a consent order entered into with FDEP, we are obligated to assess and remediate environmental impacts at this former MGP site. Groundwater monitoring results have shown a continuing reduction in contaminant concentrations from the sparging system, which has been in operation since 2002. On September 12, 2014, FDEP issued a letter approving shutdown of the sparging operations on the northern portion of the site, contingent upon continued semi-annual monitoring.
Groundwater monitoring results on the southern portion of this site indicated that natural attenuation default criteria continue to be exceeded. Plans to modify the monitoring network on the southern portion of the site in order to collect additional data to support the development of a remedial plan were specified in a letter sent to FDEP in October 2014. The well installation and abandonment program was implemented in October 2014, and documentation was reported in the next semi-annual RAP implementation status report, submitted in January 2015. FDEP approved the plan to expand the bio-sparging operations in the southern portion of the site, and additional sparge points were installed and connected to the operating system in the first quarter of 2016. Groundwater monitoring results from testing conducted in October 2016 indicated that natural attenuation default criteria were met at all wells.
We estimate that future remediation costs for the subsurface soils and groundwater at the site should not exceed
$425,000
, which includes an estimate of
$100,000
to implement additional actions, such as institutional controls, at the site.
FDEP previously indicated that we could also be required to remediate sediments along the shoreline of Lake Shipp, immediately west of the site. Based on studies performed to date, and our recent meeting with FDEP, we believe that corrective measures for lake sediments are not warranted and will not be required by FDEP. We therefore have not recorded a liability for sediment remediation.
Seaford, Delaware
In December 2013, the DNREC notified us that it would be conducting a facility evaluation of a former MGP site in Seaford, Delaware. In a report issued in January 2015, DNREC provided the evaluation, which found several compounds within the groundwater and soil that required further investigation. In September 2015, DNREC approved our application to enter this site into the voluntary cleanup program. A remedial investigation was conducted in December 2015, which resulted in DNREC requesting additional investigative work be performed prior to approval of potential remedial actions.
In December 2016, additional on-site wells were installed, developed and sampled pursuant to a September 2016 request from DNREC. The results of the sampling event and proposed future activities are anticipated to be available by the end of the second quarter of 2017. We estimate the cost of potential remedial actions, based on the findings of the DNREC report, to be between
$273,000
and
$465,000
.
Cambridge, Maryland
We are discussing with the MDE a former MGP site located in Cambridge, Maryland. The outcome of this matter cannot be determined at this time; therefore, we have not recorded an environmental liability for this location.
Ohio
We have also completed the investigation, assessment and remediation of
eight
natural gas pipeline facilities in Ohio that Aspire Energy acquired from Gatherco pursuant to the merger. Under the merger agreement, we are entitled to be indemnified from an escrow fund created at closing for certain matters, including certain claims related to environmental remediation. The costs incurred to date associated with remediation activities for these eight facilities is approximately
$1.6 million
. In September 2016, we and the Gatherco shareholder agent resolved certain disputes associated with our claims for indemnification, including claims for environmental matters. After deducting the amount of anticipated tax benefits related to our claims and an indemnification deductible in the amount of
$431,250
in accordance with the merger agreement, we received approximately
$500,000
from the indemnification escrow as final settlement of our claims related to these environmental matters. We do not anticipate submitting any additional environmental claims for indemnification.
Chesapeake Utilities Corporation 2016 Form 10-K Page
99
Notes to the Consolidated Financial Statements
20. O
THER
C
OMMITMENTS
AND
C
ONTINGENCIES
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. For our Delaware and Maryland natural gas distribution divisions, we have a contract with an unaffiliated energy marketing and risk management company to manage a portion of their natural gas transportation and storage capacity, which expires on March 31, 2017. Our Delaware and Maryland divisions are currently negotiating a
three
-year asset management agreement with PESCO and anticipate executing the agreement by the end of the first quarter of 2017. The Delaware PSC has approved PESCO serving as asset manager.
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 estimated at approximately
3.4 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 estimated at approximately
3.4 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 natural gas distribution 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 JEA requires FPU to comply with the following ratios based on the results of the prior 12 months: (a) total liabilities to tangible net worth less than
3.75
times, and (b) fixed charge coverage ratio greater than
1.5
times. If either ratio is not met by FPU, it has
30 days
to cure the default or provide an irrevocable letter of credit if the default is not cured. FPU’s electric fuel supply agreement with Gulf Power requires FPU to meet the following ratios based on the average of the prior nine 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 result in FPU providing an irrevocable letter of credit. As of
December 31, 2016
, 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. The construction of the CHP plant was completed in June 2016 and 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, it also started selling steam to Rayonier pursuant to a separate
20
-year contract. The CHP plant is powered by natural gas transported by FPU through its distribution system.
The total purchase obligations for natural gas, electric and propane supplies are approximately
$90.0 million
for 2017,
$94.6 million
for 2018-2019,
$39.5 million
for 2020-2021 and
$82.2 million
thereafter.
Corporate Guarantees
The Board of Directors has authorized the Company to issue corporate guarantees securing obligations of our subsidiaries and to obtain letters of credit securing our subsidiaries' obligations. The maximum authorized liability under such guarantees and letters of credit was
$65 million
. In February 2017, our Board of Directors increased this limit to
$85 million
.
We have issued corporate guarantees to certain vendors of our subsidiaries, the largest of which are for Xeron and PESCO. These corporate guarantees provide for the payment of propane and natural gas purchases in the event that PESCO or Xeron defaults. Neither subsidiary has ever defaulted on its obligations to pay its suppliers. The liabilities for these purchases are recorded when incurred. The aggregate amount guaranteed at
December 31, 2016
was
$57.2 million
, with the guarantees expiring on various dates through January 2018.
Chesapeake Utilities also guarantees the payment of FPU’s first mortgage bonds. The maximum exposure under the 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 12
, Long-Term Debt
, for further details).
Chesapeake Utilities Corporation 2016 Form 10-K Page
100
Notes to the Consolidated Financial Statements
We issued letters of credit totaling
$8.5 million
related to the electric transmission services for FPU's northwest electric division, firm transportation service agreement between TETLP and our Delaware and Maryland divisions and to our current and previous primary insurance carriers. These letters of credit have varying expiration dates extending through October 2017. There have been no draws on these letters of credit as of
December 31, 2016
. We do not anticipate that the letters of credit will be drawn upon by the counterparties, and we expect that the letters of credit will be renewed to the extent necessary in the future.
Tax-related Contingencies
We are subject to various audits and reviews by the federal, state and local and other regulatory authorities regarding income taxes and taxes other than income. As of
December 31, 2015
, we maintained a liability of approximately
$50,000
related to unrecognized income tax benefits and $
310,000
related to contingencies for taxes other than income. We did not have a liability related to contingencies for taxes other than income and unrecognized income tax benefits at
December 31, 2016
.
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.
21. Q
UARTERLY
F
INANCIAL
D
ATA
(U
NAUDITED
)
In our opinion, the quarterly financial information shown below includes all adjustments necessary for a fair presentation of the operations for such periods. Due to the seasonal nature of our business, there are substantial variations in operations reported on a quarterly basis.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Quarters Ended
|
|
March 31
|
|
June 30
|
|
September 30
|
|
December 31
|
(in thousands except per share amounts)
|
|
|
|
|
|
|
|
2016
(1)
|
|
|
|
|
|
|
|
Operating Revenues
|
$
|
146,296
|
|
|
$
|
102,342
|
|
|
$
|
108,348
|
|
|
141,874
|
|
Operating Income
|
$
|
36,380
|
|
|
$
|
15,742
|
|
|
$
|
10,156
|
|
|
$
|
21,819
|
|
Net Income
|
$
|
20,367
|
|
|
$
|
8,029
|
|
|
$
|
4,416
|
|
|
$
|
11,863
|
|
Earnings per share:
|
|
|
|
|
|
|
|
Basic
|
$
|
1.33
|
|
|
$
|
0.52
|
|
|
$
|
0.29
|
|
|
$
|
0.73
|
|
Diluted
|
$
|
1.33
|
|
|
$
|
0.52
|
|
|
$
|
0.29
|
|
|
$
|
0.73
|
|
|
|
|
|
|
|
|
|
2015
(1)
|
|
|
|
|
|
|
|
Operating Revenues
|
$
|
170,081
|
|
|
$
|
92,682
|
|
|
$
|
91,913
|
|
|
104,567
|
|
Operating Income
|
$
|
37,508
|
|
|
$
|
13,170
|
|
|
$
|
10,909
|
|
|
$
|
16,171
|
|
Net Income
|
$
|
21,109
|
|
|
$
|
6,294
|
|
|
$
|
5,119
|
|
|
$
|
8,619
|
|
Earnings per share:
|
|
|
|
|
|
|
|
Basic
|
$
|
1.45
|
|
|
$
|
0.41
|
|
|
$
|
0.34
|
|
|
$
|
0.56
|
|
Diluted
|
$
|
1.44
|
|
|
$
|
0.41
|
|
|
$
|
0.33
|
|
|
$
|
0.56
|
|
|
|
(1)
|
The sum of the four quarters does not equal the total year due to rounding.
|
Chesapeake Utilities Corporation 2016 Form 10-K Page
101