ITEM 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
This section provides management’s discussion of Chesapeake Utilities and its consolidated subsidiaries, with specific information on results of operations, liquidity and capital resources, as well as discussion of how certain accounting principles affect our financial statements. It includes management’s interpretation of our financial results and our operating segments, the factors affecting these results, the major factors expected to affect future operating results as well as investment and financing plans. This discussion should be read in conjunction with our consolidated financial statements and notes thereto in Item 8, Financial Statements and Supplementary Data.
Several factors exist that could influence our future financial performance, some of which are described in Item 1A, Risk Factors. They should be considered in connection with forward-looking statements contained in this Annual Report, or otherwise made by or on behalf of us, since these factors could cause actual results and conditions to differ materially from those set out in such forward-looking statements.
In the fourth quarter of 2019, we completed the sale of the assets and contracts of PESCO. As a result, PESCO’s results for all periods presented have been separately reported as discontinued operations.
In March 2020, the CDC declared a national emergency due to the rapidly growing outbreak of COVID-19. In response to this declaration and the rapid spread of COVID-19 within the United States, federal, state and local governments throughout the country imposed varying degrees of restrictions on social and commercial activity to promote social distancing in an effort to slow the spread of the illness. These restrictions have continued to significantly impact economic conditions in the United States in 2020 and will continue into 2021. Chesapeake Utilities is considered an “essential business,” which allows us to continue operational activities and construction projects while the social distancing restrictions remain in place. In response to the COVID-19 pandemic and related restrictions, we implemented our pandemic response plan, which includes having all employees who can work remotely do so in order to promote social distancing and providing personal protective equipment to field employees to reduce the spread of COVID-19.
For the year ended December 31, 2020, the estimated impacts that COVID-19 had on our earnings were approximately $1.0 million, primarily driven by reduced consumption of energy largely in the commercial and industrial sectors and incremental expenses associated with COVID-19, including protective personal equipment, bad debt expense and premium pay for field personnel. The additional operating expenses we incurred support the ongoing delivery of our essential services during these unprecedented times. In the fourth quarter of 2020, we established regulatory assets for the net incremental expense incurred for our natural gas and electric distribution businesses as currently authorized by the Delaware, Maryland and Florida PSCs. We are committed to communicating timely updates and will continue to monitor developments affecting our employees, customers, suppliers, stockholders and take additional precautions as warranted to operate safely and to comply with the CDC, Occupational Safety and Health Administration, state and local requirements in order to protect its employees, customers and the communities. Refer to Item 8, Financial Statements and Supplementary Data, Note 19, Rates and Other Regulatory Activities, for further information on the potential deferral of incremental expenses associated with COVID-19.
The following discussions and those later in the document on operating income and segment results include the use of the term “gross margin," which is determined by deducting the cost of sales from operating revenue. Cost of sales includes the purchased cost of natural gas, electricity and propane and the cost of labor spent on direct revenue-producing activities, and excludes depreciation, amortization and accretion. Gross margin should not be considered an alternative to operating income or net income, which are determined in accordance with GAAP. We believe that gross margin, although a non-GAAP measure, is useful and meaningful to investors as a basis for making investment decisions. It provides investors with information that demonstrates the profitability achieved by us under our allowed rates for regulated energy operations and under our competitive pricing structures for unregulated energy operations. Our management uses gross margin in measuring our business units’ performance and has historically analyzed and reported gross margin information publicly. Other companies may calculate gross margin in a different manner.
Earnings per share information is presented on a diluted basis, unless otherwise noted.
Chesapeake Utilities Corporation 2020 Form 10-K Page 25
OVERVIEW AND HIGHLIGHTS
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|
|
|
|
|
|
|
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(in thousands except per share data)
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Increase
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|
Increase
|
|
For the Year Ended December 31,
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2020
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|
2019
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(decrease)
|
|
2019
|
|
2018
|
|
(decrease)
|
|
Business Segment:
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|
|
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|
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Regulated Energy
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$
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92,124
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$
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86,584
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|
|
$
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5,540
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|
|
$
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86,584
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|
|
$
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79,215
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|
|
$
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7,369
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|
Unregulated Energy
|
20,664
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19,938
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|
|
726
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19,938
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|
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17,125
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|
|
2,813
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Other businesses and eliminations
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(65)
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(237)
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|
172
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(237)
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(1,496)
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|
|
1,259
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|
|
Operating Income
|
112,723
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|
|
106,285
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6,438
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106,285
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94,844
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11,441
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Other income (expense), net
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3,222
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(1,847)
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5,069
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(1,847)
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(607)
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(1,240)
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|
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Interest charges
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21,765
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|
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22,224
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(459)
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22,224
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16,146
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|
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6,078
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Income from Continuing Operations Before Income Taxes
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94,180
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82,214
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11,966
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82,214
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78,091
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|
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4,123
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Income Taxes on Continuing Operations
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23,538
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21,114
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2,424
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21,114
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21,123
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(9)
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Income from Continuing Operations
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70,642
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|
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61,100
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|
|
9,542
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|
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61,100
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|
|
56,968
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|
|
4,132
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|
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Income (loss) from Discontinued Operations, Net of Tax
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686
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(1,349)
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2,035
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(1,349)
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(388)
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|
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(961)
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|
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Gain on sale of Discontinued Operations, Net of tax
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170
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|
|
5,402
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(5,232)
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|
5,402
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|
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—
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|
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5,402
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Net Income
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71,498
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65,153
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|
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6,345
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|
|
65,153
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|
|
56,580
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|
|
8,573
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|
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Basic Earnings Per Share of Common Stock
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Earnings Per Share from Continuing Operations
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$
|
4.23
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|
|
$
|
3.73
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|
|
$
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0.50
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|
|
$
|
3.73
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|
|
$
|
3.48
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|
|
$
|
0.25
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|
|
Earnings/(loss) Per Share from Discontinued Operations
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0.05
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|
|
0.24
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|
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(0.19)
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|
|
0.24
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|
|
(0.02)
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|
|
0.26
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|
|
Basic Earnings Per Share of Common Stock
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$
|
4.28
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|
|
$
|
3.97
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|
|
$
|
0.31
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|
|
$
|
3.97
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|
|
$
|
3.46
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|
|
$
|
0.51
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|
|
Diluted Earnings Per Share of Common Stock:
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Earnings Per Share from Continuing Operations
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$
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4.21
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|
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$
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3.72
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|
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$
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0.49
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|
|
$
|
3.72
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|
|
$
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3.47
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|
|
$
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0.25
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|
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Earnings/(loss) Per Share from Discontinued Operations
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0.05
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|
|
0.24
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(0.19)
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|
0.24
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|
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(0.02)
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|
|
0.26
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|
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Diluted Earnings Per Share of Common Stock
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$
|
4.26
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|
|
$
|
3.96
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|
|
$
|
0.30
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|
|
$
|
3.96
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|
|
$
|
3.45
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|
|
$
|
0.51
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|
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Chesapeake Utilities Corporation 2020 Form 10-K Page 26
2020 compared to 2019
Key variances in continuing operations between 2020 and 2019 included:
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(in thousands, except per share data)
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Pre-tax
Income
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Net
Income
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Earnings
Per Share
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Year ended December 31, 2019 Reported Results from Continuing Operations
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$
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82,214
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$
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61,100
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$
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3.72
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Adjusting for unusual items:
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Unfavorable COVID-19 impacts
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(5,864)
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(4,284)
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(0.26)
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Decreased customer consumption - primarily weather related
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(4,305)
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(3,145)
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(0.19)
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Interest expense associated with the early extinguishment of FPU mortgage bonds
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(961)
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(715)
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(0.04)
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Favorable income tax impact associated with the CARES Act
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—
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1,841
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0.11
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Gains from sales of assets
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3,162
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2,317
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0.14
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Deferral of COVID expenses under PSC orders
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1,925
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1,432
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0.09
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(6,043)
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(2,554)
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(0.15)
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|
|
Increased (Decreased) Gross Margins:
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|
Hurricane Michael Settlement Margin Impact*
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10,864
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7,936
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|
|
0.47
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Eastern Shore and Peninsula Pipeline service expansions*
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|
8,006
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|
|
5,849
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|
|
0.35
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Margin from recent acquisitions*
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|
5,304
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|
|
3,875
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|
|
0.23
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|
|
Natural gas growth (excluding service expansions)
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|
3,370
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|
|
2,462
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|
|
0.15
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|
|
Increased retail propane margins per gallon
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|
1,937
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|
|
1,415
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|
|
0.08
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|
|
Increased demand for CNG services for Marlin Gas Services*
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|
1,821
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|
|
1,331
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|
|
0.08
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|
|
Aspire Energy rate increases
|
|
1,312
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|
|
959
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|
|
0.06
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|
Florida GRIP*
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|
1,239
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|
|
905
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|
|
0.05
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|
|
Eastern Shore margin from capital improvements and non-service expansion projects*
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|
1,033
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|
|
755
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|
|
0.05
|
|
|
|
|
34,886
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|
|
25,487
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|
|
1.52
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|
|
(Increased) Decreased Other Operating Expenses (Excluding Cost of Sales):
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|
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|
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|
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Depreciation and amortization associated with Hurricane Michael regulatory proceeding settlement
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|
(7,133)
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|
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(5,210)
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|
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(0.31)
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|
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Depreciation, amortization and property tax costs due to new capital investments
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|
(6,262)
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|
|
(4,575)
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|
|
(0.27)
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|
|
Operating expenses from recent acquisitions
|
|
(3,269)
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|
|
(2,388)
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|
|
(0.14)
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|
|
Insurance
|
|
(2,088)
|
|
|
(1,525)
|
|
|
(0.09)
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|
|
Payroll, benefits and other employee-related expenses
|
|
716
|
|
|
523
|
|
|
0.03
|
|
|
|
|
(18,036)
|
|
|
(13,175)
|
|
|
(0.78)
|
|
|
|
|
|
|
|
|
|
|
Interest charges(1)
|
|
(1,232)
|
|
|
(900)
|
|
|
(0.05)
|
|
|
Increased share count from 2020 equity offerings
|
|
—
|
|
|
—
|
|
|
(0.08)
|
|
|
Other income tax effects
|
|
—
|
|
|
(1,060)
|
|
|
(0.06)
|
|
|
Lower pension expense
|
|
1,777
|
|
|
1,298
|
|
|
0.08
|
|
|
Net Other changes
|
|
614
|
|
|
446
|
|
|
0.01
|
|
|
Year ended December 31, 2020 Reported Results from Continuing Operations
|
|
$
|
94,180
|
|
|
$
|
70,642
|
|
|
$
|
4.21
|
|
* See the Major Projects and Initiatives table.
(1) Interest charges includes amortization of a regulatory liability of $1.5 million related to the Hurricane Michael regulatory proceeding settlement.
Chesapeake Utilities Corporation 2020 Form 10-K Page 27
SUMMARY OF KEY FACTORS
Recently Completed and Ongoing Major Projects and Initiatives
We constantly pursue and develop additional projects and initiatives to serve existing and new customers, further grow our businesses and earnings, with the intention of increasing shareholder value. The following represent the major projects/initiatives recently completed and currently underway. In the future, we will add new projects and initiatives to this table once substantially finalized and the associated earnings can be estimated.
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross Margin for the Period
|
|
|
|
Year Ended December 31,
|
|
Estimate for Fiscal
|
|
(in thousands)
|
|
2018
|
|
2019
|
|
2020
|
|
2021
|
|
2022
|
|
Pipeline Expansions:
|
|
|
|
|
|
|
|
|
|
|
|
Western Palm Beach County, Florida Expansion (1)
|
|
$
|
54
|
|
|
$
|
2,139
|
|
|
$
|
4,167
|
|
|
$
|
4,984
|
|
|
$
|
5,227
|
|
|
Del-Mar Energy Pathway (1) (2)
|
|
—
|
|
|
731
|
|
|
2,462
|
|
|
4,385
|
|
|
6,708
|
|
|
Auburndale
|
|
—
|
|
|
283
|
|
|
679
|
|
|
679
|
|
|
679
|
|
|
Callahan Intrastate Pipeline (2)
|
|
—
|
|
|
—
|
|
|
3,851
|
|
|
7,564
|
|
|
7,564
|
|
|
Guernsey Power Station
|
|
—
|
|
|
—
|
|
|
—
|
|
|
514
|
|
|
1,486
|
|
|
Total Pipeline Expansions
|
|
54
|
|
|
3,153
|
|
|
11,159
|
|
|
18,126
|
|
|
21,664
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CNG Transportation
|
|
110
|
|
|
5,410
|
|
|
7,231
|
|
|
7,900
|
|
|
8,500
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
RNG Transportation
|
|
—
|
|
|
—
|
|
|
—
|
|
|
1,000
|
|
|
1,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Acquisitions:
|
|
|
|
|
|
|
|
|
|
|
|
Boulden Propane
|
|
—
|
|
|
329
|
|
|
3,900
|
|
|
4,200
|
|
|
4,409
|
|
|
Elkton Gas
|
|
—
|
|
|
—
|
|
|
1,344
|
|
|
3,992
|
|
|
4,200
|
|
|
Western Natural Gas
|
|
—
|
|
|
—
|
|
|
389
|
|
|
1,800
|
|
|
1,854
|
|
|
Total Acquisitions
|
|
—
|
|
|
329
|
|
|
5,633
|
|
|
9,992
|
|
|
10,463
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Regulatory Initiatives:
|
|
|
|
|
|
|
|
|
|
|
|
Florida GRIP
|
|
13,020
|
|
|
13,939
|
|
|
15,178
|
|
|
16,739
|
|
|
17,712
|
|
|
Hurricane Michael regulatory proceeding
|
|
—
|
|
|
—
|
|
|
10,864
|
|
|
11,014
|
|
|
11,014
|
|
|
Capital Cost Surcharge Programs
|
|
—
|
|
|
—
|
|
|
—
|
|
|
1,500
|
|
|
3,000
|
|
|
Total Regulatory Initiatives
|
|
13,020
|
|
|
13,939
|
|
|
26,042
|
|
|
29,253
|
|
|
31,726
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
13,184
|
|
|
$
|
22,831
|
|
|
$
|
50,065
|
|
|
$
|
66,271
|
|
|
$
|
73,353
|
|
(1) Includes gross margin generated from interim services.
(2) Includes gross margin from natural gas distribution services.
Chesapeake Utilities Corporation 2020 Form 10-K Page 28
Detailed Discussion of Major Projects and Initiatives
Pipeline Expansions
Western Palm Beach County, Florida Expansion
Peninsula Pipeline is constructing four transmission lines to bring additional natural gas to our distribution system in West Palm Beach, Florida. The first phase of this project was placed into service in December 2018 and generated incremental gross margin of $2.0 million during 2020 compared to 2019. We expect to complete the remainder of the project in phases through the second quarter of 2021, and estimate that the project will generate annual gross margin of $5.0 million in 2021 and $5.2 million in 2022.
Del-Mar Energy Pathway
In December 2019, the FERC issued an order approving the construction of the Del-Mar Energy Pathway project. Eastern Shore anticipates that this project will be fully in-service by the beginning of the fourth quarter of 2021. The new facilities will: (i) ensure an additional 14,300 Dts/d of firm service to four customers, (ii) provide additional natural gas transmission pipeline infrastructure in eastern Sussex County, Delaware, and (iii) represent the first extension of Eastern Shore’s pipeline system into Somerset County, Maryland. Construction of the project began in January 2020, and interim services in advance of this project generated additional gross margin $1.7 million for the year ended December 31, 2020. The estimated annual gross margin from this project including natural gas distribution service in Somerset County, Maryland, is approximately $4.4 million in 2021 and $6.7 million annually thereafter.
Auburndale
In August 2019, the Florida PSC approved Peninsula Pipeline's Transportation Service Agreement with the Florida Division of Chesapeake Utilities. Peninsula Pipeline purchased an existing pipeline owned by the Florida Division of Chesapeake Utilities and Calpine, and has completed the construction of pipeline facilities in Polk County, Florida. Peninsula Pipeline provides transportation service to the Florida Division of Chesapeake Utilities; these facilities increased both delivery capacity and downstream pressure as well as introduced a secondary source of natural gas for the Florida Division of Chesapeake Utilities' distribution system. Peninsula Pipeline generated additional gross margin from this project of $0.4 million for the year ended December 31, 2020 compared to 2019 and expects to generate annual gross margin of $0.7 million in 2021 and beyond.
Callahan Intrastate Pipeline
In May 2018, Peninsula Pipeline announced a plan to construct a jointly owned intrastate transmission pipeline with Seacoast Gas Transmission in Nassau County, Florida. The 26-mile pipeline will serve growing demand in both Nassau and Duval Counties. This project was placed in service in June 2020, one month earlier than initially forecasted, and generated $3.9 million in additional gross margin for the year ended December 31, 2020. We expect to generate $7.6 million annually in gross margin in 2021 and beyond.
Guernsey Power Station
Guernsey Power Station and our affiliate, Aspire Energy Express, entered into a precedent agreement for firm transportation capacity whereby Guernsey Power Station will construct a power generation facility and Aspire Energy Express will provide firm natural gas transportation service to this facility. Guernsey Power Station commenced construction of the project in October 2019. Aspire Energy Express is expected to commence construction of the gas transmission facilities to provide the firm transportation service to the power generation facility in the fourth quarter of 2021. This project is expected to produce gross margin of approximately $0.5 million in 2021 and $1.5 million in 2022 and beyond.
CNG Transportation
Marlin Gas Services provides CNG temporary hold services, contracted pipeline integrity services, emergency services for damaged pipelines and specialized gas services for customers who have unique requirements. For the year ended December 31, 2020, Marlin Gas Services generated additional gross margin of $1.8 million compared to the year ended December 31, 2019. We estimate that Marlin Gas Services will generate annual gross margin of approximately $7.9 million in 2021, and $8.5 million in 2022, with potential for additional growth in future years. Marlin Gas Services continues to actively expand the territories it serves, as well as leverage its patented technology to serve other markets, including pursuing liquefied natural gas transportation opportunities and renewable natural gas transportation opportunities from diverse supply sources to various pipeline interconnection points, as further outlined below.
Chesapeake Utilities Corporation 2020 Form 10-K Page 29
RNG Transportation
Noble Road Landfill RNG Project
In September 2020, Fortistar and Rumpke Waste & Recycling announced commencement of construction of the Noble Road Landfill RNG Project in Shiloh, Ohio. The project includes the construction of a new state-of-the-art facility that will utilize advanced, patented technology to treat landfill gas by removing carbon dioxide and other components to purify the gas and produce pipeline quality RNG. Aspire Energy will utilize its existing natural gas gathering assets to inject the RNG from this project to its system for distribution to end use customers. Once flowing, the RNG volume will represent nearly 10 percent of Aspire Energy’s gas gathering volumes.
Bioenergy Devco
In June 2020, our Delmarva natural gas operations and Bioenergy Devco (“BDC”), a developer of anaerobic digestion facilities that create renewable energy and healthy soil products from organic material, entered into an agreement related to the development of a project to create renewable natural gas. BDC and our affiliates are collaborating on this project in addition to several other project sites where organic waste can be converted into a potentially carbon-negative energy source. This project will provide us the opportunity to maintain the value of the green attributes of renewable natural gas as the gas is being distributed to natural gas distribution customers.
The renewable natural gas resource created from organic material at BDC's anaerobic digestion facilities in Delaware, will be processed for use by our Delmarva natural gas operations. Marlin Gas Services will transport the sustainable fuel from the BDC facility to an Eastern Shore interconnection, where it will be introduced to the distribution system and ultimately distributed to our natural gas customers.
CleanBay Project
In July 2020, our Delmarva natural gas operations and CleanBay Renewables Inc. ("CleanBay") announced a new partnership to bring renewable natural gas to our operations. As part of this partnership, we will transport the renewable natural gas produced at CleanBay's planned Westover, Maryland bio-refinery, to our natural gas infrastructure in the Delmarva Peninsula region. Eastern Shore and Marlin Gas Services, will transport the renewable natural gas from CleanBay to our Delmarva natural gas distribution system where it is ultimately delivered to the Delmarva natural gas distribution end use customers.
At the present time, we have disclosed that we expect to generate $1.0 million in 2021 in incremental margin from renewable natural gas transportation beginning in 2021. As we continue to finalize contract terms associated with some of these projects, additional information will be provided regarding incremental margin at a future time.
Acquisitions
Boulden Propane
In December 2019, Sharp acquired certain propane customers and operating assets of Boulden which provides propane distribution service to approximately 5,200 customers in Delaware, Maryland and Pennsylvania. The customers and assets acquired from Boulden have been assimilated into Sharp. The operations acquired from Boulden generated $3.6 million of incremental gross margin for the year ended December 31, 2020 compared to 2019. We estimate that this acquisition will generate additional gross margin of approximately $4.2 million in 2021, and $4.4 million in 2022, with the potential for additional growth in future years.
Elkton Gas
In July 2020, we closed on the acquisition of Elkton Gas, which provides natural gas distribution service to approximately 7,000 residential and commercial customers within a franchised area of Cecil County, Maryland. The purchase price was approximately $15.6 million, which included $0.6 million of working capital. Elkton Gas’ territory is contiguous to our franchised service territory in Cecil County, Maryland. We generated $1.3 million in additional gross margin from Elkton Gas for the year ended December 31, 2020 and estimate that this acquisition will generate gross margin of approximately $4.0 million in 2021 and $4.2 million in 2022 and beyond.
Western Natural Gas
In October 2020, Sharp acquired certain propane operating assets of Western Natural Gas, which provides propane distribution service throughout Jacksonville, Florida and the surrounding communities, for approximately $6.7 million, net of cash acquired. The acquisition was accounted for as a business combination within our Unregulated Energy Segment in the fourth quarter of 2020. We generated $0.4 million in additional gross margin from Western Natural Gas in 2020 and we estimate that this acquisition will generate gross margin of approximately $1.8 million in 2021.
Chesapeake Utilities Corporation 2020 Form 10-K Page 30
Regulatory Initiatives
Florida GRIP
Florida GRIP is a natural gas pipe replacement program approved by the Florida PSC that allows automatic recovery, through rates, of costs associated with the replacement of mains and services. Since the program's inception in August 2012, we have invested $164.9 million of capital expenditures to replace 331 miles of qualifying distribution mains, including $21.0 million and $16.7 million of new pipes during 2020 and 2019, respectively. GRIP generated additional gross margin of $1.2 million for the year ended 2020 compared to 2019.
Hurricane Michael
In October 2018, Hurricane Michael passed through FPU's electric distribution operation's service territory in Northwest Florida and caused widespread and severe damage to FPU's infrastructure resulting in 100 percent of its customers in the Northwest Florida service territory losing electrical service.
In August 2019, FPU filed a limited proceeding requesting recovery of storm-related costs associated with Hurricane Michael (capital and expenses) through a change in base rates. FPU also requested treatment and recovery of certain storm-related costs as regulatory assets for items currently not allowed to be recovered through the storm reserve as well as the recovery of capital replaced as a result of the storm. Recovery of these costs included a component of an overall return on capital additions and regulatory assets. In March 2020, we filed an update to our original filing to account for actual charges incurred through December 2019, revised the amortization period of the storm-related costs from 30 years as originally requested to 10 years, and included costs related to Hurricane Dorian of approximately $1.2 million in this filing.
In September 2019, FPU filed a petition with the Florida PSC, for approval of its consolidated electric depreciation rates. The petition was joined to the Hurricane Michael docket. The approved rates, which were part of the settlement agreement in September 2020 that is described below, were retroactively applied effective January 1, 2020.
In September 2020, the Florida PSC approved a settlement agreement between FPU and the Office of the Public Counsel regarding final cost recovery and rates associated with Hurricane Michael. Previously, in late 2019, the Florida PSC approved an interim rate increase, subject to refund, effective January 1, 2020, associated with the restoration effort following Hurricane Michael. We fully reserved these interim rates, pending a final resolution and settlement of the limited proceeding. The settlement agreement allowed us to: (a) refund the over-collection of interim rates through the fuel clause; (b) record regulatory assets for storm costs in the amount of $45.8 million including interest which will be amortized over six years; (c) recover these storm costs through a surcharge for a total of $7.7 million annually; and (d) collect an annual increase in revenue of $3.3 million to recover capital costs associated with new plant investments and a regulatory asset for the cost of removal and undepreciated plant. The new base rates and storm surcharge were effective on November 1, 2020. The following table summarizes the impact of Hurricane Michael regulatory proceeding for the year ended December 31, 2020:
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31,
|
|
(in thousands)
|
|
2020
|
|
Gross Margin
|
|
$
|
10,864
|
|
|
Depreciation
|
|
(1,184)
|
|
|
Amortization of regulatory assets
|
|
8,317
|
|
|
Operating income
|
|
3,731
|
|
|
Amortization of liability associated with interest expense
|
|
(1,475)
|
|
|
Pre-tax income
|
|
5,206
|
|
|
Income tax expense
|
|
1,403
|
|
|
Net income
|
|
$
|
3,803
|
|
|
|
|
|
Chesapeake Utilities Corporation 2020 Form 10-K Page 31
Capital Cost Surcharge Programs
In December 2019, the FERC approved Eastern Shore’s capital cost surcharge to become effective January 1, 2020. The surcharge, an approved item in the settlement of Eastern Shore’s last general rate case, allows Eastern Shore to recover capital costs associated with mandated highway or railroad relocation projects that required the replacement of existing Eastern Shore facilities. Eastern Shore expects to produce gross margin of approximately $1.5 million in 2021 and $3.0 million in 2022 from relocation projects.
Other Major Factors Influencing Gross Margin
Weather and Consumption
Weather conditions accounted for decreased gross margin of $4.3 million in 2020 compared to 2019 and $5.8 million compared to Normal temperatures as defined below. The following table summarizes heating degree day ("HDD") and cooling degree day (“CDD”) variances from the 10-year average HDD/CDD ("Normal") for the year ended December 31, 2020 compared to 2019.
HDD and CDD Information
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended December 31,
|
|
|
2020
|
|
2019
|
|
Variance
|
|
2019
|
|
2018
|
|
Variance
|
|
Delmarva
|
|
|
|
|
|
|
|
|
|
|
|
|
Actual HDD
|
3,716
|
|
|
4,089
|
|
|
(373)
|
|
|
4,089
|
|
|
4,251
|
|
|
(162)
|
|
|
10-Year Average HDD ("Normal")
|
4,294
|
|
|
4,379
|
|
|
(85)
|
|
|
4,379
|
|
|
4,374
|
|
|
5
|
|
|
Variance from Normal
|
(578)
|
|
|
(290)
|
|
|
|
|
(290)
|
|
|
(123)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Florida
|
|
|
|
|
|
|
|
|
|
|
|
|
Actual HDD
|
647
|
|
|
619
|
|
|
28
|
|
|
619
|
|
|
780
|
|
|
(161)
|
|
|
10-Year Average HDD ("Normal")
|
763
|
|
|
792
|
|
|
(29)
|
|
|
792
|
|
|
800
|
|
|
(8)
|
|
|
Variance from Normal
|
(116)
|
|
|
(173)
|
|
|
|
|
(173)
|
|
|
(20)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ohio
|
|
|
|
|
|
|
|
|
|
|
|
|
Actual HDD
|
5,218
|
|
|
5,500
|
|
|
(282)
|
|
|
5,500
|
|
|
5,845
|
|
|
(345)
|
|
|
10-Year Average HDD ("Normal")
|
5,701
|
|
|
5,983
|
|
|
(282)
|
|
|
5,983
|
|
|
5,823
|
|
|
160
|
|
|
Variance from Normal
|
(483)
|
|
|
(483)
|
|
|
|
|
(483)
|
|
|
22
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Florida
|
|
|
|
|
|
|
|
|
|
|
|
|
Actual CDD
|
2,775
|
|
|
3,200
|
|
|
(425)
|
|
|
3,200
|
|
|
3,105
|
|
|
95
|
|
|
10-Year Average CDD ("Normal")
|
2,982
|
|
|
2,939
|
|
|
43
|
|
|
2,939
|
|
|
2,889
|
|
|
50
|
|
|
Variance from Normal
|
(207)
|
|
|
261
|
|
|
|
|
261
|
|
|
216
|
|
|
|
Natural Gas Distribution Margin Growth
Customer growth for our natural gas distribution operations, as a result of the addition of new customers and the conversion of customers from alternative fuel sources to natural gas service, generated $3.4 million of additional margin in 2020. The average number of residential customers served on the Delmarva Peninsula and Florida increased by approximately 5.3 percent and 4.1 percent, respectively, during 2020. On the Delmarva Peninsula, a larger percentage of the margin growth was generated from residential growth given the expansion of gas into new housing communities and conversions to natural gas as our distribution infrastructure continues to build out. In Florida, as new communities continue to build out due to population growth and infrastructure is added to support the growth, there is increased load from both residential customers as well as new commercial and industrial customers. The details are provided in the following table:
Chesapeake Utilities Corporation 2020 Form 10-K Page 32
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross Margin increase
|
|
|
|
For the Year Ended December 31, 2020
|
|
(in thousands)
|
|
Delmarva Peninsula
|
|
Florida
|
|
Customer growth:
|
|
|
|
|
|
Residential
|
|
$
|
1,516
|
|
|
$
|
807
|
|
|
Commercial and industrial
|
|
380
|
|
|
667
|
|
|
Total customer growth
|
|
$
|
1,896
|
|
|
$
|
1,474
|
|
REGULATED ENERGY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase
|
|
|
|
|
|
Increase
|
|
For the Year Ended December
|
2020
|
|
2019
|
|
(decrease)
|
|
2019
|
|
2018
|
|
(decrease)
|
|
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
$
|
352,746
|
|
|
$
|
343,006
|
|
|
$
|
9,740
|
|
|
$
|
343,006
|
|
|
$
|
345,281
|
|
|
$
|
(2,275)
|
|
|
Cost of sales
|
91,994
|
|
|
102,803
|
|
|
(10,809)
|
|
|
102,803
|
|
|
121,828
|
|
|
(19,025)
|
|
|
Gross margin
|
260,752
|
|
|
240,203
|
|
|
20,549
|
|
|
240,203
|
|
|
223,453
|
|
|
16,750
|
|
|
Operations & maintenance
|
104,379
|
|
|
102,099
|
|
|
2,280
|
|
|
102,099
|
|
|
97,741
|
|
|
4,358
|
|
|
Gain from a settlement
|
(130)
|
|
|
(130)
|
|
|
—
|
|
|
(130)
|
|
|
(130)
|
|
|
—
|
|
|
Depreciation & amortization
|
46,079
|
|
|
35,227
|
|
|
10,852
|
|
|
35,227
|
|
|
31,876
|
|
|
3,351
|
|
|
Other taxes
|
18,300
|
|
|
16,423
|
|
|
1,877
|
|
|
16,423
|
|
|
14,751
|
|
|
1,672
|
|
|
Other operating expenses
|
168,628
|
|
|
153,619
|
|
|
15,009
|
|
|
153,619
|
|
|
144,238
|
|
|
9,381
|
|
|
Operating Income
|
$
|
92,124
|
|
|
$
|
86,584
|
|
|
$
|
5,540
|
|
|
$
|
86,584
|
|
|
$
|
79,215
|
|
|
$
|
7,369
|
|
2020 compared to 2019
Operating income for the Regulated Energy segment for 2020 was $92.1 million, an increase of $5.5 million, or 6.4 percent, compared to 2019. In the fourth quarter of 2020, we established $1.9 million of regulatory assets based on the estimated net incremental expense resulting from the COVID-19 pandemic for our natural gas distribution and electric businesses as currently authorized by the Delaware, Maryland and Florida PSCs. Excluding the estimated unfavorable COVID-19 impacts of $4.2 million for the year, operating income increased $9.7 million as a result of the Hurricane Michael regulatory proceeding settlement, higher gross margin from expansion projects completed by Eastern Shore and Peninsula Pipeline, organic growth in our natural gas distribution businesses, contribution from the Elkton Gas acquisition and margin growth from GRIP. These increases were offset by lower customer consumption driven primarily by milder weather; higher depreciation, amortization and property taxes, including amortization of the regulatory asset associated with the Hurricane Michael regulatory proceeding settlement; new expenses associated with Elkton Gas; and higher other operating expenses.
Items contributing to the year-over-year gross margin increase are listed in the following table:
|
|
|
|
|
|
|
|
(in thousands)
|
|
|
Margin contribution from Hurricane Michael regulatory proceeding settlement
|
$
|
10,864
|
|
|
Eastern Shore and Peninsula Pipeline service expansions
|
8,006
|
|
|
Natural gas distribution customer growth (excluding service expansions)
|
3,370
|
|
|
Margin contribution from Elkton Gas acquisition (completed July 2020)
|
1,344
|
|
|
Florida GRIP
|
1,239
|
|
|
Eastern Shore margin from capital relocation and non-service expansion projects
|
1,033
|
|
|
Unfavorable COVID-19 impacts on gross margin
|
(3,834)
|
|
|
Decreased customer consumption - primarily weather related
|
(1,340)
|
|
|
Other
|
(133)
|
|
|
Year-over-year increase in gross margin
|
$
|
20,549
|
|
Chesapeake Utilities Corporation 2020 Form 10-K Page 33
The following narrative discussion provides further detail and analysis of the significant items in the foregoing table.
Margin Contribution from Hurricane Michael Regulatory Proceeding Settlement
We generated $10.9 million in additional gross margin as a result of the settlement of the Hurricane Michael regulatory proceeding. Refer to Note 19, Rates and Other Regulatory Activities, in the consolidated financial statements for additional information.
Eastern Shore and Peninsula Pipeline Service Expansions
We generated additional gross margin of $6.3 million from Peninsula Pipeline's Western Palm Beach County, Auburndale and Callahan projects and $1.7 million in additional gross margin from Eastern Shore's Del-Mar Energy Pathway project.
Natural Gas Distribution Customer Growth
We generated additional gross margin of $3.4 million from natural gas customer growth. Gross margin increased by $1.5 million in Florida and $1.9 million on the Delmarva Peninsula in 2020 compared to 2019, due primarily to residential customer growth of 5.3 percent on the Delmarva Peninsula and 4.1 percent in Florida. On the Delmarva Peninsula, a larger percentage of the margin growth was generated from residential growth given the expansion of gas into new communities and conversions, while in Florida, as gas heating is not a significant portion of residential use, a greater portion of the margin growth occurred in the commercial and industrial sectors.
Margin Contribution from Elkton Gas
Gross margin increased by $1.3 million due to the margin generated by Elkton Gas which we acquired in July 2020.
Florida GRIP
Continued investment in the Florida GRIP generated additional gross margin of $1.2 million in 2020 compared to 2019.
Eastern Shore Margin from Capital Relocation and Non-service Expansion Projects
We generated additional gross margin of $1.0 million from Eastern Shore's surcharge on capital spent on several governmental-mandated relocation and non-service expansion projects.
Unfavorable COVID-19 Impacts
Gross margin decreased by $3.8 million in 2020 compared to 2019, as a result of the lower customer consumption, which was caused by the slowing of economic activities in our service territories as a result of restrictions imposed to promote social distancing and slow down the spread of COVID-19.
Decreased Customer Consumption - Weather Related
Gross margin decreased by $1.3 million due to milder weather and lower other consumption on the Delmarva Peninsula and in Florida in 2020 compared to 2019. The weather on the Delmarva Peninsula was 9 percent warmer in 2020 compared to 2019.
The major components of the increase in other operating expenses are as follows:
|
|
|
|
|
|
|
|
(in thousands)
|
|
|
Hurricane Michael settlement agreement - depreciation and amortization impact
|
$
|
7,133
|
|
|
Depreciation, amortization and property tax costs due to new capital investments
|
5,551
|
|
|
Unfavorable COVID-19 impacts (higher operating expenses)
|
2,285
|
|
|
Insurance (non-health) expense - both insured and self-insured components
|
1,442
|
|
|
Operating expenses from the Elkton Gas acquisition
|
651
|
|
|
Deferral of net expense increases of COVID-19 under PSC orders
|
(1,925)
|
|
|
Other variances
|
(128)
|
|
|
Period-over-period increase in other operating expenses
|
$
|
15,009
|
|
2019 compared to 2018
The results for the Regulated Energy segment for the year ended December 31, 2019 compared to 2018 are described in Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations of our Annual Report on Form 10-K for the year ended December 31, 2019, which is incorporated herein by reference.
Chesapeake Utilities Corporation 2020 Form 10-K Page 34
UNREGULATED ENERGY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase
|
|
|
|
|
|
Increase
|
|
For the Year Ended December 31,
|
2020
|
|
2019
|
|
(decrease)
|
|
2019
|
|
2018
|
|
(decrease)
|
|
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
$
|
152,526
|
|
|
$
|
154,150
|
|
|
$
|
(1,624)
|
|
|
$
|
154,150
|
|
|
$
|
161,904
|
|
|
$
|
(7,754)
|
|
|
Cost of sales
|
62,780
|
|
|
68,884
|
|
|
(6,104)
|
|
|
68,884
|
|
|
84,707
|
|
|
(15,823)
|
|
|
Gross margin
|
89,746
|
|
|
85,266
|
|
|
4,480
|
|
|
85,266
|
|
|
77,197
|
|
|
8,069
|
|
|
Operations & maintenance
|
53,839
|
|
|
52,028
|
|
|
1,811
|
|
|
52,028
|
|
|
48,689
|
|
|
3,339
|
|
|
Depreciation & amortization
|
11,988
|
|
|
10,130
|
|
|
1,858
|
|
|
10,130
|
|
|
8,263
|
|
|
1,867
|
|
|
Other taxes
|
3,255
|
|
|
3,170
|
|
|
85
|
|
|
3,170
|
|
|
3,120
|
|
|
50
|
|
|
Other operating expenses
|
69,082
|
|
|
65,328
|
|
|
3,754
|
|
|
65,328
|
|
|
60,072
|
|
|
5,256
|
|
|
Operating Income
|
$
|
20,664
|
|
|
$
|
19,938
|
|
|
$
|
726
|
|
|
$
|
19,938
|
|
|
$
|
17,125
|
|
|
$
|
2,813
|
|
2020 Compared to 2019
Operating income for the Unregulated Energy segment for 2020 was $20.7 million, an increase of $0.7 million compared to 2019. The increased operating income was due to an increase in gross margin of $4.5 million, which was partially offset by an increase of $3.8 million in other operating expenses. Excluding the estimated COVID-19 impacts of $1.7 million, operating income increased $2.4 million as a result of incremental gross margin from the acquisitions of the Boulden and Western Natural Gas propane assets, higher retail propane margins per gallon, increased demand for Marlin Gas Services' CNG transportation services and higher rates for Aspire Energy. These increases were partially offset by reduced gross margins from overall warmer temperatures, higher depreciation, amortization and property taxes, expenses associated with recent acquisitions, and increased insurance expense.
Gross Margin
Items contributing to the year-over-year increase in gross margin are listed in the following table:
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
Margin Impact
|
|
Propane Operations
|
|
|
|
Boulden and Western Natural Gas acquisitions (completed December 2019 and October 2020)
|
|
$
|
3,960
|
|
|
Increased retail propane margins per gallon driven by favorable market conditions and supply management
|
|
1,937
|
|
|
Decreased customer consumption - primarily weather related
|
|
(2,448)
|
|
|
Marlin Gas Services
|
|
|
|
Increased demand for CNG services
|
|
1,821
|
|
|
Aspire Energy
|
|
|
|
Higher margins from negotiated rate increases
|
|
1,312
|
|
|
Decreased customer consumption - primarily weather related
|
|
(517)
|
|
|
Unfavorable COVID-19 impacts on gross margin
|
|
(1,457)
|
|
|
Other variances
|
|
(128)
|
|
|
Year-over-year increase in gross margin
|
|
$
|
4,480
|
|
The following narrative discussion provides further detail and analysis of the significant items in the foregoing table.
Propane Operations
•Boulden and Western Natural Gas - We generated gross margin of $3.6 million from Boulden which was acquired by Sharp in December 2019 and $0.4 million from Western Natural Gas which was acquired by Sharp in October 2020.
•Increased Retail Propane Margins - Gross margin increased by $1.9 million, due to lower propane inventory costs and favorable market conditions. These market conditions, which include competition with other propane suppliers, as well as the availability and price of alternative energy sources, may fluctuate based on changes in demand, supply and other energy commodity prices.
Chesapeake Utilities Corporation 2020 Form 10-K Page 35
•Decreased Customer Consumption Primarily Driven by Weather - Gross margin decreased by $2.4 million for the Mid-Atlantic propane operations as weather on the Delmarva Peninsula was 9 percent warmer in 2020 compared to 2019.
Marlin Gas Services
•Gross margin increased by $1.8 million, as compared to 2019 due to higher demand for CNG hold services.
Aspire Energy
•Increased Margin Driven by Changes in Rates - Gross margin increased by $1.3 million, due primarily to higher margins from negotiated rate increases.
•Decreased Customer Consumption Primarily Driven by Weather - Gross margin decreased by $0.5 million due to lower consumption as weather in Ohio was approximately 5 percent warmer in 2020 compared to 2019.
Unfavorable COVID-19 Impacts
•Gross margin decreased by $1.5 million as a result of lower customer consumption, which was caused by the slowing of economic activities in our service territories as a result of restrictions imposed to promote social distancing and to slow down the spread of COVID-19.
Other Operating Expenses
Items contributing to the period-over-period increase in other operating expenses are listed in the following table:
|
|
|
|
|
|
|
|
(in thousands)
|
|
|
Depreciation and amortization due to new capital investments
|
1,840
|
|
|
Operating expenses from Boulden and Western Natural Gas acquisitions
|
1,510
|
|
|
Insurance expense (non-health) - both insured and self-insured
|
645
|
|
|
Other variances
|
(241)
|
|
|
Period-over-period increase in other operating expenses
|
$
|
3,754
|
|
2019 compared to 2018
The results for the Unregulated Energy segment for the year ended December 31, 2019 compared to 2018 are described in Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations of our Annual Report on Form 10-K for the year ended December 31, 2019, which is incorporated by reference.
Divestiture of PESCO
As discussed in Note 4, Acquisitions and Divestitures, during the fourth quarter of 2019, we sold PESCO's assets and contracts and accordingly have exited the natural gas marketing business. This was done in an effort to enable us to focus on the strategies that support our core energy delivery business. As a result, we began to report PESCO as discontinued operations during the third quarter of 2019 and excluded PESCO's performance from continuing operations for all periods presented and classified its assets and liabilities as held for sale, where applicable.
Chesapeake Utilities Corporation 2020 Form 10-K Page 36
OTHER INCOME (EXPENSE), NET
Other income (expense), net was $3.2 million and $(1.8) million for 2020 and 2019, respectively. Other income (expense), net includes non-operating investment income (expense), interest income, late fees charged to customers, gains or losses from the sale of assets for our unregulated businesses and pension and other benefits expense. The increase was primarily due to gains from the sale of two properties and lower pension expense in 2020. The property sales were the result of consolidation of certain operations facilities.
INTEREST CHARGES
2020 Compared to 2019
Interest charges for 2020 decreased by $0.5 million, compared to the same period in 2019, attributable primarily to a decrease of $4.6 million in interest expense primarily on lower levels outstanding under our revolving credit facilities and lower interest rates on short-term borrowings, $1.5 million of an amortization credit/reduction in interest expense associated with a regulatory liability that was established in connection with the Hurricane Michael regulatory proceeding settlement, and $0.5 million primarily due to higher capitalized interest associated with growth projects. This decrease was offset by an increase of $5.9 million in interest expense on long-term debt as a result of several long-term debt placements in 2019 and 2020 and $1.0 million in interest and fees associated with the early payoff of the 9.08% FPU secured first mortgage bonds.
INCOME TAXES
2020 Compared to 2019
Income tax expense from continuing operations was $23.5 million for 2020 compared to $21.1 million for 2019. Our effective income tax rate was 25.0 percent and 25.7 percent for the year ended December 31, 2020 and 2019, respectively. During the year ended December 31, 2020, we implemented certain provisions of the CARES Act that allowed us to carryback net operating losses from 2018 and 2019 into prior year periods where the federal income tax rate was higher. As a result, we recognized a $1.8 million reduction in tax expense for the twelve months ended December 31, 2020. Excluding this impact of the CARES Act, our effective tax rate for the year ended December 31, 2020 was 26.9 percent.
LIQUIDITY AND CAPITAL RESOURCES
Our capital requirements reflect the capital-intensive and seasonal nature of our business and are principally attributable to investment in new plant and equipment, retirement of outstanding debt and seasonal variability in working capital. We rely on cash generated from operations, short-term borrowings, and other sources to meet normal working capital requirements and to temporarily finance capital expenditures. We may also issue long-term debt and equity to fund capital expenditures and to more closely align our capital structure with our target capital structure. We maintain an effective shelf registration statement with the SEC for the issuance of shares of common stock under various types of equity offerings, including shares of common stock under our ATM equity program, as well as an effective registration statement with respect to the DRIP. Depending on our capital needs and subject to market conditions, in addition to other possible debt and equity offerings, we may consider issuing additional shares under the direct share purchase component of the DRIP and/or under the ATM equity program. Beginning in the third quarter of 2020, we issued shares of common stock under both the DRIP and the ATM equity program.
Our energy businesses are weather-sensitive and seasonal. We normally generate a large portion of our annual net income and subsequent increases in our accounts receivable in the first and fourth quarters of each year due to significant volumes of natural gas, electricity, and propane delivered by our distribution operations, and our natural gas transmission operations to customers during the peak heating season. In addition, our natural gas and propane inventories, which usually peak in the fall months, are largely drawn down in the heating season and provide a source of cash as the inventory is used to satisfy winter sales demand.
Capital expenditures for investments in new or acquired plant and equipment are our largest capital requirements. Our capital expenditures were $195.9 million (including the purchase of certain propane assets of Western Natural Gas and certain natural gas assets of Elkton Gas) in 2020.
Chesapeake Utilities Corporation 2020 Form 10-K Page 37
The following table shows total capital expenditures for the year ended December 31, 2020 by segment and by business line:
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31, 2020
|
|
(dollars in thousands)
|
|
|
Regulated Energy:
|
|
|
|
Natural gas distribution
|
|
$
|
85,257
|
|
|
Natural gas transmission
|
|
58,609
|
|
|
Electric distribution
|
|
3,234
|
|
|
Total Regulated Energy
|
|
147,100
|
|
|
Unregulated Energy:
|
|
|
|
Propane distribution
|
|
15,455
|
|
|
Energy transmission
|
|
19,398
|
|
|
Other unregulated energy
|
|
11,442
|
|
|
Total Unregulated Energy
|
|
46,295
|
|
|
Other:
|
|
|
|
Corporate and other businesses
|
|
2,480
|
|
|
Total Other
|
|
2,480
|
|
|
Total 2020 Capital Expenditures
|
|
$
|
195,875
|
|
In the table below, we have provided a preliminary range of our forecasted capital expenditures for 2021:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Estimate for Fiscal 2021
|
|
(dollars in thousands)
|
Low
|
|
High
|
|
Regulated Energy:
|
|
|
|
|
Natural gas distribution
|
$
|
79,000
|
|
|
$
|
85,000
|
|
|
Natural gas transmission
|
55,000
|
|
|
60,000
|
|
|
Electric distribution
|
9,000
|
|
|
13,000
|
|
|
Total Regulated Energy
|
143,000
|
|
|
158,000
|
|
|
Unregulated Energy:
|
|
|
|
|
Propane distribution
|
9,000
|
|
|
12,000
|
|
|
Energy transmission
|
14,000
|
|
|
15,000
|
|
|
Other unregulated energy
|
8,000
|
|
|
12,000
|
|
|
Total Unregulated Energy
|
31,000
|
|
|
39,000
|
|
|
Other:
|
|
|
|
|
Corporate and other businesses
|
1,000
|
|
|
3,000
|
|
|
Total Other
|
1,000
|
|
|
3,000
|
|
|
Total 2021 Forecasted Capital Expenditures
|
$
|
175,000
|
|
|
$
|
200,000
|
|
The 2021 budget, excluding acquisitions, includes capital expenditures associated with the following projects: Delmarva Natural Gas distribution's Somerset County expansion and the Bioenergy Devco RNG Project, Eastern Shore's Del-Mar Energy Pathway and the CleanBay RNG projects, Florida's Western Palm Beach County expansion and other potential pipeline projects, continued expenditures under the Florida GRIP, further expansions of our natural gas distribution and transmission systems, continued natural gas and electric system infrastructure improvement activities, facilities to support Marlin Gas Services' legacy growth and expansion into RNG and LNG transport, information technology systems, and other strategic initiatives and investments.
The capital expenditure projection is subject to continuous review and modification. Actual capital requirements may vary from the above estimates due to a number of factors, including changing economic conditions, capital delays because of COVID-19 that are greater than currently anticipated, customer growth in existing areas, regulation, new growth or acquisition
Chesapeake Utilities Corporation 2020 Form 10-K Page 38
opportunities, availability of capital and other factors discussed in Item 1A. Risk Factors. Historically, actual capital expenditures have typically lagged behind the budgeted amounts.
The timing of capital expenditures can vary based on delays in regulatory approvals, securing environmental approvals and other permits. The regulatory application and approval process has lengthened in the past few years, and we expect this trend to continue.
Capital Structure
We are committed to maintaining a sound capital structure and strong credit ratings. This commitment, along with adequate and timely rate relief for our regulated energy operations, is intended to ensure our ability to attract capital from outside sources at a reasonable cost, which will benefit our customers, creditors, employees and stockholders.
The following tables present our capitalization, excluding and including short-term borrowings, as of December 31, 2020 and 2019 follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2020
|
|
December 31, 2019
|
|
(in thousands)
|
|
|
|
|
|
|
|
|
Long-term debt, net of current maturities
|
$
|
508,499
|
|
|
42
|
%
|
|
$
|
440,168
|
|
|
44
|
%
|
|
Stockholders’ equity
|
697,085
|
|
|
58
|
%
|
|
561,577
|
|
|
56
|
%
|
|
Total capitalization, excluding short-term borrowings
|
$
|
1,205,584
|
|
|
100
|
%
|
|
$
|
1,001,745
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2020
|
|
December 31, 2019
|
|
(in thousands)
|
|
|
|
|
|
|
|
|
Short-term debt
|
$
|
175,644
|
|
|
13
|
%
|
|
$
|
247,371
|
|
|
19
|
%
|
|
Long-term debt, including current maturities
|
522,099
|
|
|
37
|
%
|
|
485,768
|
|
|
38
|
%
|
|
Stockholders’ equity
|
697,085
|
|
|
50
|
%
|
|
561,577
|
|
|
43
|
%
|
|
Total capitalization, including short-term borrowings
|
$
|
1,394,828
|
|
|
100
|
%
|
|
$
|
1,294,716
|
|
|
100
|
%
|
Our target ratio of equity to total capitalization, including short-term borrowings, is between 50 and 60 percent. Our equity to total capitalization ratio, including short-term borrowings, was 50 percent as of December 31, 2020. We seek to align permanent financing with the in-service dates of capital projects. We may utilize more temporary short-term debt when the financing cost is attractive as a bridge to the permanent long-term financing or if the equity markets are volatile.
In the third and fourth quarter of 2020, we issued 1.0 million shares of common stock through our DRIP and the ATM programs and received net proceeds of approximately $83.0 million which were added to our general funds. See Note 16, Stockholders’ Equity, in the consolidated financial statements for additional information on commissions and fees paid in connection with these issuances.
As of December 31, 2020, we had no restrictions on our cash balances. Chesapeake Utilities’ Senior Notes contain a restriction that limits the payment of dividends or other restricted payments in excess of certain pre-determined thresholds. As of December 31, 2020, $324.6 million of our consolidated net income were free of such restrictions.
Term Notes
In January 2019, we issued a $30.0 million unsecured term note through Branch Banking and Trust Company, with a maturity date of February 28, 2020. This note was paid in full in February 2020 utilizing our short-term borrowing facilities.
Uncollateralized Senior Notes
All of our 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 40.0 percent of total capitalization (including short-term borrowings), and the fixed charge coverage ratio must be at least 1.2 times. The most recent Senior Notes issued since September 2013 also contain a restriction that we must maintain an aggregate net book value in our regulated business assets of at least 50.0 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.
Chesapeake Utilities Corporation 2020 Form 10-K Page 39
Shelf Agreements
We have entered into Shelf Agreements with Prudential, MetLife and NYL, whom are under no obligation to purchase any unsecured debt. The following table summarizes our Shelf Agreements at December 31, 2020:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Borrowing Capacity
|
|
Less: Amount of Debt Issued
|
|
Less: Unfunded Commitments
|
|
Remaining Borrowing Capacity
|
|
Shelf Agreement
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
|
|
|
|
|
|
|
|
Prudential Shelf Agreement (1)
|
|
$
|
370,000
|
|
|
$
|
(220,000)
|
|
|
—
|
|
|
$
|
150,000
|
|
|
MetLife Shelf Agreement (2)
|
|
150,000
|
|
|
—
|
|
|
—
|
|
|
150,000
|
|
|
NYL Shelf Agreement (3)
|
|
150,000
|
|
|
(140,000)
|
|
|
—
|
|
|
10,000
|
|
|
Total
|
|
$
|
670,000
|
|
|
$
|
(360,000)
|
|
|
$
|
—
|
|
|
$
|
310,000
|
|
(1) In April 2020, we amended the Prudential Shelf Agreement to increase the available borrowing capacity by $150.0 million. The Shelf Agreement expires in April 2023. In July 2020, we issued $50 million of Prudential Shelf Notes at the rate of 3.00 percent per annum.
(2) In May 2020, we amended an agreement with MetLife to provide a new $150 million MetLife Shelf Agreement for a three-year term ending May 2023.
(3) In August 2020 we issued $40 million of NYL Shelf Notes at the rate of 2.96 percent per annum. The NYL Shelf Agreement expires in November 2021.
The Senior Notes, Shelf Agreements and Shelf Notes set forth certain business covenants to which we are subject when any note is outstanding, including covenants that limit or restrict our ability, and the ability of our subsidiaries, to incur indebtedness, or place or permit liens and encumbrances on any of our property or the property of our subsidiaries.
Short-Term Borrowings
At December 31, 2020 and 2019, our short-term borrowing totaled $175.6 million and $247.4 million, respectively, at weighted average interest rates of 1.28 percent and 2.62 percent, respectively. Included in the December 31, 2020 balance, is $60.0 million in short-term debt for which we have entered into interest rate swap agreements.
In September 2020, we entered into a new $375.0 million syndicated Revolver with six participating lenders. As a result of entering into the Revolver, in September 2020, we terminated and paid all outstanding balances under the previously existing bilateral lines of credit and the previous revolving credit facility.
The availability of funds under the Revolver is subject to conditions specified in the credit agreement, 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 the Revolver to maintain, at the end of each fiscal year, a funded indebtedness ratio of no greater than 65 percent. As of December 31, 2020, we are in compliance with this covenant.
The Revolver expires on September 29, 2021 and is 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. Borrowings under the Revolver are subject to a pricing grid, including the commitment fee and the interest rate charged. Our pricing is adjusted each quarter based upon our total indebtedness to total capitalization ratio. As of December 31, 2020, our pricing under the Revolver included a commitment fee of 0.175 percent and an interest rate of 1.125 percent over LIBOR. Our available credit under the new Revolver at December 31, 2020 was $196.9 million. As of December 31, 2020, we had issued $4.8 million in letters of credit to various counterparties under the syndicated Revolver. Although the letters of credit are not included in the outstanding short-term borrowings and we do not anticipate they will be drawn upon by the counterparties, the letters of credit reduce the available borrowings under our syndicated Revolver.
In the second quarter of 2020, we entered into interest rate swaps with notional amounts totaling $100.0 million associated with three of our short-term lines of credit which were settled in October 2020. The interest rate swaps were entered to hedge the variability in cash flows attributable to changes in the short-term borrowing rates during this period. The fixed swap rates ranged between 0.2615 and 0.3875 percent for the period. In the fourth quarter of 2020, we entered into an additional interest rate swap with notional amounts totaling $60.0 million, through December 2021 with pricing of 0.20 percent and 0.205 percent for the period associated with our outstanding borrowing under the Revolver. In February 2021, we entered into an additional interest rate swap with a notional amount of $40.0 million through December 2021 at pricing of 0.17 percent. Our short-term borrowing is based on the 30-day LIBOR rate. The interest swap was cash settled monthly as the counter-party pays us the 30-day LIBOR rate less the fixed rate.
Chesapeake Utilities Corporation 2020 Form 10-K Page 40
We are authorized by our Board of Directors to borrow up to $375 million of short-term debt, as required.
Key statistics regarding our unsecured short-term credit facilities (our Revolver and previous bilateral lines of credit and revolving credit facility) for the years ended December 31, 2020 and 2019 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
2020
|
|
2019
|
|
2018
|
|
Average borrowings during the year
|
$
|
230,526
|
|
|
$
|
257,587
|
|
|
$
|
238,750
|
|
|
Weighted average interest rate for the year
|
1.50
|
%
|
|
3.11
|
%
|
|
2.93
|
%
|
|
Maximum month-end borrowings
|
$
|
284,914
|
|
|
$
|
302,379
|
|
|
$
|
290,103
|
|
Cash Flows
The following table provides a summary of our operating, investing and financing cash flows for the years ended December 31, 2020, 2019 and 2018:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31,
|
|
|
2020
|
|
2019
|
|
2018
|
|
(in thousands)
|
|
|
|
|
|
|
Net cash provided by (used in):
|
|
|
|
|
|
|
Operating activities
|
$
|
158,916
|
|
|
$
|
102,964
|
|
|
$
|
117,362
|
|
|
Investing activities
|
(181,631)
|
|
|
(186,587)
|
|
|
(256,848)
|
|
|
Financing activities
|
19,229
|
|
|
84,519
|
|
|
139,961
|
|
|
Net (decrease) increase in cash and cash equivalents
|
(3,486)
|
|
|
896
|
|
|
475
|
|
|
Cash and cash equivalents—beginning of period
|
6,985
|
|
|
6,089
|
|
|
5,614
|
|
|
Cash and cash equivalents—end of period
|
$
|
3,499
|
|
|
$
|
6,985
|
|
|
$
|
6,089
|
|
Cash Flows Provided by Operating Activities
Changes in our cash flows from operating activities are attributable primarily to changes in net income, adjusted for non-cash items, such as depreciation and changes in deferred income taxes, and changes in working capital. Working capital requirements are determined by a variety of factors, including weather, the prices of natural gas, electricity and propane, the timing of customer collections, payments for purchases of natural gas, electricity and propane, and deferred fuel cost recoveries.
We normally generate a large portion of our annual net income and related increases in our accounts receivable in the first and fourth quarters of each year due to significant volumes of natural gas and propane delivered to customers during the peak heating season by our natural gas and propane operations and our natural gas supply, gathering and processing operation. In addition, our natural gas and propane inventories, which usually peak in the fall months, are largely drawn down in the heating season and provide a source of cash as the inventory is used to satisfy winter sales demand.
During 2020 and 2019, net cash provided by operating activities was $158.9 million and $103.0 million, respectively, resulting in an increase in cash flows of $55.9 million. Significant operating activities generating the cash flows change were as follows:
•Changes in net accounts receivable and accrued revenue and accounts payable and accrued liabilities increased cash flows by $23.0 million, due in part to the absence of PESCO, whose assets and contracts were sold in the fourth quarter of 2019, as well as the timing and receipt of customer receipts and vendor payments;
•Net income, adjusted for non-cash adjustments and reconciling activities, increased cash flows by $23.6 million, due primarily to higher net income, depreciation and amortization and gain on sale of assets;
•Net cash flows from income taxes receivable increased by $11.9 million due primarily to tax refunds resulting from implementation of the CARES Act in 2020 which allowed taxable losses to be carried back against prior year taxable income;
•Changes in net regulatory assets and liabilities increased cash flows by $2.8 million due primarily to the change in fuel costs collected through the various cost recovery mechanisms;
•Changes in net prepaid expenses and other current assets, customer deposits and refunds and other assets and liabilities, net increased cash flows by $1.1 million; offset by
•Net cash flows from changes in propane inventory, storage gas and other inventories which decreased by approximately $6.5 million.
Chesapeake Utilities Corporation 2020 Form 10-K Page 41
Cash Flows Used in Investing Activities
Net cash used in investing activities totaled $181.6 million and $186.6 million during the year ended December 31, 2020 and 2019, respectively, resulting in an increase in cash flows of $5.0 million. Key investing activities contributing to the cash flow change included:
•Cash used to pay for capital expenditures was $165.5 million for the year ended December 31, 2020, compared to $184.7 million in December 31, 2019;
•Net cash of $22.2 million was primarily used to acquire certain propane operating assets of Elkton Gas and Western Natural Gas in 2020, compared to net cash of $24.0 million used to acquire operating assets of Boulden in 2019; and
•Cash received from sales of assets was $8.1 million for the year ended December 31, 2020 due primarily to sale of properties as a result of consolidation of certain operations facilities.
Cash Flows Provided by Financing Activities
Net cash provided by financing activities totaled $19.2 million for the year ended December 31, 2020, compared to net cash of $84.5 million provided by financing activities during the prior year which resulted in a decrease in cash flows of $65.3 million, primarily due to the following:
•Increased cash flows of $61.0 million and $23.3 million, from new equity issued under the ATM and waiver component of the DRIP, respectively;
•Decreased cash flows from higher repayments of short-term borrowing of $25.7 million under our line of credit arrangements;
•Decreased cash flows of $109.8 million associated with less long-term debt issuances. For the year ended December 31, 2020, we received net proceeds of $89.8 million from the issuance of Prudential Shelf Notes in July 2020 and NYL Shelf Notes in August 2020. For the year ended December 31, 2019 we received $199.6 million in net cash proceeds from the issuance of Term Notes, Prudential Shelf Notes and Uncollateralized Senior Notes.
•Decreased cash flows of $11.7 million as a result of the repayment of more long-term debt;
•Increased cash flows of $0.3 million as a result of changes in cash overdrafts in 2020; and
•Cash dividend payments of $27.2 million in 2020 compared to $24.7 million for 2019.
CONTRACTUAL OBLIGATIONS
We have the following contractual obligations and other commercial commitments as of December 31, 2020:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments Due by Period
|
|
Contractual Obligations
|
2021
|
|
2022-2023
|
|
2024-2025
|
|
After 2025
|
|
Total
|
|
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
Long-term debt (1)
|
$
|
13,600
|
|
|
$
|
37,700
|
|
|
$
|
42,200
|
|
|
$
|
429,500
|
|
|
$
|
523,000
|
|
|
Operating leases (2)
|
2,027
|
|
|
3,907
|
|
|
3,052
|
|
|
4,419
|
|
|
13,405
|
|
|
Purchase obligations (3)
|
|
|
|
|
|
|
|
|
|
|
Transmission capacity
|
35,330
|
|
|
66,434
|
|
|
56,533
|
|
|
169,102
|
|
|
327,399
|
|
|
Storage capacity
|
2,044
|
|
|
2,618
|
|
|
—
|
|
|
—
|
|
|
4,662
|
|
|
Commodities
|
25,728
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
25,728
|
|
|
Electric supply
|
6,357
|
|
|
12,788
|
|
|
12,887
|
|
|
32,402
|
|
|
64,434
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unfunded benefits (4)
|
310
|
|
|
606
|
|
|
572
|
|
|
1,274
|
|
|
2,762
|
|
|
Funded benefits (5)
|
3,863
|
|
|
3,090
|
|
|
3,090
|
|
|
3,031
|
|
|
13,074
|
|
|
Total Contractual Obligations
|
$
|
89,259
|
|
|
$
|
127,143
|
|
|
$
|
118,334
|
|
|
$
|
639,728
|
|
|
$
|
974,464
|
|
(1) This represents principal payments on long-term debt. See Item 8, Financial Statements and Supplementary Data, Note 13, Long-Term Debt, for additional information. The expected interest payments on long-term debt are $18.5 million, $34.7 million, $31.5 million and $95.3 million, respectively, for the periods indicated above. Expected interest payments for all periods total $180.0 million.
(2) See Item 8, Financial Statements and Supplementary Data, Note 15, Leases, for additional information.
(3) See Item 8, Financial Statements and Supplementary Data, Note 21, Other Commitments and Contingencies, for additional information.
(4) These amounts associated with our unfunded post-employment and post-retirement benefit plans are based on expected payments to current retirees and assume a retirement age of 62 for currently active employees. There are many factors that would cause actual payments to differ from these amounts, including early retirement, future health care costs that differ from past experience and discount rates implicit in calculations. See Item 8, Financial Statements and Supplementary Data, Note 17, Employee Benefit Plans, for additional information on the plans.
(5) We have recorded long-term liabilities of $15.9 million at December 31, 2020 for two qualified, defined benefit pension plans. The assets funding these plans are in a separate trust and are not considered assets of ours or included in our balance sheets. The Contractual Obligations table above includes $2.3 million, reflecting the payments we expect to make to the trust funds in 2021. Additional contributions may be required in future years based on the actual return earned
Chesapeake Utilities Corporation 2020 Form 10-K Page 42
by the plan assets and other actuarial assumptions, such as the discount rate and long-term expected rate of return on plan assets. See Item 8, Financial Statements and Supplementary Data, Note 17, Employee Benefit Plans, for further information on the plans. Additionally, the Contractual Obligations table above includes deferred compensation obligations totaling $10.8 million, funded with Rabbi Trust assets in the same amount. The Rabbi Trust assets are recorded under Investments on the consolidated balance sheets. We assume a retirement age of 65 for purposes of distribution from this trust.
OFF-BALANCE SHEET ARRANGEMENTS
Our Board of Directors has authorized us 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 as of December 31, 2020 was $20.0 million. The aggregate amount guaranteed at December 31, 2020 was $5.7 million, with the guarantees expiring on various dates through September 2021.
As of December 31, 2020, we have issued letters of credit totaling approximately $4.8 million related to the electric transmission services for FPU's electric division, the firm transportation service agreement between TETLP and our Delaware and Maryland divisions, and our current and previous primary insurance carriers. These letters of credit have various expiration dates through October 5, 2021. There have been no draws on these letters of credit as of December 31, 2020. We do not anticipate that the counterparties will draw upon these letters of credit, and we expect that they will be renewed to the extent necessary in the future. Additional information is presented in Item 8, Financial Statements and Supplementary Data, Note 21, Other Commitments and Contingencies in the consolidated financial statements.
CRITICAL ACCOUNTING POLICIES
We prepare our financial statements in accordance with GAAP. Application of these accounting principles requires the use of estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosures of contingencies during the reporting period. We base our estimates on historical experience and on various assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Since a significant portion of our businesses are regulated and the accounting methods used by these businesses must comply with the requirements of the regulatory bodies, the choices available are limited by these regulatory requirements. In the normal course of business, estimated amounts are subsequently adjusted to actual results that may differ from the estimates.
Regulatory Assets and Liabilities
As a result of the ratemaking process, we record certain assets and liabilities in accordance with ASC Topic 980, Regulated Operations, and consequently, the accounting principles applied by our regulated energy businesses differ in certain respects from those applied by the unregulated businesses. Amounts are deferred as regulatory assets and liabilities when there is a probable expectation that they will be recovered in future revenues or refunded to customers as a result of the regulatory process. This is more fully described in Item 8, Financial Statements and Supplementary Data, Note 2, Summary of Significant Accounting Policies, in the consolidated financial statements. If we were required to terminate the application of ASC Topic 980, we would be required to recognize all such deferred amounts as a charge or a credit to earnings, net of applicable income taxes. Such an adjustment could have a material effect on our results of operations.
Valuation of Environmental Liabilities and Related Regulatory Assets
As more fully described in Item 8, Financial Statements and Supplementary Data, Note 20, Environmental Commitments and Contingencies, in the consolidated financial statements, we are currently participating in the investigation, assessment or remediation of former MGP sites for which we have sought or will seek regulatory approval to recover through rates the estimated costs of remediation and related activities. Amounts have been recorded as environmental liabilities based on estimates of future costs to remediate these sites, which are provided by independent consultants.
Financial Instruments
We utilize financial instruments to mitigate commodity price risk associated with fluctuations of natural gas, electricity and propane and to mitigate interest rate risk. We continually monitor the use of these instruments to ensure compliance with our risk management policies and account for them in accordance with GAAP, such that every derivative instrument is recorded as either an asset or a liability measured at its fair value. It also requires that changes in the derivatives' fair value are recognized in the current period earnings unless specific hedge accounting criteria are met. If these instruments do not meet the definition of derivatives or are considered “normal purchases and normal sales,” they are accounted for on an accrual basis of accounting.
Additionally, GAAP also requires us to classify the derivative assets and liabilities based on the lowest level of input that is significant to the fair value measurement. Our assessment of the significance of a particular input to the fair value measurement requires judgment and may affect the fair value of the assets and liabilities and their placement within the fair value hierarchy.
Chesapeake Utilities Corporation 2020 Form 10-K Page 43
We determined that certain propane put options, call options, swap agreements and interest rate swap agreements met the specific hedge accounting criteria. We also determined that most of our contracts for the purchase or sale of natural gas, electricity and propane either: (i) did not meet the definition of derivatives because they did not have a minimum purchase/sell requirement, or (ii) were considered “normal purchases and normal sales” because the contracts provided for the purchase or sale of natural gas, electricity or propane to be delivered in quantities that we expect to use or sell over a reasonable period of time in the normal course of business. Accordingly, these contracts were accounted for on an accrual basis of accounting.
Additional information about our derivative instruments is disclosed in Item 8, Financial Statements and Supplementary Data, Note 8, Derivative Instruments, in the consolidated financial statements.
Operating Revenues
Revenues for our natural gas and electric distribution operations are based on rates approved by the PSC of each state in which we operate. Customers’ base rates may not be changed without formal approval by these PSCs. However, the PSCs authorized our regulated operations to negotiate rates, based on approved methodologies, with customers that have competitive alternatives. Eastern Shore’s revenues are based on rates approved by the FERC. The FERC has also authorized Eastern Shore to negotiate rates above or below the FERC-approved maximum rates, which customers can elect as an alternative to negotiated rates.
Peninsula Pipeline, our Florida intrastate pipeline subsidiary that is subject to regulation by the Florida PSC, has negotiated firm transportation service contracts with third-party customers and with certain affiliates.
For regulated deliveries of natural gas, electricity and propane, 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, such as community gas system customers, whose billing cycles do not coincide with the accounting periods.
Our Ohio natural gas transmission/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.
Eight Flags records revenues based on the amount of electricity and steam generated and sold to its customers.
Our mobile compressed natural gas operation recognizes revenue for CNG services at the end of each calendar month for services provided during the month based on agreed upon rates for labor, equipment utilized, costs incurred for natural gas compression, miles driven, mobilization and demobilization fees.
Each of our natural gas distribution operations in Delaware and Maryland, our bundled natural gas distribution service in Florida and our electric distribution operation in Florida has a fuel cost recovery mechanism. This mechanism provides a method of adjusting 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.
We charge flexible rates to industrial interruptible customers on our natural gas distribution systems to compete with the price of alternative fuel that they can use. Neither we, nor any of our interruptible customers, are contractually obligated to deliver or receive natural gas on a firm service basis.
Allowance for Credit Losses
An allowance for expected credit losses is recorded against amounts due to reduce the net receivable balance to the amount we reasonably expect to collect based upon our collections experience, the condition of the overall economy and our assessment of our customers’ inability or reluctance to pay. If circumstances change, however, our estimate of the recoverability of accounts receivable may also change. Circumstances which could affect our estimates include, but are not limited to, customer credit issues, the level of natural gas, electricity and propane prices, impacts from pandemics and general economic conditions. Accounts are written off once they are deemed to be uncollectible.
Goodwill and Other Intangible Assets
We test goodwill for impairment at least annually in December. The annual impairment testing for 2020 indicated no impairment of goodwill. Additional information is presented in Item 8, Financial Statements and Supplementary Data, Note 11, Goodwill and Other Intangible Assets, in the consolidated financial statements.
Chesapeake Utilities Corporation 2020 Form 10-K Page 44
Other Assets Impairment Evaluations
We periodically evaluate whether events or circumstances have occurred which indicate that long-lived assets may not be recoverable. When events or circumstances indicate that an impairment is present, we record an impairment loss equal to the excess of the asset's carrying value over its fair value, if any.
Pension and Other Postretirement Benefits
Pension and other postretirement plan costs and liabilities are determined on an actuarial basis and are affected by numerous assumptions and estimates including the market 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. The assumed discount rates and the expected returns on plan assets are the assumptions that generally have the most significant impact on the pension costs and liabilities. The assumed discount rates, the assumed health care cost trend rates and the assumed rates of retirement generally have the most significant impact on our postretirement plan costs and liabilities. Additional information is presented in Item 8, Financial Statements and Supplementary Data, Note 17, Employee Benefit Plans, in the consolidated financial statements, including plan asset investment allocation, estimated future benefit payments, general descriptions of the plans, significant assumptions, the impact of certain changes in assumptions, and significant changes in estimates.
For 2020, actuarial assumptions include expected long-term rates of return on plan assets of 3.50 percent and 6.00 percent for Chesapeake Utilities' pension plan and FPU’s pension plan, respectively, and discount rates of 2.25 percent and 2.50 percent for Chesapeake Utilities' and FPU’s plans, respectively. The discount rate for each plan was determined by management considering high-quality corporate bond rates, such as the Prudential curve index and the FTSE Index, changes in those rates from the prior year and other pertinent factors, including the expected lives of the plans and the availability of the lump-sum payment option. A 0.25 percent decrease in the discount rate could decrease our annual pension and postretirement costs by an immaterial amount, and a 0.25 percent increase could increase our annual pension and postretirement costs by an immaterial amount.
Actual changes in the fair value of plan assets and the differences between the actual return on plan assets and the expected return on plan assets could have a material effect on the amount of pension benefit costs that we ultimately recognize. A 0.25 percent change in the rate of return could change our annual pension cost by approximately $0.2 million and would not have an impact on the postretirement and Chesapeake Utilities supplemental executive retirement pension plan ("Chesapeake SERP") because these plans are not funded.
Tax-Related Contingency
We account for uncertainty in income taxes in the consolidated financial statements only if it is more likely than not that an uncertain tax position is sustainable based on its technical merits. Recognizable tax positions are then measured to determine the amount of benefit recognized in the consolidated 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 quantifiable. 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.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of
Chesapeake Utilities Corporation
Opinions on the Consolidated Financial Statements and Internal Control over Financial Reporting
We have audited the accompanying consolidated balance sheets of Chesapeake Utilities Corporation and Subsidiaries (the "Company") as of December 31, 2020 and 2019, 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, 2020, and the related notes and financial statement schedule listed in Item 15(a)2 (collectively referred to as the "consolidated financial statements"). We also have audited the Company’s internal control over financial reporting as of December 31, 2020, based on criteria established in Internal Control - Integrated Framework: (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”).
In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2020 and 2019, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2020, in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2020, based on criteria established in Internal Control - Integrated Framework: (2013) issued by COSO.
Basis for Opinion
The Company’s management is responsible for these consolidated financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management's Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company's consolidated financial statements and an opinion on the Company’s internal control over financial reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) ("PCAOB") and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects.
Our audits of the consolidated financial statements included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.
Definition and Limitations of Internal Control Over Financial Reporting
A company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the
Chesapeake Utilities Corporation 2020 Form 10-K Page 48
company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Critical Audit Matter
The critical audit matter communicated below is a matter arising from the current period audit of the financial statements that was communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging subjective, or complex judgments. The communication of the critical audit matter does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing separate opinions on the critical audit matter or on the accounts or disclosures to which they relate.
Goodwill - Energy Transmission and Supply Services (Aspire Energy), Mid-Atlantic Propane Operations, Florida Propane Operations and Marlin Gas Services - Unregulated Energy Segment - Refer to Notes 1 and 11 to the consolidated financial statements
Critical Audit Matter Description
As described in Notes 1 and 11 to the consolidated financial statements, the Company has recorded approximately $31.1 million of goodwill within the Unregulated Energy reportable segment as of December 31, 2020, all of which relates to the four reporting units listed above. To test goodwill for impairment, the Company uses a present value technique based on discounted cash flows to estimate the fair value of its reporting units. Management’s testing of goodwill for 2020 indicated no impairment.
We determined the goodwill impairment assessment for the four reporting units listed above was a critical audit matter because the fair value estimates require significant estimates and assumptions by management, including those relating to future revenue and operating margin forecasts and discount rates. Testing these estimates involved increased auditor judgment and effort.
How the Critical Audit Matter was Addressed in the Audit
The primary procedures we performed to address this critical audit matter included:
•We obtained an understanding, evaluated the design, and tested the operating effectiveness of controls over management’s goodwill impairment evaluation, including those over the determination of the fair value of the reporting units within the Unregulated Energy reportable segment.
•We evaluated the appropriateness of management’s valuation methodology, including testing the mathematical accuracy of the calculation.
•We assessed the historical accuracy of management’s revenue and operating margin forecasts.
•We compared the significant assumptions used by management to current industry and economic trends, current and historical performance of each reporting unit, and other relevant factors.
•We performed sensitivity analyses of the significant assumptions to evaluate the changes in the fair value of the reporting units that would result from changes in the assumptions.
•We evaluated whether the assumptions were consistent with evidence obtained in other areas of the audit, including testing the Company’s fair value of all reporting units, inclusive of the Regulated and Unregulated Energy reporting units, in relation to the market capitalization of the Company and assessed the results.
/s/ Baker Tilly US, LLP (formerly Baker Tilly Virchow Krause, LLP)
We have served as the Company's auditor since 2007.
Philadelphia, Pennsylvania
February 24, 2021
Chesapeake Utilities Corporation 2020 Form 10-K Page 49
Chesapeake Utilities Corporation and Subsidiaries
Consolidated Statements of Income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31,
|
|
|
2020
|
|
2019
|
|
2018
|
|
(in thousands, except shares and per share data)
|
|
|
|
|
|
|
Operating Revenues
|
|
|
|
|
|
|
Regulated Energy
|
$
|
352,746
|
|
|
$
|
343,006
|
|
|
$
|
345,281
|
|
|
Unregulated Energy
|
152,526
|
|
|
154,151
|
|
|
161,905
|
|
|
Other businesses and eliminations
|
(17,074)
|
|
|
(17,552)
|
|
|
(16,870)
|
|
|
Total operating revenues
|
488,198
|
|
|
479,605
|
|
|
490,316
|
|
|
Operating Expenses
|
|
|
|
|
|
|
Regulated Energy cost of sales
|
91,994
|
|
|
102,803
|
|
|
121,828
|
|
|
Unregulated Energy and other cost of sales
|
45,944
|
|
|
51,698
|
|
|
68,341
|
|
|
Operations
|
142,055
|
|
|
137,845
|
|
|
132,523
|
|
|
Maintenance
|
15,587
|
|
|
15,679
|
|
|
14,387
|
|
|
Gain from a settlement
|
(130)
|
|
|
(130)
|
|
|
(130)
|
|
|
Depreciation and amortization
|
58,117
|
|
|
45,424
|
|
|
40,220
|
|
|
Other taxes
|
21,908
|
|
|
20,001
|
|
|
18,303
|
|
|
Total operating expenses
|
375,475
|
|
|
373,320
|
|
|
395,472
|
|
|
Operating Income
|
112,723
|
|
|
106,285
|
|
|
94,844
|
|
|
Other income (expense), net
|
3,222
|
|
|
(1,847)
|
|
|
(607)
|
|
|
Interest charges
|
21,765
|
|
|
22,224
|
|
|
16,146
|
|
|
Income from Continuing Operations Before Income Taxes
|
94,180
|
|
|
82,214
|
|
|
78,091
|
|
|
Income Taxes on Continuing Operations
|
23,538
|
|
|
21,114
|
|
|
21,123
|
|
|
Income from Continuing Operations
|
70,642
|
|
|
61,100
|
|
|
56,968
|
|
|
Income (loss) from Discontinued Operations, Net of Tax
|
686
|
|
|
(1,349)
|
|
|
(388)
|
|
|
Gain on sale of Discontinued Operations, Net of tax
|
170
|
|
5,402
|
|
|
—
|
|
|
Net Income
|
$
|
71,498
|
|
|
$
|
65,153
|
|
|
$
|
56,580
|
|
|
|
|
|
|
|
|
|
Weighted Average Common Shares Outstanding:
|
|
|
|
|
|
|
Basic
|
16,711,579
|
|
|
16,398,443
|
|
|
16,369,616
|
|
|
Diluted
|
16,770,735
|
|
|
16,448,486
|
|
|
16,419,870
|
|
|
Basic Earnings Per Share of Common Stock:
|
|
|
|
|
|
|
Earnings Per Share from Continuing Operations
|
$
|
4.23
|
|
|
$
|
3.73
|
|
|
$
|
3.48
|
|
|
Earnings/(Loss) Per Share from Discontinued Operations
|
0.05
|
|
|
0.24
|
|
|
(0.02)
|
|
|
Basic Earnings Per Share of Common Stock
|
$
|
4.28
|
|
|
$
|
3.97
|
|
|
$
|
3.46
|
|
|
|
|
|
|
|
|
|
Diluted Earnings Per Share of Common Stock:
|
|
|
|
|
|
|
Earnings Per Share from Continuing Operations
|
$
|
4.21
|
|
|
$
|
3.72
|
|
|
$
|
3.47
|
|
|
Earnings/(Loss) Per Share from Discontinued Operations
|
0.05
|
|
|
0.24
|
|
|
(0.02)
|
|
|
Diluted Earnings Per Share of Common Stock
|
$
|
4.26
|
|
|
$
|
3.96
|
|
|
$
|
3.45
|
|
The accompanying notes are an integral part of the financial statements.
Chesapeake Utilities Corporation 2020 Form 10-K Page 50
Chesapeake Utilities Corporation and Subsidiaries
Consolidated Statements of Comprehensive Income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31,
|
|
|
2020
|
|
2019
|
|
2018
|
|
(in thousands)
|
|
|
|
|
|
|
Net Income
|
$
|
71,498
|
|
|
$
|
65,153
|
|
|
$
|
56,580
|
|
|
Other Comprehensive Income (Loss), net of tax:
|
|
|
|
|
|
|
Employee Benefits, net of tax:
|
|
|
|
|
|
|
Amortization of prior service cost, net of tax of $(18), $(20) and $(22), respectively
|
(59)
|
|
|
(57)
|
|
|
(55)
|
|
|
Net gain (loss), net of tax of $(41), $368, and $(49), respectively
|
(154)
|
|
|
1,052
|
|
|
(108)
|
|
|
Cash Flow Hedges, net of tax:
|
|
|
|
|
|
|
Unrealized gain (loss) on commodity contract cash flow hedges, net of tax of $1,392, $(176) and $(555), respectively
|
3,643
|
|
|
(434)
|
|
|
(1,371)
|
|
|
Unrealized (loss) on interest rate swap cash flow hedges, net of tax of $(12) in 2020
|
(28)
|
|
|
—
|
|
|
—
|
|
|
Total Other Comprehensive Income (Loss)
|
3,402
|
|
|
561
|
|
|
(1,534)
|
|
|
Comprehensive Income
|
$
|
74,900
|
|
|
$
|
65,714
|
|
|
$
|
55,046
|
|
The accompanying notes are an integral part of the financial statements.
Chesapeake Utilities Corporation 2020 Form 10-K Page 51
Chesapeake Utilities Corporation and Subsidiaries
Consolidated Balance Sheets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
Assets
|
2020
|
|
2019
|
|
(in thousands, except shares and per share data)
|
|
|
|
|
Property, Plant and Equipment
|
|
|
|
|
Regulated Energy
|
$
|
1,577,576
|
|
|
$
|
1,441,473
|
|
|
Unregulated Energy
|
300,647
|
|
|
265,209
|
|
|
Other businesses and eliminations
|
30,769
|
|
|
39,850
|
|
|
Total property, plant and equipment
|
1,908,992
|
|
|
1,746,532
|
|
|
Less: Accumulated depreciation and amortization
|
(368,743)
|
|
|
(336,876)
|
|
|
Plus: Construction work in progress
|
60,929
|
|
|
54,141
|
|
|
Net property, plant and equipment
|
1,601,178
|
|
|
1,463,797
|
|
|
Current Assets
|
|
|
|
|
Cash and cash equivalents
|
3,499
|
|
|
6,985
|
|
|
Trade and other receivables
|
61,675
|
|
|
50,899
|
|
|
Less: Allowance for credit losses
|
(4,785)
|
|
|
(1,337)
|
|
|
Trade receivables, net
|
56,890
|
|
|
49,562
|
|
|
Accrued revenue
|
21,527
|
|
|
20,846
|
|
|
Propane inventory, at average cost
|
5,906
|
|
|
5,824
|
|
|
Other inventory, at average cost
|
5,539
|
|
|
6,067
|
|
|
Regulatory assets
|
10,786
|
|
|
5,144
|
|
|
Storage gas prepayments
|
2,455
|
|
|
3,541
|
|
|
Income taxes receivable
|
12,885
|
|
|
20,050
|
|
|
Prepaid expenses
|
13,239
|
|
|
13,928
|
|
|
Derivative assets, at fair value
|
3,269
|
|
|
—
|
|
|
Other current assets
|
436
|
|
|
2,879
|
|
|
|
|
|
|
|
Total current assets
|
136,431
|
|
|
134,826
|
|
|
Deferred Charges and Other Assets
|
|
|
|
|
Goodwill
|
38,731
|
|
|
32,668
|
|
|
Other intangible assets, net
|
8,292
|
|
|
8,129
|
|
|
Investments, at fair value
|
10,776
|
|
|
9,229
|
|
|
Operating lease right-of-use assets
|
11,194
|
|
|
11,563
|
|
|
Regulatory assets
|
113,806
|
|
|
73,407
|
|
|
Receivables and other deferred charges
|
12,079
|
|
|
49,579
|
|
|
|
|
|
|
|
Total deferred charges and other assets
|
194,878
|
|
|
184,575
|
|
|
Total Assets
|
$
|
1,932,487
|
|
|
$
|
1,783,198
|
|
The accompanying notes are an integral part of the financial statements.
Chesapeake Utilities Corporation 2020 Form 10-K Page 52
Chesapeake Utilities Corporation and Subsidiaries
Consolidated Balance Sheets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
Capitalization and Liabilities
|
2020
|
|
2019
|
|
(in thousands, except shares and per share data)
|
|
|
|
|
Capitalization
|
|
|
|
|
Stockholders’ equity
|
|
|
|
|
Preferred stock, par value $0.01 per share (authorized 2,000,000 shares), no shares issued and outstanding
|
$
|
—
|
|
|
$
|
—
|
|
|
Common stock, par value $0.4867 per share (authorized 50,000,000 shares)
|
8,499
|
|
|
7,984
|
|
|
Additional paid-in capital
|
348,482
|
|
|
259,253
|
|
|
Retained earnings
|
342,969
|
|
|
300,607
|
|
|
Accumulated other comprehensive loss
|
(2,865)
|
|
|
(6,267)
|
|
|
Deferred compensation obligation
|
5,679
|
|
|
4,543
|
|
|
Treasury stock
|
(5,679)
|
|
|
(4,543)
|
|
|
Total stockholders’ equity
|
697,085
|
|
|
561,577
|
|
|
Long-term debt, net of current maturities
|
508,499
|
|
|
440,168
|
|
|
Total capitalization
|
1,205,584
|
|
|
1,001,745
|
|
|
Current Liabilities
|
|
|
|
|
Current portion of long-term debt
|
13,600
|
|
|
45,600
|
|
|
Short-term borrowing
|
175,644
|
|
|
247,371
|
|
|
Accounts payable
|
60,253
|
|
|
54,068
|
|
|
Customer deposits and refunds
|
33,302
|
|
|
30,939
|
|
|
Accrued interest
|
2,905
|
|
|
2,554
|
|
|
Dividends payable
|
7,683
|
|
|
6,644
|
|
|
Accrued compensation
|
13,994
|
|
|
16,236
|
|
|
Regulatory liabilities
|
6,284
|
|
|
5,991
|
|
|
Derivative liabilities, at fair value
|
127
|
|
|
1,844
|
|
|
Other accrued liabilities
|
15,240
|
|
|
12,077
|
|
|
|
|
|
|
|
Total current liabilities
|
329,032
|
|
|
423,324
|
|
|
Deferred Credits and Other Liabilities
|
|
|
|
|
Deferred income taxes
|
205,388
|
|
|
180,656
|
|
|
Regulatory liabilities
|
142,736
|
|
|
127,744
|
|
|
Environmental liabilities
|
4,299
|
|
|
6,468
|
|
|
Other pension and benefit costs
|
30,673
|
|
|
30,569
|
|
|
Operating lease - liabilities
|
9,872
|
|
|
9,896
|
|
|
Deferred investment tax credits and other liabilities
|
4,903
|
|
|
2,796
|
|
|
Total deferred credits and other liabilities
|
397,871
|
|
|
358,129
|
|
|
Environmental and other commitments and contingencies (Note 20 and 21)
|
|
|
|
|
Total Capitalization and Liabilities
|
$
|
1,932,487
|
|
|
$
|
1,783,198
|
|
The accompanying notes are an integral part of the financial statements.
Chesapeake Utilities Corporation 2020 Form 10-K Page 53
Chesapeake Utilities Corporation and Subsidiaries
Consolidated Statements of Cash Flows
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31,
|
|
|
2020
|
|
2019
|
|
2018
|
|
(in thousands)
|
|
|
|
|
|
|
Operating Activities
|
|
|
|
|
|
|
Net Income
|
$
|
71,498
|
|
|
$
|
65,153
|
|
|
$
|
56,580
|
|
|
Adjustments to reconcile net income to net operating cash:
|
|
|
|
|
|
|
Depreciation and amortization
|
58,117
|
|
|
45,900
|
|
|
40,802
|
|
|
Depreciation and accretion included in operations expenses
|
9,599
|
|
|
8,752
|
|
|
8,535
|
|
|
Deferred income taxes, net
|
24,709
|
|
|
24,476
|
|
|
21,226
|
|
|
Gain on sale of discontinued operations
|
(200)
|
|
|
(7,344)
|
|
|
—
|
|
|
Realized gain (loss) on sale of assets/commodity contracts
|
(6,243)
|
|
|
(4,135)
|
|
|
5,497
|
|
|
Unrealized loss (gain) on investments/commodity contracts
|
(1,482)
|
|
|
(1,595)
|
|
|
429
|
|
|
Employee benefits and compensation
|
207
|
|
|
1,985
|
|
|
856
|
|
|
Share-based compensation
|
4,829
|
|
|
4,279
|
|
|
2,813
|
|
|
|
|
|
|
|
|
|
Changes in assets and liabilities:
|
|
|
|
|
|
|
Accounts receivable and accrued revenue
|
(7,426)
|
|
|
36,489
|
|
|
(16,311)
|
|
|
Propane inventory, storage gas and other inventory
|
1,709
|
|
|
8,227
|
|
|
2,107
|
|
|
Regulatory assets/liabilities, net
|
(4,973)
|
|
|
(7,812)
|
|
|
2,250
|
|
|
Prepaid expenses and other current assets
|
2,424
|
|
|
11,115
|
|
|
(7,421)
|
|
|
Accounts payable and other accrued liabilities
|
4,941
|
|
|
(62,021)
|
|
|
35,907
|
|
|
Income taxes receivable (payable)
|
7,165
|
|
|
(4,750)
|
|
|
(522)
|
|
|
Customer deposits and refunds
|
2,238
|
|
|
(1,811)
|
|
|
(596)
|
|
|
Accrued compensation
|
(2,473)
|
|
|
2,120
|
|
|
708
|
|
|
Other assets and liabilities, net
|
(5,723)
|
|
|
(16,064)
|
|
|
(35,498)
|
|
|
Net cash provided by operating activities
|
158,916
|
|
|
102,964
|
|
|
117,362
|
|
|
Investing Activities
|
|
|
|
|
|
|
Property, plant and equipment expenditures
|
(165,511)
|
|
|
(184,727)
|
|
|
(240,351)
|
|
|
Proceeds from sale of assets
|
8,080
|
|
|
427
|
|
|
782
|
|
|
Acquisitions, net of cash acquired
|
(22,231)
|
|
|
(23,988)
|
|
|
(16,654)
|
|
|
Proceeds from the sale of discontinued operations
|
200
|
|
|
22,871
|
|
|
—
|
|
|
Environmental expenditures
|
(2,169)
|
|
|
(1,170)
|
|
|
(625)
|
|
|
Net cash used in investing activities
|
(181,631)
|
|
|
(186,587)
|
|
|
(256,848)
|
|
|
Financing Activities
|
|
|
|
|
|
|
Common stock dividends
|
(27,161)
|
|
|
(24,693)
|
|
|
(22,043)
|
|
|
Issuance of stock for Dividend Reinvestment Plan
|
22,627
|
|
|
(721)
|
|
|
(706)
|
|
|
Proceeds from issuance of common stock, net of expenses
|
60,980
|
|
|
—
|
|
|
—
|
|
|
Tax withholding payments related to net settled stock compensation
|
(977)
|
|
|
(692)
|
|
|
(1,210)
|
|
|
Change in cash overdrafts due to outstanding checks
|
(825)
|
|
|
(1,174)
|
|
|
(5,943)
|
|
|
Net borrowings (repayments) under line of credit agreements
|
(71,637)
|
|
|
(45,913)
|
|
|
49,432
|
|
|
Proceeds from issuance of long-term debt
|
89,822
|
|
|
199,648
|
|
|
154,819
|
|
|
Repayment of long-term debt and finance lease obligation
|
(53,600)
|
|
|
(41,936)
|
|
|
(34,388)
|
|
|
Net cash provided by financing activities
|
19,229
|
|
|
84,519
|
|
|
139,961
|
|
|
Net (Decrease) Increase in Cash and Cash Equivalents
|
(3,486)
|
|
|
896
|
|
|
475
|
|
|
Cash and Cash Equivalents — Beginning of Period
|
6,985
|
|
|
6,089
|
|
|
5,614
|
|
|
Cash and Cash Equivalents — End of Period
|
$
|
3,499
|
|
|
$
|
6,985
|
|
|
$
|
6,089
|
|
Supplemental Cash Flow Disclosures (see Note 7)
The accompanying notes are an integral part of the financial statements.
Chesapeake Utilities Corporation 2020 Form 10-K Page 54
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, 2017
|
16,344,442
|
|
|
$
|
7,955
|
|
|
$
|
253,470
|
|
|
$
|
229,141
|
|
|
$
|
(4,272)
|
|
|
$
|
3,395
|
|
|
$
|
(3,395)
|
|
|
$
|
486,294
|
|
|
Net Income
|
—
|
|
|
—
|
|
|
—
|
|
|
56,580
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
56,580
|
|
|
Cumulative effect of the adoption of ASU 2014-09
|
—
|
|
|
—
|
|
|
—
|
|
|
(1,498)
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(1,498)
|
|
|
Reclassification upon the adoption of ASU 2018-02
|
—
|
|
|
—
|
|
|
—
|
|
|
907
|
|
|
(907)
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Other comprehensive loss
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(1,534)
|
|
|
—
|
|
|
—
|
|
|
(1,534)
|
|
|
Dividends declared ($1.4350 per share)
|
—
|
|
|
—
|
|
|
—
|
|
|
(23,600)
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(23,600)
|
|
|
Dividend reinvestment plan
|
—
|
|
|
—
|
|
|
(3)
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(3)
|
|
|
Share-based compensation and tax benefit (3) (4)
|
34,103
|
|
|
16
|
|
|
2,184
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
2,200
|
|
|
Treasury stock activities(2)
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
459
|
|
|
(459)
|
|
|
—
|
|
|
Balance at December 31, 2018
|
16,378,545
|
|
|
7,971
|
|
|
255,651
|
|
|
261,530
|
|
|
(6,713)
|
|
|
3,854
|
|
|
(3,854)
|
|
|
518,439
|
|
|
Net Income
|
—
|
|
|
—
|
|
|
—
|
|
|
65,153
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
65,153
|
|
|
Prior period reclassification
|
—
|
|
|
—
|
|
|
—
|
|
|
115
|
|
|
(115)
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Other comprehensive income
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
561
|
|
|
—
|
|
|
—
|
|
|
561
|
|
|
Dividends declared ($1.585 per share)
|
—
|
|
|
—
|
|
|
—
|
|
|
(26,191)
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(26,191)
|
|
|
Dividend reinvestment plan
|
—
|
|
|
—
|
|
|
(3)
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(3)
|
|
|
Share-based compensation and tax benefit (3) (4)
|
25,231
|
|
|
13
|
|
|
3,605
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
3,618
|
|
|
Treasury stock activities (2)
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
689
|
|
|
(689)
|
|
|
—
|
|
|
Balances at December 31, 2019
|
16,403,776
|
|
|
7,984
|
|
|
259,253
|
|
|
300,607
|
|
|
(6,267)
|
|
|
4,543
|
|
|
(4,543)
|
|
|
561,577
|
|
|
Net Income
|
—
|
|
|
—
|
|
|
—
|
|
|
71,498
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
71,498
|
|
|
Other comprehensive income
|
—
|
|
|
—
|
|
|
—
|
|
|
|
|
3,402
|
|
|
—
|
|
|
—
|
|
|
3,402
|
|
|
Dividends declared ($1.725 per share)
|
—
|
|
|
—
|
|
|
—
|
|
|
(29,106)
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(29,106)
|
|
|
Equity issuances under various plans (5)
|
1,023,609
|
|
|
498
|
|
|
85,353
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
85,851
|
|
|
Share-based compensation and tax benefit (3) (4)
|
34,456
|
|
|
17
|
|
|
3,876
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
3,893
|
|
|
Treasury stock activities (2)
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
1,136
|
|
|
(1,136)
|
|
|
—
|
|
|
Cumulative effect of the adoption of ASU 2016-13
|
—
|
|
|
—
|
|
|
—
|
|
|
(30)
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(30)
|
|
|
Balances at December 31, 2020
|
17,461,841
|
|
|
$
|
8,499
|
|
|
$
|
348,482
|
|
|
$
|
342,969
|
|
|
$
|
(2,865)
|
|
|
$
|
5,679
|
|
|
$
|
(5,679)
|
|
|
$
|
697,085
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(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 Consolidated Statements of Stockholders’ Equity.
(2) Includes 105,087, 95,329 and 97,053 shares at December 31, 2020, 2019 and 2018, respectively, held in a Rabbi Trust related to our Non-Qualified Deferred Compensation Plan.
(3) Includes amounts for shares issued for directors’ compensation.
(4) The shares issued under the SICP are net of shares withheld for employee taxes. For 2020, 2019 and 2018, we withheld 10,319, 7,635 and 16,918 shares, respectively, for taxes.
(5) Includes the Retirement Savings Plan, DRIP and ATM equity issuances.
The accompanying notes are an integral part of the financial statements.
Chesapeake Utilities Corporation 2020 Form 10-K Page 55
Notes to the Consolidated Financial Statements
1. ORGANIZATION AND BASIS OF PRESENTATION
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 operations in the Mid-Atlantic region and Florida; (b) our unregulated natural gas transmission/supply operation in central and eastern Ohio; (c) our CHP plant in Florida that generates electricity and steam; and (d) our subsidiary, based in Florida, that provides CNG, LNG and RNG transportation and pipeline solutions, primarily to utilities and pipelines throughout the eastern United States.
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. Where necessary to improve comparability, prior period amounts have been changed to conform to current period presentation.
Beginning in the third quarter of 2019, our management began executing a strategy to sell the operating assets of PESCO. In the fourth quarter of 2019, we closed on four separate transactions to sell PESCO's assets and contracts. As a result of these sales, we have fully exited the natural gas marketing business. Accordingly, PESCO’s historical financial results are reflected in our consolidated financial statements as discontinued operations, which required retrospective application to financial information for all periods presented. Refer to Note 4, Acquisitions and Divestitures for further information.
Effects of COVID-19
On March 13, 2020, the CDC declared a national emergency due to the rapidly growing outbreak of COVID-19. In response to this declaration and the rapid spread of COVID-19 within the United States, federal, state and local governments throughout the country imposed varying degrees of restrictions on social and commercial activity to promote social distancing in an effort to slow the spread of the illness. These restrictions have continued to significantly impact economic conditions in the United States. We are considered an “essential business,” which allows us to continue our operational activities and construction projects while the social distancing restrictions remain in place. In response to the COVID-19 pandemic and related restrictions, we implemented our pandemic response plan, which includes having all employees who can work remotely do so in order to promote social distancing and providing personal protective equipment to field employees to reduce the spread of COVID-19.
Impacts from the restrictions imposed in our service territories and the implementation of our pandemic response plan, included reduced consumption of energy largely in the commercial and industrial sectors, higher bad debt expenses and incremental expenses associated with COVID-19, including personal protective equipment and premium pay for field personnel. The additional operating expenses we incurred support the ongoing delivery of our essential services during these unprecedented times. In the fourth quarter of 2020, we established regulatory assets, as currently authorized by the Delaware, Maryland and Florida PSCs, associated with the incremental expenses incurred by our natural gas and electric distribution businesses as a result of the pandemic. We are continuing to provide timely updates, monitor developments affecting our employees, customers, suppliers and stockholders, and take the necessary precautions to operate safely and comply with the CDC, Occupational Safety and Health Administration, state and local requirements. Refer to Note 19, Rates and Other Regulatory Activities, for further information on the regulated assets established as a result of the incremental expenses associated with COVID-19.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
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 about various future economic factors that are difficult to predict and are beyond our control; therefore, actual results could differ from these estimates. As additional information becomes available, or actual amounts are determined, recorded estimates are revised. Consequently, operating results can be affected by revisions to prior accounting estimates.
Chesapeake Utilities Corporation 2020 Form 10-K Page 56
Notes to the Consolidated Financial Statements
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, allowance for funds used during construction ("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 for continuing operations by classification as of December 31, 2020 and 2019 is provided in the following table:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
(in thousands)
|
2020
|
|
2019
|
|
Property, plant and equipment
|
|
|
|
|
Regulated Energy
|
|
|
|
|
Natural gas distribution - Delmarva Peninsula and Florida
|
$
|
782,329
|
|
|
$
|
705,095
|
|
|
Natural gas transmission - Delmarva Peninsula, Pennsylvania and Florida
|
667,538
|
|
|
608,727
|
|
|
Electric distribution
|
127,710
|
|
|
127,651
|
|
|
Unregulated Energy
|
|
|
|
|
Propane operations – Mid-Atlantic and Florida
|
151,258
|
|
|
141,945
|
|
|
Natural gas transmission and supply – Ohio
|
87,962
|
|
|
73,658
|
|
|
Electricity and steam generation
|
36,521
|
|
|
35,436
|
|
|
Mobile CNG and pipeline solutions
|
24,905
|
|
|
14,014
|
|
|
|
|
|
|
|
Other
|
30,769
|
|
|
40,006
|
|
|
Total property, plant and equipment
|
1,908,992
|
|
|
1,746,532
|
|
|
Less: Accumulated depreciation and amortization
|
(368,743)
|
|
|
(336,876)
|
|
|
Plus: Construction work in progress
|
60,929
|
|
|
54,141
|
|
|
Net property, plant and equipment
|
$
|
1,601,178
|
|
|
$
|
1,463,797
|
|
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. Non-refundable contributions reduce property, plant and equipment at the time of such determination. As of December 31, 2020 and 2019, the non-refundable contributions totaled $2.9 million and $2.1 million, respectively.
AFUDC
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 ratemaking purposes when the completed projects are placed in service. During the years ended December 31, 2020, 2019 and 2018 AFUDC totaled $0.7 million, $0.7 million and $1.9 million, respectively, which was reflected as a reduction of interest charges.
Leases
We have entered into lease arrangements for office space, land, equipment, pipeline facilities and warehouses. These leases enable us to conduct our business operations in the regions in which we operate. Our operating leases are included in operating lease right-of-use assets, other accrued liabilities, and operating lease - liabilities in our consolidated balance sheets.
Right-of-use assets represent our right to use an underlying asset for the lease term and lease liabilities represent our obligation to make lease payments arising from the lease. Operating lease right-of-use assets and liabilities are recognized at commencement date based on the present value of lease payments over the lease term. Leases with an initial term of 12 months or less are not recorded on our balance sheet; we recognize lease expense for these leases on a straight-line basis over the lease
Chesapeake Utilities Corporation 2020 Form 10-K Page 57
Notes to the Consolidated Financial Statements
term. Our leases do not provide an implicit lease rate, therefore, we utilize our incremental borrowing rate, as the basis to calculate the present value of future lease payments, at lease commencement. Our incremental borrowing rate represents the rate that we would have to pay to borrow funds on a collateralized basis over a similar term and in a similar economic environment.
We have lease agreements with lease and non-lease components. At the adoption of ASC 842, we elected not to separate non-lease components from all classes of our existing leases. The non-lease components have been accounted for as part of the single lease component to which they are related. See Note 15, Leases, for additional information.
Jointly-owned Pipelines
Property, plant and equipment for our Florida natural gas transmission operation included $26.4 million of assets at December 31, 2020, which consist of the 26-mile Callahan intrastate transmission pipeline in Nassau County, Florida jointly-owned with Seacoast Gas Transmission. Peninsula Pipeline's ownership is 50 percent. The pipeline was placed in-service during the second quarter of 2020. Peninsula Pipeline's share of direct expenses for the jointly-owned pipeline are included in operating expenses of our consolidated statements of income. Accumulated depreciation for this pipeline totaled $0.3 million at December 31, 2020.
Property, plant and equipment for our Florida natural gas transmission operation also included $6.7 million of assets, at December 31, 2020 and 2019, which consisted of the 16-mile pipeline from the Duval/Nassau County line to Amelia Island in Nassau County, Florida, previously jointly owned with Peoples Gas. Effective October 2020, the parties agreed to terminate the pre-existing ownership and capacity agreement and rescind their ownership interests in exchange for defined sections of the pipeline. This resulted in Peninsula Pipeline taking a 100% ownership in the northern end of the pipeline. Accumulated depreciation for this pipeline totaled $1.7 million and $1.5 million at December 31, 2020 and 2019, respectively.
Impairment of Long-lived Assets
We periodically evaluate whether events or circumstances have occurred, which indicate that other long-lived assets may not be fully recoverable. The determination of whether an impairment has occurred is based on an estimate of undiscounted future cash flows attributable to the asset, compared to the carrying value of the asset. When such events or circumstances are present, we record an impairment loss equal to the excess of the asset's carrying value over its fair value, if any.
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, 2020, 2019 and 2018:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2020
|
|
2019
|
|
2018
|
|
Natural gas distribution – Delmarva Peninsula
|
2.5%
|
|
2.5%
|
|
2.5%
|
|
Natural gas distribution – Florida
|
2.5%
|
|
2.6%
|
|
2.9%
|
|
Natural gas transmission – Delmarva Peninsula
|
2.7%
|
|
2.6%
|
|
2.7%
|
|
Natural gas transmission – Florida
|
2.3%
|
|
2.4%
|
|
2.3%
|
|
Electric distribution
|
2.9%
|
|
3.4%
|
|
3.4%
|
Chesapeake Utilities Corporation 2020 Form 10-K Page 58
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, 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, 2020, 2019 and 2018, we reported $9.6 million, $8.8 million and $8.5 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 determined 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. 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. Eastern Shore’s revenues are based on rates approved by the FERC. The FERC has also authorized Eastern Shore to negotiate rates above or below the FERC-approved maximum rates, which customers can elect as an alternative to FERC-approved maximum 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 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.
All of our regulated natural gas and electric distribution operations have fuel cost recovery mechanisms, except for two utilities that provide only unbundled delivery service (Chesapeake Utilities' Central Florida Gas division and FPU's Indiantown division). These mechanisms allow us to adjust billing rates, without further regulatory approvals, to reflect changes in the cost
Chesapeake Utilities Corporation 2020 Form 10-K Page 59
Notes to the Consolidated Financial Statements
of purchased fuel. Differences between the cost of fuel purchased and delivered are 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.
We charge flexible rates to our natural gas distribution industrial interruptible customers who can use alternative fuels. Interruptible service imposes no contractual obligation to deliver or receive natural gas on a firm service basis.
Our unregulated propane delivery businesses record revenue in the period the products are delivered and/or services are rendered for their bulk delivery customers. For propane customers with meters whose billing cycles do not coincide with our accounting periods, we accrue unbilled revenue for product delivered but not yet billed and bill customers at the end of an accounting period, as we do in our regulated energy businesses.
Our Ohio natural gas transmission/supply operation recognizes revenues based on actual volumes of natural gas shipped using contractual rates based upon index prices that are published monthly.
Eight Flags records revenues based on the amount of electricity and steam generated and sold to its customers.
Our mobile compressed natural gas operation recognizes revenue for CNG services at the end of each calendar month for services provided during the month based on agreed upon rates for labor, equipment utilized, costs incurred for natural gas compression, miles driven, mobilization and demobilization fees.
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 commodity cost of natural gas, electricity and propane, costs of pipeline capacity needed to transport and store natural gas, transmission costs for electricity, costs to gather and process natural gas, costs to transport propane to/from our storage facilities or our mobile CNG equipment to customer locations, and steam and electricity generation costs. Depreciation expense is not included in 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 removal costs 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 Credit Losses
Accounts receivable consist primarily of amounts due for sales of natural gas, electricity and propane and transportation and distribution services to customers. An allowance for doubtful accounts is recorded against amounts due based upon our collections experiences and an assessment of our 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, natural gas, electricity and propane prices, impacts from pandemics and general economic conditions. Accounts receivable 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 their net realizable value. There was no lower-of-cost-or-net realizable value adjustment for the years ended December 31, 2020, 2019 or 2018.
Goodwill and Other Intangible Assets
Goodwill is not amortized but is tested for impairment at least annually, or more frequently 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 implied fair value. The testing of goodwill for the years ended December 31, 2020, 2019 and 2018 indicated no goodwill impairment. Other intangible assets are amortized on a straight-line basis over their estimated economic useful lives.
Chesapeake Utilities Corporation 2020 Form 10-K Page 60
Notes to the Consolidated Financial Statements
Other Deferred Charges
Other deferred charges 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 regulatory body (state PSC or FERC), 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 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 FTSE Index, 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 reviewed periodically and is based on the actuarial table that best reflects the expected mortality of the plan participants.
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 our consolidated 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 consolidated 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.
Chesapeake Utilities Corporation 2020 Form 10-K Page 61
Notes to the Consolidated Financial Statements
Financial Instruments
We utilize financial instruments to mitigate commodity price risk associated with fluctuations of natural gas, electricity and propane and to mitigate interest rate risk. Our propane operations 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. 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 or call option, 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.
Our natural gas, electric and propane 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 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.
We manage interest rate risk by entering into derivative contracts to hedge the variability in cash flows attributable to changes in the short-term borrowing rates. We designate and account for the interest rate swaps as cash flows hedges. Accordingly, unrealized gains and losses associated with the interest rate swaps are recorded as a component of accumulated other comprehensive income (loss). When the interest rate swaps settle, the realized gain or loss will be recorded in the income statement and recognized as a component of interest charges.
Recently Adopted Accounting Standards
Financial Instruments - Credit Losses (ASC 326) - In June 2016, the FASB issued ASU 2016-13, Measurement of Credit Losses on Financial Instruments, which changes how entities account for credit losses for most financial assets and certain other instruments, and subsequent guidance which served to clarify or amend the original standard. ASU 2016-13 and the related amendments require entities to estimate lifetime expected credit losses for trade receivables and to provide additional disclosure related to credit losses. We adopted ASU 2016-13 on January 1, 2020 and recorded an immaterial cumulative effect in retained earnings as of that date. As a result, prior period financial information has not been recast and continues to be reported under the accounting guidance that was effective during those periods.
Our estimate for expected credit losses has been developed by analyzing our portfolio of financial assets that present potential credit exposure risk. These assets consist solely of our trade receivables from customers and contract assets. The estimate is based on five years of historical collections experience, a review of current economic and operating conditions in our service territories, and an examination of economic indicators which provide a reasonable and supportable basis of potential future activity. Those indicators include metrics which we believe provide insight into the future collectability of our trade receivables such as unemployment rates and economic growth statistics in our service territories.
When determining estimated credit losses, we analyzed the balance of our trade receivables based on the underlying line of business. This resulted in an examination of trade receivables from our energy distribution, energy transmission, energy delivery services and propane operations businesses. Our energy distribution business consists of all our regulated distribution utility (natural gas and electric) operations on the Delmarva Peninsula and in Florida. These business units have the ability to recover their costs through the rate making process, which can include consideration for amounts historically written off to be included in rate base. Therefore, they possess a mechanism to recover credit losses which we believe reduces their exposure to credit risk. Our energy transmission and energy delivery services business units consist of our natural gas pipelines and our mobile CNG delivery operations. The majority of customers served by these business units are regulated distribution utilities who also have the ability to recover their costs. We believe this cost recovery mechanism significantly reduces the amount of credit risk. Our propane operations are unregulated and do not have the same ability to recover their costs as our regulated operations. However, historically our propane operations have not had material write offs relative to the amount of revenues generated.
Our estimate of expected credit losses reflects our anticipated losses associated with our trade receivables as a result of non-payment from our customers beginning the day the trade receivable is established. We believe the risk of loss associated with trade receivables classified as current presents the least amount of credit exposure risk and therefore, we assign a lower estimate to our current trade receivables. As our trade receivables age outside of their expected due date, our estimate increases. Our
Chesapeake Utilities Corporation 2020 Form 10-K Page 62
Notes to the Consolidated Financial Statements
allowance for credit losses relative to the balance of our trade receivables has historically been immaterial as a result of on time payment activity from our customers.
During the first quarter of 2020, COVID-19 began to rapidly spread within the United States. Federal, state and local governments throughout the country imposed restrictions to promote social distancing to slow the spread of the virus, which has also had the effect of limiting commercial activity. These measures have resulted in significant job losses and a slowing of economic activity across the United States and in the areas that we serve. We have considered the impact of COVID-19 on our receivables for the twelve months ended December 31, 2020, monitored developments that impact our customers’ ability to pay and have revised our estimates of expected credit losses to reflect these impacts.
|
|
|
|
|
|
|
|
(in thousands)
|
|
|
Balance at December 31, 2019
|
$
|
1,337
|
|
|
Additions:
|
|
|
Provision for credit losses
|
3,827
|
|
|
Recoveries
|
613
|
|
|
Deductions:
|
|
|
Write offs
|
(992)
|
|
|
Balance at December 31, 2020
|
$
|
4,785
|
|
Fair Value Measurement (ASC 820) - In August 2018, the FASB issued ASU 2018-13, Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement, which removes, modifies and adds certain disclosure requirements on fair value measurements in ASC 820. We adopted ASU 2018-13 beginning January 1, 2020 and, since the changes only impacted disclosures, its adoption did not have a material impact on our results of operations or financial position.
Intangibles - Goodwill (ASC 350) - In January 2017, the FASB issued ASU 2017-04, Simplifying the Test for Goodwill Impairment, which simplifies how an entity is required to test goodwill for impairment by eliminating Step 2 from the goodwill impairment test. ASU 2017-04 was effective beginning January 1, 2020. The amendments included in this ASU are to be applied prospectively, and its adoption did not have a material impact on our results of operations or financial position.
Chesapeake Utilities Corporation 2020 Form 10-K Page 63
Notes to the Consolidated Financial Statements
3. EARNINGS PER SHARE
The following table presents the calculation of our basic and diluted earnings per share for the years ended December 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31,
|
|
|
2020
|
|
2019
|
|
2018
|
|
(in thousands, except shares and per share data)
|
|
|
|
|
|
|
Calculation of Basic Earnings Per Share:
|
|
|
|
|
|
|
Income from Continuing Operations
|
$
|
70,642
|
|
|
$
|
61,100
|
|
|
$
|
56,968
|
|
|
Income/(Loss) from Discontinued Operations
|
856
|
|
|
4,053
|
|
|
(388)
|
|
|
Net Income
|
$
|
71,498
|
|
|
$
|
65,153
|
|
|
$
|
56,580
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding
|
16,711,579
|
|
|
16,398,443
|
|
|
16,369,616
|
|
|
Earnings Per Share from Continuing Operations
|
$
|
4.23
|
|
|
$
|
3.73
|
|
|
$
|
3.48
|
|
|
Earnings/(Loss) Per Share from Discontinued Operations
|
0.05
|
|
|
0.24
|
|
|
(0.02)
|
|
|
Basic Earnings Per Share
|
$
|
4.28
|
|
|
$
|
3.97
|
|
|
$
|
3.46
|
|
|
|
|
|
|
|
|
|
Calculation of Diluted Earnings Per Share:
|
|
|
|
|
|
|
Reconciliation of Denominator:
|
|
|
|
|
|
|
Weighted average shares outstanding — Basic
|
16,711,579
|
|
|
16,398,443
|
|
|
16,369,616
|
|
|
Effect of dilutive securities — Share-based compensation
|
59,156
|
|
|
50,043
|
|
|
50,254
|
|
|
Adjusted denominator — Diluted
|
16,770,735
|
|
|
16,448,486
|
|
|
16,419,870
|
|
|
Earnings Per Share from Continuing Operations
|
$
|
4.21
|
|
|
$
|
3.72
|
|
|
$
|
3.47
|
|
|
Earnings/(Loss) Per Share from Discontinued Operations
|
0.05
|
|
|
0.24
|
|
|
(0.02)
|
|
|
Diluted Earnings Per Share
|
$
|
4.26
|
|
|
$
|
3.96
|
|
|
$
|
3.45
|
|
4. ACQUISITIONS AND DIVESTITURES
Acquisition of Western Natural Gas
In October 2020, Sharp acquired certain propane operating assets of Western Natural Gas, which provides propane distribution service throughout Jacksonville, Florida and the surrounding communities, for approximately $6.7 million, net of cash acquired. Additionally, the purchase price included $0.3 million of working capital. We recorded contingent consideration of $0.3 million related to the seller's adherence to various provisions contained in the purchase agreement through the first anniversary of the transaction closing. We accounted for this acquisition as a business combination within our Unregulated Energy Segment beginning in the fourth quarter of 2020. There are multiple strategic benefits to this acquisition including it: (i) expands our propane territory serviced in Florida and (ii) includes an established customer base with opportunities for future growth.
In connection with this acquisition, we recorded $3.5 million in property plant and equipment, $1.4 million in intangible assets associated with customer relationships and non-compete agreements and $1.8 million in goodwill, all of which is deductible for income tax purposes. The amounts recorded in conjunction with the acquisition are preliminary, and subject to adjustment based on contractual provisions. The purchase price allocation will be finalized in the fourth quarter of 2021.
Acquisition of Elkton Gas
In July 2020, we closed on the acquisition of Elkton Gas, which provides natural gas distribution service to approximately 7,000 residential and commercial customers within a franchised area of Cecil County, Maryland for approximately $15.6 million, net of cash acquired. Additionally, the purchase price included $0.6 million of working capital. Elkton Gas’ territory is contiguous to our franchised service territory in Cecil County, Maryland. Elkton Gas continues to operate out of its existing office with the same local personnel who are now also serving our existing franchised service territory in Cecil County.
In connection with this acquisition, we recorded $15.9 million in property, plant and equipment, $0.6 million in accounts receivable, $2.6 million in other liabilities, $2.6 million in regulatory liabilities and $4.3 million in goodwill, all of which is
Chesapeake Utilities Corporation 2020 Form 10-K Page 64
Notes to the Consolidated Financial Statements
deductible for income tax purposes. All of the assets and liabilities are recorded in the Regulated Energy segment. The amounts recorded in conjunction with the acquisition are preliminary, and subject to adjustment based on contractual provisions. The purchase price allocation will be finalized in the third quarter of 2021.
Acquisition of Boulden
In December 2019, Sharp acquired certain propane operating assets of Boulden, which provides propane distribution service to approximately 5,200 customers in Delaware, Maryland and Pennsylvania, for approximately $24.6 million, net of cash acquired. Additionally, the purchase price included $0.2 million of working capital. We recorded contingent consideration of $0.6 million related to the seller's adherence to various provisions contained in the purchase agreement through the first anniversary of the transaction closing. We accounted for the purchase of the operating assets of Boulden as a business combination and integrated the business into our Sharp operation. There are multiple strategic benefits to this acquisition including it: (i) overlays with the Elkton Gas acquisition to establish an integrated energy delivery platform in Cecil County, Maryland; (ii) includes an established customer base with opportunities for future growth; and (iii) enables operational synergies, including supply, for the northern Delmarva Peninsula.
In connection with this acquisition, we recorded $8.3 million in property, plant and equipment, $5.1 million in intangible assets associated with customer relationships and non-compete agreements and $11.2 million in goodwill, all of which is deductible for income tax purposes. The amounts recorded in conjunction with the acquisition were finalized in the fourth quarter of 2020.
These acquisitions generated the following operating revenues and income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended
|
|
For the Year Ended
|
|
|
|
December 31, 2020
|
|
December 31, 2019
|
|
|
|
Operating Revenues
|
|
Operating Income
|
|
Operating Revenues
|
|
Operating Income
|
|
(in thousands)
|
|
|
|
|
|
|
|
|
|
Western Natural Gas
|
|
$
|
555
|
|
|
$
|
90
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
Elkton Gas
|
|
$
|
2,399
|
|
|
$
|
418
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
Boulden
|
|
$
|
5,717
|
|
|
$
|
1,854
|
|
|
$
|
550
|
|
|
$
|
239
|
|
Divestiture of PESCO
During the fourth quarter of 2019, we sold PESCO's assets and contracts in four separate transactions and exited the natural gas marketing business. In 2020 and 2019, we received a total of $23.1 million in cash consideration from the buyers, inclusive of working capital of $8.0 million and recognized total pre-tax gain of $7.5 million ($5.4 million after tax) in connection with these transactions. As a result of the sales agreements, we began to report PESCO as discontinued operations during the third quarter of 2019, excluded PESCO's performance from continuing operations for all periods presented and classified its assets and liabilities as held for sale where applicable.
Operating revenues and costs of sales from the previous reporting periods, which were previously eliminated in consolidation related to intercompany sales and purchases, have been grossed up and are now reflected as a component of operating revenues and costs of sales for the year ended December 31, 2019 and 2018. We recast these amounts because, upon completion of the sales transactions, we continued to provide and receive services from the buyers through the remainder of the contractual terms.
Chesapeake Utilities Corporation 2020 Form 10-K Page 65
Notes to the Consolidated Financial Statements
A summary of discontinued operations presented in the consolidated statements of income includes the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31,
|
|
(in thousands)
|
|
2020
|
|
2019
|
|
2018
|
|
Operating revenues(1)
|
|
$
|
26
|
|
|
$
|
161,289
|
|
|
$
|
258,713
|
|
|
Cost of sales(1)
|
|
—
|
|
|
157,646
|
|
|
252,111
|
|
|
Other operating expenses
|
|
230
|
|
|
5,221
|
|
|
6,825
|
|
|
Operating loss
|
|
(204)
|
|
|
(1,578)
|
|
|
(223)
|
|
|
Interest and other income (expense)
|
|
1,013
|
|
|
(297)
|
|
|
(294)
|
|
|
Earnings / (Loss) from Discontinued Operations before income taxes
|
|
809
|
|
|
(1,875)
|
|
|
(517)
|
|
|
Gain on sale of Discontinued Operations
|
|
200
|
|
|
7,344
|
|
|
—
|
|
|
Income tax (benefit) / expense
|
|
153
|
|
|
1,416
|
|
|
(129)
|
|
|
Gain / (Loss) from Discontinued Operations, Net of Tax
|
|
$
|
856
|
|
|
$
|
4,053
|
|
|
$
|
(388)
|
|
(1) Included in operating revenues and cost of sales for the years ended December 31, 2019 and 2018, is $19.8 million, and $31.5 million respectively, representing amounts which had been previously eliminated in consolidation related to intercompany activity which continued with the buyers after the disposition of the assets of PESCO.
Since the disposition of the assets and contracts of PESCO was completed in the fourth quarter of 2019, there were no assets or liabilities classified as held for sale at December 31, 2020 and December 31, 2019.
We have elected not to separately disclose discontinued operations on the consolidated statements of cash flows. The following table summarizes significant statements of cash flows data related to the discontinued operations of PESCO:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31,
|
|
(in thousands)
|
|
2019
|
|
2018
|
|
Depreciation and amortization
|
|
$
|
477
|
|
|
$
|
582
|
|
|
Property, plant and equipment expenditures
|
|
$
|
—
|
|
|
$
|
115
|
|
|
Deferred income taxes
|
|
$
|
(125)
|
|
|
$
|
1,088
|
|
|
Realized / (loss) gain on commodity contracts
|
|
$
|
(2,161)
|
|
|
$
|
5,002
|
|
Our Delmarva Peninsula natural gas distribution operations had executed asset management agreements with PESCO to manage their natural gas transportation and storage capacity. The agreements were effective as of April 1, 2017, and expired on March 31, 2020. As a result of the sale of the assets of PESCO, effective October 1, 2019, these agreements were managed by New Jersey Resource Energy Services Company through the remainder of the contract term. In March 2020, our Delmarva Peninsula natural gas distribution operations entered into new asset management agreements with a third party to manage their natural gas transportation and storage capacity. The agreements were effective as of April 1, 2020, and expire on March 31, 2023. In addition to the asset management agreements, Eastern Shore had several firm transportation and capacity arrangements with PESCO, which were included in the assets sold to United Energy Trading, LLC. Eastern Shore will continue to fulfill these arrangements throughout the remainder of their contractual term. These agreements currently have expiration dates of November 30, 2021.
5. REVENUE RECOGNITION
We recognize revenue when our performance obligations under contracts with customers have been satisfied, which generally occurs when our businesses have delivered or transported natural gas, electricity or propane to customers. We exclude sales taxes and other similar taxes from the transaction price. Typically, our customers pay for the goods and/or services we provide in the month following the satisfaction of our performance obligation. The following table displays revenue from continuing operations by major source based on product and service type for the years ended December 31, 2020, 2019 and 2018:
Chesapeake Utilities Corporation 2020 Form 10-K Page 66
Notes to the Consolidated Financial Statements
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the year ended December 31, 2020
|
|
(in thousands)
|
|
Regulated Energy
|
|
Unregulated Energy
|
|
Other and Eliminations
|
|
Total
|
|
Energy distribution
|
|
|
|
|
|
|
|
|
|
Delaware natural gas division
|
|
$
|
63,389
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
63,389
|
|
|
Florida natural gas division
|
|
30,850
|
|
|
—
|
|
|
—
|
|
|
30,850
|
|
|
FPU electric distribution
|
|
76,863
|
|
|
—
|
|
|
—
|
|
|
76,863
|
|
|
FPU natural gas distribution
|
|
90,150
|
|
|
—
|
|
|
—
|
|
|
90,150
|
|
|
Maryland natural gas division
|
|
21,853
|
|
|
—
|
|
|
—
|
|
|
21,853
|
|
|
Sandpiper natural gas/propane operations
|
|
17,214
|
|
|
—
|
|
|
—
|
|
|
17,214
|
|
|
Elkton Gas
|
|
2,399
|
|
|
|
|
|
|
2,399
|
|
|
Total energy distribution
|
|
302,718
|
|
|
—
|
|
|
—
|
|
|
302,718
|
|
|
|
|
|
|
|
|
|
|
|
|
Energy transmission
|
|
|
|
|
|
|
|
|
|
Aspire Energy
|
|
—
|
|
|
27,951
|
|
|
—
|
|
|
27,951
|
|
|
Aspire Energy Express
|
|
16
|
|
|
—
|
|
|
—
|
|
|
16
|
|
|
Eastern Shore
|
|
75,117
|
|
|
—
|
|
|
—
|
|
|
75,117
|
|
|
Peninsula Pipeline
|
|
23,080
|
|
|
—
|
|
|
—
|
|
|
23,080
|
|
|
Total energy transmission
|
|
98,213
|
|
|
27,951
|
|
|
—
|
|
|
126,164
|
|
|
|
|
|
|
|
|
|
|
|
|
Energy generation
|
|
|
|
|
|
|
|
|
|
Eight Flags
|
|
—
|
|
|
16,147
|
|
|
—
|
|
|
16,147
|
|
|
|
|
|
|
|
|
|
|
|
|
Propane operations
|
|
|
|
|
|
|
|
|
|
Propane delivery operations
|
|
—
|
|
|
100,744
|
|
|
—
|
|
|
100,744
|
|
|
|
|
|
|
|
|
|
|
|
|
Energy delivery services
|
|
|
|
|
|
|
|
|
|
Marlin Gas Services
|
|
—
|
|
|
7,818
|
|
|
—
|
|
|
7,818
|
|
|
|
|
|
|
|
|
|
|
|
|
Other and eliminations
|
|
|
|
|
|
|
|
|
|
Eliminations
|
|
(48,185)
|
|
|
(134)
|
|
|
(17,602)
|
|
|
(65,921)
|
|
|
Other
|
|
—
|
|
|
—
|
|
|
528
|
|
|
528
|
|
|
Total other and eliminations
|
|
(48,185)
|
|
|
(134)
|
|
|
(17,074)
|
|
|
(65,393)
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating revenues (1)
|
|
$
|
352,746
|
|
|
$
|
152,526
|
|
|
$
|
(17,074)
|
|
|
$
|
488,198
|
|
(1) Total operating revenues for the year ended December 31, 2020, include other revenue (revenues from sources other than contracts with customers) of $1.4 million and $0.2 million for our Regulated and Unregulated Energy segments, respectively. The sources of other revenues include revenue from alternative revenue programs related to revenue normalization for Maryland division and Sandpiper and late fees.
Chesapeake Utilities Corporation 2020 Form 10-K Page 67
Notes to the Consolidated Financial Statements
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the year ended December 31, 2019
|
|
(in thousands)
|
|
Regulated Energy
|
|
Unregulated Energy
|
|
Other and Eliminations
|
|
Total
|
|
Energy distribution
|
|
|
|
|
|
|
|
|
|
Delaware natural gas division
|
|
$
|
62,659
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
62,659
|
|
|
Florida natural gas division
|
|
28,485
|
|
|
—
|
|
|
—
|
|
|
28,485
|
|
|
FPU electric distribution
|
|
77,416
|
|
|
—
|
|
|
—
|
|
|
77,416
|
|
|
FPU natural gas distribution
|
|
82,418
|
|
|
—
|
|
|
—
|
|
|
82,418
|
|
|
Maryland natural gas division
|
|
22,517
|
|
|
—
|
|
|
—
|
|
|
22,517
|
|
|
Sandpiper natural gas/propane operations
|
|
19,068
|
|
|
—
|
|
|
—
|
|
|
19,068
|
|
|
Total energy distribution
|
|
292,563
|
|
|
—
|
|
|
—
|
|
|
292,563
|
|
|
|
|
|
|
|
|
|
|
|
|
Energy transmission
|
|
|
|
|
|
|
|
|
|
Aspire Energy
|
|
—
|
|
|
32,493
|
|
|
—
|
|
|
32,493
|
|
|
Aspire Energy Express
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Eastern Shore
|
|
72,924
|
|
|
—
|
|
|
—
|
|
|
72,924
|
|
|
Peninsula Pipeline
|
|
16,453
|
|
|
—
|
|
|
—
|
|
|
16,453
|
|
|
Total energy transmission
|
|
89,377
|
|
|
32,493
|
|
|
—
|
|
|
121,870
|
|
|
|
|
|
|
|
|
|
|
|
|
Energy generation
|
|
|
|
|
|
|
|
|
|
Eight Flags
|
|
—
|
|
|
16,749
|
|
|
—
|
|
|
16,749
|
|
|
|
|
|
|
|
|
|
|
|
|
Propane operations
|
|
|
|
|
|
|
|
|
|
Propane delivery operations
|
|
—
|
|
|
109,614
|
|
|
—
|
|
|
109,614
|
|
|
|
|
|
|
|
|
|
|
|
|
Energy delivery services
|
|
|
|
|
|
|
|
|
|
Marlin Gas Services
|
|
—
|
|
|
5,702
|
|
|
—
|
|
|
5,702
|
|
|
|
|
|
|
|
|
|
|
|
|
Other and eliminations
|
|
|
|
|
|
|
|
|
|
Eliminations
|
|
(38,934)
|
|
|
(10,407)
|
|
|
(18,081)
|
|
|
(67,422)
|
|
|
Other
|
|
—
|
|
|
—
|
|
|
529
|
|
|
529
|
|
|
Total other and eliminations
|
|
(38,934)
|
|
|
(10,407)
|
|
|
(17,552)
|
|
|
(66,893)
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating revenues (1)
|
|
$
|
343,006
|
|
|
$
|
154,151
|
|
|
$
|
(17,552)
|
|
|
$
|
479,605
|
|
(1) Total operating revenues for the year ended December 31, 2019, include other revenue (revenues from sources other than contracts with customers of $(0.1) million and $0.3 million for our Regulated and Unregulated Energy segments, respectively. The sources of other revenues include revenue from alternative revenue programs related to revenue normalization for Maryland division and Sandpiper and late fees.
Chesapeake Utilities Corporation 2020 Form 10-K Page 68
Notes to the Consolidated Financial Statements
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the year ended December 31, 2018
|
|
(in thousands)
|
|
Regulated Energy
|
|
Unregulated Energy
|
|
Other and Eliminations
|
|
Total
|
|
Energy distribution
|
|
|
|
|
|
|
|
|
|
Delaware natural gas division
|
|
$
|
70,338
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
70,338
|
|
|
Florida natural gas division
|
|
25,341
|
|
|
—
|
|
|
—
|
|
|
25,341
|
|
|
FPU electric distribution
|
|
79,803
|
|
|
—
|
|
|
—
|
|
|
79,803
|
|
|
FPU natural gas distribution
|
|
81,118
|
|
|
—
|
|
|
—
|
|
|
81,118
|
|
|
Maryland natural gas division
|
|
24,172
|
|
|
—
|
|
|
—
|
|
|
24,172
|
|
|
Sandpiper natural gas/propane operations
|
|
22,088
|
|
|
—
|
|
|
—
|
|
|
22,088
|
|
|
Total energy distribution
|
|
302,860
|
|
|
—
|
|
|
—
|
|
|
302,860
|
|
|
|
|
|
|
|
|
|
|
|
|
Energy transmission
|
|
|
|
|
|
|
|
|
|
Aspire Energy
|
|
—
|
|
|
35,407
|
|
|
—
|
|
|
35,407
|
|
|
Aspire Energy Express
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Eastern Shore
|
|
64,248
|
|
|
—
|
|
|
—
|
|
|
64,248
|
|
|
Peninsula Pipeline
|
|
11,927
|
|
|
—
|
|
|
—
|
|
|
11,927
|
|
|
Total energy transmission
|
|
76,175
|
|
|
35,407
|
|
|
—
|
|
|
111,582
|
|
|
|
|
|
|
|
|
|
|
|
|
Energy generation
|
|
|
|
|
|
|
|
|
|
Eight Flags
|
|
—
|
|
|
17,302
|
|
|
—
|
|
|
17,302
|
|
|
|
|
|
|
|
|
|
|
|
|
Propane operations
|
|
|
|
|
|
|
|
|
|
Propane delivery operations
|
|
—
|
|
|
125,560
|
|
|
—
|
|
|
125,560
|
|
|
|
|
|
|
|
|
|
|
|
|
Energy delivery services
|
|
|
|
|
|
|
|
|
|
Marlin Gas Services
|
|
—
|
|
|
121
|
|
|
—
|
|
|
121
|
|
|
|
|
|
|
|
|
|
|
|
|
Other and eliminations
|
|
|
|
|
|
|
|
|
|
Eliminations
|
|
(33,754)
|
|
|
(16,485)
|
|
|
(17,522)
|
|
|
(67,761)
|
|
|
Other
|
|
—
|
|
|
—
|
|
|
652
|
|
|
652
|
|
|
Total other and eliminations
|
|
(33,754)
|
|
|
(16,485)
|
|
|
(16,870)
|
|
|
(67,109)
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating revenues (1)
|
|
$
|
345,281
|
|
|
$
|
161,905
|
|
|
$
|
(16,870)
|
|
|
$
|
490,316
|
|
(1) Total operating revenues for the year ended December 31, 2018, include other revenue (revenues from sources other than contracts with customers) of $0.2 million and $0.3 million for our Regulated and Unregulated Energy segments, respectively. The sources of other revenues include revenue from alternative revenue programs related to revenue normalization for Maryland division and Sandpiper and late fees.
Regulated Energy Segment
The businesses within our Regulated Energy segment are regulated utilities whose operations and customer contracts are subject to rates approved by the respective state PSC or the FERC.
Our energy distribution operations deliver natural gas or electricity to customers, and we bill the customers for both the delivery of natural gas or electricity and the related commodity, where applicable. In most jurisdictions, our customers are also required to purchase the commodity from us, although certain customers in some jurisdictions may purchase the commodity from a third-party retailer (in which case we provide delivery service only). We consider the delivery of natural gas or electricity and/or the related commodity sale as one performance obligation because the commodity and its delivery are highly interrelated with two-way dependency on one another. Our performance obligation is satisfied over time as natural gas or electricity is delivered and consumed by the customer. We recognize revenues based on monthly meter readings, which are based on the quantity of natural gas or electricity used and the approved rates. We accrue unbilled revenues for natural gas and electricity that have been delivered, but not yet billed, at the end of an accounting period, to the extent that billing and delivery do not coincide.
Revenues for Eastern Shore are based on rates approved by the FERC. The FERC has also authorized Eastern Shore to negotiate rates above or below the FERC-approved maximum rates, which customers can elect as an alternative to the FERC-approved maximum rates. Eastern Shore's services can be firm or interruptible. Firm services are offered on a guaranteed basis and are available at all times unless prevented by force majeure or other permitted curtailments. Interruptible customers receive service only when there is available capacity or supply. Our performance obligation is satisfied over time as we deliver natural gas to the customers' locations. We recognize revenues based on capacity used or reserved and the fixed monthly charge.
Chesapeake Utilities Corporation 2020 Form 10-K Page 69
Notes to the Consolidated Financial Statements
Peninsula Pipeline is engaged in natural gas intrastate transmission to third-party customers and certain affiliates in the State of Florida. Our performance obligation is satisfied over time as the natural gas is transported to customers. We recognize revenue based on rates approved by the Florida PSC and the capacity used or reserved. We accrue unbilled revenues for transportation services provided and not yet billed at the end of an accounting period.
Unregulated Energy Segment
Revenues generated from the Unregulated Energy segment are not subject to any federal, state, or local pricing regulations. Aspire Energy primarily sources gas from hundreds of conventional producers and performs gathering and processing functions to maintain the quality and reliability of its gas for its wholesale customers. Aspire Energy's performance obligation is satisfied over time as natural gas is delivered to its customers. Aspire Energy recognizes revenue based on the deliveries of natural gas at contractually agreed upon rates (which are based upon an established monthly index price and a monthly operating fee, as applicable). For natural gas customers, we accrue unbilled revenues for natural gas that has been delivered, but not yet billed, at the end of an accounting period, to the extent that billing and delivery do not coincide with the end of the accounting period.
Eight Flags' CHP plant, which is located on land leased from a customer, produces three sources of energy: electricity, steam and heated water. This customer purchases the steam (unfired and fired) and heated water, which are used in the customer’s production facility. Our electric distribution operation purchases the electricity generated by the CHP plant for distribution to its customers. Eight Flags' performance obligation is satisfied over time as deliveries of heated water, steam and electricity occur. Eight Flags recognizes revenues over time based on the amount of heated water, steam and electricity generated and delivered to its customers.
For our propane operations, we recognize revenue based upon customer type and service offered. Generally, for propane bulk delivery customers (customers without meters) and wholesale sales, our performance obligation is satisfied when we deliver propane to the customers' locations (point-in-time basis). We recognize revenue from these customers based on the number of gallons delivered and the price per gallon at the point-in-time of delivery. For our propane delivery customers with meters, we satisfy our performance obligation over time when we deliver propane to customers. We recognize revenue over time based on the amount of propane consumed and the applicable price per unit. For propane delivery metered customers, we accrue unbilled revenues for propane that has been delivered, but not yet billed, at the end of an accounting period, to the extent that billing and delivery do not coincide with the end of the accounting period.
Marlin Gas Services provides mobile CNG and pipeline solutions primarily to utilities and pipelines. Marlin Gas Services provides temporary hold services, pipeline integrity services, emergency services for damaged pipelines and specialized gas services for customers who have unique requirements. Marlin Gas Services' performance obligations are comprised of the compression of natural gas, mobilization of CNG equipment, utilization of equipment and on-site CNG support. Our performance obligations for the compression of natural gas, utilization of mobile CNG equipment and for the on-site CNG staff support are satisfied over time when the natural gas is compressed, equipment is utilized or as our staff provide support services to our customers. Our performance obligation for the mobilization of CNG equipment is satisfied at a point-in-time when the equipment is delivered to the customer project location. We recognize revenue for CNG services at the end of each calendar month for services provided during the month based on agreed upon rates for equipment utilized, costs incurred for natural gas compression, miles driven, mobilization and demobilization fees.
Contract balances
The timing of revenue recognition, customer billings and cash collections results in trade receivables, unbilled receivables (contract assets), and customer advances (contract liabilities) in our consolidated balance sheets. The balances of our trade receivables, contract assets, and contract liabilities as of December 31, 2020 and 2019 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trade Receivables
|
|
Contract Assets (Noncurrent)
|
|
Contract Liabilities (Current)
|
|
(in thousands)
|
|
|
|
|
|
|
|
Balance at 12/31/2019
|
|
$
|
47,430
|
|
|
$
|
3,465
|
|
|
$
|
589
|
|
|
Balance at 12/31/2020
|
|
55,600
|
|
|
4,816
|
|
|
644
|
|
|
Increase (decrease)
|
|
$
|
8,170
|
|
|
$
|
1,351
|
|
|
$
|
55
|
|
Our trade receivables are included in accounts receivable in the consolidated balance sheets. Our non-current contract assets are included in receivables and other deferred charges in the consolidated balance sheet and relate to operations and maintenance
Chesapeake Utilities Corporation 2020 Form 10-K Page 70
Notes to the Consolidated Financial Statements
costs incurred by Eight Flags that have not yet been recovered through rates for the sale of electricity to our electric distribution operation pursuant to a long-term service agreement.
At times, we receive advances or deposits from our customers before we satisfy our performance obligation, resulting in contract liabilities. Contract liabilities are included in other accrued liabilities in the consolidated balance sheets and relate to non-refundable prepaid fixed fees for our Mid-Atlantic propane delivery operation's retail offerings. Our performance obligation is satisfied over the term of the respective retail offering plan on a ratable basis. For the year ended December 31, 2020 and 2019, we recognized revenue of $1.3 million and $1.0 million, respectively.
Remaining performance obligations
Our businesses have long-term fixed fee contracts with customers in which revenues are recognized when performance obligations are satisfied over the contract term. Revenue for these businesses for the remaining performance obligations at December 31, 2020 are expected to be recognized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
2021
|
|
2022
|
|
2023
|
|
2024
|
|
2025
|
|
2026 and thereafter
|
|
Eastern Shore and Peninsula Pipeline
|
$
|
34,978
|
|
|
$
|
27,155
|
|
|
$
|
21,748
|
|
|
$
|
19,587
|
|
|
$
|
18,736
|
|
|
$
|
174,774
|
|
|
Natural gas distribution operations
|
4,351
|
|
|
5,394
|
|
|
4,937
|
|
|
4,705
|
|
|
4,172
|
|
|
32,996
|
|
|
FPU electric distribution
|
566
|
|
|
566
|
|
|
566
|
|
|
566
|
|
|
275
|
|
|
825
|
|
|
Total revenue contracts with remaining performance obligations
|
$
|
39,895
|
|
|
$
|
33,115
|
|
|
$
|
27,251
|
|
|
$
|
24,858
|
|
|
$
|
23,183
|
|
|
$
|
208,595
|
|
Practical expedients
For our businesses with agreements that contain variable consideration, we use the invoice practical expedient method. We determined that the amounts invoiced to customers correspond directly with the value to our customers and our performance to date.
6. SEGMENT INFORMATION
We use the management approach to identify operating segments. We organize our business around differences in regulatory environment and/or products or services, and the operating results of each segment are regularly reviewed by the chief operating decision maker (our Chief Executive Officer) in order to make decisions about resources and to assess performance.
Our operations are entirely domestic and are comprised of two reportable segments:
•Regulated Energy. Includes energy distribution and transmission services (natural gas distribution, natural gas transmission and electric distribution operations). All operations in this segment are regulated, as to their rates and services, by the PSC having jurisdiction in each operating territory or by the FERC in the case of Eastern Shore.
•Unregulated Energy. Includes energy transmission, energy generation (the operations of our Eight Flags' CHP plant), propane operations, and mobile compressed natural gas distribution and pipeline solutions operations. Also included in this segment are other unregulated energy services, such as energy-related merchandise sales and heating, ventilation and air conditioning, plumbing and electrical services. These operations are unregulated as to their rates and services. Effective in the third quarter of 2019, the natural gas marketing and related services subsidiary (PESCO), previously reported in the Unregulated Energy segment, was reflected in discontinued operations. See Note 4, Acquisitions and Divestitures for additional details of the divestiture of PESCO.
The remainder of our operations are presented as “Other businesses and eliminations,” which consists of unregulated subsidiaries that own real estate leased to Chesapeake Utilities, as well as certain corporate costs not allocated to other operations.
Chesapeake Utilities Corporation 2020 Form 10-K Page 71
Notes to the Consolidated Financial Statements
The following table presents information about our reportable segments.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31,
|
|
|
2020
|
|
2019
|
|
2018
|
|
(in thousands)
|
|
|
|
|
|
|
Operating Revenues, Unaffiliated Customers
|
|
|
|
|
|
|
Regulated Energy
|
$
|
350,853
|
|
|
$
|
340,857
|
|
|
$
|
343,313
|
|
|
Unregulated Energy
|
137,345
|
|
|
138,748
|
|
|
147,003
|
|
|
|
|
|
|
|
|
|
Total operating revenues, unaffiliated customers
|
$
|
488,198
|
|
|
$
|
479,605
|
|
|
$
|
490,316
|
|
|
Intersegment Revenues (1)
|
|
|
|
|
|
|
Regulated Energy
|
$
|
1,893
|
|
|
$
|
2,149
|
|
|
$
|
1,968
|
|
|
Unregulated Energy
|
15,181
|
|
|
15,403
|
|
|
14,902
|
|
|
Other businesses
|
528
|
|
|
529
|
|
|
652
|
|
|
Total intersegment revenues
|
$
|
17,602
|
|
|
$
|
18,081
|
|
|
$
|
17,522
|
|
|
Operating Income
|
|
|
|
|
|
|
Regulated Energy
|
$
|
92,124
|
|
|
$
|
86,584
|
|
|
$
|
79,215
|
|
|
Unregulated Energy
|
20,664
|
|
|
19,938
|
|
|
17,125
|
|
|
Other businesses and eliminations
|
(65)
|
|
|
(237)
|
|
|
(1,496)
|
|
|
Operating Income
|
112,723
|
|
|
106,285
|
|
|
94,844
|
|
|
Other income (expense), net
|
3,222
|
|
|
(1,847)
|
|
|
(607)
|
|
|
Interest charges
|
21,765
|
|
|
22,224
|
|
|
16,146
|
|
|
Income from Continuing Operations before Income Taxes
|
94,180
|
|
|
82,214
|
|
|
78,091
|
|
|
Income Taxes on Continuing Operations
|
23,538
|
|
|
21,114
|
|
|
21,123
|
|
|
Income from Continuing Operations
|
70,642
|
|
|
61,100
|
|
|
56,968
|
|
|
Income (loss) from Discontinued Operations, Net of Tax
|
686
|
|
|
(1,349)
|
|
|
(388)
|
|
|
Gain on sale of Discontinued Operations, Net of tax
|
170
|
|
|
5,402
|
|
|
—
|
|
|
Net Income
|
$
|
71,498
|
|
|
$
|
65,153
|
|
|
$
|
56,580
|
|
|
Depreciation and Amortization
|
|
|
|
|
|
|
Regulated Energy
|
$
|
46,079
|
|
|
$
|
35,227
|
|
|
$
|
31,876
|
|
|
Unregulated Energy
|
11,988
|
|
|
10,130
|
|
|
8,263
|
|
|
Other businesses and eliminations
|
50
|
|
|
67
|
|
|
81
|
|
|
Total depreciation and amortization
|
$
|
58,117
|
|
|
$
|
45,424
|
|
|
$
|
40,220
|
|
|
Capital Expenditures
|
|
|
|
|
|
|
Regulated Energy
|
$
|
147,100
|
|
|
130,604
|
|
|
$
|
235,912
|
|
|
Unregulated Energy
|
46,295
|
|
|
60,034
|
|
|
38,585
|
|
|
Other businesses
|
2,480
|
|
|
8,348
|
|
|
8,364
|
|
|
Total capital expenditures
|
$
|
195,875
|
|
|
$
|
198,986
|
|
|
$
|
282,861
|
|
(1) All significant intersegment revenues are billed at market rates and have been eliminated from consolidated revenues.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
|
2020
|
|
2019
|
|
Identifiable Assets
|
|
|
|
|
Regulated Energy segment
|
$
|
1,547,619
|
|
|
$
|
1,434,066
|
|
|
Unregulated Energy segment
|
347,665
|
|
|
296,810
|
|
|
Other businesses and eliminations
|
37,203
|
|
|
52,322
|
|
|
Total identifiable assets
|
$
|
1,932,487
|
|
|
$
|
1,783,198
|
|
Chesapeake Utilities Corporation 2020 Form 10-K Page 72
Notes to the Consolidated Financial Statements
7. SUPPLEMENTAL CASH FLOW DISCLOSURES
Cash paid for interest and income taxes during the years ended December 31, 2020, 2019 and 2018 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31,
|
|
|
2020
|
|
2019
|
|
2018
|
|
(in thousands)
|
|
|
|
|
|
|
Cash paid for interest
|
$
|
22,884
|
|
|
$
|
23,856
|
|
|
$
|
16,741
|
|
|
Cash (received) paid for income taxes, net of refunds
|
$
|
(8,135)
|
|
|
$
|
3,221
|
|
|
$
|
477
|
|
Non-cash investing and financing activities during the years ended December 31, 2020, 2019, and 2018 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31,
|
|
|
2020
|
|
2019
|
|
2018
|
|
(in thousands)
|
|
|
|
|
|
|
Capital property and equipment acquired on account, but not paid for as of December 31
|
$
|
23,625
|
|
|
$
|
13,470
|
|
|
$
|
39,402
|
|
|
Common stock issued for the Retirement Savings Plan
|
$
|
1,605
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
Common stock issued under the SICP
|
$
|
1,971
|
|
|
$
|
1,691
|
|
|
$
|
2,006
|
|
|
Capital lease obligation
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
1,310
|
|
8. DERIVATIVE INSTRUMENTS
We use derivative and non-derivative contracts to manage risks related to obtaining adequate supplies and the price fluctuations of natural gas, electricity and propane and to mitigate interest rate risk. 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. Our natural gas gathering and transmission company has entered into contracts with producers to secure natural gas to meet its obligations. Purchases under these contracts typically either do not meet the definition of derivatives or are considered “normal purchases and normal sales” and are accounted for on an accrual basis. Our propane distribution 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. Occasionally, we may enter into interest rate swap agreements to mitigate risk associated with changes in short-term borrowing rates. As of December 31, 2020 and 2019, our natural gas and electric distribution operations did not have any outstanding derivative contracts.
PESCO's Derivative Instruments
As discussed in Note 4, Acquisitions and Divestitures, during the fourth quarter of 2019, we sold PESCO's assets and contracts and, therefore, we no longer have natural gas futures and contracts recorded in our consolidated financial statements.
Volume of Derivative Activity
As of December 31, 2020, the volume of our open commodity derivative contracts were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Business unit
|
|
Commodity
|
|
Quantity hedged (in millions)
|
|
Designation
|
|
Longest expiration date of hedge
|
|
Sharp
|
|
Propane (gallons)
|
|
17.6
|
|
Cash flows hedges
|
|
May 2023
|
|
Sharp
|
|
Propane (gallons)
|
|
0.4
|
|
Fair value hedges
|
|
February 2021
|
Sharp entered into futures and swap agreements to mitigate the risk of fluctuations in wholesale propane index prices associated with the propane volumes expected to be purchased during the heating season. Under the futures and swap agreements, Sharp will receive the difference between (i) the index prices (Mont Belvieu prices in December 2020 through May 2023) and (ii) the per gallon propane swap prices, to the extent the index prices exceed the contracted prices. If the index prices are lower than the swap prices, Sharp will pay the difference. We designated and accounted for the propane swaps as cash flows hedges. The change in the fair value of the swap agreements is recorded as unrealized gain (loss) in other comprehensive income (loss) and later recognized in the statement of income in the same period and in the same line item as the hedged transaction. We expect to reclassify approximately $2.7 million of unrealized gain from accumulated other comprehensive income to earnings during the next 12-month period ending December 31, 2021.
Chesapeake Utilities Corporation 2020 Form 10-K Page 73
Notes to the Consolidated Financial Statements
Interest Rate Swap Activities
We manage interest rate risk by entering into derivative contracts to hedge the variability in cash flows attributable to changes in the short-term borrowing rates. In the second quarter of 2020, we entered into interest rate swaps with notional amounts totaling $100.0 million associated with three of our short-term lines of credit which expired in October 2020. The interest rate swaps were entered to hedge the variability in cash flows attributable to changes in the short-term borrowing rates during this period. Pricing on the interest rate swaps ranged between 0.2615 and 0.3875 percent for the period. In the fourth quarter of 2020, we entered into additional interest rate swaps with notional amount of $60.0 million through December 2021 with pricing of 0.20 percent and 0.205 percent for the period associated with our outstanding borrowing under the Revolver. In February 2021, we entered into an additional interest rate swap with a notional amount of $40.0 million through December 2021 with pricing of 0.17 percent. Our short-term borrowing is based on the 30-day LIBOR rate. The interest swap was cash settled monthly as the counter-party pays us the 30-day LIBOR rate less the fixed rate.
We designated and accounted for interest rate swaps as cash flows hedges. Accordingly, unrealized gains and losses associated with the interest rate swaps are recorded as a component of accumulated other comprehensive income (loss). When the interest rate swaps settle, the realized gain or loss will be recorded in the income statement and recognized as a component of interest charges. We expect to reclassify less than $0.1 million from accumulated other comprehensive income (loss) to earnings during the next 12-month period ended December 31, 2021.
Broker Margin
Futures exchanges have contract specific margin requirements that require the posting of cash or cash equivalents relating to traded contracts. Margin requirements consist of initial margin that is posted upon the initiation of a position, maintenance margin that is usually expressed as a percent of initial margin, and variation margin that fluctuates based on the daily mark-to-market relative to maintenance margin requirements. We currently maintain a broker margin account for Sharp, with the balance related to the account is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
Balance Sheet Location
|
|
December 31, 2020
|
|
December 31, 2019
|
|
Sharp
|
|
Other Current Assets
|
|
$
|
—
|
|
|
$
|
2,317
|
|
|
Sharp
|
|
Other Current Liabilities
|
|
$
|
1,505
|
|
|
$
|
—
|
|
Financial Statements Presentation
The following tables present information about the fair value and related gains and losses of our derivative contracts. We did not have any derivative contracts with a credit-risk-related contingency. Fair values of the derivative contracts recorded in the consolidated balance sheets as of December 31, 2020 and 2019 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative Assets
|
|
|
|
|
Fair Value as of
|
|
(in thousands)
|
Balance Sheet Location
|
|
December 31, 2020
|
|
December 31, 2019
|
|
Derivatives designated as fair value hedges
|
|
|
|
|
|
|
Propane put options
|
Derivative assets, at fair value
|
|
$
|
14
|
|
|
$
|
—
|
|
|
Derivatives designated as cash flow hedges
|
|
|
|
|
|
|
Propane swap agreements
|
Derivative assets, at fair value
|
|
3,255
|
|
|
—
|
|
|
Total Derivative Assets
|
|
|
$
|
3,269
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative Liabilities
|
|
|
|
|
Fair Value as of
|
|
(in thousands)
|
Balance Sheet Location
|
|
December 31, 2020
|
|
December 31, 2019
|
|
Derivatives designated as fair value hedges
|
|
|
|
|
|
|
Propane put options
|
Derivative liabilities, at fair value
|
|
$
|
23
|
|
|
$
|
—
|
|
|
Derivatives designated as cash flow hedges
|
|
|
|
|
|
|
Propane swap agreements
|
Derivative liabilities, at fair value
|
|
64
|
|
|
1,844
|
|
|
Interest rate swap agreements
|
Derivative liabilities, at fair value
|
|
40
|
|
|
—
|
|
|
Total Derivative Liabilities
|
|
|
$
|
127
|
|
|
$
|
1,844
|
|
Chesapeake Utilities Corporation 2020 Form 10-K Page 74
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)
|
2020
|
|
2019
|
|
2018
|
|
Derivatives not designated as hedging instruments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Propane swap agreements
|
Cost of sales
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
(13)
|
|
|
Derivatives designated as fair value hedges
|
|
|
|
|
|
|
|
|
Put/Call option
|
Cost of sales
|
|
(12)
|
|
|
—
|
|
|
—
|
|
|
Put/Call option
|
Propane inventory
|
|
34
|
|
|
—
|
|
|
—
|
|
|
Derivatives designated as cash flow hedges
|
|
|
|
|
|
|
|
|
Propane swap agreements
|
Cost of sales
|
|
2,428
|
|
|
1,520
|
|
|
(647)
|
|
|
Propane swap agreements
|
Other comprehensive income (loss)
|
|
5,035
|
|
|
(253)
|
|
|
(2,773)
|
|
|
Interest rate swap agreements
|
Interest expense
|
|
60
|
|
|
—
|
|
|
—
|
|
|
Interest rate swap agreements
|
Other comprehensive income (loss)
|
|
(40)
|
|
|
—
|
|
|
—
|
|
|
Natural gas swap contracts
|
Other comprehensive income (loss)
|
|
—
|
|
|
(63)
|
|
|
200
|
|
|
Natural gas futures contracts
|
Other comprehensive income (loss)
|
|
—
|
|
|
(294)
|
|
|
532
|
|
|
Total
|
|
|
$
|
7,505
|
|
|
$
|
910
|
|
|
$
|
(2,701)
|
|
9. FAIR VALUE OF FINANCIAL INSTRUMENTS
GAAP establishes a fair value hierarchy that prioritizes the inputs to valuation methods used to measure fair value. The three levels of the fair value hierarchy are the following:
|
|
|
|
|
|
|
|
|
|
|
Fair Value Hierarchy
|
Description of Fair Value Level
|
Fair Value Technique Utilized
|
|
Level 1
|
Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities
|
Investments - equity securities - The fair values of these trading securities are recorded at fair value based on unadjusted quoted prices in active markets for identical securities.
Investments - mutual funds and other - The fair values of these investments, comprised of money market and mutual funds, are recorded at fair value based on quoted net asset values of the shares.
|
|
Level 2
|
Quoted prices in markets that are not active, or inputs which are observable, either directly or indirectly, for substantially the full term of the asset or liability
|
Derivative assets and liabilities - The fair value of the propane put/call options, propane and interest rate swap agreements are measured using market transactions for similar assets and liabilities in either the listed or over-the-counter markets.
|
|
Level 3
|
Prices or valuation techniques requiring inputs that are both significant to the fair value measurement and unobservable (i.e. supported by little or no market activity)
|
Investments - guaranteed income fund - The fair values of these investments are recorded at the contract value, which approximates their fair value.
|
Chesapeake Utilities Corporation 2020 Form 10-K Page 75
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, 2020 and 2019, respectively:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements Using:
|
|
As of December 31, 2020
|
Fair Value
|
|
Quoted Prices in
Active Markets
(Level 1)
|
|
Significant Other
Observable
Inputs
(Level 2)
|
|
Significant
Unobservable
Inputs
(Level 3)
|
|
(in thousands)
|
|
|
|
|
|
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
Investments—equity securities
|
$
|
21
|
|
|
$
|
21
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
Investments—guaranteed income fund
|
2,156
|
|
|
—
|
|
|
—
|
|
|
2,156
|
|
|
Investments—mutual funds and other
|
8,599
|
|
|
8,599
|
|
|
—
|
|
|
—
|
|
|
Total investments
|
10,776
|
|
|
8,620
|
|
|
—
|
|
|
2,156
|
|
|
Derivative assets
|
3,269
|
|
|
—
|
|
|
3,269
|
|
|
—
|
|
|
Total assets
|
$
|
14,045
|
|
|
$
|
8,620
|
|
|
$
|
3,269
|
|
|
$
|
2,156
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
Derivative liabilities
|
$
|
127
|
|
|
$
|
—
|
|
|
$
|
127
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements Using:
|
|
As of December 31, 2019
|
Fair Value
|
|
Quoted Prices in Active Markets (Level 1)
|
|
Significant Other
Observable
Inputs
(Level 2)
|
|
Significant
Unobservable
Inputs
(Level 3)
|
|
(in thousands)
|
|
|
|
|
|
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
Investments—equity securities
|
$
|
27
|
|
|
$
|
27
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
Investments—guaranteed income fund
|
803
|
|
|
—
|
|
|
—
|
|
|
803
|
|
|
Investments—mutual funds and other
|
8,399
|
|
|
8,399
|
|
|
—
|
|
|
—
|
|
|
Total investments
|
9,229
|
|
|
8,426
|
|
|
—
|
|
|
803
|
|
|
Derivative assets
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Total assets
|
$
|
9,229
|
|
|
$
|
8,426
|
|
|
$
|
—
|
|
|
$
|
803
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
Derivative liabilities
|
$
|
1,844
|
|
|
$
|
—
|
|
|
$
|
1,844
|
|
|
$
|
—
|
|
The following table sets forth the summary of the changes in the fair value of Level 3 investments for the years ended December 31, 2020 and 2019:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31,
|
|
|
2020
|
|
2019
|
|
(in thousands)
|
|
|
|
|
Beginning Balance
|
$
|
803
|
|
|
$
|
686
|
|
|
Purchases and adjustments
|
261
|
|
|
131
|
|
|
Transfers/disbursements
|
1,065
|
|
|
(29)
|
|
|
Investment income
|
27
|
|
|
15
|
|
|
Ending Balance
|
$
|
2,156
|
|
|
$
|
803
|
|
Investment income from the Level 3 investments is reflected in other expense, net in the consolidated statements of income.
Chesapeake Utilities Corporation 2020 Form 10-K Page 76
Notes to the Consolidated Financial Statements
At December 31, 2020 and 2019, 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, 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 near-term maturities and because interest rates approximate current market rates (Level 3 measurement).
At December 31, 2020, long-term debt, which includes the current maturities but excludes debt issuance cost, had a carrying value of $523.0 million, compared to the estimated fair value of $548.5 million. At December 31, 2019, long-term debt, which includes the current maturities but excludes finance lease obligations and debt issuance costs, had a carrying value of $486.6 million, compared to a fair value of $505.0 million. The fair value was calculated using a discounted cash flow methodology that incorporates a market interest rate based on published corporate borrowing rates for debt instruments with similar terms and average maturities, and with adjustments for duration, optionality, and risk profile. The valuation technique used to estimate the fair value of long-term debt would be considered a Level 3 measurement.
See Note 17, Employee Benefit Plans, for fair value measurement information related to our pension plan assets.
10. INVESTMENTS
The investment balances at December 31, 2020 and 2019, consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
(in thousands)
|
2020
|
|
2019
|
|
Rabbi trust (associated with the Non-Qualified Deferred Compensation Plan)
|
$
|
10,755
|
|
|
$
|
9,202
|
|
|
Investments in equity securities
|
21
|
|
|
27
|
|
|
Total
|
$
|
10,776
|
|
|
$
|
9,229
|
|
We classify these investments as trading securities and report them at their fair value. For the years ended December 31, 2020, 2019 and 2018, we recorded net unrealized gains of $1.5 million, $1.6 million, and net unrealized losses of $0.4 million, respectively in other income (expense) in the consolidated statements of income related to these investments. For the investments in the Rabbi Trust, we also have recorded an associated liability, which is included in other pension and benefit costs in the consolidated balance sheets and is adjusted each period for the gains and losses incurred by the investments in the Rabbi Trust.
11. GOODWILL AND OTHER INTANGIBLE ASSETS
The carrying value of goodwill from continuing operations as of December 31, 2020 and 2019 was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
Regulated Energy
|
|
Unregulated Energy
|
|
Total Goodwill
|
|
Balance at December 31, 2019
|
$
|
3,353
|
|
|
$
|
29,315
|
|
|
$
|
32,668
|
|
|
Additions (1)
|
4,264
|
|
|
1,799
|
|
|
6,063
|
|
|
Balance at December 31, 2020
|
$
|
7,617
|
|
|
$
|
31,114
|
|
|
$
|
38,731
|
|
(1)Includes goodwill from the purchase of operating assets of Elkton Gas in the third quarter of 2020 and Western Natural Gas in October 2020.
The annual impairment testing for 2020 and 2019 indicated no impairment of goodwill.
Chesapeake Utilities Corporation 2020 Form 10-K Page 77
Notes to the Consolidated Financial Statements
The carrying value and accumulated amortization of intangible assets subject to amortization as of December 31, 2020 and 2019 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
|
2020
|
|
2019
|
|
(in thousands)
|
Gross
Carrying
Amount
|
|
Accumulated
Amortization
|
|
Gross
Carrying
Amount
|
|
Accumulated
Amortization
|
|
Customer relationships (1)
|
$
|
10,680
|
|
|
$
|
4,269
|
|
|
$
|
9,391
|
|
|
$
|
3,463
|
|
|
Non-Compete agreements (1)
|
2,375
|
|
|
768
|
|
|
2,252
|
|
|
451
|
|
|
Patents
|
452
|
|
|
236
|
|
|
452
|
|
|
118
|
|
|
Other
|
270
|
|
|
212
|
|
|
270
|
|
|
204
|
|
|
Total
|
$
|
13,777
|
|
|
$
|
5,485
|
|
|
$
|
12,365
|
|
|
$
|
4,236
|
|
(1) The customer relationship and non-compete agreements amounts includes $1.3 million and $0.1 million, respectively, recorded as a result of the purchase of the operating assets of Western Natural Gas in October 2020. The amounts also include customer relationship and non-compete agreements amounts of $4.6 million and $0.5 million, respectively, recorded as a result of the purchase of the operating assets of Boulden in December 2019.
The customer relationships, non-compete agreements, patents and other intangible assets acquired in the purchases of the operating assets of several companies are being amortized over a weighted average of 11 years. Amortization expense of intangible assets for the year ended December 31, 2020, 2019 and 2018 was $1.2 million, $0.8 million and $0.4 million, respectively. Amortization expense of intangible assets is expected to be $1.3 million for the year 2021, $1.0 million for the year 2022 and $0.9 million for the years 2023 through 2025.
12. INCOME TAXES
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 state returns for tax years after 2015 are subject to examination. At December 31, 2020, the 2015 through 2019 federal income tax returns are under examination, and no report has been issued at this time.
We expect to have federal NOL totaling $6.3 million and $12.2 million in 2019 and 2018 respectively upon the settlement of the Internal Revenue Service examination described above. Under the CARES Act, discussed below, we elected to carry the losses back to 2015 and 2013. For state income tax purposes, we had NOL in various states of $40.0 million and $54.7 million as of December 31, 2020 and 2019, respectively, almost all of which will expire in 2039. Excluding NOL from discontinued operations, we have recorded deferred tax assets of $1.6 million and $5.5 million related to state NOL carry-forwards at December 31, 2020 and 2019, respectively. We have not recorded a valuation allowance to reduce the future benefit of the tax NOL because we believe they will be fully utilized.
Tax Law Changes
In March 2020, the CARES Act was signed into law and included several significant changes to the Internal Revenue Code. The CARES Act includes certain tax relief provisions including the ability to carryback five years net operating losses arising in a tax year beginning in 2018, 2019, or 2020. This provision allows a taxpayer to recover taxes previously paid at a 35 percent federal income tax rate during tax years prior to 2018. In addition, the CARES Act removed the taxable income limitation to allow a tax NOL to fully offset taxable income for tax years beginning before January 1, 2021. Our income tax expense for the year ended December 31, 2020 included a tax benefit of $1.8 million attributable to the tax NOL carryback provided under the CARES Act for losses generated in 2018 and 2019 and then applied back to our 2013 and 2015 tax years in which we paid federal income taxes at a 35 percent tax rate.
On December 22, 2017, President Trump signed into law the TCJA. Substantially all of the provisions of the TCJA were effective for taxable years beginning on or after January 1, 2018. The provisions that significantly impacted us include the reduction of the corporate federal income tax rate from 35 percent to 21 percent. Our federal income tax expense for periods beginning on January 1, 2018 are based on the new federal corporate income tax rate. The TCJA included changes to the Internal Revenue Code, which materially impacted our 2017 financial statements. ASC 740, Income Taxes, requires recognition of the effects of changes in tax laws in the period in which the law is enacted. ASC 740 requires deferred tax assets and liabilities to be measured at the enacted tax rate expected to apply when temporary differences are to be realized or settled. During 2018, we completed the assessment of the impact of accounting for certain effects of the TCJA. At the date of enactment in 2017, we re-measured deferred income taxes based upon the new corporate tax rate. See Note 19, Rates and Other Regulatory Activities, for further discussion of the TCJA's impact on our regulated businesses.
Chesapeake Utilities Corporation 2020 Form 10-K Page 78
Notes to the Consolidated Financial Statements
The following tables provide: (a) the components of income tax expense in 2020, 2019, and 2018; (b) the reconciliation between the statutory federal income tax rate and the effective income tax rate for 2020, 2019, and 2018 from continuing operations; and (c) the components of accumulated deferred income tax assets and liabilities at December 31, 2020 and 2019.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31,
|
|
|
2020
|
|
2019
|
|
2018
|
|
(in thousands)
|
|
|
|
|
|
|
Current Income Tax Expense
|
|
|
|
|
|
|
Federal
|
$
|
(2,777)
|
|
|
$
|
(2,252)
|
|
|
$
|
(361)
|
|
|
State
|
2,162
|
|
|
(491)
|
|
|
617
|
|
|
Other
|
(47)
|
|
|
(47)
|
|
|
(47)
|
|
|
Total current income tax expense (benefit)
|
(662)
|
|
|
(2,790)
|
|
|
209
|
|
|
Deferred Income Tax Expense (1)
|
|
|
|
|
|
|
Property, plant and equipment
|
23,224
|
|
|
25,907
|
|
|
19,178
|
|
|
Deferred gas costs
|
(714)
|
|
|
79
|
|
|
(1,435)
|
|
|
Pensions and other employee benefits
|
(75)
|
|
|
(454)
|
|
|
454
|
|
|
FPU merger-related premium cost and deferred gain
|
156
|
|
|
(278)
|
|
|
(528)
|
|
|
Net operating loss carryforwards
|
5,107
|
|
|
(3,772)
|
|
|
(250)
|
|
|
Other
|
(3,498)
|
|
|
2,422
|
|
|
3,495
|
|
|
Total deferred income tax expense
|
24,200
|
|
|
23,904
|
|
|
20,914
|
|
|
Income Tax Expense from Continuing Operations
|
23,538
|
|
|
21,114
|
|
|
21,123
|
|
|
Income Tax Expense (benefit) from Discontinued Operations
|
153
|
|
|
1,416
|
|
|
(129)
|
|
|
Total Income Tax
|
$
|
23,691
|
|
|
$
|
22,530
|
|
|
$
|
20,994
|
|
(1) Includes $4.9 million, $4.7 million, and $3.5 million of deferred state income taxes for the years 2020, 2019 and 2018, respectively.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31,
|
|
|
2020
|
|
2019
|
|
2018
|
|
(in thousands)
|
|
|
|
|
|
|
Reconciliation of Effective Income Tax Rates for Continuing Operations
|
|
|
|
|
|
|
Federal income tax expense (1)
|
$
|
19,778
|
|
|
$
|
17,264
|
|
|
$
|
16,400
|
|
|
State income taxes, net of federal benefit
|
5,051
|
|
|
5,093
|
|
|
4,071
|
|
|
ESOP dividend deduction
|
(218)
|
|
|
(173)
|
|
|
(158)
|
|
|
CARES Act Tax Benefit
|
(1,841)
|
|
|
—
|
|
|
—
|
|
|
Other
|
768
|
|
|
(1,070)
|
|
|
810
|
|
|
Total Income Tax Expense for Continuing Operations
|
$
|
23,538
|
|
|
$
|
21,114
|
|
|
$
|
21,123
|
|
|
Effective Income Tax Rate for Continuing Operations
|
24.99
|
%
|
|
25.65
|
%
|
|
27.13
|
%
|
(1) Federal income taxes were calculated at 21 percent for 2020, 2019, and 2018.
Chesapeake Utilities Corporation 2020 Form 10-K Page 79
Notes to the Consolidated Financial Statements
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
|
2020
|
|
2019
|
|
(in thousands)
|
|
|
|
|
Deferred Income Taxes
|
|
|
|
|
Deferred income tax liabilities:
|
|
|
|
|
Property, plant and equipment
|
$
|
199,287
|
|
|
$
|
173,466
|
|
|
Acquisition adjustment
|
6,618
|
|
|
6,969
|
|
|
Loss on reacquired debt
|
201
|
|
|
220
|
|
|
Deferred gas costs
|
509
|
|
|
1,223
|
|
|
Natural gas conversion costs
|
5,379
|
|
|
4,956
|
|
|
Storm reserve liability
|
7,073
|
|
|
10,316
|
|
|
Other
|
5,587
|
|
|
1,456
|
|
|
Total deferred income tax liabilities
|
224,654
|
|
|
198,606
|
|
|
Deferred income tax assets:
|
|
|
|
|
Pension and other employee benefits
|
4,636
|
|
|
3,818
|
|
|
Environmental costs
|
1,064
|
|
|
1,486
|
|
|
Net operating loss carryforwards
|
1,587
|
|
|
5,523
|
|
|
Self-insurance
|
—
|
|
|
146
|
|
|
Storm reserve liability
|
409
|
|
|
96
|
|
|
Accrued Expenses
|
6,153
|
|
|
2,064
|
|
|
Other
|
5,417
|
|
|
4,817
|
|
|
Total deferred income tax assets
|
19,266
|
|
|
17,950
|
|
|
Deferred Income Taxes Per Consolidated Balance Sheets
|
$
|
205,388
|
|
|
$
|
180,656
|
|
Chesapeake Utilities Corporation 2020 Form 10-K Page 80
Notes to the Consolidated Financial Statements
13. LONG-TERM DEBT
Our outstanding long-term debt is shown below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
(in thousands)
|
2020
|
|
2019
|
|
FPU secured first mortgage bonds:
|
|
|
|
|
9.08% bond, due June 1, 2022
|
$
|
—
|
|
|
$
|
7,990
|
|
|
Uncollateralized Senior Notes:
|
|
|
|
|
5.50% note, due October 12, 2020
|
—
|
|
|
2,000
|
|
|
5.93% note, due October 31, 2023
|
9,000
|
|
|
12,000
|
|
|
5.68% note, due June 30, 2026
|
17,400
|
|
|
20,300
|
|
|
6.43% note, due May 2, 2028
|
5,600
|
|
|
6,300
|
|
|
3.73% note, due December 16, 2028
|
16,000
|
|
|
18,000
|
|
|
3.88% note, due May 15, 2029
|
45,000
|
|
|
50,000
|
|
|
3.25% note, due April 30, 2032
|
70,000
|
|
|
70,000
|
|
|
3.48% note, due May 31, 2038
|
50,000
|
|
|
50,000
|
|
|
3.58% note, due November 30, 2038
|
50,000
|
|
|
50,000
|
|
|
3.98% note, due August 20, 2039
|
100,000
|
|
|
100,000
|
|
|
2.98% note, due December 20, 2034
|
70,000
|
|
|
70,000
|
|
|
3.00% note, due July 15, 2035
|
50,000
|
|
|
—
|
|
|
2.96% note, due August 15, 2035
|
40,000
|
|
|
—
|
|
|
Term Note due February 28, 2020
|
—
|
|
|
30,000
|
|
|
Less: debt issuance costs
|
(901)
|
|
|
(822)
|
|
|
Total long-term debt
|
522,099
|
|
|
485,768
|
|
|
Less: current maturities
|
(13,600)
|
|
|
(45,600)
|
|
|
Total long-term debt, net of current maturities
|
$
|
508,499
|
|
|
$
|
440,168
|
|
Annual maturities
Annual maturities and principal repayments of long-term debt are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year
|
|
2021
|
|
2022
|
|
2023
|
|
2024
|
|
2025
|
|
Thereafter
|
|
Total
|
|
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments
|
|
$
|
13,600
|
|
|
$
|
17,100
|
|
|
$
|
20,600
|
|
|
$
|
17,600
|
|
|
$
|
24,600
|
|
|
$
|
429,500
|
|
|
$
|
523,000
|
|
Shelf Agreements
We have entered into Shelf Agreements with Prudential, MetLife and NYL, whom are under no obligation to purchase any unsecured debt. The following table summarizes our shelf agreements at December 31, 2020:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
Total Borrowing Capacity
|
|
Less Amount of Debt Issued
|
|
Less Unfunded Commitments
|
|
Remaining Borrowing Capacity
|
|
Shelf Agreement
|
|
|
|
|
|
|
|
|
|
Prudential Shelf Agreement (1)
|
|
$
|
370,000
|
|
|
$
|
(220,000)
|
|
|
$
|
—
|
|
|
$
|
150,000
|
|
|
MetLife Shelf Agreement (2)
|
|
150,000
|
|
|
—
|
|
|
—
|
|
|
150,000
|
|
|
NYL Shelf Agreement (3)
|
|
150,000
|
|
|
(140,000)
|
|
|
—
|
|
|
10,000
|
|
|
Total
|
|
$
|
670,000
|
|
|
$
|
(360,000)
|
|
|
$
|
—
|
|
|
$
|
310,000
|
|
Chesapeake Utilities Corporation 2020 Form 10-K Page 81
Notes to the Consolidated Financial Statements
(1) In April 2020, we amended the Prudential Shelf Agreement to increase the available borrowing capacity by $150.0 million. The Shelf Agreement expires in April 2023. In July 2020, we issued $50 million of Prudential Shelf Notes at the rate of 3.00 percent per annum.
(2) In May 2020, we amended an agreement with MetLife to provide a new $150 million MetLife Shelf Agreement for a three-year term ending May 2023.
(3) In August 2020 we issued $40 million of NYL Shelf Notes at the rate of 2.96 percent per annum. The NYL Shelf Agreement expires in November 2021.
The Senior Notes, Shelf Agreements or Shelf Notes set forth certain business covenants to which we are subject when any note is outstanding, including covenants that limit or restrict our ability, and the ability of our subsidiaries, to incur indebtedness, or place or permit liens and encumbrances on any of our property or the property of our subsidiaries.
Term Notes
In January 2019, we issued a $30.0 million unsecured term note through Branch Banking and Trust Company, with a maturity date of February 28, 2020. This note was paid in full in February 2020 utilizing our short-term borrowing facilities.
Secured First Mortgage Bonds
In December 2020, we redeemed FPU’s 9.08 percent secured first mortgage bonds outstanding of $8.0 million, prior to their maturity, which included the outstanding principal balances, interest accrued, premium and fees. We used short-term borrowing to finance the redemption of these bonds. The difference between the carrying value of those bonds and the amount paid at redemption totaling $1.0 million was charged to expense. As a result of the redemption of these bonds, at December 31, 2020, the restriction that limited the payment of dividends by FPU is no longer applicable.
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 40.0 percent of total capitalization (including short-term borrowings), and the fixed charge coverage ratio must be at least 1.2 times. The most recent Senior Notes issued since September 2013 also contain a restriction that we must maintain an aggregate net book value in our regulated business assets of at least 50.0 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 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 5.93 percent Senior Note, due October 31, 2023. 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, 2020, the cumulative consolidated net income base was $581.0 million, offset by restricted payments of $256.4 million, leaving $324.6 million of cumulative net income free of restrictions. As of December 31, 2020, we were in compliance with all of our debt covenants.
14. SHORT-TERM BORROWINGS
At December 31, 2020 and 2019, our short-term borrowings totaled $175.6 million and $247.4 million, respectively, at the weighted average interest rates of 1.28 percent and 2.62 percent, respectively. Included in the December 31, 2020 balance, is $60.0 million in short-term debt for which we have entered into interest rate swap agreements.
In September 2020, we entered into a new $375.0 million syndicated Revolver with six participating lenders. As a result of entering into the Revolver, in September 2020, we terminated and paid all outstanding balances under the previously existing bilateral lines of credit and the previous revolving credit facility.
The availability of funds under the Revolver is subject to conditions specified in the credit agreement, 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 the Revolver to maintain, at the end of each fiscal year, a funded indebtedness ratio of no greater than 65 percent. As of December 31, 2020, we are in compliance with this covenant.
The Revolver expires on September 29, 2021 and is 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. Borrowings under the Revolver are subject to a pricing grid, including the commitment fee and the interest rate charged. Our pricing is adjusted each quarter based upon total indebtedness to total capitalization ratio. As of December 31, 2020, our pricing under the Revolver included a commitment fee of 0.175 percent and an interest rate of 1.125 percent over LIBOR. Our available credit under the new Revolver at December 31, 2020 was $196.9 million. As of December 31, 2020, we had issued $4.8 million in letters of credit to various counterparties under the syndicated Revolver. Although the letters of credit are not included in the outstanding short-
Chesapeake Utilities Corporation 2020 Form 10-K Page 82
Notes to the Consolidated Financial Statements
term borrowings and we do not anticipate they will be drawn upon by the counterparties, the letters of credit reduce the available borrowings under our syndicated Revolver.
In the second quarter of 2020, we entered into interest rate swaps with notional amounts totaling $100.0 million associated with three of our short-term lines of credit which expired in October 2020. The interest rate swaps were entered to hedge the variability in cash flows attributable to changes in the short-term borrowing rates during this period. The fixed swap rates ranged between 0.2615 and 0.3875 percent for the period. In the fourth quarter of 2020, we entered into additional interest rate swaps with notional amounts totaling $60.0 million through December 2021 with pricing of 0.20 percent and 0.205 percent for the period associated with our outstanding borrowing under the Revolver. In February 2021, we entered into an additional interest rate swap with a notional amount of $40.0 million through December 2021 with pricing of 0.17 percent. Our short-term borrowing is based on the 30-day LIBOR rate. The interest swap was cash settled monthly as the counter-party pays us the 30-day LIBOR rate less the fixed rate.
We are authorized by our Board of Directors to borrow up to $375 million of short-term debt, as required.
15. LEASES
We have entered into lease arrangements for office space, land, equipment, pipeline facilities and warehouses. These lease arrangements enable us to better conduct business operations in the regions in which we operate. Office space is leased to provide adequate workspace for all our employees in several locations throughout the Mid-Atlantic, Mid-West and in Florida. We lease land at various locations throughout our service territories to enable us to inject natural gas into underground storage and distribution systems, for bulk storage capacity, for our propane operations and for storage of equipment used in repairs and maintenance of our infrastructure. We lease natural gas compressors to ensure timely and reliable transportation of natural gas to our customers. Additionally, we lease a pipeline to deliver natural gas to an industrial customer in Polk County, Florida. We also lease warehouses to store equipment and materials used in repairs and maintenance for our businesses.
Some of our leases are subject to annual changes in the Consumer Price Index (“CPI”). While lease liabilities are not re-measured as a result of changes to the CPI, changes to the CPI are treated as variable lease payments and recognized in the period in which the obligation for those payments was incurred. A 100-basis-point increase in CPI would not have resulted in material additional annual lease costs. Most of our leases include options to renew, with renewal terms that can extend the lease term from one to 25 years or more. The exercise of lease renewal options is at our sole discretion. The amounts disclosed in our consolidated balance sheet at December 31, 2020, pertaining to the right-of-use assets and lease liabilities, are measured based on our current expectations of exercising our available renewal options. Our existing leases are not subject to any restrictions or covenants which preclude our ability to pay dividends, obtain financing or enter into additional leases. As of December 31, 2020, we have not entered into any leases, which have not yet commenced, that would entitle us to significant rights or create additional obligations. The following table presents information related to our total lease cost included in our consolidated statements of income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
|
|
|
|
December 31,
|
|
( in thousands)
|
|
Classification
|
|
|
2020
|
|
2019
|
|
Operating lease cost (1)
|
|
Operations expense
|
|
|
$
|
2,029
|
|
|
$
|
2,577
|
|
|
Finance lease cost:
|
|
|
|
|
|
|
|
|
Amortization of lease assets
|
|
Depreciation and amortization
|
|
|
—
|
|
|
650
|
|
|
Interest on lease liabilities
|
|
Interest expense
|
|
|
—
|
|
|
5
|
|
|
Net lease cost
|
|
|
|
|
$
|
2,029
|
|
|
$
|
3,232
|
|
(1) Includes short-term leases and variable lease costs, which are immaterial.
The following table presents the balance and classifications of our right-of-use assets and lease liabilities included in our consolidated balance sheet at December 31, 2020 and 2019:
Chesapeake Utilities Corporation 2020 Form 10-K Page 83
Notes to the Consolidated Financial Statements
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
Balance sheet classification
|
|
December 31, 2020
|
|
December 31, 2019
|
|
Assets
|
|
|
|
|
|
|
|
Operating lease assets
|
|
Operating lease right-of-use assets
|
|
$
|
11,194
|
|
|
$
|
11,563
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
Current
|
|
|
|
|
|
|
|
Operating lease liabilities
|
|
Other accrued liabilities
|
|
$
|
1,747
|
|
|
$
|
1,705
|
|
|
|
|
|
|
|
|
|
|
Noncurrent
|
|
|
|
|
|
|
|
Operating lease liabilities
|
|
Operating lease - liabilities
|
|
9,872
|
|
|
9,896
|
|
|
|
|
|
|
|
|
|
|
Total lease liabilities
|
|
|
|
$
|
11,619
|
|
|
$
|
11,601
|
|
The following table presents our weighted-average remaining lease term and weighted-average discount rate for our operating leases at December 31, 2020 and 2019:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2020
|
|
December 31, 2019
|
|
Weighted-average remaining lease term (in years)
|
|
|
|
|
Operating leases
|
8.70
|
|
8.88
|
|
|
|
|
|
|
Weighted-average discount rate
|
|
|
|
|
Operating leases
|
3.8
|
%
|
|
3.8
|
%
|
The following table presents additional information related to cash paid for amounts included in the measurement of lease liabilities included in our consolidated statements of cash flows at December 31, 2020 and 2019:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
(in thousands)
|
|
2020
|
|
2019
|
|
Operating cash flows from operating leases
|
|
$
|
1,956
|
|
|
$
|
2,230
|
|
|
Operating cash flows from finance leases
|
|
$
|
—
|
|
|
$
|
5
|
|
|
Financing cash flows from finance leases
|
|
$
|
—
|
|
|
$
|
650
|
|
The following table presents the future undiscounted maturities of our operating leases at December 31, 2020 and for each of the next five years and thereafter:
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
Operating Leases (1)
|
|
|
|
|
|
2021
|
|
$
|
2,027
|
|
|
2022
|
|
1,984
|
|
|
2023
|
|
1,923
|
|
|
2024
|
|
1,657
|
|
|
2025
|
|
1,395
|
|
|
Thereafter
|
|
4,419
|
|
|
Total lease payments
|
|
13,405
|
|
|
Less: Interest
|
|
1,786
|
|
|
Present value of lease liabilities
|
|
$
|
11,619
|
|
(1) Operating lease payments include $2.1 million related to options to extend lease terms that are reasonably certain of being exercised.
Chesapeake Utilities Corporation 2020 Form 10-K Page 84
Notes to the Consolidated Financial Statements
16. STOCKHOLDERS' EQUITY
Common Stock Issuances
In June 2020, we filed a shelf registration statement with the SEC to facilitate the issuance of our common stock. In August 2020, we filed a prospectus supplement under the shelf registration statement for an ATM equity program under which we may issue and sell shares of our common stock up to an aggregate offering price of $75.0 million. In the third and fourth quarters of 2020, we issued 0.7 million shares of common stock at an average price per share of $82.93 and received net proceeds of approximately $61.0 million, after deducting commissions and other fees of $1.5 million.
We maintain an effective shelf registration statement with the SEC for the issuance of shares under our DRIP. Depending on our capital needs and subject to market conditions, in addition to other possible debt and equity offerings, we may issue additional shares under the direct stock purchase component of the DRIP. In the third and fourth quarters of 2020, we issued 0.3 million shares at an average price per share of $86.12 and received net proceeds of $22.0 million under the DRIP.
We used the net proceeds from the ATM equity program and the DRIP, after deducting the commissions or other fees and related offering expenses payable by us, for general corporate purposes, including, but not limited to, financing of capital expenditures, repayment of short-term debt, financing acquisitions, investing in subsidiaries, and general working capital purposes.
Accumulated Other Comprehensive Loss
Defined benefit pension and postretirement plan items, unrealized gains (losses) of our propane swap agreements and natural gas swaps and futures contracts, designated as commodity contracts cash flow hedges, and the unrealized gains (losses) of our interest rate swap agreements designated as cash flow hedges are the components of our accumulated other comprehensive loss. The following table presents the changes in the balance of accumulated other comprehensive loss for the years ended December 31, 2020 and 2019. All amounts in the following tables are presented net of tax.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Defined Benefit Pension and Postretirement Plan Items
|
|
Commodity Contract Cash Flow Hedges
|
|
Interest Rate Swap Cash Flow Hedges
|
|
Total
|
|
(in thousands)
|
|
|
|
|
|
|
|
|
|
As of December 31, 2018
|
|
$
|
(5,928)
|
|
|
$
|
(785)
|
|
|
$
|
—
|
|
|
$
|
(6,713)
|
|
|
Other comprehensive income (loss) before reclassifications
|
|
(872)
|
|
|
2,161
|
|
|
—
|
|
|
1,289
|
|
|
Amounts reclassified from accumulated other comprehensive income (loss)
|
|
1,867
|
|
|
(2,595)
|
|
|
—
|
|
|
(728)
|
|
|
Net current-period other comprehensive income (loss)
|
|
995
|
|
|
(434)
|
|
|
—
|
|
|
561
|
|
|
Prior-year reclassification
|
|
—
|
|
|
(115)
|
|
|
—
|
|
|
(115)
|
|
|
As of December 31, 2019
|
|
(4,933)
|
|
|
(1,334)
|
|
|
—
|
|
|
(6,267)
|
|
|
Other comprehensive income (loss) before reclassifications
|
|
(578)
|
|
|
5,400
|
|
|
16
|
|
|
4,838
|
|
|
Amounts reclassified from accumulated other comprehensive income (loss)
|
|
365
|
|
|
(1,757)
|
|
|
(44)
|
|
|
(1,436)
|
|
|
Net current-period other comprehensive income (loss)
|
|
(213)
|
|
|
3,643
|
|
|
(28)
|
|
|
3,402
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2020
|
|
$
|
(5,146)
|
|
|
$
|
2,309
|
|
|
$
|
(28)
|
|
|
$
|
(2,865)
|
|
The following table presents amounts reclassified out of accumulated other comprehensive income (loss) for the years ended December 31, 2020, 2019 and 2018. Deferred gains and losses of our commodity contracts cash flow hedges are recognized in earnings upon settlement.
Chesapeake Utilities Corporation 2020 Form 10-K Page 85
Notes to the Consolidated Financial Statements
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31,
|
|
(in thousands)
|
|
2020
|
|
2019
|
|
2018
|
|
Amortization of defined benefit pension and postretirement plan items:
|
|
|
|
|
|
|
|
Prior service cost (1)
|
|
$
|
77
|
|
|
$
|
77
|
|
|
$
|
77
|
|
|
Net gain (1)
|
|
(592)
|
|
|
(2,600)
|
|
|
(579)
|
|
|
Total before income taxes
|
|
(515)
|
|
|
(2,523)
|
|
|
(502)
|
|
|
Income tax benefit (4)
|
|
150
|
|
|
656
|
|
|
63
|
|
|
Net of tax
|
|
$
|
(365)
|
|
|
$
|
(1,867)
|
|
|
$
|
(439)
|
|
|
|
|
|
|
|
|
|
|
Gains and losses on commodity contracts cash flow hedges
|
|
|
|
|
|
|
|
Propane swap agreements (2)
|
|
$
|
2,428
|
|
|
$
|
1,520
|
|
|
$
|
(647)
|
|
|
Natural gas swaps (2)(3)
|
|
—
|
|
|
7
|
|
|
197
|
|
|
Natural gas futures (2)(3)
|
|
—
|
|
|
2,096
|
|
|
(2,010)
|
|
|
Total before income taxes
|
|
2,428
|
|
|
3,623
|
|
|
(2,460)
|
|
|
Income tax (expense) benefit (4)
|
|
(671)
|
|
|
(1,028)
|
|
|
701
|
|
|
Net of tax
|
|
$
|
1,757
|
|
|
$
|
2,595
|
|
|
$
|
(1,759)
|
|
|
Gains on interest rate swap cash flow hedges:
|
|
|
|
|
|
|
|
Interest rate swap agreements
|
|
$
|
60
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
Total before income taxes
|
|
60
|
|
|
—
|
|
|
—
|
|
|
Income tax expense
|
|
(16)
|
|
|
—
|
|
|
—
|
|
|
Net of tax
|
|
$
|
44
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
Total reclassifications for the period
|
|
$
|
1,436
|
|
|
$
|
728
|
|
|
$
|
(2,198)
|
|
(1) These amounts are included in the computation of net periodic benefits. See Note 17, Employee Benefit Plans, for additional details.
(2) These amounts are included in the effects of gains and losses from derivative instruments. See Note 8, Derivative Instruments, for additional details.
(3) PESCO's results are reflected as discontinued operations in our consolidated statements of income.
(4) The income tax benefit is included in income tax expense in the accompanying consolidated statements of income.
17. EMPLOYEE BENEFIT PLANS
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. 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 Utilities Pension Plan ("Chesapeake Pension Plan"), the FPU Pension Plan and the Chesapeake SERP.
The Chesapeake Pension Plan, a qualified 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. In 2019, we executed a de-risking strategy for the Chesapeake Pension Plan. As a result, during the fourth quarter of 2019, we purchased annuities for those retirees currently receiving monthly payments and offered lump-sum payments to terminated vested employees. Accordingly, the pension settlement expense associated with the de-risking strategy allocated to our Regulated Energy operations was recorded as regulatory assets or deferred pending regulatory approval authorizing recovery through rates. The remaining portion of the pension settlement expense totaling $0.7 million was recorded in other expense in our consolidated statement of income which reflected the amount allocated to our Unregulated Energy operations or was deemed not recoverable through the regulatory process.
Chesapeake Utilities Corporation 2020 Form 10-K Page 86
Notes to the Consolidated Financial Statements
The FPU Pension Plan, a qualified 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 Chesapeake SERP, a nonqualified plan, is comprised of two sub-plans. The first sub-plan was frozen with respect to additional years of service and additional compensation as of December 31, 2004. Benefits under the Chesapeake SERP for the first sub-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 SERP was frozen were credited with two additional years of service. The second sub-plan provides fixed payments for several executives who joined the Company as a result of an acquisition and whose agreements with the Company provided for this benefit.
The unfunded liability for all three plans at both December 31, 2020 and 2019, is included in the other pension and benefit costs liability in our consolidated balance sheets.
The following schedules set forth the funded status at December 31, 2020 and 2019 and the net periodic cost for the years ended December 31, 2020, 2019 and 2018 for the Chesapeake and FPU Pension Plans as well as the Chesapeake SERP:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Chesapeake
Pension Plan
|
|
|
FPU
Pension Plan
|
|
|
Chesapeake
SERP
|
|
At December 31,
|
2020
|
|
2019
|
|
|
2020
|
|
2019
|
|
|
2020
|
|
2019
|
|
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in benefit obligation:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Benefit obligation — beginning of year
|
$
|
6,214
|
|
|
$
|
10,712
|
|
|
|
$
|
65,304
|
|
|
$
|
59,377
|
|
|
|
$
|
2,157
|
|
|
$
|
2,285
|
|
|
Interest cost
|
176
|
|
|
375
|
|
|
|
2,085
|
|
|
2,452
|
|
|
|
63
|
|
|
74
|
|
|
Actuarial loss
|
450
|
|
|
1,443
|
|
|
|
6,069
|
|
|
6,508
|
|
|
|
144
|
|
|
159
|
|
|
Effect of settlement
|
(612)
|
|
|
(5,833)
|
|
|
|
—
|
|
|
—
|
|
|
|
—
|
|
|
—
|
|
|
Benefits paid
|
(82)
|
|
|
(483)
|
|
|
|
(3,092)
|
|
|
(3,033)
|
|
|
|
(152)
|
|
|
(361)
|
|
|
Benefit obligation — end of year
|
6,146
|
|
|
6,214
|
|
|
|
70,366
|
|
|
65,304
|
|
|
|
2,212
|
|
|
2,157
|
|
|
Change in plan assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value of plan assets — beginning of year
|
4,630
|
|
|
8,649
|
|
|
|
49,703
|
|
|
43,601
|
|
|
|
—
|
|
|
—
|
|
|
Actual return on plan assets
|
369
|
|
|
1,180
|
|
|
|
6,581
|
|
|
7,978
|
|
|
|
—
|
|
|
—
|
|
|
Employer contributions
|
304
|
|
|
1,117
|
|
|
|
2,774
|
|
|
1,157
|
|
|
|
152
|
|
|
361
|
|
|
Effect of settlement
|
(612)
|
|
|
(5,833)
|
|
|
|
—
|
|
|
—
|
|
|
|
—
|
|
|
—
|
|
|
Benefits paid
|
(82)
|
|
|
(483)
|
|
|
|
(3,092)
|
|
|
(3,033)
|
|
|
|
(152)
|
|
|
(361)
|
|
|
Fair value of plan assets — end of year
|
4,609
|
|
|
4,630
|
|
|
|
55,966
|
|
|
49,703
|
|
|
|
—
|
|
|
—
|
|
|
Reconciliation:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Funded status
|
(1,537)
|
|
|
(1,584)
|
|
|
|
(14,400)
|
|
|
(15,601)
|
|
|
|
(2,212)
|
|
|
(2,157)
|
|
|
Accrued pension cost
|
$
|
(1,537)
|
|
|
$
|
(1,584)
|
|
|
|
$
|
(14,400)
|
|
|
$
|
(15,601)
|
|
|
|
$
|
(2,212)
|
|
|
$
|
(2,157)
|
|
|
Assumptions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discount rate
|
2.25
|
%
|
|
3.00
|
%
|
|
|
2.50
|
%
|
|
3.25
|
%
|
|
|
2.25
|
%
|
|
3.00
|
%
|
|
Expected return on plan assets
|
3.50
|
%
|
|
6.00
|
%
|
|
|
6.00
|
%
|
|
6.50
|
%
|
|
|
—
|
%
|
|
—
|
%
|
Chesapeake Utilities Corporation 2020 Form 10-K Page 87
Notes to the Consolidated Financial Statements
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Chesapeake
Pension Plan
|
|
|
FPU
Pension Plan
|
|
|
Chesapeake
SERP
|
|
For the Years Ended December 31,
|
2020
|
|
2019 (1)
|
|
2018
|
|
|
2020
|
|
2019
|
|
2018
|
|
|
2020
|
|
2019
|
|
2018
|
|
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Components of net periodic pension cost:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest cost
|
$
|
176
|
|
|
$
|
375
|
|
|
$
|
384
|
|
|
|
$
|
2,085
|
|
|
$
|
2,452
|
|
|
$
|
2,339
|
|
|
|
$
|
63
|
|
|
$
|
74
|
|
|
$
|
83
|
|
|
Expected return on assets
|
(157)
|
|
|
(487)
|
|
|
(542)
|
|
|
|
(2,967)
|
|
|
(2,770)
|
|
|
(3,091)
|
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Amortization of actuarial loss
|
243
|
|
|
391
|
|
|
343
|
|
|
|
552
|
|
|
505
|
|
|
404
|
|
|
|
20
|
|
|
85
|
|
|
101
|
|
|
Settlement expense
|
203
|
|
|
1,982
|
|
|
—
|
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
|
—
|
|
|
58
|
|
|
—
|
|
|
Net periodic pension cost
|
465
|
|
|
2,261
|
|
|
185
|
|
|
|
(330)
|
|
|
187
|
|
|
(348)
|
|
|
|
83
|
|
|
217
|
|
|
184
|
|
|
Amortization of pre-merger regulatory asset
|
—
|
|
|
—
|
|
|
—
|
|
|
|
—
|
|
|
543
|
|
|
761
|
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Total periodic cost
|
$
|
465
|
|
|
$
|
2,261
|
|
|
$
|
185
|
|
|
|
$
|
(330)
|
|
|
$
|
730
|
|
|
$
|
413
|
|
|
|
$
|
83
|
|
|
$
|
217
|
|
|
$
|
184
|
|
|
Assumptions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discount rate
|
3.00
|
%
|
|
3.00
|
%
|
|
3.50
|
%
|
|
|
3.25
|
%
|
|
4.25
|
%
|
|
3.75
|
%
|
|
|
3.00
|
%
|
|
4.00
|
%
|
|
3.50
|
%
|
|
Expected return on plan assets
|
3.50
|
%
|
|
6.00
|
%
|
|
6.00
|
%
|
|
|
6.00
|
%
|
|
6.50
|
%
|
|
6.50
|
%
|
|
|
—
|
%
|
|
—
|
%
|
|
—
|
%
|
(1) As a result of annuity purchases and lump sum payments associated with the de-risking of the Chesapeake Pension Plan, the discount rate for Chesapeake Pension Plan was remeasured which triggered settlement accounting expense in the fourth quarter of 2019. We recorded $0.7 million of the settlement expense in our consolidated statement of income which reflected a portion of the pension settlement expense that was deemed not recoverable through the regulatory process.
Included in the net periodic costs for the FPU Pension Plan for the years ended December 31, 2019 and 2018 is 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 to be recovered through rates pursuant to an order by the Florida PSC. At December 31, 2020 and 2019, this regulatory asset was fully amortized. Excluding the service cost component, the other components of the net periodic costs have been recorded or reclassified to other expense, net of tax, in the consolidated statements of income.
Our funding policy provides that payments to the trust of each qualified plan shall be equal to at least the minimum funding requirements of the Employee Retirement Income Security Act of 1974. The changes in investment types for the Chesapeake Pension Plan at December 31, 2020 and 2019, compared to same period in 2018, are associated with the de-risking strategy executed during the fourth quarter of 2019. The following schedule summarizes the assets of the Chesapeake Pension Plan and the FPU Pension Plan, by investment type, at December 31, 2020, 2019 and 2018:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Chesapeake Pension Plan
|
|
FPU Pension Plan
|
|
At December 31,
|
2020
|
|
2019
|
|
2018
|
|
2020
|
|
2019
|
|
2018
|
|
Asset Category
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity securities
|
—
|
%
|
|
—
|
%
|
|
49
|
%
|
|
54
|
%
|
|
53
|
%
|
|
50
|
%
|
|
Debt securities
|
96
|
%
|
|
92
|
%
|
|
41
|
%
|
|
37
|
%
|
|
37
|
%
|
|
41
|
%
|
|
Other
|
4
|
%
|
|
8
|
%
|
|
10
|
%
|
|
9
|
%
|
|
10
|
%
|
|
9
|
%
|
|
Total
|
100
|
%
|
|
100
|
%
|
|
100
|
%
|
|
100
|
%
|
|
100
|
%
|
|
100
|
%
|
The investment policy of both the Chesapeake Utilities 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 contributions, will provide funds adequate to pay promised benefits to present and future beneficiaries of the plans, earn a competitive return to increasingly fund a large portion of the plans’ retirement liabilities, minimize pension expense and cumulative contributions resulting from liability measurement and asset performance, and maintain the appropriate mix of investments to reduce the risk of large losses over the expected remaining life of each plan.
Chesapeake Utilities Corporation 2020 Form 10-K Page 88
Notes to the Consolidated Financial Statements
The following allocation range of asset classes is intended to produce a rate of return sufficient to meet the plans’ goals and objectives (this allocation range applied to the Chesapeake Pension Plan prior to the de-risking strategy executed during the fourth quarter of 2019):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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, 2020 and 2019, the assets of the Chesapeake Pension Plan and the FPU Pension Plan were comprised of the following investments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurement Hierarchy
|
|
|
|
|
|
|
|
At December 31, 2020
|
|
At December 31, 2019
|
|
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)
|
$
|
3,615
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
3,615
|
|
|
$
|
3,553
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
3,553
|
|
|
U.S. Mid Cap (1)
|
1,672
|
|
|
—
|
|
|
—
|
|
|
1,672
|
|
|
1,604
|
|
|
—
|
|
|
—
|
|
|
1,604
|
|
|
U.S. Small Cap (1)
|
891
|
|
|
—
|
|
|
—
|
|
|
891
|
|
|
726
|
|
|
—
|
|
|
—
|
|
|
726
|
|
|
International (2)
|
11,307
|
|
|
—
|
|
|
—
|
|
|
11,307
|
|
|
9,855
|
|
|
—
|
|
|
—
|
|
|
9,855
|
|
|
Alternative Strategies (3)
|
5,586
|
|
|
—
|
|
|
—
|
|
|
5,586
|
|
|
4,739
|
|
|
—
|
|
|
—
|
|
|
4,739
|
|
|
|
23,071
|
|
|
—
|
|
|
—
|
|
|
23,071
|
|
|
20,477
|
|
|
—
|
|
|
—
|
|
|
20,477
|
|
|
Mutual Funds - Debt securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed income (4)
|
21,563
|
|
|
—
|
|
|
—
|
|
|
21,563
|
|
|
19,220
|
|
|
—
|
|
|
—
|
|
|
19,220
|
|
|
High Yield (4)
|
2,606
|
|
|
—
|
|
|
—
|
|
|
2,606
|
|
|
2,476
|
|
|
—
|
|
|
—
|
|
|
2,476
|
|
|
|
24,169
|
|
|
—
|
|
|
—
|
|
|
24,169
|
|
|
21,696
|
|
|
—
|
|
|
—
|
|
|
21,696
|
|
|
Mutual Funds - Other
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commodities (5)
|
2,246
|
|
|
—
|
|
|
—
|
|
|
2,246
|
|
|
1,708
|
|
|
—
|
|
|
—
|
|
|
1,708
|
|
|
Real Estate (6)
|
1,954
|
|
|
—
|
|
|
—
|
|
|
1,954
|
|
|
2,288
|
|
|
—
|
|
|
—
|
|
|
2,288
|
|
|
Guaranteed deposit (7)
|
—
|
|
|
—
|
|
|
1,019
|
|
|
1,019
|
|
|
—
|
|
|
—
|
|
|
1,147
|
|
|
1,147
|
|
|
|
4,200
|
|
|
—
|
|
|
1,019
|
|
|
5,219
|
|
|
3,996
|
|
|
—
|
|
|
1,147
|
|
|
5,143
|
|
|
Total Pension Plan Assets in fair value hierarchy
|
$
|
51,440
|
|
|
$
|
—
|
|
|
$
|
1,019
|
|
|
52,459
|
|
|
$
|
46,169
|
|
|
$
|
—
|
|
|
$
|
1,147
|
|
|
47,316
|
|
|
Investments measured at net asset value (8)
|
|
|
|
|
|
|
8,116
|
|
|
|
|
|
|
|
|
7,017
|
|
|
Total Pension Plan Assets
|
|
|
|
|
|
|
$
|
60,575
|
|
|
|
|
|
|
|
|
$
|
54,333
|
|
(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.
Chesapeake Utilities Corporation 2020 Form 10-K Page 89
Notes to the Consolidated Financial Statements
At December 31, 2020 and 2019, our pension plans investments were classified under the same fair value measurement hierarchy (Level 1 through Level 3) described under Note 9, Fair Value of Financial Instruments. The Level 3 investments were recorded at fair value based on the contract value of annuity products underlying 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. Certain investments that were measured at net asset value per share have not been classified in the fair value hierarchy and are presented in the table above to reconcile to total pension plan assets.
The following table sets forth the summary of the changes in the fair value of Level 3 investments for the years ended December 31, 2020 and 2019:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31,
|
|
|
2020
|
|
2019
|
|
(in thousands)
|
|
|
|
|
Balance, beginning of year
|
$
|
1,147
|
|
|
$
|
627
|
|
|
Purchases
|
3,190
|
|
|
2,274
|
|
|
Transfers in
|
921
|
|
|
3,090
|
|
|
Disbursements
|
(4,290)
|
|
|
(4,907)
|
|
|
Investment income
|
51
|
|
|
63
|
|
|
Balance, end of year
|
$
|
1,019
|
|
|
$
|
1,147
|
|
Other Postretirement Benefits Plans
We sponsor two defined benefit postretirement health plans: the Chesapeake Utilities Postretirement Plan ("Chesapeake Postretirement Plan") and the FPU Medical Plan. The following table sets forth the funded status at December 31, 2020 and 2019:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Chesapeake
Postretirement Plan
|
|
FPU
Medical Plan
|
|
At December 31,
|
2020
|
|
2019
|
|
2020
|
|
2019
|
|
(in thousands)
|
|
|
|
|
|
|
|
|
Change in benefit obligation:
|
|
|
|
|
|
|
|
|
Benefit obligation — beginning of year
|
$
|
1,100
|
|
|
$
|
1,002
|
|
|
$
|
1,224
|
|
|
$
|
1,187
|
|
|
Interest cost
|
26
|
|
|
39
|
|
|
30
|
|
|
48
|
|
|
Plan participants contributions
|
166
|
|
|
149
|
|
|
37
|
|
|
38
|
|
|
Actuarial loss (gain)
|
(34)
|
|
|
73
|
|
|
(181)
|
|
|
47
|
|
|
Benefits paid
|
(225)
|
|
|
(163)
|
|
|
(101)
|
|
|
(96)
|
|
|
Benefit obligation — end of year
|
1,033
|
|
|
1,100
|
|
|
1,009
|
|
|
1,224
|
|
|
Change in plan assets:
|
|
|
|
|
|
|
|
|
Fair value of plan assets — beginning of year
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Employer contributions
|
59
|
|
|
14
|
|
|
64
|
|
|
58
|
|
|
Plan participants contributions
|
166
|
|
|
149
|
|
|
37
|
|
|
38
|
|
|
Benefits paid
|
(225)
|
|
|
(163)
|
|
|
(101)
|
|
|
(96)
|
|
|
Fair value of plan assets — end of year
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Reconciliation:
|
|
|
|
|
|
|
|
|
Funded status
|
(1,033)
|
|
|
(1,100)
|
|
|
(1,009)
|
|
|
(1,224)
|
|
|
Accrued postretirement cost
|
$
|
(1,033)
|
|
|
$
|
(1,100)
|
|
|
$
|
(1,009)
|
|
|
$
|
(1,224)
|
|
|
Assumptions:
|
|
|
|
|
|
|
|
|
Discount rate
|
2.25
|
%
|
|
3.00
|
%
|
|
2.50
|
%
|
|
3.25
|
%
|
Chesapeake Utilities Corporation 2020 Form 10-K Page 90
Notes to the Consolidated Financial Statements
Net periodic postretirement benefit costs for 2020, 2019, and 2018 include the following components:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Chesapeake
Postretirement Plan
|
|
FPU
Medical Plan
|
|
For the Years Ended December 31,
|
2020
|
|
2019
|
|
2018
|
|
2020
|
|
2019
|
|
2018
|
|
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
Components of net periodic postretirement cost:
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest cost
|
$
|
26
|
|
|
$
|
39
|
|
|
$
|
38
|
|
|
$
|
30
|
|
|
$
|
48
|
|
|
$
|
47
|
|
|
Amortization of actuarial loss
|
24
|
|
|
46
|
|
|
58
|
|
|
(19)
|
|
|
—
|
|
|
—
|
|
|
Amortization of prior service cost (credit)
|
(77)
|
|
|
(77)
|
|
|
(77)
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Net periodic cost
|
(27)
|
|
|
8
|
|
|
19
|
|
|
11
|
|
|
48
|
|
|
47
|
|
|
Amortization of pre-merger regulatory asset
|
—
|
|
|
—
|
|
|
—
|
|
|
6
|
|
|
8
|
|
|
8
|
|
|
Total periodic cost
|
$
|
(27)
|
|
|
$
|
8
|
|
|
$
|
19
|
|
|
$
|
17
|
|
|
$
|
56
|
|
|
$
|
55
|
|
|
Assumptions
|
|
|
|
|
|
|
|
|
|
|
|
|
Discount rate
|
3.00
|
%
|
|
4.00
|
%
|
|
3.50
|
%
|
|
3.25
|
%
|
|
4.25
|
%
|
|
3.75
|
%
|
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, 2020:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
Chesapeake
Pension
Plan
|
|
FPU
Pension
Plan
|
|
Chesapeake
SERP
|
|
Chesapeake
Postretirement
Plan
|
|
FPU
Medical
Plan
|
|
Total
|
|
Prior service cost (credit)
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
(370)
|
|
|
$
|
—
|
|
|
$
|
(370)
|
|
|
Net loss (gain)
|
2,033
|
|
|
21,242
|
|
|
699
|
|
|
546
|
|
|
(194)
|
|
|
24,326
|
|
|
Total
|
$
|
2,033
|
|
|
$
|
21,242
|
|
|
$
|
699
|
|
|
$
|
176
|
|
|
$
|
(194)
|
|
|
$
|
23,956
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated other comprehensive loss (gain) pre-tax(1)
|
$
|
2,033
|
|
|
$
|
4,036
|
|
|
$
|
699
|
|
|
$
|
176
|
|
|
$
|
(37)
|
|
|
$
|
6,907
|
|
|
Post-merger regulatory asset
|
—
|
|
|
17,206
|
|
|
—
|
|
|
—
|
|
|
(157)
|
|
|
17,049
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total unrecognized cost
|
$
|
2,033
|
|
|
$
|
21,242
|
|
|
$
|
699
|
|
|
$
|
176
|
|
|
$
|
(194)
|
|
|
$
|
23,956
|
|
(1) The total amount of accumulated other comprehensive loss recorded on our consolidated balance sheet as of December 31, 2020 is net of income tax benefits of $1.8 million.
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. As of December 31, 2020, the pre-merger regulatory asset related to the FPU Pension and FPU Medical Plan was fully amortized.
Assumptions
The assumptions used for the discount rate to calculate the benefit obligations were based on the interest rates of high-quality bonds in 2020, considering the expected lives of each 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 and the de-risking strategy implemented in the fourth quarter of 2019 for Chesapeake's 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 2020 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.
Chesapeake Utilities Corporation 2020 Form 10-K Page 91
Notes to the Consolidated Financial Statements
Estimated Future Benefit Payments
In 2021, we expect to contribute $0.3 million and $2.1 million to the Chesapeake Pension Plan and FPU Pension Plan, respectively, and $0.2 million to the Chesapeake SERP. We also expect to contribute less than $0.1 million to both the Chesapeake Postretirement Plan and FPU Medical Plan, in 2021.
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)
|
|
|
|
|
|
|
|
|
|
|
2021
|
$
|
384
|
|
|
$
|
3,409
|
|
|
$
|
151
|
|
|
$
|
68
|
|
|
$
|
67
|
|
|
2022
|
$
|
99
|
|
|
$
|
3,493
|
|
|
$
|
150
|
|
|
$
|
66
|
|
|
$
|
67
|
|
|
2023
|
$
|
981
|
|
|
$
|
3,559
|
|
|
$
|
148
|
|
|
$
|
61
|
|
|
$
|
66
|
|
|
2024
|
$
|
106
|
|
|
$
|
3,601
|
|
|
$
|
146
|
|
|
$
|
58
|
|
|
$
|
67
|
|
|
2025
|
$
|
1,007
|
|
|
$
|
3,680
|
|
|
$
|
158
|
|
|
$
|
55
|
|
|
$
|
67
|
|
|
Years 2026 through 2030
|
$
|
1,193
|
|
|
$
|
18,627
|
|
|
$
|
735
|
|
|
$
|
222
|
|
|
$
|
317
|
|
(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.
Retirement Savings Plan
For the years ended December 31, 2020, 2019 and 2018, we sponsored a 401(k) Retirement Savings Plan. This plan is offered to all eligible employees who have completed three months of service. 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. New employees who do not make an election to contribute and 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 ten percent. All contributions and matched funds can be invested among the mutual funds available for investment.
Employer contributions to our Retirement Savings Plan totaled $5.9 million, $5.7 million, and $5.5 million for the years ended December 31, 2020, 2019 and 2018, respectively. As of December 31, 2020, there were 813,230 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 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 officers can defer up to 80 percent of their base compensation, cash bonuses or any amount of their stock bonuses (net of required withholdings). 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 deferred compensation to begin on a specified future date or upon separation from service. Additionally, participants can elect to receive payments upon the earlier or later of a fixed date or separation from service. The payments can be made in one 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 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, recorded as Investments on the consolidated balance sheet, had a fair value of $10.8 million and $9.2 million at December 31, 2020 and 2019, respectively. (See Note 10, Investments, for further details). The assets of the Rabbi Trust are at all times subject to the claims of our general creditors.
Chesapeake Utilities Corporation 2020 Form 10-K Page 92
Notes to the Consolidated Financial Statements
Deferrals of officer base compensation and cash bonuses and directors’ cash retainers 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 $5.7 million and $4.5 million at December 31, 2020 and 2019, respectively, which are also shown as a deduction against stockholders' equity in the consolidated balance sheet.
18. SHARE-BASED COMPENSATION PLANS
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 415,412 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, 2020, 2019 and 2018:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31,
|
|
|
2020
|
|
2019
|
|
2018
|
|
(in thousands)
|
|
|
|
|
|
|
Awards to non-employee directors
|
$
|
733
|
|
|
$
|
620
|
|
|
$
|
539
|
|
|
Awards to key employees
|
4,096
|
|
|
3,659
|
|
|
2,871
|
|
|
Total compensation expense
|
4,829
|
|
|
4,279
|
|
|
3,410
|
|
|
Less: tax benefit
|
(1,254)
|
|
|
(1,117)
|
|
|
(934)
|
|
|
Share-based compensation amounts included in net income
|
$
|
3,575
|
|
|
$
|
3,162
|
|
|
$
|
2,476
|
|
Stock Options
There were no stock options outstanding or issued during the years 2018 through 2020.
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 2019, each of our non-employee directors received an annual retainer of 751 shares of common stock under the SICP for board service through the 2020 Annual Meeting of Stockholders; accordingly, 6,759 shares, with a weighted average fair value of $93.14 per share, were issued and vested in 2019. In May 2020, each of our non-employee directors received an annual retainer of 887 shares of common stock under the SICP for service as a director through the 2021 Annual Meeting of Stockholders; accordingly, 8,870 shares, with a weighted average fair value of $84.47 per share, were issued and vested in 2020.
In January 2020, a newly appointed member of our Board of Directors received a pro-rated retainer of 254 shares of common stock under the SICP to serve as a non-employee director through the 2020 Annual Meeting of Stockholders. The shares awarded to the non-employee director immediately vested upon issuance in January 2020, had a weighted average fair value of $95.83 per share, and the expense was recognized over the remaining service period ending on the date of the 2020 Annual Meeting of Stockholders
At December 31, 2020, there was $0.3 million of unrecognized compensation expense related to shares granted to non-employee directors. This expense will be recognized over the remaining service period ending on the date of 2021 Annual Meeting of Stockholders.
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 and subject to SEC transfer restrictions once awarded.
We currently have several outstanding multi-year performance plans, which are based upon the successful achievement of long-term goals, growth and financial results and comprise both market-based and performance-based conditions and targets. The fair value per share, tied to a performance-based condition or target, is equal to the market price per share on the grant date. For the market-based conditions, we used the Monte Carlo valuation to estimate the fair value of each share granted.
Chesapeake Utilities Corporation 2020 Form 10-K Page 93
Notes to the Consolidated Financial Statements
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, 2018
|
131,741
|
|
|
$
|
67.24
|
|
|
Granted (1)
|
88,048
|
|
|
92.74
|
|
|
Vested
|
(25,831)
|
|
|
67.08
|
|
|
Expired
|
(15,086)
|
|
|
69.28
|
|
|
Forfeited (2)
|
(21,055)
|
|
|
71.67
|
|
|
Outstanding — December 31, 2019
|
157,817
|
|
|
80.28
|
|
|
Granted
|
70,014
|
|
|
91.89
|
|
|
Vested
|
(35,651)
|
|
|
66.48
|
|
|
Expired
|
(5,302)
|
|
|
65.32
|
|
|
Outstanding — December 31, 2020
|
186,878
|
|
|
$
|
87.06
|
|
(1) Includes 43,032 shares that were granted to certain key employees in December 2019 associated with their promotion.
(2) In conjunction with the retirement of two key employees during 2019, these shares were forfeited for the remainder of the service periods associated with awards granted during their employment with the Company.
The intrinsic value of these awards was $20.2 million, $15.1 million and $10.7 million in 2020, 2019 and 2018, respectively. At December 31, 2020, there was $3.9 million of unrecognized compensation cost related to these awards, which is expected to be recognized through 2022.
In 2020, 2019 and 2018, 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 below table presents the number of shares withheld and amounts remitted to taxing authorities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31,
|
|
|
|
2020
|
|
2019
|
|
2018
|
|
(amounts except shares, in thousands)
|
|
|
|
|
|
|
|
Shares withheld to satisfy tax obligations
|
|
10,319
|
|
|
7,635
|
|
|
16,918
|
|
|
Amounts remitted to tax authorities to satisfy obligations
|
|
$
|
977
|
|
|
$
|
692
|
|
|
$
|
1,210
|
|
|
|
|
|
|
|
|
|
Chesapeake Utilities Corporation 2020 Form 10-K Page 94
Notes to the Consolidated Financial Statements
19. RATES AND OTHER REGULATORY ACTIVITIES
Our natural gas and electric distribution operations in Delaware, Maryland and Florida are subject to regulation by their respective PSC; Eastern Shore, our natural gas transmission subsidiary, is subject to regulation by the FERC; and Peninsula Pipeline and Aspire Energy Express, our intrastate pipeline subsidiaries, are subject to regulation (excluding cost of service) by the Florida PSC and Public Utilities Commission of Ohio, respectively.
Delaware
CGS: In August 2019, we filed with the Delaware PSC an application seeking an order that will establish the regulatory accounting treatment and valuation methodology for the acquisition of propane CGS owned by our affiliate, Sharp and the conversion of the CGS to natural gas service. We proposed to acquire each CGS one at a time and to pay replacement cost for each CGS system. In addition, we requested authorization to pay for and capitalize the CGS residents’ behind-the-meter conversion costs. Our existing natural gas customers will be protected against subsidizing the acquisitions and conversions of the CGS systems because we will complete only those systems that meet our economic test. The application was reviewed by the Delaware PSC, who approved and issued a final order in June 2020.
Maryland
Approval of the Elkton Gas Acquisition: In December 2019, we entered into an agreement with South Jersey Industries, Inc. to acquire its subsidiary, Elkton Gas, which provides natural gas distribution service to approximately 7,000 residential and commercial customers within a franchised area of Cecil County, Maryland. Elkton Gas territory is contiguous to our franchised service territory in Cecil County, Maryland. On June 29, 2020, the Maryland PSC issued a final order approving the settlement agreement, therefore, enabling the transaction to move forward. In July 2020, the transaction closed and we acquired Elkton Gas as our wholly-owned subsidiary.
Application for Authority to Exercise a Franchise: In March 2020, we filed with the Maryland PSC an application seeking approval to exercise a franchise granted to us by the Board of County Commissioners of Somerset County, Maryland in December 2019. The application was approved in June 2020.
Florida
Hurricane Michael: In October 2018, Hurricane Michael passed through FPU's electric distribution operation's service territory in Northwest Florida. The hurricane caused widespread and severe damage to FPU's infrastructure resulting in the loss of electric service to 100 percent of its customers in the Northwest Florida service territory. FPU, after exerting extraordinary hurricane restoration efforts, restored service to those customers who were able to accept it. FPU expended more than $65.0 million to restore service, which was recorded as new plant and equipment, charged against FPU’s accumulated depreciation or charged against FPU’s storm reserve. Additionally, in 2019, amounts undergoing review by the Florida PSC for regulatory asset treatment were recorded as receivables and other deferred charges.
In August 2019, FPU filed a limited proceeding requesting recovery of storm-related costs associated with Hurricane Michael (capital and expenses) through a change in base rates. FPU also requested treatment and recovery of certain storm-related costs as regulatory assets for items currently not allowed to be recovered through the storm reserve as well as the recovery of capital replaced as a result of the storm. Recovery of these costs includes a component of an overall return on capital additions and regulatory assets. In March 2020, we filed an update to our original filing to account for actual charges incurred through December 2019, revised the amortization period of the storm-related costs from 30 years as originally requested to 10 years, and included costs related to Hurricane Dorian of approximately $1.2 million in this filing.
In late 2019, the Florida PSC approved an interim rate increase, subject to refund, effective January 1, 2020, associated with the restoration effort following Hurricane Michael. We fully reserved these interim rates, pending a final resolution and settlement of the limited proceeding. In September 2020, the Florida PSC approved a settlement agreement between FPU and the Office of the Public Counsel regarding final cost recovery and rates associated with Hurricane Michael. The settlement agreement allowed us to: (a) refund the over-collection of interim rates through the fuel clause; (b) record regulatory assets for storm costs in the amount of $45.8 million including interest which will be amortized over six years; (c) recover these storm costs through a surcharge for a total of $7.7 million annually; and (d) collect an annual increase in revenue of $3.3 million to recover capital costs associated with new plant and a regulatory asset for cost of removal and undepreciated plant. The new base rates and storm surcharge were effective on November 1, 2020.
Electric Depreciation Study: In September 2019, FPU filed a petition, with the Florida PSC, for approval of its consolidated electric depreciation rates. The petition was joined to the Hurricane Michael docket, and was approved at the Florida PSC Agenda in September 2020. The approved rates were retroactively applied effective January 1, 2020.
Chesapeake Utilities Corporation 2020 Form 10-K Page 95
Notes to the Consolidated Financial Statements
West Palm Beach Expansion Project: In June 2019, Peninsula Pipeline filed with the Florida PSC for approval of its Transportation Service Agreement with FPU. Peninsula Pipeline will construct several new interconnection points and pipeline expansions in Palm Beach County, Florida, which will enable FPU to serve an industrial research park and several new residential developments. Peninsula Pipeline will provide transportation service to FPU, increasing reliability, system pressure as well as introducing diversity in fuel source for natural gas to serve the increased demand in these areas. The petition was approved by the Florida PSC at the August 6, 2019 Agenda. Interim services began in the fourth quarter of 2019. We expect to complete the remainder of the project in phases through the second quarter of 2021.
Callahan Pipeline, Nassau County: In the second quarter of 2020, Peninsula Pipeline and Seacoast Gas Transmission completed construction of a jointly owned 26-mile, 16-inch steel pipeline that interconnects to the Cypress Pipeline interstate system in western Nassau County in order to serve growing demand in both Nassau and Duval counties, Florida. The Callahan pipeline terminates into the existing Peninsula Pipeline, which serves Amelia Island and the Peoples Gas distribution system. The Callahan Pipeline has enhanced FPU’s ability to expand service into Nassau County and has enabled Peoples Gas to enhance its system pressure and the reliability of its service in Duval County.
Eastern Shore
Del-Mar Energy Pathway Project: In December 2019, the FERC issued an order approving the construction of the Del-Mar Energy Pathway project. The order, which was applied for in September 2018 by Eastern Shore, approved the construction and operation of new facilities that will provide an additional 14,300 Dts/d of firm service to four customers. Facilities to be constructed include six miles of pipeline looping in Delaware; 13 miles of new mainline extension in Sussex County, Delaware and Wicomico and Somerset Counties in Maryland; and new pressure control and delivery stations in these counties. The benefits of this project include: (i) additional natural gas transmission pipeline infrastructure in eastern Sussex County, Delaware, and (ii) extension of Eastern Shore’s pipeline system, for the first time, into Somerset County, Maryland. Construction on the project began in January 2020, and Eastern Shore anticipates that this project will be fully in-service by the end of 2021.
Capital Cost Surcharge: In December 2019, the FERC approved Eastern Shore’s proposed capital cost surcharge to become effective January 1, 2020. The surcharge, an approved item in the settlement of Eastern Shore’s last general rate case, allows Eastern Shore to recover capital costs associated with mandated highway or railroad relocation projects that required the replacement of existing Eastern Shore facilities. Eastern Shore expects to recover $0.5 million in capital cost surcharges on an annual basis. As government mandated relocations continue resulting in Eastern Shore undertaking capital expenditures, we will continue to utilize the surcharge to seek recovery of these costs in accordance with the settlement from Eastern Shore’s last general rate case.
Renewable Natural Gas Tariff: In October 2019, Eastern Shore filed an application with the FERC to include renewable natural gas (biogas) utilization and standards in its tariff. Eastern Shore had proposed changes to its gas quality specifications that would enable it to accommodate renewable natural gas at various receipt points on its system. Changes to the gas quality specifications would ensure interchangeability of renewable natural gas with the natural gas currently delivered to Eastern Shore. The tariffs became effective in November 2019.
Ohio
Aspire Energy Express: In October 2020, the Public Utilities Commission of Ohio approved the request by Aspire Energy Express for authority to operate as an intrastate pipeline company in Ohio and also approved the submitted tariff. Aspire Energy Express will utilize the pipeline to provide natural gas transportation service in Ohio, including delivery to the Guernsey Power Station and other potential customers elsewhere in Ohio. Aspire Energy Express has entered into agreements with the Guernsey Power Station to construct the pipeline and provide natural gas transportation service to the facility, which the Public Utilities Commission of Ohio approved in November 2020. Aspire Energy Express intends to own and operate the proposed intrastate pipeline facilities that will interconnect with the Rockies Express Pipeline and other potential points of receipt. The pipeline facilities that will be initially constructed will provide firm transportation service to the Guernsey Power Station. Aspire Energy Express will be subject to ongoing jurisdiction and supervision of the Public Utilities Commission of Ohio with respect to the gas pipeline safety standards and requirements.
COVID-19 Impact
We are monitoring the global outbreak of COVID-19 and taking steps to mitigate the potential risks posed by its spread. We provide an “essential service” to our customers, which means that it is paramount that we keep our employees who operate our business safe and informed. We have taken and are continuously monitoring and updating precautions and protocols to ensure the safety of our employees and customers. As an “essential business” we are allowed to continue operational activity and construction projects with appropriate safety precautions, personal protective equipment and social distancing restrictions in
Chesapeake Utilities Corporation 2020 Form 10-K Page 96
Notes to the Consolidated Financial Statements
place. We have taken steps to assure our customers that disconnections for non-payment will be temporarily suspended. We are also working with our suppliers to understand the potential impacts to our supply chain; if material negative impacts are identified, we will work to mitigate them. This is a rapidly evolving situation, and could lead to extended disruption of economic activity in our markets. We will continue to monitor developments affecting our employees, customers, suppliers and shareholders, and will take additional precautions as warranted to comply with the CDC, state and local requirements and recommendations to protect our employees, customers and the communities we serve.
As a result of these measures, we are incurring costs associated with crisis management and the pandemic response including restrictions put in place by the state PSCs on utility disconnects for non-payment, technology costs incurred to expand work from home capabilities, additional sanitation and cleaning costs and costs of acquiring personal protective equipment as well as other expenses.
In April 2020, the Maryland PSC issued an order that authorized utilities to establish a regulatory asset to record prudently incurred incremental costs related to COVID-19, beginning on March 16, 2020. The Maryland PSC found that the creation of a regulatory asset for COVID-19 related expenses will facilitate the recovery of those costs prudently incurred to serve customers during this period, and that the deferral of such costs is appropriate because the current catastrophic health emergency is outside the control of the utility and is a non-recurring event.
In May 2020, the Delaware PSC issued an order that authorized Delaware utilities to establish a regulatory asset to record COVID-19 related incremental costs incurred to ensure customers have essential utility services, for the period beginning on March 24, 2020 and ending 30 days after the state of emergency ends. The creation of the regulatory asset for COVID-19 related costs offers utilities the ability to seek recovery of those costs.
In October 2020, the Florida PSC approved a joint petition of our natural gas and electric distribution utilities in Florida to establish regulatory asset to record incremental expenses incurred due to COVID-19. This regulatory asset will allow us to seek recovery of these costs in our next base rate proceeding. On November 16, 2020, the Office of Public Counsel filed a protest to the order approving the establishment of this regulatory asset, contending that the order should be a reversed or modified and to request a hearing on the protest. At this time, no hearing date has been established.
In the fourth quarter of 2020, we established regulatory assets based on the net incremental expense resulting from the pandemic for our natural gas distribution and electric businesses as currently authorized by the Delaware, Maryland and Florida PSCs.
Chesapeake Utilities Corporation 2020 Form 10-K Page 97
Notes to the Consolidated Financial Statements
The table below highlights the impact to our various regulated businesses as a result of the TCJA:
Summary TCJA Table
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Regulatory Liabilities related to ADIT
|
|
|
|
Operation and Regulatory Jurisdiction
|
|
Amount (in thousands)
|
Status
|
|
Status of Customer Rate impact related to lower federal corporate income tax rate
|
|
Eastern Shore (FERC)
|
|
$34,190
|
Will be addressed in Eastern Shore's next rate case filing.
|
|
Implemented one-time bill credit (totaling $0.9 million) in April 2018. Customer rates were adjusted in April 2018.
|
|
Delaware Division (Delaware PSC)
|
|
$12,728
|
PSC approved amortization of ADIT in January 2019.
|
|
Implemented one-time bill credit (totaling $1.5 million) in April 2019. Customer rates were adjusted in March 2019.
|
|
Maryland Division (Maryland PSC)
|
|
$3,970
|
PSC approved amortization of ADIT in May 2018.
|
|
Implemented one-time bill credit (totaling $0.4 million) in July 2018. Customer rates were adjusted in May 2018.
|
|
Sandpiper Energy (Maryland PSC)
|
|
$3,713
|
PSC approved amortization of ADIT in May 2018.
|
|
Implemented one-time bill credit (totaling $0.6 million) in July 2018. Customer rates were adjusted in May 2018.
|
|
Chesapeake Florida Gas Division/Central Florida Gas (Florida PSC)
|
|
$8,184
|
PSC issued order authorizing amortization and retention of net ADIT liability by the Company in February 2019.
|
|
Florida PSC's final order was issued in February 2019. Excluding GRIP, tax savings arising from the TCJA rate reduction will be retained by the Company.
GRIP: Tax savings for 2018 will be refunded to customers in 2020 through the annual GRIP cost recovery mechanism. Future customer GRIP surcharges will be adjusted to reflect tax savings associated with TCJA.
|
|
FPU Natural Gas (excludes Fort Meade and Indiantown) (Florida PSC)
|
|
$19,257
|
Same treatment on a net basis as Chesapeake Utilities Florida Gas Division (above).
|
|
Same treatment on a net basis as Chesapeake Utilities Florida Gas Division (above).
|
|
FPU Fort Meade and Indiantown Divisions
|
|
$309
|
Same treatment on a net basis as Chesapeake Utilities Florida Gas Division (above).
|
|
Tax rate reduction: The impact was immaterial for the divisions.
GRIP (Applicable to Fort Meade division only): Same treatment as Chesapeake Utilities Florida Gas Division (above).
|
|
FPU Electric (Florida PSC)
|
|
$6,694
|
In January 2019, PSC issued order approving amortization of ADIT through purchased power cost recovery, storm reserve and rates.
|
|
TCJA benefit is provided to customers through a combination of reductions to the fuel cost recovery rate, base rates, as well as application to the storm reserve over the next several years.
|
|
Elkton Gas (Maryland PSC)
|
|
$1,124
|
PSC approved amortization of ADIT in March 2018.
|
|
Previous owner implemented one-time bill credit (totaling less than $0.1 million) in May 2020. Customer rates were adjusted in April 2020.
|
Regulatory Assets and Liabilities
At December 31, 2020 and 2019, our 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.
Chesapeake Utilities Corporation 2020 Form 10-K Page 98
Notes to the Consolidated Financial Statements
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
|
2020
|
|
2019
|
|
(in thousands)
|
|
|
|
|
Regulatory Assets
|
|
|
|
|
Under-recovered purchased fuel and conservation cost recovery (1)
|
$
|
2,078
|
|
|
$
|
5,144
|
|
|
Under-recovered GRIP revenue (2)
|
278
|
|
|
—
|
|
|
Deferred postretirement benefits (3)
|
17,716
|
|
|
16,311
|
|
|
Deferred conversion and development costs (1)
|
23,054
|
|
|
20,881
|
|
|
Environmental regulatory assets and expenditures (4)
|
1,743
|
|
|
2,241
|
|
|
Acquisition adjustment (5)
|
28,755
|
|
|
30,329
|
|
|
Loss on reacquired debt (6)
|
795
|
|
|
869
|
|
|
Deferred costs associated with COVID-19 (7)
|
1,925
|
|
|
—
|
|
|
Deferred storm costs (8)
|
44,320
|
|
|
—
|
|
|
Other
|
3,928
|
|
|
2,776
|
|
|
Total Regulatory Assets
|
$
|
124,592
|
|
|
$
|
78,551
|
|
|
|
|
|
|
|
|
|
|
|
|
Regulatory Liabilities
|
|
|
|
|
Self-insurance (9)
|
$
|
533
|
|
|
$
|
873
|
|
|
Over-recovered purchased fuel and conservation cost recovery (1)
|
4,422
|
|
|
2,724
|
|
|
Over-recovered GRIP revenue (2)
|
338
|
|
|
2,668
|
|
|
Storm reserve (9)
|
2,673
|
|
|
1,437
|
|
|
Accrued asset removal cost (10)
|
45,315
|
|
|
36,767
|
|
|
Deferred income taxes due to rate change (11)
|
90,845
|
|
|
89,191
|
|
|
Interest related to storm recovery (8)
|
3,353
|
|
|
—
|
|
|
Other
|
1,541
|
|
|
75
|
|
|
Total Regulatory Liabilities
|
$
|
149,020
|
|
|
$
|
133,735
|
|
|
|
|
|
|
(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 division and Chesapeake Utilities’ Central Florida Gas 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. This balance also includes the portion of pension settlement expense associated with the de-risking of the Chesapeake Pension Plan pursuant to an order from the FERC that allowed us to defer Eastern Shore's portion. See Note 17, 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 20, 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. We paid $34.2 million of the premium in 2009, including a gross up for income tax, because it is not tax deductible, and $0.7 million 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 deferred as regulatory assets the net incremental expense impact associated with the net expense impact of COVID-19 as authorized by the stated PSCs.
(8) The Florida PSC authorized us to recover regulatory assets (including interest) associated with the recovery of Hurricanes Michael and Dorian storm costs which will be amortized between 6 and 10 years. Recovery of these costs includes a component of an overall return on capital additions and regulatory assets.
(9) We have storm reserves in our Florida regulated energy operations and self-insurance for our 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.
(10) See Note 1, Summary of Significant Accounting Policies, for additional information on our asset removal cost policies.
(11) We recorded a regulatory liability for our regulated businesses related to the revaluation of accumulated deferred tax assets/liabilities as a result of the TCJA. The liability will be amortized over a period between 5 to 80 years based on the remaining life of the associated property. Based upon the regulatory proceedings, we will pass back the respective portion of the excess accumulated deferred taxes to rate payers. See Note 12, Income Taxes, for additional information.
Chesapeake Utilities Corporation 2020 Form 10-K Page 99
Notes to the Consolidated Financial Statements
20. ENVIRONMENTAL COMMITMENTS AND CONTINGENCIES
We are subject to federal, state and local laws and regulations governing environmental quality and pollution control. These laws and regulations require us to remove or remediate, at current and former operating sites, the effect on the environment of the disposal or release of specified substances.
MGP Sites
We have participated in the investigation, assessment or remediation of, and have exposures at, seven former MGP sites. We have received approval for recovery of clean-up costs in rates for sites located in Salisbury, Maryland; Seaford, Delaware; and Winter Haven, Key West, Pensacola, Sanford and West Palm Beach, Florida.
As of December 31, 2020 and 2019, we had approximately $5.9 million and $8.0 million, respectively, in environmental liabilities, related to FPU’s MGP sites in Key West, Pensacola, Sanford and West Palm Beach. FPU has approval to recover, from insurance and from customers through rates, up to $14.0 million of its environmental costs related to its MGP sites. As of December 31, 2020 and 2019, we have recovered approximately $12.4 million and $11.9 million, respectively, leaving approximately $1.6 million and $2.1 million, respectively, in regulatory assets for future recovery from FPU’s customers.
Environmental liabilities for our MGP sites are recorded on an undiscounted basis based on the estimate of future costs provided by independent consultants. We continue to expect that all costs related to environmental remediation and related activities, including any potential future remediation costs for which we do not currently have approval for regulatory recovery, will be recoverable from customers through rates.
The following is a summary of our remediation status and estimated costs to implement clean-up of our key MGP sites:
|
|
|
|
|
|
|
|
|
|
|
MGP Site (Jurisdiction)
|
Status
|
Estimated Cost to Clean Up
(Expect to Recover through Rates)
|
|
West Palm Beach (Florida)
|
Remediation actions approved by the Florida Department of Environmental Protection have been implemented on the east parcel of the site. Similar remediation actions have been initiated on the site's west parcel, and construction of active remedial systems are expected to be completed in 2021.
|
Between $3.3 million to $14.2 million, including costs associated with the relocation of FPU’s operations at this site, and any potential costs associated with future redevelopment of the properties.
|
|
Sanford (Florida)
|
In March 2018, the United States Environmental Protection Agency ("EPA") approved a "site-wide ready for anticipated use" status, which is the final step before delisting a site. Construction has been completed and restrictive covenants are in place to ensure protection of human health. The only remaining activity is long-term groundwater monitoring.
|
FPU's remaining remediation expenses, including attorneys' fees and costs, are anticipated to be immaterial.
|
|
Winter Haven (Florida)
|
Remediation is ongoing.
|
Not expected to exceed $0.4 million.
|
|
Seaford (Delaware)
|
Conducted investigations of on-site and off-site impacts in the vicinity of the site, from 2014 through 2018, and submitted the findings to Delaware Department of Natural Resources and Environmental Control ("DNREC") in a March 2019 report. An interim action involving air-sparging/vapor extraction is being implemented, in accordance with the DNREC-approved Work Plan.
|
Between $0.2 million and $0.5 million.
|
Chesapeake Utilities Corporation 2020 Form 10-K Page 100
Notes to the Consolidated Financial Statements
21. OTHER COMMITMENTS AND CONTINGENCIES
Natural Gas, Electric and Propane Supply
In March 2020, our Delmarva Peninsula natural gas distribution operations entered into asset management agreements with a third party to manage their natural gas transportation and storage capacity. The agreements were effective as of April 1, 2020 and expire on March 31, 2023.
In May 2019, FPU natural gas distribution operations and Eight Flags entered into separate asset management agreements with Emera Energy Services, Inc. to manage their natural gas transportation capacity. Short-term agreements were entered for a term beginning July 2019 through October 2020 with long-term agreements executed for a 10-year term that commenced in November 2020.
Chesapeake Utilities' Florida Division has firm transportation service contracts with FGT and Gulfstream. Pursuant to a capacity release program approved by the Florida PSC, all of the capacity under these agreements has been released to various third parties. Under the terms of these capacity release agreements, Chesapeake Utilities is contingently liable to FGT and Gulfstream should any party, that acquired the capacity through release, fail to pay the capacity charge. To date, Chesapeake Utilities has not been required to make a payment resulting from this contingency.
FPU’s electric supply contracts require FPU to maintain an acceptable standard of creditworthiness based on specific financial ratios. FPU’s agreement with Florida Power & Light Company requires FPU to meet or exceed a debt service coverage ratio of 1.25 times based on the results of the prior 12 months. If FPU fails to meet this ratio, it must provide an irrevocable letter of credit or pay all amounts outstanding under the agreement within five business days. FPU’s electric supply agreement with Gulf Power requires FPU to meet the following ratios based on the average of the prior six quarters: (a) funds from operations interest coverage ratio (minimum of 2 times), and (b) total debt to total capital (maximum of 65 percent). If FPU fails to meet the requirements, it has to provide the supplier a written explanation of actions taken, or proposed to be taken, to become compliant. Failure to comply with the ratios specified in the Gulf Power agreement could also result in FPU having to provide an irrevocable letter of credit. As of December 31, 2020, FPU was in compliance with all of the requirements of its fuel supply contracts.
Eight Flags provides electricity and steam generation services through its CHP plant located on Amelia Island, Florida. In June 2016, Eight Flags began selling power generated from the CHP plant to FPU pursuant to a 20-year power purchase agreement for distribution to our electric customers. In July 2016, Eight Flags also started selling steam pursuant to a separate 20-year contract, to the landowner on which the CHP plant is located. The CHP plant is powered by natural gas transported by FPU through its distribution system and Peninsula Pipeline through its intrastate pipeline.
The total purchase obligations for natural gas, electric and propane supplies are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year
|
|
2021
|
|
2022-2023
|
|
2024-2025
|
|
Beyond 2025
|
|
Total
|
|
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
Purchase Obligations
|
|
$
|
69,459
|
|
|
$
|
81,841
|
|
|
$
|
69,420
|
|
|
$
|
201,504
|
|
|
$
|
422,224
|
|
Corporate Guarantees
The Board of Directors has authorized us 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 as of December 31, 2020 was $20.0 million. The aggregate amount guaranteed at December 31, 2020 was approximately $5.7 million with the guarantees expiring on various dates through September 2021.
As of December 31, 2020, we have issued letters of credit totaling approximately $4.8 million related to the electric transmission services for FPU's electric division, the firm transportation service agreement between TETLP and our Delaware and Maryland divisions and our current and previous primary insurance carriers. These letters of credit have various expiration dates through October 5, 2021. There have been no draws on these letters of credit as of December 31, 2020. We do not anticipate that the counterparties will draw upon these letters of credit, and we expect that they will be renewed to the extent necessary in the future.
Chesapeake Utilities Corporation 2020 Form 10-K Page 101
Notes to the Consolidated Financial Statements
22. QUARTERLY FINANCIAL DATA (UNAUDITED)
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)
|
|
|
|
|
|
|
|
|
2020 (1)
|
|
|
|
|
|
|
|
|
Operating Revenues
|
$
|
152,690
|
|
|
$
|
97,051
|
|
|
$
|
101,419
|
|
|
$
|
137,038
|
|
|
Operating Income
|
$
|
42,134
|
|
|
$
|
17,977
|
|
|
$
|
17,406
|
|
|
$
|
35,206
|
|
|
Net Income:
|
|
|
|
|
|
|
|
|
Income from Continuing Operations
|
$
|
29,041
|
|
|
$
|
10,661
|
|
|
$
|
9,280
|
|
|
$
|
21,661
|
|
|
Earnings/(Loss) from Discontinued Operations, Net of Tax
|
(111)
|
|
|
125
|
|
|
(19)
|
|
|
691
|
|
|
Gain on sale of Discontinued Operations, Net of Tax
|
—
|
|
|
170
|
|
|
—
|
|
|
—
|
|
|
Net Income
|
$
|
28,930
|
|
|
$
|
10,956
|
|
|
$
|
9,261
|
|
|
$
|
22,352
|
|
|
Basic Earnings Per Share of Common Stock
|
|
|
|
|
|
|
|
|
Earnings Per Share from Continuing Operations
|
$
|
1.77
|
|
|
$
|
0.65
|
|
|
$
|
0.56
|
|
|
$
|
1.24
|
|
|
Earnings/(Loss) Per Share from Discontinued Operations
|
(0.01)
|
|
|
0.02
|
|
|
—
|
|
|
0.04
|
|
|
Basic Earnings Per Share of Common Stock
|
$
|
1.76
|
|
|
$
|
0.67
|
|
|
$
|
0.56
|
|
|
$
|
1.28
|
|
|
|
|
|
|
|
|
|
|
|
Diluted Earnings Per Share of Common Stock
|
|
|
|
|
|
|
|
|
Earnings Per Share from Continuing Operations
|
$
|
1.77
|
|
|
$
|
0.64
|
|
|
$
|
0.56
|
|
|
$
|
1.24
|
|
|
Earnings/(Loss) Per Share from Discontinued Operations
|
(0.01)
|
|
|
0.02
|
|
|
—
|
|
|
0.04
|
|
|
Diluted Earnings Per Share of Common Stock
|
$
|
1.76
|
|
|
$
|
0.66
|
|
|
$
|
0.56
|
|
|
$
|
1.28
|
|
|
|
|
|
|
|
|
|
|
|
2019 (1)
|
|
|
|
|
|
|
|
|
Operating Revenues
|
$
|
160,464
|
|
|
$
|
94,542
|
|
|
$
|
92,626
|
|
|
$
|
131,974
|
|
|
Operating Income
|
$
|
44,122
|
|
|
$
|
18,165
|
|
|
$
|
14,357
|
|
|
$
|
29,641
|
|
|
Net Income:
|
|
|
|
|
|
|
|
|
Income from Continuing Operations
|
$
|
28,811
|
|
|
$
|
8,914
|
|
|
$
|
6,251
|
|
|
$
|
17,123
|
|
|
Earnings/(Loss) from Discontinued Operations, Net of Tax
|
(148)
|
|
|
(610)
|
|
|
(630)
|
|
|
39
|
|
|
Gain on sale of Discontinued Operations, Net of Tax
|
—
|
|
|
—
|
|
|
—
|
|
|
5,402
|
|
|
Net Income
|
$
|
28,663
|
|
|
$
|
8,304
|
|
|
$
|
5,621
|
|
|
$
|
22,564
|
|
|
Basic Earnings Per Share of Common Stock
|
|
|
|
|
|
|
|
|
Earnings Per Share from Continuing Operations
|
$
|
1.76
|
|
|
$
|
0.54
|
|
|
$
|
0.38
|
|
|
$
|
1.05
|
|
|
Earnings/(Loss) Per Share from Discontinued Operations
|
(0.01)
|
|
|
(0.03)
|
|
|
(0.04)
|
|
|
0.33
|
|
|
Basic Earnings Per Share of Common Stock
|
$
|
1.75
|
|
|
$
|
0.51
|
|
|
$
|
0.34
|
|
|
$
|
1.38
|
|
|
|
|
|
|
|
|
|
|
|
Diluted Earnings Per Share of Common Stock
|
|
|
|
|
|
|
|
|
Earnings Per Share from Continuing Operations
|
$
|
1.75
|
|
|
$
|
0.54
|
|
|
$
|
0.38
|
|
|
$
|
1.04
|
|
|
Earnings/(Loss) Per Share from Discontinued Operations
|
(0.01)
|
|
|
(0.04)
|
|
|
(0.04)
|
|
|
0.33
|
|
|
Diluted Earnings Per Share of Common Stock
|
$
|
1.74
|
|
|
$
|
0.50
|
|
|
$
|
0.34
|
|
|
$
|
1.37
|
|
(1) The sum of the four quarters does not equal the total for the year due to rounding.
Chesapeake Utilities Corporation 2020 Form 10-K Page 102