QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended: March 31, 2022
OR
☐
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number: 001-11590
CHESAPEAKE UTILITIES CORPORATION
(Exact name of registrant as specified in its charter)
Delaware
51-0064146
(State or other jurisdiction of incorporation or organization)
(I.R.S. Employer Identification No.)
500 Energy Lane, Dover, Delaware19901
(Address of principal executive offices, including Zip Code)
(302) 734-6799
(Registrant’s telephone number, including area code)
909 Silver Lake Boulevard, Dover, Delaware 19904
(Former name, former address and former fiscal year, if changed since last report)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading Symbol(s)
Name of each exchange on which registered
Common Stock - par value per share $0.4867
CPK
New York Stock Exchange, Inc.
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act.
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
Common Stock, par value $0.4867 — 17,727,326 shares outstanding as of April 29, 2022.
Adjusted Gross Margin: a non-GAAP measure calculated by deducting the purchased cost of natural gas, propane and electricity and the cost of labor spent on direct revenue-producing activities from operating revenues. The costs included in Adjusted Gross Margin exclude depreciation and amortization and certain costs presented in operations and maintenance expenses in accordance with regulatory requirements
Aspire Energy: Aspire Energy of Ohio, LLC, a wholly-owned subsidiary of Chesapeake Utilities
Aspire Energy Express: Aspire Energy Express, LLC, a wholly-owned subsidiary of Chesapeake Utilities
ASU: Accounting Standards Update issued by the FASB
ATM: At-the-market
CARES Act: Coronavirus Aid, Relief, and Economic Security Act
CDC: U.S. Centers for Disease Control and Prevention
CDD: Cooling Degree-Day
CFG: Central Florida Gas Company
Chesapeake or Chesapeake Utilities: Chesapeake Utilities Corporation, its divisions and subsidiaries, as appropriate in the context of the disclosure
CHP: Combined Heat and Power Plant
Company: Chesapeake Utilities Corporation, its divisions and subsidiaries, as appropriate in the context of the disclosure
COVID-19: An infectious disease caused by a recently discovered coronavirus
CNG: Compressed natural gas
Degree-day: A degree-day is the measure of the variation in the weather based on the extent to which the average daily temperature (from 10:00 am to 10:00 am) falls above (CDD) or below (HDD) 65 degrees Fahrenheit
Delmarva Peninsula: A peninsula on the east coast of the U.S. occupied by Delaware and portions of Maryland and Virginia
Diversified Energy: Diversified Energy Company an entity from whom we acquired certain propane operating assets in North Carolina, South Carolina, Virginia, and Pennsylvania
DRIP: Dividend Reinvestment and Direct Stock Purchase Plan
Dt(s): Dekatherm(s), which is a natural gas unit of measurement that includes a standard measure for heating value
Dts/d: Dekatherms per day
Eastern Shore: Eastern Shore Natural Gas Company, a wholly-owned subsidiary of Chesapeake Utilities
Eight Flags: Eight Flags Energy, LLC, a wholly-owned subsidiary of Chesapeake Utilities
Elkton Gas: Elkton Gas Company, a wholly-owned subsidiary of Chesapeake Utilities
Escambia Meter Station: A natural gas metering station owned by Peninsula Pipeline Company located in Escambia County,
Florida OPC: The Office of Public Counsel, an agency established by the Florida legislature who advocates on behalf of Florida's utility consumers prior to actions or rule changes
FPU: Florida Public Utilities Company, a wholly-owned subsidiary of Chesapeake Utilities
GAAP: Generally Accepted Accounting Principles
Guernsey Power Station: Guernsey Power Station, LLC, a partner with Aspire Energy Express in the construction of a power generation facility in Ohio
GRIP: Gas Reliability Infrastructure Program
Gross Margin: a term under U.S. GAAP which is the excess of sales over costs of goods sold
Gulfstream: Gulfstream Natural Gas System, LLC, an unaffiliated pipeline network that supplies natural gas to FPU
HDD: Heating Degree-Day
LNG: Liquefied Natural Gas
Marlin Gas Services: Marlin Gas Services, LLC, a wholly-owned subsidiary of Chesapeake Utilities
MetLife: MetLife Investment Advisors, an institutional debt investment management firm, with which we have previously issued Senior Notes and which is a party to the current MetLife Shelf Agreement, as amended
MGP: Manufactured gas plant, which is a site where coal was previously used to manufacture gaseous fuel for industrial, commercial and residential use
Peninsula Pipeline: Peninsula Pipeline Company, Inc., a wholly-owned subsidiary of Chesapeake Utilities
Peoples Gas: Peoples Gas System, an Emera Incorporated subsidiary
Prudential: Prudential Investment Management Inc., an institutional investment management firm, with which Chesapeake Utilities entered into a previous Shelf Agreement and issued Shelf Notes
PSC: Public Service Commission, which is the state agency that regulates utility rates and/or services in certain of our jurisdictions
Revolver: Our $400.0 million unsecured revolving credit facility with certain lenders
RNG: Renewable natural gas
Sandpiper Energy: Sandpiper Energy, Inc., a wholly-owned subsidiary of Chesapeake Utilities
SEC: Securities and Exchange Commission
Senior Notes: Our unsecured long-term debt issued primarily to insurance companies on various dates
Sharp: Sharp Energy, Inc., a wholly-owned subsidiary of Chesapeake Utilities
Shelf Agreement: An agreement entered into by Chesapeake Utilities and a counterparty pursuant to which Chesapeake Utilities may request that the counterparty purchase our unsecured senior debt with a fixed interest rate and a maturity date not to exceed 20 years from the date of issuance
Shelf Notes: Unsecured senior promissory notes issuable under the Shelf Agreement executed with various counterparties
SICP: 2013 Stock and Incentive Compensation Plan
TCJA: Tax Cuts and Jobs Act enacted on December 22, 2017
TETLP: Texas Eastern Transmission, LP, an interstate pipeline interconnected with Eastern Shore's pipeline
Uncollateralized Senior Notes: Our unsecured long-term debt issued primarily to insurance companies on various dates
Condensed Consolidated Statements of Stockholders’ Equity (Unaudited)
Common Stock (1)
(in thousands, except shares and pershare data)
Number of
Shares(2)
Par Value
Additional Paid-In Capital
Retained Earnings
Accumulated Other Comprehensive Income/(Loss)
Deferred Compensation
Treasury Stock
Total
Balance at December 31, 2020
17,461,841
$
8,499
$
348,482
$
342,969
$
(2,865)
$
5,679
$
(5,679)
$
697,085
Net income
—
—
—
34,466
—
—
—
34,466
Other comprehensive income
—
—
—
—
227
—
—
227
Dividends declared ($0.440 per share)
—
—
—
(7,812)
—
—
—
(7,812)
Dividend reinvestment plan
20,511
10
2,204
—
—
—
—
2,214
Share-based compensation and tax benefit (3) (4)
39,141
19
189
—
—
—
—
208
Treasury stock activities
—
—
—
—
—
1,313
(1,313)
—
Balance at March 31, 2021
17,521,493
$
8,528
$
350,875
$
369,623
$
(2,638)
$
6,992
$
(6,992)
$
726,388
Balance at December 31, 2021
17,655,410
$
8,593
$
371,162
$
393,072
$
1,303
$
7,240
$
(7,240)
$
774,130
Net income
—
—
—
36,933
—
—
—
36,933
Other comprehensive income
—
—
—
—
547
—
—
547
Dividends declared ($0.480 per share)
—
—
—
(8,661)
—
—
—
(8,661)
Issuance under various plans (5)
24,960
12
3,410
—
—
—
—
3,422
Share-based compensation and tax benefit (3)(4)
39,018
19
(878)
—
—
—
—
(859)
Treasury stock activities
—
—
—
—
—
(763)
763
—
Balance at March 31, 2022
17,719,388
$
8,624
$
373,694
$
421,344
$
1,850
$
6,477
$
(6,477)
$
805,512
(1)2,000,000 shares of preferred stock at $0.01 par value have been authorized. No shares have been issued or are outstanding; accordingly, no information has been included in the statements of stockholders’ equity.
(2)Includes 107,518, 116,238, 116,751, and 105,087 shares at March 31, 2022, December 31, 2021, March 31, 2021 and December 31, 2020, respectively, held in a Rabbi Trust related to our Non-Qualified Deferred Compensation Plan.
(3)Includes amounts for shares issued for directors’ compensation.
(4)The shares issued under the SICP are net of shares withheld for employee taxes. For the three months ended March 31, 2022 and 2021, we withheld 21,832 and 14,020 shares, respectively, for employee taxes.
(5)Includes the Retirement Savings Plan, DRIP and ATM equity issuances.
The accompanying notes are an integral part of these financial statements.
References in this document to the “Company,” “Chesapeake Utilities,” “we,” “us” and “our” are intended to mean Chesapeake Utilities Corporation, its divisions and/or its subsidiaries, as appropriate in the context of the disclosure.
The accompanying unaudited condensed consolidated financial statements have been prepared in compliance with the rules and regulations of the SEC and GAAP. In accordance with these rules and regulations, certain information and disclosures normally required for audited financial statements have been condensed or omitted. These financial statements should be read in conjunction with the consolidated financial statements and notes thereto, included in our latest Annual Report on Form 10-K for the year ended December 31, 2021. In the opinion of management, these financial statements reflect all adjustments that are necessary for a fair presentation of our results of operations, financial position and cash flows for the interim periods presented.
Where necessary to improve comparability, prior period amounts have been changed to conform to current period presentation.
Due to the seasonality of our business, results for interim periods are not necessarily indicative of results for the entire fiscal year. Revenue and earnings are typically greater during the first and fourth quarters, when consumption of energy is highest due to colder temperatures.
Effects of COVID-19
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 significantly impacted economic conditions in the United States beginning in 2020 and to a lesser extent have continued into 2022. Chesapeake Utilities is considered an “essential business,” which allowed us to continue operational activities and construction projects while social distancing restrictions were in place. At this time, restrictions have predominantly been lifted as vaccines have become widely available in the United States. Previously existing states of emergency in all of our service territories expired during the second and third quarters of 2021 eliminating a majority of restrictions initially implemented to slow the spread of the virus. The expiration of the states of emergency along with the settlement of our limited proceeding in Florida, has concluded our ability to defer incremental pandemic related costs for consideration through the applicable regulatory process. We have adjusted our operating practices accordingly to ensure the safety of our operations and will take the necessary actions to comply with the CDC, and the Occupational and Safety and Health Administration, as new developments occur.
Refer to Note 5, Rates and Other Regulatory Activities, for further information on the regulated assets established as a result of the incremental expenses associated with COVID-19.
Recent Accounting Standards Yet to be Adopted
Reference Rate Reform - (ASC 848) - In March 2020, the FASB issued ASU 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting, which was subsequently amended by ASU 2021-01. The standard provides relief for companies preparing for the discontinuation of interest rates, such as LIBOR, and allows optional expedients and exceptions for applying GAAP to contracts, hedging relationships and other transactions affected by reference rate reform. The amendments included in this ASU are to be applied prospectively, and are not expected to have a material impact on our financial position or results of operations.
Effect of dilutive securities—Share-based compensation
83,059
67,301
Adjusted denominator—Diluted
17,761,119
17,553,167
Diluted Earnings Per Share
$
2.08
$
1.96
3. Acquisitions
Acquisition of Diversified Energy
On December 15, 2021, Sharp acquired the propane operating assets of Diversified Energy for approximately $37.5 million, net of cash acquired. In connection with this acquisition, we recorded a $2.1 million liability which is subject to the seller's adherence to various provisions contained in the purchase agreement through the first anniversary of the transaction closing. Included with the acquisition, was approximately $1.7 million of working capital from the Seller consisting predominantly of accounts receivable and propane inventory. We accounted for this acquisition as a business combination within our Unregulated Energy Segment beginning in the fourth quarter of 2021. In January 2022, we recorded a post-closing true-up of $0.8 million related to the provision for working capital valuation at the time of closing. There were multiple strategic benefits to this acquisition including it: (i) expands our propane service territory into North Carolina and South Carolina (ii) builds upon our existing propane presence in Virginia and Pennsylvania, and (iii) includes an established customer base with opportunities for future growth. Through this acquisition, the Company added approximately 19,000 residential, commercial and agricultural customers, along with expected distribution of approximately 10.0 million gallons of propane annually. In connection with this acquisition, we recorded $23.1 million in property plant and equipment, $6.2 million in intangible assets associated with customer relationships and non-compete agreements and $5.9 million in goodwill, all of which is deductible for income tax purposes. The amounts recorded in conjunction with the acquisition are preliminary, and subject to adjustment based on contractual provisions and finalization prior to the first anniversary of the transaction closing.
For the three months ended March 31, 2022, Diversified Energy generated operating revenue and operating income of $10.4 million and $1.5 million, respectively.
4. Revenue Recognition
We recognize revenue when our performance obligations under contracts with customers have been satisfied, which generally occurs when our businesses have delivered or transported natural gas, electricity or propane to customers. We exclude sales taxes and other similar taxes from the transaction price. Typically, our customers pay for the goods and/or services we provide in the month following the satisfaction of our performance obligation. The following table displays our revenue by major source based on product and service type for the three months ended March 31, 2022 and 2021:
(1)Total operating revenues for the three months ended March 31, 2022, include other revenue (revenues from sources other than contracts with customers) of $0.1 million for both Regulated and Unregulated Energy segments, respectively, and $(0.3) million and $0.1 million for our Regulated and Unregulated Energy segments, respectively, for the three months ended March 31, 2021. The sources of other revenues include revenue from alternative revenue programs related to revenue normalization for the Maryland division and Sandpiper Energy and late fees.
The timing of revenue recognition, customer billings and cash collections results in trade receivables, unbilled receivables (contract assets), and customer advances (contract liabilities) in our condensed consolidated balance sheets. The balances of our trade receivables, contract assets, and contract liabilities as of March 31, 2022 and December 31, 2021 were as follows:
Trade Receivables
Contract Assets (Current)
Contract Assets (Non-current)
Contract Liabilities (Current)
(in thousands)
Balance at 12/31/2021
$
56,277
$
18
$
4,806
$
747
Balance at 3/31/2022
50,440
18
4,743
504
Increase (decrease)
$
(5,837)
$
—
$
(63)
$
(243)
Our trade receivables are included in trade and other receivables in the condensed consolidated balance sheets. Our current contract assets are included in other current assets in the condensed consolidated balance sheet. Our non-current contract assets are included in other assets in the condensed consolidated balance sheet and primarily relate to operations and maintenance costs incurred by Eight Flags that have not yet been recovered through rates for the sale of electricity to our electric distribution operation pursuant to a long-term service agreement.
At times, we receive advances or deposits from our customers before we satisfy our performance obligation, resulting in contract liabilities. Contract liabilities are included in other accrued liabilities in the condensed consolidated balance 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 customer retail program on a ratable basis. For the three months ended March 31, 2022 and 2021, we recognized revenue of $0.4 million.
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 March 31, 2022, are expected to be recognized as follows:
(in thousands)
2022
2023
2024
2025
2026
2027
2028 and thereafter
Eastern Shore and Peninsula Pipeline
$
35,359
$
44,475
$
39,677
$
33,050
$
29,467
$
25,228
$
179,247
Natural gas distribution operations
5,010
5,681
5,458
4,928
4,745
4,406
27,089
FPU electric distribution
489
652
652
275
275
275
275
Total revenue contracts with remaining performance obligations
$
40,858
$
50,808
$
45,787
$
38,253
$
34,487
$
29,909
$
206,611
5. Rates and Other Regulatory Activities
Our natural gas and electric distribution operations in Delaware, Maryland and Florida are subject to regulation by their respective PSC; Eastern Shore, our natural gas transmission subsidiary, is subject to regulation by the FERC; and Peninsula Pipeline 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
See the discussion below under COVID-19 impact.
Maryland
Ocean City Maryland Reinforcement: In March 2022, we filed a Section 7(f) - Request for Service Area Determination with the FERC regarding plans to extend our natural gas facilities across the Delaware/Maryland state line from
Sussex County, Delaware, to Worcester County, Maryland, to provide a secondary feed to Sandpiper Energy, Inc.'s (Sandpiper) system. We anticipate resolution of this filing in the second quarter of 2022.
Strategic Infrastructure Development and Enhancement (“STRIDE”) Plan: In March 2021, Elkton Gas filed a strategic infrastructure development and enhancement plan with the Maryland PSC. The STRIDE plan accelerates Elkton Gas' Aldyl-A pipeline replacement program as costs of the plan are recovered through a fixed charge rider which is effective for five years. Under Elkton Gas’ STRIDE plan, the Aldyl-A pipelines will be fully replaced by 2023. In July 2021, Elkton Gas reached a settlement with the Maryland PSC Staff and the Maryland Office of Public Counsel that approved Elkton Gas’ STRIDE plan. The STRIDE plan allows for recovery of the associated revenue requirement through a monthly surcharge, which was implemented effective September 2021.
Florida
Winter Haven Expansion Project: In May 2021, Peninsula Pipeline filed a petition with the Florida PSC for approval of its Transportation Service Agreement with CFG for an incremental 6,800 Dts/d of firm service in the Winter Haven, Florida area. As part of this agreement, Peninsula Pipeline will construct a new interconnect with FGT and a new regulator station for CFG. CFG will use the additional firm service to support new incremental load due to growth, including providing service to a new can manufacturing facility, as well as provide reliability and operational benefits to CFG’s existing distribution system in the area. In connection with Peninsula Pipeline’s new regulator station, CFG is also extending its distribution system to connect to the new station. The Transportation Service Agreement was approved by the Florida PSC in September 2021. Construction commenced in February 2021 and the expected in-service date is the second quarter of 2022.
Beachside Pipeline Extension: In June 2021, Peninsula Pipeline and Florida City Gas entered into a Transportation Service Agreement for an incremental 10,176 Dts/d of firm service in Indian River County, Florida, to support Florida City Gas’ growth along the Indian River's barrier island. As part of this agreement, Peninsula Pipeline will construct 11.3 miles of pipeline from its existing pipeline in the Sebastian, Florida area, which will travel east under the Intercoastal Waterway ("ICW") and southward on the barrier island. As required by Peninsula Pipeline’s tariff and Florida Statutes, Peninsula Pipeline filed the required company and customer affidavits with the Florida PSC in June 2021. Construction commenced in June 2021 and the expected in-service date is early 2023.
Eastern Shore
Southern Expansion Project: In January 2022, Eastern Shore submitted a prior notice filing with the FERC pursuant to blanket certificate procedures, regarding its proposal to install an additional compressor unit and related facilities at Eastern Shore's existing compressor station in Bridgeville, Sussex County, Delaware. The project will enable Eastern Shore to provide additional firm natural gas transportation service to an existing shipper on Eastern Shore's pipeline system, with a projected in-service date by November 2022. We are currently in the midst of the comment and protest phase of the filing of the application process.
Capital Cost Surcharge: In June 2021, Eastern Shore submitted a filing with the FERC regarding a capital cost surcharge to recover capital costs associated with two mandated highway relocate projects that required the replacement of existing Eastern Shore facilities. The capital cost surcharge was an approved item in Eastern Shore’s last rate case. In conjunction with the filing of this surcharge, pursuant to the settlement agreement, a cumulative adjustment to the existing surcharge to reflect additional depreciation was included in this filing. The FERC issued an order approving the surcharge as filed on July 7, 2021. The combined revised surcharge became effective July 15, 2021.
COVID-19 Impact
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 significantly impacted economic conditions in the United States in 2020 and continued to impact economic conditions, to a lesser extent, through 2021. Chesapeake Utilities is considered an “essential business,” which allowed us to continue operational activities and construction projects with appropriate safety precautions and personal protective equipment, while being mindful of the social distancing restrictions that were in place.
In response to the COVID-19 pandemic and related restrictions, we experienced reduced consumption of energy largely in the commercial and industrial sectors, higher bad debt expenses and incremental expenses associated with COVID-19, including expenditures associated with personal protective equipment and premium pay for field
personnel. The additional operating expenses we incurred supported the ongoing delivery of our essential services during these unprecedented times. In April and May 2020, we were authorized by the Maryland and Delaware PSCs, respectively, to record regulatory assets for COVID-19 related costs which offers us the ability to seek recovery of those costs. In July 2021, the Florida PSC issued an order that approved incremental expenses we incurred due to COVID-19. The order allowed us to establish a regulatory asset in a total amount of $2.1 million as of June 30, 2021 for natural gas and electric distribution operations. The regulatory asset is amortized over two years and is recovered through the Purchased Gas Adjustment and Swing Service mechanisms for our natural gas distribution businesses and through the Fuel Purchased Power Cost Recovery clause for our electric division. As of March 31, 2022 and December 31, 2021, our total COVID-19 regulatory asset balance was $2.0 million and $2.3 million, respectively.
In 2021 and 2022, restrictions were gradually lifted as vaccines became widely available in the United States. The various state of emergencies associated with the COVID-19 pandemic that were previously declared in our service territories have been terminated and we have adjusted our operating practices accordingly to ensure the safety of our operations and will take the necessary actions to comply with the CDC, and the Occupational Safety and Health Administration, as new developments occur.
Summary TCJA Table
Customer rates for our regulated businesses were adjusted as approved by the regulators, prior to 2020 with the exception of Elkton Gas, which implemented a one-time bill credit in May 2020. The following table summarizes the regulatory liabilities related to accumulated deferred taxes ("ADIT") associated with TCJA for our regulated businesses as of March 31, 2022 and December 31, 2021:
Amount (in thousands)
Operation and Regulatory Jurisdiction
March 31, 2022
December 31, 2021
Status
Eastern Shore (FERC)
$34,190
$34,190
Will be addressed in Eastern Shore's next rate case filing.
Delaware Division (Delaware PSC)
$12,551
$12,591
PSC approved amortization of ADIT in January 2019.
Maryland Division (Maryland PSC)
$3,806
$3,840
PSC approved amortization of ADIT in May 2018.
Sandpiper Energy (Maryland PSC)
$3,641
$3,656
PSC approved amortization of ADIT in May 2018.
Chesapeake Florida Gas Division/Central Florida Gas (Florida PSC)
$7,986
$8,032
PSC issued order authorizing amortization and retention of net ADIT liability by the Company in February 2019.
FPU Natural Gas (excludes Fort Meade and Indiantown) (Florida PSC)
$19,086
$19,189
Same treatment on a net basis as Chesapeake Florida Gas Division (above).
FPU Fort Meade and Indiantown Divisions (Florida PSC)
$268
$271
Same treatment on a net basis as Chesapeake Florida Gas Division (above).
FPU Electric (Florida PSC)
$5,176
$5,237
In January 2019, PSC issued order approving amortization of ADIT through purchased power cost recovery, storm reserve and rates.
Elkton Gas (Maryland PSC)
$1,091
$1,091
PSC approved amortization of ADIT in March 2018.
6. Environmental Commitments and Contingencies
We are subject to federal, state and local laws and regulations governing environmental quality and pollution control. These laws and regulations require us to remove or remediate, at current and former operating sites, the effect on the environment of the disposal or release of specified substances.
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 March 31, 2022 and December 31, 2021, we had approximately $4.9 million and $5.2 million, respectively, in environmental liabilities related to the former MGP sites. As of March 31, 2022 and December 31, 2021, we have cumulative regulatory assets of $1.1 million and $1.3 million, respectively, in regulatory assets for future recovery of environmental costs for customers. Specific to FPU’s four MGP sites in Key West, Pensacola, Sanford and West Palm Beach. FPU has approval to recover, from insurance and through customer rates, up to $14.0 million of its environmental costs related to its MGP sites. As of March 31, 2022 and December 31, 2021, we had recovered approximately $13.0 million and $12.9 million, respectively, leaving approximately $1.0 million and $1.1 million, respectively, in regulatory assets for future recovery of environmental costs from FPU’s customers.
Environmental liabilities for our MGP sites are recorded on an undiscounted basis based on the estimate of future costs provided by independent consultants. We continue to expect that all costs related to environmental remediation and related activities, including any potential future remediation costs for which we do not currently have approval for regulatory recovery, will be recoverable from customers through rates.
Remediation is ongoing for the MGPs in Winter Haven and Key West in Florida and in Seaford, Delaware and the remaining clean-up costs are estimated to be between $0.3 million to $0.9 million for these three sites. The Environmental Protection Agency has approved a "site-wide ready for anticipated use" status for the Sanford, Florida MGP site, which is the final step before delisting a site. The remaining remediation expenses for the Sanford MGP site are immaterial.
The following is a summary of our remediation status and estimated costs to implement clean-up of our West Palm Beach Florida site:
Status
Estimated Clean-Up Costs
Remedial actions approved by the Florida Department of Environmental Protection have been implemented on the east parcel of the site. Similar remedial actions have been initiated on the site's west parcel, and construction of active remedial systems are expected be completed in 2022.
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.
7. 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 in March 2023.
FPU natural gas distribution operations and Eight Flags have separate asset management agreements with Emera Energy Services, Inc. to manage their natural gas transportation capacity. These agreements are for a 10-year term that commenced in November 2020 and expire in October 2030.
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 two times), and (b) total debt to total capital (maximum of 65 percent). If FPU fails to meet the requirements, it has to provide the supplier a written explanation of actions taken, or proposed to be taken, to become compliant. Failure to comply with the ratios specified in the Gulf Power agreement could also result in FPU having to provide an irrevocable letter of credit. As of March 31, 2022, FPU was in compliance with all of the requirements of its fuel supply contracts.
Eight Flags provides electricity and steam generation services through its CHP plant located on Amelia Island, Florida. In June 2016, Eight Flags began selling power generated from the CHP plant to FPU pursuant to a 20-year power purchase agreement for distribution to our electric customers. In July 2016, Eight Flags also started selling steam, pursuant to a separate 20-year contract, to the landowner on which the CHP plant is located. The CHP plant is powered by natural gas transported by FPU through its distribution system and Peninsula Pipeline through its intrastate pipeline.
Corporate Guarantees
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 March 31, 2022 was $20.0 million. The aggregate amount guaranteed at March 31, 2022 was approximately $13.1 million with the guarantees expiring on various dates through March 30, 2023.
As of March 31, 2022, we have issued letters of credit totaling approximately $5.3 million related to the electric transmission services for FPU's electric division, the firm transportation service agreement between TETLP and our Delaware and Maryland divisions, the capacity agreement between NEXUS and Aspire, and our current and previous primary insurance carriers. These letters of credit have various expiration dates through October 25, 2022. There have been no draws on these letters of credit as of March 31, 2022. 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.
8. Segment Information
We use the management approach to identify operating segments. We organize our business around differences in regulatory environment 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 subsidiary. Also included in this segment are other unregulated energy services, such as energy-related merchandise sales and heating, ventilation and air conditioning, plumbing and electrical services. These operations are unregulated as to their rates and services.
The remainder of our operations is presented as “Other businesses and eliminations,” which consists of unregulated subsidiaries that own real estate leased to Chesapeake Utilities, as well as certain corporate costs not allocated to other operations. The following table presents financial information about our reportable segments:
In June 2020, we filed a shelf registration statement with the SEC to facilitate the issuance of our common stock from time to time. 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.
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 2021, we issued just over 0.1 million shares at an average price per share of $125.71 and received net proceeds of $15.2 million under the DRIP. In the first three months of 2022, we issued less than 0.1 million shares at an average price per share of $137.45 and received net proceeds of $3.2 million under the DRIP.
We used the net proceeds, after fees, 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 Gain (Loss)
Defined benefit pension and postretirement plan items, unrealized gains (losses) of our propane swap agreements 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 income (loss). The following tables present the changes in the balance of accumulated other comprehensive gain (loss) as of March 31, 2022 and 2021. All amounts in the following tables are presented net of tax.
Defined Benefit
Commodity
Interest Rate
Pension and
Contracts
Swap
Postretirement
Cash Flow
Cash Flow
Plan Items
Hedges
Hedges (1)
Total
(in thousands)
As of December 31, 2021
$
(3,268)
$
4,571
$
—
$
1,303
Other comprehensive income before reclassifications
—
2,498
—
2,498
Amounts reclassified from accumulated other comprehensive income/(loss)
18
(1,969)
—
(1,951)
Net current-period other comprehensive income
18
529
—
547
As of March 31, 2022
$
(3,250)
$
5,100
$
—
$
1,850
(in thousands)
As of December 31, 2020
$
(5,146)
$
2,309
$
(28)
$
(2,865)
Other comprehensive income before reclassifications
—
2,371
1
2,372
Amounts reclassified from accumulated other comprehensive income/(loss)
63
(2,205)
(3)
(2,145)
Net prior-period other comprehensive income/(loss)
63
166
(2)
227
As of March 31, 2021
$
(5,083)
$
2,475
$
(30)
$
(2,638)
(1) All of our interest rate swaps expired at December 31, 2021.
The following table presents amounts reclassified out of accumulated other comprehensive income (loss) for the three months ended March 31, 2022 and 2021. Deferred gains or losses for our commodity contracts and interest rate swap cash flow hedges are recognized in earnings upon settlement.
Amortization of defined benefit pension and postretirement plan items:
Prior service credit (1)
$
19
$
19
Net loss(1)
(43)
(104)
Total before income taxes
(24)
(85)
Income tax benefit
6
22
Net of tax
$
(18)
$
(63)
Gains on commodity contracts cash flow hedges:
Propane swap agreements (2)
$
2,721
$
3,047
Income tax expense
(752)
(842)
Net of tax
$
1,969
$
2,205
Gains on interest rate swap cash flow hedges:
Interest rate swap agreements
$
—
$
4
Income tax expense
—
(1)
Net of tax
$
—
$
3
Total reclassifications for the period
$
1,951
$
2,145
(1)These amounts are included in the computation of net periodic costs (benefits). See Note 10, Employee Benefit Plans, for additional details.
(2)These amounts are included in the effects of gains and losses from derivative instruments. See Note 13, Derivative Instruments, for additional details.
Amortization of defined benefit pension and postretirement plan items are included in other expense, net gains and losses on propane swap agreements contracts are included in cost of sales, the realized gain or loss on interest rate swap agreements is recognized as a component of interest charges in the accompanying condensed consolidated statements of income. The income tax benefit is included in income tax expense in the accompanying condensed consolidated statements of income.
Net periodic benefit costs for our pension and post-retirement benefits plans for the three months ended March 31, 2022 and 2021 are set forth in the following tables:
Chesapeake Pension Plan
FPU Pension Plan
Chesapeake SERP
Chesapeake Postretirement Plan
FPU Medical Plan
For the Three Months Ended March 31,
2022
2021
2022
2021
2022
2021
2022
2021
2022
2021
(in thousands)
Interest cost
$
—
$
34
$
449
$
429
$
13
$
12
$
6
$
6
$
6
$
6
Expected return on plan assets
—
(40)
(857)
(830)
—
—
—
—
—
—
Amortization of prior service credit
—
—
—
—
—
—
(19)
(19)
—
—
Amortization of net (gain) loss
—
60
124
155
7
7
12
8
—
(2)
Total periodic cost (benefit)
$
—
$
54
$
(284)
$
(246)
$
20
$
19
$
(1)
$
(5)
$
6
$
4
In 2019, we began executing a de-risking strategy for the Chesapeake Pension Plan. In line with this strategy, we fully terminated the Chesapeake Pension Plan during the fourth quarter of 2021, and as of December 31, 2021, there were no remaining assets in the Chesapeake Pension Plan. Accordingly, a portion of the pension settlement expense associated with the termination was allocated to our Regulated Energy operations and was recorded as regulatory assets, previously approved in all of the impacted jurisdictions. The remaining portion of the pension settlement expense totaling $0.6 million was recorded in other expense in our consolidated statement of income in the fourth quarter 2021 which reflected the amount allocated to our Unregulated Energy operations or was deemed not recoverable through the regulatory process.
The components of our net periodic costs have been recorded or reclassified to other expense, net in the condensed consolidated statements of income. Pursuant to their respective regulatory orders, FPU and Chesapeake Utilities continue to record, as a regulatory asset, a portion of their unrecognized postretirement benefit costs related to their regulated operations. The portion of the unrecognized pension and postretirement benefit costs related to FPU’s unregulated operations and Chesapeake Utilities' operations is recorded to accumulated other comprehensive income.
The following tables present the amounts included in the regulatory asset and accumulated other comprehensive income that were recognized as components of net periodic benefit cost during the three months ended March 31, 2022 and 2021:
For the Three Months Ended March 31, 2022
Chesapeake Pension Plan
FPU Pension Plan
Chesapeake SERP
Chesapeake Postretirement Plan
FPU Medical Plan
Total
(in thousands)
Prior service credit
$
—
$
—
$
—
$
(19)
$
—
$
(19)
Net loss
—
124
7
12
—
143
Total recognized in net periodic benefit cost
—
124
7
(7)
—
124
Recognized from accumulated other comprehensive (income)/loss (1)
Recognized from accumulated other comprehensive (income)/loss (1)
60
29
7
(11)
—
85
Recognized from regulatory asset
—
126
—
—
(2)
124
Total
$
60
$
155
$
7
$
(11)
$
(2)
$
209
(1)See Note 9, Stockholders' Equity.
During the three months ended March 31, 2022, we did not contribute to the FPU Pension Plan. We expect to contribute approximately$0.3 million to the FPU Pension Plan during 2022, which represents the minimum annual contribution payments required.
The Chesapeake SERP, the Chesapeake Postretirement Plan and the FPU Medical Plan are unfunded and are expected to be paid out of our general funds. Cash benefits paid under the Chesapeake SERP for the three months ended March 31, 2022 were immaterial. We expect to pay total cash benefits of approximately $0.2 million under the Chesapeake SERP in 2022. Cash benefits paid under the Chesapeake Postretirement Plan, primarily for medical claims for the three months ended March 31, 2022 were $0.1 million. We estimate that approximately $0.1 million will be paid for such benefits under the Chesapeake Postretirement Plan in 2022. Cash benefits paid under the FPU Medical Plan, primarily for medical claims for the three months ended March 31, 2022, were immaterial. We estimate that approximately $0.1 million will be paid for such benefits under the FPU Medical Plan in 2022.
11. Investments
The investment balances at March 31, 2022 and December 31, 2021, consisted of the following:
(in thousands)
March 31, 2022
December 31, 2021
Rabbi trust (associated with the Non-Qualified Deferred Compensation Plan)
$
11,534
$
12,069
Investments in equity securities
27
26
Total
$
11,561
$
12,095
We classify these investments as trading securities and report them at their fair value. For the three months ended March 31, 2022 and 2021, we recorded a net unrealized loss of $0.5 million and a net unrealized gain of $0.4 million, respectively, in other income, net in the condensed consolidated statements of income related to these investments. For the investment in the Rabbi Trust, we also have recorded an associated liability, which is included in other pension and benefit costs in the consolidated balance sheets and is adjusted each period for the gains and losses incurred by the investments in the Rabbi Trust.
12. Share-Based Compensation
Our non-employee directors and key employees are granted share-based awards through our SICP. We record these share-based awards as compensation costs over the respective service period for which services are received in exchange for an award of equity or equity-based compensation. The compensation cost is based primarily on the fair value of the shares awarded, using the estimated fair value of each share on the date it was granted and the number of shares to be issued at the end of the service period.
The table below presents the amounts included in net income related to share-based compensation expense for the three months ended March 31, 2022 and 2021:
Share-based compensation amounts included in net income
$
1,642
$
1,389
Non-employee Directors
Shares granted to non-employee directors are issued in advance of the directors’ service periods and are fully vested as of the grant date. We record a deferred expense equal to the fair value of the shares issued and amortize the expense equally over a service period of one year. In May 2021, after the most recent election of directors, each of our non-employee directors received an annual retainer of 683 shares of common stock under the SICP for service as a director through the 2022 Annual Meeting of Stockholders; accordingly, 6,830 shares, with a weighted average fair value of $117.11 per share, were issued and vested in 2021.
On October 15, 2021, a newly appointed member of the Board of Directors received a pro-rated retainer of 342 shares of common stock under the SICP to serve as a non-employee director through the 2022 Annual Meeting of Stockholders. These shares vested immediately upon issuance in October 2021, had a weighted average fair value of $129.09 per share, and will be expensed over the remaining service period ending on the date of the 2022 Annual Meeting of Stockholders.
At March 31, 2022, there was approximately$0.1 million of unrecognized compensation expense related to shares granted to non-employee directors. This expense will be recognized over the remaining service period ending in May of 2022.
Key Employees
The table below presents the summary of the stock activity for awards to key employees for the three months ended March 31, 2022:
Number of Shares
Weighted Average Fair Value
Outstanding—December 31, 2021
197,398
$
94.15
Granted
63,382
$
123.68
Vested
(60,850)
$
90.60
Expired
557
$
91.42
Outstanding—March 31, 2022
200,487
$
105.32
During the three months ended March 31, 2022, we granted awards of 63,382 shares of common stock to key employees under the SICP, including awards granted in February 2022 and to key employees appointed in officer positions. The shares granted are multi-year awards that will vest no later than the three-year service period ending December 31, 2024. All of these stock awards are earned based upon the successful achievement of long-term financial results, which are comprised of market-based and performance-based conditions or targets. The fair value of each performance-based condition or target is equal to the market price of our common stock on the grant date of each award. For the market-based conditions, we used the Monte Carlo valuation to estimate the fair value of each market-based award granted.
In March 2022, upon the election by certain of our executive officers, we withheld shares with a value at least equivalent to each such executive officer’s minimum statutory obligation for applicable income and other employment taxes related to shares that vested and were paid in February 2022 for the performance period ended December 31, 2021, paid the balance of such awarded shares to each such executive officer net cash remitted to the appropriate taxing authorities. We withheld 21,832 shares, based on the value of the shares on their award date. Total combined payments for the employees’ tax obligations to the taxing authorities were approximately $2.8 million.
At March 31, 2022, the aggregate intrinsic value of the SICP awards granted to key employees was approximately $27.6 million. At March 31, 2022, there was approximately $9.4 million of unrecognized compensation cost related to these awards, which will be recognized through 2024.
Stock Options
There were no stock options outstanding or issued during the three months ended March 31, 2022 and 2021.
13. Derivative Instruments
We use derivative and non-derivative contracts to manage risks related to obtaining adequate supplies and the price fluctuations of natural gas, electricity and propane 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 March 31, 2022, our natural gas and electric distribution operations did not have any outstanding derivative contracts.
Volume of Derivative Activity
As of March 31, 2022, the volume of our commodity derivative contracts were as follows:
Business unit
Commodity
Contract Type
Quantity hedged (in millions)
Designation
Longest Expiration date of hedge
Sharp
Propane (gallons)
Purchases
15.5
Cash flows hedges
June 2024
Sharp
Propane (gallons)
Sales
3.8
Cash flows hedges
March 2023
Sharp entered into futures and swap agreements to mitigate the risk of fluctuations in wholesale propane index prices associated with the propane volumes that are expected to be purchased and/or sold during the heating season. Under the futures and swap agreements, Sharp will receive the difference between (i) the index prices (Mont Belvieu prices in March 2022 through June 2024) and (ii) the per gallon propane swap prices, to the extent the index prices exceed the contracted prices. If the index prices are lower than the contract 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 $4.3 million from accumulated other comprehensive income to earnings during the next 12-month period ended March 31, 2023.
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 fourth quarter of 2020, we entered into two $30.0 million interest rate swaps with a total notional amount of $60.0 million through September and December 2021 with pricing of 0.205 and 0.20 percent, respectively, 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 swaps were cash settled monthly as the counter-party pays us the 30-day LIBOR rate less the fixed rate. At December 31, 2021 all of our interest rate swaps had expired and we have not entered into any new derivative contracts associated with our outstanding short-term borrowings.
We designated and accounted for interest rate swaps as cash flows hedges. Accordingly, unrealized gains and losses associated with the interest rate swaps were recorded as a component of accumulated other comprehensive income
(loss). When the interest rate swaps settled, the realized gain or loss were recorded in the income statement and recognized as a component of interest charges.
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 as follows:
(in thousands)
Balance Sheet Location
March 31, 2022
December 31, 2021
Sharp
Other Accrued Liabilities
$
3,669
$
4,081
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 March 31, 2022 and December 31, 2021, are as follows:
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.
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 March 31, 2022 and December 31, 2021:
The following table sets forth the summary of the changes in the fair value of Level 3 investments for the three months ended March 31, 2022 and 2021:
Three months ended March 31,
2022
2021
(in thousands)
Beginning Balance
$
2,036
$
2,156
Purchases and adjustments
131
22
Transfers
—
—
Distribution
(71)
(38)
Investment income
8
8
Ending Balance
$
2,104
$
2,148
Investment income from the Level 3 investments is reflected in other expense, (net) in the condensed consolidated statements of income.
At March 31, 2022, there were no non-financial assets or liabilities required to be reported at fair value. We review our non-financial assets for impairment at least on an annual basis, as required.
Other Financial Assets and Liabilities
Financial assets with carrying values approximating fair value include cash and cash equivalents and accounts receivable. Financial liabilities with carrying values approximating fair value include accounts payable and other accrued liabilities and short-term debt. The fair value of cash and cash equivalents is measured using the comparable value in the active market and approximates its carrying value (Level 1 measurement). The fair value of short-term debt approximates the carrying value due to its near-term maturities and because interest rates approximate current market rates (Level 3 measurement).
At March 31, 2022, long-term debt, which includes current maturities but excludes debt issuance costs, had a carrying value of approximately $618.6 million, compared to the estimated fair value of $584.2 million. At December 31, 2021, long-term debt, which includes the current maturities but excludes debt issuance costs, had a carrying value of approximately $568.8 million, compared to a fair value of approximately $597.2 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.
On March 15, 2022 we issued 2.95 percent Senior Notes due March 15, 2042 to MetLife in the aggregate principal amount of $50 million. We used the proceeds received from the issuances of the Senior Notes to reduce short-term borrowings under the revolving credit facility and to fund capital expenditures. These Senior Notes have similar covenants and default provisions as the existing senior notes, and have an annual principal payment beginning in the eleventh year after the issuance.
Equipment Security Note
On September 24, 2021, we entered into an Equipment Financing Agreement with Banc of America Leasing & Capital, LLC to issue $9.6 million in sustainable financing to finance the purchase of equipment by our subsidiary, Marlin Gas Services. The equipment security note bears a 2.46 percent interest rate and has a term of ten years. Under the terms of the agreement, we granted a security interest in the equipment to the lender, to serve as collateral.
Shelf Agreements
We have entered into Shelf Agreements with Prudential and MetLife, whom are under no obligation to purchase any unsecured debt. The following table summarizes our Shelf Agreements at March 31, 2022:
(1) The Prudential and MetLife Shelf Agreements expire in April 2023 and May 2023, respectively.
The Uncollateralized Senior Notes, Shelf Agreements or Shelf Notes set forth certain business covenants to which we are subject when any note is outstanding, including covenants that limit or restrict our ability, and the ability of our subsidiaries, to incur indebtedness, or place or permit liens and encumbrances on any of our property or the property of our subsidiaries.
16. Short-Term Borrowings
We are authorized by our Board of Directors to borrow up to $400.0 million of short-term debt, as required. At March 31, 2022 and December 31, 2021, we had $140.9 million and $221.6 million, respectively, of short-term borrowings outstanding at a weighted average interest rate of 1.17 percent and 0.83 percent, respectively.
In August 2021, we amended and restated our Revolver into a multi-tranche facility totaling $400.0 million with multiple participating lenders. The two tranches of the facility consist of a $200.0 million 364-day short-term debt tranche and a $200.0 million five-year tranche, both of which have three (3) one-year extension options, which can be authorized by our Chief Financial Officer. We are eligible to establish the repayment term for individual borrowings under the five year tranche of the facility and to the extent that an individual loan under the revolver exceeded 12 months, the outstanding balance would be classified as a component of long-term debt.
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 March 31, 2022, we are in compliance with this covenant.
The 364-day tranche of the Revolver expires in August 2022 and the five-year tranche expires in August 2026 both are available to provide funds for our short-term cash needs to meet seasonal working capital requirements and to temporarily fund portions of our capital expenditures. Borrowings under both tranches of 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 a total indebtedness to total capitalization ratio. As of March 31, 2022, the pricing under the 364-day tranche of the Revolver does not include an unused commitment fee and maintains an interest rate of 0.70 percent over LIBOR. As of March 31, 2022, the pricing under the five-year tranche of the Revolver included an unused commitment fee of 0.09 percent and an interest rate of 0.95 percent over LIBOR.
Our total available credit under the Revolver at March 31, 2022 was $256.3 million. As of March 31, 2022, we had issued $5.3 million in letters of credit to various counterparties under the syndicated Revolvers. These letters of credit are not included in the outstanding short-term borrowings and we do not anticipate that they will be drawn upon by the counterparties. The letters of credit reduce the available borrowings under our syndicated Revolver.
In the fourth quarter of 2020, we entered into two $30.0 million interest rate swaps with a notional amount of $60.0 million through September and December 2021 at a pricing of 0.205 and 0.20 percent, respectively. 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. At December 31, 2021, all of our interest rate swaps had expired and we have not entered into any new derivative contracts associated with our outstanding short-term borrowings.
17. 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 our employees in several locations throughout our service territories. 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 March 31, 2022, 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 that would preclude our ability to pay dividends, obtain financing or enter into additional leases. As of March 31, 2022, 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:
Three Months Ended
March 31,
( in thousands)
Classification
2022
2021
Operating lease cost (1)
Operations expense
$651
$523
(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 condensed consolidated balance sheet at March 31, 2022 and December 31, 2021:
The following table presents our weighted-average remaining lease terms and weighted-average discount rates for our operating and financing leases at March 31, 2022 and December 31, 2021:
March 31, 2022
December 31, 2021
Weighted-average remaining lease term (in years)
Operating leases
8.76
8.10
Weighted-average discount rate
Operating leases
3.4
%
3.6
%
The following table presents additional information related to cash paid for amounts included in the measurement of lease liabilities included in our condensed consolidated statements of cash flows as of March 31, 2022 and 2021:
Three Months Ended
March 31,
(in thousands)
2022
2021
Operating cash flows from operating leases
$
609
$
471
The following table presents the future undiscounted maturities of our operating and financing leases at March 31, 2022 and for each of the next five years and thereafter:
(in thousands)
Operating
Leases (1)
Remainder of 2022
$
2,195
2023
2,804
2024
2,592
2025
2,265
2026
1,758
2027
1,509
Thereafter
6,080
Total lease payments
19,203
Less: Interest
(2,490)
Present value of lease liabilities
$
16,713
(1) Operating lease payments include $2.1 million related to options to extend lease terms that are reasonably certain of being exercised.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Management’s Discussion and Analysis of Financial Condition and Results of Operations is designed to provide a reader of the financial statements with a narrative report on our financial condition, results of operations and liquidity. This discussion and analysis should be read in conjunction with the attached unaudited condensed consolidated financial statements and notes thereto and our Annual Report on Form 10-K for the year ended December 31, 2021, including the audited consolidated financial statements and notes thereto.
Safe Harbor for Forward-Looking Statements
We make statements in this Quarterly Report on Form 10-Q (this " Quarterly Report") that do not directly or exclusively relate to historical facts. Such statements are “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, Section 21E of the Securities Exchange Act of 1934, as amended, and the Private Securities Litigation Reform Act of 1995. One can typically identify forward-looking statements by the use of forward-looking words, such as “project,” “believe,” “expect,” “anticipate,” “intend,” “plan,” “estimate,” “continue,” “potential,” “forecast” or other similar words, or future or conditional verbs such as “may,” “will,” “should,” “would” or “could.” These statements represent our intentions, plans, expectations, assumptions and beliefs about future financial performance, business strategy, projected plans and objectives of the Company. Forward-looking statements speak only as of the date they are made or as of the date indicated and we do not undertake any obligation to update forward-looking statements as a result of new information, future events or otherwise. These statements are subject to many risks and uncertainties. In addition to the risk factors described under Item 1A, Risk Factors in our 2021 Annual Report on Form 10-K, the following important factors, among others, could cause actual future results to differ materially from those expressed in the forward-looking statements:
•state and federal legislative and regulatory initiatives that affect cost and investment recovery, have an impact on rate structures, and affect the speed and the degree to which competition enters the electric and natural gas industries;
•the outcomes of regulatory, environmental and legal matters, including whether pending matters are resolved within current estimates and whether the related costs are adequately covered by insurance or recoverable in rates;
•the impact of climate change, including the impact of greenhouse gas emissions or other legislation or regulations intended to address climate change;
•the impact of significant changes to current tax regulations and rates;
•the timing of certification authorizations associated with new capital projects and the ability to construct facilities at or below estimated costs;
•changes in environmental and other laws and regulations to which we are subject and environmental conditions of property that we now, or may in the future, own or operate;
•possible increased federal, state and local regulation of the safety of our operations;
•the inherent hazards and risks involved in transporting and distributing natural gas, electricity and propane;
•the economy in our service territories or markets, the nation, and worldwide, including the impact of economic conditions (which we do not control) on demand for natural gas, electricity, propane or other fuels;
•risks related to cyber-attacks or cyber-terrorism that could disrupt our business operations or result in failure of information technology systems or result in the loss or exposure of confidential or sensitive customer, employee or Company information;
•adverse weather conditions, including the effects of hurricanes, ice storms and other damaging weather events;
•customers' preferred energy sources;
•industrial, commercial and residential growth or contraction in our markets or service territories;
•the effect of competition on our businesses from other energy suppliers and alternative forms of energy;
•the timing and extent of changes in commodity prices and interest rates;
•the effect of spot, forward and future market prices on our various energy businesses;
•the extent of our success in connecting natural gas and electric supplies to our transmission systems, establishing and maintaining key supply sources, and expanding natural gas and electric markets;
•the creditworthiness of counterparties with which we are engaged in transactions;
•the capital-intensive nature of our regulated energy businesses;
•our ability to access the credit and capital markets to execute our business strategy, including our ability to obtain financing on favorable terms, which can be affected by various factors, including credit ratings and general economic conditions;
•the ability to successfully execute, manage and integrate a merger, acquisition or divestiture of assets or businesses and the related regulatory or other conditions associated with the merger, acquisition or divestiture;
•the impact on our costs and funding obligations, under our pension and other post-retirement benefit plans, of potential downturns in the financial markets, lower discount rates, and costs associated with health care legislation and regulation;
•the ability to continue to hire, train and retain appropriately qualified personnel;
•the availability of, and competition for, qualified personnel supporting our natural gas, electricity and propane businesses;
•the effect of accounting pronouncements issued periodically by accounting standard-setting bodies; and
•the impacts associated with the outbreak of a pandemic, including the duration and scope of the pandemic the corresponding impact on our supply chains, our personnel, our contract counterparties, general economic conditions and growth, the financial markets and any costs to comply with governmental mandates.
Introduction
We are an energy delivery company engaged in the distribution of natural gas, electricity and propane; the transmission of natural gas; the generation of electricity and steam, and in providing related services to our customers.
Our strategy is focused on growing earnings from a stable regulated energy delivery foundation and investing in related businesses and services that provide opportunities for returns greater than traditional utility returns. We seek to identify and develop opportunities across the energy value chain, with emphasis on midstream and downstream investments that are accretive to earnings per share, consistent with our long-term growth strategy and create opportunities to continue our record of top tier returns on equity relative to our peer group.
Currently, our growth strategy is focused on the following platforms, including:
•Optimizing the earnings growth in our existing businesses, which includes organic growth, territory expansions, and new products and services as well as increased opportunities to transform the Company with a focus on people, process, technology and organizational structure.
•Identification and pursuit of additional pipeline expansions, including new interstate and intrastate transmission projects.
•Growth of Marlin Gas Services’ CNG transport business and expansion into LNG and RNG transport services as well as methane capture.
•Identifying and undertaking additional strategic propane acquisitions that provide a larger foundation in current markets and expand our brand and presence into new strategic growth markets.
•Pursuit of growth opportunities that enable us to utilize our integrated set of energy delivery businesses to participate in sustainable energy opportunities.
Due to the seasonality of our business, results for interim periods are not necessarily indicative of results for the entire fiscal year. Revenue and earnings are typically greater during the first and fourth quarters, when consumption of energy is normally highest due to colder temperatures.
Earnings per share information is presented on a diluted basis, unless otherwise noted.
The following discussions and those later in the document on operating income and segment results include the use of the term Adjusted Gross Margin which is a non-GAAP measure throughout our discussion on operating results. Adjusted Gross Margin is calculated by deducting the purchased cost of natural gas, propane and electricity and the cost of labor spent on direct revenue-producing activities from operating revenues. The costs included in Adjusted Gross Margin exclude depreciation and amortization and certain costs presented in operations and maintenance expenses in accordance with regulatory requirements. Adjusted Gross Margin should not be considered an alternative to Gross Margin under U.S. GAAP which is defined as the excess of sales over cost of goods sold. We believe that Adjusted 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 our unregulated energy operations. Our management uses Adjusted Gross Margin as one of the financial measures in assessing our business units’ performance. Other companies may calculate Adjusted Gross Margin in a different manner.
The below tables reconcile Gross Margin as defined under GAAP to our non-GAAP measure of Adjusted Gross Margin for the three months ended March 31, 2022 and 2021:
(1)Operations & maintenance expenses within the Consolidated Statements of Income are presented in accordance with regulatory requirements and to provide comparability within the industry. Operations & maintenance expenses which are deemed to be directly attributable to revenue producing activities have been separately presented above in order to calculate Gross Margin as defined under U.S. GAAP.
2022 to 2021 Gross Margin (GAAP) Variance – Regulated Energy
Gross Margin (GAAP) for the Regulated Energy segment for the first quarter of 2022 was $61.2 million, an increase of $3.4 million, or 5.9 percent, compared to the first quarter of 2021. Higher gross margin reflects continued pipeline expansions by Eastern Shore and Peninsula Pipeline, contributions from the new Guernsey pipeline, organic growth in the natural gas distribution businesses and operating results from the 2021 Escambia Meter acquisition. These increases were partially offset by higher depreciation and amortization related to recent capital investments and acquisitions as well as, increased payroll, benefits and other employee related costs.
2022 to 2021 Gross Margin (GAAP) Variance – Unregulated Energy
Gross Margin (GAAP) for the Unregulated Energy segment for the first quarter of 2022 was $32.3 million, an increase of $3.3 million, or 11.2 percent, compared to the first quarter of 2021. Higher gross margin is a result of contributions from the propane acquisition of Diversified Energy completed in 2021, increased propane margins per gallon and service fees, along with higher rates for Aspire Energy. These increases were partially offset by higher depreciation, amortization and property taxes related to recent capital investments and acquisitions, increased payroll, benefits and employee related costs and higher vehicle expenses primarily driven by increased fuel costs.
Results of Operations for the Three Months Ended March 31, 2022
Overview
Chesapeake Utilities is a Delaware corporation formed in 1947. We are a diversified energy company engaged, through our operating divisions and subsidiaries, in regulated energy, unregulated energy and other businesses. We operate primarily on the east coast of the United States and provide natural gas distribution and transmission; electric distribution and generation; propane gas distribution; mobile compressed natural gas services; steam generation; and other energy-related services.
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 significantly impacted economic conditions in the United States beginning in 2020 and persisted throughout 2021, though to a lesser extent. Chesapeake Utilities is considered an “essential business,” whichallowed us to continue operational activities and construction projects while social distancing restrictions were in place.
As of March 31, 2022, these restrictions have predominantly been lifted as vaccines have become widely available in the United States. Previously existing states of emergency in all of our service territories expired during the second and third quarters of 2021, eliminating a majority of restrictions initially implemented to slow the spread of the virus.The expiration of the states of emergency along with the settlement of our limited proceeding in Florida, has concluded our ability to defer incremental pandemic related costs for consideration through the applicable regulatory process. We have adjusted our operating practices accordingly to ensure the safety of our operations and will take the necessary actions to comply with the CDC, and the Occupational Safety and Health Administration, as new developments occur.
Environmental, Social and Governance Initiatives
ESG initiatives are at the core of our well-established culture, guiding our strategy and informing our ongoing business decisions. In February 2022, Chesapeake Utilities published its inaugural sustainability report. In the report, we outline our ESG commitments:
•Chesapeake Utilities will be a leader in the transition to a lower carbon future.
•We will continue to promote a diverse and inclusive workplace and further the sustainability of the communities we serve.
•Our businesses will be operated with integrity and the highest ethical standards.
These commitments guide our mission to deliver energy that makes life better for the people and communities we serve. They impact every aspect of our company and the relationships we have with our stakeholders. We encourage our investors to review the report and welcome feedback as we continue to enhance our ESG disclosures.
During the first quarter, some of our most recent ESG advancements included:
Environmental:
•Successfully completed first test of hydrogen and natural gas blend to fuel our Eight Flags' CHP
•Marlin Gas Services opened its first CNG fueling station near the Port of Savannah, capable of distributing RNG for fleet vehicles
Social:
•Named a 2022 Top Workplaces USA award recipient for mid-sized companies for the second consecutive year
•Initiated two new Employee Resource Groups within the Company
Governance:
•Increased transparency with the enhancement of our director skills matrix in the Proxy Statement distributed to shareholders in March 2022
•In April 2022, we joined governance leaders as a member of the Advisory Board for the John L. Weinberg Center for Corporate Governance
Additionally, we established our Environmental Sustainability Office ("ESO") and ESG Committee ("ESGC") during the first quarter of 2022. The ESO was established to identify and manage emission-reducing projects both internally, as well as those
that support our customers’ sustainability goals. The ESGC was established to bring together a cross-functional team of leaders across the organization to identify, assess, execute and advance the Company’s strategic ESG initiatives. We look forward to highlighting the progress of these initiatives in future sustainability reports.
Our net income for the three months ended March 31, 2022 was $36.9 million, or $2.08 per share, compared to $34.5 million, or $1.96 per share, for the same quarter of 2021. Operating income for the three months ended March 31, 2022 increased by $3.3 million, or 6.3 percent, over the same period in 2021. Higher performance in the first quarter of 2022 was generated from the 2021 acquisitions of Diversified Energy and the Escambia Meter Station, continued pipeline expansion projects, increased investment in various regulated infrastructure programs, natural gas distribution growth, contributions from increased margins and fees from our propane distribution business and Aspire Energy. These increases were partially offset by reduced consumption in our propane operations in the first quarter compared to the same period in 2021. We recorded higher depreciation, amortization and property taxes related to recent capital investments and higher operating expenses associated primarily with growth initiatives and recent acquisitions including payroll, benefits and other employee-related expenses.
Recently Completed and Ongoing Major Projects and Initiatives
We constantly pursue and develop additional projects and initiatives to serve existing and new customers, and to further grow our businesses and earnings, with the intention to increase shareholder value. The following table includes the major projects/initiatives recently completed and currently underway. Major projects and initiatives that have generated consistent year-over-year margin contributions are removed from the table. In the future, we will add new projects and initiatives to this table once negotiations are substantially completed and the associated earnings can be estimated.
Adjusted Gross Margin
Three Months Ended
Year Ended
Estimate for
March 31,
December 31,
Fiscal
in thousands
2022
2021
2021
2022
2023
Pipeline Expansions:
Western Palm Beach County, Florida Expansion (1)
$
1,307
1,167
$
4,729
$
5,227
$
5,227
Del-Mar Energy Pathway (1) (2)
1,722
884
4,584
6,980
6,867
Guernsey Power Station
263
47
187
1,380
1,486
Southern Expansion
—
—
—
375
2,344
Winter Haven Expansion
33
—
—
401
976
Beachside Pipeline Expansion
—
—
—
—
1,825
North Ocean City Connector
—
—
—
—
400
Total Pipeline Expansions
3,325
2,098
9,500
14,363
19,125
Virtual Pipeline Solutions (CNG/RNG/LNG)
2,142
2,077
7,566
8,500
9,500
RNG Infrastructure
91
—
—
1,000
1,000
Acquisitions:
Diversified Energy
3,975
—
603
11,300
12,000
Escambia Meter Station
250
—
583
1,000
1,000
Total Acquisitions
4,225
—
1,186
12,300
13,000
Regulatory Initiatives:
Florida GRIP
4,851
4,065
16,995
18,797
19,475
Capital Cost Surcharge Programs
517
136
1,199
2,018
1,936
Elkton Gas STRIDE Plan
74
—
26
241
354
Total Regulatory Initiatives
5,442
4,201
18,220
21,056
21,765
Total
$
15,225
$
8,376
$
36,472
$
57,219
$
64,390
(1) Includes adjusted gross margin generated from interim services.
(2) Includes adjusted gross margin from natural gas distribution services.
Detailed Discussion of Major Projects and Initiatives
Pipeline Expansions
West 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 with multiple phases placed into service leading up to the project's final completion in the fourth quarter of 2021. The project generated incremental adjusted gross margin of $0.1 million during the first quarter 2022 compared to the first quarter 2021. We estimate that the project will generate annual adjusted gross margin of $5.2 million in 2022 and beyond.
Del-Mar Energy Pathway
In December 2019, the FERC issued an order approving the construction of the Del-Mar Energy Pathway project. The project was placed into service in the fourth quarter of 2021. The new facilities: (i) include 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. Including interim services in advance of completion, the project generated additional adjusted gross margin of $0.8 million for the three months ended March 31, 2022. The estimated annual adjusted gross margin from this project, including natural gas distribution service in Somerset County, Maryland, is approximately $7.0 million in 2022 and growing each year thereafter, as the distribution system serving Somerset County further expands to meet demand.
Guernsey Power Station
Guernsey Power Station and the Company's 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 completed construction of the gas transmission facilities in the fourth quarter of 2021. This project added $0.2 million of adjusted gross margin in the first quarter and is expected to produce adjusted gross margin of approximately $1.4 million in 2022 and $1.5 million in 2023 and beyond.
Southern Expansion
Pending FERC authorization, Eastern Shore plans to install a new natural gas driven compressor skid unit at its existing Bridgeville, Delaware compressor station that will provide 7,300 Dts of incremental firm transportation pipeline capacity. The project is currently estimated to go into service in the fourth quarter of 2022. Eastern Shore expects the Southern Expansion project to generate annual adjusted gross margin of $0.4 million in 2022 and $2.3 million in 2023 and thereafter.
Winter Haven Expansion
In May 2021, Peninsula Pipeline filed a petition with the Florida PSC for approval of its Transportation Service Agreement with CFG for an incremental 6,800 Dts/d of firm service in the Winter Haven, Florida area. As part of this agreement, Peninsula Pipeline will construct a new interconnect with FGT and a new regulator station for CFG. The additional firm service will be used to support new incremental load due to growth in the area, including providing service, most immediately, to a new can manufacturing facility, as well as reliability and operational benefits to CFG’s existing distribution system in the area. In connection with Peninsula Pipeline’s new regulator station, CFG is also extending its distribution system to connect to the new station. We expect this expansion to generate additional adjusted gross margin of $0.4 million in 2022 and $1.0 million in 2023 and thereafter.
Beachside Pipeline Expansion
In June 2021, Peninsula Pipeline and Florida City Gas entered into a Transportation Service Agreement for an incremental 10,176 Dts/d of firm service in Indian River County, Florida, to support Florida City Gas’ growth along the Indian River's barrier island. As part of this agreement, Peninsula Pipeline will construct approximately 11.3 miles of pipeline from its existing pipeline in the Sebastian, Florida, area east under the Intercoastal Waterway and southward on the barrier island. We expect this extension to generate additional annual adjusted gross margin of $1.8 million in 2023 and $2.5 million thereafter.
North Ocean City Connector
Pending receipt of the remaining permits, we expect to begin construction beginning in the second quarter of 2022 of an extension of service into North Ocean City, Maryland. The Delaware Division and Sandpiper plan to install approximately 5.7 miles of pipeline across southern Sussex County, Delaware to Fenwick Island, Delaware and Worcester County, Maryland. The project will produce additional capacity to serve new customers and reinforce our existing system in Ocean City, Maryland. We expect this expansion to generate additional annual adjusted gross margin of $0.4 million in 2023 and beyond.
Virtual Pipeline Solutions (CNG, RNG & LNG)
Marlin Gas Services provides CNG, RNG and liquefied natural gas (“LNG”) temporary hold services, contracted pipeline integrity services, emergency services for damaged pipelines and specialized gas services for customers who have unique requirements. For the quarter ended March 31, 2022, Marlin Gas Services generated additional adjusted gross margin of $0.1 million compared to the quarter ended March 31, 2021. We estimate that Marlin Gas Services will generate annual adjusted gross margin of approximately $8.5 million in 2022, and $9.5 million in 2023, 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.
In October 2021, Aspire Energy completed construction of its Noble Road Landfill RNG pipeline project, a 33.1-mile pipeline, which transports RNG generated from the Noble Road landfill to Aspire Energy’s pipeline system, displacing conventionally produced natural gas. In conjunction with this expansion, Aspire Energy also upgraded an existing compressor station and installed two new metering and regulation sites. The RNG volume is expected to 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 a project to extract RNG from poultry production waste. BDC and our affiliates are collaborating on this project in addition to several other project sites where organic waste can be converted into a carbon-negative energy source.
Marlin Gas Services will transport the RNG created from the organic waste from the BDC facility to an Eastern Shore interconnection, where the sustainable fuel will be introduced into our transmission 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 RNG to our operations. As part of this partnership, we will transport the RNG 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 RNG 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 expect to generate adjusted gross margin of $1.0 million in 2022 and beyond from renewable natural gas transportation. 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
Diversified Energy
On December 15, 2021, Sharp Energy acquired the propane operating assets of Diversified Energy Company for approximately $37.5 million net of cash acquired. There are multiple strategic benefits to this acquisition including it: (i) expands the Company's propane territory into North Carolina and South Carolina while also expanding our existing footprint in Pennsylvania and Virginia, and (ii) includes an established customer base with opportunities for future growth. Through this acquisition, the Company added approximately 19,000 residential, commercial and agricultural customers, along with distribution of approximately 10.0 million gallons of propane annually. For the three months ended March 31, 2022, Diversified Energy contributed $4.0 million in adjusted gross margin and is expected to generate $11.3 million of additional adjusted gross margin in 2022 and $12.0 million in 2023.
Escambia Meter Station
In June 2021, Peninsula Pipeline purchased the Escambia Meter Station from Florida Power and Light and entered into a Transportation Service Agreement with Gulf Power Company to provide up to 530,000 Dts/d of firm service from an interconnect with FGT to Florida Power & Light’s Crist Lateral pipeline. The Florida Power & Light Crist Lateral provides gas supply to their natural gas fired power plant owned by Florida Power & Light in Pensacola, Florida. The Company generated $0.3 million in additional adjusted gross margin for the three months ended March 31, 2022 and estimates that this acquisition will generate adjusted gross margin of approximately $1.0 million in 2022 and beyond.
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, the Company has invested $189.5 million of capital expenditures to replace 348 miles of qualifying distribution mains, including $23.6 million of new pipes during 2021. GRIP generated additional gross margin of $0.8 million for the quarter ended March 31, 2022 compared to March 31, 2021. We are currently projecting to complete this program in 2022 and expect to generate adjusted gross margin of $18.8 million and $19.5 million in 2022 and 2023, respectively. The adjusted gross margin
on GRIP investments will continue until the Company requests the remaining net GRIP investment, and the associated expenses, be included in its next base rate proceeding.
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. For the first quarter of 2022, there was $0.4 million of adjusted gross margin generated pursuant to the program. Eastern Shore expects to produce adjusted gross margin of approximately $2.0 million in 2022 and 2023 from relocation projects, which is ultimately dependent upon the timing of filings and the completion of construction.
Elkton Gas STRIDE Plan
In June 2021, we reached a settlement with the Maryland PSC Staff and the Maryland Office of the Peoples Counsel regarding a five-year plan to replace Aldyl-A pipelines and recover the associated costs of those replacements through a fixed charge rider.The STRIDE plan went into service in September 2021 and is expected to generate $0.2 million of adjusted gross margin in 2022 and $0.4 million annually thereafter.
COVID-19 Regulatory Proceeding
In October 2020, the Florida PSC approved a joint petition of our natural gas and electric distribution utilities in Florida to establish a regulatory asset to record incremental expenses incurred due to COVID-19. The regulatory asset will allow us to seek recovery of these costs in the next base rate proceedings. In November 2020, the Office of Public Counsel filed a protest to the order approving the establishment of this regulatory asset treatment. The Company’s Florida regulated business units reached a settlement with the Florida OPC in June 2021. The settlement allowed the business units to establish a regulatory asset of $2.1 million. This amount includes COVID-19 related incremental expenses for bad debt write-offs, personnel protective equipment, cleaning and business information services for remote work. Our Florida regulated business units will amortize the amount over two years beginning January 1, 2022 and recover the regulatory asset through the Purchased Gas Adjustment and Swing Service mechanisms for the natural gas business units and through the Fuel Purchased Power Cost Recovery clause for the electric division. This results in annual additional adjusted gross margin of $1.0 million that will be offset by a corresponding amortization of regulatory asset expense for both 2022 and 2023.
Florida Natural Gas Base Rate Proceeding
On March 24, 2022, our Florida natural gas distribution business units, FPU, the Florida Division of Chesapeake Utilities, FPU – Indiantown Division, and FPU – Fort Meade (jointly, “the Florida Natural Gas Companies”), filed a joint notification with the Florida PSC, stating their intent to file a consolidated natural gas base rate proceeding and request consolidation of the Florida distribution operations under FPU for all Florida regulatory purposes.Our Florida Natural Gas Companies anticipates filing the consolidated base rate case as soon as practicable after the expiration of the notification period, but not before May 24, 2022.
We estimate that an increase in the revenue requirement of $18 million to $21 million is necessary to produce sufficient revenues to allow the Florida Natural Gas Companies, once consolidated, to continue to provide the safe and reliable natural gas service our customers deserve and have come to expect, while continuing to invest in the safety of our employees, customers, and communities, as well as the natural gas distribution system itself. Our request will seek an effective date for new rates of January 1, 2023. We will also be requesting interim rate relief, subject to refund, in accordance with the applicable statute using the period January 1, 2021 through December 31, 2021, as the test period. We currently cannot estimate the ultimate outcome of the consolidated base rate proceeding.
Other major factors influencing adjusted gross margin
Weather Impact
For the three months ended March 31, 2022, weather conditions accounted for $0.4 million of decreased adjusted gross margin compared to the same period in 2021. Assuming normal temperatures, as detailed below, adjusted gross margin would have been higher by $0.9 million. The following table summarizes HDD and CDD variances from the 10-year average HDD/CDD ("Normal") for the three months ended March 31, 2022 and 2021.
Natural Gas Distribution Adjusted Gross Margin Growth
Customer growth for our natural gas distribution operations, as a result of the addition of new customers and the conversion of customers from alternative fuel sources to natural gas service, generated $1.2 million of additional adjusted gross margin for the three months ended March 31, 2022. The average number of residential customers served on the Delmarva Peninsula increased by 5.3 percent for the three months ended March 31, 2022, while Florida customers increased by 4.0 percent, for the same period. A larger percentage of the adjusted gross margin growth was generated from residential growth given the expansion of natural gas into new housing communities and conversions to natural gas as our distribution infrastructure continues to build out. We anticipate continued customer growth, as new communities continue to build out due to population growth and additional infrastructure is added to support the growth. The details for the three months ended March 31, 2022 are provided in the following table:
Three Months Ended
March 31, 2022
(in thousands)
Delmarva Peninsula
Florida
Customer Growth:
Residential
$
760
$
375
Commercial and industrial
—
59
Total Customer Growth
$
760
$
434
Regulated Energy Segment
For the quarter ended March 31, 2022, compared to the quarter ended March 31, 2021:
(1) Adjusted Gross Margin is a non-GAAP measure utilized by Management to review business unit performance. For a more detailed discussion on the differences between Gross Margin (GAAP) and Adjusted Gross Margin, see the Reconciliation of GAAP to Non-GAAP Measures presented above.
Operating income for the Regulated Energy segment for the first quarter of 2022 was $34.7 million, an increase of $2.0 million, or 6.3 percent, over the same period in 2021. Higher operating income reflects continued pipeline expansions by Eastern Shore and Peninsula Pipeline, organic growth in our natural gas distribution businesses, incremental contributions from regulated infrastructure programs, and operating results from the Escambia Meter Station acquisition completed in 2021. Operating expenses increased by $2.3 million compared to the prior year quarter due to higher depreciation, amortization and property taxes, payroll, benefits and other employee related expenses.
Items contributing to the quarter-over-quarter increase in adjusted gross margin are listed in the following table:
(in thousands)
Natural gas transmission service expansions
$
1,227
Natural gas growth (excluding service expansions)
1,194
Contributions from regulated infrastructure programs
924
Escambia Meter Station acquisition
250
Other variances
700
Quarter-over-quarter increase in adjusted gross margin
$
4,295
The following narrative discussion provides further detail and analysis of the significant items in the foregoing table.
Natural Gas Transmission Service Expansions
We generated increased adjusted gross margin of $1.2 million from natural gas transmission service expansions including, Peninsula Pipeline's Western Palm Beach County project, Eastern Shore's Del-Mar Energy Pathway project and the Guernsey pipeline expansion for the three months ended March 31, 2022
Natural Gas Distribution Customer Growth
We generated additional adjusted gross margin of $1.2 million from natural gas customer growth. Adjusted gross margin increased by $0.4 million in Florida and $0.8 million on the Delmarva Peninsula for the three months ended March 31, 2022, as compared to the same period in 2021, due primarily to residential customer growth of 5.3 percent and 4.0 percent on the Delmarva Peninsula and in Florida, respectively.
Contributions from Regulated Infrastructure Programs
Contributions from regulated infrastructure programs generated incremental adjusted gross margin of $0.9 million in the first quarter of 2022 The increase in adjusted gross margin was primarily related to continued investment in the Florida GRIP, Eastern Shore's capital surcharge program and the Elkton Gas STRIDE Plan. Refer to Note 5, Rates and Other Regulatory Activities,in the condensed consolidated financial statements for additional information.
Acquisitions
Adjusted gross margin increased by $0.3 million due to the acquisition of the Escambia Meter Station which was consummated in June 2021.
For the quarter ended March 31, 2022, compared to the quarter ended March 31, 2021:
Three Months Ended
March 31,
Increase
2022
2021
(decrease)
(in thousands)
Revenue
$
101,292
$
74,759
$
26,533
Unregulated propane and natural gas costs
58,008
35,983
22,025
Adjusted gross margin (1)
43,284
38,776
4,508
Operations & maintenance
18,090
15,284
2,806
Depreciation & amortization
3,881
3,323
558
Other taxes
1,267
1,186
81
Total operating expenses
23,238
19,793
3,445
Operating Income
$
20,046
$
18,983
$
1,063
(1) Adjusted Gross Margin is a non-GAAP measure utilized by Management to review business unit performance. For a more detailed discussion on the differences between Gross Margin (GAAP) and Adjusted Gross Margin, see the Reconciliation of GAAP to Non-GAAP Measures presented above.
Operating results for the Unregulated Energy segment for the first quarter of 2022 increased by $1.1 million or, 5.6 percent compared to the same period in 2021.
Higher operating results during the first quarter were driven by contributions from the acquisition of Diversified Energy, margin improvement from Aspire Energy and increased propane margins including higher service fees. These increases were partially offset by reduced consumption in our propane operations. Additionally, we experienced increased operating expenses associated with the acquisition of Diversified Energy as well as increased employee related expenses, depreciation, amortization and property taxes, and increased vehicle expenses due to rising fuel costs.
Items contributing to the quarter-over-quarter increase in adjusted gross margin are listed in the following table:
(in thousands)
Propane Operations
Diversified Energy acquisition (completed in December 2021)
Decreased customer consumption due to conversion of customers to our natural gas system
(351)
Aspire Energy
Increased margins - rate changes and natural gas liquid processing
929
Increased customer consumption - primarily weather related
403
Other variances
(521)
Quarter-over-quarter increase in adjusted gross margin
$
4,508
The following narrative discussion provides further detail and analysis of the significant items in the foregoing table.
Propane Operations
•Acquisition of DiversifiedEnergy - Adjusted gross margin increased by $4.0 million due to the acquisition of Diversified Energy, which was acquired by Sharp in December 2021.
•Increased Retail Propane Margins and Service Fees - Adjusted gross margin increased by $0.7 million for the three months ended March 31, 2022, mainly due to increased customary service fees. Propane margins also increased due to gains with our SWAP agreements. These market conditions, which include market pricing and 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.
•Decreased Customer Consumption due to weather - Adjusted gross margin decreased by $0.6 million due to reduced
customer consumption during the first quarter of 2022 compared to the same period in 2021 due to intra-quarter weather volatility.
•Decreased customer consumption due to conversion of customers to natural gas - Adjusted gross margin decreased by $0.4 million as more customers converted from propane to natural gas.
Aspire Energy
•Increased Margins - Adjusted gross margin increased by $0.9 million during the first quarter of 2022 over the same period in 2021, including rate changes and improvements from natural gas liquid processing.
•Increased Customer Consumption Primarily Weather Related - Adjusted gross margin increased by $0.4 million due to higher consumption of gas as weather in Ohio was approximately 6 percent colder during the first quarter of 2022 over the same period in 2021.
Operating Expenses
Items contributing to the quarter-over-quarter increase in operating expenses are listed in the following table:
(in thousands)
Operating expenses from the Diversified Energy acquisition
$
2,450
Increased payroll, benefits and other employee-related expenses
396
Increased depreciation, amortization and property tax costs
212
Increased vehicle expenses due to higher fuel costs
186
Other variances
201
Quarter-over-quarter increase in operating expenses
$
3,445
OTHER INCOME, NET
For the quarter ended March 31, 2022 compared to the quarter ended March 31, 2021
Other income, net, which includes non-operating investment income, interest income, late fees charged to customers, gains or losses from the sale of assets and pension and other benefits expense, increased by $0.5 million in the first quarter of 2022, compared to the same period in 2021.
INTEREST CHARGES
For the quarter ended March 31, 2022 compared to the quarter ended March 31, 2021
Interest charges for the three months ended March 31, 2022 increased by $0.2 million, compared to the same period in 2021, attributable primarily to an increase of $0.3 million in interest expense as a result of a long-term debt placement in 2022 and $0.1 million of an amortization credit/increase in interest expense associated with a regulatory liability that was established in connection with the Hurricane Michael regulatory proceeding settlement in 2020. Partially offsetting the interest charges was a $0.2 million decrease in lower interest expense from lower levels of outstanding borrowings under our revolving credit facilities. During the first quarter of 2022, the interest rate associated with our Revolver increased by 0.34 percent as a result of Federal Reserve raising interest rates. Any additional increases in interest rates by the Federal Reserve would have a corresponding increase in the interest rates charged under our Revolver.
INCOME TAXES
For the quarter ended March 31, 2022 compared to the quarter ended March 31, 2021
Income tax expense was $13.5 million for the quarter ended March 31, 2022, compared to $12.4 million for the quarter ended March 31, 2021. Our effective income tax rate was 26.8 percent and 26.5 percent, for the three months ended March 31, 2022 and 2021, respectively.
FINANCIAL POSITION, LIQUIDITYAND 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 maintain our capital structure within our target capital structure range. We maintain an effective shelf registration statement with the SEC for the issuance of shares of common stock in 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.
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 $25.6 million for the three months ended March 31, 2022. In the table below, we have provided an updated range of our forecasted capital expenditures for 2022:
2022
(dollars in thousands)
Low
High
Regulated Energy:
Natural gas distribution
$
87,000
$
92,000
Natural gas transmission
60,000
67,000
Electric distribution
7,000
12,000
Total Regulated Energy
154,000
171,000
Unregulated Energy:
Propane distribution
10,000
14,000
Energy transmission
5,000
6,000
Other unregulated energy
4,000
5,000
Total Unregulated Energy
19,000
25,000
Other:
Corporate and other businesses
2,000
4,000
Total Other
2,000
4,000
Total 2022 Forecasted Capital Expenditures
$
175,000
$
200,000
The 2022 forecast, excluding acquisitions, includes capital expenditures associated with the following: Pipeline expansions related to the Eastern Shore Southern Expansion project and the Florida Beachside Pipeline as well as amounts for the expansion into Somerset County, Maryland. Furthermore, the 2022 forecast includes continued expenditures under the Florida GRIP, the capital cost surcharge program and the Elkton Gas STRIDE program as well as further expansion of our natural gas distribution and transmission systems, 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 that are greater than currently anticipated, customer growth in existing areas, regulation, new growth or acquisition opportunities and availability of capital. Historically, actual capital expenditures have typically lagged behind the budgeted amounts.
The timing of capital expenditures can vary based on delays in regulatory approvals, securing environmental approvals and other permits. The regulatory application and approval process has lengthened in the past few years, and we expect this trend to continue.
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 table presents our capitalization, excluding and including short-term borrowings, as of March 31, 2022 and December 31, 2021:
March 31, 2022
December 31, 2021
(in thousands)
Long-term debt, net of current maturities
$
597,878
43
%
$
549,903
42
%
Stockholders’ equity
805,512
57
%
774,130
58
%
Total capitalization, excluding short-term debt
$
1,403,390
100
%
$
1,324,033
100
%
March 31, 2022
December 31, 2021
(in thousands)
Short-term debt
$
140,865
9
%
$
221,634
14
%
Long-term debt, including current maturities
617,595
39
%
567,865
36
%
Stockholders’ equity
805,512
52
%
774,130
50
%
Total capitalization, including short-term debt
$
1,563,972
100
%
$
1,563,629
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 52 percent as of March 31, 2022. We seek to align permanent financing with the in-service dates of our 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 2022, we issued less than 0.1 million shares at an average price per share of $137.45 and received net proceeds of $3.2 million under the DRIP. See Note 9, Stockholders’ Equity, in the condensed consolidated financial statements for additional information on commissions and fees paid in connection with these issuances.
Shelf Agreements
We have entered into Shelf Agreements with Prudential and MetLife, whom are under no obligation to purchase any unsecured debt. The following table summarizes our Shelf Agreements at March 31, 2022:
(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 (1)
150,000
(50,000)
—
100,000
Total Shelf Agreements as of March 31, 2022
$
520,000
$
(270,000)
$
—
$
250,000
(1) The Prudential and MetLife Shelf Agreements expire in April 2023 and May 2023.
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.
We are authorized by our Board of Directors to borrow up to $400.0 million of short-term debt, as required. At March 31, 2022 and December 31, 2021, we had $140.9 million and $221.6 million, respectively, of short-term borrowings outstanding at a weighted average interest rate of 1.17 percent and 0.83 percent respectively.
In August 2021 we amended and restated our Revolver into a multi-tranche facility totaling $400.0 million with multiple participating lenders. The two tranches of the facility consist of one $200.0 million 364-day short-term debt tranche and a $200.0 million five-year tranche, both of which have three one-year extension options, which can be authorized by the Chief Financial Officer. We are eligible to establish the repayment term for individual borrowings under the five year tranche of the facility and to the extent that an individual loan under the revolver exceeded 12 months, the outstanding balance would be classified as a component of long-term debt.
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 March 31, 2022, we are in compliance with this covenant.
The 364-day tranche of the Revolver expires in August 2022 and the five-year tranche expires in August 2026. Both tranches are available to provide funds for our short-term cash needs to meet seasonal working capital requirements and to temporarily fund portions of our capital expenditures. Borrowings under both tranches of 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 March 31, 2022, the pricing under the 364-day tranche of the Revolver does not include an unused commitment fee and maintains an interest rate of 0.70 percent over LIBOR. As of March 31, 2022, the pricing under the five-year tranche of the Revolver included an unused commitment fee of 0.09 percent and an interest rate of 0.95 percent over LIBOR.
Our total available credit under the Revolver at March 31, 2022 was $256.3 million. As of March 31, 2022, we had issued $5.3 million in letters of credit to various counterparties under the syndicated Revolvers. These letters of credit are not included in the outstanding short-term borrowings and we do not anticipate that they will be drawn upon by the counterparties. The letters of credit reduce the available borrowings under our syndicated Revolver.
In the fourth quarter of 2020, the Company entered into two $30.0 million interest rate swaps with a total notional amount of $60.0 million through December 2021 with pricing of 0.205 and 0.20 percent, respectively. 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. At December 31, 2021, all of our interest rate swaps had expired and we have not entered into any new derivative contracts associated with our outstanding short-term borrowings.
Long-Term Debt
On March 15, 2022 we issued $50 million of 2.95 percent Senior Notes due March 15, 2042 to MetLife. We used the proceeds received from the issuances of the Senior Notes to reduce short-term borrowings under our revolving credit facility and to fund capital expenditures. These Senior Notes have similar covenants and default provisions as the existing senior notes, and have an annual principal payment beginning in the eleventh year after the issuance.
Cash Flows
The following table provides a summary of our operating, investing and financing cash flows for the three months ended March 31, 2022 and 2021:
Changes in our cash flows from operating activities are attributable primarily to changes in net income, adjusted for non-cash items such as depreciation and changes in deferred income taxes, and working capital. 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.
During the three months ended March 31, 2022, net cash provided by operating activities was $69.1 million. Operating cash flows were primarily impacted by the following:
•Net income, adjusted for non-cash adjustments, provided a $58.9 million source of cash;
•An increased level of deferred taxes associated with incremental tax depreciation from growth investments resulted in a source of cash of $7.4 million;
•Changes in net regulatory assets and liabilities due primarily to the change in fuel costs collected through the various cost recovery mechanisms generated a $5.8 million inflow of cash;
•Working capital changes, impacted primarily by propane inventory purchases and hedging activities, resulted in a $9.1 million use of cash; and
•An increase in income tax receivables reduced cash inflows by $6.1 million.
Cash Flows Used in Investing Activities
Net cash used in investing activities totaled $29.9 million during the three months ended March 31, 2022. Key investing activities included:
•Cash used to pay for capital expenditures was $29.9 million.
Cash Flows Used in Financing Activities
Net cash used in financing activities totaled $39.0 million during the three months ended March 31, 2022. Net cash used in financing activities:
•Repayments under lines of credit resulted in a use of cash of $82.0 million;
•Net increase in long-term debt borrowings resulted in a source of cash of $49.7 million to permanently finance investment in growth initiatives;
•Source of cash of $3.2 million from issuance of stock under the DRIP; and
•A use of cash of $8.3 million for dividend payments in 2021.
Off-Balance Sheet Arrangements
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 March 31, 2022 was $20.0 million. The aggregate amount guaranteed at March 31, 2022 was $13.1 million, with the guarantees expiring on various dates through March 30, 2023.
As of March 31, 2022, we have issued letters of credit totaling approximately $5.3 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, to our current and previous primary insurance carriers. These letters of credit have various expiration dates through October 25, 2022. We have not drawn upon these letters of credit as of March 31, 2022 and do not anticipate that the counterparties will draw upon these letters of credit. We expect that they will be renewed to the extent necessary in the future. Additional information is presented inNote 7, Other Commitments and Contingencies, in the condensed consolidated financial statements.
Contractual Obligations
There has been no material change in the contractual obligations presented in our 2021 Annual Report on Form 10-K, except for commodity purchase obligations entered into in the ordinary course of our business. The following table summarizes commodity purchase contract obligations at March 31, 2022:
(1) In addition to the obligations noted above, we have agreements with commodity suppliers that have provisions with no minimum purchase requirements. There are no monetary penalties for reducing the amounts purchased; however, the propane contracts allow the suppliers to reduce the amounts available in the winter season if we do not purchase specified amounts during the summer season. Under these contracts, the commodity prices will fluctuate as market prices fluctuate.
Rates and Regulatory Matters
Our natural gas distribution operations in Delaware, Maryland and Florida and electric distribution operation in Florida are subject to regulation by the respective state PSC; Eastern Shore is subject to regulation by the FERC; and Peninsula Pipeline 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. We regularly are involved in regulatory matters in each of the jurisdictions in which we operate. Our significant regulatory matters are fully described in Note 5, Rates and Other Regulatory Activities, to the condensed consolidated financial statements in this Quarterly Report on Form 10-Q.
Recent Authoritative Pronouncements on Financial Reporting and Accounting
Recent accounting developments, applicable to us, and their impact on our financial position, results of operations and cash flows are described in Note 1,Summary of Accounting Policies, to the condensed consolidated financial statements in this Quarterly Report on Form 10-Q.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
INTEREST RATE RISK
Long-term debt is subject to potential losses based on changes in interest rates. We evaluate whether to refinance existing debt or permanently refinance existing short-term borrowings based in part on the fluctuation in interest rates. Increases in interest rates expose us to potential increased costs we could incur when we (i) issue new debt instruments or (ii) provide financing and liquidity for our business activities. We utilize interest rate swap agreements to mitigate short-term borrowing rate risk. Additional information about our long-term debt and short-term borrowing is disclosed in Note 15, Long-Term Debt, and Note 16, Short-Term Borrowings, respectively,in the condensed consolidated financial statements.
COMMODITY PRICE RISK
Regulated Energy Segment
We have entered into agreements with various wholesale suppliers to purchase natural gas and electricity for resale to our customers. Our regulated energy distribution businesses that sell natural gas or electricity to end-use customers have fuel cost recovery mechanisms authorized by the respective PSCs that allow us to recover all of the costs prudently incurred in purchasing natural gas and electricity for our customers. Therefore, our regulated energy distribution operations have limited commodity price risk exposure.
Unregulated Energy Segment
Our propane operations are exposed to commodity price risk as a result of the competitive nature of retail pricing offered to our customers. In order to mitigate this risk, we utilize propane storage activities and forward contracts for supply.
We can store up to approximately 8.9 million gallons of propane (including leased storage and rail cars) during the winter season to meet our customers’ peak requirements and to serve metered customers. Decreases in the wholesale price of propane may cause the value of stored propane to decline, particularly if we utilize fixed price forward contracts for supply. To mitigate the risk of propane commodity price fluctuations on the inventory valuation, we have adopted a Risk Management Policy that allows our propane distribution operation to enter into fair value hedges, cash flow hedges or other economic hedges of our inventory.
Aspire Energy is exposed to commodity price risk, primarily during the winter season, to the extent we are not successful in balancing our natural gas purchases and sales and have to secure natural gas from alternative sources at higher spot prices. In order to mitigate this risk, we procure firm capacity that meets our estimated volume requirements and we continue to seek out new producers in order to fulfill our natural gas purchase requirements.
The following table reflects the changes in the fair market value of financial derivatives contracts related to propane purchases and sales from December 31, 2021 to March 31, 2022:
(in thousands)
Balance at December 31, 2021
Increase (Decrease) in Fair Market Value
Less Amounts Settled
Balance at March 31, 2022
Sharp
$
6,333
$
(2,079)
$
2,778
$
7,032
There were no changes in methods of valuations during the three months ended March 31, 2022.
The following is a summary of fair market value of financial derivatives as of March 31, 2022, by method of valuation and by maturity for each fiscal year period.
The Risk Management Committee reviews credit risks associated with counterparties to commodity derivative contracts prior to such contracts being approved.
Additional information about our derivative instruments is disclosed in Note 13, Derivative Instruments, in the condensed consolidated financial statements.
INFLATION
Inflation affects the cost of supply, labor, products and services required for operations, maintenance and capital improvements. To help cope with the effects of inflation on our capital investments and returns, we periodically seek rate increases from regulatory commissions for our regulated operations and closely monitor the returns of our unregulated energy business operations. To compensate for fluctuations in propane gas prices, we adjust propane sales prices to the extent allowed by the market.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
The Chief Executive Officer and Chief Financial Officer of Chesapeake Utilities, with the participation of other Company officials, have evaluated our “disclosure controls and procedures” (as such term is defined under Rules 13a-15(e) and 15d-15(e), promulgated under the Securities Exchange Act of 1934, as amended) as of March 31, 2022. Based upon their evaluation, the Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of March 31, 2022.
Changes in Internal Control over Financial Reporting
During the quarter ended March 31, 2022, there was no change in our internal control over financial reporting that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
As disclosed in Note 7, Other Commitments and Contingencies, of the condensed consolidated financial statements in this Quarterly Report on Form 10-Q, we are involved in certain legal actions and claims arising in the normal course of business. We are also involved in certain legal and administrative proceedings before various governmental or regulatory agencies concerning rates and other regulatory actions. In the opinion of management, the ultimate disposition of these proceedings and claims will not have a material effect on our condensed consolidated financial position, results of operations or cash flows.
Item 1A. Risk Factors
Our business, operations, and financial condition are subject to various risks and uncertainties. The risk factors described in Part I, “Item 1A. Risk Factors” in our Annual Report on Form 10-K, for the year ended December 31, 2021, should be carefully considered, together with the other information contained or incorporated by reference in this Quarterly Report on Form 10-Q and in our other filings with the SEC in connection with evaluating Chesapeake Utilities, our business and the forward-looking statements contained in this Quarterly Report on Form 10-Q.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Total Number of Shares
Average Price Paid
Total Number of Shares Purchased as Part of Publicly Announced Plans
Maximum Number of Shares That May Yet Be Purchased Under the Plans
Period
Purchased
per Share
or Programs (2)
or Programs (2)
January 1, 2022
through January 31, 2022(1)
390
$
142.49
—
—
February 1, 2022 through February 28, 2022
—
—
—
—
March 1, 2022 through March 31, 2022
—
—
—
—
Total
390
$
142.49
—
—
(1) Chesapeake Utilities purchased shares of common stock on the open market for the purpose of reinvesting the dividend on shares held in the Rabbi Trust accounts for certain directors and senior executives under the Non-Qualified Deferred Compensation Plan. The Non-Qualified Deferred Compensation Plan is discussed in detail in Item 8 under the heading “Notes to the Consolidated Financial Statements—Note 9, Employee Benefit Plans,” in our latest Annual Report on Form 10-K for the year ended December 31, 2021. During the quarter ended March 31, 2022, 390 shares were purchased through the reinvestment of dividends on deferred stock units.
(2) Except for the purposes described in Footnote (1), Chesapeake Utilities has no publicly announced plans or programs to repurchase its shares.
Cover Page Interactive Data File - formatted in Inline XBRL and contained in Exhibit 101
*Filed herewith
56
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
CHESAPEAKE UTILITIES CORPORATION
/S/ BETH W. COOPER
Beth W. Cooper Executive Vice President, Chief Financial Officer, Treasurer and Assistant Corporate Secretary
