Document

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549




	FORM 10-Q



☒	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended: June 30, 2019



☐	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission File Number: 001-11590




CHESAPEAKE UTILITIES CORPORATION (Exact name of registrant as specified in its charter)



Delaware		51-0064146
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

909 Silver Lake Boulevard, Dover, Delaware 19904

(Address of principal executive offices, including Zip Code)

(302) 734-6799

(Registrant’s telephone number, including area code)

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.

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Large accelerated filer	☒	Accelerated filer	☐

Non-accelerated filer	☐	Smaller reporting company	☐

		Emerging growth company	☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.

☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒

Common Stock, par value $0.4867 — 16,403,776 shares outstanding as of July 31, 2019.

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PART I—FINANCIAL INFORMATION		1

ITEM 1.	FINANCIAL STATEMENTS	1

ITEM 2.	MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS	34

ITEM 3.	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK	58

ITEM 4.	CONTROLS AND PROCEDURES	59

PART II—OTHER INFORMATION		61

ITEM 1.	LEGAL PROCEEDINGS	61

ITEM 1A.	RISK FACTORS	61

ITEM 2.	UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS	61

ITEM 3.	DEFAULTS UPON SENIOR SECURITIES	61

ITEM 5.	OTHER INFORMATION	61

ITEM 6.	EXHIBITS	62

SIGNATURES		63

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GLOSSARY OF DEFINITIONS

ASC: Accounting Standards Codification issued by the FASB

Aspire Energy: Aspire Energy of Ohio, LLC

ASU: Accounting Standards Update issued by the FASB

CDD: Cooling Degree-Day

Chesapeake or Chesapeake Utilities: Chesapeake Utilities Corporation, and its direct and indirect subsidiaries, as appropriate in the context of the disclosure

CHP: Combined heat and power plant

Company: Chesapeake Utilities Corporation, and its direct and indirect subsidiaries, as appropriate in the context of the disclosure

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

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 subsidiary of Chesapeake OnSight Services, LLC

FASB: Financial Accounting Standards Board

FERC: Federal Energy Regulatory Commission

FPU: Florida Public Utilities Company, a wholly-owned subsidiary of Chesapeake Utilities

GAAP: Accounting principles generally accepted in the United States of America

GRIP: Gas Reliability Infrastructure Program

Gross Margin: a non-GAAP measure defined as operating revenues less the cost of sales. The Company's cost of sales includes purchased fuel cost for natural gas, electricity and propane and the cost of labor spent on direct revenue-producing activities and excludes depreciation, amortization and accretion

Gulfstream: Gulfstream Natural Gas System, LLC, an unaffiliated pipeline network that supplies natural gas to FPU

HDD: Heating Degree-Day

Marlin Gas Services: Marlin Gas Services, LLC, a wholly-owned subsidiary of Chesapeake Utilities that acquired certain operating assets of Marlin Gas Transport, Inc.

Marlin Gas Transport: Marlin Gas Transport, Inc., a former supplier of mobile compressed natural gas distribution and pipeline solutions

MetLife: MetLife Investment Advisors, an institutional debt investment management firm, with which we entered into the MetLife Shelf Agreement

MGP: Manufactured gas plant, which is a site where coal was previously used to manufacture gaseous fuel for industrial, commercial and residential use

MTM: Mark-to-Market (fair value accounting)

NYL: New York Life Investors LLC, an institutional debt investment management firm, with which Chesapeake Utilities entered into a Shelf Agreement

Peninsula Pipeline: Peninsula Pipeline Company, Inc., a wholly-owned subsidiary of Chesapeake Utilities

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PESCO: Peninsula Energy Services Company, Inc., a wholly-owned subsidiary of Chesapeake Utilities

Prudential: Prudential Investment Management Inc., an institutional investment management firm, with which Chesapeake Utilities has entered into a 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

Retirement Savings Plan: A qualified 401(k) retirement savings plan sponsored by Chesapeake Utilities

Revolver: Our unsecured revolving credit facility with certain lenders

Sandpiper: Sandpiper Energy, Inc., a wholly-owned subsidiary of Chesapeake Utilities

SEC: U.S. Securities and Exchange Commission

Senior Notes: Our unsecured long-term debt issued primarily to insurance companies on various dates

Sharp: Sharp Energy, Inc., 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

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PART I—FINANCIAL INFORMATION

Item 1. Financial Statements

Chesapeake Utilities Corporation and Subsidiaries

Condensed Consolidated Statements of Income (Unaudited)



	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2019			2018			2019			2018
(in thousands, except shares and per share data)
Operating Revenues
Regulated Energy	$	73,403		$	70,504		$	177,021		$	179,897
Unregulated Energy and other	57,500			66,160			181,498			196,123
Total Operating Revenues	130,903			136,664			358,519			376,020
Operating Expenses
Regulated Energy cost of sales	18,317			20,010			54,833			68,241
Unregulated Energy and other cost of sales	42,476			49,393			132,179			149,219
Operations	32,696			36,281			69,839			68,983
Maintenance	3,600			3,619			7,280			7,211
Gain from a settlement	(130		)	(130		)	(130		)	(130		)
Depreciation and amortization	11,609			9,839			22,684			19,543
Other taxes	4,899			4,404			10,405			9,299
Total Operating Expenses	113,467			123,416			297,090			322,366
Operating Income	17,436			13,248			61,429			53,654
Other expense, net	(316		)	(262		)	(361		)	(194		)
Interest charges	5,655			3,881			11,365			7,545
Income Before Income Taxes	11,465			9,105			49,703			45,915
Income taxes	3,161			2,718			12,735			12,674
Net Income	$	8,304		$	6,387		$	36,968		$	33,241
Weighted Average Common Shares Outstanding:
Basic	16,401,028			16,369,641			16,393,022			16,360,540
Diluted	16,445,743			16,417,082			16,439,333			16,410,061
Earnings Per Share of Common Stock:
Basic	$	0.51		$	0.39		$	2.26		$	2.03
Diluted	$	0.50		$	0.39		$	2.25		$	2.03

The accompanying notes are an integral part of these financial statements.

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Chesapeake Utilities Corporation and Subsidiaries

Condensed Consolidated Statements of Comprehensive Income (Unaudited)



	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2019			2018			2019			2018
(in thousands)
Net Income	$	8,304		$	6,387		$	36,968		$	33,241
Other Comprehensive Income (Loss), net of tax:
Employee Benefits, net of tax:
Amortization of prior service cost, net of tax of $(5), $(5), $(10) and $(11), respectively	(14		)	(14		)	(29		)	(28		)
Net gain, net of tax of $42, $41, $86 and $80, respectively	121			108			242			217
Cash Flow Hedges, net of tax:
Unrealized gain (loss) on commodity contract cash flow hedges, net of tax of $(850), $429, $343 and $(327), respectively	(2,115		)	1,061			868			(728		)
Total Other Comprehensive Income (Loss), net of tax	(2,008		)	1,155			1,081			(539		)
Comprehensive Income	$	6,296		$	7,542		$	38,049		$	32,702

The accompanying notes are an integral part of these financial statements.

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Chesapeake Utilities Corporation and Subsidiaries

Condensed Consolidated Balance Sheets (Unaudited)



Assets	June 30, 2019			December 31, 2018
(in thousands, except shares and per share data)
Property, Plant and Equipment
Regulated Energy	$	1,380,591		$	1,297,416
Unregulated Energy	245,738			237,682
Other businesses and eliminations	30,347			34,585
Total property, plant and equipment	1,656,676			1,569,683
Less: Accumulated depreciation and amortization	(321,284		)	(294,295		)
Plus: Construction work in progress	85,630			108,584
Net property, plant and equipment	1,421,022			1,383,972
Current Assets
Cash and cash equivalents	7,254			6,089
Trade and other receivables (less allowance for uncollectible accounts of $1,190 and $1,108, respectively)	48,908			85,404
Accrued revenue	12,724			27,499
Propane inventory, at average cost	5,143			9,791
Other inventory, at average cost	7,778			7,127
Regulatory assets	6,842			4,796
Storage gas prepayments	4,143			6,603
Income taxes receivable	10,984			15,300
Prepaid expenses	5,873			10,079
Derivative assets, at fair value	10,571			13,165
Other current assets	4,022			5,684
Total current assets	124,242			191,537
Deferred Charges and Other Assets
Goodwill	25,785			25,837
Other intangible assets, net	5,611			6,207
Investments, at fair value	8,821			6,711
Operating lease right-of-use assets (refer to Note 15)	12,404			—
Regulatory assets	76,945			72,422
Other assets	6,212			6,985
Total deferred charges and other assets	135,778			118,162
Total Assets	$	1,681,042		$	1,693,671

The accompanying notes are an integral part of these financial statements.

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Chesapeake Utilities Corporation and Subsidiaries

Condensed Consolidated Balance Sheets (Unaudited)



Capitalization and Liabilities	June 30, 2019			December 31, 2018
(in thousands, except shares and per share data)
Capitalization
Stockholders’ equity
Preferred stock, par value $0.01 per share (authorized 2,000,000 shares), no shares issued and outstanding	$	—		$	—
Common stock, par value $0.4867 per share (authorized 50,000,000 shares)	7,984			7,971
Additional paid-in capital	256,385			255,651
Retained earnings	285,762			261,530
Accumulated other comprehensive loss	(5,747		)	(6,713		)
Deferred compensation obligation	4,694			3,854
Treasury stock	(4,694		)	(3,854		)
Total stockholders’ equity	544,384			518,439
Long-term debt, net of current maturities	275,924			316,020
Total capitalization	820,308			834,459
Current Liabilities
Current portion of long-term debt	75,600			11,935
Short-term borrowing	301,226			294,458
Accounts payable	50,645			129,804
Customer deposits and refunds	29,839			34,155
Accrued interest	2,073			2,317
Dividends payable	6,644			6,060
Accrued compensation	8,699			13,923
Regulatory liabilities	10,168			7,883
Derivative liabilities, at fair value	10,994			14,871
Other accrued liabilities	16,527			12,828
Total current liabilities	512,415			528,234
Deferred Credits and Other Liabilities
Deferred income taxes	164,421			156,820
Regulatory liabilities	133,858			135,039
Environmental liabilities	6,994			7,638
Other pension and benefit costs	29,675			28,513
Operating lease - liabilities (refer to Note 15)	10,710			—
Deferred investment tax credits and other liabilities	2,661			2,968
Total deferred credits and other liabilities	348,319			330,978
Environmental and other commitments and contingencies (Notes 5 and 6)
Total Capitalization and Liabilities	$	1,681,042		$	1,693,671

The accompanying notes are an integral part of these financial statements.

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Chesapeake Utilities Corporation and Subsidiaries

Condensed Consolidated Statements of Cash Flows (Unaudited)



	Six Months Ended
	June 30,
	2019			2018
(in thousands)
Operating Activities
Net income	$	36,968		$	33,241
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization	22,684			19,543
Depreciation and accretion included in other costs	4,322			4,428
Deferred income taxes	7,746			7,668
Realized (gain) loss on commodity contracts/sale of assets/investments	(572		)	3,857
Unrealized gain on investments/commodity contracts	(1,089		)	(114		)
Employee benefits and compensation	764			456
Share-based compensation	1,095			2,247
Other, net	—			(23		)
Changes in assets and liabilities:
Accounts receivable and accrued revenue	51,362			32,230
Propane inventory, storage gas and other inventory	6,458			9,844
Regulatory assets/liabilities, net	(1,610		)	11,035
Prepaid expenses and other current assets	9,660			11,523
Accounts payable and other accrued liabilities	(56,902		)	(26,152		)
Income taxes receivable	4,316			8,358
Customer deposits and refunds	(4,316		)	(2,733		)
Accrued compensation	(5,365		)	(5,196		)
Other assets and liabilities, net	(946		)	(1,860		)
Net cash provided by operating activities	74,575			108,352
Investing Activities
Property, plant and equipment expenditures	(90,443		)	(126,811		)
Proceeds from sales of assets	207			323
Environmental expenditures	(644		)	(173		)
Net cash used in investing activities	(90,880		)	(126,661		)
Financing Activities
Common stock dividends	(11,759		)	(10,301		)
Issuance of stock under the Dividend Reinvestment Plan	(368		)	(328		)
Tax withholding payments related to net settled stock compensation	(692		)	(1,210		)
Change in cash overdrafts due to outstanding checks	548			632
Net borrowings (repayments) under line of credit agreements	6,220			(16,313		)
Proceeds from long-term debt	29,956			74,916
Repayment of long-term debt, long-term borrowing under the Revolver and capital lease obligation	(6,435		)	(30,189		)
Net cash provided by financing activities	17,470			17,207
Net Increase (Decrease) in Cash and Cash Equivalents	1,165			(1,102		)
Cash and Cash Equivalents—Beginning of Period	6,089			5,614
Cash and Cash Equivalents—End of Period	$	7,254		$	4,512

The accompanying notes are an integral part of these financial statements.

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Chesapeake Utilities Corporation and Subsidiaries

Condensed Consolidated Statements of Stockholders’ Equity (Unaudited)



	Common Stock ⁽¹⁾
(in thousands, except shares and per share data)	Number of Shares⁽²⁾	Par Value		Additional Paid-In Capital			Retained Earnings			Accumulated Other Comprehensive Loss			Deferred Compensation		Treasury Stock			Total
Balance at December 31, 2017	16,344,442	$	7,955	$	253,470		$	229,141		$	(4,272	)	$	3,395	$	(3,395	)	$	486,294
Net income	—	—		—			26,854			—			—		—			26,854
Cumulative effect of the adoption of ASU 2014-09	—	—		—			(1,498		)	—			—		—			(1,498		)
Reclassification upon the adoption of ASU 2018-02	—	—		—			907			(907		)	—		—			—
Other comprehensive loss	—	—		—			—			(1,694		)	—		—			(1,694		)
Dividend declared ($0.3250 per share)	—	—		—			(5,380		)	—			—		—			(5,380		)
Dividend reinvestment plan	—	—		(1		)	—			—			—		—			(1		)
Share-based compensation and tax benefit ⁽³⁾⁽⁴⁾	19,350	9		657			—			—			—		—			666
Treasury stock activities	—	—		—			—			—			178		(178		)	—
Balance at March 31, 2018	16,363,792	7,964		254,126			250,024			(6,873		)	3,573		(3,573		)	505,241
Net income	—	—		—			6,387			—			—		—			6,387
Other comprehensive income	—	—		—			—			1,155			—		—			1,155
Dividend declared ($0.3700 per share)	—	—		—			(6,034		)	—			—		—			(6,034		)
Dividend reinvestment plan	—	—		(1		)	—			—			—		—			(1		)
Share-based compensation and tax benefit ⁽³⁾⁽⁴⁾	14,753	7		1,231			—			—			—		—			1,238
Treasury stock activities	—	—		—			—			—			209		(209		)	—
Balance at June 30, 2018	16,378,545	$	7,971	$	255,356		$	250,377		$	(5,718	)	$	3,782	$	(3,782	)	$	507,986