Acquisitions

12 Months Ended

Dec. 31, 2019

ACQUISITIONS AND DIVESTITURES

Acquisition of Elkton Gas Company

In December 2019, we entered into an agreement with SJI to acquire its subsidiary, Elkton Gas Company, which provides natural gas distribution service to approximately 7,000 residential and commercial customers within a franchised area of Cecil County, Maryland. Upon completion of the transaction, Elkton Gas Company will become our wholly-owned subsidiary. The acquisition, which is expected to close in the second half of 2020, is subject to approval by the Maryland PSC. Elkton Gas Company's territory is contiguous to our franchised service territory in Cecil County, Maryland and it will continue to operate out of its existing office with the same local personnel.

Acquisitions in 2019

In December 2019, Sharp acquired certain propane operating assets of Boulden which provides propane distribution service to approximately 5,200 customers in Delaware, Maryland and Pennsylvania, for approximately $24.6 million, net of cash acquired. Additionally, the purchase price included $0.2 million of working capital. We recorded contingent consideration of $0.6 million related to the seller's adherence to various provisions contained in the contract through the first anniversary of the transaction closing. We accounted for the purchase of the operating assets of Boulden as a business combination within our Unregulated Energy segment. In connection with this acquisition, we recorded $8.3 million in property, plant and equipment, $5.1 million in intangible assets associated with customer relationships and non-compete agreements and $11.2 million in goodwill, all of which is deductible for income tax purposes. The amounts recorded in conjunction with the acquisition are preliminary and subject to adjustment based on contractual provisions that will be finalized at the end of the measurement period. Contributions to our operating revenues and operating income as a result of this acquisition for the year ended December 31, 2019 can be found in the table below.

Acquisitions in 2018

In December 2018, Marlin Gas Services acquired certain operating assets of Marlin Gas Transport, a supplier of CNG and pipeline solutions, primarily to utilities and pipelines. Marlin Gas Services provides temporary hold services, pipeline integrity services,

emergency services for damaged pipelines and specialized gas services for customers who have unique requirements. These services are provided by a highly trained staff of drivers and maintenance technicians who safely perform these functions throughout the eastern United States. Marlin Gas Services maintains a fleet of steel tube CNG trailers, composite CNG trailers, mobile compression equipment and an internally-developed patented regulator system which allows for delivery of over 7,000 Dts/d of natural gas.

In December 2018, Sharp acquired certain propane operating assets and customers of Ohl, which provided propane distribution service to approximately 2,500 residential and commercial customers in Pennsylvania.

We accounted for the purchases of the operating assets of Marlin Gas Transport and Ohl, which totaled approximately $18.2 million, as business combinations within our Unregulated Energy segment. Goodwill of $4.8 million, related to the Marlin Gas Transport acquisition, and $1.5 million, associated with the Ohl acquisition, were initially recorded at the close of these transactions. In 2019, we recorded a reduction to the purchase price for Ohl of $0.2 million upon completing our verification of the assets purchased. The purchase price adjustment was recorded as a reduction in our property, plant and equipment balance. Due to the timing of these acquisitions, the revenue and operating income from these acquisitions in 2018 were immaterial. For the year ended December 31, 2019, these acquisitions generated the following operating revenue and income:



	For the Year Ended
	December 31, 2019
	Operating Revenues		Operating Income
(in thousands)
Marlin Gas Services	$	5,702	$	1,500
Ohl propane acquisition	$	1,662	$	385
Boulden acquisition	$	550	$	239

Divestiture of PESCO

In September of 2019, we initiated a plan to sell a majority of the assets of PESCO, our natural gas marketing subsidiary. This was done in an effort to enable us to focus on the strategies that support our core energy delivery business. During the fourth quarter of 2019, we executed four separate transactions associated with the sale of PESCO’s assets and contracts:


•	PESCO’s Florida retail operations were sold to Gas South. The initial closing for the transaction was completed in November 2019 with subsequent closings occurring in December 2019.


•	PESCO’s other non-Florida retail operations and contracts were sold to UET in October 2019.


•	PESCO’s Mid-Atlantic wholesale contracts and Chesapeake Utilities’ Delaware division, Maryland division and Sandpiper Energy asset management agreements were sold to NJRES in October 2019.


•	PESCO's producer services portfolio was sold to DFS in December 2019.

We received a total of $22.9 million in cash consideration from the aforementioned buyers that was inclusive of working capital of $8.0 million from UET. We recognized a pre-tax gain of $7.3 million in connection with the closing of these transactions during the fourth quarter of 2019. The final working capital true up associated with the sale of assets and contracts to UET will be finalized in the first quarter of 2020.

As a result of the sales agreements, we began to report PESCO as discontinued operations during the third quarter of 2019 and excluded PESCO's performance from continuing operations for all periods presented and classified its assets and liabilities as held for sale. The assets and liabilities of PESCO are presented as current and noncurrent assets and liabilities of a business held for sale in the consolidated balance sheets.

Additionally, amounts for operating revenues and costs of sales which had previously been eliminated in consolidation related to intercompany sales and purchases have been grossed up and are now reflected as a component of operating revenues and costs of sales for all periods presented. We have recast these amounts because, upon completion of the sales transactions, we will continue to provide and receive services from the buyers.

A summary of discontinued operations presented in the consolidated statements of income includes the following:



	For the Year Ended December 31,
(in thousands)	2019			2018			2017
Operating revenues⁽¹⁾	$	161,289		$	258,713		$	184,519
Cost of sales⁽¹⁾	157,646			252,111			182,307
Other operating expenses	5,222			6,825			4,522
Operating loss	(1,579		)	(223		)	(2,310		)
Interest and other expense	315			297			253
Loss from Discontinued Operations before income taxes	(1,894		)	(520		)	(2,563		)
Gain on sale of Discontinued Operations	7,344			—			—
Income tax (benefit) / expense	1,439			(238		)	(361		)
Gain / (Loss) from Discontinued Operations, Net of Tax	$	4,011		$	(282	)	$	(2,202	)

⁽¹⁾ Included in operating revenues and cost of sales for the years ended December 31, 2019, 2018 and 2017, is $19.8 million, $31.5 million and $16.6 million respectively, representing amounts which had been previously eliminated in consolidation related to intercompany activity that will continue with the buyers after the disposition of the assets of PESCO.

As a result of the disposition of the assets and contracts of PESCO, there were no assets or liabilities classified as held for sale at December 31, 2019. The assets and liabilities of the discontinued operations classified as held for sale in the consolidated balance sheet at December 31, 2018 include the following:



	As of
(in thousands)	December 31, 2018
Property, plant and equipment	$	1,242
Less: accumulated depreciation	(206		)
Net property, plant and equipment ⁽¹⁾	1,036
Current assets ⁽²⁾	52,681
Deferred charges and other assets ⁽¹⁾	6,626
Assets of Discontinued Operations held for sale	$	60,343

Current liabilities ⁽³⁾	$	48,672
Liabilities of Discontinued Operations held for sale	$	48,672
Net assets	$	11,671

⁽¹⁾ These balances have been combined within the consolidated balance sheets to arrive at noncurrent assets held for sale.

⁽²⁾ At December 31, 2018, current assets were primarily comprised of $31.1 million of accounts receivable, $13.1 million of derivative assets at fair value, $4.9 million of accrued revenue and $3.2 million of storage gas prepayments.

⁽³⁾At December 31, 2018, current liabilities were primarily comprised of $31.1 million of accounts payable, $13.3 million of derivative liabilities at fair value and $2.7 million of other accrued liabilities.

We have elected not to separately disclose discontinued operations on the consolidated statements of cash flows. The following table summarizes significant statements of cash flows data related to the discontinued operations of PESCO:



	For the Year Ended December 31,
(in thousands)	2019			2018		2017
Depreciation and amortization	$	477		$	582	$	213
Property, plant and equipment expenditures	—			115		11,766
Deferred income taxes	(125		)	1,088		(1,515		)
Realized / (loss) gain on commodity contracts	(2,161		)	5,002		4,911

Our Delmarva Peninsula natural gas distribution operations had asset management agreements with PESCO to manage their natural gas transportation and storage capacity. The agreements were effective as of April 1, 2017, and each expires on March 31, 2020. As a result of the sale of the assets of PESCO, effective October 1, 2019, these agreements are now managed by NJRES through the remainder of the contract term. In addition to the asset management agreements, Eastern Shore had several firm transportation

and capacity arrangements with PESCO which were included in the assets sold to UET. Eastern Shore will continue to fulfill these arrangements throughout the remainder of their contractual term. These agreements currently have expiration dates of March 31, 2020 and November 30, 2021.