NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
1. Summary of Accounting Policies
Basis of Presentation
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, 2019. 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 on 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.
Beginning in the third quarter of 2019, our management began executing a strategy to sell the operating assets of PESCO. In connection with this strategy, during the third and fourth quarter of 2019, we reached agreements with four entities to sell PESCO's assets and contracts. These transactions closed during the fourth quarter of 2019. As a result of the sale, we have fully exited the natural gas marketing business, which provided natural gas management and supply services to commercial and industrial customers in Florida, Delaware, Maryland, Pennsylvania, Ohio and other states. Accordingly, PESCO’s historical financial results are reflected in our condensed consolidated financial statements as discontinued operations, which required retrospective application to financial information for all periods presented. Refer to Note 3, Acquisitions and Divestitures for further information.
Effects of COVID-19
On March 13, 2020, the CDC declared a national emergency due to the rapidly growing outbreak of COVID-19. In response to this declaration and the rapid spread of COVID-19 within the United States, federal, state and local governments throughout the country have imposed varying degrees of restrictions on social and commercial activity to promote social distancing in an effort to slow the spread of the illness. These restrictions have significantly impacted economic conditions in the United States, and the economic impact is expected to continue as long as the social distancing restrictions remain in place. We are considered an “essential business,” which allows us to continue operational activities and construction projects while the social distancing restrictions remain in place. In response to the COVID-19 pandemic and related restrictions, we have implemented our pandemic response plan, which includes having all employees who can work remotely do so in order to promote social distancing and providing personal protective equipment to field employees to reduce the spread of COVID-19. For the first quarter of 2020, the COVID-19 impact on our results of operations or financial position was immaterial. Any future impact on our results of operations, liquidity or financial position from COVID-19, particularly from continued social distancing and other restrictions recommended or required by federal, state and local authorities, cannot be estimated at this time. We are committed to communicating timely updates and will continue to monitor developments affecting our employees, customers, suppliers and shareholders and take additional precautions as warranted to operate safely and to comply with the CDC, state and local requirements in order to protect our employees, customers and the communities we serve.
FASB Statements and Other Authoritative Pronouncements
Recently Adopted Accounting Standards
Financial Instruments - Credit Losses (ASC 326) - In June 2016, the FASB issued ASU 2016-13, Measurement of Credit Losses on Financial Instruments, which changes how entities account for credit losses for most financial assets and certain other instruments, and subsequent guidance which served to clarify or amend the original standard. ASU 2016-13 and the related amendments require entities to estimate lifetime expected credit losses for trade receivables and to provide additional disclosure related to credit losses. We adopted ASU 2016-13 on January 1, 2020 and recorded an immaterial cumulative effect in retained earnings as of that date. As a result, prior period financial information has not been recast and continues to be reported under the accounting guidance that was effective during those periods.
Our estimate for expected credit losses has been developed by analyzing our portfolio of financial assets that present potential credit exposure risk. These assets consist solely of our trade receivables from customers and contract assets. The estimate is based on five years of historical collections experience, a review of current economic and operating conditions in our service territories, and an examination of economic indicators which provide a reasonable and supportable basis of potential future activity. Those indicators include metrics which we believe provide insight into the future collectability of our trade receivables such as unemployment rates and economic growth statistics in our service territories.
When determining estimated credit losses we analyzed the balance of our trade receivables based on the underlying service line they pertain to. This resulted in an examination of trade receivables from our energy distribution, energy transmission, energy delivery services and propane operations service lines. Our energy distribution service line consists of all our regulated distribution utility operations on the Delmarva Peninsula and throughout Florida. These business units have the ability to recover their costs through the rate making process, which can include consideration for amounts historically written off as a component of their rate base. Therefore, they possess a mechanism to recover credit losses which we believe reduces their exposure to credit risk. Our energy transmission and energy delivery service business units consist of our natural gas pipelines and our mobile CNG delivery operations. The majority of the customer base these business units serve are regulated distribution utilities who also have the ability to recover their costs. We believe this cost recovery mechanism significantly reduces the amount of credit risk they present. Our propane operations are unregulated and do not have the same ability to recover their costs as our regulated operations. However, historically our propane operations have not had material write offs relative to the amounts of revenues earned.
Our estimate of expected credit losses reflects our anticipated losses associated with our trade receivables as a result of non-payment from our customers beginning the day the trade receivable is established. We believe the risk of loss associated with trade receivables classified as current presents the least amount of credit exposure risk and therefore, we assign a lower estimate to our current trade receivables. As our trade receivables age outside of their expected due date, our estimate increases. Our allowance for credit losses relative to the balance of our trade receivables has historically been immaterial as a result of on time payment activity from our customers.
During the first quarter of 2020, the COVID-19 virus began to rapidly spread within the United States. Federal, state and local governments throughout the country imposed restrictions to promote social distancing to slow the spread of the virus, which has also had the effect of limiting commercial activity. These measures have resulted in significant job loss and a slowing of economic activity across the United States and in the areas that we serve. At this time it is unclear as to when these restrictions might be eased or lifted, and the timing and extent to which they are lifted or eased may be determined by the state and local authorities with guidance from the CDC. We have been identified as an “essential business” which allows us to continue operational activity and construction projects with social distancing restrictions in place. We considered the impact of the COVID-19 virus for the first quarter of 2020 and will continue to monitor developments which impact our customers’ ability to pay and revise our estimates as new information becomes available.
Our prior estimates for expected credit losses had not included an evaluation of current conditions or forward-looking economic indicators as we were not required to consider those factors under the previous incurred loss accounting guidance. The below table provides a reconciliation of our allowance for credit losses at March 31, 2020:
|
|
|
|
|
(in thousands)
|
|
Balance at December 31, 2019
|
$
|
1,337
|
|
Additions:
|
|
Provision for credit losses
|
273
|
|
Recoveries
|
84
|
|
Deductions:
|
|
Write offs
|
(273
|
)
|
Balance at March 31, 2020
|
$
|
1,421
|
|
Fair Value Measurement (ASC 820) - In August 2018, the FASB issued ASU 2018-13, Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement, which removes, modifies and adds certain disclosure requirements on fair value measurements in ASC 820. We adopted ASU 2018-13 for our annual and interim financial statements beginning January 1, 2020 and, since the changes only impacted disclosures, its adoption did not have a material impact on our financial position or results of operations.
Intangibles - Goodwill (ASC 350) - In January 2017, the FASB issued ASU 2017-04, Simplifying the Test for Goodwill Impairment, which simplifies how an entity is required to test goodwill for impairment by eliminating Step 2 from the goodwill impairment test. ASU 2017-04 was effective for our annual and interim financial statements beginning January 1, 2020. 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.
|
|
2.
|
Calculation of Earnings Per Share
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
March 31,
|
|
|
2020
|
|
2019
|
(in thousands, except shares and per share data)
|
|
|
|
|
Calculation of Basic Earnings Per Share:
|
|
|
|
|
Income from Continuing Operations
|
|
$
|
29,026
|
|
|
$
|
28,814
|
|
Loss from Discontinued Operations
|
|
(96
|
)
|
|
(150
|
)
|
Net Income
|
|
$
|
28,930
|
|
|
$
|
28,664
|
|
|
|
|
|
|
Weighted average shares outstanding
|
|
16,414,773
|
|
|
16,384,927
|
|
|
|
|
|
|
Basic Earnings Per Share from Continuing Operations
|
|
$
|
1.77
|
|
|
$
|
1.76
|
|
Basic Loss Per Share from Discontinued Operations
|
|
(0.01
|
)
|
|
(0.01
|
)
|
Basic Earnings Per Share
|
|
$
|
1.76
|
|
|
$
|
1.75
|
|
|
|
|
|
|
Calculation of Diluted Earnings Per Share:
|
|
|
|
|
Reconciliation of Denominator:
|
|
|
|
|
Weighted shares outstanding—Basic
|
|
16,414,773
|
|
|
16,384,927
|
|
Effect of dilutive securities—Share-based compensation
|
|
57,054
|
|
|
47,925
|
|
Adjusted denominator—Diluted
|
|
16,471,827
|
|
|
16,432,852
|
|
|
|
|
|
|
Diluted Earnings Per Share from Continuing Operations
|
|
$
|
1.77
|
|
|
$
|
1.75
|
|
Diluted Loss Per Share from Discontinued Operations
|
|
(0.01
|
)
|
|
(0.01
|
)
|
Diluted Earnings Per Share
|
|
$
|
1.76
|
|
|
$
|
1.74
|
|
|
|
3.
|
Acquisitions and Divestitures
|
Acquisition of Elkton Gas
In December 2019, we entered into an agreement with SJI to acquire its subsidiary, Elkton Gas which provides natural gas distribution service to approximately 7,000 residential and commercial customers within a franchised area of Cecil County, Maryland. Upon completion of the transaction, Elkton Gas will become our wholly-owned subsidiary. The acquisition, which is expected to close in the third quarter of 2020, is subject to approval by the Maryland PSC. Elkton Gas’ territory is contiguous to our franchised service territory in Cecil County, Maryland. Elkton Gas will continue to operate out of its existing office with the same local personnel who are also expected to serve our existing franchised service territory in Cecil County.
Acquisition of Boulden
In December 2019, Sharp acquired certain propane operating assets of Boulden which provides propane distribution service to approximately 5,200 customers in Delaware, Maryland and Pennsylvania, for approximately $24.6 million, net of cash acquired. Additionally, the purchase price included $0.2 million of working capital. We recorded contingent consideration of $0.6 million related to the seller's adherence to various provisions contained in the contract through the first anniversary of the transaction closing. We accounted for the purchase of the operating assets of Boulden as a business combination and integrated the business into our Sharp operation. There are multiple strategic benefits to this acquisition
including it: (i) overlays with the Elkton Gas acquisition to establish an integrated energy delivery platform in Cecil County, Maryland; (ii) includes an established customer base with opportunities for future growth; (iii) enables operational synergies, including supply, for the northern Delmarva Peninsula; and (iv) provides opportunities to market additional services and pricing programs to these customers.
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 and will be finalized in the fourth quarter of 2020. For the quarter ended March 31, 2020, Boulden generated operating revenue and income of $2.8 million and $1.4 million respectively.
Divestiture of PESCO
During the fourth quarter of 2019, we sold PESCO's assets and contracts in four separate transactions and exited the natural gas marketing business. 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 where applicable.
We received a total of $22.9 million in cash consideration from the buyers, inclusive of working capital of $8.0 million. We recognized a pre-tax gain of $7.3 million ($5.4 million after tax) in connection with the closing of these transactions during the fourth quarter of 2019.
Operating revenues and costs of sales from the previous reporting periods, which were previously eliminated in consolidation, have been grossed up and are now reflected as a component of operating revenues and costs of sales for the three months ended March 31, 2019. We recast these amounts because, upon completion of the sales transactions, we continued to provide and receive services from the buyers through the remainder of the contractual terms.
A summary of discontinued operations presented in the condensed consolidated statements of income includes the following:
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
March 31,
|
(in thousands)
|
|
2020
|
|
2019
|
Operating revenues(1)
|
|
$
|
—
|
|
|
$
|
77,022
|
|
Cost of sales(1)
|
|
(9
|
)
|
|
75,162
|
|
Other operating expenses
|
|
116
|
|
|
1,991
|
|
Operating loss
|
|
(107
|
)
|
|
(131
|
)
|
Interest and other expense
|
|
(24
|
)
|
|
(70
|
)
|
Loss from Discontinued Operations before income taxes
|
|
(131
|
)
|
|
(201
|
)
|
Income tax benefit
|
|
(35
|
)
|
|
(51
|
)
|
Loss from Discontinued Operations, Net of Tax
|
|
$
|
(96
|
)
|
|
$
|
(150
|
)
|
(1) Included in operating revenues and cost of sales for the three months ended March 31, 2019, is $9.9 million 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.
Since the disposition of the assets and contracts of PESCO was completed in the fourth quarter 2019, there were no assets or liabilities classified as held for sale at March 31, 2020 and December 31, 2019.
We have elected not to separately disclose discontinued operations on the condensed consolidated statements of cash flows. The following table summarizes significant statements of cash flows data related to the discontinued operations of PESCO:
|
|
|
|
|
|
(in thousands)
|
|
Three Months Ended
March 31, 2019
|
Depreciation and amortization
|
|
$
|
146
|
|
Deferred income taxes
|
|
$
|
1,396
|
|
Realized loss on commodity contracts
|
|
$
|
584
|
|
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 expired on March 31, 2020. As a result of the sale of the assets of PESCO, effective October 1, 2019, these agreements were managed by New Jersey Resource Energy Services Company through the remainder of the contract term. In March 2020, our Delmarva Peninsula natural gas distribution operations entered into asset management agreements with a third party to manage their natural gas transportation and storage capacity. The agreements were effective as of April 1, 2020, and expire on March 31, 2023. In addition to the asset management agreements, Eastern Shore had several firm transportation and capacity arrangements with PESCO which were included in the assets sold to United Energy Trading, LLC. Eastern Shore will continue to fulfill these arrangements throughout the remainder of their contractual term. These agreements currently have expiration dates of November 30, 2021.
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 revenues in the following tables exclude operating revenues from PESCO that are now reflected as discontinued operations. The following table displays our revenue from continuing operations by major source based on product and service type for the three months ended March 31, 2020 and 2019:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended March 31, 2020
|
|
Three Months Ended March 31, 2019
|
(in thousands)
|
|
Regulated Energy
|
|
Unregulated Energy
|
|
Other and Eliminations
|
|
Total
|
|
Regulated Energy
|
|
Unregulated Energy
|
|
Other and Eliminations
|
|
Total
|
Energy distribution
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Delaware natural gas division
|
|
$
|
26,567
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
26,567
|
|
|
$
|
27,549
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
27,549
|
|
Florida natural gas division
|
|
8,477
|
|
|
—
|
|
|
—
|
|
|
8,477
|
|
|
7,900
|
|
|
—
|
|
|
—
|
|
|
7,900
|
|
FPU electric distribution
|
|
14,219
|
|
|
—
|
|
|
—
|
|
|
14,219
|
|
|
14,378
|
|
|
—
|
|
|
—
|
|
|
14,378
|
|
FPU natural gas distribution
|
|
25,444
|
|
|
—
|
|
|
—
|
|
|
25,444
|
|
|
23,786
|
|
|
—
|
|
|
—
|
|
|
23,786
|
|
Maryland natural gas division
|
|
9,138
|
|
|
—
|
|
|
—
|
|
|
9,138
|
|
|
10,047
|
|
|
—
|
|
|
—
|
|
|
10,047
|
|
Sandpiper Energy natural gas/propane operations
|
|
6,292
|
|
|
—
|
|
|
—
|
|
|
6,292
|
|
|
7,082
|
|
|
—
|
|
|
—
|
|
|
7,082
|
|
Total energy distribution
|
|
90,137
|
|
|
—
|
|
|
—
|
|
|
90,137
|
|
|
90,742
|
|
|
—
|
|
|
—
|
|
|
90,742
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Energy transmission
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Aspire Energy
|
|
—
|
|
|
9,781
|
|
|
—
|
|
|
9,781
|
|
|
—
|
|
|
13,470
|
|
|
—
|
|
|
13,470
|
|
Eastern Shore
|
|
19,279
|
|
|
—
|
|
|
—
|
|
|
19,279
|
|
|
19,056
|
|
|
—
|
|
|
—
|
|
|
19,056
|
|
Peninsula Pipeline
|
|
4,824
|
|
|
—
|
|
|
—
|
|
|
4,824
|
|
|
3,565
|
|
|
—
|
|
|
—
|
|
|
3,565
|
|
Total energy transmission
|
|
24,103
|
|
|
9,781
|
|
|
—
|
|
|
33,884
|
|
|
22,621
|
|
|
13,470
|
|
|
—
|
|
|
36,091
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Energy generation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Eight Flags
|
|
—
|
|
|
4,323
|
|
|
—
|
|
|
4,323
|
|
|
—
|
|
|
4,142
|
|
|
—
|
|
|
4,142
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Propane operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Propane delivery operations
|
|
—
|
|
|
38,282
|
|
|
—
|
|
|
38,282
|
|
|
—
|
|
|
46,125
|
|
|
—
|
|
|
46,125
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Energy delivery services
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Marlin Gas Services
|
|
—
|
|
|
1,309
|
|
|
—
|
|
|
1,309
|
|
|
—
|
|
|
2,434
|
|
|
—
|
|
|
2,434
|
|
Other
|
|
—
|
|
|
20
|
|
|
—
|
|
|
20
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Total energy delivery services
|
|
—
|
|
|
1,329
|
|
|
—
|
|
|
1,329
|
|
|
—
|
|
|
2,434
|
|
|
—
|
|
|
2,434
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other and eliminations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Eliminations
|
|
(11,285
|
)
|
|
(25
|
)
|
|
(4,409
|
)
|
|
(15,719
|
)
|
|
(9,745
|
)
|
|
(5,496
|
)
|
|
(4,366
|
)
|
|
(19,607
|
)
|
Other
|
|
—
|
|
|
341
|
|
|
133
|
|
|
474
|
|
|
—
|
|
|
405
|
|
|
132
|
|
|
537
|
|
Total other and eliminations
|
|
(11,285
|
)
|
|
316
|
|
|
(4,276
|
)
|
|
(15,245
|
)
|
|
(9,745
|
)
|
|
(5,091
|
)
|
|
(4,234
|
)
|
|
(19,070
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating revenues (1)
|
|
$
|
102,955
|
|
|
$
|
54,031
|
|
|
$
|
(4,276
|
)
|
|
$
|
152,710
|
|
|
$
|
103,618
|
|
|
$
|
61,080
|
|
|
$
|
(4,234
|
)
|
|
$
|
160,464
|
|
(1) Total operating revenues for the three months ended March 31, 2020, include other revenue (revenues from sources other than contracts with customers) of $0.7 million and $0.1 million for our Regulated and Unregulated Energy segments, respectively, and $0.1 million and $0.1 million for our Regulated and Unregulated Energy segments, respectively, for the three months ended March 31, 2019. The sources of other revenues include revenue from alternative revenue programs related to revenue normalization for the Maryland division and Sandpiper and late fees
Contract balances
The timing of revenue recognition, customer billings and cash collections results in trade receivables, unbilled receivables (contract assets), and customer advances (contract liabilities) in our condensed consolidated balance sheets. The balances of our trade receivables, contract assets, and contract liabilities as of March 31, 2020 and December 31, 2019 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trade Receivables
|
|
Contract Assets (Current)
|
|
Contract Assets (Non-current)
|
|
Contract Liabilities (Current)
|
(in thousands)
|
|
|
|
|
|
|
|
|
Balance at 12/31/2019
|
|
$
|
47,430
|
|
|
$
|
18
|
|
|
$
|
3,465
|
|
|
$
|
589
|
|
Balance at 3/31/2020
|
|
43,614
|
|
|
18
|
|
|
4,098
|
|
|
428
|
|
Increase (decrease)
|
|
$
|
(3,816
|
)
|
|
$
|
—
|
|
|
$
|
633
|
|
|
$
|
(161
|
)
|
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 sheets. Our non-current contract assets are included in receivables and other deferred charges in the condensed consolidated balance sheets 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 retail offering plan on a ratable basis. For the three months ended March 31, 2020 and 2019, we recognized revenue of $0.4 million and $0.3 million, respectively.
Remaining performance obligations
Our businesses have long-term fixed fee contracts with customers in which revenues are recognized when performance obligations are satisfied over the contract term. Revenue for these businesses for the remaining performance obligations, at March 31, 2020, are expected to be recognized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
2020
|
|
2021
|
|
2022
|
|
2023
|
|
2024
|
|
2025
|
|
2026 and thereafter
|
Eastern Shore and Peninsula Pipeline
|
$
|
28,084
|
|
|
$
|
34,404
|
|
|
$
|
27,249
|
|
|
$
|
21,795
|
|
|
$
|
19,548
|
|
|
$
|
18,699
|
|
|
$
|
177,607
|
|
Natural gas distribution operations
|
2,992
|
|
|
4,124
|
|
|
5,167
|
|
|
4,936
|
|
|
4,699
|
|
|
4,166
|
|
|
32,996
|
|
FPU electric distribution
|
424
|
|
|
566
|
|
|
566
|
|
|
566
|
|
|
566
|
|
|
275
|
|
|
825
|
|
Total revenue contracts with remaining performance obligations
|
$
|
31,500
|
|
|
$
|
39,094
|
|
|
$
|
32,982
|
|
|
$
|
27,297
|
|
|
$
|
24,813
|
|
|
$
|
23,140
|
|
|
$
|
211,428
|
|
|
|
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, our intrastate pipeline subsidiary, is subject to regulation (excluding cost of service) by the Florida PSC.
Delaware
CGS: In August 2019, we filed with the Delaware PSC an application seeking an order that will establish the regulatory accounting treatment and valuation methodology for the acquisition of propane CGS owned by our affiliate, Sharp, and the conversion of the CGS to natural gas service. We propose to acquire each CGS one at a time and to pay replacement cost for each CGS system. In addition, we are requesting authorization to pay for and capitalize the CGS residents’ behind-the-meter conversion costs. Our existing natural gas customers will be protected against subsidizing the acquisitions and conversions of the CGS systems because we will complete only those systems that meet our economic test. In September 2019, the Delaware PSC issued an order to open a docket for the purpose of reviewing our application and to conduct evidentiary hearings on the matter. A final order is anticipated in the second quarter of 2020.
Maryland
Approval of the Elkton Gas Acquisition: In December 2019, we entered into an agreement with SJI to acquire its subsidiary, Elkton Gas, which provides natural gas distribution service to approximately 7,000 residential and commercial customers within a franchised area of Cecil County, Maryland. Upon completion of the transaction, Elkton Gas will become our
wholly-owned subsidiary. The acquisition, which is expected to close in the third quarter of 2020, is subject to approval by the Maryland PSC. Elkton Gas territory is contiguous to our franchised service territory in Cecil County, Maryland. We expect Elkton Gas will continue to operate out of its existing office with the same local personnel.
Application for Authority to Exercise a Franchise: In March 2020, we filed with the Maryland PSC an application seeking approval to exercise a franchise granted to us by the Board of County Commissioners of Somerset County, Maryland dated December 2019. We are anticipating a decision by the Maryland PSC in the second quarter of 2020.
Florida
Electric Limited Proceeding-Storm Recovery (Pre-Hurricane Michael): In February 2018, FPU filed a petition with the Florida PSC, requesting recovery of incremental storm restoration costs related to several hurricanes and tropical storms, along with the replenishment of the storm reserve to its pre-storm level of $1.5 million. As a result of these hurricanes and tropical storms, FPU’s storm reserve was depleted and, at the time of filing the petition, had a deficit of $0.8 million. This matter went to hearing in December 2018 and was subsequently approved at the March 2019 Agenda with the Final Order issued on March 25, 2019. FPU received approval to begin a surcharge on customer bills for two years beginning in April 2019, to recover storm-related costs and replenish the storm reserve.
Hurricane Michael: In October 2018, Hurricane Michael passed through FPU's electric distribution operation's service territory in Northwest Florida. The hurricane caused widespread and severe damage to FPU's infrastructure resulting in the loss of electric service to 100 percent of its customers in the Northwest Florida service territory. FPU, after exerting extraordinary hurricane restoration efforts, restored service to those customers who were able to accept it. FPU expended more than $65.0 million to restore service, which was recorded as new plant and equipment, charged against FPU’s accumulated depreciation or charged against FPU’s storm reserve. Additionally, amounts currently being reviewed by the Florida PSC for regulatory asset treatment have been recorded as receivables and other deferred charges.
In August 2019, FPU filed a limited proceeding requesting recovery of storm-related costs associated with Hurricane Michael (capital and expenses) through a change in base rates. FPU also requested treatment and recovery of certain storm-related costs as regulatory assets for items currently not allowed to be recovered through the storm reserve as well as the recovery of capital replaced as a result of the storm. Recovery of these costs includes a component of an overall return on capital additions and regulatory assets. In the fourth quarter of 2019, FPU along with the Office of Public Counsel in Florida, filed a joint motion with the Florida PSC to approve an interim rate increase, subject to refund, pending the final ruling on the recovery of the restoration costs incurred. The petition was approved by the Florida PSC in November 2019 and temporary rate increases were implemented effective January 2020. The Company has fully reserved these interim rates, pending a final resolution and settlement of the limited proceeding.
In March 2020, we filed an update to our original filing to account for actual charges incurred through December 2019, revised the amortization period of the storm-related costs from 30 years as originally requested to 10 years, and included costs related to Hurricane Dorian of approximately $1.2 million in this filing. We continue to work with the Florida PSC and the petition is currently on the schedule for approval at the Florida PSC Agenda in September 2020.
Electric Depreciation Study: In September 2019, FPU filed a petition, with the Florida PSC, for approval of its consolidated electric depreciation rates. Once approved, we expect the new rates to be retroactively effective to January 1, 2020. The petition is currently on the schedule for approval at the Florida PSC agenda in September 2020.
Western Palm Beach Expansion Project: In June 2019, Peninsula Pipeline filed with the Florida PSC for approval of its Transportation Service Agreement with FPU. Peninsula Pipeline will construct several new interconnection points and pipeline expansions in Palm Beach County, Florida, which will enable FPU to serve an industrial research park and several new residential developments. Peninsula Pipeline will provide transportation service to FPU, increasing reliability, system pressure as well as introducing diversity in fuel source for natural gas to serve the increased demand in these areas. The petition was approved by the Florida PSC at the August 6, 2019 Agenda. Interim services began in the fourth quarter of 2019. The Company expects to complete the remainder of the project in phases through the third quarter of 2020.
Callahan Pipeline, Nassau County: In July 2019, Peninsula Pipeline filed a petition for approval of the firm transportation service agreement with FPU and the restructuring of the business and operational agreements between Peoples Gas, FPU and Seacoast Gas Transmission. This petition was approved by the Florida PSC at the December 10, 2019 Agenda. Peninsula Pipeline and Seacoast Gas Transmission are constructing a jointly owned 26-mile, 16-inch steel pipeline that interconnects to the Cypress Pipeline interstate system in western Nassau County in order to serve growing demand in both Nassau and Duval counties, Florida. The Callahan pipeline will terminate into the existing Peninsula Pipeline-Peoples Gas jointly owned pipeline, which serves Amelia Island and the Peoples Gas distribution system. The Callahan Pipeline will enhance FPU’s ability to expand service into Nassau County and will enable Peoples Gas to enhance its
system pressure and the reliability of its service in Duval County. The project is expected to be placed in-service during the third quarter of 2020.
Eastern Shore
Del-Mar Energy Pathway Project: In December 2019, the FERC issued an order approving the construction of the Del-Mar Energy Pathway project. The order, which was applied for in September 2018 by Eastern Shore, approved the construction and operation of new facilities that will provide an additional 14,300 Dts/d of firm service to four customers. Facilities to be constructed include six miles of pipeline looping in Delaware; 13 miles of new mainline extension in Sussex County, Delaware and Wicomico and Somerset Counties in Maryland; and new pressure control and delivery stations in these counties. The benefits of this project include: (i) additional natural gas transmission pipeline infrastructure in eastern Sussex County, Delaware, and (ii) extension of Eastern Shore’s pipeline system, for the first time, into Somerset County, Maryland. Construction on the project began in January 2020, and Eastern Shore anticipates that this project will be fully in-service by the beginning of the fourth quarter of 2021.
Capital Cost Surcharge: In December 2019, the FERC approved Eastern Shore’s proposed capital cost surcharge to become effective January 1, 2020. The surcharge, an approved item in the settlement of Eastern Shore’s last general rate case, allows Eastern Shore to recover capital costs associated with mandated highway or railroad relocation projects that required the replacement of existing Eastern Shore facilities. Eastern Shore expects to recover $0.5 million in capital cost surcharges on an annual basis.
Renewable Natural Gas Tariff: In October 2019, Eastern Shore filed an application with the FERC to include renewable natural gas (biogas) utilization and standards in its tariff. Eastern Shore had proposed changes to its gas quality specifications that would enable it to accommodate renewable natural gas at various receipt points on its system. Changes to the gas quality specifications would ensure interchangeability of renewable natural gas with the natural gas currently delivered to Eastern Shore. The tariffs became effective in November 2019.
COVID-19 Impact
We are monitoring the global outbreak of COVID-19 and taking steps to mitigate the potential risks posed by its spread. We provide an “essential service” to our customers which means that it is paramount that we keep our employees who operate our business safe and informed. We have taken and are continuously monitoring and updating precautions and protocols to ensure the safety of our employees and customers. As an “essential business” we are allowed to continue operational activity and construction projects with appropriate safety precautions, personal protective equipment and social distancing restrictions in place. We have taken steps to assure our customers that disconnections for non-payment will be temporarily suspended. We are also working with our suppliers to understand the potential impacts to our supply chain; if material negative impacts are identified, we will work to mitigate them. This is a rapidly evolving situation, and could lead to extended disruption of economic activity in our markets. We will continue to monitor developments affecting our employees, customers, suppliers and shareholders, and will take additional precautions as warranted to comply with the CDC, state and local requirements and recommendations to protect our employees, customers and the communities we serve.
As a result of these measures, we are incurring costs associated with crisis management and the pandemic response including restrictions put in place by the state PSCs on utility disconnects for non-payment, technology costs incurred to expand work from home capabilities, additional sanitation and cleaning costs and costs of acquiring personal protective equipment as well as other expenses. We are tracking and analyzing whether these costs qualify for cost recovery and could be classified as regulatory assets.
In April 2020, the Maryland PSC issued an order that authorized utilities to establish a regulatory asset to record prudently incurred incremental costs related to COVID-19, for the period beginning on March 16, 2020. The Maryland PSC found that the creation of a regulatory asset for COVID-19 related expenses will facilitate the recovery of those costs prudently incurred to serve customers during this period, and that the deferral of such costs is appropriate because the current catastrophic health emergency is outside the control of the utility and is a non-recurring event. We will continue to monitor similar orders issued by the FERC or the respective PSCs in our service territories to identify additional relief which could be available to our regulated businesses.
Summary TCJA Table
The following table summarizes the TCJA impact on our regulated businesses as of March 31, 2020:
|
|
|
|
|
|
|
|
|
Regulatory Liabilities related to Accumulated Deferred Income Taxes ("ADIT")
|
|
|
Operation and Regulatory Jurisdiction
|
|
Amount (in thousands)
|
Status
|
|
Status of Customer Rate impact related to lower federal corporate income tax rate
|
Eastern Shore (FERC)
|
|
$34,190
|
Will be addressed in Eastern Shore's next rate case filing.
|
|
Implemented one-time bill credit (totaling $0.9 million) in April 2018. Customer rates were adjusted in April 2018.
|
Delaware Division (Delaware PSC)
|
|
$12,818
|
PSC approved amortization of ADIT in January 2019.
|
|
Implemented one-time bill credit (totaling $1.5 million) in April 2019. Customer rates were adjusted in March 2019.
|
Maryland Division (Maryland PSC)
|
|
$4,058
|
PSC approved amortization of ADIT in May 2018.
|
|
Implemented one-time bill credit (totaling $0.4 million) in July 2018. Customer rates were adjusted in May 2018.
|
Sandpiper Energy (Maryland PSC)
|
|
$3,752
|
PSC approved amortization of ADIT in May 2018.
|
|
Implemented one-time bill credit (totaling $0.6 million) in July 2018. Customer rates were adjusted in May 2018.
|
Chesapeake Florida Gas Division/Central Florida Gas (Florida PSC)
|
|
$8,274
|
PSC issued order authorizing amortization and retention of net ADIT liability by the Company in February 2019.
|
|
Florida PSC's final order was issued in February 2019. Excluding GRIP, tax savings arising from the TCJA rate reduction will be retained by the Company.
GRIP: Tax savings for 2018 will be refunded to customers in 2020 through the annual GRIP cost recovery mechanism. Future customer GRIP surcharges will be adjusted to reflect tax savings associated with TCJA.
|
FPU Natural Gas (excludes Fort Meade and Indiantown) (Florida PSC)
|
|
$19,209
|
Same treatment on a net basis as Chesapeake Florida Gas Division (above).
|
|
Same treatment on a net basis as Chesapeake Florida Gas Division (above).
|
FPU Fort Meade and Indiantown Divisions
|
|
$291
|
Same treatment on a net basis as Chesapeake Florida Gas Division (above).
|
|
Tax rate reduction: The impact was immaterial for the divisions.
GRIP (Applicable to Fort Meade division only): Same treatment as Chesapeake Florida Gas Division (above).
|
FPU Electric (Florida PSC)
|
|
$5,704
|
In January 2019, PSC issued order approving amortization of ADIT through purchased power cost recovery, storm reserve and rates.
|
|
TCJA benefit is provided to customers through a combination of reductions to the fuel cost recovery rate, base rates, as well as application to the storm reserve over the next several years.
|
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.
MGP Sites
We have participated in the investigation, assessment or remediation of, and have exposures at, seven former MGP sites. We have received approval for recovery of clean-up costs in rates for sites located in Salisbury, Maryland; Seaford, Delaware; and Winter Haven, Key West, Pensacola, Sanford and West Palm Beach, Florida.
As of March 31, 2020 and December 31, 2019, we had approximately $7.6 million and $8.0 million, respectively, in environmental liabilities related to FPU’s MGP sites in Key West, Pensacola, Sanford and West Palm Beach. FPU has approval to recover, from insurance and from customers through rates, up to $14.0 million of its environmental costs related to its MGP sites. As of March 31, 2020 and December 31, 2019, we had recovered approximately $12.1 million and $11.9 million, respectively, leaving approximately $1.9 million and $2.1 million, respectively, in regulatory assets for future recovery from FPU’s customers.
Environmental liabilities for our MGP sites are recorded on an undiscounted basis based on the estimate of future costs provided by independent consultants. We continue to expect that all costs related to environmental remediation and related activities, including any potential future remediation costs for which we do not currently have approval for regulatory recovery, will be recoverable from customers through rates.
The following is a summary of our remediation status and estimated costs to implement clean-up of our key MGP sites:
|
|
|
|
MGP Site (Jurisdiction)
|
Status
|
Estimated Cost to Clean up
(Expect to Recover through Rates with Customers)
|
West Palm Beach (Florida)
|
Remedial actions approved by the Florida Department of Environmental Protection have been implemented on the east parcel of the site. We expect to implement similar remedial actions on the site's west parcel in 2020.
|
Between $4.5 million to $15.4 million, including costs associated with the relocation of FPU’s operations at this site, and any potential costs associated with future redevelopment of the properties.
|
Sanford (Florida)
|
In March 2018, the United States Environmental Protection Agency ("EPA") approved a "site-wide ready for anticipated use" status, which is the final step before delisting a site. Construction has been completed and restrictive covenants are in place to ensure protection of human health. The only remaining activity is long-term groundwater monitoring.
|
FPU's remaining remediation expenses, including attorneys' fees and costs, are anticipated to be immaterial.
|
Winter Haven (Florida)
|
Remediation is ongoing.
|
Not expected to exceed $0.4 million.
|
Seaford (Delaware)
|
Conducted investigations of on-site and off-site impacts in the vicinity of the site, from 2014 through 2018, and submitted the findings to Delaware Department of Natural Resources and Environmental Control ("DNREC") in a March 2019 report. An interim action involving air-sparging/vapor extraction is being implemented, in accordance with the DNREC-approved Work Plan.
|
Between $0.2 million and $0.5 million.
|
|
|
7.
|
Other Commitments and Contingencies
|
Natural Gas and Electric
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 are effective as of April 1, 2020 and expire on March 31, 2023. Previously, our Delmarva Peninsula natural gas distribution operations had asset management agreements with PESCO to manage their natural gas transportation and storage capacity. See Note 3, Acquisitions and Divestitures for additional details regarding the sale of PESCO's assets and contracts.
In May 2019, our natural gas distribution operations and Eight Flags entered into separate asset management agreements with Emera Energy Services, Inc. to manage their natural gas transportation capacity. The parties entered into short-term agreements for a one-year term beginning July 2019 through July 2020. The parties also entered into long-term agreements for a 10-year term that will commence in July 2020.
Chesapeake Utilities' Florida Division has firm transportation service contracts with Florida Gas Transmission Company ("FGT") and Gulfstream Natural Gas System, LLC ("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, 2020, FPU was in compliance with all of the requirements of its fuel supply contracts.
Eight Flags provides electricity and steam generation services through its CHP plant located on Amelia Island, Florida. In June 2016, Eight Flags began selling power generated from the CHP plant to FPU pursuant to a 20-year power purchase agreement for distribution to our electric customers. In July 2016, Eight Flags also started selling steam, pursuant to a separate 20-year contract, to the landowner on which the CHP plant is located. The CHP plant is powered by natural gas transported by FPU through its distribution system and Peninsula Pipeline through its intrastate pipeline.
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, 2020 was $37.0 million. The aggregate amount guaranteed at March 31, 2020 was approximately $17.9 million with the guarantees expiring on various dates through March 2, 2021. The amounts related to PESCO were $6.8 million and are expected to be terminated or transferred in the second quarter of 2020. See Note 3, Acquisitions and Divestitures, for additional details on the sale of assets and contracts for PESCO.
Chesapeake Utilities also guarantees the payment of FPU’s first mortgage bonds. The maximum exposure under this guarantee is the outstanding principal plus accrued interest balances. The outstanding principal balances of FPU’s first mortgage bonds approximate their carrying values (see Note 15, Long-Term Debt, for further details).
As of March 31, 2020, we have issued letters of credit totaling approximately $5.4 million related to the electric transmission services for FPU's electric division, the firm transportation service agreement between TETLP and our Delaware and Maryland divisions and our current and previous primary insurance carriers. These letters of credit have various expiration dates through October 22, 2020. There have been no draws on these letters of credit as of March 31, 2020. We do not anticipate that the counterparties will draw upon these letters of credit, and we expect that they will be renewed to the extent necessary in the future. The outstanding letters of credit as of March 31, 2020 also included those issued to support the operations of our divested subsidiary, PESCO. As a result of the sale of assets and contracts for PESCO, letters of credit associated with PESCO are expected to be terminated or transferred in the second quarter of 2020.
We use the management approach to identify operating segments. We organize our business around differences in regulatory environment and/or products or services, and the operating results of each segment are regularly reviewed by the chief operating decision maker (our Chief Executive Officer) in order to make decisions about resources and to assess performance. Our operations are entirely domestic and are comprised of two reportable segments:
|
|
•
|
Regulated Energy. Includes energy distribution and transmission services (natural gas distribution, natural gas transmission and electric distribution operations). All operations in this segment are regulated, as to their rates and services, by the PSC having jurisdiction in each operating territory or by the FERC in the case of Eastern Shore.
|
|
|
•
|
Unregulated Energy. Includes energy transmission, energy generation (the operations of our Eight Flags' CHP plant), propane operations, and our mobile compressed natural gas 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. Effective in the third quarter of 2019, the natural gas marketing and related services subsidiary (PESCO), previously reported in the Unregulated Energy segment, are reflected in discontinued operations. See Note 3, Acquisitions and Divestitures for additional details of the sale of PESCO.
|
The remainder of our operations are presented as “Other businesses and eliminations,” which consists of unregulated subsidiaries that own real estate leased to Chesapeake Utilities, as well as certain corporate costs not allocated to other operations.
The following table presents financial information about our reportable segments:
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
March 31,
|
|
|
2020
|
|
2019
|
(in thousands)
|
|
|
|
|
Operating Revenues, Unaffiliated Customers
|
|
|
|
|
Regulated Energy
|
|
$
|
102,494
|
|
|
$
|
103,071
|
|
Unregulated Energy
|
|
50,216
|
|
|
57,393
|
|
Total operating revenues, unaffiliated customers
|
|
$
|
152,710
|
|
|
$
|
160,464
|
|
Intersegment Revenues (1)
|
|
|
|
|
Regulated Energy
|
|
$
|
461
|
|
|
$
|
547
|
|
Unregulated Energy
|
|
3,815
|
|
|
3,687
|
|
Other businesses
|
|
132
|
|
|
132
|
|
Total intersegment revenues
|
|
$
|
4,408
|
|
|
$
|
4,366
|
|
Operating Income
|
|
|
|
|
Regulated Energy
|
|
$
|
27,888
|
|
|
$
|
29,741
|
|
Unregulated Energy
|
|
13,841
|
|
|
15,258
|
|
Other businesses and eliminations
|
|
384
|
|
|
(875
|
)
|
Operating income
|
|
42,113
|
|
|
44,124
|
|
Other income (expense), net
|
|
3,318
|
|
|
(57
|
)
|
Interest charges
|
|
5,814
|
|
|
5,628
|
|
Income from Continuing Operations before Income Taxes
|
|
39,617
|
|
|
38,439
|
|
Income Taxes on Continuing Operations
|
|
10,591
|
|
|
9,625
|
|
Income from Continuing Operations
|
|
29,026
|
|
|
28,814
|
|
Loss from Discontinued Operations, net of tax
|
|
(96
|
)
|
|
(150
|
)
|
Net Income
|
|
$
|
28,930
|
|
|
$
|
28,664
|
|
|
|
|
|
|
(1) All significant intersegment revenues are billed at market rates and have been eliminated from consolidated operating revenues.
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
March 31, 2020
|
|
December 31, 2019
|
Identifiable Assets
|
|
|
|
|
Regulated Energy segment
|
|
$
|
1,448,114
|
|
|
$
|
1,434,066
|
|
Unregulated Energy segment
|
|
295,470
|
|
|
296,810
|
|
Other businesses and eliminations
|
|
44,635
|
|
|
52,322
|
|
Total identifiable assets
|
|
$
|
1,788,219
|
|
|
$
|
1,783,198
|
|
Accumulated Other Comprehensive Loss
Defined benefit pension and postretirement plan items, unrealized gains (losses) of our propane swap agreements and natural gas swaps and futures contracts, designated as commodity contracts cash flow hedges, are the components of our accumulated other comprehensive loss. The following tables present the changes in the balance of accumulated other comprehensive (loss)/income as of March 31, 2020 and 2019. All amounts except the stranded tax reclassification are presented net of tax.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Defined Benefit
|
|
Commodity
|
|
|
|
|
Pension and
|
|
Contract
|
|
|
|
|
Postretirement
|
|
Cash Flow
|
|
|
|
|
Plan Items
|
|
Hedges
|
|
Total
|
(in thousands)
|
|
|
|
|
|
|
As of December 31, 2019
|
|
$
|
(4,933
|
)
|
|
$
|
(1,334
|
)
|
|
$
|
(6,267
|
)
|
Other comprehensive income before reclassifications
|
|
—
|
|
|
895
|
|
|
895
|
|
Amounts reclassified from accumulated other comprehensive income (loss)
|
|
66
|
|
|
(888
|
)
|
|
(822
|
)
|
Net current-period other comprehensive income
|
|
66
|
|
|
7
|
|
|
73
|
|
As of March 31, 2020
|
|
$
|
(4,867
|
)
|
|
$
|
(1,327
|
)
|
|
$
|
(6,194
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
|
|
|
|
|
As of December 31, 2018
|
|
$
|
(5,928
|
)
|
|
$
|
(785
|
)
|
|
$
|
(6,713
|
)
|
Other comprehensive income before reclassifications
|
|
—
|
|
|
3,021
|
|
|
3,021
|
|
Amounts reclassified from accumulated other comprehensive income
|
|
107
|
|
|
(39
|
)
|
|
68
|
|
Net prior-period other comprehensive income
|
|
107
|
|
|
2,982
|
|
|
3,089
|
|
Prior-year reclassification
|
|
|
|
|
(115
|
)
|
|
(115
|
)
|
As of March 31, 2019
|
|
$
|
(5,821
|
)
|
|
$
|
2,082
|
|
|
$
|
(3,739
|
)
|
The following table presents amounts reclassified out of accumulated other comprehensive loss for the three months ended March 31, 2020 and 2019. Deferred gains or losses for our commodity contract cash flow hedges are recognized in earnings upon settlement.
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
March 31,
|
|
|
2020
|
|
2019
|
(in thousands)
|
|
|
|
|
Amortization of defined benefit pension and postretirement plan items:
|
|
|
|
|
Prior service credit (1)
|
|
$
|
19
|
|
|
$
|
19
|
|
Net loss(1)
|
|
(108
|
)
|
|
(163
|
)
|
Total before income taxes
|
|
(89
|
)
|
|
(144
|
)
|
Income tax benefit
|
|
23
|
|
|
37
|
|
Net of tax
|
|
$
|
(66
|
)
|
|
$
|
(107
|
)
|
Gains and losses on commodity contracts cash flow hedges:
|
|
|
|
|
Propane swap agreements (2)
|
|
$
|
1,227
|
|
|
$
|
606
|
|
Natural gas swaps (2)(3)
|
|
—
|
|
|
11
|
|
Natural gas futures (2)(3)
|
|
—
|
|
|
(573
|
)
|
Total before income taxes
|
|
1,227
|
|
|
44
|
|
Income tax benefit (expense)
|
|
(339
|
)
|
|
(5
|
)
|
Net of tax
|
|
888
|
|
|
39
|
|
Total reclassifications for the period
|
|
$
|
822
|
|
|
$
|
(68
|
)
|
(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.
(3) PESCO's results for the first quarter of 2019 are reflected as discontinued operations in our condensed consolidated statements of income.
Amortization of defined benefit pension and postretirement plan items is included in other expense, net gains and losses on propane swap agreements, call options and natural gas futures contracts are included in cost of sales 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.
|
|
10.
|
Employee Benefit Plans
|
Net periodic benefit costs for our pension and post-retirement benefits plans for the three months ended March 31, 2020 and 2019 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,
|
|
2020
|
|
2019
|
|
2020
|
|
2019
|
|
2020
|
|
2019
|
|
2020
|
|
2019
|
|
2020
|
|
2019
|
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest cost
|
|
$
|
46
|
|
|
$
|
105
|
|
|
$
|
518
|
|
|
$
|
615
|
|
|
$
|
16
|
|
|
$
|
21
|
|
|
$
|
8
|
|
|
$
|
10
|
|
|
$
|
10
|
|
|
$
|
12
|
|
Expected return on plan assets
|
|
(42
|
)
|
|
(127
|
)
|
|
(745
|
)
|
|
(693
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Amortization of prior service credit
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(19
|
)
|
|
(19
|
)
|
|
—
|
|
|
—
|
|
Amortization of net loss
|
|
65
|
|
|
101
|
|
|
135
|
|
|
129
|
|
|
5
|
|
|
26
|
|
|
12
|
|
|
12
|
|
|
—
|
|
|
—
|
|
Net periodic cost (benefit)
|
|
69
|
|
|
79
|
|
|
(92
|
)
|
|
51
|
|
|
21
|
|
|
47
|
|
|
1
|
|
|
3
|
|
|
10
|
|
|
12
|
|
Amortization of pre-merger regulatory asset
|
|
—
|
|
|
—
|
|
|
—
|
|
|
190
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
2
|
|
|
2
|
|
Total periodic cost
|
|
$
|
69
|
|
|
$
|
79
|
|
|
$
|
(92
|
)
|
|
$
|
241
|
|
|
$
|
21
|
|
|
$
|
47
|
|
|
$
|
1
|
|
|
$
|
3
|
|
|
$
|
12
|
|
|
$
|
14
|
|
We expect to record immaterial pension and postretirement benefit costs for 2020. 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 a Florida PSC order, FPU continues to record, as a regulatory asset, a portion of the unrecognized postretirement benefit costs related to its regulated operations after the FPU merger. 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 loss.
The following tables present the amounts included in the regulatory asset and accumulated other comprehensive loss that were recognized as components of net periodic benefit cost during the three months ended March 31, 2020 and 2019:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended March 31, 2020
|
|
Chesapeake
Pension
Plan
|
|
FPU
Pension
Plan
|
|
Chesapeake SERP
|
|
Chesapeake
Postretirement
Plan
|
|
FPU
Medical
Plan
|
|
Total
|
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
Prior service credit
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
(19
|
)
|
|
$
|
—
|
|
|
$
|
(19
|
)
|
Net loss
|
|
65
|
|
|
135
|
|
|
5
|
|
|
12
|
|
|
—
|
|
|
217
|
|
Total recognized in net periodic benefit cost
|
|
65
|
|
|
135
|
|
|
5
|
|
|
(7
|
)
|
|
—
|
|
|
198
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Recognized from accumulated other comprehensive loss/(gain) (1)
|
|
65
|
|
|
26
|
|
|
5
|
|
|
(7
|
)
|
|
—
|
|
|
89
|
|
Recognized from regulatory asset
|
|
—
|
|
|
109
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
109
|
|
Total
|
|
$
|
65
|
|
|
$
|
135
|
|
|
$
|
5
|
|
|
$
|
(7
|
)
|
|
$
|
—
|
|
|
$
|
198
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended March 31, 2019
|
|
Chesapeake
Pension
Plan
|
|
FPU
Pension
Plan
|
|
Chesapeake SERP
|
|
Chesapeake
Postretirement
Plan
|
|
FPU
Medical
Plan
|
|
Total
|
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
Prior service credit
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
(19
|
)
|
|
$
|
—
|
|
|
$
|
(19
|
)
|
Net loss
|
|
101
|
|
|
129
|
|
|
26
|
|
|
12
|
|
|
—
|
|
|
268
|
|
Total recognized in net periodic benefit cost
|
|
101
|
|
|
129
|
|
|
26
|
|
|
(7
|
)
|
|
—
|
|
|
249
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Recognized from accumulated other comprehensive loss/(gain) (1)
|
|
101
|
|
|
24
|
|
|
26
|
|
|
(7
|
)
|
|
—
|
|
|
144
|
|
Recognized from regulatory asset
|
|
—
|
|
|
105
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
105
|
|
Total
|
|
$
|
101
|
|
|
$
|
129
|
|
|
$
|
26
|
|
|
$
|
(7
|
)
|
|
$
|
—
|
|
|
$
|
249
|
|
(1) See Note 9, Stockholder's Equity.
During the three months ended March 31, 2020, we contributed approximately $0.3 million to the FPU Pension Plan. Our contribution to the Chesapeake Pension Plan was immaterial. We expect to contribute approximately $0.3 million and $3.2 million to the Chesapeake Pension Plan and FPU Pension Plans, respectively, during 2020, which represents the minimum annual contribution payments required. A provision in the Coronavirus Aid, Relief, and Economy Stimulus Act, which was passed by Congress and signed into law by President Trump in March 2020, authorized the deferral of 2020 pension contributions to January 1, 2021. Despite this authorization, we will not defer any of our pension plan contributions to 2021.
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, 2020 were immaterial. We expect to pay total cash benefits of approximately $0.2 million under the Chesapeake SERP in 2020. Cash benefits paid under the Chesapeake Postretirement Plan, primarily for medical claims for the three months ended March 31, 2020 were immaterial. We estimate that approximately $0.1 million will be paid for such benefits under the Chesapeake Postretirement Plan in 2020. Cash benefits paid under the FPU Medical Plan, primarily for medical claims for the three months ended March 31, 2020 were immaterial. We estimate that approximately $0.1 million will be paid for such benefits under the FPU Medical Plan in 2020.
The investment balances at March 31, 2020 and December 31, 2019, consisted of the following:
|
|
|
|
|
|
|
|
|
(in thousands)
|
March 31,
2020
|
|
December 31,
2019
|
Rabbi trust (associated with the Non-Qualified Deferred Compensation Plan)
|
$
|
7,194
|
|
|
$
|
9,202
|
|
Investments in equity securities
|
23
|
|
|
27
|
|
Total
|
$
|
7,217
|
|
|
$
|
9,229
|
|
We classify these investments as trading securities and report them at their fair value. For the three months ended March 31, 2020 and 2019, we recorded a net unrealized loss of approximately $1.5 million and a net unrealized gain of approximately $0.7 million, respectively, in other expense, 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 condensed 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, 2020 and 2019:
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
March 31,
|
|
|
2020
|
|
2019
|
(in thousands)
|
|
|
|
|
Awards to non-employee directors
|
|
$
|
176
|
|
|
$
|
149
|
|
Awards to key employees
|
|
880
|
|
|
338
|
|
Total compensation expense
|
|
1,056
|
|
|
487
|
|
Less: tax benefit
|
|
(276
|
)
|
|
(127
|
)
|
Share-based compensation amounts included in net income
|
|
$
|
780
|
|
|
$
|
360
|
|
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 date of the grant. 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 2019, after the most recent election of directors, each of our continuing non-employee directors received an annual retainer of 751 shares of common stock under the SICP for service as a director through the 2020 Annual Meeting of Stockholders; accordingly, 6,759 shares, with a weighted average fair value of $93.14 per share, were issued and vested in 2019.
In January 2020, a newly appointed member of the Board of Directors received a pro-rated retainer of 254 shares of common stock under the SICP to serve as a non-employee director through the 2020 Annual Meeting of Stockholders. The shares awarded to the non-employee director immediately vested upon issuance in January 2020, had a weighted average fair value of $95.83 per share, and the expense will be recognized over the remaining service period ending on the date of the 2020 Annual Meeting of Stockholders.
At March 31, 2020, 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 on the date of the 2020 Annual Meeting of Stockholders.
Key Employees
The table below presents the summary of the stock activity for awards to key employees for the three months ended March 31, 2020:
|
|
|
|
|
|
|
|
|
|
|
Number of Shares
|
|
Weighted Average
Fair Value
|
Outstanding—December 31, 2019
|
|
157,817
|
|
|
$
|
80.28
|
|
Granted
|
|
65,775
|
|
|
$
|
92.78
|
|
Vested
|
|
(35,651
|
)
|
|
$
|
66.48
|
|
Expired
|
|
(5,302
|
)
|
|
$
|
65.32
|
|
Outstanding—March 31, 2020
|
|
182,639
|
|
|
$
|
87.01
|
|
In February 2020, our Board of Directors granted awards of 65,775 shares of common stock to key employees under the SICP. The shares granted are multi-year awards that will vest at the end of the three-year service period ending December 31, 2022. All of these stock awards are earned based upon the successful achievement of long-term financial results, which comprise 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 2020, upon the election of 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 we awarded in February 2020 for the performance period ended December 31, 2019, remitted the cash to the appropriate taxing authorities, and paid the balance of such awarded shares to each such executive officer. We withheld 10,319 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 $1.0 million.
At March 31, 2020, the aggregate intrinsic value of the SICP awards granted to key employees was approximately $15.7 million. At March 31, 2020, there was approximately $6.7 million of unrecognized compensation cost related to these awards, which is expected to be recognized as expense from the remainder of 2020 through 2022.
Stock Options
There were no stock options outstanding or issued during the three months ended March 31, 2020 and 2019.
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. Our natural gas, electric and propane distribution operations have entered into agreements with suppliers to purchase natural gas, electricity and propane for resale to our customers. Aspire Energy has entered into contracts with producers to secure natural gas to meet its obligations. Purchases under these
contracts typically either do not meet the definition of derivatives or are considered “normal purchases and 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. As of March 31, 2020, our natural gas and electric distribution operations did not have any outstanding derivative contracts.
PESCO's Derivative Instruments
As discussed in Note 3, Acquisitions and Divestitures, during the fourth quarter of 2019, we sold PESCO's assets and contracts, and therefore, no longer have natural gas futures and contracts recorded in our condensed consolidated financial statements.
Volume of Derivative Activity
As of March 31, 2020, the volume of our commodity derivative contracts were as follows:
|
|
|
|
|
|
|
|
|
|
Business unit
|
|
Commodity
|
|
Quantity hedged (in millions)
|
|
Designation
|
|
Longest Expiration date of hedge
|
Sharp
|
|
Propane (gallons)
|
|
15.9
|
|
Cash flows hedges
|
|
June 2022
|
Sharp entered into futures and swap agreements to mitigate the risk of fluctuations in wholesale propane index prices associated with the propane volumes expected to be purchased during the heating season. Under the futures and swap agreements, Sharp will receive the difference between: (i) the index prices (Mont Belvieu prices for March 2020 through March 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 swap prices, Sharp will pay the difference. We designated and accounted for 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 $1.5 million from accumulated other comprehensive loss to earnings during the next 12-month period ended March 31, 2021.
Broker Margin
Futures exchanges have contract specific margin requirements that require the posting of cash or cash equivalents relating to traded contracts. Margin requirements consist of initial margin that is posted upon the initiation of a position, maintenance margin that is usually expressed as a percent of initial margin, and variation margin that fluctuates based on the daily mark-to-market relative to maintenance margin requirements. We currently maintain a broker margin account for Sharp, with the balance related to the account is as follows:
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
Balance Sheet Location
|
|
March 31, 2020
|
|
December 31, 2019
|
Sharp
|
Other Current Assets
|
|
$
|
3,111
|
|
|
$
|
2,317
|
|
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.
As of March 31, 2020 and December 31, 2019, we did not have material fair value hedges. The fair values of the derivative contracts recorded in the condensed consolidated balance sheets as of March 31, 2020 and December 31, 2019, are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative Assets
|
|
|
|
|
Fair Value As Of
|
(in thousands)
|
|
Balance Sheet Location
|
|
March 31, 2020
|
|
December 31, 2019
|
Derivatives designated as cash flow hedges
|
|
|
|
|
|
|
Propane swap agreements
|
|
Derivative assets, at fair value
|
|
$
|
151
|
|
|
$
|
—
|
|
Total asset derivatives
|
|
|
|
$
|
151
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative Liabilities
|
|
|
|
|
Fair Value As Of
|
(in thousands)
|
|
Balance Sheet Location
|
|
March 31, 2020
|
|
December 31, 2019
|
Derivatives designated as cash flow hedges
|
|
|
|
|
|
|
Propane swap agreements
|
|
Derivative liabilities, at fair value
|
|
$
|
1,986
|
|
|
$
|
1,844
|
|
Total liability derivatives
|
|
|
|
$
|
1,986
|
|
|
$
|
1,844
|
|
The effects of gains and losses from derivative instruments on the condensed consolidated financial statements are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount of Gain (Loss) on Derivatives:
|
|
|
Location of Gain
|
|
For the Three Months Ended March 31,
|
(in thousands)
|
|
(Loss) on Derivatives
|
|
2020
|
|
2019
|
Derivatives designated as cash flow hedges
|
|
|
|
|
|
|
Propane swap agreements
|
|
Cost of sales
|
|
$
|
1,227
|
|
|
$
|
606
|
|
Propane swap agreements
|
|
Other comprehensive income
|
|
9
|
|
|
1,009
|
|
Natural gas swap contracts
|
|
Other comprehensive loss
|
|
—
|
|
|
(59
|
)
|
Natural gas futures contracts
|
|
Other comprehensive income
|
|
—
|
|
|
3,226
|
|
Total
|
|
|
|
$
|
1,236
|
|
|
$
|
4,782
|
|
|
|
14.
|
Fair Value of Financial Instruments
|
GAAP establishes a fair value hierarchy that prioritizes the inputs to valuation methods used to measure fair value. The three levels of the fair value hierarchy are the following:
|
|
|
|
Fair Value Hierarchy
|
Description of Fair Value Level
|
Fair Value Technique Utilized
|
Level 1
|
Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities
|
Investments - equity securities - The fair values of these trading securities are recorded at fair value based on unadjusted quoted prices in active markets for identical securities.
Investments - mutual funds and other - The fair values of these investments, comprised of money market and mutual funds, are recorded at fair value based on quoted net asset values of the shares.
|
Level 2
|
Quoted prices in markets that are not active, or inputs which are observable, either directly or indirectly, for substantially the full term of the asset or liability
|
Derivative assets and liabilities - The fair value of the propane put/call options and 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, 2020 and December 31, 2019:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements Using:
|
As of March 31, 2020
|
|
Fair Value
|
|
Quoted Prices in
Active Markets
(Level 1)
|
|
Significant Other
Observable
Inputs
(Level 2)
|
|
Significant
Unobservable
Inputs
(Level 3)
|
(in thousands)
|
|
|
|
|
|
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
Investments—equity securities
|
|
$
|
23
|
|
|
$
|
23
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Investments—guaranteed income fund
|
|
835
|
|
|
—
|
|
|
—
|
|
|
835
|
|
Investments—mutual funds and other
|
|
6,359
|
|
|
6,359
|
|
|
—
|
|
|
—
|
|
Total investments
|
|
7,217
|
|
|
6,382
|
|
|
—
|
|
|
835
|
|
Derivative assets
|
|
151
|
|
|
—
|
|
|
151
|
|
|
—
|
|
Total assets
|
|
$
|
7,368
|
|
|
$
|
6,382
|
|
|
$
|
151
|
|
|
$
|
835
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
Derivative liabilities
|
|
$
|
1,986
|
|
|
$
|
—
|
|
|
$
|
1,986
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements Using:
|
As of December 31, 2019
|
|
Fair Value
|
|
Quoted Prices in
Active Markets
(Level 1)
|
|
Significant Other
Observable
Inputs
(Level 2)
|
|
Significant
Unobservable
Inputs
(Level 3)
|
(in thousands)
|
|
|
|
|
|
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
Investments—equity securities
|
|
$
|
27
|
|
|
$
|
27
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Investments—guaranteed income fund
|
|
803
|
|
|
—
|
|
|
—
|
|
|
803
|
|
Investments—mutual funds and other
|
|
8,399
|
|
|
8,399
|
|
|
—
|
|
|
—
|
|
Total investments
|
|
9,229
|
|
|
8,426
|
|
|
—
|
|
|
803
|
|
Derivative assets
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Total assets
|
|
$
|
9,229
|
|
|
$
|
8,426
|
|
|
$
|
—
|
|
|
$
|
803
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
Derivative liabilities
|
|
$
|
1,844
|
|
|
$
|
—
|
|
|
$
|
1,844
|
|
|
$
|
—
|
|
The following table sets forth the summary of the changes in the fair value of Level 3 investments for the three months ended March 31, 2020 and 2019:
|
|
|
|
|
|
|
|
|
|
Three Months Ended
March 31,
|
|
2020
|
|
2019
|
(in thousands)
|
|
|
|
Beginning Balance
|
$
|
803
|
|
|
$
|
686
|
|
Purchases and adjustments
|
9
|
|
|
6
|
|
Transfers
|
57
|
|
|
—
|
|
Distribution
|
(38
|
)
|
|
—
|
|
Investment income
|
4
|
|
|
3
|
|
Ending Balance
|
$
|
835
|
|
|
$
|
695
|
|
Investment income from the Level 3 investments is reflected in other expense, (net) in the condensed consolidated statements of income.
At March 31, 2020, 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, 2020, long-term debt which includes current maturities but excludes debt issuance costs, had a carrying value of approximately $456.6 million, compared to the estimated fair value of $447.8 million. At December 31, 2019, long-term debt, which includes the current maturities but excludes debt issuance costs, had a carrying value of approximately $486.6 million, compared to a fair value of approximately $505.0 million. The fair value was calculated using a discounted cash flow methodology that incorporates a market interest rate based on published corporate borrowing rates for debt instruments with similar terms and average maturities, and with adjustments for duration, optionality, and risk profile. The valuation technique used to estimate the fair value of long-term debt would be considered a Level 3 measurement.
Our outstanding long-term debt is shown below:
|
|
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
December 31,
|
(in thousands)
|
|
2020
|
|
2019
|
FPU secured first mortgage bonds (1) :
|
|
|
|
|
9.08% bond, due June 1, 2022
|
|
$
|
7,991
|
|
|
$
|
7,990
|
|
Uncollateralized senior notes:
|
|
|
|
|
5.50% note, due October 12, 2020
|
|
2,000
|
|
|
2,000
|
|
5.93% note, due October 31, 2023
|
|
12,000
|
|
|
12,000
|
|
5.68% note, due June 30, 2026
|
|
20,300
|
|
|
20,300
|
|
6.43% note, due May 2, 2028
|
|
6,300
|
|
|
6,300
|
|
3.73% note, due December 16, 2028
|
|
18,000
|
|
|
18,000
|
|
3.88% note, due May 15, 2029
|
|
50,000
|
|
|
50,000
|
|
3.25% note, due April 30, 2032
|
|
70,000
|
|
|
70,000
|
|
3.48% note, due May 31, 2038
|
|
50,000
|
|
|
50,000
|
|
3.58% note, due November 30, 2038
|
|
50,000
|
|
|
50,000
|
|
3.98% note, due August 20, 2039
|
|
100,000
|
|
|
100,000
|
|
2.98% note, due December 20, 2034
|
|
70,000
|
|
|
70,000
|
|
Term Note due February 28, 2020
|
|
—
|
|
|
30,000
|
|
Less: debt issuance costs
|
|
(808
|
)
|
|
(822
|
)
|
Total long-term debt
|
|
455,783
|
|
|
485,768
|
|
Less: current maturities
|
|
(15,600
|
)
|
|
(45,600
|
)
|
Total long-term debt, net of current maturities
|
|
$
|
440,183
|
|
|
$
|
440,168
|
|
(1) FPU secured first mortgage bonds are guaranteed by Chesapeake Utilities.
Term Notes
In January 2019, we issued a $30.0 million unsecured term note through Branch Banking and Trust Company, with a maturity date of February 28, 2020. This note was paid in full in February 2020 utilizing our short-term borrowing facilities.
Shelf Agreements
We have entered into Shelf Agreements with Prudential, MetLife and NYL, with no party under any obligation to purchase any unsecured debt. The Prudential Shelf Agreement totaling $150.0 million was entered into in October 2015 and we issued $70.0 million of 3.25 percent unsecured debt in April 2017. The Prudential Shelf Agreement was then amended in September 2018 to increase the borrowing capacity back to $150.0 million, and in August 2019, we issued $100.0 million of 3.98 percent unsecured debt. In January 2020, we submitted a request for Prudential to purchase $50.0 million of our unsecured debt which was accepted and confirmed by Prudential. The Shelf Notes will bear interest at the rate of 3.00 percent per annum and the proceeds received from the issuance will be used to reduce short-term borrowings under our revolving credit facility, lines of credit and/or to fund capital expenditures. The closing of the issuance of the Shelf Notes is expected to occur on or before July 15, 2020. In April 2020, the Prudential Shelf Agreement was amended to reinstate and increase the available borrowing capacity back to $150.0 million.
The NYL Shelf Agreement totaling $100.0 million was entered into in March 2017 and we issued unsecured debt totaling $100.0 million during 2018. The NYL Shelf Agreement was amended in November 2018 to provide additional borrowing capacity of $50.0 million. In February 2020, we submitted a request for NYL to purchase $40.0 million of our unsecured debt which was accepted and confirmed by NYL. The Shelf Notes will bear interest at the rate of 2.96 percent per annum and the proceeds received from the issuance will be used to reduce short-term borrowings under our revolving credit facility, lines of credit and/or to fund capital expenditures. The closing of the issuance of the Shelf Notes is expected to occur on or before August 14, 2020.
The MetLife Shelf Agreement was entered into in March 2017 and it expired in March 2020. As of March 31, 2020, we had not requested that MetLife purchase unsecured senior debt under the MetLife Shelf Agreement. In April 2020, we
agreed to commercial terms with MetLife to provide a new $150.0 million MetLife Shelf Agreement for a three-year term ending March 31, 2023. The MetLife Shelf Agreement will be finalized in May 2020.
The following table summarizes the available borrowing capacity under our Shelf Agreements and is reflective of activity that occurred subsequent to March 31, 2020:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
Total Borrowing Capacity
|
|
Less: Amount of Debt Issued
|
|
Less: Unfunded Commitments
|
|
Remaining Borrowing Capacity
|
Shelf Agreement
|
|
|
|
|
|
|
|
|
Prudential Shelf Agreement (1)
|
|
$
|
220,000
|
|
|
$
|
(170,000
|
)
|
|
$
|
(50,000
|
)
|
|
$
|
—
|
|
NYL Shelf Agreement (2)
|
|
150,000
|
|
|
(100,000
|
)
|
|
(40,000
|
)
|
|
10,000
|
|
Total Shelf Agreements as of March 31, 2020
|
|
370,000
|
|
|
(270,000
|
)
|
|
(90,000
|
)
|
|
10,000
|
|
|
|
|
|
|
|
|
|
|
Subsequent amendments / renewals:
|
|
|
|
|
|
|
|
|
Prudential Shelf Agreement (3)
|
|
150,000
|
|
|
—
|
|
|
—
|
|
|
150,000
|
|
MetLife Shelf Agreement (4)
|
|
150,000
|
|
|
—
|
|
|
—
|
|
|
150,000
|
|
Total Shelf Agreements added after March 31, 2020
|
|
300,000
|
|
|
—
|
|
|
—
|
|
|
300,000
|
|
Total Shelf Agreements as of May 5, 2020
|
|
$
|
670,000
|
|
|
$
|
(270,000
|
)
|
|
$
|
(90,000
|
)
|
|
$
|
310,000
|
|
(1) In January 2020, we requested and Prudential accepted our request to purchase $50.0 million of our unsecured debt.
(2) In February 2020, we requested and NYL accepted our request to purchase $40.0 million of our unsecured debt.
(3) In April 2020, the Prudential Shelf Agreement was amended to reinstate and increase the available borrowing capacity back to $150.0 million.
(4) In April 2020, we agreed to commercial terms with MetLife to provide a new $150.0 million MetLife Shelf Agreement for a three-year term ending March 31, 2023. The MetLife Shelf Agreement will be finalized in May 2020.
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, from among our various short-term debt facilities. These facilities are available to provide funds for our short-term cash needs to meet seasonal working capital requirements and to temporarily fund portions of our capital expenditures.
At March 31, 2020 and December 31, 2019, we had $254.3 million and $247.4 million, respectively, of short-term borrowings outstanding at the weighted average interest rates of 2.30 percent and 2.62 percent, respectively. We have an aggregate of $370.0 million in credit lines comprised of four unsecured bank credit facilities with four financial institutions, with $220.0 million in total available credit, and a Revolver with five participating Lenders totaling $150.0 million. All of these facilities expire in October 2020. The following table summarizes our short-term borrowing facilities information at March 31, 2020 and December 31, 2019:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding borrowings at
|
|
|
(in thousands)
|
Total Facility
|
|
LIBOR Based Interest Rate
|
|
March 31, 2020
|
|
December 31, 2019
|
|
Available at March 31, 2020
|
Bank Credit Facility
|
|
|
|
|
|
|
|
|
|
Committed revolving credit facility A
|
$
|
55,000
|
|
|
plus 0.75 percent
|
|
$
|
55,000
|
|
|
$
|
55,000
|
|
|
$
|
—
|
|
Committed revolving credit facility B
|
80,000
|
|
|
plus 0.75 percent
|
|
72,389
|
|
|
57,150
|
|
|
7,611
|
|
Committed revolving credit facility C
|
45,000
|
|
|
plus 0.75 percent
|
|
35,515
|
|
|
42,040
|
|
|
9,485
|
|
Committed revolving credit facility D
|
40,000
|
|
|
plus 0.85 percent
|
|
40,000
|
|
|
40,000
|
|
|
—
|
|
Committed revolving credit facility E(2)
|
150,000
|
|
|
plus 1.125 percent
|
|
50,000
|
|
|
50,000
|
|
|
100,000
|
|
Total short term credit facilities
|
$
|
370,000
|
|
|
|
|
252,904
|
|
|
244,190
|
|
|
$
|
117,096
|
|
Book overdrafts(1)
|
|
|
|
|
1,435
|
|
|
3,181
|
|
|
|
Total short-term borrowing
|
|
|
|
|
$
|
254,339
|
|
|
$
|
247,371
|
|
|
|
(1) If presented, these book overdrafts would be funded through the bank revolving credit facilities.
(2) This committed revolving credit facility includes a restriction that our short-term borrowings, excluding any borrowings under the committed revolving credit facility, shall not exceed $350.0 million.
As a result of the uncertainty regarding the length of and depth of the impacts of the COVID-19 pandemic, in April 2020, we received commitments for an additional $50.0 million of short-term debt capacity through two credit facilities that mature on October 31, 2020. These facilities have a commitment fee of 35 basis points with an interest rate of 175 basis points over LIBOR, to the extent we borrow under these facilities. Additionally, we have also agreed to commercial terms for two additional short-term credit facilities totaling $45.0 million that mature on October 31, 2020. These credit facilities are expected to be finalized in May 2020.
The availability of funds under our credit facilities is subject to conditions specified in the respective credit agreements, all of which we currently satisfy. These conditions include our compliance with financial covenants and the continued accuracy of representations and warranties contained in these agreements. We are required by the financial covenants in our revolving credit facilities to maintain, at the end of each fiscal year, a funded indebtedness ratio of no greater than 65 percent. As of March 31, 2020, we are in compliance with all of our debt covenants.
In April 2020, we entered into interest rate swaps with notional amounts totaling $70.0 million associated with two of our short-term lines of credit for a six-month term beginning April 2020 and terminating in October 2020. The interest rate swaps were entered to hedge the variability in cash flows attributable to changes in the short-term borrowing rates during this period. The respective fixed swap rates will be 0.3875 and 0.275 percent for the period. Our short-term borrowing will be based on the 30-day LIBOR rate. The interest swap will be cash settled monthly as the counter-party will pay us the 30-day LIBOR rate less the fixed rate.
We have entered into lease arrangements for office space, land, equipment, pipeline facilities and warehouses. These lease arrangements enable us to better conduct business operations in the regions in which we operate. Office space is leased to provide adequate workspace for all our employees in several locations throughout the Mid-Atlantic, Mid-West and in Florida. We lease land at various locations throughout our service territories to enable us to inject natural gas into underground storage and distribution systems, for bulk storage capacity, for our propane operations and for storage of equipment used in repairs and maintenance of our infrastructure. We lease natural gas compressors to ensure timely and reliable transportation of natural gas to our customers. Additionally, we lease a pipeline to deliver natural gas to an industrial customer in Polk County, Florida. We also lease warehouses to store equipment and materials used in repairs and maintenance for our businesses.
Some of our leases are subject to annual changes in the Consumer Price Index (“CPI”). While lease liabilities are not re-measured as a result of changes to the CPI, changes to the CPI are treated as variable lease payments and recognized in the period in which the obligation for those payments was incurred. A 100-basis-point increase in CPI would not have resulted in material additional annual lease costs. Most of our leases include options to renew, with renewal terms that
can extend the lease term from one to 25 years or more. The exercise of lease renewal options is at our sole discretion. The amounts disclosed in our condensed consolidated balance sheet at March 31, 2020 pertaining to the right-of-use assets and lease liabilities, are measured based on our current expectations of exercising our available renewal options. Our existing leases are not subject to any restrictions or covenants which preclude our ability to pay dividends, obtain financing or enter into additional leases. As of March 31, 2020, we have not entered into any leases, which have not yet commenced, that would entitle us to significant rights or create additional obligations. The following table presents information related to our total lease cost included in our condensed consolidated statements of income:
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Three Months Ended
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March 31,
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( in thousands)
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Classification
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2020
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2019
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Operating lease cost (1)
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Operations expense
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$
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626
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$
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635
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Finance lease cost:
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Amortization of lease assets
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Depreciation and amortization
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—
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401
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Interest on lease liabilities
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Interest expense
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—
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4
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Net lease cost
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$
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626
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$
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1,040
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(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, 2020 and December 31, 2019:
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(in thousands)
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Balance sheet classification
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March 31, 2020
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December 31, 2019
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Assets
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Operating lease assets
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Operating lease right-of-use assets
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$
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11,696
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$
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11,563
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Total lease assets
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$
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11,696
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$
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11,563
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Liabilities
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Current
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Operating lease liabilities
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Other accrued liabilities
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$
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1,608
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$
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1,705
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Noncurrent
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Operating lease liabilities
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Operating lease - liabilities
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10,165
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9,896
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Total lease liabilities
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$
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11,773
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$
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11,601
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The following table presents our weighted-average remaining lease terms and weighted-average discount rates for our operating and financing leases at March 31, 2020 and December 31, 2019:
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March 31, 2020
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December 31, 2019
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Weighted-average remaining lease term (in years)
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Operating leases
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8.75
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8.88
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Weighted-average discount rate
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Operating leases
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3.8
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%
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3.8
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%
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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, 2020 and 2019:
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Three Months Ended
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March 31,
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(in thousands)
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2020
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2019
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Operating cash flows from operating leases
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$
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527
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$
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537
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Operating cash flows from finance leases
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$
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—
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$
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4
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Financing cash flows from finance leases
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$
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—
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$
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401
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The following table presents the future undiscounted maturities of our operating leases at March 31, 2020 and for each of the next five years and thereafter:
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(in thousands)
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Operating Leases (1)
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Remainder of 2020
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$
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1,545
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2021
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2,010
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2022
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1,916
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2023
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1,852
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2024
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1,597
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2025
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1,363
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Thereafter
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3,787
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Total lease payments
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$
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14,070
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Less: Interest
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2,297
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Present value of lease liabilities
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$
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11,773
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(1) Operating lease payments include $4.1 million related to options to extend lease terms that are reasonably certain of being exercised.