2 0 1 8 A N N U A L R E P O R T
A STRONG
foundation
FOR GROWTH
foundation noun
foun•da•tion
Chesapeake Utilities’ solid track record, driven by our strong
aspiration for growth and commitment to care for our
employees, customers, investors and the communities we serve.
5,359 MILES
of gas pipeline and distribution mains
2
Chesapeake Utilities Corporatation | 2018 Annual Report
Natural gas is an abundant, reliable and clean energy
source made possible by energy infrastructure. Natural
gas pipelines enable homes and businesses to access
natural gas for heating, cooking and lighting as well as
fueling vehicles. Pictured at our Chesapeake Utilities’
operation in Dover, DE, is Glenn Wilson, Distribution
System Technician.
contents
04
06
08
Our Company
Business Operations
A Letter From Our President
1 2 2018 Financial Highlights
14
1 6
24
26
30
33
34
Corporate Governance
Employee-Centric Company
Response, Relief & Restoration:
Hurricane Michael
Connecting With Our Customers &
Communities
Our Commitment To Sustainability
Marlin Gas Services
Leadership and Board of Directors
our company
of our Company. Our people
drive our strategic plan, building
upon the strong foundation
that positions us for growth
opportunities year after year.
We are a responsible Company
that fosters a workplace where
employees feel empowered to
achieve their goals, know that
they are cared for and take pride
in what they do. Our employees
work together across our
businesses to identify innovative
ways to serve our customers,
grow our businesses and support
our communities.
As we continue to expand our
geographic footprint and enter
into new markets, we remain
grounded and steadfastly
focused on long-term value for
our stakeholders and generating
results that lead the industry.
Chesapeake Utilities
Corporation (Chesapeake
Utilities) is a NYSE-traded
company (CPK) focused
on delivering outstanding
service and attaining
sustainable growth that
generates long-term
value for our employees,
customers, investors and
communities.
Headquartered in Dover, DE,
our Company has been serving
customers since 1859. Through
our operating divisions and
subsidiaries, Chesapeake Utilities
provides natural gas distribution
and transmission; electricity
generation and distribution;
propane gas distribution; and
other energy related activities.
Chesapeake Utilities’ past
performance and positive results
for 2018 reflect upon the hard
work and dedication of our
employees who are the heart
4
Chesapeake Utilities Corporation | 2018 Annual Report
John Keen, Railcar Unloader, unloads
propane gas from a rail car delivery at
Sharp Energy’s North Dover Rail Plant.
Sharp Energy owns four rail facilities with
propane storage capacity.
O U R C O M P A N Y
We have proven ourselves to be a truly caring and
always aspiring Company. The key to our success is our
employees’ creative talent, relentless pursuit of better
solutions and unwavering commitment to serving our
customers. From the personal connections that we make
with our customers, communities and each other, to the
safe and reliable service provided to our customers, our
employees are our strong foundation for growth.
Jeff Householder, President and
Chief Executive Officer
12
years of superior
earnings growth
980+
employees
$1.7B
total assets
at 12/31/18
246,000+
distribution
customers
$283M
2018 capital
investments
5
‘‘” Chesapeake Utilities
Serves approximately 68,000 customers. Owns
and operates approximately 1,400 miles of gas
distribution mains. Chesapeake Utilities distributes
natural gas through its Delaware and Maryland
divisions to residential, commercial and industrial
customers.
68,000 1,400
customers
miles of gas
distribution mains
Aspire Energy, Inc.
Owns and operates natural gas
infrastructure including over
2,700 miles of pipeline systems
in 40 counties throughout Ohio.
Aspire Energy provides natural gas
supplies to several local distribution
companies and cooperatives. Aspire
Energy primarily sources gas from
approximately 300 conventional
producers and provides additional
services to maintain quality and
reliability to wholesale markets.
2,700
miles of pipeline
40
counties served
throughout
Ohio
300
sourced
conventional
producers
6
Chesapeake Utilities Corporation | 2018 Annual Report
486
miles of pipeline
50
BCF of natural
gas transported
a year
Eastern Shore Natural Gas
Company (ESNG)
Owns and operates a
486-mile interstate pipeline that
transports natural gas from four
pipeline interconnection points
in Pennsylvania to customers
in Delaware, Maryland and
Pennsylvania. ESNG transports
over 50 billion cubic feet (BCF)
of natural gas annually to local
distribution companies, electric
power generators and industrial
customers throughout the region.
business operations
B U S I N E S S O P E R A T I O N S
Eight Flags Energy, LLC
Provides electricity and steam generation services through a
combined heat and power (CHP) plant on Amelia Island, FL,
serving approximately 50% of Amelia Island’s demand for
electricity.
7
states within its
market area
16
local
distribution
companies
served
Peninsula Energy Services
Company, Inc. (PESCO)
Provides natural gas supply, asset
management and risk management
services to retail and wholesale
customers in the Mid-Atlantic,
Southeast and Appalachian Basin
regions. PESCO transacts on more
than 10 transmission pipelines and
over 16 local distribution companies
in seven states.
21
megawatts of
baseload power
78%
efficiency
129,000
customers
21
counties served
throughout
Florida
2,900
miles of
gas distribution
mains
Florida Public Utilities
Company (FPU)
Owns and operates
approximately 2,900
miles of natural gas
distribution mains across
21 counties in Florida and
distributes natural gas to
approximately 80,000
customers; electricity to
32,000 customers; and
propane to 17,000 customers
throughout Florida (includes
the Company’s Florida
natural gas division).
Marlin Gas Services, LLC (Marlin)
Maintains one of the largest fleets of tube trailers
dedicated to transporting compressed natural gas
(CNG). Marlin provides CNG services nationwide and
offers interim solutions where pipeline supplies are not
available or cannot meet customer requirements. With
its primary focus on the Gulf Coast region from Texas
to Florida, Marlin has transported more than 7 billion
cubic feet of natural gas.
7
BCF of natural gas transported
Peninsula Pipeline Company, Inc. (PPC)
Owns and operates several intrastate natural gas pipelines
in Florida providing transportation service that links
interstate pipelines to local distribution systems, industrial
customers and power generation facilities.
106
7
miles of pipeline
counties served throughout Florida
Sandpiper Energy, Inc.
Serves approximately
11,000 residential,
commercial and industrial
customers in Worcester
County, MD.
Originally comprised
of propane distribution
systems, Sandpiper Energy
is actively converting its
customers to natural gas.
Sandpiper currently owns
and operates over 300 miles
of natural gas distribution
mains.
11,000
300
customers
miles of gas
distribution
mains
Sharp Energy, Inc.
Distributes propane to
42,000 customers in
Delaware, Maryland,
Virginia and southeastern
Pennsylvania. Sharp
AutoGas fuels over 1,200
vehicles and is available
at 48 propane fueling
stations in Delaware,
Maryland, Virginia,
Pennsylvania and Florida.
10
retail
locations
42,000
customers
1,200 vehicles fueled
via AutoGas
7
A LETTER FROM OUR
president
We continued to execute our long-term, disciplined growth strategy. Our annual capital
investment of approximately $283 million and annual gross margin growth of $36.6
million were both record results. We had solid year-over-year growth in our natural
gas and propane gas distribution operations. Our gas transmission businesses on the
Delmarva Peninsula and in Florida completed two of the largest pipeline expansion
projects in the Company’s history. Chesapeake Utilities’ 2018 adjusted earnings per share
(EPS) increased 14.5%. We have consistently delivered long-term annual shareholder
returns of 15%, and more recently as high as 25%, while at the same time being true to our
unwavering commitment to the safe operation of our systems.
This is my first letter to you as President and CEO
of Chesapeake Utilities Corporation. I am pleased
to report that 2018 was another record-setting year.
Over the past decade, Chesapeake Utilities’ growth
and financial results have made us a top quartile
performer among comparable energy companies
in the U.S. One of the principal reasons for that
success is our employees. We remain focused on
attracting, developing and retaining the talent and
experience required to maintain our culture and
manage an ever-expanding and geographically
diverse portfolio of assets.
LEADERSHIP TRANSITION
Our Board of Directors has long held the view that
succession planning is a critical component to
sustaining and increasing shareholder value. One of
the basic tenets of our strategy is to ensure we have
the bench strength to promote internal candidates
to fill key positions.
Last year, Mike McMasters, our CEO for the past
eight years, retired. As many of you know, Mike was
a 38-year Chesapeake Utilities employee. We are
fortunate to have a number of employees whose
careers, like Mike’s, span the time when Chesapeake
Utilities transformed itself from a small Delmarva
distribution and interstate transmission pipeline to a
multistate energy delivery company. Mike took over
from John Schimkaitis not long after the acquisition
of Florida Public Utilities Company. He led the
Company over an unprecedented period of growth,
where we added over $1 billion in gross plant. I was
fortunate to work with Mike and the Chesapeake
Utilities’ team to drive that growth as President of
the Company’s Florida operations since 2010.
When Mike announced his retirement, our Board,
with the assistance of a leading search firm,
implemented the next steps of its executive
succession plan. It’s a testament to the strength
and capabilities of our team that there were several
well-qualified internal candidates to consider. I’m
honored and humbled to have been chosen to
lead this dynamic organization through our next
period of growth. The Board’s decision to appoint
an internal successor is a strong endorsement of
our successful strategic growth plan, which has
consistently produced superior shareholder returns.
I certainly appreciate the opportunity of assuming
the leadership of a company in such great financial
shape. All of us at Chesapeake Utilities look forward
to writing the next chapter in our Company’s
growth story.
8
Chesapeake Utilities Corporation | 2018 Annual Report
A CULTURE OF SAFETY AND COMPLIANCE
Over the past several years, we have received many
accolades for our financial performance. However,
the awards I am most proud of recognize our efforts
to improve service reliability and sustain employee,
customer and community safety. Chesapeake Utilities’
operating units frequently receive national safety
commendations. Most recently, in 2018, our Eastern
Shore Natural Gas and Aspire Energy units were
recognized for safety achievements by the American
Gas Association.
Fostering a culture of operational safety and
reliability requires a commitment from the top and
throughout the organization of both intent and
resources. Our intentions are clear. Safety is the
most important facet of our business. Over the past
five years, we have invested almost $250 million in
pipeline integrity projects and improving our gas
and electric transmission and distribution systems.
As part of these upgrades, we have replaced almost
300 miles of natural gas pipeline, thousands of gas
service lines and installed over 2,000 storm hardened
electric poles. We’ve added personnel in key safety
and compliance positions across the Company. New
technologies have been deployed to better monitor
our facilities and track maintenance requirements. This
year, we will break ground on a new state-of-the-art
safety training facility in Dover, DE.
ENGAGED WORKFORCE
Someone recently said to me that Chesapeake
Utilities’ combination of strategic focus, engaged
employees and innovative approach to the market
was the “secret sauce” responsible for our success. I
think that’s a good way to describe our Company. It
is rare in my experience to find a group of employees
as committed to customer and community service as
those I work alongside at Chesapeake Utilities. Time
after time, I have watched our people work to put
customer interests first. Our employees actively look
for creative solutions. They are not hesitant to try an
innovative approach. Whether it’s providing propane
AutoGas to customer fleets, building a combined heat
and power plant that delivers low cost steam to a
paper mill or a new tariff service to a power generator,
our employees consistently find a way to deliver for
our customers. Our employees’ concern for customers
translates into a broader interest in the communities
we serve. Later in this report you will see only a
sampling of our extensive engagement in charitable
and community service activities.
A L E T T E R F R O M O U R P R E S I D E N T
‘‘
Someone recently said to me that
Chesapeake Utilities’ combination
of strategic focus, engaged
employees and innovative approach
to the market was the ‘secret sauce’
responsible for our success. I think
that’s a good way to describe our
Company.
”
Jeff Householder,
President and Chief Executive Officer
9
PRIORITIES FOR 2019
Our business strategy for 2019 is consistent with
the successful strategy we have executed for the
past several years. There are many opportunities
to expand and grow within our existing, core
distribution and transmission businesses. Our
regulated units will continue to develop and pursue
innovative regulatory solutions for investment cost
recovery. We will selectively, and with our customary
discipline, seek to develop projects and acquire
businesses that complement our existing portfolio,
provide rapid earnings accretion and generate
target returns. As always, we will continue to invest
in safe, reliable and efficient operations. Several of
our operational objectives for 2019 are listed below:
• Complete the Hurricane Michael cost recovery filing
with the Florida Public Service Commission.
• Complete the final phase of the ESNG 2017 System
Expansion Project and work to secure Federal Energy
Regulatory Commission (FERC) approval for the
Del-Mar Energy Pathway Project.
• Fully integrate the Marlin Gas Services acquisition;
expand marketing efforts across the South and Mid-
Atlantic.
• Deploy state infrastructure grants awarded to
Chesapeake Utilities to expand our natural gas
distribution systems further into Cecil and Somerset
Counties in Maryland and Sussex County in Delaware.
• Continue to grow Peninsula Pipeline Company’s
intrastate transmission pipeline business in Florida;
complete three expansion projects in western Palm
Beach County.
• Expand our propane AutoGas business with particular
focus on Maryland, Virginia and Florida.
•
Invest $15 million in gas pipeline replacement and
system modernization.
• Continue developing and investing in our high-
performing team to support our culture and ongoing
succession planning throughout the Company.
In addition to the above operational objectives,
we have established several financial objectives in
support of increasing shareholder value:
•
In 2018, for the first time, provided guidance on our
five-year capital spending plan with a total investment
range of $600 million to $1 billion through 2022; then,
based in part on our strong investment performance
in 2018, updated the range to $750 million to $1
billion.
• Deploy $168 million capital budget.
• Generate an EPS compound growth rate in the range
of 7.75% - 9.5% through 2022.
• Target an 11.0% consolidated Return on Equity or
higher.
• Sustain dividend growth supported by earnings
growth while generating a Dividend Payout Ratio of
approximately 45%.
• Migrate our capital structure back in line with our
target equity to total capitalization ratio of 50% to
60%.
We had a great year in 2018. Over the past several years, we have established a strong foundation that will
support future growth. Chesapeake Utilities is well positioned to continue to build on that foundation and
deliver exceptional service to our customers and industry leading results for our shareholders.
Sincerely,
Jeffry M. Householder
President and Chief Executive Officer
10
Chesapeake Utilities Corporation | 2018 Annual Report
A L E T T E R F R O M O U R P R E S I D E N T
ACHIEVEMENTS IN 2018
We executed on several strategic initiatives in 2018.
Eastern Shore Natural Gas (ESNG) 2017 Expansion
The largest single construction project in Chesapeake Utilities’ history was substantially completed and placed in-service
in 2018. The $117 million transmission system expansion increased Delmarva delivery capacity by 26% and will help meet
the growing energy requirements of southern Delaware and the Eastern Shore of Maryland.
ESNG Reliability Projects
In response to the winter peak days experienced in 2014 and 2015, ESNG initiated several projects to improve overall
system operational reliability. During the 2018/2019 winter, ESNG set a new daily delivery record in excess of 250,000
dekatherms. Our record deliveries validate both our continued growth in system demand as well as the enhanced
operational reliability.
ESNG Rate Proceeding
To recover the cost of the system expansion and reliability projects, we completed a FERC rate proceeding that
contributed $9.5 million in margin in 2018.
Peninsula Pipeline Company (PPC) Expansion
PPC, our intrastate transmission business in Florida, constructed a $36 million pipeline to serve industrial customers and
two gas utilities in Escambia County, FL. PPC also completed a $9 million project to replace an aging, undersized lateral
serving the FPU New Smyrna Beach distribution system.
Sharp Energy Acquisition
Our propane business continued to grow. We completed the acquisition of the R.F. Ohl Company, a retail propane
business in the Pocono Mountain region in Pennsylvania. Along with the Chipola Gas acquisition in Florida, completed at
the end of 2017, we added 4,500 propane customers.
Sharp Energy AutoGas
The AutoGas business keeps growing. In 2018, we delivered more than 2 million gallons of propane for vehicle fuel.
Marlin Gas Services Acquisition
Late in 2018, we acquired Marlin Gas Services, an unregulated compressed natural gas (CNG) transport and delivery
company. Marlin provides temporary CNG fuel service to support emergency and planned maintenance pipeline outages
and hold gas distribution systems until permanent pipeline service can be established while also offering a variety of
specialty services such as transporting renewable landfill gas for pipeline injection. Marlin is a business we know well; we
have been a customer for years. With the addition of Chesapeake Utilities’ capital and administrative support, we expect
significant growth from Marlin in 2019.
Delmarva Natural Gas (DNG) Expansion
Our Delmarva distribution utilities continue to grow, adding over 3,000 customers in 2018. The conversion of the
underground propane system in and around Ocean City, MD, that Chesapeake Utilities acquired in 2013, is progressing
on schedule. We have converted over 7,600 accounts to date. Two state grants awarded to DNG will enable us to install
over 10 miles of new mains to serve new customers in Kent and Sussex Counties, DE.
Hurricane Michael
One of our greatest, and at the same time most heartbreaking, accomplishments in 2018 was the response and
restoration of electric service after Hurricane Michael. We describe in greater detail later in this report the tremendous
work under very difficult conditions performed by our employees in partnership with local and state officials and many
third-party electric workers, tree crews and others. They often say the most rewarding experiences come out of periods
of great difficulty. The unwavering commitment and care of everyone involved in our restoration effort underscores that
principle.
11
2018 FINANCIAL HIGHLIGHTS
2018’s results were a culmination of the tireless efforts of
almost 1,000 employees to deliver energy and solutions
to just under 250,000 customers.
We reported 2018 net income of $56.6 million, or $3.45
per diluted share, compared to $58.1 million, or $3.55 per
diluted share for 2017. The 2017 results include a one-time
tax benefit from the Tax Cuts & Jobs Act (TCJA), which
added $0.87 per diluted share, or $14.3 million in 2017. If
you compare our adjusted results for 2018 versus 2017,
2018 registers as another year of record performance,
with an approximate 15% increase over 2017 adjusted
earnings per share.
Our operating income was $94.6 million compared
with $87.4 million in 2017, representing growth of
approximately 8%. Excluding the pass-through of lower
taxes to customers (which has a corresponding offset
in income taxes), operating income actually grew $16.8
million, or 19% annually. This operating income growth
was driven by a record gross margin increase of $36.6
million generated from continued growth across the
Company’s businesses, key regulatory initiatives and
colder weather (although still warmer than normal).
In keeping with our strong performance in 2017, the
Chesapeake Utilities’ Board of Directors approved in May
2018, our 15th consecutive annual dividend increase. Our
$1.48 per share dividend represents an approximate 14%
annual dividend increase. Chesapeake has paid a dividend
to its shareholders without interruption for 58 years.
Financial
(dollars in thousands, except per share data)
Gross Margin (Before TCJA Impact)1
Gross Margin
Operating Income
Net Income
Adjusted (Non-GAAP) Earnings
Earnings Per Share
Basic
Diluted
Adjusted (Non-GAAP) Earnings Per Share - Diluted1
Annualized Dividends Per Share
Total Assets
Stockholders’ Equity
2018
2017
2018/2017
% Change
2016
2017/2016
% Change
$316,310
$279,669
$306,748
$279,669
$94,620
$87,420
$56,580
$58,124
$54,295
$47,324
$3.46
$3.45
$3.31
$1.48
$3.56
$3.55
$2.89
$1.30
13%
10%
8%
-3%
15%
-3%
-3%
15%
14%
$260,817
$260,817
$85,983
7%
7%
2%
$44,675
30%
$44,675
6%
$2.87
$2.86
$2.86
$1.22
24%
24%
1%
7%
15%
9%
12%
Return On Average Equity
11.2%
12.6%
$1,693,671
$1,414,934
20%
$1,229,219
$518,439
$486,294
7%
-11%
$446,086
11.3%
Other
Employees
983
945
4%
903
5%
Shares Outstanding at Year End
16,378,545
16,344,442
N/M
16,303,499
N/M
Average Distribution Customers
247,487
240,323
3%
235,821
2%
1 Please see the enclosed Annual Report on Form 10-K for specific definitions of these items.
12
Chesapeake Utilities Corporation | 2018 Annual Report
Capital Expenditures
(in millions)
$938M
$
1
9
5
3
.
$
1
6
9
4
.
$
1
9
1
.
1
$
7
5
0
M
-
$
1
B
*
$
2
8
3
0
.
35%
30%
25%
20%
15%
10%
5%
0%
$250
$200
$150
$100
$50
$–
$
9
8
.
1
Diluted Earnings Per Share
8 . 8 %
-
E P S C A G R
.
$
2
8
6
.
$
2
8
9
*
$
2
7
2
.
.
$
3
4
5
.
$
3
3
1
*
r
5 - Y e a
.
$
2
4
7
.
$
2
2
6
$3.50
$3.00
$2.50
$2.00
$1.50
$1.00
$0.50
$0.00
2014
2015
2016
2017
2018
2018-2022
2013
2014
2015
2016
2017
2018*
2018
Capital Expenditures Excluding Acquisitions
Capital Expenditures/Total Capitalization
Acquisitions
*Looking forward, we expect to make capital investments
totaling $750M to $1B from 2018 to 2022.
*Adjusted Non-GAAP EPS.
Growth in 2018 and over the past five years reflects
successful execution of our disciplined growth strategy.
Average Return on Equity (ROE)
Annualized Dividends Per Share
.
1
2
2
%
1
2
.
1
%
.
1
2
6
%
1
1
.
3
%
1
1
.
2
%
13%
12%
11%
10%
9%
8%
7%
6%
5%
4%
$1.48
$1.30
$1.22
$1.15
$1.08
$2.00
$1.50
$1.40
$1.30
$1.20
$1.10
$1.00
$0.90
$0.80
2014
2015
2016
2017
2018
2014
2015
2016
2017
2018
We generated a ROE above 11% in each of
the past five years.
Chesapeake has paid dividends without interruption for 58
years. We have increased dividends for the last 15 consecutive
years. In 2018, we increased the dividend by 13.8%.
Compound Annual Shareholder Return
(Period Ended 1/31/19)
Market Capitalization
(In millions)
2
5
%
30%
25%
20%
15%
10%
5%
0%
2
1
%
2
0
%
1
5
%
1
5
%
$
1
,
2
8
3
9
.
$
1
,
3
3
1
.
6
$
1
,
0
9
1
.
5
$
8
6
6
6
.
$
7
2
4
5
.
$
5
7
8
2
.
1 Yr
3 Yr
5 Yr
10 Yr
20 Yr
Our investors have earned 15% annually or greater on their Chesapeake
Utilities’ investment (based upon periods ended January 31, 2019).
2013
2014
2015
2016
2017
2018
Our market capitalization has more than doubled
over the past five years.
13
corporate
governance
At Chesapeake Utilities, corporate governance
is the foundation of our processes and our
decision-making throughout the Company,
beginning with our Board of Directors and
extending to every employee. It reflects who
we are, what we stand for and what we do.
Our core values and strong culture unite us
and stand as part of our foundation upon
which we operate.
Our corporate governance framework is a continuation
of the strong foundation that has been cultivated here
at Chesapeake Utilities for more than 150 years.
At our core, it is our culture that promotes integrity,
accountability and reliability - with the safety of those
we serve as our highest priority. It is the possibilities
afforded to us from the commitment and engagement
of our employees who dedicate many hours to develop
initiatives, enhance the customer experience, assist
each other and make a difference in our communities.
With oversight and accountability from our Board
of Directors, along with the collective efforts of our
employees and the support of our investors, we are
able to make investments in projects that provide safe,
reliable, plentiful and environmentally friendly energy
options to existing and new customers. We are proud
to stand together, united with our stakeholders, and to
be an essential part of delivering energy solutions.
2018 was a celebratory year for Chesapeake Utilities.
We were honored to receive the award for Best
Corporate Governance Among North American Utilities
by Ethical Boardroom Magazine. This prestigious
award recognizes outstanding leadership worldwide
for companies that have raised the bar to ensure
that strong corporate governance contributes daily
to enhancing long-term value for all stakeholders.
We were also honored to be placed in the top three
companies for Corporate Governance Team of the
Year (small to mid-cap sized companies) by Corporate
Secretary Magazine, an award we received in 2017. This
award recognizes the best in corporate governance for
their commitment to a culture that promotes integrity
and accountability.
Today is a time when many of our employees,
communities and investors contribute to the evolving
corporate governance landscape. It is a time where
Environmental, Social and Governance (ESG) oversight
initiatives of many energy industry investors and
other stakeholders are helping to inform operational
decision-making and investment strategies. We
embrace these initiatives, our long-standing culture
and practices that align with these initiatives and the
opportunity to communicate to all of our stakeholders
the positive impact the energy industry has on the
country’s economy, as well as on the security of
investors, customers, regulators and the communities
we serve.
Our commitment to a culture that promotes integrity and
accountability, along with the hard work and dedication
of our team, is the foundation for our continued success.
Jim Moriarty, Executive Vice President, General Counsel, Corporate
Secretary and Chief Policy and Risk Officer
‘‘
14
Chesapeake Utilities Corporation | 2018 Annual Report
”
C O R P O R A T E G O V E R N A N C E
Pictured, left to right, are Shane Breakie, Assistant Vice President, Chesapeake Utilities; Jim Moriarty, Executive Vice President,
General Counsel, Corporate Secretary and Chief Policy and Risk Officer; Stacie Roberts, Director of Corporate Governance; Jeff
Householder, President and Chief Executive Officer; and Lou Anatrella, Vice President and Chief Human Resources Officer, at the
Corporate Secretary Magazine Corporate Governance Awards ceremony in New York City. Photo Courtesy of Corporate Secretary
Magazine.
2018 Best North
American Utility
for Corporate
Governance
Chesapeake Utilities Corporation was the recipient of Ethical
Boardroom Magazine’s 2018 award for Best Corporate
Governance in the Utilities Sector in North America. The
prestigious award recognizes outstanding leadership
worldwide for companies that have raised the bar to ensure
that strong corporate governance contributes daily to
enhancing long-term value for all stakeholders.
What We Do At Chesapeake Utilities
• We are committed to a culture that promotes integrity,
accountability and reliability - with the safety of those we
serve as our highest priority
• We invest in our infrastructure to provide clean natural gas to
customers and are an integral part of the energy solution
• We invest in diverse value-added projects, including
• Diversity, inclusion and equality are embedded in our culture
and employees are empowered and encouraged to be
authentic leaders and contribute in meaningful ways
converting customers to natural gas, opening a CNG fueling
station, promoting the use of combined heat and power and
participating in electric vehicle charging programs
•
Each employee has a duty to maintain a work environment
that is free from all discrimination and harassment and
provides a positive experience that respects human rights
• As an energy company, we report on environmental, safety
and emissions standards set by our federal and state
regulators
• Chesapeake Utilities was recognized as a Top Workplace for
the seventh consecutive year based on feedback from our
employees
• We sponsor health and wellness programs for our employees
and their families and encourage employees to be well, in
every sense
• We have a nationally recognized facility that received an
independent certification for the use of sustainable materials
and leading edge environmental elements, resulting in reduced
energy consumption
• We are members of organizations that promote energy
efficiency, such as the Energy Efficiency Advisory Council and
the Clean Cities Coalition
• We make available to our stakeholders energy efficiency
information through our websites and customer mailings
• We have a facility that is one of the most energy-efficient
cogeneration power plants in the U.S.
• We conserve approximately 2 million gallons of water annually
from a rainwater reclamation method at one of our facilities
• We are proud to offer customers an energy conservation
rebate program, and to provide conservation education to the
community
• We have a SHARING program that provides energy-related
funds to qualified families with financial needs
15
EMPLOYEE-CENTRIC
company
Chesapeake Utilities is focused on sustaining our aspiring and
caring culture that nurtures our shared values and encapsulates
the essence of our Company.
Our talented workforce comprised of experienced professionals with diverse
backgrounds working collaboratively across the Company is a pillar of our
foundation for growth. Our employees are committed to meeting the highest
standards for our colleagues, customers and communities. By building
meaningful connections, gaining new perspectives and identifying opportunities
beyond our existing offerings and service areas, our employees drive progress
and innovation.
At Chesapeake Utilities, we cultivate a high-performance workforce, promoting
integrity and accountability. Our continued growth depends upon investing in
our employees, empowering them to leverage their expertise and celebrating
Company successes and employees’ achievements.
7 YEARS
in a row being
recognized as a Top
Workplace Company
At Chesapeake Utilities, our people are the very heart of our culture. From
their relentless determination and drive to find innovative solutions, to the
personal connections they make every day, they continually go above and
beyond to turn our aspirations into reality.
Lou Anatrella, Vice President and Chief Human Resources Officer
‘‘
”
The FPU team in
Fernandina Beach, FL,
is committed to caring
for our customers,
communities and
colleagues.
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Chesapeake Utilities Corporation | 2018 Annual Report
COMPANY ACCOLADES
E M P L O Y E E - C E N T R I C C O M P A N Y
E M P L O Y E E - C E N T R I C C O M P A N Y
‘‘
As Chief Financial Officer, one measure of the Company’s success has
certainly been its financial performance as measured by any number of
metrics. What has been equally exciting as the financial performance,
though, are the many accolades we have received across the Company.
Whether it is answering a customer’s question, working with our external
partners or engaging in community service, our employees take pride in
everything they do. There is an underlying drive to demonstrate excellence
in everything that is undertaken. This comes through loud and clear. It is
very rewarding to see the Company and its many ambassadors recognized
for the positive impact being made each and every day.
Beth Cooper, Executive Vice President and Chief Financial Officer
”
PR News Award — PR Rising Star Under 30
The PR News “PR Rising Star Under 30” is bestowed upon the industry’s best and brightest. In 2018,
Crystal Campbell, Supervisor, Integrated Communications, was named a “PR Rising Star Under 30”
at the annual awards luncheon in Washington, D.C. Ms. Campbell was recognized for her leadership,
growth, campaign innovation, relationship building and mentorship qualities, as well as her ability to
grow audiences and increase awareness and engagement.
2018 Best Practices Awards in Outage Communications
FPU was honored with the Bronze Award for mid-sized utilities by Chartwell at the “2018 Best
Practices Awards in Outage Communications.” FPU’s Hurricane Irma Community Engagement
Campaign was recognized for tackling the communications challenges of this event, which included
handling an unusually large volume of operations inquiries and customer interactions. The Company’s
dedicated customer care, operations and communications team members successfully managed and
executed a social media strategy that helped to keep FPU customers safe, informed and in contact
with FPU representatives, providing reassurance and relief during times of uncertainty.
2018 Social Media Awards
PR News presented FPU with two honorable mentions at the 2018 PR News’ Social Media Awards
Luncheon. FPU was a finalist in the categories, “Facebook-Best PR Campaign” and “Facebook-
Community/Engagement” for its Hurricane Irma Restoration Communications.
International ARC Awards
Chesapeake Utilities Corporation was recognized with three International ARC Awards for its
2017 Annual Report at the 32nd International ARC Awards in Hamburg, Germany. The Mercomm
Annual Report Competition — the ARC Awards — honors standards of excellence in annual reports
from around the world and encourages vital corporate communications and creative design. The
publication was recognized with two Gold Awards for traditional Annual Report/Form 10-K and
Chairman’s/President’s Letter, and a Bronze Award for Written Text. All awards were within the
Electric and Gas Services category.
Marketing Person of the Year
The Fred Pryor Marketing Person of the Year award was presented to Danielle Mulligan, Director of
Growth and Retention, Conservation Sales, at the Florida Natural Gas Association’s annual operating
and marketing conference. Ms. Mulligan received the award for demonstrating outstanding performance
and marketing efforts in the natural gas industry. Ms. Mulligan developed the strategy for the first
hurricane storm season response including the development of practices and procedures that will serve
as the model by which the Company will conduct itself in a storm crisis going forward.
17
Chesapeake Utilities cares about creating a healthy and safe
environment for our employees, customers and communities,
just as we do for our families and ourselves. We encourage
a culture dedicated to promoting safe and reliable energy
options; a continuously safer workplace for employees;
and safe service offerings for customers and within our
communities. The efforts of our employees, who proactively
pursue a positive safety culture for our stakeholders, have led
to industry recognition and a strong reputation for being a safe
and reliable Company.
Throughout our business areas, our safety and compliance
departments are very involved with our strategic planning. A
main focus of our safety and compliance teams is supporting
the business units to ensure safe operations for, and adherence
to, personal, public and pipeline safety. These teams work
closely with public officials, emergency responders, customers
and safety advocates to promote awareness of best practices
for safety and reliability.
SAFETY
CULTURE
Our commitment to safety is
embedded in our culture and is a
key component of our operations
and everyday processes.
We all are safety leaders at Chesapeake Utilities. Our
safety culture engages and empowers employees to
take actions that have a positive impact on safety at
work, in the home and in our communities.
Hyun Ju Lee, Safety Data Analyst & Audit Coordinator
‘‘
”
27
American Gas Association (AGA)
Safety Achievement Awards
earned over the past 16 years
Safety Achievement Awards
Eastern Shore Natural Gas Company and Aspire
Energy, earned Safety Achievement Awards from
the AGA in 2018.
Hyun Ju Lee, Safety Data
Analyst & Audit Coordinator
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Chesapeake Utilities Corporation | 2018 Annual Report
E M P L O Y E E - C E N T R I C C O M P A N Y
EMPLOYEE
INVESTMENT
At Chesapeake Utilities, we
inspire our employees to
perform at their best. We
continue to invest in our people
through programs that support
our employees’ ambitions,
creating value and reinforcing
our culture.
Kim Smith, Manager,
Financial Planning and
Analytics, one of our
Aspiring Leaders Academy
graduates.
New Heights University — Aspiring Leaders Academy
New Heights University, an educational and professional
development program, assists our employees by enhancing
their leadership qualities to reach their fullest potential.
In 2018, the first class of the Aspiring Leaders Academy,
a branch of the New Heights University, completed the
18-month leadership program. This initiative combined
classroom sessions and independent assignments into an
interactive learning experience for the development of
current and future leaders throughout the Company.
The Aspiring Leaders Academy (ALA) was a
great experience. Not only did the courses
help me to develop my career, but they
helped me develop personally as well. I was
given time for reflection, gained a better
understanding of others and most importantly
formed friendships with my coworkers. I
believe that being a part of the ALA class
has helped me become the employee and
manager I am today.
Kim Smith, Manager, Financial
Planning and Analytics
19
‘‘” Chesapeake Aspiring Scholars
Our employees make up the Chesapeake
family, and by extension, their families are
important to us. Chesapeake supports the
aspirations of our employees and through
the Chesapeake Aspiring Scholars
program, the Company annually awards
scholarship grants to students of our
employees to assist with their educational
pursuits at colleges, universities and
technical schools. The program is open to
high school seniors of employees across
the Company.
Centered, are 2018 Aspiring
Scholars Alexa Curto and
Kayla Curto, daughters of Lisa
Pearson and Eric Pearson,
Senior Manager, Operations and
Compliance Engineering.
Through our Chesapeake Utilities Wellness
program, we encourage a healthy lifestyle
and community outreach via participation
in our companywide Passport to Wellness
competitions and Company-sponsored 5K
runs/walks.
Our Passport to Wellness initiative enables
employees to continuously track their
cardio health progress through Walker
Tracker, which integrates with all major
wearable and mobile apps. This promotes
goal attainment, social interaction, team
building and friendly competition.
Left to right, Stefanie Tanner,
Dispatcher; Nicole Pratt, Dispatcher;
and Cheryl Lemon, GIS Specialist,
joined employee participants in
the Company-sponsored walk
supporting the American Cancer
Society’s Making Strides Against
Breast Cancer.
167M+
steps taken by
employees via
Passport to Wellness
106+
sponsored runs/walks with
employee participation
256
employee participants
in Passport to Wellness
4,770+
miles
employees
walked/ran
20
Chesapeake Utilities Corporation | 2018 Annual Report
Left to right, are Dean Holden, Manager,
Business Development and Sales, and
his son, Miles, who participated in the
“Pajama Rama” 5K run/walk benefiting
The Shepherd Place, a community
shelter, in Dover, DE.
E M P L O Y E E - C E N T R I C C O M P A N Y
Jamie Goodman-DeFazio,
Inspector, knows how
rewarding it is to do your
best for customers and our
Company.
EMPOWERED
EMPLOYEES
Everyone matters at
Chesapeake Utilities. We
continue to enhance the
work experience by building
a more inclusive culture that
provides the resources for
our employees to achieve
their goals and make
meaningful connections with
fellow employees, customers
and within our communities.
‘‘
I chose this line of work to apply my
critical thinking and creativity to offer
fresh perspectives and innovative
approaches. At Chesapeake Utilities,
I am empowered to do so and my
colleagues welcome it.
Jamie Goodman-DeFazio, Inspector
”
Cares With A Cause
Through our Cares With a Cause program, Chesapeake
Utilities provides employees with opportunities to serve our
communities. Each quarter, we select a different charitable
cause for our employees to support by volunteering time,
donating funds or contributing items that may be needed.
In 2018, our employees collectively partnered with local charities
to donate supplies at the start of the school year, promote
breast cancer awareness, collect winter coats and support
children’s health. In honor of our veterans, we partnered with
local food banks and collected nonperishable food and other
items leading up to Veteran’s Day. Additionally, for the last two
years, the Cares With a Cause program united employees to
assist with hurricane relief efforts.
21
World Gas Conference 2018
In June 2018, the 27th World Gas Conference
was hosted by the American Gas Association in
Washington, D.C. This triennial conference is the
leading global natural gas industry forum that aims
to raise the voice of the industry while offering timely
updates on strategic, commercial and technical issues
facing the entire gas value chain. More than 600
of the industry’s most senior leaders from around
the world were featured, including Aleida Socarras,
Vice President of Chesapeake Utilities Corporation.
Ms. Socarras presented as a panelist in the Industry
Insights session “Collaboration Between Natural Gas
and LPG in Market Development.”
“Chesapeake Utilities’ Women In Energy program provides
an outlet to share diversity of thought which strengthens an
organization and provides a tool to encourage and support
women in their careers with our Company.”
Cheryl Martin, Vice President, Regulatory Affairs
Our Women In Energy program is a forum where women at
Chesapeake Utilities are able to connect, network and share
their unique experiences and perspectives as professionals in
the energy industry. Our Company includes women in careers
at various levels ranging from accounting, communications
and engineering to meter technicians, gas control managers,
pipeline locators and executive leaders. The Women In
Energy program empowers women to explore alternative
career paths that support the changing needs of the
Company.
In recognition of International Women’s Day and Women’s
History Month, female employees were honored for their
expertise and dedication with a companywide celebration.
Visit our website, chpk.com, to learn more about our Women
In Energy program and the highlighted stories of our female
employees who strengthen our foundation for growth.
22
Chesapeake Utilities Corporation | 2018 Annual Report
‘‘
The World Gas Conference provided us with an opportunity
to showcase Chesapeake Utilities’ successful strategy
of serving residential markets ahead of natural gas
infrastructure with the use of propane Community Gas
Systems (CGS). CGS customers enjoy all the benefits of gas
while under-served areas build out to sufficient density to
warrant expansion of natural gas service.
Aleida Socarras, Vice President,
Chesapeake Utilities Corporation
”
On March 8, we celebrated International Women’s Day and Women’s History
Month companywide. This was one of the gatherings, held at our Energy
Lane campus in Dover, DE.
‘‘
I have been a Brand Champion for almost four
years. I think the Chesapeake Cares program is an
awesome perk of this Company. I truly enjoy being
a Brand Champion. It is actually really fun! It can be
challenging to keep employees engaged but I feel
like the Cares events help to promote everyone to
stay connected. The program is based upon positive
reassurance and the Cares recognition adds value
and recognizes employees for all that they do.
Stefanie Tanner, Dispatcher
”
E M P L O Y E E - C E N T R I C C O M P A N Y
EMPLOYEE
RECOGNITION
Employees feel valued when they
are able to connect positive meaning
to their work and are recognized for
their accomplishments. Chesapeake
Utilities cares about our employees
and each and every one of them
contribute to the success of our
organization.
One way the Company expresses
gratitude for employees is through
the Chesapeake Cares program.
A team of more than 40 Brand
Champions organizes these events
for their colleagues. During Cares
events, we welcome new employees,
celebrate employee milestones
and highlight colleagues’ efforts
and achievements through our
recognition program.
Our peer-to-peer recognition
program offers employees a way to
acknowledge and show appreciation
for coworkers who make a difference.
Individuals are recognized for their
contributions and promoting our
shared values.
Chesapeake Utilities hosted a Family
Fun Day Event for employees and their
families to enjoy a day of fun activities
with coworkers in appreciation of all
that our employees do.
23
response, relief
& restoration:
HURRICANE MICHAEL
‘‘
I extend my sincere thanks and appreciation to our
employees and volunteers for their dedication to our
customers and colleagues during the most expansive
restoration effort in our history. Being without power for
any period of time is challenging. We thank our customers
for their continued patience and support while our crews
worked to safely repair our system as a result of the
unprecedented storm.
Kevin Webber, Senior Vice President
and President, Florida Business Unit
”
Donnie Maxwell,
Senior Lineman
1,200+
employees, contractors
and volunteers helped
with the relief efforts
a great job. You had over 12,000
Public Utilities Company. You did
possible to help these families and
to get the power back on as soon as
businesses and homes without power
and I know that you worked really hard
‘‘I want to thank everyone at Florida
”
Former Florida Governor
Rick Scott
you do to help people fully recover.
businesses. Job well done for all that
21
days to restore
service
$60M+
cost of
system
restoration
Employees from across the Company came together to keep our workforce going throughout the
restoration period by preparing food, doing laundry and helping with travel logistics for our employees,
contractors and many volunteers. Pictured, left to right, are Devon Rudloff, Assistant Vice President,
Human Resources; Morgann Firestone, Customer Service Representative; Dominica DeBrauw, (Employee
Assistance Provider) Counselor; and Todd Kelley, Assistant Manager, Customer Care – Operations.
24
Chesapeake Utilities Corporation | 2018 Annual Report
On October 10, 2018 Hurricane
Michael was the first Category
4 hurricane on record to make
landfall in the Florida Panhandle.
Michael’s 155 miles-per-hour
sustained wind speed inflicted
widespread and severe damage
to Northwest Florida.
The FPU Northwest Division
electric distribution system was
squarely in the storm’s path as it
came onshore and moved north
into Georgia. The eye of the
hurricane passed over virtually
our entire system. All of our
13,000 customers were without
power, with significant portions
of our system heavily damaged.
We have a well-developed
storm response plan. Our
employees are highly trained
to assess damage and quickly
began the process of service
restoration. Our teams have
significant experience with
storm restoration, including
recent efforts after Hurricanes
Matthew and Irma. The damage
from Hurricane Michael’s
unprecedented force was unlike
anything any of our crews had
experienced.
Large sections of our system:
miles of wire, thousands of poles
and hundreds of transformers
were on the ground. Thousands
of trees were down in
neighborhoods and along
roadways across the impacted
area. We had to cut our way
down streets, often following
a bulldozer, to even access our
facilities.
Within the first week following
the storm, we had restored
critical medical facilities, several
schools, wastewater treatment
facilities and other critical service
and commercial facilities. In less
than a month, all customers
who could receive service
were restored. FPU committed
over $60 million to the service
restoration, rebuilding the
system with upgraded storm
hardened poles and equipment.
Rhondon Gray,
Safety Coordinator
R E S P O N S E , R E L I E F & R E S T O R A T I O N
O U R C O M P A N Y
Michael, I experienced firsthand
the Company’s culture of caring for
‘‘In Marianna, Florida after Hurricane
the communities we serve. The first
our employees, our customers and
response that was heard from every
employee was concern for the welfare
of those affected by the storm and what
they could do to help.
I had employees who worked several
hours clearing trees and streets just
so they could get to work. Each and
every employee who assisted during
our electric service restoration effort
worked extremely long hours for
several weeks to bring hope and
a sense of normalcy back to the
devastated communities.
Buddy Shelley, Assistant Vice
President of Electric Operations
”
‘‘
It’s been a humbling experience. This is
the first time that I ever went through
anything like this. The good part of this
for me, from the inside looking out, is
that you can see a lot of people come
together, trying to help each other.
Rhondon Gray,
Safety Coordinator
”
”
8,400+
electric emergency
and outage calls
received
16,639
views to the Hurricane
Michael Storm Safety
landing page
25
connecting with our
customers & communities
We care about our customers and the betterment of our communities.
Beyond delivering safe, efficient and reliable service, Chesapeake Utilities appreciates
that today’s customer expectations are evolving. Customers require personalized,
seamless and digitized interactions. As we continue to serve our customers in a safe and
environmentally responsible manner, we are committed to providing them with enhanced
options, more convenience and modern solutions.
Technology and innovation have
forever transformed the customer
and utility interactions. Customers
expect knowledgeable employees,
convenience and ease when
interacting with Chesapeake
Utilities. We strive to understand
customers’ needs and design
services and interactions that value
our customers.
Nicole Carter, Assistant Vice
President of Customer Care
The Customer Journey
Our customers asked for more convenient ways to do business with
us. We listened. As a result, Chesapeake Utilities, FPU and Sandpiper
Energy embarked on an initiative to enhance the customer journey.
Through the new service, EZ-Pay, customers are able to quickly and
easily view and manage real-time account balances online and by
phone, and have more flexibility in payment options. Customers may
make payments by phone, online or using any mobile device at a
reduced fee, or at any of our expanded network of authorized retailers.
This is the first step in our journey of bill and payment transformation.
In the near future, customers can expect benefits such as electronic
and paperless billing, a customer portal that will allow for the selection
of preferences and notifications, pay by text, self-service options
and the ability to view data such as usage history which will allow
our customers to make actionable decisions based on real-time
information.
26
Chesapeake Utilities Corporation | 2018 Annual Report
‘‘” C O N N E C T I N G W I T H O U R C U S T O M E R S & C O M M U N I T I E S
Wanda Edwards, Customer
Service Representative
Best Gas Company
Award
For the third consecutive year,
Sharp Energy received awards
for “The Best of Eastern Shore
Gas Company” and “The Best
of the Eastern Shore Southern
Gas Company” as chosen by
the readers of The Metropolitan
Magazine.
Sharp Energy Customer
Experience
Sharp Energy is committed to providing
propane customers an optimal experience
by offering an enhanced customer portal
that enables customers to manage their
accounts with ease and convenience.
Customers may view and pay their bills,
order propane, submit service call requests
and view past transactions online or through
their mobile devices.
Left to right, are Andy Hesson, Vice President, Sharp Energy; Rodney
Baylous, Manager, Customer Experience; Marybeth Bowden, Manager,
Customer Experience; Jeff Householder, President and Chief Executive
Officer; Suzy Hutchison, Manager, Marketing and Communications; Lynn
Muir, Manager, Customer Experience; Eric Mays, Director, Marketing; Jim
Moriarty; Executive Vice President, General Counsel, Corporate Secretary
and Chief Policy and Risk Officer; and Andrea Gaston, Customer Service
Representative.
15,000+
customers enrolled
via the Sharp Energy
customer portal
I just signed up and cannot say enough good
things about it. I found my delivery info, at
what price I was charged and my transactions.
I feel up with the times now.
Customer Testimonial
27
‘‘” CARING IS ALWAYS
IN SEASON
Year-round, we aspire to be a good neighbor by
helping our customers and the communities in which
we live, work and serve.
640+
$347K
3,900+
employees
volunteered in 2018
donated
in 2018
hours volunteered by
Chesapeake Utilities’
employees in 2018
Chesapeake Utilities’ corporate citizenship is
an integral part of our culture. Left to right,
are Debbie Smith, Community Engagement
Manager, with the News Hound from the
Delaware State News.
35
years of providing
financial assistance
$20K
donated by
Chesapeake
Utilities in 2018
Employee representatives of the CHEERP join community partners who
assist Chesapeake Utilities in support of the SHARING program.
$600K+
in grant money
distributed over
the last 15 years
The Chesapeake Emergency Energy Recipient
Program (CHEERP)
Chesapeake Utilities created the SHARING fund, an approved
501(c) organization, with donations provided by customers,
employees and communities. Chesapeake Utilities partners with
Catholic Charities in Delaware and Shore UP! in Maryland to assist
the Company’s natural gas and propane gas customers living on
the Delmarva Peninsula who need financial assistance to pay their
gas bills or to repair their gas appliances. Annual grants for as
much as $1,000 are available to customers who meet the specific
requirements including a new grant for individuals who were
impacted by the federal government shutdown.
At Chesapeake Utilities, we care about the
communities we serve and the SHARING program
helps to support the elderly, ill and those facing
financial hardships during the challenging winter
months. We are grateful for the generosity of
our partnering organizations, customers and
employees who have helped us to keep families in
need warm for the past 35 years.
Shane Breakie, Assistant Vice President,
Chesapeake Utilities and President of CHEERP
28
Chesapeake Utilities Corporation | 2018 Annual Report
‘‘” C O N N E C T I N G W I T H O U R C U S T O M E R S & C O M M U N I T I E S
Energy Experts
We strive to educate our customers about efficient energy
use and how to manage their bills and reduce their carbon
footprint while maintaining or increasing the comfort of
their businesses or homes. Through its Energy Expert
program, FPU provides resources such as energy-related
tips and advice, articles, videos, blog content and other
downloadable materials. This energy conservation resource
features an “Ask the Energy Expert” tool which allows
customers to submit energy-related questions and receive a
response from FPU energy experts.
Left to right, are Wade Hughes, Commercial Sales Account Manager;
Michelle McMurtry, Builder/Developer Account Manager; and “Energy
Expert” Scott Ranck, Manager, Conservation.
As our Company thrives, we aim to make a difference in people’s lives and
inspire others to give back, making a positive impact. FPU sponsored and
participated in the Chipola Area Habitat for Humanity Women Build event
in Marianna, FL. Left to right, are Janine Roye, Administrative Assistant;
Kate Jones, Senior Meter Reader; Sally Jones, Quality and Customer
Experience Analysis Supervisor; Virginia Nail, Senior Meter Reader; Donna
Fowler, Stores Manager; and Janet Register, Meter Reader.
Partnerships with local and national organizations that encourage the
betterment of our communities continue to be a major part of our legacy
of giving. Sharp Energy was a sponsor of the “Help Our Kids” radiothon,
held at Nemours/Alfred I. duPont Hospital for Children in Wilmington, DE.
Left, is Krystal McGill, Financial Administration Manager.
Pay It Forward Campaign
In appreciation of our Top Workplace recognition for the seventh
consecutive year, we thanked our customers and communities
for their ongoing support through our “Pay It Forward”
Campaign. For a week in November, participating coffee shops
in our service areas offered free coffee courtesy of Chesapeake
Utilities. It was our way of giving back and showing our
appreciation of our customers and communities.
297%
increase in new visitors to the corporate
website during the campaign
29
our commitment
to sustainability
As a leading energy provider for more than 150 years, we
uphold our aspiring and caring culture.
We are a responsible Company that continues to honor our
obligation to operate in a safe and environmentally friendly manner.
As part of our commitment, our employees identify better and
innovative ways to serve our customers, grow our businesses and
support our communities to facilitate sustainable practices.
For the fourth consecutive year, Chesapeake Utilities
partnered with the Delaware Chapter of The Nature
Conservancy in support of the conservation and protection
of natural resources in Delaware. In March 2018, more than 40
employee volunteers and family members spent a day at the
conservancy’s Ponders Tract Preserve in Milton, DE, planting
more than 60 native trees and shrubs, fixing deer fencing,
restoring the main trails and trimming pine trees along the
trails. In September 2018, our employees participated in the
Dogfish Dash in Milton, DE. As a longtime Company sponsor,
employee runners/walkers and event volunteers supported
the Dogfish Head Brewery’s annual event which benefited the
Delaware Chapter of The Nature Conservancy.
30
Chesapeake Utilities Corporation | 2018 Annual Report
Amanda Chi, Director
of Business Planning
ENVIRONMENTAL
SOLUTIONS
Chesapeake Utilities is a
diversified energy provider that
draws upon its legacy of expertise
to conduct business with
environmental responsibility.
We are strongly committed to
operating in a green manner and
increasing environmental benefits
in our communities. As part of
our strategic approach, our teams
strive to identify solutions for more
efficient energy use, generate
savings for our customers and
reduce the carbon emissions within
our business operations.
40+
employees
volunteered to
support The Nature
Conservancy
280+
hours volunteered
by employees at The
Nature Conservancy
Our employees are the foundation of our growth.
Our aspiring and caring nature are at the heart of
everything that we do. For several years we have
participated in an annual volunteer event with The
Nature Conservancy. Our team eagerly looks forward
to enhancing the appearance and well-being of the
conservancy’s preserves, leaving them for visitors to
explore and enjoy their natural beauty.
Steve Thompson, Senior Vice President
and a board member of the Delaware
Chapter of The Nature Conservancy
‘‘” ENVIRONMENTAL
SOLUTIONS
O U R C O M M I T M E N T T O S U S T A I N A B I L I T Y
2018 Air Quality Awareness Champion
The Clean Cities Coalition - U.S. Department of Energy helps residents, businesses and fleet
operators to work together to reduce the use of petroleum, develop regional economic
opportunities and improve air quality. Chesapeake Utilities partners with the Delaware Clean Cities
Coalition to improve air quality and increase the use of cleaner fuels in transportation. Chesapeake
Utilities is also a member of the Maryland Clean Cities Coalition. FPU is an active member of the
Florida Clean Cities Coalition, participating in three Florida chapters. We were sponsors of the 2018
National Clean Cities Annual Meeting.
Green Globes Certificate
The Energy Lane campus earned Green Globes Certification by the Green Building Initiative.
The office building and warehouse are nationally recognized for maintaining a higher
standard of environmental integrity.
CNG
Chesapeake Utilities provides environmentally
friendly alternative fuels for vehicles including
compressed natural gas (CNG) to reduce
emissions in transportation applications.
Our new Energy Lane campus in Dover, DE,
features Chesapeake Utilities’ new CNG fueling
station for public use on the Delmarva Peninsula.
This station provides CNG for fleets and personal
Natural Gas Vehicles. We have worked with the
state of Delaware and the Clean Cities Coalition
to create grants for alternative fuel vehicles
and to develop a clean fuel corridor along the
Delmarva Peninsula.
Why CNG-Powered Vehicles vs.
Vehicles Using Gasoline or Diesel?
85%
30%
lower NOx emissions
reduced Greenhouse
Gas Emissions
30%–40%
lower CO2 emissions
Our businesses are active members of the Clean Cities Coalition - U.S. Department of Energy and
participate in events and conferences that promote environmental responsibility and the use of
cleaner fuels in transportation. Pictured is Ben Semchuck, Manager, Growth & Retention Sales, at
a Florida National Gas Association event.
Chesapeake Utilities' compressed natural gas (CNG) fueling station is the only public CNG
fueling station on the Delmarva Peninsula. Pictured is a representative from the Kent County
Tourism Office using the CNG fueling station for The Villager, the Tourism Office’s mobile
visitor center fueled by natural gas.
31
O U R C O M M I T M E N T T O S U S T A I N A B I L I T Y
CHP
Chesapeake Utilities uses combined heat and
power (CHP) to provide significant efficiency
improvements and cost savings while reducing the
overall environmental impact.
Our natural gas-fired Eight Flags Energy CHP Plant
on Amelia Island, FL, generates approximately 21
megawatts of baseload power producing enough
electricity to meet on average 50 percent of Amelia
Island’s demand. The CHP plant was designed to
produce electricity, steam and water with less air
pollutants and water usage, meeting a 78 percent
efficiency target.
The CHP plant is modeled to enhance the overall
electric grid resiliency, since on-site power units
do not rely on power transmission lines — keeping
power on for customers in times of need. During
major hurricanes, the CHP Plant had critical facilities,
such as hospitals and larger commercial and
industrial customers in operation soon after the
storms had ended.
Chesapeake Utilities has assisted customers with
the implementation of three CHP projects on the
Delmarva Peninsula as a result of its commitment
to providing valuable energy options to customers.
The Company provides natural gas service to the
CHP plants at Peninsula Regional Medical Center in
Salisbury, MD; the Dogfish Head Brewery in Milton,
DE; and the Seaford School District in Seaford, DE.
78%
efficiency target achieved
at Eight Flags CHP Plant
AUTOGAS
Propane AutoGas is a viable alternative fuel for automobiles that reduces emissions
and lowers costs. As a member of Alliance AutoGas, Sharp Energy installs and supports
propane vehicle conversion systems for vehicle fleets and provides on-site fueling
infrastructure. With 48 AutoGas stations in operation in Delaware, Maryland, Virginia,
Pennsylvania and Florida, Sharp Energy has deployed 87 propane-powered vehicles
within our own fleet displacing approximately 155,000 gallons of gasoline annually.
O
T
P
25%U
reduced Greenhouse
Gas Emissions
20%
60%
reduced NOx
reduced CO2
3M+
gallons of gasoline
and diesel
displaced in 2018
Eric Mays, Director, Marketing, explains
the benefits of AutoGas and a propane
vehicle conversion system at our
Investor Days event.
32
Chesapeake Utilities Corporation | 2018 Annual Report
marlin gas services
A STORY OF GROWTH AND INNOVATION
M A R L I N G A S S E R V I C E S
In December 2018, Chesapeake Utilities acquired the assets of Marlin Gas Transport, Inc. and established a new
subsidiary, Marlin Gas Services, LLC (Marlin). Marlin operates a fleet of compressed natural gas (CNG) tube trailers that
provide mobile gas transport services to transmission and distribution pipelines and end-use customers. The company’s
primary terminal location is in Spring Hill, FL. Over the past 15 years, Marlin has focused its business on the Southeast
and Mid-Atlantic, but delivery capabilities extend nationwide. Marlin has transported over 7 billion cubic feet of gas.
Chesapeake Utilities’ Florida business unit has been a major Marlin customer. Over the past several years, FPU has relied
on Marlin to provide temporary service to numerous expansion areas prior to installation of permanent pipeline facilities.
We believe that our experience as a Marlin customer gives us the unique insight into the operational, regulatory and
financial implications of deploying CNG tankers. We will leverage those insights to market Marlin’s services to similarly
situated pipeline and distribution customers. The increased capital availability and support offered by Chesapeake
Utilities will enable us to significantly expand Marlin’s targeted service area.
Marlin is a premier provider of virtual pipeline solutions.
We are able to provide uninterrupted access to gas
during planned and unplanned pipeline outages, as well
as providing supply to customers not directly connected
to pipeline supply. As demand for natural gas continues
to increase, Marlin offers a great opportunity to expand
Chesapeake Utilities’ gas service options and reach new
customers in new markets.
Kevin McCrackin, Director, CNG/LNG Services
Marlin’s capabilities
are a perfect solution
for transporting clean,
renewable natural gas
from landfills and other
renewable sources to
pipeline systems for
distribution.
33
‘‘” L E A D E R S H I P
leadership
Jeffry M.
Householder
President & Chief
Executive Officer
Stephen C.
Thompson
Senior Vice President;
President and Chief
Operating Officer,
Eastern Shore Natural
Gas Company; Aspire
Energy; Sandpiper
Energy; and Sharp
Energy, Inc.
Beth W. Cooper
Executive Vice
President, Chief
Financial Officer &
Assistant Corporate
Secretary
James F. Moriarty
Executive Vice
President, General
Counsel, Corporate
Secretary and Chief
Policy & Risk Officer
Kevin J. Webber
Senior Vice President
and President, Florida
Business Unit
Louis J. Anatrella
Vice President
and Chief Human
Resources Officer
Vikrant A. Gadgil
Vice President and Chief
Information Officer
Mark L. Eisenhower
Vice President,
Strategic Planning &
Development
34
Chesapeake Utilities Corporation | 2018 Annual Report
Andrew R. Hesson
Vice President, Sharp
Energy, Inc.
John J. Lewnard
Vice President of Business
Development
Tom E. Mahn
Vice President and
Treasurer
Cheryl M. Martin
Vice President, Regulatory
Affairs
Aleida F. Socarras
Vice President,
Chesapeake Utilities
Corporation
Joseph D. Steinmetz
Vice President and
Controller
Jeffrey R. Tietbohl
Vice President,
Eastern Shore Natural Gas
Company
Douglas M. Ward
Vice President,
Aspire Energy
Shane E. Breakie
Assistant Vice President,
Chesapeake Utilities
Nicole T. Carter
Assistant Vice President
of Customer Care
Michael D. Cassel
Assistant Vice President,
Florida Public Utilities
Company
Alfred V. Gallo, III
Assistant Vice President,
Peninsula Energy Services
Company
William D. Hancock
Assistant Vice President,
Peninsula Energy Services
Company
Barry D. Kennedy
Assistant Vice President
of Natural Gas Operations,
Florida Public Utilities
Company
Devon S. Rudloff
Assistant Vice President,
Human Resources
Drane A. Shelley
Assistant Vice President
of Electric Operations,
Florida Public Utilities
Company
35
L E A D E R S H I P
36
Chesapeake Utilities Corporation | 2018 Annual Report
36
board of directors
BACK ROW (LEFT TO RIGHT)
FRONT ROW (LEFT TO RIGHT)
Ronald G. Forsythe, Jr., Ph.D.
Director Since 2014
Chief Executive Officer,
Qlarant Corporation,
Easton, Maryland
Dianna F. Morgan
Director Since 2008
Former Senior Vice President,
Walt Disney World Co., Orlando,
Florida; Past Chair of the
Board of Trustees, University of
Florida,
Gainesville, Florida
Calvert A. Morgan, Jr.
Director Since 2000
Director and Former Special
Advisor,
WSFS Financial Corporation,
Wilmington, Delaware; Director
and Vice Chair,
Wilmington Savings Fund
Society (WSFS Bank),
Wilmington, Delaware; Retired
Chair, President & Chief Executive
Officer, PNC Bank, Delaware,
Wilmington, Delaware
Audit Committee
Thomas J. Bresnan — CHAIR
Ronald G. Forsythe, Jr., Ph.D.
Thomas P. Hill, Jr.
Dennis S. Hudson, III
Compensation Committee
Dianna F. Morgan — CHAIR
Dennis S. Hudson, III
Calvert A. Morgan, Jr.
Corporate Governance Committee
Calvert A. Morgan, Jr. — CHAIR
Eugene H. Bayard
Paul L. Maddock, Jr.
Investment Committee
Jeffry M. Householder - CHAIR
Thomas J. Bresnan
Thomas P. Hill, Jr.
Calvert A. Morgan, Jr.
John R. Schimkaitis
Jeffry M. Householder
Director Since 2019
President & Chief Executive
Officer,
Chesapeake Utilities
Corporation
John R. Schimkaitis
Director Since 1996
Chair of the Board, Retired
President & Chief Executive
Officer,
Chesapeake Utilities
Corporation
Michael P. McMasters
Director Since 2010
Retired President & Chief
Executive Officer,
Chesapeake Utilities
Corporation
Eugene H. Bayard
Director Since 2006
Of Counsel,
Morris James LLP,
Georgetown, Delaware
Paul L. Maddock, Jr.
Director Since 2009
Chief Executive Officer
and Manager, Palamad, LLC,
Palm Beach, Florida
Dennis S. Hudson, III
Director Since 2009
Chair & Chief Executive Officer,
Seacoast National Bank &
Seacoast Banking Corporation
of Florida,
Stuart, Florida
Thomas J. Bresnan
Director Since 2001
President, Global LT, Troy,
Michigan; Owner & President,
Accounting & Business
School of the Rockies and
Denver Accounting Services,
Greenwood Village, Colorado
Thomas P. Hill, Jr.
Director Since 2006
Retired Vice President of
Finance & Chief Financial
Officer,
Exelon Energy Delivery
Company,
Philadelphia, Pennsylvania
36
37
A STRONG
foundation
FOR GROWTH
Thank you to our employees!
Keon Aarons
Joseph Abba
Jon Abrams
Joseph Adams
William Adams
Nehal Ahmed
Ronald Alfaro
Crystal Allegretti
Christopher Allen
Catherine Alt
Clara Altvater
David Amos
Stephen Amos
Louis Anatrella
Zachary Anderson
Charles Andrews
Joshua Annand
Korri Antoine
Harold Arnold
Steven Ashcraft
Mary Atkins
Ashley Atkins-
Dellafield
Martha Audet
Joanne Auguste
Yvette Avila
Nnajiaye Awomokorie
Bradford Bacci
Kahli Baker
Keith Baker
Brittnee Baker
Kenneth Baker
David Baldinger
Gregory Ballheim
Danielle Ballinger
Bernita Banks
Michael Banks
Maureen Barr
Tina Barrington
Francis Barton
Maxine Bashford
Jeffrey Bates
Michael Bates
William Bather
Thomas Bather
Martin Batze
Jill Bauersmith
Joanah Baugh
Eric Baurys
Rodney Baylous
Andrew Bayne
Deanna Beadle
Timothy Beidler
Matthew Bell
Dina Bellechases
Lynn Bellinger
Bryan Benini
Rachel Beringer
Christopher Beun
Justin Beverly
Andrew Bevis
John Biddle
Charles Biddle
Erik Billy
Nicholas Bishop
Blake Bjorklund
Roger Blades
Katie Blades
Fred Bland
Joshua Bland
Michael Blankenship
Greg Blazina
Larry Bledsoe
Bryan Bloch
Curtis Boatright
Crystal Bohlman
John Bolling
Eric Bollinger
Renee Bolyard
Debra Bonner
Christopher Bonney
Peter Bono
Alfred Boone
Marybeth Bowden
Hunter Bowles
Richard Brabson
David Bradford
James Bradshaw
Victoria Brand
Shane Breakie
Steven Brennan
Sherrii Brentari
Richard Brewer
Nathan Brisker
Mason Brock
Natasha Brooks
Terrance Brown
Todd Brown
Nikisha Brown
Michael Brown
Charles Brown
Timothy Brown
Jevon Brown
Clinton Brown
Wayne Bryan
Gary Bryant
Charles Buckalew
Tyler Budd
Purogami Buddha
Edward Burgess
John Burke
Danial Burkhart
Aubrey Burris
Shelly Burrowes
Dale Butcher
Linda Cacella
Christopher Cafarella
Rodney Calhoun
Marielle Cameron
Terry Campbell
Jason Campbell
Crystal Campbell
Robert Candelario
Thomas Canfield
Christopher Canino
Michael Cantwell
Patricia Caouette
Belinda Caplinger
Nemesio Caraballo
Jacob Carlson
Ronald Carlton
Richard Carrick
Sergio Carrillo
Jonathan Carrington
Danita Carroll
Crosby Carswell
Nicole Carter
Michael Carter
Bruce Carver
Jacob Case
Sean Case
Michael Cassel
Eileen Cassidy
Richard Castellanos
Pablo Castro
Virginia Cespedes
Autumn Chalabala
Justin Chambers
James Champion
Cody Chance
Luice Chang
Christopher Chapman
Nixon Charles
Foster Chatham
Howard Chelton
Amanda Chi
Shailin Chokshi
Steven Christine
Jon Chullin
Virginia Cichowski
William Clardy
Jennifer Clausius
Richard Cleveland
Michael Clevens
Rita Clifford
Laura Clinton
Michael Cluley
Howard Cohee III
Roger Cohey
Anthony Coker
Marianne Coker
Denise Collins
Cody Collins
Ryan Collins
Brad Collins
Darren Coney
J. Patrick Conlon
Patricia Connors
Robert Constantine
Mateo Constantino
Beth Cooper
Susan Cooper
Shirley Cope
Deanna Cordova
Zachary Cordrey
Janet Coughlin
Clarence Council
Doreen Cox
Jessica Coxe
George Craig
Katelyn Craig
John Cramer
John Crawford
Larry Creswell
Sabrina Cribbs
Kelly Cristiano
Nicholas Cronell
Michael Cross
Eugene Crowe
Cindy Cruz
Amber Cumbie
Matthew Currie
P. Cutshaw
David Dagg
Colleen Dalious
Ellen Davies
Carl Davis
Sydney Davis
Sarah Davis
Sherrie Davis
Ashley Dawson
Gary Dean
Susan Dean
Matthew Dean
David DeCaro
Dawn DeCosta
Zuleika DeJesus
Daniel Delaney
George Delano
Scott DeLong
Joshua Denham
Gregory Denston
David Detrick
Matthew Dewey
Joseph DeYounks
Cecile DiFrancesco
Larry Dixon
Matthew Dolin
Kristin Dondarski
Marvin Dorsey
Randall Drake
Jeffrey DuBose
Danielle Duerr
George Dulin
Denise Dunham
Jacob Durbin
Nicole Durham
Wanda Edwards
Jonathan Eisenhauer
Mark Eisenhower
Robert Elgesem
James Elliott
Sherry Ennis
Bonnie Erdek
Raymond Esparza
Roger Estrada
Virginia Evans
Matthew Everngam
Steven Farkas
Calvin Favors
Gregory Fentress
James Ferguson
Laura Fevrin
Jose Figueroa
Garry Finch
Christina Finigan
Vincent Fiorelli
Morgann Firestone
Champe Fisher
Connie Fisher
Emma Fisher
Jason Fitchett
Clara Flanigan
Jose Flores
David Flowers
James Flowers
Bradley Flowers
Alvin Foran
Karl Forde
Sherry Foster
Donna Fowler
George Freeman
Roger Freeze
Raul Frenes
Debra Frye
Aaron Fullenkamp
Charles Gabbard
Vikrant Gadgil
Farisha Gajadhar
Alfred Gallo
Linda Gamble
Michael Gandee
Kimberley Gantz
Jason Garfola
Sheila Garris
Alex Garver
Andrea Gaston
Bryan Gaugler
Corey Gebhardt
Ivan Gibbs
Samuel Gilchriest
Marjorie Gill
Elizabeth Gilligan
Quade Gilmore
Tiffany Giroux
Anthony Glenn
Jennifer Gnann
Brian Goff
Mia Goins
Jesus Gonzalez
Alan Good
Jamie Goodman-
DeFazio
Deltric Gordon
William Gradie
Charlotte Grady
Miranda Granger
Rhondon Gray
Teresa Gretencord
Rebecca Grier
John Griffin
Donna Grimm
Darryl Grooms
Chad Grosch
Charles Gsvind
Vicky Guessford
David Guimont
Joseph Guyette
Vivian Gyening
Bruce Haase
Randall Hagan
Eric Hagans
George Hall
Howard Hall
Cole Hall
Keith Hall
Sherri Haller
Alexander Halterman
William Hancock
Scott Handges
Larry Handy
Ali Hanif
Carol Hardin
Sarah Hardy
Gary Hardy
Brian Harner
Duane Harrell
Cathy Harrington
Lynette Harris
Caleb Harris
Alfonzo Harris
Kevin Harris
Joseph Harrison
Janet Hart
David Hart
Gabriel Hart
Gregory Hartney
Eric Haskins
Adam Hastie
Debra Hayden
Evan Hayes
Jim Hayhurst
Ramon Hearn
Chris Hebert
David Henault
Matthew Henderson
Roger Hendricks
James Henshaw
Connie Hensley
John Herko
Joel Hermogenes
William Hermstedt
Constantino
Hernandez
Jose Hernandez
Andrew Hesson
Steve Hetland
Michael Hickey
Jason Hickman
Kortney Hill
John Hill
Fred Hill
Christopher Hines
Chad Hipsher
Maldon Hoffman
Sand Hoffman
Dean Holden
Clarence Holland
Nathaniel Holley
Beth Hoppes
Richard Hoppes
Jeffry Householder
Charles Howell
Larry Howton
Edward Hudson
Lee Anne Huffman
Laura Hufschmidt
Allison Hughart
Alton Hughes
Stephanie Hughley-
Grant
Chucky Hull
Andre Hunter
Jarvis Hunter
Jessica Husted
Catherine Hutchison
38
Chesapeake Utilities Corporation | 2018 Annual Report
Gerald Hynson
Michael Ilnisky
James Ingalls
Michael Ingley
Daniel Isner
Tevin Jackson
David Jackson
Sean Jackson
Jean Jaentschke
William Jarrett
Tanya Jensen
James Jestice
Todd Jezewski
Yugita John
David Johnson
Marvin Johnson
Randy Johnson
Anthony Johnson
Kevin Johnson
Jennifer Johnson
Kevin Jones
Jeffrey Jones
Garth Jones
Aaron Jones
Ray Jones
Sarah Jones
Jeremiah Jones
DeShaundra Jones
Teja Jones
Anna Jones
Katherine Jones
Charles Jordan
Cody Justice
Mohamed Kamagate
John Kara
John Keen
Rosa Keip
Stephanie Keithley
Robert Kelley
Brendan Kelly
John Kelly
Barry Kennedy
David Kerns
Jason Ketner
Steven Keyser
Jeremi Kidwell
Garry Killmon
James Kimmel
Ronald King
Jonathan Kliewer
Lisa Klotz
David Knight
Jerry Knox
Andrew Kochman
Melissa Koenig
George Kohan
Thomas Kosikowski
Amy Kouse
Barbara Kowal
Marie Kozel
Robert Krebs
William Kriss
Nikki Krumm
Kerry Kulha
Daryl Kunkel
Evan Kuzmenski
Gwen Kyle-Jackson
Roger LaCharite
Michael Lackey
Kira Lake
Paul Lalancette
Edward Lalo
Lisa Lambert
Johnny Lance
Conner Landon
Frank Lane
Lisa Lannon
Claude Larmonie
Stacey Laster
James Laub
Daniel Laughman
Jeffrey Leach
Joshua Leager
Leanna LeBron
Hyun Ju Lee
Richard Legar
Robert Legar
Cheryl Lemon
Jerry Lewis
John Lewis
John Lewnard
Patricia Limoli
Martin Linton
James Liott
Dale Littleton
Lynn Lloyd
Ana Londono
Brian Loucks
Theresa Ludlow
Douglas Luff
Anthony Lugo
Christopher Lunsford
Amber Lyburn
Lorraine Lynch
Lula Lynn-Aladuge
Emily Mabrey
Richard Maccari
Trever Mackey
Shane Magnus
Thomas Mahn
Lauri Major
Thomas Malice
Christopher Malkar
James Malloy
Nicole Manno
Danielle Manuel
Robert Marsh
David Marshall
John Martin
Colette Martin
Cheryl Martin
Daniel Massengill
Edward Matthews
Christopher Matthews
Joanie Maxwell
Donald Maxwell
Jacqueline Mayan
Eric Mays
Aaron Mazur
Patricia McBride
Janet McCabe
Kimberly McCarty
Michael McCarty
Jesse McCleary
Stacey McClements
James McCloskey
John McComb
Laura McCoy
Kevin McCoy
Kevin McCrackin
William McDaniel
John McDonnell
Steven McDougall
Krystal McGill
Joseph McGinley
Tyler McGuyrt
Alyssa McIntosh
Thomas McKnight
Brennan McKone
Candace McMurtry
Joshua McNeil
Lynn McNeill
Tracy McVay
Michele Medina
Andrew Menzies
Vincent Messina
Thomas Metts
Christopher Metzger
Jennifer Meyer
Shaun Middleton
Jacqueline Mildren
Elizabeth Miller
Kirk Miller
Michael Miller
John Miller
Jeremy Miller
Timothy Miller
Micky Miller
Lisa Minnich
Jaclyn Minor
Christine Minton
Michael Mitchell
Marjorie Mitchell
Steven Mitchell
Cedric Mitchell
Jamie Monaco
Kelly Monaco
Ronald Monce, Jr.
Lila Monds
Audra Mongo
David Montgomery
Jody Montgomery
Joseph Moody
Phil Mooney
Kyle Moore
Gregory Moore
Phillip Moore
Don Moore
James Moore
Douglas Moreland
Garfield Morgan
Sherri Morgan
James Moriarty
Leo Moron
Laura Morris
Florence Muir
Justin Mulcahy
Danielle Mulligan
Arleen Murchison
Shawn Murphy
Daniel Murphy
Geraldine Murray
Randall Musselman
Virginia Nail
Michelle Napier
Ryan Nellans
Jason Nester
Brian Nethers
Jason Newcomb
Joshua Ney
Jonathon Nichols
Lucas Nievas Machado
Eric Norris
Christopher Nuebling
Ana Nunez
William O’Brien
Mario O’Campo
Joseph O’Donnell
Lashonda Oliver
Philip Onsomu
John Outten
Omar Owens
Cynthia Pagan
Eli Page
Branden Palmer
Tiffany Palmer
Adam Panichella
Connie Papafio Osei
Mark Parker
Robin Parker
Richard Parks
Kelley Parmer
Marilyn Parrish
Brian Parsons
Jeremy Parsons
James Parsons
Lee Patrick
Ronald Patrick
Sharran Patterson
Lewis Peacock
Eric Pearson
Ricky Peek
Michael Pendexter
Glenn Pendleton
Kimberly Perdue
Nicholas Pereira
Daniel Perry
Matthew Perry
Robert Petenbrink
Andrew Peters
Michael Petito
Matthew Petito
John Petro
Kaitlyn Pezoldt
Jacque Phillips
Michelle Phillips
Kayla Phillips
Gary Pierce
Julie Pietraszko
Jacqueline Pilecki
Tina Pileggi
Michele Piper-Afriyie
Michael Plante
David Pluta
Gregg Poggi
Keith Pomeroy
Michael Ponder
John Poole
Brad Poole
Michael Popovich
Adiel Portales
Brent Porter
Matthew Portilla
Manickam Prasad
Nicole Pratt
Lacey Priestley
Craig Provenzano
Jorge Puentes
Keven Purnell
Adam Quann
Darrel Ragoonath
Stephanie Rahn
Sean Ramey
Glen Ranck
Barry Rankin
John Rantz
Tina Rawls
Christopher Redd
Edward Rees
Michael Reffue
Janet Register
Dwayne Reinert
Dawn Reiss
Jeffrey Reitz
Jonathan Remy
Michael Reno
William Rice
Rhonda Richardson
David Richardson
Yvonne Richmond
Samuel Richter
Marianne Riding
Robin Rigby
Robert Riley
Jessica Rivera
Eliazer Rivera Vargas
Heather Rizo-Patron
Danielle Roach
Marcy Robbins
Stephanie Roberts
Gregory Robinson
William Rodriguez
Rita Rogers
Perry Rogers
Adam Rogers
Percy Roland
James Rolle
Jose Rosales
Richard Ross
Cora Ross
Walter Rossetto
Paige Rossillo
Lynn Roth
Susan Roulston
Janine Roye
Mayer Rubin
Joel Ruderman
Devon Rudloff
Mauro Ruini
David Russell
Winston Russell
Matthew Ryan
Melanie Ryder
Phillip Sabol
Taina Sailor
Donnell Sample
Mary Santaella
Jacqueline Santana
Zurehida Santiago
Jesse Sapp
Kelsey Sapp
Dawn Sard
Stuart Sauk
Herman Savage
Michael Scher
David Schieferstein
Paul Schmidlin
Joshua Schneider
Jeremy Schneider
Penny Schoolfield
Daniel Schrey
Timothy Schroff
Frederick Schur
Walter Schwaninger
Francene Scott-Diehl
Meredith Sebastian
Ryan Sebastian
Robert See, Jr.
Lisa Sell
Ben Semchuck
Steven Senft
Andrew Sergovic
James Shadd
Robert Shatzer
Drane Shelley
Jared Shelton
Richard Shertzer
Kevin Shockley
Karen Shockley
David Shreckengost
Ramiro Sicre
Richard Simmons
Christopher Simmons
Earl Simpson
Thomas Simpson
Allyson Singletary
Francis Sluka
Margaret Sluka
Aaron Sluss
Stephen Smith
James Smith
Kimberly Smith
Kristopher Smith
Harry Smith
Debbie Smith
Kevin Smith
Trisha Smith
Jarrett Smith
James Snell
Thomas Snellgrove
Dwayne Snyder
Brian Snyder
Amy Lynn Snyder
Aleida Socarras
Leona Solomon
Chad Souder
Summer Soukup
George Speerin
Kenneth Spencer
Steven Spigelmire
Henry Spikes
Warren Springer
Julie St. Clair
Ronald Stafford
Melissa Stamper
Thomas Stanley
Kevin Staudt
Marcus Stebelton
Joseph Steinmetz
Llewellyn Stepherson
Christopher Stevenson
Vince Stewart
James Stewart
Joseph Stimpfling
Marissa Stipa
Michael Stock
Theresa Streadwick
Christopher Stryker
Jenna Stuart
Ronald Stubbs
Jeffrey Sturgill
Marc Sturtevant
Jonathan Swan
Steve Sword
Daniela Sylvester
Debra Szymanski
Rocco Tamayo
Stefanie Tanner
Randy Taylor
Olimbi Telford
David Tennant
Brian Terraciano
Donnie Tew
Gregory Tharp
John Thielemann
Sheila Thomas
Veronica Thomas
Stephen Thompson
Joann Thompson
Janice Thompson
Mark Thompson
Patricia Thornton
John Thyng
Jeffrey Tietbohl
Christopher Tietjen
Dana Tindall
Lynann Titler
Michael Torres
Stephen Tracey
Dale Treuber
James Trott
Lauren Truitt
Michael Tucker
Nicholas Tucker
Stephen Tull
Jeffrey Turner
David Tuttle
Kendall Tyus
Preston Uhl
Janine Urbanski
James Ussery, Jr.
Rafael Valentin
Cory Vance
Jennifer Vandervort
Fernando Vanleeuwen
Nicole Vanmaaren
Fred Vaughn
Barbara Velasquez
Alayda Velasquez
Joselyn Velez
Kevin Vickers
Erika Vogel
Travis Vogl
Joey Voyard
Frankie Voyles
Donald Vrsan
Heidi Wagner
Darrell Wagner
Julia Waldrop
Dana Walker
Markea Walker-Brown
Robert Wallace
Shaun Waller
Rachel Walls
Hunter Walsh
Crystal Waples
Brittany Ward
Douglas Ward
Brent Warfield
Ruth Warner
Ernest Washington
Heidi Watkins
Victoria Weaver-Martin
John Webb
David Webb
Kevin Webber
Steve Webster
Daniel Webster
Daniel Wehr
Christopher Weidman
Jeffrey Weiss
Andrew Weitz
Teresa Welch
Kevin Wells
Melissa Wells
Richard Welsh
Vanora Werner
Robert West
Tammy Wheatley
Theodore Wheaton
Carla Wheeler
James Whitaker
Michael White
Rena White
Darcy White
Ward Whiteside
Danny Whitley
Tony Whitlock
David Wicks
Neal Widdowson
Jason Widgeon
Geoffrey Wight
Marquis Wilborn
Frank Wildermuth
Yvonne Williams
Donald Williams
Teirra Williams
Horace Williams
Janie Williams
Malcolm Williams
Andre Williams
Jeffrey Willinghan
Arnell Willis
Sophia Willoughby
Travis Wilson
Glen Wilson
Samuel Wilson
Mark Wilson
Tamara Wimberly
Linda Winston
Chaneta Wise
Harry Wise
Charles Wisniewski
Matthew Witt
Max Wood
Jason Woody
April Wothers
Geoffrey Wright
Richard Wunsch
Brian Yost
Kyle Young
Keith Young
Curtis Young
Novem Yu
Magbis Zaldivar
Leslie Zambrano
Ramiro Zambrano
Heidi Zanecosky
Jason Zelinski
Auberjenois Zerrad
Duane Ziller
Philip Zimmer
Amy Zook
Note: Chesapeake
Utilities Corporation
employees as of
3/13/19.
39
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended: December 31, 2018
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number: 001-11590
CHESAPEAKE UTILITIES CORPORATION
(Exact name of registrant as specified in its charter)
State of Delaware
(State or other jurisdiction of
incorporation or organization)
51-0064146
(I.R.S. Employer
Identification No.)
909 Silver Lake Boulevard, Dover, Delaware 19904
(Address of principal executive offices, including zip code)
302-734-6799
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Common Stock—par value per share $0.4867
Name of each exchange on which registered
New York Stock Exchange, Inc.
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes
No
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes
No
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for
the past 90 days. Yes
No
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of
Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such
files). Yes
No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) is not contained herein, and will
not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or
any amendment to this Form 10-K.
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an
emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company"
in Rule 12b-2 of the Exchange Act.
Large accelerated filer
Non-accelerated filer
Accelerated filer
Smaller reporting company
Emerging growth company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or
revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
Indicate by a check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes
No
The aggregate market value of the common shares held by non-affiliates of Chesapeake Utilities Corporation as of June 30, 2018, the last business day of its
most recently completed second fiscal quarter, based on the last sale price on that date, as reported by the New York Stock Exchange, was approximately $1.3
billion.
The number of shares of Chesapeake Utilities Corporation's common stock outstanding as of February 15, 2019 was 16,378,821.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement for the 2019 Annual Meeting of Stockholders are incorporated by reference in Part II and Part III, which Proxy Statement shall
be filed with the Securities and Exchange Commission within 120 days after the end of registrant's fiscal year ended December 31, 2018.
CHESAPEAKE UTILITIES CORPORATION
FORM 10-K
YEAR ENDED DECEMBER 31, 2018
TABLE OF CONTENTS
Part I
Item 1. Business
Item 1A. Risk Factors
Item 1B. Unresolved Staff Comments
Item 2. Properties
Item 3. Legal Proceedings
Item 4. Mine Safety Disclosures
Part II
Item 5. Market for the Registrant’s Common Equity, Related Stockholder Matters and Issuer
Purchases of Equity Securities
Item 6. Selected Financial Data
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Item 8. Financial Statements and Supplementary Data
Item 9. Changes In and Disagreements With Accountants on Accounting and Financial Disclosure
Item 9A. Controls and Procedures
Item 9B. Other Information
Part III
Item 10. Directors, Executive Officers of the Registrant and Corporate Governance
Item 11. Executive Compensation
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters
Item 13. Certain Relationships and Related Transactions, and Director Independence
Item 14. Principal Accounting Fees and Services
Part IV
Item 15. Exhibits, Financial Statement Schedules
Item 16. Form 10-K Summary
Signatures
Page
1
2
11
17
17
18
18
18
18
21
23
45
47
97
97
98
98
98
98
98
98
98
98
99
103
103
GLOSSARY OF DEFINITIONS
ASC: Accounting Standards Codification
ASU: Accounting Standards Update
CDD: Cooling Degree-Day
Chesapeake or Chesapeake Utilities: Chesapeake Utilities Corporation, its divisions and subsidiaries, as appropriate in the
context of the disclosure
CHP: Combined Heat and Power Plant
Company: Chesapeake Utilities Corporation, its divisions and subsidiaries, as appropriate in the context of the disclosure
Degree-day: A degree-day is the measure of the variation in the weather based on the extent to which the average daily temperature
(from 10:00 am to 10:00 am) falls above or below 65 degrees Fahrenheit
Delmarva Peninsula: A peninsula on the east coast of the U. S. occupied by Delaware and portions of Maryland and Virginia
Dt(s): Dekatherm(s), which is a natural gas unit of measurement that includes a standard measure for heating value
Dts/d: Dekatherms per day
Eastern Shore: Eastern Shore Natural Gas Company, a wholly-owned subsidiary of Chesapeake Utilities
Eight Flags: Eight Flags Energy, LLC, a subsidiary of Chesapeake's OnSight Services, LLC
FASB: Financial Accounting Standards Board
FERC: Federal Energy Regulatory Commission
FGT: Florida Gas Transmission Company
Flo-gas: Flo-gas Corporation, a wholly-owned subsidiary of Chesapeake Utilities
FPL: Florida Power & Light Company, an unaffiliated electric company that supplies electricity to FPU
FPU: Florida Public Utilities Company, a wholly-owned subsidiary of Chesapeake Utilities
GAAP: Generally Accepted Accounting Principles
GRIP: Gas Reliability Infrastructure Program
Gross Margin: a non-GAAP measure defined as operating revenues less the cost of sales. The Company's cost of sales includes
purchased fuel cost for natural gas, electricity and propane and the cost of labor spent on direct revenue-producing activities and
excludes depreciation, amortization and accretion
Gulfstream: Gulfstream Natural Gas System, LLC, an unaffiliated pipeline network that supplies natural gas to FPU
HDD: Heating Degree Day
MetLife: MetLife Investment Advisors, an institutional debt investment management firm, with which Chesapeake Utilities has
entered into a Shelf Agreement
MGP: Manufactured gas plant, which is a site where coal was previously used to manufacture gaseous fuel for industrial,
commercial and residential use
MTM: Mark-to-Market (fair value accounting)
MW: Megawatt, which is a unit of measurement for electric base load power or capacity
NYL: New York Life Investors LLC, an institutional debt investment management firm, with which Chesapeake Utilities has
entered into a Shelf Agreement and issued Shelf Notes
Peninsula Pipeline: Peninsula Pipeline Company, Inc., a wholly-owned subsidiary of Chesapeake Utilities
PESCO: Peninsula Energy Services Company, Inc., a wholly-owned subsidiary of Chesapeake Utilities
Prudential: Prudential Investment Management Inc., an institutional investment management firm, with which Chesapeake
Utilities has entered into a Shelf Agreement and issued Shelf Notes
PSC: Public Service Commission, which is the state agency that regulates utility rates and/or services in certain of our jurisdictions
Rayonier: Rayonier Performance Fibers, LLC, the company that owns the property on which Eight Flags' CHP plant is located
and a customer of the steam generated by the CHP plant
Revolver: Our unsecured revolving credit facility with certain lenders
Sandpiper: Sandpiper Energy, Inc., a wholly-owned subsidiary of Chesapeake Utilities
SEC: Securities and Exchange Commission
Senior Notes: Our unsecured long-term debt issued primarily to insurance companies on various dates
Sharp: Sharp Energy, Inc., a wholly-owned subsidiary of Chesapeake Utilities
Shelf Agreement: An agreement entered into by Chesapeake Utilities and a counterparty pursuant to which Chesapeake Utilities
may request that the counterparty purchase our unsecured senior debt with a fixed interest rate and a maturity date not to exceed
20 years from the date of issuance
Shelf Notes: Unsecured senior promissory notes issuable under the Shelf Agreement executed with various counterparties
SICP: 2013 Stock and Incentive Compensation Plan
TCJA: Tax Cuts and Jobs Act enacted on December 22, 2017
TETLP: Texas Eastern Transmission, LP
U.S.: The United States of America
Xeron: Xeron, Inc., an inactive subsidiary of Chesapeake Utilities
PART I
References in this document to “Chesapeake,” “Chesapeake Utilities,” the “Company,” “we,” “us” and “our” mean Chesapeake
Utilities Corporation, its divisions and/or its wholly-owned subsidiaries, as appropriate in the context of the disclosure.
Safe Harbor for Forward-Looking Statements
We make statements in this Annual Report on Form 10-K that do not directly or exclusively relate to historical facts. Such statements
are “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, Section 21E of
the Securities Exchange Act of 1934, as amended, and the Private Securities Litigation Reform Act of 1995. One can typically
identify forward-looking statements by the use of forward-looking words, such as “project,” “believe,” “expect,” “anticipate,”
“intend,” “plan,” “estimate,” “continue,” “potential,” “forecast” or other similar words, or future or conditional verbs such as
“may,” “will,” “should,” “would” or “could.” These statements represent our intentions, plans, expectations, assumptions and
beliefs about future financial performance, business strategy, projected plans and objectives of the Company. Forward-looking
statements speak only as of the date they are made or as of the date indicated and we do not undertake any obligation to update
forward-looking statements as a result of new information, future events or otherwise. These statements are subject to many risks
and uncertainties. In addition to the risk factors described under Item 1A, Risk Factors, the following important factors, among
others, could cause actual future results to differ materially from those expressed in the forward-looking statements:
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
state and federal legislative and regulatory initiatives that affect cost and investment recovery, have an impact on rate
structures, and affect the speed and the degree to which competition enters the electric and natural gas industries;
the outcomes of regulatory, environmental and legal matters, including whether pending matters are resolved within current
estimates and whether the related costs are adequately covered by insurance or recoverable in rates;
the impact of significant changes to current tax regulations and rates;
the timing of certification authorizations associated with new capital projects and the ability to construct facilities at or
below estimated costs;
changes in environmental and other laws and regulations to which we are subject and environmental conditions of property
that we now, or may in the future, own or operate;
possible increased federal, state and local regulation of the safety of our operations;
the economy in our service territories or markets, the nation, and worldwide, including the impact of economic conditions
(which we do not control ) on demand for electricity, natural gas, propane or other fuels;
risks related to cyber-attacks or cyber-terrorism that could disrupt our business operations or result in failure of information
technology systems;
the weather and other natural phenomena, including the economic, operational and other effects of hurricanes, ice storms
and other damaging weather events;
customers' preferred energy sources;
industrial, commercial and residential growth or contraction in our markets or service territories;
the effect of competition on our businesses;
the timing and extent of changes in commodity prices and interest rates;
the effect of spot, forward and future market prices on our various energy businesses;
the extent of our success in connecting natural gas and electric supplies to transmission systems, establishing and maintaining
key supply sources; and expanding natural gas and electric markets;
the creditworthiness of counterparties with which we are engaged in transactions;
the capital-intensive nature of our regulated energy businesses;
the results of financing efforts, including our ability to obtain financing on favorable terms, which can be affected by
various factors, including credit ratings and general economic conditions;
the ability to successfully execute, manage and integrate a merger, acquisition or divestiture of assets or businesses and
the related regulatory or other conditions associated with the merger, acquisition or divestiture;
the impact on our costs and funding obligations, under our pension and other post-retirement benefit plans, of potential
downturns in the financial markets, lower discount rates, and costs associated with health care legislation and regulation;
the ability to continue to hire, train and retain appropriately qualified personnel; and
the effect of accounting pronouncements issued periodically by accounting standard-setting bodies.
Chesapeake Utilities Corporation 2018 Form 10-K Page 1
ITEM 1. Business.
Corporate Overview and Strategy
Chesapeake Utilities Corporation is a Delaware corporation formed in 1947 with operations primarily in the Mid-Atlantic region
and in Florida, Pennsylvania and Ohio. We are an energy delivery company engaged in the distribution of natural gas, propane
and electricity; the transmission of natural gas; the generation of electricity and steam, and in providing related services to our
customers.
Our strategy is to consistently produce industry leading total shareholder return by profitably investing capital into opportunities
that leverage our skills and expertise in energy distribution and transmission to achieve high levels of service and growth. The
key elements of our strategy include:
•
•
•
•
•
•
capital investment in growth opportunities that generate our target returns;
expanding our energy distribution and transmission operations within our existing service areas as well as into
new geographic areas;
providing new services in our current service areas;
expanding our footprint in potential growth markets through strategic acquisitions;
entering new energy markets and businesses that complement our existing operations and growth strategy; and
operating as a customer-centric full-service energy supplier/partner/provider, while providing safe and reliable
service.
Our employees strive to build meaningful connections that generate opportunities to grow our businesses, develop new markets,
and enrich the communities in which we live, work and serve.
Operating Segments
We operate within two reportable segments: Regulated Energy and Unregulated Energy. The remainder of our operations is
presented as “Other businesses and eliminations." These segments are described below in detail.
Regulated Energy
Our regulated energy businesses are comprised of natural gas and electric distribution as well as natural gas transmission services.
The following table presents net income for the year ended December 31, 2018 and total assets as of December 31, 2018, for
the Regulated Energy segment by operation and area served:
Operations
(in thousands)
Natural Gas Distribution
Areas Served
Net Income
Total Assets
Delmarva Natural Gas (Delaware division, Maryland
division and Sandpiper Energy)
Central Florida Gas and FPU
Delaware/Maryland
Florida
$
$
11,390
11,754
Natural Gas Transmission
Eastern Shore
Peninsula Pipeline
Electric Distribution
FPU
Total Regulated Energy
Delaware/Maryland/
Pennsylvania
Florida
Florida
17,460
4,303
2,249
$
47,156
$
211,458
312,769
262,918
20,493
123,863
931,501
Revenues in this operating segment are based on rates regulated by the PSC in the states in which we operate or, in the case of
Eastern Shore, which is an interstate business, by the FERC. The rates are designed to generate revenues to recover all prudent
operating and financing costs and provide a reasonable return for our stockholders. Each of our distribution and transmission
operations has a rate base, which generally consists of the original cost of the operation's plant, less accumulated depreciation,
working capital and other assets. For Delmarva Natural Gas and Eastern Shore, rate base also includes deferred income tax
liabilities and other additions or deductions. Our Regulated Energy operations in Florida do not include deferred income tax
liabilities in their rate base.
Chesapeake Utilities Corporation 2018 Form 10-K Page 2
Our natural gas and electric distribution operations bill customers at standard rates approved by their respective state PSC. Each
state PSC allows us to negotiate rates, based on approved methodologies, for large customers that can switch to other fuels.
Some of our customers in Maryland receive propane through our underground distribution system in Worcester County, which
we are in the process of converting to natural gas. We bill these customers under PSC-approved rates and include them in the
natural gas distribution results and customer statistics.
Our natural gas and electric distribution operations earn profits on the delivery of natural gas or electricity to customers. The
cost of natural gas or electricity that we deliver is passed through to customers under PSC-approved fuel cost recovery
mechanisms. The mechanisms allow us to adjust our rates on an ongoing basis without filing a rate case to recover changes in
the cost of the natural gas and electricity that we purchase for customers. Therefore, while our distribution operating revenues
fluctuate with the cost of natural gas or electricity we purchase, our distribution margin (which we define as operating revenues
less purchased gas or electric cost) is generally not impacted by fluctuations in the cost of natural gas or electricity.
Our natural gas transmission operations bill customers under rate schedules approved by the FERC or at rates negotiated with
customers.
Operational Highlights
The following table presents operating revenues, volumes and the average number of customers by customer class for our natural
gas and electric distribution operations for the year ended December 31, 2018:
Operating Revenues (in thousands)
Residential
Commercial
Industrial
Other (1)
Total Operating Revenues
Volumes (in Dts for natural gas/KW Hours for electric)
Residential
Commercial
Industrial
Other
Total Volumes
Average Number of Customers (3)
Residential
Commercial
Industrial
Other
Total Average Number of Customers
Delmarva
Natural Gas
Distribution
Florida
Natural Gas
Distribution (2)
FPU
Electric
Distribution
$
70,466
36,916
8,289
928
60% $
32%
7%
1%
35,420
33,229
33,207
4,602
34% $
31%
31%
4%
44,788
39,442
1,543
(5,970)
56 %
49 %
2 %
(7)%
$
116,599
100% $
106,458
100% $
79,803
100 %
4,142,567
3,792,220
5,549,387
80,254
13,564,428
71,322
6,979
157
5
78,463
31%
28%
40%
1%
100%
91%
9%
<1%
<1%
100%
1,762,852
6,441,806
24,759,334
2,338,815
35,302,807
72,151
5,434
2,328
11
79,924
5%
18%
70%
7%
100%
90%
7%
3%
<1%
100%
307,269
302,687
15,160
7,402
632,518
24,686
7,497
2
—
32,185
49 %
48 %
2 %
1 %
100 %
77 %
23 %
<1%
— %
100 %
(1) Operating Revenues from "Other" sources include revenue, unbilled revenue, under (over) recoveries of fuel cost, conservation revenue, other miscellaneous charges, fees for
billing services provided to third parties, and adjustments for pass-through taxes.
(2) Florida natural gas distribution includes Chesapeake Utilities' Central Florida Gas division, FPU and FPU's Indiantown and Fort Meade divisions.
(3) Average number of customers is based on the twelve-month average for the year ended December 31, 2018.
Chesapeake Utilities Corporation 2018 Form 10-K Page 3
The following table presents operating revenues, by customer type, for Eastern Shore and Peninsula Pipeline for the year ended
December 31, 2018, and contracted firm transportation capacity, by customer type, as well as design day capacity at December 31,
2018:
Operating Revenues (in thousands)
Local distribution companies - affiliated (1)
Local distribution companies - non-affiliated
Commercial and industrial - affiliated
Commercial and industrial - non-affiliated
Other (2)
Total Operating Revenues
Contracted firm transportation capacity (in Dts/d)
Local distribution companies - affiliated
Local distribution companies - non-affiliated
Commercial and industrial - affiliated
Commercial and industrial - non-affiliated
Total Contracted firm transportation capacity
Eastern Shore
Peninsula Pipeline
$
$
19,725
23,975
—
21,748
(1,200)
64,248
31 % $
37 %
— %
34 %
(2)%
100 % $
9,478
840
1,120
490
—
11,928
122,652
76,619
—
95,648
294,919
42 %
26 %
— %
32 %
100 %
143,500
4,825
1,500
5,100
154,925
80%
7%
9%
4%
—%
100%
93%
3%
1%
3%
100%
Design day capacity (in Dts/d)
(1) Eastern Shore's and Peninsula Pipeline's service to our local distribution affiliates is based on the respective regulator's approved rates and is an integral component of the cost
294,919
154,925
100 %
100%
associated with providing natural gas supplies for those affiliates. We eliminate operating revenues of these entities against the cost of sales of those affiliates in our
consolidated financial information; however, our local distribution affiliates include this amount in their purchased fuel cost and recover it through fuel cost recovery
mechanisms.
(2) Operating revenues from "Other" sources are from the rental of gas properties and reserve for rate case refund.
Regulatory Overview
The following table highlights key regulatory information for each of our principal Regulated Energy operations. The table
reflects rate increases and rates of return approved prior to the enactment of the TCJA on December 22, 2017. See Item 8,
Financial Statements and Supplementary Data (Note 19, Rates and Other Regulatory Activities and Note 12, Income Taxes in
the consolidated financial statements) for further discussion on the impact of this legislation on our regulated businesses.
Peninsula Pipeline is not regulated with regard to cost of service by either the Florida PSC or FERC and is therefore excluded
from the table.
Natural Gas Distribution
Delmarva
Florida
Electric
Distribution
Natural Gas
Transmission
Electric
Distribution
Natural Gas
Transmission
Operation/Division
Delaware
Maryland
Sandpiper
Chesapeake's
Florida
natural gas
division
FPU
FPU
Eastern
Shore
Regulatory Agency
Effective date - Last
Rate Order
Rate Base (in Rates)
Annual Rate Increase
Approved
Capital Structure (in
rates)(3)*
Allowed Return on
Equity
Delaware
PSC
Maryland PSC
Maryland
PSC
Florida PSC
Florida PSC
Florida PSC
FERC
01/01/2017
Not stated
5/1/2018(7)
Not stated
12/01/2018
01/14/2010
Not stated
$46,680,000
01/14/2010(1)
$68,940,000
01/03/2018
08/01/2017
$11,850,000
Not stated
$2,250,000
N/A(7)
N/A(2)
$2,540,000
$7,970,000
$1,560,000
$9,800,000
Not stated
LTD: 42.00%
STD: 5.00%
Equity: 53.00%
Not stated
LTD: 30.63%
STD: 6.26%
Equity: 43.49%
Other: 19.62%
LTD: 30.75%
Equity: 46.67%
Other: 22.58%
LTD: 21.91%
STD: 23.50%
Equity: 54.59%
Not stated
9.75% (4)
10.75%(4)
Not Stated (5)
10.80%(4)
10.85%(4)
10.25%(4), (6)
Not Stated
TJCA Refund Status
associated with
customer rates
(1) The effective date of the order approving the settlement agreement, which adjusted the rates originally approved on June 4, 2009.
Refunded
Refunded
Reserved
Reserved
Reserved
Reserved
Refunded
Chesapeake Utilities Corporation 2018 Form 10-K Page 4
(2)The Maryland PSC approved a declining return on equity that will result in a decline in our rates.
(3)Other components of capital structure include customer deposits, deferred income taxes and tax credits.
(4) Allowed after-tax return on equity.
(5) The terms of the agreement include revenue neutral rates for the first year (December 1, 2016 through November 30, 2017), followed by a schedule of rate
reductions in subsequent years based upon the projected rate of propane to natural gas conversions.
(6) The terms of the settlement agreement for the FPU electric division limited proceeding with the Florida PSC prescribed an authorized return on equity
range of 9.25 to 11.25 percent, with a mid-point of 10.25 percent. The FPU electric division cannot file for a base rate increase prior to December 2019,
unless its allowed return on equity is below the authorized range and it experiences an unanticipated and unforeseen event that impacts the annual revenue
requirement in excess of $800,000 within any contiguous four-month period.
(7) The Maryland PSC approved a rate reduction for Maryland division effective May 1, 2018, related to the enactment of the TJCA.
* LTD-Long-term debt; STD-Short-term debt
The following table presents surcharge and other mechanisms that have been approved by the respective PSC for our regulated
energy distribution businesses. These include Delaware’s surcharge to expand natural gas service in eastern Sussex County;
Maryland's surcharge to fund natural gas conversions and system improvement in Worcester County; Florida’s GRIP surcharge
which provides accelerated recovery of the costs of replacing older portions of the natural gas distribution system to improve
safety and reliability and Florida electric distribution operation's limited proceeding.
Operation(s)/Division(s)
Delaware division
Maryland division
Sandpiper Energy
FPU and Central Florida Gas natural gas divisions
FPU electric division
Weather
Jurisdiction
Infrastructure
mechanism
Revenue
normalization
Delaware
Maryland
Maryland
Florida
Florida
No
No
Yes
Yes
Yes
No
Yes
Yes
No
No
Weather variations directly influence the volume of natural gas and electricity sold and delivered to residential and commercial
customers for heating and cooling and changes in volumes delivered impact the revenue generated from these customers. Natural
gas volumes are highest during the winter months, when residential and commercial customers use more natural gas for heating.
Demand for electricity is highest during the summer months, when more electricity is used for cooling. We measure the relative
impact of weather using degree-days. A degree-day is the measure of the variation in the weather based on the extent to which
the average daily temperature falls above or below 65 degrees Fahrenheit. Each degree of temperature below 65 degrees
Fahrenheit is counted as one heating degree-day, and each degree of temperature above 65 degrees Fahrenheit is counted as one
cooling degree-day. Normal heating and cooling degree-days are based on the most recent 10-year average.
Competition
Natural Gas Distribution
While our natural gas distribution operations do not compete directly with other distributors of natural gas for residential and
commercial customers in our service areas, we do compete with other natural gas suppliers and alternative fuel providers for
sales to industrial customers. Large customers could bypass our natural gas distribution systems and connect directly to interstate
transmission pipelines, and we compete in all aspects of our natural gas business with alternative energy sources, including
electricity, oil, propane and renewables. The most effective means to compete against alternative fuels are lower prices, superior
reliability and flexibility of service. Natural gas historically has maintained a price advantage in the residential, commercial
and industrial markets, and reliability of natural gas supply and service has been excellent. In addition, we provide flexible
pricing to our large customers to minimize fuel switching and protect these volumes and their contributions to the profitability
of our natural gas distribution operations.
Natural Gas Transmission
Our natural gas transmission business competes with other pipeline companies to provide service to large industrial, generating
and distribution customers, primarily in the northern portion of Delmarva and in Florida.
Chesapeake Utilities Corporation 2018 Form 10-K Page 5
Electric Distribution
While our electric distribution operations do not compete directly with other distributors of electricity for residential and
commercial customers in our service areas, we do compete with other electricity suppliers and alternative fuel providers for
sales to industrial customers. Some of our large industrial customers may be capable of generating their own electricity, and
we structure rates, flexibility and service offerings to retain these customers in order to retain their business and contributions
to the profitability of our electric distribution operations.
Supplies, Transmission and Storage
Natural Gas Distribution
Our natural gas distribution operations purchase natural gas from marketers and producers and maintain contracts for
transportation and storage with several interstate pipeline companies to meet projected customer demand requirements. We
believe that our supply and capacity strategy will adequately meet our customers’ needs over the next several years.
The Delmarva natural gas distribution systems are directly connected to Eastern Shore’s pipeline, which has connections to the
other pipelines that provide us with transportation and storage. These operations can also use propane-air and liquefied natural
gas peak-shaving equipment to serve customers. Our Delmarva operations receive a fee, which we share with our customers,
from our natural gas marketing subsidiary, PESCO, who optimizes the transportation, storage and natural gas supply for these
operations under a three-year contract.
We have a contract with an unaffiliated party to supply propane for customers of our Sandpiper system in Maryland who have
not yet converted to natural gas. Under the contract, we are committed to purchase approximately 932,000 gallons of propane
annually at either a fixed per-gallon or a local indexed-index-based price. The contract expires in May 2019, at which time, we
can purchase the propane from our propane subsidiary or the external markets directly.
Our Florida natural gas distribution operation uses Peninsula Pipeline and the Peoples Gas System division of Tampa Electric
Company ("Peoples Gas") to transport natural gas where there is no direct connection with FGT.
A summary of our pipeline capacity contracts follows:
Division
Delmarva Natural Gas Distribution
Florida Natural Gas Distribution
Pipeline
Eastern Shore
Columbia Gas(1)
Transco(1)
TETLP(1)
Gulfstream(2)
FGT
Peninsula Pipeline
Peoples Gas
Maximum Daily Firm
Transportation Capacity
(Dts)
Contract
Expiration Date
122,652
15,160
27,551
50,000
10,000
41,909 - 73,317
137,500
2,660
2019-2028
2020-2024
2019-2028
2027
2022
2020-2041
2033-2048
2024-2035
(1) Transcontinental Gas Pipe Line Company, LLC ("Transco"), Columbia Gas Transmission, LLC ("Columbia Gas") and Texas Eastern Transmission, LP
("TETLP") are interstate pipelines interconnected with Eastern Shore's pipeline
(2) Pursuant to a capacity release program approved by the Florida PSC, all of the capacity under this agreement has been released to various third parties,
including PESCO. Under the terms of these capacity release agreements, Chesapeake Utilities is contingently liable to Gulfstream should any party, that
acquired the capacity through release, fail to pay the capacity charge.
Eastern Shore has three agreements with Transco for a total of 7,292 Dts/d of firm daily storage injection and withdrawal
entitlements and total storage capacity of 288,003 Dts. These agreements expire on various dates between 2019 and 2023. Eastern
Shore retains these firm storage services in order to provide swing transportation service and firm storage service to customers
requesting such services.
Chesapeake Utilities Corporation 2018 Form 10-K Page 6
Electric Distribution
Our Florida electric distribution operation purchases wholesale electricity under the power supply contracts summarized below:
Counterparty
Area Served by Contract Contracted Amount (MW) Contract Expiration Date
Gulf Power Company
FPL
Eight Flags
Rayonier
WestRock Company
Northwest Florida
Northeast Florida
Northeast Florida
Northeast Florida
Northwest Florida
Full Requirement*
Full Requirement*
21.0
1.7 to 3.0
As-available
*The counter party is obligated to provide us with the electricity to meet our customers’ demand, which may vary.
2019
2024
2036
2036
N/A
Unregulated Energy
The following table presents net income for the year ended December 31, 2018 and total assets as of December 31, 2018, for
our Unregulated Energy segment by operation and area served:
Operations
Area Served
Net Income
Total Assets
(in thousands)
Propane Operations (Sharp, FPU and Flo-
gas)
Delaware, Maryland, Virginia,
Pennsylvania, Florida
$
6,443
$
Energy Transmission (Aspire Energy)
Energy Generation (Eight Flags)
Ohio
Florida
Energy Services (PESCO)
Marlin Gas Services (1)
Other
Appalachian Basin, Mid-Atlantic,
Southeast, Western Pennsylvania
Southeast and Midwest
Other
3,620
1,657
(1,288)
(186)
393
86,989
85,733
10,895
55,021
14,046
2,884
255,568
Total
(1) In December 2018, Marlin Gas Services, LLC (“Marlin Gas Services”), our newly created subsidiary, acquired the assets of Marlin Gas Transport, Inc.
("Marlin Gas Transport"). The net loss reported is a result of the costs of consummating the acquisition exceeding the margin generated for approximately
half of December 2018.
10,639
$
$
Propane Operations
Our propane operations sell propane to residential, commercial/industrial, wholesale and AutoGas customers, in the Mid-Atlantic
region, through Sharp Energy, Inc. and Sharpgas, Inc., and in Florida through FPU and Flo-gas. We deliver to and bill our
propane customers based on two primary customer types: bulk delivery customers and metered customers. Bulk delivery
customers receive deliveries into tanks at their location. We invoice and record revenues for these customers at the time of
delivery. Metered customers are either part of an underground propane distribution system or have a meter installed on the tank
at their location. We invoice and recognize revenue for these customers based on their consumption as dictated by scheduled
meter reads. As a member of AutoGas Alliance, we install and support propane vehicle conversion systems for vehicle fleets
and provide onsite fueling infrastructure.
Chesapeake Utilities Corporation 2018 Form 10-K Page 7
Propane Operations - Operational Highlights
For the year ended December 31, 2018, operating revenues, volumes sold and average number of customers by customer class
for our Mid-Atlantic and Florida propane operations were as follows:
Operating Revenues (in thousands)
Volumes (in thousands of gallons)
Average Number of Customers (2)
Mid-Atlantic
Florida
Mid-Atlantic
Florida
Mid-Atlantic
Florida
Residential bulk
$ 27,090
26% $ 6,799
Residential metered
Commercial bulk
Commercial metered
Wholesale
AutoGas
Other (1)
Total
9,933
23,431
—
31,469
4,238
6,160
10%
23%
—%
31%
4%
6%
5,037
5,393
2,127
1,165
—
761
32%
24%
25%
10%
5%
—%
4%
10,483
4,157
14,360
—
28,680
3,104
—
17%
7%
24%
—%
47%
5%
—%
1,547
905
2,550
820
944
—
—
23% 25,870
66% 10,312
13%
38%
12%
14%
—%
—%
9,123
4,201
—
31
85
—
23%
11%
—%
<1%
<1%
—%
6,034
971
280
8
—
—
59%
34%
6%
1%
<1%
—%
—%
$102,321
100% $ 21,282
100%
60,784
100%
6,766
100% 39,310
100% 17,605
100%
(1) Operating revenues from "Other" sources include revenues from customer loyalty programs; delivery, service and appliance fees; and unbilled revenues.
(2) Average number of customers is based on a twelve-month average for the year ended December 31, 2018.
Competition
Our propane operations compete with national and local independent companies primarily on the basis of price and service.
Propane is generally a cheaper fuel for home heating than oil and electricity but more expensive than natural gas. Our propane
operations are largely concentrated in areas that are not currently served by natural gas distribution systems.
Supplies, Transportation and Storage
We purchase propane from major oil companies and independent natural gas liquids producers. Propane is transported by truck
and rail to our bulk storage facilities in Delaware, Maryland, Florida, Pennsylvania and Virginia, which have a total storage
capacity of 7.1 million gallons. Deliveries are made from these facilities by truck to tanks located on customers’ premises or to
central storage tanks that feed our underground propane distribution systems. While propane supply has traditionally been
adequate, significant fluctuations in weather, closing of refineries and disruption in supply chains, could cause temporary
reductions in available supplies.
Weather
Propane revenues are affected by seasonal variations in temperature and weather conditions, which directly influence the volume
of propane used by our customers. Our propane revenues are typically highest during the winter months when propane is used
for heating. Sustained warmer-than-normal temperatures will tend to reduce propane use, while sustained colder-than-normal
temperatures will tend to increase consumption.
Unregulated Energy Transmission (Aspire Energy)
Aspire Energy owns approximately 2,700 miles of natural gas pipeline systems in 40 counties in Ohio. The majority of Aspire
Energy’s revenues are derived from long-term supply agreements with Columbia Gas of Ohio and Consumers Gas Cooperative
("CGC"), which together serve more than 21,000 end-use customers. Aspire Energy purchases natural gas to serve these customers
from conventional producers in the Marcellus and Utica natural gas production areas. In addition, Aspire Energy earns revenue
by gathering and processing natural gas for customers.
Chesapeake Utilities Corporation 2018 Form 10-K Page 8
For the twelve-month period ended December 31, 2018, Aspire Energy's operating revenues and deliveries by customer type
were as follows:
Supply to Columbia Gas of Ohio
Supply to CGC
Supply to Marketers - affiliated
Supply to Marketers - unaffiliated
Other (including natural gas gathering and processing)
Operating revenues
(in thousands) % of Total
$
13,429
38%
12,530
2,654
3,918
2,876
35%
8%
11%
8%
Total
$
35,407
100%
Energy Generation (Eight Flags)
Deliveries
(in thousands Dts)
% of Total
2,538
1,611
1,013
1,328
141
6,631
38%
25%
15%
20%
2%
100%
Eight Flags generates electricity and steam at its CHP plant located on Amelia Island, Florida. The plant is powered by natural
gas transported by Peninsula Pipeline and our Florida natural gas distribution operation and produces approximately 21 MW of
electricity and 75,000 pounds per hour of steam. Eight Flags sells the electricity generated from the plant to our Florida electric
distribution operation and sells the steam to the customer who owns the site on which the plant is located both under separate
20-year contracts.
Energy Services (PESCO)
PESCO competes with utilities and third-party marketers to sell natural gas and related services directly to commercial and
industrial customers. PESCO delivers the natural gas it sells to customers through affiliated and non-affiliated natural gas
distribution systems and pipelines and bills customers directly or through the billing services of the natural gas distribution
utility that delivers the gas to PESCO’s customer. PESCO manages a portion of the natural gas transportation and storage capacity
for our Delmarva natural gas distribution operations under three-year asset management agreements that expire on March 31,
2020.
The following table summarizes PESCO's operating revenues by region in 2018:
Appalachian Basin
Mid-Atlantic
Southeast
Western Pennsylvania
Total
Marlin Gas Services
Operating Revenues
(in thousands)
% of Total
$
$
34,713
127,148
59,077
37,775
258,713
13%
49%
23%
15%
100%
In December 2018, Marlin Gas Services, our newly created subsidiary, acquired certain operating assets of Marlin Gas Transport,
a supplier of mobile compressed natural gas utility and pipeline solutions. Marlin Gas Services provides a temporary solution
for gas pipeline and gas distribution systems while safety and integrity work is being performed. The assets purchased have
the capacity to transport more than 7 billion cubic feet of natural gas annually using one of the largest fleets of tube trailers
dedicated to the transportation of compressed natural gas (“CNG”). The acquisition will allow us to offer solutions to address
supply interruption scenarios and provide other unique applications where pipeline supplies are not available or cannot meet
customer requirements. Operating revenues and net income generated from the date of acquisition through the year ended
December 31, 2018 were immaterial.
Chesapeake Utilities Corporation 2018 Form 10-K Page 9
Other Businesses and Eliminations
Other businesses and eliminations consists primarily of subsidiaries that own real estate leased to affiliates, eliminations of inter-
segment revenue and corporate costs which are not directly attributable to a specific business unit. See Item 8, Financial
Statements and Supplementary Data (Note 6, Segment Information, in the consolidated financial statements) for more
information.
Environmental Matters
See Item 8, Financial Statements and Supplementary Data (see Note 20, Environmental Commitments and Contingencies, in
the consolidated financial statements).
Employees
As of December 31, 2018, we had a total of 983 employees, 119 of whom are union employees represented by two labor unions:
the International Brotherhood of Electrical Workers and the United Food and Commercial Workers Union. The collective
bargaining agreements with these labor unions expire in 2019.
Executive Officers
Set forth below are the names, ages, and positions of our executive officers with their recent business experience. The age of
each officer is as of the filing date of this report.
Name
Jeffry M. Householder
Age
61
Officer
Since
2010
Beth W. Cooper
52
2005
James F. Moriarty
61
2015
Stephen C. Thompson
58
1997
Offices Held During the Past Five Years
President (January 1, 2019 - present)
Chief Executive Officer (January 1, 2019 - present)
Director (January 1, 2019 - present)
President of FPU (June 2010 - February 26, 2019)
Executive Vice President (Beginning February 26, 2019)
Chief Financial Officer (September 2008 - present)
Senior Vice President (September 2008 - February 26, 2019)
Assistant Corporate Secretary (March 2015 - present)
Corporate Secretary (June 2005 - March 2015)
Executive Vice President (Beginning February 26, 2019)
General Counsel & Corporate Secretary (March 2015 - present)
Chief Policy and Risk Officer (Beginning February 26, 2019)
Senior Vice President (February 2017 - February 26, 2019)
Vice President (March 2015 - February 2017)
Senior Vice President (September 2004 - present)
President, Eastern Shore (January 1997 - present)
President and Chief Operating Officer, Sandpiper (May 2014 -
present)
Vice President (May 1997 - September 2004)
Available Information on Corporate Governance Documents
Our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and other reports and
amendments to these reports that we file with or furnish to the SEC are available free of charge at our website, www.chpk.com,
as soon as reasonably practicable after we electronically file these reports with, or furnish these reports to the SEC. The content
of this website is not part of this report.
In addition, the following documents are available free of charge on our website, www.chpk.com:
• Business Code of Ethics and Conduct applicable to all employees, officers and directors;
• Code of Ethics for Financial Officers;
• Corporate Governance Guidelines;
• Charters for the Audit Committee, Compensation Committee, Investment Committee, and Corporate Governance
Committee of the Board of Directors; and
• Corporate Governance Guidelines on Director Independence.
Any of these reports or documents may also be obtained by writing to: Corporate Secretary; c/o Chesapeake Utilities Corporation,
909 Silver Lake Boulevard, Dover, DE 19904.
Chesapeake Utilities Corporation 2018 Form 10-K Page 10
ITEM 1A. RISK FACTORS.
The following is a discussion of the primary factors that may affect the operations and/or financial performance of our regulated
and unregulated energy businesses. Refer to the section entitled Item 7, Management’s Discussion and Analysis of Financial
Condition and Results of Operations of this report for an additional discussion of these and other related factors that affect our
operations and/or financial performance.
FINANCIAL RISKS
Instability and volatility in the financial markets could negatively impact access to capital at competitive rates, which could
affect our ability to implement our strategic plan, undertake improvements and make other investments required for our future
growth.
Our business strategy includes the continued pursuit of growth and requires capital investment in excess of cash flow from
operations. As a result, the successful execution of our strategy is dependent upon access to equity and debt at reasonable costs.
Our ability to issue new debt and equity capital and the cost of equity and debt are greatly affected by our financial performance
and the conditions of the financial markets. In addition, our ability to obtain adequate and cost-effective debt depends on our
credit ratings. A downgrade in our current credit ratings could negatively impact our access to and cost of debt. If we are not
able to access capital at competitive rates, our ability to implement our strategic plan, undertake improvements and make other
investments required for our future growth may be limited.
PESCO is exposed to market risks beyond our control, which could adversely affect our financial results and capital
requirements.
PESCO is subject to market risks beyond our control, including market liquidity and commodity price volatility. Although we
maintain a risk management policy, we may not be able to offset completely the price risk associated with volatile commodity
prices, which could lead to volatility in earnings. Physical trading also has price risk on any net open positions at the end of each
trading day, as well as volatility resulting from (i) intra-day fluctuations of natural gas prices, and (ii) daily price movements
between the time natural gas is purchased or sold for future delivery and the time the related purchase or sale is economically
hedged. The determination of our net open position at the end of any trading day requires us to make assumptions as to future
circumstances, including the use of natural gas by our customers in relation to anticipated market positions. Because the price risk
associated with any net open position at the end of such day may increase if the assumptions are not realized, we review these
assumptions daily. Net open positions may increase volatility in our financial condition or results of operations if market prices
move in a significantly favorable or unfavorable manner, because the changes in fair value of trading contracts are immediately
recognized as profits or losses for financial accounting purposes. This volatility may occur, with a resulting increase or decrease
in earnings or losses, even though the expected profit margin is essentially unchanged from the date the transactions were
consummated.
PESCO is exposed to the credit risk of its counterparties.
PESCO extends credit to counterparties and continually monitors and manages collections aggressively. There is risk that PESCO
may not be able to collect amounts owed to it. If the counterparty to such a transaction fails to perform, and any underlying
collateral is inadequate, we could experience financial losses, which would negatively impact our results of operations.
PESCO is dependent upon the availability of credit to successfully operate its business.
PESCO depends upon credit to buy natural gas for resale or to trade. If financial market conditions or the financial condition of
our Company declines, then the cost of credit could increase or become unavailable, which might adversely affect our results of
operations, cash flows and financial condition.
Fluctuations in propane gas prices could negatively affect results of operations.
We adjust the price of the propane we sell based on changes in our cost of purchasing propane. However, if the market does not
allow us to increase propane sales prices to compensate fully for fluctuations in purchased gas costs, our results of operations
and earnings could be negatively affected.
If we fail to comply with our debt covenant obligations, we could experience adverse financial consequences that could affect
our liquidity and ability to borrow funds.
Chesapeake Utilities Corporation 2018 Form 10-K Page 11
Our long-term debt obligations, term loans, the Revolver and our committed short-term lines of credit contain financial covenants
related to debt-to-capital ratios and interest-coverage ratios. Failure to comply with any of these covenants could result in an
event of default which, if not cured or waived, could result in the acceleration of outstanding debt obligations or the inability to
borrow under certain credit agreements. Any such acceleration could cause a material adverse change in our financial condition.
Increases in interest rates may adversely affect our results of operations and cash flows.
Increases in interest rates could increase the cost of future debt issuances. Absent recovery of the higher debt cost in the rates we
charge our utility customers, our earnings could be adversely affected. Increases in short-term interest rates could negatively affect
our results of operations, which depend on short-term lines of credit to finance accounts receivable and storage gas inventories
and to temporarily finance capital expenditures. Reference should be made to Item 7A, Quantitative and Qualitative Disclosures
about Market Risk for additional information.
Current market conditions could adversely impact the return on plan assets for our pension plans, which may require significant
additional funding.
Our pension plans are closed to new employees, and the future benefits are frozen. The costs of providing benefits and related
funding requirements of these plans are subject to changes in the market value of the assets that fund the plans and the discount
rates used to estimate the pension benefit obligations. The funded status of the plans and the related costs reflected in our financial
statements are affected by various factors that are subject to an inherent degree of uncertainty, particularly in the current economic
environment. Future losses of asset values and further declines in discount rates may necessitate accelerated funding of the plans
to meet minimum federal government requirements and may result in higher pension expense in future years. Adverse changes
in the benefit obligations of our pension plans may require us to record higher pension expense and fund obligations earlier than
originally planned, which would have an adverse impact on our cash flows from operations, decrease borrowing capacity and
increase interest expense.
OPERATIONAL RISKS
We are dependent upon construction of new facilities to support future growth in earnings in our natural gas and electric
distribution and natural gas transmission operations.
Construction of new facilities required to support future growth is subject to various regulatory and developmental risks, including
but not limited to: (i) our ability to obtain timely certificate authorizations, necessary approvals and permits from regulatory
agencies and on terms that are acceptable to us; (ii) potential changes in federal, state and local statutes and regulations, including
environmental requirements, that prevent a project from proceeding or increase the anticipated cost of the project; (iii) our inability
to acquire rights-of-way or land rights on a timely basis on terms that are acceptable to us; (iv) lack of anticipated future growth
in available natural gas and electricity supply; (v) insufficient customer throughput commitments; and (vi) lack of available and
qualified third-party contractors which could impact the timely construction of new facilities.
We operate in a competitive environment, and we may lose customers to competitors.
Natural Gas. Our natural gas transmission and distribution operations compete with interstate pipelines when our customers are
located close enough to a competing pipeline to make direct connections economically feasible. Our natural gas marketing
operations compete with third-party suppliers to sell natural gas to commercial and industrial customers. Customers also have
the option to switch to alternative fuels, including renewable energy sources. Failure to retain and grow our natural gas customer
base would have an adverse effect on our financial condition, cash flows and results of operations.
Electric. Our Florida electric distribution business has remained substantially free from direct competition from other electric
service providers but does face competition from other energy sources. Changes in the competitive environment caused by
legislation, regulation, market conditions, or initiatives of other electric power providers, particularly with respect to retail electric
competition, could adversely affect our results of operations, cash flows and financial condition.
Propane. Our propane operations compete with other propane distributors, primarily on the basis of service and price. Some of
our competitors have significantly greater resources. Our ability to grow the propane operations business is contingent upon
capturing additional market share, expanding into new markets, and successfully utilizing pricing programs that retain and grow
our customer base. Failure to retain and grow our customer base in our propane operations would have an adverse effect on our
results of operations, cash flows and financial condition.
Chesapeake Utilities Corporation 2018 Form 10-K Page 12
Fluctuations in weather may cause a significant variance in our earnings.
Our natural gas distribution, propane operations and natural gas transmission operations, are sensitive to fluctuations in weather
conditions, which directly influence the volume of natural gas and propane we transport, sell and deliver to our customers. A
significant portion of our natural gas distribution, propane operations and natural gas transmission revenue is derived from the
sales and deliveries to residential, commercial and industrial heating customers during the five-month peak heating season
(November through March). Other than our Maryland division and Sandpiper Energy which have revenue normalization
mechanisms, if the weather is warmer than normal, we sell and deliver less natural gas and propane to customers, and earn less
revenue, which could adversely affect our results of operations, cash flows and financial condition. Likewise, if the weather is
colder than normal, we sell and deliver more natural gas and propane to customers, and earn more revenue, which could positively
affect our results of operations, cash flows and financial condition. Variations in weather from year to year can cause our results
of operations, cash flows and financial condition to vary accordingly.
Our electric distribution operation is also affected by variations in weather conditions generally and unusually severe weather
conditions. However, electricity consumption is generally less seasonal than natural gas and propane because it is used for both
heating and cooling in our service areas.
Natural disasters, severe weather (such as a major hurricane) and acts of terrorism could adversely impact earnings.
Inherent in energy transmission and distribution activities are a variety of hazards and operational risks, such as leaks, ruptures,
fires, explosions, sabotage and mechanical problems. Natural disasters and severe weather may damage our assets, cause operational
interruptions and result in the loss of human life, all of which could negatively affect our earnings, financial condition and results
of operations. Acts of terrorism and the impact of retaliatory military and other action by the United States and its allies may lead
to increased political, economic and financial market instability and volatility in the price of natural gas, electricity and propane
that could negatively affect our operations. Companies in the energy industry may face a heightened risk of exposure to acts of
terrorism, which could affect our earnings, financial condition and results of operations. The insurance industry may also be
affected by natural disasters, severe weather and acts of terrorism; as a result, the availability of insurance covering risks against
which we and our competitors typically insure may be limited. In addition, the insurance we are able to obtain may have higher
deductibles, higher premiums and more restrictive policy terms, which could adversely affect our results of operations, financial
condition and cash flows.
Operating events affecting public safety and the reliability of our natural gas and electric distribution and transmission systems
could adversely affect our operations and increase our costs.
Our natural gas and electric operations are exposed to operational events and risks, such as major leaks, outages, mechanical
failures and breakdown, operations below the expected level of performance or efficiency, and accidents that could affect public
safety and the reliability of our distribution and transmission systems, significantly increase costs and cause loss of customer
confidence. If we are unable to recover all or some of these costs from insurance and/or customers through the regulatory process,
our results of operations, financial condition and cash flows could be adversely affected.
A security breach disrupting our operating systems and facilities or exposing confidential information may adversely affect
our reputation, disrupt our operations and increase our costs.
Security breaches of our information technology infrastructure, including cyber-attacks and cyber-terrorism, could lead to system
disruptions or cause facility shutdowns. If such an attack or security breach were to occur, our business, our earnings, results of
operation and financial condition could be adversely affected. In addition, the protection of customer, employee and Company
data is crucial to our operational security. A breach or breakdown of our systems that results in the unauthorized release of
individually identifiable customer or other sensitive data could have an adverse effect on our reputation, results of operations and
financial condition and could also materially increase our costs of maintaining our system and protecting it against future
breakdowns or breaches. We take reasonable precautions to safeguard our information systems from cyber-attacks and security
breaches; however, there is no guarantee that the procedures implemented to protect against unauthorized access to our information
systems are adequate to safeguard against all attacks and breaches.
Failure to attract and retain an appropriately qualified employee workforce could adversely affect operations.
Our ability to implement our business strategy and serve our customers depends upon our continuing ability to attract, develop
and retain talented professionals and a technically skilled workforce, and transfer the knowledge and expertise of our workforce
to new employees as our existing employees retire. Failure to hire and adequately train replacement employees, including the
transfer of significant internal historical knowledge and expertise to new employees, or the future availability and cost of contract
labor could adversely affect our ability to manage and operate our business. If we were unable to hire, train and retain appropriately
qualified personnel, our results of operations could be adversely affected.
Chesapeake Utilities Corporation 2018 Form 10-K Page 13
A strike, work stoppage or a labor dispute could adversely affect our operations.
We are party to collective bargaining agreements with labor unions at some of our Florida operations. A strike, work stoppage or
a labor dispute with a union or employees represented by a union could cause interruption to our operations and our results could
be adversely affected.
Our businesses are capital-intensive, and the increased costs and/or delays of capital projects may adversely affect our future
earnings.
Our businesses are capital-intensive and require significant investments in ongoing infrastructure projects. Our ability to complete
our infrastructure projects on a timely basis and manage the overall cost of those projects may be affected by the availability of
the necessary materials and qualified vendors. Our future earnings could be adversely affected if we are unable to manage such
capital projects effectively, or if full recovery of such capital costs is not permitted in future regulatory proceedings.
Our regulated energy business may be at risk if franchise agreements are not renewed, or new franchise agreements are not
obtained, which could adversely affect our future results or operating cash flows and financial condition.
Our regulated natural gas and electric distribution operations hold franchises in each of the incorporated municipalities that require
franchise agreements in order to provide natural gas and electricity. Ongoing financial results would be adversely impacted in
the event that franchise agreements were not renewed. If we are unable to obtain franchise agreements for new service areas,
growth in our future earnings could be negatively impacted.
Slowdowns in customer growth may adversely affect earnings and cash flows.
Our ability to increase gross margins in our natural gas, propane and electric distribution businesses is dependent upon growth in
the residential construction market, adding new commercial and industrial customers and conversion of customers to natural gas,
electricity or propane from other energy sources. Slowdowns in growth may adversely affect our gross margin, earnings and cash
flows.
Energy conservation could lower energy consumption, which would adversely affect our earnings.
Federal and state legislative and regulatory initiatives to promote energy efficiency and conservation could lower energy
consumption by our customers. In addition, higher costs of natural gas, propane and electricity may cause customers to conserve
fuel. To the extent a PSC or FERC does not allow the recovery through customer rates of the costs or lower consumption from
energy efficiency or conservation, and our propane margins cannot be increased due to market conditions, our results of operations,
cash flows and financial condition may be adversely affected.
Commodity price increases may adversely affect the operating costs and competitive positions of our natural gas, electric and
propane operations, which may adversely affect our results of operations, cash flows and financial condition.
Natural Gas/Electricity. Higher natural gas prices can significantly increase the cost of gas billed to our natural gas customers.
Increases in the cost of natural gas and other fuels used to generate electricity can significantly increase the cost of electricity
billed to our electric customers. Damage to the production or transportation facilities of our suppliers, which decreases their supply
of natural gas and electricity, could result in increased supply costs and higher prices for our customers. Such cost increases
generally have no immediate effect on our revenues and net income because of our regulated fuel cost recovery mechanisms.
However, our net income may be reduced by higher expenses that we may incur for uncollectible customer accounts and by lower
volumes of natural gas and electricity deliveries when customers reduce their consumption. Therefore, increases in the price of
natural gas and other fuels can adversely affect our operating cash flows, results of operations and financial condition, as well as
the competitiveness of natural gas and electricity as energy sources.
Propane. Propane costs are subject to changes as a result of product supply or other market conditions, including weather, economic
and political factors affecting crude oil and natural gas supply or pricing. For example, weather conditions could damage production
or transportation facilities, which could result in decreased supplies of propane, increased supply costs and higher prices for
customers. Such increases in costs can occur rapidly and can negatively affect profitability. There is no assurance that we will be
able to pass on propane cost increases fully or immediately, particularly when propane costs increase rapidly. Therefore, average
retail sales prices can vary significantly from year-to-year as product costs fluctuate in response to propane, fuel oil, crude oil and
natural gas commodity market conditions. In addition, in periods of sustained higher commodity prices, declines in retail sales
volumes due to reduced consumption and increased amounts of uncollectible accounts may adversely affect net income.
Refer to Item 7A, Quantitative and Qualitative Disclosures about Market Risk for additional information.
Chesapeake Utilities Corporation 2018 Form 10-K Page 14
A substantial disruption or lack of growth in interstate natural gas pipeline transmission and storage capacity or electric
transmission capacity may impair our ability to meet customers’ existing and future requirements.
In order to meet existing and future customer demands for natural gas and electricity, we must acquire sufficient supplies of natural
gas and electricity, interstate pipeline transmission and storage capacity, and electric transmission capacity to serve such
requirements. We must contract for reliable and adequate upstream transmission capacity for our distribution systems while
considering the dynamics of the interstate pipeline and storage and electric transmission markets, our own on-system resources,
as well as the characteristics of our markets. Our financial condition and results of operations would be materially and adversely
affected if the future availability of these capacities were insufficient to meet future customer demands for natural gas and electricity.
Currently, our Florida natural gas operation relies primarily on one pipeline system, FGT, for most of its natural gas supply and
transmission. Our Florida electric operation secures electricity from external parties. Any continued interruption of service from
these suppliers could adversely affect our ability to meet the demands of our customers, which could negatively impact our earnings,
financial condition and results of operations.
Our use of derivative instruments may adversely affect our results of operations.
Fluctuating commodity prices may affect our earnings and financing costs because our propane operations and PESCO use
derivative instruments, including forwards, futures, swaps, puts, and calls, to hedge price risk. While we have risk management
policies and operating procedures in place to control our exposure to risk, if we purchase derivative instruments that are not
properly matched to our exposure, our results of operations, cash flows, and financial condition may be adversely affected.
PESCO's earnings and operating cash flows are dependent upon optimization of physical assets.
PESCO’s earnings and cash flows are based, in part, on its ability to optimize its portfolio of contractual rights to utilize natural
gas storage and pipeline assets. The optimization strategy involves utilizing its physical assets to take advantage of differences
in natural gas prices between geographic locations and/or time periods. Any change among various pricing points could affect
those differentials. In addition, significant increases in the supply of natural gas for PESCO's market areas can reduce its ability
to take advantage of pricing fluctuations in the future. Changes in pricing dynamics and supply could have an adverse impact on
its optimization activities, earnings and cash flows. PESCO incurs fixed demand fees to acquire its contractual rights to storage
and transportation assets. Should commodity prices at various locations or time periods change in such a way that PESCO is not
able to recoup these costs from customers, the cash flows and earnings of PESCO and ultimately, the Company, could be adversely
impacted.
REGULATORY, LEGAL AND ENVIRONMENTAL RISKS
Regulation of our businesses, including changes in the regulatory environment, may adversely affect our results of operations,
cash flows and financial condition.
The Delaware, Maryland and Florida PSCs regulate our utility operations in those states. Eastern Shore is regulated by the FERC.
The PSCs and the FERC set the rates that we can charge customers for services subject to their regulatory jurisdiction. Our ability
to obtain timely future rate increases and rate supplements to maintain current rates of return depends on regulatory approvals,
and there can be no assurance that our regulated operations will be able to obtain such approvals or maintain currently authorized
rates of return. When earnings from our regulated utilities exceed the authorized rate of return, the respective regulatory authority
may require us to reduce our rates charged to customers in the future.
We may face certain regulatory and financial risks related to pipeline safety legislation.
We are subject to a number of legislative proposals at the federal and state level to implement increased oversight over natural
gas pipeline operations and facilities to inspect pipeline facilities, upgrade pipeline facilities, or control the impact of a breach of
such facilities. Additional operating expenses and capital expenditures may be necessary to remain in compliance. If new legislation
is adopted and we incur additional expenses and expenditures, our financial condition, results of operations and cash flows could
be adversely affected, particularly if we are not authorized through the regulatory process to recover from customers some or all
of these costs and our authorized rate of return.
We are subject to operating and litigation risks that may not be fully covered by insurance.
Our operations are subject to the operating hazards and risks normally incidental to handling, storing, transporting, transmitting
and delivering natural gas, electricity and propane to end users. From time to time, we are a defendant in legal proceedings arising
in the ordinary course of business. We maintain insurance coverage for our general liabilities in the amount of $51 million, which
we believe is reasonable and prudent. However, there can be no assurance that such insurance will be adequate to protect us from
Chesapeake Utilities Corporation 2018 Form 10-K Page 15
all material expenses related to potential future claims for personal injury and property damage or that such levels of insurance
will be available in the future at economical prices.
Costs of compliance with environmental laws may be significant.
We are subject to federal, state and local laws and regulations governing environmental quality and pollution control. These
evolving laws and regulations may require expenditures over a long period of time to control environmental effects at our current
and former operating sites, especially former MGP sites. To date, we have been able to recover, through regulatory rate mechanisms,
the costs associated with the remediation of former MGP sites. However, there is no guarantee that we will be able to recover
future remediation costs in the same manner or at all. A change in our approved rate mechanisms for recovery of environmental
remediation costs at former MGP sites could adversely affect our results of operations, cash flows and financial condition.
Further, existing environmental laws and regulations may be revised, or new laws and regulations seeking to protect the environment
may be adopted and be applicable to us. Revised or additional laws and regulations could result in additional operating restrictions
on our facilities or increased compliance costs, which may not be fully recoverable. Any such increase in compliance costs could
adversely affect our financial condition and results of operations. Compliance with these legal obligations requires us to commit
capital. If we fail to comply with environmental laws and regulations, even if such failure is caused by factors beyond our control,
we may be assessed civil or criminal penalties and fines, which could impact our financial condition and results of operations.
See Item 8, Financial Statements and Supplementary Data (see Note 20, Environmental Commitments and Contingencies, in the
consolidated financial statements).
Unanticipated changes in our tax provisions or exposure to additional tax liabilities could affect our profitability and cash
flow.
We are subject to income and other taxes in the U.S. Changes in applicable U.S. tax laws and regulations, or their interpretation
and application, including the possibility of retroactive effect, could affect our tax expense and profitability. In addition, the final
determination of any tax audits or related litigation could be materially different from our historical income tax provisions and
accruals. Changes in our tax provision or an increase in our tax liabilities, due to changes in applicable law and regulations, the
interpretation or application thereof, future changes in the tax rate or a final determination of tax audits or litigation, could have
a material adverse effect on our financial position, results of operations or cash flows.
Our business may be subject in the future to additional regulatory and financial risks associated with global warming and
climate change.
There have been a number of federal and state legislative and regulatory initiatives proposed in recent years in an attempt to control
or limit the effects of global warming and overall climate change, including greenhouse gas emissions, such as carbon dioxide.
The direction of future U.S. climate change regulation is difficult to predict given the potential for policy changes under different
Presidential administrations and Congressional leadership. The EPA may or may not continue developing regulations to reduce
greenhouse gas emissions. Even if federal efforts in this area slow, states may continue pursuing climate regulations. Any laws
or regulations that may be adopted to restrict or reduce emissions of greenhouse gases could require us to incur additional operating
costs, such as costs to purchase and operate emissions controls, to obtain emission allowances or to pay emission taxes, and reduce
demand for our products. Federal or state legislative initiatives to implement renewable portfolio standards or to further subsidize
the cost of solar, wind and other renewable power sources may change the demand for natural gas. We cannot predict the potential
impact that such laws or regulations, if adopted, may have on our future business, financial condition or financial results.
Climate changes may impact the demand for our services in the future and could result in more frequent and more severe
weather events, which ultimately could adversely affect our financial results.
Significant climatic change creates physical and financial risks for us. Our customers' energy needs vary with weather conditions,
primarily temperature and humidity. For residential customers, heating and cooling represent their largest energy use. To the
extent weather conditions may be affected by climate change, customers' energy use could increase or decrease depending on the
duration and magnitude of any changes. Changes in energy use due to weather variations may affect our financial condition
through volatility and/or decreased revenues and cash flows. Extreme weather conditions require more system backups and can
increase costs and system stresses, including service interruptions. Severe weather impacts our operating territories primarily
through thunderstorms, tornadoes, hurricanes, and snow or ice storms. Weather conditions outside of our operating territories
could also have an impact on our revenues and cash flows by affecting natural gas prices. To the extent the frequency of extreme
weather events increases, this could increase our costs of providing services. We may not be able to pass on the higher costs to
our customers or recover all the costs related to mitigating these physical risks. To the extent financial markets view climate
change and emissions of greenhouse gases as a financial risk, this could adversely affect our ability to access capital markets or
cause us to receive less favorable terms and conditions in future financings. Our business could be affected by the potential for
Chesapeake Utilities Corporation 2018 Form 10-K Page 16
lawsuits related to or against greenhouse gas emitters based on the claimed connection between greenhouse gas emissions and
climate change, which could impact adversely our business, results of operations and cash flows.
Our certificate of incorporation and bylaws may delay or prevent a transaction that stockholders would view as favorable.
Our certificate of incorporation and bylaws, as well as Delaware law, contain provisions that could delay, defer or prevent an
unsolicited change in control of Chesapeake Utilities, which may negatively affect the market price of our common stock or the
ability of stockholders to participate in a transaction in which they might otherwise receive a premium for their shares over the
then current market price. These provisions may also prevent changes in management. In addition, our Board of Directors is
authorized to issue preferred stock without stockholder approval on such terms as our Board of Directors may determine. Our
common stockholders will be subject to, and may be negatively affected by, the rights of any preferred stock that may be issued
in the future.
ITEM 1B. UNRESOLVED STAFF COMMENTS.
None.
ITEM 2. Properties.
Offices and other operational facilities
We own or lease offices and other operational facilities in the following locations: Anne Arundel, Cecil, Dorchester, Somerset,
Talbot, Wicomico, and Worcester Counties, Maryland; Kent, New Castle and Sussex Counties, Delaware; Accomack County,
Virginia; Alachua, Brevard, Broward, Hendry, Jackson, Levy, Martin, Nassau, Okeechobee, Palm Beach, Polk and Volusia Counties,
Florida; Orrville and Athens, Ohio; and Pittsburgh, Pennsylvania.
Regulated Energy Segment
We own approximately 1,594 miles of natural gas distribution mains (together with related service lines, meters and regulators)
in Kent, New Castle and Sussex Counties, Delaware; and Caroline, Cecil, Dorchester, Wicomico and Worcester Counties, Maryland.
We own approximately 2,862 miles of natural gas distribution mains (and related equipment) in Brevard, Broward, Citrus, Clay,
DeSoto, Escambia, Gadsden, Gilchrist, Hernando, Hillsborough, Holmes, Indian River, Jackson, Liberty, Marion, Martin, Nassau,
Okeechobee, Osceola, Palm Beach, Polk, Seminole, Suwannee, Union, Volusia and Washington Counties, Florida. In addition,
we have adequate gate stations to handle receipt of the gas into each of the distribution systems. We also own approximately 97
miles of underground propane distribution mains in Worcester County, Maryland and facilities in Delaware and Maryland, which
we use for propane-air injection during periods of peak demand.
We own and operate approximately 486 miles of natural gas transmission pipeline, extending from interconnects at Daleville,
Honey Brook and Parkesburg, Pennsylvania; and Hockessin, Delaware, to 96 delivery points in southeastern Pennsylvania,
Delaware and the eastern shore of Maryland and approximately 86 miles of natural gas transmission pipeline in Escambia, Indian
River, Palm Beach, Pensacola, Polk, Suwannee and Volusia Counties, Florida. We also own approximately 45 percent of the 16-
mile natural gas pipeline extending from the Duval/Nassau County line to Amelia Island in Nassau County, Florida. The remaining
55 percent of the natural gas pipeline is owned by Peoples Gas.
We own and operate approximately 16 miles of electric transmission line located in Nassau County, Florida and approximately
905 miles of electric distribution line in Calhoun, Jackson, Liberty and Nassau Counties, Florida.
Unregulated Energy Segment
We own bulk propane storage facilities, with an aggregate capacity of approximately 7.1 million gallons, in Delaware, Maryland,
Virginia, Pennsylvania, and Florida. These facilities are located on real estate that is either owned or leased by us.
We own approximately 204 miles of underground propane distribution mains in Delaware; Dorchester, Princess Anne, Queen
Anne's, Somerset, Talbot, Wicomico and Worcester Counties, Maryland; Chester and Delaware Counties, Pennsylvania; and
Alachua, Brevard, Broward, Citrus, Duval, Hillsborough, Marion, Nassau, Orange, Palm Beach, Polk, Seminole, St. Johns and
Volusia Counties, Florida.
We own 16 natural gas gathering systems and approximately 2,700 miles of pipeline in central and eastern Ohio.
Chesapeake Utilities Corporation 2018 Form 10-K Page 17
Florida liens
All of the assets owned by FPU are subject to a lien in favor of the holders of its first mortgage bond securing its indebtedness
under its Mortgage Indenture and Deed of Trust. These assets are not subject to any other lien as all other debt is unsecured. FPU
owns offices and facilities in the following locations: Alachua, Brevard, Broward, Citrus, Hendry, Jackson, Nassau, Okeechobee,
Palm Beach and Volusia Counties, Florida. The FPU assets subject to the lien also include: 1,980 miles of natural gas distribution
mains (and related equipment) in its service areas; 16 miles of electric transmission line located in Nassau County, Florida; 905
miles of electric distribution line located in Calhoun, Jackson, Liberty and Nassau Counties in Florida; propane storage facilities
with a total capacity of 1.1 million gallons, located in south, central and north Florida; and 76 miles of underground propane
distribution mains in Alachua, Brevard, Broward, Citrus, Duval, Hillsborough, Indian River, Marion, Martin, Nassau, Orange,
Palm Beach, Polk, Seminole, St. Johns and Volusia Counties, Florida.
ITEM 3. Legal Proceedings.
See Note 21, Other Commitments and Contingencies to the Consolidated Financial Statements, which is incorporated into Item
3 by reference.
ITEM 4. Mine Safety Disclosures.
Not applicable.
PART II
ITEM 5. Market for the Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity
Securities.
Common Stock Dividends and Stockholder Information:
Chesapeake Utilities common stock is traded on the New York Stock Exchange ("NYSE") under the ticker symbol CPK. As of
February 15, 2019, we had 2,253 holders of record of our common stock. We declared quarterly cash dividends on our common
stock totaling $1.4350 per share in 2018 and $1.2800 per share in 2017, and have paid a cash dividend to our common stock
stockholders for 58 consecutive years. Future dividend payments and amounts are at the discretion of our Board of Directors and
will depend on our financial condition, results of operations, capital requirements, and other factors.
Indentures to our long-term debt contain various restrictions which limit our ability to pay dividends. FPU’s first mortgage bonds,
which are due in 2022, contain a similar restriction that limits the payment of dividends by FPU. Refer to Item 8, Financial
Statements and Supplementary Data (see Note 13, Long-Term Debt, in the consolidated financial statements) for additional
information.
Chesapeake Utilities Corporation 2018 Form 10-K Page 18
Purchases of Equity Securities by the Issuer
The following table sets forth information on purchases by us or on our behalf of shares of our common stock during the quarter
ended December 31, 2018.
Period
October 1, 2018 through October 31, 2018 (1)
November 1, 2018 through November 30, 2018
December 1, 2018 through December 31, 2018
Total
Total
Number
of Shares
Purchased
Average
Price Paid
per Share
Total Number of Shares
Purchased as Part of
Publicly Announced Plans
or Programs (2)
Maximum Number of
Shares That May Yet Be
Purchased Under the Plans
or Programs (2)
430
$
83.03
—
—
—
—
430
$
83.03
—
—
—
—
—
—
—
—
(1) In October 2018, we purchased shares of common stock on the open market for the purpose of reinvesting the dividend on shares held in the Rabbi Trust
accounts for certain Directors and Senior Executives under the Non-Qualified Deferred Compensation Plan. The Non-Qualified Deferred Compensation Plan is
discussed in detail in Item 8, Financial Statements and Supplementary Data (see Note 17, Employee Benefit Plans, in the consolidated financial statements).
During the quarter, 430 shares were purchased through the reinvestment of dividends.
(2) Except for the purpose described in footnote (1), we have no publicly announced plans or programs to repurchase our shares.
Discussion of our compensation plans, for which shares of our common stock are authorized for issuance, is included in the section
of our Proxy Statement captioned “Equity Compensation Plan Information” and is incorporated herein by reference.
Chesapeake Utilities Corporation 2018 Form 10-K Page 19
Common Stock Performance Graph
The stock performance graph and table below compares cumulative total stockholder return on our common stock during the five
fiscal years ended December 31, 2018, with the cumulative total stockholder return of the Standard & Poor’s 500 Index and the
cumulative total stockholder return of select peers, which include the following companies: Atmos Energy Corporation; Black
Hills Corporation; New Jersey Resources Corporation; NiSource Inc.; Northwest Natural Holding Company; NorthWestern
Corporation; ONE Gas Inc.; RGC Resources, Inc.; South Jersey Industries, Inc.; Spire Inc.; Unitil Corporation; and Vectren
Corporation.
The comparison assumes $100 was invested on December 31, 2013 in our common stock and in each of the foregoing indices and
assumes reinvested dividends. The comparisons in the graph below are based on historical data and are not intended to forecast
the possible future performance of our common stock.
Chesapeake Utilities
Industry Index
S&P 500 Index
2013
2014
2015
2016
2017
2018
$
$
$
100
100
100
$
$
$
127
121
114
$
$
$
149
135
115
$
$
$
179
158
129
$
$
$
213
189
157
$
$
$
225
202
150
Chesapeake Utilities Corporation 2018 Form 10-K Page 20
ITEM 6. SELECTED FINANCIAL DATA
Operating
(in thousands)
Revenues
For the Year Ended December 31,
2018
2017
2016
2015
2014
Regulated Energy
Unregulated Energy
Other businesses and eliminations
Total revenues
Operating income(1)
Regulated Energy
Unregulated Energy
Other businesses and eliminations
Total operating income
Net income from continuing operations
$
$
$
$
$
345,281
420,617
(48,409)
717,489
$ 326,310
324,595
(33,322)
$ 617,583
79,215
16,901
(1,496)
94,620
56,580
$
$
$
74,584
12,631
205
87,420
58,124
$
$
$
$
$
305,689
203,778
(10,607)
498,860
71,515
14,066
402
85,983
44,675
$
$
$
$
$
301,902
162,108
(4,766)
459,244
62,137
16,437
418
78,992
41,140
Assets
(in thousands)
Gross property, plant and equipment
Net property, plant and equipment
Total assets
Capital expenditures
$ 1,569,683
$ 1,383,972
$ 1,693,671
$
282,976
$ 1,312,117
$ 1,126,027
$ 1,414,934
$ 191,103
$ 1,175,595
986,664
$
$ 1,229,219
169,376
$
$ 1,007,489
854,950
$
$ 1,067,421
195,261
$
Capitalization
(in thousands)
Stockholders’ equity
Long-term debt, net of current maturities
Total capitalization
Current portion of long-term debt
Short-term debt
Total capitalization and short-term financing
$
$
518,439
316,020
834,459
11,935
294,458
$ 1,140,852
$ 486,294
197,395
$ 683,689
9,421
250,969
$ 944,079
$
$
$
446,086
136,954
583,040
12,099
209,871
805,010
$
$
$
358,138
149,006
507,144
9,151
173,397
689,692
$
$
$
$
$
$
$
$
$
$
$
$
300,442
184,961
13,431
498,834
51,173
11,686
104
62,963
36,092
870,125
689,762
904,469
98,057
300,322
158,486
458,808
9,109
88,231
556,148
(1) During the first quarter of 2018, we adopted amended FASB guidance on the presentation of net periodic and postretirement benefit cost ("net benefit cost").
As a result, the components of net benefit cost other than the service component are presented below the subtotal of Operating Income in the consolidated statements
of income. All prior periods have been recast to conform to this presentation.
Chesapeake Utilities Corporation 2018 Form 10-K Page 21
Common Stock Data and Ratios
Basic earnings per share
Diluted earnings per share
Diluted earnings per share growth - 1 year
Diluted earnings per share growth - 5 year
Diluted earnings per share growth - 10 year
Return on average equity
Common equity / total capitalization
Common equity / total capitalization and short-term
financing
Capital expenditures / average total capitalization
Book value per share (1)
Weighted average number of shares outstanding (1)
Shares outstanding at year-end (1)
Cash dividends declared per share (1)
Dividend yield (annualized) (2)
Book yield (3)
Payout ratio (4)
Additional Data
Customers
Natural gas distribution
Electric distribution
Propane operations
Total employees
For the Year Ended December 31,
2018
2017
2016
2015
2014
$
$
3.46
3.45
$
$
(2.8)%
8.8 %
10.1 %
11.2 %
62.1 %
45.4 %
37.3 %
$
$
3.56
3.55
24.1%
12.3%
10.7%
12.6%
71.1%
51.5%
30.2%
$
$
2.87
2.86
5.1%
8.4%
9.3%
11.3%
76.5%
55.4%
31.1%
$
$
2.73
2.72
10.1%
8.4%
8.4%
12.1%
70.6%
51.9%
29.5%
2.48
2.47
9.3%
11.6%
8.5%
12.2%
65.5%
54.0%
22.9%
$
31.65
$
29.75
$
27.36
$
23.45
$
20.59
16,369,616
16,336,789
15,570,539
15,094,423
14,551,308
16,378,545
16,344,442
16,303,499
15,270,659
14,588,711
$
1.44
$
1.28
$
1.20
$
1.13
$
1.07
1.8 %
4.7 %
41.6 %
1.7%
4.5%
36.0%
1.8%
4.7%
41.8%
2.0%
5.1%
41.5%
2.2%
5.4%
43.0%
158,387
153,537
149,179
144,872
141,227
32,185
56,915
983
32,026
54,760
945
31,695
54,947
903
31,430
53,682
832
31,272
53,272
753
(1) Shares and per share amounts for all periods presented reflect the three-for-two stock split declared on July 2, 2014, effected in the form of a stock dividend,
and distributed on September 8, 2014.
(2) Dividend yield (annualized) is calculated by multiplying the fourth quarter dividend by four (4), then dividing that amount by the closing common stock price
at December 31.
(3) The book yield is calculated by dividing cash dividends declared per share (for the year) by average book value per share (for the year).
(4) The payout ratio is calculated by dividing cash dividends declared per share (for the year) by basic earnings per share.
Chesapeake Utilities Corporation 2018 Form 10-K Page 22
ITEM 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
This section provides management’s discussion of Chesapeake Utilities and its consolidated subsidiaries, with specific information
on results of operations, liquidity and capital resources, as well as discussion of how certain accounting principles affect our
financial statements. It includes management’s interpretation of our financial results and our operating segments, the factors
affecting these results, the major factors expected to affect future operating results as well as investment and financing plans. This
discussion should be read in conjunction with our consolidated financial statements and notes thereto in Item 8, Financial Statements
and Supplementary Data.
Several factors exist that could influence our future financial performance, some of which are described in Item 1A, Risk Factors.
They should be considered in connection with forward-looking statements contained in this report, or otherwise made by or on
behalf of us, since these factors could cause actual results and conditions to differ materially from those set out in such forward-
looking statements.
The following discussions and those later in the document on operating income and segment results include the use of the term
“gross margin," which is determined by deducting the cost of sales from operating revenue. Cost of sales includes the purchased
cost of natural gas, electricity and propane and the cost of labor spent on direct revenue-producing activities, and excludes
depreciation, amortization and accretion. Gross margin should not be considered an alternative to operating income or net income,
which are determined in accordance with GAAP. We believe that gross margin, although a non-GAAP measure, is useful and
meaningful to investors as a basis for making investment decisions. It provides investors with information that demonstrates the
profitability achieved by us under our allowed rates for regulated energy operations and under our competitive pricing structures
for unregulated energy operations. Our management uses gross margin in measuring our business units’ performance and has
historically analyzed and reported gross margin information publicly. Other companies may calculate gross margin in a different
manner.
Earnings per share information is presented on a diluted basis, unless otherwise noted.
OVERVIEW AND HIGHLIGHTS
(in thousands except per share data)
For the Year Ended December 31,
Operating Income:
Regulated Energy
Unregulated Energy
Other businesses and eliminations
Total Operating Income
Other expense
Interest charges
Income Before Income Taxes
Income taxes
Net Income
Earnings Per Share of Common Stock:
Basic
Diluted
2018
2017
(decrease)
2017
2016
(decrease)
Increase
Increase
$
$
$
$
79,215
16,901
(1,496)
94,620
(615)
16,431
77,574
20,994
56,580
3.46
3.45
$
$
$
$
74,584
12,631
205
87,420
(2,342)
12,645
72,433
14,309
58,124
3.56
3.55
$
$
$
$
$
4,631
4,270
(1,701)
7,200
1,727
3,786
5,141
6,685
(1,544) $
74,584
12,631
205
87,420
(2,342)
12,645
72,433
14,309
58,124
(0.10) $
(0.10) $
3.56
3.55
$
$
$
$
71,515
14,066
402
85,983
(2,328)
10,639
73,016
28,341
44,675
2.87
2.86
$
$
$
$
3,069
(1,435)
(197)
1,437
(14)
2,006
(583)
(14,032)
13,449
0.69
0.69
Chesapeake Utilities Corporation 2018 Form 10-K Page 23
2018 compared to 2017
Our net income decreased by approximately $1.5 million or $0.10 per share in 2018, compared to 2017. Key variances included:
(in thousands, except per share data)
Year ended December 31, 2017 Reported Results
Adjusting for unusual items:
Pre-tax
Income
Net
Income
Earnings
Per Share
$
72,433
$
58,124
$
3.55
Absence of the 2017 deferred tax revaluation benefit associated with the TCJA
—
(14,299)
Net impact of PESCO's MTM activity
One-time separation expenses associated with a former executive
Absence of Xeron expenses, including 2017 wind-down expenses
Increased (Decreased) Gross Margins:
Eastern Shore and Peninsula Pipeline service expansions*
Pass-through of lower taxes to regulated energy customers(1)
Natural gas growth (excluding service expansions)
Implementation of Eastern Shore settled rates*(2)
Impact on PESCO from Bomb Cyclone and pipeline capacity constraints
Colder weather
Unregulated Energy growth, excluding PESCO
Florida electric reliability/modernization program*
Florida GRIP*
Other margin for PESCO operations (net)
Decreased (Increased) Other Operating Expenses(3):
Depreciation, asset removal and property taxes
Payroll expense (increased staffing and annual salary increases)
Facilities maintenance costs
Operating expenses to increase staffing, infrastructure and risk management systems
necessary to support growth for PESCO(3)
Outside services
Vehicle, other taxes and credit collections
Other employee-related expenses
Incentive compensation costs
Outside regulatory costs
Early termination of facility lease due to consolidation of operations facilities
Interest charges
Income taxes - Regulated Energy (1)
Other income tax effects - primarily the impact of income rate tax changes on
Unregulated businesses
Net Other changes
10,423
(1,548)
829
9,704
9,709
(9,562)
5,911
5,803
(5,545)
5,046
3,140
1,516
1,277
(489)
16,806
(4,779)
(4,349)
(2,687)
(2,665)
(2,182)
(1,551)
(1,100)
734
661
(423)
(18,341)
(3,786)
—
—
758
7,602
(1,421)
605
(7,513)
7,082
(6,975)
4,311
4,233
(4,044)
3,680
2,290
1,106
932
(357)
12,258
(3,486)
(3,172)
(1,960)
(1,944)
(1,592)
(1,131)
(802)
535
482
(309)
(13,379)
(2,762)
6,975
2,323
554
Year ended December 31, 2018 Reported Results
$
77,574
$
56,580
$
(0.87)
0.46
(0.09)
0.04
(0.46)
0.43
(0.42)
0.26
0.26
(0.25)
0.22
0.14
0.07
0.06
(0.02)
0.75
(0.21)
(0.19)
(0.12)
(0.12)
(0.10)
(0.07)
(0.05)
0.03
0.03
(0.02)
(0.82)
(0.17)
0.42
0.14
0.04
3.45
(1) "Pass-through of lower taxes to regulated customers" represents the amounts that have already been refunded to customers or reserves
established for future refunds and/or reduced rates to customers in 2018 as a result of lower taxes due to the TCJA. Refunds made to
customers are offset by the corresponding decrease in federal income taxes expense and are expected to have no net impact on net income.
(2) Excluding amounts refunded to customers associated with the TCJA, which are broken out separately and discussed in footnote 1.
(3)As a result of increased staffing, infrastructure and risk management systems to support growth for PESCO, operating expenses for PESCO
are presented separately.
* See the Major Projects and Initiatives table.
Chesapeake Utilities Corporation 2018 Form 10-K Page 24
2017 compared to 2016
Our net income increased by approximately $13.4 million or $0.69 per share (diluted) in 2017, compared to 2016. Key variances
included:
(in thousands, except per share data)
Year ended December 31, 2016 Reported Results
Adjusting for unusual items:
Deferred tax revaluation benefit associated with the TCJA
Net impact of PESCO's MTM activity
Impact of winding down of Xeron operations and absence of 2016 loss
Increased (Decreased) Gross Margins:
Eight Flags' CHP plant
Implementation of new base rates for Eastern Shore*
PESCO - margin from operations
Natural gas growth (excluding service expansions)
Service expansions*
Florida GRIP*
Aspire Energy rates and management fees
Customer consumption (non-weather)
Implementation of Delaware Division settled rates
Wholesale propane sales and margins
Retail propane margins
Weather impact
Margin from Sandpiper System Improvement Rate
(Increased) Decreased Other Operating Expenses:
Payroll expense
Depreciation, asset removal and property tax costs due to new capital investments
Eight Flags' operating expenses
Benefit and other employee-related expenses
Regulatory expenses associated with rate filings
Taxes other than property and income
Credit, collections & customer service expenses
Outside services and facilities maintenance costs
Vehicle expenses
Sales and advertising expenses
Increase in outstanding shares from the September 2016 public offering
Interest charges
Change in other expense
Change in effective tax rate prior to tax reform
Net other changes
Year ended December 31, 2017 Reported Results
* See the Major Projects and Initiatives table.
Chesapeake Utilities Corporation 2018 Form 10-K Page 25
Pre-tax
Income
Net
Income
Earnings
Per Share
$
73,016
$ 44,675
$
2.86
—
(5,783)
745
14,299
(3,499)
451
(5,038)
11,251
4,901
3,693
3,365
2,818
2,062
1,902
1,125
721
831
678
645
578
291
2,965
2,234
2,036
1,705
1,248
1,151
680
436
503
410
390
350
176
23,610
14,284
(6,487)
(5,120)
(2,920)
(1,485)
(1,005)
(739)
515
417
(372)
(259)
(3,925)
(3,098)
(1,767)
(899)
(608)
(447)
311
252
(225)
(157)
(17,455)
(10,563)
—
(2,006)
(191)
—
497
—
(1,214)
(115)
(500)
306
$
72,433
$ 58,124
$
0.87
(0.21)
0.03
0.69
0.19
0.14
0.13
0.11
0.08
0.07
0.04
0.03
0.03
0.03
0.02
0.02
0.01
0.90
(0.25)
(0.20)
(0.11)
(0.06)
(0.04)
(0.03)
0.02
0.02
(0.01)
(0.01)
(0.67)
(0.16)
(0.08)
(0.01)
(0.03)
0.05
3.55
SUMMARY OF KEY FACTORS
Recently Completed and Ongoing Major Projects and Initiatives
We constantly seek and develop additional projects and initiatives in order to increase shareholder value and serve our customers.
The following table represents the major projects recently completed and currently underway. In the future, we will add new
projects to this table as such projects are initiated:
Project / Initiative
(in thousands)
Florida GRIP
Eastern Shore Rate Case (1)
Florida Electric Reliability/Modernization Pilot Program (1)
New Smyrna Beach, Florida(1)
2017 Eastern Shore System Expansion - including interim services (1)
Northwest Florida Expansion(1)
Western Palm Beach County, Florida Expansion(1)
Marlin Gas Services
Ohl propane acquisition (rolled into Sharp)
Total
Gross Margin for the Period
Year Ended December 31,
Estimate for
Fiscal
2016
2017
2018
2019
$
11,552
$
13,454
$
14,731
$
16,276
—
—
—
—
—
—
—
—
3,693
94
235
483
—
—
—
—
9,496
1,610
1,409
8,015
3,485
54
110
—
9,800
1,558
1,409
15,709
6,500
1,250
4,475
1,200
$
11,552
$
17,959
$
38,910
$
58,177
(1) Gross margin amount included in this table has not been adjusted to reflect the impact of the TCJA. The refunds and rate reductions implemented were or
will be, offset by lower federal income taxes due to the TCJA.
Ongoing Growth Initiatives
Florida GRIP
Florida GRIP is a natural gas pipe replacement program approved by the Florida PSC that allows automatic recovery, through
rates, of costs associated with the replacement of mains and services. Since the program's inception in August 2012, we have
invested $127.0 million to replace 268 miles of qualifying distribution mains, including $13.3 million and $10.8 million during
2018 and 2017, respectively. GRIP generated additional gross margin of $1.3 million in 2018 compared to 2017.
Regulatory Proceedings
Eastern Shore Rate Case
Eastern Shore's rate case settlement agreement became final on April 1, 2018, with settlement rates effective August 1, 2017 and
tax-adjusted rates effective January 1, 2018. The final agreement increases Eastern Shore's operating income by $6.6 million,
representing an estimated $9.8 million in additional margin from base rates offset by an estimated $3.2 million in lower federal
income tax expense for Eastern Shore resulting from the TCJA. In 2018, Eastern Shore recognized incremental gross margin of
approximately $5.8 million and provided rate reductions to customers totaling approximately $3.3 million as a result of the new
rates. Annual margin from the new rates in future years is estimated to be $9.8 million.
Florida Electric Reliability/Modernization Pilot Program
In December 2017, the Florida PSC approved a $1.6 million annualized rate increase, effective January 2018, for the recovery of
a limited number of investments and costs related to reliability, safety and modernization for our Florida electric distribution
system. This increase will continue through at least the last billing cycle of December 2019. For the years ended December 31,
2018 and 2017, incremental gross margin of $1.5 million and $94,000, respectively, was generated by this program.
Chesapeake Utilities Corporation 2018 Form 10-K Page 26
Major Projects and Initiatives Currently Underway
New Smyrna Beach, Florida Project
In the fourth quarter of 2017, we commenced construction of a 14-mile natural gas transmission pipeline to serve current customers
and planned customer growth in the New Smyrna Beach service area. A portion of the project was placed into service at the end
of 2017, and the remainder was placed into service during the fourth quarter of 2018. For the year ended December 31, 2018, the
project generated incremental gross margin of approximately $1.2 million compared to 2017 and is expected to generate $1.4
million in annual gross margin going forward.
2017 Eastern Shore System Expansion Project
From November 2017 to December 2018, Eastern Shore substantially completed the construction of a system expansion project
that increased its capacity by 26 percent. The first phase of the project was placed into service in December 2017. The project
generated $7.5 million in incremental gross margin, including margin from interim services, for the year ended December 31,
2018, compared to 2017. It is expected to produce annual gross margin of approximately $15.7 million in 2019, $15.8 million
from 2020 through 2022 and $13.2 million thereafter.
Northwest Florida Expansion Project
In our first expansion of natural gas service into Northwest Florida, Peninsula Pipeline completed construction of transmission
lines and the Florida natural gas division completed construction of lateral distribution lines to serve several customers. The project
was placed into service in May 2018 and generated gross margin of $3.5 million during 2018. The estimated annual gross margin
going forward is $6.5 million.
Western Palm Beach County Belvedere, Florida Project
Peninsula Pipeline is constructing four transmission lines to bring natural gas to our distribution system in West Palm Beach,
Florida. The first phase of this project was placed into service in December 2018 and generated gross margin of $54,000 during
2018. We expect to complete the remainder of the project in phases through early 2020 and estimate gross margin of $1.3 million
in 2019 and approximately $5.4 million in future years once fully in service.
Marlin Gas Services
In December 2018, Marlin Gas Services, our newly created subsidiary, acquired certain operating assets of Marlin Gas Transport,
a supplier of mobile compressed natural gas utility and pipeline solutions. The acquisition will allow us to offer solutions to
address supply interruption scenarios and provide other unique applications where pipeline supplies are not available or cannot
meet customer requirements. Operating margins generated in 2018 were immaterial, given the date of acquisition. We estimate
that this acquisition will generate additional annual gross margin of approximately $4.5 million in 2019, with potential for additional
growth in future years.
Ohl Propane Acquisition
In December 2018, Sharp Energy acquired certain propane customers and operating assets of R.F. Ohl Fuel Oil, Inc ("Ohl"). Ohl
provided propane distribution service to approximately 2,500 residential and commercial customers in Pennsylvania, located
between two of Sharp's existing districts. The customers and assets acquired from Ohl have been assimilated into Sharp. Operating
margins generated in 2018 were immaterial, given the date of acquisition. We estimate that this acquisition will generate additional
gross margin of approximately $1.2 million for Sharp in 2019, with the potential for additional growth in future years.
Future Projects Not Included in the Table Above
Del-Mar Energy Pathway Project
In September 2018, Eastern Shore filed for FERC authorization to construct the Del-Mar Energy Pathway project to provide an
additional 14,300 Dts/d of capacity to four customers. The benefits of this project include additional natural gas transmission
pipeline infrastructure in eastern Sussex County, Delaware, and the initial extension of Eastern Shore’s pipeline system into
Somerset County, Maryland. The estimated annual gross margin from this project is $5.1 million. Eastern Shore anticipates that
this project will be fully in-service by the third quarter of 2020, assuming that the FERC authorizes the project by August 2019.
Other Major Factors Influencing Gross Margin
Weather and Consumption
The impact of colder temperatures on customer consumption during 2018 contributed $5.0 million in incremental gross margin
compared to 2017. While 2018 was colder than 2017, it was still 1.1 percent warmer than normal (average across our service
territories). Normal weather during 2018 would have generated $4.0 million in additional gross margin. The following table
summarizes HDD and CDD variances from the 10-year average HDD/CDD ("Normal") for 2018, 2017 and 2016.
Chesapeake Utilities Corporation 2018 Form 10-K Page 27
HDD and CDD Information
For the Years Ended December 31,
2018
2017
Variance
2017
2016
Variance
Delmarva
Actual HDD
10-Year Average HDD ("Normal")
Variance from Normal
Florida
Actual HDD
10-Year Average HDD ("Normal")
Variance from Normal
Ohio
Actual HDD
10-Year Average HDD ("Normal")
Variance from Normal
Florida
Actual CDD
10-Year Average CDD ("Normal")
Variance from Normal
4,251
4,379
(128)
3,800
4,374
(574)
780
800
(20)
5,845
5,823
22
3,105
2,889
216
533
818
(285)
5,126
5,914
(788)
3,013
2,865
148
451
5
247
(18)
719
(91)
92
24
3,800
4,374
(574)
3,979
4,453
(474)
533
818
(285)
672
828
(156)
5,126
5,914
(788)
5,529
5,918
(389)
3,013
2,865
148
3,152
2,820
332
(179)
(79)
(139)
(10)
(403)
(4)
(139)
45
Hurricane Michael Update
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 100 percent of its customers losing
electrical service. FPU has restored service to those customers who were able to accept service following Hurricane Michael after
a significant hurricane restoration effort. In conjunction with restoring these services, FPU expended over $60 million to restore
service, which has been recorded as new plant and equipment or charged against FPU’s accumulated depreciation and storm
reserve. We have begun preparing the necessary regulatory filings to seek recovery for the costs incurred, including replenishment
of our storm reserve. In conjunction with the hurricane-related expenditures, we executed two 13-month unsecured term loans
as temporary financing, each in the amount of $30 million. The interest cost associated with these loans is LIBOR plus 75 basis
points. One of the term loans was executed in December 2018 and the other was executed in January 2019. The storm did not
have a material impact on our financial results in 2018 as services were restored to a majority of our customers, and is not expected
to have a significant impact going forward as we will be seeking recovery of the storm costs through rates.
Natural Gas Distribution Customer and Consumption Growth
Customer growth for our natural gas distribution operations generated $3.9 million in additional gross margin for the year ended
December 31, 2018 compared to the same period in 2017. The additional margin was generated from an increase of approximately
3.3 percent in the average number of residential customers served, growth in volumes delivered to commercial and industrial
customers on the Delmarva Peninsula and in Florida, and new service initiated to customers in Northwest Florida. Higher residential
and commercial customers' consumption increased gross margin by $2.0 million for the year ended December 31, 2018 compared
to the same period in 2017.
Chesapeake Utilities Corporation 2018 Form 10-K Page 28
(in thousands)
Customer growth:
Residential
Commercial and industrial, excluding new service in Northwest Florida
New service in Northwest Florida
Total customer growth
Volume growth:
Residential
Commercial and industrial
Other - including unbilled revenue
Total volume growth
Total natural gas distribution growth
Propane Operations
Increase (decrease) in
Margin in 2018
$
$
1,604
1,322
987
3,913
655
1,522
(179)
1,998
5,911
The Company's Florida and Mid-Atlantic propane distribution operations continue to pursue a multi-pronged growth plan, which
includes: targeting retail and wholesale customer growth in existing markets, both organically as well as through acquisitions;
incremental growth from recent and planned start-ups in new markets; targeting new community gas systems in high growth areas;
further build-out of the Company's propane vehicular platform through AutoGas fueling stations; and optimization of its supply
portfolio to generate incremental margin opportunities. Our propane operations and AutoGas segment install and support propane
vehicle conversion systems for vehicle fleets, including converting fleets to bi-fuel propane-powered engines and providing on-
site fueling infrastructure. These operations generated $4.9 million during the year ended December 31, 2018 compared to 2017.
Colder temperatures accounted for $2.2 million of the margin increase. The balance of the gross margin increase for the year
reflected the impact of the growth strategies discussed above, including generating approximately a four-percent increase in
customers. Supply management initiatives have also increased retail propane margins from many customer classes and margin
from wholesale propane sales.
PESCO
In 2018, PESCO's gross margin increased by $4.4 million compared to 2017. Higher gross margin in 2018 from PESCO resulted
from the following:
(in thousands)
Net impact of PESCO's MTM activity
Net impact of extraordinary costs associated with the 2018 Bomb Cyclone for the Mid-Atlantic wholesale portfolio (1)
Loss for the Mid-Atlantic retail portfolio caused by pipeline capacity constraints in January and warm weather in February
2018 (1)
Other margin for PESCO operations (net)
Total Change in Gross Margin for PESCO in 2018
Margin
Impact
$
10,423
(3,284)
(2,261)
(489)
4,389
$
(1) The 2018 Bomb Cyclone refers to the high-intensity winter storms in early January 2018 that impacted the Mid-Atlantic region and which had a residual impact
on our businesses through the month of February. The exceedingly high demand and associated impacts on pipeline capacity and gas supply in the Mid-Atlantic
region created significant, unusual costs for PESCO. While such concerted impacts will recur infrequently, our management revisited and refined its risk management
strategies and implemented additional controls.
For the year ended December 31, 2018, PESCO reported an operating loss of $1.4 million, compared to an operating loss of $3.1
million during the prior year period. The year-over-year improvement in operating loss reflects primarily increased gross margin
of $4.4 million, for the reasons discussed in the table above, which was offset by an increase of $2.7 million in other operating
expenses as a result of increased staffing, infrastructure and risk management system costs to ensure the appropriate infrastructure
is in place as PESCO executes its growth strategy.
Xeron
Xeron's operations were wound down during the second quarter of 2017. Operating income in 2018 improved by $718,000 over
2017, due to the absence of an operating loss and wind-down expenses incurred in 2017.
Chesapeake Utilities Corporation 2018 Form 10-K Page 29
REGULATED ENERGY
For the Year Ended December 31,
(in thousands)
Revenue
Cost of sales
Gross margin
Operations & maintenance
Gain from a settlement
Depreciation & amortization
Other taxes
Other operating expenses
Operating Income
2018 compared to 2017
2018
2017
Increase
(decrease)
2017
2016
Increase
(decrease)
$
$
345,281
121,828
223,453
97,741
(130)
31,876
14,751
144,238
79,215
$
$
326,310
118,769
207,541
90,931
(130)
28,554
13,602
132,957
74,584
$
$
18,971
3,059
15,912
6,810
—
3,322
1,149
11,281
4,631
$
$
326,310
118,769
207,541
90,931
(130)
28,554
13,602
132,957
74,584
$
$
305,689
109,609
196,080
86,434
(130)
25,677
12,584
124,565
71,515
$
$
20,621
9,160
11,461
4,497
—
2,877
1,018
8,392
3,069
Operating income for the Regulated Energy segment for 2018 was $79.2 million, an increase of $4.6 million, or 6.2 percent,
compared to 2017. Adjusting for the estimated pass-through of lower taxes to customers, operating income increased by $14.2
million or 19.0 percent, compared to the prior year. The growth in operating income was due to an increase in gross margin of
$15.9 million, $25.5 million adjusted for the tax pass-through, partially offset by $11.3 million in higher other operating expenses
to support the margin growth. Growth in 2018 was strong across all business units in the regulated energy segment with the most
significant contributions coming from expansions at Peninsula Pipeline and Eastern Shore, customer and consumption growth in
the natural gas distribution operations, colder weather, and safety and reliability investments in the Florida electric and gas
distribution operations.
Gross Margin
Items contributing to the year-over-year gross margin increase are listed in the following table:
(in thousands)
Eastern Shore and Peninsula Pipeline service expansions
Natural gas growth (excluding service expansions)
Implementation of Eastern Shore settled rates
Colder weather
Florida electric reliability/modernization program
Florida GRIP
Other
Total
Less: Pass-through to regulated customers of lower taxes as a result of the TCJA*
Year-over-year increase in gross margin
Margin Impact
9,709
5,911
5,803
1,788
1,516
1,277
(530)
25,474
(9,562)
15,912
$
$
*As a result of the TCJA and resulting directives by federal and state regulatory commissions, we reserved or refunded to customers of our regulated businesses
an estimated $9.6 million in 2018. In some jurisdictions, we have paid refunds to customers, while in other jurisdictions, we have established reserves until
agreements are approved and changes are made to customer rates. The reserves and lower customer rates are equal to the estimated reduction in federal income
taxes due to the TCJA and have no material impact on after-tax earnings from the Regulated Energy segment.
The following is a narrative discussion of the significant items in the foregoing table, which we believe is necessary to understand
the information disclosed in the table.
Service Expansions
The following natural gas pipeline service expansions generated additional gross margin of $9.7 million in 2018:
•
$7.5 million from Eastern Shore's services, including those provided to customers on an interim basis, in conjunction
with portions of Eastern Shore's 2017 Expansion Project that were placed in service, partially offset by the absence of
$2.0 million in short-term contracts that were replaced by long-term service agreements; and
•
$4.7 million generated by Peninsula Pipeline from the New Smyrna Beach and Northwest Pipeline Expansion Projects.
Chesapeake Utilities Corporation 2018 Form 10-K Page 30
Natural Gas Growth (excluding service expansions)
We generated increased gross margin of $5.9 million in 2018 from natural gas growth and consumption (excluding service
expansions) primarily from the following:
•
•
$2.3 million and $1.6 million, respectively, from residential and commercial customer growth in Florida and on the
Delmarva Peninsula; and
$2.0 million from higher sales volumes (consumption) on the Delmarva Peninsula and in Florida that were not driven by
weather.
Implementation of Eastern Shore's Settled Rates
Eastern Shore generated additional gross margin of $5.8 million from the implementation of new rates as a result of its rate case
filing. See Note 19, Rates and Other Regulatory Activities, to the consolidated financial statements for additional details.
Colder Weather
Temperatures during 2018 were 1.1 percent warmer than normal (average across our service territories), compared to 14.8 percent
warmer than normal (average across our service territories) during 2017. The colder weather increased usage and generated $1.8
million in additional margin for 2018.
Florida Electric Reliability/Modernization Program
This program generated incremental gross margin of $1.5 million in 2018. See Note 19, Rates and Other Regulatory Activities,
to the consolidated financial statements for additional details.
Florida GRIP
Continued investment in the Florida GRIP generated additional gross margin of $1.3 million in 2018 compared to 2017.
Impact of the TCJA on Customer Rates
Implementation of the TCJA in 2018, decreased gross margin by $9.6 million due to refunds and reserves for future refunds and/
or rate reductions to customers. The decrease in gross margin was offset by an equal reduction in federal income taxes, and,
therefore had no impact on net income. See Note 19, Rates and Other Regulatory Activities, for additional discussion of the TCJA
impact.
Other Operating Expenses
Other operating expenses increased by $11.3 million, incurred primarily to support business growth. The significant factors
contributing to the increase in other operating expenses included:
•
•
•
•
•
•
$4.2 million in higher depreciation, asset removal and property tax costs associated with recent capital investments;
$2.4 million in higher payroll expenses related to staffing and salary increases. This increase was partially offset by lower
incentive compensation costs of $737,000;
$2.2 million in higher costs related to outside services to support growth;
$1.7 million in higher facilities and maintenance costs to maintain system integrity;
$869,000 in higher vehicle, other taxes and credit collections; and
$514,000 in other employee-related expenses.
Chesapeake Utilities Corporation 2018 Form 10-K Page 31
2017 compared to 2016
Operating income for the Regulated Energy segment for 2017 was $74.6 million, an increase of $3.1 million, or 4.3 percent,
compared to 2016. The increased operating income was due to an increase in gross margin of $11.5 million, partially offset by
higher other operating expenses of $8.4 million.
Gross Margin
Items contributing to the year-over-year gross margin increase are listed in the following table:
(in thousands)
Margin Impact
Implementation of Eastern Shore rates
Natural gas growth (including customer and consumption growth but excluding service
expansions)
Eastern Shore and Peninsula Pipeline service expansions
Florida GRIP
Implementation of Delaware Division rates (2017 Settlement)
New natural gas transmission and distribution service to Eight Flags CHP plant
Other
Year-over-year increase in gross margin
$
$
3,693
2,818
2,062
1,902
831
537
(382)
11,461
The following is a narrative discussion of significant items in the foregoing table for which we have additional information that
we believe is necessary to understand the information disclosed in the table.
Implementation of Eastern Shore Rates
Eastern Shore generated additional gross margin of $3.7 million from implementation of new base rates in 2017 as a result of its
rate case filing. See Note 19, Rates and Other Regulatory Activities, to the consolidated financial statements for additional details.
Natural Gas Growth (including customer and consumption growth but excluding service expansions)
In 2017, growth in customers and consumption generated increased gross margin of $2.8 million including:
•
•
$1.6 million from a 3.8 percent increase in the average number of residential customers served by the Delmarva natural
gas distribution operations, as well as growth in the number of commercial and industrial customers served; and
$1.2 million from our Florida natural gas distribution operations' customer growth, with approximately two-thirds of the
margin growth generated from commercial and industrial customers and one-third generated from new residential
customers.
Service Expansions
We generated additional gross margin of $2.1 million in 2017 from the following natural gas services:
•
•
•
•
$1.2 million from short-term firm service available through Eastern Shore's natural gas receipt capacity from TETLP;
$433,000 from interim services provided by Eastern Shore after a portion of an expansion project was placed in service
in December 2017;
$298,000 from Eastern Shore's increased long-term firm service rates for an industrial customer in Delaware; and
$235,000 generated by Peninsula Pipeline from the New Smyrna Beach Expansion Project.
Florida GRIP
Increased investment in GRIP generated additional gross margin of $1.9 million in 2017 compared to 2016.
Implementation of Delaware Division Rates
Our Delaware Division generated additional gross margin of $831,000 as a result of its rate case settlement in 2017.
Service to Eight Flags
We generated additional gross margin of $537,000 in 2017, compared to 2016, from new natural gas transmission and distribution
services provided to Eight Flags' CHP plant.
Chesapeake Utilities Corporation 2018 Form 10-K Page 32
Other Operating Expenses
Other operating expenses increased by $8.4 million. The significant components of the increase in other operating expenses
included:
•
•
•
$4.1 million in higher depreciation, asset removal and property tax costs associated with recent capital investments;
$3.6 million in higher payroll expenses for additional personnel to support growth; and
$1.0 million in increased regulatory expenses, due primarily to costs associated with Eastern Shore’s rate case filing in
2017; which was partially offset by
$529,000 in lower credit, collection and customer services expenses.
•
UNREGULATED ENERGY
For the Year Ended December 31,
(in thousands)
Revenue
Cost of sales
Gross margin
Operations & maintenance
Depreciation & amortization
Other taxes
Other operating expenses
Operating Income
2018 Compared to 2017
2018
2017
(decrease)
2017
2016
(decrease)
Increase
Increase
$
$
420,617
336,819
83,798
54,263
8,845
3,789
66,897
16,901
$
$
324,595
252,023
72,572
48,576
7,954
3,411
59,941
12,631
$
$
96,022
84,796
11,226
5,687
891
378
6,956
4,270
$
$
324,595
252,023
72,572
48,576
7,954
3,411
59,941
12,631
$
$
203,778
138,816
64,962
42,437
6,386
2,073
50,896
14,066
$
$
120,817
113,207
7,610
6,139
1,568
1,338
9,045
(1,435)
Operating income for the Unregulated Energy segment for 2018 was $16.9 million, an increase of $4.3 million compared to 2017.
The increased operating income was due to an increase in gross margin of $11.2 million, which was partially offset by an increase
of $7.0 million in other operating expenses.
Given the impact of the MTM gain and loss recorded by PESCO in the first quarter of 2018 and fourth quarter of 2017, respectively,
and the increased staffing, infrastructure and risk management systems implemented to support PESCO's growth, the Company
is continuing to present PESCO’s 2018 results separate from the rest of its Unregulated Energy segment:
Unregulated Energy, excluding PESCO
For the Year Ended December 31,
(in thousands)
Gross margin
Depreciation, amortization and
property taxes
Other operating expenses
Operating Income
2018
2017
(decrease)
2017
2016
(decrease)
Increase
Increase
$
77,197
$
70,360
$
6,837
$
70,360
$
60,332
$
10,028
9,678
49,197
18,322
$
9,081
45,504
15,775
$
$
597
3,693
2,547
$
9,081
45,504
15,775
$
7,047
41,085
12,200
$
2,034
4,419
3,575
Chesapeake Utilities Corporation 2018 Form 10-K Page 33
Gross Margin
Items contributing to the year-over-year increase in gross margin are listed in the following table:
(in thousands)
Propane Operations
Customer growth, increased sales volumes (non-weather related) and other factors
Additional customer consumption from colder weather
Decreased margins per gallon in certain customer classes
Service, appliances and other fees
Higher wholesale propane margins and sales
Aspire Energy
Higher customer consumption from colder weather
Increase in rates effective on various dates in 2018
Other
Year-over-year increase in gross margin
Margin Impact
2,947
2,241
(977)
404
287
1,017
602
316
6,837
$
The following is a narrative discussion of the significant items in the foregoing table, which we believe is necessary to understand
the information disclosed in the table.
Propane Operations - Increased Margin Driven by Growth and Other Factors
Gross margin increased by $2.9 million, due to increased propane sales as a result of customer growth, higher sales volumes and
other factors in Florida and the Mid-Atlantic region.
Propane Operations - Increased Customer Consumption - (Weather)
Gross margin increased by $2.2 million, due primarily to increased customer consumption in the Mid-Atlantic region as a result
of colder temperatures in 2018 compared to 2017.
Aspire Energy - Increased Customer Consumption (Weather)
Gross margin increased by $1.0 million, as a result of increased natural gas delivered, due primarily to colder temperatures in 2018
when compared to temperatures in 2017.
Propane Operations - Decreased retail margins per gallon for certain customer classes
Gross margin decreased by $1.0 million, driven by lower sales prices for primarily two customer classes in response to market
conditions.
Propane Operations - Services, appliances and other fees
Gross margin increased by $404,000, from services, appliances and other fees.
Aspire Energy - Increased Margin Driven by Changes in Rates
Gross margin increased by $602,000, due primarily to changes in customer rates on various dates during 2018.
Wholesale Propane Margins
Gross margin increased by $287,000, in 2018 due to a higher realized margin per gallon and an increase in volumes delivered for
the Mid-Atlantic propane operations.
Chesapeake Utilities Corporation 2018 Form 10-K Page 34
PESCO
For the Year Ended December 31,
(in thousands)
Gross margin
Depreciation, amortization and
property taxes
Other operating expenses
Operating Income
2018
2017
(decrease)
2017
2016
(decrease)
Increase
Increase
$
6,601
$
2,212
$
4,389
$
2,212
$
4,630
$
(2,418)
604
7,418
(1,421) $
206
5,150
(3,144) $
$
398
2,268
1,723
$
206
5,150
(3,144) $
18
2,746
1,866
$
188
2,404
(5,010)
In 2018, PESCO's gross margin increased by $4.4 million compared to 2017. Higher gross margin in 2018 from PESCO resulted
from the following:
(in thousands)
Net impact of PESCO's MTM activity
Net impact of extraordinary costs associated with the 2018 Bomb Cyclone for the Mid-Atlantic wholesale portfolio (1)
Loss for the Mid-Atlantic retail portfolio caused by pipeline capacity constraints in January and warm weather in February
2018 (1)
Other margin for PESCO operations (net)
Total Change in Gross Margin for PESCO in 2018
Margin
Impact
$
10,423
(3,284)
(2,261)
(489)
4,389
$
(1) The 2018 Bomb Cyclone refers to the high-intensity winter storms in early January 2018 that impacted the Mid-Atlantic region and which had a residual
impact on our businesses through the month of February. The exceedingly high demand and associated impacts on pipeline capacity and gas supply in the
Mid-Atlantic region created significant, unusual costs for PESCO. While such concerted impacts are not expected to occur frequently, our management
revisited and refined its risk management strategies and implemented additional controls.
Other Operating Expenses
Other operating expenses increased by $7.0 million in 2018 compared to 2017. The significant components of the increase in
operating expenses included:
•
•
•
•
•
$2.7 million in higher expenses as a result of increased staffing, infrastructure and risk management system costs to
ensure the appropriate infrastructure is in place as PESCO executes its growth strategy;
$1.9 million in higher payroll expense for additional personnel to support growth and increased deliveries driven by the
colder weather in 2018 compared to 2017;
$953,000 in higher facilities maintenance costs as a result of ongoing compliance activities;
$597,000 in higher depreciation, amortization and property tax expense due to increased investments; and
$586,000 in other employee-related costs.
2017 Compared to 2016
Operating income for the Unregulated Energy segment for 2017 was $12.6 million, a decrease of $1.4 million compared to 2016.
The decreased operating income was due to an increase in gross margin of $7.6 million, which was offset by an increase of $9.0
million in other operating expenses. Gross margin and operating income, excluding the impact of the unrealized MTM loss on
energy-related derivatives, grew by $13.4 million, or 20.6 percent, and $4.3 million, or 30.9 percent, respectively, during 2017,
compared to 2016.
Chesapeake Utilities Corporation 2018 Form 10-K Page 35
Gross Margin
Items contributing to the year-over-year increase in gross margin are listed in the following table:
(in thousands)
PESCO - unrealized MTM loss
Eight Flags' CHP plant
PESCO - margin from operations
Customer consumption - weather and other
Pricing amendments to Aspire Energy's long-term sales agreements
Higher wholesale propane sales and margins
Wind-down of Xeron operations
Improved retail propane margins
Other
Year-over-year increase in gross margin
Margin Impact
(5,783)
$
4,365
3,365
2,144
1,125
678
658
645
413
7,610
$
The following is a narrative discussion of the significant items in the foregoing table, which we believe is necessary to understand
the information disclosed in the table.
Natural Gas Marketing - PESCO
PESCO's gross margin decreased by $2.4 million due primarily to $5.8 million in the unrealized MTM loss related to PESCO's
financial derivatives contracts that were valued at the end of the year; offset by $3.4 million in additional gross margin generated
primarily from: (a) providing natural gas to end users within one customer pool pursuant to a supplier agreement with Columbia
Gas of Ohio, which expired on March 31, 2017, and (b) an increase in commercial and industrial customers served in Florida.
Eight Flags
Eight Flags' CHP plant generated $4.4 million in additional gross margin in 2017 during its first full year of operations.
Customer Consumption - Weather and Other
Gross margin increased by $2.1 million due to higher, non-weather related sales volumes for our propane operations, increased
weather driven demand at Aspire Energy and for our Mid-Atlantic propane operations in the fourth quarter and for our Florida
propane operations during the third quarter of 2017.
Pricing Amendments to Aspire Energy's Long-Term Agreements
An increase in gross margin of $1.1 million due to favorable pricing amendments to several long-term sales agreements.
Wholesale Propane Sales and Margins
Gross margin increased by $678,000, due primarily to increased volumes and favorable supply management activities for the Mid-
Atlantic propane operations, as well as higher margins in Florida.
Wind-down of Xeron operations
The absence of the prior year operating loss from Xeron increased gross margin by $658,000.
Retail Propane Margins
Gross margin increased by $645,000, due primarily to favorable supply management activities and market conditions.
Other Operating Expenses
Other operating expenses increased by $9.0 million. The significant components of the increase in other operating expenses
included:
•
•
•
•
•
$2.9 million in higher operating expenses by Eight Flags' CHP plant in support of the margin generated;
$2.9 million in higher payroll costs for additional personnel to support growth;
$1.0 million in higher depreciation expense, of which $476,000 relates to lower depreciation recorded in 2016 as a result
of the final accounting for the acquisition of Aspire Energy;
$1.0 million in higher benefits and employee-related costs in 2017; and
$594,000 in higher taxes, other than property and income taxes.
Chesapeake Utilities Corporation 2018 Form 10-K Page 36
OTHER EXPENSE, NET
Other expense, net for 2018 was $615,000, and was $2.3 million for both 2017 and 2016. Other expense, net includes non-operating
investment income (expense), interest income, late fees charged to customers, gains or losses from the sale of assets for our
unregulated business and pension and other benefits expense. The decrease in other expense, net in 2018 was due to a decrease
in pension expenses when compared to 2017 and the absence of a lease termination payment which occurred in 2017.
INTEREST CHARGES
2018 Compared to 2017
Interest charges for 2018 increased by approximately $3.8 million, compared to 2017. The increase is attributable $3.3 million in
additional interest due to higher short-term borrowings and higher short-term interest rates as well as $1.5 million in additional
interest on long-term debt, largely as a result of the issuance of the Prudential Shelf Notes in April 2017 and the NYL Shelf Notes
(Series A) in May 2018. These increases were partially offset by allowance for funds used during construction ("AFUDC") of
approximately $1.1 million, primarily from Eastern Shore and Peninsula Pipeline.
2017 Compared to 2016
Interest charges for 2017 increased by approximately $2.0 million compared to 2016. The increase is attributable to $1.3 million
in additional interest due to higher short-term borrowings and $1.0 million in additional interest on long-term debt, largely as a
result of the issuance of the Prudential Shelf Notes in April 2017. The balance of the increase reflects higher interest expense on
customer deposits.
INCOME TAXES
2018 Compared to 2017
Income tax expense was $21.0 million for 2018 compared to $14.3 million for 2017. The increase in income tax expense in 2018
was due primarily to enactment of the TCJA in 2017, which resulted in a one-time decrease in our deferred income tax expense
for 2017 by $14.3 million. Our effective income tax rate was 27.1 percent in 2018 compared to 19.8 percent in 2017. Our lower
effective tax rate in 2017 resulted from the one-time revaluation of deferred tax assets and liabilities from our Unregulated Energy
business as a result of the enactment of the TCJA.
2017 Compared to 2016
Income tax expense was $14.3 million for 2017, compared to $28.3 million in 2016. Our effective tax rate was 19.8 percent in
2017, compared to 38.8 percent in 2016. The lower tax expense and effective tax rate in 2017 was due primarily to enactment of
the TCJA in December 2017.
LIQUIDITY AND CAPITAL RESOURCES
Capital expenditures for investments in new or acquired plant and equipment are our largest capital requirements. Our capital
expenditures were $283.0 million in 2018 (including the purchase of certain assets from Marlin CNG Services and Ohl), $191.1
million in 2017 (including the purchase of certain assets of ARM) and $169.4 million in 2016. The 2018 capital expenditures also
includes over $60.0 million of restoration costs associated with repairing damages caused by Hurricane Michael to our electric
distribution operations’ service territory in Northwest Florida.
Chesapeake Utilities Corporation 2018 Form 10-K Page 37
The following table shows the 2019 capital expenditure budget of $168.2 million by segment and by business line:
(dollars in thousands)
Regulated Energy:
Natural gas distribution
Natural gas transmission
Electric distribution
Total Regulated Energy
Unregulated Energy:
Propane operations
Energy transmission
Other unregulated energy
Total Unregulated Energy
Other:
Corporate and other businesses
Total Other
Total 2019 capital expenditures budget
Budget Capital Expenditures
64,143
$
66,787
5,949
136,879
11,870
8,345
1,416
21,631
9,705
9,705
168,215
$
The 2019 budget, excluding acquisitions, includes: Eastern Shore's Del-Mar Energy Pathway Project, Florida's Palm Beach County
Western Expansion and other potential pipeline projects, continued expenditures under Florida GRIP, further expansions of our
natural gas distribution and transmission systems, continued natural gas infrastructure improvement activities, information
technology systems, new buildings and facilities, and other strategic initiatives and investments.
The capital expenditure projection is subject to continuous review and modification. Actual capital requirements may vary from
the above estimates due to a number of factors, including changing economic conditions, customer growth in existing areas,
regulation, new growth or acquisition opportunities, availability of capital and other factors discussed in Item 1A. Risk Factors.
Over the last five years, our actual capital expenditures have averaged 98 percent of the initial budgeted capital expenditures for
those years.
The timing of capital expenditures can vary based on delays in regulatory approvals, securing environmental approvals and other
permits. The regulatory application and approval process has lengthened in the past few years, and we expect this trend to continue.
Capital Structure
We are committed to maintaining a sound capital structure and strong credit ratings. This commitment, along with adequate and
timely rate relief for our regulated energy operations, is intended to ensure our ability to attract capital from outside sources at a
reasonable cost, which will benefit our customers, creditors, employees and stockholders.
Our capitalization as of December 31, 2018 and 2017 follows:
(in thousands)
Long-term debt, net of current maturities
Stockholders’ equity
Total capitalization, excluding short-term borrowings
(in thousands)
Short-term debt
Long-term debt, including current maturities
Stockholders’ equity
Total capitalization, including short-term borrowings
December 31, 2018
December 31, 2017
316,020
518,439
834,459
38% $
62%
100% $
197,395
486,294
683,689
December 31, 2018
December 31, 2017
294,458
327,955
518,439
1,140,852
26% $
29%
45%
100% $
250,969
206,816
486,294
944,079
29%
71%
100%
26%
22%
52%
100%
$
$
$
$
Included in the long-term debt balances at December 31, 2018, were capital lease obligations for Sandpiper and Sharp. Sandpiper
maintains a capacity, supply and operating agreement ($620,000 of current maturities) that expires in May 2019. The capacity
Chesapeake Utilities Corporation 2018 Form 10-K Page 38
portion of this agreement is accounted for as a capital lease. Our Mid-Atlantic propane operations business unit has entered into
an agreement to rent property in Anne Arundel County Maryland which it intends to purchase during the first quarter of 2019
($690,000 of current maturities).
As of December 31, 2018, we had no restrictions on our cash balances. Chesapeake Utilities’ Senior Notes and FPU’s first mortgage
bonds contain a restriction that limits the payment of dividends or other restricted payments in excess of certain pre-determined
thresholds. As of December 31, 2018, $242.8 million of our consolidated net income and $118.2 million of FPU’s net income
were free of such restrictions.
Our target ratio of equity to total capitalization, including short-term borrowings, is between 50 and 60 percent. Including the
funds expended specifically related to the impact of Hurricane Michael, our equity to total capitalization ratio, including short-
term borrowings, was 45 percent as of December 31, 2018. Excluding the funds expended for Hurricane Michael restoration
activities, our equity to total capitalization ratio, including short-term borrowings, would have been approximately 48 percent.
As described below under “Short-Term Borrowings,” we have a Revolver with borrowing capacity of $150.0 million. To facilitate
the refinancing of a portion of the short-term borrowings into long-term debt, as appropriate, we also entered into long-term shelf
agreements for the potential private placement of unsecured senior debt as further described below under the heading “Shelf
Agreements.”
We will seek to align, as much as feasible, any long-term debt or equity issuance(s) with the commencement of service and
associated earnings for larger revenue generating capital projects and considering market conditions.
Shelf Agreements
We have entered into Shelf Agreements with Prudential, MetLife and NYL who are under no obligation to purchase any unsecured
debt. The proceeds received from the issuances of these shelf notes was used to reduce borrowings under the Revolver and/or
lines of credit and/or to fund capital expenditures. The Prudential Shelf Agreement totaling $150.0 million was entered in October
2015 and we issued $70.0 million of 3.25% 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 of which Prudential accepted our request to purchase
our unsecured debt of $100.0 million at an interest rate of 3.98% on or before August 20, 2019. The NYL Shelf Agreement totaling
$100.0 million was entered in March 2017 and we issued unsecured debt totaling $100.0 million during 2018. The NYL Shelf
Agreement was amended in November 2018 to add incremental borrowing capacity of $50.0 million. As of December 31, 2018,
we had not requested that MetLife purchase unsecured senior debt under the MetLife Shelf Agreement. The following table
summarizes our shelf agreements borrowing information at December 31, 2018:
Shelf Agreement
(in thousands)
Prudential Shelf Agreement
MetLife Shelf Agreement
NYL Shelf Agreement
Total
Total
Borrowing
Capacity
Less: Amount
of Debt
Issued
Less:
Unfunded
Commitments
Remaining
Borrowing
Capacity
$
$
220,000
$
150,000
150,000
520,000
$
(70,000) $
—
(100,000)
(170,000) $
(100,000) $
—
—
(100,000) $
50,000
150,000
50,000
250,000
The 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.
Short-Term Borrowings
Our outstanding short-term borrowings at December 31, 2018 and 2017 were $294.5 million and $251.0 million, respectively, at
weighted average interest rates of 3.44 percent and 2.42 percent, respectively.
We utilize bank lines of credit to provide funds for our short-term cash needs to meet seasonal working capital requirements and
to temporarily fund portions of our capital expenditures program. As of December 31, 2018, we had five unsecured bank credit
facilities with four financial institutions totaling $220.0 million in available credit. In addition, we have $150.0 million of additional
short-term debt capacity available under the Revolver. The terms of the Revolver are described in further detail below. None of
the unsecured bank lines of credit requires compensating balances.
Chesapeake Utilities Corporation 2018 Form 10-K Page 39
The $150.0 million Revolver is available through October 8, 2020 and is subject to the terms and conditions set forth in the Credit
Agreement. Borrowings under the Revolver will be used for general corporate purposes, including repayments of short-term
borrowings, working capital requirements and capital expenditures. Borrowings under the Revolver will bear interest at: (i) the
LIBOR Rate plus an applicable margin of 1.25 percent or less, with such margin based on total indebtedness as a percentage of
total capitalization, both as defined by the Credit Agreement, or (ii) the base rate plus 0.25 percent or less. Interest is payable
quarterly, and the Revolver is subject to a commitment fee on the unused portion of the facility. We have the right, under certain
circumstances, to extend the expiration date for up to two years on any anniversary date of the Revolver, with such extension
subject to the Lenders' approval. We may also request the Lenders to increase the Revolver to $200.0 million, with any increase
at the sole discretion of each Lender.
Our outstanding short-term borrowings at December 31, 2018 and 2017 included $4.4 million and $10.3 million, respectively, of
book overdrafts, which are not actual borrowings under the credit facilities but, if presented, would be funded through the credit
facilities and, therefore, were included in the short-term borrowings.
Our outstanding borrowings under these unsecured short-term credit facilities at December 31, 2018 and 2017 were $290.1 million
and $240.7 million, respectively. Short-term borrowings were as follows during 2018, 2017 and 2016:
(in thousands)
Average borrowings during the year
Weighted average interest rate for the year
Maximum month-end borrowings
2018
238,750
2.93%
290,103
$
$
2017
183,561
2.03%
240,671
$
$
2016
172,808
1.43%
201,311
$
$
As of December 31, 2018, we had issued $7.0 million in letters of credit to various counterparties under the Revolver. Although
the letters of credit are not included in the outstanding short-term borrowings and we do not anticipate they will be drawn upon
by the counterparties, the letters of credit reduce the available borrowings under the Revolver.
Cash Flows
The following table provides a summary of our operating, investing and financing cash flows for the years ended December 31,
2018, 2017 and 2016:
For the Year Ended December 31,
2017
2016
2018
(in thousands)
Net cash provided by (used in):
Operating activities
Investing activities
Financing activities
Net increase in cash and cash equivalents
Cash and cash equivalents—beginning of period
Cash and cash equivalents—end of period
Cash Flows Provided by Operating Activities
$
$
146,778
(286,264)
139,961
475
5,614
6,089
$
$
110,089
(186,895)
78,242
1,436
4,178
5,614
$
$
104,141
(170,037)
67,219
1,323
2,855
4,178
Changes in our cash flows from operating activities are attributable primarily to changes in net income, adjusted for non-cash
items such as depreciation and changes in deferred income taxes, and changes in working capital. Working capital requirements
are determined by a variety of factors, including weather, the prices of natural gas, electricity and propane, the timing of customer
collections, payments for purchases of natural gas, electricity and propane, and deferred fuel cost recoveries.
We normally generate a large portion of our annual net income and related increases in our accounts receivable in the first and
fourth quarters of each year due to significant volumes of natural gas and propane delivered to customers during the peak heating
season by our natural gas and propane operations and our natural gas supply, gathering and processing operation to customers
during the peak heating season. In addition, our natural gas and propane inventories, which usually peak in the fall months, are
largely drawn down in the heating season and provide a source of cash as the inventory is used to satisfy winter sales demand.
During 2018 and 2017, net cash provided by operating activities was $146.8 million and $110.1 million, respectively, resulting
in an increase in cash flows of $36.7 million. Significant operating activities generating the cash flows change were as follows:
Chesapeake Utilities Corporation 2018 Form 10-K Page 40
• Changes in net accounts receivable and accrued revenue and accounts payable and accrued liabilities increased cash flows
by $23.5 million, due primarily to the timing of the receipt of customer payments from increased revenue as well as the
timing of payments to vendors.
• Net cash flows from changes in propane inventory, storage gas and other inventories increased by approximately $11.1
million due primarily to higher levels of our inventory during 2017.
• Changes in net prepaid expenses and other current assets, customer deposits and refunds decreased cash flows by $11.7
million due primarily to higher refund activity to customers associated with the impacts of the TCJA through the
implementation of lower rates.
• Cash flows from changes in deferred income taxes resulted in an increase of $10.1 million due primarily to timing
differences associated with depreciation from increased capital expenditures compared to the prior year, offset by $8.6
million in changes in income taxes payable as a result of the impacts of the TCJA.
• Changes in net regulatory assets and liabilities increased cash flows by $5.1 million, due primarily to the change in fuel
costs collected through the various cost recovery mechanisms.
During 2017 and 2016, net cash provided by operating activities was $110.1 million and $104.1 million, respectively, resulting
in an increase in cash flows of $6.0 million. Significant operating activities generating the cash flow change were as follows:
• Net income, adjusted for reconciling activities, decreased cash flows by $485,000. Key reconciling items included: the
revaluation of deferred tax assets and liabilities of our unregulated businesses as a result of the implementation of the
TCJA, which decreased our deferred tax expense by $14.3 million, higher non-cash adjustments for depreciation and
amortization related to increased investing activities and realized losses on sales of assets.
• Net cash flows from changes in other inventories decreased by approximately $6.5 million, due primarily to purchases
of additional pipes and other construction inventory as a result of the large expansion projects then underway.
• Changes in income taxes receivable increased cash flows by $5.6 million, due to higher tax refunds as a result of increased
tax deductions associated with bonus depreciation.
• Changes in net regulatory assets and liabilities increased cash flows by $4.7 million, due primarily to the change in fuel
costs collected through the various cost recovery mechanisms and GRIP.
• Changes in net accounts receivable, accrued revenue, accounts payable and accrued liabilities increased cash flows by
$3.5 million, due primarily to higher revenues and the timing of customer payments and payments to vendors.
• Changes in net prepaid expenses and other current assets and customer deposits and refunds decreased cash flows by
$2.2 million.
Cash Flows Used in Investing Activities
Net cash used in investing activities totaled $286.3 million and $186.9 million during the year ended December 31, 2018 and
2017, respectively, resulting in a decrease in cash flows of $99.4 million. Key investing activities contributing to the cash flow
change included:
• Cash paid for capital expenditures increased by $94.4 million due in part to the costs associated with restoring equipment
and service to customers following Hurricane Michael in Florida.
• Net cash of $16.7 million was used to acquire operating assets of Ohl and Marlin CNG Services.
Net cash used in investing activities totaled $186.9 million and $170.0 million for 2017 and 2016, respectively, resulting in a
decrease in cash flows of $16.9 million in 2017. Key investing activities contributing to the cash flow change included:
• Cash paid for capital expenditures increased by $5.4 million to $175.3 million for 2017.
• Net cash of $11.9 million was used to acquire assets in various transactions during 2017, including ARM, Chipola and
Central Gas; there were no corresponding transactions in 2016.
Cash Flows Provided by Financing Activities
Net cash provided by financing activities totaled $140.0 million for the year ended December 31, 2018, compared to net cash of
$78.2 million provided by financing activities during the prior year resulted in an increase in cash flows of $61.7 million, primarily
due to the following:
• Receipt of $154.8 million in net cash proceeds from the Revolver, the Term Note and the issuance of the NYL Shelf
Notes (Series A) in May and November 2018, respectively, which increased cash flow by $85.0 million during the year
Chesapeake Utilities Corporation 2018 Form 10-K Page 41
ended December 31, 2018, compared to the prior year. For the year ended December 31, 2017, we received $69.8 million
in net proceeds from the issuance of the Prudential Shelf Notes;
•
Increased cash flows from lower repayments of short-term borrowing of $10.1 million under our line of credit arrangements
in 2018;
• Decreased cash flows of $7.7 million as a result of changes in cash overdrafts in 2018;
• Higher repayment of long-term debt and capital lease obligations of $34.4 million during the year ended December 31,
2018, compared to $12.1 million in the prior year; and
• Cash dividend payments of $22.0 million in 2018 compared to $19.9 million for 2017.
Net cash provided by financing activities totaled $78.2 million and $67.2 million for 2017 and 2016, respectively. The increase
in net cash provided by financing activities in 2017 resulted primarily from the following:
•
$69.8 million in net cash proceeds from the issuance of the Prudential Shelf Notes in 2017, offset by the payment of $3.0
million in scheduled long-term debt principal and capital lease obligations payments.
• Net cash flows decreased by $57.4 million due to the absence of proceeds related to the issuance of common stock during
the third quarter of 2016.
• Net borrowing of $39.3 million for 2017, compared to net borrowing of $32.5 million for 2016, increased cash flows by
$6.8 million. Change in cash overdrafts decreased cash flows by $2.2 million.
• Cash dividend payments of $19.9 million in 2017 compared to $17.5 million for 2016.
CONTRACTUAL OBLIGATIONS
We have the following contractual obligations and other commercial commitments as of December 31, 2018:
Contractual Obligations
(in thousands)
Long-term debt (1)
Operating leases (2)
Capital leases (2)
Purchase obligations (3)
Transmission capacity
Storage capacity
Commodities
Electric supply
Unfunded benefits (4)
Funded benefits (5)
Total Contractual Obligations
$
2019
2020-2021
2022-2023
After 2023
Total
Payments Due by Period
$
10,626
$
59,200
$
45,700
$
211,700
$
327,226
2,349
1,310
32,276
1,720
107,713
16,835
597
2,823
176,249
$
3,759
—
53,062
978
18,255
2,675
692
—
138,621
$
3,331
—
5,398
—
39,197
127,634
355
—
2,727
635
—
91,945
$
—
—
1,385
1,421
5,188
352,726
$
14,837
1,310
252,169
3,053
125,968
23,622
3,345
8,011
759,541
(1) This represents principal payments on long-term debt. See Item 8, Financial Statements and Supplementary Data, Note 13, Long-Term Debt, for additional
information. The expected interest payments on long-term debt are $12.9 million, $21.6 million, $17.5 million and $49.8 million, respectively, for the periods
indicated above. Expected interest payments for all periods total $101.8 million.
(2) See Item 8, Financial Statements and Supplementary Data, Note 15, Lease Obligations, for additional information.
(3) See Item 8, Financial Statements and Supplementary Data, Note 21, Other Commitments and Contingencies, for additional information.
(4) We have recorded long-term liabilities of $3.3 million at December 31, 2018 for unfunded post-employment and post-retirement benefit plans. The amounts
specified in the table are based on expected payments to current retirees and assume a retirement age of 62 for currently active employees. There are many factors
that would cause actual payments to differ from these amounts, including early retirement, future health care costs that differ from past experience and discount
rates implicit in calculations. See Item 8, Financial Statements and Supplementary Data, Note 17, Employee Benefit Plans, for additional information on the plans.
(5) We have recorded long-term liabilities of $17.8 million at December 31, 2018 for two qualified, defined benefit pension plans. The assets funding these plans
are in a separate trust and are not considered assets of ours or included in our balance sheets. The Contractual Obligations table above includes $1.3 million,
reflecting the payments we expect to make to the trust funds in 2017. Additional contributions may be required in future years based on the actual return earned
by the plan assets and other actuarial assumptions, such as the discount rate and long-term expected rate of return on plan assets. See Item 8, Financial Statements
and Supplementary Data, Note 17, Employee Benefit Plans, for further information on the plans. Additionally, the Contractual Obligations table above includes
deferred compensation obligations totaling $6.7 million, funded with Rabbi Trust assets in the same amount. The Rabbi Trust assets are recorded under Investments
on the consolidated balance sheets. We assume a retirement age of 65 for purposes of distribution from this account.
Chesapeake Utilities Corporation 2018 Form 10-K Page 42
OFF-BALANCE SHEET ARRANGEMENTS
We have issued corporate guarantees to certain vendors of our subsidiaries that provide for the payment of propane and natural
gas purchases in the event of the subsidiary’s default. The liabilities for these purchases are recorded in our financial statements
when incurred. The aggregate amount guaranteed at December 31, 2018 was $76.5 million, with the guarantees expiring on various
dates throughout 2019.
We have issued letters of credit totaling $7.0 million related to the electric transmission services for FPU's northwest electric
division, the firm transportation service agreement between TETLP and our Delaware and Maryland divisions, and to our current
and previous primary insurance carrier with expiration dates extending through December 2019. There were no draws on these
letters of credit as of December 31, 2018. We do not anticipate that the letters of credit will be drawn upon by the counterparties,
and we expect that the letters of credit will be renewed to the extent necessary in the future. Additional information is presented
in Item 8, Financial Statements and Supplementary Data, Note 21, Other Commitments and Contingencies in the consolidated
financial statements.
CRITICAL ACCOUNTING POLICIES
We prepare our financial statements in accordance with GAAP. Application of these accounting principles requires the use of
estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosures of
contingencies during the reporting period. We base our estimates on historical experience and on various assumptions that are
believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying
value of assets and liabilities that are not readily apparent from other sources. Since a significant portion of our businesses are
regulated and the accounting methods used by these businesses must comply with the requirements of the regulatory bodies, the
choices available are limited by these regulatory requirements. In the normal course of business, estimated amounts are subsequently
adjusted to actual results that may differ from the estimates.
Regulatory Assets and Liabilities
As a result of the ratemaking process, we record certain assets and liabilities in accordance with ASC Topic 980, Regulated
Operations, and consequently, the accounting principles applied by our regulated energy businesses differ in certain respects from
those applied by the unregulated businesses. Amounts are deferred as regulatory assets and liabilities when there is a probable
expectation that they will be recovered in future revenues or refunded to customers as a result of the regulatory process. This is
more fully described in Item 8, Financial Statements and Supplementary Data, Note 2, Summary of Significant Accounting Policies,
in the consolidated financial statements. If we were required to terminate the application of ASC Topic 980, we would be required
to recognize all such deferred amounts as a charge or a credit to earnings, net of applicable income taxes. Such an adjustment
could have a material effect on our results of operations.
Valuation of Environmental Liabilities and Related Regulatory Assets
As more fully described in Item 8, Financial Statements and Supplementary Data, Note 20, Environmental Commitments and
Contingencies, in the consolidated financial statements, we are currently participating in the investigation, assessment or
remediation of seven former MGP sites for which we have sought or will seek regulatory approval to recover through rates the
estimated costs of remediation and related activities. Amounts have been recorded as environmental liabilities based on estimates
of future costs to remediate these sites, which are provided by independent consultants.
Derivative Instruments
We use derivative and non-derivative instruments to manage the risks related to obtaining adequate supplies and the price
fluctuations of natural gas, electricity and propane. We continually monitor the use of these instruments to ensure compliance
with our risk management policies and account for them in accordance with GAAP, such that every derivative instrument is
recorded as either an asset or a liability measured at its fair value. It also requires that changes in the derivatives' fair value are
recognized in the current period earnings unless specific hedge accounting criteria are met. If these instruments do not meet the
definition of derivatives or are considered “normal purchases and normal sales,” they are accounted for on an accrual basis of
accounting.
Additionally, GAAP also requires us to classify the derivative assets and liabilities based on the lowest level of input that is
significant to the fair value measurement. Our assessment of the significance of a particular input to the fair value measurement
requires judgment and may affect the fair value of the assets and liabilities and their placement within the fair value hierarchy.
We determined that certain propane put options, call options, swap agreements and natural gas futures contracts met the specific
hedge accounting criteria. We also determined that most of our contracts for the purchase or sale of natural gas, electricity and
Chesapeake Utilities Corporation 2018 Form 10-K Page 43
propane either: (i) did not meet the definition of derivatives because they did not have a minimum purchase/sell requirement, or
(ii) were considered “normal purchases and normal sales” because the contracts provided for the purchase or sale of natural gas,
electricity or propane to be delivered in quantities that we expect to use or sell over a reasonable period of time in the normal
course of business. Accordingly, these contracts were accounted for on an accrual basis of accounting.
Additional information about our derivative instruments is disclosed in Item 8, Financial Statements and Supplementary Data,
Note 8, Derivative Instruments, in the Consolidated Financial Statements.
Operating Revenues
Revenues for our natural gas and electric distribution operations are based on rates approved by the PSC of each state in which
we operate. Customers’ base rates may not be changed without formal approval by these PSCs. However, the PSCs authorized
our regulated operations to negotiate rates, based on approved methodologies, with customers that have competitive alternatives.
Eastern Shore’s revenues are based on rates approved by the FERC. The FERC has also authorized Eastern Shore to negotiate
rates above or below the FERC-approved maximum rates, which customers can elect as an alternative to negotiated rates.
Peninsula Pipeline, our Florida intrastate pipeline subsidiary that is subject to regulation by the Florida PSC, has negotiated firm
transportation service contracts with third-party customers and with certain affiliates.
For regulated deliveries of natural gas, propane and electricity, we read meters and bill customers on monthly cycles that do not
coincide with the accounting periods used for financial reporting purposes. We accrue unbilled revenues for natural gas and
electricity that have been delivered, but not yet billed, at the end of an accounting period to the extent that they do not coincide.
We estimate the amount of the unbilled revenue by jurisdiction and customer class. A similar computation is made to accrue
unbilled revenues for propane customers with meters, such as community gas system customers and natural gas marketing
customers, whose billing cycles do not coincide with the accounting periods.
Our natural gas supply operation in Ohio recognizes revenues based on actual volumes of natural gas shipped, using contractual
rates, which are based upon index prices that are published monthly.
Eight Flags records revenues based on the amount of electricity and steam generated and sold to its customers.
Each of our natural gas distribution operations in Delaware and Maryland, our bundled natural gas distribution service in Florida
and our electric distribution operation in Florida has a fuel cost recovery mechanism. This mechanism provides a method of
adjusting billing rates to reflect changes in the cost of purchased fuel. The difference between the current cost of fuel purchased
and the cost of fuel recovered in billed rates is deferred and accounted for as either unrecovered fuel cost or amounts payable to
customers. Generally, these deferred amounts are recovered or refunded within one year.
We charge flexible rates to industrial interruptible customers on our natural gas distribution systems to compete with the price of
alternative fuel that they can use. Neither we, nor any of our interruptible customers, are contractually obligated to deliver or
receive natural gas on a firm service basis.
Allowance for Doubtful Accounts
An allowance for doubtful accounts is recorded against amounts due to reduce the net receivable balance to the amount we
reasonably expect to collect based upon our collections experience, the condition of the overall economy and our assessment of
our customers’ inability or reluctance to pay. If circumstances change, however, our estimate of the recoverability of accounts
receivable may also change. Circumstances which could affect our estimates include, but are not limited to, customer credit issues,
the level of natural gas, electricity and propane prices and general economic conditions. Accounts are written off once they are
deemed to be uncollectible.
Goodwill and Other Intangible Assets
We test goodwill for impairment at least annually in December. The annual impairment testing for 2018 indicated no impairment
of goodwill. Additional information is presented in Item 8, Financial Statements and Supplementary Data, Note 11, Goodwill and
Other Intangible Assets, in the consolidated financial statements.
Other Assets Impairment Evaluations
We periodically evaluate whether events or circumstances have occurred which indicate that long-lived assets may not be
recoverable. When events or circumstances indicate that an impairment is present, we record an impairment loss equal to the
excess of the asset's carrying value over its fair value, if any.
Chesapeake Utilities Corporation 2018 Form 10-K Page 44
Pension and Other Postretirement Benefits
Pension and other postretirement plan costs and liabilities are determined on an actuarial basis and are affected by numerous
assumptions and estimates including the market value of plan assets, estimates of the expected returns on plan assets, assumed
discount rates, the level of contributions made to the plans, and current demographic and actuarial mortality data. The assumed
discount rates and the expected returns on plan assets are the assumptions that generally have the most significant impact on the
pension costs and liabilities. The assumed discount rates, the assumed health care cost trend rates and the assumed rates of retirement
generally have the most significant impact on our postretirement plan costs and liabilities. Additional information is presented in
Item 8, Financial Statements and Supplementary Data, Note 17, Employee Benefit Plans, in the consolidated financial statements,
including plan asset investment allocation, estimated future benefit payments, general descriptions of the plans, significant
assumptions, the impact of certain changes in assumptions, and significant changes in estimates.
For 2018, actuarial assumptions include expected long-term rates of return on plan assets of 6.00 percent and 6.50 percent for
Chesapeake Utilities' pension plan and FPU’s pension plan, respectively, and discount rates of 3.50 percent and 3.75 percent for
Chesapeake Utilities' and FPU’s plans, respectively. The discount rate for each plan was determined by management considering
high-quality corporate bond rates, such as the Prudential curve index and the Citigroup yield curve, changes in those rates from
the prior year and other pertinent factors, including the expected lives of the plans and the availability of the lump-sum payment
option. A 0.25 percent decrease in the discount rate could increase our annual pension and postretirement costs by approximately
$20,000, and a 0.25 percent increase could decrease our annual pension and postretirement costs by approximately $20,000.
Actual changes in the fair value of plan assets and the differences between the actual return on plan assets and the expected return
on plan assets could have a material effect on the amount of pension benefit costs that we ultimately recognize. A 0.25 percent
change in the rate of return could change our annual pension cost by approximately $128,000 and would not have an impact on
the postretirement and Chesapeake SERP because these plans are not funded.
Tax-Related Contingency
We account for uncertainty in income taxes in the consolidated financial statements only if it is more likely than not that an
uncertain tax position is sustainable based on its technical merits. Recognizable tax positions are then measured to determine the
amount of benefit recognized in the consolidated financial statements. We recognize penalties and interest related to unrecognized
tax benefits as a component of other income.
We account for contingencies associated with taxes other than income when the likelihood of a loss is both probable and quantifiable.
In assessing the likelihood of a loss, we do not consider the existence of current inquiries, or the likelihood of future inquiries, by
tax authorities as a factor. Our assessment is based solely on our application of the appropriate statutes and the likelihood of a
loss, assuming the proper inquiries are made by tax authorities.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
INTEREST RATE RISK
Long-term debt is subject to potential losses based on changes in interest rates. Additional information about our long-term debt
is disclosed in Item 8, Financial Statements and Supplementary Data, Note 13, Long-term Debt, in the consolidated financial
statements.
COMMODITY PRICE RISK
Regulated Energy Segment
We have entered into agreements with various wholesale suppliers to purchase natural gas and electricity for resale to our customers.
Our regulated energy distribution businesses that sell natural gas or electricity to end-use customers have fuel cost recovery
mechanisms authorized by the PSCs that allow us to recover all of the costs prudently incurred in purchasing natural gas and
electricity for our customers. Therefore, our regulated energy distribution operations have limited commodity price risk exposure.
Unregulated Energy Segment
Our propane operations are exposed to commodity price risk as a result of the competitive nature of retail pricing offered to our
customers. In order to mitigate this risk, we utilize propane storage activities and forward contracts for supply.
Chesapeake Utilities Corporation 2018 Form 10-K Page 45
We can store up to approximately 7.1 million gallons of propane (including leased storage and rail cars) during the winter season
to serve our customers. Decreases in wholesale propane prices may cause the value of stored propane to decline, particularly if
we utilize fixed price forward contracts for supply. To mitigate this risk, we have implemented a Risk Management Policy that
allows our propane operation to enter into fair value hedges, cash flows hedges or other economic hedges of our inventory.
Aspire Energy is exposed to commodity price risk, primarily during the winter season, to the extent we are not successful in
balancing our natural gas purchases and sales and have to secure natural gas from alternative sources at higher spot prices. In order
to mitigate this risk, we procure firm capacity that meets our estimated volume requirements and we continue to seek out new
producers to fulfill our natural gas purchase requirements.
PESCO is a party to natural gas swap and futures contracts, which provide us the right to purchase natural gas at a fixed price at
future dates. Upon expiration, the contracts can be settled financially without taking delivery of natural gas, or PESCO can procure
natural gas and deliver it to its customers. PESCO is subject to commodity price risk on its open positions to the extent that market
prices for natural gas liquids and natural gas deviate from fixed contract settlement prices. Market risk associated with the trading
of futures and forward contracts is monitored daily for compliance with our Risk Management Policy, which includes volumetric
limits for open positions. To manage exposures to changing market prices, open positions are marked up or down to market prices
and reviewed daily by our oversight officials. In addition, the Risk Management Committee reviews periodic reports on markets,
approves any exceptions to the Risk Management Policy (within limits established by the Board of Directors) and authorizes the
use of any new types of contracts.
The following table reflects the changes in the fair market value of financial derivatives contracts related to natural gas and propane
purchases and sales from December 31, 2017 to December 31, 2018:
(in thousands)
PESCO
Sharp
Total
Balance at
December 31, 2017
Increase
(Decrease) in Fair
Market Value
Less Amounts
Settled
$
$
(6,153) $
1,192
(4,961) $
16,674
(3,376)
13,298
$
$
Balance at
December 31, 2018
(184)
(1,521)
(1,705)
(10,705) $
663
(10,042) $
There were no changes in the methods of valuations during the year ended December 31, 2018.
The following is a summary of fair market value of financial derivatives as of December 31, 2018, by method of valuation and
by maturity for each fiscal year period.
(in thousands)
Price based on ICE(1) PESCO
Price based on Mont Belvieu - Sharp
Total
2019
2020
2021
2022
Total Fair Value
$
$
(2,075)
(1,229)
(3,304)
$
$
1,817
(250)
1,567
$
$
72
(42)
30
$
$
2
—
2
$
$
(184)
(1,521)
(1,705)
(1) Intercontinental Exchange (an electronic trading platform)
WHOLESALE CREDIT RISK
The Risk Management Committee reviews credit risks associated with counterparties to commodity derivative contracts prior
to such contracts being approved.
Additional information about our derivative instruments is disclosed in Item 8, Financial Statements and Supplementary Data,
Note 8, Derivative Instruments, in the Consolidated Financial Statements.
INFLATION
Inflation affects the cost of supply, labor, products and services required for operations, maintenance and capital improvements.
To help cope with the effects of inflation on our capital investments and returns, we periodically seek rate increases from regulatory
commissions for our regulated operations and closely monitor the returns of our unregulated energy business operations. To
compensate for fluctuations in propane gas prices, we adjust propane sales prices to the extent allowed by the market.
Chesapeake Utilities Corporation 2018 Form 10-K Page 46
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of
Chesapeake Utilities Corporation
Opinions on the Consolidated Financial Statements and Internal Control over Financial Reporting
We have audited the accompanying consolidated balance sheets of Chesapeake Utilities Corporation and Subsidiaries (the
"Company") as of December 31, 2018 and 2017, the related consolidated statements of income, comprehensive income,
stockholders' equity, and cash flows, for each of the years in the three-year period ended December 31, 2018, and the related notes
and financial statement schedule listed in Item 15(a)2 (collectively referred to as the "consolidated financial statements"). We also
have audited the Company’s internal control over financial reporting as of December 31, 2018, based on criteria established in
Internal Control - Integrated Framework: (2013) issued by the Committee of Sponsoring Organizations of the Treadway
Commission (“COSO”).
In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company
as of December 31, 2018 and 2017, and the results of their operations and their cash flows for each of the years in the three-year
period ended December 31, 2018, in conformity with accounting principles generally accepted in the United States of America.
Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of
December 31, 2018, based on criteria established in Internal Control - Integrated Framework: (2013) issued by COSO.
Basis for Opinion
The Company’s management is responsible for these consolidated financial statements, for maintaining effective internal control
over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the
accompanying Management's Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion
on the Company's consolidated financial statements and an opinion on the Company’s internal control over financial reporting
based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United
States) ("PCAOB") and are required to be independent with respect to the Company in accordance with the U.S. federal securities
laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the
audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether
due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects.
Our audits of the consolidated financial statements included performing procedures to assess the risks of material misstatement
of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks.
Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial
statements. Our audits also included evaluating the accounting principles used and significant estimates made by management,
as well as evaluating the overall presentation of the consolidated financial statements. Our audit of internal control over financial
reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness
exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits
also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits
provide a reasonable basis for our opinions.
Definition and Limitations of Internal Control Over Financial Reporting
A company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability
of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted
accounting principles. A company's internal control over financial reporting includes those policies and procedures that (1) pertain
to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets
of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial
statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable
assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that
could have a material effect on the financial statements.
Chesapeake Utilities Corporation 2018 Form 10-K Page 47
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also,
projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because
of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ Baker Tilly Virchow Krause, LLP
We have served as the Company's auditor since 2007.
Philadelphia, Pennsylvania
February 26, 2019
Chesapeake Utilities Corporation 2018 Form 10-K Page 48
Chesapeake Utilities Corporation and Subsidiaries
Consolidated Statements of Income
(in thousands, except shares and per share data)
Operating Revenues
Regulated Energy
Unregulated Energy
Other businesses and eliminations
Total operating revenues
Operating Expenses
Regulated Energy cost of sales
Unregulated Energy and other cost of sales
Operations
Maintenance
Gain from a settlement
Depreciation and amortization
Other taxes
Total operating expenses
Operating Income
Other expense, net
Interest charges
Income Before Income Taxes
Income taxes
Net Income
Weighted Average Common Shares Outstanding:
Basic
Diluted
Earnings Per Share of Common Stock:
Basic
Diluted
Cash Dividends Declared Per Share of Common Stock
For the Year Ended December 31,
2017
2018
2016
$
$
$
$
$
$
345,281
420,617
(48,409)
717,489
$
326,310
324,595
(33,322)
617,583
121,828
288,913
138,441
14,387
(130)
40,802
18,628
622,869
94,620
(615)
16,431
77,574
20,994
56,580
16,369,616
16,419,870
3.46
3.45
1.4350
118,769
219,145
125,994
12,701
(130)
36,599
17,085
530,163
87,420
(2,342)
12,645
72,433
14,309
58,124
16,336,789
16,383,352
3.56
3.55
1.2800
$
$
$
$
$
$
$
$
305,689
203,778
(10,607)
498,860
109,609
128,434
115,684
12,391
(130)
32,159
14,730
412,877
85,983
(2,328)
10,639
73,016
28,341
44,675
15,570,539
15,613,091
2.87
2.86
1.2025
The accompanying notes are an integral part of the financial statements.
Chesapeake Utilities Corporation 2018 Form 10-K Page 49
Chesapeake Utilities Corporation and Subsidiaries
Consolidated Statements of Comprehensive Income
(in thousands)
Net Income
Other Comprehensive Income (Loss), net of tax:
Employee Benefits, net of tax:
For the Year Ended December 31,
2017
2018
2016
$
56,580
$
58,124
$
44,675
Amortization of prior service cost, net of tax of $(22), $(31) and
$(29), respectively
Net (loss)/gain, net of tax of $(49), $432, and $178, respectively
Cash Flow Hedges, net of tax:
Unrealized (loss)/gain on commodity contract cash flow hedges, net
of tax of $(555), $(8) and $496, respectively
Total Other Comprehensive Income (Loss)
Comprehensive Income
(55)
(108)
(1,371)
(1,534)
55,046
$
(46)
663
(11)
606
(48)
268
742
962
$
58,730
$
45,637
The accompanying notes are an integral part of the financial statements.
Chesapeake Utilities Corporation 2018 Form 10-K Page 50
Chesapeake Utilities Corporation and Subsidiaries
Consolidated Balance Sheets
Assets
(in thousands, except shares and per share data)
Property, Plant and Equipment
Regulated Energy
Unregulated Energy
Other businesses and eliminations
Total property, plant and equipment
Less: Accumulated depreciation and amortization
Plus: Construction work in progress
Net property, plant and equipment
Current Assets
Cash and cash equivalents
Accounts receivable (less allowance for uncollectible accounts of $1,108 and
$936, respectively)
Accrued revenue
Propane inventory, at average cost
Other inventory, at average cost
Regulatory assets
Storage gas prepayments
Income taxes receivable
Prepaid expenses
Derivative assets, at fair value
Other current assets
Total current assets
Deferred Charges and Other Assets
Goodwill
Other intangible assets, net
Investments, at fair value
Regulatory assets
Receivables and other deferred charges
Total deferred charges and other assets
Total Assets
As of December 31,
2018
2017
$
1,297,416
237,682
34,585
1,569,683
(294,295)
108,584
1,383,972
1,073,736
210,682
27,699
1,312,117
(270,599)
84,509
1,126,027
6,089
5,614
85,404
27,499
9,791
7,127
4,796
6,603
15,300
10,079
13,165
5,684
191,537
25,837
6,207
6,711
72,422
6,985
118,162
1,693,671
$
77,223
22,279
8,324
12,022
10,930
5,250
14,778
13,621
1,286
7,260
178,587
19,604
4,686
6,756
75,575
3,699
110,320
1,414,934
$
$
The accompanying notes are an integral part of the financial statements.
Chesapeake Utilities Corporation 2018 Form 10-K Page 51
Chesapeake Utilities Corporation and Subsidiaries
Consolidated Balance Sheets
Capitalization and Liabilities
(in thousands, except shares and per share data)
Capitalization
Stockholders’ equity
Preferred stock, par value $0.01 per share (authorized 2,000,000 shares), no
shares issued and outstanding
Common stock, par value $0.4867 per share (authorized 50,000,000 shares)
Additional paid-in capital
Retained earnings
Accumulated other comprehensive loss
Deferred compensation obligation
Treasury stock
Total stockholders’ equity
Long-term debt, net of current maturities
Total capitalization
Current Liabilities
Current portion of long-term debt
Short-term borrowing
Accounts payable
Customer deposits and refunds
Accrued interest
Dividends payable
Accrued compensation
Regulatory liabilities
Derivative liabilities, at fair value
Other accrued liabilities
Total current liabilities
Deferred Credits and Other Liabilities
Deferred income taxes
Regulatory liabilities
Environmental liabilities
Other pension and benefit costs
Deferred investment tax credits and other liabilities
Total deferred credits and other liabilities
Environmental and other commitments and contingencies (Note 20 and 21)
Total Capitalization and Liabilities
As of December 31,
2018
2017
$
— $
7,971
255,651
261,530
(6,713)
3,854
(3,854)
518,439
316,020
834,459
11,935
294,458
129,804
34,155
2,317
6,060
13,923
7,883
14,871
12,828
528,234
156,820
135,039
7,638
28,513
2,968
330,978
—
7,955
253,470
229,141
(4,272)
3,395
(3,395)
486,294
197,395
683,689
9,421
250,969
74,688
34,751
1,742
5,312
13,112
6,485
6,247
10,273
413,000
135,850
140,978
8,263
29,699
3,455
318,245
$
1,693,671
$
1,414,934
The accompanying notes are an integral part of the financial statements.
Chesapeake Utilities Corporation 2018 Form 10-K Page 52
Chesapeake Utilities Corporation and Subsidiaries
Consolidated Statements of Cash Flows
For the Year Ended December 31,
2017
2016
2018
$
56,580
$
58,124
$
44,675
40,802
8,535
21,226
5,497
429
856
2,813
—
(16,311)
2,107
2,250
(7,421)
35,907
(522)
(596)
708
(6,082)
146,778
(269,767)
782
(16,654)
(625)
(286,264)
(22,043)
(706)
—
(1,210)
(5,943)
49,432
154,819
(34,388)
139,961
475
5,614
6,089
$
36,599
8,122
11,085
3,179
(1,001)
1,577
2,490
(750)
(19,506)
(9,036)
(2,855)
(7,001)
15,596
8,110
5,513
2,488
(2,645)
110,089
(175,329)
708
(11,945)
(329)
(186,895)
(19,928)
89
(10)
(692)
1,738
39,338
69,807
(12,100)
78,242
1,436
4,178
5,614
$
32,159
7,334
31,257
695
(385)
1,887
2,367
(79)
(27,013)
(2,531)
(7,523)
(1,387)
19,599
2,466
2,065
358
(1,803)
104,141
(169,861)
174
—
(350)
(170,037)
(17,482)
811
57,360
(770)
3,920
32,526
—
(9,146)
67,219
1,323
2,855
4,178
(in thousands)
Operating Activities
Net Income
Adjustments to reconcile net income to net operating cash:
Depreciation and amortization
Depreciation and accretion included in operations expenses
Deferred income taxes, net
Realized loss on sale of assets/investments/commodity contracts
Unrealized loss (gain) on investments/commodity contracts
Employee benefits and compensation
Share-based compensation
Other, net
Changes in assets and liabilities:
Accounts receivable and accrued revenue
Propane inventory, storage gas and other inventory
Regulatory assets/liabilities, net
Prepaid expenses and other current assets
Accounts payable and other accrued liabilities
Income taxes receivable (payable)
Customer deposits and refunds
Accrued compensation
Other assets and liabilities, net
Net cash provided by operating activities
Investing Activities
Property, plant and equipment expenditures
Proceeds from sale of assets
Acquisitions, net of cash acquired
Environmental expenditures
Net cash used in investing activities
Financing Activities
Common stock dividends
Issuance of stock for Dividend Reinvestment Plan
Proceeds from issuance of common stock, net of expenses
Tax withholding payments related to net settled stock compensation
Change in cash overdrafts due to outstanding checks
Net borrowing under line of credit agreements
Proceeds from issuance of long-term debt
Repayment of long-term debt and capital lease obligation
Net cash provided by financing activities
Net Increase in Cash and Cash Equivalents
Cash and Cash Equivalents — Beginning of Period
Cash and Cash Equivalents — End of Period
Supplemental Cash Flow Disclosures (see Note 7)
$
The accompanying notes are an integral part of the financial statements.
Chesapeake Utilities Corporation 2018 Form 10-K Page 53
Chesapeake Utilities Corporation and Subsidiaries
Consolidated Statements of Stockholders' Equity
Common Stock (1)
(in thousands, except shares and per share data)
Number
of
Shares(2)
Par
Value
Additional
Paid-In
Capital
Retained
Earnings
Accumulated
Other
Comprehensive
Loss
Deferred
Compensation
Treasury
Stock
Total
Balance at December 31, 2015
15,270,659
$
7,432
$
190,311
$
166,235
$
(5,840)
$
1,883
$
(1,883)
$
358,138
Net Income
Other comprehensive loss
Dividends declared ($1.2025 per share)
Retirement savings plan and dividend
reinvestment plan
Stock issuance (3)
Share-based compensation and tax benefit (4) (5)
Treasury stock activities(2)
—
—
—
36,253
960,488
36,099
—
—
—
—
17
467
19
—
—
—
—
2,225
56,893
1,538
—
Balance at December 31, 2016
16,303,499
7,935
250,967
Net Income
Other comprehensive income
Dividends declared ($1.2800 per share)
Retirement savings plan and dividend
reinvestment plan
Stock issuance (3)
Share-based compensation and tax benefit (4) (5)
Treasury stock activities(2)
—
—
—
10,771
—
30,172
—
—
—
—
5
—
15
—
—
—
—
730
(10)
1,783
—
Balance at December 31, 2017
16,344,442
7,955
253,470
Net Income
Cumulative effect of the adoption of ASU
2014-09
Reclassification upon the adoption of ASU
2018-02
Other comprehensive income
Dividends declared ($1.4350 per share)
Dividend reinvestment plan
Share-based compensation and tax benefit (4) (5)
Treasury stock activities(2)
—
—
—
—
—
—
34,103
—
—
—
—
—
—
—
16
—
—
—
—
—
—
(3)
2,184
—
44,675
—
(18,848)
—
—
—
—
192,062
58,124
—
(21,045)
—
—
—
—
229,141
56,580
(1,498)
907
—
(23,600)
—
—
—
—
962
—
—
—
—
—
(4,878)
—
606
—
—
—
—
—
(4,272)
—
—
(907)
(1,534)
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
533
2,416
(533)
(2,416)
—
—
—
—
—
—
—
—
—
—
—
—
979
3,395
(979)
(3,395)
—
—
—
—
—
—
—
—
—
—
—
—
—
—
459
(459)
44,675
962
(18,848)
2,242
57,360
1,557
—
446,086
58,124
606
(21,045)
735
(10)
1,798
—
486,294
56,580
(1,498)
—
(1,534)
(23,600)
(3)
2,200
—
Balance at December 31, 2018
16,378,545
$
7,971
$
255,651
$
261,530
$
(6,713)
$
3,854
$
(3,854)
$
518,439
(1) 2,000,000 shares of preferred stock at $0.01 par value per share have been authorized. No shares have been issued or are outstanding; accordingly, no information has
been included in the Statements of Stockholders’ Equity. Shares of preferred stock may be issued from time to time, by authorization of our Board of Directors and at their
discretion.
(2) Includes 97,053, 90,961 and 76,745 shares at December 31, 2018, 2017 and 2016, respectively, held in a Rabbi Trust related to our Non-Qualified Deferred
Compensation Plan.
(3) On September 22, 2016, we completed a public offering of 960,488 shares of our common stock at a price per share of $62.26. The net proceeds from the sale of common
stock, after deducting underwriting commissions and expenses, were approximately $57.4 million.
(4) Includes amounts for shares issued for directors’ compensation.
(5) The shares issued under the SICP are net of shares withheld for employee taxes. For 2018, 2017 and 2016, we withheld 10,436, 10,269 and 12,031 shares, respectively,
for taxes.
The accompanying notes are an integral part of the financial statements.
Chesapeake Utilities Corporation 2018 Form 10-K Page 54
Notes to the Consolidated Financial Statements
1. ORGANIZATION AND BASIS OF PRESENTATION
Chesapeake Utilities, incorporated in 1947 in Delaware, is a diversified energy company engaged in regulated and unregulated
energy businesses.
Our regulated energy businesses consist of: (a) regulated natural gas distribution operations in central and southern Delaware,
Maryland’s eastern shore and Florida; (b) regulated natural gas transmission operations on the Delmarva Peninsula, in Pennsylvania
and in Florida; and (c) regulated electric distribution operations serving customers in northeast and northwest Florida.
Our unregulated energy businesses primarily include: (a) propane operations in the Mid-Atlantic region and Florida; (b) our natural
gas marketing operation providing natural gas supply directly to commercial and industrial customers in Florida, Delaware,
Maryland, Pennsylvania, Ohio and other states; (c) our unregulated natural gas transmission/supply operation in central and eastern
Ohio; (d) our CHP plant in Florida that generates electricity and steam; and (e) our newest subsidiary, based in Florida, that provides
mobile compressed natural gas ("CNG") utility and pipeline solutions to commercial, industrial and other utility customers
throughout the Southeast and Midwest portions of the country.
Our consolidated financial statements include the accounts of Chesapeake Utilities and its wholly-owned subsidiaries. We do not
have any ownership interest in investments accounted for using the equity method or any interest in a variable interest entity. All
intercompany accounts and transactions have been eliminated in consolidation. We have assessed and, if applicable, reported on
subsequent events through the date of issuance of these consolidated financial statements.
We reclassified certain amounts in the consolidated statement of income for the years ended December 31, 2017 and 2016 to
conform to the current year’s presentation.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Use of Estimates
The preparation of the consolidated financial statements in conformity with GAAP requires management to make estimates in
measuring assets and liabilities and related revenues and expenses. These estimates involve judgments about various future
economic factors that are difficult to predict and are beyond our control; therefore, actual results could differ from these estimates.
As additional information becomes available, or actual amounts are determined, recorded estimates are revised. Consequently,
operating results can be affected by revisions to prior accounting estimates.
Property, Plant and Equipment
Property, plant and equipment are stated at original cost less accumulated depreciation or fair value, if impaired. Costs include
direct labor, materials and third-party construction contractor costs, allowance for funds used during construction ("AFUDC"),
and certain indirect costs related to equipment and employees engaged in construction. The costs of repairs and minor replacements
are charged to expense as incurred, and the costs of major renewals and betterments are capitalized. Upon retirement or disposition
of property within the regulated businesses, the gain or loss, net of salvage value, is charged to accumulated depreciation. Upon
retirement or disposition of property owned by the unregulated businesses, the gain or loss, net of salvage value, is charged to
income. A summary of property, plant and equipment by classification as of December 31, 2018 and 2017 is provided in the
following table:
Chesapeake Utilities Corporation 2018 Form 10-K Page 55
Notes to the Consolidated Financial Statements
(in thousands)
Property, plant and equipment
Regulated Energy
Natural gas distribution - Delmarva Peninsula and Florida
Natural gas transmission - Delmarva Peninsula, Pennsylvania and Florida
Electric distribution – Florida
Unregulated Energy
Propane operations – Mid-Atlantic and Florida
Natural gas transmission – Ohio
Electricity and Steam generation – Florida
Mobile CNG utility and pipeline solutions
Other unregulated energy
Other
Total property, plant and equipment
Less: Accumulated depreciation and amortization
Plus: Construction work in progress
Net property, plant and equipment
Contributions or Advances in Aid of Construction
As of December 31,
2018
2017
$
657,630
$
537,654
102,133
589,149
384,360
100,227
123,632
108,177
70,225
35,239
7,240
1,346
34,584
1,569,683
(294,295)
108,584
66,037
35,239
—
1,229
27,699
1,312,117
(270,599)
84,509
$
1,383,972
$
1,126,027
Customer contributions or advances in aid of construction reduce property, plant and equipment, unless the amounts are refundable
to customers. Contributions or advances may be refundable to customers after a number of years based on the amount of revenues
generated from the customers or the duration of the service provided to the customers. Refundable contributions or advances are
recorded initially as liabilities. Non-refundable contributions reduce property, plant and equipment at the time of such determination.
As of December 31, 2018, 2017 and 2016, the non-refundable contributions totaled $2.8 million, $2.1 million and $1.0 million,
respectively.
AFUDC
Some of the additions to our regulated property, plant and equipment include AFUDC, which represents the estimated cost of
funds, from both debt and equity sources, used to finance the construction of major projects. AFUDC is capitalized in the applicable
rate base for ratemaking purposes when the completed projects are placed in service. During the year ended December 31, 2018,
AFUDC totaled $1.9 million, which was reflected as a reduction of interest charges. During the years ended December 31, 2017
and 2016, AFUDC was not material.
Assets Used in Leases
Property, plant and equipment for the Florida natural gas transmission operation included $1.4 million of assets, at December 31,
2018 and 2017, consisting primarily of mains, measuring equipment and regulation station equipment used by Peninsula Pipeline
to provide natural gas transmission service pursuant to a contract with a third party. This contract is accounted for as an operating
lease due to the exclusive use of the assets by the customer. The service under this contract commenced in January 2009 and
generates $264,000 in annual revenue for a 20-year term. Accumulated depreciation for these assets totaled $720,000 and $652,000
at December 31, 2018 and 2017, respectively.
Capital Lease Assets
Property, plant and equipment include capital lease assets related to: (i) a lease arrangement entered into by our Delmarva Peninsula
natural gas distribution operation associated with Sandpiper's capacity, supply and operating agreement and (ii) our Mid-Atlantic
propane operation's lease arrangement for property in Anne Arundel County Maryland which it intends to purchase during the
first quarter of 2019. Information regarding the impact of the capital leases in our financial statements is shown below. Additional
information can be found in Note 21, Other Commitments and Contingencies.
Chesapeake Utilities Corporation 2018 Form 10-K Page 56
Notes to the Consolidated Financial Statements
(in thousands)
Fair value of asset at lease inception
Less: Accumulated amortization
Capital lease asset
(in thousands)
Amortization included in fuel cost recovery mechanism
Jointly-owned Pipeline
As of December 31,
2018
2017
$
$
7,816
6,506
1,310
$
$
7,126
5,056
2,070
For the years ended December 31,
2018
$1,451
2017
$1,401
2016
$1,353
Property, plant and equipment for our Florida natural gas transmission operation also included $6.7 million of assets, at
December 31, 2018 and 2017, which consist of the 16-mile pipeline from the Duval/Nassau County line to Amelia Island in Nassau
County, Florida, jointly owned with Peoples Gas. The amount included in property, plant and equipment represents Peninsula
Pipeline’s 45-percent ownership of this pipeline. Peninsula Pipeline's share of direct expenses for the jointly-owned pipeline are
included in the operating expenses of the income statement. Accumulated depreciation for this pipeline totaled $1.4 million and
$1.3 million, at December 31, 2018 and 2017, respectively.
Asset Impairment Evaluations
We periodically evaluate whether events or circumstances have occurred, which indicate that other long-lived assets may not be
fully recoverable. The determination of whether an impairment has occurred is based on an estimate of undiscounted future cash
flows attributable to the asset, compared to the carrying value of the asset. When such events or circumstances are present, we
record an impairment loss equal to the excess of the asset's carrying value over its fair value, if any.
In May 2016, we received $650,000 in cash pursuant to a settlement agreement with a vendor related to implementation of a
customer billing system which is reflected as "Gain from a settlement" in the accompanying consolidated statements of income.
The retention of this amount is contingent upon engaging this vendor to provide agreed-upon services through May 2020.
Depreciation and Accretion Included in Operations Expenses
We compute depreciation expense for our regulated operations by applying composite, annual rates, as approved by the respective
regulatory bodies. The following table shows the average depreciation rates used for regulated operations during the years ended
December 31, 2018, 2017 and 2016:
Natural gas distribution – Delmarva Peninsula
Natural gas distribution – Florida
Natural gas transmission – Delmarva Peninsula
Natural gas transmission – Florida
Electric distribution – Florida
2018
2.5%
2.9%
2.7%
2.3%
3.4%
2017
2.5%
2.9%
2.8%
3.5%
3.4%
2016
2.5%
2.9%
2.7%
3.9%
3.5%
Chesapeake Utilities Corporation 2018 Form 10-K Page 57
For our unregulated operations, we compute depreciation expense on a straight-line basis over the following estimated useful lives
of the assets:
Notes to the Consolidated Financial Statements
Asset Description
Propane distribution mains
Propane bulk plants and tanks
Propane equipment, meters and meter installations
Measuring and regulating station equipment
Natural gas pipelines
Natural gas right of ways
CHP plant
Natural gas processing equipment
Office furniture and equipment
Transportation equipment
Structures and improvements
Other
Useful Life
10-37 years
10-40 years
5-33 years
5-37 years
45 years
Perpetual
30 years
20-25 years
3-10 years
4-20 years
5-45 years
Various
We report certain depreciation and accretion in operations expense, rather than as a depreciation and amortization expense, in the
accompanying consolidated statements of income in accordance with industry practice and regulatory requirements. Depreciation
and accretion included in operations expense consists of the accretion of the costs of removal for future retirements of utility assets,
vehicle depreciation, computer software and hardware depreciation, and other minor amounts of depreciation expense. For the
years ended December 31, 2018, 2017 and 2016, we reported $8.5 million, $8.1 million and $7.3 million, respectively, of
depreciation and accretion in operations expenses.
Regulated Operations
We account for our regulated operations in accordance with ASC Topic 980, Regulated Operations, which includes accounting
principles for companies whose rates are determined by independent third-party regulators. When setting rates, regulators often
make decisions, the economics of which require companies to defer costs or revenues in different periods than may be appropriate
for unregulated enterprises. When this situation occurs, a regulated company defers the associated costs as regulatory assets on
the balance sheet and records them as expense on the income statement as it collects revenues. Further, regulators can also impose
liabilities upon a regulated company, for amounts previously collected from customers and for recovery of costs that are expected
to be incurred in the future, as regulatory liabilities. If we were required to terminate the application of these regulatory provisions
to our regulated operations, all such deferred amounts would be recognized in the statement of income at that time, which could
have a material impact on our financial position, results of operations and cash flows.
We monitor our regulatory and competitive environments to determine whether the recovery of our regulatory assets continues to
be probable. If we determined that recovery of these assets is no longer probable, we would write off the assets against earnings.
We believe that the provisions of ASC Topic 980, Regulated Operations, continue to apply to our regulated operations and that
the recovery of our regulatory assets is probable.
Revenue Recognition
Revenues for our natural gas and electric distribution operations are based on rates approved by the PSC in each state in which
they operate. Eastern Shore’s revenues are based on rates approved by the FERC. Customers’ base rates may not be changed
without formal approval by these commissions. The PSCs, however, have authorized our regulated operations to negotiate rates,
based on approved methodologies, with customers that have competitive alternatives. The FERC has also authorized Eastern Shore
to negotiate rates above or below the FERC-approved maximum rates, which customers can elect as an alternative to FERC-
approved maximum rates.
For regulated deliveries of natural gas and electricity, we read meters and bill customers on monthly cycles that do not coincide
with the accounting periods used for financial reporting purposes. We accrue unbilled revenues for natural gas and electricity
delivered, but not yet billed, at the end of an accounting period to the extent that they do not coincide. We estimate the amount of
the unbilled revenue by jurisdiction and customer class.
All of our regulated natural gas and electric distribution operations have fuel cost recovery mechanisms, except for two utilities
that provide only unbundled delivery service (Chesapeake Utilities' Central Florida Gas division and FPU's Indiantown division).
These mechanisms allow us to adjust billing rates, without further regulatory approvals, to reflect changes in the cost of purchased
fuel. Differences between the cost of fuel purchased and delivered are deferred and accounted for as either unrecovered fuel cost
or amounts payable to customers. Generally, these deferred amounts are recovered or refunded within one year.
Chesapeake Utilities Corporation 2018 Form 10-K Page 58
Notes to the Consolidated Financial Statements
We charge flexible rates to our natural gas distribution industrial interruptible customers who can use alternative fuels. Interruptible
service imposes no contractual obligation to deliver or receive natural gas on a firm service basis.
For the unregulated propane operation business, we record revenue in the period the products are delivered and/or services are
rendered for bulk delivery customers without meters. For propane customers with meters and natural gas marketing customers
whose billing cycles do not coincide with our accounting periods, we accrue unbilled revenue for product delivered but not yet
billed and bill customers at the end of an accounting period, as we do in our regulated businesses.
Our Ohio natural gas transmission/supply operation recognizes revenues based on actual volumes of natural gas shipped using
contractual rates based upon index prices that are published monthly.
Our natural gas marketing operation recognizes revenue based on the volume of natural gas delivered to its customers.
Eight Flags records revenues based on the amount of electricity and steam generated and sold to its customers.
We report revenue taxes, such as gross receipts taxes, franchise taxes, and sales taxes, on a net basis.
Cost of Sales
Cost of sales includes the direct costs attributable to the products sold or services provided to our customers. These costs
include primarily the variable commodity cost of natural gas, electricity and propane, costs of pipeline capacity needed to
transport and store natural gas, transmission costs for electricity, costs to gather and process natural gas, costs to transport
propane to/from our storage facilities or our mobile CNG equipment to customer locations, and steam and electricity generation
costs. Depreciation expense is not included in cost of sales.
Operations and Maintenance Expenses
Operations and maintenance expenses include operations and maintenance salaries and benefits, materials and supplies, usage of
vehicles, tools and equipment, payments to contractors, utility plant maintenance, customer service, professional fees and other
outside services, insurance expense, minor amounts of depreciation, accretion of removal costs for future retirements of utility
assets and other administrative expenses.
Cash and Cash Equivalents
Our policy is to invest cash in excess of operating requirements in overnight income-producing accounts. Such amounts are stated
at cost, which approximates fair value. Investments with an original maturity of three months or less when purchased are considered
cash equivalents.
Accounts Receivable and Allowance for Doubtful Accounts
Accounts receivable consist primarily of amounts due for sales of natural gas, electricity and propane and transportation and
distribution services to customers. An allowance for doubtful accounts is recorded against amounts due based upon our collections
experiences and an assessment of our customers’ inability or reluctance to pay. If circumstances change, our estimates of recoverable
accounts receivable may also change. Circumstances which could affect such estimates include, but are not limited to, customer
credit issues, the level of natural gas, electricity and propane prices and general economic conditions. Accounts are written off
when they are deemed to be uncollectible.
Inventories
We use the average cost method to value propane, materials and supplies, and other merchandise inventory. If market prices drop
below cost, inventory balances that are subject to price risk are adjusted to their net realizable value. There was no lower-of-cost-
or-net realizable value adjustment during 2018, 2017 or 2016.
Goodwill and Other Intangible Assets
Goodwill is not amortized but is tested for impairment at least annually, or more frequently if an event occurs or circumstances
change that would more likely than not reduce the fair value of a reporting unit below its carrying value. We use a present value
technique based on discounted cash flows to estimate the fair value of our reporting units. An impairment charge is recognized if
the carrying value of a reporting unit’s goodwill exceeds its implied fair value. The testing of goodwill for 2018, 2017 and 2016
indicated no goodwill impairment.
Other intangible assets are amortized on a straight-line basis over their estimated economic useful lives.
Other Deferred Charges
Other deferred charges include primarily issuance costs associated with short-term borrowings. These charges are amortized over
the life of the related short-term debt borrowings.
Chesapeake Utilities Corporation 2018 Form 10-K Page 59
Notes to the Consolidated Financial Statements
Asset Removal Cost
As authorized by the appropriate regulatory body (state PSC or FERC), we accrue future asset removal costs associated with utility
property, plant and equipment even if a legal obligation does not exist. Such accruals are provided for through depreciation expense
and are recorded with corresponding credits to regulatory liabilities or assets. When we retire depreciable utility plant and equipment,
we charge the associated original costs to accumulated depreciation and amortization, and any related removal costs incurred are
charged to regulatory liabilities or assets. The difference between removal costs recognized in depreciation rates and the accretion
and depreciation expense recognized for financial reporting purposes is a timing difference between recovery of these costs in
rates and their recognition for financial reporting purposes. Accordingly, these differences are deferred as regulatory liabilities or
assets. In the rate setting process, the regulatory liability or asset is excluded from the rate base upon which those utilities have
the opportunity to earn their allowed rates of return. The costs associated with our asset retirement obligations are either currently
being recovered in rates or are probable of recovery in future rates.
Pension and Other Postretirement Plans
Pension and other postretirement plan costs and liabilities are determined on an actuarial basis and are affected by numerous
assumptions and estimates, including the fair value of plan assets, estimates of the expected returns on plan assets, assumed discount
rates, the level of contributions made to the plans, and current demographic and actuarial mortality data. We review annually the
estimates and assumptions underlying our pension and other postretirement plan costs and liabilities with the assistance of third-
party actuarial firms. The assumed discount rates, expected returns on plan assets and the mortality assumption are the factors that
generally have the most significant impact on our pension costs and liabilities. The assumed discount rates, health care cost trend
rates and rates of retirement generally have the most significant impact on our postretirement plan costs and liabilities.
The discount rates are utilized principally in calculating the actuarial present value of our pension and postretirement obligations
and net pension and postretirement costs. When estimating our discount rates, we consider high-quality corporate bond rates, such
as the Prudential curve index and the Citigroup yield curve, changes in those rates from the prior year and other pertinent factors,
including the expected life of each of our plans and their respective payment options.
The expected long-term rates of return on assets are utilized in calculating the expected returns on the plan assets component of
our annual pension plan costs. We estimate the expected returns on plan assets of each of our plans by evaluating expected bond
returns, asset allocations, the effects of active plan management, the impact of periodic plan asset rebalancing and historical
performance. We also consider the guidance from our investment advisors in making a final determination of our expected rates
of return on assets.
We estimate the health care cost trend rates used in determining our postretirement net expense based upon actual health care cost
experience, the effects of recently enacted legislation and general economic conditions. Our assumed rate of retirement is estimated
based upon our annual reviews of participant census information as of the measurement date.
The mortality assumption used for our pension and postretirement plans reviewed periodically and is based on the actuarial table
that best reflects of the expected mortality of the plan participants.
Income Taxes, Investment Tax Credit Adjustments and Tax-Related Contingency
Deferred tax assets and liabilities are recorded for the income tax effect of temporary differences between the financial statement
basis and tax basis of assets and liabilities and are measured using the enacted income tax rates in effect in the years in which the
differences are expected to reverse. Deferred tax assets are recorded net of any valuation allowance when it is more likely than
not that such income tax benefits will be realized. Investment tax credits on utility property have been deferred and are allocated
to income ratably over the lives of the subject property.
We account for uncertainty in income taxes in our consolidated financial statements only if it is more likely than not that an
uncertain tax position is sustainable based on technical merits. Recognizable tax positions are then measured to determine the
amount of benefit recognized in the consolidated financial statements. We recognize penalties and interest related to unrecognized
tax benefits as a component of other income.
We account for contingencies associated with taxes other than income when the likelihood of a loss is both probable and estimable.
In assessing the likelihood of a loss, we do not consider the existence of current inquiries, or the likelihood of future inquiries, by
tax authorities as a factor. Our assessment is based solely on our application of the appropriate statutes and the likelihood of a
loss, assuming the proper inquiries are made by tax authorities.
Financial Instruments
Our propane operations enter into derivative transactions, such as swaps, put options and call options in order to mitigate the
impact of wholesale price fluctuations on inventory valuation and future purchase commitments. Our natural gas marketing
Chesapeake Utilities Corporation 2018 Form 10-K Page 60
Notes to the Consolidated Financial Statements
operation enters into natural gas futures and swap contracts to mitigate any price risk associated with the purchase and/or sale of
natural gas to specific customers. These transactions may be designated as fair value hedges or cash flow hedges, if they meet all
of the accounting requirements pursuant to ASC Topic 815, Derivatives and Hedging, and we elect to designate the instruments
as hedges. If designated as a fair value hedge, the value of the hedging instrument, such as a swap, future, or put option, is recorded
at fair value, with the effective portion of the gain or loss of the hedging instrument effectively reducing or increasing the value
of the hedged item. If designated as a cash flow hedge, the value of the hedging instrument, such as a swap, call option or natural
gas futures contract, is recorded at fair value with the effective portion of the gain or loss of the hedging instrument being recorded
in comprehensive income. The ineffective portion of the gain or loss of a hedge is recorded in earnings. If the instrument is not
designated as a fair value or cash flow hedge, or it does not meet the accounting requirements of a hedge under ASC Topic 815,
Derivatives and Hedging, it is recorded at fair value with all gains or losses being recorded directly in earnings.
Our natural gas, electric and propane operations and natural gas marketing operations enter into agreements with suppliers to
purchase natural gas, electricity, and propane for resale to our respective customers. Purchases under these contracts, as well as
distribution and marketing operations sales agreements with counterparties or customers, either do not meet the definition of a
derivative, or qualify for “normal purchases and sales” treatment under ASC Topic 815 Derivatives and Hedging, and are accounted
for on an accrual basis.
Recently Adopted Accounting Standards
Revenue from Contracts with Customers (ASC 606) - On January 1, 2018, we adopted ASU 2014-09, Revenue from Contracts
with Customers, and all the related amendments using the modified retrospective method. We recognized the cumulative effect
of initially applying the new revenue standard to all of our contracts as an adjustment to the beginning balance of retained earnings.
The comparative information has not been restated and continues to be reported under the accounting standards in effect for those
periods. The impact of adoption of the new revenue standard was immaterial to our net income.
This standard required entities to recognize revenue when control of the promised goods or services is transferred to customers
at an amount that reflects the consideration that the entity expects to receive in exchange for those goods or services. The guidance
also requires a number of disclosures regarding the nature, amount, timing, and uncertainty of revenue and the related cash flows.
See Note 5, Revenue Recognition, for additional information.
The following highlights the impact of the adoption of ASC 606 on our income statement for the year ended December 31, 2018
and consolidated balance sheet as of December 31, 2018:
Income statement
(in thousands)
Regulated Energy operating revenues
Regulated Energy cost of sales
Depreciation and amortization
Income before income taxes
Income taxes
Net income
Year Ended
December 31, 2018
As
Reported
Without
Adoption
of ASC 606
Effect of
Change
Higher
(Lower)
$
345,281
$
346,289
$
(1,008)
121,828
122,463
40,802
77,574
20,994
56,580
40,767
77,981
21,106
56,875
(635)
35
(407)
(112)
(295)
Chesapeake Utilities Corporation 2018 Form 10-K Page 61
Balance sheet
(in thousands)
Assets
Accrued revenue
Long-term receivables and other deferred charges
Capitalization
Retained earnings
$
$
$
Notes to the Consolidated Financial Statements
As of December 31, 2018
As Reported
Without Adoption of
ASC 606
Effect of Change
Higher (Lower)
27,499
6,985
$
$
29,461
6,816
$
$
(1,962)
169
261,530
$
263,323
$
(1,793)
The primary impact of the adoption of ASC 606 on our income statement was the delayed recognition of approximately $407,000
in operating income during the year ended December 31, 2018, to future years, and a cumulative adjustment that decreased retained
earnings and other assets by $1.8 million at December 31, 2018, associated with a long-term firm transmission contract with an
industrial customer.
Compensation-Retirement Benefits (ASC 715) - In March 2017, the FASB issued ASU 2017-07, Improving the Presentation of
Net Periodic Pension Cost and Net Periodic Post-Retirement Benefit Cost. Under this guidance, employers are required to report
the service cost component in the same line item or items as other compensation costs arising from services rendered by the
pertinent employees during the period. The other components of net benefit costs are required to be presented in the income
statement separately from the service cost component and should not be included in operating expenses. We adopted ASU 2017-07
on January 1, 2018 and applied the changes in the other components of net benefit costs, retrospectively. As our plans have been
frozen for some time, there is no service cost component. The components of net benefit costs have been reclassified to other
expense. Aside from changes in presentation, implementation of this standard did not have a material impact on our financial
position or results of operations.
Statement of Cash Flows (ASC 230) - In August 2016, the FASB issued ASU 2016-15, Classification of Certain Cash Receipts
and Cash Payments, which clarifies how certain transactions are classified in the statement of cash flows. We adopted ASU 2016-15
on January 1, 2018. Implementation of this new standard did not have a material impact on our consolidated statement of cash
flows.
Compensation - Stock Compensation (ASC 718) - In May 2017, the FASB issued ASU 2017-09, Scope of Modification Accounting,
to clarify when to account for a change in the terms or conditions of a share-based payment award as a modification. Under this
guidance, modification accounting is required only if the fair value, the vesting conditions or the award classification (equity or
liability) change because of a change in the terms or conditions of the award. We adopted ASU 2017-09, prospectively, on January
1, 2018. Implementation of this new standard did not have a material impact on our financial position or results of operations.
Income Statement - Reporting Comprehensive Income (ASC 220) - In February 2018, the FASB issued ASU 2018-02,
Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income, which allows a reclassification from
accumulated other comprehensive income to retained earnings for stranded tax effects resulting from the TCJA. We adopted ASU
2018-02 on January 1, 2018, and reclassified stranded tax effects from accumulated other comprehensive loss related to our
employee benefit plans and commodity contract cash flows hedges. Implementation of this new standard did not have a material
impact on our financial position and results of operations. See Note 16, Stockholders' Equity, for additional information.
Derivatives and Hedging (ASC 815) - In August 2017, the FASB issued ASU 2017-12, Targeted Improvements to Accounting for
Hedging Activities, to better align an entity’s risk management activities and financial reporting for hedging relationships through
changes to both the designation and measurement guidance for qualifying hedging relationships and the presentation of hedge
results. ASU 2017-12 expands the risks that can be designated as hedged risks in cash flow hedges to include cash flow variability
from contractually specified components of forecasted purchases or sales of non-financial assets. ASU 2017-12 requires the entire
change in fair value of a hedging instrument that is included in the assessment of hedge effectiveness to be presented in the same
income statement line that is used to present the earnings effects of the hedged item for fair value hedges and in other comprehensive
income for cash flow hedges. ASU 2017-12 requires a tabular presentation of the income statement effect of fair value and cash
flow hedges and eliminates the requirement to disclose the ineffective portion of the change in fair value of hedging instruments.
We adopted ASU 2017-12, effective July 1, 2018, with no material impact on our financial statements. See Note 8, Derivative
Instruments, for additional information with respect to the disclosures required by ASU 2017-12.
Compensation - Retirement Benefits - Defined Benefit Plans - General (ASC 715-20) - In August 2018, the FASB issued ASU
2018-14, Disclosure Framework - Changes to the Disclosure Requirements for Defined Benefit Plans, which removes, clarifies
and adds certain disclosure requirements in ASC 715-20 related to defined benefit pension and other postretirement plans. ASU
Chesapeake Utilities Corporation 2018 Form 10-K Page 62
Notes to the Consolidated Financial Statements
2018-14 will be effective for our annual and interim financial statements, on a retrospective basis, beginning January 1, 2021,
although early adoption is permitted. We early adopted and updated our disclosures during the annual period ended December 31,
2018. Since the guidance impacted disclosures only, there was no impact on our financial position or results of operations.
Recent Accounting Standards Yet to be Adopted
Leases (ASC 842) - In February 2016, the FASB issued ASU 2016-02, Leases, which requires lessees to recognize leases on the
balance sheet and disclose key information about leasing arrangements. The standard establishes a right of use ("ROU") model
that requires a lessee to recognize a ROU asset and lease liability for all leases with a term greater than 12 months. The update
also expands the required quantitative and qualitative disclosures surrounding leases. ASC 842 was subsequently amended by
ASU No. 2018-01, Land Easement Practical Expedient for Transition to Topic 842; ASU No. 2018-10, Codification Improvements
to Topic 842, Leases; and ASU No. 2018-11, Targeted Improvements. ASU 2016-02 will be effective for our annual and interim
financial statements, beginning January 1, 2019, although early adoption is permitted. We expect to adopt ASU 2016-02 effective
January 1, 2019, and use the modified retrospective transition approach to all existing leases.
The new standard permits companies to elect several practical expedients. We expect to elect: (1) the ‘package of practical
expedients,’ pursuant to which we do not need to reassess our prior conclusions about lease identification, lease classification and
initial direct costs and (2) the ‘use-of-hindsight’ practical expedient, which allows us to use hindsight in assessing impairment of
our existing land easements. We also intend to aggregate all non-lease components with the respective lease components.
The most significant effect of ASC 842 will be recognition of ROU assets and lease liabilities on our balance sheet for our operating
leases and providing significant new disclosures about our leasing activities. We currently expect that upon adoption, we will
recognize lease liabilities ranging from $11.0 to $13.0 million, with corresponding ROU of the same amount based on the present
value of the remaining minimum rental payments for existing operating leases.
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 will be effective for our annual and interim financial statements beginning January 1, 2020, although early
adoption is permitted. The amendments included in this ASU are to be applied prospectively. We believe that implementation of
this new standard will not have a material impact on our financial position or results of operations.
Compensation - Stock Compensation (ASC 718) - In June 2018, the FASB issued ASU 2018-07, Improvements to Nonemployee
Share-Based Payment Accounting, which expands the scope of Topic 718 to include share-based payment transactions for acquiring
goods and services from nonemployees. ASU 2018-07 will be effective for our annual and interim financial statements beginning
January 1, 2019, although early adoption is permitted. We believe that implementation of this new standard will not have a material
impact on our financial position or results of operations.
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. ASU 2018-13 will be effective for our annual and interim financial statements beginning January
1, 2020. Since the changes only impact disclosures, there will be no financial impact.
Chesapeake Utilities Corporation 2018 Form 10-K Page 63
3. EARNINGS PER SHARE
Notes to the Consolidated Financial Statements
The following table presents the calculation of our basic and diluted earnings per share for the years ended December 31:
For the Year Ended December 31,
2017
2016
2018
(in thousands, except shares and per share data)
Calculation of Basic Earnings Per Share:
Net Income
Weighted average shares outstanding
Basic Earnings Per Share
Calculation of Diluted Earnings Per Share:
Net Income
Reconciliation of Denominator:
Weighted average shares outstanding — Basic
Effect of dilutive securities — Share-based compensation
Adjusted denominator — Diluted
Diluted Earnings Per Share
4. ACQUISITIONS
Acquisitions in 2018
Marlin Gas Services and Ohl Fuel Oil Acquisitions
$
$
$
$
56,580
16,369,616
3.46
$
$
58,124
16,336,789
3.56
$
$
44,675
15,570,539
2.87
56,580
$
58,124
$
44,675
16,369,616
50,254
16,419,870
3.45
16,336,789
46,563
16,383,352
3.55
15,570,539
42,552
15,613,091
2.86
$
$
In December 2018, Marlin Gas Services, LLC (“Marlin Gas Services”), our newly created subsidiary, acquired certain operating
assets of Marlin Gas Transport, Inc. (“Marlin Gas Transport”), a supplier of mobile compressed natural gas utility and pipeline
solutions. The acquisition will enable Chesapeake Utilities to offer solutions to address supply interruption scenarios and tailor
other alternatives where pipeline supplies are not available or cannot meet customer requirements.
In December 2018, Sharp acquired certain propane operating assets and customers of R. F. Ohl Fuel Oil, Inc. ("Ohl"), which
provided propane distribution service to approximately 2,500 residential and commercial customers in Pennsylvania.
We accounted for the purchases of the operating assets of Marlin Gas Transport and Ohl, which totaled approximately $18.4
million, as business combinations within our Unregulated Energy segment. Goodwill of $4.8 million, related to the Marlin Gas
Transport acquisition, and $1.5 million, associated with the Ohl acquisition, were initially recorded at the close of these transactions.
The amounts recorded in conjunction with these acquisitions are preliminary and subject to adjustment based on additional
valuations performed during the measurement period. Due to the timing of these acquisitions, the revenue and net income from
these acquisitions in 2018 were immaterial.
Acquisitions in 2017
ARM, Chipola and Central Gas Acquisitions
In August 2017, PESCO acquired certain natural gas marketing assets of ARM Energy Management, LLC ("ARM"). The acquired
assets complemented PESCO’s existing asset portfolio and expanded our regional footprint and retail demand in a market where
we had existing pipeline capacity and wholesale liquidity. We accounted for the purchase of these assets as a business combination
and initially recorded goodwill of $4.3 million within our Unregulated Energy segment. In connection with the acquisition, we
initially recorded a contingent consideration liability of $2.5 million, based on a projection that the acquired business would achieve
a gross margin target in 2018. During the second quarter of 2018, we identified certain known information as of the acquisition
date that was not considered in our original analysis and would have resulted in no contingent consideration liability being initially
recorded. Therefore, we reversed the originally-recorded contingent liability and reduced goodwill by $2.5 million. We similarly
revised the consolidated balance sheet as of December 31, 2017. These revisions are considered immaterial to our consolidated
financial statements. Based on actual gross margin results in 2018, we were not required to make additional payments under the
contingent consideration provisions of the purchase agreement.
Chesapeake Utilities Corporation 2018 Form 10-K Page 64
Notes to the Consolidated Financial Statements
In August and December of 2017, Flo-gas acquired certain operating assets of Chipola Propane Gas Company ("Chipola") and
Central Gas Company of Okeechobee, Incorporated ("Central Gas"), adding approximately 1,125 residential and commercial
propane delivery service customers in Florida.
The acquisition accounting amounts recorded in conjunction with the above transactions are final. The revenue and net income
from these acquisitions included in our consolidated statements of income were not material.
5. REVENUE RECOGNITION
We recognize revenue when our performance obligations under contracts with customers have been satisfied, which generally
occurs when our businesses have delivered or transported natural gas, electricity or propane to customers. We exclude sales taxes
and other similar taxes from the transaction price. Typically, our customers pay for the goods and/or services we provide in the
month following the satisfaction of our performance obligation.
Chesapeake Utilities Corporation 2018 Form 10-K Page 65
The following table displays our revenue by major source based on product and service type for the twelve months ended
December 31, 2018:
Notes to the Consolidated Financial Statements
(in thousands)
Energy distribution
Delaware natural gas division
Florida natural gas division
FPU electric distribution
FPU natural gas distribution
Maryland natural gas division
Sandpiper natural gas/propane operations
Total energy distribution
Energy transmission
Aspire Energy
Eastern Shore
Peninsula Pipeline
Total energy transmission
Energy generation
Eight Flags
Propane operations
Mid-Atlantic propane operations
Florida propane operations
Total propane operations
Energy services
Marlin Gas Services
PESCO - Natural Gas Marketing
Other and eliminations
Eliminations
Other
Total other and eliminations
Regulated
Energy
Unregulated
Energy
Other and
Eliminations
Total
$
70,338
$
— $
— $
25,341
79,803
81,118
24,172
22,088
302,860
—
64,248
11,927
76,175
—
—
—
—
—
—
—
—
—
—
—
—
—
35,407
—
—
35,407
17,302
102,321
21,282
123,603
121
258,713
258,834
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
70,338
25,341
79,803
81,118
24,172
22,088
302,860
35,407
64,248
11,927
111,582
17,302
102,321
21,282
123,603
121
258,713
258,834
(33,754)
—
(33,754)
(16,486)
1,957
(14,529)
(49,062)
653
(48,409)
(99,302)
2,610
(96,692)
Total operating revenues (1)
345,281
(1) Includes other revenue (revenues from sources other than contracts with customers) of $236,000 and $334,000 for our Regulated and Unregulated Energy
segments, respectively. The sources of other revenues include revenue from alternative revenue programs related to revenue normalization for Maryland division
and Sandpiper and late fees.
(48,409)
717,489
420,617
$
$
$
$
Regulated Energy Segment
The businesses within our Regulated Energy segment are regulated utilities whose operations and customer contracts are subject
to rates approved by the respective state PSC or the FERC.
Our energy distribution operations deliver natural gas or electricity to customers, and we bill the customers for both the delivery
of natural gas or electricity and the related commodity, where applicable. In most jurisdictions, our customers are also required
to purchase the commodity from us, although certain customers in some jurisdictions may purchase the commodity from a third-
Chesapeake Utilities Corporation 2018 Form 10-K Page 66
party retailer (in which case we provide delivery service only). We consider the delivery of natural gas or electricity and/or the
related commodity sale as one performance obligation because the commodity and its delivery are highly interrelated with two-
way dependency on one another. Our performance obligation is satisfied over time as natural gas or electricity is delivered and
consumed by the customer. We recognize revenues based on monthly meter readings, which are based on the quantity of natural
gas or electricity used and the approved rates. We accrue unbilled revenues for natural gas and electricity that have been delivered,
but not yet billed, at the end of an accounting period, to the extent that billing and delivery do not coincide.
Notes to the Consolidated Financial Statements
Revenues for Eastern Shore are based on rates approved by the FERC. The FERC has also authorized Eastern Shore to negotiate
rates above or below the FERC-approved maximum rates, which customers can elect as an alternative to the FERC-approved
maximum rates. Eastern Shore's services can be firm or interruptible. Firm services are offered on a guaranteed basis and are
available at all times unless prevented by force majeure or other permitted curtailments. Interruptible customers receive service
only when there is available capacity or supply. Our performance obligation is satisfied over time as we deliver natural gas to the
customers' locations. We recognize revenues based on capacity used or reserved and the fixed monthly charge.
Peninsula Pipeline is engaged in natural gas intrastate transmission to third-party customers and certain affiliates in the State of
Florida. Our performance obligation is satisfied over time as the natural gas is transported to customers. We recognize revenue
based on rates approved by the Florida PSC and the capacity used or reserved. We accrue unbilled revenues for transportation
services provided and not yet billed at the end of an accounting period.
Unregulated Energy Segment
Revenues generated from the Unregulated Energy segment are not subject to any federal, state, or local pricing regulations. Aspire
Energy primarily sources gas from hundreds of conventional producers and performs gathering and processing functions to maintain
the quality and reliability of its gas for its wholesale customers. Aspire Energy's performance obligation is satisfied over time as
natural gas is delivered to its customers. Aspire Energy recognizes revenue based on the deliveries of natural gas at contractually
agreed upon rates (which are based upon an established monthly index price and a monthly operating fee, as applicable). For
natural gas customers, we accrue unbilled revenues for natural gas that has been delivered, but not yet billed, at the end of an
accounting period, to the extent that billing and delivery do not coincide with the end of the accounting period.
Eight Flags' CHP plant, which is located on land leased from a customer, produces three sources of energy: electricity, steam and
heated water. Rayonier purchases the steam (unfired and fired) and heated water, which are used in the customer’s production
facility. Our electric distribution operation purchases the electricity generated by the CHP plant for distribution to its customers.
Eight Flags' performance obligation is satisfied over time as deliveries of heated water, steam and electricity occur. Eight Flags
recognizes revenues over time based on the amount of heated water, steam and electricity generated and delivered to its customers.
For our propane operations, we recognize revenue based upon customer type and service offered. Generally, for propane bulk
delivery customers (customers without meters) and wholesale sales, our performance obligation is satisfied when we deliver
propane to the customers' locations (point-in-time basis). We recognize revenue from these customers based on the number of
gallons delivered and the price per gallon at the point-in-time of delivery. For our propane delivery customers with meters, we
satisfy our performance obligation over time when we deliver propane to customers. We recognize revenue over time based on
the amount of propane consumed and the applicable price per unit. For propane delivery metered customers, we accrue unbilled
revenues for propane that has been delivered, but not yet billed, at the end of an accounting period, to the extent that billing and
delivery do not coincide with the end of the accounting period.
PESCO provides natural gas supply and asset management services to customers (including affiliates of Chesapeake Utilities)
located primarily in Florida, the Delmarva Peninsula, and the Appalachian Basin. PESCO's performance obligation is satisfied
over time as natural gas is delivered to its customers. PESCO recognizes revenue over time based on monthly customer meter
readings. We accrue unbilled revenues for natural gas that has been delivered, but not yet billed, at the end of an accounting period.
Chesapeake Utilities Corporation 2018 Form 10-K Page 67
Contract balances
The timing of revenue recognition, customer billings and cash collections results in trade receivables, unbilled receivables (contract
assets), and customer advances (contract liabilities) in our consolidated balance sheets. The balances of our trade receivables,
contract assets, and contract liabilities as of December 31, 2018 and 2017 were as follows:
Notes to the Consolidated Financial Statements
(in thousands)
Balance at 12/31/2017
Balance at 12/31/2018
Increase (decrease)
Trade
Receivables
Contract Assets
(Non-current)
Contract Liabilities
(Current)
$
$
74,962
83,214
8,252
$
$
1,270
2,614
1,344
$
$
407
480
73
Our trade receivables are included in accounts receivable in the consolidated balance sheets. Our non-current contract assets are
included in receivables and other deferred charges in the consolidated balance sheet and relate to operations and maintenance 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. At December 31, 2018 and 2017, we had a contract liability of $480,000 and $407,000, respectively, which was included
in other accrued liabilities in the consolidated balance sheet, and which relates to non-refundable prepaid fixed fees for our Mid-
Atlantic propane operation's retail offerings. Our performance obligation is satisfied over the term of the respective retail offering
plan on a ratable basis. For the twelve months ended December 31, 2018, we recognized revenue of $697,000.
Remaining performance obligations
Our businesses have long-term fixed fee contracts with customers in which revenues are recognized as performance obligations
are satisfied over the contract term. Revenue for these businesses for the remaining performance obligations at December 31,
2018 are expected to be recognized as follows:
(in thousands)
2019
2020
2021
2022
2023
2024 and
thereafter
Eastern Shore and Peninsula Pipeline
$ 38,505
$ 36,768
$ 33,510
$ 26,566
$ 21,146
$
212,620
Natural gas distribution operations
PESCO - Natural Gas Marketing
FPU electric distribution
4,109
8,886
297
3,586
4,702
297
3,358
1,728
297
3,320
2,924
30,826
23
109
—
—
—
—
Total revenue contracts with remaining performance
obligations
$ 51,797
$ 45,353
$ 38,893
$ 30,018
$ 24,070
$
243,446
Practical expedients
For our businesses with agreements that contain variable consideration, we use the invoice practical expedient method. We
determined that the amounts invoiced to customers correspond directly with the value to our customers and our performance to
date.
6. SEGMENT INFORMATION
We use the management approach to identify operating segments. We organize our business around differences in regulatory
environment and/or products or services, and the operating results of each segment are regularly reviewed by the chief operating
decision maker (our Chief Executive Officer) in order to make decisions about resources and to assess performance.
Our operations are 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.
Chesapeake Utilities Corporation 2018 Form 10-K Page 68
Notes to the Consolidated Financial Statements
• Unregulated Energy. Includes energy transmission, energy generation (the operations of our Eight Flags' CHP plant),
propane operations, the new mobile CNG utility and pipeline solutions subsidiary, and other energy services (natural gas
marketing and related services). These operations are unregulated as to their rates and services. Through March 2017,
this segment also included the operations of Xeron, our propane and crude oil trading subsidiary that wound down its
operations shortly after the first quarter of 2017. 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.
The remainder of our operations is presented as “Other businesses and eliminations,” which consists of unregulated subsidiaries
that own real estate leased to Chesapeake Utilities, as well as certain corporate costs not allocated to other operations.
The following table presents information about our reportable segments.
For the Year Ended December 31,
2017
2016
2018
(in thousands)
Operating Revenues, Unaffiliated Customers
Regulated Energy
Unregulated Energy
Total operating revenues, unaffiliated customers
Intersegment Revenues (1)
Regulated Energy
Unregulated Energy
Other businesses
Total intersegment revenues
Operating Income
Regulated Energy
Unregulated Energy
Other businesses and eliminations
Operating Income
Other expense
Interest charges
Income Before Income taxes
Income taxes
Net Income
Depreciation and Amortization
Regulated Energy
Unregulated Energy
Other businesses and eliminations
Total depreciation and amortization
Capital Expenditures
Regulated Energy
Unregulated Energy
Other businesses
Total capital expenditures
$
$
$
$
$
$
$
$
$
$
332,749
384,740
717,489
12,532
35,877
653
49,062
79,215
16,901
(1,496)
94,620
(615)
16,431
77,574
20,994
56,580
31,876
8,845
81
40,802
235,912
38,700
8,364
282,976
$
$
$
$
$
$
$
$
$
$
316,971
300,612
617,583
9,339
23,983
774
34,096
74,584
12,631
205
87,420
(2,342)
12,645
72,433
14,309
58,124
28,554
7,954
91
36,599
159,011
26,190
5,902
191,103
$
$
$
$
$
$
$
$
$
$
302,402
196,458
498,860
3,287
7,321
880
11,488
71,515
14,066
402
85,983
(2,328)
10,639
73,016
28,341
44,675
25,677
6,386
96
32,159
139,994
23,984
5,398
169,376
(1) All significant intersegment revenues are billed at market rates and have been eliminated from consolidated revenues.
Chesapeake Utilities Corporation 2018 Form 10-K Page 69
Identifiable Assets
Regulated Energy
Unregulated Energy
Other businesses
Total identifiable assets
Our operations are entirely domestic.
Notes to the Consolidated Financial Statements
As of December 31,
2017
2018
$
$
1,345,805
306,045
41,821
1,693,671
$
$
1,121,673
259,041
34,220
1,414,934
7. SUPPLEMENTAL CASH FLOW DISCLOSURES
Cash paid for interest and income taxes during the years ended December 31, 2018, 2017 and 2016 were as follows:
(in thousands)
Cash paid for interest
Cash paid for income taxes, net of refunds
$
$
16,741
477
$
$
12,420
$
(4,114) $
10,315
(5,308)
Non-cash investing and financing activities during the years ended December 31, 2018, 2017, and 2016 were as follows:
For the Year Ended December 31,
2017
2016
2018
For the Year Ended December 31,
2017
2016
2018
(in thousands)
Capital property and equipment acquired on account, but not paid for as of
December 31
Common stock issued for the Retirement Savings Plan
Common stock issued under the SICP
Capital lease obligation
8. DERIVATIVE INSTRUMENTS
$
$
$
$
39,402
$
— $
2,006
1,310
$
$
15,457
$
— $
1,127
2,070
$
$
9,791
777
1,027
3,471
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 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. Both our propane operations
and our natural gas marketing 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 December 31, 2018 and 2017
our natural gas and electric distribution operations did not have any outstanding derivative contracts.
We adopted ASU 2017-12 as of July 1, 2018. See Note 1, Summary of Significant Accounting Policies, under the heading "recently
adopted accounting standards" for additional details.
Volume of Derivative Activity
As of December 31, 2018, the volume of our open commodity derivative contracts were as follows:
Business unit
PESCO/natural gas marketing
PESCO/natural gas marketing
Sharp/propane operations
Sharp/propane operations
Commodity
Natural gas (Dts)
Natural gas (Dts)
Propane (gallons)
Propane (gallons)
Quantity hedged
(in millions)
14.4
3.8
9.7
0.3
Designation
Longest Expiration
date of hedge
Cash flows hedges March 2022
Not designated
December 2020
Cash flows hedges
June 2021
Fair value hedges
March 2019
Chesapeake Utilities Corporation 2018 Form 10-K Page 70
Notes to the Consolidated Financial Statements
PESCO entered into natural gas futures contracts associated with the purchase and sale of natural gas to specific customers. We
designated and accounted for them as cash flow hedges. The change in fair value of the natural gas futures contracts 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 ending December 31, 2019.
Sharp entered into futures and swap agreements to mitigate the risk of fluctuations in wholesale propane index prices associated
with the propane volumes expected to be purchased during the heating season. Under the futures and swap agreements, Sharp will
receive the difference between (i) the index prices (Mont Belvieu prices in August 2018 through June 2021) 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
$1.2 million from accumulated other comprehensive income to earnings during the next 12-month period ending December 31,
2019.
Balance sheet offsetting
PESCO has entered into master netting agreements with counterparties that enable it to net the counterparties' outstanding accounts
receivable and payable, which are presented on a net basis in the consolidated balance sheets. The following table summarizes
the accounts receivable and payables on a gross and net basis at December 31, 2018 and 2017:
(in thousands)
Accounts receivable
Accounts payable
(in thousands)
Accounts receivable
Accounts payable
Broker Margin
Gross amounts
Amounts offset
Net amounts
At December 31, 2018
$
$
$
$
12,368
24,741
Gross amounts
8,283
16,643
$
$
$
$
3,834
3,834
At December 31, 2017
Amounts offset
2,391
2,391
$
$
$
$
8,534
20,907
5,892
14,252
Net amounts
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 MTM relative to
maintenance margin requirements. We maintain separate broker margin accounts for Sharp and PESCO. At December 31, 2018
and 2017, Sharp's account had a zero balance. The balances related to PESCO are as follows:
(in thousands)
PESCO
Financial Statements Presentation
Balance Sheet Location
December 31,
2018
December 31,
2017
Other Current Assets
$
2,810
$
6,300
The following tables present information about the fair value and related gains and losses of our derivative contracts. We did not
have any derivative contracts with a credit-risk-related contingency. Fair values of the derivative contracts recorded in the
consolidated balance sheets as of December 31, 2018 and 2017 are as follows:
Chesapeake Utilities Corporation 2018 Form 10-K Page 71
(in thousands)
Balance Sheet Location
December 31, 2018
December 31, 2017
Notes to the Consolidated Financial Statements
Derivative Assets
Fair Value As Of
Derivatives not designated as hedging instruments
Propane swap agreements
Natural gas futures contracts
Derivatives designated as fair value hedges
Derivative assets, at fair value
Derivative assets, at fair value
Propane put options
Derivative assets, at fair value
Derivatives designated as cash flow hedges
Natural gas futures contracts
Propane swap agreements
Total Derivative Assets
Derivative assets, at fair value
Derivative assets, at fair value
$
$
— $
4,024
71
9,059
11
13,165
$
13
—
—
92
1,181
1,286
Derivative Liabilities
Fair Value As Of
(in thousands)
Balance Sheet Location
December 31, 2018
December 31, 2017
Derivatives not designated as hedging instruments
Natural gas futures contracts
Derivative liabilities, at fair value
Derivatives designated as cash flow hedges
Natural gas futures contracts
Natural gas swap contracts
Propane swap agreements
Total Derivative Liabilities
Derivative liabilities, at fair value
Derivative liabilities, at fair value
Derivative liabilities, at fair value
$
$
4,562
$
8,705
—
1,604
14,871
$
The effects of gains and losses from derivative instruments are as follows:
(in thousands)
Derivatives not designated as hedging
instruments
Realized gain (loss) on forward contracts
and options (1)
Natural gas futures contracts
Propane swap agreements
Natural gas swap contracts
Derivatives designated as fair value hedges
Put/Call option
Natural gas futures contracts
Derivatives designated as cash flow hedges
Propane swap agreements
Propane swap agreements
Natural gas futures contracts
Natural gas swap contracts
Natural gas futures contracts
Natural gas swap contracts
Total
Amount of Gain (Loss) on Derivatives:
Location of Gain
(Loss) on Derivatives
For the Year Ended December 31,
2018
2017
2016
Revenue
Cost of sales
Cost of sales
Cost of sales
Cost of sales
Natural gas inventory
Cost of sales
Other comprehensive income (loss)
Cost of sales
Cost of sales
Other comprehensive income (loss)
Other comprehensive income
$
— $
112
$
(3,189)
(3,633)
(13)
—
—
—
(647)
(2,773)
(2,010)
197
532
200
8
1
(9)
—
1,607
487
(456)
(822)
(1,476)
986
$
(7,703) $
(3,195) $
5,776
—
469
2
6,247
(546)
(541)
7
—
49
(233)
(364)
1,016
345
—
222
—
(45)
(1) All of the realized and unrealized gain (loss) on forward contracts represents the effect of trading activities on our consolidated statements of income.
As of December 31, 2018, the following amounts were recorded in the consolidated balance sheets related to fair value hedges:
Chesapeake Utilities Corporation 2018 Form 10-K Page 72
Notes to the Consolidated Financial Statements
(in thousands)
Carrying Amount of Hedged Item
Cumulative Adjustment Included in
Carrying Amount of Hedged Item
Balance Sheet Location of Hedged Items
Inventory
At December 31,
2018
At December 31,
2017
At December 31,
2018
At December 31,
2017
$
212
$
— $
— $
—
9. FAIR VALUE OF FINANCIAL INSTRUMENTS
GAAP establishes a fair value hierarchy that prioritizes the inputs to valuation methods used to measure fair value. The three levels
of the fair value hierarchy are the following:
Fair Value
Hierarchy
Level 1
Description of Fair Value Level
Unadjusted quoted prices in active
markets that are accessible at the
measurement date for identical,
unrestricted assets or liabilities
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
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)
Financial Assets and Liabilities Measured at Fair Value
Fair Value Technique Utilized
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.
Derivative assets and liabilities - The fair values of forward
contracts are measured using market transactions in either the
listed or over-the-counter markets. The fair value of the
propane put/call options, swap agreements and natural gas
futures contracts are measured using market transactions for
similar assets and liabilities in either the listed or over-the-
counter markets.
Investments - guaranteed income fund - The fair values of
these investments are recorded at the contract value, which
approximates their fair value.
The following tables summarize our financial assets and liabilities that are measured at fair value on a recurring basis and the fair
value measurements, by level, within the fair value hierarchy as of December 31, 2018 and 2017, respectively:
As of December 31, 2018
(in thousands)
Assets:
Investments—equity securities
Investments—guaranteed income fund
Investments—mutual funds and other
Total investments
Derivative assets
Total assets
Liabilities:
Derivative liabilities
Fair Value Measurements Using:
Quoted Prices in
Active Markets
(Level 1)
Significant Other
Observable
Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
Fair Value
$
$
$
22
686
6,003
6,711
13,165
19,876
14,871
$
$
$
$
22
—
6,003
6,025
—
6,025
$
— $
—
—
—
$
$
13,165
13,165
— $
14,871
—
686
—
686
—
686
—
Chesapeake Utilities Corporation 2018 Form 10-K Page 73
As of December 31, 2017
Fair Value
Notes to the Consolidated Financial Statements
Fair Value Measurements Using:
Quoted Prices in
Active Markets
(Level 1)
Significant Other
Observable
Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
(in thousands)
Assets:
Investments—equity securities
Investments—guaranteed income fund
Investments—mutual funds and other
Total investments
Derivative assets
Total assets
Liabilities:
Derivative liabilities
$
$
$
22
648
6,086
6,756
1,286
8,042
6,247
$
$
$
22
—
6,086
6,108
—
6,108
$
$
— $
—
—
—
1,286
1,286
$
$
—
648
—
648
—
648
—
— $
6,247
The following table sets forth the summary of the changes in the fair value of Level 3 investments for the years ended December 31,
2018 and 2017:
(in thousands)
Beginning Balance
Purchases and adjustments
Transfers/disbursements
Investment income
Ending Balance
For the Year Ended December 31,
2018
2017
$
$
648
68
(41)
11
686
$
$
561
79
(53)
61
648
Investment income from the Level 3 investments is reflected in other expense, net in the consolidated statements of income.
At December 31, 2018 and 2017, 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 short maturities
and because interest rates approximate current market rates (Level 3 measurement).
At December 31, 2018, long-term debt, which includes the current maturities but excludes capital lease obligations, had a carrying
value of $327.2 million, compared to the estimated fair value of $323.8 million, 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, adjusted for duration, optionality and risk profile. At December 31, 2017, long-term debt, which includes the
current maturities but excludes a capital lease obligation, had a carrying value of $205.2 million, compared to a fair value of $215.4
million. The valuation technique used to estimate the fair value of long-term debt would be considered a Level 3 measurement.
See Note 17, Employee Benefit Plans, for fair value measurement information related to our pension plan assets.
Chesapeake Utilities Corporation 2018 Form 10-K Page 74
Notes to the Consolidated Financial Statements
10. INVESTMENTS
The investment balances at December 31, 2018 and 2017, consisted of the following:
(in thousands)
Rabbi trust (associated with the Non-Qualified Deferred Compensation Plan)
Investments in equity securities
Total
As of December 31,
2018
2017
$
$
6,689
22
6,711
$
$
6,734
22
6,756
We classify these investments as trading securities and report them at their fair value. For the year ended December 31, 2018, we
recorded net unrealized losses of $428,000 and for the years ended December 31, 2017 and 2016, we recorded net unrealized gains
of $1.0 million and $379,000, respectively, in other income (expense) in the consolidated statements of income related to these
investments. For the investment in the Rabbi Trust, we also have recorded an associated liability, which is included in other pension
and benefit costs in the consolidated balance sheets and is adjusted each period for the gains and losses incurred by the investments
in the Rabbi Trust.
11. GOODWILL AND OTHER INTANGIBLE ASSETS
The carrying value of goodwill as of December 31, 2018 and 2017 was as follows:
(in thousands)
Goodwill
Regulated Energy
Florida Natural Gas Distribution(1)
Unregulated Energy
Mid-Atlantic Propane Operations
Florida Propane Operations
Aspire Energy
Marlin Gas Services
Natural Gas Marketing - PESCO
Total Goodwill
As of December 31,
2018
2017
$
3,353
$
3,353
2,147
1,188
10,119
4,760
4,270
$
25,837
$
674
1,188
10,119
—
4,270
19,604
(1) Florida natural gas distribution includes Chesapeake Utilities' Central Florida Gas division, FPU and FPU's Indiantown and Fort Meade divisions.
The annual impairment testing for 2018 and 2017 indicated no impairment of goodwill.
The carrying value and accumulated amortization of intangible assets subject to amortization as of December 31, 2018 and 2017
are as follows:
(in thousands)
Customer lists
Non-Compete agreements
Other
Total
As of December 31,
2018
2017
Gross
Carrying
Amount
Accumulated
Amortization
Gross
Carrying
Amount
Accumulated
Amortization
$
$
7,757
2,245
270
10,272
$
$
3,664
202
199
4,065
$
$
7,393
270
270
7,933
$
$
2,880
175
192
3,247
The customer lists, non-compete agreements and other intangibles acquired in the purchases of the operating assets of several
companies are being amortized over five to 41 years.
Chesapeake Utilities Corporation 2018 Form 10-K Page 75
For the years ended December 31, 2018, 2017 and 2016, amortization expense of intangible assets was $818,000, $537,000, and
$380,000, respectively. Amortization expense of intangible assets is expected to be $1.1 million for each of the years 2019, 2020
and 2021, $820,000 for 2022 and $813,000 for 2023.
Notes to the Consolidated Financial Statements
12. INCOME TAXES
We file a consolidated federal income tax return. Income tax expense allocated to our subsidiaries is based upon their respective
taxable incomes and tax credits. State income tax returns are filed on a separate company basis in most states where we have
operations and/or are required to file. Our state returns for tax years after 2014 are subject to examination. At December 31, 2018,
the 2015 and 2016 federal income tax returns are under examination, and no report has been issued at this time.
We had no net operating loss for federal income tax purposes as of December 31, 2018 and 2017. For state income tax purposes,
we had net operating losses in various states of $60.1 million and $34.2 million as of December 31, 2018 and 2017, respectively,
almost all of which will expire in 2037. We have recorded deferred tax assets of $2.0 million and $1.6 million related to state net
operating loss carry-forwards at December 31, 2018 and 2017, respectively, but we have not recorded a valuation allowance to
reduce the future benefit of the tax net operating losses because we believe they will be fully utilized.
Federal Tax Reform
On December 22, 2017, President Trump signed into law the TCJA. Substantially all of the provisions of the TCJA are effective
for taxable years beginning on or after January 1, 2018. The provisions significantly impacting us include the reduction of the
corporate federal income tax rate from 35 percent to 21 percent. Our federal income tax expense for periods beginning on January
1, 2018 are based on the new federal corporate income tax rate. The TCJA included changes to the Internal Revenue Code, which
materially impacted our 2017 financial statements. ASC 740, Income Taxes, requires recognition of the effects of changes in tax
laws in the period in which the law is enacted. ASC 740 requires deferred tax assets and liabilities to be measured at the enacted
tax rate expected to apply when temporary differences are to be realized or settled. We have completed the assessment of the
impact as it relates to accounting for certain effects of the TCJA. At the date of enactment in 2017, we re-measured deferred income
taxes based upon the new corporate tax rate. See Note 19, Rates and Other Regulatory Activities, for further discussion of the
TCJA's impact on our regulated businesses.
In 2018, we elected early adoption of ASU 2018-02, Reclassification of Certain Tax Effects from Accumulated Other Comprehensive
Income. Accordingly, we reclassified stranded tax effects resulting from the TCJA from accumulated other comprehensive loss
to retained earnings, related to our employee benefit plans and commodity contracts cash flow hedges.
The following tables provide: (a) the components of income tax expense in 2018, 2017, and 2016; (b) the reconciliation between
the statutory federal income tax rate and the effective income tax rate for 2018, 2017, and 2016; and (c) the components of
accumulated deferred income tax assets and liabilities at December 31, 2018 and 2017.
For the Year Ended December 31,
2017
2016
2018
(in thousands)
Current Income Tax Expense
Federal
State
Other
Total current income tax expense
Deferred Income Tax Expense (1)
Property, plant and equipment
Deferred gas costs
Pensions and other employee benefits
FPU merger-related premium cost and deferred gain
Net operating loss carryforwards
Other
Total deferred income tax expense
Total Income Tax Expense
$
$
(845) $
660
(47)
(232)
19,164
(1,435)
463
(528)
(331)
3,893
21,226
20,994
$
$
2,803
492
(71)
3,224
8,314
2,002
180
(1,148)
193
1,544
11,085
14,309
$
(4,898)
2,053
(71)
(2,916)
31,062
1,163
237
(572)
(9)
(624)
31,257
28,341
(1) Includes $3.5 million, $873,000 and $2.1 million of deferred state income taxes for the years 2018, 2017 and 2016, respectively.
Chesapeake Utilities Corporation 2018 Form 10-K Page 76
Notes to the Consolidated Financial Statements
(in thousands)
Reconciliation of Effective Income Tax Rates
Federal income tax expense (1)
State income taxes, net of federal benefit
ESOP dividend deduction
Revaluation of deferred tax assets and liabilities
Other
For the Year Ended December 31,
2017
2016
2018
$
16,291
$
25,351
$
22,759
4,088
(158)
—
773
1,894
(257)
(14,299)
1,620
3,422
(264)
—
2,424
Total Income Tax Expense
Effective Income Tax Rate (2)
(1) Federal income taxes were calculated at 21 percent for 2018 and 35 percent for 2017 and 2016.
(2)Effective tax rate 2017 includes the impact of the revaluation of deferred tax assets and liabilities for our unregulated businesses due to implementation of the
TCJA.
27.06%
38.81%
19.75%
20,994
14,309
28,341
$
$
$
(in thousands)
Deferred Income Taxes
Deferred income tax liabilities:
Property, plant and equipment
Acquisition adjustment
Loss on reacquired debt
Deferred gas costs
Natural gas conversion costs
Other
Total deferred income tax liabilities
Deferred income tax assets:
Pension and other employee benefits
Environmental costs
Net operating loss carryforwards
Self-insurance
Storm reserve liability
Other
Total deferred income tax assets
Deferred Income Taxes Per Consolidated Balance Sheets
As of December 31,
2017
2018
$
$
153,423
8,896
32
1,139
3,987
2,641
170,118
3,711
1,710
2,010
151
—
5,716
13,298
156,820
$
$
133,581
9,323
153
2,574
2,760
2,662
151,053
4,698
1,744
1,625
164
717
6,255
15,203
135,850
Chesapeake Utilities Corporation 2018 Form 10-K Page 77
13. LONG-TERM DEBT
Our outstanding long-term debt is shown below:
(in thousands)
FPU secured first mortgage bonds:
9.08% bond, due June 1, 2022
Uncollateralized Senior Notes:
5.50% note, due October 12, 2020
5.93% note, due October 31, 2023
5.68% note, due June 30, 2026
6.43% note, due May 2, 2028
3.73% note, due December 16, 2028
3.88% note, due May 15, 2029
3.25% note, due April 30, 2032
3.48% note, due May 31, 2038
3.58% note, due November 30, 2038
Term Note due January 21, 2020 (1)
Promissory notes
Capital lease obligations
Less: debt issuance costs
Total long-term debt
Less: current maturities
Total long-term debt, net of current maturities
Notes to the Consolidated Financial Statements
As of December 31,
2018
2017
$
7,986
$
7,982
4,000
15,000
23,200
7,000
20,000
50,000
70,000
50,000
50,000
30,000
26
1,310
(567)
327,955
(11,935)
316,020
$
6,000
18,000
26,100
7,000
20,000
50,000
70,000
—
—
—
97
2,070
(433)
206,816
(9,421)
197,395
$
(1)
In December of 2018 we issued a $30.0 million unsecured Term Note through PNC Bank N.A. The maturity date of the Term Note is January 21, 2020. The
Term Note bears interest at a rate equal to the one month LIBOR rate plus 75 basis points. The interest rate at December 31, 2018 was 3.23%
Annual maturities
Annual maturities and principal repayments of long-term debt, excluding the capital lease obligation, are as follows:
Year
(in thousands)
Payments
2019
2020
2021
2022
2023
Thereafter
Total
$
10,626
$
45,600
$
13,600
$
25,100
$
20,600
$
211,700
$ 327,226
See Note 15, Lease Obligations, for future payments related to the capital lease obligation.
Shelf Agreements
We have entered into Shelf Agreements with Prudential, MetLife and NYL who are under no obligation to purchase any unsecured
debt.
The Prudential Shelf Agreement totaling $150.0 million was entered in October 2015 and we issued $70.0 million of 3.25 percent
unsecured debt in April 2017. The Prudential Shelf Agreement was amended in September 2018 to increase the borrowing capacity
to $150.0 million after which Prudential accepted our request to purchase our unsecured debt of $100.0 million at an interest rate
of 3.98 percent on or before August 20, 2019. The NYL Shelf Agreement totaling $100.0 million was entered 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. As of December 31, 2018, we had not requested that MetLife purchase
unsecured senior debt under the MetLife Shelf Agreement.
Chesapeake Utilities Corporation 2018 Form 10-K Page 78
Notes to the Consolidated Financial Statements
The following table summarizes our shelf agreements borrowing information at December 31, 2018:
(in thousands)
Shelf Agreement
Prudential Shelf Agreement
MetLife Shelf Agreement
NYL Shelf Agreement
Total
Total
Borrowing
Capacity
Less Amount
of Debt
Issued
Less Unfunded
Commitments
Remaining
Borrowing
Capacity
$
$
220,000
$
150,000
150,000
520,000
$
(70,000) $
—
(100,000)
(170,000) $
(100,000) $
—
—
(100,000) $
50,000
150,000
50,000
250,000
The Prudential Shelf Agreement and the NYL Shelf Agreement 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.
Secured First Mortgage Bonds
We guaranteed FPU’s first mortgage bonds, which are secured by a lien covering all of FPU’s property. FPU’s first mortgage
bonds contain a restriction that limits the payment of dividends by FPU to an amount less than the sum of $2.5 million plus FPU’s
consolidated net income accrued on and after January 1, 1992. As of December 31, 2018, FPU’s cumulative net income base was
$155.8 million, offset by restricted payments of $37.6 million, leaving $118.2 million of available dividend capacity.
The dividend restrictions in FPU’s first mortgage bonds resulted in approximately $42.2 million of the net assets of our consolidated
subsidiaries being restricted at December 31, 2018. This represents approximately 8.1 percent of our consolidated net assets. Other
than the dividend restrictions associated with FPU’s first mortgage bonds, there are no legal, contractual or regulatory restrictions
on the net assets of our subsidiaries.
Uncollateralized Senior Notes
All of our uncollateralized Senior Notes require periodic principal and interest payments as specified in each note. They also
contain various restrictions. The most stringent restrictions state that we must maintain equity of at least 40.0 percent of total
capitalization, and the fixed charge coverage ratio must be at least 1.2 times. The most recent Senior Notes issued in December
2013 also contain a restriction that we must maintain an aggregate net book value in our regulated business assets of at least 50.0
percent of our consolidated total assets. Failure to comply with those covenants could result in accelerated due dates and/or
termination of the Senior Note agreements.
Certain uncollateralized Senior Notes contain a “restricted payments” covenant as defined in the respective note agreements. The
most restrictive covenants of this type are included within the 5.93 percent Senior Note, due October 31, 2023. The covenant
provides that we cannot pay or declare any dividends or make any other restricted payments in excess of the sum of $10.0 million,
plus our consolidated net income accrued on and after January 1, 2003. As of December 31, 2018, the cumulative consolidated
net income base was $444.3 million, offset by restricted payments of $201.5 million, leaving $242.8 million of cumulative net
income free of restrictions. As of December 31, 2018, we are in compliance with all of our debt covenants.
14. SHORT-TERM BORROWINGS
At December 31, 2018 and 2017, we had $294.5 million and $251.0 million, respectively, of short-term borrowings outstanding
at the weighted average interest rates of 3.44 percent and 2.42 percent, respectively. We have an aggregate of $370.0 million in
credit lines comprised of five 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 on October 31, 2019
with the exception of the Revolver which is available through October 8, 2020. We incurred commitment fees of $93,300, $131,000
and $145,000 in 2018, 2017 and 2016, respectively. The following table summarizes our short-term borrowing facilities information
at December 31, 2018 and 2017.
Chesapeake Utilities Corporation 2018 Form 10-K Page 79
(in thousands)
Bank Credit Facility
Notes to the Consolidated Financial Statements
Outstanding borrowings at
Total
Facility
LIBOR Based
Interest Rate
December 31,
2018
December 31,
2017
Available at
December
31, 2018
Committed revolving credit facility A
$
55,000
Committed revolving credit facility B
Short-term revolving credit note C
Committed revolving credit facility D
Committed revolving credit facility E
Committed revolving credit facility F(2)
Total short term credit facilities
Book overdrafts(1)
Total short-term borrowing
plus 1.00
percent
plus 1.00
percent
plus 0.80
percent
plus 0.85
percent
plus 0.85
percent
30,000
50,000
45,000
40,000
150,000
plus up to 1.25
percent
$
370,000
$
25,000 $
55,000 $
30,000
15,431
20,500
14,569
50,000
50,000
—
34,672
40,171
10,328
40,000
—
—
125,000
75,000
290,103 $
240,671 $
25,000
79,897
4,355
10,298
294,458 $
250,969
$
$
(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 $200.0 million.
.
We are authorized by our Board of Directors to borrow up to $350.0 million of short-term debt, as required, from these short-term
lines of credit. These bank credit 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.
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. We are in compliance
with all of our debt covenants.
15. LEASE OBLIGATIONS
We have entered into several operating lease arrangements for office space, land, equipment and pipeline facilities. Rent expense
related to these leases for 2018, 2017 and 2016 was $3.8 million, $3.6 million and $2.5 million, respectively. As of December 31,
2018, future minimum payments under our current lease agreements are as follows:
Year(s)
(in thousands)
2019
2020
2021
2022
2023
Thereafter
Total
Expected payments
$2,349
$1,998
$1,761
$1,689
$1,642
$5,398
$14,837
For the years ended December 31, 2018, 2017 and 2016 we paid $2.4 million ,$1.5 million and $1.5 million respectively, for
capital lease arrangements related to Sandpiper's capacity, supply and operating agreement and our Mid-Atlantic propane operations'
lease arrangement for property in Anne Arundel County, Maryland which it intends to purchase during the first quarter of 2019.
Future minimum payments under these lease arrangements are $1.3 million in 2019.
16. STOCKHOLDERS' EQUITY
Accumulated Other Comprehensive (Loss)
Defined benefit pension and postretirement plan items, unrealized gains (losses) of our propane swap agreements, call options
and natural gas futures and swap contracts, designated as commodity contracts cash flow hedges, are the components of our
accumulated comprehensive income (loss). In 2018, we elected early adoption of ASU 2018-02, Reclassification of Certain Tax
Chesapeake Utilities Corporation 2018 Form 10-K Page 80
Notes to the Consolidated Financial Statements
Effects from Accumulated Other Comprehensive Income. Accordingly, we reclassified stranded tax effects resulting from the TCJA
from accumulated other comprehensive loss to retained earnings, related to our employee benefit plans and commodity contracts
cash flow hedges.
The following table present the changes in the balance of accumulated other comprehensive loss for the years ended December 31,
2018 and 2017. All amounts in the following tables are presented net of tax.
(in thousands)
As of December 31, 2016
Other comprehensive income before reclassifications
Amounts reclassified from accumulated other comprehensive income/(loss)
Net current-period other comprehensive income/(loss)
As of December 31, 2017
Other comprehensive loss before reclassifications
Amounts reclassified from accumulated other comprehensive income
Net current-period other comprehensive loss
Stranded tax reclassification to retained earnings
As of December 31, 2018
Defined Benefit
Pension and
Postretirement
Plan Items
Commodity
Contracts Cash
Flow Hedges
Total
$
$
(5,360) $
281
336
617
(4,743)
(602)
439
(163)
(1,022)
(5,928) $
$ (4,878)
482
440
159
(170)
166
(11)
606
(4,272)
471
(3,732)
(3,130)
2,198
1,759
(1,534)
(1,371)
(907)
115
(785) $ (6,713)
The following table presents amounts reclassified out of accumulated other comprehensive income (loss) for the years ended
December 31, 2018, 2017 and 2016. Deferred gains and losses of our commodity contracts cash flow hedges are recognized in
earnings upon settlement.
(in thousands)
Amortization of defined benefit pension and postretirement plan
items:
Prior service cost (1)
Net gain (1)
Total before income taxes
Income tax benefit
Net of tax
Gains and losses on commodity contracts cash flow hedges
Propane swap agreements (2)
Natural gas swaps (2)
Natural gas futures (2)
Total before income taxes
Income tax impact
Net of tax
Total reclassifications for the period
For the Year Ended December 31,
2018
2017
2016
$
$
$
$
$
77
(579)
(502)
63
(439)
(647)
197
(2,010)
(2,460)
701
(1,759)
(2,198)
$
$
$
$
$
77
(636)
(559)
223
(336)
1,607
(822)
(456)
329
(159)
170
(166)
$
$
$
$
$
77
(871)
(794)
320
(474)
(322)
—
345
23
(3)
20
(454)
(1) These amounts are included in the computation of net periodic benefits. See Note 17, Employee Benefit Plans, for additional details.
(2) These amounts are included in the effects of gains and losses from derivative instruments. See Note 8, Derivative Instruments, for additional details.
Amortization of defined benefit pension and postretirement plan items is included in other expense, net and gains and losses on
propane swap agreements, call options and natural gas futures contracts are included in cost of sales in the accompanying
Chesapeake Utilities Corporation 2018 Form 10-K Page 81
consolidated statements of income. The income tax benefit is included in income tax expense in the accompanying consolidated
statements of income.
Notes to the Consolidated Financial Statements
17. EMPLOYEE BENEFIT PLANS
We measure the assets and obligations of the defined benefit pension plans and other postretirement benefits plans to determine
the plans’ funded status as of the end of the year. We record as a component of other comprehensive income/loss or a regulatory
asset the changes in funded status that occurred during the year that are not recognized as part of net periodic benefit costs.
Defined Benefit Pension Plans
We sponsor three defined benefit pension plans: the Chesapeake Pension Plan, the FPU Pension Plan and the Chesapeake unfunded
supplemental executive retirement pension plan ("SERP").
The Chesapeake Pension Plan, a qualified plan, was closed to new participants, effective January 1, 1999, and was frozen with
respect to additional years of service and additional compensation, effective January 1, 2005. Benefits under the Chesapeake
Pension Plan were based on each participant’s years of service and highest average compensation, prior to the freezing of the plan.
Active participants on the date the Chesapeake Pension Plan was frozen were credited with two additional years of service.
The FPU Pension Plan, a qualified plan, covers eligible FPU non-union employees hired before January 1, 2005 and union
employees hired before the respective union contract expiration dates in 2005 and 2006. Prior to the FPU merger, the FPU Pension
Plan was frozen with respect to additional years of service and additional compensation, effective December 31, 2009.
The Chesapeake SERP, a nonqualified plan, is comprised of two sub-plans. The first sub-plan was frozen with respect to additional
years of service and additional compensation as of December 31, 2004. Benefits under the Chesapeake SERP were based on each
participant’s years of service and highest average compensation, prior to the freezing of the plan. Active participants on the date
the Chesapeake SERP was frozen were credited with two additional years of service. The second sub-plan provides fixed payments
for several executives who joined the Company as a result of an acquisition and whose agreements with the Company provided
for this benefit.
The unfunded liability for all three plans at both December 31, 2018 and 2017, is included in the other pension and benefit costs
liability in our consolidated balance sheets.
The following schedule sets forth the funded status at December 31, 2018 and 2017 and the net periodic cost for the years ended
December 31, 2018, 2017 and 2016 for the Chesapeake and FPU Pension Plans as well as the Chesapeake SERP:
At December 31,
(in thousands)
Change in benefit obligation:
Benefit obligation — beginning of year
Interest cost
Actuarial loss (gain)
Benefits paid
Benefit obligation — end of year
Change in plan assets:
Fair value of plan assets — beginning of year
Actual return on plan assets
Employer contributions
Benefits paid
Fair value of plan assets — end of year
Reconciliation:
Funded status
Accrued pension cost
Assumptions:
Chesapeake
Pension Plan
FPU
Pension Plan
Chesapeake
SERP
2018
2017
2018
2017
2018
2017
$11,443
384
(610)
(505)
10,712
$ 11,355
402
454
(768)
11,443
$ 64,664
2,339
(4,739)
(2,887)
59,377
$ 63,832
2,482
1,199
(2,849)
64,664
$ 2,428
83
(74)
(152)
2,285
$ 2,428
89
63
(152)
2,428
9,350
(647)
451
(505)
8,649
8,668
1,144
306
(768)
9,350
48,396
(3,113)
1,205
(2,887)
43,601
43,272
6,025
1,948
(2,849)
48,396
—
—
152
(152)
—
—
—
152
(152)
—
(2,063)
$ (2,063)
(2,093)
$ (2,093)
(15,776)
$ (15,776)
(16,268)
$(16,268)
(2,285)
$ (2,285)
(2,428)
$ (2,428)
Discount rate
Expected return on plan assets
4.00%
6.00%
3.50%
6.00%
4.25%
6.50%
3.75%
6.50%
4.00%
—%
3.50%
—%
Chesapeake Utilities Corporation 2018 Form 10-K Page 82
Notes to the Consolidated Financial Statements
For the Years Ended
December 31,
(in thousands)
Components of net periodic
pension cost:
Interest cost
Expected return on assets
Amortization of actuarial loss
Settlement expense
Net periodic pension cost(1)
Amortization of pre-merger
regulatory asset
Total periodic cost
Assumptions:
Discount rate
Expected return on plan
assets
Chesapeake
Pension Plan
FPU
Pension Plan
Chesapeake
SERP
2018
2017
2016
2018
2017
2016
2018
2017
2016
$ 384
(542)
343
—
185
$ 402
(495)
399
—
306
$ 421
(501)
459
161
540
$ 2,339
(3,091)
404
—
(348)
$ 2,482
(2,779)
513
—
216
$ 2,525
(2,702)
519
—
342
$ 83
—
101
$ 89
—
87
$ 91
87
184
176
178
—
$ 185
—
$ 306
—
$ 540
761
$ 413
761
$ 977
761
$ 1,103
—
$ 184
—
$ 176
—
$ 178
3.50% 3.75% 3.75%
3.75% 4.00%
4.00% 3.50% 3.75 % 3.75 %
6.00% 6.00% 6.00%
6.50% 6.50%
6.50%
—%
—%
—%
(1) As a result of our adoption of ASU 2017-07 on January 1, 2018, the "other than service" cost components of the net periodic costs have been recorded or
reclassified to other income (expense), net in the consolidated statements of income.
Included in the net periodic costs for the FPU Pension Plan is continued amortization of the FPU pension regulatory asset, which
represents the portion attributable to FPU's regulated operations for the changes in funded status that occurred, but were not
recognized as part of net periodic cost, prior to the merger with Chesapeake Utilities in October 2009. This was previously deferred
as a regulatory asset to be recovered through rates pursuant to an order by the Florida PSC. The unamortized balance of this
regulatory asset was $543,000 and $1.3 million at December 31, 2018 and 2017, respectively.
Our funding policy provides that payments to the trustee of each qualified plan shall be equal to at least the minimum funding
requirements of the Employee Retirement Income Security Act of 1974. The following schedule summarizes the assets of the
Chesapeake Pension Plan and the FPU Pension Plan, by investment type, at December 31, 2018, 2017 and 2016:
At December 31,
Asset Category
Equity securities
Debt securities
Other
Total
Chesapeake Pension Plan
FPU Pension Plan
2018
2017
2016
2018
2017
2016
49.02%
40.98%
10.00%
100.00%
52.70%
37.79%
9.51%
100.00%
52.93%
37.64%
9.43%
100.00%
50.04%
41.06%
8.90%
100.00%
55.17%
36.56%
8.27%
100.00%
53.18%
37.74%
9.08%
100.00%
The investment policy of both the Chesapeake Utilities and FPU Pension Plans is designed to provide the capital assets necessary
to meet the financial obligations of the plans. The investment goals and objectives are to achieve investment returns that, together
with contributions, will provide funds adequate to pay promised benefits to present and future beneficiaries of the plans, earn a
long-term investment return in excess of the growth of the plans’ retirement liabilities, minimize pension expense and cumulative
contributions resulting from liability measurement and asset performance, and maintain a diversified portfolio to reduce the risk
of large losses.
Chesapeake Utilities Corporation 2018 Form 10-K Page 83
The following allocation range of asset classes is intended to produce a rate of return sufficient to meet the plans’ goals and
objectives:
Notes to the Consolidated Financial Statements
Asset Allocation Strategy
Asset Class
Domestic Equities (Large Cap, Mid Cap and Small Cap)
Foreign Equities (Developed and Emerging Markets)
Fixed Income (Inflation Bond and Taxable Fixed)
Alternative Strategies (Long/Short Equity and Hedge Fund of Funds)
Diversifying Assets (High Yield Fixed Income, Commodities, and Real Estate)
Cash
Minimum Allocation
Percentage
Maximum Allocation
Percentage
14%
13%
26%
6%
7%
0%
32%
25%
40%
14%
19%
5%
Due to periodic contributions and different asset classes producing varying returns, the actual asset values may temporarily move
outside of the intended ranges. The investments are monitored on a quarterly basis, at a minimum, for asset allocation and
performance.
At December 31, 2018 and 2017, the assets of the Chesapeake Pension Plan and the FPU Pension Plan were comprised of the
following investments:
Asset Category
(in thousands)
Mutual Funds - Equity securities
U.S. Large Cap (1)
U.S. Mid Cap (1)
U.S. Small Cap (1)
International (2)
Alternative Strategies (3)
Mutual Funds - Debt securities
Fixed income (4)
High Yield (4)
Mutual Funds - Other
Commodities (5)
Real Estate (6)
Guaranteed deposit (7)
Total Pension Plan Assets in fair
value hierarchy
Fair Value Measurement Hierarchy
At December 31, 2018
At December 31, 2017
Level 1
Level 2
Level 3
Total
Level 1
Level 2
Level 3
Total
$ 3,399
$ — $ — $ 3,399
$ 4,245
$ — $ — $ 4,245
1,478
670
9,226
5,726
20,499
18,630
2,818
21,448
1,902
2,216
—
4,118
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
627
627
1,478
670
9,226
5,726
20,499
18,630
2,818
21,448
1,902
2,216
627
4,745
1,775
918
11,916
5,528
24,382
18,454
2,772
21,226
2,154
2,300
—
4,454
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
436
436
1,775
918
11,916
5,528
24,382
18,454
2,772
21,226
2,154
2,300
436
4,890
$46,065
$ — $
627
46,692
$ 50,062
$ — $
436
50,498
Investments measured at net asset
value (8)
Total Pension Plan Assets
(1) Includes funds that invest primarily in United States common stocks.
(2) Includes funds that invest primarily in foreign equities and emerging markets equities.
(3) Includes funds that actively invest in both equity and debt securities, funds that sell short securities and funds that provide long-term capital appreciation. The
funds may invest in debt securities below investment grade.
(4) Includes funds that invest in investment grade and fixed income securities.
(5) Includes funds that invest primarily in commodity-linked derivative instruments and fixed income securities.
(6) Includes funds that invest primarily in real estate.
(7) Includes investment in a group annuity product issued by an insurance company.
$ 57,746
$ 52,250
5,558
7,248
Chesapeake Utilities Corporation 2018 Form 10-K Page 84
Notes to the Consolidated Financial Statements
(8) Certain investments that were measured at net asset value per share have not been classified in the fair value hierarchy. These amounts are presented to reconcile
to total pension plan assets.
At December 31, 2018 and 2017, all of the investments were classified under the same fair value measurement hierarchy (Level
1 through Level 3) described under Note 9, Fair Value of Financial Instruments. The Level 3 investments were recorded at fair
value based on the contract value of annuity products underlying guaranteed deposit accounts, which was calculated using
discounted cash flow models. The contract value of these products represented deposits made to the contract, plus earnings at
guaranteed crediting rates, less withdrawals and fees.
The following table sets forth the summary of the changes in the fair value of Level 3 investments for the years ended December 31,
2018 and 2017:
(in thousands)
Balance, beginning of year
Purchases
Transfers in
Disbursements
Investment income
Balance, end of year
Other Postretirement Benefits Plans
For the Year Ended December 31,
2018
2017
$
$
436
1,674
2,375
(3,872)
14
627
$
$
498
2,271
1,743
(4,101)
25
436
We sponsor two defined benefit postretirement health plans: the Chesapeake Postretirement Plan and the FPU Medical Plan.
The following table sets forth the funded status at December 31, 2018 and 2017 and the net periodic cost for the years ended
December 31, 2018, 2017, and 2016:
At December 31,
(in thousands)
Change in benefit obligation:
Benefit obligation — beginning of year
$
Interest cost
Plan participants contributions
Actuarial loss (gain)
Benefits paid
Benefit obligation — end of year
Change in plan assets:
Fair value of plan assets — beginning of year
Employer contributions(1)
Plan participants contributions
Benefits paid
Fair value of plan assets — end of year
Reconciliation:
Funded status
Accrued postretirement cost
Assumptions:
Discount rate
Chesapeake
Postretirement Plan
2017
2018
FPU
Medical Plan
2018
2017
$
1,128
38
136
(131)
(169)
1,002
—
33
136
(169)
—
$
1,132
41
118
72
(235)
1,128
—
117
118
(235)
—
$
1,287
47
41
(89)
(99)
1,187
—
58
41
(99)
—
1,349
50
48
(48)
(112)
1,287
—
64
48
(112)
—
(1,002)
(1,002)
$
(1,128)
(1,128)
$
(1,187)
(1,187)
$
(1,287)
(1,287)
$
4.00%
3.50%
4.25%
3.75%
(1) The Chesapeake Postretirement Plan does not receive a Medicare Part-D subsidy. The FPU Medical Plan did not receive a significant subsidy for the post-
merger period.
Chesapeake Utilities Corporation 2018 Form 10-K Page 85
Net periodic postretirement benefit costs for 2018, 2017, and 2016 include the following components:
Notes to the Consolidated Financial Statements
For the Years Ended December 31,
(in thousands)
Components of net periodic
postretirement cost:
Interest cost
Amortization of actuarial loss
Amortization of prior service cost
(credit)
Net periodic cost
Amortization of pre-merger regulatory
asset
Total periodic cost(1)
Assumptions
Discount rate
Chesapeake
Postretirement Plan
2017
2018
2016
2018
FPU
Medical Plan
2017
2016
$
$
38
58
(77)
19
—
19
$
$
41
53
(77)
17
—
17
$
$
43
64
(77)
30
—
30
$
$
47
—
—
47
8
55
$
$
50
—
—
50
8
58
$
$
55
—
—
55
8
63
3.50%
3.75%
3.75%
3.75%
4.00%
4.00%
(1) As a result of our adoption of ASU 2017-07 on January 1, 2018, the "other than service" cost components of the net periodic costs have been recorded or
reclassified to other income (expense), net in the condensed consolidated statements of income.
Similar to the FPU Pension Plan, continued amortization of the FPU Medical Plan regulatory asset related to the unrecognized
cost prior to the merger with Chesapeake Utilities was included in the net periodic cost. The unamortized balance of this regulatory
asset was $14,000 and $22,000 at December 31, 2018 and 2017, respectively.
The following table presents the amounts not yet reflected in net periodic benefit cost and included in accumulated other
comprehensive loss or as a regulatory asset as of December 31, 2018:
(in thousands)
Prior service cost (credit)
Net loss (gain)
Total
Accumulated other comprehensive loss
(gain) pre-tax(1)
Post-merger regulatory asset
Subtotal
Pre-merger regulatory asset
Total unrecognized cost
$
$
$
Chesapeake
Pension
Plan
FPU
Pension
Plan
Chesapeake
SERP
Chesapeake
Postretirement
Plan
FPU
Medical
Plan
— $
— $
— $
3,865
18,544
3,865
$
18,544
$
559
559
$
(524) $
578
54
$
3,865
$
3,523
$
559
$
—
3,865
—
15,021
18,544
543
$
3,865
$
19,087
$
—
559
—
559
$
54
—
54
—
54
$
$
Total
(524)
23,467
22,943
7,986
14,957
22,943
557
23,500
— $
(79)
(79) $
(15) $
(64)
(79)
14
(65) $
(1) The total amount of accumulated other comprehensive loss recorded on our consolidated balance sheet as of December 31, 2018 is net of income tax benefits
of $2.1 million.
Pursuant to a Florida PSC order, FPU continues to record as a regulatory asset a portion of the unrecognized pension and
postretirement benefit costs after the merger with Chesapeake Utilities related to its regulated operations, which is included in the
above table as a post-merger regulatory asset. FPU also continues to maintain and amortize a portion of the unrecognized pension
and postretirement benefit costs prior to the merger with Chesapeake Utilities related to its regulated operations, which is shown
as a pre-merger regulatory asset.
Chesapeake Utilities Corporation 2018 Form 10-K Page 86
Notes to the Consolidated Financial Statements
Assumptions
The assumptions used for the discount rate to calculate the benefit obligations were based on the interest rates of high-quality
bonds in 2018, considering the expected lives of each of the plans. In determining the average expected return on plan assets for
each applicable plan, various factors, such as historical long-term return experience, investment policy and current and expected
allocation, were considered. Since Chesapeake Utilities' plans and FPU’s plans have different expected plan lives, particularly in
light of the lump-sum-payment option provided in the Chesapeake Pension Plan, different assumptions regarding discount rate
and expected return on plan assets were selected for Chesapeake Utilities' and FPU’s plans. Since both pension plans are frozen
with respect to additional years of service and compensation, the rate of assumed compensation increases is not applicable.
The health care inflation rate for 2018 used to calculate the benefit obligation is 5.0 percent for medical and 6.0 percent for
prescription drugs for the Chesapeake Postretirement Plan; and 5.0 percent for both medical and prescription drugs for the FPU
Medical Plan.
Estimated Future Benefit Payments
In 2019, we expect to contribute $163,000 and $1.2 million to the Chesapeake Pension Plan and FPU Pension Plan, respectively,
and $383,000 to the Chesapeake SERP. We also expect to contribute $96,000 and $94,000 to the Chesapeake Postretirement Plan
and FPU Medical Plan, respectively, in 2019.
The schedule below shows the estimated future benefit payments for each of the plans previously described:
(in thousands)
2019
2020
2021
2022
2023
Years 2024 through 2028
Chesapeake Pension
Plan
(1)
FPU Pension
Plan
(1)
Chesapeake
SERP
(2)
Chesapeake
Postretirement
Plan
(2)
FPU
Medical
(2)
Plan
$
$
$
$
$
$
528
529
736
595
1,244
3,866
$
$
$
$
$
$
3,091
3,221
3,299
3,485
3,558
18,570
$
$
$
$
$
$
383
150
148
147
145
744
$
$
$
$
$
$
96
85
82
81
64
275
$
$
$
$
$
$
94
87
91
93
80
402
(1) The pension plan is funded; therefore, benefit payments are expected to be paid out of the plan assets.
(2) Benefit payments are expected to be paid out of our general funds.
Retirement Savings Plan
For the years ended December 31, 2018, 2017 and 2016, we sponsored a 401(k) Retirement Savings Plan. This plan is offered to
all eligible employees who have completed three months of service. We match 100 percent of eligible participants’ pre-tax
contributions to the Retirement Savings Plan up to a maximum of six percent of eligible compensation. The employer matching
contribution is made in cash and is invested based on a participant’s investment directions. In addition, we may make a discretionary
supplemental contribution to participants in the plan, without regard to whether or not they make pre-tax contributions. Any
supplemental employer contribution is generally made in our common stock. With respect to the employer match and supplemental
employer contribution, employees are 100 percent vested after two years of service or upon reaching 55 years of age while still
employed by us. New employees who do not make an election to contribute and do not opt out of the Retirement Savings Plan
will be automatically enrolled at a deferral rate of three percent, and the automatic deferral rate will increase by one percent per
year up to a maximum of ten percent. All contributions and matched funds can be invested among the mutual funds available for
investment.
Employer contributions to our Retirement Savings Plan totaled $5.5 million, $5.0 million, and $4.5 million for the years ended
December 31, 2018, 2017 and 2016, respectively. As of December 31, 2018, there were 831,183 shares of our common stock
reserved to fund future contributions to the Retirement Savings Plan.
Non-Qualified Deferred Compensation Plan
Members of our Board of Directors, and officers designated by the Compensation Committee, are eligible to participate in the
Non-Qualified Deferred Compensation Plan. Directors can elect to defer any portion of their cash or stock compensation and
officers can defer up to 80 percent of their base compensation, cash bonuses or any amount of their stock bonuses (net of required
withholdings). Officers may receive a matching contribution on their cash compensation deferrals up to six percent of their
Chesapeake Utilities Corporation 2018 Form 10-K Page 87
compensation, provided it does not duplicate a match they receive in the Retirement Savings Plan. Stock bonuses are not eligible
for matching contributions. Participants are able to elect the payment of deferred compensation to begin on a specified future date
or upon separation from service. Additionally, participants can elect to receive payments upon the earlier or later of a fixed date
or separation from service. The payments can be made in one lump sum or annual installments for up to 15 years.
Notes to the Consolidated Financial Statements
All obligations arising under the Non-Qualified Deferred Compensation Plan are payable from our general assets, although we
have established a Rabbi Trust to informally fund the plan. Deferrals of cash compensation may be invested by the participants in
various mutual funds (the same options that are available in the Retirement Savings Plan). The participants are credited with gains
or losses on those investments. Deferred stock compensation may not be diversified. The participants are credited with dividends
on our common stock in the same amount that is received by all other stockholders. Such dividends are reinvested into our common
stock. Assets held in the Rabbi Trust, recorded as Investments on the consolidated balance sheet, had a fair value of $6.7 million
at both December 31, 2018 and 2017. (See Note 10, Investments, for further details). The assets of the Rabbi Trust are at all times
subject to the claims of our general creditors.
Deferrals of officer base compensation and cash bonuses and directors’ cash retainers are paid in cash. All deferrals of executive
performance shares, which represent deferred stock units, and directors’ stock retainers are paid in shares of our common stock,
except that cash is paid in lieu of fractional shares. The value of our stock held in the Rabbi Trust is classified within the stockholders’
equity section of the consolidated balance sheets and has been accounted for in a manner similar to treasury stock. The amounts
recorded under the Non-Qualified Deferred Compensation Plan totaled $3.9 million and $3.4 million at December 31, 2018 and
2017, respectively, which are also shown as a deduction against stockholders' equity in the consolidated balance sheet.
18. SHARE-BASED COMPENSATION PLANS
Our non-employee directors and key employees have been granted share-based awards through our SICP. We record these share-
based awards as compensation costs over the respective service period for which services are received in exchange for an award
of equity or equity-based compensation. The compensation cost is based primarily on the fair value of the shares awarded, using
the estimated fair value of each share on the date it was granted and the number of shares to be issued at the end of the service
period. We have 475,099 shares of common stock reserved for issuance under the SICP.
The table below presents the amounts included in net income related to share-based compensation expense for the awards granted
under the SICP for the years ended December 31, 2018, 2017 and 2016:
For the Year Ended December 31,
2017
2016
2018
(in thousands)
Awards to non-employee directors
Awards to key employees
Total compensation expense
Less: tax benefit
Share-based compensation amounts included in net income
Stock Options
$
$
539
2,871
3,410
(934)
2,476
$
$
540
1,950
2,490
(1,003)
1,487
$
$
580
1,787
2,367
(952)
1,415
There were no stock options outstanding at December 31, 2018 or 2017, nor were any stock options issued during the years 2016
through 2018.
Non-employee Directors
Shares granted to non-employee directors are issued in advance of these directors’ service periods and are fully vested as of the
date of the grant. We record a prepaid expense equal to the fair value of the shares issued and amortize the expense equally over
a service period of one year. In May 2017, each of our non-employee directors received an annual retainer of 835 shares of
common stock under the SICP for board service through the 2018 Annual Meeting of Stockholders; as a group, 7,515 shares, with
a weighted average fair value of $71.80, were issued and vested in 2017. In May 2018, each of our non-employee directors
received an annual retainer of 792 shares of common stock under the SICP for board service through the 2019 Annual Meeting
of Stockholders; accordingly, 7,128 shares, with a weighted average fair value of $75.70, were issued and vested in 2018.
The intrinsic values of the shares granted to our non-employee directors are equal to the fair value of these awards on the date of
grant. At December 31, 2018, there was $180,000 of unrecognized compensation expense related to these awards. This expense
will be fully recognized by April 2019, which approximates the expected remaining service period of those directors.
Chesapeake Utilities Corporation 2018 Form 10-K Page 88
Notes to the Consolidated Financial Statements
Key Employees
Our Compensation Committee is authorized to grant our key employees the right to receive awards of shares of our common stock,
contingent upon the achievement of established performance goals and subject to SEC transfer restrictions once awarded.
We currently have several outstanding multi-year performance plans, which are based upon the successful achievement of long-
term goals, growth and financial results and comprise both market-based and performance-based conditions or targets. The fair
value per share, tied to a performance-based condition or target, is equal to the market price per share on the grant date. For the
market-based conditions, we used the Black-Scholes pricing model to estimate the fair value of each share granted.
The table below presents the summary of the stock activity for awards to key employees:
Outstanding — December 31, 2016
Granted
Vested
Expired
Outstanding — December 31, 2017
Granted
Vested
Vested - Accelerated pursuant to separation agreement (1)
Expired
Outstanding — December 31, 2018
(1) Includes 2,569 shares that were forfeited
Number of
Shares
Weighted Average
Fair Value
115,091
$
$
52,355
(32,926) $
(1,878) $
$
132,642
49,494
$
(29,786) $
(16,676) $
(3,933) $
$
131,741
51.85
63.42
38.88
39.97
59.31
67.76
47.39
75.78
49.66
67.24
The intrinsic value of these awards was $10.7 million, $10.4 million and $7.7 million in 2018, 2017 and 2016, respectively. At
December 31, 2018, there was $2.1 million of unrecognized compensation cost related to these awards, which is expected to be
recognized during 2019 through 2020.
In 2018, 2017 and 2016, we withheld shares with a value at least equivalent to the employees’ minimum statutory obligation for
the applicable income and other employment taxes, and remitted the cash to the appropriate taxing authorities with the executives
electing to receive the net shares. The below table presents the number of shares withheld, amounts remitted to taxing authorities
and the tax benefits associated with these obligations:
For the Year Ended December 31,
2017
2016
2018
(amounts except shares, in thousands)
Shares withheld to satisfy tax obligations
Amounts remitted to tax authorities to satisfy obligations
Tax benefit associated with settlement of share based payments
10,436
1,210
$
— $
10,269
$
692
349
12,031
770
285
$
$
In June 2018, the Company and a former executive officer entered into a separation agreement and release (the "Separation
Agreement"). Pursuant to the Separation Agreement, three awards, representing a total of 14,107 shares of common stock previously
granted to the executive officer under the SICP, immediately vested at the time of separation, and an additional 2,569 shares were
forfeited. We settled the awards that vested in cash and recognized $1.1 million as share-based compensation expense.
Chesapeake Utilities Corporation 2018 Form 10-K Page 89
19. RATES AND OTHER REGULATORY ACTIVITIES
Notes to the Consolidated Financial Statements
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 by the Florida PSC.
Delaware
Underserved Area Rates: In December 2017, we filed an application requesting authorization to utilize existing expansion area
tariff rates to serve customers located outside of the current Sussex County, Delaware expansion area boundaries that cannot be
economically served under the regular tariff rates. In June 2018, we reached a settlement agreement with the relevant parties,
which allows us to utilize higher rates for areas outside of our existing expansion area. The Delaware PSC unanimously approved
the settlement at its public meeting on July 10, 2018. The new rate schedule became effective on August 1, 2018.
CGS: In June 2018, we filed with the Delaware PSC an application requesting approval of the acquisition, and subsequent
conversion to natural gas of certain CGS located within our service territory. We requested the establishment of regulatory
accounting treatment and valuation of the proposed acquisition, approval of a methodology to set new distribution rates for CGS
customers and approval of a new system-wide tariff rate that will recover CGS conversion costs. The application included a request
that the Delaware PSC regulate the propane CGS systems after their acquisition but before conversion to natural gas. In late 2018,
the Delaware PSC ruled that it did not have jurisdiction over these propane CGS systems and could not approve the methodology
given the lack of jurisdiction. We are considering proposing legislation to clarify the Delaware PSC jurisdiction or we may redesign
the application and re-file.
Effect of the TCJA on customers: The Delaware PSC issued an order requiring all rate-regulated utilities to: (i) file estimates of
the impact of the TCJA on their cost of service for the most recent test year available (including new rate schedules), and (ii)
propose procedures for changing rates to reflect those impacts on or before March 31, 2018. In addition, on February 1, 2018,
the Delaware PSC issued an order requiring Delaware rate-regulated public utilities to accrue regulatory liabilities reflecting the
impacts of changes in the federal corporate income tax laws. In compliance with the Delaware PSC order, we have established a
regulatory liability to reflect the estimated impacts of the changes in the federal corporate income tax rate. On May 31, 2018, our
Delaware Division filed the information requested by the PSC, including an updated report reflecting the impact of the TCJA. On
January 31, 2019, the Delaware PSC approved the as-filed Delaware Division Delivery Service Rates reflecting the impact of the
TCJA. The new rates will go into effect March 1, 2019, and the Company will have to complete refunds back to February 2018,
per the Commission’s previous order, by June 30, 2019. The order also provides for a line item billing credit to go into effect on
April 1, 2019, for the return of the excess deferred income taxes. Additional information on the TCJA impact is included in the
table at the end of this Note 19, Rates and Other Regulatory Activities.
Maryland
Effect of the TCJA on customers: In April 2018, the Maryland PSC issued orders related to the TCJA impact on both the
Maryland Division and Sandpiper operations. Please see the actions taken in conjunction with these orders in the TCJA table at
the end of this Note 19, Rates and Other Regulatory Activities. Additionally, if in the future the Maryland Division or
Sandpiper identifies any additional tax savings, we must submit an additional filing to the Maryland PSC in order to return
those savings to customers as soon as possible.
Florida
Florida Electric Reliability/Modernization Pilot Program: In July 2017, our Florida electric operations filed a petition with the
Florida PSC requesting approval to include $15.2 million of certain capital project expenditures in its rate base and to adjust its
base rates accordingly. These expenditures are designed to improve the stability and safety of the electric system, while enhancing
the capability of our electrical grid. In December 2017, the Florida PSC approved this petition, effective January 1, 2018. The
settlement agreement prescribed the methodology for adjusting the new rates based on the lower federal income tax rate and the
process and methodology regarding the refund of deferred income taxes, reclassified as a regulatory liability, as a result of the
TCJA. More details about this methodology are included in the table at the end of this Note 19, Rates and Other Regulatory
Activities.
Electric Limited Proceeding-Storm Recovery: 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 this filing, had a deficit of $779,000. We requested approval of a surcharge of $1.82 per kilowatt hour for two
years to recover storm-related costs and replenish the storm reserve. FPU filed written testimony on this matter in August 2018.
This matter was heard before the Florida PSC in December 2018, final legal briefs were submitted and, on January 14, 2019, and
is scheduled for approval at Agenda on March 5, 2019.
Chesapeake Utilities Corporation 2018 Form 10-K Page 90
Notes to the Consolidated Financial Statements
In October 2018, Hurricane Michael passed through Florida Public Utilities Company's (“FPU”) electric distribution operation's
service territory in Northwest Florida. The hurricane caused widespread and severe damage to FPU's infrastructure resulting in
100 percent of its customers losing electrical service. FPU has restored service to those customers who were able to accept service
following Hurricane Michael after a significant hurricane restoration effort. In conjunction with restoring these services, FPU
expended over $60.0 million to restore service, which has been recorded as new plant and equipment or charged against FPU’s
storm reserve. We are preparing the necessary regulatory filings to seek recovery for the costs incurred, including replenishment
of FPU's storm reserve. In conjunction with the hurricane-related expenditures, we executed two 13-month unsecured term loans
as temporary financing, each in the amount of $30.0 million. The interest cost associated with these loans is LIBOR plus 75 basis
points. One of the term loans was executed in December 2018 and the other was executed in January 2019. The storm did not
have a material impact on the Company’s financial results in 2018, and is not expected to have a significant impact going forward
assuming reasonable regulatory treatment.
Effect of the TCJA on customers: In February 2018, the Florida PSC opened dockets to consider the impacts associated with the
TCJA. In May 2018, FPU’s natural gas division filed petitions and supporting testimony regarding the disposition of the related
impacts of the TCJA. Hearings on this matter took place in November 2018, The Florida PSC approved staff’s recommendations
on February 5, 2019. Final orders were issued on February 25, 2019, and are subject to a 30-day appeal period. Staff’s
recommendations are summarized in the table at the end of this Note 19, Rates and Other Regulatory Activities.
Eastern Shore
2017 Expansion Project: In October 2017, the FERC issued a Certificate of Public Convenience and Necessity authorizing Eastern
Shore to construct this project, the largest expansion in Eastern Shore's history. The facilities include approximately 23 miles of
pipeline looping in Pennsylvania, Maryland and Delaware; upgrades to existing metering facilities in Lancaster County,
Pennsylvania; installation of an additional compressor unit at Eastern Shore’s existing Daleville compressor station in Chester
County, Pennsylvania; and approximately 17 miles of new mainline extension and two pressure control stations in Sussex County,
Delaware. Eastern Shore entered into precedent agreements with seven existing customers, including three affiliates of Chesapeake
Utilities, for a total of 61,162 Dts/d of additional firm natural gas transportation service on Eastern Shore’s pipeline system and
an additional 52,500 Dts/d of firm transportation service at certain Eastern Shore receipt facilities.
The first phase of the project was placed into service in December 2017 and, as of December 31, 2018, we have substantially
completed construction. The TETLP interconnect upgrade was placed into service in December 2017, and the Fair Hill Loop, the
Jennersville Loop, the Daleville Compressor Station, the Seaford-Millsboro Connector, and the Millsboro Pressure Control Station
were placed into service at various dates in 2018. The Parkesburg Loop was placed into service in January 2019. The few remaining
segments are expected to be placed into service in various phases during the first half of 2019.
2017 Rate Case Filing: In January 2017, Eastern Shore filed a base rate proceeding with the FERC. In August 2017, Eastern
Shore implemented the proposed new rates, subject to refund, based on the outcome of the rate proceeding. Eastern Shore recorded
incremental revenue of approximately $3.7 million for the year ended December 31, 2017, and established a regulatory liability
to reserve a portion of the total incremental revenues generated by the new rates pending FERC approval of a settlement agreement
and refunds to customers according to the terms of the settlement. The FERC approved the settlement agreement in February
2018, and it became final in March 2018. In April 2018, Eastern Shore refunded to its customers, with interest, the difference
between the proposed rates and the settlement rates. Exclusive of the TCJA impact, which is discussed below, base rates increased,
on an annual basis, by approximately $9.8 million.
Effect of the TCJA on customers: In March 2018, Eastern Shore filed with the FERC its revised base rates, reflecting the reduction
in its federal corporate income tax rate. These adjusted base rates became effective January 1, 2018 and will generate approximately
$6.6 million in incremental margin, on an annual basis. Other information about the impact of the TCJA on ESNG has been
included in the table at the end of this Note 19, Rates and Other Regulatory Activities.
In October 2018, the FERC issued an order granting a waiver to Eastern Shore. In April 2018, Eastern Shore consummated a
filing, which included its comments associated with the United Airlines, Inc. vs. FERC proceeding and requested confirmation
from the FERC that Eastern Shore is not required to provide an informational filing because of its implementation of lower rates
in accordance with the 2017 rate case settlement agreement.
Chesapeake Utilities Corporation 2018 Form 10-K Page 91
Notes to the Consolidated Financial Statements
Del-Mar Energy Pathway Project: In September 2018, Eastern Shore filed a Certificate Application with the FERC, requesting
authorization to construct and operate the Del-Mar Energy Pathway project, which will provide an additional 14,300 Dts/d of
capacity 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 Somerset County, Maryland; and new pressure control and delivery stations in these
counties. The benefits of this project include: (i) further 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. During the
fourth quarter of 2018, the FERC held a full project area scoping meeting in Sussex County, Delaware and issued a Notice of
Schedule for Environmental Review, indicating issuance of its Environmental Assessment for the Del-Mar Energy Pathway project
by April 1, 2019.
Summary TCJA Table
Regulatory Liabilities related to Excess
Accumulated Deferred Income Taxes ("ADIT")
Status of Customer Rate impact related to
35 percent to 21 percent rate change
Operation and Regulatory
Jurisdiction
Amount (in
thousands)
Status
Eastern Shore (FERC)
$34,190
Delaware Division
(Delaware PSC)
Maryland Division
(Maryland PSC)
Sandpiper Energy (Maryland
PSC)
Chesapeake Florida Gas
Division/Central Florida Gas
(Florida PSC)
$13,262
$4,211
$3,815
$8,471
Will be addressed in Eastern Shore's
next rate case filing
In January 2019, PSC approved
amortization of ADIT and
corresponding customer rate
reductions effective March 1, 2019.
Implemented one-time bill credit (totaling
$900,000) in April 2018 - Customer rates
adjusted in April, 2018
Customer rates to be adjusted March 1, 2019.
One-time bill credit to be implemented during
the second quarter.
In May 2018, PSC approved
amortization of ADIT and
corresponding customer rate
reductions commenced
In May 2018, PSC approved
amortization of ADIT and
corresponding customer rate
reductions commenced
Implemented one-time bill credit (totaling
$365,000) in July 2018 - Customer rates
adjusted effective May 1, 2018
Implemented one-time bill credit (totaling
$608,000) in July 2018 - Customer rates
adjusted effective May 1, 2018
PSC Staff recommendation issued
on January 24, 2019; final order was
issued on February 25, 2019
PSC Staff recommendation issued on January
24, 2019; final order was issued on February
25, 2019
The order states that the net ADIT
liability would be amortized and
retained by the Company pursuant
to the prescribed schedule
No one-time bill credit or adjustment in rates
would be applied; the tax savings arising from
the TCJA rate reduction would be retained
FPU Natural Gas (includes
FPU, Fort Meade, and
Indiantown) (Florida PSC)
$19,505
PSC Staff recommendation issued
on January 24, 2019; final order
was issued on February 25, 2019
PSC Staff recommendation issued on January
24, 2019; final order was issued on February
25, 2019
FPU Electric (Florida PSC)
$5,995
The order states that the net ADIT
liability would be amortized and
retained by the Company pursuant
to the prescribed schedule
In January 2019, PSC approved
amortization of ADIT through
purchased power cost recovery,
storm reserve and rates.
No one-time bill credit or adjustment in rates
would be applied; the tax savings arising from
the TCJA rate reduction would be retained
TCJA benefit will flow back to its 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
Regulatory Assets and Liabilities
At December 31, 2018 and 2017, our regulated utility operations had recorded the following regulatory assets and liabilities
included in our consolidated balance sheets. These assets and liabilities will be recognized as revenues and expenses in future
periods as they are reflected in customers’ rates.
Chesapeake Utilities Corporation 2018 Form 10-K Page 92
Notes to the Consolidated Financial Statements
(in thousands)
Regulatory Assets
Under-recovered purchased fuel and conservation cost recovery (1)
Under-recovered GRIP revenue (2)
Deferred postretirement benefits (3)
Deferred conversion and development costs (1)
Environmental regulatory assets and expenditures (4)
Acquisition adjustment (5)
Loss on reacquired debt (6)
Other
Total Regulatory Assets
Regulatory Liabilities
Self-insurance (7)
Over-recovered purchased fuel and conservation cost recovery (1)
Over-recovered GRIP revenue (2)
Storm reserve (7)
Accrued asset removal cost (8)
Deferred income taxes due to rate change (9)
Other
As of December 31,
2018
2017
$
4,631
$
$
$
165
15,517
16,727
2,731
33,255
942
3,250
77,218
$
947
$
5,443
1,563
677
42,401
91,162
729
9,869
164
15,498
11,735
3,222
39,992
1,031
4,994
86,505
1,013
2,048
2,245
669
40,948
98,492
2,048
147,463
Total Regulatory Liabilities
$
142,922
$
(1) We are allowed to recover the asset or are required to pay the liability in rates. We do not earn an overall rate of return on these assets.
(2) The Florida PSC allowed us to recover through a surcharge, capital and other program-related-costs, inclusive of an appropriate return on investment, associated
with accelerating the replacement of qualifying distribution mains and services (defined as any material other than coated steel or plastic) in FPU’s natural gas
distribution, Fort Meade division and Chesapeake Utilities’ Central Florida Gas division. We are allowed to recover the asset or are required to pay the liability
in rates related to GRIP.
(3) The Florida PSC allowed FPU to treat as a regulatory asset the portion of the unrecognized costs pursuant to ASC Topic 715, Compensation - Retirement
Benefits, related to its regulated operations. See Note 17, Employee Benefit Plans, for additional information.
(4) All of our environmental expenditures incurred to date and our current estimate of future environmental expenditures have been approved by various PSCs for
recovery. See Note 20, Environmental Commitments and Contingencies, for additional information on our environmental contingencies.
(5) We are allowed to include the premiums paid in various natural gas utility acquisitions in Florida in our rate bases and recover them over a specific time period
pursuant to the Florida PSC approvals. Included in these amounts are $543,000 of the premium paid by FPU, $34.2 million of the premium paid by us in 2009,
including a gross up for income tax, because it is not tax deductible, and $746,000 of the premium paid by FPU in 2010.
(6) Gains and losses resulting from the reacquisition of long-term debt are amortized over future periods as adjustments to interest expense in accordance with
established regulatory practice.
(7) We have self-insurance and storm reserves in our Florida regulated energy operations that allow us to collect through rates amounts to be used against general
claims, storm restoration costs and other losses as they are incurred.
(8) See Note 1, Summary of Significant Accounting Policies, for additional information on our asset removal cost policies.
(9) We recorded a regulatory liability for our regulated businesses related to the revaluation of accumulated deferred tax assets/liabilities as a result of the TCJA.
Based upon the regulatory proceedings, we will pass back the respective portion of the excess accumulated deferred taxes to rate payers. See Note 12, Income
Taxes, for additional information.
20. ENVIRONMENTAL COMMITMENTS AND CONTINGENCIES
We are subject to federal, state and local laws and regulations governing environmental quality and pollution control. These laws
and regulations require us to remove or remediate, at current and former operating sites, the effect on the environment of the
disposal or release of specified substances.
MGP Sites
We have participated in the investigation, assessment or remediation of, and have exposures at, seven former MGP sites. We have
received approval for recovery of clean-up costs in rates for six sites located in Salisbury, Maryland, Seaford, Delaware and Winter
Chesapeake Utilities Corporation 2018 Form 10-K Page 93
Notes to the Consolidated Financial Statements
Haven, Key West, Pensacola, Sanford and West Palm Beach, Florida. We have also been in discussions with the MDE regarding
a former MGP site located in Cambridge, Maryland.
As of December 31, 2018, we had approximately $9.1 million in environmental liabilities, related to FPU’s MGP sites in Key
West, Pensacola, Sanford and West Palm Beach. FPU has approval to recover, from insurance and from customers through rates,
up to $14.0 million of its environmental costs related to its MGP sites. As of December 31, 2018, we have recovered approximately
$11.5 million, leaving approximately $2.5 million 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)
West Palm Beach
(Florida)
Sanford (Florida)
Winter Haven
(Florida)
Seaford
(Delaware)
Cambridge
(Maryland)
Status
Remedial actions approved by Florida Department
of Environmental Protection have been
implemented on the east parcel of the site. Similar
remedial actions expected to be implemented on
other remaining portions.
In March 2018, the 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. It is unlikely that FPU will incur any
significant future costs associated with the site.
Remediation is ongoing.
Proposed plan for implementation approved by
Delaware Department of Natural Resources and
Environmental Control in July 2017. Site
assessment is ongoing.
Estimated Cost to Clean Up
(Expect to Recover through Rates)
Between $4.5 million to $15.4 million, including
costs associated with the relocation of FPU’s
operations at this site, which is necessary to
implement the remedial plan, and any potential
costs associated with future redevelopment of the
properties.
FPU's remaining remediation expenses, including
attorneys' fees and costs, are anticipated to be less
than $10,000.
Not expected to exceed $425,000, which includes
costs of implementing institutional controls at the
site.
$273,000 to $465,000.
Currently in discussions with MDE.
Unable to estimate.
21. OTHER COMMITMENTS AND CONTINGENCIES
Natural Gas, Electric and Propane Supply
Our Delmarva Peninsula natural gas distribution operations have asset management agreements with PESCO to manage their
natural gas transportation and storage capacity. The agreements were effective as of April 1, 2017, and each has a three-year term,
expiring on March 31, 2020. Previously, the Delaware PSC approved PESCO to serve as an asset manager with respect to our
Delaware Division.
In May 2013, Sandpiper entered into a capacity, supply and operating agreement with Eastern Gas & Water Investment Company,
LLC ("EGWIC") to purchase propane through May 2019. Sandpiper's remaining commitment is approximately 1.2 million gallons.
Sandpiper has the option to enter into either a fixed per-gallon price for some or all of the propane purchases or a market-based
price utilizing one of two local propane pricing indices.
Also in May 2013, Sharp entered into a separate supply and operating agreement with EGWIC. Under this agreement, Sharp has
a commitment to supply propane to EGWIC through May 2019. Sharp's current annual commitment is estimated at approximately
1.2 million gallons. The agreement between Sharp and EGWIC is separate from the agreement between Sandpiper and EGWIC;
neither agreement permits the set off of the rights and obligations in one agreement against those in the other agreement.
Chesapeake Utilities Corporation 2018 Form 10-K Page 94
Notes to the Consolidated Financial Statements
Chesapeake Utilities' Florida Division has firm transportation service contracts with FGT and Gulfstream. Pursuant to a capacity
release program approved by the Florida PSC, all of the capacity under these agreements has been released to various third parties,
including PESCO. 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.
FPU’s electric supply contracts require FPU to maintain an acceptable standard of creditworthiness based on specific financial
ratios. FPU’s agreement with FPL requires FPU to meet or exceed a debt service coverage ratio of 1.25 times based on the results
of the prior 12 months. If FPU fails to meet this ratio, it must provide an irrevocable letter of credit or pay all amounts outstanding
under the agreement within five business days. FPU’s electric supply agreement with Gulf Power requires FPU to meet the following
ratios based on the average of the prior six quarters: (a) funds from operations interest coverage ratio (minimum of 2 times), and
(b) total debt to total capital (maximum of 65 percent). If FPU fails to meet the requirements, it has to provide the supplier a written
explanation of actions taken, or proposed to be taken, to become compliant. Failure to comply with the ratios specified in the Gulf
Power agreement could also result in FPU having to provide an irrevocable letter of credit. As of December 31, 2018, FPU was
in compliance with all of the requirements of its fuel supply contracts.
Eight Flags provides electricity and steam generation services through its CHP plant located on Amelia Island, Florida. In June
2016, Eight Flags began selling power generated from the CHP plant to FPU pursuant to a 20-year power purchase agreement for
distribution to our electric customers. In July 2016, Eight Flags also started selling steam, pursuant to a separate 20-year contract,
to the landowner on which the CHP plant is located. The CHP plant is powered by natural gas transported by FPU through its
distribution system and Peninsula Pipeline through its intrastate pipeline.
The total purchase obligations for natural gas, electric and propane supplies are as follows:
Year
(in thousands)
2019
2020-2021
2022-2023
Beyond 2023
Total
Purchase Obligations
$
158,544
$
74,970
$
42,279
$
129,019
$
404,812
Corporate Guarantees
The Board of Directors has authorized the Company 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 during 2018 was $95.0 million.
We have issued corporate guarantees to certain vendors of our subsidiaries, primarily PESCO. These corporate guarantees provide
for the payment of natural gas purchases in the event that PESCO defaults. PESCO has never defaulted on its obligations to pay
its suppliers. The liabilities for these purchases are recorded when incurred. The aggregate amount guaranteed at December 31,
2018 was $76.5 million, with the guarantees expiring on various dates through December 2019.
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 13, Long-Term Debt, for further details).
As of December 31, 2018, we have issued letters of credit totaling approximately $7.0 million related to the electric transmission
services for FPU's electric division, the firm transportation service agreement between TETLP and our Delaware and Maryland
divisions, the payment of natural gas purchases for PESCO, and to our current and previous primary insurance carriers. These
letters of credit have various expiration dates through December 2019. There have been no draws on these letters of credit as of
December 31, 2018. We do not anticipate that the letters of credit will be drawn upon by the counterparties, and we expect that
the letters of credit will be renewed to the extent necessary in the future.
Chesapeake Utilities Corporation 2018 Form 10-K Page 95
22. QUARTERLY FINANCIAL DATA (UNAUDITED)
In our opinion, the quarterly financial information shown below includes all adjustments necessary for a fair presentation of the
operations for such periods. Due to the seasonal nature of our business, there are substantial variations in operations reported on
a quarterly basis.
Notes to the Consolidated Financial Statements
(in thousands except per share amounts)
2018 (1)
Operating Revenues
Operating Income
Net Income
Earnings per share:
Basic
Diluted
2017 (1)
Operating Revenues
Operating Income
Net Income
Earnings per share:
Basic
Diluted
For the Quarters Ended
March 31
June 30
September 30
December 31
$
$
$
$
$
$
$
$
$
$
239,356
40,406
26,855
1.64
1.64
185,160
35,099
19,144
1.17
1.17
$
$
$
$
$
$
$
$
$
$
136,664
13,248
6,387
0.39
0.39
125,084
14,061
6,046
0.37
0.37
$
$
$
$
$
$
$
$
$
$
140,279
12,036
5,538
0.34
0.34
126,936
14,632
6,833
0.42
0.42
$
$
$
$
$
$
$
$
$
$
201,190
28,930
17,801
1.09
1.08
180,403
23,628
26,101
1.60
1.59
(1) The sum of the four quarters does not equal the total for the year due to rounding.
Chesapeake Utilities Corporation 2018 Form 10-K Page 96
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.
None.
ITEM 9A. CONTROLS AND PROCEDURES.
EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES
Our Chief Executive Officer and Chief Financial Officer, with the participation of other Company officials, have evaluated our
“disclosure controls and procedures” (as such term is defined under Rule 13a-15(e) and Rule 15d-15(e) promulgated under the
Securities Exchange Act of 1934, as amended) as of December 31, 2018. Based upon their evaluation, our Chief Executive Officer
and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of December 31, 2018.
CHANGE IN INTERNAL CONTROLS
There has been no change in internal control over financial reporting (as such term is defined in Exchange Act Rule 13a-15(f))
that occurred during the quarter ended December 31, 2018, that materially affected, or is reasonably likely to materially affect,
internal control over financial reporting.
CEO AND CFO CERTIFICATIONS
Our Chief Executive Officer and Chief Financial Officer have filed with the SEC the certifications required by Section 302 of the
Sarbanes-Oxley Act of 2002 as Exhibits 31.1 and 31.2 to our Annual Report on Form 10-K for the fiscal year ended December 31,
2018. In addition, on June 8, 2018, our former Chief Executive Officer certified to the NYSE that he was not aware of any violation
by us of the NYSE corporate governance listing standards.
MANAGEMENT'S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
Management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is
defined in Rule 13a-15(f) of the Exchange Act. A company’s internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external
purposes in accordance with GAAP. A company’s internal control over financial reporting includes those policies and procedures
that: (i) pertain to the maintenance of records which in reasonable detail, accurately and fairly reflect the transactions and
dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit
preparation of financial statements in accordance with GAAP and that receipts and expenditures of the company are being made
only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance
regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have
a material effect on the financial statements.
Under the supervision and with the participation of management, including the Chief Executive Officer and Chief Financial Officer,
our management conducted an evaluation of the effectiveness of its internal control over financial reporting based on the criteria
established in an updated report entitled “Internal Control - Integrated Framework,” issued in May 2013 by the Committee of
Sponsoring Organizations of the Treadway Commission. Because of its inherent limitations, internal control over financial reporting
may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the
risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or
procedures may deteriorate.
Our management has evaluated and concluded that our internal control over financial reporting was effective as of December 31,
2018.
Our independent auditors, Baker Tilly Virchow Krause, LLP, have audited the effectiveness of our internal control over financial
reporting as of December 31, 2018, as stated in their report which appears under Part II, Item 8. Financial Statements and
Supplementary Data.
Chesapeake Utilities Corporation 2018 Form 10-K Page 97
ITEM 9B. OTHER INFORMATION.
None.
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS OF THE REGISTRANT AND CORPORATE GOVERNANCE.
In December 2018, the Company announced that its Board of Directors had appointed Jeffry M. Householder, formerly President
of the Company's Florida business unit, President and Chief Executive Officer. Concurrent with his promotion, Mr. Householder
was also appointed to the Company's Board of Directors. Both appointments were effective on January 1, 2019.
The Company's former President and Chief Executive Officer, Michael P. McMasters, who retired on December 31, 2018, is
continuing as a member of the Company's Board of Directors.
We have adopted a Code of Ethics that applies to our principal executive officer, president, principal financial officer, principal
accounting officer or controller, and persons performing similar functions, which is a “code of ethics” as defined by applicable
rules of the SEC. This Code of Ethics is publicly available on our website at http://www.chpk.com/wp-content/uploads/
Code_of_Ethics.pdf. If we make any amendments to this code other than technical, administrative or other non-substantive
amendments, or grant any waivers, including implicit waivers, from a provision of this code to our principal executive officer,
president, principal financial officer, principal accounting officer or controller, we intend to disclose the nature of the amendment
or waiver, its effective date and to whom it applies by posting such information on our website at the address and location specified
above.
The remaining information required by this Item is incorporated herein by reference to the sections of our Proxy Statement
captioned “Election of Directors (Proposal 1),” “Overview,” “Corporate Governance,” “Board of Directors and its Committees”
and “Section 16(a) Beneficial Ownership Reporting Compliance.”
ITEM 11. EXECUTIVE COMPENSATION.
The information required by this Item is incorporated herein by reference to the sections of our Proxy Statement captioned “Director
Compensation,” “Executive Compensation” and “Compensation Discussion and Analysis” in the Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER
MATTERS.
The information required by this Item is incorporated herein by reference to the sections of our Proxy Statement captioned “Security
Ownership of Certain Beneficial Owners and Management” and "Equity Compensation Plan Information."
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE.
The information required by this Item is incorporated herein by reference to the section of our Proxy Statement captioned “Corporate
Governance.”
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES.
The information required by this Item is incorporated herein by reference to the portion of the Proxy Statement captioned “Fees
and Services of Independent Registered Public Accounting Firm."
Chesapeake Utilities Corporation 2018 Form 10-K Page 98
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES.
The following documents are filed as part of this report:
(a)(1) All of the financial statements, reports and notes to the financial statements included in Item 8 of Part II of this
Annual Report on Form 10-K.
(a)(2) Schedule II—Valuation and Qualifying Accounts.
(a)(3) The Exhibits below.
• Exhibit 3.1
• Exhibit 3.2
• Exhibit 3.3
• Exhibit 3.4
• Exhibit 3.5
• Exhibit 3.6
• Exhibit 4.1
• Exhibit 4.2
• Exhibit 4.3
• Exhibit 4.4
• Exhibit 4.5
Amended and Restated Certificate of Incorporation of Chesapeake Utilities Corporation is
incorporated herein by reference to Exhibit 3.1 of our Quarterly Report on Form 10-Q for
the period ended June 30, 2010, File No. 001-11590.
Amended and Restated Bylaws of Chesapeake Utilities Corporation, effective December 4,
2012, are incorporated herein by reference to Exhibit 3 of our Current Report on Form 8-K,
filed December 7, 2012, File No. 001-11590.
First Amendment to the Amended and Restated Bylaws of Chesapeake Utilities Corporation,
effective December 3, 2014, is incorporated herein by reference to Exhibit 3.3 of our Annual
Report on Form 10-K for the year ended December 31, 2014.
Second Amendment to the Amended and Restated Bylaws of Chesapeake Utilities
Corporation, effective November 2, 2016, is incorporated herein by reference to Exhibit 3.3
of our Quarterly Report on Form 10-Q for the quarter ended September 30, 2016, File No.
001-11590.
Certificate of Amendment to the Amended and Restated Certificate of Incorporation of
Chesapeake Utilities Corporation, is incorporated herein by reference to Exhibit 3.1 of our
Current Report on Form 8-K, filed May 9, 2017, File No. 001-11590.
Certificate of Elimination of Series A Participating Cumulative Preferred Stock of
Chesapeake Utilities Corporation, is incorporated herein by reference to Exhibit 3.6 to our
Annual Report on Form 10-K for the year ended December 31, 2017, File No. 001-11590.
Note Agreement dated October 18, 2005, between Chesapeake Utilities Corporation, as
issuer, and Prudential Investment Management, Inc., relating to the private placement of
Chesapeake Utilities Corporation’s 5.5% Senior Notes due 2020, is incorporated herein by
reference to Exhibit 4.1 of our Annual Report on Form 10-K for the year ended December
31, 2005, File No. 001-11590.
Note Agreement dated October 31, 2008, among Chesapeake Utilities Corporation, as issuer,
General American Life Insurance Company and New England Life Insurance Company,
relating to the private placement of Chesapeake Utilities Corporation's 5.93% Senior Notes
due 2023.†
Note Agreement dated June 29, 2010, among Chesapeake Utilities Corporation, as issuer,
Metropolitan Life Insurance Company and New England Life Insurance Company, relating
to the private placement of Chesapeake Utilities Corporation’s 5.68% Senior Notes due 2026
and Chesapeake Utilities Corporation’s 6.43% Senior Notes due 2028.†
Note Agreement dated September 5, 2013, among Chesapeake Utilities Corporation, as issuer,
and certain note holders, relating to the private placement of Chesapeake Utilities
Corporation’s 3.73% Senior Notes due 2028 and Chesapeake Utilities Corporation’s 3.88%
Senior Notes due 2029.†
Form of Indenture of Mortgage and Deed of Trust dated September 1, 1942, between Florida
Public Utilities Company and the trustee, for the First Mortgage Bonds, is incorporated herein
by reference to Exhibit 7-A of Florida Public Utilities Company’s Registration No. 2-6087.
Chesapeake Utilities Corporation 2018 Form 10-K Page 99
• Exhibit 4.6
• Exhibit 4.7
• Exhibit 4.8
• Exhibit 4.9
• Exhibit 4.10
• Exhibit 4.11
• Exhibit 10.1*
• Exhibit 10.2*
• Exhibit 10.3*
• Exhibit 10.4*
• Exhibit 10.5*
• Exhibit 10.6*
• Exhibit 10.7*
• Exhibit 10.8*
Seventeenth Supplemental Indenture dated April 12, 2011, between Chesapeake Utilities
Corporation and Florida Public Utilities Company, pursuant to which Chesapeake Utilities
Corporation guarantees the payment and performance obligations of Florida Public Utilities
Company under the Indenture, is incorporated herein by reference to Exhibit 4.1 of our
Quarterly Report on Form 10-Q for the quarter ended March 31, 2011, File No. 001-11590.
Sixteenth Supplemental Indenture dated December 1, 2009, between Chesapeake Utilities
Corporation and Florida Public Utilities Company, pursuant to which Chesapeake Utilities
Corporation guaranteed the secured First Mortgage Bonds of Florida Public Utilities
Company under the Merger Agreement, is incorporated herein by reference to Exhibit 4.9 of
our Annual Report on Form 10-K for the year ended December 31, 2010, File No. 001-11590.
Thirteenth Supplemental Indenture dated June 1, 1992, pursuant to which Florida Public
Utilities, on May 1, 1992, privately placed $8,000,000 of its 9.08% First Mortgage Bonds
due 2022, is incorporated herein by reference to Exhibit 4 to Florida Public Utilities
Company’s Quarterly Report on Form 10-Q for the period ended June 30, 1992.
Private Shelf Agreement dated October 8, 2015, between Chesapeake Utilities Corporation,
as issuer, and Prudential Investment Management Inc., relating to the private placement of
Chesapeake Utilities Corporation's 3.25% Senior Notes due 2032 and the sale of other
Chesapeake Utilities Corporation unsecured Senior Notes from time to time, is incorporated
herein by reference to Exhibit 4.1 of our Quarterly Report on Form 10-Q for the period ended
September 30, 2015, File No. 001-11590.
First Amendment to Private Shelf Agreement dated September 14, 2018, between Chesapeake
Utilities Corporation, as issuer, and PGIM, Inc. (formerly known as Prudential Investment
Management, Inc.), and other purchasers that may become party thereto. †
Master Note Agreement dated March 2, 2017, among Chesapeake Utilities Corporation, as
issuer, NYL Investors LLC, and other certain note holders that may become party thereto
from time to time relating to the private placement of Chesapeake Utilities Corporation’s
3.48% Senior Notes due 2038 and Chesapeake Utilities Corporation’s 3.58% Senior Notes
due 2038. †
Chesapeake Utilities Corporation Cash Bonus Incentive Plan, effective January 1, 2015, is
incorporated herein by reference to our Proxy Statement dated March 31, 2015, in connection
with our Annual Meeting held on May 6, 2015, File No. 001-11590.
Chesapeake Utilities Corporation 2013 Stock and Incentive Compensation Plan, effective
May 2, 2013 is incorporated herein by reference to our Proxy Statement dated March 29,
2013 in connection with our Annual Meeting held on May 2, 2013, File No. 001-11590.
Non-Qualified Deferred Compensation Plan, effective January 1, 2014, is incorporated herein
by reference to Exhibit 10.8 of our Annual Report on Form 10-K for the year ended December
31, 2013, File No. 001-11590.
Executive Employment Agreement dated January 14, 2011, between Chesapeake Utilities
Corporation and Michael P. McMasters, is incorporated herein by reference to Exhibit 10.1
of our Current Report on Form 8-K, filed January 21, 2011, File No. 001-11590.
Amendment to Executive Employment Agreement effective January 1, 2014, between
Chesapeake Utilities Corporation and Michael P. McMasters, is incorporated herein by
reference to Exhibit 10.1 of our Current Report on Form 8-K filed January 14, 2014, File
No. 001-11590.
Executive Employment Agreement dated January 9, 2013, between Chesapeake Utilities
Corporation and Stephen C. Thompson, is incorporated herein by reference to Exhibit 10.9
of our Annual Report on Form 10-K for the year ended December 31, 2012, File No.
001-11590.
Executive Employment Agreement dated January 9, 2013, between Chesapeake Utilities
Corporation and Beth W. Cooper, is incorporated herein by reference to Exhibit 10.10 of our
Annual Report on Form 10-K for the year ended December 31, 2012, File No. 001-11590.
Executive Employment Agreement dated January 9, 2013, between Chesapeake Utilities
Corporation and Elaine B. Bittner, incorporated herein by reference to Exhibit 10.11 of our
Annual Report on Form 10-K for the year ended December 31, 2012, File No. 001-11590.
Chesapeake Utilities Corporation 2018 Form 10-K Page 100
• Exhibit 10.9*
• Exhibit 10.10*
• Exhibit 10.11*
• Exhibit 10.12*
• Exhibit 10.13*
• Exhibit 10.14*
• Exhibit 10.15*
• Exhibit 10.16
• Exhibit 10.17
• Exhibit 10.18*
• Exhibit 10.19*
Executive Employment Agreement dated January 1, 2015, between Chesapeake Utilities
Corporation and Jeffry M. Householder, is incorporated herein by reference to Exhibit 10.15
of our Annual Report on Form 10-K for the year ended December 31, 2014, File No.
001-11590.
Form of Performance Share Agreement, effective January 7, 2014 for the period 2014 to
2016, pursuant to Chesapeake Utilities Corporation 2013 Stock and Incentive Compensation
Plan by and between Chesapeake Utilities Corporation and each of Michael P. McMasters,
Beth W. Cooper, Stephen C. Thompson, Elaine B. Bittner, and Jeffry M. Householder is
incorporated herein by reference to Exhibit 10.18 of our Annual Report on Form 10-K for
the year ended December 31, 2013, File No. 001-11590.
Form of Performance Share Agreement, effective January 13, 2015 for the period 2015 to
2017, pursuant to Chesapeake Utilities Corporation 2013 Stock and Incentive Compensation
Plan by and between Chesapeake Utilities Corporation and each of Michael P. McMasters,
Beth W. Cooper, Stephen C. Thompson, Elaine B. Bittner and Jeffry M. Householder, is
incorporated herein by reference to Exhibit 10.19 of our Annual Report on Form 10-K for
the year ended December 31, 2014, File No. 001-11590.
Form of Performance Share Agreement, dated March 6, 2015 for the period 2015 to 2017,
pursuant to Chesapeake Utilities Corporation 2013 Stock and Incentive Compensation Plan
by and between Chesapeake Utilities Corporation and James F. Moriarty is incorporated
herein by reference to Exhibit 10.2 to our Quarterly Report on Form 10-Q for the year ended
September 30, 2015, File No. 001-11590.
Form of Performance Share Agreement, dated January 12, 2016 for the period 2016 to 2018,
pursuant to Chesapeake Utilities Corporation 2013 Stock and Incentive Compensation Plan
by and between Chesapeake Utilities Corporation and each of Michael P. McMasters, Beth
W. Cooper, Stephen C. Thompson, Elaine B. Bittner, Jeffry M. Householder and James F.
Moriarty, is incorporated herein by reference to Exhibit 10.19 to our Annual Report on Form
10-K for the year ended December 31, 2015, File No. 001-11590.
Chesapeake Utilities Corporation Supplemental Executive Retirement Plan, as amended and
restated effective January 1, 2009, is incorporated herein by reference to Exhibit 10.27 of
our Annual Report on Form 10-K for the year ended December 31, 2008, File No. 001-11590.
First Amendment to the Chesapeake Utilities Corporation Supplemental Executive
Retirement Plan as amended and restated effective January 1, 2009, is incorporated herein
by reference to Exhibit 10.30 of our Annual Report on Form 10-K for the year ended December
31, 2010, File No. 001-11590.
Revolving Credit Agreement dated October 8, 2015, between Chesapeake Utilities
Corporation and PNC Bank, National Association, Bank of America, N.A., Citizens Bank
N.A., Royal Bank of Canada and Wells Fargo Bank, National Association as lenders, is
incorporated herein by reference to Exhibit 10.1 of our Quarterly Report on Form 10-Q for
the period ended September 30, 2015, File No. 001-11590.
First Amendment dated February 25, 2016 to the Revolving Credit Agreement dated October
8, 2015, between Chesapeake Utilities Corporation and PNC Bank, National Association,
Bank of America, N.A., Citizens Bank N.A., Royal Bank of Canada and Wells Fargo Bank,
National Association as lenders, is incorporated herein by reference to Exhibit 10.24 of our
Annual Report on Form 10-K for the year ended December 31, 2015, File No. 001-11590.
Executive Employment Agreement dated May 10, 2016, between Chesapeake Utilities
Corporation and James F. Moriarty, is incorporated herein by reference to Exhibit 10.1 of
our Quarterly Report on Form 10-Q for the year ended June 30, 2016, File No. 001-11590.
Form of Performance Share Agreement, effective February 23, 2017 for the period 2017 to
2019, pursuant to Chesapeake Utilities Corporation 2013 Stock and Incentive Compensation
Plan by and between Chesapeake Utilities Corporation and each of Michael P. McMasters,
Beth W. Cooper, Stephen C. Thompson, Elaine B. Bittner, Jeffry M. Householder, and James
F. Moriarty, is incorporated herein by reference to Exhibit 10.1 of our Quarterly Report on
Form 10-Q for the year ended June 30, 2017, File No. 001-11590.
• Exhibit 10.20
Credit Agreement, dated November 28, 2017, by and between Chesapeake Utilities
Corporation and Branch Banking and Trust Company is filed herewith.
Chesapeake Utilities Corporation 2018 Form 10-K Page 101
• Exhibit 10.21*
• Exhibit 10.22*
Separation Agreement and Release, effective as of June 7, 2018, by and between Chesapeake
Utilities Corporation and Elaine B. Bittner, is incorporated herein by reference to Exhibit
10.1 of our Current Report on Form 8-K filed on June 8, 2018, File No. 001-11590.
Form of Performance Share Agreement, effective February 26, 2018 for the period 2018 to
2020, pursuant to Chesapeake Utilities Corporation 2013 Stock and Incentive Compensation
Plan by and between Chesapeake Utilities Corporation and each of Michael P. McMasters,
Beth W. Cooper, Stephen C. Thompson, Jeffry M. Householder and James F. Moriarty, is
incorporated herein by reference to Exhibit 10.1 of our Quarterly Report on Form 10-Q for
the quarter ended March 31, 2018, File No. 001-11590.
• Exhibit 10.23
Term Note dated December 21, 2018 issued by Chesapeake Utilities Corporation in favor of
PNC Bank, National Association is filed herewith.
• Exhibit 10.24*
• Exhibit 10.25*
• Exhibit 10.26
• Exhibit 21
Form of Performance Share Agreement, effective February 25, 2019 for the period January
01, 2019 to December 31, 2021, pursuant to Chesapeake Utilities Corporation 2013 Stock
and Incentive Compensation Plan by and between Chesapeake Utilities Corporation and
Jeffry M. Householder is filed herewith.
Executive Employment Agreement dated February 25, 2019, between Chesapeake Utilities
Corporation and Jeffry M. Householder, is filed herewith.
Term Note dated January 31, 2019 issued by Chesapeake Utilities Corporation in favor of
Branch Banking & Trust Company is filed herewith.
Subsidiaries of the Registrant is filed herewith.
• Exhibit 23.1
Consent of Independent Registered Public Accounting Firm is filed herewith.
• Exhibit 31.1
• Exhibit 31.2
• Exhibit 32.1
• Exhibit 32.2
Certificate of Chief Executive Officer of Chesapeake Utilities Corporation pursuant to
Exchange Act Rule 13a-14(a) and 15d – 14(a), is filed herewith.
Certificate of Chief Financial Officer of Chesapeake Utilities Corporation pursuant to
Exchange Act Rule 13a-14(a) and 15d – 14(a), is filed herewith.
Certificate of Chief Executive Officer of Chesapeake Utilities Corporation pursuant to 18
U.S.C. Section 1350, is filed herewith.
Certificate of Chief Financial Officer of Chesapeake Utilities Corporation pursuant to 18
U.S.C. Section 1350, is filed herewith.
• Exhibit 101.INS XBRL Instance Document is filed herewith.
• Exhibit 101.SCH XBRL Taxonomy Extension Schema Document is filed herewith.
• Exhibit 101.CAL XBRL Taxonomy Extension Calculation Linkbase Document is filed herewith.
• Exhibit 101.DEF XBRL Taxonomy Extension Definition Linkbase Document is filed herewith.
• Exhibit 101.LAB XBRL Taxonomy Extension Label Linkbase Document is filed herewith.
• Exhibit 101.PRE XBRL Taxonomy Extension Presentation Linkbase Document is filed herewith.
*
†
Management contract or compensatory plan or agreement.
These agreements have not been filed herewith pursuant to Item 601(b)(4)(v) of Regulation S-K under the Securities Act
of 1933, as amended. We hereby agree to furnish copies to the SEC upon request.
Chesapeake Utilities Corporation 2018 Form 10-K Page 102
ITEM 16. FORM 10-K SUMMARY.
None.
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) of the Securities Exchange Act of 1934, Chesapeake Utilities Corporation
has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
CHESAPEAKE UTILITIES CORPORATION
By:
/s/ JEFFRY M. HOUSEHOLDER
Jeffry M. Householder
President, Chief Executive Officer and Director
February 26, 2019
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following
persons on behalf of the registrant and in the capacities and on the dates indicated.
/s/ JEFFRY M. HOUSEHOLDER
Jeffry M. Householder
President, Chief Executive Officer and Director
February 26, 2019
/S/ BETH W. COOPER
Beth W. Cooper, Executive Vice President,
Chief Financial Officer,
and Assistant Corporate Secretary
(Principal Financial and Accounting Officer)
February 26, 2019
/S/ JOHN R. SCHIMKAITIS
John R. Schimkaitis
Chair of the Board and Director
February 26, 2019
/S/ EUGENE H. BAYARD, ESQ
Eugene H. Bayard, Esq., Director
February 26, 2019
/S/ THOMAS J. BRESNAN
Thomas J. Bresnan, Director
February 26, 2019
/S/ RONALD G. FORSYTHE, JR.
Dr. Ronald G. Forsythe, Jr., Director
February 26, 2019
/S/ THOMAS P. HILL, JR.
Thomas P. Hill, Jr., Director
February 26, 2019
/S/ DENNIS S. HUDSON, III
Dennis S. Hudson, III, Director
February 26, 2019
/S/ PAUL L. MADDOCK, JR.
Paul L. Maddock, Jr., Director
February 26, 2019
/s/ MICHAEL P. MCMASTERS
Michael P. McMasters, Director
February 26, 2019
/S/ CALVERT A. MORGAN, JR.
Calvert A. Morgan, Jr., Director
February 26, 2019
/S/ DIANNA F. MORGAN
Dianna F. Morgan, Director
February 26, 2019
Chesapeake Utilities Corporation 2018 Form 10-K Page 103
Chesapeake Utilities Corporation and Subsidiaries
Schedule II
Valuation and Qualifying Accounts
Additions
For the Year Ended December 31,
(In thousands)
Reserve Deducted From Related Assets
Reserve for Uncollectible Accounts
Balance at
Beginning of
Year
Charged to
Income
Other
Accounts
(1)
Deductions
(2)
Balance at End
of Year
2018
2017
2016
$
$
936
909
909
$
1,157
602
985
$
136
337
340
(1,121) $
(912)
(1,325)
1,108
936
909
(1) Recoveries.
(2) Uncollectible accounts charged off.
Chesapeake Utilities Corporation 2018 Form 10-K Page 104
CORPORATE INFORMATION
CORPORATE OFFICE
909 Silver Lake Boulevard
Dover, DE 19904
Telephone: 302.734.6799
Website: www.chpk.com
ANNUAL MEETING
The Annual Meeting of Stockholders will be held on
Wednesday, May 8, 2019 at 9:00 a.m. in the du Barry
Room, Hotel du Pont; 42 W. 11th Street;
Wilmington, DE.
TRANSFER AGENT AND REGISTRAR
Computershare Trust Company, N.A.
c/o Chesapeake Utilities Corporation
P.O. Box 505000
Louisville, KY 40233-5000
Telephone (toll-free) 877.498.8865
Website: www.computershare.com/investor
DIVIDEND REINVESTMENT
AND DIRECT STOCK PURCHASE PLAN
The Dividend Reinvestment and Direct Stock Purchase
Plan provides flexible investment options for those
who wish to invest in the Company. Common stock
holders can have their dividends automatically
reinvested to purchase additional shares directly
through the Plan and/or send in additional optional
cash investments at any time to increase their
holdings. New investors can purchase shares directly
through the Plan. For more information, please
contact the Company’s transfer agent
(Computershare) as stated above.
ANALYST INFORMATION
Beth W. Cooper
Executive Vice President and Chief Financial Officer
Telephone: 302.734.6799
bcooper@chpk.com
Thomas E. Mahn
Vice President and Treasurer
Telephone: 302.734.6799
tmahn@chpk.com
COMMON STOCK AND DIVIDEND INFORMATION
NYSE: CPK
Chesapeake Utilities Corporation’s common stock is
traded on the New York Stock Exchange under the
symbol CPK.
QUARTER
ENDED 2018
March 31
June 30
September 30
December 31
PRICE RANGE
LOW
$63.35
$69.15
$79.10
$77.20
HIGH
$78.95
$80.90
$90.90
$93.40
CLOSE
$70.35
$79.95
$83.90
$81.30
QUARTER
ENDED 2017
March 31
June 30
September 30
December 31
PRICE RANGE
LOW
$63.00
$68.65
$74.80
$75.00
HIGH
$70.70
$77.75
$81.95
$86.35
CLOSE
$69.20
$74.95
$78.25
$78.55
DIVIDENDS
DECLARED
PER SHARE*
$0.3250
$0.3700
$0.3700
$0.3700
DIVIDENDS
DECLARED
PER SHARE*
$0.3050
$0.3250
$0.3250
$0.3250
*Declaration of dividends is at the discretion of the Board of Directors.
Dividends in 2018 and 2017 were paid quarterly.
PUBLIC INFORMATION AND SEC FILINGS
Our latest news and filings with the Securities and
Exchange Commission (SEC), including Forms 10-K,
10-Q and 8-K are available to view or request a
printed copy, free of charge, at our website,
www.chpk.com.
If you wish to request a printed copy of any of the
Company’s publications by mail, please send your
written request to Investor Relations below.
INVESTOR RELATIONS/SHAREHOLDER SERVICES
Heidi W. Watkins
Shareholder Services Manager
Telephone (toll free): 888.742.5275
hwatkins@chpk.com
CHPK.COM
909 Silver Lake Boulevard | Dover, Delaware 19904 USA
002CSN9E17