8-K
CHESAPEAKE UTILITIES CORP (CPK)
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
Date of Report (Date of Earliest Event Reported): November 9, 2023
Chesapeake Utilities Corporation
(Exact name of registrant as specified in its charter)
| Delaware | 001-11590 | 51-0064146 |
|---|---|---|
| (State or other jurisdiction<br> <br>of incorporation) | (Commission<br> <br>File Number) | (I.R.S. Employer<br> <br>Identification No.) |
| 500 Energy Lane, Dover, Delaware | 19901 | |
| --- | --- | |
| (Address of principal executive offices) | (Zip Code) |
Registrant’s telephone number, including area code: 302. 734.6799
Not Applicable
Former name or former address, if changed since last report
Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions (see General Instruction A.2. below):
| ☐ | Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425) |
|---|---|
| ☐ | Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12) |
| --- | --- |
| ☐ | Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b)) |
| --- | --- |
| ☐ | Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c)) |
| --- | --- |
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading<br> <br>Symbol(s) | Name of each exchange<br> <br>on which registered |
|---|---|---|
| Common Stock - par value per share $0.4867 | CPK | New York Stock Exchange |
Indicate by check mark whether the registrant is an emerging growth company as defined in Rule 405 of the Securities Act of 1933 (§230.405 of this chapter) or Rule 12b-2 of the Securities Exchange Act of 1934 (§240.12b-2 of this chapter).
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. ☐
| Item 8.01 | Other Events |
|---|
As previously disclosed, on September 26, 2023, Chesapeake Utilities Corporation, a Delaware corporation (the “Company”), entered into a stock purchase agreement (the “Purchase Agreement”) with Florida Power & Light Company, a Florida corporation (“FPL”), to acquire all of the outstanding common shares of Pivotal Utility Holdings, Inc., a wholly owned subsidiary of FPL doing business as Florida City Gas (“FCG”), for approximately $923.4 million in cash, subject to customary purchase price adjustments (the “Acquisition”). The Purchase Agreement is subject to the satisfaction of customary closing conditions, including the expiration of the waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, which occurred on November 6, 2023, and certain regulatory financing approvals in various jurisdictions, which have been received as of the date hereof. Subject to the satisfaction or waiver of the remaining conditions and the other terms and conditions of the Purchase Agreement, the Acquisition is expected to close in the fourth quarter of 2023.
The Company expects to fund the purchase price of the Acquisition with the net proceeds of an equity offering and from the expected issuance of approximately $550 million principal amount of uncollateralized senior notes (the “New Notes”) and additional borrowings under its existing unsecured revolving credit facility.
We have locked in an annual weighted interest rate of 6.54% for the following terms for these New Notes: $100 million for each of three, four, five, seven and ten year terms as well as $50 million under a total fifteen year/ten year average term. Although we have not signed a note purchase agreement as of the date of this report, we expect to do so prior to closing the Acquisition. The New Notes are expected to have terms and conditions that are similar to our more recently issued uncollateralized senior notes.
In connection with the Acquisition, the Company is filing this Current Report on Form 8-K to provide certain historical financial statements of FCG and pro forma financial information of the Company including FCG.
| Item 9.01 | Financial Statements and Exhibits. |
|---|
(a) Financial statements of business acquired.
Audited financial statements of Pivotal Utility Holdings, Inc. (d/b/a Florida City Gas), comprised of the balance sheets as of December 31, 2022 and 2021, the related statements of income, changes in equity and cash flows for each of the years in the two-year period ended December 31, 2022 and the related notes to the financial statements, are attached hereto as Exhibit 99.1.
Unaudited financial statements of Pivotal Utility Holdings, Inc. (d/b/a Florida City Gas), comprised of the balance sheets as of September 30, 2023 and December 31, 2022, the related statements of income and changes in equity for the three and nine months ended September 30, 2023 and 2022, the statement of cash flows for the nine months ended September 30, 2023 and 2022, and the related notes to the financial statements, are attached hereto as Exhibit 99.2.
(b) Pro forma financial information.
The unaudited pro forma condensed financial information of Chesapeake Utilities Corporation as of September 30, 2023, for the year ended December 31, 2022 and for the nine months ended September 30, 2023, giving effect to the Acquisition, are attached hereto as Exhibit 99.3.
(d) Exhibits.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.
| Chesapeake Utilities Corporation | ||
|---|---|---|
| November 9, 2023 | By: | /s/ Beth W. Cooper |
| Name: | Beth W. Cooper | |
| Title: | Executive Vice President, Chief Financial Officer,<br> <br>Treasurer, and Assistant Corporate Secretary |
EX-23.1
Exhibit 23.1
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in Registration Statement Nos. 333-250803, 333-274203, and 333-274284 on Form S-3ASR and Registration Statement Nos. 333-192198 and 333-271610 on Form S-8 of Chesapeake Utilities Corporation of our report dated October 31, 2023, relating to the financial statements of Pivotal Utility Holdings, Inc. d/b/a Florida City Gas appearing in this Current Report on Form 8-K dated November 9, 2023.
/s/ Deloitte & Touche LLP
Boca Raton, Florida
November 9, 2023
EX-99.1
Exhibit 99.1
Pivotal Utility Holdings, Inc. (d/b/a Florida City Gas)
Financial Statements as of and for the
Years EndedDecember 31, 2022 and December 31, 2021
(Audited)
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| Deloitte & Touche LLP<br><br><br>Certified Public Accountants<br> <br>Suite 200<br><br><br>1800 North Military Trail<br> <br>Boca Raton, FL 33431-6386<br><br><br>USA | |
|---|---|
| INDEPENDENT AUDITOR’S REPORT | |
| Pivotal Utility Holdings, Inc.<br><br><br>700 Universe Blvd.<br> <br>Juno Beach, FL | Tel: +1 561 962 7700<br> <br>Fax: +1 561 962<br>7750<br> <br>www.deloitte.com |
Opinion
We have audited the financial statements of Pivotal Utility Holdings, Inc. d/b/a Florida City Gas (the “Company”), which comprise the balance sheets as of December 31, 2022 and 2021, and the related statements of income, changes in equity, and cash flows for the years then ended, and the related notes to the financial statements (collectively referred to as the “financial statements”).
In our opinion, the accompanying financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2022 and 2021, and the results of its operations and its cash flows for the years then ended in accordance with accounting principles generally accepted in the United States of America.
Basis for Opinion
We conducted our audits in accordance with auditing standards generally accepted in the United States of America (GAAS). Our responsibilities under those standards are further described in the Auditor’s Responsibilities for the Audit of the Financial Statements section of our report. We are required to be independent of the Company and to meet our other ethical responsibilities, in accordance with the relevant ethical requirements relating to our audits. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.
Responsibilities of Management for the Financial Statements
Management is responsible for the preparation and fair presentation of the financial statements in accordance with accounting principles generally accepted in the United States of America, and for the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of financial statements that are free from material misstatement, whether due to fraud or error.
In preparing the financial statements, management is required to evaluate whether there are conditions or events, considered in the aggregate, that raise substantial doubt about the Company’s ability to continue as a going concern for one year after the date that the financial statements are available to be issued.
Auditor’s Responsibilities for the Audit of the Financial Statements
Our objectives are to obtain reasonable assurance about whether the financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditor’s report that includes our opinion. Reasonable assurance is a high level of assurance but is not absolute assurance and therefore is not a guarantee that an audit conducted in accordance with GAAS will always detect a material misstatement when it exists. The risk of not detecting a material misstatement resulting from fraud is higher than for one resulting from error, as fraud may involve collusion, forgery, intentional omissions, misrepresentations, or the override of internal control. Misstatements are considered material if there is a substantial likelihood that, individually or in the aggregate, they would influence the judgment made by a reasonable user based on the financial statements.
In performing an audit in accordance with GAAS, we:
| • | Exercise professional judgment and maintain professional skepticism throughout the audit. |
|---|---|
| • | Identify and assess the risks of material misstatement of the financial statements, whether due to fraud or<br>error, and design and perform audit procedures responsive to those risks. Such procedures include examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. |
| --- | --- |
| • | Obtain an understanding of internal control relevant to the audit in order to design audit procedures that are<br>appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control. Accordingly, no such opinion is expressed. |
| --- | --- |
| • | Evaluate the appropriateness of accounting policies used and the reasonableness of significant accounting<br>estimates made by management, as well as evaluate the overall presentation of the financial statements. |
| --- | --- |
| • | Conclude whether, in our judgment, there are conditions or events, considered in the aggregate, that raise<br>substantial doubt about the Company’s ability to continue as a going concern for a reasonable period of time. |
| --- | --- |
We are required to communicate with those charged with governance regarding, among other matters, the planned scope and timing of the audit, significant audit findings, and certain internal control-related matters that we identified during the audit.
/s/ Deloitte & Touche LLP
October 31, 2023
BALANCE SHEETS
Pivotal Utility Holdings, Inc. (d/b/a Florida City Gas)
At December 31, 2022 and 2021
| Assets | 2022 | 2021 | ||||
|---|---|---|---|---|---|---|
| (in thousands) | ||||||
| Current Assets: | ||||||
| Cash | $ | 5,796 | **** | $ | 7,067 | |
| Receivables — | ||||||
| Customer accounts receivable | **** | 9,343 | **** | 8,242 | ||
| Unbilled and deferred clause revenues | **** | 6,776 | **** | 5,772 | ||
| Due from affiliates | **** | 142 | **** | — | ||
| Other accounts receivable | **** | 140 | **** | 106 | ||
| Accumulated provision for uncollectible accounts | **** | (610 | ) | (793 | ) | |
| Materials and supplies | **** | 14 | **** | 14 | ||
| Natural gas for sale | **** | 582 | **** | 441 | ||
| Prepaid expenses | **** | 1,585 | **** | 1,335 | ||
| Regulatory assets, current | **** | 8,080 | **** | 5,896 | ||
| Total current assets | **** | 31,848 | **** | 28,080 | ||
| Property, Plant, and Equipment: | ||||||
| In service | **** | 577,240 | **** | 549,501 | ||
| Less: Accumulated depreciation | **** | 172,519 | **** | 163,024 | ||
| Plant in service, net of depreciation | **** | 404,721 | **** | 386,477 | ||
| Construction work in progress | **** | 72,377 | **** | 30,801 | ||
| Total property, plant, and equipment | **** | 477,098 | **** | 417,278 | ||
| Deferred Charges and Other Assets: | ||||||
| Regulatory assets, deferred | **** | 4,339 | **** | 5,713 | ||
| Prepaid pension asset | **** | 3,750 | **** | 2,603 | ||
| Right-of-use<br>asset | **** | 7,432 | **** | 7,974 | ||
| Prepaid software service costs | **** | 9,822 | **** | 10,056 | ||
| Deferred software implementation costs | **** | 4,779 | **** | 5,077 | ||
| Miscellaneous deferred debits | **** | 3,754 | **** | 399 | ||
| Deferred rate case expenses | **** | 1,737 | **** | 73 | ||
| Other deferred charges and assets | **** | 17 | **** | 211 | ||
| Total deferred charges and other assets | **** | 35,630 | **** | 32,106 | ||
| Total Assets | $ | 544,576 | **** | $ | 477,464 |
The accompanying notes are an integral part of these financial statements.
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BALANCE SHEETS
Pivotal Utility Holdings, Inc. (d/b/a Florida City Gas)
At December 31, 2022 and 2021
| Liabilities and Stockholder’s Equity | 2022 | 2021 | ||
|---|---|---|---|---|
| (in thousands) | ||||
| Current Liabilities: | ||||
| Due to affiliates | $ | 7,234 | $ | 2,738 |
| Accounts payable | **** | 20,132 | 7,604 | |
| Customer deposits | **** | 4,391 | 3,820 | |
| Accrued taxes — | ||||
| Accrued income taxes | **** | 3,104 | 3,725 | |
| Other accrued taxes | **** | 977 | 1,213 | |
| Accrued compensation | **** | 2,434 | 2,601 | |
| Current portion of long-term debt | **** | 25,150 | 24,375 | |
| Regulatory liabilities, current | **** | 3,011 | 2,343 | |
| Construction accruals | **** | 3,725 | 242 | |
| Other current liabilities | **** | 2,123 | 1,489 | |
| Total current liabilities | **** | 72,281 | 50,150 | |
| Long-Term Debt | **** | 176,150 | 170,625 | |
| Deferred Credits and Other Liabilities: | ||||
| Accumulated deferred income taxes, net | **** | 34,597 | 33,048 | |
| Accrued removal costs | **** | 39,770 | 37,742 | |
| Other regulatory liabilities | **** | 19,087 | 20,091 | |
| Long-term lease obligation | **** | 6,867 | 7,431 | |
| Other noncurrent liabilities | **** | 117 | 107 | |
| Total deferred credits and other liabilities | **** | 100,438 | 98,419 | |
| Total Liabilities | **** | 348,869 | 319,194 | |
| Stockholder’s Equity: | ||||
| Total Stockholder’s Equity | **** | 195,707 | 158,270 | |
| Total Liabilities and Stockholder’s Equity | $ | 544,576 | $ | 477,464 |
The accompanying notes are an integral part of these financial statements.
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STATEMENTS OF INCOME
Pivotal Utility Holdings, Inc. (d/b/a Florida City Gas)
For the Years Ended December 31, 2022 and 2021
| 2022 | 2021 | |||||
|---|---|---|---|---|---|---|
| (in thousands) | ||||||
| Operating Revenues | $ | 118,491 | **** | $ | 111,407 | |
| Operating Expenses: | ||||||
| Cost of natural gas | **** | 33,414 | **** | 23,486 | ||
| Other operations and maintenance | **** | 33,868 | **** | 31,365 | ||
| Depreciation and amortization | **** | 17,959 | **** | 23,528 | ||
| Taxes other than income taxes | **** | 10,328 | **** | 9,115 | ||
| Total operating expenses | **** | 95,569 | **** | 87,494 | ||
| Operating Income | **** | 22,922 | **** | 23,913 | ||
| Other Income and (Expense): | ||||||
| Interest expense | **** | (6,584 | ) | (4,447 | ) | |
| Other income (expense), net | **** | 35 | **** | 1 | ||
| Total other income and (expense) | **** | (6,549 | ) | (4,446 | ) | |
| Earnings Before Income Taxes | **** | 16,373 | **** | 19,467 | ||
| Income taxes | **** | 3,636 | **** | 4,241 | ||
| Net income | $ | 12,737 | **** | $ | 15,226 |
The accompanying notes are an integral part of these financial statements.
4
STATEMENTS OF CHANGES IN EQUITY
Pivotal Utility Holdings, Inc. (d/b/a Florida City Gas)
For the Years Ended December 31, 2022 and 2021
| (in thousands) | Number ofCommonShares | Paid-inCapital | RetainedEarnings | Total | ||||||
|---|---|---|---|---|---|---|---|---|---|---|
| Balance, December 31, 2020 | **** | 12,807 | $ | 151,381 | $ | 11,663 | **** | $ | 163,044 | **** |
| Dividends to Parent | — | (20,000 | ) | (20,000 | ) | |||||
| Net Income | — | — | 15,226 | 15,226 | ||||||
| Balance, December 31, 2021 | **** | 12,807 | $ | 151,381 | $ | 6,889 | **** | $ | 158,270 | **** |
| Contributions from Parent | — | 24,700 | — | 24,700 | ||||||
| Net Income | — | — | 12,737 | 12,737 | ||||||
| Balance, December 31, 2022 | **** | 12,807 | $ | 176,081 | $ | 19,626 | **** | $ | 195,707 | **** |
The accompanying notes are an integral part of these financial statements.
5
STATEMENTS OF CASH FLOWS
Pivotal Utility Holdings, Inc. (d/b/a Florida City Gas)
For the Years Ended December 31, 2022 and 2021
| 2022 | 2021 | |||||
|---|---|---|---|---|---|---|
| (in thousands) | ||||||
| Operating Activities: | ||||||
| Net income | $ | 12,737 | **** | $ | 15,226 | |
| Adjustments to reconcile net income to net cash provided by operating activities: | ||||||
| Depreciation and amortization | **** | 17,959 | **** | 23,528 | ||
| Other amortization | **** | 885 | **** | 1,101 | ||
| Changes in deferred income taxes | **** | 701 | **** | 431 | ||
| Cost recovery clauses and franchise fees | **** | (2,190 | ) | (3,190 | ) | |
| Changes in operating assets and liabilities | ||||||
| Current assets | **** | (2,333 | ) | 1,165 | ||
| Noncurrent assets | **** | (2,201 | ) | 2 | ||
| Current liabilities | **** | 2,332 | **** | 702 | ||
| Noncurrent liabilities | **** | (20 | ) | (5 | ) | |
| Net cash provided by operating activities | **** | 27,870 | **** | 38,960 | ||
| Investing Activities: | ||||||
| Capital expenditures | **** | (59,652 | ) | (43,639 | ) | |
| Other | **** | 54 | **** | — | ||
| Net cash used in investing activities | **** | (59,598 | ) | (43,639 | ) | |
| Financing Activities: | ||||||
| Dividends to parent | **** | — | **** | (20,000 | ) | |
| Issuances of related party debt | **** | 31,000 | **** | 25,000 | ||
| Other | **** | (543 | ) | (522 | ) | |
| Net cash provided by financing activities | **** | 30,457 | **** | 4,478 | ||
| Net change in cash | **** | (1,271 | ) | (201 | ) | |
| Cash at the Beginning of the Period | **** | 7,067 | **** | 7,268 | ||
| Cash at the End of the Period | $ | 5,796 | **** | $ | 7,067 | |
| Supplemental Disclosure of Cash Flow Information | ||||||
| Cash paid during the period for interest | **** | 6,410 | **** | 4,266 | ||
| Cash paid during the period for federal income taxes | **** | 3,196 | **** | 496 | ||
| Cash paid (received) during the period for state income taxes | **** | 360 | **** | (385 | ) | |
| Supplemental Disclosure of Non-cash Investing andFinancing Activities | ||||||
| Non-cash contribution for capital structure<br>rebalancing | **** | 24,700 | **** | — | ||
| Accrued but not paid for capital expenditures | **** | 21,333 | **** | 2,968 |
The accompanying notes are an integral part of these financial statements.
6
Pivotal Utility Holdings, Inc. d/b/a Florida City Gas
Notes to Financial Statements
December 31, 2022 and2021
| I. | ORGANIZATION AND BUSINESS |
|---|
Pivotal Utility Holdings, Inc. (Pivotal Utility) d/b/a Florida City Gas (the Company) engages in the sale and distribution of natural gas to approximately 118 thousand customers in Florida’s Miami-Dade, Brevard, St. Lucie and Indian River counties. Pivotal Utility is a wholly owned subsidiary of Florida Power & Light Company (FPL), and FPL is a wholly owned subsidiary of NextEra Energy, Inc. (NextEra Energy).
| II. | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES |
|---|
Basis of Presentation - The financial statements included herein are prepared on the accrual basis of accounting in accordance with generally accepted accounting principles in the United States of America (GAAP).
Net income and comprehensive income are the same for the years ended December 31, 2022 and 2021.
Use of Estimates - The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Regulatory Accounting - As a public utility operating in Florida, the Company is subject to rate regulation by the Florida Public Service Commission (FPSC). Its rates are designed to recover the cost of providing service to its customers including a reasonable rate of return on invested capital. As a result of this cost-based regulation, the Company follows the accounting guidance that allows regulators to create assets and impose liabilities that would not be recorded by non-rate regulated entities. Regulatory assets and liabilities represent probable future revenues that will be recovered from or refunded to customers through the ratemaking process.
Cost recovery clauses, which are designed to permit full recovery of certain costs and provide a return on certain assets allowed to be recovered through various clauses, including purchased gas and the Company’s Safety, Access, and Facility Enhancement (SAFE) program. Revenues from cost recovery clauses are recorded when billed; the Company achieves matching of costs and related revenues by deferring the net under-recovery or over-recovery. Any under-recovered costs or over-recovered revenues are collected from or returned to customers in subsequent periods.
See Note 3 - Regulatory Matters for additional information.
Revenue Recognition - The Company records revenues when goods or services are provided to customers. Those revenues are based on rates approved by the FPSC. The Company has a rate structure that includes a volumetric rate design that allows the opportunity to recover certain costs based on gas usage. Revenues from sales and transportation services are recognized in the same period in which the related volumes are delivered to customers. Revenues from residential and certain commercial and industrial customers are recognized based on scheduled meter readings. Additionally, unbilled revenues are recognized for estimated deliveries of natural gas not yet billed to these customers, from the last bill date to the end of the accounting period. For other commercial and industrial customers, revenues are based on actual deliveries to the end of the period. The Company has a diversified base of customers. No single customer or industry comprises 10% or more of revenues. For all periods presented, uncollectible accounts averaged less than 1% of revenues.
Property, Plant and Equipment – Property, plant and equipment (PP&E) consists primarily of gas assets. PP&E is recorded at cost and depreciated on a straight-line average remaining life basis. Accumulated depreciation consists of the cost of units of utility property retired less estimated net salvage value. Maintenance and repairs of property as well as replacements and renewals of items determined to be less than units of utility property are charged to Other operations and maintenance expenses.
Construction work in progress includes construction materials, progress payments on major equipment contracts, third-party engineering costs and other costs directly associated with the construction of various projects. Upon completion of the projects, these costs are transferred to utility plant in service.
See Note 4 – Property, Plant and Equipment for additional information.
7
Cost of Natural Gas - The Company charges its customers for natural gas consumed using a natural gas cost recovery mechanism set by the FPSC, under which all prudently incurred natural gas costs are passed through to customers without markup, subject to regulatory review. The Company defers or accrues the difference between the actual cost of natural gas and the amount of commodity revenue earned in a given period such that no operating income is recognized related to these costs. The deferred or accrued amount is either billed or refunded to customers prospectively through adjustments to the commodity rate. Deferred and accrued natural gas costs are included in the balance sheets as regulatory assets and regulatory liabilities, respectively.
Income and Other Taxes - The Company uses the liability method of accounting for deferred income taxes and provides deferred income taxes for all income tax temporary differences. Taxes that are collected from customers on behalf of governmental agencies to be remitted to these agencies are presented on the balance sheet.
The Company recognizes tax positions that are “more likely than not” of being sustained upon examination by the appropriate taxing authorities. See Note 9 - Unrecognized Tax Benefits for additional information.
Receivables and Provision for Uncollectible Accounts - The Company’s receivables consist primarily of natural gas sales and transportation services billed to residential, commercial, industrial, and other customers. Customers are billed monthly and payment is due within 30 days. For the majority of receivables, a provision for uncollectible accounts is established based on historical collection experience and other factors. For the remaining receivables, if the Company is aware of a specific customer’s inability to pay, a provision for uncollectible accounts is recorded to reduce the receivable balance to the amount the Company reasonably expects to collect. If circumstances change, the estimate of the recoverability of accounts receivable could change as well. Circumstances that could affect this estimate include, but are not limited to, customer credit issues, customer deposits, and general economic conditions. Customers’ accounts are written off once they are deemed to be uncollectible.
The Company applies the current expected credit loss (CECL) model, to account for credit Losses for certain financial assets, including customer receivables. The CECL model requires an entity to consider current conditions and reasonable and supportable forecasts in addition to historical information when developing an allowance for credit losses. The Company books the estimate of lifetime credit losses in the month revenue is recognized or in the month losses on previously recognized revenues are identified. As of December 31, 2022 and 2021, the Company has a provision for uncollectible customer accounts of approximately $0.6 million and $0.8 million, respectively.
Materials and Supplies - Generally, materials and supplies are charged to inventory when purchased and then expensed or capitalized to plant, as appropriate, at weighted average cost when installed.
Natural Gas for Sale - The Company’s natural gas inventories are carried at cost on a weighted average cost of gas basis.
Internal-Use Software - The Company defers qualifying implementation costs incurred to develop or obtain internal use software associated with cloud computing and hosting arrangements. As of December 31, 2022 and 2021, the Company has recognized approximately $4.8 million and $5.1 million, respectively, in Deferred software implementation costs. The costs are included in depreciation and amortization over the 20-year term of the arrangement. As of December 31, 2022 and 2021, the Company has approximately $0.7 million and $0.7 million, respectively, of current Prepaid expenses, and $9.8 million and $10.1 million, respectively, of Prepaid software service costs relating to perpetual licensing fees which is being amortized to Other operations and maintenance expenses over the 20 year life of the arrangement.
Fair Valueof Financial Instruments - The carrying amount of financial instruments, including receivables, accounts payable, due to affiliates, other current assets and liabilities and accrued interest, approximates fair value due to the short maturity of these instruments.
| III. | REGULATORY MATTERS |
|---|
Base Rates
In March 2018, the FPSC issued an order approving a stipulation and settlement between the Company and several intervenors in the Company’s base rate proceeding that, after including the impact of the tax reform legislation, approved an $11.5 million increase in annual base rate revenues, effective June 1, 2018. The stipulation and settlement also approved the Company to recover the construction costs related to a liquefied natural gas storage facility through an increase in rates to become effective when the facility is placed in service. The storage facility will improve reliability and capacity at the southern section of the Company’s system. Under the terms of the settlement, the Company’s allowed regulatory ROE was 10.19%, with a range of 9.19% to 11.19%. However, if the Company’s earned regulatory ROE falls below 9.19%, the Company could seek retail rate relief. If the earned regulatory ROE rises above 11.19%, any party withstanding, other than the Company, could seek a review of the Company’s retail base rates. The Company agreed not to file a new base rate case with an effective date prior to June 1, 2022.
On May 31, 2022, the Company filed a general base rate increase with the FPSC (2022 base rate case) based on a projected 2023 Test Year. On June 9, 2023, the FPSC issued an order approving a single total base revenue increase of $23.3 million (which
8
included an incremental increase of $14.1 million, a previously approved increase of $3.8 million for a liquefied natural gas facility, and $5.3 million to transfer the SAFE investments from clause to base), with new rates becoming effective as of May 1, 2023. The FPSC approved an allowed regulatory ROE of 9.5% with a range of 8.5% to 10.5%, and an equity ratio of 59.6%. The Commission also approved the Company’s proposed reserve surplus amortization mechanism (RSAM) with a $25 million reserve amount, continuation and expansion of the capital SAFE program, implementation of an automated metering infrastructure pilot, and continuation of the storm damage reserve with a target reserve of $800,000. On June 23, 2023, the Office of Public Counsel (OPC) filed a motion for reconsideration of the FPSC’s approval of RSAM, which was denied on September 12, 2023. On July 7, 2023, OPC filed a notice of appeal with the Florida Supreme Court, which is pending.
Regulatory Assets and Liabilities
The Company is subject to accounting requirements for the effects of rate regulation. Regulatory assets represent probable future revenues associated with certain costs that are expected to be recovered from customers through the ratemaking process. Regulatory liabilities represent probable future reductions in revenues associated with amounts that are expected to be credited to customers through the ratemaking process.
Regulatory assets and liabilities reflected in the balance sheets at December 31, relate to:
| 2022 | 2021 | |||
|---|---|---|---|---|
| (in thousands) | ||||
| Regulatory Assets: | ||||
| Current: | ||||
| Regulatory infrastructure programs | $ | 487 | $ | 558 |
| Natural gas costs | 6,522 | 2,889 | ||
| Energy conservation program | 158 | 1,292 | ||
| Competitive rate adjustment | 913 | 691 | ||
| Underrecovered SAFE/Franchise Costs | — | 466 | ||
| Total | $ | 8,080 | $ | 5,896 |
| Noncurrent: | ||||
| Regulatory infrastructure programs | $ | 1,106 | $ | 1,593 |
| Deferred customer conversion costs | 2,671 | 3,101 | ||
| Recoverable pension and retiree welfare benefit costs | 20 | 139 | ||
| Deferred piping | 272 | 243 | ||
| Deferred income tax adjustment | — | 213 | ||
| Unamortized Loss on Reacquired Debt | 270 | 424 | ||
| Total | $ | 4,339 | $ | 5,713 |
| Regulatory Liabilities: | ||||
| Current: | ||||
| Overrecovered SAFE/Franchise Costs | $ | 146 | — | |
| Unbilled Revenue | 2,865 | 2,343 | ||
| Total | $ | 3,011 | $ | 2,343 |
| Noncurrent: | ||||
| Deferred income tax credits(*) | $ | 18,882 | $ | 19,943 |
| Asset removal costs | 39,770 | 37,742 | ||
| Storm Damage Reserve | 205 | 148 | ||
| Total | $ | 58,857 | $ | 57,833 |
| (*) | Includes excess deferred income tax liabilities resulting from the Tax Cuts and Jobs Act that was signed into<br>law on December 22, 2017 and became effective January 1, 2018 (Tax Reform Legislation). | |||
| --- | --- |
In the event that the Company’s operations are no longer subject to the accounting rules applicable for rate regulation, the Company would be required to write off to income the existing regulatory assets and liabilities unless regulators specify an alternative means of recovery or refund. In addition, the Company would be required to determine if any impairment to other assets, including plant, exists and write down the assets, if impaired, to their fair values. All regulatory assets and liabilities are to be reflected in rates.
Cost Recovery Clauses
Cost recovery clauses are designed to permit full recovery of certain costs and provide a return on certain assets allowed to be recovered through these clauses. Generally, these clause charges are calculated annually based on estimated costs and estimated customer usage for the following year, plus or minus true-up adjustments to reflect the estimated over or under recovery of costs for the current and prior periods. The Company’s regulatory assets and liabilities related to cost recovery clauses represent the under and over recovery balances and the regulatory infrastructure program costs, which are recovered through specific rate riders on a dollar-for-dollar basis. The rate riders that authorize the recovery of regulatory infrastructure program costs include both a recovery of cost and a return on investment during the recovery period.
9
In 2015, the FPSC approved the Company’s SAFE program, under which costs incurred for replacing aging pipes are recovered through a rate rider with annual adjustments and true-ups. Under the program, the Company is authorized to spend $105 million over a 10-year period on infrastructure relocation and enhancement projects. As part of its 2022 base rate case, the FPSC approved the Company’s request to (i) continue the SAFE program beyond 2025 and (ii) expand the SAFE program to include the replacement of approximately 160 miles of early vintage polymer pipelines.
In 2012, the Company developed a project that makes use of the Area Extension Program (AEP) provided for in its tariff. Under the AEP, the Company is authorized to recover the costs to extend service to a single point or multiple points in a geographical area when the cost of the facilities exceeds the maximum allowable investment under its tariff and the margin from the investment. The AEP charge is initially set at a rate sufficient to recover the investment in ten years from the date the project is placed in service. The Company reassesses the amount of additional revenue required to recover the unamortized excess cost of the facilities and re-calculated the AEP charge multiple times during the ten-year recovery period.
| IV. | PROPERTY, PLANT, AND EQUIPMENT |
|---|
Property, plant, and equipment is stated at original cost less any regulatory disallowances and impairments. Original cost includes: materials; labor; minor items of property; appropriate administrative and general costs; payroll-related costs such as taxes, pensions, and other benefits. The cost of replacements of property, exclusive of minor items of property, is capitalized. The cost of maintenance, repairs, and replacement of minor items of property is charged to other operations and maintenance expenses as incurred or performed.
Depreciation
Depreciation of the original cost of utility plant in service is provided using composite straight-line rates, which approximated 2.9% for 2022 and 2021. Depreciation studies are conducted periodically to update the composite rate that is approved by the FPSC. When property subject to composite depreciation is retired or otherwise disposed of in the normal course of business, its original cost, together with the cost of removal, less salvage, is charged to accumulated depreciation. As such, gains or losses are not recognized, as they are ultimately refunded to, or recovered from, customers through future rate adjustments. Minor items of property included in the original cost of the asset are retired when the related property unit is retired.
Acquisition Adjustment
Until July 2018, the Company was held by Southern Company Gas, a wholly owned, direct subsidiary of Southern Company. Upon Southern Company Gas’ acquisition of Pivotal Utility in 2004, a $21.7 million intangible was recorded for the difference between the cost of acquiring the Company and the original cost. The FPSC approved a 30-year amortization period for this intangible asset included in Plant in service, net of depreciation. A roll forward of the intangible asset, net of accumulated amortization is as follows:
| (in thousands) | ||
|---|---|---|
| December 31, 2020 | $ | 11,671 |
| 2021 amortization expense | 722 | |
| December 31, 2021 | 12,393 | |
| 2022 amortization expense | 722 | |
| December 31, 2022 | $ | 13,115 |
| V. | DEBT | |
| --- | --- |
Loan Agreement with FPL
The Company entered into a loan agreement with FPL for the purpose of funding the Company’s ongoing cash and working capital requirements. The loan agreement is available from January l, 2019 through January 1, 2069, (the Availability Period). The agreement allows for a maximum of $150 million of short-term loans and $300 million of long-term loans to be outstanding at one time through the Availability Period. Each short-term Loan will not exceed a 365-day term. Long-terms loans will have a term between 1 year and 50 years, not to exceed the Availability Period. The interest rates for the loans will be variable and equal to FPL’s weighted average debt rate.
10
At December 31, 2022 and 2021, amounts outstanding were as follows:
| December 31, 2022 | December 31, 2021 | |||||||||
|---|---|---|---|---|---|---|---|---|---|---|
| Weighted-average<br>interest rate | Outstanding | Weighted-average<br>interest rate | Outstanding | |||||||
| (in thousands) | ||||||||||
| Long-term loans | 3.53 | % | $ | 176,150 | 3.72 | % | $ | 170,625 | ||
| Short-term loans | 1.13 | % | 25,150 | 0.45 | % | 24,375 | ||||
| Total | $ | 201,300 | $ | 195,000 | ||||||
| VI. | LEASES | |||||||||
| --- | --- |
The Company has a finance lease regarding a transport service agreement. Lease payments under the associated agreements are fixed and convey exclusive use of the assets during the arrangement. The lease terminates in 2033.
At December 31, 2022 and December 31, 2021, the Company reflected a Right-of-use asset in connection with the lease of $7.4 million and $8.0 million, and a corresponding lease liability (including current and long-term obligations) of $7.4 million and $8.0 million, respectively. The lease liability was calculated using a weighted-average incremental borrowing rate at the lease inception of 3.85%.
Lease amortization and accretion of the lease liability is included in depreciation and amortization expense and interest expense in the Company’s statements of operations. The Company recorded a lease amortization and interest expense of $0.8 million and $0.8 million for the years ended December 31, 2022 and 2021, respectively.
The following table presents fixed lease payments and a reconciliation of the undiscounted cash flows to finance lease liabilities (including current and long-term obligations) as of December 31, 2022 and December 31, 2021:
| (in thousands) | |||
|---|---|---|---|
| 2023 | $ | 800 | |
| 2024 | 800 | ||
| 2025 | 800 | ||
| 2026 | 800 | ||
| 2027 | 800 | ||
| Thereafter | 4,900 | ||
| Total | 8,900 | ||
| Less present value discount | (1,500 | ) | |
| Total finance lease liabilities | $ | 7,400 |
The Company also entered into another finance lease regarding a transport service agreement in 2021. The lease commenced in April 2023 upon the subject pipeline being placed in service and will terminate in 2053.
| VII. | RETIREMENT BENEFITS |
|---|
The Company’s employees participate in NextEra Energy’s qualified noncontributory defined benefit pension plan. NextEra Energy uses multiemployer accounting and allocates net pension benefit income or expense to its subsidiaries based on the pensionable earnings of the subsidiaries’ employees. The calculation includes several components of cost, offset by the expected return on plan assets. For the year ended December 31, 2022 and 2021, NextEra Energy allocated approximately $1.3 million and $0.9 million, respectively, of net pension benefit income to the Company.
| VIII. | CONTINGENCIES |
|---|
General Litigation Matters
The Company is subject to certain claims and legal actions arising in the ordinary course of business. One such claim is a personal injury claim alleged to have occurred on July 6, 2016, in Miami-Dade County, Florida. The plaintiff claimed multiple fractures and traumatic brain injury arising from an accident on bicycle path with a gas cap belonging to the Company. However, the Company was not added as a defendant until October 2020, after other named defendants settled or were dismissed from the case. At the time the claim was filed against the Company, the Company did not believe it was probable that any amounts would be paid out in relation to the claim. As a result of the Company’s discovery efforts conducted through the third quarter of 2023, including depositions, production of documents, examinations, and expert reviews, the Company ultimately determined that a payout on plaintiff’s claim was probable and it was in the Company’s best interest to settle and resolve the case. The matter was settled in October 2023 for $850,000 and the loss was reflected in Other operations and maintenance expenses for the nine months
11
ended September 30, 2023. The ultimate outcome of all other matters and such pending or potential litigation against the Company cannot be determined at this time; however, for current proceedings not specifically reported herein, management does not anticipate that the ultimate liabilities, if any, arising from such current proceedings would have a material effect on the Company’s financial statements.
| IX. | INCOME TAXES |
|---|
NextEra Energy will file a consolidated income tax return and various combined and separate state tax returns on behalf of the Company. Under the tax sharing agreement between NextEra Energy and certain of its subsidiaries, the income tax provision at each applicable subsidiary reflects the use of the “separate return method,” except that tax benefits that could not be used on a separate return basis, but are used on the consolidated tax return, are recorded by the subsidiary that generated the tax benefits. Any remaining consolidated income tax benefits or expenses are recorded at the corporate level. Included in Regulatory Assets, Deferred and Other Regulatory Liabilities on the Company’s balance sheet is the revenue equivalent of the difference in deferred income taxes computed under accounting rules, as compared to regulatory accounting rules. The components of income taxes are as follows:
| 2022 | 2021 | ||||
|---|---|---|---|---|---|
| (in thousands) | |||||
| Federal — | |||||
| Current | $ | 2,503 | $ | 3,414 | |
| Deferred | 191 | (78 | ) | ||
| 2,694 | 3,336 | ||||
| State — | |||||
| Current | $ | 432 | $ | 396 | |
| Deferred | 510 | 509 | |||
| 942 | 905 | ||||
| Total | $ | 3,636 | $ | 4,241 |
The tax effects of temporary differences between the carrying amounts of assets and liabilities in the financial statements and their respective tax bases, which give rise to assets and liabilities are as follows:
| 2022 | 2021 | |||
|---|---|---|---|---|
| (in thousands) | ||||
| Deferred tax liabilities — | ||||
| Property related | $ | 37,940 | $ | 37,171 |
| Employee benefit obligations | 955 | 695 | ||
| Leases | 1,883 | 2,021 | ||
| Other | 1,188 | 953 | ||
| Total | $ | 41,966 | $ | 40,840 |
| Deferred tax assets — | ||||
| Leases | $ | 1,883 | $ | 2,021 |
| Tax Reform Legislation | 4,786 | 5,054 | ||
| Other | 700 | 717 | ||
| Total | 7,369 | 7,792 | ||
| Accumulated deferred income taxes, net | $ | 34,597 | $ | 33,048 |
Effective Tax Rate
A reconciliation of the federal statutory income tax rate to the effective income tax rate is as follows:
| Years Ended December 31, | ||||||
|---|---|---|---|---|---|---|
| 2022 | 2021 | |||||
| Federal statutory rate | 21.0 | % | 21.0 | % | ||
| State income tax, net of federal deduction | 4.5 | 3.7 | ||||
| Amortization of deferred regulatory credit | (3.9 | ) | (3.1 | ) | ||
| Other, net | 0.6 | 0.2 | ||||
| Effective income tax rate | 22.2 | % | 21.8 | % |
Unrecognized Tax Benefits
The Company has no unrecognized tax benefits for any year presented. The Company classifies interest on tax uncertainties as interest expense; however, the Company had no accrued interest or penalties for unrecognized tax benefits for any year presented. The tax years 2018 through 2022 (Federal and State) remain subject to examination by the Company’s major tax jurisdictions.
12
| X. | COMMITMENTS |
|---|
Pipeline charges and storage capacity include charges recoverable through a natural gas cost recovery mechanism, or alternatively, billed to marketers of natural gas.
The Company has also made commitments in connection with a portion of their projected capital expenditures. Capital expenditures include, among other things, the cost for construction or acquisition of additional facilities and equipment to meet customer demand, as well as capital improvements to and maintenance to existing facilities.
Contractual obligations and estimated expenditures at December 31, 2022 were as follows:
| 2023 | 2024 | 2025 | 2026 | 2027 | Thereafter | Total | ||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| (in thousands) | ||||||||||||||
| Pipeline charges and storage capacity (a) | $ | 10,382 | $ | 10,449 | $ | 9,654 | $ | 9,289 | $ | 9,289 | $ | 23,931 | $ | 72,994 |
| Capital expenditures (b) | 52,925 | 50,597 | 50,345 | 52,273 | 52,312 | — | 258,452 | |||||||
| Total | $ | 63,307 | $ | 61,046 | $ | 59,999 | $ | 61,562 | $ | 61,601 | $ | 23,931 | $ | 331,446 |
| (a) | Includes charges recoverable through a natural gas cost recovery mechanism, subject to review by the FPSC.<br> | |||||||||||||
| --- | --- | |||||||||||||
| (b) | Represents projected capital expenditures through 2027 for which applicable internal approvals (and also, if<br>required, regulatory approvals) have been received. The above estimates are subject to continuing review and adjustment and actual capital expenditures may vary significantly from estimates. | |||||||||||||
| --- | --- | |||||||||||||
| XI. | RELATED PARTY TRANSACTIONS | |||||||||||||
| --- | --- |
FPL purchases and sells natural gas to meet the Company’s gas supply requirements under a Gas Purchase and Sale Agreement. All costs associated with services provided by FPL were direct billed to the Company. All costs associated with natural gas purchase and sale activities are recoverable through the natural gas cost recovery mechanism. At December 31, 2022 and 2021, the net sale amounts under the Gas Purchase and Sale Agreement were $3.7 million and $1.8 million, respectively, reflected in Operating revenues, and the net purchase amounts were $30.3 million and $17.0 million, respectively, reflected in Cost of natural gas.
At December 31, 2022 and 2021, the Company had $7.2 million and $2.7 million, respectively, in payables which was primarily due to FPL related to corporate support provided by the affiliated entity and amounts relating to purchases of natural gas as discussed above. At December 31, 2022, the Company also had $2.6 million in payables due to NextEra Energy relating to federal income tax payments made on behalf of the Company and $0.5 million in payables due to NextEra Energy relating to state income taxes. At December 31, 2021, the Company also had $3.2 million in payables due to NextEra Energy relating to federal income tax payments made on behalf of the Company and $0.4 million in payables due to NextEra Energy relating to state income taxes.
| XII. | SUBSEQUENT EVENTS |
|---|
On September 26, 2023, FPL entered into a definitive agreement to sell Pivotal Utility to Chesapeake Utilities Corporation for $923 million in cash, including the settlement of the loan agreement with FPL (See Note 5 – Debt) and subject to working capital and other adjustments. Expected to be completed over the next several months, the sale is conditioned upon satisfaction of the Hart-Scott-Rodino review and customary closing conditions.
Management has evaluated the impact of events occurring after December 31, 2022, up to February 17, 2023, the date FPL’s consolidated GAAP financial statements were issued. The Company’s financial statements include all necessary adjustments resulting from such evaluation. Management has evaluated the impact of events requiring disclosure in the financial statements through October 31, 2023, the date the Company’s financial statements were available to be issued. Other than those described above, no events have occurred after December 31, 2022 that require disclosure in the financial statements.
13
EX-99.2
Exhibit 99.2
Pivotal Utility Holdings, Inc. (d/b/a Florida City Gas)
Financial Statements as of and for the
Three and NineMonths Ended September 30, 2023 and 2022
(Unaudited)
1
BALANCE SHEETS
Pivotal Utility Holdings, Inc. (d/b/a Florida City Gas)
At September 30, 2023 and December 31, 2022
(Unaudited)
| Assets | September 30, 2023 | December 31, 2022 | ||||
|---|---|---|---|---|---|---|
| (in thousands) | ||||||
| Current Assets: | ||||||
| Cash | $ | 24,306 | **** | $ | 5,796 | |
| Receivables — | ||||||
| Customer accounts receivable | **** | 7,694 | **** | 9,343 | ||
| Unbilled and deferred clause revenues | **** | 6,079 | **** | 6,776 | ||
| Due from affiliates | **** | 187 | **** | 142 | ||
| Other accounts receivable | **** | 395 | **** | 140 | ||
| Accumulated provision for uncollectible accounts | **** | (451 | ) | (610 | ) | |
| Materials and supplies | **** | 1,324 | **** | 14 | ||
| Natural gas for sale | **** | 1,373 | **** | 582 | ||
| Prepaid expenses | **** | 1,006 | **** | 1,585 | ||
| Regulatory assets, current | **** | 2,833 | **** | 8,080 | ||
| Other current assets | **** | 436 | **** | — | ||
| Total current assets | **** | 45,182 | **** | 31,848 | ||
| Property, Plant, and Equipment: | ||||||
| In service | **** | 663,047 | **** | 577,240 | ||
| Less: Accumulated depreciation | **** | 179,367 | **** | 172,519 | ||
| Plant in service, net of depreciation | **** | 483,680 | **** | 404,721 | ||
| Construction work in progress | **** | 18,183 | **** | 72,377 | ||
| Total property, plant, and equipment | **** | 501,863 | **** | 477,098 | ||
| Deferred Charges and Other Assets: | ||||||
| Regulatory assets, deferred | **** | 3,636 | **** | 4,339 | ||
| Prepaid pension asset | **** | 4,869 | **** | 3,750 | ||
| Right-of-use<br>asset | **** | 43,828 | **** | 7,432 | ||
| Prepaid software service costs | **** | 9,551 | **** | 9,822 | ||
| Deferred software implementation costs | **** | 4,812 | **** | 4,779 | ||
| Miscellaneous deferred debits | **** | 4,427 | **** | 3,754 | ||
| Deferred rate case expenses | **** | 1,136 | **** | 1,737 | ||
| Other deferred charges and assets | **** | 15 | **** | 17 | ||
| Total deferred charges and other assets | **** | 72,274 | **** | 35,630 | ||
| Total Assets | $ | 619,319 | **** | $ | 544,576 |
The accompanying notes are an integral part of these financial statements.
2
BALANCE SHEETS
Pivotal Utility Holdings, Inc. (d/b/a Florida City Gas)
At September 30, 2023 and December 31, 2022
(Unaudited)
| Liabilities and Stockholder’s Equity | September 30, 2023 | December 31, 2022 | ||
|---|---|---|---|---|
| (in thousands) | ||||
| Current Liabilities: | ||||
| Due to affiliates | $ | 3,317 | $ | 7,234 |
| Accounts payable | **** | 5,937 | 20,132 | |
| Customer deposits | **** | 5,149 | 4,391 | |
| Accrued taxes — | ||||
| Accrued income taxes | **** | 5,285 | 3,104 | |
| Other accrued taxes | **** | 4,243 | 977 | |
| Accrued compensation | **** | 1,959 | 2,434 | |
| Current portion of long-term debt | **** | 19,538 | 25,150 | |
| Regulatory liabilities, current | **** | 3,083 | 3,011 | |
| Construction accruals | **** | 2,274 | 3,725 | |
| Other current liabilities | **** | 3,684 | 2,123 | |
| Total current liabilities | **** | 54,469 | 72,281 | |
| Long-Term Debt | **** | 136,763 | 176,150 | |
| Deferred Credits and Other Liabilities: | ||||
| Accumulated deferred income taxes, net | **** | 38,814 | 34,597 | |
| Accrued removal costs | **** | 33,605 | 39,770 | |
| Other regulatory liabilities | **** | 18,512 | 19,087 | |
| Long-term lease obligation | **** | 42,547 | 6,867 | |
| Other noncurrent liabilities | **** | 341 | 117 | |
| Total deferred credits and other liabilities | **** | 133,819 | 100,438 | |
| Total Liabilities | **** | 325,051 | 348,869 | |
| Stockholder’s Equity: | ||||
| Total Stockholder’s Equity | **** | 294,268 | 195,707 | |
| Total Liabilities and Stockholder’s Equity | $ | 619,319 | $ | 544,576 |
The accompanying notes are an integral part of these financial statements.
3
STATEMENTS OF INCOME
Pivotal Utility Holdings, Inc. (d/b/a Florida City Gas)
For the Three Months Ended September 30, 2023 and 2022
(Unaudited)
| 2023 | 2022 | |||||
|---|---|---|---|---|---|---|
| (in thousands) | ||||||
| Operating Revenues | $ | 31,151 | **** | $ | 28,308 | |
| Operating Expenses: | ||||||
| Cost of natural gas | **** | 5,320 | **** | 7,575 | ||
| Other operations and maintenance | **** | 9,955 | **** | 8,394 | ||
| Depreciation and amortization | **** | 3,665 | **** | 4,505 | ||
| Taxes other than income taxes | **** | 2,928 | **** | 2,599 | ||
| Total operating expenses | **** | 21,868 | **** | 23,073 | ||
| Operating Income | **** | 9,283 | **** | 5,235 | ||
| Other Income and (Expense): | ||||||
| Interest expense | **** | (2,182 | ) | (1,568 | ) | |
| Other income (expense), net | **** | 153 | **** | 6 | ||
| Total other income and (expense) | **** | (2,029 | ) | (1,562 | ) | |
| Earnings Before Income Taxes | **** | 7,254 | **** | 3,673 | ||
| Income taxes | **** | 1,717 | **** | 791 | ||
| Net income | $ | 5,537 | **** | $ | 2,882 |
The accompanying notes are an integral part of these financial statements.
4
STATEMENTS OF INCOME
Pivotal Utility Holdings, Inc. (d/b/a Florida City Gas)
For the Nine Months Ended September 30, 2023 and 2022
(Unaudited)
| 2023 | 2022 | |||||
|---|---|---|---|---|---|---|
| (in thousands) | ||||||
| Operating Revenues | $ | 98,078 | **** | $ | 88,735 | |
| Operating Expenses: | ||||||
| Cost of natural gas | **** | 23,856 | **** | 25,215 | ||
| Other operations and maintenance | **** | 28,604 | **** | 24,535 | ||
| Depreciation and amortization | **** | 6,020 | **** | 13,419 | ||
| Taxes other than income taxes | **** | 9,089 | **** | 8,308 | ||
| Total operating expenses | **** | 67,569 | **** | 71,477 | ||
| Operating Income | **** | 30,509 | **** | 17,258 | ||
| Other Income and (Expense): | ||||||
| Interest expense | **** | (6,533 | ) | (4,935 | ) | |
| Other income (expense), net | **** | 376 | **** | 8 | ||
| Total other income and (expense) | **** | (6,157 | ) | (4,927 | ) | |
| Earnings Before Income Taxes | **** | 24,352 | **** | 12,331 | ||
| Income taxes | **** | 5,791 | **** | 2,746 | ||
| Net income | $ | 18,561 | **** | $ | 9,585 |
The accompanying notes are an integral part of these financial statements.
5
STATEMENTS OF CHANGES IN EQUITY
Pivotal Utility Holdings, Inc. (d/b/a Florida City Gas)
For the Three Months Ended September 30, 2023
(Unaudited)
| (in thousands) | Number ofCommonShares | Paid-inCapital | RetainedEarnings | Total | ||||
|---|---|---|---|---|---|---|---|---|
| Balance, June 30, 2023 | 12,807 | $ | 256,081 | $ | 32,650 | $ | 288,731 | |
| Net Income | — | — | 5,537 | 5,537 | ||||
| Balance, September 30, 2023 | 12,807 | $ | 256,081 | $ | 38,187 | $ | 294,268 |
The accompanying notes are an integral part of these financial statements.
6
STATEMENTS OF CHANGES IN EQUITY
Pivotal Utility Holdings, Inc. (d/b/a Florida City Gas)
For the Nine Months Ended September 30, 2023
(Unaudited)
| (in thousands) | Number ofCommonShares | Paid-inCapital | RetainedEarnings | Total | ||||
|---|---|---|---|---|---|---|---|---|
| Balance, December 31, 2022 | 12,807 | $ | 176,081 | $ | 19,626 | $ | 195,707 | |
| Contributions from Parent | — | 80,000 | — | 80,000 | ||||
| Net Income | — | — | 18,561 | 18,561 | ||||
| Balance, September 30, 2023 | 12,807 | $ | 256,081 | $ | 38,187 | $ | 294,268 |
The accompanying notes are an integral part of these financial statements.
7
STATEMENTS OF CHANGES IN EQUITY
Pivotal Utility Holdings, Inc. (d/b/a Florida City Gas)
For the Three Months Ended September 30, 2022
(Unaudited)
| (in thousands) | Number ofCommonShares | Paid-inCapital | RetainedEarnings | Total | ||||
|---|---|---|---|---|---|---|---|---|
| Balance, June 30, 2022 | 12,807 | $ | 176,081 | $ | 13,592 | $ | 189,673 | |
| Net Income | — | — | 2,882 | 2,882 | ||||
| Balance, September 30, 2022 | 12,807 | $ | 176,081 | $ | 16,474 | $ | 192,555 |
The accompanying notes are an integral part of these financial statements.
8
STATEMENTS OF CHANGES IN EQUITY
Pivotal Utility Holdings, Inc. (d/b/a Florida City Gas)
For the Nine Months Ended September 30, 2022
(Unaudited)
| (in thousands) | Number ofCommonShares | Paid-inCapital | RetainedEarnings | Total | ||||
|---|---|---|---|---|---|---|---|---|
| Balance, December 31, 2021 | 12,807 | $ | 151,381 | $ | 6,889 | $ | 158,270 | |
| Contributions from Parent | — | 24,700 | — | 24,700 | ||||
| Net Income | — | — | 9,585 | 9,585 | ||||
| Balance, September 30, 2022 | 12,807 | $ | 176,081 | $ | 16,474 | $ | 192,555 |
The accompanying notes are an integral part of these financial statements.
9
STATEMENTS OF CASH FLOWS
Pivotal Utility Holdings, Inc. (d/b/a Florida City Gas)
For the Nine Months Ended September 30, 2023 and 2022
(Unaudited)
| 2023 | 2022 | |||||
|---|---|---|---|---|---|---|
| (in thousands) | ||||||
| Operating Activities: | ||||||
| Net income | $ | 18,561 | **** | $ | 9,585 | |
| Adjustments to reconcile net income to net cash provided by operating activities: | ||||||
| Depreciation and amortization | **** | 6,020 | **** | 13,419 | ||
| Other amortization | **** | 490 | **** | 699 | ||
| Changes in deferred income taxes | **** | 3,599 | **** | 596 | ||
| Cost recovery clauses and franchise fees | **** | 6,349 | **** | (197 | ) | |
| Recoverable storm-related costs | **** | — | **** | 1 | ||
| Changes in operating assets and liabilities | ||||||
| Current assets | **** | (1,309 | ) | (1,586 | ) | |
| Noncurrent assets | **** | (329 | ) | (1,895 | ) | |
| Current liabilities | **** | 3,147 | **** | 2,084 | ||
| Noncurrent liabilities | **** | 249 | **** | (24 | ) | |
| Net cash provided by operating activities | **** | 36,777 | **** | 22,682 | ||
| Investing Activities: | ||||||
| Capital expenditures | **** | (52,354 | ) | (41,051 | ) | |
| Other | **** | (10 | ) | 55 | ||
| Net cash used in investing activities | **** | (52,364 | ) | (40,996 | ) | |
| Financing Activities: | ||||||
| Issuances of related party debt | **** | 35,000 | **** | 16,000 | ||
| Other | **** | (903 | ) | (405 | ) | |
| Net cash provided by financing activities | **** | 34,097 | **** | 15,595 | ||
| Net change in cash | **** | 18,510 | **** | (2,719 | ) | |
| Cash at the Beginning of the Period | **** | 5,796 | **** | 7,067 | ||
| Cash at the End of the Period | $ | 24,306 | **** | $ | 4,348 | |
| Supplemental Disclosure of Cash Flow Information | ||||||
| Cash paid during the period for interest | $ | 6,400 | **** | $ | 4,806 | |
| Cash paid during the period for state income taxes | **** | 10 | **** | 29 | ||
| Supplemental Disclosure of Non-cash Investing andFinancing Activities | ||||||
| Non-cash contribution for capital structure<br>rebalancing | $ | 80,000 | **** | $ | 24,700 | |
| Accrued but not paid for capital expenditures | **** | 5,174 | **** | 8,616 |
The accompanying notes are an integral part of these financial statements.
10
Pivotal Utility Holdings, Inc. d/b/a Florida City Gas
Notes to Financial Statements (Unaudited)
For thePeriods Ended September 30, 2023 and 2022
| I. | ORGANIZATION AND BUSINESS |
|---|
Pivotal Utility Holdings, Inc. (Pivotal Utility) d/b/a Florida City Gas (the Company) engages in the sale and distribution of natural gas to approximately 120 thousand customers in Florida’s Miami-Dade, Brevard, St. Lucie and Indian River counties. Pivotal Utility is a wholly owned subsidiary of Florida Power & Light Company (FPL), and FPL is a wholly owned subsidiary of NextEra Energy, Inc. (NextEra Energy).
On September 26, 2023, FPL entered into a definitive agreement to sell Florida City Gas to Chesapeake Utilities Corporation for $923 million in cash, including the settlement of the loan agreement with FPL (See Note 5 – Debt) and subject to working capital and other adjustments. Expected to be completed over the next several months, the sale is conditioned upon satisfaction of the Hart-Scott-Rodino review and customary closing conditions.
| II. | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES |
|---|
Basis of Presentation - The interim financial statements included herein are prepared on the accrual basis of accounting in accordance with generally accepted accounting principles in the United States of America (GAAP). The accompanying financial statements should be read in conjunction with the December 31, 2022 statements. The results of operations for an interim period generally will not give a true indication of results for the year.
Net income and comprehensive income are the same for the three month and nine month periods ended September 30, 2023 and 2022.
Use of Estimates - The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Regulatory Accounting - As a public utility operating in Florida, the Company is subject to rate regulation by the Florida Public Service Commission (FPSC). Its rates are designed to recover the cost of providing service to its customers including a reasonable rate of return on invested capital. As a result of this cost-based regulation, the Company follows the accounting guidance that allows regulators to create assets and impose liabilities that would not be recorded by non-rate regulated entities. Regulatory assets and liabilities represent probable future revenues that will be recovered from or refunded to customers through the ratemaking process.
Cost recovery clauses, which are designed to permit full recovery of certain costs and provide a return on certain assets allowed to be recovered through various clauses, including purchased gas and the Company’s Safety, Access, and Facility Enhancement (SAFE) program. Revenues from cost recovery clauses are recorded when billed; the Company achieves matching of costs and related revenues by deferring the net under-recovery or over-recovery. Any under-recovered costs or over-recovered revenues are collected from or returned to customers in subsequent periods.
See Note 3 - Regulatory Matters for additional information.
Revenue Recognition - The Company records revenues when goods or services are provided to customers. Those revenues are based on rates approved by the FPSC. The Company has a rate structure that includes a volumetric rate design that allows the opportunity to recover certain costs based on gas usage. Revenues from sales and transportation services are recognized in the same period in which the related volumes are delivered to customers. Revenues from residential and certain commercial and industrial customers are recognized based on scheduled meter readings. Additionally, unbilled revenues are recognized for estimated deliveries of natural gas not yet billed to these customers, from the last bill date to the end of the accounting period. For other commercial and industrial customers, revenues are based on actual deliveries to the end of the period. The Company has a diversified base of customers. No single customer or industry comprises 10% or more of revenues. For all periods presented, uncollectible accounts averaged less than 1% of revenues.
Property, Plant and Equipment – Property, plant and equipment (PP&E) consists primarily of gas assets. PP&E is recorded at cost and depreciated on a straight-line average remaining life basis. Accumulated depreciation consists of the cost of units of utility property retired less estimated net salvage value. Maintenance and repairs of property as well as replacements and renewals of items determined to be less than units of utility property are charged to Other operations and maintenance expenses.
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Construction work in progress includes construction materials, progress payments on major equipment contracts, third-party engineering costs and other costs directly associated with the construction of various projects. Upon completion of the projects, these costs are transferred to utility plant in service.
See Note 4 – Property, Plant and Equipment for additional information.
Cost of Natural Gas - The Company charges its customers for natural gas consumed using a natural gas cost recovery mechanism set by the FPSC, under which all prudently incurred natural gas costs are passed through to customers without markup, subject to regulatory review. The Company defers or accrues the difference between the actual cost of natural gas and the amount of commodity revenue earned in a given period such that no operating income is recognized related to these costs. The deferred or accrued amount is either billed or refunded to customers prospectively through adjustments to the commodity rate. Deferred and accrued natural gas costs are included in the balance sheets as regulatory assets and regulatory liabilities, respectively.
Income and Other Taxes - The Company uses the liability method of accounting for deferred income taxes and provides deferred income taxes for all income tax temporary differences. Taxes that are collected from customers on behalf of governmental agencies to be remitted to these agencies are presented on the balance sheet.
The Company recognizes tax positions that are “more likely than not” of being sustained upon examination by the appropriate taxing authorities. See Note 9 - Unrecognized Tax Benefits for additional information.
Receivables and Provision forUncollectible Accounts - The Company’s receivables consist primarily of natural gas sales and transportation services billed to residential, commercial, industrial, and other customers. Customers are billed monthly and payment is due within 30 days. For the majority of receivables, a provision for uncollectible accounts is established based on historical collection experience and other factors. For the remaining receivables, if the Company is aware of a specific customer’s inability to pay, a provision for uncollectible accounts is recorded to reduce the receivable balance to the amount the Company reasonably expects to collect. If circumstances change, the estimate of the recoverability of accounts receivable could change as well. Circumstances that could affect this estimate include, but are not limited to, customer credit issues, customer deposits, and general economic conditions. Customers’ accounts are written off once they are deemed to be uncollectible.
The Company applies the current expected credit loss (CECL) model, to account for credit Losses for certain financial assets, including customer receivables. The CECL model requires an entity to consider current conditions and reasonable and supportable forecasts in addition to historical information when developing an allowance for credit losses. The Company books the estimate of lifetime credit losses in the month revenue is recognized or in the month losses on previously recognized revenues are identified. As of September 30, 2023 and December 31, 2022, the Company has a provision for uncollectible customer accounts of approximately $0.5 million and $0.6 million, respectively.
Materials and Supplies - Generally, materials and supplies are charged to inventory when purchased and then expensed or capitalized to plant, as appropriate, at weighted average cost when installed.
Natural Gasfor Sale - The Company’s natural gas inventories are carried at cost on a weighted average cost of gas basis.
Internal-Use Software - The Company defers qualifying implementation costs incurred to develop or obtain internal use software associated with cloud computing and hosting arrangements. As of September 30, 2023 and December 31, 2022, the Company has recognized approximately $4.8 million for both periods in Deferred software implementation costs. The costs are included in depreciation and amortization over the 20-year term of the arrangement. As of September 30, 2023 and December 31, 2022, the Company has approximately $0.7 million for both periods of current Prepaid expenses, and $9.6 million and $9.8 million, respectively, of Prepaid software service costs relating to perpetual licensing fees which is being amortized to Other operations and maintenance expenses over the 20 year life of the arrangement.
Fair Value of Financial Instruments - The carrying amount of financial instruments, including receivables, accounts payable, due to affiliates, other current assets and liabilities and accrued interest, approximates fair value due to the short maturity of these instruments.
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| III. | REGULATORY MATTERS |
|---|
Base Rates
In March 2018, the FPSC issued an order approving a stipulation and settlement between the Company and several intervenors in the Company’s base rate proceeding that, after including the impact of the tax reform legislation, approved an $11.5 million increase in annual base rate revenues, effective June 1, 2018. The stipulation and settlement also approved the Company to recover the construction costs related to a liquefied natural gas storage facility through an increase in rates to become effective when the facility is placed in service. The storage facility will improve reliability and capacity at the southern section of the Company’s system. Under the terms of the settlement, the Company’s allowed regulatory Return on Equity (ROE) was 10.19%, with a range of 9.19% to 11.19%. However, if the Company’s earned regulatory ROE falls below 9.19%, the Company could seek retail rate relief. If the earned regulatory ROE rises above 11.19%, any party withstanding, other than the Company, could seek a review of the Company’s retail base rates. The Company agreed not to file a new base rate case with an effective date prior to June 1, 2022.
On May 31, 2022, the Company filed a general base rate increase with the FPSC (2022 base rate case) based on a projected 2023 Test Year. On June 9, 2023, the FPSC issued an order approving a single total base revenue increase of $23.3 million (which included an incremental increase of $14.1 million, a previously approved increase of $3.8 million for a liquefied natural gas facility, and $5.3 million to transfer the Safety, Access, and Facility Enhancement (SAFE) investments from clause to base), with new rates becoming effective as of May 1, 2023. The FPSC approved an allowed regulatory ROE of 9.5% with a range of 8.5% to 10.5%, and an equity ratio of 59.6%. The Commission also approved the Company’s proposed reserve surplus amortization mechanism (RSAM) with a $25 million reserve amount, continuation and expansion of the capital SAFE program, implementation of an automated metering infrastructure pilot, and continuation of the storm damage reserve with a target reserve of $800,000. On June 23, 2023, the Office of Public Counsel (OPC) filed a motion for reconsideration of the FPSC’s approval of RSAM, which was denied on September 12, 2023. On July 7, 2023, OPC filed a notice of appeal with the Florida Supreme Court, which is pending.
Regulatory Assets and Liabilities
The Company is subject to accounting requirements for the effects of rate regulation. Regulatory assets represent probable future revenues associated with certain costs that are expected to be recovered from customers through the ratemaking process. Regulatory liabilities represent probable future reductions in revenues associated with amounts that are expected to be credited to customers through the ratemaking process.
13
Regulatory assets and liabilities reflected in the balance sheets relate to:
| September 30, 2023 | December 31, 2022 | |||
|---|---|---|---|---|
| (in thousands) | ||||
| Regulatory Assets: | ||||
| Current: | ||||
| Regulatory infrastructure programs | $ | 342 | $ | 487 |
| Natural gas costs | — | 6,522 | ||
| Energy conservation program | — | 158 | ||
| Competitive rate adjustment | 943 | 913 | ||
| Underrecovered SAFE/Franchise Costs | 1,548 | — | ||
| Total | $ | 2,833 | $ | 8,080 |
| Noncurrent: | ||||
| Regulatory infrastructure programs | 830 | 1,106 | ||
| Deferred customer conversion costs | 2,361 | 2,671 | ||
| Recoverable pension and retiree welfare benefit costs | — | 20 | ||
| Deferred piping | 291 | 272 | ||
| Unamortized Loss on Reacquired Debt | 154 | 270 | ||
| Total | $ | 3,636 | $ | 4,339 |
| Regulatory Liabilities: | ||||
| Current: | ||||
| Natural gas costs | $ | 1,114 | — | |
| Overrecovered Employee conservation program costs | 338 | — | ||
| Overrecovered SAFE/Franchise Costs | — | 146 | ||
| Unbilled Revenue | 1,631 | 2,865 | ||
| Total | $ | 3,083 | $ | 3,011 |
| Noncurrent: | ||||
| Deferred income tax credits(*) | $ | 18,263 | $ | 18,882 |
| Asset removal costs | 33,605 | 39,770 | ||
| Storm Damage Reserve | 249 | 205 | ||
| Total | $ | 52,117 | $ | 58,857 |
| (*) | Includes excess deferred income tax liabilities resulting from the Tax Cuts and Jobs Act that was signed into<br>law on December 22, 2017 and became effective January 1, 2018 (Tax Reform Legislation). | |||
| --- | --- |
In the event that the Company’s operations are no longer subject to the accounting rules applicable for rate regulation, the Company would be required to write off to income the existing regulatory assets and liabilities unless regulators specify an alternative means of recovery or refund. In addition, the Company would be required to determine if any impairment to other assets, including plant, exists and write down the assets, if impaired, to their fair values. All regulatory assets and liabilities are to be reflected in rates.
Cost Recovery Clauses
Cost recovery clauses are designed to permit full recovery of certain costs and provide a return on certain assets allowed to be recovered through these clauses. Generally, these clause charges are calculated annually based on estimated costs and estimated customer usage for the following year, plus or minus true-up adjustments to reflect the estimated over or under recovery of costs for the current and prior periods. The Company’s regulatory assets and liabilities related to cost recovery clauses represent the under and over recovery balances and the regulatory infrastructure program costs, which are recovered through specific rate riders on a dollar-for-dollar basis. The rate riders that authorize the recovery of regulatory infrastructure program costs include both a recovery of cost and a return on investment during the recovery period.
In 2015, the FPSC approved the Company’s SAFE Program, under which costs incurred for replacing aging pipes are recovered through a rate rider with annual adjustments and true-ups. Under the program, the Company is authorized to spend approximately $105 million over a 10-year period on infrastructure relocation and enhancement projects. On June 9, 2023, the FPSC approved (i) the continuation of the SAFE Program beyond its 2025 expiration date and inclusion of approximately 150 miles of additional mains and services that are located in rear property easements and eligible for replacement under the SAFE program and (ii) the expansion of the SAFE Program to include the capital investments necessary for the expedited replacement of approximately 160 miles of orange pipe installed before 1990 that has been studied by the United States Department of Transportation Pipeline and Hazardous Materials Safety Administration and shown through industry research to exhibit premature failure in the form of cracking. To implement the approved continuation and expansion of the SAFE Program, on August 31, 2023, the Company filed a petition with the FPSC seeking approval to spend approximately $206 million over a 10-year period for these additional SAFE and orange pipe projects, which petition remains pending before the FPSC.
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In 2012, the Company developed a project that makes use of the Area Extension Program (AEP) provided for in its tariff. Under the AEP, the Company is authorized to recover the costs to extend service to a single point or multiple points in a geographical area when the cost of the facilities exceeds the maximum allowable investment under its tariff and the margin from the investment. The AEP charge is initially set at a rate sufficient to recover the investment in ten years from the date the project is placed in service. The Company reassesses the amount of additional revenue required to recover the unamortized excess cost of the facilities and re-calculated the AEP charge multiple times during the ten-year recovery period.
| IV. | PROPERTY, PLANT, AND EQUIPMENT |
|---|
Property, plant, and equipment is stated at original cost less any regulatory disallowances and impairments. Original cost includes: materials; labor; minor items of property; appropriate administrative and general costs; payroll-related costs such as taxes, pensions, and other benefits. The cost of replacements of property, exclusive of minor items of property, is capitalized. The cost of maintenance, repairs, and replacement of minor items of property is charged to other operations and maintenance expenses as incurred or performed.
Depreciation
Depreciation of the original cost of utility plant in service is provided using composite straight-line rates, which approximated 2.9% and 2.5% for the three and nine months ended September 30, 2023 and September 30, 2022, respectively. Depreciation studies are conducted periodically to update the composite rate that is approved by the FPSC. As part of the 2022 base rate case, the FPSC approved new depreciation rates which became effective January 1, 2023. When property subject to composite depreciation is retired or otherwise disposed of in the normal course of business, its original cost, together with the cost of removal, less salvage, is charged to accumulated depreciation. As such, gains or losses are not recognized, as they are ultimately refunded to, or recovered from, customers through future rate adjustments. Minor items of property included in the original cost of the asset are retired when the related property unit is retired.
The FPSC approved the RSAM as part of the 2022 base rate case. The RSAM is recorded as either an increase or decrease to Accrued removal costs which is reflected on the Company’s balance sheets and a corresponding increase or decrease to Depreciation and amortization expense. The Company filed a forecast earnings surveillance report for 2023 with the FPSC on May 1, 2023 which contained a regulatory ROE of 10.0% intended to be earned based on the best information the Company had at that time. This forecast establishes a targeted regulatory ROE. In order to earn the targeted regulatory ROE in each reporting period subject to the conditions of the effective rate agreement, RSAM is calculated using a trailing thirteen-month average of retail rate base and capital structure in conjunction with the trailing twelve months regulatory retail base net operating income, which primarily includes the retail base portion of base and other revenues, net of operations and maintenance expenses, depreciation and amortization, interest and tax expenses. In general, the net impact of these income statement line items is adjusted, in part, by RSAM or its reversal to earn the targeted regulatory ROE. For the three and nine months ended September 30, 2023, the Company recorded decreases to Asset removal costs and Depreciation expense of $1.3 million and $7.6 million, respectively, as a result of the RSAM. See Note 3—Regulatory Matters for additional information.
Acquisition Adjustment
Until July 2018, the Company was held by Southern Company Gas, a wholly owned, direct subsidiary of Southern Company. Upon Southern Company Gas’ acquisition of Pivotal Utility in 2004, a $21.7 million intangible was recorded for the difference between the cost of acquiring the Company and the original cost. The FPSC approved a 30-year amortization period for this intangible asset included in Plant in service, net of depreciation. For the three and nine months ended September 30, 2023 and 2022, the Company recorded amortization expense of $0.2 million and $0.5 million, respectively, for both periods.
| V. | DEBT |
|---|
Loan Agreement with FPL
The Company entered into a loan agreement with FPL for the purpose of funding the Company’s ongoing cash and working capital requirements. The loan agreement is available from January l, 2019 through January 1, 2069, (the Availability Period). The agreement allows for a maximum of $150 million of short-term loans and $300 million of long-term loans to be outstanding at one time through the Availability Period. Each short-term Loan will not exceed a 365 day term. Long-terms loans will have a term between 1 year and 50 years, not to exceed the Availability Period. The interest rates for the loans will be variable and equal to FPL’s weighted average debt rate.
15
At September 30, 2023 and December 31, 2022, amounts outstanding were as follows:
| September 30, 2023 | December 31, 2022 | |||||||||
|---|---|---|---|---|---|---|---|---|---|---|
| Weighted-average<br>interest rate | Outstanding | Weighted-average<br>interest rate | Outstanding | |||||||
| (in thousands) | ||||||||||
| Long-term loans | 3.89 | % | $ | 136,763 | 3.53 | % | $ | 176,150 | ||
| Short-term loans | 3.47 | % | 19,538 | 1.13 | % | 25,150 | ||||
| Total | $ | 156,301 | $ | 201,300 | ||||||
| VI. | LEASES | |||||||||
| --- | --- |
The Company has two finance leases regarding transport service agreements. Lease payments under the associated agreements are fixed and convey exclusive use of the assets during the arrangement. The remaining lease term is 30 years.
At September 30, 2023 and December 31, 2022, the Company reflected a Right-of-use asset in connection with the leases of $43.8 million and $7.4 million, and a corresponding lease liability (including current and long-term obligations) of $43.8 million and $7.4 million, respectively. The lease liability using a weighted-average incremental borrowing rate at September 30, 2023 was 4.56%.
Lease amortization and accretion of the lease liability is included in depreciation and amortization expense and interest expense in the Company’s statements of operations. The Company recorded a lease amortization and interest expense of $0.7 million and $1.9 million, and $0.2 million and $0.6 million for the three and nine months ended September 30, 2023 and 2022, respectively.
The following table presents fixed lease payments and a reconciliation of the undiscounted cash flows to finance lease liabilities (including current and long-term obligations) as of September 30, 2023:
| (in thousands) | |||
|---|---|---|---|
| Remainder of 2023 | $ | 813 | |
| 2024 | 3,254 | ||
| 2025 | 3,254 | ||
| 2026 | 3,254 | ||
| 2027 | 3,254 | ||
| 2028 | 3,254 | ||
| Thereafter | 57,428 | ||
| Total | 74,511 | ||
| Less present value discount | (30,683 | ) | |
| Total finance lease liabilities | $ | 43,828 | |
| VII. | RETIREMENT BENEFITS | ||
| --- | --- |
The Company’s employees participate in NextEra Energy’s qualified noncontributory defined benefit pension plan. NextEra Energy uses multiemployer accounting and allocates net pension benefit income or expense to its subsidiaries based on the pensionable earnings of the subsidiaries’ employees. The calculation includes several components of cost, offset by the expected return on plan assets. For the three and nine months ended September 30, 2023 and 2022, NextEra Energy allocated approximately $0.4 million and $1.1 million, and $0.3 million and $1.0 million, respectively, of net pension benefit income to the Company.
| VIII. | CONTINGENCIES |
|---|
General Litigation Matters
The Company is subject to certain claims and legal actions arising in the ordinary course of business. One such claim is a personal injury claim alleged to have occurred on July 6, 2016, in Miami-Dade County, Florida. The plaintiff claimed multiple fractures
16
and traumatic brain injury arising from an accident on bicycle path with a gas cap belonging to the Company. However, the Company was not added as a defendant until October 2020, after other named defendants settled or were dismissed from the case. At the time the claim was filed against the Company, the Company did not believe it was probable that any amounts would be paid out in relation to the claim. As a result of the Company’s discovery efforts conducted through the third quarter of 2023, including depositions, production of documents, examinations, and expert reviews, the Company ultimately determined that a payout on plaintiff’s claim was probable and it was in the Company’s best interest to settle and resolve the case. The matter was settled in October 2023 for $850,000. FCG reflected a loss of $100,000 and $850,000 in Other operations and maintenance expenses for the three and nine months ended September 30, 2023 associated with this matter. The ultimate outcome of all other matters and such pending or potential litigation against the Company cannot be determined at this time; however, for current proceedings not specifically reported herein, management does not anticipate that the ultimate liabilities, if any, arising from such current proceedings would have a material effect on the Company’s financial statements.
| IX. | INCOME TAXES |
|---|
NextEra Energy will file a consolidated income tax return and various combined and separate state tax **** returns on behalf of the Company. Under the tax sharing agreement between NextEra Energy and certain of its subsidiaries, the income tax provision at each applicable subsidiary reflects the use of the “separate return method,” except that tax benefits that could not be used on a separate return basis, but are used on the consolidated tax return, are recorded by the subsidiary that generated the tax benefits. Any remaining consolidated income tax benefits or expenses are recorded at the corporate level. Included in Regulatory Assets, Deferred and Other Regulatory Liabilities on the Company’s balance sheet is the revenue equivalent of the difference in deferred income taxes computed under accounting rules, as compared to regulatory accounting rules. The components of income taxes are as follows:
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||
|---|---|---|---|---|---|---|---|---|---|
| 2023 | 2022 | 2023 | 2022 | ||||||
| (thousands) | (thousands) | ||||||||
| Federal: | |||||||||
| Current | $ | 721 | $ | 688 | $ | 1,849 | $ | 1,839 | |
| Deferred | 579 | (105 | ) | 2,577 | 191 | ||||
| Total Federal | 1,300 | 583 | 4,426 | 2,030 | |||||
| State: | |||||||||
| Current | $ | 150 | $ | 106 | $ | 343 | $ | 310 | |
| Deferred | 267 | 102 | 1,022 | 406 | |||||
| Total State | 417 | 208 | 1,365 | 716 | |||||
| Total income tax expense | $ | 1,717 | $ | 791 | $ | 5,791 | $ | 2,746 |
The tax effects of temporary differences between the carrying amounts of assets and liabilities in the financial statements and their respective tax bases, which give rise to assets and liabilities are as follows:
| September 30, 2023 | December 31, 2022 | |||
|---|---|---|---|---|
| (thousands) | ||||
| Deferred tax liabilities: | ||||
| Property-related | $ | 41,756 | $ | 37,940 |
| Employee benefit obligations | 1,234 | 955 | ||
| Leases | 11,108 | 1,883 | ||
| Other | 1,072 | 1,188 | ||
| Total | $ | 55,170 | $ | 41,966 |
| Deferred tax assets: | ||||
| Employee benefit obligations | $ | 1 | $ | — |
| Leases | 11,108 | 1,883 | ||
| Tax Reform Legislation | 4,629 | 4,786 | ||
| Other | 618 | 700 | ||
| Total | 16,356 | 7,369 | ||
| Accumulated deferred income taxes, net | $ | 38,814 | $ | 34,597 |
17
Effective Tax Rate
A reconciliation of the federal statutory income tax rate to the effective income tax rate is as follows:
| Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2023 | 2022 | 2023 | 2022 | |||||||||
| Federal statutory rate | 21.0 | % | 21.0 | % | 21.0 | % | 21.0 | % | ||||
| State income tax, net of federal deduction | 4.5 | 4.5 | 4.4 | 4.6 | ||||||||
| Amortization of deferred regulatory credit | (2.3 | ) | (4.8 | ) | (1.9 | ) | (3.9 | ) | ||||
| Other, net | 0.5 | 0.9 | 0.3 | 0.6 | ||||||||
| Effective income tax rate | 23.7 | % | 21.6 | % | 23.8 | % | 22.3 | % |
Unrecognized Tax Benefits
The Company has no unrecognized tax benefits for any year presented. The Company classifies interest on tax uncertainties as interest expense; however, the Company had no accrued interest or penalties for unrecognized tax benefits for any year presented. The tax years 2019 through 2022 (Federal and State) remain subject to examination by the Company’s major tax jurisdictions.
| X. | COMMITMENTS |
|---|
Pipeline charges and storage capacity include charges recoverable through a natural gas cost recovery mechanism, or alternatively, billed to marketers of natural gas.
The Company has also made commitments in connection with a portion of their projected capital expenditures. Capital expenditures include, among other things, the cost for construction or acquisition of additional facilities and equipment to meet customer demand, as well as capital improvements to and maintenance to existing facilities.
Contractual obligations and estimated expenditures at September 30, 2023 were as follows:
| Remainder<br>of 2023 | 2024 | 2025 | 2026 | 2027 | 2028 | Thereafter | Total | |||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| (in thousands) | ||||||||||||||||
| Pipeline charges and storage capacity^(a)^ | $ | 3,207 | $ | 10,449 | $ | 9,654 | $ | 9,289 | $ | 9,289 | $ | 9,075 | $ | 14,855 | $ | 65,818 |
| Capital expenditures^(b)^ | 32,062 | 60,597 | 50,345 | 53,783 | 53,867 | — | — | 250,654 | ||||||||
| Total | $ | 35,269 | $ | 71,046 | $ | 59,999 | $ | 63,072 | $ | 63,156 | $ | 9,075 | $ | 14,855 | $ | 316,472 |
| (a) | Includes charges recoverable through a natural gas cost recovery mechanism, subject to review by the FPSC.<br>Excludes natural gas transportation agreements accounted for as finance leases. See Note 6 - Leases for further information. | |||||||||||||||
| --- | --- | |||||||||||||||
| (b) | Represents projected capital expenditures through 2027 for which applicable internal approvals (and also, if<br>required, regulatory approvals) have been received. The above estimates are subject to continuing review and adjustment and actual capital expenditures may vary significantly from estimates. | |||||||||||||||
| --- | --- | |||||||||||||||
| XI. | RELATED PARTY TRANSACTIONS | |||||||||||||||
| --- | --- |
FPL purchases and sells natural gas to meet the Company’s gas supply requirements under a Gas Purchase and Sale Agreement. All costs associated with services provided by FPL were direct billed to the Company. All costs associated with natural gas purchase and sale activities are recoverable through the natural gas cost recovery mechanism. For the three and nine months ended September 30, 2023 and 2022, the net sale amounts under the Gas Purchase and Sale Agreement were $1.1 million and $2.1 million, and $1.8 million and $3.2 million, respectively, reflected in Operating revenues, and the net purchase amounts were $2.6 million and $11.1 million, and $7.1 million and $22.6 million, respectively, reflected in Cost of natural gas.
At September 30, 2023 and December 31, 2022, the Company had $3.3 million and $7.2 million, respectively, in payables which was primarily due to FPL related to corporate support provided by the affiliated entity and amounts relating to purchases of natural gas as discussed above. At September 30, 2023, the Company also had $4.5 million in payables due to NextEra Energy relating to federal income tax payments made on behalf of the Company and $0.8 million in payables due to NextEra Energy relating to state income taxes. At December 31, 2022, the Company also had $2.6 million in payables due to NextEra Energy relating to federal income tax payments made on behalf of the Company and $0.5 million in payables due to NextEra Energy relating to state income taxes.
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| XII. | SUBSEQUENT EVENTS |
|---|
On October 25, 2023, the Company received a letter from a large industrial customer alleging lost production due to a third-party strike of a Company gas main, which occurred on September 14, 2023, resulting in the interruption of the customer’s gas service. The customer alleges a total financial impact of $860,705 due to the loss of production and has requested the Company investigate the incident. The Company is in the early stages of investigating the customer’s allegations, but anticipates that claims could be made against the Company in connection with the incident. Although the Company cannot predict the outcome with certainty, based on the investigation conducted to date, the Company currently estimates that a loss of $250,000 will be incurred based on the alleged damages in connection with the incident. As a result, the Company recorded a loss of $250,000 to Other operations and maintenance expense for the three and nine months ended September 30, 2023.
Management has evaluated the impact of events requiring adjustments and disclosure in the financial statements through October 31, 2023, the date the Company’s financial statements were available to be issued. Other than those described above, no events have occurred after September 30, 2023 that require adjustments or disclosure in the financial statements.
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EX-99.3
Exhibit 99.3
UNAUDITED PRO FORMA CONDENSED COMBINED
FINANCIAL INFORMATION
The unaudited pro forma condensed combined financial information of Chesapeake Utilities Corporation (“Chesapeake Utilities”, or the “Company”) consists of a condensed combined balance sheet at September 30, 2023, and condensed combined statements of income for the nine months ended September 30, 2023 and the year ended December 31, 2022, all of which reflect the Company’s anticipated acquisition of Pivotal Utility Holdings, Inc. doing business as Florida City Gas (“FCG”). The unaudited pro forma condensed combined financial statements included herein have been derived from the following historical financial statements:
| • | the audited financial statements of Chesapeake Utilities as of and for the year ended December 31, 2022;<br> |
|---|---|
| • | the unaudited interim financial statements of Chesapeake Utilities as of and for the nine months ended<br>September 30, 2023; |
| --- | --- |
| • | the audited financial statements of FCG as of and for the year ended December 31, 2022; and<br> |
| --- | --- |
| • | the unaudited interim financial statements of FCG as of and for the nine months ended September 30, 2023.<br> |
| --- | --- |
The pro forma adjustments have been prepared as if the acquisition of FCG occurred on September 30, 2023 in the case of the unaudited pro forma condensed combined balance sheet and on January 1, 2022 in the case of the unaudited pro forma condensed combined statements of income for the nine months ended September 30, 2023 and for the year ended December 31, 2022. The unaudited pro forma condensed combined financial statements should be read in conjunction with the related notes, which are included herein, the financial statements and notes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2022, as filed February 22, 2023, and Quarterly Report on Form 10-Q for the nine months ended September 30, 2023, as filed November 2, 2023 and the financial statements and notes of FCG attached as Exhibits 99.1 and 99.2 in the Company’s Current Report on Form 8-K filed by the Company on November 9, 2023.
The unaudited pro forma condensed combined financial statements are presented for illustrative purposes only and do not necessarily reflect what the combined financial condition and results of operations would have reflected had the Acquisition occurred on the dates indicated. They also may not be useful in predicting the future financial condition and results of the operations of the combined company. The actual financial position and results of operations may differ significantly from the pro forma amounts reflected herein due to a variety of factors.
The unaudited pro forma information and adjustments, including the preliminary allocation of purchase price, are based upon preliminary estimates of fair values of assets acquired and liabilities assumed, current available information and certain assumptions that we believe are reasonable in the circumstances, as described in the notes to the unaudited pro forma condensed combined financial statements. The actual adjustments to the Company’s consolidated financial statements as of the closing date of the Acquisition will depend on a number of factors, including, among others, additional information available and the net assets of FCG on the closing date of the Acquisition. As a result, the actual adjustments will differ from the pro forma adjustments, and the differences may be material.
CHESAPEAKE UTILITIES CORPORATION
UNAUDITED PRO FORMA CONDENSED COMBINED
BALANCE SHEET AT SEPTEMBER 30, 2023
| Assets | FCG | TransactionAdjustments | Pro FormaCombined | |||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| (in thousands) | ||||||||||||
| Property, Plant and Equipment | ||||||||||||
| Regulated energy | 1,916,585 | $ | 663,047 | $ | (11,882 | ) | 4[a] | $ | 2,567,750 | |||
| Unregulated energy | 404,924 | — | 404,924 | |||||||||
| Other businesses and eliminations | 28,802 | — | 28,802 | |||||||||
| Total property, plant and equipment | 2,350,311 | 663,047 | (11,882 | ) | 3,001,476 | |||||||
| Less: Accumulated depreciation and amortization | (503,897 | ) | (179,367 | ) | 2,411 | 4[a] | (680,853 | ) | ||||
| Plus: Construction work in progress | 61,843 | 18,183 | 80,026 | |||||||||
| Net property, plant and equipment | 1,908,257 | 501,863 | (9,472 | ) | 2,400,648 | |||||||
| Current Assets | ||||||||||||
| Cash and cash equivalents | 1,793 | 24,306 | (22,306 | ) | 4[b] | 3,793 | ||||||
| Trade and other receivables | 47,397 | 14,355 | (187 | ) | 4[c] | 61,565 | ||||||
| Less: Allowance for credit losses | (2,405 | ) | (451 | ) | (2,856 | ) | ||||||
| Trade receivables, net | 44,992 | 13,904 | (187 | ) | 58,709 | |||||||
| Accrued revenue | 15,229 | — | 15,229 | |||||||||
| Propane inventory, at average cost | 7,001 | — | 7,001 | |||||||||
| Other inventory, at average cost | 17,593 | 1,324 | 18,917 | |||||||||
| Natural gas for sale | — | 1,373 | 1,373 | |||||||||
| Regulatory assets | 19,111 | 2,833 | 21,944 | |||||||||
| Storage gas prepayments | 5,063 | — | 5,063 | |||||||||
| Income taxes receivable | 5,340 | — | 5,340 | |||||||||
| Prepaid expenses | 17,179 | 1,006 | 18,185 | |||||||||
| Derivative assets, at fair value | 2,328 | — | 2,328 | |||||||||
| Other current assets | 1,837 | 436 | 2,273 | |||||||||
| Total current assets | 137,466 | 45,182 | (22,493 | ) | 160,155 | |||||||
| Deferred Charges and Other Assets | ||||||||||||
| Goodwill | 46,213 | — | 467,689<br> <br>(868 | ) | 4[d]<br> <br>4[e] | 513,034 | ||||||
| Other intangible assets, net | 16,518 | — | 16,518 | |||||||||
| Investments, at fair value | 11,084 | — | 11,084 | |||||||||
| Derivative assets, at fair value | 425 | — | 425 | |||||||||
| Operating lease right-of-use assets | 12,842 | 43,828 | (43,828 | ) | 4[f] | 12,842 | ||||||
| Regulatory assets | 91,678 | 3,636 | 95,314 | |||||||||
| Receivables and other deferred charges | ||||||||||||
| Prepaid pension asset | 4,869 | (4,869 | ) | 4[g] | — | |||||||
| Prepaid software service costs | 9,551 | 9,551 | ||||||||||
| Deferred software implementation costs | 4,812 | 4,812 | ||||||||||
| Miscellaneous deferred debits | 4,427 | (154 | ) | 4[h] | 4,273 | |||||||
| Deferred rate case expenses | 1,136 | 1,136 | ||||||||||
| Other receivables and other deferred charges | 16,263 | 15 | 16,278 | |||||||||
| Total deferred charges and other assets | 195,023 | 72,274 | 417,970 | 685,267 | ||||||||
| Total Assets | 2,240,746 | $ | 619,319 | $ | 386,005 | $ | 3,246,070 | |||||
| Capitalization and Liabilities | ||||||||||||
| Stockholders’ equity | ||||||||||||
| Preferred stock, par value 0.01 per share (authorized 2,000,000 shares) | — | $ | — | $ | — | $ | — | |||||
| Common stock, par value 0.4867 per share (authorized 50,000,000 shares) | 8,662 | — | 1,824 | 4[i] | 10,486 | |||||||
| Additional paid-in capital | 382,551 | 256,081 | (10,725 | ) | 4[j] | 700,002 | ||||||
| 328,176<br> <br>(256,081) | 4[i]<br> <br>4[k] | |||||||||||
| Retained earnings | 476,601 | 38,187 | (38,187)<br> <br>(18,750)<br><br><br>4,818 | 4[k]<br> <br>4[l]<br> <br>4[l] | 462,669 | |||||||
| Accumulated other comprehensive loss | (1,137 | ) | — | (1,137 | ) | |||||||
| Deferred compensation obligation | 8,987 | — | 8,987 | |||||||||
| Treasury stock | (8,987 | ) | — | (8,987 | ) | |||||||
| Total stockholders’ equity | 866,677 | 294,268 | 11,075 | 1,172,020 | ||||||||
| Long-term debt, net of current maturities | 643,801 | 136,763 | (4,125<br> <br>(136,763<br><br><br>550,000 | ) <br> <br>) | 4[m]<br> <br>4[n]<br> <br>4[i] | 1,189,677 | ||||||
| Total capitalization | 1,510,478 | 431,031 | 420,188 | 2,361,697 | ||||||||
| Current Liabilities | ||||||||||||
| Current portion of long-term debt | 20,000 | 19,538 | (19,538 | ) | 4[n] | 20,001 | ||||||
| Short-term borrowing | 118,570 | — | 77,000<br> <br>(868 | ) | 4[i]<br> <br>4[e] | 194,702 | ||||||
| Due to affiliates | — | 3,317 | (3,317 | ) | 4[o] | — | ||||||
| Accounts payable | 53,729 | 5,937 | 59,666 | |||||||||
| Customer deposits and refunds | 40,228 | 5,149 | 45,377 | |||||||||
| Accrued interest | 4,985 | — | 4,985 | |||||||||
| Dividends payable | 10,500 | — | 10,500 | |||||||||
| Income taxes payable | — | 5,285 | 5,285 | |||||||||
| Other accrued taxes | — | 4,243 | 4,243 | |||||||||
| Accrued compensation | 9,831 | 1,959 | 11,790 | |||||||||
| Regulatory liabilities | 9,092 | 3,083 | 12,175 | |||||||||
| Derivative liabilities, at fair value | 828 | — | 828 | |||||||||
| Construction accruals | — | 2,274 | 2,274 | |||||||||
| Other accrued liabilities | 20,647 | 3,684 | (1,281 | ) | 4[f] | 23,050 | ||||||
| Total current liabilities | 288,410 | 54,469 | 51,997 | 394,876 | ||||||||
| Deferred Credits and Other Liabilities | ||||||||||||
| Deferred income taxes | 264,541 | 38,814 | (38,814<br> <br>(4,818 | ) <br> <br>) | 4[p]<br> <br>4[l] | 259,723 | ||||||
| Accrued removal costs | — | 33,605 | 33,605 | |||||||||
| Regulatory liabilities | 145,092 | 18,512 | 163,604 | |||||||||
| Environmental liabilities | 2,562 | — | 2,562 | |||||||||
| Other pension and benefit costs | 17,133 | — | 17,133 | |||||||||
| Derivative liabilities, at fair value | 101 | — | 101 | |||||||||
| Lease liabilities | 11,040 | 42,547 | (42,547 | ) | 4[f] | 11,040 | ||||||
| Other liabilities | 1,389 | 341 | 1,730 | |||||||||
| Total deferred credits and other liabilities | 441,858 | 133,819 | (86,179 | ) | 489,498 | |||||||
| Other commitments and contingencies | ||||||||||||
| Total Capitalization and Liabilities | 2,240,746 | $ | 619,319 | $ | 386,005 | $ | 3,246,070 |
All values are in US Dollars.
CHESAPEAKE UTILITIES CORPORATION
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF INCOME
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2023
| CPK | FCG | TransactionAdjustments | Pro FormaCombined | |||||||
|---|---|---|---|---|---|---|---|---|---|---|
| (in thousands, except shares and per share data) | ||||||||||
| Operating Revenues | ||||||||||
| Regulated Energy | $ | 345,822 | $ | 98,078 | $ | (862 | ) | 4[q] | $ | 442,063 |
| (975 | ) | 4[r] | ||||||||
| Unregulated Energy and Other | 139,447 | — | 139,447 | |||||||
| Total operating revenues | 485,269 | 98,078 | (1,837 | ) | 581,510 | |||||
| Operating Expenses | ||||||||||
| Natural gas and electricity costs | 105,692 | 23,856 | 129,548 | |||||||
| Propane and natural gas costs | 55,786 | — | 55,786 | |||||||
| Operations | 128,147 | 28,604 | (369 | ) | 4[s] | 156,382 | ||||
| Transaction-related expenses | 3,899 | — | 3,899 | |||||||
| Maintenance | 15,487 | — | 15,487 | |||||||
| Depreciation and amortization | 52,096 | 6,020 | (732 | ) | 4[t] | 56,409 | ||||
| (975 | ) | 4[r] | ||||||||
| Other taxes | 20,674 | 9,089 | 29,763 | |||||||
| Total operating expenses | 381,781 | 67,569 | (2,076 | ) | 447,274 | |||||
| Operating Income | 103,488 | 30,509 | 239 | 134,236 | ||||||
| Other income, net | 1,036 | 376 | 1,412 | |||||||
| Interest charges, net | 21,272 | 6,533 | (862 | ) | 4[q] | 51,979 | ||||
| (5,505 | ) | 4[u] | ||||||||
| 26,978 | 4[v] | |||||||||
| 3,563 | 4[w] | |||||||||
| Income Before Income Taxes | 83,252 | 24,352 | (23,935 | ) | 83,669 | |||||
| Income Taxes | 21,368 | 5,791 | (6,143 | ) | 4[x] | 21,016 | ||||
| Net Income | $ | 61,884 | $ | 18,561 | $ | (17,792 | ) | $ | 62,653 | |
| Weighted Average Common Shares Outstanding: | ||||||||||
| Basic | 17,783,787 | 3,746,828 | 4[y] | 21,530,615 | ||||||
| Diluted | 17,847,288 | 3,746,828 | 4[y] | 21,594,116 | ||||||
| Earnings Per Share of Common Stock: | ||||||||||
| Basic Earnings Per Share of Common Stock | $ | 3.48 | $ | 2.91 | ||||||
| Diluted Earnings Per Share of Common Stock | $ | 3.47 | $ | 2.90 |
CHESAPEAKE UTILITIES CORPORATION
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF INCOME
FOR THE YEAR ENDED DECEMBER 31, 2022
| CPK | FCG | TransactionAdjustments | Pro FormaCombined | |||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| (in thousands, except shares and per share data) | ||||||||||||
| Operating Revenues | ||||||||||||
| Regulated Energy | $ | 429,424 | $ | 118,491 | $ | (297 | ) | 4[z] | $ | 547,075 | ||
| (543 | ) | 4[aa] | ||||||||||
| Unregulated Energy | 280,750 | — | 280,750 | |||||||||
| Other businesses and eliminations | (29,470 | ) | — | (29,470 | ) | |||||||
| Total operating revenues | 680,704 | 118,491 | (840 | ) | 798,355 | |||||||
| Operating Expenses | ||||||||||||
| Natural gas and electricity costs | 127,172 | 33,414 | 160,586 | |||||||||
| Propane and natural gas costs | 133,334 | — | 133,334 | |||||||||
| Operations | 164,505 | 33,868 | (1,015 | ) | 4[ab] | 197,358 | ||||||
| Maintenance | 18,176 | — | 18,176 | |||||||||
| Depreciation and amortization | 68,973 | 17,959 | (840 | ) | 4[ac] | 85,549 | ||||||
| (543 | ) | 4[aa] | ||||||||||
| Other taxes | 25,611 | 10,328 | 35,939 | |||||||||
| Total operating expenses | 537,771 | 95,569 | (2,398 | ) | 630,942 | |||||||
| Operating Income | 142,933 | 22,922 | 1,558 | 167,413 | ||||||||
| Other income, net | 5,051 | 35 | 5,086 | |||||||||
| Interest charges, net | 24,356 | 6,584 | (297 | ) | 4[z] | 65,681 | ||||||
| (6,176 | ) | 4[ad] | ||||||||||
| 35,970 | 4[ae] | |||||||||||
| 5,245 | 4[af] | |||||||||||
| Income Before Income Taxes | 123,628 | 16,373 | (33,183 | ) | 106,818 | |||||||
| Income Taxes | 33,832 | 3,636 | (9,081 | ) | 4[ag] | 28,387 | ||||||
| Net Income | $ | 89,796 | $ | 12,737 | $ | (24,102 | ) | $ | 78,431 | |||
| Weighted Average Common Shares Outstanding: | ||||||||||||
| Basic | 17,722,227 | 3,746,828 | 4[ah] | 21,469,055 | ||||||||
| Diluted | 17,804,294 | 3,746,828 | 4[ah] | 21,551,122 | ||||||||
| Earnings Per Share of Common Stock: | ||||||||||||
| Basic Earnings Per Share of Common Stock | $ | 5.07 | $ | 3.65 | ||||||||
| Diluted Earnings Per Share of Common Stock | $ | 5.04 | $ | 3.64 |
NOTE 1. BASIS OF PRESENTATION
The unaudited pro forma condensed combined financial statements included herein have been prepared in accordance with U.S. generally accepted accounting principles (“U.S. GAAP”) and Article 11 of Regulation S-X, and have been derived from the following historical financial statements:
| • | the audited financial statements of Chesapeake Utilities as of and for the year ended December 31, 2022;<br> |
|---|---|
| • | the unaudited interim financial statements of Chesapeake Utilities as of and for the nine months ended<br>September 30, 2023; |
| --- | --- |
| • | the audited financial statements of FCG as of and for the year ended December 31, 2022; and<br> |
| --- | --- |
| • | the unaudited interim financial statements of FCG as of and for the nine months ended September 30, 2023.<br> |
| --- | --- |
On September 26, 2023, the Company entered into a stock purchase agreement (the “Purchase Agreement”) with Florida Power & Light Company (“FPL”), to acquire all of the outstanding common shares of FCG, a wholly-owned subsidiary of FPL, for approximately $923.4 million in cash, subject to customary purchase price adjustments (the “Acquisition”). The Purchase Agreement is subject to the satisfaction of customary closing conditions and certain regulatory approvals in various jurisdictions, which have been received as of the date hereof. Subject to the satisfaction or waiver of the remaining conditions and the other terms and conditions of the Purchase Agreement, the Acquisition is expected to close in the fourth quarter of 2023.
The Acquisition has been accounted for in the unaudited pro forma condensed combined financial statements as an acquisition of all of the outstanding common shares of FCG using the acquisition method of accounting for business combinations. The assets acquired and liabilities assumed have been measured at estimated fair value, which is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants as of the measurement date. The Company expects to make a 338(h)(10) tax election under the Internal Revenue Code, which recharacterizes the stock purchase as an asset purchase for federal tax purposes. The Company expects to receive a tax basis in the acquired assets equal to the purchase price, and depreciate such basis over a 15-year period.
The accompanying unaudited pro forma condensed combined financial statements are not necessarily indicative of the results that would have been achieved if the transactions reflected herein had been completed on the dates indicated or the results which may be obtained in the future. While the underlying pro forma adjustments are intended to provide a reasonable basis for presenting the significant financial effects directly attributable to the Acquisition, they are preliminary and are based on currently available financial information and certain estimates and assumptions which we believe to be reasonable. The actual adjustments to our consolidated financial statements will be determined as of and subsequent to the closing date. Therefore, it is expected that the actual adjustments will differ from the pro forma adjustments, and the differences may be material.
NOTE 2.SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accounting policies followed in preparing the unaudited pro forma condensed combined financial statements are those used by Chesapeake Utilities as set forth in the audited historical financial statements and notes of the Company included in its Annual Report on Form 10-K for the year ended December 31, 2022, as filed February 22, 2023, and in the unaudited historical interim financial statements and notes of the Company included in its Quarterly Report on Form 10-Q for the nine months ended September 30, 2023. The unaudited pro forma condensed combined financial statements reflect any adjustments known at this time to conform FCG’s historical financial information to the Company’s significant accounting policies based on the Company’s review of FCG’s summary of significant accounting policies, as disclosed in the FCG historical financial statements attached as Exhibits 99.1 and 99.2 to the Company’s Current Report on Form 8-K filed on November 9, 2023 and preliminary discussions with FCG’s management. Upon completion of a more comprehensive comparison and assessment, additional differences may be identified.
NOTE 3.PURCHASE PRICE AND PRELIMINARY PURCHASE PRICE ALLOCATION
The expected purchase price for the Acquisition is as follows:
| (in thousands, except offer price) | ||
|---|---|---|
| Total shares of Chesapeake Utilities common stock issued | 3,746.8 | |
| Offer price of Chesapeake Utilities common stock on November 3, 2023 | $ | 92.71 |
| Equity portion of purchase price | $ | 330,000 |
| Issuance of long-term debt | 550,000 | |
| Short-term borrowings under the existing Revolver | 43,400 | |
| Total purchase price | $ | 923,400 |
Preliminary Purchase Price Allocation
Under the acquisition method of accounting, the identifiable assets acquired and liabilities assumed of FCG are recorded at fair value on the acquisition date and added to those of the Company. The pro forma adjustments included herein are preliminary and based on estimates of the fair value and useful lives of the assets acquired and liabilities assumed and have been prepared to illustrate the estimated effects of the acquisition between the Company and FCG. Significant portions of FCG’s operations are subject to the rate regulation by the Florida Public Service Commission. The carrying values of the assets and liabilities subject to regulatory accounting under U.S. GAAP, including property, plant and equipment, are considered to approximate the fair values.
The final determination of the preliminary purchase price allocation will be based on the net assets acquired as of the acquisition date and will depend on a number of factors, which cannot be predicted with any certainty at this time. The preliminary purchase price allocation may change based on the receipt of more detailed information. Accordingly, this allocation is preliminary and subject to further adjustment as additional information becomes available and as additional analyses and final valuations are completed. There can be no assurance that these additional analyses and final valuations will not result in significant changes to the estimates of fair value set forth below.
The following table provides a summary of the preliminary allocation of the purchase price to the identifiable tangible and intangible assets acquired and liabilities assumed of FCG, based on FCG’s balance sheet at September 30, 2023, with all excess value over consideration paid recorded as goodwill.
| (in thousands) | ||
|---|---|---|
| Total current assets | $ | 22,689 |
| Property, plant and equipment | 492,391 | |
| Goodwill | 467,689 | |
| Regulatory assets | 3,636 | |
| Other deferred charges and other assets, including intangible assets | 19,787 | |
| Total assets | 1,006,192 | |
| Total current liabilities | 30,334 | |
| Regulatory liabilities | 52,117 | |
| Deferred credits and other liabilities | 341 | |
| Total liabilities | 82,792 | |
| Total purchase price | $ | 923,400 |
NOTE 4.PRO FORMA ADJUSTMENTS AND ASSUMPTIONS
The following pro forma adjustments were based on the historical financial information and preliminary estimates and assumptions, both as described above and which are subject to change as additional information is obtained:
| a | Reflects property, plant and equipment with a net book value of $9.5 million related to software that is<br>excluded from the Acquisition and being retained by FPL. |
|---|---|
| b | Reflects a reduction in FCG’s cash balance to the minimum cash amount of $2.0 million as defined in<br>the Purchase Agreement. |
| --- | --- |
| c | Reflects $0.2 million of affiliated accounts receivable at September 30, 2023 which is an asset excluded<br>from the Acquisition and being retained by FPL. |
| --- | --- |
| d | Represents the excess of the Company’s purchase price of approximately $923.4 million over the<br>estimated fair values of assets acquired and liabilities assumed. |
| --- | --- |
| e | Reflects approximately $0.9 million of estimated working capital adjustments that in accordance with the<br>Purchase Agreement are treated as an adjustment to the Acquisition purchase price. |
| --- | --- |
| f | Reflects $43.8 million in right of use assets and lease liabilities associated with long-term<br>transportation service agreements between FCG and PPC, a wholly owned subsidiary of the Company. Upon closing of the Acquisition, these agreements will be classified as affiliate transactions and the associated assets and liabilities will be<br>eliminated in the Company’s consolidated balance sheet. |
| --- | --- |
| g | Reflects $4.9 million of prepaid pension expenses that are excluded from the Acquisition.<br> |
| --- | --- |
| h | Reflects FCG’s $0.2 million unamortized loss on reacquired debt which is excluded from the<br>Acquisition. |
| --- | --- |
| i | Reflects the financing needs of the Acquisition and the associated transaction-related costs including:<br>$550.0 million of new long-term debt, the issuance of 3.7 million shares of Chesapeake Utilities Corporation common stock, and $77.0 million of new short-term borrowings under the Company’s Revolver. |
| --- | --- |
| j | Represents approximately $10.7 million of fees associated with the issuance of 3.7 million shares of<br>the Company’s common stock to finance the Acquisition. The number of common shares assumed to be issued is estimated based on the Company’s closing price of $92.71 on November 3, 2023, net of a 5.0% underwriting discount.<br> |
| --- | --- |
| k | Reflects the elimination of FCG’s stockholder’s equity. |
| --- | --- |
| l | Represents $18.8 million of non-recurring direct incremental transaction-related expenses expected to be<br>incurred and would reduce deferred income tax liabilities by $4.8 million, including but not limited to, legal, consulting, audit and financing fees. These expenses are reflected as an adjustment to retained earnings of $18.8 million, less income<br>tax effects of $4.8 million on the unaudited pro forma condensed combined balance sheet at September 30, 2023. |
| --- | --- |
| m | Represents approximately $4.1M of debt issuance costs that have been reflected as a reduction to the<br>Company’s issuance of long-term debt to finance the Acquisition. The Company expects to issue $550.0 million in new long-term notes at an interest rate of 6.54 percent. |
| --- | --- |
| n | Reflects $156.3 million of affiliated debt of FCG that will be settled prior to the closing of the Acquisition.<br> |
| --- | --- |
| o | Reflects $3.3 million of affiliated accounts payable that will be settled prior to the closing of the<br>Acquisition. |
| --- | --- |
| p | As defined in the Purchase Agreement, the Company and FCG have elected to apply the provision of Section<br>338(h)(10) of the IRS Code, which recharacterizes the stock purchase as an asset purchase for federal tax purposes. The Company will receive a tax basis in the acquired assets equal to the purchase price and can depreciate the assets at their<br>purchased value and record goodwill that will be amortized for tax purposes over the next 15 years. As a result, FCG’s deferred tax balances will not transfer to the Company. |
| --- | --- |
| q | Represents $0.9 million of interest expense associated with long-term transportation service agreements between<br>FCG and PPC, a wholly owned subsidiary of the Company. Upon closing of the Acquisition, these agreements will be classified as affiliate transactions and the associated revenues and expenses will be eliminated in the Company’s consolidated<br>results. |
| --- | --- |
| r | Represents $1.0 million of depreciation expense associated with long-term transportation service agreements<br>between FCG and PPC, a wholly owned subsidiary of the Company. Upon closing of the Acquisition, these agreements will be classified as affiliate transactions and the associated revenues and expenses will be eliminated in the Company’s<br>consolidated results. |
| --- | --- |
| s | Reflects $0.4 million of pension expenses related to benefit plan obligations that are excluded from the<br>Acquisition. |
| --- | --- |
| t | Reflects $0.7 million of depreciation expense related to software that is excluded from the Acquisition and<br>being retained by FPL. |
| --- | --- |
| u | Reflects $5.5 million of interest expense related to outstanding debt of FCG that will be settled prior to the<br>closing of the Acquisition. |
| --- | --- |
| v | Reflects a $27.0 million net increase to interest expense resulting from the Company’s issuance of<br>long-term debt to finance the Acquisition. The Company expects to issue $550.0 million in new long-term notes at an interest rate of 6.54 percent. |
| --- | --- |
| w | Reflects a $3.6 million increase in interest expense resulting from incremental borrowings under the<br>Company’s Revolver at an interest rate of 6.17 percent. Such incremental borrowings will be used to finance the Acquisition and pay certain transaction-related expenses in connection with the closing of the Acquisition and related financing<br>activities. |
| --- | --- |
| x | Reflects the income tax effects of pro forma adjustments based on the Company’s blended federal and state<br>effective tax rate for the nine months ended September 30, 2023. |
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| y | Reflects the issuance of 3.7 million shares of the Company’s common stock to finance the Acquisition. The<br>number of common shares assumed to be issued is estimated based on the $92.71 closing price of the Company’s common stock on November 3, 2023, net of a 5.0 percent underwriting discount. |
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| z | Represents $0.3 million of interest expense associated with long-term transportation service agreements between<br>FCG and PPC, a wholly owned subsidiary of the Company. Upon closing of the Acquisition, these agreements will be classified as affiliate transactions and the associated revenues and expenses will be eliminated in the Company’s consolidated<br>results. |
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| aa | Represents $0.5 million of depreciation expense associated with long-term transportation service agreements<br>between FCG and PPC, a wholly owned subsidiary of the Company. Upon closing of the Acquisition, these agreements will be classified as affiliate transactions and the associated revenues and expenses will be eliminated in the Company’s<br>consolidated results. |
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| ab | Reflects $1.0 million of pension expenses related to benefit plan obligations that are excluded from the<br>Acquisition. |
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| ac | Reflects $0.8 million of depreciation expense related to software that is excluded from the Acquisition and<br>being retained by FPL. |
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| ad | Reflects $6.2 million of interest expense related to outstanding debt of FCG that will be settled prior to<br>the closing of the Acquisition. |
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| ae | Reflects a $36.0 million net increase to interest expense resulting from the Company’s issuance of<br>long-term debt to finance the Acquisition. The Company expects to issue $550.0 million in new long-term notes at an interest rate of 6.54 percent. |
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| af | Reflects a $5.2 million increase in interest expense resulting from incremental borrowings under the<br>Company’s Revolver at an interest rate of 6.17 percent. Such incremental borrowings will be used to finance the Acquisition and pay certain transaction-related expenses in connection with the closing of the Acquisition and related financing<br>activities. |
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| ag | Reflects the income tax effects of pro forma adjustments based on the Company’s blended federal and state<br>effective tax rate for the year ended December 31, 2022. |
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| ah | Reflects the issuance of 3.7 million shares of the Company’s common stock to finance the Acquisition. The<br>number of common shares assumed to be issued is estimated based on the closing price of the Company’s common stock of $92.71 on November 3, 2023, net of a 5.0 percent underwriting discount. |
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