Chesapeake Utilities(CPK) - 2020 Q2 - Quarterly Report

Cover Page and General Information The report identifies the company, filing type, reporting period, and key stock information - Company Name: CHESAPEAKE UTILITIES CORPORATION[3] - Document Type: Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 (FORM 10-Q)[2] - Reporting Period: For the quarterly period ended June 30, 2020[2] - Commission File Number: 001-11590[2] - Registrant Status: Large accelerated filer[6] - Common Stock: 16,493,573 shares of common stock, par value $0.4867 per share, were outstanding as of July 31, 2020[5] Table of Contents The report is structured into two main parts covering financial and other corporate information - The report is structured into two parts: Part I covers financial information including financial statements and MD&A, while Part II covers other information such as legal proceedings and risk factors[8] GLOSSARY OF DEFINITIONS This section defines key terms, abbreviations, and acronyms used throughout the report - The glossary defines key terms and abbreviations used throughout the report, covering accounting standards, company entities, regulations, business operations, and financial instruments to ensure clarity[9][10][11][12] PART I—FINANCIAL INFORMATION This part presents the company's unaudited financial statements and management's analysis ITEM 1. FINANCIAL STATEMENTS This section contains the company's unaudited condensed consolidated financial statements and accompanying notes Condensed Consolidated Statements of Income (Unaudited) Key Data from Condensed Consolidated Statements of Income (Unaudited) | Metric (in thousands of U.S. dollars) | Three Months Ended June 30, 2020 | Three Months Ended June 30, 2019 | Six Months Ended June 30, 2020 | Six Months Ended June 30, 2019 | | :--- | :--- | :--- | :--- | :--- | | Operating Revenues | | | | | | Regulated Energy | 73,518 | 73,403 | 176,473 | 177,021 | | Unregulated Energy and Other | 23,533 | 21,139 | 73,268 | 77,984 | | Total Operating Revenues | 97,051 | 94,542 | 249,741 | 255,005 | | Operating Expenses | | | | | | Cost of sales - Regulated Energy | 16,387 | 18,317 | 51,219 | 54,833 | | Cost of sales - Unregulated Energy and Other | 6,573 | 6,857 | 24,609 | 31,267 | | Operations | 34,607 | 31,531 | 70,559 | 66,945 | | Maintenance | 4,143 | 3,600 | 7,979 | 7,280 | | Settlement gain | (130) | (130) | (130) | (130) | | Depreciation and amortization | 12,247 | 11,464 | 24,500 | 22,392 | | Other taxes | 5,247 | 4,738 | 10,894 | 10,131 | | Total Operating Expenses | 79,074 | 76,377 | 189,630 | 192,718 | | Operating Income | 17,977 | 18,165 | 60,111 | 62,287 | | Other income (expense), net | (279) | (320) | 3,039 | (380) | | Interest charges | 5,054 | 5,552 | 10,868 | 11,180 | | Income from continuing operations before income taxes | 12,644 | 12,293 | 52,282 | 50,727 | | Income taxes from continuing operations | 1,983 | 3,379 | 12,580 | 13,002 | | Net income from continuing operations | 10,661 | 8,914 | 39,702 | 37,725 | | Net income (loss) from discontinued operations, net of tax | 295 | (610) | 184 | (757) | | Net Income | 10,956 | 8,304 | 39,886 | 36,968 | | Basic earnings per share | | | | | | Continuing operations | 0.65 | 0.55 | 2.42 | 2.31 | | Discontinued operations | 0.02 | (0.04) | 0.01 | (0.05) | | Total basic earnings per share | 0.67 | 0.51 | 2.43 | 2.26 | | Diluted earnings per share | | | | | | Continuing operations | 0.64 | 0.54 | 2.41 | 2.30 | | Discontinued operations | 0.02 | (0.04) | 0.01 | (0.05) | | Total diluted earnings per share | 0.66 | 0.50 | 2.42 | 2.25 | Condensed Consolidated Statements of Comprehensive Income (Unaudited) Key Data from Condensed Consolidated Statements of Comprehensive Income (Unaudited) | Metric (in thousands of U.S. dollars) | Three Months Ended June 30, 2020 | Three Months Ended June 30, 2019 | Six Months Ended June 30, 2020 | Six Months Ended June 30, 2019 | | :--- | :--- | :--- | :--- | :--- | | Net Income | 10,956 | 8,304 | 39,886 | 36,968 | | Other comprehensive income (loss), net of tax | | | | | | Employee benefits | 66 | 107 | 132 | 213 | | Cash flow hedges | 1,666 | (2,115) | 1,673 | 868 | | Total other comprehensive income (loss), net of tax | 1,732 | (2,008) | 1,805 | 1,081 | | Comprehensive Income | 12,688 | 6,296 | 41,691 | 38,049 | Condensed Consolidated Balance Sheets (Unaudited) Key Data from Condensed Consolidated Balance Sheets (Unaudited) | Metric (in thousands of U.S. dollars) | As of June 30, 2020 | As of December 31, 2019 | | :--- | :--- | :--- | | Assets | | | | Net property, plant and equipment | 1,525,360 | 1,463,797 | | Current assets | 98,558 | 134,826 | | Deferred charges and other assets | 198,257 | 184,575 | | Total Assets | 1,822,175 | 1,783,198 | | Liabilities and Stockholders' Equity | | | | Stockholders' equity | 593,277 | 561,577 | | Long-term debt, less current portion | 430,106 | 440,168 | | Current liabilities | 429,823 | 423,324 | | Deferred credits and other liabilities | 368,969 | 358,129 | | Total Capitalization and Liabilities | 1,822,175 | 1,783,198 | Condensed Consolidated Statements of Cash Flows (Unaudited) Key Data from Condensed Consolidated Statements of Cash Flows (Unaudited) | Metric (in thousands of U.S. dollars) | Six Months Ended June 30, 2020 | Six Months Ended June 30, 2019 | | :--- | :--- | :--- | | Net cash provided by operating activities | 91,678 | 74,575 | | Net cash used in investing activities | (80,254) | (90,880) | | Net cash (used in) provided by financing activities | (14,819) | 17,470 | | Net (decrease) increase in cash and cash equivalents | (3,395) | 1,165 | | Cash and cash equivalents at beginning of period | 6,985 | 6,089 | | Cash and cash equivalents at end of period | 3,590 | 7,254 | Condensed Consolidated Statements of Stockholders' Equity (Unaudited) Key Data from Condensed Consolidated Statements of Stockholders' Equity (Unaudited) | Metric (in thousands of U.S. dollars) | As of June 30, 2020 | As of June 30, 2019 | | :--- | :--- | :--- | | Common stock | 8,013 | 7,984 | | Additional paid-in capital | 263,272 | 256,385 | | Retained earnings | 326,454 | 285,762 | | Accumulated other comprehensive loss | (4,462) | (5,747) | | Deferred compensation obligation | 5,659 | 4,694 | | Treasury stock | (5,659) | (4,694) | | Total Stockholders' Equity | 593,277 | 544,384 | NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 1. Summary of Accounting Policies This section outlines the basis of preparation for the financial statements and details the impact of COVID-19 and newly adopted accounting standards - The financial statements are prepared in accordance with SEC rules and GAAP, with amounts for comparable periods adjusted for comparability[42][43] - The company's business is seasonal, with the highest energy consumption, revenue, and earnings typically occurring in the first and fourth quarters[43] - The COVID-19 pandemic led to reduced energy consumption in commercial and industrial sectors and increased operating expenses, partially offset by federal income tax benefits from the CARES Act and lower short-term borrowing costs[45] - The company adopted ASU 2016-13 (Credit Losses on Financial Instruments) on January 1, 2020, recording an immaterial cumulative-effect adjustment to retained earnings[47] - The adoption of ASU 2018-13 (Fair Value Measurement Disclosure Framework) and ASU 2017-04 (Simplifying the Test for Goodwill Impairment) is not expected to have a material impact on financial condition or results of operations[53][54] 2. Calculation of Earnings Per Share This section details the calculation of basic and diluted earnings per share for the three and six-month periods ended June 30, 2020 and 2019 Calculation of Earnings Per Share (Unaudited) | Metric | Three Months Ended June 30, 2020 | Three Months Ended June 30, 2019 | Six Months Ended June 30, 2020 | Six Months Ended June 30, 2019 | | :--- | :--- | :--- | :--- | :--- | | Basic EPS | | | | | | Net income from continuing operations (in thousands) | 10,661 | 8,914 | 39,702 | 37,725 | | Net income (loss) from discontinued operations (in thousands) | 295 | (610) | 184 | (757) | | Net income (in thousands) | 10,956 | 8,304 | 39,886 | 36,968 | | Weighted-average common shares outstanding | 16,448,490 | 16,401,028 | 16,431,724 | 16,393,022 | | Basic EPS from continuing operations | 0.65 | 0.55 | 2.42 | 2.31 | | Basic EPS (loss) from discontinued operations | 0.02 | (0.04) | 0.01 | (0.05) | | Total Basic EPS | 0.67 | 0.51 | 2.43 | 2.26 | | Diluted EPS | | | | | | Diluted weighted-average shares outstanding | 16,503,603 | 16,445,743 | 16,487,807 | 16,439,333 | | Diluted EPS from continuing operations | 0.64 | 0.54 | 2.41 | 2.30 | | Diluted EPS (loss) from discontinued operations | 0.02 | (0.04) | 0.01 | (0.05) | | Total Diluted EPS | 0.66 | 0.50 | 2.42 | 2.25 | 3. Acquisitions and Divestitures This section discloses recent and ongoing acquisition and divestiture activities, including the Elkton Gas and Boulden acquisitions and the PESCO divestiture - The company completed the acquisition of Elkton Gas in July 2020 for approximately $15 million, serving about 7,000 customers in Cecil County, Maryland[55] - In December 2019, Sharp acquired the propane operating assets of Boulden for approximately $24.6 million, serving 5,200 customers and creating strategic synergies[57] - The company sold the assets and contracts of PESCO in the fourth quarter of 2019, exiting the natural gas marketing business, with PESCO's historical results reported as discontinued operations[44][58] Impact of Boulden Acquisition on Operating Results (in thousands of U.S. dollars) | Metric | Three Months Ended June 30, 2020 | Six Months Ended June 30, 2020 | | :--- | :--- | :--- | | Operating Revenues | 800 | 3,600 | | Operating Income | 100 | 1,400 | Summary of PESCO Discontinued Operations (in thousands of U.S. dollars) | Metric | Three Months Ended June 30, 2020 | Three Months Ended June 30, 2019 | Six Months Ended June 30, 2020 | Six Months Ended June 30, 2019 | | :--- | :--- | :--- | :--- | :--- | | Operating Revenues | 3 | 41,280 | 23 | 118,302 | | Cost of Sales | 10 | 40,539 | 1 | 115,701 | | Other Operating Expenses | 39 | 1,470 | 197 | 3,460 | | Operating Loss | (46) | (729) | (175) | (859) | | Gain on sale of discontinued operations | 200 | — | 200 | — | | Income tax benefit | (147) | (220) | (188) | (268) | | Net Income (Loss) from Discontinued Operations, Net of Tax | 295 | (610) | 184 | (757) | 4. Revenue Recognition This section explains the company's revenue recognition principles and provides a breakdown of revenue by product and service type - The company recognizes revenue upon fulfillment of performance obligations, typically after delivering or transporting natural gas, electricity, or propane to customers[64] Operating Revenues from Continuing Operations by Product and Service Type (in thousands of U.S. dollars) | Business Type | Three Months Ended June 30, 2020 | Three Months Ended June 30, 2019 | Six Months Ended June 30, 2020 | Six Months Ended June 30, 2019 | | :--- | :--- | :--- | :--- | :--- | | Energy Distribution | 61,025 | 61,066 | 151,162 | 151,808 | | Energy Transmission | 28,193 | 26,727 | 62,077 | 62,819 | | Energy Generation | 3,694 | 4,235 | 8,017 | 8,377 | | Propane Operations | 17,260 | 17,488 | 55,883 | 64,017 | | Energy Transmission Services | 2,248 | 1,108 | 3,557 | 3,541 | | Other and Eliminations | (15,369) | (16,082) | (30,955) | (35,557) | | Total Operating Revenues | 97,051 | 94,542 | 249,741 | 255,005 | Contract Balances (in thousands of U.S. dollars) | Metric | As of June 30, 2020 | As of December 31, 2019 | | :--- | :--- | :--- | | Trade accounts receivable (current) | 35,764 | 47,330 | | Contract assets (current) | 18 | 18 | | Contract assets (non-current) | 4,338 | 3,465 | | Contract liabilities (current) | 347 | 589 | Future Revenue Recognition from Remaining Performance Obligations (in thousands of U.S. dollars) | Year | Operating Leases (in thousands) | | :--- | :--- | | Remainder of 2020 | 21,292 | | 2021 | 40,410 | | 2022 | 34,246 | | 2023 | 28,432 | | 2024 | 25,906 | | 2025 | 23,724 | | 2026 and thereafter | 209,564 | | Total | 383,174 | 5. Rates and Other Regulatory Activities This section details various regulatory activities and rate adjustments across Delaware, Maryland, Florida, and at the federal level - The Delaware PSC approved the company's application to acquire and convert propane CGS to natural gas service in June 2020[75] - The Maryland PSC approved the company's acquisition of Elkton Gas on June 29, 2020, which was completed in July 2020[76] - Florida Public Utilities Company has filed for storm cost recovery related to Hurricanes Michael and Dorian, with a final decision expected in September 2020[78][79] - Eastern Shore's Del-Mar Energy Pathway project was approved by FERC in December 2019 and is expected to be fully operational in the fourth quarter of 2021[84] - Eastern Shore's renewable natural gas rate became effective in November 2019, allowing its system to accommodate renewable natural gas[86] - PSCs in Maryland and Delaware have authorized utilities to establish regulatory assets to record prudently incurred incremental costs from the COVID-19 pandemic[90][91][92] Summary of TCJA Impact on Regulated Operations (in thousands of U.S. dollars) | Operation and Regulatory Jurisdiction | Status of ADIT-Related Regulatory Liability | Status of Impact on Customer Rates from Federal Corporate Income Tax Rate Reduction | | :--- | :--- | :--- | | Eastern Shore (FERC) | To be addressed in the next rate case | One-time bill credit of $0.9 million implemented in April 2018; customer rates adjusted | | Delaware Division (Delaware PSC) | PSC approved ADIT amortization in January 2019 | One-time bill credit of $1.5 million implemented in April 2019; customer rates adjusted | | Maryland Division (Maryland PSC) | PSC approved ADIT amortization in May 2018 | One-time bill credit of $0.4 million implemented in July 2018; customer rates adjusted | | Sandpiper Energy (Maryland PSC) | PSC approved ADIT amortization in May 2018 | One-time bill credit of $0.6 million implemented in July 2018; customer rates adjusted | | Chesapeake Florida Gas Division/Central Florida Gas (Florida PSC) | PSC order in February 2019 authorized amortization and retention of net ADIT liability | Tax savings from TCJA rate reduction retained by the company, except for GRIP; 2018 GRIP tax savings to be refunded in 2020 | | FPU Natural Gas (Florida PSC) | Same as Chesapeake Florida Gas Division | Same as Chesapeake Florida Gas Division | | FPU Electric (Florida PSC) | PSC order in January 2019 approved ADIT amortization via various recovery mechanisms | TCJA benefits provided to customers through a combination of reduced fuel cost recovery rates, base rates, and application to storm reserves | 6. Environmental Commitments and Contingencies This section discloses the company's environmental liabilities and remediation efforts at seven former manufactured gas plant (MGP) sites - The company is involved in investigation or remediation at seven former MGP sites and has received regulatory approval to recover most cleanup costs through rates[98] - As of June 30, 2020, the company had an environmental liability of approximately $6.1 million for FPU's MGP sites and has recovered approximately $12.2 million[102] - The company expects that all environmental remediation costs, including any potential future costs, will be recoverable from customers through rates[102] MGP Site Remediation Status and Estimated Costs (in thousands of U.S. dollars) | MGP Site (Jurisdiction) | Estimated Cleanup Costs | | :--- | :--- | | West Palm Beach (Florida) | $3.3 million to $14.2 million | | Sanford (Florida) | N/A (Completed, only long-term groundwater monitoring) | | Winter Haven (Florida) | Not to exceed $0.4 million | | Seaford (Delaware) | $0.2 million to $0.5 million | 7. Other Commitments and Contingencies This section discloses other commitments such as asset management agreements, transportation service contracts, and corporate guarantees - The company's Delmarva natural gas distribution operations entered into an asset management agreement in March 2020, effective through March 31, 2023[104] - FPU's power supply contracts require it to maintain acceptable credit rating standards, and as of June 30, 2020, FPU was in compliance with all fuel supply contract requirements[108] - The Board has authorized corporate guarantees and letters of credit, with outstanding amounts of approximately $11.2 million and $4.4 million, respectively, as of June 30, 2020, with no draws made[109][110] 8. Segment Information The company's operations are divided into two reportable segments, Regulated Energy and Unregulated Energy, based on the regulatory environment - The company's business is divided into two reportable segments: Regulated Energy (natural gas distribution, transmission, and electric distribution) and Unregulated Energy (energy transmission, generation, propane operations, and mobile CNG distribution)[112] Summary of Segment Financial Information (in thousands of U.S. dollars) | Metric | Three Months Ended June 30, 2020 | Three Months Ended June 30, 2019 | Six Months Ended June 30, 2020 | Six Months Ended June 30, 2019 | | :--- | :--- | :--- | :--- | :--- | | Operating Revenues from Unaffiliated Customers | | | | | | Regulated Energy | 73,043 | 72,880 | 175,536 | 175,951 | | Unregulated Energy | 24,008 | 21,662 | 74,205 | 79,054 | | Total Operating Revenues | 97,051 | 94,542 | 249,741 | 255,005 | | Operating Income | | | | | | Regulated Energy | 18,006 | 18,028 | 45,894 | 47,769 | | Unregulated Energy | 281 | (771) | 14,142 | 14,486 | | Other Operations and Eliminations | (310) | 908 | 75 | 32 | | Total Operating Income | 17,977 | 18,165 | 60,111 | 62,287 | Identifiable Assets (in thousands of U.S. dollars) | Segment | As of June 30, 2020 | As of December 31, 2019 | | :--- | :--- | :--- | | Regulated Energy | 1,477,616 | 1,434,066 | | Unregulated Energy | 296,140 | 296,810 | | Other Operations and Eliminations | 48,419 | 52,322 | | Total Identifiable Assets | 1,822,175 | 1,783,198 | 9. Stockholder's Equity This section details the components and changes in Accumulated Other Comprehensive Loss, which totaled $4.5 million as of June 30, 2020 - Accumulated Other Comprehensive Loss primarily consists of unrealized gains and losses on defined benefit pension plans, commodity contract cash flow hedges, and interest rate swap agreements[118] Changes in Accumulated Other Comprehensive (Loss)/Income (in thousands of U.S. dollars) | Metric | As of December 31, 2019 | As of June 30, 2020 | | :--- | :--- | :--- | | Defined benefit pension and postretirement benefit plan items | (4,933) | (4,801) | | Commodity contract cash flow hedges | (1,334) | 376 | | Interest rate swap cash flow hedges | — | (37) | | Total | (6,267) | (4,462) | Amounts Reclassified from Accumulated Other Comprehensive Loss (in thousands of U.S. dollars) | Metric | Three Months Ended June 30, 2020 | Three Months Ended June 30, 2019 | Six Months Ended June 30, 2020 | Six Months Ended June 30, 2019 | | :--- | :--- | :--- | :--- | :--- | | Amortization of defined benefit pension and postretirement benefit plan items, net of tax | (66) | (107) | (132) | (213) | | Gain (loss) on commodity contract cash flow hedges, net of tax | 172 | 93 | 1,060 | 132 | | Gain on interest rate swap cash flow hedges, net of tax | 8 | — | 8 | — | | Total reclassifications for the period | 114 | (14) | 936 | (81) | 10. Employee Benefit Plans This section provides details on the net periodic benefit costs for the company's pension and postretirement benefit plans Net Periodic Benefit Cost (in thousands of U.S. dollars) | Plan Type | Three Months Ended June 30, 2020 | Three Months Ended June 30, 2019 | Six Months Ended June 30, 2020 | Six Months Ended June 30, 2019 | | :--- | :--- | :--- | :--- | :--- | | Chesapeake Pension Plan | 69 | 78 | 138 | 158 | | FPU Pension Plan | (92) | 242 | (184) | 483 | | Chesapeake SERP | 47 | 1 | 42 | 94 | | Chesapeake Postretirement Plan | 1 | 2 | 2 | 4 | | FPU Medical Plan | 10 | 12 | 24 | 28 | | Total Periodic Cost | 69 | 335 | 202 | 767 | - The company expects that pension and postretirement benefit costs for 2020 will not be material[124] - The company expects to contribute approximately $0.3 million to the Chesapeake Pension Plan and $3.2 million to the FPU Pension Plan in 2020 and does not intend to defer these contributions[128] 11. Investments This section discloses the company's investment balances, primarily consisting of rabbi trust investments and equity securities Investment Balances (in thousands of U.S. dollars) | Investment Type | As of June 30, 2020 | As of December 31, 2019 | | :--- | :--- | :--- | | Rabbi trust | 9,551 | 9,202 | | Equity securities | 20 | 27 | | Total | 9,571 | 9,229 | - The company classifies these investments as trading securities and reports them at fair value[130] - For the three and six months ended June 30, 2020, the company recorded net unrealized gains of approximately $1.4 million and net unrealized losses of approximately $0.1 million, respectively[130] 12. Share-Based Compensation This section details the company's share-based compensation plans for non-employee directors and key employees Share-Based Compensation Expense (in thousands of U.S. dollars) | Metric | Three Months Ended June 30, 2020 | Three Months Ended June 30, 2019 | Six Months Ended June 30, 2020 | Six Months Ended June 30, 2019 | | :--- | :--- | :--- | :--- | :--- | | Non-employee director awards | 181 | 157 | 357 | 305 | | Key employee awards | 1,085 | 452 | 1,965 | 790 | | Total compensation expense | 1,266 | 609 | 2,322 | 1,095 | | Less: Tax benefit | (331) | (158) | (607) | (285) | | Share-based compensation amount included in net income | 935 | 451 | 1,715 | 810 | - In May 2020, each non-employee director received 887 shares of common stock as an annual retainer, totaling 8,870 shares with a weighted-average fair value of $84.47 per share[134] - In February 2020, the Board granted 66,857 shares of common stock to key employees as multi-year awards that will vest at the end of the service period on December 31, 2022[137] - As of June 30, 2020, there was approximately $5.8 million of unrecognized compensation cost related to key employee awards, expected to be recognized as expense through 2022[141] 13. Derivative Instruments This section describes the company's use of derivative instruments to manage commodity price and interest rate risks - The company utilizes derivative instruments to manage supply and price volatility risks for natural gas, electricity, and propane, and to hedge interest rate risk[143] - Sharp enters into propane futures and swap agreements to hedge against the risk of wholesale propane index price fluctuations, designating them as cash flow hedges[145] - In the second quarter of 2020, the company entered into interest rate swap agreements with a total notional amount of $100 million to hedge against interest rate volatility on short-term borrowings[146] Fair Value of Derivative Instruments (in thousands of U.S. dollars) | Derivative Type | Assets as of June 30, 2020 | Assets as of Dec 31, 2019 | Liabilities as of June 30, 2020 | Liabilities as of Dec 31, 2019 | | :--- | :--- | :--- | :--- | :--- | | Propane swap agreements | 1,270 | — | 751 | 1,844 | | Interest rate swap agreements | — | — | 51 | — | | Total | 1,270 | — | 802 | 1,844 | Impact of Derivative Instruments on Earnings (in thousands of U.S. dollars) | Metric | Three Months Ended June 30, 2020 | Three Months Ended June 30, 2019 | Six Months Ended June 30, 2020 | Six Months Ended June 30, 2019 | | :--- | :--- | :--- | :--- | :--- | | Propane swap agreements (Cost of sales) | 238 | 252 | 1,465 | 858 | | Propane swap agreements (Other comprehensive income/loss) | 2,354 | (494) | 2,363 | 515 | | Interest rate swap agreements (Interest charges) | 11 | — | 11 | — | | Interest rate swap agreements (Other comprehensive loss) | (51) | — | (51) | — | | Total | 2,552 | (2,713) | 3,788 | 2,069 | 14. Fair Value of Financial Instruments This section discloses the fair value measurements of the company's financial assets and liabilities according to the GAAP fair value hierarchy - GAAP establishes a fair value hierarchy that categorizes valuation inputs into three levels: Level 1 (quoted prices in active markets), Level 2 (observable inputs other than quoted prices), and Level 3 (unobservable inputs)[156] - As of June 30, 2020, the carrying value of long-term debt was approximately $446.5 million, with an estimated fair value of $481.7 million[161] Financial Assets and Liabilities Measured at Fair Value (in thousands of U.S. dollars) | Metric | Fair Value at June 30, 2020 | Level 1 | Level 2 | Level 3 | | :--- | :--- | :--- | :--- | :--- | | Assets | | | | | | Investments | 9,571 | 7,237 | — | 2,334 | | Derivative assets | 1,270 | — | 1,270 | — | | Total Assets | 10,841 | 7,237 | 1,270 | 2,334 | | Liabilities | | | | | | Derivative liabilities | 802 | — | 802 | — | Summary of Changes in Fair Value of Level 3 Investments (in thousands of U.S. dollars) | Metric | Six Months Ended June 30, 2020 | Six Months Ended June 30, 2019 | | :--- | :--- | :--- | | Beginning Balance | 803 | 686 | | Purchases and adjustments | 226 | 110 | | Transfers | 1,345 | — | | Distributions | (50) | (12) | | Investment income | 10 | 7 | | Ending Balance | 2,334 | 791 | 15. Long-Term Debt This section details the composition of the company's long-term debt, which primarily consists of FPU secured first mortgage bonds and unsecured senior notes Composition of Long-Term Debt (in thousands of U.S. dollars) | Debt Type | As of June 30, 2020 | As of December 31, 2019 | | :--- | :--- | :--- | | FPU secured first mortgage bonds | 7,992 | 7,990 | | Unsecured senior notes | 418,500 | 456,300 | | Less: Debt issuance costs | (786) | (822) | | Total Long-Term Debt | 445,706 | 485,768 | | Less: Current portion | (15,600) | (45,600) | | Net Long-Term Debt, less current portion | 430,106 | 440,168 | - In February 2020, the company fully repaid the $30 million unsecured term note issued in January 2019[163] Summary of Shelf Agreements (in thousands of U.S. dollars) | Counterparty | Total Borrowing Capacity | Issued Debt Amount | Uncommitted Amount | Remaining Borrowing Capacity | | :--- | :--- | :--- | :--- | :--- | | Prudential | 370,000 | (170,000) | (50,000) | 150,000 | | MetLife | 150,000 | — | — | 150,000 | | NYL | 150,000 | (100,000) | (40,000) | 10,000 | | Total | 670,000 | (270,000) | (90,000) | 310,000 | 16. Short-Term Borrowings This section discloses the company's short-term borrowing activities, which are used to meet short-term cash needs and fund capital expenditures - As of June 30, 2020, the company had $286.4 million in short-term borrowings outstanding at a weighted-average interest rate of 1.05%[171] - The company has a total of $465 million in credit facilities available to meet short-term cash needs and capital expenditures[171] - In the second quarter of 2020, the company entered into interest rate swap agreements with a total notional amount of $100 million to hedge against interest rate volatility on short-term borrowings[174] 17. Leases This section provides detailed information on the company's lease arrangements for office space, land, equipment, and other facilities - The company leases office space, land, equipment, pipeline facilities, and warehouses to support its business operations[175] Lease Costs (in thousands of U.S. dollars) | Lease Type | Three Months Ended June 30, 2020 | Three Months Ended June 30, 2019 | Six Months Ended June 30, 2020 | Six Months Ended June 30, 2019 | | :--- | :--- | :--- | :--- | :--- | | Operating lease cost | 629 | 654 | 1,255 | 1,288 | | Finance lease cost | — | 250 | — | 655 | | Net lease cost | 629 | 904 | 1,255 | 1,943 | Lease Asset and Liability Balances (in thousands of U.S. dollars) | Metric | As of June 30, 2020 | As of December 31, 2019 | | :--- | :--- | :--- | | Operating lease assets | 11,546 | 11,563 | | Operating lease liabilities (current) | 1,647 | 1,705 | | Operating lease liabilities (non-current) | 10,055 | 9,896 | | Total lease liabilities | 11,702 | 11,601 | Weighted-Average Remaining Lease Term and Discount Rate | Metric | As of June 30, 2020 | As of December 31, 2019 | | :--- | :--- | :--- | | Weighted-average remaining lease term for operating leases (years) | 8.6 | 8.88 | | Weighted-average discount rate for operating leases | 3.8% | 3.8% | Maturity of Future Undiscounted Lease Payments (in thousands of U.S. dollars) | Year | Operating Leases | | :--- | :--- | | Remainder of 2020 | 1,089 | | 2021 | 2,031 | | 2022 | 1,937 | | 2023 | 1,874 | | 2024 | 1,619 | | 2025 | 1,383 | | Thereafter | 3,876 | | Total lease payments | 13,809 | ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS This section provides management's detailed analysis of the company's financial condition, results of operations, and liquidity Safe Harbor for Forward-Looking Statements This section provides a safe harbor statement regarding forward-looking statements, which are subject to various risks and uncertainties - Forward-looking statements in the report are not historical facts and are subject to numerous risks and uncertainties that could cause actual results to differ materially from expectations[182] - Risk factors include regulatory policies, climate change, tax policies, project construction, economic conditions, cyber-attacks, severe weather, competition, commodity prices, interest rate fluctuations, M&A integration, and pandemics[182][184] Introduction The company is a diversified energy delivery company focused on profitable growth through its stable utility base and investments in related businesses - The company is an energy delivery company with operations in natural gas, propane, and electric distribution, gas transmission, and power and steam generation[185] - The company's strategy is to invest in growth opportunities, expand its energy distribution and transmission businesses, and enter new energy markets through strategic acquisitions[186] - The company's business is seasonal, with the highest energy consumption, revenue, and earnings typically occurring in the first and fourth quarters[186] - "Gross Margin" is defined as operating revenues less the cost of sales, a non-GAAP measure used to evaluate business unit profitability[187] Results of Operations for the Three and Six months Ended June 30, 2020 This section provides an overview of the company's operating results, highlighting the adverse impact of the COVID-19 pandemic and key growth drivers - The COVID-19 pandemic adversely impacted earnings by approximately $0.9 million for the three months and $1.1 million for the six months ended June 30, 2020[191] - The adverse impacts were partially offset by federal income tax benefits from the CARES Act and lower short-term borrowing costs[191] Summary of Operating Results (in thousands of U.S. dollars, except per share data) | Metric | Three Months Ended June 30, 2020 | Three Months Ended June 30, 2019 | Six Months Ended June 30, 2020 | Six Months Ended June 30, 2019 | | :--- | :--- | :--- | :--- | :--- | | Gross Margin | | | | | | Regulated Energy Segment | 57,131 | 55,086 | 125,254 | 122,188 | | Unregulated Energy Segment | 17,032 | 14,380 | 48,815 | 46,922 | | Total Gross Margin | 74,090 | 69,369 | 173,911 | 168,905 | | Operating Income | | | | | | Regulated Energy Segment | 18,006 | 18,028 | 45,894 | 47,769 | | Unregulated Energy Segment | 281 | (771) | 14,142 | 14,486 | | Total Operating Income | 17,977 | 18,165 | 60,111 | 62,287 | | Net Income | 10,956 | 8,304 | 39,886 | 36,968 | | Diluted EPS | 0.66 | 0.50 | 2.42 | 2.25 | Key Variances in Continuing Operations for the Three Months Ended June 30, 2020 (in thousands of U.S. dollars, except per share data) | Variance Item | Pre-tax Income | Net Income | EPS | | :--- | :--- | :--- | :--- | | 2019 Reported Results | 12,293 | 8,914 | 0.54 | | Adverse impact of COVID-19 | (3,595) | (2,557) | (0.15) | | Increased customer consumption (colder weather) | 2,013 | 1,432 | 0.08 | | CARES Act federal income tax benefits | — | 1,669 | 0.10 | | Eastern Shore and Peninsula Pipeline service expansions | 1,776 | 1,263 | 0.07 | | Increased demand for Marlin Gas Services | 1,077 | 766 | 0.05 | | Higher retail propane margins | 867 | 616 | 0.04 | | Natural gas business growth | 832 | 592 | 0.04 | | Contribution from Boulden acquisition | 549 | 390 | 0.02 | | Higher operating expenses | (2,944) | (2,094) | (0.13) | | Lower interest charges | (436) | (310) | (0.02) | | Lower pension expense | 371 | 264 | 0.02 | | 2020 Reported Results | 12,644 | 10,661 | 0.64 | Key Variances in Continuing Operations for the Six Months Ended June 30, 2020 (in thousands of U.S. dollars, except per share data) | Variance Item | Pre-tax Income | Net Income | EPS | | :--- | :--- | :--- | :--- | | 2019 Reported Results | 50,727 | 37,725 | 2.30 | | Adverse impact of COVID-19 | (3,800) | (2,764) | (0.17) | | Decreased customer consumption (warmer weather) | (1,931) | (1,405) | (0.09) | | Absence of 2019 Florida tax savings | (910) | (667) | (0.04) | | Gain on sale of assets | 3,162 | 2,317 | 0.14 | | CARES Act federal income tax benefits | — | 1,669 | 0.10 | | Eastern Shore and Peninsula Pipeline service expansions | 2,839 | 2,065 | 0.12 | | Contribution from Boulden acquisition | 2,437 | 1,773 | 0.11 | | Higher retail propane margins | 2,009 | 1,461 | 0.09 | | Natural gas business growth | 1,928 | 1,403 | 0.09 | | Aspire Energy rate increase | 308 | 224 | 0.01 | | Higher operating expenses | (5,527) | (4,020) | (0.25) | | Lower interest charges | (783) | (570) | (0.03) | | Lower pension expense | 743 | 540 | 0.03 | | 2020 Reported Results | 52,282 | 39,702 | 2.41 | Summary of Key Factors This section summarizes key performance drivers, including major projects, acquisitions, regulatory initiatives, and the impact of weather Recently Completed and Ongoing Major Projects and Initiatives The company is advancing several major projects and initiatives to drive growth, including pipeline expansions, virtual pipeline growth, and acquisitions Gross Margin Contribution from Major Projects and Initiatives (in thousands of U.S. dollars) | Project/Initiative | Three Months Ended June 30, 2020 | Three Months Ended June 30, 2019 | Six Months Ended June 30, 2020 | Six Months Ended June 30, 2019 | 2020 Estimate | 2021 Estimate | | :--- | :--- | :--- | :--- | :--- | :--- | :--- | | Pipeline Expansions | | | | | | | | West Palm Beach County, FL Expansion | 967 | 161 | 1,968 | 293 | 4,092 | 5,227 | | Del-Mar Energy Pathway | 452 | 189 | 641 | 353 | 2,398 | 4,100 | | Auburndale Callahan Intrastate Pipeline | 170 | — | 340 | — | 679 | 679 | | Guernsey Power Station | 536 | — | 536 | — | 4,039 | 7,564 | | Virtual Pipeline Growth | | | | | | | | Compressed Natural Gas Transportation | 2,107 | 1,030 | 3,454 | 3,359 | 6,900 | 7,700 | | Renewable Natural Gas Transportation | — | — | — | — | — | 1,000 | | Acquisitions | | | | | | | | Boulden Propane | 549 | — | 2,437 | — | 3,800 | 4,200 | | Elkton Gas | — | — | — | — | 1,207 | 3,992 | | Regulatory Initiatives | | | | | | | | Florida GRIP | 3,609 | 3,530 | 7,305 | 7,311 | 15,206 | 16,898 | | Hurricane Michael Regulatory Proceeding | — | — | — | — | TBD | TBD | | Total | 8,390 | 4,910 | 16,681 | 11,316 | 38,321 | 52,060 | - The West Palm Beach County expansion project is expected to generate $4.1 million in gross margin in 2020 and $5.2 million annually thereafter[207] - The Del-Mar Energy Pathway project is expected to generate $2.4 million in gross margin in 2020, $4.1 million in 2021, and $5.1 million annually thereafter[208] - The Callahan Intrastate Pipeline project, which became operational in June 2020, is expected to generate $4.0 million in gross margin in 2020 and $7.6 million annually thereafter[210] - Marlin Gas Services is expected to generate $6.9 million in gross margin in 2020 and $7.7 million in 2021, with potential for further growth[212] - The company is partnering with Bioenergy Devco and CleanBay Renewables Inc. to introduce renewable natural gas into its operations, expecting $1.0 million in incremental gross margin in 2021[213][216][217][218] - The Boulden Propane acquisition is expected to generate $3.8 million in gross margin in 2020 and $4.2 million in 2021[219] - The Elkton Gas acquisition is expected to generate $1.2 million in gross margin in 2020 and $4.0 million in 2021[220] - The Florida GRIP program is expected to generate $15.2 million in gross margin in 2020 and $16.9 million in 2021[221] Other major factors influencing gross margin This section analyzes the significant impact of weather and customer growth on gross margin - Colder weather in the second quarter of 2020 increased gross margin by $2.0 million, while warmer weather for the six-month period decreased gross margin by $1.9 million[228] - Customer growth in the natural gas distribution business contributed an additional $0.8 million and $1.9 million to gross margin for the three and six months ended June 30, 2020, respectively[231] - Residential customer counts in the Delmarva Peninsula and Florida grew by 5.3% and 3.6%, respectively, in the second quarter of 2020[232] Variance of HDD and CDD from 10-Year Average ("Normal") | Region | Metric | Three Months Ended June 30, 2020 | Three Months Ended June 30, 2019 | Variance | Six Months Ended June 30, 2020 | Six Months Ended June 30, 2019 | Variance | | :--- | :--- | :--- | :--- | :--- | :--- | :--- | :--- | | Delmarva | Actual HDD | 513 | 247 | 266 | 2,373 | 2,569 | (196) | | Delmarva | Normal HDD | 400 | 423 | (23) | 2,749 | 2,785 | (36) | | Ohio | Actual HDD | 801 | 535 | 266 | 3,297 | 3,531 | (234) | | Ohio | Normal HDD | 593 | 607 | (14) | 3,612 | 3,652 | (40) | | Florida | Actual CDD | 849 | 1,086 | (237) | 1,075 | 1,220 | (145) | | Florida | Normal CDD | 988 | 975 | 13 | 1,093 | 1,072 | 21 | Regulated Energy Segment The Regulated Energy segment's operating income was negatively impacted by COVID-19, though underlying growth drivers remained strong Regulated Energy Segment Performance (in thousands of U.S. dollars) | Metric | Three Months Ended June 30, 2020 | Three Months Ended June 30, 2019 | Six Months Ended June 30, 2020 | Six Months Ended June 30, 2019 | | :--- | :--- | :--- | :--- | :--- | | Operating Revenues | 73,518 | 73,403 | 176,473 | 177,021 | | Cost of Sales | 16,387 | 18,317 | 51,219 | 54,833 | | Gross Margin | 57,131 | 55,086 | 125,254 | 122,188 | | Operations and Maintenance | 25,456 | 24,149 | 51,697 | 48,697 | | Depreciation and Amortization | 9,347 | 8,969 | 18,666 | 17,415 | | Other Taxes | 4,322 | 3,940 | 8,997 | 8,307 | | Total Operating Expenses | 39,125 | 37,058 | 79,360 | 74,419 | | Operating Income | 18,006 | 18,028 | 45,894 | 47,769 | - In Q2 2020, the Regulated Energy segment's operating income was flat, but was negatively impacted by $3.2 million from COVID-19; excluding this, operating income grew by $3.2 million[234] - For the six months ended June 30, 2020, operating income decreased by $1.9 million; excluding a $3.3 million COVID-19 impact, operating income grew by $1.4 million[240] Gross Margin Growth Contributors for Regulated Energy Segment (in thousands of U.S. dollars) | Contributor | Three Months Ended June 30, 2020 | Six Months Ended June 30, 2020 | | :--- | :--- | :--- | | Eastern Shore and Peninsula Pipeline service expansions | 1,776 | 2,839 | | Increased customer consumption (colder weather) | 1,127 | 620 | | Natural gas business growth | 832 | 1,928 | | Adverse impact of COVID-19 | (2,201) | (2,430) | | Absence of Florida tax savings | — | (910) | | Total Gross Margin Growth | 2,045 | 3,066 | Other Operating Expense Growth Contributors for Regulated Energy Segment (in thousands of U.S. dollars) | Contributor | Three Months Ended June 30, 2020 | Six Months Ended June 30, 2020 | | :--- | :--- | :--- | | Adverse impact of COVID-19 | 1,014 | 906 | | Depreciation, asset disposals, and property tax costs from new capital investments | 682 | 1,909 | | Payroll, benefits, and other employee-related expenses | 612 | — | | Insurance expenses | 438 | 1,272 | | Facility maintenance costs | — | 837 | | Total Operating Expense Growth | 2,067 | 4,941 | Unregulated Energy Segment The Unregulated Energy segment's operating income grew in the second quarter, driven by Marlin Gas Services and higher propane margins Unregulated Energy Segment Performance (in thousands of U.S. dollars) | Metric | Three Months Ended June 30, 2020 | Three Months Ended June 30, 2019 | Six Months Ended June 30, 2020 | Six Months Ended June 30, 2019 | | :--- | :--- | :--- | :--- | :--- | | Operating Revenues | 27,741 | 25,625 | 81,753 | 86,704 | | Cost of Sales | 10,709 | 11,245 | 32,938 | 39,782 | | Gross Margin | 17,032 | 14,380 | 48,815 | 46,922 | | Operations and Maintenance | 12,959 | 11,881 | 26,997 | 25,703 | | Depreciation and Amortization | 2,889 | 2,477 | 5,806 | 4,943 | | Other Taxes | 903 | 793 | 1,870 | 1,790 | | Total Operating Expenses | 16,751 | 15,151 | 34,673 | 32,436 | | Operating Income | 281 | (771) | 14,142 | 14,486 | - In Q2 2020, the Unregulated Energy segment's operating income grew by $1.1 million; excluding a $0.7 million COVID-19 impact, operating income grew by $1.8 million[250] - For the six months ended June 30, 2020, operating income decreased by $0.3 million; excluding a $0.9 million COVID-19 impact, operating income grew by $0.6 million[256] Gross Margin Growth Contributors for Unregulated Energy Segment (in thousands of U.S. dollars) | Contributor | Three Months Ended June 30, 2020 | Six Months Ended June 30, 2020 | | :--- | :--- | :--- | | Propane Operations: Higher retail propane margins | 867 | 2,009 | | Propane Operations: Contribution from Boulden acquisition | 549 | 2,437 | | Propane Operations: Increased customer consumption (colder weather) | 535 | — | | Propane Operations: Decreased customer consumption (warmer weather) | — | (2,003) | | Marlin Gas Services: Increased service demand | 1,077 | — | | Aspire Energy: Increased customer consumption (colder weather) | 351 | — | | Aspire Energy: Decreased customer consumption (warmer weather) | — | (549) | | Aspire Energy: Rate increase | — | 308 | | Adverse impact of COVID-19 | (317) | (442) | | Total Gross Margin Growth | 2,652 | 1,893 | Other Operating Expense Growth Contributors for Unregulated Energy Segment (in thousands of U.S. dollars) | Contributor | Three Months Ended June 30, 2020 | Six Months Ended June 30, 2020 | | :--- | :--- | :--- | | Depreciation, asset disposals, and property tax costs from new capital investments | 453 | 901 | | Payroll, benefits, and other employee-related expenses | 302 | — | | Adverse impact of COVID-19 | 369 | 487 | | Boulden acquisition operating expenses | 305 | 646 | | Insurance expenses | 218 | 414 | | Total Operating Expense Growth | 1,600 | 2,237 | Divestiture of PESCO The company exited the natural gas marketing business in the fourth quarter of 2019 by selling PESCO's assets and contracts - The company sold the assets and contracts of PESCO in the fourth quarter of 2019 to focus on its core energy delivery businesses[264] - PESCO's results are reported separately as discontinued operations, and its assets and liabilities have been classified as held for sale where applicable[264] OTHER EXPENSE, NET Other expense, net, increased by $3.4 million for the six-month period, primarily due to gains on the sale of two properties - For the three months ended June 30, 2020, other expense, net, increased by less than $0.1 million[266] - For the six months ended June 30, 2020, other expense, net, increased by $3.4 million, primarily due to gains on the sale of two properties[266] INTEREST CHARGES Interest charges decreased due to lower short-term borrowing rates and increased capitalized interest, partially offset by new long-term debt - For the three months ended June 30, 2020, interest charges decreased by $0.5 million, driven by lower short-term borrowing rates and increased capitalized interest[267] - For the six months ended June 30, 2020, interest charges decreased by $0.3 million for similar reasons[268] INCOME TAXES The effective tax rate decreased significantly in the second quarter due to benefits from the CARES Act Income Tax Expense and Effective Tax Rate | Metric | Three Months Ended June 30, 2020 | Three Months Ended June 30, 2019 | Six Months Ended June 30, 2020 | Six Months Ended June 30, 2019 | | :--- | :--- | :--- | :--- | :--- | | Income Tax Expense (in thousands) | 2,000 | 3,400 | 12,600 | 13,000 | | Effective Tax Rate | 15.7% | 27.5% | 24.1% | 25.6% | - The CARES Act allowed the company to carry back net operating losses from 2018 and 2019 to prior years with higher federal income tax rates, resulting in a $1.7 million tax benefit in Q2 2020[269][270] - Excluding the CARES Act impact, the effective tax rates for the second quarter and first six months of 2020 would have been 28.9% and 27.3%, respectively[269][270] FINANCIAL POSITION, LIQUIDITY AND CAPITAL RESOURCES This section discusses the company's capital requirements, capital structure, liquidity sources, and cash flows Capital Requirements The company's capital requirements are driven by investments in new plant and equipment, debt repayment, and seasonal working capital needs - The company's capital requirements primarily stem from investments in new plant and equipment, repayment of outstanding debt, and seasonal working capital fluctuations[272] - The company's business is weather-sensitive and seasonal, typically generating most of its annual net income and accounts receivable growth in the first and fourth quarters[273] - The 2020 budget includes funding for major projects such as the Del-Mar Energy Pathway, Florida expansions, and the Florida GRIP program[274] 2020 Estimated Capital Expenditures (in thousands of U.S. dollars) | Segment | Low Estimate | High Estimate | | :--- | :--- | :--- | | Regulated Energy | 150,000 | 167,000 | | Unregulated Energy | 34,000 | 47,000 | | Other | 1,000 | 1,000 | | Total | 185,000 | 215,000 | Capital Structure The company aims to maintain a sound capital structure and strong credit ratings to ensure access to capital markets at reasonable costs - The company is committed to maintaining a sound capital structure and strong credit ratings to ensure access to capital markets at reasonable costs[278] - The company's target equity to total capitalization ratio (including short-term borrowings) is between 50% and 60%; as of June 30, 2020, this ratio was 45%[278] Capital Structure (in thousands of U.S. dollars) | Metric | As of June 30, 2020 | % of Total | As of December 31, 2019 | % of Total | | :--- | :--- | :--- | :--- | :--- | | Long-term debt, less current portion | 430,106 | 42% | 440,168 | 44% | | Stockholders' equity | 593,277 | 58% | 561,577 | 56% | | Total Capitalization | 1,023,383 | 100% | 1,001,745 | 100% | | Capitalization Including Short-Term Borrowings | | | | | | Short-term borrowings | 286,405 | 21% | 247,371 | 19% | | Long-term debt, including current portion | 445,706 | 34% | 485,768 | 38% | | Stockholders' equity | 593,277 | 45% | 561,577 | 43% | | Total Capitalization | 1,325,388 | 100% | 1,294,716 | 100% | Term Notes The company issued and subsequently repaid a $30 million unsecured term note - The company issued a $30 million unsecured term note in January 2019 and fully repaid it in February 2020 using its short-term borrowing facilities[279] Shelf Agreements The company has shelf agreements with Prudential, MetLife, and NYL, providing a total borrowing capacity of $670 million Summary of Shelf Agreements (in thousands of U.S. dollars) | Counterparty | Total Borrowing Capacity | Issued Debt Amount | Uncommitted Amount | Remaining Borrowing Capacity | | :--- | :--- | :--- | :--- | :--- | | Prudential | 370,000 | (170,000) | (50,000) | 150,000 | | MetLife | 150,000 | — | — | 150,000 | | NYL | 150,000 | (100,000) | (40,000) | 10,000 | | Total | 670,000 | (270,000) | (90,000) | 310,000 | - The shelf agreements contain commercial covenants that restrict the ability of the company and its subsidiaries to incur debt or create liens[280] Short-term Borrowings The company utilizes short-term debt to manage seasonal working capital needs and temporarily fund capital expenditures - The Board of Directors has authorized up to $400 million in short-term debt to manage seasonal working capital needs and temporarily fund capital expenditures[282] - As of June 30, 2020, the company had $286.4 million in short-term borrowings outstanding at a weighted-average interest rate of 1.05%[282] - The company has a total of $465 million in credit facilities, including existing bilateral credits and an additional $95 million added due to COVID-19 uncertainty[282] - In the second quarter of 2020, the company entered into interest rate swap agreements with a total notional amount of $100 million to hedge against interest rate volatility on short-term borrowings[284] Cash Flows Net cash from operating activities increased, while cash used in investing activities decreased and cash used in financing activities increased Summary of Cash Flows (in thousands of U.S. dollars) | Metric | Six Months Ended June 30, 2020 | Six Months Ended June 30, 2019 | | :--- | :--- | :--- | | Net cash provided by operating activities | 91,678 | 74,575 | | Net cash used in investing activities | (80,254) | (90,880) | | Net cash (used in) provided by financing activities | (14,819) | 17,470 | | Net (decrease) increase in cash and cash equivalents | (3,395) | 1,165 | | Cash and cash equivalents at end of period | 3,590 | 7,254 | - Net cash provided by operating activities increased by $17.1 million, primarily due to changes in accounts receivable and payable and changes in regulatory assets and liabilities[288] - Net cash used in investing activities decreased by $10.6 million, primarily due to a $7.6 million decrease in capital expenditures[289] - Net cash used in financing activities increased by $32.3 million, primarily due to the repayment of a $30 million term note, partially offset by an increase in short-term borrowings[290] Off-Balance Sheet Arrangements The company has provided corporate guarantees and issued letters of credit to support its subsidiaries' operations - The company has provided corporate guarantees to subsidiary suppliers, totaling $11.2 million as of June 30, 2020[291] - As of June 30, 2020, the company had issued approximately $4.4 million in letters of credit, none of which had been drawn upon[292] Contractual Obligations The company's contractual obligations, primarily for commodity purchases, have not changed materially - As of June 30, 2020, there were no material changes to the company's contractual obligations, which consist primarily of commodity purchase obligations[294] Commodity Purchase Contractual Obligations (in thousands of U.S. dollars) | Term | Amount | | :--- | :--- | | Less than 1 year | 17,644 | | 1-3 years | 16,819 | | 3-5 years | — | | More than 5 years | — | | Total | 34,463 | Rates and Regulatory Matters The company is subject to regulation in all of its operating jurisdictions for its natural gas distribution, electric distribution, and gas transmission businesses - The company is subject to regulation in all of its operating jurisdictions for its natural gas distribution, electric distribution, and gas transmission businesses[296] - As of June 30, 2020, the company was involved in several regulatory matters, as detailed in Note 5 to the Condensed Consolidated Financial Statements[296] Recent Authoritative Pronouncements on Financial Reporting and Accounting This section refers to Note 1 for details on recent accounting developments and their impact on the company's financial statements - For information on recent accounting developments applicable to the company and their impact, refer to Note 1 to the Condensed Consolidated Financial Statements[297] Item 3. Quantitative and Qualitative Disclosures about Market Risk This section discloses the company's exposure to market risks, primarily interest rate risk and commodity price risk INTEREST RATE RISK The company's long-term debt is exposed to potential losses from changes in interest rates, which it manages through various strategies - The company's long-term debt, which includes fixed-rate senior notes and secured debt, is exposed to potential losses from changes in interest rates[298] - The company occasionally utilizes interest rate swap agreements to mitigate the risk of short-term borrowing rate fluctuations[298] COMMODITY PRICE RISK The company manages commodity price risk through fuel cost recovery mechanisms for regulated operations and hedging strategies for unregulated businesses - The Regulated Energy segment has limited exposure to commodity price risk due to fuel cost recovery mechanisms[299] - The Unregulated Energy segment faces commodity price risk, which is mitigated through propane storage activities, forward contracts, and risk management policies[300][302] Change in Fair Market Value of Propane Derivative Contracts (in thousands of U.S. dollars) | Metric | Balance at Dec 31, 2019 | Increase (Decrease) in Fair Market Value | Settled Amounts | Balance at June 30, 2020 | | :--- | :--- | :--- | :--- | :--- | | Sharp | (1,844) | 898 | 1,465 | 519 | | Total | (1,844) | 898 | 1,465 | 519 | Fair Market Value of Financial Derivatives as of June 30, 2020 (in thousands of U.S. dollars) | Year | Amount | | :--- | :--- | | 2020 | 129 | | 2021 | 303 | | 2022 | 88 | | 2023 | (1) | | 2024 | — | | Total Fair Value | 519 | WHOLESALE CREDIT RISK The company's Risk Management Committee reviews counterparty credit risk before approving commodity derivative contracts - The Risk Management Committee reviews credit risk associated with counterparties before approving commodity derivative contracts[305] INFLATION The company manages the impact of inflation on its costs through periodic rate increase requests and monitoring returns on its businesses - Inflation affects the company's costs for supplies, labor, products, and services[306] - The company addresses the effects of inflation by periodically requesting rate increases for its regulated businesses and adjusting sales prices for its propane operations[306] Item 4. Controls and Procedures The company's disclosure controls and procedures were evaluated and found to be effective as of June 30, 2020 - As of June 30, 2020, the company's Chief Executive Officer and Chief Financial Officer evaluated and concluded that the company's disclosure controls and procedures were effective[307] - The shift to a remote work model due to the COVID-19 pandemic did not materially impact the design or operation of internal controls over financial reporting[308] PART II—OTHER INFORMATION This part provides additional information on legal proceedings, risk factors, and other corporate matters Item 1. Legal Proceedings The company is involved in certain legal and regulatory proceedings arising in the normal course of business, which are not expected to have a material impact - The company is involved in certain legal claims and regulatory proceedings arising in the normal course of business[310] - Management believes that the ultimate disposition of these matters will not have a material effect on the company's consolidated financial position, results of operations, or cash flows[310] Item 1A. Risk Factors The company's business is subject to various risks and uncertainties, which investors should review in the company's SEC filings - The company's business, operations, and financial condition are subject to numerous risks and uncertainties[311] - Investors should carefully review the risk fact