On
May
31, 2006, Eastern Shore Natural Gas Company (“ESNG”), a wholly owned natural gas
transmission subsidiary of Chesapeake Utilities Corporation (“Chesapeake”),
entered into Precedent Agreements with Chesapeake, through its Delaware
and
Maryland Divisions, and Delmarva Power & Light Company (“DPL”), to provide
additional firm transportation services for 20 years upon completion of
ESNG’s
latest proposed pipeline expansion project. Chesapeake and DPL (each, a
“Customer” and, together, “Customers”) are currently parties to existing firm
natural gas transportation service agreements with ESNG. In terms of ESNG’s
total volumes transported in 2005, Chesapeake and DPL accounted for 33
percent
and 11 percent, respectively.
ESNG
has
proposed to develop, construct and operate new pipeline facilities that
would
originate in Calvert County, MD, cross the Chesapeake Bay into Dorchester
and
Caroline Counties, MD, and then interconnect with ESNG’s existing facilities in
Sussex County, DE. The total cost of the project is estimated at $93 million,
with the final cost dependent upon the ultimate design of the pipeline,
construction materials and labor costs.
Pursuant
to the Precedent Agreements, the parties have agreed to proceed with obtaining
the necessary governmental and regulatory authorizations, including the
approval
of the Federal Energy Regulatory Commission (“FERC). If an application for
authorization to construct the project has not been filed with the FERC
within
24 months of May 31, 2006 (the date the Precedent Agreements were executed),
either Customer or ESNG may terminate its respective Precedent Agreement.
The
Precedent Agreements provide that ESNG and each Customer shall enter into
(1) an
extension of their respective existing service agreements and (2) a firm
transportation service agreement for a daily transportation quantity of
30,000
dekatherms upon (a) receipt of all necessary approvals for the project,
(b)
ESNG’s receipt of a formal financial commitment related to the financing of
the
project, and (c) final approval by ESNG’s board of directors.
If
any
one of the conditions described in (a), (b), or (c) above is not satisfied
within 24 months after the FERC formally accepts ESNG’s application and
institutes a decisional proceeding, either party (either Customer or ESNG)
may
thereafter, at its option, terminate their respective Precedent Agreement,
and
ESNG may withdraw its application.
Upon
obtaining the final approvals and execution of the service contract extensions
and the firm transportation service agreements, ESNG will initiate construction
of the pipeline and facilities necessary to implement the firm transportation
services. Services could commence as early as November 1, 2009, although
either
Customer may delay the date, as long as the request for deferral is communicated
to ESNG by March 31, 2007. However, if the firm transportation services
have not
commenced within 24 months of the agreed upon date, either ESNG or the
respective Customer may terminate its respective Precedent Agreement or
the firm
transportation service agreement, whichever is in effect at that
time.
During
the negotiations of the Precedent Agreements, ESNG and each of the Customers
entered into Letter Agreements, which provide that, in the event that the
project is not placed into service, each Customer would pay over a period
of no
less than 20 years up to $2 million of pre-certification costs incurred
by ESNG,
subject to FERC approval.
Copies
of
the Precedent Agreements (including the Letter Agreements) are being filed
as
Exhibits 10.1 through 10.3 to this report and are incorporated by reference
into
this Item 1.01. The description of the Precedent Agreements and the Letter
Agreements above is a summary and does not purport to be complete and is
qualified in its entirety by reference to the Precedent Agreements and
the
Letter Agreements.
A
copy of
the press release, dated June 2, 2006, announcing the transaction is attached
hereto as Exhibit 99.1 and is incorporated by reference
herein.