SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
_______________________________
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended: September 30, 2001
------------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ______ to ______
COMMISSION FILE NUMBER: 001-11590
CHESAPEAKE UTILITIES CORPORATION
--------------------------------
(Exact name of registrant as specified in its charter)
DELAWARE 51-0064146
-------- ----------
(State or other (I.R.S. Employer
jurisdiction of Identification No.)
incorporation
or organization)
909 SILVER LAKE BOULEVARD, DOVER, DELAWARE 19904
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(Address of principal executive offices, including Zip Code)
(302) 734-6799
--------------
(Registrant's Telephone Number, including Area Code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
Common Stock, par value $.4867 - 5,389,003 shares
issued as of September 30, 2001.
TABLE OF CONTENTS
PART I - FINANCIAL INFORMATION. . . . . . . . . . . . . . . . . . . . . . 1
Item 1. Financial Statements. . . . . . . . . . . . . . . . . . . . . 1
Notes to Consolidated Financial Statements. . . . . . . . . . . . . . 7
1. Quarterly Financial Data . . . . . . . . . . . . . . . . . . . . 7
2. Calculation of Earnings Per Share. . . . . . . . . . . . . . . 7
3. Commitments and Contingencies. . . . . . . . . . . . . . . . . . 7
Environmental Matters . . . . . . . . . . . . . . . . . . . . . . 7
Other Commitments and Contingencies. . . . . . . . . . . . . . . . 8
4. Reclassification of Amounts for Prior Years. . . . . . . . . . . . 9
5. Recent Authoritative Pronouncements
on Financial Reporting and Accounting. . . . . . . . . . . . . 9
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations. . . . . . . . . . . .10
Business Description . . . . . . . . . . . . . . . . . . . . . . . . .10
Financial Position, Liquidity and Capital Resources . . . . . . . . .10
Results of Operations for the Quarter
Ended September 30, 2001 . . . . . . . . . . . . . . . . . . . . . . .12
Consolidated Overview. . . . . . . . . . . . . . . . . . . . . . . . .12
Natural Gas Distribution and Transmission . . . . . . . . . . . . .12
Propane Gas Distribution and Marketing . . . . . . . . . . . . . . 13
Advanced Information Services. . . . . . . . . . . . . . . . . . . . 13
Other Business Operations. . . . . . . . . . . . . . . . . . . . . . 13
Operating Income Taxes . . . . . . . . . . . . . . . . . . . . . . . 13
Interest Expense. . . . . . . . . . . . . . . . . . . . . . . . . . . 14
Environmental Matters . . . . . . . . . . . . . . . . . . . . . . . . 14
Results of Operations for the Nine Months
Ended September 30, 2001 . . . . . . . . . . . . . . . . . . . . . . .15
Consolidated Overview . . . . . . . . . . . . . . . . . . . . . . . . 15
Natural Gas Distribution and Transmission. . . . . . . . . . . . . 15
Propane Gas Distribution and Marketing . . . . . . . . . . . . . . 16
Advanced Information Services. . . . . . . . . . . . . . . . . . . . 16
Other Business Operations. . . . . . . . . . . . . . . . . . . . . . 16
Operating Income Taxes . . . . . . . . . . . . . . . . . . . . . . . 16
Interest Expense . . . . . . . . . . . . . . . . . . . . . . . . . . .17
Environmental Matters . . . . . . . . . . . . . . . . . . . . . . . . 17
Other Matters . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
Acquisitions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
Regulatory Matters. . . . . . . . . . . . . . . . . . . . . . . . . . 17
Competition. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
Inflation. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
Cautionary Statement. . . . . . . . . . . . . . . . . . . . . . . . . 18
Item 3. Quantitative and Qualitative Disclosures about Market Risk. . 18
PART II - OTHER INFORMATION. . . . . . . . . . . . . . . . . . . . . . . 20
SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CHESAPEAKE UTILITIES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
- -------------------------------------------------------------
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2001 2000
- -------------------------------------------------------------
OPERATING REVENUES . . . . . . . $55,567,288 $59,212,768
COST OF SALES. . . . . . . . . . 43,811,636 49,342,261
- --------------------------------- ------------ ------------
GROSS MARGIN . . . . . . . . . . 11,755,652 9,870,507
- --------------------------------- ------------ ------------
OPERATING EXPENSES
Operations . . . . . . . . . . . 8,150,804 7,398,574
Maintenance. . . . . . . . . . . 424,567 497,284
Depreciation and amortization. . 2,101,239 1,887,069
Other taxes. . . . . . . . . . . 1,022,592 832,704
Income taxes . . . . . . . . . . (505,969) (701,165)
- --------------------------------- ------------ ------------
Total operating expenses . . . . 11,193,233 9,914,466
- --------------------------------- ------------ ------------
OPERATING INCOME (LOSS). . . . . 562,419 (43,959)
OTHER INCOME, NET. . . . . . . . 62,560 156,894
- --------------------------------- ------------ ------------
INCOME BEFORE INTEREST CHARGES . 624,979 112,935
INTEREST CHARGES . . . . . . . . 1,299,945 1,157,644
- --------------------------------- ------------ ------------
NET LOSS . . . . . . . . . . . . $ (674,966) $(1,044,709)
================================= ============ ============
LOSS PER SHARE OF COMMON STOCK:
BASIC. . . . . . . . . . . . . . $ (0.13) $ (0.20)
- --------------------------------- ------------ ------------
DILUTED. . . . . . . . . . . . . $ (0.13) $ (0.20)
- --------------------------------- ------------ ------------
The accompanying notes are an integral part of these financial statement.
CHESAPEAKE UTILITIES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
- ----------------------------------------------------------------
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2001 2000
- ----------------------------------------------------------------
OPERATING REVENUES. . . . . . . . . $260,658,029 $223,672,929
COST OF SALES . . . . . . . . . . . 212,129,412 179,877,924
- ------------------------------------ ------------ ------------
GROSS MARGIN. . . . . . . . . . . . 48,528,617 43,795,005
- ------------------------------------ ------------ ------------
OPERATING EXPENSES
Operations. . . . . . . . . . . . . 25,679,824 23,397,816
Maintenance . . . . . . . . . . . . 1,278,765 1,413,341
Depreciation and amortization . . . 6,136,866 5,555,690
Other taxes . . . . . . . . . . . . 3,196,681 2,721,853
Income taxes. . . . . . . . . . . . 3,266,502 2,874,304
- ------------------------------------ ------------ ------------
Total operating expenses. . . . . . 39,558,638 35,963,004
- ------------------------------------ ------------ ------------
OPERATING INCOME. . . . . . . . . . 8,969,979 7,832,001
OTHER INCOME, NET . . . . . . . . . 311,769 239,226
- ------------------------------------ ------------ ------------
INCOME BEFORE INTEREST CHARGES. . . 9,281,748 8,071,227
INTEREST CHARGES. . . . . . . . . . 3,924,519 3,126,921
- ------------------------------------ ------------ ------------
NET INCOME. . . . . . . . . . . . . $ 5,357,229 $ 4,944,306
==================================== ============ ============
EARNINGS PER SHARE OF COMMON STOCK:
BASIC . . . . . . . . . . . . . . . $ 1.00 $ 0.94
- ------------------------------------ ------------ ------------
DILUTED . . . . . . . . . . . . . . $ 0.99 $ 0.93
- ------------------------------------ ------------ ------------
The accompanying notes are an integral part of these financial statement.
CHESAPEAKE UTILITIES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
- ------------------------------------------------------------------------------------------
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2001 2000
- ------------------------------------------------------------------------------------------
OPERATING ACTIVITIES
Net Income . . . . . . . . . . . . . . . . . . . . . . . . $ 5,357,229 $ 4,944,306
Adjustments to reconcile net income to net operating cash:
Depreciation and amortization. . . . . . . . . . . . . . 7,490,163 5,031,310
Deferred income taxes, net . . . . . . . . . . . . . . . (3,883) 195,095
Investment tax credit adjustments. . . . . . . . . . . . (26,469) (26,469)
Mark-to-market adjustments . . . . . . . . . . . . . . . 881,449 (77,997)
Other, net . . . . . . . . . . . . . . . . . . . . . . . 510,570 501,641
Changes in assets and liabilities:
Accounts receivable, net . . . . . . . . . . . . . . . . 16,426,692 (1,527,281)
Inventory, materials, supplies and storage gas . . . . . (107,579) (4,099,648)
Other current assets . . . . . . . . . . . . . . . . . . (599,785) 178,957
Other deferred charges . . . . . . . . . . . . . . . . . (1,790,152) 170,552
Accounts payable, net. . . . . . . . . . . . . . . . . . (17,944,735) 3,358,296
Refunds payable to customers . . . . . . . . . . . . . . (251,568) (226,232)
Over (under) recovered purchased gas costs . . . . . . . 830,201 (2,081,300)
Other current liabilities. . . . . . . . . . . . . . . . 1,321,246 879,380
- ------------------------------------------------------------ ------------- -------------
Net cash provided by operating activities. . . . . . . . . . 12,093,379 7,220,610
- ------------------------------------------------------------ ------------- -------------
INVESTING ACTIVITIES
Property, plant and equipment expenditures, net. . . . . . (18,733,989) (11,777,192)
- ------------------------------------------------------------ ------------- -------------
Net cash used by investing activities. . . . . . . . . . . . (18,733,989) (11,777,192)
- ------------------------------------------------------------ ------------- -------------
FINANCING ACTIVITIES
Common stock dividends, net of amounts reinvested. . . . . (3,894,023) (3,740,139)
Issuance of stock:
Dividend Reinvestment Plan optional cash . . . . . . . . 133,376 147,109
Retirement Savings Plan. . . . . . . . . . . . . . . . . 793,458 692,171
Net borrowing under line of credit agreements. . . . . . . 7,600,000 10,000,000
Proceeds from issuance of long-term debt . . . . . . . . . 300,000 -
Repayment of long-term debt. . . . . . . . . . . . . . . . (1,390,221) (2,287,265)
- ------------------------------------------------------------ ------------- -------------
Net cash provided by financing activities. . . . . . . . . . 3,542,590 4,811,876
- ------------------------------------------------------------ ------------- -------------
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS . . . . (3,098,020) 255,294
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD . . . . . . 4,606,316 2,357,173
- ------------------------------------------------------------ ------------- -------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD . . . . . . . . . $ 1,508,296 $ 2,612,467
============================================================ ============= =============
The accompanying notes are an integral part of these financial statement.
CHESAPEAKE UTILITIES CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
- -------------------------------------------------------------------------------------
SEPTEMBER 30, DECEMBER 31,
ASSETS 2001 2000
- -------------------------------------------------------------------------------------
PROPERTY, PLANT AND EQUIPMENT
Natural gas distribution and transmission. . . . . . . $161,398,567 $149,121,319
Propane gas distribution and marketing . . . . . . . . 32,614,541 31,630,208
Advanced information services. . . . . . . . . . . . . 1,924,205 1,699,968
Other plant. . . . . . . . . . . . . . . . . . . . . . 11,889,628 10,488,581
- ------------------------------------------------------- ------------- -------------
Total property, plant and equipment. . . . . . . . . . 207,826,941 192,940,076
Less: Accumulated depreciation and amortization . . . (66,678,273) (61,473,757)
- ------------------------------------------------------- ------------- -------------
Net property, plant and equipment. . . . . . . . . . . 141,148,668 131,466,319
- ------------------------------------------------------- ------------- -------------
INVESTMENTS. . . . . . . . . . . . . . . . . . . . . . 615,492 616,293
- ------------------------------------------------------- ------------- -------------
CURRENT ASSETS
Cash and cash equivalents. . . . . . . . . . . . . . . 1,508,296 4,606,316
Accounts receivable, less allowance for uncollectibles 21,514,480 37,941,172
Materials and supplies, at average cost. . . . . . . . 1,365,520 1,566,126
Merchandise inventory, at average cost . . . . . . . . 1,750,517 1,234,072
Propane inventory, at average cost . . . . . . . . . . 2,957,891 4,379,599
Storage gas prepayments. . . . . . . . . . . . . . . . 4,713,771 3,500,323
Under-recovered purchased gas costs. . . . . . . . . . 6,307,632 5,388,725
Income taxes receivable. . . . . . . . . . . . . . . . 708,713 1,159,761
Prepaid expenses and other current assets. . . . . . . 1,733,611 2,015,274
- ------------------------------------------------------- ------------- -------------
Total current assets . . . . . . . . . . . . . . . . . 42,560,431 61,791,368
- ------------------------------------------------------- ------------- -------------
DEFERRED CHARGES AND OTHER ASSETS
Environmental regulatory assets. . . . . . . . . . . . 2,846,962 2,910,000
Environmental expenditures . . . . . . . . . . . . . . 3,330,623 3,626,475
Under-recovered purchased gas costs. . . . . . . . . . 210,454 1,959,562
Other deferred charges and intangible assets . . . . . 11,976,964 8,329,485
- ------------------------------------------------------- ------------- -------------
Total deferred charges and other assets. . . . . . . . 18,365,003 16,825,522
- ------------------------------------------------------- ------------- -------------
TOTAL ASSETS . . . . . . . . . . . . . . . . . . . . . $202,689,594 $210,699,502
======================================================= ============= =============
The accompanying notes are an integral part of these financial statement.
CHESAPEAKE UTILITIES CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
- -------------------------------------------------------------------------------------
SEPTEMBER 30, DECEMBER 31,
CAPITALIZATION AND LIABILITIES 2001 2000
- -------------------------------------------------------------------------------------
CAPITALIZATION
Stockholders' equity
Common Stock, par value $.4867 per share;
(authorized 12,000,000 shares; issued 5,389,003
and 5,297,443 shares, respectively). . . . . . . . . . $ 2,622,559 $ 2,577,992
Additional paid-in capital . . . . . . . . . . . . . . 29,170,980 27,672,005
Retained earnings. . . . . . . . . . . . . . . . . . . 34,683,085 33,721,747
- ------------------------------------------------------- ------------- -------------
Total stockholders' equity . . . . . . . . . . . . . . 66,476,624 63,971,744
Long-term debt, net of current maturities. . . . . . . 49,748,119 50,920,818
- ------------------------------------------------------- ------------- -------------
Total capitalization . . . . . . . . . . . . . . . . . 116,224,743 114,892,562
- ------------------------------------------------------- ------------- -------------
CURRENT LIABILITIES
Current portion of long-term debt. . . . . . . . . . . 2,685,715 2,665,091
Short-term borrowing . . . . . . . . . . . . . . . . . 33,000,000 25,400,000
Accounts payable . . . . . . . . . . . . . . . . . . . 15,709,982 33,654,718
Refunds payable to customers . . . . . . . . . . . . . 763,560 1,015,128
Accrued interest . . . . . . . . . . . . . . . . . . . 1,173,907 595,175
Dividends payable. . . . . . . . . . . . . . . . . . . 1,481,976 1,429,945
Deferred income taxes payable. . . . . . . . . . . . . 986,664 985,349
Other accrued liabilities. . . . . . . . . . . . . . . 5,860,867 5,674,418
- ------------------------------------------------------- ------------- -------------
Total current liabilities. . . . . . . . . . . . . . . 61,662,671 71,419,824
- ------------------------------------------------------- ------------- -------------
DEFERRED CREDITS AND OTHER LIABILITIES
Deferred income taxes. . . . . . . . . . . . . . . . . 15,080,952 15,086,951
Deferred investment tax credits. . . . . . . . . . . . 630,703 657,172
Environmental liability. . . . . . . . . . . . . . . . 2,846,962 2,910,000
Accrued pension costs. . . . . . . . . . . . . . . . . 1,640,134 1,625,128
Other liabilities. . . . . . . . . . . . . . . . . . . 4,603,429 4,107,865
- ------------------------------------------------------- ------------- -------------
Total deferred credits and other liabilities . . . . . 24,802,180 24,387,116
- ------------------------------------------------------- ------------- -------------
TOTAL CAPITALIZATION AND LIABILITIES . . . . . . . . . $202,689,594 $210,699,502
======================================================= ============= =============
The accompanying notes are an integral part of these financial statement.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. QUARTERLY FINANCIAL DATA
The financial information for Chesapeake Utilities Corporation (the "Company")
included herein is unaudited and should be read in conjunction with the
Company's Annual Report on Form 10-K. In the opinion of management, this
financial information reflects only normal recurring adjustments, which are
necessary for a fair presentation of the Company's interim results. Due to the
seasonal nature of the Company's business, there are substantial variations in
the results of operations reported on a quarterly basis and, accordingly,
results for any particular quarter may not give a true indication of results for
the year. Certain amounts in 2000 have been reclassified to conform to the
presentation for the current year.
2. CALCULATION OF EARNINGS PER SHARE
- ----------------------------------------------------------------------------------------------
THREE MONTHS ENDED NINE MONTHS ENDED
FOR THE PERIOD ENDED SEPTEMBER 30, 2001 2000 2001 2000
- ----------------------------------------------------------------------------------------------
CALCULATION OF BASIC EARNINGS PER SHARE:
Net (Loss) Income. . . . . . . . . . . . . $ (674,966) $(1,044,709) $5,357,229 $4,944,306
Weighted Average Shares Outstanding. . . . 5,381,702 5,263,418 5,351,523 5,235,909
- ------------------------------------------- ----------- ------------ ---------- ----------
BASIC (LOSS) EARNINGS PER SHARE. . . . . . $ (0.13) $ (0.20) $ 1.00 $ 0.94
- ------------------------------------------- ----------- ------------ ---------- ----------
CALCULATION OF DILUTED EARNINGS PER SHARE:
RECONCILIATION OF NUMERATOR:
Net (Loss) Income - Basic. . . . . . . . . $ (674,966) $(1,044,709) $5,357,229 $4,944,306
Effect of 8.25% Convertible debentures . . - - 128,940 135,382
- ------------------------------------------- ----------- ------------ ---------- ----------
Adjusted numerator - Diluted . . . . . . . $ (674,966) $(1,044,709) $5,486,169 $5,079,688
- ------------------------------------------- ----------- ------------ ---------- ----------
RECONCILIATION OF DENOMINATOR:
Weighted Shares Outstanding - Basic. . . . 5,381,702 5,263,418 5,351,523 5,235,909
Effect of Dilutive Securities
Stock options. . . . . . . . . . . . . . . - - 12,951 11,340
8.25% Convertible debentures . . . . . . . - - 201,908 211,221
- ------------------------------------------- ----------- ------------ ---------- ----------
Adjusted denominator - Diluted . . . . . . 5,381,702 5,263,418 5,566,382 5,458,470
- ------------------------------------------- ----------- ------------ ---------- ----------
DILUTED (LOSS) EARNINGS PER SHARE. . . . . $ (0.13) $ (0.20) $ 0.99 $ 0.93
- ------------------------------------------- ----------- ------------ ---------- ----------
3. COMMITMENTS AND CONTINGENCIES
ENVIRONMENTAL MATTERS
The Company is continuing to participate in the investigation, assessment and
remediation of three former manufactured gas plant sites located in different
jurisdictions. The Company continues to seek cost-effective remedial options
that are protective of human health and the environment.
In May 2001, Chesapeake, General Public Utilities Corporation, Inc. ("GPU"), the
State of Delaware and the United States Environmental Protection Agency ("EPA")
signed a settlement term sheet reflecting the agreement in principle to settle a
lawsuit with respect to the Dover Gas Light site. The parties are in the process
of memorializing the terms of the final agreement in two consent decrees. The
consent decrees will then be published for public comment and submitted to a
federal judge for approval.
At September 30, 2001, the Company had accrued $2.1 million of costs associated
with the remediation of the Dover site and had recorded an associated regulatory
asset for the same amount. Of that amount, $1.5 million was for estimated
ground-water remediation and $600,000 was for remaining soil remediation. The
$1.5 million represented the low end of the ground-water remediation estimates
prepared by an independent consultant and was used because the Company could
not, at that time, predict the remedy the EPA might require.
If the agreement in principle receives final approval, Chesapeake will:
- Design and construct a parking lot on the site and dismantle the soil
vapor extraction system that had been erected at the site.
- Receive a net payment of $1.15 million from other parties to the
agreement. These proceeds will be passed on to Chesapeake's firm
customers, in accordance with the environmental rate rider.
- Receive a release from liability and covenant not to sue from the EPA
and the State of Delaware. This will relieve Chesapeake from liability
for future remediation at the site, unless previously unknown
conditions are discovered at the site, or information previously
unknown to EPA is received that indicates the remedial action related
to the prior manufactured gas plant is not sufficiently protective.
These contingencies are standard, and are required by the United
States in all liability settlements.
Upon receiving final court approval of the consent decrees, Chesapeake will
reduce both the accrued environmental liability and the associated environmental
regulatory asset to the amount required to complete its obligations (primarily
the design and construction of the parking lot).
In accordance with approval from the Maryland Department of the Environment
("MDE"), the Company's remedial system at the Salisbury Town Gas Light site has
been temporarily shut down. The Company continues to perform ground-water
monitoring at the site and is currently collecting ground-water monitoring data
to support a permanent shut-down of the remedial system. The Company reduced the
accrual for the costs associated with remediation procedures at this site to
$112,000 from the $175,000 that had been accrued as of December 31, 2000. This
revised amount is based on current estimates of the costs of continuing the
remediation procedures for the next two years and shutting down the process. The
corresponding regulatory asset that was recorded based on management's belief
that costs incurred will be recoverable in base rates, was also reduced.
The Winter Haven Coal Gas site is located in the state of Florida. In May 2001,
a Remedial Action Plan ("RAP") was approved by the Florida Department of the
Environment ("FDEP") to address a majority of the site impacts. Proposals for
implementation of the remedial system described in the approved RAP for
remediation of soil and ground-water impacts on site were received in June 2001.
Negotiations are currently underway for performance of this work. The Company
has recorded a liability of $635,000 and a corresponding regulatory asset at
September 30, 2001.
Most of the costs associated with the remediation of environmental contamination
caused by natural gas distribution or transmission are recoverable by the
Company through its base rates. Management believes that any unrecovered costs
incurred to date, as well as costs to be incurred in the future, relating to
remediation of contamination of the sites identified above will be recoverable
through future rates or from other responsible parties.
OTHER COMMITMENTS AND CONTINGENCIES
The Company has made contractual commitments of varying terms for daily
entitlements of natural gas from various suppliers. In 2000, the Company entered
into a long-term contract with an energy marketing and risk management company
for management of some of its natural gas transportation and storage capacity.
That contract is still in effect.
The Company is involved in certain legal actions and claims arising in the
normal course of business. The Company is also involved in certain legal and
administrative proceedings before various governmental agencies concerning
rates. In the opinion of management, the ultimate disposition of these
proceedings will not have a material effect on the consolidated financial
position of the Company.
Certain assets and liabilities of the Company are accounted for in accordance
with Statement of Financial Accounting Standards ("SFAS") No. 71, which, among
other matters, provides standards for regulated enterprises for the deferral of
costs that will be recovered through future rate increases. If the Company were
required to terminate the application of these standards to its regulated
operations, all such deferred amounts would be recognized in the income
statement at that time. This would result in a charge to earnings, net of
applicable income taxes, which could be material.
4. RECLASSIFICATION OF AMOUNTS FOR PRIOR YEARS
Certain amounts and balances reported in prior years have been reclassified in
the financial statements included in this report to conform to the presentation
for the current period.
5. RECENT AUTHORITATIVE PRONOUNCEMENTS ON FINANCIAL REPORTING AND ACCOUNTING
The Financial Accounting Standards Board ("FASB") issued SFAS No. 133 in 1998,
establishing accounting and reporting standards for derivative instruments,
including certain derivative instruments embedded in other contracts, and for
hedging activities. In June of 2000, SFAS No. 138, amending certain provisions
of SFAS No. 133, was issued by the FASB. The Company adopted these new standards
in the first quarter of 2001, as required. The adoption of these new standards
did not have a material impact on the Company's financial position or results of
operations.
On June 30, 2001, the FASB issued SFAS Nos. 141, 142 and 143. SFAS No. 141,
"Business Combinations," eliminates the pooling-of-interest method of accounting
for business combinations and requires the use of the purchase method. In
addition, the reassessment of intangible assets to determine if they are
appropriately classified either separately or within goodwill is required. SFAS
No. 141 is effective for business combinations initiated after June 30, 2001.
The Company adopted SFAS No. 141 on July 1, 2001 with no material impact on net
income.
SFAS No. 142, "Goodwill and Other Intangible Assets," eliminates the
amortization of goodwill and other acquired intangible assets with indefinite
economic useful lives. SFAS No. 142 requires an annual impairment test of
goodwill and other intangible assets that are not subject to amortization. SFAS
No. 142 is effective for fiscal years beginning after December 15, 2001. The
impact of adopting SFAS No. 142 has not yet been determined, but may be
material.
SFAS No. 143, "Accounting for Asset Retirement Obligations," provides guidance
on the accounting for obligations associated with the retirement of long-lived
assets. SFAS No. 143 requires a liability to be recognized in the financial
statements for retirement obligations meeting specific criteria. Measurement of
the initial obligation is to approximate fair value with an equivalent amount
recorded as an increase in the value of the capitalized asset. The asset will be
depreciable in accordance with normal depreciation policy and the liability will
be increased, with a charge to the income statement, until the obligation is
settled. SFAS No. 143 is effective for fiscal years beginning after June 15,
2002. The potential impact of adopting SFAS No. 143 is not yet determinable.
SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets,"
replaces SFAS No. 121. The statement develops one accounting model for
long-lived assets to be disposed of by sale and addresses significant
implementation issues. SFAS No. 144 is effective for fiscal years beginning
after December 15, 2001. The effect of implementing SFAS No. 144 has not yet
been determined.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
BUSINESS DESCRIPTION
Chesapeake Utilities Corporation (the "Company") is a diversified utility
company engaged in natural gas distribution and transmission, propane
distribution and marketing, advanced information services and other related
businesses.
The Company's strategy is to grow earnings from a stable utility foundation by
investing in related businesses and services that provide opportunities for
higher, unregulated returns. This growth strategy includes acquisitions and
investments in unregulated businesses as well as the continued investment and
expansion of the Company's utility operations that provide the stable base of
earnings. The Company continually reevaluates its investments to ensure that
they are consistent with its strategy and the goal of enhancing shareholder
value. The Company's unregulated businesses and services currently include
propane distribution and marketing, water conditioning and treatment, and
advanced information services. By investing in these related business and
services, Chesapeake has created opportunities to earn higher returns than a
traditional utility. The reinvestment of these higher returns has increased the
Company's earnings and is expected to contribute to future earnings growth.
FINANCIAL POSITION, LIQUIDITY AND CAPITAL RESOURCES
The Company's capital requirements reflect the capital-intensive nature of its
business and are principally attributable to the construction program and the
retirement of outstanding debt. The Company relies on cash generated by
operations and short-term borrowing to meet normal working capital requirements
and to temporarily finance capital expenditures. To permanently finance capital
improvements and acquisitions, the Company uses long-term debt and equity as
required to maintain a sound capital structure. During the first nine months of
2001, net cash provided by operating activities, net cash used by investing
activities and net cash provided by financing activities were approximately
$12.1 million, $18.7 million and $3.5 million, respectively. Based upon
anticipated cash requirements in 2001, the Company may fund its capital
expenditures and refinance short-term borrowings through the issuance of
long-term debt. The timing of the issuance of any long-term debt is dependent
upon a number of considerations, including the nature of the securities to be
issued, and existing economic and financial market conditions.
The Board of Directors has authorized the Company to borrow up to $45 million
from various banks and trust companies under short-term lines of credit. As of
September 30, 2001, the Company had three unsecured bank lines of credit with
two financial institutions, totaling $65 million. One of the lines of credit is
fully committed. Short-term debt outstanding at September 30, 2001 and December
31, 2000 was $33 million and $25.4 million, respectively. In the first nine
months, funding for capital expenditures and long-term debt reduction came from
cash provided by operations, cash on hand and short-term borrowing. As of
September 30, 2001, the Company had deferred $6.5 million, down $830,000 since
December 31, 2000, of natural gas costs in excess of the cost of gas presently
included in its base rates. Management expects to continue to recover these
deferred costs through the gas cost recovery mechanism in each of the
jurisdictions that regulate the Company's natural gas businesses.
During the nine-month periods ended September 30, 2001 and 2000, capital
expenditures, including acquisitions, were approximately $18.7 million and $11.8
million, respectively. The Company has budgeted $31.5 million for capital
expenditures during 2001. This amount approximates the Company's current
forecasted spending for the year. The budget figures include $25.8 million for
natural gas distribution and transmission; $2.5 million for propane distribution
and marketing; $495,000 for advanced information services; and $2.7 million for
general plant. The natural gas expenditures are for expansion and improvement of
facilities, for the improvement and expansion of the pipeline system to better
serve existing customers and to extend service to customers in the City of
Milford, Delaware. The propane expenditures are to support customer growth and
for the replacement of older equipment. The advanced information services
expenditures are for computer hardware, software and related equipment.
Expenditures for general plant include building improvements, and computer
software and hardware. Management expects to finance the 2001 construction
program from short-term borrowing, cash from operations and the issuance of
long-term debt, if conditions warrant. The construction program is subject to
continual review and modification. Actual capital expenditures may differ from
these estimates due to a number of factors including acquisition opportunities,
changing economic conditions, customer growth in existing markets, regulation
and new growth opportunities. The Company does not budget for acquisitions.
The Company has budgeted $1.9 million for capital expenditures in 2001 related
to environmental remediation projects, and expects to make additional
expenditures in future years, a portion of which may need to be financed through
external sources. Management does not expect such financing to have a material
adverse effect on the financial position or capital resources of the Company
(see Note 3 to the Consolidated Financial Statements).
As of September 30, 2001, common equity represented 57.2 percent of permanent
capitalization, compared to 55.7 percent as of December 31, 2000. Including both
short-term financing and total capitalization, the equity component would have
been 43.8 percent and 44.7 percent, respectively. The Company remains committed
to maintaining a sound capital structure and strong credit ratings in order to
provide the financial flexibility needed to access the capital markets when
required. This commitment, along with adequate and timely rate relief for the
Company's regulated operations, is intended to ensure that the Company will be
able to attract capital from outside sources at a reasonable cost.
Interest for the first nine months of 2001 increased approximately $798,000, or
26%, over the same period in 2000. The increase was caused by an increase in
average short-term borrowing for the first nine months of $3.8 million and an
increase in the average long-term debt balances of $17.5 million. The increase
in borrowing was generated primarily by capital spending and under-recovered gas
costs. The Company earns interest on the under-recovered gas costs in Delaware
and Florida. The weighted average interest rates for the first half of 2001 was
down.
Accounts receivable decreased by $16.4 million and accounts payable decreased by
$17.9 million from December 31, 2000 to September 30, 2001. Balances at year-end
were higher, partially due to the higher wholesale price of propane affecting
propane marketing receivables and payables, compared to the September 30, 2001
pricing levels. Additionally, the natural gas and propane distribution
operations experienced higher revenue and receivables; thereby increasing the
corresponding cost of sales and payables in the winter months due to colder
temperatures when compared to the summer and early fall months.
RESULTS OF OPERATIONS FOR THE QUARTER ENDED SEPTEMBER 30, 2001
CONSOLIDATED OVERVIEW
The Company recognized a seasonal net loss of $675,000 or $0.13 per share for
the third quarter of 2001. As indicated in the following table, the increase in
income is primarily due to higher contributions of pre-tax operating income by
the natural gas and advanced information services businesses. These gains were
partially offset by pre-tax operating losses for the propane and other business
operations, higher interest expense and reduced operating income tax benefit.
- -----------------------------------------------------------------------------------
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2001 2000 CHANGE
- -----------------------------------------------------------------------------------
Pre-tax Operating Income (Loss)
Natural Gas Distribution & Transmission. $ 1,110,237 $ 129,024 $ 981,213
Propane Gas Distribution & Marketing . . (1,473,152) (1,439,698) (33,454)
Advanced Information Services. . . . . . 429,227 343,017 86,210
Other & Eliminations . . . . . . . . . . (9,862) 222,533 (232,395)
- ------------------------------------------- ------------ ------------ ----------
Pre-tax Operating Income (Loss). . . . . . 56,450 (745,124) 801,574
Operating Income Taxes . . . . . . . . . . (505,969) (701,165) 195,196
Interest . . . . . . . . . . . . . . . . . 1,299,945 1,157,644 142,301
Non-Operating Income, net. . . . . . . . . 62,560 156,894 (94,334)
- ------------------------------------------- ------------ ------------ ----------
Net Loss . . . . . . . . . . . . . . . . . $ (674,966) $(1,044,709) $ 369,743
=========================================== ============ ============ ==========
NATURAL GAS DISTRIBUTION AND TRANSMISSION
The natural gas distribution and transmission segment reported pre-tax operating
income of $1.1 million for the third quarter 2001 as compared to $129,000 for
the corresponding period last year an increase of $981,000. The increase in
pre-tax operating income is due primarily to an increase in gross margin.
- --------------------------------------------------------------------------
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2001 2000 CHANGE
- --------------------------------------------------------------------------
Revenue . . . . . . . . . . . . . $15,464,169 $16,801,554 $(1,337,385)
Cost of Gas . . . . . . . . . . . 8,761,703 11,131,281 (2,369,578)
- ---------------------------------- ----------- ----------- ------------
Gross Margin. . . . . . . . . . . 6,702,466 5,670,273 1,032,193
Operations & Maintenance. . . . . 3,571,183 3,666,126 (94,943)
Depreciation & Amortization . . . 1,411,992 1,346,320 65,672
Other Taxes . . . . . . . . . . . 609,054 528,803 80,251
- ---------------------------------- ----------- ----------- ------------
Total Operating Expenses. . . . . 5,592,229 5,541,249 50,980
- ---------------------------------- ----------- ----------- ------------
Pre-tax Operating Income. . . . . $ 1,110,237 $ 129,024 $ 981,213
================================== =========== =========== ============
The gross margin increase was principally due to rate increases in Florida and
an increase in firm transportation service provided by the interstate pipeline
subsidiary. Additionally, margins for the Florida gas marketing operations
increased. Operating expenses increased primarily due to increased depreciation
and property taxes. The increase was partially offset by decreases in operations
and maintenance expenses resulting from cost containment measures initiated
during the second quarter of this year.
PROPANE GAS DISTRIBUTION AND MARKETING
For the third quarter of 2001, the propane segment recognized a seasonal pre-tax
operating loss of $1,473,000 compared to $1,440,000 for the same period last
year, a change of two percent.
- --------------------------------------------------------------------------
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2001 2000 CHANGE
- --------------------------------------------------------------------------
Revenue . . . . . . . . . . . . $33,122,533 $37,357,254 $(4,234,721)
Cost of Sales . . . . . . . . . 31,708,824 35,742,022 (4,033,198)
- -------------------------------- ------------ ------------ ------------
Gross Margin. . . . . . . . . . 1,413,709 1,615,232 (201,523)
Operations & Maintenance. . . . 2,379,479 2,567,646 (188,167)
Depreciation & Amortization . . 354,132 354,837 (705)
Other Taxes . . . . . . . . . . 153,250 132,447 20,803
- -------------------------------- ------------ ------------ ------------
Total Operating Expenses. . . . 2,886,861 3,054,930 (168,069)
- -------------------------------- ------------ ------------ ------------
Pre-tax Operating Loss. . . . . $(1,473,152) $(1,439,698) $ (33,454)
================================ ============ ============ ============
Gross margins decreased due to a reduction in propane distribution gallons sold
for the third quarter. Operating expenses decreased partially due to cost
reduction initiatives undertaken during the second quarter. This offset a
portion of the decline in gross margin.
ADVANCED INFORMATION SERVICES
The advanced information services segment recognized pre-tax operating income of
$429,000 for the third quarter of 2001 as compared to $343,000 for the same
period last year, an increase of 25%.
- -------------------------------------------------------------------------
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2001 2000 CHANGE
- -------------------------------------------------------------------------
Revenue . . . . . . . . . . . . . . . $4,028,523 $3,291,323 $737,200
Cost of Sales . . . . . . . . . . . . 1,981,900 1,652,114 329,786
- -------------------------------------- ---------- ---------- ---------
Gross Margin. . . . . . . . . . . . . 2,046,623 1,639,209 407,414
Operations & Maintenance. . . . . . . 1,402,026 1,117,521 284,505
Depreciation & Amortization . . . . . 67,378 67,440 (62)
Other Taxes . . . . . . . . . . . . . 147,992 111,231 36,761
- -------------------------------------- ---------- ---------- ---------
Total Operating Expenses. . . . . . . 1,617,396 1,296,192 321,204
- -------------------------------------- ---------- ---------- ---------
Pre-tax Operating Income. . . . . . . $ 429,227 $ 343,017 $ 86,210
====================================== ========== ========== =========
The increase in pre-tax operating income was primarily the result of an increase
in revenues over the depressed levels experienced in 2000. During 2000, many
companies curtailed their information technology expenditures, after
implementing their Year 2000 contingency plans. During 2001, this segment has
expanded its service offerings and repositioned itself under a new name,
BravePoint, Inc. The margin increase was partially offset by increased operating
expenses, primarily sales and marketing. An aggressive marketing campaign,
associated with the repositioning of the segment, increased sales and marketing
expenses $268,000.
OTHER BUSINESS OPERATIONS
Pre-tax operating income for the third quarter decreased by $232,000 over the
same period last year for other operations. This decline was primarily the
result of a decline in the performance of one of the Company's water businesses
and the costs associated with establishing a management infrastructure for the
water businesses recently acquired. Additionally, costs were incurred in
conjunction with water expanding into new service territories.
OPERATING INCOME TAXES
The income tax benefit was lower due to the decrease in the operating loss for
the current quarter. For 2001, the Company anticipates paying tax at a higher
composite income tax rate.
INTEREST EXPENSE
Interest for the third quarter of 2001 increased approximately $142,000, or 12%,
over the same period in 2000. The increase was caused by an increase in average
short-term borrowing of $1.4 million and an increase in the average long-term
debt balance of $17.8 million over the third quarter of 2000. The increase in
borrowing was primarily due to capital expenditures and under-recovered gas
costs. The Company earns interest on the under-recovered gas costs. The weighted
average interest rates for the third quarter of 2001 were lower than those in
2000.
ENVIRONMENTAL MATTERS
The Company continues to work with federal and state environmental agencies to
assess the environmental impact and explore options for corrective action at
three former gas manufacturing plant sites (see Note 3 to the Consolidated
Financial Statements). The Company believes that future costs associated with
these sites will be recoverable in rates or through sharing arrangements with,
or contributions by, other responsible parties.
RESULTS OF OPERATIONS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2001
CONSOLIDATED OVERVIEW
The Company recognized net income of $5.4 million for the first nine months of
2001, an increase of eight percent over the prior year. As indicated in the
following table, the increase in income is primarily due to a greater
contribution of pre-tax operating income by the natural gas, propane and
advanced information services segments. These gains were partially offset by
lower pre-tax operating income from other business operations and increased
interest expense.
- -----------------------------------------------------------------------------------
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2001 2000 CHANGE
- -----------------------------------------------------------------------------------
Pre-tax Operating Income (Loss)
Natural Gas Distribution & Transmission. $ 9,925,881 $ 8,582,296 $1,343,585
Propane Gas Distribution & Marketing . . 1,695,813 1,144,287 551,526
Advanced Information Services. . . . . . 644,995 318,050 326,945
Other & Eliminations . . . . . . . . . . (30,208) 661,672 (691,880)
- ------------------------------------------- ------------ ----------- -----------
Pre-tax Operating Income . . . . . . . . . 12,236,481 10,706,305 1,530,176
Operating Income Taxes . . . . . . . . . . 3,266,502 2,874,304 392,198
Interest . . . . . . . . . . . . . . . . . 3,924,519 3,126,921 797,598
Non-Operating Income, net. . . . . . . . . 311,769 239,226 72,543
- ------------------------------------------- ------------ ----------- -----------
Net Income . . . . . . . . . . . . . . . . $ 5,357,229 $ 4,944,306 $ 412,923
=========================================== ============ =========== ===========
NATURAL GAS DISTRIBUTION AND TRANSMISSION
The natural gas distribution and transmission segment reported pre-tax operating
income of $9.9 million for the first nine months of 2001 as compared to $8.6
million for the corresponding period last year an increase of $1.3 million. The
increase in pre-tax operating income is due to an increase in gross margin
partially offset by higher operating expenses.
- --------------------------------------------------------------------------
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2001 2000 CHANGE
- --------------------------------------------------------------------------
Revenue . . . . . . . . . . . . . $86,064,903 $68,698,849 $17,366,054
Cost of Gas . . . . . . . . . . . 58,504,229 42,979,602 15,524,627
- ---------------------------------- ----------- ----------- ------------
Gross Margin. . . . . . . . . . . 27,560,674 25,719,247 1,841,427
Operations & Maintenance. . . . . 11,490,858 11,536,450 (45,592)
Depreciation & Amortization . . . 4,221,968 3,954,809 267,159
Other Taxes . . . . . . . . . . . 1,921,967 1,645,692 276,275
- ---------------------------------- ----------- ----------- ------------
Total Operating Expenses. . . . . 17,634,793 17,136,951 497,842
- ---------------------------------- ----------- ----------- ------------
Pre-tax Operating Income. . . . . $ 9,925,881 $ 8,582,296 $ 1,343,585
================================== =========== =========== ============
The increase in margin was the result of a rate increase in Florida and an
increase in firm transportation services provided by the interstate pipeline
subsidiary. The increased margin generated by the colder weather in Delaware was
largely offset by a reduction in Delaware's distribution margins that resulted
from a weather normalization adjustment of $418,000 recorded in 2000. Operating
expenses were higher primarily due to increased depreciation and property taxes.
PROPANE GAS DISTRIBUTION AND MARKETING
For the first nine months of 2001, the propane segment contributed pre-tax
operating income of $1.7 million as compared to $1.1 million for the same period
last year. The increase is the result of an increase in gross margin partially
offset by an increase in operating expenses.
- ---------------------------------------------------------------------------
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2001 2000 CHANGE
- ---------------------------------------------------------------------------
Revenue . . . . . . . . . . . . . $156,461,330 $140,382,417 $16,078,913
Cost of Sales . . . . . . . . . . 144,613,952 129,342,098 15,271,854
- ---------------------------------- ------------ ------------ -----------
Gross Margin. . . . . . . . . . . 11,847,378 11,040,319 807,059
Operations & Maintenance. . . . . 8,545,894 8,380,115 165,779
Depreciation & Amortization . . . 1,068,417 1,045,813 22,604
Other Taxes . . . . . . . . . . . 537,254 470,104 67,150
- ---------------------------------- ------------ ------------ -----------
Total Operating Expenses. . . . . 10,151,565 9,896,032 255,533
- ---------------------------------- ------------ ------------ -----------
Pre-tax Operating Income. . . . . $ 1,695,813 $ 1,144,287 $ 551,526
================================== ============ ============ ===========
Margins increased for both propane distribution and marketing. Retail margins
per gallon for the first quarter of 2001 were improved over depressed levels in
2000. Marketing margins were enhanced due to propane price volatility. These
increases were partially offset by increased operating expenses caused by higher
energy prices and customer service initiatives implemented in 2000.
ADVANCED INFORMATION SERVICES
The advanced information services segment recognized pre-tax operating income of
$645,000 for the first nine months of 2001 as compared to $318,000 for the same
period last year.
- --------------------------------------------------------------------------
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2001 2000 CHANGE
- --------------------------------------------------------------------------
Revenue . . . . . . . . . . . . . . $11,124,407 $9,653,927 $1,470,480
Cost of Sales . . . . . . . . . . . 5,634,383 5,234,327 400,056
- ------------------------------------ ----------- ---------- -----------
Gross Margin. . . . . . . . . . . . 5,490,024 4,419,600 1,070,424
Operations & Maintenance. . . . . . 4,179,121 3,469,783 709,338
Depreciation & Amortization . . . . 197,300 214,881 (17,581)
Other Taxes . . . . . . . . . . . . 468,608 416,886 51,722
- ------------------------------------ ----------- ---------- -----------
Total Operating Expenses. . . . . . 4,845,029 4,101,550 743,479
- ------------------------------------ ----------- ---------- -----------
Pre-tax Operating Income. . . . . . $ 644,995 $ 318,050 $ 326,945
==================================== =========== ========== ===========
This increase reflects higher revenues in 2001 compared to depressed levels in
2000. During 2000, revenues from the Company's traditional information
technology services (i.e. non web-related services) declined after their clients
finished implementing their Year 2000 contingency plans. New service offerings,
particularly web-related services, have helped improve 2001 revenues. This
business segment adopted a new name, BravePoint, Inc., and has been marketing
aggressively. Sales and marketing expenses, which increased $625,000, were the
main factors in the rise in operating expenses from 2000 to 2001.
OTHER BUSINESS OPERATIONS
Pre-tax operating income for the nine months ended September 30, 2001 decreased
by $692,000 over the same period last year for other operations. This decline
was primarily the result of a decline in the performance of one of the Company's
water businesses and the costs associated with establishing a management
infrastructure for the water businesses. Additionally, costs were incurred in
conjunction with the water business expanding into new service territories.
OPERATING INCOME TAXES
Operating income taxes were higher due to the increase in operating income for
the first nine months of the year. For 2001, the Company anticipates paying tax
at a higher composite income tax rate.
INTEREST EXPENSE
Interest for the first nine months of 2001 increased approximately $798,000, or
26%, over the same period in 2000. The increase was caused by an increase in
average short-term borrowing of $3.8 million and an increase in the average
long-term debt balances of $17.5 million. The increase in borrowing was
generated primarily by capital spending and under-recovered gas costs. The
Company earns interest on the under-recovered gas costs. In addition, the
weighted average interest rate for the first nine months of 2001 was down.
ENVIRONMENTAL MATTERS
The Company continues to work with federal and state environmental agencies to
assess the environmental impact and explore options for corrective action at
three former manufactured gas plant sites (see Note 3 to the Consolidated
Financial Statements). The Company believes that future costs associated with
these sites will be recoverable in rates or through sharing arrangements with,
or contributions by, other responsible parties.
OTHER MATTERS
ACQUISITIONS
During the second quarter of 2001, the Company acquired Absolute Water Care,
Inc. and certain assets of Aquarius Systems, Inc., two water conditioning and
treatment dealerships operating out of three locations in Florida.
In July 2001, the Company purchased selected assets of EcoWater Systems of
Rochester, located in Rochester, Minnesota, and Intermountain Water, Inc. and
Blue Springs Water, located in Boise, Idaho. As a result, the Company will now
provide water treatment, water conditioning and bottled water to customers in
those geographic regions.
REGULATORY MATTERS
The Company's natural gas distribution operations are subject to regulation by
the Delaware, Maryland and Florida Public Service Commissions. In addition, the
natural gas transmission operation is subject to regulation by the Federal
Energy Regulatory Commission.
A request for approval of a rate increase for the Florida natural gas
distribution division was filed in June 2000 and interim rates went into effect
on August 10, 2000. An order was issued by the Commission in November 2000
approving a rate increase. Final rates were effective in December 2000.
The Company filed for a base rate increase with the Delaware Public Service
Commission on August 2, 2001. Management began charging higher interim rates,
subject to refund, in October 2001 with permanent rates going into effect
subject to approval by the Public Service Commission.
COMPETITION
The Company's natural gas operations compete with other forms of energy such as
electricity, oil and propane. The principal competitive factors are price, and
to a lesser extent, accessibility. The Company's natural gas distribution
operations have several large volume industrial customers that have the capacity
to use fuel oil as an alternative to natural gas. When the cost of using fuel
oil to provide power for their operations is lower than the cost of natural gas,
these "interruptible" customers convert to oil. Oil prices, as well as the
prices of electricity and other fuels, are subject to fluctuation for a variety
of reasons; therefore, future competitive conditions are not predictable. In
order to address this uncertainty, the Company uses flexible pricing
arrangements on both the supply and sales side of its business to maximize sales
volumes. As a result of the transmission segment's conversion to open access,
the segment has shifted from providing bundled sales service to providing
transportation and contract storage services.
In some cases the Company's natural gas operations compete with alternative
natural gas delivery companies, including the Company's own interstate pipeline.
The customers at risk are usually large volume commercial and industrial
customers with the financial resources and capability to bypass the distribution
of transmission systems. In certain situations, the Company may adjust services
and rates for these customers to retain their business. The Company provides
unbundled natural gas supply services to compete more effectively for these
customers.
The Company's propane distribution operations compete with several other propane
distributors in their service territories, primarily on the basis of service and
price. Competitors include both large national companies and many, generally
smaller, local companies. The number of small local competitors has increased
significantly in the last few of years as fuel oil dealers and electric
cooperatives have entered the propane distribution business.
The Company's advanced information services segment faces significant
competition from a number of larger competitors, many of which have
substantially greater resources available to them than those of the Company.
This segment competes on the basis of technological expertise, reputation and
price.
INFLATION
Inflation affects the cost of labor, products and services required for
operation, maintenance and capital improvements. While the impact of inflation
has lessened in recent years, natural gas and propane prices are subject to
rapid fluctuations. Fluctuations in natural gas prices are passed on to
customers through the gas cost recovery mechanism in the Company's tariffs. To
help cope with the effects of inflation on its capital investments and returns,
the Company seeks rate relief from regulatory commissions for regulated
operations while monitoring the returns of its unregulated business operations.
To compensate for fluctuations in propane gas prices, the Company adjusts its
propane selling prices to the extent allowed by the market.
CAUTIONARY STATEMENT
The Company has made statements in this report that are considered to be
forward-looking statements. Such statements are not matters of historical fact.
Sometimes they contain words such as "believes," "expects," "intends," "plans,"
"will," or "may," and other similar words of a predictive nature. These
statements relate to matters such as customer growth, changes in revenues or
margins, capital expenditures, environmental remediation costs, regulatory
approvals, market risks associated with the Company's propane marketing
operation, the competitive position of the Company and other matters. It is
important to understand that these forward-looking statements are not
guarantees, but are subject to certain risks and uncertainties and other
important factors that could cause actual results to differ materially from
those in the forward-looking statements. These factors include, among other
things:
- the temperature sensitivity of the natural gas and propane businesses;
- the wholesale prices of natural gas and propane and market movements
in these prices;
- the effects of competition on the Company's unregulated and regulated
businesses;
- the effect of changes in federal, state or local legislative
requirements;
- the ability of the Company's new and planned facilities and
acquisitions to generate expected revenues; and
- the Company's ability to obtain the rate relief and cost recovery
requested from utility regulators and the timing of the requested
regulatory actions.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market risk represents the potential loss arising from adverse changes in market
rates and prices. The Company's long-term debt consists of first mortgage bonds,
senior notes and convertible debentures with fixed interest rates, none of which
was entered into for trading purposes. The carrying value of this long-term debt
at September 30, 2001 was $52.4 million with a fair value of $59.4 million,
based mainly on current market prices or discounted cash flows using current
rates for similar issues with similar terms and remaining maturities. The
Company is exposed to changes in interest rates due to the use of fixed rate
long-term debt to finance the business. Management continually monitors
fluctuations in interest rates and debt markets to assess the benefits of
changing the mix of long and short-term debt or refinancing existing debt.
The Company's propane marketing business is a party to natural gas liquids
("NGL") forward contracts, primarily propane contracts, with various third
parties. These contracts obligate the propane marketing business to purchase or
sell NGL at a fixed price at fixed future dates. At expiration, the contracts
are settled by the delivery of NGL to the respective party. The propane
marketing business also enters into futures contracts that are traded on the New
York Mercantile Exchange. In certain cases, the futures contracts are settled by
the payment of a net amount equal to the difference between the current market
price of the futures contract and the original contract price.
The forward and futures contracts are entered into for trading and wholesale
marketing purposes. The propane marketing business is subject to commodity price
risk on its open positions to the extent that market prices for NGL deviate from
fixed contract settlement prices. Market risk associated with the trading of
futures and forward contracts are monitored daily for compliance with the
Company's Risk Management Policy, which includes volumetric limits for open
positions. To manage exposures to changing market prices, open positions are
marked up or down to market prices and reviewed by oversight officials on a
daily basis. Additionally, the Risk Management Committee reviews periodic
reports on market and credit risk, approves any exceptions to the Risk
Management Policy (within limits established by the Board of Directors) and
authorizes the use of any new types of contracts. Quantitative information on
forward and futures contracts at September 30, 2001 is presented in the
following table. All of the contracts mature within twelve months.
- --------------------------------------------------------------------------------
QUANTITY ESTIMATED WEIGHTED AVERAGE
AT SEPTEMBER 30, 2001 IN GALLONS MARKET PRICES CONTRACT PRICES
- --------------------------------------------------------------------------------
FORWARD CONTRACTS
Sale. . . . . . . . . . . . 23,662,800 $0.4000 - $0.4025 $0.4654
Purchase. . . . . . . . . . 21,210,000 $0.4075 - $0.4150 $0.4720
FUTURES CONTRACTS
Sale. . . . . . . . . . . . 168,000 $0.4025 - $0.4125 $0.4250
Purchase. . . . . . . . . . 588,000 $0.4025 - $0.4125 $0.4895
- --------------------------------------------------------------------------------
<FN>
Estimated market prices and weighted average contract prices are in dollars per
gallon.
</FN>
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
See Note 3 to the Consolidated Financial Statements
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
On November 1, 2001, the Company filed, under Item 5, that three
new members had been appointed to its Board of Directors.
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, thereunto duly authorized.
Chesapeake Utilities Corporation
/s/ Michael P. McMasters
- ----------------------------------
Michael P. McMasters
Vice President, Treasurer and Chief Financial Officer
Date: November 14, 2001