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: March 31, 2003
--------------
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
------------------------------------------------
(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 - 5,576,414 shares issued as of March 31, 2003.
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 . . . . . . . . . . . . . . . . . . . . . 9
Other Commitments and Contingencies . . . . . . . . . . . . .10
4. Recent Authoritative Pronouncements
on Financial Reporting and Accounting. . . . . . . . . . . . .10
5. Adopted Pronouncements . . . . . . . . . . . . . . . . . . . . . .10
6. Segment Information . . . . . . . . . . . . . . . . . . . . . . .11
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations. . . . . . . . . . . .12
Business Description . . . . . . . . . . . . . . . . . . . . . . . . .12
Financial Position, Liquidity and Capital Resources . . . . . . . . .12
Results of Operations for the Quarter
Ended March 31, 2003 . . . . . . . . . . . . . . . . . . . . . . . . .13
Consolidated Overview. . . . . . . . . . . . . . . . . . . . . . . . .13
Natural Gas Distribution and Transmission . . . . . . . . . . . . .14
Propane. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
Advanced Information Services. . . . . . . . . . . . . . . . . . . . 15
Water Services. . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
Other Business Operations. . . . . . . . . . . . . . . . . . . . . . 16
Operating Income Taxes . . . . . . . . . . . . . . . . . . . . . . . 16
Interest Expense. . . . . . . . . . . . . . . . . . . . . . . . . . . 16
Environmental Matters . . . . . . . . . . . . . . . . . . . . . . . . 17
Other Matters . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
Regulatory Matters. . . . . . . . . . . . . . . . . . . . . . . . . . 17
Competition. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
Recent Pronouncements . . . . . . . . . . . . . . . . . . . . . . . . 18
Inflation. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
Cautionary Statement. . . . . . . . . . . . . . . . . . . . . . . . . 19
Item 3. Quantitative and Qualitative Disclosures about Market Risk. . 19
Item 4. Controls and Procedures. . . . . . . . . . . . . . . . . . .21
Evaluation of Disclosure Controls and Procedures. . . . . . . . . 21
Changes in Internal Controls. . . . . . . . . . . . . . . . . . . . 21
PART II - OTHER INFORMATION. . . . . . . . . . . . . . . . . . . . . . . 23
SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
CERTIFICATIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CHESAPEAKE UTILITIES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
- ---------------------------------------------------------------------------------------------
FOR THE THREE MONTHS ENDED MARCH 31, 2003 2002
- ---------------------------------------------------------------------------------------------
OPERATING REVENUES. . . . . . . . . . . . . . . . . . . . . . $ 66,774,480 $ 48,642,253
COST OF SALES . . . . . . . . . . . . . . . . . . . . . . . . 40,205,499 26,302,364
- ---------------------------------------------------------------------------------------------
GROSS MARGIN. . . . . . . . . . . . . . . . . . . . . . . . . 26,568,981 22,339,889
- ---------------------------------------------------------------------------------------------
OPERATING EXPENSES
Operations . . . . . . . . . . . . . . . . . . . . . . . . 10,133,063 9,321,940
Maintenance. . . . . . . . . . . . . . . . . . . . . . . . 425,911 461,981
Depreciation and amortization. . . . . . . . . . . . . . . 2,375,153 2,326,349
Other taxes. . . . . . . . . . . . . . . . . . . . . . . . 1,333,992 1,283,266
Income taxes . . . . . . . . . . . . . . . . . . . . . . . 4,266,494 3,039,429
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Total operating expenses. . . . . . . . . . . . . . . . . . . 18,534,613 16,432,965
- ---------------------------------------------------------------------------------------------
OPERATING INCOME. . . . . . . . . . . . . . . . . . . . . . . 8,034,368 5,906,924
OTHER INCOME, NET . . . . . . . . . . . . . . . . . . . . . . 59,291 211,050
- ---------------------------------------------------------------------------------------------
INCOME BEFORE INTEREST CHARGES. . . . . . . . . . . . . . . . 8,093,659 6,117,974
INTEREST CHARGES. . . . . . . . . . . . . . . . . . . . . . . 1,465,850 1,234,496
- ---------------------------------------------------------------------------------------------
INCOME BEFORE CUMULATIVE EFFECT OF
CHANGE IN ACCOUNTING PRINCIPLE . . . . . . . . . . . . . . 6,627,809 4,883,478
CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING
PRINCIPLE, NET OF TAX. . . . . . . . . . . . . . . . . . . 0 (1,916,000)
- ---------------------------------------------------------------------------------------------
NET INCOME. . . . . . . . . . . . . . . . . . . . . . . . . . $ 6,627,809 $ 2,967,478
=============================================================================================
EARNINGS PER SHARE OF COMMON STOCK:
BASIC
BEFORE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE. . . . . . $ 1.19 $ 0.90
EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE . . . . . . . . . 0.00 (0.35)
- ---------------------------------------------------------------------------------------------
NET INCOME. . . . . . . . . . . . . . . . . . . . . . . . . . $ 1.19 $ 0.55
=============================================================================================
DILUTED
BEFORE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE. . . . . . $ 1.16 $ 0.87
EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE . . . . . . . . . 0.00 (0.34)
- ---------------------------------------------------------------------------------------------
NET INCOME. . . . . . . . . . . . . . . . . . . . . . . . . . $ 1.16 $ 0.53
=============================================================================================
DIVIDENDS DECLARED PER SHARE OF COMMON STOCK: . . . . . . . . $ 0.275 $ 0.275
=============================================================================================
<FN>
The accompanying notes are an integral part of these financial statements.
</FN>
CHESAPEAKE UTILITIES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
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FOR THE THREE MONTHS ENDED MARCH 31, 2003 2002
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OPERATING ACTIVITIES
Net Income. . . . . . . . . . . . . . . . . . . . . . . . . $ 6,627,809 $ 2,967,478
Adjustments to reconcile net income to net operating cash:
Goodwill impairment. . . . . . . . . . . . . . . . . . . 0 3,200,000
Depreciation and amortization. . . . . . . . . . . . . . 2,375,153 2,326,349
Depreciation included in other costs . . . . . . . . . . 240,266 327,015
Deferred income taxes, net . . . . . . . . . . . . . . . 723,749 (2,528,067)
Mark-to-market adjustments . . . . . . . . . . . . . . . 324,494 (78,350)
Employee benefits and compensation . . . . . . . . . . . 348,401 103,512
Other, net . . . . . . . . . . . . . . . . . . . . . . . (13,701) (13,704)
Changes in assets and liabilities:
Accounts receivable, net . . . . . . . . . . . . . . . . (5,327,681) (163,710)
Inventory, materials, supplies and storage gas . . . . . 5,078,231 4,191,260
Prepaid expenses and other current assets. . . . . . . . 646,661 195,564
Other deferred charges . . . . . . . . . . . . . . . . . (19,980) (179,235)
Accounts payable, net. . . . . . . . . . . . . . . . . . (430,347) (1,291,053)
Refunds payable to customers . . . . . . . . . . . . . . (77,820) (425,178)
Accrued income taxes . . . . . . . . . . . . . . . . . . 3,218,154 4,030,787
Accrued interest . . . . . . . . . . . . . . . . . . . . 1,020,121 (888,341)
Under (over) recovered purchased gas costs . . . . . . . (1,346,725) 2,830,709
Other. . . . . . . . . . . . . . . . . . . . . . . . . . 540,450 66,396
- ---------------------------------------------------------------------------------------------
Net cash provided by operating activities. . . . . . . . . . . 13,927,235 14,671,432
- ---------------------------------------------------------------------------------------------
INVESTING ACTIVITIES
Property, plant and equipment expenditures, net . . . . . . (1,935,617) (3,102,055)
Environmental recoveries, net of expenditures . . . . . . . 524,850 372,665
- ---------------------------------------------------------------------------------------------
Net cash used by investing activities. . . . . . . . . . . . . (1,410,767) (2,729,390)
- ---------------------------------------------------------------------------------------------
FINANCING ACTIVITIES
Common stock dividends, net of amounts
reinvested of $178,775, and $166,005, respectively . . . (1,343,208) (1,325,828)
Issuance of stock:
Dividend Reinvestment Plan optional cash . . . . . . . . 73,021 74,314
Retirement Savings Plan. . . . . . . . . . . . . . . . . 264,173 260,281
Net repayment under line of credit agreements . . . . . . . (10,400,000) (10,500,000)
Repayment of long-term debt . . . . . . . . . . . . . . . . (1,267,680) (1,005,116)
- ---------------------------------------------------------------------------------------------
Net cash used by financing activities. . . . . . . . . . . . . (12,673,694) (12,496,349)
- ---------------------------------------------------------------------------------------------
NET DECREASE IN CASH AND CASH EQUIVALENTS. . . . . . . . . . . (157,226) (554,307)
CASH AND CASH EQUIVALENTS BEGINNING OF PERIOD. . . . . . . . . 2,458,276 1,188,335
- ---------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS END OF PERIOD. . . . . . . . . . . . $ 2,301,050 $ 634,028
=============================================================================================
<FN>
The accompanying notes are an integral part of these financial statements.
</FN>
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CHESAPEAKE UTILITIES CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
- ---------------------------------------------------------------------------------------------
MARCH 31, DECEMBER 31,
ASSETS 2003 2002
- ---------------------------------------------------------------------------------------------
PROPERTY, PLANT AND EQUIPMENT
Natural gas distribution and transmission. . . . . . . . . $ 180,884,624 $179,487,574
Propane. . . . . . . . . . . . . . . . . . . . . . . . . . 34,708,502 34,479,798
Advanced information services. . . . . . . . . . . . . . . 1,487,233 1,475,060
Water services . . . . . . . . . . . . . . . . . . . . . . 4,762,046 4,619,703
Other plant. . . . . . . . . . . . . . . . . . . . . . . . 9,121,689 9,065,440
- ---------------------------------------------------------------------------------------------
Total property, plant and equipment . . . . . . . . . . . . . 230,964,094 229,127,575
Less: Accumulated depreciation and amortization. . . . . . . (64,282,174) (74,348,909)
- ---------------------------------------------------------------------------------------------
Net property, plant and equipment . . . . . . . . . . . . . . 166,681,920 154,778,666
- ---------------------------------------------------------------------------------------------
INVESTMENTS . . . . . . . . . . . . . . . . . . . . . . . . . 362,589 362,855
- ---------------------------------------------------------------------------------------------
CURRENT ASSETS
Cash and cash equivalents. . . . . . . . . . . . . . . . . 2,301,050 2,458,276
Accounts receivable (less allowance for uncollectibles
of $804,606 and $659,628, respectively) . . . . . . . . 29,373,534 24,045,853
Materials and supplies, at average cost. . . . . . . . . . 1,104,291 995,165
Merchandise inventory, at FIFO . . . . . . . . . . . . . . 1,186,894 1,193,585
Propane inventory, at average cost . . . . . . . . . . . . 1,462,367 4,028,878
Storage gas prepayments. . . . . . . . . . . . . . . . . . 419,617 3,033,772
Underrecovered purchased gas costs . . . . . . . . . . . . 4,315,656 2,968,931
Income taxes receivable. . . . . . . . . . . . . . . . . . 0 488,339
Deferred income taxes receivable . . . . . . . . . . . . . 417,665 417,665
Prepaid expenses . . . . . . . . . . . . . . . . . . . . . 1,862,159 2,833,314
Other current assets . . . . . . . . . . . . . . . . . . . 700,387 755,683
- ---------------------------------------------------------------------------------------------
Total current assets. . . . . . . . . . . . . . . . . . . . . 43,143,620 43,219,461
- ---------------------------------------------------------------------------------------------
DEFERRED CHARGES AND OTHER ASSETS
Environmental regulatory assets. . . . . . . . . . . . . . 2,505,702 2,527,251
Environmental expenditures . . . . . . . . . . . . . . . . 2,032,556 2,557,406
Underrecovered purchased gas costs . . . . . . . . . . . . 0 0
Goodwill, net. . . . . . . . . . . . . . . . . . . . . . . 869,519 869,519
Intangible assets, net . . . . . . . . . . . . . . . . . . 1,872,111 1,927,622
Other deferred charges . . . . . . . . . . . . . . . . . . 4,714,813 4,701,394
- ---------------------------------------------------------------------------------------------
Total deferred charges and other assets . . . . . . . . . . . 11,994,701 12,583,192
- ---------------------------------------------------------------------------------------------
TOTAL ASSETS. . . . . . . . . . . . . . . . . . . . . . . . . $ 222,182,830 $210,944,174
=============================================================================================
<FN>
The accompanying notes are an integral part of these financial statements.
</FN>
CHESAPEAKE UTILITIES CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
- ---------------------------------------------------------------------------------------------
MARCH 31, DECEMBER 31,
CAPITALIZATION AND LIABILITIES 2003 2002
- ---------------------------------------------------------------------------------------------
CAPITALIZATION
Stockholders' equity
Common Stock, par value $.4867 per share;
(authorized 12,000,000 shares; issued and
outstanding 5,576,414 and 5,537,710 shares
for 2003 & 2002, respectively) . . . . . . . . . . . $ 2,713,772 $ 2,694,935
Additional paid-in capital. . . . . . . . . . . . . . . 32,466,963 31,756,983
Retained earnings . . . . . . . . . . . . . . . . . . . 37,332,967 32,238,510
- ---------------------------------------------------------------------------------------------
Total stockholders' equity. . . . . . . . . . . . . . . . . . 72,513,702 66,690,428
Long-term debt, net of current maturities . . . . . . . . . . 72,351,922 73,407,684
- ---------------------------------------------------------------------------------------------
Total capitalization. . . . . . . . . . . . . . . . . . . . . 144,865,624 140,098,112
- ---------------------------------------------------------------------------------------------
CURRENT LIABILITIES
Current portion of long-term debt. . . . . . . . . . . . . 3,672,138 3,938,006
Short-term borrowing . . . . . . . . . . . . . . . . . . . 500,000 10,900,000
Accounts payable . . . . . . . . . . . . . . . . . . . . . 20,711,649 21,141,996
Refunds payable to customers . . . . . . . . . . . . . . . 420,022 497,842
Customer deposits. . . . . . . . . . . . . . . . . . . . . 2,036,168 2,007,983
Income taxes payable . . . . . . . . . . . . . . . . . . . 2,729,815 0
Accrued interest . . . . . . . . . . . . . . . . . . . . . 1,719,952 699,831
Dividends payable. . . . . . . . . . . . . . . . . . . . . 1,533,352 1,521,982
Accrued compensation . . . . . . . . . . . . . . . . . . . 1,870,517 1,777,544
Other accrued liabilities. . . . . . . . . . . . . . . . . 2,341,978 2,052,442
- ---------------------------------------------------------------------------------------------
Total current liabilities . . . . . . . . . . . . . . . . . . 37,535,591 44,537,626
- ---------------------------------------------------------------------------------------------
DEFERRED CREDITS AND OTHER LIABILITIES
Deferred income taxes. . . . . . . . . . . . . . . . . . . 17,987,250 17,263,501
Deferred investment tax credits. . . . . . . . . . . . . . 533,837 547,541
Environmental liability. . . . . . . . . . . . . . . . . . 2,774,315 2,802,424
Accrued pension costs. . . . . . . . . . . . . . . . . . . 1,723,697 1,619,456
Accumulated negative salvage value . . . . . . . . . . . . 12,527,545 0
Other liabilities. . . . . . . . . . . . . . . . . . . . . 4,234,971 4,075,514
- ---------------------------------------------------------------------------------------------
Total deferred credits and other liabilities. . . . . . . . . 39,781,615 26,308,436
- ---------------------------------------------------------------------------------------------
COMMITMENTS AND CONTINGENCIES (Note 3)
TOTAL CAPITALIZATION AND LIABILITIES. . . . . . . . . . . . . $ 222,182,830 $210,944,174
=============================================================================================
<FN>
The accompanying notes are an integral part of these financial statements.
</FN>
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. QUARTERLY FINANCIAL DATA
The financial information for Chesapeake Utilities Corporation (the "Company" or
"Chesapeake") 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 normal recurring adjustments, including the
cumulative effect of change in accounting principle, which are necessary for a
fair presentation of the Company's interim results. In accordance with United
States Generally Accepted Accounting Principles, the Company's management makes
certain estimates and assumptions regarding: 1) reported amounts of assets and
liabilities, 2) disclosure of contingent assets and liabilities at the date of
the financial statements and 3) reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those estimates. 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 2002 have been reclassified to conform to the
presentation for the current year.
2. CALCULATION OF EARNINGS PER SHARE
- --------------------------------------------------------------------------------
FOR THE THREE MONTHS ENDED MARCH 31, 2003 2002
- --------------------------------------------------------------------------------
CALCULATION OF BASIC EARNINGS PER SHARE BEFORE
CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE:
Net Income before cumulative effect of
change in accounting principle . . . . . . . . $6,627,809 $4,883,478
Weighted average shares outstanding . . . . . . . 5,561,504 5,443,980
- --------------------------------------------------------------------------------
BASIC EARNINGS PER SHARE BEFORE CUMULATIVE
EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE . . . . . . $ 1.19 $ 0.90
================================================================================
CALCULATION OF DILUTED EARNINGS PER SHARE BEFORE
CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE:
RECONCILIATION OF NUMERATOR:
Net Income before cumulative effect of
change in accounting principle Basic . . . . . $6,627,809 $4,883,478
Effect of 8.25% Convertible debentures *. . . . . 40,366 41,541
- --------------------------------------------------------------------------------
Adjusted numerator Diluted . . . . . . . . . . . . . $6,668,175 $4,925,019
- --------------------------------------------------------------------------------
RECONCILIATION OF DENOMINATOR:
Weighted shares outstanding Basic . . . . . . . . 5,561,504 5,443,980
Effect of dilutive securities *
Warrants. . . . . . . . . . . . . . . . . . 1,524 1,832
8.25% Convertible debentures. . . . . . . . 191,735 197,314
- --------------------------------------------------------------------------------
Adjusted denominator Diluted . . . . . . . . . . . . 5,754,763 5,643,126
- --------------------------------------------------------------------------------
DILUTED EARNINGS PER SHARE BEFORE CUMULATIVE
EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE . . . . . . $ 1.16 $ 0.87
================================================================================
<FN>
* Amounts associated with securities resulting in an anti-dilutive effect on
earnings per share are not included in this calculation.
</FN>
3. COMMITMENTS AND CONTINGENCIES
ENVIRONMENTAL MATTERS
The Company is currently participating in the remediation of three former gas
manufacturing plant sites located in three different jurisdictions. The Company
has accrued liabilities for these three sites referred to respectively as the
Dover Gas Light, Salisbury Town Gas Light and the Winter Haven Coal Gas sites
accordingly. The Company is currently in discussions with the Maryland
Department of the Environment ("MDE") regarding the responsibilities of the
Company with respect to a possible fourth site in Cambridge, Maryland.
The Dover Gas Light Site is a former manufactured gas plant site located in
Dover, Delaware. In May 2001, the Company, General Public Utilities Corporation,
Inc. (now FirstEnergy Corporation), the State of Delaware, the United States
Environmental Protection Agency ("USEPA") and the United States Department of
Justice signed a settlement term sheet to settle complaints brought by the
Company and the United States in 1996 and 1997, respectively, with respect to
the Dover Site. In October 2002, the final Consent Decrees were signed and
delivered to the United States Department of Justice. The Consent Decrees were
lodged simultaneously with the United States District Court for the District of
Delaware and a notice soliciting public comment for a 30-day period was
published in the Federal Register. The public comment period ended April 30,
2003. Depending upon the number and nature of the comments received, the United
States may move the court to enter the Consent Decrees in May 2003.
If the Consent Decrees are approved, the Company would:
o Receive a net payment of $1.15 million from other parties to the
settlement. These proceeds will be passed on to the Company's firm
customers, in accordance with the environmental rate rider.
o Receive a release from liability and covenant not to sue from the USEPA and
the State of Delaware. This will relieve the Company from liability for
future remediation at the site, unless previously unknown conditions are
discovered at the site, or information previously unknown to USEPA is
received that indicates the remedial action related to the prior
manufactured gas plant is not sufficiently protective. The Company
understands that these contingencies are standard, and are required by the
United States in all liability settlements.
At March 31, 2003 the Company had accrued $2.1 million (discounted) of costs
associated with the remediation of the Dover Gas Light 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 USEPA might require.
Upon receiving final court approval of the Consent Decrees, the Company will
reduce both the accrued environmental liability and the associated environmental
regulatory asset to reflect any remaining costs to be incurred under the
settlement.
Through March 31, 2003 the Company has incurred approximately $9.2 million in
costs relating to environmental testing and remedial action studies at the Dover
Gas Light site. Approximately $7.4 million has been recovered through March 31,
2003 from other parties or through rates.
The Salisbury Town Gas Light Site is a former manufactured gas plant site
located in Salisbury, Maryland. In cooperation with the MDE, the Company
performed the following remedial steps: (1) operation of an air sparging/soil
vapor extraction ("AS/SVE") remedial system; (2) monitoring and recovery of
product from recovery wells; and (3) monitoring of ground-water quality. In
March 2002, with MDE's permission, the Company permanently decommissioned the
AS/SVE system and discontinued nearly all on-site and off-site monitoring wells.
In November 2002, the Company submitted a request for a No Further Action
("NFA") for the site. In December 2002, the MDE recommended that the Company
submit work plans to MDE and place deed restrictions on the property as
conditions prior to receiving an NFA. Once these items are completed, the
Company expects that MDE will issue an NFA. The Company is currently preparing
the necessary work plans for submission to MDE.
The Company has adjusted the liability with respect to the Salisbury Town Gas
Light site to $17,000 at March 31, 2003. This amount is based on the estimated
costs to perform limited product monitoring and recovery efforts and fulfill
ongoing reporting requirements. A corresponding regulatory asset has been
recorded, reflecting the Company's belief that costs incurred will be
recoverable in base rates.
Through March 31, 2003, the Company has incurred approximately $2.9 million for
remedial actions and environmental studies at the Salisbury Town Gas Light site.
Of this amount, approximately $1.8 million has been recovered through insurance
proceeds or ratemaking treatment.
The Winter Haven Coal Gas site is located in Winter Haven, Florida. In May 2001,
the Florida Department of Environmental Protection ("FDEP") approved a remedial
action plan that includes the utilization of the AS/SVE technologies to address
ground-water impacts throughout a majority of the site. The AS/SVE construction
was completed in the fourth quarter of 2002 and is now fully operational. The
Company is currently negotiating with FDEP on the extent of additional
investigation and remediation work required to address surface soil,
ground-water and sediment impacts that will not be remediated by the AS/SVE
system. The current estimate of costs to complete the remediation activities at
the site is approximately $657,000 (discounted). Accordingly, at March 31, 2003
the Company has accrued a liability of $657,000. Through March 31, 2003 the
Company has incurred approximately $1.2 million of environmental costs
associated with this site. At March 31, 2003 the Company had collected through
rates $269,000 in excess of costs incurred. A regulatory asset of approximately
$388,000 representing the uncollected portion of the estimated cleanup costs has
also been recorded.
In August 2002, the Company, along with two other parties, met with MDE to
discuss alleged manufactured gas plant contamination at a property located in
Cambridge, Maryland. At that meeting, one of the other parties agreed to perform
a remedial investigation of the site. The possible exposure of the Company at
this site is not known at this time.
It is management's opinion that any un-recovered current costs and any other
future costs associated with each of the four sites discussed above will be
recoverable through future rates or sharing arrangements with other responsible
parties.
OTHER COMMITMENTS AND CONTINGENCIES
The Company's natural gas and propane distribution operations have entered into
contractual commitments to purchase gas from various suppliers. The contracts
have various expiration dates. In 2000, the Company entered into a long-term
contract with an energy marketing and risk management company to manage a
portion of the Company's natural gas transportation and storage capacity. That
contract expires on October 31, 2003. The Company expects to replace the
contract with a similar agreement. A vendor has not yet been selected.
The Company has issued corporate guarantees to certain vendors of its propane
wholesale marketing subsidiary. The guarantees at March 31, 2003 totaled $4.5
million and expire on various dates through February 2004.
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 Financial Accounting Standards Board 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. RECENT AUTHORITATIVE PRONOUNCEMENTS ON FINANCIAL REPORTING AND ACCOUNTING
The FASB adopted SFAS No. 146, "Accounting for Costs Associated with Exit or
Disposal Activities" in June 2002. It requires that a liability for a cost
associated with an exit or disposal activity be recognized when a liability is
incurred. Under previous guidelines, a liability for an exit cost was recognized
at the date of an entity's commitment to an exit plan. Should the Company enter
into an exit plan, SFAS No. 146 will be applied prospectively.
On October 25, 2002, the EITF rescinded Issue No. 98-10 ("EITF 98-10"),
"Accounting for Contracts Involved in Energy Trading and Risk Management
Activities." The Company's interpretation of EITF 98-10 is consistent with the
current rules that are being applied under SFAS No. 133; therefore, management
does not believe that rescinding EITF 98-10 will impact its financial position
or results of operations.
FASB Interpretation ("FIN") No. 45, "Guarantor's Accounting and Disclosure
Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of
Others," was adopted in November 2002. The Company has adopted FIN No. 45. There
was no impact on the financial statements; however, the disclosures in the
Commitments and Contingencies footnote (Note 3) were expanded to include all
required information.
FIN No. 46, "Consolidation of Variable Interest Entities," was adopted in
January 2003. Chesapeake does not currently have any investments in variable
interest entities and, therefore, FIN No. 46 has not impacted the Company.
5. ADOPTED PRONOUNCEMENTS
Chesapeake adopted SFAS No. 143, "Accounting for Asset Retirement Obligations,"
as of January 1, 2003. The Company's regulated operations are allowed by the
regulatory bodies to recover the costs of retiring its long-lived assets through
the approved depreciation rates. This is sometimes referred to as negative
salvage value. Under the pronouncement, the Company was required to record the
portion of depreciation that represents negative salvage value as a liability on
its financial statements. Previously, it was included in accumulated
depreciation. There was no impact on the earnings of the Company. At March 31,
2003, accumulated depreciation was reduced by $12.5 million and the liability
for accumulated negative salvage value was increased by $12.5 million to reflect
the change.
6. SEGMENT INFORMATION
Chesapeake uses the management approach to identify operating segments.
Chesapeake organizes its business around differences in products or services and
the operating results of each segment are regularly reviewed by the Company's
chief operating decision maker in order to make decisions about resources and to
assess performance. The following table presents information about the Company's
reportable segments.
- --------------------------------------------------------------------------------
FOR THE THREE MONTHS ENDED MARCH 31, 2003 2002
- --------------------------------------------------------------------------------
OPERATING REVENUES, UNAFFILIATED CUSTOMERS
Natural gas distribution and transmission . . . $ 40,469,025 $ 31,578,956
Propane . . . . . . . . . . . . . . . . . . . . 20,247,027 11,212,440
Advanced information services . . . . . . . . . 3,233,417 3,059,256
Water services. . . . . . . . . . . . . . . . . 2,847,591 2,791,601
Other . . . . . . . . . . . . . . . . . . . . . (22,580) 0
- --------------------------------------------------------------------------------
Total operating revenues, unaffiliated customers. $ 66,774,480 $ 48,642,253
================================================================================
INTERSEGMENT REVENUES (1)
Natural gas distribution and transmission . . . $ 17,457 $ 17,458
Advanced information services . . . . . . . . . 37,834 0
Water services. . . . . . . . . . . . . . . . . 2,772 0
Other . . . . . . . . . . . . . . . . . . . . . 199,999 184,670
- --------------------------------------------------------------------------------
Total intersegment revenues . . . . . . . . . . . $ 258,062 $ 202,128
================================================================================
PRE-TAX OPERATING INCOME
Natural gas distribution and transmission . . . $ 7,536,433 $ 6,327,793
Propane . . . . . . . . . . . . . . . . . . . . 4,885,482 2,806,032
Advanced information services . . . . . . . . . 62,333 (72,016)
Water services. . . . . . . . . . . . . . . . . (266,095) (206,385)
Other and eliminations. . . . . . . . . . . . . 82,709 90,929
- --------------------------------------------------------------------------------
TOTAL PRE-TAX OPERATING INCOME. . . . . . . . . . 12,300,862 8,946,353
Less operating income taxes . . . . . . . . . . (4,266,494) (3,039,429)
- --------------------------------------------------------------------------------
TOTAL OPERATING INCOME. . . . . . . . . . . . . . $ 8,034,368 $ 5,906,924
================================================================================
<FN>
(1) All significant intersegment revenues are billed at market rates and
have been eliminated from consolidated revenues.
</FN>
- --------------------------------------------------------------------------------
MARCH 31, DECEMBER 31,
2003 2002
- --------------------------------------------------------------------------------
IDENTIFIABLE ASSETS
Natural gas distribution and transmission . . . $ 168,016,602 $153,609,232
Propane . . . . . . . . . . . . . . . . . . . . 37,429,825 37,737,882
Advanced information services . . . . . . . . . 2,634,273 2,734,188
Water services. . . . . . . . . . . . . . . . . 6,988,620 7,197,328
Other . . . . . . . . . . . . . . . . . . . . . 7,113,510 9,665,544
- --------------------------------------------------------------------------------
Total identifiable assets . . . . . . . . . . . . $ 222,182,830 $210,944,174
================================================================================
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
BUSINESS DESCRIPTION
Chesapeake Utilities Corporation (the "Company" or "Chesapeake") is a
diversified utility company engaged in natural gas distribution and
transmission, propane distribution and marketing, advanced information services,
water 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, advanced information services and water
conditioning and treatment.
Chesapeake is reevaluating its water strategy. An outside consultant has been
engaged to review the performance of each unit and develop an improvement plan.
The Company is also considering selling one or all of the units, either
individually or as a group.
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. During the first three months
of 2003, net cash provided by operating activities, net cash used by investing
activities and net cash used by financing activities were approximately $13.9
million, $1.4 million and $12.7 million, respectively.
The Board of Directors has authorized the Company to borrow up to $35.0 million
of short-term debt from various banks and trust companies. As of March 31, 2003,
Chesapeake had four unsecured bank lines of credit with three financial
institutions, totaling $75.0 million, for short-term cash needs to meet seasonal
working capital requirements and to temporarily fund portions of its capital
expenditures. One of the bank lines, totaling $15.0 million, is committed. The
other three lines are subject to the banks' availability of funds. In the first
three months of 2003, cash provided by operations was adequate to fund capital
expenditures and the reduction in short-term debt outstanding. At March 31,
2003, the debt outstanding under these lines was $500,000, compared to $10.9
million at December 31, 2002.
During the three-month periods ended March 31, 2003 and 2002, capital
expenditures were approximately $1.9 million and $3.1 million, respectively.
Chesapeake has budgeted $16.5 million for capital expenditures during 2003. This
amount includes $12.1 million for natural gas distribution and transmission,
$2.3 million for propane distribution and marketing, $237,000 for advanced
information services, $1.2 million for water services and $451,000 for other
operations. The natural gas distribution and transmission expenditures are for
expansion and improvement of facilities. The propane expenditures are to support
customer growth and for the replacement of equipment. The advanced information
services expenditures are for computer hardware, software and related equipment.
Expenditures for water services include expenditures to support customer growth
and replace equipment. The other budget represents general plant, computer
software and hardware. Financing for the 2003 capital expenditure program is
expected to be provided from short-term borrowing and cash provided by operating
activities. The capital expenditure program is subject to continuous review and
modification. Actual capital requirements may vary from the above estimates due
to a number of factors including acquisition opportunities, changing economic
conditions, customer growth in existing areas, regulation, availability of
capital and new growth opportunities.
The Company has budgeted $202,000 for capital expenditures in 2003 related to
environmental remediation projects, and expects to make additional expenditures
in future years. Management does not expect any such expenditures or 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 March 31, 2003 common equity represented 50.1 percent of total
capitalization, compared to 47.6 percent as of December 31, 2002. Combining
short-term financing with total capitalization, the equity component would have
been 48.7 percent and 43.0 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 expense for the first quarter of 2003 increased approximately $231,000,
or 19 percent, over the same period in 2002. The increase reflects the increase
in the average long-term debt balance caused by the placement of $30.0 million
completed in October 2002. The average long-term debt balance in the first
quarter of 2003 was $76.0 million with an average interest rate of 7.26 percent,
compared to $50.4 million with an average interest rate of 7.61 percent in the
first quarter of 2002. The increase in long-term debt was partially offset by a
reduction in the average short-term borrowing balance, which decreased from
$37.8 million in the first quarter of 2002 to $7.8 million in the first quarter
of 2003. The average interest rate for short-term borrowing dropped from 2.35
percent for the first quarter of 2002 to 1.85 percent in the first quarter of
2003.
RESULTS OF OPERATIONS FOR THE QUARTER ENDED MARCH 31, 2003
CONSOLIDATED OVERVIEW
The Company earned net income of $6.6 million, or $1.19 per share, for the first
quarter of 2003 an increase of 36 percent compared to net income before the
cumulative effect of change in accounting principle of $4.9 million, or $0.90
per share for the corresponding period in 2002. The improved results reflect the
continued strong performance of the regulated operations and the performance
improvement initiatives undertaken at the propane distribution operations.
Results for both the natural gas distribution and propane distribution
operations on the Delmarva Peninsula benefited from first quarter temperatures
(measured in heating degree days) that were 13 percent colder than the 10-year
average and 28 percent colder than for the same period in 2002.
Chesapeake adopted SFAS No. 142 "Goodwill and Other Intangible Assets") in the
first quarter of 2002. As a result, a non-cash charge for goodwill impairment of
$1.9 million, after tax, was recorded as the cumulative effect of a change in
accounting principle. After giving effect to this charge, earnings per share for
the first quarter of 2002 were $0.55.
The following discussions of the segment results use pre-tax operating income as
the basis for their performance. The Company's Consolidated Statements of Income
show "operating income" net of operating income taxes. This is a traditional
presentation for the utility industry. However, in other industries it is more
common to present operating income before operating income taxes. To be
consistent with other industries, our segment results have been shown pre-tax. A
reconciliation to net income is presented in the following table.
- ----------------------------------------------------------------------------------------------
FOR THE THREE MONTHS ENDED MARCH 31, 2003 2002 CHANGE
- ----------------------------------------------------------------------------------------------
Pre-tax Operating Income (Loss)
Natural Gas Distribution & Transmission. . . . . . $ 7,536,433 $ 6,327,793 $1,208,640
Propane. . . . . . . . . . . . . . . . . . . . . . 4,885,482 2,806,032 2,079,450
Advanced Information Services. . . . . . . . . . . 62,333 (72,016) 134,349
Water Services . . . . . . . . . . . . . . . . . . (266,095) (206,385) (59,710)
Other & Eliminations . . . . . . . . . . . . . . . 82,709 90,929 (8,220)
- ----------------------------------------------------------------------------------------------
Pre-tax Operating Income . . . . . . . . . . . . . . 12,300,862 8,946,353 3,354,509
Operating Income Taxes . . . . . . . . . . . . . . . 4,266,494 3,039,429 1,227,065
Interest . . . . . . . . . . . . . . . . . . . . . . 1,465,850 1,234,496 231,354
Non-Operating Income, net. . . . . . . . . . . . . . 59,291 211,050 (151,759)
- ----------------------------------------------------------------------------------------------
Net Income before cumulative effect of
change in accounting principle . . . . . . . . . . . 6,627,809 4,883,478 1,744,331
Cumulative effect of change in accounting principle. 0 (1,916,000) 1,916,000
- ----------------------------------------------------------------------------------------------
Net Income . . . . . . . . . . . . . . . . . . . . . $ 6,627,809 $ 2,967,478 $3,660,331
==============================================================================================
NATURAL GAS DISTRIBUTION AND TRANSMISSION
The natural gas distribution and transmission segment earned pre-tax operating
income of $7.5 million for the first quarter of 2003 compared to $6.3 million
for the corresponding period last year, an increase of $1.2 million.
- ----------------------------------------------------------------------------------------------
FOR THE THREE MONTHS ENDED MARCH 31, 2003 2002 CHANGE
- ----------------------------------------------------------------------------------------------
Revenue. . . . . . . . . . . . . . . . . . . . . . . $40,486,482 $31,596,414 $8,890,068
Cost of gas. . . . . . . . . . . . . . . . . . . . . 25,901,598 18,818,455 7,083,143
- ----------------------------------------------------------------------------------------------
Gross margin . . . . . . . . . . . . . . . . . . . . 14,584,884 12,777,959 1,806,925
Operations & maintenance . . . . . . . . . . . . . . 4,579,807 4,115,475 464,332
Depreciation & amortization. . . . . . . . . . . . . 1,660,145 1,619,100 41,045
Other taxes. . . . . . . . . . . . . . . . . . . . . 808,499 715,591 92,908
- ----------------------------------------------------------------------------------------------
Pre-tax operating expenses . . . . . . . . . . . . . 7,048,451 6,450,166 598,285
- ----------------------------------------------------------------------------------------------
Total Pre-tax Operating Income . . . . . . . . . . . $ 7,536,433 $ 6,327,793 $1,208,640
==============================================================================================
Gross margins for the Delaware and Maryland distribution divisions increased
$1.4 million from 2002. Temperatures for the quarter were colder than 2002 (569
heating degree-days) and the 10-year average (303 heating degree-days). The
Company estimates that, on an annual basis, for each heating degree-day variance
from the 10-year average, margins change by $1,560. An increase in the average
number of customers also contributed to the increase. Delaware and Maryland
experienced an increase of 2,150 residential customers, or 6.3 percent, in the
first quarter of 2003 compared to 2002. The Company estimates that each
residential customer added contributes $260 annually to earnings before
interest, taxes, depreciation and amortization.
Gross margins for the Florida distribution operations were also up $320,000, due
to increased deliveries to residential customers. The transmission operation's
margins increased by $37,000.
The margin increases were partially offset by higher operating expenses,
primarily operations and maintenance expenses and other taxes that relate to the
increased volumes and earnings.
PROPANE
For the first quarter of 2003, the propane segment earned a pre-tax operating
profit of $4.9 million compared to $2.8 million for the first quarter of 2002,
an increase of $2.1 million.
- ----------------------------------------------------------------------------------------------
FOR THE THREE MONTHS ENDED MARCH 31, 2003 2002 CHANGE
- ----------------------------------------------------------------------------------------------
Revenue. . . . . . . . . . . . . . . . . . . . . . . $20,247,027 $11,212,440 $9,034,587
Cost of sales. . . . . . . . . . . . . . . . . . . . 11,285,096 4,750,126 6,534,970
- ----------------------------------------------------------------------------------------------
Gross margin . . . . . . . . . . . . . . . . . . . . 8,961,931 6,462,314 2,499,617
Operations & maintenance . . . . . . . . . . . . . . 3,462,207 2,999,532 462,675
Depreciation & amortization. . . . . . . . . . . . . 384,904 398,233 (13,329)
Other taxes. . . . . . . . . . . . . . . . . . . . . 229,338 258,517 (29,179)
- ----------------------------------------------------------------------------------------------
Pre-tax operating expenses . . . . . . . . . . . . . 4,076,449 3,656,282 420,167
- ----------------------------------------------------------------------------------------------
Total Pre-tax Operating Income . . . . . . . . . . . $ 4,885,482 $ 2,806,032 $2,079,450
==============================================================================================
Margins for the propane segment increased by $2.5 million, primarily due to
increased margins of $2.1 million for the Delmarva distribution operations.
Volumes sold for the first quarter increased 2.5 million gallons or 30 percent.
Temperatures for the quarter were colder than 2002 (569 heating degree-days) and
the 10-year average (303 heating degree-days). The Company estimates that on an
annual basis, for each heating degree-day variance from the 10-year average,
margins change by $1,687. Additionally, the margins per gallon have improved by
$0.03, further enhancing margins. The Florida propane distribution operation
increased their pre-tax operating income by $240,000 for the first quarter, of
which $192,000 related to a non-recurring service project.
The Company's propane wholesale marketing operation in Houston experienced an
increase in margins of $170,000 and an increase of $160,000 in pre-tax operating
income. Greater volatility in wholesale prices during the first quarter of 2003
created additional opportunities for improved margins.
ADVANCED INFORMATION SERVICES
The advanced information services business contributed a pre-tax operating
income of $62,000 for the first quarter of 2003 compared to a loss of $72,000
for the first quarter of last year.
- ----------------------------------------------------------------------------------------------
FOR THE THREE MONTHS ENDED MARCH 31, 2003 2002 CHANGE
- ----------------------------------------------------------------------------------------------
Revenue. . . . . . . . . . . . . . . . . . . . . . . $ 3,271,251 $ 3,059,256 $ 211,995
Cost of sales. . . . . . . . . . . . . . . . . . . . 1,891,252 1,618,812 272,440
- ----------------------------------------------------------------------------------------------
Gross margin . . . . . . . . . . . . . . . . . . . . 1,379,999 1,440,444 (60,445)
Operations & maintenance . . . . . . . . . . . . . . 1,110,846 1,277,602 (166,756)
Depreciation & amortization. . . . . . . . . . . . . 50,113 56,370 (6,257)
Other taxes. . . . . . . . . . . . . . . . . . . . . 156,707 178,488 (21,781)
- ----------------------------------------------------------------------------------------------
Pre-tax operating expenses . . . . . . . . . . . . . 1,317,666 1,512,460 (194,794)
- ----------------------------------------------------------------------------------------------
Total Pre-tax Operating Income (Loss). . . . . . . . $ 62,333 ($72,016) $ 134,349
==============================================================================================
Although this segment continues to be adversely affected by the nation's
economic slowdown as discretionary consulting projects have been postponed or
cancelled, cost reduction measures and targeted marketing have allowed the
advanced information services segment to remain profitable.
WATER SERVICES
Water services experienced a pre-tax operating loss of $266,000 for the first
quarter of 2003, compared to a loss of $206,000 for the same period in 2002.
- ----------------------------------------------------------------------------------------------
FOR THE THREE MONTHS ENDED MARCH 31, 2003 2002 CHANGE
- ----------------------------------------------------------------------------------------------
Revenue. . . . . . . . . . . . . . . . . . . . . . . $ 2,850,363 $ 2,791,601 $ 58,762
Cost of sales. . . . . . . . . . . . . . . . . . . . 1,127,552 1,114,972 12,580
- ----------------------------------------------------------------------------------------------
Gross margin . . . . . . . . . . . . . . . . . . . . 1,722,811 1,676,629 46,182
Operations & maintenance . . . . . . . . . . . . . . 1,636,748 1,571,112 65,636
Depreciation & amortization. . . . . . . . . . . . . 226,910 196,209 30,701
Other taxes. . . . . . . . . . . . . . . . . . . . . 125,248 115,693 9,555
- ----------------------------------------------------------------------------------------------
Pre-tax operating expenses . . . . . . . . . . . . . 1,988,906 1,883,014 105,892
- ----------------------------------------------------------------------------------------------
Total Pre-tax Operating Loss . . . . . . . . . . . . ($266,095) ($206,385) ($59,710)
==============================================================================================
An increase in margins of $46,000 was more than offset by an increase in
operating expenses of $106,000. During the first quarter of 2003 a management
office and a branch office were closed and overhead trimmed. Chesapeake is
reevaluating its water strategy. An outside consultant has been engaged to
review the performance of each unit and develop an improvement plan. The Company
is also considering selling one or all of the units, either individually or as a
group.
OTHER BUSINESS OPERATIONS
Other operations and eliminations contributed pre-tax operating income of
$83,000 for the first quarter of 2003 compared to $91,000 for the first quarter
of last year. Other operations consist primarily of subsidiaries that own real
estate leased to other Company subsidiaries.
- ----------------------------------------------------------------------------------------------
FOR THE THREE MONTHS ENDED MARCH 31, 2003 2002 CHANGE
- ----------------------------------------------------------------------------------------------
Revenue. . . . . . . . . . . . . . . . . . . . . . . $ 177,419 $ 184,670 ($7,251)
Cost of sales. . . . . . . . . . . . . . . . . . . . 0 0 0
- ----------------------------------------------------------------------------------------------
Gross margin . . . . . . . . . . . . . . . . . . . . 177,419 184,670 (7,251)
Operations & maintenance . . . . . . . . . . . . . . 27,432 22,328 5,104
Depreciation & amortization. . . . . . . . . . . . . 59,529 56,438 3,091
Other taxes. . . . . . . . . . . . . . . . . . . . . 14,199 14,975 (776)
- ----------------------------------------------------------------------------------------------
Pre-tax operating expenses . . . . . . . . . . . . . 101,160 93,741 7,419
- ----------------------------------------------------------------------------------------------
Pre-tax Operating Income Other . . . . . . . . . . . 76,259 90,929 (14,670)
Pre-tax Operating Income Eliminations. . . . . . . . 6,450 0 6,450
- ----------------------------------------------------------------------------------------------
Total Pre-tax Operating Income . . . . . . . . . . . $ 82,709 $ 90,929 ($8,220)
==============================================================================================
OPERATING INCOME TAXES
Income taxes were higher due to the increase in the operating income for the
current quarter.
INTEREST EXPENSE
Interest for the first quarter of 2003 increased approximately $231,000, or 19
percent, over the same period in 2002. The increase resulted from the issuance
of $30.0 million of long-term debt in October 2002 at an interest rate of 6.64
percent. The proceeds from this debt issuance were used to repay $30.0 million
of short-term borrowings that were carrying lower rates. The short-term rates
fluctuate daily.
The average long-term debt balance in the first quarter of 2003 was $76.0
million with an average interest rate of 7.26 percent, compared to $50.4 million
with an average interest rate of 7.61 percent in the first quarter of 2002. The
average borrowing balance for short-term debt decreased from $37.8 million in
the first quarter of 2002 to $7.8 million in the first quarter of 2003. The
average interest rate for short-term borrowing dropped from 2.35 percent in the
first quarter of 2002 to 1.85 percent in the first quarter of 2003.
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. 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. The
Company is in discussions with the Maryland Department of the Environment
regarding a fourth site located in Cambridge, Maryland. The outcome of this
matter cannot be determined at this time. See Note 3 to the Consolidated
Financial Statements for further information.
OTHER MATTERS
REGULATORY MATTERS
The Delaware, Maryland and Florida Public Service Commissions regulate the
Company's natural gas distribution operations, while the natural gas
transmission operation is regulated by the Federal Energy Regulatory Commission
("FERC").
On August 2, 2001, the Delaware Division filed a general rate increase
application. Interim rates, subject to refund, went into effect on October 1,
2001. The Delaware Public Service Commission approved a settlement agreement for
Phase I of the Rate Increase Application in April 2002. Phase I should result in
an increase in rates of approximately $380,000 per year. Phase II of the filing
was approved by the Delaware Public Service Commission in November 2002. Phase
II should result in an additional increase in rates of approximately $90,000.
Phase II also reduces the Company's sensitivity to warmer than normal weather by
changing the minimum customer charge and the margin sharing arrangement for
interruptible sales, off system sales and capacity release income.
On October 31, 2001, Eastern Shore Natural Gas Company, the Company's natural
gas transmission subsidiary, filed a rate change with the FERC pursuant to the
requirements of the Stipulation and Agreement dated August 1, 1997. Following
settlement conferences held in May 2002, the parties reached a settlement in
principle on or about May 23, 2002 to resolve all issues related to its rate
case.
The Offer of Settlement and the Stipulation and Agreement were finalized and
filed with the FERC on August 2, 2002. The agreement provides that Eastern
Shore's rates will be based on a cost of service of $12.9 million per year. Cost
savings estimated at $456,000 will be passed on to firm transportation
customers. Initial comments supporting the settlement agreement were filed by
the FERC staff and by Eastern Shore. No adverse comments were filed. The
Presiding Judge certified the Offer of Settlement to the FERC as uncontested on
August 27, 2002. On October 10, 2002, the FERC issued an Order approving the
Offer of Settlement and the Stipulation and Agreement. Settlement rates went
into effect on December 1, 2002.
During October 2002, Eastern Shore filed for recovery of gas supply realignment
costs associated with the implementation of FERC Order No. 636. The costs
totaled $196,000 (including interest). It is uncertain at this time when the
FERC will consider this matter or the ultimate outcome.
On March 29, 2002, the Florida division filed tariff revisions with the Florida
PSC to complete the unbundling process by requiring all customers, including
residential, to migrate to transportation service and authorize the Florida
division to exit the merchant function. Transportation services were already
available to all non-residential customers. On November 5, 2002, the Florida PSC
approved the Company's request for the first phase of the unbundling process, as
a pilot program, for a minimum two-year period. The Company began implementing
the program in November 2002 and must submit an interim report for review by the
Florida PSC after one year. As a part of this pilot program, the Company expects
to submit several filings during 2003 to address transition costs, the
disposition of the un-recovered gas cost balances, the implementation of the
operational balancing account and the level of base rates.
COMPETITION
The Company's natural gas operations compete with other forms of energy
including 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 oil prices
decline, these interruptible customers convert to oil to satisfy their fuel
requirements. Lower levels in interruptible sales occur when oil prices are
lower relative to the price of natural gas. 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. 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 business' conversion to open access, this business has shifted from
providing competitive sales service to providing transportation and contract
storage services.
The Company's natural gas distribution operations located in Maryland, Delaware
and Florida offer transportation services to certain industrial customers. In
2001, the Florida operation extended transportation service to commercial
customers and, in 2002 to residential customers. With transportation services
now available on the Company's distribution systems, the Company is competing
with third party suppliers to sell gas to industrial customers. The Company's
competitors include the interstate transmission company if the distribution
customer is located close enough to the transmission company's pipeline to make
a connection economically feasible. The customers at risk are usually large
volume commercial and industrial customers with the financial resources and
capability to bypass the distribution operations in this manner. In certain
situations, the distribution operations may adjust services and rates for these
customers to retain their business. The Company expects to continue to expand
the availability of transportation services to additional classes of
distribution customers in the future. The Company established a natural gas
sales and supply operation in Florida in 1994 to compete for customers eligible
for transportation services.
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 several large national propane distribution
companies, as well as an increasing number of local suppliers. Some of these
competitors have pricing strategies designed to acquire market share.
The Company's advanced information services segment faces competition from a
number of competitors, many of which have greater resources available to them
than those of the Company. This segment competes on the basis of technological
expertise, reputation and price.
The water services segment faces competition from a variety of national and
local suppliers of water conditioning and treatment services and bottled water.
This segment competes on the basis of marketing expertise, promotions and price.
RECENT PRONOUNCEMENTS
The FASB adopted SFAS No. 146, "Accounting for Costs Associated with Exit or
Disposal Activities" in June 2002. It requires that a liability for a cost
associated with an exit or disposal activity be recognized when a liability is
incurred. Under previous guidelines, a liability for an exit cost was recognized
at the date of an entity's commitment to an exit plan. Should the Company enter
into an exit plan, SFAS No. 146 will be applied prospectively.
On October 25, 2002, the EITF rescinded Issue No. 98-10 ("EITF 98-10"),
"Accounting for Contracts Involved in Energy Trading and Risk Management
Activities." The Company's interpretation of EITF 98-10 is consistent with the
current rules that are being applied under SFAS No. 133; therefore, management
does not believe that rescinding EITF 98-10 will impact its financial position
or results of operations.
FASB Interpretation ("FIN") No. 45, "Guarantor's Accounting and Disclosure
Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of
Others," was adopted in November 2002. The Company has adopted FIN No. 45. There
was no impact on the financial statements; however, the disclosures in the
Commitments and Contingencies footnote (Note 3) were expanded to include all
required information.
FIN No. 46, "Consolidation of Variable Interest Entities," was adopted in
January 2003. Chesapeake does not currently have any investments in variable
interest entities and, therefore, FIN No. 46 has not impacted the Company.
INFLATION
Inflation affects the cost of labor, products and services required for
operation, maintenance and capital improvements. While the impact of inflation
has remained low 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
Chesapeake has made statements in this report that are considered to be
forward-looking statements. These 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 wholesale
marketing operation, competition 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:
o the temperature sensitivity of the natural gas and propane businesses;
o the effect of spot, forward and futures market prices on the Company's
distribution, wholesale marketing and energy trading businesses; o the
effects of competition on the Company's unregulated and regulated
businesses;
o the effect of changes in federal, state or local regulatory and tax
requirements, including deregulation;
o the effect of accounting changes;
o the effect of compliance with environmental regulations or the remediation
of environmental damage;
o the effects of general economic conditions on the Company and its
customers;
o the ability of the Company's new and planned facilities and acquisitions to
generate expected revenues; and
o 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. Long-term debt is subject to potential losses based on the
change in interest rates. The Company's long-term debt consists primarily of
fixed rate senior notes, first mortgage bonds and convertible debentures, none
of which was issued for trading purposes. The carrying value of long-term debt
at March 31, 2003 was $76.0 million, with a fair value of $91.8 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 distribution business is exposed to market risk as a
result of propane storage activities and entering into fixed price contracts for
supply. The Company can store up to approximately 4 million gallons (including
leased storage) of propane during the winter season to meet its customers' peak
requirements and to serve metered customers. Decreases in the wholesale price of
propane will cause the value of stored propane to decline. To mitigate the
impact of price fluctuations, the Company has adopted a risk management policy
that allows the propane distribution operation to enter into fair value hedges
of its inventory. At March 31, 2003, 840,000 gallons of propane were hedged.
That amount of propane in inventory was expected to be sold to distribution
customers in April 2003 and the hedging instrument matured in April 2003. The
hedge was efficient and therefore, no net gain or loss was recorded.
The Company's propane wholesale marketing operation is a party to natural gas
liquids ("NGL") forward contracts, primarily propane contracts, with various
third parties. These contracts require that the propane wholesale marketing
operation 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 Company or
the counter party or booking out the transaction. (Booking out is a procedure
for financially settling a contract in lieu of the physical delivery of energy.)
The propane wholesale marketing operation 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 or receipt of a net amount equal to
the difference between the current market price of the futures contract and the
original contract price; however, they may also be settled for physical receipt
or delivery of propane.
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 the credit risk of counter-parties, 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 March 31, 2003 is presented in
the following table. All of the contracts mature within twelve months.
- ------------------------------------------------------------------------
QUANTITY ESTIMATED WEIGHTED AVERAGE
AT MARCH 31, 2003 IN GALLONS MARKET PRICES CONTRACT PRICES
- ------------------------------------------------------------------------
FORWARD CONTRACTS
Sale. . . . . . . . . 7,854,000 $0.4900 - $0.5175 $0.5904
Purchase. . . . . . . 4,914,000 $0.4900 - $0.5150 $0.5487
FUTURES CONTRACTS
Sale. . . . . . . . . 630,000 $0.4900 - $0.5075 $0.5644
Purchase. . . . . . . 714,000 $0.4900 - $0.5075 $0.6906
- ------------------------------------------------------------------------
<FN>
Estimated market prices and weighted average contract prices are
in dollars per gallon.
</FN>
ITEM 4. CONTROLS AND PROCEDURES
EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES.
The Chief Executive Officer and Chief Financial Officer of the Company, with the
participation of other Company officials, have evaluated the Company's
"disclosure controls and procedures", (as such term is defined under Rule
13a-14(c) promulgated under the Securities Exchange Act of 1934, as amended)
within 90 days prior to the filing date of this report. Based upon their
evaluation, the Chief Executive Officer and Chief Financial Officer concluded
that the Company's disclosure controls and procedures are effective.
CHANGES IN INTERNAL CONTROLS.
There have been no significant changes in the Company's internal controls or in
other factors that could significantly affect these controls subsequent to the
date of the evaluation referenced above, including corrective actions with
regard to significant deficiencies or material weaknesses.
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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
(a) Exhibits:
Exhibit 99.1 - Certificate of Chief Executive Officer of
Chesapeake Utilities Corporation pursuant to 18 U.S.C
Section 1350, dated May 15, 2003
Exhibit 99.2 - Certificate of Chief Financial Officer of
Chesapeake Utilities Corporation pursuant to 18 U.S.C
Section 1350, dated May 15, 2003
(b) Reports on Form 8-K:
Earnings press release dated May 12, 2003
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: May 15, 2003
CERTIFICATIONS
I, John R. Schimkaitis, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Chesapeake Utilities
Corporation;
2. Based on my knowledge, this report does not contain any untrue statement of
a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this
quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report ("Evaluation Date");
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of the registrant's board of directors (or persons performing the
equivalent function);
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weakness in
internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: May 15, 2003
/s/ John R. Schimkaitis
- --------------------------
John R. Schimkaitis
President and Chief Executive Officer
I, Michael P. McMasters, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Chesapeake Utilities
Corporation;
2. Based on my knowledge, this report does not contain any untrue statement of
a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this
quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report ("Evaluation Date");
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of the registrant's board of directors (or persons performing the
equivalent function);
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weakness in
internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: May 15, 2003
/s/ Michael P. McMasters
- ---------------------------
Michael P. McMasters
Vice President, Treasurer and Chief Financial Officer