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, 2004
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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 [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes [X] No [ ]
Common Stock, par value $.4867 - 5,708,077 shares issued as of March 31, 2004.
TABLE OF CONTENTS
PART I - FINANCIAL INFORMATION. . . . . . . . . . . . . . . . . . . . . . 1
Item 1. Financial Statements. . . . . . . . . . . . . . . . . . . . . 1
Notes to Condensed Consolidated Financial Statements . . . . . . . . 7
1. Quarterly Financial Data . . . . . . . . . . . . . . . . . . . . 7
2. Calculation of Earnings Per Share. . . . . . . . . . . . . . . 9
3. Commitments and Contingencies. . . . . . . . . . . . . . . . . . 9
Environmental Matters . . . . . . . . . . . . . . . . . . . . . 9
Other Commitments and Contingencies . . . . . . . . . . . . .10
4. Recent Authoritative Pronouncements
on Financial Reporting and Accounting. . . . . . . . . . . . .11
5. Segment Information . . . . . . . . . . . . . . . . . . . . . . .12
6. Discontinued Operations . . . . . . . . . . . . . . . . . . . . .13
7. Employee Benefit Plans . . . . . . . . . . . . . . . . . . . . .14
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations. . . . . . . . . . . .14
Business Description . . . . . . . . . . . . . . . . . . . . . . . . .14
Financial Position, Liquidity and Capital Resources . . . . . . . . .14
Off-Balance Sheet Arrangements and Contractual Obligations. . . . . . .15
Results of Operations for the Quarter
Ended March 31, 2004 . . . . . . . . . . . . . . . . . . . . . . . . .16
Consolidated Overview. . . . . . . . . . . . . . . . . . . . . . . . .16
Natural Gas Distribution and Transmission . . . . . . . . . . . . .17
Propane. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
Advanced Information Services. . . . . . . . . . . . . . . . . . . . 18
Other Business Operations and Eliminations . . . . . . . . . . . . 18
Discontinued Operations . . . . . . . . . . . . . . . . . . . . . . . 18
Income Taxes. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
Interest Expense. . . . . . . . . . . . . . . . . . . . . . . . . . . 19
Environmental Matters . . . . . . . . . . . . . . . . . . . . . . . . 19
Other Matters . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
Regulatory Matters. . . . . . . . . . . . . . . . . . . . . . . . . . 19
Competition. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
Recent Pronouncements . . . . . . . . . . . . . . . . . . . . . . . . 22
Inflation. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
Cautionary Statement. . . . . . . . . . . . . . . . . . . . . . . . . 23
Item 3. Quantitative and Qualitative Disclosures about Market Risk. . 23
Item 4. Controls and Procedures. . . . . . . . . . . . . . . . . . .24
Evaluation of Disclosure Controls and Procedures. . . . . . . . . 24
Changes in Internal Controls. . . . . . . . . . . . . . . . . . . . 24
PART II - OTHER INFORMATION. . . . . . . . . . . . . . . . . . . . . . . 25
SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
EXHIBIT 31.1. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
EXHIBIT 31.2. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
EXHIBIT 32.1. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
EXHIBIT 32.2. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CHESAPEAKE UTILITIES CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
- -------------------------------------------------------------------------------------------
2004 2003
FOR THE THREE MONTHS ENDED MARCH 31, RESTATED
- -------------------------------------------------------------------------------------------
OPERATING REVENUES . . . . . . . . . . . . . . . . . . . . . $ 63,762,360 $ 62,959,514
OPERATING EXPENSES
Cost of sales, excluding costs below . . . . . . . . . . . 40,310,084 38,369,123
Operations . . . . . . . . . . . . . . . . . . . . . . . . 9,254,582 8,915,211
Maintenance. . . . . . . . . . . . . . . . . . . . . . . . 380,570 419,159
Depreciation and amortization. . . . . . . . . . . . . . . 1,810,624 1,736,098
Other taxes. . . . . . . . . . . . . . . . . . . . . . . . 1,307,193 1,208,744
- -------------------------------------------------------------------------------------------
Total operating expenses . . . . . . . . . . . . . . . . . . 53,063,053 50,648,335
- -------------------------------------------------------------------------------------------
OPERATING INCOME . . . . . . . . . . . . . . . . . . . . . . 10,699,307 12,311,179
OTHER INCOME . . . . . . . . . . . . . . . . . . . . . . . . 102,476 53,901
INTEREST CHARGES . . . . . . . . . . . . . . . . . . . . . . 1,326,766 1,465,851
- -------------------------------------------------------------------------------------------
INCOME BEFORE INCOME TAXES . . . . . . . . . . . . . . . . . 9,475,017 10,899,229
INCOME TAXES . . . . . . . . . . . . . . . . . . . . . . . . 3,701,483 4,262,126
- -------------------------------------------------------------------------------------------
INCOME FROM CONTINUING OPERATIONS. . . . . . . . . . . . . . 5,773,534 6,637,103
LOSS FROM DISCONTINUED OPERATIONS, NET
OF TAX OF $18,491 AND $84,720, RESPECTIVELY . . . . . . . (34,335) (162,328)
- -------------------------------------------------------------------------------------------
NET INCOME. . . . . . . . . . . . . . . . . . . . . . . . . . $ 5,739,199 $ 6,474,775
===========================================================================================
EARNINGS PER SHARE OF COMMON STOCK:
BASIC
FROM CONTINUING OPERATIONS . . . . . . . . . . . . . . . $ 1.01 $ 1.19
FROM DISCONTINUED OPERATIONS . . . . . . . . . . . . . . 0.00 (0.03)
- -------------------------------------------------------------------------------------------
NET INCOME . . . . . . . . . . . . . . . . . . . . . . . . . $ 1.01 $ 1.16
===========================================================================================
DILUTED
FROM CONTINUING OPERATIONS . . . . . . . . . . . . . . . $ 0.99 $ 1.16
FROM DISCONTINUED OPERATIONS . . . . . . . . . . . . . . (0.01) (0.03)
- -------------------------------------------------------------------------------------------
NET INCOME . . . . . . . . . . . . . . . . . . . . . . . . . $ 0.98 $ 1.13
===========================================================================================
CASH 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
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
- -------------------------------------------------------------------------------------------
2004 2003
FOR THE THREE MONTHS ENDED MARCH 31, RESTATED
- -------------------------------------------------------------------------------------------
OPERATING ACTIVITIES
Net Income. . . . . . . . . . . . . . . . . . . . . . . . . $ 5,739,199 $ 6,474,775
Adjustments to reconcile net income to net operating cash:
Depreciation and amortization . . . . . . . . . . . . . . 1,810,624 1,963,009
Depreciation and accretion included in other costs. . . . 654,052 652,410
Deferred income taxes, net. . . . . . . . . . . . . . . . (409,568) 723,749
Mark-to-market adjustments. . . . . . . . . . . . . . . . 174,743 324,493
Employee benefits and compensation. . . . . . . . . . . . 191,108 348,401
Other, net. . . . . . . . . . . . . . . . . . . . . . . . 3,796 (13,704)
Changes in assets and liabilities:
Accounts receivable and accrued revenue . . . . . . . . . 840,055 (4,363,079)
Inventories, storage gas and materials. . . . . . . . . . 3,682,437 5,078,231
Prepaid expenses and other current assets . . . . . . . . 666,874 701,957
Other deferred charges. . . . . . . . . . . . . . . . . . 142,298 (19,980)
Accounts payable, net . . . . . . . . . . . . . . . . . . (2,617,501) (430,345)
Refunds payable to customers. . . . . . . . . . . . . . . 22,289 (77,820)
Accrued income taxes. . . . . . . . . . . . . . . . . . . 3,829,922 3,115,409
Accrued interest. . . . . . . . . . . . . . . . . . . . . 981,715 1,020,121
Accrued compensation. . . . . . . . . . . . . . . . . . . (1,694,446) 7,711
Over (under) recovered deferred purchased gas costs . . . 1,967,560 (2,055,549)
Other current liabilities . . . . . . . . . . . . . . . . 524,619 317,721
Other long-term liabilities . . . . . . . . . . . . . . . 68,586 159,724
- -------------------------------------------------------------------------------------------
Net cash provided by operating activities . . . . . . . . . . 16,578,362 13,927,234
- -------------------------------------------------------------------------------------------
INVESTING ACTIVITIES
Property, plant and equipment expenditures, net . . . . . . (2,712,456) (1,935,616)
Sale of discontinued operations . . . . . . . . . . . . . . 40,598 -
Environmental recoveries, net of expenditures . . . . . . . 187,387 524,850
- -------------------------------------------------------------------------------------------
Net cash used by investing activities . . . . . . . . . . . . (2,484,471) (1,410,766)
- -------------------------------------------------------------------------------------------
FINANCING ACTIVITIES
Common stock dividends. . . . . . . . . . . . . . . . . . . (1,556,636) (1,521,983)
Issuance of stock:
Dividend Reinvestment Plan optional cash. . . . . . . . . 54,825 73,021
Dividends reinvested by stockholders. . . . . . . . . . . 191,829 178,775
Retirement Savings Plan . . . . . . . . . . . . . . . . . 271,474 264,173
Conversion of debentures. . . . . . . . . . . . . . . . . 143,779 53,950
Net repayment under line of credit agreements . . . . . . . (3,515,258) (10,400,000)
Repayment of long-term debt . . . . . . . . . . . . . . . . (1,143,979) (1,321,630)
- -------------------------------------------------------------------------------------------
Net cash used by financing activities . . . . . . . . . . . . (5,553,966) (12,673,694)
- -------------------------------------------------------------------------------------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS. . . . . 8,539,925 (157,226)
CASH AND CASH EQUIVALENTS BEGINNING OF PERIOD . . . . . . . . 3,108,501 2,458,276
- -------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS END OF PERIOD . . . . . . . . . . . $ 11,648,426 $ 2,301,050
===========================================================================================
<FN>
The accompanying notes are an integral part of these financial statements.
</FN>
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CHESAPEAKE UTILITIES CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
- ---------------------------------------------------------------------------------------
MARCH 31, DECEMBER 31,
ASSETS 2004 2003
- ---------------------------------------------------------------------------------------
PROPERTY, PLANT AND EQUIPMENT
Natural gas distribution and transmission . . . . . . . $187,775,817 $ 186,661,469
Propane . . . . . . . . . . . . . . . . . . . . . . . . 36,134,138 35,577,104
Advanced information services . . . . . . . . . . . . . 1,419,989 1,396,595
Water services. . . . . . . . . . . . . . . . . . . . . 763,121 762,383
Other plant . . . . . . . . . . . . . . . . . . . . . . 8,824,890 8,796,305
- ---------------------------------------------------------------------------------------
Total property, plant and equipment . . . . . . . . . . 234,917,955 233,193,856
Plus: Construction work in progress. . . . . . . . . . 1,877,862 1,724,721
Less: Accumulated depreciation and amortization. . . . (68,390,472) (67,046,318)
- ---------------------------------------------------------------------------------------
Net property, plant and equipment . . . . . . . . . . . 168,405,345 167,872,259
- ---------------------------------------------------------------------------------------
INVESTMENTS . . . . . . . . . . . . . . . . . . . . . . 392,764 386,710
- ---------------------------------------------------------------------------------------
CURRENT ASSETS
Cash and cash equivalents . . . . . . . . . . . . . . . 11,648,426 3,108,501
Accounts receivable (less allowance for uncollectibles
of $712,029 and $659,047, respectively). . . . . . . 26,096,803 26,191,845
Accrued revenue . . . . . . . . . . . . . . . . . . . . 3,712,141 4,497,752
Materials and supplies, at average cost . . . . . . . . 943,636 923,556
Appliance and other inventory, at FIFO. . . . . . . . . 149,537 173,044
Propane inventory, at average cost. . . . . . . . . . . 2,986,981 3,387,535
Storage gas prepayments . . . . . . . . . . . . . . . . 1,344,145 4,622,601
Underrecovered purchased gas costs. . . . . . . . . . . - 660,601
Income taxes receivable . . . . . . . . . . . . . . . . - 489,841
Deferred income taxes receivable. . . . . . . . . . . . 635,004 -
Prepaid expenses. . . . . . . . . . . . . . . . . . . . 1,276,194 2,069,988
Other current assets. . . . . . . . . . . . . . . . . . 721,135 768,958
- ---------------------------------------------------------------------------------------
Total current assets. . . . . . . . . . . . . . . . . . 49,514,002 46,894,222
- ---------------------------------------------------------------------------------------
DEFERRED CHARGES AND OTHER ASSETS
Environmental regulatory assets . . . . . . . . . . . . 334,192 353,092
Environmental expenditures. . . . . . . . . . . . . . . 176,701 364,088
Goodwill, net . . . . . . . . . . . . . . . . . . . . . 674,451 674,451
Other intangible assets, net. . . . . . . . . . . . . . 301,405 305,213
Long-term receivables . . . . . . . . . . . . . . . . . 1,588,237 1,637,998
Other regulatory assets . . . . . . . . . . . . . . . . 1,615,855 1,693,401
Other deferred charges. . . . . . . . . . . . . . . . . 961,604 983,230
- ---------------------------------------------------------------------------------------
Total deferred charges and other assets . . . . . . . . 5,652,445 6,011,473
- ---------------------------------------------------------------------------------------
TOTAL ASSETS. . . . . . . . . . . . . . . . . . . . . . $223,964,556 $ 221,164,664
=======================================================================================
<FN>
The accompanying notes are an integral part of these financial statements.
</FN>
CHESAPEAKE UTILITIES CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
- ---------------------------------------------------------------------------------------
MARCH 31, DECEMBER 31,
CAPITALIZATION AND LIABILITIES 2004 2003
- ---------------------------------------------------------------------------------------
CAPITALIZATION
Stockholders' equity
Common Stock, par value $.4867 per share;
(authorized 12,000,000 shares; issued and outstanding
5,708,077 and 5,660,594 shares, respectively) . . . . . $ 2,777,861 $ 2,754,748
Additional paid-in capital. . . . . . . . . . . . . . . 35,249,207 34,176,361
Retained earnings . . . . . . . . . . . . . . . . . . . 40,178,289 36,008,246
- ---------------------------------------------------------------------------------------
Total stockholders' equity. . . . . . . . . . . . . . . 78,205,357 72,939,355
Long-term debt, net of current maturities . . . . . . . 68,271,566 69,415,545
- ---------------------------------------------------------------------------------------
Total capitalization. . . . . . . . . . . . . . . . . . 146,476,923 142,354,900
- ---------------------------------------------------------------------------------------
CURRENT LIABILITIES
Current portion of long-term debt . . . . . . . . . . . 3,665,091 3,665,091
Short-term borrowing. . . . . . . . . . . . . . . . . . - 3,515,258
Accounts payable. . . . . . . . . . . . . . . . . . . . 19,379,912 21,997,413
Refunds payable to customers. . . . . . . . . . . . . . 228,871 206,582
Customer deposits . . . . . . . . . . . . . . . . . . . 2,091,627 2,008,379
Income taxes payable. . . . . . . . . . . . . . . . . . 3,340,081 -
Accrued interest. . . . . . . . . . . . . . . . . . . . 1,634,082 652,367
Dividends payable . . . . . . . . . . . . . . . . . . . 1,569,151 1,556,631
Overrecovered purchased gas costs . . . . . . . . . . . 1,306,959 -
Deferred income taxes payable . . . . . . . . . . . . . - 119,814
Accrued compensation. . . . . . . . . . . . . . . . . . 1,254,123 3,266,072
Other accrued liabilities . . . . . . . . . . . . . . . 2,098,892 1,657,523
- ---------------------------------------------------------------------------------------
Total current liabilities . . . . . . . . . . . . . . . 36,568,789 38,645,130
- ---------------------------------------------------------------------------------------
DEFERRED CREDITS AND OTHER LIABILITIES
Deferred income taxes . . . . . . . . . . . . . . . . . 19,936,245 19,590,995
Deferred investment tax credits . . . . . . . . . . . . 480,066 492,725
Environmental liabilities . . . . . . . . . . . . . . . 553,115 562,194
Accrued pension costs . . . . . . . . . . . . . . . . . 2,089,688 2,015,128
Accrued asset removal cost. . . . . . . . . . . . . . . 13,817,708 13,536,209
Other liabilities . . . . . . . . . . . . . . . . . . . 4,042,022 3,967,383
- ---------------------------------------------------------------------------------------
Total deferred credits and other liabilities. . . . . . 40,918,844 40,164,634
- ---------------------------------------------------------------------------------------
COMMITMENTS AND CONTINGENCIES (NOTE 3)
TOTAL CAPITALIZATION AND LIABILITIES. . . . . . . . . . $223,964,556 $ 221,164,664
=======================================================================================
<FN>
The accompanying notes are an integral part of these financial statements.
</FN>
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NOTES TO CONDENSED 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; however, the year-end balance
sheet data has been derived from audited financial statements. In the opinion of
management, this financial information reflects normal recurring adjustments
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.
Chesapeake does not have any of the components of comprehensive income that are
required to be reported by Financial Accounting Standards Board Statement of
Financial Accounting Standards ("SFAS") No. 130, "Reporting Comprehensive
Income." Therefore, net income and comprehensive income for Chesapeake are the
same.
As reported on the Company's December 31, 2003 Annual Report on Form 10-K, the
Company has restated its quarterly financial statements for prior periods in
order to reflect the results of its Delaware and Maryland natural gas divisions
on the "accrual" revenue recognition method rather than the "as billed" revenue
recognition method. This change had an insignificant effect on the Company's
annual results for 2003. Under the "as billed" method, revenues from customer
sales are not recognized until the meter is read. Under the "accrual" method, at
the end of each period, the amount of gas used is estimated and is recognized as
revenue. The Company's Florida division has historically used the "accrual"
method in accordance with Florida Public Service Commission requirements. The
Delaware and Maryland divisions have historically used the "as billed" method to
recognize revenues consistent with the rate-setting processes in those states.
In order to consistently apply the "accrual" method, the Company met separately
with the staffs of the Delaware and Maryland Public Service Commissions to
determine the regulatory impact of the change. Having determined that there is
little to no impact, the Company has conformed the revenue recognition method
used in its Delaware and Maryland divisions to the method used by its Florida
division. In order to provide comparable information, the Company has restated
its 2003 quarterly interim financial statements to reflect the "accrual" revenue
recognition method. Dollars are shown in thousands, except per share amounts.
- --------------------------------------------------------------------------------
MARCH 31, IMPACT OF MARCH 31,
2003 REVENUE 2003
AS PREVIOUSLY RECOGNITION
REPORTED (1) CHANGE AS RESTATED
- --------------------------------------------------------------------------------
SELECTED INCOME STATEMENT INFORMATION
Operating Revenues . . . . . . . . . $ 63,925 ($965) $ 62,960
Operating Income . . . . . . . . . . 12,567 (256) 12,311
Income from Continuing Operations. . 6,790 (153) 6,637
Net Income . . . . . . . . . . . . . 6,628 (153) 6,475
EARNINGS PER SHARE OF COMMON STOCK
Basic
From Continuing Operations . . . . . $ 1.22 ($0.03) $ 1.19
Net Income . . . . . . . . . . . . . $ 1.19 ($0.03) $ 1.16
Diluted
From Continuing Operations . . . . . $ 1.19 ($0.03) $ 1.16
Net Income . . . . . . . . . . . . . $ 1.16 ($0.03) $ 1.13
SELECTED BALANCE SHEET INFORMATION
Assets
Accounts receivable. . . . . . . . . $ 269 $ 2,333 $ 2,602
Unrecovered purchased gas costs. . . 4,316 (1,497) 2,819
Other regulatory assets. . . . . . . 2,172 9 2,181
Liabilities
Income taxes . . . . . . . . . . . . 2,730 (130) 2,600
Deferred income taxes. . . . . . . . (418) 468 50
Stockholders' Equity
Retained earnings. . . . . . . . . . $ 37,333 $ 507 $ 37,840
<FN>
(1) Operating Revenue, Operating Income and Income from Continuing
Operations exclude the results of the operations discontinued
in 2003 and include minor reclassifications to conform with
the presentation of the 2004 results.
</FN>
2. CALCULATION OF EARNINGS PER SHARE
- -----------------------------------------------------------------------
2004 2003
FOR THE THREE MONTHS ENDED MARCH 31, RESTATED
- -----------------------------------------------------------------------
CALCULATION OF BASIC EARNINGS PER SHARE FROM
CONTINUING OPERATIONS:
Net income from continuing operations. . . . . $5,773,534 $6,637,103
Weighted average shares outstanding. . . . . . 5,688,430 5,561,504
- -----------------------------------------------------------------------
BASIC EARNINGS PER SHARE FROM
CONTINUING OPERATIONS. . . . . . . . . . . . . $ 1.01 $ 1.19
- -----------------------------------------------------------------------
CALCULATION OF DILUTED EARNINGS PER SHARE FROM
CONTINUING OPERATIONS:
RECONCILIATION OF NUMERATOR:
Net Income from continuing operations Basic. . $5,773,534 $6,637,103
Effect of 8.25% Convertible debentures * . . . 35,666 40,366
- -----------------------------------------------------------------------
Adjusted numerator Diluted . . . . . . . . . . $5,809,200 $6,677,469
- -----------------------------------------------------------------------
RECONCILIATION OF DENOMINATOR:
Weighted shares outstanding Basic. . . . . . . 5,688,430 5,561,504
Effect of dilutive securities *
Stock options. . . . . . . . . . . . . . . . . 4,152 -
Warrants . . . . . . . . . . . . . . . . . . . 8,759 1,524
8.25% Convertible debentures . . . . . . . . . 168,946 191,735
- -----------------------------------------------------------------------
Adjusted denominator Diluted . . . . . . . . . 5,870,287 5,754,763
- -----------------------------------------------------------------------
DILUTED EARNINGS PER SHARE FROM
CONTINUING OPERATIONS. . . . . . . . . . . . . $ 0.99 $ 1.16
- -----------------------------------------------------------------------
<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.
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.
Dover Gas Light Site
- -----------------------
The Dover Gas Light site is a former manufactured gas plant site located in
Dover, Delaware. On January 15, 2004, the Company received a Certificate of
Completion of Work from the United States Environmental Protection Agency
("EPA") regarding the Dover Gas Light site. This concluded the remedial action
obligation that Chesapeake had related to this site. This relieves Chesapeake
from liability for future remediation at the site, unless previously unknown
conditions are discovered at the site, or information previously unknown to the
EPA is received that indicates the remedial action that has been taken is not
sufficiently protective. These contingencies are standard and are required by
the United States in all liability settlements.
At March 31, 2004, the Company had accrued $10,000 for costs associated with the
Dover Gas Light site and had recorded an associated regulatory asset for the
same amount. Through March 31, 2004, the Company has incurred approximately $9.7
million in costs relating to environmental testing and remedial action studies
at the site. Approximately $9.6 million has been recovered through March 2004
from other parties or through rates.
Salisbury Town Gas Light Site
- ---------------------------------
In cooperation with the MDE, the Company has completed an assessment of the
Salisbury manufactured gas plant site, located in Salisbury, Maryland, which
determined that there was localized ground-water contamination. During 1996, the
Company completed construction and began Air Sparging and Soil-Vapor Extraction
("AS/SVE") remediation procedures. Chesapeake has been reporting the remediation
and monitoring results to the MDE on an ongoing basis since 1996. In February
2002, the MDE granted permission to permanently decommission the AS/SVE system
and to discontinue all on-site and off-site well monitoring, except for one well
that is being maintained for continued product monitoring and recovery. In
November 2002, a letter was submitted to the MDE requesting No Further Action
("NFA"). 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. The Company has completed the MDE recommended work plans and
has executed the deed restrictions. During the third quarter of 2003 the Company
submitted a revised request for the NFA. The MDE has not yet responded to the
request.
The Company has adjusted the liability with respect to the Salisbury Town Gas
Light site to $7,000 at March 31, 2004. 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, 2004, 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 in rates. The Company expects to recover the remaining costs through
rates and has established a regulatory asset for those costs.
Winter Haven Coal Gas Site
- ------------------------------
The Winter Haven Coal Gas site is located in Winter Haven, Florida. Chesapeake
has been working with the Florida Department of Environmental Protection
("FDEP") in assessing this coal gas site. In May 1996, the Company filed an Air
Sparging and Soil Vapor Extraction Pilot Study Work Plan for the Winter Haven
site with the FDEP. The Work Plan described the Company's proposal to undertake
an AS/SVE pilot study to evaluate the site. After discussions with the FDEP, the
Company filed a modified AS/SVE Pilot Study Work Plan, the description of the
scope of work to complete the site assessment activities and a report describing
a limited sediment investigation performed in 1997. In December 1998, the FDEP
approved the AS/SVE Pilot Study Work Plan, which the Company completed during
the third quarter of 1999. In February 2001, the Company filed a remedial action
plan ("RAP") with the FDEP to address the contamination of the subsurface soil
and ground-water in a portion of the site. The FDEP approved the RAP on May 4,
2001.
Construction of the AS/SVE system was completed in the fourth quarter of 2002
and the system is now fully operational.
The Company has accrued a liability of $536,000 as of March 31, 2004 for the
Florida site. Through March 31, 2004, the Company has incurred approximately
$1.3 million of environmental costs associated with the Florida site. At March
31, 2004 the Company had collected through rates $219,000 in excess of costs
incurred. A regulatory asset of approximately $317,000, representing the
uncollected portion of the estimated clean-up costs, has also been recorded. The
Company expects to recover the remaining costs through rates.
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 November 2003, the Company entered into a
one-year contract with an energy marketing and risk management company to manage
a portion of the Company's natural gas transportation and storage capacity.
The Company has issued corporate guarantees to certain vendors of its propane
wholesale marketing subsidiary. The corporate guarantees provide for the payment
of propane purchases by the subsidiary, in the case of the subsidiary's default.
The guarantees at March 31, 2004 totaled $4.5 million and expire on various
dates in 2004.
The Company has issued a letter of credit to its primary insurance company for
$694,000, which expires June 1, 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, results of operations or cash flows of the Company.
Certain assets and liabilities of the Company are accounted for in accordance
with 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 Financial Accounting Standards Board ("FASB") issued SFAS No. 132R,
"Employers' Disclosures about Pensions and Other Postretirement Benefits" in
September 2003, which replaces SFAS No. 132, "Employers' Disclosures about
Pensions and Other Postretirement Benefits" and requires additional disclosures
about assets, obligations, cash flows, and net periodic benefit cost of defined
benefit pension plans and other post-retirement benefit plans. SFAS No. 132R
does not change the measurement and recognition of those plans, and accordingly
the implementation of this pronouncement had no impact on the Company's
financial statements. Refer to Note 7, Employee Benefit Plans, to the Condensed
Consolidated Financial Statements for the disclosures required in the interim
financial reports.
In December 2003, the FASB issued FASB Interpretation No. ("FIN No.") 46R,
"Consolidation of Variable Interest Entities," which replaced FIN No. 46,
"Consolidation of Variable Interest Entities," issued in January 2003. FIN No.
46R was issued to clarify the required accounting for interests in variable
interest entities. A variable interest entity is an entity that does not have
sufficient equity investment at risk, or the holders of the equity instruments
lack the essential characteristics of a controlling financial interest. A
variable interest entity is to be consolidated by a company if that company is
subject to a majority of the risk of loss from the variable interest entity's
activities, or is entitled to receive a majority of the entity's residual
returns, or both. As of March 31, 2004, the Company did not have any variable
interests in a variable interest entity.
On January 12, 2004, the FASB released FASB Staff Position No. SFAS 106-1
"Accounting and Disclosure Requirements Related to the Medicare Prescription
Drug, Improvement and Modernization Act of 2003" ("the Act"). The Company has
elected to defer the accounting for the Act, as allowed under Staff Position No.
106-1, due to the uncertainties that exist related to the Act and its impact, if
any, on the Company's post-retirement health benefits, and accordingly, the
measures of accumulated benefit obligation and net periodic benefit cost in the
financial statements and accompanying notes do not reflect the effects, if any,
of the Act on the Company's plan. Specific authoritative guidance on the
accounting for the federal subsidy is pending and that guidance, when issued,
could require the Company to change previously reported information.
5. 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. Results exclude discontinued operations.
- ----------------------------------------------------------------------------------
2004 2003
FOR THE THREE MONTHS ENDED MARCH 31, RESTATED
- ----------------------------------------------------------------------------------
OPERATING REVENUES, UNAFFILIATED CUSTOMERS
Natural gas distribution and transmission . . . $ 42,300,984 $ 39,481,841
Propane . . . . . . . . . . . . . . . . . . . . 18,460,257 20,247,027
Advanced information services . . . . . . . . . 3,001,119 3,233,417
Other . . . . . . . . . . . . . . . . . . . . . - (2,771)
- ----------------------------------------------------------------------------------
Total operating revenues, unaffiliated customers. $ 63,762,360 $ 62,959,514
- ----------------------------------------------------------------------------------
INTERSEGMENT REVENUES (1)
Natural gas distribution and transmission . . . $ 60,987 $ 40,039
Advanced information services . . . . . . . . . 9,017 37,834
Other . . . . . . . . . . . . . . . . . . . . . 169,446 180,190
- ----------------------------------------------------------------------------------
Total intersegment revenues . . . . . . . . . . . $ 239,450 $ 258,063
- ----------------------------------------------------------------------------------
OPERATING INCOME
Natural gas distribution and transmission . . . $ 7,217,754 $ 7,280,654
Propane . . . . . . . . . . . . . . . . . . . . 3,321,658 4,885,482
Advanced information services . . . . . . . . . 72,085 62,333
Other . . . . . . . . . . . . . . . . . . . . . 87,810 82,710
- ----------------------------------------------------------------------------------
Total . . . . . . . . . . . . . . . . . . . . . . $ 10,699,307 $ 12,311,179
- ----------------------------------------------------------------------------------
<FN>
(1) All significant intersegment revenues are billed at market rates and have
been eliminated from consolidated revenues.
</FN>
- ----------------------------------------------------------------------------------
MARCH 31, DECEMBER 31,
2004 2003
- ----------------------------------------------------------------------------------
IDENTIFIABLE ASSETS
Natural gas distribution and transmission . . . $ 163,763,489 $169,865,930
Propane . . . . . . . . . . . . . . . . . . . . 38,846,083 38,359,251
Advanced information services . . . . . . . . . 2,827,092 2,912,733
Other . . . . . . . . . . . . . . . . . . . . . 17,481,305 7,791,796
- ----------------------------------------------------------------------------------
Total identifiable assets . . . . . . . . . . . . $ 222,917,969 $218,929,710
- ----------------------------------------------------------------------------------
The Company's operations are all domestic. The advanced information services
segment has infrequent transactions with foreign companies, located primarily in
Canada, that are denominated and paid in U.S. dollars. These transactions are
immaterial to the consolidated revenues.
6. DISCONTINUED OPERATIONS
CHESAPEAKE UTILITIES CORPORATION DISCONTINUED OPERATIONS
BALANCE SHEETS (UNAUDITED)
- --------------------------------------------------------------------------------------
MARCH 31, DECEMBER 31,
ASSETS 2004 2003
- --------------------------------------------------------------------------------------
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment . . . . . . . . . . . . . $ 763,121 $ 762,383
Less: Accumulated depreciation and amortization. . . . (326,792) (326,792)
- --------------------------------------------------------------------------------------
Net property, plant and equipment . . . . . . . . . . . 436,329 435,591
- --------------------------------------------------------------------------------------
CURRENT ASSETS
Cash and cash equivalents . . . . . . . . . . . . . . . 104,886 1,437,821
Accounts receivable (less allowance for uncollectibles
of $1,868 and $5,346, respectively). . . . . . . . . 220,745 273,799
Appliance and other inventory, at FIFO. . . . . . . . . 93,226 99,839
Deferred income taxes receivable. . . . . . . . . . . . 20,725 20,725
Prepaid expenses. . . . . . . . . . . . . . . . . . . . 100,658 110,175
- --------------------------------------------------------------------------------------
Total current assets. . . . . . . . . . . . . . . . . . 540,240 1,942,359
- --------------------------------------------------------------------------------------
DEFERRED CHARGES AND OTHER ASSETS
Other intangible assets, net. . . . . . . . . . . . . . 70,018 70,018
Deferred income taxes receivable. . . . . . . . . . . . 150,847 150,847
- --------------------------------------------------------------------------------------
Total deferred charges and other assets . . . . . . . . 220,865 220,865
- --------------------------------------------------------------------------------------
TOTAL ASSETS. . . . . . . . . . . . . . . . . . . . . . $ 1,197,434 $ 2,598,815
======================================================================================
STOCKHOLDERS' EQUITY AND LIABILITIES
- --------------------------------------------------------------------------------------
STOCKHOLDERS' EQUITY
Common Stock. . . . . . . . . . . . . . . . . . . . . . $ 51,010 $ 51,010
Additional paid-in capital. . . . . . . . . . . . . . . 3,914,783 3,914,783
Retained deficits . . . . . . . . . . . . . . . . . . . (5,305,499) (5,271,164)
- --------------------------------------------------------------------------------------
Total stockholders' equity. . . . . . . . . . . . . . . (1,339,706) (1,305,371)
- --------------------------------------------------------------------------------------
CURRENT LIABILITIES
Accounts payable. . . . . . . . . . . . . . . . . . . . 34,679 67,303
Due to parent company . . . . . . . . . . . . . . . . . 2,264,704 3,558,434
Customer deposits . . . . . . . . . . . . . . . . . . . 11,161 11,403
Income taxes payable. . . . . . . . . . . . . . . . . . 173,800 192,290
Other accrued liabilities . . . . . . . . . . . . . . . 52,796 74,756
- --------------------------------------------------------------------------------------
Total current liabilities . . . . . . . . . . . . . . . 2,537,140 3,904,186
- --------------------------------------------------------------------------------------
TOTAL STOCKHOLDERS' EQUITY AND LIABILITIES. . . . . . . $ 1,197,434 $ 2,598,815
======================================================================================
During 2003, the Company sold the assets of six of its seven water services
businesses. The Company expects to dispose of the remaining operation, located
in Stuart, Florida, during 2004. Accordingly, the assets were recorded at their
fair value. Results for all the water dealerships were reclassified to
discontinued operations in accordance with SFAS No. 144, Accounting for the
Impairment or Disposal of Long-Lived Assets. The results of the water companies'
operations for all periods presented in the consolidated income statements have
been reclassified to discontinued operations and shown net of tax. The following
table presents the balance sheet accounts for discontinued operations.
7. EMPLOYEE BENEFIT PLANS
Net periodic benefit costs for the defined benefit pension plan, the executive
excess benefit plan and other post-retirement benefits are shown below:
OTHER
DEFINED BENEFIT EXECUTIVE EXCESS POST-RETIREMENT
PENSION PLAN BENEFIT PLAN BENEFITS
FOR THE THREE MONTHS ENDED MARCH 31, 2004 2003 2004 2003 2004 2003
- ------------------------------------------------------------------------------------------------
Service Cost . . . . . . . . . . . . $ 84,689 $ 81,342 $28,587 $26,969 $ 1,362 $ 1,285
Interest Cost. . . . . . . . . . . . 176,727 171,060 20,905 20,010 21,400 21,330
Expected return on plan assets . . . (235,889) (196,119) - - - -
Amortization of transition amount. . (3,776) (3,776) - - 6,965 6,965
Amortization of prior service cost . (1,175) (1,175) 697 697 - -
Amortization of net (gain) loss. . . - - 3,795 4,669 43,202 16,568
- ------------------------------------------------------------------------------------------------
Net periodic benefit cost. . . . . . $ 20,576 $ 51,332 $53,984 $52,345 $72,929 $46,148
- ------------------------------------------------------------------------------------------------
As disclosed in the December 31, 2003 financial statements, no contributions are
expected to be required in 2004 for the defined benefit pension plan. The
executive excess benefit plan and other post-retirement benefit plans are
unfunded.
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 wholesale 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 wholesale marketing, advanced information services and
other related businesses.
Chesapeake sold the assets and operations of six of its seven water dealerships
during 2003. The Company expects to dispose of the remaining operation during
2004.
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 finance, temporarily, capital expenditures. During the first three months
of 2004, net cash provided by operating activities, net cash used by investing
activities and net cash used by financing activities were approximately $16.6
million, $2.5 million and $5.6 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, 2004,
Chesapeake had five unsecured bank lines of credit with three financial
institutions, totaling $65.0 million, for short-term cash needs to meet seasonal
working capital requirements and to fund, temporarily, portions of its capital
expenditures. Two of the bank lines, totaling $15.0 million, are committed. The
remaining three lines are subject to the banks' availability of funds. In the
first three months of 2004, cash provided by operations was adequate to fund
capital expenditures and repay the $3.5 million of short-term debt that was
outstanding at December 31, 2003. At March 31, 2004, the Company had outstanding
an irrevocable letter of credit in the amount of $694,000 issued to one of the
Company's insurance providers. The letter of credit reduced the available
borrowing under the short-term lines.
During the three-month periods ended March 31, 2004 and 2003, capital
expenditures were approximately $2.7 million and $1.9 million, respectively.
Chesapeake has budgeted $20.8 million for capital expenditures during 2004. This
amount includes $15.8 million for natural gas distribution and transmission,
$4.1 million for propane distribution and marketing, $285,000 for advanced
information services and $614,000 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. The other operations budget
includes general plant, computer software and hardware expenditures. Financing
for the capital expenditure program for the balance of 2004 is expected to be
provided from cash on hand, short-term borrowing and cash provided by operating
activities. The capital expenditure program is subject to continual 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 $170,000 for capital expenditures in 2004 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 Condensed Consolidated Financial Statements).
As of March 31, 2004 common equity represented 53.4 percent of total
capitalization, compared to 51.2 percent as of December 31, 2003. Combining
short-term financing with total capitalization, the equity component would have
been 52.1 percent and 48.8 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 three months of 2004 decreased approximately
$139,000, or 9.5 percent, over the same period in 2003. Interest on long-term
debt accounted for $96,000 of the decrease. The average long-term debt balance
in the first three months of 2004 was $72.0 million with an average interest
rate of 7.1 percent, compared to $76.0 million with an average interest rate of
7.3 percent in the first three months of 2003. Additionally, interest on
short-term debt decreased $31,000 during the first quarter of 2004, compared to
the first three months of 2003. This decrease was the result of a decline in the
average balance of short-term debt from $7.3 million in the first quarter of
2003 to $596,000 for the first quarter of 2004.
OFF-BALANCE SHEET ARRANGEMENTS AND CONTRACTUAL OBLIGATIONS
There have been no material changes outside of the ordinary course of the
Company's business with respect to off-balance sheet arrangements and
contractual obligations as presented in the Company's 2003 Annual Report on Form
10-K.
RESULTS OF OPERATIONS FOR THE QUARTER ENDED MARCH 31, 2004
CONSOLIDATED OVERVIEW
The Company earned net income from continuing operations of $5.8 million or
$1.01 per share, for the first quarter of 2004, a decline of $864,000 compared
to net income from continuing operations of $6.6 million, or $1.19 per share for
the corresponding period in 2003. The decrease in earnings principally reflects
a decline in operating income at the Company's propane operations. The decline
was caused by warmer temperatures on the Delmarva Peninsula that reduced volumes
for the distribution operations and reduced volatility in propane wholesale
prices that reduced the income for the propane wholesale marketing operation.
The natural gas segment was able to offset the impact of warmer weather through
customer growth.
See Note 1 to the Condensed Consolidated Financial Statements for a description
of the restatement that was made in the fourth quarter of 2003. Additional
information can also be found in the Company's report on Form 10-K for the year
ended December 31, 2003.
- ------------------------------------------------------------------------------------
2004 2003
FOR THE THREE MONTHS ENDED MARCH 31, RESTATED CHANGE
- ------------------------------------------------------------------------------------
Operating Income
Natural Gas Distribution & Transmission $ 7,217,754 $ 7,280,654 $ (62,900)
Propane . . . . . . . . . . . . . . . . 3,321,658 4,885,482 (1,563,824)
Advanced Information Services . . . . . 72,085 62,333 9,752
Other . . . . . . . . . . . . . . . . . 87,810 82,710 5,100
- ------------------------------------------------------------------------------------
Operating Income. . . . . . . . . . . . . 10,699,307 12,311,179 (1,611,872)
Other Income. . . . . . . . . . . . . . . 102,476 53,901 48,575
Interest Charges. . . . . . . . . . . . . 1,326,766 1,465,851 (139,085)
Income Taxes. . . . . . . . . . . . . . . 3,701,483 4,262,126 (560,643)
- ------------------------------------------------------------------------------------
Net Income from Continuing Operations . . $ 5,773,534 $ 6,637,103 $ (863,569)
====================================================================================
The following discussions of segment results include use of the term "gross
margin." Gross margin is determined by deducting the cost of sales from
operating revenue. Cost of sales includes the purchased gas cost for the
natural gas and propane segments and the cost of labor spent on direct
revenue-producing activities for advanced information services segment.
Gross margin should not be considered an alternative to operating income or
net income, which are determined in accordance with Generally Accepted
Accounting Principles ("GAAP"). Chesapeake believes that gross margin,
although a non-GAAP measure, is useful and meaningful to investors because
it provides them with information that demonstrates the profitability
achieved by the Company under its allowed rates for regulated operations
and under its competitive pricing structure for non-regulated segments, a
basis for making investment decisions. Chesapeake's management uses gross
margin in measuring certain performance goals and has historically analyzed
and reported gross margin information publicly. Other companies may
calculate gross margin in a different manner.
NATURAL GAS DISTRIBUTION AND TRANSMISSION
The natural gas distribution and transmission segment earned operating income of
$7.2 million for the first quarter of 2004 compared to $7.3 million for the
corresponding period last year, a decrease of $63,000.
- ------------------------------------------------------------------------------------
2004 2003
FOR THE THREE MONTHS ENDED MARCH 31, RESTATED CHANGE
- ------------------------------------------------------------------------------------
Revenue . . . . . . . . . . . . . . . . . $42,361,971 $39,521,880 $ 2,840,091
Cost of gas . . . . . . . . . . . . . . . 27,324,775 25,192,774 2,132,001
- ------------------------------------------------------------------------------------
Gross margin. . . . . . . . . . . . . . . 15,037,196 14,329,106 708,090
Operations & maintenance. . . . . . . . . 5,616,976 4,991,951 625,025
Depreciation & amortization . . . . . . . 1,343,280 1,248,002 95,278
Other taxes . . . . . . . . . . . . . . . 859,186 808,499 50,687
- ------------------------------------------------------------------------------------
Operating expenses. . . . . . . . . . . . 7,819,442 7,048,452 770,990
- ------------------------------------------------------------------------------------
Total Operating Income. . . . . . . . . . $ 7,217,754 $ 7,280,654 $ (62,900)
====================================================================================
Gross margins for the Delaware and Maryland distribution divisions increased
$306,000 from 2003. Delaware and Maryland experienced an increase of 2,077
residential customers, or 6.5 percent, in the first quarter of 2004 compared to
the first quarter of 2003. The increase was the result primarily of new housing
construction. The Company estimates that each residential customer added
contributes $360 annually to gross margin and requires an additional cost of
$100 for operations and maintenance expenses. This growth offset a temperature
decline of 4 percent (113 heating degree-days) for the first quarter of 2004
compared to the first quarter of 2003. In the first quarter of 2004,
temperatures were 8 percent colder (182 heating degree-days) than the 10-year
average. The Company estimates that, on an annual basis, for each heating
degree-day variance from the 10-year average, the gross margin on gas sales
changes by $1,680. Gross margin for the Florida distribution operations
increased by $270,000, due to an increase of 5 percent in the number of
residential customers and growth in the industrial gross margin. The natural gas
transmission gross margin increased by $132,000 resulting from an increase in
transportation services. The gross margin increases were offset by higher
operating expenses, primarily payroll, pension, insurance and customer service
costs. Depreciation was also higher, reflecting the continued investment in
plant assets.
PROPANE
During the first quarter of 2004, the propane segment experienced a decrease of
$1.6 million in operating income compared to the first quarter of 2003,
reflecting a gross margin decrease of $1.8 million that was partially offset by
a $244,000 decrease in operating expenses.
- ------------------------------------------------------------------------------------
FOR THE THREE MONTHS ENDED MARCH 31, 2004 2003 CHANGE
- ------------------------------------------------------------------------------------
Revenue . . . . . . . . . . . . . . . . . $18,460,257 $20,247,027 $(1,786,770)
Cost of sales . . . . . . . . . . . . . . 11,306,532 11,285,097 21,435
- ------------------------------------------------------------------------------------
Gross margin. . . . . . . . . . . . . . . 7,153,725 8,961,930 (1,808,205)
Operations & maintenance. . . . . . . . . 3,182,549 3,462,206 (279,657)
Depreciation & amortization . . . . . . . 383,027 384,904 (1,877)
Other taxes . . . . . . . . . . . . . . . 266,491 229,338 37,153
- ------------------------------------------------------------------------------------
Operating expenses. . . . . . . . . . . . 3,832,067 4,076,448 (244,381)
- ------------------------------------------------------------------------------------
Total Operating Income. . . . . . . . . . $ 3,321,658 $ 4,885,482 $(1,563,824)
====================================================================================
The Delmarva distribution operations experienced a drop in gross margin of
$702,000. Retail volumes sold decreased 415,000 gallons, or 3.8 percent for the
first quarter of 2004 compared to 2003. Included in the decrease was a reduction
of 436,000 gallons sold to customers in the poultry industry. This decline was
caused by the closing of a poultry processing plant and by an outbreak of avian
influenza on the Delmarva Peninsula. Additionally, gross margin was affected by
temperatures in the first quarter of 2004 that were 4 percent warmer than the
first quarter of 2003 (113 heating degree-days) but 8 percent colder than the
10-year average (182 heating degree-days). The Company estimates that on an
annual basis, for each heating degree-day variance from the 10-year average,
gross margin changes by $1,670. Additionally, the gross margin per retail gallon
decreased $0.05. The Florida propane distribution operations experienced a
decrease in gross margin of $183,000. The decrease was due to a one-time service
project that contributed $192,000 to the 2003 gross margin.
The Company's propane wholesale marketing operation experienced a decrease in
gross margin of $924,000 and a decrease of $268,000 in operating expenses,
leading to a reduction of $656,000 in operating income. Lower wholesale price
volatility reduced trading opportunities during 2004 compared to 2003.
ADVANCED INFORMATION SERVICES
The advanced information services business contributed operating income of
$72,000 for the first quarter of 2004 compared to $62,000 for the first quarter
of last year, an increase of $10,000.
- ------------------------------------------------------------------------------------
FOR THE THREE MONTHS ENDED MARCH 31, 2004 2003 CHANGE
- ------------------------------------------------------------------------------------
Revenue . . . . . . . . . . . . . . . . . $ 3,010,136 $ 3,271,251 $ (261,115)
Cost of sales . . . . . . . . . . . . . . 1,678,777 1,891,252 (212,475)
- ------------------------------------------------------------------------------------
Gross margin. . . . . . . . . . . . . . . 1,331,359 1,379,999 (48,640)
Operations & maintenance. . . . . . . . . 1,053,828 1,110,845 (57,017)
Depreciation & amortization . . . . . . . 39,145 50,113 (10,968)
Other taxes . . . . . . . . . . . . . . . 166,301 156,708 9,593
- ------------------------------------------------------------------------------------
Operating expenses. . . . . . . . . . . . 1,259,274 1,317,666 (58,392)
- ------------------------------------------------------------------------------------
Total Operating Income. . . . . . . . . . $ 72,085 $ 62,333 $ 9,752
====================================================================================
During the first quarter of 2004 the advanced information services segment has
countered declining revenues and lower gross margin by implementing cost
reduction measures, primarily by reducing sales and marketing expenses.
OTHER BUSINESS OPERATIONS AND ELIMINATIONS
Other operations and eliminating entries contributed operating income of $88,000
for the first quarter of 2004 compared to income of $83,000 for the first
quarter of last year. Other operations consist primarily of subsidiaries that
own real estate leased to other Company subsidiaries. Eliminations are entries
required to eliminate activities between business segments from the consolidated
results.
- ------------------------------------------------------------------------------------
FOR THE THREE MONTHS ENDED MARCH 31, 2004 2003 CHANGE
- ------------------------------------------------------------------------------------
Revenue . . . . . . . . . . . . . . . . . $ (70,004) $ (80,644) $ 10,640
Cost of sales . . . . . . . . . . . . . . - - -
- ------------------------------------------------------------------------------------
Gross margin. . . . . . . . . . . . . . . (70,004) (80,644) 10,640
Operations & maintenance. . . . . . . . . (218,201) (230,632) 12,431
Depreciation & amortization . . . . . . . 45,172 53,079 (7,907)
Other taxes . . . . . . . . . . . . . . . 15,215 14,199 1,016
- ------------------------------------------------------------------------------------
Operating expenses. . . . . . . . . . . . (157,814) (163,354) 5,540
- ------------------------------------------------------------------------------------
Operating Income - Other. . . . . . . . . 79,771 76,260 3,511
Operating Income - Eliminations . . . . . 8,039 6,450 1,589
- ------------------------------------------------------------------------------------
Total Operating Income. . . . . . . . . . $ 87,810 $ 82,710 $ 5,100
====================================================================================
DISCONTINUED OPERATIONS
In 2003, Chesapeake decided to exit the water services business. Six of seven
water dealerships were sold during 2003. The Company expects to dispose of the
remaining operation during 2004. Accordingly, the assets are recorded at their
fair value. The results of the water companies' operations for all periods
presented in the consolidated income statements, have been reclassified to
discontinued operations and shown net of tax. Losses from discontinued
operations were $34,000 and $162,000 for the first quarters of 2004 and 2003,
respectively.
INCOME TAXES
The Company's income tax cost for the first quarter of 2004 was lower than 2003
due to lower income. The federal income tax rate was consistent from year to
year.
INTEREST EXPENSE
Interest for the first quarter of 2004 decreased approximately $139,000, or 9.5
percent, over the same period in 2003. The decrease resulted from the scheduled
repayments of principal of long-term debt and the lower balance of short-term
borrowing.
The average long-term debt balance in the first quarter of 2004 was $72.0
million with an average interest rate of 7.1 percent, compared to $76.0 million
with an average interest rate of 7.3 percent in the first quarter of 2003. The
average borrowing balance for short-term debt decreased from $7.3 million in the
first quarter of 2003 to $596,000 in the first quarter of 2004.
ENVIRONMENTAL MATTERS
As more fully described in Note 3 to the Condensed Consolidated Financial
Statements, Chesapeake has completed its responsibilities related to one
environmental site and is currently participating in the investigation,
assessment or remediation of two other former gas manufacturing plant sites. The
Company continues to work with federal and state environmental agencies to
assess the environmental impact and explore options for corrective action at
these 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.
OTHER MATTERS
REGULATORY MATTERS
The Delaware, Maryland and Florida Public Service Commissions ("PSC") regulate
the Company's natural gas distribution operations, while its natural gas
transmission operation is regulated by the Federal Energy Regulatory Commission
("FERC").
On April 1, 2003, Eastern Shore filed an application before the FERC requesting
authorization for the following: (1) Phase I - upgrade of Parkesburg Metering &
Regulating Station; (2) Phase II - construct and operate 2.7 miles of 16-inch
mainline looping in Pennsylvania; and (3) Phase III - construct and operate 3.0
miles of 16-inch mainline looping and a pressure control station in Delaware.
The purpose of this construction is to enable Eastern Shore to provide
additional daily firm transportation capacity of 15,100 dekatherms on Eastern
Shore's system. Such increased capacity is to be phased in over a three-year
period commencing November 1, 2003. Phase I of this expansion was completed and
placed into service on November 1, 2003.
During October 2002, Eastern Shore filed an application with the FERC for
recovery of gas supply realignment costs associated with the implementation of
FERC Order No. 636. The costs totaled $196,000 (including interest). At that
time, the FERC would not review Eastern Shore's filing, because the FERC wished
to settle a related matter with another transmission company first. The other
transmission company submitted a filing on December 5, 2003. The FERC has not
yet acted on the filing. Eastern Shore will resubmit its transition cost
recovery filing immediately upon learning of the FERC's approval.
On December 16, 2003, Eastern Shore filed with the FERC revised tariff sheets to
implement revisions to its Fuel Retention and Cash Out provisions. Fuel
Retention refers to the in-kind reimbursement of natural gas by Eastern Shore's
customers necessary to transport natural gas on Eastern Shore's pipeline. Such
Fuel Retention is designed to reimburse Eastern Shore for the Gas Required for
Operations ("GRO"), which consists of (1) gas used for compressor fuel and (2)
gas otherwise used, lost or unaccounted for. Cash Out refers to the month-end
process of resolving customer imbalances, that is, the difference, either
positive or negative, between natural gas received by Eastern Shore for a
customer's account and the natural gas delivered by Eastern Shore to that
customer. Rather than carry such in-kind imbalances forward on a continuing
basis, Eastern Shore's tariff permits it to buy or sell such imbalance gas to
its customers, thus effectively eliminating any imbalance created through the
month. These revisions went into effect on January 15, 2004.
The proposed tariff revisions permit Eastern Shore to incorporate its Deferred
Gas Required for Operations amounts into the calculation of its annual Fuel
Retention Percentage Adjustment and to implement a surcharge, effective July 1
of each year, to recover cash-out amounts. Deferred Gas Required for Operations
is the difference between Eastern Shore's calculated fuel retention using its
approved Fuel Retention Percentage ("FRP") and its actual fuel requirements
resulting from actual operations in a given month. Such differences, either
positive or negative, are determined each month during the determination period
and become a component of Eastern Shore's prospective FRP. This calculation is
effectively a "true-up" to the fuel retained by Eastern Shore so it recovers no
more and no less than its actual fuel requirements. Fuel Retention Percentage
Adjustment is the annual establishment of Eastern Shore's new FRP to be
effective July 1 of each year. The percentage adjustment is simply the
difference between the current FRP in effect and the new FRP as proposed to be
in effect. The FERC accepted Eastern Shore's revised tariff sheets on January
15, 2004, subject to certain revisions to clarify the tariff sheets. On January
30, 2004, Eastern Shore submitted the revised tariff sheets.
Eastern Shore, on February 9, 2004, filed with the FERC a Plan and Schedule for
Standards of Conduct Compliance as directed by the FERC's Order No. 2004, issued
on November 25, 2003. Such Standards of Conduct govern the relationship between
transmissions providers such as Eastern Shore and their energy affiliates.
Order No. 2004 revises and conforms the current gas and electric standards by
broadening the definition of an energy affiliate covered by such standards of
conduct and applies them uniformly to natural gas pipeline and electric
transmission providers. Further, the standards will assure that transmission
providers cannot extend their market power over transmission to other energy
markets by giving their energy affiliates unduly preferential treatment. The
standards also help ensure transmission providers offer service to all customers
on a non-discriminatory basis. The deadline for compliance with the Standards of
Conduct is September 1, 2004.
On November 19, 2001, the Florida division filed a petition with the Florida
Public Service Commission for approval of certain transportation cost recovery
rates. The Florida PSC approved the rates on January 24, 2002, which provide for
the recovery, over a two-year period, of the Florida division's actual and
projected non-recurring expenses incurred in the implementation of the
transportation provisions of the tariff as approved in a November 2000 rate
case. The Florida division filed a petition on February 4, 2004, to dispose of a
minor under-recovery of the actual expenses incurred to implement the tariff
provisions. The petition was approved by the Florida PSC at its March 23, 2004
agenda conference.
On November 5, 2002, the Florida PSC authorized a pilot program under which the
Florida division converted all remaining sales customers to transportation
service and exited the gas merchant function. Implementation of Phase One of the
Transitional Transportation Service ("TTS") program was completed in November
2002, and the Florida division is now actively providing the administrative
services as approved by the Florida PSC, including billing, collection service,
payment tracking, non-pay disconnects, various account reports and related
administrative activities.
On July 15, 2003, the Florida PSC approved a rate restructuring proposed by the
Florida division. The restructuring created three new low volume rate classes,
with customer charge levels that ensure that all customers receive benefits from
the TTS program.
On January 4, 2004, the Florida PSC authorized the Florida division to refund
the remaining balance in its over-recovered purchased gas costs account,
totaling $246,000, as a final step in its exit of the gas merchant function. The
refund was completed in March 2004.
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 sides 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 Delaware, Maryland
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 service
now available on the Company's distribution systems, the Company is competing
with third party suppliers to sell gas to industrial customers. As it relates to
transportation services, 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 service
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, emphasizing reliability of service and responsiveness. Competition is
generally from local outlets of national distribution companies and local
businesses, because distributors located in close proximity to customers incur
lower costs of providing service. Propane competes primarily with electricity
and heating oil as energy sources. Since natural gas has historically been less
expensive than propane, propane is generally not distributed in geographic areas
serviced by natural gas pipeline or distribution systems.
The propane wholesale marketing operation competes against various marketers,
many of which have significantly greater resources and are able to obtain price
or volumetric advantages.
The advanced information services business faces significant competition from a
number of larger competitors having substantially greater resources available to
them than does the Company. In addition, changes in the advanced information
services business are occurring rapidly, which could adversely impact the
markets for the products and services offered by these businesses. This segment
competes on the basis of technological expertise, reputation and price.
RECENT PRONOUNCEMENTS
The Financial Accounting Standards Board ("FASB") issued Statement of Financial
Accounting Standards ("SFAS") No. 132R, "Employers' Disclosures about Pensions
and Other Postretirement Benefits" in September 2003, which replaces SFAS No.
132, "Employers' Disclosures about Pensions and Other Postretirement Benefits"
and requires additional disclosures about assets, obligations, cash flows, and
net periodic benefit cost of defined benefit pension plans and other
post-retirement benefit plans. SFAS No. 132R does not change the measurement and
recognition of those plans and accordingly the implementation of this
pronouncement had no impact on the Company's financial statements. Refer to Note
7, Employee Benefit Plans, to the Condensed Consolidated Financial Statements
for the disclosures required in the interim financial reports."
In December 2003, the FASB issued FASB Interpretation No. ("FIN No.") 46R,
"Consolidation of Variable Interest Entities," which replaced FIN No. 46,
"Consolidation of Variable Interest Entities," issued in January 2003. FIN No.
46R was issued to clarify the required accounting for interests in variable
interest entities. A variable interest entity is an entity that does not have
sufficient equity investment at risk, or the holders of the equity instruments
lack the essential characteristics of a controlling financial interest. A
variable interest entity is to be consolidated by a company if that company is
subject to a majority of the risk of loss from the variable interest entity's
activities, or is entitled to receive a majority of the entity's residual
returns, or both. As of March 31, 2004, the Company did not have any variable
interests in a variable interest entity.
On January 12, 2004, the FASB released FASB Staff Position No. SFAS 106-1
"Accounting and Disclosure Requirements Related to the Medicare Prescription
Drug, Improvement and Modernization Act of 2003" (the "Act"). The Company has
elected to defer the accounting for the Act, as allowed under Staff Position No.
106-1, due to the uncertainties that exist related to the Act and its impact, if
any, on the Company's post-retirement health benefits, and accordingly the
measures of accumulated benefit obligation and net periodic benefit cost in the
financial statements and accompanying notes do not reflect the effects, if any,
of the Act on the Company's plan. Specific authoritative guidance on the
accounting for the federal subsidy is pending and that guidance, when issued,
could require the Company to change previously reported information.
INFLATION
Inflation affects the cost of labor, products and services required for
operations, 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 the potential sale of the water businesses,
customer growth, changes in revenues or gross margins, capital expenditures,
environmental remediation costs, regulatory approvals, market risks associated
with the Company's propane wholesale marketing operation, competition, inflation
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, 2004 was $71.9 million, with a fair value of $78.2 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, 2004 the Company had hedging contracts
outstanding for 1,680,000 gallons of propane.
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 wholesale 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, 2004 is presented in
the following table. All of the contracts mature within twelve months.
- ------------------------------------------------------------------------
QUANTITY ESTIMATED WEIGHTED AVERAGE
AT MARCH 31, 2004 IN GALLONS MARKET PRICES CONTRACT PRICES
- ------------------------------------------------------------------------
FORWARD CONTRACTS
Sale. . . . . . . . . 9,488,514 $0.5938 - $0.6025 $0.5735
Purchase. . . . . . . 8,001,714 $0.5938 - $0.6025 $0.5739
FUTURES CONTRACTS
Sale. . . . . . . . . 252,000 $0.5938 - $0.6025 $0.6271
Purchase. . . . . . . 420,000 $0.5938 - $0.6025 $0.6030
- ------------------------------------------------------------------------
<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-15(e) and 15d-15(e) promulgated under the Securities Exchange Act of 1934,
as amended) as of March 31, 2004. 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
During the quarter ended March 31, 2004, there was no change in the Company's
internal control over financial reporting that has materially affected, or is
reasonably likely to materially affect, the Company's internal controls over
financial reporting.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
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 government
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, results of operations or cash
flows of the Company.
ITEM 2. CHANGES IN SECURITIES, USE OF PROCEEDS AND ISSUER PURCHASES OF
EQUITY SECURITIES
The table below sets forth information with respect to shares of
common stock repurchased by the Company during the three months ended
March 31, 2004.
TOTAL NUMBER MAXIMUM NUMBER
TOTAL OF SHARES OF SHARES
NUMBER AVERAGE PURCHASED AS PART OF THAT MAY YET BE
OF SHARES PRICE PAID PUBLICLY ANNOUNCED PURCHASED UNDER THE
PERIOD PURCHASED PER SHARE PLANS OR PROGRAMS (2) PLANS OR PROGRAMS (2)
- -------------------------------- --------------- --------------- --------------------- ---------------------
January 1, 2004
through January 31, 2004 (1) 235 $ 26.0328 0 0
February 1, 2004
through February 29, 2004. . 0 $ 0.0000 0 0
March 1, 2004
through March 31, 2004 . . . 0 $ 0.0000 0 0
- ----------------------------------------------------------------------------------------------------------------
Total. . . . . . . . . . . . . . 235 $ 26.0328 0 0
- ----------------------------------------------------------------------------------------------------------------
<FN>
(1) Chesapeake purchased 200 shares of stock on the open market to use as awards for Employee
and Manager of the Year. Additionally, 35 shares were purchased on the open market and were
added to shares held in a Rabbi Trust to adjust the balance to the contractual value.
(2) Chesapeake has no publicly announced plans or programs to repurchase its shares.
</FN>
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5. OTHER INFORMATION
During the quarter, the Corporate Governance Committee adopted
Personal characteristics and core competencies for directors. These
characteristics and competencies are described in the Company's Notice
of 2004 Annual Meeting and Proxy Statement.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
- Exhibit 31.1 - Certificate of Chief Executive Officer of
Chesapeake Utilities Corporation pursuant to Rule 13a-14(a)
under the Securities Exchange Act of 1934, dated May 10,
2004
- Exhibit 31.2 - Certificate of Chief Financial Officer of
Chesapeake Utilities Corporation pursuant to Rule 13a-14(a)
under the Securities Exchange Act of 1934, dated May 10,
2004
- Exhibit 32.1 - Certificate of Chief Executive Officer of
Chesapeake Utilities Corporation pursuant to 18 U.S.C.
Section 1350, dated May 10, 2004
- Exhibit 32.2 - Certificate of Chief Financial Officer of
Chesapeake Utilities Corporation pursuant to 18 U.S.C.
Section 1350, dated May 10, 2004
(b) Reports on Form 8-K:
- Earnings press release dated May 3, 2004 (Items 7 and 12)
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 and Chief Financial Officer
Date: May 10, 2004