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: June 30, 1997
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
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(Exact name of registrant as specified in its charter)
Delaware 51-0064146
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(State of other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
909 Silver Lake Boulevard, Dover, Delaware 19904
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(Address of principal executive offices) (Zip Code)
(302) 734-6798
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(Registrant's Telephone Number, Including Area Code)
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(Former name, former address and former fiscal year,
if changed since last report.)
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 - 4,467,121 shares issued as of June 30, 1997.
PART I
FINANCIAL INFORMATION
CHESAPEAKE UTILITIES CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
JUNE 30, DECEMBER 31,
1997 1996
ASSETS (UNAUDITED) (AS RESTATED)
----------- -----------
PROPERTY, PLANT AND EQUIPMENT
Natural gas distribution $73,137,536 $70,497,872
Natural gas transmission 32,908,712 30,655,492
Propane distribution 25,979,255 25,279,217
Advanced information services 688,593 1,003,850
Other plant 4,852,694 4,769,431
Gas plant acquisition adjustment 795,004 795,004
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Total property, plant and equipment 138,361,794 133,000,866
Less: Accumulated depreciation and amortization (41,512,353) (39,430,738)
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Net property, plant and equipment 96,849,441 93,570,128
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INVESTMENTS 2,248,880 2,263,068
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CURRENT ASSETS
Cash and cash equivalents 1,442,021 2,213,529
Accounts receivable, less allowance for uncollectibles 7,973,745 14,488,945
Materials and supplies, at average cost 1,323,562 1,284,876
Propane inventory, at average cost 1,402,579 2,345,531
Storage gas prepayments 2,264,975 3,731,680
Underrecovered purchased gas costs 442,054 2,192,170
Income taxes receivable 0 112,942
Prepaid expenses 643,083 942,359
Deferred income taxes 734,477 158,010
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Total current assets 16,226,496 27,470,042
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DEFERRED CHARGES AND OTHER ASSETS
Environmental cost 8,365,312 8,428,436
Order 636 transition cost 0 943,209
Other deferred charges and intangible assets 3,352,993 3,371,027
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Total deferred charges and other assets 11,718,305 12,742,672
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TOTAL ASSETS $127,043,122 $136,045,910
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The accompanying notes are an integral part of these financial statements.
CHESAPEAKE UTILITIES CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
JUNE 30, DECEMBER 31,
1997 1996
CAPITALIZATION AND LIABILITIES (UNAUDITED) (AS RESTATED)
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CAPITALIZATION
Stockholders' equity
Common Stock, par value $.4867 per share;
(authorized 12,000,000 shares; issued 4,467,121
and 4,439,516 shares, respectively) $2,174,064 $2,160,628
Additional paid-in capital 19,198,037 18,745,718
Retained earnings 28,773,677 26,957,049
Less:
Unearned compensation - restricted stock awards (277,810) (364,529)
Net unrealized gain on marketable securities 30,944 38,598
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Total stockholders' equity 49,898,912 47,537,464
Long-term debt, net of current portion 28,647,000 30,776,919
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Total capitalization 78,545,912 78,314,383
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CURRENT LIABILITIES
Current portion of long-term debt 717,368 1,285,938
Short-term borrowings 9,900,000 12,700,000
Accounts payable 7,389,991 14,426,983
Refunds payable to customers 241,049 353,734
Income taxes payable 2,036,844 0
Accrued interest 750,664 741,768
Dividends payable 1,083,277 883,621
Other accrued expenses 3,355,033 3,733,235
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Total current liabilities 25,474,226 34,125,279
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DEFERRED CREDITS AND OTHER LIABILITIES
Deferred income taxes 10,191,835 9,798,676
Deferred investment tax credits 853,905 876,432
Environmental liability 6,539,084 6,650,088
Accrued pension costs 2,116,533 1,866,660
Order 636 transition liability 0 943,209
Other liabilities 3,321,627 3,471,183
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Total deferred credits and other liabilities 23,022,984 23,606,248
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TOTAL CAPITALIZATION AND LIABILITIES $127,043,122 $136,045,910
============= =============
The accompanying notes are an integral part of these financial statements.
CHESAPEAKE UTILITIES CORPORATION AND SUBSIDIARIES
CONSOLIDATED INCOME STATEMENTS
FOR THE QUARTER ENDED
JUNE 30,
1997 1996
(UNAUDITED) (AS RESTATED)
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OPERATING REVENUES $24,725,489 $25,215,069
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OPERATING EXPENSES
Purchased gas costs 13,912,083 14,640,392
Operations 6,144,227 6,167,166
Maintenance 598,908 578,688
Depreciation and amortization 1,348,961 1,412,486
Other taxes 923,281 853,043
Income taxes 389,058 478,902
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Total operating expenses 23,316,518 24,130,677
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OPERATING INCOME 1,408,971 1,084,392
OTHER INCOME AND DEDUCTIONS 63,654 72,396
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INCOME BEFORE INTEREST CHARGES 1,472,625 1,156,788
INTEREST CHARGES 779,784 670,477
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NET INCOME $692,841 $486,311
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EARNINGS PER SHARE OF COMMON STOCK
Earnings per share $0.16 $0.11
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Average shares outstanding 4,463,213 4,408,718
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The accompanying notes are an integral part of these financial statements.
(1) See Exhibit 11-Computation of Primary and Fully Diluted Earnings Per Share
CHESAPEAKE UTILITIES CORPORATION AND SUBSIDIARIES
CONSOLIDATED INCOME STATEMENTS
FOR THE SIX MONTHS ENDED
JUNE 30,
1997 1996
(UNAUDITED) (AS RESTATED)
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OPERATING REVENUES $68,371,075 $74,248,560
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OPERATING EXPENSES
Purchased gas costs 41,905,264 44,695,948
Operations 12,469,975 12,614,786
Maintenance 1,091,355 1,154,910
Depreciation and amortization 2,697,308 2,820,291
Other taxes 2,036,504 1,952,788
Income taxes 2,661,602 3,257,947
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Total operating expenses 62,862,008 66,496,670
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OPERATING INCOME 5,509,067 7,751,890
OTHER INCOME AND DEDUCTIONS 128,817 147,546
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INCOME BEFORE INTEREST CHARGES 5,637,884 7,899,436
INTEREST CHARGES 1,578,931 1,412,968
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NET INCOME $4,058,953 $6,486,468
============= =============
EARNINGS PER SHARE OF COMMON STOCK (1):
Primary:
Earnings per share $0.91 $1.47
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Average shares outstanding 4,481,467 4,414,307
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Fully diluted:
Earnings per share $0.88 $1.41
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Average shares outstanding 4,721,806 4,658,366
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The accompanying notes are an integral part of these financial statements.
(1) See Exhibit 11-Computation of Primary and Fully Diluted Earnings Per Share
CHESAPEAKE UTILITIES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED
JUNE 30,
1997 1996
(UNAUDITED) (AS RESTATED)
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OPERATING ACTIVITIES
Net Income $4,058,953 $6,486,468
Adjustments to reconcile net income to net operating cash
Depreciation and amortization 2,468,138 2,570,101
Deferred income taxes, net (176,775) (140,770)
Investment tax credit adjustments (22,527) (22,527)
Employee benefits 249,872 218,101
Employee compensation from lapsing stock restrictions 86,719 167,273
Other (149,555) 13,543
Changes in assets and liabilities:
Accounts receivable 6,515,199 5,465,583
Inventory, materials, supplies and storage gas 2,370,972 1,230,830
Prepaid expenses 299,278 245,601
Other deferred charges (89,823) (16,608)
Accounts payable (7,036,992) (4,981,099)
Refunds payable to customers (112,685) (221,971)
Over/(Under) recovered purchased gas costs 1,750,116 (267,456)
Other current liabilities 1,780,479 1,320,610
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Net cash provided by operating activities 11,991,369 12,067,679
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INVESTING ACTIVITIES
Property, plant and equipment expenditures, net (5,687,475) (5,106,967)
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Net cash used by investing activities (5,687,475) (5,106,967)
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FINANCING ACTIVITIES
Common stock dividends net of amounts reinvested of
$272,738 and $291,399, respectively (1,769,930) (1,342,571)
Net repayments under line of credit agreements (2,800,000) (5,225,000)
Proceeds from issuance of stock to Company 401(k) plan 193,017 159,089
Repayments of long-term debt (2,698,489) (595,953)
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Net cash used by financing activities (7,075,402) (7,004,435)
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NET DECREASE IN CASH (771,508) (43,723)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 2,213,529 1,395,614
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CASH AND CASH EQUIVALENTS AT END OF PERIOD $1,442,021 $1,351,891
============= =============
The accompanying notes are an integral part of these financial statements.
CHESAPEAKE UTILITIES CORPORATION AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
1. QUARTERLY FINANCIAL DATA
The financial information included herein is unaudited; however, the
financial information reflects normal recurring adjustments, which are,
in the opinion of management, necessary for a fair presentation of the
Company's interim results. Due to the seasonal nature of the Company's
business, there are substantial variations in the results of operations
reported on a quarterly basis. Certain amounts in 1996 have been
reclassified to conform with the 1997 presentation.
2. ACQUISITION
On March 6, 1997, the Company acquired all of the outstanding common
stock of Tri-County Gas Company, Inc. ("Tri-County") and associated
properties. The principal business of Tri-County is the distribution of
propane to both retail and wholesale customers on the Delmarva
Peninsula.
The transaction was effected through the exchange of 639,000 shares of
the Company's common stock and accounted for as a pooling of interests.
Accordingly, the financial statements for 1997 and 1996, as restated,
include the financial results of Tri-County along with the shares of
stock issued in connection with the acquisition as required by the
accounting rules.
The combined operations of the Company and Tri-County will serve
approximately 32,000 propane customers on the Delmarva Peninsula during
1997.
3. FINANCIAL ACCOUNTING STANDARDS BOARD ("FASB") STATEMENTS ISSUED
SFAS NO. 128 -- EARNINGS PER SHARE
In February 1997, the FASB issued Statement of Financial Accounting
Standards ("SFAS") No. 128 regarding earnings per share, requiring the
dual presentation of basic and diluted earnings per share on the face of
the income statement for all entities with a complex capital structure.
The Company must adopt the requirements of this standard in its
financial statements for the year ended December 31, 1997. Adoption of
this standard is not expected to have a material impact on the financial
statements of the Company.
SFAS NO. 130 -- REPORTING COMPREHENSIVE INCOME
In June 1997, the FASB issued SFAS No. 130 regarding the reporting of
comprehensive income in the full set of financial statements. The
Company must adopt the requirements of the standard in its financial
statements for the year beginning January 1, 1998. The effects of the
adoption of the standard are currently under evaluation by the Company.
SFAS NO. 131 -- DISCLOSURE ABOUT SEGMENTS OF AN ENTERPRISE AND RELATED
INFORMATION
In June 1997, the FASB issued SFAS No. 131, establishing standards for
the way that public business enterprises report information about
operating segments in annual financial statements and requiring that
those enterprises report selected information about operating segments
in interim financial reports to shareholders. The Company will adopt
the requirements of this standard in the first quarter for the fiscal
year 1998.
4. COMMITMENTS AND CONTINGENCIES -- ENVIRONMENTAL MATTERS
DOVER GAS LIGHT SITE
In 1984, the State of Delaware notified the Company that a parcel of
land it purchased in 1949 from Dover Gas Light Company, a predecessor
gas company, contains hazardous substances. The State also asserted
that the Company is responsible for any cleanup and prospective
environmental monitoring of the site. The Delaware Department of
Natural Resources and Environmental Control ("DNREC") investigated the
site and surroundings, finding coal tar residue and some ground-water
contamination.
In October 1989, the Environmental Protection Agency Region III ("EPA")
listed the Dover Site on the National Priorities List under the
Comprehensive Environmental Response, Compensation and Liability Act
("CERCLA" or "Superfund"). Under CERCLA, both the State of Delaware and
the Company were named as potentially responsible parties ("PRP") for
clean up of the site at that time.
The EPA issued the site Record of Decision ("ROD") dated August 16,
1994. The remedial action selected by the EPA in the ROD addresses the
ground-water contamination with a combination of hydraulic containment
and natural attenuation. Remediation selected for the soil at the site
is to meet stringent cleanup standards for the first two feet of soil
and less stringent standards for the soil below two feet. The ROD
estimates the costs of selected remediation of ground-water and soil at
$2.7 million and $3.3 million, respectively.
On November 18, 1994, EPA issued a "Special Notice Letter" (the
"Letter") to Chesapeake and three other PRPs. The Letter includes,
inter alia, (1) a demand for payment by the PRPs of EPA's past costs
(estimated to be approximately $300,000) and future costs incurred
overseeing Site work; (2) notice of EPA's commencement of a 60-day
moratorium on certain EPA response activities at the Site; (3) a request
by EPA that Chesapeake and the other PRPs submit a "good faith proposal"
to conduct or finance the work identified in the ROD; and (4) proposed
consent orders by which Chesapeake and other parties may agree to
perform the good faith proposal.
In January 1995, Chesapeake submitted to the EPA a good faith proposal
to perform a substantial portion of the work set forth in the ROD, which
was subsequently rejected. The Company and the EPA each attempted to
secure voluntary performance of part of the remediation by other
parties. These parties include the State of Delaware, which is the
owner of the property and was identified in the ROD as a PRP, and a
business identified in the ROD as a PRP for having contributed to
ground-water contamination.
On March 6, 1995, the Company commenced litigation against the State of
Delaware for contribution to the remedial costs being incurred to carry
out the ROD. In December of 1995, this case was dismissed without
prejudice based on a settlement agreement between the parties (the
"Settlement"). Under the Settlement, the State agreed to support the
Company's proposal to reduce the soil remedy for the site, described
below, contribute $600,000 toward the cost of implementing the ROD and
to reimburse the EPA for $400,000 in oversight costs. The Settlement is
contingent upon a formal settlement agreement between EPA and the State
of Delaware being reached within the next two years. Upon satisfaction
of all conditions of the Settlement, the litigation will be dismissed
with prejudice.
On May 17, 1995, EPA issued an order to the Company under section 106 of
CERCLA (the "Order"), which requires the Company to fund or implement
the ROD. The Order was also issued to General Public Utilities
Corporation, Inc. ("GPU"), which both EPA and the Company believe is
liable under CERCLA. Other PRPs such as the State of Delaware were not
ordered to perform the ROD. EPA may seek judicial enforcement of its
Order, as well as significant financial penalties for failure to comply.
Although notifying EPA of objections to the Order, the Company agreed to
comply. GPU informed EPA that it did not intend to comply with the
Order.
On July 7, 1995, the Company submitted to EPA a study proposing to
reduce the level and cost of soil remediation from that identified in
the ROD. Although this proposal was supported by the State of Delaware,
as required by the Settlement, it was rejected by the EPA on January 30,
1996.
On June 25, 1996, the Company initiated litigation against GPU for
contribution to the remedial costs incurred by Chesapeake in connection
with complying with the ROD. At this time, management cannot predict
the outcome of the litigation or the amount of proceeds to be received,
if any.
The Company is currently engaged in investigations related to additional
parties who may be PRPs. Based upon these investigations, the Company
will consider suit against other PRPs. The Company expects continued
negotiations with PRPs in an attempt to resolve these matters.
In July 1996, the Company commenced the design phase of the ROD, which
consists of on-site pre-design and investigation. A pre-design
investigation report ("the report") was filed in October 1996 with the
EPA. The report, which requires EPA approval, provided up to date
status on the site, which the EPA will use to determine if the remedial
design selected in the ROD is still the appropriate remedy.
In the report, the Company proposed a modification to the soil cleanup
remedy selected in the ROD to take into account existing land use
restriction that bans future development at the site. In April of 1997,
the EPA issued a fact sheet stating that the EPA was considering the
proposed modification. The fact sheet included an overall cost estimate
of $5.7 million for the proposed modified remedy and a new overall cost
estimate of $13.2 million for the remedy selected in the ROD. On April
30, 1997, the EPA held a public meeting to receive comments concerning
the proposed modification. A statement on behalf of the Company
supporting a reduced level of soil remediation was filed at the meeting.
Attached to the Company's statement were letters from the State of
Delaware and DNREC supporting the Company's proposal. If the EPA elects
to modify the ROD, the EPA will file an Explanation of Significant
Differences ("ESD") for public comment before taking final action.
In the third quarter of 1994, the Company increased its accrued
liability recorded with respect to the Dover Site to $6.0 million. This
amount reflected the EPA's estimate, as stated in the ROD, for
remediation of the site according to the ROD. Current estimates for
remediation of the site range from $5.7 million to $13.2 million,
depending on the remedy selected by the EPA. At this time, it is
management's opinion that no one amount within the range can be
determined to be a better estimate of the cost to remediate the site.
Accordingly, the Company has not adjusted its $6.0 million accrual. The
recorded liability may be adjusted upward or downward, depending on the
outcome of the EPA's consideration of the remedy and the Company's
estimate of the cost of the remedy selected. The Company has also
recorded a regulatory asset of $6.0 million, corresponding to the
recorded liability. Management believes that in addition to the
$600,000 expected to be contributed by the State of Delaware under the
Settlement, the Company will be equitably entitled to contribution from
other responsible parties for a portion of the expenses to be incurred
in connection with the remedies selected in the ROD. Management also
believes that the amounts not so contributed will be recoverable in the
Company's rates.
As of June 30, 1997, the Company has incurred approximately $4.4 million
in costs relating to environmental testing and remedial action studies.
In 1990, the Company entered into settlement agreements with a number of
insurance companies resulting in proceeds to fund actual environmental
costs incurred over a five to seven-year period beginning in 1990. In
December 1995, the Delaware Public Service Commission authorized a
process to review and provide recovery of all current and future
unrecovered environmental costs incurred by a means of a rider
(supplement) to base rates, applicable to all firm service customers.
The costs would be recovered through a five-year amortization offset by
the deferred tax benefit associated with those environmental costs. The
deferred tax benefit equals the projected cash flow savings realized by
the Company in connection with a reduced income tax liability due to the
possibility of accelerated deductions allowed on certain environmental
costs when incurred. Each year a new rider rate will be calculated to
become effective December 1. The rider rate will be based on the
amortization of expenditures through September of the filing years plus
amortization of expenses from previous years. The rider reduces the
administrative costs of obtaining recovery of environmental
expenditures. As of June 30, 1997, the amount of environmental cost not
included in the rider, effective January 1, 1997 was $482,000. With the
rider mechanism established, it is management's opinion that these costs
and any future costs, net of the deferred income tax benefit, will be
recoverable in rates.
SALISBURY TOWN GAS LIGHT SITE
In cooperation with the Maryland Department of the Environment ("MDE"),
the Company has completed an assessment of the Salisbury manufactured
gas plant site. The assessment determined that there was localized
contamination of ground-water. A remedial design report was submitted
to MDE in November 1990 and included a proposal to monitor, pump and
treat any contaminated ground-water on-site. Through negotiations with
the MDE, the remedial action work plan was revised with final approval
from MDE obtained in early 1995. The remediation process for ground-water
was revised from pump-and-treat to Air Sparging and Soil-Vapor
Extraction, resulting in a substantial reduction in overall costs.
During 1996, the Company completed construction and began remediation
procedures at the Salisbury site and will be reporting the remediation
and monitoring results to the MDE on an ongoing basis.
The cost of remediation is estimated to range from $140,000 to $190,000
per year for operating expenses. Based on these estimated costs, the
Company recorded both a liability and a deferred regulatory asset of
$650,088 on December 31, 1996, to cover the Company's projected
remediation costs for this site. The liability payout for this site is
expected to be over a five-year period. As of June 30, 1997, the
Company has incurred approximately $2.3 million for remedial actions and
environmental studies and has charged such costs to accumulated
depreciation. In January 1990, the Company entered into settlement
agreements with a number of insurance companies resulting in proceeds to
fund actual environmental costs incurred over a three to five-year
period beginning in 1990. The final insurance proceeds were requested
and received in 1992. In December 1995, the Maryland Public Service
Commission approved recovery of all environmental costs incurred through
September 30, 1995 less amounts previously amortized and insurance
proceeds. The amount approved for a 10-year amortization period was
$964,251. Of the $2.3 million in costs reported above, approximately
$528,000 has not been recovered through insurance proceeds or received
ratemaking treatment. It is management's opinion that these costs
incurred and future costs incurred, if any, will be recoverable in
rates.
WINTER HAVEN COAL GAS SITE
The Company is currently conducting investigations of a site in Winter
Haven, Florida, where the Company's predecessors manufactured coal gas
earlier this century. A Contamination Assessment Report ("CAR") was
submitted to the Florida Department of Environmental Protection ("FDEP")
in July 1990. The CAR contained the results of additional
investigations of conditions at the site. These investigations
confirmed limited soil and ground-water impacts to the site. In March
1991, FDEP directed the Company to conduct additional investigations
on-site to fully delineate the vertical and horizontal extent of soil and
ground-water impacts.
Additional contamination assessment activities were conducted at the
site in late 1992 and early 1993. In March 1993, a Contamination
Assessment Report Addendum ("CAR Addendum") was delivered to FDEP. The
CAR Addendum concluded that soil and ground-water impacts have been
adequately delineated as a result of the additional field work. The
FDEP approved the CAR and CAR Addendum in March of 1994. The next step
is a Risk Assessment ("RA") and a Feasibility Study ("FS") on the site.
A draft of the RA and FS were filed with the FDEP during 1995; however,
the RA and FS are not complete until accepted as final by the FDEP. On
May 10, 1996, the Company transmitted to FDEP an Air Sparging and Soil
Vapor Extraction Pilot Study Work Plan for FDEP's review and approval.
The Work Plan described the Company's proposal to undertake an Air
Sparging and Soil Vapor Extraction pilot study to evaluate the
effectiveness of air sparging as a ground-water remedy combined with
soil vapor extraction at the site. The Company is currently awaiting
FDEP's comments to the Work Plan. It is not possible to determine
whether remedial action will be required by FDEP and, if so, the cost of
such remediation.
The Company has spent approximately $668,000 on these investigations as
of June 30, 1997, and expects to recover these expenses, as well as any
future expenses, through base rates. These costs have been accounted
for as charges to accumulated depreciation. The Company requested and
received from the Florida Public Service Commission ("FPSC") approval to
amortize through base rates $359,659 of cleanup and removal costs
incurred as of December 31, 1986. As of December 31, 1992, these costs
were fully amortized. In January 1993, the Company received approval to
recover, through base rates, approximately $217,000 in additional costs
related to the former manufactured gas plant. This amount represents
recovery of $173,000 of costs incurred from January 1987 through
December 1992, as well as prospective recovery of estimated future costs
which had not yet been incurred at that time. The FPSC has allowed for
amortization of these costs over a three-year period and provided for
rate base treatment for the unamortized balance. In a separate docket
before the FPSC, the Company has requested and received approval to
apply a refund of 1991 over earnings of approximately $118,000 against
the balance of unamortized environmental charges incurred as of December
31, 1992. As a result, these environmental charges were fully amortized
as of June 1994. The FPSC issued an order in January 1997, applying a
refund of $292,000, pertaining to 1994 and 1995 over earnings, toward
the balance of unamortized environmental charges. Of the $668,000 in
costs reported above, all costs have received ratemaking treatment. The
FPSC has allowed the Company to continue to accrue for future
environmental costs. At June 30, 1997, the Company has $424,000
accrued. It is management's opinion that future costs, if any, will be
recoverable in rates.
SMYRNA COAL GAS SITE
On August 29, 1989 and August 4, 1993, representatives of DNREC
conducted sampling on property owned by the Company in Smyrna, Delaware.
This property is believed to be the location of a former manufactured
gas plant. Analysis of the samples taken by DNREC show a limited area
of soil contamination.
On November 2, 1993, DNREC advised the Company that it would require a
remediation of the soil contamination under the state's Hazardous
Substance Cleanup Act and submitted a draft Consent Decree to the
Company for its review. The Company met with DNREC personnel in
December 1993 to discuss the scope of any remediation of the site and in
January 1994, submitted a proposed work plan, together with comments on
the proposed Consent Decree. The final Work Plan was submitted on
September 27, 1994. DNREC has approved the Work Plan and the Consent
Decree. Remediation based on the Work Plan was completed in 1995, at a
cost of approximately $263,000. In June 1996, the Company received the
certificate of completion from DNREC. It is management's opinion that
these costs will be recoverable in rates.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS FOR THE
QUARTER ENDED JUNE 30, 1997
The Company recognized net income of $692,841 for the three months ended
June 30, 1997, representing an increase in net income of $206,530 as
compared to the corresponding period in 1996. The financial results for
1997 and 1996 include the operating results of Tri-County Gas Company, Inc.
("Tri-County"), which was acquired on March 6, 1997 and was accounted for
as a pooling of interests. As indicated in the table below, the increase
in earnings before interest and taxes ("EBIT") is due to higher earnings by
the natural gas transmission and advanced information services segments
coupled with a reduction in loss before interest and taxes ("LBIT") by the
propane distribution segment. These were partially offset by a decrease in
EBIT contributed by the natural gas distribution segment.
FOR THE QUARTER ENDED JUNE 30,
1997 1996 Change
---- ---- ------
Earnings Before Interest and Taxes
Natural Gas Distribution $ 998,202 $1,126,234 $(128,032)
Natural Gas Transmission 696,878 641,989 54,889
Propane Distribution (311,326) (633,923) 322,597
Advanced Information
Services 310,217 256,162 54,055
Eliminations & Other 104,058 172,831 (68,773)
---------- ---------- ---------
Total EBIT 1,798,029 1,563,293 234,736
Operating Income Taxes 389,058 478,902 (89,844)
Interest 779,784 670,477 109,307
Non-Operating Income, Net 63,654 72,397 (8,743)
---------- ---------- ---------
Net Income $ 692,841 $ 486,311 $ 206,530
========== ========== =========
NATURAL GAS DISTRIBUTION
The natural gas distribution segment reported EBIT of $998,202 for the
second quarter of 1997 as compared to EBIT of $1,126,234 for the
corresponding period last year -- a decrease of $128,032. The decrease in
EBIT is due to an increase in operating expenses mostly offset by an
increase in gross margin.
FOR THE QUARTER ENDED JUNE 30,
1997 1996 Change
---- ---- ------
Revenue $15,811,302 $15,602,300 $ 209,002
Cost of Gas 10,669,854 10,727,790 (57,936)
----------- ----------- ---------
Gross Margin 5,141,448 4,874,510 266,938
Operations & Maintenance 2,736,605 2,426,999 309,606
Depreciation & Amortization 789,003 744,453 44,550
Other Taxes 617,638 576,824 40,814
----------- ----------- ---------
EBIT $ 998,202 $ 1,126,234 $(128,032)
=========== =========== =========
The increase in gross margin is primarily due to 8% colder than normal
temperatures in our northern service territory which resulted in a 4%
increase in deliveries to residential and commercial customers. Operations
expenses increased in the areas of distribution, legal, data processing,
uncollectibles, benefits and regulatory related expenses. Maintenance
expenses primarily increased in mains, meters and regulators. Depreciation
and amortization expense increased due to plant placed in service during
the past twelve months. Other taxes were higher due to revenue related
taxes and property taxes.
NATURAL GAS TRANSMISSION
The natural gas transmission segment reported EBIT of $696,878 for the
second quarter of 1997 as compared to EBIT of $641,989 for the
corresponding period last year -- an increase of $54,889. The increase in
EBIT is primarily due to an increase in gross margin somewhat offset by
higher expenses.
FOR THE QUARTER ENDED JUNE 30,
1997 1996 Change
---- ---- ------
Revenue $6,673,540 $7,660,939 $(987,399)
Cost of Gas 4,877,330 6,016,536 (1,139,206)
---------- ---------- ---------
Gross Margin 1,796,210 1,644,403 151,807
Operations & Maintenance 774,055 707,824 66,231
Depreciation & Amortization 222,688 191,332 31,356
Other Taxes 102,589 103,258 (669)
---------- ---------- ---------
EBIT $ 696,878 $ 641,989 $ 54,889
========== ========== =========
The gross margin increase was primarily the result of a rate increase that
went into effect mid-April. The higher rates are subject to refund pending
the final outcome of Eastern Shore Natural Gas Company's ("Eastern Shore")
rate increase filing with the Federal Energy Regulatory Commission
("FERC"). Operations and maintenance expenses increased in the areas of
legal fees and maintenance of communication equipment. Depreciation and
amortization increased due to the capital additions placed in service
during the past twelve months.
As previously reported, Eastern Shore filed with FERC an abbreviated
application for a blanket certificate of public convenience to provide open
access transportation service. It is expected that open access
transportation service would be implemented in the second half of 1997.
PROPANE DISTRIBUTION
For the second quarter of 1997, the propane distribution segment
experienced a LBIT of $311,326. These results were more favorable than
those achieved for the corresponding quarter of 1996, with the segment
recognizing a decrease in LBIT of $322,597, or 51%, over the second quarter
1996 LBIT of $633,923. The decrease in LBIT was attributable to lower
operating expenses partially offset by a decrease in gross margin. The
1997 and 1996 financial results of the propane distribution segment include
the operating results of Tri-County.
FOR THE QUARTER ENDED JUNE 30,
1997 1996 Change
---- ---- ------
Revenue $4,370,878 $4,350,153 $ 20,725
Cost of Gas 2,361,212 2,107,997 253,215
---------- ---------- ---------
Gross Margin 2,009,666 2,242,156 (232,490)
Operations & Maintenance 1,901,541 2,347,390 (445,849)
Depreciation & Amortization 298,622 427,482 (128,860)
Other Taxes 120,829 101,207 19,622
---------- ---------- ---------
EBIT $ (311,326) $ (633,923) $ 322,597
========== ========== =========
The decrease in gross margin is due primarily to a reduction in sales
prices partially offset by an increase in deliveries. Operations and
maintenance expenses declined primarily in the areas of legal fees, outside
services, compensation and insurance. Depreciation and amortization
expense decreased $128,860 which is primarily the result of a non-compete
agreement which became fully amortized in November of 1996. Other taxes
increased due to property taxes on capital additions in 1996.
ADVANCED INFORMATION SERVICES
The advanced information services segment recognized an EBIT of $310,217
and $256,162 for the quarters ended June 30, 1997 and 1996, respectively.
This increase in EBIT of $54,055 is attributable to higher revenue slightly
offset by increased operating expenses.
FOR THE QUARTER ENDED JUNE 30,
1997 1996 Change
---- ---- ------
Revenue $1,911,836 $1,798,823 $ 113,013
Operations & Maintenance 1,502,886 1,441,970 60,916
Depreciation & Amortization 24,480 36,234 (11,754)
Other Taxes 74,253 64,457 9,796
---------- ---------- ---------
EBIT $ 310,217 $ 256,162 $ 54,055
========== ========== =========
The increase in revenue is due primarily to an increase in consulting and
resource services revenue. Operation expenses were higher, primarily
compensation expense.
INTEREST
The increase in interest expense is associated with higher short-term
borrowing balances, as compared to the same period last year.
OPERATING INCOME TAXES
Operating income taxes decreased by $89,844 because the 1996 LBIT for the
propane distribution segment does not include income tax benefits, since
Tri-County was a subchapter S corporation prior to the acquisition in the
first quarter of 1997.
RESULTS OF OPERATIONS FOR THE
SIX MONTHS ENDED JUNE 30, 1997
The Company recognized net income of $4,058,953 for the six months ended
June 30, 1997, representing a decrease in net income of $2,427,515 as
compared to the corresponding period in 1996. The financial results for
1997 and 1996 include the operating results of Tri-County. As indicated in
the table below, the decrease in EBIT is due to lower earnings in the
distribution and propane segments, offset by increased earnings in
transmission, advanced information services and other.
FOR THE SIX MONTHS ENDED JUNE 30,
1997 1996 Change
---- ---- ------
Earnings Before Interest and Taxes
Natural Gas Distribution $4,419,765 $5,882,954 $(1,463,189)
Natural Gas Transmission 1,314,290 1,197,085 117,205
Propane Distribution 1,390,847 3,077,269 (1,686,422)
Advanced Information
Services 721,300 565,955 155,345
Eliminations & Other 324,467 286,574 37,893
---------- ---------- -----------
Total EBIT 8,170,669 11,009,837 (2,839,168)
Operating Income Taxes 2,661,602 3,257,947 (596,345)
Interest 1,578,931 1,412,968 165,963
Non-Operating Income, Net 128,817 147,546 (18,729)
---------- ---------- -----------
Net Income $4,058,953 $6,486,468 $(2,427,515)
========== ========== ===========
NATURAL GAS DISTRIBUTION
The natural gas distribution segment reported EBIT of $4,419,765 for the
first six months of 1997 as compared to EBIT of $5,882,954 for the
corresponding period last year. The decrease in EBIT is due to a reduction
in gross margin, coupled with increased expenses.
FOR THE SIX MONTHS ENDED JUNE 30,
1997 1996 Change
---- ---- ------
Revenue $42,290,107 $43,318,721 $(1,028,614)
Cost of Gas 29,639,265 29,791,577 (152,312)
---------- ----------- -----------
Gross Margin 12,650,842 13,527,144 (876,302)
Operations & Maintenance 5,308,144 4,852,157 455,987
Depreciation & Amortization 1,576,489 1,486,506 89,983
Other Taxes 1,346,444 1,305,527 40,917
---------- ----------- -----------
EBIT $4,419,765 $5,882,954 $(1,463,189)
========== =========== ===========
The decrease in gross margin is primarily due to first quarter temperatures
which were 14% warmer than the first quarter in 1996, resulting in an 11%
reduction in deliveries during that period. Operations expenses increased
in the areas of distribution, legal, data processing, benefits and
regulatory related expenses. Maintenance expenses primarily increased in
mains, meters and regulators. Depreciation and amortization expense
increased due to plant placed in service during the last twelve months.
NATURAL GAS TRANSMISSION
The natural gas transmission segment reported EBIT of $1,314,290 for the
first six months of 1997 as compared to EBIT of $1,197,085 for the
corresponding period last year -- an increase of $117,205. The increase in
EBIT is due to an increase in gross margin slightly offset by an increase
in operating expenses.
FOR THE SIX MONTHS ENDED JUNE 30,
1997 1996 Change
---- ---- ------
Revenue $18,733,593 $19,370,231 $(636,638)
Cost of Gas 15,254,182 16,020,684 (766,502)
---------- ---------- ---------
Gross Margin 3,479,411 3,349,547 129,864
Operations & Maintenance 1,510,372 1,558,369 (47,997)
Depreciation & Amortization 445,376 382,663 62,713
Other Taxes 209,373 211,430 (2,057)
---------- ---------- ---------
EBIT $1,314,290 $1,197,085 $ 117,205
========== ========== =========
The gross margin increase was primarily the result of a rate increase that
went into effect mid-April. The higher rates are subject to refund pending
the final outcome of the Eastern Shore rate increase filing with the FERC.
Operations and maintenance expenses decreased in the areas of compensation
and data processing. These reductions were somewhat offset by an increase
in legal fees. Depreciation and amortization increased due to the capital
additions placed in service during the past twelve months.
PROPANE DISTRIBUTION
The propane distribution segment recognized EBIT of $1,390,847 for the
first six months of 1997, as compared to $3,077,269 EBIT for the six
months ended June 30, 1996. The financial results for 1997 and 1996
include the operating results of Tri-County. The decrease in EBIT of
$1,686,422 was primarily due to a reduction in gross margin, somewhat
offset by lower expenses.
FOR THE SIX MONTHS ENDED JUNE 30,
1997 1996 Change
---- ---- ------
Revenue $15,548,906 $19,104,053 $(3,555,147)
Cost of Gas 9,033,868 10,165,446 (1,131,578)
---------- ---------- ----------
Gross Margin 6,515,038 8,938,607 (2,423,569)
Operations & Maintenance 4,259,712 4,742,956 (483,244)
Depreciation & Amortization 587,877 854,040 (266,163)
Other Taxes 276,602 264,342 12,260
---------- ---------- ---------
EBIT $1,390,847 $3,077,269 $(1,686,422)
========== ========== =========
The decrease in gross margin occurred primarily during the first quarter
when sales volumes and margin earned per gallon sold declined 21% and 20%,
respectively. The declines resulted from warm temperatures experienced
during the first quarter of 1997. Operations and maintenance expenses
declined in the areas of legal fees, outside services, compensation and
insurance. Depreciation and amortization expense decreased $128,860 which
is primarily the result of a non-compete agreement which became fully
amortized in November 1996.
ADVANCED INFORMATION SERVICES
For the six months ended June 30, the advanced information services segment
recognized an EBIT of $721,300 and $565,955 for 1997 and 1996,
respectively. This increase in EBIT of $155,345 is the outcome of higher
revenue and lower operating expenses.
FOR THE SIX MONTHS ENDED JUNE 30,
1997 1996 Change
---- ---- ------
Revenue $3,903,552 $3,818,823 $ 84,729
Operations & Maintenance 2,955,967 3,022,919 (66,952)
Depreciation & Amortization 50,763 72,348 (21,585)
Other Taxes 175,522 157,601 17,921
---------- ---------- ---------
EBIT $ 721,300 $ 565,955 $ 155,345
========== ========== =========
The increase in revenue primarily occurred in consulting and resource
services revenues due to a rise in demand for progress training and
programmers.
INTEREST
The increase in interest expense is associated with higher short-term
borrowing balances, as compared to the same period last year.
OPERATING INCOME TAXES
Operating income taxes decreased $596,345 due to a reduction in EBIT and
the lack of income tax expense recorded by Tri-County in 1996, offset by a
one-time expense of $318,000 recorded during the first quarter. The one-time
expense was required to establish deferred income taxes for Tri-County
Gas Company, Inc., acquired during the first quarter of 1997. Prior to the
acquisition, Tri-County Gas Company, Inc. was a Subchapter S Corporation
for income tax reporting; therefore, no deferred income taxes were recorded
on their balance sheet. In addition, the Company's 1996 restated financial
statements do not include any income tax expense on EBIT reported for Tri-County
due to their 1996 Subchapter S status.
ENVIRONMENTAL MATTERS
The Company continues to work with federal and state environmental agencies
to assess the environmental impacts and explore corrective action at
several former gas manufacturing plant sites (see Note 4 to the
Consolidated Financial Statements). The Company believes that any future
costs associated with these sites will be recoverable in future rates.
FINANCIAL POSITION, LIQUIDITY AND CAPITAL RESOURCES
The Company's capital requirements reflect the capital intensive nature of
its business and are attributable principally to its construction program and
the retirement of its outstanding debt. The Company relies on funds provided
by operations and short-term borrowings to meet normal working capital
requirements and temporarily finance capital expenditures. During the first
six months of 1997, the Company's net cash flow provided by operating
activities, net cash used by investing activities and net cash used by
financing activities were approximately $12.0 million, $5.7 million and $7.1
million, respectively. Due to the seasonal nature of the Company's business,
there are substantial variations in the results of operations reported on a
quarterly basis.
The Board of Directors has authorized the Company to borrow up to $20 million
from banks and trust companies. As of June 30, 1997, the Company had four $8
million unsecured bank lines of credit. Funds provided from these lines of
credit are used for short-term cash needs to meet seasonal working capital
requirements and to fund portions of its capital expenditures. The
outstanding balances of short-term borrowings at June 30, 1997 and 1996 were
$9.9 million and $175,000, respectively.
During the six months ended June 30, 1997 and 1996, net property, plant and
equipment expenditures were approximately $5.7 million and $5.4 million,
respectively. For 1997, the Company has budgeted $18.9 million for capital
expenditures. The components of this amount include $8.5 million for natural
gas distribution, $4.5 million for natural gas transmission, $3.8 million for
environmental related expenditures, $1.8 million for propane distribution,
$150,000 for advanced information services, with the remaining $150,000 for
computer, office equipment and general plant. The natural gas and propane
expenditures are for expansion and improvement. Natural gas transmission
expenditures are to improve the pipeline system and completion of the
Delaware City compressor station. Financing of the 1997 construction will be
provided primarily by short-term borrowings and cash from operations and the
issuance of the long-term debt. In the fourth quarter of 1997, the Company
expects to finalize the issuance of $10.0 million of senior notes due in
December 2007. The construction program is subject to continuous review and
modification by management. Actual construction expenditures may vary from
the above estimates due to a number of factors including inflation, changing
economic conditions, regulation, load growth and the cost and availability of
capital.
The Company expects to incur environmental related expenditures in the future
(see Note 4 to the Consolidated Financial Statements), a portion of which may
need to be financed through external sources. Management does not expect
such financing to have a material adverse effect on the financial position or
capital resources of the Company.
The Company is continually evaluating new business opportunities and
acquisitions such as Tri-County. The Company may need to obtain financing in
conjunction with any future opportunities or acquisitions. Management will
consider the impact of such financing on the financial position of the
Company in its evaluation of the business opportunity or acquisition. Such
financings are not expected to have a material adverse effect on the
financial position or capital resources of the Company.
As of June 30, 1997, common equity represented 63.5% of permanent
capitalization, compared to 60.7% as of December 31, 1996. 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, helps to ensure
that the Company will be able to attract capital from outside sources at a
reasonable cost. The achievement of these objectives will provide benefits
to customers and creditors, as well as the Company's investors.
PART II
OTHER INFORMATION
CHESAPEAKE UTILITIES CORPORATION AND SUBSIDIARIES
Item 1: Legal Proceedings
See Note 2 to the Consolidated Financial Statements
Item 2: Changes in Securities
None
Item 3: Defaults Upon Senior Securities
None
Item 4: Submission of Matters to a Vote of Security Holders
The Annual Meeting of Stockholders was held on May 20, 1997.
Proposals as submitted in the proxy statement were voted on as
follows:
1. All Board of Director nominees were elected to the classes
indicated in the proxy statement.
2. Ratification of the selection of the Company's independent
auditors through the fiscal year ending December 31, 1997
was approved.
Item 5: Other Information
None
Item 6(a): Exhibits
Exhibit 3 - Amendments to the Bylaws of Chesapeake Utilities
Corporation, effective July 11, 1997, are filed
herewith.
Exhibit 10 - Form of the Executive Employment Agreement dated March
26, 1997, by and between Chesapeake Utilities
Corporation and each of Ralph J. Adkins and John R.
Schimkaitis, is submitted herewith.
Exhibit 11 - Computation of Primary and Fully Diluted Earnings Per
Share is submitted herewith.
Item 6 (b): Reports on Form 8-K
None
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, Chief Financial Officer and Treasurer
Date: August 13, 1997