SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
_______________________________
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended: September 30, 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 - 4,481,394 shares issued as of
September 30, 1997.
PART I
FINANCIAL INFORMATION
CHESAPEAKE UTILITIES CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, DECEMBER 31,
1997 1996
ASSETS (UNAUDITED) (AS RESTATED)
----------- -----------
PROPERTY, PLANT AND EQUIPMENT
Natural gas distribution $74,148,712 $70,497,872
Natural gas transmission 33,399,202 30,655,492
Propane distribution 26,762,385 25,279,217
Advanced information services 823,375 1,003,850
Other plant 5,025,689 4,769,431
Gas plant acquisition adjustment 795,004 795,004
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Total property, plant and equipment 140,954,367 133,000,866
Less: Accumulated depreciation and amortization (42,800,914) (39,430,738)
------------- -------------
Net property, plant and equipment 98,153,453 93,570,128
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INVESTMENTS 2,340,007 2,263,068
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CURRENT ASSETS
Cash and cash equivalents 1,467,700 2,213,529
Accounts receivable, less allowance for uncollectibles 7,357,140 14,488,945
Materials and supplies, at average cost 1,684,040 1,284,876
Propane inventory, at average cost 2,426,356 2,345,531
Storage gas prepayments 4,005,715 3,731,680
Underrecovered purchased gas costs 203,556 2,192,170
Income taxes receivable 0 112,942
Prepaid expenses 750,720 942,359
Deferred income taxes 813,681 158,010
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Total current assets 18,708,908 27,470,042
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DEFERRED CHARGES AND OTHER ASSETS
Environmental regulatory assets 6,501,505 6,650,088
Environmental expenditures, net 2,262,938 1,778,348
Order 636 transition cost 0 943,209
Other deferred charges and intangible assets 3,853,401 3,371,027
------------- -------------
Total deferred charges and other assets 12,617,844 12,742,672
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TOTAL ASSETS $131,820,212 $136,045,910
============= =============
The accompanying notes are an integral part of these financial statements.
CHESAPEAKE UTILITIES CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, DECEMBER 31,
1997 1996
CAPITALIZATION AND LIABILITIES (UNAUDITED) (AS RESTATED)
----------- -----------
CAPITALIZATION
Stockholders' equity
Common Stock, par value $.4867 per share;
(authorized 12,000,000 shares; issued 4,481,394
and 4,439,516 shares, respectively) $2,181,014 $2,160,628
Additional paid-in capital 19,433,280 18,745,718
Retained earnings 26,947,737 26,957,049
Less:
Unearned compensation - restricted stock awards (234,348) (364,529)
Net unrealized gain on marketable securities 64,560 38,598
------------- -------------
Total stockholders' equity 48,392,243 47,537,464
Long-term debt, net of current portion 28,642,000 30,776,919
------------- -------------
Total capitalization 77,034,243 78,314,383
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CURRENT LIABILITIES
Current portion of long-term debt 659,868 1,285,938
Short-term borrowings 18,400,000 12,700,000
Accounts payable 6,348,741 14,426,983
Refunds payable to customers 336,575 353,734
Income taxes payable 216,574 0
Accrued interest 619,444 741,768
Dividends payable 1,086,650 883,621
Other accrued expenses 3,862,271 3,733,235
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Total current liabilities 31,530,123 34,125,279
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DEFERRED CREDITS AND OTHER LIABILITIES
Deferred income taxes 10,230,179 9,798,676
Deferred investment tax credits 840,201 876,432
Environmental liability 6,501,505 6,650,088
Accrued pension costs 2,230,258 1,866,660
Order 636 transition liability 0 943,209
Other liabilities 3,453,703 3,471,183
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Total deferred credits and other liabilities 23,255,846 23,606,248
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TOTAL CAPITALIZATION AND LIABILITIES $131,820,212 $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
SEPTEMBER 30,
1997 1996
(UNAUDITED) (AS RESTATED)
------------- -------------
OPERATING REVENUES $19,915,309 $19,647,677
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OPERATING EXPENSES
Purchased gas costs 11,078,236 11,464,752
Operations 6,668,866 5,873,772
Maintenance 460,577 645,609
Depreciation and amortization 1,374,574 1,403,152
Other taxes 857,846 806,480
Income taxes (549,967) (385,666)
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Total operating expenses 19,890,132 19,808,099
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OPERATING INCOME 25,177 (160,422)
OTHER INCOME AND DEDUCTIONS 52,029 114,203
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INCOME BEFORE INTEREST CHARGES 77,206 (46,219)
INTEREST CHARGES 816,399 701,560
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NET INCOME ($739,193) ($747,779)
============= =============
EARNINGS PER SHARE OF COMMON STOCK
Earnings per share ($0.17) ($0.17)
------------- -------------
Average shares outstanding 4,477,569 4,422,835
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The accompanying notes are an integral part of these financial statements.
CHESAPEAKE UTILITIES CORPORATION AND SUBSIDIARIES
CONSOLIDATED INCOME STATEMENTS
FOR THE NINE MONTHS ENDED
SEPTEMBER 30,
1997 1996
(UNAUDITED) (AS RESTATED)
------------- -------------
OPERATING REVENUES $88,286,384 $93,896,237
------------- -------------
OPERATING EXPENSES
Purchased gas costs 52,983,499 56,200,448
Operations 19,138,841 18,409,062
Maintenance 1,551,932 1,840,266
Depreciation and amortization 4,071,882 4,223,444
Other taxes 2,894,350 2,759,268
Income taxes 2,111,636 2,872,281
------------- -------------
Total operating expenses 82,752,140 86,304,769
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OPERATING INCOME 5,534,244 7,591,468
OTHER INCOME AND DEDUCTIONS 180,847 261,749
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INCOME BEFORE INTEREST CHARGES 5,715,091 7,853,217
INTEREST CHARGES 2,395,330 2,114,528
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NET INCOME $3,319,761 $5,738,689
============= =============
EARNINGS PER SHARE OF COMMON STOCK (1):
Primary:
Earnings per share $0.74 $1.30
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Average shares outstanding 4,488,482 4,423,878
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Fully Diluted:
Earnings per share $0.73 $1.26
------------- -------------
Average shares outstanding 4,733,912 4,671,289
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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 NINE MONTHS ENDED
SEPTEMBER 30,
1997 1996
(UNAUDITED) (AS RESTATED)
------------- -------------
OPERATING ACTIVITIES
Net Income $3,319,761 $5,738,689
Adjustments to reconcile net income to net operating cash
Depreciation and amortization 4,575,567 4,934,216
Deferred income taxes, net (275,145) 220,549
Investment tax credit adjustments (36,231) (36,231)
Employee benefits 363,597 328,412
Employee compensation from lapsing stock restrictions 130,181 257,204
Other (1,109,270) (420,383)
Changes in assets and liabilities:
Accounts receivable 7,131,804 6,721,321
Inventory, materials, supplies and storage gas (754,024) (1,578,465)
Prepaid expenses 191,641 (157,759)
Other deferred charges 531,703 316,389
Accounts payable (8,078,242) (5,173,828)
Refunds payable to customers (17,159) (302,299)
Over/(Under) recovered purchased gas costs 1,988,614 (631,181)
Other current liabilities 336,226 474,175
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Net cash provided by operating activities 8,299,023 10,690,809
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INVESTING ACTIVITIES
Property, plant and equipment expenditures, net (9,565,768) (9,372,957)
------------- -------------
Net cash used by investing activities (9,565,768) (9,372,957)
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FINANCING ACTIVITIES
Common stock dividends net of amounts reinvested of
$409,920 and $426,341, respectively (2,716,123) (2,168,446)
Net repayments under line of credit agreements 5,700,000 825,000
Proceeds from issuance of stock to Company 401(k) plan 298,028 260,126
Repayments of long-term debt (2,760,989) (586,646)
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Net cash used by financing activities 520,916 (1,669,966)
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NET DECREASE IN CASH (745,829) (352,114)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 2,213,529 1,395,614
------------- -------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $1,467,700 $1,043,500
============= =============
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 serves approximately
34,000 propane customers on the Delmarva Peninsula.
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
The Company currently is participating in the investigation, assessment and
remediation of three former gas manufacturing plant sites located in
different jurisdictions, including the exploration of corrective action
options to remove environmental contaminants. The Company has accrued
liabilities for two of these sites, the Dover Gas Light and Salisbury Town
Gas Light sites.
DOVER GAS LIGHT SITE
The Dover site has been listed by the Environmental Protection Agency
Region III ("EPA") on the Superfund National Priorities List under the
Comprehensive Environmental Response, Compensation and Liability Act
("CERCLA"). On August 19, 1994, the EPA issued the Record of Decision
("ROD") for the site, which selected a remedial plan and estimated the
costs of the selected remedy at $2.7 million for ground-water remediation
and $3.3 million for soil remediation. 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"). Other
potentially responsible parties ("PRPs") such as the State of Delaware were
not ordered to perform the ROD. Please refer to "Environmental -- Dover
Gas Light Site" in the Company's report on Form 10-K for additional
information pertaining to the cost to remediate the site, investigations
related to additional parties who may be PRPs and/or litigation initiated
by the Company pertaining to the site.
In conjunction with the commencement of the design phase of the ROD, a pre-
design investigation report ("the report") was filed in October 1996 with the
EPA. The report, which requires EPA approval, provided an 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 an 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 August
28, 1997, the EPA issued a Proposed Plan to modify the current clean-up
plan that would involve: (1) excavation and off-site thermal treatment of
the contents of the former subsurface gas holders; (2) implementation of
soil vaporization extraction; (3) pavement of the parking lot; and (4) use
of institutional controls that would restrict future development of the
Site. The overall clean-up cost of the Site under the proposed plan was
estimated at $4.2 million, as compared to EPA's estimate of the current
clean-up plan at $13.2 million.
EPA's public comment period began August 29, 1997 and closed on September
29, 1997. The EPA will consider all comments received during this public
comment period before any final decision is made. If the decision is made
to modify the current clean-up plan, it will be formally noted by an
amendment to the ROD.
In 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. Current
estimates for remediation of the site range from $4.2 million to $13.2
million, depending on the remedy selected by the EPA. The Company has not
adjusted its $6.0 million accrual, since 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. The recorded liability
may be adjusted upward or downward, depending on the outcome of the EPA's
reconsideration 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.
As of September 30, 1997, the Company has incurred approximately $4.9
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. As of September
30, 1997, $966,000 of environmental costs are not included in the rider,
effective December 1, 1996. 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. For additional
information pertaining to the rider, please refer to "Environmental --
Dover Gas Light Site" on page 15 of the Company's report on Form 10-K.
SALISBURY TOWN GAS LIGHT SITE
In cooperation with the Maryland Department of the Environment ("MDE"), in
1996 the Company completed construction and began remediation procedures at
the Salisbury site. In addition, the Company began quarterly reporting of
the remediation and monitoring results to the MDE.
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 September 30, 1997, the Company has incurred
approximately $2.3 million for remedial actions and environmental studies.
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 $566,000 has not been recovered through
insurance proceeds or received ratemaking treatment. It is management's
opinion that these and any future costs incurred, will be recoverable in
rates.
WINTER HAVEN 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 Florida Department
of Environmental Protection ("FDEP"). The Work Plan described the
Company's proposal to undertake an Air Sparging and Soil Vapor Extraction
("AS/SVE") pilot study to evaluate at the site. After discussions with the
FDEP, the Company filed a modified AS/SVE Pilot Study Work Plan, scope of
work to complete the site assessment activities and a report describing a
limited sediment investigation performed recently. The Company will be
awaiting FDEP's comments to the modified 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 and received ratemaking treatment of approximately
$678,000 on these investigations as of September 30, 1997. The Company has
been allowed by the Florida Public Service Commission to continue to accrue
for future environmental costs. At September 30,1997, the Company had
$432,000 accrued. It is management's opinion that future costs, if any,
will be recoverable in rates.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS FOR THE
QUARTER ENDED SEPTEMBER 30, 1997
The Company recognized a net loss of $739,193 for the three months ended
September 30, 1997, representing a decrease in net loss of $8,586 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 decrease in loss before
interest and taxes ("LBIT") is due to greater earnings before interest and
taxes ("EBIT") for the natural gas transmission, information services and
other segments, a decrease in LBIT in propane distribution, offset by an
increased LBIT in the natural gas distribution segment.
FOR THE QUARTER ENDED SEPTEMBER 30,
1997 1996 Change
---- ---- ------
Loss Before Interest and Taxes
Natural Gas Distribution $(497,846) $(251,778) $(246,068)
Natural Gas Transmission 777,484 600,455 177,029
Propane Distribution (1,165,868) (1,191,129) 25,261
Advanced Information Services 254,381 204,145 50,236
Eliminations & Other 107,059 92,219 14,840
--------- --------- -------
Total LBIT (524,790) (546,088) 21,298
Operating Income Taxes (549,967) (385,666) (164,301)
Interest 816,399 701,560 114,839
Non-Operating (Loss) Income, Net 52,029 114,203 (62,174)
--------- --------- -------
Net Loss $(739,193) $(747,779) $ 8,586
========= ========= =======
NATURAL GAS DISTRIBUTION
The natural gas distribution segment reported LBIT of $497,846 for the third
quarter of 1997 as compared to $251,778 for the corresponding period last year
- -- an increase of $246,068. The increase in LBIT is due to higher operating
expenses mostly offset by an increase in gross margin.
FOR THE QUARTER ENDED SEPTEMBER 30,
1997 1996 Change
---- ---- ------
Revenue $11,488,507 $11,372,713 $115,794
Cost of Gas 7,793,376 7,938,243 (144,867)
---------- ---------- -------
Gross Margin 3,695,131 3,434,470 260,661
Operations & Maintenance 2,824,374 2,417,837 406,537
Depreciation & Amortization 795,382 748,030 47,352
Other Taxes 573,221 520,381 52,840
---------- ---------- -------
EBIT $ (497,846) $ (251,778) $(246,068)
========== ========== =======
The increase in gross margin is primarily due to an $86,000 increase in
revenue from service work, customer growth and rate restructurings which went
into effect during the first half of 1997. Operations expenses increased in
the areas of billable service work, payroll, legal fees, outside services and
regulatory related expenses. The increase in maintenance expenses is
primarily due to maintenance of mains. 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 $777,484 for the third
quarter of 1997 as compared to EBIT of $600,455 for the corresponding period
last year -- an increase of $177,029. The increase in EBIT is primarily due
to an increase in gross margin somewhat offset by higher expenses.
FOR THE QUARTER ENDED SEPTEMBER 30,
1997 1996 Change
---- ---- ------
Revenue $6,857,335 $6,701,703 $155,632
Cost of Gas 5,078,678 5,109,832 (31,154)
--------- --------- -------
Gross Margin 1,778,657 1,591,871 186,786
Operations & Maintenance 680,275 709,022 (28,747)
Depreciation & Amortization 223,928 185,249 38,679
Other Taxes 96,970 97,145 (175)
--------- --------- -------
EBIT $ 777,484 $ 600,455 $177,029
========= ========= =======
The gross margin increase was primarily the result of a rate increase that
went into effect mid-April. The higher rates resulted from of Eastern Shore
Natural Gas Company's ("Eastern Shore") rate increase filing with the Federal
Energy Regulatory Commission ("FERC"). Eastern Shore reached a settlement
with FERC during the quarter, and any refund resulting from the settlement has
been accrued, pending final approval. Operations expenses increased $42,000,
primarily in the areas of legal fees, outside services and corporate related
costs offset by a decrease in payroll. 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. Effective November 1, 1997, Eastern Shore
initiated the provision of open access transportation services on its system.
Eastern Shore will no longer sell gas, but has converted to a provider of
contract storage and transportation services. Going forward, third party
suppliers will compete with the Company to sell gas to the local distribution
companies and the end users on Eastern Shore's system.
PROPANE DISTRIBUTION
For the third quarter of 1997, the propane distribution segment experienced
LBIT of $1,165,868. These results were more favorable than those achieved for
the corresponding quarter of 1996, with the segment recognizing a decrease in
LBIT of $25,261 over the third quarter 1996 LBIT of $1,191,129. 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 SEPTEMBER 30,
1997 1996 Change
---- ---- ------
Revenue $ 2,979,855 $ 3,335,058 $(355,203)
Cost of Gas 1,640,731 1,787,561 (146,830)
--------- --------- -------
Gross Margin 1,339,124 1,547,497 (208,373)
Operations & Maintenance 2,097,645 2,206,200 (108,555)
Depreciation & Amortization 308,341 427,116 (118,775)
Other Taxes 99,006 105,310 (6,304)
--------- --------- -------
EBIT $(1,165,868 $(1,191,129) $ 25,261
========= ========= =======
The decrease in gross margin is due primarily to a 9% reduction in deliveries
and a 15% reduction in margin earned per gallon sold. Decreased expenses for
vehicles, buildings and equipment resulted in lower maintenance costs.
Depreciation and amortization expense decreased $118,775 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 $254,381 and
$204,145 for the quarters ended September 30, 1997 and 1996, respectively.
This increase in EBIT of $50,236 is attributable to higher revenue slightly
offset by increased operating expenses.
FOR THE QUARTER ENDED SEPTEMBER 30,
1997 1996 Change
---- ---- ------
Revenue $2,051,180 $1,663,855 $387,325
Operations & Maintenance 1,685,265 1,372,266 312,999
Depreciation & Amortization 33,412 30,630 2,782
Other Taxes 78,122 56,814 21,308
--------- --------- -------
EBIT $ 254,381 $ 204,145 $ 50,236
========= ========= =======
The increase in revenue is due primarily to increases in consulting and
resource services. Operations expenses were higher due to billable
compensation directly related to increases in revenue, non-billable
compensation and other costs related to overall growth.
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 $164,301 primarily due to the propane
distribution segment not including income tax benefits, since Tri-County was a
subchapter S corporation prior to the acquisition in the first quarter of 1997.
NON-OPERATING INCOME (LOSS)
The increase in the loss for the quarter is primarily due to a reduction in
interest income and the allowance for equity funds used during construction
("AFUDC").
RESULTS OF OPERATIONS FOR THE
NINE MONTHS ENDED SEPTEMBER 30, 1997
The Company recognized net income of $3,319,761 for the nine months ended
September 30, 1997, representing a decrease in net income of $2,418,928 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 natural gas
and propane distribution segments, partially offset by increased earnings in
transmission, advanced information services and other.
FOR THE NINE MONTHS ENDED SEPTEMBER 30,
1997 1996 Change
---- ---- ------
Earnings Before Interest and Taxes
Natural Gas Distribution $3,921,919 $5,631,176 $(1,709,257)
Natural Gas Transmission 2,091,774 1,797,540 294,234
Propane Distribution 224,979 1,886,140 (1,661,161)
Advanced Information Services 975,681 770,100 205,581
Eliminations & Other 431,527 378,793 52,734
--------- ---------- ---------
Total EBIT 7,645,880 10,463,749 (2,817,869)
Operating Income Taxes 2,111,636 2,872,281 (760,645)
Interest 2,395,330 2,114,528 280,802
Non-Operating Income, Net 180,847 261,749 (80,902)
--------- ---------- ---------
Net Income $3,319,761 $5,738,689 $(2,418,928)
========= ========== =========
NATURAL GAS DISTRIBUTION
The natural gas distribution segment reported EBIT of $3,921,919 for the first
nine months of 1997 as compared to EBIT of $5,631,176 for the corresponding
period last year. The decrease in EBIT is due to a reduction in gross margin,
coupled with increased expenses.
FOR THE NINE MONTHS ENDED SEPTEMBER 30,
1997 1996 Change
---- ---- ------
Revenue $53,778,615 $54,691,434 $ (912,819)
Cost of Gas 37,432,642 37,729,820 (297,178)
---------- ---------- ---------
Gross Margin 16,345,973 16,961,614 (615,641)
Operations & Maintenance 8,232,520 7,269,995 962,525
Depreciation & Amortization 2,371,871 2,324,536 47,335
Other Taxes 1,919,663 1,825,907 93,756
---------- ---------- ---------
EBIT $ 3,821,919 $ 5,541,176 $(1,719,257)
========== ========== =========
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. Partially offsetting the decrease
in margin was an $89,000 increase in service work revenue. Operations
expenses increased in the areas of billable service work, legal fees, outside
services, data processing 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 $2,091,774 for the first
nine months of 1997 as compared to EBIT of $1,797,540 for the corresponding
period last year -- an increase of $294,234. The increase in EBIT is due to
an increase in gross margin.
FOR THE NINE MONTHS ENDED SEPTEMBER 30,
1997 1996 Change
---- ---- ------
Revenue $25,590,929 $26,071,935 $(481,006)
Cost of Gas 20,332,861 21,130,517 (797,656)
---------- ---------- -------
Gross Margin 5,258,068 4,941,418 316,650
Operations & Maintenance 2,190,647 2,267,391 (76,744)
Depreciation & Amortization 669,304 567,913 101,391
Other Taxes 306,343 308,574 (2,231)
---------- ---------- -------
EBIT $ 2,091,774 $ 1,797,540 $ 294,234
========== ========== =======
The gross margin increase was primarily the result of a rate increase that
went into effect in mid-April. The higher rates were subject to refund pending
the final outcome of the Eastern Shore rate increase filing with the FERC. A
settlement was reached with FERC during the quarter and any refunds have been
accrued. 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 $224,979 for the first
nine months of 1997, as compared to EBIT of $1,886,140 for the nine months ended
September 30, 1996. The financial results for 1997 and 1996 include the
operating results of Tri-County. The decrease in EBIT of $1,661,161 was
primarily due to a reduction in gross margin, somewhat offset by lower
expenses.
FOR THE NINE MONTHS ENDED SEPTEMBER 30,
1997 1996 Change
---- ---- ------
Revenue $18,528,761 $22,439,111 $(3,910,350)
Cost of Gas 10,674,599 11,992,755 (1,318,156)
---------- ---------- ---------
Gross Margin 7,854,162 10,446,356 (2,592,194)
Operations & Maintenance 6,357,357 6,909,408 (552,051)
Depreciation & Amortization 896,218 1,281,157 (384,939)
Other Taxes 375,608 369,651 5,957
---------- ---------- ---------
EBIT $ 224,979 $ 1,886,140 $(1,661,161)
========== ========== =========
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. Year to date volumes are still down 13% and margin
earned per gallon sold declined 17%. Operations expenses declined in the
areas of legal fees, outside services and compensation. Depreciation and
amortization expense decreased $384,939 which is primarily the result of a
non-compete agreement which became fully amortized in November 1996.
ADVANCED INFORMATION SERVICES
For the nine months ended September 30, the advanced information services
segment recognized an EBIT of $975,681 and $770,100 for 1997 and 1996,
respectively. This increase in EBIT of $205,581 is the outcome of higher
revenue and lower operating expenses.
FOR THE NINE MONTHS ENDED SEPTEMBER 30,
1997 1996 Change
---- ---- ------
Revenue $5,954,733 $5,482,677 $472,056
Operations & Maintenance 4,641,232 4,395,184 246,048
Depreciation & Amortization 84,175 102,978 (18,803)
Other Taxes 253,645 214,415 39,230
--------- --------- -------
EBIT $ 975,681 $ 770,100 $205,581
========= ========= =======
The increase in revenue occurred primarily in consulting and resource services
due to a rise in demand for PROGRESS training and programmers. Operations
expenses were higher due to billable compensation directly related to
increases in revenue, non-billable compensation and other costs related to
overall growth.
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 $760,645 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 its
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
its 1996 Subchapter S status.
NON-OPERATING INCOME
The decrease in 1997 is related primarily to a reduction in interest income
and AFUDC. In addition, 1996 includes a one-time gain on the sale of real
property.
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
nine 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 $8.3 million, $9.6 million and
$520,000, 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 $24 million
from banks and trust companies. As of September 30, 1997, the Company had one
$10 million and three $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 September
30, 1997 and 1996 were $18.4 and $6.2 million, respectively.
During the nine months ended September 30, 1997 and 1996, net property, plant
and equipment expenditures were approximately $9.6 and $9.4 million,
respectively. For 1997, the Company has budgeted $15.6 million for capital
expenditures. The components of this amount include $7.5 million for natural
gas distribution, $4.3 million for natural gas transmission, $1.2 million for
environmental related expenditures, $1.9 million for propane distribution,
$350,000 for advanced information services, with the remaining $350,000 for
computers, office equipment and general plant. The natural gas and propane
distribution 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. The Company is in the process of
finalizing a refinancing of $10 million of short-term debt with a 6.85% senior
note. The refinancing is expected to be consummated in December 1997. 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, some of which may require the Company to obtain financing.
Management will consider the impact of any such financing on the Company's
financial position 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 September 30, 1997, common equity represented 62.8% 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.
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
None
Item 5: Other Information
None
Item 6(a):Exhibits
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, Treasurer and Chief Financial Officer
Date: November 12, 1997