SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
__________________________________
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended: March 31, 1998
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) 734-6799
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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 Secu-
rities 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 require-
ments for the past 90 days. Yes [X] No [ ]
Common Stock, par value $.4867 - 4,569,576 shares issued as of
March 31, 1998.
PART I
FINANCIAL INFORMATION
CHESAPEAKE UTILITIES CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
MARCH 31, DECEMBER 31,
1998 1997
ASSETS (Unaudited) (Restated)
- ----------------------------------------------------------------------------------------
PROPERTY, PLANT AND EQUIPMENT
Natural gas distribution $76,081,621 $74,769,458
Natural gas transmission 33,934,905 33,856,873
Propane distribution 26,323,129 26,920,403
Advanced information services 894,925 841,757
Other plant 7,698,252 6,896,898
Gas plant acquisition adjustment 795,004 795,004
- ----------------------------------------------------------------------------------------
Total property, plant and equipment 145,727,836 144,080,393
Less: Accumulated depreciation and amortization (45,672,868) (44,252,517)
- ----------------------------------------------------------------------------------------
Net property, plant and equipment 100,054,968 99,827,876
- ----------------------------------------------------------------------------------------
INVESTMENTS 3,022,564 2,721,443
- ----------------------------------------------------------------------------------------
CURRENT ASSETS
Cash and cash equivalents 2,910,676 617,567
Accounts receivable, less allowance for uncollectibles 12,304,073 13,159,664
Materials and supplies, at average cost 1,522,001 1,424,312
Propane inventory, at average cost 1,281,979 2,288,516
Storage gas prepayments 327,970 2,926,618
Underrecovered purchased gas costs 229,327 1,673,389
Income taxes receivable 0 842,355
Prepaid expenses 585,919 1,080,962
Deferred income taxes 126,046 247,487
- ----------------------------------------------------------------------------------------
Total current assets 19,287,991 24,260,870
- ----------------------------------------------------------------------------------------
DEFERRED CHARGES AND OTHER ASSETS
Environmental regulatory assets 4,823,490 4,865,073
Environmental expenditures, net 2,441,674 2,372,929
Other deferred charges and intangible assets 3,939,941 4,046,579
- ----------------------------------------------------------------------------------------
Total deferred charges and other assets 11,205,105 11,284,581
- ----------------------------------------------------------------------------------------
TOTAL ASSETS $133,570,628 $138,094,770
========================================================================================
The accompanying notes are an integral part of these financial statements.
CHESAPEAKE UTILITIES CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
MARCH 31, DECEMBER 31,
1998 1997
CAPITALIZATION AND LIABILITIES (Unaudited) (Restated)
- ----------------------------------------------------------------------------------------
CAPITALIZATION
Stockholders' equity
Common Stock, par value $.4867 per share;
(authorized 12,000,000 shares; issued 4,569,576
and 4,452,704 shares, respectively) $2,223,886 $2,203,960
Additional paid-in capital 20,768,549 19,962,062
Retained earnings 31,019,498 28,218,763
Less:
Unearned compensation - restricted stock awards (160,925) (190,886)
Net unrealized gain on marketable securities 481,260 296,872
- ----------------------------------------------------------------------------------------
Total stockholders' equity 54,332,268 50,490,771
Long-term debt, net of current portion 38,152,000 38,605,739
- ----------------------------------------------------------------------------------------
Total capitalization 92,484,268 89,096,510
- ----------------------------------------------------------------------------------------
CURRENT LIABILITIES
Current portion of long-term debt 520,000 671,502
Short-term borrowing 0 7,600,000
Accounts payable 11,326,474 12,544,113
Refunds payable to customers 323,909 357,041
Income taxes payable 1,680,417 0
Accrued interest 828,607 784,533
Dividends payable 1,135,924 1,092,168
Other accrued expenses 3,044,225 3,807,484
- ----------------------------------------------------------------------------------------
Total current liabilities 18,859,556 26,856,841
- ----------------------------------------------------------------------------------------
DEFERRED CREDITS AND OTHER LIABILITIES
Deferred income taxes 11,451,462 11,490,358
Deferred investment tax credits 814,884 821,617
Environmental liability 4,823,490 4,865,073
Accrued pension costs 1,890,650 1,754,715
Other liabilities 3,246,318 3,209,656
- ----------------------------------------------------------------------------------------
Total deferred credits and other liabilities 22,226,804 22,141,419
- ----------------------------------------------------------------------------------------
TOTAL CAPITALIZATION AND LIABILITIES $133,570,628 $138,094,770
========================================================================================
The accompanying notes are an integral part of these financial statements.
CHESAPEAKE UTILITIES CORPORATION AND SUBSIDIARIES
CONSOLIDATED INCOME STATEMENTS
(Unaudited)
FOR THE QUARTERS ENDED MARCH 31, 1998 1997
- ----------------------------------------------------------------------------------------
OPERATING REVENUES $39,574,776 $43,645,111
COST OF SALES 23,577,550 28,890,036
- ----------------------------------------------------------------------------------------
GROSS MARGIN 15,997,226 14,755,075
- ----------------------------------------------------------------------------------------
OPERATING EXPENSES
Operations 5,763,208 5,423,991
Maintenance 479,112 492,532
Depreciation and amortization 1,509,447 1,348,347
Other taxes 1,154,544 1,113,224
Income taxes 2,386,660 2,272,543
- ----------------------------------------------------------------------------------------
Total operating expenses 11,292,971 10,650,637
- ----------------------------------------------------------------------------------------
OPERATING INCOME 4,704,255 4,104,438
OTHER INCOME, NET 86,223 60,823
- ----------------------------------------------------------------------------------------
INCOME BEFORE INTEREST CHARGES 4,790,478 4,165,261
INTEREST CHARGES 853,819 799,148
- ----------------------------------------------------------------------------------------
NET INCOME $3,936,659 $3,366,113
========================================================================================
EARNINGS PER SHARE OF COMMON STOCK:
Basic: $0.87 $0.76
- ----------------------------------------------------------------------------------------
Diluted: $0.83 $0.72
- ----------------------------------------------------------------------------------------
COMPREHENSIVE INCOME STATEMENTS
(Unaudited)
FOR THE QUARTERS ENDED MARCH 31, 1998 1997
- ----------------------------------------------------------------------------------------
Net Income $3,936,659 $3,366,113
Components of comprehensive income, net of income taxes
Unrealized Gain / (Loss) on Marketable Securities 184,388 (7,654)
- ----------------------------------------------------------------------------------------
Comprehensive Income $4,121,047 $3,358,459
========================================================================================
The accompanying notes are an integral part of these financial statements.
CHESAPEAKE UTILITIES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
FOR THE QUARTERS ENDED MARCH 31, 1998 1997
- ----------------------------------------------------------------------------------------
OPERATING ACTIVITIES
Net Income $3,936,659 $3,366,113
Adjustments to reconcile net income to net operating cash:
Depreciation and amortization 1,658,483 1,482,246
Deferred income taxes, net (34,188) (17,972)
Investment tax credit adjustments (6,733) (8,823)
Employee benefits 135,935 120,753
Employee compensation from lapsing stock restrictions 29,961 43,462
Other 36,660 (460,205)
Changes in assets and liabilities:
Accounts receivable 855,591 2,750,766
Inventory, materials, supplies and storage gas 3,507,496 4,116,054
Prepaid expenses 495,043 539,411
Other deferred charges 115,584 25,758
Accounts payable (1,217,639) (6,845,903)
Refunds payable to customers (33,132) (2,946)
Overrecovered purchased gas costs 1,444,062 343,444
Other current liabilities 2,272,632 2,078,975
- ----------------------------------------------------------------------------------------
Net cash provided by operating activities 13,196,414 7,531,133
- ----------------------------------------------------------------------------------------
INVESTING ACTIVITIES
Property, plant and equipment expenditures, net (1,917,844) (3,741,589)
- ----------------------------------------------------------------------------------------
Net cash used by investing activities (1,917,844) (3,741,589)
- ----------------------------------------------------------------------------------------
FINANCING ACTIVITIES
Common stock dividends net of amounts reinvested of
$147,519 and $131,800, respectively (944,649) (831,088)
Net repayments under line of credit agreements (7,600,000) (700,000)
Converted debenture bonds 73,915 0
Proceeds from issuance of stock to Company 401(k) plan 90,514 90,891
Repayments of long-term debt (605,241) (2,370,989)
- ----------------------------------------------------------------------------------------
Net cash used by financing activities (8,985,461) (3,811,186)
- ----------------------------------------------------------------------------------------
NET INCREASE/(DECREASE) IN CASH $2,293,109 ($21,642)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 617,567 2,213,529
- ----------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $2,910,676 $2,191,887
========================================================================================
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; how-
ever, the financial information reflects normal recurring
adjustments, which are, in the opinion of management, neces-
sary 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 1997 have
been reclassified to conform with the 1998 presentation.
2. ACQUISITION
On April 29, 1998, the Company signed an agreement to purchase
all of the outstanding shares of Xeron, Inc. ("Xeron"), a pri-
vately held natural gas liquids trading company headquartered
in Houston, Texas. Xeron will be operated as a subsidiary of
Chesapeake.
The transaction will be effected through the exchange of
475,000 shares of the Company's common stock and accounted for
as a pooling of interests. The purchase, which is subject to
regulatory and other required approvals and conditions of
closing, is expected to close by May 31, 1998.
3. CALCULATION OF DILUTED EARNINGS PER SHARE
For the Quarters Ended March 31, 1998 1997
- -----------------------------------------------------------------------
Reconciliation of Numerator:
Net Income -- basic $3,936,659 $3,366,113
Effect of 8.25% Convertible debentures 48,082 50,780
- -----------------------------------------------------------------------
Adjusted numerator -- diluted $3,984,741 $3,416,893
=======================================================================
Reconcilation of Denominator:
Weighted Shares Outstanding -- basic $4,549,681 $4,449,346
Effect of Dilutive Securities
8.25% Convertible debentures 227,760 240,542
Stock options and performance shares 14,118 27,032
- -----------------------------------------------------------------------
Adjusted denominator -- diluted 4,791,559 4,716,920
=======================================================================
Diluted Earnings per Share $0.83 $0.72
=======================================================================
4. COMMITMENTS AND CONTINGENCIES -- ENVIRONMENTAL MATTERS
The Company is currently 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 environ-
mental 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, Compensa-
tion and Liability Act ("CERCLA"). On August 19, 1994, the EPA
issued the site Record of Decision ("ROD"), 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. In May 1995, EPA issued an order to the
Company under Section 106 of CERCLA (the "Order"), requiring
the Company to fund or implement the ROD. The Order was also
issued to General Public Utilities Corporation, Inc. ("GPU"),
which both the EPA and the Company believe is liable under
CERCLA. Other potentially responsible parties ("PRPs") such as
the State of Delaware were not ordered to perform the ROD.
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. EPA may seek judicial enforcement of
its Order, as well as significant financial penalties for
failure to comply. Additional information pertaining to
remediation costs, investigations related to additional
parties who may be PRPs and/or litigation initiated by the
Company can be found in the Company's annual report on
Form 10-K for the year ended December 31, 1997 (see the
"Environmental -- Dover Gas Light Site" section, beginning
on page 11).
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 required
EPA approval, provided an up to date status on the site, which
the EPA used to determine if the remedial design selected in
the ROD was 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 banning future development at
the site. In April of 1997, the EPA issued a fact sheet stat-
ing 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) exca-
vation of 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 estimated clean-up cost
of the Site under the proposed plan was $4.2 million, as
compared to EPA's estimate of the current clean-up plan at
$13.2 million. In January 1998, the EPA issued a revised ROD,
which modified the soil remediation to conform to the proposed
plan and included the estimated clean-up costs of $4.2
million.
The Company adjusted its accrued liability recorded with
respect to the Dover Site to $4.2 million. This amount
reflects the EPA's estimate, as stated in the ROD issued in
1998 for remediation of the site according to the ROD. The
recorded liability may be adjusted upward or downward as the
design phase progresses and the Company obtains construction
bids for performance of the work. The Company has also
recorded a regulatory asset of $4.2 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 March 31, 1998, the Company has incurred approximately
$5.3 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.
The final insurance proceeds were requested and received in
1992. 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 March 31, 1998, $417,000 of
environmental costs are not included in the rider, effective
December 1, 1997. 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,
refer to the "Environmental -- Dover Gas Light Site" section
of the Company's annual report on Form 10-K for the year ended
December 31, 1997, beginning on page 11.
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 moni-
toring 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 esti-
mated costs, the Company recorded both a liability and a
deferred regulatory asset of $665,000 on December 31, 1997, 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 March 31, 1998, the Company has
incurred approximately $2.4 million for remedial actions and
environmental studies. In January 1990, the Company entered
into settlement agreements with a number of insurance compa-
nies 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 amorti-
zation period was $964,251. Of the $2.4 million in costs
reported above, approximately $639,000 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 per-
formed 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 $696,000 on these investigations as of March 31,
1998. The Company has been allowed by the Florida Public Serv-
ice Commission to continue to accrue for future environmental
costs. At March 31, 1998, the Company had $450,000 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 MARCH 31, 1998
------------------------------
The Company recognized net income of $3,936,659 for the first
quarter of 1998, representing an increase in net income of
$570,546 as compared to the corresponding period in 1997.
Included in 1997's results is a one-time charge of $318,000 for
changes in accounting for income taxes associated with the acqui-
sition of Tri-County Gas Company, Inc. Exclusive of this one-time
charge, earnings increased $252,546. As indicated in the follow-
ing table, the increase in income is due to greater Earnings
before Interest and Taxes ("EBIT") contributed by the natural gas
transmission and propane distribution segments. These were offset
slightly by reduced contributions to EBIT from the remaining
segments.
FOR THE QUARTERS ENDED MARCH 31, 1998 1997 Change
- ----------------------------------------------------------------------------
Earnings Before Interest & Taxes
Natural Gas Distribution $3,159,612 $3,421,562 ($261,950)
Natural Gas Transmission 1,521,168 617,411 903,757
Propane Distribution 2,024,448 1,702,173 322,275
Advanced Information Services 267,914 411,084 (143,170)
Other & Eliminations 117,773 224,751 (106,978)
- ----------------------------------------------------------------------------
EBIT 7,090,915 6,376,981 713,934
Operating Income Taxes 2,386,660 2,272,543 114,117
Interest 853,819 799,148 54,671
Non-Operating Income, net 86,223 60,823 25,400
- ----------------------------------------------------------------------------
Net Income $3,936,659 $3,366,113 $570,546
============================================================================
NATURAL GAS DISTRIBUTION
The natural gas distribution segment reported EBIT of $3,159,612
for the first quarter of 1998 as compared to $3,421,562 for the
corresponding period last year -- a decrease of $261,950. The
decrease in EBIT is due to higher operating expenses.
FOR THE QUARTERS ENDED MARCH 31, 1998 1997 Change
- ----------------------------------------------------------------------------
Revenue $26,182,810 $26,477,815 ($295,005)
Cost of Gas 18,672,251 18,969,411 (297,160)
- ----------------------------------------------------------------------------
Gross Margin 7,510,559 7,508,404 2,155
Operations & Maintenance 2,765,250 2,570,551 194,699
Depreciation & Amortization 844,672 787,486 57,186
Other Taxes 741,025 728,805 12,220
- ----------------------------------------------------------------------------
EBIT $3,159,612 $3,421,562 ($261,950)
============================================================================
Customer growth from 1997 to 1998 offset the impact of the
unseasonably warmer weather on gross margin. Temperatures during
the first quarter of 1998 were 14% warmer than the same period
last year and 18% warmer than the 10-year average. Operations
expenses increased primarily in the areas of compensation, mar-
keting, rents and expenses related to various regulatory commis-
sion requirements. Maintenance expenses are down slightly. Depre-
ciation and amortization expense increased due to plant placed in
service during the past year.
NATURAL GAS TRANSMISSION
The natural gas transmission segment reported EBIT of $1,521,168
for the first quarter of 1998 as compared to EBIT of $617,411 for
the corresponding period last year -- an increase of $903,757.
The increase in EBIT is primarily due to an increase in gross
margin.
FOR THE QUARTERS ENDED MARCH 31, 1998 1997 Change
- ----------------------------------------------------------------------------
Revenue $3,162,657 $12,060,054 ($8,897,397)
Cost of Gas 578,511 10,376,853 (9,798,342)
- ----------------------------------------------------------------------------
Gross Margin 2,584,146 1,683,201 900,945
Operations & Maintenance 689,838 736,318 (46,480)
Depreciation & Amortization 267,774 222,688 45,086
Other Taxes 105,366 106,784 (1,418)
- ----------------------------------------------------------------------------
EBIT $1,521,168 $617,411 $903,757
============================================================================
Revenues and cost of gas have declined in 1998 as a result of
Eastern Shore Natural Gas Company becoming an open access pipe-
line on November 1, 1997. The rise in EBIT is partially attribu-
table to a rate increase and an increase in firm services
implemented in 1997. The rate increase is designed to generate
additional gross margin of approximately $1.2 million annually.
Additional revenues generated by the increase in transportation
services, effective with the implementation of open access,
also contributed to the increase in EBIT. On an annual basis,
the additional services will generate revenue of approximately
$1.3 million. Taking into account the 1997 rate increase, rev-
enues associated with additional capacity and lower margins on
services provided to industrial customers, the Company expects
gross margin during 1998 to be between $7.9 and $8.2 million
(see Cautionary Statement). Comparatively, gross margin for the
past two years has been $7.9 and $6.7 million for 1997 and 1996,
respectively. Compensation expenditures as well as lower costs
associated with the maintenance of communication equipment and
the pipeline system were offset by the increase in depreciation
and amortization due to capital additions placed in service
during the past year.
PROPANE DISTRIBUTION
For the first quarter of 1998, the propane distribution segment
reported EBIT of $2,024,448, as compared to $1,702,173 for the
same period last year. The increase in EBIT is due to higher
gross margin and lower operating expenses.
FOR THE QUARTERS ENDED MARCH 31, 1998 1997 Change
- ----------------------------------------------------------------------------
Revenue $9,901,919 $11,177,553 ($1,275,634)
Cost of Sales 5,325,056 6,866,646 (1,541,590)
- ----------------------------------------------------------------------------
Gross Margin 4,576,863 4,310,907 265,956
Operations & Maintenance 2,056,249 2,163,706 (107,457)
Depreciation & Amortization 326,139 289,255 36,884
Other Taxes 170,027 155,773 14,254
- ----------------------------------------------------------------------------
EBIT $2,024,448 $1,702,173 $322,275
============================================================================
The increase in gross margin is due primarily to a 9% increase in
margin earned per gallon sold, partially offset by a 1% decrease
in volumes sold. Although warmer weather resulted in a reduction
in the number of gallons sold, customer growth helped to minimize
the impact. Operations expenses declined primarily in the areas
of property insurance, legal fees and the allowance for bad
debts. Depreciation and amortization increased due to plant addi-
tions placed in service during the past year.
ADVANCED INFORMATION SERVICES
The advanced information services segment recognized an EBIT of
$267,914 and $411,084 for the quarters ended March 31, 1998 and
1997, respectively. This decrease in EBIT of $143,170 is attrib-
utable to a reduction on margin earned coupled with a rise in
expenses.
FOR THE QUARTERS ENDED MARCH 31, 1998 1997 Change
- ----------------------------------------------------------------------------
Revenue $2,278,259 $1,991,717 $286,542
Cost of Sales 1,117,386 719,213 398,173
- ----------------------------------------------------------------------------
Gross Margin 1,160,873 1,272,504 (111,631)
Operations & Maintenance 733,215 733,868 (653)
Depreciation & Amortization 41,658 26,283 15,375
Other Taxes 118,086 101,269 16,817
- ----------------------------------------------------------------------------
EBIT $267,914 $411,084 ($143,170)
============================================================================
Higher revenues are primarily due to increased sales of consult-
ing and resource services. Increased compensation and training
expenses due to associated increases in staffing levels partially
offset the additional revenue. To improve service to our customers,
the Company opened a new office in Detroit, Michigan and increased
both billable and management staffing during the second half of
1997. The additional expenses associated with the new office and
management infrastructure, coupled with increased marketing
activity, is having a negative impact on 1998 earnings.
INTEREST
The increase in interest expense is associated with the issuance
of $10 million in long-term debt in December 1997.
OPERATING INCOME TAXES
Operating income taxes increased due to the rise in operating
income. During the first quarter of 1997, the Company recorded
$318,000 as a one-time expense to establish deferred income taxes
due to the acquisition of Tri-County Gas Company, Inc. Exclusive
of this expense, operating income taxes increased $432,117.
NON-OPERATING INCOME
The increase in income for the quarter is primarily due to the
gain on the sale of fixed assets.
ENVIRONMENTAL MATTERS
The Company continues to work with federal and state environ-
mental 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.
THE YEAR 2000
Chesapeake is dependent upon a variety of information systems to
operate efficiently and effectively. In order to address the impact
of the year 2000 on its many information systems, Chesapeake is in
the process of evaluating and remediating any deficiences. The
Company has segregated the evaluation of its readiness and the
potential impact of the year 2000 on its systems into two compo-
nents: primary internal applications and other applications.
Chesapeake's primary applications include systems for its financial
information; natural gas customer information and billing; and pro-
pane customer information, billing and delivery. Other applications
include systems for services such as telephone, system control
and data acquisition for the pipeline, as well as other vendors'
systems. Chesapeake has updated its propane customer information,
billing and delivery system to a year 2000 compliant version. This
system will be tested further during 1998 to insure compliance.
The Company has conducted initial evaluations of its other two pri-
mary applications and estimates that the cost of any remediation
will not be significant. Each application will be tested during
1998. Chesapeake has developed an inventory of other applications
and is in the process of developing plans to contact vendors, test
applications and remediate to the extent necessary.
CAUTIONARY STATEMENT
Statements made herein and elsewhere in this Form 10-Q, which
are not historical fact, are forward-looking statements. In
connection with the "Safe Harbor" provisions of the Private
Securities Litigation Reform Act of 1995, Chesapeake is provi-
ding the following cautionary statement to identify important
factors that could cause actual results to differ materially
from those anticipated in forward-looking statements made here-
in or otherwise by or on behalf of the Company.
A number of factors and uncertainties make it difficult to
predict the effect on future operating results, relative to his-
torical results, of Eastern Shore operating as an open access
pipeline. While open access eliminates industrial interruptible
sales margins, such sales have varied widely from year to year
and, in future years, might have made a less significant contri-
bution to earnings even in the absence of open access.
In addition, a number of factors and uncertainties affecting
other aspects of Chesapeake's business could have a material
impact on earnings. These include: the seasonality and tempera-
ture sensitivity of the natural gas and propane businesses, the
relative price of alternative energy sources and the effects of
competition on both unregulated and natural gas sales, now that
the Company operates in an open access environment. There are
also uncertainties relative to the impact of the year 2000 on
the information systems of the Company, its vendors and other
third parties.
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 tempo-
rarily finance capital expenditures. During the first quarter of
1998, the Company's net cash flow provided by operating activi-
ties, net cash used by investing activities and net cash used by
financing activities were approximately $13.2 million, $1.9
million and $8.9 million, respectively. Due to the seasonal
nature of the Company's business, there are substantial varia-
tions 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 various banks and trust companies. As of March
31, 1998, the Company had four unsecured bank lines of credit,
totaling $34 million. 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 expendi-
tures. The outstanding balances of short-term borrowings at March
31, 1998 and 1997 were zero and $12 million, respectively.
During the three months ended March 31, 1998 and 1997, net prop-
erty, plant and equipment expenditures were approximately $1.9
and $3.7 million, respectively. Chesapeake has budgeted $15.6
million for capital expenditures during 1998. This amount
includes $8.7 million and $2.7 million for natural gas and pro-
pane distribution, respectively; $3.1 million for natural gas
transmission, $395,000 for advanced information services and
$632,000 for general plant. The natural gas and propane distribu-
tion expenditures are for expansion and improvement of facilities
in existing service territories. Natural gas transmission expen-
ditures are for improvement and expansion of the pipeline system.
The advanced information services expenditures are for computer
hardware, software and related equipment. Financing for the 1998
construction program is expected to be provided from short-term
borrowing and cash from operations. The construction program is
subject to continuous review and modification. Actual construc-
tion expenditures may vary from the above estimates due to a
number of factors including inflation, changing economic condi-
tions, regulation, sales growth and the cost and availability of
capital.
Chesapeake has budgeted $2.8 million for environmental related
expenditures during 1998 and expects to incur additional expendi-
tures in future years (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 capi-
tal 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 March 31, 1998, common equity represented 58.7% of perma-
nent capitalization, compared to 56.7% as of December 31, 1997.
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: 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: May 8, 1998