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, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ______ to ______
COMMISSION FILE NUMBER: 001-11590
CHESAPEAKE UTILITIES CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 51-0064146
(State of other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
909 SILVER LAKE BOULEVARD, DOVER, DELAWARE 19904
(Address of principal executive offices, including Zip Code)
(302) 734-6799
(Registrant's Telephone Number, including Area Code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes [X] No [ ]
Common Stock, par value $.4867 - 5,115,971 shares issued as of March 31, 1999.
TABLE OF CONTENTS
PART I - FINANCIAL INFORMATION .......................................... 1
ITEM 1. FINANCIAL STATEMENTS ....................................... 1
CONSOLIDATED STATEMENTS OF INCOME - THREE MONTHS ENDED
MARCH 31, 1999 AND 1998 ........................................ 1
CONSOLIDATED BALANCE SHEETS - MARCH 31, 1999 AND
DECEMBER 31, 1998 .............................................. 2
CONSOLIDATED STATEMENTS OF CASH FLOWS - THREE MONTHS ENDED
MARCH 31, 1999 AND 1998 ........................................ 4
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ........................ 5
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS ........................ 9
RESULTS OF OPERATIONS FOR THE QUARTER ENDED MARCH 31, 1999 ........ 9
FINANCIAL POSITION, LIQUIDITY AND CAPITAL RESOURCES .............. 11
OTHER MATTERS .................................................... 12
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK ......................................... 15
PART II - OTHER INFORMATION ............................................ 16
SIGNATURES ............................................................. 17
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CHESAPEAKE UTILITIES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
- -----------------------------------------------------------------------------
* RESTATED
FOR THE THREE MONTHS ENDED MARCH 31, 1999 1998
- -----------------------------------------------------------------------------
OPERATING REVENUES $55,646,072 $60,169,102
COST OF SALES 37,093,210 43,865,443
- -----------------------------------------------------------------------------
GROSS MARGIN 18,552,862 16,303,659
- -----------------------------------------------------------------------------
OPERATING EXPENSES
Operations 6,527,981 5,970,118
Maintenance 419,152 479,112
Depreciation and amortization 1,637,997 1,512,573
Other taxes 1,171,609 1,170,847
Income taxes 3,027,748 2,426,791
- -----------------------------------------------------------------------------
Total operating expenses 12,784,487 11,559,441
- -----------------------------------------------------------------------------
OPERATING INCOME 5,768,375 4,744,218
OTHER INCOME, NET 73,226 110,391
- -----------------------------------------------------------------------------
INCOME BEFORE INTEREST CHARGES 5,841,601 4,854,609
INTEREST CHARGES 898,618 854,007
- -----------------------------------------------------------------------------
NET INCOME $ 4,942,983 $ 4,000,602
=============================================================================
EARNINGS PER SHARE OF COMMON STOCK:
BASIC $ 0.97 $ 0.80
=============================================================================
DILUTED $ 0.94 $ 0.77
=============================================================================
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)
- -----------------------------------------------------------------------------
* RESTATED
FOR THE THREE MONTHS ENDED MARCH 31, 1999 1998
- -----------------------------------------------------------------------------
NET INCOME $ 4,942,983 $ 4,000,602
UNREALIZED (LOSS) GAIN ON MARKETABLE
SECURITIES, NET OF INCOME TAXES (233,312) 184,388
- -----------------------------------------------------------------------------
TOTAL COMPREHENSIVE INCOME $ 4,709,671 $ 4,184,990
=============================================================================
<FN>
* The financial information for March 1998 has been restated to include
the May 1998 business combination with Xeron, Inc., accounted for as
a pooling of interests.
</FN>
The accompanying notes are an integral part of these financial statements.
1
CHESAPEAKE UTILITIES CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
- ------------------------------------------------------------------------------
MARCH 31, DECEMBER 31,
1999 1998
ASSETS (Unaudited) (Audited)
- ------------------------------------------------------------------------------
PROPERTY, PLANT AND EQUIPMENT
Natural gas distribution and transmission $119,543,045 $117,232,506
Propane distribution and marketing 27,280,714 27,287,807
Advanced information services 1,253,364 1,087,910
Other plant 7,890,514 7,382,965
- ------------------------------------------------------------------------------
Total property, plant and equipment 155,967,637 152,991,188
Less: Accumulated depreciation and amortization (50,133,699) (48,725,412)
- ------------------------------------------------------------------------------
Net property, plant and equipment 105,833,938 104,265,776
- ------------------------------------------------------------------------------
INVESTMENTS 3,782,615 4,165,194
- ------------------------------------------------------------------------------
CURRENT ASSETS
Cash and cash equivalents 4,196,363 2,598,084
Accounts receivable (less allowance for
uncollectibles of $303,094 and $302,513
in 1999 and 1998, respectively) 16,136,315 14,861,255
Materials and supplies, at average cost 1,752,182 1,728,513
Propane inventory, at average cost 1,509,134 1,787,038
Storage gas prepayments 214,454 2,152,605
Underrecovered purchased gas costs - 1,552,265
Income taxes receivable - 344,311
Deferred income taxes 603,345 -
Prepaid expenses 1,268,641 1,596,595
- ------------------------------------------------------------------------------
Total current assets 25,680,434 26,620,666
- ------------------------------------------------------------------------------
DEFERRED CHARGES AND OTHER ASSETS
Environmental regulatory assets 2,676,143 2,700,000
Environmental expenditures 3,341,475 3,418,166
Other deferred charges and intangible assets 3,779,724 4,063,811
- ------------------------------------------------------------------------------
Total deferred charges and other assets 9,797,342 10,181,977
- ------------------------------------------------------------------------------
TOTAL ASSETS $145,094,329 $145,233,613
==============================================================================
The accompanying notes are an integral part of these financial statements.
2
CHESAPEAKE UTILITIES CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
- ------------------------------------------------------------------------------
MARCH 31, DECEMBER 31,
1999 1998
CAPITALIZATION AND LIABILITIES (Unaudited) (Audited)
- ------------------------------------------------------------------------------
CAPITALIZATION
Stockholders' equity
Common Stock, par value $.4867 per share;
(authorized 12,000,000 shares;
issued 5,115,971 and 5,093,788
shares, respectively) $ 2,489,816 $ 2,479,019
Additional paid-in capital 24,582,657 24,192,188
Retained earnings 32,556,375 28,892,384
Accumulated other comprehensive income 630,032 863,344
Less: Unearned compensation related to
restricted stock awards (53,281) (71,041)
- ------------------------------------------------------------------------------
Total stockholders' equity 60,205,599 56,355,894
Long-term debt, net of current portion 36,553,000 37,597,000
- ------------------------------------------------------------------------------
Total capitalization 96,758,599 93,952,894
- ------------------------------------------------------------------------------
CURRENT LIABILITIES
Current portion of long-term debt 520,000 520,000
Short-term borrowing 4,500,000 11,600,000
Accounts payable 11,109,781 11,070,642
Refunds payable to customers 484,910 636,153
Income taxes payable 3,052,219 -
Accrued interest 699,471 553,444
Dividends payable 1,278,993 1,273,446
Overrecovered purchased gas costs 386,984 -
Deferred income taxes - 56,100
Other accrued expenses 4,520,538 3,754,231
- ------------------------------------------------------------------------------
Total current liabilities 26,552,896 29,464,016
- ------------------------------------------------------------------------------
DEFERRED CREDITS AND OTHER LIABILITIES
Deferred income taxes 13,176,690 13,260,282
Deferred investment tax credits 757,979 766,802
Environmental liability 2,676,143 2,700,000
Accrued pension costs 1,612,625 1,536,304
Other liabilities 3,559,397 3,553,315
- ------------------------------------------------------------------------------
Total deferred credits and other liabilities 21,782,834 21,816,703
- ------------------------------------------------------------------------------
TOTAL CAPITALIZATION AND LIABILITIES $145,094,329 $145,233,613
==============================================================================
The accompanying notes are an integral part of these financial statements.
3
CHESAPEAKE UTILITIES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
- -----------------------------------------------------------------------------
* RESTATED
FOR THE THREE MONTHS ENDED MARCH 31, 1999 1998
- -----------------------------------------------------------------------------
OPERATING ACTIVITIES
Net Income $ 4,942,983 $ 4,000,602
Adjustments to reconcile net income
to net operating cash:
Depreciation and amortization 1,964,781 1,700,620
Deferred income taxes, net (743,036) (27,717)
Investment tax credit adjustments (8,823) (6,733)
Mark-to-market adjustments - -
Employee benefits 76,321 135,935
Employee compensation from lapsing
stock restrictions 17,760 29,961
Other, net (17,776) (4,920)
Changes in assets and liabilities:
Accounts receivable, net (1,275,060) 944,272
Inventory, materials, supplies
and storage gas 2,192,386 3,548,715
Other current assets 327,954 499,591
Other deferred charges 239,464 129,373
Accounts payable, net 39,139 (1,812,471)
Refunds payable to customers (151,243) (33,132)
Overrecovered purchased gas costs 1,939,250 1,444,062
Other current liabilities 4,338,065 2,299,887
- -----------------------------------------------------------------------------
Net cash provided by operating activities 13,882,165 12,848,045
- -----------------------------------------------------------------------------
INVESTING ACTIVITIES
Property, plant and equipment
expenditures, net (3,238,506) (1,929,062)
- -----------------------------------------------------------------------------
Net cash used by investing activities (3,238,506) (1,929,062)
- -----------------------------------------------------------------------------
FINANCING ACTIVITIES
Common stock dividends net of amounts reinvested
of $109,421 and $99,855, respectively (1,165,025) (992,313)
Issuance of stock:
Dividend Reinvestment Plan optional cash 43,880 47,664
Retirement Savings Plan 183,790 90,514
Net repayment under line of
credit agreements (7,100,000) (7,600,010)
Repayments of long-term debt (1,008,025) (531,327)
- -----------------------------------------------------------------------------
Net cash used by financing activities (9,045,380) (8,985,472)
- -----------------------------------------------------------------------------
NET INCREASE IN CASH $ 1,598,279 $ 1,933,511
CASH AND CASH EQUIVALENTS
AT BEGINNING OF PERIOD 2,598,084 4,829,176
- -----------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 4,196,363 $ 6,762,687
=============================================================================
<FN>
* The financial information for March 1998 has been restated to include
the May 1998 business combination with Xeron, Inc., accounted for as
a pooling of interests.
</FN>
The accompanying notes are an integral part of these financial statements.
4
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. QUARTERLY FINANCIAL DATA
Chesapeake Utilities Corporation's (the "Company") financial information
included herein is unaudited and should be read in conjunction with the
Company's 1998 annual report on Form 10-K. In the opinion of management, the
financial information reflects normal recurring adjustments, which are
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;
therefore, the results of operations for an interim period may not give a
true indication of results for the year. Certain amounts in 1998 have been
reclassified to conform with current year presentation.
2. CALCULATION OF EARNINGS PER SHARE
- ------------------------------------------------------------------------
FOR THE THREE MONTHS ENDED MARCH 31, 1999 1998
- ------------------------------------------------------------------------
CALCULATION OF BASIC EARNINGS PER SHARE:
Net Income $4,942,983 $4,000,602
Weighted Average Shares Outstanding 5,108,057 5,024,680
- ------------------------------------------------------------------------
BASIC EARNINGS PER SHARE $ 0.97 $ 0.80
========================================================================
CALCULATION OF DILUTED EARNINGS PER SHARE:
Reconciliation of Numerator:
Net Income - Basic $4,942,983 $4,000,602
Effect of 8.25% Convertible debentures 47,162 48,082
- ------------------------------------------------------------------------
Adjusted numerator - Diluted $4,990,145 $4,048,684
- ------------------------------------------------------------------------
Reconciliation of Denominator:
Weighted Shares Outstanding - Basic 5,108,057 5,024,680
Effect of Dilutive Securities
8.25% Convertible debentures 223,403 227,760
- ------------------------------------------------------------------------
Adjusted denominator - Diluted 5,331,460 5,252,440
- ------------------------------------------------------------------------
DILUTED EARNINGS PER SHARE $ 0.94 $ 0.77
========================================================================
3. INVESTMENTS
The investment balance at March 31, 1999 and December 31, 1998 consists
primarily of a 7.3% ownership interest in the common stock of Florida Public
Utilities Company ("FPU"). The Company has classified its investment in FPU
as an "Available for Sale" security, which requires that all unrealized gains
and losses be excluded from earnings and be reported net of income tax as a
separate component of stockholders' equity. The market value of $3.2 million
at March 31, 1999 and $3.7 million at December 31, 1998 exceeded the
aggregate cost basis of the Company's portfolio by $1.0 million and $1.55
million, respectively. As noted below, the Company has entered into an
agreement to sell this investment at a price which currently exceeds market
value.
In August 1998, the Company entered into an agreement to sell its investment
in FPU for $16.50 per share to The Southern Company. The execution of the
agreement is contingent on the approval of the Securities and Exchange
Commission. If regulatory approval is received, the Company will recognize a
$1.4 million pre-tax gain or $863,000, after taxes.
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 environmental contaminants. The Company has accrued
liabilities for two of these sites, the Dover Gas Light and Salisbury Town
Gas Light sites.
5
(A) 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"). In 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 1995, the
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 the EPA of objections to the Order, the Company
agreed to comply. GPU informed the EPA that it did not intend to comply with
the Order. The 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, 1998
(see the "Environmental - Dover Gas Light Site" section, beginning on page
11).
In June 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.
In July 1996, the Company began the design phase of the ROD, on-site pre-
design and investigation. A pre-design investigation report ("the report")
was filed in October 1996 with the EPA. The report, which required EPA
approval, provided 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 clean-up
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 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, with respect to soil remediation only, the
current clean-up plan that would involve the following three elements: (1)
excavation and off-site thermal treatment of the contents of the former
subsurface gas holders; (2) implementation of soil vaporization extraction;
and (3) pavement of the parking lot. The overall estimated clean-up cost of
the site under the proposed plan was $4.2 million ($1.5 million for soil
remediation and $2.7 million for ground-water remediation) as compared to the
ROD cleanup estimate of $6.0 million ($3.3 million for soil remediation and
$2.7 million for ground-water remediation). In January 1998, the EPA issued
a ROD Amendment, which modified the soil remediation to conform to the
proposed plan and included the estimated soil clean-up costs of $4.2 million.
During the fourth quarter of 1998 the Company completed the first element of
the soil remediation. Over the next twelve to eighteen months the Company
will finalize the remaining two elements of the soil remediation and initiate
the ground-water remedial activities.
The Company's independent consultants have prepared preliminary cost
estimates of two potentially acceptable alternatives to complete the ground-
water remediation activities at the site. The costs range from a low of
$390,000 in capital and $37,000 per year of operating costs for 30 years for
natural attenuation to a high of $4.0 million in capital and $500,000 per
year in operating costs for 30 years for a pump and treat system. A decision
by the EPA as to the most appropriate ground-water remediation method is
likely in 1999. The capital costs necessary to begin ground-water remediation
are expected to be incurred over the next twelve to eighteen months.
The Company cannot predict which ground-water remediation method will be
selected by the EPA and accordingly, has adjusted its accrual to $2.1 million
at December 31, 1998 for the Dover site, as well as a regulatory asset for an
equivalent amount. Of this amount, $1.5 million is for ground-water remediation
6
and $600,000 is for the remaining soil remediation. The $1.5
million represents the low end of the ground-water remedy estimates described
above. 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.
As of March 31, 1999, the Company has incurred approximately $6.7 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 means
of a rider (supplement) to base rates, applicable to all firm service
customers. As of March 31, 1999, $874,000 of environmental costs is not
included in the December 1, 1998 rider. 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, 1998, beginning on page 11.
(B) SALISBURY TOWN GAS LIGHT SITE
In cooperation with the Maryland Department of the Environment ("MDE"), the
Company completed assessment of the Salisbury manufactured gas plant site,
determining that there was localized ground-water contamination. During 1996,
the Company completed construction and began the Air Sparging and Soil-Vapor
Extraction remediation procedures. Chesapeake has been reporting the
remediation and monitoring results to the Maryland Department of the
Environment on an ongoing basis since 1996.
The estimated cost of the remaining remediation is approximately $136,000 per
year for operating expenses for a period of five years. Based on these
estimated costs, the Company adjusted its liability and deferred regulatory
asset to $600,000 on December 31, 1998, to cover the Company's projected
remediation costs for this site. As of March 31, 1999, the Company has
incurred approximately $2.6 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 $2.6 million in costs reported
above, approximately $794,000 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.
(C) 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, the description of the
scope of work to complete the site assessment activities and a report
describing a limited sediment investigation performed in 1997. The FDEP
responded by requesting additional field investigation work, which was
completed during the first quarter of 1999. In addition, the FDEP approved
the AS/SVE Pilot Study Work Plan, which the Company expects to begin during
June 1999. It is not possible to determine what remedial action will be
required by FDEP and the cost of such remediation.
7
The Company has spent and received recovery through rates charged to
customers of approximately $699,000 on these investigations as of March 31,
1999. The Florida Public Service Commission has allowed the Company to
continue to accrue for future environmental costs. At March 31, 1999,
Chesapeake had $517,000 accrued to recover future costs, which might be
incurred. It is management's opinion that these and future costs, if any
above this level, will also be recoverable in rates.
5. RECENT ACCOUNTING PRONOUNCEMENTS
FASB STATEMENTS AND OTHER AUTHORITATIVE PRONOUNCEMENTS ISSUED
DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
In June 1998, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 133, establishing accounting and reporting standards for derivative
instruments, including certain derivative instruments embedded in other
contracts, and for hedging activities. This statement does not allow
retroactive application to financial statements for prior periods. Chesapeake
will adopt the requirements of this standard in the first quarter of 2000, as
required. The Company believes that adoption of this statement will not have
a material impact on the Company's financial position or results of
operations.
The Emerging Issues Task Force released Issue 98-10, "Accounting for Energy
Trading and Risk Management Activities", effective January 1, 1999. The
Company records its use of derivatives in accordance with the standard by
marking open positions to market value.
8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
RESULTS OF OPERATIONS FOR THE QUARTER ENDED MARCH 31, 1999
CONSOLIDATED OVERVIEW
The Company recognized net income of $4.9 million - $.97 per share - for the
first quarter of 1999, representing an increase in income of $942,000, or $.17
per share, as compared to the corresponding period in 1998. As indicated in the
following table, the increase in income is primarily due to greater Earnings
Before Interest and Taxes ("EBIT") from the propane and natural gas segments.
The increases are primarily due to colder temperatures during the first quarter
of 1999. Based on heating degree days, temperatures in the Company's northern
service territories were 17% colder than the same period in 1998 although they
were still 9% warmer than normal. The impact of weather on the specific seg-
ments of the Company is discussed below.
- ---------------------------------------------------------------------------------------
FOR THE THREE MONTHS ENDED MARCH 31, 1999 1998 Change
- ---------------------------------------------------------------------------------------
Earnings Before Interest & Taxes
Natural Gas Distribution & Transmission $ 5,190,513 $ 4,680,780 $ 509,733
Propane Distribution & Marketing 3,215,464 2,106,164 1,109,300
Advanced Information Services 262,849 267,914 (5,065)
Other & Eliminations 127,297 116,151 11,146
- ---------------------------------------------------------------------------------------
EBIT 8,796,123 7,171,009 1,625,114
Operating Income Taxes 3,027,748 2,426,791 600,957
Interest 898,618 854,007 44,611
Non-Operating Income, net 73,226 110,391 (37,165)
- ---------------------------------------------------------------------------------------
Net Income $ 4,942,983 $ 4,000,602 $ 942,381
=======================================================================================
NATURAL GAS DISTRIBUTION AND TRANSMISSION
The natural gas distribution and transmission segment reported EBIT of $5.2
million for the first quarter of 1999 as compared to $4.7 million for the
corresponding period last year - an increase of $510,000. The increase in EBIT
is due an increase in gross margin somewhat offset by higher operating expenses.
- ---------------------------------------------------------------------------------------
FOR THE THREE MONTHS ENDED MARCH 31, 1999 1998 Change
- ---------------------------------------------------------------------------------------
Revenue $24,601,898 $27,070,648 $(2,468,750)
Cost of Gas 13,730,542 16,977,270 (3,246,728)
- ---------------------------------------------------------------------------------------
Gross Margin 10,871,356 10,093,378 777,978
Operations & Maintenance 3,641,572 3,453,761 187,811
Depreciation & Amortization 1,203,840 1,112,446 91,394
Other Taxes 835,431 846,391 (10,960)
- ---------------------------------------------------------------------------------------
Total Operating Expenses 5,680,843 5,412,598 268,245
- ---------------------------------------------------------------------------------------
EBIT $ 5,190,513 $ 4,680,780 $ 509,733
=======================================================================================
Gross margin increased due to colder temperatures combined with a 4.6% growth in
residential and commercial customers. Deliveries to these customers increased
9% due to the colder weather and the increased number of residential and commer-
cial customers. The colder temperatures and increases in customers served
contributed to a rise in margin of approximately $778,000. Also contributing to
the rise in margin were increases in transportation revenue due to system ex-
pansion. Although gross margin increased $778,000 from 1998 to 1999, revenue
and the associated cost of gas declined due to a reduction in the price of gas.
Changes in the cost of gas are passed on to customers through the purchased gas
adjustment clauses in the Company's tariffs. Increases in operating expenses
were driven by depreciation, employee benefits, marketing programs designed to
continue building customer growth and billable service work. These are par-
tially offset by decreased consulting, legal and data processing costs.
9
In an effort to reduce the impact of warmer temperatures in the future, the
Company filed to modify the rate design in one of its jurisdictions. The
proposal will increase the margins contributed by weather-sensitive customers
during periods when the weather is significantly warmer and decrease margins
contributed by them when the weather is significantly cooler. The proposed
change is expected to be approved during the second quarter of 1999. The
Company intends to make a similar filing in other temperature-sensitive
jurisdictions.
PROPANE DISTRIBUTION AND MARKETING
For the first quarter of 1999, the propane segment reported earnings before
interest and taxes of $3.2 million, as compared to $2.1 million for the same
period last year. The $1.1 million increase in income is primarily the result of
increased gross margin.
- ---------------------------------------------------------------------------------------
FOR THE THREE MONTHS ENDED MARCH 31, 1999 1998 Change
- ---------------------------------------------------------------------------------------
Revenue $27,586,694 $30,496,244 $(2,909,550)
Cost of Sales 21,574,469 25,612,947 (4,038,478)
- ---------------------------------------------------------------------------------------
Gross Margin 6,012,225 4,883,297 1,128,928
Operations & Maintenance 2,300,394 2,263,160 37,234
Depreciation & Amortization 324,719 327,643 (2,924)
Other Taxes 171,648 186,330 (14,682)
- ---------------------------------------------------------------------------------------
Total Operating Expenses 2,796,761 2,777,133 19,628
- ---------------------------------------------------------------------------------------
EBIT $ 3,215,464 $ 2,106,164 $ 1,109,300
=======================================================================================
The increase in gross margin is due primarily to a $1.2 million increase in
distribution margins offset by a $67,000 reduction in wholesale marketing
margins. Distribution gross margin increased primarily due to colder
temperatures during the first quarter of 1999 when compared to the same period
last year. The change in temperatures resulted in a 16% increase in propane
gallons distributed. The impact of colder temperatures combined with increases
in customers served contributed to a rise in margin of approximately $1.1
million. Lower wholesale propane supply costs helped to increase the distribu-
tion margins earned per gallon sold. Wholesale marketing margins were slightly
lower than those experienced during the first quarter of 1998 due to the lack of
price volatility in the wholesale propane market. Operating expenses increased
slightly due to increased marketing, employee benefits and delivery expenses for
the distribution operation.
ADVANCED INFORMATION SERVICES
The advanced information services segment recognized an EBIT of $263,000 and
$268,000 for the quarters ended March 31, 1999 and 1998, respectively. The 2%
decrease in EBIT is attributable to an increase in expenses.
- ---------------------------------------------------------------------------------------
FOR THE THREE MONTHS ENDED MARCH 31, 1999 1998 Change
- ---------------------------------------------------------------------------------------
Revenue $ 3,008,350 $ 2,278,259 $ 730,091
Cost of Sales 1,514,382 1,117,386 396,996
- ---------------------------------------------------------------------------------------
Gross Margin 1,493,968 1,160,873 333,095
Operations & Maintenance 1,030,299 733,215 297,084
Depreciation & Amortization 58,478 41,658 16,820
Other Taxes 142,342 118,086 24,256
- ---------------------------------------------------------------------------------------
Total Operating Expenses 1,231,119 892,959 338,160
- ---------------------------------------------------------------------------------------
EBIT $ 262,849 $ 267,914 $ (5,065)
=======================================================================================
Higher revenues are primarily due to increased consulting and training services,
partially offset by a reduction in placement service revenues. Operating
expenses increased primarily in the areas of compensation due to staffing
increases and employee benefits. Depreciation is also higher primarily due to
computer equipment purchases to support increased attendance in training
classes and increased staffing.
10
OPERATING INCOME TAXES
Operating income taxes increased due to the increase in operating income.
COMPREHENSIVE INCOME
The Company has disclosed an unrealized loss on the sale of marketable
securities of $233,000, reflecting a market price of $14.75 at March 31, 1999
as compared to a sale price of $16.50 at December 31, 1998, related to its
investment in Florida Public Utilities Company ("FPU"). The investment is
classified as "Available for Sale" (see Note 3 to the Consolidated Financial
Statements). As previously discussed, in August 1998, the Company entered into
an agreement with The Southern Company to sell its investment in FPU for
$16.50 per share. If the sale is consummated, the Company will recognize a
non-recurring, after tax gain of approximately $863,000, which represents the
difference between the sale price and Chesapeake's cost basis.
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 5 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 borrowing to meet normal working capital requirements
and temporarily finance capital expenditures. During the first three months of
1999, 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 $13.9 million, $3.2 million and $9.0 million, respectively. Due
to the seasonal nature of the Company's business, there are substantial var-
iations 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, 1999, the Company had
three unsecured bank lines of credit, totaling $28 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 expenditures.
The outstanding balances of short-term borrowing at March 31, 1999 and
December 31, 1998 were $4.5 and $11.6 million, respectively.
During the three months ended March 31, 1999 and March 31, 1998, net property,
plant and equipment expenditures were approximately $3.2 and $1.9 million,
respectively. Chesapeake has budgeted $23.8 million for capital expenditures
during 1999. This amount includes $19.9 million for natural gas distribution
and transmission; $1.9 million for propane distribution and marketing; $336,000
for advanced information services; and $1.7 million for general plant. The
natural gas expenditures are for expansion and improvement of facilities in
existing service territories and improvement and expansion of the pipeline
system, specifically, the construction of eight miles of pipeline to provide
additional firm transportation capacity to two existing customers. The propane
expenditures are to support customer growth and the replacement of older
equipment. The advanced information services expenditures are for computer
hardware, software and related equipment. General expenditures are for building
improvements, computer software and hardware. Financing for the 1999 con-
struction 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 construction expenditures may vary from the above estimates
due to a number of factors including inflation, changing economic conditions,
regulation, sales growth and the cost and availability of capital.
11
Chesapeake has budgeted $2.2 million for environmental related expenditures
during 1999 and expects to incur additional expenditures in future years (see
Note 5 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 acquisi-
tion. Such financing are not expected to have a material adverse effect on the
financial position or capital resources of the Company.
As of March 31, 1999, common equity represented 62.2% of permanent
capitalization, compared to 60.0% as of December 31, 1998. 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 Com-
pany will be able to attract capital from outside sources at a reasonable cost.
OTHER MATTERS
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
("Year 2000" or "Y2K") on its information systems, Chesapeake is in the process
of evaluating and remediating any deficiencies. The Company's evaluation of its
readiness and the potential impact of the Year 2000 on its systems have been
separated into five components: primary internal applications, embedded sys-
tems, vendors/suppliers, end-user computing systems and customers.
- -- Chesapeake's primary internal applications include company maintained
software systems for its financial information; natural gas customer
information and billing; and propane customer information, billing and
delivery. The Company completed testing of these three applications in
1998 and deems them Year 2000 ready.
- -- Embedded systems include the supervisory control and data acquisition
("SCADA") system for the natural gas transmission segment,
telecommunications, metering and other facilities related systems.
Chesapeake has currently identified 64 vendors that support the Company's
embedded systems. During the first quarter of 1999, no additional vendors
or embedded systems were identified. Chesapeake continues to review for
additional vendors and/or embedded systems and expects to finalize the
review during the second quarter of 1999. The Company has prioritized
these vendors into three potential impact classifications: 15 high impact
vendors, supporting items such as the SCADA system; 19 medium impact
vendors, supporting systems such as telecommunications; and 30 low impact
vendors, supporting items such as copiers and postage meters. The Company
has been testing these systems and has contacted all of the vendors
currently identified, with 85% responding. Of the vendors contacted, a
total of 20 vendors - four high impact, six medium impact and ten low
impact vendors - indicated they were Y2K ready. The Company has been
either working with vendors to reach a state of readiness with the
applicable systems or has changed to vendors or systems that are Y2K
ready. The SCADA system, the most critical embedded system, is scheduled
to be Y2K ready during the second quarter of 1999. Chesapeake will
continue to follow up with vendors that are not Y2K ready and will
consider alternate providers as necessary to the extent available.
- -- Chesapeake has identified 101 vendors/suppliers that supply the Company
with products and services that impact various elements of the Company's
business. The Company has classified these vendors into three impact
classifications: 27 high impact vendors such as suppliers of natural gas
or propane; 31 medium impact vendors such as regional communication
vendors; and 43 low impact vendors. The Company has requested a Y2K status
statement from each of these vendors. The
12
Company has received 72 responses, which indicated that nine medium impact
and 13 low impact vendors were Y2K ready. The Company will continue to
follow up with vendors that are not Y2K ready and will consider alternate
providers as necessary to the extent available.
- -- End-user computing systems are upgraded periodically through the Company's
ongoing replacement program. Chesapeake's personal computers and local
area network are Year 2000 ready. The Company's PC-based and network-based
software is also Y2K ready.
- -- Customers, primarily industrial interruptible natural gas customers, must
ensure that their plant controls are Year 2000 ready for their alternative
fuel. The Company has identified 107 interruptible customers and will
finalize contacting them during the second quarter of 1999. The Company
will take into account the results of the survey in developing the natural
gas contingency plan.
The Company believes the most significant potential risks with respect to its
internal operations, those over which it has direct control, are its ability
to: (1) use electronic devices to control and operate its natural gas delivery
systems; (2) maintain continuous operation of its computer systems; (3) render
timely bills to its customers; and (4) enforce tariffs and contracts applicable
to interruptible customers.
The Company relies on the producers of natural gas and suppliers of interstate
transportation capacity to deliver natural gas to the Company's natural gas
delivery systems. The Company is also dependent on propane producers, suppliers
and railroad facilities to receive propane supply. Chesapeake is also dependent
on various suppliers of communication services. Should any of these critical
vendors fail, the impact of any such failure could become a significant
challenge to the Company's ability to meet the demands of its customers, to
operate its delivery systems and to communicate with its customers. It could
also have a material adverse financial impact, including but not limited to,
lost sales revenues, increased operating costs and claims from customers
related to business interruptions. The Company's Year 2000 evaluation process
is addressing each of these risks and the required remediation. The Company is
developing its contingency plan for the Year 2000, which will address various
alternatives and will include assessing a variety of scenarios that could
emerge and require the Company to react. Chesapeake expects to have its con-
tingency plan finalized by the end of the second quarter of 1999. The contin-
gency plan will continue to be modified as warranted by changing events.
Chesapeake has incurred approximately $200,000 as of March 31, 1999 to address
Year 2000 issues. Estimated costs to complete Chesapeake's Y2K embedded system
readiness are $100,000. Until the Company has completed further analysis of the
impact of the Year 2000 issue on its embedded systems, vendors/suppliers, end-
user computing systems, customers and contingency planning, it is unable to
estimate any additional costs it may incur as a result of its efforts.
Presently, no Year 2000-impacted internal applications or embedded systems have
been identified that cannot be upgraded or modified within acceptable time
frames. The target date for completion of all Year 2000-related activities
remains at mid-1999.
CAUTIONARY STATEMENT
We make statements in this report and elsewhere that are considered forward-
looking statements within the meaning of the Private Securities Litigation
Reform Act of 1995. These statements are not matters of historical fact.
Sometimes they contain words such as "believes," "expects," "intends," "plans,"
"will," or "may," and other similar words. These statements relate to such
topics as customer growth, increases in revenues or margins, Year 2000
readiness, regulatory approvals, market risk associated with the Company's new
propane marketing operation, the competitive position of the Company and other
matters. It is important to understand that these forward-looking statements
are not guarantees, but are subject to certain risks and uncertainties and
other important factors that could cause actual results to differ materially
from those in the forward-looking statements. These factors include, among
other things:
- -- the seasonality and temperature sensitivity of Chesapeake's natural gas
and propane businesses (that is, the Company's earnings vary depending on
the season and, in the winter months, how cold the weather is);
- -- consumption patterns of the Company's existing and expected customers in
these businesses;
13
- -- the wholesale price of propane and market movements in these prices, which
affect both the margins in the Company's propane business and the
profitability of the propane marketing operation;
- -- the relative price of alternative energy sources, to which some of
Chesapeake's customers have access;
- -- the effects of competition on both unregulated and regulated businesses;
- -- the ability of the natural gas segment to attract new customers in an open
access environment;
- -- the ability of the Company's existing, new and planned facilities to
generate expected revenues;
- -- the Company's ability to obtain the rate relief requested from utility
regulators and the timing of that rate relief; and
- -- the Company's ability to identify and address Year 2000 issues
successfully, in a timely manner and at a reasonable cost, as well as the
ability of the Company's vendors, suppliers, and other service providers
and customers to successfully address their own Year 2000 issues in a
timely manner.
RECENT ACCOUNTING PRONOUNCEMENTS
Derivatives - SFAS No. 133, Accounting for Derivative Instruments and Hedging
Activities, establishes accounting and reporting standards for derivative
instruments, including certain derivative instruments embedded in other
contracts, and hedging activities. It requires that entities recognize all
derivatives as either assets or liabilities in the statement of financial
position and measure those instruments at fair value. This statement is
effective for all fiscal quarters of fiscal years beginning after June 15,
1999. The Company believes that adoption of this statement will not have a
material impact on the Company's financial position or results of operations.
14
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market risk represents the potential loss arising from adverse changes in
market rates and prices. The Company's long-term debt consists of first mortgage
bonds, senior notes and convertible debentures. All of Chesapeake's long-term
debt is fixed rate debt and was not entered into for trading purposes. The
carrying value of Chesapeake's long-term debt at March 31, 1999 was $37.1
million. The fair value was $39.7 million, based mainly on current market
prices or discounted cash flows using current rates for similar issues with
similar terms and remaining maturities. The Company is exposed to changes in
interest rates as a result of financing through its issuance of fixed rate
long-term debt. The Company evaluates whether to refinance existing debt or
permanently finance existing short-term borrowing based on the fluctuation in
interest rates.
At March 31, 1999, the wholesale propane marketing operation was a party to
natural gas liquids ("NGL") forward contracts, primarily propane contracts,
with various third parties. These contracts require that the wholesale propane
marketing operation purchase or sell NGL at a fixed price at fixed future
dates. At expiration, the contracts are settled by the delivery of NGL to the
respective party. The wholesale propane marketing operation also enters into
futures contracts that are traded on the New York Mercantile Exchange. In
certain cases, the futures contracts are settled by the payment of a net amount
equal to the difference between the current market price of the futures contract
and the original contract price.
The forward and futures contracts are entered into for trading and wholesale
marketing purposes. The wholesale propane marketing operation is subject to
commodity price risk on their open positions to the extent that NGL market
prices deviate from fixed contract settlement amounts. Market risks associated
with the trading of futures and forward contracts are monitored daily for com-
pliance with Chesapeake's Risk Management Policy, which includes volumetric
limits for open positions. In order to manage exposures to changing market
prices, open positions are marked to market and reviewed by oversight officials
on a daily basis. Additionally, the Risk Management Committee reviews periodic
reports on market and credit risk, approves any exceptions to the Risk Manage-
ment policy (within the limits established by the Board of Directors) and
authorizes the use of any new types of contracts. Listed below is quantitative
information on the forward and futures contracts at March 31, 1999. All of the
contracts mature during 1999.
- -------------------------------------------------------------------------
Quantity Estimated Weighted Average
At March 31, 1999 in gallons Market Prices Contract Prices
- -------------------------------------------------------------------------
Forward Contracts
Sale 14,187,600 $0.2575 - $0.2750 $0.2729
Purchase 10,101,000 $0.2575 - $0.2750 $0.2702
Futures Contracts
Sale - $0.2575 - $0.2750 -
Purchase 4,410,000 $0.2575 - $0.2750 $0.2399
- -------------------------------------------------------------------------
Estimated market prices and weighted average contract prices
are in dollars per gallon.
15
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
See Note 4 to the Consolidated Financial Statements
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
Exhibit 10 - Form of Executive Employment Agreement dated January 1,
1999, by and between Chesapeake Utilities Corporation and Ralph J.
Adkins is filed herewith.
16
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 11, 1999
17