1
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, 2000
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 -- 5,217,280 shares issued as of March 31, 2000.
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TABLE OF CONTENTS
PART I -- FINANCIAL INFORMATION............................................. 1
ITEM 1. FINANCIAL STATEMENTS.............................................. 1
CONSOLIDATED STATEMENTS OF INCOME AND CONSOLIDATED STATEMENTS
OF COMPREHENSIVE INCOME -- THREE MONTHS ENDED MARCH 31, 2000 AND 1999... 1
CONSOLIDATED BALANCE SHEETS -- MARCH 31, 2000 AND DECEMBER 31, 1999..... 2
CONSOLIDATED STATEMENTS OF CASH FLOWS -- THREE MONTHS ENDED
MARCH 31, 2000 AND 1999................................................. 4
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.............................. 5
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.............................................. 8
RESULTS OF OPERATIONS FOR THE QUARTER ENDED MARCH 31, 2000.............. 8
FINANCIAL POSITION, LIQUIDITY AND CAPITAL RESOURCES..................... 10
OTHER MATTERS........................................................... 11
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK........ 12
PART II -- OTHER INFORMATION................................................ 13
SIGNATURES.................................................................. 14
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PART I -- FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CHESAPEAKE UTILITIES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
- -----------------------------------------------------------------------------------
FOR THE THREE MONTHS ENDED MARCH 31, 2000 1999
- -----------------------------------------------------------------------------------
OPERATING REVENUES $ 98,525,160 $ 55,644,143
COST OF SALES 76,902,723 37,092,053
- -----------------------------------------------------------------------------------
GROSS MARGIN 21,622,437 18,552,090
- -----------------------------------------------------------------------------------
OPERATING EXPENSES
Operations 8,327,106 6,846,812
Maintenance 485,618 419,752
Depreciation and amortization 1,825,228 1,588,419
Other taxes 917,791 900,366
Income taxes 3,404,359 3,027,958
- -----------------------------------------------------------------------------------
Total operating expenses 14,960,102 12,783,307
- -----------------------------------------------------------------------------------
OPERATING INCOME 6,662,335 5,768,783
OTHER INCOME, NET 68,833 72,818
- -----------------------------------------------------------------------------------
INCOME BEFORE INTEREST CHARGES 6,731,168 5,841,601
INTEREST CHARGES 1,061,702 898,618
- -----------------------------------------------------------------------------------
NET INCOME $ 5,669,466 $ 4,942,983
===================================================================================
EARNINGS PER SHARE OF COMMON STOCK:
BASIC $ 1.09 $ 0.97
===================================================================================
DILUTED $ 1.05 $ 0.93
===================================================================================
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)
- -----------------------------------------------------------------------------------
FOR THE THREE MONTHS ENDED MARCH 31, 2000 1999
- -----------------------------------------------------------------------------------
NET INCOME $ 5,669,466 $ 4,942,983
UNREALIZED GAIN ON MARKETABLE SECURITIES,
NET OF INCOME TAXES - (233,312)
- -----------------------------------------------------------------------------------
TOTAL COMPREHENSIVE INCOME $ 5,669,466 $ 4,709,671
===================================================================================
The accompanying notes are an integral part of these financial statements.
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CHESAPEAKE UTILITIES CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
- ----------------------------------------------------------------------------------------
MARCH 30, DECEMBER 31,
2000 1999
ASSETS (Unaudited) (Audited)
- ----------------------------------------------------------------------------------------
PROPERTY, PLANT AND EQUIPMENT
Natural gas distribution and transmission $ 135,128,525 $ 132,929,885
Propane gas distribution and marketing 28,980,704 28,679,766
Advanced information services 1,599,710 1,460,411
Other plant 9,307,913 9,017,458
- ----------------------------------------------------------------------------------------
Total property, plant and equipment 175,016,852 172,087,520
Less: Accumulated depreciation and amortization (56,241,192) (54,424,105)
- ----------------------------------------------------------------------------------------
Net property, plant and equipment 118,775,660 117,663,415
- ----------------------------------------------------------------------------------------
INVESTMENTS 595,644 595,644
- ----------------------------------------------------------------------------------------
CURRENT ASSETS
Cash and cash equivalents 1,299,300 2,357,173
Accounts receivable 21,905,476 21,699,128
Materials and supplies, at average cost 2,597,919 2,407,214
Propane inventory, at average cost 2,267,520 2,754,401
Storage gas prepayments 343,584 2,211,084
Underrecovered purchased gas costs 498,450 1,236,914
Income taxes receivable - 73,772
Deferred income taxes 745,888 745,888
Prepaid expenses 1,009,789 1,505,397
- ----------------------------------------------------------------------------------------
Total current assets 30,667,926 34,990,971
- ----------------------------------------------------------------------------------------
DEFERRED CHARGES AND OTHER ASSETS
Environmental regulatory assets 2,319,604 2,340,000
Environmental expenditures 3,284,177 3,574,888
Other deferred charges and intangible assets 8,548,365 7,823,597
- ----------------------------------------------------------------------------------------
Total deferred charges and other assets 14,152,146 13,738,485
- ----------------------------------------------------------------------------------------
TOTAL ASSETS $ 164,191,376 $ 166,988,515
========================================================================================
The accompanying notes are an integral part of these financial statements.
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- -------------------------------------------------------------------------------
MARCH 30, DECEMBER 31,
2000 1999
CAPITALIZATION AND LIABILITIES (Unaudited) (Audited)
- -------------------------------------------------------------------------------
CAPITALIZATION
Stockholders' equity
Common Stock, par value $.4867 per share;
(authorized 12,000,000 shares; issued
5,217,280 shares and 5,186,546,
respectively) $ 2,538,691 $ 2,524,018
Additional paid-in capital 26,311,854 25,782,824
Retained earnings 36,170,858 31,857,732
- ---------------------------------------------------------------------------------
Total stockholders' equity 65,021,403 60,164,574
Long-term debt, net of current portion 32,728,933 33,776,909
- ---------------------------------------------------------------------------------
Total capitalization 97,750,336 93,941,483
- ---------------------------------------------------------------------------------
CURRENT LIABILITIES
Current portion of long-term debt 2,665,091 2,665,091
Short-term borrowing 14,000,000 23,000,000
Accounts payable 15,756,946 16,865,119
Refunds payable to customers 664,232 779,508
Income taxes payable 3,040,978 -
Accrued interest 554,564 581,649
Dividends payable 1,356,340 1,347,784
Other accrued liabilities 4,903,296 4,613,358
- ---------------------------------------------------------------------------------
Total current liabilities 42,941,447 49,852,509
- ---------------------------------------------------------------------------------
DEFERRED CREDITS AND OTHER LIABILITIES
Deferred income taxes 13,956,138 13,895,373
Deferred investment tax credits 704,503 711,987
Environmental liability 2,319,604 2,340,000
Accrued pension costs 1,544,963 1,544,963
Other liabilities 4,974,385 4,702,200
- ---------------------------------------------------------------------------------
Total deferred credits and other liabilities 23,499,593 23,194,523
- ---------------------------------------------------------------------------------
TOTAL CAPITALIZATION AND LIABILITIES $ 164,191,376 $ 166,988,515
=================================================================================
The accompanying notes are an integral part of these financial statements.
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CHESAPEAKE UTILITIES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
- ----------------------------------------------------------------------------------------------
FOR THE THREE MONTHS ENDED MARCH 31, 2000 1999
- ----------------------------------------------------------------------------------------------
OPERATING ACTIVITIES
Net Income $ 5,669,466 $ 4,942,983
Adjustments to reconcile net income to net operating cash:
Depreciation and amortization 2,279,769 1,815,800
Deferred income taxes, net 60,765 (593,769)
Investment tax credit adjustments (7,484) (8,823)
Mark-to-market adjustments (1,103,501) (708,710)
Other, net 272,186 100,163
Changes in assets and liabilities:
Accounts receivable, net 897,154 (566,350)
Inventory, materials, supplies and storage gas 2,163,676 2,192,386
Other current assets 495,606 327,954
Other deferred charges (276,516) 215,607
Accounts payable, net (1,108,173) 39,139
Refunds payable to customers (115,276) (151,243)
Overrecovered purchased gas costs 738,464 1,939,250
Income taxes payable 3,114,749 3,396,530
Other current liabilities 390,567 940,534
- ----------------------------------------------------------------------------------------------
Net cash provided by operating activities 13,471,452 13,881,451
- ----------------------------------------------------------------------------------------------
INVESTING ACTIVITIES
Property, plant and equipment expenditures, net (3,549,554) (3,238,792)
- ----------------------------------------------------------------------------------------------
Net cash used by investing activities (3,549,554) (3,238,792)
- ----------------------------------------------------------------------------------------------
FINANCING ACTIVITIES
Common stock dividends net of amounts reinvested of
$121,210 and $109,421, respectively (1,226,574) (1,164,025)
Issuance of stock:
Dividend Reinvestment Plan optional cash 40,106 43,880
Retirement Savings Plan 206,725 183,790
Net repayments under line of credit agreements (9,000,000) (7,100,000)
Repayments of long-term debt (1,000,028) (1,008,025)
- ----------------------------------------------------------------------------------------------
Net cash used by financing activities (10,979,771) (9,044,380)
- ----------------------------------------------------------------------------------------------
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS $ (1,057,873) $ 1,598,279
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 2,357,173 2,598,084
- ----------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 1,299,300 $ 4,196,363
==============================================================================================
The accompanying notes are an integral part of these financial statements.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. QUARTERLY FINANCIAL DATA
The financial information of Chesapeake Utilities Corporation (the "Company")
included herein is unaudited and should be read in conjunction with the
Company's 1999 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 1999 have been
reclassified to conform to current year presentation.
2. CALCULATION OF EARNINGS PER SHARE
- ------------------------------------------------------------------------
FOR THE THREE MONTHS ENDED MARCH 31, 2000 1999
- ------------------------------------------------------------------------
CALCULATION OF BASIC EARNINGS PER SHARE:
Net Income $ 5,669,466 $ 4,942,983
Weighted Average Shares Outstanding 5,206,266 5,108,057
- ------------------------------------------------------------------------
BASIC EARNINGS PER SHARE $ 1.09 $ 0.97
========================================================================
CALCULATION OF DILUTED EARNINGS PER SHARE:
RECONCILIATION OF NUMERATOR:
Net Income-- Basic $ 5,669,466 $ 4,942,983
Effect of 8.25% Convertible debentures 45,367 47,128
- ------------------------------------------------------------------------
Adjusted numerator-- Diluted $ 5,714,833 $ 4,990,111
- ------------------------------------------------------------------------
RECONCILIATION OF DENOMINATOR:
Weighted Shares Outstanding-- Basic 5,206,266 5,108,057
Effect of Dilutive Securities
Stock options 11,905 11,658
8.25% Convertible debentures 213,122 223,241
- ------------------------------------------------------------------------
Adjusted denominator-- Diluted 5,431,293 5,342,956
- ------------------------------------------------------------------------
DILUTED EARNINGS PER SHARE $ 1.05 $ 0.93
========================================================================
3. 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 states, including the exploration of corrective action options to
remove environmental contaminants. Chesapeake entered into settlement
agreements with a number of insurance companies resulting in proceeds to fund
actual environmental costs incurred for two of the sites over three to
seven-year periods beginning in 1990. The final insurance proceeds were
requested and received in 1992. Chesapeake has received ratemaking treatment
for costs incurred to date from the applicable regulatory commissions for the
three sites listed below. It is management's opinion that any current or
future costs that have not been recovered through insurance proceeds or rates
at this time will be recoverable in future rates.
(a) DOVER GAS LIGHT SITE
The Dover site has been listed by the Environmental Projection Agency Region
III ("EPA") on the Superfund National Priorities List under the Comprehensive
Environmental Response, Compensation and Liability Act. In 1994, the EPA
issued a site Record of Decision ("ROD"), which selected a remedial plan and
estimated the costs of the selected remediation at $2.7 million for
ground-water and $3.3 million for soil. In 1995, the EPA issued an order
("Order") requiring both the Company and General Public Utilities
Corporation, Inc. ("GPU") to fund or implement the ROD. Although notifying
the EPA of its objections, the Company agreed to comply with the Order. GPU
informed the EPA that it did not intend to comply. The EPA may seek judicial
enforcement of its Order, as well as significant financial penalties for
failure to comply. In June 1996, the Company initiated litigation against GPU
for contribution to the remedial costs
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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. Additional information pertaining to
remediation costs, investigations related to additional parties who may be
potentially responsible parties 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, 1999 (see the "Environmental -- Dover Gas Light Site" section,
beginning on page 11).
In 1996, the Company began the design phase of the ROD, on-site pre-design
and investigation. In January 1998, the EPA issued a ROD Amendment, which
modified the soil remediation clean-up plan to include: (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
EPA's ROD Amendment was $4.2 million ($1.5 million for soil remediation and
$2.7 million for ground-water remediation) as compared to the original ROD
clean-up estimate of $6.0 million ($3.3 million for soil remediation and $2.7
million for ground-water remediation).
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. The
installation of the ground-water remediation system has been delayed pending
further investigation.
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 $3.3 million in capital and $1.0 million
per year in operating costs for 30 years for a pump-and-treat system. The
pump-and-treat / ground-water containment system is intended to contain the
MGP contaminants to allow the ground-water outside of the containment area to
naturally attenuate. The operating cost estimate for the containment system
is dependent upon the actual ground-water quality and flow conditions. The
EPA has also requested that the Company submit a design for a limited
ground-water containment system that is estimated to cost $2.8 million in
capital and $600,000 per year in operating costs. The EPA has requested that
the design be submitted in enough time to allow the EPA to approve it by July
14, 2000. The Company continues to believe that a ground-water containment
system is not necessary for the MGP contaminants, that there is insufficient
information to design an overall ground-water containment program and that
natural attenuation is the appropriate remedial action for the MGP wastes.
The Company cannot predict what the EPA will require for the overall
ground-water program, and accordingly, accrued $2.1 million at December 31,
1998 for the Dover site, and recorded a regulatory asset for an equivalent
amount. Of this amount, $1.5 million is for ground-water remediation 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. No changes
have been made to these accrued amounts during 1999 and the first quarter of
2000. The Company is currently engaged in investigations related to
additional parties who may be potentially responsible parties ("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, 2000, the Company has incurred approximately $7.6 million in
costs relating to environmental testing and remedial action studies. Of this
amount, $419,000 of incurred environmental costs has not received ratemaking
treatment. In November, Chesapeake will submit a filing with the Public
Service Commission to recover these costs through rates.
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(b) SALISBURY TOWN GAS LIGHT SITE
In cooperation with the Maryland Department of the Environment, 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 Air Sparging and Soil-Vapor
Extraction remediation procedures. Chesapeake has been reporting the
remediation and monitoring results to the MDE on an ongoing basis since 1996.
The estimated cost of the remaining remediation is approximately $100,000 per
year for operating expenses for a period of two years and capital costs of
$50,000 to shut down the remediation process. Based on these estimated costs,
the Company adjusted both its liability and related regulatory asset to
$240,000 on December 31, 1999, to cover the Company's projected remediation
costs for this site. As of March 31, 2000, the Company has incurred
approximately $2.7 million for remedial actions and environmental studies. Of
this amount, approximately $878,000 of incurred costs have not been recovered
through insurance proceeds or received ratemaking treatment. Chesapeake will
apply for the recovery of these and any future costs in the next base rate
filing with the Maryland Public Service Commission.
(c) WINTER HAVEN COAL GAS SITE
Chesapeake has been working with the Florida Department of Environmental
Protection ("FDEP") in assessing a coal gas site in Winter Haven, Florida. In
May 1996, the Company filed an Air Sparging and Soil Vapor Extraction Pilot
Study Work Plan for the Winter Haven site with the FDEP. The Work Plan
described the Company's proposal to undertake an Air Sparging and Soil Vapor
Extraction ("AS/SVE") pilot study to evaluate the site. After discussions
with the FDEP, the Company filed a modified AS/SVE Pilot Study Work Plan, the
description of the scope of work to complete the site assessment activities
and a report describing a limited sediment investigation performed in 1997.
In December 1998, the FDEP approved the AS/SVE Pilot Study Work Plan, which
the Company completed during the third quarter of 1999. Chesapeake has
reported the results of the Work Plan to the FDEP for further discussion and
review. It is not possible to determine what remedial action will be required
by FDEP or the cost of such remediation.
The Company has recovered all environmental costs incurred to date,
approximately $773,000, through rates charged to customers. Additionally, the
Florida Public Service Commission has allowed the Company to continue to
recover amounts for future environmental costs that might be incurred. At
March 31, 2000, Chesapeake had received $515,000 related to future costs,
which might be incurred.
4. RECENT ACCOUNTING PRONOUNCEMENTS
FASB STATEMENTS AND OTHER AUTHORITATIVE PRONOUNCEMENTS ISSUED
DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
The Financial Accounting Standards Board ("FASB") issued Statement of
Financial Accounting Standards No. 133, establishing accounting and reporting
standards for derivative instruments, including certain derivative
instruments embedded in other contracts, and 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 2001, 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.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
BUSINESS DESCRIPTION
Chesapeake Utilities Corporation is a diversified utility company engaged in
natural gas distribution and transmission, propane distribution and wholesale
marketing and advanced information services.
Chesapeake's strategy is to grow earnings from a stable utility foundation by
investing in related businesses and services that provide opportunities for
higher, unregulated returns. This growth strategy includes acquisitions and
investments in unregulated businesses as well as the continued investment and
expansion of the Company's utility operations that provide the stable base of
earnings. Chesapeake continuously re-evaluates its investments to ensure that
they are consistent with its strategy and the goal of enhancing shareholder
value.
RESULTS OF OPERATIONS FOR THE QUARTER ENDED MARCH 31, 2000
CONSOLIDATED OVERVIEW
The Company recognized net income of $5.7 million -- $1.09 per share -- for the
first quarter of 2000, representing an increase in the income of $726,000 or
$0.12 per share, as compared to the corresponding period in 1999. As indicated
in the following table, the increase in income is primarily due to greater
contribution of pre-tax operating income by the natural gas and propane business
segments. These gains were partially offset by lower pre-tax operating income
for the advanced information services segment.
- ---------------------------------------------------------------------------------
FOR THE THREE MONTHS ENDED MARCH 31, 2000 1999 CHANGE
- ---------------------------------------------------------------------------------
Pre-tax Operating Income
Natural Gas Distribution & Transmission $ 6,387,419 $ 5,190,513 $ 1,196,906
Propane Gas Distribution & Marketing 3,491,998 3,215,464 276,534
Advanced Information Services 26,254 262,849 (236,595)
Other & Eliminations 161,023 127,915 33,108
- ---------------------------------------------------------------------------------
Pre-tax Operating Income 10,066,694 8,796,741 1,269,953
Operating Income Taxes 3,404,359 3,027,958 376,401
Interest 1,061,702 898,618 163,084
Non-Operating Income, net 68,833 72,818 (3,985)
- ---------------------------------------------------------------------------------
Net Income $ 5,669,466 $ 4,942,983 $ 726,483
=================================================================================
NATURAL GAS DISTRIBUTION AND TRANSMISSION
The natural gas distribution and transmission segment reported pre-tax operating
income of $6.4 million for the first quarter 2000 as compared to $5.2 million
for the corresponding period last year -- an increase of $1.2 million. The
increase in pre-tax operating income is due to an increase in gross margin
somewhat offset by higher operating expenses.
- -------------------------------------------------------------------------------
FOR THE THREE MONTHS ENDED MARCH 31, 2000 1999 CHANGE
- -------------------------------------------------------------------------------
Revenue $30,072,568 $ 24,606,424 $ 5,466,144
Cost of Gas 17,643,339 13,730,542 3,912,797
- -------------------------------------------------------------------------------
Gross Margin 12,429,229 10,875,882 1,553,347
Operations & Maintenance 4,059,032 3,803,808 255,224
Depreciation & Amortization 1,322,100 1,203,840 118,260
Other Taxes 660,678 677,721 (17,043)
- -------------------------------------------------------------------------------
Total Operating Expenses 6,041,810 5,685,369 356,441
- -------------------------------------------------------------------------------
Pre-tax Operating Income $ 6,387,419 $ 5,190,513 $ 1,196,906
===============================================================================
Gross margin increased due to a 4.7 percent increase in customer base, a greater
level of transportation services provided and the implementation of a weather
normalization mechanism in the Company's Delaware division. The growth in
customer base was primarily residential and commercial customers, which
generated a 13% increase in deliveries. Transportation revenues increased due to
new services provided as a result of
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the expansion of the pipeline system, which occurred during the second half of
last year. In 1999, the Company requested and received approval from the
Delaware Public Service Commission to adjust its interruptible margin sharing
mechanism in order to address the level of recovery of fixed distribution costs
from residential and small commercial heating customers. During the first
quarter of 2000, the Company increased the margin sharing thresholds (weather
normalization mechanism) resulting in an increase in gross margin of $358,000.
Operating expenses were higher due to depreciation on capital additions during
the past year, information systems expenses, communication expenses, marketing
programs that continue to build customer growth and the accrual of paid time off
benefits previously expensed in the month taken.
PROPANE GAS DISTRIBUTION AND MARKETING
For the first quarter of 2000, the propane segment contributed pre-tax operating
income of $3.5 million as compared to $3.2 million for the same period last
year. The increase is the result of a gain in gross margin partially offset by
higher operating expenses.
- --------------------------------------------------------------------------------
FOR THE THREE MONTHS ENDED MARCH 31, 2000 1999 CHANGE
- --------------------------------------------------------------------------------
Revenue $ 63,807,854 $ 27,586,695 $ 36,221,159
Cost of Sales 56,801,915 21,574,470 35,227,445
- --------------------------------------------------------------------------------
Gross Margin 7,005,939 6,012,225 993,714
Operations & Maintenance 3,132,910 2,456,550 676,360
Depreciation & Amortization 307,101 275,141 31,960
Other Taxes 73,930 65,070 8,860
- --------------------------------------------------------------------------------
Total Operating Expenses 3,513,941 2,796,761 717,180
- --------------------------------------------------------------------------------
Pre-tax Operating Income $ 3,491,998 $ 3,215,464 $ 276,534
================================================================================
The increase in gross margin is due primarily to a $1.4 million gain in
marketing margins partially offset by a 6.3 percent reduction on margins earned
on distribution sales. Temperatures for the first quarter of 2000 were similar
to the same period in 1999, resulting in distribution deliveries for the quarter
being unchanged from the same period in 1999. The decline in distribution margin
earned was the result of higher priced supply costs, which could not be
completely passed on to the customers in price increases. Operating expense were
higher due to compensation, information systems expenses, communication
expenses, marketing programs that continue to build customer growth and the
accrual of paid time off benefits previously expensed in the month taken
ADVANCED INFORMATION SERVICES
The advanced information services segment recognized pre-tax operating income of
$26,000 for the first quarter of 2000 as compared to a pre-tax operating income
of $263,000 for the period last year. The decrease in contribution from this
segment is directly related to an increase in costs somewhat offset by higher
revenue.
- --------------------------------------------------------------------------------
FOR THE THREE MONTHS ENDED MARCH 31, 2000 1999 CHANGE
- --------------------------------------------------------------------------------
Revenue $ 3,170,067 $ 3,008,350 $ 161,717
Cost of Sales 1,731,239 1,514,382 216,857
- ---------------------------------------------------------------------------------
Gross Margin 1,438,828 1,493,968 (55,140)
Operations & Maintenance 1,172,150 1,030,299 141,851
Depreciation & Amortization 73,038 58,478 14,560
Other Taxes 167,386 142,342 25,044
- ---------------------------------------------------------------------------------
Total Operating Expenses 1,412,574 1,231,119 181,455
- ---------------------------------------------------------------------------------
Pre-tax Operating Income $ 26,254 $ 262,849 $ (236,595)
=================================================================================
The advanced information services segment is primarily service related. The
decline in pre-tax operating income contribution resulted from an increase in
operating expenses to support future revenue growth. Revenue growth for the
first quarter was only 5 percent, which is less than had been achieved in
previous quarters, due to many of our customers curtailing their information
technologies ("IT") expenditures after implementing their year 2000 contingency
plans. The company expects the IT revenue growth to return to normal during the
later half of the year.
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OPERATING INCOME TAXES
Operating income taxes were higher due to an increase in operating income.
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 3 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
2000, the Company's net cash provided by operating activities, net cash used by
investing activities and net cash used by financing activities were
approximately $13.5 million, $3.5 million and $11.0 million, respectively. Due
to the seasonal nature of the Company's business, there are substantial
variations in the results of operations reported on a quarterly basis.
The Company has four unsecured lines of credit totaling $36.0 million. The Board
of Directors has recently authorized the Company to borrow up to $35.0 million
under these lines of credit. Funds provided from these lines of credit are used
for short-term cash needs to meet seasonal working capital requirements and to
fund portions of its capital expenditures. The outstanding balances of
short-term borrowing at March 31, 2000 and December 31, 1999 were $14.0 and
$23.0 million, respectively.
During the three months ended March 31, 2000 and March 31, 1999, net property,
plant and equipment expenditures were approximately $3.5 million and $3.2
million, respectively. Chesapeake has budgeted $23.0 million for capital
expenditures during 2000. This amount includes $17.2 million for natural gas
distribution and transmission; $4.1 million for propane distribution and
marketing; $400,000 for advanced information services; and $1.3 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, to provide service to customers in the City of
Milford, Delaware. 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 to
support customer growth and increased staffing. General expenditures are for
building improvements, computer software and hardware. Financing for the 2000
construction program is expected to be provided from short-term borrowing, cash
from operations and the possible issuance of long-term debt. 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.
Chesapeake has budgeted $1.2 million for environmental related expenditures
during 2000 and expects to incur additional expenditures in future years (see
Note 3 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. The
company has entered into an agreement with an investment banker to assist in
identifying acquisition candidates. Under the agreement, the Company issued
warrants to
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the investment banker to purchase 15,000 shares of the Company's common stock,
which are exercisable during the next seven years at a price of $18.00 per
share. This agreement may result in additional warrants being issued based on
performance.
As of March 31, 2000, common equity represented 66.5 percent of permanent
capitalization, compared to 64.0 percent as of December 31, 1999. Including
short-term borrowing, the equity capitalization would have been 58.2 percent and
51.5 percent. The Company remains committed to maintaining a sound capital
structure and strong credit ratings in order to provide the financial
flexibility needed to access the capital markets when required. This commitment,
along with adequate and timely rate relief for the Company's regulated
operations, is designed to ensure that the Company will be able to attract
capital from outside sources at a reasonable cost.
OTHER MATTERS
THE YEAR 2000
Chesapeake has not experienced any problems related to the year 2000 date
rollover or the year 2000 leap year issue; however, all date related problems
may not yet have become apparent. While Chesapeake believes its efforts to date
have successfully addressed the potential problems, there can be no assurance
until the passage of time, that no future problems will occur, including date
related problems with respect to Chesapeake's third party business partners. The
costs incurred in addressing the year 2000 issues have been immaterial.
CAUTIONARY STATEMENT
Chesapeake has made statements in this report that are considered to be
forward-looking statements. These statements are not matters of historical fact.
Sometimes they contain words such as "believes," "expects," "intends," "plans,"
"will," or "may," and other similar words. These statements relate to such
topics as customer growth, increases in revenues or margins, regulatory
approvals, market risk associated with the Company's 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 the natural gas
and propane gas businesses;
- the wholesale price of propane and market movements in these
prices;
- the effects of competition on both unregulated and regulated
businesses;
- 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 effect of changes in federal, state or local legislative
requirements.
RECENT ACCOUNTING PRONOUNCEMENTS
Statement of Financial Accounting Standards 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,
originally effective for all fiscal quarters of fiscal years beginning after
June 15, 1999 has been deferred by FASB and is now effective for all fiscal
quarters of fiscal years beginning after June 15, 2000. The Company believes
that adoption of this statement will not have a material impact on the Company's
financial position or results of operations.
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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, 2000 was $35.4 million. The
fair value was $35.2 million, based mainly on current market prices or
discounted cash flows using current rates for similar issues with similar terms
and remaining maturities. The Company is exposed to changes in interest rates 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, 2000, 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 prices. Market risks associated
with the trading of futures and forward contracts are monitored daily for
compliance 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
Management 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, 2000. All of the
contracts mature within nine months.
- ------------------------------------------------------------------------------------
QUANTITY ESTIMATED WEIGHTED AVERAGE
AT MARCH 31, 2000 IN GALLONS MARKET PRICES CONTRACT PRICES
- ------------------------------------------------------------------------------------
FORWARD CONTRACTS
Sale 10,966,200 $0.4450 -- $0.5600 $0.4839
Purchase 10,966,200 $0.4538 -- $0.5095 $0.4723
FUTURES CONTRACTS
Purchase 882,000 $0.4600 -- $0.5000 $0.4820
- ------------------------------------------------------------------------------------
Estimated market prices and weighted average contract prices are in dollars
per gallon.
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PART II -- OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
See Note 3 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
None
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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 15, 2000
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