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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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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, 2001
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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
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
909 SILVER LAKE BOULEVARD, DOVER, DELAWARE 19904
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(Address of principal executive offices, including Zip Code)
(302) 734-6799
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(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 -- 5,329,437 shares issued as of March
31, 2001.
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TABLE OF CONTENTS
PART I -- FINANCIAL INFORMATION...................................................................................1
ITEM 1. FINANCIAL STATEMENTS.................................................................................1
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS...................................................................5
1. Quarterly Financial Data.............................................................................5
2. Calculation of Earnings Per Share....................................................................5
3. Commitments and Contingencies........................................................................5
4. Reclassification of Amounts for Prior Years..........................................................7
5. Recent Authoritative Pronouncements on Financial Reporting and Accounting............................7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS......................................................................................7
FINANCIAL POSITION, LIQUIDITY AND CAPITAL RESOURCES..........................................................7
RESULTS OF OPERATIONS FOR THE QUARTER ENDED MARCH 31, 2001...................................................9
Consolidated Overview.....................................................................................9
Natural Gas Distribution and Transmission.................................................................9
Propane Gas Distribution and Marketing...................................................................10
Advanced Information Services............................................................................10
Operating Income Taxes...................................................................................10
Interest Expense.........................................................................................11
Environmental Matters....................................................................................11
OTHER MATTERS...............................................................................................11
Regulatory Matters.......................................................................................11
Competition..............................................................................................11
Inflation................................................................................................12
Cautionary Statement.....................................................................................12
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK..........................................12
PART II -- OTHER INFORMATION.....................................................................................14
SIGNATURES.......................................................................................................15
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PART I -- FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CHESAPEAKE UTILITIES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
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FOR THE THREE MONTHS ENDED MARCH 31, 2001 2000
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OPERATING REVENUES $ 134,039,485 $ 98,509,179
COST OF SALES 110,987,728 77,040,624
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GROSS MARGIN 23,051,757 21,468,555
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OPERATING EXPENSES
Operations 9,264,770 8,108,555
Maintenance 495,036 403,293
Depreciation and amortization 2,098,623 1,861,728
Other taxes 1,157,590 1,028,285
Income taxes 3,369,407 3,425,968
- ------------------------------------------------------------------------------------------------------
Total operating expenses 16,385,426 14,827,829
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OPERATING INCOME 6,666,331 6,640,726
OTHER INCOME, NET 134,872 26,883
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INCOME BEFORE INTEREST CHARGES 6,801,203 6,667,609
INTEREST CHARGES 1,435,734 998,143
- ------------------------------------------------------------------------------------------------------
NET INCOME $ 5,365,469 $ 5,669,466
======================================================================================================
EARNINGS PER SHARE OF COMMON STOCK:
BASIC $ 1.01 $ 1.09
- ------------------------------------------------------------------------------------------------------
DILUTED $ 0.98 $ 1.05
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The accompanying notes are an integral part of these financial statements.
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CHESAPEAKE UTILITIES CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
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MARCH 31, DECEMBER 31,
ASSETS 2001 2000
- ------------------------------------------------------------------------------------------------------
PROPERTY, PLANT AND EQUIPMENT
Natural gas distribution and transmission $ 152,593,230 $ 149,121,319
Propane gas distribution and marketing 31,922,072 31,630,208
Advanced information services 1,844,277 1,699,968
Other plant 10,770,086 10,488,581
- ------------------------------------------------------------------------------------------------------
Total property, plant and equipment 197,129,665 192,940,076
Less: Accumulated depreciation and amortization (63,405,179) (61,473,757)
- ------------------------------------------------------------------------------------------------------
Net property, plant and equipment 133,724,486 131,466,319
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INVESTMENTS 616,026 616,293
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CURRENT ASSETS
Cash and cash equivalents 3,012,580 4,606,316
Accounts receivable, less allowance for uncollectibles 29,051,719 38,046,582
Materials and supplies, at average cost 1,335,406 1,566,126
Merchandise inventory, at average cost 1,519,878 1,234,072
Propane inventory, at average cost 2,172,442 4,379,599
Storage gas prepayments 264,210 3,500,323
Underrecovered purchased gas costs 6,524,717 5,388,725
Income taxes receivable - 1,159,761
Prepaid expenses and other current assets 2,034,495 2,015,274
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Total current assets 45,915,447 61,896,778
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DEFERRED CHARGES AND OTHER ASSETS
Environmental regulatory assets 2,872,945 2,910,000
Environmental expenditures 3,513,217 3,626,475
Underrecovered purchased gas costs 2,247,338 1,959,562
Other deferred charges and intangible assets 8,266,158 8,224,076
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Total deferred charges and other assets 16,899,658 16,720,113
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TOTAL ASSETS $ 197,155,617 $ 210,699,503
======================================================================================================
The accompanying notes are an integral part of these financial statements.
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MARCH 31, DECEMBER 31,
CAPITALIZATION AND LIABILITIES 2001 2000
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CAPITALIZATION
Stockholders' equity
Common Stock, par value $.4867 per share;
(authorized 12,000,000 shares; issued 5,329,437
and 5,297,443 shares, respectively) $ 2,589,856 $ 2,577,992
Additional paid-in capital 28,109,126 27,672,005
Retained earnings 37,648,268 33,721,747
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Total stockholders' equity 68,347,250 63,971,744
Long-term debt, net of current maturities 49,903,818 50,920,818
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Total capitalization 118,251,068 114,892,562
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CURRENT LIABILITIES
Current portion of long-term debt 2,665,091 2,665,091
Short-term borrowing 21,500,000 25,400,000
Accounts payable 17,525,956 33,654,718
Refunds payable to customers 772,344 1,015,128
Income taxes payable 2,263,653 -
Accrued interest 948,393 595,175
Dividends payable 1,583,637 1,429,945
Deferred income taxes payable 985,349 985,349
Other accrued liabilities 6,171,515 5,674,419
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Total current liabilities 54,415,938 71,419,825
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DEFERRED CREDITS AND OTHER LIABILITIES
Deferred income taxes 15,086,951 15,086,951
Deferred investment tax credits 648,906 657,172
Environmental liability 2,872,945 2,910,000
Accrued pension costs 1,670,134 1,625,128
Other liabilities 4,209,675 4,107,865
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Total deferred credits and other liabilities 24,488,611 24,387,116
- ------------------------------------------------------------------------------------------------------
TOTAL CAPITALIZATION AND LIABILITIES $ 197,155,617 $ 210,699,503
======================================================================================================
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)
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FOR THE THREE MONTHS ENDED MARCH 31, 2001 2000
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OPERATING ACTIVITIES
Net Income $ 5,365,469 $ 5,669,466
Adjustments to reconcile net income to net operating cash:
Depreciation and amortization 2,553,745 2,316,267
Deferred income taxes, net 267 60,765
Investment tax credit adjustments (8,266) (7,484)
Mark-to-market adjustments 919,460 87,380
Other, net 146,817 272,186
Changes in assets and liabilities:
Accounts receivable, net 8,075,403 (293,727)
Inventory, materials, supplies and storage gas 5,388,184 2,158,621
Other current assets (19,219) 361,926
Other deferred charges (175,138) (142,836)
Accounts payable, net (16,128,763) (1,102,598)
Refunds payable to customers (242,784) (115,276)
(Under) Overrecovered purchased gas costs (1,423,768) 738,464
Other current liabilities 4,378,745 3,505,316
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Net cash provided by operating activities 8,830,152 13,508,470
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INVESTING ACTIVITIES
Property, plant and equipment expenditures, net (4,565,599) (3,586,052)
- -------------------------------------------------------------------------------------------
Net cash used by investing activities (4,565,599) (3,586,052)
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FINANCING ACTIVITIES
Common stock dividends, net of amounts reinvested (1,285,256) (1,226,574)
Issuance of stock:
Dividend Reinvestment Plan optional cash 50,839 40,106
Retirement Savings Plan 280,169 206,725
Net repayment under line of credit agreements (3,900,000) (9,000,000)
Repayment of long-term debt (1,004,041) (1,000,028)
- -------------------------------------------------------------------------------------------
Net cash used by financing activities (5,858,289) (10,979,771)
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NET DECREASE IN CASH AND CASH EQUIVALENTS (1,593,736) (1,057,353)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 4,606,316 2,357,173
- -------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 3,012,580 $ 1,299,820
===========================================================================================
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 for Chesapeake Utilities Corporation (the
"Company") included herein is unaudited and should be read in
conjunction with the Company's Annual Report on Form 10-K. In the
opinion of management, this financial information reflects only 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 and, accordingly, results for
any particular quarter may not give a true indication of results for the
year. Certain amounts in 2000 have been reclassified to conform to the
presentation for the current year.
2. CALCULATION OF EARNINGS PER SHARE
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FOR THE THREE MONTHS ENDED MARCH 31, 2001 2000
- ---------------------------------------------------------------------------------------------
CALCULATION OF BASIC EARNINGS PER SHARE:
Net Income $ 5,365,469 $ 5,669,466
Weighted Average Shares Outstanding 5,317,760 5,206,266
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BASIC EARNINGS PER SHARE $ 1.01 $ 1.09
=============================================================================================
CALCULATION OF DILUTED EARNINGS PER SHARE:
RECONCILIATION OF NUMERATOR:
Net Income-- Basic $ 5,365,469 $ 5,669,466
Effect of 8.25% Convertible debentures 42,821 45,367
- ---------------------------------------------------------------------------------------------
Adjusted numerator-- Diluted $ 5,408,290 $ 5,714,833
- ---------------------------------------------------------------------------------------------
RECONCILIATION OF DENOMINATOR:
Weighted Shares Outstanding-- Basic 5,317,760 5,206,266
Effect of Dilutive Securities
Stock options 12,782 11,880
8.25% Convertible debentures 203,395 213,122
- ---------------------------------------------------------------------------------------------
Adjusted denominator-- Diluted 5,533,937 5,431,268
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DILUTED EARNINGS PER SHARE $0.98 $1.05
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3. COMMITMENTS AND CONTINGENCIES
ENVIRONMENTAL MATTERS
The Company is continuing to participate in the investigation,
assessment and remediation of environmental contamination of three
former gas manufacturing plant sites located in different jurisdictions,
including consideration of alternative courses of action with respect to
removal of environmental contaminants. In May 2001, the parties signed a
settlement term sheet reflecting the agreement in principle reached
between Chesapeake, General Public Utilities Corporation, Inc. ("GPU"),
the State of Delaware and the United States Environmental Protection
Agency ("EPA") to settle a lawsuit with respect to the Dover Gas Light
site. The parties to the agreement are in the process of documenting the
final agreement. The agreement will then be published for public comment
and submitted to a federal judge for approval.
At March 31, 2001, the Company had accrued $2.1 million of costs
associated with the remediation of the Dover site and an associated
regulatory asset for the same amount. Of that amount, $1.5 million was
for estimated ground-water remediation and $600,000 was for remaining
soil remediation. The $1.5 million represented the low end of the
ground-water remediation estimates prepared by an independent consultant
and was used because the Company could not, at that time, predict the
remedy the EPA might require.
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If the agreement in principle receives final approval, Chesapeake will:
- Design and construct a parking lot on the site and
dismantle the soil vapor extraction system that had been
erected at the site.
- Receive a net payment of $1.15 million from other
parties to the agreement. These proceeds will be passed
on to Chesapeake's firm customers, in accordance with
the environmental rate rider.
- Receive a release from liability and covenant not to sue
from the EPA and the State of Delaware. This will
relieve Chesapeake from liability for future remediation
at the site, unless previously unknown conditions are
discovered at the site, or information previously
unknown to EPA is received that indicates the remedial
action is not sufficiently protective, related to the
prior manufactured gas plant. This provision is
standard, and is required by the United States in all
liability settlements.
Upon receiving approval of the final agreement, Chesapeake will reduce
both the accrued environmental liability and the associated
environmental regulatory asset to the amount required to complete its
obligations (primarily the design and construction of the parking lot).
Those costs are estimated at $600,000.
In cooperation with the Maryland Department of the Environment ("MDE"),
the Company is engaged in remediation procedures at the Salisbury Town
Gas Light site. However, these procedures are currently suspended
awaiting approval from the MDE to permanently shut them down. The
Company reduced the accrual for the costs associated with remediation
procedures at this site to $138,000 from the $175,000 that was accrued
as of December 31, 2000. This revised amount is based on current
estimates of the costs of continuing the remediation procedures for the
next two years and shutting down the process in 2002. The corresponding
regulatory asset that was recorded based on management's belief that
costs incurred will be recoverable in base rates, was also reduced.
The Winter Haven Coal Gas site is located in the state of Florida. In
January 2001 the Company filed a remedial action plan ("RAP") with the
Florida Department of the Environment ("FDEP"). The RAP included an
estimate of $635,000 of costs to complete remediation procedures at a
portion of the site. Accordingly, the Company has recorded a liability
of $635,000 and a corresponding regulatory asset at March 31, 2001. Once
the FDEP approves the RAP, the Company will begin the implementation of
its remediation plan.
Most of the costs associated with the remediation of environmental
contamination caused by natural gas distribution or transmission are
recoverable by the Company through its base rates. Management believes
that any unrecovered costs incurred to date, as well as costs to be
incurred in the future, relating to remediation of contamination of
these sites will be recoverable through future rates, or from other
responsible parties.
OTHER COMMITMENTS AND CONTINGENCIES
The Company has made contractual commitments of varying terms for daily
entitlements of natural gas from various suppliers. In 2000, the Company
entered into a long-term contract with an energy marketing and risk
management company for management of its natural gas transportation and
storage capacity.
The Company is involved in certain legal actions and claims arising in
the normal course of business. The Company is also involved in certain
legal and administrative proceedings before various governmental
agencies concerning rates. In the opinion of management, the ultimate
disposition of these proceedings will not have a material effect on the
consolidated financial position of the Company.
Certain assets and liabilities of the Company are accounted for in
accordance with Statement of Financial Accounting Standards ("SFAS") No.
71, which among other matters, provides standards for regulated
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enterprises for the deferral of costs that will be recovered through
future rate increases. If the Company were required to terminate the
application of these standards to its regulated operations, all such
deferred amounts would be recognized in the income statement at that
time. This would result in a charge to earnings, net of applicable
income taxes, which could be material.
4. RECLASSIFICATION OF AMOUNTS FOR PRIOR YEARS
Certain amounts and balances reported in prior years have been
reclassified in the financial statements included in this report to
conform to the presentation for the current period.
5. RECENT AUTHORITATIVE PRONOUNCEMENTS ON FINANCIAL REPORTING AND
ACCOUNTING
The Financial Accounting Standards Board ("FASB") issued SFAS No. 133 in
1998, establishing accounting and reporting standards for derivative
instruments, including certain derivative instruments embedded in other
contracts, and for hedging activities. In June of 2000, SFAS No. 138,
amending certain provisions of SFAS No. 133 was issued by the FASB. The
Company adopted these new standards in the current quarter, as required.
The adoption of these new standards did not have a material impact on
the Company's financial position or results of operations.
In February 2001, the FASB issued a revised limited Exposure Draft on
Business Combinations and Intangible Assets. Under the draft, the
pooling-of-interests method of accounting for business combinations
would be eliminated and the purchase method would be required.
Additionally, the draft would require a non-amortization approach to
account for purchased goodwill, which would be separately tested for
impairment. The provisions of the draft would be effective as of the
beginning of the first fiscal quarter following the issuance of the
final statement. Neither early application, nor retroactive application,
would be permitted. Once the exposure draft is final, the Company will
be able to determine the impact the standard will have on the Company's
financial position and results of operations.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
BUSINESS DESCRIPTION
Chesapeake Utilities Corporation (the "Company") is a diversified utility
company engaged in natural gas distribution and transmission, propane
distribution and marketing, advanced information services and other related
businesses.
The Company'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. The Company continually reevaluates its investments to ensure that
they are consistent with its strategy and the goal of enhancing shareholder
value. The Company's unregulated businesses and services currently include
propane distribution and marketing, water conditioning and treatment, and
advanced information services. By investing in these related business and
services, Chesapeake has created opportunities to earn higher returns than a
traditional utility. The reinvestment of these higher returns has increased the
Company's earnings and will contribute to future earnings growth.
FINANCIAL POSITION, LIQUIDITY AND CAPITAL RESOURCES
The Company's capital requirements reflect the capital-intensive nature of its
business and are principally attributable to the construction program and the
retirement of outstanding debt. The Company relies on cash generated by
operations and short-term borrowing to meet normal working capital requirements
and to temporarily finance capital expenditures. During the first three months
of 2001, net cash provided by operating activities, net cash used by investing
activities and net cash used by financing activities were approximately
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$8.8 million, $4.6 million and $5.9 million, respectively. Cash provided by
operations was down $4.7 million in the current quarter compared to the first
quarter of 2000 reflecting the use of funds to reduce the outstanding payables
balance. Based upon anticipated cash requirements in 2001, the Company may fund
its capital expenditures and refinance short-term borrowings through the
issuance of long-term debt. The timing of the issuance of any long-term debt is
dependent upon a number of considerations, including the nature of the
securities to be issued, and existing economic and financial market conditions.
The Board of Directors has authorized the Company to borrow up to $45 million
from various banks and trust companies. As of March 31, 2001, the Company had
four unsecured bank lines of credit with two financial institutions, totaling
$60 million. Two of the lines of credit are fully committed. Short-term debt
outstanding at March 31, 2001 and December 31, 2000 was $21.5 million and $25.4
million, respectively. In the first quarter, cash provided by operations and
cash on hand was adequate to fund capital expenditures and the reduction in
short-term debt outstanding. As of March 31, 2001, the Company had deferred $8.8
million, up $1.4 million since December 31, 2000, of natural gas costs in excess
of the cost of gas presently included in its base rates. Management expects to
recover these deferred costs through the gas cost recovery mechanism in each of
the jurisdictions that regulate the Company's natural gas businesses.
During the three-month periods ended March 31, 2001 and 2000, capital
expenditures were approximately $4.6 million and $3.6 million, respectively. The
Company has budgeted $31.5 million for capital expenditures during 2001. This
amount includes $25.8 million for natural gas distribution and transmission;
$2.5 million for propane distribution and marketing; $495,000 for advanced
information services; and $2.7 million for general plant. The natural gas
expenditures are for expansion and improvement of facilities, for the
improvement and expansion of the pipeline system to better serve existing
customers and to extend service to customers in the City of Milford, Delaware.
The propane expenditures are to support customer growth and for the replacement
of older equipment. The advanced information services expenditures are for
computer hardware, software and related equipment. Expenditures for general
plant include building improvements, and computer software and hardware.
Management expects to finance the 2001 construction program from short-term
borrowing, cash from operations and the issuance of long-term debt, if
conditions warrant. The construction program is subject to continual review and
modification. Actual capital expenditures may differ from these estimates due to
a number of factors including acquisition opportunities, changing economic
conditions, customer growth in existing markets, regulation and new growth
opportunities.
The Company has budgeted $1.9 million for capital expenditures in 2001 related
to environmental remediation projects, and expects to make additional
expenditures in future years, 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
(see Note 3 to the Consolidated Financial Statements).
As of March 31, 2001, common equity represented 57.8 percent of permanent
capitalization, compared to 55.7 percent as of December 31, 2000. Including both
short-term financing and total capitalization, the equity component would have
been 48.0 percent and 44.7 percent, respectively. 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 intended to ensure that the Company will be
able to attract capital from outside sources at a reasonable cost.
Interest for the first three months of 2001 increased approximately $438,000, or
43.8%, over the same period in 2000. The increase was caused by an increase in
average short-term borrowing for the quarter of $6.2 million and an increase in
the average long-term debt balances of $17.2 million for the quarter. The
increase in borrowing was generated primarily by capital spending and by
increases in under-recovered gas costs. The Company earns interest on the
under-recovered gas costs. The weighted average interest rates for the first
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quarter of 2001 for both the short-term and long-term debt did not change
significantly from the first quarter of 2000.
RESULTS OF OPERATIONS FOR THE QUARTER ENDED MARCH 31, 2001
CONSOLIDATED OVERVIEW
The Company recognized net income of $5.4 million -- $1.01 per share -- for the
first quarter of 2001, down $304,000, or $0.08 per share, compared to the
corresponding period in 2000. As indicated in the following table, the decline
in income is primarily attributable to lower profitability of natural gas
operations, the increased costs of operating the water business and a
substantial increase in interest expense due to higher debt levels.
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FOR THE THREE MONTHS ENDED MARCH 31, 2001 2000 CHANGE
- ----------------------------------------------------------------------------------------------
Pre-tax Operating Income (Loss)
Natural Gas Distribution & Transmission $ 6,267,995 $ 6,387,419 $ (119,424)
Propane Gas Distribution & Marketing 3,695,473 3,491,998 203,475
Advanced Information Services 103,613 26,254 77,359
Other & Eliminations (31,343) 161,023 (192,366)
- ----------------------------------------------------------------------------------------------
Pre-tax Operating Income 10,035,738 10,066,694 (30,956)
Operating Income Taxes 3,369,407 3,425,968 (56,561)
Interest 1,435,734 998,143 437,591
Non-Operating Income, net 134,872 26,883 107,989
- ----------------------------------------------------------------------------------------------
Net Income $ 5,365,469 $ 5,669,466 $ (303,997)
==============================================================================================
NATURAL GAS DISTRIBUTION AND TRANSMISSION
The natural gas distribution and transmission segment earned pre-tax operating
income of $6.3 million for the first quarter of 2001 compared to $6.4 million
for the corresponding period last year -- a decrease of $119,000. The increase
in gross margin was more than offset by higher costs and expenses.
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FOR THE THREE MONTHS ENDED MARCH 31, 2001 2000 CHANGE
- ----------------------------------------------------------------------------------------------
Revenue $ 44,240,049 $ 30,072,568 $ 14,167,481
Cost of Gas 31,633,598 17,868,342 13,765,256
- ----------------------------------------------------------------------------------------------
Gross Margin 12,606,451 12,204,226 402,225
Operations & Maintenance 4,152,517 3,899,928 252,589
Depreciation & Amortization 1,479,368 1,322,101 157,267
Other Taxes 706,571 594,778 111,793
- ----------------------------------------------------------------------------------------------
Total Operating Expenses 6,338,456 5,816,807 521,649
- ----------------------------------------------------------------------------------------------
Pre-tax Operating Income $ 6,267,995 $ 6,387,419 $ (119,424)
==============================================================================================
Gross margin increased due to a 5.2 percent increase in the customer base,
cooler temperatures, and a rate increase in Florida, partially offset by the
loss of two industrial customers who have shut down their operations.
Additionally, margins were somewhat offset by a reduction in the level of
interruptible margin sharing earned in 2001 when compared to 2000. This
reduction in interruptible shared margins is the result of cooler temperatures
in 2001, which significantly reduced the level of shared margin retained by the
Company under the Delaware division's weather normalization mechanism.
Operations and maintenance expenses increased due to compensation, benefits and
the allowance for bad debts. The increase in benefit costs is primarily due to
higher medical claims. The Company has increased the reserve for bad debts in
2001 due to the higher energy costs and their anticipated effect on its
customers. Depreciation and amortization costs have increased due to the plant
additions placed in service in 2000 and early 2001. Other taxes, primarily
revenue related taxes, have increased in conjunction with the increase in
revenue.
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PROPANE GAS DISTRIBUTION AND MARKETING
For the first quarter of 2001, the propane segment contributed pre-tax operating
income of $3.7 million compared to $3.5 million for the first quarter of 2000.
Gross margin increased $827,000 but operating expenses were up $624,000.
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FOR THE THREE MONTHS ENDED MARCH 31, 2001 2000 CHANGE
- ----------------------------------------------------------------------------------------------
Revenue $ 84,595,907 $ 63,791,873 $ 20,804,034
Cost of Sales 76,691,822 56,714,813 19,977,009
- ----------------------------------------------------------------------------------------------
Gross Margin 7,904,085 7,077,060 827,025
Operations & Maintenance 3,598,616 3,045,824 552,792
Depreciation & Amortization 386,823 343,601 43,222
Other Taxes 223,173 195,637 27,536
- ----------------------------------------------------------------------------------------------
Total Operating Expenses 4,208,612 3,585,062 623,550
- ----------------------------------------------------------------------------------------------
Pre-tax Operating Income $ 3,695,473 $ 3,491,998 $ 203,475
==============================================================================================
Gross margin was higher for the quarter due to an increase in the margin earned
per gallon in 2001 as compared to 2000 coupled with the margin earned by the our
propane start-up operations in Florida and a slight rise in our marking margins.
Operations and maintenance expenses increased due to compensation, vehicle
expenses, benefits, the allowance for bad debts, facility costs and customer
service-related initiatives. The vehicle expenses are primarily fuel and
maintenance, while the benefit costs are primarily health claims. The Company is
increasing the level of allowance for bad debts due to the rise in energy costs
and the effect it may have on our future bad debts. Facility and customer
service-related initiatives have increased the Company's costs since their
implementation in 2000. During the second quarter of 2001, the Company will be
implementing changes to specific initiatives to reduce the growth in future
costs. The Florida propane start-up operations have contributed $188,000 to the
cost increase for the quarter. The start-ups were initiated during the second
quarter of 2000 so expenses are expected to be higher for the remaining quarters
of 2001 as the operations continue to grow at levels greater than 2000.
Depreciation, amortization and property taxes are higher due to capital
additions placed in service in 2000.
ADVANCED INFORMATION SERVICES
The advanced information services business earned pre-tax operating income of
$104,000 for the first quarter of 2001 compared to $26,000 for the first quarter
of last year. The increase is the result of increased revenues offset by
increased operating expenses.
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FOR THE THREE MONTHS ENDED MARCH 31, 2001 2000 CHANGE
- ----------------------------------------------------------------------------------------------
Revenue $ 3,490,786 $ 3,170,067 $ 320,719
Cost of Sales 1,767,615 1,731,239 36,376
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Gross Margin 1,723,171 1,438,828 284,343
Operations & Maintenance 1,398,056 1,171,248 226,808
Depreciation & Amortization 62,272 73,038 (10,766)
Other Taxes 159,230 168,288 (9,058)
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Total Operating Expenses 1,619,558 1,412,574 206,984
- ----------------------------------------------------------------------------------------------
Pre-tax Operating Income $ 103,613 $ 26,254 $ 77,359
==============================================================================================
The increase in revenue was met with very little change in cost of goods sold,
thereby increasing gross margin by $284,000, or 20%. The 15% increase in
operating expenses is primarily being driven by increased marketing, recruiting,
health claims and benefits. Marketing expenses are up due to the launch of the
new "BravePoint" name in 2001. Recruiting fees and benefits are up due to the
hiring of new employees. Health claims are up company-wide.
OPERATING INCOME TAXES
Operating income taxes were lower due to the decrease in operating income for
the current quarter. For 2001, the Company anticipates paying tax at a higher
composite income tax rate.
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INTEREST EXPENSE
Interest for the first three months of 2001 increased approximately $438,000, or
43.8%, over the same period in 2000. The increase was caused by an increase in
average short-term borrowing of $6.2 million and an increase in the average
long-term debt balances of $17.2 million. The increase in borrowing was
generated primarily by capital spending and increased under-recovered gas
costs. The Company earns interest on the under-recovered gas costs. The weighted
average interest rates for the first quarter of 2001 for both the short-term and
long-term debt did not change significantly from the first quarter of 2000.
ENVIRONMENTAL MATTERS
The Company continues to work with federal and state environmental agencies to
assess the environmental impact and explore options for corrective action at
three former gas manufacturing plant sites (see Note 3 to the Consolidated
Financial Statements). The Company believes that future costs associated with
these sites will be recoverable in rates or through sharing arrangements with,
or contributions by, other responsible parties.
OTHER MATTERS
REGULATORY MATTERS
The Company's natural gas distribution operations are subject to regulation by
the Delaware, Maryland and Florida Public Service Commissions, while the natural
gas transmission operation is subject to regulation by the Federal Energy
Regulatory Commission.
In January 2000, the Company filed a request for approval of a rate increase
with the Florida Public Service Commission and, in November 2000, that
Commission issued an order approving a rate increase of $1.25 million effective
in December 2000. Also in 2000, two of the Company's large industrial customers
in Florida that they would be closing their facilities. Considering these two
factors, management estimates that gross margin on gas sales in Florida in 2001
will increase by approximately $449,000 over gross margin earned in 2000.
The Company plans to file for a base rate increase with the Delaware Public
Service Commission during the second or third quarter of 2001. Management
expects to begin charging higher interim rates, subject to refund, in the second
or third quarter of 2001 with permanent rates going into effect subject to
approval by the Public Service Commission.
COMPETITION
The Company's natural gas operations compete with other forms of energy such as
electricity, oil and propane. The principal competitive factors are price, and
to a lesser extent, accessibility. The Company's natural gas distribution
operations have several large volume industrial customers that have the capacity
to use fuel oil as an alternative to natural gas. When the cost of using fuel
oil to provide power for their operations is lower than the cost of natural gas,
these "interruptible" customers convert to oil. Oil prices, as well as the
prices of electricity and other fuels, are subject to fluctuation for a variety
of reasons; therefore, future competitive conditions are not predictable. In
order to address this uncertainty, the Company uses flexible pricing
arrangements on both the supply and sales side of its business to maximize sales
volumes. As a result of the transmission segment's conversion to open access,
the segment has shifted from providing bundled sales service to providing
transportation and contract storage services.
The Company's natural gas distribution systems in Maryland and Delaware offer
transportation services to certain industrial customers. In doing so, the
Company is competing with the interstate transmission company, if the customer's
facility is located close enough to the transmission company's pipeline to make
a connection economically feasible. The customers at risk are usually large
volume commercial and industrial customers with the financial resources and
capability to bypass the distribution systems in this manner. In certain
situations, the Company may adjust services and rates for these customers to
retain their business. The Company expects to expand the availability of
transportation services to additional classes of distribution
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customers in the future. The Company's distribution system in Florida also
provides transportation services to certain industrial customers, and operates a
natural gas brokering and supply business to compete more effectively for these
customers.
The Company's propane distribution operations compete with several other propane
distributors in their service territories, primarily on the basis of service and
price. Competitors include several large national propane distribution
companies, as well as an increasing number of local suppliers.
The Company's advanced information services segment faces significant
competition from a number of larger competitors, many of which have
substantially greater resources available to them than those of the Company.
This segment competes on the basis of technological expertise, reputation and
price.
INFLATION
Inflation affects the cost of labor, products and services required for
operation, maintenance and capital improvements. While the impact of inflation
has lessened in recent years, natural gas and propane prices are subject to
rapid fluctuations. Fluctuations in natural gas prices are passed on to
customers through the gas cost recovery mechanism in the Company's tariffs. To
help cope with the effects of inflation on its capital investments and returns,
the Company seeks rate relief from regulatory commissions for regulated
operations while monitoring the returns of its unregulated business operations.
To compensate for fluctuations in propane gas prices, the Company adjusts its
propane selling prices to the extent allowed by the market.
CAUTIONARY STATEMENT
The Company has made statements in this report that are considered to be
forward-looking statements. Such statements are not matters of historical fact.
Sometimes they contain words such as "believes," "expects," "intends," "plans,"
"will," or "may," and other similar words of a predictive nature. These
statements relate to matters such as customer growth, changes in revenues or
margins, capital expenditures, environmental remediation costs, regulatory
approvals, market risks 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 temperature sensitivity of the natural gas and propane
businesses;
- the wholesale prices of natural gas and propane and market
movements in these prices;
- the effects of competition on the Company's unregulated and
regulated businesses;
- the effect of changes in federal, state or local legislative
requirements;
- the ability of the Company's new and planned facilities and
acquisitions to generate expected revenues; and
- the Company's ability to obtain the rate relief and cost
recovery requested from utility regulators and the timing of the
requested regulatory actions.
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 with fixed interest rates, none of which
was entered into for trading purposes. The carrying value of this long-term debt
at March 31, 2001 was $52.6 million with a fair value of $58.4 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 due to the use of fixed rate long-term debt
to finance the business. Management continually monitors fluctuations in
interest rates and debt markets to assess the benefits of changing the mix of
long and short-term debt or refinancing existing debt.
The Company's propane marketing business is a party to natural gas liquids
("NGL") forward contracts, primarily propane contracts, with various third
parties. These contracts obligate the propane marketing
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business to 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 propane marketing business 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 propane marketing business is subject to commodity price
risk on its open positions to the extent that market prices for NGL deviate from
fixed contract settlement prices. Market risk associated with the trading of
futures and forward contracts are monitored daily for compliance with the
Company's Risk Management Policy, which includes volumetric limits for open
positions. To manage exposures to changing market prices, open positions are
marked up or down to market prices 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 limits established by the Board of Directors) and
authorizes the use of any new types of contracts. Quantitative information on
forward and futures contracts at March 31, 2001 is presented in the following
table. All of the contracts mature within twelve months.
- --------------------------------------------------------------------------------------------------
QUANTITY ESTIMATED WEIGHTED AVERAGE
AT MARCH 31, 2001 IN GALLONS MARKET PRICES CONTRACT PRICES
- --------------------------------------------------------------------------------------------------
FORWARD CONTRACTS
Sale 13,238,000 $0.5300 -- $0.5400 $0.5426
Purchase 12,810,000 $0.5300 -- $0.5400 $0.5474
FUTURES CONTRACTS
Sale 252,000 $0.5300 -- $0.5400 $0.5450
Purchase 1,848,000 $0.5300 -- $0.5400 $0.5432
- --------------------------------------------------------------------------------------------------
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
On May 14, 2001, the Company filed, under Item 5, that an
agreement in principle had been reached to settle a lawsuit filed
by Chesapeake in 1996 against General Public Utilities
Corporation, Inc.
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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 14, 2001
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