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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1994 COMMISSION FILE NUMBER 0-593
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CHESAPEAKE UTILITIES CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
STATE OF DELAWARE 51-0064146
(I.R.S. EMPLOYER
(STATE OR OTHER JURISDICTION OF IDENTIFICATION NO.)
INCORPORATION OR ORGANIZATION)
861 SILVER LAKE BOULEVARD, DOVER, DELAWARE 19904
(ZIP CODE)
(ADDRESS OF PRINCIPAL EXECUTIVE
OFFICES)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: 302-734-6754
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH
REGISTERED
COMMON STOCK--PAR VALUE PER SHARE $.4867 NEW YORK STOCK EXCHANGE, INC.
----------------
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
8.25% CONVERTIBLE DEBENTURES DUE 2014
(TITLE OF CLASS)
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 [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendments to this Form 10-K. [X]
As of March 30, 1995, 3,680,675 shares of common stock were outstanding. The
aggregate market value of the common shares held by non-affiliates of
Chesapeake Utilities Corporation, based on the last trade price on March 27,
1995, as reported by the New York Stock Exchange, was approximately
$46,468,522.
DOCUMENTS INCORPORATED BY REFERENCE
DOCUMENTS PART OF FORM 10-K
Definitive Proxy Statement dated April 13, 1995 Part III
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CHESAPEAKE UTILITIES CORPORATION
FORM 10-K
YEAR ENDED DECEMBER 31, 1994
TABLE OF CONTENTS
PART I
<TABLE>
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PAGE
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<C> <S> <C>
Item 1. Business....................................................... 1
Item 2. Properties..................................................... 13
Item 3. Legal Proceedings.............................................. 13
Item 4. Submission of Matters to a Vote of Security Holders............ 13
Item 10. Executive Officers of the Registrant........................... 14
PART II
Item 5. Market for Registrant's Common Stock and Related Security
Holder Matters................................................ 15
Item 6. Selected Financial Data........................................ 16
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations......................................... 16
Item 8. Financial Statements and Supplementary Data.................... 24
Item 9. Changes In and Disagreements with Accountants on Accounting and
Financial Disclosure.......................................... 45
PART III
Item 10. Directors and Executive Officers of the Registrant............. 45
Item 11. Executive Compensation......................................... 45
Item 12. Security Ownership of Certain Beneficial Owners and Management. 45
Item 13. Certain Relationships and Related Transactions................. 45
PART IV
Item 14. Financial Statements, Financial Statement Schedules, Exhibits
and Reports on Form 8-K....................................... 45
Signatures............................................................... 48
</TABLE>
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PART I
ITEM 1. BUSINESS
(A) GENERAL DEVELOPMENT OF BUSINESS
Chesapeake Utilities Corporation ("Chesapeake" or "the Company") is a
diversified utility company engaged in natural gas distribution and
transmission, propane distribution and information technology services.
Chesapeake's three natural gas distribution divisions serve more than 32,300
residential, commercial and industrial customers in southern Delaware,
Maryland's Eastern Shore and Central Florida. The natural gas transmission
subsidiary operates a 271-mile interstate pipeline system that transports gas
from various points in Pennsylvania to the Company's Delaware and Maryland
distribution divisions, as well as to other utilities and industrial customers
in Delaware and the Eastern Shore of Maryland. The Company's propane segment
serves approximately 22,600 customers in southern Delaware and the Eastern
Shore of Maryland and Virginia. The information technology services segment
provides software products and services to a wide variety of customers and
clients.
(B) FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENTS
<TABLE>
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FOR THE YEARS ENDED DECEMBER 31,
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1994 1993 1992
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<S> <C> <C> <C>
Operating Revenues, Unaffiliated
Customers
Natural gas distribution............ $ 49,523,743 $ 44,286,243 $41,090,029
Natural gas transmission............ 22,191,896 20,094,343 13,968,258
Propane distribution................ 20,684,150 16,908,289 16,489,173
Information technology services and
other.............................. 6,172,508 4,583,757 3,568,248
------------ ------------ -----------
Total operating revenues, unaffil-
iated customers.................. $ 98,572,297 $ 85,872,632 $75,934,708
============ ============ ===========
Intersegment Revenue
Natural gas distribution............ $ 55,888 $ 52,577 $ 64,381
Natural gas transmission............ 17,303,529 17,345,800 15,530,496
Propane distribution................ 85,552 48,248 2,118
Information technology services and
other.............................. 2,277,361 2,311,498 1,575,992
------------ ------------ -----------
Total intersegment revenue........ $ 19,722,330 $ 19,758,123 $17,172,987
============ ============ ===========
Operating Income Before Income Taxes
Natural gas distribution............ $ 4,696,659 $ 4,114,683 $ 4,350,992
Natural gas transmission............ 3,018,212 3,091,843 2,732,068
Propane distribution................ 2,287,688 1,588,383 1,440,096
Information technology services and
other.............................. 174,033 156,910 (378,763)
------------ ------------ -----------
Total............................. 10,176,592 8,951,819 8,144,393
Less: Eliminations.................. (419,883) (651,439) (265,510)
------------ ------------ -----------
Total operating income before
income taxes..................... $ 9,756,709 $ $8,300,380 $ 7,887,883
============ ============ ===========
Identifiable Assets
Natural gas distribution............ $ 68,528,774 $ 59,404,795 $46,550,482
Natural gas transmission............ 17,792,415 18,212,489 17,605,175
Propane distribution................ 16,949,431 18,244,020 20,417,580
Information technology services and
other.............................. 4,999,997 5,126,797 4,984,067
------------ ------------ -----------
Total identifiable assets......... $108,270,617 $100,988,101 $89,557,304
============ ============ ===========
</TABLE>
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(C) NARRATIVE DESCRIPTION OF BUSINESS
The Company is engaged in four primary business activities: natural gas
transmission; natural gas distribution; propane distribution; and information
technology services. In addition to the four primary groups, Chesapeake has
four subsidiaries engaged in other service related businesses. During 1994 and
1992 no individual customer accounted for 10% or more of revenues. The Company
had one customer, Texaco Refining and Marketing, with revenues equal to or
greater than 10% of total revenue in 1993. This industrial interruptible
customer of the Company's natural gas transmission subsidiary accounted for
approximately $9,600,000 or 11.2% of total consolidated revenue and 25.7% of
the transmission subsidiary's total revenue.
(I) (A) NATURAL GAS TRANSMISSION
Eastern Shore Natural Gas Company ("Eastern Shore"), the Company's wholly
owned transmission subsidiary, operates an interstate pipeline that
delivers gas to five utility and thirteen industrial customers in Delaware
and the Eastern Shore of Maryland. Eastern Shore is the sole source of gas
supply for Chesapeake's Maryland and Delaware divisions and for two
unaffiliated distribution entities. Eastern Shore has not elected to be an
"open access" pipeline which would only provide transportation services.
However, Eastern Shore has authority from the Federal Energy Regulatory
Commission ("FERC") to provide firm transportation to two of its customers
for gas they own and deliver to Eastern Shore for redelivery.
Operating income before income taxes attributable to natural gas
transmission has varied from between $2.7 to $3.1 million from 1992 to
1994, with the high occurring in 1993. These fluctuations have resulted
primarily from variations in volumes and margins on Eastern Shore's
interruptible sales to industrial customers that have the capability of
switching to oil for their fuel requirements. Rates charged to these
customers are determined through negotiation and thus are flexible. When
lower oil prices prevail Eastern Shore normally reduces the price it
charges to its interruptible customers, thereby reducing the profit margin
on such sales. In addition, certain customers switch from natural gas to
oil, reducing volumes sold.
NATURAL GAS SUPPLY
General. Eastern Shore has firm contracts with three major interstate
pipelines, Transcontinental Pipe Line Corporation ("Transco"), Columbia Gas
Transmission Corporation ("Columbia") and Columbia Gulf Transmission
Corporation ("Gulf"), all of which are "open-access" pipelines.
Eastern Shore's contracts with Transco include (a) firm transportation
capacity of 22,900 MCF per day, which expires in 2005; (b) firm
transportation capacity of 500 MCF per day for December through February,
which expires in 2006; (c) three firm storage services providing a peak day
entitlement of 7,046 MCF and a total capacity of 288,730 MCF and (d) two
interruptible storage services with a total capacity of 427,182 MCF.
Eastern Shore's contracts with Columbia include: (a) firm transportation
capacity of 1,481 MCF per day, which expires in 2003 and (b) firm storage
service providing a peak day entitlement of 10,525 MCF per day and a total
capacity of 509,954 MCF.
Eastern Shore's contract with Gulf is for firm transportation of 1,510
MCF per day, which also expires in 2003.
Eastern Shore currently has contracts for the purchase of firm natural
gas supplies with six reputable suppliers. These six contracts provide a
maximum daily entitlement of 18,572 MCF and the supplies are transported by
both Transco and Columbia under Eastern Shore's firm transportation
agreements. The gas purchase contracts have various expiration dates.
Adequacy of Gas Supply. Eastern Shore's firm obligations to its
customers, including Chesapeake's Delaware and Maryland utility divisions,
are 40,237 MCF for peak days and 9,200,565 MCF on an annual basis. Eastern
Shore's maximum daily firm transportation capacity on the Transco and
Columbia
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systems is 42,452 MCF per day. Currently, Eastern Shore's firm daily peak
supply is 36,643 MCF and its total annual firm supply is 7,054,332 MCF.
This is equivalent to 91% of Eastern Shore's firm daily demand and 77% of
its annual firm demand being satisfied by firm supply sources. To meet the
difference between firm supply and firm demand, Eastern Shore obtains gas
supply on the "spot market" from various other suppliers which is
transported by Transco or Columbia and sold to Eastern Shore's customers as
required. The Company believes that Eastern Shore's available firm,
interruptible and "spot market" supply is ample to meet the anticipated
needs of Eastern Shore's customers.
There was no curtailment of firm gas supply to Eastern Shore in 1994, nor
does Eastern Shore anticipate any such curtailment during 1995.
COMPETITION
Competition with Alternative Fuels. Historically, the Company's natural
gas operations have successfully competed with other forms of energy such
as electricity, oil, and propane. The principal consideration in the
competition between the Company and suppliers of other sources of energy is
price and, to a lesser extent, accessibility. All of the Company's
divisions have the capability of adjusting their interruptible rates to
compete with alternative fuels.
The Company has several large volume industrial customers that have the
capacity to use fuel oil as an alternative to natural gas. When oil prices
decline, some of Chesapeake's natural gas distribution and transmission
interruptible customers convert to oil to satisfy their fuel requirements.
Lower levels in interruptible sales occur when oil prices remain depressed
relative to the price of natural gas. However, oil prices as well as the
prices of other fuels are subject to change at any time for a variety of
reasons. Therefore, there is always uncertainty in the continuing
competition among natural gas and other fuels. 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.
To a lesser extent than price, availability of equipment and operational
efficiency are also factors in competition among fuels, primarily in
residential and commercial settings. Heating, water heating, and other
domestic or commercial equipment is generally designed for a particular
energy source, and especially with respect to heating equipment, the high
cost of conversion is a disincentive for individuals and businesses to
change their energy source.
Competition within the Natural Gas Industry. FERC Order 636 enables all
natural gas suppliers to compete for customers on equal footing. Under this
"open access" environment, interstate pipeline companies have unbundled the
traditional components of their service--gas gathering, transportation and
storage. If they choose to be a merchant of gas, they must form a separate
marketing operation independent of their pipeline operations. Hence, gas
markets have developed as a viable option for many companies because they
are providing expertise in gas purchasing along with collective purchasing
capabilities which, when combined, may reduce end-user cost.
Eastern Shore has not elected to be an "open access" pipeline and is
permitted to transport gas for only two of its existing customers. Thus,
most of Eastern Shore's customers, including Chesapeake's Maryland and
Delaware utility divisions, and, in turn, customers of these divisions, do
not have the capability of directly contracting for alternative sources of
gas supply and have Eastern Shore transport the gas to them.
RATES AND REGULATION
General. Eastern Shore is subject to regulation by the FERC as an
interstate pipeline and the Delaware Public Service Commission
("Commission") as a supplier of gas to industrial customers in the state of
Delaware. The FERC regulates the provision of service, terms and conditions
of service, and the rates and fees Eastern Shore can charge its
transportation and sale for resale customers. In addition, the
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FERC regulates the rates Eastern Shore is charged for transportation and
transmission line purchases provided by Transco and Columbia. Eastern
Shore's direct sales rates to industrial customers are currently not
regulated. The rates for such sales are established by contracts negotiated
between Eastern Shore and each industrial customer.
On February 11, 1992, the Commission issued an Order that declared
Eastern Shore to be a "public utility" under Delaware law subject to the
Commission's jurisdiction in connection with Eastern Shore's direct retail
sales of natural gas to end-users in the State of Delaware. The Order also
initiated proceeding to consider the extent to which public utility
regulatory supervision should be imposed upon the direct sales of Eastern
Shore within the State of Delaware. On May 14, 1994 the Company filed with
the commission a proposal for a limited level of regulation. On October 4,
1994, the Commission issued an Order essentially agreeing with a level of
regulation limited to the following: accepting and considering complaints
from customers, requiring Eastern Shore to file the annual and other
periodic reports and requiring Eastern Shore to pay the annual public
utility tax. In the opinion of management, the Order will not have a
material effect on Eastern Shore's financial position or results of
operations.
The rates for Eastern Shore's "sale for resale" customers, (i.e., sales
to its utility customers) are subject to a purchased gas adjustment clause.
Eastern Shore's firm industrial contracts generally include tracking
provisions that permit automatic adjustment for the full amount of
increases or decreases in Eastern Shore's suppliers' firm rates.
Rate Proceedings. On August 31, 1992, Eastern Shore filed with the FERC
to restate its Base Tariff Rates in compliance with Section 154.303(e) of
the FERC's regulations for sales and transportation to its jurisdictional
customers, including the Company's Delaware and Maryland divisions. On
March 26, 1993, Eastern Shore filed a stipulation and agreement with FERC,
which was subsequently approved on May 24, 1993 by letter. The final
settlement did not materially affect the consolidated financial position of
the Company because the resulting FERC order allowed current billing rates
to stay in effect.
FERC PGA. On May 19, 1994, the FERC issued an Order directing Eastern
Shore to refund, with interest, what the FERC characterized as overcharges
from November 1, 1992 to the current billing month. The May 19, 1994 Order
also directed Eastern Shore to file a report showing how the refund was
calculated, and revised tariff language clarifying the purchased gas
adjustment provisions its tariff.
Eastern Shore filed a request for rehearing of the Order on June 20, 1994
based on what Eastern Shore believes is the FERC's erroneous interpretation
of Eastern Shore's tariff. It is Eastern Shore's position that the FERC's
Order essentially requires a retroactive change to the FERC approved PGA
procedures which Eastern Shore has consistently applied over the last six
years. Such retroactive application is a violation of Sections 4 and 5 of
the Natural Gas Act.
On June 21, 1994, in compliance with the FERC's May 19, 1994 Order,
Eastern Shore filed: (1) revised tariff sheets clarifying its PGA
methodology and (2) two alternative refund calculations based of the FERC's
Order. The two alternatives were filed due to what Eastern Shore believes
to be an inconsistency or contradiction with respect to the FERC's language
in its Order.
On July 18, 1994 the FERC issued an "Order Granting a Rehearing Solely
for the Purpose of Further Consideration". This Order was issued only to
afford the FERC additional time for consideration of the issues raised in
Eastern Shore's request for rehearing.
As of this filing date, the FERC has not approved either of the
alternative refund calculations submitted by Eastern Shore on June 21,
1994, nor has it made a final determination as to Eastern Shore's request
for rehearing. Accordingly, Eastern Shore accrued $412,000 in the second
quarter of 1994, relating to prior periods. Eastern Shore has also accrued
an amount each month in 1994 to insure full refunding of the potential
refund. The total amount accrued on December 31, 1994 is $1,283,000.
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(I) (B) NATURAL GAS DISTRIBUTION
Chesapeake distributes natural gas to approximately 32,300 residential,
commercial and industrial customers in southern Delaware, the Salisbury and
Cambridge, Maryland areas on Maryland's Eastern Shore, and Central Florida.
These activities are conducted through three utility divisions, consisting
of one division in Delaware, one division in Maryland, and one division in
Florida. In 1993, the Company started brokering natural gas in the state of
Florida under the name of Peninsula Energy Services Company ("PESCO").
Delaware and Maryland. The Delaware and Maryland divisions serve
approximately 24,287 customers, of which approximately 24,200 are
residential and commercial customers purchasing gas primarily for heating
purposes. Residential and commercial customers account for approximately
67% of the volume delivered by the divisions, and 79% of the divisions'
revenue, on an annual basis. The divisions' industrial customers purchase
gas, primarily on an interruptible basis, for a variety of manufacturing,
agricultural and other uses. Most of Chesapeake's customer growth in these
divisions comes from new residential construction utilizing gas heating
equipment.
Florida. The Florida division distributes natural gas to approximately
8,000 residential and commercial and 83 industrial customers in Polk,
Osceola and Hillsborough Counties. Currently 34 of the division's
industrial customers, which are engaged primarily in the citrus and
phosphate industries and electric cogeneration, and purchase and transport
gas on a firm and interruptible basis, account for approximately 82% of the
volume delivered by the Florida division, and 67% of the division's natural
gas sales and transportation revenues, on an annual basis. In November
1993, the Company's Florida division began providing natural gas brokering
services to compete in the open access environment. Currently, fourteen
customers receive brokering service which generated margin of $63,000 in
1994.
NATURAL GAS SUPPLY
Delaware and Maryland. Chesapeake's Delaware and Maryland utility
divisions receive all of their gas supply requirements from Eastern Shore.
The divisions purchase most of this gas under contracts with Eastern Shore
which extend through November 1, 2000. The contracts provide for the
purchase of 15,629 firm MCF daily (up to a maximum of 5,704,585 MCF
annually). The divisions have additional firm supplies available under
contract with Eastern Shore for peak demand periods occurring during the
winter heating season. These contracts, which are renewable on a year-to-
year basis, provide for the purchase of up to 450 MCF daily (up to a
maximum of 13,500 MCF annually) of peaking service. In addition, the
divisions have contracted with Eastern Shore for firm and interruptible
storage capacity. On days when gas volumes available to the divisions from
Eastern Shore are greater than their requirements, gas is injected into
storage and is then available for withdrawal to meet heavier winter loads.
These storage contracts also permit the utility divisions to purchase lower
cost gas during the off-peak summer season. Effective November 1, 1993, the
storage capacity under contract with Eastern Shore totaled 829,532 MCF,
with a firm peak daily withdrawal entitlement of 14,605 MCF. On those days
when requirements exceed these contract pipeline supplies, the divisions
have propane-air injection facilities for peak shaving.
Eastern Shore has no authority to transport natural gas purchased from a
third party for the Delaware and Maryland divisions; however, while
Chesapeake's divisions have no direct access to lower priced "spot market"
gas, they benefit from Eastern Shore's ability to obtain "spot market" gas
and the resulting reductions in Eastern Shore's rates.
Florida. The Florida division receives transportation service from
Florida Gas Transmission Company ("FGT"), a major interstate pipeline.
Chesapeake has contracts with FGT for (a) daily firm transportation
capacity of 20,523 dekatherms in May through September, 27,105 dekatherms
in October, and 26,919 dekatherms in October through April under FGT's firm
transportation service (FTS-1) rate schedule; (b) daily firm transportation
capacity of 5,100 dekatherms in May through October, and 8,100
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dekatherms in November through April under FGT's firm transportation
service (FTS-2) rate schedule; (c) preferred interruptible transportation
service up to 2,300,000 dekatherms annually under FGT's preferred
transportation service (PTS-1) rate schedule; and (d) daily interruptible
transportation capacity of 20,000 dekatherms under FGT's interruptible
transportation services (ITS-1) rate schedule. The firm transportation
contract (FTS-1) expires on August 1, 2000 with the Company retaining a
unilateral right to extend the term for an additional ten years. After the
expiration of the primary or secondary term, Chesapeake has the right to
first refuse to match the terms of any competing bids for the capacity. The
firm transportation contract (FTS-2) expires on March 1, 2015. The
preferred interruptible contract expires on the earlier of (a) the
effective date of FGT's first rate case which includes costs for phase III
expansion; or (b) August 1, 1995 and or (c) August 1 of any subsequent
year, provided that FGT or Chesapeake gives to the other at least one
hundred eighty (180) days written notice prior to such August 1. The
interruptible transportation contract is effective until August 1, 2010 and
month to month thereafter unless cancelled by either party with thirty days
notice.
The Florida division currently receives its gas supply from various
suppliers. Some supply is bought on the spot market and some is bought
under the terms of two firm supply contacts with MG National Gas Corp. and
Hadson Gas Systems, Inc.
Having restructured its arrangements with FGT, Chesapeake believes it is
well positioned to meet the continuing needs of its customers with secure
and cost effective gas supplies.
Adequacy of Gas Supply. The Company believes that Eastern Shore's
available firm and interruptible supply is ample to meet the anticipated
needs of the Company's Delaware and Maryland natural gas distribution
divisions. Availability of gas supply to the Florida division is also
expected to be adequate under existing arrangements. Moreover, additional
supply sources have become available as a result of FGT becoming an "open
access" pipeline.
Competition within the Natural Gas Industry. Historically, Chesapeake's
Florida division has been supplied solely by FGT. In 1990, FGT became an
"open access" pipeline. The Florida division's large industrial customers
now have the option of remaining with the Florida division for gas supply
or obtaining alternative supplies from FGT, gas marketers or other
suppliers. These conditions have increased competition between Chesapeake's
Florida division, FGT, gas marketers and other natural gas providers for
industrial customers in Central Florida. Starting in early 1993, in
recognition of the opportunity created by FERC Order 636, Chesapeake's
Florida division began contacting all of the Florida division's large
industrial customers and other large users of natural gas throughout the
state of Florida about changes in the natural gas industry. As a result,
the Company has entered into agreements with a number of these large users
of natural gas to supply them with brokering and regulatory support
services.
RATES AND REGULATION
General. Chesapeake's natural gas distribution operations are subject to
regulation by the Delaware, Maryland, and Florida Public Service
Commissions with respect to various aspects of the Company's business,
including the rates for sales to all of their customers in each
jurisdiction. All of Chesapeake's firm distribution rates are subject to
purchased gas adjustment clauses, which match revenues with gas costs and
normally allow eventual full recovery of gas costs. Adjustments under these
clauses require periodic filings and hearings with the relevant regulatory
authority, but do not require a general rate proceeding. Rates on
interruptible sales by the Florida division are also subject to purchased
gas adjustment clauses.
Management monitors the rate of return in each jurisdiction in order to
ensure the timely filing of rate adjustment applications.
RATE PROCEEDINGS
Maryland. During 1994, the Company filed a petition with and received
approval from the Maryland Public Service Commission to consolidate, for
rate and accounting purposes, its two distribution divisions located in
Salisbury and Cambridge, Maryland.
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Florida. On December 10, 1993, the Florida Public Service Commission
issued an order reducing the Florida divisions allowed return on equity
from 12% to 11%, in response to lower interest rates. On August 5, 1994,
the Florida division filed Modified Minimum Filing Requirements which are
required every 4 years by Florida Public Service Commission regulations. As
of December 31, 1994, no decision had been rendered by the Florida Public
Service Commission on the Division's MMFR's. However, as a result of the
order received by the Division regarding its 1994 potential overearnings,
any change in the Division's authorized return on equity that results from
the PSC's decision on the MMFR's will not become effective until January 1,
1996. On February 6, 1995, the Florida Public Service Commission approved
the Florida division's proposal to cap its 1994 and 1995 earnings at 12%.
The order also allows the division to offset any 1994 excess earnings
against anticipated increases in major expense areas in 1995 and permits
the division to resume recovery of its annual accrual to the environmental
clean-up reserve.
(I) (C) PROPANE DISTRIBUTION
Chesapeake's propane distribution group consists of Sharp Energy, Inc.
("Sharp Energy"), a wholly owned subsidiary of Chesapeake, and its wholly
owned subsidiaries, Sharpgas, Inc. ("Sharpgas") and Sharpoil, Inc.
("Sharpoil").
Sharpgas purchases, stores and distributes propane to approximately
22,600 customers on the Delmarva Peninsula. The propane distribution
business is affected by many factors such as seasonality, the absence of
price regulation and competition among local providers.
Propane is a form of liquefied petroleum gas which is typically extracted
from natural gas or separated during the crude oil refining process.
Although propane is gaseous at normal pressures, it is easily compressed
into liquid form for storage and transportation. Propane is a clean-burning
fuel, gaining increased recognition for its environmental superiority,
safety, efficiency, transportability and ease of use relative to
alternative forms of energy.
Propane is sold primarily in suburban and rural areas which are not
served by natural gas pipelines. Demand is typically much higher in the
winter months and is significantly affected by seasonal variations,
particularly the relative severity of winter temperatures, because of its
use in residential and commercial heating.
The Company purchases propane primarily from five suppliers, including
major domestic oil companies and independent producers of gas liquids and
oil. Supplies of propane from these and other sources are readily available
for purchase by the Company. Supply contracts generally include minimum
(not subject to take-or-pay) and maximum purchase provisions.
The Company uses trucks and railroad cars to transport propane from
refineries, natural gas processing plants or pipeline terminals to the
Company's bulk storage facilities. From these facilities, propane is
delivered by "bobtail" trucks owned and operated by the Company to tanks
located at the customer's premises, or in portable cylinders. Most of the
tanks and cylinders are owned by the Company and are utilized by the
customer free of charge.
Sharpgas competes with several other propane distributors in its service
territories, primarily on the basis of service and price, emphasizing
reliability of service and responsiveness. Competition is generally local
because distributors located in close proximity to customers incur lower
costs of providing service.
Propane competes with electricity and fuel oil as an energy source.
Propane is typically comparable in price to fuel oil and generally less
expensive than electricity based on equivalent BTU value. Because natural
gas historically has been less expensive than propane, propane is generally
not distributed in geographic areas serviced by natural gas pipeline or
distribution systems.
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The Company's propane distribution activities are not subject to any
federal or state pricing regulation. Transport operations are subject to
regulations concerning the transportation of hazardous materials
promulgated under the Federal Motor Carrier Safety Act, which is
administered by the United States Department of Transportation and enforced
by the various states in which such operations take place. Propane
distribution operations are also subject to state safety regulations
relating to "hook-up" and placement of propane tanks.
The Company's propane operations are subject to all operating hazards
normally incident to the handling, storage and transportation of
combustible liquids, such as the risk of personal injury and property
damage caused by fire. The Company carries general liability insurance in
the amount of $35,000,000 per occurrence, but there is no assurance that
such insurance will be adequate.
In 1991, the Company decided to discontinue its entire fuel oils and
motor fuels delivery business. During 1992, the Company consummated the
sale of substantially all of the assets of Sharpoil. Chesapeake originally
acquired Sharpoil's assets in December 1988, when it purchased certain
propane and oil assets of Kellam Energy, Inc. Sharpoil was formed at that
time to conduct a small oil products distribution business in Virginia and
Maryland which served approximately 2,500 customers. The decision to
dispose of Sharpoil resulted in a charge to fourth quarter 1991 earnings of
$500,000 and includes the write-off of goodwill and other intangible
assets, estimated losses on the sale of all of its oil products
distribution assets and an estimated loss anticipated in 1992 with respect
to operating the remaining business through the date of sale (the actual
loss was $426,500). See Note B to the Company's Consolidated Financial
Statements.
(I) (D) INFORMATION TECHNOLOGY SERVICES
Chesapeake's information technology services segment is comprised of two
wholly owned subsidiaries of the Company: Capital Data Systems, Inc.
("CDS") and United Systems, Inc. ("USI").
CDS is an information technology provider offering software products and
services primarily to the telecommunications companies and Chesapeake's
subsidiaries. Application software solutions include customer information,
management information, billing and financial systems. To a broader market,
CDS offers outsourcing/facilities management, network design and
management, disaster recovery, contract programming and consulting
services.
USI is an Atlanta-based company that primarily provides support for users
of PROGRESS (R), a fourth generation computer language and Relational
Database Management System. USI offers consulting, training, software
development "tools" and customer software development for their client
base, which includes many large domestic and international corporations.
The Information Technology businesses face significant competition from a
number of larger competitors having substantially greater resources
available to them than the Company. In addition, changes in the Information
Technology business is occurring rapidly, which could adversely impact the
markets for the Company's products and services.
(I) (E) OTHER LINES OF BUSINESS
In addition to the four business segments previously mentioned, the
Company is involved in other businesses under the umbrella of Chesapeake
Service Company ("Chesapeake Service"), a wholly owned subsidiary of the
Company. In addition to CDS, the group contains Currin and Associates, Inc.
("C&A"), Skipjack, Inc. ("Skipjack"), and Chesapeake Investment Company
("Chesapeake Investment"), all three of which are wholly owned subsidiaries
of Chesapeake Service. Skipjack owns and leases to affiliates an office
building in Dover, Delaware. Chesapeake Investment is a Delaware affiliated
investment company.
In 1994, based on declining revenue and business projections, the Company
disposed of its investment in C&A, a rate and regulatory consulting
subsidiary acquired in 1988. Revenue declined from
8
<PAGE>
a high of $593,000 in 1992 to a low of $52,000 for 1994. The disposition
has resulted in a $260,000 after tax loss recorded to Other Income and
Deductions. The loss resulted from the write-off of goodwill and the
disposition of other assets.
(II) SEASONAL NATURE OF BUSINESS
Revenues from the Company's residential and commercial natural gas sales
and from its propane distribution activities are affected by seasonal
variations, since the majority of these sales are to customers using the
fuels for heating purposes. Revenues from these customers are accordingly
affected by the mildness or severity of the heating season.
(III) CAPITAL BUDGET
The Company's current capital budget for 1995 contemplates expenditures
totalling approximately $16.6 million. The total includes approximately
$11.7 million for Chesapeake's natural gas distribution divisions,
consisting mainly of extensions to and replacements of the distribution
facilities and related equipment; $1.7 million for natural gas transmission
operations, providing principally for improvements and enhancements to its
measuring and regulating stations; $1.7 million for propane distribution,
principally for the purchase of storage facilities, additional tanks and
transportation equipment; $452,000 for computer hardware, software and
related equipment required for expansion of the Company's information
technology services activities; and $1.0 million for building construction
and improvements in Chesapeake's Skipjack subsidiary, along with
miscellaneous equipment for the administrative group. These capital
requirements are expected to be financed by cash flow provided by the
Company's operating activities and short-term borrowing.
(IV)ENVIRONMENTAL
(IV) (A) DOVER GAS LIGHT SITE
In 1984, the State of Delaware notified the Company that a parcel of land
it purchased in 1949 from Dover Gas Light Company, a predecessor gas
company, contains hazardous substances. The State also asserted that the
Company is responsible for any clean-up and prospective environmental
monitoring of the site. The Delaware Department of Natural Resources and
Environmental Control ("DNREC") investigated the site and surroundings,
finding coal tar residue and some ground-water contamination.
In October 1989, the Environmental Protection Agency Region III ("EPA")
listed the Dover Site on the National Priorities List under the
Comprehensive Environmental Response, Compensation and Liability Act
("CERCLA" or "Superfund"). Under CERCLA, the State of Delaware and the
Company are potentially responsible parties ("PRP") for clean-up of the
site. In July 1990, the Company entered into an agreement with EPA and
DNREC to perform a Remedial Investigation/ Feasibility Study under the
supervision of EPA and DNREC to study the site and surroundings to
determine any environmental impacts. Pursuant to the agreement the Company
agreed to pay for the study and 80% of EPA's oversight cost while DNREC is
paying for all of its own oversight costs as the lead agency plus 20% of
EPA's oversight costs. The Company submitted its reports on the Remedial
Investigation ("RI") and Feasibility Study ("FS") to EPA and DNREC on
January 25, 1993 and February 15, 1993, respectively. The Company received
extensive comments from EPA and DNREC on the RI and FS reports. The Company
submitted to the EPA and DNREC its revised RI and FS on May 14, 1993 and
June 25, 1993, respectively. In the FS Report, Chesapeake proposed a remedy
which involved capping the site and monitoring ground-water quality in the
surrounding area. Chesapeake's consultant estimated that it would cost
approximately $700,000 to execute this plan of remediation.
After further discussions with the regulatory authorities, Chesapeake
agreed to undertake an additional phase study, the Ground Water Evaluation
Study--Phase III, which focused on delineating
9
<PAGE>
the area of maximum ground-water impact from the site. The results of that
study were submitted to EPA and DNREC in September 1993. On February 1,
1994, EPA issued its proposed plan of action (the "Plan"). The Plan adopted
many findings of the Phase III Study, acknowledging that the Dover Site has
impacted ground-water only in a limited area.
The Plan presented and discussed a number of remedial alternatives,
including the remedial strategy proposed by the Company in the FS. The EPA
Plan proposed a more extensive remediation strategy that involves removal
of contaminated soils from the site and drilling a series of twenty (20)
wells. EPA estimated that execution of its Plan would cost $4.9 million.
The Plan was submitted by the EPA for public comment. The 30-day public
comment period ended on April 4, 1994. During this period, the EPA received
public comments, including those submitted by the Company.
The EPA issued the site Record of Decision ("ROD") dated August 16, 1994.
The remedial action selected by the EPA in the ROD differed significantly
from the Plan. The EPA selected a remediation addressing the ground-water
contamination with a combination of hydraulic containment and natural
attenuation. Remediation selected for the soil at the site is to meet
stringent cleanup standards for the first two feet of soil and less
stringent standards for the soil below two feet. These selected levels of
remediation were not alternatives listed in the Plan, but utilized elements
proposed. In addition, the ROD incorporated many of the public comments
that were received. The ROD estimates the costs of selected remediation of
ground-water and soil at $2.7 million and $3.3 million, respectively. The
remediation selected in the ROD is substantially more limited than had been
suggested in the Plan. In the ROD, the EPA indicated that its previous $4.9
million estimate was incorrect.
On November 18, 1994, EPA issued a "Special Notice Letter" (the "Letter")
to Chesapeake and three other PRPs. The Letter included, inter alia, (1) a
demand for payment by the PRPs of EPA's past costs (currently estimated to
be approximately $300,000) and future costs incurred overseeing site work;
(2) notice of EPA's commencement of a 60 day moratorium on certain EPA
response activities at the site; (3) a request by EPA that Chesapeake and
the other PRPs submit a "good faith proposal" to conduct or finance the
work identified in the ROD; and (4) proposed consent orders by which
Chesapeake and other parties may agree to perform the good faith proposal.
In January 1995, Chesapeake submitted to the EPA a good faith proposal to
perform a substantial portion of the work set forth in the ROD, which was
subsequently rejected. It is unknown whether other PRPs will submit good
faith proposals, what such proposals might include, and whether EPA would
accept such proposals. Under CERCLA, the EPA may reject any of the
proposals, and seek an administrative or court order to require any or all
of the PRPs to implement the work. EPA may also do the work itself and seek
recovery of its costs in court.
The Company and the EPA are each attempting to secure voluntary
performance of part of the remediation by other parties. These parties
include the State of Delaware, which is the owner of the property and was
identified in the ROD as a PRP, and a business identified in the ROD as a
PRP for having contributed to ground-water contamination. On March 6, 1995,
in order to protect its interests, the Company filed suit in federal court
for a determination that the State of Delaware is a liable party and for
recovery from the State of costs of complying with the ROD. The Company is
also considering suit against other PRPs. In addition, EPA has stated that
it will take steps to secure prompt commencement of the remedial design
phase needed to implement the ROD. The Company therefore anticipates
further negotiations to resolve these matters among the parties and with
the government. Management is evaluating the ROD to determine the most
economic approach to implementation of the remedies selected in the ROD.
10
<PAGE>
In the third quarter of 1994, the Company increased its accrued liability
recorded with respect to the Dover Site to $6.0 million from $700,000. This
amount reflects the EPA's present estimate, as stated in the ROD, for
remediation of the site according to the ROD. Future developments in the
matters discussed above would be accompanied by appropriate reductions to
the liability recorded as they occur. The Company also increased the
corresponding regulatory asset to $6.0 million. If the Company incurs
expenses of that amount in connection with undertaking the remedies
selected in the ROD, management's belief is that the Company will be
equitably entitled to contribution from other responsible parties for the
greater part of these expenses. Management also believes that any amounts
not so contributed will be recoverable in the Company's rates.
As of December 31, 1994, the Company has incurred approximately
$3,099,000 in costs relating to environmental testing and remedial action
studies. In 1990, the Company entered into settlement agreements with a
number of insurance companies resulting in proceeds to fund actual
environmental costs incurred over a five to seven year period beginning in
1990. On February 23, 1993, the Delaware Public Service Commission,
consistent with prior base rate proceedings, authorized the Company to
amortize an additional $749,971 in environmental expenses for ratemaking
purposes over a seven year period. At December 31, 1994 the unamortized
balance is approximately $554,000. Of the $3,099,000 in costs reported
above, approximately $227,000 has not yet been recovered through insurance
proceeds or received ratemaking treatment. It is management's opinion that
these costs incurred will be recoverable in rates.
(IV) (B) SALISBURY TOWN GAS LIGHT SITE
In cooperation with the Maryland Department of the Environment ("MDE"),
the Company has completed an assessment of the Salisbury manufactured gas
plant site. The assessment determined that there was localized
contamination of ground-water. A remedial design report was submitted to
MDE in November 1990 and included a proposal to monitor, pump and treat any
contaminated ground-water on-site. The Company has proposed to MDE to
proceed with these activities over a maximum period of five years, after
which time any residual environmental impacts from the site will be
reevaluated. The remedial design was approved by MDE by a letter dated July
20, 1992, subject to certain conditions stated in that letter. The Company
responded by a letter dated August 6, 1992, objecting to certain conditions
imposed by MDE; however, none of these issues is expected to delay
implementation of the remedial design. In January 1993, after discussions
between the Company and MDE, the monitoring portion of the remedial design
was revised. MDE has approved additional revisions to the remedial action
workplan, resulting in a substantial reduction in the overall cost of this
project. The Company continues discussions with the MDE on the final stage
of remediation addressing the ground-water contamination.
The cost of remediation is estimated to be approximately $250,000 in
capital costs with yearly operating expenses of approximately $125,000.
Based on these estimated costs, the Company recorded both a liability and a
deferred regulatory asset of $642,092 on December 31, 1994, to cover the
Company's projected remediation costs for this site. The liability payout
for this site is expected to be over a five year period. As of 1994, the
Company has incurred approximately $1,723,000 for remedial actions and
environmental studies and has charged such costs to accumulated
depreciation. In a previous rate proceeding, the Company requested and
received recovery for all costs incurred as of November 30, 1988, through
base rates, including both a ten year amortization of these costs and rate
base treatment for the unamortized balance. As of 1994, the unamortized
balance was approximately $201,586 which will be fully amortized by May 31,
1999. In January 1990, the Company entered into settlement agreements with
a number of insurance companies resulting in proceeds to fund actual
environmental costs incurred over a three to five year period beginning in
1990. The final insurance proceeds were requested and received in 1992. Of
the $1,723,000 in costs reported above, approximately $765,000 has not been
recovered through insurance proceeds or received ratemaking treatment. It
is management's opinion that these costs incurred and future costs
incurred, if any, will be recoverable in rates.
11
<PAGE>
(IV) (C) WINTER HAVEN COAL GAS SITE
The Company is currently conducting investigations of a site in Winter
Haven, Florida, where the Company's predecessors manufactured coal gas
earlier this century. A Contamination Assessment Report ("CAR") was
submitted to the Florida Department of Environmental Protection ("FDEP") on
July 11, 1990. The CAR contained the results of additional investigations
of conditions at the site. These investigations confirmed limited soil and
ground-water impacts to the site. By letter dated March 26, 1991, FDEP
directed the Company to conduct additional investigations on-site to fully
delineate the vertical and horizontal extent of soil and ground-water
impacts.
Additional contamination assessment activities were conducted at the site
in late 1992 and early 1993. On March 25, 1993, a Contamination Assessment
Report Addendum ("CAR Addendum") was delivered to FDEP. The CAR Addendum
concluded that soil and ground-water impacts have been adequately
delineated as a result of the additional field work. The FDEP approved the
CAR and CAR Addendum in March of 1994. The next step is a Risk Assessment
("RA") and a Feasibility Study ("FS") on the site. The RA and FS are
expected to be filed with the FDEP during the first six months of 1995 at
an estimated cost of $54,000. Until the RA and FS are completed and
accepted as final by the FDEP, it is not possible to determine whether
remedial action will be required by FDEP and, if so, the cost of such
remediation.
The Company has spent approximately $595,000, as of December 31, 1994, on
these investigations, and expects to recover these expenses, as well as any
future expenses, through base rates. These costs have been accounted for as
charges to accumulated depreciation. The Company requested and received
from the Florida Public Service Commission ("FPSC") approval to amortize
through base rates $359,659 of clean-up and removal costs incurred as of
December 31, 1986. As of December 31, 1992, these costs were fully
amortized. In January 1993, the Company received approval to recover
through base rates approximately $217,000 in additional costs related to
the former manufactured gas plant. This amount represents recovery of
$173,000 of costs incurred from January 1987 through December 1992, as well
as prospective recovery of estimated future costs which have not yet been
incurred at that time. The FPSC has allowed for amortization of these costs
over a three year period and provided for rate base treatment for the
unamortized balance. In a separate docket before the FPSC, the Company has
requested and received approval to apply a refund of 1991 overearnings of
approximately $118,000 against the balance of unamortized environmental
charges incurred as of December 31, 1992. As a result, these environmental
charges were fully amortized as of June 1994. Of the $595,000 in costs
reported above, all costs have received ratemaking treatment. It is
management's opinion that future costs, if any, will be recoverable in
rates.
(IV) (D) SMYRNA COAL GAS SITE
On August 29, 1989 and August 4, 1993, representatives of DNREC conducted
sampling on property owned by the Company in Smyrna, Delaware. This
property is believed to be the location of a former manufactured gas plant.
Analysis of the samples taken by DNREC shows a limited area of soil
contamination.
On November 2, 1993, DNREC advised the Company that it would require a
remediation of the soil contamination under the state's Hazardous Substance
Cleanup Act and submitted a draft Consent Decree to the Company for its
review. The Company met with DNREC personnel in December 1993 to discuss
the scope of any remediation of the site and, on January 3, 1994, submitted
a proposed workplan, together with comments on the draft Consent Decree.
Initial comments from DNREC on the Work Plan were received on March 2,
1994, appropriate revisions were prepared and the Work plan was
resubmitted. Several additional sets of comments on the Work Plan were
received from DNREC and the final Work Plan was submitted on September 27,
1994. DNREC has approved the Work Plan and the Consent Decree. Remediation
based on the Work Plan, is scheduled to begin in 1995, at a cost of
approximately $75,000. It is management's opinion that future costs, if
any, will be recoverable in rates.
12
<PAGE>
(V) EMPLOYEES
The Company has 320 employees including 144 natural gas distribution
employees, 18 natural gas transmission employees, 92 propane distribution
employees and 38 information technology services employees. The remaining
28 employees are considered general and administrative and include officers
of the Company and treasury, accounting, marketing, human resources and
other administrative personnel.
ITEM 2. PROPERTIES
(A) GENERAL
The Company rents office space for its corporate headquarters located in
Dover, Delaware. The Company owns office and operations buildings in Salisbury,
Cambridge, and Princess Anne, Maryland; Dover, Seaford, Laurel and Georgetown,
Delaware; and Winter Haven, Florida, and rents office space in Plant City,
Florida; Chincoteague and Belle Haven, Virginia; Raleigh and Cary, North
Carolina; Easton and Pocomoke, Maryland; and Atlanta, Georgia. In general, the
properties of the Company are adequate for the uses for which they are
employed. Capacity and utilization of the Company's facilities can vary
significantly due to the seasonal nature of the natural gas and propane
distribution businesses.
(B) NATURAL GAS DISTRIBUTION
Chesapeake owns over 482 miles of natural gas distribution mains (together
with related service lines, meters and regulators) located in its Delaware and
Maryland service areas, and 454 miles of such mains (and related equipment) in
its Central Florida service areas. Chesapeake also owns facilities in Delaware
and Maryland for propane-air injection during periods of peak demand.
Nearly all of the properties constituting Chesapeake's distribution system
are encumbered pursuant to Chesapeake's First Mortgage Bonds.
(C) NATURAL GAS TRANSMISSION
Eastern Shore owns approximately 271 miles of transmission lines extending
from Parkesburg, Pennsylvania to Salisbury, Maryland. Eastern Shore also owns
two compressor stations located in Daleville, Pennsylvania and Bridgeville,
Delaware. The Daleville station is utilized to increase Columbia supply
pressures to match Transco supply pressures, and to increase Eastern Shore's
pressures in order to serve growing demands from Chesapeake's Delaware
division. The Bridgeville station is being used to provide increased pressures
required to meet the demands on the system.
(D) PROPANE DISTRIBUTION
Sharpgas owns bulk propane storage facilities with an aggregate capacity of
1,230,000 gallons at 26 plant facilities in Delaware, Maryland, and Virginia,
located on real estate it either owns or leases.
ITEM 3. LEGAL PROCEEDINGS
Environmental disclosures are set forth in Part I, Item 1(c)(iv) of this 10-
K, under "Environmental".
The Company and its subsidiaries are 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.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
13
<PAGE>
ITEM 10. EXECUTIVE OFFICERS OF THE REGISTRANT
Information pertaining to the Executive Officers of the Company is as
follows:
Ralph J. Adkins (age 52) (present term expires May 16, 1995). Mr. Adkins
is President and Chief Executive Officer of Chesapeake. He has served as
President and Chief Executive Officer since November 8, 1990. Prior to
holding his present position, Mr. Adkins served as President and Chief
Operating Officer, Executive Vice President, Senior Vice President, Vice
President and Treasurer of Chesapeake. Mr. Adkins is also Chairman,
President and Chief Executive Officer of Chesapeake Service Company, and
Chairman and Chief Executive Officer of Sharp Energy, Inc. and Eastern
Shore Natural Gas Company, all wholly owned subsidiaries of Chesapeake. He
has been a director of Chesapeake since 1989.
John R. Schimkaitis (age 47) (present term expires May 16, 1995). Mr.
Schimkaitis is Senior Vice President, Assistant Treasurer and Chief
Financial Officer of Chesapeake. He previously served as Vice President,
Treasurer and Chief Financial Officer from 1987 to 1992 and has served as
Assistant Secretary from 1986 to 1992. From 1983 to 1986 Mr. Schimkaitis
was Vice President of Cooper & Rutter, Inc., a consulting firm providing
financial services to the utility and cable industries.
Jeremy D. West (age 45) (present term expires May 16, 1995). Mr. West is
the President of Sharp Energy, Inc. and Vice President of Chesapeake. He
joined Sharp Energy in 1990 as President and in May 1992 was elected Vice
President of Chesapeake. Mr. West was Vice President of Marketing from
March 1987 to March 1989, and President from March 1989 to June 1990, of
Columbia Propane Corporation, a subsidiary of Columbia Gas System.
Previously, Mr. West was with Suburban Propane Gas Corp. as Regional
Manager from September 1985 to March 1987.
Jack E. Reinhard (age 47) (present term expires May 16, 1995). Mr.
Reinhard joined Chesapeake in 1988 as Superintendent of Division
Operations, and in 1990 was promoted to General Manager of Natural Gas
Operations. In May 1992, he was elected Vice President of Chesapeake. Mr.
Reinhard was previously employed by Southern Union Gas Company, a division
of Southern Union Corporation.
Kenneth H. Dean (age 55) (present term expires May 16, 1995). Mr. Dean
joined Chesapeake in May 1994 as Senior Vice President of Corporate
Development and Planning. He was previously employed for 11 years with
Stone and Webster Management Consultants, must recently as Senior Vice
President. Prior to that, Mr. Dean served as Executive Vice President of
Mobile (Alabama) Gas Service Corporation.
Philip S. Barefoot (age 47) (present term expires May 16, 1995). Mr.
Barefoot joined Chesapeake as Division Manager of Florida Operation in July
1988. In May 1994 he was elected Senior Vice President of Natural Gas
Operations, as well as President of Eastern Shore Natural Gas Company.
Prior to joining Chesapeake, he was employed with Peoples Natural Gas
Company where he held the positions of Division Sales Manager, Division
Manager and Vice President of Florence Operations.
14
<PAGE>
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED SECURITY HOLDER
MATTERS
(A) COMMON STOCK DIVIDENDS AND PRICE RANGES:
The following table sets forth sale price and dividend in formation for each
calendar quarter during the years December 31, 1994 and 1993:
<TABLE>
<CAPTION>
DIVIDENDS
DECLARED
QUARTER ENDED HIGH LOW CLOSE PER SHARE
------------- ------- ------- ------- ---------
<S> <C> <C> <C> <C>
1994
March 31................................ $15.250 $13.625 $13.875 $0.2200
June 30................................. 14.500 13.250 14.000 0.2200
September 30............................ 14.750 13.000 13.625 0.2200
December 31............................. 13.750 12.375 12.750 0.2200
1993
March 31................................ $15.125 $13.000 $14.000 $0.2150
June 30................................. 15.000 13.625 13.750 0.2150
September 30............................ 17.500 13.500 17.500 0.2150
December 31............................. 17.375 14.875 15.375 0.2150
</TABLE>
The common stock of the Company trades on the New York Stock Exchange under
the symbol "CPK".
(B) APPROXIMATE NUMBER OF HOLDERS OF COMMON STOCK AS OF DECEMBER 31, 1994:
<TABLE>
<CAPTION>
NUMBER OF SHAREHOLDERS
TITLE OF CLASS OF RECORD
-------------- ----------------------
<S> <C>
Common stock, par value $.4867.................... 1,721
</TABLE>
(C) DIVIDENDS:
During the years ended December 31, 1994 and 1993, cash dividends have been
declared each quarter, in the amounts set forth in the table above.
Indentures to the long-term debt of the Company and its subsidiaries contain
a restriction that the Company cannot, until the retirement of its Series I
Bonds, pay any dividends after December 31, 1988 which exceed the sum of
$2,135,188 plus consolidated net income recognized on or after January 1, 1989.
As of December 31, 1994, the amounts available for future dividends permitted
by the Series I covenant are $5,669,300.
15
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
----------------------------------------------------------
1994 1993 1992 1991 1990
---------- ---------- ---------- ---------- ----------
(DOLLARS IN THOUSANDS EXCEPT STOCK DATA)
<S> <C> <C> <C> <C> <C>
OPERATING
Operating revenues...... $ 98,572 $ 85,873 $ 75,935 $ 69,828 $ 81,256
Operating income........ $ 7,227 $ 6,311 $ 5,770 $ 5,865 $ 6,019
Income before cumulative
effect of change in
accounting principle
and discontinued
operations............. $ 4,460 $ 3,914 $ 3,475 $ 3,095 $ 3,056
Cumulative effect of
change in accounting
principle.............. $ 58
Income/(loss) from
discontinued
operations............. $ 74 $ (594) $ 52
Net income.............. $ 4,460 $ 3,972 $ 3,549 $ 2,501 $ 3,108
Volumes delivered:
Natural gas (million
cubic feet).......... 22,728 19,444 17,344 16,337 17,906
Propane (thousands of
gallons)............. 18,395 17,250 17,125 14,837 16,008
---------- ---------- ---------- ---------- ----------
BALANCE SHEET
Gross plant............. $ 110,023 $ 100,330 $ 91,039 $ 85,038 $ 80,552
Net plant............... $ 75,313 $ 69,794 $ 64,596 $ 61,970 $ 60,807
Total assets............ $ 108,271 $ 100,988 $ 89,557 $ 86,716 $ 87,432
Long-term debt.......... $ 24,329 $ 25,682 $ 25,668 $ 22,901 $ 24,671
Common stockholders'
equity................. $ 37,063 $ 34,878 $ 33,126 $ 32,207 $ 32,302
Capital expenditures.... $ 10,653 $ 10,064 $ 6,720 $ 5,923 $ 6,965
---------- ---------- ---------- ---------- ----------
COMMON STOCK
Shares outstanding at
year end............... 3,653,182 3,575,068 3,487,778 3,437,934 3,414,549
Earnings per share:
Income before
cumulative effect of
change in accounting
principle and
discontinued
operations........... $ 1.23 $ 1.10 $ 1.00 $ 0.90 $ 0.90
Cumulative effect of
change in accounting
principle............ $ 0.02
Income/(loss) from
discontinued
operations........... $ 0.02 $(0.17) $ 0.01
Net income............ $ 1.23 $ 1.12 $ 1.02 $ 0.73 $ 0.91
Cash dividends per
share.................. $ 0.88 $ 0.86 $ 0.86 $ 0.86 $ 0.85
Book value per share.... $10.15 $ 9.76 $ 9.50 $ 9.37 $ 9.46
Common equity/Total
capitalization......... 60.37% 57.59% 56.34% 58.44% 56.70%
Return on equity........ 12.03% 11.39% 10.71% 7.77% 9.62%
---------- ---------- ---------- ---------- ----------
NUMBER OF EMPLOYEES..... 320 326 317 311 315
---------- ---------- ---------- ---------- ----------
NUMBER OF REGISTERED
STOCKHOLDERS........... 1,721 1,743 1,674 1,723 1,735
========== ========== ========== ========== ==========
</TABLE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
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 cash generated
from operations and short-term borrowings to meet normal working capital
16
<PAGE>
requirements and to temporarily finance capital expenditures. During 1994, the
Company's net cash provided by operating activities, net cash used by investing
activities and net cash used by financing activities were $14,381,011,
$10,424,411 and $4,720,646, respectively.
The Board of Directors has authorized the Company to borrow up to $14,000,000
from various banks and trust companies. As of December 31, 1994, the Company
had four unsecured bank lines of credit each in the amount of $8,000,000. Funds
provided from these lines of credit are used for short-term cash needs to meet
seasonal working capital requirements and to fund portions of its capital
expenditures. The outstanding balances of short-term borrowings at December 31,
1994 and 1993 were $8,000,000 and $8,900,000, respectively. Based upon
anticipated cash requirements in late 1995, the Company may refinance the
short-term debt through the issuance of common equity, long-term debt or a
combination thereof. The timing of such an issuance is dependent upon the
nature of the securities involved as well as current market and economic
conditions.
CAPITAL EXPENDITURES
<TABLE>
<CAPTION>
(MILLIONS OF DOLLARS)
---------------------
<S> <C>
1990........................................... $ 7.0
1991........................................... 5.9
1992........................................... 6.7
1993........................................... 10.1
1994........................................... 10.6
</TABLE>
In 1994 and 1992 the Company's capital additions were funded from operations,
unlike 1993 when funding was provided by operations and financing activities.
In 1994, cash provided by operations increased due to the collection of a large
amount of underrecovered purchase gas costs present at the end of 1993. Cash
provided by operations in 1993 was lower than 1992 due, in part, to a large
accounts payable amount that was outstanding at the end of 1992 and paid in
1993 along with an increase in the amount of underrecovered purchase gas costs.
During 1994, 1993 and 1992, capital expenditures were approximately
$10,653,000, $10,064,000 and $6,720,000, respectively. For 1995, the Company
has budgeted $16,556,000 for capital expenditures. The breakdown of this amount
is $11,682,000 for natural gas distribution, $1,651,000 for natural gas
transmission, $1,734,000 for propane distribution, $452,000 for information
technology services and $1,037,000 for Skipjack, Inc. and other. The natural
gas and propane expenditures are for expansion and improvement of their
existing service territories. The information technology services expenditures
are for computer hardware, software and related equipment. The majority of
expenditures for Skipjack are for construction and improvements. Financing for
the 1995 construction program will be provided primarily using short-term
borrowings and cash from operations. The construction program is subject to
continuous review and modification. Actual construction expenditures may vary
from the above estimates due to a number of factors including inflation,
changing economic conditions, regulation, load growth, and the cost and
availability of capital.
GROSS PROPERTY, PLANT & EQUIPMENT
<TABLE>
<CAPTION>
(MILLIONS OF DOLLARS)
---------------------
<S> <C>
1990........................................... $ 80.5
1991........................................... 85.0
1992........................................... 91.0
1993........................................... 100.3
1994........................................... 110.0
</TABLE>
The Company expects to incur environmental related expenditures in the future
(see Note K to the Consolidated Financial Statements), a portion of which may
need to be financed through external sources.
17
<PAGE>
Management does not expect such financing to have a material adverse effect on
the financial position or capital resources of the Company.
Capital Structure
As of December 31, 1994, common equity represented 60.4% of permanent
capitalization, compared to 57.6% in 1993 and 56.3% in 1992. 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 the adequate and
timely rate relief for the Company's regulated operations, helps to ensure that
the Company will be able to attract capital from outside sources at a
reasonable cost. The achievement of these objectives will provide benefits to
customers and creditors, as well as to the Company's investors.
Financing Activities
The Company issued no long-term debt in 1994. During the first quarter of
1993, the Company issued $10,000,000 of 7.97% senior notes due on February 1,
2008. The Company used a portion of the funds to repay the short-term borrowing
balance outstanding (see Note F to the Consolidated Financial Statements). In
April 1993, the Company used the remaining funds, along with available short-
term borrowings, to repay $3,600,000 of the Company's 10.45% Series H First
Mortgage Bonds. These Bonds were originally due April 1, 2001. During the year,
the Company repaid a total of approximately $1,291,000 of long-term debt,
compared to $5,026,000 and $2,667,000 in 1993 and 1992, respectively. The 1992
repayment of long-term debt includes a prepayment, using available short-term
borrowing, of $900,000 to retire the Company's 12.50% Series F First Mortgage
Bonds. These Bonds were originally due in 1998. The Company issued no long-term
debt in 1992.
COMMON EQUITY
<TABLE>
<CAPTION>
(MILLIONS OF DOLLARS)
---------------------
<S> <C>
1990................................................ $32.3
1991................................................ 32.2
1992................................................ 33.1
1993................................................ 34.9
1994................................................ 37.1
</TABLE>
The Company issued 30,928, 27,942 and 12,546 shares of common stock in
connection with its Automatic Dividend Reinvestment and Stock Purchase Plan
during the years of 1994, 1993 and 1992, respectively. In 1993, the Company
realized an increase in the number of shares issued from the Plan due to an
increase in the level of optional cash payments from existing stockholders as
well as the option made available in the fourth quarter of 1992 which allows
employee stock purchases through payroll deductions.
The Company began utilizing treasury stock during the second half of 1993 to
fund the monthly Company matching contribution to the Retirement Savings Plan.
In 1994 and 1993, 14,475 and 4,808 shares respectively, were utilized, leaving
15,609 shares of treasury stock available. In 1995, the Company anticipates the
continued use of treasury stock to administer the Company's Retirement Savings
Plan.
Results of Operations
Net income for 1994 was $4,459,922, an increase of $488,251 from 1993
earnings of $3,971,671 which included $57,467 for the cumulative effect of a
change in accounting for income taxes (see Note A to the Consolidated Financial
Statements). Net income for 1993 also increased over 1992 earnings by $423,162.
Earnings for 1992 include income of $73,500 for the reversal of the estimated
loss from discontinued operations recorded in 1991 from our oil distribution
business (see Note B to the Consolidated Financial
18
<PAGE>
Statements). Earnings before interest and taxes ("EBIT") increased by
$1,456,000 or 17.5% in 1994 after increasing by $412,000 or 5.2% in 1993.
NET INCOME
<TABLE>
<CAPTION>
(MILLIONS OF DOLLARS)
---------------------
<S> <C>
1990................................................ $3.11
1991................................................ 2.50
1992................................................ 3.55
1993................................................ 3.97
1994................................................ 4.46
</TABLE>
Natural Gas Distribution
The natural gas distribution segment contributed EBIT of approximately $4.7
million for 1994 as compared to $4.1 million in 1993 and $4.4 million in 1992.
The 14.1% increase in 1994 EBIT was the result of a 6.2% increase in gross
margin partially offset by an increase in operating expenses. The decrease in
1993 EBIT as compared to 1992 was the result of an increase in operating
expenses, offset by an increase in gross margin.
Operating revenues increased to $49.6 million in 1994 from $44.3 million in
1993 after increasing from $42.0 million in 1992. Cost of gas was $32.4
million, $28.1 million and $26.1 million in 1994, 1993 and 1992, respectively.
The 1994 increase in revenue and cost of gas is primarily due to the first full
year of natural gas brokering operations for large industrial users and local
distribution companies in Florida. Overall, the brokering of gas provided a
minimal increase in gross margin for 1994. In addition, the Florida division
has increased sales to its phosphate producing and citrus processing customers
and two electric co-generation plants, which began operation in the first
quarter of 1994. Despite temperatures being 6.5% warmer than last year,
deliveries in the northern territories to residential and commercial customers
increased 5.1% because of the timing and magnitude of colder weather in the
first quarter of 1994. The 1993 increase was the result of an increase in
Florida's transportation volumes. This was partially offset by a 25.7%
reduction in interruptible sales volume due to competition from alternative
fuel services and Florida industrial customers switching to transportation
services.
REVENUES
<TABLE>
<CAPTION>
(MILLIONS OF DOLLARS)
---------------------
<S> <C>
1990................................................. $81.3
1991................................................. 69.8
1992................................................. 75.9
1993................................................. 85.9
1994................................................. 98.6
</TABLE>
Operating expenses increased by $418,000 in 1994 after increasing by $596,000
in 1993. The 1994 increase was due primarily to higher payroll, customer
accounting and maintenance of meter and regulating stations offset partially by
a reduction in employee pension and benefits, legal fees, regulatory expenses
and the absence of the one-time expense of listing of our stock on the NYSE in
the first quarter of 1993. The 1993 increase was due primarily to higher sales
expenses, employee benefit expenses, legal fees and the NYSE fees for listing
the Company's stock. Depreciation and property taxes increased in 1994 and 1993
due to plant additions during the years.
NUMBER OF CUSTOMERS
<TABLE>
<CAPTION>
(THOUSANDS)
-----------
<S> <C>
1990........................................................... 51.1
1991........................................................... 51.6
1992........................................................... 51.5
1993........................................................... 52.9
1994........................................................... 54.5
</TABLE>
19
<PAGE>
Natural Gas Transmission
The natural gas transmission operations contributed EBIT of approximately
$3.0 million for 1994 as compared to $3.1 million in 1993 and $2.7 million in
1992. The 2% decrease in 1994 EBIT was the result of an increase in operating
expenses exceeding the slight increase in gross margin. The increase in 1993
EBIT was the result of an increase in gross margin partially offset by a slight
increase in operating expenses.
Operating revenues increased to $39.5 million in 1994 from $37.4 million in
1993 after increasing from $29.5 million in 1992. The 1994 and 1993 increases
in operating revenues were partially offset by increases in cost of gas of $1.9
million in 1994 and $7.5 million in 1993. The net effect of the increases in
revenue and cost of gas is an increase in gross margin of $113,000 in 1994 and
$404,000 in 1993. However, the prior period component of the reserve for refund
recorded during the second quarter of 1994 (see Note L to the Consolidated
Financial Statements) has the impact of understating 1994 margins by $412,000.
This $412,000 accrual was recorded to adjust on a cumulative basis, the 1993
and 1992 margins as originally recorded on the books. Had the reserve been
recorded in the years that the revenue was actually generated, 1994 gross
margin would have increased by $871,000 over 1993, not $113,000.
The 1994 increase in revenue was due to a combination of factors including an
increase in industrial interruptible sales volumes of 33%, an increase in
contract demand levels effective November 1993, partially offset by a 9.4%
decrease in the commodity cost of gas, which was passed on to our customers.
The majority of the industrial interruptible sales volumes increase was
attributable to one industrial customer, which purchased natural gas, instead
of higher price alternative fuels. The increased sales to this customer
contributed $533,000 and $91,000 for the years 1994 and 1993, respectively. It
is expected that this customer will not continue to contribute to gross margin
at the 1994 levels. Deliveries to our large methanol producing industrial
customer were up 8.3% over the same period last year; however, margins earned
were lower. The 1993 increase in revenue was due to an increase in the cost of
gas and an 81% increase in interruptible sales volumes which was primarily due
to deliveries to the methonal plant.
Operating expenses increased by $187,000 in 1994 after increasing by $44,000
in 1993. Depreciation and taxes other than income increased in both 1994 and
1993. Depreciation expense increased from $604,000 to $641,000 from 1992 to
1994, primarily due to plant additions being placed in service during those
periods.
BOOK VALUE PER SHARE
<TABLE>
<CAPTION>
(DOLLARS)
---------
<S> <C>
1990.......................................................... $ 9.46
1991.......................................................... 9.37
1992.......................................................... 9.50
1993.......................................................... 9.76
1994.......................................................... 10.15
</TABLE>
Other taxes also increased from $298,000 in 1992 to $352,000 in 1994 due to
property taxes associated with the above plant additions. Maintenance expenses
increased by $125,000 due to the painting of a bridge structure and cathodic
protection related maintenance costs to the pipeline. Administrative expenses
increased slightly over 1993 as a result of an increase in payroll, legal fees
and telemetering communication expenses. This was partially offset by a
reduction in sales expense, employee pension and benefits and the other
administrative expenses.
In 1993, the FERC began reevaluating the methodology being used by Eastern
Shore in calculating its purchased gas adjustment ("PGA"). PGA clauses provide
for the adjustment of rates charged to customers as gas costs fluctuate. In May
1994, the FERC issued an Order directing Eastern Shore to refund, with
interest, what the FERC characterized as overcharges from November 1992 to the
current billing month. In June 1994, Eastern Shore filed a request for
rehearing of the Order based upon Eastern Shore's belief that the Order
essentially requires a retroactive change to the FERC approved PGA tariff. In
July 1994, the FERC
20
<PAGE>
issued an "Order Granting Rehearing Solely For The Purpose of Further
Consideration." This Order was issued only to afford the FERC additional time
for consideration of the issues raised in Eastern Shore's request for
rehearing.
TOTAL CAPITALIZATION
<TABLE>
<CAPTION>
(MILLIONS OF DOLLARS)
---------------------
<S> <C>
1990................................................ $57.0
1991................................................ 55.1
1992................................................ 58.8
1993................................................ 60.6
1994................................................ 61.4
</TABLE>
Eastern Shore has indicated to the FERC staff that it intends on filing an
offer of settlement to resolve all of the FERC's concerns. The ultimate outcome
of these proceedings cannot be forecasted with any degree of certainty and
accordingly Eastern Shore has accrued $1,283,000 for the potential refund.
Propane
For 1994, the propane segment realized record earnings, achieving an increase
in EBIT of $699,000 or 44% over 1993's results. This increase in EBIT resulted
from an increased gross margin, offset partially by higher operating costs.
Although not as dramatic as 1994, the results for 1993 were also positive, with
the segment recognizing an increase in EBIT of $149,000 over 1992. Like 1994,
the increase in 1993's EBIT was attributable to an increased gross margin
partially offset by higher operating expenses.
Comprising the increase in 1994's gross margin were several factors. The
segment recognized volume growth of 6.6% and a 2.7% increase in the gross
margin per gallon. The volume growth was principally a result of the timing and
severity of cold weather experienced in the first quarter of 1994, despite
temperatures for the year being 6.5% warmer than 1993. The increase in gross
margin per gallon resulted from a lower average cost per gallon, primarily a
result of more competitive supply contracts, offset partially by a lower
average selling price per gallon, largely due to competition. Finally,
additional margin comprising approximately 7.8% of the increase in total gross
margin was obtained from one large wholesale customer to which the segment
supplied 9 million gallons of propane in 1994.
Operating expenses in 1994 increased by 1.7%. Of this modest increase, the
majority of it represented expenses which were a direct result of the severe
weather as well as normal customer growth, including salaries for service and
delivery personnel and associated vehicle fuel and maintenance costs. Increased
expenses were also incurred for consulting services and higher insurance
claims. Partially offsetting these higher costs were lower employee benefit
costs.
For 1993, the increase in gross margin resulted from a slight growth in
volume, as well as an 8.3% increase in the gross margin per gallon. The volume
growth was a direct result of temperatures being 1.3% colder than 1992. The
increase in gross margin was the result of a reduction in the segment's average
cost per gallon. Operating expenses rose approximately 8%, of which the
majority corresponded to non-recurring programming costs, increased advertising
expenses, and higher insurance costs. Inherent within this 8% expense growth is
a recovery of bad debts expense, which was achieved as a result of improved
collection procedures; a recovery was also recognized in 1994, although not to
the extent of that recorded in 1993.
EARNINGS PER SHARE
<TABLE>
<CAPTION>
(DOLLARS)
---------
<S> <C>
1990............................................................ $.91
1991............................................................ .73
1992............................................................ 1.02
1993............................................................ 1.12
1994............................................................ 1.23
</TABLE>
21
<PAGE>
Information Technology Services and Other
The information technology services and other segment recognized an increase
of $17,000, or 10.9%, in EBIT for 1994. This increase is directly attributable
to an increase in EBIT of $169,000 for United Systems, Inc. ("USI"), partially
offset by decreases in EBIT of $130,000 and $40,000 for Capital Data Systems,
Inc. ("CDS") and Currin and Associates, Inc. ("C&A"), respectively. For 1993,
the segment recognized an increase in EBIT of approximately $536,000 over 1992.
Comprising this escalation were increases in EBIT of $474,000 and $66,000 for
CDS and USI, respectively, partially offset by a small reduction in C&A's EBIT.
Contributing to the 1994 increase in EBIT for USI were higher revenues of
$742,000, primarily relating to programming and consulting. Salaries, benefits,
and other normal operating expenses for USI rose by $573,000, in response to
these increased sales. For CDS, the increase in 1994's operating expenses of
$1,127,000 surpassed the increase in revenues of $997,000. Although a majority
of these expenses are a direct result of the increase in revenue, the balance
of the increased expenses represents the absence of any capitalized payroll
costs for software development in 1994. Slightly offsetting these expenses were
reductions in depreciation expense and employee benefit costs.
The total increase in revenues of $997,000 for 1994 represents sales to
external customers. During 1994, CDS recognized revenues of $1,227,000
associated with the ongoing development of the natural gas distribution
segment's customer billing system, UtiliCIS. This compares closely to
$1,239,000 for 1993. For these amounts, it is Chesapeake's policy to eliminate
the corresponding portion of EBIT, which represented $468,000, $651,000, and
$257,000 for 1994, 1993 and 1992, respectively. Chesapeake will reverse this
eliminated EBIT once the project is complete and the natural gas distribution
segment begins depreciating the system. Finally, as a result of declining
revenue and business prospects, Chesapeake disposed of its investment in C&A in
1994. Contributing to the increase in 1993's EBIT for CDS were increased
revenues of $1,306,000, of which approximately $815,000, or 62.4% correspond to
intercompany billings. Offsetting this rise in revenues were increased
operating expenses associated with higher programming and payroll costs as well
as increased maintenance and depreciation expenses on various pieces of
computer hardware. For USI, the increase in 1993's EBIT stemmed from higher
consulting and programming revenues of $743,000, partially offset by higher
salaries, benefits, and consulting fees of $677,000. In 1993, the net reduction
in C&A's EBIT was minimal, approximately $9,000 or 9.6%.
Other
Non-operating income was approximately $16,000 in 1994 as compared to
$265,000 in 1993. The 1994 decrease is primarily due to the disposition of its
investment in Currin & Associates and the 1993 increase of $140,000 from
interest associated with upstream supplier refunds. The 1993 decrease as
compared to 1992 is primarily due to a non-recurring gain of $382,000 on the
sale of Company-owned rental property which occurred in 1992, somewhat offset
by the interest from upstream supplier refunds received in 1993.
DIVIDENDS PER SHARE
<TABLE>
<CAPTION>
(DOLLARS)
---------
<S> <C>
1990............................................................ $.85
1991............................................................ .86
1992............................................................ .86
1993............................................................ .86
1994............................................................ .88
</TABLE>
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 K to the Consolidated Financial
Statements). The Company believes that any future costs associated with these
sites will be recoverable in rates.
22
<PAGE>
FERC Order 636
In April 1992, the FERC issued Order No. 636 ("Order") to be effective
November 1, 1993. The Order requires that pipelines restructure their services
and operations in an attempt to enhance competition and maximize the benefits
of wellhead price deregulation. The restructuring will force pipelines to incur
transition costs. Pipelines will be allowed to recover prudently incurred
transition costs from customers after approval by the FERC.
Currently, the Company is unable to determine what future transition costs
will be incurred by Eastern Shore and the effect, if any, that these costs will
have on its financial position. The Company's Florida distribution division is
currently being billed transition costs from Florida Gas Transmission. The
Company is recovering all transition costs incurred through the purchased gas
adjustment (see note L to the Consolidated Financial Statements).
Competition
Historically, the Company's natural gas operations have successfully competed
with other forms of energy such as electric, oil and propane. The principal
considerations have been price and to a lesser extent, accessibility. However,
natural gas shows great potential for increased sales as a vehicle fuel and for
electric power generation because of its environmentally superior qualities,
its production from domestic sources and endorsements received by government
officials. Since Eastern Shore has not elected to be an "open access" pipeline,
the Company is not subject to the competitive pressures, on the Delmarva
Peninsula, of FERC Order No. 636.
Both the propane distribution and the information technology businesses face
significant competition from a number of larger competitors having
substantially greater resources available to them than the Company. In
addition, in the information technology business, changes are occurring rapidly
which could adversely impact the markets for the Company's products and
services.
Inflation
Inflation impacts the prices the Company must pay for labor and other goods
and services required for operation, maintenance and capital improvements,
although in recent years, the impact of inflation has lessened. Purchased gas
costs, which have been relatively stable, are passed on to customers through
the purchased gas adjustment clause in the Company's tariff. To help cope with
the effects of inflation on its capital investments and returns, the Company
seeks rate relief from its regulatory commissions for its regulated segments
and constantly monitors the returns of its unregulated business segments.
23
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
REPORT OF INDEPENDENT ACCOUNTANTS
----------------
To the Shareholders of
Chesapeake Utilities Corporation
We have audited the accompanying consolidated balance sheets of Chesapeake
Utilities Corporation and Subsidiaries as of December 31, 1994 and 1993, and
the related consolidated statements of income, cash flows, stockholders'
equity, and income taxes for each of the three years in the period ended
December 31, 1994, and the consolidated financial statement schedules listed in
Item 14(a)(1) and (2) of this Form 10-K. These financial statements and
financial statement schedules are the responsibility of the Company's
Management. Our responsibility is to express an opinion on these financial
statements and financial statement schedules based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimate
made by Management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Chesapeake
Utilities Corporation and Subsidiaries as of December 31, 1994 and 1993, and
the consolidated results of their operations and their cash flows for each of
the three years in the period ended December 31, 1994 in conformity with
generally accepted accounting principles. In addition, in our opinion, the
consolidated financial schedules referred to above, when considered in relation
to the basic consolidated financial statements taken as a whole, present
fairly, in all material respects, the information required to be included
therein.
As discussed in Note A to the consolidated financial statements, effective
January 1, 1993, the Company changed its method of accounting for income taxes.
We have also previously audited, in accordance with generally accepted
standards, the consolidated balance sheets as of December 31, 1992, 1991, and
1990, and the related consolidated statements of income, cash flows,
stockholders' equity, and income taxes for each of the two years in the period
ended December 31, 1991, (none of which are presented herein); and we expressed
unqualified opinion on those financial statements. In our opinion, the
information set forth in the Selected Financial Data section, for each of the
five years in the period ended December 31, 1994, is fairly stated in all
material respect in relation to the financial statements from which it has been
derived.
Coopers & Lybrand, L.L.P.
Baltimore, Maryland
February 10, 1995
24
<PAGE>
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
-------------------------------------
1994 1993 1992
----------- ----------- -----------
<S> <C> <C> <C>
OPERATING REVENUES...................... $98,572,297 $85,872,632 $75,934,708
----------- ----------- -----------
OPERATING EXPENSES
Purchased gas costs................... 59,013,165 49,838,349 42,356,210
Operations............................ 19,681,435 18,178,500 16,792,136
Maintenance........................... 2,181,404 1,833,244 1,791,866
Depreciation and amortization......... 5,140,679 5,087,087 4,674,645
Other taxes........................... 2,798,905 2,635,072 2,431,968
Income taxes.......................... 2,529,635 1,989,287 2,118,340
----------- ----------- -----------
Total operating expenses............ 91,345,223 79,561,539 70,165,165
----------- ----------- -----------
OPERATING INCOME........................ 7,227,074 6,311,093 5,769,543
----------- ----------- -----------
OTHER INCOME AND (DEDUCTIONS)
Interest income....................... 123,271 351,426 213,754
Other income and (deductions), net.... (144,038) (49,185) 498,203
Income taxes.......................... (12,733) (37,002) (197,346)
Allowance for equity funds used during
construction......................... 49,154
----------- ----------- -----------
Total other income and (deductions). 15,654 265,239 514,611
----------- ----------- -----------
INCOME BEFORE INTEREST CHARGES.......... 7,242,728 6,576,332 6,284,154
----------- ----------- -----------
INTEREST CHARGES
Interest on long-term debt............ 2,322,942 2,443,035 2,201,958
Amortization of debt expense.......... 103,859 100,797 68,662
Other................................. 426,242 258,978 549,795
Allowance for borrowed funds used
during construction.................. (70,237) (140,682) (11,270)
----------- ----------- -----------
Total interest charges.............. 2,782,806 2,662,128 2,809,145
----------- ----------- -----------
INCOME BEFORE CUMULATIVE EFFECT OF
CHANGE IN ACCOUNTING PRINCIPLE AND
DISCONTINUED OPERATIONS................ 4,459,922 3,914,204 3,475,009
----------- ----------- -----------
CUMULATIVE EFFECT OF CHANGE IN
ACCOUNTING PRINCIPLE................... 57,467
----------- ----------- -----------
DISCONTINUED OPERATIONS
Income on disposal (less applicable
taxes of $37,864).................... 73,500
----------- ----------- -----------
NET INCOME.............................. $ 4,459,922 $ 3,971,671 $ 3,548,509
=========== =========== ===========
AVERAGE SHARES OUTSTANDING.............. 3,628,056 3,551,932 3,477,244
=========== =========== ===========
EARNINGS PER SHARE OF COMMON STOCK:
Income before cumulative effect of
change in accounting principle and
discontinued operations.............. $ 1.23 $ 1.10 $ 1.00
Cumulative effect of change in ac-
counting principle................... 0.02
Income from discontinued operations... 0.02
----------- ----------- -----------
Net income............................ $ 1.23 $ 1.12 $ 1.02
=========== =========== ===========
</TABLE>
See accompanying notes
25
<PAGE>
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
AT DECEMBER 31,
--------------------------
1994 1993
------------ ------------
<S> <C> <C>
ASSETS
PROPERTY, PLANT AND EQUIPMENT
Natural gas distribution.......................... $ 57,773,632 $ 50,132,505
Natural gas transmission.......................... 24,546,916 24,037,676
Propane distribution.............................. 18,289,571 17,574,143
Information technology services and other......... 8,618,014 7,790,865
Gas plant acquisition adjustments................. 795,004 795,004
------------ ------------
Total property, plant and equipment............. 110,023,137 100,330,193
Less: Accumulated depreciation and amortization... (34,710,478) (30,536,616)
------------ ------------
Net property, plant and equipment............... 75,312,659 69,793,577
------------ ------------
INVESTMENTS......................................... 1,641,851 1,766,826
------------ ------------
CURRENT ASSETS
Cash and cash equivalents......................... 398,751 1,162,797
Accounts receivable, net.......................... 8,416,293 9,719,810
Materials and supplies, at average cost........... 797,147 739,279
Propane inventory, at average cost................ 1,411,384 1,102,591
Storage gas prepayments........................... 3,467,281 3,554,831
Underrecovered purchased gas costs................ 109,025 1,832,457
Income taxes receivable........................... 836,813 190,995
Prepaid expenses.................................. 855,107 800,911
Deferred income taxes............................. 1,290,680 213,129
------------ ------------
Total current assets............................ 17,582,481 19,316,800
------------ ------------
DEFERRED CHARGES AND OTHER ASSETS
Intangible assets, net............................ 1,941,239 2,668,910
Environmental cost................................ 7,462,647 2,551,080
Order 636 transition cost......................... 2,020,732 2,503,053
Other deferred charges............................ 2,309,008 2,387,855
------------ ------------
Total deferred charges and other assets......... 13,733,626 10,110,898
------------ ------------
TOTAL ASSETS........................................ $108,270,617 $100,988,101
============ ============
</TABLE>
See accompanying notes
26
<PAGE>
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
AT DECEMBER 31,
--------------------------
1994 1993
------------ ------------
<S> <C> <C>
CAPITALIZATION AND LIABILITIES
CAPITALIZATION
Stockholders' equity
Common stock.................................... $ 1,785,514 $ 1,754,547
Additional paid-in capital...................... 16,834,823 15,850,319
Retained earnings............................... 19,480,374 18,219,083
Less: Treasury stock, at cost................... (99,842) (192,362)
Unearned compensation related to restricted
stock awarded................................ (696,679) (663,557)
Unrealized loss on marketable equity
securities, net.............................. (241,609) (90,517)
------------ ------------
Total stockholders' equity...................... 37,062,581 34,877,513
Long-term debt, net of current portion............ 24,328,988 25,682,068
------------ ------------
Total capitalization............................ 61,391,569 60,559,581
------------ ------------
CURRENT LIABILITIES
Current portion of long-term debt................. 1,348,080 1,285,946
Short-term borrowings............................. 8,000,000 8,900,000
Accounts payable.................................. 7,385,590 7,002,677
Refunds payable to customers...................... 567,817 319,818
Accrued interest.................................. 691,949 699,801
Dividends payable................................. 803,700 768,640
Other accrued expenses............................ 2,225,097 2,057,335
------------ ------------
Total current liabilities....................... 21,022,233 21,034,217
------------ ------------
DEFERRED CREDITS AND OTHER LIABILITIES
Deferred income taxes............................. 8,700,472 8,392,325
Deferred investment tax credits................... 986,062 1,040,877
Environmental liability........................... 6,642,092 1,675,000
Order 636 transition liability.................... 2,020,732 2,503,053
Accrued pension costs............................. 2,530,904 2,116,942
Other liabilities................................. 4,976,553 3,666,106
------------ ------------
Total deferred credits and other liabilities.... 25,856,815 19,394,303
------------ ------------
COMMITMENTS AND CONTINGENCIES
(Notes K and L)
TOTAL CAPITALIZATION AND LIABILITIES................ $108,270,617 $100,988,101
============ ============
</TABLE>
See accompanying notes
27
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
---------------------------------------
1994 1993 1992
------------ ------------ -----------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income........................... $ 4,459,922 $ 3,971,671 $ 3,548,509
Adjustments to reconcile net income
to net operating cash:
Cumulative effect of change in
method of accounting for income
taxes............................. (57,467)
Depreciation and amortization...... 5,862,154 5,393,934 4,955,862
Allowance for equity funds used
during construction............... (49,154)
Gain on the sale of fixed assets
and investments................... (363,542)
Investment tax credit adjustments.. (54,815) (54,815) (54,815)
Deferred income taxes, net......... (669,404) 778,896 1,308,302
Employee benefits.................. 492,082 1,117,017 756,661
Employee compensation resulting
from lapsing of stock
restrictions...................... 374,121 367,085 90,453
Reserve for refund................. 1,238,705
Other, net......................... 424,832 1,952 776,670
Changes in assets and liabilities:
Accounts receivable................ 1,303,517 (1,332,217) (1,505,048)
Other current assets............... (979,125) 1,066,583 1,216,493
Other deferred charges............. (168,078) (489,528) (851,840)
Accounts payable................... 382,913 (1,659,248) 3,308,145
Refunds payable to customers....... 59,999 (177,915) (121,463)
Overrecovered (Underrecovered) pur-
chased gas costs.................. 1,723,432 (861,006) (617,453)
Other current liabilities.......... 159,910 (204,856) (699,454)
------------ ------------ -----------
Net cash provided by operating activ-
ities: 14,381,011 7,860,086 11,747,371
------------ ------------ -----------
INVESTING ACTIVITIES
Property, plant and equipment expen-
ditures............................. (10,473,565) (10,023,702) (6,680,166)
Proceeds from the sale of Sharpoil
assets.............................. 393,261
Allowance for equity funds used dur-
ing construction.................... 49,154
------------ ------------ -----------
Net cash used by investing activi-
ties................................ (10,424,411) (10,023,702) (6,286,905)
------------ ------------ -----------
FINANCING ACTIVITIES
Common stock dividends net of amounts
reinvested of $427,190, $409,248 and
$160,555 in 1994, 1993 and 1992,
respectively........................ (2,736,388) (2,634,479) (2,834,578)
Sale of treasury stock............... 201,704 79,017
Net (repayments) borrowings under
line of credit agreements........... (900,000) 200,000 (100,000)
Proceeds from issuance of long-term
debt................................ 10,000,000
Repayments of long-term debt......... (1,285,962) (5,025,934) (2,667,388)
Payment under capital lease
obligations......................... (102,761) (91,461)
------------ ------------ -----------
Net cash (used) provided by financing
activities.......................... (4,720,646) 2,515,843 (5,693,427)
------------ ------------ -----------
NET (DECREASE) INCREASE IN CASH AND
CASH EQUIVALENTS.................... (764,046) 352,227 (232,961)
CASH AND CASH EQUIVALENTS AT
BEGINNING OF YEAR................... 1,162,797 810,570 1,043,531
------------ ------------ -----------
CASH AND CASH EQUIVALENTS AT END OF
YEAR................................ $ 398,751 $ 1,162,797 $ 810,570
============ ============ ===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION
Cash paid during the year for inter-
est................................. $ 2,652,323 $ 2,421,764 $ 2,760,308
Cash paid during the year for income
taxes............................... $ 3,509,034 $ 1,099,422 $ 1,043,378
</TABLE>
See accompanying notes
28
<PAGE>
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
-------------------------------------
1994 1993 1992
----------- ----------- -----------
<S> <C> <C> <C>
COMMON STOCK
Balance--beginning of period............ $ 1,754,547 $ 1,714,404 $ 1,690,145
Dividend Reinvestment Plan............ 15,046 13,599 6,106
USI restricted stock award agreements. 15,778 26,544 18,153
Conversion of debentures.............. 143
----------- ----------- -----------
Balance--end of period.................. 1,785,514 1,754,547 1,714,404
----------- ----------- -----------
ADDITIONAL PAID-IN CAPITAL
Balance--beginning of period............ 15,850,319 14,628,476 14,039,942
Dividend Reinvestment Plan............ 412,144 395,649 154,449
USI restricted stock award agreements. 458,335 777,920 434,085
Sale of treasury stock to Company's
Retirement Savings Plan.............. 109,184 48,274
Conversion of debentures.............. 4,841
----------- ----------- -----------
Balance--end of period.................. 16,834,823 15,850,319 14,628,476
----------- ----------- -----------
RETAINED EARNINGS
Balance--beginning of period............ 18,219,083 17,309,905 16,756,529
Net income............................ 4,459,922 3,971,671 3,548,509
Cash dividends(1)..................... (3,198,631) (3,062,493) (2,995,133)
----------- ----------- -----------
Balance--end of period.................. 19,480,374 18,219,083 17,309,905
----------- ----------- -----------
TREASURY STOCK
Balance--beginning of period............ (192,362) (223,105) (223,105)
Sale of treasury stock to Company's
Retirement Savings Plan.............. 92,520 30,743
----------- ----------- -----------
Balance--end of period.................. (99,842) (192,362) (223,105)
----------- ----------- -----------
UNEARNED COMPENSATION
Balance--beginning of period............ (663,557) (271,332) 0
Issuance of award..................... (474,113) (804,465) (452,238)
Amortization of prior years' awards... 440,991 412,240 180,906
----------- ----------- -----------
Balance--end of period.................. (696,679) (663,557) (271,332)
----------- ----------- -----------
UNREALIZED LOSS ON MARKETABLE
SECURITIES(2).......................... (241,609) (90,517) (32,151)
----------- ----------- -----------
TOTAL STOCKHOLDERS' EQUITY.............. $37,062,581 $34,877,513 $33,126,197
=========== =========== ===========
</TABLE>
--------
(1) Dividends per share of common stock were $.88, $.86 and $.86 for the years
1994, 1993 and 1992, respectively.
(2) Net of income taxes of approximately $160,000, $60,000 and $21,000 for the
years 1994, 1993 and 1992, respectively.
See accompanying notes
29
<PAGE>
CONSOLIDATED STATEMENTS OF INCOME TAXES
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
------------------------------------
1994 1993 1992
----------- ----------- ----------
<S> <C> <C> <C>
CURRENT INCOME TAX EXPENSE
Federal.................................. $ 2,375,332 $ 950,259 $ 810,728
State.................................... 707,190 332,834 289,335
Investment tax credit adjustments, net... (54,815) (54,815) (54,815)
----------- ----------- ----------
Total current income tax expense....... 3,027,707 1,228,278 1,045,248
----------- ----------- ----------
DEFERRED INCOME TAX EXPENSE
Accelerated depreciation................. 270,213 692,393 762,891
Deferred gas costs....................... (656,772) 319,794 232,014
Pensions and other employee benefits..... (169,731) (394,161) (296,059)
Alternative minimum tax.................. 230,575 320,000 107,000
Unbilled revenue......................... 188,356 (274,256) (29,033)
Reserve for refund....................... (580,361) 53,973 12,110
Other.................................... 232,381 80,268 519,379
----------- ----------- ----------
Total deferred income tax expense (1).. (485,339) 798,011 1,308,302
----------- ----------- ----------
CUMULATIVE EFFECT OF CHANGE IN METHOD OF
ACCOUNTING
FOR INCOME TAXES
Decrease in deferred tax assets.......... 297,973
Amount recorded on the balance sheet..... (355,440)
-----------
Amount recognized in income.............. (57,467)
-----------
Total income tax expense............... $ 2,542,368 $ 1,968,822 $2,353,550
=========== =========== ==========
RECONCILIATION FOR EFFECTIVE INCOME TAX
RATES
Federal income tax expense at 34%........ $ 2,458,354 $ 2,019,766 $2,006,700
State income taxes, net of federal bene-
fit..................................... 443,716 244,860 261,753
Cumulative effect of change in method of
accounting for income taxes............. (57,467)
Other.................................... (359,702) (238,337) 85,097
----------- ----------- ----------
Total income tax expense............... $ 2,542,368 $ 1,968,822 $2,353,550
=========== =========== ==========
Effective income tax rate................ 35.6% 33.1% 39.9%
DEFERRED INCOME TAXES
Deferred tax liabilities:
Accelerated depreciation............... $10,709,693 $10,883,002
Deferred gas costs..................... 36,862 693,634
Other.................................. 961,628 852,689
----------- -----------
Total deferred tax liabilities....... 11,708,183 12,429,325
----------- -----------
Deferred tax assets:
State operating loss carryforwards, net
...................................... $ 242,821 $ 284,293
Alternative minimum tax credits........ 644,309
Deferred investment tax credit......... 477,365 502,768
Reserve for refund..................... 625,549 3,872
Unbilled revenue....................... 657,098 845,454
Pensions and other employee benefits... 1,093,163 923,492
Self insurance......................... 514,509 518,604
Other.................................. 687,886 527,337
----------- -----------
Total deferred tax assets............ 4,298,391 4,250,129
----------- -----------
DEFERRED INCOME TAXES PER CONSOLIDATED
BALANCE SHEET........................... $ 7,409,792 $ 8,179,196
=========== ===========
</TABLE>
--------
(1) Total deferred income tax expense includes $66,000, $38,000 and $99,000 of
deferred state income taxes for the years 1994, 1993 and 1992,
respectively.
See accompanying notes
30
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
A. SUMMARY OF ACCOUNTING POLICIES
Principles of Consolidation
The consolidated financial statements of Chesapeake Utilities Corporation
(the "Company") include the Company's subsidiaries: Eastern Shore Natural Gas
Company ("Eastern Shore"), Sharp Energy, Inc. ("Sharp Energy") and Chesapeake
Service Company ("Chesapeake Service"). Eastern Shore's accounts include those
of its wholly owned subsidiary, Dover Exploration Company ("Dover
Exploration"). Sharp Energy's accounts include those of its wholly owned
subsidiaries, Sharpgas, Inc. ("Sharpgas") and Sharpoil, Inc. ("Sharpoil").
Chesapeake Service's accounts include those of Capital Data Systems, Inc.
("CDS"), Currin and Associates, Inc. ("C&A"), United Systems, Inc. ("USI"),
Skipjack, Inc. ("Skipjack") and Chesapeake Investment Company ("Chesapeake
Investment").
All intercompany transactions have been eliminated in consolidation.
System of Accounts
The natural gas distribution divisions of the Company located in Delaware,
Maryland and Florida are subject to regulation by the Delaware, Maryland and
Florida Public Service Commissions with respect to their rates for service,
maintenance of their accounting records and various other matters. Eastern
Shore is subject to regulation by the Federal Energy Regulatory Commission
("FERC") and the Delaware Public Service Commission. The Company's financial
statements are prepared on the basis of generally accepted accounting
principles which give appropriate recognition to the ratemaking and accounting
practices and policies of the various commissions. The propane and information
technology services subsidiaries are not subject to regulation with respect to
rates or maintenance of accounting records.
Cash and Cash Equivalents
The Company's policy is to invest cash in excess of operating requirements
in overnight income producing accounts. Such amounts are stated at cost which
approximates market. Investments with an original maturity of three months or
less are considered cash equivalents.
Property, Plant and Equipment and Depreciation
Utility property is stated at original cost while the assets of the propane
subsidiary are valued at cost. The costs of repairs and minor replacements are
charged as incurred to the appropriate operating expense and the costs of
major renewals and betterments are capitalized. Upon retirement or disposition
of utility property, the recorded cost of removal, net of salvage value, is
charged to accumulated depreciation. Upon retirement or disposition of non-
utility property, the gain or loss, net of salvage value, is charged to the
income statement.
The provision for depreciation is computed using the straight-line method at
rates which will amortize the unrecovered cost of depreciable property over
the estimated useful life. Depreciation and amortization expense for financial
statement purposes is provided at an annual rate averaging 4.5% for natural
gas distribution, 2.8% for natural gas transmission, 5.2% for propane
distribution, 6.2% for gas plant acquisition adjustments and 14.4% for
information technology services and other.
Allowance for Funds Used During Construction
The allowance for funds used during construction ("AFUDC") is an accounting
procedure whereby the cost of borrowed funds and other funds used to finance
construction projects is capitalized as part of utility plant on the balance
sheet, crediting the cost as a non-cash item on the income statement. The cost
of borrowed and equity funds is segregated between interest expense and other
income, respectively. The Company used
31
<PAGE>
rates of 4.23% in 1994, 3.52% in 1993 and 4.05% in 1992 for calculating AFUDC
on borrowed funds. In 1994, AFUDC for equity funds was calculated using an
average rate of 2.92%.
Other Deferred Charges
Other deferred charges include discount, premium and issuance costs
associated with long-term debt, restricted stock earned for services performed
but not yet awarded and rate case expenses. The discount, premium and issuance
costs are deferred and amortized over the lives of the respective debt issues.
Rate case expenses are deferred and amortized over periods approved by the
applicable regulatory authorities.
Income Taxes and Investment Tax Credit Adjustments
The Company files a consolidated federal income tax return. Income tax
expense allocated to the individual companies is based upon their respective
taxable incomes and tax credits.
Deferred tax assets and liabilities are recorded for the tax effect of
temporary differences between the financial statements and tax basis of assets
and liabilities, and is measured using current effective income tax rates. The
portion of the Company's deferred tax liabilities applicable to utility
operations which has not been reflected in current service rates represents
income taxes recoverable through future rates.
Investment tax credits on utility property have been deferred and are
allocated to income ratably over the lives of the subject property.
Effective January 1, 1993 the Company adopted Statement of Financial
Accounting Standards ("SFAS") No. 109 "Accounting for Income Taxes." The
adoption of SFAS No. 109 changed the method of accounting for income taxes from
the deferred method to the asset and liability approach. In adopting SFAS
No.109, the Company elected to restate its financial statements in order to
include the tax consequences on the amounts paid in excess of original cost in
gas plant acquisition adjustments for prior utility acquisitions. Restated
prior years' financial statements have not been presented due to the immaterial
impact of SFAS No. 109. The principal effect on the Company's financial
statements of adopting SFAS No. 109 was the recording of deferred regulatory
assets and liabilities.
The deferred regulatory assets consist primarily of income taxes on temporary
depreciation differences, which were previously flowed through to ratepayers.
Deferred regulatory assets were approximately $885,000 and $931,000 at December
31, 1994 and 1993, respectively. The deferred regulatory liabilities primarily
represent excess deferred income tax credits resulting from the reduction in
the federal income tax rate and also deferred tax credits provided on
investment tax credits which were previously flowed through to ratepayers.
Deferred regulatory liabilities were approximately $1,233,000 and $1,322,000 at
December 31, 1994 and 1993, respectively.
Changes in accumulated deferred income taxes related to the Company's non-
regulated operations have been recorded as a cumulative effect of change in
accounting principle on the income statement and a deferred tax asset on the
balance sheet. The result was a one-time increase to net income of $57,467. The
increase to net income resulted from a reduction in the deferred income taxes
associated with depreciation, coupled with the recording of net state tax loss
carryforwards. The Company has state tax loss carryforwards of $5,529,000 and
$8,753,000 at December 31, 1994 and 1993, respectively. The Company has
recorded valuation allowances of $153,000 and $255,000 at December 31, 1994 and
1993, respectively. The loss carryforwards expire in various years beginning in
1997 through 2007.
Operating Revenues
Revenues for the natural gas distribution divisions of the Company and a
portion of Eastern Shore revenues are based on rates approved by the various
commissions. Customers' base rates may not be changed without formal approval
of these commissions. The Company, except for its Florida division, recognizes
32
<PAGE>
revenues from meters read on a monthly cycle basis. This practice results in
unbilled and unrecorded revenue from the cycle date through month-end. The
Florida division recognizes revenues based on services rendered and records an
amount for gas delivered but not billed.
The natural gas distribution divisions of the Company and Eastern Shore have
purchased gas adjustment clauses that provide for the adjustment of rates
charged to customers as gas costs fluctuate. These amounts are collected or
refunded through adjustments to rates in subsequent periods.
Intangible Assets
Intangible assets are associated with the acquisition of non-utility
companies, and are being amortized on a straight-line basis. At December 31,
1994 and 1993, the balances and amortization periods for these assets were as
follows:
<TABLE>
<CAPTION>
AMORTIZATION
INTANGIBLE ASSETS 1994 1993 PERIOD
----------------- ----------- ----------- --------------
<S> <C> <C> <C>
Organization costs and other........... $ 263,657 $ 303,010 10 to 40 years
Goodwill............................... 424,226 672,368 15 to 40 years
Customer lists......................... 1,232,968 1,232,968 12 years
Covenants not to compete............... 3,100,000 3,100,000 8 years
----------- -----------
5,020,851 5,308,346
Less: Accumulated amortization......... (3,079,612) (2,639,436)
----------- -----------
Intangible assets, net................. $ 1,941,239 $ 2,668,910
=========== ===========
</TABLE>
Earnings Per Share
Earnings per common share are based on the weighted average number of shares
of common stock outstanding for each year presented. The dilutive effect of the
Company's common stock equivalents related to convertible debentures is
insignificant.
Reclassification of Prior Years Amounts
Certain prior years' amounts have been reclassified to conform with 1994
presentation.
B. DISCONTINUED OPERATIONS
During 1992, the Company consummated the sale of all the remaining assets of
Sharp Energy's oil products distribution subsidiary, Sharpoil. The Company's
decision to discontinue the operations of Sharpoil resulted in a charge to
fourth quarter 1991 earnings of $500,000, which represented the estimated
after-tax loss on the disposal of Sharpoil's assets and the expected loss on
operating the business up to the time that the assets were sold. The actual
loss incurred in 1992 was $426,500. The remaining $73,500 of the estimated loss
was reversed in the fourth quarter of 1992 and is included as income from
discontinued operations in the 1992 consolidated statement of income. Sharpoil
revenues in 1992 were approximately $595,000.
C. WRITE-OFF OF INVESTMENT
In 1994, based on declining revenue and business projections, the Company
disposed of its investment in Currin and Associates, Inc. ("C&A"), a rate and
regulatory consulting subsidiary acquired in 1988. Revenue declined from a high
of $593,000 in 1992 to a low of $51,000 for 1994. The disposition has resulted
in a $260,000 after tax loss recorded to Other Income and Deductions on the
income statement. The loss resulted from the write-off of goodwill and the
disposition of other assets.
33
<PAGE>
D. SEGMENT INFORMATION
The Company is engaged in natural gas distribution and transmission, propane
distribution and information technology services. Information concerning these
segments of the Company is stated below. The information provided pertains only
to continuing operations except where noted otherwise. All intersegment
revenues have been eliminated from consolidated revenues. During 1994 and 1992,
no individual customer accounted for 10% or more of revenues. In 1993, the
Company had sales to one customer which exceeded 10% of total revenue. Total
sales to this industrial interruptible customer of our transmission segment
were approximately $9,600,000 or 11.2% of total revenue.
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
---------------------------------------
1994 1993 1992
------------ ------------ -----------
<S> <C> <C> <C>
OPERATING REVENUES, UNAFFILIATED CUS-
TOMERS
Natural gas distribution.............. $ 49,523,743 $ 44,286,243 $41,909,029
Natural gas transmission.............. 22,191,896 20,094,343 13,968,258
Propane distribution.................. 20,684,150 16,908,289 16,489,173
Information technology services and
other................................ 6,172,508 4,583,757 3,568,248
------------ ------------ -----------
Total operating revenues,
unaffiliated customers............. $ 98,572,297 $ 85,872,632 $75,934,708
============ ============ ===========
INTERSEGMENT REVENUES
Natural gas distribution.............. $ 55,888 $ 52,577 $ 64,381
Natural gas transmission.............. 17,303,529 17,345,800 15,530,496
Propane distribution.................. 85,552 48,248 2,118
Information technology services and
other................................ 2,277,361 2,311,498 1,575,992
------------ ------------ -----------
Total intersegment revenues......... $ 19,722,330 $ 19,758,123 $17,172,987
============ ============ ===========
OPERATING INCOME BEFORE INCOME TAXES
Natural gas distribution.............. $ 4,696,659 $ 4,114,683 $ 4,350,992
Natural gas transmission.............. 3,018,212 3,091,843 2,732,068
Propane distribution.................. 2,287,688 1,588,383 1,440,096
Information technology services and
other................................ 174,033 156,910 (378,763)
------------ ------------ -----------
Total............................... 10,176,592 8,951,819 8,144,393
Less: Eliminations.................... (419,883) (651,439) (256,510)
------------ ------------ -----------
Total operating income before income
taxes.............................. $ 9,756,709 $ 8,300,380 $ 7,887,883
============ ============ ===========
DEPRECIATION AND AMORTIZATION
Natural gas distribution.............. $ 2,136,979 $ 1,938,344 $ 1,839,146
Natural gas transmission.............. 641,485 628,927 604,264
Propane distribution.................. 1,323,698 1,370,590 1,355,366
Information technology services and
other................................ 1,038,517 1,149,226 875,869
------------ ------------ -----------
Total depreciation and amortization. $ 5,140,679 $ 5,087,087 $ 4,674,645
============ ============ ===========
CAPITAL EXPENDITURES
Natural gas distribution.............. $ 8,160,874 $ 6,580,075 $ 3,475,720
Natural gas transmission.............. 619,852 1,497,910 794,139
Propane distribution.................. 828,519 724,677 721,956
Information technology services and
other................................ 1,044,094 1,261,125 1,728,266
------------ ------------ -----------
Total capital expenditures.......... $ 10,653,339 $ 10,063,787 $ 6,720,081
============ ============ ===========
IDENTIFIABLE ASSETS
Natural gas distribution.............. $ 68,528,774 $ 59,404,795 $46,550,482
Natural gas transmission.............. 17,792,415 18,212,489 17,605,175
Propane distribution.................. 16,949,431 18,244,020 20,417,580
Information technology services and
other................................ 4,999,997 5,126,797 4,984,067
------------ ------------ -----------
Total identifiable assets........... $108,270,617 $100,988,101 $89,557,304
============ ============ ===========
</TABLE>
34
<PAGE>
E. INVESTMENTS
The investment balance at December 31, 1994 and 1993 consists primarily of
the common stock of Florida Public Utilities Company ("FPU"). The Company's
ownership at December 31, 1994 and 1993 represents a 6.84% and 6.50% interest,
respectively. The Company adopted Statement of Financial Accounting Standards
("SFAS") No. 115 "Accounting for Certain Investments in Debt and Equity
Securities" effective January 1, 1994, as required. SFAS No. 115 addresses the
accounting and reporting for investments in equity securities that have readily
determinable fair values. The Company has classified its investment in FPU as
an "Available for Sale" security, which requires that all unrealized gains and
losses be excluded from earnings and be reported net of tax as a separate
component of stockholders' equity. The adoption of SFAS No. 115 had no effect
on the Company's 1994 results of operation. The aggregate cost basis of the
Company's portfolio at December 31, 1994 and 1993 exceeded its market value by
$401,609 and $150,517, respectively. In management's opinion, the decline in
the value of the stock is a temporary decline. At December 31, 1994 and 1993,
the investment was stated at the lower of cost or market, and was reported net
of tax as a separate component of stockholders' equity.
F. LEASE OBLIGATIONS
The Company has entered into several operating leases for office space at
various locations. Rent expense related to these leases was $418,043, $439,445
and $472,148 for 1994, 1993 and 1992, respectively. Future minimum payments
under the Company's lease agreements are $361,823 in 1995; $295,276 in 1996;
$111,041 in 1997; $31,800 in 1998; $33,400 in 1999 and $96,000 thereafter.
G. LONG-TERM DEBT
The outstanding long-term debt, net of current maturities is as follows:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
---------------------------------
1994 1993
---------------- ----------------
<S> <C> <C>
First mortgage sinking fund bonds:
Adjustable rate Series G, due January 1,
1998...................................... $ 562,500 $ 812,500
9.37% Series I, due December 15, 2004...... 5,860,000 6,380,000
12.00% Mortgage, due February 1, 1998...... 39,988 50,568
10.85% Senior uncollateralized note, due
October 1, 2003........................... 3,636,500 4,091,000
8.25% Convertible debentures, due March 1,
2014...................................... 4,230,000 4,348,000
7.97% Senior uncollateralized note, due
February 1, 2008.......................... 10,000,000 10,000,000
---------------- ----------------
Total long-term debt......................... $ 24,328,988 $ 25,682,068
================ ================
</TABLE>
The Series G bonds are subject to an interest rate equal to seventy-three
percent (73%) of the prime rate (8.5% and 6.00% at December 31, 1994 and 1993,
respectively).
The convertible debentures may be converted, at the option of the holder,
into shares of the Company's common stock at a conversion price of $17.01 per
share. During 1994, $5,000 in debentures were converted. The debentures are
redeemable at the option of the holder, subject to an annual non-cumulative
maximum limitation of $200,000 in the aggregate. As of December 31, 1994,
$113,000 of the debentures have been accepted for redemption. At the Company's
option, the debentures may be redeemed at the stated amounts.
On February 9, 1993, the Company issued $10,000,000 of 7.97% senior notes due
on February 1, 2008. The Company used a portion of the proceeds to repay
$8,700,000 in short-term borrowings. On April 1, 1993, the Company repayed
$3,600,000 of the 10.45% Series H bonds. These bonds were originally due April
1, 2001.
Indentures to the long-term debt of the Company and its subsidiaries contain
various restrictions. The most stringent restrictions state that the Company
must maintain equity of at least 40% of total
35
<PAGE>
capitalization, the times interest earned ratio must be at least 2.5 times and
that the Company cannot, until the retirement of its Series I bonds, pay any
dividends after December 31, 1988 which exceed the sum of $2,135,188 plus
consolidated net income recognized on or after January 1, 1989. As of December
31, 1994, the amounts available for future dividends permitted by the Series I
covenant approximated $5,669,300.
Substantially all of the natural gas distribution plant assets owned by the
Company are subject to a lien under the mortgage pursuant to which the
Company's first mortgage sinking fund bonds are issued.
Annual maturities of consolidated long-term debt are as follows:
<TABLE>
<CAPTION>
YEAR AMOUNT
---- -----------
<S> <C>
1995........................................................... $ 1,348,080
1996........................................................... $ 1,436,349
1997........................................................... $ 1,437,771
1998........................................................... $ 1,251,868
1999........................................................... $ 2,174,500
2000 through 2014.............................................. $18,028,500
</TABLE>
H. COMMON STOCK, ADDITIONAL PAID-IN CAPITAL AND TREASURY STOCK
The following is a schedule of changes in the Company's shares of common
stock:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
----------------------------------
1994 1993 1992
---------- ---------- ----------
<S> <C> <C> <C>
COMMON STOCK: SHARES ISSUED AND
OUTSTANDING*
Balance--beginning of period............ 3,605,152 3,522,670 3,472,826
Dividend Reinvestment Plan............. 30,928 27,942 12,546
USI restricted stock award agreements.. 32,418 54,540 37,298
Conversion of debentures............... 293
---------- ---------- ----------
Balance--end of period.................. 3,668,791 3,605,152 3,522,670
========== ========== ==========
SHARES OF COMMON STOCK HELD IN TREASURY
Balance--beginning of period............ 30,084 34,892 34,892
Sale of stock to Company's Retirement
Savings Plan.......................... (14,475) (4,808)
---------- ---------- ----------
Balance--end of period.................. 15,609 30,084 34,892
========== ========== ==========
</TABLE>
--------
* 12,000,000 shares authorized at a par value $.4867 per share.
As part of the USI acquisition, certain key USI employees entered into
restricted stock award agreements under which shares of Chesapeake common stock
can be issued. The issuance of these shares is treated as a non-cash
transaction on the consolidated statements of cash flow. Shares are awarded
over a five year period beginning in 1992, and restrictions lapse over a five
to ten year period from the award date, if certain financial targets are met.
Based on 1994 USI earnings, 14,138 shares of Chesapeake common stock will be
issued in 1995. Of these shares, 2,828 will have no restrictions, other than
those that may be imposed by federal or state securities laws.
In addition, 48,716 shares from the previous awards, originally valued at
$696,679, remain restricted and are shown as a reduction of stockholders'
equity at December 31, 1994. As of December 31, 1993, 47,638 shares, valued at
$663,557, remained restricted and were shown as a reduction of stockholders'
equity.
36
<PAGE>
The Performance Incentive Plan, which was adopted in 1992, provides for the
granting of stock options to certain officers of the Company over a 10 year
period. Changes in outstanding options were as follows:
<TABLE>
<CAPTION>
1994 1993 1992
------------------------ ----------------------- -----------------------
NUMBER OPTION NUMBER OPTION NUMBER OPTION
OF SHARES PRICE OF SHARES PRICE OF SHARES PRICE
--------- -------------- --------- ------------- --------- -------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding--beginning
of period.............. 80,280 $12.75 92,525 $12.75-$16.33 12,245 $16.33
Options granted......... 55,906 $12.625 80,280 $12.75
Options expired......... (12,245) $16.33
Outstanding--end of
period................. 136,186 $12.625-$12.75 80,280 $12.75 92,525 $12.75-$16.33
Exercisable............. 53,520 $12.75 26,760 $12.75
</TABLE>
I. SHORT-TERM BORROWING
The Board of Directors has authorized the Company to borrow up to $14,000,000
from various banks and trust companies. As of December 31, 1994, the Company
had four $8,000,000 unsecured bank lines of credit, none of which required
compensating balances.
A detail of short-term borrowings for 1994 and 1993 is as follows:
<TABLE>
<CAPTION>
AT DECEMBER 31,
----------------------------------
1994 1993
---------------- ----------------
<S> <C> <C>
Total authorized amount................. $ 14,000,000 $ 14,000,000
Less: Amount outstanding................ (8,000,000) (8,900,000)
---------------- ----------------
Available for borrowings.............. $ 6,000,000 $ 5,100,000
================ ================
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
----------------------------------
1994 1993
---------------- ----------------
<S> <C> <C>
Maximum amount outstanding at any month-
end.................................... $ 8,000,000 $ 9,900,000
Average daily amount outstanding........ $ 3,640,548 $ 3,297,863
Weighted average interest rates based
on:
Average daily amount outstanding...... 4.68% 3.47%
Amount outstanding at year-end........ 6.04% 3.55%
</TABLE>
J. EMPLOYEE BENEFIT PLANS
Retirement Savings Plan
The Company offers a Retirement Savings Plan, a 401(k) plan, which provides
participants a mechanism for making contributions for retirement savings. Each
participant may make pre-tax contributions based upon eligible compensation.
The Company makes a contribution equal to 60% of each participant's pre-tax
contributions not to exceed 3.6% of the participant's compensation for the plan
year. The Company's contributions totalled $240,103, $227,577 and $181,165 for
the years ended December 31, 1994, 1993 and 1992, respectively.
Pension
The Company has a defined benefit pension plan covering substantially all of
its employees. Benefits under the plan are based on each participant's years of
service and highest average compensation. The Company's funding policy provides
that payments to the trustee shall be equal to the minimum funding requirements
of the Employee Retirement Income Security Act of 1974.
37
<PAGE>
Total pension expense for the Company for 1994, 1993 and 1992 was
approximately $387,700, $741,300 and $763,200, respectively. Pension expense
decreased in 1994 because of a combination of factors including the (1)
increase in the discount rate to 7% from 6.5%; (2) decrease in the rate used
for average increase in future compensation levels to 5.5% from 6%; and (3)
increase in the expected long-term rate of return on assets to 8.5% from 7.5%.
Total Net Pension Cost
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
-----------------------------------
1994 1993 1992
----------- ----------- ---------
<S> <C> <C> <C>
Service cost.............................. $ 592,294 $ 719,417 $ 718,296
Interest cost............................. 518,184 511,536 489,812
Actual return (loss) on assets............ 742,949 (1,521,228) (68,034)
Net amortization and deferral............. (1,465,744) 1,031,618 (376,855)
----------- ----------- ---------
Total net pension cost.................... $ 387,683 $ 741,343 $ 763,219
=========== =========== =========
Assumptions:
Discount rate used in calculating total
net pension cost......................... 8.50% 7.00% 6.50%
Average increase in future compensation
levels................................... 5.50% 6.00% 6.00%
Expected long-term rate of return on
assets................................... 8.50% 7.50% 7.50%
</TABLE>
The following schedule sets forth the funding status of the pension plan at
December 31, 1994 and 1993:
Accrued Pension Cost
<TABLE>
<CAPTION>
AT DECEMBER 31,
------------------------
1994 1993
----------- -----------
<S> <C> <C>
Vested............................................... $ 4,454,627 $ 4,724,482
Nonvested............................................ 104,402 310,132
----------- -----------
Total accumulated benefit obligation................. $ 4,559,029 $ 5,034,614
=========== ===========
Plan assets at fair value............................ $ 7,799,483 $ 8,789,465
Projected benefit obligation......................... (6,492,622) (8,297,798)
----------- -----------
Plan assets in excess of projected benefit
obligation.......................................... 1,306,861 491,667
Unrecognized net gain................................ (3,590,066) (2,372,085)
Unamortized net assets from adoption of SFAS No. 87.. (171,787) (186,891)
----------- -----------
Accrued pension cost................................. $(2,454,992) $(2,067,309)
=========== ===========
</TABLE>
Other Postretirement Benefits
The Company sponsors a defined benefit postretirement health care and life
insurance plan which covers substantially all natural gas and corporate
employees. Effective January 1, 1993, the Company adopted the provisions of
Statement of Financial Accounting Standards ("SFAS") No. 106, "Employers'
Accounting for Postretirement Benefits Other than Pensions", which requires
that the expected cost of these future benefits be included in the financial
statements during the years employees render service. The implementation of
SFAS No. 106 resulted in an accumulated postretirement benefit obligation
(transition obligation) related to past employee service of $2,215,000. As
permitted, the Company elected to amortize this cost over 20 years instead of
expensing the total benefit obligation in 1993. The Company's 1993 cost under
SFAS No. 106, including the amortization of the transition obligation, was
$400,000. In the first quarter of 1994, the Company increased the amount that
future retirees would be required to contribute to participate in the Company's
health care program. The effect of the change in future employee contributions
reduced the Company's transition obligation and annual costs to $357,000 and
$70,000, respectively. The change also resulted in a one-time curtailment loss
of $64,000 in 1994.
38
<PAGE>
The health care inflation rate for 1994 and 1993 is assumed to be 12.0%. This
rate is projected to gradually decrease to an ultimate rate of 5.5% by the year
2007. A one percentage point increase in the health care inflation rate from
the assumed rate would increase the accumulated postretirement benefit
obligation by approximately $61,000 as of January 1, 1995, and would increase
the aggregate of the service cost and interest cost components of net periodic
other postretirement benefit cost for 1995 by approximately $6,000.
The Company deferred approximately $35,000 and $92,000 in 1994 and 1993,
respectively. These amounts represent the difference between the Maryland
divisions' SFAS No. 106 expense and its actual pay-as-you-go cost. The Company
expects the amount deferred would ultimately be recovered, since the Maryland
Public Service Commission has allowed rate recovery for the accrual treatment
of SFAS No. 106 costs in rate case decisions rendered for other utilities.
The following tables set forth the status of the plan at December 31, 1994
and 1993:
Accrued Postretirement Benefit Liability
<TABLE>
<CAPTION>
AT DECEMBER 31,
----------------------
1994 1993
--------- -----------
<S> <C> <C>
Accumulated postretirement obligation
Retirees.......................................... $ 426,624 $ 476,607
Fully eligible active employees................... 108,444 478,580
Other active...................................... 70,098 1,381,352
--------- -----------
Total accumulated postretirement benefit obligation. 605,166 2,336,539
Unrecognized transition obligation.................. (328,731) (2,110,000)
Net gain after recognizing change in discount rate.. 137,800
Unrecognized net gain............................... 139,637
--------- -----------
Accrued postretirement benefit liability............ $ 416,072 $ 364,339
========= ===========
Net Periodic Postretirement Benefit Cost
<CAPTION>
AT DECEMBER 31,
----------------------
1994 1993
--------- -----------
<S> <C> <C>
Service cost........................................ $ 3,553 $ 119,000
Interest cost on APBO............................... 44,118 176,000
Amortization of transition obligation over 20 years. 22,148 105,000
Curtailment loss.................................... 63,821
--------- -----------
NET PERIODIC POSTRETIREMENT COST.................... 133,640 400,000
Amount capitalized as construction cost............. (20,134) (52,112)
Amount deferred..................................... (34,969) (92,499)
--------- -----------
Amount charged to expense........................... $ 78,537 $ 255,389
========= ===========
ASSUMPTION:
Discount rate used in calculating net periodic
postretirement cost................................ 8.50% 7.00%
</TABLE>
Other Post Employment Benefits
In 1994, the Company adopted Statement of Financial Accounting Standards
("SFAS") No. 112, "Employers' Accounting for Postemployment Benefits", as
required. SFAS No. 112 establishes standards of financial accounting and
reporting for the estimated cost of benefits provided by an employer to former
or inactive employees after employment but before retirement. The adoption of
SFAS No. 112 did not have a material effect on the Company's results of
operations.
39
<PAGE>
K. ENVIRONMENTAL COMMITMENTS AND CONTINGENCIES
The Company currently is participating in the investigation, assessment, or
remediation of several former gas manufacturing plant sites, located in
different jurisdictions, including the exploration of corrective action options
to remove environmental contaminants. The Company has accrued liabilities for
two of these sites, the Dover Gas Light and Salisbury Town Gas Light sites.
The Dover site has been listed by the Environmental Protection Agency Region
III ("EPA") on the Superfund National Priorities List under the Comprehensive
Environmental Response, Compensation and Liability Act ("CERCLA"). In 1993,
both the Company and EPA proposed remedial action plans for the site. In the
fourth quarter of 1993, the Company recorded a liability of $700,000,
representing the estimated liability for future environmental expenditures
associated with the Company's proposed plan, which was the least extensive
remedial alternative set forth in the two plans. The EPA plan proposed a more
extensive remediation, estimated to cost $4.9 million. On August 19, 1994, the
EPA issued the Record of Decision ("ROD") for the site. The ROD selected a
remedial plan that differed from both proposals, and estimated the costs of the
selected remedy at $2.7 million for groundwater remediation and $3.3 million
for soil remediation. In January 1995, Chesapeake submitted to the EPA a good
faith proposal to perform a substantial portion of the work set forth in the
ROD, which was subsequently rejected. It is unknown whether any other
potentially responsible party ("PRP") will submit good faith proposals, what
such proposals might include, and whether EPA would accept such proposals.
Under CERCLA, EPA may reject any of the proposals, and seek an administrative
or court order to require any or all of the PRPs to implement the work. EPA may
also do the work itself and seek recovery of its costs in court.
In the third quarter of 1994, the Company increased its liability recorded
with respect to the Dover site to $6.0 million. This amount reflects EPA's
present estimate, as stated in the ROD, for remediation of the site according
to the ROD. The Company and EPA are each attempting to secure voluntary
performance of part of the remediation by other parties. These parties include
the State of Delaware, which is the owner of the property and was identified in
the ROD as a PRP, and a local business identified in the ROD as a PRP for
having contributed to groundwater contamination. On March 6, 1995, in order to
protect its interests, the Company filed suit in federal court for the
determination that the State of Delaware is a liable party and for recovery
from the State of costs of compliance with the ROD. The Company is also
considering a suit against other potentially responsible parties. In addition,
EPA has stated that it will take steps to secure prompt commencement of the
remedial design phase needed to implement the ROD. The Company therefore
anticipates further negotiations to resolve these matters among the parties and
with the government. Management is also evaluating the ROD to determine the
most economic approach to implementation of the remedies selected in the ROD.
Favorable developments in these matters would be accompanied by appropriate
reductions to the liability recorded as they occur.
The Company also increased the corresponding regulatory asset to $6.0
million. If the Company incurs expenses of that amount in connection with
undertaking the remedies selected in the ROD, management believes that the
Company will be equitably entitled to contribution from other responsible
parties for the greater part of these expenses. Management also believes that
any amounts not so contributed will be recoverable in the Company's rates.
The Company has accrued a liability with respect to the Salisbury site of
$642,092 as of December 31, 1994. This amount is based on the estimated capital
and operating cost as set forth in the Company's remedial action plan submitted
to the Maryland Department of the Environment ("MDE"). A corresponding
regulatory asset has been recorded, reflecting the Company's belief that costs
incurred will be recoverable in rates. The Company has begun preliminary
remediation procedures at the site and continues discussions with MDE to
finalize the remedial plan. The current liability has been reduced from the
liability of $975,000 recorded in the fourth quarter of 1993, reflecting
revised estimates of the scope of remediation, as determined by MDE.
40
<PAGE>
Portions of the liability payouts for the Dover and Salisbury sites are
expected to be over a thirty year and five year period, respectively. In
addition, the Company has two other sites currently being evaluated for which
no estimate of liability can be made at this time. It is management's opinion
that any current costs not currently recovered and any future costs incurred
will be recoverable through future rates or sharing arrangements with other
responsible parties.
The following table summarizes total environmental liabilities and associated
regulatory assets:
Environmental Liabilities and Regulatory Assets
<TABLE>
<CAPTION>
AT DECEMBER 31,
---------------------
1994 1993
---------- ----------
<S> <C> <C>
Delaware............................................... $6,000,000 $ 700,000
Maryland............................................... 642,092 975,000
---------- ----------
$6,642,092 $1,675,000
========== ==========
</TABLE>
The following table summarizes the total costs incurred related to
environmental testing and remedial action:
Environmental Costs Incurred
<TABLE>
<CAPTION>
AT DECEMBER 31,
---------------------
1994 1993
---------- ----------
<S> <C> <C>
Delaware............................................... $3,144,366 $2,814,561
Maryland............................................... 1,722,757 1,251,684
Florida................................................ 594,844 610,355
---------- ----------
$5,461,967 $4,676,600
========== ==========
</TABLE>
Of the total costs incurred and regulatory assets above, the following table
summarizes the balances of environmental costs which have not been recovered
through insurance proceeds or ratemaking:
Environmental Costs Not Recovered
<TABLE>
<CAPTION>
AT DECEMBER 31,
---------------------
1994 1993
---------- ----------
<S> <C> <C>
Delaware............................................. $6,820,555 $1,576,080
Maryland............................................. 1,608,333 1,515,813
Florida.............................................. 59,253
---------- ----------
Total................................................ 8,428,888 3,151,146
Less: Amount charged to accumulated depreciation as
cost of removal................................. 966,241 (600,066)
---------- ----------
Total Environmental Cost............................. $7,462,647 $2,551,080
========== ==========
</TABLE>
L. COMMITMENTS AND CONTINGENCIES
Delaware Public Service Commission Order Asserting Jurisdiction Over Eastern
Shore Natural Gas Company
On February 11, 1992, the Delaware Public Service Commission ("Commission")
issued an Order that declared Eastern Shore to be a "public utility" under
Delaware law subject to the Commission's jurisdiction in connection with
Eastern Shore's direct retail sales of natural gas to end users in the State of
Delaware. The Order initiated a proceeding to consider the extent to which
public utility regulatory supervision should be imposed upon the direct sales
of Eastern Shore within the State of Delaware. On May 17, 1994 the
41
<PAGE>
Company filed with the commission a proposal for a limited level of regulation.
On October 4, 1994, the Commission issued an Order essentially agreeing with a
level of regulation limited to the following: accepting and considering
complaints from customers, requiring Eastern Shore to file annual and other
periodic reports and requiring Eastern Shore to pay the annual public utility
tax. The Order will not have a material effect on Eastern Shore's financial
position or results of operations.
FERC Order No. 636
The Company is served by three direct natural gas pipelines: Columbia Gas
Transmission ("Columbia"), Transcontinental Gas Pipe Line Corporation
("Transco") and Florida Gas Transmission Company ("FGT"). Columbia and Transco
serve the Company's natural gas transmission subsidiary, Eastern Shore, which
in turn serves the Company's local distribution companies ("LDC") located in
Delaware and Maryland. FGT serves the Company's LDC in Central Florida. In
connection with the issuance of Order No. 636 ("Order") by the FERC in April
1992, pipelines will incur four types of transition costs in implementing the
unbundled service requirement of the Order: (1) gas supply realignment costs
(the cost of renegotiating existing gas supply contracts with producers); (2)
unrecovered purchased gas adjustment ("PGA") costs (gas costs remaining in the
pipelines' PGA account at the time they cease the merchant function); (3)
stranded costs (unrecovered costs of assets that cannot be assigned to
customers of unbundled services); and (4) new facilities costs (costs of new
facilities required to physically implement the Order). In order to recover
prudently incurred transition costs from its customers, each pipeline is
required to file for and obtain FERC approval. Eastern Shore, based on FERC
proceedings involving the recovery of gas purchased and related costs, believes
that transition costs passed on from pipelines will be similarly recoverable
through the Eastern Shore PGA mechanism for their FERC regulated sales. Eastern
Shore also has direct sales customers whose rates are currently not regulated.
All transition costs allocated to these non-regulated sales would be required
to be expensed when known and measurable. Eastern Shore has received
notification that FERC has approved Columbia's request for recovery of
transition costs related to PGA costs. Eastern Shore's portion of these costs
is $180,924. On April 1, 1994, Columbia started to invoice the amount in equal
installments of $15,077 over the next twelve months. Accordingly, in the second
quarter, the jurisdictional amount of $150,514 was recorded as a liability and
a regulatory asset. The liability is reduced each month as payment is made and
the asset is reduced as the costs are recorded to the PGA. The balance for both
accounts at December 31, 1994 is $38,000. The remaining amount assigned to the
non-regulated sales was expensed in 1994. The Company is unable to estimate
Eastern Shore's portion of any additional future transition costs that may be
assigned by Transco and Columbia until FERC approves their request for
recovery. In the opinion of management, it is not possible to determine the
effect, if any, that any transition costs incurred in the future would have on
Eastern Shore's financial position or results of operations. FGT has incurred
transition costs in the form of gas supply realignment costs and the FERC has
approved recovery of prudently incurred costs from FGT's customers, such as the
Company's LDC in Central Florida, through a demand charge beginning November 1,
1993 and extending for five years. The Company estimates that its portion of
the transition costs on December 31, 1994 and 1993 are $1,983,000 and
$2,503,000, respectively, of which $520,000 is due within one year. During 1994
the Company received approval of the PGA rate which includes recovery of the
transition costs. Accordingly, the Company has recorded a regulatory asset
equivalent to the liability established for transition costs at December 31,
1994 and 1993.
FERC PGA
On May 19, 1994, the FERC issued an Order directing Eastern Shore to refund,
with interest, what the FERC characterized as overcharges from November 1, 1992
to the current billing month. The Order also directed Eastern Shore to file a
report showing how the refund was calculated, and to revise tariff language
clarifying the PGA provisions of its tariff.
Eastern Shore filed a request for rehearing of the Order on June 20, 1994
based on what Eastern Shore believes is the FERC's erroneous interpretation of
Eastern Shore's tariff. It is Eastern Shore's position that
42
<PAGE>
the FERC's Order essentially requires a retroactive change to the FERC approved
PGA procedures which Eastern Shore has consistently applied over the last six
years. Such retroactive application is a violation of Sections 4 and 5 of the
Natural Gas Act.
On June 21, 1994, in compliance with the FERC's Order, Eastern Shore filed:
(1) revised tariff sheets clarifying its PGA methodology and (2) two
alternative refund calculations based on the FERC's Order. The two alternatives
were filed due to what Eastern Shore believes to be an inconsistency or
contradiction with respect to the FERC's language in its Order. On July 18,
1994 the FERC issued an "Order Granting Rehearing Solely for the Purpose of
Further Consideration." Such Order was issued only to afford the FERC
additional time for consideration of the issues raised in Eastern Shore's
request for rehearing. As of the date of this report, the FERC has not approved
either of the alternative refund calculations submitted by Eastern Shore and
has not made a final determination as to Eastern Shore's request for rehearing.
Accordingly, Eastern Shore accrued $412,000 in the second quarter of 1994,
relating to prior periods. Eastern Shore has also accrued an amount each month
in 1994 to insure fully funding the potential refund. The total accrued
liability at December 31, 1994 is $1,239,000.
Other Commitments and Contingencies
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.
M. QUARTERLY FINANCIAL DATA (UNAUDITED)
In the opinion of the Company, the quarterly financial information shown
below includes all adjustments necessary for a fair presentation of the
operations for such periods. Due to the seasonal nature of the Company's
business, there are substantial variations in operations reported on a
quarterly basis.
<TABLE>
<CAPTION>
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
1994
----
Operating Revenue............. $36,009,510 $19,868,566 $18,789,776 $23,904,445
Operating Income.............. $ 4,322,605 $ 588,550 $ 296,110 $ 2,019,809
Net Income (Loss)............. $ 3,746,087 $ (116,584) $ (264,773) $ 1,095,192
Net Income (Loss) Per Share... $ 1.04 $ (0.03) $ (0.07) $ 0.29
1993
----
Operating Revenue............. $30,020,809 $17,328,003 $13,859,549 $24,664,271
Operating Income.............. $ 3,632,209 $ 600,606 $ (67,466) $ 2,145,744
Net Income (Loss)............. $ 2,975,258 $ (13,722) $ (679,042) $ 1,689,177
Net Income (Loss) Per Share... $ 0.85 $ (0.00) $ (0.19) $ 0.46
</TABLE>
Effective January 1, 1993, the Company adopted SFAS No. 109 as discussed in
Note A to the Consolidated Financial Statements. The first quarter of 1993
includes an increase in net income of $57,467 ($0.02 per share) for the one-
time cumulative effect of the accounting change.
43
<PAGE>
OPERATING STATISTICS
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
-----------------------------------------
1994 1993 1992 1991 1990
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
REVENUES (IN THOUSANDS)
Natural gas
Residential....................... $15,228 $14,007 $12,935 $11,167 $11,387
Commercial........................ 11,594 10,837 9,857 8,606 8,794
Industrial........................ 32,718 31,622 26,977 26,660 37,617
Sale for resale................... 9,586 5,242 3,843 3,437 2,798
Transportation.................... 2,639 2,480 2,400 1,555 588
Other............................. (50) 193 (134) 44 109
------- ------- ------- ------- -------
Total natural gas revenues.......... 71,715 64,381 55,878 51,469 61,293
Propane............................. 17,789* 16,908 16,489 14,961 17,539
Other............................... 6,173 4,584 3,568 3,398 2,424
------- ------- ------- ------- -------
Total revenues........................ $95,677 $85,873 $75,935 $69,828 $81,256
======= ======= ======= ======= =======
VOLUMES
Natural gas deliveries (in MMCF)
Residential....................... 1,665 1,596 1,561 1,337 1,338
Commercial........................ 1,771 1,676 1,633 1,445 1,407
Industrial........................ 10,752 9,308 8,014 8,396 11,508
Sale for resale................... 998 984 997 922 796
Transportation.................... 7,542 5,880 5,139 4,237 2,857
------- ------- ------- ------- -------
Total natural gas deliveries........ 22,728 19,444 17,344 16,337 17,906
======= ======= ======= ======= =======
Propane (in thousands of gallons)... 18,395 17,250 17,125 14,837 16,008
======= ======= ======= ======= =======
CUSTOMERS
Natural gas
Residential....................... 28,260 27,312 26,523 25,710 24,864
Commercial........................ 3,879 3,759 3,683 3,560 3,428
Industrial**...................... 204 196 198 191 184
Sale for resale**................. 3 3 3 3 3
------- ------- ------- ------- -------
Total natural gas customers......... 32,346 31,270 30,407 29,464 28,479
Propane........................... 22,180 21,622 21,132 22,145 22,629
------- ------- ------- ------- -------
Total customers..................... 54,526 52,892 51,539 51,609 51,108
======= ======= ======= ======= =======
</TABLE>
--------
* Excludes revenue of $2,895,000, which resulted from the sale of 9 million
gallons of propane to one large wholesale customer in 1994.
**Includes transportation customers.
44
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information pertaining to the Directors of the Company is incorporated herein
by reference to the Proxy Statement, under "Information Regarding the Board of
Directors and Nominees", dated and to be filed on or before April 13, 1995 in
connection with the Company's Annual Meeting to be held on May 16, 1995.
The information required by this item with respect to executive officers is,
pursuant to instruction 3 of paragraph (b) of Item 401 of Regulation S-K, set
forth in Item 10 of Part I of this Form 10-K under "Executive Officers of the
Registrant."
ITEM 11. EXECUTIVE COMPENSATION
This information is incorporated herein by reference to the Proxy Statement,
under "Management Compensation", dated and to be filed on or before April 13,
1995 in connection with the Company's Annual Meeting to be held on May 16,
1995.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
This information is incorporated herein by reference to the Proxy Statement,
under "Beneficial Ownership of the Company's Securities", dated and to be filed
on or before April 13, 1995 in connection with the Company's Annual Meeting to
be held on May 16, 1995.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
This information is incorporated herein by reference to the Proxy Statement,
under "Beneficial Ownership of the Company's Securities", dated and to be filed
on or before April 13, 1995 in connection with the Company's Annual Meeting to
be held on May 16, 1995.
PART IV
ITEM 14. FINANCIAL STATEMENTS, FINANCIAL STATEMENT SCHEDULES, AND EXHIBITS AND
REPORTS ON FORM 8-K
(a) The following documents are filed as a part of this report:
1. Financial Statements:
--Auditors' Report dated February 10, 1995 of Coopers & Lybrand,
L.L.P., Independent Auditors
--Consolidated Statements of Income for each of the three years
ended December 31, 1994, 1993 and 1992
--Consolidated Balance Sheets at December 31, 1994 and December 31,
1993
--Consolidated Statements of Cash Flows for each of the three years
ended December 31, 1994
--Consolidated Statements of Common Shareholders' Equity for each of
the three years ended December 31, 1994
--Consolidated Statements of Income Taxes for each of the three
years ended December 31, 1994
--Notes to Consolidated Financial Statements
2. The following additional information for the years 1994, 1993 and
1992 is submitted herewith:
--Schedule II--Valuation and Qualifying Account
All other schedules are omitted because they are not required, inapplicable,
or the information is otherwise shown in the financial statements or notes
thereto.
45
<PAGE>
(b) No reports on Form 8-K were required to be filed during the fourth
quarter of 1994.
(c) Exhibits
<TABLE>
<C> <S>
Exhibit 3. (a) --Articles of Incorporation
Amended Articles of Incorporation of Chesapeake Utilities
Corporation, is incorporated herein by reference to Exhibit
3.(b) to the Annual Report on Form 10-K for the year ended
December 31, 1993, of Chesapeake Utilities Corporation.
Exhibit 3. (b) --Bylaws
Amended Bylaws of Chesapeake Utilities Corporation, filed
herewith.
Exhibit 4. (a) --The Form of Indenture between the Company and Boatmen's
Trust Company, Trustee, with respect to the 8 1/4%
Convertible Debentures is incorporated herein by reference
to Exhibit 4.2 of the Company's Registration Statement on
Form S-2, Reg. No. 33-26582, filed on January 13, 1989.
Exhibit 4. (b) --Note Agreement dated February 9, 1993, by and between the
Company and Massachusetts Mutual Life Insurance Company and
MML Pension Insurance Company, with respect to $10,000,000
7.97% Unsecured Senior Notes due February 1, 2008, is
incorporated herein by reference to Exhibit 4.(b) to the
Annual Report on Form 10-K for the year ended December 31,
1992, of Chesapeake Utilities Corporation.
Exhibit 10. (a) --Service Agreement dated November 1, 1989, by and between
Transcontinental Gas Pipe Line Corporation and Eastern Shore
Natural Gas Company, is incorporated herein by reference to
Exhibit 10.(a) to the Annual Report on Form 10-K for the
year ended December 31, 1989, of Chesapeake Utilities
Corporation.
Exhibit 10. (b) --Service Agreement dated November 1, 1989, by and between
Columbia Gas Transmission Corporation and Eastern Shore
Natural Gas Company, is incorporated herein by reference to
Exhibit 10.(b) to the Annual Report on Form 10-K for the
year ended December 31, 1989, of Chesapeake Utilities
Corporation.
Exhibit 10. (c) --Service Agreement for General Service dated November 1,
1989, by and between Florida Gas Transmission Company and
Chesapeake Utilities Corporation, is incorporated herein by
reference to Exhibit 10.(c) to the Annual Report on Form 10-
K for the year ended December 31, 1990, of Chesapeake
Utilities Corporation.
Exhibit 10. (d) --Service Agreement for Preferred Service dated November 1,
1989, by and between Florida Gas Transmission Company and
Chesapeake Utilities Corporation, is incorporated herein by
reference to Exhibit 10.(d) to the Annual Report on Form 10-
K for the year ended December 31, 1990, of Chesapeake
Utilities Corporation.
Exhibit 10. (e) --Service Agreement for Firm Transportation Service dated
November 1, 1989, by and between Florida Gas Transmission
Company and Chesapeake Utilities Corporation, is
incorporated herein by reference to Exhibit 10.(e) to the
Annual Report on Form 10-K for the year ended December 31,
1990, of Chesapeake Utilities Corporation.
Exhibit 10. (f) --Form of Service Agreement for Interruptible Sales Services
dated May 11, 1990, by and between Florida Gas Transmission
Company and Chesapeake Utilities Corporation, is
incorporated herein by reference to Exhibit 10.(f) to the
Annual Report on Form 10-K for the year ended December 31,
1990, of Chesapeake Utilities Corporation.
Exhibit 10. (g) --Interruptible Transportation Service Agreement dated
February 23, 1990, by and between Florida Gas Transmission
Company and Chesapeake Utilities Corporation, is
incorporated herein by reference to Exhibit 10.(g) to the
Annual Report on Form 10-K for the year ended December 31,
1990, of Chesapeake Utilities Corporation.
</TABLE>
46
<PAGE>
<TABLE>
<C> <S>
Exhibit 10. (h) --Interruptible Transportation Service Agreement dated
November 30, 1990, by and between Florida Gas Transmission
Company and Chesapeake Utilities Corporation, is incorporated
herein by reference to Exhibit 10.(h) to the Annual Report on
Form 10-K for the year ended December 31, 1990, of Chesapeake
Utilities Corporation.
Exhibit 10. (i) --Executive Employment Agreement dated March 26, 1992, by and
between Chesapeake Utilities Corporation and Ralph J. Adkins
is incorporated herein by reference to Exhibit 10.(a) to the
Quarterly Report on Form 10-Q for the quarter ended June 30,
1992, of Chesapeake Utilities Corporation.
Exhibit 10. (j) --Executive Employment Agreement dated March 26, 1992, by and
between Chesapeake Utilities Corporation and John R.
Schimkaitis, is incorporated herein by reference to Exhibit
10.(b) to the Quarterly Report on Form 10-Q for the quarter
ended June 30, 1992, of Chesapeake Utilities Corporation.
Exhibit 10. (k) --Executive Employment Agreement dated March 26, 1992, by and
between Chesapeake Utilities Corporation and Wayne L. Hart,
is incorporated herein by reference to Exhibit 10.(c) to the
Quarterly Report on Form 10-Q for the quarter ended June 30,
1992, of Chesapeake Utilities Corporation.
Exhibit 10. (l) --Chesapeake Utilities Corporation Cash Bonus Incentive Plan
dated January 1, 1992, is incorporated herein by reference to
Exhibit 10.(o) to the Annual Report on Form 10-K for the year
ended December 31, 1991, of Chesapeake Utilities Corporation.
Exhibit 10. (m) --Chesapeake Utilities Corporation Performance Incentive Plan
dated January 1, 1992, is incorporated herein by reference to
the Company's Proxy Statement dated April 20, 1992, in
connection with the Company's Annual Meeting held on May 19,
1992.
Exhibit 10. (n) --Form of Tandem Stock Option and Performance Share Agreement
dated November 18, 1994, pursuant to Chesapeake Utilities
Corporation Performance Incentive Plan by and between
Chesapeake Utilities Corporation and Ralph J. Adkins, John R.
Schimkaitis, Kenneth H. Dean, Philip S. Barefoot and Jerry D.
West, filed herewith.
Exhibit 11. --Computation of Primary and Fully Diluted Earnings Per Share,
filed herewith.
Exhibit 12. --Computation of Ratio of Earning to Fixed Charges, filed
herewith.
Exhibit 22. --Subsidiaries of the Registrant, filed herewith.
Exhibit 23. --Consent of Independent Accountants, filed herewith.
</TABLE>
47
<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF SECTION 13 OR 15 (D) OF THE SECURITIES
EXCHANGE ACT OF 1934, CHESAPEAKE UTILITIES CORPORATION HAS DULY CAUSED THIS
REPORT TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY
AUTHORIZED.
Chesapeake Utilities Corporation
By /s/ Ralph J. Adkins
----------------------------------
RALPH J. ADKINS PRESIDENT AND
CHIEF EXECUTIVE OFFICER
Date: March 30, 1995
-------------------------------
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THIS
REPORT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS ON BEHALF OF THE
REGISTRANT AND IN THE CAPACITIES AND ON THE DATES INDICATED.
SIGNATURES TITLE DATE
---------- ----- ----
/s/ John W. Jardine, Jr. Chairman of the March 30, 1995
------------------------------------- Board and Director
JOHN W. JARDINE, JR.
/s/ Ralph J. Adkins President, Chief March 30, 1995
------------------------------------- Executive Officer
RALPH J. ADKINS
/s/ John R. Schimkaitis Senior Vice March 30, 1995
------------------------------------- President &
JOHN R. SCHIMKAITIS Assistant Treasurer
(Principal
Financial Officer
and Principal
Accounting Officer)
/s/ Richard Bernstein Director March 30, 1995
-------------------------------------
RICHARD BERNSTEIN
/s/ Walter J. Coleman Director March 30, 1995
-------------------------------------
WALTER J. COLEMAN
/s/ Rudolph M. Peins, Jr. Director March 30, 1995
-------------------------------------
RUDOLPH M. PEINS, JR.
/s/ Robert F. Rider Director March 30, 1995
-------------------------------------
ROBERT F. RIDER
/s/ Jeremiah P. Shea Director March 30, 1995
-------------------------------------
JEREMIAH P. SHEA
/s/ William G. Warden, III Director March 30, 1995
-------------------------------------
WILLIAM G. WARDEN, III
48
<PAGE>
CHESAPEAKE UTILITIES CORPORATION AND SUBSIDIARIES
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED DECEMBER 31, 1994, 1993 AND 1992
<TABLE>
<CAPTION>
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E
-------- ---------- --------------------- ---------- ----------
ADDITIONS
---------------------
BALANCE AT CHARGED TO CHARGED TO BALANCE AT
BEGINNING COSTS AND OTHER END
DESCRIPTION OF PERIOD EXPENSE ACCOUNTS DEDUCTIONS OF PERIOD
------------------------ ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Valuation accounts
deducted from assets to
which they apply for
doubtful accounts
receivable.
The year ended December
31, 1994:.............. $186,018 $130,263 $57,633(B) $(171,762)(A) $202,152
The year ended December
31, 1993:.............. $239,019 $ 82,672 $66,246(B) $(201,919)(A) $186,018
The year ended December
31, 1992:.............. $554,188 $152,624 $37,872(B) $(505,665)(A,C) $239,019
</TABLE>
--------
Notes:
(A) Uncollectible accounts charged off.
(B) Recoveries.
(C) Recovery of propane accounts previously considered to be uncollectible
($315,500).
49
<PAGE>
CHESAPEAKE UTILITIES CORPORATION
BYLAWS
(Including revisions through February 17, 1995)
ARTICLE I
OFFICES
1.1 Registered Office. The address of the Corporation's registered office
-----------------
in the State of Delaware is 1013 Centre Road in the City of Wilmington, in the
County of New Castle, Delaware 19805. The name of the Corporation's registered
agent at such address is Corporation Service Company.
1.2 Other Offices. The Corporation may also have offices at such other
-------------
places as the Board of Directors may from time to time determine or the business
of the Corporation may require.
ARTICLE II
STOCKHOLDERS' MEETINGS
2.1 Location of Meetings. Annual and special meetings of the stockholders
--------------------
shall be held at such place within or without the State of Delaware, as the
Directors may, from time to time, fix. Whenever the Directors shall fail to fix
such place, the meeting shall be held at the principal office of the Corporation
in the State of Delaware.
2.2 Annual Meeting. The annual meeting of stockholders shall be held on
--------------
the third Tuesday in May in each year if not a legal holiday, and if a legal
holiday, then on the next business day following, at 10:00 o'clock A.M., for the
election of Directors and for the transaction of such other business as may
properly be brought before the meeting; provided, however, that if the annual
meeting of stockholders is not held on the day fixed therefor, the Directors
shall cause the meeting to be held as soon thereafter as is convenient.
2.3 Notice of Annual Meeting. Written notice of the annual meeting shall
------------------------
be served upon or mailed to each stockholder entitled to vote thereat at such
address as appears on the books of the Corporation, at least ten but not more
than sixty days prior to the meeting. Such notice shall state the location,
date and hour of the meeting, but the notice need not specify the business to be
transacted thereat.
2.4 Special Meetings. Special meetings of the stockholders for any
----------------
purpose or purposes, unless otherwise provided by law or by the Certificate of
Incorporation, may be called by the President and shall be called by the
President or Secretary at the request in
<PAGE>
writing of a majority of the Board of Directors, and not at the request of any
other person or persons. Such request must state the purpose or purposes of the
proposed meeting.
2.5 Notice of Special Meetings. Written notice of a special meeting shall
--------------------------
be served upon or mailed to each stockholder entitled to vote thereat at such
address as appears on the books of the Corporation, at least ten but not more
than sixty days prior to the meeting. Such notice shall state the location,
date and hour of the meeting and shall describe the order of business to be
addressed at the meeting. Business transacted at all special meetings shall be
confined to the objects stated in the notice.
2.6 Presiding Officer at Stockholder Meetings. The Chair of the Board
-----------------------------------------
shall preside at all meetings of the stockholders, provided that the Chair may
designate the President to preside in the Chair's stead. In the Chair's
absence, the President shall preside, and in the absence of both, the Board
shall appoint a person to preside.
2.7 Quorum; Adjournment. The holders of a majority of the stock issued
-------------------
and outstanding and entitled to vote thereat, present in person or represented
by proxy, shall be requisite and shall constitute a quorum at all meetings of
the stockholders for the transaction of business, except as otherwise provided
by law, the Certificate of Incorporation or these Bylaws. If such quorum shall
not be present or represented at any meeting of the stockholders, the presiding
officer of the meeting or the majority of the stockholders entitled to vote
thereat, present in person or represented by proxy, shall have the power to
adjourn the meeting from time to time until a quorum shall be present or
represented. Even if a quorum is present or represented at any meeting of the
stockholders, the presiding officer of the meeting, for good cause, or the
majority of the stockholders entitled to vote thereat, present in person or
represented by proxy, shall have the power to adjourn the meeting from time to
time. If the time and place of the adjourned meeting are announced at any
meeting at which an adjournment is taken, no further notice of the adjourned
meeting need be given; provided, however, that if the adjournment is for more
than thirty days, or if after the adjournment a new record date for the
adjourned meeting is fixed by the Board of Directors, notice of the adjourned
meeting shall be given to each stockholder entitled to vote at the meeting. At
the adjourned meeting the corporation may transact any business which might have
been transacted at the original meeting.
2.8 Vote Required. In all matters other than the election of Directors,
-------------
the affirmative vote of the holders of a majority of the stock present in person
or represented by proxy and entitled to vote on the matter shall decide any
question brought before a meeting unless the question is one upon which by
express provision of the Certificate of Incorporation or of these Bylaws, or by
law,
-2-
<PAGE>
a different vote is required in which case such express provision shall govern
and control the decision of such question. Directors shall be elected, by
ballot, by a plurality of the votes of the shares present in person or
represented by proxy and entitled to vote at the election of directors.
2.9 Voting; Proxies. At any meeting of the stockholders every holder of
---------------
shares entitled to vote thereat shall be entitled to vote in person, or by proxy
appointed by an instrument in writing subscribed by such stockholder and bearing
a date not more than three years prior to said meeting, unless said instrument
provides for a longer period. Each stockholder shall have one vote for each
share of stock having voting power, registered in such stockholder's name on the
books of the Corporation, and except where the transfer books of the Corporation
shall have been closed or a date shall have been fixed as a record date for the
determination of its stockholders entitled to vote, no share of stock shall be
voted on at any election of Directors which shall have been transferred on the
books of the Corporation within twenty days next preceding such election of
Directors.
2.10 Stockholder Lists. At least ten days before every meeting of the
-----------------
stockholders, a complete list of the stockholders entitled to vote at said
meeting, arranged in alphabetical order, with the residence of each and the
number of voting shares held by each, shall be prepared by the Secretary. Such
list shall be open for said ten days to examination by any stockholder for any
purpose germane to the meeting during regular business hours at the place where
the meeting is to be held, or at such other place within the city in which the
meeting is to be held as shall be specified in the notice of the meeting, and
also shall be produced and kept at the time and place of the meeting, during the
whole time thereof, and may be inspected by any stockholder who is present.
2.11 Action Without Meeting. No action required to be taken or which may
----------------------
be taken at any annual or special meeting of stockholders may be taken without a
meeting, and the power of stockholders to consent in writing to the taking of
any action is specifically denied.
ARTICLE III
DIRECTORS
3.1 Powers. The property and business of the Corporation shall be managed
------
by its Board of Directors which may exercise all such powers of the Corporation
and do all such lawful acts and things as are not by law or by the Certificate
of Incorporation or by these Bylaws directed or required to be exercised or done
by the stockholders.
-3-
<PAGE>
3.2 Composition of the Board. The number of Directors which shall
------------------------
constitute the Board shall be nine, divided into three classes, as specified in
the Certificate of Incorporation. Directors shall be elected at the annual
meeting of the stockholders, and each Director shall be elected to serve until
such Director's successor shall be elected and shall qualify; provided, however,
no person who shall have attained the age of 75 years by the date of election
shall be eligible for election as a Director of the Corporation. If not already
a stockholder at the time of assuming office, each Director shall purchase at
least one share of the Corporation's common stock within a reasonable time
thereafter. The Board of Directors at its first meeting after each annual
meeting of stockholders shall elect the Chair of the Board who shall perform
such duties as are specified in these Bylaws or are properly required of the
Chair by the Board of Directors.
3.3 Nominations. Nominations for the election of Directors may be made by
-----------
the Board or by any stockholder entitled to vote for the election of Directors.
Nominations proposed by the Board shall be given by the Chair on behalf of the
Board. Nominations by stockholders shall be in writing, and in the form
prescribed below, and shall be effective when delivered by hand or received by
registered first-class mail, postage prepaid, by the Secretary of the
Corporation not less than 14 days nor more than 80 days prior to any meeting of
the stockholders called for the election of Directors; provided, however, that
if less than 21 days notice of the meeting is given to stockholders, such
writing shall be received by the Secretary of the Corporation not later than the
close of the seventh day following the day on which notice of the meeting was
mailed to stockholders. Nominations by stockholders shall be in the form of a
notice which shall set forth (a) as to each nominee (i) the name, age, business
address and, if known, residence address of such nominee (ii) the principal
occupation or employment of such nominee (iii) the number of shares of stock
beneficially owned by the nominee (iv) the consent of the nominee to serve as a
Director of the Corporation if so elected (v) a description of all arrangements
or understandings among the stockholder and the nominee and any other person or
persons pursuant to which the nomination is to be made by the stockholder and
(vi) any other information relating to the nominee required to be disclosed in
solicitations of proxies for election of Directors, or otherwise required
pursuant to Regulation 14A under the Securities and Exchange Act of 1934, as
amended, and (b) as to the stockholder giving the notice (i) the name and
address, as they appear on the Corporation's books, of such stockholder and (ii)
the number of shares beneficially owned by such stockholder. The presiding
officer of the meeting may, if the facts warrant, determine and declare to the
meeting that a nomination was not made in accordance with the foregoing
procedure, and if the presiding officer should so determine, the presiding
officer shall so declare to the meeting and the defective nomination shall be
disregarded.
-4-
<PAGE>
3.4 Vacancy. If the office of any Director becomes vacant by reason of
-------
death, resignation, retirement, disqualification, removal from office, or
otherwise, a majority of the remaining Directors, though less than a quorum,
shall choose a successor, who shall hold office until the next election of the
class for which such Director shall have been chosen, and until such Director's
successor shall be elected and qualified.
3.5 Resignation. Any Director of the Corporation may resign from the
-----------
Board of Directors at any time by giving written notice to the President or to
the Secretary of the Corporation. The resignation shall be effective at the
time stated therein, and unless otherwise specified, the acceptance of such
resignation shall not be necessary to make it effective.
3.6 Meetings Generally. The Board of Directors may hold meetings, both
------------------
regular and special, at such times and places either within or without the State
of Delaware as shall from time to time be determined by the Board.
3.7 Regular Meetings. Regular meetings of the Board of Directors shall be
----------------
held at such times and places as shall be fixed by resolution of the Board. No
notice shall be required for regular meetings held pursuant to such resolution,
except that the Secretary of the Corporation shall promptly provide a copy of
such resolution to any Director who is absent when such resolution is adopted.
In case any scheduled meeting of the Board is not held on the day fixed
therefor, the Directors shall cause the meeting to be held as soon thereafter as
is convenient. At such regular meetings directors may transact such business as
may be brought before the meeting.
3.8 Special Meetings. Special meetings of the Board may be called by the
----------------
Chair of the Board or by the President by twenty-four (24) hours notice to each
Director, either personally, by telephone, by mail, or by telegram; special
meetings shall be called by the Chair of the Board, the President or the
Secretary in like manner and on like notice on the written request of two
Directors.
3.9 First Meeting. The first meeting of each newly elected Board shall be
-------------
held immediately after the annual meeting of stockholders and at the same place,
and no notice of such meeting to the newly elected Directors shall be necessary
in order legally to constitute the meeting, provided a quorum shall be present.
In the event such meeting is not held, the Directors shall cause the meeting to
be held as soon thereafter as is convenient.
3.10 Organization. The Chair of the Board shall preside at all meetings of
------------
the Board, provided that the Chair may designate the President to preside in the
Chair's stead. In the Chair's absence the President shall preside, and in the
absence of both,
-5-
<PAGE>
the Board shall appoint a person to preside. The Secretary of the Corporation,
or if the Secretary is not present, one of the Assistant Secretaries, in the
order determined by the Board, or if an Assistant Secretary is not present, a
person designated by the Board, shall take the minutes of the meeting.
3.11 Quorum; Adjournment. At all meetings of the Board five Directors
-------------------
shall be necessary and sufficient to constitute a quorum for the transaction of
business and the act of a majority of the Directors present at any meeting at
which there is a quorum shall be the act of the Board of Directors, except as
may be otherwise specifically provided by law or by the Certificate of
Incorporation or these Bylaws. Whether or not a quorum is present at any
meeting of the Board, a majority of the Directors present thereat may adjourn
the meeting from time to time, without notice other than announcement at the
meeting.
3.12 Participation by Telephone. Any one or more Directors may
--------------------------
participate in a meeting of the Board or any committee thereof by conference
telephone or similar communications equipment by means of which all persons
participating in the meeting can hear each other at the same time. Participation
in a meeting by such means shall be deemed attendance in person at that meeting.
3.13 Action Without Meeting. Any action required to be taken or which may
----------------------
be taken at any meeting of the Board or any committee thereof may be taken
without a meeting if all members of the Board or committee, as the case may be,
consent thereto in writing, and such writing or writings are filed with the
records of the meetings of the Board or of the committee, as the case may be.
Any action taken pursuant to such consent shall be treated for all purposes as
the act of the Board or committee.
3.14 Appointment of Committees. The Board of Directors may, by resolution
-------------------------
passed by a majority of the whole Board, designate one or more special or
standing committees, each committee to consist of two or more of the Directors
of the Corporation. The Board of Directors may designate one or more Directors
as alternate members of any committee to replace any absent or disqualified
member at any meeting of the committee.
3.15 Meetings of Committees. Regular and special meetings of any
----------------------
committee established pursuant to this Article may be called and held subject to
the same requirements with respect to time, place and notice as are specified in
these Bylaws for regular and special meetings of the Board of Directors. At all
committee meetings, a majority of the members of the committee shall be
necessary to constitute a quorum for the transaction of any business, and the
act of a majority of committee members present at a meeting at which there is a
quorum shall be the act of the committee.
-6-
<PAGE>
3.16 Powers of Committees. Committees of the Board of Directors, to the
--------------------
extent provided in the Board resolution or permitted by law, shall have and may
exercise the powers of the Board of Directors, in the management of the business
and affairs of the Corporation, and may have power to authorize the Seal of the
Corporation to be affixed to all papers which may require it. Such committee or
committees shall have such name or names as may be determined from time to time
by resolution of the Board. Except as the Board of Directors may otherwise
determine, a committee may make rules for its conduct, but unless otherwise
provided by the Board or such rules, its business shall be conducted as nearly
as possible in the same manner as is provided in these Bylaws for the conduct of
business by the Board of Directors. Each committee shall keep regular minutes
of its proceedings and report the same to the Board of Directors when required.
3.17 Compensation of Directors. Directors shall be reimbursed for
-------------------------
reasonable expenses, if any, of attendance at each meeting of the Board of
Directors and may be paid other compensation in whatever form and amount the
Board of Directors, by resolution, shall determine to be reasonable. Members of
special or standing committees may be allowed like compensation and
reimbursement for participation in committee meetings. Nothing contained in
this section shall be construed to preclude any Director from serving the
Corporation in any other capacity, as officer, agent, employee or otherwise, and
being compensated for such service.
ARTICLE IV
NOTICES
4.1 Generally. Whenever under the provisions of the Certificate of
---------
Incorporation or these Bylaws, or by law, notice is required to be given to any
Director or stockholder, it shall not be construed to require personal notice,
but such notice may be given in writing, by mail or by courier service, by
depositing the same in a post office or letter box, or with a courier service,
in a post-paid sealed wrapper, addressed to such Director or stockholder at such
address as appears on the books of the Corporation, or, in default of other
address, to such Director or stockholder at the last known address of such
person, and notice shall be deemed to be given at the time when the same shall
be thus deposited.
4.2 Waiver of Notice. Whenever any notice is required to be given under
----------------
the provisions of the Certificate of Incorporation or these Bylaws, or by law, a
waiver thereof in writing signed by the person or persons entitled to said
notice, whether before or after the time stated therein, shall be deemed
equivalent thereto. Attendance of a person at a meeting shall constitute a
waiver of notice of such meeting, except when such person attends a meeting for
the express purpose of objecting, at the beginning of the
-7-
<PAGE>
meeting, to the transaction of any business on the ground that the meeting is
not lawfully convened.
ARTICLE V
OFFICERS
5.1 Offices. The Officers of the Corporation shall be chosen by the
-------
Directors and shall be a President, a Vice President, a Secretary, and a
Treasurer. The Board of Directors may also choose additional Vice Presidents,
and one or more Assistant Secretaries and Assistant Treasurers, and may appoint
such other Officers and agents as it shall deem necessary. Two or more offices
may be held by the same person, except that where the offices of the President
and Secretary are held by the same person, such person shall not hold any other
office.
5.2 Election; Term of Office; Removal. The Board of Directors at its
---------------------------------
first meeting after each annual meeting of stockholders shall elect the
President, one or more Vice Presidents, the Secretary, the Treasurer, and such
other Officers as it shall deem necessary, who shall hold their offices for such
terms and shall exercise such powers and perform such duties as shall be
determined from time to time by the Board. The Officers of the Corporation
shall hold office until their successors are chosen and qualify in their stead,
or until such time as they may resign or be removed from office. Any Officer
elected or appointed by the Board of Directors may be removed at any time by the
affirmative vote of a majority of the whole Board of Directors. If the office
of any Officer becomes vacant for any reason, the vacancy shall be filled by the
Board of Directors. In the case of any office other than that of President,
Secretary or Treasurer, the President may appoint a person to serve in such
office, on a temporary basis, until the vacancy is filled by the Board.
5.3 Compensation. The salaries of all Officers and agents of the
------------
Corporation shall be fixed by or in the manner prescribed by the Board of
Directors.
5.4 The President and Chief Executive Officer. The President shall be the
-----------------------------------------
Chief Executive Officer and shall report directly to the Board of Directors.
The President shall perform such duties as are incident to the office of Chief
Executive Officer or are properly specified and authorized by the Board of
Directors.
5.5 Vice Presidents. The Vice Presidents, in the order fixed by the Board
---------------
of Directors, shall, in the absence or disability of the President, perform the
duties and exercise the powers of the President, and shall perform such other
duties as the Board of Directors shall prescribe.
-8-
<PAGE>
5.6 The Secretary. The Secretary shall attend all meetings of the Board
-------------
and all meetings of the stockholders and record all votes and the minutes of all
proceedings in a book to be kept for that purpose and shall perform like duties
for the standing committees when required. The Secretary shall give, or cause to
be given, notice of all meetings of the stockholders and special meetings of the
Board of Directors, and shall perform such other duties as may be prescribed by
the Board of Directors or the President, under whose supervision the Secretary
shall be. The Secretary shall keep in safe custody the Seal of the Corporation
and, when authorized by the Board, affix the same to any instrument requiring it
and, when so affixed, it shall be attested by the Secretary's signature or by
the signature of the Treasurer or an Assistant Secretary.
5.7 Assistant Secretaries. The Assistant Secretaries, in the order fixed
---------------------
by the Board of Directors, shall, in the absence or disability of the Secretary,
perform the duties and exercise the powers of the Secretary and shall perform
such other duties as the Board of Directors shall prescribe.
5.8 The Treasurer. The Treasurer shall have the custody of the corporate
-------------
funds and securities and shall keep full and accurate accounts of receipts and
disbursements in books belonging to the Corporation and shall deposit all moneys
and other valuables in the name and to the credit of the Corporation in such
depositories or other institutions as may be designated by the Board of
Directors. The Treasurer shall disburse the funds of the Corporation by check or
by electronic or wire transfer, as may be ordered by the Board, taking proper
vouchers for such disbursements, and shall render to the President and
Directors, at the regular meetings of the Board, or whenever they may require
it, an account of all transactions as Treasurer and of the financial condition
of the Corporation.
5.09 Assistant Treasurers. The Assistant Treasurers, in the order fixed
--------------------
by the Board of Directors, shall, in the absence or disability of the Treasurer,
perform the duties and exercise the powers of the Treasurer and shall perform
such other duties as the Board of Directors shall prescribe.
ARTICLE VI
STOCK CERTIFICATES, TRANSFERS AND RECORD DATE
6.1 Certificates of Stock. The certificates of stock of the Corporation
---------------------
shall be numbered and shall be entered in the books of the Corporation as they
are issued. They shall exhibit the holder's name and number of shares and shall
be signed by the President or a Vice President and the Treasurer or an Assistant
Treasurer or the Secretary or an Assistant Secretary. Any or all of the
signatures on the certificate may be a facsimile. In the event that any
officer, transfer agent, or registrar who has signed
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<PAGE>
or whose facsimile signature has been placed upon a certificate shall have
ceased to be such officer, transfer agent, or registrar before such certificate
is issued, it may be used by the Corporation with the same effect as if such
person were such officer, transfer agent, or registrar at the date of issue.
6.2 Transfers of Stock. Upon surrender to the Corporation or the Transfer
------------------
Agent of the Corporation of a certificate for shares duly endorsed or
accompanied by proper evidence of succession, assignment or authority to
transfer, it shall be the duty of the Corporation to issue a new certificate to
the person entitled thereto, cancel the old certificate and record the
transaction upon its books.
6.3 Record Date for Stockholders. For the purpose of determining the
----------------------------
stockholders entitled to notice of or to vote at any annual or special meeting
of stockholders or any adjournment thereof, or for the purpose of determining
stockholders entitled to receive payment of any dividend or other distribution
or the allotment of any rights, or entitled to exercise any rights in respect of
any change, conversion, or exchange of stock, or for the purpose of any other
lawful action, the Directors may fix, in advance, a date as the record date for
any such determination of stockholders. Such date shall not be more than sixty
days nor less than ten days before the date of such meeting, nor more than sixty
days prior to any other action. If no record date is fixed, the record date for
the determination of stockholders entitled to notice of or to vote at a meeting
of stockholders shall be at the close of business on the day next preceding the
day on which notice is given, or if notice is waived, at the close of business
on the day next preceding the day on which the meeting is held; the record date
for determining stockholders for any other purpose shall be at the close of
business on the day on which the Board of Directors adopts the resolution
relating thereto. When a determination of stockholders of record entitled to
notice of or to vote at any meeting of stockholders has been made as provided in
this paragraph, such determination shall apply to any adjournment thereof;
provided, however, that the Board of Directors may fix a new record date for the
adjourned meeting.
6.4 Registered Stockholders. The Corporation shall be entitled to treat
-----------------------
the holder of record of any share or shares of stock as the holder in fact
thereof and, accordingly, shall not be bound to recognize any equitable or other
claim to or interest in such share or shares on the part of any other person,
whether or not it shall have express or other notice thereof, except as
otherwise provided by law.
6.5 Lost Certificates. The Board of Directors may direct a new
-----------------
certificate or certificates to be issued in place of any certificate or
certificates theretofore issued by the Corporation alleged to have been lost or
destroyed, upon the making of an
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<PAGE>
affidavit of that fact by the person claiming the certificate of stock to be
lost or destroyed. When authorizing such issue of a new certificate or
certificates, the Board of Directors may, in its discretion and as a condition
precedent to the issuance thereof, require the owner of such lost or destroyed
certificate or certificates, or the owner's legal representative to advertise
the same in such manner as it shall require and/or give the Corporation a bond
in such sum as it may direct as indemnity against any claim that may be made
against the Corporation with respect to the certificate alleged to have been
lost or destroyed.
ARTICLE VII
DIVIDENDS
7.1 Power to Declare Dividends. Dividends upon the capital stock of the
--------------------------
Corporation, subject to the provisions of the Certificate of Incorporation, if
any, may be declared by the Board of Directors at any regular or special
meeting, pursuant to law. Dividends may be paid in cash, in property, or in
shares of the capital stock, subject to the provisions of the Certificate of
Incorporation.
7.2 Discretion of the Board. Before payment of any dividend, there may be
-----------------------
set aside out of any funds of the Corporation available for dividends such sum
or sums as the Directors from time to time, in their absolute discretion, think
proper as a reserve fund to meet contingencies, or for equalizing dividends, or
for repairing or maintaining any property of the Corporation, or for such other
purpose as the Directors shall think conducive to the interest of the
Corporation, and the Directors may modify or abolish any such reserve in the
manner in which it was created.
ARTICLE VIII
MISCELLANEOUS PROVISIONS
8.1 Instruments. All checks, demands for money, notes, deeds, mortgages,
-----------
bonds, contracts and other instruments of the Corporation shall be signed by
such Officer or Officers or such other person or persons as the Board of
Directors may from time to time designate.
8.2 Borrowing. No officer, agent or employee of the Corporation shall
---------
have any power or authority to borrow money on behalf of the Corporation, to
pledge the Corporation's credit, or to mortgage or pledge the Corporation's real
or personal property, except within the scope and to the extent such authority
has been delegated to such person by resolution of the Board of Directors. Such
authority may be given by the Board and may be general or limited to specific
instances.
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<PAGE>
8.3 Voting Securities of Other Corporations. Subject to any specific
---------------------------------------
direction from the Board of Directors, the President of the Corporation, or any
other person or persons who may from time to time be designated by the Board of
Directors, shall have the authority to vote on behalf of the Corporation the
securities of any other corporation which are owned or held by the Corporation
and may attend meetings of stockholders or execute and deliver proxies or
written consents for such purpose.
8.4 Fiscal Year. The fiscal year shall begin the first day of January in
-----------
each year.
8.5 Seal. The corporate seal shall have inscribed thereon the name of the
----
Corporation, the year of its organization and the words "Corporate Seal,
Delaware." Said seal may be used by causing it or a facsimile thereof to be
impressed or affixed or reproduced or otherwise.
8.6 Books and Records of the Corporation. The books and records of the
------------------------------------
Corporation shall be kept at such places as the Board may from time to time
determine.
ARTICLE IX
INDEMNIFICATION OF DIRECTORS AND OFFICERS
9.1 Right To Indemnification. Each person who was or is made a party or
------------------------
is threatened to be made a party to any action, suit or proceeding, whether
civil, criminal, administrative or investigative, by reason of the fact such
person is or was a Director or Officer of the Corporation or is or was serving
at the request of the Corporation as a Director or Officer of another
corporation or of a partnership, joint venture, trust or other enterprise, shall
be indemnified and held harmless by the Corporation to the fullest extent
permitted by the Delaware General Corporation Law against all expense, liability
and loss (including attorneys' fees, judgments, fines or penalties and amounts
paid in settlement) reasonably incurred or suffered by such person in connection
therewith, and such indemnification shall continue as to such person who has
ceased to be a Director or Officer and shall inure to the benefit of the
person's heirs, executors and administrators. For purposes of this section,
persons serving as Director or Officer of the Corporation's direct or indirect
wholly-owned subsidiaries shall be deemed to be serving at the Corporation's
request.
9.2 Right To Advancement Of Expenses. The right to indemnification
--------------------------------
conferred in Paragraph (a) of this section shall include the right to be paid by
the Corporation the expenses incurred in defending any action, suit, or
proceeding in advance of its final disposition, subject to the receipt by the
Corporation of an undertaking by or on behalf of such person to repay all
amounts
-12-
<PAGE>
so advanced if it shall ultimately be determined that such person is not
entitled to be indemnified.
9.3 Nonexclusivity of Rights. The rights to indemnification and to the
------------------------
advancement of expenses contained in this section shall not be exclusive of any
other right which any person may have or hereafter acquire under any law,
provision of the Corporation's Certificate of Incorporation, Bylaw, agreement,
vote of stockholders or disinterested Directors or otherwise.
9.4 Employee Benefit Plans. For purposes of this section, references to
----------------------
"other enterprises" shall include employee benefit plans; references to "fines"
shall include any excise taxes assessed on a person with respect to an employee
benefit plan; and references to "serving at the request of the Corporation"
shall include any service as a Director or Officer of the Corporation which
imposes duties on, or involves services by, such Director or Officer with
respect to an employee benefit plan, its participants, or beneficiaries; and a
person who acted in good faith and in a manner such person reasonably believed
to be in the interest of the participants and beneficiaries of an employee
benefit plan shall be deemed to have acted in a manner "not opposed to the best
interests of the Corporation."
ARTICLE X
AMENDMENTS
10.1 Amendment of Bylaws. These Bylaws may be altered or repealed at any
-------------------
regular meeting of the stockholders or at any special meeting of the
stockholders, provided notice of the proposed alteration or repeal be contained
in the notice of such special meeting, by the affirmative vote of the holders of
75% or more of outstanding shares of capital stock entitled to vote at such
meeting and present or represented thereat. The Board of Directors may alter or
repeal the Bylaws by the affirmative vote of a majority of the entire Board at
any regular meeting of the Board or at any special meeting of the Board if
notice of the proposed alteration or repeal be contained in the notice of such
special meeting.
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<PAGE>
TANDEM STOCK OPTION AND PERFORMANCE SHARE AGREEMENT
pursuant to the
CHESAPEAKE UTILITIES CORPORATION
PERFORMANCE INCENTIVE PLAN
AGREEMENT dated as of January 17, 1995 and entered into, in duplicate, by
and between Chesapeake Utilities Corporation, a Delaware Corporation (the
"Company"), and XXXXXXXXXXXXXXX (the "Grantee").
WITNESSETH that:
WHEREAS, the Chesapeake Utilities Corporation Performance Incentive Plan
(the "Plan") has been duly adopted by action of the Company,s Board of Directors
as of January 1, 1992; and
WHEREAS, the Committee of the Board of Directors of the Company referred to
in the Plan (the "Committee") has determined that it is in the best interests of
the Company to grant the tandem award described herein pursuant to the Plan; and
WHEREAS, the shares of the Common Stock of the Company that may be
delivered pursuant to this Agreement, when added to the other shares of the
Common Stock of the Company that may be delivered pursuant to other agreements
entered into under the Plan, do not exceed the total number of shares of the
Common Stock of the Company with respect to which awards are authorized to be
granted under the Plan;
NOW, THEREFORE, it is hereby covenanted and agreed by and between the
Company and the Grantee as follows:
Section 1. Tandem Award
------------
The Company hereby grants to the Grantee a Tandem Award for the three-year
period commencing January 1, 1995 and ending December 31, 1997 (the "Award
Period"). As more fully described herein, the Tandem Award consists of (1) an
option to purchase XXXXXX shares of the Company,s Common Stock (the "Option"),
exercisable in cumulative installments of one-third on each anniversary of the
commencement of the Award Period and (2) the right to earn XXXXXX Performance
Shares upon the Company,s achieving the respective Performance Goals set forth
in Section 3 hereof. When Performance Shares are issued, the Option shall
expire. Exercise of the Option will cancel the Grantee,s right to earn a
corresponding number of Performance Shares, as set forth in Section 3.
<PAGE>
Section 2. The Option
----------
(a) The Company hereby grants to the Grantee an Option to purchase an
aggregate of XXXXXX shares of the Common Stock, par value $.4867 per share, of
the Company (the "Shares"). Subject to all of the terms and conditions
hereinafter set forth, such Option shall be irrevocable.
(b) The price at which the Option shall be exercisable shall be $XXXXXX
per Share (the "Exercise Price").
(c) Subject to all of the other terms and conditions hereinafter set forth,
the Option shall become exercisable by the Grantee in installments as set forth
below, but in no event shall the Option be exercised later than December 31,
2004 (the "Expiration Date").
(i) On or after January 1, 1996, the Option may be exercised in
respect of one-third of the aggregate number of Shares specified in Section
2(a).
(ii) On or after January 1, 1997, the Option may be exercised in
respect of an additional one-third of the aggregate number of Shares specified
in Section 2(a).
(iii) On or after January 1, 1998, the Option may be exercised in
respect of an additional one-third of the aggregate number of Shares specified
in Section 2(a).
(d) Any unexercised portion of the Option will expire immediately upon
issuance of Performance Shares.
(e) In the event of a Change in Control, as defined in the Plan, all Option
installments that have not theretofore become exercisable shall become
exercisable in full.
(f) The Option or any portion thereof shall be exercised by delivering or
mailing to the Committee at the Company's address at the time of exercise,
(i) a notice in writing specifying the number of Shares to be
purchased, and
(ii) payment in full of the Exercise Price for the Shares so
purchased by (1) a money order, cashiers check or certified check payable to the
Company, (2) exchange of Shares of the Company's Common Stock (including
exchange of Shares received upon the exercise of a portion of a stock option to
satisfy the exercise price for additional portions of the option), valued at
Fair Market Value as defined in the Plan, or (3) such other form of payment as
shall be determined by the Committee to be acceptable, in all cases subject to
any withholding required by applicable law or regulations.
2
<PAGE>
(g) Sale, transfer, or hypothecation of the Shares shall be prohibited for
a period of three (3) years after they are issued (the "Restriction Period"),
and the Shares will bear a restrictive legend to that effect.
(h) Upon expiration of the Restriction Period, the transfer restrictions
imposed by this Agreement will expire and new certificates representing the
Shares, without the restrictive legend described in paragraph (g) of this
Section 2, shall be issued, subject to the provisions of this paragraph (h). It
is not contemplated that the Shares will be registered for resale under the
Securities Act of 1933 or the laws of any state and the Company is under no
obligation to so register the Shares. Accordingly, transfer of the Shares after
expiration of the Restriction Period will require the availability of an
exemption from such registration, and prior to issuance of new certificates, the
Company will be entitled to take such measures as it deems appropriate
(including but not limited to obtaining from the Grantee investment
representations and/or further legending the new certificates) to ensure that
Shares are not transferred in the absence of such an exemption.
(i) The Option is exercisable only by the Grantee or, in the case of the
Grantee,s death or incapacity, by the Grantee,s executors, administrators,
guardians or other legal representatives, and shall not be assignable or
transferable by the Grantee, other than by will or the laws of descent and
distribution.
(j) Upon receipt of the notice of exercise and payment of the Exercise
Price, the Company shall, subject to the provisions of this Agreement, promptly
issue to the Grantee a certificate or certificates for the Shares purchased,
without charge to the Grantee for issue or transfer tax. Until the Grantee is
recorded on the Company,s stockholder ledger as the holder of record of the
Shares, no right to vote or receive dividends or other distributions nor any
other rights as a stockholder of the Company shall exist with respect to Shares
receivable, notwithstanding the exercise of the Option. Except as provided in
Section 6 of the Agreement, no adjustment shall be made for distribution or
other rights for which the record date is prior to the date of issuance of the
certificate for the Shares.
(k) If the Grantee is separated from employment before the Option has been
exercised as to any or all of the Shares, such unexercised portion of the Option
shall be exercisable or forfeited as follows, except that under no circumstances
can any portion of the Option be exercised after the Expiration Date:
(i) Upon voluntary termination by the Grantee (other than for
retirement at age 65 or as accepted by the Committee) any unexercised portion of
the Option shall be forfeited, unless otherwise determined by the Committee.
(ii) Upon termination by the Company for failure of job performance
or other just cause as determined by the Committee, any unexercised portion of
the Option that is exercisable may be exercised during a period of 30 days
following termination, at which time the Option shall expire, unless such period
is extended by the Committee.
3
<PAGE>
(iii) Upon termination of employment by reason of death or total and
permanent disability (as determined by the Committee), the Option shall be
deemed exercisable immediately as to that proportion of the total number of
shares subject to the Option equal to the proportion of the Award Period served,
reduced by the number of shares as to which the Option has already been
exercised. The remaining portion of the exercisable portion of the Option shall
expire, unless otherwise determined by the Committee. If termination is by
reason of death, the exercisable portion of the Option shall expire (if it has
not already expired) the later of (A) six months from the date of death or (B)
March 15, 1998, unless extended by the Committee.
(iv) Upon retirement of the Grantee at age 65 or as accepted by the
Committee, the Option must be exercised no later than the fifth anniversary of
such retirement, at which time the Option shall expire, unless such period is
extended by the Committee.
(1) The Option is not, is not intended to be, and shall not be treated as,
an "incentive stock option" as defined in Section 422A of the Internal Revenue
Code of 1986.
Section 3. Performance Shares
------------------
(a) The Company hereby grants to the Grantee the right to earn a maximum of
XXXXXX shares of the Company,s Common Stock, restricted as to transfer as set
forth in paragraph (d) of this Section 3 ("Performance Shares"), according to
the following terms and conditions.
(b) As soon as practicable after the Company,s independent auditors have
certified the Company,s financial statements for the year ended December 31,
1997, the Committee shall determine for the Award Period and for purposes of
this Agreement the Company,s aggregate net income ("ANE") and return on equity
("ROE"). ANE and ROE shall be determined by the Committee based on financial
results reported to shareholders in the Company,s annual reports but shall be
subject to adjustment by the Committee for extraordinary events. The Committee
shall promptly notify the Grantee of its determination. If each of ANE and ROE
is equal to or greater than the respective Performance Goal set forth below, the
Grantee shall receive XXXXX Performance Shares, provided that if any portion of
the Option has been exercised, the number of such Performance Shares shall be
reduced by 1 share for every 1.97 shares purchased by exercise of the Option.
If ANE or ROE is less than the respective Performance Goal, no Performance
Shares will be received.
Performance Goals
-----------------
Aggregate Net Income ("ANE") XXXXXXXXXXXXXXX
Return on Equity ("ROE") XXXXX
(c) The number of Performance Shares determined under paragraph (b) will
increase by 30% for each increment of 1/2 of 1% by which ROE exceeds 12-1/2%,
but may not exceed the maximum number of Performance Shares set forth in
paragraph (a) of this Section 3.
4
<PAGE>
(d) Performance Shares shall be issued to the Grantee promptly upon the
determination described in paragraph (b), without payment of consideration by
the Grantee. The Grantee shall be the right to vote the Performance Shares and
receive the cash dividends distributable with respect to such shares on, but not
before, the date on which the Grantee is recorded on the Company's ledger as
holder of record of the Shares (the "Issue Date"). Sale, transfer, pledge, or
hypothecation of the Performance Shares shall be prohibited for a period of
three (3) years after the Issue Date (the "Restriction Period"), and the
Performance Shares will bear a restrictive legend to that effect.
(e) Upon expiration of the Restriction Period, the transfer restrictions
imposed by this Agreement will expire and new certificates representing the
Performance Shares, without the restrictive legend described in paragraph (d) of
this Section 3, shall be issued, subject to the provisions of paragraph (f) of
this Section 3.
(f) It is not contemplated that the Performance Shares will be registered
for resale under the Securities Act of 1933 or the laws of any state and the
Company is under no obligation to so register the Performance Shares.
Accordingly, transfer of Performance Shares after expiration of the Restriction
Period will require the availability of an exemption from such registration, and
prior to issuance of new certificates, the Company will be entitled to take such
measures as it deems appropriate (including but not limited to obtaining from
the Grantee investment representation and/or further legending the new
certificates) to ensure that Performance Shares are not transferred in the
absence of such an exemption.
(g) In the event of a Change of Control as defined in the Plan, the number
of Performance Shares set forth in paragraph (b) of this Section 3, pro rated
based on the proportion of the Award Period expired as of the date of such
Change of Control, shall be deemed earned upon the occurrence of the Change of
Control.
(h) If during the Award Period, the Grantee is separated from employment,
Performance Shares shall be deemed earned or forfeited as follows:
(i) Upon voluntary termination by the Grantee (other than for
retirement at age 65 or as accepted by the Committee) or termination by the
Company for failure of job performance or other just cause as determined by the
Committee, all unearned Performance Shares shall be forfeited immediately;
(ii) If the Grantee separates from employment by reason of death or
total and permanent disability (as determined by the Committee), the number of
Performance Shares earned at the end of the Award Period shall be reduced by pro
rating such Performance Shares based on the proportion of the Award Period
during which the Grantee was employed by the Company, unless the Committee
determines that the Performance Shares shall not be so reduced;
5
<PAGE>
(iii) Retirement of the Grantee at age 65 or as accepted by the
Committee shall not affect unearned Performance Shares, which shall continue to
be earned as set forth in the Table.
Section 4. Withholding
-----------
(a) The Grantee shall be solely responsible for any federal, state or local
income taxes imposed in connection with the exercise of the Option or any
portion thereof or the delivery of Shares incident thereto, or any Performance
Shares received. Prior to the transfer of Shares or Performance Shares to the
Grantee, the Grantee shall remit the Company an amount sufficient to satisfy any
federal, state, local or other withholding tax requirements.
(b) The Grantee may elect to have any withholding tax obligation satisfied
by having the Company withhold shares otherwise deliverable to the Grantee as
Performance Shares or upon exercise of an Option, provided that such election
will be subject to approval of the Committee and must be made either (i) during
one of the window periods described in Section (e) (3) of Rule 16b-3, or (ii) at
such other time as the Committee may determine that such election would be an
exempt transaction under Section 16(b) of the 1934 Act.
Section 5. Additional Conditions to Issuance of Shares
-------------------------------------------
Each exercise of the Option or any portion thereof and transfer of
Performance Shares shall be subject to the condition that if at any time the
Committee shall determine, in its sole discretion, that it is necessary or
desirable as a condition of, or in connection with, such exercise (or the
delivery of Shares thereunder) or transfer of Performance Shares (i) to satisfy
withholding tax or other withholding liabilities, (ii) to effect the listing,
registration or qualification on any securities exchange or under any state or
federal law of any Shares deliverable in connection with such exercise, or (iii)
to obtain the consent or approval of any regulatory body, then in any such event
such exercise or transfer shall not be effective unless such withholding,
listing, registration, qualification, consent or approval shall have been
effected or obtained free of any conditions not acceptable to the Company. Any
such limitation affecting the right to exercise an Option shall not extend the
time within which the Option may be exercised, unless the Committee in its sole
discretion determines otherwise; and neither the Company or any affiliate of the
Company, the directors or officers of the Company or any affiliate of the
Company, nor the Committee shall have any obligation or liability to the Grantee
or to any executor, administrator, guardian or other legal representative of the
Grantee regarding Shares with respect to which the Option shall lapse, or with
respect to which the purchase of Shares shall not be effected, because of such
limitation.
Section 6. Adjustment of Shares
--------------------
(a) If the Company shall be involved in a merger, consolidation or other
reorganization, whether or not the Company is the surviving corporation, any
unexercised portion of the Option received hereunder shall be deemed an option
to purchase the same number of shares in the surviving corporation that a holder
of the number of Shares subject to the unexercised portion of the Option would
be entitled to receive under the terms of the merger, consolidation or other
reorganization.
6
<PAGE>
Any option deemed granted under this Section 6(a) shall be deemed granted on the
date the original Option was granted for purposes of the vesting provisions of
Section 2. Any right to earn Performance Shares shall be similarly adjusted.
If the Company is not the surviving corporation, the surviving corporation (the
"Successor") shall succeed to the rights and obligations of the Company under
this Agreement.
(b) If any subdivision or combination of shares of Common Stock or any
stock dividend, capital reorganization or recapitalization occurs after the
adoption of the Plan, the Committee shall make such proportionate adjustments as
are appropriate in the purchase price of, and the number of Shares underlying,
the Option and in the number of Performance Shares to be earned in order to
prevent the dilution or enlargement of the rights of the Grantee.
Section 7. No Right to Employment
----------------------
Nothing contained in this Agreement shall be deemed by implication or
otherwise to confer upon the Grantee any right to continued employment by the
Company or any affiliate of the Company.
Section 8. Notice
------
Any notice to be given hereunder by the Grantee shall be sent by mail
addressed to Chesapeake Utilities Corporation, 861 Silver Lake Blvd., Cannon
Building, Dover, Delaware 19904, for the attention of the Committee, c/o the
Secretary, and any notice by the Company to the Grantee shall be sent by mail
addressed to the Grantee at the address of the Grantee shown on the first page
hereof. Either party may, but notice given to the other in accordance with the
provisions of this Section 8, change the address to which subsequent notices
shall be sent.
Section 9. Assumption of Risk
------------------
It is expressly understood and agreed that the Grantee assumes all risks
incident to any change hereafter in the applicable laws or regulations or
incident to any change in the market value of the Shares or Performance Shares.
Section 10. Terms of Plan
-------------
This Agreement is entered into pursuant to the Plan (a copy of which has
been delivered to the Grantee). This Agreement is subject to all of the terms
and provisions of the Plan, which are incorporated into this Agreement by
reference, and the actions taken by the Committee pursuant to the Plan. In the
event of a conflict between this Agreement and the Plan, the provisions of the
Plan shall govern. All determinations by the Committee will be in its sole
discretion and will be binding on the Company and the Grantee.
7
<PAGE>
Section 11. Governing Law; Amendment
------------------------
This Agreement shall be governed by, and shall be construed, enforced and
administered in accordance with the laws of the State of Delaware and the
requirements of any applicable federal law. This Agreement may be modified or
amended only in writing signed by the parties hereto.
Section 12. Terms of Agreement
------------------
This Agreement shall remain in full force and effect and shall be binding
against the parties hereto for so long as the Option remains outstanding and for
so long as any Shares or Performance Shares issued to the Grantee under this
Agreement continue to be held by the Grantee.
IN WITNESS WHEREOF, the Company has caused this Agreement to be executed in
its corporate name, and the Grantee has executed the same in evidence of the
Grantee,s acceptance hereof, upon the terms and conditions herein set forth, as
of the day and year first above written.
CHESAPEAKE UTILITIES CORPORATION
By: __________________________________
__________________________________
Grantee
8
<PAGE>
CHESAPEAKE UTILITIES CORPORATION AND SUBSIDIARIES
EXHIBIT 11
COMPUTATION OF PRIMARY AND FULLY DILUTED EARNINGS PER SHARE
FOR THE YEARS ENDED DECEMBER 31, 1994, 1993 AND 1992
<TABLE>
<CAPTION>
ITEM 1994 1993 1992
---- ---------- ---------- ----------
<S> <C> <C> <C>
Shares issued at beginning of year......... 3,605,152 3,522,670 3,472,826
Treasury stock at beginning of year........ (30,084) (34,892) (34,892)
Sale of treasury stock..................... 14,475 4,808
Issuance of common stock for dividend
reinvestment plan......................... 30,928 27,942 12,546
Issuance of common stock pursuant to USI
restricted stock award agreement.......... 32,418 54,540 37,298
Issuance of common stock for conversion of
debentures................................ 293
---------- ---------- ----------
Shares outstanding at end of year.......... 3,653,182 3,575,068 3,487,778
========== ========== ==========
Primary earnings per share calculation:
Weighted average number of shares
assuming primary dilution............... 3,632,413 3,556,037 3,477,244
Income from continuing operations........ $4,459,922 $3,971,671 $3,475,009
Income from discontinued operations...... 73,500
---------- ---------- ----------
Consolidated net income.................. $4,459,922 $3,971,671 $3,548,509
---------- ---------- ----------
Primary earnings per share from
continuing operations................... $ 1.23 $ 1.12 $ 1.00
Primary earnings per share from
discontinued operations................. 0.00 0.00 0.02
---------- ---------- ----------
Total primary earnings per share......... $ 1.23 $ 1.12 $ 1.02
---------- ---------- ----------
Fully diluted earnings per share
calculation:
Weighted average number of shares
assuming primary dilution............... 3,632,413 3,556,037 3,477,244
Contingent shares related to assumed
conversion of convertible debt.......... 255,777 260,258 271,887
---------- ---------- ----------
Weighted average number of shares
assuming full dilution.................. 3,888,190 3,816,295 3,749,131
---------- ---------- ----------
Adjusted income from continuing operations:
Income from continuing operations........ $4,459,922 $3,971,671 $3,475,009
Interest on convertible debt............. 358,998 365,284 381,604
Less: Applicable income taxes............ (140,009) (142,461) (148,825)
---------- ---------- ----------
Adjusted income from continuing
operations.............................. 4,678,911 4,194,494 3,707,788
Income from discontinued operations...... 73,500
---------- ---------- ----------
Adjusted net income........................ $4,678,911 $4,194,494 $3,781,288
---------- ---------- ----------
Fully diluted earnings per share from
continuing operations..................... $ 1.20 $ 1.10 $ 0.99
Fully diluted earnings per share from
discontinued operations................... 0.00 0.00 0.02
---------- ---------- ----------
Total fully diluted earnings per share..... $ 1.20* $ 1.10* $ 1.01*
========== ========== ==========
</TABLE>
--------
NOTES:
* This calculation is submitted in accordance with Regulation S-K item
601(b)(11) although not required by footnote 2 to paragraph 14 of APB Opinion
No. 15 because it results in dilution of less than 3%.
50
<PAGE>
CHESAPEAKE UTILITIES CORPORATION AND SUBSIDIARIES
EXHIBIT 12
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
--------------------------------
1994 1993 1992
---------- ---------- ----------
<S> <C> <C> <C>
Income from continuing operations............. $4,459,922 $3,971,671 $3,548,509
Add:
Income taxes................................ 2,542,368 1,968,822 2,315,686
Portion of rents representative of interest
fact....................................... 187,012 199,021 191,971
Interest on indebtedness.................... 2,637,654 2,702,013 2,751,753
Amortization of debt discount and expense... 103,859 100,797 68,662
---------- ---------- ----------
Earnings as adjusted........................ $9,930,815 $8,942,324 $8,876,581
========== ========== ==========
Fixed Charges
Portion of rents representative of interest
fact....................................... $ 187,012 $ 199,021 $ 191,971
Interest on indebtedness.................... 2,637,654 2,702,013 2,751,753
Amortization of debt discount and expense... 103,859 100,797 68,662
---------- ---------- ----------
Fixed Charges............................... $2,928,525 $3,001,831 $3,012,386
========== ========== ==========
Ratio of Earnings to Fixed Charges............ 3.39 2.98 2.95
========== ========== ==========
</TABLE>
51
<PAGE>
CHESAPEAKE UTILITIES CORPORATION AND SUBSIDIARIES
EXHIBIT 22
SUBSIDIARIES OF THE REGISTRANT
SUBSIDIARIES STATE INCORPORATED
Eastern Shore Natural Gas Company Delaware
Sharp Energy, Inc. Delaware
Chesapeake Services Company Delaware
United Systems, Inc. Georgia
SUBSIDIARY OF EASTERN SHORE NATURAL GAS STATE INCORPORATED
COMPANY Delaware
Dover Exploration Company
SUBSIDIARIES OF SHARP ENERGY, INC. STATE INCORPORATED
Sharpgas, Inc. Delaware
Sharpoil, Inc. Delaware
SUBSIDIARIES OF CHESAPEAKE SERVICE STATE INCORPORATED
COMPANY Delaware
Skipjack, Inc. North Carolina
Capital Data Systems, Inc. North Carolina
Currin and Associates, Inc. Delaware
Chesapeake Investment Company
52
<PAGE>
EXHIBIT 23
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
----------------
We consent to the incorporation be reference in the Prospectuses prepared in
accordance with the requirements of Form S-2 (File No. 33-26582) and Form S-3
(File No. 33-28391) of our report dated February 10, 1995, which contains an
explanatory paragraph related to changes in accounting methods, accompanying
the consolidated financial statements and the consolidated financial statement
schedules of Chesapeake Utilities Corporation as of December 31, 1994 and 1993
and for each of the three years in the period ended December 31, 1994, included
in this Annual Report on Form 10-K of Chesapeake Utilities Corporation.
Coopers & Lybrand, L.L.P.
Baltimore, Maryland
March 30, 1995
53
<TABLE> <S> <C>
<PAGE>
<ARTICLE> UT
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1994
<PERIOD-START> JAN-01-1994
<PERIOD-END> DEC-31-1994
<BOOK-VALUE> PER-BOOK
<TOTAL-NET-UTILITY-PLANT> 58,409,187
<OTHER-PROPERTY-AND-INVEST> 18,545,323
<TOTAL-CURRENT-ASSETS> 17,582,481
<TOTAL-DEFERRED-CHARGES> 13,733,626
<OTHER-ASSETS> 0
<TOTAL-ASSETS> 108,270,617
<COMMON> 1,785,514
<CAPITAL-SURPLUS-PAID-IN> 16,834,823
<RETAINED-EARNINGS> 19,480,374
<TOTAL-COMMON-STOCKHOLDERS-EQ> 37,062,581
0
0
<LONG-TERM-DEBT-NET> 24,328,988
<SHORT-TERM-NOTES> 8,000,000
<LONG-TERM-NOTES-PAYABLE> 0
<COMMERCIAL-PAPER-OBLIGATIONS> 0
<LONG-TERM-DEBT-CURRENT-PORT> 1,348,080
0
<CAPITAL-LEASE-OBLIGATIONS> 0
<LEASES-CURRENT> 0
<OTHER-ITEMS-CAPITAL-AND-LIAB> 36,492,838
<TOT-CAPITALIZATION-AND-LIAB> 108,270,617
<GROSS-OPERATING-REVENUE> 98,572,297
<INCOME-TAX-EXPENSE> 2,529,635
<OTHER-OPERATING-EXPENSES> 88,815,588
<TOTAL-OPERATING-EXPENSES> 91,345,223
<OPERATING-INCOME-LOSS> 7,227,074
<OTHER-INCOME-NET> 15,654
<INCOME-BEFORE-INTEREST-EXPEN> 7,242,728
<TOTAL-INTEREST-EXPENSE> 2,782,806
<NET-INCOME> 4,459,922
0
<EARNINGS-AVAILABLE-FOR-COMM> 4,459,922
<COMMON-STOCK-DIVIDENDS> 3,198,631
<TOTAL-INTEREST-ON-BONDS> 2,316,779
<CASH-FLOW-OPERATIONS> 14,381,011
<EPS-PRIMARY> 1.23
<EPS-DILUTED> 1.20
</TABLE>
