SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
_______________________________
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended: MARCH 31, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ______ to ______
Commission file number: 0-593
CHESAPEAKE UTILITIES CORPORATION
--------------------------------
(Exact name of registrant as specified in its charter)
DELAWARE 51-0064146
------------------------------- -------------------
(State of other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
909 SILVER LAKE BOULEVARD, DOVER, DELAWARE 19904
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(Address of principal executive offices) (Zip Code)
(302) 734-6798
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(Registrant's Telephone Number, Including Area Code)
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(Former name, former address and former fiscal year,
if changed since last report.)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ].
Common Stock, par value $.4867 - 4,452,704 shares issued as of March 31, 1997.
<PAGE>
PART I
FINANCIAL INFORMATION
CHESAPEAKE UTILITIES CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
March 31, December 31,
1997 1996
ASSETS (Unaudited) (As restated)
----------- -----------
<S> <C> <C>
PROPERTY, PLANT AND EQUIPMENT
Natural gas distribution $71,760,470 $70,497,872
Natural gas transmission 32,458,704 30,655,492
Propane distribution 25,585,341 25,279,217
Advanced information services 642,161 1,003,850
Other 4,853,437 4,769,431
Gas plant acquisition adjustment 795,004 795,004
--------------------------
Total property, plant and equipment 136,095,117 133,000,866
Less: Accumulated depreciation and amortization (40,235,658) (39,430,739)
--------------------------
Net property, plant and equipment 95,859,459 93,570,127
--------------------------
INVESTMENTS 2,249,147 2,263,068
--------------------------
CURRENT ASSETS
Cash and cash equivalents 2,191,887 2,213,529
Accounts receivable, less allowance for uncollectibles 11,738,178 14,488,944
Materials and supplies, at average cost 1,141,095 1,284,876
Propane inventory, at average cost 1,621,143 2,345,531
Storage gas prepayments 483,795 3,731,680
Underrecovered purchased gas costs 1,848,726 2,192,170
Income taxes receivable 0 112,942
Prepaid expenses 402,948 942,359
Deferred income taxes, net 552,730 158,010
--------------------------
Total current assets 19,980,502 27,470,041
--------------------------
DEFERRED CHARGES AND OTHER ASSETS
Environmental regulatory assets 6,616,474 6,650,088
Environmental expenditures, net 1,750,544 1,778,348
Order 636 transition cost 800,556 943,209
Other deferred charges and intangible assets 3,343,084 3,371,027
--------------------------
Total deferred charges and other assets 12,510,658 12,742,672
--------------------------
TOTAL ASSETS $130,599,766 $136,045,908
==========================
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
CHESAPEAKE UTILITIES CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
March 31, December 31,
1997 1996
CAPITALIZATION AND LIABILITIES (Unaudited) (As restated)
----------- -----------
<S> <C> <C>
CAPITALIZATION
Stockholders' equity
Common Stock, par value $.4867 per share;
(authorized 12,000,000 shares; issued 4,452,704
and 4,439,516 shares, respectively) $2,167,047 $2,160,628
Additional paid-in capital 18,961,990 18,745,718
Retained earnings 29,164,113 26,957,049
Unearned compensation - restricted stock awards (321,067) (364,529)
Net unrealized gain on marketable securities 30,944 38,598
--------------------------
Total stockholders' equity 50,003,027 47,537,464
Long-term debt, net of current portion 28,907,000 30,776,919
--------------------------
Total capitalization 78,910,027 78,314,383
--------------------------
CURRENT LIABILITIES
Current portion of long-term debt 784,868 1,285,938
Short-term borrowings 12,000,000 12,700,000
Accounts payable 7,581,080 14,426,983
Refunds payable to customers 350,788 353,734
Income taxes payable 2,414,927 0
Accrued interest 598,943 741,768
Dividends payable 1,079,781 883,621
Other accrued expenses 3,427,165 3,733,233
--------------------------
Total current liabilities 28,237,552 34,125,277
--------------------------
DEFERRED CREDITS AND OTHER LIABILITIES
Deferred income taxes, net 10,169,424 9,798,676
Deferred investment tax credits 867,609 876,432
Environmental liability 6,616,474 6,650,088
Accrued pension costs 2,006,572 1,866,660
Order 636 transition liability 800,556 943,209
Other liabilities 2,991,552 3,471,183
--------------------------
Total deferred credits and other liabilities 23,452,187 23,606,248
--------------------------
TOTAL CAPITALIZATION AND LIABILITIES $130,599,766 $136,045,908
==========================
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
CHESAPEAKE UTILITIES CORPORATION AND SUBSIDIARIES
CONSOLIDATED INCOME STATEMENTS
(UNAUDITED)
<TABLE>
<CAPTION>
For the Quarter Ended
March 31,
(Unaudited) (As restated)
--------------------------
<S> <C> <C>
OPERATING REVENUES $43,645,586 $49,033,492
--------------------------
OPERATING EXPENSES
Purchased gas costs 27,993,181 30,055,556
Operations 6,325,748 6,447,620
Maintenance 492,447 576,221
Depreciation and amortization 1,348,347 1,407,805
Other taxes 1,113,223 1,099,746
Income taxes 2,272,543 2,779,045
--------------------------
Total operating expenses 39,545,489 42,365,993
--------------------------
OPERATING INCOME 4,100,097 6,667,499
OTHER INCOME AND DEDUCTIONS 65,164 75,150
--------------------------
INCOME BEFORE INTEREST CHARGES 4,165,261 6,742,649
INTEREST CHARGES 799,148 742,492
--------------------------
NET INCOME $3,366,113 $6,000,157
==========================
Earnings per share of Common Stock (1)
Primary:
Earnings per share $0.75 $1.36
==========================
Average shares outstanding 4,475,839 4,399,372
==========================
Fully diluted:
Earnings per share $0.72 $1.30
==========================
Average shares outstanding 4,716,543 4,648,750
==========================
</TABLE>
(1) See Exhibit 11-Computation of Primary and Fully Diluted Earnings Per Share
The accompanying notes are an integral part of these financial statements.
<PAGE>
CHESAPEAKE UTILITIES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
For the Three Months Ended
March 31,
(Unaudited) (As restated)
--------------------------
<S> <C> <C>
OPERATING ACTIVITIES
Net Income $3,366,113 $6,000,157
Adjustments to reconcile net income to net operating cash
Depreciation and amortization 1,482,246 1,437,135
Deferred income taxes, net (17,972) (168,469)
Investment tax credit adjustments (8,823) (8,823)
Employee benefits 120,753 95,148
Employee compensation from lapsing stock restrictions 43,462 89,732
Other (460,205) 78,134
Changes in assets and liabilities:
Accounts receivable 2,750,766 (2,039,913)
Inventory, materials, supplies and storage gas 4,116,054 2,283,700
Prepaid expenses 539,411 613,404
Other deferred charges 25,758 157,914
Accounts payable (6,845,903) (2,172,894)
Refunds payable to customers (2,946) (60,006)
Over(Under)recovered purchased gas costs 343,444 (845,240)
Other current liabilities 2,078,975 1,396,723
--------------------------
Net cash provided by operating activities 7,531,133 6,856,702
INVESTING ACTIVITIES
Property, plant and equipment expenditures, net (3,741,589) (2,738,852)
--------------------------
Net cash used by investing activities (3,741,589) (2,738,852)
FINANCING ACTIVITIES
Common stock dividends net of amounts reinvested of
$131,800 and $141,371, respectively (831,088) (695,962)
Net repayments under line of credit agreements (700,000) (3,400,000)
Proceeds from issuance of stock to Company 401(k) plan 90,891 83,735
Repayments of long-term debt (2,370,989) (244,866)
--------------------------
Net cash used by financing activities (3,811,186) (4,257,093)
NET DECREASE IN CASH (21,642) (139,243)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 2,213,529 1,395,614
--------------------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $2,191,887 $1,256,371
==========================
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
CHESAPEAKE UTILITIES CORPORATION AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
1. QUARTERLY FINANCIAL DATA
The financial information included herein is unaudited; however, the
financial information reflects normal recurring adjustments, which are, in
the opinion of management, necessary for a fair presentation of the
Company's interim results. Due to the seasonal nature of the Company's
business, there are substantial variations in the results of operations
reported on a quarterly basis. Certain amounts in 1996 have been
reclassified to conform with the 1997 presentation.
2. ACQUISITION
On March 6, 1997, the Company acquired all of the outstanding common stock
of Tri-County Gas Company, Inc. ("Tri-County") and associated properties.
The principal business of Tri-County is the distribution of propane to both
retail and wholesale customers on the Delmarva Peninsula.
The transaction was effected through the exchange of 639,000 shares of the
Company's common stock and accounted for as a pooling of interests.
Accordingly, the financial statements for 1997 and 1996, as restated,
include the financial results of Tri-County along with the shares of stock
issued in connection with the acquisition as required by the accounting
rules.
The combined operations of the Company and Tri-County will serve
approximately 32,000 propane customers on the Delmarva Peninsula during
1997.
3. STATEMENT OF FINANCIAL ACCOUNTING STANDARDS NO. 128
In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards ("SFAS") No. 128 regarding earnings per
share, which requires us to present basic and diluted earnings per share in
our financial statements. We must adopt the requirements of this standard
in our financial statements for the year ended December 31, 1997. Adoption
of this standard is not expected to have a material impact on our financial
statements.
4. COMMITMENTS AND CONTINGENCIES
Environmental
(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"). At that time under CERCLA, both the State of
Delaware and the Company were named as potentially responsible parties
("PRP") for clean up of the site.
The EPA issued the site Record of Decision ("ROD") dated August 16, 1994.
The remedial action selected by the EPA in the ROD addresses 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. The ROD estimates the
costs of selected remediation of ground-water and soil at $2.7 million and
$3.3 million, respectively.
On November 18, 1994, EPA issued a "Special Notice Letter" (the "Letter")
to Chesapeake and three other PRPs. The Letter includes, inter alia, (1) a
demand for payment by the PRPs of EPA's past costs (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. The Company and the EPA each attempted 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 May 17, 1995, EPA issued an order to the Company under section 106 of
CERCLA (the "Order"), which requires the Company to fund or implement the
ROD. The Order was also issued to General Public Utilities Corporation,
Inc. ("GPU"), which both EPA and the Company believe is liable under
CERCLA. Other PRPs such as the State of Delaware were not ordered to
perform the ROD. EPA may seek judicial enforcement of its Order, as well
as significant financial penalties for failure to comply. Although
notifying EPA of objections to the Order, the Company agreed to comply.
GPU informed EPA that it does not intend to comply with the Order.
On March 6, 1995, the Company commenced litigation against the State of
Delaware for contribution to the remedial costs being incurred to carry out
the ROD. In December of 1995, this case was dismissed without prejudice
based on a settlement agreement between the parties (the "Settlement").
Under the Settlement, the State agreed to support the Company's proposal to
reduce the soil remedy for the site, described below, to contribute
$600,000 toward the cost of implementing the ROD, and to reimburse the EPA
for $400,000 in oversight costs. The Settlement is contingent upon a
formal settlement agreement between EPA and the State of Delaware being
reached within the next two years. Upon satisfaction of all conditions of
the Settlement, the litigation will be dismissed with prejudice.
On July 7, 1995, the Company submitted to EPA a study proposing to reduce
the level and cost of soil remediation from that identified in the ROD.
Although this proposal was supported by the State of Delaware, as required
by the Settlement, it was rejected by the EPA on January 30, 1996.
On June 25, 1996, the Company initiated litigation against GPU for
contribution to the remedial costs incurred by Chesapeake in connection
with complying with the ROD. At this time, management cannot predict the
outcome of the litigation or the amount, if any, of proceeds to be
received.
The Company is currently engaged in investigations related to additional
parties who may be PRPs. Based upon these investigations, the Company will
consider suit against other PRPs. The Company expects continued
negotiations with PRPs in an attempt to resolve these matters.
In July 1996, the Company commenced the design phase of the ROD, which
consists of on-site pre-design and investigation. A pre-design
investigation report ("the report") was filed in October 1996 with the EPA.
The report, which requires EPA approval, provided up to date status on the
site, which the EPA will use to determine if the remedial design selected
in the ROD is still the appropriate remedy.
In the report, the Company proposed a modification to the soil cleanup
remedy selected in the ROD to take into account existing land use
restriction that bans future development at the site. In April of 1997,
the EPA issued a fact sheet stating that the EPA was considering whether or
not to make this modification. The fact sheet included an overall cost
estimate of $5.7 million for the proposed modified remedy and a new overall
cost estimate of $13.2 million for the remedy selected in the ROD. On
April 30, 1997, the EPA held a public meeting to receive comments
concerning the proposed modification. A statement on behalf of the Company
supporting a reduced level of soil remediation was filed at the meeting.
Attached to the Company's statement were letters from the State of Delaware
and DNREC supporting the Company's proposal.
If the EPA elects to modify the ROD, the EPA will file an Explanation of
Significant Differences ("ESD") for public comment before taking final
action.
In the third quarter of 1994, the Company increased its accrued liability
recorded with respect to the Dover Site to $6.0 million. This amount
reflected the EPA's estimate, as stated in the ROD, for remediation of the
site according to the ROD. Current estimates for remediation of the site
range from $5.7 million to $13.2 million, depending on the remedy selected
by the EPA. At this time, it is management's opinion that no one amount
within the range can be determined to be a better estimate of the cost to
remediate the site. Accordingly, the Company has not adjusted its $6.0
million accrual. The recorded liability may be adjusted upward or
downward, depending on the outcome of the EPA's consideration of the remedy
and the Company's estimate of the cost of the remedy selected. The Company
has also recorded a regulatory asset of $6.0 million, corresponding to the
recorded liability. Management believes that in addition to the $600,000
expected to be contributed by the State of Delaware under the Settlement,
the Company will be equitably entitled to contribution from other
responsible parties for a portion of the expenses to be incurred in
connection with the remedies selected in the ROD. Management also believes
that the amounts not so contributed will be recoverable in the Company's
rates.
As of March 31, 1997, the Company has incurred approximately $4.2 million
in costs relating to environmental testing and remedial action studies. In
1990, the Company entered into settlement agreements with a number of
insurance companies resulting in proceeds to fund actual environmental
costs incurred over a five to seven-year period beginning in 1990. In
December 1995, the Delaware Public Service Commission authorized recovery
of all unrecovered environmental costs incurred by a means of a rider
(supplement) to base rates, applicable to all firm service customers. The
costs would be recovered through a five-year amortization offset by the
deferred tax benefit associated with those environmental costs. The
deferred tax benefit equals the projected cash flow savings realized by the
Company in connection with a reduced income tax liability due to the
possibility of accelerated deductions allowed on certain environmental
costs when incurred. Each year a new rider rate will be calculated to
become effective December 1. The rider rate will be based on the
amortization of expenditures through September of the filing years plus
amortization of expenses from previous years. The advantage of the rider
is that it is not necessary to file a rate case every year to recover
expenses incurred. As of March 31, 1997, the amount of environmental cost
not included in the rider, effective January 1, 1997 was $252,000. With
the rider mechanism established, it is management's opinion that these
costs and any future costs, net of the deferred income tax benefit, will be
recoverable in rates.
(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. Through negotiations with the MDE, the remedial
action work plan was revised with final approval from MDE obtained in early
1995. The remediation process for ground-water was revised from pump-and-
treat to Air Sparging and Soil-Vapor Extraction, resulting in a substantial
reduction in overall costs. During 1996, the Company completed
construction and began remediation procedures at the Salisbury site and
will be reporting the remediation and monitoring results to the MDE on an
ongoing basis.
The cost of remediation is estimated to range from $140,000 to $190,000 per
year for operating expenses. Based on these estimated costs, the Company
recorded both a liability and a deferred regulatory asset of $650,088 on
December 31, 1996, to cover the Company's projected remediation costs for
this site. The liability payout for this site is expected to be over a
five-year period. As of March 31, 1997, the Company has incurred
approximately $2.2 million for remedial actions and environmental studies
and has charged such costs to accumulated depreciation. In January 1990,
the Company entered into settlement agreements with a number of insurance
companies resulting in proceeds to fund actual environmental costs incurred
over a three to five-year period beginning in 1990. The final insurance
proceeds were requested and received in 1992. In December 1995, the
Maryland Public Service Commission approved recovery of all environmental
costs incurred through September 30, 1995 less amounts previously amortized
and insurance proceeds. The amount approved for a 10-year amortization
period was $964,251. Of the $2.2 million in costs reported above,
approximately $451,000 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.
(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") in
July 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. In March 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. In March 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. A draft of the RA and
FS were filed with the FDEP during 1995; however, the RA and FS are not
complete until accepted as final by the FDEP. On May 10, 1996, the Company
transmitted to FDEP an Air Sparging and Soil Vapor Extraction Pilot Study
Work Plan for FDEP's review and approval. The Work Plan described the
Company's proposal to undertake an Air Sparging and Soil Vapor Extraction
pilot study to evaluate the effectiveness of air sparging as a ground-water
remedy combined with soil vapor extraction at the Property. The Company is
currently awaiting FDEP's comments to the Work Plan. It is not possible to
determine whether remedial action will be required by FDEP and, if so, the
cost of such remediation.
The Company has spent approximately $666,000 on these investigations as of
March 31, 1997, 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 cleanup 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 had 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. The FPSC issued an order in
January 1997, applying a refund of $292,000, pertaining to 1994 and 1995
overearnings, toward the balance of unamortized environmental charges. Of
the $666,000 in costs reported above, all costs have received ratemaking
treatment. The FPSC has allowed the Company to continue to accrue for
future environmental costs. At March 31, 1997, the Company has $408,000
accrued. It is management's opinion that future costs, if any, will be
recoverable in rates.
(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 show 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, in January 1994, submitted a
proposed work plan, together with comments on the proposed Consent Decree.
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 was completed in 1995, at a cost of approximately $263,000. In
June 1996, the Company received the certificate of completion from DNREC.
It is management's opinion that these costs will be recoverable in rates.
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS FOR THE
QUARTER ENDED MARCH 31, 1997
The Company recognized net income of $3,366,113 for the three months ended
March 31, 1997, representing a decrease in net income of $2,634,044 as
compared to the corresponding period in 1996. The financial results for 1997
and 1996 include the operating results of Tri-County Gas Company, Inc.
("Tri-County"), which was acquired on March 6, 1997 and was accounted for as a
pooling of interests. As indicated in the table below, the decrease in
earnings before interest and taxes ("EBIT") is primarily due to the lower
earnings of the natural gas distribution and propane distribution segments
slightly offset by the higher earnings of the natural gas transmission and
advanced information services segments.
FOR THE QUARTER ENDED MARCH 31,
1997 1996 Change
---- ---- ------
Earnings Before Interest and Taxes
Natural Gas Distribution $3,421,562 $4,756,720 $(1,335,158)
Natural Gas Transmission 617,411 555,096 62,315
Propane Distribution 1,702,173 3,711,192 (2,009,019)
Advanced Information Services 411,084 309,793 101,291
Eliminations and Other 220,410 113,743 106,667
--------- --------- ---------
Total EBIT 6,372,640 9,446,544 (3,073,904)
Operating Income Taxes 2,272,543 2,779,045 (506,502)
Interest 799,148 742,492 56,656
Non-Operating Income, Net 65,164 75,150 (9,986)
--------- --------- ---------
Net Income $3,366,113 $6,000,157 $(2,634,044)
========= ========= =========
Natural Gas Distribution
The natural gas distribution segment reported EBIT of $3,421,562 for the first
quarter 1997 as compared to EBIT of $4,756,720 for the corresponding period
last year, a decrease of $1,335,158. The decrease in EBIT is due to a
reduction in gross margins, coupled with a 6% increase in operations and
maintenance expenses.
FOR THE QUARTER ENDED MARCH 31,
1997 1996 Change
---- ---- ------
Revenue $26,478,805 $27,716,421 $(1,237,616)
Cost of Gas 18,969,411 19,063,786 (94,375)
---------- ---------- ---------
Gross Margin 7,509,394 8,652,635 (1,143,241)
Operations & Maintenance 2,571,541 2,425,159 146,382
Depreciation & Amortization 787,486 742,053 45,433
Other Taxes 728,805 728,703 102
---------- ---------- ---------
EBIT $ 3,421,562 $ 4,756,720 $(1,335,158)
========== ========== =========
<PAGE>
The decrease in gross margin is primarily due to temperatures in our northern
service territories being 14% warmer than the same period last year, resulting
in an 11% reduction in volumes delivered.
The increase in operations and maintenance expenses of $146,382 is due to
increases in pensions and benefits, outside services, advertising and
maintenance of both mains and services. Depreciation and amortization
expenses increased $45,433 due to plant placed in service during the past
year.
Natural Gas Transmission
The natural gas transmission segment reported EBIT of $617,411 for the first
quarter of 1997 as compared to EBIT of $555,096 for the corresponding period
last year, an increase of $62,315. The increase in EBIT is primarily due to a
decrease in operating expenses partially offset by a decrease in gross margin.
FOR THE QUARTER ENDED MARCH 31,
1997 1996 Change
---- ---- ------
Revenue $12,060,054 $11,709,292 $350,762
Cost of Gas 10,376,853 10,004,149 372,704
---------- ---------- -------
Gross Margin 1,683,201 1,705,143 (21,942)
Operations & Maintenance 736,316 850,543 (114,227)
Depreciation & Amortization 222,688 191,332 31,356
Other Taxes 106,786 108,172 (1,386)
---------- ---------- -------
EBIT $ 617,411 $ 555,096 $ 62,315
========== ========== =======
The decrease in operations and maintenance expenses of $114,227 is due to a
decrease in compensation. Depreciation and amortization increased $31,356 due
to plant placed in service during the past year.
The Company's wholly-owned natural gas transmission subsidiary, Eastern Shore
Natural Gas Company ("Eastern Shore") applied in December of 1995 to the
Federal Energy Regulatory Commission for a blanket certificate authorizing
open access transportation service. Eastern Shore expects implementation to
occur during the second half of 1997.
Propane Distribution
The propane distribution segment reported EBIT of $1,702,173 as compared to
EBIT of $3,711,192 for the corresponding period last year. The decrease in
EBIT of $2,009,019 was primarily due to a reduction in gross margin. The 1997
and 1996 financial results of the propane distribution segment include the
operating results of Tri-County.
<PAGE>
FOR THE QUARTER ENDED MARCH 31,
1997 1996 Change
---- ---- ------
Revenue $11,178,028 $14,753,900 $(3,575,872)
Cost of Gas 6,672,656 8,057,449 (1,384,793)
---------- ---------- ---------
Gross Margin 4,505,372 6,696,451 (2,191,079)
Operations & Maintenance 2,358,170 2,395,567 (37,397)
Depreciation & Amortization 289,255 426,559 (137,304)
Other Taxes 155,774 163,133 (7,359)
---------- ---------- ---------
EBIT $ 1,702,173 $ 3,711,192 $(2,009,019)
========== ========== =========
The decrease in gross margin is due primarily to a 21% decrease in sales
volumes and a 20% decrease in the margin earned per gallon sold. The
decreases in both sales volumes and margin earned are primarily related to
temperatures which were 14% warmer than the same period last year. The
reduction in margin earned was the difference between the Company's cost of
propane in inventory, versus the cost of propane available from suppliers
during the first quarter of 1997. The difference can be attributed to the
warmer weather which reduced consumer demands and wholesale supplier prices.
Depreciation and amortization expense decreased $137,304, of which $97,000 is
related to a non-compete agreement that became fully amortized in November 1996.
Advanced Information Services
The advanced information services segment recognized EBIT of $411,084 and
$309,795 for the quarters ended March 31, 1997 and 1996, respectively. This
increase in EBIT of $101,291 resulted from lower operating expenses offset
slightly by a reduction in revenue.
FOR THE QUARTER ENDED MARCH 31,
1997 1996 Change
---- ---- ------
Revenue $1,991,717 $2,019,999 $(28,282)
Operations & Maintenance 1,453,081 1,580,948 (127,867)
Depreciation & Amortization 26,283 36,115 (9,832)
Other Taxes 101,269 93,143 8,126
--------- --------- -------
EBIT $ 411,084 $ 309,793 $101,291
========= ========= =======
The decrease in revenue primarily occurred in product development, partially
offset by an increase in consulting and resource services revenue.
<PAGE>
Operations and maintenance expenses decreased due to the consolidation of
operations and a reduction in costs associated with product development,
partially offset by an increase in billable payroll costs.
Depreciation and amortization also decreased due to the consolidation of
operations.
Operating Income Taxes
Operating income taxes decreased $506,502 due to a reduction in EBIT and the
lack of income tax expense recorded by Tri-County in 1996, offset by a one-time
expense of $318,000 recorded during the first quarter. The one-time
expense was required to establish deferred income taxes for Tri-County Gas
Company, Inc. acquired during the first quarter of 1997. Prior to the
acquisition, Tri-County Gas Company, Inc. was a Subchapter S Corporation for
income tax reporting; therefore, no deferred income taxes would have been
required to be recorded on their balance sheet. In addition, the Company's
1996 restated financial statements do not include any income tax expense on
EBIT reported for Tri-County due to their 1996 Subchapter S status.
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 4 to the Consolidated Financial
Statements). The Company believes that any future costs associated with these
sites will be recoverable in future rates.
FINANCIAL POSITION, LIQUIDITY AND CAPITAL RESOURCES
The Company's capital requirements reflect the capital intensive nature of its
business and are attributable principally to its construction program and the
retirement of its outstanding debt. The Company relies on funds provided by
operations and short-term borrowings to meet normal working capital
requirements and temporarily finance capital expenditures. During the first
three months of 1997, the Company's net cash flow provided by operating
activities, net cash used by investing activities and net cash used by
financing activities were approximately $7,531,133, $3,741,589 and $3,811,186,
respectively. Due to the seasonal nature of the Company's business, there are
substantial variations in the results of operations reported on a quarterly
basis.
The Board of Directors has authorized the Company to borrow up to $20 million
from banks and trust companies. As of March 31, 1997, the Company had four $8
million unsecured bank lines of credit. Funds provided from these lines of
credit are used for short-term cash needs to meet seasonal working capital
requirements and to fund portions of its capital expenditures. The
outstanding balances of short-term borrowings at March 31, 1997 and 1996 were
$12.0 million and $12.7 million, respectively.
During the three months ended March 31, 1997 and 1996, net property, plant and
equipment expenditures were approximately $3.7 million and $3.0 million,
respectively. For 1997, the Company has budgeted $18.9 million for capital
expenditures. The components of this amount include $8.5 million for natural
gas distribution, $4.5 million for natural gas transmission, $3.8 million for
environmental related expenditures, $1.8 million for propane distribution,
$150,000 for advanced information services with the remaining $150,000 for
computer, office equipment and general plant. The natural gas and propane
expenditures are for expansion and improvement of their existing service
territories. Natural gas transmission expenditures are for improvements to
the pipeline system and completion of the Delaware City compressor station.
Financing of the 1997 construction will be provided primarily by short-term
borrowings, cash from operations and from an issuance of long-term debt. The
construction program is subject to continuous review and modification by
management. 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.
The Company expects to incur environmental related expenditures in the future
(see Note 4 to the Consolidated Financial Statements), a portion of which may
need to be financed through external sources. Management does not expect such
financing to have a material adverse effect on the financial position or
capital resources of the Company.
As of March 31, 1997, common equity represented 63.4% of permanent
capitalization, compared to 60.7% as of December 31, 1996. The Company
remains committed to maintaining a sound capital structure and strong credit
ratings in order to provide the financial flexibility needed to access the
capital markets when required. This commitment, along with adequate and
timely rate relief for the Company's regulated operations, helps to ensure
that the Company will be able to attract capital from outside sources at a
reasonable cost. The achievement of these objectives will provide benefits to
customers and creditors, as well as the Company's investors.
<PAGE>
PART II
OTHER INFORMATION
CHESAPEAKE UTILITIES CORPORATION AND SUBSIDIARIES
Item 1: Legal Proceedings
See Note 2 to the Consolidated Financial Statements
Item 2(a): Changes in Securities
None
Item 2(b): None
Item 2(c): Previously reported in Part II, Item 5 of the Company's Annual
Report on Form 10-K for the year ended December 31, 1996.
Item 3: Defaults Upon Senior Securities
None
Item 4: Submission of Matters to a Vote of Security Holders
None
Item 5: Other Information
None
Item 6(a): Exhibits
Exhibit 11 - Computation of Primary and Fully Diluted Earnings Per
Share is submitted herewith.
Item 6(b): Reports on Form 8-K
On January 13, 1997, the Company filed a report on Form 8-K,
reporting under Item 5 that the Company had agreed to purchase
Tri-County Gas Company, Inc.
On March 21, 1997, the Company filed a report on Form 8-K,
reporting under Item 2 that the Company acquired Tri-County Gas
Company, Inc. on March 6, 1997.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
CHESAPEAKE UTILITIES CORPORATION
/s/ Michael P. McMasters
- -------------------------------
Michael P. McMasters
Vice President and Chief Financial Officer
Date: May 13, 1997
CHESAPEAKE UTILITIES CORPORATION AND SUBSIDIARIES
EXHIBIT 11
COMPUTATION OF PRIMARY AND FULLY DILUTED EARNINGS PER SHARE
<TABLE>
<CAPTION>
For the Quarter Ended
March 31,
------------------------
1997 1996
---- ----
<S> <C> <C>
Primary earnings per share calculation:
Weighted average number of shares 4,475,839 4,399,372
========================
Consolidated net income $3,366,113 $6,000,157
========================
Primary earnings per share $0.75 $1.36
========================
Fully diluted earings per share calculation:
Weighted average number of shares 4,475,839 4,399,372
Contingent shares related to assumed
conversion of convertible debt 240,704 245,359
------------------------
Weighted average number of shares assuming
full dilution 4,716,543 4,644,731
========================
Adjusted income
Consolidated net income $3,366,113 $6,000,157
Interest on convertible debt 83,302 85,621
Less: Applicable income taxes (32,488) (33,392)
------------------------
Adjusted net income $3,481,903 $6,119,170
========================
Fully diluted earnings per share $0.74 $1.32
========================
</TABLE>
<TABLE> <S> <C>
<ARTICLE> UT
<LEGEND>
This schedule contains summary financial information extracted from
the Balance Sheet, Income Statement and Statement of Cash Flows of
Chesapeake Utilities Corporation and is qualified in its entirety by
reference to such financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> MAR-31-1997
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