SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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, 1997
Commission File Number 001-11590
CHESAPEAKE UTILITIES CORPORATION
(Exact name of registrant as specified in its charter)
State of Delaware 51-0064146
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
909 Silver Lake Boulevard, Dover, Delaware 19904
(Address of principal executive offices) (Zip Code)
Registrants telephone number, including area code: 302-734-6799
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
-----------------------------------------
Common Stock - par value per share $.4867
Name of each exchange on which registered
-----------------------------------------
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 registrants 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 20, 1998, 4,543,695 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 20,
1997, as reported by the New York Stock Exchange, was approximately $67
million.
DOCUMENTS INCORPORATED BY REFERENCE
DOCUMENTS PART OF FORM 10-K
Definitive Proxy Statement Part III
dated March 30, 1998
<PAGE>
CHESAPEAKE UTILITIES CORPORATION
FORM 10-K
Year Ended December 31, 1997
TABLE OF CONTENTS
PART I
Page
----
Item 1. Business ...................................................... 1
Item 2. Properties ................................................... 11
Item 3. Legal Proceedings ............................................ 12
Item 4. Submission of Matters to a Vote of Security Holders .......... 15
Item 10.Executive Officers of the Registrant ......................... 15
PART II
Item 5. Market for Registrants Common Stock and Related
Security Holder Matters ...................................... 16
Item 6. Selected Financial Data ...................................... 17
Item 7. Managements Discussion and Analysis of Financial
Condition and Results of Operations .......................... 18
Item 8. Financial Statements and Supplementary Data .................. 25
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 ........................................................... 49
<PAGE>
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 advanced information services.
Chesapeakes three natural gas distribution divisions serve approximately
35,800 residential, commercial and industrial customers in southern Delaware,
Marylands Eastern Shore and Central Florida. The Companys natural gas
transmission subsidiary, Eastern Shore Natural Gas Company ("Eastern Shore"),
operates a 271-mile interstate pipeline system that transports gas from
various points in Pennsylvania to the Companys Delaware and Maryland
distribution divisions, as well as to other utilities and industrial
customers in Delaware and on the Eastern Shore of Maryland. The Companys
propane segment serves approximately 34,000 customers in southern Delaware
and on the Eastern Shore of Maryland and Virginia. The advanced information
services segment provides software services and products to a wide variety of
customers and clients.
(b) Financial Information about Industry Segments
Financial information by business segment is included in Item 7 under the
heading Notes to Consolidated Financial Statements.
(c) Narrative Description of Business
The Company is engaged in four primary business activities: natural gas
transmission, natural gas distribution, propane distribution and advanced
information services. In addition to the four primary groups, Chesapeake has
three subsidiaries engaged in other service related businesses.
(i) (a) Natural Gas Transmission
Eastern Shore, the Companys wholly owned transmission subsidiary,
operates an interstate natural gas transportation and provides contract
storage services for affiliated and non-affiliated companies through an
integrated gas pipeline extending from southeastern Pennsylvania to
Delaware and the Eastern Shore of Maryland. During 1997, Eastern Shore
implemented open access transportation services. Eastern Shore now
provides transportation services, contract storage services as well as
purchasing and selling small amounts of gas for system balancing purposes
("swing gas"). Eastern Shores rates are subject to regulation by the
Federal Energy Regulatory Commission ("FERC").
Adequacy of Resources
With the implementation of open access effective November 1, 1997, Eastern
Shore released, through the permanent release mechanism of its upstream
service providers tariffs, various levels of firm transportation capacity
and contract storage service to customers. Eastern Shore retained
contracts with Transcontinental Gas Pipe Line Corporation ("Transco") for
4,916 thousand cubic feet ("Mcf") firm transportation capacity, expiring
in 2005, and three firm storage services providing peak day entitlements
of 7,046 Mcf.
Eastern Shore also retained contracts with Columbia Gas Transportation
("Columbia") for services, including: firm transportation capacity of 869
Mcf per day, which expires in 2018; storage service providing a peak day
entitlement of 1,111 Mcf and total capacity of 53,738 Mcf, expiring in
2004; and firm storage service providing peak day entitlements of 563 Mcf
and a total capacity of 50,686 Mcf, which expires in 2018. Eastern Shore
retained the firm transportation capacity to provide swing transportation
service to a limited number of customers that requested this service.
Prior to open access, Eastern Shore had firm contracts with three
interstate pipelines for transportation and storage services coupled with
firm contracts for natural gas supply with five suppliers providing a
maximum firm daily capacity of 20,469 Mcf.
Competition
Under this open access environment, interstate pipeline companies have
unbundled the traditional components of their service -- gas gathering,
transportation and storage -- from the sale of the commodity. Pipelines
that choose to be merchants of gas must form separate marketing operations
independent of their pipeline operations. Hence, gas marketers 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. Additional discussion on
competition is included in Item 7 under the heading "Managements
Discussion and Analysis of Financial Condition and Results of Operations".
Rates and Regulation
General. Eastern Shore is subject to regulation by the FERC as an
interstate pipeline. The FERC regulates the provision of service, terms
and conditions of service, and the rates and fees Eastern Shore can charge
to its transportation customers. In addition, the FERC regulates the rates
Eastern Shore is charged for transportation and transmission line capacity
and services provided by Transco and Columbia.
Regulatory Proceedings
Delaware City Compressor Station Filing. In December 1995, Eastern Shore
filed an application before the FERC pursuant to Sections 7(b) and (c) of
the Natural Gas Act for a certificate of public convenience and necessity
authorizing Eastern Shore to: (1) construct and operate a 2,170 horsepower
compressor station in Delaware City, New Castle County, Delaware on a
portion of its existing pipeline system known as the "Hockessin Line",
such new station to be known as the "Delaware City Compressor Station";
(2) construct and operate slightly less than one mile of 16-inch pipeline
in Delaware City, New Castle County, Delaware to tie the suction side of
the proposed Delaware City Compressor Station into the Hockessin Line; and
(3) increase the maximum allowable operating pressure from 500 psig to 590
psig on 28.7 miles of Eastern Shores pipeline from Eastern Shores
existing Bridgeville Compressor Station in Bridgeville, Sussex County,
Delaware to its terminus in Salisbury, Wicomico County, Maryland.
In September 1996 the FERC issued its Final Order, which: (1) authorized
Eastern Shore to construct and operate the facilities requested in its
application; (2) authorized Eastern Shore to roll-in the cost of the
facilities into its existing rates if the revenues from the increase in
services exceed the cost associated with the expansion portion of the
project; (3) denied Eastern Shore the authority to increase the level of
sales and storage service it provides its customers until it completes its
restructuring in its open access proceeding; and (4) authorized Eastern
Shore to abandon the 100 Mcf per day of firm sale service, to one of its
direct sale customers. The compressor facility and associated piping were
needed to stabilize capacity on Eastern Shores system as a result of
steadily declining inlet pressures at the Hockessin interconnect with
Transcontinental Gas Pipe Line Corporation. Construction of the facilities
started during the second half of 1996 and was completed during the first
quarter of 1997.
Rate Case Filing. In October 1996 Eastern Shore filed for a general rate
increase with the FERC. The filing proposed an increase in Eastern Shores
jurisdictional rates that would generate additional annual operating
revenue of approximately $1.4 million. Eastern Shore also stated in the
filing that it intended to use the cost-of-service submitted in the
general rate increase filing to develop rates in the pending Open Access
Docket. In September 1997, the FERC approved a rate increase of $1.2
million.
Open Access Filing. In December 1995, Eastern Shore filed its abbreviated
application for a blanket certificate of public convenience and necessity
authorizing the transportation of natural gas on behalf of others. Eastern
Shore proposed to unbundle the sales and storage services it had provided.
Customers who had previously received firm sales and storage services on
Eastern Shore (the "Converting Customers") would receive entitlements to
firm transportation service on Eastern Shores pipeline in a quantity
equivalent to their existing service rights. Eastern Shore proposed to
retain some of its pipeline entitlements and storage capacity for
operational issues and to facilitate "no-notice" (no prior notification
required to receive service) transportation service on its pipeline
system. Eastern Shore would release or assign to the remaining Converting
Customers the firm transportation capacity, including contract storage, it
held on its upstream pipelines so that the Converting Customers would be
able to become direct customers of such upstream pipelines. Converting
Customers who previously received bundled sales service having no-notice
characteristics would have the right to elect no-notice firm
transportation service.
In connection with the rate increase settlement, the issues pertaining to
Eastern Shore operating as an open access pipeline were also settled in
September 1997, with open access implementation occurring on November 1, 1997.
(i) (b) Natural Gas Distribution
Chesapeake distributes natural gas to approximately 35,800 residential,
commercial and industrial customers in southern Delaware, the Salisbury
and Cambridge, Maryland areas on Marylands Eastern Shore, and Central
Florida. These activities are conducted through three utility divisions,
one division in Delaware, another in Maryland and a third division in
Florida. In 1993, the Company started natural gas supply management
services in the state of Florida under the name of Peninsula Energy
Services Company ("PESCO").
Delaware and Maryland. The Delaware and Maryland divisions serve
approximately 29,950 customers, of which approximately 26,860 are
residential and commercial customers purchasing gas primarily for heating
purposes. Annually, residential and commercial customers account for
approximately 69% of the volume delivered by the divisions, and 79% of the
divisions revenue. The divisions industrial customers purchase gas,
primarily on an interruptible basis, for a variety of manufacturing,
agricultural and other uses. Most of Chesapeakes customer growth in these
divisions comes from new residential construction using gas heating
equipment.
Florida. The Florida division distributes natural gas to approximately
8,748 residential and commercial and 84 industrial customers in Polk,
Osceola and Hillsborough Counties. Currently 42 of the divisions
industrial customers, which purchase and transport gas on a firm and
interruptible basis, account for approximately 90% of the volume delivered
by the Florida division and 60% of the divisions annual natural gas and
transportation revenues. These customers are primarily engaged in the
citrus and phosphate industries and electric cogeneration. The Companys
Florida division also provides natural gas supply management services to
compete in the open access environment. Currently, twenty-one customers
receive such services, which generated gross margin of $70,000 in 1997.
Adequacy of Resources
General. Chesapeakes Delaware and Maryland utility divisions ("Delaware",
"Maryland" or "the Divisions") have firm and interruptible contracts with
four (4) interstate "open access" pipelines. The Divisions are directly
interconnected with Eastern Shore and services upstream of Eastern Shore
are contracted with Transco, Columbia, and Columbia Gulf Transmission
Company ("Gulf").
Delaware. Delawares contracts with Transco include: (a) firm
transportation capacity of 8,663 dekatherms ("Dt") per day, which expires
in 2005; (b) firm transportation capacity of 311 Dt per day for December
through February, expiring in 2006; and (c) firm storage service,
providing a total capacity of 142,830 Dt, which expires in 1998.
Delawares contracts with Columbia include: (a) firm transportation
capacity of 852 Dt per day, which expires in 2004; (b) firm transportation
capacity of 1,132 Dt per day, which expires in 2017; (c) firm storage
service, providing a peak day entitlement of 6,193 Dt and a total capacity
of 298,195 Dt, which expires in 2004; and (d) firm storage service
providing a peak day entitlement of 635 Dt and a total capacity of 57,139
Dt, expring in 2017. Delawares contracts with Columbia for storage
related transportation provide quantities that are equivalent to the peak
day entitlement for the period of October through March and are equivalent
to fifty percent (50%) of the peak day entitlement for the period of April
through September. The terms of the storage related transportation
contracts mirror the storage services that they support.
Delawares contract with Gulf, which expires in 2004, provides firm
transportation capacity of 868 Dt per day for the period November through
March and 798 Dt per day for the period April through October.
Delawares contracts with Eastern Shore include: (a) firm transportation
capacity of 23,494 Dt per day for the period December through February,
22,272 Dt per day for the months of November, March and April, and 13,196
Dt per day for the period May through October, with various expiration
dates ranging from 2004 to 2017; (b) firm storage capacity under Eastern
Shores Rate Schedule GSS providing a peak day entitlement of 2,655 Dt and
a total capacity of 131,370 Dt, which expires in 2013; (c) firm storage
capacity under Eastern Shores Rate Schedule LSS providing a peak day
entitlement of 580 Dt and a total capacity of 29,000 Dt, which expires in
2013; and (d) firm storage capacity under Eastern Shores Rate Schedule
LGA providing a peak day entitlement of 911 Dt and a total capacity of
5,708 Dt, which expires in 2006. Delawares firm transportation contracts
with Eastern Shore also include Eastern Shores provision of swing
transportation service. This service includes: (a) firm transportation
capacity of 1,846 Dt per day on Transcos pipeline system, retained by
Eastern Shore, in addition to Delawares Transco capacity referenced
earlier and (b) an interruptible storage service under Transcos Rate
Schedule ESS that supports a swing supply service provided under Transcos
Rate Schedule FS.
Delaware currently has contracts for the purchase of firm natural gas
suppy with five (5) suppliers. These contracts provide the availability of
a maximum firm daily entitlement of 10,958 Dt and the supplies are
transported by Transco, Columbia, Gulf and Eastern Shore under Delawares
transportation contracts. The gas purchase contracts have various
expiration dates.
Maryland. Marylands contracts with Transco include: (a) firm
transportation capacity of 4,738 Dt per day, which expires in 2005; (b)
firm transportation capacity of 155 Dt per day for December through
February, expiring in 2006; and (c) firm storage service providing a total
capacity of 33,120 Dt, which expires in 1998.
Marylands contracts with Columbia include: (a) firm transportation
capacity of 442 Dt per day, which expires in 2004; (b) firm transportation
capacity of 908 Dt per day, which expires in 2017; (c) firm storage
service providing a peak day entitlement of 3,142 Dt and a total capacity
of 154,756 Dt, which expires in 2004; and (d) firm storage service
providing a peak day entitlement of 521 Dt and a total capacity of 46,881
Dt, which expires in 2017. Marylands contracts with Columbia for storage
related transportation provide quantities that are equivalent to the peak
day entitlement for the period October through March and are equivalent to
fifty percent (50%) of the peak day entitlement for the period April
through September. The terms of the storage related transportation
contracts mirror the storage services that they support.
Marylands contract with Gulf, which expires in 2004, provides firm
transportation capacity of 590 Dt per day for the period November through
March and 543 Dt per day for the period April through October.
Marylands contracts with Eastern Shore include: (a) firm transportation
capacity of 13,028 Dt per day for the period December through February,
12,304 Dt per day for the months of November. March and April, and 7,743
Dt per day for the period May through October; (b) firm storage capacity
under Eastern Shores Rate Schedule GSS providing a peak day entitlement
of 1,428 Dt and a total capacity of 70,665 Dt, which expires in 2013; (c)
firm storage capacity under Eastern Shores Rate Schedule LSS providing a
peak day entitlement of 309 Dt and a total capacity of 15,500 Dt, which
expires in 2013; and (d) firm storage capacity under Eastern Shores Rate
Schedule LGA providing a peak day entitlement of 569 Dt and a total
capacity of 3,560 Dt, which expires in 2006. Marylands firm
transportation contracts with Eastern Shore also include Eastern Shores
provision of swing transportation service. This service includes: (a) firm
transportation capacity of 969 Dt per day on Transcos pipeline system,
retained by Eastern Shore, in addition to Marylands Transco capacity
referenced earlier and (b) an interruptible storage service under
Transcos Rate Schedule ESS that supports a swing supply service provided
under Transcos Rate Schedule FS.
Maryland currently has contracts for the purchase of firm natural gas
supply with five (5) suppliers. These contracts provide the availability
of a maximum firm daily entitlement of 6,243 Dt and the supplies are
transported by Transco, Columbia, Gulf and Eastern Shore under Marylands
transportation contracts. The gas purchase contracts have various
expiration dates. The Divisions use their firm supply sources to meet a
significant percentage of their projected demand requirements. In order to
meet the difference between firm supply and firm demand, Delaware and
Maryland obtain gas supply on the "spot market" from various other
suppliers that is transported by the upstream pipelines and delivered to
the Divisions interconnects with Eastern Shore as needed. The Company
believes that Delaware and Marylands available firm and "spot market"
supply is ample to meet the anticipated needs of their customers.
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 Dt in May through September, 27,105 Dt in October, and 26,919 Dt in
November through April under FGTs firm transportation service (FTS-1)
rate schedule; (b) daily firm transportation capacity of 5,100 Dt in May
through October, and 8,100 Dt in November through April under FGTs firm
transportation service (FTS-2) rate schedule; and (c) daily interruptible
transportation capacity of 20,000 Dt under FGTs 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
interruptible transportation contract is effective until August 1, 2010
and month to month thereafter unless canceled by either party with thirty
days notice.
The Florida division currently receives its gas supply from various
suppliers. If needed, some supply is bought on the spot market; however,
the majority is bought under the terms of two firm supply contacts with
Natural Gas Clearinghouse and LG&E Energy Marketing. Availability of gas
supply to the Florida division is also expected to be adequate under
existing arrangements.
Competition
Competition with Alternative Fuels. Historically, the Companys natural
gas distribution divisions 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
Companys divisions have the capability of adjusting their interruptible
rates to compete with alternative fuels.
The divisions have several large volume industrial customers that have the
capacity to use fuel oil as an alternative to natural gas. When oil prices
decline, these 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 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 an equal footing. Under
this open access environment, interstate pipeline companies have unbundled
the traditional components of their service - gas gathering,
transportation and storage from the sale of the commodity. If they choose
to be a merchant of gas, they must form a separate marketing operation
independent of their pipeline operations. Hence, gas marketers 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.
Also resulting from an open access environment, the distribution division
can be in competition with the interstate transmission company if the
distribution customer is located close to the transmission companys
pipeline. The customers at risk are usually large volume commercial and
industrial customers with the financial resources and capability to bypass
the distribution division. In certain situations the distribution
divisions may adjust rates and serves for these customers to retain their
business.
Rates and Regulation
General. Chesapeakes natural gas distribution divisions are subject to
regulation by the Delaware, Maryland and Florida Public Service
Commissions with respect to various aspects of the Companys business,
including the rates for sales to all of their customers in each
jurisdiction. All of Chesapeakes 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.
Regulatory Proceedings
Maryland. In July 1995, Chesapeakes Maryland division filed an
application with the Maryland Public Service Commission ("MPSC")
requesting a rate increase of $1,426,711 or 17.09%. The two largest
components of the increase were attributable to environmental costs and a
new customer information system, implemented in 1995.
On November 30, 1995, the MPSC issued an order approving a settlement
proposal of a $975,000 increase in annual base rates effective for gas
provided on or after December 1, 1995. As required in the settlement of
the rate case, the Company filed a cost of service study with the MPSC in
June 1996. The purpose of a cost of service study was to allocate revenue
among customer or rate classifications. The filing, which included
proposals for restructuring sales services that more closely reflect the
cost of serving commercial and industrial customers, the unbundling of gas
costs from distribution system costs, revisions to sharing of
interruptible margins between firm ratepayers and the Company and new
services that would allow customers using more than 30,000 Ccf of gas per
year to purchase gas from suppliers other than the Company.
After negotiations with MPSC staff and other interested parties, a
settlement was reached on most sales service issues and the Commission
approved a proposed order in March 1997. The settlement includes: (1)
class revenue requirements and restructured sales services which provide
for separate firm commercial and industrial rate schedules for general
service, medium volume, large volume and high load factor customer groups;
(2) unbundling of gas costs from distribution charges; (3) a new gas cost
recovery mechanism, which utilizes a projected period under which the
fixed cost portion of the gas rate will be forecasted on an annual basis
and the commodity cost portion of the gas rate will be estimated
quarterly, based on projected market prices; and (4) interruptible margins
will continue to be shared, 90% to customers and 10% to the Company, but
distribution costs incurred for incremental load additions can be
recovered with carrying charges utilizing 100% of the incremental margin
if the payback period is within three years.
At the request of MPSC staff, consideration of the new transportation
services were postponed until Eastern Shores open access filing was
settled with the FERC.
Delaware. In April 1995, Chesapeakes Delaware division filed an
application with the Delaware Public Service Commission ("DPSC")
requesting a rate increase of $2,751,000 or 14% over current rates. The
largest component, one-third of the total requested increase, was
attributable to projected costs associated with the remediation proposed
by the Environmental Protection Agency ("EPA") of the site of a former
coal gas manufacturing plant operated in Dover, Delaware. The Company and
the DPSC agreed to separate the environmental recovery from the rate
increase so each could be addressed individually. In December 1995, the
DPSC approved an order authorizing a $900,000 increase to base rates
effective January 1,1996.
In December 1995, the DPSC approved a recovery of environmental costs
associated with the Dover Gas Light Site by means of a rider (supplement)
to base rates. The DPSC approved a rider effective January 1, 1996 to
recover over five years all unrecovered environmental costs through
September 30, 1995 offset by the deferred tax benefit of these costs. The
deferred tax benefit equals the projected cashflow savings realized by the
Company in connection with a reduced income tax liability due to the
possibility of accelerated deduction allowed on certain environmental
costs when incurred. Each year, the rider rate will be calculated based on
the amortization of expenses for previous years. The advantage of the
environmental rider is that it is not necessary to file a rate case every
year to recover expenses.
In December 1995, Chesapeakes Delaware division filed its rate design
proposal with the DPSC to initiate Phase II of this proceeding. The
principal objective of the filing was to prepare the Company for an
increasingly competitive environment anticipated when Eastern Shore
becomes an open access pipeline. This initial filing proposed new rate
schedules for commercial and industrial sales service, individual pricing
for interruptible negotiated contract rates, a modified purchased gas cost
recovery mechanism and a natural gas vehicle tariff.
In May 1996, Delaware division filed its proposal relating to
transportation and balancing services with the DPSC, which proposed that
transportation of customer-owned gas be available to all commercial and
industrial customers with annual consumption over 3,000 Mcf per year.
In February 1997, the DPSC approved an order authorizing new service
offerings and rate design for services rendered on and after March 1,
1997. The approved changes include: (1) restructured sales services which
provide commercial and industrial customers with various service
classifications such as general service, medium volume, large volume and
high load factor services; (2) a modified purchased gas cost recovery
mechanism which takes into consideration the unbundling of gas costs from
distribution charges as well as charging certain firm service
classifications different gas cost rates based on the service
classifications load factor; (3) the implementation of a mechanism for
sharing interruptible, capacity release and off-system sales margins
between firm sales customers and the Company, with changing margin sharing
percentages based on the level of total margin; and (4) a provision for
transportation and balancing services for commercial and industrial
customers with annual consumption over 30,000 Ccf per year to transport
customer-owned gas on the Companys distribution system.
Florida. On November 26, 1997, the Florida Division filed a request with
the Florida Public Service Commission (FPSC) in Docket No. 971559-GU, for
a Limited Proceeding to Restructure Rates and for Approval of Gas
Transportation Agreements. The Florida Division has entered into Gas
Transportation Contracts with its two largest customers which resulted in
retaining these two customers on the Companys distribution system at
rates lower than previously achieved. As a result of this reduction in
revenue, the Company has proposed in its application to restructure rates
for its remaining customers to more closely reflect the cost of service
for each rate class and to recover the level of revenues previously
generated by the two Contract customers.
The Companys restructuring proposal is revenue neutral. Approval of this
request would not result in additional revenues to the Company; however,
FPSC approval would enable the Company to retain its two largest customers
while providing the Company with the opportunity to achieve its FPSC
authorized rate of return.
FPSC Staff issued their recommendation in this docket on March 12, 1998.
The Commission voted to approve the Companys restructuring proposal on
March 24, 1998. A Commission Order in this docket is expected April 14, 1998.
(i) (c) Propane Distribution
Chesapeakes propane distribution group consists of Sharp Energy, Inc.
("Sharp Energy"), a wholly owned subsidiary of Chesapeake, its wholly
owned subsidiary, Sharpgas, Inc. ("Sharpgas") and Tri-County Gas Company,
Inc. ("Tri-County") a wholly owned subsidiary of Chesapeake.
On March 6, 1997, Chesapeake acquired all of the outstanding shares of
Tri-County a family-owned and operated propane distribution business
located in Salisbury and Pocomoke, Maryland. The combined operations of
the Company and Tri-County served approximately 34,000 propane customers
on the Delmarva Peninsula and delivered approximately 27 million retail
and wholesale gallons of propane during 1997.
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 significantly affected by
seasonal variations, particularly the relative severity of winter temperatures,
because of its use in residential and commercial heating.
Adequacy of Resources
Sharp Energy and Tri-County purchase propane primarily from 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 a take-or-pay premiums) and maximum
purchase provisions.
Sharp Energy and Tri-County use trucks and railroad cars to transport
propane from refineries, natural gas processing plants or pipeline
terminals to the Companys bulk storage facilities. From these facilities,
propane is delivered in portable cylinders or by "bobtail" trucks, owned
and operated by the Companies, to tanks located at the customers
premises.
Competition
Sharp Energy and Tri-County compete with several other propane
distributors in their 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 both fuel oil and electricity as an energy source.
Propane competes with fuel oil based on its cleanliness and environmental
advantages. Propane is also typically less expensive than both fuel oil
and electricity, based on equivalent BTU value. Since natural gas has
historically been less expensive than propane, propane is generally not
distributed in geographic areas serviced by natural gas pipeline or
distribution systems.
The Companys 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 Companys propane operations are subject to all operating hazards
normally associated with 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.
(i) (d) Advanced Information Services
Chesapeakes advanced information services segment is comprised of United
Systems, Inc. ("USI") and Capital Data Systems, Inc. ("CDS"), both wholly
owned subsidiaries of the Company. CDS provided programming support for
application software, until the first quarter of 1997, at which time it
disposed of substantially all of its assets.
USI is an Atlanta-based company that primarily provides support for users
of PROGRESS(TM), a fourth generation computer language and Relational Database
Management System. USI offers consulting, training, software development
"tools" and customer software development for its client base, which
includes many large domestic and international corporations.
Competition
The advanced information services 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 advanced
information services businesses are occurring rapidly, which could
adversely impact the markets for the Companys products and services.
(i) (e) Other Subsidiaries
Skipjack, Inc. ("Skipjack") and Chesapeake Investment Company ("Chesapeake
Investment"), are wholly owned subsidiaries of Chesapeake Service Company.
Skipjack owns and leases to affiliates, two office buildings in Dover,
Delaware. Chesapeake Investment is a Delaware affiliated investment
company.
On March 6, 1997, in connection with the acquisition of Tri-County, the
Company acquired Eastern Shore Real Estate, Inc. ("ESR"), which became a
wholly owned subsidiary of Chesapeake Service Company. ESR owns and leases
office buildings to affiliates and external companies.
(ii) Seasonal Nature of Business
Revenues from the Companys 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
A discussion of capital expenditures by business segment is included in
Item 7 under the heading "Liquidity and Capital Resources".
(iv) Employees
The Company has 397 employees, including 114 in natural gas distribution,
nine in natural gas transmission, 131 in propane distribution and 63 in
advanced information services. The remaining 80 employees are considered
general and administrative and include officers of the Company and
marketing, engineering, treasury, accounting, data processing, planning,
human resources and other administrative personnel. The acquisition of
Tri-County added 43 employees to the total number of employees of the
Company.
Item 2. Properties
(a) General
The Company owns offices and operates facilities in Pocomoke, Salisbury,
Cambridge, and Princess Anne, Maryland; Dover, Seaford, Laurel and
Georgetown, Delaware; and Winter Haven, Florida, and rents office space in
Dover, Delaware; Plant City, Florida; Chincoteague and Belle Haven, Virginia;
Easton and Pocomoke, Maryland; Detroit, Michigan; 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 Companys facilities can
vary significantly due to the seasonal nature of the natural gas and propane
distribution businesses.
(b) Natural Gas Distribution
Chesapeake owns over 542 miles of natural gas distribution mains (together
with related service lines, meters and regulators) located in its Delaware
and Maryland service areas, and 469 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. A portion of the properties constituting Chesapeakes
distribution system are encumbered pursuant to Chesapeakes 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
three compressor stations located in Delaware City, Delaware, Daleville,
Pennsylvania and Bridgeville, Delaware. The Delaware City compressor facility
and associated piping are needed to stabilize capacity on Eastern Shores
system as a result of steadily declining inlet pressures at the Hockessin
interconnect with Transcontinental Gas Pipe Line Corporation. The Daleville
station is used to increase Columbia supply pressures to match Transco supply
pressures, and to increase Eastern Shores pressures in order to serve
Eastern Shores firm customers demands, including those of Chesapeakes
Delaware and Maryland divisions. The Bridgeville station is being used to
provide increased pressures required to meet demands on the system.
(d) Propane Distribution
Sharpgas and Tri-County own bulk propane storage facilities with an aggregate
capacity of 1.9 million gallons at 33 plant facilities in Delaware, Maryland
and Virginia, located on real estate they either own or lease.
Item 3. Legal Proceedings
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.
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,
contained 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 ("PRPs") 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 addressed the ground-water
contamination with a combination of hydraulic containment and natural
attenuation. Remediation selected for the soil at the site was to meet
stringent cleanup standards for the first two feet of soil and less stringent
standards for the soil below two feet. The ROD estimated the costs of
selected remediation of ground-water and soil at $2.7 million and $3.3
million, respectively.
In May 1995, EPA issued an order to the Company under section 106 of CERCLA
(the "Order"), which required 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 did not intend
to comply with the Order.
In March 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 Companys 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. Upon satisfaction of all
conditions of the Settlement, the litigation will be dismissed with
prejudice.
In June 1996, the Company initiated litigation against GPU for contribution
to the remedial costs incurred by Chesapeake in connection with complying
with the ROD. At this time, management cannot predict the outcome of the
litigation or the amount, if any, of proceeds to be received.
In July 1996, the Company began the design phase of the ROD, on-site pre-
design and investigation. A pre-design investigation report ("the report")
was filed in October 1996 with the EPA. The report, which required EPA
approval, provided up to date status on the site, which the EPA used to
determine if the remedial design selected in the ROD was still the
appropriate remedy.
In the report, the Company proposed a modification to the soil clean-up
remedy selected in the ROD to take into account an existing land use
restriction banning future development at the site. In April of 1997, the EPA
issued a fact sheet stating that the EPA was considering the proposed
modification. The fact sheet included an overall cost estimate of $5.7
million for the proposed modified remedy and a new overall cost estimate of
$13.2 million for the remedy selected in the ROD. On August 28, 1997, the EPA
issued a Proposed Plan to modify the current clean-up plan that would
involve: (1) excavation of off-site thermal treatment of the contents of the
former subsurface gas holders; (2) implementation of soil vaporization
extraction; (3) pavement of the parking lot; and (4) use of institutional
controls that would restrict future development of the Site. The overall
estimated clean-up cost of the Site under the proposed plan was $4.2 million,
as compared to EPAs estimate of the current clean-up plan at $13.2 million.
In January 1998, the EPA issued a revised ROD, which modified the soil
remediation to conform to the proposed plan and included the estimated clean-
up costs of $4.2 million.
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.
The Company adjusted its accrued liability recorded with respect to the Dover
Site to $4.2 million. This amount reflects the EPAs estimate, as stated in
the ROD issued in 1998 for remediation of the site according to the ROD. The
recorded liability may be adjusted upward or downward as the design phase
progresses and the Company obtains construction bids for performance of the
work. The Company has also recorded a regulatory asset of $4.2 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 Companys
rates.
As of December 31, 1997, the Company has incurred approximately $5.0 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. In December 1995, the Delaware
Public Service Commission, authorized recovery of all unrecovered
environmental cost 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 cashflow savings realized by the Company in connection with a
reduced income tax liability due to the possibility of accelerated deduction
allowed on certain environmental costs when incurred. Each year a new rider
rate is calculated to become effective December 1. The rider rate is 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 December 31, 1997, the unamortized balance and amount of
environmental costs not included in the rider, effective January 1, 1998 was
$2.1 million and $190,000, respectively. With the rider mechanism
established, it is managements opinion that these costs and any future cost,
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 assessment, construction and has begun remediation 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 has been reporting the remediation and monitoring results
to the Maryland Department of the Environment 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 $665,000 on
December 31, 1997, to cover the Companys projected remediation costs for
this site. The liability payout for this site is expected to be over a five-
year period. As of December 31, 1997, the Company has incurred approximately
$2.4 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 cost incurred through
September 30, 1995 less amounts previously amortized and insurance proceeds.
The amount approved for a 10-year amortization was $964,251. Of the $2.4
million in costs reported above, approximately $597,000 has not been
recovered through insurance proceeds or received ratemaking treatment. It is
managements opinion that these costs incurred and future costs incurred, if
any, will be recoverable in rates.
(c) Winter Haven Coal Gas Site
In May 1996, the Company filed an Air Sparging and Soil Vapor Extraction
Pilot Study Work Plan for the Winter Haven site with the Florida Department
of Environmental Protection ("FDEP"). The Work Plan described the Companys
proposal to undertake an Air Sparging and Soil Vapor Extraction ("AS/SVE")
pilot study to evaluate at the site. After discussions with the FDEP, the
Company filed a modified AS/SVE Pilot Study Work Plan, scope of work to
complete the site assessment activities and a report describing a limited
sediment investigation performed recently. The Company will be awaiting
FDEPs comments to the modified 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 and received ratemaking treatment of approximately
$678,000 on these investigations as of September 30, 1997. The Company has
been allowed by the Florida Public Service Commission to continue to accrue
for future environmental costs. At September 30, 1997, the Company had
$432,000 accrued. It is managements opinion that future costs, if any, will
be recoverable in rates.
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 10. Executive Officers of the Registrant
Information pertaining to the Executive Officers of the Company is as
follows:
Ralph J. Adkins (age 55) Mr. Adkins is Chairman of the Board and Chief
Executive Officer of Chesapeake. He has served as Chairman of the Board
and Chief Executive Officer since August 1997. Prior to holding his
present position, Mr. Adkins served as President and Chief Executive
Officer, President and Chief Operating Officer, Executive Vice President,
Senior Vice President, Vice President and Treasurer of Chesapeake. Mr.
Adkins is also Chairman and Chief Executive Officer of Chesapeake Service
Company, and Chairman and Chief Executive Officer of Sharp Energy, Inc.,
Tri-County Gas Company, Inc., Chesapeake Service Company 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 50) Mr. Schimkaitis is President and Chief
Operating Officer. He has served as President since August 1997. He
previously served as Executive Vice President, Chief Financial Officer,
Senior Vice President, Treasurer and Assistant Secretary. 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. He was appointed as a director of Chesapeake in February 1996.
Michael P. McMasters (age 39) Mr. McMasters is Vice President, Chief
Financial Officer and Treasurer of Chesapeake Utilities Corporation. He
has served as Vice President, Chief Financial Officer and Treasurer since
December 1996. He previously served as Vice President of Eastern Shore,
Director of Accounting and Rates and Controller. From 1992 to May 1994,
Mr. McMasters was employed as Director of Operations Planning for
Equitable Gas Company.
Stephen C. Thompson (age 37) Mr. Thompson is Vice President of the Natural
Gas Operations, as well as Vice President of Chesapeake Utilities
Corporation. He has served as Vice President since May 1997. He has served
as President, Vice President, Manager, Director of Gas Supply and
Marketing and Superintendent of Eastern Shore and Regional Manager for the
Florida distribution Operations.
Philip S. Barefoot (age 51) Mr. Barefoot joined Chesapeake as Division
Manager of Florida Operations in July 1988. In May 1994 he was elected
Vice President of Chesapeake Utilities Corporation. Prior to joining
Chesapeake, he was employed by Peoples Natural Gas Company where he held
the positions of Division Sales Manager, Division Manager and Vice
President of Florence Operations.
Jeremy D. West (age 48) Mr. West joined Chesapeake as President of Sharp
Energy in June 1990. In May 1992 he was elected Vice President of
Chesapeakes Propane Operations and in May 1997, he was promoted to Vice
President of Strategic Planning and Acquisitions. Prior to joining
Chesapeake, he was employed by Columbia Propane Corporation, a subsidiary
of Columbia Gas System, as Vice President of Marketing, and later,
President of Columbia Propane Corporation. He has also serviced as
Regional Manager of Suburban Propane.
PART II
Item 5. Market for the Registrants Common Stock and Related Security Holder
Matters
(a) Common Stock Dividends and Price Ranges:
The following table sets forth sale price and dividend information for each
calendar quarter during the years December 31, 1997 and 1996:
- ---------------------------------------------------------------------------
Dividends
Declared
Quarter Ended: High Low Close Per Share
- ---------------------------------------------------------------------------
1997
March 31 $18.000 $16.500 $17.375 $0.2425
June 30 17.500 16.000 17.000 0.2425
September 30 18.500 16.250 18.375 0.2425
December 31 21.750 18.375 20.500 0.2425
- ---------------------------------------------------------------------------
1996
March 31 $17.000 $14.500 $16.750 $0.2325
June 30 17.875 15.875 16.000 0.2325
September 30 17.750 15.125 17.500 0.2325
December 31 18.000 16.375 16.875 0.2325
- ---------------------------------------------------------------------------
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, 1997:
Number of Shareholders
Title of Class of Record
--------------------------- ----------------------
Common stock, par value $.4867 2,178
(c) Dividends:
During the years ended December 31, 1997 and 1996, cash dividends paid by
Chesapeake have been declared each quarter, in the amounts set forth in the
table above. During 1996 and 1995, Tri-County paid dividends of $79,000 and
$592,000, respectively.
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, 1997, the amounts available for future dividends
permitted by the Series I covenant are $14.6 million.
(d) On March 6, 1997, in conjunction with the acquisition of Tri-County Gas
Company, Inc., the Company issued 639,000 shares of Company stock to William
P. Schneider and James R. Schneider in reliance on the private placement
exemption provided by Section 4(2) of the Securities Act of 1933 and
Regulation D, thereunder.
<PAGE>
<TABLE>
<CAPTION>
Item 6. Selected Financial Data
- --------------------------------------------------------------------------------------------------
(dollars in thousands except stock data)
For the Years Ended December 31, 1997 1996 1995 1994 (1) 1993 (1)
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Operating
Operating revenues $122,775 $130,213 $111,796 $98,572 $85,873
Operating income $8,559 $10,110 $10,067 $7,227 $6,311
Income before cumulative effect of
change in accounting principle $5,683 $7,605 $7,594 $4,460 $3,914
Cumulative effect of change in
accounting principle $58
Net income $5,683 $7,605 $7,594 $4,460 $3,972
- --------------------------------------------------------------------------------------------------
Balance Sheet
Gross plant $143,345 $133,001 $119,837 $110,023 $100,330
Net plant $99,517 $93,570 $84,589 $75,313 $69,794
Total assets $137,379 $136,046 $123,339 $108,271 $100,988
Long-term debt, net $38,226 $28,984 $31,619 $24,329 $25,682
Common stockholders' equity $50,336 $47,537 $42,582 $37,063 $34,878
Capital expenditures $11,381 $14,837 $12,887 $10,653 $10,064
- --------------------------------------------------------------------------------------------------
Common Stock
Basic earnings per share:
Income before cumulative effect of
change in accounting principle $1.27 $1.72 $1.75 $1.23 $1.10
Cumulative effect of change in
accounting principle $0.02
Net income $1.27 $1.72 $1.75 $1.23 $1.12
Diluted earnings per share:
Income before cumulative effect of
change in accounting principle $1.24 $1.67 $1.70 $1.20 $1.08
Cumulative effect of change in
accounting principle $0.02
Net income $1.24 $1.67 $1.70 $1.20 $1.10
Average shares outstanding 4,472,087 4,412,137 4,336,431 3,628,056 3,551,932
Cash dividends per share $0.97 $0.93 $0.90 $0.88 $0.86
Book value per share $11.18 $10.71 $9.77 $10.15 $9.76
Common equity/Total capitalization 56.80% 62.10% 57.40% 60.37% 57.59%
Return on equity 11.29% 16.00% 17.80% 12.03% 11.39%
- --------------------------------------------------------------------------------------------------
Other
Number of Employees 397 386 383 320 326
Number of Registered Stockholders 2,178 2,213 2,098 1,721 1,743
Heating Degree Days 4,418 4,717 4,593 4,398 4,705
Heating Degree Days (10-year average) 4,577 4,596 4,586 4,564 4,588
- --------------------------------------------------------------------------------------------------
<FN>
(1) 1994 and 1993 have not been restated to include the business combination
with Tri-County Gas Company, Inc.
</FN>
</TABLE>
Item 7. Managements Discussion and Analysis of Financial Condition
and Results of Operations
Liquidity and Capital Resources
The capital requirements of Chesapeake Utilities Corporation ("Chesapeake"
or "the Company") reflect the capital-intensive nature of its business and
are attributable principally to the construction program and the retirement
of outstanding debt. The Company relies on cash generated from operations
and short-term borrowing to meet normal working capital requirements and
temporarily finance capital expenditures. During 1997, net cash provided by
operating activities, used by investing activities and used by financing
activities were $12.3 million, $12.4 million and $1.5 million, respectively.
The Board of Directors has authorized the Company to borrow up to $20.0
million from various banks and trust companies. As of December 31, 1997,
Chesapeake had four unsecured bank lines of credit, totaling $34.0 million,
for short-term cash needs to meet seasonal working capital requirements and
to temporarily fund portions of its capital expenditures. The outstanding
balances of short-term borrowing at December 31, 1997 and 1996 were $7.6
million and $12.7 million, respectively.
In 1997, Chesapeake used cash provided by operations and the issuance of
long-term debt to fund capital expenditures and reduce short-term borrowing.
During 1996, the Company used cash provided by operating activities and
short-term borrowing to fund the capital expenditures and increases in
working capital requirements.
During 1997, 1996 and 1995, capital expenditures were approximately $12.8
million, $14.8 million and $12.9 million, respectively. Chesapeake has
budgeted $15.6 million for capital expenditures during 1998. This amount
includes $8.7 million and $2.7 million for natural gas and propane
distribution, respectively; $3.1 million for natural gas transmission,
$395,000 for advanced information services and $632,000 for general plant.
The natural gas and propane distribution expenditures are for expansion and
improvement of facilities in existing service territories. Natural gas
transmission expenditures are for improvement and expansion of the pipeline
system. The advanced information services expenditures are for computer
hardware, software and related equipment. Financing for the 1998
construction program is expected to be provided from short-term borrowing
and cash from operations. The construction program is subject to continuous
review and modification. Actual construction expenditures may vary from the
above estimates due to a number of factors including inflation, changing
economic conditions, regulation, sales growth and the cost and availability
of capital.
Chesapeake has budgeted $2.8 million for environmental related expenditures
during 1998 and expects to incur additional expenditures in future years
(see Note J 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.
Capital Structure
As of December 31, 1997, common equity represented 56.8% of permanent
capitalization compared to 62.1% in 1996 and 57.4% in 1995. Chesapeake
remains committed to maintaining a sound capital structure and strong credit
ratings to provide the financial flexibility needed to access the capital
markets when required. This commitment, along with adequate and timely rate
relief for the Companys regulated operations, helps to ensure that
Chesapeake 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 Companys investors.
Financing Activities
In December 1997, Chesapeake finalized a private placement of $10 million of
6.85% Senior Notes due January 1, 2012. The Company used the proceeds to
repay a portion of its short-term borrowing. In October 1995, the Company
finalized a private placement of $10 million of 6.91% Senior Notes due in
2010. The Company used the proceeds to retire $4.1 million of the 10.85%
Senior Notes of Eastern Shore Natural Gas Company, the Companys natural gas
transmission subsidiary ("Eastern Shore") originally due in 2003. The
remaining proceeds were used to reduce short-term borrowing. The Company
issued no long-term debt in 1996. During 1997, the Company repaid
approximately $3.1 million of long-term debt, compared to $823,000 and $5.4
million in 1996 and 1995, respectively. The increase in debt payments for
1997 resulted from the payoff of $2.2 million of debt assumed in the pooling
of interests with Tri-County Gas Company, Inc. ("Tri-County").
On March 6, 1997, the Company acquired all of the outstanding common stock
of Tri-County and associated properties. Tri-County distributes propane to
both retail and wholesale customers on the peninsula. The transaction was
effected through the exchange of 639,000 shares of the Companys common
stock and was accounted for as a pooling of interests.
Chesapeake issued 32,169, 33,926 and 38,660 shares of common stock in
connection with its Automatic Dividend Reinvestment and Stock Purchase Plan
during the years of 1997, 1996 and 1995, respectively.
Results of Operations
Net income for 1997 was $5,682,946 as compared to $7,604,915 for 1996. The
decrease in net income is primarily related to temperatures in the Companys
northern service territory, which were, on average, 6% warmer than in 1996.
The warmer weather resulted in a reduction in volumes sold by the natural
gas and propane distribution segments. The lower gas volumes contributed to
the reduction in Earnings Before Interest and Taxes ("EBIT") for both
distribution segments as shown in the table below.
<TABLE>
<CAPTION>
EARNINGS BEFORE INTEREST AND TAXES (in thousands):
- -------------------------------------------------------------------------------------------------------
Increase/ Increase/
For the Years Ended December 31, 1997 1996 (decrease) 1996 1995 (decrease)
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
EBIT by Business Segment:
Natural gas distribution $5,498 $7,167 ($1,669) $7,167 $4,728 $2,439
Natural gas transmission 3,721 2,458 1,263 2,458 6,083 (3,625)
Propane distribution 1,064 2,815 (1,751) 2,815 2,252 563
Advanced information services 1,046 1,056 (10) 1,056 1,061 (5)
Other 558 561 (3) 561 (32) 593
- -------------------------------------------------------------------------------------------------------
Total EBIT $11,887 $14,057 ($2,170) $14,057 $14,092 ($35)
=======================================================================================================
</TABLE>
Chesapeakes 1996 net income was $7,604,915, as compared to $7,593,506 for
1995. Although net income was relatively unchanged, the contribution to net
income from each business segment differed during the two-year period.
Natural gas distribution EBIT was higher in 1996 due to rate increases
placed in effect in two of the three service territories during 1995. EBIT
for the propane distribution segment increased due to greater volumes sold
due to temperatures being 3% colder than in 1995. Natural gas transmissions
contribution decreased due to a reduction in volumes sold to industrial
interruptible customers during 1996. In addition, 1995 net income includes a
one-time benefit from a settlement with the Federal Energy Regulatory
Commission (see Note K to the Consolidated Financial Statements).
Natural Gas Distribution
The reduction in EBIT of $1.7 million from 1996 to 1997 is primarily related
to a decline in total gross margin, as indicated in the following table,
coupled with an overall increase in expenses. The reduction in gross margin
earned on volumes sold is primarily the result of a 3% decline in volumes
sold to residential and commercial customers and a decrease in volumes sold
to industrial interruptible customers in Chesapeakes Florida service
territory. The reduction in volumes sold to residential and commercial
customers was directly related to warmer temperatures, primarily during the
first quarter of 1997. Operations and maintenance expenses increased
$633,000 and $108,000, respectively. Compensation, regulatory commission
expenses and costs related to data processing and billable service revenue
contributed to the increase in operations expenses. A greater level of
maintenance to the gas pipeline system resulted in an increase in
maintenance expenses.
The $2.4 million rise in EBIT from 1995 to 1996 resulted from an increase in
gross margin earned on sales of natural gas in two of Chesapeakes three
service territories, offset by an overall increase in expenses. The $4.0
million increase in gross margin was partially due to a full year of rate
increases, which went into effect in 1995. Maryland operations rates became
effective during December and interim rates were in effect during June of
1995 for Delaware operations. In addition, colder temperatures contributed
to the 20% increase in deliveries to residential and commercial customers
located in Chesapeakes northern service territory. The $583,000 increase in
operations expenses was primarily the result of higher compensation,
benefits, data processing costs, bad debts and regulatory expenses. Plant
additions placed in service during 1996 resulted in higher depreciation
expense. In addition, other taxes increased by $460,000 or 23%, partially
due to the inclusion of certain state revenue related taxes, which were
previously included as reductions to revenue.
<TABLE>
<CAPTION>
GROSS MARGIN SUMMARY (in thousands)
- -------------------------------------------------------------------------------------------------------
Increase/ Increase/
For the Years Ended December 31, 1997 1996 (decrease) 1996 1995 (decrease)
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Revenues:
Gas sold $54,205 $52,290 $1,915 $52,290 $42,784 $9,506
Gas transported 3,061 2,991 70 2,991 2,618 373
Gas marketed 18,419 19,382 (963) 19,382 8,555 10,827
Other 275 193 82 193 168 25
- -------------------------------------------------------------------------------------------------------
Total Revenues $75,960 $74,856 $1,104 $74,856 $54,125 $20,731
=======================================================================================================
Cost of Sales:*
Gas sold $35,507 $32,846 $2,661 $32,846 $26,789 $6,057
Gas marketed 18,233 19,117 (884) 19,117 8,410 10,707
- -------------------------------------------------------------------------------------------------------
Total Cost of Sales $53,740 $51,963 $1,777 $51,963 $35,199 $16,764
=======================================================================================================
Gross Margin:
Gas sold $18,698 $19,444 ($746) $19,444 $15,995 $3,449
Gas transported 3,061 2,991 70 2,991 2,618 373
Gas marketed 186 265 (79) 265 145 120
Other 275 193 82 193 168 25
- -------------------------------------------------------------------------------------------------------
Total Gross Margin $22,220 $22,893 ($673) $22,893 $18,926 $3,967
=======================================================================================================
</TABLE>
* Transportation service does not have an associated cost of sales.
Natural Gas Transmission
The Companys natural gas transmission segment, Eastern Shore, which became
an open access pipeline on November 1, 1997, had an increase in EBIT of $1.3
million for 1997. The rise in EBIT is partially attributable to a rate
increase and an increase in firm services implemented in 1997, as well as an
overall reduction in expenses. The rate increase is designed to generate
additional gross margin of approximately $1.2 million annually. Also
contributing to the increase in EBIT were additional revenues generated by
the increase in transportation services that were effective with the
implementation of open access. On an annual basis, the additional services
will generate revenue of approximately $1.3 million. Operations expense
decreased by $143,000 or 5%, primarily consisting of compensation,
relocation costs and property insurance. Maintenance expenses were also
lower due to reduced maintenance required during the year on the gas
pipeline system. Capital additions during the year resulted in higher
depreciation expense.
The $3.6 million reduction in 1996 EBIT was primarily due to lower gross
margin on sales to industrial customers. The gross margin decreased due to a
67% reduction in volumes delivered, primarily reflecting lower deliveries to
two industrial interruptible customers -- a municipal power plant and a
methanol plant. The methanol plant shut down operations on April 1, 1996.
During 1996 and 1995, deliveries to the methanol and power plants
contributed approximately $284,000 and $2.4 million, respectively to gross
margin. As interruptible customers, they had no ongoing commitment,
contractual or otherwise, to purchase natural gas from the Company (see Note
A to the Consolidated Financial Statements). The $109,000 increase in
operating expenses reflects increased compensation and benefit related
expenses. Depreciation increased due to plant placed in service.
With Eastern Shores conversion to open access, all of its customers will
have the opportunity to transport gas over its system at rates regulated by
the FERC. The variability in Eastern Shores margins, historically driven by
the sales to industrial customers, will dramatically decrease, as capacity
reservation fees for transportation services will drive prospective margins.
It is expected that in the future, Eastern Shores EBIT will tend to be more
stable and resemble a fully regulated return. Taking the 1997 rate increase,
revenues associated with additional capacity and lower margins on services
provided to industrial customers into account, the Company expects gross
margin during 1998 to be between $7.9 and $8.2 million (see Cautionary
Statement). Comparatively, gross margin for the past three years has been
$7.9 million, $6.7 million and $10.2 million for 1997, 1996 and 1995,
respectively.
Propane Distribution
In 1997, Chesapeake integrated the operations of Tri-County and the
Companys existing propane distribution operations. Like Chesapeakes
existing propane operations, Tri-Countys earnings are heavily dependent
upon weather conditions.
The reduction in 1997 EBIT of $1.8 million was primarily due to a reduction
in gross margin, partially offset by a reduction in expenses. Gross margin
decreased due to an 11% reduction in sales volumes coupled with a 13% lower
margin per gallon sold. The decline in sales volumes is directly related to
the warmer temperatures, which averaged 6% warmer than the prior year.
Furthermore, during the first quarter of 1997 temperatures were 14% warmer
than normal. The Company normally sells a high percentage of its annual
volume during this period. The reduction in margin per gallon sold was also
the result of abnormally warmer temperatures. As temperatures warmed during
the first quarter, demand decreased and supply-prices declined rapidly. Due
to the low cost of wholesale-supply, retail prices declined, thereby
reducing margins. Operations expenses decreased $554,000 or 7% primarily in
the areas of compensation, delivery related costs, advertising and legal
fees. Maintenance expenses declined primarily in equipment and structures.
Depreciation and amortization expenses declined $477,000 or 28% primarily
the result of a non-compete agreement, which became fully amortized in
November of 1996.
The increase in 1996 EBIT of $563,000 is primarily attributable to a rise in
gross margin partially offset by higher expenses. Gross margin was higher
due to a 12% increase in volumes sold and a slight increase in margin earned
per gallon sold. The increases are directly related to temperatures which
were 3% colder than those in 1995. Operating expenses increased $1.3 million
or 19% in 1996 primarily due to compensation, delivery related costs,
benefits and outside services. Maintenance expenses increased in the areas
of propane storage facilities, equipment and structures.
Advanced Information Services
The results of the advanced information services segment consisted primarily
of those of United Systems, Inc. ("USI"), due to the downsizing of
Chesapeakes North Carolina operations in early 1997. Although the EBIT
contribution of this segment has remained unchanged from 1996 to 1997, USIs
gross margin has increased by $970,000 or 34%. Operating expenses increased
due to the opening of a new office in Detroit, Michigan and the expansion of
staff training and marketing efforts to position USI to be able to provide
new services and for future growth of current services. Since the rise in
operating costs offset most of the growth in gross margin, EBIT remained
constant.
Although the EBIT contributed by the advanced information segment was
relatively unchanged from 1995 to 1996, EBIT contributed by USI increased
$268,000. This was mostly offset by a reduction in EBIT contributed by the
North Carolina operation as they ceased to provide facilities management
services beginning in early 1996.
Income Taxes
Operating income taxes in 1997 decreased $619,000 due to a reduction in
EBIT. This was partially offset by the one-time expense of $318,000 recorded
in 1997 to establish the deferred income tax liability for Tri-County. Prior
to 1997, Tri-County was a subchapter S Corporation for income tax reporting;
therefore, no deferred income taxes were recorded on its balance sheet. In
addition, the Companys 1996 and 1995 restated financial statements do not
include any income tax expense for Tri-County due to its subchapter S status
during those years.
Other
Non-operating income was $428,000, $458,000 and $391,000 for 1997, 1996 and
1995, respectively. The decrease in 1997 is primarily due to a reduction in
interest income, partially offset by the gain on the sale of fixed assets.
The increase in 1996 is primarily the result of a rise in interest income
earned partially offset by a reduction in the gain on sales of fixed assets.
Environmental Matters
The Company continues to work with federal and state environmental agencies
to assess the environmental impact and explore corrective action at several
former gas manufacturing plant sites (see Note J to the Consolidated
Financial Statements). The Company believes that any future costs associated
with these sites will be recoverable in rates.
The Year 2000
Chesapeake is dependent upon information systems to operate efficiently and
effectively. In order to address the impact of the year 2000 on its many
information systems, Chesapeake is in the process of evaluating and
remediating any deficiencies. The Company has segregated the evaluation of
its readiness and the potential impact of the year 2000 on its systems into
two components: primary internal applications and other applications. The
Companys primary applications include systems for its financial
information; natural gas customer information and billing; and propane
customer information, billing and delivery. Other applications include
systems for services such as telephone, system control and data acquisition
for the pipeline, as well as other vendors systems. With respect to the
three primary applications, Chesapeake has updated its propane customer
information, billing and delivery system to a year 2000 compliant version.
This system will be tested further to insure compliance during 1998. With
respect to the other two primary applications, Chesapeake has conducted
initial evaluations and estimates that the cost of any remediation will not
be significant. Each application will be tested during 1998. Chesapeake has
developed an inventory of other applications and is in the process of
developing plans to contact its vendors, test and remediate to the extent
necessary.
Competition
Historically, the Companys natural gas operations have successfully
competed with other forms of energy such as electricity, oil and propane.
The principle considerations have been price, and to a lesser extent,
accessibility. As a result of Eastern Shores recent conversion to open
access, the Company expects to be subject to competitive pressures from
other sellers of natural gas. With open access transportation services
available on Eastern Shores system, third party suppliers will compete with
Chesapeake to sell gas to the local distribution companies and the end users
on Eastern Shores system. Eastern Shore has shifted from providing sales
service to providing transportation and contract storage services.
The Companys distribution operations located in Delaware began to offer
transportation services to certain industrial customers in December 1997.
Chesapeake expects that during 1998, the distribution operations located in
Maryland will also begin offering transportation services. The Company
expects to expand the availability of transportation services to additional
customers in the future. Since the Florida distribution operations have been
open to certain industrial customers since 1994, the Company has gained
experience in operating in an open access environment. The Company
established a natural gas brokering and supplies operation in Florida to
compete for these customers. The Company is evaluating whether to establish
similar services in our northern service territory.
Both the propane distribution and the advanced information services
businesses face significant competition from a number of larger competitors
with substantially greater resources available to them than those of the
Company. In addition, in the advanced information services business, changes
are occurring rapidly, which could adversely affect the markets for the
Companys services.
Inflation
Inflation affects the cost of labor and other goods and services required
for operation, maintenance and capital improvements. The impact of inflation
has lessened in recent years, except for the effect on purchased gas costs.
These costs are passed on to customers through the purchased gas adjustment
clause in the Companys tariffs. To help cope with the effects of inflation
on its capital investments and returns, the Company seeks rate relief from
regulatory commissions for regulated operations while monitoring the returns
of its unregulated business operations.
Cautionary Statement
Statements made herein and elsewhere in this Form 10-K, which are not
historical fact, are forward-looking statements. In connection with the
"Safe Harbor" provisions of the Private Securities Litigation Reform Act of
1995, Chesapeake is providing the following cautionary statement to identify
important factors that could cause actual results to differ materially from
those anticipated in forward-looking statements made herein or otherwise by
or on behalf of the Company.
A number of factors and uncertainties make it difficult to predict the
effect on future operating results of Eastern Shore operating as an open
access pipeline, relative to historical results. While open access
eliminates industrial interruptible sales margins, such sales have varied
widely from year to year and, in future years, might have made a less
significant contribution to earnings even in the absence of open access.
Additionally, there are a number of uncertainties, including future open
access proceedings and the effects of competition, which will affect whether
the Company will be able to provide economical gas marketing, transportation
and other services.
In addition, a number of factors and uncertainties affecting other aspects
of the Companys business could have a material impact on earnings. These
include: the seasonality and temperature sensitivity of Chesapeakes natural
gas and propane businesses, the relative price of alternative energy sources
and the effects of competition on both unregulated and natural gas sales,
now that the Company operates in an open access environment. There are also
uncertainties relative to the impact of the year 2000 on the information
systems of the Company, its vendors and other third parties.
Item 8. Financial Statements and Supplemental Data
REPORT OF INDEPENDENT ACCOUNTANTS
________
To the Stockholders of
Chesapeake Utilities Corporation
We have audited the consolidated financial statements and
consolidated financial statement schedules of Chesapeake
Utilities Corporation and Subsidiaries listed in Item 14(a) of
this Form 10-K. These financial statements and financial
statement schedules are the responsibility of the Companys
Management. Our responsibility is to express an opinion on these
financial statements and the 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 estimates 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, 1997 and 1996, and the
consolidated results of their operations and their cash flows for
each of the three years in the period ended December 31, 1997 in
conformity with generally accepted accounting principles. In
addition, in our opinion, the consolidated financial statement
schedules referred to above, when considered in relation to the
basic consolidated financial statements taken as a whole,
presents fairly, in all material respects, the information
required to be included therein.
We have also previously audited, in accordance with
generally accepted standards, the consolidated balance sheets and
statements of capitalization as of December 31, 1995, 1994 and
1993, 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, 1994 (none of which are
presented herein) and we expressed unqualified opinions on those
consolidated financial statements. In our opinion, the
information set forth in the Financial Highlights included in the
Selected Financial Data for each of the five years in the period
ended December 31, 1997, appearing on page 17 is fairly stated in
all material respects in relation to the financial statements
from which it has been derived.
COOPERS & LYBRAND L.L.P.
Baltimore, Maryland
February 12, 1998
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED BALANCE SHEETS
Assets
- ----------------------------------------------------------------------------------------------
At December 31, 1997 1996
- ----------------------------------------------------------------------------------------------
<S> <C> <C>
Property, Plant and Equipment
Natural gas distribution $74,769,458 $69,853,054
Natural gas transmission 33,856,873 30,655,492
Propane distribution 26,920,403 25,279,217
Advanced information services 841,757 1,003,850
Other plant 6,161,631 5,414,249
Gas plant acquisition adjustment 795,004 795,004
- ----------------------------------------------------------------------------------------------
Total property, plant and equipment 143,345,126 133,000,866
Less: Accumulated depreciation and amortization (43,827,961) (39,430,738)
- ----------------------------------------------------------------------------------------------
Net property, plant and equipment 99,517,165 93,570,128
- ----------------------------------------------------------------------------------------------
Investments 2,721,443 2,263,068
- ----------------------------------------------------------------------------------------------
Current Assets
Cash and cash equivalents 555,198 2,213,529
Accounts receivable (less allowance for uncollectibles
of $331,775 and $392,412 in 1997 and 1996, respectively) 13,087,999 14,488,944
Materials and supplies, at average cost 1,380,120 1,284,876
Propane inventory, at average cost 2,288,516 2,345,531
Storage gas prepayments 2,926,618 3,731,680
Underrecovered purchased gas costs 1,673,389 2,192,170
Income taxes receivable 849,623 112,942
Prepaid expenses 1,060,911 942,359
Deferred income taxes 247,487 158,010
- ----------------------------------------------------------------------------------------------
Total current assets 24,069,861 27,470,041
- ----------------------------------------------------------------------------------------------
Deferred Charges and Other Assets
Environmental regulatory assets 4,865,073 6,650,088
Environmental expenditures, net 2,372,929 1,778,348
Other deferred charges and intangible assets 3,832,389 4,314,235
- ----------------------------------------------------------------------------------------------
Total deferred charges and other assets 11,070,391 12,742,671
- ----------------------------------------------------------------------------------------------
Total Assets $137,378,860 $136,045,908
==============================================================================================
</TABLE>
See accompanying notes
<PAGE>
<TABLE>
<CAPTION>
Capitalization and Liabilities
- ----------------------------------------------------------------------------------------------
At December 31, 1997 1996
- ----------------------------------------------------------------------------------------------
<S> <C> <C>
Capitalization
Stockholders' equity
Common stock $2,191,792 $2,160,628
Additional paid-in capital 19,819,604 18,745,718
Retained earnings 28,218,763 26,957,048
Less: Unearned compensation related to restricted stock awarded (190,886) (364,529)
Unrealized gain on marketable securities, net 296,872 38,598
- ----------------------------------------------------------------------------------------------
Total stockholders' equity 50,336,145 47,537,463
Long-term debt, net of current portion 38,226,000 28,984,368
- ----------------------------------------------------------------------------------------------
Total capitalization 88,562,145 76,521,831
- ----------------------------------------------------------------------------------------------
Current Liabilities
Current portion of long-term debt 582,500 3,078,489
Short-term borrowing 7,600,000 12,700,000
Accounts payable 12,451,570 14,426,983
Refunds payable to customers 357,041 353,734
Accrued interest 784,533 741,768
Dividends payable 1,092,168 883,621
Other accrued expenses 3,807,484 3,733,233
- ----------------------------------------------------------------------------------------------
Total current liabilities 26,675,296 35,917,828
- ----------------------------------------------------------------------------------------------
Deferred Credits and Other Liabilities
Deferred income taxes 11,490,358 9,798,676
Deferred investment tax credits 821,617 876,432
Environmental liability 4,865,073 6,650,088
Accrued pension costs 1,754,715 1,866,661
Other liabilities 3,209,656 4,414,392
- ----------------------------------------------------------------------------------------------
Total deferred credits and other liabilities 22,141,419 23,606,249
- ----------------------------------------------------------------------------------------------
Commitments and Contingencies
(Notes J and K)
Total Capitalization and Liabilities $137,378,860 $136,045,908
==============================================================================================
</TABLE>
See accompanying notes
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF INCOME
- -----------------------------------------------------------------------------------------------------------
For the Years Ended December 31, 1997 1996 1995
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Operating Revenues $122,774,593 $130,213,409 $111,795,778
Cost of Sales 77,764,830 82,226,644 65,616,368
- -----------------------------------------------------------------------------------------------------------
Gross Margin 45,009,763 47,986,765 46,179,410
- -----------------------------------------------------------------------------------------------------------
Operating Expenses
Operations 21,831,194 22,230,425 20,612,585
Maintenance 2,041,043 2,504,894 2,477,454
Depreciation and amortization 5,396,975 5,504,637 5,802,884
Other taxes 3,853,954 3,689,748 3,194,673
Income taxes 3,327,627 3,947,056 4,025,274
- -----------------------------------------------------------------------------------------------------------
Total operating expenses 36,450,793 37,876,760 36,112,870
- -----------------------------------------------------------------------------------------------------------
Operating Income 8,558,970 10,110,005 10,066,540
- -----------------------------------------------------------------------------------------------------------
Other Income
Interest income 239,543 249,509 191,845
Other income, net 405,156 177,045 239,687
Income taxes (216,988) (83,739) (105,280)
Allowance for equity funds used during construction 115,434 65,198
- -----------------------------------------------------------------------------------------------------------
Total other income 427,711 458,249 391,450
- -----------------------------------------------------------------------------------------------------------
Income Before Interest Charges 8,986,681 10,568,254 10,457,990
- -----------------------------------------------------------------------------------------------------------
Interest Charges
Interest on long-term debt 2,347,369 2,392,458 2,282,247
Amortization of debt expense 119,401 120,345 109,399
Other 922,110 514,856 566,320
Allowance for borrowed funds used during construction (85,145) (64,320) (93,482)
- -----------------------------------------------------------------------------------------------------------
Total interest charges 3,303,735 2,963,339 2,864,484
- -----------------------------------------------------------------------------------------------------------
Net Income $5,682,946 $7,604,915 $7,593,506
===========================================================================================================
Earnings Per Share of Common Stock:
Basic: $1.27 $1.72 $1.75
Diluted: $1.24 $1.67 $1.70
</TABLE>
See accompanying notes
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF CASH FLOWS
- -----------------------------------------------------------------------------------------------------------
For the Years Ended December 31, 1997 1996 1995
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Operating Activities
Net Income $5,682,946 $7,604,915 $7,593,506
Adjustments to reconcile net income to net operating cash:
Depreciation and amortization 6,090,665 6,148,232 6,246,222
Allowance for equity funds used during construction (115,434) (65,198)
Investment tax credit adjustments (54,815) (54,815) (54,815)
Deferred income taxes, net 1,437,206 1,794,146 252,727
Employee benefits (238,826) 471,870 178,803
Employee compensation from lapsing of stock restrictions 173,643 334,745 431,694
Allowance for refund (1,356,705)
Other, net (286,147) 83,301 (339,081)
Changes in assets and liabilities:
Accounts receivable, net 1,400,945 (904,516) (4,727,364)
Other current assets 648,282 (2,141,048) 1,588,675
Other deferred charges (625,395) (977,652) (946,450)
Accounts payable, net (1,823,912) 1,422,807 3,619,023
Refunds payable to customers 3,307 (613,206) 400,192
Overrecovered (underrecovered) purchased gas costs 518,781 (2,245,544) 162,399
Other current liabilities (619,668) 396,326 939,750
- -----------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 12,307,012 11,204,127 13,923,378
- -----------------------------------------------------------------------------------------------------------
Investing Activities
Property, plant and equipment expenditures, net (12,380,826) (14,069,116) (11,666,442)
Allowance for equity funds used during construction 115,434 65,198
Purchases of investments (36,167) (129,406) (38,836)
- -----------------------------------------------------------------------------------------------------------
Net cash used by investing activities (12,416,993) (14,083,088) (11,640,080)
- -----------------------------------------------------------------------------------------------------------
Financing Activities
Common stock dividends, net of amounts reinvested of $382,932,
$346,308 and $304,106 in 1997, 1996 and 1995, respectively (3,829,752) (3,337,755) (3,324,376)
Issuance of stock -- Dividend Reinvestment Plan optional cash 167,337 208,813 202,835
Issuance of stock -- Retirement Savings Plan 404,297 349,031
Net (repayments) borrowings under line of credit agreements (5,100,000) 7,300,000 (3,197,039)
Proceeds from issuance of long-term debt 9,908,223 10,428,753
Repayment of long-term debt (3,098,455) (823,213) (5,439,151)
- -----------------------------------------------------------------------------------------------------------
Net cash (used) provided by financing activities (1,548,350) 3,696,876 (1,328,978)
- -----------------------------------------------------------------------------------------------------------
Net (Decrease) Increase in Cash and Cash Equivalents (1,658,331) 817,915 954,320
Cash and Cash Equivalents at Beginning of Year 2,213,529 1,395,614 441,294
- -----------------------------------------------------------------------------------------------------------
Cash and Cash Equivalents at End of Year $555,198 $2,213,529 $1,395,614
===========================================================================================================
Supplemental Disclosure of Cash Flow Information
Cash paid for interest $3,203,709 $2,831,109 $2,884,864
Cash paid for income tax $3,400,479 $2,122,120 $3,288,895
</TABLE>
See accompanying notes
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
- -----------------------------------------------------------------------------------------------------------
For the Years Ended December 31, 1997 1996 1995
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Common Stock
Balance -- beginning of year $2,160,628 $2,122,212 $2,096,515 (1)
Dividend Reinvestment Plan 15,398 16,514 18,816
USI restricted stock award agreements 10,639 6,881
Conversion of debentures 4,461 429
Company's Retirement Savings Plan 11,305 9,928
Exercised stock options 906
- -----------------------------------------------------------------------------------------------------------
Balance -- end of year 2,191,792 2,160,628 2,122,212
- -----------------------------------------------------------------------------------------------------------
Additional Paid-in Capital
Balance -- beginning of year 18,745,718 17,489,108 16,731,689 (1)
Dividend Reinvestment Plan 529,453 538,607 488,125
USI restricted stock award agreements 344,570 176,029
Sale of treasury stock to Company's
Retirement Savings Plan 93,265
Conversion of debentures 151,441 14,557
Company's Retirement Savings Plan 392,992 328,465
Exercised stock options 30,411
- -----------------------------------------------------------------------------------------------------------
Balance -- end of year 19,819,604 18,745,718 17,489,108
- -----------------------------------------------------------------------------------------------------------
Retained Earnings
Balance -- beginning of year 26,957,048 23,458,776 19,480,374
Net income 5,682,946 7,604,915 7,593,506 (1)
Cash dividends -- Chesapeake (2) (4,341,964) (3,514,694) (3,331,972)
Cash dividends -- Pooled companies (79,267) (591,949) (283,132)
- -----------------------------------------------------------------------------------------------------------
Balance -- end of year 28,218,763 26,957,048 23,458,776
- -----------------------------------------------------------------------------------------------------------
Treasury Stock (3)
Unearned Compensation
Balance -- beginning of year (364,529) (415,107) (696,679)
Issuance of award (284,167) (121,343)
Amortization of prior years' awards 173,643 334,745 402,915
- -----------------------------------------------------------------------------------------------------------
Balance -- end of year (190,886) (364,529) (415,107)
- -----------------------------------------------------------------------------------------------------------
Unrealized Gain (Loss) on Marketable Securities (4) 296,872 38,598 (72,839)
- -----------------------------------------------------------------------------------------------------------
Total Stockholders' Equity $50,336,145 $47,537,463 $42,582,150
===========================================================================================================
<FN>
(1) The following adjustments have been made to 1995 presentation to reflect the Tri-County pooling of
interests: Begining balances of Common Stock and Additional Paid-in Capital have been adjusted by
$311,001 and ($103,314), respectively. Net income as shown in the Retained Earnings section has
been adjusted by $356,811.
(2) Dividends per share of common stock were $.97, $.93 and $.90 for the years 1997, 1996
and 1995, respectively.
(3) The entire Treasury Stock balance of ($99,842) was sold to the Company's Retirement Savings Plan
during 1995, leaving a zero balance.
(4) Net of income tax expense (benefit) of approximately $190,000, $25,000 and ($48,000) for the
the years 1997, 1996 and 1995, respectively.
</FN>
</TABLE>
See accompanying notes
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF INCOME TAXES
- -----------------------------------------------------------------------------------------------------------
For the Years Ended December 31, 1997 1996 1995
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Current Income Tax Expense
Federal $1,916,654 $1,884,609 $3,182,346
State 442,563 356,576 621,238
Investment tax credit adjustments, net (54,815) (54,815) (54,815)
- -----------------------------------------------------------------------------------------------------------
Total current income tax expense 2,304,402 2,186,370 3,748,769
- -----------------------------------------------------------------------------------------------------------
Deferred Income Tax Expense
Property, plant and equipment 1,335,802 581,373 455,151
Deferred gas costs (204,170) 873,904 (56,915)
Pensions and other employee benefits (19,508) 107,131 57,508
Unbilled revenue (104,632) 54,320 (260,922)
Contributions in aid of construction (33,028) (6,979) (283,033)
Environmental expenditures 249,417 108,578 272,068
Allowance for refund 121,671 442,064
Other 16,332 4,427 (244,136)
- -----------------------------------------------------------------------------------------------------------
Total deferred income tax expense (1) 1,240,213 1,844,425 381,785
- -----------------------------------------------------------------------------------------------------------
Total Income Tax Expense $3,544,615 $4,030,795 $4,130,554
===========================================================================================================
Reconciliation of Effective Income Tax Rates
Federal income tax expense at 34% 3,171,505 3,956,118 3,986,180
State income taxes, net of Federal benefit 399,213 537,566 546,955
Acquisition of subchapter S Corporation (2) 317,821 (268,211) (137,800)
Other (343,924) (194,678) (264,781)
- -----------------------------------------------------------------------------------------------------------
Total income tax expense $3,544,615 $4,030,795 $4,130,554
===========================================================================================================
Effective income tax rate 38.4% 36.8% 36.3%
- ----------------------------------------------------------------------------------------------
At December 31, 1997 1996
- ----------------------------------------------------------------------------------------------
Deferred Income Taxes
Deferred income tax liabilities:
Property, plant and equipment $12,095,782 $10,716,757
Deferred gas costs 649,681 853,851
Other 1,560,988 1,322,272
- ----------------------------------------------------------------------------------------------
Total deferred income tax liabilities 14,306,451 12,892,880
- ----------------------------------------------------------------------------------------------
Deferred income tax assets:
State operating loss carryforwards 57,303 3,320
Deferred investment tax credit 403,789 426,565
Unbilled revenue 968,311 863,679
Pension and other employee benefits 898,060 917,568
Self insurance 585,995 545,836
Other 150,122 495,246
- ----------------------------------------------------------------------------------------------
Total deferred income tax assets 3,063,580 3,252,214
- ----------------------------------------------------------------------------------------------
Deferred Income Taxes Per Consolidated Balance Sheet $11,242,871 $9,640,666
==============================================================================================
<FN>
(1) Includes $208,000, $392,000 and $108,000 of deferred state income taxes for
the years 1997, 1996 and 1995, respectively.
(2) Accounted for as a pooling of interests (see Note B to the Consolidated
Financial Statements).
</FN>
</TABLE>
See accompanying notes
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
A. Summary of Accounting Policies
Nature of Business
Chesapeake Utilities Corporation (the "Company") is engaged in natural gas
distribution to approximately 35,800 customers located in southern Delaware,
Marylands Eastern Shore and Central Florida. The Companys natural gas
transmission subsidiary operates a pipeline from various points in
Pennsylvania to the Companys Delaware and Maryland distribution divisions,
as well as other utility and industrial customers in Delaware and the
Eastern Shore of Maryland. The Companys propane distribution segment serves
approximately 34,000 customers in southern Delaware, the Eastern Shore of
Maryland and Virginia. The advanced information services segment provides
software services and products to a wide variety of clients.
Principles of Consolidation
The Consolidated Financial Statements include the accounts of the Company
and its wholly owned subsidiaries, Eastern Shore Natural Gas Company
("Eastern Shore"), Sharp Energy, Inc. ("Sharp Energy"), Tri-County Gas
Company, Inc. ("Tri-County") and Chesapeake Service Company. Sharp Energys
accounts include those of its wholly owned subsidiary, Sharpgas, Inc.
Chesapeake Service Companys accounts include United Systems, Inc. ("USI"),
Capital Data Systems, Inc. and Skipjack, Inc. Investments in entities in
which the Company owns more than 20 percent but 50 percent or less, are
accounted for by the equity method. All significant 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"). The Companys 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 advanced information services subsidiaries are
not subject to regulation with respect to rates or maintenance of accounting
records.
Cash and Cash Equivalents
The Companys 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, 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 to income as incurred 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 income. 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 for each segment
averaging 4.73% for natural gas distribution; 3.04% for natural gas
transmission and 5.46% for propane distribution. In addition, annualized
rates average 4.73% for gas plant acquisition adjustments, 17.78% for the
advanced information services segment and 2.59% for general plant.
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
costs of borrowed and equity funds are segregated between interest expense
and other income, respectively. AFUDC was capitalized on utility plant
construction at the rates of 5.63%, 9.51% and 7.31% for 1997, 1996 and 1995,
respectively.
Environmental Regulatory Assets
Environmental regulatory assets represent amounts related to environmental
liabilities for which cash expenditures have not been made. As expenditures
are incurred, the environmental liability can be reduced along with the
environmental regulatory asset. These amounts are recorded to either
environmental expenditures or accumulated depreciation as cost of removal.
All amounts incurred are amortized in accordance with the ratemaking
treatment granted in each jurisdiction.
Other Deferred Charges and Intangible Assets
Other deferred charges include discount, premium and issuance costs
associated with long-term debt and rate case expenses. The discount, premium
and issuance costs are deferred, then amortized over the original lives of
the respective debt issues. Gains and losses on the reacquisition of debt
are amortized over the remaining lives of the original issuance(s). Rate
case expenses are deferred, then amortized over periods approved by the
applicable regulatory authorities. Intangible assets are associated with the
acquisition of non-utility companies, and are amortized on a straight-line
basis over a period of five to 40 years. The gross intangible assets were
$2,516,120 and $1,920,851 at December 31, 1997 and 1996, respectively.
Accumulated amortization related to intangible assets was $1,093,905 and
$962,227 at December 31, 1997 and 1996, respectively. In addition, the 1997
acquisition of a propane business resulted in the Company acquiring
goodwill, a customer list and a non-compete agreement valued at $437,000,
$108,000 and $50,000, respectively.
Income Taxes and Investment Tax Credit Adjustments
The Company files a consolidated federal income tax return. Income tax
expense allocated to the Companys subsidiaries 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 bases of
assets and liabilities, and are measured using current effective income tax
rates. The portion of the Companys 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.
The Company had state tax loss carryforwards of $796,000 and $46,000 at
December 31, 1997 and 1996, respectively. The Company expects to use all of
the loss carryforwards; therefore, no valuation allowance was recorded at
December 31, 1997 or 1996. The loss carryforwards expire in 2006 through 2012.
Fair Value of Financial Instruments
Various items within the balance sheet are considered to be financial
instruments because they are cash or are to be settled in cash. The carrying
values of these items generally approximate their fair value (see Note C to
the Consolidated Financial Statements for disclosure of fair value of
investments). The fair value of the Companys long-term debt is estimated
using a discounted cash flow methodology. The estimated fair value of the
Companys long-term debt at December 31, 1997, including current maturities,
is approximately $40.7 million as compared to a carrying value of $38.8
million. At December 31, 1996, the estimated fair value was approximately
$30.3 million as compared to a carrying value of $29.8 million. These
estimates are based on published corporate borrowing rates for debt
instruments with similar terms and average maturities.
Operating Revenues
Revenues for the natural gas distribution divisions of the Company are based
on rates approved by the various commissions. Customers base rates may not
be changed without formal approval by these commissions. With the exception
of the Companys Florida division, the Company recognizes 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 propane segment recognizes
revenue for certain customers on a metered basis and all other customers on
an as-delivered basis.
The natural gas distribution divisions of the Company have purchased gas
adjustment ("PGA") 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.
The natural gas transmission segment became an open access pipeline on
November 1, 1997 with revenues based on rates approved by FERC. Before open
access, only portions of revenues were based on rates approved by FERC. In
addition, the transmission segment had a PGA clause similar to those in the
distribution operations. Since the transmission segment records revenue for
service only, the PGA clause no longer applies, now that open access is in
effect.
The Company charges flexible rates to the industrial interruptible customers
of the natural gas distribution segment to make natural gas competitive with
alternative types of fuel. Based on pricing, these customers can choose
natural gas or alternative types of supply. Neither the Company nor the
customer is contractually obligated to deliver or receive natural gas.
Earnings Per Share
The Company has adopted Statement of Financial Accounting Standards ("SFAS")
No. 128, issued by the Financial Accounting Standards Board ("FASB") in
February 1997, requiring dual presentation of basic and diluted per share
earnings on the face of the income statement. Basic earnings per share is
based on the weighted average number of shares of common stock outstanding.
On a diluted basis, both earnings and shares outstanding are adjusted for
stock options for each year presented and the assumed conversion of the
convertible debentures. The adoption of SFAS No. 128 did not have a material
effect on the Companys financial statements. Prior years presentations of
earnings per share have been restated to conform to the guidelines of SFAS
No. 128.
<TABLE>
<CAPTION>
CALCULATION OF DILUTED EARNINGS PER SHARE
- -------------------------------------------------------------------------------------------------
For the Years Ended December 31, 1997 1996 1995
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Reconciliation of Numerator:
Net Income - basic $5,682,946 $7,604,915 $7,593,506
Effect of 8.25% Convertible debentures 204,070 207,825 213,043
- -------------------------------------------------------------------------------------------------
Adjusted numerator - diluted $5,887,016 $7,812,740 $7,806,549
=================================================================================================
Reconciliation of Denominator:
Weighted Shares Outstanding - basic 4,472,087 4,412,137 4,336,431
Effect of Dilutive Securities
8.25% Convertible debentures 238,353 242,742 248,833
Stock options and performance shares * 38,462 22,053 4,487
- -------------------------------------------------------------------------------------------------
Adjusted denominator - diluted 4,748,902 4,676,932 4,589,751
=================================================================================================
Diluted Earnings per Share $1.24 $1.67 $1.70
=================================================================================================
<FN>
* The impact of the 95,492 stock options that were granted in 1997 (see Note H to
the Consolidated Financial Statements) could potentially dilute earnings per share
in the future.
</FN>
</TABLE>
Certain Risks and Uncertainties
The financial statements are prepared in conformity with generally accepted
accounting principles that require management to make estimates (see Note J
to the Consolidated Financial Statements for significant estimates) in
measuring assets and liabilities and related revenue and expenses. These
estimates involve judgements with respect to, among other things, various
future economic factors that are difficult to predict and are beyond the
control of the Company; therefore, actual results could differ from those
estimates.
The Company records certain assets and liabilities in accordance with SFAS
No. 71. If the Company were required to terminate application of SFAS No. 71
for regulated operations, all such deferred amounts would be recognized in
the income statement at that time, resulting in a charge to earnings, net of
applicable income taxes.
FASB Statements Issued
Comprehensive Income. In June 1997, the FASB issued SFAS No. 130 regarding
the reporting of comprehensive income in the full set of financial
statements. The Company must adopt the requirements of the standard in its
financial statements for the year beginning January 1, 1998. The effect of
the adoption of the standard pertains primarily to SFAS No. 115 regarding
held for sale investments, and is not expected to have a material impact
on the Companys financial statements.
Segment Information. In June 1997, FASB issued SFAS No. 131, establishing
standards for public business enterprises to report information about
operating segments in annual financial statements and requiring that those
enterprises report selected information about operating segments in
interim financial reports to shareholders. The Company will adopt the
requirements of this standard in the first quarter of the 1998 fiscal
year. The adoption of the standard is not expected to have a material
impact on the Companys financial statements.
Reclassification of Prior Years Amounts
Certain prior years amounts have been reclassified to conform to current
year presentation.
B. Business Combinations
In March 1997, the Company acquired all of the outstanding common stock of
Tri-County Gas Company, Inc. and associated properties. Tri-Countys
principal business is the distribution of propane to both retail and
wholesale customers in southern Delaware, the Eastern Shore of Maryland and
Virginia. Six hundred thirty-nine thousand shares of the Companys common
stock were exchanged in the transaction, which was accounted for as a
pooling of interests. All prior period consolidated financial statements
presented have been restated to include the combined results of operations,
financial position and cash flows of Tri-County. All material transactions
between the Company and Tri-County have been eliminated in consolidation.
The results of operations for the separate companies and the combined
amounts are presented in the consolidated financial statements to follow.
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------
Two months ended Year Ended Year Ended
February 28, 1997 December 31, 1996 December 31, 1995
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Operating Revenues
Chesapeake $29,690,819 $119,330,068 $104,020,416
Tri-County 2,652,910 10,883,341 7,775,362
- ---------------------------------------------------------------------------------------------------------------
Combined $32,343,729 $130,213,409 $111,795,778
===============================================================================================================
Net Income
Chesapeake $2,434,351 $6,910,428 $7,236,695
Tri-County 265,059 694,487 356,811
- ---------------------------------------------------------------------------------------------------------------
Combined $2,699,410 $7,604,915 $7,593,506
===============================================================================================================
Unaudited Pro Forma Net Income*
Chesapeake N/A $6,910,428 $7,236,695
Tri-County N/A 426,276 219,011
- ---------------------------------------------------------------------------------------------------------------
Combined N/A $7,336,704 $7,455,706
===============================================================================================================
<FN>
* Unaudited pro forma net income reflects adjustments to net income to record an estimated provision
for income taxes, assuming Tri-County was a tax paying entity in 1996 and 1995. During 1997, Tri-County
was a C Corporation for federal income tax purposes. Tri-County will be included in the Company's
U.S. federal income tax return, effective March 1997.
</FN>
</TABLE>
C. Investments
The investment balance at December 31, 1997 and 1996 consists primarily of
the common stock of Florida Public Utilities Company ("FPU"). The Companys
ownership at December 31, 1997 and 1996 represents a 7.34% and 7.41%
interest, respectively. The Company has classified its investment in FPU as
an "Available for Sale" security, which requires that all unrealized gains
and losses be excluded from earnings and be reported net of income tax as a
separate component of stockholders equity. At December 31, 1997 and 1996,
the market value exceeded the aggregate cost basis of the Companys
portfolio by $486,872 and $63,598, respectively.
D. Lease Obligations
The Company has entered several operating lease arrangements for office
space at various locations. Rent expense related to these leases was
$277,000, $293,000 and $409,000 for 1997, 1996 and 1995, respectively.
Future minimum payments under the Companys current lease agreements are
$236,000; $228,000; $232,000; $145,000 and $91,000 for the years of 1998
through 2002, respectively; and $198,000 thereafter.
<TABLE>
<CAPTION>
E. Segment Information
- ----------------------------------------------------------------------------------------------------------
For the Years Ended December 31, 1997 1996 1995
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Operating Revenues, Unaffiliated Customers
Natural gas distribution $75,940,968 $74,904,100 $54,120,280
Natural gas transmission 12,164,369 15,188,752 24,984,767
Propane distribution 26,994,404 33,179,114 25,345,696
Advanced information services 7,636,407 6,903,246 7,307,413
Other 38,445 38,197 37,622
- ----------------------------------------------------------------------------------------------------------
Total operating revenues, unaffiliated customers $122,774,593 $130,213,409 $111,795,778
==========================================================================================================
Intersegment Revenues *
Natural gas distribution $18,970 $12,232 $5,095
Natural gas transmission 19,282,359 21,543,352 16,663,043
Propane distribution 52,230 2,059 139,052
Advanced information services 149,602 326,913 1,554,498
Other 523,007 332,512 349,508
- ----------------------------------------------------------------------------------------------------------
Total intersegment revenues $20,026,168 $22,217,068 $18,711,196
==========================================================================================================
Operating Income Before Income Taxes
Natural gas distribution $5,498,471 $7,167,237 $4,728,348
Natural gas transmission 3,721,148 2,458,442 6,083,440
Propane distribution 1,063,554 2,814,958 2,252,165
Advanced information services 1,045,912 1,056,201 1,061,309
Other 524,785 406,632 215,146
- ----------------------------------------------------------------------------------------------------------
Total 11,853,870 13,903,470 14,340,408
Add (Less): Eliminations 32,727 153,591 (248,594)
- ----------------------------------------------------------------------------------------------------------
Total operating income before income taxes $11,886,597 $14,057,061 $14,091,814
==========================================================================================================
Depreciation and Amortization
Natural gas distribution $3,076,654 $2,907,831 $2,468,141
Natural gas transmission 892,258 697,834 638,099
Propane distribution 1,204,968 1,681,588 1,629,971
Advanced information services 122,081 131,877 969,587
Other 101,014 85,507 97,086
- ----------------------------------------------------------------------------------------------------------
Total depreciation and amortization $5,396,975 $5,504,637 $5,802,884
==========================================================================================================
Capital Expenditures
Natural gas distribution $5,826,065 $6,472,459 $7,424,489
Natural gas transmission 3,286,860 5,567,509 1,335,793
Propane distribution 2,820,166 2,189,368 2,427,773
Advanced information services 277,015 162,189 114,461
Other 559,043 445,916 1,584,813
- ----------------------------------------------------------------------------------------------------------
Total capital expenditures $12,769,149 $14,837,441 $12,887,329
==========================================================================================================
Identifiable Assets, at December 31,
Natural gas distribution $78,732,860 $77,426,232 $72,256,841
Natural gas transmission 24,781,292 23,981,989 19,292,524
Propane distribution 24,209,693 25,009,751 22,723,647
Advanced information services 1,751,192 1,496,419 1,635,100
Other 7,903,823 8,131,517 7,430,616
- ----------------------------------------------------------------------------------------------------------
Total identifiable assets $137,378,860 $136,045,908 $123,338,728
==========================================================================================================
* All significant intersegment revenues have been eliminated from consolidated revenues.
</TABLE>
F. Long-term Debt
The outstanding long-term debt, net of current maturities, is as follows:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------
At December 31, 1997 1996
- ------------------------------------------------------------------------------------
<S> <C> <C>
First mortgage sinking fund bonds:
Adjustable rate Series G*, due January 1, 1998 $0 $62,500
9.37% Series I, due December 15, 2004 4,300,000 4,820,000
12.00% Mortgage, due February 1, 1998 14,868
8.25% Convertible debentures, due March 1, 2014 3,926,000 4,087,000
Uncollateralized Senior notes:
7.97% note, due February 1, 2008 10,000,000 10,000,000
6.91% note, due October 1, 2010 10,000,000 10,000,000
6.85% note, due January 1, 2012 10,000,000
- ------------------------------------------------------------------------------------
Total long-term debt $38,226,000 $28,984,368
====================================================================================
<FN>
* The Series G bonds are subject to an interest rate equal to seventy-three
percent (73%) of the prime rate (8.50% and 8.25% at December 31, 1997 and
1996, respectively).
Annual maturities of consolidated long-term debt for the five years are as
follows: $582,500 for 1998, $1,520,000 for 1999 and $2,665,091 for the
years 2000 through 2002.
</FN>
</TABLE>
On December 15, 1997, the Company issued $10 million of 6.85% senior notes
due January 1, 2012. The Company used the proceeds to repay a portion of the
Companys short-term borrowing.
The convertible debentures may be converted, at the option of the holder,
into shares of the Companys common stock at a conversion price of $17.01
per share. During 1997, $156,000 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, 1997, no debentures have been accepted for redemption in 1998.
At the Companys option, the debentures may be redeemed at the stated
amounts.
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 capitalization, the times
interest earned ratio must be at least 2.5 and 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, 1997, the amounts available
for future dividends permitted by the Series I covenant approximated $14.6
million.
A portion of the natural gas distribution plant assets owned by the Company
are subject to a lien under the mortgage pursuant to which the Companys
first mortgage sinking fund bonds are issued.
G. Short-term Borrowings
The Board of Directors has authorized the Company to borrow up to $20.0
million from various bank and trust companies. As of December 31, 1997, the
Company had four unsecured bank lines of credit totaling $34.0 million, none
of which required compensating balances. Under these lines of credit at
December 31, 1997 and 1996, the Company had short-term debt outstanding of
$7.6 million and $12.7 million, respectively, with a weighted average
interest rate of 5.63% and 6.12%, respectively.
H. Common Stock, Additional Paid-in Capital and Treasury Stock
The following is a schedule of changes in the Companys shares of common
stock.
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------
For the Years Ended December 31, 1997 1996 1995 (1)
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Common Stock: Shares Issued and outstanding (2)
Balance - beginning of year 4,439,516 4,360,589 4,307,791
Dividend Reinvestment Plan (3) 32,169 33,926 38,660
Sale of stock to Company's Retirement Savings Plan 23,228 20,398
USI restricted stock award agreements 21,859 14,138
Conversion of debentures 9,166 881
Exercised stock options 1,863
- ----------------------------------------------------------------------------------------------------
Balance - end of year 4,504,079 4,439,516 4,360,589
====================================================================================================
<FN>
(1) The 1995 beginning balance of 4,307,791 has been restated to include 639,000 shares
of Common Stock that were issued to effect the business combination with Tri-County
Gas Company, Inc.
(2) 12,000,000 shares are authorized at a par value of $.4867 per share.
(3) Includes dividends and reinvested optional cash payments.
</FN>
</TABLE>
At the beginning of 1995, the Company had 15,609 shares of common stock held
in treasury. During 1995, all of these were sold to the Companys retirement
savings plan.
Certain key USI employees entered into restricted stock award agreements
under which shares of Chesapeake common stock can be issued. Shares were
awarded as a non-cash transaction 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. At December 31, 1997 and 1996,
respectively, 12,515 and 24,350 shares valued at $190,886 and $364,529
remain restricted.
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. In November 1994, the Company executed Tandem Stock Option and
Performance Share Agreements ("Agreements") with certain executive officers.
These Agreements provide the participants an option to purchase shares of
the Companys common stock, exercisable in cumulative installments of one-
third on each anniversary of the commencement of the award period. The
Agreements also enable the participants the right to earn performance shares
upon the Companys achievement of the performance goals set forth in the
Agreements. During the three-year period ended December 31, 1997, the
aforementioned performance goals were achieved. Following the approval of
the Board of Directors on February 27, 1998, the Company issued 44,081
performance shares. Forty-four thousand ninety-six stock options expired
upon the issuance of the performance shares on February 27. In 1997, the
Company recorded $415,681 to recognize the compensation expense associated
with the performance shares. Changes in outstanding options were as follows:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------
1997 1996 1995
- --------------------------------------------------------------------------------------------------------------------
Number Option Number Option Number Option
of shares Price of Shares Price of shares Price
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance - beginning of year 113,051 $12.625 - $12.75 125,186 $12.625 - $12.75 136,186 $12.625 - $12.75
Options granted 95,492 $20.50
Options exercised (12,135) $12.75
Options forfeited (11,000) $12.625
- --------------------------------------------------------------------------------------------------------------------
Balance - end of year 208,543 $12.625 - $20.50 113,051 $12.625 - $12.75 125,186 $12.625 - $12.75
====================================================================================================================
Exercisable 98,083 $12.625 - $12.75 83,114 $12.625 - $12.75 80,280 $12.75
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
In December 1997, the Company granted stock options to certain executive
officers of the Company. As required by SFAS No. 123, 1997 pro forma net
income as if fair value based accounting had been used to account for the
stock-based compensation costs is $5,679,603. Pro forma basic and diluted
earnings per share are $1.27 and $1.24, respectively. Pro forma disclosures
for 1997 are not likely to be representative of future effects of reported
net income. The fair value of each option grant was estimated on the date of
grant using the Black-Scholes option-pricing model with the following
weighted-average assumptions used for grants in 1997: dividend yield of
4.73%; expected volatility of 15.53%; risk-free interest rate of 5.89%; and
expected lives of four years.
I. Employee Benefit Plans
Pension Plan
The Company sponsors a defined benefit pension plan covering substantially
all of its employees. Benefits under the plan are based on each
participants years of service and highest average compensation. The
Companys 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.
<TABLE>
<CAPTION>
PENSION COST
- ---------------------------------------------------------------------------------------------
For the Years Ended December 31, 1997 1996 1995
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Service cost $680,192 $656,985 $474,000
Interest cost 732,188 658,238 562,003
Actual return on assets (2,427,768) (1,142,287) (1,546,325)
Net amortization and deferral 1,421,028 269,135 689,947
- ---------------------------------------------------------------------------------------------
Total net pension cost 405,640 442,071 179,625
Amounts capitalized as construction cost (33,942) (38,860) (30,740)
- ---------------------------------------------------------------------------------------------
Amount charged to expense $371,698 $403,211 $148,885
=============================================================================================
</TABLE>
The following schedule sets forth the funding status of the pension plan at
December 31, 1997 and 1996.
<TABLE>
<CAPTION>
ACCRUED PENSION COST
- ------------------------------------------------------------------------------------
At December 31, 1997 1996
- ------------------------------------------------------------------------------------
<S> <C> <C>
Vested $7,615,194 $6,834,661
Non-vested 123,255 139,483
- ------------------------------------------------------------------------------------
Total accumulated benefit obligation 7,738,449 6,974,144
====================================================================================
Plan assets at fair value $13,592,699 $10,720,514
Projected benefit obligation (11,534,355) (10,265,987)
- ------------------------------------------------------------------------------------
Plan assets less projected benefit obligation 2,058,344 454,527
Unrecognized net gain (4,038,679) (2,820,957)
Unamortized net assets from adoption of SFAS No. 87 (198,326) (141,579)
- ------------------------------------------------------------------------------------
Accrued pension cost ($2,178,661) ($2,508,009)
====================================================================================
Assumptions:
Discount rate 7.25% 7.25%
Average increase in future compensation levels 4.75% 4.75%
Expected long-term rate of return on assets 8.50% 8.50%
- ------------------------------------------------------------------------------------
</TABLE>
Other Post-retirement Benefits
The Company sponsors a defined benefit post-retirement health care and life
insurance plan that covers substantially all natural gas and corporate
employees. The Company had deferred approximately $126,000, which
represented the difference between the Maryland divisions SFAS No. 106
expense and its actual pay-as-you-go cost. The amount is being amortized
over five years starting in 1995. The unamortized balance is $78,000 at
December 31, 1997.
<TABLE>
<CAPTION>
POST-RETIREMENT COST
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C>
For the Years Ended December 31, 1997 1996 1995
- ---------------------------------------------------------------------------------------------
Service cost $3,287 $2,820 $1,827
Interest cost on APBO 60,221 54,651 59,706
Amortization of transition obligation over 20 years 29,413 27,859 27,859
- ---------------------------------------------------------------------------------------------
Net periodic post-retirement benefit cost 92,921 85,330 89,392
Amount capitalized as construction cost (16,274) (16,672) (14,010)
Amount amortized (deferred) 25,254 25,254 (20,561)
- ---------------------------------------------------------------------------------------------
Amount charged to expense $101,901 $93,912 $54,821
=============================================================================================
</TABLE>
<TABLE>
<CAPTION>
ACCRUED POST-RETIREMENT LIABILITY
- ------------------------------------------------------------------------------------
At December 31, 1997 1996
- ------------------------------------------------------------------------------------
<S> <C> <C>
Accumulated post-retirement benefit obligation:
Retirees $621,203 $567,599
Fully eligible active employees 145,356 137,378
Other active 102,340 86,894
- ------------------------------------------------------------------------------------
Total accumulated post-retirement benefit obligation 868,899 791,871
Unrecognized transition obligation (245,154) (273,013)
Unrecognized net (loss) gain (147,422) (67,155)
- ------------------------------------------------------------------------------------
Accrued post-retirement liability $476,323 $451,703
====================================================================================
Assumption:
Discount rate 7.25% 7.25%
- ------------------------------------------------------------------------------------
</TABLE>
The health care inflation rate for 1997 is assumed to be 9.5%. This rate is
projected to gradually decrease to an ultimate rate of 5% by the year 2007.
A one percentage point increase in the health care inflation rate from the
assumed rate would increase the accumulated post-retirement benefit
obligation by approximately $98,650 as of January 1, 1998, and would
increase the aggregate of the service cost and interest cost components of
net periodic post-retirement benefit cost for 1998 by
approximately $8,293.
Retirement Savings Plan
The Company sponsors a Retirement Savings Plan, a 401(k) plan ("Plan"), that
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% or 100% of each
participants pre-tax contributions, not to exceed 6%, of the participants
eligible compensation for the plan year. The Companys contributions totaled
$404,406, $353,350 and $301,794 for the years ended December 31, 1997, 1996
and 1995, respectively. As of December 31, 1997, there are 56,374 shares
reserved to fund future contributions to the Plan.
J. Environmental Commitments and Contingencies
The Company currently is participating in the investigation, assessment or
remediation of three former gas manufacturing plant sites located in
different jurisdictions, including the exploration of corrective action
options to remove environmental contaminants. The Company has accrued
liabilities for two of these sites, the Dover Gas Light and Salisbury Town
Gas Light sites.
The Dover sites remediation costs are estimated at $4.2 million in the
Record of Decision ("ROD") issued by the Environmental Protection Agency
("EPA") in January 1998. The Company and General Public Utilities
Corporation, Inc. ("GPU") were ordered by the EPA to fund or implement the
ROD. During 1998, the Company will commence with the design phase. The
Company has adjusted the liability associated with the Dover site from $6.0
million to $4.2 million. The Company has also recorded a regulatory asset in
the same amount. The previous accrual of $6.0 million was based on the
original Record of Decision issued by the EPA in 1994.
The Company initiated litigation against one of the other potentially
responsible parties for contribution to the remedial costs incurred by
Chesapeake in connection with complying with the ROD. At this time,
management cannot predict the outcome of the litigation or the amount of
proceeds to be received, if any. Management believes that 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 Companys rates.
In cooperation with the Maryland Department of the Environment ("MDE"), in
1996 the Company completed construction and began remediation procedures at
the Salisbury site. In addition, the Company began quarterly reporting of
the remediation and monitoring results to the MDE. The Company has
established a liability with respect to the Salisbury site of $665,000 as of
December 31, 1997. This amount is based on the estimated operating costs of
the remediation facilities. A corresponding regulatory asset has been
recorded, reflecting the Companys belief that costs incurred will be
recoverable in rates.
Portions of the liability payouts for the Dover and Salisbury sites are
expected to be over 30 and five-year periods, respectively. In addition, the
Company has a site located in the state of Florida, which is currently being
evaluated. At this time, no estimate of liability can be made. It is
managements opinion that any unrecovered current costs and any other future
costs incurred will be recoverable through future rates or sharing
arrangements with other responsible parties.
<TABLE>
<CAPTION>
ENVIRONMENTAL COSTS INCURRED
- ------------------------------------------------------------------------------------
At December 31, 1997 1996
- ------------------------------------------------------------------------------------
<S> <C> <C>
Delaware $5,317,380 $4,423,843
Maryland 2,368,168 2,187,810
Florida 692,391 660,828
- ------------------------------------------------------------------------------------
Total costs incurred 8,377,939 7,272,481
Less: Amounts, net of insurance proceeds, which
have been approved for ratemaking treatment (7,319,496) (6,396,108)
- ------------------------------------------------------------------------------------
Amounts pending ratemaking recovery 1,058,443 876,373
====================================================================================
</TABLE>
K. Commitments and Contingencies
FERC PGA
In the third quarter of 1995, Eastern Shore reached a settlement with the
FERC pertaining to Eastern Shores PGA methodology. Accordingly, Eastern
Shore reversed a large portion of the estimated liability that had been
accrued. This reversal contributed $1,385,000 to pre-tax earnings, or
$833,000 to after-tax earnings, for the period.
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.
L. 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 Companys
business, there are substantial variations in operations reported on a
quarterly basis.
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------
For the Quarters Ended: March 31 June 30 September 30 December 31
- -----------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
1997
Operating Revenue $43,645,111 $24,805,428 $19,910,307 $34,413,746
Operating Income 4,104,438 1,409,752 25,177 3,019,603
Net Income 3,366,113 692,841 (739,193) 2,363,185
Earnings per share:
Basic 0.76 0.16 (0.17) 0.53
Diluted 0.72 0.15 (0.17) 0.51
- -----------------------------------------------------------------------------------
1996
Operating Revenue $49,026,542 $25,213,979 $19,637,074 $36,335,814
Operating Income 6,667,499 1,084,392 (160,422) 2,518,536
Net Income 6,000,157 486,311 (747,779) 1,866,226
Earnings per share:
Basic 1.37 0.11 (0.17) 0.42
Diluted 1.30 0.11 (0.17) 0.41
- -----------------------------------------------------------------------------------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Operating Statistics
- --------------------------------------------------------------------------------------------------
For the Years Ended December 31, 1997 1996 1995 1994 (1) 1993 (1)
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Revenues (in thousands)
Natural gas
Residential $21,540 $18,256 $14,857 $15,228 $14,007
Commercial 16,557 14,339 11,383 11,594 10,837
Industrial 22,625 28,546 36,898 32,718 31,622
Sale for resale 23,010 24,481 12,459 9,586 5,242
Transportation 4,212 3,369 2,993 2,639 2,480
Other 162 1,102 515 (50) 193
- --------------------------------------------------------------------------------------------------
Total natural gas revenues 88,106 90,093 79,105 71,715 64,381
Propane (1) 26,994 33,179 25,346 17,789 16,908
Other 7,675 6,941 7,345 6,173 4,584
- --------------------------------------------------------------------------------------------------
Total revenues $122,775 $130,213 $111,796 $95,677 $85,873
==================================================================================================
Volumes
Natural gas deliveries (in MMCF)
Residential 1,753 1,987 1,686 1,665 1,596
Commercial 2,138 2,092 1,792 1,771 1,676
Industrial 5,946 7,501 13,622 10,752 9,308
Sale for resale 872 1,065 990 998 984
Transportation 12,559 12,096 11,131 7,542 5,880
- --------------------------------------------------------------------------------------------------
Total natural gas deliveries 23,268 24,741 29,221 22,728 19,444
==================================================================================================
Propane (in thousands of gallons) (1) 26,682 29,975 26,184 18,395 17,250
==================================================================================================
Customers
Natural gas
Residential 31,277 30,349 29,285 28,260 27,312
Commercial 4,288 4,151 4,030 3,879 3,759
Industrial (2) 229 210 212 204 196
Sale for resale (2) 3 3 3 3 3
- --------------------------------------------------------------------------------------------------
Total natural gas customers 35,797 34,713 33,530 32,346 31,270
Propane 33,998 32,218 31,372 22,180 21,622
- --------------------------------------------------------------------------------------------------
Total customers 69,795 66,931 64,902 54,526 52,892
==================================================================================================
<FN>
(1) 1994 and 1993 have not been restated to include the business combination
with Tri-County Gas Company, Inc.
(2) 1994 amounts exclude $2,895,000 in revenue and nine million gallons of
propane sold to one large wholesale customer.
(3) Includes transportation customers.
</FN>
</TABLE>
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 March 30, 1998
in connection with the Companys Annual Meeting to be held on May 19, 1998.
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 "Report on Executive Compensation", dated and to be filed on or before
March 30, 1998 in connection with the Companys Annual Meeting to be held on
May 19, 1998.
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 Companys Securities", dated and to be
filed on or before March 30, 1998 in connection with the Companys Annual
Meeting to be held on May 19, 1998.
Item 13. Certain Relationships and Related Transactions
This information is incorporated herein by reference to the Proxy Statement,
under "Beneficial Ownership of the Companys Securities", dated and to be
filed on or before March 30, 1998 in connection with the Companys Annual
Meeting to be held on May 19, 1998.
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:
- Accountants Report dated February 12, 1998 of Coopers & Lybrand
L.L.P., Independent Accountants
- Consolidated Statements of Income for each of the three years
ended December 31, 1997, 1996 and 1995
- Consolidated Balance Sheets at December 31, 1997 and
December 31, 1996
- Consolidated Statements of Cash Flows for each of the three years
ended December 31, 1997, 1996 and 1995
- Consolidated Statements of Common Stockholders Equity for each
of the three years ended December 31, 1997, 1996 and 1995
- Consolidated Statements of Income Taxes for each of the three
years ended December 31, 1997, 1996 and 1995
- Notes to Consolidated Financial Statements
2. The following additional information for the years 1997, 1996 and
1995 is submitted herewith:
- Schedule II - Valuation and Qualifying Accounts
All other schedules are omitted because they are not required, are
inapplicable or the information is otherwise shown in the financial
statements or notes thereto.
(b) Reports on Form 8-K
None.
(c) Exhibits
Exhibit 2(a) - Agreement and Plan of Merger by and between Chesapeake
Utilities Corporation and Tri-County Gas Company, Inc., filed on
the Companys Form 8-K, File No. 001-11590 on January 13, 1997, is
incorporated herein by reference.
Exhibit 3(a) - Amended Certificate of Incorporation of Chesapeake Utilities
Corporation is incorporated herein by reference to Exhibit 3 of the
Companys Quarterly Report on Form 10-Q for the period ended June
30, 1995, File No. 001-11590.
Exhibit 3(b) - Amended Bylaws of Chesapeake Utilities Corporation, effective
July 11, 1997, are incorporated herein by reference to Exhibit 3 of
the Quarterly Report on Form 10-Q for the period ended June 30,
1997, File No. 001-11590.
Exhibit 4(a) - Form of Indenture between the Company and Boatmens Trust
Company, Trustee, with respect to the 8 1/4% Convertible Debentures
is incorporated herein by reference to Exhibit 4.2 of the Companys
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 million of 7.97%
Unsecured Senior Notes due February 1, 2008, is incorporated herein
by reference to Exhibit 4 to the Companys Annual Report on Form
10-K for the year ended December 31, 1992, File No. 0-593.
Exhibit 4(c) - Directors Stock Compensation Plan adopted by Chesapeake
Utilities Corporation in 1995 is incorporated herein by reference
to the Companys Proxy Statement dated April 17, 1995 in connection
with the Companys Annual Meeting held in May 1995.
Exhibit 4(d) Note Purchase Agreement entered into by the Company on October
2, 1995, pursuant to which the Company privately placed $10 million
of its 6.91% Senior Notes due in 2010, is not being filed herewith,
in accordance with Item 601(b)(4)(iii) of Regulation S-K. The
Company hereby agrees to furnish a copy of that agreement to the
Commission upon request.
Exhibit 4(e) Note Purchase Agreement entered into by the Company on
December 15, 1997, pursuant to which the Company privately placed
$10.million of its 6.85 senior notes due 2012, is not being filed
herewith, in accordance with Item 601(b)(4)(iii) of Regulation S-K.
The Company hereby agrees to furnish a copy of that agreement to
the Commission upon request.
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 to the Companys Annual Report on Form 10-K for the year ended
December 31, 1989, File No. 0-593.
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 to the
Companys Annual Report on Form 10-K for the year ended December
31, 1989, File No. 0-593.
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 to the Companys Annual Report on Form 10-K
for the year ended December 31, 1990, File No. 0-593.
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 to the Companys Annual Report on Form 10-K
for the year ended December 31, 1990, File No. 0-593.
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 to the Companys Annual Report on Form 10-K
for the year ended December 31, 1990, File No. 0-593.
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 to the Companys
Annual Report on Form 10-K for the year ended December 31, 1990,
File No. 0-593.
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 to the Companys Annual Report on Form 10-K
for the year ended December 31, 1990, File No. 0-593.
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 to the Companys Annual Report on Form 10-K
for the year ended December 31, 1990, File No. 0-593.
Exhibit 10(i) - Executive Employment Agreement dated March 26, 1997, by and
between Chesapeake Utilities Corporation and each Ralph J. Adkins
and John R. Schimkaitis is incorporated herein by reference to
Exhibit 10 to the Companys Quarterly Report on Form 10-Q for the
period ended June 30, 1997, File No. 001-11590.
Exhibit 10(j) - Form of Performance Share Agreement dated January 1, 1998,
pursuant to Chesapeake Utilities Corporation Performance Incentive
Plan by and between Chesapeake Utilities Corporation and each of
Ralph J. Adkins and John R. Schimkaitis is filed herewith.
Exhibit 10(k) - Chesapeake Utilities Corporation Cash Bonus Incentive Plan
dated January 1, 1992, is incorporated herein by reference to
Exhibit 10 to the Companys Annual Report on Form 10-K for the year
ended December 31, 1991, File No. 0-593.
Exhibit 10(l) - Chesapeake Utilities Corporation Performance Incentive Plan
dated January 1, 1992, is incorporated herein by reference to the
Companys Proxy Statement dated April 20, 1992, in connection with
the Companys Annual Meeting held on May 19, 1992.
Exhibit 10(m) - Form of Stock Option Agreement dated January 1, 1998,
pursuant to Chesapeake Utilities Corporation Performance Incentive
Plan by and between Chesapeake Utilities Corporation and each of
Michael P. McMasters, Stephen C. Thompson, William C. Boyles,
Philip S. Barefoot, Jeremy D. West, William P. Schneider and James
R. Schneider, is filed herewith.
Exhibit 12 - Computation of Ratio of Earning to Fixed Charges, filed herewith.
Exhibit 21 - Subsidiaries of the Registrant, filed herewith.
Exhibit 23 - Consent of Independent Accountants, filed herewith.
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
Chairman of the Board and Chief
Executive Officer
Date: March 20, 1998
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.
/S/ RALPH J. ADKINS /S/ JOHN R. SCHIMKAITIS
- ------------------------------ ------------------------------
Ralph J. Adkins, Chairman of the John R. Schimkaitis,
Board, President, Chief Executive Chief Operating Officer
Officer and Director and Director
Date: March 20, 1998 Date: March 20, 1998
/S/ MICHAEL P. MCMASTERS /S/ RICHARD BERNSTEIN
- ------------------------------ ------------------------------
Michael P. McMasters, Vice President, Richard Bernstein, Director
Chief Financial Officer and Treasurer
(Principal Financial Officer)
Date: March 20, 1998 Date: March 20, 1998
/S/ WALTER J. COLEMAN /S/ JOHN W. JARDINE, JR.
- ------------------------------ ------------------------------
Walter J. Coleman, Director John W. Jardine, Jr., Director
Date: March 20, 1998 Date: March 20, 1998
/S/ RUDOLPH M. PEINS, JR. /S/ ROBERT F. RIDER
- ------------------------------ ------------------------------
Rudolph M. Peins, Jr., Director Robert F. Rider, Director
Date: March 20, 1998 Date: March 20, 1998
/S/ JEREMIAH P. SHEA /S/ WILLIAM G. WARDEN, III
- ------------------------------ ------------------------------
Jeremiah P. Shea, Director William G. Warden, III, Director
Date: March 20, 1998 Date: March 20, 1998
<PAGE>
<TABLE>
<CAPTION>
CHESAPEAKE UTILITIES CORPORATION AND SUBSIDIARIES
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
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
- ----------------------------------------------------------------------------------------------------------------
Valuation accounts deducted from assets
to which they apply for doubtful
accounts receivable:
<S> <C> <C> <C> <C> <C>
1997 . . . . . . . . . . . . . . $392,412 $203,624 $68,038 (B) ($332,299) (A) $331,775
1996 . . . . . . . . . . . . . . $309,955 $364,622 $55,631 (B) ($337,796) (A) $392,412
1995 . . . . . . . . . . . . . . $202,152 $328,012 $43,151 (B) ($263,360) (A) $309,955
</TABLE>
Notes:
(A) Uncollectible accounts charged off.
(B) Recoveries.
<TABLE>
<CAPTION>
CHESAPEAKE UTILITIES CORPORATION AND SUBSIDIARIES
EXHIBIT 12
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
For the Years Ended December 31,
---------------------------------------
1997 1996 1995
---------------------------------------
<S> <C> <C> <C>
Income from continuing operations 5,682,946 7,604,915 7,593,506
Add:
Income taxes 3,599,430 4,085,610 3,865,179
Portion of rents representative of interest factor 140,491 129,223 182,211
Interest on indebtedness 3,269,479 2,907,314 2,848,567
Amortization of debt discount and expense 119,401 120,345 109,399
---------------------------------------
Earnings as adjusted 12,811,747 14,847,407 14,598,862
=======================================
Fixed Charges
Portion of rents representative of interest factor $140,491 $129,223 $182,211
Interest on indebtedness 3,269,479 2,907,314 2,848,567
Amortization of debt discount and expense 119,401 120,345 109,399
---------------------------------------
Fixed Charges $3,529,371 $3,156,882 $3,140,177
=======================================
Ratio of Earnings to Fixed Charges 3.63 4.70 4.65
=======================================
</TABLE>
<TABLE>
<CAPTION>
CHESAPEAKE UTILITIES CORPORATION
EXHIBIT 21
SUBSIDIARIES OF THE REGISTRANT
Subsidiaries State Incorporated
------------ ------------------
<S> <C>
Eastern Shore Natural Gas Company Delaware
Sharp Energy, Inc. Delaware
Chesapeake Services Company Delaware
United Systems, Inc. Georgia
Tri-County Gas Company, Inc. Maryland
Eastern Shore Real Estate Maryland
Subsidiary of Eastern Shore Natural Gas Company State Incorporated
----------------------------------------------- ------------------
Dover Exploration Company Delaware
Subsidiaries of Sharp Energy, Inc. State Incorporated
---------------------------------- ------------------
Sharpgas, Inc. Delaware
Sharpoil, Inc. Delaware
Subsidiaries of Chesapeake Service Company State Incorporated
------------------------------------------ ------------------
Skipjack, Inc. Delaware
Capital Data Systems, Inc. North Carolina
Currin and Associates, Inc. North Carolina
Chesapeake Investment Company Delaware
</TABLE>
CONSENT OF INDEPENDENT ACCOUNTANTS
________
We consent to the incorporation by reference in the
Prospectuses of Chesapeake Utilities Corporation on Form S-2
(File No. 33-26582), Form S-3 (File Nos. 33-28391 and 33-64671)
and Form S-8 (File No. 33-301175) of our report dated February
12, 1998 on our audits of the consolidated financial statements
and the consolidated financial statement schedules of Chesapeake
Utilities Corporation as of December 31, 1997 and 1996 and for
each of the three years in the period ended December 31, 1997
included in this Annual Report on Form 10-K.
COOPERS & LYBRAND L.L.P.
Baltimore, Maryland
March 23, 1998
PERFORMANCE SHARE AGREEMENT
pursuant to the
CHESAPEAKE UTILITIES CORPORATION
PERFORMANCE INCENTIVE PLAN
AGREEMENT dated as of January 1, 1998 and entered into, in duplicate,
by and between Chesapeake Utilities Corporation, a Delaware corporation
(the "Company"), and [Ralph J. Adkins/John R. Schimkaitis] (the "Grantee")
who resides at [address].
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 performance share 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 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. PERFORMANCE SHARE AWARD
The Company hereby grants to the Grantee a Performance Share Award for
the three-year period commencing January 1, 1998 and ending December 31,
2000 (the "Award Period"). As more fully described herein, the Performance
Share Award consists of the right to earn [XX,XXX] Performance Shares upon
the Company's achieving the Performance Goals set forth in Section 2
hereof. Such Performance Shares shall be restricted as to transfer as set
forth in Section 2(b) hereof.
Section 2. PERFORMANCE SHARES
(a) As soon as practicable after the Company's independent auditors
have certified the Company's financial statements for each calendar year in
the Award Period ("Award Year"), the Committee shall determine for purposes
of this Agreement the Company's earnings growth (measured by reference to
book value per share), growth in non-gas net income ("NGNI") and share
price relative to book value ("Price/Book Value") as of the end of that
Award Year. EG, NGNI and Price/Book Value 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. For each Award Year, the Grantee shall
be eligible to earn a maximum number of Performance Shares equal to [X,XXX]
plus the Rollover Number as defined below (the "Maximum Award").
On a cumulative basis, a Grantee shall earn
Performance Shares in each Award Year as follows:
-- If book value per share for the Award Year
exceeds book value per share for the prior calendar year by
seven percent (7%) or more, then the Grantee shall receive
fifty percent (50%) of the Maximum Award for such Award Year;
-- If NGNI for the Award Year exceeds NGNI for the
prior calendar year by ten percent (10%) or more, then the
Grantee shall receive thirty percent (30%) of the Maximum
Award for such Award Year; and/or
-- If Price/Book Value for the Award Year falls
within the top quintile of companies included in the C.A.
Turner database (natural gas distribution companies and
integrated natural gas distribution companies) for such Award
Year, then the Grantee shall receive twenty percent (20%) of
the Maximum Award for such Award Year.
For purposes of this Agreement, the "Rollover Number" of
Performance Shares for Award Year 1998 shall be zero and the
Rollover Number of Performance Shares for each of Award Years
1999 and 2000 shall be seventy-five percent (75%) of the
difference between the Maximum Award for the prior Award Year
and the number of Performance Shares earned by the Grantee for
such Award Year.
(b) Performance Shares shall be issued to the Grantee
promptly upon the determination described in paragraph (a),
without payment of consideration by the Grantee. The Grantee
shall have 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
Performance 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.
(c) 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 (b) of
this Section 2, shall be issued, subject to the provisions of
paragraph (d) of this Section 2.
(d) The Performance Shares will be not registered for
resale under the Securities Act of 1933 or the laws of any
state except when and to the extent determined by the Board
pursuant to a resolution. Until a registration statement is
filed and becomes effective, however, transfer of the
Performance Shares after expiration of the Restriction Period
will require the availability of an exemption from such
registration, and prior to the 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 an investment representation letter and/or further
legending the new certificates) to ensure that the Performance
Shares are not transferred in the absence of such exemption.
(e) In the event of a Change of Control as defined in
the Plan during an Award Year, the maximum number of
Performance Shares set forth in Section 2(a) for such Award
Year, pro rated based on the proportion of such Award Year
expired as of the date of such Change of Control, shall be
deemed earned upon the occurrence of the Change of Control.
(f) If during an Award Year, 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 Performance Shares for uncompleted Award Years
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
that would otherwise have been earned at the end of the Award
Year of separation shall be reduced by pro rating such
Performance Shares based on the proportion of the Award Year
during which the Grantee was employed by the Company, unless
the Committee determines that the Performance Shares shall not
be so reduced;
(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 through
the remaining term of this Agreement as set forth above.
Section 3. WITHHOLDING
(a) The Grantee shall be solely responsible for any
federal, state or local income taxes imposed in connection
with the delivery of Performance Shares. Prior to the
transfer of Performance Shares to the Grantee, the Grantee
shall remit to 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,
unless the Committee otherwise determines by resolution.
Section 4. ADDITIONAL CONDITIONS TO ISSUANCE OF
SHARES
Each 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, 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.
Section 5. ADJUSTMENT OF SHARES
(a) If the Company shall be involved in merger,
consolidation or other reorganization, whether or not the
Company is the surviving corporation, any right to earn
Performance Shares shall be deemed a right to earn the
compensation into which the shares of Common Stock represented
by the Performance Shares would have been converted under the
terms of the merger, consolidation or other reorganization.
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 number of Performance Shares to be earned
in order to prevent the dilution or enlargement of the rights
of the Grantee.
Section 6. 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 7. NOTICE
Any notice to be given hereunder by the Grantee shall be
sent by mail addressed to Chesapeake Utilities Corporation,
861 Silver Lake Boulevard, 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, by notice
given to the other in accordance with the provisions of this
Section 7, 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 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.
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
long as any 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
(..continued)
STOCK OPTION AGREEMENT
pursuant to the
CHESAPEAKE UTILITIES CORPORATION
PERFORMANCE INCENTIVE PLAN
AGREEMENT dated as of January 1, 1998 and entered into, in duplicate,
by and between Chesapeake Utilities Corporation, a Delaware corporation
(the "Company"), and [Jeremy D. West/William C. Boyles/Michael P.
McMasters/Steve Thompson/Philip Barefoot/William P. Schneider/James
Schneider] (the "Grantee") who resides at [address].
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 stock option award described
herein pursuant to the Plan; and
WHEREAS, [subject to Section 12,] 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. STOCK OPTION AWARD
The Company hereby grants to the Grantee a Stock Option Award for the
three-year period commencing January 1, 1998 and ending December 31, 2000
(the "Award Period"). As more fully described herein, the Stock Option
Award consists of an option to purchase [XX,XXX] shares of the Company's
Common Stock (par value $.4867 per share) (the "Option"), half subject to
the time vesting requirements and half subject to the performance vesting
requirements set forth in Section 2 hereof. Subject to all the terms and
conditions hereinafter set forth, the Option shall be irrevocable. The
price at which the Option shall be exercisable shall be $20.50 per Share
(the "Exercise Price").
Section 2. THE OPTION
(a) 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, 2005 (the "Expiration Date").
-- On or after December 31, 1998, the Option may be exercised in
respect of one-sixth of the aggregate number of Shares specified in Section
1.
-- On or after December 31, 1999, the Option may be exercised in
respect of an additional one-sixth of the aggregate number of Shares
specified in Section 1.
-- On or after December 31, 2000, the Option may be exercised in
respect of an additional one-sixth of the aggregate number of Shares
specified in Section 1.
(b) In addition, as soon as practicable after the Company's
independent auditors have certified the Company's financial statements for
each calendar year in the Award Period (an "Award Year"), the Committee
shall determine for that calendar year and for purposes of this Agreement
the Company's earnings growth (measured by reference to book value per
share) ("EG"), growth in non-gas net income ("NGNI") and share price
relative to book value ("Price/Book Value") as of the end of that Award
Year. EG, NGNI and Price/Book Value 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. Following each such determination, the Grantee shall be
eligible to exercise the Option as to additional shares subject to the
performance vesting requirements set forth below.
On a cumulative basis, a Grantee may exercise the Option after
each determination for an Award Year as follows:
-- If EG for the Award Year exceeds EG for the prior calendar
year by seven percent (7%) or more, then the Grantee may exercise his
Option with respect to one-twelfth of the aggregate number of Shares
specified in Section 1;
-- If NGNI for an Award Year exceeds NGNI for the prior calendar
year by ten percent (10%) or more, then the Grantee may exercise his Option
with respect to one-twentieth of the aggregate number of Shares specified
in Section 1; and/or
-- If Price/Book Value for an Award Year falls within the top
quintile of companies included in the C.A. Turner database (natural gas
distribution companies and integrated natural gas companies), then the
Grantee may exercise his Option with respect to one-thirtieth of the
aggregate number of Shares specified in Section 1.
(c) In the event of a Change in Control, as defined in the Plan, (A)
all Option installments subject to Section 2(a) above that have not
theretofore become exercisable shall become exercisable in full and (B) the
Option installment subject to Section 2(b) for the Award Year in which the
Change in Control occurs shall be become exercisable as if all performance
criteria were satisfied for such Award Year but only in proportion to the
total number of days in the year that have elapsed prior to the Change in
Control.
(d) 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.
(e) 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.
(f) 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 (e) of this Section 2, shall be issued, subject to the provisions
of this paragraph (f). The Shares will not be registered for resale under
the Securities Act of 1933 or the laws of any state except when and to the
extent determined by the Board pursuant to a resolution. Until a
registration statement is filed and becomes effective, however, 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 an investment representation letter and/or further legending the
new certificates) to ensure that Shares are not transferred in the absence
of such an exemption.
(g) 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.
(h) 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 5 of this 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.
(i) 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.
(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 and reduced by the number of shares subject to
Section 2(c) for which performance criteria were not met in year completed
prior to termination. The remaining 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, 2001, 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.
(j) 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. 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. Prior to
the transfer of 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 upon exercise of an Option, unless the Committee shall
determine otherwise by resolution.
Section 4. ADDITIONAL CONDITIONS TO ISSUANCE OF SHARES
Each exercise of the Option or any portion thereof 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)
(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 5. 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 if the holder
had exercised such portion of the Option immediately prior to the merger,
consolidation or other reorganization. Any option deemed granted under
this Section 5(a) shall be deemed granted on the date the original Option
was granted for purposes of the vesting provisions of Section 2. 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 in order to prevent the dilution or
enlargement of the rights of the Grantee.
Section 6. 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 7. NOTICE
Any notice to be given hereunder by the Grantee shall be sent by mail
addressed to Chesapeake Utilities Corporation, 861 Silver Lake Boulevard,
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, by notice given to the other
in accordance with the provisions of this Section 7, change the address to
which subsequent notices shall be sent.
Section 8. 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.
Section 9. 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.
Section 10. 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 11. 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 issued to the Grantee under this
Agreement continue to be held by the Grantee.
Section 12. SHAREHOLDER APPROVAL
It is a condition precedent to the exercise of all or a portion of the
Option issued to the Grantee that the shareholders of the Company pursuant
to Section 8.01(a) of the Plan shall have approved an amendment to Section
6.01 of the Plan increasing the number of shares subject to awards under
the Plan to a number of shares greater than the number of shares of Common
Stock subject to awards granted under the Plan through the date of this
Agreement.
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
(..continued)
- - 7 -
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This schedule contains summary financial information extracted from
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This schedule contains summary financial information extracted from
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1281970
0 0 0 0
0
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0
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0
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42455950
<TOT-CAPITALIZATION-AND-LIAB> 123453978 118227447 122075302 136045910
123338728
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111795778
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4025274
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97703964
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101729238
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10066540
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391450
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10457990
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2864484
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7593506
0 0 0 0
0
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7593506
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3615104
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2282247
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13923378
<EPS-PRIMARY> 1.37 1.47 1.30 1.72
1.75
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1.70
</TABLE>
