<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------------------
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ______ to ______
COMMISSION FILE NUMBER: 001-11590
CHESAPEAKE UTILITIES CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 51-0064146
(State of other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
909 SILVER LAKE BOULEVARD, DOVER, DELAWARE 19904
(Address of principal executive offices) (Zip Code)
(302) 734-6799
(Registrant's Telephone Number, Including Area Code)
(Former name, former address and former fiscal year,
if changed since last report.)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
Common Stock, par value $.4867 - 5,076,939 shares issued as of September 30,
1998.
<PAGE> 2
PART I
FINANCIAL INFORMATION
CHESAPEAKE UTILITIES CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1998 1997
ASSETS (UNAUDITED) (RESTATED)
- --------------------------------------------------------------------------------------------
<S> <C> <C>
PROPERTY, PLANT AND EQUIPMENT
Natural gas distribution $ 79,444,734 $ 74,769,458
Natural gas transmission 34,685,867 33,856,873
Propane distribution and marketing 27,071,334 27,091,102
Advanced information services 1,041,772 841,757
Other plant 7,110,287 6,896,899
Gas plant acquisition adjustment 795,004 795,004
- --------------------------------------------------------------------------------------------
Total property, plant and equipment 150,148,998 144,251,093
Less: Accumulated depreciation and amortization (47,665,380) (44,371,890)
- --------------------------------------------------------------------------------------------
Net property, plant and equipment 102,483,618 99,879,203
- --------------------------------------------------------------------------------------------
INVESTMENTS 3,876,034 2,721,443
- --------------------------------------------------------------------------------------------
CURRENT ASSETS
Cash and cash equivalents 916,873 4,829,176
Accounts receivable, less allowance for uncollectibles 10,586,072 15,598,777
Materials and supplies, at average cost 1,556,900 1,424,312
Propane inventory, at average cost 2,228,676 2,436,200
Storage gas prepayments 2,915,962 2,926,618
Underrecovered purchased gas costs 582,480 1,673,389
Income taxes receivable - 787,034
Prepaid expenses 1,700,487 1,107,825
Deferred income taxes 490,088 247,487
- --------------------------------------------------------------------------------------------
Total current assets 20,977,538 31,030,818
- --------------------------------------------------------------------------------------------
DEFERRED CHARGES AND OTHER ASSETS
Environmental regulatory assets 4,736,136 4,865,073
Environmental expenditures, net 2,893,923 2,372,929
Other deferred charges and intangible assets 4,086,340 4,053,068
- --------------------------------------------------------------------------------------------
Total deferred charges and other assets 11,716,399 11,291,070
- --------------------------------------------------------------------------------------------
TOTAL ASSETS $139,053,589 $144,922,534
============================================================================================
</TABLE>
The accompanying notes are an integral part of these financial statements.
2
<PAGE> 3
CHESAPEAKE UTILITIES CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1998 1997
CAPITALIZATION AND LIABILITIES (UNAUDITED) (RESTATED)
- --------------------------------------------------------------------------------
<S> <C> <C>
CAPITALIZATION
Stockholders' equity
Common Stock, par value $.4867 per
share; (authorized 12,000,000 shares;
issued 5,076,939 and 5,004,078 shares,
respectively) $ 2,470,819 $ 2,435,142
Additional paid-in capital 23,903,562 22,581,463
Retained earnings 27,908,713 28,554,001
Accumulated other comprehensive income 696,764 296,872
Less:
Unearned compensation--restricted
stock awards (101,002) (190,886)
- --------------------------------------------------------------------------------
Total stockholders' equity 54,878,856 53,676,592
Long-term debt, net of current portion 37,870,000 38,694,741
- --------------------------------------------------------------------------------
Total capitalization 92,748,856 92,371,333
- --------------------------------------------------------------------------------
CURRENT LIABILITIES
Current portion of long-term debt 520,000 582,500
Short-term borrowing 5,200,000 7,600,010
Accounts payable 10,969,844 16,164,032
Refunds payable to customers 263,516 357,041
Income taxes payable 562,792 -
Accrued interest 867,671 784,533
Dividends payable 1,269,132 1,092,168
Other accrued expenses 3,840,137 3,829,497
- --------------------------------------------------------------------------------
Total current liabilities 23,493,092 30,409,781
- --------------------------------------------------------------------------------
DEFERRED CREDITS AND OTHER LIABILITIES
Deferred income taxes 11,441,207 11,490,358
Deferred investment tax credits 786,433 821,617
Environmental liability 4,736,136 4,865,073
Accrued pension costs 2,078,835 1,754,715
Other liabilities 3,769,030 3,209,657
- --------------------------------------------------------------------------------
Total deferred credits and other liabilities 22,811,641 22,141,420
- --------------------------------------------------------------------------------
TOTAL CAPITALIZATION AND LIABILITIES $139,053,589 $144,922,534
================================================================================
</TABLE>
The accompanying notes are an integral part of these financial statements.
3
<PAGE> 4
CHESAPEAKE UTILITIES CORPORATION AND SUBSIDIARIES
CONSOLIDATED INCOME STATEMENTS
(UNAUDITED)
<TABLE>
<CAPTION>
RESTATED
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1998 1997
- ------------------------------------------------------------------------------
<S> <C> <C>
OPERATING REVENUES $36,231,924 $41,680,719
COST OF SALES 28,085,138 33,608,290
- ------------------------------------------------------------------------------
GROSS MARGIN 8,146,786 8,072,429
- ------------------------------------------------------------------------------
OPERATING EXPENSES
Operations 6,430,835 5,884,878
Maintenance 493,894 471,674
Depreciation and amortization 1,541,710 1,410,097
Other taxes 911,918 867,920
Income taxes (771,606) (543,701)
- ------------------------------------------------------------------------------
Total operating expenses 8,606,751 8,090,868
- ------------------------------------------------------------------------------
OPERATING INCOME (459,965) (18,439)
OTHER INCOME, NET 23,052 70,492
- ------------------------------------------------------------------------------
INCOME BEFORE INTEREST CHARGES (436,913) 52,053
INTEREST CHARGES 829,585 826,251
- ------------------------------------------------------------------------------
NET INCOME $(1,266,498) $(774,198)
==============================================================================
EARNINGS PER SHARE OF COMMON STOCK:
Basic: $ (0.25) $ (0.16)
- ------------------------------------------------------------------------------
Diluted: $ (0.25) $ (0.16)
- ------------------------------------------------------------------------------
</TABLE>
COMPREHENSIVE INCOME STATEMENTS
(UNAUDITED)
<TABLE>
<CAPTION>
RESTATED
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1998 1997
- ------------------------------------------------------------------------------
<S> <C> <C>
NET INCOME $(1,266,498) $ (774,198)
COMPONENTS OF COMPREHENSIVE INCOME, NET OF
INCOME TAXES
Unrealized Gain/(Loss) on Marketable
Securities (16,808) 33,616
- ------------------------------------------------------------------------------
COMPREHENSIVE INCOME $(1,283,306) $ (740,582)
==============================================================================
</TABLE>
The accompanying notes are an integral part of these financial statements.
4
<PAGE> 5
CHESAPEAKE UTILITIES CORPORATION AND SUBSIDIARIES
CONSOLIDATED INCOME STATEMENTS
(UNAUDITED)
<TABLE>
<CAPTION>
RESTATED
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998 1997
- ------------------------------------------------------------------------------------
<S> <C> <C>
OPERATING REVENUES $139,995,969 $162,901,824
COST OF SALES 105,260,338 128,866,837
- ------------------------------------------------------------------------------------
GROSS MARGIN 34,735,631 34,034,987
- ------------------------------------------------------------------------------------
OPERATING EXPENSES
Operations 18,604,094 17,661,056
Maintenance 1,505,544 1,573,091
Depreciation and amortization 4,576,084 4,136,315
Other taxes 3,045,862 2,997,694
Income taxes 1,731,775 2,118,734
- ------------------------------------------------------------------------------------
Total operating expenses 29,463,359 28,486,890
- ------------------------------------------------------------------------------------
OPERATING INCOME 5,272,272 5,548,097
OTHER INCOME, NET 223,468 270,086
- ------------------------------------------------------------------------------------
INCOME BEFORE INTEREST CHARGES 5,495,740 5,818,183
INTEREST CHARGES 2,471,129 2,426,318
- ------------------------------------------------------------------------------------
NET INCOME $ 3,024,611 $ 3,391,865
====================================================================================
EARNINGS PER SHARE OF COMMON STOCK:
Basic: $ 0.60 $ 0.68
- ------------------------------------------------------------------------------------
Diluted: $ 0.60 $ 0.68
- ------------------------------------------------------------------------------------
</TABLE>
COMPREHENSIVE INCOME STATEMENTS
(UNAUDITED)
<TABLE>
<CAPTION>
RESTATED
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998 1997
- ------------------------------------------------------------------------------------
<S> <C> <C>
NET INCOME $ 3,024,611 $ 3,391,865
COMPONENTS OF COMPREHENSIVE INCOME, NET OF
INCOME TAXES
Unrealized Gain/(Loss) on Marketable
Securities 399,892 25,962
- ------------------------------------------------------------------------------------
COMPREHENSIVE INCOME $ 3,424,503 $ 3,417,827
====================================================================================
</TABLE>
The accompanying notes are an integral part of these financial statements.
5
<PAGE> 6
CHESAPEAKE UTILITIES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
RESTATED
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998 1997
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C>
OPERATING ACTIVITIES
Net Income $ 3,024,611 $ 3,391,865
Adjustments to reconcile net income to net operating cash:
Depreciation and amortization 5,057,149 4,493,875
Deferred income taxes, net (1,046,451) (275,145)
Investment tax credit adjustments (35,184) (36,231)
Employee benefits 324,119 363,597
Employee compensation from lapsing stock restrictions 89,884 130,181
Other 59,371 (17,480)
Changes in assets and liabilities:
Accounts receivable 5,385,316 15,171,810
Inventory, materials, supplies and storage gas 85,592 17,895
Assets and liabilities from trading activities (372,610) 1,176,193
Prepaid expenses (592,661) 169,677
Other deferred charges 350,791 18,729
Accounts payable (5,194,188) (19,111,751)
Refunds payable to customers (93,525) (17,159)
Overrecovered purchased gas costs 1,090,909 1,988,614
Other current liabilities 1,912,650 (1,287,283)
- --------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 10,045,773 6,177,387
- --------------------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES
Property, plant and equipment expenditures, net (8,066,622) (9,949,607)
- --------------------------------------------------------------------------------------------------------------
Net cash used by investing activities (8,066,622) (9,949,607)
- --------------------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES
Common stock dividends net of amounts reinvested of
$453,844 and $409,920, respectively (3,039,091) (2,719,136)
Net (repayment) borrowing under line of credit agreements (2,400,010) 5,665,010
Converted debenture bonds 95,856 -
Proceeds from issuance of stock to Company 401(k) plan 339,032 298,028
Repayments of long-term debt (887,241) (2,760,566)
- --------------------------------------------------------------------------------------------------------------
Net cash (used) provided by financing activities (5,891,454) 483,336
- --------------------------------------------------------------------------------------------------------------
NET DECREASE IN CASH $(3,912,303) $ (3,288,884)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 4,829,176 7,139,838
- --------------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 916,873 $ 3,850,954
==============================================================================================================
</TABLE>
The accompanying notes are an integral part of these financial statements.
6
<PAGE> 7
CHESAPEAKE UTILITIES CORPORATION AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
1. QUARTERLY FINANCIAL DATA
Chesapeake Utilities Corporation's (the "Company") financial information
included herein is unaudited; however, the financial information reflects
normal recurring adjustments, which are, in the opinion of management,
necessary for a fair presentation of the Company's interim results. Due to
the seasonal nature of the Company's business, there are substantial
variations in the results of operations reported on a quarterly basis.
Certain amounts in 1997 have been reclassified to conform with the 1998
presentation.
2. ACQUISITIONS
On March 31, 1998, Chesapeake acquired Sam Shannahan Well Company, Inc.,
operating as Tolan Water Service, in exchange for 25,000 shares of the
Company's common stock. Tolan provides water treatment services to
approximately 3,000 residential, commercial and industrial customers on the
Delmarva Peninsula.
On May 29, 1998, the Company acquired all of the outstanding shares of Xeron,
Inc. ("Xeron"), a privately held company headquartered in Houston, Texas,
engaged in the wholesale marketing of natural gas liquids, primarily propane,
to both major and large independent oil and petrochemical companies,
wholesale gas resellers and southeastern propane companies. The transaction
was effected through the exchange of 475,000 shares of the Company's common
stock and was accounted for as a pooling of interests. Xeron will continue to
operate as a subsidiary of Chesapeake. Xeron accounts for all open positions
on a mark to market basis and reflects the resulting gains and losses in
revenue.
The results of operations for the separate companies and the combined amounts
are presented in the following table.
<TABLE>
<CAPTION>
THREE MONTHS ENDED SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 30,
1998 1997 1998 1997
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
OPERATING REVENUES
Chesapeake $ 16,085,658 $ 19,910,307 $ 76,514,578 $ 88,360,846
Xeron 19,717,074 21,269,741 62,183,831 73,335,653
Tolan 429,192 500,671 1,297,560 1,205,325
- --------------------------------------------------------------------------------------------------------
COMBINED $ 36,231,924 $ 41,680,719 $ 139,995,969 $ 162,901,824
- --------------------------------------------------------------------------------------------------------
NET INCOME
Chesapeake $ (1,267,544) $ (739,193) $ 2,812,633 $ 3,319,760
Xeron 13,032 (33,271) 183,673 9,235
Tolan (11,986) (1,734) 28,305 62,870
- --------------------------------------------------------------------------------------------------------
COMBINED $ (1,266,498) $ (774,198) $ 3,024,611 $ 3,391,865
- --------------------------------------------------------------------------------------------------------
</TABLE>
7
<PAGE> 8
3. CALCULATION OF DILUTED EARNINGS PER SHARE
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1998 1997
- --------------------------------------------------------------------------
<S> <C> <C>
RECONCILIATION OF NUMERATOR:
Net Loss -- Basic $(1,266,498) $ (774,198)
Effect of 8.25% Convertible debentures* - -
- --------------------------------------------------------------------------
Adjusted numerator -- Diluted $(1,266,498) $ (774,198)
- --------------------------------------------------------------------------
RECONCILIATION OF DENOMINATOR:
Weighted Shares Outstanding -- Basic 5,071,791 4,977,568
Effect of Dilutive Securities*
8.25% Convertible debentures - -
Stock options and performance shares - -
- --------------------------------------------------------------------------
Adjusted denominator -- Diluted 5,071,791 4,977,568
- --------------------------------------------------------------------------
DILUTED EARNINGS PER SHARE $ (0.25) $ (0.16)
- --------------------------------------------------------------------------
</TABLE>
* Due to the Company reporting a net loss for the three months ended
September 30, 1998 and 1997, any adjustment to the numerator or denominator
would be considered antidilutive; therefore, they are not shown in this
calculation although they could have a dilutive effect in the future or in
other periods.
<TABLE>
<CAPTION>
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998 1997
- --------------------------------------------------------------------------
<S> <C> <C>
RECONCILIATION OF NUMERATOR:
Net Income -- Basic $3,024,611 $3,391,865
Effect of 8.25% Convertible debentures* - 153,816
- --------------------------------------------------------------------------
Adjusted numerator -- Diluted $3,024,611 $3,545,681
- --------------------------------------------------------------------------
RECONCILIATION OF DENOMINATOR:
Weighted Shares Outstanding -- Basic 5,050,742 4,963,478
Effect of Dilutive Securities
8.25% Convertible debentures* - 240,204
Stock options and performance shares 12,442 33,437
- --------------------------------------------------------------------------
Adjusted denominator -- Diluted 5,063,184 5,237,119
- --------------------------------------------------------------------------
DILUTED EARNINGS PER SHARE $ (0.60) $ (0.68)
- --------------------------------------------------------------------------
</TABLE>
* Inclusion of the convertible debentures produces an anti-dilutive effect in
the calculation of diluted earnings per share for the nine months ended
September 30, 1998; therefore, they are not shown in this calculation although
they could have a dilutive effect in the future or in other periods.
4. INVESTMENTS
The Company owns 218,464 shares of Florida Public Utilities Company ("FPU")
stock with a cost basis of $10.02 per share. 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. See
"Accumulated other comprehensive income" in the Stockholders' equity section
of the Consolidated Balance Sheet. The unrealized gain at September 30, 1998
represents the difference between our cost basis of $10.02 per share and the
market value of the stock at September 30, 1998 of $15.25 per share. In
August 1998, the Company entered into an agreement with Southern Company to
sell our investment in FPU for $16.50 per share. The sale is contingent on
Southern Company receiving approvals from the proper regulatory authority and
their Board of Directors.
5. COMMITMENTS AND CONTINGENCIES -- ENVIRONMENTAL MATTERS The Company is
currently participating in the investigation, assessment and remediation of
three former gas manufacturing plant sites located in different
jurisdictions, including the exploration of corrective
8
<PAGE> 9
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.
(a) DOVER GAS LIGHT SITE
The Dover site has been listed by the Environmental Protection Agency Region
III ("EPA") on the Superfund National Priorities List under the Comprehensive
Environmental Response, Compensation and Liability Act ("CERCLA"). In 1994,
the EPA issued the site Record of Decision ("ROD"), which selected a remedial
plan and estimated the costs of the selected remedy at $2.7 million for
ground-water remediation and $3.3 million for soil remediation. In 1995, EPA
issued an order to the Company under Section 106 of CERCLA (the "Order"),
requiring the Company to fund or implement the ROD. The Order was also issued
to General Public Utilities Corporation, Inc. ("GPU"), which both the EPA and
the Company believe is liable under CERCLA. Other potentially responsible
parties ("PRPs") such as the State of Delaware were not ordered to perform
the ROD. 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. EPA may seek judicial enforcement of its Order, as well as significant
financial penalties for failure to comply. Additional information pertaining
to remediation costs, investigations related to additional parties who may be
PRPs and/or litigation initiated by the Company can be found in the Company's
annual report on Form 10-K for the year ended December 31, 1997 (see the
"Environmental -- Dover Gas Light Site" section, beginning on page 11).
In conjunction with the commencement of the design phase of the ROD, a
pre-design investigation report ("the report") was filed in October 1996 with
the EPA. In the report, the Company proposed a modification to the soil
cleanup remedy selected in the ROD to take into account an existing land use
restriction banning future development at the site. In August 1997, the EPA
issued a Proposed Plan to modify the current clean-up plan that would
involve: (1) excavation of an 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. 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 complying with the ROD as amended in the Proposed Plan, as
listed above, and is currently seeking EPA approval for the ground-water
remediation design. Soil vaporization extraction and soil remediation
pertaining to the former subsurface gas holders started in the third quarter.
The Company adjusted its accrued liability recorded with respect to the Dover
site to $4.2 million at December 31, 1997. This amount reflects the EPA's
estimate, as stated in the ROD issued in January 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 pursuant to a settlement agreement between the parties, the
Company will be equitably entitled to contribution from other responsible
parties for a portion of the expenses to be incurred in connection with the
remedies selected in the ROD. Management also believes that the amounts not
so contributed will be recoverable in the Company's rates.
As of September 30, 1998, the Company has incurred approximately $5.9 million
in costs relating to environmental testing and remedial action studies. In
1990, the Company entered into settlement agreements with a number of
insurance companies resulting in proceeds to fund actual environmental costs
incurred over a five to seven-year period beginning in 1990. The final
insurance proceeds were requested and received in 1992. In December 1995, the
Delaware Public Service Commission authorized a process to review and provide
recovery of all current and future unrecovered environmental costs
9
<PAGE> 10
incurred by means of a rider (supplement) to base rates, applicable to all
firm service customers. As of September 30, 1998, $1,033,000 of environmental
costs are not included in the December 1, 1997 rider. With the rider
mechanism established, it is management's opinion that these costs and any
future costs, net of the deferred income tax benefit, will be recoverable in
rates. For additional information pertaining to the rider, refer to the
"Environmental -- Dover Gas Light Site" section of the Company's annual
report on Form 10-K for the year ended December 31, 1997, beginning on page
11.
(b) SALISBURY TOWN GAS LIGHT SITE
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 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 Company's projected remediation costs for
this site. The liability payout for this site is expected to be over a
five-year period. As of September 30, 1998, the Company has incurred
approximately $2.5 million for remedial actions and environmental studies. In
January 1990, the Company entered into settlement agreements with a number of
insurance companies resulting in proceeds to fund actual environmental costs
incurred over a three to five-year period beginning in 1990. The final
insurance proceeds were requested and received in 1992. In December 1995, the
Maryland Public Service Commission approved recovery of all environmental
costs incurred through September 30, 1995 less amounts previously amortized
and insurance proceeds. The amount approved for a 10-year amortization period
was $964,251. Of the $2.5 million in costs reported above, approximately
$726,000 has not been recovered through insurance proceeds or received
ratemaking treatment. It is management's opinion that these and any future
costs incurred 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 Company's
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, the description of the
scope of work to complete the site assessment activities and a report
describing a limited sediment investigation performed recently. The Company
will be awaiting FDEP's 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 recovery through rates charged to
customers of approximately $696,000 on these investigations as of September
30, 1998. The Florida Public Service Commission has allowed the Company to
continue to accrue for future environmental costs. At September 30, 1998,
Chesapeake had $484,000 accrued to recover future costs which might be
incurred. It is management's opinion that these and future costs, if any
above this level, will also be recoverable in rates.
6. RECENT ACCOUNTING PRONOUNCEMENTS
(a) COMPREHENSIVE INCOME -- As of January 1, 1998, the Company adopted
Statement of Financial Accounting Standards ("SFAS") No. 130, Reporting
Comprehensive Income, which requires additional disclosures with respect to
certain changes in assets and liabilities that previously were not reported
as results of operations for the period.
10
<PAGE> 11
(b) SEGMENT INFORMATION -- The Financial Accounting Standards Board has
issued SFAS No. 131, Disclosures about Segments of an Enterprise and Related
Information, which became effective for periods beginning after December 15,
1997. Interim reporting is not required under SFAS No. 131 prior to its
adoption. SFAS No. 131 requires financial and descriptive information with
respect to "operating segments" of an entity based on the way management
disaggregates the entity for making internal operating decisions. The Company
will begin making the disclosures required by SFAS No. 131 with financial
statements for the period ending December 31, 1998. The impact of SFAS No.
131 will only effect disclosure, as results are disaggregated. There will be
no financial impact from the adoption.
(c) PENSIONS AND OTHER POST-RETIREMENT BENEFITS -- The FASB has issued SFAS
No. 132, Employers' Disclosures about Pensions and Other Post-retirement
Benefits, for periods beginning after December 15, 1997. Interim reporting is
not required prior to its adoption. This statement standardizes the
disclosure requirements for pensions and other post-retirement benefits,
requires additional information on changes in the benefit obligations and
fair values of plan assets and eliminates certain disclosures that are no
longer useful. The Company will begin making the disclosures required by SFAS
No. 132 with financial statements for the period ending December 31, 1998.
The impact of SFAS No. 132 will only effect disclosure. There will be no
financial impact from the adoption.
(d) DERIVATIVES -- SFAS No. 133, Accounting for Derivative Instruments and
Hedging Activities, establishes accounting and reporting standards for
derivative instruments, including certain derivative instruments embedded in
other contracts, and hedging activities. It requires that an entity recognize
all derivatives as either assets or liabilities in the statement of financial
position and measure those instruments at fair value. This statement is
effective for all fiscal quarters of fiscal years beginning after June 15,
1999. Management is currently assessing any financial impact the adoption may
have.
11
<PAGE> 12
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS FOR THE
QUARTER ENDED SEPTEMBER 30, 1998
The Company recognized net loss of $1,266,498 for the third quarter of 1998,
representing an increase in net loss of $492,300 as compared to the
corresponding period in 1997. As indicated in the following table, the increase
in loss is primarily due to a greater Loss Before Interest and Taxes ("LBIT")
from the natural gas distribution and propane segments coupled with a reduction
in Earnings Before Interest and Taxes ("EBIT") for the natural gas transmission
segment. These were partially offset by increased EBIT contributions from the
advanced information services segment.
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1998 1997 CHANGE
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Earnings/(Loss) Before Interest & Taxes
Natural Gas Distribution $ (788,300) $ (497,846) $ (290,454)
Natural Gas Transmission 482,052 777,484 (295,432)
Propane Distribution & Marketing (1,421,710) (1,226,019) (195,691)
Advanced Information Services 389,444 254,381 135,063
Other & Eliminations 106,943 129,860 (22,917)
- ---------------------------------------------------------------------------------------------------------------------------
EBIT/(LBIT) (1,231,571) (562,140) (669,431)
Operating Income Taxes (771,606) (543,701) (227,905)
Interest 829,585 826,251 3,334
Non-Operating Income, net 23,052 70,492 (47,440)
- ---------------------------------------------------------------------------------------------------------------------------
Net Loss $ (1,266,498) $ (774,198) $ (492,300)
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
NATURAL GAS DISTRIBUTION
The natural gas distribution segment reported LBIT of $788,300 for the third
quarter of 1998 as compared to $497,846 for the corresponding period last year
- -- an increase of $290,454. The increase in LBIT is due to lower margins
combined with higher operating expenses.
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1998 1997 CHANGE
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Revenue $ 9,944,572 $ 11,487,517 $ (1,542,945)
Cost of Gas 6,387,277 7,793,376 (1,406,099)
- --------------------------------------------------------------------------------------------------------------------------
Gross Margin 3,557,295 3,694,141 (136,846)
Operations & Maintenance 2,919,683 2,823,385 96,298
Depreciation & Amortization 852,144 795,382 56,762
Other Taxes 573,768 573,220 548
- --------------------------------------------------------------------------------------------------------------------------
LBIT $ (788,300) $ (497,846) $ (290,454)
- --------------------------------------------------------------------------------------------------------------------------
</TABLE>
Gross margin is down due to a reduction in service work revenue and deliveries
to interruptible customers somewhat offset by firm customer growth from 1997 to
1998. During 1997, the Company recognized an $86,000 increase in service work
revenue, primarily one large non-recurring job. Interruptible volumes were
primarily affected by lower sales to our Florida division's interruptible
industrial customers primarily engaged in the phosphate industry. Increased
operating expenses are partially related to an aggressive marketing campaign
designed to build awareness of the Company's services and continue building
customer growth, offset by a reduction in billable service work. In addition,
consulting fees and regulatory commission expenses
12
<PAGE> 13
increased. These are partially offset by decreased data processing costs,
pensions and benefits. Depreciation and amortization expense increased due to
plant placed in service during the past year.
NATURAL GAS TRANSMISSION
The natural gas transmission segment reported EBIT of $482,052 for the third
quarter of 1998 as compared to EBIT of $777,484 for the corresponding period
last year -- a decrease of $295,432. The reduction in EBIT is primarily due to
an decrease in gross margin.
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1998 1997 CHANGE
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Revenue $2,055,534 $6,857,335 $(4,801,801)
Cost of Gas 480,103 5,078,678 (4,598,575)
- ------------------------------------------------------------------------------------------
Gross Margin 1,575,431 1,778,657 (203,226)
Operations & Maintenance 722,594 680,274 42,320
Depreciation & Amortization 267,774 223,928 43,846
Other Taxes 103,011 96,971 6,040
- ------------------------------------------------------------------------------------------
EBIT $ 482,052 $ 777,484 $ (295,432)
- ------------------------------------------------------------------------------------------
</TABLE>
During 1998, the transmission segment's margins are generated almost entirely by
firm billing entitlements related to the provision of natural gas transportation
services. As a part of restructuring to an open access pipeline, the Company
implemented seasonal transportation service entitlements. Accordingly, the
transmission segment has less margin during the off-peak periods; furthermore in
1997 the transmission segment was still selling natural gas and recording
margins on the sale of the gas. The reduction in margin is also due to the
elimination of interruptible sales margins in 1998. For additional information
related to open access and its impact on gross margin, see the Natural Gas
Transmission portion of "Results of Operations for the Nine Months Ended
September 30, 1998". Depreciation and amortization increased due to capital
additions placed in service during the past year.
PROPANE DISTRIBUTION AND MARKETING
Xeron, Inc., the propane wholesale marketing company acquired in May 1998, has
been combined with Chesapeake's propane distribution operation for financial
statement reporting. Xeron is a high volume, low margin wholesale propane
business; accordingly Xeron's revenues are strongly influenced by the wholesale
cost of propane. See Note 2 to the Consolidated Financial Statements for further
disclosure of Xeron's revenues and net income for the periods shown.
For the third quarter of 1998, the propane segment reported a loss before
interest and taxes of $1,421,710, as compared to $1,226,019 for the same period
last year. The $195,691 increase in the loss is primarily the result of
increased expenses somewhat offset by an increase in gross margin.
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1998 1997 CHANGE
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Revenue $22,392,292 $24,244,594 $(1,852,302)
Cost of Sales 21,016,607 22,890,913 (1,874,306)
- --------------------------------------------------------------------------------------------
Gross Margin 1,375,685 1,353,681 22,004
Operations & Maintenance 2,348,640 2,168,525 180,115
Depreciation & Amortization 328,722 309,844 18,878
Other Taxes 120,033 101,331 18,702
- --------------------------------------------------------------------------------------------
LBIT $(1,421,710) $(1,226,019) $ (195,691)
- --------------------------------------------------------------------------------------------
</TABLE>
13
<PAGE> 14
The increase in gross margin is due primarily to a 151% increase in wholesale
marketing margins combined with a 15% reduction in distribution margins.
Operations and maintenance expenses increased, primarily due to incentive
compensation for the wholesale operations and increased marketing initiative for
the distribution operations. Depreciation and amortization increased due to
plant additions placed in service during the past year.
ADVANCED INFORMATION SERVICES
The advanced information services segment recognized an EBIT of $389,444 and
$254,381 for the quarters ended September 30, 1998 and 1997, respectively. This
increase in EBIT of $135,063 is attributable an increase in margin earned offset
by higher expenses.
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1998 1997 CHANGE
- ------------------------------------------------------------------------------------
<S> <C> <C> <C>
Revenue $2,845,601 $2,051,180 $794,421
Cost of Sales 1,376,459 1,019,487 356,972
- ------------------------------------------------------------------------------------
Gross Margin 1,469,142 1,031,693 437,449
Operations & Maintenance 939,052 665,777 273,275
Depreciation & Amortization 47,759 33,412 14,347
Other Taxes 92,887 78,123 14,764
- ------------------------------------------------------------------------------------
EBIT $ 389,444 $ 254,381 $135,063
- ------------------------------------------------------------------------------------
</TABLE>
Higher revenues are primarily due to increased consulting services, partially
offset by a reduction in placement service revenues. Increased compensation and
training expenses due to associated increases in staffing levels partially
offset the additional revenue.
OPERATING INCOME TAXES
Operating income taxes increased due to the increase in operating loss.
14
<PAGE> 15
RESULTS OF OPERATIONS FOR THE
NINE MONTHS ENDED SEPTEMBER 30, 1998
The Company recognized net income of $3,024,611 for the first nine months of
1998, representing a decrease in net income of $367,254 as compared to the
corresponding period in 1997. Included in 1997's results is a one-time charge of
$318,000 to establish deferred income taxes associated with the acquisition of
Tri-County Gas Company, Inc. Exclusive of this one-time charge, earnings
decreased $685,254. As indicated in the following table, the decrease in income
is primarily due to lower Earnings Before Interest and Taxes contributed by the
natural gas distribution segment, offset by a greater contribution to EBIT from
the natural gas transmission segment.
<TABLE>
<CAPTION>
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998 1997 CHANGE
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Earnings Before Interest & Taxes
Natural Gas Distribution $ 2,869,453 $ 3,921,919 $ (1,052,466)
Natural Gas Transmission 2,816,442 2,091,774 724,668
Propane Distribution & Marketing (96,566) 144,490 (241,056)
Advanced Information Services 994,374 975,681 18,693
Other & Eliminations 420,344 532,967 (112,623)
- --------------------------------------------------------------------------------------------------
EBIT 7,004,047 7,666,831 (662,784)
Operating Income Taxes 1,731,775 2,118,734 (386,959)
Interest 2,471,129 2,426,318 44,811
Non-Operating Income, net 223,468 270,086 (46,618)
- --------------------------------------------------------------------------------------------------
Net Income $ 3,024,611 $ 3,391,865 $ (367,254)
- --------------------------------------------------------------------------------------------------
</TABLE>
NATURAL GAS DISTRIBUTION
The natural gas distribution segment reported EBIT of $2,869,453 for the first
nine months of 1998 as compared to $3,921,919 for the corresponding period last
year -- a decrease of $1,052,466. The decrease in EBIT is due to higher
operating expenses coupled with lower margins.
<TABLE>
<CAPTION>
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998 1997 CHANGE
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Revenue $ 50,142,562 $ 53,775,644 $ (3.633,082)
Cost of Gas 34,165,565 37,432,641 (3,267,076)
- --------------------------------------------------------------------------------------------------
Gross Margin 15,976,997 16,343,003 (366,006)
Operations & Maintenance 8,634,996 8,129,550 505,446
Depreciations & Amortization 2,546,198 2,371,871 174,327
Other Taxes 1,926,350 1,919,663 6,687
- --------------------------------------------------------------------------------------------------
EBIT $ 2,869,453 $ 3,921,919 $ (1,052,466)
- --------------------------------------------------------------------------------------------------
</TABLE>
Gross margin is down due to decreased deliveries to our Florida division's
interruptible industrial customers primarily engaged in the phosphate industry.
Firm customer growth from 1997 to 1998 helped to offset the impact of the
unseasonably warm weather on volumes. Temperatures during the first nine months
of 1998 were 18% warmer than the same period last year and 21% warmer than the
10-year average. The Company estimates that 1998 gross margin would have been
approximately $700,000 higher under normal weather conditions (i.e. the 10-year
average). Increased expenses are partially due to an aggressive marketing
campaign designed to build awareness of the Company's services and continue
building customer growth. In addition, compensation, customer installation and
rent expenses increased. These are partially offset by decreased data processing
costs, legal fees, pensions and benefits. Depreciation and amortization expense
increased due to plant placed in service during the past year.
15
<PAGE> 16
NATURAL GAS TRANSMISSION
The natural gas transmission segment reported EBIT of $2,816,442 for the first
nine months of 1998 as compared to EBIT of $2,091,774 for the corresponding
period last year -- an increase of $724,668. The increase in EBIT is primarily
due to an increase in gross margin.
<TABLE>
<CAPTION>
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998 1997 Change
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Revenue $ 7,687,669 $ 25,590,929 $(17,903,260)
Cost of Gas 1,619,932 20,332,861 (18,712,929)
- ------------------------------------------------------------------------------------------------------
Gross Margin 6,067,737 5,258,068 809,669
Operations & Maintenance 2,141,227 2,190,646 (49,419)
Depreciation & Amortization 803,322 669,304 134,018
Other Taxes $ 306,746 $ 306,344 $ 402
- ------------------------------------------------------------------------------------------------------
EBIT $ 2,816,442 $ 2,091,774 $ 724,668
- ------------------------------------------------------------------------------------------------------
</TABLE>
Revenues and cost of gas have declined in 1998 as a result of Eastern Shore
Natural Gas Company becoming an open access pipeline on November 1, 1997. The
increase in gross margin in 1998 is partially attributable to a rate increase
and an increase in firm transportation service entitlements implemented in 1997.
The Company expects gross margin for the transmission segment during 1998 to be
between $8.0 and $8.3 million (see Cautionary Statement). Comparatively, gross
margin for the past two years has been $7.9 and $6.7 million for 1997 and 1996,
respectively. Compensation expenditures as well as lower costs associated with
the maintenance of communication equipment and the pipeline system were offset
by the increase in depreciation and amortization due to capital additions placed
in service during the past year.
PROPANE DISTRIBUTION AND MARKETING
As previously stated, Xeron has been combined with Chesapeake's propane
distribution operation for financial statement reporting. Xeron is a high
volume, low margin wholesale propane business; accordingly, Xeron's revenues are
strongly influenced by the wholesale cost of propane. See Note 2 to the
Consolidated Financial Statements for further disclosure of Xeron's revenues and
net income for the periods shown.
For the first nine months of 1998, the propane segment reported LBIT of $96,566,
as compared to EBIT of $144,490 for the same period last year. The $241,056
decrease in EBIT is due to lower margins, mostly offset by lower operating
expenses.
<TABLE>
<CAPTION>
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998 1997 Change
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Revenue $ 78,662,920 $ 91,938,876 $(13,275,956)
Cost of Sales 70,455,291 83,319,974 (12,864,683)
- -------------------------------------------------------------------------------------------------------
Gross Margin 8,207,629 8,618,902 (411,273)
Operations & Maintenance 6,880,840 7,115,336 (234,496)
Depreciation & Amortization 978,402 904,664 73,738
Other Taxes 444,953 454,412 (9,459)
- -------------------------------------------------------------------------------------------------------
(LBIT)/EBIT $ (96,566) $ 144,490 $ (241,056)
- -------------------------------------------------------------------------------------------------------
</TABLE>
The decrease in gross margin is primarily due to a 16% reduction in wholesale
marketing margins combined with a three-percent reduction in margins from the
distribution operation. Wholesale margins are down due to a reduction in the
margin earned per gallon, somewhat offset by an increase in gallons marketed.
Although the distribution margins are down slightly due to a reduction in
billable service work and the unseasonably
16
<PAGE> 17
warmer weather, customer growth has helped to somewhat offset the decrease. The
Company estimates that distribution margins would have been $950,000 higher
under normal weather conditions (i.e. the 10-year average). Operations and
maintenance expenses are down due to lower incentive compensation related to
lower earnings from the wholesale marketing operation partially offset by
expenses related to the Company's marketing plan. Depreciation and amortization
increased due to plant additions placed in service during the past year.
ADVANCED INFORMATION SERVICES
The advanced information services segment recognized EBIT of $994,374 and
$975,681 for the nine months ended September 30, 1998 and 1997, respectively.
<TABLE>
<CAPTION>
FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 1998 1997 CHANGE
- ------------------------------------------------------------------------------
<S> <C> <C> <C>
Revenue $7,594,515 $5,954,733 $1,639,782
Cost of Sales 3,685,121 2,646,668 1,038,453
- ----------------------------------------------------------------------------
Gross Margin 3,909,394 3,308,065 601,329
Operations & Maintenance 2,477,107 1,994,564 482,543
Depreciation & Amortization 131,533 84,175 47,358
Other Taxes 306,380 253,645 52,735
- ----------------------------------------------------------------------------
EBIT $ 994,374 $ 975,681 $ 18,693
- ----------------------------------------------------------------------------
</TABLE>
Higher revenues are primarily due to increased sales of consulting services.
Increased compensation and training expenses due to associated increases in
staffing levels partially offset the additional revenue. To improve service to
our customers, the Company opened a new office in Detroit, Michigan and
increased both billable and management staffing during the second half of 1997.
The additional expenses associated with the new office and management
infrastructure, coupled with increased marketing activity, is having a negative
impact on 1998 earnings.
OPERATING INCOME TAXES
During the first quarter of 1997, the Company recorded $318,000 as a one-time
expense to establish deferred income taxes due to the acquisition of Tri-County
Gas Company, Inc.
COMPREHENSIVE INCOME
The Company has disclosed comprehensive income of $399,892 reflecting a market
price of $15.25 at September 30, 1998 related to our investment in Florida
Public Utilities Company ("FPU"). The investment is classified as "Available for
Sale" (see Note 4 to the Consolidated Financial Statements). In August 1998, the
Company entered into an agreement with Southern Company to sell our investment
in FPU for $16.50 per share. If the sale is consummated, the Company will
recognize a non-recurring, after tax gain of approximately $870,000, which
represents the difference between the sale price and our cost basis.
ENVIRONMENTAL MATTERS
The Company continues to work with federal and state environmental agencies to
assess the environmental impacts and explore corrective action at several former
gas manufacturing plant sites (see Note 5 to the Consolidated Financial
Statements). The Company believes that any future costs associated with these
sites will be recoverable in future rates.
17
<PAGE> 18
FINANCIAL POSITION, LIQUIDITY AND CAPITAL RESOURCES
The Company's capital requirements reflect the capital-intensive nature of its
business and are attributable principally to its construction program and the
retirement of its outstanding debt. The Company relies on funds provided by
operations and short-term borrowing to meet normal working capital requirements
and temporarily finance capital expenditures. During the first nine months of
1998, the Company's net cash flow provided by operating activities, net cash
used by investing activities and net cash used by financing activities were
approximately $10.0 million, $8.1 million and $5.9 million, respectively. Due to
the seasonal nature of the Company's business, there are substantial variations
in the results of operations reported on a quarterly basis.
The Board of Directors has authorized the Company to borrow up to $20 million
from various banks and trust companies. As of September 30, 1998, the Company
had four unsecured bank lines of credit, totaling $34 million. Funds provided
from these lines of credit are used for short-term cash needs to meet seasonal
working capital requirements and to fund portions of its capital expenditures.
The outstanding balances of short-term borrowing at September 30, 1998 and 1997
were $5.2 and $7.6 million, respectively.
During the nine months ended September 30, 1998 and 1997, net property, plant
and equipment expenditures were approximately $8.1 and $9.9 million,
respectively. Chesapeake has budgeted $17.7 million for capital expenditures
during 1998. This amount includes $9.4 million and $2.0 million for natural gas
and propane distribution, respectively; $2.6 million for natural gas
transmission, $395,000 for advanced information services and $1.0 million 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 $2.4 million for environmental related expenditures
during 1998 and expects to incur additional expenditures in future years (see
Note 5 to the Consolidated Financial Statements), a portion of which may need to
be financed through external sources. Management does not expect such financing
to have a material adverse effect on the financial position or capital resources
of the Company.
The Company is continually evaluating new business opportunities and
acquisitions, some of which may require the Company to obtain financing.
Management will consider the impact of any such financing on the Company's
financial position in its evaluation of the business opportunity or acquisition.
Such financings are not expected to have a material adverse effect on the
financial position or capital resources of the Company.
As of September 30, 1998, common equity represented 59.2% of permanent
capitalization, compared to 58.1% as of December 31, 1997. The Company remains
committed to maintaining a sound capital structure and strong credit ratings in
order to provide the financial flexibility needed to access the capital markets
when required. This commitment, along with adequate and timely rate relief for
the Company's regulated operations, helps to ensure that the Company will be
able to attract capital from outside sources at a reasonable cost.
18
<PAGE> 19
OTHER MATTERS
THE YEAR 2000
Chesapeake is dependent upon a variety of information systems to operate
efficiently and effectively. In order to address the impact of the Year 2000 on
its information systems, Chesapeake is in the process of evaluating and
remediating any deficiencies. The Company's evaluation of its readiness and the
potential impact of the Year 2000 on its systems have been separated into five
components: primary internal applications, embedded systems, vendors/suppliers,
end-user computing systems and customers.
Chesapeake's primary internal applications include systems for its financial
information; natural gas customer information and billing; and propane
customer information, billing and delivery. The Company has recently
completed testing of its three primary applications and has deemed them Year
2000 compliant.
Embedded systems include systems for services such as telephone, system
control and data acquisition for the natural gas transmission segment, as
well as other facilities related systems. Chesapeake has developed an
inventory of the embedded systems and is currently in the process of
contacting vendors and testing these systems. Remediation will be done to the
extent necessary.
Vendors/suppliers that supply the Company with products and services that are
critical elements of our business, such as natural gas and propane, have been
identified and the Company is in the process of contacting them. The Company
will consider alternate providers as necessary to the extent available.
End-user computing systems are upgraded periodically through the Company's
ongoing replacement program. Almost all of the Company's personal computers
("PC's") are currently Year 2000 compliant. Additional PC's will be replaced
during the first quarter of 1999. Chesapeake's local area network ("LAN") is
Year 2000 compliant as is all PC-based and network-based software.
Customers, primarily industrial, that utilize natural gas on an interruptible
basis must ensure that their plant controls are Year 2000 compliant for their
alternative fuel. The Company is identifying these customers and expects to
start contacting them.
The Company believes the most significant potential risks with respect to its
internal operations, those over which it has direct control, are its ability to:
(1) use electronic devices to control and operate its natural gas delivery
systems; (2) maintain continuous operation of its computer systems; (3) render
timely bills to its customers; and (4) enforce tariffs and contracts applicable
to interruptible customers.
The Company relies on the producers of natural gas and suppliers of interstate
transportation capacity to deliver natural gas to the Company's natural gas
delivery systems. The Company is also dependent on propane producers, suppliers
and railroad facilities to receive propane supply. Should any of these critical
vendors fail, the impact of any such failure could become a significant
challenge to the Company's ability to meet the demands of its customers, to
operate its delivery systems and to communicate with its customers. It could
also have a material adverse financial impact, including but not limited to,
lost sales revenues, increased operating costs and claims from customers related
to business interruptions. The Company's Year 2000 evaluation process will
address each of these risks and the required remediation or replacement of these
systems.
The Company is developing its contingency plan for the Year 2000, which will
address various alternatives and will include assessing a variety of scenarios
that could emerge and require the Company to react.
19
<PAGE> 20
The costs incurred as of September 30, 1998 in addressing other Year 2000 issues
have been immaterial. The Company has estimated costs of $250,000 to replace
and/or remediate specific embedded systems. However, until the Company has
completed further analysis of the impact of the Year 2000 issue on its embedded
systems, vendor/suppliers, end-user computing systems, customers and contingency
planning, it is unable to estimate any additional costs it may incur as a result
of its efforts.
Presently, no Year 2000-impacted internal applications or embedded systems have
been identified that cannot be upgraded or modified within acceptable time
frames. The target date for completion of all Year 2000-related activities
remains at mid-1999.
CAUTIONARY STATEMENT
Statements made herein and elsewhere in this Form 10-Q that are not historical
fact are forward-looking statements, as defined in the Private Securities
Litigation Reform Act of 1995. These forward-looking statements are subject to
certain risk and uncertainties including but not limited to those identified
below which 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, both independently and relative to historical results,
of Eastern Shore operating as an open access pipeline. 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.
In addition, a number of factors and uncertainties affecting other aspects of
Chesapeake's business could have a material impact on earnings. These include:
the seasonality and temperature sensitivity of the natural gas and propane
businesses; the relative price of alternative energy sources; the effects of
competition on both unregulated and natural gas sales; and with respect to the
acquisition of Xeron, Inc., the price volatility in wholesale propane
transactions. There are also uncertainties relative to the impact of the Year
2000 on the Company's primary applications, embedded systems, end-users systems,
vendors/suppliers and customers.
RECENT ACCOUNTING PRONOUNCEMENTS
Comprehensive Income -- As of January 1, 1998, the Company adopted Statement of
Financial Accounting Standards ("SFAS") No. 130, Reporting Comprehensive Income,
which requires additional disclosures with respect to certain changes in assets
and liabilities that previously were not reported as results of
operations for the period.
Segment Information -- The Financial Accounting Standards Board has issued SFAS
No. 131, Disclosures about Segments of an Enterprise and Related Information,
which became effective for periods beginning after December 15, 1997. Interim
reporting is not required under SFAS No. 131 prior to its adoption. SFAS No. 131
requires financial and descriptive information with respect to "operating
segments" of an entity based on the way management disaggregates the entity for
making internal operating decisions. The Company will begin making the
disclosures required by SFAS No. 131 with financial statements for the period
ending December 31, 1998. The impact of SFAS No. 131 will only effect
disclosure, as results are disaggregated. There will be no financial impact from
the adoption.
Pensions and Other Post-retirement Benefits -- The FASB has issued SFAS No. 132,
Employers' Disclosures about Pensions and Other Post-retirement Benefits, for
periods beginning after December 15, 1997. Interim reporting is not required
prior to its adoption. This statement standardizes the disclosure requirements
for
20
<PAGE> 21
pensions and other post-retirement benefits, requires additional information on
changes in the benefit obligations and fair values of plan assets and eliminates
certain disclosures that are no longer useful. The Company will begin making the
disclosures required by SFAS No. 132 with financial statements for the period
ending December 31, 1998. The impact of SFAS No. 132 will only effect
disclosure. There will be no financial impact from the adoption.
Derivatives -- SFAS No. 133, Accounting for Derivative Instruments and Hedging
Activities, establishes accounting and reporting standards for derivative
instruments, including certain derivative instruments embedded in other
contracts, and hedging activities. It requires that an entity recognize all
derivatives as either assets or liabilities in the statement of financial
position and measure those instruments at fair value. This statement is
effective for all fiscal quarters of fiscal years beginning after June 15, 1999.
Management is currently assessing any financial impact the adoption may have.
21
<PAGE> 22
PART II
OTHER INFORMATION
CHESAPEAKE UTILITIES CORPORATION AND SUBSIDIARIES
Item 1: Legal Proceedings
See Note 4 to the Consolidated Financial Statements
Item 2(c): Changes in Securities
None
Item 3: Defaults upon Senior Securities
None
Item 4: Submission of Matters to a Vote of Security Holders
None
Item 5: Other Information
None
Item 6(a): Exhibits
None
Item 6(b): Reports on Form 8-K On August 31, 1998, the Company filed, under
Item 5, that the Company entered into an agreement to sell its
investment in the stock of Florida Public Utilities Company.
22
<PAGE> 23
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
CHESAPEAKE UTILITIES CORPORATION
/s/ Michael P. McMasters
- ------------------------
Michael P. McMasters
Vice President, Treasurer and Chief Financial Officer
Date: November 11, 1998
23
<TABLE> <S> <C>
<ARTICLE> UT <LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE BALANCE
SHEET INCOME STATEMENT AND STATEMENT OF CASH FLOWS FOR CHESAPEAKE UTILITIES
CORPORATION AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS. </LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<BOOK-VALUE> PER-BOOK
<TOTAL-NET-UTILITY-PLANT> 79,792,209
<OTHER-PROPERTY-AND-INVEST> 26,567,443
<TOTAL-CURRENT-ASSETS> 20,977,538
<TOTAL-DEFERRED-CHARGES> 11,716,399
<OTHER-ASSETS> 0
<TOTAL-ASSETS> 139,053,589
<COMMON> 2,470,819
<CAPITAL-SURPLUS-PAID-IN> 23,903,562
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0
0
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</TABLE>
