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: June 30, 1999
-----------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ______ to ______
COMMISSION FILE NUMBER: 001-11590
CHESAPEAKE UTILITIES CORPORATION
--------------------------------
(Exact name of registrant as specified in its charter)
DELAWARE 51-0064146
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(State 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, including Zip Code)
(302) 734-6799
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(Registrant's Telephone Number, including Area Code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
Common Stock, par value $.4867 - 5,139,498 shares issued as of June 30, 1999.
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TABLE OF CONTENTS
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PART I - FINANCIAL INFORMATION . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Item 1. Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . 1
Consolidated Statements of Income and Consolidated Statements
of Comprehensive Income - Three Months Ended June 30, 1999 and 1998 . . . . . . 1
Consolidated Statements of Income and Consolidated Statements
of Comprehensive Income - Six Months Ended June 30, 1999 and 1998 . . . . . . . 2
Consolidated Statements of Cash Flows - Six Months Ended June 30, 1999 and 1998 3
Consolidated Balance Sheets - June 30, 1999 and December 31, 1998 . . . . . . . 4
Notes to Consolidated Financial Statements. . . . . . . . . . . . . . . . . . . 6
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations . . . . . . . . . . . . . . . . . . . . . . . . 9
Results of Operations for the Quarter Ended June 30, 1999 . . . . . . . . . . . 9
Results of Operations for the Six Months Ended June 30, 1999. . . . . . . . . . 11
Financial Position, Liquidity and Capital Resources . . . . . . . . . . . . . . 13
Other Matters . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
Item 3. Quantitative and Qualitative Disclosures about Market Risk. . . . . . 16
PART II - OTHER INFORMATION . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
SIGNATURES. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
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PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
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CHESAPEAKE UTILITIES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
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FOR THE THREE MONTHS ENDED JUNE 30, 1999 1998
- ----------------------------------------------------------------
<S> <C> <C>
OPERATING REVENUES. . . . . . . . . $46,851,305 $43,594,944
COST OF SALES . . . . . . . . . . . 35,221,923 33,309,758
- ----------------------------------------------------------------
GROSS MARGIN. . . . . . . . . . . . 11,629,382 10,285,186
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OPERATING EXPENSES
Operations. . . . . . . . . . . . . 6,548,966 6,203,139
Maintenance . . . . . . . . . . . . 428,183 532,539
Depreciation and amortization . . . 1,658,836 1,521,802
Other taxes . . . . . . . . . . . . 1,008,566 963,097
Income taxes. . . . . . . . . . . . 430,320 102,507
- ----------------------------------------------------------------
Total operating expenses. . . . . . 10,074,871 9,323,084
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OPERATING INCOME. . . . . . . . . . 1,554,511 962,102
OTHER INCOME, NET . . . . . . . . . 74,471 89,187
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INCOME BEFORE INTEREST CHARGES. . . 1,628,982 1,051,289
INTEREST CHARGES. . . . . . . . . . 832,879 787,538
- ----------------------------------------------------------------
NET INCOME. . . . . . . . . . . . . $ 796,103 $ 263,751
================================================================
EARNINGS PER SHARE OF COMMON STOCK:
BASIC . . . . . . . . . . . . . . . $ 0.16 $ 0.05
- ----------------------------------------------------------------
DILUTED . . . . . . . . . . . . . . $ 0.15 $ 0.05
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<CAPTION>
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)
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FOR THE THREE MONTHS ENDED JUNE 30, 1999 1998
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NET INCOME. . . . . . . . . . . . . . . . $ 796,103 $263,751
UNREALIZED GAIN ON MARKETABLE SECURITIES,
NET OF INCOME TAXES . . . . . . . . . . . 233,312 198,697
- ----------------------------------------------------------------
TOTAL COMPREHENSIVE INCOME. . . . . . . . $1,029,415 $462,448
================================================================
<FN>
The accompanying notes are an integral part of these financial statements.
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CHESAPEAKE UTILITIES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
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FOR THE SIX MONTHS ENDED JUNE 30, 1999 1998
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<S> <C> <C>
OPERATING REVENUES. . . . . . . . . $102,497,377 $103,764,046
COST OF SALES . . . . . . . . . . . 72,315,133 77,175,201
- ------------------------------------------------------------------
GROSS MARGIN. . . . . . . . . . . . 30,182,244 26,588,845
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OPERATING EXPENSES
Operations. . . . . . . . . . . . . 13,076,947 12,173,257
Maintenance . . . . . . . . . . . . 847,335 1,011,651
Depreciation and amortization . . . 3,296,832 3,034,375
Other taxes . . . . . . . . . . . . 2,180,176 2,133,944
Income taxes. . . . . . . . . . . . 3,458,068 2,529,298
- ------------------------------------------------------------------
Total operating expenses. . . . . . 22,859,358 20,882,525
- ------------------------------------------------------------------
OPERATING INCOME. . . . . . . . . . 7,322,886 5,706,320
OTHER INCOME, NET . . . . . . . . . 147,697 199,577
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INCOME BEFORE INTEREST CHARGES. . . 7,470,583 5,905,897
INTEREST CHARGES. . . . . . . . . . 1,731,497 1,641,544
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NET INCOME. . . . . . . . . . . . . $ 5,739,086 $ 4,264,353
==================================================================
EARNINGS PER SHARE OF COMMON STOCK:
BASIC . . . . . . . . . . . . . . . $ 1.12 $ 0.85
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DILUTED . . . . . . . . . . . . . . $ 1.09 $ 0.83
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<CAPTION>
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)
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FOR THE SIX MONTHS ENDED JUNE 30, 1999 1998
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NET INCOME. . . . . . . . . . . . . . . . $5,739,086 $4,264,353
UNREALIZED GAIN ON MARKETABLE SECURITIES,
NET OF INCOME TAXES . . . . . . . . . . . - 383,084
- ------------------------------------------------------------------
TOTAL COMPREHENSIVE INCOME. . . . . . . . $5,739,086 $4,647,437
==================================================================
<FN>
The accompanying notes are an integral part of these financial statements.
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CHESAPEAKE UTILITIES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
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FOR THE SIX MONTHS ENDED JUNE 30, 1999 1998
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<S> <C> <C>
OPERATING ACTIVITIES
Net Income . . . . . . . . . . . . . . . . . . . . . . . . $ 5,739,086 $ 4,264,353
Adjustments to reconcile net income to net operating cash:
Depreciation and amortization. . . . . . . . . . . . . . . 3,658,483 3,392,447
Deferred income taxes, net . . . . . . . . . . . . . . . . (883,899) (898,931)
Investment tax credit adjustments. . . . . . . . . . . . . (16,601) (22,526)
Mark-to-market adjustments . . . . . . . . . . . . . . . . 33,855 (325,699)
Employee benefits. . . . . . . . . . . . . . . . . . . . . 57,398 218,076
Employee compensation from lapsing stock restrictions. . . 35,520 59,922
Other, net . . . . . . . . . . . . . . . . . . . . . . . . 41,635 26,160
Changes in assets and liabilities:
Accounts receivable, net . . . . . . . . . . . . . . . . . 222,951 3,492,595
Inventory, materials, supplies and storage gas . . . . . . 772,431 2,306,045
Other current assets . . . . . . . . . . . . . . . . . . . 630,782 (31,838)
Other deferred charges . . . . . . . . . . . . . . . . . . 343,267 (327,659)
Accounts payable, net. . . . . . . . . . . . . . . . . . . 1,867,404 (6,862,584)
Refunds payable to customers . . . . . . . . . . . . . . . (13,758) (100,333)
Overrecovered purchased gas costs. . . . . . . . . . . . . 2,239,032 1,861,725
Other current liabilities. . . . . . . . . . . . . . . . . 3,861,696 3,577,168
- ----------------------------------------------------------------------------------------
Net cash provided by operating activities. . . . . . . . . 18,589,282 10,628,921
- ----------------------------------------------------------------------------------------
INVESTING ACTIVITIES
Property, plant and equipment expenditures, net. . . . . . (7,336,408) (4,740,118)
- ----------------------------------------------------------------------------------------
Net cash used by investing activities. . . . . . . . . . . (7,336,408) (4,740,118)
- ----------------------------------------------------------------------------------------
FINANCING ACTIVITIES
Common stock dividends net of amounts reinvested of
$219,808 and $206,024, respectively. . . . . . . . . . . . (2,332,631) (2,022,068)
Issuance of stock:
Dividend Reinvestment Plan optional cash . . . . . . . . . 93,755 90,433
Retirement Savings Plan. . . . . . . . . . . . . . . . . . 420,236 207,949
Net repayment under line of credit agreements. . . . . . . (7,100,000) (5,500,010)
Repayments of long-term debt . . . . . . . . . . . . . . . (1,268,025) (791,326)
- ----------------------------------------------------------------------------------------
Net cash used by financing activities. . . . . . . . . . . (10,186,665) (8,015,022)
- ----------------------------------------------------------------------------------------
NET INCREASE IN CASH AND CASH EQUIVALENTS. . . . . . . . . $ 1,066,209 $(2,126,219)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD . . . . . 2,598,084 4,829,176
- ----------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD . . . . . . . . $ 3,664,293 $ 2,702,957
========================================================================================
<FN>
The accompanying notes are an integral part of these financial statements.
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CHESAPEAKE UTILITIES CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
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JUNE 30, DECEMBER 31,
1999 1998
ASSETS (UNAUDITED) (AUDITED)
- ------------------------------------------------------------------------------------------
<S> <C> <C>
PROPERTY, PLANT AND EQUIPMENT
Natural gas distribution and transmission. . . . . . . . . $122,724,609 $ 117,232,506
Propane gas distribution and marketing . . . . . . . . . . 27,391,027 27,287,807
Advanced information services. . . . . . . . . . . . . . . 1,309,744 1,087,910
Other plant. . . . . . . . . . . . . . . . . . . . . . . . 8,240,455 7,382,965
- ------------------------------------------------------------------------------------------
Total property, plant and equipment. . . . . . . . . . . . 159,665,835 152,991,188
Less: Accumulated depreciation and amortization . . . . . (51,586,674) (48,725,412)
- ------------------------------------------------------------------------------------------
Net property, plant and equipment. . . . . . . . . . . . . 108,079,161 104,265,776
- ------------------------------------------------------------------------------------------
INVESTMENTS. . . . . . . . . . . . . . . . . . . . . . . . 4,164,660 4,165,194
- ------------------------------------------------------------------------------------------
CURRENT ASSETS
Cash and cash equivalents. . . . . . . . . . . . . . . . . 3,664,293 2,598,084
Accounts receivable (less allowance for uncollectibles of
$239,204 and $302,513 in 1999 and 1998, respectively). . . 14,604,449 14,861,255
Materials and supplies, at average cost. . . . . . . . . . 1,773,554 1,728,513
Propane inventory, at average cost . . . . . . . . . . . . 1,564,779 1,787,038
Storage gas prepayments. . . . . . . . . . . . . . . . . . 1,557,392 2,152,605
Underrecovered purchased gas costs . . . . . . . . . . . . - 1,552,265
Income taxes receivable. . . . . . . . . . . . . . . . . . - 344,311
Deferred income taxes. . . . . . . . . . . . . . . . . . . 745,712 -
Prepaid expenses . . . . . . . . . . . . . . . . . . . . . 965,813 1,596,595
- ------------------------------------------------------------------------------------------
Total current assets . . . . . . . . . . . . . . . . . . . 24,875,992 26,620,666
- ------------------------------------------------------------------------------------------
DEFERRED CHARGES AND OTHER ASSETS
Environmental regulatory assets. . . . . . . . . . . . . . 2,653,980 2,700,000
Environmental expenditures . . . . . . . . . . . . . . . . 3,419,252 3,418,166
Other deferred charges and intangible assets . . . . . . . 3,583,998 4,063,811
- ------------------------------------------------------------------------------------------
Total deferred charges and other assets. . . . . . . . . . 9,657,230 10,181,977
- ------------------------------------------------------------------------------------------
TOTAL ASSETS . . . . . . . . . . . . . . . . . . . . . . . $146,777,043 $ 145,233,613
==========================================================================================
<FN>
The accompanying notes are an integral part of these financial statements.
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CHESAPEAKE UTILITIES CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
- ------------------------------------------------------------------------------------------
JUNE 30, DECEMBER 31,
1999 1998
CAPITALIZATION AND LIABILITIES (UNAUDITED) (AUDITED)
- ------------------------------------------------------------------------------------------
<S> <C> <C>
CAPITALIZATION
Stockholders' equity
Common Stock, par value $.4867 per share;
(authorized 12,000,000 shares; issued 5,140,486
and 5,093,788 shares, respectively) . . . . . . . . . . . $ 2,501,748 $ 2,479,019
Additional paid-in capital . . . . . . . . . . . . . . . . 24,967,433 24,192,188
Retained earnings. . . . . . . . . . . . . . . . . . . . . 32,015,951 28,892,384
Accumulated other comprehensive income . . . . . . . . . . 863,344 863,344
Less: Unearned compensation related to
restricted stock awards . . . . . . . . . . . . . . (35,521) (71,041)
- ------------------------------------------------------------------------------------------
Total stockholders' equity . . . . . . . . . . . . . . . . 60,312,955 56,355,894
Long-term debt, net of current portion . . . . . . . . . . 35,175,000 37,597,000
- ------------------------------------------------------------------------------------------
Total capitalization . . . . . . . . . . . . . . . . . . . 95,487,955 93,952,894
- ------------------------------------------------------------------------------------------
CURRENT LIABILITIES
Current portion of long-term debt. . . . . . . . . . . . . 1,638,000 520,000
Short-term borrowing . . . . . . . . . . . . . . . . . . . 4,500,000 11,600,000
Accounts payable . . . . . . . . . . . . . . . . . . . . . 12,938,046 11,070,642
Refunds payable to customers . . . . . . . . . . . . . . . 622,395 636,153
Income taxes payable . . . . . . . . . . . . . . . . . . . 2,079,672 -
Accrued interest . . . . . . . . . . . . . . . . . . . . . 1,026,919 553,444
Dividends payable. . . . . . . . . . . . . . . . . . . . . 1,336,526 1,273,446
Overrecovered purchased gas costs. . . . . . . . . . . . . 686,767 -
Deferred income taxes. . . . . . . . . . . . . . . . . . . - 56,100
Other accrued liabilities. . . . . . . . . . . . . . . . . 4,690,269 3,754,231
- ------------------------------------------------------------------------------------------
Total current liabilities. . . . . . . . . . . . . . . . . 29,518,594 29,464,016
- ------------------------------------------------------------------------------------------
DEFERRED CREDITS AND OTHER LIABILITIES
Deferred income taxes. . . . . . . . . . . . . . . . . . . 13,177,661 13,260,282
Deferred investment tax credits. . . . . . . . . . . . . . 750,201 766,802
Environmental liability. . . . . . . . . . . . . . . . . . 2,653,980 2,700,000
Accrued pension costs. . . . . . . . . . . . . . . . . . . 1,593,702 1,536,304
Other liabilities. . . . . . . . . . . . . . . . . . . . . 3,594,950 3,553,315
- ------------------------------------------------------------------------------------------
Total deferred credits and other liabilities . . . . . . . 21,770,494 21,816,703
- ------------------------------------------------------------------------------------------
TOTAL CAPITALIZATION AND LIABILITIES . . . . . . . . . . . $146,777,043 $ 145,233,613
==========================================================================================
<FN>
The accompanying notes are an integral part of these financial statements.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. QUARTERLY FINANCIAL DATA
The financial information of Chesapeake Utilities Corporation (the "Company")
included herein is unaudited and should be read in conjunction with the
Company's 1998 annual report on Form 10-K. In the opinion of management, the
financial information reflects normal recurring adjustments, which are necessary
for a fair presentation of the Company's interim results. Due to the seasonal
nature of the Company's business, there are substantial variations in the
results of operations reported on a quarterly basis; therefore, the results of
operations for an interim period may not give a true indication of results for
the year. Certain amounts in 1998 have been reclassified to conform with current
year presentation.
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THREE MONTHS ENDED SIX MONTHS ENDED
FOR THE PERIODS ENDED JUNE 30, 1999 1998 1999 1998
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CALCULATION OF BASIC EARNINGS PER SHARE:
Net Income . . . . . . . . . . . . . . . . $ 796,103 $ 263,751 $5,739,086 $4,264,353
Weighted Average Shares Outstanding. . . . 5,134,178 5,055,237 5,121,189 5,040,043
- -------------------------------------------------------------------------------------------
BASIC EARNINGS PER SHARE . . . . . . . . . $ 0.16 $ 0.05 $ 1.12 $ 0.85
- -------------------------------------------------------------------------------------------
CALCULATION OF DILUTED EARNINGS PER SHARE:
RECONCILIATION OF NUMERATOR:
Net Income Basic . . . . . . . . . . . . . $ 796,103 $ 263,751 $5,739,086 $4,264,353
Effect of 8.25% Convertible debentures . . - - 94,602 96,412
- -------------------------------------------------------------------------------------------
Adjusted numerator Diluted . . . . . . . . $ 796,103 $ 263,751 $5,833,688 $4,360,765
- -------------------------------------------------------------------------------------------
RECONCILIATION OF DENOMINATOR:
Weighted Shares Outstanding Basic. . . . . 5,134,178 5,055,237 5,121,189 5,040,043
Effect of Dilutive Securities
Stock options. . . . . . . . . . . . . . . 10,368 11,860 11,026 13,034
8.25% Convertible debentures . . . . . . . - - 222,822 227,087
- -------------------------------------------------------------------------------------------
Adjusted denominator Diluted . . . . . . . 5,144,546 5,067,097 5,355,037 5,280,164
- -------------------------------------------------------------------------------------------
DILUTED EARNINGS PER SHARE . . . . . . . . $ 0.15 $ 0.05 $ 1.09 $ 0.83
- -------------------------------------------------------------------------------------------
</TABLE>
No adjustments have been made to adjust basic earnings per share for the
quarters ended June 30, 1999 and 1998 for the 8.25% convertible debentures due
to their anti-dilutive effect for those periods.
3. INVESTMENTS
The investment balance at June 30, 1999 and December 31, 1998 consists primarily
of a 7.3% ownership interest in the common stock of Florida Public Utilities
Company ("FPU"). 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. As noted below, the Company has entered into
an agreement to sell this investment.
In August 1998, the Company entered into an agreement to sell its investment in
FPU for $16.50 per share to The Southern Company. The execution of the agreement
is contingent on the approval of the Securities and Exchange Commission for
which the Company cannot predict the timing. If regulatory approval is received,
the Company will recognize a $1.4 million pre-tax gain or $863,000, after taxes.
4. 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 action options to remove
environmental contaminants. Chesapeake entered into settlement agreements with a
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number of insurance companies resulting in proceeds to fund actual environmental
costs incurred for two of the sites over three to seven-year periods beginning
in 1990. The final insurance proceeds were requested and received in 1992.
Chesapeake has received ratemaking treatment for costs incurred to date from the
applicable regulatory commissions for the three sites listed below. It is
management's opinion that any current or future costs that have not been
recovered through insurance proceeds or rates at this time will be recoverable
in future rates.
The Company has received and responded to an inquiry from the Maryland
Department of the Environment regarding an investigation of hazardous substances
at or about the location of a former manufactured gas plant ("MGP") in
Cambridge. The Company never owned the property on which the MGP operated. After
MGP operations ceased, Chesapeake acquired an adjoining property on which a gas
storage tank was once operated. The successor to the MPG operator carried out a
clean-up of that tank in the 1980's. The Company uses the adjoining property for
other purposes and has not engaged in manufactured gas operations at Cambridge.
(A) DOVER GAS LIGHT SITE
The Dover site has been listed by the Environmental Projection Agency Region III
("EPA") on the Superfund National Priorities List under the Comprehensive
Environmental Response, Compensation and Liability Act. In 1994, the EPA issued
a site Record of Decision ("ROD"), which selected a remedial plan and estimated
the costs of the selected remediation at $2.7 million for ground-water and $3.3
million for soil. In 1995, the EPA issued an order ("Order") requiring both the
Company and General Public Utilities Corporation, Inc. ("GPU") to fund or
implement the ROD. Although notifying the EPA of its objections, the Company
agreed to comply with the Order. GPU informed the EPA that it did not intend to
comply; therefore, the EPA may seek judicial enforcement of its Order, as well
as significant financial penalties for failure to comply. 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 of
proceeds to be received, if any. Additional information pertaining to
remediation costs, investigations related to additional parties who may be
potentially responsible parties 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, 1998 (see the "Environmental - Dover Gas Light Site" section, beginning on
page 11).
In 1996, the Company began the design phase of the ROD, on-site pre-design and
investigation. In January 1998, the EPA issued a ROD Amendment, which modified
the soil remediation clean-up plan to include: (1) excavation and off-site
thermal treatment of the contents of the former subsurface gas holders; (2)
implementation of soil vaporization extraction; and (3) pavement of the parking
lot. The overall estimated clean-up cost of the site under the EPA's ROD
Amendment was $4.2 million ($1.5 million for soil remediation and $2.7 million
for ground-water remediation) as compared to the original ROD cleanup estimate
of $6.0 million ($3.3 million for soil remediation and $2.7 million for
ground-water remediation).
During the fourth quarter of 1998 the Company completed the first element of the
soil remediation. Over the next twelve to eighteen months the Company will
finalize the remaining two elements of the soil remediation and initiate the
ground-water remedial activities.
The Company's independent consultants have prepared preliminary cost estimates
of two potentially acceptable alternatives to complete the ground-water
remediation activities at the site. The costs range from a low of $390,000 in
capital and $37,000 per year of operating costs for 30 years for natural
attenuation to a high of $4.0 million in capital and $500,000 per year in
operating costs for 30 years for a pump and treat system. A decision by the EPA
as to the most appropriate ground-water remediation method is likely in 1999.
The capital costs necessary to begin ground-water remediation are expected to be
incurred over the next twelve to eighteen months. The Company cannot predict
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which ground-water remediation method will be selected by the EPA and
accordingly, adjusted its accrual to $2.1 million at December 31, 1998 for the
Dover site, and recorded a regulatory asset for an equivalent amount. Of this
amount, $1.5 million is for ground-water remediation and $600,000 is for the
remaining soil remediation. The $1.5 million represents the low end of the
ground-water remedy estimates described above. No changes have been made to
these accrued amounts in 1999. The Company is currently engaged in
investigations related to additional parties who may be potentially responsible
parties ("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.
As of June 30, 1999, the Company has incurred approximately $7.0 million in
costs relating to environmental testing and remedial action studies. Of this
amount, $1.1 million of incurred environmental costs have not received
ratemaking treatment.
(B) SALISBURY TOWN GAS LIGHT SITE
In cooperation with the Maryland Department of the Environment ("MDE"), the
Company completed assessment of the Salisbury manufactured gas plant site,
determining that there was localized ground-water contamination. During 1996,
the Company completed construction and began Air Sparging and Soil-Vapor
Extraction remediation procedures. Chesapeake has been reporting the remediation
and monitoring results to the Maryland Department of the Environment on an
ongoing basis since 1996.
The estimated cost of the remaining remediation is approximately $136,000 per
year for operating expenses for a period of five years. Based on these estimated
costs, the Company adjusted both its liability and related regulatory asset to
$600,000 on December 31, 1998, to cover the Company's projected remediation
costs for this site. As of June 30, 1999, the Company has incurred approximately
$2.6 million for remedial actions and environmental studies. Of this amount,
approximately $817,000 of incurred costs have not been recovered through
insurance proceeds or received ratemaking treatment.
(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 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 in 1997. The FDEP responded by requesting
additional field investigation work, which was completed during the first
quarter of 1999. In addition, the FDEP approved the AS/SVE Pilot Study Work
Plan, which the Company began during June 1999. It is not possible to determine
what remedial action will be required by FDEP and the cost of such remediation.
The Company has recovered all environmental costs incurred, approximately
$738,000, through rates charged to customers. Additionally, the Florida Public
Service Commission has allowed the Company to continue to recover amounts for
future environmental costs that might be incurred. At June 30, 1999, Chesapeake
had received $496,000 related to future costs, which might be incurred.
5. RECENT ACCOUNTING PRONOUNCEMENTS
FASB STATEMENTS AND OTHER AUTHORITATIVE PRONOUNCEMENTS ISSUED
DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
In June 1998, the Financial Accounting Standards Board ("FASB") issued SFAS No.
133, establishing accounting and reporting standards for derivative instruments,
Page 8
<PAGE>
including certain derivative instruments embedded in other contracts, and
hedging activities. This statement does not allow retroactive application to
financial statements for prior periods. Chesapeake will adopt the requirements
of this standard in the first quarter of 2001, as required. Originally
applicable to all fiscal quarters of fiscal years beginning after June 15, 1999,
the FASB has deferred application of this standard to all fiscal quarters of
fiscal years beginning after June 15, 2000. The Company believes that adoption
of this statement will not have a material impact on the Company's financial
position or results of operations.
The Emerging Issues Task Force released Issue 98-10, "Accounting for Energy
Trading and Risk Management Activities", effective January 1, 1999. The Company
records its use of derivatives in accordance with the standard by marking open
positions to market value.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
RESULTS OF OPERATIONS FOR THE QUARTER ENDED JUNE 30, 1999
CONSOLIDATED OVERVIEW
The Company recognized net income of $796,000 - $.16 per share - for the second
quarter of 1999, representing an increase in income of $532,000, or $.11 per
share, as compared to the corresponding period in 1998. As indicated in the
following table, the increase in the Company's Earnings Before Interest and
Taxes ("EBIT") is primarily due to increased contributions from the natural gas
propane gas and advanced information services segments.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------
FOR THE THREE MONTHS ENDED JUNE 30, 1999 1998
- --------------------------------------------------------------------
<S> <C> <C>
Earnings Before Interest & Taxes
Natural Gas Distribution & Transmission $1,954,213 $1,311,362
Propane Gas Distribution & Marketing. . (443,730) (781,021)
Advanced Information Services . . . . . 418,751 337,016
Other & Eliminations. . . . . . . . . . 55,597 197,252
- --------------------------------------------------------------------
Earnings Before Interest & Taxes. . . . . 1,984,831 1,064,609
Operating Income Taxes. . . . . . . . . . 430,320 102,507
Interest. . . . . . . . . . . . . . . . . 832,879 787,538
Non-Operating Income, net . . . . . . . . 74,471 89,187
- --------------------------------------------------------------------
Net Income. . . . . . . . . . . . . . . . $ 796,103 $ 263,751
====================================================================
</TABLE>
NATURAL GAS DISTRIBUTION AND TRANSMISSION
The natural gas distribution and transmission segment reported EBIT of
$1,954,000 for the second quarter of 1999 as compared to $1,311,000 for the
corresponding period last year - an increase of $643,000. The rise in EBIT is
primarily due an increase in gross margin.
<TABLE>
<CAPTION>
- -------------------------------------------------------------
FOR THE THREE MONTHS ENDED JUNE 30, 1999 1998
- -------------------------------------------------------------
<S> <C> <C>
Revenue. . . . . . . . . . . . . . $15,974,554 $14,789,163
Cost of Gas. . . . . . . . . . . . 8,534,536 7,972,686
- -------------------------------------------------------------
Gross Margin . . . . . . . . . . . 7,440,018 6,816,477
Operations & Maintenance . . . . . 3,548,637 3,678,032
Depreciation & Amortization. . . . 1,206,328 1,117,157
Other Taxes. . . . . . . . . . . . 730,840 709,926
- -------------------------------------------------------------
Total Operating Expenses . . . . . 5,485,805 5,505,115
- -------------------------------------------------------------
Earnings Before Interest & Taxes . $ 1,954,213 $ 1,311,362
=============================================================
</TABLE>
Page 9
<PAGE>
Gross margin increased due to transportation revenue combined with increased
deliveries to residential and commercial customers in Chesapeake's northern
service territory. Higher transportation revenue is primarily attributable to a
single industrial customer contracting services on a monthly basis. Deliveries
to the residential and commercial customers increased 6.6%, contributing
approximately $292,000 in additional margin, due to cooler temperatures and the
increased number of residential and commercial customers. The reduction in
operating expenses was primarily the result of lower operations and maintenance
expenses offset by depreciation, marketing programs designed to continue
building customer growth and billable service work.
PROPANE GAS DISTRIBUTION AND MARKETING
For the second quarter of 1999, the propane gas segment reported a loss before
interest and taxes of $444,000, as compared to $781,000 for the same period last
year. The $337,000 improvement is primarily the result of increased gross
margin.
<TABLE>
<CAPTION>
- ---------------------------------------------------------------
FOR THE THREE MONTHS ENDED JUNE 30, 1999 1998
- ---------------------------------------------------------------
<S> <C> <C>
Revenue. . . . . . . . . . . . . . $26,764,392 $25,774,384
Cost of Sales. . . . . . . . . . . 24,503,285 23,825,736
- ---------------------------------------------------------------
Gross Margin . . . . . . . . . . . 2,261,107 1,948,648
Operations & Maintenance . . . . . 2,254,518 2,269,042
Depreciation & Amortization. . . . 324,646 322,038
Other Taxes. . . . . . . . . . . . 125,673 138,589
- ---------------------------------------------------------------
Total Operating Expenses . . . . . 2,704,837 2,729,669
- ---------------------------------------------------------------
Loss Before Interest & Taxes . . . $ (443,730) $ (781,021)
===============================================================
</TABLE>
The increase in gross margin is due primarily to a $239,000 increase in
distribution sales margins and a $133,000 increase in propane marketing margins,
offset by a $60,000 reduction in other margins. Distribution gross margin
increased primarily due to cooler temperatures during the second quarter of 1999
when compared to the same period last year. The change in temperatures resulted
in a 15% increase in propane gallons distributed. Lower wholesale propane supply
costs helped to increase the distribution margins earned per gallon sold,
accounting for approximately 25% of the $239,000 increase. Operating expenses
for the quarter decreased slightly due to lower maintenance, service and selling
expenses offset by increased marketing, employee benefits and delivery expenses.
ADVANCED INFORMATION SERVICES
The advanced information services segment recognized EBIT of $419,000 and
$337,000 for the quarters ended June 30, 1999 and 1998, respectively. The
$82,000 increase in EBIT is attributable to an increase in margin, reduced by
higher operating expenses.
<TABLE>
<CAPTION>
- -----------------------------------------------------------
FOR THE THREE MONTHS ENDED JUNE 30, 1999 1998
- -----------------------------------------------------------
<S> <C> <C>
Revenue. . . . . . . . . . . . . . $3,573,799 $2,470,655
Cost of Sales. . . . . . . . . . . 1,771,201 1,191,276
- -----------------------------------------------------------
Gross Margin . . . . . . . . . . . 1,802,598 1,279,379
Operations & Maintenance . . . . . 1,184,984 804,839
Depreciation & Amortization. . . . 66,448 42,116
Other Taxes. . . . . . . . . . . . 132,415 95,408
- -----------------------------------------------------------
Total Operating Expenses . . . . . 1,383,847 942,363
- -----------------------------------------------------------
Earnings Before Interest & Taxes . $ 418,751 $ 337,016
===========================================================
</TABLE>
Higher revenues are primarily due to increased consulting services and software
sales. Operating expenses increased primarily in the areas of compensation, both
Page 10
<PAGE>
earnings-driven and staff-related, employee benefits and consulting services.
Depreciation is also higher primarily due to computer equipment purchases to
support increased attendance in training classes and increased staffing.
OPERATING INCOME TAXES
Operating income taxes increased due to the increase in operating income.
COMPREHENSIVE INCOME
The Company has disclosed an unrealized gain on the sale of marketable
securities of $233,000 for the three months ended June 30, 1999, reflecting the
change from a market price of $14.75 per share at March 31, 1999 to the agreed
upon sale price of $16.50 per share at June 30, 1999. The investment is
classified as "Available for Sale" (see Note 3 to the Consolidated Financial
Statements). As previously discussed, in August 1998, the Company entered into
an agreement with The Southern Company to sell its 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 $863,000, which represents the
difference between the sale price and Chesapeake's cost basis.
RESULTS OF OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30, 1999
CONSOLIDATED OVERVIEW
The Company recognized net income of $5,739,000 - $1.12 per share - for the six
months ended 1999, representing an increase of $1,475,000, or $.27 per share, as
compared to net income for the first half of 1998. As indicated in the following
table, the increase in the Company's Earnings Before Interest and Taxes ("EBIT")
is primarily due to increased contributions from Chesapeake's three primary
business units - natural gas, propane gas and advanced information services.
<TABLE>
<CAPTION>
- -------------------------------------------------------------------
FOR THE SIX MONTHS ENDED JUNE 30, 1999 1998
- -------------------------------------------------------------------
<S> <C> <C>
Earnings Before Interest & Taxes
Natural Gas Distribution & Transmission $ 7,144,726 $5,992,142
Propane Gas Distribution & Marketing. . 2,771,734 1,325,144
Advanced Information Services . . . . . 681,600 604,930
Other & Eliminations. . . . . . . . . . 182,894 313,402
- -------------------------------------------------------------------
Earnings Before Interest & Taxes. . . . . 10,780,954 8,235,618
Operating Income Taxes. . . . . . . . . . 3,458,068 2,529,298
Interest. . . . . . . . . . . . . . . . . 1,731,497 1,641,544
Non-Operating Income, net . . . . . . . . 147,697 199,577
- -------------------------------------------------------------------
Net Income. . . . . . . . . . . . . . . . $ 5,739,086 $4,264,353
===================================================================
</TABLE>
NATURAL GAS DISTRIBUTION AND TRANSMISSION
The natural gas distribution and transmission segment reported EBIT of
$7,145,000 for the first six months of 1999 as compared to $5,992,000 for the
corresponding period last year - an increase of $1,153,000. The increase in EBIT
is due an increase in gross margin.
Page 11
<PAGE>
<TABLE>
<CAPTION>
- -----------------------------------------------------------
FOR THE SIX MONTHS ENDED JUNE 30, 1999 1998
- -----------------------------------------------------------
<S> <C> <C>
Revenue. . . . . . . . . . . . . $40,576,451 $41,859,811
Cost of Gas. . . . . . . . . . . 22,265,077 24,949,956
- -----------------------------------------------------------
Gross Margin . . . . . . . . . . 18,311,374 16,909,855
Operations & Maintenance . . . . 7,190,209 7,131,794
Depreciation & Amortization. . . 2,410,168 2,229,602
Other Taxes. . . . . . . . . . . 1,566,271 1,556,317
- -----------------------------------------------------------
Total Operating Expenses . . . . 11,166,648 10,917,713
- -----------------------------------------------------------
Earnings Before Interest & Taxes $ 7,144,726 $ 5,992,142
===========================================================
</TABLE>
Gross margin increased due to colder temperatures combined with a 5.6% growth in
residential and commercial customers. Deliveries to these customers increased
6.3% due to the colder weather and the increased number of residential and
commercial customers. The colder temperatures and increases in customers served
contributed to a rise in margin of approximately $818,000. Also contributing to
the rise in margin were increases in transportation revenue earned from the
system expansion and industrial customers. Although gross margin increased from
$16.9 million to $18.3 million from 1998 to 1999, revenue and the associated
cost of gas declined due to a reduction in the price of gas. Changes in the cost
of gas are passed on to customers through the purchased gas adjustment clauses
in the Company's tariffs. Increases in operating expenses were driven by
depreciation, employee benefits, marketing programs designed to continue
building customer growth and billable service work. These are partially offset
by decreased consulting, legal and data processing costs.
In an effort to reduce the impact of warmer temperatures in the future,
Chesapeake filed and received approval in the state of Delaware to implement a
weather normalization clause. The new margin sharing mechanism was approved May
25, 1999. It will increase the margins contributed by weather-sensitive
customers during periods when the weather is significantly warmer and decrease
margins contributed by them when the weather is significantly cooler. The
Company intends to make a similar filing in its Maryland jurisdiction in the
third quarter.
PROPANE GAS DISTRIBUTION AND MARKETING
For the first six months of 1999, the propane gas segment reported earnings
before interest and taxes of $2,772,000, as compared to $1,325,000 for the same
period last year. The $1,447,000 increase is primarily the result of increased
gross margin.
<TABLE>
<CAPTION>
- -----------------------------------------------------------
FOR THE SIX MONTHS ENDED JUNE 30, 1999 1998
- -----------------------------------------------------------
<S> <C> <C>
Revenue. . . . . . . . . . . . . $54,351,087 $56,270,628
Cost of Sales. . . . . . . . . . 46,077,755 49,438,683
- -----------------------------------------------------------
Gross Margin . . . . . . . . . . 8,273,332 6,831,945
Operations & Maintenance . . . . 4,554,912 4,532,201
Depreciation & Amortization. . . 649,365 649,681
Other Taxes. . . . . . . . . . . 297,321 324,919
- -----------------------------------------------------------
Total Operating Expenses . . . . 5,501,598 5,506,801
- -----------------------------------------------------------
Earnings Before Interest & Taxes $ 2,771,734 $ 1,325,144
===========================================================
</TABLE>
The increase in gross margin is due primarily to a $1.4 million increase in
distribution sales margins and a $66,000 increase in propane marketing margins,
offset by a $46,000 reduction in other margins. Distribution gross margin
increased primarily due to colder temperatures during the first six months of
1999 when compared to the same period last year. The change in temperatures
resulted in a 15.9% increase in propane gallons distributed. Lower wholesale
Page 12
<PAGE>
propane supply costs helped to increase the distribution margins earned per
gallon sold - approximately 36% of the $1.4 million - resulting in a margin per
gallon increase of approximately 7.5%.
ADVANCED INFORMATION SERVICES
The advanced information services segment recognized an EBIT of $682,000 and
$605,000 for the six months ended June 30, 1999 and 1998, respectively. The
$77,000 increase in EBIT is attributable to increased gross margin partially
offset by increased expenses.
<TABLE>
<CAPTION>
- ---------------------------------------------------------
FOR THE SIX MONTHS ENDED JUNE 30, 1999 1998
- ---------------------------------------------------------
<S> <C> <C>
Revenue. . . . . . . . . . . . . $6,582,149 $4,748,914
Cost of Sales. . . . . . . . . . 3,285,583 2,308,662
- ---------------------------------------------------------
Gross Margin . . . . . . . . . . 3,296,566 2,440,252
Operations & Maintenance . . . . 2,215,283 1,538,056
Depreciation & Amortization. . . 124,925 83,773
Other Taxes. . . . . . . . . . . 274,758 213,493
- ---------------------------------------------------------
Total Operating Expenses . . . . 2,614,966 1,835,322
- ---------------------------------------------------------
Earnings Before Interest & Taxes $ 681,600 $ 604,930
=========================================================
</TABLE>
Higher revenues are primarily due to increased consulting and training services
and software sales. These are partially offset by a reduction in placement
service revenues. Operating expenses increased primarily in the areas of
compensation, due to both increased staffing and earnings-driven compensation,
employee benefits and consulting services. Depreciation is also higher primarily
due to computer equipment purchases to support increased attendance in training
classes and increased staffing.
OPERATING INCOME TAXES
Operating income taxes increased due to the increase in operating income.
ENVIRONMENTAL MATTERS
The Company continues to work with federal and state environmental agencies to
assess the environmental impacts and explore corrective action at several former
gas manufacturing plant sites (see Note 4 to the Consolidated Financial
Statements). The Company believes that any future costs associated with these
sites will be recoverable in future rates.
FINANCIAL POSITION, LIQUIDITY AND CAPITAL RESOURCES
The Company's capital requirements reflect the capital-intensive nature of its
business and are attributable principally to its construction program and the
retirement of its outstanding debt. The Company relies on funds provided by
operations and short-term borrowing to meet normal working capital requirements
and temporarily finance capital expenditures. During the first six months of
1999, the Company's net cash provided by operating activities, net cash used by
investing activities and net cash used by financing activities were
approximately $18.6 million, $7.3 million and $10.2 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 Company has three unsecured bank lines of credit, totaling $28 million.
Under these lines of credit, the Board of Directors has authorized the Company
to borrow up to $20 million from various banks and trust companies. 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 June 30, 1999
and December 31, 1998 were $4.5 and $11.6 million, respectively.
Page 13
<PAGE>
During the six months ended June 30, 1999 and June 30, 1998, net property, plant
and equipment expenditures were approximately $7.3 and $4.7 million,
respectively. Chesapeake has budgeted $25.0 million for capital expenditures
during 1999. This amount includes $21.2 million for natural gas distribution and
transmission; $2.1 million for propane distribution and marketing; $336,000 for
advanced information services; and $1.4 million for general plant. The natural
gas expenditures are for expansion and improvement of facilities in existing
service territories and improvement and expansion of the pipeline system,
specifically, the construction of eight miles of pipeline to provide additional
firm transportation capacity to two existing customers. The propane expenditures
are to support customer growth and the replacement of older equipment. The
advanced information services expenditures are for computer hardware, software
and related equipment to support customer growth and increased staffing. General
expenditures are for building improvements, computer software and hardware.
Financing for the 1999 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 $2.2 million for environmental related expenditures
during 1999 and expects to incur additional expenditures in future years (see
Note 4 to the Consolidated Financial Statements), a portion of which may need to
be financed through external sources. Management does not expect such financing
to have a material adverse effect on the financial position or capital resources
of the Company.
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.
Any such financing activities are not expected to have a material adverse effect
on the financial position or capital resources of the Company.
As of June 30, 1999, common equity represented 63.2% of permanent
capitalization, compared to 60.0% as of December 31, 1998. 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.
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
("Y2K") on its information systems, the Company has been preparing for Y2K since
1996 by engaging in a strategic initiative to assess, correct and test all of
our information systems and date-sensitive equipment. Since that time,
Chesapeake has been evaluating and remediating any deficiencies. The Company's
evaluation of its readiness and the potential impact of Y2K 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 company maintained
software systems for its financial information; natural gas customer information
and billing; and propane customer information, billing and delivery. The Company
completed testing of these three applications in 1998 and deems them Y2K ready.
Page 14
<PAGE>
- - Embedded systems include the supervisory control and data acquisition
("SCADA") system for the natural gas segment, telecommunications, metering and
other facilities related systems. The Company has prioritized the vendors of
these systems into three potential impact classifications: high impact vendors,
supporting items such as the SCADA system; medium impact vendors, supporting
systems such as telecommunications; and low impact vendors, supporting items
such as copiers and postage meters. The Company has been testing these systems
and has either worked with vendors to reach a state of readiness with the
applicable systems or has changed to vendors or systems that are Y2K ready.
- - Chesapeake has identified vendors/suppliers that supply the Company with
products and services that impact various elements of the Company's business.
The Company has classified these vendors into three impact classifications -
high impact vendors such as suppliers of natural gas or propane; medium impact
vendors such as regional communication vendors; and low impact vendors. The
Company has requested a Y2K status statement from each of these vendors. The
Company will continue to follow up with vendors that are not Y2K ready and has
considered alternate providers as necessary to the extent available.
- - End-user computing systems are upgraded periodically through the Company's
ongoing replacement program. Chesapeake's personal computers and local area
network are Y2K ready. The Company's PC-based and network-based software is also
Y2K ready.
- - Customers, primarily industrial interruptible natural gas customers, must
ensure that their plant controls are Y2K ready for their alternative fuel. The
Company has contacted these interruptible customers and has taken into account
the results of the survey in developing the natural gas contingency plan. Four
of Chesapeake's service territories have filed contingency plans with their
respective regulatory agencies.
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. Chesapeake is also dependent
on various suppliers of communication services. 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 Y2K evaluation process has addressed
each of these risks and the required remediation. The Company has developed
contingency plans for its various service areas, addressing various alternatives
and assessing a variety of scenarios that could emerge and require the Company
to react. Plans include preemptive measures for interruption of interruptible
customers, loss of electrical power and communications, communicating with
emergency services and employing multiple shifts during the period. Alternate
methods of communicating with employees scheduled to handle potential service
calls, stationing crews in pre-determined locations in the event of telephone
system failure and having food and water on hand for Chesapeake employees to be
able to continue to function throughout any possible emergency have also been
incorporated into the plans. The contingency plans could be modified as
warranted by changing events.
The costs Chesapeake has incurred as of June 30, 1999 to address Y2K issues have
been immaterial. The Company has completed its Y2K evaluation, remediation and
contingency planning process and deems the Company to be Y2K ready.
Page 15
<PAGE>
CAUTIONARY STATEMENT
Statements in this report and elsewhere are considered forward-looking
statements within the meaning of the Private Securities Litigation Reform Act of
1995. These statements are not matters of historical fact. Sometimes they
contain words such as "believes," "expects," "intends," "plans," "will," or
"may," and other similar words. These statements relate to such topics as
customer growth, increases in revenues or margins, Y2K readiness, regulatory
approvals, market risk associated with the Company's propane marketing
operation, the competitive position of the Company and other matters. It is
important to understand that these forward-looking statements are not
guarantees, but are subject to certain risks and uncertainties and other
important factors that could cause actual results to differ materially from
those in the forward-looking statements. These factors include, among other
things:
- - the seasonality and temperature sensitivity of Chesapeake's natural gas
and propane gas businesses (that is, the Company's earnings vary depending on
the season and, in the winter months, how cold the weather is);
- - consumption patterns of the Company's existing and expected customers in
these businesses;
- - the wholesale price of propane and market movements in these prices, which
affect both the margins in the Company's propane gas distribution business and
the profitability of the propane gas marketing operation;
- - the relative price of alternative energy sources, to which some of
Chesapeake's customers have access;
- - the effects of competition on both unregulated and regulated businesses;
- - the ability of the natural gas segment to attract new customers in an open
access environment;
- - the ability of the Company's existing, new and planned facilities to
generate expected revenues;
- - the Company's ability to obtain the rate relief requested from utility
regulators and the timing of that rate relief; and
- - the Company's ability to identify and address Y2K issues successfully, in
a timely manner and at a reasonable cost, as well as the ability of the
Company's vendors, suppliers, and other service providers and customers to
successfully address their own Y2K issues in a timely manner.
RECENT ACCOUNTING PRONOUNCEMENTS
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 entities recognize all
derivatives as either assets or liabilities in the statement of financial
position and measure those instruments at fair value. This statement, originally
effective for all fiscal quarters of fiscal years beginning after June 15, 1999
has been deferred by FASB and is now effective for all fiscal quarters of fiscal
years beginning after June 15, 2000. The Company believes that adoption of this
statement will not have a material impact on the Company's financial position or
results of operations.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market risk represents the potential loss arising from adverse changes in market
rates and prices. The Company's long-term debt consists of first mortgage bonds,
senior notes and convertible debentures. All of Chesapeake's long-term debt is
fixed rate debt and was not entered into for trading purposes. The carrying
value of Chesapeake's long-term debt at June 30, 1999 was $36.8 million. The
fair value was $37.9 million, based mainly on current market prices or
discounted cash flows using current rates for similar issues with similar terms
and remaining maturities. The Company is exposed to changes in interest rates as
a result of financing through its issuance of fixed rate long-term debt. The
Company evaluates whether to refinance existing debt or permanently finance
existing short-term borrowing based on the fluctuation in interest rates.
Page 16
<PAGE>
At June 30, 1999, the wholesale propane marketing operation was a party to
natural gas liquids ("NGL") forward contracts, primarily propane contracts, with
various third parties. These contracts require that the wholesale propane
marketing operation purchase or sell NGL at a fixed price at fixed future dates.
At expiration, the contracts are settled by the delivery of NGL to the
respective party. The wholesale propane marketing operation also enters into
futures contracts that are traded on the New York Mercantile Exchange. In
certain cases, the futures contracts are settled by the payment of a net amount
equal to the difference between the current market price of the futures contract
and the original contract price.
The forward and futures contracts are entered into for trading and wholesale
marketing purposes. The wholesale propane marketing operation is subject to
commodity price risk on their open positions to the extent that NGL market
prices deviate from fixed contract settlement amounts. Market risks associated
with the trading of futures and forward contracts are monitored daily for
compliance with Chesapeake's Risk Management Policy, which includes volumetric
limits for open positions. In order to manage exposures to changing market
prices, open positions are marked to market and reviewed by oversight officials
on a daily basis. Additionally, the Risk Management Committee reviews periodic
reports on market and credit risk, approves any exceptions to the Risk
Management policy (within the limits established by the Board of Directors) and
authorizes the use of any new types of contracts. Listed below is quantitative
information on the forward and futures contracts at June 30, 1999. All of the
contracts mature during 1999.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------
QUANTITY ESTIMATED WEIGHTED AVERAGE
AT JUNE 30, 1999 IN GALLONS MARKET PRICES CONTRACT PRICES
- ------------------------------------------------------------------
<S> <C> <C> <C>
FORWARD CONTRACTS
Sale. . . . . . . 17,383,800 $0.3450 -- $0.3525 $0.3197
Purchase. . . . . 18,051,600 $0.3450 -- $0.3525 $0.3169
FUTURES CONTRACTS
Sale. . . . . . . 2,856,000 $0.3450 -- $0.3525 $0.3098
Purchase. . . . . 4,998,000 $0.3450 -- $0.3525 $0.3243
- ------------------------------------------------------------------
<FN>
Estimated market prices and weighted average contract prices are
in dollars per gallon.
</TABLE>
Page 17
<PAGE>
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
See Note 4 to the Consolidated Financial Statements
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The annual Meeting of Stockholders was held on May 18, 1999.
Proposals as submitted in the proxy statement were voted on
as follows:
1. All nominees to the Board of Directors were elected to
the class indicated in the proxy statement.
2. Ratification of the selection of the Company's independent
auditors through the fiscal year ending December 31, 1999
was approved.
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
None
Page 18
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Chesapeake Utilities Corporation
/s/ Michael P. McMasters
- ---------------------------------
Michael P. McMasters
Vice President, Treasurer and Chief Financial Officer
Date: August 12, 1999
Page 19
<TABLE> <S> <C>
<ARTICLE> UT
<LEGEND>
This schedule contains summary financial information extracted from
the Consolidated Statement of Income, Statement of Cash Flow and
Balance Sheet of Chesapeake Utilities Corporation for the period
ended June 30, 1999 included in the Company's Form 10-Q and is
qualified in its entirety by reference to such financial statements.
</LEGEND>
<S> <C>
<PERIOD-START> JAN-01-1999
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> JUN-30-1999
<BOOK-VALUE> PER-BOOK
<TOTAL-NET-UTILITY-PLANT> 84580347
<OTHER-PROPERTY-AND-INVEST> 27663474
<TOTAL-CURRENT-ASSETS> 24875992
<TOTAL-DEFERRED-CHARGES> 9657230
<OTHER-ASSETS> 0
<TOTAL-ASSETS> 146777043
<COMMON> 2501748
<CAPITAL-SURPLUS-PAID-IN> 24967433
<RETAINED-EARNINGS> 32015951
<TOTAL-COMMON-STOCKHOLDERS-EQ> 60312955
0
0
<LONG-TERM-DEBT-NET> 35175000
<SHORT-TERM-NOTES> 4500000
<LONG-TERM-NOTES-PAYABLE> 0
<COMMERCIAL-PAPER-OBLIGATIONS> 0
<LONG-TERM-DEBT-CURRENT-PORT> 1638000
0
<CAPITAL-LEASE-OBLIGATIONS> 0
<LEASES-CURRENT> 0
<OTHER-ITEMS-CAPITAL-AND-LIAB> 45151088
<TOT-CAPITALIZATION-AND-LIAB> 146777043
<GROSS-OPERATING-REVENUE> 102497377
<INCOME-TAX-EXPENSE> 3458068
<OTHER-OPERATING-EXPENSES> 19401290
<TOTAL-OPERATING-EXPENSES> 22859358
<OPERATING-INCOME-LOSS> 7322886
<OTHER-INCOME-NET> 147697
<INCOME-BEFORE-INTEREST-EXPEN> 7470583
<TOTAL-INTEREST-EXPENSE> 1731497
<NET-INCOME> 5739086
0
<EARNINGS-AVAILABLE-FOR-COMM> 5739086
<COMMON-STOCK-DIVIDENDS> 2615519
<TOTAL-INTEREST-ON-BONDS> 1430567
<CASH-FLOW-OPERATIONS> 18589282
<EPS-BASIC> 1.12
<EPS-DILUTED> 1.09
</TABLE>
