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, 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
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(Address of principal executive offices, including Zip Code)
(302) 734-6799
----------------------------------
(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 - 5,162,827 shares issued as of September 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 September 30, 1999 and 1998. . . . 1
Consolidated Statements of Income and Consolidated Statements
of Comprehensive Income - Nine Months Ended September 30, 1999 and 1998 . . . . 2
Consolidated Statements of Cash Flows - Nine Months Ended
September 30, 1999 and 1998 . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Consolidated Balance Sheets - September 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 September 30, 1999. . . . . . . . . 9
Results of Operations for the Nine Months Ended September 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 SEPTEMBER 30, 1999 1998
- ---------------------------------------------------------------------
<S> <C> <C>
OPERATING REVENUES . . . . . . . . . . . $56,525,775 $36,231,924
COST OF SALES. . . . . . . . . . . . . . 47,269,310 28,085,138
- ---------------------------------------------------------------------
GROSS MARGIN . . . . . . . . . . . . . . 9,256,465 8,146,786
- ---------------------------------------------------------------------
OPERATING EXPENSES
Operations . . . . . . . . . . . . . . . 6,658,997 6,430,835
Maintenance. . . . . . . . . . . . . . . 464,099 493,894
Depreciation and amortization. . . . . . 1,664,680 1,541,710
Other taxes. . . . . . . . . . . . . . . 985,953 911,918
Income taxes . . . . . . . . . . . . . . (551,370) (771,606)
- ---------------------------------------------------------------------
Total operating expenses . . . . . . . . 9,222,359 8,606,751
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OPERATING INCOME . . . . . . . . . . . . 34,106 (459,965)
OTHER INCOME, NET. . . . . . . . . . . . 54,714 23,052
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INCOME BEFORE INTEREST CHARGES . . . . . 88,820 (436,913)
INTEREST CHARGES . . . . . . . . . . . . 873,801 829,585
- ---------------------------------------------------------------------
NET LOSS . . . . . . . . . . . . . . . . $ (784,981) $(1,266,498)
=====================================================================
EARNINGS PER SHARE OF COMMON STOCK:
BASIC. . . . . . . . . . . . . . . . . . $ (0.15) $ (0.25)
- ---------------------------------------------------------------------
DILUTED. . . . . . . . . . . . . . . . . $ (0.15) $ (0.25)
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</TABLE>
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<CAPTION>
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)
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FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1999 1998
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NET LOSS. . . . . . . . . . . . . . . . . $(784,981) $(1,266,498)
UNREALIZED GAIN ON MARKETABLE SECURITIES,
NET OF INCOME TAXES . . . . . . . . . . . - 16,807
- ---------------------------------------------------------------------
TOTAL COMPREHENSIVE LOSS. . . . . . . . . $(784,981) $(1,249,691)
=====================================================================
<FN>
The accompanying notes are an integral part of these financial statements.
</TABLE>
1
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<TABLE>
<CAPTION>
CHESAPEAKE UTILITIES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
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FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999 1998
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<S> <C> <C>
OPERATING REVENUES. . . . . . . . . . . $159,012,763 $139,995,969
COST OF SALES . . . . . . . . . . . . . 119,574,054 105,260,339
- --------------------------------------------------------------------
GROSS MARGIN. . . . . . . . . . . . . . 39,438,709 34,735,630
- --------------------------------------------------------------------
OPERATING EXPENSES
Operations. . . . . . . . . . . . . . . 19,735,943 18,604,093
Maintenance . . . . . . . . . . . . . . 1,311,435 1,505,544
Depreciation and amortization . . . . . 4,961,513 4,576,084
Other taxes . . . . . . . . . . . . . . 3,166,129 3,045,862
Income taxes. . . . . . . . . . . . . . 2,906,698 1,757,692
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Total operating expenses. . . . . . . . 32,081,718 29,489,275
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OPERATING INCOME. . . . . . . . . . . . 7,356,991 5,246,355
OTHER INCOME, NET . . . . . . . . . . . 202,412 222,628
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INCOME BEFORE INTEREST CHARGES. . . . . 7,559,403 5,468,983
INTEREST CHARGES. . . . . . . . . . . . 2,605,298 2,471,129
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NET INCOME. . . . . . . . . . . . . . . $ 4,954,105 $ 2,997,854
====================================================================
EARNINGS PER SHARE OF COMMON STOCK:
BASIC . . . . . . . . . . . . . . . . . $ 0.97 $ 0.59
- --------------------------------------------------------------------
DILUTED . . . . . . . . . . . . . . . . $ 0.95 $ 0.59
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</TABLE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)
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FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999 1998
- --------------------------------------------------------------------
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NET INCOME. . . . . . . . . . . . . . . . $4,954,105 $2,997,854
UNREALIZED GAIN ON MARKETABLE SECURITIES,
NET OF INCOME TAXES . . . . . . . . . . . - 399,892
- --------------------------------------------------------------------
TOTAL COMPREHENSIVE INCOME. . . . . . . . $4,954,105 $3,397,746
====================================================================
<FN>
The accompanying notes are an integral part of these financial statements.
</TABLE>
2
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<TABLE>
<CAPTION>
CHESAPEAKE UTILITIES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
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FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999 1998
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OPERATING ACTIVITIES
Net Income . . . . . . . . . . . . . . . . . . . . . . . . $ 4,954,105 $ 2,997,854
Adjustments to reconcile net income to net operating cash:
Depreciation and amortization. . . . . . . . . . . . . . . 5,524,879 5,154,749
Deferred income taxes, net . . . . . . . . . . . . . . . . (631,070) (1,039,980)
Investment tax credit adjustments. . . . . . . . . . . . . (22,289) (35,184)
Mark-to-market adjustments . . . . . . . . . . . . . . . . (15,412) (372,611)
Employee benefits. . . . . . . . . . . . . . . . . . . . . 101,063 324,119
Employee compensation from lapsing stock restrictions. . . 53,281 89,884
Other, net . . . . . . . . . . . . . . . . . . . . . . . . 99,626 559,374
Changes in assets and liabilities:
Accounts receivable, net . . . . . . . . . . . . . . . . . (4,407,993) 5,385,317
Inventory, materials, supplies and storage gas . . . . . . (1,492,231) 85,592
Other current assets . . . . . . . . . . . . . . . . . . . (116,101) (592,661)
Other deferred charges . . . . . . . . . . . . . . . . . . 676,995 (241,290)
Accounts payable, net. . . . . . . . . . . . . . . . . . . 8,661,443 (5,194,191)
Refunds payable to customers . . . . . . . . . . . . . . . 43,470 (93,525)
Overrecovered purchased gas costs. . . . . . . . . . . . . 1,528,274 1,090,909
Other current liabilities. . . . . . . . . . . . . . . . . 1,526,803 1,932,937
- ----------------------------------------------------------------------------------------
Net cash provided by operating activities. . . . . . . . . 16,484,843 10,051,293
- ----------------------------------------------------------------------------------------
INVESTING ACTIVITIES
Property, plant and equipment expenditures, net. . . . . . (14,117,623) (8,072,141)
- ----------------------------------------------------------------------------------------
Net cash used by investing activities. . . . . . . . . . . (14,117,623) (8,072,141)
- ----------------------------------------------------------------------------------------
FINANCING ACTIVITIES
Common stock dividends net of amounts reinvested of
$338,709 and $314,031, respectively. . . . . . . . . . . . (3,550,256) (3,178,904)
Issuance of stock:
Dividend Reinvestment Plan optional cash . . . . . . . . . 141,078 139,812
Retirement Savings Plan. . . . . . . . . . . . . . . . . . 619,377 339,032
Net borrowing (repayments) under line of credit agreements 600,000 (2,400,010)
Repayments of long-term debt . . . . . . . . . . . . . . . (1,268,129) (791,385)
- ----------------------------------------------------------------------------------------
Net cash used by financing activities. . . . . . . . . . . (3,457,930) (5,891,455)
- ----------------------------------------------------------------------------------------
NET DECREASE IN CASH AND CASH EQUIVALENTS. . . . . . . . . $ (1,090,710) $(3,912,303)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD . . . . . 2,598,084 4,829,176
- ----------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD . . . . . . . . $ 1,507,374 $ 916,873
========================================================================================
<FN>
The accompanying notes are an integral part of these financial statements.
</TABLE>
3
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CHESAPEAKE UTILITIES CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
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SEPTEMBER 30, DECEMBER 31,
1999 1998
ASSETS (UNAUDITED) (AUDITED)
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<S> <C> <C>
PROPERTY, PLANT AND EQUIPMENT
Natural gas distribution and transmission. . . . $ 128,196,856 $ 117,232,506
Propane gas distribution and marketing . . . . . 27,956,007 27,287,807
Advanced information services. . . . . . . . . . 1,381,396 1,087,910
Other plant. . . . . . . . . . . . . . . . . . . 8,554,665 7,382,965
- ----------------------------------------------------------------------------------
Total property, plant and equipment. . . . . . . 166,088,924 152,991,188
Less: Accumulated depreciation and amortization (53,113,676) (48,725,412)
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Net property, plant and equipment. . . . . . . . 112,975,248 104,265,776
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INVESTMENTS. . . . . . . . . . . . . . . . . . . 4,164,394 4,165,194
- ----------------------------------------------------------------------------------
CURRENT ASSETS
Cash and cash equivalents. . . . . . . . . . . . 1,507,374 2,598,084
Accounts receivable (less allowance for
uncollectibles of $236,649 and $302,513
in 1999 and 1998, respectively). . . . . . . . . 19,284,659 14,861,255
Materials and supplies, at average cost. . . . . 1,901,297 1,728,513
Propane inventory, at average cost . . . . . . . 2,131,169 1,787,038
Storage gas prepayments. . . . . . . . . . . . . 3,127,921 2,152,605
Underrecovered purchased gas costs . . . . . . . 23,991 1,552,265
Income taxes receivable. . . . . . . . . . . . . - 344,311
Deferred income taxes. . . . . . . . . . . . . . 474,628 -
Prepaid expenses . . . . . . . . . . . . . . . . 1,712,697 1,596,595
- ----------------------------------------------------------------------------------
Total current assets . . . . . . . . . . . . . . 30,163,736 26,620,666
- ----------------------------------------------------------------------------------
DEFERRED CHARGES AND OTHER ASSETS
Environmental regulatory assets. . . . . . . . . 2,592,683 2,700,000
Environmental expenditures . . . . . . . . . . . 3,455,998 3,418,166
Other deferred charges and intangible assets . . 3,232,255 4,063,811
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Total deferred charges and other assets. . . . . 9,280,936 10,181,977
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TOTAL ASSETS . . . . . . . . . . . . . . . . . . $ 156,584,314 $ 145,233,613
==================================================================================
<FN>
The accompanying notes are an integral part of these financial statements.
</TABLE>
4
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<CAPTION>
CHESAPEAKE UTILITIES CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
- ----------------------------------------------------------------------------------
SEPTEMBER 30, DECEMBER 31,
1999 1998
CAPITALIZATION AND LIABILITIES (UNAUDITED) (AUDITED)
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<S> <C> <C>
CAPITALIZATION
Stockholders' equity
Common Stock, par value $.4867 per share;
(authorized 12,000,000 shares; issued 5,162,827
and 5,093,788 shares, respectively). . . . . . . $ 2,512,621 $ 2,479,019
Additional paid-in capital . . . . . . . . . . . 25,370,820 24,192,188
Retained earnings. . . . . . . . . . . . . . . . 29,888,635 28,892,384
Accumulated other comprehensive income . . . . . 863,344 863,344
Less: Unearned compensation related to
restricted stock awards. . . . . . . . . . . . . (17,760) (71,041)
- ----------------------------------------------------------------------------------
Total stockholders' equity . . . . . . . . . . . 58,617,660 56,355,894
Long-term debt, net of current portion . . . . . 35,126,000 37,597,000
- ----------------------------------------------------------------------------------
Total capitalization . . . . . . . . . . . . . . 93,743,660 93,952,894
- ----------------------------------------------------------------------------------
CURRENT LIABILITIES
Current portion of long-term debt. . . . . . . . 1,638,000 520,000
Short-term borrowing . . . . . . . . . . . . . . 12,200,000 11,600,000
Accounts payable . . . . . . . . . . . . . . . . 19,732,084 11,070,642
Refunds payable to customers . . . . . . . . . . 679,623 636,153
Income taxes payable . . . . . . . . . . . . . . 134,744 -
Accrued interest . . . . . . . . . . . . . . . . 569,168 553,444
Dividends payable. . . . . . . . . . . . . . . . 1,342,335 1,273,446
Deferred income taxes. . . . . . . . . . . . . . - 56,100
Other accrued liabilities. . . . . . . . . . . . 4,758,056 3,754,231
- ----------------------------------------------------------------------------------
Total current liabilities. . . . . . . . . . . . 41,054,010 29,464,016
- ----------------------------------------------------------------------------------
DEFERRED CREDITS AND OTHER LIABILITIES
Deferred income taxes. . . . . . . . . . . . . . 13,159,140 13,260,282
Deferred investment tax credits. . . . . . . . . 744,513 766,802
Environmental liability. . . . . . . . . . . . . 2,592,683 2,700,000
Accrued pension costs. . . . . . . . . . . . . . 1,637,367 1,536,304
Other liabilities. . . . . . . . . . . . . . . . 3,652,941 3,553,315
- ----------------------------------------------------------------------------------
Total deferred credits and other liabilities . . 21,786,644 21,816,703
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TOTAL CAPITALIZATION AND LIABILITIES . . . . . . $ 156,584,314 $ 145,233,613
==================================================================================
<FN>
The accompanying notes are an integral part of these financial statements.
</TABLE>
5
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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.
2. CALCULATION OF EARNINGS PER SHARE
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THREE MONTHS ENDED NINE MONTHS ENDED
FOR THE PERIODS ENDED SEPTEMBER 30, 1999 1998 1999 1998
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CALCULATION OF BASIC EARNINGS PER SHARE:
Net Income . . . . . . . . . . . . . . . . $ (784,981) $(1,266,498) $4,954,105 $2,997,854
Weighted Average Shares Outstanding. . . . 5,156,082 5,071,791 5,132,948 5,050,742
- ----------------------------------------------------------------------------------------------
BASIC EARNINGS PER SHARE . . . . . . . . . $ (0.15) $ (0.25) $ 0.97 $ 0.59
- ----------------------------------------------------------------------------------------------
CALCULATION OF DILUTED EARNINGS PER SHARE:
RECONCILIATION OF NUMERATOR:
Net Income Basic . . . . . . . . . . . . . $ (784,981) $(1,266,498) $4,954,105 $2,997,854
Effect of 8.25% Convertible debentures . . - - 141,942 -
- ----------------------------------------------------------------------------------------------
Adjusted numerator Diluted . . . . . . . . $ (784,981) $(1,266,498) $5,096,047 $2,997,854
- ----------------------------------------------------------------------------------------------
RECONCILIATION OF DENOMINATOR:
Weighted Shares Outstanding Basic. . . . . 5,156,082 5,071,791 5,132,948 5,050,742
Effect of Dilutive Securities
Stock options. . . . . . . . . . . . . . . - - 11,664 12,442
8.25% Convertible debentures . . . . . . . - - 221,660 -
- ----------------------------------------------------------------------------------------------
Adjusted denominator Diluted . . . . . . . 5,156,082 5,071,791 5,366,272 5,063,184
- ----------------------------------------------------------------------------------------------
DILUTED EARNINGS PER SHARE . . . . . . . . $ (0.15) $ (0.25) $ 0.95 $ 0.59
- ----------------------------------------------------------------------------------------------
</TABLE>
Inclusion of the convertible debentures and stock options produced an
anti-dilutive effect in the calculation of diluted earnings per share for the
quarters ended September 30, 1999 and 1998 and 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 of in other periods.
3. INVESTMENTS
The investment balance consists primarily of common stock of Florida Public
Utilities Company ("FPU"). At September 30,1999, the shares owned represented
7.2% of the shares outstanding. 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 the sale is completed, the
Company will recognize a $1.4 million pre-tax gain or $863,000, after taxes.
6
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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
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.
During the second quarter of 1999 the Company received and responded to an
inquiry from the Maryland Department of the Environment ("MDE") 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 the Cambridge location. The Company
has had no further discussion with the MDE in regard to this issue.
(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. The installation of
the ground-water remediation system has been delayed pending further
investigation.
7
<PAGE>
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
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 September 30, 1999, the Company has incurred approximately $7.2 million in
costs relating to environmental testing and remedial action studies. Of this
amount, $1.2 million of incurred environmental costs have not received
ratemaking treatment. In November, Chesapeake will submit a filing with the
Public Service Commission to recover these costs through rates.
(B) SALISBURY TOWN GAS LIGHT SITE
In cooperation with the Maryland Department of the Environment, 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 MDE 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 September 30, 1999, the Company has incurred
approximately $2.6 million for remedial actions and environmental studies. Of
this amount, approximately $878,000 of incurred costs have not been recovered
through insurance proceeds or received ratemaking treatment. Chesapeake will
apply for the recovery of these and any future costs in the next base rate
filing with the Maryland Public Service Commission.
(C) WINTER HAVEN COAL GAS SITE
Chesapeake has been working with the Florida Department of Environmental
Protection ("FDEP") in assessing a coal gas site in Winter Haven, Florida. In
May 1996, the Company filed an Air Sparging and Soil Vapor Extraction Pilot
Study Work Plan for the Winter Haven site with the 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. In December 1998
the FDEP approved the AS/SVE Pilot Study Work Plan, which the Company completed
during the third quarter of 1999. Chesapeake has reported the results of the
Work Plan to the FDEP for further discussion and review. It is not possible to
determine what remedial action will be required by FDEP or the cost of such
remediation.
8
<PAGE>
The Company has recovered all environmental costs incurred to date,
approximately $756,000, 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 September 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
The Financial Accounting Standards Board ("FASB") issued Statement of Financial
Accounting Standards No. 133, establishing accounting and reporting standards
for derivative instruments, 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. 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 SEPTEMBER 30, 1999
CONSOLIDATED OVERVIEW
The Company recognized improved results for the third quarter of 1999 as
compared to corresponding period in 1998. Chesapeake typically experiences a
loss in the third quarter due to the temperature sensitivity of the Company's
natural gas and propane distribution operations. The loss for the quarter of
$785,000 - $.15 per share - represented an improvement of $482,000, or $.10 per
share, as compared to the previous year. As indicated in the following table,
improved performance for the quarter was primarily driven by the natural gas and
propane segments.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1999 1998 CHANGE
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Earnings/(Loss) Before Interest & Taxes
Natural Gas Distribution & Transmission $ 190,029 $ (306,248) $496,277
Propane Gas Distribution & Marketing. . (1,253,008) (1,421,710) 168,702
Advanced Information Services . . . . . 420,236 389,444 30,792
Other & Eliminations. . . . . . . . . . 125,479 106,943 18,536
- --------------------------------------------------------------------------------
Loss Before Interest & Taxes. . . . . . . (517,264) (1,231,571) 714,307
Operating Income Taxes. . . . . . . . . . (551,370) (771,606) 220,236
Interest. . . . . . . . . . . . . . . . . 873,801 829,585 44,216
Non-Operating Income, net . . . . . . . . 54,714 23,052 31,662
- --------------------------------------------------------------------------------
Net Loss. . . . . . . . . . . . . . . . . $ (784,981) $(1,266,498) $481,517
================================================================================
</TABLE>
NATURAL GAS DISTRIBUTION AND TRANSMISSION
The natural gas distribution and transmission segment reported Earnings Before
Interest and Taxes ("EBIT") of $190,000 for the third quarter of 1999 as
compared to loss of $306,000 for the corresponding period last year - an
increase of $496,000. The rise in EBIT is primarily due an increase in gross
margin.
9
<PAGE>
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1999 1998 CHANGE
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Revenue . . . . . . . . . . . . . . . . $13,757,683 $10,575,119 $3,182,564
Cost of Gas . . . . . . . . . . . . . . 7,964,882 5,444,716 2,520,166
- --------------------------------------------------------------------------------
Gross Margin. . . . . . . . . . . . . . 5,792,801 5,130,403 662,398
Operations & Maintenance. . . . . . . . 3,693,110 3,639,954 53,156
Depreciation & Amortization . . . . . . 1,202,141 1,119,918 82,223
Other Taxes . . . . . . . . . . . . . . 707,521 676,779 30,742
- --------------------------------------------------------------------------------
Total Operating Expenses. . . . . . . . 5,602,772 5,436,651 166,121
- --------------------------------------------------------------------------------
Earnings/(Loss) Before Interest & Taxes $ 190,029 $ (306,248) $ 496,277
================================================================================
</TABLE>
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 additional services on a monthly basis
during 1999. Deliveries to the residential and commercial customers increased
4.1%, contributing approximately $200,000 in additional margin, due to growth of
5% in residential and commercial customers. The increase in operating expenses
was primarily the result of higher depreciation and property taxes on capital
improvements.
PROPANE GAS DISTRIBUTION AND MARKETING
For the third quarter of 1999, the propane gas segment reported a loss before
interest and taxes of $1,253,000, as compared to $1,422,000 for the same period
last year. The $169,000 improvement is primarily the result of increased gross
margin.
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1999 1998 CHANGE
- ----------------------------------------------------------------------------------
<S> <C> <C> <C>
Revenue . . . . . . . . . . . . . . . . $38,821,477 $22,392,292 $16,429,185
Cost of Sales . . . . . . . . . . . . . 37,289,466 21,016,607 16,272,859
- ----------------------------------------------------------------------------------
Gross Margin. . . . . . . . . . . . . . 1,532,011 1,375,685 156,326
Operations & Maintenance. . . . . . . . 2,317,014 2,348,640 (31,626)
Depreciation & Amortization . . . . . . 328,685 328,722 (37)
Other Taxes . . . . . . . . . . . . . . 139,320 120,033 19,287
- ----------------------------------------------------------------------------------
Total Operating Expenses. . . . . . . . 2,785,019 2,797,395 (12,376)
- ----------------------------------------------------------------------------------
Loss Before Interest & Taxes. . . . . . $(1,253,008) $(1,421,710) $ 168,702
==================================================================================
</TABLE>
The increase in gross margin is due primarily to a $98,000 increase in propane
marketing margins and a $95,000 increase in propane distribution sales margins,
offset by a $37,000 reduction in other margins. The 82.7% increase in propane
marketing revenues was offset by an 83.7% increase in the cost of sales,
resulting in a $98,000 increase in margin. The Company uses margin, rather than
revenue, to measure the growth and performance of its propane business. Propane
marketing is a high volume, low margin business. A margin per gallon increase of
approximately 12.9% contributed to the increase in margins. 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 $420,000 and
$389,000 for the quarters ended September 30, 1999 and 1998, respectively. The
$31,000 increase in EBIT is attributable to an increase in margin, reduced by
higher operating expenses.
10
<PAGE>
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1999 1998 CHANGE
- --------------------------------------------------------------------------
<S> <C> <C> <C>
Revenue . . . . . . . . . . . . . . . . $3,431,482 $2,845,601 $585,881
Cost of Sales . . . . . . . . . . . . . 1,697,969 1,376,459 321,510
- --------------------------------------------------------------------------
Gross Margin. . . . . . . . . . . . . . 1,733,513 1,469,142 264,371
Operations & Maintenance. . . . . . . . 1,124,079 939,052 185,027
Depreciation & Amortization . . . . . . 71,100 47,759 23,341
Other Taxes . . . . . . . . . . . . . . 118,098 92,887 25,211
- --------------------------------------------------------------------------
Total Operating Expenses. . . . . . . . 1,313,277 1,079,698 233,579
- --------------------------------------------------------------------------
Earnings Before Interest & Taxes. . . . $ 420,236 $ 389,444 $ 30,792
==========================================================================
</TABLE>
Revenues have increased 20.6% over the same period in 1998. This increase is
primarily due to increased consulting services, partially offset by a reduction
in placement service revenues. Operating expenses increased primarily in the
areas of compensation, due to both higher earnings and increased staffing,
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 benefit decreased due to the decrease in the operating
loss.
COMPREHENSIVE INCOME
There has been no change in the Company's unrealized gain on the sale of
marketable securities for the three months ended September 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 NINE MONTHS ENDED SEPTEMBER 30, 1999
CONSOLIDATED OVERVIEW
The Company recognized net income of $4,954,000 - $.97 per share - for the nine
months ended 1999, representing an increase of $1,956,000, or $.38 per share, as
compared to net income for the corresponding period in 1998. As indicated in the
following table, the increase in the Company's Earnings Before Interest and
Taxes ("EBIT") is due to increased contributions from each of Chesapeake's three
primary business units - natural gas, propane gas and advanced information
services.
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999 1998 CHANGE
- ---------------------------------------------------------------------------------
<S> <C> <C> <C>
Earnings Before Interest & Taxes
Natural Gas Distribution & Transmission $ 7,334,755 $5,685,895 $1,648,860
Propane Gas Distribution & Marketing. . 1,518,726 (96,566) 1,615,292
Advanced Information Services . . . . . 1,101,836 994,374 107,462
Other & Eliminations. . . . . . . . . . 308,372 420,344 (111,972)
- ---------------------------------------------------------------------------------
Earnings Before Interest & Taxes. . . . . 10,263,689 7,004,047 3,259,642
Operating Income Taxes. . . . . . . . . . 2,906,698 1,757,692 1,149,006
Interest. . . . . . . . . . . . . . . . . 2,605,298 2,471,129 134,169
Non-Operating Income, net . . . . . . . . 202,412 222,628 (20,216)
- ---------------------------------------------------------------------------------
Net Income. . . . . . . . . . . . . . . . $ 4,954,105 $2,997,854 $1,956,251
=================================================================================
</TABLE>
11
<PAGE>
NATURAL GAS DISTRIBUTION AND TRANSMISSION
The natural gas distribution and transmission segment reported EBIT of
$7,335,000 for the first nine months of 1999 as compared to $5,686,000 for the
corresponding period last year - an increase of $1,649,000. The increase in EBIT
is due an increase in gross margin offset by increased operating expenses.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999 1998 CHANGE
- ------------------------------------------------------------------------------
<S> <C> <C> <C>
Revenue. . . . . . . . . . . . . . . . $54,334,135 $52,434,931 $1,899,204
Cost of Gas. . . . . . . . . . . . . . 30,229,960 30,394,673 (164,713)
- ------------------------------------------------------------------------------
Gross Margin . . . . . . . . . . . . . 24,104,175 22,040,258 2,063,917
Operations & Maintenance . . . . . . . 10,883,319 10,771,747 111,572
Depreciation & Amortization. . . . . . 3,612,309 3,349,520 262,789
Other Taxes. . . . . . . . . . . . . . 2,273,792 2,233,096 40,696
- ------------------------------------------------------------------------------
Total Operating Expenses . . . . . . . 16,769,420 16,354,363 415,057
- ------------------------------------------------------------------------------
Earnings Before Interest & Taxes . . . $ 7,334,755 $ 5,685,895 $1,648,860
==============================================================================
</TABLE>
Gross margin increased due to colder temperatures combined with a 5% growth in
residential and commercial customers. Deliveries to these customers increased
8.4% 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 $1 million. Also contributing
to the rise in margin were increases in transportation revenue earned from the
system expansion and industrial customers. The reduction in the cost of gas did
not impact earnings, as it is passed on to customers through the purchased gas
adjustment clauses in the Company's tariffs. The increase in operating expenses
was primarily the result of higher depreciation and property taxes on capital
improvements.
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 during the
fourth quarter.
PROPANE GAS DISTRIBUTION AND MARKETING
For the first nine months of 1999, the propane gas segment reported earnings
before interest and taxes of $1,519,000, as compared to a loss of $97,000 for
the same period last year. The $1,615,000 increase is primarily the result of
increased gross margin.
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999 1998 CHANGE
- ---------------------------------------------------------------------------------
<S> <C> <C> <C>
Revenue . . . . . . . . . . . . . . . . $93,172,564 $78,662,920 $14,509,644
Cost of Sales . . . . . . . . . . . . . 83,367,221 70,455,291 12,911,930
- ---------------------------------------------------------------------------------
Gross Margin. . . . . . . . . . . . . . 9,805,343 8,207,629 1,597,714
Operations & Maintenance. . . . . . . . 6,871,927 6,880,840 (8,913)
Depreciation & Amortization . . . . . . 978,050 978,402 (352)
Other Taxes . . . . . . . . . . . . . . 436,640 444,953 (8,313)
- ---------------------------------------------------------------------------------
Total Operating Expenses. . . . . . . . 8,286,617 8,304,195 (17,578)
- ---------------------------------------------------------------------------------
Earnings/(Loss) Before Interest & Taxes $ 1,518,726 $ (96,566) $ 1,615,292
=================================================================================
</TABLE>
The increase in gross margin is due primarily to a $1.5 million increase in
distribution sales margins and a $164,000 increase in propane marketing margins,
offset by a $83,000 reduction in other margins. Distribution gross margin
increased primarily due to colder temperatures during the first nine months of
1999 when compared to the same period last year. The colder temperatures
resulted in a 13.6% increase in propane
12
<PAGE>
gallons distributed. In addition, margin per gallon increased approximately
7.7%, contributing to the increase in margin.
ADVANCED INFORMATION SERVICES
The advanced information services segment recognized an EBIT of $1,102,000 and
$994,000 for the nine months ended September 30, 1999 and 1998, respectively.
The $107,000 increase in EBIT is attributable to increased gross margin
partially offset by increased expenses.
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999 1998 CHANGE
- ----------------------------------------------------------------------------
<S> <C> <C> <C>
Revenue. . . . . . . . . . . . . . . . $10,013,631 $7,594,515 $2,419,116
Cost of Sales. . . . . . . . . . . . . 4,983,552 3,685,121 1,298,431
- ----------------------------------------------------------------------------
Gross Margin . . . . . . . . . . . . . 5,030,079 3,909,394 1,120,685
Operations & Maintenance . . . . . . . 3,339,362 2,477,107 862,255
Depreciation & Amortization. . . . . . 196,025 131,533 64,492
Other Taxes. . . . . . . . . . . . . . 392,856 306,380 86,476
- ----------------------------------------------------------------------------
Total Operating Expenses . . . . . . . 3,928,243 2,915,020 1,013,223
- ----------------------------------------------------------------------------
Earnings Before Interest & Taxes . . . $ 1,101,836 $ 994,374 $ 107,462
============================================================================
</TABLE>
The 31.9% increase in revenues is primarily due to increased consulting and
training services, 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 nine 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 $16.5 million, $14.1 million and $3.5 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. The
Board of Directors has recently authorized the Company to borrow up to $35
million from various banks and trust companies. The Company is in the process of
increasing its current lines of credit to meet the authorized limit. 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,
1999 and December 31, 1998 were $12.2 and $11.6 million, respectively.
13
<PAGE>
During the nine months ended September 30, 1999 and September 30, 1998, net
property, plant and equipment expenditures were approximately $14.1 and $8.1
million, respectively. Chesapeake has budgeted $27.0 million for capital
expenditures during 1999. This amount includes $23 million for natural gas
distribution and transmission; $1.8 million for propane distribution and
marketing; $388,000 for advanced information services; and $1.6 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 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 September 30, 1999, common equity represented 62.5% 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, is designed 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,
14
<PAGE>
- - billing and delivery. The Company completed testing of these three
applications in 1998 and deems them Y2K ready.
- - 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 September 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.
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
Statement of Financial Accounting Standards 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 September 30, 1999 was $36.8 million.
The fair value was $37.5 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.
16
<PAGE>
At September 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 September 30, 1999. All of
the contracts mature within six months.
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------
QUANTITY ESTIMATED WEIGHTED AVERAGE
AT SEPTEMBER 30, 1999 IN GALLONS MARKET PRICES CONTRACT PRICES
- ----------------------------------------------------------------------
<S> <C> <C> <C>
FORWARD CONTRACTS
Sale. . . . . . . . . 21,756,000 $0.4425 $0.4675 $0.4147
Purchase. . . . . . . 19,433,400 $0.4425 $0.4675 $0.4056
FUTURES CONTRACTS
Sale. . . . . . . . . - NA NA
Purchase. . . . . . . 3,444,000 $0.4425 $0.4675 $0.4210
- ----------------------------------------------------------------------
<FN>
Estimated market prices and weighted average contract prices are in dollars per
gallon.
</TABLE>
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
None
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
Adoption of a Shareholder Rights Plan was filed August 24, 1999
under Form 8-K.
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: November 1, 1999
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 September 30, 1999 included in the Company's Form 10-Q and is
qualified in its entirety be reference to such financial statements.
</LEGEND>
<CAPTION>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> SEP-30-1999
<BOOK-VALUE> PER-BOOK
<TOTAL-NET-UTILITY-PLANT> 88,988,452
<OTHER-PROPERTY-AND-INVEST> 28,151,190
<TOTAL-CURRENT-ASSETS> 30,163,736
<TOTAL-DEFERRED-CHARGES> 9,280,936
<OTHER-ASSETS> 0
<TOTAL-ASSETS> 156,584,314
<COMMON> 2,512,621
<CAPITAL-SURPLUS-PAID-IN> 25,370,820
<RETAINED-EARNINGS> 29,888,635
<TOTAL-COMMON-STOCKHOLDERS-EQ> 58,617,660
0
0
<LONG-TERM-DEBT-NET> 35,126,000
<SHORT-TERM-NOTES> 12,200,000
<LONG-TERM-NOTES-PAYABLE> 0
<COMMERCIAL-PAPER-OBLIGATIONS> 0
<LONG-TERM-DEBT-CURRENT-PORT> 1,638,000
0
<CAPITAL-LEASE-OBLIGATIONS> 0
<LEASES-CURRENT> 0
<OTHER-ITEMS-CAPITAL-AND-LIAB> 49,002,654
<TOT-CAPITALIZATION-AND-LIAB> 156,584,314
<GROSS-OPERATING-REVENUE> 159,012,763
<INCOME-TAX-EXPENSE> 2,906,698
<OTHER-OPERATING-EXPENSES> 29,175,020
<TOTAL-OPERATING-EXPENSES> 32,081,718
<OPERATING-INCOME-LOSS> 7,356,991
<OTHER-INCOME-NET> 202,412
<INCOME-BEFORE-INTEREST-EXPEN> 7,559,403
<TOTAL-INTEREST-EXPENSE> 2,605,298
<NET-INCOME> 4,954,105
0
<EARNINGS-AVAILABLE-FOR-COMM> 4,954,105
<COMMON-STOCK-DIVIDENDS> 3,957,854
<TOTAL-INTEREST-ON-BONDS> 2,137,655
<CASH-FLOW-OPERATIONS> 16,484,843
<EPS-BASIC> $ 0.97
<EPS-DILUTED> $ 0.95
</TABLE>
