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, 2000
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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
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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 - 5,246,794 shares issued as of June 30, 2000.
<PAGE>
TABLE OF CONTENTS
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, 2000 and 1999 . 1
Consolidated Statements of Income and Consolidated Statements of
Comprehensive Income - Six Months Ended June 30, 2000 and 1999. . 2
Consolidated Statements of Cash Flows - Six Months Ended
June 30, 2000 and 1999. . . . . . . . . . . . . . . . . . . . . . . . . . 3
Consolidated Balance Sheets - June 30, 2000 and December 31, 1999 . 4
Notes to Consolidated Financial Statements. . . . . . . . . . . . . . 6
1. Quarterly Financial Data . . . . . . . . . . . . . . . . . . . . 6
2. Calculation of Earnings Per Share. . . . . . . . . . . . . . . 6
3. Commitments and Contingencies - Environmental Matters . . . . 6
4. Recent Accounting Pronouncements . . . . . . . . . . . . . . . . 8
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations. . . . . . . . . . . . 9
Business Description . . . . . . . . . . . . . . . . . . . . . . . . . 9
Results of Operations for the Quarter Ended June 30, 2000. . . . 9
Consolidated Overview. . . . . . . . . . . . . . . . . . . . . . . . . 9
Natural Gas Distribution and Transmission . . . . . . . . . . . . . 9
Propane Gas Distribution and Marketing . . . . . . . . . . . . . . 10
Advanced Information Services. . . . . . . . . . . . . . . . . . . . 10
Operating Income Taxes . . . . . . . . . . . . . . . . . . . . . . . 10
Interest Expense. . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Results of Operations for the Six Months Ended June 30, 2000 . 11
Consolidated Overview . . . . . . . . . . . . . . . . . . . . . . . . 11
Natural Gas Distribution and Transmission. . . . . . . . . . . . . 11
Propane Gas Distribution and Marketing . . . . . . . . . . . . . . 12
Advanced Information Services. . . . . . . . . . . . . . . . . . . . 12
Interest Expense . . . . . . . . . . . . . . . . . . . . . . . . . . .12
Environmental Matters . . . . . . . . . . . . . . . . . . . . . . . . 12
Financial Position, Liquidity and Capital Resources . . . . . . . . 13
Other Matters . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
Cautionary Statement. . . . . . . . . . . . . . . . . . . . . . . . . 14
Recent Accounting Pronouncements . . . . . . . . . . . . . . . . . . 14
Item 3. Quantitative and Qualitative Disclosures about Market Risk . 14
PART II - OTHER INFORMATION. . . . . . . . . . . . . . . . . . . . . . . 16
SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
<PAGE>
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, 2000 1999
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<S> <C> <C>
OPERATING REVENUES. . . . . . . . . . . . . . . $66,170,793 $46,842,720
COST OF SALES . . . . . . . . . . . . . . . . . 53,666,552 35,281,467
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GROSS MARGIN. . . . . . . . . . . . . . . . . . 12,504,241 11,561,253
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OPERATING EXPENSES
Operations. . . . . . . . . . . . . . . . . . . 7,929,546 6,760,049
Maintenance . . . . . . . . . . . . . . . . . . 618,625 428,733
Depreciation and amortization . . . . . . . . . 1,770,674 1,609,596
Other taxes . . . . . . . . . . . . . . . . . . 800,662 777,387
Income taxes. . . . . . . . . . . . . . . . . . 149,502 442,743
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Total operating expenses. . . . . . . . . . . . 11,269,009 10,018,508
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OPERATING INCOME. . . . . . . . . . . . . . . . 1,235,232 1,542,745
OTHER INCOME, NET . . . . . . . . . . . . . . . 55,451 50,315
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INCOME BEFORE INTEREST CHARGES. . . . . . . . . 1,290,683 1,593,060
INTEREST CHARGES. . . . . . . . . . . . . . . . 971,135 796,957
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NET INCOME. . . . . . . . . . . . . . . . . . . $ 319,548 $ 796,103
==============================================================================
EARNINGS PER SHARE OF COMMON STOCK:
BASIC . . . . . . . . . . . . . . . . . . . . . $ 0.06 $ 0.16
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DILUTED . . . . . . . . . . . . . . . . . . . . $ 0.06 $ 0.15
==============================================================================
</TABLE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)
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FOR THE THREE MONTHS ENDED JUNE 30, 2000 1999
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NET INCOME. . . . . . . . . . . . . . . . . . . $ 319,548 $ 796,103
UNREALIZED LOSS ON MARKETABLE SECURITIES,
NET OF INCOME TAXES . . . . . . . . . . . . . . - 233,312
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TOTAL COMPREHENSIVE INCOME. . . . . . . . . . . $ 319,548 $1,029,415
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</TABLE>
<PAGE>
<TABLE>
<CAPTION>
CHESAPEAKE UTILITIES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
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FOR THE SIX MONTHS ENDED JUNE 30, 2000 1999
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<S> <C> <C>
OPERATING REVENUES. . . . . . . . . . . . . . . $165,035,078 $102,486,863
COST OF SALES . . . . . . . . . . . . . . . . . 131,066,230 72,441,430
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GROSS MARGIN. . . . . . . . . . . . . . . . . . 33,968,848 30,045,433
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OPERATING EXPENSES
Operations . . . . . . . . . . . . . . . . . . 16,098,821 13,538,951
Maintenance . . . . . . . . . . . . . . . . . 1,104,242 848,485
Depreciation and amortization . . . . . . . . . 3,595,903 3,198,015
Other taxes . . . . . . . . . . . . . . . . . . 1,718,453 1,677,753
Income taxes. . . . . . . . . . . . . . . . . . 3,575,469 3,482,080
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Total operating expenses. . . . . . . . . . . . 26,092,888 22,745,284
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OPERATING INCOME. . . . . . . . . . . . . . . . 7,875,960 7,300,149
OTHER INCOME, NET . . . . . . . . . . . . . . . 82,332 101,045
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INCOME BEFORE INTEREST CHARGES. . . . . . . . . 7,958,292 7,401,194
INTEREST CHARGES. . . . . . . . . . . . . . . . 1,969,278 1,662,108
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NET INCOME. . . . . . . . . . . . . . . . . . . $ 5,989,014 $ 5,739,086
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EARNINGS PER SHARE OF COMMON STOCK:
BASIC . . . . . . . . . . . . . . . . . . . . . $ 1.15 $ 1.12
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DILUTED . . . . . . . . . . . . . . . . . . . . $ 1.12 $ 1.09
===========================================================================
</TABLE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)
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FOR THE SIX MONTHS ENDED JUNE 30, 2000 1999
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<S> <C> <C>
NET INCOME. . . . . . . . . . . . . . . . . . . $ 5,989,014 $ 5,739,086
UNREALIZED GAIN ON MARKETABLE SECURITIES,
NET OF INCOME TAXES . . . . . . . . . . . . . . - -
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TOTAL COMPREHENSIVE INCOME. . . . . . . . . . . $ 5,989,014 $ 5,739,086
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</TABLE>
<PAGE>
<TABLE>
<CAPTION>
CHESAPEAKE UTILITIES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
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FOR THE SIX MONTHS ENDED JUNE 30, 2000 1999
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OPERATING ACTIVITIES
Net Income. . . . . . . . . . . . . . . . . . . $ 5,989,014 $ 5,739,086
Adjustments to reconcile net income to net
operating cash:
Depreciation and amortization . . . . . . . . . 4,504,556 3,658,484
Deferred income taxes, net. . . . . . . . . . . 194,063 (883,899)
Investment tax credit adjustments . . . . . . . (17,646) (16,601)
Mark-to-market adjustments. . . . . . . . . . . (10,637) 33,855
Other, net. . . . . . . . . . . . . . . . . . . 441,923 134,553
Changes in assets and liabilities:
Accounts receivable, net. . . . . . . . . . . . 1,816,644 222,951
Inventory, materials, supplies and storage gas (672,358) 772,431
Other current assets. . . . . . . . . . . . . . 432,236 630,783
Other deferred charges. . . . . . . . . . . . . (421,639) 343,265
Accounts payable, net . . . . . . . . . . . . . 65,324 1,867,403
Refunds payable to customers. . . . . . . . . . (97,321) (13,757)
Overrecovered purchased gas costs . . . . . . . (81,438) 2,239,032
Income taxes payable. . . . . . . . . . . . . . 842,919 2,423,983
Other current liabilities . . . . . . . . . . . 843,050 1,437,713
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Net cash provided by operating activities . . . 13,828,690 18,589,282
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INVESTING ACTIVITIES
Property, plant and equipment expenditures, net (7,645,747) (7,336,408)
Purchase of investments . . . . . . . . . . . . - -
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Net cash used by investing activities . . . . . (7,645,747) (7,336,408)
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FINANCING ACTIVITIES
Common stock dividends net of amounts reinvested
of $245,551 and $219,808, respectively . . . . (2,458,573) (2,332,631)
Issuance of stock:
Dividend Reinvestment Plan optional cash. . . . 111,419 93,754
Retirement Savings Plan . . . . . . . . . . . . 470,471 420,237
Net repayments under line of credit agreements. (1,600,000) (7,100,000)
Proceeds from issuance of long-term debt. . . . - -
Repayments of long-term debt. . . . . . . . . . (1,378,068) (1,268,025)
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Net cash used by financing activities . . . . . (4,854,751) (10,186,665)
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NET INCREASE IN CASH AND CASH EQUIVALENTS. . . . $ 1,328,192 $ 1,066,209
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 2,357,173 2,598,084
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CASH AND CASH EQUIVALENTS AT END OF PERIOD. . . $ 3,685,365 $ 3,664,293
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</TABLE>
<PAGE>
<TABLE>
<CAPTION>
CHESAPEAKE UTILITIES CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
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JUNE 30, DECEMBER 31,
ASSETS 2000 1999
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<S> <C> <C>
PROPERTY, PLANT AND EQUIPMENT
Natural gas distribution and transmission . . . . . $137,958,355 $132,929,885
Propane gas distribution and marketing. . . . . . . 29,543,663 28,679,766
Advanced information services . . . . . . . . . . . 1,656,882 1,460,411
Other plant . . . . . . . . . . . . . . . . . . . . 9,392,883 9,017,458
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Total property, plant and equipment . . . . . . . . 178,551,783 172,087,520
Less: Accumulated depreciation and amortization. . (57,905,403) (54,424,105)
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Net property, plant and equipment . . . . . . . . . 120,646,380 117,663,415
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INVESTMENTS . . . . . . . . . . . . . . . . . . . . 595,111 595,644
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CURRENT ASSETS
Cash and cash equivalents . . . . . . . . . . . . . 2,403,944 2,357,173
Accounts receivable . . . . . . . . . . . . . . . . 19,893,122 21,699,128
Materials and supplies, at average cost . . . . . . 2,963,739 2,407,214
Propane inventory, at average cost. . . . . . . . . 2,688,354 2,754,401
Storage gas prepayments . . . . . . . . . . . . . . 2,392,963 2,211,084
Underrecovered purchased gas costs. . . . . . . . . 1,318,353 1,236,914
Income taxes receivable . . . . . . . . . . . . . . - 73,772
Deferred income taxes . . . . . . . . . . . . . . . 745,888 745,888
Prepaid expenses. . . . . . . . . . . . . . . . . . 1,073,159 1,505,396
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Total current assets. . . . . . . . . . . . . . . . 33,479,522 34,990,970
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DEFERRED CHARGES AND OTHER ASSETS
Environmental regulatory assets . . . . . . . . . . 2,301,821 2,340,000
Environmental expenditures. . . . . . . . . . . . . 3,408,231 3,574,888
Other deferred charges and intangible assets. . . . 8,570,120 7,823,597
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Total deferred charges and other assets . . . . . . 14,280,172 13,738,485
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TOTAL ASSETS. . . . . . . . . . . . . . . . . . . . $169,001,185 $166,988,514
=================================================================================
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
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JUNE 30, DECEMBER 31,
CAPITALIZATION AND LIABILITIES 2000 1999
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<S> <C> <C>
CAPITALIZATION
Stockholders' equity
Common Stock, par value $.4867 per share;
(authorized 12,000,000 shares; issued 5,246,794
and 5,186,546 shares, respectively). . . . . . . . . $ 2,553,341 $ 2,524,018
Additional paid-in capital . . . . . . . . . . . . . 26,810,540 25,782,824
Retained earnings. . . . . . . . . . . . . . . . . . 35,074,391 31,857,732
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Total stockholders' equity . . . . . . . . . . . . . 64,438,272 60,164,574
Long-term debt, net of current portion . . . . . . . 32,296,957 33,776,909
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Total capitalization . . . . . . . . . . . . . . . . 96,735,229 93,941,483
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CURRENT LIABILITIES
Current portion of long-term debt. . . . . . . . . . 2,665,091 2,665,091
Short-term borrowing . . . . . . . . . . . . . . . . 21,400,000 23,000,000
Accounts payable . . . . . . . . . . . . . . . . . . 15,649,022 16,865,119
Refunds payable to customers . . . . . . . . . . . . 682,187 779,508
Income taxes payable . . . . . . . . . . . . . . . . 769,147 -
Accrued interest . . . . . . . . . . . . . . . . . . 553,424 581,649
Dividends payable. . . . . . . . . . . . . . . . . . 1,416,016 1,347,784
Overrecovered purchased gas costs. . . . . . . . . . - -
Other accrued liabilities. . . . . . . . . . . . . . 5,356,918 4,613,358
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Total current liabilities. . . . . . . . . . . . . . 48,491,805 49,852,509
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DEFERRED CREDITS AND OTHER LIABILITIES
Deferred income taxes. . . . . . . . . . . . . . . . 14,088,903 13,895,373
Deferred investment tax credits. . . . . . . . . . . 694,341 711,987
Environmental liability. . . . . . . . . . . . . . . 2,301,821 2,340,000
Accrued pension costs. . . . . . . . . . . . . . . . 1,548,638 1,544,963
Other liabilities. . . . . . . . . . . . . . . . . . 5,140,448 4,702,199
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Total deferred credits and other liabilities . . . . 23,774,151 23,194,522
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TOTAL CAPITALIZATION AND LIABILITIES . . . . . . . . $169,001,185 $166,988,514
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</TABLE>
<PAGE>
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 1999 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 1999 have been reclassified to conform to current
year presentation.
2. CALCULATION OF EARNINGS PER SHARE
<TABLE>
<CAPTION>
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THREE MONTHS ENDED SIX MONTHS ENDED
FOR THE PERIOD ENDED JUNE 30, 2000 1999 2000 1999
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<S> <C> <C>
CALCULATION OF BASIC EARNINGS PER SHARE:
Net Income . . . . . . . . . . . . . . . . . . . . $ 319,548 $ 796,103 $5,989,014 $5,739,086
Weighted Average Shares Outstanding. . . . . . . . 5,237,741 5,134,178 5,222,004 5,121,189
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BASIC EARNINGS PER SHARE . . . . . . . . . . . . . $ 0.06 $ 0.16 $ 1.15 $ 1.12
==================================================================================================
CALCULATION OF DILUTED EARNINGS PER SHARE:
RECONCILIATION OF NUMERATOR:
Net Income Basic . . . . . . . . . . . . . . . . . $ 319,548 $ 796,103 $5,989,014 $5,739,086
Effect of 8.25% Convertible debentures . . . . . . - - 90,414 94,467
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Adjusted numerator Diluted . . . . . . . . . . . . $ 319,548 $ 796,103 $6,079,428 $5,833,553
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RECONCILIATION OF DENOMINATOR:
Weighted Shares Outstanding Basic. . . . . . . . . 5,237,741 5,134,178 5,222,004 5,121,189
Effect of Dilutive Securities
Stock options. . . . . . . . . . . . . . . . . . . 11,029 10,368 11,461 11,026
8.25% Convertible debentures . . . . . . . . . . . - - 212,370 222,505
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Adjusted denominator Diluted . . . . . . . . . . . 5,248,770 5,144,546 5,445,835 5,354,720
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DILUTED EARNINGS PER SHARE . . . . . . . . . . . . $ 0.06 $ 0.15$ 1.12 $ 1.09
==================================================================================================
</TABLE>
1. 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
states, 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.
(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 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. 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
<PAGE>
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, 1999 (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 clean-up 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.
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 $3.3 million in capital and $1.0 million per year in
operating costs for 30 years for a pump-and-treat system. The pump-and-treat /
ground-water containment system is intended to contain the manufactured gas
plant ("MGP") contaminants to allow the ground-water outside of the containment
area to naturally attenuate. The operating cost estimate for the containment
system is dependent upon the actual ground-water quality and flow conditions.
The Company continues to believe that a ground-water containment system is not
necessary for the MGP contaminants, that there is insufficient information to
design an overall ground-water containment program and that natural attenuation
is the appropriate remedial action for the MGP wastes. The Company is currently
in discussions with the EPA on possible ground-water alternatives to the
pump-and-treat. Natural attenuation is still being evaluated as a possible
ground-water remedy.
The Company cannot predict what the EPA will require for the overall
ground-water program, and accordingly, accrued $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 through the second quarter of 2000. The Company is
currently engaged in investigations related to possible additional 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, 2000, the Company has incurred approximately $7.8 million in
costs relating to environmental testing and remedial action studies. Of this
amount, $709,000 of incurred environmental costs has not received ratemaking
treatment. In November, Chesapeake will submit a filing with the Public Service
Commission seeking to recover these costs through rates.
(B) SALISBURY TOWN GAS LIGHT SITE
In cooperation with the Maryland Department of the Environment ("MDE"), the
Company completed an assessment of the Salisbury manufactured gas plant site,
<PAGE>
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 Company
has requested approval from the MDE to shut down the remediation procedures
currently in place. The MDE has approved a temporary shut down and is evaluating
a complete shut down of the site.
The estimated cost of the remaining remediation is approximately $100,000 per
year for operating expenses for a period of two years and capital costs of
$50,000 to shut down the remediation process. Based on these estimated costs,
the Company adjusted both its liability and related regulatory asset to $240,000
on December 31, 1999, to cover the Company's projected remediation costs for
this site. The Company has not adjusted the accrual during 2000. As of June 30,
2000, the Company has incurred approximately $2.7 million for remedial actions
and environmental studies. Of this amount, approximately $940,000 of incurred
costs has 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.
The Company has recovered all environmental costs incurred to date,
approximately $773,000, 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, 2000,
Chesapeake had received $532,000 related to future costs, which might be
incurred.
2. 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.
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
BUSINESS DESCRIPTION
Chesapeake Utilities Corporation is a diversified utility company engaged in
natural gas distribution and transmission, propane distribution and wholesale
marketing and advanced information services.
Chesapeake's strategy is to grow earnings from a stable utility foundation by
investing in related businesses and services that provide opportunities for
higher, unregulated returns. This growth strategy includes acquisitions and
investments in unregulated businesses as well as the continued investment and
expansion of the Company's utility operations that provide the stable base of
earnings. Chesapeake continuously re-evaluates its investments to ensure that
they are consistent with its strategy and the goal of enhancing shareholder
value.
RESULTS OF OPERATIONS FOR THE QUARTER ENDED JUNE 30, 2000
CONSOLIDATED OVERVIEW
The Company recognized net income of $320,000 or $0.06 per share for the second
quarter of 2000. As indicated in the following table, the decrease in income is
primarily due to lower contributions of pre-tax operating income by the advanced
information services business and propane segments. These reductions were
partially offset by higher pre-tax operating income for the natural gas and
other business segment.
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------
FOR THE THREE MONTHS ENDED JUNE 30, 2000 1999 CHANGE
---------------------------------------------------------------------------------------
<S> <C> <C> <C>
Pre-tax Oprerating Income
Natural Gas Distribution & Transmission . . . . $2,065,853 $1,954,213 $ 111,640
Propane Gas Distribution & Marketing. . . . . . (908,013) (443,730) (464,283)
Advanced Information Services . . . . . . . . . (51,221) 418,751 (469,972)
Other & Eliminations. . . . . . . . . . . . . . 278,115 56,254 221,861
---------------------------------------------------------------------------------------
Pre-tax Operating Income. . . . . . . . . . . . . 1,384,734 1,985,488 (600,754)
Operating Income Taxes. . . . . . . . . . . . . . 149,502 442,743 (293,241)
Interest. . . . . . . . . . . . . . . . . . . . . 971,135 796,957 174,178
Non-Operating Income, net . . . . . . . . . . . . 55,451 50,315 5,136
---------------------------------------------------------------------------------------
Net Income. . . . . . . . . . . . . . . . . . . . $ 319,548 $ 796,103 $(476,555)
=======================================================================================
</TABLE>
NATURAL GAS DISTRIBUTION AND TRANSMISSION
The natural gas distribution and transmission segment reported pre-tax operating
income of $2.1 million for the second quarter 2000 as compared to $2.0 million
for the corresponding period last year an increase of $112,000. The increase in
pre-tax operating income is due to an increase in gross margin offset by higher
operating expenses.
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------
FOR THE THREE MONTHS ENDED JUNE 30, 2000 1999 CHANGE
---------------------------------------------------------------------------------------
<S> <C> <C> <C>
Revenue . . . . . . . . . . . . . . . . . . . . . $21,824,727 $15,978,130 $5,846,597
Cost of Gas . . . . . . . . . . . . . . . . . . . 13,727,644 8,601,911 5,125,733
---------------------------------------------------------------------------------------
Gross Margin. . . . . . . . . . . . . . . . . . . 8,097,083 7,376,219 720,864
Operations & Maintenance. . . . . . . . . . . . . 4,151,362 3,625,369 525,993
Depreciation & Amortization . . . . . . . . . . . 1,286,388 1,206,328 80,060
Other Taxes . . . . . . . . . . . . . . . . . . . 593,480 590,309 3,171
---------------------------------------------------------------------------------------
Total Operating Expenses. . . . . . . . . . . . . 6,031,230 5,422,006 609,224
---------------------------------------------------------------------------------------
Pre-tax Operating Income. . . . . . . . . . . . . $ 2,065,853 $ 1,954,213 $ 111,640
=======================================================================================
</TABLE>
Gross margin increased due to a greater level of transportation services
provided, a 4.4 percent increase in customer base and a weather normalization
adjustment in the Company's Delaware division. Transportation revenues increased
due to new services provided as a result of the expansion of the pipeline
system, which occurred during the second half of last year. In 1999, the Company
<PAGE>
requested and received approval from the Delaware Public Service Commission to
adjust its interruptible margin sharing mechanism in order to address the level
of recovery of fixed distribution costs from residential and small commercial
heating customers. During the second quarter of 2000, the Company increased the
margin sharing thresholds for the weather normalization mechanism resulting in
an increase in gross margin of $60,000. Operating expenses were higher due to
depreciation on capital additions during the past year, compensation,
information systems and marketing expenses.
PROPANE GAS DISTRIBUTION AND MARKETING
For the second quarter of 2000, the propane segment recognized a pre-tax
operating loss of $908,000 compared to $444,000 for the same period last year.
The increase in the loss was the result of an increase in operating expenses
combined with a reduction in gross margin.
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------
FOR THE THREE MONTHS ENDED JUNE 30, 2000 1999 CHANGE
---------------------------------------------------------------------------------------
<S> <C> <C> <C>
Revenue . . . . . . . . . . . . . . . . . . . $39,453,101 $26,764,392 $12,688,709
Cost of Sales . . . . . . . . . . . . . . . . 37,309,109 24,503,285 12,805,824
---------------------------------------------------------------------------------------
Gross Margin. . . . . . . . . . . . . . . . . 2,143,992 2,261,107 (117,115)
Operations & Maintenance. . . . . . . . . . . 2,685,910 2,390,432 295,478
Depreciation & Amortization . . . . . . . . . 311,157 275,407 35,750
Other Taxes . . . . . . . . . . . . . . . . . 54,938 38,998 15,940
---------------------------------------------------------------------------------------
Total Operating Expenses. . . . . . . . . . . 3,052,005 2,704,837 347,168
---------------------------------------------------------------------------------------
Pre-tax Operating Income. . . . . . . . . . . $ (908,013) $ (443,730) $ (464,283)
=======================================================================================
</TABLE>
The decline in gross margin is primarily due to a 10.4 percent reduction in
distribution gallons sold, partially offset by a slight increase in margin
earned on distribution sales and marketing margins. Operating expenses were
higher due to compensation, information systems and marketing expenses.
ADVANCED INFORMATION SERVICES
The advanced information services segment recognized a pre-tax operating loss of
$51,000 for the second quarter of 2000 as compared to pre-tax operating income
of $419,000 for the same period last year. The decrease in contribution from
this segment is directly related to a reduction in revenue.
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------
FOR THE THREE MONTHS ENDED JUNE 30, 2000 1999 CHANGE
---------------------------------------------------------------------------------------
<S> <C> <C> <C>
Revenue . . . . . . . . . . . . . . . . . . . . . $3,192,537 $3,573,799 $(381,262)
Cost of Sales . . . . . . . . . . . . . . . . . . 1,850,974 1,771,201 79,773
---------------------------------------------------------------------------------------
Gross Margin. . . . . . . . . . . . . . . . . . . 1,341,563 1,802,598 (461,035)
Operations & Maintenance. . . . . . . . . . . . . 1,181,632 1,184,984 (3,352)
Depreciation & Amortization . . . . . . . . . . . 74,403 66,448 7,955
Other Taxes . . . . . . . . . . . . . . . . . . . 136,749 132,415 4,334
---------------------------------------------------------------------------------------
Total Operating Expenses. . . . . . . . . . . . . 1,392,784 1,383,847 8,937
---------------------------------------------------------------------------------------
Pre-tax Operating Income. . . . . . . . . . . . . $ (51,221) $ 418,751 $(469,972)
=======================================================================================
</TABLE>
The decline in pre-tax operating income was primarily the result of a decrease
in revenue due to many companies curtailing their information technology ("IT")
expenditures after implementing their Year 2000 contingency plans. The Company
expects the traditional service revenues to remain depressed for the remainder
of the year.
OPERATING INCOME TAXES
Operating income taxes were lower due to a decline in operating income.
INTEREST EXPENSE
The Company's interest expense increased due to a greater level of short-term
borrowings combined with a rise in interest rates.
<PAGE>
RESULTS OF OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30, 2000
CONSOLIDATED OVERVIEW
The Company recognized net income of $6.0 million $1.15 per share for the
first six months of 2000. As indicated in the following table, the increase in
income is primarily due to a greater contribution of pre-tax operating income by
the natural gas and other business segments. These gains were mostly offset by
lower pre-tax operating income for the advanced information services and propane
business segment.
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------
FOR THE SIX MONTHS ENDED JUNE 30, 2000 1999 CHANGE
---------------------------------------------------------------------------------------
<S> <C> <C> <C>
Pre-tax Oprerating Income
Natural Gas Distribution & Transmission . . . $ 8,453,272 $ 7,144,726 $1,308,546
Propane Gas Distribution & Marketing. . . . . 2,583,985 2,771,734 (187,749)
Advanced Information Services . . . . . . . . (24,966) 681,600 (706,566)
Other & Eliminations. . . . . . . . . . . . . 439,138 184,169 254,969
---------------------------------------------------------------------------------------
Pre-tax Operating Income. . . . . . . . . . . . 11,451,429 10,782,229 669,200
Operating Income Taxes. . . . . . . . . . . . . 3,575,469 3,482,080 93,389
Interest. . . . . . . . . . . . . . . . . . . . 1,969,278 1,662,108 307,170
Non-Operating Income, net . . . . . . . . . . . 82,332 101,045 (18,713)
---------------------------------------------------------------------------------------
Net Income. . . . . . . . . . . . . . . . . . . $ 5,989,014 $ 5,739,086 $ 249,928
=======================================================================================
</TABLE>
NATURAL GAS DISTRIBUTION AND TRANSMISSION
The natural gas distribution and transmission segment reported pre-tax operating
income of $8.5 million for the first six months of 2000 as compared to $7.1
million for the corresponding period last year an increase of $1.3 million. The
increase in pre-tax operating income is due to an increase in gross margin
somewhat offset by higher operating expenses.
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------
FOR THE SIX MONTHS ENDED JUNE 30, 2000 1999 CHANGE
---------------------------------------------------------------------------------------
<S> <C> <C> <C>
Revenue . . . . . . . . . . . . . . . . . . . . $51,897,295 $40,584,553 $11,312,742
Cost of Gas . . . . . . . . . . . . . . . . . . 31,386,816 22,400,362 8,986,454
---------------------------------------------------------------------------------------
Gross Margin. . . . . . . . . . . . . . . . . . 20,510,479 18,184,191 2,326,288
Operations & Maintenance. . . . . . . . . . . . 8,194,560 7,361,267 833,293
Depreciation & Amortization . . . . . . . . . . 2,608,489 2,410,168 198,321
Other Taxes . . . . . . . . . . . . . . . . . . 1,254,158 1,268,030 (13,872)
---------------------------------------------------------------------------------------
Total Operating Expenses. . . . . . . . . . . . 12,057,207 11,039,465 1,017,742
---------------------------------------------------------------------------------------
Pre-tax Operating Income. . . . . . . . . . . . $ 8,453,272 $ 7,144,726 $ 1,308,546
=======================================================================================
</TABLE>
Gross margin increased due to a 4.5 percent increase in customer base, a greater
level of transportation services provided and the implementation of a weather
normalization mechanism in the Company's Delaware division. The growth in
customer base was primarily residential and commercial customers, which
generated a 3 percent increase in deliveries. Transportation revenues increased
due to new services provided resulting from the pipeline system expansion, which
occurred during the second half of last year. In 1999, the Company requested and
received approval from the Delaware Public Service Commission to adjust its
interruptible margin sharing mechanism in order to address the level of recovery
of fixed distribution costs from residential and small commercial heating
customers. With this in place, the Company increased the margin sharing
thresholds for the weather normalization mechanism during the first quarter of
2000, resulting in an increase in gross margin of $418,000. Operating expenses
were higher due to depreciation on capital additions during the past year,
compensation, information systems and expenses for marketing programs that are
designed to build customer growth.
PROPANE GAS DISTRIBUTION AND MARKETING
For the first six months of 2000, the propane segment contributed pre-tax
operating income of $2.6 million as compared to $2.8 million for the same period
last year. The decrease is the result of an increase in operating expenses
partially offset by an increase in gross margin.
<PAGE>
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------
FOR THE SIX MONTHS ENDED JUNE 30, 2000 1999 CHANGE
---------------------------------------------------------------------------------------
<S> <C> <C> <C>
Revenue . . . . . . . . . . . . . . . . . . . . $103,600,080 $54,351,087 $49,248,993
Cost of Sales . . . . . . . . . . . . . . . . . 94,592,148 46,077,755 48,514,393
---------------------------------------------------------------------------------------
Gross Margin. . . . . . . . . . . . . . . . . . 9,007,932 8,273,332 734,600
Operations & Maintenance. . . . . . . . . . . . 5,676,820 4,846,982 829,838
Depreciation & Amortization . . . . . . . . . . 618,258 550,548 67,710
Other Taxes . . . . . . . . . . . . . . . . . . 128,869 104,068 24,801
---------------------------------------------------------------------------------------
Total Operating Expenses. . . . . . . . . . . . 6,423,947 5,501,598 922,349
---------------------------------------------------------------------------------------
Pre-tax Operating Income. . . . . . . . . . . . $ 2,583,985 $ 2,771,734 $ (187,749)
=======================================================================================
</TABLE>
The increase in gross margin is due primarily to a $1.4 million increase in
marketing margins partially offset by a 6.0 percent reduction on margins earned
on distribution sales. Temperatures for the first six months of 2000 were 2
percent cooler than the same period in 1999. However, distribution deliveries
for the first six months of 2000 were 3 percent lower primarily due to reduced
consumption by agricultural customers. The decline in distribution margin earned
was the result of higher priced supply costs, which could not be completely
passed on to the customers in price increases. Operating expenses were higher
due to compensation, information systems and marketing programs that are
designed to build customer growth.
ADVANCED INFORMATION SERVICES
The advanced information services segment recognized a pre-tax operating loss of
$25,000 for the first six months of 2000 as compared to a pre-tax operating
income of $682,000 for the period last year. The decrease in contribution from
this segment is directly related to revenues not meeting expectations.
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------
FOR THE SIX MONTHS ENDED JUNE 30, 2000 1999 CHANGE
---------------------------------------------------------------------------------------
<S> <C> <C> <C>
Revenue . . . . . . . . . . . . . . . . . . . . . $6,362,604 $6,582,149 $(219,545)
Cost of Sales . . . . . . . . . . . . . . . . . . 3,582,213 3,285,583 296,630
---------------------------------------------------------------------------------------
Gross Margin. . . . . . . . . . . . . . . . . . . 2,780,391 3,296,566 (516,175)
Operations & Maintenance. . . . . . . . . . . . . 2,353,780 2,215,283 138,497
Depreciation & Amortization . . . . . . . . . . . 147,442 124,925 22,517
Other Taxes . . . . . . . . . . . . . . . . . . . 304,135 274,758 29,377
---------------------------------------------------------------------------------------
Total Operating Expenses. . . . . . . . . . . . . 2,805,357 2,614,966 190,391
---------------------------------------------------------------------------------------
Pre-tax Operating Income. . . . . . . . . . . . . $ (24,966) $ 681,600 $(706,566)
=======================================================================================
</TABLE>
During 2000, revenues from the Company's traditional IT services (i.e. non
web-related services) have declined in comparison to the prior year, thereby
eliminating the revenue growth from the Company's web-related services. Due to
the increased costs incurred to meet the growth that the Company has been
experiencing, earnings are down. The decline in traditional revenues is due to
the reduction in IT project implementation after companies completed their Year
2000 contingency plans. The Company expects the traditional service revenues to
remain depressed for the remainder of the year.
INTEREST EXPENSE
The Company's interest expense increased due to a greater level of short-term
borrowings combined with a rise in interest rates.
ENVIRONMENTAL MATTERS
The Company continues to work with federal and state environmental agencies to
assess the environmental impact and explore or implement corrective action at
several former gas manufacturing plant sites (see Note 3 to the Consolidated
Financial Statements). The Company believes that any future costs associated
with these sites will be recoverable in future rates.
<PAGE>
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
2000, the Company's net cash provided by operating activities, net cash used by
investing activities and net cash used by financing activities were
approximately $12.5 million, $7.6 million and $4.9 million, respectively. Due to
the seasonal nature of the Company's business, there are substantial variations
in the results of operations reported on a quarterly basis.
The Company has three unsecured lines of credit totaling $51.0 million. The
Board of Directors has authorized the Company to borrow up to $35.0 million
under these lines of credit. Funds provided from these lines of credit are used
for short-term cash needs to meet seasonal working capital requirements and to
fund portions of its capital expenditures. The outstanding balances of
short-term borrowing at June 30, 2000 and December 31, 1999 were $21.4 and $23.0
million, respectively.
During the six months ended June 30, 2000 and June 30, 1999, net property, plant
and equipment expenditures were approximately $7.6 million and $7.3 million,
respectively. Chesapeake has budgeted $24.9 million for capital expenditures
during 2000. This amount includes $17.8 million for natural gas distribution and
transmission; $4.9 million for propane distribution and marketing; $400,000 for
advanced information services; and $1.8 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, to provide service to customers in the City of Milford, Delaware.
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 revenue growth and increased
staffing. General expenditures are for building improvements, computer software
and hardware. During the second quarter of 2000, the Company entered into a
Joint Electric Generation Agreement with the City of Seaford, Delaware. Under
the agreement the Company would lease three electric generating units to the
City of Seaford. The cost to purchase and install the units is estimated at $8
to $9 million. Financing for the 2000 construction program, including the
Seaford project, is expected to be provided from short-term borrowing, cash from
operations and the possible issuance of long-term debt. 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 $1.2 million for environmental related expenditures
during 2000 and expects to incur additional expenditures in future years (see
Note 3 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. The
Company has entered into an agreement with an investment banker to assist in
identifying acquisition candidates. Under the agreement, the Company issued
warrants to the investment banker to purchase 15,000 shares of the Company's
common stock, which are exercisable during the next seven years at a price of
$18.00 per share. In addition to cash compensation payable in connection with a
successful transaction, the agreement also provides for the possible issuance of
additional warrants being issued to the investment banker based on performance.
As of June 30, 2000, common equity represented 66.6 percent of permanent
capitalization, compared to 64.0 percent as of December 31, 1999. Including
short-term borrowing, the equity capitalization would have been 54.5 percent and
51.5 percent. 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,
<PAGE>
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
CAUTIONARY STATEMENT
Chesapeake has made statements in this report that are considered to be
forward-looking statements. 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, regulatory
approvals, market risk associated with the Company's propane marketing
operation, the competitive position of the Company, rate recovery of
environmental clean-up costs 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 the natural gas and propane
gas businesses;
- the wholesale price of propane and market movements in these prices;
- the effects of competition on both unregulated and regulated businesses;
- 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 effect of changes in federal, state or local legislative requirements.
- the ability of the Company's marketing programs to generate expected
customer growth.
- the ability of the Advanced Information Services segment to maintain
and/or generate future revenue growth.
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 June 30, 2000 was $35.0 million. The
fair value was $35.2 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.
At June 30, 2000, 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
<PAGE>
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 prices. 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, 2000. All of the
contracts mature within nine months.
<TABLE>
<CAPTION>
---------------------------------------------------------------------
QUANTITY ESTIMATED WEIGHTED AVERAGE
AT JUNE 30, 2000 IN GALLONS MARKET PRICES CONTRACT PRICES
---------------------------------------------------------------------
<S> <C> <C> <C>
FORWARD CONTRACTS
Sale. . . . . . . 13,146,000 $0.4800 $0.5850 - $0.5461
Purchase. . . . . 9,723,000 $0.4700 $0.5950 - $0.5370
FUTURES CONTRACTS
Sale. . . . . . . 1,890,000 $0.5550 $0.5810 - $0.5608
Purchase. . . . . 4,620,000 $0.5475 $0.5650 - $0.5581
---------------------------------------------------------------------
<FN>
Estimated market prices and weighted average contract prices
are in dollars per gallon.
</FN>
</TABLE>
<PAGE>
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
See Note 3 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
(a) The matters described in Item 4(c) below were submitted to a
vote of stockholders at the Annual Meeting of Stockholders on
May 16, 2000, in connection with which, proxies were solicited
in accordance with Regulation 14A under the Securities Exchange
Act of 1934, as amended.
(b) Not applicable.
(c) Proposals as submitted in the proxy statement were voted on
as follows:
i. to elect four Class I Directors for three-year terms ending
in 2003, and until their successors are elected and
qualified; and
ii. to consider and vote upon the ratification of the
selection of PricerwaterhouseCoopers, LLP as independent
auditors for the fiscal year ending December 31, 2000.
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
None
<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 14, 2000
