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, 2000
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
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(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 - 5,271,591 shares
issued as of September 30, 2000.
<PAGE>
TABLE OF CONTENTS
PART I - FINANCIAL INFORMATION. . . . . . . . . . . . . . . . . . . . . . 1
Item 1. Financial Statements . . . . . . . . . . . . . . . . . . . . . 1
Consolidated Statements of Income and Comprehensive Income. -
Three Months Ended September 30, 2000 and 1999 . . . . . . . . . . .1
Consolidated Statements of Income and Comprehensive Income -
Nine Months Ended September 30, 2000 and 1999. . . . . . . . . . . .2
Consolidated Statements of Cash Flows -
Nine Months Ended September 30, 2000 and 1999. . . . . . . . . . . .3
Consolidated Balance Sheets - September 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 . . . . . . . . . . . . . . . . . . 10
Results of Operations for the Quarter Ended September 30, 2000 . 10
Consolidated Overview. . . . . . . . . . . . . . . . . . . . . . . . . 10
Natural Gas Distribution and Transmission . . . . . . . . . . . . . 10
Propane Gas Distribution and Marketing. . . . . . . . . . . . . . . 11
Advanced Information Services . . . . . . . . . . . . . . . . . . . . 11
Operating Income Taxes. . . . . . . . . . . . . . . . . . . . . . . . 11
Non-Operating Income . . . . . . . . . . . . . . . . . . . . . . . . . 11
Interest Expense . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
Results of Operations for the Nine Months Ended September 30, 2000. . . . 12
Consolidated Overview. . . . . . . . . . . . . . . . . . . . . . . . . 12
Natural Gas Distribution and Transmission . . . . . . . . . . . . . 12
Propane Gas Distribution and Marketing. . . . . . . . . . . . . . . 13
Advanced Information Services . . . . . . . . . . . . . . . . . . . . 13
Non-Operating Income . . . . . . . . . . . . . . . . . . . . . . . . . 13
Interest Expense . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
Environmental Matters. . . . . . . . . . . . . . . . . . . . . . . . . 14
Financial Position, Liquidity and Capital Resources. . . . . . . . . 14
Other Matters. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
Cautionary Statement . . . . . . . . . . . . . . . . . . . . . . . . . 15
Recent Accounting Pronouncements. . . . . . . . . . . . . . . . . . . 15
Item 3. Quantitative and Qualitative Disclosures about Market Risk. . 16
PART II - OTHER INFORMATION . . . . . . . . . . . . . . . . . . . . . . . 17
SIGNATURES. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
CHESAPEAKE UTILITIES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
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FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2000 1999
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<S> <C> <C>
OPERATING REVENUES . . . . . . . . . . . . . . $59,449,978 $56,579,150
COST OF SALES . . . . . . . . . . . . . . . . . 49,030,471 47,074,497
-------------------------------------------------------------------------
GROSS MARGIN. . . . . . . . . . . . . . . . . . 10,419,507 9,504,653
-------------------------------------------------------------------------
OPERATING EXPENSES
Operations . . . . . . . . . . . . . . . . . . . 7,996,806 7,255,415
Maintenance. . . . . . . . . . . . . . . . . . . . 527,681 378,203
Depreciation and amortization. . . . . . . . . . 1,873,193 1,616,041
Other taxes. . . . . . . . . . . . . . . . . . . . 766,951 771,936
Income taxes. . . . . . . . . . . . . . . . . . . (701,165) (539,488)
-------------------------------------------------------------------------
Total operating expenses. . . . . . . . . . . . 10,463,466 9,482,107
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OPERATING (LOSS) INCOME. . . . . . . . . . . . . . (43,959) 22,546
OTHER INCOME, NET. . . . . . . . . . . . . . . . . 156,893 31,533
-------------------------------------------------------------------------
INCOME BEFORE INTEREST CHARGES . . . . . . . . . . 112,934 54,079
INTEREST CHARGES . . . . . . . . . . . . . . . . 1,157,643 839,060
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NET LOSS . . . . . . . . . . . . . . . . . . . $(1,044,709) $ (784,981)
=========================================================================
EARNINGS PER SHARE OF COMMON STOCK:
BASIC. . . . . . . . . . . . . . . . . . . . . $ (0.20) $ (0.15)
=========================================================================
DILUTED. . . . . . . . . . . . . . . . . . . . $ (0.20) $ (0.15)
=========================================================================
</TABLE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)
-------------------------------------------------------------------------
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2000 1999
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<S> <C> <C>
NET INCOME . . . . . . . . . . . . . . . . . . $(1,044,709) $(784,981)
UNREALIZED LOSS ON MARKETABLE SECURITIES,
NET OF INCOME TAXES . . . . . . . . . . . - -
-------------------------------------------------------------------------
TOTAL COMPREHENSIVE LOSS . . . . . . . . . . . $(1,044,709) $(784,981)
=========================================================================
<FN>
The accompanying notes are an integral part of these financial statements.
</FN>
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
CHESAPEAKE UTILITIES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
---------------------------------------------------------------------------
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2000 1999
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<S> <C> <C>
OPERATING REVENUES. . . . . . . . . . . . . . $224,485,056 $159,141,663
COST OF SALES. . . . . . . . . . . . . . . . . 179,099,774 118,963,166
---------------------------------------------------------------------------
GROSS MARGIN. . . . . . . . . . . . . . . . . . 45,385,282 40,178,497
---------------------------------------------------------------------------
OPERATING EXPENSES
Operations. . . . . . . . . . . . . . . . . . . 25,092,553 21,565,296
Maintenance. . . . . . . . . . . . . . . . . . . 1,631,924 1,084,169
Depreciation and amortization. . . . . . . . . . 5,469,095 4,814,056
Other taxes. . . . . . . . . . . . . . . . . . . 2,485,405 2,449,689
Income taxes . . . . . . . . . . . . . . . . . . 2,874,304 2,942,592
---------------------------------------------------------------------------
Total operating expenses. . . . . . . . . . . . 37,553,281 32,855,802
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OPERATING INCOME . . . . . . . . . . . . . . . . 7,832,001 7,322,695
OTHER INCOME, NET. . . . . . . . . . . . . . . . . 239,226 132,578
---------------------------------------------------------------------------
INCOME BEFORE INTEREST CHARGES . . . . . . . . . 8,071,227 7,455,273
INTEREST CHARGES . . . . . . . . . . . . . . . . 3,126,921 2,501,168
---------------------------------------------------------------------------
NET INCOME. . . . . . . . . . . . . . . . . . $ 4,944,306 $ 4,954,105
===========================================================================
EARNINGS PER SHARE OF COMMON STOCK:
BASIC . . . . . . . . . . . . . . . . . . . . $ 0.94 $ 0.97
---------------------------------------------------------------------------
DILUTED . . . . . . . . . . . . . . . . . . . $ 0.93 $ 0.95
---------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)
---------------------------------------------------------------------------
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2000 1999
---------------------------------------------------------------------------
<S> <C> <C>
NET INCOME . . . . . . . . . . . . . . . . . . $4,944,306 $4,954,105
UNREALIZED GAIN ON MARKETABLE SECURITIES,
NET OF INCOME TAXES . . . . . . . . . . . . . - -
---------------------------------------------------------------------------
TOTAL COMPREHENSIVE INCOME . . . . . . . . . . $4,944,306 $4,954,105
===========================================================================
<FN>
The accompanying notes are an integral part of these financial statements.
</FN>
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
CHESAPEAKE UTILITIES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
---------------------------------------------------------------------------
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2000 1999
---------------------------------------------------------------------------
<S> <C> <C>
OPERATING ACTIVITIES
Net Income . . . . . . . . . . . . . . . . . . $ 4,944,306 $ 4,954,105
Adjustments to reconcile net income to net operating cash:
Depreciation and amortization . . . . . . . . . . 6,823,584 5,524,591
Deferred income taxes, net. . . . . . . . . . . . . 194,295 (631,070)
Investment tax credit adjustments . . . . . . . . .(26,469) (22,289)
Mark-to-market adjustments. . . . . . . . . . . . . (77,997) (15,412)
Other, net. . . . . . . . . . . . . . . . . . . . . 501,642 253,970
Changes in assets and liabilities:
Accounts receivable, net . . . . . . . . . . . . (1,432,897) (4,407,993)
Inventory, materials, supplies and storage gas . (4,099,647) (1,492,231)
Other current assets. . . . . . . . . . . . . . . . 136,291 (116,101)
Other deferred charges. . . . . . . . . . . . . . . 118,834 676,995
Accounts payable, net . . . . . . . . . . . . . . 3,359,294 8,661,443
Refunds payable to customers . . . . . . . . . . . (226,233) 43,470
(Under) Over recovered purchased gas costs . . . (2,081,300) 1,528,274
Income taxes receivable. . . . . . . . . . . . . . . 69,229 479,055
Other current liabilities . . . . . . . . . . . . . 810,152 1,047,748
---------------------------------------------------------------------------
Net cash provided by operating activities . . . . 9,013,084 16,484,555
---------------------------------------------------------------------------
INVESTING ACTIVITIES
Property, plant and equipment expenditures, net (13,568,666) (14,117,335)
Purchase of investments . . . . . . . . . . . . - -
---------------------------------------------------------------------------
Net cash used by investing activities . . . . . (13,568,666) (14,117,335)
---------------------------------------------------------------------------
FINANCING ACTIVITIES
Common stock dividends net of amounts reinvested
of $380,002 and $338,709, respectively. . . . . .(3,740,139) (3,550,256)
Issuance of stock:
Dividend Reinvestment Plan optional cash. . . . . . 147,109 141,078
Retirement Savings Plan . . . . . . . . . . . . . . 692,171 619,377
Net borrowings under line of credit agreements . 11,000,000 600,000
Proceeds from issuance of long-term debt. . . . - -
Repayments of long-term debt . . . . . . . . . . (2,287,265) (1,268,129)
---------------------------------------------------------------------------
Net cash provided (used) by financing activities. 5,811,876 (3,457,930)
---------------------------------------------------------------------------
NET INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS. . . . . . . . . . . . . .$ 1,256,294 $ (1,090,710)
CASH AND CASH EQUIVALENT
AT BEGINNING OF PERIOD. . . . . . . . . . . . . . 2,357,173 2,598,084
---------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD. . .$ 3,613,467 $ 1,507,374
===========================================================================
<FN>
The accompanying notes are an integral part of these financial statements.
</FN>
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
CHESAPEAKE UTILITIES CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
---------------------------------------------------------------------------------
SEPTEMBER 30, DECEMBER 31,
ASSETS 2000 1999
---------------------------------------------------------------------------------
<S> <C> <C>
PROPERTY, PLANT AND EQUIPMENT
Natural gas distribution and transmission. . . . . . $142,374,742 $132,929,885
Propane gas distribution and marketing . . . . . . . . 30,327,354 28,679,766
Advanced information services . . . . . . . . . . . . . 1,684,390 1,460,411
Other plant . . . . . . . . . . . . . . . . . . . . . . 9,437,559 9,017,458
---------------------------------------------------------------------------------
Total property, plant and equipment . . . . . . . . . 183,824,045 172,087,520
Less: Accumulated depreciation and amortization. . . (59,649,034) (54,424,105)
---------------------------------------------------------------------------------
Net property, plant and equipment . . . . . . . . . . 124,175,011 117,663,415
---------------------------------------------------------------------------------
INVESTMENTS . . . . . . . . . . . . . . . . . . . . . . . 594,844 595,644
---------------------------------------------------------------------------------
CURRENT ASSETS
Cash and cash equivalents . . . . . . . . . . . . . . . 3,613,467 2,357,173
Accounts receivable. . . . . . . . . . . . . . . . . . 23,210,022 21,699,128
Materials and supplies, at average cost . . . . . . . . 3,586,621 2,407,214
Propane inventory, at average cost. . . . . . . . . . . 3,073,101 2,754,401
Storage gas prepayments . . . . . . . . . . . . . . . . 4,812,624 2,211,084
Underrecovered purchased gas costs. . . . . . . . . . . 3,318,214 1,236,914
Income taxes receivable . . . . . . . . . . . . . . . . . . 4,543 73,772
Deferred income taxes . . . . . . . . . . . . . . . . . . 745,888 745,888
Prepaid expenses. . . . . . . . . . . . . . . . . . . . 1,369,105 1,505,396
---------------------------------------------------------------------------------
Total current assets. . . . . . . . . . . . . . . . . .43,733,585 34,990,970
---------------------------------------------------------------------------------
DEFERRED CHARGES AND OTHER ASSETS
Environmental regulatory assets . . . . . . . . . . . . 2,286,507 2,340,000
Environmental expenditures. . . . . . . . . . . . . . . 3,559,215 3,574,888
Other deferred charges and intangible assets. . . . . . 7,954,722 7,823,597
---------------------------------------------------------------------------------
Total deferred charges and other assets. . . . . . . . 13,800,444 13,738,485
---------------------------------------------------------------------------------
TOTAL ASSETS . . . . . . . . . . . . . . . . . . . . $182,303,884 $166,988,514
=================================================================================
<FN>
The accompanying notes are an integral part of these financial statements.
</FN>
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
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SEPTEMBER 30, DECEMBER 31,
CAPITALIZATION AND LIABILITIES 2000 1999
---------------------------------------------------------------------------------
<S> <C> <C>
CAPITALIZATION
Stockholders' equity
Common Stock, par value $.4867 per share;
(authorized 12,000,000 shares; issued 5,271,591
and 5,186,546 shares, respectively) . . . . . . . . . $ 2,565,410 $ 2,524,018
Additional paid-in capital. . . . . . . . . . . . . . . 27,231,254 25,782,824
Retained earnings . . . . . . . . . . . . . . . . . . . 32,606,796 31,857,732
---------------------------------------------------------------------------------
Total stockholders' equity. . . . . . . . . . . . . . . 62,403,460 60,164,574
Long-term debt, net of current portion. . . . . . . . . 31,346,818 33,776,909
---------------------------------------------------------------------------------
Total capitalization. . . . . . . . . . . . . . . . . . 93,750,278 93,941,483
---------------------------------------------------------------------------------
CURRENT LIABILITIES
Current portion of long-term debt. . . . . . . . . . . . 2,665,091 2,665,091
Short-term borrowing. . . . . . . . . . . . . . . . . . 34,000,000 23,000,000
Accounts payable. . . . . . . . . . . . . . . . . . . . 20,224,413 16,865,119
Refunds payable to customers . . . . . . . . . . . . . . . 553,276 779,508
Accrued interest . . . . . . . . . . . . . . . . . . . . . 660,657 581,649
Dividends payable. . . . . . . . . . . . . . . . . . . . 1,422,886 1,347,784
Other accrued liabilities . . . . . . . . . . . . . . . .5,216,786 4,613,358
---------------------------------------------------------------------------------
Total current liabilities . . . . . . . . . . . . . . . 64,743,109 49,852,509
---------------------------------------------------------------------------------
DEFERRED CREDITS AND OTHER LIABILITIES
Deferred income taxes . . . . . . . . . . . . . . . . . 14,089,668 13,895,373
Deferred investment tax credits. . . . . . . . . . . . . . 685,518 711,987
Environmental liability. . . . . . . . . . . . . . . . . 2,286,507 2,340,000
Accrued pension costs . . . . . . . . . . . . . . . . . .1,577,017 1,544,963
Other liabilities. . . . . . . . . . . . . . . . . . . . 5,171,787 4,702,199
---------------------------------------------------------------------------------
Total deferred credits and other liabilities. . . . . . 23,810,497 23,194,522
---------------------------------------------------------------------------------
TOTAL CAPITALIZATION AND LIABILITIES . . . . . . . . $ 182,303,884 $166,988,514
=================================================================================
<FN>
The accompanying notes are an integral part of these financial statements.
</FN>
</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 NINE MONTHS ENDED
FOR THE PERIOD ENDED SEPTEMBER 30, 2000 1999 2000 1999
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<S> <C> <C> <C> <C>
CALCULATION OF BASIC EARNINGS PER SHARE:
Net (Loss) Income. . . . . . . . . . . . . . . $(1,044,709) $ (784,981) $4,944,306 $4,954,105
Weighted Average Shares Outstanding. . . . . . . 5,263,418 5,156,082 5,235,909 5,132,948
------------------------------------------------------------------------------------------------
BASIC EARNINGS PER SHARE . . . . . . . . . . . $ (0.20) $ (0.15) $ .94 $ .97
================================================================================================
CALCULATION OF DILUTED EARNINGS PER SHARE:
RECONCILIATION OF NUMERATOR:
Net (Loss) Income Basic. . . . . . . . . . . . $(1,044,709) $ (784,981) $4,944,306 $4,954,105
Effect of 8.25% Convertible debentures . . . . - - 135,382 141,942
------------------------------------------------------------------------------------------------
Adjusted numerator Diluted . . . . . . . . . . $(1,044,709) $ (784,981) $5,079,688 $5,096,047
------------------------------------------------------------------------------------------------
RECONCILIATION OF DENOMINATOR:
Weighted Shares Outstanding Basic. . . . . . . . 5,263,418 5,156,082 5,235,909 5,132,948
Effect of Dilutive Securities
Stock options. . . . . . . . . . . . . . . . . . - - 11,340 11,664
8.25% Convertible debentures . . . . . . . . . . - - 211,221 221,660
------------------------------------------------------------------------------------------------
Adjusted denominator Diluted . . . . . . . . . . 5,263,418 5,156,082 5,458,470 5,366,272
------------------------------------------------------------------------------------------------
DILUTED EARNINGS PER SHARE . . . . . . . . . . $ (0.20) $ (0.15) $ 0.93 $ 0.95
================================================================================================
</TABLE>
3. 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 each of 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, which is located in Delaware, 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 and 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. 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. In August 1997, the United
<PAGE>
States Department of Justice ("DOJ") also filed a civil complaint against GPU
for its failure to comply with the Order. The Court has consolidated the
complaints filed by the DOJ and the Company. DOJ continues to seek judicial
enforcement of the EPA Order, as well as significant financial penalties for
GPU's failure to comply. 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 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 ("SVE"); 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 remediation of the
contents of the subsurface gas holders. The EPA granted closure of that
component of the soil remediation in April 1999. The construction of the SVE
system was also completed and the system continues to be in operation. In May
2000, the Company proposed decommissioning the SVE system since data showed
remedial completion throughout the majority of the site. In July 2000, the EPA
approved a reduced scope for the SVE operations. Over the next twelve to
eighteen months the Company will seek closure of the remaining soil remediation
to include completion of the SVE and construction of a parking lot. 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 and
the actual clean-up criteria selected by the EPA. 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 regarding the Company's position that natural attenuation is the most
appropriate 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 third 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 September 30, 2000, the Company has incurred approximately $8.0 million in
costs relating to environmental investigations, testing and remedial action. Of
<PAGE>
this amount, $956,000 of incurred environmental costs has not received
ratemaking treatment. In October, Chesapeake submitted its annual 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,
determining that there was localized ground-water contamination. During 1996,
the Company completed construction and began Air Sparging and Soil-Vapor
Extraction ("AS/SVE") 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 system.
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, on
December 31, 1999 the Company adjusted both its liability and related regulatory
asset from $600,000 to $240,000 to cover the Company's projected remediation
costs for this site. The Company has not adjusted the accrual during 2000. As of
September 30, 2000, the Company has incurred approximately $2.7 million for
remedial actions and environmental studies relating to this site. Of this
amount, approximately $955,000 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 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 September 30,
2000, Chesapeake had received $549,000 related to future costs, which might be
incurred.
4. RECENT ACCOUNTING PRONOUNCEMENTS
FASB STATEMENTS AND OTHER AUTHORITATIVE PRONOUNCEMENTS ISSUED
DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
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
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. This statement, originally effective for all
<PAGE>
fiscal quarters of fiscal years beginning after June 15, 1999 has been deferred
by the FASB under FAS No. 137 and is now effective for all fiscal quarters of
fiscal years beginning after June 15, 2000. In June 2000, the FASB issued FAS
No. 138, which amends the accounting and reporting standards of FAS No. 133. 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 SEPTEMBER 30, 2000
CONSOLIDATED OVERVIEW
The Company recognized a net loss of $1,045,000 or $0.20 per share for the third
quarter of 2000. As indicated in the following table, the increase in the
Company's seasonal loss is primarily due to an increase in the pre-tax operating
loss for propane gas combined with lower contributions of pre-tax operating
income by the advanced information services and natural gas segments and an
increase in interest expense.
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2000 1999 CHANGE
---------------------------------------------------------------------------------------
<S> <C> <C> <C>
Pre-tax Operating Income (Loss)
Natural Gas Distribution & Transmission. . . . . $ 129,024 $ 190,029 $ (61,005)
Propane Gas Distribution & Marketing . . . . . . (1,439,698) (1,253,008) (186,690)
Advanced Information Services . . . . . . . . . . . 343,017 420,236 (77,219)
Other & Eliminations. . . . . . . . . . . . . . . . 222,533 125,801 96,732
---------------------------------------------------------------------------------------
Pre-tax Operating Loss . . . . . . . . . . . . . . . (745,124) (516,942) (228,182)
Operating Income Taxes . . . . . . . . . . . . . . . (701,165) (539,488) (161,677)
Interest . . . . . . . . . . . . . . . . . . . . . .1,157,643 839,060 318,583
Non-Operating Income, net. . . . . . . . . . . . . . 156,893 31,533 125,360
---------------------------------------------------------------------------------------
Net Loss. . . . . . . . . . . . . . . . . . . . . $(1,044,709) $ (784,981) $(259,728)
=======================================================================================
</TABLE>
NATURAL GAS DISTRIBUTION AND TRANSMISSION
The natural gas distribution and transmission segment reported pre-tax operating
income of $129,000 for the third quarter 2000 as compared to $190,000 for the
corresponding period last year a decrease of $61,000. The decrease in pre-tax
operating income is due to an increase in operating expenses partially offset by
higher gross margin.
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2000 1999 CHANGE
---------------------------------------------------------------------------------------
<S> <C> <C> <C>
Revenue . . . . . . . . . . . . . . . . . . . . . $16,801,554 $13,789,439 $3,012,115
Cost of Gas. . . . . . . . . . . . . . . . . . . . 10,916,992 8,035,512 2,881,480
---------------------------------------------------------------------------------------
Gross Margin. . . . . . . . . . . . . . . . . . . . 5,884,562 5,753,927 130,635
Operations & Maintenance. . . . . . . . . . . . . . 3,822,695 3,783,455 39,240
Depreciation & Amortization . . . . . . . . . . . . 1,346,320 1,202,141 144,179
Other Taxes . . . . . . . . . . . . . . . . . . . . . 586,523 578,302 8,221
---------------------------------------------------------------------------------------
Total Operating Expenses. . . . . . . . . . . . . . 5,755,538 5,563,898 191,640
---------------------------------------------------------------------------------------
Pre-tax Operating Income. . . . . . . . . . . . . $ 129,024 $ 190,029 $ (61,005)
=======================================================================================
</TABLE>
Gross margin increased due to a greater level of transportation services
provided and a 4.8 percent increase in customer base. Operating expenses were
higher due to depreciation on capital additions during the past year,
compensation, information systems and marketing expenses.
<PAGE>
PROPANE GAS DISTRIBUTION AND MARKETING
For the third quarter of 2000, the propane segment recognized a pre-tax
operating loss of $1,440,000 compared to $1,253,000 for the same period last
year. The increase in the loss was the result of an increase in operating
expenses.
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2000 1999 CHANGE
---------------------------------------------------------------------------------------
<S> <C> <C> <C>
Revenue . . . . . . . . . . . . . . . . . . . . . $37,594,464 $38,838,997 $(1,244,533)
Cost of Sales. . . . . . . . . . . . . . . . . . . 35,699,443 37,015,453 (1,316,010)
---------------------------------------------------------------------------------------
Gross Margin. . . . . . . . . . . . . . . . . . . . 1,895,021 1,823,544 71,477
Operations & Maintenance. . . . . . . . . . . . . . 2,941,018 2,737,575 203,443
Depreciation & Amortization . . . . . . . . . . . . . 340,961 280,045 60,916
Other Taxes. . . . . . . . . . . . . . . . . . . . . . 52,740 58,932 (6,192)
---------------------------------------------------------------------------------------
Total Operating Expenses. . . . . . . . . . . . . . 3,334,719 3,076,552 258,167
---------------------------------------------------------------------------------------
Pre-tax Operating Loss. . . . . . . . . . . . . . $(1,439,698) $(1,253,008) $ (186,690)
=======================================================================================
</TABLE>
Operating expenses were higher due to costs related to a start-up propane
operation located in the state of Florida, compensation, information systems and
marketing expenses.
ADVANCED INFORMATION SERVICES
The advanced information services segment recognized a pre-tax operating income
of $343,000 for the third quarter of 2000 as compared to pre-tax operating
income of $420,000 for the same period last year. The decrease in contribution
from this segment is directly related to revenues not meeting expectations.
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2000 1999 CHANGE
---------------------------------------------------------------------------------------
<S> <C> <C> <C>
Revenue . . . . . . . . . . . . . . . . . . . . . .$3,291,323 $3,431,482 $(140,159)
Cost of Sales . . . . . . . . . . . . . . . . . . . 1,597,192 1,697,969 (100,777)
---------------------------------------------------------------------------------------
Gross Margin. . . . . . . . . . . . . . . . . . . . 1,694,131 1,733,513 (39,382)
Operations & Maintenance. . . . . . . . . . . . . . 1,172,944 1,124,079 48,865
Depreciation & Amortization. . . . . . . . . . . . . . 67,440 71,100 (3,660)
Other Taxes . . . . . . . . . . . . . . . . . . . . . 110,730 118,098 (7,368)
---------------------------------------------------------------------------------------
Total Operating Expenses. . . . . . . . . . . . . . 1,351,114 1,313,277 37,837
---------------------------------------------------------------------------------------
Pre-tax Operating Income . . . . . . . . . . . . . $ 343,017 $ 420,236 $ (77,219)
=======================================================================================
</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
is experiencing growth in its web-related services; however, it has not been
sufficient to offset the decline in traditional IT services. The Company expects
the traditional service revenues to remain depressed for the remainder of the
year.
OPERATING INCOME TAXES
The Company's income tax benefit is higher due to the increase in the Company's
seasonal operating loss.
NON-OPERATING INCOME
During the third quarter of 2000, the Company recognized a one-time gain of
$116,000 on the sale of Company-owned property.
INTEREST EXPENSE
The Company's interest expense increased due to a $10.0 million average increase
in short-term borrowing combined with a rise in interest rates.
<PAGE>
RESULTS OF OPERATIONS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2000
CONSOLIDATED OVERVIEW
The Company recognized net income of $4.9 million $0.94 per share for the
first nine 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 business segment and the growth in the Company's water unit
included in other. These gains were offset by lower pre-tax operating income for
the advanced information services and propane business segment and higher
interest expense.
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2000 1999 CHANGE
---------------------------------------------------------------------------------------
<S> <C> <C> <C>
Pre-tax Operating Income
Natural Gas Distribution & Transmission. . . . . $8,582,296 $7,334,755 $1,247,541
Propane Gas Distribution & Marketing. . . . . . . 1,144,287 1,518,725 (374,438)
Advanced Information Services . . . . . . . . . . . 318,050 1,101,836 (783,786)
Other & Eliminations. . . . . . . . . . . . . . . . 661,672 309,971 351,701
---------------------------------------------------------------------------------------
Pre-tax Operating Income . . . . . . . . . . . . . 10,706,305 10,265,287 441,018
Operating Income Taxes. . . . . . . . . . . . . . . 2,874,304 2,942,592 (68,288)
Interest. . . . . . . . . . . . . . . . . . . . . . 3,126,921 2,501,168 625,753
Non-Operating Income, net . . . . . . . . . . . . . . 239,226 132,578 106,648
---------------------------------------------------------------------------------------
Net Income. . . . . . . . . . . . . . . . . . . . $ 4,944,306 $ 4,954,105 $ (9,799)
=======================================================================================
</TABLE>
NATURAL GAS DISTRIBUTION AND TRANSMISSION
The natural gas distribution and transmission segment reported pre-tax operating
income of $8.6 million for the first nine months of 2000 as compared to $7.3
million for the corresponding period last year an increase of $1.2 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 NINE MONTHS ENDED SEPTEMBER 30, 2000 1999 CHANGE
---------------------------------------------------------------------------------------
<S> <C> <C> <C>
Revenue . . . . . . . . . . . . . . . . . . . . . $68,698,849 $54,449,644 $14,249,205
Cost of Gas. . . . . . . . . . . . . . . . . . . . 42,303,808 30,435,875 11,867,933
---------------------------------------------------------------------------------------
Gross Margin . . . . . . . . . . . . . . . . . . . 26,395,041 24,013,769 2,381,272
Operations & Maintenance . . . . . . . . . . . . . 12,017,255 11,220,373 796,882
Depreciation & Amortization . . . . . . . . . . . . 3,954,809 3,612,309 342,500
Other Taxes . . . . . . . . . . . . . . . . . . . . 1,840,681 1,846,332 (5,651)
---------------------------------------------------------------------------------------
Total Operating Expenses . . . . . . . . . . . . . 17,812,745 16,679,014 1,133,731
---------------------------------------------------------------------------------------
Pre-tax Operating Income . . . . . . . . . . . . . $8,582,296 $7,334,755 $1,247,541
=======================================================================================
</TABLE>
Gross margin increased due to a 4.6 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 8.7 percent increase in deliveries. Transportation revenues
increased due to new services provided by 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.
<PAGE>
PROPANE GAS DISTRIBUTION AND MARKETING
For the first nine months of 2000, the propane segment contributed pre-tax
operating income of $1.1 million as compared to $1.5 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.
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2000 1999 CHANGE
---------------------------------------------------------------------------------------
<S> <C> <C> <C>
Revenue. . . . . . . . . . . . . . . . . . . . . $141,194,544 $93,190,083 $48,004,461
Cost of Sales . . . . . . . . . . . . . . . . . . 129,294,663 82,540,447 46,754,216
---------------------------------------------------------------------------------------
Gross Margin . . . . . . . . . . . . . . . . . . . 11,899,881 10,649,636 1,250,245
Operations & Maintenance. . . . . . . . . . . . . . 9,614,767 8,137,317 1,477,450
Depreciation & Amortization . . . . . . . . . . . . . 959,218 830,594 128,624
Other Taxes . . . . . . . . . . . . . . . . . . . . . 181,609 163,000 18,609
---------------------------------------------------------------------------------------
Total Operating Expenses . . . . . . . . . . . . . 10,755,594 9,130,911 1,624,683
---------------------------------------------------------------------------------------
Pre-tax Operating Income . . . . . . . . . . . . $ 1,144,287 $ 1,518,725 $ (374,438)
=======================================================================================
</TABLE>
The increase in gross margin is due primarily to a $1.4 million increase in
marketing margins partially offset by a 4.5 percent reduction on margins earned
on distribution sales. Temperatures for the first nine months of 2000 were 5
percent cooler than the same period in 1999. However, distribution deliveries
for the first nine months of 2000 were 2.7 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 customers via price increases. Operating expenses were
higher due to compensation, information systems and marketing programs that the
Company implemented to build customer growth. Also contributing to the increased
level of operating expenses are costs related to a start-up propane operation in
the state of Florida, which began operations during the second quarter of 2000.
ADVANCED INFORMATION SERVICES
The advanced information services segment recognized a pre-tax operating income
of $318,000 for the first nine months of 2000 as compared to a pre-tax operating
income of $1.1 million for the period last year. The decrease in contribution
from this segment is directly related to revenues not meeting expectations.
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2000 1999 CHANGE
---------------------------------------------------------------------------------------
<S> <C> <C> <C>
Revenue . . . . . . . . . . . . . . . . . . . . . .$9,653,927 $10,013,631 $(359,704)
Cost of Sales . . . . . . . . . . . . . . . . . . . 5,179,405 4,983,552 195,853
---------------------------------------------------------------------------------------
Gross Margin. . . . . . . . . . . . . . . . . . . . 4,474,522 5,030,079 (555,557)
Operations & Maintenance. . . . . . . . . . . . . . 3,526,726 3,339,361 187,365
Depreciation & Amortization . . . . . . . . . . . . . 214,881 196,026 18,855
Other Taxes . . . . . . . . . . . . . . . . . . . . . 414,865 392,856 22,009
---------------------------------------------------------------------------------------
Total Operating Expenses. . . . . . . . . . . . . . 4,156,472 3,928,243 228,229
---------------------------------------------------------------------------------------
Pre-tax Operating Income . . . . . . . . . . . . . $ 318,050 $ 1,101,836 $(783,786)
=======================================================================================
</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.
NON-OPERATING INCOME
During the 2000, the Company recognized a one-time gain of $116,000 on the sale
of Company-owned property.
<PAGE>
INTEREST EXPENSE
The Company's interest expense increased due to a $10.0 million average increase
in short-term borrowing 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 current or future costs
that have not been recovered through insurance proceeds or rates at this time
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. The Company's net cash provided by
operating activities, used by investing activities and used by financing
activities for the nine months ended September 30, 2000 were approximately $9.0
million, $13.6 million and $5.8 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 million. The Board
of Directors has authorized the Company to borrow up to $45 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 September 30, 2000 and December 31, 1999 were $34 and $23 million,
respectively. The Company expects to issue long-term debt in the near future to
pay off a portion of its short-term borrowing.
During the nine months ended September 30, 2000 and September 30, 1999, net
property, plant and equipment expenditures were approximately $13.6 million and
$14.1 million, respectively. Chesapeake has budgeted $21.9 million for capital
expenditures during 2000. This amount includes $15.8 million for natural gas
distribution and transmission; $3.8 million for propane distribution and
marketing; $400,000 for advanced information services; and $1.9 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 in 2001. 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 expected 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 $1.0 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.
<PAGE>
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 issuance of
additional warrants to the investment banker based on performance.
As of September 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 48.8 percent and
51.4 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,
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, future revenues, margins or profits, future capital
expenditures, 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;
- the effect of changes in federal, state or local legislative requirements;
- the ability of the Company's marketing programs to generate expected
customer growth; and
- 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 the FASB under FAS No. 137 and is now
effective for all fiscal quarters of fiscal years beginning after June 15, 2000.
In June 2000, the FASB issued FAS No. 138, which amends the accounting and
reporting standards of FAS No. 133. 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 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, 2000 was $35.0 million.
The fair value was $34.7 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 September 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
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 September 30, 2000. All of
the contracts mature by March 31, 2001.
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------
QUANTITY ESTIMATED WEIGHTED AVERAGE
AT SEPTEMBER 30, 2000 IN GALLONS MARKET PRICES CONTRACT PRICES
-------------------------------------------------------------------------------
<S> <C> <C> <C>
FORWARD CONTRACTS
Sale. . . . . . . . . . . . . 49,875,000 $0.5775 $0.6625 $0.6318
Purchase. . . . . . . . . . . 46,019,400 $0.5775 $0.6625 $0.6269
FUTURES CONTRACTS
Sale . . . . . . . . . . . . . 1,302,000 $0.6325 $0.6350 $0.6352
Purchase . . . . . . . . . . . 1,680,000 $0.6150 $0.6375 $0.6284
-------------------------------------------------------------------------------
<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
None
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: November 14, 2000
