SECURITIES AND EXCHANGE COMMISSION
                               Washington, D.C. 20549


                                     FORM 10-K


                    ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
                          THE SECURITIES EXCHANGE ACT OF 1934


                      For the Fiscal Year EndedEnded: December 31, 19971998

                           Commission File NumberNumber: 001-11590


                           CHESAPEAKE UTILITIES CORPORATION
              (Exact name of registrant as specified in its charter)


                 State of Delaware                       51-0064146
        (State or other jurisdiction of              (I.R.S. Employer
         incorporation or organization)             Identification No.)

                   909 Silver Lake Boulevard, Dover, Delaware 19904
            (Address of principal executive offices)        (Zip Code)

      Registrantsoffices, including zip code)

                                    302-734-6799
                (Registrant's telephone number, including area code:  302-734-6799

          Securities registered pursuant to Section 12(b) of the Act:code)

              SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
            Title of each class
                   -----------------------------------------class: Common Stock - par value per share $.4867
        Name of each exchange on which registered
                   -----------------------------------------registered: New York Stock Exchange, Inc.


              Securities registered pursuant to Section 12(g)SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
                Title of the Act:class: 8.25% Convertible Debentures Due 2014
                     -------------------------------------
                                (Title of class)


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 [ ]].

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 
of Regulation S-K is not contained herein, and will not be contained, to the 
best of registrantsregistrant's knowledge, in definitive proxy or information statements 
incorporated by reference in Part III of this Form 10-K or any amendments to 
this Form 10-K. [X]

As of March 20, 1998, 4,543,69526, 1999, 5,115,971 shares of common stock were outstanding. The 
aggregate market value of the common shares held by non-affiliates of 
Chesapeake Utilities Corporation, based on the last trade price on March 20, 
1997,26, 
1999, as reported by the New York Stock Exchange, was approximately $67 
million.

                         DOCUMENTS INCORPORATED BY REFERENCE
DOCUMENTS           PART OF FORM 10-K
            DefinitivePortions of the Proxy Statement for the 1999 Annual Meeting of Stockholders 
are incorporated by reference in Part III
               dated March 30, 1998

III.

                         CHESAPEAKE UTILITIES CORPORATION
                                    FORM 10-K

                           Year Ended DecemberYEAR ENDED DECEMBER 31, 19971998

                                TABLE OF CONTENTS

                                                                            Page
PART I Page
                                                                      ----........................................................................1
Item 1. Business ...................................................... 1..............................................................1
Item 2. Properties ................................................... 11...........................................................11
Item 3. Legal Proceedings ............................................ 12....................................................11
Item 4. Submission of
        Matters to a Vote of Security Holders .......... 15................................14
Item 10.Executive10. Executive Officers of the Registrant ......................... 15................................14

PART II ......................................................................15
Item 5. Market for Registrantsthe Registrant's Common Stock
        and Related Security Holder Matters ...................................... 16..................................15
Item 6. Selected Financial Data ...................................... 17..............................................16
Item 7. ManagementsManagement's Discussion and Analysis of
        Financial Condition and Results of Operations .......................... 18........................17
Item 7a. Quantitative and Qualitative Disclosures
         About Market Risk ...................................................24
Item 8. Financial Statements and SupplementarySupplemental Data .................. 25...........................24
Item 9. Changes In and Disagreements withWith Accountants
        on Accounting and Financial Disclosure ....................... 45...............................44

PART III .....................................................................44
Item 10.Directors10. Directors and Executive Officers
         of the Registrant ........... 45...................................................44
Item 11.Executive11. Executive Compensation ....................................... 45..............................................44
Item 12.Security12. Security Ownership of Certain
         Beneficial Owners and Management ........................................ 45....................................44
Item 13.Certain13. Certain Relationships and Related Transactions ............... 45......................44

PART IVIV.......................................................................44
Item 14.Financial14. Financial Statements, Financial Statement Schedules,
         Exhibits and Reports on Form 8-K ............................. 458-K.....................................44
Signatures ........................................................... 49


...................................................................47




PART I

Item 1. Business
(a)  General Development of Business
Chesapeake Utilities Corporation ("Chesapeake" or "the Company") is a 
diversified utility company engaged primarily in natural gas distribution and 
transmission, propane distribution and marketing and advanced information 
services.

ChesapeakesChesapeake's three natural gas distribution divisions serve approximately 
35,80037,100 residential, commercial and industrial customers in southern Delaware, 
MarylandsMaryland's Eastern Shore and Central Florida. The CompanysCompany's natural gas 
transmission subsidiary, Eastern Shore Natural Gas Company ("Eastern Shore"), 
operates a 271-mile273-mile interstate pipeline system that transports gas from 
various points in Pennsylvania to the CompanysCompany's Delaware and Maryland 
distribution divisions, as well as to other utilities and industrial customers 
in Delaware and on the Eastern Shore of Maryland. The CompanysCompany's propane 
segmentdistribution operation serves approximately 34,00035,000 customers in southern 
Delaware and on the Eastern Shore of Maryland and Virginia. The advanced 
information services segment provides software servicesconsulting, custom programming, training 
and products to a wide variety of 
customersdevelopment tools for national and international clients.

(b)  Financial Information about Industry Segments
Financial information by business segment is included in Item 7 under the 
heading Notes"Notes to Consolidated Financial Statements.Statements - Note C".

(c)  Narrative Description of Business
The Company is engaged in four primary business activities: natural gas 
transmission, natural gas distribution, propane distribution and marketing and 
advanced information services. In addition to the four primary groups, 
Chesapeake has threefour subsidiaries engaged in other service relatedservice-related businesses. 

(i) (a) Natural Gas Transmission
General
Eastern Shore, the CompanysCompany's wholly owned transmission subsidiary, operates 
an interstate natural gas transportationpipeline and provides contract 
storageopen access transportation 
services for affiliated and non-affiliated companies through an integrated 
gas pipeline extending from southeastern Pennsylvania to Delaware and the 
Eastern Shore of Maryland. During 1997, Eastern Shore implemented open access transportation services. Eastern Shore nowalso provides transportation services, contract storage 
services as well as purchasingthe purchase and sellingsale of small amountsquantities of gas for 
system balancing purposes ("swing gas"). Eastern ShoresShore's rates are subject 
to regulation by the Federal Energy Regulatory Commission ("FERC").

Adequacy of Resources
With the implementation of open access effective November 1, 1997, Eastern Shore released, through the permanent release mechanism of its upstream 
service providers tariffs, various levelshas 4,916 thousand cubic feet ("Mcf") of firm transportation 
capacity andunder Rate Schedule FT under contract storage service to customers. Eastern Shore retained 
contracts with Transcontinental Gas 
Pipe Line Corporation ("Transco") for 
4,916 thousand cubic feet ("Mcf")which expires in 2005. Eastern Shore also 
has 7,046 Mcf of firm transportation capacity, expiring 
in 2005, and three firm storage services providing peak day entitlements and total storage capacity of 
7,046278,264Mcf under Rate Schedules GSS, LSS and LGA, respectively, under 
contract with Transco. The GSS and LSS contracts expire in 2013 and the LGA 
contract expires in 2006.

Eastern Shore also has firm storage service under Rate Schedule FSS and 
firm storage transportation capacity under Rate Schedule SST under contract 
with Columbia Gas Transmission ("Columbia"). These contracts, which expire 
in 2004, provide for 1,073 Mcf of firm peak day entitlement and total 
storage capacity of 53,738 Mcf.

Eastern Shore also retained contracts with Columbia Gas Transportation 
("Columbia") for services, including: firm transportation capacity of 869 
Mcf per day, which expires in 2018; storage service providing a peak day 
entitlement of 1,111 Mcf and total capacity of 53,738 Mcf, expiring in 
2004; and firm storage service providing peak day entitlements of 563 Mcf 
and a total capacity of 50,686 Mcf, which expires in 2018. Eastern Shorehas retained the firm transportation capacity and firm 
storage services described above in order to provide swing transportation 
service to a limited number ofthose customers that requested thissuch service. 
Prior to open access, Eastern Shore had firm contracts with three 
interstate pipelines for transportation and storage services coupled with 
firm contracts for natural gas supply with five suppliers providing a 
maximum firm daily capacity of 20,469 Mcf.

Competition
Under thisthe open access environment, interstate pipeline companies have 
unbundled the traditional components of their service --- gas gathering, 
transportation and storage --- from the sale of the commodity. Pipelines that 
choose to be merchants of gas must form separate marketing operations 
independent of their pipeline operations. Hence, gas marketers have 
developed as a viable option for many companies because they are providing 
expertise in gas purchasing along with collective purchasing capabilities 
which, when combined, may reduce the end-user cost. Additional discussion 
on competition is included in Item 7 under the heading "Managements"Management's 
Discussion and Analysis of Financial Condition and Results of Operations"- Competition".

Rates and Regulation
General. Eastern Shore is subject to regulation by the FERC as an 
interstate pipeline. The FERC regulates the provision of service, terms and 
conditions of service, and the rates and fees Eastern Shore can charge to 
its transportation customers. In addition, the FERC regulates the rates 
Eastern Shore is charged for transportation and transmission line capacity 
and services provided by Transco and Columbia. 

Regulatory Proceedings
Amendment to Rt. 72 and Porter Road filing. On March 6, 1998, the FERC 
authorized Eastern Shore to replace 2.3 miles of 6-inch pipeline with 10-
inch pipeline along Route 72 and Power Road, all in conjunction with a 
Delaware Department of Transportation highway relocation project. On 
September 15, 1998, Eastern Shore filed an amendment in Docket No. CP97-
279-001 requesting that the FERC authorize an increase in the diameter of 
the previously approved 2.3-mile pipeline from 10 inches to 16 inches. 
Eastern Shore filed this amendment in connection with the 1999 System 
Expansion described below. The FERC issued an Order Amending Certificate in 
this docket on October 16, 1998, approving Eastern Shore's proposal. 
Construction has started and is expected to be completed during 1999.

1999 System Expansion. On September 25, 1998, Eastern Shore filed an 
application before the FERC requesting authorization to construct and 
operate a total of eight miles (4.5 miles in Pennsylvania and 3.5 miles in 
Delaware) of 16-inch pipeline looping on Eastern Shore's existing system 
and to install 1,085 horsepower of additional compression at its Delaware 
City compressor station. The purpose of these new facilities is to enable 
Eastern Shore to provide 16,540 dekatherms of additional firm 
transportation capacity on its system for two existing customers, Delmarva 
Power and Light Company and Star Enterprise. The proposed expansion has 
been targeted for completion on November 1, 1999. The estimated project 
cost is approximately $7.0 million and is expected to generate 
approximately $1.8 million in additional annual revenue. Eastern Shore also 
requested the FERC to issue a preliminary determination of rolled-in 
treatment of the costs incurred in this project into existing rates. The 
Company is awaiting FERC approval.

Rate Case Filing. In October 1996, Eastern Shore filed for a general rate 
increase with the FERC. The filing proposed an increase in Eastern Shore's 
jurisdictional rates that would generate additional annual operating 
revenue of approximately $1.4 million. Eastern Shore also stated in the 
filing that it intended to use the cost-of-service submitted in the general 
rate increase filing to develop rates in the pending Open Access Docket. In 
September 1997, the FERC approved a rate increase of $1.2 million. 

Open Access Filing. In December 1995, Eastern Shore filed its abbreviated 
application for a blanket certificate of public convenience and necessity 
authorizing the transportation of natural gas on behalf of others. Eastern 
Shore proposed to unbundle the sales and storage services it had provided. 
Customers who had previously received firm sales and storage services on 
Eastern Shore (the "Converting Customers") would receive entitlements to 
firm transportation service on Eastern Shore's pipeline in a quantity 
equivalent to their existing service rights. Eastern Shore proposed to 
retain some of its pipeline entitlements and storage capacity for 
operational issues and to facilitate "no-notice" (no prior notification 
required to receive service) transportation service on its pipeline system. 
Eastern Shore would release or assign to the remaining Converting Customers 
the firm transportation capacity, including contract storage, it held on 
its upstream pipelines so that the Converting Customers would be able to 
become direct customers of such upstream pipelines. Converting Customers 
who previously received bundled sales service having no-notice 
characteristics would have the right to elect no-notice firm transportation 
service.
In connection with the rate increase settlement, the issues listed above 
pertaining to Eastern Shore operating as an open access pipeline were also 
settled in September 1997, with open access implementation occurring on 
November 1, 1997.

Delaware City Compressor Station Filing. In December 1995, Eastern Shore 
filed an application before the FERC pursuant to Sections 7(b) and (c) of 
the Natural Gas Act for a certificate of public convenience and necessity 
authorizing Eastern Shore to: (1) construct and operate a 2,170 horsepower 
compressor station in Delaware City, New Castle County, Delaware on a 
portion of its existing pipeline system known as the "Hockessin Line", such 
new station to be known as the "Delaware City Compressor Station"; (2) 
construct and operate slightly less than one mile of 16-inch pipeline in 
Delaware City, New Castle County, Delaware to tie the suction side of the 
proposed Delaware City Compressor Station into the Hockessin Line; and (3) 
increase the maximum allowable operating pressure from 500 psig to 590 
psig on 28.7 miles of Eastern 
ShoresShore's pipeline from Eastern ShoresShore's existing Bridgeville Compressor 
Station in Bridgeville, Sussex County, Delaware to its terminus in 
Salisbury, Wicomico County, Maryland. 

In September 1996 the FERC issued its Final Order, which: (1) authorized 
Eastern Shore toto: (1) construct and operate the facilities requested in its 
application;application: (2) authorized Eastern Shore to roll-in the cost of the facilities into its existing rates 
if the revenues from the increase in services exceed the cost associated 
with the expansion portion of the project; and (3) abandon the 100 Mcf per 
day of firm sale service to one of its direct sale customers. The FERC's 
Final Order also denied Eastern Shore the authority to increase the level 
of sales and storage service it provides its customers until it completes 
its restructuring in its open access proceeding; and (4) authorized Eastern 
Shore to abandon the 100 Mcf per day of firm sale service, to one of its 
direct sale customers.proceeding.  The compressor facility 
and associated piping were needed to stabilize capacity on Eastern ShoresShore's 
system as a result of steadily declining inlet pressures at the Hockessin 
interconnect with Transcontinental Gas Pipe Line Corporation. Construction 
of the facilities started during the second half of 1996 and was completed 
during the first quarter of 1997. 

Rate Case Filing. In October 1996 Eastern Shore filed for a general rate 
increase with the FERC. The filing proposed an increase in Eastern Shores 
jurisdictional rates that would generate additional annual operating 
revenue of approximately $1.4 million. Eastern Shore also stated in the 
filing that it intended to use the cost-of-service submitted in the 
general rate increase filing to develop rates in the pending Open Access 
Docket. In September 1997, the FERC approved a rate increase of $1.2 
million. 

Open Access Filing. In December 1995, Eastern Shore filed its abbreviated 
application for a blanket certificate of public convenience and necessity 
authorizing the transportation of natural gas on behalf of others. Eastern 
Shore proposed to unbundle the sales and storage services it had provided. 
Customers who had previously received firm sales and storage services on 
Eastern Shore (the "Converting Customers") would receive entitlements to 
firm transportation service on Eastern Shores pipeline in a quantity 
equivalent to their existing service rights. Eastern Shore proposed to 
retain some of its pipeline entitlements and storage capacity for 
operational issues and to facilitate "no-notice" (no prior notification 
required to receive service) transportation service on its pipeline 
system. Eastern Shore would release or assign to the remaining Converting 
Customers the firm transportation capacity, including contract storage, it 
held on its upstream pipelines so that the Converting Customers would be 
able to become direct customers of such upstream pipelines. Converting 
Customers who previously received bundled sales service having no-notice 
characteristics would have the right to elect no-notice firm 
transportation service.

In connection with the rate increase settlement, the issues pertaining to 
Eastern Shore operating as an open access pipeline were also settled in 
September 1997, with open access implementation occurring on November 1, 1997.

(i) (b) Natural Gas Distribution
General
Chesapeake distributes natural gas to approximately 35,80037,100 residential, 
commercial and industrial customers in southern Delaware, the Salisbury and 
Cambridge, Maryland areas on MarylandsMaryland's Eastern Shore, and Central Florida. 
These activities are conducted through three utility divisions, one 
division in Delaware, another in Maryland and a third division in Florida. 
In 1993, the Company started natural gas supply management services in the 
state of Florida under the name of Peninsula Energy Services Company 
("PESCO").

Delaware and Maryland. The Delaware and Maryland divisions serve an average 
of approximately 29,95027,900 customers, of which approximately 26,86027,800 are 
residential and commercial customers purchasing gas primarily for heating 
purposes. Annually, residential and commercial customers account for 
approximately 69%56% of the volume delivered by the divisions and 79%75% of the 
divisionsdivisions' revenue. The divisionsdivisions' industrial customers purchase gas, 
primarily on an interruptible basis, for a variety of manufacturing, 
agricultural and other uses. Most of ChesapeakesChesapeake's customer growth in these 
divisions comes from new residential construction using gas heating 
equipment.

Florida. The Florida division distributes natural gas to an average of 
approximately 8,7489,100 residential and commercial and 8490 industrial customers 
in Polk, Osceola and Hillsborough Counties. Currently 4241 of the divisionsdivision's 
industrial customers, which purchase and transport gas on a firm and 
interruptible basis, account for approximately 90%89% of the volume delivered 
by the Florida division and 60%50% of the divisionsdivision's annual natural gas and 
transportation revenues. These customers are primarily engaged in the 
citrus and phosphate industries and electric cogeneration. The CompanysCompany's 
Florida division also provides natural gas supply management services to 
compete in the open access environment. Currently, twenty-onetwenty-two customers 
receive such services, which generated gross marginnet income of $70,000$66,000 in 1997.1998.

Adequacy of Resources
General. ChesapeakesChesapeake's Delaware and Maryland utility divisions ("Delaware", 
"Maryland" or "the Divisions") have firm and interruptible contracts with 
four (4) interstate "open access" pipelines. The Divisions are directly 
interconnected with Eastern Shore and services upstream of Eastern Shore 
are contracted with Transco, Columbia, and Columbia Gulf Transmission 
Company ("Gulf"). The Divisions use their firm supply sources to meet a 
significant percentage of their projected demand requirements. In order to 
meet the difference between firm supply and firm demand, Delaware and 
Maryland obtain gas supply on the "spot market" from various other 
suppliers that is transported by the upstream pipelines and delivered to 
the Divisions' interconnects with Eastern Shore as needed. The Company 
believes that Delaware and Maryland's available firm and "spot market" 
supply is ample to meet the anticipated needs of their customers.

Delaware. DelawaresDelaware's contracts with Transco include: (a) firm 
transportation capacity of 8,663 dekatherms ("Dt") per day, which expires 
in 2005; (b) firm transportation capacity of 311 Dt per day for December 
through February, expiring in 2006; and (c) firm storage service, providing 
a total capacity of 142,830 Dt, which expiresDt. Delaware and Transco are currently engaged 
in 1998.

Delawaresnegotiations with regard to an extension of the term of the firm storage 
service. Although the original contract expired in 1998, Transco and 
Delaware have continued under the previous terms and conditions until an 
agreement is finalized.

Delaware's contracts with Columbia include: (a) firm transportation 
capacity of 852 Dt per day, which expires in 2004; (b) firm transportation 
capacity of 1,132 Dt per day, which expires in 2017; (c) firm 
transportation capacity of 549 Dt per day, which expires in 2018; (d) firm 
storage service providing a peak day entitlement of 6,193 Dt and a total 
capacity of 298,195 Dt, which expiresexpiring in 2004; and (d)(f) firm storage service, 
providing a peak day entitlement of 635583 Dt per day and a total capacity of 
57,13952,460 Dt, expringwhich expires in 2017. Delawares2018. Delaware's contracts with Columbia for 
storage related transportation provide quantities that are equivalent to 
the peak day entitlement for the period of October through March and are 
equivalent to fifty percent (50%) of the peak day entitlement for the 
period of April through September. The terms of the storage related 
transportation contracts mirror the storage services that they support.

DelawaresDelaware's contract with Gulf, which expires in 2004, provides firm 
transportation capacity of 868 Dt per day for the period November through 
March and 798 Dt per day for the period April through October.

DelawaresDelaware's contracts with Eastern Shore include: (a) firm transportation 
capacity of 23,49425,560 Dt per day for the period December through February, 
22,27224,338 Dt per day for the months of November, March and April, and 13,19615,262 
Dt per day for the period May through October, with various expiration 
dates ranging from 2004 to 2017; (b) firm storage capacity under Eastern 
ShoresShore's Rate Schedule GSS providing a peak day entitlement of 2,655 Dt and 
a total capacity of 131,370 Dt, which expires in 2013; (c) firm storage 
capacity under Eastern ShoresShore's Rate Schedule LSS providing a peak day 
entitlement of 580 Dt and a total capacity of 29,000 Dt, which expires in 
2013; and (d) firm storage capacity under Eastern ShoresShore's Rate Schedule LGA 
providing a peak day entitlement of 911 Dt and a total capacity of 5,708 
Dt, which expires in 2006. DelawaresDelaware's firm transportation contracts with 
Eastern Shore also include Eastern ShoresShore's provision of swing 
transportation service. This service includes: (a) firm transportation 
capacity of 1,846 Dt per day on TranscosTransco's pipeline system, retained by 
Eastern Shore, in addition to DelawaresDelaware's Transco capacity referenced 
earlier and (b) an interruptible storage service under TranscosTransco's Rate 
Schedule ESS that supports a swing supply service provided under TranscosTransco's 
Rate Schedule FS.

Delaware currently has contracts for the purchase of firm natural gas 
suppysupply with five (5)four (4) suppliers. These contracts provide the availability of 
a maximum firm daily entitlement of 10,95812,200 Dt and the supplies are 
transported by Transco, Columbia, Gulf and Eastern Shore under DelawaresDelaware's 
transportation contracts. The gas purchase contracts have various 
expiration dates.

Maryland. MarylandsMaryland's contracts with Transco include: (a) firm 
transportation capacity of 4,738 Dt per day, which expires in 2005; (b) 
firm transportation capacity of 155 Dt per day for December through 
February, expiring in 2006; and (c) firm storage service providing a total 
capacity of 33,120 Dt, which expiresDt. Maryland and Transco are currently engaged in 
1998.

Marylandsnegotiations with regard to an extension of the term of the firm storage 
service. Although the original contract expired in 1998, Transco and 
Maryland have continued under the previous terms and conditions until an 
agreement is finalized.

Maryland's contracts with Columbia include: (a) firm transportation 
capacity of 442 Dt per day, which expires in 2004; (b) firm transportation 
capacity of 908 Dt per day, which expires in 2017; (c) firm transportation 
capacity of 350 Dt per day, which expires in 2018; (d) firm storage service 
providing a peak day entitlement of 3,142 Dt and a total capacity of 
154,756 Dt, which expires in 2004; and (d)(e) firm storage service providing a 
peak day entitlement of 521 Dt and a total capacity of 46,881 Dt, which 
expires in 2017. MarylandsMaryland's contracts with Columbia for storage related 
transportation provide quantities that are equivalent to the peak day 
entitlement for the period October through March and are equivalent to 
fifty percent (50%) of the peak day entitlement for the period April 
through September. The terms of the storage related transportation 
contracts mirror the storage services that they support.

MarylandsMaryland's contract with Gulf, which expires in 2004, provides firm 
transportation capacity of 590 Dt per day for the period November through 
March and 543 Dt per day for the period April through October.

MarylandsMaryland's contracts with Eastern Shore include: (a) firm transportation 
capacity of 13,02813,378 Dt per day for the period December through February, 
12,30412,654 Dt per day for the months of November.November, March and April, and 7,7438,093 Dt 
per day for the period May through October; (b) firm storage capacity under 
Eastern ShoresShore's Rate Schedule GSS providing a peak day entitlement of 1,428 
Dt and a total capacity of 70,665 Dt, which expires in 2013; (c) firm 
storage capacity under Eastern ShoresShore's Rate Schedule LSS providing a peak 
day entitlement of 309 Dt and a total capacity of 15,500 Dt, which expires 
in 2013; and (d) firm storage capacity under Eastern ShoresShore's Rate Schedule 
LGA providing a peak day entitlement of 569 Dt and a total capacity of 
3,560 Dt, which expires in 2006. MarylandsMaryland's firm transportation contracts 
with Eastern Shore also include Eastern ShoresShore's provision of swing 
transportation service. This service includes: (a) firm transportation 
capacity of 969 Dt per day on TranscosTransco's pipeline system, retained by 
Eastern Shore, in addition to MarylandsMaryland's Transco capacity referenced 
earlier and (b) an interruptible storage service under TranscosTransco's Rate 
Schedule ESS that supports a swing supply service provided under TranscosTransco's 
Rate Schedule FS.

Maryland currently has contracts for the purchase of firm natural gas 
supply with five (5)four (4) suppliers. These contracts provide the availability of 
a maximum firm daily entitlement of 6,2437,239 Dt and the supplies are 
transported by Transco, Columbia, Gulf and Eastern Shore under MarylandsMaryland's 
transportation contracts. The gas purchase contracts have various 
expiration dates. The Divisions use their firm supply sources to meet a 
significant percentage of their projected demand requirements. In order to 
meet the difference between firm supply and firm demand, Delaware and 
Maryland obtain gas supply on the "spot market" from various other 
suppliers that is transported by the upstream pipelines and delivered to 
the Divisions interconnects with Eastern Shore as needed. The Company 
believes that Delaware and Marylands available firm and "spot market" 
supply is ample to meet the anticipated needs of their customers.

Florida. The Florida division receives transportation service from Florida 
Gas Transmission Company ("FGT"), a major interstate pipeline. Chesapeake 
has contracts with FGT for: (a) daily firm transportation capacity of 
20,52321,123 Dt in May through September, 27,105 Dt in October, and 26,91927,519 Dt in 
November through April under FGTsFGT's firm transportation service (FTS-1) rate 
schedule; (b) daily firm transportation capacity of 5,100 Dt in May through 
October, and 8,100 Dt in November through April under FGTsFGT's firm 
transportation service (FTS-2) rate schedule; and (c) daily interruptible 
transportation capacity of 20,000 Dt under FGTsFGT's interruptible 
transportation services (ITS-1) rate schedule. The firm transportation 
contract (FTS-1) expires on August 1, 2000 with the Company retaining a 
unilateral right to extend the term for an additional ten years. After the 
expiration of the primary or secondary term, Chesapeake has the right to 
first refuse to match the terms of any competing bids for the capacity. The 
firm transportation contract (FTS-2) expires on March 1, 2015. The 
interruptible transportation contract is effective until August 1, 2010 and 
month to month thereafter unless canceled by either party with thirty days 
notice.

The Florida division currently receives its gas supply from various 
suppliers. If needed, some supply is bought on the spot market; however, 
the majority is bought under the terms of two firm supply contacts with 
Natural Gas ClearinghouseDynergy Marketing and LG&E Energy Marketing.Trade and Duke Energy. Availability of gas supply to 
the Florida division is also expected to be adequate under existing 
arrangements.

Competition
Competition with Alternative Fuels. Historically, the CompanysCompany's natural gas 
distribution divisions have successfully competed with other forms of 
energy such as electricity, oil and propane. The principal consideration in 
the competition between the Company and suppliers of other sources of 
energy is price and, to a lesser extent, accessibility. All of the 
CompanysCompany's divisions have the capability of adjusting their interruptible 
rates to compete with alternative fuels.

The divisions have several large volume industrial customers that have the 
capacity to use fuel oil as an alternative to natural gas. When oil prices 
decline, these interruptible customers convert to oil to satisfy their fuel 
requirements. Lower levels in interruptible sales occur when oil prices 
remain depressed relative to the price of natural gas. However, oil prices 
as well as the prices of other fuels are subject to change at any time for 
a variety of reasons; therefore, there is always uncertainty in the 
continuing competition among natural gas and other fuels. In order to 
address this uncertainty, the Company uses flexible pricing arrangements on 
both the supply and sales side of its business to maximize sales volumes.

To a lesser extent than price, availability of equipment and operational 
efficiency are also factors in competition among fuels, primarily in 
residential and commercial settings. Heating, water heating and other 
domestic or commercial equipment is generally designed for a particular 
energy source, and especially with respect to heating equipment, the cost 
of conversion is a disincentive for individuals and businesses to change 
their energy source.

Competition within the Natural Gas Industry. FERC Order 636 enables all 
natural gas suppliers to compete for customers on an equal footing. Under 
this open access environment, interstate pipeline companies have unbundled 
the traditional components of their service -such as gas gathering, 
transportation and storage from the sale of the commodity. If they choose 
to be a merchant of gas, they must form a separate marketing operation 
independent of their pipeline operations. Hence, gas marketers have 
developed as a viable option for many companies because they are providing 
expertise in gas purchasing along with collective purchasing capabilities 
which, when combined, may reduce end-user cost.

Also resulting from an open access environment, the distribution division 
can be in competition with the interstate transmission company if the 
distribution customer is located close to the transmission companyscompany's 
pipeline. The customers at risk are usually large volume commercial and 
industrial customers with the financial resources and capability to bypass 
the distribution division. In certain situations the distribution divisions 
may adjust rates and servesservices for these customers to retain their business.

Rates and Regulation
General. ChesapeakesChesapeake's natural gas distribution divisions are subject to 
regulation by the Delaware, Maryland and Florida Public Service Commissions 
with respect to various aspects of the CompanysCompany's business, including the 
rates for sales to all of their customers in each jurisdiction. All of 
ChesapeakesChesapeake's firm distribution rates are subject to purchased gas 
adjustment clauses, which match revenues with gas costs and normally allow 
eventual full recovery of gas costs. Adjustments under these clauses 
require periodic filings and hearings with the relevant regulatory 
authority, but do not require a general rate proceeding. Rates on 
interruptible sales by the Florida division are also subject to purchased 
gas adjustment clauses.

Management monitors the rate of return in each jurisdiction in order to 
ensure the timely filing of rate adjustment applications.

Regulatory Proceedings
Maryland. In July 1995, Chesapeakes Maryland division filed an 
application withDuring the month of March 1997, the Maryland Public Service 
Commission ("MPSC") requesting a rate increase of $1,426,711 or 17.09%. The two largest 
components of the increase were attributable to environmental costs and a 
new customer information system, implemented in 1995. 

On November 30, 1995, the MPSC issuedapproved an order approving a settlement 
proposal of a $975,000 increase in annual base rates effectiveauthorizing Chesapeake to implement 
new service offerings and rate design for gas 
providedservices rendered on orand after 
DecemberApril 1, 1995. As required in the settlement of 
the rate case, the Company filed a cost of service study with the MPSC in 
June 1996. The purpose of a cost of service study was to allocate revenue 
among customer or rate classifications. The filing, which included 
proposals for restructuring sales services that more closely reflect the 
cost of serving commercial and industrial customers, the unbundling of gas 
costs from distribution system costs, revisions to sharing of 
interruptible margins between firm ratepayers and the Company and new 
services that would allow customers using more than 30,000 Ccf of gas per 
year to purchase gas from suppliers other than the Company.

After negotiations with MPSC staff and other interested parties, a 
settlement was reached on most sales service issues and the Commission 
approved a proposed order in March 1997. The settlement includes:approved changes included: (1) class revenue 
requirements and restructured sales services which provide for separate 
firm commercial and industrial rate schedules for general service, medium 
volume, large volume and high load factor customer groups; (2) unbundling 
of gas costs from distribution charges; (3) a new gas cost recovery 
mechanism, which utilizes a projected period under which the fixed cost 
portion of the gas rate will be forecasted on an annual basis and the 
commodity cost portion of the gas rate will be estimated quarterly, based 
on projected market prices; and (4) a new sharing agreement under which 
interruptible margins will continue to be shared, 90% to customers and 10% 
to the Company, but distribution costs incurred for incremental load 
additions can be recovered with carrying charges utilizing 100% of the 
incremental margin if the payback period is within three years.

At the request of the MPSC staff,Staff, consideration of the Company's proposed 
new transportation services werewas postponed until Eastern ShoresShore Natural Gas 
Company's open access filing was settled with the FERC. As mentioned 
previously, Eastern Shore Natural Gas Company became an open access 
pipeline on November 1, 1997. 

Chesapeake's Maryland division was involved in a roundtable collaborative 
process with the MPSC Staff, customer representatives, third party 
suppliers or marketers and the Maryland Office of People's Counsel during 
the last half of 1997 and the first half of 1998, developing initial 
transportation services for its commercial and industrial customers. The 
MPSC issued an order in July 1998 authorizing the Company to implement 
transportation and balancing services effective October 1, 1998 for 
commercial and industrial customers with annual consumption over 30,000 Ccf 
per year to transport customer-owned gas on the Company's distribution 
system.

Delaware. In April 1995, ChesapeakesSeptember 1998, Chesapeake's Delaware division filed an 
application with the Delaware Public Service Commission ("DPSC") requestingto propose 
certain rate design changes to its existing margin sharing mechanism which 
was approved in the Company's 1997 rate restructuring. Chesapeake filed 
this application as an alternative to a base rate increaseproceeding in order to 
provide the Company an opportunity to earn its allowed rate of $2,751,000return, 
without increasing the price of its natural gas services from the Company's 
last rate case in 1995.

The Company proposed certain rate design changes to its currently existing 
margin sharing mechanism in order to address the level of recovery of fixed 
distribution costs from the residential heating service customers and 
smaller commercial heating customers. Chesapeake proposed to modify the 
existing margin sharing thresholds to address the actual level of fixed 
distribution cost recovered from the residential and smaller commercial 
customers based on the base tariff rates established in PSC Docket No. 95-
73, Phase II. Chesapeake's base tariff rates established in the last rate 
case were designed to recover a certain amount of fixed distribution costs 
in order for Chesapeake to earn its authorized rate of return. The proposal 
increases or 14% overdecreases the current rates.margin sharing thresholds based on the 
actual level of recovery of fixed distribution costs from these respective 
customer classes as compared to the level which the base tariff rates were 
designed to recover in the last rate case.

The largest component, one-thirdCompany also proposed to change the existing margin sharing mechanism 
to take into consideration the appropriate treatment of the total requested increase, was 
attributable to projected costs associated with the remediation proposedmargins achieved by 
the Environmental Protection Agency ("EPA")addition of new interruptible customers on the sitedistribution system for 
which the Company makes capital investments to serve these customers. 
Currently, Chesapeake is required to include in its margin sharing 
calculation the margins achieved from all of its interruptible customers. 
Chesapeake does not have the opportunity to earn a return on its capital 
investments until base tariff rates are established in the context of a 
former 
coal gas manufacturing plant operatedbase rate proceeding. The Company proposes to exclude from the margin 
sharing mechanism the margins achieved from the addition of new 
interruptible customers in Dover, Delaware.order to provide the Company a reasonable 
opportunity to earn its authorized rate of return until the Company's next 
base rate proceeding.

During October 1998, the DPSC suspended the Company's tariff filing, 
pending the completion of full evidentiary hearing(s) and a final decision 
by the DPSC during 1999. During February 1999, the scheduled evidentiary 
hearing was convened to introduce the Company's testimony and exhibits, as 
well as DPSC Staff's testimony, into the record of evidence. The parties 
deferred any cross-examination in this docket until March 1999 when the 
hearing will reconvene. At this time, the Company and the DPSC agreedrespective 
parties are engaged in discussions in an effort to separatereach a settlement on 
the environmental recovery fromissues beneficial to all parties prior to the rate 
increase so each couldnext scheduled hearing. 
If a settlement cannot be addressed individually. In December 1995,reached among the DPSC approved an order authorizingparties in this docket, then 
the hearing will reconvene in March 1999 and the issues will be determined 
based on a $900,000 increase to base rates 
effective January 1,1996. 

In December 1995, the DPSC approved a recovery of environmental costs 
associated with the Dover Gas Light Site by means of a rider (supplement) 
to base rates.formal commission proceeding. The DPSC approvedmost likely would issue a 
rider effective January 1, 1996 to 
recover over five years all unrecovered environmental costs through 
September 30, 1995 offset by the deferred tax benefit of these costs. The 
deferred tax benefit equals the projected cashflow savings realized by the 
Companyfinal order in connection with a reduced income tax liability due to the 
possibility of accelerated deduction allowed on certain environmental 
costs when incurred. Each year, the rider rate will be calculated based on 
the amortization of expenses for previous years. The advantage of the 
environmental rider is that it is not necessary to file a rate case every 
year to recover expenses.

In December 1995, Chesapeakes Delaware division filed its rate design 
proposal with the DPSC to initiate Phase II of this proceeding. The 
principal objective of the filing was to prepare the Company for an 
increasingly competitive environment anticipated when Eastern Shore 
becomes an open access pipeline. This initial filing proposed new rate 
schedules for commercial and industrial sales service, individual pricing 
for interruptible negotiated contract rates, a modified purchased gas cost 
recovery mechanism and a natural gas vehicle tariff.

Indocket during May 1996, Delaware division filed its proposal relating to 
transportation and balancing services with the DPSC, which proposed that 
transportation of customer-owned gas be available to all commercial and 
industrial customers with annual consumption over 3,000 Mcf per year.or June 1999.

In February 1997, the DPSC approved an order authorizing Chesapeake to 
implement new service offerings and rate design for services rendered on 
and after March 1, 1997. The approved changes include:included: (1) restructured 
sales services which provideprovided commercial and industrial customers with 
various service classifications such as general service, medium volume, 
large volume, and high load factor services; (2) a modified purchased gas 
cost recovery mechanism which takes into consideration the unbundling of 
gas costs from distribution charges as well as charging certain firm 
service classifications different gas cost rates based on the service 
classificationsclassification's load factor; (3) the implementation of a mechanism for 
sharing interruptible, capacity release and off-system sales margins 
between firm sales customers and the Company, with changing margin sharing 
percentages based on the level of total margin;margin achieved; and (4) a 
provision for transportation and balancing services for commercial and 
industrial customers with annual consumption over 30,000 Ccf per year to 
transport customer-owned gas on the CompanysCompany's distribution system. The 
Company's Delaware division implemented these initial transportation and 
balancing services on December 1, 1997 as a result of its pipeline 
supplier, Eastern Shore Natural Gas Company, becoming an open access 
pipeline on November 1, 1997.

Florida. On August 7, 1998, the Florida Division filed an administrative 
request for approval to revise its tariff sheets to include Citrus County, 
Florida in its service territory. On August 19, 1998, we received 
notification that the tariff sheets had been approved by the PSC Staff. The 
Company has executed service agreements with several customers in the area 
and is in the process of securing franchise agreements with the cities of 
Crystal River and Inverness. The Company's approved tariff sheets became 
effective on September 10, 1998.

On July 15, 1998, the Florida Division filed a petition seeking the 
authority to implement a flexible gas service tariff. This tariff is 
designed to meet the Company's need to compete for potential customers who 
have other viable energy options and to increase load by working with 
customers with regard to specific terms and conditions of service. Approval 
of this tariff would enable the Company to provide potential and existing 
customers with flexible pricing and contract terms which would be precluded 
under our existing tariff. On October 6, 1998, the Commission voted to 
approve our Flexible Gas Service tariff. The tariff became effective upon 
approval and is now available for use in negotiations with customers at the 
sole option of the Company.

On May 7, 1998, the Company filed for approval of two transportation 
agreements with Quincy Farms and Fernlea Nurseries. Both customers are 
located in Gadsden County, Florida. The agreements provide for a 
transportation rate equal to the non-fuel rate in existence prior to the 
rate restructuring for the first two years of each contract. The majority 
of our negotiations with these two customers took place prior to the rate 
restructuring proceeding. The Company also requested modification of its 
tariff sheets to include Gadsden County in its service territory. PSC Staff 
issued its recommendation supporting the petition on June 18, 1998. The 
Commission voted to approve the contracts and tariff sheet revisions on 
June 30, 1998.

On November 26, 1997, the Florida Division filed a request with the Florida 
Public Service Commission (FPSC) in Docket No. 971559-GU, for a Limited 
Proceeding to Restructure Rates and for Approval of Gas Transportation 
Agreements. The Florida Division has entered into Gas Transportation 
Contracts with its two largest customers which resulted in retaining these 
two customers on the CompanysCompany's distribution system at rates lower than 
previously achieved. As a result of this reduction in non-fuel revenue, the 
Company has proposed in its application to restructure rates for its 
remaining customers to more closely reflect the cost of service for each 
rate class and to recover the level of revenues previously generated by the 
two Contract customers.

The CompanysCompany's restructuring proposal is revenue neutral. Approval of this 
request would not result in additional revenues to the Company; however, 
FPSC approval would enable the Company to retain its two largest customers 
while providing the Company with the opportunity to achieve its FPSC 
authorized rate of return.

FPSC Staff issued their recommendation in this docket on March 12, 1998. 
The Commission voted to approve the CompanysCompany's restructuring proposal on 
March 24, 1998. A Commission Order inon this docket is expected April 14,was issued on March 31, 
1998.

(i) (c) Propane Distribution Chesapeakesand Marketing
General
Chesapeake's propane distribution group consists of Sharp Energy, Inc. 
("Sharp Energy"), a wholly owned subsidiary of Chesapeake, its wholly owned 
subsidiary, Sharpgas, Inc. ("Sharpgas") and Tri-County Gas Company, Inc. 
("Tri-County") a wholly owned subsidiary of Chesapeake. The propane 
marketing group consists of Xeron, Inc. ("Xeron"), a wholly owned 
subsidiary of Chesapeake.

On May 30, 1998, Chesapeake acquired Xeron, a natural gas liquids trading 
company located in Houston, Texas. Xeron markets propane to a number of 
large independent and petrochemical companies, resellers, and southeastern 
retail propane companies.

On March 6, 1997, Chesapeakethe Company acquired all of the outstanding shares of Tri-County, a family-owned and 
operated propane distribution business located in Salisbury and Pocomoke, 
Maryland. The combined operations of the Company and Tri-County served 
approximately 34,00035,000 propane customers on the Delmarva Peninsula and 
delivered approximately 2726 million retail and wholesale gallons of propane 
during 1997.1998.

The propane distribution business is affected by many factors such as 
seasonality, the absence of price regulation and competition among local 
providers. The propane marketing business is affected by wholesale price 
volatility and the demand and supply of propane at a wholesale level.

Propane is a form of liquefied petroleum gas which is typically extracted 
from natural gas or separated during the crude oil refining process. 
Although propane is gaseous at normal pressures, it is easily compressed 
into liquid form for storage and transportation. Propane is a clean-
burningclean-burning 
fuel, gaining increased recognition for its environmental superiority, 
safety, efficiency, transportability and ease of use relative to 
alternative forms of energy. Propane is sold primarily in suburban and 
rural areas which are not served by natural gas pipelines. Demand is 
typically much higher in the winter months and is significantly affected by 
seasonal variations, particularly the relative severity of winter 
temperatures, because of its use in residential and commercial heating.

Adequacy of Resources
Sharp Energy and Tri-County purchase propane primarily from suppliers, 
including major domestic oil companies and independent producers of gas 
liquids and oil. Supplies of propane from these and other sources are 
readily available for purchase by the Company. Supply contracts generally 
include minimum (not subject to a take-or-pay premiums) and maximum 
purchase provisions.

Sharp Energy and Tri-County use trucks and railroad cars to transport 
propane from refineries, natural gas processing plants or pipeline 
terminals to the CompanysCompany's bulk storage facilities. From these facilities, 
propane is delivered in portable cylinders or by "bobtail" trucks, owned 
and operated by the Companies, to tanks located at the customerscustomer's premises.

Xeron has no physical storage facilities or equipment to transport propane; 
however, they contract for storage and pipeline capacity to facilitate the 
sale of propane on a wholesale basis.

Competition
Sharp Energy and Tri-County compete with several other propane distributors 
in their service territories, primarily on the basis of service and price, 
emphasizing reliability of service and responsiveness. Competition is 
generally local because distributors located in close proximity to 
customers incur lower costs of providing service. Propane competes with 
both fuel oil and electricity as an energy source. 
Propane competes with fuel oil based on its cleanliness and environmental 
advantages. Propanesource, because it is also typically less expensive 
than both fuel oil 
and electricity, based on equivalent BTU value. Since natural gas has 
historically been less expensive than propane, propane is generally not 
distributed in geographic areas serviced by natural gas pipeline or 
distribution systems.

Xeron competes against various marketers that may have significantly great 
resources and are able to obtain price or volumetric advantages over Xeron.

The CompanysCompany's propane distribution and marketing activities are not subject 
to any federal or state pricing regulation. Transport operations are 
subject to regulations concerning the transportation of hazardous materials 
promulgated under the Federal Motor Carrier Safety Act, which is 
administered by the United States Department of Transportation and enforced 
by the various states in which such operations take place. Propane 
distribution operations are also subject to state safety regulations 
relating to "hook-up" and placement of propane tanks.

The CompanysCompany's propane operations are subject to all operating hazards 
normally associated with the handling, storage and transportation of 
combustible liquids, such as the risk of personal injury and property 
damage caused by fire. The Company carries general liability insurance in 
the amount of $35,000,000 per occurrence, but there is no assurance that 
such insurance will be adequate.

(i) (d) Advanced Information Services
ChesapeakesGeneral
Chesapeake's advanced information services segment is comprised of United 
Systems, Inc. ("USI") and Capital Data Systems, Inc. ("CDS"), both wholly 
owned subsidiaries of the Company. CDS provided programming support for 
application software, until the first quarter of 1997, at which time it 
disposed of substantially all of its assets.

USI is an Atlanta-based company that primarily provides support for users 
of PROGRESS(TM),PROGRESST, a fourth generation computer language and Relational Database 
Management System. USI offers consulting, training, software development 
"tools", web development and customer software development for its client 
base, which includes many large domestic and international corporations. 

Competition
The advanced information services businesses face significant competition 
from a number of larger competitors having substantially greater resources 
available to them than the Company. In addition, changes in the advanced 
information services businesses are occurring rapidly, which could 
adversely impact the markets for the CompanysCompany's products and services.

(i) (e) Other Subsidiaries
Skipjack, Inc. ("Skipjack") and Chesapeake Investment Company ("Chesapeake 
Investment"), are wholly owned subsidiaries of Chesapeake Service Company. 
Skipjack owns and leases to affiliates, two office buildings in Dover, Delaware.Delaware to 
affiliates. Chesapeake Investment is a Delaware affiliated investment 
company.

On March 30, 1998, the Company acquired Sam Shannahan Well Co., based in 
Salisbury, Maryland, operating as Tolan Water Service ("Tolan"). Tolan was 
a privately owned company serving 3,000 customers on the Delmarva Peninsula 
with divisions supporting residential, commercial and industrial water 
treatment.

On March 6, 1997, in connection with the acquisition of Tri-County, the 
Company acquired Eastern Shore Real Estate, Inc. ("ESR"), which became a 
wholly owned subsidiary of Chesapeake Service Company. ESR owns and leases 
office buildings to affiliates and external companies.

(ii) Seasonal Nature of Business
Revenues from the CompanysCompany's residential and commercial natural gas sales 
and from its propane distribution activities are affected by seasonal 
variations, since the majority of these sales are to customers using the 
fuels for heating purposes. Revenues from these customers are accordingly 
affected by the mildness or severity of the heating season. 

(iii) Capital Budget
A discussion of capital expenditures by business segment is included in 
Item 7 under the heading "Liquidity"Management Discussion and Analysis - Liquidity 
and Capital Resources".

(iv) Employees
The CompanyChesapeake has 397456 employees, including 114165 in natural gas distribution nine in natural gasand 
transmission, 131135 in propane distribution, and 637 in propane marketing, 81 in 
advanced information services.services and 25 in water conditioning. The remaining 
8043 employees are considered general and administrative and include officers 
of the Company, and 
marketing, engineering, treasury, accounting, data processing, planning,information technology, human 
resources and other administrative personnel. The acquisition of Tri-CountyTolan 
Water Service added 4325 employees, towhile the total number of employees of the 
Company.Xeron acquisition added 7 
employees.

Item 2. Properties
(a)  General
The Company owns offices and operates facilities in the following locations: 
Pocomoke, Salisbury, Cambridge, and Princess Anne, Maryland; Dover, Seaford, 
Laurel and Georgetown, Delaware; and Winter Haven, Florida, andFlorida. Chesapeake rents 
office space in Dover, Delaware; Plant City, Florida; Chincoteague and Belle 
Haven, Virginia; Easton and Pocomoke, Maryland; Detroit, Michigan; Houston, 
Texas and Atlanta, Georgia. In general, the properties of the Company are 
adequate for the uses for which they are employed. Capacity and utilization of 
the CompanysCompany's facilities can vary significantly due to the seasonal nature of 
the natural gas and propane distribution businesses.

(b)  Natural Gas Distribution
Chesapeake owns over 542576 miles of natural gas distribution mains (together 
with related service lines, meters and regulators) located in its Delaware and 
Maryland service areas, and 469474 miles of such mains (and related equipment) in 
its Central Florida service areas. Chesapeake also owns facilities in Delaware 
and Maryland for propane-air injection during periods of peak demand. A portionPortions 
of the properties constituting ChesapeakesChesapeake's distribution system are encumbered 
pursuant to ChesapeakesChesapeake's First Mortgage Bonds.

(c)  Natural Gas Transmission
Eastern Shore owns approximately 271273 miles of transmission lines extending 
from Parkesburg, Pennsylvania to Salisbury, Maryland. Eastern Shore also owns 
three compressor stations located in Delaware City, Delaware,Delaware; Daleville, 
Pennsylvania and Bridgeville, Delaware. The Delaware City compressor facility 
and associated piping are needed to stabilize capacity on Eastern ShoresShore's 
system as a result of steadily declining inlet pressures at the Hockessin 
interconnect with Transcontinental Gas Pipe Line Corporation.Transco. The Daleville station is used to increase Columbia 
supply pressures to match Transco supply pressures, and to increase Eastern 
ShoresShore's pressures in order to serve Eastern ShoresShore's firm customerscustomers' demands, 
including those of ChesapeakesChesapeake's Delaware and Maryland divisions. The 
Bridgeville station is being used to provide increased pressures required to 
meet demands on the system.

(d)  Propane Distribution and Marketing
Sharpgas and Tri-County own bulk propane storage facilities with an aggregate 
capacity of approximately 1.9 million gallons at 3332 plant facilities in 
Delaware, Maryland and Virginia, located on real estate they either own or 
lease. Xeron has no physical storage facilities or equipment to transport 
propane.

Item 3. Legal Proceedings
(a)  General
The Company and its subsidiaries are involved in certain legal actions and 
claims arising in the normal course of business. The Company is also involved 
in certain legal and administrative proceedings before various governmental 
agencies concerning rates. In the opinion of management, the ultimate 
disposition of these proceedings will not have a material effect on the 
consolidated financial position of the Company.

(b)  Environmental
(a)
Dover Gas Light Site
In 1984, the State of Delaware notified the Company that a parcel of land it 
purchased in 1949 from Dover Gas Light Company, a predecessor gas company, 
contained hazardous substances. The State also asserted that the Company is 
responsible for any clean-up and prospective environmental monitoring of the 
site. The Delaware Department of Natural Resources and Environmental Control 
("DNREC") investigated the site and surroundings, finding coal tar residue and 
some ground-water contamination.

In October 1989, the Environmental Protection Agency Region III ("EPA") listed 
the Dover Sitesite on the National Priorities List under the Comprehensive 
Environmental Response, Compensation and Liability Act ("CERCLA" or 
"Superfund"). At that time under CERCLA, both the State of Delaware and the 
Company were named as potentially responsible parties ("PRPs") for clean-up of 
the site.

The EPA issued the site Record of Decision ("ROD") dated August 16, 1994. The 
remedial action selected by the EPA in the ROD addressed the ground-water 
contamination with a combination of hydraulic containment and natural 
attenuation. Remediation selected for the soil at the site was to meet 
stringent cleanup standards for the first two feet of soil and less stringent 
standards for the soil below two feet. The ROD estimated the costs of selected 
remediation of ground-water and soil at $2.7 million and $3.3 million, 
respectively. 

In May 1995, EPA issued an order to the Company under section 106 of CERCLA 
(the "Order"), which required the Company to fund or implement the ROD. The 
Order was also issued to General Public Utilities Corporation, Inc. ("GPU"), 
which both EPA and the Company believe is liable under CERCLA. Other PRPs such 
as the State of Delaware were not ordered to perform the ROD. EPA may seek 
judicial enforcement of its Order, as well as significant financial penalties 
for failure to comply. Although notifying EPA of objections to the Order, the 
Company agreed to comply. GPU informed EPA that it did not intend to comply 
with the Order. 

In March 1995, the Company commenced litigation against the State of Delaware 
for contribution to the remedial costs being incurred to carry out the ROD. In 
December of 1995, this case was dismissed without prejudice based on a 
settlement agreement between the parties (the "Settlement"). Under the 
Settlement, the State agreed toto: support the CompanysCompany's proposal to reduce the 
soil remedy for the site, described below, tobelow; contribute $600,000 toward the cost 
of implementing the ROD and to reimburse the EPA for $400,000 in oversight costs. 
The Settlement is contingent upon a formal settlement agreement between EPA 
and the State of Delaware. Upon satisfaction of all conditions of the 
Settlement, the litigation will be dismissed with prejudice.

In June 1996, the Company initiated litigation against GPU for contribution to 
the remedial costs incurred by Chesapeake in connection with complying with 
the ROD. At this time, management cannot predict the outcome of the litigation 
or the amount if any, of proceeds to be received.received, if any.

In July 1996, the Company began the design phase of the ROD, on-site pre-
design and investigation. A pre-design investigation report ("the report") was 
filed in October 1996 with the EPA. The report, which required EPA approval, 
provided up to date status on the site, which the EPA used to determine if the 
remedial design selected in the ROD was still the appropriate remedy.

In the report, the Company proposed a modification to the soil clean-up remedy 
selected in the ROD to take into account an existing land use restriction 
banning future development at the site. In April of 1997, the EPA issued a 
fact sheet stating that the EPA was considering the proposed modification. The 
fact sheet included an overall cost estimate of $5.7 million for the proposed 
modified remedy and a new overall cost estimate of $13.2 million for the 
remedy selected in the ROD. On August 28, 1997, the EPA issued a Proposed Plan 
to modify, with respect to soil remediation only, the current clean-up plan 
that would involve:involve the following three elements: (1) excavation ofand 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; and (4) use of institutional 
controls that would restrict future development of the Site.lot. The overall estimated clean-up cost of the Sitesite under the 
proposed plan was $4.2 million ($1.5 million for soil remediation and $2.7 
million for ground-water remediation) as compared to EPAsthe ROD cleanup estimate 
of the current clean-up plan at $13.2 million.$6.0 million ($3.3 million for soil remediation and $2.7 million for 
ground-water remediation). In January 1998, the EPA issued a revised ROD Amendment, 
which modified the soil remediation to conform to the proposed plan and 
included the estimated clean-
upsoil clean-up costs of $4.2 million.

During the fourth quarter of 1998 the Company completed the first element of 
the soil remediation at the Dover site at a cost of $450,000. Over the next 
twelve to eighteen months the Company will finalize the remaining two elements 
of the soil remediation and initiate the ground-water remedial activities. 

The Company's independent consultants have prepared preliminary cost estimates 
of two potentially acceptable alternatives to complete the ground-water 
remediation activities at the site. The costs range from a low of $390,000 in 
capital and $37,000 per year of operating costs for 30 years for natural 
attenuation to a high of $4.0 million in capital and $500,000 per year in 
operating costs for 30 years for a pump and treat system. A decision by the 
EPA as to the most appropriate ground-water remediation method is likely in 
1999. The capital costs necessary to begin ground-water remediation are 
expected to be incurred over the next twelve to eighteen months.

The Company cannot predict which ground-water remediation method will be 
selected by the EPA and accordingly, has accrued $2.1 million at December 31, 
1998 for the Dover site, as well as 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 remedition. The $1.5 million represents the 
low end of the ground-water remedy estimates described above.  As of December 
31, 1997, the Company had accrued both a liability and a regulatory asset of 
$4.2 million. The Company is currently engaged in investigations related to 
additional parties who may be 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.

The Company adjusted its accrued liability recorded with respect to the Dover 
Site to $4.2 million. This amount reflects the EPAs estimate, as stated in 
the ROD issued in 1998 for remediation of the site according to the ROD. The 
recorded liability may be adjusted upward or downward as the design phase 
progresses and the Company obtains construction bids for performance of the 
work. The Company has also recorded a regulatory asset of $4.2 million, 
corresponding to the recorded liability.

Management believes that in addition to the $600,000 expected to be 
contributed by the State of Delaware under the Settlement, the Company will be 
equitably entitled to contribution from other responsible parties for a 
portion of the expenses to be incurred in connection with the remedies 
selected in the ROD. Management also believesThe Company expects that the amounts not so contributedit will be recoverableable to recover 
actual costs incurred (exclusive of carrying costs), which are not recovered 
from other responsible parties, through the ratemaking process in accordance 
with the Companys 
rates.existing environmental cost recovery rider provisions described 
below. 

As of December 31, 1997,1998, the Company has incurred approximately $5.0$6.6 million 
in costs relating to environmental testing and remedial action studies. In 
1990, the Company entered into settlement agreements with a number of 
insurance companies resulting in proceeds to fund actual environmental costs 
incurred over a five to seven-year period. In December 1995, the Delaware Public 
Service Commission, authorized recovery of all unrecovered environmental costcosts 
incurred by a means of a rider (supplement) to base rates, applicable to all 
firm service customers. The costs, exclusive of carrying costs, would be 
recovered through a five-year amortization offset by the deferred tax benefit 
associated with those environmental costs. The deferred tax benefit equals the 
projected cashflowcash flow savings realized by the Company in connection with a 
reduced income tax liability due to the possibility of accelerated deduction 
allowed on certain environmental costs when incurred. Each year a new rider 
rate is calculated to become effective December 1. The rider rate is based on 
the amortization of expenditures through September of the filing yearsyear plus 
amortization of expenses from previous years. The advantage of the rider is 
that it is not necessary to file a rate case every year to recover expenses 
incurred. As of December 31, 1997,1998, the unamortized balance and amount of 
environmental costs not included in the rider, effective January 1, 1998 was 
$2.11999 were 
$2.5 million and $190,000,$679,000, respectively. With the rider mechanism established, 
it is managementsmanagement's opinion that these costs and any future cost, net of the 
deferred income tax benefit, will be recoverable in rates.

(b) Salisbury Town Gas Light Site
In cooperation with the Maryland Department of the Environment ("MDE"), the 
Company has completed assessment construction and has begun remediation of the Salisbury manufactured gas plant site. The assessment determinedsite, 
determining that there was localized contamination of ground-water. A remedial design report 
was submitted to MDE in November 1990 and included a proposal to monitor, 
pump and treat any contaminated ground-water on-site. Through negotiations 
with the MDE, the remedial action work plan was revised with final approval 
from MDE obtained in early 1995. The remediation process for ground-water was 
revised from pump-and-treat to Air Sparging and Soil-Vapor Extraction, 
resulting in a substantial reduction in overall costs.contamination. During 1996, 
the Company completed construction and began the Air Sparging and Soil-Vapor 
Extraction remediation procedures at the 
Salisbury site andprocedures. Chesapeake has been reporting the 
remediation and monitoring results to the Maryland Department of the 
Environment on an ongoing basis.basis since 1996.

The cost of remediation is estimated to range from $140,000 to $190,000at $136,000 per year for operating 
expenses.expenses for five years. Based on these estimated costs, the Company recorded 
both a liability and a deferred regulatory asset of $665,000$600,000 on December 31, 
1997,1998, to cover the CompanysCompany's projected remediation costs for this site. The liability payout for this site is expected to be over a five-
year period. As of 
December 31, 1997,1998, the Company has incurred approximately $2.4$2.5 million for 
remedial actions and environmental studies and has charged such costs to 
accumulated depreciation. In January 1990, the Company entered into settlement 
agreements with a number of insurance companies resulting in proceeds to fund 
actual environmental costs incurred over a three to five-
yearfive-year period beginning 
in 1990. The final insurance proceeds were requested and received in 1992. In 
December 1995, the Maryland Public Service Commission approved recovery of all 
environmental cost incurred through September 30, 1995 less amounts previously 
amortized and insurance proceeds. The amount approved for a 10-year 
amortization was $964,251. Of the $2.4$2.5 million in costs reported above, 
approximately $597,000$770,000 has not been recovered through insurance proceeds or 
received ratemaking treatment. It is managementsmanagement's opinion that these costs 
incurred and future costs incurred, if any, will be recoverable in rates.

(c)

Winter Haven Coal Gas Site
In May 1996, the Company filed an Air Sparging and Soil Vapor Extraction Pilot 
Study Work Plan for the Winter Haven site with the Florida Department of 
Environmental Protection ("FDEP"). The Work Plan described the CompanysCompany's 
proposal to undertake an Air Sparging and Soil Vapor Extraction ("AS/SVE") 
pilot study to evaluate at the site. After discussions with the FDEP, the 
Company filed a modified AS/SVE Pilot Study Work Plan, scope of work to 
complete the site assessment activities and a report describing a limited 
sediment investigation performed recently. The Company will beis awaiting FDEPsFDEP's 
comments to the modified Work Plan. It is not possible to determine whether 
remedial action will be required by FDEP and, if so, the cost of such 
remediation.

The companyCompany has spent and received ratemaking treatment of approximately 
$678,000$697,000 on these investigations as of September 30, 1997.December 31, 1998. The Company has been 
allowed by the Florida Public Service Commission to continue to accrue for 
future environmental costs. At September 30, 1997,December 31, 1998, the Company had $432,000$501,000 
accrued. It is managementsmanagement's opinion that future costs, if any, will be 
recoverable in rates.

Item 4. Submission of Matters to a Vote of Security Holders
None

Item 10. Executive Officers of the Registrant
Information pertaining to the Executive Officers of the Company is as follows:

Ralph J. Adkins (age 55)56) Mr. Adkins is Chairman of the Board and Chief 
Executive Officer of Chesapeake. 
He has served as Chairman of the Board since August 1997. Previously, Mr. 
Adkins served as Chairman of the Board and Chief Executive Officer, since August 1997. Prior to holding his 
present position, Mr. Adkins served as 
President and Chief Executive Officer, President and Chief Operating 
Officer, Executive Vice President, Senior Vice President, Vice President 
and Treasurer of Chesapeake. Mr. Adkins is also Chairman and Chief Executive Officer of Chesapeake Service 
Company, and Chairman and Chief Executive Officer of Sharp Energy, Inc., Tri-County Gas Company, Inc., Chesapeake 
ServiceInvestment Company, Xeron, Inc., Sam Shannahan Well Co. and Eastern Shore 
Natural Gas Company, all wholly owned subsidiaries of Chesapeake. He has 
been a director of Chesapeake since 1989.

John R. Schimkaitis (age 50)51) Mr. Schimkaitis is President and Chief 
OperatingExecutive Officer. He has served as Presidentin this position since August 1997.January 1, 1999. 
Mr. Schimkaitis is also Chief Executive Officer of Chesapeake Service 
Company, Sharp Energy, Inc., Tri-County Gas Company, Chesapeake Investment 
Company, Xeron, Inc., Sam Shannahan Well Co. and Eastern Shore Natural Gas 
Company, all wholly owned subsidiaries of Chesapeake. He previously served 
as President and Chief Operating Officer, Executive Vice President, Chief 
Financial Officer, Senior Vice President, Treasurer and Assistant 
Secretary. From 1983 to 1986, Mr. Schimkaitis was Vice President of Cooper 
& Rutter, Inc., a consulting firm providing financial services to the 
utility and cable industries. He was appointed as a director of Chesapeake 
in February 1996.

Michael P. McMasters (age 39)40) Mr. McMasters is Vice President, Chief 
Financial Officer and Treasurer of Chesapeake Utilities Corporation. He has 
served as Vice President, Chief Financial Officer and Treasurer since 
December 1996. He previously served as Vice President of Eastern Shore, 
Director of Accounting and Rates and Controller. From 1992 to May 1994, Mr. 
McMasters was employed as Director of Operations Planning for Equitable Gas 
Company.

Stephen C. Thompson (age 37)38) Mr. Thompson is Vice President of the Natural 
Gas Operations, as well as Vice President of Chesapeake Utilities 
Corporation. He has served as Vice President since May 1997. He has served 
as President, Vice President, Manager, Director of Gas Supply and 
Marketing, and Superintendent of Eastern Shore and Regional Manager for the 
Florida distribution Operations.

Philip S. Barefoot (age 51) Mr. Barefoot joined Chesapeake as Division 
Manager of Florida Operations in July 1988. In May 1994, he was elected 
Vice President of Chesapeake Utilities Corporation. Prior to joining 
Chesapeake, he was employed by Peoples Natural Gas Company where he held 
the positions of Division Sales Manager, Division Manager and Vice 
President of Florence Operations.


Jeremy D. West (age 48) Mr. West joined Chesapeake as President of Sharp 
Energy in June 1990. In May 1992 he was elected Vice President of 
Chesapeakes Propane Operations and in May 1997, he was promoted to Vice 
President of Strategic Planning and Acquisitions. Prior to joining 
Chesapeake, he was employed by Columbia Propane Corporation, a subsidiary 
of Columbia Gas System, as Vice President of Marketing, and later, 
President of Columbia Propane Corporation. He has also serviced as 
Regional Manager of Suburban Propane.

                                    PART II

Item 5. Market for the RegistrantsRegistrant's Common Stock and Related Security Holder 
Matters
(a)  Common Stock Price Ranges, Common Stock Dividends and Price Ranges:Shareholder 
Information:

The following table sets forth sale priceCompany's Common Stock is listed on the New York Stock Exchange under the 
symbol "CPK". The high, low and dividend informationclosing prices of Chesapeake's Common Stock 
and dividends declared per share for each calendar quarter during the years 
December 31,1998 and 1997 and 1996:were as follows:
- -------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                  Dividends
                                                                  Declared
     Quarter Ended:Ended         High          Low          Close       Per Share
- -------------------------------------------------------------------------------------------------------------------------------------------------------
1998     
     March 31            $20.500       $18.250       $18.375       $0.2500
     June 30              18.500        17.125        17.625        0.2500
     September 30         18.500        16.500        17.938        0.2500
     December 31          18.500        17.000        18.938        0.2500
- ----------------------------------------------------------------------------
1997     
     March 31            $18.000       $16.500       $17.375       $0.2425
     June 30              17.500        16.000        17.000        0.2425
     September 30         18.500        16.250        18.375        0.2425
     December 31          21.750        18.375        20.500        0.2425
- ---------------------------------------------------------------------------
                  1996
              March 31  $17.000  $14.500  $16.750  $0.2325
               June 30   17.875   15.875   16.000   0.2325
          September 30   17.750   15.125   17.500   0.2325
           December 31   18.000   16.375   16.875   0.2325
- ---------------------------------------------------------------------------

The common stock of----------------------------------------------------------------------------
In addition to the dividends declared by the Company, trades on the New York Stock Exchange under 
the symbol "CPK".

(b) Approximate number of holders of common stock as of December 31, 1997:
                                      Number of Shareholders
          Title of Class                    of Record       
    ---------------------------       ----------------------
   Common stock, par value $.4867             2,178

(c) Dividends:
During the years ended December 31, 1997 and 1996, cash dividendsXeron paid by 
Chesapeake have been declared each quarter, in the amounts set forth in the 
table above. During 1996 and 1995, Tri-County paidtotal
dividends of $79,000 and 
$592,000, respectively.$27,000 during 1998.

Indentures to the long-term debt of the Company and its subsidiaries contain a 
restriction that the Company cannot, until the retirement of its Series I Bonds,
pay any dividends after December 31, 1988 which exceed the sum of $2,135,188
plus consolidated net income recognized on or after January 1, 1989. As of
December 31, 1997,1998, the amounts available for future dividends permitted by the
Series I covenant are $14.6$14.7 million.

(d)At December 31, 1998, there were approximately 2,271 shareholders of record. 

(b)  Issuance of shares:
On March 6, 1997,May 29, 1998, in conjunction with the acquisition of Tri-County Gas 
Company,Xeron, Inc., the Company
issued 639,000475,000 shares of Companycommon stock to William 
P. SchneiderJ. Phillip Keeter, Earnest Allen Jr.
and James R. SchneiderPatrick E. Armand in reliance on the private placement exemption provided by
Section 4(2)4(c) of the Securities Act of 1933 and Regulation D, thereunder.
On March 31, 1998, in conjunction with the acquisition of Sam Shannahan Well
Co., the Company issued 25,000 shares of company stock to Deshield J. Shannahan
and Joyce C. Shannahan in reliance on the private placement exemption provided 
by Section 4(c) of the Securities Act of 2933 and Regulation D, thereunder.


Item 6. Selected Financial Data - ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- (dollars in thousands except stock data) For the Years Ended December 31, 1998 1997 1996 1995 1994 (1) 1993 (1) - ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- Operating Operating revenues $122,775 $130,213 $111,796 $98,572 $85,873$183,569 $222,489 $260,102 $235,285 $ 98,572 Operating income $8,559 $10,110 $10,067 $7,227 $6,311 Income before cumulative effect of change in accounting principle $5,683 $7,605 $7,594 $4,460 $3,914 Cumulative effect of change in accounting principle $58$ 8,441 $ 8,666 $ 10,099 $ 9,962 $ 7,227 Net income $5,683 $7,605 $7,594 $4,460 $3,972$ 5,303 $ 5,868 $ 7,782 $ 7,696 $ 4,460 - ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- Balance Sheet Gross plant $143,345 $133,001 $119,837$152,991 $144,251 $134,001 $120,746 $110,023 $100,330 Net plant $99,517 $93,570 $84,589 $75,313 $69,794$104,266 $ 99,879 $ 94,014 $ 85,055 $ 75,313 Total assets $137,379 $136,046 $123,339$145,234 $145,719 $155,786 $130,998 $108,271 $100,988 Long-term debt, net $38,226 $28,984 $31,619 $24,329 $25,682$ 37,597 $ 38,226 $ 28,984 $ 31,619 $ 24,329 Common stockholders' equity $50,336 $47,537 $42,582 $37,063 $34,878$ 56,356 $ 53,656 $ 50,699 $ 45,587 $ 37,063 Capital expenditures $11,381 $14,837 $12,887 $10,653 $10,064$ 12,650 $ 13,471 $ 15,399 $ 12,887 $ 10,653 - ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- Common Stock Basic earningsEarnings per share: Income before cumulative effect of change in accounting principle $1.27 $1.72 $1.75 $1.23 $1.10 Cumulative effect of change in accounting principle $0.02 Net income $1.27 $1.72 $1.75 $1.23 $1.12Basic $ 1.05 $ 1.18 $ 1.58 $ 1.59 $ 1.23 Diluted earnings per share: Income before cumulative effect of change in accounting principle $1.24 $1.67 $1.70 $1.20 $1.08 Cumulative effect of change in accounting principle $0.02 Net income $1.24 $1.67 $1.70 $1.20 $1.10$ 1.04 $ 1.17 $ 1.55 $ 1.56 $ 1.20 Average shares outstanding 4,472,087 4,412,137 4,336,4315,060,328 4,972,086 4,912,136 4,836,430 3,628,056 3,551,932 Cash dividends per share $0.97 $0.93 $0.90 $0.88 $0.86$ 1.00 $ 0.97 $ 0.93 $ 0.90 $ 0.88 Book value per share $11.18 $10.71 $9.77 $10.15 $9.76$ 11.06 $ 10.72 $ 10.26 $ 9.38 $ 10.15 Common equity/Total capitalization 56.80% 62.10% 57.40%59.98% 58.40% 63.63% 59.05% 60.37% 57.59% Return on equity 11.29% 16.00% 17.80%9.41% 10.94% 15.35% 16.88% 12.03% 11.39% - ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- Other Number of Employees 397 386 383employees 456 429 418 415 320 326 Number of Registered Stockholdersregistered shareholders 2,271 2,178 2,213 2,098 1,721 1,743 Heating Degree Days 4,418degree days 3,704 4,430 4,717 4,5934,594 4,398 4,705 Heating Degree Daysdegree days (10-year average) 4,5774,579 4,596 4,586 4,564 4,588 - ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- (1) 1994 and 1993 havehas not been restated to include the business combinationcombinations with Tri-County Gas Company, Inc., Tolan Water Service or Xeron, Inc.
[GRAPH APPEARS HERE] Growth in Book Value Compared to Dividend Growth Book Dividends Year Value Per Share ---- ----- --------- 1994 $10.15 $0.88 1995 $9.37 $0.90 1996 $10.26 $0.93 1997 $10.72 $0.97 1998 $11.06 $1.00 [GRAPH APPEARS HERE] Earnings Compared to Heating Degree Days Heating Degree Year Earnings Days ---- -------- ------- 1994 $1.23 4,398 1995 $1.59 4,594 1996 $1.58 4,717 1997 $1.18 4,430 1998 $1.05 3,704 Item 7. ManagementsManagement's Discussion and Analysis of Financial Condition and Results of Operations Liquidity and Capital Resources The capital requirements of Chesapeake Utilities Corporation ("Chesapeake" or "the Company") reflect the capital-intensive nature of its business and are attributable principally to the construction program and the retirement of outstanding debt. The Company relies on cash generated from operations and short-term borrowing to meet normal working capital requirements and temporarily finance capital expenditures. During 1997,1998, net cash provided by operating activities was $11.0 million, cash used by investing activities was $12.5 million and cash used by financing activities were $12.3 million, $12.4 million and $1.5 million, respectively.was $737,000. The Board of Directors has authorized the Company to borrow up to $20.0 million from various banks and trust companies. As of December 31, 1997,1998, Chesapeake had fourthree unsecured bank lines of credit, totaling $34.0$28.0 million, for short-term cash needs to meet seasonal working capital requirements and to temporarily fund portions of its capital expenditures. The outstanding balances of short-term borrowing at December 31, 1998 and 1997 and 1996 were $7.6$11.6 million and $12.7$7.6 million, respectively. In 1998, Chesapeake used cash provided by operations and short-term borrowing to fund capital expenditures. During 1997, Chesapeakethe Company used cash provided by operations and the issuance of long-term debt to fund capital expenditures and reduce short-term borrowing. During 1996, the Company used cash provided by operating activities1998, 1997 and short-term borrowing to fund the capital expenditures and increases in working capital requirements. During 1997, 1996, and 1995, capital expenditures were approximately $12.8$12.0 million, $14.8$12.4 million and $12.9$14.0 million, respectively. Chesapeake has budgeted $15.6$22.7 million for capital expenditures during 1998.1999. This amount includes $8.7$10.5 million and $2.7$8.6 million for natural gas distribution and transmission, respectively, $1.8 million for propane distribution respectively; $3.1 million for natural gas transmission, $395,000and marketing, $336,000 for advanced information services and $632,000$1.5 million for general plant. The natural gas and propane distribution expenditures are for expansion and improvement of facilities in existing service territories. Natural gas transmission expenditures are for improvement and expansion of the pipeline system.system, specifically, the construction of eight miles of pipeline to provide additional firm transportation capacity to two existing customers. The propane expenditures are to support customer growth and the replacement of older equipment. The advanced information services expenditures are for computer hardware, software and related equipment. General expenditures are for building improvements, computer software and hardware. Financing for the 19981999 construction program is expected to be provided from short-term borrowing and cash from operations. The construction program is subject to continuous review and modification. Actual construction expenditures may vary from the above estimates due to a number of factors including inflation,acquisition opportunities, changing economic conditions, customer growth in existing areas, regulation salesand new growth and the cost and availability of capital.opportunities. Chesapeake has budgeted $2.8$2.2 million for environmental related expenditures during 19981999 and expects to incur additional expenditures in future years, (see Note J to the Consolidated Financial Statements), a portion of which may need to be financed through external sources.sources (see Note L to the Consolidated Financial Statements). Management does not expect such financing to have a material adverse effect on the financial position or capital resources of the Company. Capital Structure As of December 31, 1997,1998, common equity represented 56.8%60.0% of permanent capitalization, compared to 62.1%58.4% in 19961997 and 57.4%63.6% in 1995.1996. Chesapeake remains committed to maintaining a sound capital structure and strong credit ratings to provide the financial flexibility needed to access the capital markets when required. This commitment, along with adequate and timely rate relief for the CompanysCompany's regulated operations, helps to ensure that Chesapeake will be able to attract capital from outside sources at a reasonable cost. The achievement of these objectives will provide benefits to customers and creditors, as well as to the CompanysCompany's investors. Financing Activities On March 31, 1998, Chesapeake acquired Sam Shannahan Well Co., Inc., operating as Tolan Water Service ("Tolan" or "Tolan Water") in exchange for 25,000 shares of Chesapeake's common stock. Tolan provides water conditioning services to approximately 3,000 residential, commercial and industrial customers on the Delmarva Peninsula. All of the outstanding common stock of Xeron, Inc. ("Xeron") was acquired by Chesapeake on May 29, 1998. Xeron markets propane to a number of large independent oil and petrochemical companies, resellers, and southeastern retail propane companies. Four hundred seventy-five thousand shares of the Company's common stock were exchanged in the transaction. On March 6, 1997, the Company acquired all of the outstanding common stock of Tri-County Gas Company, Inc. ("Tri-County") and associated properties. Tri- County distributes propane to both retail and wholesale customers on the Delmarva Peninsula. The transaction was effected through the exchange of 639,000 shares of the Company's common stock. Each of these business combinations was accounted for as a pooling of interests. During 1998, Chesapeake repaid approximately $1.1 million of long-term debt. In December 1997, Chesapeake finalized a private placement of $10 million of 6.85% Senior Notes due January 1, 2012. The Company used the proceeds to repay a portion of its short-term borrowing.Debt repayments during 1997 totaled $3.1 million. In October 1995, the Company finalized a private placement of $10 million of 6.91% Senior Notes due1996, Chesapeake repaid $881,000 in 2010. The Company used the proceeds to retire $4.1 million of the 10.85% Senior Notes of Eastern Shore Natural Gas Company, the Companys natural gas transmission subsidiary ("Eastern Shore") originally due in 2003. The remaining proceeds were used to reduce short-term borrowing. The Company issued no long-term debt in 1996. During 1997, the Company repaid approximately $3.1 million of long-term debt, compared to $823,000 and $5.4 million in 1996 and 1995, respectively. The increase in debt payments for 1997 resulted from the payoff of $2.2 million of debt assumed in the pooling of interests with Tri-County Gas Company, Inc. ("Tri-County"). On March 6, 1997, the Company acquired all of the outstanding common stock of Tri-County and associated properties. Tri-County distributes propane to both retail and wholesale customers on the peninsula. The transaction was effected through the exchange of 639,000 shares of the Companys common stock and was accounted for as a pooling of interests.debt. Chesapeake issued 32,925, 32,169 33,926 and 38,66033,926 shares of common stock in connection with its Automatic Dividend Reinvestment and Stock Purchase Plan during the years of 1998, 1997 1996 and 1995,1996, respectively. Results of Operations Net income for 19971998 was $5,682,946$5.3 million as compared to $7,604,915$5.9 million for 1997 and $7.8 million for 1996. The decrease in net income is primarily related to warmer temperatures in the CompanysCompany's northern service territory, whichpartially offset by a one-time reduction in pension costs of $1.2 million resulting from Chesapeake's 1998 restructuring of the Company's retirement benefits plans. Temperatures in 1998, based upon heating degree days, were on average,19% warmer than normal, 16% warmer than 1997 and 21% warmer than 1996. Temperatures in 1997 were approximately 6% warmer than those experienced in 1996. Normal weather conditions are calculated from the most recent ten years of temperature data measured in heating degree days. The warmer weather resulted in a reduction in volumes sold by both the natural gas distribution and propane distribution segments. The lower gas volumes contributed to the reduction in Earnings Before Interest and Taxes ("EBIT") for both distribution segments as shown in the table below.
EARNINGS BEFORE INTEREST AND TAXES (in thousands):
- ------------------------------------------------------------------------------------------------------- Increase/ Increase/------------------------------------------------------------------------------------------------ Increase Increase For the Years Ended December 31, 1998 1997 (decrease) 1997 1996 (decrease) 1996 1995 (decrease) - ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- EBIT by Business Segment: Natural gas distribution $5,498 $7,167 ($1,669) $7,167 $4,728 $2,439$ 4,697 $ 5,498 $ (801) $ 5,498 $ 7,167 $(1,669) Natural gas transmission 4,117 3,721 396 3,721 2,458 1,263 2,458 6,083 (3,625) Propane distribution 1,064 2,815 (1,751) 2,815 2,252 563and marketing 971 1,158 (187) 1,158 2,669 (1,511) Advanced information services 1,316 1,046 270 1,046 1,056 (10) 1,056 1,061 (5) Other 558 561 (3) 561 (32) 593522 671 (149) 671 633 38 - ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- Total EBIT $11,887 $14,057 ($2,170) $14,057 $14,092 ($35) =======================================================================================================$11,623 $12,094 $ (471) $12,094 $13,983 $(1,889) ================================================================================================
Chesapeakes 1996 net incomeNatural Gas Distribution The $801,000 reduction in EBIT from 1997 to 1998 was $7,604,915,primarily the result of a reduction in gross margin, as comparedindicated in the following table. Exclusive of the expense reductions related to $7,593,506 for 1995. Although net incomethe restructuring of the Company's retirement benefits plans, the decrease in EBIT of $1.5 million or 27% was relatively unchanged,attributable to warmer than normal weather conditions. The reduction in gross margin of $832,000 from the contributionprior year is primarily due to net income from each business segment differedthe negative impact of warmer temperatures on volumes sold, partially offset by customer growth during the two-year period. Natural gas distribution EBIT was higheryear. After taking into account customer growth of 4% for residential and commercial customers in 1996 duethe northern service territory, overall volumes declined by 12% for these customer classifications. Under normal temperatures and customer usage, the 4% customer growth is estimated to rate increases placedgenerate an additional margin of $550,000 annually within this segment. Also contributing to the decline in effect in two of the three service territories during 1995. EBIT for the propane distribution segment increased due to greater volumes sold due to temperatures being 3% colder than in 1995. Natural gas transmissions contribution decreased due to amargin is an 11% reduction in volumes sold and transported to industrial interruptible customers during 1996. In addition, 1995 net income includes a one-time benefit from a settlementin the Florida service territory. Although operating expenses remained relatively unchanged, specific expense categories such as marketing, building rent, legal costs and depreciation and amortization increased. These were offset by decreases in pension expense, administrative fees associated with the Federal Energy Regulatory Commission (see Note K to the Consolidated Financial Statements). Natural Gas Distributionpension plan, compensation and outside services. The reduction in EBIT of $1.7 million from 1996 to 1997 is primarily related to a decline in total gross margin, as indicated in the following table, coupled with an overall increase in expenses. The reduction in gross margin earned on volumes sold is primarily the result of a 3%4% decline in volumes sold to residential and commercial customers and a 5% decrease in volumes sold and transported to industrial interruptible customers in ChesapeakesChesapeake's Florida service territory. The reduction in volumes sold to residential and commercial customers was directly related to warmer temperatures, primarily during the first quarter of 1997. Operations and maintenanceOperating expenses increased $633,000 and $108,000, respectively. Compensation,$996,000 due to increases in compensation, regulatory commission expenses, and costs related to data processing and billable service revenue contributed to the increase in operations expenses. Arevenue. In addition, there was a greater level of maintenance to the gas pipeline system resulted in an increase in maintenance expenses. The $2.4 million rise in EBIT from 1995 to 1996 resulted from an increase in gross margin earned on sales of natural gas in two of Chesapeakes three service territories, offset by an overall increase in expenses. The $4.0 million increase in gross margin was partiallyand increased depreciation and amortization due to a full year of rate increases, which went into effect in 1995. Maryland operations rates became effective during December and interim rates were in effect during June of 1995 for Delaware operations. In addition, colder temperatures contributed to the 20% increase in deliveries to residential and commercial customers located in Chesapeakes northern service territory. The $583,000 increase in operations expenses was primarily the result of higher compensation, benefits, data processing costs, bad debts and regulatory expenses. Plant additionsadditional plant being placed in service during 1996 resulted in higher depreciation expense. In addition, other taxes increased by $460,000 or 23%, partially due to the inclusion of certain state revenue related taxes, which were previously included as reductions to revenue.
service. NATURAL GAS DISTRIBUTION GROSS MARGIN SUMMARY (in thousands)
- ------------------------------------------------------------------------------------------------------- Increase/ Increase/----------------------------------------------------------------------------------------------- Increase Increase For the Years Ended December 31, 1998 1997 (decrease) 1997 1996 (decrease) 1996 1995 (decrease) - ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ Revenues: Gas sold $50,466 $54,205 $ (3,739) $54,205 $52,290 $1,915 $52,290 $42,784 $9,506$ 1,915 Gas transported 2,875 3,061 (186) 3,061 2,991 70 2,991 2,618 373 Gas marketed 11,683 18,419 (6,736) 18,419 19,382 (963) 19,382 8,555 10,827 Other 401 275 126 275 193 82 193 168 25 - ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ Total Revenues $65,425 $75,960 $(10,535) $75,960 $74,856 $1,104 $74,856 $54,125 $20,731 =======================================================================================================$ 1,104 =============================================================================================== Cost of Sales:* Gas sold $32,529 $35,507 $ (2,978) $35,507 $32,846 $2,661 $32,846 $26,789 $6,057$ 2,661 Gas marketed 11,508 18,233 (6,725) 18,233 19,117 (884) 19,117 8,410 10,707 - ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ Total Cost of Sales $44,037 $53,740 $ (9,703) $53,740 $51,963 $1,777 $51,963 $35,199 $16,764 =======================================================================================================$ 1,777 =============================================================================================== Gross Margin: Gas sold $17,937 $18,698 $ (761) $18,698 $19,444 ($746) $19,444 $15,995 $3,449$ (746) Gas transported 2,875 3,061 (186) 3,061 2,991 70 2,991 2,618 373 Gas marketed 175 186 (11) 186 265 (79) 265 145 120 Other 401 275 126 275 193 82 193 168 25 - ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ Total Gross Margin $21,388 $22,220 $ (832) $22,220 $22,893 ($673) $22,893 $18,926 $3,967 =======================================================================================================
$ (673) =============================================================================================== * Transportation service does not have an associated cost of sales.
Natural Gas Transmission The CompanysEarnings Before Interest and Taxes of the Company's natural gas transmission segment Eastern Shore, which becameincreased $396,000 from 1997 to 1998. This was the result of an increase in gross margin of $468,000 offset by an $87,000 increase in operating expenses. Exclusive of the expense reduction related to the restructuring of the Company's retirement benefits plans, EBIT increased $221,000 or 6%. Gross margin increased under a full year of open access pipeline on November 1, 1997, had anoperations, as well as the full year's effect of both a rate increase and the implementation of new services which were both effective in 1997. Operating expenses were higher due to increases in regulatory commission expenses, legal fees, pipeline system maintenance and depreciation. These costs were offset by declines in pension costs, compensation and administrative fees associated with the pension plan. The transmission segment's EBIT ofincreased $1.3 million forfrom 1996 to 1997. The rise in EBIT iswas partially attributable to a rate increase and an increase in firm services implemented in 1997, as well as an overall reduction in expenses. The rate increase is designed to generate additional gross margin of approximately $1.2 million annually. Also contributing to the increase in EBIT were additional revenues generated by the increase in transportation services that were effective with the implementation of open access. On an annual basis, the additional services will generate revenue of approximately $1.3 million. Operations expenseOperating expenses decreased by $143,000$124,000 or 5%3%, primarily consisting ofdue to reduced compensation, relocation costs, property insurance and property insurance. Maintenancepipeline system maintenance. These reductions were offset by higher depreciation expenses were also lower due to reduced maintenance required during the year on the gas pipeline system. Capitalgenerated by capital additions during the year resulted in higher depreciation expense. The $3.6 million reduction in 1996 EBIT was primarily due to lower gross margin on sales to industrial customers. The gross margin decreased due to a 67% reduction in volumes delivered, primarily reflecting lower deliveries to two industrial interruptible customers -- a municipal power plantyear. Propane Distribution and a methanol plant. The methanol plant shut down operations on April 1, 1996. During 1996 and 1995, deliveries to the methanol and power plants contributed approximately $284,000 and $2.4 million, respectively to gross margin. As interruptible customers, they had no ongoing commitment, contractual or otherwise, to purchase natural gas fromMarketing In May 1998, the Company acquired Xeron, Inc., a wholesale marketer of propane, expanding Chesapeake's propane operations (see Note AB to the Consolidated Financial Statements). The $109,000EBIT contribution of the propane distribution and marketing segment declined by $187,000 from 1997 to 1998 due to a decrease in gross margin which was partially offset by a decline in operating expenses. Exclusive of the expense reduction related to the restructuring of the Company's retirement benefits plans, EBIT decreased $463,000 or 40%. The propane distribution operation was negatively affected by the warmer temperatures realized in 1998, resulting in a decline in sales volumes of 8%, after taking into account a 3% increase in operating expenses reflects increased compensation and benefit related expenses. Depreciation increasedcustomer growth. Somewhat offsetting this volume-related decline in margin was an increase of 6% in the margin earned per gallon delivered as compared to the prior year. In addition, the lack of volatility in the wholesale propane market resulted in a reduction to propane marketing margins due to plant placed in service. With Eastern Shores conversionfewer gallons being marketed. Wholesale marketing is a high volume, low margin business. During 1998, marketing revenues declined by $18.1 million or 18% while margins declined by $250,000 or 16%. Operating expenses declined primarily due to open access, all of its customers will have the opportunitycompensation linked to transport gas over its system at rates regulated by the FERC. The variability in Eastern Shores margins, historically driven by the sales to industrial customers, will dramatically decrease, as capacity reservationXeron's earnings, pension expense and administrative fees for transportation services will drive prospective margins. It is expected that in the future, Eastern Shores EBIT will tend to be more stable and resemble a fully regulated return. Taking the 1997 rate increase, revenues associated with additional capacity and lowerthe pension plan. The Company estimates that the warm temperatures experienced in 1998 reduced EBIT by $1.9 million when compared to normal temperatures. In addition, margins on services provided to industrial customers into account, the Company expects gross margin during 1998 to be between $7.9 and $8.2 million (see Cautionary Statement). Comparatively, gross margin for the past three years has been $7.9 million, $6.7 million and $10.2 million for 1997, 1996 and 1995, respectively. Propane Distribution In 1997, Chesapeake integrated the operations of Tri-County and the Companys existing propane distribution operations. Like Chesapeakes existing propane operations, Tri-Countys earnings are heavily dependent upon weather conditions.were lower than historical norms, further reducing EBIT by approximately $1.6 million. The reduction in 1997 EBIT of $1.8$1.5 million from 1996 to 1997 was primarily due to a reduction in gross margin earned by the distribution operation, partially offset by a reduction in operating expenses. Gross marginDistribution margins decreased due to an 11%a 14% reduction in sales volumes coupled with a 13% lower margin per gallon sold. The decline in sales volumes is directly related to the warmer temperatures which averaged 6% warmer than the prior year.those experienced in 1996. Furthermore, during the first quarter of 1997, temperatures were 14% warmer than normal. The Company normally sells a high percentage of its annual volume during this period. The reduction in margin per gallon sold was also the result of abnormally warmer temperatures. As temperatures warmed during the first quarter, demand decreased and supply-prices declined rapidly. Duemarketing operation contributed an additional $240,000 to the low cost of wholesale-supply, retail prices declined, thereby reducing margins. Operations expenses decreased $554,000 or 7% primarily in the areas of compensation, delivery related costs, advertising and legal fees. Maintenance expenses declined primarily in equipment and structures. Depreciation and amortization expenses declined $477,000 or 28% primarily the result of a non-compete agreement, which became fully amortized in November of 1996. The increase in 1996 EBIT of $563,000 is primarily attributable to a rise in gross margin partially offset by higher expenses. Gross margin was higher due to a 12% increasereduction in volumes sold and a slight increase in margin earned per gallon sold. The increases are directly related to temperatures which were 3% colder than those in 1995. Operating expenses increased $1.3 million or 19% in 1996 primarily due to compensation delivery related costs, benefits and outside services. Maintenance expenses increased in the areas of propane storage facilities, equipment and structures.expense. Advanced Information Services The results of the advanced information services segment consisted primarily of those of United Systems, Inc. ("USI"), due. Exclusive of the expense reductions related to the downsizingrestructuring of Chesapeakes North Carolina operationsthe Company's retirement benefits plans, EBIT contributed by USI increased 15% or $156,000 from 1997 to 1998. Due to increased opportunities in early 1997.areas such as website development, training and consulting, gross margin increased 38%, or $1.5 million from 1997 to 1998. Although the EBIT contribution of this segment has remained virtually unchanged from 1996 to 1997, USIsUSI's gross margin has increased by $970,000 or 34%. Operating expenses increased due to the opening of a new office in Detroit, Michigan and the expansion of staff training and marketing efforts to position USI to be able to provide new services and for future growth of current services. Since the rise in operating costs offset most of the growth in gross margin, EBIT remained constant. Although the EBIT contributed by the advanced information segment was relatively unchanged from 1995 to 1996, EBIT contributed by USI increased $268,000. This was mostly offset by a reduction in EBIT contributed by the North Carolina operation as they ceased to provide facilities management services beginning in early 1996. Income Taxes Operating income taxes decreased $245,000 in 1998 due to the reduction in EBIT. Income taxes also decreased in 1997 decreased $619,000 due to athe reduction in EBIT. This was partially offset by thea one-time expense of $318,000 recorded in 1997 to establish the deferred income tax liability forin connection with the 1997 acquisition of Tri-County. Prior to 1997, Tri-County was a subchapter S Corporation for income tax reporting; therefore, no deferred income taxes were recorded on its balance sheet. In addition, the CompanysThe 1996 and 1995 restated financial statements do not include any income tax expense for Tri-Countythe acquisition due to its subchapter S status during those years.that year. Other Non-operating income was $428,000, $458,000$241,000, $545,000 and $391,000$688,000 for the years 1998, 1997 1996 and 1995,1996, respectively. The decrease in 19971998 is primarily dueattributable to one-time pre-tax gains of $452,000 and $300,000 on the sale of fixed assets included in 1997 and 1996, respectively. Also contributing to the 1998 decline is a reduction in interest income partially offset by the gain on the sale of fixed assets. The increase in 1996 is primarily the result of a rise in interest income earned partially offset by a reduction in the gain on sales of fixed assets.from $288,000 for 1997 to $188,000 for 1998. Environmental Matters The Company continues to work with federal and state environmental agencies to assess the environmental impact and explore corrective action at several former gas manufacturing plant sites (see Note JL to the Consolidated Financial Statements). The Company believes that any future costs associated with these sites will be recoverable in rates. 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 (see Note G to the Consolidated Financial Statements for annual maturities of consolidated long- term debt). All of Chesapeake's long-term debt is fixed rate debt and was not entered into for trading purposes. The carrying value of the Company's long- term debt was $38.1 million at December 31, 1998. The fair value was $41.6 million at December 31, 1998, 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 December 31, 1998, the wholesale propane marketing operation was a party to natural gas liquids ("NGL") forward contracts, primarily propane contracts, with various third parties. These contracts require that the wholesale propane marketing operation purchase or sell NGL at a fixed price at fixed future dates. At expiration, the contracts are settled by the delivery of NGL to the respective party. The wholesale propane marketing operation also enters into futures contracts that are traded on the New York Mercantile Exchange. In certain cases, the futures contracts are settled by the payment of a net amount equal to the difference between the current market price of the futures contract and the original contract price. The forward and futures contracts are entered into for trading and wholesale marketing purposes. The wholesale propane marketing operation is subject to commodity price risk on their open positions to the extent that NGL market prices deviate from fixed contract settlement amounts. Market risks associated with the trading of futures and forward contracts are monitored daily for compliance with Chesapeake's Risk Management Policy, which includes volumetric limits for open positions. In order to manage exposures to changing market prices, open positions are marked to market and reviewed by oversight officials on a daily basis. Additionally, the Risk Management Committee reviews periodic reports on market and credit risk, approves any exceptions to the Risk Management policy (within the limits established by the Board of Directors) and authorizes the use of any new types of contracts. Listed below is quantitative information on the forward and futures contracts at December 31, 1998. All of the contracts mature during 1999.
- ---------------------------------------------------------------------- Quantity Estimated Weighted Average At December 31, 1998 in gallons Market Prices Contract Prices - ---------------------------------------------------------------------- Forward Contracts Sale 20,647,200 $.2125 - $.2550 $0.2569 Purchase 24,263,400 $.2125 - $.2550 $0.2424 Futures Contracts Sale 4,200,000 $.2125 - $.2550 $0.2194 Purchase 714,000 $.2125 - $.2550 $0.2110 - ----------------------------------------------------------------------
Estimated market prices and weighted average contract prices are in dollars per gallon. The Year 2000 Chesapeake is dependent upon a variety of information systems to operate efficiently and effectively. In order to address the impact of the yearYear 2000 ("Year 2000" or "Y2K") on its many information systems, Chesapeake is in the process of evaluating and remediating any deficiencies. The Company has segregated theCompany's evaluation of its readiness and the potential impact of the yearYear 2000 on its systems have been separated into twofive components: primary internal applications, embedded systems, vendors/suppliers, end-user computing systems and other applications. The Companyscustomers. - - Chesapeake's primary internal applications include company maintained software systems for its financial information; natural gas customer information and billing; and propane customer information, billing and delivery. OtherThe Company completed testing of these three applications in 1998 and deems them Year 2000 ready. - - Embedded systems include systems for services such as telephone, systemthe supervisory control and data acquisition ("SCADA") system for the pipeline, as well asnatural gas transmission segment, telecommunications, metering and other vendorsfacilities related systems. With respect to the three primary applications, Chesapeake has updated its propane customer information, billingcurrently identified 64 vendors that support the Company's embedded systems. Chesapeake expects to finalize the review for additional vendors and/or embedded systems by the end of the first quarter of 1999. The Company has prioritized these vendors into three potential impact classifications: 15 high impact vendors, supporting items such as the SCADA system; 19 medium impact vendors, supporting systems such as telecommunications; and delivery30 low impact vendors, supporting items such as copiers and postage meters. The Company has been testing these systems and has contacted all of the vendors currently identified, with 85% responding. Of the vendors contacted, a total of 20 vendors - four high impact, six medium impact and ten low impact vendors - indicated they were Y2K ready. The Company has been either working with vendors to reach a state of readiness with the applicable systems or has changed to vendors or systems that are Y2K ready. The SCADA system, the most critical embedded system, is scheduled to a year 2000 compliant version. This systembe Y2K ready during the second quarter of 1999. Chesapeake will be tested furthercontinue to insure compliance during 1998. With respect to the other two primary applications, Chesapeake has conducted initial evaluationsfollow up with vendors that are not Y2K ready and estimates that the cost of any remediation will not be significant. Each application will be tested during 1998. Chesapeake has developed an inventory of other applications and is in the process of developing plans to contact its vendors, test and remediateconsider alternate providers as necessary to the extent necessary.available. - - Chesapeake has identified 101 vendors/suppliers that supply the Company with products and services that impact various elements of the Company's business. The Company has classified these vendors into three impact classifications: 27 high impact vendors such as suppliers of natural gas or propane; 31 medium impact vendors such as regional communication vendors; and 43 low impact vendors. The Company has requested a Y2K status statement from each of these vendors. The Company has received 72 responses, which indicated that nine medium impact and 13 low impact vendors were Y2K ready. The Company will continue to follow up with vendors that are not Y2K ready and will consider alternate providers as necessary to the extent available. - - End-user computing systems are upgraded periodically through the Company's ongoing replacement program. Almost all of the Company's personal computers are currently Year 2000 ready. Additional personal computers will be replaced during the first quarter of 1999. Chesapeake's local area network is Year 2000 ready as is all PC-based and network-based software. - - Customers, primarily industrial interruptible natural gas customers, must ensure that their plant controls are Year 2000 ready for their alternative fuel. The Company has identified 107 interruptible customers and will contact each of them by the end of the first quarter of 1999. The Company will take into account the results of the survey in developing the natural gas contingency plan. The Company believes the most significant potential risks with respect to its internal operations, those over which it has direct control, are its ability to: (1) use electronic devices to control and operate its natural gas delivery systems; (2) maintain continuous operation of its computer systems; (3) render timely bills to its customers; and (4) enforce tariffs and contracts applicable to interruptible customers. The Company relies on the producers of natural gas and suppliers of interstate transportation capacity to deliver natural gas to the Company's natural gas delivery systems. The Company is also dependent on propane producers, suppliers and railroad facilities to receive propane supply. Chesapeake is also dependent on various suppliers of communication services. Should any of these critical vendors fail, the impact of any such failure could become a significant challenge to the Company's ability to meet the demands of its customers, to operate its delivery systems and to communicate with its customers. It could also have a material adverse financial impact, including but not limited to, lost sales revenues, increased operating costs and claims from customers related to business interruptions. The Company's Year 2000 evaluation process is addressing each of these risks and the required remediation. The Company is developing its contingency plan for the Year 2000, which will address various alternatives and will include assessing a variety of scenarios that could emerge and require the Company to react. Chesapeake expects to have its contingency plan finalized by the end of the second quarter of 1999. The contingency plan will continue to be modified as warranted by changing events. The costs incurred as of December 31, 1998 in addressing Year 2000 issues have been immaterial. The Company has estimated costs of $270,000 to replace and/or remediate specific embedded systems. However, until the Company has completed further analysis of the impact of the Year 2000 issue on its embedded systems, vendors/suppliers, end-user computing systems, customers and contingency planning; it is unable to estimate any additional costs it may incur as a result of its efforts. Presently, no Year 2000-impacted internal applications or embedded systems have been identified that cannot be upgraded or modified within acceptable time frames. The target date for completion of all Year 2000-related activities remains at mid-1999. Competition Historically, the CompanysCompany's natural gas operations have successfully competed with other forms of energy such as electricity, oil and propane. The principleprincipal considerations have been price, and to a lesser extent, accessibility. As a result of Eastern ShoresShore's recent conversion to open access, the Company expects to be subject to competitive pressures from other sellers of natural gas. With open access transportation services available on Eastern ShoresShore's system, third party suppliers will compete with Chesapeake to sell gas to the local distribution companies and the end usersend-users on Eastern ShoresShore's system. Eastern Shore has shifted from providing sales service to providing transportation and contract storage services. The CompanysCompany's natural gas distribution operationsoperation located in DelawareMaryland began to offer transportation services to certain industrial customers in December 1997. Chesapeake expects that during 1998,1998. During 1997, the distribution operationsoperation located in Maryland willDelaware also beginbegan offering transportation services. The Company expects to expand the availability of transportation services to additional customers in the future. Since theThe Florida distribution operations haveoperation has been open to certain industrial customers since 1994, the Company has gained experience in operating in an open access environment.1994. The Company established a natural gas brokering and suppliessupply operation in Florida to compete for these customers. The Company is evaluating whether to establish similar services in our northern service territory. Both the propane distribution and the advanced information services businesses face significant competition from a number of larger competitors with substantially greater resources available to them than those of the Company. In addition, in the advanced information services business, changes are occurring rapidly which could adversely affect the markets for the CompanysCompany's services. Inflation Inflation affects the cost of labor and other goods and services required for operation, maintenance and capital improvements. TheWhile the impact of inflation has lessened in recent years, except for the effect on purchasednatural gas costs.prices are subject to rapid fluctuations. These costsfluctuations are passed on to customers through the purchased gas adjustment clausecost recovery mechanism in the CompanysCompany's tariffs. To help cope with the effects of inflation on its capital investments and returns, the Company seeks rate relief from regulatory commissions for regulated operations while monitoring the returns of its unregulated business operations. Cautionary Statement Statements made herein and elsewhereWe make statements in this Form 10-K, whichreport that are not historical fact, areconsidered forward-looking statements. In connection withstatements within the "Safe Harbor" provisionsmeaning of the Private Securities Litigation Reform Act of 1995, Chesapeake1995. 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, Year 2000 readiness, regulatory approvals, market risk associated with the Company's new propane marketing operation, the competitive position of the Company and other matters. It is providing the following cautionary statementimportant to identifyunderstand 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 anticipated in forward-looking statements made herein or otherwise by or on behalf of the Company. A number of factors and uncertainties make it difficult to predict the effect on future operating results of Eastern Shore operating as an open access pipeline, relative to historical results. While open access eliminates industrial interruptible sales margins, such sales have varied widely from year to year and, in future years, might have made a less significant contribution to earnings even in the absence of open access. Additionally, there are a number of uncertainties, including future open access proceedings and the effects of competition, which will affect whether the Company will be able to provide economical gas marketing, transportation andforward-looking statements. These factors include, among other services. In addition, a number of factors and uncertainties affecting other aspects of the Companys business could have a material impact on earnings. These include:things: - - the seasonality and temperature sensitivity of ChesapeakesChesapeake's natural gas and propane businesses (that is, the Company's earnings vary depending on the season and, in the winter months, how cold the weather is); - - consumption patterns of the Company's existing and expected customers in these businesses; - - the wholesale price of propane and market movements in these prices, which affect both the margins in the Company's propane business and the profitability of the propane marketing operation; - - the relative price of alternative energy sources, andto which some of Chesapeake's customers have access; - - the effects of competition on both unregulated and natural gas sales, now thatregulated businesses; - - the Company operatesability of the transmission segment to attract new customers in an open access environment. There are also uncertainties relative toenvironment; - - the impactability of the yearCompany's new and planned facilities to generate expected revenues; - - the Company's ability to obtain the rate relief requested from utility regulators and the timing of that rate relief; and - - the Company's ability to identify and address Year 2000 onissues successfully, in a timely manner and at a reasonable cost, as well as the information systemsability of the Company, itsCompany's vendors, suppliers, and other third parties.service providers and customers to successfully address their own Year 2000 issues in a timely manner. Item 7a. Quantitative and Qualitative Disclosures About Market Risk. Information related to quantitative and qualitative disclosure about market risk is included in Item 7 under the heading "Management's Discussion and Analysis - Market Risk". Item 8. Financial Statements and Supplemental Data REPORT OF INDEPENDENT ACCOUNTANTS ________ To the Stockholders of Chesapeake Utilities Corporation We have auditedIn our opinion, the consolidated financial statements and consolidatedlisted in the index appearing under item 14(a)(1) of this Form 10-K present fairly, in all material respects, the financial statement schedulesposition of Chesapeake Utilities Corporation and Subsidiariesits subsidiaries at December 31, 1998 and 1997, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1998, in conformity with generally accepted accounting principles. In addition, in our opinion, the consolidated financial statement schedule listed in Itemthe index appearing under item 14(a)(2) of this Form 10-K.10-K presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. These financial statements and financial statement schedulesschedule are the responsibility of the Companys Management. OurCompany's management; our responsibility is to express an opinion on these financial statements and the financial statement schedulesschedule based on our audits. We conducted our audits of these statements in accordance with generally accepted auditing standards. Those standards which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includesstatements, assessing the accounting principles used and significant estimates made by Management, as well asmanagement, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In ourthe opinion the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Chesapeake Utilities Corporation and Subsidiaries as of December 31, 1997 and 1996, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 1997 in conformity with generally accepted accounting principles. In addition, in our opinion, the consolidated financial statement schedules referred to above, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information required to be included therein. We have also previously audited, in accordance with generally accepted standards, the consolidated balance sheets and statements of capitalization as of December 31, 1995, 1994 and 1993, and the related consolidated statements of income, cash flows, stockholders equity, and income taxes for each of the two years in the period ended December 31, 1994 (none of which are presented herein) and we expressed unqualified opinions on those consolidated financial statements. In our opinion, the information set forth in the Financial Highlights included in the Selected Financial Data for each of the five years in the period ended December 31, 1997, appearing on page 17 is fairly stated in all material respects in relation to the financial statements from which it has been derived. COOPERS & LYBRAND L.L.P. Baltimore, Marylandabove. PricewaterhouseCoopers LLP Washington, D.C. February 12, 1999
CONSOLIDATED STATEMENTS OF INCOME - -------------------------------------------------------------------------------------------------------------------- For the Years Ended December 31, 1998 1997 1996 - -------------------------------------------------------------------------------------------------------------------- Operating Revenues $ 183,568,795 $ 222,489,264 $ 260,102,200 Cost of Sales 136,019,813 175,191,090 207,655,979 Gross Margin 47,548,982 47,298,174 52,446,221 - -------------------------------------------------------------------------------------------------------------------- Operating Expenses Operations 23,669,514 23,686,774 26,485,013 Maintenance 2,123,456 2,068,114 2,550,197 Depreciation and amortization 6,109,202 5,475,417 5,605,930 Other taxes 4,024,129 3,974,097 3,822,200 Income taxes 3,181,599 3,427,308 3,884,377 - -------------------------------------------------------------------------------------------------------------------- Total operating expenses 39,107,900 38,631,710 42,347,717 - -------------------------------------------------------------------------------------------------------------------- Operating Income 8,441,082 8,666,464 10,098,504 - -------------------------------------------------------------------------------------------------------------------- Other Income Interest income 188,394 288,339 248,632 Other income, net 97,005 533,704 642,238 Income taxes (44,145) (276,888) (202,239) - -------------------------------------------------------------------------------------------------------------------- Total other income 241,254 545,155 688,631 - -------------------------------------------------------------------------------------------------------------------- Income Before Interest Charges 8,682,336 9,211,619 10,787,135 - -------------------------------------------------------------------------------------------------------------------- Interest Charges Interest on long-term debt 2,966,043 2,387,641 2,434,321 Amortization of debt expense 123,335 119,401 120,345 Other 290,372 836,965 450,536 - -------------------------------------------------------------------------------------------------------------------- Total interest charges 3,379,750 3,344,007 3,005,202 - -------------------------------------------------------------------------------------------------------------------- Net Income $ 5,302,586 $ 5,867,612 $ 7,781,933 =================================================================================================================== Earnings Per Share of Common Stock : Basic $ 1.05 $ 1.18 $ 1.58 Diluted $ 1.04 $ 1.17 $ 1.55
Consolidated Statements of Comprehensive Income - -------------------------------------------------------------------------------------------------------------------- For the Years Ended December 31, 1998 1997 1996 - -------------------------------------------------------------------------------------------------------------------- Net Income $ 5,302,586 $ 5,867,612 $ 7,781,933 Unrealized gain on marketable securities, net of income taxes 566,472 258,274 111,437 - -------------------------------------------------------------------------------------------------------------------- Total Comprehensive Income $ 5,869,058 $ 6,125,886 $ 7,893,370 =================================================================================================================== See accompanying notes
CONSOLIDATED BALANCE SHEETS Assets - ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- At December 31, 1998 1997 1996 - ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- Property, Plant and Equipment Natural gas distribution $74,769,458 $69,853,054$ 81,844,066 $ 75,564,462 Natural gas transmission 35,388,440 33,856,873 30,655,492 Propane distribution 26,920,403 25,279,217and marketing 27,287,807 27,091,102 Advanced information services 1,087,910 841,757 1,003,850 Other plant 6,161,631 5,414,249 Gas plant acquisition adjustment 795,004 795,0047,382,965 6,896,899 - ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- Total property, plant and equipment 143,345,126 133,000,866152,991,188 144,251,093 Less: Accumulated depreciation and amortization (43,827,961) (39,430,738)(48,725,412) (44,371,890) - ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- Net property, plant and equipment 99,517,165 93,570,128104,265,776 99,879,203 - ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- Investments, at fair market value 4,165,194 2,721,443 2,263,068 - ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- Current Assets Cash and cash equivalents 555,198 2,213,5292,598,084 4,829,176 Accounts receivable (less allowance for uncollectibles of $302,513 and $331,775 in 1998 and $392,412 in 1997, and 1996, respectively) 13,087,999 14,488,94414,861,255 16,415,922 Materials and supplies, at average cost 1,380,120 1,284,8761,728,513 1,424,312 Propane inventory, at average cost 2,288,516 2,345,5311,787,038 2,436,200 Storage gas prepayments 2,152,605 2,926,618 3,731,680 Underrecovered purchased gas costs 1,552,265 1,673,389 2,192,170 Income taxes receivable 849,623 112,942 Prepaid expenses 1,060,911 942,359344,311 766,178 Deferred income taxes - 247,487 158,010Prepaid expenses 1,596,595 1,107,825 - ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- Total current assets 24,069,861 27,470,04126,620,666 31,827,107 - ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- Deferred Charges and Other Assets Environmental regulatory assets 2,700,000 4,865,073 6,650,088 Environmental expenditures net3,418,166 2,372,929 1,778,348 Other deferred charges and intangible assets 3,832,389 4,314,2354,063,811 4,053,068 - ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- Total deferred charges and other assets 11,070,391 12,742,67110,181,977 11,291,070 - ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- Total Assets $137,378,860 $136,045,908 ==============================================================================================
$145,233,613 $145,718,823 ================================================================================================== See accompanying notes
CONSOLIDATED BALANCE SHEETS Capitalization and Liabilities - ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- At December 31, 1998 1997 1996 - ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- Capitalization Stockholders' equity Common stock $2,191,792 $2,160,628$ 2,479,019 $ 2,435,142 Additional paid-in capital 19,819,604 18,745,71824,192,188 22,581,463 Retained earnings 28,218,763 26,957,04828,892,384 28,533,145 Less: Unearned compensation related to restricted stock awarded (71,041) (190,886) (364,529) Unrealized gain on marketable securities, netAccumulated other comprehensive income 863,344 296,872 38,598 - ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- Total stockholders' equity 50,336,145 47,537,46356,355,894 53,655,736 Long-term debt, net of current portion 37,597,000 38,226,000 28,984,368 - ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- Total capitalization 88,562,145 76,521,83193,952,894 91,881,736 - ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- Current Liabilities Current portion of long-term debt 582,500 3,078,489520,000 1,051,241 Short-term borrowing 7,600,000 12,700,000borrowings 11,600,000 7,600,010 Accounts payable 12,451,570 14,426,98311,070,642 16,397,691 Refunds payable to customers 636,153 357,041 353,734 Accrued interest 553,444 784,533 741,768 Dividends payable 1,273,446 1,092,168 883,621Deferred income taxes 56,100 - Other accrued expenses 3,807,484 3,733,233liabilities 3,754,231 3,829,497 - ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- Total current liabilities 26,675,296 35,917,82829,464,016 31,112,181 - ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- Deferred Credits and Other Liabilities Deferred income taxes 13,260,282 11,490,358 9,798,676 Deferred investment tax credits 766,802 821,617 876,432 Environmental liability 2,700,000 4,865,073 6,650,088 Accrued pension costs 1,754,715 1,866,6611,536,304 2,338,201 Other liabilities 3,209,656 4,414,3923,553,315 3,209,657 - ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- Total deferred credits and other liabilities 22,141,419 23,606,24921,816,703 22,724,906 - ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- Commitments and Contingencies (Notes JL and K)M) Total Capitalization and Liabilities $137,378,860 $136,045,908 ==============================================================================================
$145,233,613 $145,718,823 ================================================================================================== See accompanying notes
CONSOLIDATED STATEMENTS OF INCOME - ----------------------------------------------------------------------------------------------------------- For the Years Ended December 31, 1997 1996 1995 - ----------------------------------------------------------------------------------------------------------- Operating Revenues $122,774,593 $130,213,409 $111,795,778 Cost of Sales 77,764,830 82,226,644 65,616,368 - ----------------------------------------------------------------------------------------------------------- Gross Margin 45,009,763 47,986,765 46,179,410 - ----------------------------------------------------------------------------------------------------------- Operating Expenses Operations 21,831,194 22,230,425 20,612,585 Maintenance 2,041,043 2,504,894 2,477,454 Depreciation and amortization 5,396,975 5,504,637 5,802,884 Other taxes 3,853,954 3,689,748 3,194,673 Income taxes 3,327,627 3,947,056 4,025,274 - ----------------------------------------------------------------------------------------------------------- Total operating expenses 36,450,793 37,876,760 36,112,870 - ----------------------------------------------------------------------------------------------------------- Operating Income 8,558,970 10,110,005 10,066,540 - ----------------------------------------------------------------------------------------------------------- Other Income Interest income 239,543 249,509 191,845 Other income, net 405,156 177,045 239,687 Income taxes (216,988) (83,739) (105,280) Allowance for equity funds used during construction 115,434 65,198 - ----------------------------------------------------------------------------------------------------------- Total other income 427,711 458,249 391,450 - ----------------------------------------------------------------------------------------------------------- Income Before Interest Charges 8,986,681 10,568,254 10,457,990 - ----------------------------------------------------------------------------------------------------------- Interest Charges Interest on long-term debt 2,347,369 2,392,458 2,282,247 Amortization of debt expense 119,401 120,345 109,399 Other 922,110 514,856 566,320 Allowance for borrowed funds used during construction (85,145) (64,320) (93,482) - ----------------------------------------------------------------------------------------------------------- Total interest charges 3,303,735 2,963,339 2,864,484 - ----------------------------------------------------------------------------------------------------------- Net Income $5,682,946 $7,604,915 $7,593,506 =========================================================================================================== Earnings Per Share of Common Stock: Basic: $1.27 $1.72 $1.75 Diluted: $1.24 $1.67 $1.70
See accompanying notes
CONSOLIDATED STATEMENTS OF CASH FLOWS - ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- For the Years Ended December 31, 1998 1997 1996 1995 - ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- Operating Activities Net Income $5,682,946 $7,604,915 $7,593,506$ 5,302,586 $ 5,867,612 $ 7,781,933 Adjustments to reconcile net income to net operating cash: Depreciation and amortization 6,090,665 6,148,232 6,246,222 Allowance for equity funds used during construction (115,434) (65,198)6,864,063 6,168,777 6,248,618 Investment tax credit adjustments (54,815) (54,815) (54,815) Deferred income taxes, net 1,711,510 1,437,206 1,794,146 252,727Mark-to-market adjustments (242,757) 1,144,966 (1,109,416) Employee benefits (801,898) (238,826) 471,870 178,803 Employee compensation from lapsing of stock restrictions 119,845 173,643 334,745 431,694 Allowance for refund (1,356,705) Other, net (171,616) (286,147) 83,301 (339,081)(32,133) Changes in assets and liabilities: Accounts receivable, net 1,400,945 (904,516) (4,727,364)1,797,425 10,914,969 (8,597,772) Other current assets 648,282 (2,141,048) 1,588,675630,202 1,368,006 (2,766,414) Other deferred charges (625,395) (977,652) (946,450)215,119 (623,138) (977,257) Accounts payable, net (1,823,912) 1,422,807 3,619,023(5,327,052) (12,525,992) 12,048,169 Refunds payable to customers 279,112 3,307 (613,206) 400,192 Overrecovered (underrecovered) purchased gas costs 121,123 518,781 (2,245,544) 162,399 Other current liabilities (619,668) 396,326 939,750584,558 (2,193,548) 1,739,020 - ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- Net cash provided by operating activities 12,307,012 11,204,127 13,923,37811,027,405 11,674,801 14,021,944 - ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- Investing Activities Property, plant and equipment expenditures, net (12,380,826) (14,069,116) (11,666,442) Allowance for equity funds used during construction 115,434 65,198(12,021,735) (12,370,932) (14,025,373) Purchases of investments (500,000) (36,167) (129,406) (38,836) - ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- Net cash used by investing activities (12,416,993) (14,083,088) (11,640,080)(12,521,735) (12,407,099) (14,154,779) - ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- Financing Activities Common stock dividends, net of amounts reinvested of $463,231, $382,932 and $346,308 in 1998, 1997 and $304,106 in 1997, 1996, and 1995, respectively (3,829,752) (3,337,755) (3,324,376)(4,298,837) (3,846,264) (3,368,545) Issuance of stock --- Dividend Reinvestment Plan optional cash 146,716 167,337 208,813 202,835 Issuance of stock --- Retirement Savings Plan 466,759 404,297 349,031 Net borrowings (repayments) borrowings under line of credit agreements (5,100,000) 7,300,000 (3,197,039)3,999,990 (5,134,990) 7,334,990 Proceeds from issuance of long-term debt 9,908,223 10,428,753- 9,929,711 - Repayment of long-term debt (1,051,390) (3,098,455) (823,213) (5,439,151)(881,467) - ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- Net cash (used) provided by financing activities (1,548,350) 3,696,876 (1,328,978)(736,762) (1,578,364) 3,642,822 - ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- Net (Decrease) Increase in Cash and Cash Equivalents (1,658,331) 817,915 954,320(2,231,092) (2,310,662) 3,509,987 Cash and Cash Equivalents at Beginning of Year 2,213,529 1,395,614 441,2944,829,176 7,139,838 3,629,851 - ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- Cash and Cash Equivalents at End of Year $555,198 $2,213,529 $1,395,614 ===========================================================================================================$ 2,598,084 $ 4,829,176 $ 7,139,838 ====================================================================================================================== Supplemental Disclosure of Cash Flow Information Cash paid for interest $3,203,709 $2,831,109 $2,884,864$ 3,490,993 $ 3,243,981 $ 2,872,973 Cash paid for income tax $3,400,479 $2,122,120 $3,288,895
$ 2,670,580 $ 3,500,160 $ 2,059,441 See accompanying notes
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY - ----------------------------------------------------------------------------------------------------------- For the Years Ended December 31, 1998 1997 1996 1995 - ----------------------------------------------------------------------------------------------------------- Common Stock Balance --- beginning of year $2,160,628 $2,122,212 $2,096,515 (1)$ 2,435,142 $ 2,403,978 $ 2,365,562 Dividend Reinvestment Plan 16,240 15,398 16,514 18,816Retirement Savings Plan 12,663 11,305 9,928 Conversion of debentures 3,115 4,461 429 USI restricted stock award agreements - - 10,639 6,881 Conversion of debentures 4,461 429 Company's Retirement Savings Plan 11,305 9,928Performance shares 11,859 - - Exercised stock options - - 906 - ----------------------------------------------------------------------------------------------------------- Balance --- end of year 2,191,792 2,160,628 2,122,2122,479,019 2,435,142 2,403,978 - ----------------------------------------------------------------------------------------------------------- Additional Paid-in Capital Balance --- beginning of year 18,745,718 17,489,108 16,731,689 (1)22,581,463 21,507,577 20,250,967 Dividend Reinvestment Plan 593,706 529,453 538,607 488,125Retirement Savings Plan 454,096 392,992 328,465 Conversion of debentures 105,736 151,441 14,557 USI restricted stock award agreements - - 344,570 176,029 Sale of treasury stock to Company's Retirement Savings Plan 93,265 Conversion of debentures 151,441 14,557 Company's Retirement Savings Plan 392,992 328,465Performance shares 457,187 - - Exercised stock options - - 30,411 - ----------------------------------------------------------------------------------------------------------- Balance --- end of year 19,819,604 18,745,718 17,489,10824,192,188 22,581,463 21,507,577 - ----------------------------------------------------------------------------------------------------------- Retained Earnings Balance --- beginning of year 26,957,04828,533,145 27,113,764 23,458,776 19,480,374 Net income 5,682,946 7,604,915 7,593,506 (1)5,302,586 5,867,612 7,781,933 Cash dividends --- Chesapeake (2)(4,943,347) (4,341,964) (3,514,694) (3,331,972) Cash dividends --- Pooled companies (79,267) (591,949) (283,132)- (106,267) (612,251) - ----------------------------------------------------------------------------------------------------------- Balance --- end of year 28,218,763 26,957,048 23,458,77628,892,384 28,533,145 27,113,764 - ----------------------------------------------------------------------------------------------------------- Treasury Stock (3) Unearned Compensation Balance --- beginning of year (190,886) (364,529) (415,107) (696,679) Issuance of award - - (284,167) (121,343) Amortization of prior years' awards 119,845 173,643 334,745 402,915 - ----------------------------------------------------------------------------------------------------------- Balance --- end of year (71,041) (190,886) (364,529) (415,107) - ----------------------------------------------------------------------------------------------------------- Unrealized Gain (Loss) on Marketable Securities (4)Accumulated Other Comprehensive Income Net of income tax expense of approximately $552,000, $190,000 and $25,000 for the years 1998, 1997 and 1996, respectively 863,344 296,872 38,598 (72,839) - ----------------------------------------------------------------------------------------------------------- Total Stockholders' Equity $50,336,145 $47,537,463 $42,582,150 =========================================================================================================== (1) The following adjustments have been made to 1995 presentation to reflect the Tri-County pooling of interests: Begining balances of Common Stock and Additional Paid-in Capital have been adjusted by $311,001 and ($103,314), respectively. Net income as shown in the Retained Earnings section has been adjusted by $356,811. (2) Dividends per share of common stock were $.97, $.93 and $.90 for the years 1997, 1996 and 1995, respectively. (3) The entire Treasury Stock balance of ($99,842) was sold to the Company's Retirement Savings Plan during 1995, leaving a zero balance. (4) Net of income tax expense (benefit) of approximately $190,000, $25,000 and ($48,000) for the the years 1997, 1996 and 1995, respectively.
$56,355,894 $53,655,736 $50,699,388 ========================================================================================================== See accompanying notes
CONSOLIDATED STATEMENTS OF INCOME TAXES - ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ For the Years Ended December 31, 1998 1997 1996 1995 - ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ Current Income Tax Expense Federal $1,916,654 $1,884,609 $3,182,346$ 1,553,839 $ 2,076,235 $1,940,430 State 307,654 442,563 356,576 621,238 Investment tax credit adjustments, net (54,815) (54,815) (54,815) - ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- Total current income tax expense 2,304,402 2,186,370 3,748,7691,806,678 2,463,983 2,242,191 - ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- Deferred Income Tax Expense Property, plant and equipment 887,175 1,335,802 581,373 455,151 Deferred gas costs (111,416) (204,170) 873,904 (56,915) Pensions and other employee benefits 546,237 (19,508) 107,131 57,508 Unbilled revenue (16,198) (104,632) 54,320 (260,922) Contributions in aid of construction (104,003) (33,028) (6,979) (283,033) Environmental expenditures 415,845 249,417 108,578 272,068 Allowance for refund 121,671 442,064 Other (198,574) 16,332 4,427 (244,136)126,098 - ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- Total deferred income tax expense (1) 1,419,066 1,240,213 1,844,425 381,785 - ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- Total Income Tax Expense $3,544,615 $4,030,795 $4,130,554 ===========================================================================================================$ 3,225,744 $ 3,704,196 $4,086,616 =================================================================================================================== Reconciliation of Effective Income Tax Rates Federal income tax expense at 34% 3,171,505 3,956,118 3,986,180$ 2,899,632 $ 3,254,412 $4,035,307 State income taxes, net of Federal benefit 363,041 399,213 537,566 546,955 Acquisition of subchapter S Corporation (2) - 317,821 (268,211) (137,800) Other (343,924) (194,678) (264,781)(36,929) (267,250) (218,046) - ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- Total income tax expense $3,544,615 $4,030,795 $4,130,554 ===========================================================================================================Income Tax Expense $ 3,225,744 $ 3,704,196 $4,086,616 ==================================================================================================================== Effective income tax rate 38.4% 36.8% 36.3%37.8% 38.7% 34.4% - -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- At December 31, 1998 1997 1996 - -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- Deferred Income Taxes Deferred income tax liabilities: Property, plant and equipment $13,222,141 $12,095,782 $10,716,757 Deferred gas costs 546,391 649,681 853,851Environmental costs 1,358,443 855,997 Other 1,560,988 1,322,2721,077,008 704,991 - -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- Total deferred income tax liabilities 16,203,983 14,306,451 12,892,880 - -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- Deferred income tax assets: State operating loss carryforwards 72,041 57,303 3,320 Deferred investment tax credit 403,789 426,565 Unbilled revenue 984,510 968,311 863,679 Pension and other employee benefits 898,060 917,568884,286 831,735 Self insurance 625,602 585,995 545,836 Other 150,122 495,246321,162 620,236 - -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- Total deferred income tax assets 2,887,601 3,063,580 3,252,214 - -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- Deferred Income Taxes Per Consolidated Balance Sheet $13,316,382 $11,242,871 $9,640,666 ================================================================================================================================================================================================= (1) Includes $156,000, $208,000 $392,000 and $108,000$392,000 of deferred state income taxes for the years 1998, 1997 1996 and 1995,1996, respectively. (2) Accounted for as a pooling of interests (see Note B to the Consolidated Financial Statements).
See accompanying notes NOTES TO CONSOLIDATED FINANCIAL STATEMENTS A. Summary of Accounting Policies Nature of Business Chesapeake Utilities Corporation (the "Company") is engaged in natural gas distribution to approximately 35,80037,100 customers located in southern Delaware, MarylandsMaryland's Eastern Shore and Central Florida. The CompanysCompany's natural gas transmission subsidiary operates a pipeline from various points in Pennsylvania and northern Delaware to the CompanysCompany's Delaware and Maryland distribution divisions, as well as other utility and industrial customers in Delaware and the Eastern Shore of Maryland. The CompanysCompany's propane distribution and marketing segment servesprovides distribution service to approximately 34,00035,000 customers in southern Delaware, the Eastern Shore of Maryland and Virginia.Virginia, and markets propane to a number of large independent oil and petrochemical companies, resellers, and propane distribution companies in the southeastern United States. The advanced information services segment provides software servicesconsulting, custom programming, training and products to a wide variety ofdevelopment tools for national and international clients. Principles of Consolidation The Consolidated Financial Statements include the accounts of the Company and its wholly owned subsidiaries, Eastern Shore Natural Gas Company ("Eastern Shore"), Sharp Energy, Inc. ("Sharp Energy"), Tri-County Gas Company, Inc. ("Tri-County") and Chesapeake Service Company. Sharp Energys accounts include those of its wholly owned subsidiary, Sharpgas, Inc. Chesapeake Service Companys accounts include United Systems, Inc. ("USI"), Capital Data Systems, Inc. and Skipjack, Inc.subsidiaries. Investments in entities in which the Company owns more than 20 percent but 50 percent or less, are accounted for by the equity method. All significant intercompany transactions have been eliminated in consolidation. System of Accounts The natural gas distribution divisions of the Company located in Delaware, Maryland and Florida are subject to regulation by the Delaware, Maryland and Florida Public Service Commissions with respect to their rates for service, maintenance of their accounting records and various other matters. Eastern Shore Natural Gas Company ("Eastern Shore") is an open access pipeline and is subject to regulation by the Federal Energy Regulatory Commission ("FERC"). The CompanysCompany's financial statements are prepared on the basis of generally accepted accounting principles which give appropriate recognition to the ratemaking and accounting practices and policies of the various commissions. The propane distribution and marketing and advanced information services subsidiariessegments are not subject to regulation with respect to rates or maintenance of accounting records. Cash and Cash Equivalents The CompanysCompany's policy is to invest cash in excess of operating requirements in overnight income producing accounts. Such amounts are stated at cost, which approximates market.market value. Investments with an original maturity of three months or less are considered cash equivalents. Property, Plant, Equipment and Depreciation Utility property is stated at original cost while the assets of the propane subsidiarysegment are valued at cost. The costs of repairs and minor replacements are charged to income as incurred and the costs of major renewals and betterments are capitalized. Upon retirement or disposition of utility property, the recorded cost of removal, net of salvage value, is charged to accumulated depreciation. Upon retirement or disposition of non-utility property, the gain or loss, net of salvage value, is charged to income. The provision for depreciation is computed using the straight-line method at rates which will amortize the unrecovered cost of depreciable property over the estimated useful life. Depreciation and amortization expense for financial statement purposes is provided at an annual rate for each segment averaging 4.73%segment. Average rates for 1998 were 5% and 3% for the natural gas distribution; 3.04% for natural gasdistribution and transmission and 5.46%segments, respectively, 5% for propane distribution. In addition, annualized rates average 4.73%distribution and marketing, 16% for gas plant acquisition adjustments, 17.78% for the advanced information services segment and 2.59%6% for general plant. Allowance for Funds Used During Construction The allowance for funds used during construction ("AFUDC") is an accounting procedure whereby the cost of borrowed funds and other funds used to finance construction projects is capitalized as part of utility plant on the balance sheet, crediting the cost as a non-cash item on the income statement. The costs of borrowed and equity funds are segregated between interest expense and other income, respectively. AFUDC was capitalized on utility plant construction at the rates of 5.63%, 9.51% and 7.31% for 1997, 1996 and 1995, respectively. Environmental Regulatory Assets Environmental regulatory assets represent amounts related to environmental liabilities for which cash expenditures have not been made. As expenditures are incurred, the environmental liability can beis reduced along with the environmental regulatory asset. These amounts, awaiting ratemaking treatment, are recorded to either environmental expenditures as an asset or accumulated depreciation as cost of removal. All amounts incurredEnvironmental expenditures are amortized and/or recovered through a rider to base rates in accordance with the ratemaking treatment granted in each jurisdiction. Other Deferred Charges and Intangible Assets Other deferred charges include discount, premium and issuance costs associated with long-term debt and rate case expenses. The discount, premium and issuance costs are deferred, then amortized over the original lives of the respective debt issues. Gains and losses on the reacquisition of debt are amortized over the remaining lives of the original issuance(s).issuances. Rate case expenses are deferred, then amortized over periods approved by the applicable regulatory authorities. Intangible assets are associated with the acquisition of non-utilitynon- utility companies, and are amortized on a straight-line basis over a period of five to 40 years. The grossA summary of intangible assets were $2,516,120 and $1,920,851 at December 31, 1997 and 1996, respectively. Accumulated amortization related to intangible assets was $1,093,905 and $962,227 at December 31, 1997 and 1996, respectively. In addition, the 1997 acquisition of a propane business resulted in the Company acquiring goodwill, a customer list and a non-compete agreement valued at $437,000, $108,000 and $50,000, respectively.is as follows:
- ------------------------------------------------- At December 31, 1998 1997 - ------------------------------------------------- Gross intangibles $2,776,000 $2,776,000 Accumulated amortization (1,288,000) (1,133,000) - ------------------------------------------------- Net unamortized balance $1,488,000 $1,643,000 =================================================
Income Taxes and Investment Tax Credit Adjustments The Company files a consolidated federal income tax return. Income tax expense allocated to the CompanysCompany's subsidiaries is based upon their respective taxable incomes and tax credits. Deferred tax assets and liabilities are recorded for the tax effect of temporary differences between the financial statements and tax bases of assets and liabilities, and are measured using current effective income tax rates. The portion of the CompanysCompany's deferred tax liabilities applicable to utility operations which has not been reflected in current service rates represents income taxes recoverable through future rates. Investment tax credits on utility property have been deferred and are allocated to income ratably over the lives of the subject property. The Company had state tax loss carryforwards of $796,000$980,000 and $46,000$818,000 at December 31, 19971998 and 1996,1997, respectively. The Company expects to use all of the loss carryforwards; therefore, no valuation allowance was recorded at December 31, 19971998 or 1996.1997. The loss carryforwards expire in 2006 through 2012. Fair Value of2013. Financial Instruments Various items withinXeron, the balance sheetCompany's wholesale propane marketing operation, engages in trading activities using forward and futures contracts which have been accounted for using the mark-to-market method of accounting. Under mark-to-market accounting, the Company's trading contracts are considered to be financial instruments because they are cash or are to be settled in cash. The carrying values of these items generally approximate theirrecorded at fair value, (see Note C tonet of future servicing costs. Changes in market price are recognized as gains or losses in the Consolidated Financial Statements for disclosureperiod of fair value of investments).change. The fair value of the Companys long-term debt is estimated using a discounted cash flow methodology. The estimated fair value of the Companys long-term debt at December 31, 1997, including current maturities, is approximately $40.7 millionresulting unrealized gains and losses are recorded as compared to a carrying value of $38.8 million. At December 31, 1996, the estimated fair value was approximately $30.3 million as compared to a carrying value of $29.8 million. These estimates are based on published corporate borrowing rates for debt instruments with similar terms and average maturities.assets or liabilities. Operating Revenues Revenues for the natural gas distribution divisions of the Company are based on rates approved by the various public service commissions. CustomersCustomers' base rates may not be changed without formal approval by these commissions. With the exception of the CompanysCompany's Florida division, the Company recognizes revenues from meters read on a monthly cycle basis. This practice results in unbilled and unrecorded revenue from the cycle date through month-end. The Florida division recognizes revenues based on services rendered and records an amount for gas delivered but not billed. The propane segment recognizes revenue for certain customers on a metered basis and all other customers on an as-delivered basis. TheChesapeake's natural gas distribution divisions of the Companyeach have purchaseda gas adjustment ("PGA") clausescost recovery mechanism that provideprovides for the adjustment of rates charged to customers as gas costs fluctuate. These amounts are collected or refunded through adjustments to rates in subsequent periods. The Company charges flexible rates to the natural gas distribution segment's industrial interruptible customers to make them competitive with alternative types of fuel. Based on pricing, these customers can choose natural gas or alternative types of supply. Neither the Company nor the customer is contractually obligated to deliver or receive natural gas. The natural gas transmission segment became an open access pipeline on November 1, 1997 with revenues based on rates approved by FERC. Before open access, only portions of revenues were based on rates approved by FERC. In addition, the transmission segment hadThe propane distribution operation records revenues on either an "as delivered" or on a PGA clause similar to those in the distribution operations. Since the transmission segment records revenue for service only, the PGA clause no longer applies, now that open access is in effect. The Company charges flexible rates to the industrial interruptible customers of the natural gas distribution segment to make natural gas competitive with alternative types of fuel. Based"metered" basis depending on pricing, these customers can choose natural gas or alternative types of supply. Neither the Company nor the customer is contractually obligated to deliver or receive natural gas.type. The wholesale propane marketing operation calculates revenues daily on a mark-to- market basis for open contracts. Earnings Per Share The Company has adopted Statementcalculations of Financial Accounting Standards ("SFAS") No. 128, issued by the Financial Accounting Standards Board ("FASB") in February 1997, requiring dual presentation ofboth basic and diluted per share earnings on the face of the income statement. Basic earnings per share is based on the weighted average number of shares of common stock outstanding. On a diluted basis, both earnings and shares outstanding are adjusted for stock options for each year presented and the assumed conversion of the convertible debentures. The adoption of SFAS No. 128 did not have a material effect on the Companys financial statements. Prior years presentations of earnings per share have been restated to conform to the guidelines of SFAS No. 128.below.
CALCULATION OF DILUTED EARNINGS PER SHARE - --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- For the Years Ended December 31, 1998 1997 1996 1995 - --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- Calculation of Basic Earnings Per Share: Net Income $5,302,586 $5,867,612 $7,781,933 Weighted Average Shares Outstanding 5,060,328 4,972,089 4,912,136 - -------------------------------------------------------------------------------- Basic Earnings Per Share $ 1.05 $ 1.18 $ 1.58 ================================================================================ Calculation of Diluted Earnings Per Share: Reconciliation of Numerator: Net Income - basic $5,682,946 $7,604,915 $7,593,506$5,302,586 $5,867,612 $7,781,933 Effect of 8.25% Convertible debentures 196,333 204,070 207,825 213,043 - --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- Adjusted numerator - diluted $5,887,016 $7,812,740 $7,806,549 ================================================================================================= Reconciliation$5,498,919 $6,071,682 $7,989,758 - -------------------------------------------------------------------------------- Reconcilation of Denominator: Weighted Shares Outstanding - basic 4,472,087 4,412,137 4,336,4315,060,328 4,972,089 4,912,136 Effect of Dilutive Securities 8.25% Convertible debentures 226,203 238,353 242,742 248,833 Stock options and performance shares * 38,462 22,053 4,487 - --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- Adjusted denominator - diluted 4,748,902 4,676,932 4,589,751 =================================================================================================5,286,531 5,210,442 5,154,878 - -------------------------------------------------------------------------------- Diluted Earnings per Share $1.24 $1.67 $1.70 ================================================================================================= * The impact of the 95,492 stock options that were granted in 1997 (see Note H to the Consolidated Financial Statements) could potentially dilute earnings per share in the future. $ 1.04 $ 1.17 $ 1.55 ================================================================================
Certain Risks and Uncertainties The financial statements are prepared in conformity with generally accepted accounting principles that require management to make estimates (see Note J to the Consolidated Financial Statements for significant estimates) in measuring assets and liabilities and related revenue and expenses.expenses (see Note L to the Consolidated Financial Statements for significant estimates). These estimates involve judgements with respect to, among other things, various future economic factors that are difficult to predict and are beyond the control of the Company; therefore, actual results could differ from those estimates. The Company records certain assets and liabilities in accordance with SFASStatement of Financial Accounting Standards ("SFAS") No. 71. If the Company were required to terminate application of SFAS No. 71 for regulated operations, all such deferred amounts would be recognized in the income statement at that time, resulting in a charge to earnings, net of applicable income taxes. FASB Statements and Other Authoritative Pronouncements Issued Comprehensive Income.Derivative Instruments and Hedging Activities In June 1997,1998, the FASBFinancial Accounting Standards Board ("FASB") issued SFAS No. 130 regarding the133, establishing accounting and reporting of comprehensive incomestandards for derivative instruments, including certain derivative instruments embedded in the full set of financial statements. The Company must adopt the requirements of the standard in itsother contracts, and for hedging activities. This statement does not allow retroactive application to financial statements for the year beginning January 1, 1998. The effect of the adoption of the standard pertains primarily to SFAS No. 115 regarding held for sale investments, and is not expected to have a material impact on the Companys financial statements. Segment Information. In June 1997, FASB issued SFAS No. 131, establishing standards for public business enterprises to report information about operating segments in annual financial statements and requiring that those enterprises report selected information about operating segments in interim financial reports to shareholders. The Companyprior periods. Chesapeake will adopt the requirements of this standard in the first quarter of 2000, as required. The Company believes that adoption of this statement will not have a material impact on the 1998 fiscal year.Company's financial position or results of operations. The Emerging Issues Task Force released Issue 98-10, "Accounting for Energy Trading and Risk Management Activities." The Company records its use of derivatives in accordance with the standard by marking open positions to market value. The adoption of the standardpronouncement is not expected to have a material impact on the Companys financial statements.position or results of operations of the Company. Restatement and Reclassification of Prior YearsYears' Amounts Certain prior yearsyears' amounts have been reclassified to conform to current year presentation. Additionally, prior year amounts have been restated to reflect acquisitions accounted for as poolings of interests. B. Business Combinations In May 1998, Chesapeake acquired all of the outstanding common stock of Xeron, Inc, based in Houston, Texas for 475,000 shares of Chesapeake common stock. Xeron markets propane to a number of large independent oil and petrochemical companies, resellers, and southeastern retail propane companies. The transaction was accounted for as a pooling of interests. In March 1998, the Company acquired Sam Shannahan Well Co., Inc., operating as Tolan Water Service in exchange for 25,000 shares of Chesapeake's common stock. Tolan provides water conditioning services to approximately 3,000 residential, commercial and industrial customers on the Delmarva Peninsula. This transaction was also accounted for as a pooling of interests. The results of operations for the separate companies and the combined amounts are presented in the consolidated financial statements as follows.
- ------------------------------------------------------------------------------ Five months ended Year Ended Year Ended May 31, 1998 * December 31, 1997 December 31, 1996 - ------------------------------------------------------------------------------ Operating Revenues Chesapeake $ 54,750,771 $ 122,774,593 $ 130,213,409 Xeron 37,136,067 98,164,932 128,633,042 Tolan 719,523 1,549,739 1,255,749 - ------------------------------------------------------------------------------ Combined $ 92,606,361 $ 222,489,264 $ 260,102,200 ============================================================================== Net Income Chesapeake $ 4,385,817 $ 5,682,946 $ 7,604,915 Xeron 21,704 128,910 158,991 Tolan 2,346 55,756 18,027 - ------------------------------------------------------------------------------ Combined $ 4,409,867 $ 5,867,612 $ 7,781,933 ============================================================================== * Statements for the five months ended May 31, 1998 are unaudited.
In March 1997, the Company acquired all of the outstanding common stock of Tri-County Gas Company, Inc. and associated properties. Tri-CountysTri-County's principal business iswas the distribution of propane to both retail and wholesale customers in southern Delaware, the Eastern Shore of Maryland and Virginia. Six hundred thirty-nine thousand shares of the CompanysCompany's common stock were exchanged in the transaction, which was accounted for as a pooling of interests. All prior period consolidated financial statements presented have been restated to include the combined results of operations, financial position and cash flows of Tri-County.each of the business combinations discussed above. All material intercompany transactions between the Company and Tri-County have been eliminated in consolidation. TheC. Segment Information Chesapeake uses the management approach to identify operating segments. Chesapeake organizes its business around differences in products or services and the operating results of operations forevery segment are regularly reviewed by the separate companiesCompany's chief operating decision maker in order to make decisions about resources and to assess performance. The following table presents information about the combined amounts are presented in the consolidated financial statements to follow.Company's reportable segments.
- --------------------------------------------------------------------------------------------------------------- Two months ended Year-------------------------------------------------------------------------------------------------------------- For the Years Ended Year Ended February 28, 1997 December 31, 1998 1997 1996 December 31, 1995 - ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- Operating Revenues, Chesapeake $29,690,819 $119,330,068 $104,020,416 Tri-County 2,652,910 10,883,341 7,775,362Unaffiliated Customers Natural gas distribution $ 65,384,413 $ 75,940,968 $ 74,904,100 Natural gas transmission 3,199,032 12,164,369 15,188,752 Propane distribution and marketing 102,872,909 125,159,336 161,812,156 Advanced information services 10,330,703 7,636,407 6,903,246 Other 1,781,738 1,588,184 1,293,946 - --------------------------------------------------------------------------------------------------------------- Combined $32,343,729 $130,213,409 $111,795,778-------------------------------------------------------------------------------------------------------------- Total operating revenues, unaffiliated customers $183,568,795 $222,489,264 $260,102,200 ============================================================================================================== Intersegment Revenues * Natural gas distribution $ 40,494 $ 18,970 $ 12,232 Natural gas transmission 7,269,620 19,282,359 21,543,352 Propane distribution and marketing - 52,230 2,059 Advanced information services - 149,602 326,913 Other 634,032 523,007 332,512 - -------------------------------------------------------------------------------------------------------------- Total intersegment revenues $ 7,944,146 $ 20,026,168 $ 22,217,068 =============================================================================================================== NetOperating Income Chesapeake $2,434,351 $6,910,428 $7,236,695 Tri-County 265,059 694,487 356,811Before Income Taxes Natural gas distribution $ 4,696,759 $ 5,498,471 $ 7,167,237 Natural gas transmission 4,117,366 3,721,148 2,458,442 Propane distribution and marketing 971,215 1,157,543 2,668,839 Advanced information services 1,316,158 1,045,912 1,056,201 Other 461,174 637,971 478,571 - --------------------------------------------------------------------------------------------------------------- Combined $2,699,410 $7,604,915 $7,593,506 =============================================================================================================== Unaudited Pro Forma Net Income* Chesapeake N/A $6,910,428 $7,236,695 Tri-County N/A 426,276 219,011-------------------------------------------------------------------------------------------------------------- Total 11,562,672 12,061,045 13,829,290 Eliminations 60,009 32,727 153,591 - --------------------------------------------------------------------------------------------------------------- Combined N/A $7,336,704 $7,455,706 ===============================================================================================================-------------------------------------------------------------------------------------------------------------- Total operating income before income taxes $ 11,622,681 $ 12,093,772 $ 13,982,881 ============================================================================================================== Depreciation and Amortization Natural gas distribution $ 3,330,624 $ 3,076,654 $ 2,907,831 Natural gas transmission 1,050,714 892,258 697,834 Propane distribution and marketing 1,334,414 1,214,918 1,720,631 Advanced information services 183,553 122,081 131,877 Other 209,897 169,506 147,757 - -------------------------------------------------------------------------------------------------------------- Total depreciation and amortization $ 6,109,202 $ 5,475,417 $ 5,605,930 ============================================================================================================== Capital Expenditures Natural gas distribution $ 8,512,661 $ 6,569,865 $ 6,961,652 Natural gas transmission 1,505,830 2,959,019 5,567,509 Propane distribution and marketing 1,544,992 2,820,166 2,189,368 Advanced information services 246,153 273,351 162,189 Other 840,186 848,680 517,997 - -------------------------------------------------------------------------------------------------------------- Total capital expenditures $ 12,649,822 $ 13,471,081 $ 15,398,715 ============================================================================================================== Identifiable Assets, at December 31, Natural gas distribution $ 77,756,422 $ 78,732,860 $ 77,426,232 Natural gas transmission 24,862,165 24,781,292 23,981,989 Propane distribution and marketing 27,526,019 31,831,616 44,073,080 Advanced information services 2,304,609 1,751,192 1,496,419 Other 12,784,398 8,621,863 8,808,724 - -------------------------------------------------------------------------------------------------------------- Total identifiable assets $145,233,613 $145,718,823 $155,786,444 ============================================================================================================== * Unaudited pro forma net income reflects adjustments to net income to record an estimated provision for income taxes, assuming Tri-County was a tax paying entity in 1996 and 1995. During 1997, Tri-County was a C Corporation for federal income tax purposes. Tri-County will be included in the Company's U.S. federal income tax return, effective March 1997.All significant intersegment revenues have been eliminated from consolidated revenues.
C.D. Fair Value of Financial Instruments Various items within the balance sheet are considered to be financial instruments because they are cash or are to be settled in cash. The carrying values of these items generally approximate their fair value (see Note E to the Consolidated Financial Statements for disclosure of fair value of investments). The fair value of the Company's open forward and futures contracts at December 31, 1998 and December 31, 1997 based on market rates were $207,000 and $36,000, respectively. The fair value of the Company's long- term debt is estimated using a discounted cash flow methodology. The estimated fair value of the Company's long-term debt at December 31, 1998, including current maturities, is approximately $41.6 million as compared to a carrying value of $38.1 million. At December 31, 1997, the estimated fair value was approximately $40.7 million as compared to a carrying value of $38.8 million. These estimates are based on published corporate borrowing rates for debt instruments with similar terms and average maturities. E. Investments The investment balance at December 31, 19971998 and 19961997 consists primarily of a 7.3% ownership interest in the common stock of Florida Public Utilities Company ("FPU"). The Companys ownership at December 31, 1997 and 1996 represents a 7.34% and 7.41% interest, respectively. The Company has classified its investment in FPU as an "Available for Sale" security, which requires that all unrealized gains and losses be excluded from earnings and be reported net of income tax as a separate component of stockholdersstockholders' equity. At December 31, 19971998 and 1996,1997, the market value exceeded the aggregate cost basis of the CompanysCompany's portfolio by $486,872$1,552,000 and $63,598,$487,000, respectively. D. Lease ObligationsIn August 1998, the Company entered into an agreement to sell its investment in FPU for $16.50 per share to The Southern Company. The execution of the agreement is contingent on the approval of the Securities and Exchange Commission, which is expected to be obtained in 1999. Once regulatory approval is received, the Company has entered several operating lease arrangements for office space at various locations. Rent expense related to these leases was $277,000, $293,000will recognize a $1,415,000 pre-tax gain or $863,000, after taxes. F. Common Stock and $409,000 for 1997, 1996 and 1995, respectively. Future minimum payments underAdditional Paid-in Capital The following is a schedule of changes in the Companys current lease agreements are $236,000; $228,000; $232,000; $145,000 and $91,000 for the yearsCompany's shares of 1998 through 2002, respectively; and $198,000 thereafter.common stock.
E. Segment Information - ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- For the Years Ended December 31, 1998 1997 1996 1995(1) - ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- Operating Revenues, Unaffiliated Customers Natural gas distribution $75,940,968 $74,904,100 $54,120,280 Natural gas transmission 12,164,369 15,188,752 24,984,767 Propane distribution 26,994,404 33,179,114 25,345,696 Advanced information services 7,636,407 6,903,246 7,307,413 Other 38,445 38,197 37,622Common Stock: Shares issued and outstanding (2) Balance - ---------------------------------------------------------------------------------------------------------- Total operating revenues, unaffiliated customers $122,774,593 $130,213,409 $111,795,778 ========================================================================================================== Intersegment Revenues * Natural gas distribution $18,970 $12,232 $5,095 Natural gas transmission 19,282,359 21,543,352 16,663,043 Propane distribution 52,230 2,059 139,052 Advanced information services 149,602 326,913 1,554,498 Other 523,007 332,512 349,508beginning of year 5,004,078 4,939,515 4,860,588 Dividend Reinvestment Plan (3) 32,925 32,169 33,926 Sale of stock to Company's Retirement Savings Plan 26,018 23,228 20,398 Conversion of debentures 6,401 9,166 881 Performance shares 24,366 - ---------------------------------------------------------------------------------------------------------- Total intersegment revenues $20,026,168 $22,217,068 $18,711,196 ========================================================================================================== Operating Income Before Income Taxes Natural gas distribution $5,498,471 $7,167,237 $4,728,348 Natural gas transmission 3,721,148 2,458,442 6,083,440 Propane distribution 1,063,554 2,814,958 2,252,165 Advanced information services 1,045,912 1,056,201 1,061,309 Other 524,785 406,632 215,146 - ---------------------------------------------------------------------------------------------------------- Total 11,853,870 13,903,470 14,340,408 Add (Less): Eliminations 32,727 153,591 (248,594)USI restricted stock award agreements - ---------------------------------------------------------------------------------------------------------- Total operating income before income taxes $11,886,597 $14,057,061 $14,091,814 ========================================================================================================== Depreciation- 21,859 Exercised stock options - - 1,863 - --------------------------------------------------------------------------------------- Balance - end of year 5,093,788 5,004,078 4,939,515 ======================================================================================= (1) The 1996 beginning balance has been restated to include 639,000, 25,000 and Amortization Natural gas distribution $3,076,654 $2,907,831 $2,468,141 Natural gas transmission 892,258 697,834 638,099 Propane distribution 1,204,968 1,681,588 1,629,971 Advanced information services 122,081 131,877 969,587 Other 101,014 85,507 97,086 - ---------------------------------------------------------------------------------------------------------- Total depreciation475,000 shares of Common Stock that were issued to effect the business combinations with Tri-County Gas Company, Inc., Tolan Water Service and amortization $5,396,975 $5,504,637 $5,802,884 ========================================================================================================== Capital Expenditures Natural gas distribution $5,826,065 $6,472,459 $7,424,489 Natural gas transmission 3,286,860 5,567,509 1,335,793 Propane distribution 2,820,166 2,189,368 2,427,773 Advanced information services 277,015 162,189 114,461 Other 559,043 445,916 1,584,813 - ---------------------------------------------------------------------------------------------------------- Total capital expenditures $12,769,149 $14,837,441 $12,887,329 ========================================================================================================== Identifiable Assets,Xeron, Inc., respectively. (2) 12,000,000 shares are authorized at December 31, Natural gas distribution $78,732,860 $77,426,232 $72,256,841 Natural gas transmission 24,781,292 23,981,989 19,292,524 Propane distribution 24,209,693 25,009,751 22,723,647 Advanced information services 1,751,192 1,496,419 1,635,100 Other 7,903,823 8,131,517 7,430,616 - ---------------------------------------------------------------------------------------------------------- Total identifiable assets $137,378,860 $136,045,908 $123,338,728 ========================================================================================================== * All significant intersegment revenues have been eliminated from consolidated revenues.a par value of $.4867 per share. (3) Includes dividends and reinvested optional cash payments.
F.G. Long-term Debt The outstanding long-term debt, net of current maturities, is as follows:
- --------------------------------------------------------------------------------------------------------------------------------------------------------------- At December 31, 1998 1997 1996 - --------------------------------------------------------------------------------------------------------------------------------------------------------------- First mortgage sinking fund bonds: Adjustable rate Series G*, due January 1, 1998 $0 $62,500 9.37% Series I, due December 15, 2004 $ 3,780,000 $ 4,300,000 4,820,000 12.00% Mortgage, due February 1, 1998 14,868 8.25% Convertible debentures, due March 1, 2014 3,817,000 3,926,000 4,087,000 Uncollateralized Seniorsenior notes: 7.97% note, due February 1, 2008 10,000,000 10,000,000 6.91% note, due October 1, 2010 10,000,000 10,000,000 6.85% note, due January 1, 2012 10,000,000 10,000,000 - --------------------------------------------------------------------------------------------------------------------------------------------------------------- Total long-term debt $37,597,000 $38,226,000 $28,984,368 =============================================================================================================================================================== * The Series G bonds are subject to an interest rate equal to seventy-three percent (73%) of the prime rate (8.50% and 8.25% at December 31, 1997 and 1996, respectively). Annual maturities of consolidated long-term debt for the next five years are as follows: $582,500 for 1998, $1,520,000 for 1999, and $2,665,091 for the years 2000 through 2002.2002 and $3,665,091 for 2003.
On December 15, 1997, the Company issued $10 million of 6.85% senior notes due January 1, 2012. The Company used the proceeds to repay a portion of the CompanysCompany's short-term borrowing. The convertible debentures may be converted, at the option of the holder, into shares of the CompanysCompany's common stock at a conversion price of $17.01 per share. During 1997, $156,000 in1998, $109,000 of debentures were converted. The debentures are redeemable at the option of the holder, subject to an annual non-cumulative maximum limitation of $200,000 in the aggregate. As of December 31, 1997, no debentures have been accepted for redemption in 1998. At the CompanysCompany's option, the debentures may be redeemed at the stated amounts. Indentures to the long-term debt of the Company and its subsidiaries contain various restrictions. The most stringent restrictions state that the Company must maintain equity of at least 40% of total capitalization, the times interest earned ratio must be at least 2.5 and the Company cannot, until the retirement of its Series I bonds, pay any dividends after December 31, 1988 which exceed the sum of $2,135,188 plus consolidated net income recognized on or after January 1, 1989. As of December 31, 1997,1998, the amounts available for future dividends permitted by the Series I covenant approximated $14.6$14.7 million. A portion of the natural gas distribution plant assets owned by the Company are subject to a lien under the mortgage pursuant to which the CompanysCompany's first mortgage sinking fund bonds are issued. G.H. Short-term BorrowingsBorrowing The Board of Directors has authorized the Company to borrow up to $20.0 million from various bankbanks and trust companies. As of December 31, 1997,1998, the Company had fourthree unsecured bank lines of credit totaling $34.0$28.0 million, none of which required compensating balances. Under these lines of credit at December 31, 19971998 and 1996,1997, the Company had short-term debt outstanding of $7.6$11.6 million and $12.7$7.6 million, respectively, with a weighted average interest rate of 5.63%5.56% and 6.12%5.63%, respectively. H. Common Stock, Additional Paid-in CapitalI. Lease Obligations The Company has entered several operating lease arrangements for office space at various locations. Rent expense related to these leases was $309,000, $343,000 and Treasury Stock The following is a schedule of changes in the Companys shares of common stock.
- ---------------------------------------------------------------------------------------------------- For the Years Ended December 31, 1997 1996 1995 (1) - ---------------------------------------------------------------------------------------------------- Common Stock: Shares Issued and outstanding (2) Balance - beginning of year 4,439,516 4,360,589 4,307,791 Dividend Reinvestment Plan (3) 32,169 33,926 38,660 Sale of stock to Company's Retirement Savings Plan 23,228 20,398 USI restricted stock award agreements 21,859 14,138 Conversion of debentures 9,166 881 Exercised stock options 1,863 - ---------------------------------------------------------------------------------------------------- Balance - end of year 4,504,079 4,439,516 4,360,589 ==================================================================================================== (1) The 1995 beginning balance of 4,307,791 has been restated to include 639,000 shares of Common Stock that were issued to effect the business combination with Tri-County Gas Company, Inc. (2) 12,000,000 shares are authorized at a par value of $.4867 per share. (3) Includes dividends and reinvested optional cash payments.
At the beginning of 1995, the Company had 15,609 shares of common stock held in treasury. During 1995, all of these were sold to the Companys retirement savings plan. Certain key USI employees entered into restricted stock award agreements under which shares of Chesapeake common stock can be issued. Shares were awarded as a non-cash transaction over a five-year period beginning in 1992, and restrictions lapse over a five to ten-year period from the award date, if certain financial targets are met. At December 31,$359,000 for 1998, 1997 and 1996, respectively, 12,515respectively. Future minimum payments under the Company's current lease agreements are $309,000, $297,000, $261,000, $187,000 and 24,350 shares valued at $190,886 and $364,529 remain restricted. The Performance Incentive Plan, which was adopted in 1992, provides$169,000 for the grantingyears of stock options to certain officers of the Company over a 10-year period. In November 1994, the Company executed Tandem Stock Option1999 through 2003, respectively; and Performance Share Agreements ("Agreements") with certain executive officers. These Agreements provide the participants an option to purchase shares of the Companys common stock, exercisable in cumulative installments of one- third on each anniversary of the commencement of the award period. The Agreements also enable the participants the right to earn performance shares upon the Companys achievement of the performance goals set forth in the Agreements. During the three-year period ended$299,000 thereafter. J. Employee Benefits Plans Pension Plan Through December 31, 1997, the aforementioned performance goals were achieved. Following the approval of the Board of Directors on February 27, 1998, the Company issued 44,081 performance shares. Forty-four thousand ninety-six stock options expired upon the issuance of the performance shares on February 27. In 1997, the Company recorded $415,681 to recognize the compensation expense associated with the performance shares. Changes in outstanding options were as follows:
- -------------------------------------------------------------------------------------------------------------------- 1997 1996 1995 - -------------------------------------------------------------------------------------------------------------------- Number Option Number Option Number Option of shares Price of Shares Price of shares Price - -------------------------------------------------------------------------------------------------------------------- Balance - beginning of year 113,051 $12.625 - $12.75 125,186 $12.625 - $12.75 136,186 $12.625 - $12.75 Options granted 95,492 $20.50 Options exercised (12,135) $12.75 Options forfeited (11,000) $12.625 - -------------------------------------------------------------------------------------------------------------------- Balance - end of year 208,543 $12.625 - $20.50 113,051 $12.625 - $12.75 125,186 $12.625 - $12.75 ==================================================================================================================== Exercisable 98,083 $12.625 - $12.75 83,114 $12.625 - $12.75 80,280 $12.75 - --------------------------------------------------------------------------------------------------------------------
In December 1997, the Company granted stock options to certain executive officers of the Company. As required by SFAS No. 123, 1997 pro forma net income as if fair value based accounting had been used to account for the stock-based compensation costs is $5,679,603. Pro forma basic and diluted earnings per share are $1.27 and $1.24, respectively. Pro forma disclosures for 1997 are not likely to be representative of future effects of reported net income. The fair value of each option grant was estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted-average assumptions used for grants in 1997: dividend yield of 4.73%; expected volatility of 15.53%; risk-free interest rate of 5.89%; and expected lives of four years. I. Employee Benefit Plans Pension Plan The Company sponsorssponsored a defined benefit pension plan covering substantially all of its employees.employees (see Enhanced Retirement Savings Plan). Benefits under the plan are based on each participantsparticipant's years of service and highest average compensation. The CompanysCompany's funding policy provides that payments to the trustee shall be equal to the minimum funding requirements of the Employee Retirement Income Security Act of 1974.
PENSION COST - --------------------------------------------------------------------------------------------- For the Years Ended December 31, 1997 1996 1995 - --------------------------------------------------------------------------------------------- Service cost $680,192 $656,985 $474,000 Interest cost 732,188 658,238 562,003 Actual return on assets (2,427,768) (1,142,287) (1,546,325) Net amortization and deferral 1,421,028 269,135 689,947 - --------------------------------------------------------------------------------------------- Total net pension cost 405,640 442,071 179,625 Amounts capitalized as construction cost (33,942) (38,860) (30,740) - --------------------------------------------------------------------------------------------- Amount charged to expense $371,698 $403,211 $148,885 =============================================================================================
In December 1998, the Company restructured the employee benefits plans to be competitive with employers in similar industries. Chesapeake offered current participants of the defined benefit plan the option to remain in the current plan or receive a one-time payout and enroll in an enhanced retirement savings plan. Chesapeake closed the defined benefit plan to new participants, effective December 31, 1998. Based on the election options selected by the employees, the Company reduced their accrued pension liability to $1,283,088. Based on the change in the accrued liability, the Company was able to record a curtailment gain of $1,224,298 in 1998. The following schedule sets forth the fundingfunded status of the pension plan at December 31, 19971998 and 1996.1997:
ACCRUED PENSION COST - -------------------------------------------------------------------------------------------------------------------------------------------------------------- At December 31, 1998 1997 1996 - -------------------------------------------------------------------------------------------------------------------------------------------------------------- Vested $7,615,194 $6,834,661 Non-vested 123,255 139,483Change in benefit obligation: Benefit obligation at beginning of year $11,534,355 $10,265,987 Service cost 838,177 680,192 Interest cost 803,727 732,188 Effect of curtailment (1,224,298) - ------------------------------------------------------------------------------------ Total accumulated benefitChange in discount rate 952,552 - Actuarial (gain) loss (384,492) 146,559 Benefits paid (332,136) (290,571) - -------------------------------------------------------------------------- Benefit obligation 7,738,449 6,974,144 ==================================================================================== Planat end of year 12,187,885 11,534,355 - -------------------------------------------------------------------------- Change in plan assets: Fair value of plan assets at fairbeginning of year 13,592,699 10,720,514 Actual return on plan assets 1,324,606 2,427,768 Employer contribution - 734,988 Benefits paid (332,136) (290,571) - -------------------------------------------------------------------------- Fair value $13,592,699 $10,720,514 Projected benefitof plan assets at end of year 14,585,169 13,592,699 - -------------------------------------------------------------------------- Funded Status 2,397,284 2,058,344 Unrecognized transition obligation (11,534,355) (10,265,987) - ------------------------------------------------------------------------------------ Plan assets less projected benefit obligation 2,058,344 454,527(111,371) (126,475) Unrecognized prior service cost (67,152) (71,851) Unrecognized net gain (3,501,849) (4,038,679) (2,820,957) Unamortized net assets from adoption of SFAS No. 87 (198,326) (141,579) - -------------------------------------------------------------------------------------------------------------------------------------------------------------- Accrued pension cost ($2,178,661) ($2,508,009) ====================================================================================$(1,283,088) $(2,178,661) ========================================================================== Assumptions: Discount rate 6.75% 7.25% 7.25% AverageRate of compensation increase in future compensation levels 4.75% 4.75% Expected long-term rate of return on plan assets 8.50% 8.50% - --------------------------------------------------------------------------------------------------------------------------------------------------------------
Net periodic pension costs for the defined pension benefit plan for 1998, 1997 and 1996 include the following components:
- -------------------------------------------------------------------------------- For the Years Ended December 31, 1998 1997 1996 - -------------------------------------------------------------------------------- Components of net periodic pension cost: Service cost $ 838,177 $ 680,192 $ 656,985 Interest cost 803,727 732,188 658,238 Expected return on assets (1,149,754) (898,037) (784,924) Amortization of: Transition assets (15,104) (15,104) (15,104) Prior service cost (4,699) (4,699) (4,699) Actuarial gain (143,622) (88,900) (68,425) - -------------------------------------------------------------------------------- Net periodic pension cost 328,725 405,640 442,071 Curtailment gain (1,224,298) - - Amounts capitalized as construction costs (31,107) (33,942) (38,860) - -------------------------------------------------------------------------------- Total pension cost accruals $ (926,680) $ 371,698 $ 403,211 ================================================================================
Retirement Savings Plan The Company sponsors a Retirement Savings Plan, a 401(k) plan, that provides participants a mechanism for making contributions for retirement savings. Each participant may make pre-tax contributions up to 15% of eligible base compensation subject to IRS limitations. Based on each participant's years of service, the Company makes a contribution matching 60% or 100% of each participant's pre-tax contributions, not to exceed 6% of the participant's eligible compensation for the plan year. The Company's contributions totaled $495,000, $404,000 and $353,000 for the years ended December 31, 1998, 1997 and 1996, respectively. As of December 31, 1998, there are 30,356 shares reserved to fund future contributions to the Retirement Savings Plan. Enhanced Retirement Savings Plan Effective January 1, 1999, the Company will offer an enhanced 401(k) plan to all new employees, as well as existing employees that elected to no longer participate in the defined benefit plan. The Company will make a matching contribution of each employee's pre-tax contribution of up to 6% of the eligible compensation for the year. The match will be between 100% and 200% based on a combination of the employee's age and years of service. The first 100% of the funds will be matched with Chesapeake common stock. The remaining match will be invested in the Company's 401(k) plan according to each employee's election options. Other Post-retirement Benefits The Company sponsors a defined benefit post-retirement health care and life insurance plan that covers substantially all natural gas and corporate employees. The Company had deferred approximately $126,000, which represented the difference between the Maryland divisionsdivision's SFAS No. 106 expense and its actual pay-as-you-go cost. The amount is being amortized over five years starting in 1995. The unamortized balance is $78,000was $50,000 at December 31, 1997.1998. Net periodic post-retirement costs for 1998, 1997 and 1996 include the following components:
POST-RETIREMENT COST - --------------------------------------------------------------------------------------------- ----------------------------------------------------------------------- For the Years Ended December 31, 1998 1997 1996 1995 - -------------------------------------------------------------------------------------------------------------------------------------------------------------------- Components of net periodic post-retirement cost: Service cost $3,287 $2,820 $1,827$ 3,361 $ 3,287 $ 2,820 Interest cost on APBO59,321 60,221 54,651 59,706 Amortization of transitionof: Transition obligation over 20 years 29,413 27,859 27,859 27,859 Actuarial loss 6,071 1,554 - ---------------------------------------------------------------------------------------------- ----------------------------------------------------------------------- Net periodic post-retirement benefit cost 96,612 92,921 85,330 89,392 AmountAmounts capitalized as construction costcosts (22,459) (16,274) (16,672) (14,010) AmountAmounts amortized (deferred) 25,254 25,254 (20,561)25,254 - --------------------------------------------------------------------------------------------- Amount charged to expense----------------------------------------------------------------------- Total post-retirement cost accruals $99,407 $101,901 $93,912 $54,821 ====================================================================================================================================================================
The following schedule sets forth the funded status of the post-retirement health care and life insurance plan:
ACCRUED POST-RETIREMENT LIABILITY - --------------------------------------------------------------------------------------------------------------------------------------------------- At December 31, 1998 1997 1996 - --------------------------------------------------------------------------------------------------------------------------------------------------- Accumulated post-retirementChange in benefit obligation: Benefit obligation at beginning of year $ 868,899 $ 791,871 Retirees $621,203 $567,599 Fully eligible14,236 53,604 Fully-eligible active employees 145,356 137,378674 7,978 Other active 102,340 86,8943,251 15,446 - ------------------------------------------------------------------------------------ Total accumulated post-retirement benefit--------------------------------------------------------------- Benefit obligation at end of year $ 887,060 $ 868,899 791,871=============================================================== Funded Status $(887,060) $(868,899) Unrecognized transition obligation (245,154) (273,013)217,295 245,154 Unrecognized net (loss) gain (147,422) (67,155)loss 165,160 147,422 - --------------------------------------------------------------------------------------------------------------------------------------------------- Accrued post-retirement liability $476,323 $451,703 ==================================================================================== Assumption:cost $(504,605) $(476,323) =============================================================== Assumptions: Discount rate 7.25%6.75% 7.25% - ---------------------------------------------------------------------------------------------------------------------------------------------------
The health care inflation rate for 19971998 is assumed to be 9.5%9.0%. This rate is projected to gradually decrease to an ultimate rate of 5% by the year 2007. A one percentage point increase in the health care inflation rate from the assumed rate would increase the accumulated post-retirement benefit obligation by approximately $98,650$105,000 as of January 1, 1998,1999, and would increase the aggregate of the service cost and interest cost components of net periodic post-retirement benefit cost for 19981999 by approximately $8,293. Retirement Savings$8,000. K. Executive Incentive Plans The Performance Incentive Plan ("the Plan") adopted in 1992, provides for the granting of stock options to certain officers of the Company over a 10-year period. The Plan provides participants an option to purchase shares of the Company's common stock, exercisable in cumulative installments of up to one- third on each anniversary of the commencement of the award period. The Plan also enables participants the right to earn performance shares upon the Company's achievement of certain performance goals as set forth in the specific agreements associated with particular options and/or performance shares. The Company sponsorshas executed Stock Option Agreements for a Retirement Savings Plan,three-year performance period ending December 31, 2000 with certain executive officers. One-half of these options become exercisable over time and the other half become exercisable if certain performance targets are achieved. Chesapeake also executed Performance Share Agreements for the same period with certain other executive officers. Each year participants are eligible to earn a 401(k) plan ("Plan"), that provides participants a mechanism for making contributions for retirement savings. Each participant may make pre-tax contributionsmaximum number of performance shares equal to one-third of the total number of performance shares granted, based upon eligible compensation.on the Company's achievement of certain performance goals. The Company makes a contribution equal to 60% or 100%recorded $49,000 of each participants pre-tax contributions, not to exceed 6%, ofcompensation expense associated with these performance shares in 1998. In November 1994, the participants eligible compensation forCompany executed Tandem Stock Option and Performance Share Agreements ("Agreements") with certain executive officers. During the plan year. The Companys contributions totaled $404,406, $353,350 and $301,794 for the yearsthree-year period ended December 31, 1997, the performance goals set forth in the Agreements were achieved. Following the approval of the Board of Directors on February 27, 1998, the Company issued 44,081 performance shares. At that time, 44,906 stock options expired. The Company recorded $416,000 and $227,000 to recognize the compensation expense associated with these performance shares in 1997 and 1996, and 1995, respectively. Changes in outstanding options were as follows:
- ------------------------------------------------------------------------------------------------------------ 1998 1997 1996 Number Option Number Option Number Option of shares Price of shares Price of shares Price - ------------------------------------------------------------------------------------------------------------ Balance - beginning of year 208,543 $12.625 - $20.50 113,051 $12.625 - $12.75 125,186 $12.625 - $12.75 Options granted 95,492 $20.50 Options expired (44,906) $12.625 Options exercised (12,135) $12.75 - ------------------------------------------------------------------------------------------------------------ Balance - end of year 163,637 $12.75 - $20.50 208,543 $12.625 - $20.50 113,051 $12.625 - $12.75 ============================================================================================================ Exercisable 68,145 $12.75 98,083 $12.625 - $12.75 83,114 $12.625 - $12.75 - ------------------------------------------------------------------------------------------------------------
In December 1997, the Company granted stock options to certain executive officers of the Company. As required by SFAS No. 123, the pro forma information as if fair value based accounting had been used to account for the stock-based compensation costs is shown below.
- --------------------------------------------------------- For the Years Ended December 31, 1998 1997 - --------------------------------------------------------- Pro forma Net Income $5,262,468 $5,864,269 Pro forma Earnings Per Share: Basic $ 1.04 $ 1.18 Diluted $ 1.03 $ 1.16 Assumptions: Dividend yield 4.73% 4.73% Expected volatility 15.53% 15.53% Risk-free interest rate 5.89% 5.89% Expected lives 4 years 4 years - ---------------------------------------------------------
Certain key USI employees entered into restricted stock award agreements under which shares of Chesapeake common stock were issued over a five-year period beginning in 1992 as certain targets were met. Restrictions lapse over a five to ten-year period from the award date. At December 31, 1998 and 1997, there are 56,374respectively, 4,371 and 12,515 shares reserved to fund future contributions to the Plan. J.valued at $71,041 and $190,886 remain restricted. L. Environmental Commitments and Contingencies The Company is currently is participating in the investigation, assessment or remediation of three former gas manufacturing plant sites located in different jurisdictions, including the exploration of corrective action options to remove environmental contaminants. The Company has accrued liabilities for two of these sites, the Dover Gas Light and Salisbury Town Gas Light sites. TheWith respect to the Dover sites remediation costs are estimated at $4.2 million inGas Light site, the Record of Decision ("ROD") issued by the Environmental Protection Agency ("EPA") in January 1998. The Company and General Public Utilities Corporation, Inc. ("GPU") werehave been ordered by the EPAEnvironmental Protection Agency ("EPA") to fund or implement the ROD.EPA's Record of Decision ("ROD") on the appropriate remedial activities to be performed, which include both soil and ground-water remedies. During the fourth quarter of 1998, the Company started the soil remediation process at that site at a cost of $450,000. Over the next twelve to eighteen months, the Company will commence withfinalize the design phase.soil remediation and initiate the ground-water remedial activities. The Company's independent consultants have prepared preliminary estimates of the costs of two potentially acceptable alternatives to complete the ground- water remediation activities at the site. The costs to remediate the ground- water range from a low of $390,000 in capital and $37,000 per year of operating costs; to a high of $4.0 million in capital and $500,000 per year in operating costs. In both cases, the operating costs are assumed to last for 30 years. A decision by the EPA as to the most appropriate ground-water remediation method is likely in 1999. The capital costs necessary to begin remediation are expected to be incurred over the next twelve to eighteen months. Chesapeake cannot predict the ground-water remediation the EPA will select; therefore, the Company has adjusted the liability associated withaccrued $2.1 million at December 31, 1998 for the Dover site from $6.0 million to $4.2 million. The Companyand has also recorded a regulatory asset infor an equivalent amount. Of this amount, $1.5 million is for ground-water remediation and $600,000 is for the same amount.remaining soil remedition. The previous accrual$1.5 million represents the low end of $6.0 million was based on the original Record of Decision issued by the EPA in 1994.ground-water remedy estimates described above. The Company initiated litigation against one of the other potentially responsible parties for contribution to the remedial costs incurred by Chesapeake in connection with complying with the ROD. At this time, management cannot predict the outcome of the litigation or the amount of proceeds to be received, if any. Management believes that the Company will be equitably entitled to contribution from other responsible parties for a portion of the expenses to be incurred in connection with the remedies selected in the ROD. Management also believesThe Company expects that the amounts not so contributedit will be recoverableable to recover actual costs incurred, which are not recovered from other responsible parties, exclusive of associated carrying costs, through the ratemaking process in the Companys rates.accordance with environmental cost recovery rider provisions currently in effect. In cooperation with the Maryland Department of the Environment ("MDE"), in 1996 the Company completed construction and began remediation procedures at the Salisbury site. In addition, the Company began quarterly reporting of the remediation and monitoring results to the MDE. The Company has established a liability with respect to the Salisbury site of $665,000$600,000 as of December 31, 1997.1998. This amount is based on the estimated operating costs of the remediation facilities.facilities over the next five years. A corresponding regulatory asset has been recorded, reflecting the CompanysCompany's belief that costs incurred will be recoverable in base rates. Portions of the liability payouts for the Dover and Salisbury sites are expected to be over 30 and five-year periods, respectively. In addition, the Company has a site located in the state of Florida which is currently being evaluated. At this time, no estimate of liability can be made. It is managementsmanagement's opinion that any unrecovered current costs and any other future costs incurred will be recoverable through future rates or sharing arrangements with other responsible parties.
ENVIRONMENTAL COSTS INCURRED
- ------------------------------------------------------------------------------------------------------------------------------------------------------------- At December 31, 1998 1997 1996 - ------------------------------------------------------------------------------------------------------------------------------------------------------------- Delaware $6,846,722 $5,317,380 $4,423,843 Maryland 2,541,263 2,368,168 2,187,810 Florida 696,847 692,391 660,828 - ------------------------------------------------------------------------------------------------------------------------------------------------------------- Total costs incurred 10,084,832 8,377,939 7,272,481 Less: Amounts, net of insurance proceeds, which have been approved for ratemaking treatment (8,391,953) (7,319,496) (6,396,108) - ------------------------------------------------------------------------------------------------------------------------------------------------------------- Amounts pending ratemaking recovery 1,058,443 876,373 ====================================================================================$1,692,879 $1,058,443 =========================================================================
K.M. Other Commitments and Contingencies FERC PGA In the third quarterNatural Gas Supply The Company's natural gas distribution operations have entered into contractual commitments for daily entitlements of 1995, Eastern Shore reached a settlement with the FERC pertaining to Eastern Shores PGA methodology. Accordingly, Eastern Shore reversed a large portion of the estimated liability that had been accrued. This reversal contributed $1,385,000 to pre-tax earnings, or $833,000 to after-tax earnings, for the period.natural gas from various suppliers. The contracts have various expiration dates. Other Commitments and Contingencies The Company is involved in certain legal actions and claims arising in the normal course of business. The Company is also involved in certain legal and administrative proceedings before various governmental agencies concerning rates. In the opinion of management, the ultimate disposition of these proceedings will not have a material effect on the consolidated financial position of the Company. L.N. Quarterly Financial Data (Unaudited) In the opinion of the Company, the quarterly financial information shown below includes all adjustments necessary for a fair presentation of the operations for such periods. Due to the seasonal nature of the CompanysCompany's business, there are substantial variations in operations reported on a quarterly basis.
- ------------------------------------------------------------------------------------------------------------------------------------------------------------------ For the Quarters Ended:Ended, March 31 June 30 September 30 December 3131* - ------------------------------------------------------------------------------------------------------------------------------------------------------------------ 19971998 Operating Revenue $43,645,111 $24,805,428 $19,910,307 $34,413,746$60,169,102 $43,594,944 $36,231,924 $43,572,825 Operating Income 4,104,438 1,409,752 25,177 3,019,6034,744,218 962,101 (459,965) 3,194,728 Net Income 3,366,113 692,841 (739,193) 2,363,1854,000,602 263,751 (1,266,498) 2,304,731 Earnings per share: Basic 0.76 0.16 (0.17) 0.53$ 0.80 $ 0.05 $ (0.25) $ 0.45 Diluted 0.72 0.15 (0.17) 0.51$ 0.77 $ 0.05 $ (0.25) $ 0.44 - ----------------------------------------------------------------------------------- 1996------------------------------------------------------------------------------- 1997 Operating Revenue $49,026,542 $25,213,979 $19,637,074 $36,335,814$76,302,285 $44,918,820 $41,680,719 $59,587,440 Operating Income 6,667,499 1,084,392 (160,422) 2,518,5364,148,755 1,392,667 (7,026) 3,132,068 Net Income 6,000,157 486,311 (747,779) 1,866,2263,433,648 707,300 (762,784) 2,489,448 Earnings per share: Basic 1.37 0.11 (0.17) 0.42$ 0.69 $ 0.14 $ (0.15) $ 0.50 Diluted 1.30 0.11 (0.17) 0.41$ 0.67 $ 0.14 $ (0.15) $ 0.49 - ------------------------------------------------------------------------------------------------------------------------------------------------------------------ * Results for the fourth quarter of 1998 reflect a one-time pension plan curtailment gain of approximately $750,000, net of income tax expense. See Note J to the Consolidated Financial Statements.
Operating StatisticsOPERATING STATISTICS - ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- For the Years Ended December 31, 1998 1997 1996 1995 1994 (1) 1993 (1) - ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- Revenues (in thousands) Natural gas Residential $21,540 $18,256 $14,857$ 19,274 $ 21,540 $ 18,256 $ 14,857 $15,228 $14,007 Commercial 15,243 16,557 14,339 11,383 11,594 10,837 Industrial 15,953 22,625 28,546 36,898 32,718 31,622 Sale for resale 11,683 23,010 24,481 12,459 9,586 5,242 Transportation 6,120 4,212 3,369 2,993 2,639 2,480 Other 310 162 1,102 515 (50) 193 - ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- Total natural gas revenues 68,583 88,106 90,093 79,105 71,715 64,381 Propane (1) 26,994 33,179 25,346distribution and marketing (2) 102,873 125,159 161,812 147,596 17,789 16,908 Other 7,675 6,941 7,34512,113 9,224 8,197 8,584 6,173 4,584 - ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- Total revenues $122,775 $130,213 $111,796$183,569 $222,489 $260,102 $235,285 $95,677 $85,873 ===================================================================================================================================================================================================================== Volumes Natural gas deliveries (in MMCF) Residential 1,636 1,753 1,987 1,686 1,665 1,596 Commercial 2,138 2,0921,907 2,113 2,059 1,792 1,771 1,676 Industrial 5,946 7,5013,115 5,975 7,553 13,622 10,752 9,308 Sale for resale 8721,194 1,200 1,065 990 998 984 Transportation 12,559 12,09613,548 12,231 12,138 11,131 7,542 5,880 - ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- Total natural gas deliveries 23,268 24,74121,400 23,272 24,802 29,221 22,728 19,444 ===================================================================================================================================================================================================================== Propane distribution (in thousands of gallons) (1)(2) 25,979 26,682 29,975 26,184 18,395 17,250 ===================================================================================================================================================================================================================== Customers Natural gas Residential 32,473 31,277 30,349 29,285 28,260 27,312 Commercial 4,416 4,288 4,151 4,030 3,879 3,759 Industrial (2)(3) 236 229 210 212 204 196 Sale for resale (2)(3) 3 3 3 3 3 - ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- Total natural gas customers 37,128 35,797 34,713 33,530 32,346 31,270 Propane distribution 34,988 33,998 32,218 31,372 22,180 21,622 - ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- Total customers 72,116 69,795 66,931 64,902 54,526 52,892 ====================================================================================================================================================================================================================== (1) 1994 and 1993 havehas not been restated to include the business combinationcombinations with Tri-County Gas Company, Inc., Tolan Water Service or Xeron, Inc. (2) 1994 amounts exclude $2,895,000 in revenue and nine million gallons of propane sold to one large wholesale customer. (3) Includes transportation customers.
[GRAPH APPEARS HERE] Natural Gas and Propane Customer Growth Natural Gas Propane Year Customers Customers ---- --------- --------- 1994 32,346 22,180 1995 33,530 31,372 1996 34,713 32,218 1997 35,797 33,998 1998 37,152 34,988 [GRAPH APPEARS HERE] Volumes Compared to Heating Degree Days Natural Propane Heating Gas (in thousands Degree Year (in MMCF) of gallons) Days ---- ------- ---------- ------- 1994 22,728 18,395 4,398 1995 29,221 26,184 4,594 1996 24,741 29,975 4,717 1997 23,268 26,682 4,430 1998 21,400 26,029 3,704 Item 9. Changes In and Disagreements With Accountants on Accounting and Financial Disclosure None PART III Item 10. Directors and Executive Officers of the Registrant Information pertaining to the Directors of the Company is incorporated herein by reference to the Proxy Statement, under "Information Regarding the Board of Directors and Nominees", dated and to be filed on or before March 30, 19981999 in connection with the CompanysCompany's Annual Meeting to be held on May 19, 1998.18, 1999. The information required by this item with respect to executive officers is, pursuant to instruction 3 of paragraph (b) of Item 401 of Regulation S-K, set forth in Item 10 of Part I of this Form 10-K under "Executive Officers of the Registrant." Item 11. Executive Compensation This information is incorporated herein by reference to the Proxy Statement, under "Report on Executive Compensation", dated and to be filed on or before March 30, 19981999 in connection with the CompanysCompany's Annual Meeting to be held on May 19, 1998.18, 1999. Item 12. Security Ownership of Certain Beneficial Owners and Management This information is incorporated herein by reference to the Proxy Statement, under "Beneficial Ownership of the CompanysCompany's Securities", dated and to be filed on or before March 30, 19981999 in connection with the CompanysCompany's Annual Meeting to be held on May 19, 1998.18, 1999. Item 13. Certain Relationships and Related Transactions This information is incorporated herein by reference to the Proxy Statement, under "Beneficial Ownership of the CompanysCompany's Securities", dated and to be filed on or before March 30, 19981999 in connection with the CompanysCompany's Annual Meeting to be held on May 19, 1998.18, 1999. PART IV Item 14. Financial Statements, Financial Statement Schedules, and Exhibits and Reports on Form 8-K (a) The following documents are filed as a part of this report: 1. Financial Statements: - Accountants- Accountants' Report dated February 12, 19981999 of Coopers & Lybrand L.L.P.,PricewaterhouseCoopers LLP, Independent Accountants - - Consolidated Statements of Income for each of the three years ended December 31, 1998, 1997 and 1996 and 1995- - Consolidated Balance Sheets at December 31, 19971998 and December 31, 19961997 - - Consolidated Statements of Cash Flows for each of the three years ended December 31, 1998, 1997 and 1996 and 1995- - Consolidated Statements of Common StockholdersStockholders' Equity for each of the three years ended December 31, 1998, 1997 and 1996 and 1995- - Consolidated Statements of Income Taxes for each of the three years ended December 31, 1998, 1997 and 1996 and 1995- - Notes to Consolidated Financial Statements 2. The following additional information for the years 1998, 1997 1996 and 19951996 is submitted herewith: - - Schedule II - Valuation and Qualifying Accounts All other schedules are omitted because they are not required, are inapplicable or the information is otherwise shown in the financial statements or notes thereto. (b) Reports on Form 8-K8-K: None. (c) ExhibitsExhibits: Exhibit 2(a) - Agreement and Plan of Merger by and between Chesapeake Utilities Corporation and Tri-County Gas Company, Inc., filed on the CompanysCompany's Form 8-K, File No. 001-11590 on January 13, 1997, is incorporated herein by reference. Exhibit 3(a) - Amended Certificate of Incorporation of Chesapeake Utilities Corporation is incorporated herein by reference to Exhibit 33.1 of the CompanysCompany's Quarterly Report on Form 10-Q for the period ended June 30, 1995,1998, File No. 001-11590. Exhibit 3(b) - Amended Bylaws of Chesapeake Utilities Corporation, effective July 11, 1997, are incorporated herein by reference to Exhibit 33.2 of the Quarterly Report on Form 10-Q for the period ended June 30, 1997,1998, File No. 001-11590. Exhibit 4(a) - Form of Indenture between the Company and BoatmensBoatmen's Trust Company, Trustee, with respect to the 8 1/4% Convertible Debentures is incorporated herein by reference to Exhibit 4.2 of the CompanysCompany's Registration Statement on Form S-2, Reg. No. 33-26582, filed on January 13, 1989. Exhibit 4(b) - Note Agreement dated February 9, 1993, by and between the Company and Massachusetts Mutual Life Insurance Company and MML Pension Insurance Company, with respect to $10 million of 7.97% Unsecured Senior Notes due February 1, 2008, is incorporated herein by reference to Exhibit 4 to the CompanysCompany's Annual Report on Form 10-K for the year ended December 31, 1992, File No. 0-593. Exhibit 4(c) - Directors Stock Compensation Plan adopted by Chesapeake Utilities Corporation in 1995 is incorporated herein by reference to the CompanysCompany's Proxy Statement dated April 17, 1995 in connection with the CompanysCompany's Annual Meeting held in May 1995. Exhibit 4(d) Note Purchase Agreement entered into by the Company on October 2, 1995, pursuant to which the Company privately placed $10 million of its 6.91% Senior Notes due in 2010, is not being filed herewith, in accordance with Item 601(b)(4)(iii) of Regulation S-K. The Company hereby agrees to furnish a copy of that agreement to the Commission upon request. Exhibit 4(e) Note Purchase Agreement entered into by the Company on December 15, 1997, pursuant to which the Company privately placed $10.million of its 6.85 senior notes due 2012, is not being filed herewith, in accordance with Item 601(b)(4)(iii) of Regulation S-K. The Company hereby agrees to furnish a copy of that agreement to the Commission upon request. Exhibit 10(a) - Service Agreement dated November 1, 1989, by and between Transcontinental Gas Pipe Line Corporation and Eastern Shore Natural Gas Company, is incorporated herein by reference to Exhibit 10 to the CompanysCompany's Annual Report on Form 10-K for the year ended December 31, 1989, File No. 0-593. Exhibit 10(b) - Service Agreement dated November 1, 1989, by and between Columbia Gas Transmission Corporation and Eastern Shore Natural Gas Company, is incorporated herein by reference to Exhibit 10 to the CompanysCompany's Annual Report on Form 10-K for the year ended December 31, 1989, File No. 0-593. Exhibit 10(c) - Service Agreement for General Service dated November 1, 1989, by and between Florida Gas Transmission Company and Chesapeake Utilities Corporation, is incorporated herein by reference to Exhibit 10 to the CompanysCompany's Annual Report on Form 10-K for the year ended December 31, 1990, File No. 0-593. Exhibit 10(d) - Service Agreement for Preferred Service dated November 1, 1989, by and between Florida Gas Transmission Company and Chesapeake Utilities Corporation, is incorporated herein by reference to Exhibit 10 to the CompanysCompany's Annual Report on Form 10-K for the year ended December 31, 1990, File No. 0-593. Exhibit 10(e) - Service Agreement for Firm Transportation Service dated November 1, 1989, by and between Florida Gas Transmission Company and Chesapeake Utilities Corporation, is incorporated herein by reference to Exhibit 10 to the CompanysCompany's Annual Report on Form 10-K for the year ended December 31, 1990, File No. 0-593. Exhibit 10(f) - Form of Service Agreement for Interruptible Sales Services dated May 11, 1990, by and between Florida Gas Transmission Company and Chesapeake Utilities Corporation, is incorporated herein by reference to Exhibit 10 to the CompanysCompany's Annual Report on Form 10-K for the year ended December 31, 1990, File No. 0-593. Exhibit 10(g) - Interruptible Transportation Service Agreement dated February 23, 1990, by and between Florida Gas Transmission Company and Chesapeake Utilities Corporation, is incorporated herein by reference to Exhibit 10 to the CompanysCompany's Annual Report on Form 10-K for the year ended December 31, 1990, File No. 0-593. Exhibit 10(h) - Interruptible Transportation Service Agreement dated November 30, 1990, by and between Florida Gas Transmission Company and Chesapeake Utilities Corporation, is incorporated herein by reference to Exhibit 10 to the CompanysCompany's Annual Report on Form 10-K for the year ended December 31, 1990, File No. 0-593. Exhibit 10(i) - Executive Employment Agreement dated March 26, 1997, by and between Chesapeake Utilities Corporation and each Ralph J. Adkins and John R. Schimkaitis is incorporated herein by reference to Exhibit 10 to the CompanysCompany's Quarterly Report on Form 10-Q for the period ended June 30, 1997, File No. 001-11590. Exhibit 10(j) - Form of Performance Share Agreement dated January 1, 1998, pursuant to Chesapeake Utilities Corporation Performance Incentive Plan by and between Chesapeake Utilities Corporation and each of Ralph J. Adkins and John R. Schimkaitis is filed herewith.incorporated herein by reference to Exhibit 10 of the Company's Annual Report on Form 10-K for the year ended December 31, 1997, File No. 001-11590. Exhibit 10(k) - Chesapeake Utilities Corporation Cash Bonus Incentive Plan dated January 1, 1992, is incorporated herein by reference to Exhibit 10 to the CompanysCompany's Annual Report on Form 10-K for the year ended December 31, 1991, File No. 0-593. Exhibit 10(l) - Chesapeake Utilities Corporation Performance Incentive Plan dated January 1, 1992, is incorporated herein by reference to the CompanysCompany's Proxy Statement dated April 20, 1992, in connection with the CompanysCompany's Annual Meeting held on May 19, 1992. Exhibit 10(m) - Form of Stock Option Agreement dated January 1, 1998, pursuant to Chesapeake Utilities Corporation Performance Incentive Plan by and between Chesapeake Utilities Corporation and each of Michael P. McMasters, Stephen C. Thompson, William C. Boyles, Philip S. Barefoot, Jeremy D. West, William P. Schneider and James R. Schneider, is filed herewith.incorporated herein by reference to Exhibit 10 of the Company's Annual Report on Form 10-K for the year ended December 31, 1997, File No. 001-11590. Exhibit 12 - Computation of Ratio of Earning to Fixed Charges, filed herewith. Exhibit 21 - Subsidiaries of the Registrant, filed herewith. Exhibit 23 - Consent of Independent Accountants, filed herewith. SIGNATURES Pursuant to the requirements of Section 13 or 15 (d) of the Securities Exchange Act of 1934, Chesapeake Utilities Corporation has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. CHESAPEAKE UTILITIES CORPORATION By: /S/ RALPH J. ADKINS ------------------------------- Ralph J. Adkins Chairman of the Board/s/ JOHN R. SCHIMKAITIS ------------------------- John R. Schimkaitis President and Chief Executive Officer Date: March 20, 199816, 1999 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. /S//s/ RALPH J. ADKINS /S//s/ JOHN R. SCHIMKAITIS - ------------------------------ ------------------------------------------------------- ------------------------- Ralph J. Adkins, Chairman of the Board John R. Schimkaitis, Board, President, and Director Chief Executive Chief Operating Officer Officer and Director and Director Date: March 20, 199816, 1999 Date: March 20, 1998 /S/16, 1999 /s/ MICHAEL P. MCMASTERS /S//s/ RICHARD BERNSTEIN - ------------------------------ ------------------------------------------------------- ------------------------- Michael P. McMasters, Vice President, Richard Bernstein, Director Chief Financial Officer and Treasurer Date: March 16,1999 (Principal Financial Officer) Date: March 20, 1998 Date: March 20, 1998 /S/16, 1999 /s/ WALTER J. COLEMAN /S/ JOHN/s/ John W. JARDINE, JR. - ------------------------------ ------------------------------------------------------- ------------------------- Walter J. Coleman, Director John W. Jardine, Jr., Director Date: March 20, 199816, 1999 Date: March 20, 1998 /S/16, 1999 /s/ RUDOLPH M. PEINS, JR. /S//s/ ROBERT F. RIDER - ------------------------------ ------------------------------------------------------- ------------------------- Rudolph M. Peins, Jr., Director Robert F. Rider, Director Date: March 20, 199816, 1999 Date: March 20, 1998 /S/16, 1999 /s/ JEREMIAH P. SHEA /S/ WILLIAM G. WARDEN, III - ------------------------------ ------------------------------------------------------- ------------------------- Jeremiah P. Shea, Director William G. Warden, III, Director Date: March 20, 199816, 1999 Date: March 20, 199816, 1999
CHESAPEAKE UTILITIES CORPORATION AND SUBSIDIARIES SCHEDULEChesapeake Utilities Corporation and Subsidiaries Schedule II VALUATION AND QUALIFYING ACCOUNTS FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995 COLUMN A COLUMN B COLUMN C COLUMN D COLUMN EValuation and Qualifying Accounts - ---------------------------------------------------------------------------------------------------------------- ------------------------------------------------------------------------------------------------- Additions ---------------------------- Balance at Charged to Charged to Balance at Beginning Costs andCharged to Other End Description of Period ExpenseFor the Year Ended December 31, of Year Income Accounts(1) Deductions(2) Year - -------------------------------------------------------------------------------------------- Reserve Deducted From Related Assets Reserve for Uncollectible Accounts Deductions of Period 1998 $ 331,775 $280,391 $ 57,759 $ (367,412) $ 302,513 1997 $ 392,412 $203,624 $ 68,038 $ (332,299) $ 331,775 1996 $ 309,955 $364,622 $ 55,631 $ (337,796) $ 392,412 - ---------------------------------------------------------------------------------------------------------------- Valuation-------------------------------------------------------------------------------------------- (1) Recoveries. (2) Uncollectible accounts deducted from assets to which they apply for doubtful accounts receivable: 1997 . . . . . . . . . . . . . . $392,412 $203,624 $68,038 (B) ($332,299) (A) $331,775 1996 . . . . . . . . . . . . . . $309,955 $364,622 $55,631 (B) ($337,796) (A) $392,412 1995 . . . . . . . . . . . . . . $202,152 $328,012 $43,151 (B) ($263,360) (A) $309,955charged off.
Notes: (A) Uncollectible accounts charged off. (B) Recoveries.