SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
_______________________________
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended: March 31,September 30, 2003
--------------------------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ______ to ______
COMMISSION FILE NUMBER: 001-11590
CHESAPEAKE UTILITIES CORPORATION
--------------------------------
(Exact name of registrant as specified in its charter)
DELAWARE 51-0064146
-------- ----------
(State or other (I.R.S. Employer
jurisdiction of Identification No.)
incorporation
or organization)
909 SILVER LAKE BOULEVARD, DOVER, DELAWARE 19904
------------------------------------------------
(Address of principal executive offices, including Zip Code)
(302) 734-6799
--------------
(Registrant's Telephone Number, including Area Code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes [X] No [ ]
Common Stock, par value $.4867 - 5,576,4145,635,702 shares
issuedoutstanding as of March 31,September 30, 2003.
TABLE OF CONTENTS
PART I - FINANCIAL INFORMATION. . . . . . . . . . . . . . . . . . . . . . 1
Item 1. Financial Statements. . . . . . . . . . . . . . . . . . . . . 1
Notes to Consolidated Financial Statements. . . . . . . . . . . . . . 7
1. Quarterly Financial Data . . . . . . . . . . . . . . . . . . . . 7
2. Calculation of Earnings Per Share. . . . . . . . . . . . . . . 7
3. Commitments and Contingencies. . . . . . . . . . . . . . . . . . 7
Environmental Matters . . . . . . . . . . . . . . . . . . . . . 97
Other Commitments and Contingencies . . . . . . . . . . . . .10. 9
4. Recent Authoritative Pronouncements
on Financial Reporting and Accounting. . . . . . . . . . . . .10
5. Adopted PronouncementsSegment Information . . . . . . . . . . . . . . . . . . . . . . .10
6. Segment Information . .Discontinued Operations . . . . . . . . . . . . . . . . . . . . .11
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations. . . . . . . . . . . .12.13
Business Description . . . . . . . . . . . . . . . . . . . . . . . . .12.13
Financial Position, Liquidity and Capital Resources . . . . . . . . .12.13
Results of Operations for the Quarter
Ended March 31, 2003September 30, 2003. . . . . . . . . . . . . . . . . . . . . . . . . .13.15
Consolidated Overview. . . . . . . . . . . . . . . . . . . . . . . . .13.15
Natural Gas Distribution and Transmission . . . . . . . . . . . . .14.15
Propane. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1516
Advanced Information Services. . . . . . . . . . . . . . . . . . . . 1516
Water Services.Business Operations. . . . . . . . . . . . . . . . . . . . . . 17
Other Business Operations. . . . . . . . . . . . . . . . . . . . . . 17
Income Taxes. . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
Other Business Operations. . . . . . . . . . . . . . . . . . . . . . 16
Operating Income Taxes . . . . . . . . . . . . . . . . . . . . . . . 1617
Interest Expense. . . . . . . . . . . . . . . . . . . . . . . . . . . 1618
Results of Operations for the Nine Months
Ended September 30, 2003. . . . . . . . . . . . . . . . . . . . . . . .18
Consolidated Overview. . . . . . . . . . . . . . . . . . . . . . . . .18
Natural Gas Distribution and Transmission . . . . . . . . . . . . .19
Propane. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
Advanced Information Services. . . . . . . . . . . . . . . . . . . . 20
Water Business Operations. . . . . . . . . . . . . . . . . . . . . . 20
Other Business Operations. . . . . . . . . . . . . . . . . . . . . . 21
Income Taxes. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
Interest Expense. . . . . . . . . . . . . . . . . . . . . . . . . . . 21
Environmental Matters . . . . . . . . . . . . . . . . . . . . . . . . 1721
Other Matters . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1722
Regulatory Matters. . . . . . . . . . . . . . . . . . . . . . . . . . 1722
Competition. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1823
Recent Pronouncements . . . . . . . . . . . . . . . . . . . . . . . . 1824
Inflation. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1924
Cautionary Statement. . . . . . . . . . . . . . . . . . . . . . . . . 1925
Item 3. Quantitative and Qualitative Disclosures about Market Risk. . 1925
Item 4. Controls and Procedures. . . . . . . . . . . . . . . . . . .21
Evaluation of Disclosure Controls and Procedures. . . . . . . . . 21
Changes in Internal Controls. . . . . . . . . . . . . . . . . . . . 21.26
PART II - OTHER INFORMATION. . . . . . . . . . . . . . . . . . . . . . . 2327
SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
CERTIFICATIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2528
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CHESAPEAKE UTILITIES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
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FOR THE THREE MONTHS ENDED MARCH 31,SEPTEMBER 30, 2003 2002
- --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
OPERATING REVENUES.REVENUES . . . . . . . . . . . . . . . . . . . . $ 24,742,187 $ 22,009,556
COST OF SALES. . . . . . . . . . . . . . . . . . . . . . $ 66,774,480 $ 48,642,253
COST OF SALES. 12,782,686 10,573,652
- -----------------------------------------------------------------------------------------
GROSS MARGIN . . . . . . . . . . . . . . . . . . . . . . . . 40,205,499 26,302,36411,959,501 11,435,904
- ---------------------------------------------------------------------------------------------
GROSS MARGIN. . . . . . . . . . . . . . . . . . . . . . . . . 26,568,981 22,339,889
- --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
OPERATING EXPENSES
Operations . . . . . . . . . . . . . . . . . . . . . . . . 10,133,063 9,321,9408,118,870 8,013,111
Maintenance. . . . . . . . . . . . . . . . . . . . . . . . 425,911 461,981443,315 498,250
Depreciation and amortization. . . . . . . . . . . . . . . 2,375,153 2,326,3492,260,553 2,144,589
Other taxes. . . . . . . . . . . . . . . . . . . . . . . . 1,333,992 1,283,266
Income taxes979,465 1,058,118
- -----------------------------------------------------------------------------------------
Total operating expenses . . . . . . . . . . . . . . . . . 11,802,203 11,714,068
- -----------------------------------------------------------------------------------------
OPERATING INCOME (LOSS). . . . . . . . . . . . . . . . . . 157,298 (278,164)
OTHER (LOSS) INCOME. . . . . . . . . . . . . . . . . . . . (16,282) 34,294
- -----------------------------------------------------------------------------------------
INCOME (LOSS) BEFORE INTEREST CHARGES. . . . . . . . . . . 141,016 (243,870)
INTEREST CHARGES . . . . . . . . . . . . . . . . . . . . . 1,419,887 1,176,379
- -----------------------------------------------------------------------------------------
LOSS BEFORE INCOME TAXES . . . . . . . . . . . . . . . . . (1,278,871) (1,420,249)
INCOME TAXES . . . . . . . . . . . . . . . . . . . . . . . 4,266,494 3,039,429(578,239) (608,150)
- ---------------------------------------------------------------------------------------------
Total operating expenses.-----------------------------------------------------------------------------------------
NET LOSS FROM CONTINUING OPERATIONS. . . . . . . . . . . . (700,632) (812,099)
NET LOSS FROM DISCONTINUED
OPERATIONS, NET OF TAX
Discontinued operations. . . . . . . . . . . . . . . . . . . 18,534,613 16,432,965
- ---------------------------------------------------------------------------------------------
OPERATING INCOME.(58,750) (127,066)
Loss on sale . . . . . . . . . . . . . . . . . . . . . . 8,034,368 5,906,924
OTHER INCOME, NET. (106,028) -
- -----------------------------------------------------------------------------------------
TOTAL LOSS FROM DISCONTINUED OPERATIONS. . . . . . . . . . . . . . . . . . . . . . . 59,291 211,050(164,778) (127,066)
- ---------------------------------------------------------------------------------------------
INCOME BEFORE INTEREST CHARGES. . . . . . . . . . . . . . . . 8,093,659 6,117,974
INTEREST CHARGES. . . . . . . . . . . . . . . . . . . . . . . 1,465,850 1,234,496
- ---------------------------------------------------------------------------------------------
INCOME BEFORE CUMULATIVE EFFECT OF
CHANGE IN ACCOUNTING PRINCIPLE . . . . . . . . . . . . . . 6,627,809 4,883,478
CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING
PRINCIPLE,-----------------------------------------------------------------------------------------
NET OF TAX. . . . . . . . . . . . . . . . . . . 0 (1,916,000)
- ---------------------------------------------------------------------------------------------
NET INCOME.LOSS . . . . . . . . . . . . . . . . . . . . . . . . . $ 6,627,809 $ 2,967,478
=============================================================================================
EARNINGS($865,410) ($939,165)
=========================================================================================
LOSS PER SHARE OF COMMON STOCK:
BASIC
BEFORE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE. . . . . . $ 1.19 $ 0.90
EFFECT OF CHANGE IN ACCOUNTING PRINCIPLEFROM CONTINUING OPERATIONS . . . . . . . . . 0.00 (0.35). . . . . . ($0.12) ($0.15)
FROM DISCONTINUED OPERATIONS . . . . . . . . . . . . . . (0.03) (0.02)
- --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
NET INCOME.LOSS . . . . . . . . . . . . . . . . . . . . . . . . . $ 1.19 $ 0.55
=============================================================================================($0.15) ($0.17)
=========================================================================================
DILUTED
BEFORE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE. . . . . . $ 1.16 $ 0.87
EFFECT OF CHANGE IN ACCOUNTING PRINCIPLEFROM CONTINUING OPERATIONS . . . . . . . . . 0.00 (0.34). . . . . . ($0.12) ($0.15)
FROM DISCONTINUED OPERATIONS . . . . . . . . . . . . . . (0.03) (0.02)
- --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
NET INCOME.LOSS . . . . . . . . . . . . . . . . . . . . . . . . . $ 1.16 $ 0.53
=============================================================================================($0.15) ($0.17)
=========================================================================================
DIVIDENDS DECLARED PER SHARE OF COMMON STOCK: . . . . . . . . $ 0.275 $ 0.275
=============================================================================================- -----------------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
CHESAPEAKE UTILITIES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
- -----------------------------------------------------------------------------------------
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2003 2002
- -----------------------------------------------------------------------------------------
OPERATING REVENUES . . . . . . . . . . . . . . . . . . . . $123,595,098 $ 99,309,268
COST OF SALES. . . . . . . . . . . . . . . . . . . . . . . 70,775,536 52,671,658
- -----------------------------------------------------------------------------------------
GROSS MARGIN . . . . . . . . . . . . . . . . . . . . . . . 52,819,562 46,637,610
- -----------------------------------------------------------------------------------------
OPERATING EXPENSES
Operations . . . . . . . . . . . . . . . . . . . . . . . . 25,509,232 24,477,951
Maintenance. . . . . . . . . . . . . . . . . . . . . . . . 1,297,485 1,407,655
Depreciation and amortization. . . . . . . . . . . . . . . 6,781,142 6,634,659
Other taxes. . . . . . . . . . . . . . . . . . . . . . . . 3,322,104 3,260,250
- -----------------------------------------------------------------------------------------
Total operating expenses . . . . . . . . . . . . . . . . . 36,909,963 35,780,515
- -----------------------------------------------------------------------------------------
OPERATING INCOME . . . . . . . . . . . . . . . . . . . . . 15,909,599 10,857,095
OTHER INCOME . . . . . . . . . . . . . . . . . . . . . . . 92,692 388,857
- -----------------------------------------------------------------------------------------
INCOME BEFORE INTEREST CHARGES . . . . . . . . . . . . . . 16,002,291 11,245,952
INTEREST CHARGES . . . . . . . . . . . . . . . . . . . . . 4,314,742 3,558,254
- -----------------------------------------------------------------------------------------
INCOME BEFORE INCOME TAXES . . . . . . . . . . . . . . . . 11,687,549 7,687,698
INCOME TAXES . . . . . . . . . . . . . . . . . . . . . . . 4,461,043 2,902,563
- -----------------------------------------------------------------------------------------
NET INCOME FROM CONTINUING OPERATIONS. . . . . . . . . . . 7,226,506 4,785,135
NET LOSS FROM DISCONTINUED
OPERATIONS, NET OF TAX
Discontinued operations. . . . . . . . . . . . . . . . . . (253,337) (311,128)
Loss on sale . . . . . . . . . . . . . . . . . . . . . . . (34,454) -
- -----------------------------------------------------------------------------------------
TOTAL NET LOSS FROM DISCONTINUED OPERATIONS. . . . . . . . (287,791) (311,128)
CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING
PRINCIPLE, NET OF TAX . . . . . . . . . . . . . . . . . - (1,916,000)
- -----------------------------------------------------------------------------------------
NET INCOME . . . . . . . . . . . . . . . . . . . . . . . . $ 6,938,715 $ 2,558,007
=========================================================================================
EARNINGS (LOSS) PER SHARE OF COMMON STOCK:
BASIC
FROM CONTINUING OPERATIONS . . . . . . . . . . . . . . . $ 1.29 $ 0.87
FROM DISCONTINUED OPERATIONS . . . . . . . . . . . . . . (0.05) (0.05)
EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE . . . . . . . . - (0.35)
- -----------------------------------------------------------------------------------------
NET INCOME . . . . . . . . . . . . . . . . . . . . . . . . $ 1.24 $ 0.47
=========================================================================================
DILUTED
FROM CONTINUING OPERATIONS . . . . . . . . . . . . . . . $ 1.27 $ 0.87
FROM DISCONTINUED OPERATIONS . . . . . . . . . . . . . . (0.05) (0.05)
EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE . . . . . . . . - (0.35)
- -----------------------------------------------------------------------------------------
NET INCOME . . . . . . . . . . . . . . . . . . . . . . . . $ 1.22 $ 0.47
=========================================================================================
DIVIDENDS DECLARED PER SHARE OF COMMON STOCK:. . . . . . . $ 0.825 $ 0.825
- -----------------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
CHESAPEAKE UTILITIES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
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FOR THE THREENINE MONTHS ENDED MARCH 31,SEPTEMBER 30, 2003 2002
- --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
OPERATING ACTIVITIES
Net Income. . . . . . . . . . . . . . . . . . . . . . . . . $ 6,627,8096,938,715 $ 2,967,4782,558,007
Adjustments to reconcile net income to net operating cash:
Goodwill impairment.impairment . . . . . . . . . . . . . . . . . . 0- 3,200,000
Depreciation and amortization.amortization . . . . . . . . . . . . . 2,375,153 2,326,3497,084,141 6,965,483
Depreciation included in other costscosts. . . . . . . . . . . 240,266 327,015726,977 828,465
Deferred income taxes, net . . . . . . . . . . . . . . . 723,749 (2,528,067)
Mark-to-market adjustments . . . . . . . . . . . . . . . 324,494 (78,350)
Employee benefits and compensation . . . . . . . . . . . 348,401 103,512
Other, net . . . . . . . . . . . . . . . . . . . . . . . (13,701) (13,704)
Changes in assets and liabilities:
Accounts receivable, net . . . . . . . . . . . . . . . . (5,327,681) (163,710)
Inventory, materials, supplies and storage gas . . . . . 5,078,231 4,191,260
Prepaid expenses and other current assets. . . . . . . . 646,661 195,564
Other deferred charges . . . . . . . . . . . . . . . . . (19,980) (179,235)
Accounts payable, net. . . . . . . . . . . . . . . . . . (430,347) (1,291,053)
Refunds payable to customers2,991,996 (1,086,520)
Mark-to-market adjustments. . . . . . . . . . . . . . . (77,820) (425,178)
Accrued income taxes604,652 (45,155)
Employee benefits and compensation. . . . . . . . . . . . . . . . . . . 3,218,154 4,030,787
Accrued interest . . . . . . . . . . . . . . . . . . . . 1,020,121 (888,341)
Under (over) recovered purchased gas costs . . . . . . . (1,346,725) 2,830,709
Other.756,051 205,681
Other . . . . . . . . . . . . . . . . . . . . . . . . . 540,450 66,396
- ---------------------------------------------------------------------------------------------
Net cash provided by operating activities. . . . . . . . . . . 13,927,235 14,671,432
- ---------------------------------------------------------------------------------------------
INVESTING ACTIVITIES
Property, plant12,453 (41,112)
Changes in assets and equipment expenditures, net . . . . . . (1,935,617) (3,102,055)
Environmental recoveries, net of expenditures . . . . . . . 524,850 372,665
- ---------------------------------------------------------------------------------------------
Net cash used by investing activities. . . . . . . . . . . . . (1,410,767) (2,729,390)
- ---------------------------------------------------------------------------------------------
FINANCING ACTIVITIES
Common stock dividends, net of amounts
reinvested of $178,775, and $166,005, respectively . . . (1,343,208) (1,325,828)
Issuance of stock:
Dividend Reinvestment Plan optional cash . . . . . . . . 73,021 74,314
Retirement Savings Plan.liabilities:
Accounts receivable . . . . . . . . . . . . . . . . 264,173 260,281. . 5,760,008 7,259,075
Inventory, materials, supplies and storage gas. . . . . (2,720,339) (1,031,969)
Prepaid expenses and other current assets . . . . . . . 352,264 (203,267)
Other deferred charges. . . . . . . . . . . . . . . . . 735,614 (369,146)
Accounts payable. . . . . . . . . . . . . . . . . . . . (7,262,453) (2,016,965)
Refunds payable to customers. . . . . . . . . . . . . . (213,473) (683,382)
Accrued income taxes. . . . . . . . . . . . . . . . . . (2,302,419) 404,046
Accrued interest. . . . . . . . . . . . . . . . . . . . 1,021,253 (790,870)
Over (under) recovered deferred purchased gas costs . . 225,118 4,931,090
Other current liabilities . . . . . . . . . . . . . . . 693,690 (723,543)
- -----------------------------------------------------------------------------------------
Net cash provided by operating activities . . . . . . . . . 15,404,248 19,359,918
- -----------------------------------------------------------------------------------------
INVESTING ACTIVITIES
Property, plant and equipment expenditures, net . . . . . (7,695,569) (9,142,227)
Sale of discontinued operations . . . . . . . . . . . . . 945,404 -
Environmental recoveries, net of expenditures . . . . . . 1,986,312 377,492
- -----------------------------------------------------------------------------------------
Net cash used by investing activities . . . . . . . . . . . (4,763,853) (8,764,735)
- -----------------------------------------------------------------------------------------
FINANCING ACTIVITIES
Common stock dividends, net of amounts reinvested . . . . (4,045,145) (3,985,881)
Issuance of stock:
Dividend Reinvestment Plan optional cash. . . . . . . . 248,533 214,857
Retirement Savings Plan . . . . . . . . . . . . . . . . 704,409 773,488
Net repayment under line of credit agreements . . . . . . (7,000,000) (6,419,401)
Proceeds from issuance of long-term debt. . (10,400,000) (10,500,000). . . . . . . - 60,681
Repayment of long-term debt . . . . . . . . . . . . . . . . (1,267,680) (1,005,116)(1,658,333) (1,408,908)
- --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Net cash used by financing activities.activities . . . . . . . . . . . . (12,673,694) (12,496,349)(11,750,536) (10,765,164)
- --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
NET DECREASE IN CASH AND CASH EQUIVALENTS.EQUIVALENTS . . . . . . . . . . (157,226) (554,307)(1,110,141) (169,981)
CASH AND CASH EQUIVALENTS BEGINNING OF PERIOD. .PERIOD . . . . . . . 2,458,276 1,188,335
- --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS END OF PERIOD. .PERIOD . . . . . . . . . . $ 2,301,0501,348,135 $ 634,028
=============================================================================================
The accompanying notes are an integral part of these financial statements.
This page intentionally left blank
CHESAPEAKE UTILITIES CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
- ---------------------------------------------------------------------------------------------
MARCH 31, DECEMBER 31,
ASSETS 2003 2002
- ---------------------------------------------------------------------------------------------
PROPERTY, PLANT AND EQUIPMENT
Natural gas distribution and transmission. . . . . . . . . $ 180,884,624 $179,487,574
Propane. . . . . . . . . . . . . . . . . . . . . . . . . . 34,708,502 34,479,798
Advanced information services. . . . . . . . . . . . . . . 1,487,233 1,475,060
Water services . . . . . . . . . . . . . . . . . . . . . . 4,762,046 4,619,703
Other plant. . . . . . . . . . . . . . . . . . . . . . . . 9,121,689 9,065,440
- ---------------------------------------------------------------------------------------------
Total property, plant and equipment . . . . . . . . . . . . . 230,964,094 229,127,575
Less: Accumulated depreciation and amortization. . . . . . . (64,282,174) (74,348,909)
- ---------------------------------------------------------------------------------------------
Net property, plant and equipment . . . . . . . . . . . . . . 166,681,920 154,778,666
- ---------------------------------------------------------------------------------------------
INVESTMENTS . . . . . . . . . . . . . . . . . . . . . . . . . 362,589 362,855
- ---------------------------------------------------------------------------------------------
CURRENT ASSETS
Cash and cash equivalents. . . . . . . . . . . . . . . . . 2,301,050 2,458,276
Accounts receivable (less allowance for uncollectibles
of $804,606 and $659,628, respectively) . . . . . . . . 29,373,534 24,045,853
Materials and supplies, at average cost. . . . . . . . . . 1,104,291 995,165
Merchandise inventory, at FIFO . . . . . . . . . . . . . . 1,186,894 1,193,585
Propane inventory, at average cost . . . . . . . . . . . . 1,462,367 4,028,878
Storage gas prepayments. . . . . . . . . . . . . . . . . . 419,617 3,033,772
Underrecovered purchased gas costs . . . . . . . . . . . . 4,315,656 2,968,931
Income taxes receivable. . . . . . . . . . . . . . . . . . 0 488,339
Deferred income taxes receivable . . . . . . . . . . . . . 417,665 417,665
Prepaid expenses . . . . . . . . . . . . . . . . . . . . . 1,862,159 2,833,314
Other current assets . . . . . . . . . . . . . . . . . . . 700,387 755,683
- ---------------------------------------------------------------------------------------------
Total current assets. . . . . . . . . . . . . . . . . . . . . 43,143,620 43,219,461
- ---------------------------------------------------------------------------------------------
DEFERRED CHARGES AND OTHER ASSETS
Environmental regulatory assets. . . . . . . . . . . . . . 2,505,702 2,527,251
Environmental expenditures . . . . . . . . . . . . . . . . 2,032,556 2,557,406
Underrecovered purchased gas costs . . . . . . . . . . . . 0 0
Goodwill, net. . . . . . . . . . . . . . . . . . . . . . . 869,519 869,519
Intangible assets, net . . . . . . . . . . . . . . . . . . 1,872,111 1,927,622
Other deferred charges . . . . . . . . . . . . . . . . . . 4,714,813 4,701,394
- ---------------------------------------------------------------------------------------------
Total deferred charges and other assets . . . . . . . . . . . 11,994,701 12,583,192
- ---------------------------------------------------------------------------------------------
TOTAL ASSETS. . . . . . . . . . . . . . . . . . . . . . . . . $ 222,182,830 $210,944,174
=============================================================================================1,018,354
=========================================================================================
The accompanying notes are an integral part of these financial statements.
CHESAPEAKE UTILITIES CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
- ---------------------------------------------------------------------------------------------
MARCH----------------------------------------------------------------------------------------
SEPTEMBER 30, DECEMBER 31,
ASSETS 2003 2002
- ----------------------------------------------------------------------------------------
PROPERTY, PLANT AND EQUIPMENT
Natural gas distribution and transmission . . . . . . . $ 185,037,787 $ 179,487,574
Propane . . . . . . . . . . . . . . . . . . . . . . . . 34,921,466 34,479,798
Advanced information services . . . . . . . . . . . . . 1,525,930 1,475,060
Water services. . . . . . . . . . . . . . . . . . . . . 3,925,047 4,619,703
Other plant . . . . . . . . . . . . . . . . . . . . . . 9,132,866 9,065,440
- ----------------------------------------------------------------------------------------
Total property, plant and equipment . . . . . . . . . . 234,543,096 229,127,575
Less: Accumulated depreciation and amortization. . . . (67,085,298) (74,348,909)
- ----------------------------------------------------------------------------------------
Net property, plant and equipment . . . . . . . . . . . 167,457,798 154,778,666
- ----------------------------------------------------------------------------------------
INVESTMENTS . . . . . . . . . . . . . . . . . . . . . . 323,692 362,855
- ----------------------------------------------------------------------------------------
CURRENT ASSETS
Cash and cash equivalents . . . . . . . . . . . . . . . 1,348,135 2,458,276
Accounts receivable (less allowance for uncollectibles
of $885,367 and $659,628, respectively). . . . . . . 18,605,972 24,045,853
Materials and supplies, at average cost . . . . . . . . 1,028,003 995,165
Merchandise inventory, at FIFO. . . . . . . . . . . . . 676,596 1,193,585
Propane inventory, at average cost. . . . . . . . . . . 4,266,072 4,028,878
Storage gas prepayments . . . . . . . . . . . . . . . . 5,754,154 3,033,772
Underrecovered purchased gas costs. . . . . . . . . . . 2,743,813 2,968,931
Income taxes receivable . . . . . . . . . . . . . . . . 2,790,758 488,339
Deferred income taxes receivable. . . . . . . . . . . . 774,040 417,665
Prepaid expenses and other current assets . . . . . . . 2,606,887 3,588,997
- ----------------------------------------------------------------------------------------
Total current assets. . . . . . . . . . . . . . . . . . 40,594,430 43,219,461
- ----------------------------------------------------------------------------------------
DEFERRED CHARGES AND OTHER ASSETS
Environmental regulatory assets . . . . . . . . . . . . 372,366 2,527,251
Environmental expenditures. . . . . . . . . . . . . . . 571,094 2,557,406
Goodwill, net . . . . . . . . . . . . . . . . . . . . . 869,519 869,519
Other intangible assets, net. . . . . . . . . . . . . . 1,234,445 1,927,622
Other deferred charges. . . . . . . . . . . . . . . . . 3,950,755 4,701,394
- ----------------------------------------------------------------------------------------
Total deferred charges and other assets . . . . . . . . 6,998,179 12,583,192
- ----------------------------------------------------------------------------------------
TOTAL ASSETS. . . . . . . . . . . . . . . . . . . . . . $ 215,374,099 $ 210,944,174
========================================================================================
The accompanying notes are an integral part of these financial statements.
CHESAPEAKE UTILITIES CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
- ----------------------------------------------------------------------------------------
SEPTEMBER 30, DECEMBER 31,
CAPITALIZATION AND LIABILITIES 2003 2002
- -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
CAPITALIZATION
Stockholders' equity
Common Stock, par value $.4867 per share;
(authorized 12,000,000 shares; issued and
outstanding 5,576,4145,635,702 and 5,537,710 shares
for 2003 & 2002, respectively). . . . . . . . . . . . . $ 2,713,7722,742,633 $ 2,694,935
Additional paid-in capital. . . . . . . . . . . . . . . 32,466,96333,612,176 31,756,983
Retained earnings . . . . . . . . . . . . . . . . . . . 37,332,96734,552,256 32,238,510
- -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Total stockholders' equity. . . . . . . . . . . . . . . . . . 72,513,70270,907,065 66,690,428
Long-term debt, net of current maturities . . . . . . . . . . 72,351,92271,783,624 73,407,684
- -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Total capitalization. . . . . . . . . . . . . . . . . . . . . 144,865,624142,690,689 140,098,112
- -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
CURRENT LIABILITIES
Current portion of long-term debt.debt . . . . . . . . . . . 3,665,091 3,938,006
Short-term borrowing. . . . . . . . . . . . . 3,672,138 3,938,006
Short-term borrowing. . . . . 3,900,000 10,900,000
Accounts payable. . . . . . . . . . . . . . . . . . . . 500,000 10,900,000
Accounts13,869,900 21,141,996
Refunds payable to customers. . . . . . . . . . . . . . 284,369 497,842
Customer deposits . . . . . . . . . . . . . . . . . . . 1,903,547 2,007,983
Accrued interest. . . . . . . . . . . . . . . . . . . . 1,721,084 699,831
Dividends payable . . . . . . . . . . . . . . . . . . . . . 20,711,649 21,141,996
Refunds payable to customers1,549,398 1,521,982
Accrued compensation. . . . . . . . . . . . . . . . 420,022 497,842
Customer deposits.. . 2,660,683 1,777,544
Other accrued liabilities . . . . . . . . . . . . . . . 1,778,751 2,052,442
- ----------------------------------------------------------------------------------------
Total current liabilities . . . . . . . . . . . . . . . 31,332,823 44,537,626
- ----------------------------------------------------------------------------------------
DEFERRED CREDITS AND OTHER LIABILITIES
Deferred income taxes . . . . . . . . . . . . . . . . . 20,611,871 17,263,501
Deferred investment tax credits . . . . . . . . . . . . 506,429 547,541
Environmental liability . . . . . . . . . . . . . . . . 632,513 2,802,424
Accrued pension costs . . . . . . . . . . . . . . . . . 1,897,739 1,619,456
Accumulated negative salvage value. . . . . . . . . . . 13,221,088 -
Other liabilities . . . . . . . . . . . . . . . . . . . . 2,036,168 2,007,983
Income taxes payable . . . . . . . . . . . . . . . . . . . 2,729,815 0
Accrued interest . . . . . . . . . . . . . . . . . . . . . 1,719,952 699,831
Dividends payable. . . . . . . . . . . . . . . . . . . . . 1,533,352 1,521,982
Accrued compensation . . . . . . . . . . . . . . . . . . . 1,870,517 1,777,544
Other accrued liabilities. . . . . . . . . . . . . . . . . 2,341,978 2,052,442
- ---------------------------------------------------------------------------------------------
Total current liabilities . . . . . . . . . . . . . . . . . . 37,535,591 44,537,626
- ---------------------------------------------------------------------------------------------
DEFERRED CREDITS AND OTHER LIABILITIES
Deferred income taxes. . . . . . . . . . . . . . . . . . . 17,987,250 17,263,501
Deferred investment tax credits. . . . . . . . . . . . . . 533,837 547,541
Environmental liability. . . . . . . . . . . . . . . . . . 2,774,315 2,802,424
Accrued pension costs. . . . . . . . . . . . . . . . . . . 1,723,697 1,619,456
Accumulated negative salvage value . . . . . . . . . . . . 12,527,545 0
Other liabilities. . . . . . . . . . . . . . . . . . . . . 4,234,9714,480,947 4,075,514
- -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Total deferred credits and other liabilities. . . . . . . . . 39,781,61541,350,587 26,308,436
- -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
COMMITMENTS AND CONTINGENCIES (Note 3)
TOTAL CAPITALIZATION AND LIABILITIES. . . . . . . . . . . . . $ 222,182,830 $210,944,174
=============================================================================================215,374,099 $ 210,944,174
========================================================================================
The accompanying notes are an integral part of these financial statements.
This page intentionally left blankblank.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. QUARTERLY FINANCIAL DATA
The financial information for Chesapeake Utilities Corporation (the "Company" or
"Chesapeake") included herein is unaudited and should be read in conjunction
with the Company's Annual Report on Form 10-K. In the opinion of management,
this financial information reflects normal recurring adjustments, including the
cumulative effect of changechanges in accounting principle,principles, which are necessary for a
fair presentation of the Company's interim results. In accordance with United
States Generally Accepted Accounting Principles, the Company's management makes
certain estimates and assumptions regarding: 1) reported amounts of assets and
liabilities, 2) disclosure of contingent assets and liabilities at the date of
the financial statements and 3) reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those estimates. Due to
the seasonal nature of the Company's business, there are substantial variations
in the results of operations reported on a quarterly basis and, accordingly,
results for any particular quarter may not give a true indication of results for
the year. Certain amounts in 2002 have been reclassified to conform to the
presentation for the current year.
2. CALCULATION OF EARNINGS PER SHARE
- --------------------------------------------------------------------------------
FOR THE--------------------------------------------------------------------------------------------------------
THREE MONTHS ENDED MARCH 31,NINE MONTHS ENDED
FOR THE PERIOD ENDED SEPTEMBER 30, 2003 2002 2003 2002
- ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
CALCULATION OF BASIC (LOSS) EARNINGS PER SHARE BEFORE
CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE:FROM
CONTINUING OPERATIONS:
Net (Loss) Income before cumulative effect of
change in accounting principlefrom continuing operations. . . . . . . . . $6,627,809 $4,883,478($700,632) ($812,099) $7,226,506 $4,785,135
Weighted average shares outstanding . . . . . . . 5,561,504 5,443,980. . 5,626,202 5,503,318 5,595,981 5,475,555
- ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
BASIC (LOSS) EARNINGS PER SHARE BEFORE CUMULATIVE
EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE . . . . . . $ 1.19 $ 0.90
================================================================================
CALCULATION OF DILUTED EARNINGS PER SHARE BEFORE
CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE:
RECONCILIATION OF NUMERATOR:
Net Income before cumulative effect of
change in accounting principle Basic . . . . . $6,627,809 $4,883,478
Effect of 8.25% Convertible debentures *. . . . . 40,366 41,541
- --------------------------------------------------------------------------------
Adjusted numerator DilutedFROM
CONTINUING OPERATIONS . . . . . . . . . . . . . $6,668,175 $4,925,019. . . ($0.12) ($0.15) $ 1.29 $ 0.87
- ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
CALCULATION OF DILUTED (LOSS) EARNINGS PER SHARE FROM
CONTINUING OPERATIONS:
RECONCILIATION OF NUMERATOR:
Net (Loss) Income from continuing operations Basic. . ($700,632) ($812,099) $7,226,506 $4,785,135
Effect of 8.25% Convertible debentures *. . . . . . . - - 119,740 -
- --------------------------------------------------------------------------------------------------------
Adjusted numerator Diluted. . . . . . . . . . . . . . ($700,632) ($812,099) $7,346,246 $4,785,135
- --------------------------------------------------------------------------------------------------------
RECONCILIATION OF DENOMINATOR:
Weighted shares outstanding Basic . . . . . . . . 5,561,504 5,443,980. . 5,626,202 5,503,318 5,595,981 5,475,555
Effect of dilutive securities *
Stock options . . . . . . . . . . . . . . . . . . . . - - 634 -
Warrants. . . . . . . . . . . . . . . . . . 1,524 1,832
8.25% Convertible debentures. . . . . . . . 191,735 197,314
- --------------------------------------------------------------------------------
Adjusted denominator Diluted- 4,400 1,963
8.25% Convertible debentures. . . . . . . . . . . . . 5,754,763 5,643,126
- --------------------------------------------------------------------------------
DILUTED EARNINGS PER SHARE BEFORE CUMULATIVE
EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE- 187,501 -
- --------------------------------------------------------------------------------------------------------
Adjusted denominator Diluted. . . . . . . . . . . . . 5,626,202 5,503,318 5,788,516 5,477,518
- --------------------------------------------------------------------------------------------------------
DILUTED (LOSS) EARNINGS PER SHARE FROM
CONTINUING OPERATIONS . . . . . . . . . . . . . . . . ($0.12) ($0.15) $ 1.161.27 $ 0.87
========================================================================================================================================================================================
* Amounts associated with securities resulting in an anti-dilutive effect
on earnings per share are not included in this calculation.
3. COMMITMENTS AND CONTINGENCIES
ENVIRONMENTAL MATTERS
The Company is currently participating in the remediation of three former gas
manufacturing plant sites located in three different jurisdictions. The Company
has accrued liabilities for these three sites referred to respectively as the
Dover Gas Light, Salisbury Town Gas Light and the Winter Haven Coal Gas sites
accordingly.sites.
The Company is currently in discussions with the Maryland Department of the
Environment ("MDE") regarding the responsibilities of the Company with respect
to a possible fourth site in Cambridge, Maryland.
The Dover Gas Light Site is a former manufactured gas plant site located in
Dover, Delaware. In May 2001, the Company, General Public Utilities Corporation,
Inc. (now FirstEnergy Corporation), the State of Delaware, the United States
Environmental Protection Agency ("USEPA") and the United States Department of
Justice signed a settlement term sheet to settle complaints brought by the
Company and the United States in 1996 and 1997, respectively, with respect to
the Dover Site. In October 2002, the final Consent Decrees were signed and
delivered to the United States Department of Justice.Justice ("DOJ"). The Consent
Decrees were lodged simultaneously with the United States District Court for the
District of Delaware and a notice soliciting public comment for a 30-day period
was published in the Federal Register. The public comment period ended April 30,
2003 with no public comments. The DOJ filed an Unopposed Motion for Entry of
Consent Decrees on June 26, 2003.
Depending uponBy Order dated July 18, 2003, the numberU.S. District Court for the District of
Delaware entered final judgment approving and nature of the comments received, the United
States may move the court to enterentering the Consent Decrees
in May 2003.
Ifresolving this litigation. The entry of the Consent Decrees are approved,triggered the
Company would:
o Receive a net payment of $1.15 millionparties' obligations to make the payments required by the settlement agreement
within thirty days. Chesapeake received from other parties, to the
settlement.net settlement
payments of $1.15 million. These proceeds will be passed on to the Company's
firm customers, in accordance with the environmental rate rider. o Receive a release from liability and covenant not to sue fromChesapeake has
no further obligations under the USEPA and
the State of Delaware. This will relieve the Company from liability for
future remediationConsent Decrees at the site, unless previously unknown conditions are
discovered at the site, or information previously unknown to USEPA is
received that indicates the remedial action related to the prior
manufactured gas plant is not sufficiently protective. The Company
understands that these contingencies are standard, and are required by the
United States in all liability settlements.this time.
At March 31,June 30, 2003, the Company had accrued $2.1 million (discounted) of costsreduced the liability and associated with theregulatory
asset for remediation of the Dover Gas Light site and had recorded an
associated regulatory asset forto $10,000, based on the same amount. Of that amount, $1.5 million
was for estimated ground-water remediation and $600,000 was for remaining soil
remediation. The $1.5 million represented the low end of the ground-water
remediation estimates prepared by an independent consultant and was used because
the Company could not, at that time, predict the remedy the USEPA might require.
Upon receiving final court
approval of the Consent Decrees, representing the Company will
reduce bothCompany's estimate of the accrued environmental liability and the associated environmental
regulatory asset to reflect any
remaining costs related to be incurred under the settlement.site. At September 30, 2003 the balance remained
at $10,000.
Through March 31,September 30, 2003, the Company has incurred approximately $9.2 million
in costs relating to environmental testing and remedial action studies at the
Dover Gas Light site. Approximately $7.4$8.8 million (which includes the net
settlement of $1.15 million) has been recovered through March 31,September 30, 2003 from
other parties or through rates. A regulatory asset has been established for the
remaining uncollected costs. They are expected to be recovered through rates or
from other responsible parties.
The Salisbury Town Gas Light Site is a former manufactured gas plant site
located in Salisbury, Maryland. In cooperation with the MDE, the Company
performed the following remedial steps: (1) operation of an air sparging/soil
vapor extraction ("AS/SVE") remedial system; (2) monitoring and recovery of
product from recovery wells; and (3) monitoring of ground-water quality. In
March 2002, with MDE's permission, the Company permanently decommissioned the
AS/SVE system and discontinued nearly all on-site and off-site monitoring wells.
In November 2002, the Company submitted a request for a No Further Action
("NFA") for the site. In December 2002, the MDE recommended that the Company
submit work plans to MDE and place deed restrictions on the property as
conditions prior to receiving an NFA. Once these items areThe Company has completed the Company expects that MDE
will issue an NFA. The Company is currently preparing
the necessaryrecommended work plans and has executed the deed restrictions. During the third
quarter of 2003 the Company submitted a revised request for submission to MDE.the NFA.
The Company has adjusted the liability with respect to the Salisbury Town Gas
Light site to $17,000$9,500 at March 31,September 30, 2003. This amount is based on the
estimated costs to perform limited product monitoring and recovery efforts and
fulfill ongoing reporting requirements. A corresponding regulatory asset has
been recorded, reflecting the Company's belief that costs incurred will be
recoverable in base rates.
Through March 31,September 30, 2003, the Company has incurred approximately $2.9 million
for remedial actions and environmental studies at the Salisbury Town Gas Light
site. Of this amount, approximately $1.8 million has been recovered through
insurance proceeds or ratemaking treatment. The Company expects to recover the
remaining costs through rates and has established a regulatory asset for those
costs.
The Winter Haven Coal Gas site is located in Winter Haven, Florida. In May 2001,
the Florida Department of Environmental Protection ("FDEP") approved a remedial
action plan that includes the utilization of the AS/SVE technologies to address
ground-water impacts throughout a majority of the site. The AS/SVE construction
was completed in the fourth quarter of 2002 and is now fully operational. The
Company is currently negotiating with FDEP on the extent of additional
investigation and remediation work required to address surface soil,
ground-water and sediment impacts that will not be remediated by the AS/SVE
system. The current estimate of costs to complete the remediation activities at
the site is approximately $657,000 (discounted)$613,000 (present value). Accordingly, at March 31,September
30, 2003 the Company has accrued a liability of $657,000.$613,000. Through March 31,September 30,
2003 the Company has incurred approximately $1.2 million of environmental costs
associated with this site. At March 31,September 30, 2003 the Company had collected
through rates $269,000$260,000 in excess of costs incurred. A regulatory asset of
approximately $388,000$353,000 representing the uncollected portion of the estimated
cleanup costs has also been recorded.
In August 2002, the Company, along with two other parties, met with MDE to
discuss alleged manufactured gas plant contamination at a property located in
Cambridge, Maryland. At that meeting, one of the other parties agreed to perform
a remedial investigation of the site. The possible exposure of the Company at
this site is not known at this time.
It is management's opinion that any un-recovered current costs and any other
future costs associated with each of the four sites discussed above will be
recoverable through future rates or sharing arrangements with other responsible
parties.
OTHER COMMITMENTS AND CONTINGENCIES
The Company's natural gas and propane distribution operations have entered into
contractual commitments to purchase gas from various suppliers. The contracts
have various expiration dates. In 2000,November 2003, the Company entered into a
long-termone-year contract with an energy marketing and risk management company to manage
a portion of the Company's natural gas transportation and storage capacity. That
contract expiresreplaced one that expired on October 31, 2003. The Company expects to replaceprevious energy
marketing and risk management company had declared bankruptcy; however, the
contract with a similar agreement. A vendor hasbankruptcy did not yet been selected.result in any adverse financial impact on Chesapeake.
The Company has issued corporate guarantees to certain vendors of its propane
wholesale marketing subsidiary. The guarantees at March 31,September 30, 2003 totaled
$4.5 million and expire on various dates through FebruarySeptember 2004.
The Company is involved in certain legal actions and claims arising in the
normal course of business. On September 16, 2003, the Company's wholesale
propane marketing operation, Xeron, Inc. received a letter from an attorney
representing Enron Gas Liquids, Inc. ("EGLI"), a debtor in a pending chapter 11
case. In this letter, EGLI's attorney claims that Xeron owes EGLI $727,000 in
connection with certain agreements between Xeron and EGLI that required EGLI to
deliver gas in January, February and March 2002. EGLI defaulted on the
agreements and did not fulfill their obligation to deliver the product.
Therefore, under the terms of the agreements, the Company believes that it has
valid defenses to the EGLI claim. The Company will vigorously defend its
position and believes that it will prevail if this EGLI claim goes to trial.
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.
Certain assets and liabilities of the Company are accounted for in accordance
with Financial Accounting Standards Board Statement of Financial Accounting
Standards ("SFAS") No. 71, which, among other matters, provides standards for
regulated enterprises for the deferral of costs that will be recovered through
future rate increases. If the Company were required to terminate the application
of these standards to its regulated operations, all such deferred amounts would
be recognized in the income statement at that time. This would result in a
charge to earnings, net of applicable income taxes, which could be material.
4. RECENT AUTHORITATIVE PRONOUNCEMENTS ON FINANCIAL REPORTING AND ACCOUNTING
The FASBFinancial Accounting Standards Board ("FASB") adopted SFAS No. 146,
"Accounting for Costs Associated with Exit or Disposal Activities" in June 2002. It2002,
which requires that a liability for a cost associated with an exit or disposal
activity be recognized when a liability is incurred. Under previous guidelines,
a liability for an exit cost was recognized at the date of an entity's
commitment to an exit plan. Should the Company enter into an exit plan, SFAS No.
146 will be applied prospectively.
On October 25, 2002, the EITF rescinded Issue No. 98-10 ("EITF 98-10"),
"Accounting for Contracts Involved in Energy Trading and Risk Management
Activities." The Company's interpretation of EITF 98-10 is consistent with the
current rules that are being applied under SFAS No. 133; therefore, management
does not believe that rescinding EITF 98-10 will impact its financial position
or results of operations.
FASB Interpretation ("FIN") No. 45, "Guarantor's Accounting and Disclosure
Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of
Others," was adopted in November 2002. The Company has adopted FIN No. 45. There
was no impact on the financial statements; however, the disclosures in the
Commitments and Contingencies footnote (Note 3) were expanded to include all
required information.
FIN No. 46, "Consolidation of Variable Interest Entities," was adopted in
January 2003. Chesapeake does not currently have any investments in variable
interest entities and, therefore, FIN No. 46 has not impacted the Company.
5. ADOPTED PRONOUNCEMENTS
Chesapeake adopted SFAS No. 143, "Accounting for Asset Retirement Obligations,"
as of January 1, 2003. The Company's regulated operations are allowed by the
regulatory bodies to recover the costs of retiring its long-lived assets through
the approved depreciation rates. This is sometimes referred to as negative
salvage value. Under the pronouncement, the Company was required to record the
portion of depreciation that represents negative salvage value as a liability on
its financial statements. Previously, it was included in accumulated
depreciation. There was no impact on the earnings of the Company. At March 31,As of January
1, 2003, accumulated depreciation was reduced by $12.5 million and the liability for accumulated negative salvage value was $12.1 million
and increased during the first nine months of 2003 by $12.5approximately $1.1
million, to reflectwhich was offset by a reduction in accumulated depreciation for the
change.
6.same period of $13.2 million.
In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133 on
Derivative Instruments and Hedging Activities." This statement amends and
clarifies financial accounting and reporting for derivative instruments and for
hedging activities under FASB Statement No. 133, "Accounting for Derivative
Instruments and Hedging Activities" by requiring that contracts with comparable
characteristics be accounted for similarly. The Company does not believe that
the adoption of SFAS No. 149 will have a material impact on Chesapeake's
financial position or results of operations.
5. 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 each segment are regularly reviewed by the Company's
chief operating decision maker in order to make decisions about resources and to
assess performance. The following table presents information about the Company's
reportable segments.
- --------------------------------------------------------------------------------
FOR THE-------------------------------------------------------------------------------------------------------------
THREE MONTHS ENDED MARCH 31,NINE MONTHS ENDED
FOR THE PERIOD ENDED SEPTEMBER 30, 2003 2002 2003 2002
- ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
OPERATING REVENUES, UNAFFILIATED CUSTOMERS
Natural gas distribution and transmission . . . $ 40,469,02516,894,614 $ 31,578,95614,172,555 $ 80,856,987 $ 66,915,666
Propane . . . . . . . . . . . . . . . . . . . . 20,247,027 11,212,4403,636,283 3,282,636 29,420,717 18,601,725
Advanced information services . . . . . . . . . 3,233,417 3,059,2562,645,511 3,154,916 9,064,082 9,576,559
Water services. . . . . . . . . . . . . . . . . 2,847,591 2,791,6011,565,779 1,391,751 4,253,312 4,207,621
Other . . . . . . . . . . . . . . . . . . . . . (22,580) 0
- --------------------------------------------------------------------------------7,698 - 7,698
- -------------------------------------------------------------------------------------------------------------
Total operating revenues, unaffiliated customers. $ 66,774,48024,742,187 $ 48,642,253
================================================================================22,009,556 $123,595,098 $ 99,309,269
- -------------------------------------------------------------------------------------------------------------
INTERSEGMENT REVENUES (1)
Natural gas distribution and transmission . . . $ 26,382 $ 17,457 $ 17,458128,147 $ 52,371
Advanced information services . . . . . . . . . 37,834 015,961 101,507 83,985 101,507
Water services. . . . . . . . . . . . . . . . . 2,772 02,431 - 6,955 -
Other . . . . . . . . . . . . . . . . . . . . . 199,999 184,670174,529 169,929 527,100 532,039
- ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Total intersegment revenues . . . . . . . . . . . $ 258,062219,303 $ 202,128
================================================================================
PRE-TAX288,893 $ 746,187 $ 685,917
- -------------------------------------------------------------------------------------------------------------
OPERATING INCOME (LOSS)
Natural gas distribution and transmission . . . $ 7,536,4331,545,994 $ 6,327,7931,331,116 $ 12,481,371 $ 10,577,226
Propane . . . . . . . . . . . . . . . . . . . . 4,885,482 2,806,032(1,596,707) (1,688,874) 2,898,743 30,409
Advanced information services . . . . . . . . . 62,333 (72,016)99,495 181,123 326,129 285,061
Water services. . . . . . . . . . . . . . . . . (266,095) (206,385)13,951 (125,240) (67,946) (235,381)
Other and eliminations. . . . . . . . . . . . . 82,709 90,92994,565 23,711 271,302 199,780
- ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
TOTAL PRE-TAX OPERATING INCOME. . . . . . . . . . 12,300,862 8,946,353
Less operating income taxesINCOME (LOSS) . . . . . . . . . . (4,266,494) (3,039,429)
- --------------------------------------------------------------------------------
TOTAL OPERATING INCOME. . . . . . . . . . . . . . $ 8,034,368 $ 5,906,924
================================================================================157,298 (278,164) 15,909,599 10,857,095
=============================================================================================================
(1)* All significant intersegment revenues are billed at market rates and have been eliminated
from consolidated revenues.
- --------------------------------------------------------------------------------
MARCH 31,-------------------------------------------------------------------------------
SEPTEMBER 30, DECEMBER 31,
2003 2002
- ---------------------------------------------------------------------------------------------------------------------------------------------------------------
IDENTIFIABLE ASSETS
Natural gas distribution and transmission . . . $ 168,016,602$158,160,638 $153,609,232
Propane . . . . . . . . . . . . . . . . . . . . 37,429,82535,076,290 37,737,882
Advanced information services . . . . . . . . . 2,634,2732,574,054 2,734,188
Water services. . . . . . . . . . . . . . . . . 6,988,620 7,197,3283,319,021 3,441,785
Other . . . . . . . . . . . . . . . . . . . . . 7,113,51012,919,854 9,665,544
- ---------------------------------------------------------------------------------------------------------------------------------------------------------------
Total identifiable assets . . . . . . . . . . . . $212,049,857 $207,188,631
===============================================================================
During the third quarter of 2003, the Company sold the assets of one of its
water services businesses, bringing the total sold year-to-date to three water
businesses. Additionally, an agreement was reached to sell a fourth. Results for
all four companies were reclassified to discontinued operations. The results
reported above reflect only the continuing operations of the Company. The
segment reporting information for 2003 and 2002 presented above does not include
discontinued operations.
6. DISCONTINUED OPERATIONS
During the third quarter of 2003, Chesapeake sold the assets of a water services
business unit based in Idaho. An after-tax loss of $106,000 on the disposal of
water assets was recognized in the third quarter. For the nine months ended
September 30, 2003, three water service businesses were sold, resulting in a
total after-tax loss of $34,000 on the sales. As of September 30, 2003,
management also had approval to sell the assets of another water services
business based in Michigan, and in accordance with Statement of Financial
Accounting Standards No. 144, Accounting for the Impairment or Disposal of
Long-Lived Assets, was reported as a discontinued operation. The sale of the
Michigan business was completed on October 9, 2003. The gain on the sale was
approximately $24,000 (after tax) and will be recorded in the October. The loss
from operations of discontinued businesses is shown, net of tax, separately on
the income statements. The following table presents the balance sheet accounts
for discontinued operations, including the Michigan business.
CHESAPEAKE UTILITIES CORPORATION - DISCONTINUED OPERATIONS
BALANCE SHEETS (UNAUDITED)
- ----------------------------------------------------------------------------------------
SEPTEMBER 30, DECEMBER 31,
ASSETS 2003 2002
- ----------------------------------------------------------------------------------------
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment . . . . . . . . . . . . . $ 222,182,830 $210,944,174
================================================================================781,619 $ 1,730,476
Less: Accumulated depreciation and amortization. . . . (295,172) (475,512)
- ----------------------------------------------------------------------------------------
Net property, plant and equipment . . . . . . . . . . . 486,447 1,254,964
- ----------------------------------------------------------------------------------------
CURRENT ASSETS
Cash and cash equivalents . . . . . . . . . . . . . . . 44,862 203,731
Accounts receivable (less allowance for uncollectibles
of $37,764 and $48,860, respectively). . . . . . . . 517,341 354,843
Merchandise inventory, at FIFO. . . . . . . . . . . . . 171,050 503,705
Income taxes receivable . . . . . . . . . . . . . . . . 1,391,717 3,100
Deferred income taxes receivable. . . . . . . . . . . . - 17,101
Prepaid expenses. . . . . . . . . . . . . . . . . . . . 23,251 82,874
- ----------------------------------------------------------------------------------------
Total current assets. . . . . . . . . . . . . . . . . . 2,148,221 1,165,354
- ----------------------------------------------------------------------------------------
OTHER ASSETS
Intangible assets, net. . . . . . . . . . . . . . . . . 689,574 1,335,225
Deferred income taxes receivable. . . . . . . . . . . . - 1,277,116
- ----------------------------------------------------------------------------------------
Total other assets. . . . . . . . . . . . . . . . . . . 689,574 2,612,341
- ----------------------------------------------------------------------------------------
TOTAL ASSETS. . . . . . . . . . . . . . . . . . . . . . $ 3,324,242 $ 5,032,659
========================================================================================
- ----------------------------------------------------------------------------------------
SEPTEMBER 30, DECEMBER 31,
CAPITALIZATION AND LIABILITIES 2003 2002
- ----------------------------------------------------------------------------------------
CAPITALIZATION
Common Stock. . . . . . . . . . . . . . . . . . . . . . $ 16,000 $ 16,000
Additional paid-in capital. . . . . . . . . . . . . . . 116,548 116,548
Retained earnings . . . . . . . . . . . . . . . . . . . (70,773) 217,016
- ----------------------------------------------------------------------------------------
Total stockholders' equity. . . . . . . . . . . . . . . 61,775 349,564
Long-term debt, net of current maturities . . . . . . . - 7,047
- ----------------------------------------------------------------------------------------
Total capitalization. . . . . . . . . . . . . . . . . . 61,775 356,611
- ----------------------------------------------------------------------------------------
CURRENT LIABILITIES
Current portion of long-term debt . . . . . . . . . . . - 7,047
Accounts payable. . . . . . . . . . . . . . . . . . . . 34,517 104,596
Due to parent company . . . . . . . . . . . . . . . . . 2,488,763 3,747,846
Customer deposits . . . . . . . . . . . . . . . . . . . 17,517 31,512
Other accrued liabilities . . . . . . . . . . . . . . . 91,670 125,047
- ----------------------------------------------------------------------------------------
Total current liabilities . . . . . . . . . . . . . . . 2,632,467 4,016,048
- ----------------------------------------------------------------------------------------
DEFERRED CREDITS AND OTHER LIABILITIES
Other Liabilities . . . . . . . . . . . . . . . . . . . 630,000 660,000
- ----------------------------------------------------------------------------------------
Total deferred credits and other liabilities. . . . . . 630,000 660,000
- ----------------------------------------------------------------------------------------
COMMITMENTS AND CONTINGENCIES (Note 3)
TOTAL CAPITALIZATION AND LIABILITIES. . . . . . . . . . $ 3,324,242 $ 5,032,659
========================================================================================
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
BUSINESS DESCRIPTION
Chesapeake Utilities Corporation (the "Company" or "Chesapeake") is a
diversified utility company engaged in natural gas distribution and
transmission, propane distribution and marketing, advanced information services,
water services
and other related businesses.
The Company's strategy is to grow earnings from a stable utility foundation by
investing in related businesses and services that provide opportunities for
higher, unregulated returns. This growth strategy includes acquisitions and
investments in unregulated businesses as well as the continued investment and
expansion of the Company's utility operations that provide the stable base of
earnings. The Company continually reevaluates its investments to ensure that
they are consistent with its strategy and the goal of enhancing shareholder
value. The Company's unregulated businesses and services currently include
propane distribution and wholesale marketing, advanced information services and
water conditioning and treatment.
Chesapeake is reevaluatingcontinues to reassess its water strategy. An outside consultant has been
engagedservices activities and take actions
to reviewimprove returns from this business segment. The assets and operations of one
business were sold in the performancethird quarter and another business was sold in October
2003, increasing to four the number of each unit and develop an improvement plan.
The Company is also considering selling one or all ofwater services businesses sold in 2003.
Management continues to look at options for the units, either
individually or as a group.remaining three water service
businesses.
FINANCIAL POSITION, LIQUIDITY AND CAPITAL RESOURCES
The Company's capital requirements reflect the capital-intensive nature of its
business and are principally attributable to the construction program and the
retirement of outstanding debt. The Company relies on cash generated by
operations and short-term borrowing to meet normal working capital requirements
and to finance temporarily finance capital expenditures. During the first threenine months of
2003, net cash provided by operating activities, net cash used by investing
activities and net cash used by financing activities were approximately $13.9$15.2
million, $1.4$4.6 million and $12.7$11.8 million, respectively.
The Board of Directors has authorized the Company to borrow up to $35.0 million
of short-term debt from various banks and trust companies. As of March 31,September 30,
2003, Chesapeake had fourfive unsecured bank lines of credit with three financial
institutions, totaling $75.0$65.0 million, for short-term cash needs to meet seasonal
working capital requirements and to temporarily fund portions of its capital
expenditures. OneTwo of the bank lines, totaling $15.0 million, isare committed. The
other three lines are subject to the banks' availability of funds. In the first
threenine months of 2003, cash provided by operations was adequate to fund capital
expenditures and the reduction in short-term debt outstanding. At March 31,September 30,
2003, the debt outstanding under these lines was $500,000,$3.9 million, compared to $10.9
million at December 31, 2002. Additionally, at September 30, 2003 The Company
had outstanding an irrevocable letter of credit in the amount of $693,600 issued
to one of the Company's insurance providers. The letter of credit reduced the
available borrowing under the short-term lines.
During the three-monthnine-month periods ended March 31,September 30, 2003 and 2002, capital
expenditures were approximately $1.9$7.9 million and $3.1$9.1 million, respectively.
Chesapeake has budgeted $16.5 million for capital expenditures during 2003. This
amount includes $12.1 million for natural gas distribution and transmission,
$2.3 million for propane distribution and marketing, $237,000 for advanced
information services $1.2 million for water services and $451,000 for other operations. The Company had
originally budgeted $1.2 million for water services; however, the sale of the
assets for four of its water service businesses is expected to reduce the actual
spending below this level. The natural gas distribution and transmission
expenditures are for expansion and improvement of facilities. The propane
expenditures are to support customer growth and for the replacement of
equipment. The advanced information services expenditures are for computer
hardware, software and related equipment. ExpendituresBudgeted expenditures for water
services include expenditureswere to support customer growth and replace equipment. The other
operations budget representsincludes general plant, computer software and hardware.hardware
expenditures. Financing for the 2003 capital expenditure program for the balance of
2003 is expected to be provided from short-term borrowing and cash provided by
operating activities. The capital expenditure program is subject to continuouscontinual
review and modification. Actual capital requirements may vary from the above
estimates due to a number of factors including acquisition opportunities,
possible divestiture of additional water businesses, changing economic
conditions, customer growth in existing areas, regulation, availability of
capital and new growth opportunities.
The Company has budgeted $202,000 for capital expenditures in 2003 related to
environmental remediation projects, and expects to make additional expenditures
in future years. Management does not expect any such expenditures or financing
to have a material adverse effect on the financial position or capital resources
of the Company (see Note 3 to the Consolidated Financial Statements).
As of March 31,September 30, 2003 common equity represented 50.149.7 percent of total
capitalization, compared to 47.6 percent as of December 31, 2002. Combining
short-term financing with total capitalization, the equity component would have
been 48.747.2 percent and 43.0 percent, respectively. The Company remains committed
to maintaining a sound capital structure and strong credit ratings in order to
provide the financial flexibility needed to access the capital markets when
required. This commitment, along with adequate and timely rate relief for the
Company's regulated operations, is intended to ensure that the Company will be
able to attract capital from outside sources at a reasonable cost.
Interest expense for the first quarternine months of 2003 increased approximately
$231,000,$756,000, or 1921 percent, over the same period in 2002. The increase reflects the
increase in the average long-term debt balance caused by the placement of $30.0
million completed in October 2002. The average long-term debt balance in the
first quarternine months of 2003 was $76.0$75.8 million with an average interest rate of 7.267.2
percent, compared to $50.4$50.0 million with an average interest rate of 7.617.6 percent
in the first quarternine months of 2002. The increase in long-term debt was partially offset by a
reduction in the average short-term borrowing balance, which decreased from
$37.8$32.8 million in the first quarternine months of 2002 to $7.8$3.4 million in the first quarternine
months of 2003. The average interest rate for short-term borrowing dropped from
2.352.4 percent for the first quarternine months of 2002 to 1.851.7 percent in the first quarternine
months of 2003.
RESULTS OF OPERATIONS FOR THE QUARTER ENDED MARCH 31,SEPTEMBER 30, 2003
CONSOLIDATED OVERVIEW
The Company earned net incomeexperienced a seasonal loss from continuing operations of $6.6 million,$701,000,
or $1.19$0.12 per share, for the firstthird quarter of 2003, an increaseimprovement of 36 percent$111,000
compared to a net income before the
cumulative effectloss from continuing operations of change in accounting principle of $4.9 million,$812,000, or $0.90$0.15 per
share for the corresponding period in 2002. The improved results reflect the
continued strong performance of the regulated natural gas operations and the
performance improvement initiatives undertaken at the propane distribution
operations. Results for bothChesapeake typically experiences a loss in the natural gas distribution and propane distribution
operationsthird quarter, when
warm temperatures on the Delmarva Peninsula benefited from first quarter temperatures
(measured in heating degree days) that were 13 percent colder than the 10-year
average and 28 percent colder than for the same period in 2002.
Chesapeake adopted SFAS No. 142 "Goodwill and Other Intangible Assets")cause a reduction in the firstusage of
natural gas and propane by heating customers.
During the third quarter of 2002. As a result, a non-cash charge for goodwill impairment2003, Chesapeake sold the assets of $1.9 million, after tax,one water
service business with offices in Boise and Moscow, Idaho and reached an
agreement to sell the assets of another water service business in Detroit,
Michigan. The operating results of these businesses have been presented as
discontinued operations. An after-tax loss of $106,000 was recorded asrecognized in the
cumulative effect of a change in
accounting principle. After giving effect to this charge, earnings per share forthird quarter on the first quarter of 2002 were $0.55.
The following discussionsdisposal of the segment results use pre-tax operating income as
the basis for their performance.water assets. The Company's Consolidated StatementsMichigan sale was closed
on October 9, 2003. A gain of Income
show "operating income" net of operating income taxes. This is a traditional
presentation for the utility industry. However, in other industries it is more
common to present operating income before operating income taxes. Toapproximately $24,000 will be consistent with other industries, our segment results have been shown pre-tax. A
reconciliation to net income is presentedrecorded in the
following table.fourth quarter related to the Michigan sale.
- -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
FOR THE THREE MONTHS ENDED MARCH 31,SEPTEMBER 30, 2003 2002 CHANGE
- ----------------------------------------------------------------------------------------------
Pre-tax---------------------------------------------------------------------------------------
Operating Income (Loss)
Natural Gas Distribution & Transmission. . . . . . $ 7,536,4331,545,994 $ 6,327,793 $1,208,6401,331,116 $ 214,878
Propane. . . . . . . . . . . . . . . . . . . . . . 4,885,482 2,806,032 2,079,450(1,596,707) (1,688,874) 92,167
Advanced Information Services. . . . . . . . . . . 62,333 (72,016) 134,34999,495 181,123 (81,628)
Water Services . . . . . . . . . . . . . . . . . . (266,095) (206,385) (59,710)13,951 (125,240) 139,191
Other & Eliminations . . . . . . . . . . 94,565 23,711 70,854
- ---------------------------------------------------------------------------------------
Operating Income (Loss). . . . . 82,709 90,929 (8,220)
- ----------------------------------------------------------------------------------------------
Pre-tax Operating Income. . . . . 157,298 (278,164) 435,462
Other (Loss) Income. . . . . . . . . . . . (16,282) 34,294 (50,576)
Interest Charges . . . . . . . . . . . . . . 12,300,862 8,946,353 3,354,509
Operating1,419,887 1,176,379 243,508
Income Taxes . . . . . . . . . . . . . . . 4,266,494 3,039,429 1,227,065
Interest(578,239) (608,150) 29,911
- ---------------------------------------------------------------------------------------
Net Loss from Continuing Operations. . . . . . . . . . . . . . . . . . . . . . . 1,465,850 1,234,496 231,354
Non-Operating Income, net. . . . . . . . . . . . . . 59,291 211,050 (151,759)
- ----------------------------------------------------------------------------------------------
Net Income before cumulative effect of
change in accounting principle . . . . . . . . . . . 6,627,809 4,883,478 1,744,331
Cumulative effect of change in accounting principle. 0 (1,916,000) 1,916,000
- ----------------------------------------------------------------------------------------------
Net Income . . . . . . . . . . . . . . . . . . . . .($700,632) ($812,099) $ 6,627,809 $ 2,967,478 $3,660,331
==============================================================================================111,467
=======================================================================================
NATURAL GAS DISTRIBUTION AND TRANSMISSION
The natural gas distribution and transmission segment earned pre-tax operating income of
$7.5$1.5 million for the firstthird quarter of 2003 compared to $6.3$1.3 million for the
corresponding period last year, an increase of $1.2 million.$215,000.
- -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
FOR THE THREE MONTHS ENDED MARCH 31,SEPTEMBER 30, 2003 2002 CHANGE
- -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Revenue. . . . . . . . . . . . . . . . . . . . . . . $40,486,482 $31,596,414 $8,890,068$ 16,920,996 $ 14,190,012 $ 2,730,984
Cost of gas. . . . . . . . . . . . . . . . . . . . . 25,901,598 18,818,455 7,083,1438,607,836 6,728,589 1,879,247
- -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Gross margin . . . . . . . . . . . . . . . . . . . . 14,584,884 12,777,959 1,806,9258,313,160 7,461,423 851,737
Operations & maintenance . . . . . . . . . . . . . . 4,579,807 4,115,475 464,3324,425,817 3,918,455 507,362
Depreciation & amortization. . . . . . . . . . . . . 1,660,145 1,619,100 41,0451,663,367 1,518,562 144,805
Other taxes. . . . . . . . . . . . . . . . . . . . . 808,499 715,591 92,908677,982 693,290 (15,308)
- ----------------------------------------------------------------------------------------------
Pre-tax operating---------------------------------------------------------------------------------------
Operating expenses . . . . . . . . . . . . . 7,048,451 6,450,166 598,2856,767,166 6,130,307 636,859
- -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Total Pre-tax Operating Income . . . . . . . . . . . $ 7,536,4331,545,994 $ 6,327,793 $1,208,640
==============================================================================================1,331,116 $ 214,878
=======================================================================================
Gross margins for the Delaware and Maryland distribution divisions increased
$1.4 million$349,000 from 2002. Temperatures for the quarter were colder than 2002 (569
heating degree-days) and the 10-year average (303 heating degree-days). The
Company estimates that, on an annual basis, for each heating degree-day variance
from the 10-year average, margins change by $1,560. An increase in the average
number of customers also contributed to the increase. Delaware and Maryland experienced an increase of 2,1501,839
residential customers, or 6.36 percent, in the firstthird quarter of 2003 compared to
the third quarter of 2002. The increase was the result primarily of new housing
construction. The Company estimates that each residential customer added
contributes $260$360 annually to earnings before
interest, taxes, depreciationgross margin and amortization.requires an additional cost of
$100 for operations and maintenance expenses. Finally, a rate restructuring in
Delaware in December 2002 increased the monthly minimum charge per customer,
resulting in increased margins during non-heating months.
Gross margins for the Florida distribution operations were also up $320,000,$437,000, due
to increased deliveries to residential customers.the implementation of transportation services and customer additions. The
transmission operation's margins increased by $37,000.$54,000.
The gross margin increases were partially offset by higher operating expenses,
primarily operations and maintenance expenses and other taxes that relate to the increased
volumes and earnings.
earnings and pension and employee costs. Depreciation was higher,
reflecting the continued investment in plant assets.
PROPANE
For the firstthird quarter of 2003, the propane segment earnedexperienced a pre-taxseasonal
operating profitloss of $4.9$1.6 million compared to $2.8a $1.7 million loss for the firstthird
quarter of 2002,
an increase2002. A gross margin decrease of $2.1 million.$228,000 was more than offset by
decreases in operating expenses of $320,000.
- -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
FOR THE THREE MONTHS ENDED MARCH 31,SEPTEMBER 30, 2003 2002 CHANGE
- -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Revenue. . . . . . . . . . . . . . . . . . . . . . . $20,247,027 $11,212,440 $9,034,587$ 3,636,283 $ 3,282,636 $ 353,647
Cost of sales. . . . . . . . . . . . . . . . . . . . 11,285,096 4,750,126 6,534,9702,280,092 1,698,702 581,390
- -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Gross margin . . . . . . . . . . . . . . . . . . . . 8,961,931 6,462,314 2,499,6171,356,191 1,583,934 (227,743)
Operations & maintenance . . . . . . . . . . . . . . 3,462,207 2,999,532 462,6752,422,606 2,696,584 (273,978)
Depreciation & amortization. . . . . . . . . . . . . 384,904 398,233 (13,329)385,151 417,084 (31,933)
Other taxes. . . . . . . . . . . . . . . . . . . . . 229,338 258,517 (29,179)145,141 159,140 (13,999)
- ----------------------------------------------------------------------------------------------
Pre-tax operating---------------------------------------------------------------------------------------
Operating expenses . . . . . . . . . . . . . 4,076,449 3,656,282 420,1672,952,898 3,272,808 (319,910)
- -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Total Pre-tax Operating IncomeLoss . . . . . . . . . . . ($1,596,707) ($1,688,874) $ 4,885,482 $ 2,806,032 $2,079,450
==============================================================================================92,167
=======================================================================================
MarginsThe margin decrease for the propane segment increasedwas due primarily to a decrease of
$256,000 in the propane wholesale marketing operations and a decline of $135,000
in the Florida distribution operations, partially offset by $2.5 million, primarily due to
increased marginsan increase of
$2.1 million$119,000 for the Delmarva distribution operations. Volumes sold for the first quarter increased 2.5 million gallons or 30 percent.
Temperatures for the quarter were colder than 2002 (569 heating degree-days) and
the 10-year average (303 heating degree-days). The Company estimates that on an
annual basis, for each heating degree-day variance from the 10-year average,
margins changewholesale marketing
operations experienced a slow down in trading activities due to lower wholesale
price volatility. This was partially offset by $1,687. Additionally, the margins per gallon have improved by
$0.03, further enhancing margins.a reduction of $137,000 in
operating expenses. The Florida propane distribution operation
increased their pre-tax operating income by $240,000 for the first quarter, of
which $192,000 related to a non-recurringoperations had reduced margins from
service project.
The Company's propane wholesale marketing operation in Houston experienced an
increase in margins of $170,000 and an increase of $160,000 in pre-tax operating
income. Greater volatility in wholesale priceswork during the firstthird quarter of 2003 created additional opportunities for improved margins.compared to 2002. Performance
improvement initiatives at the Delmarva propane distribution operations resulted
in reduced operating expenses of $251,000.
ADVANCED INFORMATION SERVICES
The advanced information services business contributed a pre-tax operating income of
$62,000$99,000 for the firstthird quarter of 2003 compared to a loss of $72,000$181,000 for the firstthird quarter
of last year.year, a decrease of $82,000.
- -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
FOR THE THREE MONTHS ENDED MARCH 31,SEPTEMBER 30, 2003 2002 CHANGE
- -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Revenue. . . . . . . . . . . . . . . . . . . . . . . $ 3,271,2512,661,472 $ 3,059,256 $ 211,9953,256,423 ($594,951)
Cost of sales. . . . . . . . . . . . . . . . . . . . 1,891,252 1,618,812 272,4401,281,096 1,668,567 (387,471)
- -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Gross margin . . . . . . . . . . . . . . . . . . . . 1,379,999 1,440,444 (60,445)1,380,376 1,587,856 (207,480)
Operations & maintenance . . . . . . . . . . . . . . 1,110,846 1,277,602 (166,756)1,130,889 1,208,236 (77,347)
Depreciation & amortization. . . . . . . . . . . . . 50,113 56,370 (6,257)47,256 49,713 (2,457)
Other taxes. . . . . . . . . . . . . . . . . . . . . 156,707 178,488 (21,781)102,736 148,784 (46,048)
- ----------------------------------------------------------------------------------------------
Pre-tax operating---------------------------------------------------------------------------------------
Operating expenses . . . . . . . . . . . . . 1,317,666 1,512,460 (194,794)1,280,881 1,406,733 (125,852)
- -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Total Pre-tax Operating Income (Loss). . . . . . . . . . $ 62,33399,495 $ 181,123 ($72,016) $ 134,349
==============================================================================================81,628)
=======================================================================================
Although thisThis segment continues to behas been adversely affected by the nation's economic slowdown asand
the resulting postponement or cancellation of discretionary consulting projects have been postponed or
cancelled,projects;
however, the Company has countered declining revenues by implementing cost
reduction measures, and targeted marketing have allowedincluding reductions in staffing. A non-recurring sale of
software contributed $284,000 to operating income in the advanced information services segment to remain profitable.
third quarter of 2003.
WATER SERVICESBUSINESS OPERATIONS
Water services experienced a pre-tax operating loss of $266,000continuing operations earned $14,000 for the firstthird quarter of
2003, an improvement of $139,000 in operating income (loss), compared to a loss
of $206,000$125,000 for the same period in 2002.
- -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
FOR THE THREE MONTHS ENDED MARCH 31,SEPTEMBER 30, 2003 2002 CHANGE
- -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Revenue. . . . . . . . . . . . . . . . . . . . . . . $ 2,850,3631,568,210 $ 2,791,6011,391,751 $ 58,762176,459
Cost of sales. . . . . . . . . . . . . . . . . . . . 1,127,552 1,114,972 12,580615,177 512,103 103,074
- -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Gross margin . . . . . . . . . . . . . . . . . . . . 1,722,811 1,676,629 46,182953,033 879,648 73,385
Operations & maintenance . . . . . . . . . . . . . . 1,636,748 1,571,112 65,636781,930 861,610 (79,680)
Depreciation & amortization. . . . . . . . . . . . . 226,910 196,209 30,701117,201 100,163 17,038
Other taxes. . . . . . . . . . . . . . . . . . . . . 125,248 115,693 9,55539,951 43,115 (3,164)
- ----------------------------------------------------------------------------------------------
Pre-tax operating---------------------------------------------------------------------------------------
Operating expenses . . . . . . . . . . . . . 1,988,906 1,883,014 105,892939,082 1,004,888 (65,806)
- -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Total Pre-tax Operating Loss Income (Loss). . . . . . . . . . . .$ 13,951 ($266,095) ($206,385) ($59,710)
==============================================================================================125,240) $ 139,191
=======================================================================================
An increase in margins of $46,000 was more than offset by an increase$73,000 coupled with a decrease in operating expenses
of $106,000.$66,000 generated the improvement. During the firstthird quarter of 2003,
a management
officeChesapeake sold the assets of one water service business with offices in Boise
and a branch office were closed andMoscow, Idaho. Additionally, an agreement was reached to sell the assets of
another dealership in the Detroit, Michigan area. The results of the two
businesses have been reclassified to discontinued operations (with the
operations of the two businesses sold in the second quarter). Included in
discontinued operations for the third quarter of 2003 is approximately $24,000
(pre-tax) representing fixed overhead trimmed.expense allocations that will not result
in future savings for the Company.
Chesapeake is
reevaluatingcontinues to reassess its water strategy. An outside consultant has been engagedservices operations and take actions
in an effort to reviewimprove returns from this business segment. Further action may
include the performancesale of each unit and develop an improvement plan. The Company
is also considering selling onesome or all of the units, either individually or as a
group.remaining businesses.
OTHER BUSINESS OPERATIONS
Other operations and eliminationseliminating entries contributed pre-tax operating income of $83,000$95,000
for the firstthird quarter of 2003 compared to $91,000income of $24,000 for the firstthird
quarter of last year. Other operations consist primarily of subsidiaries that
own real estate leased to other Company subsidiaries. Eliminations are entries
required to eliminate activities between business segments from the consolidated
results.
- -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
FOR THE THREE MONTHS ENDED MARCH 31,SEPTEMBER 30, 2003 2002 CHANGE
- -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Revenue. . . . . . . . . . . . . . . . . . . . . . . $ 177,419174,529 $ 184,670177,627 ($7,251)3,098)
Cost of sales. . . . . . . . . . . . . . . . . . . . 0 0 0
- ----------------------------------------------------------------------------------------------- -
- ---------------------------------------------------------------------------------------
Gross margin . . . . . . . . . . . . . . . . . . . . 177,419 184,670 (7,251)174,529 177,627 (3,098)
Operations & maintenance . . . . . . . . . . . . . . 27,432 22,328 5,10418,573 21,045 (2,472)
Depreciation & amortization. . . . . . . . . . . . . 59,529 56,438 3,09159,067 462
Other taxes. . . . . . . . . . . . . . . . . . . . . 14,199 14,975 (776)13,656 13,790 (134)
- ----------------------------------------------------------------------------------------------
Pre-tax operating---------------------------------------------------------------------------------------
Operating expenses . . . . . . . . . . . . . 101,160 93,741 7,41991,758 93,902 (2,144)
- ----------------------------------------------------------------------------------------------
Pre-tax---------------------------------------------------------------------------------------
Operating Income Other . . . . . . . . . . . 76,259 90,929 (14,670)
Pre-tax82,771 83,725 (954)
Operating Income Eliminations. . . . . . . . 6,450 0 6,45011,794 (60,014) 71,808
- -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Total Pre-tax Operating Income . . . . . . . . . . . $ 82,70994,565 $ 90,929 ($8,220)
==============================================================================================23,711 $ 70,854
=======================================================================================
OPERATING
INCOME TAXES
Income taxes were higherThe Company's income tax benefit for the third quarter of 2003 was a lower than
2002 due to lower losses. The federal income tax rate was consistent year to
year. The Company's effective tax rate during periods of losses or lower
earnings, such as the increase inthird quarter, appears lower than the operating income forannual effective
rate because of the current quarter.impact of tax savings, such as the tax deductibility of
dividends paid to the Company's Employee Stock Ownership Plan ("ESOP").
INTEREST EXPENSE
Interest for the firstthird quarter of 2003 increased approximately $231,000,$244,000, or 1921
percent, over the same period in 2002. The increase resulted from the issuance
of $30.0 million of long-term debt in October 2002 at an interest rate of 6.64
percent. The proceeds from this debt issuance were used to repay $30.0 million
of short-term borrowings that were carrying lower rates. The short-term rates
fluctuate daily.
The average long-term debt balance in the firstthird quarter of 2003 was $76.0$75.5
million with an average interest rate of 7.267.2 percent, compared to $50.4$49.7 million
with an average interest rate of 7.617.6 percent in the firstthird quarter of 2002. The
average borrowing balance for short-term debt decreased from $37.8$32.4 million in
the firstthird quarter of 2002 to $7.8$2.6 million in the firstthird quarter of 2003. The
average interest rate for short-term borrowing dropped from 2.352.39 percent in the
third quarter of 2002 to 1.31 percent in the third quarter of 2003.
RESULTS OF OPERATIONS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2003
CONSOLIDATED OVERVIEW
The Company recognized net income from continuing operations of $7.2 million, or
$1.29 per share, for the first nine months of 2003, an increase of $2.4 million,
or $0.42 per share, compared to the corresponding period in 2002. As indicated
in the following table, the higher earnings for the first nine months of 2003
reflect significant improvement in the natural gas and propane distribution
operations due to colder weather and customer growth.
Chesapeake adopted Financial Accounting Standards Board Statement of Accounting
Standards No. 142, "Goodwill and Other Intangible Assets," in the first quarter
of 2002. As a result of the change in the goodwill impairment testing methods
prescribed by SFAS No. 142, a non-cash charge for goodwill impairment of $1.9
million, after tax, was recorded as the cumulative effect of a change in
accounting principle. After giving effect to this charge and the discontinued
operations, earnings per share for the first nine months of 2002 were $0.47.
- ---------------------------------------------------------------------------------------
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2003 2002 CHANGE
- ---------------------------------------------------------------------------------------
Operating Income (Loss)
Natural Gas Distribution & Transmission. $ 12,481,371 $ 10,577,226 $ 1,904,145
Propane. . . . . . . . . . . . . . . . . 2,898,743 30,409 2,868,334
Advanced Information Services. . . . . . 326,129 285,061 41,068
Water Services . . . . . . . . . . . . . (67,946) (235,381) 167,435
Other & Eliminations . . . . . . . . . . 271,302 199,780 71,522
- ---------------------------------------------------------------------------------------
Operating Income . . . . . . . . . . . . . 15,909,599 10,857,095 5,052,504
Other Income . . . . . . . . . . . . . . . 92,692 388,857 (296,165)
Interest Charges . . . . . . . . . . . . . 4,314,742 3,558,254 756,488
Income Taxes . . . . . . . . . . . . . . . 4,461,043 2,902,563 1,558,480
- ---------------------------------------------------------------------------------------
Net Income from Continuing Operations. . . $ 7,226,506 $ 4,785,135 $ 2,441,371
=======================================================================================
NATURAL GAS DISTRIBUTION AND TRANSMISSION
The natural gas distribution and transmission segment earned operating income of
$12.5 million for the first nine months of 2003 compared to 1.85$10.6 million for
the corresponding period last year, an increase of $1.9 million.
- ---------------------------------------------------------------------------------------
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2003 2002 CHANGE
- ---------------------------------------------------------------------------------------
Revenue. . . . . . . . . . . . . . . . . . $ 80,985,134 $ 66,968,037 $14,017,097
Cost of gas. . . . . . . . . . . . . . . . 47,920,917 37,585,321 10,335,596
- ---------------------------------------------------------------------------------------
Gross margin . . . . . . . . . . . . . . . 33,064,217 29,382,716 3,681,501
Operations & maintenance . . . . . . . . . 13,395,446 11,978,226 1,417,220
Depreciation & amortization. . . . . . . . 5,001,702 4,779,850 221,852
Other taxes. . . . . . . . . . . . . . . . 2,185,698 2,047,414 138,284
- ---------------------------------------------------------------------------------------
Operating expenses . . . . . . . . . . . . 20,582,846 18,805,490 1,777,356
- ---------------------------------------------------------------------------------------
Total Operating Income . . . . . . . . . . $ 12,481,371 $ 10,577,226 $ 1,904,145
=======================================================================================
Gross margins for the Delaware and Maryland distribution divisions increased
$2.4 million from 2002. Temperatures for the first nine months of 2003 were 30
percent colder than 2002 (745 heating degree-days) and 14 percent colder than
the 10-year average (396 heating degree-days). The Company estimates that, on an
annual basis, for each heating degree-day variance from the 10-year average,
gross margins change by $1,680. An increase in the average number of customers
also contributed to the increase. Delaware and Maryland experienced an increase
of 1,902 in the average number of customers, or 6.4 percent, in the first nine
months of 2003 compared to the same period in 2002. The Company estimates that
each residential customer added contributes $360 annually to gross margin and
requires an additional cost of $100 for operations and maintenance expenses.
Gross margins for the Florida distribution operations were also up $1.1 million,
due to the implementation of transportation services and customer additions. The
transmission operation's margin increased by $106,000.
The margin increases were partially offset by higher operating expenses,
primarily operations and maintenance expenses and other taxes that relate to the
increased volumes and earnings and pension and employee costs. Depreciation was
higher, reflecting the continued investment in natural gas operations.
PROPANE
For the first nine months of 2003, the propane segment contributed operating
income of $2.9 million compared to $30,000 for the first nine months of 2002.
Gross margin increased $3.1 million, but was partially offset by increases in
operating expenses of $241,000.
- ---------------------------------------------------------------------------------------
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2003 2002 CHANGE
- ---------------------------------------------------------------------------------------
Revenue. . . . . . . . . . . . . . . . . . $ 29,420,717 $ 18,601,725 $10,818,992
Cost of sales. . . . . . . . . . . . . . . 16,236,221 8,526,687 7,709,534
- ---------------------------------------------------------------------------------------
Gross margin . . . . . . . . . . . . . . . 13,184,496 10,075,038 3,109,458
Operations & maintenance . . . . . . . . . 8,579,531 8,243,773 335,758
Depreciation & amortization. . . . . . . . 1,143,516 1,235,716 (92,200)
Other taxes. . . . . . . . . . . . . . . . 562,706 565,140 (2,434)
- ---------------------------------------------------------------------------------------
Operating expenses . . . . . . . . . . . . 10,285,753 10,044,629 241,124
- ---------------------------------------------------------------------------------------
Total Operating Income . . . . . . . . . . $ 2,898,743 $ 30,409 $ 2,868,334
=======================================================================================
The margin increase for the propane segment was due primarily to an increase of
$3.0 million for the Delmarva distribution operations. Volumes sold for the
first nine months increased 3.5 million gallons or 25 percent. Temperatures for
the nine months were 30 percent colder than 2002 (745 heating degree-days) and
14 percent colder than the 10-year average (396 heating degree-days). The
Company estimates that on an annual basis, for each heating degree-day variance
from the 10-year average, margins change by $1,670. Additionally, the margin per
retail gallon improved by $0.065 in the first nine months of 2003 compared to
2002. The margin increase was partially offset by increased operating expenses,
primarily related to the higher volumes and revenues, including an increase in
the reserve for bad debts. The Florida propane distribution operations
experienced an increase in margins of $131,000 for the nine-month period;
however, the margin included $192,000 related to a non-recurring service
project.
The Company's propane wholesale marketing operation experienced a decrease in
margins of $43,000 and a decrease of $101,000 in operating expenses, leading to
an improvement of $58,000 in operating income. Although wholesale price
volatility created trading opportunities early in 2003, a slow down in trading
activities for the third quarter reduced margins. Offsetting costs savings have
allowed the wholesale marketing operation to improve operating income for the
period.
ADVANCED INFORMATION SERVICES
The advanced information services business earned operating income of $326,000
for the first nine months of 2003 compared to income of $285,000 for the first
nine months of last year. The increase is the result of decreased operating
expenses that offset a decline in revenue.
- ---------------------------------------------------------------------------------------
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2003 2002 CHANGE
- ---------------------------------------------------------------------------------------
Revenue. . . . . . . . . . . . . . . . . . $ 9,148,067 $ 9,678,066 ($529,999)
Cost of sales. . . . . . . . . . . . . . . 5,043,257 5,050,516 (7,259)
- ---------------------------------------------------------------------------------------
Gross margin . . . . . . . . . . . . . . . 4,104,810 4,627,550 (522,740)
Operations & maintenance . . . . . . . . . 3,239,011 3,719,944 (480,933)
Depreciation & amortization. . . . . . . . 146,127 158,301 (12,174)
Other taxes. . . . . . . . . . . . . . . . 393,543 464,244 (70,701)
- ---------------------------------------------------------------------------------------
Operating expenses . . . . . . . . . . . . 3,778,681 4,342,489 (563,808)
- ---------------------------------------------------------------------------------------
Total Operating Income . . . . . . . . . . $ 326,129 $ 285,061 $ 41,068
=======================================================================================
This segment continues to be adversely affected by the nation's economic
slowdown as discretionary consulting projects have been postponed or cancelled.
However, strong cost containment efforts have reduced operating expenses to
offset margin reductions. Operating income for 2003 includes approximately
$284,000 related to a non-recurring sale of software.
WATER BUSINESS OPERATIONS
Water services continuing operations experienced an operating loss of $68,000
for the first nine months of 2003, compared to an operating loss of $235,000 for
the same period in 2002, an improvement of $167,000.
- ---------------------------------------------------------------------------------------
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2003 2002 CHANGE
- ---------------------------------------------------------------------------------------
Revenue. . . . . . . . . . . . . . . . . . $ 4,260,267 $ 4,207,621 $ 52,646
Cost of sales. . . . . . . . . . . . . . . 1,590,538 1,543,444 47,094
- ---------------------------------------------------------------------------------------
Gross margin . . . . . . . . . . . . . . . 2,669,729 2,664,177 5,552
Operations & maintenance . . . . . . . . . 2,262,716 2,471,753 (209,037)
Depreciation & amortization. . . . . . . . 336,060 287,480 48,580
Other taxes. . . . . . . . . . . . . . . . 138,899 140,325 (1,426)
- ---------------------------------------------------------------------------------------
Operating expenses . . . . . . . . . . . . 2,737,675 2,899,558 (161,883)
- ------------------------------------------- ------------- ------------- ------------
Total Operating Loss . . . . . . . . . . . ($67,946) ($235,381) $ 167,435
=======================================================================================
An increase in margins of $6,000 and a decrease in operating expenses of
$162,000 generated the improvement. During the first nine months of 2003,
Chesapeake sold the assets of three water service businesses, based in Venice,
Florida, Rochester, Minnesota and Boise and Moscow, Idaho. Additionally, it
reached an agreement to sell the assets of a fourth business located outside
Detroit, Michigan. The results of the four businesses have been reclassified to
discontinued operations. Included in discontinued operations for 2003 is
approximately $83,000 (pre-tax) representing fixed overhead expense allocations
that will not result in future savings for the Company.
Chesapeake continues to reassess its water services operations and take actions
in an effort to improve returns from this business segment. These actions may
include the sale of some or all of the remaining businesses.
OTHER BUSINESS OPERATIONS
Other operations and eliminations generated operating income of $271,000 for the
first nine months of 2003, compared to $200,000 for the first nine months of
last year. Other operations consist primarily of subsidiaries that own real
estate leased to other Company subsidiaries. Eliminations are entries required
to eliminate activities between business segments from the consolidated results.
- ---------------------------------------------------------------------------------------
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2003 2002 CHANGE
- ---------------------------------------------------------------------------------------
Revenue. . . . . . . . . . . . . . . . . . $ 527,100 $ 539,737 ($12,637)
Cost of sales. . . . . . . . . . . . . . . - - -
- ---------------------------------------------------------------------------------------
Gross margin . . . . . . . . . . . . . . . 527,100 539,737 (12,637)
Operations & maintenance . . . . . . . . . 58,907 63,504 (4,597)
Depreciation & amortization. . . . . . . . 178,589 173,312 5,277
Other taxes. . . . . . . . . . . . . . . . 41,260 43,126 (1,866)
- ---------------------------------------------------------------------------------------
Operating expenses . . . . . . . . . . . . 278,756 279,942 (1,186)
- ---------------------------------------------------------------------------------------
Operating Income Other . . . . . . . . . . 248,344 259,795 (11,451)
Operating Income Eliminations. . . . . . . 22,958 (60,015) 82,973
- ---------------------------------------------------------------------------------------
Total Operating Income . . . . . . . . . . $ 271,302 $ 199,780 $ 71,522
=======================================================================================
INCOME TAXES
Income taxes were higher due to the increase in operating income for the nine
months ended September 30, 2003. The federal income tax rate was consistent year
to year.
INTEREST EXPENSE
Interest expense for the first nine months of 2003 increased approximately
$756,000, or 21 percent, over the same period in 2002. The increase reflects the
increase in the average long-term debt balance caused by the placement of $30.0
million completed in October 2002, offset somewhat by a lower average interest
rate. The average long-term debt balance in the first nine months of 2003 was
$75.8 million with an average interest rate of 7.2 percent, compared to $50.0
million with an average interest rate of 7.6 percent in the first nine months of
2002. The increase in long-term debt was partially offset by a reduction in the
average short-term borrowing balance, which decreased from $32.8 million in the
first nine months of 2002 to $3.4 million in the first nine months of 2003. The
average interest rate for short-term borrowing dropped from 2.38 percent for the
first nine months of 2002 to 1.70 percent in the first nine months of 2003.
ENVIRONMENTAL MATTERS
The Company continues to work with federal and state environmental agencies to
assess the environmental impact and explore options for corrective action at
three former gas manufacturing plant sites. The Company believes that future
costs associated with these sites will be recoverable in rates or through
sharing arrangements with, or contributions by, other responsible parties. The
Company is in discussions with the Maryland Department of the Environment
regarding a fourth site located in Cambridge, Maryland. The outcome of this
matter cannot be determined at this time. See Note 3 to the Consolidated
Financial Statements for further information.
OTHER MATTERS
REGULATORY MATTERS
The Delaware, Maryland and Florida Public Service Commissions regulate the
Company's natural gas distribution operations, while theits natural gas
transmission operation is regulated by the Federal Energy Regulatory Commission
("FERC").
On August 2, 2001, the Delaware Divisiondivision filed a general rate increase
application. Interim rates, subject to refund, went into effect on October 1,
2001. The Delaware Public Service Commission approved a settlement agreement for
Phase I of the Rate Increase Application in April 2002. Phase I should result in
an increase in rates of approximately $380,000 per year.year, during periods of
average temperatures (the results for the periods after October 1, 2001, when
the interim rates went into effect, reflect the impact of this increase). Phase
II of the filing was approved by the Delaware Public Service Commission in
November 2002. Phase II should result in an additional increase in rates of
approximately $90,000.$90,000 per year. Phase II also reduces the Company's sensitivity
to warmer than normal weather by changing the minimum customer charge and the
margin sharing arrangement for interruptible sales, off systemoff-system sales and
capacity release income.
On October 31, 2001, Eastern Shore Natural Gas Company ("Eastern Shore"), the
Company's natural gas transmission subsidiary, filed a rate change with the FERC
pursuant to the requirements of the Stipulation and Agreement dated August 1,
1997. Following settlement conferences held in May 2002, the parties reached a
settlement in principle on or about May 23, 2002 to resolve all issues related
to its rate case.
The Offer of Settlement and the Stipulation and Agreement were finalized and
filed with the FERC on August 2, 2002. The agreement provides that Eastern Shore's
rates will be based on a cost of service of $12.9 million per year. Cost savings
estimated at $456,000 will be passed on to firm transportation customers. Initial comments supporting the settlement agreement were filed by
the FERC staff and by Eastern Shore. No adverse comments were filed. The
Presiding Judge certified the Offer of Settlement to the FERC as uncontested on
August 27, 2002. On
October 10, 2002, the FERC issued an Order approving the Offer of Settlement and the
Stipulation and Agreement. Settlement rates went into effect on December 1,
2002.
During October 2002, Eastern Shore filed for recovery of gas supply realignment
costs associated with the implementation of FERC Order No. 636. The costs
totaled $196,000 (including interest). It is uncertain at this time when the
FERC
will consider this matter or the ultimate outcome.
On March 31, 2003, Eastern Shore filed an application with FERC for
authorization to construct and operate new facilities in Pennsylvania and
Delaware. On October 8, 2003, FERC issued an order authorizing Eastern Shore to
construct and operate the facilities as proposed. The $8.5 million project is
comprised of three phases and is scheduled to be in service on November 1, 2003,
November 1, 2004, and November 1, 2005, respectively. Assuming completion by the
above dates, this project will provide increased firm transportation capacity to
four existing customers by a total of 15,100 dekatherms per day, a 14% increase
over and above Eastern Shore's current peak day transportation capacity. The
requests for additional service by Eastern Shore's existing customers are a
reflection of the continued growth in Eastern Shore's market area.
Eastern Shore continues to proceed with the necessary project planning that will
allow Eastern Shore to meet its customers' requests to serve an additional 3,800
dekatherms per day of natural gas beginning in the 2003/2004 heating season.
Eastern Shore completed the development of a new interactive web site ("IWS") to
replace its current Electronic Bulletin Board, as required by FERC. Completion
of this project allowed Eastern Shore to achieve the compliance standards
established by the North American Energy Standards Board ("NAESB") and will
fulfill Eastern Shore's goal of finding new and better ways to service our
customers by providing them with an interactive web site capable of managing
their natural gas transportation needs on Eastern Shore's pipeline system.
Eastern Shore's new IWS successfully went on-line in August of 2003. The IWS was
certified by an independent NAESB expert to be fully compliant with current
NAESB standards as required by the FERC.
In June 2003, Eastern Shore filed to intervene and participate in FERC Docket
No. PA03-12-000, a fact-finding proceeding which was established by the FERC to
investigate and determine the causes of electric transmission congestion on the
Delmarva Peninsula and seek potential solutions to the problem. Eastern Shore
submitted written testimony and recommendations detailing the manner in which
natural gas can be utilized to help resolve this matter. This proceeding is
still on going and Eastern Shore will continue to monitor and participate as
appropriate. Eastern Shore believes natural gas can play a significant role in
complementing potential solutions to the problem.
Eastern Shore also continued its active participation in the Delaware Energy
Task Force. The Task Force included seventeen members from various public and
private sectors invited by the Governor to respond to the Governor's stated goal
to make Delaware "the most energy-efficient state in the country." The Delaware
Energy Task Force presented its Final Report to the Governor in September 2003.
By its participation on the task force, Eastern Shore was able to help shape and
develop the recommendations contained in the Final Report. For example, a
primary strategy was deemed to be "Enhance availability of natural gas", along
with the recommendation that the State should evaluate possible incentives for
expanding residential and commercial natural gas service.
On March 29, 2002, the Florida division filed tariff revisions with the Florida
PSC to complete the unbundling process by requiring all customers, including
residential, to migrate to transportation service and authorize the Florida
division to exit the merchant function. Transportation services were already
available to all non-residential customers. On November 5, 2002, the Florida PSC
approved the Company's request for the first phase of the unbundling process, as
a pilot program, for a minimum two-year period. The Company began implementing
the program in November 2002 and must submit an interim report for review by the
Florida PSC after one year. As a part of this pilot program, the Company expects
to submit several filings during 2003has
filed and received Florida PSC approval to address transition costs and the
level of base rates. The Company made an additional filing in September 2003
regarding the disposition of the un-recoveredover-recovered gas cost balances and the
implementation of the operational balancing account and the level of base rates.mechanism.
COMPETITION
The Company's natural gas operations compete with other forms of energy
including electricity, oil and propane. The principal competitive factors are
price, and to a lesser extent, accessibility. The Company's natural gas
distribution operations 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 are
lower relative to the price of natural gas. Oil prices, as well as the prices of
electricity and other fuels are subject to fluctuation for a variety of reasons;
therefore, future competitive conditions are not predictable. To address this
uncertainty, the Company uses flexible pricing arrangements on both the supply
and sales sidesides of its business to maximize sales volumes. As a result of the
transmission business' conversion to open access, this business has shifted from
providing competitive sales service to providing transportation and contract
storage services.
The Company's natural gas distribution operations located in Maryland, Delaware
and Florida offer transportation services to certain industrial customers. In
2001, the Florida operation extended transportation service to commercial
customers and, in 2002 to residential customers. With transportation services
now available on the Company's distribution systems, the Company is competing
with third party suppliers to sell gas to industrial customers and, in Florida,
to commercial customers. (The Company no longer performs the merchant function
for gas sales to its residential customers in Florida.) The Company's
competitors include the interstate transmission company if the distribution
customer is located close enough to the transmission company's pipeline to make
a direct connection economically feasible. The customers at risk are usually
large volume commercial and industrial customers with the financial resources
and capability to bypass the Company's distribution operations in this manner.
In certain situations, the Company's distribution operations may adjust services
and rates for these customers to retain their business. The Company expects to
continue to expand the availability of transportation services to additional
classes of distribution customers in the future. The Company established a
natural gas sales and supply operation in Florida in 1994 to compete for
customers eligible for transportation services.
The Company's propane distribution operations compete with several other propane
distributors in theirthe Company's service territories, primarily on the basis of
service and price. Competitors include several large national propane
distribution companies, as well as an increasing number of local suppliers. Some
of these competitors have pricing strategies designed to acquire market share.
The Company's advanced information services segment faces competition from a
number of competitors, many of which have greater resources available to them
than those of the Company. This segment competes on the basis of technological
expertise, reputation and price.
The water services segment faces competition from a variety of national and
local suppliers of water conditioning and treatment services and with bottled
water. This segment competes on the basis of marketing expertise, promotions and
price.
RECENT PRONOUNCEMENTS
The FASB adopted SFAS No. 146, "Accounting for Costs Associated with Exit or
Disposal Activities" in June 2002. It requires that a liability for a cost
associated with an exit or disposal activity be recognized when a liability is
incurred. Under previous guidelines, a liability for an exit cost was recognized
at the date of an entity's commitment to an exit plan. Should the Company enter
into an exit plan, SFAS No. 146 will be applied prospectively.
On October 25, 2002, the EITF rescinded Issue No. 98-10 ("EITF 98-10"),
"Accounting for Contracts Involved in Energy Trading and Risk Management
Activities." The Company's interpretation of EITF 98-10 is consistent with the
current rules that are being applied under SFAS No. 133; therefore, management
does not believe that rescinding EITF 98-10 will impact its financial position
or results of operations.
FASB Interpretation ("FIN") No. 45, "Guarantor's Accounting and Disclosure
Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of
Others," was adopted in November 2002. The Company has adopted FIN No. 45. There
was no impact on the financial statements; however, the disclosures in the
Commitments and Contingencies footnote (Note 3) were expanded to include all
required information.
FIN No. 46, "Consolidation of Variable Interest Entities," was adopted in
January 2003. Chesapeake does not currently have any investments in variable
interest entities and, therefore, FIN No. 46 has not impacted the Company.
In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133 on
Derivative Instruments and Hedging Activities." This statement amends and
clarifies financial accounting and reporting for derivative instruments and for
hedging activities under FASB Statement No. 133, "Accounting for Derivative
Instruments and Hedging Activities" by requiring that contracts with comparable
characteristics be accounted for similarly. The Company does not believe that
the adoption of SFAS No. 149 will have a material impact on Chesapeake's
financial position or results of operations.
INFLATION
Inflation affects the cost of labor, products and services required for
operation,operations, maintenance and capital improvements. While the impact of inflation
has remained low in recent years, natural gas and propane prices are subject to
rapid fluctuations. Fluctuations in natural gas prices are passed on to
customers through the gas cost recovery mechanism in the Company'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.
To compensate for fluctuations in propane gas prices, the Company adjusts its
propane selling prices to the extent allowed by the market.
CAUTIONARY STATEMENT
Chesapeake has made statements in this report that are considered to be
forward-looking statements. These statements are not matters of historical fact.
Sometimes they contain words such as "believes," "expects," "intends," "plans,"
"will," or "may," and other similar words of a predictive nature. These
statements relate to matters such as the potential sale of the water businesses,
customer growth, changes in revenues or margins, capital expenditures,
environmental remediation costs, regulatory approvals, market risks associated
with the Company's propane wholesale marketing operation, competition, inflation
and other matters. It is important to understand that these forward-looking
statements are not guarantees, but are subject to certain risks and
uncertainties and other important factors that could cause actual results to
differ materially from those in the forward-looking statements. These factors
include, among other things:
o the temperature sensitivity of the natural gas and propane businesses;
o the effect of spot, forward and futures market prices on the Company's
distribution, wholesale marketing and energy trading businesses;
o the effects of competition on the Company's unregulated and regulated
businesses;
o the effect of changes in federal, state or local regulatory and tax
requirements, including deregulation;
o the effect of accounting changes;
o the effect of compliance with environmental regulations or the
remediation of environmental damage;
o the effects of general economic conditions on the Company and its
customers;
o the ability of the Company's new and planned facilities and
acquisitions to generate expected revenues; and
o the Company's ability to obtain the rate relief and cost recovery
requested from utility regulators and the timing of the requested
regulatory actions.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market risk represents the potential loss arising from adverse changes in market
rates and prices. Long-term debt is subject to potential losses based on the
change in interest rates. The Company's long-term debt consists primarily of
fixed rate senior notes, first mortgage bonds and convertible debentures, none
of which was issued for trading purposes. The carrying value of long-term debt
at March 31,September, 2003 was $76.0$75.4 million, with a fair value of $91.8$82.4 million, based
mainly on current market prices or discounted cash flows using current rates for
similar issues with similar terms and remaining maturities. The Company is
exposed to changes in interest rates due to the use of fixed rate long-term debt
to finance the business. Management continually monitors fluctuations in
interest rates and debt markets to assess the benefits of changing the mix of
long and short-term debt or refinancing existing debt.
The Company's propane distribution business is exposed to market risk as a
result of propane storage activities and entering into fixed price contracts for
supply. The Company can store up to approximately 4 million gallons (including
leased storage) of propane during the winter season to meet its customers' peak
requirements and to serve metered customers. Decreases in the wholesale price of
propane will cause the value of stored propane to decline. To mitigate the
impact of price fluctuations, the Company has adopted a risk management policy
that allows the propane distribution operation to enter into fair value hedges
of its inventory. At March 31,However, at September 30, 2003 840,000 gallons of propanethere were hedged.
That amount of propane in inventory was expected to be sold to distribution
customers in April 2003 and the hedging instrument matured in April 2003. The
hedge was efficient and therefore, no net gain or loss was recorded.hedged items.
The Company's propane wholesale marketing operation is a party to natural gas
liquids ("NGL") forward contracts, primarily propane contracts, with various
third parties. These contracts require that the propane wholesale 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 Company or
the counter party or booking out the transaction. (Booking out is a procedure
for financially settling a contract in lieu of the physical delivery of energy.)
The propane wholesale 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 or receipt of a net amount equal to
the difference between the current market price of the futures contract and the
original contract price; however, they may also be settled for physical receipt
or delivery of propane.
The forward and futures contracts are entered into for trading and wholesale
marketing purposes. The propane marketing business is subject to commodity price
risk on its open positions to the extent that market prices for NGL deviate from
fixed contract settlement prices. Market risk associated with the trading of
futures and forward contracts are monitored daily for compliance with the
Company's Risk Management Policy, which includes volumetric limits for open
positions. To manage exposures to changing market prices, open positions are
marked up or down to market prices and reviewed by oversight officials on a
daily basis. Additionally, the Risk Management Committee reviews periodic
reports on market and the credit risk of counter-parties, approves any
exceptions to the Risk Management Policy (within limits established by the Board
of Directors) and authorizes the use of any new types of contracts. Quantitative
information on forward and futures contracts at March 31,September 30, 2003 is presented
in the following table. All of the contracts mature within twelve months.
- ------------------------------------------------------------------------
QUANTITY ESTIMATED WEIGHTED AVERAGE
AT MARCH 31,SEPTEMBER 30, 2003 IN GALLONS MARKET PRICES CONTRACT PRICES
- ------------------------------------------------------------------------
FORWARD CONTRACTS
Sale. . . . . . . . . 7,854,000 $0.490014,260,000 $0.5200 - $0.5175 $0.5904$0.5500 $0.5419
Purchase. . . . . . . 4,914,000 $0.490010,640,000 $0.5200 - $0.5150 $0.5487$0.5500 $0.5408
FUTURES CONTRACTS
Sale. . . . . . . . . 630,000 $0.4900280,000 $0.5200 - $0.5075 $0.5644$0.5500 $0.5214
Purchase. . . . . . . 714,000 $0.4900160,000 $0.5200 - $0.5075 $0.6906$0.5500 $0.5163
- ------------------------------------------------------------------------
Estimated market prices and weighted average contract prices are
in dollars per gallon.
ITEM 4. CONTROLS AND PROCEDURES
EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES.PROCEDURES
The Chief Executive Officer and Chief Financial Officer of the Company, with the
participation of other Company officials, have evaluated the Company's
"disclosure controls and procedures", (as such term is defined under Rule
13a-14(c) promulgated under the Securities Exchange Act of 1934, as amended) within 90 days prior to the filing dateas
of this report.September 30, 2003. Based upon their evaluation, the Chief Executive Officer
and Chief Financial Officer concluded that the Company's disclosure controls and
procedures are effective.
CHANGES IN INTERNAL CONTROLS.
There have beenCONTROLS
During the fiscal quarter of the Company ending September 30, 2003, there was no
significant changeschange in the Company's internal control over financial reporting that has
materially affected, or is reasonably likely to materially affect, the Company's
internal controls or in
other factors that could significantly affect these controls subsequent to the
date of the evaluation referenced above, including corrective actions with
regard to significant deficiencies or material weaknesses.
This page intentionally left blankover financial reporting.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
See Note 3 to the Consolidated Financial Statements
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
- Exhibit 99.13 - Revised Bylaws of Chesapeake Utilities
Corporation
- Exhibit 31.1 - Certificate of Chief Executive Officer of
Chesapeake Utilities Corporation pursuant to Rule 13a-14(a)
under the Securities Exchange Act of 1934, dated November
14, 2003
- Exhibit 31.2 - Certificate of Chief Financial Officer of
Chesapeake Utilities Corporation pursuant to Rule 13a-14(a)
under the Securities Exchange Act of 1934, dated November
14, 2003
- Exhibit 32.1 - Certificate of Chief Executive Officer of
Chesapeake Utilities Corporation pursuant to 18 U.S.CU.S.C.
Section 1350, dated May 15,November 14, 2003
- Exhibit 99.232.2 - Certificate of Chief Financial Officer of
Chesapeake Utilities Corporation pursuant to 18 U.S.CU.S.C.
Section 1350, dated May 15,November 14, 2003
(b) Reports on Form 8-K:
Earnings press release dated May 12,November 7, 2003 (Items 5 and 12)
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Chesapeake Utilities Corporation
/s/ Michael P. McMasters
- ---------------------------
Michael P. McMasters
Vice President Treasurer and Chief Financial Officer
Date: May 15,November 14, 2003
CERTIFICATIONS
I, John R. Schimkaitis, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Chesapeake Utilities
Corporation;
2. Based on my knowledge, this report does not contain any untrue statement of
a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this
quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report ("Evaluation Date");
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of the registrant's board of directors (or persons performing the
equivalent function);
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weakness in
internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: May 15, 2003
/s/ John R. Schimkaitis
- --------------------------
John R. Schimkaitis
President and Chief Executive Officer
I, Michael P. McMasters, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Chesapeake Utilities
Corporation;
2. Based on my knowledge, this report does not contain any untrue statement of
a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this
quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report ("Evaluation Date");
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of the registrant's board of directors (or persons performing the
equivalent function);
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weakness in
internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: May 15, 2003
/s/ Michael P. McMasters
- ---------------------------
Michael P. McMasters
Vice President, Treasurer and Chief Financial Officer