-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, RlvcBFz4MdHzXfNvGaF7W1SGrSE4gi+cKpB9xX9Za/g4JRmXVUqutvzv0niYIPXT 5clahUk8ywEsfCa+wnNqsQ== 0000019745-95-000008.txt : 19951119 0000019745-95-000008.hdr.sgml : 19951119 ACCESSION NUMBER: 0000019745-95-000008 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19950930 FILED AS OF DATE: 19951113 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: CHESAPEAKE UTILITIES CORP CENTRAL INDEX KEY: 0000019745 STANDARD INDUSTRIAL CLASSIFICATION: NATURAL GAS TRANSMISSION & DISTRIBUTION [4923] IRS NUMBER: 510064146 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-11590 FILM NUMBER: 95589210 BUSINESS ADDRESS: STREET 1: 909 SILVER LAKE BLVD STREET 2: PO BOX 615 CITY: DOVER STATE: DE ZIP: 19904 BUSINESS PHONE: 302-734-6799 EX 6724 MAIL ADDRESS: STREET 1: 909 SILVER LAKE BLVD CITY: DOVER STATE: DE ZIP: 19904 10-Q 1 10-Q - F/S, NOTES, MD&A SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 _______________________________ FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended: September 30, 1995 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: 0-593 CHESAPEAKE UTILITIES CORPORATION (Exact name of registrant as specified in its charter) Delaware 51-0064146 (State of other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 909 Silver Lake Boulevard, Dover, Delaware 19904 (Address of principal executive offices) (Zip Code) (302) 734-6754 (Registrant's Telephone Number, Including Area Code) 861 Silver Lake Boulevard, Dover, Delaware 19904 (Former name, former address and former fiscal year, if changed since last report.) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ]. Common Stock, par value $.4867 - 3,712,864 shares issued as of September 30, 1995, of which 2,919 are held in treasury. PART I FINANCIAL INFORMATION CHESAPEAKE UTILITIES CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS September 30, December 31, 1995 1994 Assets (Unaudited) ----------- ----------- Property, Plant And Equipment Natural gas distribution $62,525,116 $57,773,632 Natural gas transmission 25,110,722 24,546,916 Propane distribution 19,083,173 18,289,571 Information technology services and other 5,785,961 8,618,014 Gas plant acquisition adjustment 795,004 795,004 -------------------------- Total property, plant and equipment 113,299,976 110,023,137 Less: Accumulated depreciation and amortization (33,838,216) (34,710,478) -------------------------- Net property, plant and equipment 79,461,760 75,312,659 -------------------------- Investments 1,876,996 1,641,851 -------------------------- Current Assets Cash and cash equivalents 485,031 398,751 Accounts receivable, less allowance for uncollectibles 6,879,591 8,416,293 Materials and supplies, at average cost 878,680 797,147 Propane inventory, at average cost 1,226,640 1,411,384 Storage gas prepayments 3,310,804 3,467,281 Underrecovered purchased gas costs 0 109,025 Income taxes receivable 5,487 836,813 Prepaid expenses 910,837 855,107 Deferred income taxes 1,165,012 1,290,680 -------------------------- Total current assets 14,862,082 17,582,481 -------------------------- Deferred Charges and Other Assets Intangible assets, net of accumulated amortization 1,560,649 1,941,239 Environmental cost 8,390,610 7,462,647 Order 636 transition cost 1,608,980 2,020,732 Other deferred charges 2,316,009 2,309,008 -------------------------- Total deferred charges and other assets 13,876,248 13,733,626 -------------------------- Total Assets $110,077,086 $108,270,617 ========================== The accompanying notes are an integral part of these financial statements. CHESAPEAKE UTILITIES CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS September 30, December 31, 1995 1994 Capitalization and Liabilities (Unaudited) ----------- ----------- Capitalization Stockholders' equity Common Stock, par value $.4867 per share; (authorized 12,000,000 shares; issued 3,712,864 and 3,668,791 shares, respectively) $1,806,965 $1,785,514 Additional paid-in capital 17,470,033 16,834,823 Retained earnings 22,396,398 19,480,374 Less: Treasury stock, at cost; (2,919 and 15,609 shares, respectively) (38,270) (99,842) Unearned compensation - restricted stock awards (496,966) (696,679) Net unrealized loss on marketable securities (126,729) (241,609) -------------------------- Total stockholders' equity 41,011,431 37,062,581 Long-term debt, net of current portion 26,119,139 24,328,988 -------------------------- Total capitalization 67,130,570 61,391,569 -------------------------- Current Liabilities Current portion of long-term debt 4,872,849 1,348,080 Short-term borrowings 1,791,000 8,000,000 Accounts payable 5,711,508 7,385,590 Refunds payable to customers 1,009,933 567,817 Overrecovered purchased gas costs 1,182,351 0 Accrued interest 535,460 691,949 Dividends payable 834,738 803,700 Other accrued expenses 2,644,679 2,225,097 -------------------------- Total current liabilities 18,582,518 21,022,233 -------------------------- Deferred Credits and Other Liabilities Deferred income taxes 8,689,587 8,700,472 Deferred investment tax credits 949,831 986,062 Environmental liability 7,117,083 6,642,092 Accrued pension costs 2,669,817 2,530,904 Order 636 transition liability 1,608,980 2,020,732 Other liabilities 3,328,700 4,976,553 -------------------------- Total deferred credits and other liabilities 24,363,998 25,856,815 -------------------------- Total Capitalization and Liabilities $110,077,086 $108,270,617 ========================== The accompanying notes are an integral part of these financial statements. CHESAPEAKE UTILITIES CORPORATION AND SUBSIDIARIES CONSOLIDATED INCOME STATEMENTS (UNAUDITED) For the Quarter Ended September 30, 1995 1994 -------------------------- Operating Revenues $20,564,994 $18,789,776 -------------------------- Operating Expenses Purchased gas costs 10,594,483 11,490,822 Operations 5,411,880 4,729,442 Maintenance 528,140 565,442 Depreciation and amortization 1,382,311 1,257,900 Other taxes 665,908 611,795 Income taxes 490,072 (161,735) -------------------------- Total operating expenses 19,072,794 18,493,666 -------------------------- Operating Income 1,492,200 296,110 Other Income and Deductions 93,730 81,068 -------------------------- Income Before Interest Charges 1,585,930 377,178 Interest Charges 597,808 641,951 -------------------------- Net Income (Loss) $988,122 ($264,773) ========================== Weighted Average Number of Common Shares Outstanding 3,705,763 3,637,056 ========================== Earnings Per Share of Common Stock (1): Net Income (Loss) $0.27 ($0.07) ========================== Fully Diluted Earnings Per Share of Common Stock (1): Net Income (Loss) $0.26 ($0.05) ========================== The accompanying notes are an integral part of these financial statements. (1) See Exhibit 11 - Computation of Primary and Fully Diluted Earnings Per Sha CHESAPEAKE UTILITIES CORPORATION AND SUBSIDIARIES CONSOLIDATED INCOME STATEMENTS (UNAUDITED) For the Nine Months Ended September 30, 1995 1994 -------------------------- Operating Revenues $73,536,454 $74,667,852 -------------------------- Operating Expenses Purchased gas costs 40,493,514 45,653,150 Operations 15,136,089 14,424,956 Maintenance 1,446,532 1,546,975 Depreciation and amortization 4,049,238 3,906,765 Other taxes 2,239,348 2,119,483 Income taxes 2,979,229 1,809,259 -------------------------- Total operating expenses 66,343,950 69,460,588 -------------------------- Operating Income 7,192,504 5,207,264 Other Income and Deductions 225,409 105,889 -------------------------- Income Before Interest Charges 7,417,913 5,313,153 Interest Charges 2,007,274 1,948,423 -------------------------- Net Income $5,410,639 $3,364,730 ========================== Weighted Average Number of Common Shares Outstanding 3,689,900 3,620,618 ========================== Earnings Per Share of Common Stock (1): Net Income $1.47 $0.93 ========================== Fully Diluted Earnings Per Share of Common Stock (1): Net Income $1.41 $0.91 ========================== The accompanying notes are an integral part of these financial statements. (1) See Exhibit 11 - Computation of Primary and Fully Diluted Earnings Per Sha CHESAPEAKE UTILITIES CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) For the Nine Months Ended September 30, 1995 1994 -------------------------- Operating Activities Net Income $5,410,639 $3,364,730 Adjustments to reconcile net income to net operating cash Depreciation and amortization 4,294,633 4,148,802 Deferred income taxes, net 38,783 (965,499) Investment tax credit adjustments (36,231) (41,112) Employee benefits 101,543 639,776 Employee compensation from lapsing stock restrictions 332,514 270,667 Reserve for refund (1,356,705) 1,007,862 Other (118,419) 89,504 Changes in assets and liabilities: Accounts receivable 1,536,702 3,561,814 Inventory, materials, supplies and storage gas 259,688 (416,211) Prepaid expenses (55,730) (427,738) Other deferred charges (559,073) (125,719) Accounts payable (1,674,082) (2,960,100) Refunds payable to customers 442,116 135,419 Overrecovered purchased gas costs 1,291,376 2,468,958 Other current liabilities 1,041,462 721,038 -------------------------- Net cash provided by operating activities 10,949,216 11,472,191 Investing Activities Property, plant and equipment expenditures, net (8,063,144) (6,419,165) Purchases of investments, net (38,836) 0 -------------------------- Net cash used by investing activities (8,101,980) (6,419,165) Financing Activities Common stock dividends net of amounts reinvested of $383,959 and $312,657, respectively (2,079,570) (2,048,974) Net repayments under line of credit agreements (300,000) (2,700,000) Proceeds from issuance of treasury stock 212,694 145,608 Repayments of long-term debt (594,080) (513,946) Payments under capital lease obligations 0 (46,476) Converted debenture bonds 0 4,984 -------------------------- Net cash used by financing activities (2,760,956) (5,158,804) Net Increase (Decrease) in Cash 86,280 (105,778) Cash and Cash Equivalents at Beginning of Period 398,751 1,162,797 -------------------------- Cash and Cash Equivalents at End of Period $485,031 $1,057,019 ========================== CHESAPEAKE UTILITIES CORPORATION AND SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS (UNAUDITED) 1. Quarterly Financial Data The financial information included herein is unaudited; however, the financial information reflects normal recurring adjustments, which are, in the opinion of management, necessary for a fair presentation of the Company's interim results. Due to the seasonal nature of the Company's business, there are substantial variations in the results of operations reported on a quarterly basis. Certain amounts in 1994 have been reclassified to conform with the 1995 presentation. 2. Investments The investment balances at September 30, 1995 and December 31, 1994 consist primarily of an investment in the common stock of Florida Public Utilities Company ("FPU"). The Company's ownership at September 30, 1995 and December 31, 1994, represents a 7.05% and 6.84% interest, respectively. The Company has classified its investment in FPU as an "available for sale" security, which requires that all unrealized gains and losses be excluded from earnings and be reported as a separate component of stockholders' equity, net of income taxes. At September 30, 1995 the market price per share, cost basis per share, and the unrealized loss on the investment in FPU were $18.00, $20.05 and $210,729, respectively. In management's opinion, the decline in the value of the stock is temporary. At December 31, 1994 the market price per share, cost basis per share and the unrealized loss were $16.125, $20.20 and $401,609, respectively. 3. Statement of Financial Accounting Standards No. 121 In March 1995, the Financial Accounting Standards Board issued Statement of Accounting Standards ("SFAS") No. 121 regarding accounting for asset impairments. This statement, which must be adopted by the Company by January 1, 1996, requires that long-lived assets be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Additionally, the standard requires rate- regulated companies to write-off regulatory assets to earnings whenever those assets no longer meet the criteria for recognition of a regulatory asset as defined by SFAS No. 71, Accounting for the Effects of Certain Types of Regulation. Adoption of SFAS No. 121 is not expected to have a material impact on the Company's financial statements. 4 Commitments and Contingencies FERC PGA Settlement The Federal Energy Regulatory Commission ("FERC") issued an Order on May 19, 1994 directing the Company's interstate pipeline subsidiary, Eastern Shore Natural Gas Company ("Eastern Shore") to refund, with interest, what the FERC characterized as overcharges from November 1, 1992 to the current billing month. The Order also directed Eastern Shore to file a report showing how the refund was calculated, and to revise tariff language clarifying the PGA provisions of its tariff. On June 20, 1994, Eastern Shore filed a request for rehearing of the Order. In addition, on June 21, 1994, Eastern Shore filed revised tariff sheets clarifying its PGA methodology and two alternative refund calculations. Eastern Shore filed two alternative refund calculations due to what it believed were inconsistencies and contradictions in the Order. The FERC issued an Order on July 18, 1994, for the sole purpose of extending the time for consideration of Eastern Shore's filings. Subsequently Eastern Shore and the FERC Staff entered into negotiations to resolve this issue. In response to the FERC s May 19, 1994 Order, Eastern Shore accrued $412,000 during the second quarter of 1994, as a reserve for potential refund relating to prior periods. Thereafter, Eastern Shore accrued an amount each month to ensure that the potential refund was fully reserved. As of July 31, 1995, the total amount accrued was $1,660,200. On August 17, 1995 the FERC issued an Order approving an Offer of Settlement submitted by Eastern Shore. The Order approved a change in Eastern Shore s PGA methodology retroactive to June 1, 1994, which will result in a rate reduction of approximately $234,000 per year. The reserves the Company had been accruing for the potential refund were significantly greater than the rate reduction ordered. Accordingly, Eastern Shore has reversed a large portion of the reserve that it had been accruing. This reversal contributed $1,385,000 to pre-tax earnings or $833,000 to after-tax earnings during the third quarter of 1995. In connection with the FERC Order, Eastern Shore will apply to the FERC for a blanket certificate authorizing open access transportation service on its pipeline system. The implementation of open access transportation service, expected to occur during the second half of 1996, will provide all of Eastern Shore's customers with the opportunity to transport gas over its system at FERC regulated rates. Open access will thus result in a shift of Eastern Shore's business from higher margin sales of gas to large industrial customers, to lower margin transportation services. The Company believes that the impact on earnings can be partially offset by anticipated pipeline expansion and the Company's plans to provide unregulated supply management services. Environmental Matters Dover Gas Light Company Site In 1984, the State of Delaware notified the Company that a parcel of land it purchased in 1949 from Dover Gas Light Company, a predecessor gas company, contains hazardous substances. The State also asserted that the Company is responsible for any cleanup and prospective environmental monitoring of the site. The Delaware Department of Natural Resources and Environmental Control ("DNREC") investigated the site and surroundings, finding coal tar residue and some ground-water contamination. In October 1989, the Environmental Protection Agency Region III ("EPA") listed the Dover Site on the National Priorities List under the Comprehensive Environmental Response, Compensation and Liability Act ("CERCLA" or "Superfund"). At this time, under CERCLA, both the State of Delaware and the Company were named as potentially responsible parties ("PRP") for cleanup of the site. In July 1990, the Company entered into an agreement with EPA and DNREC to perform a Remedial Investigation/Feasibility Study under the supervision of EPA and DNREC to study the site and surroundings to determine any environmental impacts. Pursuant to the agreement, the Company agreed to pay for the study and 80% of the EPA's oversight costs. The Company submitted its reports on the Remedial Investigation ("RI") and Feasibility Study ("FS") to EPA and DNREC in January and February 1993, respectively. After receiving extensive comments, the Company submitted to the EPA and DNREC its revised RI and FS reports in May and June 1993, respectively. In the FS Report, Chesapeake proposed a remedy, which involved capping the site and monitoring ground-water quality in the surrounding area with a total estimated cost of approximately $700,000. After further discussions with the regulatory authorities, Chesapeake undertook an additional phase study, the Ground Water Evaluation Study - Phase III, which focused on delineating the area of maximum ground-water impact from the site. The results of that study were submitted to EPA and DNREC in September 1993. On February 1, 1994, EPA issued its proposed plan of action (the "Plan"). The Plan adopted many findings of the Phase III Study, acknowledging that the Dover Site has only impacted ground-water in a limited area. The Plan presented and discussed a number of remedial alternatives, including the remedial strategy proposed by the Company in the FS. The EPA Plan proposed a more extensive remediation strategy that involved removal of contaminated soils from the site and drilling a series of twenty (20) wells. EPA estimated that execution of its Plan would cost $4.9 million. The Plan was submitted by the EPA for 30-day public comment period, which ended on April 4, 1994. During this period, the EPA received public comments, including those submitted by the Company. The EPA issued the site Record of Decision ("ROD") dated August 16, 1994. The remedial action selected by the EPA in the ROD differed significantly from the Plan. The EPA selected a less stringent ground-water remediation addressing contamination with a combination of hydraulic containment and natural attenuation. Remediation selected for the soil at the site is to meet stringent cleanup standards for the first two feet of soil and less stringent standards for the soil below two feet. These selected levels of remediation were not alternatives listed in the Plan, but utilized elements proposed. In addition, the ROD incorporated many of the public comments that were received. The ROD estimates the costs of selected remediation of ground-water and soil at $2.7 million and $3.3 million, respectively. The remediation selected in the ROD is substantially more limited than had been suggested in the Plan. In the ROD, the EPA indicated that its previous $4.9 million estimate was incorrect. On November 18, 1994, EPA issued a "Special Notice Letter" (the "Letter") to Chesapeake and three other PRPs. The Letter included, inter alia, (1) a demand for payment by the PRPs of EPA's past costs (currently estimated to be approximately $300,000) and future costs incurred overseeing site work; (2) notice of EPA's commencement of a 60-day moratorium on certain EPA response activities at the Site; (3) a request by EPA that Chesapeake and the other PRPs submit a "good faith proposal" to conduct or finance the work identified in the ROD and (4) proposed consent orders by which Chesapeake and other parties may agree to perform the good faith proposal. In January 1995, Chesapeake submitted to the EPA a good faith proposal to perform a substantial portion of the work set forth in the ROD, which was subsequently rejected. The Company and the EPA each attempted to secure voluntary performance of part of the remediation by other parties. These parties include the State of Delaware, which is the owner of the property and was identified in the ROD as a PRP, and a business identified in the ROD as a PRP for having contributed to ground-water contamination. On March 6, 1995, in order to protect its interests, the Company filed suit in U.S. District Court for the District of Delaware for a determination that the State of Delaware is a liable party and for recovery from the State of costs of complying with the ROD. The Company is also considering suit against other PRPs. On May 17, 1995, EPA issued an order to the Company under section 106 of CERCLA (the Order ), which requires the Company to fund or implement the site ROD issued by EPA on August 6, 1994. The Order was also issued to General Public Utilities Corporation, Inc. ( GPU ), which EPA and the Company believe is liable under CERCLA. Other PRPs such as the State of Delaware were not ordered to perform the ROD. EPA may seek judicial enforcement of its Order, as well as significant financial penalties for failure to comply. Although notifying EPA of objections to the Order, the Company agreed to comply. GPU has informed EPA that it does not intend to comply with the order. The Company has commenced the design phase of the work required by the Order. On July 6, 1995, the Company also submitted to EPA a study that proposes two alternative remedies for the soil at the site. The alternatives contemplate a reduction in the level and cost of soil-cleanup from that identified in the ROD. The alternatives are consistent with a prior agreement by the State of Delaware that limits construction on the site. The EPA is currently evaluating the proposal, which is supported by the State of Delaware, and the Company anticipates further negotiations on this issue. The litigation commenced by the Company on March 6, 1995 against the State of Delaware remains pending in U.S. District Court for the District of Delaware. The Company is currently engaged in discovery related to any additional parties who may be PRPs. Based upon this discovery, the Company will consider suit against other PRPs. Additionally, the Company and EPA each continue to attempt to secure voluntary funding or performance of part of the remediation by other PRPs. The Company expects continued negotiations with PRPs to attempt to resolve these matters. In the third quarter of 1994, the Company increased its accrued liability recorded with respect to the Dover Site to $6.0 million from $700,000, reflecting the EPA's present estimate, as stated in the ROD, for remediation of the site according to the ROD. Future developments in the matters discussed above would be accompanied by appropriate reductions to the liability recorded as they occur. The Company also increased the corresponding regulatory asset to $6.0 million. If the Company incurs expenses of that amount in connection with undertaking the remedies selected in the ROD, management's belief is that the Company will be equitably entitled to contribution from other responsible parties for the greater part of these expenses. Management also believes that any amounts not so contributed will be recoverable in the Company's rates. As of September 30, 1995, the Company has incurred approximately $3.4 million in costs relating to environmental testing and remedial action studies. In 1990, the Company entered into settlement agreements with a number of insurance companies resulting in proceeds to fund a portion of actual environmental costs incurred over a five to seven-year period beginning in 1990. The final insurance proceeds were requested and received in 1994. On February 23, 1993, the Delaware Public Service Commission, consistent with prior base rate proceedings, authorized the Company to amortize an additional $749,971 in environmental expenses for ratemaking purposes over a seven-year period. At September 30, 1995 the unamortized balance is approximately $473,000. Of the $3.4 million in costs reported above, approximately $328,000 has not been recovered through insurance proceeds or received ratemaking treatment. It is management's opinion that these costs incurred will be recoverable in future rates. Salisbury Town Gas Light Site In cooperation with the Maryland Department of the Environment ("MDE"), the Company has completed an assessment of the Salisbury manufactured gas plant site. The assessment determined that there was localized contamination of ground-water. A remedial design report was submitted to MDE in November 1990 and included a proposal to monitor, pump and treat any contaminated ground- water on-site. Through negotiations with the MDE, the remedial action workplan was revised with final approval from MDE obtained in early 1995. The remediation process for ground-water was revised from pump-and-treat to Air Sparging and Soil-Vapor Extraction, resulting in a substantial reduction in overall costs. The Company hopes to have the remediation facilities for ground water designed and constructed by mid-year 1996. The cost of remediation is estimated to be approximately $365,000 in capital costs with yearly operating expenses of approximately $200,000. Based on earlier estimated costs, the Company recorded both a liability and a deferred regulatory asset of $642,092 on December 31, 1994 to cover the Company's projected remediation costs for this site. In July, the Company increased both the liability and deferred regulatory asset to $1,163,000 to reflect an increase in costs. The liability payout for this site is expected to be over a five-year period. As of September 30, 1995, the Company has incurred approximately $1,771,000 for remedial actions and environmental studies and has charged such costs to accumulated depreciation. In a previous rate proceeding, the Company requested and received recovery for all costs incurred as of November 30, 1988 through base rates, including both a ten- year amortization of these costs and rate base treatment for the unamortized balance. As of September 30, 1995, the unamortized balance was approximately $167,000 and will be fully amortized by May 31, 1999. In January 1990, the Company entered into settlement agreements with a number of insurance companies resulting in proceeds to fund a portion of actual environmental costs incurred over a three to five-year period beginning in 1990. The final insurance proceeds were requested and received in 1992. Of the $1,771,000 in costs reported above, approximately $813,000 has not been recovered through insurance proceeds or received ratemaking treatment. It is management's opinion that these costs incurred and future costs incurred, if any, will be recoverable in future rates. Winter Haven Coal Gas Site The Company is currently conducting investigations of a site in Winter Haven, Florida, where the Company's predecessors manufactured coal gas earlier this century. A Contamination Assessment Report ("CAR") was submitted to the Florida Department of Environmental Protection ("FDEP") on July 11, 1990. The CAR contained the results of additional investigations of conditions at the site. These investigations confirmed limited soil and ground-water impacts to the site. By letter dated March 26, 1991, FDEP directed the Company to conduct additional investigations on-site to fully delineate the vertical and horizontal extent of soil and ground-water impacts. Additional contamination assessment activities were conducted at the site in late 1992 and early 1993. On March 25, 1993, a Contamination Assessment Report Addendum ("CAR Addendum") was delivered to FDEP. The CAR Addendum concluded that soil and ground-water impacts have been adequately delineated as a result of the additional field work. The FDEP approved the CAR and CAR Addendum in April of 1994. The next step is a Risk Assessment ("RA") and a Feasibility Study ("FS") on the site. The RA and FS are expected to be filed with the FDEP during the fourth quarter of 1995 at an estimated cost of $60,000. Until the RA and FS are completed and accepted as final by the FDEP, it is not possible to determine whether remedial action will be required by FDEP and, if so, the cost of such remediation. The Company has spent approximately $621,000 on these investigations as of September 30, 1995 and expects to recover these expenses, as well as any future expenses, through base rates. These costs have been accounted for as charges to accumulated depreciation. The Company requested and received approval from the Florida Public Service Commission ("FPSC") to amortize through base rates $359,659 of all costs incurred as of December 31, 1986. As of December 31, 1992, these costs were fully amortized. In January 1993, the Company received approval to recover through base rates approximately $217,000 in additional costs related to the former manufactured gas plant. This amount represents recovery of $173,000 of costs incurred from January 1987 through December 1992, as well as prospective recovery of estimated future costs, which had not yet been incurred at that time. The FPSC has allowed for amortization of these costs over a three-year period and provided for rate base treatment for the unamortized balance. In a separate docket before the FPSC, the Company has requested and received approval to apply a refund of 1991 overearnings of approximately $118,000 against the balance of unamortized environmental charges incurred as of December 31, 1992. As a result, these environmental charges were fully amortized as of June 1994. Of the $621,000 in costs reported above, all costs have received ratemaking treatment. The FPSC has allowed the Company to continue to accrue for future environmental costs. At September 30, 1995, the Company has $54,000 accrued. It is management's opinion that future costs above the amount accrued, if any, will be recoverable in future rates. Smyrna Coal Gas Site On August 29, 1989 and August 4, 1993, representatives of DNREC conducted sampling on property owned by the Company in Smyrna, Delaware. This property is believed to be the location of a former manufactured gas plant. Analysis of the samples taken by DNREC show a limited area of soil contamination. In November 1993 DNREC advised the Company that it would require a remediation of the soil contamination under the state's Hazardous Substance Cleanup Act. The Company met with DNREC personnel in December 1993 to discuss the scope of any remediation of the site, and in January 1994, submitted a proposed workplan, together with comments on the draft Consent Decree. The final Work Plan was submitted on September 27, 1994. DNREC has approved the Work Plan and the Consent Decree. Remediation based on the Work Plan began in 1995 at an estimated cost of approximately $250,000. All soil and debris were removed in the third quarter, restoration is complete and DNREC has initiated site closure procedures. At September 30, 1995, the Company has incurred approximately $234,000 in remediation costs, of which $229,000 has not received ratemaking treatment. It is management's opinion that these and any other costs will be recoverable in future rates. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS FOR THE QUARTER ENDED SEPTEMBER 30, 1995 The Company recognized net income of $988,122 for the three months ended September 30, 1995, representing an increase in net income of $1,252,895 as compared to the corresponding period in 1994. As indicated in the table below, the increase in earnings before interest and taxes ("EBIT") is primarily due to the settlement between Eastern Shore and FERC regarding Eastern Shore's computation of the Purchased Gas Adjustment clause of its tariff, coupled with substantially higher than usual EBIT from Eastern Shore, and partially offset by slightly lower EBIT in the Company's natural gas distribution and propane segments. Exclusive of matters relating to the settlement, net income increased by approximately $310,000. FOR THE QUARTER ENDED SEPTEMBER 30, 1995 1994 Change ---- ---- ------ Earnings Before Interest and Taxes Natural Gas Distribution $(400,399) $(227,018) $(173,381) Natural Gas Transmission 3,086,878 1,133,330 1,953,548 Propane Distribution (909,619) (770,593) (139,026) Information Technology Services and Other 247,884 79,847 168,037 Eliminations & Corporate (42,472) (81,191) 38,719 --------- --------- --------- Total EBIT 1,982,272 134,375 1,847,897 Operating Income Taxes 490,072 (161,735) 651,807 Interest 597,808 641,951 (44,143) Non-Operating Income, Net 93,730 81,068 12,662 --------- --------- --------- Net Income (Loss) $988,122 $(264,773) $1,252,895 ========= ========= ========= Natural Gas Distribution The natural gas distribution segment reported a loss before earnings and taxes ("LBIT") of $400,399 for the third quarter 1995 as compared to LBIT of $227,018 for the corresponding period last year, an increase of $173,381. The increase in LBIT is due to an increase in operating expenses, partially offset by an increase in gross margin. FOR THE QUARTER ENDED SEPTEMBER 30, 1995 1994 Change ---- ---- ------ Revenue $8,458,920 $6,424,563 $2,034,357 Cost of Gas 5,396,931 3,677,082 1,719,849 --------- --------- --------- Gross Margin 3,061,989 2,747,481 314,508 Operations & Maintenance 2,436,136 2,070,555 365,581 Depreciation & Amortization 596,717 516,063 80,654 Other Taxes 429,535 387,881 41,654 --------- --------- --------- LBIT $(400,399) $(227,018) $(173,381) ========= ========= ========= The increase in revenue and cost of gas is primarily due to an increase in firm sales in our northern service territories, the brokering of gas in Florida, an increase in sales to phosphate customers and transportation of gas to two co- generation facilities in our Florida division. Adding to gross margin is an increase in base rates in our Delaware division effective June 3, 1995, the increase subject to refund pending final regulatory approval. The increase in operations and maintenance expenses of $365,581 is due to an increase in customer installation expenses, customer accounting, administrative payroll and outside services. This was partially offset by a decrease in pensio and benefits. Depreciation and amortization expenses increased $80,654 due to plant placed in service during the past year. Increased revenue in our Florida division caused other taxes to rise due to an increase in revenue related taxes. Natural Gas Transmission The natural gas transmission segment reported EBIT of $3,086,878 for the third quarter of 1995 as compared to EBIT of $1,133,330 for the corresponding period last year, an increase of $1,953,548. The increase in EBIT is primarily due to a one-time reversal in the third quarter of 1995, in connection with the FERC settlement, of $1.3 million previously accrued as reserves for potential refunds to customers and a reduction in the level of required current accruals for refunds from $192,000 in the third quarter of 1994, to $38,000 in the third quarter of 1995 (See Note 4 to the Consolidated Financial Statements). Contributing to the rise in EBIT was an increase in gross margin due to greater deliveries to industrial customers. FOR THE QUARTER ENDED SEPTEMBER 30, 1995 1994 Change ---- ---- ------ Revenue $10,995,581 $10,178,061 $817,520 Cost of Gas 6,851,181 8,063,993 (1,212,812) ---------- ---------- --------- Gross Margin 4,144,400 2,114,068 2,030,332 Operations & Maintenance 780,826 722,901 57,925 Depreciation & Amortization 181,677 165,643 16,034 Other Taxes 95,019 92,194 2,825 ---------- ---------- --------- EBIT $3,086,878 $1,133,330 $1,953,548 ========== ========== ========= The increase in revenue is primarily due to a 31.5% increase in industrial interruptible sales volumes, partially offset by a 19.1% decrease in the cost of gas component of revenue, which is passed on to our customers. Cost of gas decreased due to the one-time reversal explained above, partially offset by the increase in sales volumes. The increase in gross margin is attributable to the increase in interruptible sales volumes as natural gas competed favorably with alternative fuels. The increased sales volumes were primarily to the methanol plant and a municipal power plant, which are industrial interruptible customers. Sales volumes and margins to these customers were up 33% and 89%, respectively, when compared to the same period last year. The increase in operations and maintenance expenses of $57,925 is due to an increase in payroll, property insurance, outside services and the painting of a bridge structure partially offset by a reduction in maintenance expenses. Depreciation and amortization increased $16,034 due to plant placed in service during the past year. In connection with the FERC Order, Eastern Shore will apply to the FERC for a blanket certificate authorizing open access transportation service on its pipeline system. The implementation of open access transportation service, expected to occur during the second half of 1996, will provide all of Eastern Shore's customers with the opportunity to transport gas over its system at FERC regulated rates. Open access will thus result in a shift of Eastern Shore's business from higher margin sales of gas to large industrial customers, to lower margin transportation services. The Company believes that the impact on earning can be partially offset by anticipated pipeline expansion and the Company's plan to provide unregulated supply management services. Propane Distribution For the third quarter of 1995, the propane distribution segment recognized an increase in LBIT of $139,026, or 18%. Generating the additional loss was a reduction in gross margin, coupled with higher operations and maintenance expenses. FOR THE QUARTER ENDED SEPTEMBER 30, 1995 1994 Change ---- ---- ------ Revenue $1,902,900 $3,493,363 $(1,590,463) Cost of Gas 993,062 2,510,516 (1,517,454) --------- --------- --------- Gross Margin 909,838 982,847 (73,009) Operations & Maintenance 1,417,755 1,344,469 73,286 Depreciation & Amortization 330,243 335,637 (5,394) Other Taxes 71,459 73,334 (1,875) --------- --------- --------- LBIT $(909,619) $(770,593) $(139,026) ========= ========= ========= Both revenue and cost of gas decreased $1.5 million due to the absence of sales to a wholesale customer to which we supplied propane under a non-recurring contract in 1994. The gross margin earned on sales to the wholesale customer wa minimal. Excluding gallons sold under this contract, sales volumes decreased by 9% over the same quarter for 1994, contributing approximately $63,000 of the decrease in gross margin. The remaining reduction in gross margin was due to lower service revenue. Operations and maintenance expenses rose $73,286, or 5%, due to increases in advertising, outside services and salaries, offset by a reduction in pension benefits. Information Technology Services and Other The information technology services and other segment recognized EBIT of $247,88 and $79,847 for the quarters ended September 30, 1995 and 1994, respectively. This increase in EBIT of $168,037 resulted from increased revenues partially offset by higher operating expenses. FOR THE QUARTER ENDED SEPTEMBER 30, 1995 1994 Change ---- ---- ------ Revenue $2,274,500 $2,037,347 $237,153 Operations & Maintenance 1,691,227 1,663,227 28,000 Depreciation & Amortization 265,494 235,887 29,607 Other Taxes 69,895 58,386 11,509 --------- --------- ------- EBIT $247,884 $79,847 $168,037 ========= ========= ======= The increase in revenues of $237,153, or 12%, resulted from higher facilities management ("FM"), consulting and resource services revenues. Partially offsetting these revenues were reduced consulting and programming, software licensing, system software and training revenues. For this quarter, intercompan revenues totaled $412,997 and $581,456, while intercompany LBIT connected with the development of UtiliCISTM totaled $27,702 and $81,421 for 1995 and 1994, respectively. UtiliCISTM, the customer information and billing system designed for the Company s natural gas distribution segment, is installed and running at two of our three divisions, with full implementation at the remaining division to be complete by the end of 1995. The decline in intercompany revenue and intercompany LBIT should continue for the remainder of 1995. Operations and maintenance expenses increased $28,000, or 2%. Although Capital Data Systems ("CDS") recognized reduced expenses, these were more than offset by increased expenses from United Systems, Inc. ("USI"). CDS' operations have been scaled back over the past year due to the decline in intercompany revenue and to downsizing efforts. This downsizing was initiated as a result of the terminatio of its contract by CDS' largest FM customer in connection with a change in control of that customer. Following the termination, CDS is no longer providing FM services for Page-ITTM, the billing software product designed by CDS for the telecommunications industry. CDS will be focusing mainly on consulting and contract programming, similar to USI's operation. Reductions in payroll, benefits and outside programming costs comprised the largest portion of the overall decline in CDS' expenses. Generating the overall increase in operations and maintenance expenses for the segment were higher payroll and benefit costs for USI. Depreciation and amortization increased $29,607, or 13%, due to accelerated amortization of Page-ITTM , directly correlating to the downsizing efforts mentioned above. Other taxes rose $11,509, or 20%, in response to an overall segment increase in payroll costs. Interest The decrease in interest expense resulted from an adjustment to interest expense accrued in association with the FERC PGA issue (see Note 4 to the Consolidated Financial Statements) partially offset by higher short-term borrowing balances and higher interest rates on those balances. Non-Operating Income The increase of approximately $13,000 over the corresponding quarter in 1994 is primarily due to the net result of a one-time termination fee paid to CDS and costs to downsize CDS. The termination fee was paid to CDS by its largest facilities management customer in connection with a change in control of that customer. The downsizing costs included a one-time writedown of assets, since CDS will no longer provide FM services in connection with its Page-ITTM software The increase was somewhat offset by the absence of any recorded AFUDC in the third quarter of 1995 when compared to approximately $50,000 recorded last year. Operating Income Taxes Income taxes increased due to higher third quarter EBIT, as compared to last year. RESULTS OF OPERATIONS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1995 The Company recognized net income of $5,410,639 for the nine months ended September 30, 1995, representing an increase in net income of $2,045,909 as compared to the corresponding period in 1994. As indicated in the table below, the increase in EBIT is primarily due to Eastern Shore's settlement with FERC, coupled with substantially higher EBIT from Eastern Shore and, to a lesser extent, higher EBIT from the information technology segment. Partially offsetting these were lower EBIT from the natural gas and propane distribution operations located in the Company's northern service territory. Exclusive of matters relating to the settlement, net income increased by approximately $780,000. FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1995 1994 Change ---- ---- ------ Earnings Before Interest and Taxes Natural Gas Distribution $3,564,839 $3,676,713 $(111,874) Natural Gas Transmission 5,350,942 2,108,065 3,242,877 Propane Distribution 733,225 1,585,205 (851,980) Information Technology Services and Other 722,834 51,260 671,574 Eliminations & Corporate (200,107) (404,720) 204,613 ---------- --------- --------- Total EBIT 10,171,733 7,016,523 3,155,210 Operating Income Taxes 2,979,229 1,809,259 1,169,970 Interest 2,007,274 1,948,423 58,851 Non-Operating Income, Net 225,409 105,889 119,520 ---------- --------- --------- Net Income $5,410,639 $3,364,730 $2,045,909 ========== ========= ========= Natural Gas Distribution The natural gas distribution segment reported EBIT of $3,564,839 for the first nine months of 1995 as compared to EBIT of $3,676,713 for the corresponding period last year, a decrease of $111,874. The decrease in EBIT is due to an increase in operating expenses being partially offset by an increase in gross margin. FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1995 1994 Change ---- ---- ------ Revenue $36,883,237 $37,933,573 $(1,050,336) Cost of Gas 23,424,471 25,075,063 (1,650,592) ---------- ---------- --------- Gross Margin 13,458,766 12,858,510 600,256 Operations & Maintenance 6,667,193 6,248,467 418,726 Depreciation & Amortization 1,778,255 1,561,523 216,732 Other Taxes 1,448,479 1,371,807 76,672 ---------- ---------- --------- EBIT $3,564,839 $3,676,713 $(111,874) ========== ========== ========= The decrease in revenue and cost of gas is primarily due to a decrease in firm sales in our northern service territories due to temperatures being 10% warmer in the first three quarters of 1995 as compared to the corresponding period of 1994. Partially offsetting this decrease, was an increase in sales to phosphate customers and two co-generation facilities in our Florida division. Adding to margin is an increase in base rates in our Delaware operations effective June 3, 1995, subject to refund pending final regulatory approval. The increase in operations and maintenance expenses of $418,726 is due to an increase in engineering, customer installation expenses, customer accounting les administrative expenses transferred to plant, outside services and maintenance to mains. This was partially offset by a decrease to pension and benefits. Depreciation and amortization expenses and other taxes increased $216,732 and $76,672, respectively, due to plant placed in service during the past year. Natural Gas Transmission The natural gas transmission segment reported EBIT of $5,350,942 for the first nine months of 1995 as compared to EBIT of $2,108,065 for the corresponding period last year, an increase of $3,242,877. The increase in EBIT is primarily due to a one-time reversal in the third quarter of 1995, in connection with the FERC settlement, of $1.3 million previously accrued as reserves for potential refunds to customers and a reduction in the level of required current accruals for refunds from $984,000 for the nine months ended September 30, 1994, to $288,000 for the corresponding period in 1995 (See Note 4 to the Consolidated Financial Statements). Contributing to the rise in EBIT was an increase in gros margin due to greater deliveries to industrial customers. FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1995 1994 Change ---- ---- ------ Revenue $30,974,448 $30,004,912 $969,536 Cost of Gas 22,730,710 24,999,207 (2,268,497) ---------- ---------- --------- Gross Margin 8,243,738 5,005,705 3,238,033 Operations & Maintenance 2,073,289 2,118,953 (45,664) Depreciation & Amortization 530,155 514,533 15,622 Other Taxes 289,352 264,154 25,198 ---------- ---------- --------- EBIT $5,350,942 $2,108,065 $3,242,877 ========== ========== ========= The increase in revenue is primarily due to a 47% increase in industrial interruptible sales volumes, which was offset by a 22% decrease in the cost of gas component of revenue, which is passed on to our customers. Cost of gas decreased due to the one-time reversal explained above, partially offset by the increase in sales volumes. The increase in gross margin is attributable to the increase in interruptible sales volumes as natural gas competed favorably with alternative fuels. The increased sales volumes were primarily to the methanol plant, which is an industrial interruptible customer. Sales volumes and margins to this customer were up 44% and 91%, respectively, when compared to the same period last year. The decrease in operations and maintenance expenses of $45,664 is due to a decrease in pensions and benefits and maintenance expenses being partially offse by an increase in payroll when compared to the same period of 1994. Depreciatio and amortization increased $15,622 due to plant placed in service during the pas year. Other taxes increased $25,198 due to plant placed in service during the past year, an increase in pipeline safety assessments from the federal governmen and payroll related taxes. In connection with the FERC Order, Eastern Shore will apply to the FERC for a blank certificate authorizing open access transportation service on its pipeline (See Management's Discussion and Analysis of Financial Condition and Results of Operations for the Quarter Ended September 30, 1995.) Propane Distribution The Company's propane distribution segment recognized EBIT of $733,225 and $1,585,205 for the nine months ended September 1995 and 1994, respectively. Thi decrease in EBIT of $851,980, or 54%, resulted from a substantial decline in gross margin, as well as a slight increase in operating expenses. FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1995 1994 Change ---- ---- ------ Revenue $11,740,332 $15,333,065 $(3,592,733) Cost of Gas 5,748,639 8,515,521 (2,766,882) ---------- ---------- --------- Gross Margin 5,991,693 6,817,544 (825,851) Operations & Maintenance 4,015,297 3,950,463 64,834 Depreciation & Amortization 979,254 1,015,458 (36,204) Other Taxes 263,917 266,418 (2,501) ---------- ---------- --------- EBIT $733,225 $1,585,205 $(851,980) ========== ========== ========= The decrease in gross margin of $825,851, or 12%, was a result of several factors. Excluding the impact from a non-recurring sale of propane to a wholesale customer in 1994, the average margin per gallon for the nine-month period of 1995 dropped just over 1% as compared to the same period in 1994. Thi decrease in average margin per gallon resulted from higher market prices for propane when compared to the same period last year. Impacting gross margin even further was an 11% decline in sales volumes. The weather for 1995 contributed to this decline, with temperatures being 9% warmer than the same period in 1994, and 7% warmer than the 10-year average. Comprising the remaining decline in gross margin were reduced appliance sales and the absence of additional margin from the non-recurring wholesale contract in 1995. Operations and maintenance expenses were higher due to increased outside service and salaries expenses, partially offset by lower insurance, maintenance and pension costs. Information Technology Services and Other The information technology services and other segment recognized EBIT of $722,83 for the nine months ended September 30, 1995. These results are significantly higher than the EBIT of $51,260 for the corresponding period in 1994, principall due to increased revenues and lower operating expenses. FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1995 1994 Change ---- ---- ----- Revenue $6,637,541 $6,148,057 $489,484 Operations & Maintenance 4,941,801 5,083,050 (141,249) Depreciation & Amortization 735,307 796,644 (61,337) Other Taxes 237,599 217,103 20,496 --------- --------- ------- EBIT $722,834 $51,260 $671,574 ========= ========= ======= Comprising the increase in revenues of $489,484, or 8%, were higher consulting and programming, training, facilities management and resource services revenues. Partially offsetting these higher revenues were reduced system software, hardwar and data circuit sales, as well as the absence of any Currin & Associates, Inc. ("C&A") revenues due to its dissolution in 1994. Included in the results for th nine months ending September 30, intercompany revenues totaled $1,278,094 and $1,810,873, while intercompany LBIT connected with the development of UtiliCISTM totaled $164,583 and $404,319 for 1995 and 1994, respectively. This expected decline in intercompany revenues and intercompany LBIT was due to UtiliCISTM development nearing completion. Implementation is now complete at two out of three divisions, with the remaining division scheduled for conversion and implementation by the end of 1995. Operations and maintenance expenses declined $141,249, or 3%, primarily due to the absence of approximately $150,000 incurred by C&A in 1994. The Company wrot off its investment in C&A during the second quarter of 1994. Although CDS recognized reduced expenses of approximately $591,000, these were more than offset by an increase of $625,000 from USI. CDS' operations have been scaled back over the past year due to the decline in intercompany revenue and to downsizing efforts, which have been initiated, to no longer provide FM services for Page-ITTM, due to the termination of a contract with its largest FM custome due to a change in control of that customer. CDS will be changing their focus to consulting and contract programming, similar to operations at USI. Areas where costs have declined for CDS include payroll and benefits, computer hardwar and outside programming costs. USI's payroll and benefits costs have increased dramatically in response to increased revenue. Depreciation and amortization declined $61,337, or 8%, due to more assets becoming fully depreciated and the dissolution of C&A in 1994. Other taxes rose $20,496, or 9%, in response to an overall segment increase in payroll costs. Interest Interest expense is higher due to increased short-term borrowings, partially offset by a decrease in long-term debt interest, coupled with an adjustment to interest in association with the FERC PGA issue (see Note 4 to the Consolidated Financial Statements). Non-Operating Income Non-operating income increased approximately $120,000 as compared to the same period in 1994. The increase was the result of the absence of the 1994 write-of of our investment in Currin and Associates, Inc. and the net result of a one-tim termination fee paid to CDS and costs to downsize CDS. This was partially offse by a reduction in the amount of AFUDC recorded in 1995 as compared to 1994. Operating Income Taxes Income taxes increased due to higher 1995 EBIT, as compared to last year, and th elimination of the valuation allowance for state operating loss carryforwards associated with the Company's propane segment. The Company projects the utilization of all state operating loss carryforwards generated by the propane segment. Environmental Matters The Company continues to work with federal and state environmental agencies to assess the environmental impacts and explore corrective action at several former gas manufacturing plant sites (see Note 4 to the Consolidated Financial Statements). The Company believes that any future costs associated with these sites will be recoverable in future rates. FINANCIAL POSITION, LIQUIDITY AND CAPITAL RESOURCES The Company s capital requirements reflect the capital intensive nature of its business and are attributable principally to its construction program and the retirement of its outstanding debt. The Company relies on funds provided by operations and short-term borrowings to meet normal working capital requirements and temporarily finance capital expenditures. During the first nine months of 1995, the Company s net cash flow provided by operating activities, net cash use by investing activities and net cash used by financing activities were approximately $10,949,000, $8,102,000 and $2,761,000, respectively. Due to the seasonal nature of the Company s business, there are substantial variations in the results of operations reported on a quarterly basis. The Board of Directors has authorized the Company to borrow up to $14 million from banks and trust companies. As of September 30, 1995, the Company had four $8 million unsecured bank lines of credit. Funds provided from these lines of credit are used for short-term cash needs to meet seasonal working capital requirements and to fund portions of its capital expenditures. The outstanding balances of short-term borrowings at September 30, 1995 and 1994 were $7.7 million and $6.2 million, respectively. On October 2, 1995, the Company finalized a private placement of $10 million of 6.91% Senior Notes due in 2010. The Company used the proceeds to retire $4,091,000 of the 10.85% Senior Notes of Eastern Shore Natural Gas Company, originally due October 1, 2003. Accordingly, $4,091,000 was reclassified to current portion of long-term debt for financial statement presentation at September 30, 1995. The remaining proceeds of $5,909,000 were used to repay short-term borrowing under the Company s lines of credit. Accordingly, $5,909,000 of short-term borrowings was reclassified to long-term debt for financial statement presentation at September 30, 1995. During the nine months ended September 30, 1995 and 1994, net property, plant an equipment expenditures were approximately $8,063,000 and $6,419,000, respectively. For 1995, the Company has budgeted $15.5 million for capital expenditures. The components of this amount include $10.8 million for natural gas distribution, $1.7 million for natural gas transmission, $1.7 million for propane distribution, $1.0 million for structures and improvements, with the remaining $300,000 for computer and office equipment. The natural gas and propane expenditures are for expansion and improvement of their existing service territories. Financing of the 1995 construction will be provided primarily by short-term borrowings, a private placement of $10 million of Senior Notes and cash from operations. The construction program is subject to continuous review and modification by management. Actual construction expenditures may vary from the above estimates due to a number of factors including inflation, changing economic conditions, regulation, load growth and the cost and availability of capital. The Company expects to incur environmental related expenditures in the future (see Note 4 to the Consolidated Financial Statements), a portion of which may need to be financed through external sources. Management does not expect such financing to have a material adverse effect on the financial position or capital resources of the Company. As of September 30, 1995, common equity represented 61.1% of permanent capitalization, compared to 60.4% as of December 31, 1994. 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, helps to ensure that the Company will be abl to attract capital from outside sources at a reasonable cost. The achievement of these objectives will provide benefits to customers and creditors, as well as the Company s investors. PART II OTHER INFORMATION CHESAPEAKE UTILITIES CORPORATION AND SUBSIDIARIES Item 1: Legal Proceedings See Note 4 to the Consolidated Financial Statements Item 2: Changes in Securities 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(a): Exhibits Exhibit 4 - The Note Purchase Agreement entered into by the Company on October 2, 1995, pursuant to which the Company privately placed $10 million of its 6.91% Senior Notes due in 2010, is not being filed herewith, in accordance with Item 601(b)(4)(iii) of Regulation S-K. The Company hereby agrees to furnish a copy of that agreement to the Commission upon request. Exhibit 11 - Computation of Primary and Fully Diluted Earnings Per Share is submitted herewith. Item 6 (b): Reports on Form 8-K On August 17, 1995, the Company filed a report on Form 8-K, reporting under Item 5 Eastern Shore's settlement with the FERC, described in Note 4 to the Consolidated Financial Statements. 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/ John R. Schimkaitis - ---------------------------- John R. Schimkaitis Senior Vice President and Assistant Treasurer (Principal Financial and Accounting Officer) Date: November 9, 1995 EX-11 2 PRIMARY & FULLY DILUTED EPS CHESAPEAKE UTILITIES CORPORATION AND SUBSIDIARIES EXHIBIT 11 COMPUTATION OF PRIMARY AND FULLY DILUTED EARNINGS PER SHARE
For the Quarter For the Nine Months Ended September 30, Ended September 30, ------------------------ ------------------------ 1995 1994 1995 1994 ---- ---- ---- ---- Primary earnings per share calculation: Weighted average number of shares assuming primary dilution 3,710,054 3,642,317 3,691,866 3,626,117 ======================== ======================== Consolidated net income $988,122 ($264,773) $5,410,639 $3,364,730 ======================== ======================== Total primary earnings per share $0.27 ($0.07) $1.47 $0.93 ======================== ======================== Fully diluted earings per share calculation (1): Weighted average number of shares assuming primary dilution 3,710,054 3,642,317 3,691,866 3,626,117 Contingent shares 247,287 255,282 249,487 255,948 ------------------------ ------------------------ Weighted average number of shares assuming full dilution 3,957,341 3,897,599 3,941,353 3,882,065 ======================== ======================== Consolidated net income (loss) $988,122 ($264,773) $5,410,639 $3,364,730 Interest on convertible debt 87,484 90,311 261,907 268,689 Less: Applicable federal income taxes 34,119 35,221 102,144 104,789 ------------------------ ------------------------ Adjusted net income $1,041,487 ($209,683) $5,570,402 $3,528,630 ======================== ======================== Fully diluted earnings per share $0.26 ($0.05) $1.41 $0.91 ======================== ========================
(1) This calculation is submitted in accordance with Regulation S-K item 601(b)(11) although it is contrary to paragraph 40 of APB Opinion No. 15, because it produces an anti-dilutive result for the quarter ended September 30, 1994. EX-27 3 FINANCIAL DATA SCHEDULE
UT 3-MOS DEC-31-1994 JUL-1-1995 SEP-30-1995 PER-BOOK 79461760 1876996 14862082 13876248 0 110077086 1806965 17470033 22396398 41011431 0 0 26119139 1791000 0 0 4872849 0 0 0 36282667 110077086 20564994 490072 18582722 19072794 1492200 93730 1585930 597808 988122 0 988122 2079570 22359446 (1083449) .27 .26
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