-----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, PVFpECX5wyu1ooMJqrvye8q8vbJFCu1u3I0oKPX5AeP2ecSgyxS/uBoQMlAzG7Tu OVrTI9q1o8GZzYbiRPfFWA== 0000019745-96-000007.txt : 19961113 0000019745-96-000007.hdr.sgml : 19961113 ACCESSION NUMBER: 0000019745-96-000007 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19960930 FILED AS OF DATE: 19961112 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: 96659690 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, 1996 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) ---------------------------------------------------- (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 - 3,788,017 shares issued as of September 30, 1996. PART I FINANCIAL INFORMATION CHESAPEAKE UTILITIES CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS SEPTEMBER 30, DECEMBER 31, 1996 1995 ASSETS (UNAUDITED) ----------- ----------- PROPERTY, PLANT AND EQUIPMENT Natural gas distribution $68,627,972 $64,785,616 Natural gas transmission 28,423,261 25,651,558 Propane distribution 20,769,632 19,645,973 Advanced information services 971,897 841,661 Other plant 3,812,472 3,563,247 Gas plant acquisition adjustment 795,004 795,004 ----------- ----------- Total property, plant and equipment 123,400,238 115,283,059 Less: Accumulated depreciation and amortization (36,826,393) (33,567,446) ----------- ----------- Net property, plant and equipment 86,573,845 81,715,613 ----------- ----------- INVESTMENTS 2,143,272 1,957,218 ----------- ----------- CURRENT ASSETS Cash and cash equivalents 583,927 977,407 Accounts receivable, less allowance for uncollectibles 6,569,490 12,701,256 Materials and supplies, at average cost 1,180,574 844,786 Propane inventory, at average cost 1,495,456 1,442,633 Storage gas prepayments 3,675,909 2,663,721 Underrecovered purchased gas costs 577,807 0 Income taxes receivable 0 193,916 Prepaid expenses 971,818 842,460 Deferred income taxes 1,034,142 1,362,289 ----------- ----------- Total current assets 16,089,123 21,028,468 ----------- ----------- DEFERRED CHARGES AND OTHER ASSETS Environmental cost 8,557,883 8,618,712 Order 636 transition cost 1,089,032 1,463,157 Other deferred charges and intangible assets 3,359,579 4,010,812 ----------- ----------- Total deferred charges and other assets 13,006,494 14,092,681 ----------- ----------- TOTAL ASSETS $117,812,734 $118,793,980 =========== =========== The accompanying notes are an integral part of these financial statements. CHESAPEAKE UTILITIES CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS SEPTEMBER 30, DECEMBER 31, 1996 1995 CAPITALIZATION AND LIABILITIES (UNAUDITED) ----------- ----------- CAPITALIZATION Stockholders' equity Common Stock, par value $.4867 per share; (authorized 12,000,000 shares; issued 3,788,017 and 3,721,589 shares, respectively) $1,843,543 $1,811,211 Additional paid-in capital 18,637,250 17,592,242 Retained earnings 25,844,799 23,385,097 Less: Unearned compensation-restricted stock awards (448,265) (415,107) Net unrealized gain(loss) on marketable securities 36,212 (72,839) ----------- ----------- Total stockholders' equity 45,913,539 42,300,604 Long-term debt, net of current portion 29,314,868 29,794,639 ----------- ----------- Total capitalization 75,228,407 72,095,243 ----------- ----------- CURRENT LIABILITIES Current portion of long-term debt 783,271 864,849 Short-term borrowings 5,800,000 4,800,000 Accounts payable 6,257,110 11,162,775 Refunds payable to customers 664,641 966,940 Income taxes payable 652,684 0 Accrued interest 583,447 742,701 Overrecovered purchased gas costs 0 53,374 Dividends payable 879,893 837,358 Other accrued expenses 2,974,529 3,123,191 ----------- ----------- Total current liabilities 18,595,575 22,551,188 ----------- ----------- DEFERRED CREDITS AND OTHER LIABILITIES Deferred income taxes 9,106,212 9,136,808 Deferred investment tax credits 895,016 931,247 Environmental liability 6,905,480 7,113,572 Accrued pension costs 2,446,957 2,118,545 Order 636 transition liability 1,089,032 1,463,157 Other liabilities 3,546,055 3,384,220 ----------- ----------- Total deferred credits and other liabilities 23,988,752 24,147,549 ----------- ----------- TOTAL CAPITALIZATION AND LIABILITIES $117,812,734 $118,793,980 =========== =========== 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, 1996 1995 -------------------------- OPERATING REVENUES $18,475,914 $20,564,994 -------------------------- OPERATING EXPENSES Purchased gas costs 10,852,652 10,594,483 Operations 5,277,715 5,411,880 Maintenance 507,850 528,140 Depreciation and amortization 1,301,677 1,382,311 Other taxes 768,242 665,908 Income taxes (385,666) 490,072 -------------------------- Total operating expenses 18,322,470 19,072,794 -------------------------- OPERATING INCOME 153,444 1,492,200 OTHER INCOME AND DEDUCTIONS 102,486 93,730 -------------------------- INCOME BEFORE INTEREST CHARGES 255,930 1,585,930 INTEREST CHARGES 646,801 597,808 -------------------------- NET (LOSS)/INCOME ($390,871) $988,122 ========================== (LOSS)/EARNINGS PER SHARE OF COMMON STOCK (1): Primary: (Loss)/Earnings per share ($0.10) $0.27 -------------------------- Average shares outstanding 3,803,719 3,710,054 Fully diluted: (Loss)/Earnings per share ($0.10) $0.26 -------------------------- Average shares outstanding 3,803,719 3,957,341 The accompanying notes are an integral part of these financial statements. (1) See Exhibit 11-Computation of Primary and Fully Diluted Earnings Per Share CHESAPEAKE UTILITIES CORPORATION AND SUBSIDIARIES CONSOLIDATED INCOME STATEMENTS (UNAUDITED) FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996 1995 -------------------------- OPERATING REVENUES $86,596,729 $73,536,454 -------------------------- OPERATING EXPENSES Purchased gas costs 52,385,855 40,493,514 Operations 16,468,414 15,136,089 Maintenance 1,471,211 1,446,532 Depreciation and amortization 3,921,875 4,049,238 Other taxes 2,644,958 2,239,349 Income taxes 2,872,211 2,979,229 -------------------------- Total operating expenses 79,764,524 66,343,951 -------------------------- OPERATING INCOME 6,832,205 7,192,503 OTHER INCOME AND DEDUCTIONS 219,330 225,410 -------------------------- INCOME BEFORE INTEREST CHARGES 7,051,535 7,417,913 INTEREST CHARGES 1,960,940 2,007,274 -------------------------- NET INCOME $5,090,595 $5,410,639 ========================== EARNINGS PER SHARE OF COMMON STOCK (1): Primary: Earnings per share $1.35 $1.47 -------------------------- Average shares outstanding 3,784,217 3,691,866 Fully diluted: Earnings per share $1.30 $1.41 -------------------------- Average shares outstanding 4,027,644 3,941,353 The accompanying notes are an integral part of these financial statements. (1) See Exhibit 11-Computation of Primary and Fully Diluted Earnings Per Share CHESAPEAKE UTILITIES CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996 1995 -------------------------- OPERATING ACTIVITIES Net Income $5,090,595 $5,410,639 Adjustments to reconcile net income to net operating cash Depreciation and amortization 4,335,600 4,294,633 Deferred income taxes, net 338,651 38,783 Investment tax credit adjustments (36,231) (36,231) Employee benefits 271,975 101,544 Employee compensation from lapsing stock restrictions 288,521 332,514 Allowance for refund 0 (1,356,705) Other (142,581) (118,419) Changes in assets and liabilities: Accounts receivable 6,131,766 1,536,702 Inventory, materials, supplies and storage gas (1,400,799) 259,688 Prepaid expenses (129,358) (55,730) Other deferred charges 664,989 (559,073) Accounts payable (4,905,665) (1,674,082) Refunds payable to customers (302,299) 442,116 (Under)Overrecovered purchased gas costs (631,181) 1,291,375 Other current liabilities 538,684 1,041,462 -------------------------- Net cash provided by operating activities 10,112,667 10,949,216 -------------------------- INVESTING ACTIVITIES Property, plant and equipment expenditures, net (8,813,243) (8,063,144) Purchases of investments, net (15,230) (38,836) -------------------------- Net cash used by investing activities (8,828,473) (8,101,980) -------------------------- FINANCING ACTIVITIES Common stock dividends net of amounts reinvested of $426,345 and $383,959, respectively (2,131,310) (2,079,570) Net borrowings(repayments) under line of credit agreements 1,000,000 (300,000) Proceeds from issuance of treasury stock 0 212,694 Converted debenture bonds 14,985 0 Repayments of long-term debt (561,349) (594,080) -------------------------- Net cash used by financing activities (1,677,674) (2,760,956) -------------------------- NET DECREASE IN CASH (393,480) 86,280 CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 977,407 398,751 -------------------------- CASH AND CASH EQUIVALENTS AT END OF PERIOD $583,927 $485,031 ========================== The accompanying notes are an integral part of these financial statements. 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 1995 have been reclassified to conform with the 1996 presentation. 2. COMMITMENTS AND CONTINGENCIES Environmental Matters Dover Gas Light Site In 1984, the State of Delaware notified the Company that a parcel of land it purchased in 1949 from Dover Gas Light Company, a predecessor gas company, contains hazardous substances. The State also asserted that the Company is responsible for any clean-up and prospective environmental monitoring of the site. The Delaware Department of Natural Resources and Environmental Control ("DNREC") investigated the site and surroundings, finding coal tar residue and some ground-water contamination. In October 1989, the Environmental Protection Agency Region III ("EPA") listed the Dover 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 clean-up of the site. The EPA issued the site Record of Decision ("ROD") dated August 16, 1994. The remedial action selected by the EPA in the ROD addresses the ground- water contamination with a combination of hydraulic containment and natural attenuation. Remediation selected for the soil at the site is to meet stringent clean-up standards for the first two feet of soil and less stringent standards for the soil below two feet. The ROD estimates the costs of selected remediation of ground-water and soil at $2.7 million and $3.3 million, respectively. On November 18, 1994, EPA issued a "Special Notice Letter" (the "Letter") to Chesapeake and three other PRPs. The Letter includes, 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 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 ROD. The Order was also issued to General Public Utilities Corporation, Inc. ("GPU"), which both EPA and the Company believe is liable under CERCLA. Other PRPs, such as the State of Delaware, were not ordered to perform the ROD. EPA may seek judicial enforcement of its Order, as well as significant financial penalties for failure to comply. Although notifying EPA of objections to the Order, the Company agreed to comply. GPU has informed EPA that it does not intend to comply with the Order. In July 1996, the Company has commenced the design phase of the ROD, on-site pre-design and investigation. A pre-design investigation report will be filed with the EPA in the fourth quarter of 1996. The report, which requires EPA approval, determines if the remedial design selected in the ROD is still the appropriate remedy. On March 6, 1995, the Company commenced litigation against the State of Delaware for contribution to the remedial costs being incurred to carry out the ROD. In December of 1995, this case was dismissed without prejudice based on a settlement agreement (the "Settlement") between the parties. Under the Settlement, the State agreed to support the Company s proposal to reduce the soil remedy for the site, described below, to contribute $600,000 toward the cost of implementing the ROD and to reimburse the EPA for $400,000 in oversight costs. The Settlement is contingent upon a formal settlement agreement between EPA and the State of Delaware being reached within the next two years. Upon satisfaction of all conditions of the Settlement, the litigation will be dismissed with prejudice. On July 7, 1995, the Company submitted to EPA a study proposing to reduce the level and cost of soil remediation from that identified in the ROD. Although this proposal was supported by the State of Delaware, as required by the Settlement, it was rejected by the EPA on January 30, 1996. On June 25, 1996, the Company initiated litigation against GPU for contribution to the remedial costs incurred by Chesapeake in connection with complying with the ROD. At this time, management cannot predict the outcome of the litigation or the amount, if any, of proceeds to be received. The Company is currently engaged in investigations related to additional parties who may be PRPs. Based upon these investigations, the Company will consider suit against other PRPs. The Company expects continued negotiations with PRPs in an attempt to resolve these matters. In the third quarter of 1994, the Company increased its accrued liability recorded with respect to the Dover Site to $6.0 million. This amount reflects the EPA's estimate, as stated in the ROD for remediation of the site according to the ROD. The recorded liability may be adjusted upward or downward as the design phase progresses and the Company obtains construction bids for performance of the work. The Company has also recorded a regulatory asset of $6.0 million, corresponding to the recorded liability. Management believes that in addition to the $600,000 expected to be contributed by the State of Delaware under the Settlement, the Company will be equitably entitled to contribution from other responsible parties for a portion of the expenses to be incurred in connection with the remedies selected in the ROD. Management also believes that the amounts not so contributed will be recoverable in the Company s rates. As of September 30, 1996, the Company has incurred approximately $4.0 million in costs relating to environmental testing and remedial action studies. In 1990, the Company entered into settlement agreements with a number of insurance companies resulting in proceeds to fund actual environmental costs incurred over a five to seven-year period beginning in 1990. In December 1995, the Delaware Public Service Commission, authorized recovery of all unrecovered environmental cost incurred net of insurance proceeds through September 30, 1995. This amount totaled $564,514. The recovery was authorized by a means of a rider (supplement) to base rates, applicable to all firm service customers. The costs would be recovered through a five-year amortization offset by the cashflow benefits resulting from deferred tax deductions associated with those environmental costs. The projected cashflow savings realized by the Company results from a reduced income tax liability due to the possibility of accelerated deduction allowed on certain environmental costs when incurred. Each year a new rider rate will be calculated to become effective December 1. Each year the rider rate will be based on the amortization of actual expenditures through September of the filing year plus amortization of expenses from previous years. The advantage of the rider, which was effective January 1, 1996, is that it is not necessary to file a rate case every year to recover expenses incurred. As of September 30, 1996, the unamortized balance and amount of environmental costs not included in the rider, were $732,000 and $2,000, respectively. With the rider mechanism established, it is management s opinion that these costs and any future cost, will be recoverable in 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 completed construction of the remediation facilities for ground-water. Operations of the facilities are expected to start in the fourth quarter of 1996. The cost of remediation was estimated to be approximately $380,000 in capital costs with yearly operating expenses ranging from $136,000 to $195,000 per year. Based on these estimated costs, the Company recorded both a liability and a deferred regulatory asset of $1,113,572 as of December 31, 1995, to cover the Company's projected remediation costs for this site. The liability payout for this site is expected to be over a five-year period. As of September 30, 1996 the Company has incurred approximately $2.0 million for remedial actions and environmental studies and has charged such costs to accumulated depreciation. In January 1990, the Company entered into settlement agreements with a number of insurance companies resulting in proceeds to fund actual environmental costs incurred over a three to five-year period beginning in 1990. The final insurance proceeds were requested and received in 1992. In December 1995, the Maryland Public Service Commission approved recovery of all environmental costs incurred through September 30, 1995 less amounts previously amortized and insurance proceeds. The amount approved for a 10-year amortization was $964,251. Of the $2.0 million in costs reported above, approximately $243,000 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 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") in July 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. In March 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. In March 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 March of 1994. The next step is a Risk Assessment ("RA") and a Feasibility Study ("FS") on the site. Drafts of the RA and FS were filed with the FDEP during 1995; however, until the RA and FS are complete and accepted as filed 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 also submitted a request to the FDEP to conduct a pilot program for ground-water treatment. The program would remediate the ground-water using an air-sparging process. The Company is awaiting FDEP s response. The Company has spent approximately $661,000 on these investigations, as of September 30, 1996, 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 from the Florida Public Service Commission ("FPSC") approval to amortize through base rates $359,659 of clean-up and removal 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 $661,000 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, 1996, the Company has $87,000 accrued. It is management's opinion that future costs, if any, will be recoverable in 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. On November 2, 1993, DNREC advised the Company that it would require a remediation of the soil contamination under the state's Hazardous Substance Cleanup Act and submitted a draft Consent Decree to the Company for its review. 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 proposed 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 was completed in 1995, at a cost of approximately $268,000. In June 1996, the Company received the certificate of completion from DNREC. It is management's opinion that these costs will be recoverable in rates. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS FOR THE QUARTER ENDED SEPTEMBER 30, 1996 The Company recognized a net loss of $390,871 for the three months ended September 30, 1996, representing a decrease in net income of $1,378,993 as compared to the corresponding period in 1995. As indicated in the table below, the decrease in earnings before interest and taxes ("EBIT") is due to a significant reduction in earnings by the transmission segment, slightly offset by an increase in earnings in the advanced information services and other segment and a reduction in loss before interest and taxes ("LBIT") by the natural gas and propane distribution segments. The reduction in the transmission segments EBIT is primarily related to the settlement, between Eastern Shore Natural Gas Company ("Eastern Shore") and the Federal Energy Regulatory Commission ("FERC") in the third quarter of 1995 regarding Eastern Shore s computation of the Purchased Gas Adjustment ("PGA") clause of its tariff ("FERC settlement"). The FERC settlement, which was a non-recurring event, increased the third quarter 1995 EBIT and net income by $1.3 million and $833,000, respectively. Exclusive of the effects of the FERC settlement, net loss and LBIT for the third quarter 1996 increased by $545,993 and $926,494, respectively over the same period in 1995. FOR THE QUARTER ENDED SEPTEMBER 30, 1996 1995 CHANGE ---- ---- ------ (Loss)/Earnings Before Interest and Taxes Natural Gas Distribution $(251,778) $(400,399) $ 148,621 Natural Gas Transmission 600,455 3,086,878 (2,486,423) Propane Distribution (858,216) (909,619) 51,403 Advanced Information Services and Other 263,149 247,884 15,265 Eliminations & Corporate 14,168 (42,472) 56,640 ------- --------- --------- Total (LBIT)/EBIT (232,222) 1,982,272 (2,214,494) Operating Income Taxes (385,666) 490,072 (875,738) Interest 646,801 597,808 48,993 Non-Operating Income, Net 102,486 93,730 8,756 ------- --------- --------- Net (Loss)/Income $(390,871) $ 988,122 $(1,378,993) ======= ========= ========= NATURAL GAS DISTRIBUTION The natural gas distribution segment reported LBIT of $251,778 for the third quarter 1996 as compared to LBIT of $400,399 for the corresponding period last year, a decrease in LBIT of $148,621. The decrease in LBIT is due to an increase in gross margin in all of our service territories, partially offset by an increase in operating expenses. FOR THE QUARTER ENDED SEPTEMBER 30, 1996 1995 CHANGE ---- ---- ------ Revenue $11,372,713 $8,458,920 $2,913,793 Cost of Gas 7,938,243 5,396,931 2,541,312 ---------- --------- --------- Gross Margin 3,434,470 3,061,989 372,481 Operations & Maintenance 2,417,837 2,436,136 (18,299) Depreciation & Amortization 748,030 596,717 151,313 Other Taxes 520,381 429,535 90,846 ---------- --------- --------- LBIT $ (251,778) $ (400,399) $ 148,621 ========== ========= ========= The increase in revenue and cost is primarily due to a rate increase that went into effect during December of 1995 for our Maryland service territory and increased sales to interruptible industrial customers. Gross margin also increased due to the inclusion of revenue related taxes now required to be shown as revenue and corresponding other tax expense. The increase in operations expense is primarily due to an increase in compensation, pension and benefits. Depreciation and amortization expense increased due to plant placed in service during the past year. Other taxes were higher due to the inclusion of taxes in revenue mentioned above. NATURAL GAS TRANSMISSION The natural gas transmission segment reported EBIT of $600,455 for the third quarter of 1996 as compared to EBIT of $3,086,878 for the corresponding period last year, a decrease of $2,486,423. FOR THE QUARTER ENDED SEPTEMBER 30, 1996 1995 CHANGE ---- ---- ------ Revenue $6,701,704 $10,995,581 $(4,293,877) Cost of Gas 5,109,833 6,851,181 (1,741,348) --------- ---------- ---------- Gross Margin 1,591,871 4,144,400 (2,552,529) Operations & Maintenance 709,023 780,826 (71,803) Depreciation & Amortization 185,249 181,677 3,572 Other Taxes 97,144 95,019 2,125 --------- ---------- ---------- EBIT $ 600,455 $ 3,086,878 $(2,486,423) ========= ========== ========== The decrease in EBIT is primarily due to a reduction in deliveries to industrial customers coupled with the FERC settlement. The FERC settlement increased the third quarter 1995 EBIT and net income by $1.3 million and $833,000, respectively. During the third quarter of 1996, the Company experienced a decrease in volumes of natural gas delivered to two industrial interruptible customers, a municipal power plant and a methanol plant. The methanol plant shut down operations on April 1, 1996. The management of the methanol plant had stated that they would monitor methanol prices and would re-evaluate their position as to reopening or permanently closing on or about October 1, 1996. To our knowledge, no decision has been made regarding reopening or permanently closing the methanol plant. For the same period in 1995, the two customers contributed approximately 79% of the segment s net income exclusive of the FERC settlement. Operation expenses have decreased due to a reduction in legal and consulting fees slightly offset by an increase in pension and benefit cost. As previously reported, Eastern Shore filed with FERC an abbreviated application for a blanket certificate of public convenience to provide open access transportation service. It was originally expected that open access transportation service would be implemented in the second half of 1996. It is now expected that such implementation will not occur until the first half of 1997. PROPANE DISTRIBUTION For the third quarter of 1996, the propane distribution segment experienced a LBIT of $858,216 which is a decrease in LBIT of $51,403, or 21%, over the third quarter 1995 LBIT of $909,619. The decrease in LBIT was attributable to an increased gross margin, partially offset by increased operations and maintenance expense. FOR THE QUARTER ENDED SEPTEMBER 30, 1996 1995 CHANGE ---- ---- ------ Revenue $2,198,918 $1,902,900 $296,018 Cost of Gas 1,175,461 993,062 182,399 --------- --------- ------- Gross Margin 1,023,457 909,838 113,619 Operations & Maintenance 1,472,501 1,417,755 54,746 Depreciation & Amortization 332,274 330,243 2,031 Other Taxes 76,898 71,459 5,439 --------- --------- ------- LBIT $ (858,216) $ (909,619) $ 51,403 ========= ========= ======= The increase in gross margin is due primarily to a 2% increase in sales volumes and a 12% increase in the average margin per gallon. Operations and maintenance expense rose due to increases in compensation, pension, benefits and delivery related expenses. ADVANCED INFORMATION SERVICES AND OTHER The advanced information services and other segment recognized an EBIT of $263,149 and $247,884 for the third quarters ended September 30, 1996 and 1995, respectively. This increase in EBIT of $15,265 is attributable to lower operating expenses mostly offset by a reduction in revenue. FOR THE QUARTER ENDED SEPTEMBER 30, 1996 1995 CHANGE ---- ---- ------ Revenue $1,759,864 $2,274,500 $(514,636) Operations & Maintenance 1,370,847 1,691,227 (320,380) Depreciation & Amortization 61,332 265,494 (204,162) Other Taxes 64,536 69,895 (5,359) --------- --------- -------- EBIT $ 263,149 $ 247,884 $ 15,265 ========= ========= ======== The decrease in revenue is due primarily to the decision to no longer provide facilities management services at Capital Data Systems ("CDS") as previously reported, partially offset by an increase in consulting and resource services revenue at United Systems, Inc. ("USI"). Operations and maintenance expense decreased due to the reduction in expenses associated with no longer providing facilities management services at CDS, partially offset by increase in payroll and outside services expense at USI. Depreciation and amortization decreased, in part, due to the write-off of the Page-IT(TM) billing software product in 1995 in conjunction with the termination of CDS' largest facilities management customer. INTEREST The increase in interest expense is due primarily to reversing accrued interest associated with the FERC settlement in the third quarter of 1995 and the long-term debt issuance in October 1995, offset by the decrease in interest on short-term borrowings. RESULTS OF OPERATIONS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996 The Company recognized net income of $5,090,595 for the nine months ended September 30, 1996, representing a decrease in net income of $320,044 as compared to the corresponding period in 1995. As indicated in the table below, the decrease in EBIT is due to a lower earnings by the transmission segment partially offset by increased earnings by all other segments of the Company. The lower earnings by the transmission segment was due to a FERC settlement in the third quarter of 1995. The FERC settlement, which was a non-recurring event, contributed $1.3 million and $833,000 to EBIT and net income, respectively. In 1995, Eastern Shore accrued amounts monthly for the potential refund associated with the PGA clause. The accruals totaled $289,000 in 1995. Exclusive of the effects of the settlement and associated accruals, net income and EBIT increased by $288,027 and $533,246, respectively, for the nine months ended September 30, 1996 when compared to the same period in 1995. FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996 1995 CHANGE ---- ---- ------ Earnings Before Interest and Taxes Natural Gas Distribution $5,631,176 $3,564,839 $2,066,337 Natural Gas Transmission 1,797,540 5,350,942 (3,553,402) Propane Distribution 1,207,691 733,225 474,466 Advanced Information Services and Other 943,924 722,834 221,090 Eliminations & Corporate 124,085 (200,108) 324,193 --------- --------- --------- Total EBIT 9,704,416 10,171,732 (467,316) Operating Income Taxes 2,872,211 2,979,229 (107,018) Interest 1,960,940 2,007,274 (46,334) Non-Operating Income, Net 219,330 225,410 (6,080) --------- --------- --------- Net Income $5,090,595 $5,410,639 $(320,044) ========= ========= ========= NATURAL GAS DISTRIBUTION The natural gas distribution segment reported EBIT of $5,631,176 for the first nine months of 1996 as compared to EBIT of $3,564,839 for the corresponding period last year, an increase of $2,066,337. The increase in EBIT is due to an increase in gross margin in our service territories, partially offset by an increase in operating expenses. FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996 1995 CHANGE ---- ---- ------ Revenue $54,691,434 $36,883,237 $17,808,197 Cost of Gas 37,729,820 23,424,471 14,305,349 ---------- ---------- ---------- Gross Margin 16,961,614 13,458,766 3,502,848 Operations & Maintenance 7,269,994 6,667,193 602,801 Depreciation & Amortization 2,234,536 1,778,255 456,281 Other Taxes 1,825,908 1,448,479 377,429 ---------- ---------- ---------- EBIT $ 5,631,176 $ 3,564,839 $ 2,066,337 ========== ========== ========== The increase in gross margin primarily occurred in the Company's operating divisions located in the northern service territory due to 16% increase deliveries of natural gas coupled with rate increases that went into effect during the second half of 1995. The increased deliveries resulted from temperatures which were 8% colder than the same period in 1995. Gross margin also increased due to inclusion of revenue related taxes now required to be shown as revenue and corresponding other tax expense. Operations expense increased in the areas of compensation, pension, benefits and customer service expenses. Depreciation and amortization expense increased due to plant placed in service during the past year. Other taxes were higher due to the inclusion of taxes in revenue shown above. NATURAL GAS TRANSMISSION The natural gas transmission segment reported EBIT of $1,797,540 for the first nine months of 1996 as compared to EBIT of $5,350,942 for the corresponding period last year, a decrease of $3,553,402. The decrease in EBIT is due to a decrease in gross margin and an increase in operating expenses. FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996 1995 CHANGE ---- ---- ------ Revenue $26,071,935 $30,974,448 $(4,902,513) Cost of Gas 21,130,517 22,730,710 (1,600,193) ---------- ---------- --------- Gross Margin 4,941,418 8,243,738 (3,302,320) Operations & Maintenance 2,267,391 2,073,289 194,102 Depreciation & Amortization 567,913 530,155 37,758 Other Taxes 308,574 289,352 19,222 ---------- ---------- --------- EBIT $ 1,797,540 $ 5,350,942 $(3,553,402) ========== ========== ========= During 1995, the transmission segment accrued monthly for a potential refund to customers in conjunction with the purchased gas adjustment clause. These accruals in 1995 resulted in reducing EBIT $289,000 for the first nine months of 1995. The transmission segment subsequently settled the issue with the FERC in August 1995. The settlement, which was a non-recurring event, contributed $1.3 million and $833,000 to EBIT in 1995 and net income, respectively. The reduction in gross margin is primarily related to the decrease in volumes of natural gas delivered to two industrial interruptible customers as discussed previously in the third quarter results of operations. During the same period in 1995 the two customers contributed approximately 51% of the segments net income, exclusive of the effect of the settlement and associated accruals. Operations and maintenance expense was higher due to increases in compensation, pension, benefits and maintenance of mains partially offset by a reduction in outside service expenses. Depreciation and amortization expense increased due to plant placed in service during the past year. PROPANE DISTRIBUTION The propane distribution segment recognized EBIT of $1,207,690 for the first nine months of 1996 which represents an increase in EBIT of $474,465 over the same period in 1995. Producing this increase in EBIT was a higher gross margin, offset by increased operating expenses. FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996 1995 CHANGE ---- ---- ------ Revenue $15,247,472 $11,740,332 $3,507,140 Cost of Gas 8,178,162 5,748,639 2,429,523 ---------- ---------- --------- Gross Margin 7,069,310 5,991,693 1,077,617 Operations & Maintenance 4,599,822 4,015,297 584,525 Depreciation & Amortization 996,631 979,254 17,377 Other Taxes 265,167 263,917 1,250 ---------- ---------- --------- EBIT $ 1,207,690 $ 733,225 $ 474,465 ========== ========== ========= The increase in gross margin of $1,077,617 is due primarily to a 16% increase in sales volumes resulting from the 8% colder temperatures experienced during the first nine months of 1996 when compared to the same period in 1995. Also contributing to the increase in gross margin is a 3% increase in average margin per gallon earned. Operations and maintenance expense rose primarily due to increases in compensation, pension, benefits, outside services and delivery related expenses. ADVANCED INFORMATION SERVICES AND OTHER For the nine months ended September 30, the advanced information services and other segment recognized an EBIT of $943,924 and $722,834 for 1996 and 1995, respectively. This increase in EBIT of $221,090 is the outcome of lower operating and depreciation expenses. FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996 1995 CHANGE ---- ---- ------ Revenue $5,770,704 $6,637,541 $(866,837) Operations & Maintenance 4,391,510 4,941,801 (550,291) Depreciation & Amortization 199,245 735,307 (536,062) Other Taxes 236,025 237,599 (1,574) --------- --------- ------- EBIT $ 943,924 $ 722,834 $ 221,090 ========= ========= ======= The decrease in revenue is due primarily to the decision to no longer provide facilities management services at CDS, partially offset by an increase in consulting and resource services revenues at USI. Operations and maintenance expense decreased due to the reduction in expenses associated with no longer providing facilities management services at CDS, partially offset by an increase in compensation and outside services at USI. Depreciation and amortization expense decreased, in part, due to the write-off of the Page-IT(TM) billing software product in 1995 in conjunction with the termination of CDS' largest facilities management customer. ENVIRONMENTAL MATTERS The Company continued to work with federal and state environmental agencies to assess the environmental impacts and explore corrective actions at several former gas manufacturing plant sites (see Note 2 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 1996, the Company s net cash flow provided by operating activities, net cash used by investing activities and net cash used by financing activities were approximately $10.1 million, $8.8 million and $1.7 million, respectively. Due to the seasonal nature of the Company's business, there are substantial variations in the results of operations reported on a quarterly basis. The Board of Directors has authorized the Company to borrow up to $14 million from banks and trust companies. As of September 30, 1996, 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, 1996 and 1995 were $5.8 million and $1.8 million, respectively. During the nine months ended September 30, 1996 and 1995, net property, plant and equipment expenditures were approximately $8.8 million and $8.1 million, respectively. For 1996, the Company has budgeted $16.8 million for capital expenditures. The components of this amount include $8.8 million for natural gas distribution, $6.1 million for natural gas transmission, $1.6 million for propane distribution, with the remaining $300,000 for computer, office equipment and general plant. The natural gas and propane expenditures are for expansion and improvement of their existing service territories. Natural gas transmission expenditures are to improve the pipeline system by adding a compressor station. Financing of the 1996 construction will be provided primarily by short-term borrowings 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 2 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, 1996, common equity represented 61.0% of permanent capitalization, compared to 58.7% as of December 31, 1995. 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 able to attract capital from outside sources at a reasonable cost. The achieve- ment 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 2 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 11 - Computation of Primary and Fully Diluted Earnings Per Share is submitted herewith. Item 6 (b): Reports on Form 8-K None 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 Executive Vice President and Assistant Treasurer (Chief Operating and Chief Financial Officer) Date: November 12, 1996 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, ------------------------ ------------------------ 1996 1995 1996 1995 ---- ---- ---- ---- Primary earnings per share calculation: Weighted average number of shares assuming primary dilution 3,803,719 3,710,054 3,784,217 3,691,866 ======================== ======================== Consolidated net (loss)/income ($390,871) $988,122 $5,090,595 $5,410,639 ======================== ======================== Total primary earnings per share ($0.10) $0.27 $1.35 $1.47 ======================== ======================== Fully diluted earings per share calculation (1): Weighted average number of shares assuming primary dilution 3,803,719 3,710,054 3,784,217 3,691,866 Contingent shares 242,171 247,287 243,427 249,487 ------------------------ ------------------------ Weighted average number of shares assuming full dilution 4,045,890 3,957,341 4,027,644 3,941,353 ======================== ======================== Consolidated net (loss)/income ($390,871) $988,122 $5,090,595 $5,410,639 Interest on convertible debt 85,438 87,484 255,775 261,907 Less: Applicable federal income taxes 33,321 34,119 99,752 102,144 ------------------------ ------------------------ Adjusted net (loss)/income ($338,754) $1,041,487 $5,246,618 $5,570,402 ======================== ======================== Fully diluted earnings per share ($0.08) $0.26 $1.30 $1.41 ======================== ========================
(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, 1996. EX-27 3 FINANCIAL DATA SCHEDULE
UT 3-MOS DEC-31-1995 SEP-30-1996 PER-BOOK 86573847 2143272 14447173 13006492 0 116200783 1843543 18637250 25844799 45913539 0 0 29314868 0 0 0 783271 0 0 0 40189105 116200783 18475914 (385666) 18708137 18322471 102487 255930 358417 646801 (390871) 0 (390871) 2131310 2405047 10112667 (.10) (.10)
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