-----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, MNqoHpZ/N2Tym7BkYd8K0r8vt7xUrPxbOron8Cg5yCM2d4lvI8ZCbxA0to2QadUp b6O8EqQIzYhUOt37iPY8sg== 0000019745-97-000006.txt : 19970515 0000019745-97-000006.hdr.sgml : 19970515 ACCESSION NUMBER: 0000019745-97-000006 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19970331 FILED AS OF DATE: 19970514 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: 97604901 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: MARCH 31, 1997 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) 734-6798 --------------------------------------------------- (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 - 4,452,704 shares issued as of March 31, 1997. PART I FINANCIAL INFORMATION CHESAPEAKE UTILITIES CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
March 31, December 31, 1997 1996 ASSETS (Unaudited) (As restated) ----------- ----------- PROPERTY, PLANT AND EQUIPMENT Natural gas distribution $71,760,470 $70,497,872 Natural gas transmission 32,458,704 30,655,492 Propane distribution 25,585,341 25,279,217 Advanced information services 642,161 1,003,850 Other 4,853,437 4,769,431 Gas plant acquisition adjustment 795,004 795,004 -------------------------- Total property, plant and equipment 136,095,117 133,000,866 Less: Accumulated depreciation and amortization (40,235,658) (39,430,739) -------------------------- Net property, plant and equipment 95,859,459 93,570,127 -------------------------- INVESTMENTS 2,249,147 2,263,068 -------------------------- CURRENT ASSETS Cash and cash equivalents 2,191,887 2,213,529 Accounts receivable, less allowance for uncollectibles 11,738,178 14,488,944 Materials and supplies, at average cost 1,141,095 1,284,876 Propane inventory, at average cost 1,621,143 2,345,531 Storage gas prepayments 483,795 3,731,680 Underrecovered purchased gas costs 1,848,726 2,192,170 Income taxes receivable 0 112,942 Prepaid expenses 402,948 942,359 Deferred income taxes, net 552,730 158,010 -------------------------- Total current assets 19,980,502 27,470,041 -------------------------- DEFERRED CHARGES AND OTHER ASSETS Environmental regulatory assets 6,616,474 6,650,088 Environmental expenditures, net 1,750,544 1,778,348 Order 636 transition cost 800,556 943,209 Other deferred charges and intangible assets 3,343,084 3,371,027 -------------------------- Total deferred charges and other assets 12,510,658 12,742,672 -------------------------- TOTAL ASSETS $130,599,766 $136,045,908 ==========================
The accompanying notes are an integral part of these financial statements. CHESAPEAKE UTILITIES CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
March 31, December 31, 1997 1996 CAPITALIZATION AND LIABILITIES (Unaudited) (As restated) ----------- ----------- CAPITALIZATION Stockholders' equity Common Stock, par value $.4867 per share; (authorized 12,000,000 shares; issued 4,452,704 and 4,439,516 shares, respectively) $2,167,047 $2,160,628 Additional paid-in capital 18,961,990 18,745,718 Retained earnings 29,164,113 26,957,049 Unearned compensation - restricted stock awards (321,067) (364,529) Net unrealized gain on marketable securities 30,944 38,598 -------------------------- Total stockholders' equity 50,003,027 47,537,464 Long-term debt, net of current portion 28,907,000 30,776,919 -------------------------- Total capitalization 78,910,027 78,314,383 -------------------------- CURRENT LIABILITIES Current portion of long-term debt 784,868 1,285,938 Short-term borrowings 12,000,000 12,700,000 Accounts payable 7,581,080 14,426,983 Refunds payable to customers 350,788 353,734 Income taxes payable 2,414,927 0 Accrued interest 598,943 741,768 Dividends payable 1,079,781 883,621 Other accrued expenses 3,427,165 3,733,233 -------------------------- Total current liabilities 28,237,552 34,125,277 -------------------------- DEFERRED CREDITS AND OTHER LIABILITIES Deferred income taxes, net 10,169,424 9,798,676 Deferred investment tax credits 867,609 876,432 Environmental liability 6,616,474 6,650,088 Accrued pension costs 2,006,572 1,866,660 Order 636 transition liability 800,556 943,209 Other liabilities 2,991,552 3,471,183 -------------------------- Total deferred credits and other liabilities 23,452,187 23,606,248 -------------------------- TOTAL CAPITALIZATION AND LIABILITIES $130,599,766 $136,045,908 ==========================
The accompanying notes are an integral part of these financial statements. CHESAPEAKE UTILITIES CORPORATION AND SUBSIDIARIES CONSOLIDATED INCOME STATEMENTS (UNAUDITED)
For the Quarter Ended March 31, (Unaudited) (As restated) -------------------------- OPERATING REVENUES $43,645,586 $49,033,492 -------------------------- OPERATING EXPENSES Purchased gas costs 27,993,181 30,055,556 Operations 6,325,748 6,447,620 Maintenance 492,447 576,221 Depreciation and amortization 1,348,347 1,407,805 Other taxes 1,113,223 1,099,746 Income taxes 2,272,543 2,779,045 -------------------------- Total operating expenses 39,545,489 42,365,993 -------------------------- OPERATING INCOME 4,100,097 6,667,499 OTHER INCOME AND DEDUCTIONS 65,164 75,150 -------------------------- INCOME BEFORE INTEREST CHARGES 4,165,261 6,742,649 INTEREST CHARGES 799,148 742,492 -------------------------- NET INCOME $3,366,113 $6,000,157 ========================== Earnings per share of Common Stock (1) Primary: Earnings per share $0.75 $1.36 ========================== Average shares outstanding 4,475,839 4,399,372 ========================== Fully diluted: Earnings per share $0.72 $1.30 ========================== Average shares outstanding 4,716,543 4,648,750 ==========================
(1) See Exhibit 11-Computation of Primary and Fully Diluted Earnings Per Share The accompanying notes are an integral part of these financial statements. CHESAPEAKE UTILITIES CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
For the Three Months Ended March 31, (Unaudited) (As restated) -------------------------- OPERATING ACTIVITIES Net Income $3,366,113 $6,000,157 Adjustments to reconcile net income to net operating cash Depreciation and amortization 1,482,246 1,437,135 Deferred income taxes, net (17,972) (168,469) Investment tax credit adjustments (8,823) (8,823) Employee benefits 120,753 95,148 Employee compensation from lapsing stock restrictions 43,462 89,732 Other (460,205) 78,134 Changes in assets and liabilities: Accounts receivable 2,750,766 (2,039,913) Inventory, materials, supplies and storage gas 4,116,054 2,283,700 Prepaid expenses 539,411 613,404 Other deferred charges 25,758 157,914 Accounts payable (6,845,903) (2,172,894) Refunds payable to customers (2,946) (60,006) Over(Under)recovered purchased gas costs 343,444 (845,240) Other current liabilities 2,078,975 1,396,723 -------------------------- Net cash provided by operating activities 7,531,133 6,856,702 INVESTING ACTIVITIES Property, plant and equipment expenditures, net (3,741,589) (2,738,852) -------------------------- Net cash used by investing activities (3,741,589) (2,738,852) FINANCING ACTIVITIES Common stock dividends net of amounts reinvested of $131,800 and $141,371, respectively (831,088) (695,962) Net repayments under line of credit agreements (700,000) (3,400,000) Proceeds from issuance of stock to Company 401(k) plan 90,891 83,735 Repayments of long-term debt (2,370,989) (244,866) -------------------------- Net cash used by financing activities (3,811,186) (4,257,093) NET DECREASE IN CASH (21,642) (139,243) CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 2,213,529 1,395,614 -------------------------- CASH AND CASH EQUIVALENTS AT END OF PERIOD $2,191,887 $1,256,371 ==========================
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 1996 have been reclassified to conform with the 1997 presentation. 2. ACQUISITION On March 6, 1997, the Company acquired all of the outstanding common stock of Tri-County Gas Company, Inc. ("Tri-County") and associated properties. The principal business of Tri-County is the distribution of propane to both retail and wholesale customers on the Delmarva Peninsula. The transaction was effected through the exchange of 639,000 shares of the Company's common stock and accounted for as a pooling of interests. Accordingly, the financial statements for 1997 and 1996, as restated, include the financial results of Tri-County along with the shares of stock issued in connection with the acquisition as required by the accounting rules. The combined operations of the Company and Tri-County will serve approximately 32,000 propane customers on the Delmarva Peninsula during 1997. 3. STATEMENT OF FINANCIAL ACCOUNTING STANDARDS NO. 128 In February 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards ("SFAS") No. 128 regarding earnings per share, which requires us to present basic and diluted earnings per share in our financial statements. We must adopt the requirements of this standard in our financial statements for the year ended December 31, 1997. Adoption of this standard is not expected to have a material impact on our financial statements. 4. COMMITMENTS AND CONTINGENCIES Environmental (a) Dover Gas Light Site In 1984, the State of Delaware notified the Company that a parcel of land it purchased in 1949 from Dover Gas Light Company, a predecessor gas company, 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 that 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 cleanup 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 (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 informed EPA that it does not intend to comply with the Order. 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 between the parties (the "Settlement"). 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 July 1996, the Company commenced the design phase of the ROD, which consists of on-site pre-design and investigation. A pre-design investigation report ("the report") was filed in October 1996 with the EPA. The report, which requires EPA approval, provided up to date status on the site, which the EPA will use to determine if the remedial design selected in the ROD is still the appropriate remedy. In the report, the Company proposed a modification to the soil cleanup remedy selected in the ROD to take into account existing land use restriction that bans future development at the site. In April of 1997, the EPA issued a fact sheet stating that the EPA was considering whether or not to make this modification. The fact sheet included an overall cost estimate of $5.7 million for the proposed modified remedy and a new overall cost estimate of $13.2 million for the remedy selected in the ROD. On April 30, 1997, the EPA held a public meeting to receive comments concerning the proposed modification. A statement on behalf of the Company supporting a reduced level of soil remediation was filed at the meeting. Attached to the Company's statement were letters from the State of Delaware and DNREC supporting the Company's proposal. If the EPA elects to modify the ROD, the EPA will file an Explanation of Significant Differences ("ESD") for public comment before taking final action. 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 reflected the EPA's estimate, as stated in the ROD, for remediation of the site according to the ROD. Current estimates for remediation of the site range from $5.7 million to $13.2 million, depending on the remedy selected by the EPA. At this time, it is management's opinion that no one amount within the range can be determined to be a better estimate of the cost to remediate the site. Accordingly, the Company has not adjusted its $6.0 million accrual. The recorded liability may be adjusted upward or downward, depending on the outcome of the EPA's consideration of the remedy and the Company's estimate of the cost of the remedy selected. 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 March 31, 1997, the Company has incurred approximately $4.2 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 costs incurred 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 deferred tax benefit associated with those environmental costs. The deferred tax benefit equals the projected cash flow savings realized by the Company in connection with a reduced income tax liability due to the possibility of accelerated deductions allowed on certain environmental costs when incurred. Each year a new rider rate will be calculated to become effective December 1. The rider rate will be based on the amortization of expenditures through September of the filing years plus amortization of expenses from previous years. The advantage of the rider is that it is not necessary to file a rate case every year to recover expenses incurred. As of March 31, 1997, the amount of environmental cost not included in the rider, effective January 1, 1997 was $252,000. With the rider mechanism established, it is management's opinion that these costs and any future costs, net of the deferred income tax benefit, will be recoverable in rates. (b) Salisbury Town Gas Light Site In cooperation with the Maryland Department of the Environment ("MDE"), the Company has completed 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 work plan was revised with final approval from MDE obtained in early 1995. The remediation process for ground-water was revised from pump-and- treat to Air Sparging and Soil-Vapor Extraction, resulting in a substantial reduction in overall costs. During 1996, the Company completed construction and began remediation procedures at the Salisbury site and will be reporting the remediation and monitoring results to the MDE on an ongoing basis. The cost of remediation is estimated to range from $140,000 to $190,000 per year for operating expenses. Based on these estimated costs, the Company recorded both a liability and a deferred regulatory asset of $650,088 on December 31, 1996, 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 March 31, 1997, the Company has incurred approximately $2.2 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 period was $964,251. Of the $2.2 million in costs reported above, approximately $451,000 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. (c) 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. A draft of the RA and FS were filed with the FDEP during 1995; however, the RA and FS are not complete until accepted as final by the FDEP. On May 10, 1996, the Company transmitted to FDEP an Air Sparging and Soil Vapor Extraction Pilot Study Work Plan for FDEP's review and approval. The Work Plan described the Company's proposal to undertake an Air Sparging and Soil Vapor Extraction pilot study to evaluate the effectiveness of air sparging as a ground-water remedy combined with soil vapor extraction at the Property. The Company is currently awaiting FDEP's comments to the Work Plan. It is not possible to determine whether remedial action will be required by FDEP and, if so, the cost of such remediation. The Company has spent approximately $666,000 on these investigations as of March 31, 1997, 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 cleanup 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. The FPSC issued an order in January 1997, applying a refund of $292,000, pertaining to 1994 and 1995 overearnings, toward the balance of unamortized environmental charges. Of the $666,000 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 March 31, 1997, the Company has $408,000 accrued. It is management's opinion that future costs, if any, will be recoverable in rates. (d) 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 work plan, 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 $263,000. 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 MARCH 31, 1997 The Company recognized net income of $3,366,113 for the three months ended March 31, 1997, representing a decrease in net income of $2,634,044 as compared to the corresponding period in 1996. The financial results for 1997 and 1996 include the operating results of Tri-County Gas Company, Inc. ("Tri-County"), which was acquired on March 6, 1997 and was accounted for as a pooling of interests. As indicated in the table below, the decrease in earnings before interest and taxes ("EBIT") is primarily due to the lower earnings of the natural gas distribution and propane distribution segments slightly offset by the higher earnings of the natural gas transmission and advanced information services segments. FOR THE QUARTER ENDED MARCH 31, 1997 1996 Change ---- ---- ------ Earnings Before Interest and Taxes Natural Gas Distribution $3,421,562 $4,756,720 $(1,335,158) Natural Gas Transmission 617,411 555,096 62,315 Propane Distribution 1,702,173 3,711,192 (2,009,019) Advanced Information Services 411,084 309,793 101,291 Eliminations and Other 220,410 113,743 106,667 --------- --------- --------- Total EBIT 6,372,640 9,446,544 (3,073,904) Operating Income Taxes 2,272,543 2,779,045 (506,502) Interest 799,148 742,492 56,656 Non-Operating Income, Net 65,164 75,150 (9,986) --------- --------- --------- Net Income $3,366,113 $6,000,157 $(2,634,044) ========= ========= ========= Natural Gas Distribution The natural gas distribution segment reported EBIT of $3,421,562 for the first quarter 1997 as compared to EBIT of $4,756,720 for the corresponding period last year, a decrease of $1,335,158. The decrease in EBIT is due to a reduction in gross margins, coupled with a 6% increase in operations and maintenance expenses. FOR THE QUARTER ENDED MARCH 31, 1997 1996 Change ---- ---- ------ Revenue $26,478,805 $27,716,421 $(1,237,616) Cost of Gas 18,969,411 19,063,786 (94,375) ---------- ---------- --------- Gross Margin 7,509,394 8,652,635 (1,143,241) Operations & Maintenance 2,571,541 2,425,159 146,382 Depreciation & Amortization 787,486 742,053 45,433 Other Taxes 728,805 728,703 102 ---------- ---------- --------- EBIT $ 3,421,562 $ 4,756,720 $(1,335,158) ========== ========== ========= The decrease in gross margin is primarily due to temperatures in our northern service territories being 14% warmer than the same period last year, resulting in an 11% reduction in volumes delivered. The increase in operations and maintenance expenses of $146,382 is due to increases in pensions and benefits, outside services, advertising and maintenance of both mains and services. Depreciation and amortization expenses increased $45,433 due to plant placed in service during the past year. Natural Gas Transmission The natural gas transmission segment reported EBIT of $617,411 for the first quarter of 1997 as compared to EBIT of $555,096 for the corresponding period last year, an increase of $62,315. The increase in EBIT is primarily due to a decrease in operating expenses partially offset by a decrease in gross margin. FOR THE QUARTER ENDED MARCH 31, 1997 1996 Change ---- ---- ------ Revenue $12,060,054 $11,709,292 $350,762 Cost of Gas 10,376,853 10,004,149 372,704 ---------- ---------- ------- Gross Margin 1,683,201 1,705,143 (21,942) Operations & Maintenance 736,316 850,543 (114,227) Depreciation & Amortization 222,688 191,332 31,356 Other Taxes 106,786 108,172 (1,386) ---------- ---------- ------- EBIT $ 617,411 $ 555,096 $ 62,315 ========== ========== ======= The decrease in operations and maintenance expenses of $114,227 is due to a decrease in compensation. Depreciation and amortization increased $31,356 due to plant placed in service during the past year. The Company's wholly-owned natural gas transmission subsidiary, Eastern Shore Natural Gas Company ("Eastern Shore") applied in December of 1995 to the Federal Energy Regulatory Commission for a blanket certificate authorizing open access transportation service. Eastern Shore expects implementation to occur during the second half of 1997. Propane Distribution The propane distribution segment reported EBIT of $1,702,173 as compared to EBIT of $3,711,192 for the corresponding period last year. The decrease in EBIT of $2,009,019 was primarily due to a reduction in gross margin. The 1997 and 1996 financial results of the propane distribution segment include the operating results of Tri-County. FOR THE QUARTER ENDED MARCH 31, 1997 1996 Change ---- ---- ------ Revenue $11,178,028 $14,753,900 $(3,575,872) Cost of Gas 6,672,656 8,057,449 (1,384,793) ---------- ---------- --------- Gross Margin 4,505,372 6,696,451 (2,191,079) Operations & Maintenance 2,358,170 2,395,567 (37,397) Depreciation & Amortization 289,255 426,559 (137,304) Other Taxes 155,774 163,133 (7,359) ---------- ---------- --------- EBIT $ 1,702,173 $ 3,711,192 $(2,009,019) ========== ========== ========= The decrease in gross margin is due primarily to a 21% decrease in sales volumes and a 20% decrease in the margin earned per gallon sold. The decreases in both sales volumes and margin earned are primarily related to temperatures which were 14% warmer than the same period last year. The reduction in margin earned was the difference between the Company's cost of propane in inventory, versus the cost of propane available from suppliers during the first quarter of 1997. The difference can be attributed to the warmer weather which reduced consumer demands and wholesale supplier prices. Depreciation and amortization expense decreased $137,304, of which $97,000 is related to a non-compete agreement that became fully amortized in November 1996. Advanced Information Services The advanced information services segment recognized EBIT of $411,084 and $309,795 for the quarters ended March 31, 1997 and 1996, respectively. This increase in EBIT of $101,291 resulted from lower operating expenses offset slightly by a reduction in revenue. FOR THE QUARTER ENDED MARCH 31, 1997 1996 Change ---- ---- ------ Revenue $1,991,717 $2,019,999 $(28,282) Operations & Maintenance 1,453,081 1,580,948 (127,867) Depreciation & Amortization 26,283 36,115 (9,832) Other Taxes 101,269 93,143 8,126 --------- --------- ------- EBIT $ 411,084 $ 309,793 $101,291 ========= ========= ======= The decrease in revenue primarily occurred in product development, partially offset by an increase in consulting and resource services revenue. Operations and maintenance expenses decreased due to the consolidation of operations and a reduction in costs associated with product development, partially offset by an increase in billable payroll costs. Depreciation and amortization also decreased due to the consolidation of operations. Operating Income Taxes Operating income taxes decreased $506,502 due to a reduction in EBIT and the lack of income tax expense recorded by Tri-County in 1996, offset by a one-time expense of $318,000 recorded during the first quarter. The one-time expense was required to establish deferred income taxes for Tri-County Gas Company, Inc. acquired during the first quarter of 1997. Prior to the acquisition, Tri-County Gas Company, Inc. was a Subchapter S Corporation for income tax reporting; therefore, no deferred income taxes would have been required to be recorded on their balance sheet. In addition, the Company's 1996 restated financial statements do not include any income tax expense on EBIT reported for Tri-County due to their 1996 Subchapter S status. 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 three months of 1997, 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 $7,531,133, $3,741,589 and $3,811,186, 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 $20 million from banks and trust companies. As of March 31, 1997, 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 March 31, 1997 and 1996 were $12.0 million and $12.7 million, respectively. During the three months ended March 31, 1997 and 1996, net property, plant and equipment expenditures were approximately $3.7 million and $3.0 million, respectively. For 1997, the Company has budgeted $18.9 million for capital expenditures. The components of this amount include $8.5 million for natural gas distribution, $4.5 million for natural gas transmission, $3.8 million for environmental related expenditures, $1.8 million for propane distribution, $150,000 for advanced information services with the remaining $150,000 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 for improvements to the pipeline system and completion of the Delaware City compressor station. Financing of the 1997 construction will be provided primarily by short-term borrowings, cash from operations and from an issuance of long-term debt. 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 March 31, 1997, common equity represented 63.4% of permanent capitalization, compared to 60.7% as of December 31, 1996. 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 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 2 to the Consolidated Financial Statements Item 2(a): Changes in Securities None Item 2(b): None Item 2(c): Previously reported in Part II, Item 5 of the Company's Annual Report on Form 10-K for the year ended December 31, 1996. 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 On January 13, 1997, the Company filed a report on Form 8-K, reporting under Item 5 that the Company had agreed to purchase Tri-County Gas Company, Inc. On March 21, 1997, the Company filed a report on Form 8-K, reporting under Item 2 that the Company acquired Tri-County Gas Company, Inc. on March 6, 1997. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. CHESAPEAKE UTILITIES CORPORATION /s/ Michael P. McMasters - ------------------------------- Michael P. McMasters Vice President and Chief Financial Officer Date: May 13, 1997 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 Ended March 31, ------------------------ 1997 1996 ---- ---- Primary earnings per share calculation: Weighted average number of shares 4,475,839 4,399,372 ======================== Consolidated net income $3,366,113 $6,000,157 ======================== Primary earnings per share $0.75 $1.36 ======================== Fully diluted earings per share calculation: Weighted average number of shares 4,475,839 4,399,372 Contingent shares related to assumed conversion of convertible debt 240,704 245,359 ------------------------ Weighted average number of shares assuming full dilution 4,716,543 4,644,731 ======================== Adjusted income Consolidated net income $3,366,113 $6,000,157 Interest on convertible debt 83,302 85,621 Less: Applicable income taxes (32,488) (33,392) ------------------------ Adjusted net income $3,481,903 $6,119,170 ======================== Fully diluted earnings per share $0.74 $1.32 ========================
EX-27 3 FINANCIAL DATA SCHEDULE
UT This schedule contains summary financial information extracted from the Balance Sheet, Income Statement and Statement of Cash Flows of Chesapeake Utilities Corporation and is qualified in its entirety by reference to such financial statements. 3-MOS DEC-31-1997 MAR-31-1997 PER-BOOK 75314310 22794296 19980502 12510658 0 130599766 2167047 18961990 29164113 50003027 0 0 28907000 12000000 0 0 784868 0 0 0 15452684 130599766 43645586 2272543 37272946 39545489 4100097 65164 4165261 799148 3366113 0 3366113 962888 2374102 7531133 .75 .72
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