-----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, EpbR+W276eIc+mMr2t1sLfBsfMAGVZS/PhWiHuXEvtL09yPnxVCZRHaa5zAwVL2g NTRGypit3czWkbHplwqzxQ== 0000019745-02-000007.txt : 20020515 0000019745-02-000007.hdr.sgml : 20020515 20020515164343 ACCESSION NUMBER: 0000019745-02-000007 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 20020331 FILED AS OF DATE: 20020515 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: 02653177 BUSINESS ADDRESS: STREET 1: 909 SILVER LAKE BLVD STREET 2: PO BOX 615 CITY: DOVER STATE: DE ZIP: 19903-0615 BUSINESS PHONE: 3027346799 MAIL ADDRESS: STREET 1: 909 SILVER LAKE BLVD CITY: DOVER STATE: DE ZIP: 19904 10-Q 1 cpkmqq.txt CPK FORM 10-Q 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, 2002 ------------------ OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ______ to ______ COMMISSION FILE NUMBER: 001-11590 CHESAPEAKE UTILITIES CORPORATION -------------------------------- (Exact name of registrant as specified in its charter) DELAWARE 51-0064146 -------- ---------- (State or other (I.R.S. Employer jurisdiction of Identification No.) incorporation or organization) 909 SILVER LAKE BOULEVARD, DOVER, DELAWARE 19904 ------------------------------------------------ (Address of principal executive offices, including Zip Code) (302) 734-6799 -------------- (Registrant's Telephone Number, including Area Code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Common Stock, par value $.4867 - 5,456,947 shares issued as of March 31, 2002. TABLE OF CONTENTS PART I - FINANCIAL INFORMATION. . . . . . . . . . . . . . . . . . . . . . 1 Item 1. Financial Statements. . . . . . . . . . . . . . . . . . . . . 1 Notes to Consolidated Financial Statements. . . . . . . . . . . . . . 5 1. Quarterly Financial Data . . . . . . . . . . . . . . . . . . . . 5 2. Calculation of Earnings Per Share. . . . . . . . . . . . . . . 5 3. Commitments and Contingencies. . . . . . . . . . . . . . . . . . 5 4. Recent Authoritative Pronouncements on Financial Reporting and Accounting. . . . . . . . . . . . . 8 4. Goodwill and Other Intangible Assets . . . . . . . . . . . . . . . 8 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations. . . . . . . . . . . . 9 Business Description . . . . . . . . . . . . . . . . . . . . . . . . . 9 Financial Position, Liquidity and Capital Resources . . . . . . . . . 9 Results of Operations for the Quarter Ended March 31, 2002 . . . . . . . . . . . . . . . . . . . . . . . . .11 Consolidated Overview. . . . . . . . . . . . . . . . . . . . . . . . .11 Natural Gas Distribution and Transmission . . . . . . . . . . . . .12 Propane. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12 Advanced Information Services. . . . . . . . . . . . . . . . . . . . 13 Other Operations. . . . . . . . . . . . . . . . . . . . . . . . . . . 14 Operating Income Taxes . . . . . . . . . . . . . . . . . . . . . . . 14 Interest Expense. . . . . . . . . . . . . . . . . . . . . . . . . . . 14 Environmental Matters . . . . . . . . . . . . . . . . . . . . . . . . 14 Other Matters . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14 Regulatory Matters. . . . . . . . . . . . . . . . . . . . . . . . . . 14 Competition. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15 Inflation. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16 Cautionary Statement. . . . . . . . . . . . . . . . . . . . . . . . . 16 Item 3. Quantitative and Qualitative Disclosures about Market Risk. . 16 PART II - OTHER INFORMATION. . . . . . . . . . . . . . . . . . . . . . . 18 SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19 ITEM 1. FINANCIAL STATEMENTS CHESAPEAKE UTILITIES CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
- -------------------------------------------------------------------------------- FOR THE THREE MONTHS ENDED MARCH 31, 2002 2001 - -------------------------------------------------------------------------------- OPERATING REVENUES. . . . . . . . . . . . . . . . . $68,540,959 $134,039,485 COST OF SALES . . . . . . . . . . . . . . . . . . . 46,210,982 110,882,622 - ---------------------------------------------------- ------------ ------------ GROSS MARGIN. . . . . . . . . . . . . . . . . . . . 22,329,977 23,156,863 - ---------------------------------------------------- ------------ ------------ OPERATING EXPENSES Operations. . . . . . . . . . . . . . . . . . . . . 9,319,706 9,321,749 Maintenance . . . . . . . . . . . . . . . . . . . . 464,576 495,036 Depreciation and amortization . . . . . . . . . . . 2,326,349 2,127,379 Other taxes . . . . . . . . . . . . . . . . . . . . 1,272,993 1,176,961 Income taxes. . . . . . . . . . . . . . . . . . . . 3,039,429 3,369,407 - ---------------------------------------------------- ------------ ------------ Total operating expenses. . . . . . . . . . . . . . 16,423,053 16,490,532 - ---------------------------------------------------- ------------ ------------ OPERATING INCOME. . . . . . . . . . . . . . . . . . 5,906,924 6,666,331 OTHER INCOME, NET . . . . . . . . . . . . . . . . . 211,050 134,872 - ---------------------------------------------------- ------------ ------------ INCOME BEFORE INTEREST CHARGES. . . . . . . . . . . 6,117,974 6,801,203 INTEREST CHARGES. . . . . . . . . . . . . . . . . . 1,234,496 1,435,734 - ---------------------------------------------------- ------------ ------------ INCOME BEFORE CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE . . . . . . . . . 4,883,478 5,365,469 CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE (1,916,000) 0 - ---------------------------------------------------- ------------ ------------ NET INCOME. . . . . . . . . . . . . . . . . . . . . $ 2,967,478 $ 5,365,469 ==================================================== ============ ============
EARNINGS PER SHARE OF COMMON STOCK: ----------------------------------- BASIC BEFORE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE . $ 0.90 $ 1.01 EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE. . . . . (0.35) 0.00 - ---------------------------------------------------- ------------ ------------ NET INCOME. . . . . . . . . . . . . . . . . . . . . $ 0.55 $ 1.01 ==================================================== ============ ============ DILUTED BEFORE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE . $ 0.87 $ 0.98 EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE. . . . . (0.34) 0.00 - ---------------------------------------------------- ------------ ------------ NET INCOME. . . . . . . . . . . . . . . . . . . . . $ 0.53 $ 0.98 ==================================================== ============ ============ The accompanying notes are an integral part of these financial statements.
CHESAPEAKE UTILITIES CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (UNAUDITED)
- ---------------------------------------------------------------------------------------- MARCH 31, DECEMBER 31, ASSETS 2002 2001 - ---------------------------------------------------------------------------------------- PROPERTY, PLANT AND EQUIPMENT Natural gas distribution and transmission . . . . . . . $ 172,339,079 $ 170,254,892 Propane . . . . . . . . . . . . . . . . . . . . . . . . 32,980,942 32,877,317 Advanced information services . . . . . . . . . . . . . 1,549,204 1,521,144 Other plant . . . . . . . . . . . . . . . . . . . . . . 12,651,855 12,249,442 - -------------------------------------------------------- -------------- -------------- Total property, plant and equipment . . . . . . . . . . 219,521,080 216,902,795 Less: Accumulated depreciation and amortization. . . . (68,925,566) (66,646,944) - -------------------------------------------------------- -------------- -------------- Net property, plant and equipment . . . . . . . . . . . 150,595,514 150,255,851 - -------------------------------------------------------- -------------- -------------- INVESTMENTS . . . . . . . . . . . . . . . . . . . . . . 513,982 517,901 - -------------------------------------------------------- -------------- -------------- CURRENT ASSETS Cash and cash equivalents . . . . . . . . . . . . . . . 634,028 1,188,335 Accounts receivable, less allowance for uncollectibles. 21,430,019 21,266,309 Materials and supplies, at average cost . . . . . . . . 1,144,544 1,106,995 Merchandise inventory, at average cost. . . . . . . . . 1,505,455 1,610,786 Propane inventory, at average cost. . . . . . . . . . . 2,042,424 2,518,871 Storage gas prepayments . . . . . . . . . . . . . . . . 848,182 4,326,416 Underrecovered purchased gas costs. . . . . . . . . . . 3,689,045 6,519,754 Income taxes receivable . . . . . . . . . . . . . . . . 0 675,504 Prepaid expenses and other current assets . . . . . . . 1,815,031 1,932,246 - -------------------------------------------------------- -------------- -------------- Total current assets. . . . . . . . . . . . . . . . . . 33,108,728 41,145,216 - -------------------------------------------------------- -------------- -------------- DEFERRED CHARGES AND OTHER ASSETS Environmental regulatory assets . . . . . . . . . . . . 2,664,877 2,677,010 Environmental expenditures. . . . . . . . . . . . . . . 2,816,491 3,189,156 Intangible assets, net. . . . . . . . . . . . . . . . . 4,464,513 7,724,283 Other deferred charges. . . . . . . . . . . . . . . . . 5,244,213 5,141,363 - -------------------------------------------------------- -------------- -------------- Total deferred charges and other assets . . . . . . . . 15,190,094 18,731,812 - -------------------------------------------------------- -------------- -------------- TOTAL ASSETS. . . . . . . . . . . . . . . . . . . . . . $ 199,408,318 $ 210,650,780 ======================================================== ============== ============== The accompanying notes are an integral part of these financial statements.
CHESAPEAKE UTILITIES CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (UNAUDITED)
- ---------------------------------------------------------------------------------------- MARCH 31, DECEMBER 31, ASSETS 2002 2001 - ---------------------------------------------------------------------------------------- CAPITALIZATION Stockholders' equity Common Stock, par value $.4867 per share; (authorized 12,000,000 shares; issued 5,456,947 and 5,424,962 shares, respectively) . . . . . . . . . . $ 2,655,628 $ 2,640,060 Additional paid-in capital. . . . . . . . . . . . . . . 30,258,031 29,653,992 Retained earnings . . . . . . . . . . . . . . . . . . . 36,022,490 34,555,560 - -------------------------------------------------------- -------------- -------------- Total stockholders' equity. . . . . . . . . . . . . . . 68,936,149 66,849,612 Long-term debt, net of current maturities . . . . . . . 46,393,048 48,408,596 - -------------------------------------------------------- -------------- -------------- Total capitalization. . . . . . . . . . . . . . . . . . 115,329,197 115,258,208 - -------------------------------------------------------- -------------- -------------- CURRENT LIABILITIES Current portion of long-term debt . . . . . . . . . . . 3,686,596 2,686,145 Short-term borrowing. . . . . . . . . . . . . . . . . . 31,600,000 42,100,000 Accounts payable. . . . . . . . . . . . . . . . . . . . 13,260,565 14,551,621 Refunds payable to customers. . . . . . . . . . . . . . 546,397 971,575 Income taxes payable. . . . . . . . . . . . . . . . . . 3,355,283 0 Accrued interest. . . . . . . . . . . . . . . . . . . . 870,060 1,758,401 Dividends payable . . . . . . . . . . . . . . . . . . . 1,500,547 1,491,832 Deferred income taxes payable . . . . . . . . . . . . . 846,956 848,271 Other accrued liabilities . . . . . . . . . . . . . . . 5,249,524 5,327,457 - -------------------------------------------------------- -------------- -------------- Total current liabilities . . . . . . . . . . . . . . . 60,915,928 69,735,302 - -------------------------------------------------------- -------------- -------------- DEFERRED CREDITS AND OTHER LIABILITIES Deferred income taxes . . . . . . . . . . . . . . . . . 13,206,089 15,732,842 Deferred investment tax credits . . . . . . . . . . . . 588,653 602,357 Environmental liability . . . . . . . . . . . . . . . . 3,147,713 3,199,733 Accrued pension costs . . . . . . . . . . . . . . . . . 1,621,114 1,595,650 Other liabilities . . . . . . . . . . . . . . . . . . . 4,599,624 4,526,688 - -------------------------------------------------------- -------------- -------------- Total deferred credits and other liabilities. . . . . . 23,163,193 25,657,270 - -------------------------------------------------------- -------------- -------------- TOTAL CAPITALIZATION AND LIABILITIES. . . . . . . . . . $ 199,408,318 $ 210,650,780 ======================================================== ============== ============== 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, 2002 2001 - ------------------------------------------------------------------------------------------ OPERATING ACTIVITIES Net Income . . . . . . . . . . . . . . . . . . . . . . . . $ 2,967,478 $ 5,365,469 Adjustments to reconcile net income to net operating cash: Goodwill impairment. . . . . . . . . . . . . . . . . . . 3,200,000 0 Depreciation and amortization. . . . . . . . . . . . . . 2,775,058 2,582,501 Deferred income taxes, net . . . . . . . . . . . . . . . (2,524,149) 266 Investment tax credit adjustments. . . . . . . . . . . . (13,704) (8,266) Mark-to-market adjustments . . . . . . . . . . . . . . . (78,350) 919,460 Other, net . . . . . . . . . . . . . . . . . . . . . . . 98,400 146,816 Changes in assets and liabilities: Accounts receivable, net . . . . . . . . . . . . . . . . (163,710) 8,992,865 Inventory, materials, supplies and storage gas . . . . . 4,022,463 5,388,184 Other current assets . . . . . . . . . . . . . . . . . . 195,564 (937,756) Other deferred charges . . . . . . . . . . . . . . . . . (165,087) (174,063) Accounts payable, net. . . . . . . . . . . . . . . . . . (1,291,052) (16,128,762) Refunds payable to customers . . . . . . . . . . . . . . (425,178) (242,784) Over (under) recovered purchased gas costs . . . . . . . 2,830,709 (1,423,768) Other current liabilities. . . . . . . . . . . . . . . . 3,173,535 4,378,745 - ------------------------------------------------------------ ------------- ------------- Net cash provided by operating activities. . . . . . . . . . 14,601,977 8,858,907 - ------------------------------------------------------------ ------------- ------------- INVESTING ACTIVITIES Property, plant and equipment expenditures, net. . . . . . (2,659,937) (4,594,355) - ------------------------------------------------------------ ------------- ------------- Net cash used by investing activities. . . . . . . . . . . . (2,659,937) (4,594,355) - ------------------------------------------------------------ ------------- ------------- FINANCING ACTIVITIES Common stock dividends, net of amounts reinvested. . . . . (1,325,828) (1,285,256) Issuance of stock: Dividend Reinvestment Plan optional cash . . . . . . . . 74,314 50,839 Retirement Savings Plan. . . . . . . . . . . . . . . . . 260,281 280,170 Net repayment under line of credit agreements. . . . . . . (10,500,000) (3,900,000) Repayment of long-term debt. . . . . . . . . . . . . . . . (1,005,114) (1,004,041) - ------------------------------------------------------------ ------------- ------------- Net cash used by financing activities. . . . . . . . . . . . (12,496,347) (5,858,288) - ------------------------------------------------------------ ------------- ------------- NET DECREASE IN CASH AND CASH EQUIVALENTS. . . . . . . . . . (554,307) (1,593,736) CASH AND CASH EQUIVALENTS - BEGINNING OF PERIOD. . . . . . . 1,188,335 4,606,316 - ------------------------------------------------------------ ------------- ------------- CASH AND CASH EQUIVALENTS - END OF PERIOD. . . . . . . . . . $ 634,028 $ 3,012,580 ============================================================ ============= ============= The accompanying notes are an integral part of these financial statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. QUARTERLY FINANCIAL DATA The financial information for Chesapeake Utilities Corporation (the "Company") included herein is unaudited and should be read in conjunction with the Company's Annual Report on Form 10-K. In the opinion of management, this financial information reflects normal recurring adjustments, including the cumulative effect of change in accounting principles, which are 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 and, accordingly, results for any particular quarter may not give a true indication of results for the year. Certain amounts in 2001 have been reclassified to conform to the presentation for the current year. 2. CALCULATION OF EARNINGS PER SHARE
- ----------------------------------------------------------------------------- FOR THE THREE MONTHS ENDED MARCH 31, 2002 2001 - ----------------------------------------------------------------------------- CALCULATION OF BASIC EARNINGS PER SHARE BEFORE CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE: Net Income before cumulative effect of change in accounting principle. . . . . . . . . . . . . . $4,883,478 $5,365,469 Weighted average shares outstanding. . . . . . . . . 5,443,980 5,317,760 - ----------------------------------------------------- ---------- ---------- BASIC EARNINGS PER SHARE BEFORE CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE . . . . . . $ 0.90 $ 1.01 ===================================================== ========== ========== CALCULATION OF DILUTED EARNINGS PER SHARE BEFORE CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE: RECONCILIATION OF NUMERATOR: Net Income before cumulative effect of change in accounting principle - Basic. . . . . . . . . . $4,883,478 $5,365,469 Effect of 8.25% Convertible debentures . . . . . . . 41,541 42,821 - ----------------------------------------------------- ---------- ---------- Adjusted numerator - Diluted . . . . . . . . . . . . $4,925,019 $5,408,290 - ----------------------------------------------------- ---------- ---------- RECONCILIATION OF DENOMINATOR: Weighted shares outstanding - Basic. . . . . . . . . 5,443,980 5,317,760 Effect of dilutive securities Stock options. . . . . . . . . . . . . . . . . . . 0 12,782 Warrants . . . . . . . . . . . . . . . . . . . . . 1,832 335 8.25% Convertible debentures . . . . . . . . . . . 197,314 203,395 - ----------------------------------------------------- ---------- ---------- Adjusted denominator - Diluted . . . . . . . . . . . 5,643,126 5,534,272 - ----------------------------------------------------- ---------- ---------- DILUTED EARNINGS PER SHARE BEFORE CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE . . . . . . $ 0.87 $ 0.98 ===================================================== ========== ==========
3. COMMITMENTS AND CONTINGENCIES ENVIRONMENTAL MATTERS The Company is currently participating in the investigation, assessment or remediation of three former gas manufacturing plant sites located in different jurisdictions, including the exploration of corrective action options to remove environmental contaminants. The Company has accrued liabilities for the Dover Gas Light, Salisbury Town Gas Light and the Winter Haven Coal Gas sites. During the first quarter of 2002, the Company received a letter from the Maryland Department of the Environment requesting that the Company and two other parties enter into an Administrative Consent Order for cleanup of contamination at a fourth site located in Cambridge, Maryland. The Dover Gas Light site is located in Dover, Delaware. In May 2001, the Company, General Public Utilities Corporation, Inc. ("GPU"), the State of Delaware and the United States Environmental Protection Agency ("EPA") signed a settlement term sheet reflecting the agreement in principle to settle a lawsuit with respect to the site. The parties are in the process of memorializing the terms of the final agreement in two consent decrees. The consent decrees will then be published for public comment and submitted to a federal judge for approval. If the agreement in principle receives final approval, the Company will: - - Design and construct a parking lot on the site and dismantle the soil vapor extraction system that had been erected at the site. - - Receive a net payment of $1.15 million from other parties to the agreement. These proceeds will be passed on to the Company's firm customers, in accordance with the environmental rate rider. - - Receive a release from liability and covenant not to sue from the EPA and the State of Delaware. This will relieve the Company from liability for future remediation at the site, unless previously unknown conditions are discovered at the site, or information previously unknown to EPA is received that indicates the remedial action related to the prior manufactured gas plant is not sufficiently protective. These contingencies are standard, and are required by the United States in all liability settlements. At March 31, 2002, the Company had accrued $2.1 million (discounted) of costs associated with the remediation of the Dover site and had recorded an associated regulatory asset for the same amount. Of that amount, $1.5 million was for estimated ground-water remediation and $600,000 was for remaining soil remediation. The $1.5 million represented the low end of the ground-water remediation estimates prepared by an independent consultant and was used because the Company could not, at that time, predict the remedy the EPA might require. Through March 31, 2002, the Company has incurred approximately $8.9 million in costs relating to environmental testing and remedial action studies at the Dover site. Approximately $6.4 million has been recovered through March 31, 2002 from other parties or through rates. Upon receiving final court approval of the consent decrees, the Company will reduce both the accrued environmental liability and the associated environmental regulatory asset to the amount required to complete its obligations (primarily the final demobilization of the remedial system and final design and construction of the parking lot). The Salisbury Town Gas Light site is located in Salisbury, Maryland. In cooperation with the Maryland Department of the Environment ("MDE"), the Company is engaged in remediation that primarily includes the following: (1) operation of an air sparging/soil vapor extraction ("AS/SVE") remedial system; (2) monitoring and recovery of product from recovery wells; and (3) monitoring of ground-water quality. In February 2002, the MDE granted permission to permanently decommission the AS/SVE system and abandon nearly all of the monitoring wells on-site and off-site. The Company is currently seeking a No Further Action ("NFA") for the site. The NFA would be conditional upon the Company performing continued product monitoring and recovery at one well location and implementing land use controls. Evaluation of historical sampling results is currently being performed to determine the level of land use controls that will be required by the MDE for the site. A plan for decommissioning the AS/SVE system and monitoring well network is currently being prepared for approval from the MDE. The final decommissioning and well abandonment is anticipated to occur the second quarter in 2002. The Company has adjusted the liability with respect to the Salisbury site to $88,000 at March 31, 2002. This amount is based on the estimated costs to perform limited product monitoring and recovery efforts, abandon the monitoring well network, decommission the remedial system and fulfill ongoing reporting requirements. A corresponding regulatory asset has been recorded, reflecting the Company's belief that costs incurred will be recoverable in base rates. Through March 31, 2002, the Company has incurred approximately $2.8 million for remedial actions and environmental studies at the Salisbury site. Of this amount, approximately $1.8 million has been recovered through insurance proceeds or ratemaking treatment. The Winter Haven Coal Gas site is located in Winter Haven, Florida. In January 2001, the Company filed a remedial action plan ("RAP") with the Florida Department of the Environment ("FDEP"). The RAP was approved by the FDEP on May 4, 2001. The current estimate of costs to complete the RAP is approximately $1 million (discounted). Accordingly, at March 31, 2002, the Company has accrued a liability of $1 million. Through March 31, 2002, the Company has incurred approximately $947,000 of environmental costs associated with the Florida site. At March 31, 2002, the Company had collected $523,000 in excess of costs incurred. A regulatory asset of $477,000 representing the uncollected portion of the estimated cleanup costs has also been recorded. Once the FDEP approves the RAP, the Company will commence with the remediation procedures per the RAP. It is management's opinion that any unrecovered current costs and any other future costs associated with each of the three sites incurred will be recoverable through future rates or sharing arrangements with other responsible parties. The Maryland Department of the Environment submitted a letter to Chesapeake and two other parties requesting that the parties enter into an Administrative Consent Order for cleanup of contamination at the Todd Seafood property located in Cambridge, Maryland. It has been alleged that contamination at the Todd Seafood property is a result of manufactured gas plant operations. Neither Chesapeake nor any of its affiliates have ever owned or operated a manufactured gas plant in Cambridge, Maryland. A company acquired by Chesapeake did, at one time, own a piece of land where a manufactured gas plant had once stood. The plant was removed before they purchased the land and the land was sold prior to the company's acquisition by Chesapeake. Chesapeake's environmental consultants have examined some of the MDE's records under the Public Information Act ("PIA"). Key documents were not available during the PIA review. Chesapeake's attorneys have been in discussions with the MDE to obtain access to these files. Upon receipt of these files, a response to the MDE's letter will be prepared and discussed with the MDE. The outcome of this matter cannot be determined at this time. OTHER COMMITMENTS AND CONTINGENCIES The Company's natural gas distribution operations have entered into contractual commitments for daily entitlements of natural gas from various suppliers. The contracts have various expiration dates. In 2000, the Company entered into a long-term contract with an energy marketing and risk management company to manage a portion of the Company's natural gas transportation and storage capacity. That contract remains in effect. The Company is involved in certain legal actions and claims arising in the normal course of business. The Company is also involved in certain legal and administrative proceedings before various governmental agencies concerning rates. In the opinion of management, the ultimate disposition of these proceedings will not have a material effect on the consolidated financial position of the Company. Certain assets and liabilities of the Company are accounted for in accordance with Statement of Financial Accounting Standards ("SFAS") No. 71, which, among other matters, provides standards for regulated enterprises for the deferral of costs that will be recovered through future rate increases. If the Company were required to terminate the application of these standards to its regulated operations, all such deferred amounts would be recognized in the income statement at that time. This would result in a charge to earnings, net of applicable income taxes, which could be material. 4. RECENT AUTHORITATIVE PRONOUNCEMENTS ON FINANCIAL REPORTING AND ACCOUNTING On June 30, 2001, the FASB issued SFAS Nos. 142 and 143. SFAS No. 142, "Goodwill and Other Intangible Assets," eliminates the amortization of goodwill and other acquired intangible assets with indefinite economic useful lives. SFAS No. 142 requires an annual impairment test of goodwill and other intangible assets that are not subject to amortization. SFAS No. 142 is effective for fiscal years beginning after December 15, 2001; however, amortization of goodwill for acquisitions completed after June 30, 2001 was prohibited. This pronouncement was adopted in the current quarter. See Note 5 to the Consolidated Financial Statements for a description of its impact on the financial statements and additional disclosures required by the pronouncement. SFAS No. 143, "Accounting for Asset Retirement Obligations," provides guidance on the accounting for obligations associated with the retirement of long-lived assets. SFAS No. 143 requires a liability to be recognized in the financial statements for retirement obligations meeting specific criteria. Measurement of the initial obligation is to approximate fair value with an equivalent amount recorded as an increase in the value of the capitalized asset. The asset will be depreciable in accordance with normal depreciation policy and the liability will be increased, with a charge to the income statement, until the obligation is settled. SFAS No. 143 is effective for fiscal years beginning after June 15, 2002. The potential impact of adopting SFAS No. 143 has not yet been determined. SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets," replaces SFAS No. 121. The statement develops one accounting model for long-lived assets to be disposed of by sale and addresses significant implementation issues. SFAS No. 144 was adopted in the current quarter, as required. Its adoption did not have a material impact on the Company's financial position or results of operations. 5. GOODWILL AND OTHER INTANGIBLE ASSETS The Company has adopted SFAS No. 142 in the first quarter of 2002. Application of the non-amortization provisions resulted in $34,000 of additional income ($0.006 per share), after tax, for the first quarter of 2002 compared to 2001. The Company performed a test for goodwill impairment, using the two-step process prescribed in SFAS No. 142. The first step was a screen for potential impairment, using January 1, 2002 as the measurement date. The second step was a measurement of the amount of the goodwill determined to be impaired. The results of the tests indicate that the goodwill associated with the Company's water business, which is included in the reportable segment entitled "Other," has been impaired and that the amount of the impairment loss is $3.2 million. This has been recorded in the first quarter as the cumulative effect of a change in accounting principle. The fair value of the water business was determined using several methods, including discounted cash flow projections and market valuations for recent purchase and sales of similar businesses. These were weighted based on their expected probability. The previous test for impairment of goodwill, prescribed under SFAS No. 121, looked at undiscounted cash flows. The determination that the goodwill associated with the Company's water business was impaired was the result of the more stringent tests required by the new pronouncement. The performance of the Company's water unit in Michigan is the primary cause of the impairment. The change in the carrying value of goodwill for the quarter ended March 31, 2002 is as follows:
WATER BUSINESSES PROPANE TOTAL ------------ -------- ------------ Balance at January 1, 2002 $ 4,869,068 $674,451 $ 5,543,519 Impairment charge. . . . . (3,200,000) 0 (3,200,000) - --------------------------- ------------ -------- ------------ Balance at March 31, 2002. $ 1,669,068 $674,451 $ 2,343,519 - --------------------------- ------------ -------- ------------
The impact of the non-amortization provision of SFAS No. 142 was as follows:
- ----------------------------------------------------------------------------- BASIC DILUTED NET EARNINGS EARNINGS FOR THE THREE MONTHS ENDED MARCH 31, 2001 INCOME PER SHARE PER SHARE - ----------------------------------------------------------------------------- Net Income . . . . . . . . . . . . . . . $5,365,469 $ 1.01 $ 0.98 Amortization of goodwill, after tax. . . 33,844 0.01 0.00 - ----------------------------------------- ---------- ---------- ---------- Net Income, exclusive of amortization. . $5,399,313 $ 1.02 $ 0.98 - ----------------------------------------- ---------- ---------- ----------
Intangible assets subject to amortization are as follows:
MARCH 31, 2002 DECEMBER 31, 2001 -------------------------- ------------------------- Gross Gross Carrying Accumulated Carrying Accumulated Amount Amortization Amount Amortization ---------- -------------- ---------- ------------- Customer Lists . . . . $1,111,651 $ 108,852 $1,111,651 $ 82,141 Non-compete agreements 1,000,000 169,917 1,000,000 140,417 Acquisition costs. . . 379,541 91,429 379,541 87,870 - ----------------------- ---------- -------------- ---------- ------------- Total. . . . . . . . . $2,491,192 $ 370,198 $2,491,192 $ 310,428 - ----------------------- ---------- -------------- ---------- -------------
Amortization of intangible assets was $60,000 for the three months ended March 31, 2002. For the year ended December 31, 2001, amortization of intangibles, excluding goodwill, was $132,000. The estimated annual amortization of intangibles for the next five years is: $230,000 for 2002; $224,000 for 2003; $224,000 for 2004; $213,000 for 2005; and $213,000 for 2006. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS BUSINESS DESCRIPTION Chesapeake Utilities Corporation (the "Company") is a diversified utility company engaged in natural gas distribution and transmission, propane distribution and marketing, advanced information services and other related businesses. The Company's strategy is to grow earnings from a stable utility foundation by investing in related businesses and services that provide opportunities for higher, unregulated returns. This growth strategy includes acquisitions and investments in unregulated businesses as well as the continued investment and expansion of the Company's utility operations that provide the stable base of earnings. The Company continually reevaluates its investments to ensure that they are consistent with its strategy and the goal of enhancing shareholder value. The Company's unregulated businesses and services currently include propane distribution and marketing, advanced information services and water conditioning and treatment. By investing in these related business and services, the Company has created opportunities to earn higher returns than those typically earned by a traditional utility. FINANCIAL POSITION, LIQUIDITY AND CAPITAL RESOURCES The Company's capital requirements reflect the capital-intensive nature of its business and are principally attributable to the construction program and the retirement of outstanding debt. The Company relies on cash generated by operations and short-term borrowing to meet normal working capital requirements and to temporarily finance capital expenditures. During the first three months of 2002, net cash provided by operating activities, net cash used by investing activities and net cash used by financing activities were approximately $14.6 million, $2.7 million and. $12.5 million, respectively. Cash provided by operations was up $5.7 million in the current quarter compared to the first quarter of 2001. The cash flow increased due to a reduction in working capital requirements associated with lower energy prices. The first quarter of 2001 required the use of funds to reduce the outstanding payables balance. In 2002, the underrecovered purchased gas cost balance was reduced by $2.8 million, generating positive cash flow. Based upon the Company's current level of short-term borrowing and the anticipated cash requirements in 2002, the Company has engaged a placement agent and is in the process of filing for regulatory approval to issue $30 million of long-term debt. The placement is expected to be completed and the funds available by the end of October 2002. The funds will be used to refinance short-term borrowing and fund capital expenditures. The Board of Directors has authorized the Company to borrow up to $55.0 million of short-term debt from various banks and trust companies. As of March 31, 2002, Chesapeake had three unsecured bank lines of credit with two financial institutions, totaling $65.0 million, for short-term cash needs to meet seasonal working capital requirements and to temporarily fund portions of its capital expenditures. One of the bank lines is committed. The other two lines are subject to the banks' availability of funds. In the first quarter, cash provided by operations and cash on hand was adequate to fund capital expenditures and the reduction in short-term debt outstanding. At March 31, 2002, the debt outstanding under these lines was $31.6 million. During the three-month periods ended March 31, 2002 and 2001, capital expenditures were approximately $2.7 million and $4.6 million, respectively. Chesapeake has budgeted $16.8 million for capital expenditures during 2002. This amount includes $11.8 million for natural gas distribution and transmission, $2.3 million for propane distribution and marketing, $200,000 for advanced information services and $2.5 million for other operations. The natural gas distribution and transmission expenditures are for expansion and improvement of facilities. The propane expenditures are to support customer growth and for the replacement of equipment. The advanced information services expenditures are for computer hardware, software and related equipment. Expenditures for other operations include expenditures to support customer growth and replace equipment for water operations and general plant, computer software and hardware. Financing for the 2002 capital expenditure program is expected to be provided from short-term borrowing, cash provided by operating activities and the expected issuance of long-term debt. The capital expenditure program is subject to continuous review and modification. Actual capital requirements may vary from the above estimates due to a number of factors including acquisition opportunities, changing economic conditions, customer growth in existing areas, regulation, availability of capital and new growth opportunities. The Company has budgeted $846,000 for capital expenditures in 2002 related to environmental remediation projects, and expects to make additional expenditures in future years, a portion of which may need to be financed through external sources. Management does not expect any such expenditures or financing to have a material adverse effect on the financial position or capital resources of the Company (see Note 3 to the Consolidated Financial Statements). As of March 31, 2002, common equity represented 59.8 percent of total capitalization, compared to 58.0 percent as of December 31, 2001. Combining short-term financing with total capitalization, the equity component would have been 45.8 percent and 41.8 percent, respectively. The Company remains committed to maintaining a sound capital structure and strong credit ratings in order to provide the financial flexibility needed to access the capital markets when required. This commitment, along with adequate and timely rate relief for the Company's regulated operations, is intended to ensure that the Company will be able to attract capital from outside sources at a reasonable cost. Interest expense for the first three months of 2002 decreased approximately $201,000, or 14%, over the same period in 2001. The decrease was due primarily to a reduction in the average interest rate for short-term borrowing from 6.17%for the first quarter of 2001 to 2.36% for the same period in 2002. A reduction in the average long-term debt balance of $2.5 million due to scheduled repayments also contributed to this reduction. These factors were partially offset by an increase in the average short-term debt balance from $24.4 million in 2001 to $37.7 million in 2002. RESULTS OF OPERATIONS FOR THE QUARTER ENDED MARCH 31, 2002 CONSOLIDATED OVERVIEW The Company recognized net income before cumulative effect of change in accounting principle of $4.9 million, or $0.90 per share, for the first quarter of 2002, a decrease of $486,000, or $0.11 per share, compared to the corresponding period in 2001. As indicated in the following table, the decline in income is primarily attributable to lower profitability of propane and the advanced information services segments, as well as increased cost to add a corporate infrastructure to the water business, partially offset by lower taxes and interest expenses. Chesapeake adopted Financial Accounting Standards Board ("FASB") Statement of Accounting Standards ("SFAS") No. 142, "Goodwill and Other Intangible Assets," in the first quarter of 2002. As a result of the change in the goodwill impairment testing methods prescribed by SFAS No. 142, a non-cash charge for goodwill impairment of $1.9 million, after tax, was recorded as the cumulative effect of a change in accounting principle. The charge was necessitated primarily by the performance of the Michigan water business. After giving effect to this charge, earnings per share for the first quarter were $0.55. In accordance with the pronouncement, Chesapeake also ceased regular amortization of goodwill. In 2001, amortization of goodwill amounted to $142,000 per year, after tax, or approximately $0.026 per share. The Company's remaining goodwill balance was $2.3 million as of March 31, 2002. The Company is continuing the implementation of its water business strategy. Management changes have been implemented during the last six months, which are designed to improve the performance of the water business. The investments in the water business are a part of Chesapeake's strategy to diversify its earnings into unregulated, non-weather sensitive businesses, thereby providing opportunities for the Company to achieve higher earnings and earnings growth. The impact of the change in accounting principle is discussed further in Note 5 to the Consolidated Financial Statements.
- ------------------------------------------------------------------------------------------------ FOR THE THREE MONTHS ENDED MARCH 31, 2002 2001 CHANGE - ------------------------------------------------------------------------------------------------ Pre-tax Operating Income (Loss) Natural Gas Distribution & Transmission. . . . . . $ 6,355,270 $ 6,267,995 $ 87,275 Propane. . . . . . . . . . . . . . . . . . . . . . 2,778,555 3,695,473 (916,918) Advanced Information Services. . . . . . . . . . . (72,016) 103,613 (175,629) Other & Eliminations . . . . . . . . . . . . . . . (115,456) (31,343) (84,113) - ----------------------------------------------------- ------------ ------------ ------------- Pre-tax Operating Income . . . . . . . . . . . . . . 8,946,353 10,035,738 (1,089,385) Operating Income Taxes . . . . . . . . . . . . . . . 3,039,429 3,369,407 (329,978) Interest . . . . . . . . . . . . . . . . . . . . . . 1,234,496 1,435,734 (201,238) Non-Operating Income, net. . . . . . . . . . . . . . 211,050 134,872 76,178 - ----------------------------------------------------- ------------ ------------ ------------- Net Income before cumulative effect of change in accounting principle . . . . . . . . . . . 4,883,478 5,365,469 (481,991) Cumulative effect of change in accounting principle. (1,916,000) 0 (1,916,000) - ----------------------------------------------------- ------------ ------------ ------------- Net Income . . . . . . . . . . . . . . . . . . . . . $ 2,967,478 $ 5,365,469 $ (2,397,991) ===================================================== ============ ============ =============
NATURAL GAS DISTRIBUTION AND TRANSMISSION The natural gas distribution and transmission segment earned pre-tax operating income of $6.36 million for the first quarter of 2002 compared to $6.27 million for the corresponding period last year, an increase of $87,000.
- ------------------------------------------------------------------------------------------------ FOR THE THREE MONTHS ENDED MARCH 31, 2002 2001 CHANGE - ------------------------------------------------------------------------------------------------ Revenue. . . . . . . . . . . . . . . . . . . . . . . $31,788,059 $44,240,049 $(12,451,990) Cost of gas. . . . . . . . . . . . . . . . . . . . . 18,902,773 31,674,622 (12,771,849) - ----------------------------------------------------- ------------ ------------ ------------- Gross margin . . . . . . . . . . . . . . . . . . . . 12,885,286 12,565,427 319,859 Operations & maintenance . . . . . . . . . . . . . . 4,180,231 4,111,494 68,737 Depreciation & amortization. . . . . . . . . . . . . 1,631,584 1,479,368 152,216 Other taxes. . . . . . . . . . . . . . . . . . . . . 718,201 706,570 11,631 - ----------------------------------------------------- ------------ ------------ ------------- Pre-tax operating expenses . . . . . . . . . . . . . 6,530,016 6,297,432 232,584 - ----------------------------------------------------- ------------ ------------ ------------- Total Pre-tax Operating Income . . . . . . . . . . . $ 6,355,270 $ 6,267,995 $ 87,275 ===================================================== ============ ============ =============
Revenues and cost of gas decreased due to lower natural gas commodity costs for the first quarter of 2002 compared to 2001. Commodity cost changes are passed on to the ratepayers through a Gas Cost Recovery ("GSR") or Purchased Gas Cost ("PGA") adjustment in all jurisdictions; therefore, they have no impact on the Company's profitability. Revenues and cost of gas were also down because the Florida division went "open access" for all non-residential customers in 2001. As a result, some customers switched from sales service, where they purchase the commodity and transportation from the Company, to transportation only. Gross margins increased $320,000 over the same period in 2001 due to increases in the margins for Florida and the transmission operations. Florida experienced an increase in transportation volumes of 36%. Transmission margins were up due to the completion of a major system expansion in November of 2001. Margins in Delaware and Maryland were adversely impacted by temperatures that were 18% warmer than 2001. Management estimates that the warmer weather reduced margins by $888,000 compared to 2001 when weather was colder than normal. If the temperatures had been normal, management estimates that margins would have been $497,000 higher. This decline was partially offset by customer growth of 5.0% and a rate increase in Delaware. The margin increases were partially offset by higher operating expenses, primarily depreciation. The increase in depreciation reflects completion of recent capital projects that increased the transmission capacity by 25% and various expansion projects in Florida. PROPANE For the first quarter of 2002, the propane segment contributed pre-tax operating income of $2.8 million compared to $3.7 million for the first quarter of 2001. Gross margin decreased $1.5 million, but was partially offset by reductions in operating expenses of $632,000.
- ------------------------------------------------------------------------------------------------ FOR THE THREE MONTHS ENDED MARCH 31, 2002 2001 CHANGE - ------------------------------------------------------------------------------------------------ Revenue. . . . . . . . . . . . . . . . . . . . . . . $30,919,500 $84,595,907 $(53,676,407) Cost of sales. . . . . . . . . . . . . . . . . . . . 24,564,513 76,691,822 (52,127,309) - ----------------------------------------------------- ------------ ------------ ------------- Gross margin . . . . . . . . . . . . . . . . . . . . 6,354,987 7,904,085 (1,549,098) Operations & maintenance . . . . . . . . . . . . . . 2,934,776 3,598,616 (663,840) Depreciation & amortization. . . . . . . . . . . . . 385,749 386,823 (1,074) Other taxes. . . . . . . . . . . . . . . . . . . . . 255,907 223,173 32,734 - ----------------------------------------------------- ------------ ------------ ------------- Pre-tax operating expenses . . . . . . . . . . . . . 3,576,432 4,208,612 (632,180) - ----------------------------------------------------- ------------ ------------ ------------- Total Pre-tax Operating Income . . . . . . . . . . . $ 2,778,555 $ 3,695,473 $ (916,918) ===================================================== ============ ============ =============
Both the revenues and cost of sales declined significantly for the propane segment. Propane wholesale marketing accounted for $46.4 million of the revenue decrease and $45.8 million of the cost of sales decrease. The drop primarily reflects the decrease in the wholesale prices for propane from the first quarter of 2001 to the first quarter of 2002. Additionally, the volume of activity was also down, due to the lower price volatility in 2002. Propane distribution revenues and costs were also lower by $8.3 million and $7.4 million, respectively due to the drop in propane commodity prices. Commodity cost changes, both increases and decreases are generally passed on to the distribution customers contingent upon competitive market conditions. The Delmarva distribution operations experienced a drop of $1.0 million in gross margin. Volumes sold for the first quarter were down 22.6%. Volumes were negatively impacted by temperatures that were 18% warmer than 2001, increased competition and lower sales to the poultry industry. Management estimates that $500,000 in additional margin would have been earned of the temperatures had been normal. The reduction in sales to poultry customers resulted in a drop in margins of $150,000 compared to 2001. A decrease in operating expenses of $525,000 partially offset the decline in margins. Cost containment efforts that began in April 2001 remain in effect and have reduced customer accounting and sales and marketing costs. Other costs, such as delivery expenses, decreased due to the lower volumes sold. The Florida propane start-ups increased their pre-tax operating income by $37,000 for the first quarter. Propane wholesale marketing margins declined by $572,000 and were partially offset by a reduction of $146,000 in operating expenses. The 2001 results reflected increased opportunities due to the extreme price volatility in the propane wholesale market. The same level of price fluctuations have not been experienced in 2002. The 2002 results reflect increased margins of approximately $650,000 that resulted from a bankrupt vendor defaulting on supply contracts during the first quarter of 2002. The supply was replaced by purchasing from different vendors at a lower cost than the original contract. Although the propane wholesale marketing business has not been as profitable as in 2001, it is still performing above the earnings targets established by the Company. ADVANCED INFORMATION SERVICES The advanced information services business experienced a pre-tax operating loss of $72,000 for the first quarter of 2002 compared to income of $104,000 for the first quarter of last year. The decrease is the result of decreased revenues partially offset by decreased operating expenses.
- ------------------------------------------------------------------------------------------------ FOR THE THREE MONTHS ENDED MARCH 31, 2002 2001 CHANGE - ------------------------------------------------------------------------------------------------ Revenue. . . . . . . . . . . . . . . . . . . . . . . $ 3,059,256 $ 3,490,786 $ (431,530) Cost of sales. . . . . . . . . . . . . . . . . . . . 1,618,812 1,767,615 (148,803) - ----------------------------------------------------- ------------ ------------ ------------- Gross margin . . . . . . . . . . . . . . . . . . . . 1,440,444 1,723,171 (282,727) Operations & maintenance . . . . . . . . . . . . . . 1,277,601 1,398,056 (120,455) Depreciation & amortization. . . . . . . . . . . . . 56,370 62,272 (5,902) Other taxes. . . . . . . . . . . . . . . . . . . . . 178,489 159,230 19,259 - ----------------------------------------------------- ------------ ------------ ------------- Pre-tax operating expenses . . . . . . . . . . . . . 1,512,460 1,619,558 (107,098) - ----------------------------------------------------- ------------ ------------ ------------- Total Pre-tax Operating (Loss) Income. . . . . . . . $ (72,016) $ 103,613 $ (175,629) ===================================================== ============ ============ =============
This segment was adversely affected by the nation's economic slowdown as discretionary consulting projects have been postponed or cancelled. Additionally, training revenues have declined significantly due to a reluctance on the part of students to travel in the aftermath of September 11. OTHER OPERATIONS Other operations experienced a pre-tax operating loss of $115,000 for the first quarter of 2002 compared to a loss of $31,000 for the first quarter of last year. The results for 2002 include the operations of five water businesses that were purchased after the first quarter of 2001.
- ------------------------------------------------------------------------------------------------ FOR THE THREE MONTHS ENDED MARCH 31, 2002 2001 CHANGE - ------------------------------------------------------------------------------------------------ Revenue. . . . . . . . . . . . . . . . . . . . . . . $ 2,774,144 $ 1,712,743 $ 1,061,401 Cost of sales. . . . . . . . . . . . . . . . . . . . 1,124,885 748,563 376,322 - ----------------------------------------------------- ------------ ------------ ------------- Gross margin . . . . . . . . . . . . . . . . . . . . 1,649,259 964,180 685,079 Operations & maintenance . . . . . . . . . . . . . . 1,391,673 708,620 683,053 Depreciation & amortization. . . . . . . . . . . . . 252,646 198,916 53,730 Other taxes. . . . . . . . . . . . . . . . . . . . . 120,396 87,987 32,409 - ----------------------------------------------------- ------------ ------------ ------------- Pre-tax operating expenses . . . . . . . . . . . . . 1,764,715 995,523 769,192 - ----------------------------------------------------- ------------ ------------ ------------- Total Pre-tax Operating Loss . . . . . . . . . . . . $ (115,456) $ (31,343) $ (84,113) ===================================================== ============ ============ =============
The increases in all categories reflect the addition of new water businesses. Pre-tax operating income dropped $84,000 due to increased expenses associated with building a corporate infrastructure and developing and implementing uniform operating controls and procedures for the group. There have also been some relocations and additions of operating locations for the businesses. OPERATING INCOME TAXES Operating income taxes were lower due to the decrease in operating income for the current quarter. INTEREST EXPENSE Interest expense for the first three months of 2002 decreased approximately $201,000, or 14%, over the same period in 2001. The decrease was due primarily to a reduction in the average interest rate for short-term borrowing from 6.17%for the first quarter of 2001 to 2.36% for the same period in 2002. A reduction in the average long-term debt balance of $2.5 million due to scheduled repayments also contributed to this reduction. These factors were partially offset by an increase in the average short-term debt balance from $24.4 million in 2001 to $37.7 million in 2002. ENVIRONMENTAL MATTERS The Company continues to work with federal and state environmental agencies to assess the environmental impact and explore options for corrective action at three former gas manufacturing plant sites (see Note 3 to the Consolidated Financial Statements). The Company believes that future costs associated with these sites will be recoverable in rates or through sharing arrangements with, or contributions by, other responsible parties. The Maryland Department of the Environment ("MDE") submitted a letter to Chesapeake and two other parties requesting that the parties enter into an Administrative Consent Order for cleanup of contamination at the Todd Seafood property located in Cambridge, Maryland. The outcome of this matter cannot be determined at this time. See Note 3 to the Consolidated Financial Statements for further information. OTHER MATTERS REGULATORY MATTERS The Company's natural gas distribution operations are subject to regulation by the Delaware, Maryland and Florida Public Service Commissions, while the natural gas transmission operation is subject to regulation by the Federal Energy Regulatory Commission ("FERC"). On August 2, 2001, the Delaware Division filed a general rate increase application. Interim rates, subject to refund went into effect on October 1, 2001. A settlement agreement was approved in April 2002 by the Delaware Public Service Commission that should result in an increase in rates of approximately $380,000 per year. On October 31, 2001, Eastern Shore, the Company's natural gas transmission subsidiary, filed a rate change with the FERC pursuant to the requirements of Article XII of the Stipulation and Agreement dated August 1, 1997. Eastern Shore's filing proposed a change in base rates for firm transportation services. On November 30, 2001, the Commission issued an Order, which accepted and suspended the effectiveness of the rates until May 1, 2002 subject to refund and the outcome of a hearing. A pre-hearing conference was held on December 18, 2001 and the hearing was scheduled for September 24, 2002. Discovery related to the rate proceeding began in January 2002 with FERC Staff data requests. The outcome of the proceedings is uncertain. The Florida Division filed tariff revisions on March 29, 2002 to complete the unbundling process by requiring all customers, including residential, to migrate to transportation service and authorize the Florida Division to exit the merchant function. Transportation services are currently available to all non-residential customers. The Florida Public Service Commission has requested that the Company hold customer meetings to allow for an opportunity for comments by our customers. These meetings are scheduled for June 25 and 26 at four locations in our service territory. At this time, the outcome of the petition cannot be determined. COMPETITION The Company's natural gas operations compete with other forms of energy including electricity, oil and propane. The principal competitive factors are price, and to a lesser extent, accessibility. The Company's natural gas distribution operations have several large volume industrial customers that have the capacity to use fuel oil as an alternative to natural gas. When oil prices decline, these interruptible customers convert to oil to satisfy their fuel requirements. Lower levels in interruptible sales occur when oil prices are lower relative to the price of natural gas. Oil prices, as well as the prices of electricity and other fuels are subject to fluctuation for a variety of reasons; therefore, future competitive conditions are not predictable. To address this uncertainty, the Company uses flexible pricing arrangements on both the supply and sales side of its business to maximize sales volumes. As a result of the transmission business' conversion to open access, this business has shifted from providing competitive sales service to providing transportation and contract storage services. The Company's natural gas distribution operations located in Maryland, Delaware and Florida began offering transportation services to certain industrial customers during 1998, 1997 and 1994, respectively. In 2001, the Florida operation extended transportation service to commercial customers. With transportation services now available on the Company's distribution systems, the Company is competing with third party suppliers to sell gas to industrial customers. The Company's competitors include the interstate transmission company if the distribution customer is located close enough to the transmission company's pipeline to make a connection economically feasible. The customers at risk are usually large volume commercial and industrial customers with the financial resources and capability to bypass the distribution operations in this manner. In certain situations, the distribution operations may adjust services and rates for these customers to retain their business. The Company expects to continue to expand the availability of transportation services to additional classes of distribution customers in the future. The Company established a natural gas brokering and supply operation in Florida in 1994 to compete for customers eligible for transportation services. The Company's propane distribution operations compete with several other propane distributors in their service territories, primarily on the basis of service and price. Competitors include several large national propane distribution companies, as well as an increasing number of local suppliers. Some of these competitors have pricing strategies designed to acquire market share. The Company's advanced information services segment faces competition from a number of competitors, many of which have greater resources available to them than those of the Company. This segment competes on the basis of technological expertise, reputation and price. The water businesses face competition from a variety of national and local suppliers of water conditioning and treatment services and bottled water. INFLATION Inflation affects the cost of labor, products and services required for operation, maintenance and capital improvements. While the impact of inflation has remained low in recent years, natural gas and propane prices are subject to rapid fluctuations. Fluctuations in natural gas prices are passed on to customers through the gas cost recovery mechanism in the Company's tariffs. To help cope with the effects of inflation on its capital investments and returns, the Company seeks rate relief from regulatory commissions for regulated operations while monitoring the returns of its unregulated business operations. To compensate for fluctuations in propane gas prices, the Company adjusts its propane selling prices to the extent allowed by the market. CAUTIONARY STATEMENT Chesapeake has made statements in this report that are considered to be forward-looking statements. These statements are not matters of historical fact. Sometimes they contain words such as "believes," "expects," "intends," "plans," "will," or "may," and other similar words of a predictive nature. These statements relate to matters such as customer growth, changes in revenues or margins, capital expenditures, environmental remediation costs, regulatory approvals, market risks associated with the Company's propane marketing operation, competition and other matters. It is important to understand that these forward-looking statements are not guarantees, but are subject to certain risks and uncertainties and other important factors that could cause actual results to differ materially from those in the forward-looking statements. These factors include, among other things: - - the temperature sensitivity of the natural gas and propane businesses; - - the wholesale prices of natural gas and propane and market movements in these prices; - - the effects of competition on the Company's unregulated and regulated businesses; - - the effect of changes in federal, state or local regulatory requirements, including deregulation; - - the ability of the Company's new and planned facilities and acquisitions to generate expected revenues; and - - the Company's ability to obtain the rate relief and cost recovery requested from utility regulators and the timing of the requested regulatory actions. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Market risk represents the potential loss arising from adverse changes in market rates and prices. The Company's long-term debt consists of first mortgage bonds, senior notes and convertible debentures with fixed interest rates, none of which was entered into for trading purposes. The carrying value of this long-term debt at March 31, 2002 was $50.1 million, with a fair value of $54.7 million, based mainly on current market prices or discounted cash flows using current rates for similar issues with similar terms and remaining maturities. The Company is exposed to changes in interest rates due to the use of fixed rate long-term debt to finance the business. Management continually monitors fluctuations in interest rates and debt markets to assess the benefits of changing the mix of long and short-term debt or refinancing existing debt. The Company's propane distribution business is exposed to market risk as a result of propane storage activities and entering into fixed price contracts for supply. The Company can store up to approximately 4 million gallons of propane during the winter season to meet its customers' peak requirements and to serve metered customers. Decreases in the wholesale price of propane may cause the value of stored propane to decline. The Company's propane marketing operation is a party to natural gas liquids ("NGL") forward contracts, primarily propane contracts, with various third parties. These contracts require that the propane marketing operation purchase or sell NGL at a fixed price at fixed future dates. At expiration, the contracts are settled by the delivery of NGL to the Company or the counter party. The propane wholesale marketing operation also enters into futures contracts that are traded on the New York Mercantile Exchange. In certain cases, the futures contracts are settled by the payment of a net amount equal to the difference between the current market price of the futures contract and the original contract price. The forward and futures contracts are entered into for trading and wholesale marketing purposes. The propane marketing business is subject to commodity price risk on its open positions to the extent that market prices for NGL deviate from fixed contract settlement prices. Market risk associated with the trading of futures and forward contracts are monitored daily for compliance with the Company's Risk Management Policy, which includes volumetric limits for open positions. To manage exposures to changing market prices, open positions are marked up or down to market prices and reviewed by oversight officials on a daily basis. Additionally, the Risk Management Committee reviews periodic reports on market and credit risk, approves any exceptions to the Risk Management Policy (within limits established by the Board of Directors) and authorizes the use of any new types of contracts. Quantitative information on forward and futures contracts at March 31, 2002 is presented in the following table. All of the contracts mature within twelve months.
- ------------------------------------------------------------------ QUANTITY ESTIMATED WEIGHTED AVERAGE AT MARCH 31, 2002 IN GALLONS MARKET PRICES CONTRACT PRICES - ------------------------------------------------------------------ FORWARD CONTRACTS Sale. . . . . . . 7,946,400 $0.4050 - $0.4200 $ 0.3645 Purchase. . . . . 5,418,000 $0.4050 - $0.4200 $ 0.3895 FUTURES CONTRACTS Sale. . . . . . . 210,000 $0.4050 - $0.4200 $ 0.3985 Purchase. . . . . 1,092,000 $0.4050 - $0.4200 $ 0.3439 - ------------------------------------------------------------------ Estimated market prices and weighted average contract prices are in dollars per gallon.
PART II - OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS See Note 3 to the Consolidated Financial Statements ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS None ITEM 3. DEFAULTS UPON SENIOR SECURITIES None ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None ITEM 5. OTHER INFORMATION None ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 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/ Michael P. McMasters - --------------------------- Michael P. McMasters Vice President, Treasurer and Chief Financial Officer Date: May 15, 2002 -----END PRIVACY-ENHANCED MESSAGE-----