-----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, P5nXpXn4NKBexaCQ6KLaJeJBl0V3JcGpD+9dmndPgnY5g/s7XuVbfmPh8ysFM/T3 WMoCg/61PB9DR0IvlQq0+A== 0000019745-04-000020.txt : 20041110 0000019745-04-000020.hdr.sgml : 20041110 20041109170916 ACCESSION NUMBER: 0000019745-04-000020 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 20040930 FILED AS OF DATE: 20041109 DATE AS OF CHANGE: 20041109 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: 041130487 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 doc1.txt CHESAPEAKE 3RD QTR 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: September 30, 2004 ------------------ OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ______ to ______ COMMISSION FILE NUMBER: 001-11590 CHESAPEAKE UTILITIES CORPORATION -------------------------------- (Exact name of registrant as specified in its charter) DELAWARE 51-0064146 -------- ---------- (State or other (I.R.S. Employer jurisdiction of Identification No.) incorporation or organization) 909 SILVER LAKE BOULEVARD, DOVER, DELAWARE 19904 ------------------------------------------------ (Address of principal executive offices, including Zip Code) (302) 734-6799 -------------- (Registrant's Telephone Number, including Area Code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes [X] No [ ] Common Stock, par value $.4867 - 5,711,725 shares issued as of September 30. 2004. TABLE OF CONTENTS PART I - FINANCIAL INFORMATION. . . . . . . . . . . . . . . . . . . . . . 1 Item 1. Financial Statements. . . . . . . . . . . . . . . . . . . . . 1 Notes to Condensed Consolidated Financial Statements . . . . . . . . 7 1. Quarterly Financial Data . . . . . . . . . . . . . . . . . . . . 7 2. Calculation of Earnings Per Share. . . . . . . . . . . . . . . 9 3. Commitments and Contingencies. . . . . . . . . . . . . . . . . . 9 Environmental Matters . . . . . . . . . . . . . . . . . . . . . 9 Other Commitments and Contingencies . . . . . . . . . . . . .11 4. Recent Authoritative Pronouncements on Financial Reporting and Accounting. . . . . . . . . . . . .12 5. Segment Information . . . . . . . . . . . . . . . . . . . . . . .13 6. Discontinued Operations . . . . . . . . . . . . . . . . . . . . .14 7. Employee Benefit Plans . . . . . . . . . . . . . . . . . . . . .15 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations. . . . . . . . . . . .16 Business Description . . . . . . . . . . . . . . . . . . . . . . . . .16 Financial Position, Liquidity and Capital Resources . . . . . . . . .16 Off-Balance Sheet Arrangements and Contractual Obligations. . . . . . .18 Results of Operations for the Quarter Ended September 30, 2004 . . . . . . . . . . . . . . . . . . . . . . .19 Consolidated Overview. . . . . . . . . . . . . . . . . . . . . . . . .19 Natural Gas Distribution and Transmission . . . . . . . . . . . . .20 Propane. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20 Advanced Information Services. . . . . . . . . . . . . . . . . . . . 21 Other Business Operations and Eliminations . . . . . . . . . . . . 21 Discontinued Operations . . . . . . . . . . . . . . . . . . . . . . . 22 Income Taxes. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22 Interest Expense. . . . . . . . . . . . . . . . . . . . . . . . . . . 22 Results of Operations for the Nine Months Ended September 30, 2004 . . . . . . . . . . . . . . . . . . . . . . .23 Consolidated Overview. . . . . . . . . . . . . . . . . . . . . . . . .23 Natural Gas Distribution and Transmission . . . . . . . . . . . . .24 Propane. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25 Advanced Information Services. . . . . . . . . . . . . . . . . . . . 25 Other Business Operations and Eliminations . . . . . . . . . . . . 26 Discontinued Operations . . . . . . . . . . . . . . . . . . . . . . . 26 Income Taxes. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26 Interest Expense. . . . . . . . . . . . . . . . . . . . . . . . . . . 26 Environmental Matters . . . . . . . . . . . . . . . . . . . . . . . . 26 Other Matters . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27 Regulatory Matters. . . . . . . . . . . . . . . . . . . . . . . . . . 27 Competition. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28 Recent Pronouncements . . . . . . . . . . . . . . . . . . . . . . . . 29 Inflation. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30 Cautionary Statement. . . . . . . . . . . . . . . . . . . . . . . . . 30 Item 3. Quantitative and Qualitative Disclosures about Market Risk. . 30 Item 4. Controls and Procedures. . . . . . . . . . . . . . . . . . .31 Evaluation of Disclosure Controls and Procedures. . . . . . . . . 31 Changes in Internal Control Over Financial Reporting . . . . . . 31 PART II - OTHER INFORMATION. . . . . . . . . . . . . . . . . . . . . . . 32 SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33 EXHIBIT 31.1. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34 EXHIBIT 31.2. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35 EXHIBIT 32.1. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36 EXHIBIT 32.2. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37 PART I - FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS CHESAPEAKE UTILITIES CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
- -------------------------------------------------------------------------------- 2004 2003 FOR THE THREE MONTHS ENDED SEPTEMBER 30, RESTATED - -------------------------------------------------------------------------------- OPERATING REVENUES. . . . . . . . . . . . . . . . $ 26,613,333 $ 23,448,989 OPERATING EXPENSES Cost of sales, excluding costs below. . . . . . . 14,792,677 12,433,234 Operations. . . . . . . . . . . . . . . . . . . . 8,214,240 7,716,075 Maintenance . . . . . . . . . . . . . . . . . . . 459,917 440,319 Depreciation and amortization . . . . . . . . . . 1,842,485 1,767,211 Other taxes . . . . . . . . . . . . . . . . . . . 1,021,276 939,515 - -------------------------------------------------------------------------------- Total operating expenses. . . . . . . . . . . . . 26,330,595 23,296,354 - -------------------------------------------------------------------------------- OPERATING INCOME. . . . . . . . . . . . . . . . . 282,738 152,635 OTHER INCOME NET OF OTHER EXPENSES. . . . . . . . 38,357 (24,869) INTEREST CHARGES. . . . . . . . . . . . . . . . . 1,325,397 1,419,887 - -------------------------------------------------------------------------------- LOSS BEFORE INCOME TAXES. . . . . . . . . . . . . (1,004,302) (1,292,121) INCOME TAX BENEFIT. . . . . . . . . . . . . . . . (420,131) (582,328) - -------------------------------------------------------------------------------- LOSS FROM CONTINUING OPERATIONS . . . . . . . . . (584,171) (709,793) NET LOSS FROM DISCONTINUED OPERATIONS NET OF TAX OF $39,795 AND $80,823, RESPECTIVELY . . . . . . . . . . . . . (72,041) (150,131) - -------------------------------------------------------------------------------- NET LOSS . . . . . . . . . . . . . . . . . . . . . $ (656,212) $ (859,924) ================================================================================ LOSS PER SHARE OF COMMON STOCK: BASIC FROM CONTINUING OPERATIONS. . . . . . . . . . . $ (0.10) $ (0.13) FROM DISCONTINUED OPERATIONS. . . . . . . . . . (0.01) (0.02) - -------------------------------------------------------------------------------- NET LOSS. . . . . . . . . . . . . . . . . . . . . $ (0.11) $ (0.15) ================================================================================ DILUTED FROM CONTINUING OPERATIONS. . . . . . . . . . . $ (0.10) $ (0.13) FROM DISCONTINUED OPERATIONS. . . . . . . . . . (0.01) (0.02) - -------------------------------------------------------------------------------- NET LOSS. . . . . . . . . . . . . . . . . . . . . $ (0.11) $ (0.15) ================================================================================ CASH DIVIDENDS DECLARED PER SHARE OF COMMON STOCK $ 0.280 $ 0.275 ================================================================================ The accompanying notes are an integral part of these financial statements.
CHESAPEAKE UTILITIES CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
- -------------------------------------------------------------------------------- 2004 2003 FOR THE NINE MONTHS ENDED SEPTEMBER 30, RESTATED - -------------------------------------------------------------------------------- OPERATING REVENUES. . . . . . . . . . . . . . . . $124,668,665 $117,193,427 OPERATING EXPENSES Cost of sales, excluding costs below. . . . . . . 75,430,921 67,750,838 Operations. . . . . . . . . . . . . . . . . . . . 26,009,404 24,349,024 Maintenance . . . . . . . . . . . . . . . . . . . 1,256,054 1,290,591 Depreciation and amortization . . . . . . . . . . 5,464,279 5,294,439 Other taxes . . . . . . . . . . . . . . . . . . . 3,363,168 3,183,205 - -------------------------------------------------------------------------------- Total operating expenses. . . . . . . . . . . . . 111,523,826 101,868,097 - -------------------------------------------------------------------------------- OPERATING INCOME. . . . . . . . . . . . . . . . . 13,144,839 15,325,330 OTHER INCOME NET OF OTHER EXPENSES. . . . . . . . 215,051 63,289 INTEREST CHARGES. . . . . . . . . . . . . . . . . 3,980,395 4,314,742 - -------------------------------------------------------------------------------- INCOME BEFORE INCOME TAXES. . . . . . . . . . . . 9,379,495 11,073,877 INCOME TAXES. . . . . . . . . . . . . . . . . . . 3,578,614 4,212,031 - -------------------------------------------------------------------------------- INCOME FROM CONTINUING OPERATIONS . . . . . . . . 5,800,881 6,861,846 NET LOSS FROM DISCONTINUED OPERATIONS NET OF TAX OF $47,052 AND $168,442, RESPECTIVELY . . . . . . . . . . . . (87,228) (312,846) - -------------------------------------------------------------------------------- NET INCOME. . . . . . . . . . . . . . . . . . . . $ 5,713,653 $ 6,549,000 ================================================================================ EARNINGS PER SHARE OF COMMON STOCK: BASIC FROM CONTINUING OPERATIONS. . . . . . . . . . . $ 1.01 $ 1.23 FROM DISCONTINUED OPERATIONS. . . . . . . . . . (0.01) (0.06) - -------------------------------------------------------------------------------- NET INCOME. . . . . . . . . . . . . . . . . . . . $ 1.00 $ 1.17 ================================================================================ DILUTED FROM CONTINUING OPERATIONS. . . . . . . . . . . $ 1.00 $ 1.21 FROM DISCONTINUED OPERATIONS. . . . . . . . . . (0.01) (0.06) - -------------------------------------------------------------------------------- NET INCOME. . . . . . . . . . . . . . . . . . . . $ 0.99 $ 1.15 ================================================================================ CASH DIVIDENDS DECLARED PER SHARE OF COMMON STOCK $ 0.835 $ 0.825 ================================================================================ The accompanying notes are an integral part of these financial statements.
CHESAPEAKE UTILITIES CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
- ------------------------------------------------------------------------------------------ 2004 2003 FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2004 RESTATED - ------------------------------------------------------------------------------------------ OPERATING ACTIVITIES Net Income . . . . . . . . . . . . . . . . . . . . . . . . $ 5,713,653 $ 6,549,000 Adjustments to reconcile net income to net operating cash: Depreciation and amortization. . . . . . . . . . . . . . 5,464,279 5,294,439 Depreciation and accretion included in other costs . . . 1,941,301 2,511,274 Deferred income taxes, net . . . . . . . . . . . . . . . 2,617,520 2,991,995 Mark-to-market adjustments . . . . . . . . . . . . . . . (235,341) 604,652 Employee benefits and compensation . . . . . . . . . . . 351,637 756,051 Other. . . . . . . . . . . . . . . . . . . . . . . . . . (13,072) 143,751 Changes in assets and liabilities: Accounts receivable and accrued revenue. . . . . . . . . 3,003,200 7,901,412 Inventory, materials, supplies and storage gas . . . . . (5,283,627) (2,720,339) Prepaid expenses and other current assets. . . . . . . . (1,206,314) 377,458 Other deferred charges . . . . . . . . . . . . . . . . . 700,596 662,799 Accounts payable, net. . . . . . . . . . . . . . . . . . 2,370,018 (7,262,452) Refunds payable to customers . . . . . . . . . . . . . . 245,305 (213,473) Accrued income taxes . . . . . . . . . . . . . . . . . . 316,834 (2,564,919) Accrued interest . . . . . . . . . . . . . . . . . . . . 1,001,174 1,021,253 Accrued compensation . . . . . . . . . . . . . . . . . . (922,332) 564,269 Over (under) recovered deferred purchased gas costs. . . (547,345) (1,264,072) Other current liabilities. . . . . . . . . . . . . . . . 2,281,799 (340,367) Other liabilities . . . . . . . . . . . . . . . . . . . (73,960) 444,596 - ------------------------------------------------------------------------------------------ Net cash provided by operating activities. . . . . . . . . . 17,725,325 15,457,327 - ------------------------------------------------------------------------------------------ INVESTING ACTIVITIES Property, plant and equipment expenditures, net. . . . . . (12,067,921) (7,690,164) Sale of discontinued operations. . . . . . . . . . . . . . 65,998 886,920 Environmental recoveries, net of expenditures. . . . . . . 309,506 1,986,312 - ------------------------------------------------------------------------------------------ Net cash used by investing activities. . . . . . . . . . . . (11,692,417) (4,816,932) - ------------------------------------------------------------------------------------------ FINANCING ACTIVITIES Common stock dividends . . . . . . . . . . . . . . . . . . (4,730,235) (4,597,554) Issuance of stock: Dividend Reinvestment Plan optional cash . . . . . . . . 136,727 248,533 Dividends reinvested by stockholders . . . . . . . . . . 619,873 552,409 Retirement Savings Plan. . . . . . . . . . . . . . . . . 815,970 691,378 Conversion of debentures . . . . . . . . . . . . . . . . 262,543 238,642 Purchase of treasury stock . . . . . . . . . . . . . . . . (193,625) 13,031 Net repayment under line of credit agreements. . . . . . . (3,515,258) (7,000,000) Repayment of long-term debt. . . . . . . . . . . . . . . . (1,641,000) (1,896,975) - ------------------------------------------------------------------------------------------ Net cash used by financing activities. . . . . . . . . . . . (8,245,005) (11,750,536) - ------------------------------------------------------------------------------------------ NET DECREASE IN CASH AND CASH EQUIVALENTS. . . . . . . . . . (2,212,097) (1,110,141) CASH AND CASH EQUIVALENTS BEGINNING OF PERIOD. . . . . . . . 3,108,501 2,458,276 - ------------------------------------------------------------------------------------------ CASH AND CASH EQUIVALENTS END OF PERIOD. . . . . . . . . . . $ 896,404 $ 1,348,135 ========================================================================================== The accompanying notes are an integral part of these financial statements.
CHESAPEAKE UTILITIES CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
- ----------------------------------------------------------------------------------------- SEPTEMBER 30, DECEMBER 31, ASSETS 2004 2003 - ----------------------------------------------------------------------------------------- PROPERTY, PLANT AND EQUIPMENT Natural gas distribution and transmission . . . . . . $ 192,163,601 $ 186,661,469 Propane . . . . . . . . . . . . . . . . . . . . . . . 37,067,539 35,577,104 Advanced information services . . . . . . . . . . . . 1,443,183 1,396,595 Water services. . . . . . . . . . . . . . . . . . . . 774,825 762,383 Other plant . . . . . . . . . . . . . . . . . . . . . 8,955,365 8,796,305 - ----------------------------------------------------------------------------------------- Total property, plant and equipment . . . . . . . . . 240,404,513 233,193,856 Plus: Construction work in progress. . . . . . . . . 4,886,019 1,724,721 Less: Accumulated depreciation and amortization. . . (71,662,393) (67,046,318) - ----------------------------------------------------------------------------------------- Net property, plant and equipment . . . . . . . . . . 173,628,139 167,872,259 - ----------------------------------------------------------------------------------------- INVESTMENTS . . . . . . . . . . . . . . . . . . . . . . 355,564 386,710 - ----------------------------------------------------------------------------------------- CURRENT ASSETS Cash and cash equivalents . . . . . . . . . . . . . . 896,404 3,108,501 Accounts receivable (less allowance for uncollectibles of $743,643 and $659,047, respectively). . . . . . 25,636,244 26,191,845 Accrued revenue . . . . . . . . . . . . . . . . . . . 1,984,155 4,497,752 Materials and supplies, at average cost . . . . . . . 1,111,231 923,556 Appliance and other inventory, at FIFO. . . . . . . . 107,692 173,044 Propane inventory, at average cost. . . . . . . . . . 6,621,315 3,387,535 Storage gas prepayments . . . . . . . . . . . . . . . 6,550,125 4,622,601 Underrecovered purchased gas costs. . . . . . . . . . 1,252,678 660,601 Income taxes receivable . . . . . . . . . . . . . . . 486,868 489,841 Prepaid expenses. . . . . . . . . . . . . . . . . . . 3,551,629 2,069,988 Other current assets. . . . . . . . . . . . . . . . . 728,971 768,958 - ----------------------------------------------------------------------------------------- Total current assets. . . . . . . . . . . . . . . . . . 48,927,312 46,894,222 - ----------------------------------------------------------------------------------------- DEFERRED CHARGES AND OTHER ASSETS Environmental regulatory assets . . . . . . . . . . . 297,001 353,092 Environmental expenditures. . . . . . . . . . . . . . 54,581 364,088 Goodwill. . . . . . . . . . . . . . . . . . . . . . . 674,451 674,451 Other intangible assets, net. . . . . . . . . . . . . 248,218 305,213 Long-term receivables . . . . . . . . . . . . . . . . 1,258,771 1,637,998 Other regulatory assets . . . . . . . . . . . . . . . 1,303,835 1,693,401 Other deferred charges. . . . . . . . . . . . . . . . 976,914 983,230 - ----------------------------------------------------------------------------------------- Total deferred charges and other assets . . . . . . . . 4,813,771 6,011,473 - ----------------------------------------------------------------------------------------- TOTAL ASSETS. . . . . . . . . . . . . . . . . . . . . . $ 227,724,786 $ 221,164,664 ========================================================================================= The accompanying notes are an integral part of these financial statements.
CHESAPEAKE UTILITIES CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
- ----------------------------------------------------------------------------------------- SEPTEMBER 30, DECEMBER 31, CAPITALIZATION AND LIABILITIES 2004 2003 - ----------------------------------------------------------------------------------------- CAPITALIZATION Stockholders' equity Common Stock, par value $.4867 per share (1). . . . $ 2,803,013 $ 2,754,748 Additional paid-in capital. . . . . . . . . . . . . 36,402,351 34,176,361 Retained earnings . . . . . . . . . . . . . . . . . 36,917,229 36,008,246 Accumulated other comprehensive income. . . . . . . (488,853) - Deferred compensation obligation. . . . . . . . . . 802,391 913,689 Treasury stock. . . . . . . . . . . . . . . . . . . (996,016) (913,689) - ----------------------------------------------------------------------------------------- Total stockholders' equity. . . . . . . . . . . . . . 75,440,115 72,939,355 Long-term debt, net of current maturities . . . . . . 68,152,546 69,415,545 - ----------------------------------------------------------------------------------------- Total capitalization. . . . . . . . . . . . . . . . . . 143,592,661 142,354,900 - ----------------------------------------------------------------------------------------- CURRENT LIABILITIES Current portion of long-term debt . . . . . . . . . . 3,287,091 3,665,091 Short-term borrowing. . . . . . . . . . . . . . . . . - 3,515,258 Accounts payable. . . . . . . . . . . . . . . . . . . 24,367,430 21,997,413 Refunds payable to customers. . . . . . . . . . . . . 451,887 206,582 Customer deposits . . . . . . . . . . . . . . . . . . 2,024,984 2,008,379 Accrued interest. . . . . . . . . . . . . . . . . . . 1,653,541 652,367 Dividends payable . . . . . . . . . . . . . . . . . . 1,612,590 1,556,631 Overrecovered purchased gas costs . . . . . . . . . . 44,732 - Deferred income taxes payable . . . . . . . . . . . . 92,865 119,814 Accrued compensation. . . . . . . . . . . . . . . . . 2,277,255 3,266,072 Other accrued liabilities . . . . . . . . . . . . . . 3,922,716 1,657,523 - ----------------------------------------------------------------------------------------- Total current liabilities . . . . . . . . . . . . . . . 39,735,091 38,645,130 - ----------------------------------------------------------------------------------------- DEFERRED CREDITS AND OTHER LIABILITIES Deferred income taxes . . . . . . . . . . . . . . . . 22,235,464 19,590,995 Deferred investment tax credits . . . . . . . . . . . 451,613 492,725 Environmental liabilities . . . . . . . . . . . . . . 478,106 562,194 Accrued pension costs . . . . . . . . . . . . . . . . 2,796,821 2,015,128 Accrued asset removal cost. . . . . . . . . . . . . . 14,572,753 13,536,209 Other liabilities . . . . . . . . . . . . . . . . . . 3,862,277 3,967,383 - ----------------------------------------------------------------------------------------- Total deferred credits and other liabilities. . . . . . 44,397,034 40,164,634 - ----------------------------------------------------------------------------------------- COMMITMENTS AND CONTINGENCIES (NOTE 3) TOTAL CAPITALIZATION AND LIABILITIES. . . . . . . . . . $ 227,724,786 $ 221,164,664 ========================================================================================= (1) At September 30, 2004 there were 12 million shares authorized; 5,759,405 issued and 5,711,725 outstanding. At December 31, 2003 there were 12 million shares authorized; 5,660,594 issued and 5,612,935 outstanding. The accompanying notes are an integral part of these financial statements.
CHESAPEAKE UTILITIES CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (UNAUDITED)
- ------------------------------------------------------------------------------------------------- FOR THE NINE FOR THE TWELVE MONTHS ENDED MONTHS ENDED SEPTEMBER 30, DECEMBER 31, 2004 2003 - ------------------------------------------------------------------------------------------------- COMMON STOCK Balance beginning of period . . . . . . . . . . . . . . . . . $ 2,754,748 $ 2,694,935 Dividend Reinvestment Plan. . . . . . . . . . . . . . . . . 14,918 24,888 Retirement Savings Plan . . . . . . . . . . . . . . . . . . 16,208 21,047 Conversion of debentures. . . . . . . . . . . . . . . . . . 7,516 9,144 Performance shares and options exercised. . . . . . . . . . 9,623 4,734 - ------------------------------------------------------------------------------------------------- Balance end of period . . . . . . . . . . . . . . . . . . . . 2,803,013 2,754,748 - ------------------------------------------------------------------------------------------------- ADDITIONAL PAID-IN CAPITAL Balance beginning of period . . . . . . . . . . . . . . . . . 34,176,361 31,756,983 Dividend Reinvestment Plan. . . . . . . . . . . . . . . . . 741,682 1,066,386 Retirement Savings Plan . . . . . . . . . . . . . . . . . . 799,761 899,475 Conversion of debentures. . . . . . . . . . . . . . . . . . 255,027 310,293 Performance shares and options exercised. . . . . . . . . . 429,520 143,224 - ------------------------------------------------------------------------------------------------- Balance end of period . . . . . . . . . . . . . . . . . . . . 36,402,351 34,176,361 - ------------------------------------------------------------------------------------------------- RETAINED EARNINGS Balance beginning of period . . . . . . . . . . . . . . . . . 36,008,246 32,898,283 Net income. . . . . . . . . . . . . . . . . . . . . . . . . 5,713,653 9,291,876 Cash dividends (1). . . . . . . . . . . . . . . . . . . . . (4,804,670) (6,181,913) - ------------------------------------------------------------------------------------------------- Balance end of period . . . . . . . . . . . . . . . . . . . . 36,917,229 36,008,246 - ------------------------------------------------------------------------------------------------- ACCUMULATED OTHER COMPREHENSIVE INCOME Balance beginning of period . . . . . . . . . . . . . . . . . - - Minimum pension liability adjustment. . . . . . . . . . . . (488,853) - - ------------------------------------------------------------------------------------------------- Balance end of period . . . . . . . . . . . . . . . . . . . . (488,853) - - ------------------------------------------------------------------------------------------------- DEFERRED COMPENSATION OBLIGATION Balance beginning of period . . . . . . . . . . . . . . . . . 913,689 711,109 New deferrals . . . . . . . . . . . . . . . . . . . . . . . 283,137 202,580 Pay out of deferred compensation. . . . . . . . . . . . . . (394,435) - - ------------------------------------------------------------------------------------------------- Balance end of period . . . . . . . . . . . . . . . . . . . . 802,391 913,689 - ------------------------------------------------------------------------------------------------- TREASURY STOCK Balance beginning of period . . . . . . . . . . . . . . . . . (913,689) (711,109) Purchase of treasury stock. . . . . . . . . . . . . . . . . (283,137) (202,580) Distribution of treasury stock. . . . . . . . . . . . . . . 200,810 - - ------------------------------------------------------------------------------------------------- Balance end of period . . . . . . . . . . . . . . . . . . . . (996,016) (913,689) - ------------------------------------------------------------------------------------------------- TOTAL STOCKHOLDERS' EQUITY . . . . . . . . . . . . . . . . . . $ 75,440,115 $ 72,939,355 ================================================================================================= (1) Cash dividends declared per share for the nine months ended September 30, 2004 and the year 2003 were $0.83 and $1.10, respectively. STATEMENT OF COMPREHENSIVE INCOME (UNAUDITED) - ------------------------------------------------------------------------------------------------- Net Income. . . . . . . . . . . . . . . . . . . . . . . . . . $ 5,713,653 $ 9,291,876 Minimum pension liability adjustment, net of tax of $313,861. (488,853) - - ------------------------------------------------------------------------------------------------- COMPREHENSIVE INCOME . . . . . . . . . . . . . . . . . . . . . $ 5,224,800 $ 9,291,876 =================================================================================================
- ------------------------------------------------------------------------------------------------- FOR THE NINE FOR THE TWELVE MONTHS ENDED MONTHS ENDED SEPTEMBER 30, DECEMBER 31, 2004 2003 - ------------------------------------------------------------------------------------------------- COMMON STOCK SHARES ISSUED (2) Balance beginning of period . . . . . . . . . . . . . . . . . 5,660,594 5,537,710 Dividend Reinvestment Plan (3). . . . . . . . . . . . . . . 30,652 51,125 Sale of stock to the Company's Retirement Savings Plan. . . 33,302 43,245 Conversion of debentures. . . . . . . . . . . . . . . . . . 15,443 18,788 Performance shares and options exercised. . . . . . . . . . 19,414 9,726 - ------------------------------------------------------------------------------------------------- Balance end of period (4) . . . . . . . . . . . . . . . . . . 5,759,405 5,660,594 ================================================================================================= (2) 12,000,000 shares are authorized at a par value of $0.4867 per share. (3) Includes dividends reinvested and optional cash payments. (4) The Company had 47,680 and 47,659 shares held in Rabbi Trusts at September 30, 2004 and at December 31, 2003. The accompanying notes are an integral part of these financial statements.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 1. QUARTERLY FINANCIAL DATA The financial information for Chesapeake Utilities Corporation (the "Company" or "Chesapeake") included herein is unaudited and should be read in conjunction with the Company's Annual Report on Form 10-K; however, the year-end balance sheet data has been derived from audited financial statements. In the opinion of management, this financial information reflects normal recurring adjustments which are necessary for a fair presentation of the Company's interim results. In accordance with United States Generally Accepted Accounting Principles, the Company's management makes certain estimates and assumptions regarding: 1) reported amounts of assets and liabilities, 2) disclosure of contingent assets and liabilities at the date of the financial statements and 3) reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Due to the seasonal nature of the Company's business, there are substantial variations in the results of operations reported on a quarterly basis and, accordingly, results for any particular quarter may not give a true indication of results for the year. As reported on the Company's December 31, 2003 Annual Report on Form 10-K, the Company has restated its quarterly financial statements for prior periods in order to reflect the results of its Delaware and Maryland natural gas divisions on the "accrual" revenue recognition method rather than the "as billed" revenue recognition method. This change had an insignificant effect on the Company's annual results for 2003. Under the "as billed" method, revenues from customer sales are not recognized until the meter is read. Under the "accrual" method, at the end of each period, the amount of gas used is estimated and is recognized as revenue. The Company's Florida division has historically used the "accrual" method in accordance with Florida Public Service Commission requirements. Prior to December 31, 2003, the Delaware and Maryland divisions used the "as billed" method to recognize revenues consistent with the rate-setting processes in those states. In order to consistently apply the "accrual" method, the Company met separately with the staffs of the Delaware and Maryland Public Service Commissions to determine the regulatory impact of the change. Having determined that there is little to no regulatory impact, the Company has conformed the revenue recognition method used in its Delaware and Maryland divisions to the method used by its Florida division. In order to provide comparable information, the Company has restated its 2003 quarterly interim financial statements to reflect the "accrual" revenue recognition method. Dollars are shown in thousands, except per share amounts.
- -------------------------------------------------------------------------------------------------------------------------------- ---------- THREE MONTHS ENDED ---------- ---------- NINE MONTHS ENDED ----------- SEPTEMBER 30, IMPACT OF SEPTEMBER 30, SEPTEMBER 30, IMPACT OF SEPTEMBER 30, 2003 REVENUE 2003 2003 REVENUE 2003 AS PREVIOUSLY RECOGNITION AS PREVIOUSLY RECOGNITION REPORTED (1) CHANGE AS RESTATED REPORTED (1) CHANGE AS RESTATED - -------------------------------------------------------------------------------------------------------------------------------- SELECTED INCOME STATEMENT INFORMATION Operating Revenues . . . . . . . . . . . $ 23,174 $ 275 $ 23,449 $ 119,334 $ (2,141) $ 117,193 Operating Income . . . . . . . . . . . . 144 9 153 15,977 (652) 15,325 Income from Continuing Operations. . . . (715) 5 (710) 7,252 (390) 6,862 Net Income . . . . . . . . . . . . . . . (865) 5 (860) 6,939 (390) 6,549 EARNINGS PER SHARE OF COMMON STOCK Basic From Continuing Operations . . . . . . . $ (0.13) $ 0.00 $ (0.13) $ 1.30 $ (0.07) $ 1.23 Net Income . . . . . . . . . . . . . . . $ (0.15) $ 0.00 $ (0.15) $ 1.24 $ (0.07) $ 1.17 Diluted From Continuing Operations . . . . . . . $ (0.13) $ 0.00 $ (0.13) $ 1.28 $ (0.07) $ 1.21 Net Income . . . . . . . . . . . . . . . $ (0.15) $ 0.00 $ (0.15) $ 1.22 $ (0.07) $ 1.15
- -------------------------------------------------------------------------------------- SEPTEMBER 30, IMPACT OF SEPTEMBER 30, 2003 REVENUE 2003 AS PREVIOUSLY RECOGNITION REPORTED (1) CHANGE AS RESTATED - -------------------------------------------------------------------------------------- Assets Accounts receivable and accrued revenue. $ 18,606 $ 1,156 $ 19,762 Unrecovered purchased gas costs. . . . . 2,744 (717) 2,027 Deferred income taxes. . . . . . . . . . 774 (467) 307 Income taxes . . . . . . . . . . . . . . 2,791 289 3,080 Other regulatory assets. . . . . . . . . 1,842 9 1,851 Stockholders' Equity Retained earnings. . . . . . . . . . . . $ 34,552 $ 270 $ 34,822 (1) Operating Revenue, Operating Income and Income from Continuing Operations exclude the results of the operations discontinued in 2003 and include minor reclassifications to conform with the presentation of the 2004 results.
2. CALCULATION OF EARNINGS PER SHARE
- -------------------------------------------------------------------------------------------------- -- THREE MONTHS ENDED -- -- NINE MONTHS ENDED -- 2004 2003 2004 2003 FOR THE PERIOD ENDED SEPTEMBER 30, RESTATED RESTATED - -------------------------------------------------------------------------------------------------- CALCULATION OF BASIC EARNINGS PER SHARE FROM CONTINUING OPERATIONS: Net income from continuing operations. . . . . $ (584,171) $ (709,793) $5,800,881 $6,861,846 Weighted average shares outstanding. . . . . . 5,752,623 5,626,202 5,723,178 5,595,981 - -------------------------------------------------------------------------------------------------- BASIC EARNINGS PER SHARE FROM CONTINUING OPERATIONS. . . . . . . . . . . . . $ (0.10) $ (0.13) $ 1.01 $ 1.23 ================================================================================================== CALCULATION OF DILUTED EARNINGS PER SHARE FROM CONTINUING OPERATIONS: RECONCILIATION OF NUMERATOR: ---------------------------- Net Income from continuing operations Basic. . $ (584,171) $ (709,793) $5,800,881 $6,861,846 Effect of 8.25% Convertible debentures * . . . - - 104,995 119,740 - -------------------------------------------------------------------------------------------------- Adjusted numerator Diluted . . . . . . . . . . $ (584,171) $ (709,793) $5,905,876 $6,981,586 - -------------------------------------------------------------------------------------------------- RECONCILIATION OF DENOMINATOR: ------------------------------ Weighted shares outstanding Basic. . . . . . . 5,752,623 5,626,202 5,723,178 5,595,981 Effect of dilutive securities * Stock options. . . . . . . . . . . . . . . . - - 1,793 634 Warrants . . . . . . . . . . . . . . . . . . - - 7,598 4,400 8.25% Convertible debentures . . . . . . . . - - 163,963 187,501 - -------------------------------------------------------------------------------------------------- Adjusted denominator Diluted . . . . . . . . . 5,752,623 5,626,202 5,896,532 5,788,516 - -------------------------------------------------------------------------------------------------- DILUTED EARNINGS PER SHARE FROM CONTINUING OPERATIONS. . . . . . . . . . . . . $ (0.10) $ (0.13) $ 1.00 $ 1.21 ================================================================================================== * Amounts associated with securities resulting in an anti-dilutive effect on earnings per share are not included in this calculation.
3. COMMITMENTS AND CONTINGENCIES ENVIRONMENTAL MATTERS In 2003, Chesapeake completed its responsibilities related to one former gas manufacturing plant site and is currently participating in the investigation, assessment or remediation of two other former gas manufacturing plant sites. These sites are located in three different jurisdictions. The Company has accrued liabilities for these three sites referred to respectively as the Dover Gas Light, Salisbury Town Gas Light and the Winter Haven Coal Gas sites. The Company is currently in discussions with the Maryland Department of the Environment ("MDE") regarding the possible responsibilities of the Company with respect to a fourth former gas manufacturing plant site in Cambridge, Maryland. Dover Gas Light Site - ----------------------- The Dover Gas Light site is a former manufactured gas plant site located in Dover, Delaware. On January 15, 2004, the Company received a Certificate of Completion of Work from the United States Environmental Protection Agency ("EPA") regarding this site. This concluded Chesapeake's remedial action obligation related to this site and relieves Chesapeake from liability for future remediation at the site, unless previously unknown conditions are discovered at the site, or information previously unknown to the EPA is received that indicates the remedial action that has been taken is not sufficiently protective. These contingencies are standard and are required by the United States in all liability settlements. At September 30, 2004, the Company had accrued $10,000 for costs associated with the Dover Gas Light site and had recorded an associated regulatory asset for the same amount. Through September 30, 2004, the Company has incurred approximately $9.7 million in costs relating to environmental testing and remedial action studies at the site. Approximately $9.6 million has been recovered through September 2004 from other parties or through rates. The unrecovered portion is recorded as a regulatory asset. Salisbury Town Gas Light Site - --------------------------------- In cooperation with the MDE, the Company has completed an assessment of the Salisbury manufactured gas plant site, located in Salisbury, Maryland, which determined that there was localized ground-water contamination. During 1996, the Company completed construction and began Air Sparging and Soil-Vapor Extraction ("AS/SVE") remediation procedures. Chesapeake has been reporting the remediation and monitoring results to the MDE on an ongoing basis since 1996. In February 2002, the MDE granted permission to permanently decommission the AS/SVE system and to discontinue all on-site and off-site well monitoring, except for one well that is being maintained for continued product monitoring and recovery. In November 2002, Chesapeake submitted a letter to the MDE requesting No Further Action ("NFA") determination. In December 2002, the MDE recommended that the Company submit work plans to MDE and place deed restrictions on the property as conditions prior to receiving an NFA. The Company has completed the MDE recommended work plans and has executed the deed restrictions. During the third quarter of 2003 the Company submitted a revised request for the NFA. The MDE has not yet responded to the request. The Company has adjusted the liability with respect to the Salisbury Town Gas Light site to $5,000 at September 30, 2004. This amount is based on the estimated costs to perform limited product monitoring and recovery efforts and fulfill ongoing reporting requirements. A corresponding regulatory asset has been recorded, reflecting the Company's belief that costs incurred will be recoverable in base rates. Through September 30, 2004, the Company has incurred approximately $2.9 million for remedial actions and environmental studies at the Salisbury Town Gas Light site. Of this amount, approximately $1.8 million has been recovered through insurance proceeds or in rates. The Company expects to recover the remaining costs through rates. Winter Haven Coal Gas Site - ------------------------------ The Winter Haven Coal Gas site is located in Winter Haven, Florida. Chesapeake has been working with the Florida Department of Environmental Protection ("FDEP") in assessing this coal gas site. In May 1996, the Company filed an Air Sparging and Soil Vapor Extraction Pilot Study Work Plan (the "Work Plan") for the Winter Haven site with the FDEP. The Work Plan described the Company's proposal to undertake an AS/SVE pilot study to evaluate the site. After discussions with the FDEP, the Company filed a modified AS/SVE Pilot Study Work Plan, the description of the scope of work to complete the site assessment activities and a report describing a limited sediment investigation performed in 1997. In December 1998, the FDEP approved the AS/SVE Pilot Study Work Plan, which the Company completed during the third quarter of 1999. In February 2001, the Company filed a Remedial Action Plan ("RAP") with the FDEP to address the contamination of the subsurface soil and ground-water in a portion of the site. The FDEP approved the RAP on May 4, 2001. Construction of the AS/SVE system was completed in the fourth quarter of 2002 and the system is now fully operational. FDEP has indicated that the Company may be required to remediate sediments along the shoreline of Lake Shipp, immediately west of the Winter Haven site. Based on studies performed to date, the Company objects to FDEP's suggestion that the sediments have been contaminated and require remediation. Early estimates by the Company's environmental consultant indicate that some of the corrective measures discussed by FDEP may cost as much as $1 million. Given the Company's view as to the absence of ecological effects, the Company believes that cost expenditures of this magnitude are unwarranted and plans to vigorously oppose any requirements that it undertake corrective measures in the offshore sediments. Chesapeake anticipates that it will be several years before this issue is resolved. At this time, the Company has not recorded a liability for sediment remediation. The outcome of this matter cannot be predicted at this time. The Company has accrued a liability of $463,000 as of September 30, 2004 for the Florida site. Through September 30, 2004, the Company has incurred approximately $1.3 million of environmental costs associated with the Florida site. At September 30, 2004 the Company had collected through rates $181,000 in excess of costs incurred. A regulatory asset of approximately $282,000, representing the uncollected portion of the estimated clean-up costs, has also been recorded. The Company expects to recover the remaining costs through rates. Other - ----- The Company is in discussions with the MDE regarding the possible responsibilities of the Company for remediation of a fourth gas manufacturing plant site located in Cambridge, Maryland. The outcome of this matter cannot be determined at this time. OTHER COMMITMENTS AND CONTINGENCIES Our Florida service territory was impacted by three hurricanes during August and September of 2004. The effects included property damage to our natural gas administrative office building, reduced earnings due to our industrial and commercial customers' temporary business closings and potential future reduced earnings due to reduced customer demand, such as from the citrus processing industry. The Company expects that the property damage and related costs will be fully recovered under its insurance policies and has not recorded an impairment loss. The amount of reduced pre-tax earnings due to the temporary closings of our customers' operations during the storms in August and September, is being quantified, and is currently estimated at approximately $140,000. Although a claim will be submitted to recover these costs from our insurance carrier under our business interruption policy, we have not recorded any potential recovery due to the uncertainty of the amounts and the amount, if any, that will be recovered under the insurance policy. One customer, who operates a citrus processing plant, has notified the Company that they will not open the plant for the upcoming season, November 2004 to June 2005. We estimate that the pre-tax earnings for the customer would have been $150,000 over the 8-month period. To-date, no other customers have informed us of changes in their expected usage. We cannot estimate any other future impacts from the hurricanes. Although the Company expects to file claims for future business interruption losses, no recoveries will be recorded until the loss has been incurred and there is a high level of certainty of the recovery. The Company's natural gas and propane distribution operations have entered into contractual commitments to purchase gas from various suppliers. The contracts have various expiration dates. In November 2003, the Company entered into a one-year contract with an energy marketing and risk management company to manage a portion of the Company's natural gas transportation and storage capacity. Negotiations to extend the contract are currently underway. The Company has issued corporate guarantees to certain vendors of its propane wholesale marketing subsidiary. The corporate guarantees provide for the payment of propane purchases by the subsidiary, in the event of the subsidiary's default. The aggregate amount guaranteed at September 30, 2004 totaled $4.5 million, with the guarantees expiring on various dates through September 2005. The Company has issued a letter of credit to its primary insurance company for $694,000, which expires June 1, 2005. The letter of credit was provided as security for claims amounts below the deductibles on the Company's policies. 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 and claims will not have a material effect on the consolidated financial position, results of operations or cash flows of the Company. Certain assets and liabilities of the Company are accounted for in accordance with SFAS No. 71. SFAS No. 71 provides guidance for public utilities and other regulated operations where the rates (prices) charged to customers are subject to regulatory review and approval. Regulators sometimes include costs in allowable costs in a period other than the period in which the costs would be charged to expense by an unregulated enterprise. That procedure can create assets, reduce assets, or create liabilities for the regulated enterprise. For financial reporting, an incurred cost for which a regulator permits recovery in a future period is accounted for like an incurred cost that is reimbursable under a cost-reimbursement-type contract. The Company believes that all regulatory assets as of September 30, 2004 are probable of recovery through rates. If the Company were required to terminate the application of SFAS No. 71 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, in an amount which could be material. 4. RECENT AUTHORITATIVE PRONOUNCEMENTS ON FINANCIAL REPORTING AND ACCOUNTING On January 12, 2004, the FASB released FASB Staff Position No. SFAS 106-1 "Accounting and Disclosure Requirements Related to the Medicare Prescription Drug, Improvement and Modernization Act of 2003" (the "Act"). On May 19, 2004, the FASB released FASB Staff Position No. SFAS 106-2, which superseded SFAS 106-1. SFAS No. 106-2 provides guidance on the accounting for the effects of the Act and requires certain disclosures regarding the effect of the federal subsidy provided by the Act. It is effective for the first interim or annual period beginning after June 15, 2004. Adoption of SFAS No. 106-2 is not expected to have a material impact on the Company's post-retirement benefit obligation. The Emerging Issues Task Force ("EITF") of the FASB issued EITF No. 03-6 on February 9, 2004. It requires that earnings used to calculate earnings per share be allocated between common shareholders and other securities holders based on their respective rights to receive dividends. This requirement was effective for the second quarter of 2004. It had no impact on the Company's calculation of earnings per share. 5. SEGMENT INFORMATION Chesapeake uses the management approach to identify operating segments. Chesapeake organizes its business around differences in products or services and the operating results of each segment are regularly reviewed by the Company's chief operating decision maker in order to make decisions about resources and to assess performance. The following table presents information about the Company's reportable segments. Results exclude discontinued operations.
- ------------------------------------------------------------------------------------------------------------ ---- THREE MONTHS ENDED ---- ---- NINE MONTHS ENDED ---- 2004 2003 2004 2003 FOR THE PERIOD ENDED SEPTEMBER 30, RESTATED RESTATED - ------------------------------------------------------------------------------------------------------------ OPERATING REVENUES, UNAFFILIATED CUSTOMERS Natural gas distribution and transmission . . . $ 18,906,566 $ 17,166,927 $ 86,308,792 $ 78,712,882 Propane . . . . . . . . . . . . . . . . . . . . 4,719,959 3,636,283 28,934,622 29,420,717 Advanced information services . . . . . . . . . 2,986,808 2,645,511 9,425,251 9,064,082 Other . . . . . . . . . . . . . . . . . . . . . - 268 - (4,254) - ------------------------------------------------------------------------------------------------------------ Total operating revenues, unaffiliated customers. $ 26,613,333 $ 23,448,989 $124,668,665 $117,193,427 ============================================================================================================ INTERSEGMENT REVENUES (1) Natural gas distribution and transmission . . . $ 36,409 $ 29,081 $ 132,400 $ 130,847 Advanced information services . . . . . . . . . 16,017 15,961 38,604 83,985 Other . . . . . . . . . . . . . . . . . . . . . 154,623 174,261 492,755 531,354 - ------------------------------------------------------------------------------------------------------------ Total intersegment revenues . . . . . . . . . . . $ 207,049 $ 219,303 $ 663,759 $ 746,186 ============================================================================================================ OPERATING INCOME Natural gas distribution and transmission . . . $ 1,759,680 $ 1,555,282 $ 11,674,347 $ 11,829,156 Propane . . . . . . . . . . . . . . . . . . . . (1,547,622) (1,596,707) 892,459 2,898,743 Advanced information services . . . . . . . . . 44,698 99,495 376,533 326,129 Other . . . . . . . . . . . . . . . . . . . . . 25,982 94,565 201,500 271,302 - ------------------------------------------------------------------------------------------------------------ Total operating income. . . . . . . . . . . . . . $ 282,738 $ 152,635 $ 13,144,839 $ 15,325,330 ============================================================================================================ (1) All significant intersegment revenues are billed at market rates and have been eliminated from consolidated revenues.
- ------------------------------------------------------------------------------- SEPTEMBER 30, DECEMBER 31, 2004 2003 - ------------------------------------------------------------------------------- IDENTIFIABLE ASSETS Natural gas distribution and transmission . . . $168,381,784 $169,865,930 Propane . . . . . . . . . . . . . . . . . . . . 48,410,522 38,359,251 Advanced information services . . . . . . . . . 2,838,046 2,912,733 Other . . . . . . . . . . . . . . . . . . . . . 7,402,081 7,791,796 - ------------------------------------------------------------------------------- Total identifiable assets . . . . . . . . . . . . $227,032,433 $218,929,710 ================================================================================
The Company's operations are all domestic. The advanced information services segment has infrequent transactions with foreign companies, located primarily in Canada, that are denominated and paid in U.S. dollars. These transactions are immaterial to the consolidated revenues. 6. DISCONTINUED OPERATIONS The following table presents the balance sheet accounts for discontinued operations. CHESAPEAKE UTILITIES CORPORATION DISCONTINUED OPERATIONS BALANCE SHEETS (UNAUDITED)
- ----------------------------------------------------------------------------------------- SEPTEMBER 30, DECEMBER 31, 2004 2003 - ----------------------------------------------------------------------------------------- ASSETS - ------- PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment . . . . . . . . . . . . . $ 774,826 $ 762,383 Less: Accumulated depreciation and amortization. . . . (353,005) (326,792) - ----------------------------------------------------------------------------------------- Net property, plant and equipment . . . . . . . . . . . 421,821 435,591 - ----------------------------------------------------------------------------------------- CURRENT ASSETS Cash and cash equivalents . . . . . . . . . . . . . . . 42,223 1,437,821 Accounts receivable (less allowance for uncollectibles of $1,776 and $5,346, respectively). . . . . . . . . 169,507 273,799 Appliance and other inventory, at FIFO. . . . . . . . . 56,557 99,839 Deferred income taxes receivable. . . . . . . . . . . . 1,871 20,725 Prepaid expenses. . . . . . . . . . . . . . . . . . . . 84,529 110,175 - ----------------------------------------------------------------------------------------- Total current assets. . . . . . . . . . . . . . . . . . 354,687 1,942,359 - ----------------------------------------------------------------------------------------- DEFERRED CHARGES AND OTHER ASSETS Other intangible assets, net. . . . . . . . . . . . . . 24,447 70,018 Deferred income taxes receivable. . . . . . . . . . . . 131,293 150,847 - ----------------------------------------------------------------------------------------- Total deferred charges and other assets . . . . . . . . 155,740 220,865 - ----------------------------------------------------------------------------------------- TOTAL ASSETS. . . . . . . . . . . . . . . . . . . . . . $ 932,248 $ 2,598,815 ========================================================================================= STOCKHOLDERS' EQUITY AND LIABILITIES - ------------------------------------- STOCKHOLDERS' EQUITY Common Stock. . . . . . . . . . . . . . . . . . . . . . $ 51,010 $ 51,010 Additional paid-in capital. . . . . . . . . . . . . . . 3,914,783 3,914,783 Retained deficits . . . . . . . . . . . . . . . . . . . (6,458,392) (5,271,164) - ----------------------------------------------------------------------------------------- Total stockholders' equity. . . . . . . . . . . . . . . (2,492,599) (1,305,371) - ----------------------------------------------------------------------------------------- CURRENT LIABILITIES Accounts payable. . . . . . . . . . . . . . . . . . . . 17,003 67,303 Due to parent company . . . . . . . . . . . . . . . . . 3,244,521 3,558,434 Customer deposits . . . . . . . . . . . . . . . . . . . 9,998 11,403 Income taxes payable. . . . . . . . . . . . . . . . . . 106,731 192,290 Other accrued liabilities . . . . . . . . . . . . . . . 46,594 74,756 - ----------------------------------------------------------------------------------------- Total current liabilities . . . . . . . . . . . . . . . 3,424,847 3,904,186 - ----------------------------------------------------------------------------------------- TOTAL STOCKHOLDERS' EQUITY AND LIABILITIES. . . . . . . $ 932,248 $ 2,598,815 =========================================================================================
During 2003, the Company sold the assets of six of its seven water services businesses. The Company sold the remaining operation, located in Stuart, Florida, during October 2004. Due to an expected loss on sale, an impairment charge on the assets to be sold of approximately $30,000 (net of $16,000 in taxes) was recorded in September to reflect the assets at their estimated fair value. The total losses for discontinued operations for the three months ended September 30, 2004 were $72,000 (net of $40,000 in taxes). For the three months ended September 30, 2003, losses from the sale of discontinued operations were $106,000 (net of $58,000 in taxes) and operating losses were $44,000 (net of $23,000 in taxes). For the nine months ended September 30, 2003, losses from the sale of discontinued operations were $34,000 (net of $19,000 in taxes) and operating losses were $278,000 (net of $149,000 in taxes). Results for all the water dealerships were reclassified to discontinued operations in accordance with SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets" for all periods presented in the consolidated income statements and are shown net of tax. 7. EMPLOYEE BENEFIT PLANS Net periodic benefit costs for the defined benefit pension plan, the executive excess benefit plan and other post-retirement benefits are shown below:
- ---------------------------------------------------------------------------------------------------------------- OTHER DEFINED BENEFIT EXECUTIVE EXCESS POST-RETIREMENT PENSION PLAN BENEFIT PLAN BENEFITS FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2004 2003 2004 2003 2004 2003 - ---------------------------------------------------------------------------------------------------------------- Service Cost . . . . . . . . . . . . . . $ 81,014 $ 81,342 $ 26,219 $ 26,969 $ 1,339 $ 1,285 Interest Cost. . . . . . . . . . . . . . 175,307 171,059 20,750 20,009 21,720 21,329 Expected return on plan assets . . . . . (232,100) (196,119) - - - - Amortization of transition amount. . . . (3,776) (3,776) - - 6,964 6,964 Amortization of prior service cost . . . (1,174) (1,174) 696 696 - - Amortization of net (gain) loss. . . . . - - 4,137 4,669 19,725 16,567 - ---------------------------------------------------------------------------------------------------------------- Net periodic benefit cost. . . . . . . . $ 19,271 $ 51,332 $ 51,802 $ 52,343 $ 49,748 $ 46,145 - ----------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------- OTHER DEFINED BENEFIT EXECUTIVE EXCESS POST-RETIREMENT PENSION PLAN BENEFIT PLAN BENEFITS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2004 2003 2004 2003 2004 2003 - ---------------------------------------------------------------------------------------------------------------- Service Cost . . . . . . . . . . . . . . $ 250,393 $ 244,025 $ 78,657 $ 80,908 $ 4,016 $ 3,854 Interest Cost. . . . . . . . . . . . . . 528,761 513,179 62,252 60,029 65,162 63,989 Expected return on plan assets . . . . . (703,878) (588,357) - - - - Amortization of transition amount. . . . (11,328) (11,328) - - 20,894 20,894 Amortization of prior service cost . . . (3,524) (3,524) 2,090 2,090 - - Amortization of net (gain) loss. . . . . - - 12,411 14,008 59,175 49,703 - ---------------------------------------------------------------------------------------------------------------- Net periodic benefit cost. . . . . . . . $ 60,424 $ 153,995 $ 155,410 $ 157,035 $ 149,247 $ 138,440 - ----------------------------------------------------------------------------------------------------------------
As disclosed in the December 31, 2003 financial statements, no contributions are expected to be required in 2004 for the defined benefit pension plan. The executive excess benefit plan and other post-retirement benefit plans are unfunded. Cash benefits paid under the executive excess plan for the first nine months of 2004 were $18,825. Benefits paid under other post-retirement benefits are primarily for medical claims and were $187,000 for the first nine months of 2004. The Company sponsors two tax-qualified retirement plans: a defined benefit pension plan (the "Pension Plan") and a defined contribution savings plan (the "Savings Plan"). The Company also sponsors unfunded, non-qualified defined benefit and defined contribution plans for certain management employees that provide for benefits in excess of those permitted by law under the qualified plans. Before 1999, Company employees generally participated in both the Pension Plan and the Savings Plan. Effective January 1, 1999, the Company restructured its retirement program to compete more effectively with similar businesses. As part of this restructuring, the Company froze the Pension Plan to new participants. Employees who participated in the Pension Plan at that time were given the option of remaining in (and continuing to accrue benefits under) the Pension Plan or receiving an enhanced matching contribution in the Savings Plan. Because the Pension Plan is not open to new participants, the number of active participants in that plan has decreased and is approaching the minimum number needed for the Pension Plan to maintain its tax-qualified status. To avoid jeopardizing the tax-qualified status of the Pension Plan, the Company's Board of Directors ("Board") amended the Pension Plan on September 24, 2004. To ensure that the Company continues to provide appropriate levels of benefits to the Company's employees, the Board amended the Pension Plan and the Savings Plan, effective January 1, 2005, so that Pension Plan participants who are actively employed by the Company on that date (1) receive two additional years of benefit service credit to be used in calculating their Pension Plan benefit (subject to the Pension Plan's limit of 35 years of benefit service credit), (2) have the option to receive their Pension Plan benefit in the form of a lump sum at the time it is distributed, and (3) are eligible to receive the enhanced matching contribution in the Savings Plan. In addition, effective January 1, 2005, the Board amended the Pension Plan so that participants will not accrue any additional benefits under that plan. These changes were communicated to the Company's employees during the first week of November 2004. As a result of the amendments to the Pension Plan, a gain of approximately $172,000 (after tax) was recorded during the third quarter of 2004. In connection with these changes to the Company's retirement program, the Board also amended the non-qualified defined benefit plan on September 24, 2004 to reflect the two additional years of benefit service credit and to freeze all benefit accruals under that plan as of January 1, 2005. However, benefits under the non-qualified plan will not be payable in the form of a lump sum. As a result of these amendments, a new actuarial valuation was performed as of September 30, 2004. A loss of $41,000 (after tax) was recorded in September 2004. Additionally, because the actuarial valuation indicated that the accumulated benefit obligation exceeded the liability accrued as of September 30, 2004, a minimum pension liability in the amount of $489,000 (after tax) was recorded as a component of comprehensive income. The assumptions used for the discount rates for the revaluations of the plans were reviewed by the Company and lowered from 6 percent to 5.5 percent, reflecting a reduction in the interest rates of high quality bonds and a reduction in the expected life of the plan, due to the lump sum payment option. Additionally, the expected return on plan assets for the qualified plan was lowered from 8.5 percent to 6 percent, due to the adoption of a change in the investment policy that calls for a higher level of investment in bonds and a lower level of equity investments. There was no change in the assumed pay rate increases. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS BUSINESS DESCRIPTION Chesapeake Utilities Corporation (the "Company" or "Chesapeake") is a diversified utility company engaged in natural gas distribution and transmission, propane distribution and wholesale 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 wholesale marketing, advanced information services and other related businesses. Chesapeake sold the assets and operations of six of its seven water dealerships during 2003. The Company sold the remaining operation in October 2004. FINANCIAL POSITION, LIQUIDITY AND CAPITAL RESOURCES The Company's capital requirements reflect the capital-intensive nature of its business and are principally attributable to its construction program (described below) and the retirement of outstanding debt. The Company relies on cash generated by operations and short-term borrowing to meet normal working capital requirements and to finance, temporarily, capital expenditures. During the first nine months of 2004, net cash provided by operating activities, net cash used by investing activities and net cash used by financing activities were approximately $17.7 million, $11.7 million and $8.2 million, respectively. The Board of Directors has authorized the Company to borrow up to $35.0 million of short-term debt from various banks and trust companies. As of September 30, 2004, Chesapeake had five unsecured bank lines of credit with three financial institutions, totaling $65.0 million, for short-term cash needs to meet seasonal working capital requirements and to fund, temporarily, portions of its capital expenditures. Two of the bank lines, totaling $15.0 million, are committed. The remaining three lines are subject to the banks' availability of funds. In the first nine months of 2004, cash provided by operations was adequate to fund capital expenditures and repay the $3.5 million of short-term debt that was outstanding at December 31, 2003. At September 30, 2004, the Company had outstanding an irrevocable letter of credit in the amount of $694,000 issued to one of the Company's insurance providers. The letter of credit reduced the available borrowing under the short-term lines. During the nine-month periods ended September 30, 2004 and 2003, capital expenditures (net of retirements) were approximately $12.1 million and $7.7 million, respectively. Chesapeake has budgeted $20.8 million for capital expenditures during 2004. This amount includes $15.8 million for natural gas distribution and transmission, $4.1 million for propane distribution and marketing, $285,000 for advanced information services and $614,000 for other operations. Through September 30, 2004, the natural gas segment had spent $9.6 million, the propane segment $2.6 million, the advanced information services segment $35,000 and the other operations $266,000 on capital items. 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. The other operations budget includes general plant, computer software and hardware expenditures. Financing for the capital expenditure program for the balance of 2004 is expected to be provided from short-term borrowing and cash provided by operating activities. The capital expenditure program is subject to continual 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 $170,000 for capital expenditures in 2004 related to environmental remediation projects, and expects to make additional expenditures in future years. Management does not expect any such expenditures or financing to have a material adverse effect on the financial position or capital resources of the Company (see Note 3 to the Condensed Consolidated Financial Statements). As of September 30, 2004 common equity represented 52.5 percent of total capitalization, compared to 51.2 percent as of December 31, 2003. Combining short-term financing with total capitalization, the equity component would have been 51.4 percent and 48.8 percent at September 30, 2004 and December 31, 2003, 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 nine months of 2004 decreased approximately $334,000, or 8 percent, versus the same period in 2003. Interest on long-term debt accounted for $255,000 of the decrease. The average long-term debt balance in the first nine months of 2004 was $71.7 million compared to $75.8 million for the first nine months of 2003. The average interest rate was 7.2 percent during both periods. Additionally, interest on short-term debt decreased $59,000 during the first nine months of 2004, compared to the same period during 2003. This decrease was the result of a decline in the average balance of short-term debt from $3.4 million during the first nine months of 2003 to $207,000 for the first nine months of 2004. OFF-BALANCE SHEET ARRANGEMENTS AND CONTRACTUAL OBLIGATIONS As noted in the Company's 2003 Annual Report on Form 10-K, the only off-balance sheet arrangements are corporate guarantees to certain vendors of its propane wholesale marketing subsidiary and a letter of credit issued to its main insurance carrier. See Note 3 to the Condensed Consolidated Financial Statements for further information. There have been no material changes in the contractual obligations presented in the Company's 2003 Annual Report on Form 10-K, except for commodity purchase obligations and forward contracts entered into in the ordinary course of the Company's business. Below is a summary of the commodity and forward contract obligations at September 30, 2004. None of the commodity or forward contracts extend beyond 2005.
- -------------------------------------------------------------------- PAYMENTS DUE BY PERIOD ------------------------------------- CONTRACTUAL OBLIGATIONS: 2004 2005 TOTAL - -------------------------------------------------------------------- Commodities (1) . . . . . . . $ 2,983,050 $ 2,479,635 $ 5,462,685 Forward contracts propane (2) 6,172,530 - 6,172,530 - -------------------------------------------------------------------- Total . . . . . . . . . . . . $ 9,155,580 $ 2,479,635 $11,635,215 ==================================================================== (1) In addition to the obligations noted above, the natural gas distribution and propane distribution operations have agreements with commodity suppliers that have provisions which allow the Company to reduce or eliminate the quantities purchased. There are no monetary penalties for reducing the amounts purchased; however, the propane contracts allow the suppliers to reduce the amounts available in the winter season if the Company does not purchase specified amounts during the summer season. Under these contracts, the commodity prices will fluctuate with a market-based index. (2) The Company has also entered into forward and future sale contracts of $9.9 million. See the "Quantitative and Qualitative Disclosures about Market Risk" section of the Management's Discussion and Analysis of Financial Condition and Results of Operations portion of this report for Further information.
RESULTS OF OPERATIONS FOR THE QUARTER ENDED SEPTEMBER 30, 2004 CONSOLIDATED OVERVIEW The Company improved its results from continuing operations by $126,000 during the third quarter of 2004. Chesapeake experienced a seasonal loss from continuing operations of $584,000 or $0.10 per share (fully diluted), compared to a seasonal net loss from continuing operations of $710,000 or $0.13 per share (fully diluted) for the third quarter of 2003. Chesapeake's Delmarva natural gas distribution and propane distribution operations typically experience losses during the third quarter, because heating customers do not require gas in the summer months. Losses from discontinued operations decreased $78,000 during the quarter, reflecting the sales of six of the seven water service businesses during the second half of 2003. The Company amended its qualified and supplemental defined benefit pension plans and froze all benefit accruals effective December 31, 2004. As a result, a net gain of $218,000 (pre-tax) was recorded in the third quarter of 2004. The Company's Florida service territory was impacted by three hurricanes during August and September of 2004. See Note 3 to the Condensed Consolidated Financial Statements for information on the incurred and expected future effects from the hurricanes. In the fourth quarter of 2003, the Company restated its quarterly financial statements for prior periods to reflect the results of its Delaware and Maryland natural gas divisions on the accrual revenue recognition method rather than the "as billed" method. See Note 1 to the Condensed Consolidated Financial Statements. Additional information regarding this restatement can also be found in the Company's report on Form 10-K for the year ended December 31, 2003.
- ------------------------------------------------------------------------------------ . 2004 2003 FOR THE THREE MONTHS ENDED SEPTEMBER 30, RESTATED CHANGE - ------------------------------------------------------------------------------------ Operating Income Natural Gas Distribution & Transmission $ 1,759,680 $ 1,555,282 $ 204,398 Propane . . . . . . . . . . . . . . . . (1,547,622) (1,596,707) 49,085 Advanced Information Services . . . . . 44,698 99,495 (54,797) Other . . . . . . . . . . . . . . . . . 25,982 94,565 (68,583) - ------------------------------------------------------------------------------------ Operating Income. . . . . . . . . . . . . 282,738 152,635 130,103 Other Income. . . . . . . . . . . . . . . 38,357 (24,869) 63,226 Interest Charges. . . . . . . . . . . . . 1,325,397 1,419,887 (94,490) Income Taxes. . . . . . . . . . . . . . . (420,131) (582,328) 162,197 - ------------------------------------------------------------------------------------ Net Loss from Continuing Operations . . . $ (584,171) $ (709,793) $ 125,622 ====================================================================================
The following discussions of segment results include use of the term "gross margin." Gross margin is determined by deducting the cost of sales from operating revenue. Cost of sales includes the purchased gas cost for the natural gas and propane segments and the cost of labor spent on direct revenue-producing activities for advanced information services segment. Gross margin should not be considered an alternative to operating income or net income, which are determined in accordance with Generally Accepted Accounting Principles ("GAAP"). Chesapeake believes that gross margin, although a non-GAAP measure, is useful and meaningful to investors as a basis for making investment decisions. It provides investors with information that demonstrates the profitability achieved by the Company under its allowed rates for regulated operations and under its competitive pricing structure for non-regulated segments. Chesapeake's management uses gross margin in measuring certain performance goals and has historically analyzed and reported gross margin information in its public filings and presentations. Other companies may calculate gross margin in a different manner. NATURAL GAS DISTRIBUTION AND TRANSMISSION The natural gas distribution and transmission segment earned operating income of $1,647,000 for the third quarter of 2004 compared to $1,555,000 for the corresponding period last year, an increase of $92,000.
- ------------------------------------------------------------------------------------ . 2004 2003 FOR THE THREE MONTHS ENDED SEPTEMBER 30, RESTATED CHANGE - ------------------------------------------------------------------------------------ Revenue . . . . . . . . . . . . . . . . . $18,942,975 $17,196,008 $ 1,746,967 Cost of gas . . . . . . . . . . . . . . . 10,066,381 8,873,560 1,192,821 - ------------------------------------------------------------------------------------ Gross margin. . . . . . . . . . . . . . . 8,876,594 8,322,448 554,146 Other Operating Expenses: Operations & maintenance. . . . . . . . 4,976,464 4,801,957 174,507 Depreciation & amortization . . . . . . 1,375,472 1,287,227 88,245 Other taxes . . . . . . . . . . . . . . 764,978 677,982 86,996 - ------------------------------------------------------------------------------------ Other operating expenses. . . . . . . . . 7,116,914 6,767,166 349,748 - ------------------------------------------------------------------------------------ Total Operating Income. . . . . . . . . . $ 1,759,680 $ 1,555,282 $ 204,398 ====================================================================================
Gross margin for the Delaware and Maryland distribution divisions increased $162,000 from 2003. The increase resulted from an increase of 2,423 in the number of residential customers in the third quarter of 2004, an 8 percent increase compared to the third quarter of 2003. The customer growth was primarily the result of new housing construction. The Company estimates that each residential customer added contributes $372 annually to gross margin and requires an additional cost of $104 for operations and maintenance expenses. Gross margin for the Florida operations increased by $289,000, due to an increase of 8 percent in the number of residential customers and growth in the industrial gross margin. The natural gas transmission gross margin increased by $93,000 resulting from an increase in transportation services. Other operating expenses, primarily payroll, pension, insurance and customer service costs, were higher primarily as a result of customer growth. Depreciation was also higher, reflecting the continued investment in plant assets. PROPANE During the third quarter of 2004, the propane segment experienced a reduction of $31,000 in operating loss compared to the third quarter of 2003. An increase of $371,000 in gross margin was largely offset by an increase of $340,000 in other operating expenses.
- ------------------------------------------------------------------------------------ FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2004 2003 CHANGE - ------------------------------------------------------------------------------------ Revenue . . . . . . . . . . . . . . . . . $ 4,719,959 $ 3,636,283 $ 1,083,676 Cost of sales . . . . . . . . . . . . . . 2,993,237 2,280,092 713,145 - ------------------------------------------------------------------------------------ Gross margin. . . . . . . . . . . . . . . 1,726,722 1,356,191 370,531 Other Operating Expenses: Operations & maintenance. . . . . . . . 2,752,409 2,422,607 329,802 Depreciation & amortization . . . . . . 391,099 385,151 5,948 Other taxes . . . . . . . . . . . . . . 130,836 145,140 (14,304) - ------------------------------------------------------------------------------------ Other operating expenses. . . . . . . . . 3,274,344 2,952,898 321,446 - ------------------------------------------------------------------------------------ Total Operating Loss. . . . . . . . . . . $(1,547,622) $(1,596,707) $ 49,085 ====================================================================================
The Delmarva distribution operations experienced an increase in gross margin of $102,000 that was more than offset by an increase in other operating expenses of $291,000. The Florida propane distribution operations experienced a decrease in operating losses of $103,000. An increase of $109,000 in gross margin was slightly offset by an increase of $5,000 in other operating expenses. The improvement in Florida's gross margin occurred due to a reduction in service department costs caused by terminating house piping service offerings at certain locations. The Company's propane wholesale marketing operation increased operating income $117,000 compared to the third quarter of 2003. Gross margins improved $160,000 but were partially offset by an increase of $43,000 in other operating expenses. ADVANCED INFORMATION SERVICES The advanced information services business contributed operating income of $45,000 for the third quarter of 2004, a decrease of $55,000 compared to the third quarter of last year.
- ------------------------------------------------------------------------------------ FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2004 2003 CHANGE - ------------------------------------------------------------------------------------ Revenue . . . . . . . . . . . . . . . . . $ 3,002,825 $ 2,661,472 $ 341,353 Cost of sales . . . . . . . . . . . . . . 1,733,059 1,281,096 451,963 - ------------------------------------------------------------------------------------ Gross margin. . . . . . . . . . . . . . . 1,269,766 1,380,376 (110,610) Other Operating Expenses: Operations & maintenance. . . . . . . . 1,083,639 1,130,888 (47,249) Depreciation & amortization . . . . . . 32,690 47,256 (14,566) Other taxes . . . . . . . . . . . . . . 108,739 102,737 6,002 - ------------------------------------------------------------------------------------ Other operating expenses. . . . . . . . . 1,225,068 1,280,881 (55,813) - ------------------------------------------------------------------------------------ Total Operating Income. . . . . . . . . . $ 44,698 $ 99,495 $ (54,797) ====================================================================================
The advanced information services segment increased its revenue by $341,000; however, the cost of sales increased by $452,000, resulting in a decrease in gross margin. The 2003 results included the sale of rights to an internally-developed software product. The product development costs were expensed as incurred, therefore, there was no associated cost of sales in 2003. The sale added $284,000 to operating income for the third quarter of 2003. Operations expenses in 2004 included costs to enhance the Lightweight Association Management Processing System (LAMPS) software product. Version 2.0 of LAMPS was released on October 7, 2004. These costs were offset by reduced incentive compensation costs. OTHER BUSINESS OPERATIONS AND ELIMINATIONS Other operations and eliminating entries contributed operating income of $149,000 for the third quarter of 2004 compared to operating income of $83,000 for the third quarter of last year. Other operations consist primarily of subsidiaries that own real estate leased to other Company subsidiaries. Eliminations are entries required to eliminate activities between business segments from the consolidated results.
- ------------------------------------------------------------------------------------ FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2004 2003 CHANGE - ------------------------------------------------------------------------------------ Revenue . . . . . . . . . . . . . . . . . $ 154,623 $ 174,529 $ (19,906) Cost of sales . . . . . . . . . . . . . . - - - - ------------------------------------------------------------------------------------ Gross margin. . . . . . . . . . . . . . . 154,623 174,529 (19,906) Other Operating Expenses: Operations & maintenance. . . . . . . . 68,694 18,573 50,121 Depreciation & amortization . . . . . . 51,263 59,529 (8,266) Other taxes . . . . . . . . . . . . . . 16,723 13,656 3,067 - ------------------------------------------------------------------------------------ Other operating expenses. . . . . . . . . 136,680 91,758 44,922 - ------------------------------------------------------------------------------------ Operating Income - Other. . . . . . . . . 17,943 82,771 (64,828) Operating Income - Eliminations . . . . . 8,039 11,794 (3,755) - ------------------------------------------------------------------------------------ Total Operating Income. . . . . . . . . . $ 25,982 $ 94,565 $ (68,583) ====================================================================================
DISCONTINUED OPERATIONS In 2003, Chesapeake decided to exit the water services business. Six of seven water dealerships were sold during 2003 and the remaining operation in October 2004. During the third quarter of 2004 the Company recorded an asset impairment of approximately $30,000 (after-tax) based on the preliminary sales agreement. The results of the water companies' operations for all periods presented in the consolidated income statements have been reclassified to discontinued operations and shown net of tax. For the third quarter of 2004 discontinued operations experienced a loss from operations of $42,000 (in addition to the $30,000 expected impairment noted above), compared to a loss of $44,000 in the third quarter of 2003. INCOME TAXES The Company's income tax benefit for the third quarter of 2004 was lower than 2003 due to a lower loss. The federal income tax rate was consistent from year to year. INTEREST EXPENSE Interest for the third quarter of 2004 decreased approximately $94,000, or 7 percent, over the same period in 2003. The decrease resulted from the scheduled repayments of principal of long-term debt and lower short-term borrowing. The average long-term debt balance in the third quarter of 2004 was $71.5 million, compared to $75.5 million in the second quarter of 2003. The average interest rate was 7.2 percent during both periods. The average borrowing against the Company's short-term credit facilities during the third quarter of 2004 was $27,000, compared to $2.6 million in the third quarter of 2003. RESULTS OF OPERATIONS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2004 CONSOLIDATED OVERVIEW The Company's net income from continuing operations was $5.8 million or $1.00 per share (fully diluted), for the first nine months of 2004, a decline of $1.1 million compared to net income from continuing operations of $6.9 million, or $1.21 per share (fully diluted) for the corresponding period in 2003. The decrease principally reflects a decline in operating income caused by warmer temperatures on the Delmarva Peninsula. Management estimates that warmer weather negatively impacted margins by $1.1 million. The natural gas segment was able to partially offset the impact of warmer weather through customer growth. Additionally, the Company has incurred approximately $331,000 of expenses through September 30, 2004 related to compliance with section 404 of the Sarbanes Oxley legislation. These costs include incremental audit fees, expansion of the Internal Audit Department and hiring an outside consultant. The Company estimates that the total incremental cost of these compliance efforts will be approximately $500,000 in 2004. The Company's Florida service territory was impacted by three hurricanes during August and September of 2004. See Note 3 to the Condensed Consolidated Financial Statements for information on the incurred and expected future effects from the hurricanes. In the fourth quarter of 2003, the Company restated its quarterly financial statements for prior periods to reflect the results of its Delaware and Maryland natural gas divisions on the accrual revenue recognition method rather than the "as billed" revenue recognition method. See Note 1 to the Condensed Consolidated Financial Statements. Additional information regarding this restatement can also be found in the Company's report on Form 10-K for the year ended December 31, 2003.
- ------------------------------------------------------------------------------------ . 2004 2003 FOR THE NINE MONTHS ENDED SEPTEMBER 30,. . RESTATED CHANGE - ------------------------------------------------------------------------------------ Operating Income Natural Gas Distribution & Transmission $11,674,347 $11,829,156 $ (154,809) Propane . . . . . . . . . . . . . . . . 892,459 2,898,743 (2,006,284) Advanced Information Services . . . . . 376,533 326,129 50,404 Other & eliminations. . . . . . . . . . 201,500 271,302 (69,802) - ------------------------------------------------------------------------------------ Operating Income. . . . . . . . . . . . . 13,144,839 15,325,330 (2,180,491) Other Income. . . . . . . . . . . . . . . 215,051 63,289 151,762 Interest Charges. . . . . . . . . . . . . 3,980,395 4,314,742 (334,347) Income Taxes. . . . . . . . . . . . . . . 3,578,614 4,212,031 (633,417) - ------------------------------------------------------------------------------------ Net Income from Continuing Operations . . $ 5,800,881 $ 6,861,846 $(1,060,965) ====================================================================================
The following discussions of segment results include use of the term "gross margin." Gross margin is determined by deducting the cost of sales from operating revenue. Cost of sales includes the purchased gas cost for the natural gas and propane segments and the cost of labor spent on direct revenue-producing activities for advanced information services segment. Gross margin should not be considered an alternative to operating income or net income, which are determined in accordance with Generally Accepted Accounting Principles ("GAAP"). Chesapeake believes that gross margin, although a non-GAAP measure, is useful and meaningful to investors as a basis for making investment decisions. It provides investors with information that demonstrates the profitability achieved by the Company under its allowed rates for regulated operations and under its competitive pricing structure for non-regulated segments. Chesapeake's management uses gross margin in measuring certain performance goals and has historically analyzed and reported gross margin information in its public filings and presentations. Other companies may calculate gross margin in a different manner. NATURAL GAS DISTRIBUTION AND TRANSMISSION The natural gas distribution and transmission segment earned operating income of $11.6 million for the first nine months of 2004 compared to $11.8 million for the corresponding period last year, a decrease of $267,000.
- ------------------------------------------------------------------------------------ . 2004 2003 FOR THE NINE MONTHS ENDED SEPTEMBER 30,. . RESTATED CHANGE - ------------------------------------------------------------------------------------ Revenue . . . . . . . . . . . . . . . . . $86,441,192 $78,843,729 $ 7,597,463 Cost of gas . . . . . . . . . . . . . . . 52,596,322 46,486,758 6,109,564 - ------------------------------------------------------------------------------------ Gross margin. . . . . . . . . . . . . . . 33,844,870 32,356,971 1,487,899 Other Operating Expenses: Operations & maintenance. . . . . . . . 15,715,467 14,491,058 1,224,409 Depreciation & amortization . . . . . . 4,078,568 3,851,059 227,509 Other taxes . . . . . . . . . . . . . . 2,376,488 2,185,698 190,790 - ------------------------------------------------------------------------------------ Other operating expenses. . . . . . . . . 22,170,523 20,527,815 1,642,708 - ------------------------------------------------------------------------------------ Total Operating Income. . . . . . . . . . $11,674,347 $11,829,156 $ (154,809) ====================================================================================
Gross margin for the Delaware and Maryland distribution divisions increased $158,000 over 2003 due to an increase in customers that offset the negative impact of warmer temperatures. Delaware and Maryland experienced an increase of 2,237 in the number of residential customers during the nine months ended September 30, 2004, a 7.0 percent increase compared to the first nine months of 2003. The increase was primarily the result of new housing construction. The Company estimates that each residential customer added contributes $372 annually to gross margin and requires an additional cost of $104 for operations and maintenance expenses. This growth offset a temperature decline of 9 percent (303 heating degree-days) for the first nine months of 2004 compared to the same period of 2003. Management estimates that warmer temperatures negatively impacted margins by $545,000. Temperatures were 4 percent colder (103 heating degree-days) than the 10-year average. The Company estimates that, on an annual basis, each heating degree-day changes gross margin on gas sales by $1,800. Gross margin for the Florida distribution operations increased by $798,000, due to an increase of 6.7 percent in the number of residential customers and growth in the industrial gross margin. The natural gas transmission gross margin increased by $517,000. Firm transportation services increased $449,000 due to firm customers adding capacity. Additionally, interruptible transportation increased $65,000 over 2003. The gross margin increases were offset by higher operating expenses primarily due to customer growth. Payroll, benefits and facilities costs were up. Depreciation was also higher, reflecting the continued investment in plant assets. PROPANE During the nine months ended September 30, 2004, the propane segment experienced a decrease of $2.0 million in operating income compared to the same period in 2003, reflecting a gross margin decrease of $1.8 million and an increase in operating expenses of $217,000.
- ------------------------------------------------------------------------------------ FOR THE NINE MONTHS ENDED SEPTEMBER 30,. . 2004 2003 CHANGE - ------------------------------------------------------------------------------------ Revenue . . . . . . . . . . . . . . . . . $28,934,622 $29,420,717 $ (486,095) Cost of sales . . . . . . . . . . . . . . 17,558,053 16,236,221 1,321,832 - ------------------------------------------------------------------------------------ Gross margin. . . . . . . . . . . . . . . 11,376,569 13,184,496 (1,807,927) Other Operating Expenses: Operations & maintenance. . . . . . . . 8,789,573 8,579,532 210,041 Depreciation & amortization . . . . . . 1,145,062 1,143,516 1,546 Other taxes . . . . . . . . . . . . . . 549,475 562,705 (13,230) - ------------------------------------------------------------------------------------ Other operating expenses. . . . . . . . . 10,484,110 10,285,753 198,357 - ------------------------------------------------------------------------------------ Total Operating Income. . . . . . . . . . $ 892,459 $ 2,898,743 $(2,006,284) ====================================================================================
The Delmarva distribution operations experienced a drop in gross margin of $993,000, caused primarily by warmer temperatures. Retail volumes sold decreased 957,000 gallons, or 6 percent, for the first nine months of 2004 compared to 2003. Management estimates that the negative impact of weather on gross margin was $512,000. Temperatures in the first nine months of 2004 were 9 percent warmer than the first nine months of 2003 (303 heating degree-days) but 4 percent colder than the 10-year average (103 heating degree-days). The Company estimates that on an annual basis, each heating degree-day generates gross margin of $1,691. Additionally, there was a reduction caused by the closing of a poultry processing plant in the fourth quarter of 2003 and by an outbreak of avian influenza on the Delmarva Peninsula in the first quarter or 2004. The plant is not expected to reopen. The influenza outbreak was contained. The Florida propane distribution operations experienced a decrease in gross margin of $54,000. The decrease was due primarily to a one-time service project that contributed $192,000 to the 2003 gross margin, partially offset by a reduction of service department costs during 2004. The Company's propane wholesale marketing operation contributed $241,000 to operating income; however, this was a decrease of $539,000 compared to the same period in 2003. This reflects a conservative strategy taken in the wholesale marketing operation, due to the high level of energy prices. ADVANCED INFORMATION SERVICES The advanced information services business contributed operating income of $377,000 for the nine months ended September 30, 2004 compared to $326,000 for the same period last year, an increase of $50,000.
- ------------------------------------------------------------------------------------ FOR THE NINE MONTHS ENDED SEPTEMBER 30,. . 2004 2003 CHANGE - ------------------------------------------------------------------------------------ Revenue . . . . . . . . . . . . . . . . . $ 9,463,855 $ 9,148,067 $ 315,788 Cost of sales . . . . . . . . . . . . . . 5,276,546 5,043,257 233,289 - ------------------------------------------------------------------------------------ Gross margin. . . . . . . . . . . . . . . 4,187,309 4,104,810 82,499 Other Operating Expenses: Operations & maintenance. . . . . . . . 3,313,835 3,239,012 74,823 Depreciation & amortization . . . . . . 106,365 146,127 (39,762) Other taxes . . . . . . . . . . . . . . 390,576 393,542 (2,966) - ------------------------------------------------------------------------------------ Other operating expenses. . . . . . . . . 3,810,776 3,778,681 32,095 - ------------------------------------------------------------------------------------ Total Operating Income. . . . . . . . . . $ 376,533 $ 326,129 $ 50,404 ====================================================================================
During the first nine months of 2004 gross margin grew by $82,000. Other operating expenses increased primarily as a result of development work to enhance the LAMPS software product. Version 2.0 of LAMPS was released on October 7, 2004. The 2003 results included a one-time sale of rights to a software product that increased operating income by $284,000. OTHER BUSINESS OPERATIONS AND ELIMINATIONS Other operations and eliminating entries contributed operating income of $308,000 for the nine months ended September 30, 2004 compared to income of $248,000 for the same period last year. Other operations consist primarily of subsidiaries that own real estate leased to other Company subsidiaries. Eliminations are entries required to eliminate activities between business segments from the consolidated results.
- ------------------------------------------------------------------------------------ FOR THE NINE MONTHS ENDED SEPTEMBER 30,. . 2004 2003 CHANGE - ------------------------------------------------------------------------------------ Revenue . . . . . . . . . . . . . . . . . $ 492,755 $ 527,100 $ (34,345) Cost of sales . . . . . . . . . . . . . . - - - - ------------------------------------------------------------------------------------ Gross margin. . . . . . . . . . . . . . . 492,755 527,100 (34,345) Other Operating Expenses: Operations & maintenance. . . . . . . . 110,343 58,907 51,436 Depreciation & amortization . . . . . . 158,401 178,589 (20,188) Other taxes . . . . . . . . . . . . . . 46,629 41,260 5,369 - ------------------------------------------------------------------------------------ Other operating expenses. . . . . . . . . 315,373 278,756 36,617 - ------------------------------------------------------------------------------------ Operating Income - Other. . . . . . . . . 177,382 248,344 (70,962) Operating Income - Eliminations . . . . . 24,118 22,958 1,160 - ------------------------------------------------------------------------------------ Total Operating Income. . . . . . . . . . $ 201,500 $ 271,302 $ (69,802) ====================================================================================
DISCONTINUED OPERATIONS In 2003, Chesapeake decided to exit the water services business. Six of seven water dealerships were sold during 2003 and the remaining operation was sold October 2004. At September 30, 2004, the Company recorded an expected asset impairment of $30,000 (after tax), based on the preliminary agreement. The results of the water companies' operations for all periods presented in the consolidated income statements, have been reclassified to discontinued operations and shown net of tax. For the first nine months of 2004 the discontinued operations experienced an operating loss of $58,000 (in addition to the $30,000 asset impairment noted above), compared to a loss of $278,000 for the same period in 2003. INCOME TAXES The Company's income tax cost for the nine months ended September 30, 2004 was lower than 2003 due to lower income. The federal income tax rate was consistent from year to year. INTEREST EXPENSE Interest for the nine months ended September 30, 2004 decreased approximately $334,000, or 8 percent, over the same period in 2003. The decrease resulted from the scheduled repayments of principal of long-term debt and lower short-term borrowing. The average long-term debt balance for the first nine months of 2004 was $71.7 million compared to $75.8 for the same period in 2003. The average interest rate was 7.2 percent for both periods. The average short-term borrowing for the first nine months of 2004 was $207,000 compared to $3.4 million for 2003. ENVIRONMENTAL MATTERS As more fully described in Note 3 to the Condensed Consolidated Financial Statements, Chesapeake has completed its responsibilities related to one former gas manufacturing plant site and is currently participating in the investigation, assessment or remediation of two other former gas manufacturing plant sites. The Company continues to work with federal and state environmental agencies to assess the environmental impact and explore options for corrective action at these sites. The Company believes that future costs associated with these sites will be recoverable in rates or through sharing arrangements with, or contributions by, other responsible parties. The Company is in discussions with the Maryland Department of the Environment regarding a fourth former gas manufacturing plant site located in Cambridge, Maryland. The outcome of this matter cannot be determined at this time. OTHER MATTERS REGULATORY MATTERS The Delaware, Maryland and Florida Public Service Commissions regulate the Company's natural gas distribution operations, while its natural gas transmission operation is regulated by the Federal Energy Regulatory Commission ("FERC"). On April 1, 2003, Eastern Shore filed an application before the FERC requesting authorization for the following: (1) Phase I - upgrade of Parkesburg Metering & Regulating Station; (2) Phase II - construct and operate 2.7 miles of 16-inch mainline looping in Pennsylvania; and (3) Phase III - construct and operate 3.0 miles of 16-inch mainline looping and a pressure control station in Delaware. The purpose of this construction is to enable Eastern Shore to provide additional daily firm transportation capacity of 15,100 dekatherms on Eastern Shore's system phased in over a three-year period commencing November 1, 2003. Phase I of this expansion was completed and placed into service on November 1, 2003. Bids for Phase II construction were received and a contract awarded. Construction for Phase II started in July 2004 with a projected completion and in-service date of November 2004. Phase III is expected to be constructed during 2005. In October 2002, Eastern Shore filed an application with the FERC for recovery of gas supply realignment costs associated with the implementation of FERC Order No. 636. The costs totaled $196,000 (including interest). At that time, the FERC would not review Eastern Shore's filing because the FERC wished to settle a related matter with another transmission company first. The other transmission company submitted a filing on December 5, 2003. Eastern Shore is preparing to resubmit its transition cost recovery filing. Eastern Shore, on February 9, 2004, filed with the FERC a Plan and Schedule for Standards of Conduct Compliance as directed by the FERC's Order No. 2004, issued on November 25, 2003. Such Standards of Conduct govern the relationship between transmission providers such as Eastern Shore and their energy affiliates. Order No. 2004 revises and conforms the current gas and electric standards by broadening the definition of an energy affiliate covered by such standards of conduct and applies them uniformly to natural gas pipeline and electric transmission providers. Further, the standards will assure that transmission providers cannot extend their market power over transmission to other energy markets by giving their energy affiliates unduly preferential treatment. The standards also help ensure transmission providers offer service to all customers on a non-discriminatory basis. The deadline for compliance with the Standards of Conduct was September 22, 2004. Eastern Shore performed the necessary training required by FERC and completed the posting of required information as described in Order 2004. Eastern Shore is also following the FERC's recent rulemaking pertaining to creditworthiness standards for interstate natural gas pipelines. Eastern Shore will evaluate its current tariff creditworthiness provisions and make any necessary revisions to conform to the FERC's rules relating to such standards. On November 19, 2001, the Florida division filed a petition with the Florida Public Service Commission ( the "Florida PSC") for approval of certain transportation cost recovery rates. The Florida PSC approved the rates on January 24, 2002, which provide for the recovery, over a two-year period, of the Florida division's actual and projected non-recurring expenses incurred in the implementation of the transportation provisions of the tariff as approved in a November 2000 rate case. The Florida division filed a petition on February 4, 2004, to dispose of a minor under-recovery of the actual expenses incurred to implement the tariff provisions. The petition was approved by the Florida PSC at its March 23, 2004 agenda conference. On November 5, 2002, the Florida PSC authorized a pilot program under which the Florida division converted all remaining sales customers to transportation service and exited the gas merchant function. Implementation of Phase One of the Transitional Transportation Service ("TTS") program was completed in November 2002, and the Florida division is now actively providing the administrative services as approved by the Florida PSC, including billing, collection service, payment tracking, non-pay disconnects, various account reports and related administrative activities. On July 15, 2003, the Florida PSC approved a rate restructuring proposed by the Florida division. The restructuring created three new low volume rate classes, with customer charge levels that ensure that all customers receive benefits from the TTS program. On January 4, 2004, the Florida PSC authorized the Florida division to refund the remaining balance in its over-recovered purchased gas costs account, totaling $246,000, as a final step in its exit of the gas merchant function. The refund was completed in March 2004. On May 3, 2004, the Florida division filed its Conservation Program Cost Recovery True-up for the calendar year 2003 with the Florida PSC. The Florida PSC audited the program's revenues and expenditures and recommended a minor adjustment to the amounts. The Florida division accepted the Florida PSC findings and the 2005 conservation rates were approved by the Florida PSC on November 4, 2004. On August 25, 2004, the Florida division filed with the Florida PSC a petition for authorization to restructure rates and establish new customer classifications. The filing would allow the Florida division to collect a greater percentage of revenues from fixed charges, rather than variable charges based on consumption. The Florida PSC is expected to rule on this request in the first quarter of 2005. On September 1, 2004, the Delaware division filed its annual Gas Sales Service Rates ("GSR") application that will be effective for service rendered on and after November 1, 2004, with the Delaware Public Service Commission (Delaware "PSC"). Along with the GSR application, the Delaware division also filed a proposed natural gas commodity procurement plan, developed by an independent consultant retained by the division and the Delaware PSC staff. The Delaware PSC approved the GSR charges, subject to full evidentiary hearings and a final decision by the Commission, on September 14, 2004. In September, the Maryland division filed a proposed quarterly GSR charge to become effective October 1, 2004, subject to review during the annual gas cost proceeding. The quarterly filings allow the division to set gas cost recovery rates at a level that closely reflects the current market rate for natural gas commodities. The Maryland PSC issued new proposed code of conduct and affiliate transaction regulations on May 10, 2004. The proposed regulations do contain a clause that allows the Commission to waive any of the regulations for a utility because of "good cause" shown. The final regulations are not expected to be effective until the end of 2004 or the beginning of 2005, due to the time needed for a review by the Governor's office, publication in the Maryland Register and a comment period. 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 sides 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 Delaware, Maryland and Florida offer transportation services to certain industrial customers. In 2001, the Florida operation extended transportation service to commercial customers and, in 2002, to residential customers. With transportation service now available on the Company's distribution systems, the Company is competing with third party suppliers to sell gas to industrial customers. As it relates to transportation services, 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 service to additional classes of distribution customers in the future. The Company established a natural gas sales and supply operation in Florida in 1994 to compete for customers eligible for transportation services. The Company's propane distribution operations compete with several other propane distributors in their service territories, primarily on the basis of service and price, emphasizing reliability of service and responsiveness. Competition is generally from local outlets of national distribution companies and local businesses, because distributors located in close proximity to customers incur lower costs of providing service. Propane competes primarily with electricity and heating oil as energy sources. Since natural gas has historically been less expensive than propane, propane is generally not distributed in geographic areas serviced by natural gas pipeline or distribution systems. The propane wholesale marketing operation competes against various marketers, many of which have significantly greater resources and are able to obtain price or volumetric advantages. The advanced information services business faces significant competition from a number of larger competitors having substantially greater resources available to them than does the Company. In addition, changes in the advanced information services business are occurring rapidly, which could adversely impact the markets for the products and services offered by these businesses. This segment competes on the basis of technological expertise, reputation and price. RECENT PRONOUNCEMENTS On January 12, 2004, the Financial Accounting Standards Board ("FASB") released FASB Staff Position No. Statement of Financial Accounting Standards ("SFAS") 106-1 "Accounting and Disclosure Requirements Related to the Medicare Prescription Drug, Improvement and Modernization Act of 2003" ("the Act"). On May 19, 2004, the FASB released FASB Staff Position No. SFAS 106-2 which superseded SFAS 106-1. SFAS No. 106-2 provides guidance on the accounting for the effects of the Act and requires certain disclosures regarding the effect of the federal subsidy provided by the Act. It is effective for the first interim or annual period beginning after June 15, 2004. Adoption of SFAS No. 106-2 is not expected to have a material impact on the Company's post-retirement benefit obligation. The Emerging Issues Task Force ("EITF") of the FASB issued EITF No. 03-6 on February 9, 2004. It requires that earnings used to calculate earnings per share be allocated between common shareholders and other securities holders based on their respective rights to receive dividends. This requirement was effective for the second quarter of 2004. It had no impact on the Company's calculation of earnings per share. INFLATION Inflation affects the cost of labor, products and services required for operations, maintenance and capital improvements. While the impact of inflation has remained low in recent years, natural gas and propane prices are subject to rapid fluctuations. Fluctuations in natural gas prices are passed on to customers through the gas cost recovery mechanism in the Company's tariffs. To help cope with the effects of inflation on its capital investments and returns, the Company seeks rate relief from regulatory commissions for regulated operations while monitoring the returns of its unregulated business operations. To compensate for fluctuations in propane gas prices, the Company adjusts its propane selling prices to the extent allowed by the market. CAUTIONARY STATEMENT Chesapeake has made statements in this report that are considered to be forward-looking statements. These statements are not matters of historical fact. Sometimes they contain words such as "believes," "expects," "intends," "plans," "will," or "may," and other similar words of a predictive nature. These statements relate to matters such as the sale of the water businesses, customer growth, changes in revenues or gross margins, capital expenditures, environmental remediation costs, regulatory approvals, market risks associated with the Company's propane wholesale marketing operation, competition, inflation and other matters. It is important to understand that these forward-looking statements are not guarantees, but are subject to certain risks and uncertainties and other important factors that could cause actual results to differ materially from those in the forward-looking statements. These factors include, among other things: o the temperature sensitivity of the natural gas and propane businesses; o the effect of spot, forward and futures market prices on the Company's distribution, wholesale marketing and energy trading businesses; o the effects of competition on the Company's unregulated and regulated businesses; o the effect of changes in federal, state or local regulatory and tax requirements, including deregulation; o the effect of accounting changes; o the effect of compliance with environmental regulations or the remediation of environmental damage; o the effects of general economic conditions on the Company and its customers; o the ability of the Company's new and planned facilities and acquisitions to generate expected revenues; and o the Company's ability to obtain the rate relief and cost recovery requested from utility regulators and the timing of the requested regulatory actions. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Market risk represents the potential loss arising from adverse changes in market rates and prices. Long-term debt is subject to potential losses based on the change in interest rates. The Company's long-term debt consists primarily of fixed rate senior notes, first mortgage bonds and convertible debentures, none of which was issued for trading purposes. The carrying value of long-term debt at September 30, 2004 was $71.4 million, with a fair value of $77.6 million, based mainly on current market prices or discounted cash flows using current rates for similar issues with similar terms and remaining maturities. The Company is exposed to changes in interest rates due to the use of fixed rate long-term debt to finance the business. Management continually monitors fluctuations in interest rates and debt markets to assess the benefits of changing the mix of long and short-term debt or refinancing existing debt. The Company's propane distribution business is exposed to market risk as a result of propane storage activities and entering into fixed price contracts for supply. The Company can store up to approximately 4 million gallons (including leased storage) of propane during the winter season to meet its customers' peak requirements and to serve metered customers. Decreases in the wholesale price of propane will cause the value of stored propane to decline. To mitigate the impact of price fluctuations, the Company has adopted a risk management policy that allows the propane distribution operation to enter into fair value hedges of its inventory. At September 30, 2004 the Company had entered into a "put" contract for 1.1 million gallons of propane to protect against a drop in the inventory value. The "put" expires in January 2005. The Company's propane wholesale marketing operation is a party to natural gas liquids ("NGL") forward contracts, primarily propane contracts, with various third parties. These contracts require that the propane wholesale marketing operation purchase or sell NGL at a fixed price at fixed future dates. At expiration, the contracts are settled by the delivery of NGL to the Company or the counter party or booking out the transaction. (Booking out is a procedure for financially settling a contract in lieu of the physical delivery of energy.) The propane wholesale marketing operation also enters into futures contracts that are traded on the New York Mercantile Exchange. In certain cases, the futures contracts are settled by the payment or receipt of a net amount equal to the difference between the current market price of the futures contract and the original contract price; however, they may also be settled for physical receipt or delivery of propane. The forward and futures contracts are entered into for trading and wholesale marketing purposes. The propane wholesale marketing business is subject to commodity price risk on its open positions to the extent that market prices for NGL deviate from fixed contract settlement prices. Market risk associated with the trading of futures and forward contracts are monitored daily for compliance with the Company's Risk Management Policy, which includes volumetric limits for open positions. To manage exposures to changing market prices, open positions are marked up or down to market prices and reviewed by oversight officials on a daily basis. Additionally, the Risk Management Committee reviews periodic reports on market and the credit risk of counter-parties, approves any exceptions to the Risk Management Policy (within limits established by the Board of Directors) and authorizes the use of any new types of contracts. Quantitative information on forward and futures contracts at September 30, 2004 is presented in the following table. All of the contracts mature within twelve months.
- -------------------------------------------------------------------------- QUANTITY ESTIMATED WEIGHTED AVERAGE AT SEPTEMBER 30, 2004 IN GALLONS MARKET PRICES CONTRACT PRICES - -------------------------------------------------------------------------- FORWARD CONTRACTS Sale. . . . . . . . . 12,537,000 $0.8350 - $0.8600 $0.7907 Purchase. . . . . . . 7,980,000 $0.8350 - $0.8550 $0.7735 FUTURES CONTRACTS Sale. . . . . . . . . 420,000 $0.8375 - $0.8400 $0.7950 - -------------------------------------------------------------------------- Estimated market prices and weighted average contract prices are in dollars per gallon.
ITEM 4. CONTROLS AND PROCEDURES EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES The Chief Executive Officer and Chief Financial Officer of the Company, with the participation of other Company officials, have evaluated the Company's "disclosure controls and procedures" (as such term is defined under Rule 13a-15(e) and 15d-15(e) promulgated under the Securities Exchange Act of 1934, as amended) as of September 30, 2004. Based upon their evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the Company's disclosure controls and procedures are effective. CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING During the quarter ended September 30, 2004, there was no change in the Company's internal control over financial reporting that has materially affected, or is reasonably likely to materially affect, the Company's internal control over financial reporting. PART II - OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS 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 government agencies concerning rates. In the opinion of management, the ultimate disposition of these proceedings and claims will not have a material effect on the consolidated financial position, results of operations or cash flows of the Company. ITEM 2. CHANGES IN SECURITIES, USE OF PROCEEDS AND ISSUER PURCHASES OF EQUITY SECURITIES The Company did not repurchase any of its shares of common stock during the three month period ended September 30, 2004. Chesapeake has no publicly announced plans or programs to repurchase its shares. ITEM 3. DEFAULTS UPON SENIOR SECURITIES None ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None ITEM 5. OTHER INFORMATION None ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits: - Exhibit 31.1 - Certificate of Chief Executive Officer of Chesapeake Utilities Corporation pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934, dated November 9, 2004 - Exhibit 31.2 - Certificate of Chief Financial Officer of Chesapeake Utilities Corporation pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934, dated November 9, 2004 - Exhibit 32.1 - Certificate of Chief Executive Officer of Chesapeake Utilities Corporation pursuant to 18 U.S.C. Section 1350, dated November 9, 2004 - Exhibit 32.2 - Certificate of Chief Financial Officer of Chesapeake Utilities Corporation pursuant to 18 U.S.C. Section 1350, dated November 9, 2004 (b) Reports on Form 8-K: August 5, 2004 furnishing the Company's earnings press release for the quarter ended June 30, 2004 (Items 7 and 12). SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. Chesapeake Utilities Corporation /s/ Michael P. McMasters - --------------------------- Michael P. McMasters Vice President and Chief Financial Officer Date: November 9, 2004 EX-31.1 2 doc2.txt CEO CERTIFICATION-RULE 13A-14(A) EXHIBIT 31.1 CERTIFICATE PURSUANT TO RULE 13A-14(A) UNDER THE SECURITIES EXCHANGE ACT OF 1934 I, John R. Schimkaitis, certify that: 1. I have reviewed this quarterly report on Form 10-Q for the quarter ended September 30, 2004 of Chesapeake Utilities Corporation; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and we have: a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; c) disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): a) all significant deficiencies and material weakness in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: November 9, 2004 /s/ John R. Schimkaitis - -------------------------- John R. Schimkaitis President and Chief Executive Officer EX-31.2 3 doc3.txt CFO CERTIFICATION-RULE 13A-14(A) EXHIBIT 31.2 CERTIFICATE PURSUANT TO RULE 13A-14(A) UNDER THE SECURITIES EXCHANGE ACT OF 1934 I, Michael P. McMasters, certify that: 1. I have reviewed this quarterly report on Form 10-Q for the quarter ended September 30, 2004 of Chesapeake Utilities Corporation; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and we have: a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; c) disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): a) all significant deficiencies and material weakness in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: November 9, 2004 /s/ Michael P. McMasters - --------------------------- Michael P. McMasters Senior Vice President and Chief Financial Officer EX-32.1 4 doc4.txt CEO SECTION 1350 CERTIFICATION EXHIBIT 32.1 CERTIFICATE OF CHIEF EXECUTIVE OFFICER OF CHESAPEAKE UTILITIES CORPORATION (PURSUANT TO 18 U.S.C. SECTION 1350) I, John R. Schimkaitis, President and Chief Executive Officer of Chesapeake Utilities Corporation, certify that, to the best of my knowledge, the Quarterly Report on Form 10-Q of Chesapeake Utilities Corporation ("Chesapeake") for the period ended September 30, 2004, filed with the Securities and Exchange Commission on the date hereof (i) fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, and (ii) the information contained therein fairly presents, in all material respects, the financial condition and results of operations of Chesapeake. /s/ John R. Schimkaitis -------------------------- John R. Schimkaitis November 9, 2004 A signed original of this written statement required by Section 906 of the Sarbanes-Oxley Act of 2002, or other document authenticating, acknowledging, or otherwise adopting the signature that appears in typed form within the electronic version of this written statement required by Section 906, has been provided to Chesapeake Utilities Corporation and will be retained by Chesapeake Utilities Corporation and furnished to the Securities and Exchange Commission or its staff upon request. EX-32 5 doc5.txt CEO SECTION 1350 CERTIFICATION EXHIBIT 32.2 CERTIFICATE OF CHIEF FINANCIAL OFFICER OF CHESAPEAKE UTILITIES CORPORATION (PURSUANT TO 18 U.S.C. SECTION 1350) I, Michael P. McMasters, Vice President and Chief Financial Officer of Chesapeake Utilities Corporation, certify that, to the best of my knowledge, the Quarterly Report on Form 10-Q of Chesapeake Utilities Corporation ("Chesapeake") for the period ended September 30, 2004, filed with the Securities and Exchange Commission on the date hereof (i) fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, and (ii) the information contained therein fairly presents, in all material respects, the financial condition and results of operations of Chesapeake. /s/ Michael P. McMasters --------------------------- Michael P. McMasters November 9, 2004 A signed original of this written statement required by Section 906 of the Sarbanes-Oxley Act of 2002, or other document authenticating, acknowledging, or otherwise adopting the signature that appears in typed form within the electronic version of this written statement required by Section 906, has been provided to Chesapeake Utilities Corporation and will be retained by Chesapeake Utilities Corporation and furnished to the Securities and Exchange Commission or its staff upon request. -----END PRIVACY-ENHANCED MESSAGE-----