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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, 2002
------------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ______ to ______
COMMISSION FILE NUMBER: 001-11590
CHESAPEAKE UTILITIES CORPORATION
--------------------------------
(Exact name of registrant as specified in its charter)
DELAWARE 51-0064146
-------- ----------
(State or other (I.R.S. Employer
jurisdiction of Identification No.)
incorporation
or organization)
909 SILVER LAKE BOULEVARD, DOVER, DELAWARE 19904
------------------------------------------------
(Address of principal executive offices, including Zip Code)
(302) 734-6799
--------------
(Registrant's Telephone Number, including Area Code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
Common Stock, par value $.4867 - 5,511,610 shares
issued and outstanding as of September 30, 2002.
TABLE OF CONTENTS
PART I - FINANCIAL INFORMATION. . . . . . . . . . . . . . . . . . . . . . 1
Item 1. Financial Statements. . . . . . . . . . . . . . . . . . . . . 1
Notes to Consolidated Financial Statements. . . . . . . . . . . . . . 7
1. Quarterly Financial Data . . . . . . . . . . . . . . . . . . . . 7
2. Calculation of Earnings Per Share. . . . . . . . . . . . . . . 7
3. Commitments and Contingencies. . . . . . . . . . . . . . . . . . 7
Environmental Matters . . . . . . . . . . . . . . . . . . . . . 7
Other Commitments and Contingencies . . . . . . . . . . . . . 9
4. Recent Authoritative Pronouncements
on Financial Reporting and Accounting. . . . . . . . . . . . .10
5. Goodwill and Other Intangible Assets . . . . . . . . . . . . . . .11
6. Segment Information . . . . . . . . . . . . . . . . . . . . . . .13
7. Subsequent Events . . . . . . . . . . . . . . . . . . . . . . . .13
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations. . . . . . . . . . . .13
Business Description . . . . . . . . . . . . . . . . . . . . . . . . .13
Financial Position, Liquidity and Capital Resources . . . . . . . . .14
Results of Operations for the Quarter
Ended September 30, 2002 . . . . . . . . . . . . . . . . . . . . . . .15
Consolidated Overview. . . . . . . . . . . . . . . . . . . . . . . . .15
Natural Gas Distribution and Transmission . . . . . . . . . . . . .16
Propane. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
Advanced Information Services. . . . . . . . . . . . . . . . . . . . 17
Other Business Operations. . . . . . . . . . . . . . . . . . . . . . 18
Operating Income Taxes . . . . . . . . . . . . . . . . . . . . . . . 18
Interest Expense. . . . . . . . . . . . . . . . . . . . . . . . . . . 18
Results of Operations for the Nine Months
Ended September 30, 2002 . . . . . . . . . . . . . . . . . . . . . . .18
Consolidated Overview. . . . . . . . . . . . . . . . . . . . . . . . .18
Natural Gas Distribution and Transmission . . . . . . . . . . . . .19
Propane. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
Advanced Information Services. . . . . . . . . . . . . . . . . . . . 21
Other Business Operations. . . . . . . . . . . . . . . . . . . . . . 21
Operating Income Taxes . . . . . . . . . . . . . . . . . . . . . . . 21
Interest Expense. . . . . . . . . . . . . . . . . . . . . . . . . . . 22
Environmental Matters . . . . . . . . . . . . . . . . . . . . . . . . 22
Other Matters . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
Regulatory Matters. . . . . . . . . . . . . . . . . . . . . . . . . . 22
Competition. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
Recent Pronouncements . . . . . . . . . . . . . . . . . . . . . . . . 24
Inflation. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
Cautionary Statement. . . . . . . . . . . . . . . . . . . . . . . . . 24
Item 3. Quantitative and Qualitative Disclosures about Market Risk. . 24
Item 4. Controls and Procedures. . . . . . . . . . . . . . . . . . .25
Evaluation of Disclosure Controls and Procedures. . . . . . . . . 25
Changes in Internal Controls. . . . . . . . . . . . . . . . . . . . 25
PART II - OTHER INFORMATION. . . . . . . . . . . . . . . . . . . . . . . 26
SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
CERTIFICATIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CHESAPEAKE UTILITIES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
- -----------------------------------------------------------------------------------
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2002 2001
- -----------------------------------------------------------------------------------
OPERATING REVENUES . . . . . . . . . . . . . . . . . $ 23,526,898 $ 24,794,008
COST OF SALES. . . . . . . . . . . . . . . . . . . . 11,195,053 13,038,356
- ----------------------------------------------------- ------------- -------------
GROSS MARGIN . . . . . . . . . . . . . . . . . . . . 12,331,845 11,755,652
- ----------------------------------------------------- ------------- -------------
OPERATING EXPENSES
Operations . . . . . . . . . . . . . . . . . . . . . 8,884,605 8,150,804
Maintenance. . . . . . . . . . . . . . . . . . . . . 511,595 424,567
Depreciation and amortization. . . . . . . . . . . . 2,256,828 2,101,239
Other taxes. . . . . . . . . . . . . . . . . . . . . 1,128,980 1,022,592
Income taxes . . . . . . . . . . . . . . . . . . . . (648,535) (505,969)
- ----------------------------------------------------- ------------- -------------
Total operating expenses . . . . . . . . . . . . . . 12,133,473 11,193,233
- ----------------------------------------------------- ------------- -------------
OPERATING INCOME . . . . . . . . . . . . . . . . . . 198,372 562,419
OTHER INCOME, NET. . . . . . . . . . . . . . . . . . 38,842 62,560
- ----------------------------------------------------- ------------- -------------
INCOME BEFORE INTEREST CHARGES . . . . . . . . . . . 237,214 624,979
INTEREST CHARGES . . . . . . . . . . . . . . . . . . 1,176,379 1,299,945
- ----------------------------------------------------- ------------- -------------
NET LOSS . . . . . . . . . . . . . . . . . . . . . . $ (939,165) $ (674,966)
===================================================== ============= =============
EARNINGS PER SHARE OF COMMON STOCK:
BASIC. . . . . . . . . . . . . . . . . . . . . . . . $ (0.17) $ (0.13)
===================================================== ============= =============
DILUTED. . . . . . . . . . . . . . . . . . . . . . . $ (0.17) $ (0.13)
===================================================== ============= =============
DIVIDENDS DECLARED PER SHARE OF COMMON STOCK:. . . . $ 0.275 $ 0.275
===================================================== ============= =============
The accompanying notes are an integral part of these financial statements.
CHESAPEAKE UTILITIES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
- -----------------------------------------------------------------------------------
FOR THE NINE MONTHS ENDED SEPTEMBER 30,. . . . . . . 2002 2001
- -----------------------------------------------------------------------------------
OPERATING REVENUES . . . . . . . . . . . . . . . . . $101,111,779 $127,377,546
COST OF SALES. . . . . . . . . . . . . . . . . . . . 51,913,647 78,653,710
- ----------------------------------------------------- ------------- -------------
GROSS MARGIN . . . . . . . . . . . . . . . . . . . . 49,198,132 48,723,836
- ----------------------------------------------------- ------------- -------------
OPERATING EXPENSES
Operations . . . . . . . . . . . . . . . . . . . . . 26,899,856 25,811,574
Maintenance. . . . . . . . . . . . . . . . . . . . . 1,440,985 1,278,881
Depreciation and amortization. . . . . . . . . . . . 6,965,484 6,175,573
Other taxes. . . . . . . . . . . . . . . . . . . . . 3,450,031 3,221,327
Income taxes . . . . . . . . . . . . . . . . . . . . 2,634,672 3,266,502
- ----------------------------------------------------- ------------- -------------
Total operating expenses . . . . . . . . . . . . . . 41,391,028 39,753,857
- ----------------------------------------------------- ------------- -------------
OPERATING INCOME . . . . . . . . . . . . . . . . . . 7,807,104 8,969,979
OTHER INCOME, NET. . . . . . . . . . . . . . . . . . 289,469 311,769
- ----------------------------------------------------- ------------- -------------
INCOME BEFORE INTEREST CHARGES . . . . . . . . . . . 8,096,573 9,281,748
INTEREST CHARGES . . . . . . . . . . . . . . . . . . 3,622,566 3,924,519
- ----------------------------------------------------- ------------- -------------
INCOME BEFORE CUMULATIVE EFFECT OF
CHANGE IN ACCOUNTING PRINCIPLE. . . . . . . . . . 4,474,007 5,357,229
CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING
PRINCIPLE, NET OF TAX . . . . . . . . . . . . . . (1,916,000) 0
- ----------------------------------------------------- ------------- -------------
NET INCOME . . . . . . . . . . . . . . . . . . . . . $ 2,558,007 $ 5,357,229
===================================================== ============= =============
EARNINGS PER SHARE OF COMMON STOCK:
BASIC
BEFORE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE. . . $ 0.82 $ 1.00
EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE . . . . . . (0.35) 0.00
- ----------------------------------------------------- ------------- -------------
NET INCOME . . . . . . . . . . . . . . . . . . . . . $ 0.47 $ 1.00
===================================================== ============= =============
DILUTED
BEFORE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE. . . $ 0.82 $ 0.99
EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE . . . . . . (0.35) 0.00
- ----------------------------------------------------- ------------- -------------
NET INCOME . . . . . . . . . . . . . . . . . . . . . $ 0.47 $ 0.99
===================================================== ============= =============
DIVIDENDS DECLARED PER SHARE OF COMMON STOCK:. . . . $ 0.825 $ 0.820
===================================================== ============= =============
The accompanying notes are an integral part of these financial statements.
CHESAPEAKE UTILITIES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
- ------------------------------------------------------------------------------------------
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2002 2001
- ------------------------------------------------------------------------------------------
OPERATING ACTIVITIES
Net Income . . . . . . . . . . . . . . . . . . . . . . . . $ 2,558,007 $ 5,357,229
Adjustments to reconcile net income to net operating cash:
Goodwill impairment. . . . . . . . . . . . . . . . . . . 3,200,000 0
Depreciation and amortization. . . . . . . . . . . . . . 6,965,484 6,175,573
Deferred income taxes, net . . . . . . . . . . . . . . . (955,277) (3,884)
Investment tax credit adjustments. . . . . . . . . . . . (41,112) (26,469)
Mark-to-market adjustments . . . . . . . . . . . . . . . (45,155) 881,449
Other, net . . . . . . . . . . . . . . . . . . . . . . . 943,091 1,096,802
Changes in assets and liabilities:
Accounts receivable, net . . . . . . . . . . . . . . . . 7,259,075 16,426,692
Inventory, materials, supplies and storage gas . . . . . (1,031,969) (107,579)
Other current assets . . . . . . . . . . . . . . . . . . (203,267) (599,716)
Environmental recoveries, net of expenditures. . . . . . 377,492 295,852
Other deferred charges . . . . . . . . . . . . . . . . . (369,147) (1,231,932)
Accounts payable, net. . . . . . . . . . . . . . . . . . (2,016,961) (17,944,737)
Refunds payable to customers . . . . . . . . . . . . . . (683,382) (251,568)
Accrued income taxes . . . . . . . . . . . . . . . . . . 404,046 451,048
Accrued interest . . . . . . . . . . . . . . . . . . . . (790,870) 578,732
Overrecovered deferred purchased gas costs . . . . . . . 4,931,090 830,201
Flex rate liability. . . . . . . . . . . . . . . . . . . (481,146) (181,941)
Other current liabilities. . . . . . . . . . . . . . . . (282,589) 295,995
- ------------------------------------------------------------ ------------- -------------
Net cash provided by operating activities. . . . . . . . . . 19,737,410 12,041,747
- ------------------------------------------------------------ ------------- -------------
INVESTING ACTIVITIES
Property, plant and equipment expenditures, net. . . . . . (9,142,228) (18,682,357)
- ------------------------------------------------------------ ------------- -------------
Net cash used by investing activities. . . . . . . . . . . . (9,142,228) (18,682,357)
- ------------------------------------------------------------ ------------- -------------
FINANCING ACTIVITIES
Common stock dividends, net of amounts reinvested. . . . . (3,985,880) (3,894,023)
Issuance of stock:
Dividend Reinvestment Plan optional cash . . . . . . . . 214,857 133,376
Retirement Savings Plan. . . . . . . . . . . . . . . . . 773,488 793,458
Net repayment under line of credit agreements. . . . . . . (6,419,401) 7,600,000
Proceeds from issuance of long-term debt . . . . . . . . . 60,681 300,000
Repayment of long-term debt. . . . . . . . . . . . . . . . (1,408,908) (1,390,221)
- ------------------------------------------------------------ ------------- -------------
Net cash (used) provided by financing activities . . . . . . (10,765,163) 3,542,590
- ------------------------------------------------------------ ------------- -------------
NET DECREASE IN CASH AND CASH EQUIVALENTS. . . . . . . . . . (169,981) (3,098,020)
CASH AND CASH EQUIVALENTS BEGINNING OF PERIOD. . . . . . . . 1,188,335 4,606,316
- ------------------------------------------------------------ ------------- -------------
CASH AND CASH EQUIVALENTS END OF PERIOD. . . . . . . . . . . $ 1,018,354 $ 1,508,296
============================================================ ============= =============
The accompanying notes are an integral part of these financial statements.
CHESAPEAKE UTILITIES CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
- -----------------------------------------------------------------------------------------
SEPTEMBER 30, DECEMBER 31,
ASSETS 2002 2001
- -----------------------------------------------------------------------------------------
PROPERTY, PLANT AND EQUIPMENT
Natural gas distribution and transmission . . . . . . . $ 173,609,126 $ 168,436,347
Propane . . . . . . . . . . . . . . . . . . . . . . . . 35,155,507 34,695,862
Advanced information services . . . . . . . . . . . . . 1,550,960 1,521,144
Other plant . . . . . . . . . . . . . . . . . . . . . . 13,786,742 12,249,442
- -------------------------------------------------------- --------------- --------------
Total property, plant and equipment . . . . . . . . . . 224,102,335 216,902,795
Less: Accumulated depreciation and amortization. . . . (72,313,482) (66,646,944)
- -------------------------------------------------------- --------------- --------------
Net property, plant and equipment . . . . . . . . . . . 151,788,853 150,255,851
- -------------------------------------------------------- --------------- --------------
INVESTMENTS . . . . . . . . . . . . . . . . . . . . . . 386,656 517,901
- -------------------------------------------------------- --------------- --------------
CURRENT ASSETS
Cash and cash equivalents . . . . . . . . . . . . . . . 1,018,354 1,188,335
Accounts receivable (less allowance for uncollectibles
of $576,100 and $621,516, respectively). . . . . . . 14,007,234 21,266,309
Materials and supplies, at average cost . . . . . . . . 1,325,167 1,106,995
Merchandise inventory, at average cost. . . . . . . . . 1,140,542 1,610,786
Propane inventory, at average cost. . . . . . . . . . . 4,017,439 2,518,871
Storage gas prepayments . . . . . . . . . . . . . . . . 4,111,889 4,326,416
Underrecovered purchased gas costs. . . . . . . . . . . 1,588,664 6,519,754
Income taxes receivable . . . . . . . . . . . . . . . . 271,458 675,504
Prepaid expenses and other current assets . . . . . . . 2,938,592 2,209,026
- -------------------------------------------------------- --------------- --------------
Total current assets. . . . . . . . . . . . . . . . . . 30,419,339 41,421,996
- -------------------------------------------------------- --------------- --------------
DEFERRED CHARGES AND OTHER ASSETS
Environmental regulatory assets . . . . . . . . . . . . 2,555,550 2,677,010
Environmental expenditures. . . . . . . . . . . . . . . 2,811,664 3,189,156
Intangible assets, net. . . . . . . . . . . . . . . . . 4,339,560 7,724,283
Other deferred charges. . . . . . . . . . . . . . . . . 4,788,079 4,548,829
- -------------------------------------------------------- --------------- --------------
Total deferred charges and other assets . . . . . . . . 14,494,853 18,139,278
- -------------------------------------------------------- --------------- --------------
TOTAL ASSETS. . . . . . . . . . . . . . . . . . . . . . $ 197,089,701 $ 210,335,026
======================================================== =============== ==============
The accompanying notes are an integral part of these financial statements.
CHESAPEAKE UTILITIES CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
- -----------------------------------------------------------------------------------------
SEPTEMBER 30, DECEMBER 31,
CAPITALIZATION AND LIABILITIES. . . . . . . . . . . . . 2002 2001
- -----------------------------------------------------------------------------------------
CAPITALIZATION
Stockholders' equity
Common Stock, par value $.4867 per share;
(authorized 12,000,000 shares; issued and outstanding
5,511,610 and 5,424,962 shares, respectively) . . . . . $ 2,681,804 $ 2,640,060
Additional paid-in capital. . . . . . . . . . . . . . . 31,272,223 29,653,992
Retained earnings . . . . . . . . . . . . . . . . . . . 32,590,235 34,555,560
- -------------------------------------------------------- --------------- --------------
Total stockholders' equity. . . . . . . . . . . . . . . 66,544,262 66,849,612
Long-term debt, net of current maturities . . . . . . . 75,990,876 48,408,596
- -------------------------------------------------------- --------------- --------------
Total capitalization. . . . . . . . . . . . . . . . . . 142,535,138 115,258,208
- -------------------------------------------------------- --------------- --------------
CURRENT LIABILITIES
Current portion of long-term debt . . . . . . . . . . . 3,707,753 2,686,145
Short-term borrowing. . . . . . . . . . . . . . . . . . 5,680,599 42,100,000
Accounts payable. . . . . . . . . . . . . . . . . . . . 12,534,652 14,551,621
Refunds payable to customers. . . . . . . . . . . . . . 288,193 971,575
Accrued interest. . . . . . . . . . . . . . . . . . . . 967,531 1,758,401
Dividends payable . . . . . . . . . . . . . . . . . . . 1,514,563 1,491,832
Deferred income taxes payable . . . . . . . . . . . . . 846,956 848,271
Other accrued liabilities . . . . . . . . . . . . . . . 5,382,408 5,604,237
- -------------------------------------------------------- --------------- --------------
Total current liabilities . . . . . . . . . . . . . . . 30,922,655 70,012,082
- -------------------------------------------------------- --------------- --------------
DEFERRED CREDITS AND OTHER LIABILITIES
Deferred income taxes . . . . . . . . . . . . . . . . . 14,647,636 15,732,842
Deferred investment tax credits . . . . . . . . . . . . 561,245 602,357
Environmental liability . . . . . . . . . . . . . . . . 2,948,376 3,199,733
Accrued pension costs . . . . . . . . . . . . . . . . . 1,631,551 1,595,650
Other liabilities . . . . . . . . . . . . . . . . . . . 3,843,100 3,934,154
- -------------------------------------------------------- --------------- --------------
Total deferred credits and other liabilities. . . . . . 23,631,908 25,064,736
- -------------------------------------------------------- --------------- --------------
TOTAL CAPITALIZATION AND LIABILITIES. . . . . . . . . . $ 197,089,701 $ 210,335,026
======================================================== =============== ==============
The accompanying notes are an integral part of these financial statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. QUARTERLY FINANCIAL DATA
The financial information for Chesapeake Utilities Corporation (the "Company" or
"Chesapeake") included herein is unaudited and should be read in conjunction
with the Company's Annual Report on Form 10-K. In the opinion of management,
this financial information reflects normal recurring adjustments, including the
cumulative effect of change in accounting principle, 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. Certain amounts in 2001 have been reclassified to conform to the
presentation for the current year.
2. CALCULATION OF EARNINGS PER SHARE
- -------------------------------------------------------------------------------------------------------
THREE MONTHS ENDED NINE MONTHS ENDED
FOR THE PERIOD ENDED SEPTEMBER 30, 2002 2001 2002 2001
- -------------------------------------------------------------------------------------------------------
CALCULATION OF BASIC EARNINGS PER SHARE BEFORE
CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE:
Net Income (Loss) before cumulative effect of
change in accounting principle . . . . . . . . . . . $ (939,165) $ (674,966) $4,474,007 $5,357,229
Weighted average shares outstanding. . . . . . . . . 5,503,318 5,381,702 5,475,555 5,351,523
- ----------------------------------------------------- ----------- ----------- ---------- ----------
BASIC EARNINGS PER SHARE BEFORE CUMULATIVE
EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE . . . . . . $ (0.17) $ (0.13) $ 0.82 $ 1.00
===================================================== =========== =========== ========== ==========
CALCULATION OF DILUTED EARNINGS PER SHARE BEFORE
CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE:
RECONCILIATION OF NUMERATOR:
Net Income (Loss) before cumulative effect of
change in accounting principle Basic . . . . . . . . $ (939,165) $ (674,966) $4,474,007 $5,357,229
Effect of 8.25% Convertible debentures * . . . . . . 0 0 0 125,940
- ----------------------------------------------------- ----------- ----------- ---------- ----------
Adjusted numerator Diluted . . . . . . . . . . . . . $ (939,165) $ (674,966) $4,474,007 $5,483,169
- ----------------------------------------------------- ----------- ----------- ---------- ----------
RECONCILIATION OF DENOMINATOR:
Weighted shares outstanding Basic. . . . . . . . . . 5,503,318 5,381,702 5,475,555 5,351,523
Effect of dilutive securities *
Stock options. . . . . . . . . . . . . . . . . . . . 0 0 8,863 8,060
Warrants . . . . . . . . . . . . . . . . . . . . . . 0 0 1,963 640
8.25% Convertible debentures . . . . . . . . . . . . 0 0 0 201,908
- ----------------------------------------------------- ----------- ----------- ---------- ----------
Adjusted denominator Diluted . . . . . . . . . . . . 5,503,318 5,381,702 5,486,381 5,562,131
- ----------------------------------------------------- ----------- ----------- ---------- ----------
DILUTED EARNINGS PER SHARE BEFORE CUMULATIVE
EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE . . . . . . $ (0.17) $ (0.13) $ 0.82 $ 0.99
===================================================== =========== =========== ========== ==========
* 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
The Company is currently participating in the remediation of three former gas
manufacturing plant sites located in different jurisdictions. The Company has
accrued liabilities for the Dover Gas Light, Salisbury Town Gas Light and the
Winter Haven Coal Gas sites accordingly. The Company is currently in discussions
with the Maryland Department of the Environment ("MDE") regarding a fourth site
in Cambridge, Maryland.
The Dover Gas Light Site is a former manufactured gas plant site located in
Dover, Delaware. Remedies were selected by the United States Environmental
Protection Agency ("USEPA") to address the soil and ground-water. The Company
has completed each of the components of the soil remediation. The parking lot
construction, the final component of the soil remediation, was completed in the
third quarter 2002. A final report requesting certification of completion of all
components of the soil remediation has been submitted to the USEPA. Following
receipt of certification from the USEPA, Chesapeake's obligations for the Dover
Site have been met. Under the terms of the settlement, described below,
Chesapeake would not be obligated to perform the ground-water remediation.
In May 2001, the Company, General Public Utilities Corporation, Inc. (now
FirstEnergy Corporation), the State of Delaware, the USEPA and the United States
Department of Justice signed a settlement term sheet to settle complaints
brought by the Company and the United States in 1996 and 1997, respectively,
with respect to the Dover Site. In October 2002, the final Consent Decrees were
signed and delivered to the United States Department of Justice. The United
States anticipates that the Consent Decrees will be lodged simultaneously with
the United States District Court for the District of Delaware and a notice
soliciting public comment for a 30-day period will be published in the Federal
Register during the fourth quarter 2002. Depending upon the date of publication,
and upon the number and nature of the comments received, the United States may
move the court to enter the Consent Decrees later in the fourth quarter in 2002.
Once the Consent Decrees receive final approval, the Company will:
- Receive a net payment of $1.15 million from other parties to
the agreement. These proceeds will be passed on to the
Company's firm customers, in accordance with the
environmental rate rider.
- Receive a release from liability and covenant not to sue
from the USEPA and the State of Delaware. This will relieve
the Company from liability for future remediation at the
site, unless previously unknown conditions are discovered at
the site, or information previously unknown to USEPA is
received that indicates the remedial action related to the
prior manufactured gas plant is not sufficiently protective.
These contingencies are standard, and are required by the
United States in all liability settlements.
At September 30, 2002, the Company had accrued $2.1 million (discounted) of
costs associated with the remediation of the Dover Site and had recorded an
associated regulatory asset for the same amount. Of that amount, $1.5 million
was for estimated ground-water remediation and $600,000 was for remaining soil
remediation. The $1.5 million represented the low end of the ground-water
remediation estimates prepared by an independent consultant and was used because
the Company could not, at that time, predict the remedy the USEPA might require.
Upon receiving final court approval of the Consent Decrees, the Company will
reduce both the accrued environmental liability and the associated environmental
regulatory asset.
Through September 30, 2002, the Company has incurred approximately $9.2 million
in costs relating to environmental testing and remedial action studies at the
Dover Site. Approximately $6.7 million has been recovered through September 30,
2002 from other parties or through rates.
The Salisbury Town Gas Light Site is a former manufactured gas plant site
located in Salisbury, Maryland. In cooperation with the MDE, the Company has
been engaged in remediation that has primarily included the following: (1)
operation of an air sparging/soil vapor extraction ("AS/SVE") remedial system;
(2) monitoring and recovery of product from recovery wells; and (3) monitoring
of ground-water quality. In March 2002, in accordance with MDE's permission, the
Company permanently decommissioned the AS/SVE system and discontinued nearly all
on-site and off-site monitoring wells. The Company has not received a response
from the MDE concerning the Company's request for a No Further Action ("NFA")
for the site. The NFA would be conditional upon the Company performing continued
product monitoring and recovery at one well location and implementing land use
controls.
The Company has adjusted the liability with respect to the Salisbury Site to
$32,000 at September 30, 2002. 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, 2002, the Company has incurred approximately $2.9 million
for remedial actions and environmental studies at the Salisbury Site. Of this
amount, approximately $1.8 million has been recovered through insurance proceeds
or ratemaking treatment.
The Winter Haven Coal Gas site is located in Winter Haven, Florida. In May 2001,
the Florida Department of Environmental Protection ("FDEP") approved a remedial
action plan that includes the utilization of the AS/SVE technologies to address
ground-water impacts throughout a majority of the site. The AS/SVE construction
was completed and start-up of the AS/SVE system is expected to commence during
the fourth quarter of 2002. The Company is currently negotiating with FDEP on
the extent of additional investigation and remediation work required to address
surface soil, ground-water and sediment impacts that will not be remediated by
the AS/SVE system. The current estimate of costs to complete the remediation
activities at the site is approximately $817,000 (discounted). Accordingly, at
September 30, 2002, the Company has accrued a liability of $817,000. Through
September 30, 2002, the Company has incurred approximately $1.1 million of
environmental costs associated with the Florida site. At September 30, 2002, the
Company had collected $393,000 in excess of costs incurred. A regulatory asset
of approximately $424,000 representing the uncollected portion of the estimated
cleanup costs has also been recorded.
In August 2002, the Company, along with two other parties, met with MDE to
discuss alleged manufactured gas plant contamination at a property located in
Cambridge, Maryland. At that meeting, one of the other parties agreed to perform
a remedial investigation of the site. The possible exposure of the Company at
this site cannot be determined at this time.
It is management's opinion that any unrecovered current costs and any other
future costs associated with each of the four sites discussed above will be
recoverable through future rates or sharing arrangements with other responsible
parties.
OTHER COMMITMENTS AND CONTINGENCIES
The Company's natural gas distribution operations have entered into contractual
commitments for daily entitlements of natural gas from various suppliers. The
contracts have various expiration dates. In 2000, the Company entered into a
long-term contract with an energy marketing and risk management company to
manage a portion of the Company's natural gas transportation and storage
capacity. That contract remains in effect.
The Company is involved in certain legal actions and claims arising in the
normal course of business. The Company is also involved in certain legal and
administrative proceedings before various governmental agencies concerning
rates. In the opinion of management, the ultimate disposition of these
proceedings will not have a material effect on the consolidated financial
position of the Company.
Certain assets and liabilities of the Company are accounted for in accordance
with Financial Accounting Standards Board Statement of Financial Accounting
Standards ("SFAS") No. 71, which, among other matters, provides standards for
regulated enterprises for the deferral of costs that will be recovered through
future rate increases. If the Company were required to terminate the application
of these standards to its regulated operations, all such deferred amounts would
be recognized in the income statement at that time. This would result in a
charge to earnings, net of applicable income taxes, which could be material.
4. RECENT AUTHORITATIVE PRONOUNCEMENTS ON FINANCIAL REPORTING AND ACCOUNTING
During the third quarter, the Company implemented the provisions of a recent
consensus reached by the Emerging Issues Task Force ("EITF") of the Financial
Accounting Standards Board that reconsidered certain provisions in EITF 02-03
"Accounting for Contracts Involved in Energy Trading and Risk Management
Activities." EITF 02-03 addresses the presentation of revenue and expense
associated with energy trading contracts on a gross versus net basis.
Previously, the EITF concluded that gross presentation was acceptable. However,
during deliberations held in June 2002, a consensus was reached that net
presentation should be required. This consensus also indicated that
implementation would be effective for the third quarter 2002 reporting cycle and
that prior periods should also be reclassified.
Under prior standards, the Company classified certain energy trading contracts
entered into by its propane wholesale marketing operations on a gross basis.
Recording the energy trading contracts on a net basis did not change the gross
margin, net income, earnings per share or the financial position of the Company.
For the three months ended September 30, 2002 and 2001 both revenues and cost of
sales were reduced by $20.7 million and $30.8 million, respectively. For the
nine months ended September 30, 2002 and 2001 both revenues and cost of sales
were reduced by $64.8 million and $133.3 million, respectively. As stated above,
there was no impact on gross margin, net income, earnings per share or the
financial position of the Company.
On June 30, 2001, the Financial Accounting Standards Board ("FASB") issued SFAS
Nos. 142 and 143. SFAS No. 142, "Goodwill and Other Intangible Assets,"
eliminates the amortization of goodwill and other acquired intangible assets
with indefinite economic useful lives. The pronouncement requires an annual
impairment test of goodwill and other intangible assets that are not subject to
amortization. SFAS No. 142 is effective for fiscal years beginning after
December 15, 2001; however, amortization of goodwill for acquisitions completed
after June 30, 2001 was prohibited. This pronouncement was adopted in the first
quarter of 2002. See Note 5 to the Consolidated Financial Statements for a
description of its impact on the financial statements and additional disclosures
required by the pronouncement.
SFAS No. 143, "Accounting for Asset Retirement Obligations," provides guidance
on the accounting for obligations associated with the retirement of long-lived
assets. The pronouncement requires a liability to be recognized in the financial
statements for retirement obligations meeting specific criteria. Measurement of
the initial obligation is to approximate fair value with an equivalent amount
recorded as an increase in the value of the capitalized asset. The asset will be
depreciable in accordance with normal depreciation policy and the liability will
be increased, with a charge to the income statement, until the obligation is
settled. SFAS No. 143 is effective for fiscal years beginning after June 15,
2002. The potential impact of adopting this pronouncement has not yet been
determined.
SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets,"
replaces SFAS No. 121. The statement develops one accounting model for
long-lived assets to be disposed of by sale and addresses significant
implementation issues. SFAS No. 144 was adopted in the first quarter of 2002, as
required. Its adoption did not have a material impact on the Company's financial
position or results of operations.
In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements No.
4, 44 and 64, Amendment of FASB Statement No. 13, and Technical Corrections."
SFAS No. 145 covers the reporting of gains and losses on extinguishment of debt.
This pronouncement is not expected to have a material impact on the Company's
financial position or results of operations.
The FASB adopted SFAS No. 146, "Accounting for Costs Associated with Exit or
Disposal Activities" in June 2002. It requires that a liability for a cost
associated with an exit or disposal activity be recognized when a liability is
incurred. Under previous guidelines, a liability for an exit cost was recognized
at the date of an entity's commitment to an exit plan. The Company does not
currently have any exit or disposal liabilities recorded; therefore, adoption of
this pronouncement is not expected to impact the Company's financial position or
results of operations.
On October 25, 2002, the EITF rescinded Issue No. 98-10 ("EITF 98-10"),
"Accounting for Contracts Involved in Energy Trading and Risk Management
Activities." The Company's interpretation of EITF 98-10 is consistent with the
current rules that are being applied under SFAS No. 133; therefore, management
does not believe that rescinding EITF 98-10 will impact its financial position
or results of operations.
The FASB adopted SFAS No. 147, "Acquisitions of Certain Financial Institutions,"
in October 2002. This pronouncement has no impact on the Company's financial
position or results of operations.
5. GOODWILL AND OTHER INTANGIBLE ASSETS
The Company adopted SFAS No. 142 in the first quarter of 2002. Application of
the non-amortization provisions resulted in $112,000 of additional income
($0.021 per share), after tax, for the first nine months of 2002 compared to
2001. The Company performed a test for goodwill impairment using the two-step
process prescribed in SFAS No. 142. The first step was a screen for potential
impairment, using January 1, 2002 as the measurement date. The second step was a
measurement of the amount of the goodwill determined to be impaired. The results
of the tests indicate that the goodwill associated with the Company's water
business, which is included in the reportable segment entitled "Other Business
Operations," has been impaired and that the amount of the impairment loss is
$3.2 million. This was recorded as the cumulative effect of a change in
accounting principle. The fair value of the water business was determined using
several methods, including discounted cash flow projections and market
valuations for recent purchases and sales of similar businesses. These were
weighted based on their expected probability. The previous test for impairment
of goodwill, prescribed under SFAS No. 121, looked at undiscounted cash flows.
The determination that the goodwill associated with the Company's water business
was impaired was the result of the more stringent tests required by the new
pronouncement. The performance of the Company's water unit in Michigan is the
primary cause of the impairment. SFAS No. 142 requires that impairment tests be
performed annually. The Company will again perform the test as of December 31,
2002.
The change in the carrying value of goodwill for the nine months ended September
30, 2002 is as follows:
WATER
BUSINESSES PROPANE TOTAL
------------ -------- ------------
Balance at January 1, 2002. . $ 4,869,068 $674,451 $ 5,543,519
Impairment charge . . . . . . (3,200,000) 0 (3,200,000)
- ------------------------------ ------------ -------- ------------
Balance at September 30, 2002 $ 1,669,068 $674,451 $ 2,343,519
============================== ============ ======== ============
The impact of the non-amortization provision of SFAS No. 142 was as follows:
BASIC DILUTED
NET EARNINGS EARNINGS
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2001 INCOME PER SHARE PER SHARE
- --------------------------------------------- ----------- ----------- -----------
Net Income . . . . . . . . . . . . . . . . . ($674,966) ($0.125) ($0.125)
Amortization of goodwill, after tax. . . . . 37,679 0.007 0.007
- --------------------------------------------- ----------- ----------- -----------
Net Loss, exclusive of amortization. . . . . ($637,287) ($0.118) ($0.118)
============================================= =========== =========== ===========
BASIC DILUTED
NET EARNINGS EARNINGS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2001 INCOME PER SHARE PER SHARE
- --------------------------------------------- ----------- ----------- -----------
Net Income . . . . . . . . . . . . . . . . . $5,357,229 $ 1.001 $ 0.986
Amortization of goodwill, after tax. . . . . 111,568 0.021 0.020
- --------------------------------------------- ----------- ----------- -----------
Net Loss, exclusive of amortization. . . . . $5,468,797 $ 1.022 $ 1.006
============================================= =========== =========== ===========
Intangible assets subject to amortization are as follows:
SEPTEMBER 30, 2002 DECEMBER 31, 2001
------------------------- ------------------------
Gross Gross
Carrying Accumulated Carrying Accumulated
Amount Amortization Amount Amortization
---------- ------------- ---------- -------------
Customer Lists . . . . $1,111,651 $ 164,770 $1,111,651 $ 82,141
Non-compete agreements 1,000,000 231,250 1,000,000 140,417
Acquisition costs. . . 379,541 99,131 379,541 87,870
- ----------------------- ---------- ------------- ---------- -------------
Total. . . . . . . . . $2,491,192 $ 495,151 $2,491,192 $ 310,428
======================= ========== ============= ========== =============
Amortization of intangible assets was $185,000 for the nine months ended
September 30, 2002. For the year ended December 31, 2001, amortization of
intangibles, excluding goodwill, was $132,000. The estimated annual amortization
of intangibles for the next five years is: $230,000 for 2002; $224,000 for 2003;
$224,000 for 2004; $213,000 for 2005; and $213,000 for 2006.
6.
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.
- -------------------------------------------------------------------------------------------------------------
THREE MONTHS ENDED NINE MONTHS ENDED
FOR THE PERIOD ENDED SEPTEMBER 30, 2002 2001 2002 2001
- -------------------------------------------------------------------------------------------------------------
OPERATING REVENUES, UNAFFILIATED CUSTOMERS
Natural gas distribution and transmission . . . $ 14,172,555 $ 15,429,057 $ 66,915,666 $ 85,762,192
Propane . . . . . . . . . . . . . . . . . . . . 3,192,252 2,366,908 15,785,080 23,407,482
Advanced information services . . . . . . . . . 3,256,423 4,028,523 9,678,066 11,124,407
Other . . . . . . . . . . . . . . . . . . . . . 2,905,668 2,969,520 8,732,967 7,083,465
- ------------------------------------------------- ------------- ------------- ------------- -------------
Total operating revenues, unaffiliated customers. $ 23,526,898 $ 24,794,008 $101,111,779 $127,377,546
- ------------------------------------------------- ------------- ------------- ------------- -------------
INTERSEGMENT REVENUES (1)
Natural gas distribution and transmission . . . $ 17,457 $ 17,457 $ 52,371 $ 76,075
Other . . . . . . . . . . . . . . . . . . . . . 271,436 187,191 633,546 607,522
- ------------------------------------------------- ------------- ------------- ------------- -------------
Total intersegment revenues . . . . . . . . . . . $ 288,893 $ 204,648 $ 685,917 $ 683,597
- ------------------------------------------------- ------------- ------------- ------------- -------------
PRE-TAX OPERATING INCOME
Natural gas distribution and transmission . . . $ 1,331,116 $ 1,175,082 $ 10,577,226 $ 10,060,301
Propane . . . . . . . . . . . . . . . . . . . . (1,688,874) (1,537,997) 30,409 1,561,392
Advanced information services . . . . . . . . . 181,123 429,227 285,061 644,995
Other and eliminations. . . . . . . . . . . . . (273,528) (9,862) (450,920) (30,207)
- ------------------------------------------------- ------------- ------------- ------------- -------------
Total . . . . . . . . . . . . . . . . . . . . . . $ (450,163) $ 56,450 $ 10,441,776 $ 12,236,481
- ------------------------------------------------- ------------- ------------- ------------- -------------
(1) All significant intersegment revenues are billed at market rates
and have been eliminated from consolidated revenues.
- -------------------------------------------------------------------------------
SEPTEMBER 30, DECEMBER 31,
2002 2001
- -------------------------------------------------------------------------------
IDENTIFIABLE ASSETS
Natural gas distribution and transmission . . . $143,425,186 $151,872,347
Propane . . . . . . . . . . . . . . . . . . . . 33,573,042 34,314,633
Advanced information services . . . . . . . . . 2,863,559 2,593,740
Other . . . . . . . . . . . . . . . . . . . . . 17,227,914 21,554,306
- ------------------------------------------------- ------------- -------------
Total identifiable assets . . . . . . . . . . . . $197,089,701 $210,335,026
- ------------------------------------------------- ------------- -------------
7. SUBSEQUENT EVENTS
The Company completed the private placement of $30.0 million of long-term debt
and drew down the funds on October 31, 2002. The debt has a fixed interest rate
of 6.64 percent. The funds were used to refinance short-term borrowing;
therefore, at September 30, 2002, $30.0 million of short-term financing was
reclassified to long-term.
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 marketing, advanced information services
and other related businesses.
The Company's strategy is to grow earnings from a stable utility foundation by
investing in related businesses and services that provide opportunities for
higher, unregulated returns. This growth strategy includes acquisitions and
investments in unregulated businesses as well as the continued investment and
expansion of the Company's utility operations that provide the stable base of
earnings. The Company continually reevaluates its investments to ensure that
they are consistent with its strategy and the goal of enhancing shareholder
value. The Company's unregulated businesses and services currently include
propane distribution and marketing, advanced information services and water
conditioning and treatment.
FINANCIAL POSITION, LIQUIDITY AND CAPITAL RESOURCES
The Company's capital requirements reflect the capital-intensive nature of its
business and are principally attributable to the construction program and the
retirement of outstanding debt. The Company relies on cash generated by
operations and short-term borrowing to meet normal working capital requirements
and to temporarily finance capital expenditures. During the first nine months of
2002, net cash provided by operating activities, net cash used by investing
activities and net cash used by financing activities were approximately $19.7
million, $9.1 million and $10.8 million, respectively. Cash provided by
operations was up $7.7 million for the first nine months of 2002 compared to
2001. The cash flow increased due to a reduction in working capital requirements
associated with lower energy prices. In 2002, the under-recovered purchased gas
cost balance was reduced by $4.9 million, generating positive cash flow.
The Company completed the private placement of $30.0 million of long-term debt
and drew down the funds on October 31, 2002. The debt has a fixed interest rate
of 6.64 percent. The funds were used to refinance short-term borrowing and,
therefore, at September 30, 2002, $30.0 million of short-term financing was
reclassified to long-term.
The Board of Directors previously authorized the Company to borrow up to $55.0
million of short-term debt from various banks and trust companies. On November
8, 2002, after completion of the long-term debt placement, the limit on
short-term borrowing was adjusted to $35.0 million. As of September 30, 2002,
Chesapeake had four unsecured bank lines of credit with three financial
institutions, totaling $75.0 million, for short-term cash needs to meet seasonal
working capital requirements and to temporarily fund portions of its capital
expenditures. One of the bank lines, totaling $15.0 million, is committed. The
other three lines are subject to the banks' availability of funds. In the first
nine months of 2002, cash provided by operations was adequate to fund capital
expenditures and the reduction in short-term debt outstanding. At September 30,
2002, the debt outstanding under these lines was $35.5 million as compared to
$42.1 million at December 31, 2001 and $33 million at September 30, 2001.
During the nine-month periods ended September 30, 2002 and 2001, capital
expenditures were approximately $9.1 million and $18.7 million, respectively.
Chesapeake has budgeted $16.8 million for capital expenditures during 2002. This
amount includes $11.8 million for natural gas distribution and transmission,
$2.3 million for propane distribution and marketing, $200,000 for advanced
information services and $2.5 million for other operations. The natural gas
distribution and transmission expenditures are for expansion and improvement of
facilities. The propane expenditures are to support customer growth and for the
replacement of equipment. The advanced information services expenditures are for
computer hardware, software and related equipment. Expenditures for other
operations include expenditures to support customer growth and replace equipment
for water operations and general plant, computer software and hardware.
Financing for the 2002 capital expenditure program is being provided from
short-term borrowing, cash provided by operating activities and the October 31,
2002 issuance of long-term debt. The capital expenditure program is subject to
continuous review and modification. Actual capital requirements may vary from
the above estimates due to a number of factors including acquisition
opportunities, changing economic conditions, customer growth in existing areas,
regulation, availability of capital and new growth opportunities.
The Company has budgeted $846,000 for capital expenditures in 2002 related to
environmental remediation projects, and expects to make additional expenditures
in future years, a portion of which may need to be financed through external
sources. Management does not expect any such expenditures or financing to have a
material adverse effect on the financial position or capital resources of the
Company (see Note 3 to the Consolidated Financial Statements).
As of September 30, 2002, common equity represented 46.7 percent of total
capitalization, compared to 58.0 percent as of December 31, 2001. Combining
short-term financing with total capitalization, the equity component would have
been 43.8 percent and 41.8 percent, respectively. The Company remains committed
to maintaining a sound capital structure and strong credit ratings in order to
provide the financial flexibility needed to access the capital markets when
required. This commitment, along with adequate and timely rate relief for the
Company's regulated operations, is intended to ensure that the Company will be
able to attract capital from outside sources at a reasonable cost.
Interest expense for the first nine months of 2002 decreased approximately
$302,000, or 8 percent, over the same period in 2001. The decrease was due
primarily to a reduction in the average interest rate for short-term borrowing
from 5.24 percent on an average balance of $22.8 million for the first nine
months of 2001 to 2.38 percent on an average balance of $32.8 million for the
same period in 2002. A reduction in the average long-term debt balance of $2.7
million due to scheduled repayments also contributed to this reduction.
RESULTS OF OPERATIONS FOR THE QUARTER ENDED SEPTEMBER 30, 2002
CONSOLIDATED OVERVIEW
The Company recognized a seasonal net loss of $939,000, or $0.17 per share, for
the third quarter of 2002 compared to a seasonal loss of $675,000 or $0.13 per
share for the corresponding period in 2001. Chesapeake's Delmarva natural gas
distribution and propane distribution operations typically experience losses
during the third quarter, when heating customers require little gas. As
indicated in the following table, the decline in income is primarily
attributable to declines in the propane, advanced information services and other
segments. The other segment decline resulted from increased costs associated
with the corporate infrastructure of the water business. The declines were
partially offset by higher pre-tax operating income in the natural gas segment
and lower taxes and interest.
- ------------------------------------------------------------------------------------------------
FOR THE THREE MONTHS ENDED SEPTEMBER 30,. . . . . . . 2002 2001 CHANGE
- ------------------------------------------------------------------------------------------------
Pre-tax Operating Income (Loss)
Natural Gas Distribution & Transmission. . . . . . $ 1,331,116 $ 1,175,082 $ 156,034
Propane. . . . . . . . . . . . . . . . . . . . . . (1,688,874) (1,537,997) (150,877)
Advanced Information Services. . . . . . . . . . . 181,123 429,227 (248,104)
Other & Eliminations . . . . . . . . . . . . . . . (273,528) (9,862) (263,666)
- ----------------------------------------------------- ------------ ------------ -------------
Pre-tax Operating Income (Loss). . . . . . . . . . . (450,163) 56,450 (506,613)
Operating Income Taxes . . . . . . . . . . . . . . . (648,535) (505,969) (142,566)
Interest . . . . . . . . . . . . . . . . . . . . . . 1,176,379 1,299,945 (123,566)
Non-Operating Income, net. . . . . . . . . . . . . . 38,842 62,560 (23,718)
- ----------------------------------------------------- ------------ ------------ -------------
Net Loss . . . . . . . . . . . . . . . . . . . . . . $ (939,165) $ (674,966) $ (264,199)
===================================================== ============ ============ =============
NATURAL GAS DISTRIBUTION AND TRANSMISSION
The natural gas distribution and transmission segment earned pre-tax operating
income of $1.3 million for the third quarter of 2002 compared to $1.2 million
for the corresponding period last year, an increase of $156,000.
- ------------------------------------------------------------------------------------------------
FOR THE THREE MONTHS ENDED SEPTEMBER 30,. . . . . . . 2002 2001 CHANGE
- ------------------------------------------------------------------------------------------------
Revenue. . . . . . . . . . . . . . . . . . . . . . . $14,190,012 $15,446,514 $ (1,256,502)
Cost of gas. . . . . . . . . . . . . . . . . . . . . 6,728,589 8,752,574 (2,023,985)
- ----------------------------------------------------- ------------ ------------ -------------
Gross margin . . . . . . . . . . . . . . . . . . . . 7,461,423 6,693,940 767,483
Operations & maintenance . . . . . . . . . . . . . . 3,918,455 3,506,763 411,692
Depreciation & amortization. . . . . . . . . . . . . 1,518,562 1,405,189 113,373
Other taxes. . . . . . . . . . . . . . . . . . . . . 693,290 606,906 86,384
- ----------------------------------------------------- ------------ ------------ -------------
Pre-tax operating expenses . . . . . . . . . . . . . 6,130,307 5,518,858 611,449
- ----------------------------------------------------- ------------ ------------ -------------
Total Pre-tax Operating Income . . . . . . . . . . . $ 1,331,116 $ 1,175,082 $ 156,034
===================================================== ============ ============ =============
Revenue and cost of gas decreased due to lower natural gas commodity costs for
the third quarter of 2002 compared to 2001. Commodity cost changes are passed on
to the ratepayers through a Gas Cost Recovery or Purchased Gas Cost Adjustment
in all jurisdictions; therefore, they have no impact on the Company's
profitability. Revenue and cost of gas were also down in part because of the
unbundling of services which took effect in 2001 for all non-residential
customers of the Florida division. As a result, some customers switched from
sales service, where they purchase both the commodity and transportation from
the Company, to purchasing transportation only.
Gross margin increased $767,000 over the same period in 2001 due to increases in
the margins for the transmission operation and the Florida distribution
operation. Transmission margins were up due to the completion of a system
capacity expansion in November of 2001 that increased pipeline capacity by
approximately 25 percent.
Gross margins for the Delaware and Maryland distribution divisions increased
$103,000 from 2001. Temperatures for the quarter were warmer than 2001 (68
heating degree-days) and the 10-year average (33 heating degree-days).
Management estimates that on an annual basis for each heating degree-day warmer
than the 10-year average, margins decrease by $1,730. An increase in the average
number of customers and a rate increase in Delaware more than offset the
temperature decline. Delaware and Maryland experienced an increase of 2,041
residential customers, or 7 percent, in the third quarter of 2002 compared to
2001. Management estimates that each residential customer added contributes $335
annually to earnings before interest, taxes, depreciation and amortization.
The margin increases were partially offset by higher operating expenses,
primarily administrative and general and depreciation. The increase in
depreciation reflects completion of recent capital projects that increased the
transmission capacity by 25 percent and various expansion projects in Florida.
PROPANE
For the third quarter of 2002, the propane segment experienced a pre-tax
operating loss of $1.7 million compared to $1.5 million for the third quarter of
2001. Gross margin increased $162,000, but was more than offset by increases in
operating expenses of $313,000.
- ------------------------------------------------------------------------------------------------
FOR THE THREE MONTHS ENDED SEPTEMBER 30,. . . . . . . 2002 2001 CHANGE
- ------------------------------------------------------------------------------------------------
Revenue. . . . . . . . . . . . . . . . . . . . . . . $ 3,192,252 $ 2,366,908 $ 825,344
Cost of sales. . . . . . . . . . . . . . . . . . . . 1,608,318 944,673 663,645
- ----------------------------------------------------- ------------ ------------ -------------
Gross margin . . . . . . . . . . . . . . . . . . . . 1,583,934 1,422,235 161,699
Operations & maintenance . . . . . . . . . . . . . . 2,696,585 2,443,899 252,686
Depreciation & amortization. . . . . . . . . . . . . 417,084 360,935 56,149
Other taxes. . . . . . . . . . . . . . . . . . . . . 159,139 155,398 3,741
- ----------------------------------------------------- ------------ ------------ -------------
Pre-tax operating expenses . . . . . . . . . . . . . 3,272,808 2,960,232 312,576
- ----------------------------------------------------- ------------ ------------ -------------
Total Pre-tax Operating Loss . . . . . . . . . . . . $(1,688,874) $(1,537,997) $ (150,877)
===================================================== ============ ============ =============
A retroactive reclassification was made in the third quarter due to a consensus
that was reached by the EITF in June 2002 to revise EITF 02-03 and disallow
gross reporting of revenue and cost of sales for energy trading contracts. The
Company's propane wholesale marketing operation previously used the gross method
for certain energy trading contracts. The requirement that all energy trading
contracts be reported net reduced both the revenue and cost of sales by $20.7
million and $30.8 million in 2002 and 2001, respectively. There was no impact on
the gross margin, net income, earnings per share or the financial position of
the Company.
Propane wholesale marketing margins increased by $100,000 and were partially
offset by an increase of $36,000 in operating expenses. The Delmarva
distribution operations experienced a drop of $32,000 in gross margin and an
increase of $182,000 in operating expenses. Expenses are up due to increases in
depreciation, insurance, rental payments and delivery costs. Volumes sold for
the third quarter were down 15 percent. Increased competition and warmer
temperatures negatively impacted volumes. Temperatures for the quarter were
warmer than 2001 (68 heating degree-days) and the 10-year average (33 heating
degree-days). Management estimates that on an annual basis, for each heating
degree-day warmer than the 10-year average, margins decrease by $1,566. The
Florida propane operation increased their pre-tax operating income by $45,000
for the third quarter.
ADVANCED INFORMATION SERVICES
The advanced information services business contributed a pre-tax operating
income of $181,000 for the third quarter of 2002 compared to $429,000 for the
third quarter of last year. The decline is the result of decreased revenues
partially offset by decreased cost of sales and operating expenses.
- ------------------------------------------------------------------------------------------------
FOR THE THREE MONTHS ENDED SEPTEMBER 30,. . . . . . . 2002 2001 CHANGE
- ------------------------------------------------------------------------------------------------
Revenue. . . . . . . . . . . . . . . . . . . . . . . $ 3,256,423 $ 4,028,523 $ (772,100)
Cost of sales. . . . . . . . . . . . . . . . . . . . 1,668,567 1,981,900 (313,333)
- ----------------------------------------------------- ------------ ------------ -------------
Gross margin . . . . . . . . . . . . . . . . . . . . 1,587,856 2,046,623 (458,767)
Operations & maintenance . . . . . . . . . . . . . . 1,208,236 1,402,026 (193,790)
Depreciation & amortization. . . . . . . . . . . . . 49,713 67,378 (17,665)
Other taxes. . . . . . . . . . . . . . . . . . . . . 148,784 147,992 792
- ----------------------------------------------------- ------------ ------------ -------------
Pre-tax operating expenses . . . . . . . . . . . . . 1,406,733 1,617,396 (210,663)
- ----------------------------------------------------- ------------ ------------ -------------
Total Pre-tax Operating Income . . . . . . . . . . . $ 181,123 $ 429,227 $ (248,104)
===================================================== ============ ============ =============
This segment was adversely affected by the nation's economic slowdown as
discretionary consulting projects have been postponed or cancelled. However, a
corresponding reduction in expenses, primarily cost of sales and sales and
marketing, partially offset the decline.
OTHER BUSINESS OPERATIONS
Other operations experienced a pre-tax operating loss of $274,000 for the third
quarter of 2002 compared to a loss of $10,000 for the third quarter of last
year.
- ------------------------------------------------------------------------------------------------
FOR THE THREE MONTHS ENDED SEPTEMBER 30,. . . . . . . 2002 2001 CHANGE
- ------------------------------------------------------------------------------------------------
Revenue. . . . . . . . . . . . . . . . . . . . . . . $ 2,888,211 $ 2,952,063 $ (63,852)
Cost of sales. . . . . . . . . . . . . . . . . . . . 1,189,579 1,359,210 (169,631)
- ----------------------------------------------------- ------------ ------------ -------------
Gross margin . . . . . . . . . . . . . . . . . . . . 1,698,632 1,592,853 105,779
Operations & maintenance . . . . . . . . . . . . . . 1,572,925 1,222,682 350,243
Depreciation & amortization. . . . . . . . . . . . . 271,468 267,737 3,731
Other taxes. . . . . . . . . . . . . . . . . . . . . 127,767 112,296 15,471
- ----------------------------------------------------- ------------ ------------ -------------
Pre-tax operating expenses . . . . . . . . . . . . . 1,972,160 1,602,715 369,445
- ----------------------------------------------------- ------------ ------------ -------------
Total Pre-tax Operating Loss . . . . . . . . . . . . $ (273,528) $ (9,862) $ (263,666)
===================================================== ============ ============ =============
Pre-tax operating losses increased $264,000 due to increased expenses associated
with the corporate infrastructure and developing and implementing uniform
operating controls and procedures for the group. There have also been some
additions to and relocations of operating facilities.
OPERATING INCOME TAXES
Income taxes were lower due to the increase in the operating loss for the
current quarter. Additionally, during 2002, the Company benefited from a change
in the tax law that allows tax deductions for dividends paid on Company stock
held in Employee Stock Ownership Plans ("ESOP").
INTEREST EXPENSE
Interest for the third quarter of 2002 decreased approximately $124,000, or 10
percent, over the same period in 2001. Interest on short-term debt declined due
to a reduction in the average interest rate for short-term borrowing from 4.52
percent on an average balance of $25.9 million for the three-month period ended
September 30, 2001 to 2.39 percent on an average balance of $32.4 million for
the same period in 2002. Interest on long-term debt also declined due to
scheduled repayments of debt.
RESULTS OF OPERATIONS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2002
CONSOLIDATED OVERVIEW
The Company recognized net income before cumulative effect of change in
accounting principle of $4.5 million, or $0.82 per share, for the first nine
months of 2002, a decrease of $883,000, or $0.18 per share, compared to the
corresponding period in 2001. As indicated in the following table, the decline
in income is primarily attributable to lower profitability of propane and the
advanced information services segments, as well as the increased costs of a
corporate infrastructure for the water business, partially offset by
improvements in the natural gas segment and lower taxes and interest expenses.
Chesapeake adopted Financial Accounting Standards Board Statement of Accounting
Standards No. 142, "Goodwill and Other Intangible Assets," in the first quarter
of 2002. As a result of the change in the goodwill impairment testing methods
prescribed by SFAS No. 142, a non-cash charge for goodwill impairment of $1.9
million, after tax, was recorded as the cumulative effect of a change in
accounting principle. The charge was necessitated primarily by the performance
of the Michigan water business. After giving effect to this charge, earnings per
share for the first nine months were $0.47. In accordance with the
pronouncement, Chesapeake also ceased regular amortization of goodwill.
Amortization of goodwill for the twelve months ended December 31, 2001 amounted
to $142,000, after tax, or approximately $0.026 per share. The Company's
remaining goodwill balance was $2.3 million as of September 30, 2002.
The impact of the change in accounting principle is discussed further in Note 5
to the Consolidated Financial Statements.
- ------------------------------------------------------------------------------------------------
FOR THE NINE MONTHS ENDED SEPTEMBER 30, . . . . . . . 2002 2001 CHANGE
- ------------------------------------------------------------------------------------------------
Pre-tax Operating Income (Loss)
Natural Gas Distribution & Transmission. . . . . . $10,577,226 $10,060,301 $ 516,925
Propane. . . . . . . . . . . . . . . . . . . . . . 30,409 1,561,392 (1,530,983)
Advanced Information Services. . . . . . . . . . . 285,061 644,995 (359,934)
Other & Eliminations . . . . . . . . . . . . . . . (450,920) (30,207) (420,713)
- ----------------------------------------------------- ------------ ------------ -------------
Pre-tax Operating Income . . . . . . . . . . . . . . 10,441,776 12,236,481 (1,794,705)
Operating Income Taxes . . . . . . . . . . . . . . . 2,634,672 3,266,502 (631,830)
Interest . . . . . . . . . . . . . . . . . . . . . . 3,622,566 3,924,519 (301,953)
Non-Operating Income, net. . . . . . . . . . . . . . 289,469 311,769 (22,300)
- ----------------------------------------------------- ------------ ------------ -------------
Net Income before cumulative effect of
change in accounting principle . . . . . . . . . . . 4,474,007 5,357,229 (883,222)
Cumulative effect of change in accounting principle. (1,916,000) 0 (1,916,000)
- ----------------------------------------------------- ------------ ------------ -------------
Net Income . . . . . . . . . . . . . . . . . . . . . $ 2,558,007 $ 5,357,229 $ (2,799,222)
===================================================== ============ ============ =============
NATURAL GAS DISTRIBUTION AND TRANSMISSION
The natural gas distribution and transmission segment earned pre-tax operating
income of $10.6 million for the first nine months of 2002 compared to $10.1
million for the corresponding period last year, an increase of $517,000.
- ------------------------------------------------------------------------------------------------
FOR THE NINE MONTHS ENDED SEPTEMBER 30, . . . . . . . 2002 2001 CHANGE
- ------------------------------------------------------------------------------------------------
Revenue. . . . . . . . . . . . . . . . . . . . . . . $66,968,037 $85,838,267 $(18,870,230)
Cost of gas. . . . . . . . . . . . . . . . . . . . . 37,585,321 58,370,337 (20,785,016)
- ----------------------------------------------------- ------------ ------------ -------------
Gross margin . . . . . . . . . . . . . . . . . . . . 29,382,716 27,467,930 1,914,786
Operations & maintenance . . . . . . . . . . . . . . 11,978,226 11,292,398 685,828
Depreciation & amortization. . . . . . . . . . . . . 4,779,850 4,201,435 578,415
Other taxes. . . . . . . . . . . . . . . . . . . . . 2,047,414 1,913,796 133,618
- ----------------------------------------------------- ------------ ------------ -------------
Pre-tax operating expenses . . . . . . . . . . . . . 18,805,490 17,407,629 1,397,861
- ----------------------------------------------------- ------------ ------------ -------------
Total Pre-tax Operating Income . . . . . . . . . . . $10,577,226 $10,060,301 $ 516,925
===================================================== ============ ============ =============
Revenue and cost of gas decreased due to lower natural gas commodity costs in
2002 compared to 2001. Commodity cost changes are passed on to the ratepayers
through a Gas Cost Recovery or Purchased Gas Cost Adjustment in all
jurisdictions; therefore, they have no impact on the Company's profitability.
Revenue and cost of gas were also down in part because of the unbundling of
services which took effect in 2001 for all non-residential customers of the
Florida division. As a result, some customers switched from sales service, where
they purchase both the commodity and transportation from the Company, to
purchasing transportation only.
Gross margin increased $1.9 million over the same period in 2001 due to
increases in the margins for the transmission operation and the Florida
distribution operation. Transmission margin was up due to the completion of a
major system expansion in November of 2001. The Company expects this system
expansion to increase margins by approximately $2.2 million per year. As
discussed more fully in the regulatory matters section, the Company's
transmission subsidiary, Eastern Shore Natural Gas Company ("Eastern Shore"),
reached an agreement with the Federal Energy Regulatory Commission on October
10, 2002. The agreement is subject to a public comment period of 30 days before
becoming final. That agreement is expected to lower annual margins by an
estimated $456,000. The new rates are expected to take effect in the fourth
quarter of 2002. Margins in Delaware and Maryland were adversely impacted by
temperatures that were 18 percent warmer (532 heating degree-days) than 2001 and
13 percent (380 heating degree-days) warmer than the 10-year average. Management
estimates that on an annual basis, margins will decrease by $1,730 for each
heating degree-day warmer than the 10-year average. This decline was partially
offset by residential customer growth of 1,812, or 6 percent, and a rate
increase in Delaware. Management estimates that for each residential customer
added, an additional $335 per year will be added to earnings before interest,
taxes, depreciation and amortization. The margin increases were partially offset
by higher operating expenses, primarily administrative and general and
depreciation. The increase in depreciation reflects completion of recent capital
projects that increased the transmission capacity by 25 percent and various
expansion projects in Florida.
PROPANE
For the first nine months of 2002, the propane segment contributed pre-tax
operating income of $30,000 compared to $1.6 million for the first nine months
of 2001. Gross margin decreased $1.9 million, but was partially offset by
reductions in operating expenses of $334,000.
- ------------------------------------------------------------------------------------------------
FOR THE NINE MONTHS ENDED SEPTEMBER 30, . . . . . . . 2002 2001 CHANGE
- ------------------------------------------------------------------------------------------------
Revenue. . . . . . . . . . . . . . . . . . . . . . . $15,785,080 $23,407,482 $ (7,622,402)
Cost of sales. . . . . . . . . . . . . . . . . . . . 5,710,043 11,467,359 (5,757,316)
- ----------------------------------------------------- ------------ ------------ -------------
Gross margin . . . . . . . . . . . . . . . . . . . . 10,075,037 11,940,123 (1,865,086)
Operations & maintenance . . . . . . . . . . . . . . 8,243,772 8,744,357 (500,585)
Depreciation & amortization. . . . . . . . . . . . . 1,235,716 1,088,950 146,766
Other taxes. . . . . . . . . . . . . . . . . . . . . 565,140 545,424 19,716
- ----------------------------------------------------- ------------ ------------ -------------
Pre-tax operating expenses . . . . . . . . . . . . . 10,044,628 10,378,731 (334,103)
- ----------------------------------------------------- ------------ ------------ -------------
Total Pre-tax Operating Income . . . . . . . . . . . $ 30,409 $ 1,561,392 $ (1,530,983)
===================================================== ============ ============ =============
A retroactive reclassification was made in the third quarter due to a consensus
that was reached by the EITF in June 2002 to revise EITF 02-03 and disallow
gross reporting of revenue and cost of sales for energy trading contracts. The
Company's propane wholesale marketing operation previously used the gross method
for certain energy trading contracts. The requirement that all energy trading
contracts be reported net reduced both the revenue and cost of sales by $64.8
million in 2002 and $133.3 million in 2001. There was no impact on the gross
margin, net income, earnings per share or the financial position of the Company.
Propane distribution revenues and costs were lower by $9.2 million and $8.4
million, respectively, due to a drop in propane commodity prices and volume
decreases. Commodity cost changes, both increases and decreases, are generally
passed on to the distribution customers contingent upon competitive market
conditions.
The Delmarva distribution operations experienced a drop of $1.2 million in gross
margin. Volumes sold for the first nine months were down 19 percent. Volumes
were negatively impacted by temperatures that were 18 percent warmer than 2001
(532 heating degree-days) and 13 percent warmer than the 10-year average (380
heating degree-days), and increased competition and lower sales to the poultry
industry. Management estimates that on an annual basis, for each heating
degree-day warmer than the 10-year average, margins decrease by $1,566. The
reduction in sales to poultry customers resulted in a drop in margin of $183,000
compared to 2001. A decrease in operating expenses of $310,000 partially offset
the decline in margin. Cost containment efforts that began in April 2001 remain
in effect and have reduced customer accounting and sales and marketing costs.
Other costs, such as delivery expenses, decreased due to the lower volumes sold.
The pre-tax operating income of the Florida propane operation increased by
$188,000 for the first nine months.
Propane wholesale marketing margins declined by $984,000 and were partially
offset by a reduction of $239,000 in operating expenses. The 2001 results
reflected increased opportunities due to the extreme price volatility in the
propane wholesale market. The same level of price fluctuations has not been
experienced in 2002. The 2002 results reflect increased margin of approximately
$650,000 that resulted from a bankrupt vendor defaulting on supply contracts
during the first quarter of 2002. The supply was replaced by purchasing from
different vendors at a lower cost than the original contract. Although the
propane wholesale marketing business has not been as profitable as in 2001, it
is still performing above the earnings targets established by the Company.
ADVANCED INFORMATION SERVICES
The advanced information services business earned a pre-tax operating income of
$284,000 for the first nine months of 2002 compared to income of $645,000 for
the first nine months of last year. The decrease is the result of decreased
revenue partially offset by decreased operating expenses.
- ------------------------------------------------------------------------------------------------
FOR THE NINE MONTHS ENDED SEPTEMBER 30, . . . . . . . 2002 2001 CHANGE
- ------------------------------------------------------------------------------------------------
Revenue. . . . . . . . . . . . . . . . . . . . . . . $ 9,678,066 $11,124,407 $ (1,446,341)
Cost of sales. . . . . . . . . . . . . . . . . . . . 5,050,516 5,634,383 (583,867)
- ----------------------------------------------------- ------------ ------------ -------------
Gross margin . . . . . . . . . . . . . . . . . . . . 4,627,550 5,490,024 (862,474)
Operations & maintenance . . . . . . . . . . . . . . 3,719,944 4,179,121 (459,177)
Depreciation & amortization. . . . . . . . . . . . . 158,301 197,300 (38,999)
Other taxes. . . . . . . . . . . . . . . . . . . . . 464,244 468,608 (4,364)
- ----------------------------------------------------- ------------ ------------ -------------
Pre-tax operating expenses . . . . . . . . . . . . . 4,342,489 4,845,029 (502,540)
- ----------------------------------------------------- ------------ ------------ -------------
Total Pre-tax Operating Income . . . . . . . . . . . $ 285,061 $ 644,995 $ (359,934)
===================================================== ============ ============ =============
This segment was adversely affected by the nation's economic slowdown as
discretionary consulting projects have been postponed or cancelled.
Additionally, training revenues have declined significantly due to reluctance on
the part of students to travel in the aftermath of September 11. This was
partially offset by a reduction in operating expenses, principally sales and
marketing.
OTHER BUSINESS OPERATIONS
Other operations experienced a pre-tax operating loss of $451,000 for the first
nine months of 2002 compared to a loss of $30,000 for the first nine months of
last year. The results for 2002 include a full nine months of operations for the
five water businesses that were purchased between April and July of 2001.
- ------------------------------------------------------------------------------------------------
FOR THE NINE MONTHS ENDED SEPTEMBER 30, . . . . . . . 2002 2001 CHANGE
- ------------------------------------------------------------------------------------------------
Revenue. . . . . . . . . . . . . . . . . . . . . . . $ 8,680,596 $ 7,007,390 $ 1,673,206
Cost of sales. . . . . . . . . . . . . . . . . . . . 3,567,767 3,181,631 386,136
- ----------------------------------------------------- ------------ ------------ -------------
Gross margin . . . . . . . . . . . . . . . . . . . . 5,112,829 3,825,759 1,287,070
Operations & maintenance . . . . . . . . . . . . . . 4,398,899 2,874,579 1,524,320
Depreciation & amortization. . . . . . . . . . . . . 791,616 687,888 103,728
Other taxes. . . . . . . . . . . . . . . . . . . . . 373,234 293,499 79,735
- ----------------------------------------------------- ------------ ------------ -------------
Pre-tax operating expenses . . . . . . . . . . . . . 5,563,749 3,855,966 1,707,783
- ----------------------------------------------------- ------------ ------------ -------------
Total Pre-tax Operating Loss . . . . . . . . . . . . $ (450,920) $ (30,207) $ (420,713)
===================================================== ============ ============ =============
The increases in all categories reflect the acquisition of the new water
businesses. Pre-tax operating losses increased $421,000 due to increased
expenses associated with the corporate infrastructure and developing and
implementing uniform operating controls and procedures for the group. There have
also been some relocations and additions of operating locations for the
businesses.
OPERATING INCOME TAXES
Operating income taxes were lower due to the decrease in operating income for
the nine months ended September 30, 2002. Additionally, during 2002, the Company
benefited from a change in the tax law that allows tax deductions for dividends
paid on Company stock held in ESOP Plans.
INTEREST EXPENSE
Interest expense for the first nine months of 2002 decreased approximately
$302,000, or 8 percent, over the same period in 2001. The decrease was due
primarily to a reduction in the average interest rate for short-term borrowing
from 5.24 percent on an average balance of $22.8 million for the fist nine
months of 2001 to 2.38 percent on an average balance of $32.8 million for the
same period in 2002. A reduction in the average long-term debt balance of $2.7
million due to scheduled repayments also contributed to this reduction.
ENVIRONMENTAL MATTERS
The Company continues to work with federal and state environmental agencies to
assess the environmental impact and explore options for corrective action at
three former gas manufacturing plant sites. 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 site located in Cambridge, Maryland. The outcome of this
matter cannot be determined at this time. See Note 3 to the Consolidated
Financial Statements for further information.
OTHER MATTERS
REGULATORY MATTERS
The Delaware, Maryland and Florida Public Service Commissions regulate the
Company's natural gas distribution operations, while the natural gas
transmission operation is regulated by the Federal Energy Regulatory Commission
("FERC").
On August 2, 2001, the Delaware Division filed a general rate increase
application. Interim rates, subject to refund, went into effect on October 1,
2001. The Delaware Public Service Commission approved a settlement agreement for
Phase I of the Rate Increase Application in April 2002. Phase I should result in
an increase in rates of approximately $380,000 per year. The Company, the
Commission staff and the Division of the Public Advocate have reached a
settlement agreement for Phase II. The Delaware Public Service Commission must
approve the agreement before it can become final. The PSC is scheduled to review
the agreement during the fourth quarter of 2002. If approved, Phase II should
result in an additional increase in rates. Phase II also reduces the Company's
sensitivity to warmer than normal weather by changing the minimum customer
charge and the margin sharing arrangement for interruptible sales, off system
sales and capacity release income.
On October 31, 2001, Eastern Shore Natural Gas Company, the Company's natural
gas transmission subsidiary, filed a rate change with the FERC pursuant to the
requirements of the Stipulation and Agreement dated August 1, 1997. Following
settlement conferences held in May 2002, the parties reached a settlement in
principle on or about May 23, 2002 to resolve all issues related to its rate
case.
The Offer of Settlement and the Stipulation and Agreement were finalized and
filed with the FERC on August 2, 2002. The agreement provides that Eastern
Shore's rates will be based on a cost of service of $12.9 million per year. Cost
savings estimated at $456,000 will be passed on to firm transportation
customers. Initial comments supporting the settlement agreement were filed by
the FERC staff and by Eastern Shore. No adverse comments were filed. The
Presiding Judge certified the Offer of Settlement to the FERC as uncontested on
August 27, 2002. On October 10, 2002, the FERC issued an Order approving the
Offer of Settlement and the Stipulation and Agreement. It is anticipated that
settlement rates will go into effect on December 1, 2002.
During October 2002, Eastern Shore filed for recovery of gas supply realignment
costs associated with the implementation of FERC Order No. 636. The costs
totaled $196,000 (including interest). It is uncertain at this time when the
FERC will consider this matter or the ultimate outcome.
The Florida division filed tariff revisions on March 29, 2002 to complete the
unbundling process by requiring all customers, including residential, to migrate
to transportation service and authorize the Florida division to exit the
merchant function. Transportation services are currently available to all
non-residential customers. The Florida Public Service Commission requested that
the Company hold customer meetings to allow for an opportunity for comments by
our customers. These meetings were held on June 25 and 26, 2002 at four
locations in our service territory. The Public Service Commission addressed this
matter at its November 5, 2002 Agenda Conference. The Commission approved the
Company's request for the first phase of the unbundling process as a pilot
program for a minimum two-year period. The Company is implementing the program
immediately and must submit an interim report for Public Service Commission
review after one year. In addition, the Commission is requiring the Company to
return for approval to move beyond the first phase of the proposed unbundling
transitional program and to seek clarification of the level of legislative
jurisdiction that the Public Service Commission has to approve further movement
towards a free-market environment.
COMPETITION
The Company's natural gas operations compete with other forms of energy
including electricity, oil and propane. The principal competitive factors are
price, and to a lesser extent, accessibility. The Company's natural gas
distribution operations have several large volume industrial customers that have
the capacity to use fuel oil as an alternative to natural gas. When oil prices
decline, these interruptible customers convert to oil to satisfy their fuel
requirements. Lower levels in interruptible sales occur when oil prices are
lower relative to the price of natural gas. Oil prices, as well as the prices of
electricity and other fuels are subject to fluctuation for a variety of reasons;
therefore, future competitive conditions are not predictable. To address this
uncertainty, the Company uses flexible pricing arrangements on both the supply
and sales side of its business to maximize sales volumes. As a result of the
transmission business' conversion to open access, this business has shifted from
providing competitive sales service to providing transportation and contract
storage services.
The Company's natural gas distribution operations located in Maryland, Delaware
and Florida began offering transportation services to certain industrial
customers during 1998, 1997 and 1994, respectively. In 2001, the Florida
operation extended transportation service to commercial customers. With
transportation services now available on the Company's distribution systems, the
Company is competing with third party suppliers to sell gas to industrial
customers. The Company's competitors include the interstate transmission company
if the distribution customer is located close enough to the transmission
company's pipeline to make a connection economically feasible. The customers at
risk are usually large volume commercial and industrial customers with the
financial resources and capability to bypass the distribution operations in this
manner. In certain situations, the distribution operations may adjust services
and rates for these customers to retain their business. The Company expects to
continue to expand the availability of transportation services to additional
classes of distribution customers in the future. The Company established a
natural gas brokering and supply operation in Florida in 1994 to compete for
customers eligible for transportation services.
The Company's propane distribution operations compete with several other propane
distributors in their service territories, primarily on the basis of service and
price. Competitors include several large national propane distribution
companies, as well as an increasing number of local suppliers. Some of these
competitors have pricing strategies designed to acquire market share.
The Company's advanced information services segment faces competition from a
number of competitors, many of which have greater resources available to them
than those of the Company. This segment competes on the basis of technological
expertise, reputation and price.
The water businesses face competition from a variety of national and local
suppliers of water conditioning and treatment services and bottled water.
RECENT PRONOUNCEMENTS
See Note 4 to the Consolidated Financial Statements for a discussion of recent
accounting pronouncements.
INFLATION
Inflation affects the cost of labor, products and services required for
operation, maintenance and capital improvements. While the impact of inflation
has remained low in recent years, natural gas and propane prices are subject to
rapid fluctuations. Fluctuations in natural gas prices are passed on to
customers through the gas cost recovery mechanism in the Company's tariffs. To
help cope with the effects of inflation on its capital investments and returns,
the Company seeks rate relief from regulatory commissions for regulated
operations while monitoring the returns of its unregulated business operations.
To compensate for fluctuations in propane gas prices, the Company adjusts its
propane selling prices to the extent allowed by the market.
CAUTIONARY STATEMENT
Chesapeake has made statements in this report that are considered to be
forward-looking statements. These statements are not matters of historical fact.
Sometimes they contain words such as "believes," "expects," "intends," "plans,"
"will," or "may," and other similar words of a predictive nature. These
statements relate to matters such as customer growth, changes in revenues or
margins, capital expenditures, environmental remediation costs, regulatory
approvals, market risks associated with the Company's propane marketing
operation, competition and other matters. It is important to understand that
these forward-looking statements are not guarantees, but are subject to certain
risks and uncertainties and other important factors that could cause actual
results to differ materially from those in the forward-looking statements. These
factors include, among other things:
- the temperature sensitivity of the natural gas and propane
businesses;
- the wholesale prices of natural gas and propane and market
movements in these prices;
- the effects of competition on the Company's unregulated and
regulated businesses;
- the effect of changes in federal, state or local regulatory
requirements, including deregulation;
- the effect of accounting changes;
- the ability of the Company's new and planned facilities and
acquisitions to generate expected revenues; and
- the Company's ability to obtain the rate relief and cost
recovery requested from utility regulators and the timing of
the requested regulatory actions.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market risk represents the potential loss arising from adverse changes in market
rates and prices. The Company's long-term debt consists primarily of senior
notes, first mortgage bonds and convertible debentures with fixed interest
rates, none of which was entered into for trading purposes. At September 30,
2002, $30 million of short-term borrowing was reclassified to long-term due to
its repayment upon completing the private placement of long-term debt on October
31, 2002. The carrying value of long-term debt at September 30, 2002 was $79.7
million, with a fair value of $95.7 million, based mainly on current market
prices or discounted cash flows using current rates for similar issues with
similar terms and remaining maturities. The Company is exposed to changes in
interest rates due to the use of fixed rate long-term debt to finance the
business. Management continually monitors fluctuations in interest rates and
debt markets to assess the benefits of changing the mix of long and short-term
debt or refinancing existing debt.
The Company's propane distribution business is exposed to market risk as a
result of propane storage activities and entering into fixed price contracts for
supply. The Company can store up to approximately 4 million gallons of propane
during the winter season to meet its customers' peak requirements and to serve
metered customers. Decreases in the wholesale price of propane may cause the
value of stored propane to decline.
The Company's propane 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 of a net amount equal to the
difference between the current market price of the futures contract and the
original contract price.
The forward and futures contracts are entered into for trading and wholesale
marketing purposes. The propane marketing business is subject to commodity price
risk on its open positions to the extent that market prices for NGL deviate from
fixed contract settlement prices. Market risk associated with the trading of
futures and forward contracts are monitored daily for compliance with the
Company's Risk Management Policy, which includes volumetric limits for open
positions. To manage exposures to changing market prices, open positions are
marked up or down to market prices and reviewed by oversight officials on a
daily basis. Additionally, the Risk Management Committee reviews periodic
reports on market and credit risk, approves any exceptions to the Risk
Management Policy (within limits established by the Board of Directors) and
authorizes the use of any new types of contracts. Quantitative information on
forward and futures contracts at September 30, 2002 is presented in the
following table. All of the contracts mature within twelve months.
- ------------------------------------------------------------------------
QUANTITY ESTIMATED WEIGHTED AVERAGE
AT SEPTEMBER 30, 2002 IN GALLONS MARKET PRICES CONTRACT PRICES
- ------------------------------------------------------------------------
FORWARD CONTRACTS
Sale. . . . . . . . . 19,362,000 $0.4875 - $0.5075 $ 0.4229
Purchase. . . . . . . 14,448,000 $0.4825 - $0.5075 $ 0.4406
FUTURES CONTRACTS
Sale. . . . . . . . . 210,000 $0.4875 - $0.5075 $ 0.4325
- ------------------------------------------------------------------------
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-14(c) promulgated under the Securities Exchange Act of 1934, as amended)
within 90 days prior to the filing date of this report. 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 CONTROLS.
There have been no significant changes in the Company's internal controls or in
other factors that could significantly affect these controls subsequent to the
date of the evaluation referenced above, including corrective actions with
regard to significant deficiencies or material weaknesses.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
See Note 3 to the Consolidated Financial Statements
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibit 99.1
Certificate of Chief Executive Officer of Chesapeake
Utilities Corporation pursuant to 18 U.S.C Section
1350, dated November 14, 2002
(b) Exhibit 99.2
Certificate of Chief Financial Officer of Chesapeake
Utilities Corporation pursuant to 18 U.S.C Section
1350, dated November 14, 2002
(c) Reports on Form 8-K
On November 6, 2002, the Company filed, under
Item 5, that the Company had completed a private
placement of $30 million of long-term Senior Notes payable.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Chesapeake Utilities Corporation
/s/ Michael P. McMasters
- ---------------------------
Michael P. McMasters
Vice President, Treasurer and Chief Financial Officer
Date: November 14, 2002
CERTIFICATIONS
I, John R. Schimkaitis, certify that:
1. I have reviewed this quarterly report on Form 10-Q 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 quarterly 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 quarterly 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-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures 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 quarterly
report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report ("Evaluation Date");
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit committee
of the registrant's board of directors (or persons performing the equivalent
function);
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weakness in
internal controls;
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: November 14, 2002
/s/ John R. Schimkaitis
- --------------------------
John R. Schimkaitis
President and Chief Executive Officer
I, Michael P. McMasters, certify that:
1. I have reviewed this quarterly report on Form 10-Q 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 quarterly 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 quarterly 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-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures 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 quarterly
report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report ("Evaluation Date");
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit committee
of the registrant's board of directors (or persons performing the equivalent
function);
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weakness in
internal controls;
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: November 14, 2002
/s/ Michael P. McMasters
- ---------------------------
Michael P. McMasters
Vice President, Treasurer and Chief Financial Officer