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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: June 30, 2003
-------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ______ to ______
COMMISSION FILE NUMBER: 001-11590
CHESAPEAKE UTILITIES CORPORATION
--------------------------------
(Exact name of registrant as specified in its charter)
DELAWARE 51-0064146
-------- ----------
(State or other (I.R.S. Employer
jurisdiction of Identification No.)
incorporation
or organization)
909 SILVER LAKE BOULEVARD, DOVER, DELAWARE 19904
------------------------------------------------
(Address of principal executive offices, including Zip Code)
(302) 734-6799
--------------
(Registrant's Telephone Number, including Area Code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes [X] No [ ]
Common Stock, par value $.4867 - 5,609,031 shares
outstanding as of June 30, 2003.
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. Adopted Pronouncements . . . . . . . . . . . . . . . . . . . . . .10
6. Segment Information . . . . . . . . . . . . . . . . . . . . . . .10
7. Discontinued Operations . . . . . . . . . . . . . . . . . . . . .11
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations. . . . . . . . . . . .13
Business Description . . . . . . . . . . . . . . . . . . . . . . . . .13
Financial Position, Liquidity and Capital Resources . . . . . . . . .13
Results of Operations for the Quarter
Ended June 30, 2003 . . . . . . . . . . . . . . . . . . . . . . . . . .15
Consolidated Overview. . . . . . . . . . . . . . . . . . . . . . . . .15
Natural Gas Distribution and Transmission . . . . . . . . . . . . .15
Propane. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
Advanced Information Services. . . . . . . . . . . . . . . . . . . . 16
Water Business Operations. . . . . . . . . . . . . . . . . . . . . . 17
Other Business Operations. . . . . . . . . . . . . . . . . . . . . . 17
Income Taxes. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
Interest Expense. . . . . . . . . . . . . . . . . . . . . . . . . . . 18
Results of Operations for the Six Months
Ended June 30, 2003 . . . . . . . . . . . . . . . . . . . . . . . . . .18
Consolidated Overview. . . . . . . . . . . . . . . . . . . . . . . . .18
Natural Gas Distribution and Transmission . . . . . . . . . . . . .19
Propane. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
Advanced Information Services. . . . . . . . . . . . . . . . . . . . 20
Water Business Operations. . . . . . . . . . . . . . . . . . . . . . 20
Other Business Operations. . . . . . . . . . . . . . . . . . . . . . 21
Income Taxes. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
Interest Expense. . . . . . . . . . . . . . . . . . . . . . . . . . . 21
Environmental Matters . . . . . . . . . . . . . . . . . . . . . . . . 21
Other Matters . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
Regulatory Matters. . . . . . . . . . . . . . . . . . . . . . . . . . 22
Competition. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
Recent Pronouncements . . . . . . . . . . . . . . . . . . . . . . . . 24
Inflation. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
Cautionary Statement. . . . . . . . . . . . . . . . . . . . . . . . . 25
Item 3. Quantitative and Qualitative Disclosures about Market Risk. . 25
Item 4. Controls and Procedures. . . . . . . . . . . . . . . . . . .26
PART II - OTHER INFORMATION. . . . . . . . . . . . . . . . . . . . . . . 28
SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CHESAPEAKE UTILITIES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
- ----------------------------------------------------------------------------------------------
FOR THE THREE MONTHS ENDED JUNE 30, 2003 2002
- ----------------------------------------------------------------------------------------------
OPERATING REVENUES. . . . . . . . . . . . . . . . . . . . . . $ 34,798,810 $ 31,170,089
COST OF SALES . . . . . . . . . . . . . . . . . . . . . . . . 18,962,976 16,944,226
- ----------------------------------------------------------------------------------------------
GROSS MARGIN. . . . . . . . . . . . . . . . . . . . . . . . . 15,835,834 14,225,863
- ----------------------------------------------------------------------------------------------
OPERATING EXPENSES
Operations. . . . . . . . . . . . . . . . . . . . . . . . . . 8,701,291 8,392,366
Maintenance . . . . . . . . . . . . . . . . . . . . . . . . . 437,454 456,916
Depreciation and amortization . . . . . . . . . . . . . . . . 2,346,908 2,349,271
Goodwill impairment . . . . . . . . . . . . . . . . . . . . . 0 0
Other taxes . . . . . . . . . . . . . . . . . . . . . . . . . 1,128,765 1,024,478
- ----------------------------------------------------------------------------------------------
Total operating expenses. . . . . . . . . . . . . . . . . . . 12,614,418 12,223,031
- ----------------------------------------------------------------------------------------------
OPERATING INCOME. . . . . . . . . . . . . . . . . . . . . . . 3,221,416 2,002,832
OTHER INCOME. . . . . . . . . . . . . . . . . . . . . . . . . 57,772 52,663
- ----------------------------------------------------------------------------------------------
INCOME BEFORE INTEREST CHARGES. . . . . . . . . . . . . . . . 3,279,188 2,055,495
INTEREST CHARGES. . . . . . . . . . . . . . . . . . . . . . . 1,429,005 1,207,417
- ----------------------------------------------------------------------------------------------
INCOME BEFORE INCOME TAXES. . . . . . . . . . . . . . . . . . 1,850,183 848,078
INCOME TAXES. . . . . . . . . . . . . . . . . . . . . . . . . 695,869 281,149
- ----------------------------------------------------------------------------------------------
NET INCOME FROM CONTINUING OPERATIONS . . . . . . . . . . . . 1,154,314 566,929
NET INCOME (LOSS) FROM
DISCONTINUED OPERATIONS, NET OF TAX
Discontinued operations . . . . . . . . . . . . . . . . . . . (49,573) (37,235)
Gain on sale. . . . . . . . . . . . . . . . . . . . . . . . . 71,575 0
- ----------------------------------------------------------------------------------------------
Total Net Income (Loss) from Discontinued Operations. . . . . 22,002 (37,235)
- ----------------------------------------------------------------------------------------------
NET INCOME. . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,176,316 $ 529,694
==============================================================================================
EARNINGS PER SHARE OF COMMON STOCK:
BASIC
FROM CONTINUING OPERATIONS. . . . . . . . . . . . . . . . . . $ 0.21 $ 0.10
FROM DISCONTINUED OPERATIONS. . . . . . . . . . . . . . . . . 0.00 0.00
- ----------------------------------------------------------------------------------------------
NET INCOME. . . . . . . . . . . . . . . . . . . . . . . . . . $ 0.21 $ 0.10
==============================================================================================
DILUTED
FROM CONTINUING OPERATIONS. . . . . . . . . . . . . . . . . . $ 0.21 $ 0.10
FROM DISCONTINUED OPERATIONS. . . . . . . . . . . . . . . . . 0.00 0.00
- ----------------------------------------------------------------------------------------------
NET INCOME. . . . . . . . . . . . . . . . . . . . . . . . . . $ 0.21 $ 0.10
==============================================================================================
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 SIX MONTHS ENDED JUNE 30, . . . . . . . . . . . . . . 2003 2002
- ----------------------------------------------------------------------------------------------
OPERATING REVENUES. . . . . . . . . . . . . . . . . . . . . . $ 100,993,522 $ 79,368,545
COST OF SALES . . . . . . . . . . . . . . . . . . . . . . . . 58,915,708 43,060,341
- ----------------------------------------------------------------------------------------------
GROSS MARGIN. . . . . . . . . . . . . . . . . . . . . . . . . 42,077,814 36,308,204
- ----------------------------------------------------------------------------------------------
OPERATING EXPENSES
Operations. . . . . . . . . . . . . . . . . . . . . . . . . . 18,504,210 17,442,439
Maintenance . . . . . . . . . . . . . . . . . . . . . . . . . 860,372 918,623
Depreciation and amortization . . . . . . . . . . . . . . . . 4,684,265 4,643,507
Goodwill impairment . . . . . . . . . . . . . . . . . . . . . 0 0
Other taxes . . . . . . . . . . . . . . . . . . . . . . . . . 2,443,731 2,296,023
- ----------------------------------------------------------------------------------------------
Total operating expenses. . . . . . . . . . . . . . . . . . . 26,492,578 25,300,592
- ----------------------------------------------------------------------------------------------
OPERATING INCOME. . . . . . . . . . . . . . . . . . . . . . . 15,585,236 11,007,612
OTHER INCOME. . . . . . . . . . . . . . . . . . . . . . . . . 144,424 390,657
- ----------------------------------------------------------------------------------------------
INCOME BEFORE INTEREST CHARGES. . . . . . . . . . . . . . . . 15,729,660 11,398,269
INTEREST CHARGES. . . . . . . . . . . . . . . . . . . . . . . 2,894,855 2,428,517
- ----------------------------------------------------------------------------------------------
INCOME BEFORE INCOME TAXES. . . . . . . . . . . . . . . . . . 12,834,805 8,969,752
INCOME TAXES. . . . . . . . . . . . . . . . . . . . . . . . . 5,011,032 3,474,071
- ----------------------------------------------------------------------------------------------
NET INCOME FROM CONTINUING OPERATIONS . . . . . . . . . . . . 7,823,773 5,495,681
NET INCOME (LOSS) FROM
DISCONTINUED OPERATIONS, NET OF TAX
Discontinued operations . . . . . . . . . . . . . . . . . . . (91,224) (82,509)
Gain on sale. . . . . . . . . . . . . . . . . . . . . . . . . 71,575 0
- ----------------------------------------------------------------------------------------------
Total Loss from Discontinued Operations . . . . . . . . . . . (19,649) (82,509)
CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING
PRINCIPLE, NET OF TAX. . . . . . . . . . . . . . . . . . . 0 (1,916,000)
- ----------------------------------------------------------------------------------------------
NET INCOME. . . . . . . . . . . . . . . . . . . . . . . . . . $ 7,804,124 $ 3,497,172
==============================================================================================
EARNINGS PER SHARE OF COMMON STOCK:
BASIC
FROM CONTINUING OPERATIONS. . . . . . . . . . . . . . . . . . $ 1.40 $ 1.01
FROM DISCONTINUED OPERATIONS. . . . . . . . . . . . . . . . . 0.00 (0.02)
EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE. . . . . . . . . . . 0.00 (0.35)
- ----------------------------------------------------------------------------------------------
NET INCOME. . . . . . . . . . . . . . . . . . . . . . . . . . $ 1.40 $ 0.64
==============================================================================================
DILUTED
FROM CONTINUING OPERATIONS. . . . . . . . . . . . . . . . . . $ 1.37 $ 0.99
FROM DISCONTINUED OPERATIONS. . . . . . . . . . . . . . . . . 0.00 (0.01)
EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE. . . . . . . . . . . 0.00 (0.35)
- ----------------------------------------------------------------------------------------------
NET INCOME. . . . . . . . . . . . . . . . . . . . . . . . . . $ 1.37 $ 0.63
==============================================================================================
DIVIDENDS DECLARED PER SHARE OF COMMON STOCK: . . . . . . . . $ 0.550 $ 0.550
==============================================================================================
The accompanying notes are an integral part of these financial statements.
CHESAPEAKE UTILITIES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
- ----------------------------------------------------------------------------------------------
FOR THE SIX MONTHS ENDED JUNE 30, . . . . . . . . . . . . . . 2003 2002
- ----------------------------------------------------------------------------------------------
OPERATING ACTIVITIES
Net Income. . . . . . . . . . . . . . . . . . . . . . . . . $ 7,804,124 $ 3,497,172
Adjustments to reconcile net income to net operating cash:
Goodwill impairment. . . . . . . . . . . . . . . . . . . 0 3,200,000
Depreciation and amortization. . . . . . . . . . . . . . 4,754,976 4,708,656
Depreciation included in other costs . . . . . . . . . . 480,521 665,612
Deferred income taxes, net . . . . . . . . . . . . . . . 957,212 (933,756)
Mark-to-market adjustments . . . . . . . . . . . . . . . 604,430 36,616
Employee benefits and compensation . . . . . . . . . . . 579,775 166,156
Other. . . . . . . . . . . . . . . . . . . . . . . . . . (27,408) (27,408)
Changes in assets and liabilities:
Accounts receivable. . . . . . . . . . . . . . . . . . . 5,709,082 5,916,085
Inventory, materials, supplies and storage gas . . . . . 1,187,467 1,409,439
Prepaid expenses and other current assets. . . . . . . . 393,983 (133,847)
Other deferred charges . . . . . . . . . . . . . . . . . 394,959 (430,898)
Accounts payable . . . . . . . . . . . . . . . . . . . . (8,709,146) (3,899,224)
Refunds payable to customers . . . . . . . . . . . . . . (165,282) (614,544)
Accrued income taxes . . . . . . . . . . . . . . . . . . 1,773,230 2,461,214
Accrued interest . . . . . . . . . . . . . . . . . . . . 1,186,664 (68,967)
(Under) over recovered deferred purchased gas costs. . . (1,053,724) 5,682,150
Other current liabilities. . . . . . . . . . . . . . . . 129,025 (751,743)
- ----------------------------------------------------------------------------------------------
Net cash provided by operating activities. . . . . . . . . . . 15,999,888 20,882,713
- ----------------------------------------------------------------------------------------------
INVESTING ACTIVITIES
Property, plant and equipment expenditures, net . . . . . . (4,607,407) (5,689,883)
Sale of plant discontinued operations . . . . . . . . . . . 395,396 0
Sale of intangibles discontinued operations . . . . . . . . 395,100 0
Environmental recoveries, net of expenditures . . . . . . . 731,633 465,376
- ----------------------------------------------------------------------------------------------
Net cash used by investing activities. . . . . . . . . . . . . (3,085,278) (5,224,507)
- ----------------------------------------------------------------------------------------------
FINANCING ACTIVITIES
Common stock dividends, net of amounts reinvested . . . . . (2,692,803) (2,653,816)
Issuance of stock:
Dividend Reinvestment Plan optional cash . . . . . . . . 166,486 160,539
Retirement Savings Plan. . . . . . . . . . . . . . . . . 574,632 513,753
Net repayment under line of credit agreements . . . . . . . (9,400,000) (12,098,844)
Proceeds from issuance of long-term debt. . . . . . . . . . 0 60,681
Repayment of long-term debt . . . . . . . . . . . . . . . . (1,647,546) (1,398,497)
- ----------------------------------------------------------------------------------------------
Net cash used by financing activities. . . . . . . . . . . . . (12,999,231) (15,416,184)
- ----------------------------------------------------------------------------------------------
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS . . . . . (84,621) 242,022
CASH AND CASH EQUIVALENTS BEGINNING OF PERIOD. . . . . . . . . 2,458,276 1,188,335
- ----------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS END OF PERIOD. . . . . . . . . . . . $ 2,373,655 $ 1,430,357
==============================================================================================
The accompanying notes are an integral part of these financial statements.
CHESAPEAKE UTILITIES CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
- ---------------------------------------------------------------------------------------------
JUNE 30, DECEMBER 31,
ASSETS 2003 2002
- ---------------------------------------------------------------------------------------------
PROPERTY, PLANT AND EQUIPMENT
Natural gas distribution and transmission . . . . . . . . . . $ 182,728,789 $ 179,487,574
Propane . . . . . . . . . . . . . . . . . . . . . . . . . . . 35,020,570 34,479,798
Advanced information services . . . . . . . . . . . . . . . . 1,488,120 1,475,060
Water services. . . . . . . . . . . . . . . . . . . . . . . . 4,213,771 4,619,703
Other plant . . . . . . . . . . . . . . . . . . . . . . . . . 9,019,044 9,065,440
- ----------------------------------------------------------------------------------------------
Total property, plant and equipment . . . . . . . . . . . . . 232,470,294 229,127,575
Less: Accumulated depreciation and amortization. . . . . . . (65,762,094) (74,348,909)
- ----------------------------------------------------------------------------------------------
Net property, plant and equipment . . . . . . . . . . . . . . 166,708,200 154,778,666
- ----------------------------------------------------------------------------------------------
INVESTMENTS . . . . . . . . . . . . . . . . . . . . . . . . . 323,959 362,855
- ----------------------------------------------------------------------------------------------
CURRENT ASSETS
Cash and cash equivalents . . . . . . . . . . . . . . . . . . 2,373,655 2,458,276
Accounts receivable (less allowance for uncollectibles
of $973,327 and $659,628, respectively). . . . . . . . . . 18,336,771 24,045,853
Materials and supplies, at average cost . . . . . . . . . . . 1,097,315 995,165
Merchandise inventory, at FIFO. . . . . . . . . . . . . . . . 1,037,191 1,193,585
Propane inventory, at average cost. . . . . . . . . . . . . . 2,986,626 4,028,878
Storage gas prepayments . . . . . . . . . . . . . . . . . . . 2,942,801 3,033,772
Underrecovered purchased gas costs. . . . . . . . . . . . . . 4,022,655 2,968,931
Income taxes receivable . . . . . . . . . . . . . . . . . . . 0 488,339
Deferred income taxes receivable. . . . . . . . . . . . . . . 1,465,840 417,665
Prepaid expenses. . . . . . . . . . . . . . . . . . . . . . . 1,834,901 2,833,314
Other current assets. . . . . . . . . . . . . . . . . . . . . 722,415 755,683
- ----------------------------------------------------------------------------------------------
Total current assets. . . . . . . . . . . . . . . . . . . . . 36,820,170 43,219,461
- ----------------------------------------------------------------------------------------------
DEFERRED CHARGES AND OTHER ASSETS
Environmental regulatory assets . . . . . . . . . . . . . . . 394,362 2,527,251
Environmental expenditures. . . . . . . . . . . . . . . . . . 1,825,773 2,557,406
Goodwill, net . . . . . . . . . . . . . . . . . . . . . . . . 869,519 869,519
Intangible assets, net. . . . . . . . . . . . . . . . . . . . 1,441,032 1,927,622
Other deferred charges. . . . . . . . . . . . . . . . . . . . 4,290,533 4,701,394
- ----------------------------------------------------------------------------------------------
Total deferred charges and other assets . . . . . . . . . . . 8,821,219 12,583,192
- ----------------------------------------------------------------------------------------------
TOTAL ASSETS. . . . . . . . . . . . . . . . . . . . . . . . . $ 212,673,548 $ 210,944,174
==============================================================================================
The accompanying notes are an integral part of these financial statements.
CHESAPEAKE UTILITIES CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
- ---------------------------------------------------------------------------------------------
JUNE 30, DECEMBER 31,
CAPITALIZATION AND LIABILITIES 2003 2002
- ---------------------------------------------------------------------------------------------
CAPITALIZATION
Stockholders' equity
Common Stock, par value $.4867 per share;
(authorized 12,000,000 shares; issued and
outstanding 5,609,031 and 5,537,710 shares
for 2003 & 2002, respectively). . . . . . . . . . . . . . . . $ 2,729,647 $ 2,694,935
Additional paid-in capital. . . . . . . . . . . . . . . . . . 33,098,657 31,756,983
Retained earnings . . . . . . . . . . . . . . . . . . . . . . 36,967,370 32,238,510
- ----------------------------------------------------------------------------------------------
Total stockholders' equity. . . . . . . . . . . . . . . . . . 72,795,674 66,690,428
Long-term debt, net of current maturities . . . . . . . . . . 71,912,172 73,407,684
- ----------------------------------------------------------------------------------------------
Total capitalization. . . . . . . . . . . . . . . . . . . . . 144,707,846 140,098,112
- ----------------------------------------------------------------------------------------------
CURRENT LIABILITIES
Current portion of long-term debt . . . . . . . . . . . . . . 3,672,138 3,938,006
Short-term borrowing. . . . . . . . . . . . . . . . . . . . . 1,500,000 10,900,000
Accounts payable. . . . . . . . . . . . . . . . . . . . . . . 12,432,850 21,141,996
Refunds payable to customers. . . . . . . . . . . . . . . . . 332,560 497,842
Customer deposits . . . . . . . . . . . . . . . . . . . . . . 1,908,525 2,007,983
Income taxes payable. . . . . . . . . . . . . . . . . . . . . 1,284,891 0
Accrued interest. . . . . . . . . . . . . . . . . . . . . . . 1,886,495 699,831
Dividends payable . . . . . . . . . . . . . . . . . . . . . . 1,541,907 1,521,982
Accrued compensation. . . . . . . . . . . . . . . . . . . . . 2,303,806 1,777,544
Other accrued liabilities . . . . . . . . . . . . . . . . . . 1,746,247 2,052,442
- ----------------------------------------------------------------------------------------------
Total current liabilities . . . . . . . . . . . . . . . . . . 28,609,419 44,537,626
- ----------------------------------------------------------------------------------------------
DEFERRED CREDITS AND OTHER LIABILITIES
Deferred income taxes . . . . . . . . . . . . . . . . . . . . 19,268,888 17,263,501
Deferred investment tax credits . . . . . . . . . . . . . . . 520,133 547,541
Environmental liability . . . . . . . . . . . . . . . . . . . 653,631 2,802,424
Accrued pension costs . . . . . . . . . . . . . . . . . . . . 1,814,037 1,619,456
Accumulated negative salvage value. . . . . . . . . . . . . . 12,861,530 0
Other liabilities . . . . . . . . . . . . . . . . . . . . . . 4,238,064 4,075,514
- ----------------------------------------------------------------------------------------------
Total deferred credits and other liabilities. . . . . . . . . 39,356,283 26,308,436
- ----------------------------------------------------------------------------------------------
COMMITMENTS AND CONTINGENCIES (Note 3)
TOTAL CAPITALIZATION AND LIABILITIES. . . . . . . . . . . . . $ 212,673,548 $ 210,944,174
==============================================================================================
The accompanying notes are an integral part of these financial statements.
This page intentionally left blank
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 changes in accounting principles, 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 2002 have been reclassified to conform to the
presentation for the current year.
2. CALCULATION OF EARNINGS PER SHARE
- -----------------------------------------------------------------------------------------------
THREE MONTHS ENDED SIX MONTHS ENDED
FOR THE PERIOD ENDED JUNE 30, 2003 2002 2003 2002
- -----------------------------------------------------------------------------------------------
CALCULATION OF BASIC EARNINGS PER SHARE FROM
CONTINUING OPERATIONS:
Net Income from continuing operations. . . . . $1,154,314 $ 566,929 $7,823,773 $5,495,681
Weighted average shares outstanding. . . . . . 5,599,525 5,478,714 5,580,620 5,461,443
- -----------------------------------------------------------------------------------------------
BASIC EARNINGS PER SHARE FROM
CONTINUING OPERATIONS. . . . . . . . . . . . . $ 0.21 $ 0.10 $ 1.40 $ 1.01
- -----------------------------------------------------------------------------------------------
CALCULATION OF DILUTED EARNINGS PER SHARE FROM
CONTINUING OPERATIONS:
RECONCILIATION OF NUMERATOR:
Net Income from continuing operations Basic. . $1,154,314 $ 566,929 $7,823,773 $5,495,681
Effect of 8.25% Convertible debentures * . . . 0 0 80,457 83,168
- -----------------------------------------------------------------------------------------------
Adjusted numerator Diluted . . . . . . . . . . $1,154,314 $ 566,929 $7,904,230 $5,578,849
- -----------------------------------------------------------------------------------------------
RECONCILIATION OF DENOMINATOR:
Weighted shares outstanding Basic. . . . . . . 5,599,525 5,478,714 5,580,620 5,461,443
Effect of dilutive securities *
Stock options. . . . . . . . . . . . . . . . . 852 0 0 0
Warrants . . . . . . . . . . . . . . . . . . . 4,359 2,901 3,016 2,376
8.25% Convertible debentures . . . . . . . . . 0 0 190,027 196,429
- -----------------------------------------------------------------------------------------------
Adjusted denominator Diluted . . . . . . . . . 5,604,736 5,481,615 5,773,663 5,660,248
- -----------------------------------------------------------------------------------------------
DILUTED EARNINGS PER SHARE FROM
CONTINUING OPERATIONS. . . . . . . . . . . . . $ 0.21 $ 0.10 $ 1.37 $ 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 three different jurisdictions. The Company
has accrued liabilities for these three sites referred to respectively as the
Dover Gas Light, Salisbury Town Gas Light and the Winter Haven Coal Gas sites.
The Company is currently in discussions with the Maryland Department of the
Environment ("MDE") regarding the responsibilities of the Company with respect
to a possible fourth site in Cambridge, Maryland.
The Dover Gas Light Site is a former manufactured gas plant site located in
Dover, Delaware. In May 2001, the Company, General Public Utilities Corporation,
Inc. (now FirstEnergy Corporation), the State of Delaware, the United States
Environmental Protection Agency ("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 ("DOJ"). The Consent
Decrees were lodged simultaneously with the United States District Court for the
District of Delaware and a notice soliciting public comment for a 30-day period
was published in the Federal Register. The public comment period ended April 30,
2003 with no public comments. The DOJ filed an Unopposed Motion for Entry of
Consent Decrees on June 26, 2003. The court granted the consent decrees on July
20, 2003. Therefore, during the third quarter of 2003, the Company expects to:
o Receive a net payment of $1.15 million from other parties to the
settlement. These proceeds will be passed on to the Company's firm
customers, in accordance with the environmental rate rider.
o 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. The Company understands that these contingencies are
standard, and are required by the United States in all liability
settlements.
At June 30, 2003 the Company reduced the liability and associated regulatory
asset for remediation of the Dover Gas Light site to $10,000, based on the
approval of the consent decrees. That represents the estimated remaining costs
related to the site. Previously, the Company had accrued $2.1 million
(discounted) of costs associated with the remediation of the Dover Gas Light
site and had recorded an associated regulatory asset for the same amount.
Through June 30, 2003 the Company has incurred approximately $9.2 million in
costs relating to environmental testing and remedial action studies at the Dover
Gas Light site. Approximately $7.6 million has been recovered through June 30,
2003 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
performed the following remedial steps: (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, with MDE's permission, the Company permanently decommissioned the
AS/SVE system and discontinued nearly all on-site and off-site monitoring wells.
In November 2002, the Company submitted a request for a No Further Action
("NFA") for the site. In December 2002, the MDE recommended that the Company
submit work plans to MDE and place deed restrictions on the property as
conditions prior to receiving an NFA. The Company has completed the MDE
recommended work plans and is in the process of executing the deed restrictions.
The Company anticipates submittal of a revised request for the NFA during the
third quarter of 2003.
The Company has adjusted the liability with respect to the Salisbury Town Gas
Light site to $14,000 at June 30, 2003. 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 June 30, 2003, the Company has incurred approximately $2.9 million for
remedial actions and environmental studies at the Salisbury Town Gas Light site.
Of this amount, approximately $1.8 million has been recovered through insurance
proceeds or 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 in the fourth quarter of 2002 and is now fully operational. 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 $630,000 (discounted). Accordingly, at June 30, 2003
the Company has accrued a liability of $630,000. Through June 30, 2003 the
Company has incurred approximately $1.2 million of environmental costs
associated with this site. At June 30, 2003 the Company had collected through
rates $259,000 in excess of costs incurred. A regulatory asset of approximately
$371,000 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 is not known at this time.
It is management's opinion that any un-recovered 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 and propane distribution operations have entered into
contractual commitments to purchase 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 expires on October 31, 2003. The Company expects to replace the
contract with a similar agreement. A vendor has not yet been selected. During
the second quarter of 2003, the energy marketing and risk management company
described above declared bankruptcy. Chesapeake has been and will continue to
monitor its risks related to the bankruptcy, in order to minimize any impact on
our operations. The Company is not aware of any adverse financial impact on its
business related to the bankruptcy. Should the vendor not be able to fulfill any
supply commitments, Chesapeake will contract with other vendors for gas supply.
The Company has issued corporate guarantees to certain vendors of its propane
wholesale marketing subsidiary. The guarantees at June 30, 2003 totaled $4.5
million and expire on various dates through February 2004.
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
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. Should the Company enter
into an exit plan, SFAS No. 146 will be applied prospectively.
FASB Interpretation ("FIN") No. 45, "Guarantor's Accounting and Disclosure
Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of
Others," was adopted in November 2002. The Company has adopted FIN No. 45. There
was no impact on the financial statements; however, the disclosures in the
Commitments and Contingencies footnote (Note 3) were expanded to include all
required information.
FIN No. 46, "Consolidation of Variable Interest Entities," was adopted in
January 2003. Chesapeake does not currently have any investments in variable
interest entities and, therefore, FIN No. 46 has not impacted the Company.
The FASB adopted SFAS No. 147, "Acquisitions of Certain Financial Institutions"
in October 2002 and SFAS No. 148, "Accounting for Stock-Based Compensation -
Transition and Disclosure" in December 2002. Neither pronouncement has an impact
on the Company's current operations. If required for future transactions, they
will be implemented prospectively.
In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133 on
Derivative Instruments and Hedging Activities." This statement amends and
clarifies financial accounting and reporting for derivative instruments and for
hedging activities under FASB Statement No. 133, "Accounting for Derivative
Instruments and Hedging Activities" by requiring that contracts with comparable
characteristics be accounted for similarly. The Company does not believe that
the adoption of SFAS No. 149 will have a material impact on Chesapeake's
financial position or results of operations.
SFAS No. 150, "Accounting for Certain Financial Instruments with Characteristics
of both Liability and Equity" was issued in May 2003 by the FASB. This statement
establishes standards for how an issuer classifies and measures certain
financial instruments with characteristics of both liability and equity. It
requires that an issuer classify a financial instrument that is within in its
scope as a liability. Chesapeake does not currently have any financial
instruments that would be impacted by this statement. Therefore, adoption of
this statement is not expected to have a material impact on the Company's
financial position or results of operations.
5. ADOPTED PRONOUNCEMENTS
Chesapeake adopted SFAS No. 143, "Accounting for Asset Retirement Obligations,"
as of January 1, 2003. The Company's regulated operations are allowed by the
regulatory bodies to recover the costs of retiring its long-lived assets through
the approved depreciation rates. This is sometimes referred to as negative
salvage value. Under the pronouncement, the Company was required to record the
portion of depreciation that represents negative salvage value as a liability on
its financial statements. Previously, it was included in accumulated
depreciation. There was no impact on the earnings of the Company. As of January
1, 2003, the liability for accumulated negative salvage value was $12.1 million
and increased during the first six months of 2003 by approximately $800,000,
which was offset by a reduction in accumulated depreciation for the same period
of $12.9 million.
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 SIX MONTHS ENDED
FOR THE PERIOD ENDED JUNE 30, 2003 2002 2003 2002
- -------------------------------------------------------------------------------------------------------------
OPERATING REVENUES, UNAFFILIATED CUSTOMERS
Natural gas distribution and transmission . . . $ 23,515,929 $ 21,164,155 $ 63,962,373 $ 52,743,111
Propane . . . . . . . . . . . . . . . . . . . . 5,537,407 4,106,649 25,784,434 15,319,089
Advanced information services . . . . . . . . . 3,185,153 3,362,386 6,418,571 6,421,642
Water services. . . . . . . . . . . . . . . . . 2,560,321 2,536,899 4,828,144 4,884,703
- -------------------------------------------------------------------------------------------------------------
Total operating revenues, unaffiliated customers. $ 34,798,810 $ 31,170,089 $100,993,522 $ 79,368,545
- -------------------------------------------------------------------------------------------------------------
INTERSEGMENT REVENUES (1)
Natural gas distribution and transmission . . . $ 61,727 $ 17,456 $ 101,765 $ 34,914
Advanced information services . . . . . . . . . 30,190 0 68,024 0
Water services. . . . . . . . . . . . . . . . . 1,752 0 4,524 0
Other . . . . . . . . . . . . . . . . . . . . . 175,151 177,440 352,570 362,110
- -------------------------------------------------------------------------------------------------------------
Total intersegment revenues . . . . . . . . . . . $ 268,820 $ 194,896 $ 526,883 $ 397,024
- -------------------------------------------------------------------------------------------------------------
OPERATING INCOME (LOSS)
Natural gas distribution and transmission . . . $ 3,398,944 $ 2,918,317 $ 10,935,377 $ 9,246,110
Propane . . . . . . . . . . . . . . . . . . . . (390,032) (1,086,750) 4,495,450 1,719,283
Advanced information services . . . . . . . . . 164,301 175,954 226,634 103,937
Water services. . . . . . . . . . . . . . . . . (45,825) (89,830) (248,962) (237,788)
Other and eliminations. . . . . . . . . . . . . 94,028 85,141 176,738 176,070
- -------------------------------------------------------------------------------------------------------------
TOTAL OPERATING INCOME. . . . . . . . . . . . . . 3,221,416 2,002,832 15,585,237 11,007,612
=============================================================================================================
* All significant intersegment revenues are billed at market rates and have been eliminated
from consolidated revenues.
- -------------------------------------------------------------------------------
JUNE 30, DECEMBER 31,
2003 2002
- -------------------------------------------------------------------------------
IDENTIFIABLE ASSETS
Natural gas distribution and transmission . . . $159,896,909 $153,609,232
Propane . . . . . . . . . . . . . . . . . . . . 34,317,059 37,737,882
Advanced information services . . . . . . . . . 2,402,416 2,734,188
Water services. . . . . . . . . . . . . . . . . 5,979,972 5,719,091
Other . . . . . . . . . . . . . . . . . . . . . 9,725,298 9,665,544
- -------------------------------------------------------------------------------
Total identifiable assets . . . . . . . . . . . . $212,321,654 $209,465,937
===============================================================================
During the second quarter of 2003, the Company sold the assets of two water
businesses. The results reported above reflect only the continuing operations of
the Company. The segment reporting information for 2003 and 2002 presented above
does not include discontinued operations.
7. DISCONTINUED OPERATIONS
During the second quarter of 2003, Chesapeake sold the assets of two water
service businesses, one based in Venice, Florida and one in Rochester,
Minnesota. An after-tax gain of $72,000 on the disposal of the assets was
recognized. The loss from operations of discontinued businesses is shown, net of
tax, separately on the income statements. The following table presents the
balance sheet accounts for discontinued operations.
CHESAPEAKE UTILITIES CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
- ---------------------------------------------------------------------------------------------
JUNE 30, DECEMBER 31,
ASSETS 2003 2002
- ---------------------------------------------------------------------------------------------
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment . . . . . . . . . . . . . . . . $ 0 $ 567,859
Less: Accumulated depreciation and amortization. . . . . . . 0 (172,463)
- ----------------------------------------------------------------------------------------------
Net property, plant and equipment . . . . . . . . . . . . . . 0 395,396
- ----------------------------------------------------------------------------------------------
CURRENT ASSETS
Cash and cash equivalents . . . . . . . . . . . . . . . . . . 96,340 220,283
Accounts receivable (less allowance for uncollectibles
of $7,740 and $15,800, respectively) . . . . . . . . . . . 183,642 165,862
Merchandise inventory, at FIFO. . . . . . . . . . . . . . . . 0 198,823
Income taxes receivable . . . . . . . . . . . . . . . . . . . 60,327 79,376
Deferred income taxes receivable. . . . . . . . . . . . . . . 901 5,530
Prepaid expenses. . . . . . . . . . . . . . . . . . . . . . . 10,684 17,867
- ----------------------------------------------------------------------------------------------
Total current assets. . . . . . . . . . . . . . . . . . . . . 351,894 687,741
- ----------------------------------------------------------------------------------------------
OTHER ASSETS
Intangible assets, net. . . . . . . . . . . . . . . . . . . . 0 395,100
- ----------------------------------------------------------------------------------------------
Total other assets. . . . . . . . . . . . . . . . . . . . . . 0 395,100
- ----------------------------------------------------------------------------------------------
TOTAL ASSETS. . . . . . . . . . . . . . . . . . . . . . . . . $ 351,894 $ 1,478,237
==============================================================================================
- ---------------------------------------------------------------------------------------------
JUNE 30, DECEMBER 31,
CAPITALIZATION AND LIABILITIES 2003 2002
- ---------------------------------------------------------------------------------------------
STOCKHOLDERS' EQUITY
Common Stock. . . . . . . . . . . . . . . . . . . . . . . . . $ 1,000 $ 1,000
Additional paid-in capital. . . . . . . . . . . . . . . . . . 116,548 116,548
Retained earnings . . . . . . . . . . . . . . . . . . . . . . (470,576) (453,592)
- ----------------------------------------------------------------------------------------------
Total stockholders' equity. . . . . . . . . . . . . . . . . . (353,028) (336,045)
CURRENT LIABILITIES
Accounts payable. . . . . . . . . . . . . . . . . . . . . . . 11,974 10,928
Due to parent company . . . . . . . . . . . . . . . . . . . . 636,094 1,693,892
Customer deposits . . . . . . . . . . . . . . . . . . . . . . 0 1,140
Other accrued liabilities . . . . . . . . . . . . . . . . . . 24,158 59,913
- ----------------------------------------------------------------------------------------------
Total current liabilities . . . . . . . . . . . . . . . . . . 672,226 1,765,873
- ----------------------------------------------------------------------------------------------
DEFERRED CREDITS AND OTHER LIABILITIES
Deferred income taxes . . . . . . . . . . . . . . . . . . . . 32,696 48,409
- ----------------------------------------------------------------------------------------------
Total deferred credits and other liabilities. . . . . . . . . 32,696 48,409
- ----------------------------------------------------------------------------------------------
COMMITMENTS AND CONTINGENCIES (Note 3)
TOTAL STOCKHOLDER'S EQUITY AND LIABILITIES. . . . . . . . . . $ 351,894 $ 1,478,237
==============================================================================================
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
BUSINESS DESCRIPTION
Chesapeake Utilities Corporation (the "Company") is a diversified utility
company engaged in natural gas distribution and transmission, propane
distribution and marketing, advanced information services and other related
businesses.
The Company's strategy is to grow earnings from a stable utility foundation by
investing in related businesses and services that provide opportunities for
higher, unregulated returns. This growth strategy includes acquisitions and
investments in unregulated businesses as well as the continued investment and
expansion of the Company's utility operations that provide the stable base of
earnings. The Company continually reevaluates its investments to ensure that
they are consistent with its strategy and the goal of enhancing shareholder
value. The Company's unregulated businesses and services currently include
propane distribution and wholesale marketing, advanced information services and
water conditioning and treatment.
Chesapeake continues to reassess its water services activities and take actions
to improve returns from this business segment. The assets and operations of two
businesses were sold in the second quarter. Management continues to look at
options for the remaining water businesses.
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 six months of
2003, net cash provided by operating activities, net cash used by investing
activities and net cash used by financing activities were approximately $16.0
million, $3.1 million and $13.0 million, respectively.
The Board of Directors has authorized the Company to borrow up to $35.0 million
of short-term debt from various banks and trust companies. As of June 30, 2003,
Chesapeake had three unsecured bank lines of credit with two financial
institutions, totaling $65.0 million, for short-term cash needs to meet seasonal
working capital requirements and to temporarily fund portions of its capital
expenditures. One of the bank lines, totaling $15.0 million, is committed. The
other two lines are subject to the banks' availability of funds. In the first
three months of 2003, cash provided by operations was adequate to fund capital
expenditures and the reduction in short-term debt outstanding. At June 30, 2003,
the debt outstanding under these lines was $1.5 million, compared to $10.9
million at December 31, 2002. Additionally, at June 30, 2003 there was an
irrevocable letter of credit outstanding for $250,000 issued to one of the
Company's insurance providers. The letter of credit reduced the available
borrowing under the short-term lines.
During the six-month periods ended June 30, 2003 and 2002, capital expenditures
were approximately $3.8 million and $5.7 million, respectively. Chesapeake has
budgeted $16.5 million for capital expenditures during 2003. This amount
includes $12.1 million for natural gas distribution and transmission, $2.3
million for propane distribution and marketing, $237,000 for advanced
information services and $451,000 for other operations. The Company had
originally budgeted $1.2 million for water services; however, the sale of assets
for two of the water businesses and the possible sale of other water units is
now expected to reduce the actual spending below this level. 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 water
services include expenditures to support customer growth and replace equipment.
The other operations budget includes general plant, computer software and
hardware expenditures. Financing for the capital expenditure program for the
balance of 2003 is expected to be provided from short-term borrowing and cash
provided by operating activities. The capital expenditure program is subject to
continual review and modification. Actual capital requirements may vary from the
above estimates due to a number of factors including acquisition opportunities,
possible divestiture of additional water businesses, changing economic
conditions, customer growth in existing areas, regulation, availability of
capital and new growth opportunities.
The Company has budgeted $202,000 for capital expenditures in 2003 related to
environmental remediation projects, and expects to make additional expenditures
in future years. Management does not expect any such expenditures or financing
to have a material adverse effect on the financial position or capital resources
of the Company (see Note 3 to the Consolidated Financial Statements).
As of June 30, 2003 common equity represented 50.3 percent of total
capitalization, compared to 47.6 percent as of December 31, 2002. Combining
short-term financing with total capitalization, the equity component would have
been 48.6 percent and 43.0 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 half of 2003 increased approximately $466,000, or
19 percent, over the same period in 2002. The increase reflects the increase in
the average long-term debt balance caused by the placement of $30.0 million
completed in October 2002. The average long-term debt balance in the first half
of 2003 was $76.0 million with an average interest rate of 7.24 percent,
compared to $50.2 million with an average interest rate of 7.61 percent in the
first half of 2002. The increase in long-term debt was offset by a reduction in
the average short-term borrowing balance, which decreased from $32.9 million in
the first half of 2002 to $3.8 million in the first half of 2003. The average
interest rate for short-term borrowing dropped from 2.37 percent for the first
half of 2002 to 1.83 percent in the first half of 2003.
RESULTS OF OPERATIONS FOR THE QUARTER ENDED JUNE 30, 2003
CONSOLIDATED OVERVIEW
The Company earned net income from continuing operations of $1.2 million, or
$0.21 per share, for the second quarter of 2003, an increase of 104 percent
compared to net income from continuing operations of $567,000, or $0.10 per
share for the corresponding period in 2002. The improved results reflect the
continued strong performance of the regulated natural gas operations and the
performance improvement initiatives undertaken at the propane distribution
operations. Results for both the natural gas distribution and propane
distribution operations on the Delmarva Peninsula benefited from second quarter
temperatures (measured in heating degree days) that were 28 percent colder than
the 10-year average and 39 percent colder than the same period in 2002.
During the second quarter of 2003, Chesapeake sold the assets of two water
service businesses, one based in Venice, Florida and one in Rochester,
Minnesota. An after-tax gain of $72,000 on the disposal of the assets was
recognized, offsetting the loss from operations of discontinued businesses of
$50,000.
- --------------------------------------------------------------------------------------
FOR THE THREE MONTHS ENDED JUNE 30, 2003 2002 CHANGE
- --------------------------------------------------------------------------------------
Operating Income (Loss)
Natural Gas Distribution & Transmission. $ 3,398,944 $ 2,918,317 $ 480,627
Propane. . . . . . . . . . . . . . . . . (390,032) (1,086,750) 696,718
Advanced Information Services. . . . . . 164,301 175,954 (11,653)
Water Services . . . . . . . . . . . . . (45,825) (89,830) 44,005
Other & Eliminations . . . . . . . . . . 94,028 85,141 8,887
- --------------------------------------------------------------------------------------
Operating Income . . . . . . . . . . . . . 3,221,416 2,002,832 1,218,584
Other Income . . . . . . . . . . . . . . . 57,772 52,663 5,109
Interest Charges . . . . . . . . . . . . . 1,429,005 1,207,417 221,588
Income Taxes . . . . . . . . . . . . . . . 695,869 281,149 414,720
- --------------------------------------------------------------------------------------
Net Income from Continuing Operations. . . $ 1,154,314 $ 566,929 $ 587,385
======================================================================================
NATURAL GAS DISTRIBUTION AND TRANSMISSION
The natural gas distribution and transmission segment earned operating income of
$3.4 million for the second quarter of 2003 compared to $2.9 million for the
corresponding period last year, an increase of $481,000.
- --------------------------------------------------------------------------------------
FOR THE THREE MONTHS ENDED JUNE 30, 2003 2002 CHANGE
- --------------------------------------------------------------------------------------
Revenue. . . . . . . . . . . . . . . . . . $23,577,656 $ 21,181,611 $ 2,396,045
Cost of gas. . . . . . . . . . . . . . . . 13,411,483 12,038,277 1,373,206
- --------------------------------------------------------------------------------------
Gross margin . . . . . . . . . . . . . . . 10,166,173 9,143,334 1,022,839
Operations & maintenance . . . . . . . . . 4,389,822 3,944,297 445,525
Depreciation & amortization. . . . . . . . 1,678,190 1,642,188 36,002
Other taxes. . . . . . . . . . . . . . . . 699,217 638,532 60,685
- --------------------------------------------------------------------------------------
Operating expenses . . . . . . . . . . . . 6,767,229 6,225,017 542,212
- --------------------------------------------------------------------------------------
Total Operating Income . . . . . . . . . . $ 3,398,944 $ 2,918,317 $ 480,627
======================================================================================
Gross margins for the Delaware and Maryland distribution divisions increased
$687,000 from 2002. Temperatures for the quarter were colder than 2002 (174
heating degree-days) and the 10-year average (138 heating degree-days). The
Company estimates that, on an annual basis, for each heating degree-day variance
from the 10-year average, margins change by $1,560. An increase in the average
number of residential customers also contributed to the increase. Delaware and
Maryland experienced an increase of 1,845 residential customers, or 6 percent,
in the second quarter of 2003 compared to 2002. The Company estimates that each
residential customer added contributes $360 annually to gross margin and
requires an addition cost of $100 for operations and maintenance expenses.
Gross margins for the Florida distribution operations were also up $250,000, due
to the implementation of transportation services and customer additions. The
transmission operation's margins increased by $15,000.
The margin increases were partially offset by higher operating expenses,
primarily operations and maintenance expenses and other taxes that relate to the
increased volumes and earnings. Additionally, pension costs, employee costs and
depreciation were higher.
PROPANE
For the second quarter of 2003, the propane segment experienced a seasonal
operating loss of $390,000 compared to a $1.1 million loss for the second
quarter of 2002. Gross margin increased $838,000, but was partially offset by
increases in operating expenses of $141,000.
- --------------------------------------------------------------------------------------
FOR THE THREE MONTHS ENDED JUNE 30, 2003 2002 CHANGE
- --------------------------------------------------------------------------------------
Revenue. . . . . . . . . . . . . . . . . . $ 5,537,407 $ 4,106,649 $ 1,430,758
Cost of sales. . . . . . . . . . . . . . . 2,671,033 2,077,860 593,173
- --------------------------------------------------------------------------------------
Gross margin . . . . . . . . . . . . . . . 2,866,374 2,028,789 837,585
Operations & maintenance . . . . . . . . . 2,694,718 2,547,657 147,061
Depreciation & amortization. . . . . . . . 373,461 420,399 (46,938)
Other taxes. . . . . . . . . . . . . . . . 188,227 147,483 40,744
- --------------------------------------------------------------------------------------
Operating expenses . . . . . . . . . . . . 3,256,406 3,115,539 140,867
- --------------------------------------------------------------------------------------
Total Operating Loss . . . . . . . . . . . ($390,032) ($1,086,750) $ 696,718
======================================================================================
The margin increase for the propane segment was due primarily to an increase of
$805,000 in the Delmarva distribution operations. Volumes sold in Delmarva for
the second quarter increased 509,000 gallons or 19 percent. Temperatures for the
quarter were colder than 2002 (174 heating degree-days) and the 10-year average
(138 heating degree-days). The Company estimates that on an annual basis, for
each heating degree-day variance from the 10-year average, margins change by
$1,678. The margin increase was partially offset by increased operating
expenses, primarily related to the higher volumes and billings, including an
increase in the reserve for bad debts.
The Company's propane wholesale marketing operation experienced an increase in
margins of $43,000 and a decrease of $8,000 in operating expenses, leading to an
improvement of $51,000 in operating income.
ADVANCED INFORMATION SERVICES
The advanced information services business contributed operating income of
$164,000 for the second quarter of 2003 compared to $176,000 for the second
quarter of last year.
- --------------------------------------------------------------------------------------
FOR THE THREE MONTHS ENDED JUNE 30, 2003 2002 CHANGE
- --------------------------------------------------------------------------------------
Revenue. . . . . . . . . . . . . . . . . . $ 3,215,343 $ 3,362,386 ($147,043)
Cost of sales. . . . . . . . . . . . . . . 1,870,909 1,763,137 107,772
- --------------------------------------------------------------------------------------
Gross margin . . . . . . . . . . . . . . . 1,344,434 1,599,249 (254,815)
Operations & maintenance . . . . . . . . . 997,278 1,234,106 (236,828)
Depreciation & amortization. . . . . . . . 48,758 52,218 (3,460)
Other taxes. . . . . . . . . . . . . . . . 134,097 136,971 (2,874)
- --------------------------------------------------------------------------------------
Operating expenses . . . . . . . . . . . . 1,180,133 1,423,295 (243,162)
- --------------------------------------------------------------------------------------
Total Operating Income . . . . . . . . . . $ 164,301 $ 175,954 ($11,653)
======================================================================================
This segment has been adversely affected by the nation's economic slowdown and
the resulting postponement or cancellation of discretionary consulting projects;
however, the Company has countered declining revenues by implementing cost
reduction measures, including reductions in staffing.
WATER BUSINESS OPERATIONS
Water services continuing operations experienced an improvement of $44,000 in
operating income (loss). Their operating loss was reduced to $46,000 for the
second quarter of 2003, compared to a loss of $90,000 for the same period in
2002.
- --------------------------------------------------------------------------------------
FOR THE THREE MONTHS ENDED JUNE 30, 2003 2002 CHANGE
- --------------------------------------------------------------------------------------
Revenue. . . . . . . . . . . . . . . . . . $ 2,562,073 $ 2,536,899 $ 25,174
Cost of sales. . . . . . . . . . . . . . . 1,023,435 1,064,952 (41,517)
- --------------------------------------------------------------------------------------
Gross margin . . . . . . . . . . . . . . . 1,538,638 1,471,947 66,691
Operations & maintenance . . . . . . . . . 1,297,225 1,297,988 (763)
Depreciation & amortization. . . . . . . . 193,420 176,659 16,761
Goodwill impairment. . . . . . . . . . . . 0 0 0
Other taxes. . . . . . . . . . . . . . . . 93,818 87,130 6,688
- --------------------------------------------------------------------------------------
Operating expenses . . . . . . . . . . . . 1,584,463 1,561,777 22,686
- --------------------------------------------------------------------------------------
Total Operating Loss . . . . . . . . . . . ($45,825) ($89,830) $ 44,005
======================================================================================
An increase in margins of $67,000 was partially offset by an increase in
operating expenses of $23,000. During the second quarter of 2003, Chesapeake
sold the assets of two water service businesses, one based in Venice, Florida
and one in Rochester, Minnesota. The results of the two businesses have been
reclassified to discontinued operations. Included in discontinued operations for
2003 is approximately $18,000 (pre-tax) representing fixed overhead expense
allocations that will not result in future savings for the Company.
Chesapeake continues to reassess its water services operations and take actions
in an effort to improve returns from this business segment. Further action may
include the sale of some or all of the remaining businesses.
OTHER BUSINESS OPERATIONS
Other operations contributed operating income of $89,000 for the second quarter
of 2003 compared to income of $85,000 for the second quarter of last year. Other
operations consist primarily of subsidiaries that own real estate leased to
other Company subsidiaries.
- --------------------------------------------------------------------------------------
FOR THE THREE MONTHS ENDED JUNE 30, 2003 2002 CHANGE
- --------------------------------------------------------------------------------------
Revenue. . . . . . . . . . . . . . . . . . $ 175,151 $ 177,440 ($2,289)
Cost of sales. . . . . . . . . . . . . . . 0 0 0
- --------------------------------------------------------------------------------------
Gross margin . . . . . . . . . . . . . . . 175,151 177,440 (2,289)
Operations & maintenance . . . . . . . . . 12,902 20,131 (7,229)
Depreciation & amortization. . . . . . . . 59,529 57,807 1,722
Other taxes. . . . . . . . . . . . . . . . 13,406 14,361 (955)
- --------------------------------------------------------------------------------------
Operating expenses . . . . . . . . . . . . 85,837 92,299 (6,462)
- --------------------------------------------------------------------------------------
Operating Income Other . . . . . . . . . . 89,314 85,141 4,173
Operating Income Eliminations. . . . . . . 4,714 0 4,714
- --------------------------------------------------------------------------------------
Total Operating Income . . . . . . . . . . $ 94,028 $ 85,141 $ 8,887
======================================================================================
INCOME TAXES
Income taxes are up for the quarter primarily as a result of the higher
earnings. Additionally, the impact of certain permanent differences, such as the
tax savings on dividends paid to the Company's Employee Stock Ownership Plan
("ESOP"), has a greater impact on the effective tax rates in periods of lower
earnings.
INTEREST EXPENSE
Interest for the second quarter of 2003 increased approximately $222,000, or 18
percent, over the same period in 2002 The increase resulted from the issuance of
$30.0 million of long-term debt in October 2002 at an interest rate of 6.64
percent. The proceeds from this debt issuance were used to repay $30.0 million
of short-term borrowings that were carrying lower rates. The short-term rates
fluctuate daily.
The average long-term debt balance in the second quarter of 2003 was $76.0
million with an average interest rate of 7.22 percent, compared to $49.9 million
with an average interest rate of 7.61 percent in the second quarter of 2002. The
average borrowing balance for short-term debt decreased from $28.1 million in
the second quarter of 2002 to $336,000 in the second quarter of 2003. The
average interest rate for short-term borrowing dropped from 2.39 percent in the
second quarter of 2002 to 1.89 percent in the second quarter of 2003.
RESULTS OF OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30, 2003
CONSOLIDATED OVERVIEW
The Company recognized net income from continuing operations of $7.8 million, or
$1.40 per share, for the first six months of 2003, an increase of $2.3 million,
or $0.39 per share, compared to the corresponding period in 2002. As indicated
in the following table, the higher earnings for the first six months of 2003
reflect significant improvement in the natural gas and propane distribution
operations due to colder weather and customer growth.
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. After giving effect to this charge and the discontinued
operations, earnings per share for the first six months of 2002 were $0.64.
- --------------------------------------------------------------------------------------
FOR THE SIX MONTHS ENDED JUNE 30, 2003 2002 CHANGE
- --------------------------------------------------------------------------------------
Operating Income (Loss)
Natural Gas Distribution & Transmission. $10,935,377 $ 9,246,110 $ 1,689,267
Propane. . . . . . . . . . . . . . . . . 4,495,450 1,719,283 2,776,167
Advanced Information Services. . . . . . 226,634 103,937 122,697
Water Services . . . . . . . . . . . . . (248,962) (237,788) (11,174)
Other & Eliminations . . . . . . . . . . 176,738 176,070 668
- --------------------------------------------------------------------------------------
Operating Income . . . . . . . . . . . . . 15,585,237 11,007,612 4,577,625
Other Income . . . . . . . . . . . . . . . 144,424 390,657 (246,233)
Interest Charges . . . . . . . . . . . . . 2,894,855 2,428,517 466,338
Income Taxes . . . . . . . . . . . . . . . 5,011,032 3,474,071 1,536,961
- --------------------------------------------------------------------------------------
Net Income from Continuing Operations. . . $ 7,823,774 $ 5,495,681 $ 2,328,093
======================================================================================
NATURAL GAS DISTRIBUTION AND TRANSMISSION
The natural gas distribution and transmission segment earned pre-tax operating
income of $10.9 million for the first six months of 2003 compared to $9.2
million for the corresponding period last year, an increase of $1.7 million.
- --------------------------------------------------------------------------------------
FOR THE SIX MONTHS ENDED JUNE 30, 2003 2002 CHANGE
- --------------------------------------------------------------------------------------
Revenue. . . . . . . . . . . . . . . . . . $64,064,138 $ 52,778,025 $11,286,113
Cost of gas. . . . . . . . . . . . . . . . 39,313,081 30,856,732 8,456,349
- --------------------------------------------------------------------------------------
Gross margin . . . . . . . . . . . . . . . 24,751,057 21,921,293 2,829,764
Operations & maintenance . . . . . . . . . 8,969,629 8,059,772 909,857
Depreciation & amortization. . . . . . . . 3,338,335 3,261,288 77,047
Other taxes. . . . . . . . . . . . . . . . 1,507,716 1,354,123 153,593
- --------------------------------------------------------------------------------------
Operating expenses . . . . . . . . . . . . 13,815,680 12,675,183 1,140,497
- --------------------------------------------------------------------------------------
Total Operating Income . . . . . . . . . . $10,935,377 $ 9,246,110 $ 1,689,267
======================================================================================
Gross margins for the Delaware and Maryland distribution divisions increased
$2.1 million from 2002. Temperatures for the first half were 30 percent colder
than 2002 (743 heating degree-days) and 16 percent colder than the 10-year
average (441 heating degree-days). The Company estimates that, on an annual
basis, for each heating degree-day variance from the 10-year average, margins
change by $1,560. An increase in the average number of customers also
contributed to the increase. Delaware and Maryland experienced an increase of
1,934 in the average number of customers, or 6 percent, in the first half of
2003 compared to 2002. The Company estimates that each residential customer
added contributes $360 annually to gross margin and requires an addition cost of
$100 for operations and maintenance expenses.
Gross margins for the Florida distribution operations were also up $569,000, due
to the implementation of transportation services and customer additions. The
transmission operation's margins increased by $52,000.
The margin increases were partially offset by higher operating expenses,
primarily operations and maintenance expenses and other taxes that relate to the
increased volumes and earnings. Additionally, pension costs, employee costs and
depreciation were higher.
PROPANE
For the first six months of 2003, the propane segment contributed operating
income of $4.5 million compared to $1.7 million for the first six months of
2002. Gross margin increased $3.3 million, but was partially offset by increases
in operating expenses of $561,000.
- --------------------------------------------------------------------------------------
FOR THE SIX MONTHS ENDED JUNE 30, 2003 2002 CHANGE
- --------------------------------------------------------------------------------------
Revenue. . . . . . . . . . . . . . . . . . $25,784,434 $ 15,319,089 $10,465,345
Cost of sales. . . . . . . . . . . . . . . 13,956,129 6,827,985 7,128,144
- --------------------------------------------------------------------------------------
Gross margin . . . . . . . . . . . . . . . 11,828,305 8,491,104 3,337,201
Operations & maintenance . . . . . . . . . 6,156,924 5,547,189 609,735
Depreciation & amortization. . . . . . . . 758,365 818,632 (60,267)
Other taxes. . . . . . . . . . . . . . . . 417,566 406,000 11,566
- --------------------------------------------------------------------------------------
Operating expenses . . . . . . . . . . . . 7,332,855 6,771,821 561,034
- --------------------------------------------------------------------------------------
Total Operating Income . . . . . . . . . . $ 4,495,450 $ 1,719,283 $ 2,776,167
======================================================================================
The margin increase for the propane segment was due primarily to an increase of
$2.9 million for the Delmarva distribution operations. Volumes sold for the
first half increased 3.1 million gallons or 28 percent. Temperatures for the
half were 30 percent colder than 2002 (743 heating degree-days) and 16 percent
colder than the 10-year average (441 heating degree-days). The Company estimates
that on an annual basis, for each heating degree-day variance from the 10-year
average, margins change by $1,678. Additionally, the margin per gallon improved
by $0.045 in the first half of 2003 compared to 2002. The margin increase was
partially offset by increased operating expenses, primarily related to the
higher volumes and revenues, including an increase in the reserve for bad debts.
The Florida propane distribution operations experienced an increase in margins
of $266,000 for the half; however, $192,000 related to a non-recurring service
project.
The Company's propane wholesale marketing operation experienced an increase in
margins of $213,000 and an increase of $2,000 in operating expenses, leading to
an improvement of $211,000 in operating income. This improvement primarily
reflects increased trading opportunities in the first quarter of 2003 caused by
higher wholesale price volatility.
ADVANCED INFORMATION SERVICES
The advanced information services business earned operating income of $227,000
for the first six months of 2003 compared to income of $104,000 for the first
half of last year. The increase is the result of slightly higher revenue and
decreased operating expenses, partially offset by increased cost of sales.
- --------------------------------------------------------------------------------------
FOR THE SIX MONTHS ENDED JUNE 30, 2003 2002 CHANGE
- --------------------------------------------------------------------------------------
Revenue. . . . . . . . . . . . . . . . . . $ 6,486,595 $ 6,421,642 $ 64,953
Cost of sales. . . . . . . . . . . . . . . 3,762,162 3,381,949 380,213
- --------------------------------------------------------------------------------------
Gross margin . . . . . . . . . . . . . . . 2,724,433 3,039,693 (315,260)
Operations & maintenance . . . . . . . . . 2,108,123 2,511,708 (403,585)
Depreciation & amortization. . . . . . . . 98,871 108,588 (9,717)
Other taxes. . . . . . . . . . . . . . . . 290,805 315,460 (24,655)
- --------------------------------------------------------------------------------------
Operating expenses . . . . . . . . . . . . 2,497,799 2,935,756 (437,957)
- --------------------------------------------------------------------------------------
Total Operating Income . . . . . . . . . . $ 226,634 $ 103,937 $ 122,697
======================================================================================
This segment continues to be adversely affected by the nation's economic
slowdown as discretionary consulting projects have been postponed or cancelled.
However, strong cost containment efforts have reduced operating expenses to
offset margin reductions.
WATER BUSINESS OPERATIONS
Water services continuing operations experienced an operating loss of $249,000
for the first half of 2003, compared to an operating loss of $238,000 for the
same period in 2002.
- --------------------------------------------------------------------------------------
FOR THE SIX MONTHS ENDED JUNE 30, 2003 2002 CHANGE
- --------------------------------------------------------------------------------------
Revenue. . . . . . . . . . . . . . . . . . $ 4,832,668 $ 4,884,703 ($52,035)
Cost of sales. . . . . . . . . . . . . . . 1,898,220 1,993,675 (95,455)
- --------------------------------------------------------------------------------------
Gross margin . . . . . . . . . . . . . . . 2,934,448 2,891,028 43,420
Operations & maintenance . . . . . . . . . 2,600,836 2,596,958 3,878
Depreciation & amortization. . . . . . . . 382,535 340,755 41,780
Goodwill impairment. . . . . . . . . . . . 0 0 0
Other taxes. . . . . . . . . . . . . . . . 200,039 191,103 8,936
- --------------------------------------------------------------------------------------
Operating expenses . . . . . . . . . . . . 3,183,410 3,128,816 54,594
- --------------------------------------------------------------------------------------
Total Operating Loss . . . . . . . . . . . ($248,962) ($237,788) ($11,174)
======================================================================================
An increase in margins of $43,000 was more than offset by an increase in
operating expenses of $55,000. During the second quarter of 2003, Chesapeake
sold the assets of two water service businesses, one based in Venice, Florida
and one in Rochester, Minnesota. The results of the two businesses have been
reclassified to discontinued operations. Included in discontinued operations for
2003 is approximately $37,000 (pre-tax) representing fixed overhead expense
allocations that will not result in future savings for the Company.
Chesapeake continues to reassess its water services operations and take actions
in an effort to improve returns from this business segment. These actions may
include the sale of some or all of the remaining businesses.
OTHER BUSINESS OPERATIONS
Other operations earned operating income of $177,000 for the first half of 2003,
approximately equal to the first six months of last year. Other operations
consist primarily of subsidiaries that own real estate leased to other Company
subsidiaries.
- --------------------------------------------------------------------------------------
FOR THE SIX MONTHS ENDED JUNE 30, 2003 2002 CHANGE
- --------------------------------------------------------------------------------------
Revenue. . . . . . . . . . . . . . . . . . $ 352,570 $ 362,110 ($9,540)
Cost of sales. . . . . . . . . . . . . . . 0 0 0
- --------------------------------------------------------------------------------------
Gross margin . . . . . . . . . . . . . . . 352,570 362,110 (9,540)
Operations & maintenance . . . . . . . . . 40,332 42,458 (2,126)
Depreciation & amortization. . . . . . . . 119,059 114,245 4,814
Other taxes. . . . . . . . . . . . . . . . 27,605 29,337 (1,732)
- --------------------------------------------------------------------------------------
Operating expenses . . . . . . . . . . . . 186,996 186,040 956
- --------------------------------------------------------------------------------------
Operating Income Other . . . . . . . . . . 165,574 176,070 (10,496)
Operating Income Eliminations. . . . . . . 11,164 0 11,164
- --------------------------------------------------------------------------------------
Total Operating Income . . . . . . . . . . $ 176,738 $ 176,070 $ 668
======================================================================================
INCOME TAXES
Income taxes were higher due to the increase in operating income for the six
months ended June 30, 2003; however, the federal income tax rate was consistent
year to year.
INTEREST EXPENSE
Interest expense for the first half of 2003 increased approximately $466,000, or
19 percent, over the same period in 2002. The increase reflects the increase in
the average long-term debt balance caused by the placement of $30.0 million
completed in October 2002, offset somewhat by a lower average interest rate. The
average long-term debt balance in the first half of 2003 was $76.0 million with
an average interest rate of 7.24 percent, compared to $50.2 million with an
average interest rate of 7.61 percent in the first half of 2002. The increase in
long-term debt was partially offset by a reduction in the average short-term
borrowing balance, which decreased from $32.9 million in the first half of 2002
to $3.8 million in the first half of 2003. The average interest rate for
short-term borrowing dropped from 2.37 percent for the first half of 2002 to
1.83 percent in the first half of 2003.
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 its 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 results for the
period after October 1, 2001, when the interim rates went into effect, reflect
the impact of this increase). Phase II of the filing was approved by the
Delaware Public Service Commission in November 2002. Phase II should result in
an additional increase in rates of approximately $90,000 per year. 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. Settlement rates went
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.
Eastern Shore filed an application with the FERC on March 31, 2003 for
authorization to construct and operate new facilities in Pennsylvania and
Delaware. The $8.5 million project is comprised of three phases and is scheduled
to be in service on November 1, 2003, November 1, 2004, and November 1, 2005,
respectively. Pending FERC approval and assuming completion by the above dates,
this project will provide increased firm transportation capacity to four
existing customers by a total of 15,100 dekatherms per day, a 14% increase over
and above Eastern Shore's current peak day transportation capacity. The requests
for additional service by Eastern Shore's existing customers are a reflection of
the continued growth in Eastern Shore's market area.
On April 10, 2003, the FERC noticed Eastern Shore's application and established
a deadline of May 1, 2003 for interested parties to file interventions and/or
protests. No protests were filed. Eastern Shore received and responded to FERC
data requests regarding the above matter. As part of Eastern Shore's
application, Eastern Shore requested authorization to construct the facilities
in three phases with Phase I service beginning on November 1, 2003. The Phase I
work includes an upgrade at the metering and regulating station located in
Parkesburg, Pennsylvania. Eastern Shore continues to proceed with the necessary
project planning that will allow Eastern Shore to meet its customers' requests
to serve an additional 3,800 dekatherms per day of natural gas beginning in the
2003/2004 heating season.
Eastern Shore is in the process of developing a new interactive web site to
replace its current Electronic Bulletin Board, as required by the FERC.
Completion of this project will allow Eastern Shore to successfully achieve the
compliance standards established by the North American Energy Standards Board
and will also achieve Eastern Shore's goal of finding new and better ways to
service our customers by providing them with an interactive web site capable of
managing their natural gas transportation needs on Eastern Shore's pipeline
system.
In June 2003, Eastern Shore filed to intervene and participate in FERC Docket
No. PA03-12-000, a fact-finding proceeding which was established by the FERC to
investigate and determine the causes of electric transmission congestion on the
Delmarva Peninsula and seek potential solutions to the problem. Eastern Shore
believes natural gas can play a significant role in complementing potential
solutions to the problem.
Eastern Shore also continued its active participation in the Delaware Energy
Task Force. The Task Force includes seventeen members from various public and
private sectors invited by the Governor to respond to the Governor's stated goal
to make Delaware "the most energy-efficient state in the country." Participation
in this task force is also an opportunity to showcase the advantages of natural
gas to an audience focused on the energy needs along the Delmarva Peninsula.
On March 29, 2002, the Florida division filed tariff revisions with the Florida
PSC 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 were already
available to all non-residential customers. On November 5, 2002, the Florida PSC
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 began implementing
the program in November 2002 and must submit an interim report for review by the
Florida PSC after one year. As a part of this pilot program, the Company has
filed and received Florida PSC approval to address transition costs and the
level of base rates. The Company expects to submit additional filings during
2003 regarding the disposition of the unrecovered gas cost balances and the
implementation of the operational balancing account mechanism.
COMPETITION
The Company's natural gas operations compete with other forms of energy
including electricity, oil and propane. The principal competitive factors are
price, and to a lesser extent, accessibility. The Company's natural gas
distribution operations have several large volume industrial customers that have
the capacity to use fuel oil as an alternative to natural gas. When oil prices
decline, these interruptible customers convert to oil to satisfy their fuel
requirements. Lower levels in interruptible sales occur when oil prices are
lower relative to the price of natural gas. Oil prices, as well as the prices of
electricity and other fuels are subject to fluctuation for a variety of reasons;
therefore, future competitive conditions are not predictable. To address this
uncertainty, the Company uses flexible pricing arrangements on both the supply
and sales sides of its business to maximize sales volumes. As a result of the
transmission business' conversion to open access, this business has shifted from
providing competitive sales service to providing transportation and contract
storage services.
The Company's natural gas distribution operations located in Maryland, Delaware
and Florida offer transportation services to certain industrial customers. In
2001, the Florida operation extended transportation service to commercial
customers and, in 2002 to residential customers. With transportation services
now available on the Company's distribution systems, the Company is competing
with third party suppliers to sell gas to industrial customers and, in Florida,
to commercial customers. (The Company no longer performs the merchant function
for gas sales to its residential customers in Florida.) 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 direct connection economically feasible. The customers at risk are usually
large volume commercial and industrial customers with the financial resources
and capability to bypass the Company's distribution operations in this manner.
In certain situations, the Company's 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 sales and supply operation in Florida in 1994 to compete for
customers eligible for transportation services.
The Company's propane distribution operations compete with several other propane
distributors in the Company's 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 services segment faces competition from a variety of national and
local suppliers of water conditioning and treatment services and with bottled
water. This segment competes on the basis of marketing expertise, promotions and
price.
RECENT PRONOUNCEMENTS
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. Should the Company enter
into an exit plan, SFAS No. 146 will be applied prospectively.
FASB Interpretation ("FIN") No. 45, "Guarantor's Accounting and Disclosure
Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of
Others," was adopted in November 2002. The Company has adopted FIN No. 45. There
was no impact on the financial statements; however, the disclosures in the
Commitments and Contingencies footnote (Note 3) were expanded to include all
required information.
FIN No. 46, "Consolidation of Variable Interest Entities," was adopted in
January 2003. Chesapeake does not currently have any investments in variable
interest entities and, therefore, FIN No. 46 has not impacted the Company.
The FASB adopted SFAS No. 147, "Acquisitions of Certain Financial Institutions"
in October 2002 and SFAS No. 148, "Accounting for Stock-Based Compensation -
Transition and Disclosure" in December 2002. Neither pronouncement has an impact
on the Company's current operations. If required for future transactions, they
will be implemented prospectively.
In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133 on
Derivative Instruments and Hedging Activities." This statement amends and
clarifies financial accounting and reporting for derivative instruments and for
hedging activities under FASB Statement No. 133, "Accounting for Derivative
Instruments and Hedging Activities" by requiring that contracts with comparable
characteristics be accounted for similarly. The Company does not believe that
the adoption of SFAS No. 149 will have a material impact on Chesapeake's
financial position or results of operations.
SFAS No. 150, "Accounting for Certain Financial Instruments with Characteristics
of both Liability and Equity" was issued in May 2003 by the FASB. This statement
establishes standards for how an issuer classifies and measures certain
financial instruments with characteristics of both liability and equity. It
requires that an issuer classify a financial instrument that is within in its
scope as a liability. Chesapeake does not currently have any financial
instruments that would be impacted by this statement. Therefore, adoption of
this statement is not expected to have a material impact on the Company's
financial position or results of operations.
INFLATION
Inflation affects the cost of labor, products and services required for
operations, maintenance and capital improvements. While the impact of inflation
has remained low in recent years, natural gas and propane prices are subject to
rapid fluctuations. Fluctuations in natural gas prices are passed on to
customers through the gas cost recovery mechanism in the Company's tariffs. To
help cope with the effects of inflation on its capital investments and returns,
the Company seeks rate relief from regulatory commissions for regulated
operations while monitoring the returns of its unregulated business operations.
To compensate for fluctuations in propane gas prices, the Company adjusts its
propane selling prices to the extent allowed by the market.
CAUTIONARY STATEMENT
Chesapeake has made statements in this report that are considered to be
forward-looking statements. These statements are not matters of historical fact.
Sometimes they contain words such as "believes," "expects," "intends," "plans,"
"will," or "may," and other similar words of a predictive nature. These
statements relate to matters such as the potential sale of the water businesses,
customer growth, changes in revenues or margins, capital expenditures,
environmental remediation costs, regulatory approvals, market risks associated
with the Company's propane wholesale marketing operation, competition, inflation
and other matters. It is important to understand that these forward-looking
statements are not guarantees, but are subject to certain risks and
uncertainties and other important factors that could cause actual results to
differ materially from those in the forward-looking statements. These factors
include, among other things:
o the temperature sensitivity of the natural gas and propane businesses;
o the effect of spot, forward and futures market prices on the Company's
distribution, wholesale marketing and energy trading businesses;
o the effects of competition on the Company's unregulated and regulated
businesses;
o the effect of changes in federal, state or local regulatory and tax
requirements, including deregulation;
o the effect of accounting changes;
o the effect of compliance with environmental regulations or the
remediation of environmental damage;
o the effects of general economic conditions on the Company and its
customers;
o the ability of the Company's new and planned facilities and
acquisitions to generate expected revenues; and
o the Company's ability to obtain the rate relief and cost recovery
requested from utility regulators and the timing of the requested
regulatory actions.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market risk represents the potential loss arising from adverse changes in market
rates and prices. Long-term debt is subject to potential losses based on the
change in interest rates. The Company's long-term debt consists primarily of
fixed rate senior notes, first mortgage bonds and convertible debentures, none
of which was issued for trading purposes. The carrying value of long-term debt
at June, 2003 was $75.6 million, with a fair value of $82.4 million, based
mainly on current market prices or discounted cash flows using current rates for
similar issues with similar terms and remaining maturities. The Company is
exposed to changes in interest rates due to the use of fixed rate long-term debt
to finance the business. Management continually monitors fluctuations in
interest rates and debt markets to assess the benefits of changing the mix of
long and short-term debt or refinancing existing debt.
The Company's propane distribution business is exposed to market risk as a
result of propane storage activities and entering into fixed price contracts for
supply. The Company can store up to approximately 4 million gallons (including
leased storage) of propane during the winter season to meet its customers' peak
requirements and to serve metered customers. Decreases in the wholesale price of
propane will cause the value of stored propane to decline. To mitigate the
impact of price fluctuations, the Company has adopted a risk management policy
that allows the propane distribution operation to enter into fair value hedges
of its inventory. At June 30, 2003, 420,000 gallons of propane were hedged. That
amount of propane in inventory was expected to be sold to distribution customers
in July 2003 and the hedging instrument matured in July 2003. The hedge was
effective and therefore, no net gain or loss was recorded.
The Company's propane wholesale marketing operation is a party to natural gas
liquids ("NGL") forward contracts, primarily propane contracts, with various
third parties. These contracts require that the propane wholesale marketing
operation purchase or sell NGL at a fixed price at fixed future dates. At
expiration, the contracts are settled by the delivery of NGL to the Company or
the counter party or booking out the transaction. (Booking out is a procedure
for financially settling a contract in lieu of the physical delivery of energy.)
The propane wholesale marketing operation also enters into futures contracts
that are traded on the New York Mercantile Exchange. In certain cases, the
futures contracts are settled by the payment or receipt of a net amount equal to
the difference between the current market price of the futures contract and the
original contract price; however, they may also be settled for physical receipt
or delivery of propane.
The forward and futures contracts are entered into for trading and wholesale
marketing purposes. The propane marketing business is subject to commodity price
risk on its open positions to the extent that market prices for NGL deviate from
fixed contract settlement prices. Market risk associated with the trading of
futures and forward contracts are monitored daily for compliance with the
Company's Risk Management Policy, which includes volumetric limits for open
positions. To manage exposures to changing market prices, open positions are
marked up or down to market prices and reviewed by oversight officials on a
daily basis. Additionally, the Risk Management Committee reviews periodic
reports on market and the credit risk of counter-parties, approves any
exceptions to the Risk Management Policy (within limits established by the Board
of Directors) and authorizes the use of any new types of contracts. Quantitative
information on forward and futures contracts at June 30, 2003 is presented in
the following table. All of the contracts mature within twelve months.
- ------------------------------------------------------------------------
QUANTITY ESTIMATED WEIGHTED AVERAGE
AT JUNE 30, 2003 IN GALLONS MARKET PRICES CONTRACT PRICES
- ------------------------------------------------------------------------
FORWARD CONTRACTS
Sale. . . . . . . . . 13,440,000 $0.5375 - $0.5625 $0.5548
Purchase. . . . . . . 10,940,000 $0.5375 - $0.5625 $0.5482
FUTURES CONTRACTS
Sale. . . . . . . . . 240,000 $0.5375 - $0.5625 $0.5525
- ------------------------------------------------------------------------
Estimated market prices and weighted average contract prices are
in dollars per gallon.
29
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) as
of June 30, 2003. 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
During the fiscal quarter of the Company ending June 30, 2003, there was no
change in the Company's internal control over financial reporting that has
materially affected, or is reasonably likely to materially affect, the Company's
internal controls over financial reporting.
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
(a) The matters described in Item 4(c) below were submitted to a
vote of stockholders at the Annual Meeting of Stockholders
on May 20, 2003 in connection with which, proxies were
solicited in accordance with Regulation 14A under the
Securities Exchange Act of 1934, as amended.
(b) Not applicable.
(c) Proposals as submitted in the proxy statement were voted on
as follows:
i. The election of Class I Directors for three-year terms
ending in 2006, and until their successors are elected
and qualified.
NAME VOTES FOR VOTES WITHHELD SHARES NOT VOTED
- ----------------------- --------- -------------- ----------------
Calvert A. Morgan, Jr. 5,083,263 148,297 344,854
Rudolph M. Peins, Jr. 5,070,928 160,632 344,854
Robert F. Rider 5,068,067 163,493 344,854
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
- Exhibit 31.1 - Certificate of Chief Executive Officer
of Chesapeake Utilities Corporation pursuant to Rule
13a-14(a) under the Securities Exchange Act of 1934,
dated August 14, 2003
- Exhibit 31.2 - Certificate of Chief Financial Officer
of Chesapeake Utilities Corporation pursuant to Rule
13a-14(a) under the Securities Exchange Act of 1934,
dated August 14, 2003
- Exhibit 32.1 - Certificate of Chief Executive Officer
of Chesapeake Utilities Corporation pursuant to 18
U.S.C. Section 1350, dated August 14, 2003
- Exhibit 32.2 - Certificate of Chief Financial Officer
of Chesapeake Utilities Corporation pursuant to 18
U.S.C. Section 1350, dated August 14, 2003
(b) Reports on Form 8-K:
Earnings press release dated August 11, 2003
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Chesapeake Utilities Corporation
/s/ MICHAEL P. MCMASTERS
- --------------------------
Michael P. McMasters
Vice President and Chief Financial Officer
Date: August 14, 2003