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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, 2004
-------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ______ to ______
COMMISSION FILE NUMBER: 001-11590
CHESAPEAKE UTILITIES CORPORATION
--------------------------------
(Exact name of registrant as specified in its charter)
DELAWARE 51-0064146
-------- ----------
(State or other (I.R.S. Employer
jurisdiction of Identification No.)
incorporation
or organization)
909 SILVER LAKE BOULEVARD, DOVER, DELAWARE 19904
------------------------------------------------
(Address of principal executive offices, including Zip Code)
(302) 734-6799
--------------
(Registrant's Telephone Number, including Area Code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes [X] No [ ]
Common Stock, par value $.4867 - 5,725,500 shares issued as of June 30. 2004.
TABLE OF CONTENTS
PART I - FINANCIAL INFORMATION. . . . . . . . . . . . . . . . . . . . . . 1
Item 1. Financial Statements. . . . . . . . . . . . . . . . . . . . . 1
Notes to Condensed Consolidated Financial Statements . . . . . . . . 7
1. Quarterly Financial Data . . . . . . . . . . . . . . . . . . . . 7
2. Calculation of Earnings Per Share. . . . . . . . . . . . . . . 9
3. Commitments and Contingencies. . . . . . . . . . . . . . . . . . 9
Environmental Matters . . . . . . . . . . . . . . . . . . . . . 9
Other Commitments and Contingencies . . . . . . . . . . . . .11
4. Recent Authoritative Pronouncements
on Financial Reporting and Accounting. . . . . . . . . . . . .11
5. Segment Information . . . . . . . . . . . . . . . . . . . . . . .12
6. Discontinued Operations . . . . . . . . . . . . . . . . . . . . .13
7. Employee Benefit Plans . . . . . . . . . . . . . . . . . . . . .14
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations. . . . . . . . . . . .14
Business Description . . . . . . . . . . . . . . . . . . . . . . . . .14
Financial Position, Liquidity and Capital Resources . . . . . . . . .15
Off-Balance Sheet Arrangements and Contractual Obligations. . . . . . .16
Results of Operations for the Quarter
Ended June 30, 2004 . . . . . . . . . . . . . . . . . . . . . . . . .17
Consolidated Overview. . . . . . . . . . . . . . . . . . . . . . . . .17
Natural Gas Distribution and Transmission . . . . . . . . . . . . .18
Propane. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
Advanced Information Services. . . . . . . . . . . . . . . . . . . . 19
Other Business Operations and Eliminations . . . . . . . . . . . . 20
Discontinued Operations . . . . . . . . . . . . . . . . . . . . . . . 20
Income Taxes. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
Interest Expense. . . . . . . . . . . . . . . . . . . . . . . . . . . 20
Results of Operations for the Six Months
Ended June 30, 2004 . . . . . . . . . . . . . . . . . . . . . . . . .21
Consolidated Overview. . . . . . . . . . . . . . . . . . . . . . . . .21
Natural Gas Distribution and Transmission . . . . . . . . . . . . .22
Propane. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
Advanced Information Services. . . . . . . . . . . . . . . . . . . . 23
Other Business Operations and Eliminations . . . . . . . . . . . . 24
Discontinued Operations . . . . . . . . . . . . . . . . . . . . . . . 24
Income Taxes. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
Interest Expense. . . . . . . . . . . . . . . . . . . . . . . . . . . 24
Environmental Matters . . . . . . . . . . . . . . . . . . . . . . . . 24
Other Matters . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
Regulatory Matters. . . . . . . . . . . . . . . . . . . . . . . . . . 25
Competition. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
Recent Pronouncements . . . . . . . . . . . . . . . . . . . . . . . . 28
Inflation. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
Cautionary Statement. . . . . . . . . . . . . . . . . . . . . . . . . 29
Item 3. Quantitative and Qualitative Disclosures about Market Risk. . 29
Item 4. Controls and Procedures. . . . . . . . . . . . . . . . . . .30
Evaluation of Disclosure Controls and Procedures. . . . . . . . . 30
Changes in Internal Controls. . . . . . . . . . . . . . . . . . . . 30
PART II - OTHER INFORMATION. . . . . . . . . . . . . . . . . . . . . . . 31
SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33
EXHIBIT 31.1. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34
EXHIBIT 31.2. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35
EXHIBIT 32.1. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36
EXHIBIT 32.2. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CHESAPEAKE UTILITIES CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
- -----------------------------------------------------------------------------------------
2004 2003
FOR THE THREE MONTHS ENDED JUNE 30, RESTATED
- -----------------------------------------------------------------------------------------
OPERATING REVENUES $34,292,997 $30,784,922
OPERATING EXPENSES
Cost of sales, excluding costs below. . . . . . . . . . . 20,234,037 16,893,451
Operations. . . . . . . . . . . . . . . . . . . . . . . . 8,634,728 7,772,767
Maintenance . . . . . . . . . . . . . . . . . . . . . . . 415,567 431,112
Depreciation and amortization . . . . . . . . . . . . . . 1,811,171 1,791,128
Other taxes . . . . . . . . . . . . . . . . . . . . . . . 1,034,700 1,034,947
- -----------------------------------------------------------------------------------------
Total operating expenses. . . . . . . . . . . . . . . . . . 32,130,203 27,923,405
- -----------------------------------------------------------------------------------------
OPERATING INCOME. . . . . . . . . . . . . . . . . . . . . . 2,162,794 2,861,517
OTHER INCOME NET OF OTHER EXPENSES. . . . . . . . . . . . . 74,217 34,257
INTEREST CHARGES. . . . . . . . . . . . . . . . . . . . . . 1,328,231 1,429,005
- -----------------------------------------------------------------------------------------
INCOME BEFORE INCOME TAXES. . . . . . . . . . . . . . . . . 908,780 1,466,769
INCOME TAXES. . . . . . . . . . . . . . . . . . . . . . . . 297,262 532,233
- -----------------------------------------------------------------------------------------
INCOME FROM CONTINUING OPERATIONS . . . . . . . . . . . . . 611,518 934,536
NET INCOME (LOSS) FROM DISCONTINUED
OPERATIONS, NET OF TAX
Discontinued operations, net of tax
of $11,234 and ($2,899), respectively . . . . . . . . . 19,148 (71,961)
Gain on sale. . . . . . . . . . . . . . . . . . . . . . . - 71,574
- -----------------------------------------------------------------------------------------
Total income (loss) from discontinued operations, net . . . 19,148 (387)
- -----------------------------------------------------------------------------------------
NET INCOME . . . . . . . . . . . . . . . . . . . . . . . . . $ 630,666 $ 934,149
=========================================================================================
EARNINGS PER SHARE OF COMMON STOCK:
BASIC
FROM CONTINUING OPERATIONS. . . . . . . . . . . . . . . $ 0.11 $ 0.17
FROM DISCONTINUED OPERATIONS. . . . . . . . . . . . . . 0.00 0.00
- -----------------------------------------------------------------------------------------
NET INCOME. . . . . . . . . . . . . . . . . . . . . . . . $ 0.11 $ 0.17
=========================================================================================
DILUTED
FROM CONTINUING OPERATIONS. . . . . . . . . . . . . . . $ 0.11 $ 0.17
FROM DISCONTINUED OPERATIONS. . . . . . . . . . . . . . 0.00 0.00
- -----------------------------------------------------------------------------------------
NET INCOME. . . . . . . . . . . . . . . . . . . . . . . . $ 0.11 $ 0.17
=========================================================================================
CASH DIVIDENDS DECLARED PER SHARE OF COMMON STOCK . . . . . $ 0.280 $ 0.275
=========================================================================================
The accompanying notes are an integral part of these financial statements.
CHESAPEAKE UTILITIES CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
- -----------------------------------------------------------------------------------------
2004 2003
FOR THE SIX MONTHS ENDED JUNE 30, RESTATED
- -----------------------------------------------------------------------------------------
OPERATING REVENUES. . . . . . . . . . . . . . . . . . . . . $98,055,357 $ 93,744,437
OPERATING EXPENSES
Cost of sales, excluding costs below. . . . . . . . . . . 60,638,245 55,317,606
Operations. . . . . . . . . . . . . . . . . . . . . . . . 17,795,187 16,632,945
Maintenance . . . . . . . . . . . . . . . . . . . . . . . 796,137 850,272
Depreciation and amortization . . . . . . . . . . . . . . 3,621,795 3,527,227
Other taxes . . . . . . . . . . . . . . . . . . . . . . . 2,341,893 2,243,691
- -----------------------------------------------------------------------------------------
Total operating expenses. . . . . . . . . . . . . . . . . . 85,193,257 78,571,741
- -----------------------------------------------------------------------------------------
OPERATING INCOME. . . . . . . . . . . . . . . . . . . . . . 12,862,100 15,172,696
OTHER INCOME NET OF OTHER EXPENSES. . . . . . . . . . . . . 176,694 88,157
INTEREST CHARGES. . . . . . . . . . . . . . . . . . . . . . 2,654,997 2,894,855
- -----------------------------------------------------------------------------------------
INCOME BEFORE INCOME TAXES. . . . . . . . . . . . . . . . . 10,383,797 12,365,998
INCOME TAXES. . . . . . . . . . . . . . . . . . . . . . . . 3,998,745 4,794,359
- -----------------------------------------------------------------------------------------
INCOME FROM CONTINUING OPERATIONS . . . . . . . . . . . . . 6,385,052 7,571,639
NET INCOME (LOSS) FROM DISCONTINUED
OPERATIONS, NET OF TAX
Discontinued operations, net of tax
of ($7,257) and ($87,619), respectively . . . . . . . . (15,187) (234,289)
Gain on sale. . . . . . . . . . . . . . . . . . . . . . . - 71,574
- -----------------------------------------------------------------------------------------
Total loss from discontinued operations, net. . . . . . . . (15,187) (162,715)
- -----------------------------------------------------------------------------------------
NET INCOME . . . . . . . . . . . . . . . . . . . . . . . . . $ 6,369,865 $ 7,408,924
=========================================================================================
EARNINGS PER SHARE OF COMMON STOCK:
BASIC
FROM CONTINUING OPERATIONS. . . . . . . . . . . . . . . $ 1.12 $ 1.36
FROM DISCONTINUED OPERATIONS. . . . . . . . . . . . . . 0.00 (0.03)
- -----------------------------------------------------------------------------------------
NET INCOME. . . . . . . . . . . . . . . . . . . . . . . . $ 1.12 $ 1.33
=========================================================================================
DILUTED
FROM CONTINUING OPERATIONS. . . . . . . . . . . . . . . $ 1.10 $ 1.33
FROM DISCONTINUED OPERATIONS. . . . . . . . . . . . . . (0.01) (0.03)
- -----------------------------------------------------------------------------------------
NET INCOME. . . . . . . . . . . . . . . . . . . . . . . . $ 1.09 $ 1.30
=========================================================================================
CASH DIVIDENDS DECLARED PER SHARE OF COMMON STOCK . . . . . $ 0.555 $ 0.550
=========================================================================================
The accompanying notes are an integral part of these financial statements.
CHESAPEAKE UTILITIES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
- -----------------------------------------------------------------------------------------
2004 2003
FOR THE SIX MONTHS ENDED JUNE 30, RESTATED
- -----------------------------------------------------------------------------------------
OPERATING ACTIVITIES
Net Income . . . . . . . . . . . . . . . . . . . . . . . . $ 6,369,865 $ 7,408,924
Adjustments to reconcile net income to net operating cash:
Depreciation and amortization. . . . . . . . . . . . . . 3,621,795 3,980,473
Depreciation and accretion included in other costs . . . 1,286,104 1,255,024
Deferred income taxes, net . . . . . . . . . . . . . . . 822,082 957,212
Mark-to-market adjustments . . . . . . . . . . . . . . . 140,089 604,430
Employee benefits and compensation . . . . . . . . . . . 440,404 579,775
Other. . . . . . . . . . . . . . . . . . . . . . . . . . (14,620) 21,449
Changes in assets and liabilities:
Accounts receivable and accrued revenue. . . . . . . . . 10,773,033 8,125,498
Inventory, materials, supplies and storage gas . . . . . (648,888) 1,187,467
Prepaid expenses and other current assets. . . . . . . . 221,095 427,248
Other deferred charges . . . . . . . . . . . . . . . . . 303,234 346,101
Accounts payable, net. . . . . . . . . . . . . . . . . . (6,699,976) (8,709,145)
Refunds payable to customers . . . . . . . . . . . . . . 236,603 (165,282)
Accrued income taxes . . . . . . . . . . . . . . . . . . 2,609,586 1,506,928
Accrued interest . . . . . . . . . . . . . . . . . . . . 1,144,624 1,186,664
Accrued compensation . . . . . . . . . . . . . . . . . . (1,139,897) 299,966
Over (under) recovered deferred purchased gas costs. . . 745,519 (2,808,638)
Other current liabilities. . . . . . . . . . . . . . . . 456,922 (405,652)
Other liabilities . . . . . . . . . . . . . . . . . . . (94,088) 201,446
- -----------------------------------------------------------------------------------------
Net cash provided by operating activities. . . . . . . . . . 20,573,486 15,999,888
- -----------------------------------------------------------------------------------------
INVESTING ACTIVITIES
Property, plant and equipment expenditures, net. . . . . . (6,582,168) (4,607,407)
Sale of discontinued operations. . . . . . . . . . . . . . 65,998 790,496
Environmental recoveries, net of expenditures. . . . . . . 262,946 731,633
- -----------------------------------------------------------------------------------------
Net cash used by investing activities. . . . . . . . . . . . (6,253,224) (3,085,278)
- -----------------------------------------------------------------------------------------
FINANCING ACTIVITIES
Common stock dividends . . . . . . . . . . . . . . . . . . (3,125,798) (3,055,339)
Issuance of stock:
Dividend Reinvestment Plan optional cash . . . . . . . . 102,483 166,486
Dividends reinvested by stockholders . . . . . . . . . . 385,169 362,536
Retirement Savings Plan. . . . . . . . . . . . . . . . . 588,794 574,632
Conversion of debentures . . . . . . . . . . . . . . . . 205,663 113,834
Purchase of treasury stock . . . . . . . . . . . . . . . . (193,625) -
Net repayment under line of credit agreements. . . . . . . (3,515,258) (9,400,000)
Repayment of long-term debt. . . . . . . . . . . . . . . . (1,584,000) (1,761,380)
- -----------------------------------------------------------------------------------------
Net cash used by financing activities. . . . . . . . . . . . (7,136,572) (12,999,231)
- -----------------------------------------------------------------------------------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS . . . . 7,183,690 (84,621)
CASH AND CASH EQUIVALENTS BEGINNING OF PERIOD. . . . . . . . 3,108,501 2,458,276
- -----------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS END OF PERIOD. . . . . . . . . . . $10,292,191 $ 2,373,655
=========================================================================================
The accompanying notes are an integral part of these financial statements.
CHESAPEAKE UTILITIES CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
- -----------------------------------------------------------------------------------------
JUNE 30, DECEMBER 31,
ASSETS 2004 2003
- -----------------------------------------------------------------------------------------
PROPERTY, PLANT AND EQUIPMENT
Natural gas distribution and transmission. . . . . . . . $189,999,737 $186,661,469
Propane. . . . . . . . . . . . . . . . . . . . . . . . . 36,843,142 35,577,104
Advanced information services. . . . . . . . . . . . . . 1,431,674 1,396,595
Water services . . . . . . . . . . . . . . . . . . . . . 750,947 762,383
Other plant. . . . . . . . . . . . . . . . . . . . . . . 8,840,050 8,796,305
- -----------------------------------------------------------------------------------------
Total property, plant and equipment. . . . . . . . . . . . 237,865,550 233,193,856
Plus: Construction work in progress . . . . . . . . . . . 2,224,284 1,724,721
Less: Accumulated depreciation and amortization . . . . . (69,873,829) (67,046,318)
- -----------------------------------------------------------------------------------------
Net property, plant and equipment. . . . . . . . . . . . . 170,216,005 167,872,259
- -----------------------------------------------------------------------------------------
INVESTMENTS. . . . . . . . . . . . . . . . . . . . . . . . 341,602 386,710
- -----------------------------------------------------------------------------------------
CURRENT ASSETS
Cash and cash equivalents. . . . . . . . . . . . . . . . 10,292,191 3,108,501
Accounts receivable (less allowance for uncollectibles
of $698,078 and $659,047, respectively). . . . . . . . 18,577,898 26,191,845
Accrued revenue. . . . . . . . . . . . . . . . . . . . . 1,272,668 4,497,752
Materials and supplies, at average cost. . . . . . . . . 987,460 923,556
Appliance and other inventory, at FIFO . . . . . . . . . 143,106 173,044
Propane inventory, at average cost . . . . . . . . . . . 5,222,715 3,387,535
Storage gas prepayments. . . . . . . . . . . . . . . . . 3,402,343 4,622,601
Underrecovered purchased gas costs . . . . . . . . . . . - 660,601
Income taxes receivable. . . . . . . . . . . . . . . . . - 489,841
Deferred income taxes receivable . . . . . . . . . . . . 79,685 -
Prepaid expenses . . . . . . . . . . . . . . . . . . . . 1,763,805 2,069,988
Other current assets . . . . . . . . . . . . . . . . . . 713,957 768,958
- -----------------------------------------------------------------------------------------
Total current assets . . . . . . . . . . . . . . . . . . . 42,455,828 46,894,222
- -----------------------------------------------------------------------------------------
DEFERRED CHARGES AND OTHER ASSETS
Environmental regulatory assets. . . . . . . . . . . . . 316,414 353,092
Environmental expenditures . . . . . . . . . . . . . . . 101,142 364,088
Goodwill, net. . . . . . . . . . . . . . . . . . . . . . 674,451 674,451
Other intangible assets, net . . . . . . . . . . . . . . 297,597 305,213
Long-term receivables. . . . . . . . . . . . . . . . . . 1,543,811 1,637,998
Other regulatory assets. . . . . . . . . . . . . . . . . 1,408,683 1,693,401
Other deferred charges . . . . . . . . . . . . . . . . . 1,011,032 983,230
- -----------------------------------------------------------------------------------------
Total deferred charges and other assets. . . . . . . . . . 5,353,130 6,011,473
- -----------------------------------------------------------------------------------------
TOTAL ASSETS . . . . . . . . . . . . . . . . . . . . . . . $218,366,565 $221,164,664
=========================================================================================
The accompanying notes are an integral part of these financial statements.
CHESAPEAKE UTILITIES CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
- -----------------------------------------------------------------------------------------
JUNE 30, DECEMBER 31,
CAPITALIZATION AND LIABILITIES 2004 2003
- -----------------------------------------------------------------------------------------
CAPITALIZATION
Stockholders' equity
Common Stock, par value $.4867 per share;
(authorized 12,000,000 shares; issued and outstanding
5,734,853 and 5,660,594 shares, respectively) . . . . $ 2,790,720 $ 2,754,748
Additional paid-in capital . . . . . . . . . . . . . . 35,856,549 34,176,361
Retained earnings. . . . . . . . . . . . . . . . . . . 39,186,041 36,008,246
Treasury stock . . . . . . . . . . . . . . . . . . . . (193,625) -
- -----------------------------------------------------------------------------------------
Total stockholders' equity . . . . . . . . . . . . . . . 77,639,685 72,939,355
Long-term debt, net of current maturities. . . . . . . . 68,209,546 69,415,545
- -----------------------------------------------------------------------------------------
Total capitalization . . . . . . . . . . . . . . . . . . 145,849,231 142,354,900
- -----------------------------------------------------------------------------------------
CURRENT LIABILITIES
Current portion of long-term debt. . . . . . . . . . . . 3,287,091 3,665,091
Short-term borrowing . . . . . . . . . . . . . . . . . . - 3,515,258
Accounts payable . . . . . . . . . . . . . . . . . . . . 15,297,436 21,997,413
Refunds payable to customers . . . . . . . . . . . . . . 443,185 206,582
Customer deposits. . . . . . . . . . . . . . . . . . . . 1,969,981 2,008,379
Income taxes payable . . . . . . . . . . . . . . . . . . 2,119,745 -
Accrued interest . . . . . . . . . . . . . . . . . . . . 1,796,991 652,367
Dividends payable. . . . . . . . . . . . . . . . . . . . 1,604,427 1,556,631
Overrecovered purchased gas costs. . . . . . . . . . . . 84,918 -
Deferred income taxes payable. . . . . . . . . . . . . . - 119,814
Accrued compensation . . . . . . . . . . . . . . . . . . 1,921,388 3,266,072
Other accrued liabilities. . . . . . . . . . . . . . . . 2,152,843 1,657,523
- -----------------------------------------------------------------------------------------
Total current liabilities. . . . . . . . . . . . . . . . . 30,678,005 38,645,130
- -----------------------------------------------------------------------------------------
DEFERRED CREDITS AND OTHER LIABILITIES
Deferred income taxes. . . . . . . . . . . . . . . . . . 20,612,576 19,590,995
Deferred investment tax credits. . . . . . . . . . . . . 465,317 492,725
Environmental liabilities. . . . . . . . . . . . . . . . 508,910 562,194
Accrued pension costs. . . . . . . . . . . . . . . . . . 2,226,268 2,015,128
Accrued asset removal cost . . . . . . . . . . . . . . . 14,198,070 13,536,209
Other liabilities. . . . . . . . . . . . . . . . . . . . 3,828,188 3,967,383
- -----------------------------------------------------------------------------------------
Total deferred credits and other liabilities . . . . . . . 41,839,329 40,164,634
- -----------------------------------------------------------------------------------------
COMMITMENTS AND CONTINGENCIES (NOTE 3)
TOTAL CAPITALIZATION AND LIABILITIES . . . . . . . . . . . $218,366,565 $221,164,664
=========================================================================================
The accompanying notes are an integral part of these financial statements.
This page intentionally left blank.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. QUARTERLY FINANCIAL DATA
The financial information for Chesapeake Utilities Corporation (the "Company" or
"Chesapeake") included herein is unaudited and should be read in conjunction
with the Company's Annual Report on Form 10-K; however, the year-end balance
sheet data has been derived from audited financial statements. In the opinion of
management, this financial information reflects normal recurring adjustments
which are necessary for a fair presentation of the Company's interim results. In
accordance with United States Generally Accepted Accounting Principles, the
Company's management makes certain estimates and assumptions regarding: 1)
reported amounts of assets and liabilities, 2) disclosure of contingent assets
and liabilities at the date of the financial statements and 3) reported amounts
of revenues and expenses during the reporting period. Actual results could
differ from those estimates. Due to the seasonal nature of the Company's
business, there are substantial variations in the results of operations reported
on a quarterly basis and, accordingly, results for any particular quarter may
not give a true indication of results for the year.
Chesapeake does not have any material components of comprehensive income that
are required to be reported by Financial Accounting Standards Board ("FASB")
Statement of Financial Accounting Standards ("SFAS") No. 130, "Reporting
Comprehensive Income."
As reported on the Company's December 31, 2003 Annual Report on Form 10-K, the
Company has restated its quarterly financial statements for prior periods in
order to reflect the results of its Delaware and Maryland natural gas divisions
on the "accrual" revenue recognition method rather than the "as billed" revenue
recognition method. This change had an insignificant effect on the Company's
annual results for 2003. Under the "as billed" method, revenues from customer
sales are not recognized until the meter is read. Under the "accrual" method, at
the end of each period, the amount of gas used is estimated and is recognized as
revenue. The Company's Florida division has historically used the "accrual"
method in accordance with Florida Public Service Commission requirements. Prior
to December 31, 2003, the Delaware and Maryland divisions used the "as billed"
method to recognize revenues consistent with the rate-setting processes in those
states. In order to consistently apply the "accrual" method, the Company met
separately with the staffs of the Delaware and Maryland Public Service
Commissions to determine the regulatory impact of the change. Having determined
that there is little to no regulatory impact, the Company has conformed the
revenue recognition method used in its Delaware and Maryland divisions to the
method used by its Florida division. In order to provide comparable information,
the Company has restated its 2003 quarterly interim financial statements to
reflect the "accrual" revenue recognition method. Dollars are shown in
thousands, except per share amounts.
- --------------------------------------------------------------------------------------------------------------------------------
---------- THREE MONTHS ENDED ---------- ----------- SIX MONTHS ENDED -----------
JUNE 30, IMPACT OF JUNE 30, JUNE 30, IMPACT OF JUNE 30,
2003 REVENUE 2003 2003 REVENUE 2003
AS PREVIOUSLY RECOGNITION AS PREVIOUSLY RECOGNITION
REPORTED (1) CHANGE AS RESTATED REPORTED (1) CHANGE AS RESTATED
- --------------------------------------------------------------------------------------------------------------------------------
SELECTED INCOME STATEMENT INFORMATION
Operating Revenues . . . . . . . . . . . $ 32,237 $ (1,452) $ 30,785 $ 96,160 $ (2,416) $ 93,744
Operating Income . . . . . . . . . . . . 3,268 (406) 2,862 15,835 (662) 15,173
Income from Continuing Operations. . . . 1,177 (242) 935 7,967 (395) 7,572
Net Income . . . . . . . . . . . . . . . 1,176 (242) 934 7,804 (395) 7,409
EARNINGS PER SHARE OF COMMON STOCK
Basic
From Continuing Operations . . . . . . . $ 0.21 $ (0.04) $ 0.17 $ 1.43 $ (0.07) $ 1.36
Net Income . . . . . . . . . . . . . . . $ 0.21 $ (0.04) $ 0.17 $ 1.40 $ (0.07) $ 1.33
Diluted
From Continuing Operations . . . . . . . $ 0.21 $ (0.04) $ 0.17 $ 1.40 $ (0.07) $ 1.33
Net Income . . . . . . . . . . . . . . . $ 0.21 $ (0.04) $ 0.17 $ 1.37 $ (0.07) $ 1.30
- --------------------------------------------------------------------------------------
JUNE 30, IMPACT OF JUNE 30,
2003 REVENUE 2003
AS PREVIOUSLY RECOGNITION
REPORTED (1) CHANGE AS RESTATED
- --------------------------------------------------------------------------------------
Assets
Accounts receivable and accrued revenue. $ 18,337 $ 881 $ 19,218
Unrecovered purchased gas costs. . . . . 4,023 (451) 3,572
Deferred income taxes. . . . . . . . . . 1,465 (467) 998
Other regulatory assets. . . . . . . . . 2,118 9 2,127
Liabilities
Income taxes . . . . . . . . . . . . . . 1,285 (293) 992
Stockholders' Equity
Retained earnings. . . . . . . . . . . . $ 36,967 $ 265 $ 37,232
(1) Operating Revenue, Operating Income and Income from Continuing Operations
exclude the results of the operations discontinued in 2003 and include
minor reclassifications to conform with the presentation of the 2004
results.
2. CALCULATION OF EARNINGS PER SHARE
- ------------------------------------------------------------------------------------------------
THREE MONTHS ENDED SIX MONTHS ENDED
2004 2003 2004 2003
FOR THE PERIOD ENDED JUNE 30, RESTATED RESTATED
- ------------------------------------------------------------------------------------------------
CALCULATION OF BASIC EARNINGS PER SHARE FROM
CONTINUING OPERATIONS:
Net income from continuing operations . . . $ 611,518 $ 934,536 $6,385,052 $7,571,639
Weighted average shares outstanding . . . . 5,728,158 5,599,525 5,708,294 5,580,620
- ------------------------------------------------------------------------------------------------
BASIC EARNINGS PER SHARE FROM
CONTINUING OPERATIONS . . . . . . . . . . . . $ 0.11 $ 0.17 $ 1.12 $ 1.36
================================================================================================
CALCULATION OF DILUTED EARNINGS PER SHARE FROM
CONTINUING OPERATIONS:
RECONCILIATION OF NUMERATOR:
Net Income from continuing operations Basic $ 611,518 $ 934,536 $6,385,052 $7,571,639
Effect of 8.25% Convertible debentures *. . - - 70,421 80,457
- ------------------------------------------------------------------------------------------------
Adjusted numerator Diluted. . . . . . . . . . $ 611,518 $ 934,536 $6,455,473 $7,652,096
- ------------------------------------------------------------------------------------------------
RECONCILIATION OF DENOMINATOR:
Weighted shares outstanding Basic . . . . . 5,728,158 5,599,525 5,708,294 5,580,620
Effect of dilutive securities *
Stock options . . . . . . . . . . . . . . 2,369 852 3,414 -
Warrants. . . . . . . . . . . . . . . . . 6,492 4,359 7,682 3,016
8.25% Convertible debentures. . . . . . . - - 165,867 190,027
- ------------------------------------------------------------------------------------------------
Adjusted denominator Diluted. . . . . . . . . 5,737,019 5,604,736 5,885,257 5,773,663
- ------------------------------------------------------------------------------------------------
DILUTED EARNINGS PER SHARE FROM
CONTINUING OPERATIONS . . . . . . . . . . . . $ 0.11 $ 0.17 $ 1.10 $ 1.33
================================================================================================
* Amounts associated with securities resulting in an anti-dilutive effect on
earnings per share are not included in this calculation.
3. COMMITMENTS AND CONTINGENCIES
ENVIRONMENTAL MATTERS
In 2003, Chesapeake completed its responsibilities related to one former gas
manufacturing plant site and is currently participating in the investigation,
assessment or remediation of two other former gas manufacturing plant sites.
These sites are located in three different jurisdictions. The Company has
accrued liabilities for these three sites referred to respectively as the Dover
Gas Light, Salisbury Town Gas Light and the Winter Haven Coal Gas sites. The
Company is currently in discussions with the Maryland Department of the
Environment ("MDE") regarding the possible responsibilities of the Company with
respect to a fourth former gas manufacturing plant site in Cambridge, Maryland.
Dover Gas Light Site
- -----------------------
The Dover Gas Light site is a former manufactured gas plant site located in
Dover, Delaware. On January 15, 2004, the Company received a Certificate of
Completion of Work from the United States Environmental Protection Agency
("EPA") regarding this site. This concluded Chesapeake's remedial action
obligation related to this site and relieves Chesapeake from liability for
future remediation at the site, unless previously unknown conditions are
discovered at the site, or information previously unknown to the EPA is received
that indicates the remedial action that has been taken is not sufficiently
protective. These contingencies are standard and are required by the United
States in all liability settlements.
At June 30, 2004, the Company had accrued $10,000 for costs associated with the
Dover Gas Light site and had recorded an associated regulatory asset for the
same amount. Through June 30, 2004, the Company has incurred approximately $9.7
million in costs relating to environmental testing and remedial action studies
at the site. Approximately $9.6 million has been recovered through June 2004
from other parties or through rates.
Salisbury Town Gas Light Site
- ---------------------------------
In cooperation with the MDE, the Company has completed an assessment of the
Salisbury manufactured gas plant site, located in Salisbury, Maryland, which
determined that there was localized ground-water contamination. During 1996, the
Company completed construction and began Air Sparging and Soil-Vapor Extraction
("AS/SVE") remediation procedures. Chesapeake has been reporting the remediation
and monitoring results to the MDE on an ongoing basis since 1996. In February
2002, the MDE granted permission to permanently decommission the AS/SVE system
and to discontinue all on-site and off-site well monitoring, except for one well
that is being maintained for continued product monitoring and recovery. In
November 2002, Chesapeake submitted a letter to the MDE requesting No Further
Action ("NFA") determination. In December 2002, the MDE recommended that the
Company submit work plans to MDE and place deed restrictions on the property as
conditions prior to receiving an NFA. The Company has completed the MDE
recommended work plans and has executed the deed restrictions. During the third
quarter of 2003 the Company submitted a revised request for the NFA. The MDE has
not yet responded to the request.
The Company has adjusted the liability with respect to the Salisbury Town Gas
Light site to $7,000 at June 30, 2004. This amount is based on the estimated
costs to perform limited product monitoring and recovery efforts and fulfill
ongoing reporting requirements. A corresponding regulatory asset has been
recorded, reflecting the Company's belief that costs incurred will be
recoverable in base rates.
Through June 30, 2004, the Company has incurred approximately $2.9 million for
remedial actions and environmental studies at the Salisbury Town Gas Light site.
Of this amount, approximately $1.8 million has been recovered through insurance
proceeds or in rates. The Company expects to recover the remaining costs through
rates.
Winter Haven Coal Gas Site
- ------------------------------
The Winter Haven Coal Gas site is located in Winter Haven, Florida. Chesapeake
has been working with the Florida Department of Environmental Protection
("FDEP") in assessing this coal gas site. In May 1996, the Company filed an Air
Sparging and Soil Vapor Extraction Pilot Study Work Plan (the "Work Plan") for
the Winter Haven site with the FDEP. The Work Plan described the Company's
proposal to undertake an AS/SVE pilot study to evaluate the site. After
discussions with the FDEP, the Company filed a modified AS/SVE Pilot Study Work
Plan, the description of the scope of work to complete the site assessment
activities and a report describing a limited sediment investigation performed in
1997. In December 1998, the FDEP approved the AS/SVE Pilot Study Work Plan,
which the Company completed during the third quarter of 1999. In February 2001,
the Company filed a Remedial Action Plan ("RAP") with the FDEP to address the
contamination of the subsurface soil and ground-water in a portion of the site.
The FDEP approved the RAP on May 4, 2001. Construction of the AS/SVE system was
completed in the fourth quarter of 2002 and the system is now fully operational.
FDEP has indicated that the Company may be required to remediate sediments along
the shoreline of Lake Shipp, immediately west of the Winter Haven site. Based on
studies performed to date, the Company objects to FDEP's suggestion that the
sediments have been contaminated and require remediation. Early estimates by the
Company's environmental consultant indicate that some of the corrective measures
discussed by FDEP may cost as much as $1 million. Given the Company's view as to
the absence of ecological effects, the Company believes that cost expenditures
of this magnitude are unwarranted and plans to vigorously oppose any
requirements that it undertake corrective measures in the offshore sediments.
Chesapeake anticipates that it will be several years before this issue is
resolved. At this time, the Company has not recorded a liability for sediment
remediation. The outcome of this matter cannot be predicted at this time.
The Company has accrued a liability of $492,000 as of June 30, 2004 for the
Florida site. Through June 30, 2004, the Company has incurred approximately $1.3
million of environmental costs associated with the Florida site. At June 30,
2004 the Company had collected through rates $193,000 in excess of costs
incurred. A regulatory asset of approximately $299,000, representing the
uncollected portion of the estimated clean-up costs, has also been recorded. The
Company expects to recover the remaining costs through rates.
Other
- -----
The Company is in discussions with the MDE regarding the possible
responsibilities of the Company for remediation of a fourth gas manufacturing
plant site located in Cambridge, Maryland. The outcome of this matter cannot be
determined at this time.
OTHER COMMITMENTS AND CONTINGENCIES
The Company's natural gas and propane distribution operations have entered into
contractual commitments to purchase gas from various suppliers. The contracts
have various expiration dates. In November 2003, the Company entered into a
one-year contract with an energy marketing and risk management company to manage
a portion of the Company's natural gas transportation and storage capacity.
The Company has issued corporate guarantees to certain vendors of its propane
wholesale marketing subsidiary. The corporate guarantees provide for the payment
of propane purchases by the subsidiary, in the event of the subsidiary's
default. The aggregate amount guaranteed at June 30, 2004 totaled $4.5 million,
with the guarantees expiring on various dates through February 2005.
The Company has issued a letter of credit to its primary insurance company for
$694,000, which expires June 1, 2005.
The Company is involved in certain legal actions and claims arising in the
normal course of business. The Company is also involved in certain legal and
administrative proceedings before various governmental agencies concerning
rates. In the opinion of management, the ultimate disposition of these
proceedings and claims will not have a material effect on the consolidated
financial position, results of operations or cash flows of the Company.
Certain assets and liabilities of the Company are accounted for in accordance
with SFAS No. 71. SFAS No. 71 provides guidance for public utilities and other
regulated operations where the rates (prices) charged to customers are subject
to regulatory review and approval. Regulators sometimes include costs in
allowable costs in a period other than the period in which the costs would be
charged to expense by an unregulated enterprise. That procedure can create
assets, reduce assets, or create liabilities for the regulated enterprise. For
general-purpose financial reporting, an incurred cost for which a regulator
permits recovery in a future period is accounted for like an incurred cost that
is reimbursable under a cost-reimbursement-type contract. If the Company were
required to terminate the application of SFAS No. 71 to its regulated
operations, all such deferred amounts would be recognized in the income
statement at that time. This would result in a charge to earnings, net of
applicable income taxes, in an amount which could be material.
4. RECENT AUTHORITATIVE PRONOUNCEMENTS ON FINANCIAL REPORTING AND ACCOUNTING
On January 12, 2004, the FASB released FASB Staff Position No. SFAS 106-1
"Accounting and Disclosure Requirements Related to the Medicare Prescription
Drug, Improvement and Modernization Act of 2003" (the "Act"). On May 19, 2004,
the FASB released FASB Staff Position No. SFAS 106-2 which superseded SFAS
106-1. SFAS No. 106-2 provides guidance on the accounting for the effects of the
Act and requires certain disclosures regarding the effect of the federal subsidy
provided by the Act. It is effective for the first interim or annual period
beginning after June 15, 2004. Adoption of SFAS No. 106-2 is not expected to
have a material impact on the Company's post-retirement benefit obligation.
The Emerging Issues Task Force ("EITF") of the FASB issued EITF No. 03-6 on
February 9, 2004. It requires that earnings used to calculate earnings per share
be allocated between common shareholders and other securities holders based on
their respective rights to receive dividends. This requirement was effective for
the second quarter of 2004. It had no impact on the Company's calculation of
earnings per share.
5. SEGMENT INFORMATION
Chesapeake uses the management approach to identify operating segments.
Chesapeake organizes its business around differences in products or services and
the operating results of each segment are regularly reviewed by the Company's
chief operating decision maker in order to make decisions about resources and to
assess performance. The following table presents information about the Company's
reportable segments. Results exclude discontinued operations.
- ------------------------------------------------------------------------------------------------------------
THREE MONTHS ENDED SIX MONTHS ENDED
2004 2003 2004 2003
FOR THE PERIOD ENDED JUNE 30, RESTATED RESTATED
- ------------------------------------------------------------------------------------------------------------
OPERATING REVENUES, UNAFFILIATED CUSTOMERS
Natural gas distribution and transmission . . . $ 25,101,267 $ 22,064,115 $ 67,402,252 $ 61,545,956
Propane . . . . . . . . . . . . . . . . . . . . 5,754,405 5,537,407 24,214,662 25,784,434
Advanced information services . . . . . . . . . 3,437,325 3,185,153 6,438,443 6,418,571
Other . . . . . . . . . . . . . . . . . . . . . - (1,753) - (4,524)
- ------------------------------------------------------------------------------------------------------------
Total operating revenues, unaffiliated customers. $ 34,292,997 $ 30,784,922 $ 98,055,357 $ 93,744,437
============================================================================================================
INTERSEGMENT REVENUES (1)
Natural gas distribution and transmission . . . $ 35,004 $ 61,727 $ 95,991 $ 101,766
Advanced information services . . . . . . . . . 13,570 30,190 22,587 68,024
Other . . . . . . . . . . . . . . . . . . . . . 168,686 176,903 338,132 357,094
- ------------------------------------------------------------------------------------------------------------
Total intersegment revenues . . . . . . . . . . . $ 217,260 $ 268,820 $ 456,710 $ 526,884
============================================================================================================
OPERATING INCOME
Natural gas distribution and transmission . . . $ 2,696,914 $ 2,993,220 $ 9,914,667 $ 10,273,874
Propane . . . . . . . . . . . . . . . . . . . . (881,576) (390,032) 2,440,082 4,495,450
Advanced information services . . . . . . . . . 259,750 164,301 331,835 226,634
Other . . . . . . . . . . . . . . . . . . . . . 87,706 94,028 175,516 176,738
- ------------------------------------------------------------------------------------------------------------
Total . . . . . . . . . . . . . . . . . . . . . . $ 2,162,794 $ 2,861,517 $ 12,862,100 $ 15,172,696
============================================================================================================
(1) All significant intersegment revenues are billed at market rates and have
been.
- -------------------------------------------------------------------------------
JUNE 30, DECEMBER 31,
2004 2003
- -------------------------------------------------------------------------------
IDENTIFIABLE ASSETS
Natural gas distribution and transmission . . . $158,763,569 $169,865,930
Propane . . . . . . . . . . . . . . . . . . . . 38,659,073 38,359,251
Advanced information services . . . . . . . . . 2,912,282 2,912,733
Other . . . . . . . . . . . . . . . . . . . . . 17,080,992 7,791,796
- -------------------------------------------------------------------------------
Total identifiable assets . . . . . . . . . . . . $217,415,916 $218,929,710
===============================================================================
The Company's operations are all domestic. The advanced information services
segment has infrequent transactions with foreign companies, located primarily in
Canada, that are denominated and paid in U.S. dollars. These transactions are
immaterial to the consolidated revenues.
6. DISCONTINUED OPERATIONS
The following table presents the balance sheet accounts for discontinued
operations.
CHESAPEAKE UTILITIES CORPORATION DISCONTINUED OPERATIONS
BALANCE SHEETS (UNAUDITED)
- -----------------------------------------------------------------------------------------
JUNE 30, DECEMBER 31,
ASSETS 2004 2003
- -----------------------------------------------------------------------------------------
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment. . . . . . . . . . . . . . $ 750,947 $ 762,383
Less: Accumulated depreciation and amortization . . . . (319,127) (326,792)
- -----------------------------------------------------------------------------------------
Net property, plant and equipment. . . . . . . . . . . . . 431,820 435,591
- -----------------------------------------------------------------------------------------
CURRENT ASSETS
Cash and cash equivalents. . . . . . . . . . . . . . . . 19,903 1,437,821
Accounts receivable (less allowance for uncollectibles
of $1,619 and $5,346, respectively). . . . . . . . . . 217,184 273,799
Appliance and other inventory, at FIFO . . . . . . . . . 95,594 99,839
Income taxes receivable. . . . . . . . . . . . . . . . . - -
Deferred income taxes receivable . . . . . . . . . . . . 20,725 20,725
Prepaid expenses . . . . . . . . . . . . . . . . . . . . 95,405 110,175
- -----------------------------------------------------------------------------------------
Total current assets . . . . . . . . . . . . . . . . . . . 448,811 1,942,359
- -----------------------------------------------------------------------------------------
DEFERRED CHARGES AND OTHER ASSETS
Other intangible assets, net . . . . . . . . . . . . . . 70,018 70,018
Deferred income taxes receivable . . . . . . . . . . . . 125,369 150,847
- -----------------------------------------------------------------------------------------
Total deferred charges and other assets. . . . . . . . . . 195,387 220,865
- -----------------------------------------------------------------------------------------
TOTAL ASSETS . . . . . . . . . . . . . . . . . . . . . . . $ 1,076,018 $ 2,598,815
=========================================================================================
STOCKHOLDERS' EQUITY AND LIABILITIES
- -------------------------------------------------------------------------------------
STOCKHOLDERS' EQUITY
Common Stock . . . . . . . . . . . . . . . . . . . . . . $ 51,010 $ 51,010
Additional paid-in capital . . . . . . . . . . . . . . . 3,914,783 3,914,783
Retained deficits. . . . . . . . . . . . . . . . . . . . (6,386,352) (5,271,164)
- -----------------------------------------------------------------------------------------
Total stockholders' equity . . . . . . . . . . . . . . . . (2,420,559) (1,305,371)
- -----------------------------------------------------------------------------------------
CURRENT LIABILITIES
Accounts payable . . . . . . . . . . . . . . . . . . . . 16,684 67,303
Due to parent company. . . . . . . . . . . . . . . . . . 3,252,016 3,558,434
Customer deposits. . . . . . . . . . . . . . . . . . . . 9,342 11,403
Income taxes payable . . . . . . . . . . . . . . . . . . 159,556 192,290
Other accrued liabilities. . . . . . . . . . . . . . . . 58,979 74,756
- -----------------------------------------------------------------------------------------
Total current liabilities. . . . . . . . . . . . . . . . . 3,496,577 3,904,186
- -----------------------------------------------------------------------------------------
TOTAL STOCKHOLDERS' EQUITY AND LIABILITIES . . . . . . . . $ 1,076,018 $ 2,598,815
=========================================================================================
During 2003, the Company sold the assets of six of its seven water services
businesses. The Company expects to dispose of the remaining operation, located
in Stuart, Florida, during 2004. The assets are recorded at their estimated fair
value. Results for all the water dealerships were reclassified to discontinued
operations in accordance with SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets." The results of the water companies' operations
for all periods presented in the consolidated income statements have been
reclassified to discontinued operations and shown net of tax.
7. EMPLOYEE BENEFIT PLANS
Net periodic benefit costs for the defined benefit pension plan, the executive
excess benefit plan and other post-retirement benefits are shown below:
- ------------------------------------------------------------------------------------------------
OTHER
DEFINED BENEFIT EXECUTIVE EXCESS POST-RETIREMENT
PENSION PLAN BENEFIT PLAN BENEFITS
FOR THE THREE MONTHS ENDED JUNE 30, 2004 2003 2004 2003 2004 2003
- ------------------------------------------------------------------------------------------------
Service Cost . . . . . . . . . . . . $ 84,690 $ 81,341 $23,851 $26,970 $ 1,315 $ 1,284
Interest Cost. . . . . . . . . . . . 176,727 171,060 20,597 20,010 22,042 21,330
Expected return on plan assets . . . (235,889) (196,119) - - - -
Amortization of transition amount. . (3,776) (3,776) - - 6,965 6,965
Amortization of prior service cost . (1,175) (1,175) 697 697 - -
Amortization of net (gain) loss. . . - - 4,479 4,670 (3,752) 16,568
- ------------------------------------------------------------------------------------------------
Net periodic benefit cost. . . . . . $ 20,577 $ 51,331 $49,624 $52,347 $26,570 $46,147
================================================================================================
- --------------------------------------------------------------------------------------------------
OTHER
DEFINED BENEFIT EXECUTIVE EXCESS POST-RETIREMENT
PENSION PLAN BENEFIT PLAN BENEFITS
FOR THE SIX MONTHS ENDED JUNE 30, 2004 2003 2004 2003 2004 2003
- --------------------------------------------------------------------------------------------------
Service Cost . . . . . . . . . . . . $ 169,379 $ 162,683 $ 52,438 $ 53,939 $ 2,677 $ 2,569
Interest Cost. . . . . . . . . . . . 353,454 342,120 41,502 40,020 43,442 42,660
Expected return on plan assets . . . (471,778) (392,238) - - - -
Amortization of transition amount. . (7,552) (7,552) - - 13,930 13,930
Amortization of prior service cost . (2,350) (2,350) 1,394 1,394 - -
Amortization of net (gain) loss. . . - - 8,274 9,339 39,450 33,136
- --------------------------------------------------------------------------------------------------
Net periodic benefit cost. . . . . . $ 41,153 $ 102,663 $103,608 $104,692 $99,499 $92,295
================================================================================================
As disclosed in the December 31, 2003 financial statements, no contributions are
expected to be required in 2004 for the defined benefit pension plan. The
executive excess benefit plan and other post-retirement benefit plans are
unfunded. Cash benefits paid under the executive excess plan for the first six
months of 2004 were $12,550. Benefits paid under other post-retirement benefits
are primarily for medical claims and were $87,000 for the first six months of
2004.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
BUSINESS DESCRIPTION
Chesapeake Utilities Corporation (the "Company" or "Chesapeake") is a
diversified utility company engaged in natural gas distribution and
transmission, propane distribution and wholesale marketing, advanced information
services and other related businesses.
The Company's strategy is to grow earnings from a stable utility foundation by
investing in related businesses and services that provide opportunities for
higher, unregulated returns. This growth strategy includes acquisitions and
investments in unregulated businesses as well as the continued investment and
expansion of the Company's utility operations that provide the stable base of
earnings. The Company continually reevaluates its investments to ensure that
they are consistent with its strategy and the goal of enhancing shareholder
value. The Company's unregulated businesses and services currently include
propane distribution and wholesale marketing, advanced information services and
other related businesses.
Chesapeake sold the assets and operations of six of its seven water dealerships
during 2003. The Company expects to dispose of the remaining operation during
2004.
FINANCIAL POSITION, LIQUIDITY AND CAPITAL RESOURCES
The Company's capital requirements reflect the capital-intensive nature of its
business and are principally attributable to its construction program (described
below) and the retirement of outstanding debt. The Company relies on cash
generated by operations and short-term borrowing to meet normal working capital
requirements and to finance, temporarily, capital expenditures. During the first
six months of 2004, net cash provided by operating activities, net cash used by
investing activities and net cash used by financing activities were
approximately $20.6 million, $6.3 million and $7.1 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, 2004,
Chesapeake had five unsecured bank lines of credit with three financial
institutions, totaling $65.0 million, for short-term cash needs to meet seasonal
working capital requirements and to fund, temporarily, portions of its capital
expenditures. Two of the bank lines, totaling $15.0 million, are committed. The
remaining three lines are subject to the banks' availability of funds. In the
first six months of 2004, cash provided by operations was adequate to fund
capital expenditures and repay the $3.5 million of short-term debt that was
outstanding at December 31, 2003. At June 30, 2004, the Company had outstanding
an irrevocable letter of credit in the amount of $694,000 issued to one of the
Company's insurance providers. The letter of credit reduced the available
borrowing under the short-term lines.
During the six-month periods ended June 30, 2004 and 2003, capital expenditures
were approximately $6.6 million and $4.6 million, respectively. Chesapeake has
budgeted $20.8 million for capital expenditures during 2004. This amount
includes $15.8 million for natural gas distribution and transmission, $4.1
million for propane distribution and marketing, $285,000 for advanced
information services and $614,000 for other operations. The natural gas
distribution and transmission expenditures are for expansion and improvement of
facilities. The propane expenditures are to support customer growth and for the
replacement of equipment. The advanced information services expenditures are for
computer hardware, software and related equipment. The other operations budget
includes general plant, computer software and hardware expenditures. Financing
for the capital expenditure program for the balance of 2004 is expected to be
provided from cash on hand, short-term borrowing and cash provided by operating
activities. The capital expenditure program is subject to continual review and
modification. Actual capital requirements may vary from the above estimates due
to a number of factors including acquisition opportunities, changing economic
conditions, customer growth in existing areas, regulation, availability of
capital and new growth opportunities.
The Company has budgeted $170,000 for capital expenditures in 2004 related to
environmental remediation projects, and expects to make additional expenditures
in future years. Management does not expect any such expenditures or financing
to have a material adverse effect on the financial position or capital resources
of the Company (see Note 3 to the Condensed Consolidated Financial Statements).
As of June 30, 2004 common equity represented 53.2 percent of total
capitalization, compared to 51.2 percent as of December 31, 2003. Combining
short-term financing with total capitalization, the equity component would have
been 52.1 percent and 48.8 percent for 2004 and 2003, respectively. The Company
remains committed to maintaining a sound capital structure and strong credit
ratings in order to provide the financial flexibility needed to access the
capital markets when required. This commitment, along with adequate and timely
rate relief for the Company's regulated operations, is intended to ensure that
the Company will be able to attract capital from outside sources at a reasonable
cost.
Interest expense for the first six months of 2004 decreased approximately
$240,000, or 8 percent, versus the same period in 2003. Interest on long-term
debt accounted for $176,000 of the decrease. The average long-term debt balance
in the first six months of 2004 was $72.0 million with an average interest rate
of 7.2 percent, compared to $76.0 million with an average interest rate of 7.2
percent in the first six months of 2003. Additionally, interest on short-term
debt decreased $46,000 during the first half of 2004, compared to the first half
of 2003. This decrease was the result of a decline in the average balance of
short-term debt from $3.8 million in the first six months of 2003 to $298,000
for the first six months of 2004.
OFF-BALANCE SHEET ARRANGEMENTS AND CONTRACTUAL OBLIGATIONS
As noted in the Company's 2003 Annual Report on Form 10-K, the only off-balance
sheet arrangements are corporate guarantees to certain vendors of its propane
wholesale marketing subsidiary and a letter of credit issued to its main
insurance carrier. See Note 3 to the Condensed Consolidated Financial Statements
for further information.
There have been no material changes in the contractual obligations presented in
the Company's 2003 Annual Report on Form 10-K, except for commodity purchase
obligations and forward contracts entered into in the ordinary course of the
Company's business. Below is a summary of the commodity and forward contract
obligations at June 30, 2004. None of the commodity or forward contracts extend
beyond 2005.
- -----------------------------------------------------------------
PAYMENTS DUE BY PERIOD
----------------------------------
CONTRACTUAL OBLIGATIONS: 2004 2005 TOTAL
- -----------------------------------------------------------------
Commodities (1) . . . . . . . $1,877,446 $ 501,000 $2,378,446
Forward contracts propane (2) 5,363,707 - 5,363,707
- -----------------------------------------------------------------
Total . . . . . . . . . . . . $7,241,153 $ 501,000 $7,742,153
=================================================================
(1) In addition to the obligations noted above, the natural gas distribution
and propane distribution operations have agreements with commodity
suppliers that have provisions which allow the Company to reduce or
eliminate the quantities purchased. There are no monetary penalties for
reducing the amounts purchased; however, the propane contracts allow the
suppliers to reduce the amounts available in the winter season if the
Company does not purchase specified amounts during the summer season. Under
these contracts, the commodity prices will fluctuate with a market-based
index.
(2) The Company has also entered into forward and future sale contracts of
$8,041,169. See the "Quantitative and Qualitative Disclosures about Market
Risk" section of the Management's Discussion and Analysis of Financial
Condition and Results of Operations portion of this report for further
information.
RESULTS OF OPERATIONS FOR THE QUARTER ENDED JUNE 30, 2004
CONSOLIDATED OVERVIEW
The Company earned net income from continuing operations of $612,000 or $0.11
per share, for the second quarter of 2004, a decline of $323,000 compared to net
income from continuing operations of $935,000, or $0.17 per share for the
corresponding period in 2003. The decrease in earnings principally reflects a
decline in margins and operating income for the Company's Delmarva natural gas
and propane operations caused by warmer temperatures on the Delmarva Peninsula.
Management estimates that the warmer weather reduced margins and operating
income by $677,000 for the quarter. Gross margin increases related to
residential customer growth for natural gas distribution and natural gas
transmission's firm transportation services partially offset this decline.
Operating expenses were also up as a result of customer growth.
See Note 1 to the Condensed Consolidated Financial Statements for a description
of the restatement that was made in the fourth quarter of 2003. Additional
information can also be found in the Company's report on Form 10-K for the year
ended December 31, 2003.
- ------------------------------------------------------------------------------------
2004 2003
FOR THE THREE MONTHS ENDED JUNE 30, . . . RESTATED CHANGE
- ------------------------------------------------------------------------------------
Operating Income
Natural Gas Distribution & Transmission $ 2,696,914 $ 2,993,220 $ (296,306)
Propane . . . . . . . . . . . . . . . . (881,576) (390,032) (491,544)
Advanced Information Services . . . . . 259,750 164,301 95,449
Other . . . . . . . . . . . . . . . . . 87,706 94,028 (6,322)
- ------------------------------------------------------------------------------------
Operating Income. . . . . . . . . . . . . 2,162,794 2,861,517 (698,723)
Other Income. . . . . . . . . . . . . . . 74,217 34,257 39,960
Interest Charges. . . . . . . . . . . . . 1,328,231 1,429,005 (100,774)
Income Taxes. . . . . . . . . . . . . . . 297,262 532,233 (234,971)
- ------------------------------------------------------------------------------------
Net Income from Continuing Operations . . $ 611,518 $ 934,536 $ (323,018)
====================================================================================
The following discussions of segment results include use of the term "gross
margin." Gross margin is determined by deducting the cost of sales from
operating revenue. Cost of sales includes the purchased gas cost for the natural
gas and propane segments and the cost of labor spent on direct revenue-producing
activities for advanced information services segment. Gross margin should not be
considered an alternative to operating income or net income, which are
determined in accordance with Generally Accepted Accounting Principles ("GAAP").
Chesapeake believes that gross margin, although a non-GAAP measure, is useful
and meaningful to investors as a basis for making investment decisions. It
provides investors with information that demonstrates the profitability achieved
by the Company under its allowed rates for regulated operations and under its
competitive pricing structure for non-regulated segments. Chesapeake's
management uses gross margin in measuring certain performance goals and has
historically analyzed and reported gross margin information in its public
filings and presentations. Other companies may calculate gross margin in a
different manner.
NATURAL GAS DISTRIBUTION AND TRANSMISSION
The natural gas distribution and transmission segment earned operating income of
$2.7 million for the second quarter of 2004 compared to $3.0 million for the
corresponding period last year, a decrease of $296,000.
- ------------------------------------------------------------------------------------
2004 2003
FOR THE THREE MONTHS ENDED JUNE 30, . . . RESTATED CHANGE
- ------------------------------------------------------------------------------------
Revenue . . . . . . . . . . . . . . . . . $25,136,271 $22,125,842 $ 3,010,429
Cost of gas . . . . . . . . . . . . . . . 15,111,043 12,365,393 2,745,650
- ------------------------------------------------------------------------------------
Gross margin. . . . . . . . . . . . . . . 10,025,228 9,760,449 264,779
Other Operating Expenses:
Operations & maintenance. . . . . . . . 5,216,174 4,752,182 463,992
Depreciation & amortization . . . . . . 1,359,816 1,315,830 43,986
Other taxes . . . . . . . . . . . . . . 752,324 699,217 53,107
- ------------------------------------------------------------------------------------
Other operating expenses. . . . . . . . . 7,328,314 6,767,229 561,085
- ------------------------------------------------------------------------------------
Total Operating Income. . . . . . . . . . $ 2,696,914 $ 2,993,220 $ (296,306)
====================================================================================
Gross margins for the Delaware and Maryland distribution divisions decreased
$270,000 from 2003. This was caused primarily by a temperature decline of 31
percent (194 heating degree-days) for the second quarter of 2004 compared to the
second quarter of 2003. Management estimates that warmer weather negatively
impacted 2004 margins by $349,000. In the second quarter of 2004, temperatures
were 14 percent warmer (68 heating degree-days) than the 10-year average. The
Company estimates that, on an annual basis, for each heating degree-day variance
from the 10-year average, the gross margin on gas sales changes by $1,800. The
decline due to temperatures was partially offset by customer growth. Delaware
and Maryland experienced an increase of 2,211 residential customers, or 7
percent, in the second quarter of 2004 compared to the second quarter of 2003.
The increase was primarily the result of new housing construction. The Company
estimates that each residential customer added contributes $372 annually to
gross margin and requires an additional cost of $104 for operations and
maintenance expenses. Gross margin for the Florida operations increased by
$239,000, due to an increase of 6.8 percent in the number of residential
customers and growth in the industrial gross margin. The natural gas
transmission gross margin increased by $292,000 resulting from an increase in
transportation services. Other operating expenses, primarily payroll, pension,
insurance and customer service costs, were higher primarily as a result of
customer growth. Depreciation was also higher, reflecting the continued
investment in plant assets.
PROPANE
During the second quarter of 2004, the propane segment experienced a decrease of
$492,000 in operating income compared to the second quarter of 2003, reflecting
a gross margin decrease of $370,000 and an increase of $121,000 in operating
expenses.
- ------------------------------------------------------------------------------------
FOR THE THREE MONTHS ENDED JUNE 30, . . . 2004 2003 CHANGE
- ------------------------------------------------------------------------------------
Revenue . . . . . . . . . . . . . . . . . $ 5,754,405 $ 5,537,407 $ 216,998
Cost of sales . . . . . . . . . . . . . . 3,258,284 2,671,033 587,251
- ------------------------------------------------------------------------------------
Gross margin. . . . . . . . . . . . . . . 2,496,121 2,866,374 (370,253)
Other Operating Expenses:
Operations & maintenance. . . . . . . . 2,854,614 2,694,718 159,896
Depreciation & amortization . . . . . . 370,935 373,461 (2,526)
Other taxes . . . . . . . . . . . . . . 152,148 188,227 (36,079)
- ------------------------------------------------------------------------------------
Other operating expenses. . . . . . . . . 3,377,697 3,256,406 121,291
- ------------------------------------------------------------------------------------
Total Operating Loss. . . . . . . . . . . $ (881,576) $ (390,032) $ (491,544)
====================================================================================
The Delmarva distribution operations experienced a drop in gross margin of
$393,000. Management estimates that warmer weather negatively impacted margins
by $328,000. Temperatures in the second quarter of 2004 were 31 percent warmer
than the second quarter of 2003 (194 heating degree-days) and 14 percent warmer
than the 10-year average (68 heating degree-days). The Company estimates that on
an annual basis, gross margin changes by $1,691 for each heating degree-day. The
Florida propane distribution operations experienced an increase in operating
losses of $26,000. An increase of $20,000 in gross margin was more than offset
by an increase in other operating expenses, primarily sales and marketing.
The Company's propane wholesale marketing operation increased operating income
$18,000 over the second quarter of 2003. Gross margins were essentially the
same; however, other operating expenses were lower.
ADVANCED INFORMATION SERVICES
The advanced information services business contributed operating income of
$260,000 for the second quarter of 2004, an increase of $95,000 or 58 percent
over the second quarter of last year.
- ------------------------------------------------------------------------------------
FOR THE THREE MONTHS ENDED JUNE 30, . . . 2004 2003 CHANGE
- ------------------------------------------------------------------------------------
Revenue . . . . . . . . . . . . . . . . . $ 3,450,895 $ 3,215,343 $ 235,552
Cost of sales . . . . . . . . . . . . . . 1,864,710 1,870,909 (6,199)
- ------------------------------------------------------------------------------------
Gross margin. . . . . . . . . . . . . . . 1,586,185 1,344,434 241,751
Other Operating Expenses:
Operations & maintenance. . . . . . . . 1,176,368 997,277 179,091
Depreciation & amortization . . . . . . 34,530 48,758 (14,228)
Other taxes . . . . . . . . . . . . . . 115,537 134,098 (18,561)
- ------------------------------------------------------------------------------------
Other operating expenses. . . . . . . . . 1,326,435 1,180,133 146,302
- ------------------------------------------------------------------------------------
Total Operating Income. . . . . . . . . . $ 259,750 $ 164,301 $ 95,449
====================================================================================
The advanced information services segment has increased its revenue primarily
due to increased software sales. The cost of sales did not rise in proportion
because all development costs associated with internally-developed software
products are expensed as incurred. Additionally, compensation arrangements with
the Company's consultants have been revised to include lower base pay, but
higher incentive compensation based on productive hours. Operations and
maintenance costs increased primarily due to software development costs to
enhance a software product and increased incentive compensation for
administrative and management employees.
OTHER BUSINESS OPERATIONS AND ELIMINATIONS
Other operations and eliminating entries contributed operating income of $88,000
for the second quarter of 2004 compared to income of $94,000 for the second
quarter of last year. Other operations consist primarily of subsidiaries that
own real estate leased to other Company subsidiaries. Eliminations are entries
required to eliminate activities between business segments from the consolidated
results.
- ------------------------------------------------------------------------------------
FOR THE THREE MONTHS ENDED JUNE 30, . . . 2004 2003 CHANGE
- ------------------------------------------------------------------------------------
Revenue . . . . . . . . . . . . . . . . . $ 168,686 $ 175,150 $ (6,464)
Cost of sales . . . . . . . . . . . . . . - - -
- ------------------------------------------------------------------------------------
Gross margin. . . . . . . . . . . . . . . 168,686 175,150 (6,464)
Other Operating Expenses:
Operations & maintenance. . . . . . . . 20,399 12,902 7,497
Depreciation & amortization . . . . . . 53,929 59,529 (5,600)
Other taxes . . . . . . . . . . . . . . 14,691 13,405 1,286
- ------------------------------------------------------------------------------------
Other operating expenses. . . . . . . . . 89,019 85,836 3,183
- ------------------------------------------------------------------------------------
Operating Income - Other. . . . . . . . . 79,667 89,314 (9,647)
Operating Income - Eliminations . . . . . 8,039 4,714 3,325
- ------------------------------------------------------------------------------------
Total Operating Income. . . . . . . . . . $ 87,706 $ 94,028 $ (6,322)
====================================================================================
DISCONTINUED OPERATIONS
In 2003, Chesapeake decided to exit the water services business. Six of seven
water dealerships were sold during 2003. The Company expects to dispose of the
remaining operation during 2004. Accordingly, the assets are recorded at their
fair value. The results of the water companies' operations for all periods
presented in the consolidated income statements, have been reclassified to
discontinued operations and shown net of tax. For the second quarter of 2004
they earned income of $19,000, compared to an immaterial loss in the second
quarter of 2003.
INCOME TAXES
The Company's income tax cost for the second quarter of 2004 was lower than 2003
due to lower income. The federal income tax rate was consistent from year to
year.
INTEREST EXPENSE
Interest for the second quarter of 2004 decreased approximately $101,000, or 7
percent, over the same period in 2003. The decrease resulted from the scheduled
repayments of principal of long-term debt and lower short-term borrowing.
The average long-term debt balance in the second quarter of 2004 was $72.0
million with an average interest rate of 7.2 percent, compared to $76.0 million
with an average interest rate of 7.3 percent in the second quarter of 2003. The
Company did not borrow against its short-term credit facilities during the
second quarter of 2004. In the second quarter of 2003 the average borrowing
balance for short-term debt was $337,000.
RESULTS OF OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30, 2004
CONSOLIDATED OVERVIEW
The Company earned income from continuing operations of $6.4 million or $1.10
per share, for the first six months of 2004, a decline of $1.2 million compared
to income from continuing operations of $7.6 million, or $1.33 per share for the
corresponding period in 2003. The decrease in earnings principally reflects a
decline in operating income caused by warmer temperatures on the Delmarva
Peninsula. Management estimates that warmer weather negatively impacted margins
by $1.1 million. The natural gas segment was able to partially offset the impact
of warmer weather through customer growth.
See Note 1 to the Condensed Consolidated Financial Statements for a description
of the restatement that was made in the fourth quarter of 2003. Additional
information can also be found in the Company's report on Form 10-K for the year
ended December 31, 2003.
- ------------------------------------------------------------------------------------
2004 2003
FOR THE SIX MONTHS ENDED JUNE 30, . . . . RESTATED CHANGE
- ------------------------------------------------------------------------------------
Operating Income
Natural Gas Distribution & Transmission $ 9,914,667 $10,273,874 $ (359,207)
Propane . . . . . . . . . . . . . . . . 2,440,082 4,495,450 (2,055,368)
Advanced Information Services . . . . . 331,835 226,634 105,201
Other & eliminations. . . . . . . . . . 175,516 176,738 (1,222)
- ------------------------------------------------------------------------------------
Operating Income. . . . . . . . . . . . . 12,862,100 15,172,696 (2,310,596)
Other Income. . . . . . . . . . . . . . . 176,694 88,157 88,537
Interest Charges. . . . . . . . . . . . . 2,654,997 2,894,855 (239,858)
Income Taxes. . . . . . . . . . . . . . . 3,998,745 4,794,359 (795,614)
- ------------------------------------------------------------------------------------
Net Income from Continuing Operations . . $ 6,385,052 $ 7,571,639 $(1,186,587)
====================================================================================
The following discussions of segment results include use of the term "gross
margin." Gross margin is determined by deducting the cost of sales from
operating revenue. Cost of sales includes the purchased gas cost for the natural
gas and propane segments and the cost of labor spent on direct revenue-producing
activities for advanced information services segment. Gross margin should not be
considered an alternative to operating income or net income, which are
determined in accordance with Generally Accepted Accounting Principles ("GAAP").
Chesapeake believes that gross margin, although a non-GAAP measure, is useful
and meaningful to investors as a basis for making investment decisions. It
provides investors with information that demonstrates the profitability achieved
by the Company under its allowed rates for regulated operations and under its
competitive pricing structure for non-regulated segments. Chesapeake's
management uses gross margin in measuring certain performance goals and has
historically analyzed and reported gross margin information in its public
filings and presentations. Other companies may calculate gross margin in a
different manner.
NATURAL GAS DISTRIBUTION AND TRANSMISSION
The natural gas distribution and transmission segment earned operating income of
$9.9 million for the first six months of 2004 compared to $10.3 million for the
corresponding period last year, a decrease of $359,000.
- ------------------------------------------------------------------------------------
2004 2003
FOR THE SIX MONTHS ENDED JUNE 30, . . . . RESTATED CHANGE
- ------------------------------------------------------------------------------------
Revenue . . . . . . . . . . . . . . . . . $67,498,243 $61,647,722 $ 5,850,521
Cost of gas . . . . . . . . . . . . . . . 42,529,942 37,613,199 4,916,743
- ------------------------------------------------------------------------------------
Gross margin. . . . . . . . . . . . . . . 24,968,301 24,034,523 933,778
Other Operating Expenses:
Operations & maintenance. . . . . . . . 10,739,027 9,689,101 1,049,926
Depreciation & amortization . . . . . . 2,703,097 2,563,832 139,265
Other taxes . . . . . . . . . . . . . . 1,611,510 1,507,716 103,794
- ------------------------------------------------------------------------------------
Other operating expenses. . . . . . . . . 15,053,634 13,760,649 1,292,985
- ------------------------------------------------------------------------------------
Total Operating Income. . . . . . . . . . $ 9,914,667 $10,273,874 $ (359,207)
====================================================================================
Gross margin for the Delaware and Maryland distribution divisions was
essentially even with 2003 due to an increase in customers that offset the
negative impact of warmer temperatures. Delaware and Maryland experienced an
increase of 2,144 residential customers, or 6.7 percent, in the first half of
2004 compared to 2003. The increase was primarily the result of new housing
construction. The Company estimates that each residential customer added
contributes $372 annually to gross margin and requires an additional cost of
$104 for operations and maintenance expenses. This growth offset a temperature
decline of 10 percent (307 heating degree-days) for the first six months of 2004
compared to the same period of 2003. Management estimates that warmer
temperatures negatively impacted margins by $553,000. Temperatures were 4
percent colder (114 heating degree-days) than the 10-year average. The Company
estimates that, on an annual basis, each heating degree-day changes gross margin
on gas sales by $1,800.
Gross margin for the Florida distribution operations increased by $509,000, due
to an increase of 6 percent in the number of residential customers and growth in
the industrial gross margin. The natural gas transmission gross margin increased
by $424,000. Firm transportation services increased $293,000 due to firm
customers adding capacity. Additionally, interruptible transportation increased
$130,000 over 2003.
The gross margin increases were offset by higher operating expenses primarily
due to customer growth. Payroll, benefits and insurance costs were up.
Depreciation was also higher, reflecting the continued investment in plant
assets.
PROPANE
During the first six months of 2004, the propane segment experienced a decrease
of $2.1 million in operating income compared to the first half of 2003,
reflecting a gross margin decrease of $2.2 million that was partially offset by
a $123,000 decrease in operating expenses.
- ------------------------------------------------------------------------------------
FOR THE SIX MONTHS ENDED JUNE 30, . . . . 2004 2003 CHANGE
- ------------------------------------------------------------------------------------
Revenue . . . . . . . . . . . . . . . . . $24,214,662 $25,784,434 $(1,569,772)
Cost of sales . . . . . . . . . . . . . . 14,564,816 13,956,129 608,687
- ------------------------------------------------------------------------------------
Gross margin. . . . . . . . . . . . . . . 9,649,846 11,828,305 (2,178,459)
Other Operating Expenses:
Operations & maintenance. . . . . . . . 6,037,163 6,156,925 (119,762)
Depreciation & amortization . . . . . . 753,962 758,365 (4,403)
Other taxes . . . . . . . . . . . . . . 418,639 417,565 1,074
- ------------------------------------------------------------------------------------
Other operating expenses. . . . . . . . . 7,209,764 7,332,855 (123,091)
- ------------------------------------------------------------------------------------
Total Operating Income. . . . . . . . . . $ 2,440,082 $ 4,495,450 $(2,055,368)
====================================================================================
The Delmarva distribution operations experienced a drop in gross margin of $1.1
million, caused primarily by warmer temperatures. Retail volumes sold decreased
837,000 gallons, or 6 percent for the first six months of 2004 compared to 2003.
Management estimates that the negative impact of weather on gross margin was
$519,000. Temperatures in the first six months of 2004 were 10 percent warmer
than the first six months of 2003 (307 heating degree-days) but 4 percent colder
than the 10-year average (114 heating degree-days). The Company estimates that
on an annual basis, each heating degree-day generates gross margin of $1,691.
Additionally, there was a reduction caused by the closing of a poultry
processing plant and by an outbreak of avian influenza on the Delmarva
Peninsula. The Florida propane distribution operations experienced a decrease in
gross margin of $162,000. The decrease was due primarily to a one-time service
project that contributed $192,000 to the 2003 gross margin.
The Company's propane wholesale marketing operation experienced a decrease in
gross margin of $921,000 and a decrease of $284,000 in operating expenses,
leading to a reduction of $637,000 in operating income. Results for the second
quarter were consistent for 2004 and 2003; however, lower wholesale price
volatility reduced trading opportunities during the first quarter of 2004
compared to 2003.
ADVANCED INFORMATION SERVICES
The advanced information services business contributed operating income of
$332,000 for the first six months of 2004 compared to $227,000 for the first six
months of last year, an increase of $105,000.
- ------------------------------------------------------------------------------------
FOR THE SIX MONTHS ENDED JUNE 30, . . . . 2004 2003 CHANGE
- ------------------------------------------------------------------------------------
Revenue . . . . . . . . . . . . . . . . . $ 6,461,030 $ 6,486,595 $ (25,565)
Cost of sales . . . . . . . . . . . . . . 3,543,487 3,762,162 (218,675)
- ------------------------------------------------------------------------------------
Gross margin. . . . . . . . . . . . . . . 2,917,543 2,724,433 193,110
Other Operating Expenses:
Operations & maintenance. . . . . . . . 2,230,196 2,108,123 122,073
Depreciation & amortization . . . . . . 73,675 98,871 (25,196)
Other taxes . . . . . . . . . . . . . . 281,837 290,805 (8,968)
- ------------------------------------------------------------------------------------
Other operating expenses. . . . . . . . . 2,585,708 2,497,799 87,909
- ------------------------------------------------------------------------------------
Total Operating Income. . . . . . . . . . $ 331,835 $ 226,634 $ 105,201
====================================================================================
During the first half of 2004 revenues for the advanced information services
operations remained consistent with 2003; however, a reduction in the cost of
sales resulted in increased gross margins. The reduced cost of sales reflects a
staff reduction that reduced non-billable hours and a change in compensation
arrangements with the Company's consultants that reduced base pay and increased
incentive compensation that is based on billable hours worked. Operations
expenses increased as a result of increases in incentive compensation and
development work to enhance a software product.
OTHER BUSINESS OPERATIONS AND ELIMINATIONS
Other operations and eliminating entries contributed operating income of
$176,000 for the first six months of 2004 compared to income of $177,000 for the
first six months of last year. Other operations consist primarily of
subsidiaries that own real estate leased to other Company subsidiaries.
Eliminations are entries required to eliminate activities between business
segments from the consolidated results.
- ------------------------------------------------------------------------------------
FOR THE SIX MONTHS ENDED JUNE 30, . . . . 2004 2003 CHANGE
- ------------------------------------------------------------------------------------
Revenue . . . . . . . . . . . . . . . . . $ 338,132 $ 352,570 $ (14,438)
Cost of sales . . . . . . . . . . . . . . - - -
- ------------------------------------------------------------------------------------
Gross margin. . . . . . . . . . . . . . . 338,132 352,570 (14,438)
Other Operating Expenses:
Operations & maintenance. . . . . . . . 41,648 40,332 1,316
Depreciation & amortization . . . . . . 107,139 119,059 (11,920)
Other taxes . . . . . . . . . . . . . . 29,907 27,605 2,302
- ------------------------------------------------------------------------------------
Other operating expenses. . . . . . . . . 178,694 186,996 (8,302)
- ------------------------------------------------------------------------------------
Operating Income - Other. . . . . . . . . 159,438 165,574 (6,136)
Operating Income - Eliminations . . . . . 16,078 11,164 4,914
- ------------------------------------------------------------------------------------
Total Operating Income. . . . . . . . . . $ 175,516 $ 176,738 $ (1,222)
====================================================================================
DISCONTINUED OPERATIONS
In 2003, Chesapeake decided to exit the water services business. Six of seven
water dealerships were sold during 2003. The Company expects to dispose of the
remaining operation during 2004. Accordingly, the assets are recorded at their
fair value. The results of the water companies' operations for all periods
presented in the consolidated income statements, have been reclassified to
discontinued operations and shown net of tax. For the first six months of 2004
they experienced an operating loss of $15,000, compared to a loss of $163,000
for the same period in 2003.
INCOME TAXES
The Company's income tax cost for the six months ended June 30, 2004 was lower
than 2003 due to lower income. The federal income tax rate was consistent from
year to year.
INTEREST EXPENSE
Interest for the first half of 2004 decreased approximately $240,000, or 8
percent, over the same period in 2003. The decrease resulted from the scheduled
repayments of principal of long-term debt and lower short-term borrowing.
The average long-term debt balance for the first six months of 2004 was $72.0
million with an average interest rate of 7.2 percent, compared to $76.0 million
with an average interest rate of 7.2 percent for the same period in 2003. The
average short-term borrowing for the first half of 2004 was $298,000 compared to
$3.8 million for 2003.
ENVIRONMENTAL MATTERS
As more fully described in Note 3 to the Condensed Consolidated Financial
Statements, Chesapeake has completed its responsibilities related to one former
gas manufacturing plant site and is currently participating in the
investigation, assessment or remediation of two other former gas manufacturing
plant sites. The Company continues to work with federal and state environmental
agencies to assess the environmental impact and explore options for corrective
action at these sites. The Company believes that future costs associated with
these sites will be recoverable in rates or through sharing arrangements with,
or contributions by, other responsible parties. The Company is in discussions
with the Maryland Department of the Environment regarding a fourth former gas
manufacturing plant site located in Cambridge, Maryland. The outcome of this
matter cannot be determined at this time.
OTHER MATTERS
REGULATORY MATTERS
The Delaware, Maryland and Florida Public Service Commissions regulate the
Company's natural gas distribution operations, while its natural gas
transmission operation is regulated by the Federal Energy Regulatory Commission
("FERC").
On April 1, 2003, Eastern Shore filed an application before the FERC requesting
authorization for the following: (1) Phase I - upgrade of Parkesburg Metering &
Regulating Station; (2) Phase II - construct and operate 2.7 miles of 16-inch
mainline looping in Pennsylvania; and (3) Phase III - construct and operate 3.0
miles of 16-inch mainline looping and a pressure control station in Delaware.
The purpose of this construction is to enable Eastern Shore to provide
additional daily firm transportation capacity of 15,100 dekatherms on Eastern
Shore's system phased in over a three-year period commencing November 1, 2003.
Phase I of this expansion was completed and placed into service on November 1,
2003. Bids for Phase II construction were received and a contract awarded.
Construction for Phase II started in July 2004 with a projected completion and
in-service date of November 2004.
During October 2002, Eastern Shore filed an application with the FERC for
recovery of gas supply realignment costs associated with the implementation of
FERC Order No. 636. The costs totaled $196,000 (including interest). The FERC
has declined to review Eastern Shore's filing until it had first settled a
related matter with another transmission company. The other transmission company
submitted a filing on December 5, 2003. Eastern Shore will resubmit its
transition cost recovery filing immediately upon learning of the FERC's
approval.
On December 16, 2003, Eastern Shore filed with the FERC revised tariff sheets to
implement revisions to its Fuel Retention and Cash Out provisions. Fuel
Retention refers to the in-kind reimbursement of natural gas by Eastern Shore's
customers necessary to transport natural gas on Eastern Shore's pipeline. Such
Fuel Retention is designed to reimburse Eastern Shore for the Gas Required for
Operations ("GRO"), which consists of (1) gas used for compressor fuel and (2)
gas otherwise used, lost or unaccounted for. Cash Out refers to the month-end
process of resolving customer imbalances, that is, the difference, either
positive or negative, between natural gas received by Eastern Shore for a
customer's account and the natural gas delivered by Eastern Shore to that
customer. Rather than carry such in-kind imbalances forward on a continuing
basis, Eastern Shore's tariff permits it to buy or sell such imbalance gas to
its customers, thus effectively eliminating any imbalance created through the
month. These revisions went into effect on January 15, 2004.
The proposed tariff revisions permit Eastern Shore to incorporate its Deferred
Gas Required for Operations amounts into the calculation of its annual Fuel
Retention Percentage ("FRP") Adjustment and to implement a surcharge, effective
July 1 of each year, to recover cash-out amounts. Deferred Gas Required for
Operations is the difference between Eastern Shore's calculated fuel retention
using its approved FRP and its actual fuel requirements resulting from actual
operations in a given month. Such differences, either positive or negative, are
determined each month during the determination period and become a component of
Eastern Shore's prospective FRP. This calculation is effectively a "true-up" to
the fuel retained by Eastern Shore so it recovers no more and no less than its
actual fuel requirements. Fuel Retention Percentage Adjustment is the annual
establishment of Eastern Shore's new FRP to be effective July 1 of each year.
The percentage adjustment is simply the difference between the current FRP in
effect and the new FRP as proposed to be in effect. The FERC accepted Eastern
Shore's revised tariff sheets on January 15, 2004, subject to certain revisions
to clarify the tariff sheets. On January 30, 2004, Eastern Shore submitted the
revised tariff sheets.
Eastern Shore, on February 9, 2004, filed with the FERC a Plan and Schedule for
Standards of Conduct Compliance as directed by the FERC's Order No. 2004, issued
on November 25, 2003. Such Standards of Conduct govern the relationship between
transmissions providers such as Eastern Shore and their energy affiliates.
Order No. 2004 revises and conforms the current gas and electric standards by
broadening the definition of an energy affiliate covered by such standards of
conduct and applies them uniformly to natural gas pipeline and electric
transmission providers. Further, the standards will assure that transmission
providers cannot extend their market power over transmission to other energy
markets by giving their energy affiliates unduly preferential treatment. The
standards also help ensure transmission providers offer service to all customers
on a non-discriminatory basis. The deadline for compliance with the Standards of
Conduct is September 1, 2004. Numerous requests for clarifications and a
rehearing have been submitted to FERC by other parties. At this time, there has
been no change in the September 1, 2004 compliance deadline, Eastern Shore
continues to monitor this closely and will react appropriately to any future
rulings of the FERC.
Eastern Shore is also following the FERC's recent rulemaking pertaining to
creditworthiness standards for interstate natural gas pipelines. Eastern Shore
will evaluate its current tariff creditworthiness provisions and make any
necessary revisions to conform to the FERC's rules relating to such standards.
On May 27, 2004 the FERC accepted Eastern Shore's annual Interruptible
Transportation ("IT") Revenue Sharing report. Eastern Shore refunded $119,595 to
its customers in compliance with the IT revenue sharing provision detailed in
the Stipulation and Agreement in Docket No. RP02-34-000 currently in effect.
On May 28, 2004 the FERC accepted Eastern Shore's annual GRO filing authorizing
a new FRP to be made effective July 1, 2004. The new FRP is based on Eastern
Shore's actual GRO quantities attributable to system-wide operations for the
twelve-month period ending April 30, 2004 plus the balance of $548,203
accumulated in its Deferred GRO Account at March 31, 2004.
On June 22, 2004 the FERC accepted Eastern Shore's annual Cash Out filing
authorizing a new Cash Out surcharge 0f $0.0033 per dekatherm to be made
effective July 1, 2004. The new Cash Out surcharge is designed to recover the
under-recovered balance of $59,304 accumulated in its Cash Out account at March
31, 2004.
On November 19, 2001, the Florida division filed a petition with the Florida
Public Service Commission for approval of certain transportation cost recovery
rates. The Florida PSC approved the rates on January 24, 2002, which provide for
the recovery, over a two-year period, of the Florida division's actual and
projected non-recurring expenses incurred in the implementation of the
transportation provisions of the tariff as approved in a November 2000 rate
case. The Florida division filed a petition on February 4, 2004, to dispose of a
minor under-recovery of the actual expenses incurred to implement the tariff
provisions. The petition was approved by the Florida PSC at its March 23, 2004
agenda conference.
On November 5, 2002, the Florida PSC authorized a pilot program under which the
Florida division converted all remaining sales customers to transportation
service and exited the gas merchant function. Implementation of Phase One of the
Transitional Transportation Service ("TTS") program was completed in November
2002, and the Florida division is now actively providing the administrative
services as approved by the Florida PSC, including billing, collection service,
payment tracking, non-pay disconnects, various account reports and related
administrative activities.
On July 15, 2003, the Florida PSC approved a rate restructuring proposed by the
Florida division. The restructuring created three new low volume rate classes,
with customer charge levels that ensure that all customers receive benefits from
the TTS program.
On January 4, 2004, the Florida PSC authorized the Florida division to refund
the remaining balance in its over-recovered purchased gas costs account,
totaling $246,000, as a final step in its exit of the gas merchant function. The
refund was completed in March 2004.
On May 3, 2004, the Florida division filed its Conservation Program Cost
Recovery True-up for the calendar year 2003 with the Florida PSC. The Florida
PSC will audit the program's revenues and expenditures and issue a report on its
findings during the third quarter of 2004.
COMPETITION
The Company's natural gas operations compete with other forms of energy
including electricity, oil and propane. The principal competitive factors are
price, and to a lesser extent, accessibility. The Company's natural gas
distribution operations have several large volume industrial customers that have
the capacity to use fuel oil as an alternative to natural gas. When oil prices
decline, these interruptible customers convert to oil to satisfy their fuel
requirements. Lower levels in interruptible sales occur when oil prices are
lower relative to the price of natural gas. Oil prices, as well as the prices of
electricity and other fuels are subject to fluctuation for a variety of reasons;
therefore, future competitive conditions are not predictable. To address this
uncertainty, the Company uses flexible pricing arrangements on both the supply
and sales sides of its business to maximize sales volumes. As a result of the
transmission business' conversion to open access, this business has shifted from
providing competitive sales service to providing transportation and contract
storage services.
The Company's natural gas distribution operations located in Delaware, Maryland
and Florida offer transportation services to certain industrial customers. In
2001, the Florida operation extended transportation service to commercial
customers and, in 2002, to residential customers. With transportation service
now available on the Company's distribution systems, the Company is competing
with third party suppliers to sell gas to industrial customers. As it relates to
transportation services, the Company's competitors include the interstate
transmission company if the distribution customer is located close enough to the
transmission company's pipeline to make a connection economically feasible. The
customers at risk are usually large volume commercial and industrial customers
with the financial resources and capability to bypass the distribution
operations in this manner. In certain situations, the distribution operations
may adjust services and rates for these customers to retain their business. The
Company expects to continue to expand the availability of transportation service
to additional classes of distribution customers in the future. The Company
established a natural gas sales and supply operation in Florida in 1994 to
compete for customers eligible for transportation services.
The Company's propane distribution operations compete with several other propane
distributors in their service territories, primarily on the basis of service and
price, emphasizing reliability of service and responsiveness. Competition is
generally from local outlets of national distribution companies and local
businesses, because distributors located in close proximity to customers incur
lower costs of providing service. Propane competes primarily with electricity
and heating oil as energy sources. Since natural gas has historically been less
expensive than propane, propane is generally not distributed in geographic areas
serviced by natural gas pipeline or distribution systems.
The propane wholesale marketing operation competes against various marketers,
many of which have significantly greater resources and are able to obtain price
or volumetric advantages.
The advanced information services business faces significant competition from a
number of larger competitors having substantially greater resources available to
them than does the Company. In addition, changes in the advanced information
services business are occurring rapidly, which could adversely impact the
markets for the products and services offered by these businesses. This segment
competes on the basis of technological expertise, reputation and price.
RECENT PRONOUNCEMENTS
On January 12, 2004, the Financial Accounting Standards Board ("FASB") released
FASB Staff Position No. Statement of Financial Accounting Standards ("SFAS")
106-1 "Accounting and Disclosure Requirements Related to the Medicare
Prescription Drug, Improvement and Modernization Act of 2003" ("the Act"). On
May 19, 2004, the FASB released FASB Staff Position No. SFAS 106-2 which
superseded SFAS 106-1. SFAS No. 106-2 provides guidance on the accounting for
the effects of the Act and requires certain disclosures regarding the effect of
the federal subsidy provided by the Act. It is effective for the first interim
or annual period beginning after June 15, 2004. Adoption of SFAS No. 106-2 is
not expected to have a material impact on the Company's post-retirement benefit
obligation.
The Emerging Issues Task Force ("EITF") of the FASB issued EITF No. 03-6 on
February 9, 2004. It requires that earnings used to calculate earnings per share
be allocated between common shareholders and other securities holders based on
their respective rights to receive dividends. This requirement was effective for
the second quarter of 2004. It had no impact on the Company's calculation of
earnings per share.
INFLATION
Inflation affects the cost of labor, products and services required for
operations, maintenance and capital improvements. While the impact of inflation
has remained low in recent years, natural gas and propane prices are subject to
rapid fluctuations. Fluctuations in natural gas prices are passed on to
customers through the gas cost recovery mechanism in the Company's tariffs. To
help cope with the effects of inflation on its capital investments and returns,
the Company seeks rate relief from regulatory commissions for regulated
operations while monitoring the returns of its unregulated business operations.
To compensate for fluctuations in propane gas prices, the Company adjusts its
propane selling prices to the extent allowed by the market.
CAUTIONARY STATEMENT
Chesapeake has made statements in this report that are considered to be
forward-looking statements. These statements are not matters of historical fact.
Sometimes they contain words such as "believes," "expects," "intends," "plans,"
"will," or "may," and other similar words of a predictive nature. These
statements relate to matters such as the potential sale of the water businesses,
customer growth, changes in revenues or gross margins, capital expenditures,
environmental remediation costs, regulatory approvals, market risks associated
with the Company's propane wholesale marketing operation, competition, inflation
and other matters. It is important to understand that these forward-looking
statements are not guarantees, but are subject to certain risks and
uncertainties and other important factors that could cause actual results to
differ materially from those in the forward-looking statements. These factors
include, among other things:
o the temperature sensitivity of the natural gas and propane businesses;
o the effect of spot, forward and futures market prices on the Company's
distribution, wholesale marketing and energy trading businesses;
o the effects of competition on the Company's unregulated and regulated
businesses;
o the effect of changes in federal, state or local regulatory and tax
requirements, including deregulation;
o the effect of accounting changes;
o the effect of compliance with environmental regulations or the
remediation of environmental damage;
o the effects of general economic conditions on the Company and its
customers;
o the ability of the Company's new and planned facilities and
acquisitions to generate expected revenues; and
o the Company's ability to obtain the rate relief and cost recovery
requested from utility regulators and the timing of the requested
regulatory actions.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market risk represents the potential loss arising from adverse changes in market
rates and prices. Long-term debt is subject to potential losses based on the
change in interest rates. The Company's long-term debt consists primarily of
fixed rate senior notes, first mortgage bonds and convertible debentures, none
of which was issued for trading purposes. The carrying value of long-term debt
at June 30, 2004 was $71.5 million, with a fair value of $76.8 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. However, at June 30, 2004 the Company did not have any hedging
contracts outstanding.
The Company's propane wholesale marketing operation is a party to natural gas
liquids ("NGL") forward contracts, primarily propane contracts, with various
third parties. These contracts require that the propane wholesale marketing
operation purchase or sell NGL at a fixed price at fixed future dates. At
expiration, the contracts are settled by the delivery of NGL to the Company or
the counter party or booking out the transaction. (Booking out is a procedure
for financially settling a contract in lieu of the physical delivery of energy.)
The propane wholesale marketing operation also enters into futures contracts
that are traded on the New York Mercantile Exchange. In certain cases, the
futures contracts are settled by the payment or receipt of a net amount equal to
the difference between the current market price of the futures contract and the
original contract price; however, they may also be settled for physical receipt
or delivery of propane.
The forward and futures contracts are entered into for trading and wholesale
marketing purposes. The propane wholesale marketing business is subject to
commodity price risk on its open positions to the extent that market prices for
NGL deviate from fixed contract settlement prices. Market risk associated with
the trading of futures and forward contracts are monitored daily for compliance
with the Company's Risk Management Policy, which includes volumetric limits for
open positions. To manage exposures to changing market prices, open positions
are marked up or down to market prices and reviewed by oversight officials on a
daily basis. Additionally, the Risk Management Committee reviews periodic
reports on market and the credit risk of counter-parties, approves any
exceptions to the Risk Management Policy (within limits established by the Board
of Directors) and authorizes the use of any new types of contracts. Quantitative
information on forward and futures contracts at June 30, 2004 is presented in
the following table. All of the contracts mature within twelve months.
- ------------------------------------------------------------------------
QUANTITY ESTIMATED WEIGHTED AVERAGE
AT JUNE 30, 2004 IN GALLONS MARKET PRICES CONTRACT PRICES
- ------------------------------------------------------------------------
FORWARD CONTRACTS
Sale. . . . . . . . . 11,592,000 $0.6750 - $0.6925 $0.6592
Purchase. . . . . . . 7,938,000 $0.6750 - $0.6925 $0.6757
FUTURES CONTRACTS
Sale. . . . . . . . . 588,000 $0.6750 - $0.6925 $0.6798
- ------------------------------------------------------------------------
Estimated market prices and weighted average contract prices are
in dollars per gallon.
ITEM 4. CONTROLS AND PROCEDURES
EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES
The Chief Executive Officer and Chief Financial Officer of the Company, with the
participation of other Company officials, have evaluated the Company's
"disclosure controls and procedures" (as such term is defined under Rule
13a-15(e) and 15d-15(e) promulgated under the Securities Exchange Act of 1934,
as amended) as of June 30, 2004. Based upon their evaluation, the Chief
Executive Officer and Chief Financial Officer concluded that the Company's
disclosure controls and procedures are effective.
CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING
During the quarter ended June 30, 2004, there was no change in the Company's
internal control over financial reporting that has materially affected, or is
reasonably likely to materially affect, the Company's internal control over
financial reporting.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company is involved in certain legal actions and claims arising in
the normal course of business. The Company is also involved in certain
legal and administrative proceedings before various government
agencies concerning rates. In the opinion of management, the ultimate
disposition of these proceedings and claims will not have a material
effect on the consolidated financial position, results of operations
or cash flows of the Company.
ITEM 2. CHANGES IN SECURITIES, USE OF PROCEEDS AND ISSUER PURCHASES OF
EQUITY SECURITIES
The table below sets forth information with respect to shares of
common stock repurchased by the Company during the three months ended
June 30, 2004.
- ----------------------------------------------------------------------------------------------------------------
TOTAL NUMBER MAXIMUM NUMBER
TOTAL OF SHARES OF SHARES
NUMBER AVERAGE PURCHASED AS PART OF THAT MAY YET BE
OF SHARES PRICE PAID PUBLICLY ANNOUNCED PURCHASED UNDER THE
PERIOD PURCHASED PER SHARE PLANS OR PROGRAMS (2) PLANS OR PROGRAMS (2)
- ----------------------------------------------------------------------------------------------------------------
April 1, 2004
through April 30, 2004 (1) . 5,882 $ 25.4861 0 0
May 1, 2004
through May 31, 2004 (3) . . 0 $ 0.0000 0 0
June 1, 2004
through June 30, 2004. . . . 0 $ 0.0000 0 0
- ----------------------------------------------------------------------------------------------------------------
Total. . . . . . . . . . . . . . 5,882 $ 25.4861 0 0
================================================================================================================
(1) Chesapeake purchased 5,850 shares of stock on the open market to use for
the Board of Directors' Stock Compensation Plan. The stock was distributed
in May, 2004. Additionally, 32 shares were purchased on the open market and
were added to shares held in a Rabbi Trust to adjust the balance to the
contractual value.
(2) Chesapeake has no publicly announced plans or programs to repurchase its
shares.
(3) The Company maintains a Rabbi Trust ("the Trust") that holds Chesapeake
Utilities Corporation common stock, pursuant to a deferred compensation
plan. The stock in the Trust is recorded as treasury stock. There is an
offsetting liability that is also recorded in the equity section of the
balance sheet. In prior periods, these accounts netted to a zero balance.
In May 2004, there was a distribution of shares from the Trust. As allowed
by the deferred compensation plan, the recipient elected to have the
Company withhold shares in an amount equivalent to the participant's share
of payroll taxes. The Company remitted cash in payment of the participant's
payroll taxes and continues to hold 9,353 shares in the Rabbi Trust, that
are not currently offset by a deferred compensation liability. The Company
has the option of canceling these shares or using them to satisfy future
deferred compensation commitments.
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 6,
2004 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 II Directors for three-year terms
ending in 2007, and until their successors are elected and
qualified.
- -----------------------------------------------------------
SHARES NOT
NAME VOTES FOR VOTES WITHHELD VOTED
- -----------------------------------------------------------
Ralph J. Adkins 5,098,137 101,222 508,733
Richard Bernstein 5,108,720 90,639 508,733
J. Peter Martin 5,069,637 129,722 508,733
- -----------------------------------------------------------
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 9,
2004
- Exhibit 31.2 - Certificate of Chief Financial Officer of
Chesapeake Utilities Corporation pursuant to Rule 13a-14(a)
under the Securities Exchange Act of 1934, dated August 9,
2004
- Exhibit 32.1 - Certificate of Chief Executive Officer of
Chesapeake Utilities Corporation pursuant to 18 U.S.C.
Section 1350, dated August 9, 2004
- Exhibit 32.2 - Certificate of Chief Financial Officer of
Chesapeake Utilities Corporation pursuant to 18 U.S.C.
Section 1350, dated August 9, 2004
(b) Reports on Form 8-K:
May 4, 2004 furnishing the Company's earnings press release for
the quarter ended March 31, 2004 (Items 7 and 12).
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Chesapeake Utilities Corporation
/s/ Michael P. McMasters
- ---------------------------
Michael P. McMasters
Vice President and Chief Financial Officer
Date: August 9, 2004