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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended December 31, 1997
Commission File Number 001-11590
CHESAPEAKE UTILITIES CORPORATION
(Exact name of registrant as specified in its charter)
State of Delaware 51-0064146
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
909 Silver Lake Boulevard, Dover, Delaware 19904
(Address of principal executive offices) (Zip Code)
Registrants telephone number, including area code: 302-734-6799
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
-----------------------------------------
Common Stock - par value per share $.4867
Name of each exchange on which registered
-----------------------------------------
New York Stock Exchange, Inc.
Securities registered pursuant to Section 12(g) of the Act:
8.25% Convertible Debentures Due 2014
-------------------------------------
(Title of class)
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 if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of registrants knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendments to this Form 10-K. [X]
As of March 20, 1998, 4,543,695 shares of common stock were outstanding.
The aggregate market value of the common shares held by non-affiliates of
Chesapeake Utilities Corporation, based on the last trade price on March 20,
1997, as reported by the New York Stock Exchange, was approximately $67
million.
DOCUMENTS INCORPORATED BY REFERENCE
DOCUMENTS PART OF FORM 10-K
Definitive Proxy Statement Part III
dated March 30, 1998
CHESAPEAKE UTILITIES CORPORATION
FORM 10-K
Year Ended December 31, 1997
TABLE OF CONTENTS
PART I
Page
----
Item 1. Business ...................................................... 1
Item 2. Properties ................................................... 11
Item 3. Legal Proceedings ............................................ 12
Item 4. Submission of Matters to a Vote of Security Holders .......... 15
Item 10.Executive Officers of the Registrant ......................... 15
PART II
Item 5. Market for Registrants Common Stock and Related
Security Holder Matters ...................................... 16
Item 6. Selected Financial Data ...................................... 17
Item 7. Managements Discussion and Analysis of Financial
Condition and Results of Operations .......................... 18
Item 8. Financial Statements and Supplementary Data .................. 25
Item 9. Changes In and Disagreements with Accountants
on Accounting and Financial Disclosure ....................... 45
PART III
Item 10.Directors and Executive Officers of the Registrant ........... 45
Item 11.Executive Compensation ....................................... 45
Item 12.Security Ownership of Certain Beneficial
Owners and Management ........................................ 45
Item 13.Certain Relationships and Related Transactions ............... 45
PART IV
Item 14.Financial Statements, Financial Statement Schedules,
Exhibits and Reports on Form 8-K ............................. 45
Signatures ........................................................... 49
PART I
Item 1. Business
(a) General Development of Business
Chesapeake Utilities Corporation ("Chesapeake" or "the Company") is a
diversified utility company engaged in natural gas distribution and
transmission, propane distribution and advanced information services.
Chesapeakes three natural gas distribution divisions serve approximately
35,800 residential, commercial and industrial customers in southern Delaware,
Marylands Eastern Shore and Central Florida. The Companys natural gas
transmission subsidiary, Eastern Shore Natural Gas Company ("Eastern Shore"),
operates a 271-mile interstate pipeline system that transports gas from
various points in Pennsylvania to the Companys Delaware and Maryland
distribution divisions, as well as to other utilities and industrial
customers in Delaware and on the Eastern Shore of Maryland. The Companys
propane segment serves approximately 34,000 customers in southern Delaware
and on the Eastern Shore of Maryland and Virginia. The advanced information
services segment provides software services and products to a wide variety of
customers and clients.
(b) Financial Information about Industry Segments
Financial information by business segment is included in Item 7 under the
heading Notes to Consolidated Financial Statements.
(c) Narrative Description of Business
The Company is engaged in four primary business activities: natural gas
transmission, natural gas distribution, propane distribution and advanced
information services. In addition to the four primary groups, Chesapeake has
three subsidiaries engaged in other service related businesses.
(i) (a) Natural Gas Transmission
Eastern Shore, the Companys wholly owned transmission subsidiary,
operates an interstate natural gas transportation and provides contract
storage services for affiliated and non-affiliated companies through an
integrated gas pipeline extending from southeastern Pennsylvania to
Delaware and the Eastern Shore of Maryland. During 1997, Eastern Shore
implemented open access transportation services. Eastern Shore now
provides transportation services, contract storage services as well as
purchasing and selling small amounts of gas for system balancing purposes
("swing gas"). Eastern Shores rates are subject to regulation by the
Federal Energy Regulatory Commission ("FERC").
Adequacy of Resources
With the implementation of open access effective November 1, 1997, Eastern
Shore released, through the permanent release mechanism of its upstream
service providers tariffs, various levels of firm transportation capacity
and contract storage service to customers. Eastern Shore retained
contracts with Transcontinental Gas Pipe Line Corporation ("Transco") for
4,916 thousand cubic feet ("Mcf") firm transportation capacity, expiring
in 2005, and three firm storage services providing peak day entitlements
of 7,046 Mcf.
Eastern Shore also retained contracts with Columbia Gas Transportation
("Columbia") for services, including: firm transportation capacity of 869
Mcf per day, which expires in 2018; storage service providing a peak day
entitlement of 1,111 Mcf and total capacity of 53,738 Mcf, expiring in
2004; and firm storage service providing peak day entitlements of 563 Mcf
and a total capacity of 50,686 Mcf, which expires in 2018. Eastern Shore
retained the firm transportation capacity to provide swing transportation
service to a limited number of customers that requested this service.
Prior to open access, Eastern Shore had firm contracts with three
interstate pipelines for transportation and storage services coupled with
firm contracts for natural gas supply with five suppliers providing a
maximum firm daily capacity of 20,469 Mcf.
Competition
Under this open access environment, interstate pipeline companies have
unbundled the traditional components of their service -- gas gathering,
transportation and storage -- from the sale of the commodity. Pipelines
that choose to be merchants of gas must form separate marketing operations
independent of their pipeline operations. Hence, gas marketers have
developed as a viable option for many companies because they are providing
expertise in gas purchasing along with collective purchasing capabilities
which, when combined, may reduce end-user cost. Additional discussion on
competition is included in Item 7 under the heading "Managements
Discussion and Analysis of Financial Condition and Results of Operations".
Rates and Regulation
General. Eastern Shore is subject to regulation by the FERC as an
interstate pipeline. The FERC regulates the provision of service, terms
and conditions of service, and the rates and fees Eastern Shore can charge
to its transportation customers. In addition, the FERC regulates the rates
Eastern Shore is charged for transportation and transmission line capacity
and services provided by Transco and Columbia.
Regulatory Proceedings
Delaware City Compressor Station Filing. In December 1995, Eastern Shore
filed an application before the FERC pursuant to Sections 7(b) and (c) of
the Natural Gas Act for a certificate of public convenience and necessity
authorizing Eastern Shore to: (1) construct and operate a 2,170 horsepower
compressor station in Delaware City, New Castle County, Delaware on a
portion of its existing pipeline system known as the "Hockessin Line",
such new station to be known as the "Delaware City Compressor Station";
(2) construct and operate slightly less than one mile of 16-inch pipeline
in Delaware City, New Castle County, Delaware to tie the suction side of
the proposed Delaware City Compressor Station into the Hockessin Line; and
(3) increase the maximum allowable operating pressure from 500 psig to 590
psig on 28.7 miles of Eastern Shores pipeline from Eastern Shores
existing Bridgeville Compressor Station in Bridgeville, Sussex County,
Delaware to its terminus in Salisbury, Wicomico County, Maryland.
In September 1996 the FERC issued its Final Order, which: (1) authorized
Eastern Shore to construct and operate the facilities requested in its
application; (2) authorized Eastern Shore to roll-in the cost of the
facilities into its existing rates if the revenues from the increase in
services exceed the cost associated with the expansion portion of the
project; (3) denied Eastern Shore the authority to increase the level of
sales and storage service it provides its customers until it completes its
restructuring in its open access proceeding; and (4) authorized Eastern
Shore to abandon the 100 Mcf per day of firm sale service, to one of its
direct sale customers. The compressor facility and associated piping were
needed to stabilize capacity on Eastern Shores system as a result of
steadily declining inlet pressures at the Hockessin interconnect with
Transcontinental Gas Pipe Line Corporation. Construction of the facilities
started during the second half of 1996 and was completed during the first
quarter of 1997.
Rate Case Filing. In October 1996 Eastern Shore filed for a general rate
increase with the FERC. The filing proposed an increase in Eastern Shores
jurisdictional rates that would generate additional annual operating
revenue of approximately $1.4 million. Eastern Shore also stated in the
filing that it intended to use the cost-of-service submitted in the
general rate increase filing to develop rates in the pending Open Access
Docket. In September 1997, the FERC approved a rate increase of $1.2
million.
Open Access Filing. In December 1995, Eastern Shore filed its abbreviated
application for a blanket certificate of public convenience and necessity
authorizing the transportation of natural gas on behalf of others. Eastern
Shore proposed to unbundle the sales and storage services it had provided.
Customers who had previously received firm sales and storage services on
Eastern Shore (the "Converting Customers") would receive entitlements to
firm transportation service on Eastern Shores pipeline in a quantity
equivalent to their existing service rights. Eastern Shore proposed to
retain some of its pipeline entitlements and storage capacity for
operational issues and to facilitate "no-notice" (no prior notification
required to receive service) transportation service on its pipeline
system. Eastern Shore would release or assign to the remaining Converting
Customers the firm transportation capacity, including contract storage, it
held on its upstream pipelines so that the Converting Customers would be
able to become direct customers of such upstream pipelines. Converting
Customers who previously received bundled sales service having no-notice
characteristics would have the right to elect no-notice firm
transportation service.
In connection with the rate increase settlement, the issues pertaining to
Eastern Shore operating as an open access pipeline were also settled in
September 1997, with open access implementation occurring on November 1, 1997.
(i) (b) Natural Gas Distribution
Chesapeake distributes natural gas to approximately 35,800 residential,
commercial and industrial customers in southern Delaware, the Salisbury
and Cambridge, Maryland areas on Marylands Eastern Shore, and Central
Florida. These activities are conducted through three utility divisions,
one division in Delaware, another in Maryland and a third division in
Florida. In 1993, the Company started natural gas supply management
services in the state of Florida under the name of Peninsula Energy
Services Company ("PESCO").
Delaware and Maryland. The Delaware and Maryland divisions serve
approximately 29,950 customers, of which approximately 26,860 are
residential and commercial customers purchasing gas primarily for heating
purposes. Annually, residential and commercial customers account for
approximately 69% of the volume delivered by the divisions, and 79% of the
divisions revenue. The divisions industrial customers purchase gas,
primarily on an interruptible basis, for a variety of manufacturing,
agricultural and other uses. Most of Chesapeakes customer growth in these
divisions comes from new residential construction using gas heating
equipment.
Florida. The Florida division distributes natural gas to approximately
8,748 residential and commercial and 84 industrial customers in Polk,
Osceola and Hillsborough Counties. Currently 42 of the divisions
industrial customers, which purchase and transport gas on a firm and
interruptible basis, account for approximately 90% of the volume delivered
by the Florida division and 60% of the divisions annual natural gas and
transportation revenues. These customers are primarily engaged in the
citrus and phosphate industries and electric cogeneration. The Companys
Florida division also provides natural gas supply management services to
compete in the open access environment. Currently, twenty-one customers
receive such services, which generated gross margin of $70,000 in 1997.
Adequacy of Resources
General. Chesapeakes Delaware and Maryland utility divisions ("Delaware",
"Maryland" or "the Divisions") have firm and interruptible contracts with
four (4) interstate "open access" pipelines. The Divisions are directly
interconnected with Eastern Shore and services upstream of Eastern Shore
are contracted with Transco, Columbia, and Columbia Gulf Transmission
Company ("Gulf").
Delaware. Delawares contracts with Transco include: (a) firm
transportation capacity of 8,663 dekatherms ("Dt") per day, which expires
in 2005; (b) firm transportation capacity of 311 Dt per day for December
through February, expiring in 2006; and (c) firm storage service,
providing a total capacity of 142,830 Dt, which expires in 1998.
Delawares contracts with Columbia include: (a) firm transportation
capacity of 852 Dt per day, which expires in 2004; (b) firm transportation
capacity of 1,132 Dt per day, which expires in 2017; (c) firm storage
service, providing a peak day entitlement of 6,193 Dt and a total capacity
of 298,195 Dt, which expires in 2004; and (d) firm storage service
providing a peak day entitlement of 635 Dt and a total capacity of 57,139
Dt, expring in 2017. Delawares contracts with Columbia for storage
related transportation provide quantities that are equivalent to the peak
day entitlement for the period of October through March and are equivalent
to fifty percent (50%) of the peak day entitlement for the period of April
through September. The terms of the storage related transportation
contracts mirror the storage services that they support.
Delawares contract with Gulf, which expires in 2004, provides firm
transportation capacity of 868 Dt per day for the period November through
March and 798 Dt per day for the period April through October.
Delawares contracts with Eastern Shore include: (a) firm transportation
capacity of 23,494 Dt per day for the period December through February,
22,272 Dt per day for the months of November, March and April, and 13,196
Dt per day for the period May through October, with various expiration
dates ranging from 2004 to 2017; (b) firm storage capacity under Eastern
Shores Rate Schedule GSS providing a peak day entitlement of 2,655 Dt and
a total capacity of 131,370 Dt, which expires in 2013; (c) firm storage
capacity under Eastern Shores Rate Schedule LSS providing a peak day
entitlement of 580 Dt and a total capacity of 29,000 Dt, which expires in
2013; and (d) firm storage capacity under Eastern Shores Rate Schedule
LGA providing a peak day entitlement of 911 Dt and a total capacity of
5,708 Dt, which expires in 2006. Delawares firm transportation contracts
with Eastern Shore also include Eastern Shores provision of swing
transportation service. This service includes: (a) firm transportation
capacity of 1,846 Dt per day on Transcos pipeline system, retained by
Eastern Shore, in addition to Delawares Transco capacity referenced
earlier and (b) an interruptible storage service under Transcos Rate
Schedule ESS that supports a swing supply service provided under Transcos
Rate Schedule FS.
Delaware currently has contracts for the purchase of firm natural gas
suppy with five (5) suppliers. These contracts provide the availability of
a maximum firm daily entitlement of 10,958 Dt and the supplies are
transported by Transco, Columbia, Gulf and Eastern Shore under Delawares
transportation contracts. The gas purchase contracts have various
expiration dates.
Maryland. Marylands contracts with Transco include: (a) firm
transportation capacity of 4,738 Dt per day, which expires in 2005; (b)
firm transportation capacity of 155 Dt per day for December through
February, expiring in 2006; and (c) firm storage service providing a total
capacity of 33,120 Dt, which expires in 1998.
Marylands contracts with Columbia include: (a) firm transportation
capacity of 442 Dt per day, which expires in 2004; (b) firm transportation
capacity of 908 Dt per day, which expires in 2017; (c) firm storage
service providing a peak day entitlement of 3,142 Dt and a total capacity
of 154,756 Dt, which expires in 2004; and (d) firm storage service
providing a peak day entitlement of 521 Dt and a total capacity of 46,881
Dt, which expires in 2017. Marylands contracts with Columbia for storage
related transportation provide quantities that are equivalent to the peak
day entitlement for the period October through March and are equivalent to
fifty percent (50%) of the peak day entitlement for the period April
through September. The terms of the storage related transportation
contracts mirror the storage services that they support.
Marylands contract with Gulf, which expires in 2004, provides firm
transportation capacity of 590 Dt per day for the period November through
March and 543 Dt per day for the period April through October.
Marylands contracts with Eastern Shore include: (a) firm transportation
capacity of 13,028 Dt per day for the period December through February,
12,304 Dt per day for the months of November. March and April, and 7,743
Dt per day for the period May through October; (b) firm storage capacity
under Eastern Shores Rate Schedule GSS providing a peak day entitlement
of 1,428 Dt and a total capacity of 70,665 Dt, which expires in 2013; (c)
firm storage capacity under Eastern Shores Rate Schedule LSS providing a
peak day entitlement of 309 Dt and a total capacity of 15,500 Dt, which
expires in 2013; and (d) firm storage capacity under Eastern Shores Rate
Schedule LGA providing a peak day entitlement of 569 Dt and a total
capacity of 3,560 Dt, which expires in 2006. Marylands firm
transportation contracts with Eastern Shore also include Eastern Shores
provision of swing transportation service. This service includes: (a) firm
transportation capacity of 969 Dt per day on Transcos pipeline system,
retained by Eastern Shore, in addition to Marylands Transco capacity
referenced earlier and (b) an interruptible storage service under
Transcos Rate Schedule ESS that supports a swing supply service provided
under Transcos Rate Schedule FS.
Maryland currently has contracts for the purchase of firm natural gas
supply with five (5) suppliers. These contracts provide the availability
of a maximum firm daily entitlement of 6,243 Dt and the supplies are
transported by Transco, Columbia, Gulf and Eastern Shore under Marylands
transportation contracts. The gas purchase contracts have various
expiration dates. The Divisions use their firm supply sources to meet a
significant percentage of their projected demand requirements. In order to
meet the difference between firm supply and firm demand, Delaware and
Maryland obtain gas supply on the "spot market" from various other
suppliers that is transported by the upstream pipelines and delivered to
the Divisions interconnects with Eastern Shore as needed. The Company
believes that Delaware and Marylands available firm and "spot market"
supply is ample to meet the anticipated needs of their customers.
Florida. The Florida division receives transportation service from Florida
Gas Transmission Company ("FGT"), a major interstate pipeline. Chesapeake
has contracts with FGT for: (a) daily firm transportation capacity of
20,523 Dt in May through September, 27,105 Dt in October, and 26,919 Dt in
November through April under FGTs firm transportation service (FTS-1)
rate schedule; (b) daily firm transportation capacity of 5,100 Dt in May
through October, and 8,100 Dt in November through April under FGTs firm
transportation service (FTS-2) rate schedule; and (c) daily interruptible
transportation capacity of 20,000 Dt under FGTs interruptible
transportation services (ITS-1) rate schedule. The firm transportation
contract (FTS-1) expires on August 1, 2000 with the Company retaining a
unilateral right to extend the term for an additional ten years. After the
expiration of the primary or secondary term, Chesapeake has the right to
first refuse to match the terms of any competing bids for the capacity.
The firm transportation contract (FTS-2) expires on March 1, 2015. The
interruptible transportation contract is effective until August 1, 2010
and month to month thereafter unless canceled by either party with thirty
days notice.
The Florida division currently receives its gas supply from various
suppliers. If needed, some supply is bought on the spot market; however,
the majority is bought under the terms of two firm supply contacts with
Natural Gas Clearinghouse and LG&E Energy Marketing. Availability of gas
supply to the Florida division is also expected to be adequate under
existing arrangements.
Competition
Competition with Alternative Fuels. Historically, the Companys natural
gas distribution divisions have successfully competed with other forms of
energy such as electricity, oil and propane. The principal consideration
in the competition between the Company and suppliers of other sources of
energy is price and, to a lesser extent, accessibility. All of the
Companys divisions have the capability of adjusting their interruptible
rates to compete with alternative fuels.
The divisions 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 remain depressed relative to the price of natural gas. However, oil
prices as well as the prices of other fuels are subject to change at any
time for a variety of reasons; therefore, there is always uncertainty in
the continuing competition among natural gas and other fuels. In order to
address this uncertainty, the Company uses flexible pricing arrangements
on both the supply and sales side of its business to maximize sales
volumes.
To a lesser extent than price, availability of equipment and operational
efficiency are also factors in competition among fuels, primarily in
residential and commercial settings. Heating, water heating and other
domestic or commercial equipment is generally designed for a particular
energy source, and especially with respect to heating equipment, the cost
of conversion is a disincentive for individuals and businesses to change
their energy source.
Competition within the Natural Gas Industry. FERC Order 636 enables all
natural gas suppliers to compete for customers on an equal footing. Under
this open access environment, interstate pipeline companies have unbundled
the traditional components of their service - gas gathering,
transportation and storage from the sale of the commodity. If they choose
to be a merchant of gas, they must form a separate marketing operation
independent of their pipeline operations. Hence, gas marketers have
developed as a viable option for many companies because they are providing
expertise in gas purchasing along with collective purchasing capabilities
which, when combined, may reduce end-user cost.
Also resulting from an open access environment, the distribution division
can be in competition with the interstate transmission company if the
distribution customer is located close to the transmission companys
pipeline. The customers at risk are usually large volume commercial and
industrial customers with the financial resources and capability to bypass
the distribution division. In certain situations the distribution
divisions may adjust rates and serves for these customers to retain their
business.
Rates and Regulation
General. Chesapeakes natural gas distribution divisions are subject to
regulation by the Delaware, Maryland and Florida Public Service
Commissions with respect to various aspects of the Companys business,
including the rates for sales to all of their customers in each
jurisdiction. All of Chesapeakes firm distribution rates are subject to
purchased gas adjustment clauses, which match revenues with gas costs and
normally allow eventual full recovery of gas costs. Adjustments under
these clauses require periodic filings and hearings with the relevant
regulatory authority, but do not require a general rate proceeding. Rates
on interruptible sales by the Florida division are also subject to
purchased gas adjustment clauses.
Management monitors the rate of return in each jurisdiction in order to
ensure the timely filing of rate adjustment applications.
Regulatory Proceedings
Maryland. In July 1995, Chesapeakes Maryland division filed an
application with the Maryland Public Service Commission ("MPSC")
requesting a rate increase of $1,426,711 or 17.09%. The two largest
components of the increase were attributable to environmental costs and a
new customer information system, implemented in 1995.
On November 30, 1995, the MPSC issued an order approving a settlement
proposal of a $975,000 increase in annual base rates effective for gas
provided on or after December 1, 1995. As required in the settlement of
the rate case, the Company filed a cost of service study with the MPSC in
June 1996. The purpose of a cost of service study was to allocate revenue
among customer or rate classifications. The filing, which included
proposals for restructuring sales services that more closely reflect the
cost of serving commercial and industrial customers, the unbundling of gas
costs from distribution system costs, revisions to sharing of
interruptible margins between firm ratepayers and the Company and new
services that would allow customers using more than 30,000 Ccf of gas per
year to purchase gas from suppliers other than the Company.
After negotiations with MPSC staff and other interested parties, a
settlement was reached on most sales service issues and the Commission
approved a proposed order in March 1997. The settlement includes: (1)
class revenue requirements and restructured sales services which provide
for separate firm commercial and industrial rate schedules for general
service, medium volume, large volume and high load factor customer groups;
(2) unbundling of gas costs from distribution charges; (3) a new gas cost
recovery mechanism, which utilizes a projected period under which the
fixed cost portion of the gas rate will be forecasted on an annual basis
and the commodity cost portion of the gas rate will be estimated
quarterly, based on projected market prices; and (4) interruptible margins
will continue to be shared, 90% to customers and 10% to the Company, but
distribution costs incurred for incremental load additions can be
recovered with carrying charges utilizing 100% of the incremental margin
if the payback period is within three years.
At the request of MPSC staff, consideration of the new transportation
services were postponed until Eastern Shores open access filing was
settled with the FERC.
Delaware. In April 1995, Chesapeakes Delaware division filed an
application with the Delaware Public Service Commission ("DPSC")
requesting a rate increase of $2,751,000 or 14% over current rates. The
largest component, one-third of the total requested increase, was
attributable to projected costs associated with the remediation proposed
by the Environmental Protection Agency ("EPA") of the site of a former
coal gas manufacturing plant operated in Dover, Delaware. The Company and
the DPSC agreed to separate the environmental recovery from the rate
increase so each could be addressed individually. In December 1995, the
DPSC approved an order authorizing a $900,000 increase to base rates
effective January 1,1996.
In December 1995, the DPSC approved a recovery of environmental costs
associated with the Dover Gas Light Site by means of a rider (supplement)
to base rates. The DPSC approved a rider effective January 1, 1996 to
recover over five years all unrecovered environmental costs through
September 30, 1995 offset by the deferred tax benefit of these costs. The
deferred tax benefit equals the projected cashflow savings realized by the
Company in connection with a reduced income tax liability due to the
possibility of accelerated deduction allowed on certain environmental
costs when incurred. Each year, the rider rate will be calculated based on
the amortization of expenses for previous years. The advantage of the
environmental rider is that it is not necessary to file a rate case every
year to recover expenses.
In December 1995, Chesapeakes Delaware division filed its rate design
proposal with the DPSC to initiate Phase II of this proceeding. The
principal objective of the filing was to prepare the Company for an
increasingly competitive environment anticipated when Eastern Shore
becomes an open access pipeline. This initial filing proposed new rate
schedules for commercial and industrial sales service, individual pricing
for interruptible negotiated contract rates, a modified purchased gas cost
recovery mechanism and a natural gas vehicle tariff.
In May 1996, Delaware division filed its proposal relating to
transportation and balancing services with the DPSC, which proposed that
transportation of customer-owned gas be available to all commercial and
industrial customers with annual consumption over 3,000 Mcf per year.
In February 1997, the DPSC approved an order authorizing new service
offerings and rate design for services rendered on and after March 1,
1997. The approved changes include: (1) restructured sales services which
provide commercial and industrial customers with various service
classifications such as general service, medium volume, large volume and
high load factor services; (2) a modified purchased gas cost recovery
mechanism which takes into consideration the unbundling of gas costs from
distribution charges as well as charging certain firm service
classifications different gas cost rates based on the service
classifications load factor; (3) the implementation of a mechanism for
sharing interruptible, capacity release and off-system sales margins
between firm sales customers and the Company, with changing margin sharing
percentages based on the level of total margin; and (4) a provision for
transportation and balancing services for commercial and industrial
customers with annual consumption over 30,000 Ccf per year to transport
customer-owned gas on the Companys distribution system.
Florida. On November 26, 1997, the Florida Division filed a request with
the Florida Public Service Commission (FPSC) in Docket No. 971559-GU, for
a Limited Proceeding to Restructure Rates and for Approval of Gas
Transportation Agreements. The Florida Division has entered into Gas
Transportation Contracts with its two largest customers which resulted in
retaining these two customers on the Companys distribution system at
rates lower than previously achieved. As a result of this reduction in
revenue, the Company has proposed in its application to restructure rates
for its remaining customers to more closely reflect the cost of service
for each rate class and to recover the level of revenues previously
generated by the two Contract customers.
The Companys restructuring proposal is revenue neutral. Approval of this
request would not result in additional revenues to the Company; however,
FPSC approval would enable the Company to retain its two largest customers
while providing the Company with the opportunity to achieve its FPSC
authorized rate of return.
FPSC Staff issued their recommendation in this docket on March 12, 1998.
The Commission voted to approve the Companys restructuring proposal on
March 24, 1998. A Commission Order in this docket is expected April 14, 1998.
(i) (c) Propane Distribution
Chesapeakes propane distribution group consists of Sharp Energy, Inc.
("Sharp Energy"), a wholly owned subsidiary of Chesapeake, its wholly
owned subsidiary, Sharpgas, Inc. ("Sharpgas") and Tri-County Gas Company,
Inc. ("Tri-County") a wholly owned subsidiary of Chesapeake.
On March 6, 1997, Chesapeake acquired all of the outstanding shares of
Tri-County a family-owned and operated propane distribution business
located in Salisbury and Pocomoke, Maryland. The combined operations of
the Company and Tri-County served approximately 34,000 propane customers
on the Delmarva Peninsula and delivered approximately 27 million retail
and wholesale gallons of propane during 1997.
The propane distribution business is affected by many factors such as
seasonality, the absence of price regulation and competition among local
providers.
Propane is a form of liquefied petroleum gas which is typically extracted
from natural gas or separated during the crude oil refining process.
Although propane is gaseous at normal pressures, it is easily compressed
into liquid form for storage and transportation. Propane is a clean-
burning fuel, gaining increased recognition for its environmental
superiority, safety, efficiency, transportability and ease of use relative
to alternative forms of energy. Propane is sold primarily in suburban and
rural areas which are not served by natural gas pipelines. Demand is
typically much higher in the winter months and significantly affected by
seasonal variations, particularly the relative severity of winter temperatures,
because of its use in residential and commercial heating.
Adequacy of Resources
Sharp Energy and Tri-County purchase propane primarily from suppliers,
including major domestic oil companies and independent producers of gas
liquids and oil. Supplies of propane from these and other sources are
readily available for purchase by the Company. Supply contracts generally
include minimum (not subject to a take-or-pay premiums) and maximum
purchase provisions.
Sharp Energy and Tri-County use trucks and railroad cars to transport
propane from refineries, natural gas processing plants or pipeline
terminals to the Companys bulk storage facilities. From these facilities,
propane is delivered in portable cylinders or by "bobtail" trucks, owned
and operated by the Companies, to tanks located at the customers
premises.
Competition
Sharp Energy and Tri-County 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 local because distributors located in close
proximity to customers incur lower costs of providing service.
Propane competes with both fuel oil and electricity as an energy source.
Propane competes with fuel oil based on its cleanliness and environmental
advantages. Propane is also typically less expensive than both fuel oil
and electricity, based on equivalent BTU value. 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 Companys propane distribution activities are not subject to any
federal or state pricing regulation. Transport operations are subject to
regulations concerning the transportation of hazardous materials
promulgated under the Federal Motor Carrier Safety Act, which is
administered by the United States Department of Transportation and
enforced by the various states in which such operations take place.
Propane distribution operations are also subject to state safety
regulations relating to "hook-up" and placement of propane tanks.
The Companys propane operations are subject to all operating hazards
normally associated with the handling, storage and transportation of
combustible liquids, such as the risk of personal injury and property
damage caused by fire. The Company carries general liability insurance in
the amount of $35,000,000 per occurrence, but there is no assurance that
such insurance will be adequate.
(i) (d) Advanced Information Services
Chesapeakes advanced information services segment is comprised of United
Systems, Inc. ("USI") and Capital Data Systems, Inc. ("CDS"), both wholly
owned subsidiaries of the Company. CDS provided programming support for
application software, until the first quarter of 1997, at which time it
disposed of substantially all of its assets.
USI is an Atlanta-based company that primarily provides support for users
of PROGRESS(TM), a fourth generation computer language and Relational Database
Management System. USI offers consulting, training, software development
"tools" and customer software development for its client base, which
includes many large domestic and international corporations.
Competition
The advanced information services businesses face significant competition
from a number of larger competitors having substantially greater resources
available to them than the Company. In addition, changes in the advanced
information services businesses are occurring rapidly, which could
adversely impact the markets for the Companys products and services.
(i) (e) Other Subsidiaries
Skipjack, Inc. ("Skipjack") and Chesapeake Investment Company ("Chesapeake
Investment"), are wholly owned subsidiaries of Chesapeake Service Company.
Skipjack owns and leases to affiliates, two office buildings in Dover,
Delaware. Chesapeake Investment is a Delaware affiliated investment
company.
On March 6, 1997, in connection with the acquisition of Tri-County, the
Company acquired Eastern Shore Real Estate, Inc. ("ESR"), which became a
wholly owned subsidiary of Chesapeake Service Company. ESR owns and leases
office buildings to affiliates and external companies.
(ii) Seasonal Nature of Business
Revenues from the Companys residential and commercial natural gas sales
and from its propane distribution activities are affected by seasonal
variations, since the majority of these sales are to customers using the
fuels for heating purposes. Revenues from these customers are accordingly
affected by the mildness or severity of the heating season.
(iii) Capital Budget
A discussion of capital expenditures by business segment is included in
Item 7 under the heading "Liquidity and Capital Resources".
(iv) Employees
The Company has 397 employees, including 114 in natural gas distribution,
nine in natural gas transmission, 131 in propane distribution and 63 in
advanced information services. The remaining 80 employees are considered
general and administrative and include officers of the Company and
marketing, engineering, treasury, accounting, data processing, planning,
human resources and other administrative personnel. The acquisition of
Tri-County added 43 employees to the total number of employees of the
Company.
Item 2. Properties
(a) General
The Company owns offices and operates facilities in Pocomoke, Salisbury,
Cambridge, and Princess Anne, Maryland; Dover, Seaford, Laurel and
Georgetown, Delaware; and Winter Haven, Florida, and rents office space in
Dover, Delaware; Plant City, Florida; Chincoteague and Belle Haven, Virginia;
Easton and Pocomoke, Maryland; Detroit, Michigan; and Atlanta, Georgia. In
general, the properties of the Company are adequate for the uses for which
they are employed. Capacity and utilization of the Companys facilities can
vary significantly due to the seasonal nature of the natural gas and propane
distribution businesses.
(b) Natural Gas Distribution
Chesapeake owns over 542 miles of natural gas distribution mains (together
with related service lines, meters and regulators) located in its Delaware
and Maryland service areas, and 469 miles of such mains (and related
equipment) in its Central Florida service areas. Chesapeake also owns
facilities in Delaware and Maryland for propane-air injection during periods
of peak demand. A portion of the properties constituting Chesapeakes
distribution system are encumbered pursuant to Chesapeakes First Mortgage
Bonds.
(c) Natural Gas Transmission
Eastern Shore owns approximately 271 miles of transmission lines extending
from Parkesburg, Pennsylvania to Salisbury, Maryland. Eastern Shore also owns
three compressor stations located in Delaware City, Delaware, Daleville,
Pennsylvania and Bridgeville, Delaware. The Delaware City compressor facility
and associated piping are needed to stabilize capacity on Eastern Shores
system as a result of steadily declining inlet pressures at the Hockessin
interconnect with Transcontinental Gas Pipe Line Corporation. The Daleville
station is used to increase Columbia supply pressures to match Transco supply
pressures, and to increase Eastern Shores pressures in order to serve
Eastern Shores firm customers demands, including those of Chesapeakes
Delaware and Maryland divisions. The Bridgeville station is being used to
provide increased pressures required to meet demands on the system.
(d) Propane Distribution
Sharpgas and Tri-County own bulk propane storage facilities with an aggregate
capacity of 1.9 million gallons at 33 plant facilities in Delaware, Maryland
and Virginia, located on real estate they either own or lease.
Item 3. Legal Proceedings
The Company and its subsidiaries are involved in certain legal actions and
claims arising in the normal course of business. The Company is also involved
in certain legal and administrative proceedings before various governmental
agencies concerning rates. In the opinion of management, the ultimate
disposition of these proceedings will not have a material effect on the
consolidated financial position of the Company.
Environmental
(a) Dover Gas Light Site
In 1984, the State of Delaware notified the Company that a parcel of land it
purchased in 1949 from Dover Gas Light Company, a predecessor gas company,
contained hazardous substances. The State also asserted that the Company is
responsible for any clean-up and prospective environmental monitoring of the
site. The Delaware Department of Natural Resources and Environmental Control
("DNREC") investigated the site and surroundings, finding coal tar residue
and some ground-water contamination.
In October 1989, the Environmental Protection Agency Region III ("EPA")
listed the Dover Site on the National Priorities List under the Comprehensive
Environmental Response, Compensation and Liability Act ("CERCLA" or
"Superfund"). At that time under CERCLA, both the State of Delaware and the
Company were named as potentially responsible parties ("PRPs") for clean-up
of the site.
The EPA issued the site Record of Decision ("ROD") dated August 16, 1994. The
remedial action selected by the EPA in the ROD addressed the ground-water
contamination with a combination of hydraulic containment and natural
attenuation. Remediation selected for the soil at the site was to meet
stringent cleanup standards for the first two feet of soil and less stringent
standards for the soil below two feet. The ROD estimated the costs of
selected remediation of ground-water and soil at $2.7 million and $3.3
million, respectively.
In May 1995, EPA issued an order to the Company under section 106 of CERCLA
(the "Order"), which required the Company to fund or implement the ROD. The
Order was also issued to General Public Utilities Corporation, Inc. ("GPU"),
which both EPA and the Company believe is liable under CERCLA. Other PRPs
such as the State of Delaware were not ordered to perform the ROD. EPA may
seek judicial enforcement of its Order, as well as significant financial
penalties for failure to comply. Although notifying EPA of objections to the
Order, the Company agreed to comply. GPU informed EPA that it did not intend
to comply with the Order.
In March 1995, the Company commenced litigation against the State of Delaware
for contribution to the remedial costs being incurred to carry out the ROD.
In December of 1995, this case was dismissed without prejudice based on a
settlement agreement between the parties (the "Settlement"). Under the
Settlement, the State agreed to support the Companys proposal to reduce the
soil remedy for the site, described below, to contribute $600,000 toward the
cost of implementing the ROD and to reimburse the EPA for $400,000 in
oversight costs. The Settlement is contingent upon a formal settlement
agreement between EPA and the State of Delaware. Upon satisfaction of all
conditions of the Settlement, the litigation will be dismissed with
prejudice.
In June 1996, the Company initiated litigation against GPU for contribution
to the remedial costs incurred by Chesapeake in connection with complying
with the ROD. At this time, management cannot predict the outcome of the
litigation or the amount, if any, of proceeds to be received.
In July 1996, the Company began the design phase of the ROD, on-site pre-
design and investigation. A pre-design investigation report ("the report")
was filed in October 1996 with the EPA. The report, which required EPA
approval, provided up to date status on the site, which the EPA used to
determine if the remedial design selected in the ROD was still the
appropriate remedy.
In the report, the Company proposed a modification to the soil clean-up
remedy selected in the ROD to take into account an existing land use
restriction banning future development at the site. In April of 1997, the EPA
issued a fact sheet stating that the EPA was considering the proposed
modification. The fact sheet included an overall cost estimate of $5.7
million for the proposed modified remedy and a new overall cost estimate of
$13.2 million for the remedy selected in the ROD. On August 28, 1997, the EPA
issued a Proposed Plan to modify the current clean-up plan that would
involve: (1) excavation of off-site thermal treatment of the contents of the
former subsurface gas holders; (2) implementation of soil vaporization
extraction; (3) pavement of the parking lot; and (4) use of institutional
controls that would restrict future development of the Site. The overall
estimated clean-up cost of the Site under the proposed plan was $4.2 million,
as compared to EPAs estimate of the current clean-up plan at $13.2 million.
In January 1998, the EPA issued a revised ROD, which modified the soil
remediation to conform to the proposed plan and included the estimated clean-
up costs of $4.2 million.
The Company is currently engaged in investigations related to additional
parties who may be PRPs. Based upon these investigations, the Company will
consider suit against other PRPs. The Company expects continued negotiations
with PRPs in an attempt to resolve these matters.
The Company adjusted its accrued liability recorded with respect to the Dover
Site to $4.2 million. This amount reflects the EPAs estimate, as stated in
the ROD issued in 1998 for remediation of the site according to the ROD. The
recorded liability may be adjusted upward or downward as the design phase
progresses and the Company obtains construction bids for performance of the
work. The Company has also recorded a regulatory asset of $4.2 million,
corresponding to the recorded liability. Management believes that in addition
to the $600,000 expected to be contributed by the State of Delaware under the
Settlement, the Company will be equitably entitled to contribution from other
responsible parties for a portion of the expenses to be incurred in
connection with the remedies selected in the ROD. Management also believes
that the amounts not so contributed will be recoverable in the Companys
rates.
As of December 31, 1997, the Company has incurred approximately $5.0 million
in costs relating to environmental testing and remedial action studies. In
1990, the Company entered into settlement agreements with a number of
insurance companies resulting in proceeds to fund actual environmental costs
incurred over a five to seven-year period. In December 1995, the Delaware
Public Service Commission, authorized recovery of all unrecovered
environmental cost incurred by a means of a rider (supplement) to base rates,
applicable to all firm service customers. The costs would be recovered
through a five-year amortization offset by the deferred tax benefit
associated with those environmental costs. The deferred tax benefit equals
the projected cashflow savings realized by the Company in connection with a
reduced income tax liability due to the possibility of accelerated deduction
allowed on certain environmental costs when incurred. Each year a new rider
rate is calculated to become effective December 1. The rider rate is based on
the amortization of expenditures through September of the filing years plus
amortization of expenses from previous years. The advantage of the rider is
that it is not necessary to file a rate case every year to recover expenses
incurred. As of December 31, 1997, the unamortized balance and amount of
environmental costs not included in the rider, effective January 1, 1998 was
$2.1 million and $190,000, respectively. With the rider mechanism
established, it is managements opinion that these costs and any future cost,
net of the deferred income tax benefit, will be recoverable in rates.
(b) Salisbury Town Gas Light Site
In cooperation with the Maryland Department of the Environment ("MDE"), the
Company has completed assessment, construction and has begun remediation of
the Salisbury manufactured gas plant site. The assessment determined that
there was localized contamination of ground-water. A remedial design report
was submitted to MDE in November 1990 and included a proposal to monitor,
pump and treat any contaminated ground-water on-site. Through negotiations
with the MDE, the remedial action work plan was revised with final approval
from MDE obtained in early 1995. The remediation process for ground-water was
revised from pump-and-treat to Air Sparging and Soil-Vapor Extraction,
resulting in a substantial reduction in overall costs. During 1996, the
Company completed construction and began remediation procedures at the
Salisbury site and has been reporting the remediation and monitoring results
to the Maryland Department of the Environment on an ongoing basis.
The cost of remediation is estimated to range from $140,000 to $190,000 per
year for operating expenses. Based on these estimated costs, the Company
recorded both a liability and a deferred regulatory asset of $665,000 on
December 31, 1997, to cover the Companys projected remediation costs for
this site. The liability payout for this site is expected to be over a five-
year period. As of December 31, 1997, the Company has incurred approximately
$2.4 million for remedial actions and environmental studies and has charged
such costs to accumulated depreciation. In January 1990, the Company entered
into settlement agreements with a number of insurance companies resulting in
proceeds to fund actual environmental costs incurred over a three to five-
year period beginning in 1990. The final insurance proceeds were requested
and received in 1992. In December 1995, the Maryland Public Service
Commission approved recovery of all environmental cost incurred through
September 30, 1995 less amounts previously amortized and insurance proceeds.
The amount approved for a 10-year amortization was $964,251. Of the $2.4
million in costs reported above, approximately $597,000 has not been
recovered through insurance proceeds or received ratemaking treatment. It is
managements opinion that these costs incurred and future costs incurred, if
any, will be recoverable in rates.
(c) Winter Haven Coal Gas Site
In May 1996, the Company filed an Air Sparging and Soil Vapor Extraction
Pilot Study Work Plan for the Winter Haven site with the Florida Department
of Environmental Protection ("FDEP"). The Work Plan described the Companys
proposal to undertake an Air Sparging and Soil Vapor Extraction ("AS/SVE")
pilot study to evaluate at the site. After discussions with the FDEP, the
Company filed a modified AS/SVE Pilot Study Work Plan, scope of work to
complete the site assessment activities and a report describing a limited
sediment investigation performed recently. The Company will be awaiting
FDEPs comments to the modified Work Plan. It is not possible to determine
whether remedial action will be required by FDEP and, if so, the cost of such
remediation.
The company has spent and received ratemaking treatment of approximately
$678,000 on these investigations as of September 30, 1997. The Company has
been allowed by the Florida Public Service Commission to continue to accrue
for future environmental costs. At September 30, 1997, the Company had
$432,000 accrued. It is managements opinion that future costs, if any, will
be recoverable in rates.
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 10. Executive Officers of the Registrant
Information pertaining to the Executive Officers of the Company is as
follows:
Ralph J. Adkins (age 55) Mr. Adkins is Chairman of the Board and Chief
Executive Officer of Chesapeake. He has served as Chairman of the Board
and Chief Executive Officer since August 1997. Prior to holding his
present position, Mr. Adkins served as President and Chief Executive
Officer, President and Chief Operating Officer, Executive Vice President,
Senior Vice President, Vice President and Treasurer of Chesapeake. Mr.
Adkins is also Chairman and Chief Executive Officer of Chesapeake Service
Company, and Chairman and Chief Executive Officer of Sharp Energy, Inc.,
Tri-County Gas Company, Inc., Chesapeake Service Company and Eastern Shore
Natural Gas Company, all wholly owned subsidiaries of Chesapeake. He has
been a director of Chesapeake since 1989.
John R. Schimkaitis (age 50) Mr. Schimkaitis is President and Chief
Operating Officer. He has served as President since August 1997. He
previously served as Executive Vice President, Chief Financial Officer,
Senior Vice President, Treasurer and Assistant Secretary. From 1983 to
1986, Mr. Schimkaitis was Vice President of Cooper & Rutter, Inc., a
consulting firm providing financial services to the utility and cable
industries. He was appointed as a director of Chesapeake in February 1996.
Michael P. McMasters (age 39) Mr. McMasters is Vice President, Chief
Financial Officer and Treasurer of Chesapeake Utilities Corporation. He
has served as Vice President, Chief Financial Officer and Treasurer since
December 1996. He previously served as Vice President of Eastern Shore,
Director of Accounting and Rates and Controller. From 1992 to May 1994,
Mr. McMasters was employed as Director of Operations Planning for
Equitable Gas Company.
Stephen C. Thompson (age 37) Mr. Thompson is Vice President of the Natural
Gas Operations, as well as Vice President of Chesapeake Utilities
Corporation. He has served as Vice President since May 1997. He has served
as President, Vice President, Manager, Director of Gas Supply and
Marketing and Superintendent of Eastern Shore and Regional Manager for the
Florida distribution Operations.
Philip S. Barefoot (age 51) Mr. Barefoot joined Chesapeake as Division
Manager of Florida Operations in July 1988. In May 1994 he was elected
Vice President of Chesapeake Utilities Corporation. Prior to joining
Chesapeake, he was employed by Peoples Natural Gas Company where he held
the positions of Division Sales Manager, Division Manager and Vice
President of Florence Operations.
Jeremy D. West (age 48) Mr. West joined Chesapeake as President of Sharp
Energy in June 1990. In May 1992 he was elected Vice President of
Chesapeakes Propane Operations and in May 1997, he was promoted to Vice
President of Strategic Planning and Acquisitions. Prior to joining
Chesapeake, he was employed by Columbia Propane Corporation, a subsidiary
of Columbia Gas System, as Vice President of Marketing, and later,
President of Columbia Propane Corporation. He has also serviced as
Regional Manager of Suburban Propane.
PART II
Item 5. Market for the Registrants Common Stock and Related Security Holder
Matters
(a) Common Stock Dividends and Price Ranges:
The following table sets forth sale price and dividend information for each
calendar quarter during the years December 31, 1997 and 1996:
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Dividends
Declared
Quarter Ended: High Low Close Per Share
- ---------------------------------------------------------------------------
1997
March 31 $18.000 $16.500 $17.375 $0.2425
June 30 17.500 16.000 17.000 0.2425
September 30 18.500 16.250 18.375 0.2425
December 31 21.750 18.375 20.500 0.2425
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1996
March 31 $17.000 $14.500 $16.750 $0.2325
June 30 17.875 15.875 16.000 0.2325
September 30 17.750 15.125 17.500 0.2325
December 31 18.000 16.375 16.875 0.2325
- ---------------------------------------------------------------------------
The common stock of the Company trades on the New York Stock Exchange under
the symbol "CPK".
(b) Approximate number of holders of common stock as of December 31, 1997:
Number of Shareholders
Title of Class of Record
--------------------------- ----------------------
Common stock, par value $.4867 2,178
(c) Dividends:
During the years ended December 31, 1997 and 1996, cash dividends paid by
Chesapeake have been declared each quarter, in the amounts set forth in the
table above. During 1996 and 1995, Tri-County paid dividends of $79,000 and
$592,000, respectively.
Indentures to the long-term debt of the Company and its subsidiaries contain
a restriction that the Company cannot, until the retirement of its Series I
Bonds, pay any dividends after December 31, 1988 which exceed the sum of
$2,135,188 plus consolidated net income recognized on or after January 1,
1989. As of December 31, 1997, the amounts available for future dividends
permitted by the Series I covenant are $14.6 million.
(d) On March 6, 1997, in conjunction with the acquisition of Tri-County Gas
Company, Inc., the Company issued 639,000 shares of Company stock to William
P. Schneider and James R. Schneider in reliance on the private placement
exemption provided by Section 4(2) of the Securities Act of 1933 and
Regulation D, thereunder.
Item 6. Selected Financial Data
- --------------------------------------------------------------------------------------------------
(dollars in thousands except stock data)
For the Years Ended December 31, 1997 1996 1995 1994 (1) 1993 (1)
- --------------------------------------------------------------------------------------------------
Operating
Operating revenues $122,775 $130,213 $111,796 $98,572 $85,873
Operating income $8,559 $10,110 $10,067 $7,227 $6,311
Income before cumulative effect of
change in accounting principle $5,683 $7,605 $7,594 $4,460 $3,914
Cumulative effect of change in
accounting principle $58
Net income $5,683 $7,605 $7,594 $4,460 $3,972
- --------------------------------------------------------------------------------------------------
Balance Sheet
Gross plant $143,345 $133,001 $119,837 $110,023 $100,330
Net plant $99,517 $93,570 $84,589 $75,313 $69,794
Total assets $137,379 $136,046 $123,339 $108,271 $100,988
Long-term debt, net $38,226 $28,984 $31,619 $24,329 $25,682
Common stockholders' equity $50,336 $47,537 $42,582 $37,063 $34,878
Capital expenditures $11,381 $14,837 $12,887 $10,653 $10,064
- --------------------------------------------------------------------------------------------------
Common Stock
Basic earnings per share:
Income before cumulative effect of
change in accounting principle $1.27 $1.72 $1.75 $1.23 $1.10
Cumulative effect of change in
accounting principle $0.02
Net income $1.27 $1.72 $1.75 $1.23 $1.12
Diluted earnings per share:
Income before cumulative effect of
change in accounting principle $1.24 $1.67 $1.70 $1.20 $1.08
Cumulative effect of change in
accounting principle $0.02
Net income $1.24 $1.67 $1.70 $1.20 $1.10
Average shares outstanding 4,472,087 4,412,137 4,336,431 3,628,056 3,551,932
Cash dividends per share $0.97 $0.93 $0.90 $0.88 $0.86
Book value per share $11.18 $10.71 $9.77 $10.15 $9.76
Common equity/Total capitalization 56.80% 62.10% 57.40% 60.37% 57.59%
Return on equity 11.29% 16.00% 17.80% 12.03% 11.39%
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Other
Number of Employees 397 386 383 320 326
Number of Registered Stockholders 2,178 2,213 2,098 1,721 1,743
Heating Degree Days 4,418 4,717 4,593 4,398 4,705
Heating Degree Days (10-year average) 4,577 4,596 4,586 4,564 4,588
- --------------------------------------------------------------------------------------------------
(1) 1994 and 1993 have not been restated to include the business combination
with Tri-County Gas Company, Inc.
Item 7. Managements Discussion and Analysis of Financial Condition
and Results of Operations
Liquidity and Capital Resources
The capital requirements of Chesapeake Utilities Corporation ("Chesapeake"
or "the Company") reflect the capital-intensive nature of its business and
are attributable principally to the construction program and the retirement
of outstanding debt. The Company relies on cash generated from operations
and short-term borrowing to meet normal working capital requirements and
temporarily finance capital expenditures. During 1997, net cash provided by
operating activities, used by investing activities and used by financing
activities were $12.3 million, $12.4 million and $1.5 million, respectively.
The Board of Directors has authorized the Company to borrow up to $20.0
million from various banks and trust companies. As of December 31, 1997,
Chesapeake had four unsecured bank lines of credit, totaling $34.0 million,
for short-term cash needs to meet seasonal working capital requirements and
to temporarily fund portions of its capital expenditures. The outstanding
balances of short-term borrowing at December 31, 1997 and 1996 were $7.6
million and $12.7 million, respectively.
In 1997, Chesapeake used cash provided by operations and the issuance of
long-term debt to fund capital expenditures and reduce short-term borrowing.
During 1996, the Company used cash provided by operating activities and
short-term borrowing to fund the capital expenditures and increases in
working capital requirements.
During 1997, 1996 and 1995, capital expenditures were approximately $12.8
million, $14.8 million and $12.9 million, respectively. Chesapeake has
budgeted $15.6 million for capital expenditures during 1998. This amount
includes $8.7 million and $2.7 million for natural gas and propane
distribution, respectively; $3.1 million for natural gas transmission,
$395,000 for advanced information services and $632,000 for general plant.
The natural gas and propane distribution expenditures are for expansion and
improvement of facilities in existing service territories. Natural gas
transmission expenditures are for improvement and expansion of the pipeline
system. The advanced information services expenditures are for computer
hardware, software and related equipment. Financing for the 1998
construction program is expected to be provided from short-term borrowing
and cash from operations. The construction program is subject to continuous
review and modification. Actual construction expenditures may vary from the
above estimates due to a number of factors including inflation, changing
economic conditions, regulation, sales growth and the cost and availability
of capital.
Chesapeake has budgeted $2.8 million for environmental related expenditures
during 1998 and expects to incur additional expenditures in future years
(see Note J to the Consolidated Financial Statements), a portion of which
may need to be financed through external sources. Management does not expect
such financing to have a material adverse effect on the financial position
or capital resources of the Company.
Capital Structure
As of December 31, 1997, common equity represented 56.8% of permanent
capitalization compared to 62.1% in 1996 and 57.4% in 1995. Chesapeake
remains committed to maintaining a sound capital structure and strong credit
ratings to provide the financial flexibility needed to access the capital
markets when required. This commitment, along with adequate and timely rate
relief for the Companys regulated operations, helps to ensure that
Chesapeake will be able to attract capital from outside sources at a
reasonable cost. The achievement of these objectives will provide benefits
to customers and creditors, as well as to the Companys investors.
Financing Activities
In December 1997, Chesapeake finalized a private placement of $10 million of
6.85% Senior Notes due January 1, 2012. The Company used the proceeds to
repay a portion of its short-term borrowing. In October 1995, the Company
finalized a private placement of $10 million of 6.91% Senior Notes due in
2010. The Company used the proceeds to retire $4.1 million of the 10.85%
Senior Notes of Eastern Shore Natural Gas Company, the Companys natural gas
transmission subsidiary ("Eastern Shore") originally due in 2003. The
remaining proceeds were used to reduce short-term borrowing. The Company
issued no long-term debt in 1996. During 1997, the Company repaid
approximately $3.1 million of long-term debt, compared to $823,000 and $5.4
million in 1996 and 1995, respectively. The increase in debt payments for
1997 resulted from the payoff of $2.2 million of debt assumed in the pooling
of interests with Tri-County Gas Company, Inc. ("Tri-County").
On March 6, 1997, the Company acquired all of the outstanding common stock
of Tri-County and associated properties. Tri-County distributes propane to
both retail and wholesale customers on the peninsula. The transaction was
effected through the exchange of 639,000 shares of the Companys common
stock and was accounted for as a pooling of interests.
Chesapeake issued 32,169, 33,926 and 38,660 shares of common stock in
connection with its Automatic Dividend Reinvestment and Stock Purchase Plan
during the years of 1997, 1996 and 1995, respectively.
Results of Operations
Net income for 1997 was $5,682,946 as compared to $7,604,915 for 1996. The
decrease in net income is primarily related to temperatures in the Companys
northern service territory, which were, on average, 6% warmer than in 1996.
The warmer weather resulted in a reduction in volumes sold by the natural
gas and propane distribution segments. The lower gas volumes contributed to
the reduction in Earnings Before Interest and Taxes ("EBIT") for both
distribution segments as shown in the table below.
EARNINGS BEFORE INTEREST AND TAXES (in thousands):
- -------------------------------------------------------------------------------------------------------
Increase/ Increase/
For the Years Ended December 31, 1997 1996 (decrease) 1996 1995 (decrease)
- -------------------------------------------------------------------------------------------------------
EBIT by Business Segment:
Natural gas distribution $5,498 $7,167 ($1,669) $7,167 $4,728 $2,439
Natural gas transmission 3,721 2,458 1,263 2,458 6,083 (3,625)
Propane distribution 1,064 2,815 (1,751) 2,815 2,252 563
Advanced information services 1,046 1,056 (10) 1,056 1,061 (5)
Other 558 561 (3) 561 (32) 593
- -------------------------------------------------------------------------------------------------------
Total EBIT $11,887 $14,057 ($2,170) $14,057 $14,092 ($35)
=======================================================================================================
Chesapeakes 1996 net income was $7,604,915, as compared to $7,593,506 for
1995. Although net income was relatively unchanged, the contribution to net
income from each business segment differed during the two-year period.
Natural gas distribution EBIT was higher in 1996 due to rate increases
placed in effect in two of the three service territories during 1995. EBIT
for the propane distribution segment increased due to greater volumes sold
due to temperatures being 3% colder than in 1995. Natural gas transmissions
contribution decreased due to a reduction in volumes sold to industrial
interruptible customers during 1996. In addition, 1995 net income includes a
one-time benefit from a settlement with the Federal Energy Regulatory
Commission (see Note K to the Consolidated Financial Statements).
Natural Gas Distribution
The reduction in EBIT of $1.7 million from 1996 to 1997 is primarily related
to a decline in total gross margin, as indicated in the following table,
coupled with an overall increase in expenses. The reduction in gross margin
earned on volumes sold is primarily the result of a 3% decline in volumes
sold to residential and commercial customers and a decrease in volumes sold
to industrial interruptible customers in Chesapeakes Florida service
territory. The reduction in volumes sold to residential and commercial
customers was directly related to warmer temperatures, primarily during the
first quarter of 1997. Operations and maintenance expenses increased
$633,000 and $108,000, respectively. Compensation, regulatory commission
expenses and costs related to data processing and billable service revenue
contributed to the increase in operations expenses. A greater level of
maintenance to the gas pipeline system resulted in an increase in
maintenance expenses.
The $2.4 million rise in EBIT from 1995 to 1996 resulted from an increase in
gross margin earned on sales of natural gas in two of Chesapeakes three
service territories, offset by an overall increase in expenses. The $4.0
million increase in gross margin was partially due to a full year of rate
increases, which went into effect in 1995. Maryland operations rates became
effective during December and interim rates were in effect during June of
1995 for Delaware operations. In addition, colder temperatures contributed
to the 20% increase in deliveries to residential and commercial customers
located in Chesapeakes northern service territory. The $583,000 increase in
operations expenses was primarily the result of higher compensation,
benefits, data processing costs, bad debts and regulatory expenses. Plant
additions placed in service during 1996 resulted in higher depreciation
expense. In addition, other taxes increased by $460,000 or 23%, partially
due to the inclusion of certain state revenue related taxes, which were
previously included as reductions to revenue.
GROSS MARGIN SUMMARY (in thousands)
- -------------------------------------------------------------------------------------------------------
Increase/ Increase/
For the Years Ended December 31, 1997 1996 (decrease) 1996 1995 (decrease)
- -------------------------------------------------------------------------------------------------------
Revenues:
Gas sold $54,205 $52,290 $1,915 $52,290 $42,784 $9,506
Gas transported 3,061 2,991 70 2,991 2,618 373
Gas marketed 18,419 19,382 (963) 19,382 8,555 10,827
Other 275 193 82 193 168 25
- -------------------------------------------------------------------------------------------------------
Total Revenues $75,960 $74,856 $1,104 $74,856 $54,125 $20,731
=======================================================================================================
Cost of Sales:*
Gas sold $35,507 $32,846 $2,661 $32,846 $26,789 $6,057
Gas marketed 18,233 19,117 (884) 19,117 8,410 10,707
- -------------------------------------------------------------------------------------------------------
Total Cost of Sales $53,740 $51,963 $1,777 $51,963 $35,199 $16,764
=======================================================================================================
Gross Margin:
Gas sold $18,698 $19,444 ($746) $19,444 $15,995 $3,449
Gas transported 3,061 2,991 70 2,991 2,618 373
Gas marketed 186 265 (79) 265 145 120
Other 275 193 82 193 168 25
- -------------------------------------------------------------------------------------------------------
Total Gross Margin $22,220 $22,893 ($673) $22,893 $18,926 $3,967
=======================================================================================================
* Transportation service does not have an associated cost of sales.
Natural Gas Transmission
The Companys natural gas transmission segment, Eastern Shore, which became
an open access pipeline on November 1, 1997, had an increase in EBIT of $1.3
million for 1997. The rise in EBIT is partially attributable to a rate
increase and an increase in firm services implemented in 1997, as well as an
overall reduction in expenses. The rate increase is designed to generate
additional gross margin of approximately $1.2 million annually. Also
contributing to the increase in EBIT were additional revenues generated by
the increase in transportation services that were effective with the
implementation of open access. On an annual basis, the additional services
will generate revenue of approximately $1.3 million. Operations expense
decreased by $143,000 or 5%, primarily consisting of compensation,
relocation costs and property insurance. Maintenance expenses were also
lower due to reduced maintenance required during the year on the gas
pipeline system. Capital additions during the year resulted in higher
depreciation expense.
The $3.6 million reduction in 1996 EBIT was primarily due to lower gross
margin on sales to industrial customers. The gross margin decreased due to a
67% reduction in volumes delivered, primarily reflecting lower deliveries to
two industrial interruptible customers -- a municipal power plant and a
methanol plant. The methanol plant shut down operations on April 1, 1996.
During 1996 and 1995, deliveries to the methanol and power plants
contributed approximately $284,000 and $2.4 million, respectively to gross
margin. As interruptible customers, they had no ongoing commitment,
contractual or otherwise, to purchase natural gas from the Company (see Note
A to the Consolidated Financial Statements). The $109,000 increase in
operating expenses reflects increased compensation and benefit related
expenses. Depreciation increased due to plant placed in service.
With Eastern Shores conversion to open access, all of its customers will
have the opportunity to transport gas over its system at rates regulated by
the FERC. The variability in Eastern Shores margins, historically driven by
the sales to industrial customers, will dramatically decrease, as capacity
reservation fees for transportation services will drive prospective margins.
It is expected that in the future, Eastern Shores EBIT will tend to be more
stable and resemble a fully regulated return. Taking the 1997 rate increase,
revenues associated with additional capacity and lower margins on services
provided to industrial customers into account, the Company expects gross
margin during 1998 to be between $7.9 and $8.2 million (see Cautionary
Statement). Comparatively, gross margin for the past three years has been
$7.9 million, $6.7 million and $10.2 million for 1997, 1996 and 1995,
respectively.
Propane Distribution
In 1997, Chesapeake integrated the operations of Tri-County and the
Companys existing propane distribution operations. Like Chesapeakes
existing propane operations, Tri-Countys earnings are heavily dependent
upon weather conditions.
The reduction in 1997 EBIT of $1.8 million was primarily due to a reduction
in gross margin, partially offset by a reduction in expenses. Gross margin
decreased due to an 11% reduction in sales volumes coupled with a 13% lower
margin per gallon sold. The decline in sales volumes is directly related to
the warmer temperatures, which averaged 6% warmer than the prior year.
Furthermore, during the first quarter of 1997 temperatures were 14% warmer
than normal. The Company normally sells a high percentage of its annual
volume during this period. The reduction in margin per gallon sold was also
the result of abnormally warmer temperatures. As temperatures warmed during
the first quarter, demand decreased and supply-prices declined rapidly. Due
to the low cost of wholesale-supply, retail prices declined, thereby
reducing margins. Operations expenses decreased $554,000 or 7% primarily in
the areas of compensation, delivery related costs, advertising and legal
fees. Maintenance expenses declined primarily in equipment and structures.
Depreciation and amortization expenses declined $477,000 or 28% primarily
the result of a non-compete agreement, which became fully amortized in
November of 1996.
The increase in 1996 EBIT of $563,000 is primarily attributable to a rise in
gross margin partially offset by higher expenses. Gross margin was higher
due to a 12% increase in volumes sold and a slight increase in margin earned
per gallon sold. The increases are directly related to temperatures which
were 3% colder than those in 1995. Operating expenses increased $1.3 million
or 19% in 1996 primarily due to compensation, delivery related costs,
benefits and outside services. Maintenance expenses increased in the areas
of propane storage facilities, equipment and structures.
Advanced Information Services
The results of the advanced information services segment consisted primarily
of those of United Systems, Inc. ("USI"), due to the downsizing of
Chesapeakes North Carolina operations in early 1997. Although the EBIT
contribution of this segment has remained unchanged from 1996 to 1997, USIs
gross margin has increased by $970,000 or 34%. Operating expenses increased
due to the opening of a new office in Detroit, Michigan and the expansion of
staff training and marketing efforts to position USI to be able to provide
new services and for future growth of current services. Since the rise in
operating costs offset most of the growth in gross margin, EBIT remained
constant.
Although the EBIT contributed by the advanced information segment was
relatively unchanged from 1995 to 1996, EBIT contributed by USI increased
$268,000. This was mostly offset by a reduction in EBIT contributed by the
North Carolina operation as they ceased to provide facilities management
services beginning in early 1996.
Income Taxes
Operating income taxes in 1997 decreased $619,000 due to a reduction in
EBIT. This was partially offset by the one-time expense of $318,000 recorded
in 1997 to establish the deferred income tax liability for Tri-County. Prior
to 1997, Tri-County was a subchapter S Corporation for income tax reporting;
therefore, no deferred income taxes were recorded on its balance sheet. In
addition, the Companys 1996 and 1995 restated financial statements do not
include any income tax expense for Tri-County due to its subchapter S status
during those years.
Other
Non-operating income was $428,000, $458,000 and $391,000 for 1997, 1996 and
1995, respectively. The decrease in 1997 is primarily due to a reduction in
interest income, partially offset by the gain on the sale of fixed assets.
The increase in 1996 is primarily the result of a rise in interest income
earned partially offset by a reduction in the gain on sales of fixed assets.
Environmental Matters
The Company continues to work with federal and state environmental agencies
to assess the environmental impact and explore corrective action at several
former gas manufacturing plant sites (see Note J to the Consolidated
Financial Statements). The Company believes that any future costs associated
with these sites will be recoverable in rates.
The Year 2000
Chesapeake is dependent upon information systems to operate efficiently and
effectively. In order to address the impact of the year 2000 on its many
information systems, Chesapeake is in the process of evaluating and
remediating any deficiencies. The Company has segregated the evaluation of
its readiness and the potential impact of the year 2000 on its systems into
two components: primary internal applications and other applications. The
Companys primary applications include systems for its financial
information; natural gas customer information and billing; and propane
customer information, billing and delivery. Other applications include
systems for services such as telephone, system control and data acquisition
for the pipeline, as well as other vendors systems. With respect to the
three primary applications, Chesapeake has updated its propane customer
information, billing and delivery system to a year 2000 compliant version.
This system will be tested further to insure compliance during 1998. With
respect to the other two primary applications, Chesapeake has conducted
initial evaluations and estimates that the cost of any remediation will not
be significant. Each application will be tested during 1998. Chesapeake has
developed an inventory of other applications and is in the process of
developing plans to contact its vendors, test and remediate to the extent
necessary.
Competition
Historically, the Companys natural gas operations have successfully
competed with other forms of energy such as electricity, oil and propane.
The principle considerations have been price, and to a lesser extent,
accessibility. As a result of Eastern Shores recent conversion to open
access, the Company expects to be subject to competitive pressures from
other sellers of natural gas. With open access transportation services
available on Eastern Shores system, third party suppliers will compete with
Chesapeake to sell gas to the local distribution companies and the end users
on Eastern Shores system. Eastern Shore has shifted from providing sales
service to providing transportation and contract storage services.
The Companys distribution operations located in Delaware began to offer
transportation services to certain industrial customers in December 1997.
Chesapeake expects that during 1998, the distribution operations located in
Maryland will also begin offering transportation services. The Company
expects to expand the availability of transportation services to additional
customers in the future. Since the Florida distribution operations have been
open to certain industrial customers since 1994, the Company has gained
experience in operating in an open access environment. The Company
established a natural gas brokering and supplies operation in Florida to
compete for these customers. The Company is evaluating whether to establish
similar services in our northern service territory.
Both the propane distribution and the advanced information services
businesses face significant competition from a number of larger competitors
with substantially greater resources available to them than those of the
Company. In addition, in the advanced information services business, changes
are occurring rapidly, which could adversely affect the markets for the
Companys services.
Inflation
Inflation affects the cost of labor and other goods and services required
for operation, maintenance and capital improvements. The impact of inflation
has lessened in recent years, except for the effect on purchased gas costs.
These costs are passed on to customers through the purchased gas adjustment
clause in the Companys 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.
Cautionary Statement
Statements made herein and elsewhere in this Form 10-K, which are not
historical fact, are forward-looking statements. In connection with the
"Safe Harbor" provisions of the Private Securities Litigation Reform Act of
1995, Chesapeake is providing the following cautionary statement to identify
important factors that could cause actual results to differ materially from
those anticipated in forward-looking statements made herein or otherwise by
or on behalf of the Company.
A number of factors and uncertainties make it difficult to predict the
effect on future operating results of Eastern Shore operating as an open
access pipeline, relative to historical results. While open access
eliminates industrial interruptible sales margins, such sales have varied
widely from year to year and, in future years, might have made a less
significant contribution to earnings even in the absence of open access.
Additionally, there are a number of uncertainties, including future open
access proceedings and the effects of competition, which will affect whether
the Company will be able to provide economical gas marketing, transportation
and other services.
In addition, a number of factors and uncertainties affecting other aspects
of the Companys business could have a material impact on earnings. These
include: the seasonality and temperature sensitivity of Chesapeakes natural
gas and propane businesses, the relative price of alternative energy sources
and the effects of competition on both unregulated and natural gas sales,
now that the Company operates in an open access environment. There are also
uncertainties relative to the impact of the year 2000 on the information
systems of the Company, its vendors and other third parties.
Item 8. Financial Statements and Supplemental Data
REPORT OF INDEPENDENT ACCOUNTANTS
________
To the Stockholders of
Chesapeake Utilities Corporation
We have audited the consolidated financial statements and
consolidated financial statement schedules of Chesapeake
Utilities Corporation and Subsidiaries listed in Item 14(a) of
this Form 10-K. These financial statements and financial
statement schedules are the responsibility of the Companys
Management. Our responsibility is to express an opinion on these
financial statements and the financial statement schedules based
on our audits.
We conducted our audits in accordance with generally
accepted auditing standards. Those standards require that we plan
and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting
principles used and significant estimates made by Management, as
well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above
present fairly, in all material respects, the consolidated
financial position of Chesapeake Utilities Corporation and
Subsidiaries as of December 31, 1997 and 1996, and the
consolidated results of their operations and their cash flows for
each of the three years in the period ended December 31, 1997 in
conformity with generally accepted accounting principles. In
addition, in our opinion, the consolidated financial statement
schedules referred to above, when considered in relation to the
basic consolidated financial statements taken as a whole,
presents fairly, in all material respects, the information
required to be included therein.
We have also previously audited, in accordance with
generally accepted standards, the consolidated balance sheets and
statements of capitalization as of December 31, 1995, 1994 and
1993, and the related consolidated statements of income, cash
flows, stockholders equity, and income taxes for each of the two
years in the period ended December 31, 1994 (none of which are
presented herein) and we expressed unqualified opinions on those
consolidated financial statements. In our opinion, the
information set forth in the Financial Highlights included in the
Selected Financial Data for each of the five years in the period
ended December 31, 1997, appearing on page 17 is fairly stated in
all material respects in relation to the financial statements
from which it has been derived.
COOPERS & LYBRAND L.L.P.
Baltimore, Maryland
February 12, 1998
CONSOLIDATED BALANCE SHEETS
Assets
- ----------------------------------------------------------------------------------------------
At December 31, 1997 1996
- ----------------------------------------------------------------------------------------------
Property, Plant and Equipment
Natural gas distribution $74,769,458 $69,853,054
Natural gas transmission 33,856,873 30,655,492
Propane distribution 26,920,403 25,279,217
Advanced information services 841,757 1,003,850
Other plant 6,161,631 5,414,249
Gas plant acquisition adjustment 795,004 795,004
- ----------------------------------------------------------------------------------------------
Total property, plant and equipment 143,345,126 133,000,866
Less: Accumulated depreciation and amortization (43,827,961) (39,430,738)
- ----------------------------------------------------------------------------------------------
Net property, plant and equipment 99,517,165 93,570,128
- ----------------------------------------------------------------------------------------------
Investments 2,721,443 2,263,068
- ----------------------------------------------------------------------------------------------
Current Assets
Cash and cash equivalents 555,198 2,213,529
Accounts receivable (less allowance for uncollectibles
of $331,775 and $392,412 in 1997 and 1996, respectively) 13,087,999 14,488,944
Materials and supplies, at average cost 1,380,120 1,284,876
Propane inventory, at average cost 2,288,516 2,345,531
Storage gas prepayments 2,926,618 3,731,680
Underrecovered purchased gas costs 1,673,389 2,192,170
Income taxes receivable 849,623 112,942
Prepaid expenses 1,060,911 942,359
Deferred income taxes 247,487 158,010
- ----------------------------------------------------------------------------------------------
Total current assets 24,069,861 27,470,041
- ----------------------------------------------------------------------------------------------
Deferred Charges and Other Assets
Environmental regulatory assets 4,865,073 6,650,088
Environmental expenditures, net 2,372,929 1,778,348
Other deferred charges and intangible assets 3,832,389 4,314,235
- ----------------------------------------------------------------------------------------------
Total deferred charges and other assets 11,070,391 12,742,671
- ----------------------------------------------------------------------------------------------
Total Assets $137,378,860 $136,045,908
==============================================================================================
See accompanying notes
Capitalization and Liabilities
- ----------------------------------------------------------------------------------------------
At December 31, 1997 1996
- ----------------------------------------------------------------------------------------------
Capitalization
Stockholders' equity
Common stock $2,191,792 $2,160,628
Additional paid-in capital 19,819,604 18,745,718
Retained earnings 28,218,763 26,957,048
Less: Unearned compensation related to restricted stock awarded (190,886) (364,529)
Unrealized gain on marketable securities, net 296,872 38,598
- ----------------------------------------------------------------------------------------------
Total stockholders' equity 50,336,145 47,537,463
Long-term debt, net of current portion 38,226,000 28,984,368
- ----------------------------------------------------------------------------------------------
Total capitalization 88,562,145 76,521,831
- ----------------------------------------------------------------------------------------------
Current Liabilities
Current portion of long-term debt 582,500 3,078,489
Short-term borrowing 7,600,000 12,700,000
Accounts payable 12,451,570 14,426,983
Refunds payable to customers 357,041 353,734
Accrued interest 784,533 741,768
Dividends payable 1,092,168 883,621
Other accrued expenses 3,807,484 3,733,233
- ----------------------------------------------------------------------------------------------
Total current liabilities 26,675,296 35,917,828
- ----------------------------------------------------------------------------------------------
Deferred Credits and Other Liabilities
Deferred income taxes 11,490,358 9,798,676
Deferred investment tax credits 821,617 876,432
Environmental liability 4,865,073 6,650,088
Accrued pension costs 1,754,715 1,866,661
Other liabilities 3,209,656 4,414,392
- ----------------------------------------------------------------------------------------------
Total deferred credits and other liabilities 22,141,419 23,606,249
- ----------------------------------------------------------------------------------------------
Commitments and Contingencies
(Notes J and K)
Total Capitalization and Liabilities $137,378,860 $136,045,908
==============================================================================================
See accompanying notes
CONSOLIDATED STATEMENTS OF INCOME
- -----------------------------------------------------------------------------------------------------------
For the Years Ended December 31, 1997 1996 1995
- -----------------------------------------------------------------------------------------------------------
Operating Revenues $122,774,593 $130,213,409 $111,795,778
Cost of Sales 77,764,830 82,226,644 65,616,368
- -----------------------------------------------------------------------------------------------------------
Gross Margin 45,009,763 47,986,765 46,179,410
- -----------------------------------------------------------------------------------------------------------
Operating Expenses
Operations 21,831,194 22,230,425 20,612,585
Maintenance 2,041,043 2,504,894 2,477,454
Depreciation and amortization 5,396,975 5,504,637 5,802,884
Other taxes 3,853,954 3,689,748 3,194,673
Income taxes 3,327,627 3,947,056 4,025,274
- -----------------------------------------------------------------------------------------------------------
Total operating expenses 36,450,793 37,876,760 36,112,870
- -----------------------------------------------------------------------------------------------------------
Operating Income 8,558,970 10,110,005 10,066,540
- -----------------------------------------------------------------------------------------------------------
Other Income
Interest income 239,543 249,509 191,845
Other income, net 405,156 177,045 239,687
Income taxes (216,988) (83,739) (105,280)
Allowance for equity funds used during construction 115,434 65,198
- -----------------------------------------------------------------------------------------------------------
Total other income 427,711 458,249 391,450
- -----------------------------------------------------------------------------------------------------------
Income Before Interest Charges 8,986,681 10,568,254 10,457,990
- -----------------------------------------------------------------------------------------------------------
Interest Charges
Interest on long-term debt 2,347,369 2,392,458 2,282,247
Amortization of debt expense 119,401 120,345 109,399
Other 922,110 514,856 566,320
Allowance for borrowed funds used during construction (85,145) (64,320) (93,482)
- -----------------------------------------------------------------------------------------------------------
Total interest charges 3,303,735 2,963,339 2,864,484
- -----------------------------------------------------------------------------------------------------------
Net Income $5,682,946 $7,604,915 $7,593,506
===========================================================================================================
Earnings Per Share of Common Stock:
Basic: $1.27 $1.72 $1.75
Diluted: $1.24 $1.67 $1.70
See accompanying notes
CONSOLIDATED STATEMENTS OF CASH FLOWS
- -----------------------------------------------------------------------------------------------------------
For the Years Ended December 31, 1997 1996 1995
- -----------------------------------------------------------------------------------------------------------
Operating Activities
Net Income $5,682,946 $7,604,915 $7,593,506
Adjustments to reconcile net income to net operating cash:
Depreciation and amortization 6,090,665 6,148,232 6,246,222
Allowance for equity funds used during construction (115,434) (65,198)
Investment tax credit adjustments (54,815) (54,815) (54,815)
Deferred income taxes, net 1,437,206 1,794,146 252,727
Employee benefits (238,826) 471,870 178,803
Employee compensation from lapsing of stock restrictions 173,643 334,745 431,694
Allowance for refund (1,356,705)
Other, net (286,147) 83,301 (339,081)
Changes in assets and liabilities:
Accounts receivable, net 1,400,945 (904,516) (4,727,364)
Other current assets 648,282 (2,141,048) 1,588,675
Other deferred charges (625,395) (977,652) (946,450)
Accounts payable, net (1,823,912) 1,422,807 3,619,023
Refunds payable to customers 3,307 (613,206) 400,192
Overrecovered (underrecovered) purchased gas costs 518,781 (2,245,544) 162,399
Other current liabilities (619,668) 396,326 939,750
- -----------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 12,307,012 11,204,127 13,923,378
- -----------------------------------------------------------------------------------------------------------
Investing Activities
Property, plant and equipment expenditures, net (12,380,826) (14,069,116) (11,666,442)
Allowance for equity funds used during construction 115,434 65,198
Purchases of investments (36,167) (129,406) (38,836)
- -----------------------------------------------------------------------------------------------------------
Net cash used by investing activities (12,416,993) (14,083,088) (11,640,080)
- -----------------------------------------------------------------------------------------------------------
Financing Activities
Common stock dividends, net of amounts reinvested of $382,932,
$346,308 and $304,106 in 1997, 1996 and 1995, respectively (3,829,752) (3,337,755) (3,324,376)
Issuance of stock -- Dividend Reinvestment Plan optional cash 167,337 208,813 202,835
Issuance of stock -- Retirement Savings Plan 404,297 349,031
Net (repayments) borrowings under line of credit agreements (5,100,000) 7,300,000 (3,197,039)
Proceeds from issuance of long-term debt 9,908,223 10,428,753
Repayment of long-term debt (3,098,455) (823,213) (5,439,151)
- -----------------------------------------------------------------------------------------------------------
Net cash (used) provided by financing activities (1,548,350) 3,696,876 (1,328,978)
- -----------------------------------------------------------------------------------------------------------
Net (Decrease) Increase in Cash and Cash Equivalents (1,658,331) 817,915 954,320
Cash and Cash Equivalents at Beginning of Year 2,213,529 1,395,614 441,294
- -----------------------------------------------------------------------------------------------------------
Cash and Cash Equivalents at End of Year $555,198 $2,213,529 $1,395,614
===========================================================================================================
Supplemental Disclosure of Cash Flow Information
Cash paid for interest $3,203,709 $2,831,109 $2,884,864
Cash paid for income tax $3,400,479 $2,122,120 $3,288,895
See accompanying notes
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
- -----------------------------------------------------------------------------------------------------------
For the Years Ended December 31, 1997 1996 1995
- -----------------------------------------------------------------------------------------------------------
Common Stock
Balance -- beginning of year $2,160,628 $2,122,212 $2,096,515 (1)
Dividend Reinvestment Plan 15,398 16,514 18,816
USI restricted stock award agreements 10,639 6,881
Conversion of debentures 4,461 429
Company's Retirement Savings Plan 11,305 9,928
Exercised stock options 906
- -----------------------------------------------------------------------------------------------------------
Balance -- end of year 2,191,792 2,160,628 2,122,212
- -----------------------------------------------------------------------------------------------------------
Additional Paid-in Capital
Balance -- beginning of year 18,745,718 17,489,108 16,731,689 (1)
Dividend Reinvestment Plan 529,453 538,607 488,125
USI restricted stock award agreements 344,570 176,029
Sale of treasury stock to Company's
Retirement Savings Plan 93,265
Conversion of debentures 151,441 14,557
Company's Retirement Savings Plan 392,992 328,465
Exercised stock options 30,411
- -----------------------------------------------------------------------------------------------------------
Balance -- end of year 19,819,604 18,745,718 17,489,108
- -----------------------------------------------------------------------------------------------------------
Retained Earnings
Balance -- beginning of year 26,957,048 23,458,776 19,480,374
Net income 5,682,946 7,604,915 7,593,506 (1)
Cash dividends -- Chesapeake (2) (4,341,964) (3,514,694) (3,331,972)
Cash dividends -- Pooled companies (79,267) (591,949) (283,132)
- -----------------------------------------------------------------------------------------------------------
Balance -- end of year 28,218,763 26,957,048 23,458,776
- -----------------------------------------------------------------------------------------------------------
Treasury Stock (3)
Unearned Compensation
Balance -- beginning of year (364,529) (415,107) (696,679)
Issuance of award (284,167) (121,343)
Amortization of prior years' awards 173,643 334,745 402,915
- -----------------------------------------------------------------------------------------------------------
Balance -- end of year (190,886) (364,529) (415,107)
- -----------------------------------------------------------------------------------------------------------
Unrealized Gain (Loss) on Marketable Securities (4) 296,872 38,598 (72,839)
- -----------------------------------------------------------------------------------------------------------
Total Stockholders' Equity $50,336,145 $47,537,463 $42,582,150
===========================================================================================================
(1) The following adjustments have been made to 1995 presentation to reflect the Tri-County pooling of
interests: Begining balances of Common Stock and Additional Paid-in Capital have been adjusted by
$311,001 and ($103,314), respectively. Net income as shown in the Retained Earnings section has
been adjusted by $356,811.
(2) Dividends per share of common stock were $.97, $.93 and $.90 for the years 1997, 1996
and 1995, respectively.
(3) The entire Treasury Stock balance of ($99,842) was sold to the Company's Retirement Savings Plan
during 1995, leaving a zero balance.
(4) Net of income tax expense (benefit) of approximately $190,000, $25,000 and ($48,000) for the
the years 1997, 1996 and 1995, respectively.
See accompanying notes
CONSOLIDATED STATEMENTS OF INCOME TAXES
- -----------------------------------------------------------------------------------------------------------
For the Years Ended December 31, 1997 1996 1995
- -----------------------------------------------------------------------------------------------------------
Current Income Tax Expense
Federal $1,916,654 $1,884,609 $3,182,346
State 442,563 356,576 621,238
Investment tax credit adjustments, net (54,815) (54,815) (54,815)
- -----------------------------------------------------------------------------------------------------------
Total current income tax expense 2,304,402 2,186,370 3,748,769
- -----------------------------------------------------------------------------------------------------------
Deferred Income Tax Expense
Property, plant and equipment 1,335,802 581,373 455,151
Deferred gas costs (204,170) 873,904 (56,915)
Pensions and other employee benefits (19,508) 107,131 57,508
Unbilled revenue (104,632) 54,320 (260,922)
Contributions in aid of construction (33,028) (6,979) (283,033)
Environmental expenditures 249,417 108,578 272,068
Allowance for refund 121,671 442,064
Other 16,332 4,427 (244,136)
- -----------------------------------------------------------------------------------------------------------
Total deferred income tax expense (1) 1,240,213 1,844,425 381,785
- -----------------------------------------------------------------------------------------------------------
Total Income Tax Expense $3,544,615 $4,030,795 $4,130,554
===========================================================================================================
Reconciliation of Effective Income Tax Rates
Federal income tax expense at 34% 3,171,505 3,956,118 3,986,180
State income taxes, net of Federal benefit 399,213 537,566 546,955
Acquisition of subchapter S Corporation (2) 317,821 (268,211) (137,800)
Other