SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 _______________________________ FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended: June 30, 2004 ------------- OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ______ to ______ COMMISSION FILE NUMBER: 001-11590 CHESAPEAKE UTILITIES CORPORATION -------------------------------- (Exact name of registrant as specified in its charter) DELAWARE 51-0064146 -------- ---------- (State or other (I.R.S. Employer jurisdiction of Identification No.) incorporation or organization) 909 SILVER LAKE BOULEVARD, DOVER, DELAWARE 19904 ------------------------------------------------ (Address of principal executive offices, including Zip Code) (302) 734-6799 -------------- (Registrant's Telephone Number, including Area Code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes [X] No [ ] Common Stock, par value $.4867 - 5,725,500 shares issued as of June 30. 2004.
TABLE OF CONTENTS PART I - FINANCIAL INFORMATION. . . . . . . . . . . . . . . . . . . . . . 1 Item 1. Financial Statements. . . . . . . . . . . . . . . . . . . . . 1 Notes to Condensed Consolidated Financial Statements . . . . . . . . 7 1. Quarterly Financial Data . . . . . . . . . . . . . . . . . . . . 7 2. Calculation of Earnings Per Share. . . . . . . . . . . . . . . 9 3. Commitments and Contingencies. . . . . . . . . . . . . . . . . . 9 Environmental Matters . . . . . . . . . . . . . . . . . . . . . 9 Other Commitments and Contingencies . . . . . . . . . . . . .11 4. Recent Authoritative Pronouncements on Financial Reporting and Accounting. . . . . . . . . . . . .11 5. Segment Information . . . . . . . . . . . . . . . . . . . . . . .12 6. Discontinued Operations . . . . . . . . . . . . . . . . . . . . .13 7. Employee Benefit Plans . . . . . . . . . . . . . . . . . . . . .14 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations. . . . . . . . . . . .14 Business Description . . . . . . . . . . . . . . . . . . . . . . . . .14 Financial Position, Liquidity and Capital Resources . . . . . . . . .15 Off-Balance Sheet Arrangements and Contractual Obligations. . . . . . .16 Results of Operations for the Quarter Ended June 30, 2004 . . . . . . . . . . . . . . . . . . . . . . . . .17 Consolidated Overview. . . . . . . . . . . . . . . . . . . . . . . . .17 Natural Gas Distribution and Transmission . . . . . . . . . . . . .18 Propane. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18 Advanced Information Services. . . . . . . . . . . . . . . . . . . . 19 Other Business Operations and Eliminations . . . . . . . . . . . . 20 Discontinued Operations . . . . . . . . . . . . . . . . . . . . . . . 20 Income Taxes. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20 Interest Expense. . . . . . . . . . . . . . . . . . . . . . . . . . . 20 Results of Operations for the Six Months Ended June 30, 2004 . . . . . . . . . . . . . . . . . . . . . . . . .21 Consolidated Overview. . . . . . . . . . . . . . . . . . . . . . . . .21 Natural Gas Distribution and Transmission . . . . . . . . . . . . .22 Propane. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23 Advanced Information Services. . . . . . . . . . . . . . . . . . . . 23 Other Business Operations and Eliminations . . . . . . . . . . . . 24 Discontinued Operations . . . . . . . . . . . . . . . . . . . . . . . 24 Income Taxes. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24 Interest Expense. . . . . . . . . . . . . . . . . . . . . . . . . . . 24 Environmental Matters . . . . . . . . . . . . . . . . . . . . . . . . 24 Other Matters . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25 Regulatory Matters. . . . . . . . . . . . . . . . . . . . . . . . . . 25 Competition. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27 Recent Pronouncements . . . . . . . . . . . . . . . . . . . . . . . . 28 Inflation. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28 Cautionary Statement. . . . . . . . . . . . . . . . . . . . . . . . . 29 Item 3. Quantitative and Qualitative Disclosures about Market Risk. . 29 Item 4. Controls and Procedures. . . . . . . . . . . . . . . . . . .30 Evaluation of Disclosure Controls and Procedures. . . . . . . . . 30 Changes in Internal Controls. . . . . . . . . . . . . . . . . . . . 30 PART II - OTHER INFORMATION. . . . . . . . . . . . . . . . . . . . . . . 31 SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33 EXHIBIT 31.1. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34 EXHIBIT 31.2. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35 EXHIBIT 32.1. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36 EXHIBIT 32.2. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37 PART I - FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS CHESAPEAKE UTILITIES CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED) <TABLE> <CAPTION> - ----------------------------------------------------------------------------------------- 2004 2003 FOR THE THREE MONTHS ENDED JUNE 30, RESTATED - ----------------------------------------------------------------------------------------- OPERATING REVENUES $34,292,997 $30,784,922 OPERATING EXPENSES <S> <C> <C> Cost of sales, excluding costs below. . . . . . . . . . . 20,234,037 16,893,451 Operations. . . . . . . . . . . . . . . . . . . . . . . . 8,634,728 7,772,767 Maintenance . . . . . . . . . . . . . . . . . . . . . . . 415,567 431,112 Depreciation and amortization . . . . . . . . . . . . . . 1,811,171 1,791,128 Other taxes . . . . . . . . . . . . . . . . . . . . . . . 1,034,700 1,034,947 - ----------------------------------------------------------------------------------------- Total operating expenses. . . . . . . . . . . . . . . . . . 32,130,203 27,923,405 - ----------------------------------------------------------------------------------------- OPERATING INCOME. . . . . . . . . . . . . . . . . . . . . . 2,162,794 2,861,517 OTHER INCOME NET OF OTHER EXPENSES. . . . . . . . . . . . . 74,217 34,257 INTEREST CHARGES. . . . . . . . . . . . . . . . . . . . . . 1,328,231 1,429,005 - ----------------------------------------------------------------------------------------- INCOME BEFORE INCOME TAXES. . . . . . . . . . . . . . . . . 908,780 1,466,769 INCOME TAXES. . . . . . . . . . . . . . . . . . . . . . . . 297,262 532,233 - ----------------------------------------------------------------------------------------- INCOME FROM CONTINUING OPERATIONS . . . . . . . . . . . . . 611,518 934,536 NET INCOME (LOSS) FROM DISCONTINUED OPERATIONS, NET OF TAX Discontinued operations, net of tax of $11,234 and ($2,899), respectively . . . . . . . . . 19,148 (71,961) Gain on sale. . . . . . . . . . . . . . . . . . . . . . . - 71,574 - ----------------------------------------------------------------------------------------- Total income (loss) from discontinued operations, net . . . 19,148 (387) - ----------------------------------------------------------------------------------------- NET INCOME . . . . . . . . . . . . . . . . . . . . . . . . . $ 630,666 $ 934,149 ========================================================================================= EARNINGS PER SHARE OF COMMON STOCK: BASIC FROM CONTINUING OPERATIONS. . . . . . . . . . . . . . . $ 0.11 $ 0.17 FROM DISCONTINUED OPERATIONS. . . . . . . . . . . . . . 0.00 0.00 - ----------------------------------------------------------------------------------------- NET INCOME. . . . . . . . . . . . . . . . . . . . . . . . $ 0.11 $ 0.17 ========================================================================================= DILUTED FROM CONTINUING OPERATIONS. . . . . . . . . . . . . . . $ 0.11 $ 0.17 FROM DISCONTINUED OPERATIONS. . . . . . . . . . . . . . 0.00 0.00 - ----------------------------------------------------------------------------------------- NET INCOME. . . . . . . . . . . . . . . . . . . . . . . . $ 0.11 $ 0.17 ========================================================================================= CASH DIVIDENDS DECLARED PER SHARE OF COMMON STOCK . . . . . $ 0.280 $ 0.275 ========================================================================================= <FN> The accompanying notes are an integral part of these financial statements. </FN> </TABLE>
CHESAPEAKE UTILITIES CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED) <TABLE> <CAPTION> - ----------------------------------------------------------------------------------------- 2004 2003 FOR THE SIX MONTHS ENDED JUNE 30, RESTATED - ----------------------------------------------------------------------------------------- <S> <C> <C> OPERATING REVENUES. . . . . . . . . . . . . . . . . . . . . $98,055,357 $ 93,744,437 OPERATING EXPENSES Cost of sales, excluding costs below. . . . . . . . . . . 60,638,245 55,317,606 Operations. . . . . . . . . . . . . . . . . . . . . . . . 17,795,187 16,632,945 Maintenance . . . . . . . . . . . . . . . . . . . . . . . 796,137 850,272 Depreciation and amortization . . . . . . . . . . . . . . 3,621,795 3,527,227 Other taxes . . . . . . . . . . . . . . . . . . . . . . . 2,341,893 2,243,691 - ----------------------------------------------------------------------------------------- Total operating expenses. . . . . . . . . . . . . . . . . . 85,193,257 78,571,741 - ----------------------------------------------------------------------------------------- OPERATING INCOME. . . . . . . . . . . . . . . . . . . . . . 12,862,100 15,172,696 OTHER INCOME NET OF OTHER EXPENSES. . . . . . . . . . . . . 176,694 88,157 INTEREST CHARGES. . . . . . . . . . . . . . . . . . . . . . 2,654,997 2,894,855 - ----------------------------------------------------------------------------------------- INCOME BEFORE INCOME TAXES. . . . . . . . . . . . . . . . . 10,383,797 12,365,998 INCOME TAXES. . . . . . . . . . . . . . . . . . . . . . . . 3,998,745 4,794,359 - ----------------------------------------------------------------------------------------- INCOME FROM CONTINUING OPERATIONS . . . . . . . . . . . . . 6,385,052 7,571,639 NET INCOME (LOSS) FROM DISCONTINUED OPERATIONS, NET OF TAX Discontinued operations, net of tax of ($7,257) and ($87,619), respectively . . . . . . . . (15,187) (234,289) Gain on sale. . . . . . . . . . . . . . . . . . . . . . . - 71,574 - ----------------------------------------------------------------------------------------- Total loss from discontinued operations, net. . . . . . . . (15,187) (162,715) - ----------------------------------------------------------------------------------------- NET INCOME . . . . . . . . . . . . . . . . . . . . . . . . . $ 6,369,865 $ 7,408,924 ========================================================================================= EARNINGS PER SHARE OF COMMON STOCK: BASIC FROM CONTINUING OPERATIONS. . . . . . . . . . . . . . . $ 1.12 $ 1.36 FROM DISCONTINUED OPERATIONS. . . . . . . . . . . . . . 0.00 (0.03) - ----------------------------------------------------------------------------------------- NET INCOME. . . . . . . . . . . . . . . . . . . . . . . . $ 1.12 $ 1.33 ========================================================================================= DILUTED FROM CONTINUING OPERATIONS. . . . . . . . . . . . . . . $ 1.10 $ 1.33 FROM DISCONTINUED OPERATIONS. . . . . . . . . . . . . . (0.01) (0.03) - ----------------------------------------------------------------------------------------- NET INCOME. . . . . . . . . . . . . . . . . . . . . . . . $ 1.09 $ 1.30 ========================================================================================= CASH DIVIDENDS DECLARED PER SHARE OF COMMON STOCK . . . . . $ 0.555 $ 0.550 ========================================================================================= <FN> The accompanying notes are an integral part of these financial statements. </FN> </TABLE>
CHESAPEAKE UTILITIES CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) <TABLE> <CAPTION> - ----------------------------------------------------------------------------------------- 2004 2003 FOR THE SIX MONTHS ENDED JUNE 30, RESTATED - ----------------------------------------------------------------------------------------- OPERATING ACTIVITIES <S> <C> <C> Net Income . . . . . . . . . . . . . . . . . . . . . . . . $ 6,369,865 $ 7,408,924 Adjustments to reconcile net income to net operating cash: Depreciation and amortization. . . . . . . . . . . . . . 3,621,795 3,980,473 Depreciation and accretion included in other costs . . . 1,286,104 1,255,024 Deferred income taxes, net . . . . . . . . . . . . . . . 822,082 957,212 Mark-to-market adjustments . . . . . . . . . . . . . . . 140,089 604,430 Employee benefits and compensation . . . . . . . . . . . 440,404 579,775 Other. . . . . . . . . . . . . . . . . . . . . . . . . . (14,620) 21,449 Changes in assets and liabilities: Accounts receivable and accrued revenue. . . . . . . . . 10,773,033 8,125,498 Inventory, materials, supplies and storage gas . . . . . (648,888) 1,187,467 Prepaid expenses and other current assets. . . . . . . . 221,095 427,248 Other deferred charges . . . . . . . . . . . . . . . . . 303,234 346,101 Accounts payable, net. . . . . . . . . . . . . . . . . . (6,699,976) (8,709,145) Refunds payable to customers . . . . . . . . . . . . . . 236,603 (165,282) Accrued income taxes . . . . . . . . . . . . . . . . . . 2,609,586 1,506,928 Accrued interest . . . . . . . . . . . . . . . . . . . . 1,144,624 1,186,664 Accrued compensation . . . . . . . . . . . . . . . . . . (1,139,897) 299,966 Over (under) recovered deferred purchased gas costs. . . 745,519 (2,808,638) Other current liabilities. . . . . . . . . . . . . . . . 456,922 (405,652) Other liabilities . . . . . . . . . . . . . . . . . . . (94,088) 201,446 - ----------------------------------------------------------------------------------------- Net cash provided by operating activities. . . . . . . . . . 20,573,486 15,999,888 - ----------------------------------------------------------------------------------------- INVESTING ACTIVITIES Property, plant and equipment expenditures, net. . . . . . (6,582,168) (4,607,407) Sale of discontinued operations. . . . . . . . . . . . . . 65,998 790,496 Environmental recoveries, net of expenditures. . . . . . . 262,946 731,633 - ----------------------------------------------------------------------------------------- Net cash used by investing activities. . . . . . . . . . . . (6,253,224) (3,085,278) - ----------------------------------------------------------------------------------------- FINANCING ACTIVITIES Common stock dividends . . . . . . . . . . . . . . . . . . (3,125,798) (3,055,339) Issuance of stock: Dividend Reinvestment Plan optional cash . . . . . . . . 102,483 166,486 Dividends reinvested by stockholders . . . . . . . . . . 385,169 362,536 Retirement Savings Plan. . . . . . . . . . . . . . . . . 588,794 574,632 Conversion of debentures . . . . . . . . . . . . . . . . 205,663 113,834 Purchase of treasury stock . . . . . . . . . . . . . . . . (193,625) - Net repayment under line of credit agreements. . . . . . . (3,515,258) (9,400,000) Repayment of long-term debt. . . . . . . . . . . . . . . . (1,584,000) (1,761,380) - ----------------------------------------------------------------------------------------- Net cash used by financing activities. . . . . . . . . . . . (7,136,572) (12,999,231) - ----------------------------------------------------------------------------------------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS . . . . 7,183,690 (84,621) CASH AND CASH EQUIVALENTS BEGINNING OF PERIOD. . . . . . . . 3,108,501 2,458,276 - ----------------------------------------------------------------------------------------- CASH AND CASH EQUIVALENTS END OF PERIOD. . . . . . . . . . . $10,292,191 $ 2,373,655 ========================================================================================= <FN> The accompanying notes are an integral part of these financial statements. </FN> </TABLE>
CHESAPEAKE UTILITIES CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED) <TABLE> <CAPTION> - ----------------------------------------------------------------------------------------- JUNE 30, DECEMBER 31, ASSETS 2004 2003 - ----------------------------------------------------------------------------------------- PROPERTY, PLANT AND EQUIPMENT <S> <C> <C> Natural gas distribution and transmission. . . . . . . . $189,999,737 $186,661,469 Propane. . . . . . . . . . . . . . . . . . . . . . . . . 36,843,142 35,577,104 Advanced information services. . . . . . . . . . . . . . 1,431,674 1,396,595 Water services . . . . . . . . . . . . . . . . . . . . . 750,947 762,383 Other plant. . . . . . . . . . . . . . . . . . . . . . . 8,840,050 8,796,305 - ----------------------------------------------------------------------------------------- Total property, plant and equipment. . . . . . . . . . . . 237,865,550 233,193,856 Plus: Construction work in progress . . . . . . . . . . . 2,224,284 1,724,721 Less: Accumulated depreciation and amortization . . . . . (69,873,829) (67,046,318) - ----------------------------------------------------------------------------------------- Net property, plant and equipment. . . . . . . . . . . . . 170,216,005 167,872,259 - ----------------------------------------------------------------------------------------- INVESTMENTS. . . . . . . . . . . . . . . . . . . . . . . . 341,602 386,710 - ----------------------------------------------------------------------------------------- CURRENT ASSETS Cash and cash equivalents. . . . . . . . . . . . . . . . 10,292,191 3,108,501 Accounts receivable (less allowance for uncollectibles of $698,078 and $659,047, respectively). . . . . . . . 18,577,898 26,191,845 Accrued revenue. . . . . . . . . . . . . . . . . . . . . 1,272,668 4,497,752 Materials and supplies, at average cost. . . . . . . . . 987,460 923,556 Appliance and other inventory, at FIFO . . . . . . . . . 143,106 173,044 Propane inventory, at average cost . . . . . . . . . . . 5,222,715 3,387,535 Storage gas prepayments. . . . . . . . . . . . . . . . . 3,402,343 4,622,601 Underrecovered purchased gas costs . . . . . . . . . . . - 660,601 Income taxes receivable. . . . . . . . . . . . . . . . . - 489,841 Deferred income taxes receivable . . . . . . . . . . . . 79,685 - Prepaid expenses . . . . . . . . . . . . . . . . . . . . 1,763,805 2,069,988 Other current assets . . . . . . . . . . . . . . . . . . 713,957 768,958 - ----------------------------------------------------------------------------------------- Total current assets . . . . . . . . . . . . . . . . . . . 42,455,828 46,894,222 - ----------------------------------------------------------------------------------------- DEFERRED CHARGES AND OTHER ASSETS Environmental regulatory assets. . . . . . . . . . . . . 316,414 353,092 Environmental expenditures . . . . . . . . . . . . . . . 101,142 364,088 Goodwill, net. . . . . . . . . . . . . . . . . . . . . . 674,451 674,451 Other intangible assets, net . . . . . . . . . . . . . . 297,597 305,213 Long-term receivables. . . . . . . . . . . . . . . . . . 1,543,811 1,637,998 Other regulatory assets. . . . . . . . . . . . . . . . . 1,408,683 1,693,401 Other deferred charges . . . . . . . . . . . . . . . . . 1,011,032 983,230 - ----------------------------------------------------------------------------------------- Total deferred charges and other assets. . . . . . . . . . 5,353,130 6,011,473 - ----------------------------------------------------------------------------------------- TOTAL ASSETS . . . . . . . . . . . . . . . . . . . . . . . $218,366,565 $221,164,664 ========================================================================================= <FN> The accompanying notes are an integral part of these financial statements. </FN> </TABLE>
CHESAPEAKE UTILITIES CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED) <TABLE> <CAPTION> - ----------------------------------------------------------------------------------------- JUNE 30, DECEMBER 31, CAPITALIZATION AND LIABILITIES 2004 2003 - ----------------------------------------------------------------------------------------- CAPITALIZATION Stockholders' equity Common Stock, par value $.4867 per share; (authorized 12,000,000 shares; issued and outstanding <S> <C> <C> 5,734,853 and 5,660,594 shares, respectively) . . . . $ 2,790,720 $ 2,754,748 Additional paid-in capital . . . . . . . . . . . . . . 35,856,549 34,176,361 Retained earnings. . . . . . . . . . . . . . . . . . . 39,186,041 36,008,246 Treasury stock . . . . . . . . . . . . . . . . . . . . (193,625) - - ----------------------------------------------------------------------------------------- Total stockholders' equity . . . . . . . . . . . . . . . 77,639,685 72,939,355 Long-term debt, net of current maturities. . . . . . . . 68,209,546 69,415,545 - ----------------------------------------------------------------------------------------- Total capitalization . . . . . . . . . . . . . . . . . . 145,849,231 142,354,900 - ----------------------------------------------------------------------------------------- CURRENT LIABILITIES Current portion of long-term debt. . . . . . . . . . . . 3,287,091 3,665,091 Short-term borrowing . . . . . . . . . . . . . . . . . . - 3,515,258 Accounts payable . . . . . . . . . . . . . . . . . . . . 15,297,436 21,997,413 Refunds payable to customers . . . . . . . . . . . . . . 443,185 206,582 Customer deposits. . . . . . . . . . . . . . . . . . . . 1,969,981 2,008,379 Income taxes payable . . . . . . . . . . . . . . . . . . 2,119,745 - Accrued interest . . . . . . . . . . . . . . . . . . . . 1,796,991 652,367 Dividends payable. . . . . . . . . . . . . . . . . . . . 1,604,427 1,556,631 Overrecovered purchased gas costs. . . . . . . . . . . . 84,918 - Deferred income taxes payable. . . . . . . . . . . . . . - 119,814 Accrued compensation . . . . . . . . . . . . . . . . . . 1,921,388 3,266,072 Other accrued liabilities. . . . . . . . . . . . . . . . 2,152,843 1,657,523 - ----------------------------------------------------------------------------------------- Total current liabilities. . . . . . . . . . . . . . . . . 30,678,005 38,645,130 - ----------------------------------------------------------------------------------------- DEFERRED CREDITS AND OTHER LIABILITIES Deferred income taxes. . . . . . . . . . . . . . . . . . 20,612,576 19,590,995 Deferred investment tax credits. . . . . . . . . . . . . 465,317 492,725 Environmental liabilities. . . . . . . . . . . . . . . . 508,910 562,194 Accrued pension costs. . . . . . . . . . . . . . . . . . 2,226,268 2,015,128 Accrued asset removal cost . . . . . . . . . . . . . . . 14,198,070 13,536,209 Other liabilities. . . . . . . . . . . . . . . . . . . . 3,828,188 3,967,383 - ----------------------------------------------------------------------------------------- Total deferred credits and other liabilities . . . . . . . 41,839,329 40,164,634 - ----------------------------------------------------------------------------------------- COMMITMENTS AND CONTINGENCIES (NOTE 3) TOTAL CAPITALIZATION AND LIABILITIES . . . . . . . . . . . $218,366,565 $221,164,664 ========================================================================================= <FN> The accompanying notes are an integral part of these financial statements. </FN> </TABLE>
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 1. QUARTERLY FINANCIAL DATA The financial information for Chesapeake Utilities Corporation (the "Company" or "Chesapeake") included herein is unaudited and should be read in conjunction with the Company's Annual Report on Form 10-K; however, the year-end balance sheet data has been derived from audited financial statements. In the opinion of management, this financial information reflects normal recurring adjustments which are necessary for a fair presentation of the Company's interim results. In accordance with United States Generally Accepted Accounting Principles, the Company's management makes certain estimates and assumptions regarding: 1) reported amounts of assets and liabilities, 2) disclosure of contingent assets and liabilities at the date of the financial statements and 3) reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Due to the seasonal nature of the Company's business, there are substantial variations in the results of operations reported on a quarterly basis and, accordingly, results for any particular quarter may not give a true indication of results for the year. Chesapeake does not have any material components of comprehensive income that are required to be reported by Financial Accounting Standards Board ("FASB") Statement of Financial Accounting Standards ("SFAS") No. 130, "Reporting Comprehensive Income."
As reported on the Company's December 31, 2003 Annual Report on Form 10-K, the Company has restated its quarterly financial statements for prior periods in order to reflect the results of its Delaware and Maryland natural gas divisions on the "accrual" revenue recognition method rather than the "as billed" revenue recognition method. This change had an insignificant effect on the Company's annual results for 2003. Under the "as billed" method, revenues from customer sales are not recognized until the meter is read. Under the "accrual" method, at the end of each period, the amount of gas used is estimated and is recognized as revenue. The Company's Florida division has historically used the "accrual" method in accordance with Florida Public Service Commission requirements. Prior to December 31, 2003, the Delaware and Maryland divisions used the "as billed" method to recognize revenues consistent with the rate-setting processes in those states. In order to consistently apply the "accrual" method, the Company met separately with the staffs of the Delaware and Maryland Public Service Commissions to determine the regulatory impact of the change. Having determined that there is little to no regulatory impact, the Company has conformed the revenue recognition method used in its Delaware and Maryland divisions to the method used by its Florida division. In order to provide comparable information, the Company has restated its 2003 quarterly interim financial statements to reflect the "accrual" revenue recognition method. Dollars are shown in thousands, except per share amounts. <TABLE> <CAPTION> - -------------------------------------------------------------------------------------------------------------------------------- ---------- THREE MONTHS ENDED ---------- ----------- SIX MONTHS ENDED ----------- JUNE 30, IMPACT OF JUNE 30, JUNE 30, IMPACT OF JUNE 30, 2003 REVENUE 2003 2003 REVENUE 2003 AS PREVIOUSLY RECOGNITION AS PREVIOUSLY RECOGNITION REPORTED (1) CHANGE AS RESTATED REPORTED (1) CHANGE AS RESTATED - -------------------------------------------------------------------------------------------------------------------------------- SELECTED INCOME STATEMENT INFORMATION <S> <C> <C> <C> <C> <C> <C> Operating Revenues . . . . . . . . . . . $ 32,237 $ (1,452) $ 30,785 $ 96,160 $ (2,416) $ 93,744 Operating Income . . . . . . . . . . . . 3,268 (406) 2,862 15,835 (662) 15,173 Income from Continuing Operations. . . . 1,177 (242) 935 7,967 (395) 7,572 Net Income . . . . . . . . . . . . . . . 1,176 (242) 934 7,804 (395) 7,409 EARNINGS PER SHARE OF COMMON STOCK Basic From Continuing Operations . . . . . . . $ 0.21 $ (0.04) $ 0.17 $ 1.43 $ (0.07) $ 1.36 Net Income . . . . . . . . . . . . . . . $ 0.21 $ (0.04) $ 0.17 $ 1.40 $ (0.07) $ 1.33 Diluted From Continuing Operations . . . . . . . $ 0.21 $ (0.04) $ 0.17 $ 1.40 $ (0.07) $ 1.33 Net Income . . . . . . . . . . . . . . . $ 0.21 $ (0.04) $ 0.17 $ 1.37 $ (0.07) $ 1.30 </TABLE> <TABLE> <CAPTION> - -------------------------------------------------------------------------------------- JUNE 30, IMPACT OF JUNE 30, 2003 REVENUE 2003 AS PREVIOUSLY RECOGNITION REPORTED (1) CHANGE AS RESTATED - -------------------------------------------------------------------------------------- Assets <S> <C> <C> <C> Accounts receivable and accrued revenue. $ 18,337 $ 881 $ 19,218 Unrecovered purchased gas costs. . . . . 4,023 (451) 3,572 Deferred income taxes. . . . . . . . . . 1,465 (467) 998 Other regulatory assets. . . . . . . . . 2,118 9 2,127 Liabilities Income taxes . . . . . . . . . . . . . . 1,285 (293) 992 Stockholders' Equity Retained earnings. . . . . . . . . . . . $ 36,967 $ 265 $ 37,232 <FN> (1) Operating Revenue, Operating Income and Income from Continuing Operations exclude the results of the operations discontinued in 2003 and include minor reclassifications to conform with the presentation of the 2004 results. </FN> </TABLE>
2. CALCULATION OF EARNINGS PER SHARE <TABLE> <CAPTION> - ------------------------------------------------------------------------------------------------ THREE MONTHS ENDED SIX MONTHS ENDED 2004 2003 2004 2003 FOR THE PERIOD ENDED JUNE 30, RESTATED RESTATED - ------------------------------------------------------------------------------------------------ CALCULATION OF BASIC EARNINGS PER SHARE FROM CONTINUING OPERATIONS: <S> <C> <C> <C> <C> Net income from continuing operations . . . $ 611,518 $ 934,536 $6,385,052 $7,571,639 Weighted average shares outstanding . . . . 5,728,158 5,599,525 5,708,294 5,580,620 - ------------------------------------------------------------------------------------------------ BASIC EARNINGS PER SHARE FROM CONTINUING OPERATIONS . . . . . . . . . . . . $ 0.11 $ 0.17 $ 1.12 $ 1.36 ================================================================================================ CALCULATION OF DILUTED EARNINGS PER SHARE FROM CONTINUING OPERATIONS: RECONCILIATION OF NUMERATOR: Net Income from continuing operations Basic $ 611,518 $ 934,536 $6,385,052 $7,571,639 Effect of 8.25% Convertible debentures *. . - - 70,421 80,457 - ------------------------------------------------------------------------------------------------ Adjusted numerator Diluted. . . . . . . . . . $ 611,518 $ 934,536 $6,455,473 $7,652,096 - ------------------------------------------------------------------------------------------------ RECONCILIATION OF DENOMINATOR: Weighted shares outstanding Basic . . . . . 5,728,158 5,599,525 5,708,294 5,580,620 Effect of dilutive securities * Stock options . . . . . . . . . . . . . . 2,369 852 3,414 - Warrants. . . . . . . . . . . . . . . . . 6,492 4,359 7,682 3,016 8.25% Convertible debentures. . . . . . . - - 165,867 190,027 - ------------------------------------------------------------------------------------------------ Adjusted denominator Diluted. . . . . . . . . 5,737,019 5,604,736 5,885,257 5,773,663 - ------------------------------------------------------------------------------------------------ DILUTED EARNINGS PER SHARE FROM CONTINUING OPERATIONS . . . . . . . . . . . . $ 0.11 $ 0.17 $ 1.10 $ 1.33 ================================================================================================ <FN> * Amounts associated with securities resulting in an anti-dilutive effect on earnings per share are not included in this calculation. </FN> </TABLE> 3. COMMITMENTS AND CONTINGENCIES ENVIRONMENTAL MATTERS In 2003, Chesapeake completed its responsibilities related to one former gas manufacturing plant site and is currently participating in the investigation, assessment or remediation of two other former gas manufacturing plant sites. These sites are located in three different jurisdictions. The Company has accrued liabilities for these three sites referred to respectively as the Dover Gas Light, Salisbury Town Gas Light and the Winter Haven Coal Gas sites. The Company is currently in discussions with the Maryland Department of the Environment ("MDE") regarding the possible responsibilities of the Company with respect to a fourth former gas manufacturing plant site in Cambridge, Maryland. Dover Gas Light Site - ----------------------- The Dover Gas Light site is a former manufactured gas plant site located in Dover, Delaware. On January 15, 2004, the Company received a Certificate of Completion of Work from the United States Environmental Protection Agency ("EPA") regarding this site. This concluded Chesapeake's remedial action obligation related to this site and relieves Chesapeake from liability for future remediation at the site, unless previously unknown conditions are discovered at the site, or information previously unknown to the EPA is received that indicates the remedial action that has been taken is not sufficiently protective. These contingencies are standard and are required by the United States in all liability settlements. At June 30, 2004, the Company had accrued $10,000 for costs associated with the Dover Gas Light site and had recorded an associated regulatory asset for the same amount. Through June 30, 2004, the Company has incurred approximately $9.7 million in costs relating to environmental testing and remedial action studies at the site. Approximately $9.6 million has been recovered through June 2004 from other parties or through rates. Salisbury Town Gas Light Site - --------------------------------- In cooperation with the MDE, the Company has completed an assessment of the Salisbury manufactured gas plant site, located in Salisbury, Maryland, which determined that there was localized ground-water contamination. During 1996, the Company completed construction and began Air Sparging and Soil-Vapor Extraction ("AS/SVE") remediation procedures. Chesapeake has been reporting the remediation and monitoring results to the MDE on an ongoing basis since 1996. In February 2002, the MDE granted permission to permanently decommission the AS/SVE system and to discontinue all on-site and off-site well monitoring, except for one well that is being maintained for continued product monitoring and recovery. In November 2002, Chesapeake submitted a letter to the MDE requesting No Further Action ("NFA") determination. In December 2002, the MDE recommended that the Company submit work plans to MDE and place deed restrictions on the property as conditions prior to receiving an NFA. The Company has completed the MDE recommended work plans and has executed the deed restrictions. During the third quarter of 2003 the Company submitted a revised request for the NFA. The MDE has not yet responded to the request. The Company has adjusted the liability with respect to the Salisbury Town Gas Light site to $7,000 at June 30, 2004. This amount is based on the estimated costs to perform limited product monitoring and recovery efforts and fulfill ongoing reporting requirements. A corresponding regulatory asset has been recorded, reflecting the Company's belief that costs incurred will be recoverable in base rates. Through June 30, 2004, the Company has incurred approximately $2.9 million for remedial actions and environmental studies at the Salisbury Town Gas Light site. Of this amount, approximately $1.8 million has been recovered through insurance proceeds or in rates. The Company expects to recover the remaining costs through rates. Winter Haven Coal Gas Site - ------------------------------ The Winter Haven Coal Gas site is located in Winter Haven, Florida. Chesapeake has been working with the Florida Department of Environmental Protection ("FDEP") in assessing this coal gas site. In May 1996, the Company filed an Air Sparging and Soil Vapor Extraction Pilot Study Work Plan (the "Work Plan") for the Winter Haven site with the FDEP. The Work Plan described the Company's proposal to undertake an AS/SVE pilot study to evaluate the site. After discussions with the FDEP, the Company filed a modified AS/SVE Pilot Study Work Plan, the description of the scope of work to complete the site assessment activities and a report describing a limited sediment investigation performed in 1997. In December 1998, the FDEP approved the AS/SVE Pilot Study Work Plan, which the Company completed during the third quarter of 1999. In February 2001, the Company filed a Remedial Action Plan ("RAP") with the FDEP to address the contamination of the subsurface soil and ground-water in a portion of the site. The FDEP approved the RAP on May 4, 2001. Construction of the AS/SVE system was completed in the fourth quarter of 2002 and the system is now fully operational. FDEP has indicated that the Company may be required to remediate sediments along the shoreline of Lake Shipp, immediately west of the Winter Haven site. Based on studies performed to date, the Company objects to FDEP's suggestion that the sediments have been contaminated and require remediation. Early estimates by the Company's environmental consultant indicate that some of the corrective measures discussed by FDEP may cost as much as $1 million. Given the Company's view as to the absence of ecological effects, the Company believes that cost expenditures of this magnitude are unwarranted and plans to vigorously oppose any requirements that it undertake corrective measures in the offshore sediments. Chesapeake anticipates that it will be several years before this issue is resolved. At this time, the Company has not recorded a liability for sediment remediation. The outcome of this matter cannot be predicted at this time. The Company has accrued a liability of $492,000 as of June 30, 2004 for the Florida site. Through June 30, 2004, the Company has incurred approximately $1.3 million of environmental costs associated with the Florida site. At June 30, 2004 the Company had collected through rates $193,000 in excess of costs incurred. A regulatory asset of approximately $299,000, representing the uncollected portion of the estimated clean-up costs, has also been recorded. The Company expects to recover the remaining costs through rates. Other - ----- The Company is in discussions with the MDE regarding the possible responsibilities of the Company for remediation of a fourth gas manufacturing plant site located in Cambridge, Maryland. The outcome of this matter cannot be determined at this time. OTHER COMMITMENTS AND CONTINGENCIES The Company's natural gas and propane distribution operations have entered into contractual commitments to purchase gas from various suppliers. The contracts have various expiration dates. In November 2003, the Company entered into a one-year contract with an energy marketing and risk management company to manage a portion of the Company's natural gas transportation and storage capacity. The Company has issued corporate guarantees to certain vendors of its propane wholesale marketing subsidiary. The corporate guarantees provide for the payment of propane purchases by the subsidiary, in the event of the subsidiary's default. The aggregate amount guaranteed at June 30, 2004 totaled $4.5 million, with the guarantees expiring on various dates through February 2005. The Company has issued a letter of credit to its primary insurance company for $694,000, which expires June 1, 2005. The Company is involved in certain legal actions and claims arising in the normal course of business. The Company is also involved in certain legal and administrative proceedings before various governmental agencies concerning rates. In the opinion of management, the ultimate disposition of these proceedings and claims will not have a material effect on the consolidated financial position, results of operations or cash flows of the Company. Certain assets and liabilities of the Company are accounted for in accordance with SFAS No. 71. SFAS No. 71 provides guidance for public utilities and other regulated operations where the rates (prices) charged to customers are subject to regulatory review and approval. Regulators sometimes include costs in allowable costs in a period other than the period in which the costs would be charged to expense by an unregulated enterprise. That procedure can create assets, reduce assets, or create liabilities for the regulated enterprise. For general-purpose financial reporting, an incurred cost for which a regulator permits recovery in a future period is accounted for like an incurred cost that is reimbursable under a cost-reimbursement-type contract. If the Company were required to terminate the application of SFAS No. 71 to its regulated operations, all such deferred amounts would be recognized in the income statement at that time. This would result in a charge to earnings, net of applicable income taxes, in an amount which could be material. 4. RECENT AUTHORITATIVE PRONOUNCEMENTS ON FINANCIAL REPORTING AND ACCOUNTING On January 12, 2004, the FASB released FASB Staff Position No. SFAS 106-1 "Accounting and Disclosure Requirements Related to the Medicare Prescription Drug, Improvement and Modernization Act of 2003" (the "Act"). On May 19, 2004, the FASB released FASB Staff Position No. SFAS 106-2 which superseded SFAS 106-1. SFAS No. 106-2 provides guidance on the accounting for the effects of the Act and requires certain disclosures regarding the effect of the federal subsidy provided by the Act. It is effective for the first interim or annual period beginning after June 15, 2004. Adoption of SFAS No. 106-2 is not expected to have a material impact on the Company's post-retirement benefit obligation. The Emerging Issues Task Force ("EITF") of the FASB issued EITF No. 03-6 on February 9, 2004. It requires that earnings used to calculate earnings per share be allocated between common shareholders and other securities holders based on their respective rights to receive dividends. This requirement was effective for the second quarter of 2004. It had no impact on the Company's calculation of earnings per share. 5. SEGMENT INFORMATION Chesapeake uses the management approach to identify operating segments. Chesapeake organizes its business around differences in products or services and the operating results of each segment are regularly reviewed by the Company's chief operating decision maker in order to make decisions about resources and to assess performance. The following table presents information about the Company's reportable segments. Results exclude discontinued operations. <TABLE> <CAPTION> - ------------------------------------------------------------------------------------------------------------ THREE MONTHS ENDED SIX MONTHS ENDED 2004 2003 2004 2003 FOR THE PERIOD ENDED JUNE 30, RESTATED RESTATED - ------------------------------------------------------------------------------------------------------------ OPERATING REVENUES, UNAFFILIATED CUSTOMERS <S> <C> <C> <C> <C> Natural gas distribution and transmission . . . $ 25,101,267 $ 22,064,115 $ 67,402,252 $ 61,545,956 Propane . . . . . . . . . . . . . . . . . . . . 5,754,405 5,537,407 24,214,662 25,784,434 Advanced information services . . . . . . . . . 3,437,325 3,185,153 6,438,443 6,418,571 Other . . . . . . . . . . . . . . . . . . . . . - (1,753) - (4,524) - ------------------------------------------------------------------------------------------------------------ Total operating revenues, unaffiliated customers. $ 34,292,997 $ 30,784,922 $ 98,055,357 $ 93,744,437 ============================================================================================================ INTERSEGMENT REVENUES (1) Natural gas distribution and transmission . . . $ 35,004 $ 61,727 $ 95,991 $ 101,766 Advanced information services . . . . . . . . . 13,570 30,190 22,587 68,024 Other . . . . . . . . . . . . . . . . . . . . . 168,686 176,903 338,132 357,094 - ------------------------------------------------------------------------------------------------------------ Total intersegment revenues . . . . . . . . . . . $ 217,260 $ 268,820 $ 456,710 $ 526,884 ============================================================================================================ OPERATING INCOME Natural gas distribution and transmission . . . $ 2,696,914 $ 2,993,220 $ 9,914,667 $ 10,273,874 Propane . . . . . . . . . . . . . . . . . . . . (881,576) (390,032) 2,440,082 4,495,450 Advanced information services . . . . . . . . . 259,750 164,301 331,835 226,634 Other . . . . . . . . . . . . . . . . . . . . . 87,706 94,028 175,516 176,738 - ------------------------------------------------------------------------------------------------------------ Total . . . . . . . . . . . . . . . . . . . . . . $ 2,162,794 $ 2,861,517 $ 12,862,100 $ 15,172,696 ============================================================================================================ <FN> (1) All significant intersegment revenues are billed at market rates and have been. </FN> </TABLE> <TABLE> <CAPTION> - ------------------------------------------------------------------------------- JUNE 30, DECEMBER 31, 2004 2003 - ------------------------------------------------------------------------------- IDENTIFIABLE ASSETS <S> <C> <C> Natural gas distribution and transmission . . . $158,763,569 $169,865,930 Propane . . . . . . . . . . . . . . . . . . . . 38,659,073 38,359,251 Advanced information services . . . . . . . . . 2,912,282 2,912,733 Other . . . . . . . . . . . . . . . . . . . . . 17,080,992 7,791,796 - ------------------------------------------------------------------------------- Total identifiable assets . . . . . . . . . . . . $217,415,916 $218,929,710 =============================================================================== </TABLE> The Company's operations are all domestic. The advanced information services segment has infrequent transactions with foreign companies, located primarily in Canada, that are denominated and paid in U.S. dollars. These transactions are immaterial to the consolidated revenues.
6. DISCONTINUED OPERATIONS The following table presents the balance sheet accounts for discontinued operations. CHESAPEAKE UTILITIES CORPORATION DISCONTINUED OPERATIONS BALANCE SHEETS (UNAUDITED) <TABLE> <CAPTION> - ----------------------------------------------------------------------------------------- JUNE 30, DECEMBER 31, ASSETS 2004 2003 - ----------------------------------------------------------------------------------------- PROPERTY, PLANT AND EQUIPMENT <S> <C> <C> Property, plant and equipment. . . . . . . . . . . . . . $ 750,947 $ 762,383 Less: Accumulated depreciation and amortization . . . . (319,127) (326,792) - ----------------------------------------------------------------------------------------- Net property, plant and equipment. . . . . . . . . . . . . 431,820 435,591 - ----------------------------------------------------------------------------------------- CURRENT ASSETS Cash and cash equivalents. . . . . . . . . . . . . . . . 19,903 1,437,821 Accounts receivable (less allowance for uncollectibles of $1,619 and $5,346, respectively). . . . . . . . . . 217,184 273,799 Appliance and other inventory, at FIFO . . . . . . . . . 95,594 99,839 Income taxes receivable. . . . . . . . . . . . . . . . . - - Deferred income taxes receivable . . . . . . . . . . . . 20,725 20,725 Prepaid expenses . . . . . . . . . . . . . . . . . . . . 95,405 110,175 - ----------------------------------------------------------------------------------------- Total current assets . . . . . . . . . . . . . . . . . . . 448,811 1,942,359 - ----------------------------------------------------------------------------------------- DEFERRED CHARGES AND OTHER ASSETS Other intangible assets, net . . . . . . . . . . . . . . 70,018 70,018 Deferred income taxes receivable . . . . . . . . . . . . 125,369 150,847 - ----------------------------------------------------------------------------------------- Total deferred charges and other assets. . . . . . . . . . 195,387 220,865 - ----------------------------------------------------------------------------------------- TOTAL ASSETS . . . . . . . . . . . . . . . . . . . . . . . $ 1,076,018 $ 2,598,815 ========================================================================================= STOCKHOLDERS' EQUITY AND LIABILITIES - ------------------------------------------------------------------------------------- STOCKHOLDERS' EQUITY Common Stock . . . . . . . . . . . . . . . . . . . . . . $ 51,010 $ 51,010 Additional paid-in capital . . . . . . . . . . . . . . . 3,914,783 3,914,783 Retained deficits. . . . . . . . . . . . . . . . . . . . (6,386,352) (5,271,164) - ----------------------------------------------------------------------------------------- Total stockholders' equity . . . . . . . . . . . . . . . . (2,420,559) (1,305,371) - ----------------------------------------------------------------------------------------- CURRENT LIABILITIES Accounts payable . . . . . . . . . . . . . . . . . . . . 16,684 67,303 Due to parent company. . . . . . . . . . . . . . . . . . 3,252,016 3,558,434 Customer deposits. . . . . . . . . . . . . . . . . . . . 9,342 11,403 Income taxes payable . . . . . . . . . . . . . . . . . . 159,556 192,290 Other accrued liabilities. . . . . . . . . . . . . . . . 58,979 74,756 - ----------------------------------------------------------------------------------------- Total current liabilities. . . . . . . . . . . . . . . . . 3,496,577 3,904,186 - ----------------------------------------------------------------------------------------- TOTAL STOCKHOLDERS' EQUITY AND LIABILITIES . . . . . . . . $ 1,076,018 $ 2,598,815 ========================================================================================= </TABLE> During 2003, the Company sold the assets of six of its seven water services businesses. The Company expects to dispose of the remaining operation, located in Stuart, Florida, during 2004. The assets are recorded at their estimated fair value. Results for all the water dealerships were reclassified to discontinued operations in accordance with SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets." The results of the water companies' operations for all periods presented in the consolidated income statements have been reclassified to discontinued operations and shown net of tax. 7. EMPLOYEE BENEFIT PLANS Net periodic benefit costs for the defined benefit pension plan, the executive excess benefit plan and other post-retirement benefits are shown below: <TABLE> <CAPTION> - ------------------------------------------------------------------------------------------------ OTHER DEFINED BENEFIT EXECUTIVE EXCESS POST-RETIREMENT PENSION PLAN BENEFIT PLAN BENEFITS FOR THE THREE MONTHS ENDED JUNE 30, 2004 2003 2004 2003 2004 2003 - ------------------------------------------------------------------------------------------------ <S> <C> <C> <C> <C> <C> <C> Service Cost . . . . . . . . . . . . $ 84,690 $ 81,341 $23,851 $26,970 $ 1,315 $ 1,284 Interest Cost. . . . . . . . . . . . 176,727 171,060 20,597 20,010 22,042 21,330 Expected return on plan assets . . . (235,889) (196,119) - - - - Amortization of transition amount. . (3,776) (3,776) - - 6,965 6,965 Amortization of prior service cost . (1,175) (1,175) 697 697 - - Amortization of net (gain) loss. . . - - 4,479 4,670 (3,752) 16,568 - ------------------------------------------------------------------------------------------------ Net periodic benefit cost. . . . . . $ 20,577 $ 51,331 $49,624 $52,347 $26,570 $46,147 ================================================================================================ </TABLE> <TABLE> <CAPTION> - -------------------------------------------------------------------------------------------------- OTHER DEFINED BENEFIT EXECUTIVE EXCESS POST-RETIREMENT PENSION PLAN BENEFIT PLAN BENEFITS FOR THE SIX MONTHS ENDED JUNE 30, 2004 2003 2004 2003 2004 2003 - -------------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> <C> <C> Service Cost . . . . . . . . . . . . $ 169,379 $ 162,683 $ 52,438 $ 53,939 $ 2,677 $ 2,569 Interest Cost. . . . . . . . . . . . 353,454 342,120 41,502 40,020 43,442 42,660 Expected return on plan assets . . . (471,778) (392,238) - - - - Amortization of transition amount. . (7,552) (7,552) - - 13,930 13,930 Amortization of prior service cost . (2,350) (2,350) 1,394 1,394 - - Amortization of net (gain) loss. . . - - 8,274 9,339 39,450 33,136 - -------------------------------------------------------------------------------------------------- Net periodic benefit cost. . . . . . $ 41,153 $ 102,663 $103,608 $104,692 $99,499 $92,295 ================================================================================================ </TABLE> As disclosed in the December 31, 2003 financial statements, no contributions are expected to be required in 2004 for the defined benefit pension plan. The executive excess benefit plan and other post-retirement benefit plans are unfunded. Cash benefits paid under the executive excess plan for the first six months of 2004 were $12,550. Benefits paid under other post-retirement benefits are primarily for medical claims and were $87,000 for the first six months of 2004. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS BUSINESS DESCRIPTION Chesapeake Utilities Corporation (the "Company" or "Chesapeake") is a diversified utility company engaged in natural gas distribution and transmission, propane distribution and wholesale marketing, advanced information services and other related businesses. The Company's strategy is to grow earnings from a stable utility foundation by investing in related businesses and services that provide opportunities for higher, unregulated returns. This growth strategy includes acquisitions and investments in unregulated businesses as well as the continued investment and expansion of the Company's utility operations that provide the stable base of earnings. The Company continually reevaluates its investments to ensure that they are consistent with its strategy and the goal of enhancing shareholder value. The Company's unregulated businesses and services currently include propane distribution and wholesale marketing, advanced information services and other related businesses. Chesapeake sold the assets and operations of six of its seven water dealerships during 2003. The Company expects to dispose of the remaining operation during 2004. FINANCIAL POSITION, LIQUIDITY AND CAPITAL RESOURCES The Company's capital requirements reflect the capital-intensive nature of its business and are principally attributable to its construction program (described below) and the retirement of outstanding debt. The Company relies on cash generated by operations and short-term borrowing to meet normal working capital requirements and to finance, temporarily, capital expenditures. During the first six months of 2004, net cash provided by operating activities, net cash used by investing activities and net cash used by financing activities were approximately $20.6 million, $6.3 million and $7.1 million, respectively. The Board of Directors has authorized the Company to borrow up to $35.0 million of short-term debt from various banks and trust companies. As of June 30, 2004, Chesapeake had five unsecured bank lines of credit with three financial institutions, totaling $65.0 million, for short-term cash needs to meet seasonal working capital requirements and to fund, temporarily, portions of its capital expenditures. Two of the bank lines, totaling $15.0 million, are committed. The remaining three lines are subject to the banks' availability of funds. In the first six months of 2004, cash provided by operations was adequate to fund capital expenditures and repay the $3.5 million of short-term debt that was outstanding at December 31, 2003. At June 30, 2004, the Company had outstanding an irrevocable letter of credit in the amount of $694,000 issued to one of the Company's insurance providers. The letter of credit reduced the available borrowing under the short-term lines. During the six-month periods ended June 30, 2004 and 2003, capital expenditures were approximately $6.6 million and $4.6 million, respectively. Chesapeake has budgeted $20.8 million for capital expenditures during 2004. This amount includes $15.8 million for natural gas distribution and transmission, $4.1 million for propane distribution and marketing, $285,000 for advanced information services and $614,000 for other operations. The natural gas distribution and transmission expenditures are for expansion and improvement of facilities. The propane expenditures are to support customer growth and for the replacement of equipment. The advanced information services expenditures are for computer hardware, software and related equipment. The other operations budget includes general plant, computer software and hardware expenditures. Financing for the capital expenditure program for the balance of 2004 is expected to be provided from cash on hand, short-term borrowing and cash provided by operating activities. The capital expenditure program is subject to continual review and modification. Actual capital requirements may vary from the above estimates due to a number of factors including acquisition opportunities, changing economic conditions, customer growth in existing areas, regulation, availability of capital and new growth opportunities. The Company has budgeted $170,000 for capital expenditures in 2004 related to environmental remediation projects, and expects to make additional expenditures in future years. Management does not expect any such expenditures or financing to have a material adverse effect on the financial position or capital resources of the Company (see Note 3 to the Condensed Consolidated Financial Statements). As of June 30, 2004 common equity represented 53.2 percent of total capitalization, compared to 51.2 percent as of December 31, 2003. Combining short-term financing with total capitalization, the equity component would have been 52.1 percent and 48.8 percent for 2004 and 2003, respectively. The Company remains committed to maintaining a sound capital structure and strong credit ratings in order to provide the financial flexibility needed to access the capital markets when required. This commitment, along with adequate and timely rate relief for the Company's regulated operations, is intended to ensure that the Company will be able to attract capital from outside sources at a reasonable cost. Interest expense for the first six months of 2004 decreased approximately $240,000, or 8 percent, versus the same period in 2003. Interest on long-term debt accounted for $176,000 of the decrease. The average long-term debt balance in the first six months of 2004 was $72.0 million with an average interest rate of 7.2 percent, compared to $76.0 million with an average interest rate of 7.2 percent in the first six months of 2003. Additionally, interest on short-term debt decreased $46,000 during the first half of 2004, compared to the first half of 2003. This decrease was the result of a decline in the average balance of short-term debt from $3.8 million in the first six months of 2003 to $298,000 for the first six months of 2004. OFF-BALANCE SHEET ARRANGEMENTS AND CONTRACTUAL OBLIGATIONS As noted in the Company's 2003 Annual Report on Form 10-K, the only off-balance sheet arrangements are corporate guarantees to certain vendors of its propane wholesale marketing subsidiary and a letter of credit issued to its main insurance carrier. See Note 3 to the Condensed Consolidated Financial Statements for further information. There have been no material changes in the contractual obligations presented in the Company's 2003 Annual Report on Form 10-K, except for commodity purchase obligations and forward contracts entered into in the ordinary course of the Company's business. Below is a summary of the commodity and forward contract obligations at June 30, 2004. None of the commodity or forward contracts extend beyond 2005. <TABLE> <CAPTION> - ----------------------------------------------------------------- PAYMENTS DUE BY PERIOD ---------------------------------- CONTRACTUAL OBLIGATIONS: 2004 2005 TOTAL - ----------------------------------------------------------------- <S> <C> <C> <C> Commodities (1) . . . . . . . $1,877,446 $ 501,000 $2,378,446 Forward contracts propane (2) 5,363,707 - 5,363,707 - ----------------------------------------------------------------- Total . . . . . . . . . . . . $7,241,153 $ 501,000 $7,742,153 ================================================================= </TABLE> (1) In addition to the obligations noted above, the natural gas distribution and propane distribution operations have agreements with commodity suppliers that have provisions which allow the Company to reduce or eliminate the quantities purchased. There are no monetary penalties for reducing the amounts purchased; however, the propane contracts allow the suppliers to reduce the amounts available in the winter season if the Company does not purchase specified amounts during the summer season. Under these contracts, the commodity prices will fluctuate with a market-based index. (2) The Company has also entered into forward and future sale contracts of $8,041,169. See the "Quantitative and Qualitative Disclosures about Market Risk" section of the Management's Discussion and Analysis of Financial Condition and Results of Operations portion of this report for further information.
RESULTS OF OPERATIONS FOR THE QUARTER ENDED JUNE 30, 2004 CONSOLIDATED OVERVIEW The Company earned net income from continuing operations of $612,000 or $0.11 per share, for the second quarter of 2004, a decline of $323,000 compared to net income from continuing operations of $935,000, or $0.17 per share for the corresponding period in 2003. The decrease in earnings principally reflects a decline in margins and operating income for the Company's Delmarva natural gas and propane operations caused by warmer temperatures on the Delmarva Peninsula. Management estimates that the warmer weather reduced margins and operating income by $677,000 for the quarter. Gross margin increases related to residential customer growth for natural gas distribution and natural gas transmission's firm transportation services partially offset this decline. Operating expenses were also up as a result of customer growth. See Note 1 to the Condensed Consolidated Financial Statements for a description of the restatement that was made in the fourth quarter of 2003. Additional information can also be found in the Company's report on Form 10-K for the year ended December 31, 2003. <TABLE> <CAPTION> - ------------------------------------------------------------------------------------ 2004 2003 FOR THE THREE MONTHS ENDED JUNE 30, . . . RESTATED CHANGE - ------------------------------------------------------------------------------------ Operating Income <S> <C> <C> <C> Natural Gas Distribution & Transmission $ 2,696,914 $ 2,993,220 $ (296,306) Propane . . . . . . . . . . . . . . . . (881,576) (390,032) (491,544) Advanced Information Services . . . . . 259,750 164,301 95,449 Other . . . . . . . . . . . . . . . . . 87,706 94,028 (6,322) - ------------------------------------------------------------------------------------ Operating Income. . . . . . . . . . . . . 2,162,794 2,861,517 (698,723) Other Income. . . . . . . . . . . . . . . 74,217 34,257 39,960 Interest Charges. . . . . . . . . . . . . 1,328,231 1,429,005 (100,774) Income Taxes. . . . . . . . . . . . . . . 297,262 532,233 (234,971) - ------------------------------------------------------------------------------------ Net Income from Continuing Operations . . $ 611,518 $ 934,536 $ (323,018) ==================================================================================== </TABLE> The following discussions of segment results include use of the term "gross margin." Gross margin is determined by deducting the cost of sales from operating revenue. Cost of sales includes the purchased gas cost for the natural gas and propane segments and the cost of labor spent on direct revenue-producing activities for advanced information services segment. Gross margin should not be considered an alternative to operating income or net income, which are determined in accordance with Generally Accepted Accounting Principles ("GAAP"). Chesapeake believes that gross margin, although a non-GAAP measure, is useful and meaningful to investors as a basis for making investment decisions. It provides investors with information that demonstrates the profitability achieved by the Company under its allowed rates for regulated operations and under its competitive pricing structure for non-regulated segments. Chesapeake's management uses gross margin in measuring certain performance goals and has historically analyzed and reported gross margin information in its public filings and presentations. Other companies may calculate gross margin in a different manner.
NATURAL GAS DISTRIBUTION AND TRANSMISSION The natural gas distribution and transmission segment earned operating income of $2.7 million for the second quarter of 2004 compared to $3.0 million for the corresponding period last year, a decrease of $296,000. <TABLE> <CAPTION> - ------------------------------------------------------------------------------------ 2004 2003 FOR THE THREE MONTHS ENDED JUNE 30, . . . RESTATED CHANGE - ------------------------------------------------------------------------------------ <S> <C> <C> <C> Revenue . . . . . . . . . . . . . . . . . $25,136,271 $22,125,842 $ 3,010,429 Cost of gas . . . . . . . . . . . . . . . 15,111,043 12,365,393 2,745,650 - ------------------------------------------------------------------------------------ Gross margin. . . . . . . . . . . . . . . 10,025,228 9,760,449 264,779 Other Operating Expenses: Operations & maintenance. . . . . . . . 5,216,174 4,752,182 463,992 Depreciation & amortization . . . . . . 1,359,816 1,315,830 43,986 Other taxes . . . . . . . . . . . . . . 752,324 699,217 53,107 - ------------------------------------------------------------------------------------ Other operating expenses. . . . . . . . . 7,328,314 6,767,229 561,085 - ------------------------------------------------------------------------------------ Total Operating Income. . . . . . . . . . $ 2,696,914 $ 2,993,220 $ (296,306) ==================================================================================== </TABLE> Gross margins for the Delaware and Maryland distribution divisions decreased $270,000 from 2003. This was caused primarily by a temperature decline of 31 percent (194 heating degree-days) for the second quarter of 2004 compared to the second quarter of 2003. Management estimates that warmer weather negatively impacted 2004 margins by $349,000. In the second quarter of 2004, temperatures were 14 percent warmer (68 heating degree-days) than the 10-year average. The Company estimates that, on an annual basis, for each heating degree-day variance from the 10-year average, the gross margin on gas sales changes by $1,800. The decline due to temperatures was partially offset by customer growth. Delaware and Maryland experienced an increase of 2,211 residential customers, or 7 percent, in the second quarter of 2004 compared to the second quarter of 2003. The increase was primarily the result of new housing construction. The Company estimates that each residential customer added contributes $372 annually to gross margin and requires an additional cost of $104 for operations and maintenance expenses. Gross margin for the Florida operations increased by $239,000, due to an increase of 6.8 percent in the number of residential customers and growth in the industrial gross margin. The natural gas transmission gross margin increased by $292,000 resulting from an increase in transportation services. Other operating expenses, primarily payroll, pension, insurance and customer service costs, were higher primarily as a result of customer growth. Depreciation was also higher, reflecting the continued investment in plant assets. PROPANE During the second quarter of 2004, the propane segment experienced a decrease of $492,000 in operating income compared to the second quarter of 2003, reflecting a gross margin decrease of $370,000 and an increase of $121,000 in operating expenses. <TABLE> <CAPTION> - ------------------------------------------------------------------------------------ FOR THE THREE MONTHS ENDED JUNE 30, . . . 2004 2003 CHANGE - ------------------------------------------------------------------------------------ <S> <C> <C> <C> Revenue . . . . . . . . . . . . . . . . . $ 5,754,405 $ 5,537,407 $ 216,998 Cost of sales . . . . . . . . . . . . . . 3,258,284 2,671,033 587,251 - ------------------------------------------------------------------------------------ Gross margin. . . . . . . . . . . . . . . 2,496,121 2,866,374 (370,253) Other Operating Expenses: Operations & maintenance. . . . . . . . 2,854,614 2,694,718 159,896 Depreciation & amortization . . . . . . 370,935 373,461 (2,526) Other taxes . . . . . . . . . . . . . . 152,148 188,227 (36,079) - ------------------------------------------------------------------------------------ Other operating expenses. . . . . . . . . 3,377,697 3,256,406 121,291 - ------------------------------------------------------------------------------------ Total Operating Loss. . . . . . . . . . . $ (881,576) $ (390,032) $ (491,544) ==================================================================================== </TABLE> The Delmarva distribution operations experienced a drop in gross margin of $393,000. Management estimates that warmer weather negatively impacted margins by $328,000. Temperatures in the second quarter of 2004 were 31 percent warmer than the second quarter of 2003 (194 heating degree-days) and 14 percent warmer than the 10-year average (68 heating degree-days). The Company estimates that on an annual basis, gross margin changes by $1,691 for each heating degree-day. The Florida propane distribution operations experienced an increase in operating losses of $26,000. An increase of $20,000 in gross margin was more than offset by an increase in other operating expenses, primarily sales and marketing. The Company's propane wholesale marketing operation increased operating income $18,000 over the second quarter of 2003. Gross margins were essentially the same; however, other operating expenses were lower. ADVANCED INFORMATION SERVICES The advanced information services business contributed operating income of $260,000 for the second quarter of 2004, an increase of $95,000 or 58 percent over the second quarter of last year. <TABLE> <CAPTION> - ------------------------------------------------------------------------------------ FOR THE THREE MONTHS ENDED JUNE 30, . . . 2004 2003 CHANGE - ------------------------------------------------------------------------------------ <S> <C> <C> <C> Revenue . . . . . . . . . . . . . . . . . $ 3,450,895 $ 3,215,343 $ 235,552 Cost of sales . . . . . . . . . . . . . . 1,864,710 1,870,909 (6,199) - ------------------------------------------------------------------------------------ Gross margin. . . . . . . . . . . . . . . 1,586,185 1,344,434 241,751 Other Operating Expenses: Operations & maintenance. . . . . . . . 1,176,368 997,277 179,091 Depreciation & amortization . . . . . . 34,530 48,758 (14,228) Other taxes . . . . . . . . . . . . . . 115,537 134,098 (18,561) - ------------------------------------------------------------------------------------ Other operating expenses. . . . . . . . . 1,326,435 1,180,133 146,302 - ------------------------------------------------------------------------------------ Total Operating Income. . . . . . . . . . $ 259,750 $ 164,301 $ 95,449 ==================================================================================== </TABLE> The advanced information services segment has increased its revenue primarily due to increased software sales. The cost of sales did not rise in proportion because all development costs associated with internally-developed software products are expensed as incurred. Additionally, compensation arrangements with the Company's consultants have been revised to include lower base pay, but higher incentive compensation based on productive hours. Operations and maintenance costs increased primarily due to software development costs to enhance a software product and increased incentive compensation for administrative and management employees.
OTHER BUSINESS OPERATIONS AND ELIMINATIONS Other operations and eliminating entries contributed operating income of $88,000 for the second quarter of 2004 compared to income of $94,000 for the second quarter of last year. Other operations consist primarily of subsidiaries that own real estate leased to other Company subsidiaries. Eliminations are entries required to eliminate activities between business segments from the consolidated results. <TABLE> <CAPTION> - ------------------------------------------------------------------------------------ FOR THE THREE MONTHS ENDED JUNE 30, . . . 2004 2003 CHANGE - ------------------------------------------------------------------------------------ <S> <C> <C> <C> Revenue . . . . . . . . . . . . . . . . . $ 168,686 $ 175,150 $ (6,464) Cost of sales . . . . . . . . . . . . . . - - - - ------------------------------------------------------------------------------------ Gross margin. . . . . . . . . . . . . . . 168,686 175,150 (6,464) Other Operating Expenses: Operations & maintenance. . . . . . . . 20,399 12,902 7,497 Depreciation & amortization . . . . . . 53,929 59,529 (5,600) Other taxes . . . . . . . . . . . . . . 14,691 13,405 1,286 - ------------------------------------------------------------------------------------ Other operating expenses. . . . . . . . . 89,019 85,836 3,183 - ------------------------------------------------------------------------------------ Operating Income - Other. . . . . . . . . 79,667 89,314 (9,647) Operating Income - Eliminations . . . . . 8,039 4,714 3,325 - ------------------------------------------------------------------------------------ Total Operating Income. . . . . . . . . . $ 87,706 $ 94,028 $ (6,322) ==================================================================================== </TABLE> DISCONTINUED OPERATIONS In 2003, Chesapeake decided to exit the water services business. Six of seven water dealerships were sold during 2003. The Company expects to dispose of the remaining operation during 2004. Accordingly, the assets are recorded at their fair value. The results of the water companies' operations for all periods presented in the consolidated income statements, have been reclassified to discontinued operations and shown net of tax. For the second quarter of 2004 they earned income of $19,000, compared to an immaterial loss in the second quarter of 2003. INCOME TAXES The Company's income tax cost for the second quarter of 2004 was lower than 2003 due to lower income. The federal income tax rate was consistent from year to year. INTEREST EXPENSE Interest for the second quarter of 2004 decreased approximately $101,000, or 7 percent, over the same period in 2003. The decrease resulted from the scheduled repayments of principal of long-term debt and lower short-term borrowing. The average long-term debt balance in the second quarter of 2004 was $72.0 million with an average interest rate of 7.2 percent, compared to $76.0 million with an average interest rate of 7.3 percent in the second quarter of 2003. The Company did not borrow against its short-term credit facilities during the second quarter of 2004. In the second quarter of 2003 the average borrowing balance for short-term debt was $337,000.
RESULTS OF OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30, 2004 CONSOLIDATED OVERVIEW The Company earned income from continuing operations of $6.4 million or $1.10 per share, for the first six months of 2004, a decline of $1.2 million compared to income from continuing operations of $7.6 million, or $1.33 per share for the corresponding period in 2003. The decrease in earnings principally reflects a decline in operating income caused by warmer temperatures on the Delmarva Peninsula. Management estimates that warmer weather negatively impacted margins by $1.1 million. The natural gas segment was able to partially offset the impact of warmer weather through customer growth. See Note 1 to the Condensed Consolidated Financial Statements for a description of the restatement that was made in the fourth quarter of 2003. Additional information can also be found in the Company's report on Form 10-K for the year ended December 31, 2003. <TABLE> <CAPTION> - ------------------------------------------------------------------------------------ 2004 2003 FOR THE SIX MONTHS ENDED JUNE 30, . . . . RESTATED CHANGE - ------------------------------------------------------------------------------------ Operating Income <S> <C> <C> <C> Natural Gas Distribution & Transmission $ 9,914,667 $10,273,874 $ (359,207) Propane . . . . . . . . . . . . . . . . 2,440,082 4,495,450 (2,055,368) Advanced Information Services . . . . . 331,835 226,634 105,201 Other & eliminations. . . . . . . . . . 175,516 176,738 (1,222) - ------------------------------------------------------------------------------------ Operating Income. . . . . . . . . . . . . 12,862,100 15,172,696 (2,310,596) Other Income. . . . . . . . . . . . . . . 176,694 88,157 88,537 Interest Charges. . . . . . . . . . . . . 2,654,997 2,894,855 (239,858) Income Taxes. . . . . . . . . . . . . . . 3,998,745 4,794,359 (795,614) - ------------------------------------------------------------------------------------ Net Income from Continuing Operations . . $ 6,385,052 $ 7,571,639 $(1,186,587) ==================================================================================== </TABLE> The following discussions of segment results include use of the term "gross margin." Gross margin is determined by deducting the cost of sales from operating revenue. Cost of sales includes the purchased gas cost for the natural gas and propane segments and the cost of labor spent on direct revenue-producing activities for advanced information services segment. Gross margin should not be considered an alternative to operating income or net income, which are determined in accordance with Generally Accepted Accounting Principles ("GAAP"). Chesapeake believes that gross margin, although a non-GAAP measure, is useful and meaningful to investors as a basis for making investment decisions. It provides investors with information that demonstrates the profitability achieved by the Company under its allowed rates for regulated operations and under its competitive pricing structure for non-regulated segments. Chesapeake's management uses gross margin in measuring certain performance goals and has historically analyzed and reported gross margin information in its public filings and presentations. Other companies may calculate gross margin in a different manner.
NATURAL GAS DISTRIBUTION AND TRANSMISSION The natural gas distribution and transmission segment earned operating income of $9.9 million for the first six months of 2004 compared to $10.3 million for the corresponding period last year, a decrease of $359,000. <TABLE> <CAPTION> - ------------------------------------------------------------------------------------ 2004 2003 FOR THE SIX MONTHS ENDED JUNE 30, . . . . RESTATED CHANGE - ------------------------------------------------------------------------------------ <S> <C> <C> <C> Revenue . . . . . . . . . . . . . . . . . $67,498,243 $61,647,722 $ 5,850,521 Cost of gas . . . . . . . . . . . . . . . 42,529,942 37,613,199 4,916,743 - ------------------------------------------------------------------------------------ Gross margin. . . . . . . . . . . . . . . 24,968,301 24,034,523 933,778 Other Operating Expenses: Operations & maintenance. . . . . . . . 10,739,027 9,689,101 1,049,926 Depreciation & amortization . . . . . . 2,703,097 2,563,832 139,265 Other taxes . . . . . . . . . . . . . . 1,611,510 1,507,716 103,794 - ------------------------------------------------------------------------------------ Other operating expenses. . . . . . . . . 15,053,634 13,760,649 1,292,985 - ------------------------------------------------------------------------------------ Total Operating Income. . . . . . . . . . $ 9,914,667 $10,273,874 $ (359,207) ==================================================================================== </TABLE> Gross margin for the Delaware and Maryland distribution divisions was essentially even with 2003 due to an increase in customers that offset the negative impact of warmer temperatures. Delaware and Maryland experienced an increase of 2,144 residential customers, or 6.7 percent, in the first half of 2004 compared to 2003. The increase was primarily the result of new housing construction. The Company estimates that each residential customer added contributes $372 annually to gross margin and requires an additional cost of $104 for operations and maintenance expenses. This growth offset a temperature decline of 10 percent (307 heating degree-days) for the first six months of 2004 compared to the same period of 2003. Management estimates that warmer temperatures negatively impacted margins by $553,000. Temperatures were 4 percent colder (114 heating degree-days) than the 10-year average. The Company estimates that, on an annual basis, each heating degree-day changes gross margin on gas sales by $1,800. Gross margin for the Florida distribution operations increased by $509,000, due to an increase of 6 percent in the number of residential customers and growth in the industrial gross margin. The natural gas transmission gross margin increased by $424,000. Firm transportation services increased $293,000 due to firm customers adding capacity. Additionally, interruptible transportation increased $130,000 over 2003. The gross margin increases were offset by higher operating expenses primarily due to customer growth. Payroll, benefits and insurance costs were up. Depreciation was also higher, reflecting the continued investment in plant assets.
PROPANE During the first six months of 2004, the propane segment experienced a decrease of $2.1 million in operating income compared to the first half of 2003, reflecting a gross margin decrease of $2.2 million that was partially offset by a $123,000 decrease in operating expenses. <TABLE> <CAPTION> - ------------------------------------------------------------------------------------ FOR THE SIX MONTHS ENDED JUNE 30, . . . . 2004 2003 CHANGE - ------------------------------------------------------------------------------------ <S> <C> <C> <C> Revenue . . . . . . . . . . . . . . . . . $24,214,662 $25,784,434 $(1,569,772) Cost of sales . . . . . . . . . . . . . . 14,564,816 13,956,129 608,687 - ------------------------------------------------------------------------------------ Gross margin. . . . . . . . . . . . . . . 9,649,846 11,828,305 (2,178,459) Other Operating Expenses: Operations & maintenance. . . . . . . . 6,037,163 6,156,925 (119,762) Depreciation & amortization . . . . . . 753,962 758,365 (4,403) Other taxes . . . . . . . . . . . . . . 418,639 417,565 1,074 - ------------------------------------------------------------------------------------ Other operating expenses. . . . . . . . . 7,209,764 7,332,855 (123,091) - ------------------------------------------------------------------------------------ Total Operating Income. . . . . . . . . . $ 2,440,082 $ 4,495,450 $(2,055,368) ==================================================================================== </TABLE> The Delmarva distribution operations experienced a drop in gross margin of $1.1 million, caused primarily by warmer temperatures. Retail volumes sold decreased 837,000 gallons, or 6 percent for the first six months of 2004 compared to 2003. Management estimates that the negative impact of weather on gross margin was $519,000. Temperatures in the first six months of 2004 were 10 percent warmer than the first six months of 2003 (307 heating degree-days) but 4 percent colder than the 10-year average (114 heating degree-days). The Company estimates that on an annual basis, each heating degree-day generates gross margin of $1,691. Additionally, there was a reduction caused by the closing of a poultry processing plant and by an outbreak of avian influenza on the Delmarva Peninsula. The Florida propane distribution operations experienced a decrease in gross margin of $162,000. The decrease was due primarily to a one-time service project that contributed $192,000 to the 2003 gross margin. The Company's propane wholesale marketing operation experienced a decrease in gross margin of $921,000 and a decrease of $284,000 in operating expenses, leading to a reduction of $637,000 in operating income. Results for the second quarter were consistent for 2004 and 2003; however, lower wholesale price volatility reduced trading opportunities during the first quarter of 2004 compared to 2003. ADVANCED INFORMATION SERVICES The advanced information services business contributed operating income of $332,000 for the first six months of 2004 compared to $227,000 for the first six months of last year, an increase of $105,000. <TABLE> <CAPTION> - ------------------------------------------------------------------------------------ FOR THE SIX MONTHS ENDED JUNE 30, . . . . 2004 2003 CHANGE - ------------------------------------------------------------------------------------ <S> <C> <C> <C> Revenue . . . . . . . . . . . . . . . . . $ 6,461,030 $ 6,486,595 $ (25,565) Cost of sales . . . . . . . . . . . . . . 3,543,487 3,762,162 (218,675) - ------------------------------------------------------------------------------------ Gross margin. . . . . . . . . . . . . . . 2,917,543 2,724,433 193,110 Other Operating Expenses: Operations & maintenance. . . . . . . . 2,230,196 2,108,123 122,073 Depreciation & amortization . . . . . . 73,675 98,871 (25,196) Other taxes . . . . . . . . . . . . . . 281,837 290,805 (8,968) - ------------------------------------------------------------------------------------ Other operating expenses. . . . . . . . . 2,585,708 2,497,799 87,909 - ------------------------------------------------------------------------------------ Total Operating Income. . . . . . . . . . $ 331,835 $ 226,634 $ 105,201 ==================================================================================== </TABLE> During the first half of 2004 revenues for the advanced information services operations remained consistent with 2003; however, a reduction in the cost of sales resulted in increased gross margins. The reduced cost of sales reflects a staff reduction that reduced non-billable hours and a change in compensation arrangements with the Company's consultants that reduced base pay and increased incentive compensation that is based on billable hours worked. Operations expenses increased as a result of increases in incentive compensation and development work to enhance a software product. OTHER BUSINESS OPERATIONS AND ELIMINATIONS Other operations and eliminating entries contributed operating income of $176,000 for the first six months of 2004 compared to income of $177,000 for the first six months of last year. Other operations consist primarily of subsidiaries that own real estate leased to other Company subsidiaries. Eliminations are entries required to eliminate activities between business segments from the consolidated results. <TABLE> <CAPTION> - ------------------------------------------------------------------------------------ FOR THE SIX MONTHS ENDED JUNE 30, . . . . 2004 2003 CHANGE - ------------------------------------------------------------------------------------ <S> <C> <C> <C> Revenue . . . . . . . . . . . . . . . . . $ 338,132 $ 352,570 $ (14,438) Cost of sales . . . . . . . . . . . . . . - - - - ------------------------------------------------------------------------------------ Gross margin. . . . . . . . . . . . . . . 338,132 352,570 (14,438) Other Operating Expenses: Operations & maintenance. . . . . . . . 41,648 40,332 1,316 Depreciation & amortization . . . . . . 107,139 119,059 (11,920) Other taxes . . . . . . . . . . . . . . 29,907 27,605 2,302 - ------------------------------------------------------------------------------------ Other operating expenses. . . . . . . . . 178,694 186,996 (8,302) - ------------------------------------------------------------------------------------ Operating Income - Other. . . . . . . . . 159,438 165,574 (6,136) Operating Income - Eliminations . . . . . 16,078 11,164 4,914 - ------------------------------------------------------------------------------------ Total Operating Income. . . . . . . . . . $ 175,516 $ 176,738 $ (1,222) ==================================================================================== </TABLE> DISCONTINUED OPERATIONS In 2003, Chesapeake decided to exit the water services business. Six of seven water dealerships were sold during 2003. The Company expects to dispose of the remaining operation during 2004. Accordingly, the assets are recorded at their fair value. The results of the water companies' operations for all periods presented in the consolidated income statements, have been reclassified to discontinued operations and shown net of tax. For the first six months of 2004 they experienced an operating loss of $15,000, compared to a loss of $163,000 for the same period in 2003. INCOME TAXES The Company's income tax cost for the six months ended June 30, 2004 was lower than 2003 due to lower income. The federal income tax rate was consistent from year to year. INTEREST EXPENSE Interest for the first half of 2004 decreased approximately $240,000, or 8 percent, over the same period in 2003. The decrease resulted from the scheduled repayments of principal of long-term debt and lower short-term borrowing. The average long-term debt balance for the first six months of 2004 was $72.0 million with an average interest rate of 7.2 percent, compared to $76.0 million with an average interest rate of 7.2 percent for the same period in 2003. The average short-term borrowing for the first half of 2004 was $298,000 compared to $3.8 million for 2003. ENVIRONMENTAL MATTERS As more fully described in Note 3 to the Condensed Consolidated Financial Statements, Chesapeake has completed its responsibilities related to one former gas manufacturing plant site and is currently participating in the investigation, assessment or remediation of two other former gas manufacturing plant sites. The Company continues to work with federal and state environmental agencies to assess the environmental impact and explore options for corrective action at these sites. The Company believes that future costs associated with these sites will be recoverable in rates or through sharing arrangements with, or contributions by, other responsible parties. The Company is in discussions with the Maryland Department of the Environment regarding a fourth former gas manufacturing plant site located in Cambridge, Maryland. The outcome of this matter cannot be determined at this time. OTHER MATTERS REGULATORY MATTERS The Delaware, Maryland and Florida Public Service Commissions regulate the Company's natural gas distribution operations, while its natural gas transmission operation is regulated by the Federal Energy Regulatory Commission ("FERC"). On April 1, 2003, Eastern Shore filed an application before the FERC requesting authorization for the following: (1) Phase I - upgrade of Parkesburg Metering & Regulating Station; (2) Phase II - construct and operate 2.7 miles of 16-inch mainline looping in Pennsylvania; and (3) Phase III - construct and operate 3.0 miles of 16-inch mainline looping and a pressure control station in Delaware. The purpose of this construction is to enable Eastern Shore to provide additional daily firm transportation capacity of 15,100 dekatherms on Eastern Shore's system phased in over a three-year period commencing November 1, 2003. Phase I of this expansion was completed and placed into service on November 1, 2003. Bids for Phase II construction were received and a contract awarded. Construction for Phase II started in July 2004 with a projected completion and in-service date of November 2004. During October 2002, Eastern Shore filed an application with the FERC for recovery of gas supply realignment costs associated with the implementation of FERC Order No. 636. The costs totaled $196,000 (including interest). The FERC has declined to review Eastern Shore's filing until it had first settled a related matter with another transmission company. The other transmission company submitted a filing on December 5, 2003. Eastern Shore will resubmit its transition cost recovery filing immediately upon learning of the FERC's approval. On December 16, 2003, Eastern Shore filed with the FERC revised tariff sheets to implement revisions to its Fuel Retention and Cash Out provisions. Fuel Retention refers to the in-kind reimbursement of natural gas by Eastern Shore's customers necessary to transport natural gas on Eastern Shore's pipeline. Such Fuel Retention is designed to reimburse Eastern Shore for the Gas Required for Operations ("GRO"), which consists of (1) gas used for compressor fuel and (2) gas otherwise used, lost or unaccounted for. Cash Out refers to the month-end process of resolving customer imbalances, that is, the difference, either positive or negative, between natural gas received by Eastern Shore for a customer's account and the natural gas delivered by Eastern Shore to that customer. Rather than carry such in-kind imbalances forward on a continuing basis, Eastern Shore's tariff permits it to buy or sell such imbalance gas to its customers, thus effectively eliminating any imbalance created through the month. These revisions went into effect on January 15, 2004. The proposed tariff revisions permit Eastern Shore to incorporate its Deferred Gas Required for Operations amounts into the calculation of its annual Fuel Retention Percentage ("FRP") Adjustment and to implement a surcharge, effective July 1 of each year, to recover cash-out amounts. Deferred Gas Required for Operations is the difference between Eastern Shore's calculated fuel retention using its approved FRP and its actual fuel requirements resulting from actual operations in a given month. Such differences, either positive or negative, are determined each month during the determination period and become a component of Eastern Shore's prospective FRP. This calculation is effectively a "true-up" to the fuel retained by Eastern Shore so it recovers no more and no less than its actual fuel requirements. Fuel Retention Percentage Adjustment is the annual establishment of Eastern Shore's new FRP to be effective July 1 of each year. The percentage adjustment is simply the difference between the current FRP in effect and the new FRP as proposed to be in effect. The FERC accepted Eastern Shore's revised tariff sheets on January 15, 2004, subject to certain revisions to clarify the tariff sheets. On January 30, 2004, Eastern Shore submitted the revised tariff sheets. Eastern Shore, on February 9, 2004, filed with the FERC a Plan and Schedule for Standards of Conduct Compliance as directed by the FERC's Order No. 2004, issued on November 25, 2003. Such Standards of Conduct govern the relationship between transmissions providers such as Eastern Shore and their energy affiliates. Order No. 2004 revises and conforms the current gas and electric standards by broadening the definition of an energy affiliate covered by such standards of conduct and applies them uniformly to natural gas pipeline and electric transmission providers. Further, the standards will assure that transmission providers cannot extend their market power over transmission to other energy markets by giving their energy affiliates unduly preferential treatment. The standards also help ensure transmission providers offer service to all customers on a non-discriminatory basis. The deadline for compliance with the Standards of Conduct is September 1, 2004. Numerous requests for clarifications and a rehearing have been submitted to FERC by other parties. At this time, there has been no change in the September 1, 2004 compliance deadline, Eastern Shore continues to monitor this closely and will react appropriately to any future rulings of the FERC. Eastern Shore is also following the FERC's recent rulemaking pertaining to creditworthiness standards for interstate natural gas pipelines. Eastern Shore will evaluate its current tariff creditworthiness provisions and make any necessary revisions to conform to the FERC's rules relating to such standards. On May 27, 2004 the FERC accepted Eastern Shore's annual Interruptible Transportation ("IT") Revenue Sharing report. Eastern Shore refunded $119,595 to its customers in compliance with the IT revenue sharing provision detailed in the Stipulation and Agreement in Docket No. RP02-34-000 currently in effect. On May 28, 2004 the FERC accepted Eastern Shore's annual GRO filing authorizing a new FRP to be made effective July 1, 2004. The new FRP is based on Eastern Shore's actual GRO quantities attributable to system-wide operations for the twelve-month period ending April 30, 2004 plus the balance of $548,203 accumulated in its Deferred GRO Account at March 31, 2004. On June 22, 2004 the FERC accepted Eastern Shore's annual Cash Out filing authorizing a new Cash Out surcharge 0f $0.0033 per dekatherm to be made effective July 1, 2004. The new Cash Out surcharge is designed to recover the under-recovered balance of $59,304 accumulated in its Cash Out account at March 31, 2004. On November 19, 2001, the Florida division filed a petition with the Florida Public Service Commission for approval of certain transportation cost recovery rates. The Florida PSC approved the rates on January 24, 2002, which provide for the recovery, over a two-year period, of the Florida division's actual and projected non-recurring expenses incurred in the implementation of the transportation provisions of the tariff as approved in a November 2000 rate case. The Florida division filed a petition on February 4, 2004, to dispose of a minor under-recovery of the actual expenses incurred to implement the tariff provisions. The petition was approved by the Florida PSC at its March 23, 2004 agenda conference. On November 5, 2002, the Florida PSC authorized a pilot program under which the Florida division converted all remaining sales customers to transportation service and exited the gas merchant function. Implementation of Phase One of the Transitional Transportation Service ("TTS") program was completed in November 2002, and the Florida division is now actively providing the administrative services as approved by the Florida PSC, including billing, collection service, payment tracking, non-pay disconnects, various account reports and related administrative activities. On July 15, 2003, the Florida PSC approved a rate restructuring proposed by the Florida division. The restructuring created three new low volume rate classes, with customer charge levels that ensure that all customers receive benefits from the TTS program. On January 4, 2004, the Florida PSC authorized the Florida division to refund the remaining balance in its over-recovered purchased gas costs account, totaling $246,000, as a final step in its exit of the gas merchant function. The refund was completed in March 2004. On May 3, 2004, the Florida division filed its Conservation Program Cost Recovery True-up for the calendar year 2003 with the Florida PSC. The Florida PSC will audit the program's revenues and expenditures and issue a report on its findings during the third quarter of 2004. COMPETITION The Company's natural gas operations compete with other forms of energy including electricity, oil and propane. The principal competitive factors are price, and to a lesser extent, accessibility. The Company's natural gas distribution operations have several large volume industrial customers that have the capacity to use fuel oil as an alternative to natural gas. When oil prices decline, these interruptible customers convert to oil to satisfy their fuel requirements. Lower levels in interruptible sales occur when oil prices are lower relative to the price of natural gas. Oil prices, as well as the prices of electricity and other fuels are subject to fluctuation for a variety of reasons; therefore, future competitive conditions are not predictable. To address this uncertainty, the Company uses flexible pricing arrangements on both the supply and sales sides of its business to maximize sales volumes. As a result of the transmission business' conversion to open access, this business has shifted from providing competitive sales service to providing transportation and contract storage services. The Company's natural gas distribution operations located in Delaware, Maryland and Florida offer transportation services to certain industrial customers. In 2001, the Florida operation extended transportation service to commercial customers and, in 2002, to residential customers. With transportation service now available on the Company's distribution systems, the Company is competing with third party suppliers to sell gas to industrial customers. As it relates to transportation services, the Company's competitors include the interstate transmission company if the distribution customer is located close enough to the transmission company's pipeline to make a connection economically feasible. The customers at risk are usually large volume commercial and industrial customers with the financial resources and capability to bypass the distribution operations in this manner. In certain situations, the distribution operations may adjust services and rates for these customers to retain their business. The Company expects to continue to expand the availability of transportation service to additional classes of distribution customers in the future. The Company established a natural gas sales and supply operation in Florida in 1994 to compete for customers eligible for transportation services. The Company's propane distribution operations compete with several other propane distributors in their service territories, primarily on the basis of service and price, emphasizing reliability of service and responsiveness. Competition is generally from local outlets of national distribution companies and local businesses, because distributors located in close proximity to customers incur lower costs of providing service. Propane competes primarily with electricity and heating oil as energy sources. Since natural gas has historically been less expensive than propane, propane is generally not distributed in geographic areas serviced by natural gas pipeline or distribution systems. The propane wholesale marketing operation competes against various marketers, many of which have significantly greater resources and are able to obtain price or volumetric advantages. The advanced information services business faces significant competition from a number of larger competitors having substantially greater resources available to them than does the Company. In addition, changes in the advanced information services business are occurring rapidly, which could adversely impact the markets for the products and services offered by these businesses. This segment competes on the basis of technological expertise, reputation and price. RECENT PRONOUNCEMENTS On January 12, 2004, the Financial Accounting Standards Board ("FASB") released FASB Staff Position No. Statement of Financial Accounting Standards ("SFAS") 106-1 "Accounting and Disclosure Requirements Related to the Medicare Prescription Drug, Improvement and Modernization Act of 2003" ("the Act"). On May 19, 2004, the FASB released FASB Staff Position No. SFAS 106-2 which superseded SFAS 106-1. SFAS No. 106-2 provides guidance on the accounting for the effects of the Act and requires certain disclosures regarding the effect of the federal subsidy provided by the Act. It is effective for the first interim or annual period beginning after June 15, 2004. Adoption of SFAS No. 106-2 is not expected to have a material impact on the Company's post-retirement benefit obligation. The Emerging Issues Task Force ("EITF") of the FASB issued EITF No. 03-6 on February 9, 2004. It requires that earnings used to calculate earnings per share be allocated between common shareholders and other securities holders based on their respective rights to receive dividends. This requirement was effective for the second quarter of 2004. It had no impact on the Company's calculation of earnings per share. INFLATION Inflation affects the cost of labor, products and services required for operations, maintenance and capital improvements. While the impact of inflation has remained low in recent years, natural gas and propane prices are subject to rapid fluctuations. Fluctuations in natural gas prices are passed on to customers through the gas cost recovery mechanism in the Company's tariffs. To help cope with the effects of inflation on its capital investments and returns, the Company seeks rate relief from regulatory commissions for regulated operations while monitoring the returns of its unregulated business operations. To compensate for fluctuations in propane gas prices, the Company adjusts its propane selling prices to the extent allowed by the market.
CAUTIONARY STATEMENT Chesapeake has made statements in this report that are considered to be forward-looking statements. These statements are not matters of historical fact. Sometimes they contain words such as "believes," "expects," "intends," "plans," "will," or "may," and other similar words of a predictive nature. These statements relate to matters such as the potential sale of the water businesses, customer growth, changes in revenues or gross margins, capital expenditures, environmental remediation costs, regulatory approvals, market risks associated with the Company's propane wholesale marketing operation, competition, inflation and other matters. It is important to understand that these forward-looking statements are not guarantees, but are subject to certain risks and uncertainties and other important factors that could cause actual results to differ materially from those in the forward-looking statements. These factors include, among other things: o the temperature sensitivity of the natural gas and propane businesses; o the effect of spot, forward and futures market prices on the Company's distribution, wholesale marketing and energy trading businesses; o the effects of competition on the Company's unregulated and regulated businesses; o the effect of changes in federal, state or local regulatory and tax requirements, including deregulation; o the effect of accounting changes; o the effect of compliance with environmental regulations or the remediation of environmental damage; o the effects of general economic conditions on the Company and its customers; o the ability of the Company's new and planned facilities and acquisitions to generate expected revenues; and o the Company's ability to obtain the rate relief and cost recovery requested from utility regulators and the timing of the requested regulatory actions. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Market risk represents the potential loss arising from adverse changes in market rates and prices. Long-term debt is subject to potential losses based on the change in interest rates. The Company's long-term debt consists primarily of fixed rate senior notes, first mortgage bonds and convertible debentures, none of which was issued for trading purposes. The carrying value of long-term debt at June 30, 2004 was $71.5 million, with a fair value of $76.8 million, based mainly on current market prices or discounted cash flows using current rates for similar issues with similar terms and remaining maturities. The Company is exposed to changes in interest rates due to the use of fixed rate long-term debt to finance the business. Management continually monitors fluctuations in interest rates and debt markets to assess the benefits of changing the mix of long and short-term debt or refinancing existing debt. The Company's propane distribution business is exposed to market risk as a result of propane storage activities and entering into fixed price contracts for supply. The Company can store up to approximately 4 million gallons (including leased storage) of propane during the winter season to meet its customers' peak requirements and to serve metered customers. Decreases in the wholesale price of propane will cause the value of stored propane to decline. To mitigate the impact of price fluctuations, the Company has adopted a risk management policy that allows the propane distribution operation to enter into fair value hedges of its inventory. However, at June 30, 2004 the Company did not have any hedging contracts outstanding. The Company's propane wholesale marketing operation is a party to natural gas liquids ("NGL") forward contracts, primarily propane contracts, with various third parties. These contracts require that the propane wholesale marketing operation purchase or sell NGL at a fixed price at fixed future dates. At expiration, the contracts are settled by the delivery of NGL to the Company or the counter party or booking out the transaction. (Booking out is a procedure for financially settling a contract in lieu of the physical delivery of energy.) The propane wholesale marketing operation also enters into futures contracts that are traded on the New York Mercantile Exchange. In certain cases, the futures contracts are settled by the payment or receipt of a net amount equal to the difference between the current market price of the futures contract and the original contract price; however, they may also be settled for physical receipt or delivery of propane. The forward and futures contracts are entered into for trading and wholesale marketing purposes. The propane wholesale marketing business is subject to commodity price risk on its open positions to the extent that market prices for NGL deviate from fixed contract settlement prices. Market risk associated with the trading of futures and forward contracts are monitored daily for compliance with the Company's Risk Management Policy, which includes volumetric limits for open positions. To manage exposures to changing market prices, open positions are marked up or down to market prices and reviewed by oversight officials on a daily basis. Additionally, the Risk Management Committee reviews periodic reports on market and the credit risk of counter-parties, approves any exceptions to the Risk Management Policy (within limits established by the Board of Directors) and authorizes the use of any new types of contracts. Quantitative information on forward and futures contracts at June 30, 2004 is presented in the following table. All of the contracts mature within twelve months. <TABLE> <CAPTION> - ------------------------------------------------------------------------ QUANTITY ESTIMATED WEIGHTED AVERAGE AT JUNE 30, 2004 IN GALLONS MARKET PRICES CONTRACT PRICES - ------------------------------------------------------------------------ <S> <C> <C> <C> FORWARD CONTRACTS Sale. . . . . . . . . 11,592,000 $0.6750 - $0.6925 $0.6592 Purchase. . . . . . . 7,938,000 $0.6750 - $0.6925 $0.6757 FUTURES CONTRACTS Sale. . . . . . . . . 588,000 $0.6750 - $0.6925 $0.6798 - ------------------------------------------------------------------------ <FN> Estimated market prices and weighted average contract prices are in dollars per gallon. </FN> </TABLE> ITEM 4. CONTROLS AND PROCEDURES EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES The Chief Executive Officer and Chief Financial Officer of the Company, with the participation of other Company officials, have evaluated the Company's "disclosure controls and procedures" (as such term is defined under Rule 13a-15(e) and 15d-15(e) promulgated under the Securities Exchange Act of 1934, as amended) as of June 30, 2004. Based upon their evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the Company's disclosure controls and procedures are effective. CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING During the quarter ended June 30, 2004, there was no change in the Company's internal control over financial reporting that has materially affected, or is reasonably likely to materially affect, the Company's internal control over financial reporting.
PART II - OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS The Company is involved in certain legal actions and claims arising in the normal course of business. The Company is also involved in certain legal and administrative proceedings before various government agencies concerning rates. In the opinion of management, the ultimate disposition of these proceedings and claims will not have a material effect on the consolidated financial position, results of operations or cash flows of the Company. ITEM 2. CHANGES IN SECURITIES, USE OF PROCEEDS AND ISSUER PURCHASES OF EQUITY SECURITIES The table below sets forth information with respect to shares of common stock repurchased by the Company during the three months ended June 30, 2004. <TABLE> <CAPTION> - ---------------------------------------------------------------------------------------------------------------- TOTAL NUMBER MAXIMUM NUMBER TOTAL OF SHARES OF SHARES NUMBER AVERAGE PURCHASED AS PART OF THAT MAY YET BE OF SHARES PRICE PAID PUBLICLY ANNOUNCED PURCHASED UNDER THE PERIOD PURCHASED PER SHARE PLANS OR PROGRAMS (2) PLANS OR PROGRAMS (2) - ---------------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> April 1, 2004 through April 30, 2004 (1) . 5,882 $ 25.4861 0 0 May 1, 2004 through May 31, 2004 (3) . . 0 $ 0.0000 0 0 June 1, 2004 through June 30, 2004. . . . 0 $ 0.0000 0 0 - ---------------------------------------------------------------------------------------------------------------- Total. . . . . . . . . . . . . . 5,882 $ 25.4861 0 0 ================================================================================================================ <FN> (1) Chesapeake purchased 5,850 shares of stock on the open market to use for the Board of Directors' Stock Compensation Plan. The stock was distributed in May, 2004. Additionally, 32 shares were purchased on the open market and were added to shares held in a Rabbi Trust to adjust the balance to the contractual value. (2) Chesapeake has no publicly announced plans or programs to repurchase its shares. (3) The Company maintains a Rabbi Trust ("the Trust") that holds Chesapeake Utilities Corporation common stock, pursuant to a deferred compensation plan. The stock in the Trust is recorded as treasury stock. There is an offsetting liability that is also recorded in the equity section of the balance sheet. In prior periods, these accounts netted to a zero balance. In May 2004, there was a distribution of shares from the Trust. As allowed by the deferred compensation plan, the recipient elected to have the Company withhold shares in an amount equivalent to the participant's share of payroll taxes. The Company remitted cash in payment of the participant's payroll taxes and continues to hold 9,353 shares in the Rabbi Trust, that are not currently offset by a deferred compensation liability. The Company has the option of canceling these shares or using them to satisfy future deferred compensation commitments. </FN> </TABLE> ITEM 3. DEFAULTS UPON SENIOR SECURITIES None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS (a) The matters described in Item 4(c) below were submitted to a vote of stockholders at the Annual Meeting of Stockholders on May 6, 2004 in connection with which, proxies were solicited in accordance with Regulation 14A under the Securities Exchange Act of 1934, as amended. (b) Not applicable. (c) Proposals as submitted in the proxy statement were voted on as follows: i. The election of Class II Directors for three-year terms ending in 2007, and until their successors are elected and qualified. <TABLE> <CAPTION> - ----------------------------------------------------------- SHARES NOT NAME VOTES FOR VOTES WITHHELD VOTED - ----------------------------------------------------------- <S> <C> <C> <C> Ralph J. Adkins 5,098,137 101,222 508,733 Richard Bernstein 5,108,720 90,639 508,733 J. Peter Martin 5,069,637 129,722 508,733 - ----------------------------------------------------------- </TABLE> ITEM 5. OTHER INFORMATION None ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits: - Exhibit 31.1 - Certificate of Chief Executive Officer of Chesapeake Utilities Corporation pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934, dated August 9, 2004 - Exhibit 31.2 - Certificate of Chief Financial Officer of Chesapeake Utilities Corporation pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934, dated August 9, 2004 - Exhibit 32.1 - Certificate of Chief Executive Officer of Chesapeake Utilities Corporation pursuant to 18 U.S.C. Section 1350, dated August 9, 2004 - Exhibit 32.2 - Certificate of Chief Financial Officer of Chesapeake Utilities Corporation pursuant to 18 U.S.C. Section 1350, dated August 9, 2004 (b) Reports on Form 8-K: May 4, 2004 furnishing the Company's earnings press release for the quarter ended March 31, 2004 (Items 7 and 12).
SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. Chesapeake Utilities Corporation /s/ Michael P. McMasters - --------------------------- Michael P. McMasters Vice President and Chief Financial Officer Date: August 9, 2004