CPK 2004 Form 10-K
SECURITIES
AND EXCHANGE COMMISSION |
Washington,
D.C. 20549 |
|
|
|
FORM
10-K |
|
ANNUAL
REPORT PURSUANT TO SECTION 13 OR 15(d) OF |
THE
SECURITIES EXCHANGE ACT OF 1934 |
|
For
the Fiscal Year Ended: December 31, 2004 Commission File Number:
001-11590 |
|
Chesapeake
Utilities Corporation |
(Exact
name of registrant as specified in its
charter) |
State
of Delaware |
51-0064146 |
(State
or other jurisdiction of |
(I.R.S.
Employer |
incorporation
or organization) |
Identification
No.) |
909
Silver Lake Boulevard, Dover, Delaware
19904 |
(Address
of principal executive offices, including zip
code) |
|
302-734-6799 |
(Registrant’s
telephone number, including area code) |
|
Securities
registered pursuant to Section 12(b) of the
Act: |
Title
of each class |
Name
of each exchange on which registered |
Common
Stock - par value per share $.4867 |
New
York Stock Exchange, Inc. |
Securities
registered pursuant to Section 12(g) of the
Act: |
8.25%
Convertible Debentures Due 2014 |
(Title
of class) |
Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days. Yes [X].
No [
].
Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be contained, to the best
of registrant’s knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendments to
this Form 10-K. [ ]
Indicate
by checkmark whether the registrant is an accelerated filer (as defined by
Exchange Act Rule 12b-2). Yes [X].
No [
].
As of
March 11, 2005, 5,757,146 shares of common stock were outstanding. The aggregate
market value of the common shares held by non-affiliates of Chesapeake Utilities
Corporation as of June 30, 2004, the last business day of its most recently
completed second fiscal quarter, based on the last trade price on that date, as
reported by the New York Stock Exchange, was approximately $124
million.
DOCUMENTS
INCORPORATED BY REFERENCE
Portions
of the Proxy Statement for the 2005 Annual Meeting of Stockholders are
incorporated by reference in Part III.
Chesapeake
Utilities Corporation
Form
10-K
YEAR
ENDED DECEMBER 31, 2004
TABLE
OF CONTENTS
|
Page |
Part I |
3 |
Item
1. Business |
3 |
Item
2. Proprties |
10 |
Item
3. Legal Proceedings |
11 |
Item
4. Submission of Matters to a Vote of Security Holders |
11 |
Part II |
11 |
Item
5. Market for the Registrant's Common Equity, Related Shareholder Matters
and Issuer Purchases of Equity Securities |
11 |
Item
6. Selected Financial Data |
14 |
Item
7. Management's Discussion and Analysis of Financial Condition and Results
of Operations |
18 |
Item
7A. Quantitative and Qualitative Disclosures About Market Risk |
35 |
Item
8. Financial Statements and Supplemental Data |
35 |
Item
9. Changes in and Disagreements With Accountants on Accounting and
Financial Disclosure |
66 |
Item
9A. Controls and Procedures |
66 |
Item
9B. Other Information |
66 |
Part III |
66 |
Item
10. Directors and Executive Officers of the Registrant |
66 |
Item
11. Executive Compensation |
67 |
Item
12. Security Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters |
67 |
Item
13. Certain Relationships and Related Transactions |
67 |
Item
14. Principal Accounting Fees and Services |
68 |
Part IV |
68 |
Item 15. Exhibits, Financial Statement
Schedules |
68 |
Signatures |
72 |
Part
I
Item
1. Business
Chesapeake
Utilities Corporation (“Chesapeake” or “the Company”) has made statements in
this Form 10-K that are considered to be forward-looking statements. These
statements are not matters of historical fact. Sometimes they contain words such
as “believes,” “expects,” “intends,” “plans,” “will” or “may,” and other similar
words of a predictive nature. These statements relate to matters such as
customer growth, changes in revenues or margins, capital expenditures,
environmental remediation costs, regulatory approvals, market risks associated
with the Company’s propane operations, the competitive position of the Company
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. See Item 7 under
the heading “Management’s Discussion and Analysis — Cautionary
Statement.”
As a
public company, Chesapeake files annual, quarterly and other reports, as well as
its annual proxy statement and other information, with the Securities and
Exchange Commission (“the SEC”). The SEC maintains an Internet site that
contains reports, proxy and information statements and other information
regarding the Company. The address of the SEC’s Internet website is www.sec.gov.
Chesapeake makes available, free of charge, on its Internet website its Annual
Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K
and amendments to those reports, as soon as reasonably practicable after such
reports are electronically filed with or furnished to the SEC. The address of
Chesapeake’s Internet website is www.chpk.com. The content of this website is
not part of this report.
Chesapeake
has a Business Code of Ethics and Conduct applicable to all employees, officers
and directors and a Code of Ethics for Financial Officers. Copies of the
Business Code of Ethics and Conduct and the Financial Officer Code of Ethics are
available on its website. Chesapeake also adopted Corporate Governance
Guidelines and Charters for the Audit Committee, Compensation Committee, and
Governance Committee of the Board of Directors, each of which satisfies the
regulatory requirements established by the Securities and Exchange Commission
and the New York Stock Exchange. The Board of Directors has also adopted
“Corporate Governance Guidelines on Director Independence,” which conform to the
New York Stock Exchange (“NYSE”) listing standards on director independence.
Each of these documents also is available on Chesapeake’s Internet website or
may be obtained by writing to: Corporate Secretary; c/o Chesapeake Utilities
Corporation; 909 Silver Lake Blvd.; Dover, DE 19904.
If
Chesapeake makes any amendment to, or grants a waiver of, any provision of the
Business Code of Ethics and Conduct or the Financial Officer Code of Ethics
applicable to its principal executive officer, principal financial officer,
principal accounting officer or controller, the amendment or waiver will be
disclosed within five business days on the Company’s Internet
website.
(a) |
General
Development of Business |
Chesapeake
is a diversified utility company engaged directly or through subsidiaries in
natural gas distribution and transmission, propane distribution and wholesale
marketing, advanced information services and other related businesses.
Chesapeake’s
three natural gas distribution divisions serve approximately 50,900 residential,
commercial and industrial customers in central and southern Delaware, Maryland’s
Eastern Shore and parts of Florida. The Company’s natural gas transmission
subsidiary, Eastern Shore Natural Gas Company (“Eastern Shore”), operates a
307-mile interstate pipeline system that transports gas from various points in
Pennsylvania to the Company’s Delaware and Maryland distribution divisions, as
well as to other utilities and industrial customers in southern Pennsylvania,
Delaware and on the Eastern Shore of Maryland. The Company’s propane
distribution operation serves approximately 34,900 customers in central and
southern Delaware, the Eastern Shore of both Maryland and Virginia and parts of
Florida. The advanced information
services
segment provides domestic and international clients with information technology
related business services and solutions for both enterprise and e-business
applications.
During
2003, Chesapeake decided to exit the water services business and sold the assets
of six of the seven dealerships. Chesapeake sold the remaining water dealership
during 2004.
(b) |
Financial
Information about Industry
Segments |
Financial
information by business segment is included in Item 8 under the heading “Notes
to Consolidated Financial Statements — Note D.”
(c) |
Narrative
Description of Business |
The
Company is engaged in three primary business activities: natural gas
distribution and transmission, propane distribution and wholesale marketing and
advanced information services. In addition to the primary groups, Chesapeake has
subsidiaries in other related businesses.
(i)
(a) Natural Gas Distribution and Transmission
General
Chesapeake
distributes natural gas to residential, commercial and industrial customers in
central and southern Delaware, the Salisbury and Cambridge, Maryland areas on
Maryland’s Eastern Shore and parts of Florida. These activities are conducted
through three utility divisions, one division in Delaware, another in Maryland
and a third division in Florida. The Company also offers natural gas supply and
supply management services in the state of Florida through its subsidiary,
Peninsula Energy Services Company (“PESCO”).
Delaware
and Maryland.
Chesapeake’s Delaware and Maryland utility divisions serve approximately 38,900
customers, of which approximately 38,700 are residential and commercial
customers purchasing gas primarily for heating purposes. The remainder are
industrial customers. For the year 2004, residential and commercial customers
accounted for approximately 65% of the volume delivered by the divisions and 71%
of the divisions’ revenue. The divisions’ industrial customers purchase gas,
primarily on an interruptible basis, for a variety of manufacturing,
agricultural and other uses. Most of Chesapeake’s customer growth in these
divisions comes from new residential construction using gas-heating
equipment.
Florida.
The
Florida division distributes natural gas to approximately 12,300 residential and
commercial and 90 industrial customers in Polk, Osceola, Hillsborough, Gadsden,
Gilchrist, Union, Holmes, Jackson, Desoto, Suwannee, Liberty and Citrus
Counties. Currently the 90 industrial customers, which purchase and transport
gas on a firm basis, account for approximately 97% of the volume delivered by
the Florida division and 64% of the revenues. These customers are primarily
engaged in the citrus and phosphate industries and in electric cogeneration.
PESCO provides natural gas supply management services to 320
customers.
Eastern
Shore. The
Company’s wholly owned transmission subsidiary, Eastern Shore, owns and operates
an interstate natural gas pipeline and provides open access transportation
services for affiliated and non-affiliated companies through an integrated gas
pipeline extending from southeastern Pennsylvania through Delaware to its
terminus on the Eastern Shore of Maryland. Eastern Shore also provides swing
transportation service and contract storage services. Eastern Shore’s rates and
services are subject to regulation by the Federal Energy Regulatory Commission
(“FERC”).
Adequacy
of Resources
General.
The
Delaware and Maryland divisions have both firm and interruptible contracts with
four interstate “open access” pipelines including Eastern Shore. The divisions
are directly interconnected with Eastern Shore and services upstream of Eastern
Shore are contracted with Transcontinental Gas Pipeline Corporation (“Transco”),
Columbia Gas Transmission Corporation (“Columbia”) and Columbia Gulf
Transmission Company (“Gulf”). The divisions use their firm transportation
supply resources to meet a significant percentage of their projected demand
requirements. In order to meet the difference between firm supply and firm
demand, the divisions purchase natural gas supply on the spot market from
various suppliers. This gas is transported by the upstream pipelines and
delivered to the divisions’
interconnects
with Eastern Shore. The divisions also have the capability to use propane-air
peak-shaving to supplement or displace the spot market purchases. The Company
believes that the availability of gas supply and transportation to the Delaware
and Maryland divisions is adequate under existing arrangements to meet the
anticipated needs of their customers.
Delaware.
The
Delaware division’s contracts with Transco include: (a) firm transportation
capacity of 9,029 dekatherms (“Dt”) per day, which expires in 2005; (b) firm
transportation capacity of 311 Dt per day for December through February,
expiring in 2006; (c) firm transportation capacity of 174 Dt per day, which
expires in 2005 and (d) firm storage service, providing a total capacity of
142,830 Dt, with provisions to continue from year to year, subject to six (6)
months notice for termination.
The
Delaware division’s contracts with Columbia include: (a) firm transportation
capacity of 880 Dt per day, which expires in 2014; (b) firm transportation
capacity of 1,132 Dt per day, which expires in 2017; (c) firm transportation
capacity of 549 Dt per day, which expires in 2018; (d) firm transportation
capacity of 899 per day, which expires in 2019; (e) firm storage service
providing a peak day entitlement of 6,193 Dt and a total capacity of 298,195 Dt,
which expires in 2015; (f) firm storage service, providing a peak day
entitlement of 635 Dt and a total capacity of 57,139 Dt, which expires in 2018;
(g) firm storage service providing a peak day entitlement of 583 Dt and a total
capacity of 52,460 Dt, which expires in 2019; (h) firm storage service providing
a peak day entitlement of 583 Dt and a total capacity of 52,460 Dt, which
expires in 2020; (i) firm storage service providing a peak day entitlement of 15
Dt and a total capacity of 1,350 Dt, which expires in 2018; and (j) firm storage
service providing a peak day entitlement of 215 Dt and a total capacity of
10,646 Dt, which expires in 2010. Delaware’s contracts with Columbia for
storage-related transportation provide quantities that are equivalent to the
peak day entitlement for the period of October through March and are equivalent
to fifty percent (50%) of the peak day entitlement for the period of April
through September. The terms of the storage-related transportation contracts
mirror the storage services that they support.
The
Delaware division’s contract with Gulf, which expires in 2009, provides firm
transportation capacity of 880 Dt per day for the period November through March
and 809 Dt per day for the period April through October.
The
Delaware division’s contracts with Eastern Shore include: (a) firm
transportation capacity of 39,987 Dt per day for the period December through
February, 38,765 Dt per day for the months of November, March and April, and
29,689 Dt per day for the period May through October, with various expiration
dates ranging from 2005 to 2017; (b) firm storage capacity providing a peak day
entitlement of 2,655 Dt and a total capacity of 131,370 Dt, which expires in
2013; (c) firm storage capacity providing a peak day entitlement of 580 Dt and a
total capacity of 29,000 Dt, which expires in 2013; (d) firm storage capacity
providing a peak day entitlement of 911 Dt and a total capacity of 5,708 Dt,
which expires in 2006. The Delaware division’s firm transportation contracts
with Eastern Shore also include Eastern Shore’s provision of swing
transportation service that expires March 31, 2005. This service includes: (a)
firm transportation capacity of 1,846 Dt per day on Transco’s pipeline system,
retained by Eastern Shore, in addition to the Delaware division’s Transco
capacity referenced earlier and (b) an interruptible storage service that
supports a swing supply service provided by Transco. Upon expiration of this
Eastern shore contract, the associated transportation and storage entitlements
will become Delaware division entitlements.
The
Delaware division currently has contracts for the purchase of firm natural gas
supply with several suppliers. These supply contracts provide the availability
of a maximum firm daily entitlement of 27,500 Dt and the supplies are
transported by Transco, Columbia, Gulf and Eastern Shore under firm
transportation contracts. The gas purchase contracts have various expiration
dates and daily quantities may vary from day to day and month to
month.
Maryland. The
Maryland division’s contracts with Transco include: (a) firm transportation
capacity of 4,738 Dt per day, which expires in 2005; (b) firm transportation
capacity of 155 Dt per day for December through February, expiring in 2006; and
(c) firm storage service providing a total capacity of 33,120 Dt, with
provisions to continue from year to year, subject to six months notice for
termination.
The
Maryland division’s contracts with Columbia include: (a) firm transportation
capacity of 442 Dt per day, which expires in 2014; (b) firm transportation
capacity of 908 Dt per day, which expires in 2017; (c) firm transportation
capacity of 350 Dt per day, which expires in 2018; (d) firm storage service
providing a peak day entitlement of 3,142 Dt and a total capacity of 154,756 Dt,
which expires in 2015; and (e) firm storage service providing a peak day
entitlement of 521 Dt and a total capacity of 46,881 Dt, which expires in 2018.
The Maryland division’s contracts with Columbia for storage-related
transportation provide quantities that are equivalent to the peak day
entitlement for the period October through March and are equivalent to fifty
percent (50%) of the peak day entitlement for the period April through
September. The terms of the storage-related transportation contracts mirror the
storage services that they support.
The
Maryland division’s contract with Gulf, which expires in 2009, provides firm
transportation capacity of 590 Dt per day for the period November through March
and 543 Dt per day for the period April through October.
The
Maryland division’s contracts with Eastern Shore include: (a) firm
transportation capacity of 14,918 Dt per day for the period December through
February, 14,254 Dt per day for the months of November, March and April and
9,693 Dt per day for the period May through October, with various expiration
dates ranging from 2004 to 2013; (b) firm storage capacity providing a peak day
entitlement of 1,428 Dt and a total capacity of 70,665 Dt, which expires in
2013; (c) firm storage capacity providing a peak day entitlement of 309 Dt and a
total capacity of 15,500 Dt, which expires in 2013; and (d) firm storage
capacity providing a peak day entitlement of 569 Dt and a total capacity of
3,560 Dt, which expires in 2006. The Maryland division’s firm transportation
contracts with Eastern Shore also include Eastern Shore’s provision of swing
transportation service that expires March 31, 2005. This service includes: (a)
firm transportation capacity of 969 Dt per day on Transco’s pipeline system,
retained by Eastern Shore, in addition to the Maryland division’s Transco
capacity referenced earlier and (b) an interruptible storage service that
supports a swing supply service provided by Transco. Upon expiration of this
Eastern Shore contract, the associated transportation and storage entitlements
will become Maryland division entitlements.
The
Maryland division currently has contracts for the purchase of firm natural gas
supply with several suppliers. These supply contracts provide the availability
of a maximum firm daily entitlement of 9,000 Dt and the supplies are transported
by Transco, Columbia, Gulf and Eastern Shore under the Maryland division’s
transportation contracts. The gas purchase contracts have various expiration
dates and daily quantities may vary from day to day and month to
month.
Florida.
The
Florida division receives transportation service from Florida Gas Transmission
Company (“FGT”), a major interstate pipeline. Chesapeake has contracts with FGT
for: (a) daily firm transportation capacity of 27,579 Dt in November through
April; 21,200 Dt in May through September, and 27,416 Dt in October, which
expires in 2010; and (b) daily firm transportation capacity of 1,000 Dt daily,
which expires in 2015.
The
Florida division also began receiving transportation service from Gulfstream
Natural Gas System (“Gulfstream”), beginning in June 2002. Chesapeake has a
contract with Gulfstream for daily firm transportation capacity of 10,000 Dt
daily. The contract with Gulfstream expires May 31, 2022.
Eastern
Shore.
Eastern
Shore has 2,888 thousand cubic feet (“Mcf”) of firm transportation capacity
under contract with Transco, which expires in 2005. Eastern Shore also has
contracts with Transco for: (a) 5,406 Mcf of firm peak day entitlements and
total storage capacity of 267,981 Mcf, which expires in 2013; and (b) 1,640 Mcf
of firm peak day entitlements and total storage capacity of 10,283 Mcf, which
expires in 2006.
Eastern
Shore has retained the firm transportation capacity and firm storage services
described above in order to provide swing transportation service and storage
service to those customers that requested such service.
Competition
See
discussion on competition in Item 7 under the heading “Management’s Discussion
and Analysis — Competition.”
Rates
and Regulation
General.
Chesapeake’s
natural gas distribution divisions are subject to regulation by the Delaware,
Maryland and Florida Public Service Commissions with respect to various aspects
of the Company’s business, including the rates for sales and transportation to
all customers in each respective jurisdiction. All of Chesapeake’s firm
distribution sales rates are subject to purchased gas adjustment clauses, which
match revenues with gas costs and normally allow eventual full recovery of gas
costs. Adjustments under these clauses require periodic filings and hearings
with the relevant regulatory authority, but do not require a general rate
proceeding.
Eastern
Shore is subject to regulation by the FERC as an interstate pipeline. The FERC
regulates the provision of service, terms and conditions of service, and the
rates Eastern Shore can charge for its transportation and storage services. In
addition, the FERC regulates the rates Eastern Shore is charged for
transportation and transmission line capacity and services provided by Transco
and Columbia.
Management
monitors the achieved rate of return in each jurisdiction in order to ensure the
timely filing of rate adjustment applications.
Regulatory
Proceedings
See
discussion of regulatory activities in Item 7 under the heading “Management’s
Discussion and Analysis — Regulatory Activities.”
(i)
(b) Propane Distribution and Wholesale Marketing
General
Chesapeake’s
propane distribution group consists of (1) Sharp Energy, Inc. (“Sharp Energy”),
a wholly owned subsidiary of Chesapeake, (2) Sharpgas, Inc. (“Sharpgas”), a
wholly owned subsidiary of Sharp Energy, and (3) Tri-County Gas Co.,
Incorporated (“Tri-County”), a wholly owned subsidiary of Chesapeake. The
propane wholesale marketing group consists of Xeron, Inc. (“Xeron”), a wholly
owned subsidiary of Chesapeake.
Propane
is a form of liquefied petroleum gas, which is typically extracted from natural
gas or separated during the crude oil refining process. Although propane is a
gas at normal pressure, it is easily compressed into liquid form for storage and
transportation. Propane is a clean-burning fuel, gaining increased recognition
for its environmental superiority, safety, efficiency, transportability and ease
of use relative to alternative forms of energy. Propane is sold primarily in
suburban and rural areas, which are not served by natural gas pipelines. Demand
is typically much higher in the winter months and is significantly affected by
seasonal variations, particularly the relative severity of winter temperatures,
because of its use in residential and commercial heating.
During
2004, the Company’s propane distribution operations served approximately 34,900
propane customers on the Delmarva Peninsula, southeastern Pennsylvania and in
Florida and delivered approximately 25 million retail and wholesale gallons of
propane.
In May
1998, Chesapeake acquired Xeron, a natural gas liquids trading company located
in Houston, Texas. Xeron markets propane to large independent and petrochemical
companies, resellers and southeastern retail propane companies in the United
States. Additional information on Xeron’s trading and wholesale marketing
activities, market risks and the controls that limit and monitor the risks are
included in Item 7 under the heading “Management’s Discussion and Analysis —
Market Risk.”
The
propane distribution business is affected by many factors such as seasonality,
the absence of price regulation and competition among local providers. The
propane wholesale marketing business is affected by wholesale price volatility
and the supply and demand for propane at a wholesale level.
Adequacy
of Resources
The
Company’s propane distribution operations purchase propane primarily from
suppliers, including major domestic oil companies and independent producers of
gas liquids and oil. Supplies of propane from these and other sources are
readily available for purchase by the Company. Supply contracts generally
include minimum (not subject to take-or-pay premiums) and maximum purchase
provisions.
The
Company’s propane distribution operations use trucks and railroad cars to
transport propane from refineries, natural gas processing plants or pipeline
terminals to the Company’s bulk storage facilities. From these facilities,
propane is delivered in portable cylinders or by “bobtail” trucks, owned and
operated by the Company, to tanks located at the customer’s
premises.
Xeron
does not own physical storage facilities or equipment to transport propane;
however, it contracts for storage and pipeline capacity to facilitate the sale
of propane on a wholesale basis.
Competition
See
discussion on competition in Item 7 under the heading “Management’s Discussion
and Analysis — Competition.”
Rates
and Regulation
The
Company’s propane distribution and wholesale marketing activities are not
subject to any federal or state pricing regulation. Transport operations are
subject to regulations concerning the transportation of hazardous materials
promulgated under the Federal Motor Carrier Safety Act, which is administered by
the United States Department of Transportation and enforced by the various
states in which such operations take place. Propane distribution operations are
also subject to state safety regulations relating to “hook-up” and placement of
propane tanks.
The
Company’s propane operations are subject to all operating hazards normally
associated with the handling, storage and transportation of combustible liquids,
such as the risk of personal injury and property damage caused by fire. The
Company carries general liability insurance in the amount of $35 million, but
there is no assurance that such insurance will be adequate.
(i)
(c) Advanced Information Services
General
Chesapeake’s
advanced information services segment consists of BravePoint, Inc.
(“BravePoint”), a wholly owned subsidiary of the Company. The Company changed
its name from United Systems, Inc. in 2001 to reflect a change in service
offerings.
BravePoint,
headquartered in Norcross, Georgia, provides domestic and international clients
with information technology related business services and solutions for both
enterprise and e-business applications.
Competition
See
discussion on competition in Item 7 under the heading “Management’s Discussion
and Analysis — Competition.”
(i)
(d) Other Subsidiaries
Skipjack,
Inc. (“Skipjack”), Eastern Shore Real Estate, Inc. and Chesapeake Investment
Company are wholly owned subsidiaries of Chesapeake Service Company. Skipjack
and Eastern Shore Real Estate, Inc. own and lease office
buildings
in Delaware and Maryland to affiliates of Chesapeake. Chesapeake Investment
Company is a Delaware affiliated investment company. During 2004, Chesapeake
formed a new company, OnSight Energy, LLC (“OnSight”), to provide distributed
energy solutions to customers requiring reliable, uninterrupted energy sources
and/or those wishing to reduce energy costs. OnSight signed its first contract
in January 2005.
Chesapeake
conducted its water conditioning and treatment and bottled water services
business through separate subsidiaries. The assets of all of the water
businesses were sold in 2003 and 2004 and the subsidiaries are now
inactive.
(ii)
Seasonal Nature of Business
Revenues
from the Company’s residential and commercial natural gas sales and from its
propane distribution activities are affected by seasonal variations, since the
majority of these sales are to customers using the fuels for heating purposes.
Revenues from these customers are accordingly affected by the mildness or
severity of the heating season.
(iii)
Capital Budget
A
discussion of capital expenditures by business segment and capital expenditures
for environmental control facilities are included in Item 7 under the heading
“Management Discussion and Analysis — Liquidity and Capital
Resources.”
(iv)
Employees
As of
December 31, 2004, Chesapeake had 426 employees, including 187 in natural gas,
138 in propane and 71 in advanced information services. The remaining 30
employees are considered general and administrative and include officers of the
Company, treasury, accounting, information technology, human resources and other
administrative personnel.
(v)
Executive Officers of the Registrant
Information
pertaining to the executive officers of the Company is as follows:
John
R. Schimkaitis (age 57)
Mr. Schimkaitis is President and Chief Executive Office of Chesapeake and its
subsidiaries. Mr. Schimkaitis assumed the role of Chief Executive Officer on
January 1, 1999. He has served as President since 1997. Prior to this, Mr.
Schimkaitis served as President and Chief Operating Officer, Executive Vice
President, Senior Vice President, Chief Financial Officer, Vice President,
Treasurer, Assistant Treasurer and Assistant Secretary of
Chesapeake.
Paul
M. Barbas (age 48)
Mr. Barbas is Executive Vice President and President of Chesapeake Service
Company. He was appointed Executive Vice President in 2004 and served as Vice
President and President of Chesapeake Service Company since joining the company
in 2003. Prior to joining Chesapeake, Mr. Barbas was Executive Vice President of
Allegheny Power. Mr. Barbas joined Allegheny Energy as President of Allegheny
Ventures in 1999 and was appointed Executive Vice President of Allegheny Power
in 2001. Prior to 1999 Mr. Barbas held a variety of executive position within
G.E. Capital.
Michael
P. McMasters (age 46)
Mr. McMasters is Senior Vice President and Chief Financial Officer of Chesapeake
Utilities Corporation. He was appointed Senior Vice President in 2004 and has
served as Chief Financial Officer since December 1996. He has previously held
the positions of Vice President, Treasurer, Director of Accounting and Rates,
and Controller. From 1992 to May 1994, Mr. McMasters was employed as Director of
Operations Planning for Equitable Gas Company.
Stephen
C. Thompson (age 44)
Mr. Thompson is President of Eastern Shore Natural Gas Company and Senior Vice
President of Chesapeake Utilities Corporation. Prior to becoming Senior Vice
President in 2004, he served as Vice
President
of Chesapeake since May 1997. He has also served as Vice President, Director of
Gas Supply and Marketing, Superintendent of Eastern Shore and Regional Manager
for the Florida distribution operations.
William
C. Boyles (age 47)
Mr. Boyles is Vice President and Corporate Secretary of Chesapeake Utilities
Corporation. Mr. Boyles has served as Corporate Secretary since 1998 and Vice
President since 1997. He previously served as Director of Accounting and
Finance, Treasurer, Assistant Treasurer, Treasury Department Manager and
Assistant Secretary. Prior to joining Chesapeake, he was employed as a Manager
of Financial Analysis at Equitable Bank of Delaware and Group Controller at
Irving Trust Company of New York.
S.
Robert Zola (age 52)
Mr. Zola joined Sharp Energy in August of 2002 as President. Prior to joining
Sharp Energy, Mr. Zola most recently served as Northeast Regional Manager of
Synergy Gas, now Cornerstone MLP in Philadelphia, PA. During his 24-year career
in the propane industry, Mr. Zola also started Bluestreak Propane in Phoenix,
AZ, which after successfully developing the business, was sold to Ferrell
Gas.
Item
2. Properties
The
Company owns offices and operates facilities in the following locations:
Pocomoke, Salisbury, Cambridge and Princess Anne, Maryland; Dover, Seaford,
Laurel and Georgetown, Delaware; and Winter Haven, Florida. Chesapeake rents
office space in Dover and Ocean View, Delaware; Jupiter and Lecanto, Florida;
Chincoteague and Belle Haven, Virginia; Easton, and Salisbury, Maryland; Honey
Brook, Pennsylvania; Houston, Texas; and Atlanta, Georgia. In general, the
Company believes that its properties are adequate for the uses for which they
are employed. Capacity and utilization of the Company’s facilities can vary
significantly due to the seasonal nature of the natural gas and propane
distribution businesses.
(b) |
Natural
Gas Distribution |
Chesapeake
owns over 800 miles of natural gas distribution mains (together with related
service lines, meters and regulators) located in its Delaware and Maryland
service areas and 678 miles of natural gas distribution mains (and related
equipment) in its central Florida service areas. Chesapeake also owns facilities
in Delaware and Maryland for propane-air injection during periods of peak
demand. During 2004, portions of the properties constituting Chesapeake’s
distribution system were encumbered by the lien of the Mortgage securing
Chesapeake’s First Mortgage Bonds. In December 2004, the outstanding First
Mortgage Bonds were repaid in full.
(c) |
Natural
Gas Transmission |
Eastern
Shore owns and operates approximately 307 miles of transmission pipelines
extending from supply interconnects at Parkesburg, Pennsylvania; Daleville,
Pennsylvania and Hockessin, Delaware to approximately seventy-five delivery
points in southeastern Pennsylvania, Delaware and the eastern shore of Maryland.
Eastern Shore also owns compressor stations located in Daleville, Pennsylvania,
Delaware City, Delaware and Bridgeville, Delaware. The compressor stations are
used to increase pressures as necessary to meet system demands.
(d) |
Propane
Distribution and Wholesale
Marketing |
The
company’s Delmarva-based propane distribution operation owns bulk propane
storage facilities with an aggregate capacity of approximately 2.0 million
gallons at 38 plant facilities in Delaware, Maryland and Virginia, located on
real estate that is either owned or leased. The company’s Florida-based propane
distribution operation owns three bulk propane storage facilities with a total
capacity of 66,000 gallons. Xeron does not own physical storage facilities or
equipment to transport propane; however, it leases propane storage capacity and
pipeline capacity.
The
Company owns a facility in Salisbury, Maryland, formerly used in connection with
its water business, which is listed for sale.
Item
3. Legal Proceedings
The
Company and its subsidiaries are involved in various legal actions and claims
arising in the normal course of business. The Company is also involved in
certain legal and administrative proceedings before various governmental
agencies concerning rates. In the opinion of management, the ultimate
disposition of these proceedings will not have a material effect on the
consolidated financial position of the Company.
See
discussion of environmental commitments and contingencies in Item 8 under the
heading “Notes to Consolidated Financial Statements — Note N.”
Item
4. Submission of Matters to a Vote of Security Holders
None
Part
II
Item
5. Market for the Registrant’s Common Equity, Related Shareholder Matters and
Issuer Purchases of Equity Securities
(a) |
Common
Stock Price Ranges, Common Stock Dividends and Shareholder
Information: |
The
Company’s Common Stock is listed on the New York Stock Exchange under the symbol
“CPK.” The high, low and closing prices of Chesapeake’s Common Stock and
dividends declared per share for each calendar quarter during the years 2004 and
2003 were as follows:
|
|
|
|
|
Dividends |
|
|
|
|
|
Declared |
|
Quarter
Ended |
High |
Low |
Close |
Per
Share |
2004 |
|
|
|
|
|
|
March
31 |
$26.51 |
$24.30 |
$25.62 |
$0.275 |
|
June
30 |
26.20 |
20.42 |
22.70 |
0.275 |
|
September
30 |
25.40 |
22.10 |
25.10 |
0.280 |
|
December
31 |
27.55 |
24.50 |
26.70 |
0.280 |
2003 |
|
|
|
|
|
|
March
31 |
$19.84 |
$18.40 |
$18.80 |
$0.275 |
|
June
30 |
23.84 |
18.45 |
22.60 |
0.275 |
|
September
30 |
24.45 |
20.49 |
22.92 |
0.275 |
|
December
31 |
26.70 |
23.02 |
26.05 |
0.275 |
Indentures
to the long-term debt of the Company contain various restrictions. The most
stringent restrictions state that the Company must maintain equity of at least
40 percent of total capitalization and the times interest earned ratio must be
at least 2.5. Additionally, under the terms of the Company’s Note Agreement for
the 6.64 percent Senior Notes, the Company cannot, until the retirement of the
Senior Note, pay any dividends after October 31, 2002 which exceed the sum of
$10 million plus consolidated net income recognized after January 1, 2003. As of
December 31, 2004, the amount available for future dividends under this covenant
is $14.6 million.
At
December 31, 2004, there were approximately 2,026 shareholders of record of the
Common Stock.
(b) |
Changes
in Securities, Use of Proceeds and Issues Purchases of Equity
Securities |
The
following table sets forth information on purchases by or on behalf of
Chesapeake of shares of its Common Stock during the quarter ended December 31,
2004.
Period |
|
Total
Number of Shares Purchased |
|
Average
Price Paid per Share |
|
Total
Number of Shares Purchased as Part of Publicly Announced Plans or Programs
(1) |
|
Maximum
Number of Shares That May Yet Be Purchased Under the Plans or Programs
(1) |
|
October
1, 2004 through October 31, 2004 (2) |
|
|
417
|
|
$ |
25.59 |
|
|
-
|
|
|
-
|
|
November
1, 2004 through November 30, 2004 |
|
|
-
|
|
$ |
0.00 |
|
|
-
|
|
|
-
|
|
December
1, 2004 through December 31, 2004 |
|
|
-
|
|
$ |
0.00 |
|
|
-
|
|
|
-
|
|
Total |
|
|
417
|
|
$ |
25.59 |
|
|
-
|
|
|
-
|
|
|
|
(1)
Chesapeake has no publicly announced plans or programs to repurchase its
shares. |
|
(2)
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. The Trustee
reinvests cash dividends in Company stock. The stock is purchased on the
open market. |
|
This page intentionally left blank.
Item
6. Selected Financial Data
For
the Years Ended December 31, |
|
2004 |
|
2003 |
|
2002 |
|
2001 |
|
2000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
(in thousands of dollars)
(2) |
|
|
|
|
|
|
|
|
|
|
|
Revenues |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Natural
gas distribution & transmission |
|
$ |
124,246 |
|
$ |
110,247 |
|
$ |
93,588 |
|
$ |
107,418 |
|
$ |
101,138 |
|
Propane |
|
|
41,500
|
|
|
41,029
|
|
|
29,238
|
|
|
35,742
|
|
|
31,780
|
|
Advanced
informations systems |
|
|
12,427
|
|
|
12,578
|
|
|
12,764
|
|
|
14,104
|
|
|
12,390
|
|
Other
& eliminations |
|
|
(218 |
) |
|
(286 |
) |
|
(334 |
) |
|
(113 |
) |
|
(131 |
) |
Total
revenues |
|
$ |
177,955 |
|
$ |
163,568 |
|
$ |
135,256 |
|
$ |
157,151 |
|
$ |
145,177 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Natural
gas distribution & transmission |
|
$ |
17,091 |
|
$ |
16,653 |
|
$ |
14,973 |
|
$ |
14,405 |
|
$ |
12,798 |
|
Propane |
|
|
2,364
|
|
|
3,875
|
|
|
1,052
|
|
|
913
|
|
|
2,135
|
|
Advanced
informations systems |
|
|
387
|
|
|
692
|
|
|
343
|
|
|
517
|
|
|
336
|
|
Other
& eliminations |
|
|
128
|
|
|
359
|
|
|
237
|
|
|
386
|
|
|
816
|
|
Total
operating income |
|
$ |
19,970 |
|
$ |
21,579 |
|
$ |
16,605 |
|
$ |
16,221 |
|
$ |
16,085 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income from continuing operations |
|
$ |
9,550 |
|
$ |
10,079 |
|
$ |
7,535 |
|
$ |
7,341 |
|
$ |
7,665 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets
(in thousands of dollars) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
property, plant and equipment |
|
$ |
250,267 |
|
$ |
234,919 |
|
$ |
229,128 |
|
$ |
216,903 |
|
$ |
192,925 |
|
Net
property, plant and equipment (3) |
|
$ |
177,053 |
|
$ |
167,872 |
|
$ |
166,846 |
|
$ |
161,014 |
|
$ |
131,466 |
|
Total
assets (3) |
|
$ |
241,938 |
|
$ |
222,058 |
|
$ |
223,721 |
|
$ |
222,229 |
|
$ |
211,764 |
|
Capital
expenditures (2) |
|
$ |
17,852 |
|
$ |
11,822 |
|
$ |
13,836 |
|
$ |
26,293 |
|
$ |
22,057 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capitalization
(in thousands of dollars) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders'
equity |
|
$ |
77,962 |
|
$ |
72,939 |
|
$ |
67,350 |
|
$ |
67,517 |
|
$ |
64,669 |
|
Long-term
debt, net of current maturities |
|
|
66,190
|
|
|
69,416
|
|
|
73,408
|
|
|
48,409
|
|
|
50,921
|
|
Total
capitalization |
|
$ |
144,152 |
|
$ |
142,355 |
|
$ |
140,758 |
|
$ |
115,926 |
|
$ |
115,590 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
portion of long-term debt |
|
$ |
2,909 |
|
$ |
3,665 |
|
$ |
3,938 |
|
$ |
2,686 |
|
$ |
2,665 |
|
Short-term
debt |
|
|
4,700
|
|
|
3,515
|
|
|
10,900
|
|
|
42,100
|
|
|
25,400
|
|
Total
capitalization and short-term financing |
|
$ |
151,761 |
|
$ |
149,535 |
|
$ |
155,596 |
|
$ |
160,712 |
|
$ |
143,655 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
The years 1998, 1997, 1996 and 1995 have not been restated to reflect the
"accrual" revenue recognition method due to the immateriality of the
impact on the Company's financial results. |
|
(2)
These amounts exclude the results of water services due to their
reclassification to discontinued operations. |
|
(3)
The years 2004, 2003, 2002 and 2001 reflect the results of adopting SFAS
No. 143. |
|
Item 6. Selected Financial
Data
For
the Years Ended December 31, |
|
1999 |
|
1998
(1) |
|
1997
(1) |
|
1996
(1) |
|
1995
(1) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
(in thousands of dollars)
(2) |
|
|
|
|
|
|
|
|
|
|
|
Revenues |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Natural
gas distribution & transmission |
|
$ |
75,637 |
|
$ |
68,770 |
|
$ |
88,108 |
|
$ |
90,044 |
|
$ |
79,110 |
|
Propane |
|
|
25,199
|
|
|
23,377
|
|
|
28,614
|
|
|
36,727
|
|
|
26,806
|
|
Advanced
informations systems |
|
|
13,531
|
|
|
10,331
|
|
|
7,786
|
|
|
7,230
|
|
|
8,862
|
|
Other
& eliminations |
|
|
(14 |
) |
|
(15 |
) |
|
(182 |
) |
|
(243 |
) |
|
(1,661 |
) |
Total
revenues |
|
$ |
114,353 |
|
$ |
102,463 |
|
$ |
124,326 |
|
$ |
133,758 |
|
$ |
113,117 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Natural
gas distribution & transmission |
|
$ |
10,388 |
|
$ |
8,820 |
|
$ |
9,240 |
|
$ |
9,627 |
|
$ |
10,812 |
|
Propane |
|
|
2,622
|
|
|
965
|
|
|
1,137
|
|
|
2,668
|
|
|
2,128
|
|
Advanced
informations systems |
|
|
1,470
|
|
|
1,316
|
|
|
1,046
|
|
|
1,056
|
|
|
1,061
|
|
Other
& eliminations |
|
|
495
|
|
|
485
|
|
|
558
|
|
|
560
|
|
|
(34 |
) |
Total
operating income |
|
$ |
14,975 |
|
$ |
11,586 |
|
$ |
11,981 |
|
$ |
13,911 |
|
$ |
13,967 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income from continuing operations |
|
$ |
8,372 |
|
$ |
5,329 |
|
$ |
5,812 |
|
$ |
7,764 |
|
$ |
7,681 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets
(in thousands of dollars) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
property, plant and equipment |
|
$ |
172,068 |
|
$ |
152,991 |
|
$ |
144,251 |
|
$ |
134,001 |
|
$ |
120,746 |
|
Net
property, plant and equipment (3) |
|
$ |
117,663 |
|
$ |
104,266 |
|
$ |
99,879 |
|
$ |
94,014 |
|
$ |
85,055 |
|
Total
assets (3) |
|
$ |
166,958 |
|
$ |
145,029 |
|
$ |
145,719 |
|
$ |
155,786 |
|
$ |
130,998 |
|
Capital
expenditures (2) |
|
$ |
21,365 |
|
$ |
12,516 |
|
$ |
13,471 |
|
$ |
15,399 |
|
$ |
12,887 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capitalization
(in thousands of dollars) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders'
equity |
|
$ |
60,714 |
|
$ |
56,356 |
|
$ |
53,656 |
|
$ |
50,700 |
|
$ |
45,587 |
|
Long-term
debt, net of current maturities |
|
|
33,777
|
|
|
37,597
|
|
|
38,226
|
|
|
28,984
|
|
|
31,619
|
|
Total
capitalization |
|
$ |
94,491 |
|
$ |
93,953 |
|
$ |
91,882 |
|
$ |
79,684 |
|
$ |
77,206 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
portion of long-term debt |
|
$ |
2,665 |
|
$ |
520 |
|
$ |
1,051 |
|
$ |
3,526 |
|
$ |
1,787 |
|
Short-term
debt |
|
|
23,000
|
|
|
11,600
|
|
|
7,600
|
|
|
12,735
|
|
|
5,400
|
|
Total
capitalization and short-term financing |
|
$ |
120,156 |
|
$ |
106,073 |
|
$ |
100,533 |
|
$ |
95,945 |
|
$ |
84,393 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
The years 1998, 1997, 1996 and 1995 have not been restated to reflect the
"accrual" revenue recognition method due to the immateriality of the
impact on the Company's financial results. |
|
(2)
These amounts exclude the results of water services due to their
reclassification to discontinued operations. |
|
(3)
The years 2004, 2003, 2002 and 2001 reflect the results of adopting SFAS
No. 143. |
|
Item 6. Selected Financial
Data
For
the Years Ended December 31, |
|
2004 |
|
2003 |
|
2002 |
|
2001 |
|
2000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
Stock Data and Ratios |
|
|
|
|
|
|
|
|
|
|
|
Basic
earnings per share from continuing operations (2) |
|
$ |
1.66 |
|
$ |
1.80 |
|
$ |
1.37 |
|
$ |
1.37 |
|
$ |
1.46 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Return
on average equity from continuing operations (2) |
|
|
12.7 |
% |
|
14.4 |
% |
|
11.2 |
% |
|
11.1 |
% |
|
12.2 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
equity / total capitalization |
|
|
54.1 |
% |
|
51.2 |
% |
|
47.8 |
% |
|
58.2 |
% |
|
55.9 |
% |
Common
equity / total capitalization and short-term financing |
|
|
51.4 |
% |
|
48.8 |
% |
|
43.3 |
% |
|
42.0 |
% |
|
45.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Book
value per share |
|
$ |
13.49 |
|
$ |
12.89 |
|
$ |
12.16 |
|
$ |
12.45 |
|
$ |
12.21 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Market
price: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
High |
|
$ |
27.550 |
|
$ |
26.700 |
|
$ |
21.990 |
|
$ |
19.900 |
|
$ |
18.875 |
|
Low |
|
$ |
20.420 |
|
$ |
18.400 |
|
$ |
16.500 |
|
$ |
17.375 |
|
$ |
16.250 |
|
Close |
|
$ |
26.700 |
|
$ |
26.050 |
|
$ |
18.300 |
|
$ |
19.800 |
|
$ |
18.625 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
number of shares outstanding |
|
|
5,735,405
|
|
|
5,610,592
|
|
|
5,489,424
|
|
|
5,367,433
|
|
|
5,249,439
|
|
Shares
outstanding at year-end |
|
|
5,730,913
|
|
|
5,612,935
|
|
|
5,500,357
|
|
|
5,394,516
|
|
|
5,290,001
|
|
Registered
common shareholders |
|
|
2,026
|
|
|
2,069
|
|
|
2,130
|
|
|
2,171
|
|
|
2,166
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
dividends declared per share |
|
$ |
1.12 |
|
$ |
1.10 |
|
$ |
1.10 |
|
$ |
1.10 |
|
$ |
1.07 |
|
Dividend
yield (annualized) |
|
|
4.2 |
% |
|
4.2 |
% |
|
6.0 |
% |
|
5.6 |
% |
|
5.8 |
% |
Payout
ratio from continuing operations (2) |
|
|
67.5 |
% |
|
61.1 |
% |
|
80.3 |
% |
|
80.3 |
% |
|
73.3 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional
Data |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Customers
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Natural
gas distribution and transmission |
|
|
50,878
|
|
|
47,649
|
|
|
45,133
|
|
|
42,741
|
|
|
40,854
|
|
Propane
distribution |
|
|
34,888
|
|
|
34,894
|
|
|
34,566
|
|
|
35,530
|
|
|
35,563
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Volumes |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Natural
gas deliveries (in MMCF) |
|
|
31,430
|
|
|
29,375
|
|
|
27,935
|
|
|
27,264
|
|
|
30,830
|
|
Propane
distribution (in thousands of gallons) |
|
|
24,979
|
|
|
25,147
|
|
|
21,185
|
|
|
23,080
|
|
|
28,469
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Heating
degree-days (Delmarva Peninsula) |
|
|
4,539
|
|
|
4,715
|
|
|
4,161
|
|
|
4,368
|
|
|
4,730
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Propane
bulk storage capacity (in thousands of gallons) |
|
|
2,045
|
|
|
2,195
|
|
|
2,151
|
|
|
1,958
|
|
|
1,928
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
employees (2) |
|
|
426
|
|
|
439
|
|
|
455
|
|
|
458
|
|
|
471
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
The years 1998, 1997, 1996 and 1995 have not been restated to reflect the
"accrual" revenue recognition method due to the immateriality of the
impact on the Company's financial results. |
|
(2)
These amounts exclude the results of water services due to their
reclassification to discontinued operations. |
|
Item 6. Selected Financial Data
For
the Years Ended December 31, |
|
1999 |
|
1998
(1) |
|
1997
(1) |
|
1996
(1) |
|
1995
(1) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
Stock Data and Ratios |
|
|
|
|
|
|
|
|
|
|
|
Basic
earnings per share from continuing operations (2) |
|
$ |
1.63 |
|
$ |
1.05 |
|
$ |
1.17 |
|
$ |
1.58 |
|
$ |
1.59 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Return
on average equity from continuing operations (2) |
|
|
14.3 |
% |
|
9.7 |
% |
|
11.1 |
% |
|
16.1 |
% |
|
18.6 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
equity / total capitalization |
|
|
64.3 |
% |
|
60.0 |
% |
|
58.4 |
% |
|
63.6 |
% |
|
59.0 |
% |
Common
equity / total capitalization and short-term financing |
|
|
50.5 |
% |
|
53.1 |
% |
|
53.4 |
% |
|
52.8 |
% |
|
54.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Book
value per share |
|
$ |
11.71 |
|
$ |
11.06 |
|
$ |
10.72 |
|
$ |
10.26 |
|
$ |
9.38 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Market
price: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
High |
|
$ |
19.813 |
|
$ |
20.500 |
|
$ |
21.750 |
|
$ |
18.000 |
|
$ |
15.500 |
|
Low |
|
$ |
14.875 |
|
$ |
16.500 |
|
$ |
16.250 |
|
$ |
15.125 |
|
$ |
12.250 |
|
Close |
|
$ |
18.375 |
|
$ |
18.313 |
|
$ |
20.500 |
|
$ |
16.875 |
|
$ |
14.625 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
number of shares outstanding |
|
|
5,144,449
|
|
|
5,060,328
|
|
|
4,972,086
|
|
|
4,912,136
|
|
|
4,836,430
|
|
Shares
outstanding at year-end |
|
|
5,186,546
|
|
|
5,093,788
|
|
|
5,004,078
|
|
|
4,939,515
|
|
|
4,860,588
|
|
Registered
common shareholders |
|
|
2,212
|
|
|
2,271
|
|
|
2,178
|
|
|
2,213
|
|
|
2,098
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
dividends declared per share |
|
$ |
1.03 |
|
$ |
1.00 |
|
$ |
0.97 |
|
$ |
0.93 |
|
$ |
0.90 |
|
Dividend
yield (annualized) |
|
|
5.7 |
% |
|
5.5 |
% |
|
4.7 |
% |
|
5.5 |
% |
|
6.2 |
% |
Payout
ratio from continuing operations (2) |
|
|
63.2 |
% |
|
95.2 |
% |
|
82.9 |
% |
|
58.9 |
% |
|
56.6 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional
Data |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Customers
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Natural
gas distribution and transmission |
|
|
39,029
|
|
|
37,128
|
|
|
35,797
|
|
|
34,713
|
|
|
33,530
|
|
Propane
distribution |
|
|
35,267
|
|
|
34,113
|
|
|
33,123
|
|
|
31,961
|
|
|
31,115
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Volumes |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Natural
gas deliveries (in MMCF) |
|
|
27,383
|
|
|
21,400
|
|
|
23,297
|
|
|
24,835
|
|
|
29,260
|
|
Propane
distribution (in thousands of gallons) |
|
|
27,788
|
|
|
25,979
|
|
|
26,682
|
|
|
29,975
|
|
|
26,184
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Heating
degree-days (Delmarva Peninsula) |
|
|
4,082
|
|
|
3,704
|
|
|
4,430
|
|
|
4,717
|
|
|
4,594
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Propane
bulk storage capacity (in thousands of gallons) |
|
|
1,926
|
|
|
1,890
|
|
|
1,866
|
|
|
1,860
|
|
|
1,818
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
employees (2) |
|
|
466
|
|
|
431
|
|
|
397
|
|
|
338
|
|
|
335
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
The years 1998, 1997, 1996 and 1995 have not been restated to reflect the
"accrual" revenue recognition method due to the immateriality of the
impact on the Company's financial results. |
|
(2)
These amounts exclude the results of water services due to their
reclassification to discontinued operations. |
|
Item
7. Management’s Discussion and Analysis of Financial Condition and Results of
Operations
Business
Description
Chesapeake
Utilities Corporation (“Chesapeake” or “the Company”) is a diversified utility
company engaged in natural gas distribution and transmission, propane
distribution and wholesale marketing, advanced information services and other
related businesses.
Critical
Accounting Policies
Chesapeake’s
reported financial condition and results of operations are affected by the
accounting methods, assumptions and estimates that are used in the preparation
of the Company’s financial statements. Because most of Chesapeake’s businesses
are regulated, the accounting methods used by Chesapeake must comply with the
requirements of the regulatory bodies. Therefore, the choices available are
limited by these regulatory requirements. Management believes that the following
policies require significant estimates or other judgments of matters that are
inherently uncertain. These policies and their application have been discussed
with the Audit Committee of Chesapeake.
Regulatory
Assets and Liabilities
Chesapeake
records certain assets and liabilities in accordance with SFAS No. 71
“Accounting for the Effects of Certain Types of Regulation.” Costs are deferred
when there is a probable expectation that they will be recovered in future
revenues as a result of the regulatory process. At December 31, 2004, Chesapeake
had recorded regulatory assets of $4.0 million, including $1.5 million for
under-recovered purchased gas costs, $737,000 for Florida flex rates and
$712,000 for tax-related regulatory assets. The Company has recorded regulatory
liabilities totaling $17.2 million, including $15.0 million for accrued asset
removal cost and $1.3 million for self-insurance at December 31, 2004. If the
Company were required to terminate application of SFAS No. 71, it would be
required to recognize all such deferred amounts as a charge to earnings, net of
applicable income taxes. Such a charge could have a material adverse effect on
the Company’s results of operations.
Valuation
of Environmental Assets and Liabilities
As more
fully described in Note N to the Financial Statements, Chesapeake has completed
its responsibilities related to one environmental site and is currently
participating in the investigation, assessment or remediation of three other
former gas manufacturing plant sites. Amounts have been recorded as
environmental liabilities and associated environmental regulatory assets based
on estimates of future costs provided by independent consultants. There is
uncertainty in these amounts because the Environmental Protection Agency (“EPA”)
or state authority may not have selected the final remediation methods.
Additionally, there is uncertainty due to the outcome of legal remedies sought
from other potentially responsible parties. At December 31, 2004, Chesapeake had
recorded environmental regulatory assets of $279,000 and a liability for
environmental costs of $462,000.
Propane
Wholesale Marketing Contracts
Chesapeake’s
propane wholesale marketing operation enters into forward and futures contracts
that are considered derivatives under Statement of Financial Accounting
Standards (“SFAS”) No. 133, “Accounting for Derivative Instruments and Hedging
Activities.” In accordance with the pronouncement, open positions are marked to
market prices at the end of each reporting period and unrealized gains or losses
are recorded in the Consolidated Statement of Income as revenue. The contracts
all mature within one year, and are almost exclusively for propane commodities
with delivery points of Mt. Belvieu, Texas and Hattiesburg, Mississippi.
Management estimates the market valuation based on reference to exchange-traded
futures prices, historical differentials and actual trading activity at the end
of the reporting period. At December 31, 2004, these contracts had net
unrealized losses of $182,000 that were recorded in the financial statements. At
December 31, 2003, these contracts had net unrealized gains of $172,000 that
were recorded in the financial statements.
Operating
Revenues
Revenues
for the natural gas distribution operations of the Company are based on rates
approved by the public service commissions of the jurisdictions in which the
Company operates. The natural gas transmission operation’s revenues are based on
rates approved by the Federal Energy Regulatory Commission (“FERC”). Customers’
base rates may not be changed without formal approval by these commissions.
However, the regulatory authorities have granted the Company’s regulated natural
gas distribution operations the ability to negotiate rates with customers that
have competitive alternatives using approved methodologies. In addition, the
natural gas transmission operation can negotiate rates above or below the FERC
approved tariff rates.
Chesapeake’s
natural gas distribution operations in Delaware and Maryland each have a gas
cost recovery mechanism that provides for the adjustment of rates charged to
customers as gas costs fluctuate. These amounts are collected or refunded
through adjustments to rates in subsequent periods.
The
Company charges flexible rates to the natural gas distribution’s industrial
interruptible customers to make them competitive with alternative types of fuel.
Based on pricing, these customers can choose natural gas or alternative types of
supply. Neither the Company nor the interruptible customer is contractually
obligated to deliver or receive natural gas.
The
propane wholesale marketing operation records trading activity net, on a
mark-to-market basis, for open contracts. The natural gas segment recognizes
revenue on an accrual basis. The propane distribution, advanced information
services and other segments record revenue in the period the products are
delivered and/or services are rendered.
Goodwill
Impairment
In
accordance with SFAS No. 142, “Goodwill and Other Intangible Assets,” Chesapeake
no longer amortizes goodwill. Instead, goodwill is tested for impairment. The
initial test was performed upon adoption of SFAS No. 142 on January 1, 2002, and
again at the end of 2002, 2003 and 2004. These tests were based on subjective
measurements, including discounted cash flows of expected future operating
results and market valuations of similar businesses. Those tests indicated that
the goodwill associated with the water business was impaired and charges
totaling $4.7 million (pre-tax) were recorded in 2002. At December 31, 2003 and
2004, no goodwill remained related to the water companies. The propane unit had
$674,000 in goodwill at both December 31, 2003 and 2004. Testing has not
indicated that any impairment is necessary. Goodwill is tested annually and when
events change.
Results
of Operations
The
Company’s net income from continuing operations was $9.6 million, or $1.64 per
share (diluted), for 2004, a decline of $530,000 compared to net income from
continuing operations of $10.1 million, or $1.76 per share (diluted), for 2003.
The decrease principally reflects a decline in operating income caused by warmer
temperatures on the Delmarva Peninsula and cost increases associated with
documenting and auditing internal control and compliance efforts in accordance
with Section 404 of the Sarbanes-Oxley Act of 2002
(“Sarbanes-Oxley”).
Net
income from continuing operations for 2003 was $10.1 million compared to $7.5
million for 2002. Net income for 2003 was $9.3 million, or $1.63 per share
(diluted), compared to net income of $3.7 million in 2002, or $0.68 per share
(diluted). During 2003, Chesapeake decided to exit the water services business
and had sold the assets of six of seven dealerships by December 31, 2003. The
remaining operation was sold in 2004. The results of water services were
classified as discontinued operations for all periods. Discontinued operations
experienced losses of $0.02, $0.13 and $0.34 per share (diluted) for 2004, 2003
and 2002, respectively. Chesapeake adopted SFAS No. 142 “Goodwill and Other
Intangible Assets” in 2002. This resulted in a non-cash charge of $0.35 per
share for goodwill impairment recorded as the cumulative effect of a change in
accounting principle.
Net
Income & Diluted Earnings Per Share Summary |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase |
|
|
|
|
|
|
|
|
Increase |
|
For
the Years Ended December 31, |
|
|
2004 |
|
|
2003 |
|
|
(decrease |
) |
|
2003 |
|
|
2002 |
|
|
(decrease |
) |
Net
Income * |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing
operations |
|
$ |
9,550 |
|
$ |
10,080 |
|
|
($530 |
) |
$ |
10,080 |
|
$ |
7,535 |
|
$ |
2,545 |
|
Discontinued
operations |
|
|
(121 |
) |
|
(788 |
) |
|
667
|
|
|
(788 |
) |
|
(1,898 |
) |
|
1,110
|
|
Change
in accounting principle |
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(1,916 |
) |
|
1,916
|
|
Total
Net Income |
|
$ |
9,429 |
|
$ |
9,292 |
|
$ |
137 |
|
$ |
9,292 |
|
$ |
3,721 |
|
$ |
5,571 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
Earnings Per Share |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing
operations |
|
$ |
1.64 |
|
$ |
1.76 |
|
|
($0.12 |
) |
$ |
1.76 |
|
$ |
1.37 |
|
$ |
0.39 |
|
Discontinued
operations |
|
|
(0.02 |
) |
|
(0.13 |
) |
|
0.11
|
|
|
(0.13 |
) |
|
(0.34 |
) |
|
0.21
|
|
Change
in accounting principle |
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(0.35 |
) |
|
0.35
|
|
Total
Earnings Per Share |
|
$ |
1.62 |
|
$ |
1.63 |
|
|
($0.01 |
) |
$ |
1.63 |
|
$ |
0.68 |
|
$ |
0.95 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
*
Dollars in thousands. |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Chesapeake’s
2004 results reflected strong customer growth, warmer weather as compared to
2003, customers’ energy conservation and costs incurred to comply with
Sarbanes-Oxley. Weather, measured in heating degree-days, was 4 percent warmer
than 2003. Management estimates that warmer weather negatively impacted gross
margin by $614,000. The natural gas segment was able to offset the impact of
warmer weather through customer growth of 7 percent. Additionally, the Company
incurred approximately $600,000 of expenses through December 31, 2004 related to
compliance with Section 404 of Sarbanes-Oxley. These costs include incremental
audit fees, expansion of the Internal Audit Department and the temporary hiring
of an outside consultant. The increase in operating income from the Company’s
natural gas operations was more than offset by decreases in the propane and
advanced information services businesses.
Improvement
in Chesapeake’s 2003 overall results compared to 2002 was primarily related to
strong customer growth and colder weather, which led to increased contributions
from the Company’s natural gas and propane operations. The Delmarva natural gas
operations experienced an increase of 6.4 percent in residential customers.
Weather, measured in heating degree-days, was 13 percent colder than 2002. The
propane wholesale marketing operation and the advanced information services
segment also improved operating income compared to
2002.
Operating
Income Summary (in thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase |
|
|
|
|
|
|
|
|
Increase |
|
For
the Years Ended December 31, |
|
|
2004 |
|
|
2003 |
|
|
(decrease |
) |
|
2003 |
|
|
2002 |
|
|
(decrease |
) |
Business
Segment: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Natural
gas distribution & transmission |
|
$ |
17,091 |
|
$ |
16,653 |
|
$ |
438 |
|
$ |
16,653 |
|
$ |
14,973 |
|
$ |
1,680 |
|
Propane |
|
|
2,364
|
|
|
3,875
|
|
|
(1,511 |
) |
|
3,875
|
|
|
1,052
|
|
|
2,823
|
|
Advanced
information services |
|
|
387
|
|
|
692
|
|
|
(305 |
) |
|
692
|
|
|
343
|
|
|
349
|
|
Other
& eliminations |
|
|
128
|
|
|
359
|
|
|
(231 |
) |
|
359
|
|
|
237
|
|
|
122
|
|
Total
Operating Income |
|
$ |
19,970 |
|
$ |
21,579 |
|
|
($1,609 |
) |
$ |
21,579 |
|
$ |
16,605 |
|
$ |
4,974 |
|
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 natural gas and
propane and the cost of labor spent on direct revenue-producing activities.
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 its business units’ performance and
has historically analyzed and reported gross margin information publicly. 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
$17.1 million for 2004, $16.7 million for 2003, and $15.0 million for 2002,
resulting in an increase of $438,000 for 2004 and an increase of $1.7 million
for 2003.
Natural
Gas Distribution and Transmission (in thousands) |
|
|
|
|
|
|
|
|
|
|
Increase |
|
|
|
|
|
|
|
|
Increase |
|
For
the Years Ended December 31, |
|
|
2004 |
|
|
2003 |
|
|
(decrease |
) |
|
2003 |
|
|
2002 |
|
|
(decrease |
) |
Revenue |
|
$ |
124,246 |
|
$ |
110,247 |
|
$ |
13,999 |
|
$ |
110,247 |
|
$ |
93,588 |
|
$ |
16,659 |
|
Cost
of gas |
|
|
77,456
|
|
|
65,495
|
|
|
11,961
|
|
|
65,495
|
|
|
52,737
|
|
|
12,758
|
|
Gross
margin |
|
|
46,790
|
|
|
44,752
|
|
|
2,038
|
|
|
44,752
|
|
|
40,851
|
|
|
3,901
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operations
& maintenance |
|
|
21,129
|
|
|
19,893
|
|
|
1,236
|
|
|
19,893
|
|
|
18,045
|
|
|
1,848
|
|
Depreciation
& amortization |
|
|
5,418
|
|
|
5,188
|
|
|
230
|
|
|
5,188
|
|
|
5,050
|
|
|
138
|
|
Other
taxes |
|
|
3,152
|
|
|
3,018
|
|
|
134
|
|
|
3,018
|
|
|
2,783
|
|
|
235
|
|
Other
operating expenses |
|
|
29,699
|
|
|
28,099
|
|
|
1,600
|
|
|
28,099
|
|
|
25,878
|
|
|
2,221
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Operating Income |
|
$ |
17,091 |
|
$ |
16,653 |
|
$ |
438 |
|
$ |
16,653 |
|
$ |
14,973 |
|
$ |
1,680 |
|
Natural
Gas Heating Degree-Day (HDD) and Customer
Analysis |
|
|
|
|
|
|
|
|
|
|
Increase |
|
|
|
|
|
|
|
|
Increase |
|
For
the Years Ended December 31, |
|
|
2004 |
|
|
2003 |
|
|
(decrease |
) |
|
2003 |
|
|
2002 |
|
|
(decrease |
) |
Heating
degree-days — Delmarva |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Actual |
|
|
4,539
|
|
|
4,715
|
|
|
(176 |
) |
|
4,715
|
|
|
4,161
|
|
|
554
|
|
10-year
average |
|
|
4,383
|
|
|
4,409
|
|
|
(26 |
) |
|
4,409
|
|
|
4,393
|
|
|
16
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
number of residential customers |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Delmarva |
|
|
34,352
|
|
|
31,996
|
|
|
2,356
|
|
|
31,996
|
|
|
30,073
|
|
|
1,923
|
|
Florida |
|
|
10,910
|
|
|
10,189
|
|
|
721
|
|
|
10,189
|
|
|
9,755
|
|
|
434
|
|
Total |
|
|
45,262
|
|
|
42,185
|
|
|
3,077
|
|
|
42,185
|
|
|
39,828
|
|
|
2,357
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Estimated
gross margin per HDD |
|
$ |
1,800 |
|
$ |
1,680 |
|
|
|
|
$ |
1,680 |
|
$ |
1,730 |
|
|
|
|
Per
Delmarva residential customer added: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Estimated
gross margin |
|
$ |
372 |
|
$ |
360 |
|
|
|
|
$ |
360 |
|
$ |
360 |
|
|
|
|
Estimated
other operating expenses |
|
$ |
104 |
|
$ |
100 |
|
|
|
|
$ |
100 |
|
$ |
100 |
|
|
|
|
2004
Compared to 2003
Revenue
and cost of gas increased in 2004 compared to 2003, primarily due to changes in
natural gas commodity prices and customer growth. Commodity cost changes are
passed on to the ratepayers through a gas cost recovery or purchased gas cost
adjustment in all jurisdictions; therefore, they have limited impact on the
Company’s profitability. However, higher commodity prices may cause customers to
reduce their energy consumption through conservation efforts and may cause the
Company to have higher bad debt expense.
Gross
margin grew by $2.0 million in 2004 compared to 2003. The Company estimates that
warmer weather reduced gross margin by $317,000. After adjusting for the effect
of weather, gross margin would have increased 5.3 percent. The Company estimates
that residential and commercial growth for the distribution operations generated
$1.1 million of gross margin increase. The Company added 3,077 residential
customers, an increase of 7 percent, in 2004. This
growth
was net of lower consumption per customer, that reflects customer conservation
efforts in light of higher energy costs and a higher mix of apartments rather
than single family homes in the customer additions for some divisions.
Additionally, the natural gas supply and management services operation increased
gross margin by $565,000, primarily through industrial customer growth and
resale of seasonal excess capacity on upstream pipelines. The natural gas
transmission operation also achieved gross margin growth of $716,000, due to
additional transportation services provided to its firm customers.
Higher
other operating expenses partially offset the gross margin increase. Included in
the 2004 expenses were $382,000 related to Sarbanes-Oxley Section 404 compliance
implementation. Excluding the Sarbanes-Oxley costs, expenses would have
increased $1.2 million, or 4.3 percent. The higher other operating expenses
reflect the costs to support customer growth.
2003
Compared to 2002
Revenue
and cost of gas increased in 2003 compared to 2002, primarily due to changes in
natural gas commodity prices. Revenue and cost of gas were also affected by the
unbundling of services that took effect in 2001 for all non-residential
customers of the Florida division and in November 2002 for residential
customers. As a result, all Florida customers have switched from sales service,
where they purchased both the commodity and transportation service from the
Company, to purchasing transportation service only. Therefore, there are no
longer revenues or costs associated with the commodities.
Gross
margin for the Delaware and Maryland distribution divisions increased $2.7
million in 2003 over 2002. Temperatures in 2003 were 13 percent colder than the
prior year. The Company estimates that the colder weather in 2003 generated an
additional $931,000 of gross margin compared to 2002. Additionally, the increase
of 1,923 residential customers, or 6.4 percent, contributed an estimated
$692,000 to gross margin. The growth also required an estimated additional cost
of $192,000 for operations and maintenance expenses. Also contributing to the
increased gross margin were rate increases in Delaware that became effective in
December 2002 and volumetric increases for existing customers.
Gross
margin for the Florida distribution operations increased $1.2 million, due to
the implementation of transportation services for residential customers and
customer additions. Residential customer growth reached 4.4 percent in Florida,
an increase of 434 customers. Agreements with two new industrial customers also
helped increase gross margin.
Gross
margin for the transmission operation increased by $219,000 in 2003 compared to
2002. An increase in interruptible transportation gross margin and volume added
through a system expansion completed in November 2002 were partially offset by a
rate reduction that became effective December 2002. The rate agreement is more
fully discussed in the section below captioned “Regulatory
Activities.”
The
natural gas gross margin increases in 2003 were partially offset by higher
operating expenses, primarily operations and maintenance expenses and other
taxes that relate to the increased volumes and earnings as well as pension and
employee costs.
Propane
During
2004, the propane segment experienced a decrease of $1.5 million in operating
income compared to 2003, reflecting a gross margin decrease of $1.9 million,
partially offset by a decrease in operating expenses of $411,000. During 2003,
the propane segment experienced an increase in operating income of $2.8 million,
or 268 percent, over 2002. In addition, gross margin increased $3.4 million,
partially offset by an increase of $527,000 in operating
expenses.
Propane
(in thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase |
|
|
|
|
|
|
|
|
Increase |
|
For
the Years Ended December 31, |
|
|
2004 |
|
|
2003 |
|
|
(decrease |
) |
|
2003 |
|
|
2002 |
|
|
(decrease |
) |
Revenue |
|
$ |
41,500 |
|
$ |
41,029 |
|
$ |
471 |
|
$ |
41,029 |
|
$ |
29,238 |
|
$ |
11,791 |
|
Cost
of sales |
|
|
25,155
|
|
|
22,762
|
|
|
2,393
|
|
|
22,762
|
|
|
14,321
|
|
|
8,441
|
|
Gross
margin |
|
|
16,345
|
|
|
18,267
|
|
|
(1,922 |
) |
|
18,267
|
|
|
14,917
|
|
|
3,350
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operations
& maintenance |
|
|
11,718
|
|
|
12,053
|
|
|
(335 |
) |
|
12,053
|
|
|
11,519
|
|
|
534
|
|
Depreciation
& amortization |
|
|
1,524
|
|
|
1,506
|
|
|
18
|
|
|
1,506
|
|
|
1,603
|
|
|
(97 |
) |
Other
taxes |
|
|
739
|
|
|
833
|
|
|
(94 |
) |
|
833
|
|
|
743
|
|
|
90
|
|
Other
operating expenses |
|
|
13,981
|
|
|
14,392
|
|
|
(411 |
) |
|
14,392
|
|
|
13,865
|
|
|
527
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Operating Income |
|
$ |
2,364 |
|
$ |
3,875 |
|
|
($1,511 |
) |
$ |
3,875 |
|
$ |
1,052 |
|
$ |
2,823 |
|
Propane
Heating Degree-Day (HDD) Analysis |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase |
|
|
|
|
|
|
|
|
Increase |
|
For
the Years Ended December 31, |
|
|
2004 |
|
|
2003 |
|
|
(decrease |
) |
|
2003 |
|
|
2002 |
|
|
(decrease |
) |
Heating
degree-days — Delmarva |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Actual |
|
|
4,539
|
|
|
4,715
|
|
|
(176 |
) |
|
4,715
|
|
|
4,161
|
|
|
554
|
|
10-year
average |
|
|
4,383
|
|
|
4,409
|
|
|
(26 |
) |
|
4,409
|
|
|
4,393
|
|
|
16
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Estimated
gross margin per HDD |
|
$ |
1,691 |
|
$ |
1,670 |
|
|
|
|
$ |
1,670 |
|
$ |
1,566 |
|
|
|
|
2004
Compared to 2003
Increases
in revenues and cost of sales in 2004 were caused by an increase in the
commodity prices of propane, partially offset by lower sales volumes due to
warmer weather. Commodity price changes are generally passed on to the customer,
subject to competitive market conditions. High commodity prices may cause
customers to reduce their energy consumption through conservation efforts and
may cause higher bad debt expense.
Propane
distribution gross margin declined $1.2 million and propane wholesale marketing
gross margin fell by $710,000. The Company estimates that warmer weather
negatively impacted gross margin by $298,000. After adjusting for the impact of
weather, gross margin decreased 9 percent. Lower retail gross margin per gallon
in the distribution business reduced gross margin by approximately $493,000. In
addition, lower sales volumes, not attributable to the weather, reduced gross
margin by approximately $197,000, including $172,000 related to customers in the
poultry industry. The closing of a poultry processing plant in the fourth
quarter of 2003 is estimated to have reduced gross margin by $129,000. The plant
is not expected to reopen. An outbreak of avian influenza on the Delmarva
Peninsula in the first quarter of 2004 also contributed to the lower sales
volumes. The influenza outbreak was contained. Volumes were also down partially
due to customers conserving energy in light of higher energy costs. Finally,
gross margin earned from a non-recurring service project in 2003 contributed
$192,000 to the decline in gross margin.
The
Company’s propane wholesale marketing operation contributed $373,000 to
operating income; however, this was a decrease of $533,000 compared to 2003.
This reflects a conservative strategy taken in the wholesale marketing
operation, due to the high level of energy prices.
Other
operating expenses decreased $411,000 despite additional costs of $142,000
associated with the implementation of Sarbanes-Oxley Section 404 compliance
procedures. Adjusted for Sarbanes-Oxley, operating expenses dropped $553,000.
The decrease included reductions in incentive compensation, revenue-related
taxes and lower delivery costs.
2003
Compared to 2002
The
increases in revenues and cost of sales in 2003 compared to 2002 were caused
both by increases in volumes and by increases in the commodity prices of
propane. Commodity price changes are generally passed on to the customer,
subject to competitive market conditions.
The gross
margin increase for the propane segment was due primarily to an increase of $2.9
million for the Delmarva distribution operations. Volumes sold in 2003 increased
3.3 million gallons or 15 percent. Temperatures in 2003 were 13 percent colder
than 2002 causing an estimated gross margin increase of $925,000. Additionally,
the gross margin per retail gallon improved by $0.0374 in 2003 compared to 2002.
The gross margin increase was partially offset by increased operating expenses,
primarily related to the higher volumes, such as delivery costs, and incentive
compensation costs associated with higher income. The Florida propane
distribution operations experienced an increase in gross margin of $102,000 in
2003; however, the gross margin included $192,000 related to a non-recurring
service project.
The
Company’s propane wholesale marketing operation experienced an increase in gross
margin of $51,000 and a decrease of $148,000 in operating expenses, leading to
an improvement of $199,000 in operating income over 2002. Wholesale price
volatility created trading opportunities during some portions of the year;
however, these were partially offset by reduced trading activities particularly
during the third quarter.
Advanced
Information Services
The
advanced information services segment provides domestic and international
clients with information technology related business services and solutions for
both enterprise and e-business applications. The advanced information services
business contributed operating income of $387,000 for 2004, $692,000 for 2003,
and $343,000 for 2002.
Advanced
Information Services (in thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase |
|
|
|
|
|
|
|
|
Increase |
|
For
the Years Ended December 31, |
|
|
2004 |
|
|
2003 |
|
|
(decrease |
) |
|
2003 |
|
|
2002 |
|
|
(decrease |
) |
Revenue |
|
$ |
12,427 |
|
$ |
12,578 |
|
|
($151 |
) |
$ |
12,578 |
|
$ |
12,764 |
|
|
($186 |
) |
Cost
of sales |
|
|
7,015
|
|
|
7,018
|
|
|
(3 |
) |
|
7,018
|
|
|
6,700
|
|
|
318
|
|
Gross
margin |
|
|
5,412
|
|
|
5,560
|
|
|
(148 |
) |
|
5,560
|
|
|
6,064
|
|
|
(504 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operations
& maintenance |
|
|
4,405
|
|
|
4,196
|
|
|
209
|
|
|
4,196
|
|
|
4,940
|
|
|
(744 |
) |
Depreciation
& amortization |
|
|
138
|
|
|
191
|
|
|
(53 |
) |
|
191
|
|
|
208
|
|
|
(17 |
) |
Other
taxes |
|
|
482
|
|
|
481
|
|
|
1
|
|
|
481
|
|
|
573
|
|
|
(92 |
) |
Other
operating expenses |
|
|
5,025
|
|
|
4,868
|
|
|
157
|
|
|
4,868
|
|
|
5,721
|
|
|
(853 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Operating Income |
|
$ |
387 |
|
$ |
692 |
|
|
($305 |
) |
$ |
692 |
|
$ |
343 |
|
$ |
349 |
|
The
decrease in gross margin and operating income in 2004 was due to the
non-recurring revenue recorded in 2003 on the sale of some rights to one of the
Company’s internally-developed software products to a third party software
provider. Absent the sale, gross margin would have increased by $351,000;
however, the increase was partially offset by higher costs associated with
continued investment in the Company’s LAMPS™ product and Sarbanes-Oxley
compliance costs of $60,000.
Revenues
declined in 2003 compared to 2002. The revenue decline was more than offset by
reduced operating costs, primarily payroll and benefits. As noted above, a
non-recurring sale of software contributed $302,000 to operating income in
2003.
Other
Operations and Eliminations
Other
operations and eliminating entries contributed operating income of $128,000 for
2004 compared to income of $359,000 for 2003. Other operations consist primarily
of subsidiaries that own real estate leased to other Company subsidiaries. In
addition, in 2004 the Company formed OnSight Energy, LLC (“OnSight”) to provide
distributed energy services. As a result of the start-up, other operating
expenses increased by $207,000 over 2003 levels. OnSight entered into its first
contract in the first quarter of 2005. Eliminations are entries required to
eliminate activities between business segments from the consolidated
results.
Other
Operations & Eliminations (in thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase |
|
|
|
|
|
|
|
|
Increase |
|
For
the Years Ended December 31, |
|
|
2004 |
|
|
2003 |
|
|
(decrease |
) |
|
2003 |
|
|
2002 |
|
|
(decrease |
) |
Revenue |
|
$ |
647 |
|
$ |
702 |
|
|
($55 |
) |
$ |
702 |
|
$ |
717 |
|
|
($15 |
) |
Cost
of sales |
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Gross
margin |
|
|
647
|
|
|
702
|
|
|
(55 |
) |
|
702
|
|
|
717
|
|
|
(15 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operations
& maintenance |
|
|
279
|
|
|
80
|
|
|
199
|
|
|
80
|
|
|
83
|
|
|
(3 |
) |
Depreciation
& amortization |
|
|
210
|
|
|
238
|
|
|
(28 |
) |
|
238
|
|
|
233
|
|
|
5
|
|
Other
taxes |
|
|
63
|
|
|
55
|
|
|
8
|
|
|
55
|
|
|
57
|
|
|
(2 |
) |
Other
operating expenses |
|
|
552
|
|
|
373
|
|
|
179
|
|
|
373
|
|
|
373
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
Income — Other |
|
$ |
95 |
|
$ |
329 |
|
|
($234 |
) |
$ |
329 |
|
$ |
344 |
|
|
($15 |
) |
Operating
Income — Eliminations |
|
$ |
33 |
|
$ |
30 |
|
$ |
3 |
|
$ |
30 |
|
|
($107 |
) |
$ |
137 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Operating Income |
|
$ |
128 |
|
$ |
359 |
|
|
($231 |
) |
$ |
359 |
|
$ |
237 |
|
$ |
122 |
|
Discontinued
Operations
In 2003,
Chesapeake decided to exit the water services business. Six of seven water
dealerships were sold during 2003 and the remaining operation was sold in
October 2004. 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 2004, the discontinued
operations experienced a net loss of $121,000, compared to a net loss of
$788,000 for 2003.
Losses
from discontinued operations were $788,000 and $1.9 million for 2003 and 2002,
respectively. The 2002 loss included a non-cash impairment charge of $973,000
(after-tax) related to goodwill.
Income
Taxes
Operating
income taxes decreased in 2004 compared to 2003, due to decreased income. The
effective current federal income tax rate for both years was approximately 34
percent. Operating income taxes increased in 2003 compared to 2002, due to
increased income. During 2004, 2003 and 2002, the Company benefited from a
change in the tax law that allows tax deductions for dividends paid on Company
stock held in Employee Stock Ownership Plans (“ESOP”).
Other
Income
Other
income was $549,000, $238,000 and $495,000 for the years 2004, 2003 and 2002,
respectively. This includes interest income, earned primarily on regulatory
assets, and gains from the sale of assets.
Interest
Expense
Total
interest expense for 2004 decreased approximately $438,000, or 8 percent,
compared to 2003. The decrease reflects the decrease in the average long-term
debt balance. The average long-term debt balance during 2004 was $71.3 million
with a weighted average interest rate of 7.2 percent, compared to $75.4 million
with a weighted average interest rate of 7.2 percent in 2003. The average
short-term borrowing balance in 2004 was $870,000, a
decrease
from $3.5 million in 2003. The weighted average interest rate for short-term
borrowing increased from 2.4 percent for 2003 to 3.7 percent for
2004.
In 2002,
approximately $103,000 of interest expense was associated with discontinued
operations and has been reclassified on the income statement to discontinued
operations. Total interest expense for 2003 increased approximately $648,000, or
13 percent, over 2002. The increase reflects the increase in the average
long-term debt balance caused by the placement of $30.0 million completed in
October 2002. The average long-term debt balance during 2003 was $75.4 million
with an average interest rate of 7.2 percent, compared to $54.6 million with an
average interest rate of 7.52 percent in 2002. The increase in long-term debt
was partially offset by a reduction in the average short-term borrowing balance,
which decreased from $29.4 million in 2002 to $3.5 million in 2003. The average
interest rate for short-term borrowing was essentially constant at 2.4 percent
for 2002 and 2003.
Liquidity
and Capital Resources
Chesapeake’s
capital requirements reflect the capital-intensive nature of its business and
are principally attributable to its investment in new plant and equipment and
the retirement of outstanding debt. The Company relies on cash generated from
operations and short-term borrowing to meet normal working capital requirements
and temporarily to finance capital expenditures. During 2004, net cash provided
by operating activities was $23.5 million, cash used by investing activities was
$16.8 million and cash used by financing activities was $8.1
million.
During
2003, net cash provided by operating activities was $22.9 million, cash used by
investing activities was $5.9 million and cash used by financing activities was
$16.4 million. Cash provided by operating activities declined by $2.0 million
from 2002 to 2003, as higher income in 2003 was more than offset by changes in
working capital items.
As of
December 31, 2004, 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.
On December 31, 2004, Chesapeake had five unsecured bank lines of credit with
three financial institutions, totaling $65.0 million. These bank lines provide
funds for the Company’s short-term cash needs to meet seasonal working capital
requirements and to temporarily fund portions of its capital expenditures. Two
of the bank lines, totaling $15.0 million, are committed. The other three lines
are subject to the banks’ availability of funds. The outstanding balances of
short-term borrowing at December 31, 2004 and 2003 were $4.7 million and $3.5
million, respectively. In 2004 and 2003, Chesapeake used funds provided by
operations to fund net investing and financing activities.
During
2004, 2003 and 2002, net cash used for investing activities totaled
approximately $16.8, $5.9 and $14.1 million, respectively. Cash used by
investing activities was up in 2004, due primarily to increased capital
expenditures in 2004, compared to 2003, which included cash provided by the
sales of the water businesses in 2003 and lower recoveries of environmental
costs. Additions to property, plant and equipment in 2004 totaled $17.8 million
and were primarily for natural gas distribution ($8.8 million), natural gas
transmission ($5.2 million) and propane distribution ($3.4 million). The
property, plant and equipment expenditures for 2003 totaled $11.8 million and
were primarily for natural gas distribution ($7.5 million), propane distribution
($2.0 million) and natural gas transmission ($1.8 million). In both 2004 and
2003, the natural gas distribution expenditures were used primarily to fund
expansion and facilities improvements. Natural gas transmission expenditures
related primarily to expanding the Company’s transmission system.
Chesapeake
has budgeted $38.6 million for capital expenditures during 2005. This amount
includes $15.4 million for natural gas distribution, $16.9 million for natural
gas transmission, $5.1 million for propane distribution and wholesale marketing,
$504,000 for advanced information services and $695,000 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 category includes
general
plant, computer software and hardware. Financing for the 2005 capital
expenditure program is expected to be provided from short-term borrowing and
cash provided by operating activities. The capital expenditure program is
subject to continuous review and modification. Actual capital requirements may
vary from the above estimates due to a number of factors, including acquisition
opportunities, changing economic conditions, customer growth in existing areas,
regulation, new growth opportunities and availability of capital.
Chesapeake
expects to incur approximately $245,000 in 2005 and $137,000 in 2006 for
environmental-related expenditures. Additional expenditures may be required in
future years (see Note N to the Consolidated Financial Statements). Management
does not expect financing of future environmental-related expenditures to have a
material adverse effect on the financial position or capital resources of the
Company.
Capital
Structure
As of
December 31, 2004, common equity represented 54.1 percent of total
capitalization, compared to 51.2 percent in 2003. If short-term borrowing and
the current portion of long-term debt were included in total capitalization, the
equity component of the Company’s capitalization would have been 51.4 percent
and 48.8 percent, respectively. Chesapeake remains committed to maintaining a
sound capital structure and strong credit ratings to provide the financial
flexibility needed to access the capital markets when required. This commitment,
along with adequate and timely rate relief for the Company’s regulated
operations, is intended to ensure that Chesapeake will be able to attract
capital from outside sources at a reasonable cost. The Company believes that the
achievement of these objectives will provide benefits to customers and
creditors, as well as to the Company’s investors.
Financing
Activities
On
October 31, 2002, Chesapeake completed a private placement of $30.0 million of
6.64 percent Senior Notes due October 31, 2017. The Company used the proceeds to
repay short-term debt.
Chesapeake
issued common stock in connection with its Automatic Dividend Reinvestment and
Stock Purchase Plan in the amounts of 40,993 shares in 2004, 51,125 shares in
2003 and 49,782 shares in 2002. Chesapeake also issued shares of common stock
totaling 39,157, 43,245 and 52,740 in 2004, 2003 and 2002, respectively, for
matching contributions for the Retirement Savings Plan.
Chesapeake
liquidated approximately $4.0 million and $4.3 million of long-term debt in 2004
and 2003, respectively. These amounts include conversions to equity of
convertible stock.
Contractual
Obligations
We have
the following contractual obligations and other commercial commitments as of
December 31, 2004:
|
|
Payments
Due by Period |
|
Contractual
Obligations |
|
|
Less
than 1 year |
|
|
1
- 3 years |
|
|
3
- 5 years |
|
|
More
than 5 years |
|
|
Total |
|
Long-term
debt (1) |
|
$ |
2,909,091 |
|
$ |
12,545,455 |
|
$ |
14,272,727 |
|
$ |
39,371,273 |
|
$ |
69,098,546 |
|
Operating
leases (2) |
|
|
762,063
|
|
|
629,256
|
|
|
269,333
|
|
|
224,850
|
|
|
1,885,502
|
|
Purchase
obligations (3) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Transmission
capacity |
|
|
8,322,842
|
|
|
12,966,711
|
|
|
12,469,841
|
|
|
30,738,701
|
|
|
64,498,095
|
|
Storage
— Natural Gas |
|
|
1,412,985
|
|
|
2,752,221
|
|
|
2,719,934
|
|
|
7,916,096
|
|
|
14,801,236
|
|
Commodities |
|
|
12,720,923
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
12,720,923
|
|
Forward
and futures contracts — Propane (4) |
|
|
8,301,983
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
8,301,983
|
|
Unfunded
benefits (5) |
|
|
241,811
|
|
|
483,336
|
|
|
527,639
|
|
|
2,677,588
|
|
|
3,930,374
|
|
Funded
benefits (6) |
|
|
48,303
|
|
|
96,606
|
|
|
96,606
|
|
|
144,908
|
|
|
386,423
|
|
Total
Contractual Obligations |
|
$ |
34,720,001 |
|
$ |
29,473,585 |
|
$ |
30,356,080 |
|
$ |
81,073,416 |
|
$ |
175,623,082 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
Principal payments on long-term debt, see Note I, "Long-Term Debt," in the
Notes to the Consolidated Financial Statements for additional
discussion of this item. |
|
(2)
See Note K, "Lease Obligations," in the Notes to the Consolidated
Financial Statements for additional discussion of this
item. |
|
(3)
See Note O, "Other Commitments and Contingencies," in the Notes to the
Consolidated Financial Statements for further information. |
|
(4)
The Company has also entered into forward and futures sale contracts of
$8,160,253, see "Market Risk" of the Management's Discussion
and Analysis for further information. |
|
(5)
The Company has recorded long-term liabilities of $650,000 at December 31,
2004 for unfunded post-retirement benefit plans. The amounts
specified in the table are based on expected payments to current retirees
and assumes a retirement age of 65 for currently
active employees. There are many factors that would cause actual payments
to differ from these amounts, including early
retirement, future health care costs that differ from past experience and
discount rates implicit in
calculations. |
|
(6)
The Company has recorded long-term liabilities of $1.2 million at December
31, 2004 for funded benefits. Of this total, $386,000 has
been funded using a Rabbi Trust and an asset in the same amount is
recorded in the Investments caption on the Balance Sheet. The
other balance, $845,000, represents a liability for a defined benefit
pension plan. The plan was closed to new participants on January
1, 1999 and participants in the plan on that date were given the option to
leave the plan. See Note L, "Employee Benefit Plans,"
in the Notes to the Consolidated Financial Statements for further
information on the plan. Since the plan modification, no additional
funding has been required from the Company and none is expected for the
next five years, based on factors in effect at
December 31, 2004. However, this is subject to change based on the actual
return earned by the plan assets and other actuarial assumptions,
such as the discount rate and long-term expected rate of return on plan
assets. |
|
Off-Balance
Sheet Arrangements
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 case of the subsidiary’s default.
The liabilities for these purchases are included in the Company’s Consolidated
Financial Statements. The guarantees at December 31, 2004, totaled $3.8 million
and expire on various dates in 2005.
The
Company has issued a letter of credit to its main insurance company for
$694,000, which expires June 1, 2005. The letter of credit was provided as
security for claims amounts below the deductibles on the Company’s
policies.
Regulatory
Activities
The
Company’s natural gas distribution operations are subject to regulation by the
Delaware, Maryland and Florida Public Service Commissions. The natural gas
transmission operation is subject to regulation by the FERC.
Delaware. On
September 1, 2004, the Delaware division filed its annual Gas Sales Service
Rates (“GSR”) application that was effective for service rendered on and after
November 1, 2004 with the Delaware Public Service Commission (“Delaware PSC”).
On September 14, 2004, the Delaware PSC approved the GSR charges, subject to
full evidentiary hearings and a final decision. Due to the most recent rise in
natural gas market prices, the Delaware
division’s
under-collection balance was expected to exceed the six percent tolerance as
defined in its tariff; therefore, on December 1, 2004, the Delaware division
filed an “out-of-cycle” rate application with the Delaware PSC proposing to
place revised GSR charges into effect on January 1, 2005, pending approval by
the Delaware PSC. On December 21, 2004, the Delaware PSC granted approval of
these supplemental GSR charges, subject to full evidentiary hearings and a final
decision. An evidentiary hearing is currently scheduled for May 26, 2005, with a
final decision by the Delaware PSC expected during the third quarter of
2005.
On
November 1, 2004, the Delaware division filed with the Delaware PSC its annual
Environmental Rider (“ER”) Rate application that was effective for service
rendered on and after December 1, 2004. The Delaware PSC granted approval of the
ER rate at its regularly scheduled meeting on November 9, 2004, subject to full
evidentiary hearings and a final decision. An evidentiary hearing is currently
scheduled for June 2, 2005, with a final decision by the Delaware PSC expected
during the third quarter of 2005.
Maryland. On
December 16, 2004, the Maryland Public Service Commission (“Maryland PSC”) held
an evidentiary hearing to determine the reasonableness of the Maryland
division’s four quarterly gas cost recovery filings during the twelve months
ended September 30, 2004. On January 4, 2005, the Hearing Examiner issued
proposed findings approving the quarterly gas cost recovery rates as filed by
the Maryland division, permitting complete recovery of its purchased gas costs
for the period under review. Since no parties involved in the case appealed or
provided written exceptions to the proposed findings, the findings became a
final order of the Maryland PSC on February 4, 2005.
Florida. On March
29, 2002, the Florida division filed tariff revisions with the Florida Public
Service Commission (“Florida PSC”) to complete the natural gas commodity and
transportation unbundling process by requiring all customers, including
residential, to migrate to transportation service and authorize the Florida
division to exit the commodity merchant function. Transportation services were
already available to all non-residential customers. On November 5, 2002, the
Florida PSC approved the Company’s request for the first phase of the unbundling
process as a pilot program for a minimum two-year period. The Company has
implemented the program. As a part of this pilot program, the Company submitted
several filings during 2003 to address transition costs, the disposition of the
over-recovered gas cost balances, the implementation of the operational
balancing account and the level of base rates. The Florida PSC approved the
transition cost resolution on January 4, 2004. The Florida PSC also approved the
refunding of the remaining balance of $246,000 in the over-recovered purchased
gas cost account. The refund was made in March 2004. Additionally, the Florida
PSC approved the activation of the operational balancing account on January 4,
2004. On July 15, 2003, the Florida PSC approved a rate restructuring proposed
by Chesapeake. The restructuring created three new low volume rate classes, with
customer charge levels that are designed to ensure that all customers receive
benefits from the unbundling.
On August
25, 2004, the Florida division filed a petition with the Florida PSC for
authorization to restructure rates and establish new customer classifications.
The filing is revenue-neutral, but would allow the Florida division to collect a
greater percentage of revenues from fixed charges, rather than variable charges
based upon consumption. On February 1, 2005, the Florida PSC voted to approve
the petition, as modified by the PSC staff. The vote is expected to become final
in March 2005.
Eastern
Shore.
Pursuant to the requirements of the Stipulation and Agreement dated August 1,
1997, Eastern Shore filed a rate change with the FERC on October 31, 2001. The
final agreement reached with the FERC provided for a reduction in rates of
approximately $456,000 on an annual basis. Settlement rates went into effect on
December 1, 2002.
During
October 2002, Eastern Shore filed for recovery of gas supply realignment costs
associated with the implementation of FERC Order No. 636. The costs totaled
$196,000 (including interest). At that time, the FERC deferred review of the
filing pending settlement of a related matter concerning another transmission
company.
Chesapeake
understands that the other matter has now been resolved and Eastern Shore
intends to resubmit its transition cost recovery filing during
2005.
On
December 16, 2003, Eastern Shore filed revised tariff sheets to implement
revisions to its Fuel Retention and Cash-Out provisions. 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
adjustment and to implement a surcharge, effective July 1 of each year, to
recover cash-out amounts. The FERC accepted Eastern Shore’s revised tariff
sheets and they became effective on January 15, 2004, subject to certain
revisions to clarify the tariff sheets. On January 30, 2004, Eastern Shore
submitted the revised tariff sheets.
On April
1, 2003, Eastern Shore filed an application for a Certificate of Public
Convenience and Necessity (“Application”) before the FERC requesting
authorization to construct the necessary facilities to enable Eastern Shore to
provide additional daily firm transportation capacity of 15,100 dekatherms over
a three-year period commencing November 1, 2003. On October 8, 2003, the FERC
issued an order granting Eastern Shore the authority to construct and operate
certain pipeline and measurement facilities in its service territories as
requested. Phases I and II were completed in 2003 and 2004 with new Phase II
service levels beginning November 1, 2004. Phase III is planned for construction
during 2005.
On
December 22, 2004, Eastern Shore filed to amend the Application, seeking FERC
authorization to construct and operate new pipeline facilities necessary to
provide an additional 7,450 dekatherms of daily firm transportation needs
identified and requested by its customers to be available November 1, 2005. This
amended filing is currently pending before the FERC. Eastern Shore has requested
the FERC to expedite its decision-making process in order to construct the
proposed new facilities on a timely basis. At December 31, 2004, the Company had
recorded $210,000 in construction work in progress related to this project.
While the Company cannot predict the final outcome of this pending amended
application, the FERC has typically granted approval to construct and operate
new pipeline facilities to serve its customers in a timely fashion.
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
transmission 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 are designed to 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 was September 22, 2004. Eastern Shore performed the
necessary training required by FERC and completed the posting of required
information as described in Order No. 2004.
Eastern
Shore is also following the FERC’s recent rulemaking pertaining to
creditworthiness standards for customers of interstate natural gas pipelines.
FERC has not yet issued its final rules in this proceeding. Upon such issuance,
Eastern Shore will evaluate its currently effective tariff creditworthiness
provisions to determine whether any actions will need to be taken to conform to
the FERC’s final rules.
Environmental
Matters
The
Company has completed its responsibilities related to the Dover Gas Light site
and continues to work with federal and state environmental agencies to assess
the environmental impact and explore corrective action at three other
environmental sites (see Note N to the Consolidated Financial Statements). 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.
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 of first mortgage bonds,
senior notes and convertible debentures (see Note I to the Consolidated
Financial Statements for annual maturities of consolidated long-term debt). All
of Chesapeake’s long-term debt is fixed-rate debt and was not entered into for
trading purposes. The carrying value of the Company’s long-term debt, including
current maturities, was $69.1 million at December 31, 2004, as compared to a
fair value of $74.8 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 evaluates whether to refinance existing debt
or permanently finance existing short-term borrowing based in part on the
fluctuation in interest rates.
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 four million gallons of propane
(including leased storage and rail cars) during the winter season to meet its
customers’ peak requirements and to serve metered customers. Decreases in the
wholesale price of propane may cause the value of stored propane to decline. To
mitigate the impact of price fluctuations, the Company has adopted a Risk
Management Policy that allows the propane distribution operation to enter into
fair value hedges of its inventory. At December 31, 2004, the propane
distribution operation had entered into a put contract to protect the value of
1.1 million gallons of propane inventory from a drop in fair value. The put
contract expires in January 2005.
The
propane wholesale marketing operation is a party to natural gas liquids (“NGL”)
forward contracts, primarily propane contracts, with various third parties.
These contracts require that the propane wholesale marketing operation purchase
or sell NGL at a fixed price at fixed future dates. At expiration, the contracts
are settled by the delivery of NGL to the Company or the counter party or
booking out the transaction (booking out is a procedure for financially settling
a contract in lieu of the physical delivery of energy). The propane wholesale
marketing operation also enters into futures contracts that are traded on the
New York Mercantile Exchange. In certain cases, the futures contracts are
settled by the payment of a net amount equal to the difference between the
current market price of the futures contract and the original contract
price.
The
forward and futures contracts are entered into for trading and wholesale
marketing purposes. The propane wholesale marketing operation is subject to
commodity price risk on its open positions to the extent that market prices for
NGL deviate from fixed contract settlement amounts. Market risk associated with
the trading of futures and forward contracts are monitored daily for compliance
with Chesapeake’s Risk Management Policy, which includes volumetric limits for
open positions. To manage exposures to changing market prices, open positions
are marked up or down to market prices and reviewed by oversight officials on a
daily basis. Additionally, the Risk Management Committee reviews periodic
reports on market and credit risk, approves any exceptions to the Risk
Management Policy (within the limits established by the Board of Directors) and
authorizes the use of any new types of contracts. Quantitative information on
the forward and futures contracts at December 31, 2004 and 2003 is shown in the
following chart.
|
|
Quantity
|
|
Estimated
|
|
Weighted
Average |
|
At
December 31, 2004 |
|
in
gallons |
|
Market
Prices |
|
Contract
Prices |
|
Forward
Contracts |
|
|
|
|
|
|
|
Sale
|
|
10,044,510
|
|
$0.7725
— $0.7750 |
|
$0.7828 |
|
Purchase
|
|
9,975,000
|
|
$0.7300
— $0.7500 |
|
$0.8007 |
|
|
|
|
|
|
|
|
|
Futures
Contracts |
|
|
|
|
|
|
|
Sale
|
|
378,000
|
|
$0.7450
— $0.7500 |
|
$0.7868 |
|
Purchase
|
|
420,000
|
|
$0.7200
— $0.7300 |
|
$0.7500 |
|
|
|
|
|
|
|
|
|
Estimated
market prices and weighted average contract prices are in dollars per
gallon.
All
contracts expire in 2005. |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quantity
|
|
Estimated
|
|
Weighted
Average |
|
At
December 31, 2003 |
|
in
gallons |
|
Market
Prices |
|
Contract
Prices |
|
Forward
Contracts |
|
|
|
|
|
|
|
Sale
|
|
11,956,000
|
|
$0.6650
— $0.6900 |
|
$0.6153 |
|
Purchase
|
|
10,876,000
|
|
$0.6650
— $0.6900 |
|
$0.6085 |
|
|
|
|
|
|
|
|
|
Futures
Contracts |
|
|
|
|
|
|
|
Sale
|
|
200,000
|
|
$0.6650
— $0.6675 |
|
$0.6675 |
|
|
|
|
|
|
|
|
|
Estimated
market prices and weighted average contract prices are in dollars per
gallon.
All
contracts expire in 2004. |
|
|
|
|
|
|
|
The
Company’s natural gas distribution operations have entered into agreements with
natural gas suppliers to purchase natural gas for resale to their customers.
Purchases under these contracts either do not meet the definition of derivatives
in SFAS No. 133 or are considered “normal purchases and sales” under SFAS No.
138 and are not marked to market.
Competition
The
Company’s natural gas operations compete with other forms of energy including
electricity, oil and propane. The principal competitive factors are price, and
to a lesser extent, accessibility. The Company’s natural gas distribution
operations have several large volume industrial customers that have the capacity
to use fuel oil as an alternative to natural gas. When oil prices decline, these
interruptible customers convert to oil to satisfy their fuel requirements. Lower
levels in interruptible sales occur when oil prices are lower relative to the
price of natural gas. Oil prices, as well as the prices of electricity and other
fuels, are subject to fluctuation for a variety of reasons; therefore, future
competitive conditions are not predictable. To address this uncertainty, the
Company uses flexible pricing arrangements on both the supply and sales side of
its business to maximize sales volumes. As a result of the transmission
business’ conversion to open access and the Florida division’s restructuring of
its services, their businesses have 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 commercial and industrial
customers. In 2002, the Florida operation extended transportation service 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 also provides sales
service in Delaware.
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 with electricity as an energy
source, because it is typically less expensive than electricity, based on
equivalent BTU value. Propane also competes with home heating oil as an energy
source. 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.
Inflation
Inflation
affects the cost of labor, products and services required for operation,
maintenance and capital improvements. While the impact of inflation has remained
low in recent years, natural gas and propane prices are subject to rapid
fluctuations. Fluctuations in natural gas prices are passed on to customers
through the gas cost recovery mechanism in the Company’s tariffs. To help cope
with the effects of inflation on its capital investments and returns, the
Company seeks rate relief from regulatory commissions for regulated operations
while monitoring the returns of its unregulated business operations. To
compensate for fluctuations in propane gas prices, Chesapeake adjusts its
propane selling prices to the extent allowed by the market.
Recent
Pronouncements
On
January 12, 2004, the Financial Accounting Standards Board (“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 did not have a material impact on the Company’s post-retirement
benefit obligation. Chesapeake’s post-retirement health benefits require
that
Medicare be the primary insurance for all participants that qualify for Medicare
coverage; therefore, there is no federal subsidy for Chesapeake’s
plan.
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.
In
December 2004, the FASB released a revision (“Share-Based Payment”) to SFAS No.
123 “Accounting for Stock-Based Compensation.” It is effective for the first
interim or annual period beginning after June 15, 2005. This Statement
establishes financial accounting and reporting standards for stock-based
employee compensation plans. Those plans include all arrangements by which
employees receive shares of stock or other equity instruments of the employer or
the employer incurs liabilities to employees in amounts based on the price of
the employer’s stock. Examples are stock purchase plans, stock options,
restricted stock and stock appreciation rights. The Company does not expect the
adoption of SFAS No. 123 to have a material impact on the financial statements.
Cautionary
Statement
Chesapeake
has made statements in this report that are considered to be forward-looking
statements. These statements are not matters of historical fact. Sometimes they
contain words such as “believes,” “expects,” “intends,” “plans,” “will” or
“may,” and other similar words of a predictive nature. These statements relate
to matters such as customer growth, changes in revenues or gross margin, 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 changes in benefit plan
assumptions; |
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
7A. Quantitative and Qualitative Disclosures About Market
Risk
Information
concerning quantitative and qualitative disclosure about market risk is included
in Item 7 under the heading “Management’s Discussion and Analysis — Market
Risk.”
Item
8. Financial Statements and Supplemental Data
Management’s
Report on Internal Controls Over Financial Reporting
Management
is responsible for establishing and maintaining adequate internal controls over
financial reporting, as such term is defined in Exchange Act Rules 13a-15(f). A
system of internal controls is designed to provide reasonable assurance as to
the fair and reliable preparation and presentation of the consolidated financial
statements, as well as to safeguard assets from unauthorized use or
disposition.
Under the
supervision and with the participation of management, including the principal
executive officer and principal financial officer, Chesapeake’s management
conducted an evaluation of the effectiveness of its internal controls over
financial reporting based on the criteria established in a report entitled
“Internal Control — Integrated Framework” issued by the Committee of Sponsoring
Organizations of the Treadway Commission. Although there are inherent
limitations on internal controls over financial reporting, Chesapeake’s
management has evaluated and concluded that Chesapeake’s internal controls over
financial reporting were effective as of December 31, 2004.
Management’s
assessment of the effectiveness of Chesapeake’s internal controls over financial
reporting as of December 31, 2004 has been audited by PricewaterhouseCoopers
LLP, an independent registered public accounting firm and auditor of
Chesapeake’s consolidated financial statements.
Report
of Independent Registered Public Accounting Firm
________
To the
Board of Directors and Stockholders
of
Chesapeake Utilities Corporation
We have
completed an integrated audit of Chesapeake Utilities Corporation’s 2004
consolidated financial statements and of its internal control over financial
reporting as of December 31, 2004 and audits of its 2003 and 2002 consolidated
financial statements in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Our opinions, based on our audits,
are presented below.
Consolidated
financial statements and financial statement schedule
In our
opinion, the
consolidated financial statements listed in the index appearing under Item
15(a)(1) present
fairly, in all material respects, the financial position of Chesapeake Utilities
Corporation and its subsidiaries at December 31, 2004 and 2003, and the results
of their operations and their cash flows for each of the three years in the
period ended December 31, 2004 in
conformity with accounting principles generally accepted in the United States of
America. In
addition, in our opinion, the financial statement schedule listed in the index
appearing under Item 15(a)(2) presents
fairly, in all material respects, the information set forth therein when read in
conjunction with the related consolidated financial statements. These
financial statements and financial statement schedule are the responsibility of
the Company’s management. Our responsibility is to express an opinion on these
financial statements and financial statement schedule based on
our audits. We conducted our audits of these statements in accordance with the
standards of the Public
Company Accounting Oversight Board (United
States). Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit of financial statements includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our
opinion.
As
discussed in Note G to the consolidated financial statements, the Company
adopted Statement of Financial Accounting Standards No. 142, “Goodwill and Other
Intangible Assets,” in 2002. In addition, as discussed in Note B to the
consolidated financial statements, the Company adopted Statement of Financial
Accounting Standards No. 143, “Accounting for Asset Retirement Obligations,” in
2003.
Internal
control over financial reporting
Also, in
our opinion, management’s assessment, included in Management’s Report on
Internal Control Over Financial Reporting under Item 8, that the Company
maintained effective internal control over financial reporting as of December
31, 2004 based on
criteria established in Internal
Control - Integrated Framework issued
by the Committee of Sponsoring Organizations of the Treadway Commission (COSO),
is fairly stated, in all material respects, based on those criteria.
Furthermore, in our opinion, the Company maintained, in all material respects,
effective internal control over financial reporting as of December 31, 2004,
based on criteria established in Internal
Control - Integrated Framework issued
by the COSO. The Company’s management is responsible for maintaining effective
internal control over financial reporting and for its assessment of the
effectiveness of internal control over financial reporting. Our responsibility
is to express opinions on management’s assessment and on the effectiveness of
the Company’s internal control over financial reporting based on our audit. We
conducted our audit of internal control over financial reporting in accordance
with the standards of the Public Company Accounting Oversight Board (United
States). Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether effective internal control over financial
reporting was maintained in all material respects. An audit of internal control
over financial reporting includes obtaining an understanding of internal control
over financial reporting, evaluating management’s assessment, testing and
evaluating the design and operating effectiveness of internal control, and
performing such other procedures as we consider necessary in the circumstances.
We believe that our audit provides a reasonable basis for our opinions.
A
company’s internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. A company’s internal control over
financial reporting includes those policies and procedures that (i) pertain to
the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company; (ii)
provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of
the company; and (iii) provide reasonable assurance regarding prevention or
timely detection of unauthorized acquisition, use, or disposition of the
company’s assets that could have a material effect on the financial statements.
Because
of its inherent limitations, internal control over financial reporting may not
prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
/s/ PricewaterhouseCoopers LLP
PricewaterhouseCoopers
LLP
Boston,
MA
March 16,
2005
Consolidated
Statements of Income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For
the Years Ended December 31, |
|
|
2004 |
|
|
2003 |
|
|
2002 |
|
Operating
Revenues |
|
$ |
177,955,441 |
|
$ |
163,567,592 |
|
$ |
135,256,498 |
|
|
|
|
|
|
|
|
|
|
|
|
Operating
Expenses |
|
|
|
|
|
|
|
|
|
|
Cost
of sales, excluding costs below |
|
|
109,626,377
|
|
|
95,246,819
|
|
|
73,648,958
|
|
Operations
|
|
|
35,146,595
|
|
|
33,526,804
|
|
|
31,833,198
|
|
Maintenance
|
|
|
1,518,774
|
|
|
1,737,855
|
|
|
1,924,210
|
|
Depreciation
and amortization |
|
|
7,257,538
|
|
|
7,089,836
|
|
|
7,089,190
|
|
Other
taxes |
|
|
4,436,411
|
|
|
4,386,878
|
|
|
4,156,263
|
|
Total
operating expenses |
|
|
157,985,695
|
|
|
141,988,192
|
|
|
118,651,819
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
Income |
|
|
19,969,746
|
|
|
21,579,400
|
|
|
16,604,679
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
income net of other expenses |
|
|
549,156
|
|
|
238,439
|
|
|
494,904
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
charges |
|
|
5,268,145
|
|
|
5,705,911
|
|
|
4,955,022
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
Before Income Taxes |
|
|
15,250,757
|
|
|
16,111,928
|
|
|
12,144,561
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
taxes |
|
|
5,701,090
|
|
|
6,032,445
|
|
|
4,609,552
|
|
Net
Income from Continuing Operations |
|
|
9,549,667
|
|
|
10,079,483
|
|
|
7,535,009
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
from discontinued operations, net of tax benefit of $59,751,
$74,997 and $964,869 |
|
|
(120,900 |
) |
|
(787,607 |
) |
|
(1,897,837 |
) |
|
|
|
|
|
|
|
|
|
|
|
Cumulative
effect of change in accounting principle, net of tax benefit of $1,284,000
|
|
|
-
|
|
|
-
|
|
|
(1,916,000 |
) |
|
|
|
|
|
|
|
|
|
|
|
Net
Income |
|
$ |
9,428,767 |
|
$ |
9,291,876 |
|
$ |
3,721,172 |
|
|
|
|
|
|
|
|
|
|
|
|
Earnings
Per Share of Common Stock: |
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
|
|
|
|
|
|
|
|
From
continuing operations |
|
$ |
1.66 |
|
$ |
1.80 |
|
$ |
1.37 |
|
From
discontinued operations |
|
|
(0.02 |
) |
|
(0.14 |
) |
|
(0.34 |
) |
Effect
of change in accounting principle |
|
|
-
|
|
|
-
|
|
|
(0.35 |
) |
Net
Income |
|
$ |
1.64 |
|
$ |
1.66 |
|
$ |
0.68 |
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
|
|
|
|
|
|
|
|
|
From
continuing operations |
|
$ |
1.64 |
|
$ |
1.76 |
|
$ |
1.37 |
|
From
discontinued operations |
|
|
(0.02 |
) |
|
(0.13 |
) |
|
(0.34 |
) |
Effect
of change in accounting principle |
|
|
-
|
|
|
-
|
|
|
(0.35 |
) |
Net
Income |
|
$ |
1.62 |
|
$ |
1.63 |
|
$ |
0.68 |
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of the
financial statements. |
|
Consolidated
Statements of Cash Flows |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For
the Years Ended December 31, |
|
|
2004 |
|
|
2003 |
|
|
2002 |
|
|
|
|
|
|
|
|
|
|
|
|
Operating
Activities |
|
|
|
|
|
|
|
|
|
|
Net
Income |
|
$ |
9,428,767 |
|
$ |
9,291,876 |
|
$ |
3,721,172 |
|
Adjustments
to reconcile net income to net operating cash: |
|
|
|
|
|
|
|
|
|
|
Depreciation
and amortization |
|
|
7,272,768
|
|
|
8,030,398
|
|
|
7,932,345
|
|
Depreciation
and accretion included in other costs |
|
|
2,619,069
|
|
|
2,467,582
|
|
|
2,490,799
|
|
Goodwill
impairment |
|
|
-
|
|
|
-
|
|
|
4,674,000
|
|
Deferred
income taxes, net |
|
|
4,211,481
|
|
|
2,397,594
|
|
|
263,826
|
|
Mark-to-market
adjustments |
|
|
353,183
|
|
|
457,901
|
|
|
(704,908 |
) |
Employee
benefits and compensation |
|
|
1,729,238
|
|
|
2,042,093
|
|
|
1,200,131
|
|
Other,
net |
|
|
33,184
|
|
|
15,874
|
|
|
34,571
|
|
Changes
in assets and liabilities: |
|
|
|
|
|
|
|
|
|
|
Accounts
receivable, net |
|
|
(11,723,505 |
) |
|
(3,565,363 |
) |
|
(2,821,343 |
) |
Inventories,
storage gas and materials |
|
|
(1,741,941 |
) |
|
(466,411 |
) |
|
311,668
|
|
Prepaid
expenses and other current assets |
|
|
(402,702 |
) |
|
(316,425 |
) |
|
(135,943 |
) |
Other
deferred charges |
|
|
851,704
|
|
|
239,862
|
|
|
(347,669 |
) |
Accounts
payable, net |
|
|
11,648,832
|
|
|
929,428
|
|
|
6,098,044
|
|
Income
taxes receivable |
|
|
118,489
|
|
|
25,090
|
|
|
182,591
|
|
Accrued
interest |
|
|
(51,272 |
) |
|
(47,464 |
) |
|
(1,058,570 |
) |
Accrued
compensation |
|
|
(794,194 |
) |
|
762,629
|
|
|
(261,114 |
) |
Regulatory
assets |
|
|
(479,562 |
) |
|
273,646
|
|
|
2,925,107
|
|
Other
current liabilities |
|
|
277,944
|
|
|
(112,356 |
) |
|
262,220
|
|
Other
long-term liabilities |
|
|
109,533
|
|
|
521,870
|
|
|
141,358
|
|
Net
cash provided by operating activities |
|
|
23,461,016
|
|
|
22,947,824
|
|
|
24,908,285
|
|
|
|
|
|
|
|
|
|
|
|
|
Investing
Activities |
|
|
|
|
|
|
|
|
|
|
Property,
plant and equipment expenditures, net |
|
|
(17,806,950 |
) |
|
(11,790,364 |
) |
|
(14,705,244 |
) |
Change
in intangibles |
|
|
-
|
|
|
-
|
|
|
12,426
|
|
Sale
of discontinued operations |
|
|
415,707
|
|
|
3,732,649
|
|
|
-
|
|
Sale
of investments |
|
|
178,812
|
|
|
-
|
|
|
-
|
|
Environmental
recoveries, net of expenditures |
|
|
364,088
|
|
|
2,193,318
|
|
|
631,750
|
|
Net
cash used by investing activities |
|
|
(16,848,343 |
) |
|
(5,864,397 |
) |
|
(14,061,068 |
) |
|
|
|
|
|
|
|
|
|
|
|
Financing
Activities |
|
|
|
|
|
|
|
|
|
|
Common
stock dividends |
|
|
(5,560,535 |
) |
|
(5,403,536 |
) |
|
(5,322,194 |
) |
Issuance
of stock: |
|
|
|
|
|
|
|
|
|
|
Dividend
Reinvestment Plan optional cash net of issuance costs |
|
|
268,341
|
|
|
347,546
|
|
|
266,638
|
|
Purchase
of treasury stock |
|
|
(192,652 |
) |
|
-
|
|
|
-
|
|
Change
in cash overdrafts due to outstanding checks |
|
|
(143,720 |
) |
|
(46,853 |
) |
|
492,331
|
|
Net
borrowing (repayment) under line of credit
agreements |
|
|
1,184,742
|
|
|
(7,384,742 |
) |
|
(31,200,000 |
) |
Proceeds
from issuance of long-term debt, net |
|
|
-
|
|
|
-
|
|
|
29,918,850
|
|
Repayment
of long-term debt |
|
|
(3,665,589 |
) |
|
(3,945,617 |
) |
|
(3,732,901 |
) |
Net
cash used by financing activities |
|
|
(8,109,413 |
) |
|
(16,433,202 |
) |
|
(9,577,276 |
) |
|
|
|
|
|
|
|
|
|
|
|
Net
(Decrease) Increase in Cash and Cash Equivalents |
|
|
(1,496,740 |
) |
|
650,225
|
|
|
1,269,941
|
|
Cash
and Cash Equivalents — Beginning of Period |
|
|
3,108,501
|
|
|
2,458,276
|
|
|
1,188,335
|
|
Cash
and Cash Equivalents — End of Period |
|
$ |
1,611,761 |
|
$ |
3,108,501 |
|
$ |
2,458,276 |
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental
Disclosure of Cash Flow Information |
|
|
|
|
|
|
|
|
|
|
Cash
paid for interest |
|
$ |
5,280,299 |
|
$ |
5,648,332 |
|
$ |
6,255,193 |
|
Cash
paid for income taxes |
|
$ |
1,977,223 |
|
$ |
3,767,816 |
|
$ |
2,160,750 |
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of the
financial statements. |
|
Consolidated
Balance Sheets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets
|
|
|
|
|
|
|
|
At
December 31, |
|
|
2004 |
|
|
2003 |
|
|
|
|
|
|
|
|
|
Property,
Plant and Equipment |
|
|
|
|
|
|
|
Natural
gas distribution and transmission |
|
$ |
198,306,668 |
|
$ |
186,661,469 |
|
Propane
|
|
|
38,344,983
|
|
|
35,577,104
|
|
Advanced
information services |
|
|
1,480,779
|
|
|
1,396,595
|
|
Water
services |
|
|
332,313
|
|
|
762,383
|
|
Other
plant |
|
|
9,035,840
|
|
|
8,796,305
|
|
Total
property, plant and equipment |
|
|
247,500,583
|
|
|
233,193,856
|
|
Plus:
Construction work in progress |
|
|
2,766,209
|
|
|
1,724,721
|
|
Less:
Accumulated depreciation and amortization |
|
|
(73,213,605 |
) |
|
(67,046,318 |
) |
Net
property, plant and equipment |
|
|
177,053,187
|
|
|
167,872,259
|
|
|
|
|
|
|
|
|
|
Investments
|
|
|
386,422
|
|
|
386,710
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
Assets |
|
|
|
|
|
|
|
Cash
and cash equivalents |
|
|
1,611,761
|
|
|
3,108,501
|
|
Accounts
receivable (less allowance for uncollectibles |
|
|
|
|
|
|
|
of
$610,819 and $682,002, respectively) |
|
|
36,938,688
|
|
|
26,191,845
|
|
Accrued
revenue |
|
|
5,229,955
|
|
|
4,497,752
|
|
Propane
inventory |
|
|
4,654,119
|
|
|
3,387,535
|
|
Other
inventory |
|
|
1,056,530
|
|
|
1,096,601
|
|
Regulatory
assets |
|
|
2,435,284
|
|
|
2,211,599
|
|
Storage
gas prepayments |
|
|
5,085,382
|
|
|
4,622,601
|
|
Income
taxes receivable |
|
|
719,078
|
|
|
489,841
|
|
Prepaid
expenses |
|
|
1,759,643
|
|
|
1,696,333
|
|
Other
current assets |
|
|
459,908
|
|
|
484,468
|
|
Total
current assets |
|
|
59,950,348
|
|
|
47,787,076
|
|
|
|
|
|
|
|
|
|
Deferred
Charges and Other Assets |
|
|
|
|
|
|
|
Goodwill
|
|
|
674,451
|
|
|
674,451
|
|
Other
intangible assets, net |
|
|
219,964
|
|
|
305,213
|
|
Long-term
receivables |
|
|
1,209,034
|
|
|
1,637,998
|
|
Other
regulatory assets |
|
|
1,542,741
|
|
|
2,632,900
|
|
Other
deferred charges |
|
|
902,281
|
|
|
760,911
|
|
Total
deferred charges and other assets |
|
|
4,548,471
|
|
|
6,011,473
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Assets |
|
$ |
241,938,428 |
|
$ |
222,057,518 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of the
financial statements. |
|
Consolidated
Balance Sheets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capitalization
and Liabilities |
|
|
|
|
|
|
|
At
December 31, |
|
|
2004 |
|
|
2003 |
|
|
|
|
|
|
|
|
|
Capitalization
|
|
|
|
|
|
|
|
Stockholders'
equity |
|
|
|
|
|
|
|
Common
Stock, par value $.4867 per share; |
|
|
|
|
|
|
|
(authorized
12,000,000 shares) (1) |
|
$ |
2,812,538 |
|
$ |
2,754,748 |
|
Additional
paid-in capital |
|
|
36,854,717
|
|
|
34,176,361
|
|
Retained
earnings |
|
|
39,015,087
|
|
|
36,008,246
|
|
Accumulated
other comprehensive income |
|
|
(527,246 |
) |
|
0
|
|
Deferred
compensation obligation |
|
|
816,044
|
|
|
913,689
|
|
Treasury
stock, at cost |
|
|
(1,008,696 |
) |
|
(913,689 |
) |
Total
stockholders' equity |
|
|
77,962,444
|
|
|
72,939,355
|
|
|
|
|
|
|
|
|
|
Long-term
debt, net of current maturities |
|
|
66,189,454
|
|
|
69,415,545
|
|
Total
capitalization |
|
|
144,151,898
|
|
|
142,354,900
|
|
|
|
|
|
|
|
|
|
Current
Liabilities |
|
|
|
|
|
|
|
Current
portion of long-term debt |
|
|
2,909,091
|
|
|
3,665,091
|
|
Short-term
borrowing |
|
|
4,700,000
|
|
|
3,515,258
|
|
Accounts
payable |
|
|
33,502,526
|
|
|
21,997,413
|
|
Customer
deposits and refunds |
|
|
2,415,721
|
|
|
2,214,961
|
|
Accrued
interest |
|
|
601,095
|
|
|
652,367
|
|
Dividends
payable |
|
|
1,617,245
|
|
|
1,556,631
|
|
Deferred
income taxes payable |
|
|
571,876
|
|
|
119,814
|
|
Accrued
compensation |
|
|
2,680,370
|
|
|
3,266,072
|
|
Regulatory
liabilities |
|
|
571,111
|
|
|
826,988
|
|
Other
accrued liabilities |
|
|
1,800,541
|
|
|
1,723,389
|
|
Total
current liabilities |
|
|
51,369,576
|
|
|
39,537,984
|
|
|
|
|
|
|
|
|
|
Deferred
Credits and Other Liabilities |
|
|
|
|
|
|
|
Deferred
income taxes payable |
|
|
23,350,414
|
|
|
19,590,995
|
|
Deferred
investment tax credits |
|
|
437,909
|
|
|
492,725
|
|
Other
regulatory liabilities |
|
|
1,578,374
|
|
|
1,481,464
|
|
Environmental
liabilities |
|
|
461,656
|
|
|
562,194
|
|
Accrued
pension costs |
|
|
3,007,949
|
|
|
2,015,128
|
|
Accrued
asset removal cost |
|
|
15,024,849
|
|
|
13,536,209
|
|
Other
liabilities |
|
|
2,555,803
|
|
|
2,485,919
|
|
Total
deferred credits and other liabilities |
|
|
46,416,954
|
|
|
40,164,634
|
|
|
|
|
|
|
|
|
|
Commitments
and Contingencies
(Notes N and O) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Capitalization and Liabilities |
|
$ |
241,938,428 |
|
$ |
222,057,518 |
|
|
|
|
|
|
|
|
|
(1)
Shares issued were 5,778,976 and 5,660,594 for 2004 and 2003,
respectively. Shares outstanding were 5,730,913 and 5,612,935 for 2004 and
2003, respectively. 2004 included 9,306 purchased treasury stock
shares. |
|
|
|
The accompanying notes are an integral part of the
financial statements. |
|
Consolidated
Statements of Stockholders' Equity |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For
the Years Ended December 31, |
|
|
2004 |
|
|
2003 |
|
|
2002 |
|
|
|
|
|
|
|
|
|
|
|
|
Common
Stock |
|
|
|
|
|
|
|
|
|
|
Balance
— beginning of year |
|
$ |
2,754,748 |
|
$ |
2,694,935 |
|
$ |
2,640,060 |
|
Dividend
Reinvestment Plan |
|
|
20,125
|
|
|
24,888
|
|
|
24,229
|
|
Retirement
Savings Plan |
|
|
19,058
|
|
|
21,047
|
|
|
25,669
|
|
Conversion
of debentures |
|
|
9,060
|
|
|
9,144
|
|
|
2,199
|
|
Performance
shares and options exercised |
|
|
9,547
|
|
|
4,734
|
|
|
2,778
|
|
Balance
— end of year |
|
|
2,812,538
|
|
|
2,754,748
|
|
|
2,694,935
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional
Paid-in Capital |
|
|
|
|
|
|
|
|
|
|
Balance
— beginning of year |
|
|
34,176,361
|
|
|
31,756,983
|
|
|
29,653,992
|
|
Dividend
Reinvestment Plan |
|
|
996,715
|
|
|
1,066,386
|
|
|
936,268
|
|
Retirement
Savings Plan |
|
|
946,319
|
|
|
899,475
|
|
|
985,846
|
|
Conversion
of debentures |
|
|
307,940
|
|
|
310,293
|
|
|
74,632
|
|
Performance
shares and options exercised |
|
|
427,382
|
|
|
143,224
|
|
|
106,245
|
|
Balance
— end of year |
|
|
36,854,717
|
|
|
34,176,361
|
|
|
31,756,983
|
|
|
|
|
|
|
|
|
|
|
|
|
Retained
Earnings |
|
|
|
|
|
|
|
|
|
|
Balance
— beginning of year |
|
|
36,008,246
|
|
|
32,898,283
|
|
|
35,223,313
|
|
Net
income |
|
|
9,428,767
|
|
|
9,291,876
|
|
|
3,721,172
|
|
Cash
dividends (1) |
|
|
(6,403,450 |
) |
|
(6,181,913 |
) |
|
(6,046,202 |
) |
Loss
on issuance of treasury stock |
|
|
(18,476 |
) |
|
-
|
|
|
-
|
|
Balance
— end of year |
|
|
39,015,087
|
|
|
36,008,246
|
|
|
32,898,283
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
Other Comprehensive Income |
|
|
|
|
|
|
|
|
|
|
Balance
— beginning of year |
|
|
-
|
|
|
-
|
|
|
-
|
|
Minimum
pension liability adjustment, net of tax |
|
|
(527,246 |
) |
|
-
|
|
|
-
|
|
Balance
— end of year |
|
|
(527,246 |
) |
|
0
|
|
|
0
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred
Compensation Obligation |
|
|
|
|
|
|
|
|
|
|
Balance
— beginning of year |
|
|
913,689
|
|
|
711,109
|
|
|
576,342
|
|
New
deferrals |
|
|
296,790
|
|
|
202,580
|
|
|
134,767
|
|
Payout
of deferred compensation |
|
|
(394,435 |
) |
|
-
|
|
|
-
|
|
Balance
— end of year |
|
|
816,044
|
|
|
913,689
|
|
|
711,109
|
|
|
|
|
|
|
|
|
|
|
|
|
Treasury
Stock, at cost |
|
|
|
|
|
|
|
|
|
|
Balance
— beginning of year |
|
|
(913,689 |
) |
|
(711,109 |
) |
|
(576,342 |
) |
New
deferrals related to corporate obligation |
|
|
(296,790 |
) |
|
(202,580 |
) |
|
(134,767 |
) |
Purchase
of treasury stock |
|
|
(344,753 |
) |
|
-
|
|
|
-
|
|
Sale
and distribution of treasury stock |
|
|
546,536
|
|
|
-
|
|
|
-
|
|
Balance
— end of year |
|
|
(1,008,696 |
) |
|
(913,689 |
) |
|
(711,109 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Stockholders’ Equity |
|
$ |
77,962,444 |
|
$ |
72,939,355 |
|
$ |
67,350,201 |
|
|
|
|
|
|
|
|
|
|
|
|
(1)
Cash dividends declared per share for 2004, 2003 and 2002 were $1.12,
$1.10 and $1.10, respectively. |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
Statements of Comprehensive Income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income |
|
$ |
9,428,767 |
|
$ |
9,291,876 |
|
$ |
3,721,172 |
|
Minimum
pension liability adjustment, net of tax of $347,726 |
|
|
(527,246 |
) |
|
-
|
|
|
-
|
|
Comprehensive
Income |
|
$ |
8,901,521 |
|
$ |
9,291,876 |
|
$ |
3,721,172 |
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of the
financial statements. |
|
Consolidated
Statements of Income Taxes |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For
the Years Ended December 31, |
|
|
2004 |
|
|
2003 |
|
|
2002 |
|
|
|
|
|
|
|
|
|
|
|
|
Current
Income Tax Expense |
|
|
|
|
|
|
|
|
|
|
Federal |
|
$ |
990,369 |
|
$ |
2,732,101 |
|
$ |
1,624,698 |
|
State |
|
|
617,848
|
|
|
943,993
|
|
|
571,540
|
|
Investment
tax credit adjustments, net |
|
|
(54,816 |
) |
|
(54,816 |
) |
|
(54,816 |
) |
Total
current income tax expense |
|
|
1,553,401
|
|
|
3,621,278
|
|
|
2,141,422
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred
Income Tax Expense (1) |
|
|
|
|
|
|
|
|
|
|
Property,
plant and equipment |
|
|
4,279,752
|
|
|
1,855,131
|
|
|
3,742,415
|
|
Deferred
gas costs |
|
|
283,547
|
|
|
105,846
|
|
|
(1,701,273 |
) |
Pensions
and other employee benefits |
|
|
(49,620 |
) |
|
(203,229 |
) |
|
(139,861 |
) |
Impairment
of intangibles |
|
|
125,165
|
|
|
1,463,995
|
|
|
(1,785,160 |
) |
Environmental
expenditures |
|
|
(150,864 |
) |
|
(866,206 |
) |
|
(404,659 |
) |
Other |
|
|
(399,862 |
) |
|
(19,367 |
) |
|
507,799
|
|
Total
deferred income tax expense |
|
|
4,088,118
|
|
|
2,336,170
|
|
|
219,261
|
|
Total
Income Tax Expense |
|
$ |
5,641,519 |
|
$ |
5,957,448 |
|
$ |
2,360,683 |
|
|
|
|
|
|
|
|
|
|
|
|
Reconciliation
of Effective Income Tax Rates |
|
|
|
|
|
|
|
|
|
|
Continuing
operations |
|
|
|
|
|
|
|
|
|
|
Federal
income tax expense (2) |
|
$ |
5,185,257 |
|
$ |
5,478,056 |
|
$ |
4,129,150 |
|
State
income taxes, net of federal benefit |
|
|
736,176
|
|
|
737,367
|
|
|
582,681
|
|
Other |
|
|
(220,343 |
) |
|
(182,978 |
) |
|
(102,279 |
) |
Total
continuing operations |
|
|
5,701,090
|
|
|
6,032,445
|
|
|
4,609,552
|
|
Discontinued
operations |
|
|
(59,571 |
) |
|
(74,997 |
) |
|
(2,248,869 |
) |
Total
Income Tax Expense |
|
$ |
5,641,519 |
|
$ |
5,957,448 |
|
$ |
2,360,683 |
|
|
|
|
|
|
|
|
|
|
|
|
Effective
income tax rate |
|
|
37.4 |
% |
|
39.1 |
% |
|
38.8 |
% |
|
|
|
|
|
|
|
|
|
|
|
At
December 31, |
|
|
2004 |
|
|
2003 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred
Income Taxes |
|
|
|
|
|
|
|
|
|
|
Deferred
income tax liabilities: |
|
|
|
|
|
|
|
|
|
|
Property,
plant and equipment |
|
$ |
25,736,718 |
|
$ |
21,186,978 |
|
|
|
|
Environmental
costs |
|
|
-
|
|
|
67,354
|
|
|
|
|
Deferred
gas costs |
|
|
599,945
|
|
|
277,438
|
|
|
|
|
Other |
|
|
749,259
|
|
|
910,705
|
|
|
|
|
Total
deferred income tax liabilities |
|
|
27,085,922
|
|
|
22,442,475
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred
income tax assets: |
|
|
|
|
|
|
|
|
|
|
Pension
and other employee benefits |
|
|
2,158,424
|
|
|
1,500,539
|
|
|
|
|
Impairment
of intangibles |
|
|
-
|
|
|
125,165
|
|
|
|
|
Self
insurance |
|
|
535,755
|
|
|
585,524
|
|
|
|
|
Environmental
costs |
|
|
83,510
|
|
|
-
|
|
|
|
|
Other |
|
|
385,944
|
|
|
520,438
|
|
|
|
|
Total
deferred income tax assets |
|
|
3,163,633
|
|
|
2,731,666
|
|
|
|
|
Deferred
Income Taxes Per Consolidated Balance Sheet |
|
$ |
23,922,289 |
|
$ |
19,710,809 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
Includes $386,000, $113,000 and $131,000 of deferred state income taxes
for the years 2004, 2003 and 2002, respectively. |
|
(2)
Federal income taxes for all years were recorded at 34%. |
|
|
|
The accompanying notes are an integral part of the
financial statements. |
|
A.
Summary of Accounting Policies
Nature
of Business
Chesapeake
Utilities Corporation (“Chesapeake” or “the Company”) is engaged in natural gas
distribution to approximately 50,900 customers located in central and southern
Delaware, Maryland’s Eastern Shore and Florida. The Company’s natural gas
transmission subsidiary operates a pipeline from various points in Pennsylvania
and northern Delaware to the Company’s Delaware and Maryland distribution
divisions, as well as other utility and industrial customers in Pennsylvania,
Delaware and the Eastern Shore of Maryland. The Company’s propane distribution
and wholesale marketing segment provides distribution service to approximately
34,900 customers in central and southern Delaware, the Eastern Shore of
Maryland, southeastern Pennsylvania, central Florida and the Eastern Shore of
Virginia, and markets propane to wholesale customers including large independent
oil and petrochemical companies, resellers and propane distribution companies in
the southeastern United States. The advanced information services segment
provides domestic and international clients with information technology related
business services and solutions for both enterprise and e-business applications.
Principles
of Consolidation
The
Consolidated Financial Statements include the accounts of the Company and its
wholly owned subsidiaries. The Company does not have any ownership interests in
investments accounted for using the equity method or any variable interests in a
variable interest entity. All significant intercompany transactions have been
eliminated in consolidation.
System
of Accounts
The
natural gas distribution divisions of the Company located in Delaware, Maryland
and Florida are subject to regulation by their respective public service
commissions with respect to their rates for service, maintenance of their
accounting records and various other matters. Eastern Shore Natural Gas Company
is an open access pipeline and is subject to regulation by the Federal Energy
Regulatory Commission (“FERC”). The Company’s financial statements are prepared
in accordance with generally accepted accounting principles, which give
appropriate recognition to the ratemaking and accounting practices and policies
of the various commissions. The propane, advanced information services and other
business segments are not subject to regulation with respect to rates or
maintenance of accounting records.
Property,
Plant, Equipment and Depreciation
Utility
property is stated at original cost while the assets of the non-utility segments
are recorded at cost. The costs of repairs and minor replacements are charged
against income as incurred and the costs of major renewals and betterments are
capitalized. As of January 1, 2003, Chesapeake adopted Statement of Financial
Accounting Standards (“SFAS”) No. 143, “Accounting for Asset Retirement
Obligations.” See Note B for a summary of the impact on the financial
statements. Prior to the adoption of SFAS No. 143, upon retirement or
disposition of utility property, the recorded cost of removal, net of salvage
value, was charged to accumulated depreciation. After adoption of SFAS No. 143,
the costs are being charged against accrued asset removal cost. Upon retirement
or disposition of non-utility property, the gain or loss, net of salvage value,
is charged to income. The provision for depreciation is computed using the
straight-line method at rates that amortize the unrecovered cost of depreciable
property over the estimated remaining useful life of the asset. Depreciation and
amortization expenses are provided at an annual rate for each segment. Average
rates for the past three years were 3 percent for natural gas distribution and
transmission, 5 percent for propane, 12 percent for advanced information
services and 7 percent for general plant.
At
December 31, |
|
2004 |
|
2003 |
|
Useful
Life (1) |
|
Plant
in service |
|
|
|
|
|
|
|
|
|
|
Mains |
|
$ |
99,154,938 |
|
$ |
93,015,109 |
|
|
24-37
years |
|
Services
— utility |
|
|
25,733,797
|
|
|
22,982,547
|
|
|
14-28
years |
|
Compressor
station equipment |
|
|
23,766,105
|
|
|
22,700,233
|
|
|
28
years |
|
Liquefied
petroleum gas equipment |
|
|
21,483,969
|
|
|
21,005,616
|
|
|
30-39
years |
|
Meters
and meter installations |
|
|
13,656,918
|
|
|
12,634,487
|
|
|
Propane
10-15 years, Natural gas 17-49 years |
|
Measuring
and regulating station equipment |
|
|
10,142,531
|
|
|
9,948,881
|
|
|
17-37
years |
|
Office
furniture and equipment |
|
|
10,171,180
|
|
|
9,719,520
|
|
|
Non-regulated
3-10 years, Regulated 3-20 years |
|
Transportation
equipment |
|
|
9,425,605
|
|
|
9,266,324
|
|
|
2-11
years |
|
Structures
and improvements |
|
|
9,177,011
|
|
|
9,046,759
|
|
|
5-44
years(2) |
|
Land
and land rights |
|
|
4,703,683
|
|
|
4,489,721
|
|
|
Not
depreciable, except certain regulated assets |
|
Propane
bulk plants and tanks |
|
|
5,024,462
|
|
|
4,206,094
|
|
|
15
- 40 years |
|
Various |
|
|
15,060,384
|
|
|
14,178,565
|
|
|
Various |
|
Total
plant in service |
|
|
247,500,583
|
|
|
233,193,856
|
|
|
|
|
Plus
construction work in progress |
|
|
2,766,209
|
|
|
1,724,721
|
|
|
|
|
Less
accumulated depreciation |
|
|
(73,213,605 |
) |
|
(67,046,318 |
) |
|
|
|
Net
property, plant and equipment |
|
$ |
177,053,187 |
|
$ |
167,872,259 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
Certain immaterial account balances may fall outside this
range. |
|
|
|
|
|
|
|
|
|
|
|
|
The
regulated operations compute depreciation in accordance with rates
approved by either the state Public Service Commission or
the Federal Energy Regulatory Commission. These rates are based on
depreciation studies and may change periodically upon receiving
approval from the appropriate regulatory body. The depreciation rates
shown above are based on the remaining useful lives
of the assets at the time of the depreciation study, rather than their
original lives. The depreciation rates are composite, straight-line
rates applied to the average investment for each class of depreciable
property and are adjusted for anticipated cost of removal less salvage
value. |
|
|
|
|
|
|
|
|
|
|
|
|
The
non-regulated operations compute depreciation using the straight-line
method over the estimated useful life of the asset. |
|
|
|
|
|
|
|
|
|
|
|
|
(2)
Includes buildings, structures used in connection with natural gas and
propane operations, improvements to those facilities and leasehold
improvements. |
|
Cash
and Cash Equivalents
The
Company’s policy is to invest cash in excess of operating requirements in
overnight income producing accounts. Such amounts are stated at cost, which
approximates market value. Investments with an original maturity of three months
or less when purchased are considered cash equivalents.
Inventories
The
Company uses the average cost method to value propane and materials and supplies
inventory. The appliance inventory is valued at first-in first-out (“FIFO”). If
the market prices drop below cost, inventory balances that are subject to price
risk are adjusted to market values.
Regulatory
Assets, Liabilities and Expenditures
The
Company accounts for its regulated operations in accordance with SFAS No. 71,
“Accounting for the Effects of Certain Types of Regulation.” This standard
includes accounting principles for companies whose rates are determined by
independent third-party regulators. When setting rates, regulators often make
decisions, the economics of which require companies to record costs as expense
(or defer costs or revenues) in different periods than may be appropriate for
unregulated enterprises. When this situation occurs, the regulated utility
defers the associated costs as assets (regulatory assets) on the balance sheet,
and records them as expense on the income statement as it collects revenues.
Further, regulators can also impose liabilities upon a company for amounts
previously collected from customers, and for recovery of costs that are expected
to be incurred in the future (regulatory liabilities).
At
December 31, 2004 and 2003, the regulated utility operations had recorded the
following regulatory assets and liabilities on the Balance Sheets. These assets
and liabilities will be recognized as revenues and expenses in future periods as
they are reflected in customers’ rates.
At
December 31, |
|
|
2004 |
|
|
2003 |
|
Regulatory
Assets |
|
|
|
|
|
|
|
Current |
|
|
|
|
|
|
|
Underrecovered purchased gas costs |
|
$ |
1,479,358 |
|
$ |
1,180,010 |
|
Cash-in/cash-out and gas required for operations |
|
|
32,707
|
|
|
262,631
|
|
Conservation cost recovery |
|
|
186,234
|
|
|
-
|
|
Flex rate asset |
|
|
736,985
|
|
|
768,958
|
|
Total
current regulatory assets |
|
|
2,435,284
|
|
|
2,211,599
|
|
|
|
|
|
|
|
|
|
Non-Current |
|
|
|
|
|
|
|
Income tax related amounts due from customers |
|
|
711,961
|
|
|
728,473
|
|
Deferred regulatory and other expenses |
|
|
200,746
|
|
|
383,857
|
|
Deferred gas supply |
|
|
15,201
|
|
|
7
|
|
Deferred gas required for operations |
|
|
141,082
|
|
|
581,064
|
|
Deferred post retirement benefits |
|
|
194,529
|
|
|
222,319
|
|
Environmental regulatory assets and expenditures |
|
|
279,222
|
|
|
717,180
|
|
Total
other regulatory assets |
|
|
1,542,741
|
|
|
2,632,900
|
|
|
|
|
|
|
|
|
|
Total
Regulatory Assets |
|
$ |
3,978,025 |
|
$ |
4,844,499 |
|
|
|
|
|
|
|
|
|
Regulatory
Liabilities |
|
|
|
|
|
|
|
Current |
|
|
|
|
|
|
|
Self insurance — current |
|
$ |
127,000 |
|
$ |
111,923 |
|
Overrecovered purchased gas costs |
|
|
-
|
|
|
519,409
|
|
Shared interruptible margins |
|
|
135,098
|
|
|
84,843
|
|
Operational flow order penalties |
|
|
130,338
|
|
|
-
|
|
Swing transportation imbalances |
|
|
178,675
|
|
|
110,813
|
|
Total
current regulatory liabilities |
|
|
571,111
|
|
|
826,988
|
|
|
|
|
|
|
|
|
|
Non-Current |
|
|
|
|
|
|
|
Self insurance — long-term |
|
|
1,221,101
|
|
|
1,138,966
|
|
Conservation cost recovery |
|
|
-
|
|
|
1,017
|
|
Income tax related amounts due to customers |
|
|
324,974
|
|
|
341,481
|
|
Environmental overcollections |
|
|
32,299
|
|
|
-
|
|
Total
other regulatory liabilities |
|
|
1,578,374
|
|
|
1,481,464
|
|
|
|
|
|
|
|
|
|
Accrued
asset removal cost |
|
|
15,024,849
|
|
|
13,536,209
|
|
|
|
|
|
|
|
|
|
Total
Regulatory Liabilities |
|
$ |
17,174,334 |
|
$ |
15,844,661 |
|
Included
in the regulatory assets listed above are $2.4 million of which are accruing
interest. Of the remaining regulatory assets, $275,000 will be collected in
approximately one to two years, $661,000 will be collected within approximately
5 years, $469,000 will be collected within approximately 10 to 15 years and
$206,000 are awaiting regulatory approval for recovery, but once approved are
expected to be collected within 12 months.
As
required by SFAS No. 71, the Company monitors its regulatory and competitive
environment to determine whether the recovery of its regulatory assets continues
to be probable. If the Company were to determine that recovery of these assets
is no longer probable, it would write off the assets against earnings. The
Company believes that SFAS No. 71 continues to apply to its regulated
operations, and the recovery of its regulatory assets is probable.
Goodwill
and Other Intangible Assets
Goodwill
and other intangible assets are associated with the acquisition of non-utility
companies. In accordance with SFAS No. 142, goodwill is not amortized, but is
tested for impairment on an annual basis and when events change. Other
intangible assets are amortized on a straight-line basis over their estimated
economic useful lives.
Other
Deferred Charges
Other
deferred charges include discount, premium and issuance costs associated with
long-term debt. Debt costs are deferred, then amortized over the original lives
of the respective debt issuances. State income tax loss carryforwards are
reduced to the extent taxable income is available. Deferred post employment
benefits are adjusted based on current age, the present value of the projected
annual benefit received and estimated life expectancy.
Income
Taxes and Investment Tax Credit Adjustments
The
Company files a consolidated federal income tax return. Income tax expense
allocated to the Company’s subsidiaries is based upon their respective taxable
incomes and tax credits.
Deferred
tax assets and liabilities are recorded for the tax effect of temporary
differences between the financial statements bases and tax bases of assets and
liabilities and are measured using current effective income tax rates. The
portions of the Company’s deferred tax liabilities applicable to utility
operations, which have not been reflected in current service rates, represent
income taxes recoverable through future rates. Investment tax credits on utility
property have been deferred and are allocated to income ratably over the lives
of the subject property.
Financial
Instruments
Xeron,
Inc. (“Xeron”), the Company’s propane wholesale marketing operation, engages in
trading activities using forward and futures contracts which have been accounted
for using the mark-to-market method of accounting. Under mark-to-market
accounting, the Company’s trading contracts are recorded at fair value, net of
future servicing costs, and changes in market price are recognized as gains or
losses in revenues on the income statement in the period of change. The
resulting unrealized gains and losses are recorded as assets or liabilities,
respectively. There were unrealized losses of $182,000 and unrealized gains of
$172,000 at December 31, 2004 and 2003, respectively. Trading liabilities are
recorded in other accrued liabilities. Trading assets are recorded in prepaid
expenses and other current assets.
The
Company’s natural gas and propane distribution operations have entered into
agreements with natural gas and propane suppliers to purchase gas for resale to
their customers. Purchases under these contracts either do not meet the
definition of derivatives in SFAS No. 133 or are considered “normal purchases
and sales” under SFAS No. 138 and are accounted for on an accrual
basis.
The
propane distribution operation has entered into fair value hedges of its
inventory, in order to mitigate the impact of wholesale price fluctuations. At
December 31, 2004, propane distribution had entered into a put contract to
protect 1.1 million gallons of propane inventory from a drop in value below the
strike price of the put. The put expired in January 2005.
Earnings
Per Share
The
calculations of both basic and diluted earnings per share from continuing
operations are presented in the following chart. In 2002, the impact of
converting the debentures and the effect of exercising the outstanding stock
options would have been anti-dilutive; therefore, they were not included in the
calculations.
For
the Years Ended December 31, |
|
|
2004 |
|
|
2003 |
|
|
2002 |
|
Calculation
of Basic Earnings Per Share from Continuing
Operations: |
|
|
|
|
|
|
|
|
|
|
Net income from continuing operations |
|
$ |
9,549,667 |
|
$ |
10,079,483 |
|
$ |
7,535,009 |
|
Weighted average shares outstanding |
|
|
5,735,405
|
|
|
5,610,592
|
|
|
5,489,424
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
Earnings Per Share from Continuing Operations |
|
$ |
1.66 |
|
$ |
1.80 |
|
$ |
1.37 |
|
|
|
|
|
|
|
|
|
|
|
|
Calculation
of Diluted Earnings Per Share from Continuing
Operations: |
|
|
|
|
|
|
|
|
|
|
Reconciliation of Numerator: |
|
|
|
|
|
|
|
|
|
|
Net income from continuing operations — Basic |
|
$ |
9,549,667 |
|
$ |
10,079,483 |
|
$ |
7,535,009 |
|
Effect of 8.25% Convertible debentures |
|
|
139,097
|
|
|
157,557
|
|
|
-
|
|
Adjusted numerator — Diluted |
|
$ |
9,688,764 |
|
$ |
10,237,040 |
|
$ |
7,535,009 |
|
|
|
|
|
|
|
|
|
|
|
|
Reconciliation of Denominator: |
|
|
|
|
|
|
|
|
|
|
Weighted shares outstanding — Basic |
|
|
5,735,405
|
|
|
5,610,592
|
|
|
5,489,424
|
|
Effect of dilutive securities |
|
|
|
|
|
|
|
|
|
|
Stock options |
|
|
1,784
|
|
|
1,361
|
|
|
-
|
|
Warrants |
|
|
7,900
|
|
|
5,481
|
|
|
1,649
|
|
8.25% Convertible debentures |
|
|
162,466
|
|
|
184,532
|
|
|
-
|
|
Adjusted denominator — Diluted |
|
|
5,907,555
|
|
|
5,801,966
|
|
|
5,491,073
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
Earnings Per Share fron Continuing Operations |
|
$ |
1.64 |
|
$ |
1.76 |
|
$ |
1.37 |
|
Operating
Revenues
Revenues
for the natural gas distribution operations of the Company are based on rates
approved by the various public service commissions. The natural gas transmission
operation’s revenues are based on rates approved by the FERC. Customers’ base
rates may not be changed without formal approval by these commissions; however,
the regulatory authorities have granted the Company’s regulated natural gas
distribution operations the ability to negotiate rates with customers that have
competitive alternatives using approved methodologies. In addition, the natural
gas transmission operation can negotiate rates above or below the FERC-approved
tariff rates.
Chesapeake’s
Maryland and Delaware natural gas distribution operations each have a gas cost
recovery mechanism that provides for the adjustment of rates charged to
customers as gas costs fluctuate. These amounts are collected or refunded
through adjustments to rates in subsequent periods.
The
Company charges flexible rates to the natural gas distribution’s industrial
interruptible customers to compete with alternative types of fuel. Based on
pricing, these customers can choose natural gas or alternative types of supply.
Neither the Company nor the interruptible customer is contractually obligated to
deliver or receive natural gas.
The
propane wholesale marketing operation records trading activity net, on a
mark-to-market basis, for open contracts. The propane distribution, advanced
information services and other segments record revenue in the period the
products are delivered and/or services are rendered.
Certain
Risks and Uncertainties
The
financial statements are prepared in conformity with generally accepted
accounting principles that require management to make estimates in measuring
assets and liabilities and related revenues and expenses (see Notes N and O to
the Consolidated Financial Statements for significant estimates). These
estimates involve judgments with respect to, among other things, various future
economic factors that are difficult to predict and are beyond the control of the
Company; therefore, actual results could differ from those
estimates.
The
Company records certain assets and liabilities in accordance with SFAS No. 71.
If the Company were required to terminate application of SFAS No. 71 for its
regulated operations, all such deferred amounts would be recognized in the
income statement at that time. This could result in a charge to earnings, net of
applicable income taxes, which could be material.
FASB
Statements and Other Authoritative Pronouncements
On
January 12, 2004, the Financial Accounting Standards Board (“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 did not have a material impact on the Company’s post-retirement
benefit obligation. Chesapeake’s post-retirement health benefits require that
Medicare be the primary insurance for all participants that qualify for Medicare
coverage; therefore, there is no federal subsidy for Chesapeake’s
plan.
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.
In
December 2004, the FASB released a revision (“Share-Based Payment”) to SFAS No.
123 “Accounting for Stock-Based Compensation.” It is effective for the first
interim or annual period beginning after June 15, 2005. This Statement
establishes financial accounting and reporting standards for stock-based
employee compensation plans. Those plans include all arrangements by which
employees receive shares of stock or other equity instruments of the employer or
the employer incurs liabilities to employees in amounts based on the price of
the employer’s stock. Examples are stock purchase plans, stock options,
restricted stock and stock appreciation rights. The Company does not expect the
adoption of SFAS No. 123 to have a material impact on the financial statements.
Reclassification
of Prior Years’ Amounts
Certain
prior years’ amounts have been reclassified to conform to the current year’s
presentation.
B.
Adoption of Accounting Principles
Chesapeake
adopted SFAS No. 143, “Accounting for Asset Retirement Obligations,” during
2003. The Company’s regulated operations are allowed by the regulatory bodies to
recover the costs of retiring their long-lived assets through approved
depreciation rates. Under the pronouncement, the Company was required to record
the portion of depreciation that represents asset removal cost as a regulatory
liability on its financial statements. Previously, asset removal costs were
included in accumulated depreciation. Additionally, the portion of the
depreciation rates approved by the regulators that represents asset removal
costs are now recorded in operations expense. In the past, they were recorded in
depreciation expense. These changes had no impact on the net earnings of the
Company. All
periods
presented have been reclassified in order to make the statements comparable.
Accrued asset removal cost was $15.0 million and $13.5 million at December 31,
2004 and 2003, respectively.
Please
refer to Note G for information on the adoption of SFAS No. 142, “Goodwill and
Other Intangible Assets.”
C.
Business
Dispositions and Discontinued Operations
During
2003, Chesapeake decided to exit the water services business and sold six of its
seven operations. The remaining operation was disposed of in October 2004. At
December 31, 2004, Chesapeake owned one piece of property that was formerly used
by a water subsidiary. That property is listed for sale. The results of
operations for all water service businesses have been reclassified to
discontinued operations for all periods presented. A loss of $52,000 and a gain
of $12,000, net of tax, was recorded for 2004 and 2003, respectively, on the
sale of the water operations.
Operating
revenues for discontinued operations were $1.1 million, $9.8 million and $11.7
million for 2004, 2003 and 2002, respectively. Operating losses for discontinued
operations were $94,000, $917,000 and $2.8 million for 2004, 2003 and 2002,
respectively. The following table represents amounts for discontinued operations
that are included in the balance sheets at December 31, 2004 and
2003.
Chesapeake
Utilities Corporation — Discontinued Operations |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
Sheets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets
|
|
|
|
|
|
|
|
At
December 31, |
|
|
2004 |
|
|
2003 |
|
Net
Property, Plant and Equipment |
|
$ |
183,765 |
|
$ |
435,591 |
|
|
|
|
|
|
|
|
|
Current
Assets |
|
|
|
|
|
|
|
Cash
|
|
|
4,830
|
|
|
1,437,821
|
|
Other
current assets |
|
|
62,719
|
|
|
504,539
|
|
Total
current assets |
|
|
67,549
|
|
|
1,942,360
|
|
|
|
|
|
|
|
|
|
Deferred
Charges and Other Assets |
|
|
-
|
|
|
220,865
|
|
|
|
|
|
|
|
|
|
Total
Assets |
|
$ |
251,314 |
|
$ |
2,598,816 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders'
Equity and Liabilities |
|
|
|
|
|
|
|
Stockholders'
Equity |
|
|
|
|
|
|
|
Common
stock |
|
$ |
51,010 |
|
$ |
51,010 |
|
Additional
paid-in capital |
|
|
3,914,783
|
|
|
3,914,783
|
|
Retained
deficits |
|
|
(6,492,065 |
) |
|
(5,271,164 |
) |
Total
stockholders' equity |
|
|
(2,526,272 |
) |
|
(1,305,371 |
) |
|
|
|
|
|
|
|
|
Current
Liabilities |
|
|
|
|
|
|
|
Due
to affiliated companies |
|
|
2,733,072
|
|
|
3,558,434
|
|
Other
current liabilities |
|
|
44,514
|
|
|
345,753
|
|
Total
current liabilities |
|
|
2,777,586
|
|
|
3,904,187
|
|
|
|
|
|
|
|
|
|
Total
Capitalization and Liabilities |
|
$ |
251,314 |
|
$ |
2,598,816 |
|
D.
Segment Information
The
following table presents information about the Company’s reportable segments.
The table excludes discontinued operations. The identifiable assets for
discontinued operations are shown in Note C to the Consolidated Financial
Statements.
For
the Years Ended December 31, |
|
|
2004 |
|
|
2003 |
|
|
2002 |
|
Operating
Revenues, Unaffiliated Customers |
|
|
|
|
|
|
|
|
|
|
Natural
gas distribution and transmission |
|
$ |
124,073,939 |
|
$ |
110,071,054 |
|
$ |
93,497,345 |
|
Propane |
|
|
41,499,687
|
|
|
41,029,121
|
|
|
29,238,061
|
|
Advanced
information services |
|
|
12,381,815
|
|
|
12,476,746
|
|
|
12,523,856
|
|
Other |
|
|
0
|
|
|
(9,329 |
) |
|
(2,764 |
) |
Total
operating revenues, unaffiliated customers |
|
$ |
177,955,441 |
|
$ |
163,567,592 |
|
$ |
135,256,498 |
|
|
|
|
|
|
|
|
|
|
|
|
Intersegment
Revenues (1) |
|
|
|
|
|
|
|
|
|
|
Natural
gas distribution and transmission |
|
$ |
172,427 |
|
$ |
175,757 |
|
$ |
90,730 |
|
Advanced
information services |
|
|
45,266
|
|
|
100,804
|
|
|
239,767
|
|
Other |
|
|
647,378
|
|
|
711,159
|
|
|
720,221
|
|
Total
intersegment revenues |
|
$ |
865,071 |
|
$ |
987,720 |
|
$ |
1,050,718 |
|
|
|
|
|
|
|
|
|
|
|
|
Operating
Income |
|
|
|
|
|
|
|
|
|
|
Natural
gas distribution and transmission |
|
$ |
17,091,360 |
|
$ |
16,653,111 |
|
$ |
14,973,405 |
|
Propane |
|
|
2,363,884
|
|
|
3,875,351
|
|
|
1,051,888
|
|
Advanced
information services |
|
|
387,193
|
|
|
691,909
|
|
|
343,296
|
|
Other
and eliminations |
|
|
127,309
|
|
|
359,029
|
|
|
236,090
|
|
Total
operating income |
|
$ |
19,969,746 |
|
$ |
21,579,400 |
|
$ |
16,604,679 |
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation
and Amortization |
|
|
|
|
|
|
|
|
|
|
Natural
gas distribution and transmission |
|
$ |
5,418,007 |
|
$ |
5,188,273 |
|
$ |
5,049,546 |
|
Propane |
|
|
1,524,016
|
|
|
1,506,201
|
|
|
1,602,655
|
|
Advanced
information services |
|
|
138,007
|
|
|
190,548
|
|
|
208,430
|
|
Other
and eliminations |
|
|
177,508
|
|
|
204,814
|
|
|
228,559
|
|
Total
depreciation and amortization |
|
$ |
7,257,538 |
|
$ |
7,089,836 |
|
$ |
7,089,190 |
|
|
|
|
|
|
|
|
|
|
|
|
Capital
Expenditures |
|
|
|
|
|
|
|
|
|
|
Natural
gas distribution and transmission |
|
$ |
13,945,214 |
|
$ |
9,078,043 |
|
$ |
12,116,993 |
|
Propane |
|
|
3,417,900
|
|
|
2,244,583
|
|
|
1,231,199
|
|
Advanced
information services |
|
|
84,185
|
|
|
76,924
|
|
|
99,290
|
|
Other |
|
|
404,941
|
|
|
422,789
|
|
|
388,051
|
|
Total
capital expenditures |
|
$ |
17,852,240 |
|
$ |
11,822,339 |
|
$ |
13,835,533 |
|
|
|
|
|
|
|
|
|
|
|
|
(1)
All significant intersegment revenues are billed at market rates and have
been eliminated from consolidated revenues.. |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At
December 31, |
|
|
2004 |
|
|
2003 |
|
|
2002 |
|
Identifiable
Assets |
|
|
|
|
|
|
|
|
|
|
Natural
gas distribution and transmission |
|
$ |
184,412,301 |
|
$ |
170,758,784 |
|
$ |
166,478,223 |
|
Propane |
|
|
47,531,106
|
|
|
38,359,251
|
|
|
37,939,683
|
|
Advanced
information services |
|
|
2,387,440
|
|
|
2,912,733
|
|
|
2,680,304
|
|
Other |
|
|
7,379,794
|
|
|
7,791,796
|
|
|
9,460,267
|
|
Total
identifiable assets |
|
$ |
241,710,641 |
|
$ |
219,822,564 |
|
$ |
216,558,477 |
|
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 segments are evaluated based on their pre-tax operating
income.
The
Company’s operations are all domestic. The advanced information services segment
has infrequent transactions with foreign companies, located primarily in Canada,
which are denominated and paid in U.S. dollars. These transactions are
immaterial to the consolidated revenues.
E.
Fair Value of Financial Instruments
Various
items within the balance sheet are considered to be financial instruments
because they are cash or are to be settled in cash. The carrying values of these
items generally approximate their fair value (see Note F to the Consolidated
Financial Statements for disclosure of fair value of investments). The Company’s
open forward and futures contracts at December 31, 2004 had a loss in fair value
of $182,000 and at December 31, 2003 had a gain in fair value of $172,000 based
on market rates. The fair value of the Company’s long-term debt is estimated
using a discounted cash flow methodology. The Company’s long-term debt at
December 31, 2004, including current maturities, had an estimated fair value of
$74.8 million as compared to a carrying value of $69.1 million. At December 31,
2003, the estimated fair value was approximately $80.9 million as compared to a
carrying value of $73.1 million. These estimates are based on published
corporate borrowing rates for debt instruments with similar terms and average
maturities.
F.
Investments
The
investment balances at December 31, 2004 and 2003, represent a Rabbi Trust (“the
trust”) associated with the acquisition of Xeron, Inc. The Company has
classified the underlying investments held by the trust as trading securities,
which require all gains and losses to be recorded into other income. The trust
was established during the acquisition as a retention bonus for an executive of
Xeron. The Company has an associated liability recorded which is adjusted, along
with other expense, for the gains and losses incurred by the trust.
G.
Goodwill and Other Intangible Assets
The
Company adopted SFAS No. 142 in the first quarter of 2002. The Company performed
a test as of January 1, 2002, for goodwill impairment using the two-step process
prescribed in SFAS No. 142. The first step was a screen for potential
impairment, using January 1, 2002 as the measurement date. The second step was a
measurement of the amount of the goodwill determined to be impaired. The results
of the tests indicated that the goodwill associated with the Company’s water
business was impaired and that the amount of the impairment was $3.2 million.
This was recorded as the cumulative effect of a change in accounting principle.
The fair value of the water business was determined using several methods,
including discounted cash flow projections and market valuations for recent
purchases and sales of similar businesses. These were weighted based on their
expected probability. The determination that the goodwill associated with the
Company’s water business was impaired was the result of the more stringent tests
required by the new pronouncement. SFAS No. 142 requires that impairment tests
be performed annually. At December 31, 2002, the test indicated an additional
impairment charge of $1.5 million was necessary. The unprofitable performance of
the Company’s water services business was the primary cause of the
impairment.
The
change in the carrying value of goodwill for the two years ended December 31,
2004, is as follows:
|
|
|
Water
Businesses |
|
|
Propane |
|
|
Total
|
|
Balance
at January 1, 2003 |
|
$ |
195,068 |
|
$ |
674,451 |
|
$ |
869,519 |
|
Sale
of discontinued operations |
|
|
(195,068 |
) |
|
-
|
|
|
(195,068 |
) |
Balance
at December 31, 2003 |
|
|
-
|
|
|
674,451
|
|
|
674,451
|
|
No
change |
|
|
-
|
|
|
-
|
|
|
-
|
|
Balance
at December 31, 2004 |
|
$ |
0 |
|
$ |
674,451 |
|
$ |
674,451 |
|
Intangible
assets subject to amortization are as follows:
|
|
|
December
31, 2004 |
|
|
December
31, 2003 |
|
|
|
|
Gross
Carrying Amount |
|
|
Accumulated
Amortization |
|
|
Gross
Carrying Amount |
|
|
Accumulated
Amortization |
|
Customer
lists |
|
$ |
115,333 |
|
$ |
60,155 |
|
$ |
276,616 |
|
$ |
142,780 |
|
Acquisition
costs |
|
|
263,659
|
|
|
98,873
|
|
|
263,659
|
|
|
92,282
|
|
Total
|
|
$ |
378,992 |
|
$ |
159,028 |
|
$ |
540,275 |
|
$ |
235,062 |
|
The
decrease from 2003 to 2004 in the customer list balance reflects the sale of the
assets of a water services operation. Amortization of intangible assets was
$15,000 and $168,000 for the years ended December 31, 2004 and 2003,
respectively. The estimated annual amortization of intangibles for the next five
years is: $14,000 for 2005; $14,000 for 2006; $14,000 for 2007; $14,000 for
2008, and $14,000 for 2009.
H.
Stockholders’
Equity
The
changes in the common stock shares issued and outstanding are shown in the table
below:
For
the Years Ended December 31, |
|
|
2004 |
|
|
2003 |
|
|
2002 |
|
|
|
|
|
|
|
|
|
|
|
|
Common
Stock shares issued and outstanding (1) |
|
|
|
|
|
|
|
|
|
|
Shares
issued — beginning of year balance |
|
|
5,660,594
|
|
|
5,537,710
|
|
|
5,424,962
|
|
Dividend
Reinvestment Plan (2) |
|
|
40,993
|
|
|
51,125
|
|
|
49,782
|
|
Sale
of stock to the Company's Retirement Savings Plan |
|
|
39,157
|
|
|
43,245
|
|
|
52,740
|
|
Conversion
of debentures |
|
|
18,616
|
|
|
18,788
|
|
|
4,518
|
|
Performance
shares and options exercised |
|
|
19,616
|
|
|
9,726
|
|
|
5,708
|
|
Shares
issued — end of year balance (3) |
|
|
5,778,976
|
|
|
5,660,594
|
|
|
5,537,710
|
|
Treasury
Stock |
|
|
(48,063 |
) |
|
(47,659 |
) |
|
(37,353 |
) |
Total
Shares Outstanding |
|
|
5,730,913
|
|
|
5,612,935
|
|
|
5,500,357
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
12,000,000 shares are authorized at a par value of $0.4867 per
share. |
|
|
|
|
|
|
|
|
|
|
(2)
Includes dividends reinvested and optional cash payments. |
|
|
|
|
|
|
|
|
|
|
(3)
The Company had 48,063, 47,659, and 37,353 shares held in Rabbi Trusts at
December 31, 2004, 2003 and 2002, respectively. |
|
|
|
|
|
|
|
|
|
|
The
Company had outstanding warrants for 30,000 shares of stock at an average
exercise price of $18.25 per share. The warrants expire in 2008.
I.
Long-term Debt
The
outstanding long-term debt, net of current maturities, is as shown
below.
At
December 31, |
|
|
2004 |
|
|
2003 |
|
Uncollateralized
senior notes: |
|
|
|
|
|
|
|
7.97% note, due February 1, 2008 |
|
$ |
3,000,000 |
|
$ |
4,000,000 |
|
6.91% note, due October 1, 2010 |
|
|
4,545,454
|
|
|
5,454,545
|
|
6.85% note, due January 1, 2012 |
|
|
6,000,000
|
|
|
7,000,000
|
|
7.83% note, due January 1, 2015 |
|
|
20,000,000
|
|
|
20,000,000
|
|
6.64% note, due October 31, 2017 |
|
|
30,000,000
|
|
|
30,000,000
|
|
Convertible
debentures: |
|
|
|
|
|
|
|
8.25% due March 1, 2014 |
|
|
2,644,000
|
|
|
2,961,000
|
|
Total
Long-Term Debt |
|
$ |
66,189,454 |
|
$ |
69,415,545 |
|
|
|
|
|
|
|
|
|
Annual
maturities of consolidated long-term debt for the next five years are as
follows: $2,909,091 for 2005; $4,909,091 for 2006; $7,636,364 for 2007;
$7,636,364 for 2008; and $6,636,364 for 2009. |
|
The
convertible debentures may be converted, at the option of the holder, into
shares of the Company’s common stock at a conversion price of $17.01 per share.
During 2004 and 2003, debentures totaling $317,000 and $320,000, respectively,
were converted to stock. The debentures are also redeemable for cash at the
option of the holder, subject to an annual non-cumulative maximum limitation of
$200,000. During 2004 and 2003, no debentures were redeemed for cash. At the
Company’s option, the debentures may be redeemed at stated amounts.
Indentures
to the long-term debt of the Company and its subsidiaries contain various
restrictions. The most stringent restrictions state that the Company must
maintain equity of at least 40 percent of total capitalization and the times
interest earned ratio must be at least 2.5. In addition, under the terms of the
Company’s Note Agreement for the 6.64 percent Senior Notes, the Company cannot,
until the retirement of the Senior Note, pay any dividends after October 31,
2002 which exceed the sum of $10 million plus consolidated net income recognized
after January 1, 2003. As of December 31, 2004, the amount available for future
dividends under this covenant is $14.6 million. The Company’s Series I First
Mortgage Sinking Fund Bonds were secured by a lien against substantially all the
natural gas distribution real, personal and mixed property. The Bonds were fully
repaid at December 31, 2004. The outstanding balance at December 31, 2003 was
$756,000. The Company is in compliance with all of its debt covenants.
J.
Short-term Borrowing
As of
December 31, 2004, the Board of Directors (“Board”) had authorized the Company
to borrow up to $35.0 million from various banks and trust companies under
short-term lines of credit. As of December 31, 2004, the Company had three
uncommitted and two committed, short-term bank lines of credit totaling $65.0
million, none of which required compensating balances. Under these lines of
credit, the Company had short-term debt outstanding of approximately $4.7
million and $3.5 million at December 31, 2004 and 2003, respectively. The annual
weighted average interest rates were 3.72 percent for 2004 and 2.40 percent for
2003. The Company also had a letter of credit outstanding in the amount of
$694,000 that reduced the amounts available under the lines of
credit.
K.
Lease Obligations
The
Company has entered into several operating lease arrangements for office space
at various locations, equipment and pipeline facilities. Rent expense related to
these leases was $928,000, $1.1 million and $1.2 million for 2004, 2003 and
2002, respectively. Future minimum payments under the Company’s current lease
agreements are
$762,000,
$363,000, $267,000, $156,000 and $114,000 for the years of 2005 through 2009,
respectively; and $225,000 thereafter, totaling $1.9 million.
L.
Employee Benefit Plans
Retirement
Plans
Before
1999, Company employees generally participated in both a defined benefit Pension
Plan and a Retirement Savings Plan. Effective January 1, 1999, the Company
restructured its retirement program to compete more effectively with similar
businesses. As part of this restructuring, the Company closed the defined
benefit Pension Plan to new participants. Employees who participated in the
defined benefit Pension Plan at that time were given the option of remaining in
(and continuing to accrue benefits under) the Pension Plan or receiving an
enhanced matching contribution in the Retirement Savings Plan.
Because
the defined benefit Pension Plan was not open to new participants, the number of
active participants in that plan decreased and is approaching the minimum number
needed for the Pension Plan to maintain its tax-qualified status. To avoid
jeopardizing the tax-qualified status of the Pension Plan, the Company’s Board
of Directors amended the defined benefit Pension Plan on September 24, 2004. To
ensure that the Company continues to provide appropriate levels of benefits to
the Company’s employees, the Board amended the defined benefit Pension Plan and
the Retirement Savings Plan, effective January 1, 2005, so that Pension Plan
participants who are actively employed by the Company on that date (1) receive
two additional years of benefit service credit to be used in calculating their
Pension Plan benefit (subject to the Pension Plan’s limit of 35 years of benefit
service credit), (2) have the option to receive their Pension Plan benefit in
the form of a lump sum at the time they retire, and (3) are eligible to receive
the enhanced matching contribution in the Retirement Savings Plan. In addition,
effective January 1, 2005, the Board amended the defined benefit Pension Plan so
that participants will not accrue any additional benefits under that plan. These
changes were communicated to the Company’s employees during the first week of
November 2004. As a result of the amendments to the Pension Plan, a gain of
approximately $172,000 (after tax) was recorded during 2004.
Defined
Benefit Pension Plan
As
described above, effective January 1, 2005, the defined benefit Pension Plan was
frozen with respect to additional years of service or additional compensation.
Benefits under the plan were based on each participant’s years of service and
highest average compensation, prior to the freeze. The Company’s funding policy
provides that payments to the trustee shall be equal to the minimum funding
requirements of the Employee Retirement Income Security Act of 1974. The Company
does not expect to be required to make any funding payments in 2005. The
measurement dates for the Pension Plan were December 31, 2004 and 2003,
respectively.
The
following schedule summarizes the assets of the Pension Plan, by investment
type, at December 31, 2004 and 2003:
At
December 31, |
|
|
2004 |
|
|
2003 |
|
Asset
Category |
|
|
|
|
|
|
|
Equity
securities |
|
|
72.64 |
% |
|
73.69 |
% |
Debt
securities |
|
|
12.91 |
% |
|
14.95 |
% |
U.S.
Treasury Bills |
|
|
11.45 |
% |
|
8.29 |
% |
Money
market and other |
|
|
3.00 |
% |
|
3.07 |
% |
Total |
|
|
100.00 |
% |
|
100.00 |
% |
The
investment policy of the Plan calls for an allocation of assets between equity
and debt instruments with equity being 60 percent and debt at 40 percent, but
allowing for a variance of 20 percent in either direction. Additionally, as
changes
are made to holdings, cash, money market funds or United States Treasury Bills
may be held temporarily by the fund. Investments in the following are
prohibited: options, guaranteed investment contracts, real estate, venture
capital, private placements, futures, commodities, limited partnerships and
Chesapeake stock. Additionally, short selling and margin transactions are
prohibited. During 2004, Chesapeake modified its investment policy to allow the
Employee Benefits Committee to reallocate investments to better match the
expected life of the plan.
The
following schedule sets forth the funded status of the Pension Plan at December
31, 2004 and 2003:
At
December 31, |
|
|
2004 |
|
|
2003 |
|
Change
in benefit obligation: |
|
|
|
|
|
|
|
Benefit
obligation — beginning of year |
|
$ |
11,948,755 |
|
$ |
10,781,990 |
|
Service
cost |
|
|
338,352
|
|
|
325,366
|
|
Interest
cost |
|
|
690,620
|
|
|
684,239
|
|
Change
in discount rate |
|
|
573,639
|
|
|
772,254
|
|
Actuarial
loss (gain) |
|
|
220,842
|
|
|
(212,528 |
) |
Amendments |
|
|
883,753
|
|
|
-
|
|
Effect
of curtailment/settlement |
|
|
(2,171,289 |
) |
|
-
|
|
Benefits
paid |
|
|
(431,609 |
) |
|
(402,566 |
) |
Benefit
obligation — end of year |
|
|
12,053,063
|
|
|
11,948,755
|
|
|
|
|
|
|
|
|
|
Change
in plan assets: |
|
|
|
|
|
|
|
Fair
value of plan assets — beginning of year |
|
|
11,301,548
|
|
|
9,438,725
|
|
Actual
return on plan assets |
|
|
1,227,309
|
|
|
2,265,389
|
|
Benefits
paid |
|
|
(431,609 |
) |
|
(402,566 |
) |
Fair
value of plan assets — end of year |
|
|
12,097,248
|
|
|
11,301,548
|
|
|
|
|
|
|
|
|
|
Funded
status |
|
|
44,185
|
|
|
(647,207 |
) |
Unrecognized
transition obligation |
|
|
-
|
|
|
(35,851 |
) |
Unrecognized
prior service cost |
|
|
(38,958 |
) |
|
(43,657 |
) |
Unrecognized
net gain |
|
|
(850,224 |
) |
|
(261,665 |
) |
Accrued
pension cost |
|
|
($844,997 |
) |
|
($988,380 |
) |
|
|
|
|
|
|
|
|
Assumptions: |
|
|
|
|
|
|
|
Discount
rate |
|
|
5.50 |
% |
|
6.00 |
% |
Rate
of compensation increase |
|
|
4.00 |
% |
|
4.00 |
% |
Expected
return on plan assets |
|
|
7.88 |
% |
|
8.50 |
% |
The
assumptions used for the discount rate of the plan was reviewed by the Company
and lowered from 6 percent to 5.5 percent, reflecting a reduction in the
interest rates of high quality bonds and a reduction in the expected life of the
plan, due to the lump sum payment option. Additionally, the expected return on
plan assets for the qualified plan was lowered from 8.5 percent to 6 percent,
due to the adoption of a change in the investment policy, made on September 30,
2004, that allows for a higher level of investment in bonds and a lower level of
equity investments. The average return on plan assets for the year was 7.88
percent. There was no change in the assumed pay rate increases. The accumulated
benefit obligation was $12.1 million and $9.8 million at December 31, 2004 and
2003, respectively.
Net
periodic pension costs for the defined benefit Pension Plan for 2004, 2003 and
2002 include the components as shown below:
For
the Years Ended December 31, |
|
|
2004 |
|
|
2003 |
|
|
2002 |
|
Components
of net periodic pension cost: |
|
|
|
|
|
|
|
|
|
|
Service
cost |
|
$ |
338,352 |
|
$ |
325,366 |
|
$ |
319,230 |
|
Interest
cost |
|
|
690,620
|
|
|
684,239
|
|
|
672,392
|
|
Expected
return on assets |
|
|
(869,336 |
) |
|
(784,476 |
) |
|
(980,915 |
) |
Amortization
of: |
|
|
|
|
|
|
|
|
|
|
Transition
assets |
|
|
(11,328 |
) |
|
(15,104 |
) |
|
(15,104 |
) |
Prior
service cost |
|
|
(4,699 |
) |
|
(4,699 |
) |
|
(4,699 |
) |
Actuarial
gain |
|
|
-
|
|
|
-
|
|
|
(115,570 |
) |
Net
periodic pension cost (benefit) |
|
$ |
143,609 |
|
$ |
205,326 |
|
|
($124,666 |
) |
Executive
Excess Defined Benefit Pension Plan
The
Company also sponsors an unfunded executive excess defined benefit pension plan.
As noted above, this plan was frozen with respect to additional years of service
and additional compensation as of December 31, 2004. Benefits under the plan
were based on each participant’s years of service and highest average
compensation, prior to the freeze. The accumulated benefit obligation was $2.2
million and $1.3 million at December 31, 2004 and 2003, respectively. Accrued
pension costs at December 31, 2004 include $875,000 related to a minimum pension
liability. The minimum pension liability is a component of other comprehensive
income.
Net
periodic pension costs for the executive excess benefit pension plan for 2004,
2003 and 2002 include the components as shown below:
For
the Years Ended December 31, |
|
|
2004 |
|
|
2003 |
|
|
2002 |
|
Components
of net periodic pension cost: |
|
|
|
|
|
|
|
|
|
|
Service
cost |
|
$ |
105,913 |
|
$ |
107,877 |
|
$ |
90,419 |
|
Interest
cost |
|
|
87,568
|
|
|
80,039
|
|
|
70,510
|
|
Amortization
of: |
|
|
|
|
|
|
|
|
|
|
Prior
service cost |
|
|
2,090
|
|
|
2,787
|
|
|
2,787
|
|
Actuarial
loss |
|
|
21,699
|
|
|
18,677
|
|
|
14,039
|
|
Net
periodic pension cost |
|
$ |
217,270 |
|
$ |
209,380 |
|
$ |
177,755 |
|
The
following schedule sets forth the status of the executive excess benefit
plan:
At
December 31, |
|
2004 |
|
2003 |
|
Change
in benefit obligation: |
|
|
|
|
|
|
|
Benefit
obligation — beginning of year |
|
$ |
1,406,190 |
|
$ |
1,189,155 |
|
Service
cost |
|
|
105,913
|
|
|
107,877
|
|
Interest
cost |
|
|
87,568
|
|
|
80,039
|
|
Actuarial
loss |
|
|
713,225
|
|
|
52,127
|
|
Amendments |
|
|
60,000
|
|
|
-
|
|
Effect
of curtailment/settlement |
|
|
(184,844 |
) |
|
-
|
|
Benefits
paid |
|
|
(25,100 |
) |
|
(23,008 |
) |
Benefit
obligation — end of year |
|
|
2,162,952
|
|
|
1,406,190
|
|
|
|
|
|
|
|
|
|
Change
in plan assets: |
|
|
|
|
|
|
|
Fair
value of plan assets — beginning of year |
|
|
-
|
|
|
-
|
|
Employer
contributions |
|
|
25,100
|
|
|
23,008
|
|
Benefits
paid |
|
|
(25,100 |
) |
|
(23,008 |
) |
Fair
value of plan assets — end of year |
|
|
-
|
|
|
-
|
|
|
|
|
|
|
|
|
|
Funded
status |
|
|
(2,162,952 |
) |
|
(1,406,190 |
) |
Unrecognized
prior service cost |
|
|
-
|
|
|
11,152
|
|
Unrecognized
net loss |
|
|
874,972
|
|
|
368,290
|
|
Accrued
pension cost |
|
|
($1,287,980 |
) |
|
($1,026,748 |
) |
|
|
|
|
|
|
|
|
Assumptions: |
|
|
|
|
|
|
|
Discount
rate |
|
|
5.50 |
% |
|
6.00 |
% |
Rate
of compensation increase |
|
|
4.00 |
% |
|
4.00 |
% |
The
assumptions used for the discount rate of the plan was reviewed by the Company
and lowered from 6 percent to 5.5 percent, reflecting a reduction in the
interest rates of high quality bonds and a reduction in the expected life of the
plan. There was no change in the assumed pay rate increases. The measurement
dates for the executive excess benefit plan were December 31, 2004 and 2003,
respectively.
Other
Post-Retirement Benefits
The
Company sponsors a defined benefit post-retirement health care and life
insurance plan that covers substantially all employees.
Net
periodic post-retirement costs for 2004, 2003 and 2002 include the following
components:
For
the Years Ended December 31, |
|
2004 |
|
2003 |
|
2002 |
|
Components
of net periodic post-retirement cost: |
|
|
|
|
|
|
|
|
|
|
Service
cost |
|
$ |
5,354 |
|
$ |
5,138 |
|
$ |
2,739 |
|
Interest
cost |
|
|
86,883
|
|
|
85,319
|
|
|
68,437
|
|
Amortization
of: |
|
|
|
|
|
|
|
|
|
|
Transition
obligation |
|
|
27,859
|
|
|
27,859
|
|
|
27,859
|
|
Actuarial
loss |
|
|
78,900
|
|
|
66,271
|
|
|
12,109
|
|
Total
post-retirement cost |
|
$ |
198,996 |
|
$ |
184,587 |
|
$ |
111,144 |
|
The
following schedule sets forth the status of the post-retirement health care and
life insurance plan:
At
December 31, |
|
|
2004 |
|
|
2003 |
|
Change
in benefit obligation: |
|
|
|
|
|
|
|
Benefit
obligation — beginning of year |
|
$ |
1,471,664 |
|
$ |
1,053,950 |
|
Retirees |
|
|
91,747
|
|
|
(24,779 |
) |
Fully-eligible
active employees |
|
|
22,071
|
|
|
356,027
|
|
Other
active |
|
|
13,798
|
|
|
86,466
|
|
Benefit
obligation — end of year |
|
$ |
1,599,280 |
|
$ |
1,471,664 |
|
|
|
|
|
|
|
|
|
Funded
status |
|
|
($1,599,280 |
) |
|
($1,471,664 |
) |
Unrecognized
transition obligation |
|
|
50,141
|
|
|
78,000
|
|
Unrecognized
net loss |
|
|
899,228
|
|
|
655,585
|
|
Accrued
post-retirement cost |
|
|
($649,911 |
) |
|
($738,079 |
) |
|
|
|
|
|
|
|
|
Assumptions: |
|
|
|
|
|
|
|
Discount
rate |
|
|
5.50 |
% |
|
6.00 |
% |
The
health care inflation rate for 2004 is assumed to be 9 percent for medical and
12 percent for prescription drugs. These rates are projected to gradually
decrease to ultimate rates of 5 and 6 percent, respectively, by the year 2009. A
one percentage point increase in the health care inflation rate from the assumed
rate would increase the accumulated post-retirement benefit obligation by
approximately $198,000 as of January 1, 2005, and would increase the aggregate
of the service cost and interest cost components of the net periodic
post-retirement benefit cost for 2005 by approximately $13,000. A one percentage
point decrease in the health care inflation rate from the assumed rate would
decrease the accumulated post-retirement benefit obligation by approximately
$164,000 as of January 1, 2005, and would decrease the aggregate of the service
cost and interest cost components of the net periodic post-retirement benefit
cost for 2005 by approximately $11,000. The measurement dates were December 31,
2004 and 2003, respectively.
The
Medicare Prescription Drug, Improvement and Modernization Act of 2003 was signed
into law on December 8, 2003. The Company’s post-retirement health benefit
requires that Medicare be the primary insurance for all participants that are
eligible for Medicare. Therefore, the prescription drug benefit offered by the
Company’s plan is not “actuarially equivalent” to the prescription drug benefits
provided under Medicare and the Company does not expect to receive subsidy
payments from the government. The actuarial evaluation of the post-retirement
health benefit did factor in a reduction of 20 percent for prescription costs
for retirees on Medicare beginning in 2006, due to the coverage expected to be
provided by Medicare.
Estimated
Future Benefit Payments
The
schedule below shows the estimated future benefit payments for each of the years
2005 through 2009 and the aggregate of the next five years for each of the plans
previously described.
|
|
|
Defined
Benefit Pension Plan (1) |
|
|
Executive
Excess Pension Plan(2) |
|
|
Other
Post-Retirement Benefits(2) |
|
2005 |
|
$ |
620,073 |
|
$ |
89,204 |
|
$ |
128,451 |
|
2006 |
|
|
418,294
|
|
|
88,490
|
|
|
123,435
|
|
2007 |
|
|
759,686
|
|
|
87,782
|
|
|
135,317
|
|
2008 |
|
|
814,588
|
|
|
87,080
|
|
|
151,091
|
|
2009 |
|
|
377,974
|
|
|
86,384
|
|
|
154,772
|
|
Years
2010 through 2014 |
|
|
3,968,275
|
|
|
597,496
|
|
|
905,606
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
The pension plan is funded; therefore, benefit payments are expected tobe
paid out of the plan assets. |
|
(2)
Benefit payments are expected to be paid out of the general funds of the
Company. |
|
Retirement
Savings Plan
The
Company sponsors a 401(k) Retirement Savings Plan, which provides participants a
mechanism for making contributions for retirement savings. Each participant may
make pre-tax contributions of up to 15 percent of eligible base compensation,
subject to Internal Revenue Service limitations. For participants still covered
by the defined benefit pension plan, the Company makes a contribution matching
60 percent or 100 percent of each participant’s pre-tax contributions based on
the participant’s years of service, not to exceed six percent of the
participant’s eligible compensation for the plan year. These participants will
be eligible for the enhanced matching described below effective January 1, 2005.
Effective
January 1, 1999, the Company began offering an enhanced 401(k) plan to all new
employees, as well as existing employees that elected to no longer participate
in the defined benefit plan. The Company makes matching contributions on a basis
of up to six percent of each employee's pre-tax compensation for the year. The
match is between 100 percent and 200 percent, based on a combination of the
employee’s age and years of service. The first 100 percent of the funds are
matched with Chesapeake common stock. The remaining match is invested in the
Company’s 401(k) plan according to each employee’s election options.
On
December 1, 2001, the Company converted the 401(k) fund holding Chesapeake stock
to an Employee Stock Ownership Plan (“ESOP”).
Effective,
January 1, 1999, the Company began offering a non-qualified supplemental
employee retirement savings plan open to Company executives over a specific
income threshold. Participants receive a cash only matching contribution
percentage equivalent to their 401(k) match level. All contributions and matched
funds earn interest income monthly. This plan is not funded
externally.
The
Company’s contributions to the 401(k) plans totaled $1,497,000, $1,444,000 and
$1,488,000 for the years ended December 31, 2004, 2003 and 2002, respectively.
As of December 31, 2004, there are 141,992 shares reserved to fund future
contributions to the Retirement Savings Plan.
M.
Executive Incentive Plans
A
Performance Incentive Plan (“the Plan”) adopted in 1992 and amended in April
1998 allows for the granting of performance shares, stock options and stock
appreciation rights to certain officers of the Company. The Company
now uses
performance shares exclusively; however, stock options granted in prior years
remained outstanding at December 31, 2004. Additionally, stock appreciation
rights (“SARs”) were granted previously. All SARs were exercised prior to
December 31, 2003.
The Plan
enables participants the right to earn performance shares upon the Company’s
achievement of certain performance goals, as set forth in the specific
agreements, and the individual’s achievement of goals set annually for each
executive. The Company recorded compensation expense of $490,000, $726,000 and
$165,000 associated with these performance shares in 2004, 2003 and 2002,
respectively.
In 1997,
the Company executed Stock Option Agreements for a three-year performance period
ending December 31, 2000, with certain executive officers. One-half of these
options became exercisable over time and the other half became exercisable if
certain performance targets were achieved. SFAS No. 123 requires the disclosure
of pro forma net income and earnings per share as if fair value based accounting
had been used to account for the stock-based compensation costs. The assumptions
used in calculating the pro forma information were: dividend yield, 4.73
percent; expected volatility, 15.53 percent; risk-free interest rate, 5.89
percent; and an expected life of four years. No options have been granted since
1997; therefore, there is no pro forma impact for 2004, 2003 or 2002. The
weighted average exercise price of outstanding options was $20.50 for all years
presented. The options outstanding at December 31, 2004, expire on December 31,
2005.
Changes
in outstanding options are shown on the chart below:
|
|
|
2004 |
|
|
2003 |
|
|
2002 |
|
|
|
|
Number
of shares |
|
|
Option
Price |
|
|
Number
of shares |
|
|
Option
Price |
|
|
Number
of shares |
|
|
Option
Price |
|
Balance
— beginning of year |
|
|
29,490
|
|
$ |
20.50 |
|
|
41,948
|
|
$ |
20.50 |
|
|
41,948
|
|
$ |
20.50 |
|
Options
exercised |
|
|
(11,834 |
) |
$ |
20.50 |
|
|
(12,458 |
) |
$ |
20.50 |
|
|
|
|
|
|
|
Options
forfeited |
|
|
(119 |
) |
$ |
20.50 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
— end of year |
|
|
17,537
|
|
$ |
20.50 |
|
|
29,490
|
|
$ |
20.50 |
|
|
41,948
|
|
$ |
20.50 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable |
|
|
17,537
|
|
$ |
20.50 |
|
|
29,490
|
|
$ |
20.50 |
|
|
41,948
|
|
$ |
20.50 |
|
In 2000,
the Company replaced the third year of this Stock Option Agreement with Stock
Appreciation Rights. The SARs were awarded based on performance with a minimum
number of SARs established for each participant. During 2001 and 2000, the
Company granted 10,650 and 13,150 SARs, respectively, in conjunction with the
agreement. During 2003, all SARs were exercised.
As of
December 31, 2004, there were 306,899 shares reserved for issuance under the
terms of the Company’s Performance Incentive Plan.
N.
Environmental Commitments and Contingencies
In 2004,
Chesapeake received a Certificate of Completion for remedial work at 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 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 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
December 31, 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 December 31, 2004, the Company has incurred approximately
$9.7 million in costs relating to environmental testing and remedial action
studies at the site. Approximately $9.7 million has been recovered through
December 2004 from other parties or through rates.
Salisbury
Town Gas Light Site
In
cooperation with the MDE, the Company has completed remediation of the Salisbury
Town Gas Light site, located in Salisbury, Maryland, where it was determined
that a former manufactured gas plant had caused 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. The Company has been in discussions with the MDE regarding such
request and is waiting on a determination from the MDE.
The
Company has adjusted the liability with respect to the Salisbury Town Gas Light
site to $5,000 at December 31, 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
December 31, 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.
The 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 the
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 the 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 $446,000 as of December 31, 2004 for the
Winter Haven site. Through December 31, 2004, the Company has incurred
approximately $1.3 million of environmental costs associated with the Winter
Haven site. At December 31, 2004 the Company had collected through rates
$182,000 in excess of costs incurred. A regulatory asset of approximately
$264,000, 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 gas manufacturing plant site located in
Cambridge, Maryland. The outcome of this matter cannot be determined at this
time.
O.
Other Commitments and Contingencies
Possible
Application of Florida Gross Receipts Tax
The
Company has an unregulated natural gas supply and management services operation
that sells natural gas to commercial and industrial customers located in
Florida. Under Florida law, the Company is required to collect and remit to the
Florida Department of Revenue a gross receipts tax on its sales of natural gas
when title to the gas passes to customers in Florida. Substantially all of the
natural gas purchased by the customers of the Company’s unregulated operation is
sold to the customers at a delivery point located outside the State of Florida.
Because title passes outside Florida, the Company has not been collecting gross
receipts taxes from its customers on such sales. The Company understands that
the Florida Department of Revenue has questioned the failure of other companies
in the natural gas marketing industry to collect the gross receipts tax under
similar circumstances. Due to the current uncertainty as to application of the
tax, legislation currently is pending in Florida that would specifically provide
amnesty from collection of gross receipts taxes for companies whose gross
receipts are derived from sales where a written sales agreement provides for
transfer of title outside of Florida. However, the Company cannot predict
whether the proposed legislation will pass.
The
Company has not been contacted by the Florida Department of Revenue regarding
this matter. The Company believes that it has acted in good faith in not
collecting Florida gross receipts tax when the title passes outside the State of
Florida and should not be held responsible for the collection of the tax.
However, if it were to be determined that the Company was required to collect
the gross receipts tax on prior sales, the Company could be held responsible to
the State of Florida for the taxes not collected. In these circumstances, the
Company would incur additional expenses to the extent the Company could not
collect the tax from the purchasers of the gas. The amount of such expense would
depend on the Company’s revenues from those sales to which the tax is deemed to
apply and on the willingness or ability to pay of the Company’s customers
against which recovery could be sought. At this time, the Company does not
believe that it is probable that it will be held responsible for collection of
the gross receipts tax on past sales where title passed outside the State of
Florida.
Natural
Gas and Propane Supply
The
Company’s natural gas and propane distribution operations have entered into
contractual commitments for gas from various suppliers. The contracts have
various expiration dates. In November 2004, the Company renewed its
contract
with an energy marketing and risk management company to manage a portion of the
Company’s natural gas transportation and storage capacity. The contract expires
March 31, 2007.
Corporate
Guarantees
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 December 31, 2004 totaled $3.8
million, with the guarantees expiring on various dates in 2005. All payables of
the subsidiary are recorded in the Consolidated Financial
Statements.
The
Company has issued a letter of credit to its primary insurance company for
$694,000, which expires June 1, 2005. The letter of credit was provided as
security for claims amounts below the deductibles on the Company’s
policies.
Other
The
Company is involved in certain legal actions and claims arising in the normal
course of business. The Company is also involved in certain legal and
administrative proceedings before various governmental agencies concerning
rates. In the opinion of management, the ultimate disposition of these
proceedings will not have a material effect on the consolidated financial
position, results of operations or cash flows of the Company.
P.
Quarterly Financial Data (Unaudited)
In the
opinion of the Company, the quarterly financial information shown below includes
all adjustments necessary for a fair presentation of the operations for such
periods. Due to the seasonal nature of the Company’s business, there are
substantial variations in operations reported on a quarterly basis.
For
the Quarters Ended |
|
|
March
31 |
|
|
June
30 |
|
|
September
30 |
|
|
December
31 |
|
2004 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
Revenue |
|
$ |
63,762,360 |
|
$ |
34,292,972 |
|
$ |
26,614,699 |
|
$ |
53,285,410 |
|
Operating
Income |
|
|
10,699,307
|
|
|
2,162,794
|
|
|
282,738
|
|
|
6,824,907
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Income (Loss) |
|
|
|
|
|
|
|
|
|
|
|
|
|
From
continuing operations |
|
$ |
5,773,534 |
|
$ |
611,518 |
|
|
($584,171 |
) |
$ |
3,748,786 |
|
From
discontinued operations |
|
|
(34,335 |
) |
|
19,148
|
|
|
(72,041 |
) |
|
(33,672 |
) |
Net
Income (Loss) |
|
$ |
5,739,199 |
|
$ |
630,666 |
|
|
($656,212 |
) |
$ |
3,715,114 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings
per share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
|
|
|
|
|
|
|
|
|
|
|
|
From
continuing operations |
|
$ |
1.01 |
|
$ |
0.11 |
|
|
($0.10 |
) |
$ |
0.65 |
|
From
discontinued operations |
|
|
-
|
|
|
-
|
|
|
(0.01 |
) |
|
(0.01 |
) |
Net
Income (Loss) |
|
$ |
1.01 |
|
$ |
0.11 |
|
|
($0.11 |
) |
$ |
0.64 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted |
|
|
|
|
|
|
|
|
|
|
|
|
|
From
continuing operations |
|
$ |
0.99 |
|
$ |
0.11 |
|
|
($0.10 |
) |
$ |
0.64 |
|
From
discontinued operations |
|
|
(0.01 |
) |
|
-
|
|
|
(0.01 |
) |
|
(0.01 |
) |
Net
Income (Loss) |
|
$ |
0.98 |
|
$ |
0.11 |
|
|
($0.11 |
) |
$ |
0.63 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2003 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
Revenue |
|
$ |
63,294,950 |
|
$ |
31,003,302 |
|
$ |
23,671,955 |
|
$ |
45,597,385 |
|
Operating
Income |
|
|
12,311,179
|
|
|
2,861,517
|
|
|
152,635
|
|
|
6,254,069
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Income (Loss) |
|
|
|
|
|
|
|
|
|
|
|
|
|
From
continuing operations |
|
$ |
6,637,104 |
|
$ |
934,536 |
|
|
($709,793 |
) |
$ |
3,217,636 |
|
From
discontinued operations |
|
|
(162,329 |
) |
|
(387 |
) |
|
(150,131 |
) |
|
(474,760 |
) |
Net
Income (Loss) |
|
$ |
6,474,775 |
|
$ |
934,149 |
|
|
($859,924 |
) |
$ |
2,742,876 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings
per share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
|
|
|
|
|
|
|
|
|
|
|
|
From
continuing operations |
|
$ |
1.19 |
|
$ |
0.17 |
|
|
($0.13 |
) |
$ |
0.57 |
|
From
discontinued operations |
|
|
(0.03 |
) |
|
-
|
|
|
(0.02 |
) |
|
(0.08 |
) |
Net
Income (Loss) |
|
$ |
1.16 |
|
$ |
0.17 |
|
|
($0.15 |
) |
$ |
0.49 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted |
|
|
|
|
|
|
|
|
|
|
|
|
|
From
continuing operations |
|
$ |
1.16 |
|
$ |
0.17 |
|
|
($0.13 |
) |
$ |
0.56 |
|
From
discontinued operations |
|
|
(0.03 |
) |
|
-
|
|
|
(0.02 |
) |
|
(0.08 |
) |
Net
Income (Loss) |
|
$ |
1.13 |
|
$ |
0.17 |
|
|
($0.15 |
) |
$ |
0.48 |
|
Item
9. Changes In and Disagreements With Accountants on Accounting and Financial
Disclosure
None
Item
9A. 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 December 31, 2004. Based upon their evaluation, the Chief
Executive Officer and Chief Financial Officer concluded that the Company’s
disclosure controls and procedures were effective as of December 31,
2004.
Changes
in Internal Controls
During
the fiscal quarter of the Company ended December 31, 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
controls over financial reporting.
Management’s
Report on Internal Controls Over Financial Reporting
See
Management’s Report on Internal Controls Over Financial Reporting in Item 8,
“Financial Statements and Supplemental Data.”
Item
9B. Other Information
The
Company filed a Current Report on Form 8-K, dated January 19, 2005, discussing
the Compensation Committee’s (the “Committee”) actions on November 9, 2004,
including their approval of the compensation arrangements relating to the
executive officers for 2005. The filing of the Current Report on Form 8-K on
January 19, 2005 with the Securities and Exchange Commission was not made within
the prescribed reporting timeframe and was, therefore, late.
On
November 9, 2004, the Committee approved awards under the Company’s Performance
Incentive Plan to John R. Schimkaitis, President and Chief Executive Officer;
Paul M. Barbas, Executive Vice President; and Michael P. McMasters, Senior Vice
President and Chief Financial Officer. According to the terms of the awards,
each executive officer is entitled to earn up to a specified number of shares of
the Company’s common stock depending on the extent to which pre-established
performance goals are achieved during the year ended December 31, 2005. The
Compensation Committee also reaffirmed the 2005 awards under the Performance
Incentive Plan made to (i) Stephen C. Thompson, Senior Vice President, and (ii)
S. Robert Zola, President of Sharp Energy, Inc., a Company subsidiary, for the
three-year period ending December 31, 2005. Under the Company’s Cash Bonus
Incentive Plan, the Committee approved target cash bonus awards, measured as a
percentage of base salary, and the performance targets, for each of Messrs.
Schimkaitis, Barbas, McMasters, Thompson and Zola, also for 2005.
Part
III
Item
10. Directors and Executive Officers of the Registrant
The
information required by this Item is incorporated herein by reference to the
portions of the Proxy Statement, captioned “Information Regarding the Board of
Directors and Nominees,” “Corporate Governance Practices and Stockholder
Communications - Nomination of Directors,” “Committees of the Board - Audit
Committee” and “Section 16(a) Beneficial Ownership Reporting Compliance” to be
filed not later than April 29, 2005 in connection with the Company’s Annual
Meeting to be held on May 5, 2005.
The
information required by this Item with respect to executive officers is,
pursuant to instruction 3 of paragraph (b) of Item 401 of Regulation S-K, set
forth in Part I of this Form 10-K under “Executive Officers of the
Registrant.”
The
Company has adopted a Code of Ethics for Financial Officers, which applies to
its principal executive officer, principal financial officer, principal
accounting officer or controller, or persons performing similar functions. The
information set forth under Item 1 hereof concerning the Code of Ethics for
Financial Officers is incorporated herein by reference.
Item
11. Executive Compensation
The
information required by this Item is incorporated herein by reference to the
portion of the Proxy Statement captioned “Director Compensation” and “Management
Compensation” in the Proxy Statement to be filed not later than April 29, 2005,
in connection with the Company’s Annual Meeting to be held on May 5,
2005.
Item
12. Security Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters
The
information required by this Item is incorporated herein by reference to the
portion of the Proxy Statement captioned “Beneficial Ownership of Chesapeake’s
Securities” to be filed not later than April 29, 2005 in connection with the
Company’s Annual Meeting to be held on May 5, 2005.
The
following table sets forth information as of December 31, 2004, with respect to
compensation plans of Chesapeake and its subsidiaries under which shares of
Chesapeake common stock are authorized for issuance:
|
|
(a) |
|
|
|
(b) |
|
(c) |
|
|
|
|
|
Number
of securities to be issued upon exercise of outstanding options, warrants
and rights |
|
|
|
Weighted-average
exercise price of outstanding options, warrants and rights |
|
Number
of securities remaining available for future issuance under equity
compensation plans (excluding securities reflected in column
(a)) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity
compensation plans approved by security holders |
|
|
17,537
|
|
(1) |
|
$ |
20.500 |
|
|
306,899
|
|
(2) |
Equity
compensation plans not approved by security holders |
|
|
30,000
|
|
(3) |
|
$ |
18.125 |
|
|
0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
47,537
|
|
|
|
$ |
19.001 |
|
|
306,899
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
Consists of options to purchase 17,537 shares under the 1992 Performance
Incentive Plan, as amended. |
|
(2)
Includes 306,899 shares under the 1992 Performance Incentive
Plan. |
|
(3)
In 2000 and 2001, the Company entered into agreements with an investment
banker to assist in identifying acquisition
candidates. Under the agreements, the Company issued warrants to the
investment banker to purchase
15,000 shares of Chesapeake stock in 2001 at a price of $18.25 per share
and 15,000 shares in 2000
at a price of $18.00. The warrants are exercisable during a seven-year
period after the date granted. |
|
Item
13. Certain Relationships and Related Transactions
None
Item
14. Principal Accounting Fees and Services
The
information required by this Item is incorporated herein by reference to the
portion of the Proxy Statement captioned “Fees and Services of
PricewaterhouseCoopers LLP” to be filed not later than April 29, 2005, in
connection with the Company’s Annual Meeting to be held on May 5, 2005.
Part
IV
Item
15. Exhibits, Financial Statement Schedules
(a) The
following documents are filed as part of this report:
1. Financial
Statements:
o |
Auditors’
Report dated March 16, 2005 of PricewaterhouseCoopers LLP, Independent
Registered Public Accounting Firm |
o |
Consolidated
Statements of Income for each of the three years ended December 31, 2004,
2003 and 2002 |
o |
Consolidated
Balance Sheets at December 31, 2004 and December 31,
2003 |
o |
Consolidated
Statements of Cash Flows for each of the three years ended December 31,
2004, 2003 and 2002 |
o |
Consolidated
Statements of Common Stockholders’ Equity for each of the three years
ended December 31, 2004, 2003 and 2002 |
o |
Consolidated
Statements of Income Taxes for each of the three years ended December 31,
2004, 2003 and 2002 |
o |
Notes
to Consolidated Financial Statements |
2. Financial
Statement Schedules — Schedule II - Valuation and Qualifying
Accounts
All other
schedules are omitted because they are not required, are inapplicable or the
information is otherwise shown in the financial statements or notes
thereto.
(b) Reports
on Form 8-K:
Earnings
press release dated November 5, 2004 (Items 2.02 and 9.01)
(c) Exhibits:
Exhibit
3(a) Amended
Certificate of Incorporation of Chesapeake Utilities Corporation is incorporated
herein by reference to Exhibit 3.1 of the Company’s Quarterly Report on Form
10-Q for the period ended June 30, 1998, File No. 001-11590.
Exhibit
3(b) Amended
Bylaws of Chesapeake Utilities Corporation, effective February 24, 2005, is
filed herewith.
Exhibit
4(a) Form of
Indenture between the Company and Boatmen’s Trust Company, Trustee, with respect
to the 8 1/4% Convertible Debentures is incorporated herein by reference to
Exhibit 4.2 of the Company’s Registration Statement on Form S-2, Reg. No.
33-26582, filed on January 13, 1989.
Exhibit
4(b) Note
Agreement dated February 9, 1993, by and between the Company and Massachusetts
Mutual Life Insurance Company and MML Pension Insurance Company, with respect to
$10 million of 7.97% Unsecured Senior Notes due February 1, 2008, is
incorporated herein by reference to Exhibit 4 to the Company’s Annual Report on
Form 10-K for the year ended December 31, 1992, File No. 0-593.
Exhibit
4(c) Note
Purchase Agreement entered into by the Company on October 2, 1995, pursuant to
which the Company privately placed $10 million of its 6.91% Senior Notes due in
2010, is not being filed herewith, in accordance with Item 601(b)(4)(iii) of
Regulation S-K. The Company hereby agrees to furnish a copy of that agreement to
the SEC upon request.
Exhibit
4(d) Note
Purchase Agreement entered into by the Company on December 15, 1997, pursuant to
which the Company privately placed $10 million of its 6.85% Senior Notes due
2012, is not being filed herewith, in accordance with Item 601(b)(4)(iii) of
Regulation S-K. The Company hereby agrees to furnish a copy of that agreement to
the SEC upon request.
Exhibit
4(e) Note
Purchase Agreement entered into by the Company on December 27, 2000, pursuant to
which the Company privately placed $20 million of its 7.83% Senior Notes due
2015, is not being filed herewith, in accordance with Item 601(b)(4)(iii) of
Regulation S-K. The Company hereby agrees to furnish a copy of that agreement to
the SEC upon request.
Exhibit
4(f) Note
Agreement entered into by the Company on October 31, 2002, pursuant to which the
Company privately placed $30 million of its 6.64% Senior Notes due 2017, is
incorporated herein by reference to Exhibit 2 of the Company’s Current Report on
Form 8-K, filed November 6, 2002, File No. 001-11590.
*Exhibit
10(a) Executive
Employment Agreement dated March 26, 2002, by and between Chesapeake Utilities
Corporation and John R. Schimkaitis is incorporated herein by reference to
Exhibit 10 of the Company’s Annual Report on Form 10-K for the year ended
December 31, 2003.
*Exhibit
10(b) Form of
Executive Employment Agreement dated March 26, 2003, by and between Chesapeake
Utilities Corporation and each of Michael P. McMasters, William C. Boyles and
Stephen C. Thompson, is incorporated herein by reference to Exhibit 10 of the
Company’s Annual Report on Form 10-K for the year ended December 31, 2003, File
No. 001-11590.
*Exhibit
10(c) Form of
Executive Employment Agreement dated August 1, 2002, by and between Sharp
Energy, Inc. and S. Robert Zola, is incorporated herein by reference to Exhibit
10 of the Company’s Annual Report on Form 10-K for the year ended December 31,
2003, File No. 001-11590.
*Exhibit
10(d) Executive
Employment Agreement dated January 1, 2003, by and between Chesapeake Utilities
Corporation and Ralph J. Adkins is incorporated herein by reference to Exhibit
10 of the Company’s Annual Report on Form 10-K for the year ended December 31,
2002, File No. 001-11590.
*Exhibit
10(e) Form of
Performance Share Agreement dated January 1, 2003, pursuant to Chesapeake
Utilities Corporation Performance Incentive Plan by and between Chesapeake
Utilities Corporation and each of John R. Schimkaitis, Michael P. McMasters,
Stephen C. Thompson and William C. Boyles is incorporated herein by reference to
Exhibit 10 of the Company’s Annual Report on Form 10-K for the year ended
December 31, 2002, File No. 001-11590.
*Exhibit
10(f) Form of
Performance Share Agreement dated January 1, 2003, pursuant to Chesapeake
Utilities Corporation Performance Incentive Plan by and between Chesapeake
Utilities Corporation and S. Robert Zola, is incorporated herein by reference to
Exhibit 10 of the Company’s Annual Report on Form 10-K for the year ended
December 31, 2003, File No. 001-11590.
*Exhibit
10(g) Form of
Performance Share Agreement dated December 4, 2003, pursuant to Chesapeake
Utilities Corporation Performance Incentive Plan by and between Chesapeake
Utilities Corporation and each of John R. Schimkaitis and Michael P. McMasters,
is incorporated herein by reference to Exhibit 10 of the Company’s Annual Report
on Form 10-K for the year ended December 31, 2003, File No.
001-11590.
*Exhibit
10(h) Form of
Performance Share Agreement dated November 9, 2004, pursuant to Chesapeake
Utilities Corporation Performance Incentive Plan by and between Chesapeake
Utilities Corporation and each of John R. Schimkaitis, Michael P. McMasters and
Paul Barbas, is filed herewith.
*Exhibit
10(i) Executive
Employment Agreement dated August 4, 2003, by and between Chesapeake Utilities
Corporation and Paul Barbas is filed herewith.
*Exhibit
10(j) Chesapeake
Utilities Corporation Cash Bonus Incentive Plan dated January 1, 2005, is filed
herewith.
*Exhibit
10(k) Chesapeake
Utilities Corporation Performance Incentive Plan dated January 1, 1992, is
incorporated herein by reference to the Company’s Proxy Statement dated April
20, 1992, in connection with the Company’s Annual Meeting held on May 19, 1992,
File No. 001-11590.
*Exhibit
10(l) Amendments
to Chesapeake Utilities Corporation Performance Incentive Plan are incorporated
herein by reference to the Company’s Proxy Statement dated April 1, 1998, in
connection with the Company’s Annual Meeting held on May 19, 1998, File No.
001-11590.
*Exhibit
10(m) Executive
Officer Compensation Arrangements, filed herewith.
*Exhibit
10(n) Directors
Stock Compensation Plan adopted by Chesapeake Utilities Corporation in 1995 is
incorporated herein by reference to the Company’s Proxy Statement dated April
17, 1995 in connection with the Company’s Annual Meeting held in May 1995, File
No. 001-11590.
*Exhibit
10(o) Non-Employee
Director Compensation Arrangements, filed herewith.
*Exhibit
10(p) United
Systems, Inc. Executive Appreciation Rights Plan dated December 31, 2000 is
incorporated herein by reference to Exhibit 10 of the Company's Annual Report on
Form 10-K for the year ended December 31, 2000, File No. 001-11590.
Exhibit
12 Computation
of Ratio of Earning to Fixed Charges, filed herewith.
Exhibit
21 Subsidiaries
of the Registrant, filed herewith.
Exhibit
23 Consent
of Independent Registered Public Accounting Firm, filed herewith.
Exhibit
31.1 Certificate
of Chief Executive Office of Chesapeake Utilities Corporation pursuant to
Exchange Act Rule 13a-14(a), dated March 16, 2005, filed herewith.
Exhibit
31.2 Certificate
of Chief Financial Officer of Chesapeake Utilities Corporation pursuant to
Exchange Act Rule 13a-14(a), dated March 16, 2005, filed herewith.
Exhibit
32.1 Certificate
of Chief Executive Office of Chesapeake Utilities Corporation pursuant to 18
U.S.C. Section 1350, dated March 16, 2005, filed herewith.
Exhibit
32.2 Certificate
of Chief Financial Officer of Chesapeake Utilities Corporation pursuant to 18
U.S.C. Section 1350, dated March 16, 2005, filed herewith.
*
Management contract or compensatory plan or agreement.
This
page intentionally left blank.
SIGNATURES
Pursuant
to the requirements of Section 13 or 15 (d) of the Securities Exchange Act of
1934, Chesapeake Utilities Corporation has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
Chesapeake
Utilities Corporation
By: /s/
John R. Schimkaitis
John R.
Schimkaitis
President
and Chief Executive Officer
Date: March 16,
2005
Pursuant
to the requirements of the Securities Exchange Act of 1934, this report has been
signed below by the following persons on behalf of the registrant and in the
capacities and on the dates indicated.
/s/
Ralph J. Adkins |
/s/
John R. Schimkaitis |
Ralph
J. Adkins, Chairman of the Board |
John
R. Schimkaitis, President, |
and
Director |
Chief
Executive Officer and Director |
Date:
March 16, 2005 |
Date:
March 16, 2005 |
|
|
/s/
Michael P. McMasters |
/s/
Richard Bernstein |
Michael
P. McMasters, Senior Vice President |
Richard
Bernstein, Director |
and
Chief Financial Officer |
Date:
March 16, 2005 |
(Principal
Financial and Accounting Officer) |
|
Date:
March 16, 2005 |
|
|
|
/s/
Thomas J. Bresnan |
/s/
Walter J. Coleman |
Thomas
J. Bresnan, Director |
Walter
J. Coleman, Director |
Date:
March 16, 2005 |
Date:
March 16, 2005 |
|
|
/s/
J. Peter Martin |
/s/
Joseph E. Moore, Esq. |
J.
Peter Martin, Director |
Joseph
E. Moore, Esq., Director |
Date:
March 16, 2005 |
Date:
March 16, 2005 |
|
|
/s/
Calvert A. Morgan, Jr. |
/s/
Rudolph M. Peins, Jr. |
Calvert
A. Morgan, Jr., Director |
Rudolph
M. Peins, Jr., Director |
Date:
March 16, 2005 |
Date:
March 16, 2005 |
|
|
/s/
Robert F. Rider |
|
Robert
F. Rider, Director |
|
Date:
March 16, 2005 |
|
Chesapeake
Utilities Corporation and Subsidiaries |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Schedule
II |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Valuation
and Qualifying Accounts |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For
the Year Ended December 31, |
|
|
Balance
at Beginning of Year |
|
|
Charged
to Income |
|
|
Other
Accounts
(1) |
|
|
Deductions
(2) |
|
|
Blanace
at End Year |
|
Reserve
Deducted From Related Assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reserve
for Uncollectible Accounts |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2004 |
|
$ |
682,002 |
|
$ |
505,595 |
|
$ |
103,020 |
|
$ |
(679,798 |
) |
$ |
610,819 |
|
2003 |
|
$ |
659,628 |
|
$ |
660,390 |
|
$ |
10,093 |
|
$ |
(648,109 |
) |
$ |
682,002 |
|
2002 |
|
$ |
621,516 |
|
$ |
677,461 |
|
$ |
210,735 |
|
$ |
(850,084 |
) |
$ |
659,628 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
Recoveries. |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2)
Uncollectible accounts charged off. |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Upon
written request,
Chesapeake
will provide, free of
charge,
a copy of any exhibit to
the
2004 Annual Report on
Form
10-K not included
in
this document.
Bylaws Effective February 24, 2005
Exhibit
3
CHESAPEAKE
UTILITIES CORPORATION
BYLAWS
(Including
revisions through December 10, 2004)
ARTICLE
I
OFFICES
1.1 Registered
Office. The
address of the Corporation's registered office in the State of Delaware is 1013
Centre Road in the City of Wilmington, in the County of New Castle, Delaware
19805. The name of the Corporation's registered agent at such address is
Corporation Service Company.
1.2 Other
Offices. The
Corporation may also have offices at such other places as the Board of Directors
may from time to time determine or the business of the Corporation may
require.
ARTICLE
II
STOCKHOLDERS'
MEETINGS
2.1 Location
of Meetings. Annual
and special meetings of the stockholders shall be held at such place within or
without the State of Delaware, as the Directors may, from time to time, fix.
Whenever the Directors shall fail to fix such place, the meeting shall be held
at the principal office of the Corporation in the State of
Delaware.
2.2 Annual
Meeting. The
annual meeting of stockholders shall be held each year at such time and place,
within or outside of the State of Delaware, as shall be designated by the Board
of Directors and stated in the notice of the meeting. At the annual meeting the
stockholders shall elect the Directors of the Corporation and may transact any
other business that is properly brought before the meeting.
2.3 Advance
Notice Requirement for Stockholder Proposals. At an
annual meeting of the stockholders, only such business shall be conducted as
shall be have been properly brought before the meeting. To be properly brought
before an annual meeting, business must be specified in the notice of meeting
(or any supplement thereto) given by or at the direction of the Board, otherwise
properly brought before the meeting by or at the direction of the Board, or
otherwise properly brought before the meeting by a stockholder. In addition to
any other applicable requirements, for business to be properly brought before an
annual meeting by a stockholder, the stockholder must have given timely notice
thereof in writing to the Secretary of the Corporation. To be timely, a
stockholder's notice must be received at the principal executive offices of the
Corporation not less than 60 days nor more than 90 days prior to the meeting;
provided, however, that in the event that less than 75 days' notice or prior
public disclosure of the date of the meeting is given or made to stockholders,
notice by the stockholder to be timely must be so received no later than the
close of business on the fifteenth day following the day on which such notice of
the date of the annual meeting was mailed or such public disclosure was made,
whichever first occurs. A stockholder's notice to the Secretary shall set forth
(i) a brief description of the business desired to be brought before the annual
meeting and the reasons for conducting such business at the annual meeting; (ii)
the name and record address of the stockholder proposing such business, (iii)
the class and number of shares of the Corporation that are beneficially owned by
the stockholder, and (iv) any material interest of the stockholder in such
business. Notwithstanding anything in the By-Laws to the contrary, no business
shall be conducted at the annual meeting except in accordance with the
procedures set forth in this Section 2.3; provided, however, that nothing in
this Section 2.3 shall be deemed to preclude discussion by any stockholder of
any business properly brought before the annual meeting in accordance with such
procedures.
2.4 Notice
of Annual Meeting. Written
notice of the annual meeting shall be served upon or mailed to each stockholder
entitled to vote thereat at such address as appears on the books of the
Corporation, at least ten but not more than sixty days prior to the meeting.
Such notice shall state the location, date and hour of the meeting, but the
notice need not specify the business to be transacted thereat.
2.5 Special
Meetings. Special
meetings of the stockholders for any purpose or purposes, unless otherwise
provided by law or by the Certificate of Incorporation, may be called by the
President and shall be called by the President or Secretary at the request in
writing of a majority of the Board of Directors, and not at the request of any
other person or persons. Such request must state the purpose or purposes of the
proposed meeting.
2.6 Notice
of Special Meetings. Written
notice of a special meeting shall be served upon or mailed to each stockholder
entitled to vote thereat at such address as appears on the books of the
Corporation, at least ten but not more than sixty days prior to the meeting.
Such notice shall state the location, date and hour of the meeting and shall
describe the order of business to be addressed at the meeting. Business
transacted at all special meetings shall be confined to the objects stated in
the notice.
2.7 Presiding
Officer at Stockholder Meetings. The
Chair of the Board shall preside at all meetings of the stockholders, provided
that the Chair may designate the President to preside in the Chair's stead. In
the Chair's absence, the President shall preside, and in the absence of both,
the Board shall appoint a person to preside.
2.8 Quorum;
Adjournment. The
holders of a majority of the stock issued and outstanding and entitled to vote
thereat, present in person or represented by proxy, shall be requisite and shall
constitute a quorum at all meetings of the stockholders for the transaction of
business, except as otherwise provided by law, the Certificate of Incorporation
or these Bylaws. If such quorum shall not be present or represented at any
meeting of the stockholders, the presiding officer of the meeting or the
majority of the stockholders entitled to vote thereat, present in person or
represented by proxy, shall have the power to adjourn the meeting from time to
time until a quorum shall be present or represented. Even if a quorum is present
or represented at any meeting of the stockholders, the presiding officer of the
meeting, for good cause, or the majority of the stockholders entitled to vote
thereat, present in person or represented by proxy, shall have the power to
adjourn the meeting from time to time. If the time and place of the adjourned
meeting are announced at any meeting at which an adjournment is taken, no
further notice of the adjourned meeting need be given; provided, however, that
if the adjournment is for more than thirty days, or if after the adjournment a
new record date for the adjourned meeting is fixed by the Board of Directors,
notice of the adjourned meeting shall be given to each stockholder entitled to
vote at the meeting. At the adjourned meeting the corporation may transact any
business which might have been transacted at the original
meeting.
2.9 Vote
Required. In all
matters other than the election of Directors, the affirmative vote of the
holders of a majority of the stock present in person or represented by proxy and
entitled to vote on the matter shall decide any question brought before a
meeting unless the question is one upon which by express provision of the
Certificate of Incorporation or of these Bylaws, or by law, a different vote is
required in which case such express provision shall govern and control the
decision of such question. Directors shall be elected, by ballot, by a plurality
of the votes of the shares present in person or represented by proxy and
entitled to vote at the election of directors.
2.10 Voting;
Proxies. At any
meeting of the stockholders every holder of shares entitled to vote thereat
shall be entitled to vote in person, or by proxy appointed by an instrument in
writing subscribed by such stockholder and bearing a date not more than three
years prior to said meeting, unless said instrument provides for a longer
period. Each stockholder shall have one vote for each share of stock having
voting power, registered in such stockholder's name on the books of the
Corporation, and except where the transfer books of the Corporation shall have
been closed or a date shall have been fixed as a record date for the
determination of its stockholders entitled to vote, no share of stock shall be
voted on at any election of Directors which shall have been transferred on the
books of the Corporation within twenty days next preceding such election of
Directors.
2.11 Stockholder
Lists. At
least ten days before every meeting of the stockholders, a complete list of the
stockholders entitled to vote at said meeting, arranged in alphabetical order,
with the residence of each and the number of voting shares held by each, shall
be prepared by the Secretary. Such list shall be open for said ten days to
examination by any stockholder for any purpose germane to the meeting during
regular business hours at the place where the meeting is to be held, or at such
other place within the city in which the meeting is to be held as shall be
specified in the notice of the meeting, and also shall be produced and kept at
the time and place of the meeting, during the whole time thereof, and may be
inspected by any stockholder who is present.
2.12 Action
Without Meeting. No
action required to be taken or which may be taken at any annual or special
meeting of stockholders may be taken without a meeting, and the power of
stockholders to consent in writing to the taking of any action is specifically
denied.
ARTICLE
III
DIRECTORS
3.1 Powers. The
property and business of the Corporation shall be managed by its Board of
Directors which may exercise all such powers of the Corporation and do all such
lawful acts and things as are not by law or by the Certificate of Incorporation
or by these Bylaws directed or required to be exercised or done by the
stockholders.
3.2 Composition
of the Board. The
number of Directors which shall constitute the Board shall be fixed from time to
time by resolution of a majority of directors in office; provided, that their
number shall not be less than five nor more than fifteen. Directors shall be
divided into three classes, as specified in the Certificate of Incorporation.
Directors shall be elected at the annual meeting of the stockholders, and each
Director shall be elected to serve until such Director's successor shall be
elected and shall qualify; provided, however, no person who shall have attained
the age of 72 years by the date of election shall be eligible for election as a
Director of the Corporation. Directors shall be stockholders. The Board of
Directors, at its first meeting after each annual meeting of stockholders, shall
elect the Chair of the Board who shall perform such duties as are specified in
these Bylaws or are properly required of the Chair by the Board of Directors.
3.3 Nominations.
Nominations for the election of Directors may be made by the Board or by any
stockholder entitled to vote for the election of Directors. Nominations proposed
by the Board shall be given by the Chair on behalf of the Board. Nominations by
stockholders shall be in writing, and in the form prescribed below, and shall be
effective when delivered by hand or received by registered first-class mail,
postage prepaid, by the Secretary of the Corporation not less than 14 days nor
more than 80 days prior to any meeting of the stockholders called for the
election of Directors; provided, however, that if less than 21 days notice of
the meeting is given to stockholders, such writing shall be received by the
Secretary of the Corporation not later than the close of the seventh day
following the day on which notice of the meeting was mailed to stockholders.
Nominations by stockholders shall be in the form of a notice which shall set
forth (a) as to each nominee (i) the name, age, business address and, if known,
residence address of such nominee (ii) the principal occupation or employment of
such nominee (iii) the number of shares of stock beneficially owned by the
nominee (iv) the consent of the nominee to serve as a Director of the
Corporation if so elected (v) a description of all arrangements or
understandings among the stockholder and the nominee and any other person or
persons pursuant to which the nomination is to be made by the stockholder and
(vi) any other information relating to the nominee required to be disclosed in
solicitations of proxies for election of Directors, or otherwise required
pursuant to Regulation 14A under the Securities and Exchange Act of 1934, as
amended, and (b) as to the stockholder giving the notice (i) the name and
address, as they appear on the Corporation's books, of such stockholder and (ii)
the number of shares beneficially owned by such stockholder. The presiding
officer of the meeting may, if the facts warrant, determine and declare to the
meeting that a nomination was not made in accordance with the foregoing
procedure, and if the presiding officer should so determine, the presiding
officer shall so declare to the meeting and the defective nomination shall be
disregarded.
3.4 Vacancy. If the
office of any Director becomes vacant by reason of death, resignation,
retirement, disqualification, removal from office, or otherwise, a majority of
the remaining Directors, though less than a quorum, shall choose a successor,
who shall hold office until the next election of the class for which such
Director shall have been chosen, and until such Director's successor shall be
elected and qualified.
3.5 Resignation. Any
Director of the Corporation may resign from the Board of Directors at any time
by giving written notice to the President or to the Secretary of the
Corporation. The resignation shall be effective at the time stated therein, and
unless otherwise specified, the acceptance of such resignation shall not be
necessary to make it effective.
3.6 Meetings
Generally. The
Board of Directors may hold meetings, both regular and special, at such times
and places either within or without the State of Delaware as shall from time to
time be determined by the Board.
3.7 Regular
Meetings. Regular
meetings of the Board of Directors shall be held at such times and places as
shall be fixed by resolution of the Board. No notice shall be required for
regular meetings held pursuant to such resolution, except that the Secretary of
the Corporation shall promptly provide a copy of such resolution to any Director
who is absent when such resolution is adopted. In case any scheduled meeting of
the Board is not held on the day fixed therefore, the Directors shall cause the
meeting to be held as soon thereafter as is convenient. At such regular meetings
directors may transact such business as may be brought before the meeting.
3.8 Special
Meetings. Special
meetings of the Board may be called by the Chair of the Board or by the
President by twenty-four (24) hours notice to each Director, either personally,
by telephone, by mail, or by telegram; special meetings shall be called by the
Chair of the Board, the President or the Secretary in like manner and on like
notice on the written request of two Directors.
3.9 First
Meeting. The
first meeting of each newly elected Board shall be held immediately after the
annual meeting of stockholders and at the same place, and no notice of such
meeting to the newly elected Directors shall be necessary in order legally to
constitute the meeting, provided a quorum shall be present. In the event such
meeting is not held, the Directors shall cause the meeting to be held as soon
thereafter as is convenient.
3.10 Organization. The
Chair of the Board shall preside at all meetings of the Board, provided that the
Chair may designate the President to preside in the Chair's stead. In the
Chair's absence the President shall preside, and in the absence of both, the
Board shall appoint a person to preside. The Secretary of the Corporation, or if
the Secretary is not present, one of the Assistant Secretaries, in the order
determined by the Board, or if an Assistant Secretary is not present, a person
designated by the Board, shall take the minutes of the meeting.
3.11 Quorum;
Adjournment. At all
meetings of the Board a majority of the number of directors fixed by the Board
shall be necessary and sufficient to constitute a quorum for the transaction of
business and the act of a majority of the Directors present at any meeting at
which there is a quorum shall be the act of the Board of Directors, except as
may be otherwise specifically provided by law or by the Certificate of
Incorporation or these Bylaws. Whether or not a quorum is present at any meeting
of the Board, a majority of the Directors present thereat may adjourn the
meeting from time to time, without notice other than announcement at the
meeting.
3.12 Participation
by Telephone. Any one
or more Directors may participate in a meeting of the Board or any committee
thereof by conference telephone or similar communications equipment by means of
which all persons participating in the meeting can hear each other at the same
time. Participation in a meeting by such means shall be deemed attendance in
person at that meeting.
3.13 Action
Without Meeting. Any
action required to be taken or which may be taken at any meeting of the Board or
any committee thereof may be taken without a meeting if all members of the Board
or committee, as the case may be, consent thereto in writing, and such writing
or writings are filed with the records of the meetings of the Board or of the
committee, as the case may be. Any action taken pursuant to such consent shall
be treated for all purposes as the act of the Board or committee.
3.14 Appointment
of Committees. The
Board of Directors may, by resolution passed by a majority of the whole Board,
designate one or more special or standing committees, each committee to consist
of two or more of the Directors of the Corporation. The Board of Directors may
designate one or more Directors as alternate members of any committee to replace
any absent or disqualified member at any meeting of the committee.
3.15 Meetings
of Committees. Regular
and special meetings of any committee established pursuant to this Article may
be called and held subject to the same requirements with respect to time, place
and notice as are specified in these Bylaws for regular and special meetings of
the Board of Directors. At all committee meetings, a majority of the members of
the committee shall be necessary to constitute a quorum for the transaction of
any business, and the act of a majority of committee members present at a
meeting at which there is a quorum shall be the act of the
committee.
3.16 Powers
of Committees.
Committees of the Board of Directors, to the extent provided in the Board
resolution or permitted by law, shall have and may exercise the powers of the
Board of Directors, in the management of the business and affairs of the
Corporation, and may have power to authorize the Seal of the Corporation to be
affixed to all papers which may require it. Such committee or committees shall
have such name or names as may be determined from time to time by resolution of
the Board. Except as the Board of Directors may otherwise determine, a committee
may make rules for its conduct, but unless otherwise provided by the Board or
such rules, its business shall be conducted as nearly as possible in the same
manner as is provided in these Bylaws for the conduct of business by the Board
of Directors. Each committee shall keep regular minutes of its proceedings and
report the same to the Board of Directors when required.
3.17 Compensation
of Directors.
Directors shall be reimbursed for reasonable expenses, if any, of attendance at
each meeting of the Board of Directors and may be paid other compensation in
whatever form and amount the Board of Directors, by resolution, shall determine
to be reasonable. Members of special or standing committees may be allowed like
compensation and reimbursement for participation in committee meetings. Nothing
contained in this section shall be construed to preclude any Director from
serving the Corporation in any other capacity, as officer, agent, employee or
otherwise, and being compensated for such service.
ARTICLE
IV
NOTICES
4.1 Generally.
Whenever under the provisions of the Certificate of Incorporation or these
Bylaws, or by law, notice is required to be given to any Director or
stockholder, it shall not be construed to require personal notice, but such
notice may be given in writing, by mail or by courier service, by depositing the
same in a post office or letter box, or with a courier service, in a post-paid
sealed wrapper, addressed to such Director or stockholder at such address as
appears on the books of the Corporation, or, in default of other address, to
such Director or stockholder at the last known address of such person, and
notice shall be deemed to be given at the time when the same shall be thus
deposited.
4.2 Waiver
of Notice.
Whenever any notice is required to be given under the provisions of the
Certificate of Incorporation or these Bylaws, or by law, a waiver thereof in
writing signed by the person or persons entitled to said notice, whether before
or after the time stated therein, shall be deemed equivalent thereto. Attendance
of a person at a meeting shall constitute a waiver of notice of such meeting,
except when such person attends a meeting for the express purpose of objecting,
at the beginning of the meeting, to the transaction of any business on the
ground that the meeting is not lawfully convened.
ARTICLE
V
OFFICERS
5.1 Officers. The
Officers of the Corporation shall be chosen by the Board of Directors and shall
be a President, a Vice President, a Secretary, and a Treasurer, and, if the
Board has designated the Chair as the Chief Executive Officer of the Corporation
pursuant to Section 3.2 of these Bylaws, the Chair. The Board of Directors may
also choose additional Vice Presidents, and one or more Assistant Secretaries
and Assistant Treasurers, and may appoint such other Officers and agents as it
shall deem necessary. Two or more offices may be held by the same person, except
that where the officer designated as the Chief Executive Officer and the
Secretary are the same person, such person shall not hold any other
office.
5.2 Election;
Term of Office; Removal. The
Board of Directors at its first meeting after each annual meeting of
stockholders shall elect the President, one or more Vice Presidents, the
Secretary, the Treasurer, and such other Officers as it shall deem necessary,
who shall hold their offices for such terms and shall exercise such powers and
perform such duties as shall be determined from time to time by the Board. The
Officers of the Corporation shall hold office until their successors are chosen
and qualify in their stead, or until such time as they may resign or be removed
from office. Any Officer elected or appointed by the Board of Directors may be
removed at any time by the affirmative vote of a majority of the whole Board of
Directors. If the office of any Officer becomes vacant for any reason, the
vacancy shall be filled by the Board of Directors. In the case of any office
other than that of the Chair, President, Secretary or Treasurer, the officer
designated as the Chief Executive Officer may appoint a person to serve in such
office, on a temporary basis, until the vacancy is filled by the
Board.
5.3 Compensation. The
salaries of all Officers and agents of the Corporation shall be fixed by or in
the manner prescribed by the Board of Directors.
5.4 The
Chair, the President and the Chief Executive Officer. The
Chair shall be the Chief Executive Officer of the Corporation if, and only if,
the Chair has been so designated pursuant to Section 3.2 of these Bylaws. If the
Chair has not been so designated, the President shall hereby be designated as
the Chief Executive Officer. The Chief Executive Officer shall report directly
to the Board of Directors, and shall perform such duties as are incident to the
office of the Chief Executive Officer or are properly specified and authorized
by the Board of Directors. If the Chair has been designated as the Chief
Executive Officer, the President shall be the Chief Operating Officer. In such
case, the President shall report to the Chief Executive Officer and shall
perform such duties as are incident to the office of the Chief Operating Officer
or are properly specified and authorized by the Board of Directors; in the
absence or disability of the Chair, the President shall perform the duties and
exercise the powers of the Chief Executive Officer.
5.5 Vice
Presidents. The
Vice Presidents, in the order fixed by the Board of Directors, shall, in the
absence or disability of the President, perform the duties and exercise the
powers of the President, and shall perform such other duties as the Board of
Directors shall prescribe.
5.6 The
Secretary. The
Secretary shall attend all meetings of the Board and all meetings of the
stockholders and record all votes and the minutes of all proceedings in a book
to be kept for that purpose and shall perform like duties for the standing
committees when required. The Secretary shall give, or cause to be given, notice
of all meetings of the stockholders and special meetings of the Board of
Directors, and shall perform such other duties as may be prescribed by the Board
of Directors or the President, under whose supervision the Secretary shall be.
The Secretary shall keep in safe custody the Seal of the Corporation and, when
authorized by the Board, affix the same to any instrument requiring it and, when
so affixed, it shall be attested by the Secretary's signature or by the
signature of the Treasurer or an Assistant Secretary.
5.7 Assistant
Secretaries. The
Assistant Secretaries, in the order fixed by the Board of Directors, shall, in
the absence or disability of the Secretary, perform the duties and exercise the
powers of the Secretary and shall perform such other duties as the Board of
Directors shall prescribe.
5.8 The
Treasurer. The
Treasurer shall have the custody of the corporate funds and securities and shall
keep full and accurate accounts of receipts and disbursements in books belonging
to the Corporation and shall deposit all moneys and other valuables in the name
and to the credit of the Corporation in such depositories or other institutions
as may be designated by the Board of Directors. The Treasurer shall disburse the
funds of the Corporation by check or by electronic or wire transfer, as may be
ordered by the Board, taking proper vouchers for such disbursements, and shall
render to the President and Directors, at the regular meetings of the Board, or
whenever they may require it, an account of all transactions as Treasurer and of
the financial condition of the Corporation.
5.9 Assistant
Treasurers. The
Assistant Treasurers, in the order fixed by the Board of Directors, shall, in
the absence or disability of the Treasurer, perform the duties and exercise the
powers of the Treasurer and shall perform such other duties as the Board of
Directors shall prescribe.
ARTICLE
VI
STOCK
CERTIFICATES, TRANSFERS AND RECORD DATE
6.1 Certificates
of Stock. The
certificates of stock of the Corporation shall be numbered and shall be entered
in the books of the Corporation as they are issued. They shall exhibit the
holder's name and number of shares and shall be signed by the officer designated
as the Chief Executive Officer, the President or a Vice President and the
Treasurer or an Assistant Treasurer or the Secretary or an Assistant Secretary.
Any or all of the signatures on the certificate may be a facsimile. In the event
that any officer, transfer agent, or registrar who has signed or whose facsimile
signature has been placed upon a certificate shall have ceased to be such
officer, transfer agent, or registrar before such certificate is issued, it may
be used by the Corporation with the same effect as if such person were such
officer, transfer agent, or registrar at the date of issue.
6.2 Transfers
of Stock. Upon
surrender to the Corporation or the Transfer Agent of the Corporation of a
certificate for shares duly endorsed or accompanied by proper evidence of
succession, assignment or authority to transfer, it shall be the duty of the
Corporation to issue a new certificate to the person entitled thereto, cancel
the old certificate and record the transaction upon its books.
6.3 Record
Date for Stockholders. For the
purpose of determining the stockholders entitled to notice of or to vote at any
annual or special meeting of stockholders or any adjournment thereof, or for the
purpose of determining stockholders entitled to receive payment of any dividend
or other distribution or the allotment of any rights, or entitled to exercise
any rights in respect of any change, conversion, or exchange of stock, or for
the purpose of any other lawful action, the Directors may fix, in advance, a
date as the record date for any such determination of stockholders. Such date
shall not be more than sixty days nor less than ten days before the date of such
meeting, nor more than sixty days prior to any other action. If no record date
is fixed, the record date for the determination of stockholders entitled to
notice of or to vote at a meeting of stockholders shall be at the close of
business on the day next preceding the day on which notice is given, or if
notice is waived, at the close of business on the day next preceding the day on
which the meeting is held; the record date for determining stockholders for any
other purpose shall be at the close of business on the day on which the Board of
Directors adopts the resolution relating thereto. When a determination of
stockholders of record entitled to notice of or to vote at any meeting of
stockholders has been made as provided in this paragraph, such determination
shall apply to any adjournment thereof; provided, however, that the Board of
Directors may fix a new record date for the adjourned meeting.
6.4 Registered
Stockholders. The
Corporation shall be entitled to treat the holder of record of any share or
shares of stock as the holder in fact thereof and, accordingly, shall not be
bound to recognize any equitable or other claim to or interest in such share or
shares on the part of any other person, whether or not it shall have express or
other notice thereof, except as otherwise provided by law.
6.5 Lost
Certificates. The
Board of Directors may direct a new certificate or certificates to be issued in
place of any certificate or certificates theretofore issued by the Corporation
alleged to have been lost or destroyed, upon the making of an affidavit of that
fact by the person claiming the certificate of stock to be lost or destroyed.
When authorizing such issue of a new certificate or certificates, the Board of
Directors may, in its discretion and as a condition precedent to the issuance
thereof, require the owner of such lost or destroyed certificate or
certificates, or the owner's legal representative to advertise the same in such
manner as it shall require and/or give the Corporation a bond in such sum as it
may direct as indemnity against any claim that may be made against the
Corporation with respect to the certificate alleged to have been lost or
destroyed.
ARTICLE
VII
DIVIDENDS
7.1 Power
to Declare Dividends.
Dividends upon the capital stock of the Corporation, subject to the provisions
of the Certificate of Incorporation, if any, may be declared by the Board of
Directors at any regular or special meeting, pursuant to law. Dividends may be
paid in cash, in property, or in shares of the capital stock, subject to the
provisions of the Certificate of Incorporation.
7.2 Discretion
of the Board. Before
payment of any dividend, there may be set aside out of any funds of the
Corporation available for dividends such sum or sums as the Directors from time
to time, in their absolute discretion, think proper as a reserve fund to meet
contingencies, or for equalizing dividends, or for repairing or maintaining any
property of the Corporation, or for such other purpose as the Directors shall
think conducive to the interest of the Corporation, and the Directors may modify
or abolish any such reserve in the manner in which it was created.
ARTICLE
VIII
MISCELLANEOUS
PROVISIONS
8.1 Instruments. All
checks, demands for money, notes, deeds, mortgages, bonds, contracts and other
instruments of the Corporation shall be signed by such Officer or Officers or
such other person or persons as the Board of Directors may from time to time
designate.
8.2 Borrowing. No
officer, agent or employee of the Corporation shall have any power or authority
to borrow money on behalf of the Corporation, to pledge the Corporation's
credit, or to mortgage or pledge the Corporation's real or personal property,
except within the scope and to the extent such authority has been delegated to
such person by resolution of the Board of Directors. Such authority may be given
by the Board and may be general or limited to specific instances.
8.3 Voting
Securities of Other Corporations. Subject
to any specific direction from the Board of Directors, the officer designated as
the Chief Executive Officer of the Corporation, or any other person or persons
who may from time to time be designated by the Board of Directors, shall have
the authority to vote on behalf of the Corporation the securities of any other
corporation which are owned or held by the Corporation and may attend meetings
of stockholders or execute and deliver proxies or written consents for such
purpose.
8.4 Fiscal
Year. The
fiscal year shall begin the first day of January in each year.
8.5 Seal. The
corporate seal shall have inscribed thereon the name of the Corporation, the
year of its organization and the words "Corporate Seal, Delaware." Said seal may
be used by causing it or a facsimile thereof to be impressed or affixed or
reproduced or otherwise.
8.6 Books
and Records of the Corporation. The
books and records of the Corporation shall be kept at such places as the Board
may from time to time determine.
ARTICLE
IX
INDEMNIFICATION
OF DIRECTORS AND OFFICERS
9.1 Right
To Indemnification. Each
person who was or is made a party or is threatened to be made a party to any
action, suit or proceeding, whether civil, criminal, administrative or
investigative, by reason of the fact such person is or was a Director or Officer
of the Corporation or is or was serving at the request of the Corporation as a
Director or Officer of another corporation or of a partnership, joint venture,
trust or other enterprise, shall be indemnified and held harmless by the
Corporation to the fullest extent permitted by the Delaware General Corporation
Law against all expense, liability and loss (including attorneys' fees,
judgments, fines or penalties and amounts paid in settlement) reasonably
incurred or suffered by such person in connection therewith, and such
indemnification shall continue as to such person who has ceased to be a Director
or Officer and shall inure to the benefit of the person's heirs, executors and
administrators. For purposes of this section, persons serving as Director or
Officer of the Corporation's direct or indirect wholly-owned subsidiaries shall
be deemed to be serving at the Corporation's request.
9.2 Right
To Advancement Of Expenses. The
right to indemnification conferred in Paragraph (a) of this section shall
include the right to be paid by the Corporation the expenses incurred in
defending any action, suit, or proceeding in advance of its final disposition,
subject to the receipt by the Corporation of an undertaking by or on behalf of
such person to repay all amounts so advanced if it shall ultimately be
determined that such person is not entitled to be indemnified.
9.3 Nonexclusivity
of Rights. The
rights to indemnification and to the advancement of expenses contained in this
section shall not be exclusive of any other right which any person may have or
hereafter acquire under any law, provision of the Corporation's Certificate of
Incorporation, Bylaw, agreement, vote of stockholders or disinterested Directors
or otherwise.
9.4 Employee
Benefit Plans. For
purposes of this section, references to "other enterprises" shall include
employee benefit plans; references to "fines" shall include any excise taxes
assessed on a person with respect to an employee benefit plan; and references to
"serving at the request of the Corporation" shall include any service as a
Director or Officer of the Corporation which imposes duties on, or involves
services by, such Director or Officer with respect to an employee benefit plan,
its participants, or beneficiaries; and a person who acted in good faith and in
a manner such person reasonably believed to be in the interest of the
participants and beneficiaries of an employee benefit plan shall be deemed to
have acted in a manner "not opposed to the best interests of the
Corporation."
ARTICLE
X
AMENDMENTS
10.1 Amendment
of Bylaws. These
Bylaws may be altered or repealed at any regular meeting of the stockholders or
at any special meeting of the stockholders, provided notice of the proposed
alteration or repeal be contained in the notice of such special meeting, by the
affirmative vote of the holders of 75% or more of outstanding shares of capital
stock entitled to vote at such meeting and present or represented thereat. The
Board of Directors may alter or repeal the Bylaws by the affirmative vote of a
majority of the entire Board at any regular meeting of the Board or at any
special meeting of the Board if notice of the proposed alteration or repeal be
contained in the notice of such special meeting.
Form of Performance Share Agreement dated November 9, 2004
FORM
OF PERFORMANCE SHARE AGREEMENT
pursuant
to the
CHESAPEAKE
UTILITIES CORPORATION
PERFORMANCE
INCENTIVE PLAN
AGREEMENT
dated as of November 9, 2004, and entered into, in duplicate, by and between
Chesapeake Utilities Corporation, a Delaware corporation (the "Company"), and
[name of executive] (the "Grantee") who resides at [address of
executive].
WITNESSETH
that:
WHEREAS,
the Chesapeake Utilities Corporation Performance Incentive Plan (the "Plan") has
been duly adopted by action of the Company's Board of Directors (the "Board") as
of January 1, 1992; and
WHEREAS,
the Committee of the Board of Directors of the Company referred to in the Plan
(the "Committee") has determined that it is in the best interests of the Company
to grant the Performance Share Award described herein pursuant to the Plan;
and
WHEREAS,
the shares of the Common Stock of the Company that are subject to this
Agreement, when added to the other shares of Common Stock that are subject to
awards granted under the Plan, do not exceed the total number of shares of
Common Stock with respect to which awards are authorized to be granted under the
Plan;
NOW,
THEREFORE, it is hereby covenanted and agreed by and between the Company and the
Grantee as follows:
Section
1. Performance
Share Award
The
Company hereby grants to the Grantee a Performance Share Award for the year
ending December 31, 2005 (the "Award Year"). As more fully described herein, the
Grantee may earn a maximum total of [number of shares] shares (the "Contingent
Performance Shares") upon the Company's achievement of the Performance Goals set
forth in Section 2. Alternatively, the Grantee may elect to receive [number of
shares] shares (the "Forfeitable Performance Shares"), as detailed in Section 3,
in lieu of receiving any Contingent Performance Shares. The Forfeitable
Performance Shares shall be subject to forfeiture conditions, as set forth in
Section 3(c).
Section
2. Contingent
Performance Shares
(a) |
As
soon as practicable after the Company’s independent auditors have
certified the Company’s financial statements for the Award Year, the
Committee shall determine for purposes of this Agreement the Company’s (1)
earnings growth (“EG”), (2) growth in non-regulated investments (“NRIG”)
and (3) Shareholder Value as of the end of the Award Year. The EG, NRIG
and Shareholder Value shall be determined by the Committee based on
financial results reported to shareholders in the Company’s annual reports
and shall be subject to adjustment by the Committee for extraordinary
events
during
the Award Year. The Committee shall promptly notify the Grantee of its
determination. |
(b) |
The
Grantee may earn up to [number of shares] Contingent Performance Shares
(the “Maximum Award”) as follows: |
(1) The
performance measured for Shareholder Value will be the value of $10,000 invested
in the Company stock compared to a Utility Index. If the Company’s performance
exceeds the Utility Index, the Grantee will be eligible to earn up to 30% of the
Maximum Award for the Award Year. If the value of $10,000 invested for the Award
Year does not exceed the Utility Index for the Award Year, the Grantee shall not
earn any Contingent Performance Shares under this Paragraph (b)(1).
(2) The
performance measured for EG will be based upon the performance of the Company’s
regulated natural gas operations, the Company’s Delmarva propane distribution
operations and the overall corporate results of operation.
a.The
performance measured for EG for the Company’s regulated natural gas operations
will be based upon achieving at least 90% of the average allowed pre-tax return
on investment (“target return on investment”) in the Award Year. If the
Company’s regulated operations achieve the target return on investment in the
Award Year, the Grantee will be eligible to earn at least 12.5% of the Maximum
Award. If the target return on investment is not achieved in the Company’s
regulated natural gas operations, the Grantee shall not earn any Contingent
Performance Shares under this paragraph (b)(2)(a).
b. |
The
performance measured for EG for the Company’s Delmarva propane
distribution operation will be based upon generating at least the target
level of earnings, before interest expense and income taxes (“target
EBIT”), for the Award Year. If the Delmarva propane distribution operation
achieves the target EBIT, the Grantee will be eligible to earn 12.5% of
the Maximum Award. If the target EBIT in the Company’s Delmarva propane
distribution operation is not achieved, the Grantee will not be eligible
to any Contingent Performance Shares under this paragraph
(b)(2)(b). |
c. |
The
performance measured for overall corporate results of operation will be
based upon achieving a growth in earnings per share of 3% to 5% for the
award year. If the Company earnings per share for 2005 is equal to or
exceeds $1.65, the Grantee is eligible to earn 10% of the maximum award.
If the earnings per share is equal to or greater than $1.68, the Grantee
is eligible to earn an additional 10% of the maximum award but in no event
shall the Grantee earn more than a 20% of the maximum award under this
paragraph (b)(2)(c). If any of the award under this paragraph is unearned
in the current year, the Grantee is eligible to earn those shares, if the
accumulative earnings per share for 2005 to 2007 equals or exceeds
$5.19. |
(3)The
performance measured for growth in non-regulated investments (“NRIG”) will be
based upon execution of the Company’s long-term strategic plan, assuming
attainment of pre-authorized milestones and objectives. If the long-term
strategy is executed, the Grantee will be eligible to earn 25% of the Maximum
Award. If the long-term strategic plan is not executed, after approval from the
Company’s Board of Directors, the Grantee shall not earn any Contingent
Performance Shares under this paragraph (b)(3).
(c) Contingent
Performance Shares that are earned by the Grantee pursuant to this Section 2
shall be issued promptly, without payment of consideration by the Grantee. The
Grantee shall have the right to vote the Contingent Performance Shares and to
receive the dividends distributable with respect to such shares on and after,
but not before, the date on which the Grantee is recorded on the Company's
ledger as holder of record of the Contingent Performance Shares (the "Issue
Date"). If, however, the Grantee receives shares of Common Stock as part of any
dividend or other distribution with respect to the Contingent Performance
Shares, such shares shall be treated as if they are Contingent Performance
Shares, and such shares shall be subject to all of the terms and conditions
imposed by this Section 2.
(d) Sale,
transfer, pledge, or hypothecation of the Contingent Performance Shares shall be
prohibited for a period of three (3) years after the Issue Date (the "Limitation
Period"), and the Performance Shares shall bear a restrictive legend to that
effect. Any attempt to dispose of Contingent Performance Shares in contravention
of this Agreement shall be ineffective. Upon expiration of the Limitation
Period, the transfer restrictions imposed by this Section shall expire, and new
certificates representing the Contingent Performance Shares, without the
restrictive legend described in this paragraph (d), shall be issued, subject to
the provisions of paragraph (e) of this Section 2.
(e) The
Performance Shares will be not registered for resale under the Securities Act of
1933 or the laws of any state except when and to the extent determined by the
Board pursuant to a resolution. Until a registration statement is filed and
becomes effective, however, transfer of the Contingent Performance Shares after
expiration of the Limitation Period shall require the availability of an
exemption from such registration, and prior to the issuance of new certificates,
the Company shall be entitled to take such measures as it deems appropriate
(including but not limited to obtaining from the Grantee an investment
representation letter and/or further legending the new certificates) to ensure
that the Contingent Performance Shares are not transferred in the absence of
such exemption.
(f) In the
event of a Change in Control, as defined in the Plan, during the Award Year, the
Grantee shall earn at least the Maximum Award of Contingent Performance Shares
set forth in this Section 2, as if all employment and performance criteria were
satisfied, pro rated based on the proportion of the Award Year that has expired
as of the date of such Change in Control.
(g) If,
during the Award Year, the Grantee is separated from employment, Contingent
Performance Shares shall be deemed earned or forfeited as follows:
(1) Upon
voluntary termination by the Grantee (other than for retirement at age 65 or as
accepted by the Committee) or termination by the Company for failure of job
performance or other just cause as determined by the Committee, all unearned
Contingent Performance Shares shall be forfeited immediately;
(2) If the
Grantee separates from employment by reason of death or total and permanent
disability (as determined by the Committee), the number of Contingent
Performance Shares that would otherwise have been earned at the end of the Award
Year shall be reduced by pro rating such Contingent Performance Shares based on
the proportion of the Award Year during which the Grantee was employed by the
Company, unless the Committee determines that the Contingent Performance Shares
shall not be so reduced;
(3) Retirement
of the Grantee at age 65 or as accepted by the Committee shall not affect the
Contingent Performance Shares, which shall continue to be earned through the
remainder of the Award Year, as set forth above.
(h) The
Grantee shall be solely responsible for any federal, state and local income
taxes imposed in connection with the delivery of Contingent Performance Shares.
Prior to the transfer of any Contingent Performance Shares to the Grantee, the
Grantee shall remit to the Company an amount sufficient to satisfy any federal,
state, local and other withholding tax requirements. The Grantee may elect to
have all or part of any withholding tax obligation satisfied by having the
Company withhold shares otherwise deliverable to the Grantee as Contingent
Performance Shares, unless the Committee determines otherwise by resolution. If
the Grantee fails to make such payments or election, the Company and its
subsidiaries shall, to the extent permitted by law, have the right to deduct
from any payments of any kind otherwise due to the Grantee any taxes required by
law to be withheld with respect to the Contingent Performance
Shares.
Section
3. Forfeitable
Performance Shares
(a) In lieu
of earning Contingent Performance Shares, the Grantee may elect to receive
[number of shares] Forfeitable Performance Shares, irrespective of whether the
Company meets any Performance Goals. The Grantee must make any such election on
or before September 30, 2005, and the election must be made in writing, in a
manner prescribed by the Committee. Once made, the election is irrevocable. If a
Grantee makes such an election, he shall not receive any Contingent Performance
Shares under this Agreement.
(b) Any
Forfeitable Performance Shares received by the Grantee pursuant to this Section
3 shall be issued as promptly as possible after December 31, 2005, without
payment of consideration by the Grantee. The Grantee shall have the right to
vote the Forfeitable Performance Shares and to receive the dividends
distributable with respect to such shares on and after, but not before, the date
on which the Grantee is recorded on the Company's ledger as holder of record of
the Forfeitable Performance Shares (the "Issue Date"). If, however, the Grantee
receives shares of Common Stock as part of any dividend or distribution with
respect to the Forfeitable Performance Shares, such shares shall be treated as
if they are Forfeitable Performance Shares, and such shares shall be subject to
all of the terms and conditions imposed by this Section 3.
(c) The
Forfeitable Performance Shares shall be subject to the following
restrictions:
(1) Sale,
transfer, pledge or hypothecation of the Forfeitable Performance Shares shall be
prohibited for a period of three (3) years after the Issue Date (the
"Restriction Period"), and the certificates evidencing the Forfeitable
Performance Shares shall bear an appropriate restrictive legend that refers to
the terms, conditions, and restrictions set forth in this Agreement. Any attempt
to dispose of Forfeitable Performance Shares in contravention of this Agreement
shall be ineffective. Upon expiration of the Restriction Period, the transfer
restrictions imposed by this Section shall expire, and new certificates
representing the Forfeitable Performance Shares, without the restrictive legend
described in this paragraph (c)(1), shall be issued, subject to the provisions
of paragraph (f) of this Section 3.
(2) If,
during the Restriction Period, the Grantee separates from employment for any
reason other than death, normal retirement, total and permanent disability (as
determined by the Committee), or involuntary termination without cause (as
determined by the Committee), all Forfeitable Performance Shares shall be
forfeited immediately.
(d) All
restrictions under paragraph (c) of this Section 3 shall immediately expire on
the earliest of: (A) the Grantee's separation from employment because of death,
total and permanent disability (as determined by the Committee), or involuntary
termination without cause (as determined by the Committee), (B) a Change in
Control, as defined in the Plan, or (C) the end of the Restriction Period.
(e) If, after
the Grantee has made an election to receive Forfeitable Performance Shares
pursuant to Section 3(a), a Change in Control, as defined in the Plan, occurs
during the Award Year, the Grantee shall receive at least the total number of
Forfeitable Performance Shares due under this Agreement, pro rated based on the
proportion of the Award Year that has expired as of the date of such Change in
Control. Pursuant to Section 3(d), such Shares shall not be subject to any of
the restrictions imposed by this Section.
(f) The
Forfeitable Performance Shares shall be not registered for resale under the
Securities Act of 1933 or the laws of any state except when and to the extent
determined by the Board pursuant to a resolution. Until a registration statement
is filed and becomes effective, however, transfer of the Forfeitable Performance
Shares after expiration of the Restriction Period shall require the availability
of an exemption from such registration, and prior to the issuance of new
certificates, the Company shall be entitled to take such measures as it deems
appropriate (including but not limited to obtaining from the Grantee an
investment representation letter and/or further legending the new certificates)
to ensure that the Forfeitable Performance Shares are not transferred in the
absence of such exemption.
(g) The
Grantee shall be solely responsible for any federal, state and local income
taxes imposed in connection with receipt of the Forfeitable Performance
Shares:
(1) The
Grantee agrees that, no later than the date that the restrictions set forth in
Section 3(c) lapse, he shall remit to the Company an amount sufficient to
satisfy any federal, state, local and other withholding tax requirements.
(2) The
Grantee may elect to have all or part of any withholding tax obligation
satisfied by having the Company withhold shares otherwise deliverable to the
Grantee in connection with the Award of Restricted Stock, unless the Committee
determines otherwise by resolution.
(3) If the
Grantee properly elects, within 30 days of the Issue Date, to include in gross
income for federal income tax purposes an amount equal to the fair market value
of the Forfeitable Performance Shares, he shall make arrangements satisfactory
to the Committee to remit in the year of issue an amount sufficient to satisfy
any federal, state, local and other withholding tax requirements with respect to
such Forfeitable Performance Shares.
(4) If the
Grantee fails to make satisfactory arrangements to meet all withholding tax
obligations, the Company and its subsidiaries shall, to the extent permitted by
law, have the right to deduct from any payments of any kind otherwise due to the
Grantee any taxes required by law to be withheld with respect to the Forfeitable
Performance Shares.
Section
4. Additional
Conditions to Issuance of Shares
Each
transfer of Contingent Performance Shares or Forfeitable Performance Shares
(together, the "Award Shares") shall be subject to the condition that if at any
time the Committee shall determine, in its sole discretion, that it is necessary
or desirable as a condition of, or in connection with, transfer of Award Shares
(i) to satisfy withholding tax or other withholding liabilities, (ii) to effect
the listing, registration or qualification on any securities exchange or under
any state or federal law of any Shares deliverable in connection with such
exercise, or (iii) to obtain the consent or approval of any regulatory body,
then in any such event such transfer shall not be effective unless such
withholding, listing, registration, qualification, consent or approval shall
have been effected or obtained free of any conditions not acceptable to the
Company.
Section
5. Adjustment
of Shares
(a) If the
Company shall become involved in a merger, consolidation or other
reorganization, whether or not the Company is the surviving corporation, any
right to earn Contingent Performance Shares or to elect to receive Forfeitable
Performance Shares shall be deemed a right to earn or to elect to receive the
consideration into which the shares of Common Stock represented by the
Contingent Performance Shares or by the Forfeitable Performance Shares would
have been converted under the terms of the merger, consolidation or other
reorganization. If the Company is not the surviving corporation, the surviving
corporation (the "Successor") shall succeed to the rights and obligations of the
Company under this Agreement.
(b) If any
subdivision or combination of shares of Common Stock or any stock dividend,
capital reorganization or recapitalization occurs after the adoption of the
Plan, the Committee shall make such proportionate adjustments as are appropriate
to the number of Contingent Performance Shares to be earned and/or to the number
of Forfeitable Performance Shares to be received in order to prevent the
dilution or enlargement of the rights of the Grantee.
Section
6. No
Right to Employment
Nothing
contained in this Agreement shall be deemed by implication or otherwise to
confer upon the Grantee any right to continued employment by the Company or any
affiliate of the Company.
Section
7. Notice
Any
notice to be given hereunder by the Grantee shall be sent by mail addressed to
Chesapeake Utilities Corporation, 909 Silver Lake Boulevard, Dover, Delaware
19904, for the attention of the Committee, c/o the Secretary, and any notice by
the Company to the Grantee shall be sent by mail addressed to the Grantee at the
address of the Grantee shown on the first page hereof. Either party may, by
notice given to the other in accordance with the provisions of this Section,
change the address to which subsequent notices shall be sent.
Section
8. Assumption
of Risk
It is
expressly understood and agreed that the Grantee assumes all risks incident to
any change hereafter in the applicable laws or regulations or incident to any
change in the market value of the Award Shares.
Section
9. Terms
of Plan
This
Agreement is entered into pursuant to the Plan (a copy of which has been
delivered to the Grantee). This Agreement is subject to all of the terms and
provisions of the Plan, which are incorporated into this Agreement by reference,
and the actions taken by the Committee pursuant to the Plan. In the event of a
conflict between this Agreement and the Plan, the provisions of the Plan shall
govern. All determinations by the Committee shall be in its sole discretion and
shall be binding on the Company and the Grantee.
Section
10. Governing
Law; Amendment
This
Agreement shall be governed by, and shall be construed and administered in
accordance with, the laws of the State of Delaware (without regard to its choice
of law rules) and the requirements of any applicable federal law. This Agreement
may be modified or amended only by a writing signed by the parties
hereto.
Section
11. Terms
of Agreement
This
Agreement shall remain in full force and effect and shall be binding on the
parties hereto for so long as any Award Shares issued to the Grantee under this
Agreement continue to be held by the Grantee.
IN
WITNESS WHEREOF, the Company has caused this Agreement to be executed in its
corporate name, and the Grantee has executed the same in evidence of the
Grantee's acceptance
hereof, upon the terms and conditions herein set forth, as of the day and year
first above written.
CHESAPEAKE
UTILITIES CORPORATION
By: ___________________________________
___________________________________
Grantee
Executive Employment Agreement with Paul Barbas Dated August 4, 2003
EXECUTIVE
EMPLOYMENT AGREEMENT
AN
EXECUTIVE EMPLOYMENT AGREEMENT ("Agreement") dated this 4th day of
August, 2003, by and between Chesapeake Utilities Corporation, a Delaware
corporation (the "Company"), and Paul M. Barbas ("Executive").
WITNESSETH:
WHEREAS,
the Company is currently obtaining the benefit of Executive's services as a
full-time executive employee in the capacity of Vice President;
WHEREAS,
the Company's Board of Directors (the "Board") has authorized the Company to
agree to provide for Executive's continued employment pursuant to the terms of
this Agreement; and
WHEREAS,
Executive is willing, in consideration of the covenants hereinafter provided, to
continue to be employed by the Company in the capacity of Vice President and to
render services incident to such position during the term of this
Agreement.
NOW,
THEREFORE, in consideration of the mutual promises and covenants contained
herein, the Company and Executive hereby agree as follows:
1. Employment. The
Company agrees to employ Executive, and Executive agrees to accept employment,
as an executive officer of the Company in the capacity of Vice President, with
such reasonable duties and responsibilities as are consistent with the By-laws
of the Company as of the date hereof, including, but not limited to,
responsibility for formulating financial policy and plans. Responsible for
providing overall direction for the accounting, tax, credit and treasury
functions.
2. Term.
(a) Term
of Agreement. The
term of this Agreement ("Term") shall be the Initial Term (as defined in
Paragraph 2(b) hereof), and, if applicable, the Extended Term (as defined in
Paragraph 2(c) hereof).
(b) Initial
Term. Subject
to Paragraph 2(c) hereof, the Initial Term of this Agreement shall extend for
three (3) years commencing on the date of this Agreement.
(c) Extended
Term. Upon
the occurrence of a Change in Control (as defined in Paragraph 2(d) hereof), the
Initial Term shall end and the Term of this Agreement shall thereupon
automatically be extended, commencing on the date of such Change in Control, for
the shorter of three (3) years or the period until Executive attains the
earliest age, if any, at which his compulsory retirement is permitted under
section 12(c) of the Age Discrimination in Employment Act of 1967, as amended,
29 U.S.C. § 631(c), or its successor (such extended three-year or shorter
term constituting the "Extended Term").
(d) Change
In Control. For the
purposes of this Agreement, Change in Control shall mean a change in the control
of the Company during the Term of this Agreement, which shall be deemed to have
occurred if:
(i) The
registration of the Company's voting securities under the Securities Exchange
Act of 1934, as amended (the "1934 Act"), terminates or the Company shall have
fewer than 300 stockholders of record; or
(ii) any
person or group (within the meaning of Sections 13(d) and 14(d) of the 1934
Act), other than the Company or any of its majority-controlled subsidiaries,
becomes the beneficial owner (within the meaning of Rule 13d-3 under the 1934
Act) of 30 percent or more of the combined voting power of the Company's then
outstanding voting securities; or
(iii) a
tender offer or exchange offer (other than an offer by the Company or a
majority-controlled subsidiary), pursuant to which 30 percent or more of the
combined voting power of the company's then outstanding voting securities was
purchased, expires; or
(iv) the
stockholders of the Company approve an agreement to merge or consolidate with
another corporation (other than a majority-controlled subsidiary of the Company)
unless the stockholders of the Company immediately before the merger or
consolidation are to own more than 70 percent of the combined voting power of
the resulting entity's voting securities; or
(v) the
Company's stockholders approve an agreement (including, without limitation, a
plan of liquidation) to sell or otherwise dispose of all or substantially all of
the business or assets of the Company; or
(vi) during
any period of two consecutive years, individuals who, at the beginning of such
period, constituted the Board cease for any reason to constitute at least a
majority thereof, unless the election or the nomination for election by the
Company's stockholders of each new director was approved by a vote of at least
two-thirds of the directors then still in office who were directors at the
beginning of the period; or
(vii) the
acquisition of direct or indirect beneficial ownership of more than 15 percent
of the Company's then outstanding voting securities by any person or group is
approved over the formal objection of the Company by the Securities and Exchange
Commission pursuant to Section 9 of the Public Utility Holding Company Act of
1935, as amended.
However,
no Change in Control shall be deemed to have occurred by reason of any event
involving a transaction in which Executive, or a group of persons or entities
with which Executive acts in concert, acquires, directly or indirectly, more
than 30 percent of the common stock or the business or assets of the Company;
any event involving or arising out of a proceeding under Title 11 of the United
States Code (or the provisions of any future United States bankruptcy law), an
assignment for the benefit of creditors or an insolvency proceeding under state
or local law; or any event constituting approval by the Company's stockholders
of a merger or consolidation if a majority of the group consisting of the
President and Vice Presidents of the Company who are parties to agreements
conferring rights upon a Change in Control shall have agreed in writing prior to
such approval that approval shall be deemed not to constitute a Change in
Control.
3. Time.
Executive agrees to devote all reasonable full time and best efforts for the
benefit of the Company and any subsidiary of the Company, and not to serve any
other business enterprise or organization in any capacity during the Term hereof
without the prior written consent of the Company, which consent shall not be
unreasonably with-held.
4. Office.
(a) Initial
Term. During
the Initial Term, the Company shall elect Executive as its Vice
President.
(b) Extended
Term. During
the Extended Term of this Agreement:
(i) Executive
shall hold and perform an office with the responsibility, importance and scope
within the Company at least equal to that of the office described and
contemplated in Paragraph 1 hereof; and
(ii) Executive's
office shall be located in Dover, Delaware, and Executive shall not be required,
without his written consent, to change his office location or to be absent
therefrom on business for more than 60 working days in any year.
5. Compensation.
(a)
Initial
Term. The
Company shall compensate Executive for his services hereunder during the Initial
Term at a rate of $255,000 per annum, payable in equal semi-monthly
installments, or such greater or lesser amount as the Board may determine ("Base
Compensation"). The Base Compensation rate shall be reviewed annually and may be
increased or decreased from time to time.
(b) Extended
Term. During
the Extended Term, the Company shall compensate Executive for his services
hereun-der at a rate per annum, payable in equal semi-monthly installments,
equal to his Base Compensation at the time the Extended Term commences,
increased:
(i)
effective on each anniversary of the date of this Agreement during the Extended
Term by an amount equal to the product of such Base Compensation times the
increase in the preceding calendar year of the Consumer Price Index for Urban
Wage Earners and Clerical Workers for the Philadelphia metropolitan region as
reported by the U.S. Department of Labor (or, if such index is no longer
reported, the corresponding increase in a comparable index); and
(ii) by such
additional amounts as the Board may determine from time to time based, in part,
on an annual review of Executive's compensation.
6. Expenses. During
the Term of this Agreement, the Company shall pay all necessary and reasonable
business expenses incurred by Executive on behalf of the Company in the course
of his employment hereunder, including, without limitation, expenses incurred in
the conduct of the Company's business while away from his domicile and expenses
for travel, meals, lodging, entertainment and related expenses that are for the
benefit of the Company.
7. Other
Benefits.
(a) Executive
shall be entitled to participate in all profit-sharing, insurance, medical and
retirement benefit plans, together with vacation and other employee benefits of
the Company, now in effect or as hereafter amended or established, in which the
Company executive employees are permitted to participate. The Executive’s
participation shall be in accordance with the terms and provisions of such
plans.
(b) The
Company shall furnish Executive with a suitable office, necessary administrative
support and customary furniture and furnishings for such office. The Company
further agrees that Executive shall have the use of a Company-owned or
Company-leased and Company-maintained automobile, new every three years, of a
kind and model appropriate to his position with the Company.
(c) Nothing
in this Agreement shall preclude the Company from amending or terminating any
employee benefit plan or practice, but, it being the intent of the parties that
the Executive shall continue to be entitled during the Extended Term to benefits
and perquisites as set forth in Paragraphs 7(a) and 7(b) hereof at least equal
to those attached to his position on the date of this Agreement, nothing in this
Agreement shall operate as, or be construed to authorize, a reduction during the
Extended Term without Executive's written consent in the level of such benefits
or perquisites as in effect on the date of a Change in Control. If and to the
extent that such benefits or perquisites are not payable or provided to
Executive under any such plan or practice by reason of an amendment thereto or
termination thereof during the Extended Term, the Company shall pay or provide
such benefits or perquisites to Executive.
8. Termination.
(a)
Termination
for Cause. This
Agreement and Executive's employment hereunder may be terminated by the Company
at any time for Cause. In the event of termination for Cause, the Executive
shall not be entitled to any severance benefits under this agreement. During the
Initial Term, Cause shall be as the Board may reasonably determine. During the
Extended Term, termination of this Agreement and the Executive's employment
shall be deemed to have been for Cause only if it shall have been the result
of:
(i)
conduct by Executive that constitutes a felony under the laws of the United
States or a state in which Executive works or resides;
(ii) an
act or acts of dishonesty by Execu-tive resulting or intended to result directly
or indirectly in material gain to or personal enrichment of Executive at the
Company's expense;
(iii) a
deliberate and intentional refusal by Executive during the Extended Term (except
by reason of incapacity due to illness or accident) to comply with the
provisions of Paragraph 1 hereof, provided that such breach shall have resulted
in demonstrably material injury to the Company and the Executive shall have
failed to remedy such breach within thirty days after notice from the Secretary
of the Company demanding that the Executive remedy such breach; or
(iv) the
engagement in conduct by Executive that is materially injurious to the Company
if such conduct was undertaken without good faith and the reasonable belief that
such conduct was in the best interest of the Company.
(b) Termination
During Extended Term. During
the
Extended
Term of this Agreement, the term "Termination" shall mean:
(i)
Termination by the Company of Executive's employment; or
(ii)
Termination by Executive of his employment following the occurrence of any of
the following events:
(A)
Failure to elect or reelect Executive to, or removal of Executive from, the
office or offices set forth in Paragraph 1 hereof, or the Board if Executive
shall have been a member of the Board immediately prior to a Change in Control
of the Company;
(B)
Executive's good-faith determination that there has been a significant change in
the nature or scope of his authorities, powers, functions, duties or
responsibilities attached to the positions contemplated in Paragraph 1 hereof or
a reduction in his compensation as provided in Paragraph 5 hereof or his
benefits as provided in Paragraph 7, which change or reduction is not remedied
within thirty days after notice to the Company by Executive;
(C) Any
other breach by the Company of any provision of this Agreement (including,
without limitation, relocation of Executive in violation of Paragraph 4(b)
hereof), which breach is not remedied within thirty days after notice to the
Company by Executive; or
(D) The
liquidation, dissolution, consolidation or merger of the Company or transfer of
all or a significant portion of its assets unless a successor or successors (by
merger, consolidation or otherwise) to which all or a significant portion of its
assets has been transferred shall have assumed all duties and obligations of the
Company under this Agreement;
provided
that in any event set forth in this Paragraph 8(b)(ii), Executive shall have
elected to terminate his employment under this Agreement upon not less than
forty (40) and not more than ninety (90) days' notice to the Board, attention of
the Secretary, given, except in the case of a continuing breach, within three
calendar months after (1) failure to be so elected or reelected, or such
removal, (2) expiration of the 30-day cure period with respect to such event, or
(3) the closing date of such liquidation, dissolution, consolidation, merger or
transfer of assets.
An
election by Executive to terminate his employment under the provisions of this
Paragraph shall not be deemed a voluntary termination of employment by Executive
for the purpose of this Agreement or any plan or practice of the
Company.
(c) Payment
Upon Termination During Extended Term. In the
event of a Termination of this Agreement during the Extended Term hereof for any
reason other than Cause or Executive's death, the Company shall, subject to
Paragraph 9 hereof, pay to Executive (or, in the event of his death following
the Termination, his legal representative) in cash within thirty (30) days after
the date of such Termination (the "Termination Date"):
(i) An
amount equal to the product of multiplying the monthly rate of Base Compensation
to which Executive was entitled under Paragraph 5(b) hereof on the day
immediately prior to the Termination Date by the lesser of (A) twenty-four (24)
months or (B) the number of months remaining in the Term of this Agreement (the
shorter of such periods constituting the "Covered Period");
(ii) An
amount equal to the present value of the additional benefits that would have
been paid Executive under the Company's retirement plans if he had continued to
be employed pursuant to this Agreement during the Covered Period and the
retirement plans had continued during such period without change from the date
of the Change in Control;
(iii) For
each share of Company stock subject to a stock option that was awarded to
Executive under a Company stock option plan, was held by Executive on the day
immediately prior to his Termination Date, was not exercisable on that date but
would have become exercisable during the Covered Period if Executive's
employment with the Company had continued during that period, an amount equal to
the excess of (A) the daily average closing price for a share of the Company's
stock on the New York Stock Exchange, or such other national securities exchange
on which such stock may be listed, during the 30-day period ending upon the date
of the Change in Control, or, if higher, during the 30-day period ending upon
the Termination Date (adjusted as appropriate for any changes in the capital
structure of the Company) over (B) the option price for a share of the Company's
stock subject to the option; and
(iv) An amount
equal to the aggregate of the Company's contributions to the Company's savings
plan in respect of Executive that were not vested on the day immediately prior
to the Termination Date but that would have been vested at the end of the
Covered Period if Executive had remained employed by the Company for the
duration of that period.
For
purposes of calculating the present value specified in Paragraph 8(c)(ii), the
discount rate shall equal the PBGC interest rate for immediate annuities, as
provided in 29 C.F.R. Part 4044, Appendix B, Table II or its successor, in
effect for a valuation date coinciding with the Termination Date. If that rate
should no longer be published, the discount rate shall be such closely
comparable interest rate as the Company may reasonably determine.
(d) Payment
Upon Termination During Initial Term. In the
event that the Company terminates this Agreement during, or elects pursuant to
Paragraph 17 hereof not to renew this Agreement at the end of, the Initial Term
hereof for any reason other than Cause or Executive’s death, the Company shall
continue to pay to Executive (or in the event of his death following such
termination, his legal representative) his Base Compensation under Paragraph
5(a) hereof, at the semi-monthly rate in effect immediately prior to the date of
such termination (“Termination Date”), for a period of six months following the
Termination Date.
9. Maximum
Payment Upon Termination.
Notwithstanding any other provision of this Agreement, if the Company should
determine, in consultation with tax advisors satisfactory to Executive, that any
amount payable to Executive pursuant to Paragraph 8 of this Agreement during the
Extended Term, either alone or in conjunction with any payments or benefits to
or on behalf of Executive pursuant to this Agreement or otherwise, would not be
deductible by the Company, in whole or in part, for federal income tax purposes
by reason of section 280G of the Internal Revenue Code or its successor, then
the aggregate amount payable to Executive pursuant to Paragraph 8 shall be
reduced to the largest amount that, in the opinion of such tax advisors, the
Company could pay Executive under Para-graph 8 without any part of that amount
being nondeductible by the Company as a result of Section 280G or its successor.
10. Mitigation.
Executive shall not be required to mitigate the amount of any payment provided
for in this Agreement either by seeking other employment or otherwise. The
amount of any payment provided for herein shall not be reduced by any
remuneration that Executive may earn from employment with another employer or
otherwise following his Termination Date.
11. Noncompetition
Covenant. For a
period of one year following the Termination Date and, if Executive has given a
notice pursuant to Paragraph 8(b)(ii) hereof, for a period of 15 months
following the giving of such notice, Executive shall assist no individual or
entity other than the Company to acquire any entity with respect to which a
proposal to acquire was presented to the Board prior to the beginning of the
period.
12. Indemnification. The
Company shall indemnify Executive to the fullest extent permitted by applicable
Delaware law (as may be amended from time to time), including the advance of
expenses permitted therein.
13. Performance. The
failure of either party to this Agreement to insist upon strict performance of
any provision hereof shall not constitute a waiver of its rights subsequently to
insist upon strict performance of such provision or any other provision of this
Agreement.
14. Non-Assignability. Neither
party shall have the right to assign this Agreement or any rights or obligations
hereunder without the consent of the other party.
15. Invalidity. If any
provisions of this Agreement shall be found to be invalid by any court of
competent jurisdiction, such finding shall not affect the remaining provisions
of this Agreement, all of the which shall remain in full force and
effect.
16. Arbitration
and Legal Fees. In the
event of any dispute regarding a refusal or failure by the Company to make
payments or provide benefits hereunder for any reason, Executive shall have the
right, in addition to all other rights and remedies provided by law, to
arbitration of such dispute under the rules of the American Arbitration
Asso-ciation, which right shall be invoked by serving upon the Company a notice
to arbitrate, stating the place of arbitration, within ninety (90) days of
receipt of notice in any form (including, without limitation, failure by the
Company to respond to a notice from Executive within thirty (30) days) that the
Company is withholding or proposes to withhold payments or provisions of
benefits. In the event of any such dis-pute, whether or not Executive exercises
his right to arbitration, if it shall ultimately be determined that the
Company's refusal or failure to make payments or provide benefits hereunder was
wrongful or otherwise inconsistent with the terms of this Agreement, the Company
shall indemni-fy and hold harmless Executive from and against any and all
expenses incurred in connection with such determination, including legal and
other fees and expenses. Without limitation of or by the foregoing, the Company
shall, within ten (10) days after notice from Executive, provide Executive with
an irrevocable letter of credit in the amount of $100,000 from a bank
satisfactory to Executive against which Executive may draw to pay legal fees and
other fees and expenses in connection with any attempt by Executive to enforce
any of his rights under this Agreement during the Extended Term. Said letter of
credit shall not expire before ten (10) years following the date of this
Agreement.
17. Renewal. If the
Initial Term of this Agreement expires without there having been a Change in
Control, this Agreement shall be renewed, as of the day following such
expiration, unless, during the period beginning 90 days prior and ending 30 days
prior to such day, either the Company or Executive shall have given notice to
the other that this Agreement will not be renewed. If this Agreement is renewed
as provided under this Paragraph, the new Agreement shall be identical to this
Agreement (except insofar as the Company and Executive may otherwise agree in
writing) except that the date of the new Agreement shall be as of the day
following the expiration of the Initial Term of this Agreement.
18. Successors. This
Agreement shall be binding upon and inure to the benefit of the Executive (and
his personal representative), the Company and any successor organization or
organizations that shall succeed to substantially all of the business and
property of the Company, whether by means of merger, consolidation, acquisition
of substantially all of the assets of the Company or otherwise, including by
operation of law.
19. Set-off. The
Company shall have no right of set-off or counterclaim in respect of any claim,
debt or obligation against any payments or benefits provided for in this
Agreement.
20. Amendments. No
Amendment to this Agreement shall be effective unless in writing and signed by
both the Company and Executive.
21. Governing
Law. This
Agreement shall be interpret-ed and enforced in accordance with the laws of the
State of Delaware.
22. Notices. Unless
otherwise stated herein, all notices hereunder shall be in writing and shall be
deemed to be given when personally delivered or mailed by United States
registered or certified mail, postage prepaid, to, if to the Company, 909 Silver
Lake Boulevard, Dover, Delaware 19904, and, if to Executive, the last address
therefore shown on the records of the Company. Either the Company or Executive
may, by notice to the other, designate an address other than the foregoing for
the receipt of subsequent notices.
23. Withholding. The
Company may withhold from any amounts payable to Executive hereunder all
federal, state, city or other taxes that the Company may reasonably determine
are required to be withheld pursuant to any applicable law or
regulation.
24. Nature
of Payments Upon Termination. All
payments to Executive pursuant to Paragraphs 8 and 9 of this Agreement shall be
considered as liquidated damages or, in the case of certain payments pursuant to
Paragraph 8(d), as severance payments in consideration of Executive's past
services to the Company, and no such payment shall be regarded as a penalty to
the Company.
25. Acknowledgment. The
parties hereto each acknowledge that each has read this Agreement and
understands the same and that each enters into this Agreement freely and
voluntarily.
IN
WITNESS WHEREOF, the parties hereto have executed this Agreement as of the date
first above written.
CHESAPEAKE
UTILITIES CORPORATION
[CORPORATE
SEAL] By: _______________________________
Title:
ATTEST:
__________________________
Secretary EXECUTIVE
____________________________________
Cash Bonus Incentive Plan Dated January 1, 2005
CHESAPEAKE
UTILITIES CORPORATION
CASH
BONUS INCENTIVE PLAN
Effective
January 1, 2005
SECTION
1.
INTRODUCTION
1.01 |
Purposes
of the Plan. |
The
purposes of the Chesapeake Utilities Corporation Cash Bonus Incentive Plan (the
“Plan”) are (a) to further the long-term growth and earnings of Chesapeake
Utilities Corporation (the “Company”) by providing incentives and rewards to
those executive officers and other key employees of the Company and its
subsidiaries who are in positions in which they can contribute significantly to
the achievement of that growth; (b) to encourage those employees to remain as
employees of the Company and its subsidiaries; and (c) to assist the Company and
its subsidiaries in recruiting able management personnel. To accomplish these
objectives, the Plan authorizes the grant of Awards, as further described
herein.
The Plan
shall be effective as of January 1, 2005. Unless the Plan is terminated earlier
in accordance with Section
8, the
Plan shall remain in full force and effect until the close of business on
December 31, 2014, at which time the Plan shall terminate and no further Awards
shall be granted under the Plan. Any Award granted before the termination of the
Plan shall continue to be governed thereafter by the terms of the Plan and its
terms as in effect on December 31, 2014.
SECTION
2.
DEFINITIONS
Except
where otherwise indicated, the following terms shall have the definitions set
forth below for purposes of the Plan:
(a) |
“Award”
means a Contingent Cash Bonus Award granted under Section
5 or
a Cash Bonus Award granted under Section
6.
|
(b) |
“Beneficiary”
means the person or persons entitled, in accordance with Section
9.02,
to receive any benefit payable because of the Participant’s
death. |
(c) |
“Board”
means the Board of Directors of the
Company. |
(d) |
“Cash
Bonus Award”
means the dollar amount granted by the Committee and payable to a
Participant in accordance with Section 6.01. |
(e) |
“Change
in Control”
means the first of the following events
occurs: |
(1) |
Any
one person, or group of owners of another corporation who acting together
through a merger, consolidation, purchase, acquisition of stock or the
like (a “group”), acquires ownership of stock of the Company (or a
majority-controlled subsidiary of the Company) that, together with the
stock held by such person or group, constitutes more than 50 percent of
the total fair market value or total voting power of the stock of the
Company. However, if such person or group is considered to own more than
50 percent of the total fair market value or total voting power of the
stock of the corporation before this transfer of the Company’s stock, the
acquisition of additional stock by the same person or person shall not be
considered to cause a Change in Control of the Company;
or |
(2) |
Any
one person or group (as described in subsection (e)(1), above) acquires
(or has acquired during the 12-month period ending on the date of the most
recent acquisition by such person or persons) ownership of stock of the
Company (or a majority-owned subsidiary of the Company) possessing 35
percent or more of the total voting power of the stock of the Company
where such person or group is not merely acquiring additional control of
the Company; or |
(3) |
A
majority of members of the Company’s Board (other than the Board of a
majority-controlled subsidiary of the Company) is replaced during any
12-month period by directors whose appointment or election is not endorsed
by a majority of the members of the Company’s Board prior to the date of
the appointment or election; or |
(4) |
Any
one person or group (as described in subsection (e)(1), above) acquires
(or has acquired during the 12-month period ending on the date of the most
recent acquisition by such person or group) assets from the Company (or a
majority-controlled subsidiary of the Company) that have a total gross
fair market value equal to or more than 40 percent of the total fair
market value of all assets of the Company immediately prior to such
acquisition or acquisitions. For this purpose, gross fair market value
means the value of the assets of the Company, or the value of the assets
being disposed of, determined without regard to any liabilities associated
with such assets. A transfer of assets by the Company will not result in a
Change in Control if the assets are transferred
to: |
(A) |
A
shareholder of the Company (immediately before the asset transfer) in
exchange for or with respect to its stock; |
(B) |
An
entity, 50 percent or more of the total value or voting power of which is
owned, directly or indirectly, by the Company immediately after the
transfer of assets; |
(C) |
A
person, or more than one person acting as a group (as described in
subsection (e)(1), above), that owns, directly or indirectly, 50 percent
or more of the total value or voting power of all the outstanding stock of
the Company; or |
(D) |
An
entity, at least 50 percent of the total value or voting power of which is
owned directly or indirectly, by a person described in subsection (e)(1),
above. |
However,
no Change in Control shall be deemed to have occurred with respect to a
Participant by reason of (i) any event involving a transaction in which the
Participant or a group of persons or entities with which the Participant acts in
concert, acquires, directly or indirectly, more than 30 percent of the common
stock or the business or assets of the Company; (ii) any event involving or
arising out of a proceeding under Title 11 of the United States Code (or the
provisions of any future United States bankruptcy law), an assignment for the
benefit of creditors or an insolvency proceeding under state or local law; or
(iii) any event constituting approval by the Company’s stockholders of a merger
or consolidation if a majority of the group consisting of the president and vice
presidents of the Company who are parties to agreements conferring rights upon a
Change in Control shall have agreed in writing prior to the approval that the
approval shall be deemed not to constitute a Change in Control.
(f) |
“Code”
means the Internal Revenue Code of 1986, as amended from time to
time. |
(g) |
“Committee”
means a committee of three or more persons appointed by the Board of
Directors to administer the Plan, each member of whom shall be (1) an
“independent director” as defined by the rules of the New York Stock
Exchange, (2) a “non-employee director” within the meaning of Rule 16b-3
and (3) an “outside director” within the meaning of section 162(m) of the
Code and the regulations thereunder. |
(h) |
“Company”
means Chesapeake Utilities Corporation or a Related
Company. |
(i) |
“Contingent
Cash Bonus Award”
means a potential cash award that may be designated for a Participant in
accordance with Section 5.01. |
(j) |
“Disability”
means a medically determinable physical or mental impairment that can be
expected to result in death or last for at least 12 months; and the
impairment either (1) prevents the Participant from engaging in any
substantial gainful activity, or (2) entitles the Participant to receive
income replacement benefits for at least 3 months under an accident or
health plan sponsored by the Company. |
(k) |
“Participant”
means any person who has received an Award. |
(l) |
“Performance
Goal”
means a criterion established by the Committee with respect to a Plan Year
in accordance with Section 5.02. |
(m) |
“Person”
means any individual, firm, corporation, partnership, joint venture,
association, trust, or other entity. |
(n) |
“Plan”
means the Chesapeake Utilities Corporation Cash Bonus Incentive Plan, as
set forth herein and as amended from time to
time. |
(o) |
“Plan
Year”
means the calendar year. |
(p) |
“Related
Company”
means a corporation, partnership, joint venture, or other entity in which
the Company has a direct or indirect ownership or other proprietary
interest of at least fifty percent. |
(q) |
“Rule
16b-3”
means Rule 16b-3 under the Securities Exchange Act of 1934, as amended
from time to time, or any successor
thereto. |
SECTION
3.
ADMINISTRATION
The Plan
shall be administered by the Committee. The Committee shall periodically
determine, in its sole discretion, the individuals who shall participate in the
Plan and the amounts and other terms and conditions of Awards to be granted to
such individuals under the Plan. The Committee shall administer the Plan in
accordance with applicable legal requirements. All questions of interpreta-tion
and administration with respect to the Plan shall be determined by the Committee
in its sole and absolute discretion. All determinations by the Committee shall
be final and conclusive upon all parties. The Committee shall act by vote or
written consent of a majority of its members and its actions shall be recorded
in the minutes of the Committee.
3.02 |
Additional
Powers of the Committee. |
In
addition to any implied powers and duties that are needed to carry out the
provisions of the Plan, the Committee shall have the following specific powers
and duties:
(a) |
to
make and enforce any rules and regulations it shall deem necessary or
proper for the efficient administration of the
Plan; |
(b) |
to
designate one or more officers of the Company to execute on behalf of the
Company all agreements and other documents approved by the Committee under
the Plan; |
(c) |
to
appoint other persons to carry out any ministerial responsibilities under
the Plan as it may determine consistent with applicable law;
and |
(d) |
to
employ one or more persons to render advice with respect to any of its
responsibilities under the Plan. |
SECTION
4.
PARTICIPATION
The
Committee may select to receive Awards under the Plan any key employees of the
Company (including officers or employees who are members of the Board, but
excluding directors who are not officers or employees) who the Committee
determines are in positions from which they can contribute significantly to the
achievement to the long-term growth, development, and financial success of the
Company or its subsidiaries. An individual who is not an employee of the Company
shall not be eligible to participate in the Plan. Because all Awards are granted
in the discretion of the Committee, no officer or employee of the Company shall
have any right to receive an Award under the Plan.
SECTION
5. CONTINGENT
CASH BONUS AWARDS
5.01 |
Grant
of Contingent Cash Bonus Awards. |
The
Committee may, from time to time, grant to persons eligible to participate in
the Plan, as the Committee shall determine in its sole discretion, a Cash Bonus
Award the vesting of which is contingent on the achievement of established
Performance Goals or the occurrence of another specified event as determined by
the Committee in accordance with the terms of the Plan. In determining whether
to grant an Award and the nature and amount of the Award, the Committee shall
consider, among other factors, the eligible employee’s responsibility level,
performance, and potential cash compensation level. Designation of a Contingent
Cash Bonus Award will not create any right of the Participant to the Cash Bonus
Award, even if the Participant meets the Performance Goals.
5.02 |
Establishment
of Performance Goals. |
In
selecting the Performance Goals for the vesting of an Award the Committee may
choose from among any one or more of the following, in any case as measured in
absolute terms or relative to the performance of any group of companies or index
selected by the Committee:
(a) |
earnings
per share or earnings per share growth, |
(b) |
operating
income or operating income growth, |
(c) |
operating
margin or operating margin growth, |
(d) |
net
income or net income growth, |
(e) |
revenue
or revenue growth, |
(g) |
pre-tax
return on investment, |
(h) |
total
shareholder return, |
(j) |
earnings
before interest, taxes, depreciation, and amortization,
|
(k) |
one
or more strategic goals for the Company; any segment of its business;
and/or any company or group of companies or
|
(l) |
any
other criteria or event selected by the
Committee. |
If during
a Plan Year there are significant changes in economic conditions that the
Committee did not foresee when it established the Performance Goals for that
Plan Year and that, in the Committee’s sole judgment, have or are expected to
have a substantial effect on the performance of the Company during the Plan
Year, the Committee may revise the Performance Goals in any manner that the
Committee may deem appropriate.
5.03 |
Payment
of Contingent Cash Bonus Awards. |
Contingent
Cash Bonus Awards as determined by the Committee shall be paid in cash on or
before March 15 of the Plan Year following the Plan Year for which the
Contingent Cash Bonus Awards were granted.
SECTION
6. CASH
BONUS AWARDS
6.01 |
Additional
Cash Bonus Awards. |
The
Committee may also grant and pay Cash Bonus Awards at any other time during a
Plan Year as the Committee, in its discretion, determines to be
appropriate.
6.02 |
Payment
of Cash Bonus Awards. |
After the
Company’s financial results for a Plan Year become available, the Committee may,
but shall not be required to, grant Cash Bonus Awards to one or more
Participants, including but not limited to a Participant as to whom Contingent
Cash Bonus Awards have been designated pursuant to Section 5.01. Cash
Bonus Awards as determined by the Committee shall be paid in cash on or before
March 15 of the Plan Year following the Plan Year for which the Cash Bonus Award
was granted.
SECTION
7. PAYMENTS
OF AWARDS
7.01 |
Awards
Solely from General Assets. |
The
Awards under the Plan shall be paid solely from the general assets of the
Company. Nothing herein shall be construed to require the Company or the Board
to maintain any fund or to segregate any amount for the benefit of any
Participant, and no Participant or other person shall have any right against,
right to, or security or other interest in, any fund, account, or asset of the
Company from which the payment pursuant to the Plan may be made.
All
reasonable expenses of administering the Plan shall be paid by the
Company.
SECTION
8. AMENDMENT
AND TERMINATION
Except as
otherwise provided in Section 8.02, the
Board may, at any time and from time to time, alter, amend, suspend or terminate
the Plan as it shall deem advisable.
Notwithstanding
Section 8.01, above,
on or after the occurrence of a Change in Control, no direct or indirect
alteration, amendment, suspension, termination or discontinuance of the Plan, no
establishment or modification of rules, regulations or procedures under the
Plan, no interpretation of the Plan or determination under the Plan, and no
exercise of authority or discretion vested in the Committee under any provision
of the Plan (collectively or individually, a “Change”) shall be made if the
Change (i) is not required by applicable law or necessary to meet the
requirements of Rule 16b-3 or section 409A of the Code and (ii) would have the
effect of:
(a) |
eliminating,
reducing or otherwise adversely affecting a Participant’s, former
Participant’s or beneficiary’s rights with respect to any Award granted
prior to the Change in Control, |
(b) |
altering
the meaning or operation of the definition of “Change in Control” in
Section 2.01(e)
(and of the definition of all the defined terms that appear in the
definition of “Change in Control”), the provisions of this Section
8,
or any rule, regulation, procedure, provision or determination made or
adopted prior to the Change in Control pursuant to this Section
8 or
any provision in any rule, regulation, procedure, provision or
determination made or adopted pursuant to the Plan that becomes effective
upon the occurrence of a Change in Control (collectively, the “Change in
Control Provisions”), or |
(c) |
undermining
or frustrating the intent of the Change in Control Provisions to secure
for Participants, former Participants and beneficiaries the maximum rights
and benefits that can be provided under the
Plan. |
Upon and
after the occurrence of a Change in Control, (i) all rights of all Participants,
former Participants and beneficiaries under the Plan (including without
limitation any rules, regulations or procedures promulgated under the Plan)
shall be contractual rights enforceable against Chesapeake and any successor to
all or substantially all of Chesapeake’s business or assets and (ii) any
Contingent Cash Bonus Award (1) shall be deemed to have been earned at the
maximum annual target amount, regardless of whether the specified performance
criteria have been satisfied and (2) shall be payable immediately following the
Change in Control. The Change in Control Provisions may be altered, amended or
suspended at any time before the date on which a Change in Control occurs;
provided that any alteration, amendment or suspension of the Change in Control
Provisions that is made before the date on which a Change in Control occurs, and
at the request of a person who effectuates the Change in Control, shall be
treated as though it occurred after the Change in Control and shall be subject
to the restrictions and limitations imposed by the preceding provisions of the
immediately preceding paragraph.
Nothing
herein shall preclude the Committee from authorizing or approving other plans or
forms of incentive compensation. The Committee shall have the right to determine
the extent to which any Participant shall participate in this Plan in addition
to any other plan or plans of the Company in which he shall
participate.
SECTION
9.
MISCELLANEOUS
9.01 |
No
Right To Employment. |
The
receipt of an Award under the Plan shall not give any employee any right to
continued employment by the Company, and the right to dismiss any employee is
specifically reserved to the Company. The receipt of an Award shall not give an
employee the right to receive any subsequent Award.
9.02 |
Designation
of Beneficiary. |
Each
Participant may designate a Beneficiary to receive the Participant’s awards in
the event of the Participant’s death. The designation shall be in writing, shall
be made in the form and manner prescribed by the Committee, and shall be
effective only if filed with the Committee prior to the Participant’s death. A
Participant may, at any time prior to his death, and without the consent of his
Beneficiary, change his designation of Beneficiary by filing a written notice of
such change with the Committee in the form and manner prescribed by the
Committee. In the absence of a designated Beneficiary, or if the designated
Beneficiary and any designated contingent Beneficiary predecease the
Participant, the Beneficiary shall be the Participant’s surviving spouse, or if
the Participant has no surviving spouse, the Participant’s estate.
9.03 |
Recipient
of Payment. |
(a) |
Except
as otherwise provided in paragraph (b), below, any Award under the Plan
shall be paid to the Participant, or to the Beneficiary of a deceased
Participant. |
(b) |
If
the Committee determines that a Participant or Beneficiary is not
competent, the Committee may pay any amount otherwise due to the
Participant or Beneficiary to the court-appointed legal guardian of the
Participant or Beneficiary, to an individual who has become the legal
guardian of the Participant or Beneficiary by operation of state law, or
to another individual whom the Committee determines to be entitled to
receive the payment on behalf of the Participant or
Beneficiary. |
(c) |
If
a payment is made under the Plan to a third party pursuant to paragraph
(b), above, the Plan, the Committee, and the Company shall be relieved, to
the fullest extent permitted by law, of any obligation to make a duplicate
payment to or on behalf of the Participant or
Beneficiary. |
The
Committee may make any appropriate arrangements to deduct from amounts otherwise
payable to a Participant any taxes that the Committee believes to be required to
be withheld by any government or governmental agency in respect of an Award. The
Participant and/or his Beneficiary shall bear all taxes on amounts paid under
the Plan to the extent that no taxes are withheld, irrespective of whether
withholding is required.
Any
headings used in this document are for convenience of reference only and may not
be given any weight in interpreting any provision of the Plan.
If any
provision of the Plan shall be held illegal or invalid for any reason, the
illegality or invalidity shall not affect the remaining parts of the Plan, and
the Plan shall be construed and enforced as if the illegal or invalid provision
had never been inserted herein. In addition, if any provision of the Plan
inadvertently causes an Award granted under the Plan to be “nonqualified
deferred compensation” within the meaning of section 409A of the Code, then such
Award shall be construed and enforced as if the provision had never been
inserted therein.
The Plan
shall be construed, administered, and regulated in accordance with the laws of
the State of Delaware (excluding the choice of law provisions thereof) and any
applicable requirements of federal law.
Executive Officer Compensation Arrangements
EXECUTIVE
OFFICER COMPENSATION ARRANGEMENTS
The
following table sets forth for each named executive officer of Chesapeake
Utilities Corporation (“Chesapeake”) (which officers were determined by
reference to Item 402(a)(3) of SEC Regulation S-K based on 2004 compensation)
information concerning determinations made with respect to the compensation paid
or payable for services in all capacities to Chesapeake and its subsidiaries,
which compensation decisions may be deemed the entry into or the amendment of a
material contract within the meaning of Item 601(b)(10) of SEC Regulation S-K.
These decisions consisting of (i) the establishment of the executive’s base
salary for 2005, (ii) the determination of the executive’s annual bonus for 2004
under the Cash
Bonus Incentive Plan, (iii)
the establishment of the executive’s 2005 target cash bonus (as a percentage of
salary) under the Cash Bonus Incentive Plan, (iv) determination of the
executive’s restricted stock award for 2004 under the Performance Incentive Plan
and (v) the establishment of the executive’s target restricted stock award for a
performance cycle ending December 31, 2005 under the Performance Incentive
Plan.
Name
and Pricipal Position |
|
2004
Base Salary |
|
2004
Cash Bonus |
|
2005
Cash Bonus Target (1) |
|
2004
Restricted Stock Awards (3) |
|
2005
Restricted Stock Awards Target (4) |
|
|
John
R. Schimkaitis, President, CEO and Director |
|
$ |
330,000 |
|
$ |
107,539 |
|
|
30 |
% |
|
|
|
6,720
|
|
|
9,600
|
|
|
Paul
M. Barbas, Executive Vice President |
|
$ |
265,000 |
|
$ |
72,875 |
|
|
25 |
% |
|
|
|
3,584
|
|
|
5,120
|
|
|
Michael
P. McMasters, Sr. Vice President and CFO |
|
$ |
230,000 |
|
$ |
61,669 |
|
|
25 |
% |
|
|
|
3,584
|
|
|
5,120
|
|
|
Stephen
C. Thompson, Sr. Vice President |
|
$ |
227,000 |
|
$ |
55,626 |
|
|
25 |
% |
|
|
|
-
|
|
|
7,680
|
|
(5) |
S.
Robert Zola, President, Sharp Energy, Inc. |
|
$ |
126,500 |
|
$ |
41,417 |
|
|
30 |
% |
(2 |
) |
|
-
|
|
|
7,680
|
|
(5) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) Up
to 150% of this cash bonus target can be earned to the extent certain
performance targets are achieved. The performance targets are based upon
the following performance criteria: (i) earnings per share, (ii) pretax
return on average investment of the Company's regulated
natural gas operations and (iii) earnings before interest and taxes of the
Company's Delmarva propane distribution operations. |
|
|
(2)
Mr. Zola has an additional cash bonus arrangement under which he can earn
a cash bonus equal to 10% of actual propane distribution net income in
excess of the upper end of a target income range. |
|
|
(3)
Represents the shares of Chesapeake stock awarded to each executive for
2004 under the Performance Incentive Plan. |
|
|
(4)
Represents a target restricted share award granted to each executive under
the Performance Incentive Plan for the performance period ending December
31, 2005. Messrs. Schimkaitis, Barbas and McMasters can earn up to 100% of
the target restricted stock award to the extent the following performance
criteria are attained: (i) earnings growth based on the achievement of
targeted measures of earnings for the Company's regulated natural gas
operations, Delmarva propane distribution operations, and overall
corporate results, (ii) growth in non-regulated investments based upon the
achievement of established milestones and objectives under the Company’s
long-term strategic plan, and (iii) shareholder value as measured by the
performance of the Company’s stock price (including the reinvestment of
dividends), in relationship to an index of industry peers. |
|
|
(5)
For 2005, Messrs. Thompson and Zola can earn up to 960 shares of
restricted stock , contingent upon Chesapeake achieving specified
performance goals relative to the Industry Peer Group relating to
stockholder value performance.
Mr. Thompson is also entitled to earn 6,720 shares of restricted stock if
the Company's natural gas segment achieves at least 90% of the target
pre-tax return on investment over the three-year period January 1, 2003 to
December 31, 2005. Mr. Zola is also entitled to earn
6,720 shares of restricted stock if the Company's propane distribution
income exceeds the income target for the three-year period January 1, 2003
to December 31, 2005. |
|
|
Non-Employee Director Compensation Arrangements
NON-EMPLOYEE
DIRECTOR COMPENSATION ARRANGEMENTS
The
non-employee director compensation arrangements consist of the following:
The
Chairman of the Board, who is a non-employee director, is paid an annual cash
retainer of $120,000 for his services in that capacity. Each of the Company’s
non-employee directors receives for his services as a director an annual cash
retainer of $12,000. Each non-employee director also is paid a fee of $1,000 for
each Board or committee meeting attended, except that, if a director attends
more than one meeting on the same day, the director is paid an additional fee of
$500 for each additional meeting attended. The Company is submitting to a
stockholder vote at the 2005 Annual Meeting the approval of a new Directors
Stock Compensation Plan (“DSCP”). If the DSCP is approved, each non-employee
director will receive an annual award of 600 shares of common stock and an
additional award of 150 shares for service as a committee chairman, subject to
adjustment in future years consistent with the terms of the DSCP. If the DSCP is
not approved by the stockholders at the 2005 Annual Meeting, each non-employee
director will be paid a retainer of an equivalent amount in cash.
Ratio of Earnings to Fixed Charges
Exhibit
12
Chesapeake
Utilities Corporation
Ratio
of Earnings to Fixed Charges
For
the Years Ended December 31, |
|
|
2004 |
|
|
2003 |
|
|
2002 |
|
Income
from continuing operations |
|
$ |
9,549,667 |
|
$ |
10,079,483 |
|
$ |
7,535,009 |
|
Add: |
|
|
|
|
|
|
|
|
|
|
Income
taxes |
|
|
5,701,090
|
|
|
6,032,445
|
|
|
4,609,552
|
|
Portion
of rents representative of interest factor |
|
|
309,446
|
|
|
351,445
|
|
|
411,461
|
|
Interest
on indebtedness |
|
|
5,206,723
|
|
|
5,616,756
|
|
|
4,867,520
|
|
Amortization
of debt discount and expense |
|
|
61,422
|
|
|
89,155
|
|
|
87,502
|
|
Earnings
as adjusted |
|
$ |
20,828,348 |
|
$ |
22,169,284 |
|
$ |
17,511,044 |
|
|
|
|
|
|
|
|
|
|
|
|
Fixed
Charges |
|
|
|
|
|
|
|
|
|
|
Portion
of rents representative of interest factor |
|
$ |
309,446 |
|
$ |
351,445 |
|
$ |
411,461 |
|
Interest
on indebtedness |
|
|
5,206,723
|
|
|
5,616,756
|
|
|
4,867,520
|
|
Amortization
of debt discount and expense |
|
|
61,422
|
|
|
89,155
|
|
|
87,502
|
|
Fixed
Charges |
|
$ |
5,577,591 |
|
$ |
6,057,356 |
|
$ |
5,366,483 |
|
Ratio
of Earnings to Fixed Charges |
|
|
3.73
|
|
|
3.66
|
|
|
3.26
|
|
Subsidiaries of the Registrant
Exhibit
21
Chesapeake
Utilities Corporation
Subsidiaries
of the Registrant
Subsidiaries |
State
Incorporated |
aQuality
Company, Inc |
Delaware |
Eastern
Shore Natural Gas Company |
Delaware |
Sharp
Energy, Inc. |
Delaware |
Chesapeake
Service Company |
Delaware |
Xeron,
Inc. |
Mississippi |
Sam
Shannahan Well Company, Inc. |
Maryland |
Sharp
Water, Inc. |
Delaware |
OnSight
Energy, LLC |
Delaware |
Peninsula
Energy Services Company, Inc. |
Delaware |
|
|
|
|
Subsidiaries
of Sharp Energy, Inc. |
State
Incorporated |
Sharpgas,
Inc. |
Delaware |
Sharp
Living, Inc. |
Delaware |
Tri-County
Gas Co., Incorporated |
Maryland |
|
|
|
|
Subsidiaries
of Chesapeake Service Company |
State
Incorporated |
Skipjack,
Inc. |
Delaware |
BravePoint,
Inc. |
Georgia |
Chesapeake
Investment Company |
Delaware |
Eastern
Shore Real Estate, Inc. |
Maryland |
|
|
|
|
Subsidiaries
of Sharp Water, Inc. |
State
Incorporated |
aquality
Solution, of Maryland, Inc. |
Maryland |
Absolute
Water Care, Inc. |
Florida |
Sharp
Water of Florida, Inc. |
Delaware |
Sharp
Water of Idaho, Inc. |
Delaware |
Sharp
Water of Minnesota, Inc. |
Delaware |
Consent of Indenpendent Registered Public Accounting Firm
Exhibit
23
Consent
of Independent Registered Public Accounting Firm
________
We hereby
consent to the incorporation by reference in the Registration Statement on Form
S-3 (Nos. 33-28391, 33-64671, 333-63381 and 333-121524) and Form S-8 (Nos.
333-01175 and 333-94159) of Chesapeake Utilities Corporation of our report dated
March 16, 2005 relating to the financial statements, financial statement
schedule, management’s assessment of the effectiveness of internal control over
financial reporting and the effectiveness of internal control over financial
reporting, which appears in this Form 10-K.
/s/ PricewaterhouseCoopers LLP
PricewaterhouseCoopers
LLP
Boston,
Massachusetts
March 16,
2005
CEO Certification
Exhibit
31.1
CERTIFICATE
PURSUANT TO RULE 13A-14(A)
UNDER
THE SECURITIES EXCHANGE ACT OF 1934
I, John
R. Schimkaitis, certify that:
I have
reviewed this annual report on Form 10-K of Chesapeake Utilities
Corporation;
Based on
my knowledge, this report does not contain any untrue statement of a material
fact or omit to state a material fact necessary to make the statements made, in
light of the circumstances under which such statements were made, not misleading
with respect to the period covered by this report;
Based on
my knowledge, the financial statements, and other financial information included
in this report, fairly present in all material respects the financial condition,
results of operations and cash flows of the registrant as of, and for, the
periods presented in this report;
The
registrant’s other certifying officers and I are responsible for establishing
and maintaining disclosure controls and procedures (as defined in Exchange Act
Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as
defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and we
have:
a) |
designed
such disclosure controls and procedures, or caused such disclosure
controls and procedures to be designed under our supervision, to ensure
that material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this report is being
prepared; |
b) |
designed
such internal control over financial reporting, or caused such internal
control over financial reporting to be designed under our supervision, to
provide reasonable assurance regarding the reliability of financial
reporting and the preparation of financial statements for external
purposes in accordance with generally accepted accounting
principles; |
c) |
evaluated
the effectiveness of the registrant’s disclosure controls and procedures
and presented in this report our conclusions about the effectiveness of
the disclosure controls and procedures, as of the end of the
period covered
by this report based on such evaluations; and |
d) |
disclosed
in this report any change in the registrant’s internal control over
financial reporting that occurred during the registrant’s most recent
fiscal quarter (the registrant’s fourth fiscal quarter in the case of an
annual report) that has materially affected, or is reasonably likely to
materially affect, the registrant 's internal control over financial
reporting; and |
The
registrant’s other certifying officers and I have disclosed, based on our most
recent evaluation of internal control over financial reporting, to the
registrant’s auditors and the audit committee of the registrant’s board of
directors (or persons performing the equivalent functions):
a) |
all
significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant’s ability to record,
process, summarize and report financial information;
and |
b) |
any
fraud, whether or not material, that involves management or other
employees who have a significant role in the
registrant’s
internal control over financial reporting. |
Date:
March 16, 2005
/s/
John R. Schimkaitis
John R.
Schimkaitis
President
and Chief Executive Officer
CFO Certification
Exhibit
31.2
CERTIFICATE
PURSUANT TO RULE 13A-14(A)
UNDER
THE SECURITIES EXCHANGE ACT OF 1934
I,
Michael P. McMasters, certify that:
I have
reviewed this annual report on Form 10-K of Chesapeake Utilities
Corporation;
Based on
my knowledge, this report does not contain any untrue statement of a material
fact or omit to state a material fact necessary to make the statements made, in
light of the circumstances under which such statements were made, not misleading
with respect to the period covered by this report;
Based on
my knowledge, the financial statements, and other financial information included
in this report, fairly present in all material respects the financial condition,
results of operations and cash flows of the registrant as of, and for, the
periods presented in this report;
The
registrant’s other certifying officers and I are responsible for establishing
and maintaining disclosure controls and procedures (as defined in Exchange Act
Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as
defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and we
have:
a) |
designed
such disclosure controls and procedures, or caused such disclosure
controls and procedures to be designed under our supervision, to ensure
that material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this report is being
prepared; |
b) |
designed
such internal control over financial reporting, or caused such internal
control over financial reporting to be designed under our supervision, to
provide reasonable assurance regarding the reliability of financial
reporting and the preparation of financial statements for external
purposes in accordance with generally accepted accounting
principles; |
c) |
evaluated
the effectiveness of the registrant’s disclosure controls and procedures
and presented in this report our conclusions about the effectiveness of
the disclosure controls and procedures, as of the end of the
period covered
by this report based on such evaluations; and |
d) |
disclosed
in this report any change in the registrant’s internal control over
financial reporting that occurred during the registrant’s most recent
fiscal quarter (the registrant’s fourth fiscal quarter in the case of an
annual report) that has materially affected, or is reasonably likely to
materially affect, the registrant 's internal control over financial
reporting; and |
The
registrant’s other certifying officers and I have disclosed, based on our most
recent evaluation of internal control over financial reporting, to the
registrant’s auditors and the audit committee of the registrant’s board of
directors (or persons performing the equivalent functions):
a) |
all
significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant’s ability to record,
process, summarize and report financial information;
and |
b) |
any
fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant’s internal control
over financial reporting. |
Date:
March 16, 2005
/s/
Michael P. McMasters
Michael
P. McMasters
Senior
Vice President and Chief Financial Officer
CEO Section 1350 Certification
Exhibit
32.1
Certificate
of Chief Executive Officer
of
Chesapeake
Utilities Corporation
(pursuant
to 18 U.S.C. Section 1350)
I, John
R. Schimkaitis, President and Chief Executive Officer of Chesapeake Utilities
Corporation, certify that, to the best of my knowledge, the Annual Report on
Form 10-K of Chesapeake Utilities Corporation (“Chesapeake”) for the year ended
December 31, 2004, filed with the Securities and Exchange Commission on the date
hereof (i) fully complies with the requirements of section 13(a) or 15(d) of the
Securities Exchange Act of 1934, as amended, and (ii) the information contained
therein fairly presents, in all material respects, the financial condition and
results of operations of Chesapeake.
/s/
John R. Schimkaitis
John R.
Schimkaitis
March 16,
2005
A signed
original of this written statement required by Section 906 of the Sarbanes-Oxley
Act of 2002, or other document authenticating, acknowledging, or otherwise
adopting the signature that appears in typed form within the electronic version
of this written statement required by Section 906, has been provided to
Chesapeake Utilities Corporation and will be retained by Chesapeake Utilities
Corporation and furnished to the Securities and Exchange Commission or its staff
upon request.
CFO Section 1350 Certification
Exhibit
32.2
Certificate
of Chief Financial Officer
of
Chesapeake
Utilities Corporation
(pursuant
to 18 U.S.C. Section 1350)
I,
Michael P. McMasters, Senior Vice President and Chief Financial Officer of
Chesapeake Utilities Corporation, certify that, to the best of my knowledge, the
Annual Report on Form 10-K of Chesapeake Utilities Corporation (“Chesapeake”)
for the year ended December 31, 2004, filed with the Securities and Exchange
Commission on the date hereof (i) fully complies with the requirements of
section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, and
(ii) the information contained therein fairly presents, in all material
respects, the financial condition and results of operations of
Chesapeake.
/s/
Michael P. McMasters
Michael
P. McMasters
March 16,
2005
A signed
original of this written statement required by Section 906 of the Sarbanes-Oxley
Act of 2002, or other document authenticating, acknowledging, or otherwise
adopting the signature that appears in typed form within the electronic version
of this written statement required by Section 906, has been provided to
Chesapeake Utilities Corporation and will be retained by Chesapeake Utilities
Corporation and furnished to the Securities and Exchange Commission or its staff
upon request.