Chesapeake Utilities Corporation

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Chesapeake Utilities Corporation

909 Silver Lake Boulevard
Dover, Delaware, 19904
U.S.A.
Telephone: (302) 734-6799
Fax: (302) 734-6750
Web site: http://www.chpk.com

Public Company
Incorporated: 1947
Employees: 582
Sales: $142.2 million (2002)
Stock Exchanges: New York
Ticker Symbol: CPK
NAIC: 221210 Natural Gas Distribution

Chesapeake Utilities Corporation, based in Dover, Delaware, is a small, diversified utility company involved in four areas: natural gas distribution and transmission, propane gas distribution and wholesale marketing, advanced information services, and water services. Distribution and transmission of natural gas is the company’s primary business, serving more than 45,000 residential, commercial, and industrial customers through three divisions. On the gas distribution side, in central and southern Delaware and Maryland’s Eastern Shore, the company does business under its own name, while in Florida, primarily in the corridor between Orlando and Tampa, it operates as Central Florida Gas Company. Natural gas transmission is conducted by a subsidiary, Eastern Shore Natural Gas Company, owner and operator of the only natural gas transmission system south of the Chesapeake and Delaware Canal. Chesapeake’s propane distribution and marketing segment is handled by two subsidiaries: Sharp Energy, Inc., which serves some 35,000 customers in central and southern Delaware, and the Eastern Shore of Maryland and Virginia. In recent years, Chesapeake has taken steps to extend its propane operations to its Florida markets. In addition, another Chesapeake subsidiary, Houston-based Xeron, markets propane to major independent oil and petrochemical companies as well as retail propane companies and provides pricing flexibility for Sharp customers. The Advance Information Services segment is conducted by Brave-Point, Inc., providing information technology consulting services, custom programming, and training to corporate clients around the world. Finally, Chesapeake’s Water Services segment offers water conditioning and treatment services through seven EcoWater dealerships operating in Delaware, Florida, Idaho, Maryland, Michigan, and Minnesota. Beyond its four core businesses, Chesapeake also owns two real estate companies, Skipjack Inc. and Eastern Shore Real Estate, whose primary functions to lease property to Chesapeake affiliates.

Origins of Company Date Back to Mid-1800s

Chesapeake Utilities Corporation was formed in Delaware on November 12, 1947, and was soon comprised of three operating subsidiaries: Dover Gas Light Company, Citizens Gas Company, and Sussex Gas Company. The oldest of these entities was Dover Gas Light Company, chartered in 1850 but not operational until 1859. The company was owned by a Philadelphia businessman named Daniel Trump, who in October 1859 bought a 12,000-square-foot facility in Dover, Delaware, where he established the headquarters of Dover Gas Light. Like many gas companies of the era, it was established to provide street lighting, which was just starting to become widespread. Scientists had experimented throughout the 1700s with the concept of creating an illuminant from gas distilled from coal that had the potential to replace candles and oil lamps, but it was not until 1798 that the technology applied in a commercial way, when William Murdock distributed coal gas through pipes in the Boulton and Watt Soho Works in Birmingham, England. In 1807, Frederick Winsor used gas to light the Pall Mall section of London, and in 1812 he was granted a charter from Parliament to create The London and Westminster Chartered Gas Light and Coke Company. Paris had gas lights in 1816, and Vienna in 1818. The first gas streetlight company to be chartered in America was located in Baltimore in 1817, followed by Boston in 1822 and New York a year later. Dover Gas was one of the earlier gas light companies organized in the country.

At first Trump manufactured his gas using resin, which cost around $1.50 a barrel. A few years later, because of the Civil War, the price of resin reached an astounding $60 a barrel, forcing Trump to turn to coal-oil and wood as a substitute. He sold the business to Richardson and Robbins, a canning company, which resumed the use of resin before opting to employ the more popular method of coal gas. At this time in America, gas was still distributed by a multitude of small operators like Dover Gas, which manufactured their own product in local plants. Typically, coal gas was produced by reducing coal to coke in a retort house, then piping the product to another facility where it was purified by lime. The gas was then piped to a massive tank called a gasholder or “gasometer.” This method of providing commercial gas would remain essentially unchanged until the 1930s, when advances in pipeline technologies began to make the use of natural gas practical. Dover Gas, in fact, would use its coal gas plant until the post-World War II era.

From 1947 Incorporation to 1970s Gas Shortages

Dover Gas was incorporated in 1881. Harry A. Richardson was named president, his family owning a controlling interest in the business. Several years later Dover Gas became a subsidiary of a holding company, General Gas and Electric Corporation. It remained a part of General Gas and Electric until 1942, when it was sold to the Philadelphia investment banking firm of Harrison and Company, which already owned a Maryland utility, Hagerstown Gas Company. A key element of this transaction that would affect the future of Chesapeake Utilities Corporation was the decision of Edward C. Burton, Sr., manager of Dover Gas and another gas subsidiary, to cast his lot with Harrison and Company and take over the management of Dover Gas and Hagerstown Gas. In November 1947, Harrison and Company incorporated Chesapeake Utilities Corporation to serve as the parent company for its Dover Gas and Hagerstown Gas assets. Only a few months later, in March 1948, Chesapeake acquired Citizens Gas and Sussex Gas, the other companies that would form the bulk of its present holdings.

The history of Citizens Gas can be traced back to 1907 with the creation of Salisbury, Maryland-based Home Gas company, financed by a group of wealthy local investors. It became known as Citizens Gas Company in 1914 after it was acquired by William J. Downing. The business then changed hands twice in a short period of time, first acquired by Southern Cities Utilities and later becoming a subsidiary of Consolidated Electric and Gas Company, which at the same time acquired Sussex Gas Company, the third of the three principal subsidiaries of Chesapeake Utilities. Sussex Gas was started in 1910 to serve Seaford, Delaware. Beyond that fact, little is known about the roots of the business. Consolidated Electric and Gas looked to divest its gas interests in the late 1930s, and in 1939 Citizens Gas and Sussex Gas were sold to a partnership doing business as C.M. Lucas Co. and James Piper. They remained under management of this firm until 1948, when the companies were sold to Chesapeake Utilities.

Burton was named vice-president of the merged company and for the next 23 years acted essentially as its chief operating officer and was responsible in large measure for the success of the enterprise. One of the first areas of change for the business was the switch from manufactured gas to propane-air, a change which had already been undertaken by Sussex Gas a short time before the merger. Dover Gas converted later in 1948, followed by Citizens Gas two years later. It was also in 1948 that Burton’s son, Edward C. Burton, Jr. started his business career by becoming manager of the Eastern Shore Public Service Company, bought by the Burton family in that year. In 1950, he became president of the company, which in 1955 became a subsidiary of Chesapeake Utilities.

The major thrust of Chesapeake Utilities in the 1950s was to create a consolidated system and to expand upon it. A key element was put in place in 1956 when Eastern Shore Natural Gas Company was incorporated as a subsidiary and a year later began to construct a natural gas pipeline to connect with the network of Transcontinental Gas Pipeline Corporation in order to supply Dover, Citizens, and Sussex, as well as other users in Maryland and Delaware. In recent years, natural gas provided by wells in the southwestern United States had begun to be distributed throughout the country by thousands of miles of pipeline, making gas a popular choice for heating and cooking in the new housing developments that sprung up during the boom years of the postwar era. With the completion of the Eastern Shore pipeline, Chesapeake Utility’s three operating gas companies in 1959 converted from propane-air to natural gas. As a result, customers’ rates were reduced by as much as 20 percent.

In January 1960, due to changes in federal legislation governing utilities, Chesapeake was able to merge its three gas subsidiaries and begin to do business as a single company. Eastern Shore, because it was not a utility, remained a subsidiary. With the industrialization of the Delmarva Peninsula in 1960s, Chesapeake underwent significant expansion to keep pace with rising demand for gas in its market, completing a number of extensions to its distribution network. This effort continued into the 1970s, but Chesapeake now faced a different challenge: a gas shortage.

Company Perspectives:

Chesapeake Utilities Corporation is a diversified utility company engaged in natural gas distribution and transmission, propane distribution and wholesale marketing, advanced information systems, water services, and other related businesses.

In 1971, Transcontinental Gas Pipeline Corporation cut back on the supply of gas it delivered to Chesapeake by 4 percent. Even as Chesapeake continued to expand its distribution network, cutbacks in gas mounted over the next several years, resulting in a 19 percent decrease in net income between 1972 and 1977. The gas shortage grew so severe that in 1977 some of Chesapeake’s industrial customers were cut off completely for weeks at a time. Nevertheless, Chesapeake was able to find and deliver alternative sources of fuel, and as a result no businesses were closed or jobs lost, occurrences that were commonplace elsewhere in the eastern United States. To help alleviate the shortage, Chesapeake, through an Eastern Shore subsidiary, Dover Exploration Company, began in the mid-1970s to invest in exploration. Within a few years, gas drawn from successful wells began to flow through the natural gas system and reach Chesapeake customers. As gas supplies improved, Dover Exploration changed its focus from drilling to the development of existing wells.

New Leadership and Growth: 1980s–90s

Edward C. Burton, Sr. died in February 1974. His son took over a position of leadership, becoming president of the company, then in June 1980 was named chief executive officer and chairman of the board of directors. He oversaw the start of a diversification effort in the 1980s, including involvement in propane. (Piped propane was a viable alternative to natural gas for residential subdivisions, either delivered by a community gas system that served an entire development from a central site or by a cluster tank system that relied on a number of smaller storage facilities.) In 1980, the company acquired Mitchell’s Gas Service, a Laurel, Delaware, propane distribution company, then in 1981 purchased the Clarence E. Sharp Company, a Georgetown, Delaware, propane company. They would be consolidated as Sharpgas, Inc. and form the basis of today’s Sharp Energy, Inc. These propane assets were augmented a year later with the acquisition of a division of Northern Propane Gas Company, which doubled the size of Sharp.

Edward C. Burton, Jr. retired as CEO in July 1983, ending the long tenure of active service by the Burton family. Under new leadership the company continued to diversify in the 1980s. In order to help fund these efforts, Chesapeake went public in 1985 and began trading on the NASDAQ. (In 1993 it would move to the New York Stock Exchange.) To offset the dependence of its gas distribution business on the temperature-sensitive Delmarva region, Chesapeake looked to Florida. In 1985, it paid $3 million to acquire Central Florida Gas Company, a Winter Haven, Florida, natural gas distribution company that served the rapidly growing area surrounding Walt Disney World. The company in 1988 used stock to acquire the Plant City Natural Gas Company and Saf-T-Gas Co., a propane business, both located in Plant City, Florida. In the meantime, Chesapeake also looked to expand on its home territory. In 1986, it bought Cambridge Gas Company, a Cambridge, Maryland, gas company, then in 1987 acquired Georgetown Service and Gas Company, a propane distribution business located in Georgetown, Delaware. Chesapeake next paid more than $13.5 million in 1988 to acquire the propane and oil products distribution assets of Kellam Energy, Inc., based in Belle Haven, Virginia.

It was also in the 1980s that Chesapeake laid the foundation for its Advance Information Services segment of its business. In 1988, it bought Capital Data Systems, Inc. to develop in-house financial and energy billing systems as well as serve outside clients. In 1991, Chesapeake hired Atlanta-based United Systems, Inc. to act as a consultant to the struggling subsidiary, and management was so pleased with its relationship that later in 1991 it acquired United Systems. These two information technology purchases would evolve into Bravepoint, Inc.

In the 1990s, Chesapeake continued to adjust its business mix. It sold its Florida propane business and opted to exit the fuel oil and motor fuels delivery business in Maryland and Virginia. In 1998, Chesapeake established its water services segment by acquiring Salisbury, Maryland-based Tolan Water Service, an EcoWater dealership and water conditioning and treatment business. A year later, the company acquired EcoWater Systems of Michigan, Inc., a Detroit-area company doing business as Douglas Water Conditioning. In 2000, Carroll Water Systems, Inc. of Westminster, Maryland, another EcoWater dealership, was brought into the fold. Then in 2001 the Chesapeake water services segment acquired water conditioning and treatment assets from Absolute Water Care, Inc., serving Sarasota, Charlotte, and Manatee counties in Florida; Aquarius Systems, Inc., serving Fort Pierce and Port St. Lucie, Florida; Automatic Water Conditioning Inc., another company serving Port St. Lucie; EcoWater Systems of Rochester, serving Rochester, Minnesota; and Intermountain Water Inc./Blue Springs Water, serving Boise, Idaho.

Other acquisitions in the 1990s that filled out Chesapeake’s slate of businesses included the 1997 acquisition of Eastern Shore Real Estate and the 1998 purchase of Xeron, a propane marketing company. In its core gas distribution segment, Chesapeake faced the challenge of deregulation, first in Florida and later in its main markets. Increasingly, the future of the company lay with the unregulated portions of its business. As Chesapeake entered a new century, it looked to continue investing in its traditional gas distribution business while at the same time seeking opportunities in other areas in an effort to establish a stable base of earnings and generate higher returns that a traditional utility.