##### Table of Contents



United StatesSecurities and Exchange Commission
 Washington, D.C. 20549
 
 FORM 10-Q
 þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the quarterly period ended: September 30, 2010
 OR
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the transition period from  to
 Commission File Number: 001-11590
 Chesapeake Utilities Corporation
  Delaware
    
    51-0064146(State or other jurisdiction of
    
    (I.R.S. Employerincorporation 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)
 þ o
 o o
  Large accelerated filer o
    
    Accelerated filer þ
    
    Non-accelerated filer o
    
    Smaller reporting company o
 o þ




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##### 



Table of Contents
 PART I  FINANCIAL INFORMATION
    
    
    1Item 1. Financial Statements
    
    
    1Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    30Item 3. Quantitative and Qualitative Disclosures about Market Risk
    
    
    54Item 4. Controls and Procedures
    
    
    56PART II  OTHER INFORMATION
    
    
    57Item 1. Legal Proceedings
    
    
    57Item 1A. Risk Factors
    
    
    57Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    57Item 3. Defaults upon Senior Securities
    
    
    57Item 5. Other Information
    
    
    58Item 6. Exhibits
    
    
    58SIGNATURES
    
    
    59Exhibit 10.1Exhibit 31.1Exhibit 31.2Exhibit 32.1Exhibit 32.2




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##### Table of Contents



GLOSSARY OF KEY TERMS
 Frequently used abbreviations, acronyms, or terms used in this report:
 Subsidiaries of Chesapeake Utilities Corporation
 BravePoint
    
    BravePoint, Inc. is a wholly-owned subsidiary of Chesapeake Services Company, which is a wholly-owned subsidiary of ChesapeakeChesapeake
    
    The Registrant, the Registrant and its subsidiaries, or the Registrants subsidiaries, as appropriate in the context of the disclosureCompany
    
    The Registrant, the Registrant and its subsidiaries, or the Registrants subsidiaries, as appropriate in the context of the disclosureESNG
    
    Eastern Shore Natural Gas Company, a wholly-owned subsidiary of ChesapeakeFPU
    
    Florida Public Utilities Company, a wholly-owned subsidiary of Chesapeake, effective October 28, 2009PESCO
    
    Peninsula Energy Services Company, Inc., a wholly-owned subsidiary of ChesapeakePIPECO
    
    Peninsula Pipeline Company, Inc., a wholly-owned subsidiary of ChesapeakeSharp
    
    Sharp Energy, Inc., a wholly-owned subsidiary of Chesapeakes and Sharps subsidiary, Sharpgas, Inc.Xeron
    
    Xeron, Inc., a wholly-owned subsidiary of Chesapeake
 Regulatory Agencies
 Delaware PSC
    
    Delaware Public Service CommissionEPA
    
    United States Environmental Protection AgencyFASB
    
    Financial Accounting Standards BoardFERC
    
    Federal Energy Regulatory CommissionFDEP
    
    Florida Department of Environmental ProtectionFlorida PSC
    
    Florida Public Service CommissionIASB
    
    International Accounting Standards BoardMaryland PSC
    
    Maryland Public Service CommissionMDE
    
    Maryland Department of the EnvironmentPSC
    
    Public Service CommissionSEC
    
    Securities and Exchange Commission
 Accounting Standards Related
 ASC
    
    FASB Accounting Standards CodificationTM (Codification)ASU
    
    FASB Accounting Standards UpdateGAAP
    
    Generally Accepted Accounting PrinciplesIFRS
    
    International Financial Reporting Standards
 Other
 AS/SVE
    
    Air Sparging and Soil/Vapor ExtractionBS/SVE
    
    Bio-Sparging and Soil/Vapor ExtractionCGS
    
    Community Gas SystemsDSCP
    
    Directors Stock Compensation PlanDts
    
    DekathermsDts/d
    
    Dekatherms per dayFRP
    
    Fuel Retention PercentageGSR
    
    Gas Sales Service RatesGulf Power
    
    Gulf Power CorporationHDD
    
    Heating Degree-DaysMcf
    
    Thousand Cubic FeetMWH
    
    Megawatt HourMGP
    
    Manufactured Gas PlantNYSE
    
    New York Stock ExchangePIP
    
    Performance Incentive PlanRAP
    
    Remedial Action PlanSanford Group
    
    FPU and Other Responsible Parties involved with the Sanford Environmental SiteTETLP
    
    Texas Eastern Transmission, LP




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##### Table of Contents



PART I  FINANCIAL INFORMATION
 
 Item 1. Financial Statements
 Chesapeake Utilities Corporation and Subsidiaries
 Condensed Consolidated Statements of Income  (Unaudited)
 For the Three Months Ended September 30,
    
    2010
    
    
    2009(in thousands, except shares and per share data)Operating RevenuesRegulated energy
    
    $
    53,412
    
    
    $
    15,372Unregulated energy
    
    
    20,134
    
    
    
    14,011Other
    
    
    2,920
    
    
    
    2,375Total operating revenues
    
    
    76,466
    
    
    
    31,758Operating ExpensesRegulated energy cost of sales
    
    
    27,148
    
    
    
    2,345Unregulated energy and other cost of sales
    
    
    17,238
    
    
    
    12,071Operations
    
    
    17,993
    
    
    
    11,001Transaction-related costs
    
    
    68
    
    
    
    (675
    )Maintenance
    
    
    1,899
    
    
    
    600Depreciation and amortization
    
    
    5,058
    
    
    
    2,437Other taxes
    
    
    2,479
    
    
    
    1,722Total operating expenses
    
    
    71,883
    
    
    
    29,501Operating Income
    
    
    4,583
    
    
    
    2,257Other income (loss), net of expenses
    
    
    102
    
    
    
    (26
    )Interest charges
    
    
    2,256
    
    
    
    1,540Income Before Income Taxes
    
    
    2,429
    
    
    
    691Income tax expense
    
    
    801
    
    
    
    383Net Income
    
    $
    1,628
    
    
    $
    308Weighted Average Common Shares Outstanding:Basic
    
    
    9,493,425
    
    
    
    6,883,070Diluted
    
    
    9,497,696
    
    
    
    6,888,024Earnings Per Share of Common Stock:Basic
    
    $
    0.17
    
    
    $
    0.04Diluted
    
    $
    0.17
    
    
    $
    0.04Cash Dividends Declared Per Share of Common Stock
    
    $
    0.330
    
    
    $
    0.315
   - 1 -




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##### Table of Contents



Chesapeake Utilities Corporation and Subsidiaries
 Condensed Consolidated Statements of Income (Unaudited)
 For the Nine Months Ended September 30,
    
    2010
    
    
    2009(in thousands, except shares and per share data)Operating RevenuesRegulated energy
    
    $
    197,779
    
    
    $
    86,422Unregulated energy
    
    
    104,018
    
    
    
    83,236Other
    
    
    7,990
    
    
    
    7,413Total operating revenues
    
    
    309,787
    
    
    
    177,071Operating ExpensesRegulated energy cost of sales
    
    
    105,322
    
    
    
    39,143Unregulated energy and other cost of sales
    
    
    82,713
    
    
    
    66,962Operations
    
    
    54,848
    
    
    
    34,820Transaction-related costs
    
    
    179
    
    
    
    530Maintenance
    
    
    5,388
    
    
    
    1,932Depreciation and amortization
    
    
    15,719
    
    
    
    7,235Other taxes
    
    
    7,876
    
    
    
    5,371Total operating expenses
    
    
    272,045
    
    
    
    155,993Operating Income
    
    
    37,742
    
    
    
    21,078Other income, net of expenses
    
    
    206
    
    
    
    19Interest charges
    
    
    6,924
    
    
    
    4,755Income Before Income Taxes
    
    
    31,024
    
    
    
    16,342Income tax expense
    
    
    12,082
    
    
    
    6,636Net Income
    
    $
    18,942
    
    
    $
    9,706Weighted-Average Common Shares Outstanding:Basic
    
    
    9,460,462
    
    
    
    6,859,516Diluted
    
    
    9,570,921
    
    
    
    6,981,010Earnings Per Share of Common Stock:Basic
    
    $
    2.00
    
    
    $
    1.41Diluted
    
    $
    1.98
    
    
    $
    1.40Cash Dividends Declared Per Share of Common Stock
    
    $
    0.975
    
    
    $
    0.935
   - 2 -




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Chesapeake Utilities Corporation and Subsidiaries
 Condensed Consolidated Statements of Cash Flows (Unaudited)
 For the Nine Months Ended September 30,
    
    2010
    
    
    2009(in thousands)Operating ActivitiesNet Income
    
    $
    18,942
    
    
    $
    9,706Adjustments to reconcile net income to net cash provided by operating activities:Depreciation and amortization
    
    
    15,719
    
    
    
    7,235Depreciation and accretion included in other costs
    
    
    2,428
    
    
    
    1,987Deferred income taxes, net
    
    
    9,847
    
    
    
    2,353Unrealized loss (gain) on commodity contracts
    
    
    (443
    )
    
    
    1,382Unrealized gain on investments
    
    
    (13
    )
    
    
    (161
    )Employee benefits
    
    
    (594
    )
    
    
    1,394Share-based compensation
    
    
    899
    
    
    
    897Changes in assets and liabilities:Accounts receivable and accrued revenue
    
    
    23,337
    
    
    
    25,513Propane inventory, storage gas and other inventory
    
    
    (411
    )
    
    
    2,071Regulatory assets
    
    
    967
    
    
    
    (1,182
    )Prepaid expenses and other current assets
    
    
    631
    
    
    
    480Accounts payable and other accrued liabilities
    
    
    (13,922
    )
    
    
    (13,409
    )Income taxes receivable
    
    
    (6,392
    )
    
    
    6,766Accrued interest
    
    
    1,381
    
    
    
    1,160Customer deposits and refunds
    
    
    1,891
    
    
    
    (1,027
    )Accrued compensation
    
    
    735
    
    
    
    (280
    )Regulatory liabilities
    
    
    453
    
    
    
    2,179Other liabilities
    
    
    191
    
    
    
    388Net cash provided by operating activities
    
    
    55,646
    
    
    
    47,452Investing ActivitiesProperty, plant and equipment expenditures
    
    
    (26,953
    )
    
    
    (19,674
    )Purchase of investments
    
    
    (2,308
    )
    
    
    Environmental expenditures
    
    
    (522
    )
    
    
    (33
    )Net cash used in investing activities
    
    
    (29,783
    )
    
    
    (19,707
    )Financing ActivitiesCommon stock dividends
    
    
    (8,187
    )
    
    
    (5,683
    )Issuance (purchase) of stock for Dividend Reinvestment Plan
    
    
    405
    
    
    
    (9
    )Change in cash overdrafts due to outstanding checks
    
    
    7,020
    
    
    
    471Net repayment under line of credit agreements
    
    
    (23,069
    )
    
    
    (23,387
    )Other short-term borrowing
    
    
    29,100
    
    
    
    Repayment of long-term debt
    
    
    (31,207
    )
    
    
    (20
    )Net cash used in financing activities
    
    
    (25,938
    )
    
    
    (28,628
    )Net Decrease in Cash and Cash Equivalents
    
    
    (75
    )
    
    
    (883
    )Cash and Cash Equivalents  Beginning of Period
    
    
    2,828
    
    
    
    1,611Cash and Cash Equivalents  End of Period
    
    $
    2,753
    
    
    $
    728
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Chesapeake Utilities Corporation and Subsidiaries
 Condensed Consolidated Balance Sheets (Unaudited)
 September 30,
    
    
    December 31,Assets
    
    2010
    
    
    2009(in thousands, except shares and per share data)Property, Plant and EquipmentRegulated energy
    
    $
    478,048
    
    
    $
    463,856Unregulated energy
    
    
    60,614
    
    
    
    61,360Other
    
    
    16,582
    
    
    
    16,054Total property, plant and equipment
    
    
    555,244
    
    
    
    541,270Less: Accumulated depreciation and amortization
    
    
    (118,393
    )
    
    
    (107,318
    )Plus: Construction work in progress
    
    
    11,029
    
    
    
    2,476Net property, plant and equipment
    
    
    447,880
    
    
    
    436,428Investments
    
    
    3,006
    
    
    
    1,959Current AssetsCash and cash equivalents
    
    
    2,753
    
    
    
    2,828Accounts receivable (less allowance for uncollectible
accounts of $1,030 and $1,609, respectively)
    
    
    52,166
    
    
    
    70,029Accrued revenue
    
    
    7,410
    
    
    
    12,838Propane inventory, at average cost
    
    
    7,804
    
    
    
    7,901Other inventory, at average cost
    
    
    3,586
    
    
    
    3,149Regulatory assets
    
    
    53
    
    
    
    1,205Storage gas prepayments
    
    
    6,215
    
    
    
    6,144Income taxes receivable
    
    
    9,071
    
    
    
    2,614Deferred income taxes
    
    
    523
    
    
    
    1,498Prepaid expenses
    
    
    5,301
    
    
    
    5,843Mark-to-market energy assets
    
    
    2,290
    
    
    
    2,379Other current assets
    
    
    147
    
    
    
    147Total current assets
    
    
    97,319
    
    
    
    116,575Deferred Charges and Other AssetsGoodwill
    
    
    35,609
    
    
    
    34,095Other intangible assets, net
    
    
    3,547
    
    
    
    3,951Long-term receivables
    
    
    235
    
    
    
    343Regulatory assets
    
    
    20,835
    
    
    
    19,860Other deferred charges
    
    
    3,844
    
    
    
    3,891Total deferred charges and other assets
    
    
    64,070
    
    
    
    62,140Total Assets
    
    $
    612,275
    
    
    $
    617,102
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Chesapeake Utilities Corporation and Subsidiaries
 Condensed Consolidated Balance Sheets (Unaudited)
 September 30,
    
    
    December 31,Capitalization and Liabilities
    
    2010
    
    
    2009(in thousands, except shares and per share data)CapitalizationStockholders equityCommon stock, par value $0.4867 per share
(authorized 25,000,000 and 12,000,000 shares, respectively)
    
    $
    4,623
    
    
    $
    4,572Additional paid-in capital
    
    
    147,022
    
    
    
    144,502Retained earnings
    
    
    72,858
    
    
    
    63,231Accumulated other comprehensive loss
    
    
    (2,404
    )
    
    
    (2,524
    )Deferred compensation obligation
    
    
    767
    
    
    
    739Treasury stock
    
    
    (767
    )
    
    
    (739
    )Total stockholders equity
    
    
    222,099
    
    
    
    209,781Long-term debt, net of current maturities
    
    
    97,491
    
    
    
    98,814Total capitalization
    
    
    319,590
    
    
    
    308,595Current LiabilitiesCurrent portion of long-term debt
    
    
    7,216
    
    
    
    35,299Short-term borrowing
    
    
    43,073
    
    
    
    30,023Accounts payable
    
    
    34,363
    
    
    
    51,948Customer deposits and refunds
    
    
    26,591
    
    
    
    24,960Accrued interest
    
    
    3,267
    
    
    
    1,887Dividends payable
    
    
    3,135
    
    
    
    2,959Accrued compensation
    
    
    4,261
    
    
    
    3,445Regulatory liabilities
    
    
    9,573
    
    
    
    8,882Mark-to-market energy liabilities
    
    
    1,982
    
    
    
    2,514Other accrued liabilities
    
    
    13,353
    
    
    
    8,683Total current liabilities
    
    
    146,814
    
    
    
    170,600Deferred Credits and Other LiabilitiesDeferred income taxes
    
    
    75,396
    
    
    
    66,923Deferred investment tax credits
    
    
    125
    
    
    
    193Regulatory liabilities
    
    
    3,475
    
    
    
    4,154Environmental liabilities
    
    
    10,946
    
    
    
    11,104Other pension and benefit costs
    
    
    16,257
    
    
    
    17,505Accrued asset removal cost  Regulatory liability
    
    
    34,683
    
    
    
    33,214Other liabilities
    
    
    4,989
    
    
    
    4,814Total deferred credits and other liabilities
    
    
    145,871
    
    
    
    137,907Total Capitalization and Liabilities
    
    $
    612,275
    
    
    $
    617,102
   - 5 -




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##### Table of Contents



Chesapeake Utilities Corporation and Subsidiaries
 Condensed Consolidated Statements of Stockholders Equity (Unaudited)
 Common Stock
    
    
    
    
    
    
    
    
    
    
    Accumulated OtherNumber of
    
    
    
    
    
    
    Additional Paid-In
    
    
    
    
    
    
    Comprehensive
    
    
    Deferred(in thousands, except shares and per share data)
    
    Shares(7)
    
    
    Par Value
    
    
    Capital
    
    
    Retained Earnings
    
    
    Loss
    
    
    Compensation
    
    
    Treasury Stock
    
    
    TotalBalances at December 31, 2008
    
    
    6,827,121
    
    
    $
    3,323
    
    
    $
    66,681
    
    
    $
    56,817
    
    
    $
    (3,748
    )
    
    $
    1,549
    
    
    $
    (1,549
    )
    
    
    123,073Net Income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    15,897
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    15,897Other comprehensive income, net of tax:Employee Benefit Plans, net of tax:Amortization of prior service costs (4)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    7
    
    
    
    
    
    
    
    
    
    
    
    7Net Gain (5)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,217
    
    
    
    
    
    
    
    
    
    
    
    1,217Total comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    17,121Dividend Reinvestment Plan
    
    
    31,607
    
    
    
    15
    
    
    
    921
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    936Retirement Savings Plan
    
    
    32,375
    
    
    
    16
    
    
    
    966
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    982Conversion of debentures
    
    
    7,927
    
    
    
    4
    
    
    
    131
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    135Share based compensation (1) (3)
    
    
    7,374
    
    
    
    3
    
    
    
    1,332
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,335Deferred Compensation Plan (6)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (810
    )
    
    
    810
    
    
    
    Purchase of treasury stock
    
    
    (2,411
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (73
    )
    
    
    (73
    )Sale and distribution of treasury stock
    
    
    2,411
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    73
    
    
    
    73Common stock issued in the merger
    
    
    2,487,910
    
    
    
    1,211
    
    
    
    74,471
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    75,682Dividends on stock-based compensation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (104
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (104
    )Cash dividends (2)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (9,379
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (9,379
    )Balances at December 31, 2009
    
    
    9,394,314
    
    
    
    4,572
    
    
    
    144,502
    
    
    
    63,231
    
    
    
    (2,524
    )
    
    
    739
    
    
    
    (739
    )
    
    
    209,781Net Income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    18,942
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    18,942Other comprehensive income, net of tax:Employee Benefit Plans, net of tax:Amortization of prior service costs (4)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    6
    
    
    
    
    
    
    
    
    
    
    
    6Net Gain (5)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    114
    
    
    
    
    
    
    
    
    
    
    
    114Total comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    19,062Dividend Reinvestment Plan
    
    
    41,100
    
    
    
    20
    
    
    
    1,240
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,260Retirement Savings Plan
    
    
    21,998
    
    
    
    11
    
    
    
    675
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    686Conversion of debentures
    
    
    5,636
    
    
    
    3
    
    
    
    93
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    96Tax benefit on share based compensation
    
    
    
    
    
    
    
    
    
    
    73
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    73Share based compensation (1) (3)
    
    
    36,415
    
    
    
    17
    
    
    
    439
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    456Deferred Compensation Plan (6)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    28
    
    
    
    (28
    )
    
    
    Purchase of treasury stock
    
    
    (886
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (28
    )
    
    
    (28
    )Sale and distribution of treasury stock
    
    
    886
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    28
    
    
    
    28Dividends on stock-based compensation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (80
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (80
    )Cash dividends (2)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (9,235
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (9,235
    )Balances at September 30, 2010
    
    
    9,499,463
    
    
    $
    4,623
    
    
    $
    147,022
    
    
    $
    72,858
    
    
    $
    (2,404
    )
    
    $
    767
    
    
    $
    (767
    )
    
    $
    222,099
 (1)
    
    Includes amounts for shares issued for Directors compensation.(2)
    
    Cash dividends declared per share for the periods ended September 30, 2010 and
December 31, 2009 were $0.975 and $1.250, respectively.(3)
    
    The shares issued under the Performance Incentive Plan (PIP) are net of shares
withheld for employee taxes. For the period ended September 30, 2010, the Company withheld 17,695
shares for taxes.
We did not issue any shares under the PIP in 2009.(4)
    
    Tax expense recognized on the prior service cost component of employee benefit plans
for the periods ended September 30, 2010 and December 31, 2009 were approximately $4 and $5,
respectively.(5)
    
    Tax expense recognized on the net gain component of employee benefit plans for the
periods ended September 30, 2010 and December 31, 2009 were $77 and $794, respectively.(6)
    
    In May and November 2009, certain participants of the Deferred Compensation Plan
received distributions totaling $883. There were no distributions in the first nine months of 2010.(7)
    
    Includes 29,338 and 28,452 shares at September 30, 2010 and December 31, 2009,
respectively, held in a Rabbi Trust established by the Company relating to the Deferred
Compensation Plan.   - 6 -




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##### Table of Contents



Notes to Condensed Consolidated Financial Statements (Unaudited)
 1.
    
    Summary of Accounting Policies
 Basis of Presentation
      Recent Accounting Amendments Yet to be Adopted by the Company
   - 7 -




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##### Table of Contents



Other Accounting Amendments Adopted by the Company during the first nine months of 2010
   2.
    
    Acquisitions
 FPU
      - 8 -




---



##### Table of Contents



(in thousands)
    
    October 28, 2009Purchase price
    
    $
    75,699Current assets
    
    
    26,761Property, plant and equipment
    
    
    139,709Regulatory assets
    
    
    19,899Investments and other deferred charges
    
    
    3,659Intangible assets
    
    
    4,019Total assets acquired
    
    
    194,047Long term debt
    
    
    47,812Borrowings from line of credit
    
    
    4,249Other current liabilities
    
    
    17,427Pre-merger contingencies
    
    
    923Other regulatory liabilities
    
    
    19,414Pension and post retirement obligations
    
    
    14,276Environmental liabilities
    
    
    12,414Deferred income taxes
    
    
    20,559Customer deposits and other liabilities
    
    
    15,467Total liabilities assumed
    
    
    152,541Net identifiable assets acquired
    
    
    41,506Goodwill
    
    $
    34,193
      - 9 -




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##### Table of Contents



For the Nine Months Ended September 30,
    
    2010
    
    
    2009(in thousands, except per share data)Operating Revenues
    
    $
    309,787
    
    
    $
    291,389Operating Income
    
    
    37,742
    
    
    
    30,106Net income
    
    
    18,942
    
    
    
    13,319Earnings per share  basic
    
    $
    2.00
    
    
    $
    1.43Earnings per share  diluted
    
    $
    1.98
    
    
    $
    1.41
    Virginia LP Gas
   - 10 -




---



##### Table of Contents



Indiantown Gas Company
  3.
    
    Calculation of Earnings Per Share
 Three Months
    
    
    Nine MonthsFor the Periods Ended September 30,
    
    2010
    
    
    2009
    
    
    2010
    
    
    2009(in thousands, except Shares and Per Share Data)Calculation of Basic Earnings Per Share:Net Income
    
    $
    1,628
    
    
    $
    308
    
    
    $
    18,942
    
    
    $
    9,706Weighted average shares outstanding
    
    
    9,493,425
    
    
    
    6,883,070
    
    
    
    9,460,462
    
    
    
    6,859,516Basic Earnings Per Share
    
    $
    0.17
    
    
    $
    0.04
    
    
    $
    2.00
    
    
    $
    1.41Calculation of Diluted Earnings Per Share:Reconciliation of Numerator:Net Income
    
    $
    1,628
    
    
    $
    308
    
    
    $
    18,942
    
    
    $
    9,706Effect of 8.25% Convertible debentures (1)
    
    
    
    
    
    
    
    
    
    
    56
    
    
    
    60Adjusted numerator  Diluted
    
    $
    1,628
    
    
    $
    308
    
    
    $
    18,998
    
    
    $
    9,766Reconciliation of Denominator:Weighted shares outstanding  Basic
    
    
    9,493,425
    
    
    
    6,883,070
    
    
    
    9,460,462
    
    
    
    6,859,516Effect of dilutive securities: (1)Share-based Compensation
    
    
    4,271
    
    
    
    4,954
    
    
    
    23,708
    
    
    
    27,8388.25% Convertible debentures
    
    
    
    
    
    
    
    
    
    
    86,751
    
    
    
    93,656Adjusted denominator  Diluted
    
    
    9,497,696
    
    
    
    6,888,024
    
    
    
    9,570,921
    
    
    
    6,981,010Diluted Earnings Per Share
    
    $
    0.17
    
    
    $
    0.04
    
    
    $
    1.98
    
    
    $
    1.40
 (1)
    
    Amounts associated with securities resulting in an anti-dilutive effect on earnings
per share are not included in this calculation. 4.
    
    Rates and Other Regulatory Activities
   - 11 -




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##### Table of Contents



Delaware
      - 12 -




---



##### Table of Contents



Maryland
   Florida
       - 13 -




---



##### Table of Contents



ESNG
  Energylink Expansion Project:
 Mainline Extension Project:
  - 14 -




---



##### Table of Contents



Mainline Extension and Interconnect Project
      5.
    
    Environmental Commitments and Contingencies
     - 15 -




---



##### Table of Contents



Salisbury, Maryland
   Winter Haven, Florida
      - 16 -




---



##### Table of Contents



Key West, Florida
  Pensacola, Florida
  Sanford, Florida
       - 17 -




---



##### Table of Contents



West Palm Beach, Florida
     Other
   - 18 -




---



##### Table of Contents



6.
    
    Other Commitments and Contingencies
 Litigation
   Natural Gas, Electric and Propane Supply
    Corporate Guarantees
    - 19 -




---



##### Table of Contents



Agreements for Access to New Natural Gas Supplies
         - 20 -




---



##### Table of Contents



7.
    
    Segment Information
   
    
    Regulated Energy. The regulated energy segment includes natural gas
distribution, electric distribution and natural gas transmission operations. All
operations in this segment are regulated, as to their rates and services, by
various PSCs having jurisdiction in each operating territory or by the FERC in the
case of ESNG.
 
    
    Unregulated Energy.The unregulated energy segment includes natural gas
marketing, propane distribution and propane wholesale marketing operations, which
are unregulated as to their rates and services.
 
    
    Other. The Other segment consists primarily of the advanced information
services operation, unregulated subsidiaries that own real estate leased to
Chesapeake and certain corporate costs not allocated to other operations.
  - 21 -




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##### Table of Contents



Three Months Ended
    
    
    Nine Months EndedFor the Periods Ended September 30,
    
    2010
    
    
    2009
    
    
    2010
    
    
    2009(in thousands)Operating Revenues, Unaffiliated CustomersRegulated Energy
    
    $
    53,215
    
    
    $
    15,098
    
    
    $
    196,966
    
    
    $
    85,529Unregulated Energy
    
    
    20,134
    
    
    
    14,011
    
    
    
    103,646
    
    
    
    82,982Other
    
    
    3,117
    
    
    
    2,649
    
    
    
    9,175
    
    
    
    8,560Total operating revenues, unaffiliated customers
    
    $
    76,466
    
    
    $
    31,758
    
    
    $
    309,787
    
    
    $
    177,071Intersegment Revenues(1)Regulated Energy
    
    $
    300
    
    
    $
    274
    
    
    $
    822
    
    
    $
    893Unregulated Energy
    
    
    
    
    
    
    
    
    
    
    364
    
    
    
    254Other
    
    
    197
    
    
    
    170
    
    
    
    644
    
    
    
    546Total intersegment revenues
    
    $
    497
    
    
    $
    444
    
    
    $
    1,830
    
    
    $
    1,693Operating Income (Loss)Regulated Energy
    
    $
    6,536
    
    
    $
    2,971
    
    
    $
    32,360
    
    
    $
    16,554Unregulated Energy
    
    
    (2,237
    )
    
    
    (1,361
    )
    
    
    4,732
    
    
    
    5,233Other and eliminations
    
    
    284
    
    
    
    647
    
    
    
    650
    
    
    
    (709
    )Total operating income
    
    $
    4,583
    
    
    $
    2,257
    
    
    $
    37,742
    
    
    $
    21,078Other income (loss), net of other expenses
    
    
    102
    
    
    
    (26
    )
    
    
    206
    
    
    
    19Interest
    
    
    2,256
    
    
    
    1,540
    
    
    
    6,924
    
    
    
    4,755Income taxes
    
    
    801
    
    
    
    383
    
    
    
    12,082
    
    
    
    6,636Net income
    
    $
    1,628
    
    
    $
    308
    
    
    $
    18,942
    
    
    $
    9,706
 (1)
    
    All significant intersegment revenues are billed at market rates and have been
eliminated from consolidated operating revenues. September 30,
    
    
    December 31,(in thousands)
    
    2010
    
    
    2009Identifiable AssetsRegulated energy
    
    $
    498,483
    
    
    $
    480,903Unregulated energy
    
    
    84,046
    
    
    
    101,437Other
    
    
    29,746
    
    
    
    34,724Total identifiable assets
    
    $
    612,275
    
    
    $
    617,064
   - 22 -




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##### Table of Contents



8.
    
    Employee Benefit Plans
  ChesapeakeChesapeake
    
    
    FPU
    
    
    Chesapeake
    
    
    Postretirement
    
    
    FPUPension Plan
    
    
    Pension Plan
    
    
    SERP
    
    
    Plan
    
    
    Medical PlanFor the Three Months Ended September 30,
    
    2010
    
    
    2009
    
    
    2010
    
    
    2010
    
    
    2009
    
    
    2010
    
    
    2009
    
    
    2010(in thousands)Service Cost
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    28Interest Cost
    
    
    147
    
    
    
    140
    
    
    
    638
    
    
    
    35
    
    
    
    33
    
    
    
    30
    
    
    
    27
    
    
    
    33Expected return on plan assets
    
    
    (108
    )
    
    
    (86
    )
    
    
    (618
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Amortization of prior service cost
    
    
    (1
    )
    
    
    (2
    )
    
    
    
    
    
    
    5
    
    
    
    3
    
    
    
    
    
    
    
    
    
    
    
    Amortization of net loss
    
    
    40
    
    
    
    68
    
    
    
    
    
    
    
    15
    
    
    
    14
    
    
    
    15
    
    
    
    40
    
    
    
    Net periodic cost
    
    $
    78
    
    
    $
    120
    
    
    $
    20
    
    
    $
    55
    
    
    $
    50
    
    
    $
    45
    
    
    $
    67
    
    
    $
    61ChesapeakeChesapeake
    
    
    FPU
    
    
    Chesapeake
    
    
    Postretirement
    
    
    FPUPension Plan
    
    
    Pension Plan
    
    
    SERP
    
    
    Plan
    
    
    Medical PlanFor the Nine Months Ended September 30,
    
    2010
    
    
    2009
    
    
    2010
    
    
    2010
    
    
    2009
    
    
    2010
    
    
    2009
    
    
    2010(in thousands)Service Cost
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    1
    
    
    $
    83Interest Cost
    
    
    441
    
    
    
    420
    
    
    
    1,913
    
    
    
    105
    
    
    
    97
    
    
    
    91
    
    
    
    81
    
    
    
    101Expected return on plan assets
    
    
    (323
    )
    
    
    (259
    )
    
    
    (1,856
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Amortization of prior service cost
    
    
    (4
    )
    
    
    (4
    )
    
    
    
    
    
    
    15
    
    
    
    10
    
    
    
    
    
    
    
    
    
    
    
    Amortization of net loss
    
    
    119
    
    
    
    205
    
    
    
    
    
    
    
    45
    
    
    
    44
    
    
    
    44
    
    
    
    119
    
    
    
    Net periodic cost
    
    $
    233
    
    
    $
    362
    
    
    $
    57
    
    
    $
    165
    
    
    $
    151
    
    
    $
    135
    
    
    $
    201
    
    
    $
    184
     - 23 -




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##### Table of Contents



9.
    
    Investments
  10.
    
    Share-Based Compensation
   Three Months Ended
    
    
    Nine Months EndedFor the periods ended September 30,
    
    2010
    
    
    2009
    
    
    2010
    
    
    2009(in thousands)Directors Stock Compensation Plan
    
    $
    74
    
    
    $
    48
    
    
    $
    209
    
    
    $
    143Performance Incentive Plan
    
    
    213
    
    
    
    264
    
    
    
    690
    
    
    
    754Total compensation expense
    
    
    287
    
    
    
    312
    
    
    
    899
    
    
    
    897Less: tax benefit
    
    
    115
    
    
    
    125
    
    
    
    361
    
    
    
    359Share-Based Compensation amounts included in net income
    
    $
    172
    
    
    $
    187
    
    
    $
    538
    
    
    $
    538
 Directors Stock Compensation Plan
  Number of
    
    
    Weighted AverageShares
    
    
    Grant Date Fair ValueOutstanding  December 31, 2009
    
    
    
    
    
    
    Granted
    
    
    9,900
    
    
    $
    29.99Vested
    
    
    9,900
    
    
    $
    29.99Forfeited
    
    
    
    
    
    
    Outstanding  September 30, 2010
    
    
    
    
    
    
    
   - 24 -




---



##### Table of Contents



Performance Incentive Plan
  Weighted AverageNumber of Shares
    
    
    Fair ValueOutstanding  December 31, 2009
    
    
    123,075
    
    
    $
    28.15Granted
    
    
    40,875
    
    
    
    28.05Vested
    
    
    43,960
    
    
    
    27.94Fortfeited
    
    
    
    
    
    
    Expired
    
    
    18,840
    
    
    
    27.94Outstanding  September 30, 2010
    
    
    101,150
    
    
    $
    28.24
   11.
    
    Derivative Instruments
   Quantity in
    
    
    Estimated Market
    
    Weighted AverageAt September 30, 2010
    
    Gallons
    
    
    Prices
    
    Contract PricesForward ContractsSale
    
    
    18,964,932
    
    
    $0.9925  $1.12150
    
    $
    1.1194Purchase
    
    
    18,484,200
    
    
    $1.0100  $1.2475
    
    $
    1.1055
 Estimated market prices and weighted average contract prices are in dollars per gallon.
 All contracts expire during or prior to the second quarter of 2011.
  - 25 -




---



##### Table of Contents



Asset DerivativesFair Value(in thousands)
    
    Balance Sheet Location
    
    September 30, 2010
    
    
    December 31, 2009Derivatives not
designated as hedging
instrumentsForward contracts
    
    Mark-to-market energy assets
    
    $
    2,290
    
    
    $
    2,379Put option (1)
    
    Mark-to-market energy assets
    
    
    
    
    
    
    Total asset derivatives
    
    
    
    
    
    $
    2,290
    
    
    $
    2,379
 Liability DerivativesFair Value(in thousands)
    
    Balance Sheet Location
    
    September 30, 2010
    
    
    December 31, 2009Derivatives not designated
as hedging instrumentsForward contracts
    
    Mark-to-market energy liabilities
    
    $
    1,982
    
    
    $
    2,514Total liability derivatives
    
    
    
    
    
    $
    1,982
    
    
    $
    2,514
 (1)
    
    We purchased a put option for the Pro-Cap (Propane Price Cap) plan
in September 2009. The put option expired on March 31, 2010. The put
option had a fair value of $0 at December 31, 2009.  Amount of Gain (Loss) on Derivatives:Location of Gain
    
    
    Three months ended September 30,
    
    
    Nine months ended September 30,(in thousands)
    
    (Loss) on Derivatives
    
    
    2010
    
    
    2009
    
    
    2010
    
    
    2009Derivatives designated as fair value hedges:Propane swap agreement (1)
    
    Cost of Sales
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    (42
    )Derivatives not designated as fair value hedges:Unrealized
gain (loss) on forward contracts
    
    Revenue
    
    $
    69
    
    
    $
    (246
    )
    
    $
    443
    
    
    $
    (1,382
    )Total
    
    
    
    
    
    $
    69
    
    
    $
    (246
    )
    
    $
    443
    
    
    $
    (1,424
    )
 (1)
    
    Our propane distribution operation entered into a propane swap
agreement to protect it from the impact that wholesale propane price increases
would have on the Pro-Cap (Propane Price Cap) plan that was offered to
customers. We terminated this swap agreement in January 2009.  - 26 -




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##### Table of Contents



Location in the
    
    
    Three months ended September 30,
    
    
    Nine months ended September 30,(in thousands)
    
    Statement of Income
    
    
    2010
    
    
    2009
    
    
    2010
    
    
    2009Realized gains on forward contracts
    
    Revenue
    
    $
    271
    
    
    $
    915
    
    
    $
    1,010
    
    
    $
    2,984Changes in mark-to-market energy assets
    
    Revenue
    
    
    69
    
    
    
    (246
    )
    
    
    443
    
    
    
    (1,382
    )Total
    
    
    
    
    
    $
    340
    
    
    $
    669
    
    
    $
    1,453
    
    
    $
    1,602
 12.
    
    Fair Value of Financial Instruments
      Fair Value Measurements Using:Significant Other
    
    
    SignificantQuoted Prices in
    
    
    Observable
    
    
    UnobservableActive Markets
    
    
    Inputs
    
    
    Inputs(in thousands)
    
    Fair Value
    
    
    (Level 1)
    
    
    (Level 2)
    
    
    (Level 3)Assets:Investments
    
    $
    3,006
    
    
    $
    3,006
    
    
    $
    
    
    
    $
    Mark-to-market energy assets,
    
    $
    2,290
    
    
    $
    
    
    
    $
    2,290
    
    
    $
    Liabilities:Mark-to-market energy liabilities
    
    $
    1,982
    
    
    $
    
    
    
    $
    1,982
    
    
    $
    
  - 27 -




---



##### Table of Contents



Fair Value Measurements Using:Significant Other
    
    
    SignificantQuoted Prices in
    
    
    Observable
    
    
    UnobservableActive Markets
    
    
    Inputs
    
    
    Inputs(in thousands)
    
    Fair Value
    
    
    (Level 1)
    
    
    (Level 2)
    
    
    (Level 3)Assets:Investments
    
    $
    1,959
    
    
    $
    1,959
    
    
    $
    
    
    
    $
    Mark-to-market energy assets,
including put option
    
    $
    2,379
    
    
    $
    
    
    
    $
    2,379
    
    
    $
    Liabilities:Mark-to-market energy liabilities
    
    $
    2,514
    
    
    $
    
    
    
    $
    2,514
    
    
    $
    
  Level 1 Fair Value Measurements:
 Investments
 Level 2 Fair Value Measurements:
 Mark-to-market energy assets and liabilities 
 Propane put option 
  Other Financial Assets and Liabilities
    - 28 -




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##### Table of Contents



13.
    
    Long Term Debt
  September 30,
    
    
    December 31,(in thousands)
    
    2010
    
    
    2009FPU secured first mortgage bonds:9.57% bond, due May 1, 2018
    
    $
    7,247
    
    
    $
    8,15610.03% bond, due May 1, 2018
    
    
    3,986
    
    
    
    4,4869.08% bond, due June 1, 2022
    
    
    7,950
    
    
    
    7,9506.85% bond, due October 1, 2031
    
    
    
    
    
    
    14,0124.90% bond, due November 1, 2031
    
    
    
    
    
    
    13,222Uncollateralized senior notes:6.91% note, due October 1, 2010
    
    
    
    
    
    
    9096.85% note, due January 1, 2012
    
    
    2,000
    
    
    
    2,0007.83% note, due January 1, 2015
    
    
    10,000
    
    
    
    10,0006.64% note, due October 31, 2017
    
    
    21,818
    
    
    
    21,8185.50% note, due October 12, 2020
    
    
    20,000
    
    
    
    20,0005.93% note, due October 31, 2023
    
    
    30,000
    
    
    
    30,000Convertible debentures:8.25% due March 1, 2014
    
    
    1,424
    
    
    
    1,520Promissory note
    
    
    282
    
    
    
    40Total long-term debt
    
    
    104,707
    
    
    
    134,113Less: current maturities
    
    
    (7,216
    )
    
    
    (35,299
    )Total long-term debt, net of current maturities
    
    $
    97,491
    
    
    $
    98,814
    - 29 -




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##### Table of Contents



Item 2.
    
    Managements Discussion and Analysis of Financial Condition and Results of Operations
  Safe Harbor for Forward-Looking Statements
  
    
    state and federal legislative and regulatory initiatives that affect cost and
investment recovery, have an impact on rate structures, and affect the speed at and degree
to which competition enters the electric and natural gas industries (including
deregulation);
 
    
    the outcomes of regulatory, tax, environmental and legal matters, including whether
pending matters are resolved within current estimates;
 
    
    industrial, commercial and residential growth or contraction in our service
territories;
 
    
    the weather and other natural phenomena, including the economic, operational and other
effects of hurricanes and ice storms;
 
    
    the timing and extent of changes in commodity prices and interest rates;
 
    
    general economic conditions, including any potential effects arising from terrorist
attacks and any consequential hostilities or other hostilities or other external factors
over which we have no control;
 
    
    changes in environmental and other laws and regulations to which we are subject;
 
    
    the results of financing efforts, including our ability to obtain financing on
favorable terms, which can be affected by various factors, including credit ratings and
general economic conditions;
 
    
    declines in the market prices of equity securities and resultant cash funding
requirements for our defined benefit pension plans;
 
    
    the creditworthiness of counterparties with which we are engaged in transactions;
 
    
    growth in opportunities for our business units;
 
    
    the extent of success in connecting natural gas and electric supplies to transmission
systems and in expanding natural gas and electric markets;
 
    
    the effect of accounting pronouncements issued periodically by accounting
standard-setting bodies;
 
    
    conditions of the capital markets and equity markets during the periods covered by the
forward-looking statements;
 
    
    the ability to successfully execute, manage and integrate merger, acquisition or
divestiture plans, and to address regulatory or other limitations imposed as a result of a
merger, acquisition or divestiture, as well as the success of the business following a
merger, acquisition or divestiture;
 
    
    the ability to manage and maintain key customer relationships;
 
    
    the ability to maintain key supply sources;
 
    
    the effect of spot, forward and future market prices on our distribution, wholesale
marketing and energy trading businesses;
 
    
    the effect of competition on our businesses;
 
    
    the ability to construct facilities at or below estimated costs;
 
    
    changes in technology affecting our advanced information services business; and
 
    
    operation and litigation risks that may not be covered by insurance.
  - 30 -




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##### Table of Contents



Introduction
   
    
    executing a capital investment program in pursuit of organic growth opportunities that
generate returns equal to or greater than our cost of capital;
 
    
    expanding the regulated energy distribution and transmission businesses through
expansion into new geographic areas and providing new services in our current service
territories;
 
    
    expanding the propane distribution business in existing and new markets through
leveraging our community gas system services and our bulk delivery capabilities;
 
    
    utilizing our expertise across our various businesses to improve overall performance;
 
    
    enhancing marketing channels to attract new customers;
 
    
    providing reliable and responsive customer service to retain existing customers;
 
    
    maintaining a capital structure that enables us to access capital as needed;
 
    
    maintaining a consistent and competitive dividend for shareholders; and
 
    
    creating and maintaining a diversified customer base, energy portfolio and utility
foundation.
   
    
    Regulated Energy. The regulated energy segment includes natural gas distribution,
electric distribution and natural gas transmission operations. All operations in this
segment are regulated, as to their rates and services, by various PSCs having jurisdiction
in each operating territory or by the FERC in the case of ESNG.
 
    
    Unregulated Energy.The unregulated energy segment includes natural gas marketing,
propane distribution and propane wholesale marketing operations, which are unregulated as to
their rates and services.
 
    
    Other. The Other segment consists primarily of the advanced information services
operation, unregulated subsidiaries that own real estate leased to Chesapeake and certain
corporate costs not allocated to other operations.
  - 31 -




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##### Table of Contents



The following discussions and those later in the document on operating income and 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 cost of natural gas, electricity 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 GAAP. We believe 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 energy
operations and under its competitive pricing structure for unregulated natural gas marketing and
propane distribution operations. Our management uses gross margin in measuring our business units
performance and has historically analyzed and reported gross margin information publicly. Other
companies may calculate gross margin in a different manner.
 In addition, certain information is presented, which, for comparison purposes, includes only FPUs
results of operations or excludes FPUs results from the consolidated results of operations for the
periods ended September 30, 2010. Certain other information is presented, which, for comparison
purposes, excludes all merger-related costs incurred in connection with the FPU merger. Although
non-GAAP measures are not intended to replace the GAAP measures for evaluation of our performance,
we believe that the portions of the presentation, which include only the FPU results, or which
exclude FPUs financial results for the post-merger period and merger-related costs, provide
helpful comparisons for an investors evaluation purposes.
 Results of Operations for the Quarter Ended September 30, 2010
 Overview and Highlights
  For the Three Months Ended September 30,
    
    2010
    
    
    2009
    
    
    Change(in thousands)Operating Income (Loss)Regulated Energy
    
    $
    6,536
    
    
    $
    2,971
    
    
    $
    3,565Unregulated Energy
    
    
    (2,237
    )
    
    
    (1,361
    )
    
    
    (876
    )Other
    
    
    284
    
    
    
    647
    
    
    
    (363
    )Operating Income
    
    
    4,583
    
    
    
    2,257
    
    
    
    2,326Other Income (Loss), net of expenses
    
    
    102
    
    
    
    (26
    )
    
    
    128Interest Charges
    
    
    2,256
    
    
    
    1,540
    
    
    
    716Income Taxes
    
    
    801
    
    
    
    383
    
    
    
    418Net Income
    
    $
    1,628
    
    
    $
    308
    
    
    $
    1,320Earnings Per Share of Common Stock:Basic
    
    $
    0.17
    
    
    $
    0.04
    
    
    $
    0.13Diluted
    
    $
    0.17
    
    
    $
    0.04
    
    
    $
    0.13
  - 32 -




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##### Table of Contents



2010Chesapeake,For the Three Months Ended September 30,
    
    excluding FPU
    
    
    FPU
    
    
    Chesapeake Total
    
    
    2009(in thousands)Operating Income (Loss)Regulated Energy
    
    $
    3,512
    
    
    $
    3,024
    
    
    $
    6,536
    
    
    $
    2,971Unregulated Energy
    
    
    (1,632
    )
    
    
    (605
    )
    
    
    (2,237
    )
    
    
    (1,361
    )Other
    
    
    284
    
    
    
    
    
    
    
    284
    
    
    
    647Operating Income
    
    
    2,164
    
    
    
    2,419
    
    
    
    4,583
    
    
    
    2,257Other Income (Loss), net of expenses
    
    
    56
    
    
    
    46
    
    
    
    102
    
    
    
    (26
    )Interest Charges
    
    
    1,566
    
    
    
    690
    
    
    
    2,256
    
    
    
    1,540Income Taxes
    
    
    98
    
    
    
    703
    
    
    
    801
    
    
    
    383Net Income
    
    $
    556
    
    
    $
    1,072
    
    
    $
    1,628
    
    
    $
    308Excluding effect of transaction-related costs:Net Income
    
    $
    556
    
    
    $
    1,072
    
    
    $
    1,628
    
    
    $
    308Transaction-related costs
    
    
    68
    
    
    
    
    
    
    
    68
    
    
    
    (675
    )Income tax impact
    
    
    (27
    )
    
    
    
    
    
    
    (27
    )
    
    
    452Net Income, excluding transaction-related costs
    
    $
    597
    
    
    $
    1,072
    
    
    $
    1,669
    
    
    $
    85
  - 33 -




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##### Table of Contents



Key Factors Affecting Our Businesses
  Merger.
 Regulated Energy
    
    
    Unregulated EnergyFor the Three Months Ended September 30, 2010
    
    Natural Gas
    
    
    Electric
    
    
    Propane
    
    
    Other
    
    
    Total(in thousands)Revenue
    
    $
    11,457
    
    
    $
    26,331
    
    
    $
    3,066
    
    
    $
    509
    
    
    $
    41,363Cost of sales
    
    
    4,376
    
    
    
    21,397
    
    
    
    1,548
    
    
    
    332
    
    
    
    27,653Gross margin
    
    
    7,081
    
    
    
    4,934
    
    
    
    1,518
    
    
    
    177
    
    
    
    13,710Other operating expenses
    
    
    5,726
    
    
    
    3,265
    
    
    
    2,201
    
    
    
    99
    
    
    
    11,291Operating
Income (Loss)
    
    $
    1,355
    
    
    $
    1,669
    
    
    $
    (683
    )
    
    $
    78
    
    
    $
    2,419Average number of residential customers
    
    
    46,731
    
    
    
    23,594
    
    
    
    12,877
    
    
    
    
    
    
    
    83,202
  Weather.
 Growth.
  Rates and Regulatory Matters.
  - 34 -




---



##### Table of Contents



Propane Prices.
 Advanced Information Services.
 Other Operating Expenses.
  - 35 -




---



##### Table of Contents



Regulated Energy
 For the Three Months Ended September 30,
    
    2010
    
    
    2009
    
    
    Change(in thousands)Revenue
    
    $
    53,412
    
    
    $
    15,372
    
    
    $
    38,040Cost of sales
    
    
    27,148
    
    
    
    2,345
    
    
    
    24,803Gross margin
    
    
    26,264
    
    
    
    13,027
    
    
    
    13,237Operations & maintenance
    
    
    13,620
    
    
    
    6,869
    
    
    
    6,751Depreciation & amortization
    
    
    4,092
    
    
    
    1,841
    
    
    
    2,251Other taxes
    
    
    2,016
    
    
    
    1,346
    
    
    
    670Other operating expenses
    
    
    19,728
    
    
    
    10,056
    
    
    
    9,672Operating Income
    
    $
    6,536
    
    
    $
    2,971
    
    
    $
    3,565Statistical Data  Delmarva PeninsulaHeating degree-days (HDD):Actual
    
    
    50
    
    
    
    80
    
    
    
    (30
    )10-year average (normal)
    
    
    60
    
    
    
    58
    
    
    
    2Estimated gross margin per HDD
    
    $
    2,429
    
    
    $
    1,937
    
    
    $
    492Per residential customer added:Estimated gross margin
    
    $
    375
    
    
    $
    375
    
    
    $
    Estimated other operating expenses
    
    $
    105
    
    
    $
    103
    
    
    $
    2FloridaHDD:Actual
    
    
    
    
    
    
    
    
    
    
    10-year average (normal)
    
    
    
    
    
    
    
    
    
    
    Cooling degree-days:Actual
    
    
    1,654
    
    
    
    1,425
    
    
    
    22910-year average (normal)
    
    
    1,405
    
    
    
    1,466
    
    
    
    (61
    )Residential Customer InformationAverage number of customers (1):Delmarva
    
    
    46,908
    
    
    
    45,871
    
    
    
    1,037Florida  Chesapeake
    
    
    13,388
    
    
    
    13,059
    
    
    
    329Total
    
    
    60,296
    
    
    
    58,930
    
    
    
    1,366
 (1)
    
    Average number of residential customers for FPU are included in the
discussions of FPUs results on page 34.   - 36 -




---



##### Table of Contents



Gross Margin
     
    
    New transportation services implemented by ESNG in November 2009 as a result of the
completion of its latest expansion program, provided an additional 6,957 Mcfs per day and
added $254,000 to gross margin during the third quarter. In addition, a new expansion
project, which was completed in May 2010, provided an additional 1,120 Mcfs of service per
day, adding $60,000 to gross margin during the third quarter. The new expansion project
completed in May 2010 is expected to provide annualized gross margin of $343,000.
 
    
    New firm transportation service for an industrial customer for the period from November
2009 to October 2012 provided an additional 2,705 Mcfs per day and added $76,000 to gross
margin in the third quarter of 2010.
 
    
    Warm temperatures on the Delmarva Peninsula during the third quarter resulted in
increased volumes delivered to two electric generation customers, increasing gross margin
by $105,000.
 
    
    Offsetting the foregoing increases to gross margin, ESNG received notices from two
customers of their intentions not to renew their firm transportation service contracts,
which expired in November 2009 and April 2010, decreasing gross margin by $97,000 in the
third quarter of 2010. Also, a decline in firm deliveries decreased gross margin by
$14,000.
  Other Operating Expenses
  Other Developments
  
    
    In the first half of 2010, we announced two agreements to provide natural gas service to
two industrial customers in southern Delaware. The anticipated annual margin from these
services equates to approximately 1,575 average residential heating customers. We
commenced service to one of the industrial customers in the third quarter of 2010, adding
$24,000 to gross margin. Service to the other industrial customer is expected to commence
in late 2010 or early 2011. These services further extend our natural gas distribution and
transmission infrastructures to serve other potential customers in the same area.
  - 37 -




---



##### Table of Contents




    
    On April 8, 2010, we entered into a Precedent Agreement with TETLP to secure firm
transportation service from TETLP in conjunction with its new expansion project. The
Precedent Agreement provides that, upon satisfaction of certain conditions, the parties
will execute two firm transportation service contracts, one for our Delaware division and
one for our Maryland division, for 30,000 and 10,000 Dts/d, respectively, to be effective
on the service commencement date of the project, currently projected to occur in
November 2012. As a result of this new service, our Delaware and Maryland divisions will
have access to new supplies of natural gas, providing increased reliability and diversity
of supply. This will also provide them additional upstream transportation capacity, which
is essential to meet their current customer demands and to plan for sustainable growth. In
conjunction with this project, ESNG will build and operate an eight-mile mainline extension
from TETLPs pipeline to ESNGs existing facility to provide transportation services for
the Delaware and Maryland divisions at ESNGs current tariff rate for service in that area.
ESNGs transportation service is expected to provide a three-year phase-in from 20,000 Dts
per day to 40,000 Dts
per day, providing estimated annualized margin of $2.2 million (at 20,000 Dts per day) to
$4.3 million (at 40,000 Dts per day). This service is expected to begin no later than
January 2011.
 Unregulated Energy
 For the Three Months Ended September 30,
    
    2010
    
    
    2009
    
    
    Change(in thousands)Revenue
    
    $
    20,134
    
    
    $
    14,011
    
    
    $
    6,123Cost of sales
    
    
    15,714
    
    
    
    10,711
    
    
    
    5,003Gross margin
    
    
    4,420
    
    
    
    3,300
    
    
    
    1,120Operations & maintenance
    
    
    5,435
    
    
    
    3,920
    
    
    
    1,515Depreciation & amortization
    
    
    896
    
    
    
    521
    
    
    
    375Other taxes
    
    
    326
    
    
    
    220
    
    
    
    106Other operating expenses
    
    
    6,657
    
    
    
    4,661
    
    
    
    1,996Operating Loss
    
    $
    (2,237
    )
    
    $
    (1,361
    )
    
    $
    (876
    )Statistical Data  Delmarva PeninsulaHeating degree-days (HDD):Actual
    
    
    50
    
    
    
    80
    
    
    
    (30
    )10-year average (normal)
    
    
    60
    
    
    
    58
    
    
    
    2Estimated gross margin per HDD
    
    $
    3,083
    
    
    $
    2,465
    
    
    $
    618
  Gross Margin
     - 38 -




---



##### Table of Contents



Other Operating Expenses
  Other
 For the Three Months Ended September 30,
    
    2010
    
    
    2009
    
    
    Change(in thousands)Revenue
    
    $
    2,920
    
    
    $
    2,375
    
    
    $
    545Cost of sales
    
    
    1,524
    
    
    
    1,360
    
    
    
    164Gross margin
    
    
    1,396
    
    
    
    1,015
    
    
    
    381Operations & maintenance
    
    
    837
    
    
    
    812
    
    
    
    25Transaction-related costs
    
    
    68
    
    
    
    (675
    )
    
    
    743Depreciation & amortization
    
    
    70
    
    
    
    75
    
    
    
    (5
    )Other taxes
    
    
    137
    
    
    
    156
    
    
    
    (19
    )Other operating expenses
    
    
    1,112
    
    
    
    368
    
    
    
    744Operating Income
    
    $
    284
    
    
    $
    647
    
    
    $
    (363
    )
  Gross margin
  Operating expenses
   - 39 -




---



##### Table of Contents



Interest Expense
  
    
    An increase in long-term interest expense of $456,000 is related to interest on FPUs
first mortgage bonds.
 
    
    Interest expense from a new term loan facility during the third quarter of 2010 was
$140,000. Two series of FPU bonds, the 4.9 percent and 6.85 percent series, were redeemed
by using this new short-term term loan facility at the end of January 2010.
 
    
    Additional interest expense of $184,000 is related to interest on deposits from FPUs
customers.
  Income Taxes
   - 40 -




---



##### Table of Contents



Results of Operations for the Nine Months Ended September 30, 2010
 Overview and Highlights
  For the Nine Months Ended September 30,
    
    2010
    
    
    2009
    
    
    Change(in thousands)Operating Income (Loss)Regulated Energy
    
    $
    32,360
    
    
    $
    16,554
    
    
    $
    15,806Unregulated Energy
    
    
    4,732
    
    
    
    5,233
    
    
    
    (501
    )Other
    
    
    650
    
    
    
    (709
    )
    
    
    1,359Operating Income
    
    
    37,742
    
    
    
    21,078
    
    
    
    16,664Other Income, net of expenses
    
    
    206
    
    
    
    19
    
    
    
    187Interest Charges
    
    
    6,924
    
    
    
    4,755
    
    
    
    2,169Income Taxes
    
    
    12,082
    
    
    
    6,636
    
    
    
    5,446Net Income
    
    $
    18,942
    
    
    $
    9,706
    
    
    $
    9,236Earnings Per Share of Common Stock:Basic
    
    $
    2.00
    
    
    $
    1.41
    
    
    $
    0.59Diluted
    
    $
    1.98
    
    
    $
    1.40
    
    
    $
    0.58
    - 41 -




---



##### Table of Contents



2010Chesapeake,For the Nine Months Ended September 30,
    
    excluding FPU
    
    
    FPU
    
    
    Chesapeake Total
    
    
    2009(in thousands)Operating Income (Loss)Regulated Energy
    
    $
    19,417
    
    
    $
    12,943
    
    
    $
    32,360
    
    
    $
    16,554Unregulated Energy
    
    
    3,527
    
    
    
    1,205
    
    
    
    4,732
    
    
    
    5,233Other
    
    
    650
    
    
    
    
    
    
    
    650
    
    
    
    (709
    )Operating Income
    
    
    23,594
    
    
    
    14,148
    
    
    
    37,742
    
    
    
    21,078Other Income, net of expenses
    
    $
    69
    
    
    $
    137
    
    
    $
    206
    
    
    $
    19Interest Charges
    
    
    4,488
    
    
    
    2,436
    
    
    
    6,924
    
    
    
    4,755Income Taxes
    
    
    7,530
    
    
    
    4,552
    
    
    
    12,082
    
    
    
    6,636Net Income
    
    $
    11,645
    
    
    $
    7,297
    
    
    $
    18,942
    
    
    $
    9,706Excluding effect of transaction-related costs:Net Income
    
    $
    11,645
    
    
    $
    7,297
    
    
    $
    18,942
    
    
    $
    9,706Transaction-related costs
    
    
    179
    
    
    
    
    
    
    
    179
    
    
    
    530Income tax impact
    
    
    (72
    )
    
    
    
    
    
    
    (72
    )
    
    
    (30
    )Net Income, excluding
transaction-related costs
    
    $
    11,752
    
    
    $
    7,297
    
    
    $
    19,049
    
    
    $
    10,206
 Key Factors Affecting Our Businesses
  Merger.
 Regulated Energy
    
    
    Unregulated EnergyFor the Nine Months Ended September  30, 2010
    
    Natural Gas
    
    
    Electric
    
    
    Propane
    
    
    Other
    
    
    Total(in thousands)Revenue
    
    $
    48,086
    
    
    $
    72,492
    
    
    $
    13,130
    
    
    $
    1,694
    
    
    $
    135,402Cost of sales
    
    
    20,830
    
    
    
    58,467
    
    
    
    6,393
    
    
    
    1,039
    
    
    
    86,729Gross margin
    
    
    27,256
    
    
    
    14,025
    
    
    
    6,737
    
    
    
    655
    
    
    
    48,673Other operating expenses
    
    
    18,230
    
    
    
    10,108
    
    
    
    5,866
    
    
    
    321
    
    
    
    34,525Operating Income
    
    $
    9,026
    
    
    $
    3,917
    
    
    $
    871
    
    
    $
    334
    
    
    $
    14,148Average number of residential customers
    
    
    46,970
    
    
    
    23,570
    
    
    
    12,786
    
    
    
    
    
    
    
    83,326
   - 42 -




---



##### Table of Contents



Weather.
 Growth.
  Rates and Regulatory Matters.
  Propane Prices.
  - 43 -




---



##### Table of Contents



Natural Gas Spot Sale Opportunities.
 Advanced Information Services.
 Other Operating Expenses.
  - 44 -




---



##### Table of Contents



Regulated Energy
 For the Nine Months Ended September 30,
    
    2010
    
    
    2009
    
    
    Change(in thousands)Revenue
    
    $
    197,779
    
    
    $
    86,422
    
    
    $
    111,357Cost of sales
    
    
    105,322
    
    
    
    39,143
    
    
    
    66,179Gross margin
    
    
    92,457
    
    
    
    47,279
    
    
    
    45,178Operations & maintenance
    
    
    40,951
    
    
    
    21,144
    
    
    
    19,807Depreciation & amortization
    
    
    12,843
    
    
    
    5,453
    
    
    
    7,390Other taxes
    
    
    6,303
    
    
    
    4,128
    
    
    
    2,175Other operating expenses
    
    
    60,097
    
    
    
    30,725
    
    
    
    29,372Operating Income
    
    $
    32,360
    
    
    $
    16,554
    
    
    $
    15,806Statistical Data  Delmarva PeninsulaHeating degree-days (HDD):Actual
    
    
    3,021
    
    
    
    3,003
    
    
    
    1810-year average (normal)
    
    
    2,923
    
    
    
    2,889
    
    
    
    34Estimated gross margin per HDD
    
    $
    2,429
    
    
    $
    1,937
    
    
    $
    492Per residential customer added:Estimated gross margin
    
    $
    375
    
    
    $
    375
    
    
    $
    Estimated other operating expenses
    
    $
    103
    
    
    $
    103
    
    
    $
    FloridaHDDActual
    
    
    942
    
    
    
    614
    
    
    
    32810-year average (normal)
    
    
    587
    
    
    
    547
    
    
    
    40Cooling degree-days:Actual
    
    
    2,693
    
    
    
    2,434
    
    
    
    25910-year average (normal)
    
    
    2,365
    
    
    
    2,418
    
    
    
    (53
    )Residential Customer InformationAverage number of customers (1):Delmarva
    
    
    47,508
    
    
    
    46,669
    
    
    
    839Florida  Chesapeake
    
    
    13,423
    
    
    
    13,291
    
    
    
    132Total
    
    
    60,931
    
    
    
    59,960
    
    
    
    971
 (1)
    
    Heating degree-days and average number of residential customers for FPU are
included in the discussions of FPUs results on page 42.  Gross Margin
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
    
    The Delmarva natural gas distribution operations experienced growth in residential,
commercial and industrial customers, which contributed $798,000 to the gross margin
increase. Residential, commercial and industrial growth by our Delaware division
contributed $418,000, $145,000 and $137,000, respectively, to the gross margin increase,
and the customer growth by our Maryland division contributed $98,000 to the gross margin
increase in Maryland. We experienced a two-percent increase in average residential
customers in the Delmarva natural gas distribution operation.
 
    
    Colder weather on the Delmarva Peninsula generated an additional $219,000 to the gross
margin as heating degree-days increased by one percent for the first nine months of 2010
compared to the same period in 2009. Residential heating rates for our Maryland division
are weather-normalized, and we typically do not experience an impact on gross margin from
the weather for our residential customers in Maryland.
 
    
    A decline in non-weather-related customer consumption, primarily by residential
customers of our Delaware division, decreased gross margin by $310,000.
 
    
    The remaining gross margin change is due primarily to changes in negotiated rates for a
commercial customer in Delaware and two industrial customers in Maryland, which increased
gross margin by $241,000 for the first nine months of 2010. These increases were offset by
a change in rate classifications for certain residential customers in Delaware, which
decreased gross margin by $190,000 during the period.
  
    
    FPUs natural gas distribution operation contributed $27.3 million in gross margin in
the nine months ended September 30, 2010, which includes $49,000 of gross margin generated
by Indiantown Gas Company, whose operating assets were purchased by FPU on August 9, 2010. Gross margin from FPUs natural gas
distribution operation in the first half of 2010 was positively affected by an annual rate
increase of approximately $8.0 million approved by the Florida PSC on December 15, 2009,
and colder temperatures during the first quarter of 2010.
 
    
    Included in gross margin from FPUs natural gas distribution operation is the impact of
the $500,000 reserve for its regulatory risk previously described.
 
    
    Chesapeakes Florida division also experienced an increase in gross margin of $1.7
million from an annual rate increase of approximately $2.5 million approved by the Florida
PSC on December 15, 2009 (applicable to all meters read on or after January 14, 2010).
 
    
    During the first nine months of 2010, Chesapeakes Florida division experienced an
increase in customer consumption, which was heavily affected by the colder temperatures in
Florida during the first quarter of 2010. We estimate that the colder temperatures
contributed an additional $245,000 to gross margin in the first nine months of 2010
compared to the same period in 2009.
  
    
    New transportation services, implemented by ESNG in November 2009 as a result of the
completion of its latest expansion program, provided an additional 6,957 Mcfs per day and
added $762,000 to gross margin during the first nine months in 2010. In addition, a new
expansion project, which was completed in May 2010, provided an additional 1,120 Mcfs of
service per day, adding $101,000 to gross margin during the
nine months ended September 30, 2010. The new expansion project completed in May 2010 is
expected to provide an annualized gross margin of $343,000.
 
    
    New firm transportation service for an industrial customer for the period from November
2009 to October 2012 provided an additional 9,662 Mcfs per day for the period January 1,
2010 through February 5, 2010, and an additional 2,705 Mcfs per day for the period
February 6, 2010 through September 30, 2010. These new services added $304,000 to gross
margin for the first nine months of 2010. During the second quarter of 2009, the same
customer temporarily increased the service, which further increased ESNGs gross margin by
$61,000. This temporary increase in service did not occur in 2010.
 
    
    Offsetting the foregoing increases to gross margin, ESNG received notices from two
customers of their intentions not to renew their firm transportation service contracts,
which expired in November 2009 and April 2010, decreasing gross margin by $284,000 for the
first nine months of 2010. A change in certain customer rates offset these decreases.
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Other Operating Expenses
  Other Developments
  
    
    In the first half of 2010, we announced two agreements to provide natural gas service to
two industrial customers in southern Delaware. The anticipated annual margin from these
services equates to approximately 1,575 average residential heating customers. We
commenced service to one of the industrial customers in the third quarter of 2010, adding
$24,000 to gross margin. Service to the other industrial customer is expected to commence
in late 2010 or early 2011. These services further extend our natural gas distribution and
transmission infrastructures to serve other potential customers in the same area.
 
    
    On April 8, 2010, we entered into a Precedent Agreement with TETLP to secure firm
transportation service from TETLP in conjunction with its new expansion project. The
Precedent Agreement provides that, upon satisfaction of certain conditions, the parties
will execute two firm transportation service contracts, one for our Delaware division and
one for our Maryland division, for 30,000 and 10,000 Dts/d, respectively, to be effective
on the service commencement date of the project, currently projected to occur in
November 2012. As a result of this new service, our Delaware and Maryland divisions will
have access to new supplies of natural gas, providing increased reliability and diversity
of supply. This will also provide them additional upstream transportation capacity, which
is essential to meet their current customer demands and to plan for sustainable growth. In
conjunction with this project, ESNG will build and operate an eight-mile mainline extension
from TETLPs pipeline to ESNGs existing facility to provide transportation services for
the Delaware and Maryland divisions at ESNGs current tariff rate for service in that area.
ESNGs transportation service is expected to provide a three-year phase-in from 20,000 Dts
per day to 40,000 Dts per day, providing estimated annualized margin of $2.2 million (at
20,000 Dts per day) to $4.3 million (at 40,000 Dts per day). This service is expected to
begin no later than January 2011.
 Unregulated Energy
 For the Nine Months Ended September 30,
    
    2010
    
    
    2009
    
    
    Change(in thousands)Revenue
    
    $
    104,018
    
    
    $
    83,236
    
    
    $
    20,782Cost of sales
    
    
    78,740
    
    
    
    62,943
    
    
    
    15,797Gross margin
    
    
    25,278
    
    
    
    20,293
    
    
    
    4,985Operations & maintenance
    
    
    16,792
    
    
    
    12,788
    
    
    
    4,004Depreciation & amortization
    
    
    2,660
    
    
    
    1,552
    
    
    
    1,108Other taxes
    
    
    1,094
    
    
    
    720
    
    
    
    374Other operating expenses
    
    
    20,546
    
    
    
    15,060
    
    
    
    5,486Operating Income
    
    $
    4,732
    
    
    $
    5,233
    
    
    $
    (501
    )Statistical Data  Delmarva PeninsulaHeating degree-days (HDD):Actual
    
    
    3,021
    
    
    
    3,003
    
    
    
    1810-year average (normal)
    
    
    2,923
    
    
    
    2,889
    
    
    
    34Estimated gross margin per HDD
    
    $
    3,083
    
    
    $
    2,465
    
    
    $
    618
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Gross Margin
   
    
    A lower margin per gallon during the first nine months of 2010 compared to the same
period in 2009 decreased gross margin by $1.0 million. Retail margins for the first half
of 2009 benefited from the $939,000 loss recorded in late 2008 on a swap agreement for the
2008/2009 winter Pro-Cap (Propane Price Cap) program. This loss lowered the propane
inventory costs and, therefore, increased retail margins during the first half of 2009.
Retail margins for the first half of 2010 returned to more normal levels.
 
    
    Non-weather-related volumes sold increased in the first nine months of 2010, compared to
the same period in 2009, adding $143,000 to gross margin. The addition of 433 community
gas system customers and 1,000 other customers acquired in February 2010 as part of the
purchase of the operating assets of a propane distributor serving Northampton and Accomack
Counties in Virginia contributed $141,000 and $114,000, respectively, to this increase.
 
    
    The remaining change was primarily related to an increase in other fees of $165,000, as
a result of increased customer participation in various customer loyalty programs, and the
impact of the colder weather of $55,000.
    Other Operating Expenses
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Other
 For the Nine Months Ended September 30,
    
    2010
    
    
    2009
    
    
    Change(in thousands)Revenue
    
    $
    7,990
    
    
    $
    7,413
    
    
    $
    577Cost of sales
    
    
    3,973
    
    
    
    4,019
    
    
    
    (46
    )Gross margin
    
    
    4,017
    
    
    
    3,394
    
    
    
    623Operations & maintenance
    
    
    2,493
    
    
    
    2,820
    
    
    
    (327
    )Transaction-related costs
    
    
    179
    
    
    
    530
    
    
    
    (351
    )Depreciation & amortization
    
    
    216
    
    
    
    230
    
    
    
    (14
    )Other taxes
    
    
    479
    
    
    
    523
    
    
    
    (44
    )Other operating expenses
    
    
    3,367
    
    
    
    4,103
    
    
    
    (736
    )Operating Income (Loss)
    
    $
    650
    
    
    $
    (709
    )
    
    $
    1,359
  Gross margin
  Operating expenses
  Interest Expense
  
    
    An increase in long-term interest expense of $1.5 million is related to interest on
FPUs first mortgage bonds.
 
    
    Interest expense from a new term loan credit facility during the first nine months of
2010 was $356,000. Two series of FPU bonds, the 4.9 percent and 6.85 percent series, were
redeemed by using this new short-term term loan facility at the end of January 2010.
 
    
    Additional interest expense of $553,000 is related to interest on deposits from FPUs
customers.
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Income Taxes
  Financial Position, Liquidity and Capital Resources
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Capital Structure
    Cash Flows Provided By Operating Activities
  For the Nine Months Ended September 30,
    
    2010
    
    
    2009(in thousands)Net Income
    
    $
    18,942
    
    
    $
    9,706Non-cash adjustments to net income
    
    
    27,843
    
    
    
    15,087Changes in assets and liabilities
    
    
    8,861
    
    
    
    22,659Net cash provided by operating activities
    
    $
    55,646
    
    
    $
    47,452
  
    
    Net income increased by $9.2 million. Consolidation of FPU and organic growth of
existing Chesapeake businesses contributed to this increase.
 
    
    Non-cash adjustments to net income increased by $12.8 million due primarily to higher
depreciation and amortization, changes in deferred income taxes and changes in unrealized
gains/losses on commodity contracts. Higher depreciation and amortization is due to
inclusion of FPU and an increase in capital investments. The increase in deferred income
taxes is a result of bonus depreciation in 2010, which significantly reduces our income tax
payment obligations in 2010.
 
    
    Net cash flows from income taxes receivable decreased by $13.8 million due to low income
tax payments and large refunds received in 2009 as a result of bonus depreciation
authorized for 2008 and 2009. Prior to the extension of bonus depreciation to include
2010, we made approximately $8.5 million in income tax payments for 2010. We expect to
receive refunds for a significant portion of those payments in late 2010 or early 2011.
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Cash Flows Used in Investing Activities
  Cash Flows Used by Financing Activities
  
    
    During the first nine months of 2010 we had a net repayment of $23.1 million under our
line of credit agreements related to working capital compared to $23.4 million in the same
period in 2009. Changes in cash overdrafts increased by $6.5 million.
 
    
    During the first nine months of 2010 we issued $29.1 million in short-term term notes
and used the proceeds to finance the redemption, in January 2010, of two series of FPUs
secured first mortgage bonds prior to their respective maturities.
 
    
    We repaid $31.2 million of long-term debt during the first nine months of 2010,
primarily related to early redemption of FPUs long-term debt described above.
 
    
    We paid $8.2 million and $5.7 million in cash dividends for the nine months ended
September 30, 2010 and 2009, respectively. Dividends paid in the first nine months of 2010
increased as a result of an increase in our annualized dividend rate and in the number of
 shares outstanding.
 Off-Balance Sheet Arrangements
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Contractual Obligations
  Payments Due by PeriodPurchase Obligations
    
    Less than 1 year
    
    
    1 - 3 years
    
    
    3 - 5 years
    
    
    More than 5 years
    
    
    Total(in thousands)Commodities (1) (3)
    
    $
    27,711
    
    
    $
    197
    
    
    $
    
    
    
    $
    
    
    
    $
    27,908Propane (2)
    
    
    35,103
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    35,103Total Purchase Obligations
    
    $
    62,814
    
    
    $
    197
    
    
    $
    
    
    
    $
    
    
    
    $
    63,011
 (1)
    
    In addition to the obligations noted above, the natural gas
distribution, the electric distribution and propane distribution operations
have agreements with commodity suppliers that have provisions with no
minimum purchase requirements. There are no monetary penalties for reducing
the amounts purchased; however, the propane contracts allow the suppliers
to reduce the amounts available in the winter season if we do not purchase
specified amounts during the summer season. Under these contracts, the
commodity prices will fluctuate as market prices fluctuate.(2)
    
    We have also entered into forward sale contracts in the aggregate
amount of $21.2 million. See Part I, Item 3, Quantitative and Qualitative
Disclosures about Market Risk, below, for further information.(3)
    
    In March 2009, we renewed our contract with an energy marketing
and risk management company to manage a portion of our natural gas
transportation and storage capacity. There were no material changes to the
contracts terms, as reported in our 2009 Annual Report on Form 10-K. Environmental Matters
  Other Matters
 Rates and Regulatory Matters
  Competition
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Inflation
  Recent Authoritative Pronouncements on Financial Reporting and Accounting
  
 Item 3. Quantitative and Qualitative Disclosures about Market Risk
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Quantity in
    
    
    Estimated Market
    
    
    Weighted AverageAt September 30, 2010
    
    Gallons
    
    
    Prices
    
    
    Contract PricesForward ContractsSale
    
    
    18,964,932
    
    
    $
    0.9925  $1.2150
    
    
    $
    1.1194Purchase
    
    
    18,484,200
    
    
    $
    1.0100  $1.2475
    
    
    $
    1.1055
 Estimated market prices and weighted average contract prices are in dollars per gallon.
 All contracts expire prior to or during the second quarter of 2011.
  September 30,
    
    
    December 31,(in thousands)
    
    2010
    
    
    2009Mark-to-market energy assets
    
    $
    2,290
    
    
    $
    2,379Mark-to-market energy liabilities
    
    $
    1,982
    
    
    $
    2,514
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Item 4. Controls and Procedures
 Evaluation of Disclosure Controls and Procedures
  Changes in Internal Control Over Financial Reporting
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PART II  OTHER INFORMATION
 
 Item 1. Legal Proceedings
  
 Item 1A. Risk Factors
  
 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
 Total
    
    
    
    
    
    
    Total Number of Shares
    
    
    Maximum Number ofNumber of
    
    
    Average
    
    
    Purchased as Part of
    
    
    Shares That May Yet BeShares
    
    
    Price Paid
    
    
    Publicly Announced Plans
    
    
    Purchased Under the PlansPeriod
    
    Purchased
    
    
    per Share
    
    
    or Programs(2)
    
    
    or Programs(2)July 1, 2010
through July 31, 2010 (1)
    
    
    306
    
    
    $
    31.23
    
    
    
    
    
    
    
    August 1, 2010 through
August 31, 2010
    
    
    
    
    
    $
    
    
    
    
    
    
    
    
    September 1, 2010
through September 30, 2010
    
    
    
    
    
    $
    
    
    
    
    
    
    
    
    Total
    
    
    306
    
    
    $
    31.23
    
    
    
    
    
    
    
    
 (1)
    
    Chesapeake purchased shares of stock on the open market for the purpose of reinvesting the dividend on deferred stock units
held in the Rabbi Trust accounts for certain Directors and Senior Executives under the Deferred Compensation Plan. The
Deferred Compensation Plan is discussed in detail in Item 8 under the heading Notes to the Consolidated Financial Statements 
Note M, Employee Benefit Plans of our Form 10-K filed with the Securities and Exchange Commission on March 8, 2010.
During the quarter, 306 shares were purchased through the reinvestment of dividends on deferred stock units.(2)
    
    Except for the purposes described in Footnote (1), Chesapeake has no publicly announced plans or programs to
repurchase its shares. 
 Item 3. Defaults upon Senior Securities
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Item 5. Other Information
  
 Item 6. Exhibits
 10.1
    
    
    First Amendment to the Chesapeake Utilities
Corporation Supplemental Executive Retirement Savings Plan, dated October 28, 2010, is filed herewith.31.1
    
    
    Certificate of Chief Executive Officer of Chesapeake Utilities
Corporation pursuant to Rule 13a-14(a) under the Securities Exchange
Act of 1934, dated November 4, 2010.31.2
    
    
    Certificate of Chief Financial Officer of Chesapeake Utilities
Corporation pursuant to Rule 13a-14(a) under the Securities Exchange
Act of 1934, dated November 4, 2010.32.1
    
    
    Certificate of Chief Executive Officer of Chesapeake Utilities
Corporation pursuant to 18 U.S.C. Section 1350, dated November 4,
2010.32.2
    
    
    Certificate of Chief Financial Officer of Chesapeake Utilities
Corporation pursuant to 18 U.S.C. Section 1350, dated November 4,
2010.
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SIGNATURES
  Chesapeake Utilities Corporation
 /s/ Beth W. Cooper

Beth W. CooperSenior Vice President and Chief Financial Officer
   - 59 -