Prudential Commitment Letter and Term Sheet


    
      	 [Prudential Company
              Logo]	
              Brian
                N. Thomas

              Investment
                Vice President

               

               

              Prudential
                Capital Group

              2200
                Ross Avenue, Suite 4200E, Dallas, Texas 75201

              Tel:
                214 720-6275 Fax: 214 720-6299

              brian.Thomas@prudential.com

            


    

    


    June
      29,
      2005

    


    


    Chesapeake
      Utilities Corporation

    909
      Silver Lake Blvd.

    Dover,
      DE
      19904

    


    Attention:
      Beth Cooper

    Assistant
      Vice President and Corporate Treasurer

    


    Ladies
      and Gentlemen:

    


    I
      am
      pleased to confirm the agreement in principle of Prudential Investment
      Management, Inc. and/or one or more accounts managed by it and/or its affiliates
      (collectively, "Prudential"),
      subject to the conditions set forth below, to purchase $20,000,000
      principal amount of 5.50% Senior Notes due 2020 (the "Notes")
      of the
      Company. Prudential's agreement in principle to purchase the Notes will expire
      on the Cancellation Date. The principal terms to be contained in the Note
      Agreement (the "Note
      Agreement")
      and
      the Notes would be as outlined in the attached preliminary term sheet. Unless
      otherwise defined, capitalized terms used in this letter have the meanings
      described in Annex 1 which is attached hereto and incorporated herein by
      reference.

    


    Prudential's
      purchase of the Notes would be subject to (a)
      authorization of such purchase by (or pursuant to authority delegated by) the
      Investment Committee of Prudential's Board of Directors, (b) Prudential
      and
      the Company reaching final agreement upon terms, conditions, covenants and
      other
      provisions satisfactory to Prudential to be included in the Note Agreement
      and
      the Notes and the other documents relating to the proposed financing, (c)
      satisfactory completion of Prudential's due diligence investigation (including
      investigation of the financial condition and prospects of the
      Company), (d)
      the
      absence of any material adverse change in the condition (financial or otherwise)
      or prospects of the Company, (e) payment to Prudential at closing of
      the
      structuring fee specified in the attached term sheet and (f) the satisfaction
      of
      Prudential Capital's Law Department with the documentation, proceedings, legal
      opinions and other matters in connection with the proposed
      financing.

    


    On
      June
      29th,
      2005,
      the interest rate was fixed on all of the Notes. If the Company does not issue
      the Notes:

    


    
      	 	
              (a)

            	
              on
                or before December 28, 2006, the Company will pay Prudential the
                Rate Lock
                Delayed Delivery Fee, and 

            


    

    


    
      	 	
              (b)

            	
              by
                the Cancellation Date for any reason, then on the Cancellation Date
                the
                Company will pay Prudential the Cancellation Payment described in
                the
                attached term sheet.

            


    

    


    We
      intend
      to retain the law firm of Schiff Hardin LLP to act as our special counsel in
      connection with the proposed financing. In addition, we may determine that
      it is
      necessary to retain other consultants of our choice to advise us in connection
      with the proposed financing. We understand that the fees, charges and
      disbursements of our special counsel and other consultants will be paid by
      the
      Company whether or not the proposed financing closes. If the fees and expenses
      incurred exceed $25,000, the $15,000 Structuring Fee described in the term
      sheet
      will be reduced by 50% of the excess amount.

    


    If
      the
      terms and conditions described above are acceptable to you, please so indicate
      by signing the enclosed copy of this letter in the place provided and returning
      the same to me. 

    


    Very
      truly yours,

    


    PRUDENTIAL
      INVESTMENT

    MANAGEMENT,
      INC.

    


    


    By:___________________________

    Vice
      President

    Accepted
      and agreed to:

    


    CHESAPEAKE
      UTILITIES CORPORATION

    


    


    By:________________________________

    Name:

    Title:

    


    


    
      
         

      

      
         

        
          

        

      

      
         

      

    


    


    ANNEX
      1

    


    


    DEFINITIONS

    


    


    "Cancellation
      Date"
      means
      the earlier of (i) the date Prudential receives the Company's notice that it
      does not intend to issue the Notes (or the next business day if Prudential
      receives that notice after 4:00 p.m. Eastern time) and (ii) January 15,
      2007.

    


    "Rate
      Lock Delayed Delivery Fee"
      means
      the amount calculated as follows:

    


    (BEY
      -
      MMY) x DTS/360 x Full Price;

    


    where:

    


    BEY
      means
      the bond equivalent yield of the Notes;

    


    DTS,
      or Days
      to Settlement, means the number of days (a) from December 28, 2006, (b) to
      the
      date on which the Rate Lock Delayed Delivery Fee is to be paid pursuant to
      the
      terms of the Letter to which this Annex is attached;

    


    MMY,
      or
      Money Market Yield, means the yield of an alternative investment selected by
      Prudential on the date Prudential receives notice of a delay in the closing
      of
      the financing having a maturity date approximately equal to the rescheduled
      closing date (a new alternative investment will be selected each time the
      closing is delayed); and

    


    Full
      Price
      means
      (i) if the Notes are to be purchased at par, the principal amount of the Notes
      for which the rate was fixed or (ii) if the Notes are to be purchased at a
      premium or discount, the purchase price, including any accrued
      interest.

    


    The
      Rate
      Lock Delayed Delivery Fee will never be less than zero and will be recalculated
      for the period following each delay of the closing date.

     

    
      
        
        

      

      
        
        

        
          

        

      

      
        
        

      

    

     

    

      CONFIDENTIAL                                                                    June
        29, 2005

      


      Chesapeake
        Utilities Corporation

      Senior
        Notes 

      Term
        Sheet

      


      


    

    
      
        Issuer:   Chesapeake
          Utilities Corporation (the "Company").

         

      

      Purchaser:   Prudential
        Investment Management, Inc. or its affiliates or investment funds or managed
        accounts ("Prudential").

      


      Principal
        Amount:  $20
        million (the “Notes”).
        

      


      Type
        of Securities:  Private
        placement of senior unsecured notes.

      


      Closing
        Date:  Approximately
        eight weeks from execution of a commitment letter.

      


      Use
        of Proceeds:  The
        proceeds from the sale of the Notes will be used by the Company for capital
        expenditures and general corporate purposes.

      


      Price:  100
        (par)

      


      Average
        Life:  Up
        to 10
        years from the Funding Date.

      


      Maturity:  Up
        to 14
        years from the Funding Date.

      


      Funding
        Date:  December
        28, 2006.

      


      Required
        Prepayments:  $2
        million annually beginning December 28, 2011 through December 28,
        2020.

      


      Interest
        Rate:  149
        basis
        points over the respective on-the-run or off-the-run U.S. Treasury Note or
        interpolated U.S. Treasury Note yield for the effective average life of the
        Notes, with interest payable quarterly in arrears. Indicative spreads at
        which
        Prudential would currently be interested in purchasing the Notes are as
        follows:

      


      
        	
                Average

                Life/Maturity
                  From Funding

              	
                Credit

                Spread

              	
                Treasury

                Rate

              	
                Indicative

                Coupon

              
	
                9.5
                  yrs / 14 yrs

              	
                149

              	
                4.01%

              	
                5.50%

              


      

      


      Interest
        Rate:  Interest
        will be paid quarterly in arrears.

       

      Funding:  In
        the
        event the Company fixes the interest rate, but fails to issue any Notes on
        the
        Funding Date, and either the Company notifies Prudential of its intention
        not to
        issue any Notes, or Prudential determines that the Company will not issue
        any
        Notes, then the Company shall immediately pay to Prudential a cancellation
        payment (the “Cancellation
        Payment”).

       

      If
        the
        Company determines its will not issue any Notes before the Closing Date,
        the
        Company shall pay to Prudential a Cancellation Payment equal to the product
        of
        (a) the price increase determined by Prudential as the excess, if any, of
        the
        ask price of the Treasury Note(s) (the "Hedge
        Treasury Note")
        with
        the duration that most closely approximates the duration of the Notes proposed
        to be issued, on the date of cancellation, over the bid price of the Hedge
        Treasury Note on the date of the Acceptance, divided by such bid price, and
        (b)
        the principal amount of such Notes. 

       

      If
        the
        Company determines it will not issue any Notes after the Closing Date, the
        Company shall pay to Prudential a Cancellation Payment, for the Notes, equal
        to
        the greater of (i) $50,000 and (ii) the product of (a) the price increase
        determined by Prudential as the excess, if any, of the ask price of the Treasury
        Note(s) (the "Hedge
        Treasury Note")
        with
        the duration that most closely approximates the duration of the Notes proposed
        to be issued, on the date of cancellation, over the bid price of the Hedge
        Treasury Note on the date of the Acceptance, divided by such bid price, and
        (b)
        the principal amount of such Notes. 

       

      If
        after
        the Company fixes the interest rate, the funding fails to occur on or before
        the
        Funding Date, a Delayed Delivery Fee (the "Delayed
        Delivery Fee")
        shall
        be charged to the Company to offset Prudential's hedging costs and to preserve
        its anticipated yield. The Delayed Delivery Fee shall be determined by
        Prudential as the product of (i) the bond equivalent yield of the Notes proposed
        to be issued minus the bond equivalent yield of high grade commercial paper
        selected by Prudential with a maturity date approximately equal to the new
        funding date, (ii) the principal amount of the Notes proposed to be issued,
        and
        (iii) a fraction the numerator of which is equal to the number of days from
        the
        originally scheduled Funding Date to the day the fee is paid and the denominator
        of which is 360. 

       

      If
        Company satisfies all Conditions Precedent to the purchase of Notes and
        Prudential refuses to purchase Notes, no Cancellation Payment or Delayed
        Delivery Fee will be paid.

       

      Structuring
        Fee:  A
        structuring fee of $15,000 will be paid by the Company to Prudential on the
        Closing Date. The structuring fee will be subject to reduction by an amount
        equal to 50% of the fees and expenses of Prudential's special legal counsel
        in
        excess of $25,000.

       

      Optional
        Prepayments:  The
        Notes
        may be prepaid, at the option of the Company, in whole or in part (in a minimum
        amount of $1,000,000 and integral multiples of $100,000), on any interest
        payment date, at par plus accrued interest and a Yield-Maintenance Amount
        equal
        to the excess, if any, of (a) the net present value of the future debt service
        (principal plus interest) on the Notes being redeemed, discounted at a rate
        equal to the sum of 50 bps and the current yield on the U.S. Treasury Note(s)
        having a maturity comparable to the weighted average life remaining on such
        Notes over (b) the principal amount of the Notes being prepaid plus interest
        accrued thereon to the date of prepayment. The difference between such price
        and
        the par value being the "Yield-
        Maintenance Amount".
        

       

      Conditions
        Precedent: The
        conditions precedent to funding would be typical for transactions of this
        type
        and will be the same as those contained in the Company’s Note Purchase Agreement
        dated October 31, 2002 (the “Existing
        Agreement”)
        except
        to the extent additional conditions are required to take into account the
        delayed funding on the Funding Date. 

       

      Covenants: 
        Covenants
        of the Company will be the same as those contained in the Existing Agreement
        and
        include terrorism sanction covenants.

       

      Events
        of Default:  Events
        of
        Default will be the same as those contained in the Existing
        Agreement.

       

      Remedies
        Upon Default:  Remedies
        Upon Default will be the same as those contained in the Existing
        Agreement.

      


      Representations
        and Warranties:  Customary
        for an agreement of this nature and will be the same as those contained in
        the
        Existing Agreement, including absence of material adverse change and such
        other
        representations and warranties required for terrorism sanctions regulations
        and
        the delayed issuance of Notes.

       

      Expenses:  The
        Company shall pay all legal and other out-of-pocket expenses of the Purchasers,
        including the fees and expenses of special counsel and local counsel and
        travel
        and lodging expenses of the Purchasers. 

       

      Governing
        Law:  State
        of
        New York.