CHESAPEAKE UTILITIES CORP - Annual Report: 2010 (Form 10-K)

Form 10-K

YEAR ENDED DECEMBER 31, 2010

TABLE OF CONTENTS

		Page
Part I			1
Item 1. Business			2
Item 1A. Risk Factors			13
Item 1B. Unresolved Staff Comments			22
Item 2. Properties			22
Item 3. Legal Proceedings			23
Item 4. Removed and Reserved			23
Item 4A. Executive Officers of the Registrant			23
Part II			24
Item 5. Market for the Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities			24
Item 6. Selected Financial Data			27
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations			31
Item 7A. Quantitative and Qualitative Disclosures About Market Risk			60
Item 8. Financial Statements and Supplementary Data			60
Item 9. Changes In and Disagreements With Accountants on Accounting and Financial Disclosure			114
Item 9A. Controls and Procedures			114
Item 9B. Other Information			116
Part III			116
Item 10. Directors, Executive Officers of the Registrant and Corporate Governanace			116
Item 11. Executive Compensation			116
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters			116
Item 13. Certain Relationships and Related Transactions, and Director Independence			117
Item 14. Principal Accounting Fees and Services			117
Part IV			118
Item 15. Exhibits, Financial Statement Schedules			118
Signatures			124
Exhibit 4.9
Exhibit 10.6
Exhibit 10.8
Exhibit 10.13
Exhibit 10.28
Exhibit 10.30
Exhibit 10.41
Exhibit 10.43
Exhibit 12
Exhibit 14.1
Exhibit 14.2
Exhibit 21
Exhibit 23.1
Exhibit 31.1
Exhibit 31.2
Exhibit 32.1
Exhibit 32.2

GLOSSARY OF KEY TERMS

Frequently used abbreviations, acronyms, or terms used in this report:

Subsidiaries of Chesapeake Utilities Corporation

BravePoint		BravePoint®, Inc., a wholly-owned subsidiary of Chesapeake Services Company, which is a wholly-owned subsidiary of Chesapeake
Chesapeake		The Registrant, the Registrant and its subsidiaries, or the Registrant’s subsidiaries, as appropriate in the context of the disclosure
Company		The Registrant, the Registrant and its subsidiaries or the Registrant’s subsidiaries, as appropriate in the context of the disclosure
ESNG		Eastern Shore Natural Gas Company, a wholly-owned subsidiary of Chesapeake
FPU		Florida Public Utilities Company, a wholly-owned subsidiary of Chesapeake, effective October 28, 2009
PESCO		Peninsula Energy Services Company, Inc., a wholly-owned subsidiary of Chesapeake
PIPECO		Peninsula Pipeline Company, Inc., a wholly-owned subsidiary of Chesapeake
Sharp		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 Commission
DOT		United States Department of Transportation
EPA		United States Environmental Protection Agency
FASB		Financial Accounting Standards Board
FERC		Federal Energy Regulatory Commission
FDEP		Florida Department of Environmental Protection
Florida PSC		Florida Public Service Commission
IASB		International Accounting Standards Board
IRS		Internal Revenue Service
Maryland PSC		Maryland Public Service Commission
MDE		Maryland Department of the Environment
PSC		Public Service Commission
SEC		Securities and Exchange Commission

Accounting Standards Related

ASC		FASB Accounting Standards Codification TM
ASU		FASB Accounting Standards Update
GAAP		Generally Accepted Accounting Principles
IFRS		International Financial Reporting Standards
FASB		Financial Accounting Standards Board

Other

AS/SVE		Air Sparging and Soil/Vapor Extraction
BS/SVE		Bio-Sparging and Soil/Vapor Extraction
CDD		Cooling Degree-Days
Columbia		Columbia Gas Transmission, LLC
DSCP		Directors Stock Compensation Plan
Dts		Dekatherms
Dts/d		Dekatherms per Day
FCG		Florida City Gas
FGT		Florida Gas Transmission Company
FRP		Fuel Retention Percentage
GSR		Gas Sales Service Rates
Gulf		Columbia Gulf Transmission Company
Gulf Power		Gulf Power Company
Gulfstream		Gulfstream Natural Gas System, LLC
HDD		Heating Degree-Days
IGC		Indiantown Gas Company
Mcf		Thousand Cubic Feet
MGP		Manufactured Gas Plant
MWH		Megawatt Hour
NYSE		New York Stock Exchange
PIP		Performance Incentive Plan
RAP		Remedial Action Plan
S&P 500 Index		Standard & Poor’s 500 Index
Sanford Group		FPU and Other Responsible Parties involved with the Sanford Environmental Site
TETLP		Texas Eastern Transmission, LP
Transco		Transcontinental Gas Pipe Line Company, LLC

Part I

References in this document to “Chesapeake,” “the Company,” “we,” “us” and “our” mean Chesapeake Utilities Corporation and/or its wholly-owned subsidiaries, as appropriate in the context of the disclosure.

Safe Harbor for Forward-Looking Statements

We make statements in this Form 10-K that do not directly or exclusively relate to historical facts. Such statements are “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. You can typically identify forward-looking statements by the use of forward-looking words, such as “project,” “believe,” “expect,” “anticipate,” “intend,” “plan,” “estimate,” “continue,” “potential,” “forecast” or other similar words, or future or conditional verbs such as “may,” “will,” “should,” “would” or “could.” These statements represent our intentions, plans, expectations, assumptions and beliefs about future financial performance, business strategy, projected plans and objectives of the Company. These statements are subject to many risks and uncertainties. In addition to the risk factors described under Item 1A “Risk Factors,” the following important factors, among others, could cause actual future results to differ materially from those expressed in the 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, 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, regulatory or other limitations imposed as a result of a merger, acquisition or divestiture, and 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

•

operational and litigation risks that may not be covered by insurance.

Item 1. Business.

(a)		Overview
		We are a diversified utility company engaged in various energy and other businesses. Chesapeake is a Delaware corporation that was formed in 1947. On October 28, 2009, we completed a merger with Florida Public Utilities Company (“FPU”), pursuant to which FPU became a wholly-owned subsidiary of Chesapeake. We operate regulated energy businesses through our natural gas distribution divisions in Delaware, Maryland and Florida, natural gas and electric distribution operations in Florida through FPU, and natural gas transmission operations on the Delmarva Peninsula and Florida through our subsidiaries, Eastern Shore Natural Gas Company (“ESNG”) and Peninsula Pipeline Company, Inc. (“PIPECO”), respectively. Our unregulated businesses include our natural gas marketing operation through Peninsula Energy Services Company, Inc. (“PESCO”); propane distribution operations through Sharp Energy, Inc. and its subsidiary Sharpgas, Inc. (collectively “Sharp”) and FPU’s propane distribution subsidiary, Flo-Gas Corporation; and our propane wholesale marketing operation through Xeron, Inc. (“Xeron”). We also have an advanced information services subsidiary, BravePoint®, Inc. (“BravePoint”).

(b)		Operating Segments
		We are composed of three operating segments:

•

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 the Public Service Commission (“PSC”) having jurisdiction in each operating territory or by the Federal Energy Regulatory Commission (“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.

The following table shows the size of each of our operating segments based on operating income for 2010 and net property, plant and equipment as of December 31, 2010:

										Net Property, Plant
(in thousands)		Operating Income								& Equipment
Regulated Energy		$	43,509				84	%		$	414,622				90	%
Unregulated Energy			7,908				15	%			35,658				8	%
Other			513				1	%			12,477				2	%
Total		$	51,930				100	%		$	462,757				100	%

Additional financial information by business segment is included in Item 8 under the heading “Notes to the Consolidated Financial Statements — Note C, Segment Information.”

(i)		Regulated Energy
		Our regulated energy segment provides natural gas distribution services in Delaware, Maryland and Florida, electric distribution services in Florida and natural gas transmission services in Delaware, Maryland, Pennsylvania and Florida.
		Natural Gas Distribution
		Natural gas supplies nearly one-fourth of the energy used in the United States. Due to its efficiency, cleanliness and reliability, natural gas is growing increasingly popular. With 99 percent of the natural gas consumed in the United States coming from North America, supplies of natural gas are abundant. Natural gas is delivered to customers through a safe and efficient underground pipeline system. As the cleanest-burning fossil fuel, increased use of natural gas can help address various environmental concerns today.
		Our Delaware and Maryland natural gas distribution divisions serve 52,686 residential and commercial customers and 177 industrial customers in central and southern Delaware and Maryland’s Eastern Shore. For the year ended December 31, 2010, operating revenues and deliveries by customer class for our Delaware and Maryland distribution divisions were as follows:

		Operating Revenues								Deliveries
		(in thousands)								(Mcfs)
Residential		$	46,041				57	%			2,881,073				35	%
Commercial			27,896				34	%			2,145,143				26	%
Industrial			3,766				5	%			3,020,907				36	%
Subtotal			77,703				96	%			8,047,123				97	%
Interruptible			655				1	%			232,653				3	%
Other (1)			2,507				3	%			—				—
Total		$	80,865				100	%			8,279,776				100	%

(1)		Operating revenues from “other” include unbilled revenue, rental of gas properties, and other miscellaneous charges.

Our Florida natural gas distribution operations consist of Chesapeake’s Florida division and FPU’s natural gas operation, which was acquired in the merger with FPU in October 2009. In August 2010, FPU added a new division through the purchase of the natural gas operating assets of Indiantown Gas Company (“IGC”). On a combined basis, our Florida natural gas distribution operations serve 61,053 residential customers and 6,314 commercial and industrial customers in 20 counties in Florida. For the year ended December 31, 2010, operating revenues and deliveries by customer class for our Florida natural gas distribution operations were as follows:

		Operating Revenues								Deliveries
		(in thousands)								(Mcf’s)
Residential		$	27,742				35	%			1,716,934				8	%
Commercial			39,006				48	%			4,451,414				20	%
Industrial			13,043				16	%			15,582,234				72	%
Other (1)			607				1	%			12,723				—
Total		$	80,398				100	%			21,763,305				100	%

(1)		Operating revenues from “other” include unbilled revenue, conservation revenue, fees for billing services provided to third parties and other miscellaneous charges.

Electric Distribution

Our Florida electric distribution operation, which was acquired in the FPU merger, distributes electricity to 30,966 customers in four counties in northeast and northwest Florida. For the year ended December 31, 2010, operating revenues and deliveries by customer class for the FPU electric distribution operation were as follows:

		Operating Revenues								Deliveries
		(in thousands)								(MWHs)
Residential		$	51,498				55	%			347,040				47	%
Commercial			45,332				48	%			332,322				45	%
Industrial			7,705				8	%			66,580				9	%
Subtotal			104,535				111	%			745,942				101	%
Other (1)			(10,452	)			(11	%)			(6,286	)			(1	%)
Total		$	94,083				100	%			739,656				100	%

(1)		Operating revenues from “other” include unbilled revenue, under (over) recoveries of fuel cost, conservation revenue, other miscellaneous charges and adjustments for pass-through taxes.

Natural Gas Transmission

ESNG operates a 396-mile interstate pipeline system that transports natural gas from various points in Pennsylvania to Chesapeake’s Delaware and Maryland natural gas distribution divisions, as well as to other utilities and industrial customers in southern Pennsylvania, Delaware and on the Eastern Shore of Maryland. ESNG also provides swing transportation service and contract storage services. For the year ended December 31, 2010, operating revenues and deliveries by customer class for ESNG were as follows:

		Operating Revenues								Deliveries
		(in thousands)								(Mcfs)
Local distribution companies		$	20,441				76	%			10,848,108				62	%
Industrial			4,864				18	%			4,794,442				27	%
Commercial			1,571				6	%			1,962,890				11	%
Other (1)			41				0	%			—				—
Subtotal			26,917				100	%			17,605,440				100	%
Less: affiliated local distribution companies			(12,903	)			(48	%)			(5,853,083	)			(33	%)
Total non-affiliated		$	14,014				52	%			11,752,357				67	%

(1)		Operating revenues from “other” sources are from rental of gas properties.

PIPECO currently provides natural gas transportation services to a customer for a period of 20 years beginning in January 2009 at a fixed monthly charge, through an eight-mile pipeline located in Suwanee County, Florida, which PIPECO owns. For the year ended December 31, 2010, PIPECO had $264,000 in operating revenues under the contract.

Supplies, Transmission and Storage

We believe that the availability of supply and transmission of natural gas and electricity is adequate under existing arrangements to meet the anticipated needs of customers.

Natural Gas Distribution- Delaware and Maryland

Our Delaware and Maryland natural gas distribution divisions have both firm and interruptible transportation service contracts with five interstate “open access” pipeline companies, including the ESNG pipeline. These divisions are directly interconnected with the ESNG pipeline, and have contracts with interstate pipelines upstream of ESNG, including Transcontinental Gas Pipe Line Company LLC (“Transco”), Columbia Gas Transmission LLC (“Columbia”), Columbia Gulf Transmission Company (“Gulf”) and Texas Eastern Transmission, LP (“TETLP”). The Transco, Columbia and TETLP pipelines are directly interconnected with the ESNG pipeline. The Gulf pipeline is directly interconnected with the Columbia pipeline and indirectly interconnected with the ESNG pipeline. None of the upstream pipelines is owned or operated by an affiliate of the Company.

On April 8, 2010, our Delaware and Maryland divisions entered into a Precedent Agreement with TETLP in conjunction with TETLP’s new expansion project. Upon satisfaction of certain conditions provided in the Precedent Agreement, the Delaware and Maryland divisions will execute two firm transportation service contracts, one for our Delaware division for 28,986 Mcfs per day and one for our Maryland division for 9,662 Mcfs per day, to be effective on the service commencement date of the project, which is currently projected to occur in November 2012. The new firm transportation service contracts between our Delaware and Maryland divisions and TETLP will provide us with an additional direct interconnection with ESNG’s transmission system and access to new sources of natural gas supplies from other natural gas production regions, including the Appalachian production region, thereby providing increased reliability and diversity of supply. They will also provide our Delaware and Maryland divisions with additional upstream transportation capacity to meet current customer demands and to plan for sustainable growth. In December 2010, ESNG completed its mainline extension to interconnect with the TETLP pipeline. Until TETLP’s expansion project is completed, our Delaware and Maryland divisions expect to utilize currently available capacity on a portion of TETLP’s existing pipeline. For the 2010 and 2011 winter season, our Delaware and Maryland divisions have contracted for 14,493 Mcfs per day and 4,831 Mcfs per day, respectively, from TETLP.

The Delaware and Maryland divisions use their firm transportation supply resources to meet a significant percentage of their projected demand requirements and they purchase natural gas supplies on the spot market from various suppliers as needed to match firm supply and demand. This gas is transported by the upstream pipelines and delivered to their interconnections with ESNG. These divisions also have the capability to use propane-air peak-shaving to supplement or displace spot market purchases.

The following table shows the firm transportation and storage capacity that the Delaware and Maryland divisions currently have under contract with ESNG and pipelines upstream of the ESNG pipeline, including the respective contract expiration dates.

Delaware

		Firm transportation				Firm storage capacity
		capacity maximum				maximum peak-day
		peak-day daily				daily withdrawal
Pipeline		deliverability (Mcfs)				(Mcfs)				Expiration
Transco			20,699				6,190			Various dates between 2012 and 2028
Columbia			17,836				7,946			Various dates between 2011 and 2020
Gulf			850				—			Expires in 2014
TETLP			14,493				—			Expires in 2012
ESNG			64,602				4,006			Various dates between 2011 and 2027

Maryland

		Firm transportation				Firm storage capacity
		capacity maximum				maximum peak-day
		peak-day daily				daily withdrawal
Pipeline		deliverability (Mcfs)				(Mcfs)				Expiration
Transco			5,921				2,909			Various dates between 2012 and 2013
Columbia			6,473				3,539			Various dates between 2011 and 2018
Gulf			570				—			Expires in 2014
TETLP			4,831				—			Expires in 2012
ESNG			21,380				2,228			Various dates between 2011 and 2027

The Delaware and Maryland divisions currently have contracts with several suppliers for the purchase of firm natural gas supply in the amount of their capacities on the Transco and Columbia pipelines.

Natural Gas Distribution- Florida

Chesapeake’s Florida natural gas distribution division has firm transportation service contracts with Florida Gas Transmission Company (“FGT”) and Gulfstream Natural Gas System, LLC (“Gulfstream”). Pursuant to a program approved by the Florida Public Service Commission (“Florida PSC”), all of the capacity under these agreements has been released to various third-parties, including PESCO. Under the terms of these capacity release agreements, Chesapeake is contingently liable to FGT and Gulfstream, should any party that acquired the capacity through release fail to pay for the service.

Contracts by Chesapeake’s Florida natural gas distribution division with FGT include: (a) a contract, which expires on July 31, 2012, for daily firm transportation capacity of 17,175 Mcfs for the months of November through April, capacity of 14,695 Mcfs for the months of May through September, and 16,143 Mcfs for October; and (b) a contract for daily firm transportation capacity of 974 Mcfs daily, which expires in 2015. Chesapeake’s contract with Gulfstream is for daily firm transportation capacity of 9,737 Mcfs and expires in 2022.

FPU has the following firm transportation contracts with FGT:

(a) two contracts expiring in July 2020 for daily firm transportation capacity of:

		Daily Firm
		Transportation Capacity
		(in Mcfs)
January — March			28,647
April			24,156
May — September			9,681
October			10,210
November — December			28,647

(b) one contract expiring in February 2015 for daily firm transportation capacity of:

		Daily Firm
		Transportation Capacity
		(in Mcfs)
January — April			10,286
May — October			4,360
November — December			10,286

(c) one contract for daily firm transportation capacity of 1,774 Mcfs with various partial expiration dates between 2016 and 2023.

FPU also has a firm transportation contract with Florida City Gas (“FCG”), expiring in 2013, which provides daily firm transportation capacity of 292 Mcfs on its Pioneer Pipeline, and a firm transportation contract with IGC, expiring in 2016, which provides daily firm transportation capacity of 487 Mcfs on its distribution system.

FPU uses gas marketers and producers to procure all of its gas supplies for its natural gas distribution operations. FPU also uses TECO Peoples Gas to provide wholesale gas sales service in areas distant from its interconnections with FGT.

Natural Gas Transmission

ESNG has three contracts with Transco for a total of 7,045 Mcfs of firm peak day storage entitlements and total storage capacity of 278,264 Mcfs, each of which expires in 2013. ESNG has retained these firm storage services in order to provide swing transportation service and firm storage service to those customers that have requested such services.

Electric Distribution

Our electric distribution operation through FPU purchases all of its wholesale electricity from two suppliers: Gulf Power Company (“Gulf Power”) and JEA (formerly known as Jacksonville Electric Authority). Both of these contracts are all requirement contracts and they expire in December 2019 and December 2017, respectively. The JEA contract provides generation, transmission and distribution service to northeast Florida. The Gulf Power contract provides generation, transmission and distribution service to northwest Florida.

Competition

See discussion of competition in Item 7 under the heading “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Competition.”

Rates and Regulation

Our natural gas and electric distribution operations are subject to regulation by the Delaware, Maryland and Florida PSCs with respect to various aspects of their business, including rates for sales and transportation to all customers in each respective jurisdiction. All of our firm distribution sales rates are subject to fuel cost recovery mechanisms, which match revenues with natural gas and electric supply and transportation costs and normally allow full recovery of such costs. Adjustments under these mechanisms, which are limited to such costs, require periodic filings and hearings with the state regulatory authority having jurisdiction.

ESNG is subject to regulation as an interstate pipeline by the FERC, which regulates the terms and conditions of service and the rates ESNG can charge for its transportation and storage services. PIPECO is subject to regulation by the Florida PSC.

The following table shows the regulatory jurisdictions under which our regulated energy businesses currently operate, including the effective dates of the most recent full rate proceedings and the rates of return that were authorized therein:

		Regulatory		Effective Date of		Allowed
Regulated Business		Jurisdiction		the Currrent Rates		Return
Chesapeake — Delaware Division		Delaware PSC		9/3/2008			10.25% (1)
Chesapeake — Maryland Division		Maryland PSC		12/1/2007			10.75% (1)
Chesapeake — Florida Division		Florida PSC		1/14/2010			10.80% (1)
FPU — Natural Gas		Florida PSC		1/14/2010 (3)			10.85% (1)
FPU — Electric		Florida PSC		5/22/2008			11.00% (1)
ESNG		FERC		9/1/2007			13.60% (2)

(1)		Allowed return on equity
(2)		Allowed overall pre-tax, pre-interest rate of return
(3)		Effective date of the Order approving settlement agreement, which adjusted rates originally approved on June 4, 2009.

PIPECO, which is regulated by the Florida PSC, currently provides service to one customer at a negotiated rate.

On December 30, 2010, ESNG submitted a base rate filing to the FERC. See discussion of regulatory activities in Item 7 under the heading “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Rate Filings and Other Regulatory Activities.”

Management monitors the achieved rates of return of each of our regulated energy operations in order to ensure timely filing of rate cases.

Regulatory Proceedings

See discussion of regulatory activities in Item 7 under the heading “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Rate Filings and Other Regulatory Activities.”

Seasonality of Natural Gas and Electric Distribution Revenues

Revenues from our residential and commercial natural gas distribution activities are affected by seasonal variations in weather conditions, which directly influence the volume of natural gas sold and delivered. Specifically, customer demand substantially increases during the winter months, when natural gas is used for heating. Accordingly, the volumes sold for this purpose are directly affected by the severity of winter weather and can vary substantially from year to year. Sustained warmer-than-normal temperatures will tend to reduce use of natural gas, while sustained colder-than-normal temperatures will tend to increase consumption. We measure the relative impact of weather by using an accepted degree-day methodology. Degree-day data is used to estimate amounts of energy required to maintain comfortable indoor temperature levels based on each day’s average temperature. A degree-day is the measure of the variation in the weather based on the extent to which the average daily temperature (from 10:00 am to 10:00 am) falls below 65 degrees Fahrenheit. Each degree of temperature below 65 degrees Fahrenheit is counted as one heating degree-day. Normal heating degree-days are based on the most recent 10-year average.

For the electric distribution operations in northeast and northwest Florida, hot summers and cold winters produce year-round electric sales that normally do not have large seasonal fluctuations.

In an effort to stabilize the level of net revenues collected from customers regardless of weather conditions, we received approval from the Maryland Public Service Commission (“Maryland PSC”) on September 26, 2006 to implement a weather normalization adjustment for our residential heating and smaller commercial heating customers. A weather normalization adjustment is a billing adjustment mechanism that is designed to eliminate the effect of deviations from average seasonal temperatures on utility net revenues.

Delaware, like many other states, has been looking at ways to enable implementation of energy efficiency and considering revenue decoupling, which is a mechanism for separating the revenue needed to recover the fixed cost of delivery from the variable cost that fluctuates with the amount of natural gas consumed. Since March of 2007, the Delaware Public Service Commission (“Delaware PSC”) has been investigating whether to implement a revenue decoupling mechanism for the natural gas distribution utilities. Recently, the Delaware PSC decided in response to a decoupling request by another Delaware distribution utility that it would need a further review of the implementation plan, including more customer education about decoupling and the greater awareness of energy efficiency programs, prior to approving the request. Our Delaware natural gas distribution operation is currently evaluating the feasibility of decoupling. In light of the Delaware PSC’s recent actions, it is uncertain as to when our Delaware natural gas distribution operation will file a request for decoupling or whether it will be required to file such request by the Delaware PSC.

(ii)

Unregulated Energy

Our unregulated energy segment provides natural gas marketing, propane distribution and propane wholesale marketing services to customers.

Natural Gas Marketing

Our natural gas marketing subsidiary, PESCO, provides natural gas supply and supply management services to 2,486 customers in Florida and 11 customers on the Delmarva Peninsula. It competes with regulated utilities and other unregulated third-party marketers to sell natural gas supplies directly to commercial and industrial customers through competitively-priced contracts. PESCO does not own or operate any natural gas transmission or distribution assets. The gas that PESCO sells is delivered to retail customers through affiliated and non-affiliated local distribution company systems and transmission pipelines. PESCO bills its customers through the billing services of the regulated utilities that deliver the gas, or directly, through its own billing capabilities. For the year ended December 31, 2010, PESCO’s operating revenues and deliveries were as follows:

		Operating Revenues								Deliveries
State		(in thousands)								(Mcfs)
Florida		$	47,441				86	%			8,236,014				84	%
Delmarva			8,006				14	%			1,538,895				16	%
Total		$	55,447				100	%			9,774,909				100	%

PESCO currently has contracts with natural gas production companies for the purchase of firm natural gas supplies. These contracts provide a maximum firm daily entitlement of 35,000 Mcfs, and expire in May 2011. PESCO is currently in the process of obtaining and reviewing proposals from suppliers and anticipates executing agreements prior to the end of the term of the existing contracts.

Propane Distribution

Propane is a form of liquefied petroleum gas, which is typically extracted from natural gas or separated during the crude oil refining process. Although propane is a gas at normal pressure, it is easily compressed into liquid form for storage and transportation. Propane is a clean-burning fuel, gaining increased recognition for its environmental superiority, safety, efficiency, transportability and ease of use relative to alternative forms of fossil fuels. Propane is sold primarily in suburban and rural areas, which are not served by natural gas distributors.

Sharp, our propane distribution subsidiary, serves 34,243 customers throughout Delaware, the Eastern Shore of Maryland and Virginia, and southeastern Pennsylvania. Our Florida propane distribution subsidiary provides propane distribution services to 13,857 customers in parts of Florida. For the year ended December 31, 2010, operating revenues and total gallons sold by our Delmarva and Florida propane distribution operations were as follows:

		Operating Revenues								Total Gallons Sold
State		(in thousands)								(in thousands)
Delmarva		$	68,558				79	%			32,617				82	%
Florida			18,725				21	%			6,995				18	%
Total		$	87,283				100	%			39,612				100	%

Propane Wholesale Marketing

Xeron, our propane wholesale marketing operation, markets propane to large, independent petrochemical companies, resellers and retail propane companies in the southeastern United States. The propane wholesale marketing business is affected by propane wholesale price volatility and supply levels. In 2010, Xeron had operating revenues totaling approximately $1.8 million, net of the associated cost of propane sold. For further discussion of Xeron’s trading and wholesale marketing activities, market risks and controls that monitor Xeron’s risks, see Item 7 under the heading “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Market Risk.”

Xeron does not own physical storage facilities or equipment to transport propane; however, it contracts for storage and pipeline capacity to facilitate the sale of propane on a wholesale basis.

Supplies, Transportation and Storage

Our propane distribution operations purchase propane primarily from suppliers, including major oil companies, independent producers of natural gas liquids and from Xeron. Supplies of propane from these and other sources are readily available for purchase.

Our propane distribution operations use trucks and railroad cars to transport propane from refineries, natural gas processing plants or pipeline terminals to our bulk storage facilities. We own bulk propane storage facilities with an aggregate capacity of approximately 3.0 million gallons at various locations in Delaware, Maryland, Pennsylvania, Virginia and Florida. From these storage facilities, propane is delivered by “bobtail” trucks, owned and operated by us, to tanks located at the customers’ premises.

Competition

See discussion of competition in Item 7 under the heading “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Competition.”

Rates and Regulation

Natural gas marketing, propane distribution and propane wholesale marketing activities are not subject to any federal or state pricing regulation. Transport operations are subject to regulations concerning the transportation of hazardous materials promulgated by the Federal Motor Carrier Safety Administration within the United States Department of Transportation (“DOT”) and enforced by the various states in which such operations take place. Propane distribution operations are also subject to state safety regulations relating to “hook-up” and placement of propane tanks.

Seasonality of Propane Revenues

Revenues from our propane distribution sales activities are affected by seasonal variations in weather conditions. Weather conditions directly influence the volume of propane sold and delivered to customers; specifically, customers’ demand substantially increases during the winter months when propane is used for heating. Accordingly, the propane volumes sold for this purpose are directly affected by the severity of winter weather and can vary substantially from year to year. Sustained warmer-than-normal temperatures will tend to reduce propane use, while sustained colder-than-normal temperatures will tend to increase consumption.

(iii)

Other

The “other” segment consists primarily of our advanced information services subsidiary, other unregulated subsidiaries that own real estate leased to Chesapeake and its subsidiaries and certain unallocated corporate costs. Certain corporate costs that have not been allocated to different operations consist of merger-related costs that have been expensed and have not been allocated because such costs are not directly attributable to the business unit operations.

Advanced Information Services

Our advanced information services subsidiary, BravePoint, is headquartered in Norcross, Georgia, and provides domestic and international clients with information technology services and solutions for both enterprise and e-business applications.

Other Subsidiaries

Skipjack, Inc. and Eastern Shore Real Estate, Inc. own and lease office buildings in Delaware and Maryland to affiliates of Chesapeake. Chesapeake Investment Company is an affiliated investment company incorporated in Delaware.

(c)

Additional information about the Business

(i)

Capital Budget

A discussion of capital expenditures by business segment and capital expenditures for environmental remediation facilities is included in Item 7 under the heading “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Liquidity and Capital Resources.”

(ii)

Employees

As of December 31, 2010, we had a total of 734 employees, 160 of whom are union employees represented by three labor unions: the International Brotherhood of Electrical Workers, the International Chemical Workers Union and United Food and Commercial Workers Union, all of whose collective bargaining agreements expire in 2013.

(iii)

Financial Information about Geographic Areas

All of our material operations, customers, and assets are located in the United States.

(d)

Available Information

As a public company, we file annual, quarterly and other reports, as well as our annual proxy statement and other information, with the Securities and Exchange Commission (“SEC”). The public may read and copy any materials that we file with the SEC at the SEC’s Public Reference Room at 100 F Street, N.E., Washington, DC 20549-5546; the public may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330.

The SEC also maintains an Internet site that contains reports, proxy and information statements and other information regarding the Company. The address of the SEC’s Internet website is www.sec.gov. We make available, free of charge, on our Internet website, our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and amendments to those reports, as soon as reasonably practicable after such reports are electronically filed with or furnished to the SEC. The address of our Internet website is www.chpk.com. The content of this website is not part of this report.

We have a Business Code of Ethics and Conduct applicable to all employees, officers and directors and a Code of Ethics for Financial Officers. Copies of the Business Code of Ethics and Conduct and the Financial Officer Code of Ethics are available on our Internet website. We also adopted Corporate Governance Guidelines and Charters for the Audit Committee, Compensation Committee, and Corporate Governance Committee of the Board of Directors, each of which satisfies the regulatory requirements established by the SEC and the New York Stock Exchange (“NYSE”). The Board of Directors has also adopted Corporate Governance Guidelines on Director Independence, which conform to the NYSE listing standards on director independence. Each of these documents also is available on our Internet website or may be obtained by writing to: Corporate Secretary; c/o Chesapeake Utilities Corporation, 909 Silver Lake Boulevard, Dover, DE 19904.

If we make any amendment to, or grant a waiver of, any provision of the Business Code of Ethics and Conduct or the Code of Ethics for Financial Officers applicable to our principal executive officer, president, principal financial officer, principal accounting officer or controller, the amendment or waiver will be disclosed within four business days in a press release, by website disclosure, or by filing a current report on Form 8-K with the SEC.

Our Chief Executive Officer certified to the NYSE on June 3, 2010 that, as of that date, he was unaware of any violation by Chesapeake of the NYSE’s corporate governance listing standards.

Item 1A. Risk Factors.

The following is a discussion of the primary financial, operational, regulatory and legal, and environmental risk factors that may affect the operations and/or financial performance of our regulated and unregulated businesses. Refer to the section entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations” under Item 7 of this report for an additional discussion of these and other related factors that affect our operations and/or financial performance.

Financial Risks

The anticipated benefits of the merger with FPU may not be realized.

We entered into the merger with FPU with the expectation that the merger would result in various benefits, including, among other things, synergies, cost savings and operating efficiencies. Although we have achieved significant synergies, cost savings and operating efficiencies since the merger, there can be no assurance that these benefits will be sustained in the future, or additional benefits will be achieved in the future. Failure to sustain these benefits or achieve additional benefits in the future will adversely affect our expected future performance.

We are currently in discussions with the Office of Public Counsel of Florida and the Florida PSC staff regarding the benefits and cost savings of the merger, current and expected earnings level as well as the recovery of approximately $34.9 million in purchase premium and $2.2 million in merger-related costs. If we fail to obtain the necessary approval to earn a return on the purchase premium and merger-related costs and treat the amortization as allowable operating costs, we may be required to expense the amortization of these assets without recovery which will adversely affect our financial performance for the related periods. We may also be required to pass on to ratepayers, some, or all of the increased earnings generated from cost savings, resulting from the merger.

Instability and volatility in the financial markets could have a negative impact on our growth strategy.

Our business strategy includes the continued pursuit of growth, both organically and through acquisitions. To the extent that we do not generate sufficient cash from operations, we may incur additional indebtedness to finance our growth. Specifically, we rely on access to both short-term and long-term capital markets as a significant source of liquidity for capital requirements not satisfied by the cash flows from our operations. Currently, $40 million of the total $100 million of short-term lines of credit utilized to satisfy our short-term financing requirements are discretionary, uncommitted lines of credit. We utilize discretionary lines of credit to reduce the cost associated with these short-term financing requirements. We are committed to maintaining a sound capital structure and strong credit ratings to provide the financial flexibility needed to access the capital markets when required. However, if we are not able to access capital at competitive rates, our ability to implement our strategic plan, undertake improvements and make other investments required for our future growth may be limited.

A downgrade in our credit rating could adversely affect our access to capital markets and our cost of capital.

Our ability to obtain adequate and cost-effective capital depends on our credit ratings, which are greatly affected by our financial performance and the liquidity of financial markets. A downgrade in our current credit ratings could adversely affect our access to capital markets, as well as our cost of capital.

Debt covenant obligations, if triggered, may affect our financial condition.

Our long-term debt obligations and committed short-term lines of credit contain financial covenants related to debt-to-capital ratios and interest-coverage ratios. Failure to comply with any of these covenants could result in an event of default which, if not cured or waived, could result in the acceleration of outstanding debt obligations or the inability to borrow under certain credit agreements. Any such acceleration would cause a material adverse change in our financial condition.

The continuation of recent economic conditions could adversely affect our customers and negatively impact our financial results.

A continued downturn in the economies of the regions in which we operate, together with increased unemployment, mortgage and other credit defaults and significant decreases in the values of homes and investment assets, have adversely affected the financial resources of many domestic households. These economic conditions have slowed the growth in our customer base and cash flows. It is unclear whether governmental responses to these conditions will be successful in lessening the severity or duration of the current recession. As a result, our customers may use less natural gas, electricity or propane and it may become more difficult for them to pay their bills. This may slow collections and lead to higher than normal levels of accounts receivable, which in turn, could increase our financing requirements and result in higher bad debt expense.

An increase in interest rates may adversely affect our results of operations and cash flows.

An increase in interest rates, without the recovery of the higher cost of debt in the sales and/or transportation rates we charge our utility customers, could adversely affect future earnings. An increase in short-term interest rates would negatively affect our results of operations, which depend on short-term lines of credit to finance accounts receivable and storage gas inventories, as well as to temporarily finance capital expenditures.

Inflation may impact our results of operations, cash flows and financial position.

Inflation affects the cost of supply, labor, products and services required for operations, maintenance and capital improvements. To help cope with the effects of inflation on our capital investments and returns, we seek rate increases from regulatory commissions for regulated operations and closely monitor the returns of our unregulated operations. There can be no assurance that we will be able to obtain adequate and timely rate increases to offset the effects of inflation. To compensate for fluctuations in propane gas prices, we adjust our propane selling prices to the extent allowed by the market. There can be no assurance, however, that we will be able to increase propane sales prices sufficiently to compensate fully for such fluctuations in the cost of propane gas to us.

Our operations are exposed to market risks, beyond our control, which could adversely affect our financial results and capital requirements.

Our natural gas marketing and propane wholesale marketing operations are subject to market risks beyond their control, including market liquidity and commodity price volatility. Although we maintain a risk management policy, we may not be able to offset completely the price risk associated with volatile commodity prices, which could lead to volatility in earnings. Physical trading also has price risk on any net open positions at the end of each trading day, as well as volatility resulting from: (i) intra-day fluctuations of natural gas and/or propane prices, and (ii) daily price movements between the time natural gas and/or propane is purchased or sold for future delivery and the time the related purchase or sale is hedged. The determination of our net open position at the end of any trading day requires Xeron to make assumptions as to future circumstances, including the use of natural gas and/or propane by its customers in relation to its anticipated market positions. Because the price risk associated with any net open position at the end of such day may increase if the assumptions are not realized, we review these assumptions daily. Net open positions may increase volatility in our financial condition or results of operations if market prices move in a significantly favorable or unfavorable manner, because the timing of the recognition of profits or losses on the economic hedges for financial accounting purposes usually does not match up with the timing of the economic profits or losses on the item being hedged. This volatility may occur, with a resulting increase or decrease in earnings or losses, even though the expected profit margin is essentially unchanged from the date the transactions were consummated.

Our energy marketing subsidiaries have credit risk and credit requirements that may adversely affect our results of operations, cash flows and financial condition.

Our energy marketing subsidiaries extend credit to counterparties and continually monitor and manage collections aggressively. Each of these subsidiaries is exposed to the risk that it may not be able to collect amounts owed to it. If the counterparty to such a transaction fails to perform, and any underlying collateral is inadequate, we could experience financial losses. These subsidiaries are also dependent upon the availability of credit to buy propane and natural gas for resale or to trade. If financial market conditions decline generally, or the financial condition of these subsidiaries or of our Company declines, then the cost of credit available to these subsidiaries could increase. If credit is not available, or if credit is more costly, our results of operations, cash flows and financial condition may be adversely affected.

Current market conditions have had an adverse impact on the return on plan assets for our pension plans, which may require significant additional funding and adversely affect our cash flows.

We have pension plans that have been closed to new employees. The costs of providing benefits and related funding requirements of these plans are subject to changes in the market value of the assets that fund the plans. As a result of the extreme volatility and disruption in the domestic and international equity and bond markets in recent years, the asset values of Chesapeake’s and FPU’s pension plans have fluctuated significantly since 2008. The funded status of the plans and the related costs reflected in our financial statements are affected by various factors that are subject to an inherent degree of uncertainty, particularly in the current economic environment. Future losses of asset values may necessitate accelerated funding of the plans in the future to meet minimum federal government requirements. Downward pressure on the asset values of our pension plans may require us to fund obligations earlier than originally planned, which would have an adverse impact on our cash flows from operations, decrease borrowing capacity and increase interest expense.

Operational Risks

We may be unable to successfully integrate operations after the merger.

The merger between Chesapeake and FPU involves the integration of two companies that have previously operated independently. We began the process of integrating operations, both geographically and organizationally, immediately after the merger and this process is still on-going today. While significant progress has been made in integration, we continue to combine and enhance various systems, facilities and personnel deployment. Throughout the integration process, we are subject to employee workforce factors, including loss of key employees, availability of qualified personnel, collective bargaining agreements with unions and work stoppages that could affect our business and financial condition. Continued integration efforts may divert management’s focus and resources from other strategic opportunities. The diversion of management’s attention and any delays or difficulties encountered in connection with continued integration activities could result in the disruption of our ongoing businesses or inconsistencies in standards, controls, procedures and policies that adversely affect our ability to maintain relationships with customers, suppliers, employees and others with whom we have business dealings.

Fluctuations in weather may adversely affect our results of operations, cash flows and financial condition.

Our natural gas and propane distribution operations are sensitive to fluctuations in weather conditions, which directly influence the volume of natural gas and propane sold and delivered. A significant portion of our natural gas and propane distribution revenues is derived from the sales and deliveries of natural gas and propane to residential and commercial heating customers during the five-month peak heating season (November through March). If the weather is warmer than normal, we sell and deliver less natural gas and propane to customers, and earn less revenue. In addition, hurricanes or other extreme weather conditions could damage production or transportation facilities, which could result in decreased supplies of natural gas, propane and electricity, increased supply costs and higher prices for customers.

Our electric operations, while generally less seasonal than natural gas and propane sales as electricity is used for both heating and cooling in our service areas, are also affected by variations in general weather conditions and unusually severe weather.

The amount and availability of natural gas, electricity and propane supplies are difficult to predict; a substantial reduction in available supplies could reduce our earnings in those segments.

Natural gas, electricity and propane production can be affected by factors beyond our control, such as weather, closings of generation facilities and refineries. If we are unable to obtain sufficient natural gas, electricity and propane supplies to meet demand, results in those businesses may be adversely affected.

We rely on a limited number of natural gas, electric and propane suppliers, the loss of which could have a materially adverse effect on our financial condition and results of operations.

Our natural gas distribution and marketing operations, electric distribution operation and propane operations have entered into various agreements with suppliers to purchase natural gas, electricity and propane to serve their customers. The loss of any significant suppliers or our inability to renew these contracts at favorable terms upon their expiration could significantly affect our ability to serve our customers and have a material adverse impact on our financial condition and results of operations.

We rely on having access to interstate natural gas pipelines’ transmission and storage capacity and electric transmission capacity; a substantial disruption or lack of growth in these services may impair our ability to meet customers’ existing and future requirements.

In order to meet existing and future customer demands for natural gas and electricity, we must acquire sufficient natural gas supplies, interstate pipeline transmission and storage capacity, and electric transmission capacity to serve such requirements. We must contract for reliable and adequate delivery capacity for our distribution systems while considering the dynamics of the interstate pipeline and storage and electric transmission markets, our own on-system resources, as well as the characteristics of our markets. Our financial condition and results of operations would be materially and adversely affected if the future availability of these capacities were insufficient to meet future customer demands for natural gas and electricity. Currently, FPU’s natural gas is transported primarily through one pipeline system. Any interruption to that system could adversely affect our ability to meet the demands of FPU’s customers and our earnings.

Commodity price changes may affect the operating costs and competitive positions of our natural gas, electric and propane distribution operations, which may adversely affect our results of operations, cash flows and financial condition.

Natural Gas/Electric. Higher natural gas prices can significantly increase the cost of gas billed to our natural gas customers. Increases in the cost of coal and other fuels can significantly increase the cost of electricity billed to our electric customers. Such cost increases generally have no immediate effect on our revenues and net income because of our regulated fuel cost recovery mechanisms. Our net income, however, may be reduced by higher expenses that we may incur for uncollectible customer accounts and by lower volumes of natural gas and electricity deliveries when customers reduce their consumption. Therefore, increases in the price of natural gas, coal and other fuels can affect our operating cash flows and the competitiveness of natural gas and electricity as energy sources and consequently have an adverse effect on our operating cash flows.

Propane. Propane costs are subject to volatile changes as a result of product supply or other market conditions, including weather and economic and political factors affecting crude oil and natural gas supply or pricing. Such cost changes can occur rapidly and can affect profitability. There is no assurance that we will be able to pass on propane cost increases fully or immediately, particularly when propane costs increase rapidly. Therefore, average retail sales prices can vary significantly from year to year as product costs fluctuate in response to propane, fuel oil, crude oil and natural gas commodity market conditions. In addition, in periods of sustained higher commodity prices, declines in retail sales volumes due to reduced consumption and increased amounts of uncollectible accounts may adversely affect net income.

Our propane inventory is subject to inventory risk, which may adversely affect our results of operations and financial condition.

Our propane distribution operations own bulk propane storage facilities, with an aggregate capacity of approximately 3.0 million gallons. We purchase and store propane based on several factors, including inventory levels and the price outlook. We may purchase large volumes of propane at current market prices during periods of low demand and low prices, which generally occur during the summer months. Propane is a commodity, and, as such, its unit price is subject to volatile fluctuations in response to changes in supply or other market conditions. We have no control over these market conditions. Consequently, the unit price of the propane that we purchase can change rapidly over a short period of time. The market price for propane could fall below the price at which we made the purchases, which would adversely affect our profits or cause sales from that inventory to be unprofitable. In addition, falling propane prices may result in inventory write-downs as required by U.S. generally accepted accounting principles (“GAAP”) if the market price of propane falls below our weighted average cost of inventory, which could adversely affect net income.

Operating events affecting public safety and the reliability our natural gas and electric distribution systems could adversely affect the results of operations, cash flows and financial condition.

Our business is exposed to operational events, such as major leaks, mechanical problems and accidents, that could affect the public safety and reliability of our natural gas distribution and transmission systems, significantly increase costs and cause loss of customer confidence. The occurrence of any such operational events could adversely affect the results of operations, financial condition and cash flows. If we are unable to recover from customers, through the regulatory process, all or some of these costs and our authorized rate of return on these costs, this also could adversely affect the results of operations, financial condition and cash flows.

Our electric operation is subject to various operational risks, including accidents, outages, equipment breakdowns or failures, or operations below expected levels of performance or efficiency. Problems such as the breakdown or failure of electric equipment or processes and interruptions in service which would result in performance below expected levels of output or efficiency, particularly if extended for prolonged periods of time, could have a materially adverse effect on our financial condition and results of operations.

Because we operate in a competitive environment, we may lose customers to competitors which could adversely affect our results of operations, cash flows and financial condition.

Natural Gas. Our natural gas marketing operations compete with third-party suppliers to sell natural gas to commercial and industrial customers. Our natural gas transmission and distribution operations compete with interstate pipelines when our transmission and/or distribution customers are located close enough to a competing pipeline to make direct connections economically feasible. Failure to retain and grow our customer base in the natural gas operations would have an adverse effect on our financial condition, cash flows and results of operations.

Electric. While there is active wholesale power sales competition in Florida, our retail electric business through FPU has remained substantially free from direct competition. Changes in the competitive environment caused by legislation, regulation, market conditions or initiatives of other electric power providers, particularly with respect to retail competition, could adversely affect our results of operations, cash flows and financial condition.

Propane. Our propane distribution operations compete with other propane distributors, primarily on the basis of service and price. Some of our competitors have significantly greater resources. Our ability to grow the propane distribution business is contingent upon capturing additional market share, expanding new service territories, and successfully utilizing pricing programs that retain and grow our customer base. Failure to retain and grow our customer base in our propane gas operations would have an adverse effect on our results of operations, cash flows and financial condition.

Our propane wholesale marketing operations compete with various marketers, many of which have significantly greater resources and are able to obtain price or volumetric advantages.

Changes in technology may adversely affect our advanced information services subsidiary’s results of operations, cash flows and financial condition.

BravePoint participates in a market that is characterized by rapidly changing technology and accelerating product introduction cycles. The success of our advanced information services subsidiary depends upon our ability to address the rapidly changing needs of our customers by developing and supplying high-quality, cost-effective products, product enhancements and services, on a timely basis, and by keeping pace with technological developments and emerging industry standards. There is no assurance that we will be able to keep up with technological advancements to the degree necessary to keep our products and services competitive.

Our use of derivative instruments may adversely affect our results of operations.

Fluctuating commodity prices may affect our earnings and financing costs because our propane distribution and wholesale marketing operations use derivative instruments, including forwards, futures, swaps and puts, to hedge price risk. In addition, we have utilized in the past, and may decide, after further evaluation, to continue to utilize derivative instruments to hedge price risk. While we have a risk management policy and operating procedures in place to control our exposure to risk, if we purchase derivative instruments that are not properly matched to our exposure, our results of operations, cash flows, and financial condition may be adversely affected.

Changes in customer growth may affect earnings and cash flows.

Our ability to increase gross margins in our regulated energy and unregulated propane distribution businesses is dependent upon growth in the residential construction market, adding new commercial and industrial customers and conversion of customers to natural gas, electricity or propane from other energy sources. Slowdowns in these markets may adversely affect our gross margin in our regulated energy or propane distribution businesses, earnings and cash flows.

Our businesses are capital intensive, and the costs of capital projects may be significant.

Our businesses are capital intensive and require significant investments in internal infrastructure projects. Our results of operations and financial condition could be adversely affected if we do not pursue or are unable to manage such capital projects effectively or if full recovery of such capital costs is not permitted in future regulatory proceedings.

The risk of terrorism and political unrest and the current hostilities in the Middle East may adversely affect the economy and the price and availability of propane, refined fuels, electricity and natural gas.

Terrorist attacks, political unrest and the current hostilities in the Middle East may adversely affect the price and availability of propane, refined fuels and natural gas, as well as our results of operations, our ability to raise capital and our future growth. The impact that the foregoing may have on our industry in general, and on us in particular, is not known at this time. An act of terror could result in disruptions of crude oil, electricity or natural gas supplies and markets, and our infrastructure facilities could be direct or indirect targets. Terrorist activity may also hinder our ability to transport/transmit propane, electricity and natural gas if our means of supply transportation, such as rail, power grid or pipeline, become damaged as a result of an attack. A lower level of economic activity following such events could result in a decline in energy consumption, which could adversely affect our revenues or restrict our future growth. Instability in the financial markets as a result of terrorism could also affect our ability to raise capital. Terrorist activity and hostilities in the Middle East could likely lead to increased volatility in prices for propane, refined fuels, electricity and natural gas. We maintain insurance policies with insurers in such amounts and with such coverage and deductibles as we believe are reasonable and prudent. There can be no assurance, however, that such insurance will be adequate to protect us from all material expenses related to potential future claims for personal injury and property damage or that such levels of insurance will be available in the future at economical prices.

Operational interruptions to our natural gas transmission and natural gas and electric distribution activities, caused by accidents, malfunctions, severe weather (such as a major hurricane), a pandemic or acts of terrorism, could adversely impact earnings.

Inherent in natural gas transmission and natural gas and electric distribution activities are a variety of hazards and operational risks, such as leaks, ruptures, fires, explosions and mechanical problems. If they are severe enough or if they lead to operational interruptions, they could cause substantial financial losses. In addition, these risks could result in the loss of human life, significant damage to property, environmental damage and impairment of our operations. The location of pipeline, storage, transmission and distribution facilities near populated areas, including residential areas, commercial business centers, industrial sites and other public gathering places, could increase the level of damages resulting from these risks. Our natural gas and electric distribution, natural gas transmission and propane storage facilities may be targets of terrorist activities that could disrupt our ability to meet customer requirements. Terrorist attacks may also disrupt capital markets and our ability to raise capital. A terrorist attack on our facilities, or those of our suppliers or customers, could result in a significant decrease in revenues or a significant increase in repair costs. The occurrence of any of these events could adversely affect our results of operations, cash flows and financial condition.

Our regulated energy business will be at risk if franchise agreements are not renewed.

Our regulated natural gas and electric distribution operations hold franchises in each of the incorporated municipalities that require franchise agreements in order to provide natural gas and electricity. Our natural gas and electric distribution operations are currently in negotiations for franchises with certain municipalities for new service areas and renewal of some existing franchises. Ongoing financial results would be adversely impacted from the loss of service to certain operating areas within our electric or natural gas territories in the event that franchise agreements were not renewed.

A strike, work stoppage or a labor dispute could adversely affect our results of operation.

We are party to collective bargaining agreements with various labor unions at some of our Florida operations. A strike, work stoppage or a labor dispute with a union or employees represented by a union could cause interruption to our operations. If a strike, work stoppage or other labor dispute were to occur, our results could be adversely affected.

Regulatory and Legal Risks

Regulation of our Company, including changes in the regulatory environment, may adversely affect our results of operations, cash flows and financial condition.

The Delaware, Maryland and Florida PSCs regulate our utility operations in those states. ESNG is regulated by the FERC. These commissions set the rates that we can charge customers for services subject to their regulatory jurisdiction. Our ability to obtain timely future rate increases and rate supplements to maintain current rates of return depends on regulatory approvals, and there can be no assurance that our regulated operations will be able to obtain such approvals or maintain currently authorized rates of return. When our earnings from the regulated utilities exceed the authorized rate of return, these commissions may require us to refund the excess earnings or reduce our rates charged to customers in the future.

We are required to detail known benefits, synergies, cost savings and cost increases resulting from the FPU merger and present the information in the “come-back” filing to the Florida PSC by April 29, 2011 (within 18 months of the FPU merger). We also intend to seek for the recovery of the purchase premium and merger-related costs from the FPU merger. We are currently in discussions with the Office of Public Counsel of Florida regarding the “come-back” filing and the recovery of the purchase premium and merger-related costs. The outcome of such discussions or the ultimate outcome of the “come-back” filing, are unknown at this time.

We are dependent upon construction of new facilities to support future growth in earnings in our natural gas and electric distribution and natural gas transmission operations.

Construction of new facilities required to support future growth is subject to various regulatory and developmental risks, including but not limited to: (a) our ability to obtain necessary approvals and permits from regulatory agencies on a timely basis and on terms that are acceptable to us; (b) potential changes in federal, state and local statutes and regulations, including environmental requirements, that prevent a project from proceeding or increase the anticipated cost of the project; (c) inability to acquire rights-of-way or land rights on a timely basis on terms that are acceptable to us; (d) lack of anticipated future growth in available natural gas and electricity supply; and (e) insufficient customer throughput commitments.

We are subject to operating and litigation risks that may not be fully covered by insurance.

Our operations are subject to the operating hazards and risks normally incidental to handling, storing, transporting/ transmitting and delivering natural gas, electricity and propane to end users. As a result, we are sometimes a defendant in legal proceedings arising in the ordinary course of business. We maintain insurance policies with insurers in the amount of $51 million covering general liabilities of our Company, which we believe are reasonable and prudent. There can be no assurance, however, that such insurance will be adequate to protect us from all material expenses related to potential future claims for personal injury and property damage or that such levels of insurance will be available in the future at economical prices.

We have recorded significant amounts of goodwill and regulatory assets prior to obtaining a rate order. An adverse outcome could result in an impairment of those assets.

The merger with FPU and the purchase of the operating assets from IGC resulted in approximately $34.9 million in purchase premium which is currently recorded as goodwill. We intend to seek regulatory approval to include the purchase premium and approximately $2.2 million in merger-related costs in future rates in Florida. Other utilities in Florida, including Chesapeake and FPU in the past, have been successful in recovering similar costs by demonstrating benefits to customers attributable to the business combination. The ultimate outcome of such regulatory proceedings will depend on various factors, including but not limited to, our ability to demonstrate the benefits of the merger, the regulatory environment in Florida and the results of our Florida regulated operations. If we are not successful in obtaining regulatory approval to recover these costs in future rates, we will be required to perform impairment tests of goodwill and regulatory assets, the results of which could be an impairment of all or part of the goodwill and/or regulatory assets in the future.

We may face certain regulatory and financial risks related to climate change legislation.

A number of proposals to limit greenhouse gas emissions, measured in carbon dioxide equivalent units, are pending, or at least being considered, at regional, federal and international levels. These proposals would require us to measure and potentially limit greenhouse gas emissions from our energy operations and our customers or purchase allowances for such emissions. While we cannot predict with certainty the extent of these limitations or when they will become effective, these actions could:

•

increase our costs related to operations, energy efficiency activities and compliance;

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affect the demand for natural gas, electricity and propane; and

•

increase the prices we charge our energy customers.

The occurrence of any such legislation could adversely affect our results of operations, financial condition and cash flows. If our regulated energy operations are unable to recover from customers through the regulatory process all or some of these costs and our authorized rate of return on these costs, this also could adversely affect our results of operations, financial condition and cash flows.

We may face certain regulatory and financial risks related to pipeline safety legislation.

A number of proposals to implement increased oversight over pipeline operations and increased investment in facilities to inspect pipeline facilities, upgrade pipeline facilities, or control the impact of a breach of such facilities are pending at the federal level. Additional operating expenses and capital expenditures may be necessary to remain in compliance with the increased federal oversight resulting from such proposals. While we cannot predict with certainty the extent of these expenses and expenditures or when they will become effective, the adoption of such legislation could adversely affect our results of operations, financial conditions and cash flows. If our regulated natural gas operations are unable to recover from customers through the regulatory process all or some of these costs and our authorized rate of return on these costs, this also could adversely affect our results of operations, financial condition and cash flows.

Environmental Risks

Costs of compliance with environmental laws may be significant.

We are subject to federal, state and local laws and regulations governing environmental quality and pollution control. These evolving laws and regulations may require expenditures over a long period of time to control environmental effects at current and former operating sites, including former manufactured gas plant (“MGP”) sites that we have acquired from third-parties. Compliance with these legal obligations requires us to commit capital. If we fail to comply with environmental laws and regulations, even if such failure is caused by factors beyond our control, we may be assessed civil or criminal penalties and fines.

To date, we have been able to recover, through regulatory rate mechanisms, the costs associated with the remediation of former MGP sites. There is no guarantee, however, that we will be able to recover future remediation costs in the same manner or at all. A change in our approved rate mechanisms for recovery of environmental remediation costs at former MGP sites could adversely affect our results of operations, cash flows and financial condition.

Further, existing environmental laws and regulations may be revised, or new laws and regulations seeking to protect the environment may be adopted and be applicable to us. Revised or additional laws and regulations could result in additional operating restrictions on our facilities or increased compliance costs, which may not be fully recoverable.

Pending environmental matters, particularly with respect to FPU’s site in West Palm Beach, Florida, may have a materially adverse effect on our Company and our results of operations.

We have participated in the investigation, assessment or remediation of environmental matters with respect to certain of our properties and we believe our Company has certain exposures at six former MGP sites. Those sites are located in Salisbury, Maryland, and Winter Haven, Key West, Pensacola, Sanford and West Palm Beach, Florida. We have also been in discussions with the Maryland Department of the Environment (“MDE”) regarding a seventh former MGP site located in Cambridge, Maryland. The Key West, Pensacola, Sanford and West Palm Beach sites are related to FPU, for which we assumed any existing and future contingencies in the merger with FPU.

The site with the most potential exposure is the former West Palm Beach MGP. In November 2010, we presented a new proposed strategy with an aggressive remedial action plan to expedite remediation of this site, and the Florida Department of Environmental Protection (the “FDEP”) agreed with the proposal to implement a phased approach. In February 2011, FDEP approved the interim Remedial Action Plan (“RAP”) for the east parcel of this site, contingent upon certain conditions, and we are currently implementing the plan. Our current estimate of total remediation costs and expenses for the West Palm Beach site based on the most recently proposed remedial action plan is between $5.1 million and $13.3 million. This estimate does not include any costs associated with relocation of our operations from the site, which is necessary to implement the remedial action, and any potential costs associated with re-development of the properties. Actual costs may also be higher or lower than the range of current estimate based upon the final remedy required by FDEP.

As of December 31, 2010, we had recorded $358,000 in environmental liabilities related to Chesapeake’s MGP sites in Maryland and Winter Haven, Florida, representing our estimate of the future costs associated with those sites. We had recorded approximately $1.3 million in assets for future recovery of environmental costs to be received from our customers through our approved rates. As of December 31, 2010, we had recorded approximately $11.6 million in environmental liabilities related to FPU’s MGP sites in Florida, primarily related to the West Palm Beach site. Such amount represents our estimate as of December 31, 2010, of the future costs associated with those sites, although FPU is approved to recover its environmental costs up to $14.0 million from insurance and customers through approved rates. Of the approximately $11.6 million recorded as environmental liabilities related to FPU’s MGP sites in Florida as of December 31, 2010, we have recovered approximately $7.8 million of environmental costs from insurance and customers through rates, and have recorded approximately $6.2 million in assets for future recovery of environmental costs to be received from FPU’s customers through approved rates.

The costs and expenses we incur to address environmental issues at our sites may have a material adverse effect on our results of operations and earnings to the extent that such costs and expenses exceed the amounts we have accrued as environmental reserves or that we are otherwise permitted to recover from customers through rates. At present, we believe that the amounts accrued as environmental reserves and that we are otherwise permitted to recover from customers through rates are sufficient to fund the pending environmental liabilities previously described.

Item 1B. Unresolved Staff Comments.

None.

Item 2. Properties.

(a) General

We own offices and operate facilities in the following locations: Pocomoke, Salisbury, Cambridge and Princess Anne, Maryland; Dover, Seaford, Laurel and Georgetown, Delaware; Lecanto, Virginia; and West Palm Beach, DeBary, Inglis, Indiantown, Marianna, Lantana, Lauderhill, Fernandina Beach and Winter Haven, Florida. We rent office space in Dover, Ocean View, and South Bethany, Delaware; Fernandina and Lecanto, Florida; Chincoteague and Belle Haven, Virginia; Easton, Maryland; Honey Brook and Allentown, Pennsylvania; Houston, Texas; and Norcross, Georgia. In general, we believe that our offices and facilities are adequate for the uses for which they are employed.

(b) Natural Gas Distribution

Our Delmarva natural gas distribution operation owns over 1,127 miles of natural gas distribution mains (together with related service lines, meters and regulators) located in our Delaware and Maryland service areas. Our Florida natural gas distribution operations, including Chesapeake’s Florida division and FPU in its service areas, own 2,451 miles of natural gas distribution mains (and related equipment). In addition, we have adequate gate stations to handle receipt of the gas in each of the distribution systems. We also own facilities in Delaware and Maryland, which we use for propane-air injection during periods of peak demand.

(c) Natural Gas Transmission

ESNG owns and operates approximately 396 miles of transmission pipeline, extending from supply interconnects at Parkesburg, Pennsylvania; Daleville, Pennsylvania; Honey Brook, Pennsylvania; and Hockessin, Delaware, to approximately 80 delivery points in southeastern Pennsylvania, Delaware and the Eastern Shore of Maryland.

PIPECO owns and operates approximately eight miles of transmission pipeline in Suwanee County, Florida.

(d) Electric Distribution

The Company’s electric distribution operation owns and operates 20 miles of electric transmission line located in northeast Florida and 1,128 miles of electric distribution line located in northeast and northwest Florida.

(e) Propane Distribution and Wholesale Marketing

Our Delmarva-based propane distribution operation owns bulk propane storage facilities, with an aggregate capacity of approximately 2.4 million gallons, at 42 plant facilities in Delaware, Maryland, Pennsylvania and Virginia, located on real estate that is either owned or leased by our Company. Our Florida-based propane distribution operation owns 24 bulk propane storage facilities with a total capacity of 642,000 gallons. Xeron does not own physical storage facilities or equipment to transport propane; however, it leases propane storage and pipeline capacity from non-affiliated third-parties.

(f) Lien

All of the properties owned by FPU are subject to a lien in favor of the holders of its first mortgage bonds securing its indebtedness under its Mortgage Indenture and Deed of Trust. FPU owns offices and operates facilities in the following locations: West Palm Beach, DeBary, Inglis, Indiantown, Marianna, Lantana, Lauderhill and Fernandina Beach, Florida. FPU’s natural gas distribution operation owns 1,659 miles of natural gas distribution mains (and related equipment) in its service areas. FPU’s electric distribution operation owns and operates 20 miles of electric transmission line located in northeast Florida and 1,128 miles of electric distribution line located in northeast and northwest Florida. FPU’s propane distribution operation owns 24 bulk propane storage facilities with a total capacity of 642,000 gallons located in south and central Florida.

Item 3. Legal Proceedings.

(a) General

As disclosed in Item 8 under the heading “Notes to the Consolidated Financial Statements — Note Q, “Other Commitments and Contingencies,” we are involved in various legal actions and claims arising in the normal course of business. We are also involved in certain administrative proceedings before various governmental or regulatory agencies concerning rates. In the opinion of management, the ultimate disposition of these current proceedings will not have a material effect on our consolidated financial position, results of operations or cash flows.

(b) Environmental

See discussion of environmental commitments and contingencies in Item 8 under the heading “Notes to the Consolidated Financial Statements — Note P, Environmental Commitments and Contingencies.”

Item 4. Removed and Reserved

Item 4A. Executive Officers of the Registrant.

Set forth below are the names, ages, and positions of executive officers of the registrant with their recent business experience. The age of each officer is as of the filing date of this report.

Name			Age			Position
Michael P. McMasters			52			President and Chief Executive Officer
Beth W. Cooper			44			Senior Vice President and Chief Financial Officer
Stephen C. Thompson			50			Senior Vice President and President, ESNG
Joseph Cummiskey			39			Vice President and President, PESCO
Elaine B. Bittner			41			Vice President of Strategic Development

Michael P. McMasters is President and Chief Executive Officer of Chesapeake. Mr. McMasters assumed the role of Chief Executive Officer effective January 1, 2011 and was appointed as President on March 1, 2010. Prior to these appointments, Mr. McMasters served as Chief Operating Officer since 2008, Senior Vice President since 2004 and Chief Financial Officer of Chesapeake since 1996. He has previously held the positions of Vice President, Treasurer, Director of Accounting and Rates, and Controller. From 1992 to May 1994, Mr. McMasters was employed as Director of Operations Planning for Equitable Gas Company.

Beth W. Cooper was appointed as Senior Vice President and Chief Financial Officer in September 2008 in addition to her duties as Treasurer and Corporate Secretary. Prior to this appointment, Ms. Cooper served as Vice President and Corporate Secretary of Chesapeake Utilities Corporation since July 2005. She has served as Treasurer of Chesapeake since 2003. She previously served as Assistant Treasurer and Assistant Secretary, Director of Internal Audit, Director of Strategic Planning, Planning Consultant, Accounting Manager for Non-regulated Operations and Treasury Analyst. Prior to joining Chesapeake, she was employed as an auditor with Ernst & Young’s Entrepreneurial Services Group.

Stephen C. Thompson is Senior Vice President of Chesapeake and President of ESNG. Prior to becoming Senior Vice President in 2004, he served as Vice President of Chesapeake. He has also served as Vice President, Director of Gas Supply and Marketing, Superintendent of ESNG and Regional Manager for the Florida distribution operations.

Joseph Cummiskey was appointed as Vice President of Chesapeake and President of PESCO in December 2009. Mr. Cummiskey joined Chesapeake in December 2005 as the Director of Propane Supply and Wholesale Marketing. In 2008 and 2009, he served as the Director of Strategic Planning/Corporate Development and Director of Propane Operations. Prior to joining Chesapeake, Mr. Cummiskey was employed as a Natural Gas Liquids Regional Director for Ferrell North America. In that position, he was responsible for the purchasing and distribution of Ferrell’s propane supply.

Elaine B. Bittner was appointed as Vice President of Strategic Development in June 2010. Prior to this appointment, Ms. Bittner served as Vice President of ESNG since 2005. She previously served as Director of ESNG, Director of Customer Services and Regulatory Affairs for ESNG, Director of Environmental Affairs for Chesapeake, Manager of Environmental Affairs and Environmental Engineer. Prior to joining Chesapeake, Ms. Bittner was a Project Chemist, Client Consultant and Environmental Lab Chemist in the environmental industry specializing in environmental analysis and reporting related to volatile organic compounds.

Part II

Item 5.		Market for the Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.

(a) Common Stock Price Ranges, Common Stock Dividends and Shareholder Information:

Our common stock is listed on the NYSE under the symbol “CPK.” The high, low and closing prices of our common stock and dividends declared per share for each calendar quarter during the years 2010 and 2009 were as follows:

																Dividends
																Declared
		Quarter Ended		High				Low				Close				Per Share
2010
		March 31		$	32.25			$	28.22			$	29.80			$	0.315
		June 30			32.20				28.01				31.40				0.330
		September 30			36.93				30.24				36.22				0.330
		December 31			42.20				35.00				41.52				0.330
2009
		March 31		$	32.36			$	22.02			$	30.48			$	0.305
		June 30			34.55				27.62				32.53				0.315
		September 30			35.00				29.24				30.99				0.315
		December 31			32.67				29.53				32.05				0.315

Holders

At December 31, 2010, there were 2,482 holders of record of Chesapeake common stock.

Dividends

We have paid a cash dividend to common stock shareholders for 50 consecutive years. Dividends are payable at the discretion of our Board of Directors. Future payment of dividends, and the amount of these dividends, will depend on our financial condition, results of operations, capital requirements, and other factors. We declared quarterly cash dividends on our common stock in 2010 and 2009, totaling $1.305 per share and $1.250 per share, respectively.

Indentures to the long-term debt of the Company contain various restrictions. In terms of restrictions which limit the payment of dividends by Chesapeake, each of its unsecured senior notes contains a “Restricted Payments” covenant. The most restrictive covenants of this type are included within the 7.83 percent Senior Notes, due January 1, 2015. The covenant provides that Chesapeake cannot pay or declare any dividends or make any other Restricted Payments (such as dividends) in excess of the sum of $10.0 million plus consolidated net income of the Company accrued on and after January 1, 2001. As of December 31, 2010, Chesapeake’s cumulative consolidated net income base was $128.9 million, offset by Restricted Payments of $76.2 million, leaving $52.7 million of cumulative net income free of restrictions.

Each series of FPU’s first mortgage bonds contains a similar restriction that limits the payment of dividends by FPU. The most restrictive covenants of this type are included within the series that is due in 2022, which provided that FPU cannot make dividend or other restricted payments in excess of the sum of $2.5 million plus FPU’s consolidated net income accrued on and after January 1, 1992. As of December 31, 2010, FPU had a cumulative net income base of $65.9 million, offset by restricted payments of $37.6 million, leaving $28.3 million of cumulative net income of FPU free of restrictions based on this covenant.

Recent Sales of Unregistered Securities

No securities were sold during the year 2010 that were not registered under the Securities Act of 1933, as amended.

(b) Purchases of Equity Securities by the Issuer

The following table sets forth information on purchases by or on behalf of Chesapeake of shares of its common stock during the quarter ended December 31, 2010.

		Total								Total Number of Shares				Maximum Number of
		Number				Average				Purchased as Part of				Shares That May Yet Be
		of Shares				Price Paid				Publicly Announced Plans				Purchased Under the Plans
Period		Purchased				per Share				or Programs(2)				or Programs(2)
October 1, 2010 through October 31, 2010 (1)			258			$	37.58				—				—
November 1, 2010 through November 30, 2010			—				—				—				—
December 1, 2010 through December 31, 2010			—				—				—				—
Total			258			$	37.58				—				—

(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 Note N to the Consolidated Financial Statements. During the quarter, 258 shares were purchased through the reinvestment of dividends on deferred stock units.
(2)		Except for the purpose described in Footnote (1), Chesapeake has no publicly announced plans or programs to repurchase its shares.

Discussion of compensation plans of Chesapeake and its subsidiaries, for which shares of Chesapeake common stock are authorized for issuance, is included in the portion of the Proxy Statement captioned “Equity Compensation Plan Information” to be filed no later than March 31, 2011, in connection with the Company’s Annual Meeting to be held on or about May 4, 2011 and, is incorporated herein by reference.

(c) Chesapeake Utilities Corporation Common Stock Performance Graph

The following Stock Performance graph compares cumulative total shareholder return on a hypothetical investment in our common stock during the five fiscal years ended December 31, 2010, with the cumulative total shareholder return on a hypothetical investment in both (i) the Standard & Poor’s 500 Index (“S&P 500 Index”), and (ii) an industry index consisting of Chesapeake and 11 of the companies in the current Edward Jones Natural Gas Distribution Group, a published listing of selected gas distribution utilities’ results. The Compensation Committee utilizes the Edward Jones Natural Gas Distribution Group as our peer group to which our performance is compared for purposes of determining the level of long-term performance awards earned by our named executives.

The eleven companies in the Edward Jones Natural Gas Distribution Group industry index include: AGL Resources, Inc., Atmos Energy Corporation, Delta Natural Gas Company, Inc., Gas Natural, Inc., The Laclede Group, Inc., New Jersey Resources Corporation, Northwest Natural Gas Company, Piedmont Natural Gas Co., Inc., RGC Resources, Inc., South Jersey Industries, Inc, and WGL Holdings, Inc.

The comparison assumes $100 was invested on December 31, 2005 in our common stock and in each of the foregoing indices and assumes reinvested dividends. The comparisons in the graph below are based on historical data and are not intended to forecast the possible future performance of our common stock.

		2005				2006				2007				2008				2009				2010
Chesapeake		$	100			$	103			$	111			$	114			$	121			$	161
Industry Index		$	100			$	119			$	123			$	132			$	136			$	155
S&P 500 Index		$	100			$	116			$	122			$	77			$	97			$	112

Item 6. Selected Financial Data

For the Years Ended December 31,		2010				2009(2)				2008
Operating(1)
(in thousands)
Revenues
Regulated Energy		$	269,934			$	139,099			$	116,468
Unregulated Energy			146,793				119,973				161,290
Other			10,819				9,713				13,685
Total revenues		$	427,546			$	268,785			$	291,443
Operating income
Regulated Energy		$	43,509			$	26,900			$	24,733
Unregulated Energy			7,908				8,158				3,781
Other			513				(1,322	)			(35	)
Total operating income		$	51,930			$	33,736			$	28,479
Net income from continuing operations		$	26,056			$	15,897			$	13,607
Assets
(in thousands)
Gross property, plant and equipment		$	584,385			$	543,905			$	381,689
Net property, plant and equipment		$	462,757			$	436,587			$	280,671
Total assets		$	670,993			$	615,811			$	385,795
Capital expenditures (1)		$	46,955			$	26,294			$	30,844
Capitalization
(in thousands)
Stockholders’ equity		$	226,239			$	209,781			$	123,073
Long-term debt, net of current maturities			89,642				98,814				86,422
Total capitalization		$	315,881			$	308,595			$	209,495
Current portion of long-term debt			9,216				35,299				6,656
Short-term debt			63,958				30,023				33,000
Total capitalization and short-term financing		$	389,055			$	373,917			$	249,151

(1)		These amounts exclude the results of distributed energy and water services due to their reclassification to discontinued operations. The Company closed its distributed energy operation in 2007. All assets of all of the water businesses were sold in 2004 and 2003.
(2)		These amounts include the financial position and results of operation of FPU for the period from the merger (October 28, 2009) to December 31, 2009. These amounts also include the effects of acquisition accounting and issuance of Chesapeake common shares as a result of the merger. These amounts may not be indicative of future results due to the inclusion of merger effects. See Item 8 under the heading “Notes to the Consolidated Financial Statements - Note B, Acquisitions and Dispositions” for additional discussions and presentation of pro forma results.
(3)		SFAS No. 123R (now codified within FASB ASC 718, 505 and 260 ) and SFAS No. 158 (codified within FASB ASC 715) were adopted in the year 2006; therefore, they were not applicable for the years prior to 2006.

 

 

2007				2006 (3)				2005				2004				2003				2002				2001
$	128,850			$	124,631			$	124,563			$	98,139			$	92,079			$	82,098			$	87,444
	115,190				94,320				90,995				67,607				59,197				40,728				56,970
	14,246				12,249				13,927				12,209				12,292				12,430				13,992
$	258,286			$	231,200			$	229,485			$	177,955			$	163,568			$	135,256			$	158,406
$	21,809			$	18,593			$	16,248			$	16,258			$	16,219			$	14,867			$	14,060
	5,174				3,675				4,197				3,197				4,310				1,158				1,259
	1,131				1,064				1,476				722				1,050				580				902
$	28,114			$	23,332			$	21,921			$	20,177			$	21,579			$	16,605			$	16,221
$	13,218			$	10,748			$	10,699			$	9,686			$	10,079			$	7,535			$	7,341
$	352,838			$	325,836			$	280,345			$	250,267			$	234,919			$	229,128			$	216,903
$	260,423			$	240,825			$	201,504			$	177,053			$	167,872			$	166,846			$	161,014
$	381,557			$	325,585			$	295,980			$	241,938			$	222,058			$	223,721			$	222,229
$	30,142			$	49,154			$	33,423			$	17,830			$	11,822			$	13,836			$	26,293
$	119,576			$	111,152			$	84,757			$	77,962			$	72,939			$	67,350			$	67,517
	63,256				71,050				58,991				66,190				69,416				73,408				48,409
$	182,832			$	182,202			$	143,748			$	144,152			$	142,355			$	140,758			$	115,926
	7,656				7,656				4,929				2,909				3,665				3,938				2,686
	45,664				27,554				35,482				5,002				3,515				10,900				42,100
$	236,152			$	217,412			$	184,159			$	152,063			$	149,535			$	155,596			$	160,712

For the Years Ended December 31,		2010				2009(3)				2008
Common Stock Data and Ratios
Basic earnings per share from continuing operations (1)		$	2.75			$	2.17			$	2.00
Diluted earnings per share from continuing operations (1)		$	2.73			$	2.15			$	1.98
Return on average equity from continuing operations (1)			11.6	%			11.2	%			11.2	%
Common equity / total capitalization			71.6	%			68.0	%			58.7	%
Common equity / total capitalization and short-term financing			58.2	%			56.1	%			49.4	%
Book value per share		$	23.75			$	22.33			$	18.03
Market price:
High		$	42.200			$	35.000			$	34.840
Low		$	28.010			$	22.020			$	21.930
Close		$	41.520			$	32.050			$	31.480
Average number of shares outstanding			9,474,554				7,313,320				6,811,848
Shares outstanding at year-end			9,524,195				9,394,314				6,827,121
Registered common shareholders			2,482				2,670				1,914
Cash dividends declared per share		$	1.31			$	1.25			$	1.21
Dividend yield (annualized) (2)			3.2	%			3.9	%			3.9	%
Payout ratio from continuing operations (1) (4)			47.6	%			57.6	%			60.5	%
Additional Data
Customers (5)
Natural gas distribution			120,230				117,887				65,201
Electric distribution			30,966				31,030				—
Propane distribution			48,100				48,680				34,981
Volumes(6)
Natural gas deliveries (in Mcfs)			41,795,438				44,586,158				39,778,067
Electric Distribution (in MWHs)			739,656				105,739				—
Propane distribution (in thousands of gallons)			39,612				32,546				27,956
Heating degree-days (Delmarva Peninsula)
Actual HDD			4,831				4,729				4,431
10-year average HDD (normal)			4,528				4,462				4,401
Propane bulk storage capacity (in thousands of gallons)			3,041				3,042				2,471
Total employees (1) (7)			734				757				448

(1)		These amounts exclude the results of distributed energy and water services due to their reclassification to discontinued operations. The Company closed its distributed energy operation in 2007. All assets of all of the water businesses were sold in 2004 and 2003.
(2)		Dividend yield (annualized) is calculated by multiplying the fourth quarter dividend by four (4), then dividing that amount by the closing common stock price at December 31.
(3)		These amounts include the financial position and results of operation of FPU for the period from the merger closing (October 28, 2009) to December 31, 2009. These amounts also include the effects of acquisition accounting and issuance of Chesapeake common shares as a result of the merger. These amounts may not be indicative of future results due to the inclusion of merger effects. See Item 8 under the heading “Notes to the Consolidated Financial Statements — Note B, Acquisitions and Dispositions” for additional discussions and presentation of pro forma results.
(4)		The payout ratio from continuing operations is calculated by dividing cash dividends declared per share (for the year) by basic earnings per share from continuing operations.
(5)		Customer data for 2009 includes 51,536, 31,030 and 13,651 of natural gas distribution, electric distribution and propane distribution customers, respectively, from FPU.
(6)		Volumes data for 2009 includes 1,109,177 Mcfs, 105,739 MWHs and 1.1 million gallons for natural gas distribution, electric distribution and propane distribution, respectively, delivered by FPU from October 28, 2009 through December 31, 2009
(7)		Total employees for 2009 include 332 FPU employees added to the Company upon the merger, effective October 28, 2009.

2007				2006(8)				2005				2004				2003				2002				2001
$	1.96			$	1.78			$	1.83			$	1.68			$	1.80			$	1.37			$	1.37
$	1.94			$	1.76			$	1.81			$	1.64			$	1.76			$	1.37			$	1.35
	11.5	%			11.0	%			13.2	%			12.8	%			14.4	%			11.2	%			11.1	%
	65.4	%			61.0	%			59.0	%			54.1	%			51.2	%			47.8	%			58.2	%
	50.6	%			51.1	%			46.0	%			51.3	%			48.8	%			43.3	%			42.0	%
$	17.64			$	16.62			$	14.41			$	13.49			$	12.89			$	12.16			$	12.45
$	37.250			$	35.650			$	35.780			$	27.550			$	26.700			$	21.990			$	19.900
$	28.000			$	27.900			$	23.600			$	20.420			$	18.400			$	16.500			$	17.375
$	31.850			$	30.650			$	30.800			$	26.700			$	26.050			$	18.300			$	19.800
	6,743,041				6,032,462				5,836,463				5,735,405				5,610,592				5,489,424				5,367,433
	6,777,410				6,688,084				5,883,099				5,778,976				5,660,594				5,537,710				5,424,962
	1,920				1,978				2,026				2,026				2,069				2,130				2,171
$	1.18			$	1.16			$	1.14			$	1.12			$	1.10			$	1.10			$	1.10
	3.7	%			3.8	%			3.7	%			4.2	%			4.2	%			6.0	%			5.6	%
	60.2	%			65.2	%			62.3	%			66.7	%			61.1	%			80.3	%			80.3	%
	62,884				59,132				54,786				50,878				47,649				45,133				42,741
	—				—				—				—				—				—				—
	34,143				33,282				32,117				34,888				34,894				34,566				35,530
	34,820,050				34,321,160				34,980,939				31,429,494				29,374,818				27,934,715				27,263,542
	—				—				—				—				—				—				—
	29,785				24,243				26,178				24,979				25,147				21,185				23,080
	4,504				3,931				4,792				4,553				4,715				4,161				4,368
	4,376				4,372				4,436				4,389				4,409				4,393				4,446
	2,441				2,315				2,315				2,045				2,195				2,151				1,958
	445				437				423				426				439				455				458