Management's Discussion and Analysis of Financial Condition and Results of Operations is designed to provide a reader of the financial statements with a narrative report on the Company's financial condition, results of operations and liquidity. This discussion and analysis should be read in conjunction with the attached unaudited condensed consolidated financial statements and notes thereto and Chesapeake's Annual Report on Form 10-K for the year ended December 31, 2008, including the audited consolidated financial statements and notes contained in the Annual Report on Form 10-K. Safe Harbor for Forward-Looking Statements The Company has made statements in this Quarterly Report on Form 10-Q that are considered to be "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. These statements are not matters of historical fact and are typically identified by words such as, but not limited to, "believes," "expects," "intends," "plans," and similar expressions, or future or conditional verbs such as "may," "will," "should," "would," and "could." These statements relate to matters such as customer growth, changes in revenues or gross margins, capital expenditures, environmental remediation costs, regulatory trends and decisions, market risks associated with our propane operations, the competitive position of the Company, mergers, inflation, and other matters. It is important to understand that these forward-looking statements are not guarantees; rather, they are subject to certain risks, uncertainties and other important factors that could cause actual results to differ materially from those in the forward-looking statements. Such factors include, but are not limited to:
• the weather or temperature sensitivity of the natural gas and propane businesses;

• the effects of spot, forward, futures market prices, and the Company's use of derivative instruments on the Company's distribution, wholesale marketing and energy trading businesses;

• the amount and availability of natural gas and propane supplies;

• access to interstate pipelines' transportation and storage capacity and the construction of new facilities to support future growth;

• the effects of natural gas and propane commodity price changes on the operating costs and competitive positions of our natural gas and propane distribution operations;

• the impact that declining propane prices may have on the valuation of our propane inventory;

• third-party competition for the Company's unregulated and regulated businesses;

• changes in federal, state or local regulation and tax requirements, including deregulation;

• changes in technology affecting the Company's advanced information services segment;

• changes in credit risk and credit requirements affecting the Company's energy marketing subsidiaries;

• the effects of accounting changes and new accounting pronouncements;

• changes in benefit plan assumptions, return on plan assets, and funding requirements;

• cost of compliance with environmental regulations or the remediation of environmental damage;

• the effects of general economic conditions, including interest rates, on the Company and its customers;

• the impact of the volatility in the financial and credit markets on the Company's ability to access credit;

• the ability of the Company's new and planned facilities and acquisitions to generate expected revenues;

• the ability of the Company to construct facilities at or below estimated costs;

• the Company's ability to obtain the rate relief and cost recovery requested from utility regulators and the timing of the requested regulatory actions;

• the Company's ability to obtain necessary approvals and permits from regulatory agencies on a timely basis;

• the impact of inflation on the results of operations, cash flows, financial position and on the Company's planned capital expenditures;

• inability to access the financial markets to a degree that may impair future growth; and

• operating and litigation risks that may not be covered by insurance.

Certain of the forward-looking statements in this report relate to the merger with FPU and include statements regarding the tax treatment of the proposed merger, the benefits of the proposed merger and the expectation that earnings will be neutral or slightly accretive in 2010 and meaningfully accretive in 2011, and certain merger-related costs will be allowed to be recovered through rates. There are a number of risks and uncertainties that could cause actual results to differ materially from the forward-looking statements included in this report. These risks and uncertainties include the following: problems which may arise in successfully integrating the businesses of the companies and may result in the combined company not operating as effectively and efficiently as expected; the combined company may be unable to achieve cost-cutting synergies, or it may take longer than expected to achieve those synergies; the transaction may involve unexpected costs or unexpected liabilities, or the accounting for the transaction may be different from the Company's expectations; the natural gas and electric industries may be subject to future regulatory or legislative actions that could adversely affect the combined company; and the combined company may be adversely affected by other economic, business, and/or competitive factors.

Overview
Chesapeake is a diversified utility company engaged, directly or through subsidiaries, in natural gas distribution, transmission and marketing, propane distribution and wholesale marketing, advanced information services and other related businesses. For additional information regarding segments, refer to Note 5, "Segment Information," of the Notes to the condensed consolidated financial statements in this Quarterly Report on Form 10-Q.
The Company's strategy is focused on growing earnings from a stable utility foundation and investing in related businesses and services that provide opportunities for returns greater than traditional utility returns. The key elements of this strategy include:
• executing a capital investment program in pursuit of organic growth opportunities that generate returns equal to or greater than our cost of capital;

• expanding the natural gas distribution and transmission business through expansion into new geographic areas in our current and potentially new service territories;

• expanding the propane distribution business in existing and new markets by leveraging our community gas system services and our bulk delivery capabilities;

• utilizing the Company's expertise across our various businesses to improve overall performance;

• enhancing marketing channels to attract new customers;

• providing reliable and responsive service to retain existing customers;

• maintaining a capital structure that enables the Company to access capital as needed; and

• maintaining a consistent and competitive dividend for shareholders.

Due to the seasonality of the Company's business, results for interim periods are not necessarily indicative of results for the entire fiscal year. Revenue and earnings are typically greater during the Company's first and fourth quarters, when consumption of natural gas and propane is highest due to colder temperatures.
Merger with Florida Public Utilities Company On April 20, 2009, Chesapeake and Florida Public Utilities Company ("FPU") announced a definitive merger agreement, pursuant to which FPU would merge with a wholly-owned subsidiary of Chesapeake, with FPU being the surviving corporation and operating as a wholly-owned subsidiary of Chesapeake after the merger. On October 22, 2009, shareholders of both Chesapeake and FPU approved the merger, which became effective on October 28, 2009 and each outstanding share of FPU common stock was converted into 0.405 share of Chesapeake's common stock. At closing, FPU had 6,140,592 common shares outstanding and Chesapeake's common stock was valued at $30.42 per share, which resulted in total consideration paid by Chesapeake of approximately $75.7 million. The total consideration is based upon the closing price of Chesapeake's common stock on October 27, 2009, the last trading day prior to the effective date of the merger. Immediately after the merger, Chesapeake's stockholders owned approximately 73.5 percent of the combined company, and FPU's stockholders owned approximately 26.5 percent of the combined company.
On September 29, 2009, a putative class action lawsuit, which had been filed on May 8, 2009 in Palm Beach County, Florida, challenging the merger, purportedly on behalf of the shareholders of FPU, against FPU, each member of FPU's board of directors and Chesapeake was dismissed without prejudice.
The merger is intended to qualify as a reorganization within the meaning of
Section 368(a) of the Internal Revenue Code of 1986, as amended, and will be accounted for under the acquisition method of GAAP, with Chesapeake being treated as the acquirer. Under this method, the assets acquired and liabilities assumed are recorded at their respective fair values and added to those of Chesapeake. Chesapeake is in the process of finalizing its evaluation of the tangible and intangible assets acquired and liabilities assumed, as well as the initial purchase price allocation as of the acquisition date, including the determination of any resulting goodwill. Therefore, this information cannot be provided at this time.

In connection with the merger, Chesapeake has incurred $1.9 million in transaction-related costs during the nine months ended September 30, 2009. Chesapeake has begun the process of seeking regulatory approval to defer a portion of these costs related to regulated operations for future rate recovery. Based on precedents established by the Florida PSC in previous business combinations involving natural gas utilities in Florida, Chesapeake determined that future rate recovery of the acquisition-related transaction costs for regulated operations is probable and deferred a portion of these costs as a regulatory asset as of September 30, 2009. This regulatory asset includes deferrals of merger-related costs incurred during the first and second quarters of 2009, respectively, that were previously accounted for as expenses. The reversal of these amounts is presented as a credit to Chesapeake's operating expenses for the three months ended September 30, 2009. Future regulatory developments may require Chesapeake to re-assess the probability of future rate recovery with regard to the costs deferred as a regulatory asset.
FPU distributes natural gas, propane and electricity to residential, commercial and industrial customers in Florida. FPU also sells merchandise and other service-related products as a complement to its natural gas and propane operations. FPU serves approximately 96,000 customers and employs 348 people. The merger will create a combined energy company serving approximately 200,000 customers (117,000 natural gas, 48,000 propane and 31,000 electric customers) in the Mid-Atlantic and Florida markets with assets totaling $595 million. The Company and FPU recognized $291.4 million and $168.5 million in revenues, respectively, and $13.6 million and $3.5 million in net income, respectively, for 2008. Chesapeake's management expects the transaction to be earnings neutral or slightly accretive in 2010 and meaningfully accretive in 2011. Results of Operations for the Quarter Ended September 30, 2009 The following discussions on operating income and segment results for the three months ended September 30, 2009 and 2008, include use of the term "gross margin," which is determined by deducting the cost of sales from operating revenue. Cost of sales includes the purchased gas cost for natural gas and propane and the cost of labor spent on direct revenue-producing activities. Gross margin should not be considered an alternative to operating income or net income, which are determined in accordance with Generally Accepted Accounting Principles ("GAAP"). Chesapeake believes that gross margin, although a non-GAAP measure, is useful and meaningful to investors as a basis for making investment decisions. It provides investors with information that demonstrates the profitability achieved by Chesapeake under its allowed rates for regulated operations and under its competitive pricing structure for non-regulated segments. Chesapeake's management uses gross margin in measuring the performance of its business units and has historically analyzed and reported gross margin information publicly. Other companies may calculate gross margin in a different manner. In addition, certain information is presented, which excludes for comparison purposes, all merger-related transaction costs incurred in connection with the FPU merger. Although the non-GAAP measures are not intended to replace the GAAP measures for evaluation of Chesapeake's performance, Chesapeake believes that the portions of the presentation which exclude merger-related transaction costs are helpful on a comparative basis for investors to understand Chesapeake's performance.

Consolidated Overview
The Company's net income for the quarter ended September 30, 2009 was $308,000, or $0.04 per share (diluted). This represents an increase of $506,000, compared to a net loss of $198,000, or $0.03 per share (diluted), reported in the same period in 2008. The Company's Delmarva natural gas distribution and propane distribution operations typically experience seasonal losses or reduced earnings during the third quarter, because customers do not require natural gas or propane for heating purposes during the summer months. Net income for the quarter ended September 30, 2009, included the effect of deferring as a regulatory asset certain merger-related transaction costs, which the Company will seek to recover in subsequent rate proceedings. Absent the effects of the merger-related costs and related income taxes, the Company would have generated net income of $78,000, or $0.01 per share (diluted), for the quarter ended September 30, 2009.

       For the Three Months Ended September 30,     2009         2008       Change
       (in Thousands)
       Operating Income (Loss):
       Natural Gas                                $  3,181     $  2,938     $   243
       Propane                                      (1,570 )     (2,135 )       565
       Advanced Information Services                  (103 )        277        (380 )
       Other & eliminations                            749           90         659

       Operating Income                              2,257        1,170       1,087

       Other Loss, Net of Other Income                 (26 )        (91 )        65
       Interest Charges                              1,540        1,488          52
       Income Taxes (Benefit)                          383         (211 )       594

       Net Income (Loss)                          $    308     $   (198 )   $   506

The Company's period-over-period operating results reflect an increase of $1.3 million, or eight percent, in gross margin and an increase of other operating expenses of $208,000. Customer growth in the Delmarva natural gas distribution operations and new transportation services placed into service by the natural gas transmission operation positively impacted gross margin during the third quarter of 2009. The Delmarva natural gas distribution operations contributed to the gross margin increase from the implementation of new rate structures in October 2008, which allows collection of a greater portion of revenue through non-volume-based charges. Absent the costs related to inventory valuation adjustments, including a mark-to-market loss on a price swap agreement, by the propane distribution operations totaling $975,000 in the third quarter of 2008, which did not recur in the same period in 2009, also contributed to the increase in gross margin. These increases were partially offset by the advanced information services segment's gross margin decrease, a result of current economic conditions in which information technology spending has broadly declined. The Company has taken actions in the first and third quarters to reduce costs within the advanced information services segment to offset the decline in revenues.
The increase of $208,000 in other operating expenses includes the effects of a credit of $939,000 associated with the deferral of previously expensed merger-related costs and additional merger-related costs, of $265,000 in the third quarter of 2009, which are not subject to recovery through rates. Exclusive of the net effects of merger-related transaction costs, the increase in other operating expenses was $883,000, which is due to: (i) increased compensation costs of $608,000, attributable primarily to payroll adjustments that commenced on January 1, 2009, pursuant to the results of a salary survey conducted during the fourth quarter of 2008; (ii) increased accruals for incentive compensation due to improved non-merger related operating results; and
(iii) increased pension costs of $195,000 due to the decline in the value of pension plan assets in 2008.

Natural Gas
The natural gas segment reported operating income of $3.2 million for the third
quarter of 2009, an increase of $243,000, or eight percent, compared to
operating income of $2.9 million reported in the third quarter of 2008.

      For the Three Months Ended September 30,     2009         2008        Change
      (in Thousands)
      Revenue                                    $ 23,091     $ 37,359     $ (14,268 )
      Cost of sales                                 9,545       24,867       (15,322 )

      Gross margin                                 13,546       12,492         1,054

      Operations & maintenance                      7,170        6,599           571
      Depreciation & amortization                   1,841        1,683           158
      Other taxes                                   1,354        1,272            82

      Other operating expenses                     10,365        9,554           811

      Operating Income                           $  3,181     $  2,938     $     243


      Statistical Data - Delmarva Peninsula
      Heating degree-days ("HDD"):
      Actual                                           80           69            11
      10-year average (normal)                         58           55             3
      Estimated gross margin per HDD             $  1,937     $  1,937             -

      Per residential customer added:
      Estimated gross margin                     $    375     $    375             -
      Estimated other operating expenses         $    103     $    103             -

      Residential Customer Information
      Average number of customers:
      Delmarva                                     45,871       44,726         1,145
      Florida                                      13,059       13,221          (162 )

      Total                                        58,930       57,947           983

Operating income for the natural gas segment increased by $243,000 as the result of a gross margin increase of $1.1 million, or eight percent, which was partially offset by increased other operating expenses of $811,000, or eight percent, for the third quarter in 2009 compared to the same period in 2008. Gross Margin
Gross margin increases of $707,000 for the natural gas transmission operation and $552,000 for the natural gas distribution operations were partially offset by decreased gross margin of $205,000 for the natural gas marketing operations. The natural gas transmission operation achieved gross margin growth of $707,000 in the third quarter of 2009, an increase of 14 percent over the same period in 2008, due primarily to the implementation of the following new transportation services:
• New long-term transportation services, implemented by ESNG in November 2008, which provided for an additional 5,650 Dts per day, generated $247,000 of gross margin in the third quarter of 2009. These new services are expected to generate approximately $988,000 of annualized gross margin.

• New transportation services provided to an industrial customer for the period of February 6, 2009 through October 31, 2009, provided for an additional 7,200 Dts per day. For the third quarter of 2009, this service provided $195,000 of additional gross margin and is expected to generate approximately $573,000 of gross margin for 2009. In addition, ESNG entered into two other firm transportation service agreements with this customer for the period of (i) November 1, 2009 through October 31, 2012, for 10,000 Dts per day, and (ii) November 1, 2009 through November 30, 2009, for 3,131 Dts per day. Although there was no impact from these contracts in the third quarter of 2009, they are expected to increase gross margin by approximately $209,000 in the fourth quarter of 2009 and by $1.1 million in 2010.

• ESNG changed its rates effective April 2009 to recover specified project costs in accordance with the terms of precedent agreements with certain customers. These rates generated $129,000 in gross margin for the third quarter of 2009 and will contribute $387,000 of annualized gross margin in 2009 and $516,000 annually thereafter for a period of 20 years.

Although the following had no impact in the third quarter of 2009, they could affect future results for the natural gas transmission operation:
• The remaining facilities included in ESNG's most recent multi-year system expansion to be placed into service in November 2009, and will provide for 7,200 Dts of firm service capacity per day. For the years 2009 and 2010, these facilities are expected to contribute $169,000 and $1.0 million, respectively, to gross margin.

• ESNG received notice from a customer of its intention not to renew two firm transportation service contracts, one expiring in October 2009 and the other in March 2010. If these contracts are not renewed, or equivalent firm service capacity is not subscribed to by other customers, gross margin could be reduced by approximately $56,000 in 2009 and approximately $427,000 in 2010. ESNG also received notice from a smaller customer that it does not intend to renew its firm transportation service contract, which expires in April 2010. This contract provides for annualized gross margin of approximately $54,000.

The natural gas distribution operations for the Delmarva Peninsula generated an increase in gross margin of $682,000 for the third quarter of 2009, compared to the same period in 2008. The new rate structure in Delaware, implemented in October of 2008, contributed $323,000 of the increased gross margin. This new rate structure allows a greater portion of the revenue requirements to be collected through non-volume-based charges and reduces volatility in gross margin based on weather changes. The new rate structure also allows collection of miscellaneous service fees of $74,000, which, although not representing additional revenue, had previously been offset against other operating expenses. Despite the continued slowdown in the new housing market and industrial growth in the region, the Delmarva natural gas distribution operations experienced growth in residential, commercial, and industrial customers, which contributed $300,000 to the increased gross margin. The aforementioned increases to gross margin overcame the negative impact of decreased interruptible sales to industrial customers, due to a reduction in the price of alternative fuels, which reduced gross margin by $133,000.
The Florida natural gas distribution operation experienced a decrease in gross margin of $130,000 in the third quarter of 2009, due primarily to reduced customer consumption and loss of three industrial customers, one in October 2008 and two in the third quarter of 2009, all attributable to adverse economic conditions in the region. On July 14, 2009, the division filed with the Florida PSC a petition for a rate increase of approximately $3.0 million, which represents a twenty-five percent base rate increase on average for the Florida operation's customers. In the same filing, the Company sought an increase of approximately $418,000 in its interim rates, which was approved by the Florida PSC on August 18, 2009. The Company began billing the increased interim rates, subject to refund, on September 17, 2009.
The Company's natural gas marketing operation experienced a decrease in gross margin of $205,000 for the third quarter of 2009, as prior year's gross margin included favorable imbalance resolutions with interstate pipelines that did not recur during the third quarter of 2009, and as a result of a four-percent decrease in customer consumption in the current quarter. Other Operating Expenses
The factors contributing to the increase in other operating expenses by $811,000 for the natural gas segment are as follows:
• Salaries and incentive compensation increased by $370,000, due primarily to compensation adjustments for non-executive employees that were made effective January 1, 2009, pursuant to the results of a compensation survey completed in the fourth quarter of 2008, and an increase in accruals for incentive compensation as a result of improved operating results. Benefit costs increased by $149,000, due primarily to higher pension costs resulting from the decline in the value of pension assets in 2008 and other benefit costs relating to increased payroll costs.

• Partially offsetting the increases in operating expenses was a decrease of $108,000 in allowance for doubtful accounts attributable to lower energy prices in the current quarter.

• Depreciation expense, asset removal costs and property taxes, collectively, increased by approximately $197,000 as a result of the Company's continued capital investments to support customer growth.

Propane
The propane segment experienced a seasonal operating loss of $1.6 million for
the third quarter of 2009, a reduction of $565,000, or twenty-six percent,
compared to an operating loss of $2.1 million in the third quarter of 2008.

      For the Three Months Ended September 30,     2009         2008        Change
      (in Thousands)
      Revenue                                    $  6,198     $  8,759     $ (2,561 )
      Cost of sales                                 3,416        6,642       (3,226 )

      Gross margin                                  2,782        2,117          665

      Operations & maintenance                      3,619        3,573           46
      Depreciation & amortization                     521          509           12
      Other taxes                                     212          170           42
. . .