CHESAPEAKE UTILITIES CORP - 10-Q Quarterly Report

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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
_______________________________
FORM 10-Q

[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934

For the quarterly period ended: June 30, 2002
------------------

OR

[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934

For the transition period from ______ to ______

COMMISSION FILE NUMBER: 001-11590

CHESAPEAKE UTILITIES CORPORATION
--------------------------------
(Exact name of registrant as specified in its charter)

DELAWARE 51-0064146
-------- ----------
(State or other (I.R.S. Employer
jurisdiction of Identification No.)
incorporation
or organization)

909 SILVER LAKE BOULEVARD, DOVER, DELAWARE 19904
------------------------------------------------
(Address of principal executive offices, including Zip Code)

(302) 734-6799
--------------
(Registrant's Telephone Number, including Area Code)

Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]

Common Stock, par value $.4867 - 5,484,404 shares
issued as of June 30, 2002.

TABLE OF CONTENTS

PART I - FINANCIAL INFORMATION. . . . . . . . . . . . . . . . . . . . . . 1

Item 1. Financial Statements. . . . . . . . . . . . . . . . . . . . . 1

Notes to Consolidated Financial Statements. . . . . . . . . . . . . . 7
1. Quarterly Financial Data . . . . . . . . . . . . . . . . . . . . 7
2. Calculation of Earnings Per Share. . . . . . . . . . . . . . . 7
3. Commitments and Contingencies. . . . . . . . . . . . . . . . . . 7
Environmental Matters . . . . . . . . . . . . . . . . . . . . . . 7
Other Commitments and Contingencies . . . . . . . . . . . . . . 9
4. Recent Authoritative Pronouncements
on Financial Reporting and Accounting. . . . . . . . . . . . . 9
5. Goodwill and Other Intangible Assets . . . . . . . . . . . . . . .10
6. Segment Information . . . . . . . . . . . . . . . . . . . . . . .12

Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations. . . . . . . . . . . .13

Business Description . . . . . . . . . . . . . . . . . . . . . . . . .13

Financial Position, Liquidity and Capital Resources . . . . . . . . .13

Results of Operations for the Quarter
Ended June 30, 2002. . . . . . . . . . . . . . . . . . . . . . . . . .15
Consolidated Overview. . . . . . . . . . . . . . . . . . . . . . . . .15
Natural Gas Distribution and Transmission . . . . . . . . . . . . .16
Propane. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
Advanced Information Services. . . . . . . . . . . . . . . . . . . . 17
Other Business Operations. . . . . . . . . . . . . . . . . . . . . . 17
Operating Income Taxes . . . . . . . . . . . . . . . . . . . . . . . 17
Interest Expense. . . . . . . . . . . . . . . . . . . . . . . . . . . 18

Results of Operations for the Six Months
Ended June 30, 2002. . . . . . . . . . . . . . . . . . . . . . . . . .18
Consolidated Overview. . . . . . . . . . . . . . . . . . . . . . . . .18
Natural Gas Distribution and Transmission . . . . . . . . . . . . .19
Propane. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
Advanced Information Services. . . . . . . . . . . . . . . . . . . . 21
Other Business Operations. . . . . . . . . . . . . . . . . . . . . . 21
Operating Income Taxes . . . . . . . . . . . . . . . . . . . . . . . 21
Interest Expense. . . . . . . . . . . . . . . . . . . . . . . . . . . 21
Environmental Matters . . . . . . . . . . . . . . . . . . . . . . . . 22

Other Matters . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
Regulatory Matters. . . . . . . . . . . . . . . . . . . . . . . . . . 22
Competition. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
Recent Pronouncements . . . . . . . . . . . . . . . . . . . . . . . . 23
Inflation. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
Cautionary Statement. . . . . . . . . . . . . . . . . . . . . . . . . 24

Item 3. Quantitative and Qualitative Disclosures about Market Risk. . 24

PART II - OTHER INFORMATION. . . . . . . . . . . . . . . . . . . . . . . 26

SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27

PART I - FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

CHESAPEAKE UTILITIES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)

- --------------------------------------------------------------------------------
FOR THE THREE MONTHS ENDED JUNE 30, 2002 2001
- --------------------------------------------------------------------------------

OPERATING REVENUES . . . . . . . . . . . . . . . . $ 53,235,106 $ 71,051,256
COST OF SALES. . . . . . . . . . . . . . . . . . . 38,708,708 57,239,934
- --------------------------------------------------- ------------- ------------
GROSS MARGIN . . . . . . . . . . . . . . . . . . . 14,526,398 13,811,322
- --------------------------------------------------- ------------- ------------

OPERATING EXPENSES
Operations . . . . . . . . . . . . . . . . . . . . 8,695,906 8,339,022
Maintenance. . . . . . . . . . . . . . . . . . . . 464,814 359,278
Depreciation and amortization. . . . . . . . . . . 2,382,307 1,946,955
Other taxes. . . . . . . . . . . . . . . . . . . . 1,037,785 1,021,774
Income taxes . . . . . . . . . . . . . . . . . . . 243,778 403,064
- --------------------------------------------------- ------------- ------------
Total operating expenses . . . . . . . . . . . . . 12,824,590 12,070,093
- --------------------------------------------------- ------------- ------------
OPERATING INCOME . . . . . . . . . . . . . . . . . 1,701,808 1,741,229

OTHER INCOME, NET. . . . . . . . . . . . . . . . . 39,577 114,337
- --------------------------------------------------- ------------- ------------
INCOME BEFORE INTEREST CHARGES . . . . . . . . . . 1,741,385 1,855,566

INTEREST CHARGES . . . . . . . . . . . . . . . . . 1,211,691 1,188,840
- --------------------------------------------------- ------------- ------------
NET INCOME . . . . . . . . . . . . . . . . . . . . $ 529,694 $ 666,726
=================================================== ============= ============

EARNINGS PER SHARE OF COMMON STOCK:

BASIC. . . . . . . . . . . . . . . . . . . . . . . $ 0.10 $ 0.12
=================================================== ============= ============
DILUTED. . . . . . . . . . . . . . . . . . . . . . $ 0.10 $ 0.12
=================================================== ============= ============

The accompanying notes are an integral part of these financial statements.

CHESAPEAKE UTILITIES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)

- --------------------------------------------------------------------------------
FOR THE SIX MONTHS ENDED JUNE 30, 2002 2001
- --------------------------------------------------------------------------------

OPERATING REVENUES . . . . . . . . . . . . . . . . $121,776,065 $205,090,741
COST OF SALES. . . . . . . . . . . . . . . . . . . 84,919,691 168,122,556
- --------------------------------------------------- ------------- ------------
GROSS MARGIN . . . . . . . . . . . . . . . . . . . 36,856,374 36,968,185
- --------------------------------------------------- ------------- ------------
OPERATING EXPENSES
Operations . . . . . . . . . . . . . . . . . . . . 18,015,611 17,660,772
Maintenance. . . . . . . . . . . . . . . . . . . . 929,390 854,314
Depreciation and amortization. . . . . . . . . . . 4,708,656 4,074,334
Other taxes. . . . . . . . . . . . . . . . . . . . 2,310,778 2,198,735
Income taxes . . . . . . . . . . . . . . . . . . . 3,283,207 3,772,471
- --------------------------------------------------- ------------- ------------
Total operating expenses . . . . . . . . . . . . . 29,247,642 28,560,626
- --------------------------------------------------- ------------- ------------
OPERATING INCOME . . . . . . . . . . . . . . . . . 7,608,732 8,407,559

OTHER INCOME, NET. . . . . . . . . . . . . . . . . 250,627 249,210
- --------------------------------------------------- ------------- ------------
INCOME BEFORE INTEREST CHARGES . . . . . . . . . . 7,859,359 8,656,769

INTEREST CHARGES . . . . . . . . . . . . . . . . . 2,446,187 2,624,574
- --------------------------------------------------- ------------- ------------
INCOME BEFORE CUMULATIVE EFFECT OF
CHANGE IN ACCOUNTING PRINCIPLE. . . . . . . . . 5,413,172 6,032,195

CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING
PRINCIPLE, NET OF TAX . . . . . . . . . . . . . (1,916,000) 0
- --------------------------------------------------- ------------- ------------
NET INCOME . . . . . . . . . . . . . . . . . . . . $ 3,497,172 $ 6,032,195
=================================================== ============= ============

EARNINGS PER SHARE OF COMMON STOCK:

BASIC
BEFORE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE. . $ 0.99 $ 1.13
EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE . . . . . (0.35) 0.00
- --------------------------------------------------- ------------- ------------
NET INCOME . . . . . . . . . . . . . . . . . . . . $ 0.64 $ 1.13
=================================================== ============= ============

DILUTED
BEFORE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE. . $ 0.97 $ 1.10
EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE . . . . . (0.34) 0.00
- --------------------------------------------------- ------------- ------------
NET INCOME . . . . . . . . . . . . . . . . . . . . $ 0.63 $ 1.10
=================================================== ============= ============

The accompanying notes are an integral part of these financial statements.

CHESAPEAKE UTILITIES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

- ------------------------------------------------------------------------------------------
FOR THE SIX MONTHS ENDED JUNE 30, 2002 2001
- ------------------------------------------------------------------------------------------

OPERATING ACTIVITIES
Net Income . . . . . . . . . . . . . . . . . . . . . . . . $ 3,497,172 $ 6,032,195
Adjustments to reconcile net income to net operating cash:
Goodwill impairment. . . . . . . . . . . . . . . . . . . 3,200,000 0
Depreciation and amortization. . . . . . . . . . . . . . 4,708,656 4,074,334
Deferred income taxes, net . . . . . . . . . . . . . . . (841,719) (501,427)
Mark-to-market adjustments . . . . . . . . . . . . . . . 36,616 444,419
Other, net . . . . . . . . . . . . . . . . . . . . . . . 388,138 1,326,839
Changes in assets and liabilities:
Accounts receivable, net . . . . . . . . . . . . . . . . 5,916,085 20,025,737
Inventory, materials, supplies and storage gas . . . . . 1,240,642 2,071,093
Other current assets . . . . . . . . . . . . . . . . . . (451,630) (680,538)
Environmental recoveries, net of expenditures. . . . . . 465,376 221,313
Other deferred charges . . . . . . . . . . . . . . . . . (359,063) (1,700,944)
Accounts payable, net. . . . . . . . . . . . . . . . . . (3,899,222) (20,865,949)
Refunds payable to customers . . . . . . . . . . . . . . (614,544) (105,518)
Accrued income taxes . . . . . . . . . . . . . . . . . . 2,461,214 2,538,595
Accrued interest . . . . . . . . . . . . . . . . . . . . (68,967) 1,167,805
Over (under) recovered deferred purchased gas costs. . . 5,682,150 1,037,233
Other current liabilities. . . . . . . . . . . . . . . . (301,667) 366,005
- ------------------------------------------------------------ ------------- -------------
Net cash provided by operating activities. . . . . . . . . . 21,059,237 15,451,192
- ------------------------------------------------------------ ------------- -------------

INVESTING ACTIVITIES
Property, plant and equipment expenditures . . . . . . . . (5,401,031) (9,811,537)
- ------------------------------------------------------------ ------------- -------------
Net cash used by investing activities. . . . . . . . . . . . (5,401,031) (9,811,537)
- ------------------------------------------------------------ ------------- -------------

FINANCING ACTIVITIES
Common stock dividends, net of amounts reinvested. . . . . (2,653,816) (2,576,451)
Issuance of stock:
Dividend Reinvestment Plan optional cash . . . . . . . . 160,539 88,746
Retirement Savings Plan. . . . . . . . . . . . . . . . . 513,753 535,470
Net repayment under line of credit agreements. . . . . . . (12,098,844) (3,200,000)
Proceeds from issuance of long-term debt . . . . . . . . . 60,681 300,000
Repayment of long-term debt. . . . . . . . . . . . . . . . (1,398,497) (1,385,290)
- ------------------------------------------------------------ ------------- -------------
Net cash used by financing activities. . . . . . . . . . . . (15,416,184) (6,237,525)
- ------------------------------------------------------------ ------------- -------------

NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS . . . . 242,022 (597,870)
CASH AND CASH EQUIVALENTS BEGINNING OF PERIOD. . . . . . . . 1,188,335 4,606,316
- ------------------------------------------------------------ ------------- -------------
CASH AND CASH EQUIVALENTS END OF PERIOD. . . . . . . . . . . $ 1,430,357 $ 4,008,446
============================================================ ============= =============

The accompanying notes are an integral part of these financial statements.

CHESAPEAKE UTILITIES CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (UNAUDITED)

- ----------------------------------------------------------------------------------------
JUNE 30, DECEMBER 31,
ASSETS 2002 2001
- ----------------------------------------------------------------------------------------

PROPERTY, PLANT AND EQUIPMENT
Natural gas distribution and transmission . . . . . . . $ 171,505,538 $ 168,436,347
Propane . . . . . . . . . . . . . . . . . . . . . . . . 34,759,452 34,695,862
Advanced information services . . . . . . . . . . . . . 1,577,072 1,521,144
Other plant . . . . . . . . . . . . . . . . . . . . . . 12,997,903 12,249,442
- -------------------------------------------------------- -------------- --------------
Total property, plant and equipment . . . . . . . . . . 220,839,965 216,902,795
Less: Accumulated depreciation and amortization. . . . (70,312,737) (66,646,944)
- -------------------------------------------------------- -------------- --------------
Net property, plant and equipment . . . . . . . . . . . 150,527,228 150,255,851
- -------------------------------------------------------- -------------- --------------

INVESTMENTS . . . . . . . . . . . . . . . . . . . . . . 425,863 517,901
- -------------------------------------------------------- -------------- --------------

CURRENT ASSETS
Cash and cash equivalents . . . . . . . . . . . . . . . 1,430,357 1,188,335
Accounts receivable (less allowance for uncollectibles
of $489,235 and $621,516, respectively). . . . . . . 15,350,224 21,266,309
Materials and supplies, at average cost . . . . . . . . 1,125,034 1,106,995
Merchandise inventory, at average cost. . . . . . . . . 1,437,056 1,610,786
Propane inventory, at average cost. . . . . . . . . . . 3,267,199 2,518,871
Storage gas prepayments . . . . . . . . . . . . . . . . 2,493,137 4,326,416
Underrecovered purchased gas costs. . . . . . . . . . . 837,604 6,519,754
Income taxes receivable . . . . . . . . . . . . . . . . 0 675,504
Prepaid expenses and other current assets . . . . . . . 2,624,039 2,209,026
- -------------------------------------------------------- -------------- --------------
Total current assets. . . . . . . . . . . . . . . . . . 28,564,650 41,421,996
- -------------------------------------------------------- -------------- --------------

DEFERRED CHARGES AND OTHER ASSETS
Environmental regulatory assets . . . . . . . . . . . . 2,655,964 2,677,010
Environmental expenditures. . . . . . . . . . . . . . . 2,723,780 3,189,156
Intangible assets, net. . . . . . . . . . . . . . . . . 4,399,723 7,724,283
Other deferred charges. . . . . . . . . . . . . . . . . 5,407,832 5,141,363
- -------------------------------------------------------- -------------- --------------
Total deferred charges and other assets . . . . . . . . 15,187,299 18,731,812
- -------------------------------------------------------- -------------- --------------

TOTAL ASSETS. . . . . . . . . . . . . . . . . . . . . . $ 194,705,040 $ 210,927,560
======================================================== ============== ==============

The accompanying notes are an integral part of these financial statements.

CHESAPEAKE UTILITIES CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS

- ----------------------------------------------------------------------------------------
JUNE 30, DECEMBER 31,
CAPITALIZATION AND LIABILITIES 2002 2001
- ----------------------------------------------------------------------------------------

CAPITALIZATION
Stockholders' equity
Common Stock, par value $.4867 per share;
(authorized 12,000,000 shares; issued 5,484,404
and 5,424,962 shares, respectively) . . . . . . . . . . $ 2,668,991 $ 2,640,060
Additional paid-in capital. . . . . . . . . . . . . . . 30,784,867 29,653,992
Retained earnings . . . . . . . . . . . . . . . . . . . 35,044,850 34,555,560
- -------------------------------------------------------- -------------- --------------
Total stockholders' equity. . . . . . . . . . . . . . . 68,498,708 66,849,612

Long-term debt, net of current maturities . . . . . . . 46,011,721 48,408,596
- -------------------------------------------------------- -------------- --------------
Total capitalization. . . . . . . . . . . . . . . . . . 114,510,429 115,258,208
- -------------------------------------------------------- -------------- --------------

CURRENT LIABILITIES
Current portion of long-term debt . . . . . . . . . . . 3,707,283 2,686,145
Short-term borrowing. . . . . . . . . . . . . . . . . . 30,001,156 42,100,000
Accounts payable. . . . . . . . . . . . . . . . . . . . 10,652,398 14,551,621
Refunds payable to customers. . . . . . . . . . . . . . 357,031 971,575
Income taxes payable. . . . . . . . . . . . . . . . . . 1,785,710 0
Accrued interest. . . . . . . . . . . . . . . . . . . . 1,689,434 1,758,401
Dividends payable . . . . . . . . . . . . . . . . . . . 1,507,329 1,491,832
Deferred income taxes payable . . . . . . . . . . . . . 846,956 848,271
Other accrued liabilities . . . . . . . . . . . . . . . 5,193,546 5,604,237
- -------------------------------------------------------- -------------- --------------
Total current liabilities . . . . . . . . . . . . . . . 55,740,843 70,012,082
- -------------------------------------------------------- -------------- --------------

DEFERRED CREDITS AND OTHER LIABILITIES
Deferred income taxes . . . . . . . . . . . . . . . . . 14,800,400 15,732,842
Deferred investment tax credits . . . . . . . . . . . . 574,949 602,357
Environmental liability . . . . . . . . . . . . . . . . 3,086,093 3,199,733
Accrued pension costs . . . . . . . . . . . . . . . . . 1,625,362 1,595,650
Other liabilities . . . . . . . . . . . . . . . . . . . 4,366,964 4,526,688
- -------------------------------------------------------- -------------- --------------
Total deferred credits and other liabilities. . . . . . 24,453,768 25,657,270
- -------------------------------------------------------- -------------- --------------

TOTAL CAPITALIZATION AND LIABILITIES. . . . . . . . . . $ 194,705,040 $ 210,927,560
======================================================== ============== ==============

The accompanying notes are an integral part of these financial statements.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. QUARTERLY FINANCIAL DATA
The financial information for Chesapeake Utilities Corporation (the "Company")
included herein is unaudited and should be read in conjunction with the
Company's Annual Report on Form 10-K. In the opinion of management, this
financial information reflects normal recurring adjustments, including the
cumulative effect of change in accounting principle, which are necessary for a
fair presentation of the Company's interim results. Due to the seasonal nature
of the Company's business, there are substantial variations in the results of
operations reported on a quarterly basis and, accordingly, results for any
particular quarter may not give a true indication of results for the year.
Certain amounts in 2001 have been reclassified to conform to the presentation
for the current year.

2. CALCULATION OF EARNINGS PER SHARE

- ------------------------------------------------------------------------------------------------------
THREE MONTHS ENDED SIX MONTHS ENDED
FOR THE PERIOD ENDED JUNE 30, 2002 2001 2002 2001
- ------------------------------------------------------------------------------------------------------

CALCULATION OF BASIC EARNINGS PER SHARE BEFORE
CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE:

Net Income before cumulative effect of change
in accounting principle. . . . . . . . . . . . . . . $ 529,694 $ 666,726 $5,413,172 $6,032,195
Weighted average shares outstanding. . . . . . . . . 5,478,714 5,354,405 5,461,443 5,336,184
- ----------------------------------------------------- ---------- ---------- ---------- ----------
BASIC EARNINGS PER SHARE BEFORE CUMULATIVE
EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE . . . . . . $ 0.10 $ 0.12 $ 0.99 $ 1.13
===================================================== ========== ========== ========== ==========

CALCULATION OF DILUTED EARNINGS PER SHARE BEFORE
CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE:

RECONCILIATION OF NUMERATOR:
Net Income before cumulative effect of change
in accounting principle Basic. . . . . . . . . . . . $ 529,694 $ 666,726 $5,413,172 $6,032,195
Effect of 8.25% Convertible debentures . . . . . . . 0 0 83,168 85,793
- ----------------------------------------------------- ---------- ---------- ---------- ----------
Adjusted numerator Diluted . . . . . . . . . . . . . $ 529,694 $ 666,726 $5,496,340 $6,117,988
- ----------------------------------------------------- ---------- ---------- ---------- ----------

RECONCILIATION OF DENOMINATOR:
Weighted shares outstanding Basic. . . . . . . . . . 5,478,714 5,354,405 5,461,443 5,336,184
Effect of dilutive securities
Stock options. . . . . . . . . . . . . . . . . . . . 0 8,237 0 8,097
Warrants . . . . . . . . . . . . . . . . . . . . . . 2,901 931 2,376 700
8.25% Convertible debentures . . . . . . . . . . . . 0 0 196,429 202,628
- ----------------------------------------------------- ---------- ---------- ---------- ----------
Adjusted denominator Diluted . . . . . . . . . . . . 5,481,615 5,363,573 5,660,248 5,547,609
- ----------------------------------------------------- ---------- ---------- ---------- ----------

DILUTED EARNINGS PER SHARE BEFORE CUMULATIVE
EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE . . . . . . $ 0.10 $ 0.12 $ 0.97 $ 1.10
===================================================== ========== ========== ========== ==========

3. COMMITMENTS AND CONTINGENCIES

ENVIRONMENTAL MATTERS
The Company is currently participating in the remediation of three former gas
manufacturing plant sites located in different jurisdictions. The Company has
accrued liabilities for the Dover Gas Light, Salisbury Town Gas Light and the
Winter Haven Coal Gas sites accordingly. The Company is currently in discussions
with the Maryland Department of the Environment ("MDE") regarding a fourth site
in Cambridge, Maryland.

The Dover Gas Light site is a former manufactured gas plant site located in
Dover, Delaware. Remedies were selected by the United States Environmental
Protection Agency ("EPA") to address the soil and ground-water. During 2002, the
Company has been engaged in completing the remaining component of the soil
remediation, consisting of: (1) soil vapor extraction and (2) parking lot
construction. The soil vapor extraction has been completed and the system has
been dismantled. The parking lot construction is underway and expected to be
completed in the third quarter of 2002.

In May 2001, the Company, General Public Utilities Corporation, Inc., the State
of Delaware and the EPA signed a settlement term sheet reflecting the agreement
in principle to settle a lawsuit with respect to the Dover site. The parties are
in the process of memorializing the terms of the final agreement in two consent
decrees. The consent decrees will then be published for public comment and
submitted to a federal judge for approval.

If the agreement in principle receives final approval, the Company will:

- Receive a net payment of $1.15 million from other parties to the
agreement. These proceeds will be passed on to the Company's firm
customers, in accordance with the environmental rate rider.
- Receive a release from liability and covenant not to sue from the EPA and
the State of Delaware. This will relieve the Company from liability for
future remediation at the site, unless previously unknown conditions are
discovered at the site, or information previously unknown to EPA is
received that indicates the remedial action related to the prior
manufactured gas plant is not sufficiently protective. These
contingencies are standard, and are required by the United States in
all liability settlements.

At June 30, 2002, the Company had accrued $2.1 million (discounted) of costs
associated with the remediation of the Dover site and had recorded an associated
regulatory asset for the same amount. Of that amount, $1.5 million was for
estimated ground-water remediation and $600,000 was for remaining soil
remediation. The $1.5 million represented the low end of the ground-water
remediation estimates prepared by an independent consultant and was used because
the Company could not, at that time, predict the remedy the EPA might require.
Upon receiving final court approval of the consent decrees, the Company will
reduce both the accrued environmental liability and the associated environmental
regulatory asset to the amount required to complete its obligations.

Through June 30, 2002, the Company has incurred approximately $9.0 million in
costs relating to environmental testing and remedial action studies at the Dover
site. Approximately $6.6 million has been recovered through June 30, 2002 from
other parties or through rates.

The Salisbury Town Gas Light site is a former manufactured gas plant site
located in Salisbury, Maryland. In cooperation with the MDE, the Company has
been engaged in remediation that primarily included the following: (1) operation
of an air sparging/soil vapor extraction ("AS/SVE") remedial system; (2)
monitoring and recovery of product from recovery wells; and (3) monitoring of
ground-water quality. In accordance with MDE's permission to permanently
decommission the AS/SVE system and abandon nearly all of the monitoring wells
on-site and off-site, the final AS/SVE system decommissioning and monitoring
well network abandonment was completed in March 2002. The Company is currently
seeking a No Further Action ("NFA") for the site. The NFA would be conditional
upon the Company performing continued product monitoring and recovery at one
well location and implementing land use controls.

The Company has adjusted the liability with respect to the Salisbury site to
$79,000 at June 30, 2002. This amount is based on the estimated costs to perform
limited product monitoring and recovery efforts and fulfill ongoing reporting
requirements. A corresponding regulatory asset has been recorded, reflecting the
Company's belief that costs incurred will be recoverable in through rates.

Through June 30, 2002, the Company has incurred approximately $2.9 million for
remedial actions and environmental studies at the Salisbury site. Of this
amount, approximately $1.8 million has been recovered through insurance proceeds
or ratemaking treatment.

The Winter Haven Coal Gas site is located in Winter Haven, Florida. In May 2001,
the Florida Department of Environmental Protection ("FDEP") approved a remedial
action plan that includes the utilization of the AS/SVE technologies to address
ground-water impacts throughout a majority of the site. Completion of
construction and start-up of the AS/SVE system is projected to occur during the
third quarter of 2002. The Company is currently negotiating with FDEP on the
extent of additional investigation and remediation work required to address
surface soil, ground-water and sediment impacts that will not be remediated by
the AS/SVE system. The current estimate of costs to complete the remediation
activities at the site is approximately $907,000 (discounted). Accordingly, at
June 30, 2002, the Company has accrued a liability of $907,000. Through June 30,
2002, the Company has incurred approximately $1.0 million of environmental costs
associated with the Florida site. At June 30, 2002, the Company had collected
$523,000 in excess of costs incurred. A regulatory asset of approximately
$477,000 representing the uncollected portion of the estimated cleanup costs has
also been recorded.

It is management's opinion that any unrecovered current costs and any other
future costs associated with each of the three sites incurred will be
recoverable through future rates or sharing arrangements with other responsible
parties.

The MDE has requested a meeting with Chesapeake and two other parties to discuss
the alleged manufactured gas plant contamination at the fourth site located in
Cambridge, Maryland. The outcome of this matter cannot be determined at this
time.

OTHER COMMITMENTS AND CONTINGENCIES
The Company's natural gas distribution operations have entered into contractual
commitments for daily entitlements of natural gas from various suppliers. The
contracts have various expiration dates. In 2000, the Company entered into a
long-term contract with an energy marketing and risk management company to
manage a portion of the Company's natural gas transportation and storage
capacity. That contract remains in effect.

The Company is involved in certain legal actions and claims arising in the
normal course of business. The Company is also involved in certain legal and
administrative proceedings before various governmental agencies concerning
rates. In the opinion of management, the ultimate disposition of these
proceedings will not have a material effect on the consolidated financial
position of the Company.

Certain assets and liabilities of the Company are accounted for in accordance
with Financial Accounting Standards Board Statement of Financial Accounting
Standards ("SFAS") No. 71, which, among other matters, provides standards for
regulated enterprises for the deferral of costs that will be recovered through
future rate increases. If the Company were required to terminate the application
of these standards to its regulated operations, all such deferred amounts would
be recognized in the income statement at that time. This would result in a
charge to earnings, net of applicable income taxes, which could be material.

4. RECENT AUTHORITATIVE PRONOUNCEMENTS ON FINANCIAL REPORTING AND ACCOUNTING
The Company is in the process of assessing the provisions of a recent consensus
reached by the Emerging Issues Task Force ("EITF") of the Financial Accounting
Standards Board that reconsidered certain provisions in EITF 02-03 "Accounting
for Contracts Involved in Energy Trading and Risk Management Activities." EITF
02-03 addresses the presentation of revenue and expense associated with energy
trading contracts on a gross versus net basis. Previously, the EITF concluded
that gross presentation was acceptable. However, during deliberations held in
June 2002, a consensus was reached that net presentation should be required.
This consensus also indicated that implementation would be effective for the
third quarter 2002 reporting cycle. The final EITF has not yet been issued.

Under current standards, the Company classifies certain energy trading contracts
entered into by its propane wholesale marketing operations on a gross basis.
Recording the energy trading contracts on a net basis would not change the gross
margin, net income, earnings per share or the financial position of the Company.
It would reduce reported amounts of both revenue and cost of sales. Based on the
information currently available regarding the consensus, we expect that for
fiscal 2001, previously reported gross revenue and cost of sales would each have
been approximately $169.0 million lower. For the first six months of 2002, both
revenue and cost of sales would have been approximately $44.0 million lower. As
stated above, there would be no impact on gross margin, net income earnings per
share or the financial position of the Company.

The EITF is still subject to deliberations. Until the final EITF is issued, we
cannot be certain of its provisions.

On June 30, 2001, the Financial Accounting Standards Board ("FASB") issued SFAS
Nos. 142 and 143. SFAS No. 142, "Goodwill and Other Intangible Assets,"
eliminates the amortization of goodwill and other acquired intangible assets
with indefinite economic useful lives. The pronouncement requires an annual
impairment test of goodwill and other intangible assets that are not subject to
amortization. SFAS No. 142 is effective for fiscal years beginning after
December 15, 2001; however, amortization of goodwill for acquisitions completed
after June 30, 2001 was prohibited. This pronouncement was adopted in the first
quarter of 2002. See Note 5 to the Consolidated Financial Statements for a
description of its impact on the financial statements and additional disclosures
required by the pronouncement.

SFAS No. 143, "Accounting for Asset Retirement Obligations," provides guidance
on the accounting for obligations associated with the retirement of long-lived
assets. The pronouncement requires a liability to be recognized in the financial
statements for retirement obligations meeting specific criteria. Measurement of
the initial obligation is to approximate fair value with an equivalent amount
recorded as an increase in the value of the capitalized asset. The asset will be
depreciable in accordance with normal depreciation policy and the liability will
be increased, with a charge to the income statement, until the obligation is
settled. SFAS No. 143 is effective for fiscal years beginning after June 15,
2002. The potential impact of adopting this pronouncement has not yet been
determined.

SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets,"
replaces SFAS No. 121. The statement develops one accounting model for
long-lived assets to be disposed of by sale and addresses significant
implementation issues. SFAS No. 144 was adopted in the first quarter of 2002, as
required. Its adoption did not have a material impact on the Company's financial
position or results of operations.

In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements No.
4, 44 and 64, Amendment of FASB Statement No. 13, and Technical Corrections."
SFAS No. 145 covers the reporting of gains and losses on extinguishment of debt.
This pronouncement is not expected to have a material impact on the Company's
financial position or results of operations.

The FASB adopted SFAS No. 146, "Accounting for Costs Associated with Exit or
Disposal Activities" in June 2002. It requires that a liability for a cost
associated with an exit or disposal activity be recognized when a liability is
incurred. Under previous guidelines, a liability for an exit cost was recognized
at the date of an entity's commitment to an exit plan. The Company does not
currently have any exit or disposal liabilities recorded; therefore, adoption of
this pronouncement is not expected to impact the Company's financial position or
results of operations.

5. GOODWILL AND OTHER INTANGIBLE ASSETS
The Company adopted SFAS No. 142 in the first quarter of 2002. Application of
the non-amortization provisions resulted in $68,000 of additional income ($0.013
per share), after tax, for the first six months of 2002 compared to 2001. The
Company performed a test for goodwill impairment using the two-step process
prescribed in SFAS No. 142. The first step was a screen for potential
impairment, using January 1, 2002 as the measurement date. The second step was a
measurement of the amount of the goodwill determined to be impaired. The results
of the tests indicate that the goodwill associated with the Company's water
business, which is included in the reportable segment entitled "Other Business
Operations," has been impaired and that the amount of the impairment loss is
$3.2 million. This was recorded as the cumulative effect of a change in
accounting principle. The fair value of the water business was determined using
several methods, including discounted cash flow projections and market
valuations for recent purchases and sales of similar businesses. These were
weighted based on their expected probability. The previous test for impairment
of goodwill, prescribed under SFAS No. 121, looked at undiscounted cash flows.
The determination that the goodwill associated with the Company's water business
was impaired was the result of the more stringent tests required by the new
pronouncement. The performance of the Company's water unit in Michigan is the
primary cause of the impairment.

The change in the carrying value of goodwill for the six months ended June 30,
2002 is as follows:

WATER
BUSINESSES PROPANE TOTAL
------------ -------- ------------

Balance at January 1, 2002 $ 4,869,068 $674,451 $ 5,543,519
Impairment charge. . . . . (3,200,000) 0 (3,200,000)
- --------------------------- ------------ -------- ------------
Balance at June 30, 2002 . $ 1,669,068 $674,451 $ 2,343,519
- --------------------------- ------------ -------- ------------

The impact of the non-amortization provision of SFAS No. 142 was as follows:

- ----------------------------------------------------------------------------
BASIC DILUTED
NET EARNINGS EARNINGS
FOR THE THREE MONTHS ENDED JUNE 30, 2001 INCOME PER SHARE PER SHARE
- ----------------------------------------------------------------------------

Net Income. . . . . . . . . . . . . . . $ 666,726 $ 0.12 $ 0.12
Amortization of goodwill, after tax . . 34,549 0.01 0.01
- ---------------------------------------- ---------- ---------- ----------
Net Income, exclusive of amortization . $ 701,275 $ 0.13 $ 0.13
- ---------------------------------------- ---------- ---------- ----------

- ----------------------------------------------------------------------------
BASIC DILUTED
NET EARNINGS EARNINGS
FOR THE SIX MONTHS ENDED JUNE 30, 2001 INCOME PER SHARE PER SHARE
- ----------------------------------------------------------------------------

Net Income. . . . . . . . . . . . . . . $6,032,195 $ 1.13 $ 1.10
Amortization of goodwill, after tax . . 68,393 0.01 0.02
- ---------------------------------------- ---------- ---------- ----------
Net Income, exclusive of amortization . $6,100,588 $ 1.14 $ 1.12
- ---------------------------------------- ---------- ---------- ----------

Intangible assets subject to amortization are as follows:

JUNE 30, 2002 DECEMBER 31, 2001
------------------------- -------------------------
Gross Gross
Carrying Accumulated Carrying Accumulated
Amount Amortization Amount Amortization
---------- ------------- ---------- -------------

Customer Lists . . . . $1,111,651 $ 135,563 $1,111,651 $ 82,141
Non-compete agreements 1,000,000 204,167 1,000,000 140,417
Acquisition costs. . . 379,541 95,258 379,541 87,870
- ----------------------- ---------- ------------- ---------- -------------
Total. . . . . . . . . $2,491,192 $ 434,988 $2,491,192 $ 310,428
- ----------------------- ---------- ------------- ---------- -------------

Amortization of intangible assets was $125,000 for the six months ended June 30,
2002. For the year ended December 31, 2001, amortization of intangibles,
excluding goodwill, was $132,000. The estimated annual amortization of
intangibles for the next five years is: $230,000 for 2002; $224,000 for 2003;
$224,000 for 2004; $213,000 for 2005; and $213,000 for 2006.

6. SEGMENT INFORMATION
Chesapeake uses the management approach to identify operating segments.
Chesapeake organizes its business around differences in products or services and
the operating results of each segment are regularly reviewed by the Company's
chief operating decision maker in order to make decisions about resources and to
assess performance. The following table presents information about the Company's
reportable segments.

- --------------------------------------------------------------------------------
FOR THE SIX MONTHS ENDED JUNE 30, 2002 2001
- --------------------------------------------------------------------------------

OPERATING REVENUES, UNAFFILIATED CUSTOMERS
Natural gas distribution and transmission . . . $ 52,743,111 $ 70,333,135
Propane . . . . . . . . . . . . . . . . . . . . 56,784,013 123,547,777
Advanced information services . . . . . . . . . 6,421,642 7,095,884
Other . . . . . . . . . . . . . . . . . . . . . 5,827,299 4,113,945
- ------------------------------------------------- -------------- -------------
Total operating revenues, unaffiliated customers. $ 121,776,065 $205,090,741
- ------------------------------------------------- -------------- -------------

INTERSEGMENT REVENUES (1)
Natural gas distribution and transmission . . . $ 34,914 $ 58,618
Other . . . . . . . . . . . . . . . . . . . . . 362,110 420,331
- ------------------------------------------------- -------------- -------------
Total intersegment revenues . . . . . . . . . . . $ 397,024 $ 478,949
- ------------------------------------------------- -------------- -------------

PRE-TAX OPERATING INCOME
Natural gas distribution and transmission . . . $ 9,246,110 $ 8,885,220
Propane . . . . . . . . . . . . . . . . . . . . 1,719,283 3,099,388
Advanced information services . . . . . . . . . 103,938 215,767
Other . . . . . . . . . . . . . . . . . . . . . (177,392) (20,345)
- ------------------------------------------------- -------------- -------------
Total . . . . . . . . . . . . . . . . . . . . . . $ 10,891,939 $ 12,180,030
- ------------------------------------------------- -------------- -------------

(1) All significant intersegment revenues are billed at market
rates and have been eliminated from consolidated revenues.

- --------------------------------------------------------------------------------
JUNE 30, DECEMBER 31,
2002 2001
- --------------------------------------------------------------------------------

IDENTIFIABLE ASSETS
Natural gas distribution and transmission . . . $ 142,550,246 $152,464,880
Propane . . . . . . . . . . . . . . . . . . . . 32,779,155 34,314,633
Advanced information services . . . . . . . . . 2,879,823 2,593,740
Other . . . . . . . . . . . . . . . . . . . . . 16,495,816 21,554,307
- ------------------------------------------------- -------------- -------------
Total identifiable assets . . . . . . . . . . . . $ 194,705,040 $210,927,560
- ------------------------------------------------- -------------- -------------

During the second quarter of 2002, the Company reassigned the responsibility for
management of its underground piped propane systems from the natural gas segment
to the propane segment. The segment reporting information for 2002 and 2001
presented above reflects the reclassification

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS

BUSINESS DESCRIPTION
Chesapeake Utilities Corporation (the "Company") is a diversified utility
company engaged in natural gas distribution and transmission, propane
distribution and marketing, advanced information services and other related
businesses.

The Company's strategy is to grow earnings from a stable utility foundation by
investing in related businesses and services that provide opportunities for
higher, unregulated returns. This growth strategy includes acquisitions and
investments in unregulated businesses as well as the continued investment and
expansion of the Company's utility operations that provide the stable base of
earnings. The Company continually reevaluates its investments to ensure that
they are consistent with its strategy and the goal of enhancing shareholder
value. The Company's unregulated businesses and services currently include
propane distribution and marketing, advanced information services and water
conditioning and treatment.

FINANCIAL POSITION, LIQUIDITY AND CAPITAL RESOURCES

The Company's capital requirements reflect the capital-intensive nature of its
business and are principally attributable to the construction program and the
retirement of outstanding debt. The Company relies on cash generated by
operations and short-term borrowing to meet normal working capital requirements
and to temporarily finance capital expenditures. During the first six months of
2002, net cash provided by operating activities, net cash used by investing
activities and net cash used by financing activities were approximately $21.1
million, $5.4 million and $15.4 million, respectively. Cash provided by
operations was up $5.6 million in the first six months of 2002 compared to 2001.
The cash flow increased due to a reduction in working capital requirements
associated with lower energy prices. In 2002 the under-recovered purchased gas
cost balance was reduced by $5.7 million, generating positive cash flow.

Based upon the Company's current level of short-term borrowing and the
anticipated cash requirements in 2002, the Company expects to complete the
private placement of $30.0 million of long-term debt and draw down the funds by
the end of October 2002. The funds will be used to refinance short-term
borrowing and fund capital expenditures. Chesapeake has received regulatory
approval for the borrowing and the prospective lenders have completed due
diligence procedures. The Company has agreed upon a fixed rate of 6.64 percent
for this debt, contingent upon final approval.

The Board of Directors has authorized the Company to borrow up to $55.0 million
of short-term debt from various banks and trust companies. Upon completion of
the effected long-term debt placement, the limit on short-term borrowing will be
adjusted to $45.0 million. As of June 30, 2002, Chesapeake had four unsecured
bank lines of credit with three financial institutions, totaling $75.0 million,
for short-term cash needs to meet seasonal working capital requirements and to
temporarily fund portions of its capital expenditures. One of the bank lines,
totaling $15.0 million, is committed. The other three lines are subject to the
banks' availability of funds. In the first six months of 2002, cash provided by
operations was adequate to fund capital expenditures and the reduction in
short-term debt outstanding. At June 30, 2002, the debt outstanding under these
lines was $30.0 million as compared to $31.6 million at March 31, 2002.

During the six-month periods ended June 30, 2002 and 2001, capital expenditures
were approximately $5.4 million and $9.8 million, respectively. Chesapeake has
budgeted $16.8 million for capital expenditures during 2002. This amount
includes $11.8 million for natural gas distribution and transmission, $2.3
million for propane distribution and marketing, $200,000 for advanced
information services and $2.5 million for other operations. The natural gas
distribution and transmission expenditures are for expansion and improvement of
facilities. The propane expenditures are to support customer growth and for the
replacement of equipment. The advanced information services expenditures are for
computer hardware, software and related equipment. Expenditures for other
operations include expenditures to support customer growth and replace equipment
for water operations and general plant, computer software and hardware.
Financing for the 2002 capital expenditure program is expected to be provided
from short-term borrowing, cash provided by operating activities and the
expected issuance of long-term debt. The capital expenditure program is subject
to continuous review and modification. Actual capital requirements may vary from
the above estimates due to a number of factors including acquisition
opportunities, changing economic conditions, customer growth in existing areas,
regulation, availability of capital and new growth opportunities.

The Company has budgeted $846,000 for capital expenditures in 2002 related to
environmental remediation projects, and expects to make additional expenditures
in future years, a portion of which may need to be financed through external
sources. Management does not expect any such expenditures or financing to have a
material adverse effect on the financial position or capital resources of the
Company (see Note 3 to the Consolidated Financial Statements).

As of June 30, 2002, common equity represented 59.8 percent of total
capitalization, compared to 58.0 percent as of December 31, 2001. Combining
short-term financing with total capitalization, the equity component would have
been 46.2 percent and 41.8 percent, respectively. The Company remains committed
to maintaining a sound capital structure and strong credit ratings in order to
provide the financial flexibility needed to access the capital markets when
required. This commitment, along with adequate and timely rate relief for the
Company's regulated operations, is intended to ensure that the Company will be
able to attract capital from outside sources at a reasonable cost.

Interest expense for the first six months of 2002 decreased approximately
$178,000, or 7 percent, over the same period in 2001. The decrease was due
primarily to a reduction in the average interest rate for short-term borrowing
from 5.67 percent on an average balance of $21.2 million for the first six
months of 2001 to 2.37 percent on an average balance of $32.9 million for the
same period in 2002. A reduction in the average long-term debt balance of $2.6
million due to scheduled repayments also contributed to this reduction.

RESULTS OF OPERATIONS FOR THE QUARTER ENDED JUNE 30, 2002

CONSOLIDATED OVERVIEW
The Company recognized net income before cumulative effect of change in
accounting principle of $530,000, or $0.10 per share, for the second quarter of
2002, a decrease of $137,000, or $0.02 per share, compared to the corresponding
period in 2001. As indicated in the following table, the decline in income is
primarily attributable to a loss by the propane segment, as well as increased
costs to add a corporate infrastructure to the water business, partially offset
by higher pre-tax operating income in the natural gas and advanced information
systems segments and lower taxes.

- -------------------------------------------------------------------------------------------------
FOR THE THREE MONTHS ENDED JUNE 30, 2002 2001 CHANGE
- -------------------------------------------------------------------------------------------------

Pre-tax Operating Income (Loss)
Natural Gas Distribution & Transmission. . . . . . $ 2,918,317 $ 2,607,934 $ 310,383
Propane. . . . . . . . . . . . . . . . . . . . . . (1,086,750) (586,793) (499,957)
Advanced Information Services. . . . . . . . . . . 175,954 112,154 63,800
Other & Eliminations . . . . . . . . . . . . . . . (61,935) 10,998 (72,933)
- ----------------------------------------------------- ------------ ------------- -------------
Pre-tax Operating Income . . . . . . . . . . . . . . 1,945,586 2,144,293 (198,707)

Operating Income Taxes . . . . . . . . . . . . . . . 243,778 403,064 (159,286)
Interest . . . . . . . . . . . . . . . . . . . . . . 1,211,691 1,188,840 22,851
Non-Operating Income, net. . . . . . . . . . . . . . 39,577 114,337 (74,760)
- ----------------------------------------------------- ------------ ------------- -------------
Net Income . . . . . . . . . . . . . . . . . . . . . $ 529,694 $ 666,726 $ (137,032)
===================================================== ============ ============= =============

NATURAL GAS DISTRIBUTION AND TRANSMISSION
The natural gas distribution and transmission segment earned pre-tax operating
income of $2.9 million for the second quarter of 2002 compared to $2.6 million
for the corresponding period last year, an increase of $310,000.

- -------------------------------------------------------------------------------------------------
FOR THE THREE MONTHS ENDED JUNE 30, 2002 2001 CHANGE
- -------------------------------------------------------------------------------------------------

Revenue. . . . . . . . . . . . . . . . . . . . . . . $21,181,611 $ 26,316,606 $ (5,134,995)
Cost of gas. . . . . . . . . . . . . . . . . . . . . 12,038,277 18,045,645 (6,007,368)
- ----------------------------------------------------- ------------ ------------- -------------
Gross margin . . . . . . . . . . . . . . . . . . . . 9,143,334 8,270,961 872,373

Operations & maintenance . . . . . . . . . . . . . . 3,944,297 3,735,712 208,585
Depreciation & amortization. . . . . . . . . . . . . 1,642,188 1,323,805 318,383
Other taxes. . . . . . . . . . . . . . . . . . . . . 638,532 603,510 35,022
- ----------------------------------------------------- ------------ ------------- -------------
Pre-tax operating expenses . . . . . . . . . . . . . 6,225,017 5,663,027 561,990
- ----------------------------------------------------- ------------ ------------- -------------
Total Pre-tax Operating Income . . . . . . . . . . . $ 2,918,317 $ 2,607,934 $ 310,383
===================================================== ============ ============= =============

Revenue and cost of gas decreased due to lower natural gas commodity costs for
the second quarter of 2002 compared to 2001. Commodity cost changes are passed
on to the ratepayers through a Gas Cost Recovery ("GSR") or Purchased Gas Cost
Adjustment ("PGA") in all jurisdictions; therefore, they have no impact on the
Company's profitability. Revenue and cost of gas were also down in part because
of "open access" which took effect in 2001 for all non-residential customers of
the Florida division. As a result, some customers switched from sales service,
where they purchase both the commodity and transportation from the Company, to
purchasing transportation only.

Gross margin increased $872,000 over the same period in 2001 due to increases in
the margins for the transmission operation and the Florida distribution
operation. The transmission margin was up due to the completion of a system
capacity expansion in November of 2001 that increased pipeline capacity by
approximately 25 percent.

Gross margins for the Delaware and Maryland distribution divisions increased
$149,000 from 2001. Temperatures were 5 percent warmer than the second quarter
of 2001 (26 degree-days) and 11 percent (54 degree-days) warmer than the 10-year
average. Chesapeake estimates that on an annual basis for each degree-day warmer
than the 10-year average, margins decrease by $1,730. However, an increase in
the average number of customers and a rate increase in Delaware offset the
temperature decline. Delaware and Maryland experienced an increase of 1,965
customers or 6 percent in the second quarter of 2002 compared to 2001.
Chesapeake estimates that each customer added contributes $335 annually to
earnings before interest, taxes, depreciation and amortization.

The margin increases were partially offset by higher operating expenses,
primarily depreciation. The increase in depreciation reflects completion of
recent capital projects that increased the transmission capacity by 25 percent
and various expansion projects in Florida.

PROPANE
For the second quarter of 2002, the propane segment experienced a pre-tax
operating loss of $1.1 million compared to $587,000 for the second quarter of
2001. Gross margin decreased $523,000, but was slightly offset by reductions in
operating expenses of $23,000.

- -------------------------------------------------------------------------------------------------
FOR THE THREE MONTHS ENDED JUNE 30, 2002 2001 CHANGE
- -------------------------------------------------------------------------------------------------

Revenue. . . . . . . . . . . . . . . . . . . . . . . $25,672,867 $ 38,786,968 $(13,114,101)
Cost of sales. . . . . . . . . . . . . . . . . . . . 23,644,077 36,235,563 (12,591,486)
- ----------------------------------------------------- ------------ ------------- -------------
Gross margin . . . . . . . . . . . . . . . . . . . . 2,028,790 2,551,405 (522,615)

Operations & maintenance . . . . . . . . . . . . . . 2,547,658 2,640,271 (92,613)
Depreciation & amortization. . . . . . . . . . . . . 420,399 334,265 86,134
Other taxes. . . . . . . . . . . . . . . . . . . . . 147,483 163,662 (16,179)
- ----------------------------------------------------- ------------ ------------- -------------
Pre-tax operating expenses . . . . . . . . . . . . . 3,115,540 3,138,198 (22,658)
- ----------------------------------------------------- ------------ ------------- -------------
Total Pre-tax Operating Loss . . . . . . . . . . . . $(1,086,750) $ (586,793) $ (499,957)
===================================================== ============ ============= =============

Both the revenue and cost of sales declined significantly for the propane
segment. Propane wholesale marketing accounted for $12.5 million of the revenue
decrease and $12.0 million of the cost of sales decrease. The drop primarily
reflects the decrease in the wholesale prices for propane from the second
quarter of 2001 compared to the second quarter of 2002. Additionally, the volume
of activity was down due to the lower price volatility in 2002. A consensus was
reached by the EITF in June 2002 to revise EITF 02-03 and disallow gross
reporting of revenue and cost of sales for energy trading contracts. The
Company's propane wholesale marketing operation currently uses the gross method
for certain energy trading contracts. The final EITF has not been issued;
however, implementation is expected to be required in the third quarter of 2002.
The requirement that all energy trading contracts be reported net would reduce
both the revenue and cost of sales by approximately $21.6 million in 2002 and
approximately $34.1 million in 2001. There is no impact on the gross margin, net
income, earnings per share or the financial position of the Company.

Propane wholesale marketing margins declined by $513,000 and were partially
offset by a reduction of $129,000 in operating expenses. The 2001 results
reflected increased opportunities due to the extreme price volatility in the
propane wholesale market. The same level of price fluctuations has not been
experienced in 2002. Although the propane wholesale marketing business has not
been as profitable as in 2001, on a year-to-date basis, it is still performing
above the earnings targets established by the Company.

The Delmarva distribution operations experienced a drop of $197,000 in gross
margin. Volumes sold for the second quarter were down 9 percent. Increased
competition and warmer temperatures negatively impacted volumes. Management
estimates that $30,000 in additional margin would have been earned if the
temperatures had been equal to the 10-year average. The Florida propane
operation increased their pre-tax operating income by $106,000 for the second
quarter.

ADVANCED INFORMATION SERVICES
The advanced information services business contributed a pre-tax operating
income of $176,000 for the second quarter of 2002 compared to $112,000 for the
second quarter of last year. The increase is the result of decreased operating
expenses that more than offset decreased revenues.

- -------------------------------------------------------------------------------------------------
FOR THE THREE MONTHS ENDED JUNE 30, 2002 2001 CHANGE
- -------------------------------------------------------------------------------------------------

Revenue. . . . . . . . . . . . . . . . . . . . . . . $ 3,362,386 $ 3,605,098 $ (242,712)
Cost of sales. . . . . . . . . . . . . . . . . . . . 1,763,137 1,884,868 (121,731)
- ----------------------------------------------------- ------------ ------------- -------------
Gross margin . . . . . . . . . . . . . . . . . . . . 1,599,249 1,720,230 (120,981)

Operations & maintenance . . . . . . . . . . . . . . 1,234,106 1,379,042 (144,936)
Depreciation & amortization. . . . . . . . . . . . . 52,218 67,649 (15,431)
Other taxes. . . . . . . . . . . . . . . . . . . . . 136,971 161,385 (24,414)
- ----------------------------------------------------- ------------ ------------- -------------
Pre-tax operating expenses . . . . . . . . . . . . . 1,423,295 1,608,076 (184,781)
- ----------------------------------------------------- ------------ ------------- -------------
Total Pre-tax Operating Income . . . . . . . . . . . $ 175,954 $ 112,154 $ 63,800
===================================================== ============ ============= =============

This segment was adversely affected by the nation's economic slowdown as
discretionary consulting projects have been postponed or cancelled.
Additionally, training revenues have declined significantly due to reluctance on
the part of students to travel in the aftermath of September 11. However, a
reduction in expenses, primarily sales and marketing, resulted in improved
performance in 2002 compared to 2001.

OTHER BUSINESS OPERATIONS
Other operations experienced a pre-tax operating loss of $62,000 for the second
quarter of 2002 compared to income of $11,000 for the second quarter of last
year. The results for 2002 include three full months of operations for the five
water businesses that were purchased between April and July of 2001.

- -------------------------------------------------------------------------------------------------
FOR THE THREE MONTHS ENDED JUNE 30, 2002 2001 CHANGE
- -------------------------------------------------------------------------------------------------

Revenue. . . . . . . . . . . . . . . . . . . . . . . $ 3,018,242 $ 2,342,584 $ 675,658
Cost of sales. . . . . . . . . . . . . . . . . . . . 1,263,217 1,073,859 189,358
- ----------------------------------------------------- ------------ ------------- -------------
Gross margin . . . . . . . . . . . . . . . . . . . . 1,755,025 1,268,725 486,300

Operations & maintenance . . . . . . . . . . . . . . 1,434,660 943,276 491,384
Depreciation & amortization. . . . . . . . . . . . . 267,502 221,235 46,267
Other taxes. . . . . . . . . . . . . . . . . . . . . 114,798 93,216 21,582
- ----------------------------------------------------- ------------ ------------- -------------
Pre-tax operating expenses . . . . . . . . . . . . . 1,816,960 1,257,727 559,233
- ----------------------------------------------------- ------------ ------------- -------------
Total Pre-tax Operating (Loss) Income. . . . . . . . $ (61,935) $ 10,998 $ (72,933)
===================================================== ============ ============= =============

The increases in all categories reflect the addition of the new water
businesses. Pre-tax operating income dropped $73,000 due to increased expenses
associated with building a corporate infrastructure and developing and
implementing uniform operating controls and procedures for the group. There have
also been some relocations and additions of operating locations for the
businesses.

OPERATING INCOME TAXES
Income taxes were lower due to the decrease in the operating income for the
current quarter. Additionally, during 2002, the Company benefited from a change
in the tax law that allows tax deductions for dividends paid on Company stock
held in Employee Stock Ownership Plans ("ESOP").

INTEREST EXPENSE
Interest for the second quarter of 2002 increased approximately $23,000, or 2
percent, over the same period in 2001. The results for 2001 included a reduction
in interest expense of $85,000 due to the capitalization of interest on a large
construction project. There was no similar project in 2002. Interest on
short-term debt declined due to a reduction in the average interest rate for
short-term borrowing from 4.98 percent on an average balance of $18.1 million
for the three-month period ended June 30, 2001 to 2.39 percent on an average
balance of $28.1 million for the same period in 2002. Interest on long-term debt
also declined due to scheduled repayments of debt.

RESULTS OF OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30, 2002

CONSOLIDATED OVERVIEW
The Company recognized net income before cumulative effect of change in
accounting principle of $5.4 million, or $0.99 per share, for the first six
months of 2002, a decrease of $619,000, or $0.14 per share, compared to the
corresponding period in 2001. As indicated in the following table, the decline
in income is primarily attributable to lower profitability of propane and the
advanced information services segments, as well as increased cost to add a
corporate infrastructure to the water business, partially offset by lower taxes
and interest expenses.

Chesapeake adopted Financial Accounting Standards Board Statement of Accounting
Standards No. 142, "Goodwill and Other Intangible Assets," in the first quarter
of 2002. As a result of the change in the goodwill impairment testing methods
prescribed by SFAS No. 142, a non-cash charge for goodwill impairment of $1.9
million, after tax, was recorded as the cumulative effect of a change in
accounting principle. The charge was necessitated primarily by the performance
of the Michigan water business. After giving effect to this charge, earnings per
share for the first six months were $0.64. In accordance with the pronouncement,
Chesapeake also ceased regular amortization of goodwill. Amortization of
goodwill for the twelve months ended December 31, 2001 amounted to $142,000,
after tax, or approximately $0.026 per share. The Company's remaining goodwill
balance was $2.3 million as of June 30, 2002.

The impact of the change in accounting principle is discussed further in Note 5
to the Consolidated Financial Statements.

- -------------------------------------------------------------------------------------------------
FOR THE SIX MONTHS ENDED JUNE 30, 2002 2001 CHANGE
- -------------------------------------------------------------------------------------------------

Pre-tax Operating Income (Loss)
Natural Gas Distribution & Transmission. . . . . . $ 9,246,110 $ 8,885,220 $ 360,890
Propane. . . . . . . . . . . . . . . . . . . . . . 1,719,283 3,099,388 (1,380,105)
Advanced Information Services. . . . . . . . . . . 103,938 215,767 (111,829)
Other & Eliminations . . . . . . . . . . . . . . . (177,392) (20,345) (157,047)
- ----------------------------------------------------- ------------ ------------- -------------
Pre-tax Operating Income . . . . . . . . . . . . . . 10,891,939 12,180,030 (1,288,091)

Operating Income Taxes . . . . . . . . . . . . . . . 3,283,207 3,772,471 (489,264)
Interest . . . . . . . . . . . . . . . . . . . . . . 2,446,187 2,624,574 (178,387)
Non-Operating Income, net. . . . . . . . . . . . . . 250,627 249,210 1,417
- ----------------------------------------------------- ------------ ------------- -------------
Net Income before cumulative effect of
change in accounting principle . . . . . . . . . . . 5,413,172 6,032,195 (619,023)
Cumulative effect of change in accounting principle. (1,916,000) 0 (1,916,000)
- ----------------------------------------------------- ------------ ------------- -------------
Net Income . . . . . . . . . . . . . . . . . . . . . $ 3,497,172 $ 6,032,195 $ (2,535,023)
===================================================== ============ ============= =============

NATURAL GAS DISTRIBUTION AND TRANSMISSION
The natural gas distribution and transmission segment earned pre-tax operating
income of $9.2 million for the first six months of 2002 compared to $8.9 million
for the corresponding period last year, an increase of $361,000.

- -------------------------------------------------------------------------------------------------
FOR THE SIX MONTHS ENDED JUNE 30, 2002 2001 CHANGE
- -------------------------------------------------------------------------------------------------

Revenue. . . . . . . . . . . . . . . . . . . . . . . $52,778,025 $ 70,391,753 $(17,613,728)
Cost of gas. . . . . . . . . . . . . . . . . . . . . 30,856,732 49,617,764 (18,761,032)
- ----------------------------------------------------- ------------ ------------- -------------
Gross margin . . . . . . . . . . . . . . . . . . . . 21,921,293 20,773,989 1,147,304

Operations & maintenance . . . . . . . . . . . . . . 8,059,772 7,785,632 274,140
Depreciation & amortization. . . . . . . . . . . . . 3,261,288 2,796,247 465,041
Other taxes. . . . . . . . . . . . . . . . . . . . . 1,354,123 1,306,890 47,233
- ----------------------------------------------------- ------------ ------------- -------------
Pre-tax operating expenses . . . . . . . . . . . . . 12,675,183 11,888,769 786,414
- ----------------------------------------------------- ------------ ------------- -------------
Total Pre-tax Operating Income . . . . . . . . . . . $ 9,246,110 $ 8,885,220 $ 360,890
===================================================== ============ ============= =============

Revenue and cost of gas decreased due to lower natural gas commodity costs in
2002 compared to 2001. Commodity cost changes are passed on to the ratepayers
through a Gas Cost Recovery ("GSR") or Purchased Gas Cost Adjustment ("PGA") in
all jurisdictions; therefore, they have no impact on the Company's
profitability. Revenue and cost of gas were also down in part because of "open
access" which took effect in 2001 for all non-residential customers of the
Florida division. As a result, some customers switched from sales service, where
they purchase both the commodity and transportation from the Company, to
purchasing transportation only.

Gross margin increased $1.1 million over the same period in 2001 due to
increases in the margins for the transmission operation and the Florida
distribution operation. Transmission margin was up due to the completion of a
major system expansion in November of 2001. The Company expects this system
expansion to increase margin by approximately $2.2 million per year. As
discussed more fully in the regulatory matters section, the Company's
transmission subsidiary, Eastern Shore Natural Gas Company ("Eastern Shore"),
has reached an agreement in principle with its customers that, if approved by
the Federal Energy Regulatory Commission, would lower annual margins by an
estimated $456,000. The new rates are expected to take effect in the third
quarter of 2002. Margins in Delaware and Maryland were adversely impacted by
temperatures that were 16 percent warmer (464 degree-days) than 2001 and 12
percent (347 degree-days) warmer than the 10-year average. Management estimates
that on an annual basis, margins will decrease by $1,730 for each degree-day
warmer than the 10-year average. This decline was partially offset by customer
growth of 1,805 or 5.6 percent and a rate increase in Delaware. Chesapeake
estimates that for each customer added, an additional $335 per year will be
added to earnings before interest, taxes, depreciation and amortization. The
margin increases were partially offset by higher operating expenses, primarily
depreciation. The increase in depreciation reflects completion of recent capital
projects that increased the transmission capacity by 25 percent and various
expansion projects in Florida.

PROPANE
For the first six months of 2002, the propane segment contributed pre-tax
operating income of $1.7 million compared to $3.1 million for the first six
months of 2001. Gross margin decreased $2.0 million, but was partially offset by
reductions in operating expenses of $647,000.

- -------------------------------------------------------------------------------------------------
FOR THE SIX MONTHS ENDED JUNE 30, 2002 2001 CHANGE
- -------------------------------------------------------------------------------------------------

Revenue. . . . . . . . . . . . . . . . . . . . . . . $56,784,013 $123,547,777 $(66,763,764)
Cost of sales. . . . . . . . . . . . . . . . . . . . 48,292,909 113,029,889 (64,736,980)
- ----------------------------------------------------- ------------ ------------- -------------
Gross margin . . . . . . . . . . . . . . . . . . . . 8,491,104 10,517,888 (2,026,784)

Operations & maintenance . . . . . . . . . . . . . . 5,547,189 6,300,459 (753,270)
Depreciation & amortization. . . . . . . . . . . . . 818,632 728,015 90,617
Other taxes. . . . . . . . . . . . . . . . . . . . . 406,000 390,026 15,974
- ----------------------------------------------------- ------------ ------------- -------------
Pre-tax operating expenses . . . . . . . . . . . . . 6,771,821 7,418,500 (646,679)
- ----------------------------------------------------- ------------ ------------- -------------
Total Pre-tax Operating Income . . . . . . . . . . . $ 1,719,283 $ 3,099,388 $ (1,380,105)
===================================================== ============ ============= =============

Both the revenue and cost of sales declined significantly for the propane
segment. Propane wholesale marketing accounted for $57.9 million of the revenue
decrease and $56.7 million of the cost of sales decrease. The drop primarily
reflects the decrease in the wholesale prices for propane from the first six
months of 2001 to the first six months of 2002. Additionally, the volume of
activity was down, due to the lower price volatility in 2002. A consensus was
reached by the EITF in June 2002 to revise EITF 02-03 and disallow gross
reporting of revenue and cost of sales for energy trading contracts. The
Company's propane wholesale marketing operation currently uses the gross method
for certain energy trading contracts. The final EITF has not been issued;
however, implementation is expected to be required in the third quarter of 2002.
The requirement that all energy trading contracts be reported net would reduce
both the revenue and cost of sales by approximately $44.2 million in 2002 and
approximately $102.5 million in 2001. There is no impact on the gross margin,
net income, earnings per share or the financial position of the Company. Propane
distribution revenues and costs were also lower by $8.9 million and $8.0
million, respectively, due to the drop in propane commodity prices. Commodity
cost changes, both increases and decreases, are generally passed on to the
distribution customers contingent upon competitive market conditions.

The Delmarva distribution operations experienced a drop of $1.2 million in gross
margin. Volumes sold for the first six months were down 20 percent. Volumes were
negatively impacted by temperatures that were 16 percent warmer than 2001,
increased competition and lower sales to the poultry industry. Management
estimates that $512,000 in additional margin would have been earned if the
temperatures had been equal to the 10-year average. The reduction in sales to
poultry customers resulted in a drop in margin of $140,000 compared to 2001. A
decrease in operating expenses of $492,000 partially offset the decline in
margin. Cost containment efforts that began in April 2001 remain in effect and
have reduced customer accounting and sales and marketing costs. Other costs,
such as delivery expenses, decreased due to the lower volumes sold. The pre-tax
operating income of the Florida propane operation increased by $143,000 for the
first six months.

Propane wholesale marketing margins declined by $1.1 million and were partially
offset by a reduction of $275,000 in operating expenses. The 2001 results
reflected increased opportunities due to the extreme price volatility in the
propane wholesale market. The same level of price fluctuations has not been
experienced in 2002. The 2002 results reflect increased margin of approximately
$650,000 that resulted from a bankrupt vendor defaulting on supply contracts
during the first quarter of 2002. The supply was replaced by purchasing from
different vendors at a lower cost than the original contract. Although the
propane wholesale marketing business has not been as profitable as in 2001, it
is still performing above the earnings targets established by the Company.

ADVANCED INFORMATION SERVICES
The advanced information services business earned a pre-tax operating income of
$104,000 for the first six months of 2002 compared to income of $216,000 for the
first half of last year. The decrease is the result of decreased revenue
partially offset by decreased operating expenses.

- -------------------------------------------------------------------------------------------------
FOR THE SIX MONTHS ENDED JUNE 30, 2002 2001 CHANGE
- -------------------------------------------------------------------------------------------------

Revenue. . . . . . . . . . . . . . . . . . . . . . . $ 6,421,642 $ 7,095,884 $ (674,242)
Cost of sales. . . . . . . . . . . . . . . . . . . . 3,381,949 3,652,483 (270,534)
- ----------------------------------------------------- ------------ ------------- -------------
Gross margin . . . . . . . . . . . . . . . . . . . . 3,039,693 3,443,401 (403,708)

Operations & maintenance . . . . . . . . . . . . . . 2,511,707 2,777,096 (265,389)
Depreciation & amortization. . . . . . . . . . . . . 108,588 129,922 (21,334)
Other taxes. . . . . . . . . . . . . . . . . . . . . 315,460 320,616 (5,156)
- ----------------------------------------------------- ------------ ------------- -------------
Pre-tax operating expenses . . . . . . . . . . . . . 2,935,755 3,227,634 (291,879)
- ----------------------------------------------------- ------------ ------------- -------------
Total Pre-tax Operating Income . . . . . . . . . . . $ 103,938 $ 215,767 $ (111,829)
===================================================== ============ ============= =============

This segment was adversely affected by the nation's economic slowdown as
discretionary consulting projects have been postponed or cancelled.
Additionally, training revenues have declined significantly due to reluctance on
the part of students to travel in the aftermath of September 11. This was
partially offset by reduction in operating expenses, principally sales and
marketing.

OTHER BUSINESS OPERATIONS
Other operations experienced a pre-tax operating loss of $177,000 for the first
half of 2002 compared to $20,000 for the first six months of last year. The
results for 2002 include a full six months of operations for the five water
businesses that were purchased between April and July of 2001.

- -------------------------------------------------------------------------------------------------
FOR THE SIX MONTHS ENDED JUNE 30, 2002 2001 CHANGE
- -------------------------------------------------------------------------------------------------

Revenue. . . . . . . . . . . . . . . . . . . . . . . $ 5,792,385 $ 4,055,327 $ 1,737,058
Cost of sales. . . . . . . . . . . . . . . . . . . . 2,388,101 1,822,421 565,680
- ----------------------------------------------------- ------------ ------------- -------------
Gross margin . . . . . . . . . . . . . . . . . . . . 3,404,284 2,232,906 1,171,378

Operations & maintenance . . . . . . . . . . . . . . 2,826,334 1,651,897 1,174,437
Depreciation & amortization. . . . . . . . . . . . . 520,148 420,151 99,997
Other taxes. . . . . . . . . . . . . . . . . . . . . 235,194 181,203 53,991
- ----------------------------------------------------- ------------ ------------- -------------
Pre-tax operating expenses . . . . . . . . . . . . . 3,581,676 2,253,251 1,328,425
- ----------------------------------------------------- ------------ ------------- -------------
Total Pre-tax Operating Loss . . . . . . . . . . . . $ (177,392) $ (20,345) $ (157,047)
===================================================== ============ ============= =============

The increases in all categories reflect the acquisition of the new water
businesses. Pre-tax operating income dropped $157,000 due to increased expenses
associated with building a corporate infrastructure and developing and
implementing uniform operating controls and procedures for the group. There have
also been some relocations and additions of operating locations for the
businesses.

OPERATING INCOME TAXES
Operating income taxes were lower due to the decrease in operating income for
the six months ended June 30, 2002. Additionally, during 2002, the Company
benefited from a change in the tax law that allows tax deductions for dividends
paid on Company stock held in Employee Stock Ownership Plans ("ESOP").

INTEREST EXPENSE
Interest expense for the first six months of 2002 decreased approximately
$178,000, or 7 percent, over the same period in 2001. The decrease was due
primarily to a reduction in the average interest rate for short-term borrowing
from 5.67 percent on an average balance of $21.2 million for the fist half of
2001 to 2.37 percent on an average balance of $32.9 million for the same period
in 2002. A reduction in the average long-term debt balance of $2.6 million due
to scheduled repayments also contributed to this reduction.

ENVIRONMENTAL MATTERS
The Company continues to work with federal and state environmental agencies to
assess the environmental impact and explore options for corrective action at
three former gas manufacturing plant sites. The Company believes that future
costs associated with these sites will be recoverable in rates or through
sharing arrangements with, or contributions by, other responsible parties. The
Company is in discussions with the Maryland Department of the Environment
regarding a fourth site located in Cambridge, Maryland. The outcome of this
matter cannot be determined at this time. See Note 3 to the Consolidated
Financial Statements for further information.

OTHER MATTERS

REGULATORY MATTERS
The Delaware, Maryland and Florida Public Service Commissions regulate the
Company's natural gas distribution operations, while the natural gas
transmission operation is regulated by the Federal Energy Regulatory Commission
("FERC").

On August 2, 2001, the Delaware Division filed a general rate increase
application. Interim rates, subject to refund, went into effect on October 1,
2001. A settlement agreement was approved in April 2002 by the Delaware Public
Service Commission that should result in an increase in rates of approximately
$380,000 per year.

On October 31, 2001, Eastern Shore, the Company's natural gas transmission
subsidiary, filed a rate change with the United States Federal Energy Regulatory
Commission pursuant to the requirements of a Stipulation and Agreement approved
by the FERC in October 1997. Eastern Shore's filing proposed a change in base
rates for firm transportation services.

Following settlement conferences held in May 2002, the parties reached a
settlement in principle. The agreement provides that Eastern Shore's rates will
be based on a cost of service of $12.9 million per year, including a rate of
return higher than had been approved in 1997. If the agreement receives final
FERC approval, cost savings estimated at $456,000 annually will be passed on to
firm transportation customers. The settlement in principle was filed on August
2, 2002; there is a thirty-day comment period. It is anticipated that the
settlement agreement will be finalized in the third quarter 2002.

The Florida division filed tariff revisions on March 29, 2002 to complete the
unbundling process by requiring all customers, including residential, to migrate
to transportation service and authorize the Florida division to exit the
merchant function. Transportation services are currently available to all
non-residential customers. The Florida Public Service Commission has requested
that the Company hold customer meetings to allow for an opportunity for comments
by our customers. These meetings were held on June 25 and 26, 2002 at four
locations in our service territory. The Public Service Commission is expected to
address this matter at its August 20, 2002 Agenda Conference. At this time, the
outcome of the petition cannot be determined.

COMPETITION
The Company's natural gas operations compete with other forms of energy
including electricity, oil and propane. The principal competitive factors are
price, and to a lesser extent, accessibility. The Company's natural gas
distribution operations have several large volume industrial customers that have
the capacity to use fuel oil as an alternative to natural gas. When oil prices
decline, these interruptible customers convert to oil to satisfy their fuel
requirements. Lower levels in interruptible sales occur when oil prices are
lower relative to the price of natural gas. Oil prices, as well as the prices of
electricity and other fuels are subject to fluctuation for a variety of reasons;
therefore, future competitive conditions are not predictable. To address this
uncertainty, the Company uses flexible pricing arrangements on both the supply
and sales side of its business to maximize sales volumes. As a result of the
transmission business' conversion to open access, this business has shifted from
providing competitive sales service to providing transportation and contract
storage services.

The Company's natural gas distribution operations located in Maryland, Delaware
and Florida began offering transportation services to certain industrial
customers during 1998, 1997 and 1994, respectively. In 2001, the Florida
operation extended transportation service to commercial customers. With
transportation services now available on the Company's distribution systems, the
Company is competing with third party suppliers to sell gas to industrial
customers. The Company's competitors include the interstate transmission company
if the distribution customer is located close enough to the transmission
company's pipeline to make a connection economically feasible. The customers at
risk are usually large volume commercial and industrial customers with the
financial resources and capability to bypass the distribution operations in this
manner. In certain situations, the distribution operations may adjust services
and rates for these customers to retain their business. The Company expects to
continue to expand the availability of transportation services to additional
classes of distribution customers in the future. The Company established a
natural gas brokering and supply operation in Florida in 1994 to compete for
customers eligible for transportation services.

The Company's propane distribution operations compete with several other propane
distributors in their service territories, primarily on the basis of service and
price. Competitors include several large national propane distribution
companies, as well as an increasing number of local suppliers. Some of these
competitors have pricing strategies designed to acquire market share.

The Company's advanced information services segment faces competition from a
number of competitors, many of which have greater resources available to them
than those of the Company. This segment competes on the basis of technological
expertise, reputation and price.

The water businesses face competition from a variety of national and local
suppliers of water conditioning and treatment services and bottled water.

RECENT PRONOUNCEMENTS
See Note 4 to the Consolidated Financial Statements for a discussion of recent
accounting pronouncements, including the consequences on revenue and cost of
sales of EITF 02-03.

INFLATION
Inflation affects the cost of labor, products and services required for
operation, maintenance and capital improvements. While the impact of inflation
has remained low in recent years, natural gas and propane prices are subject to
rapid fluctuations. Fluctuations in natural gas prices are passed on to
customers through the gas cost recovery mechanism in the Company's tariffs. To
help cope with the effects of inflation on its capital investments and returns,
the Company seeks rate relief from regulatory commissions for regulated
operations while monitoring the returns of its unregulated business operations.
To compensate for fluctuations in propane gas prices, the Company adjusts its
propane selling prices to the extent allowed by the market.

CAUTIONARY STATEMENT
Chesapeake has made statements in this report that are considered to be
forward-looking statements. These statements are not matters of historical fact.
Sometimes they contain words such as "believes," "expects," "intends," "plans,"
"will," or "may," and other similar words of a predictive nature. These
statements relate to matters such as customer growth, changes in revenues or
margins, capital expenditures, environmental remediation costs, regulatory
approvals, market risks associated with the Company's propane marketing
operation, competition and other matters. It is important to understand that
these forward-looking statements are not guarantees, but are subject to certain
risks and uncertainties and other important factors that could cause actual
results to differ materially from those in the forward-looking statements. These
factors include, among other things:

- the temperature sensitivity of the natural gas and propane businesses;
- the wholesale prices of natural gas and propane and market movements in
these prices;
- the effects of competition on the Company's unregulated and regulated
businesses;
- the effect of changes in federal, state or local regulatory requirements,
including deregulation;
- the effect of accounting changes;
- the ability of the Company's new and planned facilities and acquisitions
to generate expected revenues; and
- the Company's ability to obtain the rate relief and cost recovery
requested from utility regulators and the timing of the requested
regulatory actions.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Market risk represents the potential loss arising from adverse changes in market
rates and prices. The Company's long-term debt consists primarily of senior
notes, first mortgage bonds and convertible debentures with fixed interest
rates, none of which was entered into for trading purposes. The carrying value
of this long-term debt at June 30, 2002 was $49.7 million, with a fair value of
$56.7 million, based mainly on current market prices or discounted cash flows
using current rates for similar issues with similar terms and remaining
maturities. The Company is exposed to changes in interest rates due to the use
of fixed rate long-term debt to finance the business. Management continually
monitors fluctuations in interest rates and debt markets to assess the benefits
of changing the mix of long and short-term debt or refinancing existing debt.

The Company's propane distribution business is exposed to market risk as a
result of propane storage activities and entering into fixed price contracts for
supply. The Company can store up to approximately 4 million gallons of propane
during the winter season to meet its customers' peak requirements and to serve
metered customers. Decreases in the wholesale price of propane may cause the
value of stored propane to decline.

The Company's propane wholesale marketing operation is a party to natural gas
liquids ("NGL") forward contracts, primarily propane contracts, with various
third parties. These contracts require that the propane wholesale marketing
operation purchase or sell NGL at a fixed price at fixed future dates. At
expiration, the contracts are settled by the delivery of NGL to the Company or
the counter party or booking out the transaction. (Booking out is a procedure
for financially settling a contract for the physical delivery of energy.) The
propane wholesale marketing operation also enters into futures contracts that
are traded on the New York Mercantile Exchange. In certain cases, the futures
contracts are settled by the payment of a net amount equal to the difference
between the current market price of the futures contract and the original
contract price.

The forward and futures contracts are entered into for trading and wholesale
marketing purposes. The propane marketing business is subject to commodity price
risk on its open positions to the extent that market prices for NGL deviate from
fixed contract settlement prices. Market risk associated with the trading of
futures and forward contracts are monitored daily for compliance with the
Company's Risk Management Policy, which includes volumetric limits for open
positions. To manage exposures to changing market prices, open positions are
marked up or down to market prices and reviewed by oversight officials on a
daily basis. Additionally, the Risk Management Committee reviews periodic
reports on market and credit risk, approves any exceptions to the Risk
Management Policy (within limits established by the Board of Directors) and
authorizes the use of any new types of contracts. Quantitative information on
forward and futures contracts at June 30, 2002 is presented in the following
table. All of the contracts mature within twelve months.

- --------------------------------------------------------------------
QUANTITY ESTIMATED WEIGHTED AVERAGE
AT JUNE 30, 2002 IN GALLONS MARKET PRICES CONTRACT PRICES
- --------------------------------------------------------------------

FORWARD CONTRACTS
Sale. . . . . . . 14,607,600 $0.3875 - $0.4125 $ 0.3798
Purchase. . . . . 10,710,000 $0.3775 - $0.3975 $ 0.3899

FUTURES CONTRACTS
Sale. . . . . . . 3,360,000 $0.3815 - $0.3910 $ 0.3856
Purchase. . . . . 1,428,000 $0.3825 - $0.3825 $ 0.3825
- --------------------------------------------------------------------

Estimated market prices and weighted average contract
prices are in dollars per gallon.

PART II - OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS
See Note 3 to the Consolidated Financial Statements

ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
None

ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
(a) The matters described in Item 4(c) below were submitted
to a vote of stockholders at the Annual Meeting of
Stockholders on May 21, 2002 in connection with which,
proxies were solicited in accordance with Regulation 14A
under the Securities Exchange Act of 1934, as amended.
(b) Not applicable.
(c) Proposals as submitted in the proxy statement were voted
on as follows:
i. The election of Thomas J. Bresnan, Water J. Coleman,
Joseph E. Moore and John R. Schimkaitis as Class III
Directors for three-year terms ending in 2005, and
until their successors are elected and qualified; and
ii. The ratification of the selection of
PricerwaterhouseCoopers, LLP as independent auditors
for the fiscal year ending December 31, 2002.

ITEM 5. OTHER INFORMATION
None

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibit 99
Certificate of Chief Executive Officer and Chief Financial
Officer of Chesapeake Utilities Corporation pursuant to
18 U.S.C Section 1350, dated August 14, 2002
(b) Reports on Form 8-K
None

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.

Chesapeake Utilities Corporation

/s/ Michael P. McMasters
- ---------------------------
Michael P. McMasters
Vice President, Treasurer and Chief Financial Officer

Date: August 14, 2002