As filed with the Securities and Exchange Commission on July 24, 2009.

Registration No. 333-[      ]

 

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

 

 

Form S-4

 

REGISTRATION STATEMENT

UNDER

THE SECURITIES ACT OF 1933

 

 

 

 

CHESAPEAKE UTILITIES CORPORATION

(Exact name of registrant as specified in its charter)

 

 

 

 

 

909 Silver Lake Boulevard

Dover, Delaware 19904

(302) 734-6799

(Address, including zip code, and telephone number, including area code, of registrant’s principal executive offices)

 

 

 

 

Beth W. Cooper

Senior Vice President and Chief Financial Officer

Chesapeake Utilities Corporation

909 Silver Lake Boulevard

Dover, Delaware 19904

(302) 734-6799

(Name, address, including zip code, and telephone number, including area code, of agent for service)

 

 

 

 

Copy to:

 

Jeffrey E. Decker, Esq.

Baker & Hostetler LLP

200 South Orange Avenue

Suite 2300

Orlando, Florida 32801

(407) 649-4017

 

Approximate date of commencement of the proposed sale of the securities to the public:  As soon as practicable after this registration statement becomes effective and upon completion of the merger described in the enclosed document.

 

If the securities being registered on this form are being offered in connection with the formation of a holding company and there is compliance with General Instruction G, check the following box.  o

 

If this form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  o

 

If this form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  o

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

(Do not check if a smaller reporting company)

 

CALCULATION OF REGISTRATION FEE

 

 

 

The Registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933, as amended, or until this Registration Statement shall become effective on such date as the Securities and Exchange Commission, acting pursuant to Section 8(a), may determine.

 

 

 

PRELIMINARY COPY — SUBJECT TO COMPLETION, DATED JULY 24, 2009

 

 

Dear Chesapeake Utilities Corporation and Florida Public Utilities Company Shareholders:

 

On behalf of the boards of directors and management teams of Chesapeake and Florida Public Utilities, we are pleased to enclose the joint proxy statement/prospectus relating to the merger of Chesapeake and Florida Public Utilities. Upon completion of the merger, Florida Public Utilities will be a wholly owned subsidiary of Chesapeake. We believe this merger will create a strong combined company that will deliver important benefits to our shareholders, customers and employees and to the communities we serve.

 

If the merger is completed, Florida Public Utilities shareholders will receive 0.405 shares of Chesapeake common stock for each share of Florida Public Utilities common stock held. The exchange ratio is fixed. Based on the number of Florida Public Utilities common shares outstanding on [          ], 2009, we estimate that Chesapeake will issue approximately [          ] shares of its common stock, par value $0.4867 per share, to Florida Public Utilities shareholders in connection with the merger. Chesapeake shareholders will continue to own their existing Chesapeake shares. Based on the number of shares of common stock of Chesapeake and Florida Public Utilities outstanding on [          ], 2009, Chesapeake shareholders immediately prior to the merger will own approximately [     ]% of the combined company and former Florida Public Utilities common shareholders will own approximately [     ]% of the combined company. Chesapeake’s common stock will continue to be listed on the New York Stock Exchange, under the symbol “CPK”.

 

In connection with the merger, Chesapeake and Florida Public Utilities are each holding a special meeting of their shareholders to consider and vote on the merger and certain other matters. The places, dates and times of the special meetings are as follows:

 

 

At Chesapeake’s special meeting, shareholders will be asked to vote on adoption of the merger agreement, approval of the merger and the issuance of Chesapeake common stock in the merger and certain other matters. At Florida Public Utilities’ special meeting, shareholders will be asked to vote on approval of the merger agreement and the merger.

 

Before voting, you should carefully review all the information contained in the attached joint proxy statement/prospectus. For a discussion of risk factors that you should consider in evaluating the merger, see “Risk Factors” beginning on page [  ].

 

Your vote is very important.  Whether or not you expect to attend the applicable special meeting, the details of which are described on the following pages, please complete, sign, date and promptly return the accompanying proxy card in the enclosed envelope or submit your vote by telephone or over the Internet if that option is available to you. We enthusiastically support the merger of our two companies and join with our boards of directors in recommending that you vote FOR the proposals related to the merger.

 

 

 

 

 

This joint proxy statement/prospectus is dated [          ], 2009, and is first being mailed to the shareholders of Chesapeake and Florida Public Utilities on or about [          ], 2009.

 

 

NOTICE OF SPECIAL MEETING OF SHAREHOLDERS OF

CHESAPEAKE UTILITIES CORPORATION

TO BE HELD ON [          ], 2009

 

To the Shareholders of Chesapeake Utilities Corporation:

 

We will hold a special meeting of the shareholders of Chesapeake Utilities Corporation, on [          ], 2009 at [          ], Eastern Daylight Time, in the Board Room of PNC Bank, Delaware, located at 222 Delaware Avenue, Wilmington, Delaware 19801, to consider and vote upon the following matters:

 

 

Only holders of record of Chesapeake common stock at the close of business on [          ], 2009, the record date for the special meeting, are entitled to receive this notice and to vote their shares at the special meeting or any adjournment or postponement of the special meeting.

 

We cannot complete the merger described above unless holders of a majority of all shares of Chesapeake common stock outstanding that are entitled to vote at the Chesapeake special meeting vote to adopt the merger agreement and approve the merger and the issuance of Chesapeake common stock in the merger.

 

For more information about the merger and the other transactions contemplated by the merger agreement, please review the accompanying joint proxy statement/prospectus and the merger agreement attached to it.

 

The Chesapeake board of directors unanimously recommends that Chesapeake shareholders vote “FOR” the adoption of the merger agreement and the approval of the merger and the issuance of Chesapeake common stock in the merger and “FOR” the adjournment of the Chesapeake special meeting if necessary or appropriate to permit further solicitation of proxies.

 

By Order of the Board of Directors,

 

Beth W. Cooper

Corporate Secretary

 

Dover, Delaware

[          ], 2009

 

 

 

 

 

 

NOTICE OF SPECIAL MEETING OF SHAREHOLDERS OF

FLORIDA PUBLIC UTILITIES COMPANY

TO BE HELD ON [          ], 2009

 

To the Shareholders of Florida Public Utilities Company:

 

We will hold a special meeting of the shareholders of Florida Public Utilities Company, on [          ], 2009 at [          ], Eastern Daylight Time, at Florida Public Utilities’ corporate headquarters, located at 401 South Dixie Highway, West Palm Beach, Florida 33401, to consider and vote upon the following matters:

 

 

Only holders of record of Florida Public Utilities common stock at the close of business on [          ], 2009, the record date for the special meeting, are entitled to receive this notice and to vote their shares at the special meeting or any adjournment or postponement of the special meeting.

 

We cannot complete the merger described above unless holders of a majority of all shares of Florida Public Utilities common stock outstanding that are entitled to vote at the Florida Public Utilities special meeting vote to approve the merger agreement and the merger.

 

For more information about the merger and the other transactions contemplated by the merger agreement, please review the accompanying joint proxy statement/prospectus and the merger agreement attached to it.

 

The Florida Public Utilities board of directors unanimously recommends that Florida Public Utilities shareholders vote “FOR” the approval of the merger agreement and the merger and “FOR” the adjournment of the Florida Public Utilities special meeting if necessary or appropriate to permit further solicitation of proxies.

 

By Order of the Board of Directors,

 

George M. Bachman

Secretary

 

West Palm Beach, Florida

[          ], 2009

 

 

 

 

 

 

REFERENCES TO ADDITIONAL INFORMATION

 

This joint proxy statement/prospectus incorporates important business and financial information about Chesapeake and Florida Public Utilities from documents that are not included in or delivered with this joint proxy statement/prospectus. You can review documents incorporated by reference in this joint proxy statement/prospectus, other than certain exhibits to those documents, free of charge through the Securities and Exchange Commission website (www.sec.gov ) or by requesting them in writing or by telephone from the appropriate company at the following addresses and telephone numbers:

 

 

You will not be charged for any of these documents that you request. Chesapeake and Florida Public Utilities shareholders requesting documents should do so by [          ], 2009, in order to receive them before their respective special meetings.

 

See “Where You Can Find More Information” beginning on page [  ].

 

VOTING BY TELEPHONE, INTERNET OR MAIL

 

Chesapeake shareholders of record may submit their proxies by:

 

Telephone.  You can vote by telephone by calling the toll-free number (800) 652-VOTE (8683) in the United States, Canada or Puerto Rico on a touch-tone telephone. You will then be prompted to enter the control number printed on your proxy card and to follow the subsequent instructions. Telephone voting is available 24 hours a day until 11:59 p.m. Eastern Daylight Time on [          ], 2009. If you vote by telephone, you do not need to return your proxy card(s) or voting instruction card(s).

 

Internet.  You can vote over the Internet by accessing the website at www.investorvote.com and following the instructions on the secure website. Internet voting is available 24 hours a day until 11:59 p.m. Eastern Daylight Time on [          ], 2009. If you vote over the Internet, you do not need to return your proxy card(s) or voting instruction card(s).

 

Mail.  You can vote by mail by completing, signing, dating and mailing your proxy card(s) or voting instruction card(s) in the postage-paid envelope included with this joint proxy statement/prospectus.

 

Florida Public Utilities shareholders of record may submit their proxies by:

 

Telephone.  You can vote by telephone by calling the toll-free number [          ] in the United States, Canada or Puerto Rico on a touch-tone telephone. You will then be prompted to enter the control number printed on your proxy card and to follow the subsequent instructions. Telephone voting is available 24 hours a day until 11:59 p.m. Eastern Daylight Time on [          ], 2009. If you vote by telephone, you do not need to return your proxy card(s) or voting instruction card(s).

 

Internet.  You can vote over the Internet by accessing the website at [          ] and following the instructions on the secure website. Internet voting is available 24 hours a day until 11:59 p.m. Eastern Daylight Time on [          ], 2009. If you vote over the Internet, you do not need to return your proxy card(s) or voting instruction card(s).

 

Mail.  You can vote by mail by completing, signing, dating and mailing your proxy card(s) or voting instruction card(s) in the postage-paid envelope included with this joint proxy statement/prospectus.

 

If you hold your Chesapeake or Florida Public Utilities shares through a bank, broker, custodian or other record holder:

 

Please refer to your proxy card or voting instruction form or the information forwarded by your bank, broker, custodian or other record holder to see which voting methods are available to you.

TABLE OF CONTENTS

 

 

The following are answers to certain questions that you may have regarding your special meeting. Chesapeake and Florida Public Utilities urge you to read carefully the remainder of this joint proxy statement/prospectus because the information in this section may not provide all that might be important to you in determining how to vote. Additional important information is also contained in the annexes to, and the documents incorporated by reference in, this joint proxy statement/prospectus.

 

 

 

 

 

SUMMARY

 

The Companies (see page [  ])

 

The Merger (see page [  ])

 

What Holders of Florida Public Utilities Common Stock Will Receive in the Merger (see page [  ])

 

Material Federal Income Tax Consequences of the Merger (see page [  ])

 

Recommendations by Boards of Directors (see page [  ])

 

Reasons for the Merger (see page [  ])

	•	Increased Scale and Scope.  The merger will create a larger, regionally focused energy company serving approximately twice the number of energy customers served presently by Chesapeake. As a result of the merger, the combined company’s energy presence in Florida will be more comparable to the regional energy presence Chesapeake currently maintains on the Delmarva Peninsula. The combined operations will include sizable customer bases for electric, natural gas and propane in several key markets across Florida including the Southeast, Central, Northeast and Panhandle geographic areas. The increased scale and scope is expected to result in greater efficiencies provided by economies of scale.
	•	Stronger Utility Business Platform.  Chesapeake’s strategy has been to enhance its utility foundation and furthermore to grow its earnings from a stable utility foundation by investing in related businesses and services that provide opportunities for higher returns. The merger will enhance Chesapeake’s existing utility foundation as a result of the addition of Florida Public Utilities’ natural gas and electric distribution businesses. Increased diversity within the utility portfolio will result from the merger, as Florida Public Utilities’ electric business will expand both Chesapeake’s energy portfolio and its utility foundation.
	•	Diversified Portfolio of Investments.  Chesapeake and Florida Public Utilities believe that the combined company will benefit from a more diversified portfolio of investments. Additionally, diversity will result in the combined company’s customer base, energy portfolio, utility foundation, as well as its broader geographical presence.
	•	Common Regulatory Framework and Benefits of Florida’s Supportive Regulatory Climate.  Chesapeake and Florida Public Utilities believe that the combined company will benefit from the favorable Florida regulatory framework applicable to the combined company’s franchised service areas, diversified regulatory risk and the combined expertise in operating the regulated businesses under complex regulations. In addition, Chesapeake’s board of directors considered the long history of the Florida Public Service Commission actively promoting natural gas expansion throughout the state.
	•	Positioned to Benefit from Future Florida Growth.  Long-term forecasts project Florida to be among the fastest growing states in the country. Although the current economic climate has caused a temporary decline in growth, state projections for Florida anticipate that population growth will begin to slowly increase again in 2010 and accelerate thereafter. Chesapeake and Florida Public Utilities believe that the combined company will be well-positioned to help meet the energy needs of new residential consumers in the combined service territory, along with the commercial development that typically follows. Chesapeake and Florida Public Utilities believe the merger will create a stronger company with increased capabilities to serve the future growth.
	•	Combined Expertise.  Chesapeake and Florida Public Utilities believe that the combined company will benefit from each company’s experience and expertise in the natural gas and propane distribution businesses. In addition, the combined company’s natural gas and electric operations will benefit from the regulatory and customer service expertise of each company in Florida. Chesapeake and Florida Public Utilities believe that the combined company will be able to effectively utilize the intellectual capital, technical expertise and experience of a deeper, more diverse workforce.
	•	Impact on Customers.  Customers will benefit from the economies of scale, the increased availability of capital to extend service to more customers, other operating efficiencies resulting from the merger, and a continued focus on safety and reliability. Chesapeake and Florida Public Utilities believe that the merger will result in a reduction in aggregated rate increase requests for the combined company’s natural gas and electric operations, which would benefit the combined company’s utility customers in Florida.
	•	Synergistic Opportunities.  Chesapeake and Florida Public Utilities believe that the merger presents opportunities to operate more effectively, creating additional efficiencies at all levels of the combined company and enabling further implementation of best practices.

	•	Financial Considerations and Increased Financial Strength.  Chesapeake and Florida Public Utilities believe that the increased scale and scope resulting from the merger will generate increased financial flexibility and ensure continued access to capital markets.
	•	Impact of the Merger on Communities.  Chesapeake and Florida Public Utilities believe that the communities served by the combined company will benefit from each company’s history of being a good corporate citizen in their respective communities and supporting growth of the communities they serve. The local communities will benefit from the combined company’s ability to provide a stronger utility infrastructure capable of supporting continued growth in the local communities.

 

Shareholder Votes Required (see page [  ])

 

Ownership of Chesapeake After the Merger

 

Conditions to the Completion of the Merger (see page [  ])

 

Termination of the Merger Agreement (see page [  ])

	•	if the merger has not been completed by January 31, 2010 (subject to possible extension to March 31, 2010 under specified circumstances), unless the failure to complete the merger by that date is due to the terminating party’s failure to abide by the merger agreement;
	•	if either party has failed to obtain the requisite vote of its shareholders required for the consummation of the merger at a duly held meeting of its shareholders or at any adjournment or postponement thereof;
	•	if any final and nonappealable government order preventing the merger is in effect;
	•	if the other party materially breaches the merger agreement and such breach is incapable of being or is not timely cured and gives rise to the failure to satisfy a closing condition; or
	•	if the other party suffers a material adverse effect.

 

Termination Fee (see page [  ])

 

No Solicitation (see page [  ])

 

Regulatory Approvals (see page [  ])

 

Shareholder Litigation Related to the Merger (see page [  ])

 

Chesapeake Board of Directors following Completion of the Merger (see page [  ])

 

Transaction, Integration and Merger-Related Costs

 

Listing of Chesapeake Common Stock

 

No Dissenters’ or Appraisal Rights (see page [  ])

 

Comparison of Shareholder Rights (see page [  ])

 

Interests of Florida Public Utilities’ Directors and Executive Officers in the Merger (see page [  ])

 

Accounting Treatment of the Merger (see page [  ])

 

Opinion of Chesapeake’s Financial Advisor (see page [  ])

 

Opinion of Florida Public Utilities’ Financial Advisor (see page [  ])

 

Selected Historical Financial Information

		For Three Months Ended March 31,								For the Year Ended December 31,
		2009				2008				2008				2007				2006(1)				2005				2004
		(In thousands, except per share data)
Income Statement Information(2)
Operating Revenues		$	104,479			$	100,274			$	291,443			$	258,286			$	231,200			$	229,485			$	177,955
Operating Income			15,966				14,041				28,479				28,114				23,332				21,921				20,177
Net Income from Continuing Operations			8,593				7,574				13,607				13,218				10,748				10,699				9,686
Per Share Information(2)
Basic Earnings per Common Share from Continuing Operations		$	1.26			$	1.11			$	2.00			$	1.96			$	1.78			$	1.83			$	1.68
Diluted Earnings per Common Share from Continuing Operations			1.24				1.10				1.98				1.94				1.76				1.81				1.64
Dividends Declared per Common Share			0.305				0.295				1.21				1.18				1.16				1.14				1.12

		As of March 31,								As of December 31,
		2009				2008				2008				2007				2006(1)				2005				2004
		(In thousands)
Balance Sheet Information
Net Property, Plant and Equipment		$	281,423			$	262,765			$	280,671			$	260,423			$	240,825			$	201,504			$	177,053
Total Assets			360,170				367,985				385,795				381,557				324,585				295,980				241,938
Long-Term Debt(3)			93,014				69,879				93,079				70,912				78,706				63,920				69,099
Common Stockholders’ Equity			130,172				125,267				123,073				119,576				111,152				84,757				77,962
Total Capitalization and Short-Term Financing			232,986				241,333				249,152				236,152				217,412				184,159				152,063

(1)		Statement of Financial Accounting Standard (SFAS) No. 123R, Share-Based Payment, and SFAS No. 158, Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans — An Amendment of FASB Statements Nos. 87, 88, 106 and 132(R), were adopted in the year ended December 31, 2006; therefore, they were not applicable for the years prior to 2006.
(2)		These amounts exclude the results of distributed energy and water services due to their reclassification to discontinued operations. Chesapeake closed its distributed energy operations in 2007. The assets of the water businesses were sold in 2004 and 2003.
(3)		These amounts include the portion due within one year.

		For the Three Months Ended March 31,								For the Year Ended December 31,
		2009				2008				2008				2007				2006(1)				2005				2004(2)
		(In thousands, except per share data)
Income Statement Information(3)
Operating Revenues		$	45,781			$	45,030			$	168,548			$	136,542			$	134,781			$	130,285			$	110,131
Operating Income			2,005				4,011				9,109				8,821				10,177				10,637				8,986
Net Income			744				1,950				3,486				3,301				4,169				4,248				3,594
Per Share Information(3)
Basic Earnings per Common Share		$	0.12			$	0.32			$	0.57			$	0.54			$	0.69			$	0.71			$	0.60
Diluted Earnings per Common Share			0.12				0.32				0.57				0.54				0.69				0.71				0.60
Dividends Declared per Common Share			0.1175				0.1125				0.47				0.45				0.43				0.41				0.40

		As of March 31,								As of December 31,
		2009				2008				2008				2007				2006(1)				2005				2004(2)
		(In thousands)
Balance Sheet Information
Net Property, Plant and Equipment		$	142,374			$	139,741			$	142,325			$	138,372			$	129,211			$	123,061			$	117,191
Total Assets			200,396				196,028				208,931				192,344				181,234				182,666				170,503
Long-Term Debt(4)			49,349				50,792				49,329				50,772				50,702				50,620				50,538
Common Stockholders’ Equity			49,836				50,435				48,512				48,946				47,572				45,503				43,213
Total Capitalization and Short-Term Financing			102,832				111,507				111,188				111,440				102,340				106,281				100,176

(1)		SFAS No. 123R, Share-Based Payment, and SFAS No. 158, Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans — An Amendment of FASB Statements Nos. 87, 88, 106 and 132(R), were adopted in the year ended December 31, 2006; therefore, they were not applicable for the years prior to 2006.
(2)		On July 25, 2005, a three-for-two stock split in the form of a stock dividend was issued to the shareholders of record on July 15, 2005. All common share information has been restated to reflect the stock split for all periods presented.
(3)		Florida Public Utilities did not report any discontinued operations in the periods presented.
(4)		These amounts include the portion due within one year.

 

		For the Three Months				For the Year
		Ended				Ended
		March 31, 2009				December 31, 2008
		(In thousands, except per share data)
Pro Forma Income Statement Information
Operating Revenues		$	147,672			$	451,292
Operating Income			18,344				38,370
Net Income			9,556				17,528
Pro Forma Per Share Information
Basic Earnings per Common Share		$	1.03			$	1.89
Diluted Earnings per Common Share			1.01				1.87
Dividends Declared per Common Share(1)			0.305				1.21

		As of March 31, 2009
		(In thousands)
Pro Forma Balance Sheet Information
Net Property, Plant and Equipment		$	429,926
Total Assets			598,036
Long-Term Debt(2)			149,714
Common Stockholders’ Equity			206,517
Total Capitalization and Short-Term Financing			369,078

(1)		After the merger, it is currently expected that Chesapeake will continue the dividend policy of Chesapeake in effect at the time of the merger.
(2)		The amount includes the portion due within one year.

 

Unaudited Comparative Per Share Information

		For the Three Months Ended				For the Year Ended
		March 31, 2009				December 31, 2008
Earnings per Common Share — Basic		$	1.26			$	2.00
Earnings per Common Share — Diluted			1.24				1.98
Dividends Declared per Common Share			0.305				1.21

		As of March 31, 2009				As of December 31, 2008
Book Value per Common Share		$	19.03			$	18.03

		For the Three Months Ended				For the Year Ended
		March 31, 2009				December 31, 2008
Earnings per Common Share — Basic		$	0.12			$	0.57
Earnings per Common Share — Diluted			0.12				0.57
Dividends Declared per Common Share			0.1175				0.47

		As of March 31, 2009				As of December 31, 2008
Book Value per Common Share		$	8.14			$	7.95

		For the Three Months Ended				For the Year Ended
		March 31, 2009				December 31, 2008
Earnings per Common Share — Basic		$	1.03			$	1.89
Earnings per Common Share — Diluted			1.01				1.87
Dividends Declared per Common Share(1)			0.305				1.21

		As of March 31, 2009
Book Value per Common Share		$	22.16

(1)		After the merger, it is currently expected that Chesapeake will continue the dividend policy of Chesapeake in effect at the time of the merger.

		For the Three Months Ended				For the Year Ended
		March 31, 2009				December 31, 2008
Earnings per Common Share — Basic		$	0.42			$	0.77
Earnings per Common Share — Diluted			0.41				0.76
Dividends Declared per Common Share(1)			0.124				0.49

		As of March 31, 2009
Book Value per Common Share		$	8.97

(1)		After the merger, it is currently expected that Chesapeake will continue the dividend policy of Chesapeake in effect at the time of the merger.

 

Comparative Per Share Market Price and Dividend Information

		Chesapeake												Florida Public Utilities
		Common Stock												Common Stock
		High				Low				Dividends				High				Low				Dividends
2007
First Quarter		$	31.10			$	28.85			$	0.290			$	13.50			$	11.90			$	0.1075
Second Quarter			35.58				29.92				0.295				12.91				11.01				0.1125
Third Quarter			37.25				28.00				0.295				12.49				11.15				0.1125
Fourth Quarter			36.38				29.59				0.295				12.83				11.24				0.1125
2008
First Quarter		$	33.60			$	27.21			$	0.295			$	12.35			$	10.75			$	0.1125
Second Quarter			31.88				25.02				0.305				12.25				10.34				0.1175
Third Quarter			34.84				24.65				0.305				13.12				11.40				0.1175
Fourth Quarter			34.66				21.93				0.305				13.09				8.00				0.1175
2009
First Quarter		$	32.35			$	22.02			$	0.305			$	13.15			$	8.37			$	0.1175

 

Recent Closing Prices

Florida Public

Chesapeake

Florida Public

Utilities Common

Common

Utilities Common

Stock per Share

Date

Stock

Stock

Equivalent

April 17, 2009

$

29.65

$

10.40

$

12.01

[          ], 2009

[     ]

[     ]

[     ]

 

In addition to the other information included and incorporated by reference in this joint proxy statement/prospectus, Chesapeake and Florida Public Utilities shareholders should carefully consider the matters described below to determine whether, in the case of the Chesapeake shareholders, to adopt the merger agreement and approve the merger and the issuance of Chesapeake common stock in the merger and, in the case of the Florida Public Utilities shareholders, to approve the merger agreement and the merger.

 

The anticipated benefits of combining the companies may not be realized.

 

Chesapeake and Florida Public Utilities entered into the merger agreement with the expectation that the merger would result in various benefits, including, among other things, synergies, cost savings and operating efficiencies. Achieving these synergies, cost savings and operating efficiencies cannot be assured and failure to achieve these benefits will adversely affect expected future performance of the combined company. In addition, the regulatory agencies that have jurisdiction over certain of the combined company’s businesses and operations may require it to pass on some of the achieved cost savings to ratepayers.

 

The combined company may be unable to successfully integrate operations.

 

The merger involves the integration of two companies that have previously operated independently. The difficulties of combining the companies’ operations include, among other things:

 

 

The process of integrating operations could cause an interruption of, or loss of momentum in, the activities of one or more of the combined company’s businesses and the loss of key personnel. The combined company will be subject to employee workforce factors, including loss of employees, availability of qualified personnel, collective bargaining agreements with unions and work stoppages that could affect the business and financial condition of the combined company. The respective management teams of Chesapeake and Florida Public Utilities will dedicate substantial efforts to integrating the businesses. Such efforts could divert management’s focus and resources from other strategic opportunities during the integration process. The diversion of management’s attention and any delays or difficulties encountered in connection with the merger and the integration of the two companies’ operations could result in the disruption of the combined company’s ongoing businesses or inconsistencies in standards, controls, procedures and policies that adversely affect the combined company’s ability to maintain relationships with customers, suppliers, employees and others with whom it has business dealings.

 

The combined company may incur transaction, integration and merger-related costs that may not be recoverable in rates and that may be in excess of the currently estimated costs, thereby adversely affecting the projected accretive impact to earnings of the merger.

 

Chesapeake and Florida Public Utilities expect to incur costs associated with consummating the merger and integrating the operations of the two companies, as well as transaction fees of approximately $2.9 million in the case of Chesapeake and $2.6 million in the case of Florida Public Utilities (in each case, excluding change in control and stay bonus payments and costs incurred in connection with any shareholder litigation related to the merger). The amount of transaction fees expected to be incurred by each of Chesapeake and Florida Public Utilities are preliminary estimates and are subject to change. Chesapeake currently estimates integration costs associated with the merger to be approximately $1 million over the first two years after completion of the merger. Chesapeake is in the early stages of assessing the magnitude of these costs, and,

therefore, these estimates may change substantially, and additional unanticipated costs may be incurred in the integration of the businesses of Chesapeake and Florida Public Utilities. The costs related to the transaction and integration will not be included as a component of the purchase price but instead will be expensed as incurred as a cost of ongoing operations until such time as Chesapeake deems appropriate to defer these costs under the existing accounting standards based on regulatory developments. Although Chesapeake and Florida Public Utilities expect that the elimination of duplicate costs and realization of other efficiencies related to the integration of the businesses may offset these incremental costs, any actual efficiencies to be achieved are not fully determinable at this time. In addition, the approval of the deferral of these costs as a regulatory asset and any future rate recovery of the merger-related costs, including costs related to the transaction and integration of the companies and any associated premium, cannot be assured.

 

The combined company will record goodwill that may not be approved as a deferred regulatory asset and that could become impaired and adversely affect the combined company’s operating results.

 

The merger will be accounted for using the acquisition method of accounting under accounting principles generally accepted in the United States of America with Chesapeake treated as the acquirer. Under the acquisition method of accounting, the assets acquired and liabilities assumed will be recorded, as of completion of the merger, at their respective fair values and added to those of Chesapeake. The excess of the purchase price over those fair values will be recorded as goodwill. Chesapeake is seeking regulatory approval to treat the goodwill as an acquisition adjustment for which it would receive future rate recovery.

 

To the extent any portion of goodwill that cannot be treated as an acquisition adjustment becomes impaired, the combined company may be required to incur material charges relating to such impairment. Such a potential impairment charge could have a material impact on the combined company’s operating results. Additionally, the treatment of goodwill as an acquisition adjustment and the associated future rate recovery of this acquisition adjustment cannot be determined at this time.

 

The merger may cause dilution to Chesapeake’s earnings per share and, accordingly, adversely impact the market price of Chesapeake common stock.

 

Although the merger is expected to be earnings neutral or slightly accretive in 2010 and meaningfully accretive in 2011, this accretion may not be achieved. The current expectations with respect to the effect of the merger on earnings are based upon preliminary estimates and are subject to change. Chesapeake and Florida Public Utilities could also encounter other transaction and integration-related costs or other factors such as the failure to realize any benefit from synergies anticipated in the merger. All of these factors could adversely impact the market price of Chesapeake common stock.

 

A potential downgrade in Chesapeake’s credit rating as a result of the merger could adversely affect the combined company’s access to capital markets.

 

Each of Chesapeake’s and Florida Public Utilities’ ability to obtain adequate and cost-effective capital depends on their financial performance and the liquidity of financial markets. A downgrade following the merger in Chesapeake’s current credit ratings could adversely affect the combined company’s access to capital markets, as well as its cost of capital.

 

Debt covenant obligations, if triggered because of the merger, may affect the combined company’s financial condition.

 

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

Failure to complete the merger could adversely impact the stock prices and the future business and financial results of Chesapeake and Florida Public Utilities because of, among other things, the market disruption that would occur as a result of uncertainties relating to a failure to complete the merger.

 

There is no assurance that Chesapeake and Florida Public Utilities will obtain the necessary shareholder approvals to complete the merger or satisfy the other conditions to the completion of the merger. If the merger is not completed for any reason, Chesapeake and Florida Public Utilities will be subject to several risks, including the following:

 

 

The value of Chesapeake shares to be received in the merger will fluctuate; common shareholders of Florida Public Utilities may receive more or less value depending on fluctuations in the price of Chesapeake common stock.

 

The number of shares of Chesapeake common stock issued in the merger for each share of Florida Public Utilities common stock is fixed. The market prices of Chesapeake common stock and Florida Public Utilities common stock may vary from their market prices at the date of this joint proxy statement/prospectus and at the date of the special meetings. Because the exchange ratio will not be adjusted to reflect any changes in the market value of Chesapeake common stock, the market value of Chesapeake common stock issued in the merger may be higher or lower than the value of such shares on earlier dates. During the 12-month period ending on [          ], 2009, the most recent practical date prior to the mailing of this joint proxy statement/prospectus, Chesapeake common stock traded in a range from a low of $[     ] to a high of $[     ] and ended that period at $[     ]. During that time, Florida Public Utilities common stock traded in a range from a low of $[     ] to a high of $[     ] and ended that period at $[     ]. See “Summary — Comparative Per Share Market Price and Dividend Information” on page [  ] for more detailed share price information.

 

Certain directors and executive officers of Florida Public Utilities have interests different from Florida Public Utilities shareholders generally that you should consider in deciding your vote regarding the merger.

 

Certain directors and executive officers of Florida Public Utilities may have interests that differ from, or are in addition to, Florida Public Utilities shareholders interests. Following the completion of the merger, John T. English, Chairman, President and Chief Executive Officer of Florida Public Utilities, will be a consultant to Chesapeake, as he entered into a consulting agreement with Chesapeake concurrently with the execution of the merger agreement that becomes effective upon consummation of, and contains certain payment provisions that will be triggered by, the merger in accordance with its terms that are described under “The Merger — Interests of Florida Public Utilities’ Directors and Executive Officers in the Merger.” In addition, Charles L. Stein, Chief Operating Officer and Senior Vice President of Florida Public Utilities, and George M. Bachman, Chief Financial Officer, Secretary and Treasurer of Florida Public Utilities, have entered into amended and restated employment agreements with Chesapeake and Florida Public Utilities that also become effective upon consummation of, and contain certain payment provisions that will be triggered by, the merger in accordance with their terms that are also described under “The Merger — Interests of Florida Public Utilities’ Directors and Executive Officers in the Merger.” Two directors from Florida Public Utilities’ board of directors will be

appointed to Chesapeake’s board of directors after the merger. Florida Public Utilities directors and officers will be entitled to continuation of indemnification and insurance arrangements under the merger agreement as described under “The Merger — Interests of Florida Public Utilities’ Directors and Executive Officers in the Merger.” You should be aware of the interests described under “The Merger — Interests of Florida Public Utilities’ Directors and Executive Officers in the Merger” when you consider your board of directors’ recommendation that you vote in favor of the merger.

 

A pending shareholder suit could delay or prevent the closing of the merger or otherwise adversely impact the business and operations of Florida Public Utilities and Chesapeake.

 

On May 8, 2009, a putative class action lawsuit purportedly on behalf of the shareholders of Florida Public Utilities was filed in Palm Beach County, Florida against Florida Public Utilities, each of its directors and Chesapeake. The complaint alleges, among other things, that approval of the proposed merger by the directors of Florida Public Utilities constituted a breach of their fiduciary duties. The suit seeks to enjoin completion of the merger. See “The Merger — Shareholder Litigation Related to the Merger” on page [  ]. No assurances can be given as to the outcome of this lawsuit, including the costs associated with defending this lawsuit or any other liabilities or costs the parties may incur in connection with the litigation or settlement of this lawsuit. Furthermore, one of the conditions to closing the merger is that there are no injunctions issued by any court preventing the completion of the transactions. No assurance can be given that this lawsuit will not result in such an injunction being issued which could prevent or delay the closing of the transactions contemplated by the merger agreement.

 

Chesapeake and Florida Public Utilities will be subject to business uncertainties and contractual restrictions while the merger is pending which could adversely affect their businesses.

 

Uncertainty about the effect of the merger on employees and customers may have an adverse effect on Chesapeake and Florida Public Utilities and, consequently, on the combined company. These uncertainties may impair Chesapeake’s and Florida Public Utilities’ ability to attract, retain and motivate key personnel until the merger is consummated and for a period of time thereafter. These uncertainties also could cause customers, suppliers and others that deal with Chesapeake and Florida Public Utilities to seek to change existing business relationships. Employee retention may be particularly challenging during the pendency of the merger, as employees may experience uncertainty about their future roles with the combined company. If key employees depart, the combined company’s business could be harmed. In addition, the merger agreement restricts Chesapeake and Florida Public Utilities, without the other party’s consent, from making certain acquisitions and taking other specified actions until the merger occurs or the merger agreement terminates. These restrictions may prevent Chesapeake and Florida Public Utilities from pursuing otherwise attractive business opportunities and making other changes to their businesses prior to completion of the merger or termination of the merger agreement.

 

After consummation of the merger, the combined company will be subject to many financial risks and uncertainties. Some of these risks are discussed below. For a discussion of additional financial risks and uncertainties that you should consider, see the risk factors sections of the respective annual reports on Form 10-K for the year ended December 31, 2008 for Chesapeake and Florida Public Utilities, as updated by their respective quarterly reports on Form 10-Q for the quarter ended March 31, 2009, all of which are incorporated by reference in this joint proxy statement/prospectus.

 

Instability and volatility in the financial markets could have an adverse impact on the combined company’s growth strategy.

 

Chesapeake’s business strategy includes the continued pursuit of growth, both organically and through acquisitions. To the extent that the combined company does not generate sufficient cash from operations, it may incur additional indebtedness to finance its growth. The turmoil experienced in the credit markets during 2008 and 2009 and its potential impact on the liquidity of major financial institutions may have an adverse

effect on the combined company’s ability to fund its business strategy through borrowings, under either existing or newly created arrangements in the public or private markets on terms the combined company believes to be reasonable. Specifically, Chesapeake relies on access to both short-term and longer-term capital markets as a significant source of liquidity for capital requirements not satisfied by the cash flow from its operations. Currently, $45 million of the total $100 million of short-term lines of credit utilized to satisfy Chesapeake’s short-term financing requirements are discretionary, uncommitted lines of credit. Chesapeake utilizes discretionary lines of credit to reduce the cost associated with these short-term financing requirements. If the combined company is not able to access capital at competitive rates, its ability to implement its strategic plan, undertake improvements and make other investments required for its future growth may be limited.

 

Further changes in economic conditions and interest rates may adversely affect the combined company’s results of operations and cash flows.

 

A continued downturn in the economies of the regions in which the combined company operates might adversely affect its ability to increase its customer base and cash flows at historical rates. Further, an increase in interest rates, without the recovery of the higher cost of debt in the sales and/or transportation rates the combined company charges its utility customers, could adversely affect future earnings. An increase in short-term interest rates would adversely affect results of operations, which depend on short-term lines of credit to finance accounts receivable and storage gas inventories, and to temporarily finance capital expenditures.

 

Current market conditions have had an adverse impact on the return on plan assets for Chesapeake’s and Florida Public Utilities’ respective pension plans, which may require significant additional funding and adversely affect the combined company’s cash flows.

 

Each of Chesapeake and Florida Public Utilities has a pension plan that has been closed to new employees. The costs of providing benefits and related funding requirements of these plans are subject to changes in the market value of the assets that fund the plans. As a result of the extreme volatility and disruption in the domestic and international equity and bond markets, during 2008 Chesapeake’s pension plan experienced a decline of $4.3 million in its asset values and Florida Public Utilities’ pension plan experienced a decline of $10.9 million in its asset values. The funded status of the plans and the related costs reflected in the combined company’s financial statements are affected by various factors that are subject to an inherent degree of uncertainty, particularly in the current economic environment. Under the Pension Protection Act of 2006, continued losses of asset values may necessitate accelerated funding of the plans in the future to meet minimum federal government requirements. Continued downward pressure on the asset values of the respective pension plans may require the combined company to fund obligations earlier than originally planned, which would have an adverse impact on its cash flows from operations, decrease borrowing capacity and increase interest expense.

 

The combined company’s operations will be exposed to market risks, beyond its control, which could adversely affect its financial results and capital requirements.

 

Chesapeake’s natural gas supply and supply management services operations and its propane wholesale marketing operations, conducted through wholly owned subsidiaries, are subject to market risks beyond its control, including market liquidity and commodity price volatility. Although Chesapeake maintains a risk management policy, the combined company may not be able to offset completely the price risk associated with volatile commodity prices, which could lead to volatility in its earnings. Physical trading also has price risk on any net open positions at the end of each trading day, as well as volatility resulting from: (i) intra-day fluctuations of natural gas and/or propane prices, and (ii) daily price movements between the time natural gas and/or propane is purchased or sold for future delivery and the time the related purchase or sale is hedged. The determination of Chesapeake’s net open position at the end of any trading day requires it to make assumptions as to future circumstances, including the use of natural gas and/or propane by its customers in relation to its anticipated market positions. Because the price risk associated with any net open position at the end of such day may increase if the assumptions are not realized, Chesapeake reviews these assumptions daily. Net open positions may increase volatility in the combined company’s financial condition or results of

operations if market prices move in a significantly favorable or unfavorable manner, because the timing of the recognition of profits or losses on the hedges for financial accounting purposes usually does not match up with the timing of the economic profits or losses on the item being hedged. This volatility may occur, with a resulting increase or decrease in earnings or losses, even though the expected profit margin is essentially unchanged from the date the transactions were consummated.

 

The combined company’s results of operations, cash flows and financial position could be adversely affected if it is unable to obtain adequate and timely rate relief and pricing changes to offset the effects of inflation.

 

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

 

Chesapeake’s energy marketing subsidiaries have credit risk and credit requirements that may adversely affect the combined company’s results of operations, cash flows and financial condition.

 

Chesapeake’s energy marketing subsidiaries extend credit to counterparties and continually monitor and manage collections aggressively. Each of these subsidiaries is exposed to the risk that it may not be able to collect amounts owed to it. If the counterparty to such a transaction fails to perform, and any underlying collateral is inadequate, the combined company could experience financial losses.

 

These subsidiaries are also dependent upon the availability of credit to buy propane and natural gas for resale or to trade. If financial market conditions decline generally, or the financial condition of these subsidiaries or of the combined company declines, then the cost of credit available to these subsidiaries could increase. If credit is not available, or if credit is more costly, the combined company’s results of operations, cash flows and financial condition may be adversely affected.

 

After consummation of the merger, the combined company will be subject to many operational risks and uncertainties. Some of these risks are discussed below. For a discussion of additional operational risks and uncertainties that you should consider, see the risk factors sections of the respective annual reports on Form 10-K for the year ended December 31, 2008 for Chesapeake and Florida Public Utilities, as updated by their respective quarterly reports on Form 10-Q for the quarter ended March 31, 2009, all of which are incorporated by reference in this joint proxy statement/prospectus.

 

Fluctuations in weather may adversely affect the combined company’s results of operations, cash flows and financial condition.

 

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

Florida Public Utilities’ electric operations, while generally less weather sensitive than natural gas and propane sales, are also affected by variations in general weather conditions and unusually severe weather. Mild winter weather in Florida can be expected to adversely impact results from the combined company’s electric operations.

 

The amount and availability of natural gas and propane supplies are difficult to predict; a substantial reduction in available supplies could reduce the combined company’s earnings in those segments.

 

Natural gas and propane production can be affected by factors beyond the combined company’s control, such as weather and refinery closings. If the combined company is unable to obtain sufficient natural gas and propane supplies to meet demand, results in those segments may be adversely affected.

 

The combined company will rely on a limited number of natural gas, electric and propane suppliers, the loss of which could materially adversely affect its financial condition and results of operations.

 

Chesapeake’s natural gas distribution and marketing operations and propane operations have entered into various agreements with suppliers to purchase natural gas and propane to serve their customers. Florida Public Utilities’ natural gas and electric operations have entered into several long-term supply and transportation contracts to meet the demands of its customers. The loss of any significant suppliers or the combined company’s inability to renew these contracts at favorable terms upon their expiration could significantly affect the combined company’s ability to serve its customers and have a material adverse impact on its financial condition and results of operations.

 

The combined company will rely on having access to interstate natural gas pipelines’ transportation and storage capacity; a substantial disruption or lack of growth in these services may impair the combined company’s ability to meet customers’ existing and future requirements.

 

In order to meet existing and future customer demands for natural gas, the combined company must acquire both sufficient natural gas supplies and interstate pipeline and storage capacity to serve such requirements. The combined company must contract for reliable and adequate delivery capacity for its distribution systems while considering the dynamics of the interstate pipeline and storage capacity market, its own on-system resources, as well as the characteristics of its markets. The combined company’s financial condition and results of operations would be materially and adversely affected if the future availability of upstream interstate pipeline and storage capacity were insufficient to meet future customer demands for natural gas. Currently, all of Florida Public Utilities’ natural gas is transported through one pipeline system. Any interruption to that system could adversely affect the combined company’s ability to meet the demands of its customers and the earnings of the combined company.

 

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

 

Natural Gas.  Higher natural gas prices can significantly increase the cost of gas billed to the combined company’s customers. Such cost increases will generally have no immediate effect on revenues and net income because of regulated gas recovery mechanisms. The combined company’s net income, however, may be reduced by higher expenses that it may incur for uncollectible customer accounts and by lower volumes of natural gas deliveries when customers reduce their consumption. Therefore, increases in the price of natural gas can affect the combined company’s operating cash flows and the competitiveness of natural gas as an energy source.

 

Propane.  Propane costs are subject to volatile changes as a result of product supply or other market conditions, including economic and political factors affecting crude oil and natural gas supply or pricing. Such cost changes can occur rapidly and can affect profitability. There is no assurance that the combined company will be able to pass on propane cost increases fully or immediately, particularly when propane costs increase rapidly. Therefore, average retail sales prices can vary significantly from year-to-year as product costs fluctuate

in response to propane, fuel oil, crude oil and natural gas commodity market conditions. In addition, in periods of sustained higher commodity prices, declines in retail sales volumes due to reduced consumption and increased amounts of uncollectible accounts may adversely affect net income.

 

Electric.  Increases in the cost of coal and other commodity fuels can significantly increase the cost of electricity billed to the combined company’s customers. Such cost increases will generally have no immediate effect on revenues and net income because of the regulated electric recovery mechanisms. The combined company’s net income, however, may be reduced by higher expenses that it may incur for uncollectible customer accounts and by lower volumes of electricity deliveries when customers reduce their consumption. Therefore, increases in the cost of coal and other commodity fuels can affect the combined company’s operating cash flows and the competitiveness of electricity as an energy source.

 

The combined company’s propane inventory will be subject to inventory risk, which may adversely affect its results of operations and financial condition.

 

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

 

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

 

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

 

The combined company’s electric operations will be subject to various operational risks, including accidents, outages, equipment breakdowns or failures, or operations below expected levels of performance or efficiency. Problems such as the breakdown or failure of electric equipment or processes and interruptions in service which would result in performance below affected levels of output or efficiency, particularly if extending for prolonged periods of time, could have a material adverse effect on the combined company’s financial condition and results of operations.

 

The combined company may lose customers to competitors, which could adversely affect the combined company’s results of operation, cash flows and financial condition.

 

Natural Gas.  In the combined company’s natural gas supply and supply management services operations in Delaware, Florida and Maryland, it will compete with third-party suppliers to sell gas to commercial and industrial customers. In the combined company’s natural gas transportation and distribution operations, it will compete with interstate pipelines when its transmission and/or distribution customers are located close enough to a competing pipeline to make direct connections economically feasible. Failure to retain and grow the

combined company’s customer base in its natural gas operations would have an adverse effect on its financial condition and results of operations.

 

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

 

The combined company’s propane wholesale marketing operations will compete against various marketers, many of which have significantly greater resources and are able to obtain price or volumetric advantages.

 

Electric.  While there is active wholesale power sales competition in Florida, the retail electric business has remained substantially free from direct competition. Changes in the competitive environment caused by legislation, regulation, market conditions or initiatives of other electric power providers, particularly with respect to retail competition, could adversely affect the combined company’s results of operations, cash flows and financial condition. To the extent competitive pressures increase and the pricing and sale of electricity assumes more of the characteristics of a commodity business, the economics of the combined company’s electric operating segment could change. In addition, regulatory changes may increase access to electricity transmission grids by utility and non-utility purchasers and sellers of electricity, thus potentially resulting in a significant number of additional competitors.

 

Chesapeake’s use of derivative instruments may adversely affect the combined company’s results of operations.

 

Fluctuating commodity prices may affect the combined company’s earnings and financing costs because Chesapeake’s propane distribution and wholesale marketing segments use derivative instruments, including forwards, swaps and puts, to hedge price risk. In addition, Chesapeake has utilized in the past, and the combined company may decide, after further evaluation, to continue to utilize derivative instruments to hedge price risk for its Delaware and Maryland natural gas distribution divisions, as well as its natural gas supply operations. If the combined company purchases derivative instruments that are not properly matched to its exposure, its results of operations, cash flows and financial conditions may be adversely affected.

 

The combined company’s businesses will be capital intensive and the costs of capital projects may be significant.

 

The combined company’s businesses will be capital intensive and require significant investments in internal infrastructure projects. The combined company’s results of operations and financial condition could be adversely affected if it is unable to manage such capital projects effectively or if it does not receive full recovery of such capital costs in future regulatory proceedings.

 

Operational interruptions to the combined company’s gas transmission and gas and electric distribution activities, caused by accidents, malfunctions, severe weather (such as a major hurricane), a pandemic or acts of terrorism, could adversely impact its results of operations, cash flows and financial condition.

 

Inherent in gas transmission and gas and electric distribution activities are a variety of hazards and operational risks, such as leaks, ruptures, fires, explosions and mechanical problems. If they are severe enough or if they lead to operational interruptions, they could cause substantial financial losses. In addition, these risks could result in the loss of human life, significant damage to property, environmental damage and impairment of the combined company’s operations. The location of pipeline, storage, transmission and distribution facilities near populated areas, including residential areas, commercial business centers, industrial sites and other public gathering places, could increase the level of damages resulting from these risks. The occurrence of any of these events could adversely affect the combined company’s results of operations, cash flows and financial condition.

The combined company will be at risk of its franchise agreements not being renewed.

 

The combined company will hold franchises in each of the incorporated municipalities that require franchise agreements in order to provide natural gas and electricity. Chesapeake and Florida Public Utilities are currently in negotiations for franchises with certain municipalities for new service areas along with renewing some existing franchises. Ongoing financial results would be adversely impacted from the loss of service to certain operating areas within the combined company’s electric or gas territories because of nonrenewal of the respective franchise agreements.

 

After consummation of the merger, the combined company will be subject to many regulatory and legal risks and uncertainties. Some of these risks are discussed below. For a discussion of additional regulatory and legal risks and uncertainties that you should consider, see the risk factors sections of the respective annual reports on Form 10-K for the year ended December 31, 2008 for Chesapeake and Florida Public Utilities, as updated by their respective quarterly reports on Form 10-Q for the quarter ended March 31, 2009, all of which are incorporated by reference in this joint proxy statement/prospectus.

 

The combined company will be affected by developments in the natural gas and electric utility industries, including changes in regulation and increased competition. A failure to adapt to the changing regulatory environment and increased competition after the merger could adversely affect the stability of the combined company’s earnings and could result in the erosion of its market position, revenues and profits.

 

Because Chesapeake and Florida Public Utilities and their respective subsidiaries are regulated in the United States at the federal level and in a number of states and municipalities, the combined company will continue to be impacted by legislative and regulatory developments. The combined company will be subject in the United States to extensive federal regulation as well as to state and local regulation in Florida, Delaware and Maryland. The costs and burdens associated with complying with regulatory jurisdictions may have a material adverse effect on the combined company.

 

Moreover, increased competition resulting from potential legislative changes, regulatory changes or otherwise may create greater risks to the stability of utility earnings generally. If the combined company is not responsive to the competitive natural gas and electric utilities industry marketplace, it could suffer erosion in market position, revenues and profits as competitors gain access to the service territories of the combined company.

 

The Delaware, Maryland and Florida Public Service Commissions and the Federal Energy Regulatory Commission set the rates that the combined company can charge customers for services subject to their regulatory jurisdiction. The combined company’s ability to obtain timely future rate increases and rate supplements to maintain current rates of return depends on regulatory approvals, and there can be no assurance that its regulated operations will be able to obtain such approvals or maintain currently authorized rates of return.

 

The combined company will be dependent upon the construction of new facilities to support future growth in earnings in its natural gas distribution and interstate pipeline operations.

 

To sustain continued earnings growth, the combined company must identify and construct new facilities that generate earnings that meet or exceed financial targets. The combined company’s ability to identify new facilities is dependent upon the growth in its service areas, the local economies, the cost of alternative fuels, and other competitive factors. Once a facility has been approved for construction, there are many regulatory and developmental risks that also must be managed before the project can be constructed, including but not limited to: (i) obtaining the necessary approvals and permits by regulatory agencies on a timely basis and on terms that are acceptable; (ii) managing potential changes in federal, state and local laws and regulations, including environmental requirements, that prevent a project from proceeding or increase the anticipated cost of the project; (iii) acquiring the necessary rights-of-way or land rights on a timely basis on terms that are

acceptable; (iv) securing access to additional natural gas supply; and (v) ensuring there are sufficient customer throughput commitments.

 

The combined company will be subject to operating and litigation risks that may not be fully covered by insurance.

 

The combined company’s operations will be subject to the operating hazards and risks normally incidental to handling, storing, transporting and delivering natural gas and propane and transmitting and distributing electricity to end users. As a result, the combined company will from time to time be a defendant in legal proceedings arising in the ordinary course of business. The combined company will maintain insurance policies with insurers in such amounts and with such coverages and deductibles as are believed to be reasonable and prudent. There can be no assurance, however, that such insurance will be adequate to protect the combined company from all material expenses related to potential future claims for personal injury and property damage or that such levels of insurance will be available in the future at economical prices.

 

After consummation of the merger, the combined company will be subject to many environmental risks and uncertainties. Some of these risks are discussed below. For a discussion of additional environmental risks and uncertainties that you should consider, see the risk factors sections of the respective annual reports on Form 10-K for the year ended December 31, 2008 for Chesapeake and Florida Public Utilities, as updated by their respective quarterly reports on Form 10-Q for the quarter ended March 31, 2009, all of which are incorporated by reference in this joint proxy statement/prospectus.

 

Costs of compliance with environmental laws may be significant.

 

The combined company will be subject to federal, state and local laws and regulations governing environmental quality and pollution control. These evolving laws and regulations may require expenditures over a long period of time to control environmental effects at current and former operating sites, including former manufactured gas plant sites that have been acquired from third parties. Compliance with these legal obligations will require the combined company to commit capital. If the combined company fails to comply with environmental laws and regulations, even if such failure is caused by factors beyond its control, it may be assessed civil or criminal penalties and fines.

 

To date, Chesapeake and Florida Public Utilities have been able to recover, through regulatory rate mechanisms, the costs associated with the remediation of former manufactured gas plant sites. However, there is no guarantee that the combined company will be able to recover future remediation costs in the same manner or at all. A change in the combined company’s approved rate mechanisms for recovery of environmental remediation costs at former manufactured gas plant sites could adversely affect its results of operations, cash flows and financial condition.

 

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

 

Pending environmental cleanup proceedings in West Palm Beach, Florida may have a material adverse effect on the combined company.

 

Florida Public Utilities is currently evaluating remedial options to respond to environmental impacts to soil and groundwater at and in the immediate vicinity of a parcel of property in West Palm Beach, Florida. Florida Public Utilities is working with the Florida Department of Environmental Protection with respect to remedies for this property. The total costs for remedies which have been evaluated range from a low of $2.8 million to a high of $54.6 million. Discussions with the Florida Department of Environmental Protection are ongoing to reach a final remedy for the site. Prior to the conclusion of those negotiations, however, Florida Public Utilities is unable to determine, to a reasonable degree of certainty, the complete extent or cost of

remedial action that may be required. The ultimate remedy could exceed the current expectations and environmental reserves of Florida Public Utilities and have a material adverse effect on the combined company.

 

The combined company may be exposed to certain regulatory and financial risks related to climate change.

 

Climate change is receiving ever increasing attention from scientists and legislators alike. The debate is ongoing as to the extent to which the climate is changing, the potential causes of this change and its potential impacts. Some attribute global warming to increased levels of greenhouse gases, including carbon dioxide, which has led to significant legislative and regulatory efforts to limit greenhouse gas emissions.

 

There are a number of legislative and regulatory proposals that address greenhouse gas emissions, which are in various phases of discussion or implementation. The outcome of federal and state actions to address global climate change could result in a variety of regulatory programs, including potential new regulations, additional charges to fund energy efficiency activities, or other regulatory actions. These actions could:

 

 

Any adoption by federal or state governments mandating a substantial reduction in greenhouse gas emissions could have far-reaching and significant impacts on the energy industry. Chesapeake and Florida Public Utilities cannot predict the potential impact of such laws or regulations on their future consolidated results of operations, cash flows or financial condition.

 

This joint proxy statement/prospectus and the documents that are incorporated by reference into this joint proxy statement/prospectus contain or incorporate by reference statements that do not directly or exclusively relate to historical facts. Such statements are “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. You can typically identify forward-looking statements by the use of forward-looking words, such as “project,” “believe,” “expect,” “anticipate,” “intend,” “plan,” “estimate,” “continue,” “potential,” “forecast” or other similar words, or future or conditional verbs such as “may,” “will,” “should,” “would” or “could.” These statements represent Chesapeake’s and Florida Pubic Utilities’ intentions, plans, expectations, assumptions and beliefs about future financial performance, business strategy, projected plans and objectives of Chesapeake, Florida Public Utilities and the combined company. These statements are subject to many risks and uncertainties. In addition to the risk factors described above under “Risks Factors,” the following important factors, among others, could cause actual future results to differ materially from those expressed in the forward-looking statements:

 

 

 

In light of these risks, uncertainties and assumptions, the events described in the forward-looking statements might not occur or might occur to a different extent or at a different time than Chesapeake and Florida Public Utilities have described. The areas of risk and uncertainty described above should be considered in connection with any written or oral forward-looking statement that may be made after the date of this joint proxy statement/prospectus by Chesapeake or Florida Public Utilities or anyone acting on behalf of either or both of them. Chesapeake and Florida Public Utilities do not undertake any obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.

 

The discussion in this joint proxy statement/prospectus of the merger and the principal terms of the merger agreement are subject to, and are qualified in their entirety by reference to, the merger agreement, a copy of which is attached to this joint proxy statement/prospectus as Annex A and is incorporated by reference into this joint proxy statement/prospectus.

 

The merger is structured as a stock-for-stock transaction. Prior to entering into the merger agreement, Chesapeake formed CPK Pelican, Inc., a new wholly owned subsidiary incorporated in Florida. The merger agreement contemplates that CPK Pelican, Inc. will merge with and into Florida Public Utilities with Florida Public Utilities as the surviving corporation. In the merger, holders of Florida Public Utilities common stock will receive 0.405 shares of Chesapeake common stock for each share of Florida Public Utilities common stock held (the exchange ratio). As a result, the current holders of Florida Public Utilities common stock will become holders of Chesapeake common stock, and Florida Public Utilities will become a wholly owned subsidiary of Chesapeake. Immediately following completion of the merger, based on the number of shares of common stock of each of Chesapeake and Florida Public Utilities outstanding as of          , 2009, current Chesapeake shareholders will own approximately     % of Chesapeake’s common stock, and former Florida Public Utilities common shareholders will own approximately     % of Chesapeake’s common stock.

 

The respective senior management teams and boards of directors of Chesapeake and Florida Public Utilities have historically monitored and assessed developments in the energy industry and were generally aware of the business activities of other energy companies, in particular, those companies within their peer group. In addition, the respective senior management teams and boards of directors of the companies have regularly reviewed strategic opportunities in the energy industry in response to developments within their respective businesses, industry trends, competitive conditions and changes in legislation and regulation.

 

For several years, Chesapeake’s senior management team and board of directors have been engaged in a strategic planning process designed to enhance its utility foundation and furthermore to grow earnings from a stable utility foundation by investing in related businesses and services that provide opportunities for higher returns. As part of this process, Chesapeake has periodically evaluated possible business combinations. In determining the feasibility of a business combination, the Chesapeake board considered whether a transaction with the other companies would be consistent with Chesapeake’s evolving strategic direction and the actual opportunity presented by the various potential transactions. In addition, consideration was given to each company’s size, business portfolio, and preliminary financial information.

 

The respective boards of directors and senior management teams of Chesapeake and Florida Public Utilities have focused on their respective company’s ability to access capital to profitably fund growth, and considered whether an appropriate business combination would provide certain benefits. In particular, Chesapeake’s board and management team considered that the potential transaction would, among other things: expand Chesapeake’s geographic footprint and increase the number of total customers served and the diversity of service offerings; increase its capabilities to serve future expected growth in Florida; expand Chesapeake’s energy portfolio and utility foundation; and increase financial flexibility and ensure continued access to capital markets.

 

On June 12, 2007, at a regularly scheduled meeting of the Florida Public Utilities board of directors, the board discussed strategic opportunities and directed John T. English, Chairman, President and Chief Executive Officer of Florida Public Utilities, to arrange for discussions with Chesapeake to determine opportunities for the two companies to discuss ideas to improve growth and reduce costs.

 

On August 6, 2007, Mr. English and John R. Schimkaitis, President and Chief Executive Officer of Chesapeake, agreed to meet to discuss best practices for the two companies, including opportunities for the two companies to improve growth and reduce costs.

 

On August 20, 2007, at a regularly scheduled meeting of the Florida Public Utilities board of directors, the board discussed strategic opportunities and directed Mr. English to continue his discussions with Chesapeake regarding best practices.

 

On September 27, 2007, Messrs. Schimkaitis and English, joined by Michael P. McMasters, the current Executive Vice President and Chief Operating Officer of Chesapeake, Charles L. Stein, Senior Vice President and Chief Operating Officer of Florida Public Utilities, and George M. Bachman, Treasurer and Chief

Financial Officer of Florida Public Utilities, met and discussed working together to grow their respective businesses. At this meeting, Mr. English provided Messrs. Schimkaitis and McMasters with certain publicly available information relating to Florida Public Utilities.

 

Following this meeting, over the course of the next several days, at Mr. Schimkaitis’ direction, certain senior executives of Chesapeake analyzed strategic opportunities involving Florida Public Utilities. Given Chesapeake’s natural gas and propane distribution operations in Florida, Chesapeake was generally familiar with Florida Public Utilities’ natural gas and propane distribution operations.

 

On October 12, 2007, Mr. English contacted Mr. Schimkaitis by telephone and suggested they meet to discuss a potential business combination. Mr. Schimkaitis agreed to meet to discuss the matter.

 

On November 7, 2007, at a regular meeting of the Chesapeake board of directors, the board reviewed information presented relating to certain companies of strategic interest to Chesapeake, including Florida Public Utilities. After discussion regarding these companies, the board authorized Chesapeake management to continue discussions and other activities relating to a potential transaction with Florida Public Utilities.

 

On November 12, 2007, Chesapeake provided a form of confidentiality agreement to Florida Public Utilities. The parties engaged in discussions and negotiations on the confidentiality agreement over the next week. On November 27, 2007, Chesapeake and Florida Public Utilities entered into a confidentiality agreement covering the discussions between the companies and any confidential material that might be exchanged by the parties. In December 2007, Chesapeake and Florida Public Utilities commenced due diligence pursuant to the confidentiality agreement.

 

On December 4, 2007, at a regularly scheduled meeting of the Florida Public Utilities board of directors, the board received a briefing from Messrs. English and Bachman. After discussion, the board authorized Mr. English to further explore a business combination with Chesapeake. In a subsequent special meeting of the Florida Public Utilities board of directors on December 10, 2007, the board reviewed the strategic and operational goals of Florida Public Utilities and the advantages and disadvantages of a possible merger with Chesapeake.

 

On December 6, 2007, Messrs. Schimkaitis, McMasters, English and Stein met in Orlando, Florida to discuss further the possibility of a transaction involving Chesapeake and Florida Public Utilities, including structuring the transaction as a merger of the two companies.

 

On December 12, 2007, at a regular meeting of the Chesapeake board of directors, Mr. McMasters reviewed with the board certain key financial data and operating information relating to Chesapeake, Florida Public Utilities and the two companies on a combined basis. Mr. McMasters also summarized for the board the discussions held to date. Mr. McMasters presented the board with preliminary financial analysis relating to a business combination with Florida Public Utilities, and highlighted for the board the estimated required synergies to avoid earnings dilution. At this meeting, the Chesapeake board approved the establishment of a new Mergers & Acquisitions Committee, or the Chesapeake M&A Committee, of the Chesapeake board to assist management and the board with the evaluation of a potential business combination with Florida Public Utilities. A formal charter was drafted and approved by the board for the Chesapeake M&A Committee.

 

Throughout December of 2007, Chesapeake and Florida Public Utilities began to exchange confidential financial and other information regarding each company’s businesses.

 

On January 4, 2008, Messrs. English and Bachman met in Orlando, Florida with Messrs. Schimkaitis and McMasters and Beth W. Cooper, the current Senior Vice President and Chief Financial Officer of Chesapeake, to discuss the synergies of a merger between the companies and the outlines of a term sheet, timeline and due diligence requests.

 

After this meeting, over the course of the next couple of weeks, the parties worked together to develop a comprehensive due diligence listing that would serve as the outline for what documents needed to be gathered.

 

During this period of time, Chesapeake also reached out and solicited proposals from four financial advisory firms qualified to conduct the financial analyses necessary to be able to issue a fairness opinion.

On January 15, 2008, during a telephonic meeting of the Chesapeake M&A Committee, Mr. McMasters discussed with the Committee the latest events related to a possible transaction with Florida Public Utilities, including the current range of estimated synergies. He also discussed with the Committee the impact of Florida Public Utilities’ stock price and then-pending rate case on the estimated synergies for the purposes of calculating the estimated accretion and dilution of a business combination with Florida Public Utilities. Mr. McMasters then reviewed with the Committee the key provisions of a preliminary term sheet for a business combination with Florida Public Utilities, and he informed the Committee that Chesapeake executives were continuing their discussions with Florida Public Utilities regarding a stock-for-stock exchange offer and the associated exchange ratio for such a transaction. The Committee identified several outside parties to assist with the possible transaction, discussed the experience and backgrounds of legal counsel that would be assisting Chesapeake and discussed the proposals made by certain financial advisory firms in connection with the transaction. The Committee also discussed several critical success factors relating to the transaction. Mr. McMasters briefly described to the Committee the cost and benefits of engaging a financial advisor for the transaction. After discussion regarding proposals by the various financial advisory firms, the Committee requested that Chesapeake management continue discussions on pricing and services with several of the financial advisory firms.

 

On January 22, 2008, Chesapeake retained Robert W. Baird & Co. Incorporated, or Baird, as its financial advisor for the transaction by entering into an engagement letter with Baird.

 

On January 23, 2008, executives of Chesapeake and representatives of Baird engaged in preliminary discussions relating to the exchange ratio and financial due diligence for the transaction.

 

Also on January 23, 2008, the Florida Public Utilities board of directors held a special meeting to discuss the possible transaction with Chesapeake. Messrs. English and Bachman presented to the board an update on the discussions. The board discussed a variety of matters pertaining to a possible merger with Chesapeake. The board discussed the desirability of retaining a financial advisory firm to provide the company with financial advisory services and directed management to obtain bids. Over the next few days, management of Florida Public Utilities interviewed several firms, and ultimately selected Houlihan Lokey to act as Florida Public Utilities’ financial advisor based on Houlihan Lokey’s experience and reputation as an internationally recognized financial advisor in connection with transactions similar to the one being considered with Chesapeake.

 

In January 2008, Chesapeake provided to Florida Public Utilities a proposed timeline for due diligence, negotiation of a merger agreement and regulatory filings, an outline of proposed next steps to be taken in connection with the proposed transaction and a preliminary due diligence request list. Over the next couple of weeks, the parties continued to exchange financial and other information electronically and engage in phone discussions for diligence purposes. Also during this period, Chesapeake engaged an environmental consultant to assist Chesapeake with the environmental analyses of Florida Public Utilities and its properties.

 

In the second week of February 2008, each of the two companies made available to the other and their respective advisors access to more extensive confidential financial and other information regarding their respective businesses contained in an electronic data room established by Florida Public Utilities’ outside legal counsel for the transaction. Also during February 2008, Chesapeake engaged an electric utility operations consultant to conduct diligence procedures related to Florida Public Utilities’ two electric operations. Chesapeake also expanded the scope of services of its current investor relations consultant to include drafting the investor relations strategy for the transaction as well as reviewing the key documents that would be utilized to communicate with the financial community.

 

On February 12, 2008, Chesapeake presented a draft term sheet to Florida Public Utilities and Florida Public Utilities provided preliminary comments on the draft.

 

On February 13, 2008, certain Chesapeake executives met with representatives of Baird to discuss a possible transaction with Florida Public Utilities. Key items discussed and reviewed during this meeting included: stock price activity, an analysis of relative contribution, discounted cash flow analyses, accretion/dilution sensitivity models, an implied premium analysis, a comparative company analysis, and ratios related

to recent natural gas utility transactions. Meeting participants also discussed recent trends with regard to post-merger board of directors appointments.

 

On February 19, 2008, the Chesapeake M&A Committee met. Prior to this meeting, management circulated information for the Committee members’ review. At the meeting, Mr. McMasters discussed with the Committee certain financial data relating to a potential business combination with Florida Public Utilities. Mr. McMasters described to the Committee certain key objectives, and the associated assumptions and risks, that would need to be accomplished in order for Chesapeake to achieve the pro forma as presented. Mr. McMasters also described to the Committee Chesapeake’s proposed strategy to accomplish such key objectives. Mrs. Cooper informed the Committee of the ongoing discussions between executives of Chesapeake and Florida Public Utilities relating to the exchange ratio for the business combination. Mrs. Cooper provided the Committee with an overview of the recent changes that had been made to the term sheet for the transaction, and she informed the Committee that a draft term sheet had been presented to Florida Public Utilities. After discussion, the Committee ratified the terms set forth in the term sheet in their entirety. The Committee was presented with a preliminary draft of the merger agreement for the business combination. Mrs. Cooper summarized for the Committee the key provisions in the merger agreement, and members of the Committee asked several questions and discussed several provisions in the merger agreement. Mr. Schimkaitis provided the Committee with an overview of the current members of the Florida Public Utilities board of directors and informed the Committee that several members of the Florida Public Utilities board may be interested in serving on Chesapeake’s board if the transaction were consummated. The Committee discussed other organizational considerations, including the current and prospective roles of key officers of Florida Public Utilities. The Committee ratified Chesapeake’s selection of Baird to serve as its financial advisor in the transaction. Mrs. Cooper summarized for the Committee certain key points from the meeting held on February 13, 2008 among certain Chesapeake executives and representatives of Baird. The Committee then discussed the investor relations aspect of the transaction.

 

On February 20, 2008, at a regular meeting of the Chesapeake board of directors, Mrs. Cooper reviewed with the board the key provisions of the term sheet presented to the Chesapeake M&A Committee at its February 19, 2008 meeting, including the fees associated with the proposed transaction, the proposed price per share and certain other key terms and conditions. After consideration, the Chesapeake board ratified the terms and conditions of the term sheet and the distribution of the term sheet to Florida Public Utilities executives.

 

On February 22, 2008, Mrs. Cooper presented a draft term sheet to Mr. Bachman and she informed Mr. Bachman that Chesapeake preferred a merger transaction structure whereby Florida Public Utilities would become a wholly owned subsidiary of Chesapeake upon consummation of the transaction. Mrs. Cooper also informed him that Chesapeake proposed to maintain the Florida Public Utilities executive officers in their existing positions, subject to modifications to their existing employment agreements. Mrs. Cooper directed Mr. Bachman’s attention to the provision in the proposed term sheet relating to board composition of Chesapeake and Florida Public Utilities upon consummation of the transaction. Mrs. Cooper also raised certain open questions relating to Florida Public Utilities employee benefit plans.

 

In late February 2008, Chesapeake and Florida Public Utilities executives discussed the retention of Florida Public Utilities executives by the combined company and the change in control severance payments that might be due to Florida Public Utilities executives in the event of a combination of the two companies.

 

On March 4, 2008, Chesapeake’s outside legal counsel sent Florida Public Utilities’ outside legal counsel a first draft of the merger agreement. The draft did not specify the exchange ratio.

 

To further the ongoing due diligence efforts and discussions by the companies relating to the proposed business combination, during the period from March 5 to March 12, 2008, employees of Chesapeake and representatives of Baird and Chesapeake’s outside legal counsel met on certain days during that period in West Palm Beach, Florida with employees of Florida Public Utilities and representatives of Houlihan Lokey and Florida Public Utilities’ outside legal counsel. At these meetings, members of each company’s management team answered questions regarding their respective company’s businesses. Also during this period, the employees and financial and legal advisors of each company conducted additional diligence review of

extensive confidential financial and other information made available by both companies at the site of these meetings.

 

On March 10, 2008, representatives of the respective financial advisors of Chesapeake and Florida Public Utilities met in West Palm Beach, Florida to discuss outstanding business and legal matters relating to a potential merger transaction, including a potential exchange ratio.

 

On March 14, 2008, executives of Chesapeake and Florida Public Utilities, with the assistance of their respective legal and financial advisors, met to discuss Chesapeake’s businesses.

 

In late March 2008, representatives of the respective outside legal counsel for the two companies began to discuss concerns raised by the draft merger agreement, including, among other matters, the representations and warranties, fiduciary and termination fee provisions, covenants of the parties between signing of the merger agreement and closing of the transaction, closing conditions and the definition of material adverse effect.

 

On March 28, 2008, Florida Public Utilities’ outside legal counsel sent proposed revisions to the draft merger agreement to Chesapeake’s outside legal counsel. These proposed revisions did not specify the exchange ratio.

 

During April 2008, the parties continued to conduct diligence with respect to the other company’s businesses and in that regard discussions were held by executives and representatives of the parties and extensive information continued to be exchanged by the parties.

 

On April 2, 2008, representatives of the respective outside legal counsels for the two companies discussed the March 28, 2008 draft of the merger agreement. This discussion did not include any discussion of the exchange ratio.

 

On April 4, 2008, executives of Florida Public Utilities met with representatives of Florida Public Utilities’ legal and financial advisors to discuss matters relating to the transaction, including the status of discussions with Chesapeake representatives regarding a potential exchange ratio.

 

On April 7, 2008, executives of Chesapeake and representatives of Baird and Chesapeake’s outside legal counsel discussed several outstanding matters relating to the transaction, including the exchange ratio in the transaction, Florida Public Utilities’ pension plan and the new employment agreements under negotiation with Messrs. English, Stein and Bachman.

 

On April 11, 2008, Chesapeake entered into an agreement with a public relations/communications firm to assist Chesapeake in developing and implementing a communications strategy associated with the announcement of a transaction. The consultant assisted Chesapeake in drafting key documents that would be distributed both internally and externally.

 

On April 17, 2008, the Florida Public Utilities board of directors met in a regularly scheduled meeting. Present at that meeting were representatives of Houlihan Lokey and Florida Public Utilities’ outside legal counsel. At that meeting, the directors, with the assistance of the company’s legal and financial advisors, reviewed and discussed the status of discussions with Chesapeake and the potential terms of a merger transaction with Chesapeake. The directors also discussed the possibility of engaging in discussions with another potential merger partner, but ultimately directed management to continue to negotiate a potential merger transaction with Chesapeake.

 

On April 18 and 19, 2008, representatives of the respective financial advisors of Chesapeake and Florida Public Utilities met to discuss outstanding business and legal matters relating to the potential merger transaction, including a potential exchange ratio and the proposed termination fee.

 

On April 18, 2008, Chesapeake’s outside legal counsel sent a revised draft of the merger agreement to Florida Public Utilities’ outside legal counsel. Also on this date, Chesapeake’s outside legal counsel communicated to Florida Public Utilities’ outside legal counsel Chesapeake’s understanding of the status of certain unresolved matters pertaining to the change in control provision of Florida Public Utilities’ pension

plan, Chesapeake’s board composition after consummation of the transaction, the new employment agreements under negotiation with Messrs. English, Stein and Bachman, and certain diligence items.

 

On April 22, 2008, Chesapeake’s outside legal counsel sent Florida Public Utilities’ outside legal counsel the exhibit to the merger agreement containing actions proposed by Chesapeake to be undertaken by Florida Public Utilities to ensure that the merger would not constitute a change in control under Florida Public Utilities’ pension plan.

 

On April 23, 2008, representatives of the respective outside legal counsels for the two companies discussed the April 18, 2008 draft of the merger agreement. This did not include any discussion of a proposed exchange ratio.

 

From April 24 to April 27, 2008, Chesapeake’s environmental consultant conducted Phase I environmental assessments on certain properties of Florida Public Utilities. In addition to these Phase I assessments, the environmental consultant also reviewed other publicly available information on the properties, title searches, and former Phase I environmental assessments.

 

On April 24, 2008, executives of Chesapeake and representatives of its outside legal counsel and executives of Florida Public Utilities and representatives of its outside legal counsel discussed the open items in the draft merger agreement.

 

On April 25, 2008, Chesapeake’s outside legal counsel sent a revised draft of the merger agreement to Florida Public Utilities’ outside legal counsel, reflecting changes resulting from the discussions held between executives and representatives of the parties on April 23 and 24, 2008. The draft did not specify an exchange ratio.

 

On April 28, 2008, representatives of the respective outside legal counsels for the two companies discussed unresolved items in the April 25, 2008 draft of the merger agreement. This did not include any discussion of the exchange ratio. Later that day, Chesapeake’s outside legal counsel sent Florida Public Utilities’ outside legal counsel a revised draft of the merger agreement, reflecting changes resulting from the discussion held earlier that day. Florida Public Utilities’ outside legal counsel, on that same day, sent comments to Chesapeake’s outside legal counsel relating to the revised merger agreement. Neither the draft nor the comments addressed the exchange ratio.

 

On April 30, 2008, the Chesapeake M&A Committee met to discuss the proposed transaction. Prior to this meeting, Chesapeake management had circulated the documents that would be discussion points during the upcoming meeting. At this meeting, representatives of Baird provided the Committee with an overview of the proposed transaction. The Baird representatives informed the Committee that discussions with representatives of Houlihan Lokey were ongoing regarding the exchange ratio in the transaction.

 

On May 1, 2008, at a regular meeting of the Chesapeake board of directors, Mr. Schimkaitis summarized for the board recent events and certain unresolved matters relating to the transaction. Chesapeake’s outside legal counsel discussed with the board the fiduciary responsibilities and duties of the directors under applicable law and the proposed key terms and conditions of the merger agreement, including the representations and warranties, certain covenants and the termination fee. Chesapeake’s outside legal counsel also reiterated for the board the unresolved matters summarized by Mr. Schimkaitis and provided the board with further clarification of the status of each of these matters. Chesapeake’s outside legal counsel also reviewed with the board the role of a fairness opinion in these types of transactions. Baird representatives then provided the board with an overview of the proposed transaction from a financial point of view.

 

Also on May 1, 2008, representatives of the respective outside legal counsels for the two companies discussed unresolved items in the April 28, 2008 draft of the merger agreement. The exchange ratio was not discussed. Later in the day, Chesapeake’s outside legal counsel sent a revised draft of the merger agreement to Florida Public Utilities’ outside legal counsel, reflecting changes resulting from the discussion of the merger agreement held earlier that day.

On May 2, 2008, representatives of the respective financial advisors of Chesapeake and Florida Public Utilities met to discuss outstanding business and legal matters relating to the potential merger, including the possible exchange ratio for the transaction.

 

Also on May 2, 2008, the Florida Public Utilities board of directors met to discuss the potential transaction. Representatives of Houlihan Lokey and the company’s outside legal counsel were present at the meeting. The board, with the assistance of the company’s legal and financial advisors, reviewed and discussed the status of the discussions and the potential terms of a merger transaction with Chesapeake, including the advantages and disadvantages of engaging in a merger transaction with Chesapeake.

 

On May 3, 2008, Messrs. Schimkaitis and English discussed the exchange ratio in the transaction, the new employment agreements that remained under negotiation with Messrs. English, Stein and Bachman and the treatment in the transaction of certain diligence issues. From May 3, 2008 to May 20, 2008, the respective executives and representatives for the two companies engaged in numerous discussions relating to these unresolved matters.

 

On May 20, 2008, representatives of Chesapeake communicated to representatives of Florida Public Utilities Chesapeake’s proposals pertaining to the new employment agreements under negotiation with Messrs. English, Stein and Bachman and certain diligence matters.

 

On May 21, 2008, a meeting of the Florida Public Utilities board of directors was convened to discuss the proposed merger with Chesapeake. Present at the meeting were representatives of the company’s outside legal counsel and Houlihan Lokey. The outstanding due diligence items were discussed as were the matters pertaining to the proposed exchange ratio and other economic terms of the proposed deal. The board expressed to management concern about the inability to reach agreement on key business items and the then current pricing for the transaction and concluded that because of those matters a transaction was not feasible at this time. The board instructed Mr. English to advise Chesapeake of the board’s decision. Accordingly, on that same day, Mr. English informed Mr. Schimkaitis that Florida Public Utilities was terminating discussions with Chesapeake regarding a potential transaction.

 

Even though discussions between the parties terminated, Chesapeake continued to analyze a potential transaction with Florida Public Utilities and, on June 24, 2008, at a regular meeting of the Chesapeake board of directors, Mr. Schimkaitis informed the board of several strategies and the key points relating to such strategies that management was pursuing in regards to renewing discussions related to a potential transaction with Florida Public Utilities. The board instructed management to finalize their position on the likelihood of these strategies being successful and also provided feedback on several other strategies for consideration and research.

 

During the next several months, Chesapeake management periodically discussed and internally analyzed the impact of renewing and pursuing a potential transaction with Florida Public Utilities. Chesapeake management also considered the outstanding matters between Chesapeake and Florida Public Utilities that, in part, resulted in the termination of discussions in May 2008 and discussed and analyzed possible resolutions thereof.

 

On December 4, 2008, Messrs. Schimkaitis and English met to discuss the possibility of re-opening discussions regarding a business combination between their respective companies.

 

On December 11, 2008, at a regular meeting of the Chesapeake board of directors, Mr. McMasters informed the board of the recent discussions between Messrs. Schimkaitis and English, and that Mr. Schimkaitis would be meeting with Mr. English again in the near future to resume discussions and assess the likelihood of pursuing a transaction. Also on that date, the Florida Public Utilities board of directors met to hear a report from Mr. English on his meeting with Mr. Schimkaitis.

 

On December 19, 2008, the companies resumed a business due diligence process.

 

On February 13, 2009, Mr. Schimkaitis sent a revised draft of the merger agreement to Mr. English. The draft did not specify the exchange ratio.

On February 16, 2009, Mr. English conveyed his general comments on the revised draft of the merger agreement to Mr. Schimkaitis, including the treatment in the merger agreement of certain items that, in part, resulted in the termination of discussions in 2008.

 

On February 18, 2009, Mr. Schimkaitis sent a revised draft of the merger agreement to Mr. English reflecting changes intended to address Mr. English’s comments to the February 13, 2009 draft and to reflect the parties’ mutual understanding with respect to those items. The exchange ratio remained unspecified in this draft.

 

On February 23, 2009, there was a special meeting of the Florida Public Utilities board of directors convened to consider the renewed discussions. Messrs. English and Bachman provided a full report of the status of the discussions and the treatment of the unresolved matters from 2008. The board directed management to continue negotiations with Chesapeake.

 

On February 24, 2009, at a regular meeting of the Chesapeake board of directors, Mr. McMasters informed the board of the renewal of dialogue between Chesapeake and Florida Public Utilities in regards to a potential transaction, and that the merger agreement was being reviewed and revised by the parties and their respective outside legal counsels. Mr. McMasters also discussed with the board the current questions outstanding regarding the tax opinion to be given in connection with the transaction.

 

On March 11, 2009, at a regularly scheduled meeting of the Florida Public Utilities board of directors, management provided the board with an update on the status of the renewed discussions with Chesapeake.

 

On March 17, 2009, Chesapeake’s outside legal counsel sent a revised draft of the merger agreement to Florida Public Utilities’ outside legal counsel. The draft did not specify the exchange ratio. Included in this transmittal was Chesapeake’s revised proposal of the actions to be taken by Florida Public Utilities prior to consummation of the merger to ensure that the merger would not constitute a change in control under Florida Public Utilities’ pension plan.

 

On March 19, 2009, at a meeting of the Chesapeake M&A Committee, Mr. Schimkaitis provided the Committee with an update on the possible transaction with Florida Public Utilities, including the status of the representations letter that will serve as the basis for the tax opinion to be given in connection with the transaction. He also discussed with the Committee the anticipated timeframe for execution of the merger agreement and announcement of the transaction, including the required disclosure documents to be filed with the SEC in connection with consummation of the transaction. Mr. Schimkaitis discussed with the Committee the financial aspects of the transaction, and he informed the Committee of the status of the pro forma financial statements and the analysis being conducted with respect to potential synergies. Mr. McMasters then informed the Committee that Florida Public Utilities had requested Chesapeake’s proposed exchange ratio and that Chesapeake would be contacting representatives from Baird to receive an analysis of the exchange ratio for the proposed transaction. After discussion, the Committee authorized Messrs. Schimkaitis and McMasters to proceed with negotiations at a targeted exchange ratio range. Mr. Schimkaitis then provided the Committee with an update on the merger agreement, and he informed the Committee that the termination fee and the exchange ratio provisions would be completed after completion of updated diligence. Mr. Schimkaitis also highlighted for the Committee the key provisions of the new employment agreements being negotiated with Messrs. Bachman and Stein, as well as the consulting agreement, in lieu of an ongoing employment agreement as was contemplated during 2008 discussions, being negotiated with Mr. English. Mrs. Cooper then informed the Committee of the status and process relating to updated diligence.

 

Also on March 19, 2009, representatives of the respective financial advisors of Chesapeake and Florida Public Utilities met to discuss outstanding business and legal matters relating to the potential merger transaction, including a potential exchange ratio.

 

On March 24, 2009, at a meeting of the Florida Public Utilities board of directors, the directors were updated on the progress of the proposed transaction with Chesapeake.

 

On March 25, 2009, Chesapeake’s external auditors, Beard Miller Company LLP traveled to Florida to review the workpapers of Florida Public Utilities’ external auditors, BDO Seidman, LLP.

On or around March 27, 2009, Florida Public Utilities’ outside legal counsel re-opened the electronic data room previously established for due diligence purposes, and the companies began uploading updated financial and other information regarding their respective businesses into the data room.

 

On April 1, 2009, Messrs. English, Bachman, Stein, Schimkaitis and McMasters met in West Palm Beach, Florida to review the status of the diligence process and to discuss changes and developments in the respective companies since May 2008. A similar meeting was held on April 9, 2009 in West Palm Beach to review diligence matters.

 

Also on April 1, 2009, Florida Public Utilities’ outside legal counsel sent proposed revisions to the merger agreement to Chesapeake’s outside legal counsel. An exchange ratio was not proposed in the revisions.

 

On April 7, 2009, Chesapeake’s outside legal counsel sent a revised draft of the merger agreement to Florida Public Utilities’ outside legal counsel. The draft did not specify an exchange ratio. This draft of the merger agreement was also reviewed by the members of the Chesapeake board of directors and representatives of Baird.

 

On April 9, 2009, the respective executives and financial and legal representatives of the companies performed additional due diligence procedures and discussed the anticipated timing of meetings of the boards of directors of the respective companies to consider and approve the merger agreement.

 

On April 13, 2009, the Florida Public Utilities board of directors held a special meeting. Representatives of Houlihan Lokey and the company’s outside legal counsel were present at this meeting. At this meeting, the board, with the assistance of the company’s legal and financial advisors, considered and discussed the status of negotiations, outstanding business and legal matters, including the potential exchange ratio, and other economic terms of the proposed transaction with Chesapeake. The board also considered the written proposal from another third party, Energy West, Incorporated, to merge with Florida Public Utilities in a stock-for-stock transaction.

 

Also on April 13, 2009, at a meeting of the Chesapeake M&A Committee, Mr. Schimkaitis provided the Committee with an update on the transaction with Florida Public Utilities, including the status of the merger agreement. He discussed with the Committee certain matters relating to Florida Public Utilities’ pension plan and the impact of the pension plan matters on the merger agreement. The Committee discussed the termination fee and the takeover proposal provisions of the merger agreement. Mr. Schimkaitis provided the Committee with an update of the status of the new employment agreements being negotiated with Messrs. Bachman and Stein and the consulting agreement being negotiated with Mr. English, and highlighted for the Committee certain tax items relating to the stay bonus and change in control payment provision of such agreements. Mr. Schimkaitis then discussed with the Committee the financial aspects of a business combination with Florida Public Utilities, and he reviewed with the Committee the pro forma financial statements, as well as Florida Public Utilities’ revised five-year forecast. Mr. Schimkaitis informed the Committee of Chesapeake’s range of proposed exchange ratios for the transaction. The Committee discussed the summary it received prior to the meeting regarding various scenarios and the related impact of a change in the range of the proposed exchange ratios. The Committee also discussed the possibility and impact of a counteroffer of an exchange ratio outside of the targeted range. Mr. Schimkaitis reminded the Committee of the anticipated timing of consummating the transaction and the types of documents that would be filed with the SEC as a result of consummation. Mr. Schimkaitis then reviewed with the Committee the current draft Form 8-K and press release relating to the announcement of the transaction. After discussion, the Committee recommended several changes to the draft Form 8-K and press release. Mr. Schimkaitis also provided the Committee with a summary of the communications plan to be implemented upon execution of the merger agreement. Mr. Schimkaitis provided the Committee several other updates, including with respect to updated diligence, the tax opinion to be given in connection with the transaction, and the proposed regulatory plan relating to the

transaction. Lastly, he informed the Committee that the trading window would remain closed until the closing date of the transaction and until further notice was provided.

 

From April 13 to April 15, 2009, representatives of the respective financial advisors of Chesapeake and Florida Public Utilities continued to meet to discuss the outstanding items, including the proposed exchange ratios.

 

On April 15, 2009, Chesapeake’s outside legal counsel sent a revised draft of the merger agreement to Florida Public Utilities’ outside legal counsel. The draft did not specify an exchange ratio.

 

On April 16, 2009, at a meeting of the Chesapeake M&A Committee, Mr. Schimkaitis discussed with the Committee the updated pro forma financial statements provided prior to the meeting. He informed the Committee that after discussions between the respective financial advisors and then among the executives of Chesapeake and Florida Public Utilities, the exchange ratio for the transaction had been established at 0.405 and the termination fee had been established at $3.4 million. The Committee discussed the exchange ratio and the termination fee and the impact of the termination fee on the transaction. The Committee approved the exchange ratio of 0.405 and the termination fee of $3.4 million and recommended their adoption by the Chesapeake board of directors. Mr. Schimkaitis then provided the Committee with an update on the status of the transaction documents, including the merger agreement, the new employment agreements with Messrs. Bachman and Stein and the consulting agreement with Mr. English.

 

Also on April 16, 2009, Chesapeake’s outside legal counsel sent a revised draft of the merger agreement to Florida Public Utilities’ outside legal counsel that specified an exchange ratio of 0.405.

 

On April 17, 2009, the Chesapeake board of directors met to discuss the proposed transaction. Mr. Schimkaitis provided the board with a brief overview of the remaining outstanding business items with respect to the merger agreement, including the exchange ratio. Mr. McMasters then reviewed with the board the pro forma financial statements presented to the board to illustrate the financial impact on Chesapeake after consummation of the transaction. After discussion and questions by the board relating to various line items in the pro forma financial statements, Mr. Schimkaitis informed the board that the exchange ratio for the transaction was currently proposed at 0.405 shares of Chesapeake for each share of Florida Public Utilities. The board discussed the negotiations of the exchange ratio to date. Mr. Schimkaitis directed the board to the financial models provided to the board prior to the meeting. He reviewed with the board the models that compared different exchange ratios, considering expected synergies and other opportunities. After board discussion with respect to such financial models, a representative of Baird reviewed with the board the fairness presentation of Baird presented at the meeting, including several assumptions underlying Baird’s analysis of the proposed transaction. He also discussed with the board several financial aspects of the transaction, including the implied valuation, transaction multipliers, implied tax premiums, historical and projected financials for Florida Public Utilities and Chesapeake, as well as stock price performance, trading volume and share ownership. The Baird representative also discussed and reviewed with the board various valuation methodologies utilized by Baird to assess with respect to fairness, from a financial point of view, the exchange ratio. After discussion by the board with regard to the various analyses performed by Baird, the Baird representative reviewed with the board Baird’s written fairness opinion presented at the meeting, which stated to the effect that, subject to the terms of the letter, the exchange ratio of 0.405 shares of Chesapeake for each share of Florida Public Utilities is fair from a financial point of view to Chesapeake. After discussion, a representative of Chesapeake’s outside legal counsel reviewed with the board the material terms of the proposed merger agreement presented at the meeting. The terms reviewed included termination and non-solicitation provisions, the proposed termination fee of $3.4 million and the terms under which such termination fee would be triggered. After discussion by the board with regard to the proposed termination fee and its triggers, Mr. Schimkaitis provided the board with an update on the status of the new employment agreements with Messrs. Bachman and Stein and the consulting agreement with Mr. English. He highlighted for the board several provisions in the agreements and discussed with the board changes in the tax-related provisions. Following these discussions, and discussions among the members of the board, management and the company’s advisors, including consideration of the factors described below under “— Recommendation of the Chesapeake Board of Directors and Chesapeake’s Reasons for the Merger,” the board unanimously

approved the proposed transaction and authorized management to conclude negotiations and execute the merger agreement on the terms described to the board.

 

The Florida Public Utilities board of directors also met in a special meeting on April 17, 2009. Present at that meeting were members of the company’s management team, Messrs. Bachman and Stein, as well as representatives of Houlihan Lokey and the company’s outside legal counsel. The board considered the proposed merger agreement with Chesapeake, providing for a stock-for-stock tax-free merger at a fixed exchange ratio of 0.405 of a share of Chesapeake common stock for each outstanding share of Florida Public Utilities common stock. At this meeting, the representative from the company’s outside legal counsel reviewed with the board the terms of the proposed merger agreement, the conditions to closing, termination rights and consequences, the proposed executive agreements and the proposed economic terms. Counsel then discussed with the board its fiduciary duties in connection with its consideration of the proposed transaction, the legal terms of the proposed transaction agreements, the shareholder and regulatory approvals that would be required to complete the proposed merger, the likely process and timetable of the merger, including expected timing for obtaining the required shareholder and regulatory approvals and the proposed executive agreements and other compensation and benefits matters in connection with the merger. Counsel then reviewed with the board draft resolutions relating to the proposed merger. Counsel responded to questions of the directors and a discussion was had. A representative of Houlihan Lokey then reviewed and discussed with the board Houlihan Lokey’s financial analysis with respect to the proposed merger with Chesapeake and responded to questions from the directors about the proposed transaction from a financial perspective. The directors, with the assistance of the company’s legal and financial advisors, then discussed the unsolicited written proposal from Energy West. After discussion, the directors unanimously agreed not to pursue the Energy West transaction because such a transaction was not in the best interests of Florida Public Utilities’ shareholders and would not accomplish Florida Public Utilities’ strategic objectives. The board also particularly noted that the proposed consideration from Energy West was not as beneficial to the shareholders of Florida Public Utilities as the proposed consideration from Chesapeake. The board directed Mr. English to notify Energy West of the board’s decision. The board then asked the representative of Houlihan Lokey if Houlihan Lokey was prepared to deliver its opinion regarding the proposed merger with Chesapeake. The representative rendered orally Houlihan Lokey’s opinion to the board with respect to the fairness, from a financial point of view, to the holders of Florida Public Utilities common stock of the exchange ratio provided for in the proposed merger pursuant to the merger agreement. Following these discussions, and discussions among the members of the board, management and the company’s advisors, including consideration of the factors described below under “— Recommendation of the Florida Public Utilities’ Board of Directors and Florida Public Utilities’ Reasons for the Merger,” the board unanimously determined that the transactions contemplated by the Chesapeake merger agreement and the related transactions and agreements are fair to, advisable and in the best interests of Florida Public Utilities and its shareholders, and the directors voted unanimously to approve the merger with Chesapeake, to approve the merger agreement and related transactions and agreements, and to recommend approval of the merger and the merger agreement to the shareholders of Florida Public Utilities.

 

Following the board meetings on April 17, 2009, the respective executives and other representatives of Chesapeake and Florida Public Utilities finalized the merger agreement and Chesapeake and Florida Public Utilities executed the merger agreement on the evening of April 17, 2009. In addition, the new employment agreements with each of Messrs. Stein and Bachman and the consulting agreement with Mr. English were finalized and executed by the parties on April 17, 2009. The execution of the merger agreement was publicly announced on the morning of April 20, 2009 before the opening of trading on the New York Stock Exchange. A joint press release was issued and both companies filed a Form 8-K describing the key terms and conditions of the transaction, including the new employment agreements executed with Messrs. Stein and Bachman, as well as the consulting agreement with Mr. English. The merger agreement was attached as an exhibit to each Form 8-K.

 

The Chesapeake board of directors has unanimously determined that the merger and the merger agreement are advisable and in the best interests of Chesapeake and its shareholders, has unanimously approved the merger agreement, the merger and the other transactions contemplated by the merger agreement, and unanimously recommends that Chesapeake shareholders vote “FOR” the proposal to adopt the merger agreement and approve the merger and the issuance of Chesapeake common stock in the merger.

 

In reaching its determination to recommend the adoption of the merger agreement and the approval of the merger and the issuance of Chesapeake common stock in the merger, the Chesapeake board of directors consulted with management, as well as Baird, Chesapeake’s financial advisor which was engaged to provide a financial opinion to the Chesapeake board with respect to the merger, and Chesapeake’s outside legal counsel, and considered various material factors, which are discussed below. The following discussion of the information and factors considered by the Chesapeake board of directors is not intended to be exhaustive. In view of the wide variety of factors considered in connection with the merger, the Chesapeake board of directors did not consider it practicable to, nor did it attempt to, quantify or otherwise assign relative weights to the specific material factors it considered in reaching its decision. In addition, individual members of the Chesapeake board of directors may have given different weight to different factors. The Chesapeake board of directors considered this information and these factors as a whole, and overall considered the relevant information and factors to be favorable to, and in support of, its determinations and recommendations. Among the material information and factors considered by the Chesapeake board of directors were the following:

 

 

 

The merger will increase Chesapeake’s regulatory exposure in Florida. Chesapeake and Florida Public Utilities enjoy favorable relationships with the Florida Public Service Commission. Chesapeake’s

board of directors views the increased opportunity for the combined company to work with the Florida Public Service Commission as a positive outcome of the merger.

 

In addition, Chesapeake’s board of directors considered that the merger will create greater diversity among Chesapeake’s utility portfolio as a result of the addition of Florida Public Utilities’ natural gas and electric distribution businesses. Florida Public Utilities’ electric operations provide service to approximately 31,000 customers throughout four counties in Florida. Florida Public Utilities’ electric business will expand both Chesapeake’s energy portfolio and its utility foundation.

 

 

 

 

 

The Chesapeake board of directors also considered the potential risks of the merger, including the following:

 

 

 

 

 

The Chesapeake board of directors believes that, overall, the potential benefits of the merger to Chesapeake and Chesapeake’s shareholders outweigh the risks, many of which are identified above.

 

The Chesapeake board of directors realizes that there can be no assurance about future results, including results considered or expected as described in the factors listed above. It should be noted that this explanation of the Chesapeake board of directors’ reasoning and all other information presented in this section are forward-looking in nature and, therefore, should be read in light of the factors discussed under the heading “Forward-Looking Statements” on page [  ].

 

Chesapeake retained Robert W. Baird & Co. Incorporated to act as its exclusive financial advisor in connection with the proposed merger. On April 17, 2009, Baird delivered to the Chesapeake board of directors an oral opinion, which was confirmed by delivery of a written opinion dated the same date, to the effect that, as of that date, and based upon and subject to the factors and assumptions set forth in the opinion, the exchange ratio of 0.405 provided for in the merger was fair, from a financial point of view, to Chesapeake. Baird does not have any obligation to update, revise or reaffirm its opinion.

 

The full text of Baird’s opinion, dated April 17, 2009, which sets forth the assumptions made, procedures followed, matters considered and limitations on the review undertaken by Baird, is attached as Annex B to this joint proxy statement/prospectus and is incorporated by reference into this joint proxy statement/prospectus. The summary of Baird’s opinion set forth below is qualified in its entirety by reference to the full text of the opinion. Chesapeake shareholders are urged to read the opinion carefully in its entirety. Baird’s opinion was delivered to the Chesapeake board of directors for its information and is directed only to the fairness, from a financial point of view, of the exchange ratio to Chesapeake, and does not address the fairness to, or any other consideration of, the holders of any class of securities, creditors or other constituencies of Chesapeake, or any other aspect of the merger, including the merits of the underlying decision by Chesapeake to engage in the merger. Baird’s opinion does not constitute a recommendation to any Chesapeake shareholder as to how the shareholder should vote with respect to the proposed merger or any other matter.

In preparing its opinion to the Chesapeake board of directors, Baird performed various financial and comparative analyses, including those described below. The summary set forth below does not purport to be a complete description of the analyses underlying Baird’s opinion or the presentation made by Baird to the Chesapeake board of directors. The preparation of a fairness opinion is a complex analytical process involving various determinations as to the most appropriate and relevant methods of financial analysis and the application of those methods to the particular circumstances and, therefore, a fairness opinion is not readily susceptible to partial analysis or summary description. In arriving at its opinion, Baird did not attribute any particular weight to any analysis or factor considered by it, but rather made its determination as to fairness on the basis of its experience and professional judgment after considering the results of all of its analyses. Accordingly, Baird believes that its analyses must be considered as a whole and that selecting portions of its analyses and factors without considering all of the analyses and factors or the narrative description of the analyses, would create a misleading or incomplete view of the process underlying its opinion.

 

In performing its analyses, Baird made numerous assumptions with respect to industry performance, general business, economic, market and financial conditions and other matters, many of which are beyond the control of Baird, Chesapeake or Florida Public Utilities. Any estimates contained in the analyses performed by Baird are not necessarily indicative of actual values or future results, which may be significantly more or less favorable than those suggested by such analyses. Additionally, estimates of the value of businesses or securities do not purport to be appraisals or to reflect the prices at which such businesses or securities might actually be sold. Accordingly, these analyses and estimates are inherently subject to substantial uncertainty. In addition, as described above, Baird’s opinion was among several factors taken into consideration by the Chesapeake board of directors in making its determination to approve the merger agreement, the merger and the issuance of shares of Chesapeake common stock in the merger. Consequently, Baird’s analyses should not be viewed as determinative of the decision of the Chesapeake board of directors or Chesapeake management with respect to the fairness of the exchange ratio provided for in the merger agreement.

 

In conducting its investigation and analyses and arriving at its opinion, Baird, among other things, did the following:

 

 

In arriving at its opinion, Baird assumed and relied upon the accuracy and completeness of all of the financial and other information that was publicly available or provided to it by or on behalf of Florida Public

Utilities and Chesapeake. Baird was not engaged to independently verify, and did not assume any responsibility to verify, any such information, and Baird assumed that neither Florida Public Utilities nor Chesapeake was aware of any information prepared by Florida Public Utilities, Chesapeake or their respective advisors that might be material to Baird’s opinion that was not provided to Baird. Baird assumed that: (i) all material assets and liabilities (contingent or otherwise, known or unknown) of Florida Public Utilities and Chesapeake are as set forth in the their respective financial statements; (ii) the financial statements of Florida Public Utilities and Chesapeake provided to Baird present fairly the results of operations, cash flows and financial condition of Florida Public Utilities and Chesapeake, respectively, for the periods indicated and were prepared in conformity with U.S. generally accepted accounting principles consistently applied; (iii) the Forecasts for Florida Public Utilities and Chesapeake were reasonably prepared on bases reflecting the best available estimates and good faith judgments of Florida Public Utilities’ and Chesapeake’s respective senior management teams as to the future performance of Florida Public Utilities and Chesapeake, and such Forecasts and related extrapolations (which were reviewed by Chesapeake’s management) will be achieved; (iv) the merger will be consummated in accordance with the terms and conditions of the merger agreement without any amendment thereto and without waiver by any party of any of the conditions to its obligations thereunder; (v) in all respects material to Baird’s analysis, the representations and warranties contained in the merger agreement are true and correct and that each party will perform all of the covenants and agreements required to be performed by it under the merger agreement; and (vi) all material corporate, governmental, regulatory or other consents and approvals required to consummate the merger have been or will be obtained without the need for divestitures. Baird relied as to all legal matters regarding the merger on the advice of outside legal counsel of Chesapeake. In conducting its review, Baird did not undertake nor obtain an independent evaluation or appraisal of any of the assets or liabilities (contingent or otherwise) of Florida Public Utilities nor make a physical inspection of the properties or facilities of Florida Public Utilities.

 

Baird’s opinion is based upon economic, monetary and market conditions as they existed and could be evaluated on April 17, 2009, and Baird’s opinion does not predict or take into account any changes which occurred or may occur, or information which became available or may become available, after April 17, 2009. Furthermore, Baird expressed no opinion as to the price or trading range at which any of Florida Public Utilities’ or Chesapeake’s securities (including Florida Public Utilities’ common stock and Chesapeake’s common stock) would or will trade following April 17, 2009.

 

Financial Analysis.  The following is a summary of the material analyses performed by Baird in connection with its opinion to the Chesapeake board of directors dated April 17, 2009.

 

Selected Company Analysis.  Baird reviewed certain publicly available financial information and stock market information for certain publicly traded companies that Baird deemed relevant. The group of selected publicly traded companies reviewed is listed below.

 

 

Baird chose these companies based on a review of publicly traded companies that possessed general business, operating and financial characteristics representative of companies in the industry in which Florida Public Utilities operates. Baird noted that none of the companies reviewed is identical to Florida Public Utilities and that, accordingly, the analysis of such companies necessarily involves complex considerations and judgments concerning differences in the business, operating and financial characteristics of each company and other factors that affect the public market values of such companies.

 

For each company, Baird calculated the equity market value (defined as the market price per share of each company’s common stock multiplied by the total number of diluted common shares outstanding of such company, including net shares issuable upon the exercise of stock options and warrants). In addition, Baird

calculated the total market value (defined as the equity market value plus the book value of each company’s total debt, preferred stock and minority interests, less cash, cash equivalents and marketable securities). Baird calculated the multiples of each company’s total market value to its last twelve months (LTM), estimated 2009 and projected 2010 Earnings Before Interest, Tax, Depreciation and Amortization (EBITDA). Baird also calculated multiples of each company’s price per share to its LTM, estimated calendar year 2009 and projected calendar year 2010 diluted earnings per share and to its LTM book value per share. Baird then compared the transaction multiples implied in the merger with the corresponding trading multiples for the selected companies. Stock market and historical financial information for the selected companies was based on information publicly available as of April 15, 2009, and projected financial information was based on research reports publicly available as of such date. In addition, Baird calculated a reference range of implied per share equity values of Florida Public Utilities’ common stock of $7.01 to $15.26 per share based on the trading multiples of the selected public companies and compared such values to the per share equity purchase price of $12.44 per share, which was based on the closing prices per share of Chesapeake common stock and Florida Public Utilities common stock as reported on April 15, 2009. Baird compared the implied per share equity values with the per share equity purchase price implied in the merger in concluding that the consideration was fair to the holders of Chesapeake’s common stock from a financial point of view.

 

Select Acquisition Analysis.  Baird reviewed certain publicly available financial information concerning completed or pending acquisition transactions that Baird deemed relevant. The group of selected acquisition transactions is listed below.

 

 

Baird chose these acquisition transactions based on a review of completed and pending acquisition transactions involving target companies that possessed general business, operating and financial characteristics representative of companies in the industry in which Florida Public Utilities operates. Baird noted that none of the acquisition transactions or subject target companies reviewed is identical to the merger or Florida Public Utilities, respectively, and that, accordingly, the analysis of such acquisition transactions necessarily involves complex considerations and judgments concerning differences in the business, operating and financial characteristics of each subject target company and each acquisition transaction and other factors that affect the values implied in such acquisition transactions.

 

For each transaction, Baird calculated the implied equity purchase price (defined as the purchase price per share of each target company’s common stock multiplied by the total number of diluted common shares outstanding of such company, including gross shares issuable upon the exercise of stock options and warrants, less assumed option and warrant proceeds, or alternatively defined as the value attributable to the equity of a target company). In addition, Baird calculated the implied total purchase price (defined as the equity purchase price plus the book value of each target company’s total debt, preferred stock and minority interests, less cash, cash equivalents and marketable securities). Baird calculated the multiples of each target company’s implied total purchase price to its LTM EBITDA. Baird also calculated multiples of each target company’s implied equity purchase price to its LTM net income and book value. In addition, Baird calculated the acquisition premiums paid in such transactions where the target companies were publicly traded. Baird then compared the transaction multiples and premiums implied in the merger with the corresponding acquisition transaction multiples and

premiums for the selected acquisition transactions. Stock market and historical financial information for the selected transaction was based on publicly available information as of the closing date of each respective transaction. In addition, Baird calculated a reference range of implied per share equity values of Florida Public Utilities’ common stock of $9.64 to $32.92 per share based on the acquisition transaction multiples of the selected acquisition transactions and compared such values to the per share equity purchase price of $12.44 per share. Baird compared the implied per share equity values with the per share equity purchase price implied in the merger in concluding that the consideration was fair to the holders of Chesapeake’s common stock from a financial point of view.

 

Discounted Cash Flow Analysis.  Baird performed a discounted cash flow analysis utilizing Florida Public Utilities’ projected unlevered free cash flows (defined as net income excluding after-tax net interest, plus depreciation and amortization, less capital expenditures and increases in net working capital, plus/minus changes in other operating and investing cash flows) from 2009 to 2013, as provided by Chesapeake’s senior management. In such analysis, Baird calculated the present values of the unlevered free cash flows from 2009 to 2013 by discounting such amounts at rates ranging from 11.0% to 13.0%. Baird calculated the present values of the free cash flows beyond 2013 by assuming terminal values ranging from 8.0x to 10.0x year 2013 EBITDA and discounting the resulting terminal values at rates ranging from 11.0% to 13.0%. Baird compared the resulting implied per share reference equity values of $9.44 to $15.57 per share with the $12.44 per share equity purchase price implied in the merger in concluding that the consideration was fair to the holders of Chesapeake’s common stock from a financial point of view.

 

Miscellaneous.  Pursuant to the terms of Baird’s engagement, Chesapeake has agreed to pay Baird (a) a fee of $450,000 upon the delivery of its opinion to the Chesapeake board of directors and (b) a transaction fee of $300,000, all of which is contingent and payable only if the merger is completed. In the event Chesapeake receives a termination fee (see “The Merger Agreement — Termination of Merger Agreement”), Chesapeake will pay Baird $300,000 of such termination fee. Chesapeake also has agreed to reimburse Baird for reasonable expenses incurred by Baird in performing its services and to indemnify Baird and related persons and entities against certain liabilities arising out of Baird’s engagement.

 

Chesapeake retained Baird based upon Baird’s industry and transactional experience and expertise and Baird’s knowledge of Chesapeake. Baird is an internationally recognized investment banking and advisory firm. Baird, as part of its investment banking business, is regularly engaged in the valuation of businesses and securities in connection with mergers and acquisitions, negotiated underwritings, competitive biddings, secondary distributions of listed and unlisted securities, private placements and valuations for corporate and other purposes.

 

Baird has, in the past, provided financial advisory services to Chesapeake, for which it received its customary compensation. Specifically, Baird served as lead underwriter for Chesapeake’s $20 million follow-on equity offering in November 2006. Baird has also regularly consulted with Chesapeake on an informal basis on general corporate finance and strategic matters, and may be engaged by Chesapeake on future matters. Since 1997 Baird has also prepared equity analyst research reports regarding Chesapeake and Baird is likely to provide such reports in the future. In the ordinary course of business, Baird may actively trade in the securities of Chesapeake and Florida Public Utilities for its own account and for the accounts of its customers and, accordingly, may at any time hold long or short positions or effect transactions in such securities.

 

After careful consideration, the Florida Public Utilities board of directors has unanimously approved the merger agreement and the transactions contemplated thereby and resolved that the merger and the other transactions contemplated by the merger agreement are fair, advisable and in the best interests of the shareholders of Florida Public Utilities. The Florida Public Utilities board of directors recommends that the shareholders of Florida Public Utilities vote “FOR” the proposal to approve the merger agreement and the merger.

 

In evaluating the merger agreement, the board consulted with management, the company’s legal and financial advisors and considered a number of factors, including but not limited to those discussed below.

Strategic Considerations.  The Florida Public Utilities board of directors considered a number of strategic advantages of the merger in comparison to a standalone strategy. These factors included the following:

 

 

Financial Considerations.  The board of directors considered the financial terms of the merger based on, among other things, the following factors:

 

 

Other considerations.  The board of Florida Public Utilities also considered the following:

 

 

 

Consideration of Risks and Other Potentially Adverse Factors.  The Florida Public Utilities board of directors considered a variety of risks and other potentially adverse factors concerning the merger, including, but not limited, to the following:

 

 

The above discussion of the factors considered by the board of Florida Public Utilities is not meant to be an exhaustive list, but does include the material factors considered by the board in determining that the merger is fair to its shareholders and in their best interests. The board did not quantify or assign any relative or specific weight to the various factors that it considered. Rather, the board based its recommendation on the totality of the information presented to and considered by it. In addition, individual members of the Florida Public Utilities board of directors may have given no weight or different weight to different factors.

 

On April 17, 2009, Houlihan Lokey rendered its oral opinion to the board of directors of Florida Public Utilities (which was subsequently confirmed in writing by delivery of Houlihan Lokey’s written opinion dated the same date) to the effect that, as of April 17, 2009, the exchange ratio provided for in the proposed merger pursuant to the merger agreement was fair to holders of Florida Public Utilities common stock from a financial point of view.

 

Houlihan Lokey’s opinion was directed to the board of directors of Florida Public Utilities and only addressed the fairness, from a financial point of view, to the holders of Florida Public Utilities common

stock of the exchange ratio provided for in the proposed merger pursuant to the merger agreement, and did not address any aspect or implication of the proposed merger. The summary of Houlihan Lokey’s opinion in this joint proxy statement/prospectus is qualified in its entirety by reference to the full text of its written opinion, which is included as Annex C to this joint proxy statement/prospectus and sets forth the procedures followed, assumptions made, qualifications and limitations on the review undertaken and other matters considered by Houlihan Lokey in preparing its opinion. However, neither Houlihan Lokey’s written opinion nor the summary of its opinion and the related analyses set forth in this joint proxy statement/prospectus are intended to be, and they do not constitute, advice or a recommendation to any shareholder as to how such shareholder should act or vote with respect to any matter relating to the merger.

 

In arriving at its opinion, Houlihan Lokey:

 

 

Houlihan Lokey relied upon and assumed, without independent verification, the accuracy and completeness of all data, material and other information furnished, or otherwise made available, to Houlihan Lokey, discussed with or reviewed by Houlihan Lokey, or publicly available, and did not assume any responsibility with respect to such data, material and other information. In addition, managements of Florida Public Utilities and Chesapeake advised Houlihan Lokey, and Houlihan Lokey assumed, that the financial projections reviewed by Houlihan Lokey were reasonably prepared in good faith on bases reflecting the best currently available estimates and judgments of such managements as to the future financial results and condition of Florida Public Utilities and Chesapeake, and Houlihan Lokey expressed no opinion with respect to such projections or the assumptions on which they were based. Houlihan Lokey relied upon and assumed, without independent verification, that there had been no material change in the business, assets, liabilities, financial condition, results of operations, cash flows or prospects of Florida Public Utilities or Chesapeake since the date of the most recent financial statements provided to Houlihan Lokey, and that there was no information or any facts that would make any of the information reviewed by Houlihan Lokey incomplete or misleading. Houlihan Lokey did not consider any aspect or implication of any transaction to which Florida Public Utilities or Chesapeake may be a party (other than as specifically described in the opinion with respect to the merger).

Houlihan Lokey relied upon and assumed, without independent verification, that (a) the representations and warranties of all parties to the merger agreement and all other related documents and instruments that are referred to therein were true and correct, (b) each party to the merger agreement and other related documents and instruments would fully and timely perform all of the covenants and agreements required to be performed by such party, (c) all conditions to the consummation of the proposed merger would be satisfied without waiver thereof, and (d) the proposed merger would be consummated in a timely manner in accordance with the terms described in the agreements and documents provided to Houlihan Lokey, without any amendments or modifications thereto. Houlihan Lokey also assumed, with Florida Public Utilities’ consent, that the proposed merger would be treated as a tax-free reorganization for United States federal income tax purposes. Houlihan Lokey also relied upon and assumed, without independent verification, that (i) the proposed merger would be consummated in a manner that complies in all respects with all applicable federal and state statutes, rules and regulations, and (ii) all governmental, regulatory, and other consents and approvals necessary for the consummation of the proposed merger would be obtained and that no delay, limitations, restrictions or conditions would be imposed or amendments, modifications or waivers made that would result in the disposition of any material portion of the assets of Florida Public Utilities or Chesapeake, or otherwise have an adverse effect on Florida Public Utilities or Chesapeake or any expected benefits of the proposed merger. In addition, Houlihan Lokey relied upon and assumed, without independent verification, that the final form of the merger agreement would not differ in any material respect from the draft of the merger agreement identified above.

 

Furthermore, in connection with its opinion, Houlihan Lokey was not requested to make, and did not make, any physical inspection or independent appraisal of any of the assets, properties or liabilities (fixed, contingent, derivative, off-balance-sheet or otherwise) of Florida Public Utilities, Chesapeake or any other party, nor was Houlihan Lokey provided with any such appraisal. Houlihan Lokey did not estimate, and expressed no opinion regarding, the liquidation value of any entity. Houlihan Lokey undertook no independent analysis of any potential or actual litigation, regulatory action, possible unasserted claims or other contingent liabilities, to which Florida Public Utilities or Chesapeake is or may be a party or is or may be subject, or of any governmental investigation of any possible unasserted claims or other contingent liabilities to which Florida Public Utilities or Chesapeake is or may be a party or is or may be subject.

 

Houlihan Lokey was not requested to, and did not, solicit indications of interest from, third parties with respect to the proposed merger, the assets, businesses or operations of Florida Public Utilities, or any alternatives to the proposed merger. Houlihan Lokey’s opinion was necessarily based on financial, economic, market and other conditions as in effect on, and the information made available to Houlihan Lokey as of, the date of its opinion. Houlihan Lokey’s opinion was rendered during a period of unusual volatility in the financial markets and necessarily assumed the absence of further material changes in the financial, economic and market conditions from those prevailing on the date of Houlihan Lokey’s opinion. Houlihan Lokey did not undertake, and is under no obligation, to update, revise, reaffirm or withdraw its opinion, or otherwise comment on or consider events occurring after the date of its opinion. Houlihan Lokey did not express any opinion as to what the value of Chesapeake common stock actually will be when issued pursuant to the proposed merger or the price or range of prices at which Florida Public Utilities common stock or Chesapeake common stock may be purchased or sold at any time. Houlihan Lokey assumed that the shares of Chesapeake common stock to be issued in the proposed merger would be listed on the New York Stock Exchange.

 

Houlihan Lokey’s opinion was furnished for the use and benefit of the board of directors of Florida Public Utilities in connection with its consideration of the proposed merger and may not be used for any other purpose without Houlihan Lokey’s prior written consent. Houlihan Lokey’s opinion should not be construed as creating any fiduciary duty on Houlihan Lokey’s part to any party. Houlihan Lokey’s opinion is not intended to be, and does not constitute, a recommendation to the board of directors of Florida Public Utilities, any security holder of Florida Public Utilities or any other person as to how to act or vote with respect to any matter relating to the proposed merger.

 

Houlihan Lokey’s opinion only addressed whether the exchange ratio provided for in the proposed merger pursuant to the merger agreement is fair to the holders of Florida Public Utilities common stock from a financial point of view. Houlihan Lokey was not requested to opine as to, and its opinion did not in any

manner address, among other things: (i) the underlying business decision of Florida Public Utilities, Chesapeake, their respective security holders or any other party to proceed with or effect the proposed merger or the value of the consideration to be received by the holders of Florida Public Utilities common stock in the proposed merger as compared to the value of the consideration that could be obtained pursuant to any alternative transaction that may exist for Florida Public Utilities, (ii) the terms of any arrangements, understandings, agreements or documents related to, or the form or any other portion or aspect of, the proposed merger or otherwise (other than the exchange ratio to the extent expressly specified herein), (iii) the fairness of any portion or aspect of the proposed merger to the holders of any class of securities, creditors or other constituencies of Florida Public Utilities or Chesapeake, or to any other party, except as set forth in its opinion, (iv) the relative merits of the proposed merger as compared to any alternative business strategies that might exist for Florida Public Utilities, Chesapeake or any other party or the effect of any other transaction in which Florida Public Utilities, Chesapeake or any other party might engage, (v) the fairness of any portion or aspect of the proposed merger to any one class or group of Florida Public Utilities’ or any other party’s security holders vis-à-vis any other class or group of Florida Public Utilities’ or such other party’s security holders (including without limitation the allocation of any consideration amongst or within such classes or groups of security holders), (vi) whether or not Florida Public Utilities, Chesapeake, their respective security holders or any other party is receiving or paying reasonably equivalent value in the proposed merger, (vii) the solvency, creditworthiness or fair value of Florida Public Utilities, Chesapeake or any other participant in the proposed merger under any applicable laws relating to bankruptcy, insolvency, fraudulent conveyance or similar matters, or (viii) the fairness, financial or otherwise, of the amount or nature of any compensation to or consideration payable to or received by any officers, directors or employees of any party to the proposed merger, any class of such persons or any other party, relative to the exchange ratio or otherwise. Furthermore, no opinion, counsel or interpretation is intended in matters that require legal, regulatory, accounting, insurance, tax or other similar professional advice. It is assumed that such opinions, counsel or interpretations have been or will be obtained from the appropriate professional sources. Furthermore, Houlihan Lokey relied, with Florida Public Utilities’ consent, on the assessment by Florida Public Utilities, Chesapeake and their respective advisors, as to all legal, regulatory, accounting, insurance and tax matters with respect to Florida Public Utilities, Chesapeake and the proposed merger. The issuance of Houlihan Lokey’s opinion was approved by a committee of Houlihan Lokey authorized to approve opinions of this nature.

 

In preparing its opinion to the board of directors of Florida Public Utilities, Houlihan Lokey performed a variety of analyses, including those described below. The summary of Houlihan Lokey’s valuation analyses described below is not a complete description of the analyses underlying Houlihan Lokey’s opinion. The preparation of a fairness opinion is a complex process involving various quantitative and qualitative judgments and determinations with respect to the financial, comparative and other analytic methods employed and the adaptation and application of those methods to the unique facts and circumstances presented. As a consequence, neither Houlihan Lokey’s opinion nor the analyses underlying its opinion are readily susceptible to partial analysis or summary description. Houlihan Lokey arrived at its opinion based on the results of all analyses undertaken by it and assessed as a whole and did not draw, in isolation, conclusions from or with regard to any individual analysis, analytic method or factor. Accordingly, Houlihan Lokey believes that its analyses must be considered as a whole and that selecting portions of its analyses, analytic methods and factors, without considering all analyses and factors or the narrative description of the analyses, could create a misleading or incomplete view of the processes underlying its analyses and opinion.

 

In performing its analyses, Houlihan Lokey considered business, economic, industry and market conditions, financial and otherwise, and other matters as they existed on, and could be evaluated as of, the date of its opinion. No company, transaction or business used in Houlihan Lokey’s analyses for comparative purposes is identical to Florida Public Utilities or the proposed merger. While the results of each analysis were taken into account in reaching its overall conclusion with respect to fairness, Houlihan Lokey did not make separate or quantifiable judgments regarding individual analyses. The implied valuation reference ranges indicated by Houlihan Lokey’s analyses are illustrative and not necessarily indicative of actual values or predictive of future results or values, which may be significantly more or less favorable than those suggested by the analyses. In addition, any analyses relating to the value of assets, businesses or securities do not purport to be appraisals or to reflect the prices at which businesses or securities actually may be sold, which may

depend on a variety of factors, many of which are beyond Chesapeake’s and Florida Public Utilities’ control and the control of Houlihan Lokey. Much of the information used in, and accordingly the results of, Houlihan Lokey’s analyses are inherently subject to substantial uncertainty.

 

Houlihan Lokey’s opinion and analyses were provided to the board of directors of Florida Public Utilities in connection with its consideration of the proposed merger and Houlihan Lokey’s analyses were among many factors considered by the board of directors of Florida Public Utilities in evaluating the proposed merger. Neither Houlihan Lokey’s opinion nor its analyses were determinative of the exchange ratio or of the views of the board of directors of Florida Public Utilities or Florida Public Utilities’ management with respect to the proposed merger.

 

The following is a summary of the material valuation analyses performed in connection with the preparation of Houlihan Lokey’s opinion rendered to the board of directors of Florida Public Utilities on April 17, 2009. The analyses summarized below include information presented in tabular format. The tables alone do not constitute a complete description of the analyses. Considering the data in the tables below without considering the full narrative description of the analyses, as well as the methodologies underlying and the assumptions, qualifications and limitations affecting each analysis, could create a misleading or incomplete view of Houlihan Lokey’s analyses.

 

For purposes of its analysis, Houlihan Lokey reviewed a number of financial metrics including:

 

EBIT — generally the amount of the relevant company’s earnings before interest and taxes for a specified time period.

 

EBITDA — generally the amount of the relevant company’s earnings before interest, taxes, depreciation, and amortization for a specified time period.

 

Unless the context indicates otherwise, equity values used in the selected companies analysis described below were calculated using the closing price of the common stock of the selected companies listed below as of April 16, 2009. Estimates of Net Income for Florida Public Utilities for the fiscal years ending December 31, 2009 and December 31, 2010 were based on estimates provided by Florida Public Utilities’ management. Estimates of Net Income for Chesapeake for fiscal years ending December 31, 2009 and December 31, 2010 were based on estimates provided by Chesapeake’s management. Estimates of Net Income for the selected companies listed below for the fiscal years ending December 31, 2009 and December 31, 2010 were based on publicly available research analyst estimates for those companies.

 

Selected Companies Analysis

 

Houlihan Lokey calculated the multiples of equity value to Net Income and certain other financial data for selected companies in the utilities industry.

 

The calculated multiples included:

 

 

The following companies were selected because they were deemed to be similar to Florida Public Utilities or Chesapeake in one or more respects which included nature of business, size, diversification, financial performance and geographic concentration. No specific numeric or other similar criteria were used to select the selected companies and all criteria were evaluated in their entirety without application of definitive qualifications or limitations to individual criteria. As a result, a significantly larger or smaller company with substantially similar lines of businesses and business focus may have been included while a similarly sized company with less similar lines of business and greater diversification may have been excluded. Houlihan Lokey identified a sufficient number of companies for purposes of its analysis but may not have included all companies that might be deemed comparable to Florida Public Utilities or Chesapeake as applicable.

The selected companies for Florida Public Utilities were:

 

 

The selected companies analysis for Florida Public Utilities indicated the following high, low, median and mean multiples for the selected utility companies:

 

 

The selected companies for Chesapeake were:

 

 

The selected companies analysis for Chesapeake indicated the following high, low, median and mean multiples for selected utility companies:

 

 

Houlihan Lokey applied multiple ranges based on the selected companies analysis to corresponding financial data for Florida Public Utilities, including estimates of 2009 Net Income and 2010 Net Income provided by Florida Public Utilities’ management, and corresponding data for Chesapeake, including estimates of 2009 Net Income and 2010 Net Income provided by Chesapeake’s management. The selected companies analysis indicated (i) an implied exchange ratio reference range of 0.2707 to 0.3712 based on the LTM adjusted Net Income for Florida Public Utilities and Chesapeake, (ii) an implied exchange ratio reference range of 0.2811 to 0.3836 based on the 2009E Net Income for Florida Public Utilities and Chesapeake, and (iii) an implied exchange ratio reference range of 0.3091 to 0.4533 based on the 2010E Net Income of both Florida Public Utilities and Chesapeake, in each case as compared to the 0.405 exchange ratio provided for in the proposed merger.

 

Discounted Cash Flow Analysis

 

Houlihan Lokey also calculated the net present value of each of Florida Public Utilities’ and Chesapeake’s unlevered, after-tax cash flows based on projections provided by managements of Florida Public Utilities and

Chesapeake. In performing a discounted cash flow analysis with respect to Florida Public Utilities, Houlihan Lokey applied discount rates ranging from 8.25% to 8.75% based on Florida Public Utilities’ estimated weighted average cost of capital and perpetuity growth rates ranging from 2.25% to 2.75%. In addition, based on information provided by management of Florida Public Utilities, Houlihan Lokey treated a non-operating receivable from the sale of Florida Public Utilities’ water assets in 2003 as having a value of $5.5 million. In performing a discounted cash flow analysis with respect to Chesapeake, Houlihan Lokey applied discount rates ranging from 8.75% to 9.25% based on Chesapeake’s estimated weighted average cost of capital and perpetuity growth rates ranging from 2.50% to 3.00%. The discounted cash flow analyses indicated an implied exchange ratio reference range of 0.2581 to 0.4743, as compared to the 0.405 exchange ratio provided for in the proposed merger.

 

Other Considerations

 

Contribution Analysis.  Houlihan Lokey also reviewed the respective contributions of Florida Public Utilities and Chesapeake to various financial metrics for the pro forma combined entity resulting from the proposed merger, without giving effect to any cost savings or synergies. This analysis indicated the following relative contributions of Florida Public Utilities relative to the pro forma ownership of Florida Public Utilities’ shareholders in the combined entity resulting from the proposed merger:

 

 

Historical Trading Ratio.  Houlihan Lokey also noted the following historical trading ratios of Florida Public Utilities common stock and Chesapeake common stock as of April 16, 2009, as compared to the 0.405 exchange ratio provided for in the proposed merger: