News Column

CHESAPEAKE UTILITIES CORP - 10-Q - Management's Discussion and Analysis of Financial Condition and Results of Operations

August 7, 2014

Management's Discussion and Analysis of Financial Condition and Results of Operations is designed to provide a reader of the financial statements with a narrative report on our financial condition, results of operations and liquidity. This discussion and analysis should be read in conjunction with the attached unaudited condensed consolidated financial statements and notes thereto and our Annual Report on Form 10-K for the year ended December 31, 2013, including the audited consolidated financial statements and notes thereto. Safe Harbor for Forward-Looking Statements We make statements in this Quarterly Report on Form 10-Q 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. One can typically identify forward-looking statements by the use of forward-looking words, such as "project," "believe," "expect," "anticipate," "intend," "plan," "estimate," "continue," "potential," "forecast" or other similar words, or future or conditional verbs such as "may," "will," "should," "would" or "could." These statements represent our intentions, plans, expectations, assumptions and beliefs about future financial performance, business strategy, projected plans and objectives of the Company. These statements are subject to many risks, uncertainties and other important factors that could cause actual results to differ materially from those expressed in the forward-looking statements. Such factors include, but are not limited to: state and federal legislative and regulatory initiatives (including deregulation) that affect cost and investment recovery, have an impact on rate structures, and affect the speed at and degree to which competition enters the electric and natural gas industries; the outcomes of regulatory, tax, environmental and legal matters, including whether pending matters are resolved within current estimates and whether the costs associated with such matters are adequately covered by insurance or recovered in rates; the loss of customers due to a government-mandated sale of our utility distribution facilities; industrial, commercial and residential growth or contraction in our markets or service territories; the weather and other natural phenomena, including the economic, operational and other effects of hurricanes, ice storms and other damaging weather events; the timing and extent of changes in commodity prices and interest rates; general economic conditions, including any potential effects arising from terrorist attacks and any consequential hostilities or other hostilities or other external factors over which we have no control; changes in environmental and other laws and regulations to which we are subject and changes in environmental conditions of



property that

we now or may in the future own or operate; the results of financing efforts, including our ability to obtain financing on favorable terms, which can be affected by various factors, including credit ratings and general economic conditions; the impact to the asset values and resulting higher costs and funding obligations of the Company's pension and other postretirement benefit plans as a result of potential



downturns in

the financial markets, lower discount rates or impacts



associated

with the Patient Protection and Affordable Care Act; the creditworthiness of counterparties with which we are



engaged in

transactions; the extent of success in connecting natural gas and electric supplies to transmission systems and in expanding natural gas and electric markets; the effect of accounting pronouncements issued periodically by accounting standard-setting bodies; conditions of the capital markets and equity markets during the periods covered by the forward-looking statements; the ability to successfully execute, manage and integrate merger, acquisition or divestiture plans, regulatory or other



limitations

imposed as a result of a merger, acquisition or divestiture, and the success of the business following a merger, acquisition or divestiture;



the ability to establish and maintain new key supply sources;

the effect of spot, forward and future market prices on our distribution, wholesale marketing and energy trading businesses;



the effect of competition on our businesses;

the ability to construct facilities at or below estimated costs;

risks related to cyber-attack or failure of information technology systems; and - 26



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changes in technology affecting our advanced information services business.

Introduction

We are a diversified energy company engaged, directly or through our operating divisions and subsidiaries, in regulated energy businesses, unregulated energy businesses, and other unregulated businesses, including advanced information services. Our strategy is focused on growing earnings from a stable utility foundation and investing in related businesses and services that provide opportunities for returns greater than traditional utility returns. The key elements of this strategy include: executing a capital investment program in pursuit of organic growth opportunities that generate returns equal to or greater than our cost of capital; expanding the regulated energy distribution and transmission businesses into new geographic areas and providing new services in our current service territories; expanding the propane distribution business in existing and new markets through leveraging our community gas system services and our bulk delivery capabilities; expanding both our regulated energy and unregulated energy businesses through strategic acquisitions; utilizing our expertise across our various businesses to improve overall performance; pursuing and entering new unregulated energy markets and business lines that will complement our existing strategy and operating units;



enhancing marketing channels to attract new customers;

providing reliable and responsive customer service to existing customers so they become our best promoters;



engaging our customers through a distinctive service excellence initiative;

developing and retaining a high-performing team that advances our goals; empowering and engaging our employees at all levels to live our brand and vision; demonstrating community leadership and engaging our local



communities

and governments in a cooperative and mutually beneficial way;



maintaining a capital structure that enables us to access capital as needed;

maintaining a consistent and competitive dividend for shareholders; and

creating and maintaining a diversified customer base, energy portfolio and utility foundation. Due to the seasonality of our business, results for interim periods are not necessarily indicative of results for the entire fiscal year. Revenue and earnings are typically greater during the first and fourth quarters, when consumption of energy is normally highest due to colder temperatures. The following discussions and those elsewhere in the document on operating income and segment results include the use of the term "gross margin." Gross margin is determined by deducting the cost of sales from operating revenue. Cost of sales includes the purchased cost of natural gas, electricity and propane and the cost of labor spent on direct revenue-producing activities. Gross margin should not be considered an alternative to operating income or net income, which is determined in accordance with GAAP. We believe that gross margin, although a non-GAAP measure, is useful and meaningful to investors as a basis for making investment decisions. It provides investors with information that demonstrates the profitability achieved by us under our allowed rates for regulated energy operations and under our competitive pricing structure for non-regulated segments. Our management uses gross margin in measuring our business units' performance and has historically analyzed and reported gross margin information publicly. Other companies may calculate gross margin in a different manner. - 27



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Results of Operations for the Three and Six Months ended June 30, 2014 Overview and Highlights Our net income for the quarter ended June 30, 2014 was $5.1 million, or $0.53 per share (diluted). This represents an increase of $778,000, or $0.08 per share (diluted), compared to net income of $4.4 million, or $0.45 per share (diluted), as reported for the same quarter in 2013. Three Months Ended June 30, Increase 2014 2013 (decrease) (in thousands except per share) Business Segment: Regulated Energy $ 10,711$ 8,619$ 2,092 Unregulated Energy (43 ) 447 (490 ) Other (211 ) 86 (297 ) Operating Income 10,457 9,152 1,305 Other Income 405 24 381 Interest Charges 2,303 2,016 287 Income Taxes 3,425 2,804 621 Net Income $ 5,134$ 4,356$ 778 Earnings Per Share of Common Stock Basic $ 0.53$ 0.45$ 0.08 Diluted $ 0.53$ 0.45$ 0.08 - 28



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Table of Contents Key variances included: Pre-tax Net Earnings (in thousands, except per share) Income Income Per Share Second Quarter of 2013 Reported Results $ 7,160$ 4,356$ 0.45 Adjusting for unusual items: One-time sales tax expensed by Sandpiper associated with the acquisition 759 462 0.05 759 462 0.05 Increased Gross Margins: Major Projects (See Major Projects Highlights table) Service expansions 1,545 939 0.10 Contribution from Sandpiper 966 588 0.06 GRIP 643 391 0.04 Other natural gas growth 572 348 0.04 Contribution from other acquisitions 53 32 - 3,779 2,298 0.24 (Increased) Decreased Other Operating Expenses: Higher payroll costs (1,509 ) (918 ) (0.09 ) Expenses from acquisitions (1,098 )



(668 ) (0.07 ) Higher depreciation, asset removal and property tax costs due to new capital investments

(852 ) (519 ) (0.05 ) Higher benefits costs (661 ) (402 ) (0.04 ) Lower accrual for incentive bonuses 316 193 0.02 (3,804 ) (2,314 ) (0.23 ) Net Other Changes 665 332 0.02 Second Quarter of 2014 Reported Results $ 8,559$ 5,134$ 0.53 Our net income for the six months ended June 30, 2014 was $22.8 million, or $2.35 per share (diluted). This represents an increase of $3.6 million, or $0.36 per share (diluted), compared to net income of $19.2 million, or $1.99 per share (diluted), as reported for the same period in 2013. Six Months Ended June 30, Increase 2014 2013 (decrease) (in thousands except per share) Business Segment: Regulated Energy $ 31,802$ 25,925$ 5,877 Unregulated Energy 10,815 9,816 999 Other (538 ) (39 ) (499 ) Operating Income 42,079 35,702 6,377 Other Income 413 312 101 Interest Charges 4,459 4,088 371 Income Taxes 15,218 12,701 2,517 Net Income $ 22,815$ 19,225$ 3,590 Earnings Per Share of Common Stock Basic $ 2.36$ 2.00$ 0.36 Diluted $ 2.35$ 1.99$ 0.36 - 29



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Table of Contents Key variances included: Pre-tax Net Earnings (in thousands, except per share) Income Income Per Share Six months ended June 30, 2013 Reported Results $ 31,926$ 19,225$ 1.99 Adjusting for unusual items: Weather impact (due primarily to colder temperatures in 2014) 2,266 1,365 0.14 One-time sales tax expensed by Sandpiper associated with the acquisition 759 457 0.05 3,025 1,822 0.19 Increased Gross Margins: Major Projects (See Major Projects Highlights table) Contribution from Sandpiper 5,255 3,165 0.33 Service expansions 2,970 1,789 0.18 GRIP 1,310 789 0.08 Increased wholesale propane sales 1,286 774 0.08 Other natural gas growth 1,159 698 0.07 Propane wholesale marketing 930 560 0.06 Contributions from other acquisitions 555



334 0.03

13,465 8,109 0.83 Increased Other Operating Expenses: Expenses from acquisitions (3,214 ) (1,935 ) (0.20 ) Higher payroll costs (2,664 ) (1,605 ) (0.17 ) Higher benefits costs (1,709 )



(1,030 ) (0.11 ) Higher depreciation, asset removal costs and property tax costs due to new capital investments

(1,631 ) (982 ) (0.10 ) Larger accrual for incentive bonuses (742 ) (447 ) (0.05 ) (9,960 ) (5,999 ) (0.63 ) Net Other Changes (423 ) (342 ) (0.03 ) Six months ended June 30, 2014 Reported Results $ 38,033$ 22,815$ 2.35 Summary of Key Factors The following information highlights certain key factors contributing to our results for the current and future periods. Major Projects Acquisition In May 2013, we completed the purchase of the operating assets of ESG. Approximately 11,000 residential and commercial underground propane distribution system customers acquired in this transaction are now being served by Sandpiper under the tariff approved by the Maryland PSC. We are evaluating the potential conversion of some of the underground propane distribution systems to natural gas distribution and have begun to convert some of these customers. This acquisition was accretive to earnings per share in the first full year of operations, generating $0.22 in additional earnings per share. We generated $966,000 and $5.3 million, in additional gross margin from Sandpiper for the three and six months ended June 30, 2014, respectively, and incurred $782,000 and $2.2 million in additional other operating expenses for the three and six months ended June 30, 2014, respectively. Additionally, in the second quarter of 2013, we recorded $759,000 in a one-time sales tax expense associated with the acquisition of ESG. Service Expansions During 2013, Eastern Shore, our interstate natural gas transmission subsidiary, commenced new natural gas transmission services to local distribution utilities and industrial customers in Delaware and Maryland. These new services generated additional gross - 30



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margin of $740,000 and $2.0 million in the three and six months ended June 30, 2014, respectively, compared to the same periods in 2013.

Eastern Shore also executed a one-year contract with another industrial customer to provide 50,000 Dts/d of additional transmission service from April 2014 to April 2015. This short-term contract generated $599,000 in the second quarter of 2014, and is expected to generate $1.9 million and $767,000 of gross margin in 2014 and 2015, respectively. Eastern Shore is constructing a pipeline lateral to an industrial customer facility under construction in Kent County, Delaware. Upon completion of this lateral, which is currently expected in October 2014, this new service is expected to generate annual gross margin between $1.2 million to $1.8 million. During 2014, we expect to generate $463,000 in additional gross margin from this new service. The new facilities include approximately 5.5 miles of pipeline lateral and metering facilities, which will extend from Eastern Shore's mainline to the new industrial customer facility.



In August 2013, Peninsula Pipeline, our intrastate natural gas transmission subsidiary, commenced a new firm transportation service in Florida with an unaffiliated utility. This new service generated $210,000 and $420,000 in gross margin for the three and six months ended June 30, 2014.

The following Major Project Highlights table summarizes 2014 gross margin from our major projects initiated since 2011 (dollars in thousands):

Q2 2014 YTD 2014 2014 (1) Acquisition: ESG acquisition being served by Sandpiper in Worcester County, Maryland (2) $ 1,504$ 5,794$ 9,817 Service Expansions Natural Gas Distribution: Long-term Sussex County, Delaware (3) $ 155$ 359$ 694 Natural Gas Transmission: Short-term New Castle County, Delaware (4) (5) $ 599$ 599$ 1,862 Kent County, Delaware (5) - - - Total Short-term $ 599$ 599$ 1,862 Long-term Sussex County, Delaware (6) $ 431$ 863$ 1,725 New Castle County, Delaware (6) (7) 741 1,482 2,964 Nassau County, Florida (6) 328 655 1,300 Worcester County, Maryland (6) 137 274 547 Cecil County, Maryland (6) 287 574 1,147 Indian River County, Florida 210 420 840 Kent County, Delaware 665 1,330 3,123 Total Long-term $ 2,799$ 5,598$ 11,646 Total Service Expansions $ 3,553$ 6,556$ 14,202 Total Major Projects $ 5,057$ 12,350$ 24,019 Less: 2013 Margin $ 2,545$ 4,124$ 13,176 Incremental Margin in 2014 over 2013 $ 2,512 $



8,226 $ 10,843

(1) The figures provided represent the estimated annual gross margin. (2) During the three months and six months ended June 30, 2014, we incurred $782,000 and $2.2 million, respectively, in other operating expenses related to Sandpiper's operation. We expect to incur a total of $6.3 million in other operating expenses during 2014.

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(3) These services generated $153,000 and $355,000 in gross margin for the three and six months ended June 30, 2013, respectively. (4) Expected gross margin in 2014 includes $1.9 million from a new short-term contract for 50,000 Dts/d for one year, which began in April 2014. (5) We provided short-term service for New Castle County and generated $128,000 and $168,000 in gross margin for the three and six months ended June 30, 2013, respectively. We also provided short-term service for Kent County and generated $386,000 in gross margin for the three and six months ended June 30, 2013. These short-term services were displaced by the new long-term services in November 2013. (6) Gross margin generated by these services for the three months ended June 30, 2013 was $345,000 for Sussex County, Delaware; $343,000 for New Castle County, Delaware; $334,000 for Nassau County, Florida; $98,000 for Worcester County, Maryland; and $220,000 for Cecil County, Maryland. Gross margin generated by these services for the six months ended June 30, 2013 was $690,000 for Sussex County, Delaware; $686,000 for New Castle County, Delaware; $665,000 for Nassau County, Florida; $195,000 for Worcester County, Maryland; and $441,000 for Cecil County, Maryland. (7) Gross margin generated from this service expansion replaces the 10,000 Dts/d contract, which expired in November 2012. This expired contract had annualized gross margin of $1.1 million.



GRIP

In August 2012, the Florida PSC approved the GRIP, which is designed to recover capital and other program-related-costs, inclusive of a return on investment, to replace older pipes in our Florida service territories. We received approval to invest $75.0 million to replace qualifying distribution mains and services (any material other than coated steel or plastic). Since the program's inception on August 12, 2012, we have invested $29.3 million. During the first half of 2014, we invested $9.5 million and expect to invest an additional $12.4 million during the second half of 2014. These investments generated additional gross margin of $643,000 and $1.3 million for the three and six months ended June 30, 2014, respectively, compared to the same periods in 2013. Investing in Growth We have continued to expand our resources and capabilities to support growth. Our Delmarva natural gas distribution operation has initiated natural gas distribution expansions in Sussex County, Delaware, and Worcester and Cecil Counties, Maryland, which require the construction and conversion of distribution facilities, as well as the conversion of residential customers' appliances and equipment. To support this growth as well as future expansions, our Delmarva natural gas distribution operation increased staffing. Eastern Shore also increased its staffing. Finally, resources have been added in our corporate shared services departments to increase our overall capabilities to support sustained future growth. The additional staffing has increased payroll expenses for our Regulated Energy segment by $439,000 and $864,000, respectively, for the three and six months ended June 30, 2014, compared to the same periods in 2013. We expect to make additional investments in human resources, as needed, to further develop our capability to capitalize on future growth opportunities. Weather and Consumption Weather was not a significant factor in the second quarter. Temperatures on the Delmarva Peninsula and in Florida during the first quarter of 2014 were significantly colder compared to the same period in 2013, which positively affected our year-to-date results in 2014. The following tables highlight the HDD and CDD information for the three and six months ended June 30, 2014 and 2013 and the gross margin variance resulting from weather fluctuations in those periods. - 32



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Table of Contents HDD and CDD Information Three Months Ended Six Months Ended June 30, June 30, 2014 2013 Variance 2014 2013 Variance Delmarva Actual HDD 456 490 (34 ) 3,173 2,897 276 10-Year Average HDD ("Normal") 459 473 (14 ) 2,820 2,850 (30 ) Variance from Normal (3 ) 17 353 47 Florida Actual HDD 17 19 (2 ) 574 487 87 10-Year Average HDD ("Normal") 26 28 (2 ) 555 569 (14 ) Variance from Normal (9 ) (9 ) 19 (82 ) Florida Actual CDD 928 865 63 970 946 24 10-Year Average CDD ("Normal") 908 911 (3 ) 982 986 (4 ) Variance from Normal 20 (46 ) (12 ) (40 )



Gross Margin Variance attributed to Weather

YTD 2014 vs. (in thousands) Q2 2014 vs. Q2 2013 Q2 2014 vs. Normal YTD 2013 YTD 2014 vs. Normal Delmarva Regulated Energy $ (256 ) $ 19 $ 255 $ 636 Unregulated Energy (39 ) (46 ) 1,694 1,096 Florida Regulated Energy (56 ) (116 ) 269 (322 ) Unregulated Energy - - 48 81 Total $ (351 ) $ (143 ) $ 2,266 $ 1,491 Propane During 2014, retail propane margins on the Delmarva Peninsula reverted to more normal levels as a significant increase in wholesale prices in late 2013 and early 2014 increased our average propane inventory cost. This reduced our Delmarva gross margin by $75,000 and $891,000 for the three and six months ended June 30, 2014, respectively. In Florida, higher retail propane margins as a result of local market conditions increased gross margin by $312,000 and $637,000 for the three and six months ended June 30, 2014. Wholesale propane sales increased, generating additional gross margin of $254,000 and $1.3 million for the three and six months ended June 30, 2014, respectively, due primarily to sales to an affiliate of ESG. Xeron, which benefits from wholesale price volatility by entering into trading transactions, did not have a significant impact on the quarter-over-quarter variance for the three months ended June 30, 2014 due to lower wholesale price volatility. For the six months ended June 30, 2014, Xeron generated an increase in gross margin of $930,000, compared to the same period in 2013. This increase was due to higher wholesale price volatility primarily during the winter heating season, which resulted in increased trading activities and higher profits on executed trades. - 33



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Regulated Energy

For the quarter ended June 30, 2014 compared to 2013

Three Months Ended June 30, Increase 2014 2013 (decrease) (in thousands) Revenue $ 61,646$ 55,216$ 6,430 Cost of sales 24,672 22,115 2,557 Gross margin 36,974 33,101 3,873 Operations & maintenance 18,109 16,683 1,426 Depreciation & amortization 5,623 4,897 726 Other taxes 2,531 2,902 (371 ) Other operating expenses 26,263 24,482 1,781 Operating Income $ 10,711$ 8,619$ 2,092 Operating income for the Regulated Energy segment for the quarter ended June 30, 2014 was $10.7 million, an increase of $2.1 million, or 24 percent. An increase in gross margin of $3.9 million was partially offset by an increase in other operating expenses of $1.8 million. Gross Margin Items contributing to the quarter-over-quarter increase of $3.9 million, or 12 percent, in gross margin are listed in the following table: (in thousands) Gross margin for the three months ended June 30, 2013 $



33,101

Factors contributing to the gross margin increase for the three months ended June 30, 2014: Service expansions

1,545

Contributions from acquisitions



1,007

Additional revenue from GRIP in Florida 643 Other natural gas growth 572 Other 106 Gross margin for the three months ended June 30, 2014 $



36,974

Service Expansions Increased gross margin from natural gas service expansions was due primarily to the following: $599,000 from a short-term contract with an industrial customer to provide 50,000 Dts/d of additional natural gas transmission services from April 2014 to April 2015. This short-term contract is expected to generate $1.9 million and $767,000 of gross margin in 2014 and 2015, respectively.



$549,000 from long-term natural gas transmission services that commenced

in November 2013 to several industrial customers, located in New Castle

and Kent Counties, Delaware. These long-term transmission services displaced short-term services that Eastern Shore provided to these customers from May through October 2013 and are expected to generate $4.3



million of annual gross margin. They also displace annualized gross margin

of $1.1 million from an older contract, which expired in November 2012.

$398,000 from service expansions completed in 2013 that facilitated new

natural gas transmission and distribution services in Sussex County,

Delaware; Worcester and Cecil Counties, Maryland; and Nassau and Indian

River Counties, Florida.

Contributions from Acquisitions In late May 2013, upon completion of the purchase of the ESG operating assets, Sandpiper began providing services to approximately 11,000 propane underground distribution system customers in Worcester County, Maryland, under a tariff approved by the Maryland PSC. Sandpiper generated $966,000 of additional gross margin in the second quarter of 2014. Also, the acquisition - 34



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of certain operating assets of the City of Fort Meade, Florida, in December 2013, generated $41,000 of additional gross margin during the second quarter of 2014. Additional Revenue from GRIP in Florida InAugust 2012, the Florida PSC approved the GRIP for FPU and Chesapeake's Florida division. This program provides additional revenue designed to recover capital and other program-related costs, inclusive of an appropriate rate of return on investment, associated with accelerating the replacement of qualifying natural gas distribution mains and services. During the second quarter of 2014, FPU and Chesapeake's Florida division recorded $643,000 in additional gross margin as a result of additional GRIP capital expenditures. Other Natural Gas Growth Increased gross margin from other natural gas growth was due primarily to the following: $473,000 from Florida natural gas customer growth due primarily to new services to commercial and industrial customers; and



$165,000 from three percent residential customer growth, as well as growth

in commercial and industrial customers, in our Delmarva natural gas

distribution operation.

Other Operating Expenses The increase in other operating expenses was due primarily to: (a) $832,000 in higher depreciation, amortization, asset removal and property tax costs associated with capital investments to support growth and maintain system integrity; (b) $782,000 in other operating expenses associated with Sandpiper's operations; (c) $439,000 in higher payroll costs incurred primarily to support recent growth and expand our capability to cultivate future growth; (d) $399,000 in higher benefits costs; and (e) $419,000 in higher payroll costs in Florida due primarily to a vacation policy change in 2013, which reduced the accrual for that year. These increases in other operating expenses were partially offset by the absence of a one-time sales tax expense of $759,000 in the second quarter of 2013 related to the ESG acquisition.



For the six months ended June 30, 2014 compared to 2013

Six Months Ended June 30, Increase 2014 2013 (decrease) (in thousands) Revenue $ 163,812$ 136,783$ 27,029 Cost of sales 78,980 63,731 15,249 Gross margin 84,832 73,052 11,780 Operations & maintenance 36,510 32,150 4,360 Depreciation & amortization 11,150 9,706 1,444 Other taxes 5,370 5,271 99 Other operating expenses 53,030 47,127 5,903 Operating Income $ 31,802$ 25,925$ 5,877 Operating income for the Regulated Energy segment for the six months ended June 30, 2014 was $31.8 million, an increase of $5.9 million, or 23 percent. An increase in gross margin of $11.8 million was partially offset by an increase in other operating expenses of $5.9 million. Gross Margin Items contributing to the period-over-period increase of $11.8 million, or 16 percent, in gross margin are listed in the following table: - 35



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(in thousands) Gross margin for the six months ended June 30, 2013 $



73,052

Factors contributing to the gross margin increase for the six months ended June 30, 2014: Contributions from acquisitions

5,358

Service expansions



2,970

Additional revenue from GRIP in Florida



1,310

Other natural gas growth



1,159

Increased customer consumption - weather and other



540

Other



443

Gross margin for the six months ended June 30, 2014 $



84,832

Contributions from Acquisitions Sandpiper generated $5.3 million of additional gross margin in the first six months of 2014. Also, the acquisition of certain operating assets of the City of Fort Meade, Florida, in December 2013, generated $102,000 of additional gross margin during the first six months of 2014. Service Expansions Increased gross margin from natural gas service expansions was due primarily to the following: $1.6 million from long-term natural gas transmission services, which commenced in November 2013, for services provided by Eastern Shore to



industrial customers located in New Castle and Kent Counties, Delaware.

These long-term transmission services, which displaced short-term services

provided by Eastern Shore to these customers from May through October

2013, are expected to generate $4.3 million of annual gross margin. They also displace annualized gross margin of $1.1 million from an older contract, which expired in November 2012.



$799,000 from expansions completed in 2013 that facilitated new natural

gas transmission and distribution services in Sussex County, Delaware;

Worcester and Cecil Counties, Maryland; and Nassau and Indian River Counties, Florida.



$599,000 from a short-term contract with an existing industrial customer

to provide an additional 50,000 Dts/d of natural gas transmission services

from April 2014 to April 2015. This short-term contract is expected to generate $1.9 million and $767,000 of gross margin in 2014 and 2015, respectively. Additional Revenue from GRIP in Florida During the first half of 2014, FPU and Chesapeake's Florida division recorded $1.3 million in additional gross margin as a result of additional GRIP capital expenditures. Other Natural Gas Growth Increased gross margin from other natural gas growth was due primarily to the following: $997,000 from Florida natural gas customer growth due primarily to new services to commercial and industrial customers.



$445,000 from a three-percent residential customer growth rate, as well as

growth in commercial and industrial customers, in our Delmarva natural gas

distribution operation.

These increases were partially offset by a decrease in Eastern Shore's

interruptible service to an existing industrial customer, which lowered

lower gross margin by $454,000.

Increased Customer Consumption-Weather and Other Higher customer consumption due to colder temperatures on the Delmarva Peninsula and in Florida during the first six months of 2014 generated increased gross margin of approximately $255,000 and $269,000, respectively. Other Operating Expenses The increase in other operating expenses for the Regulated Energy segment was due primarily to: (a) $2.2 million in other operating expenses associated with Sandpiper's operations; (b) $1.6 million in higher depreciation, amortization, asset removal and property tax costs associated with capital investments to support growth and maintain system integrity; (c) $1.1 million in higher benefits costs; (d) $864,000 in higher payroll costs to support recent and future growth; and (e) $610,000 in higher payroll costs in Florida principally resulting from a change in vacation policy in 2013, which reduced the accrual for that year. These increases in other - 36



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operating expenses were partially offset by the absence a one-time sales tax expense of $759,000 in 2013 related to the ESG acquisition. Unregulated Energy

For the quarter ended June 30, 2014 compared to 2013

Three Months Ended June 30, Increase 2014 2013 (decrease) (in thousands) Revenue $ 34,321$ 36,025$ (1,704 ) Cost of sales 26,020 27,934 (1,914 ) Gross margin 8,301 8,091 210 Operations & maintenance 7,022 6,319 703 Depreciation & amortization 986 967 19 Other taxes 336 358 (22 ) Other operating expenses 8,344 7,644 700 Operating Income (Loss) $ (43 )$ 447$ (490 ) The Unregulated Energy segment reported an operating loss of $43,000 in the second quarter of 2014, compared to operating income of $447,000 in the same quarter of 2013. Gross margin increased by $210,000 while other operating expense increased by $700,000. Gross Margin Items contributing to the quarter-over-quarter increase of $210,000 in gross margin are as follows: (in thousands) Gross margin for the three months ended June 30, 2013 $



8,091

Factors contributing to the gross margin increase for the three months ended June 30, 2014: Increased wholesale propane sales

254

Increase in retail propane margins



237

Decreased customer consumption-weather and other (195 ) Contributions from acquisitions



12

Other (98 ) Gross margin for the three months ended June 30, 2014 $



8,301

Increased Wholesale Propane Sales An increase in wholesale propane sales generated additional gross margin of $254,000 as a result of a supply agreement entered into in May 2013 with an affiliate of ESG.

Increase in Retail Propane Margins Higher retail propane margins for our Florida propane distribution operation increased gross margin by $312,000. The higher margins in Florida were partially offset by $75,000 in lower retail propane margins on the Delmarva Peninsula. Decreased Customer Consumption-Weather and Other Lower customer consumption decreased gross margin by $195,000. This lower consumption was due primarily to a decrease in non-weather related consumption by Florida customers, partially offset by an increase in non-weather related consumption on the Delmarva Peninsula. Contributions from Acquisitions The acquisition of the operating assets of Austin Cox in June 2013 generated $12,000 of additional gross margin during the second quarter of 2014. - 37



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Table of Contents Other Operating Expenses Other operating expenses for the Unregulated Energy segment increased by $700,000 of which $466,000 is attributable to higher payroll and benefits costs principally attributed to resources added to support growth.



For the six months ended June 30, 2014 compared to 2013

Six Months Ended June 30, Increase 2014 2013 (decrease) (in thousands) Revenue $ 114,294$ 91,016$ 23,278 Cost of sales 85,179 65,741 19,438 Gross margin 29,115 25,275 3,840 Operations & maintenance 15,447 12,706 2,741 Depreciation & amortization 1,966 1,867 99 Other taxes 887 886 1 Other operating expenses 18,300 15,459 2,841 Operating Income $ 10,815$ 9,816$ 999 Operating income for the Unregulated Energy segment for the six months ended June 30, 2014 was $10.8 million, an increase of $999,000, or 10 percent. An increase in gross margin of $3.8 million was partially offset by an increase in other operating expenses of $2.8 million. Gross Margin Items contributing to the period-over-period increase of $3.8 million, or 15 percent, in gross margin are as follows: (in thousands) Gross margin for the six months ended June 30, 2013 $



25,275

Factors contributing to the gross margin increase for the six months ended June 30, 2014: Increased customer consumption-weather and other

1,640

Increased wholesale propane sales



1,286

Increased margins from propane wholesale marketing



930

Contributions from acquisitions



452

Decrease in retail propane margins (254 ) Other (214 ) Gross margin for the six months ended June 30, 2014$ 29,115 - 38



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Increased Customer Consumption-Weather and Other Higher customer consumption increased gross margin by $1.6 million. This increase was due primarily to colder temperatures on the Delmarva Peninsula during the first six months of 2014. Increased Wholesale Propane Sales An increase in wholesale propane sales generated additional gross margin of $1.3 million due primarily to the supply agreement entered into in May 2013 with an affiliate of ESG. Increased Margins from Propane Wholesale Marketing Xeron generated additional gross margin of $930,000 during the first half of 2014 as a result of: (a) trades executed with higher margins because of higher price volatility in the wholesale propane market, primarily during the first three months of 2014, and (b) a 34-percent increase in trading activity. Contributions from Acquisitions The acquisitions of the operating assets of Glades in February 2013 and Austin Cox in June 2013 generated $146,000 and $306,000, respectively, of additional gross margin during the first six months of 2014. Decrease in Retail Propane Margins Lower retail propane margins for our Delmarva propane distribution operation decreased gross margin by $891,000. This decrease was partially offset by $637,000 in higher retail propane margins in Florida as a result of sustained pricing in response to local market conditions. Retail propane margins began to return to more normal levels on the Delmarva Peninsula during the first six months of 2014 as a significant increase in wholesale prices in late 2013 and early 2014 increased our average propane inventory costs. In contrast, retail propane margins on the Delmarva Peninsula were unusually strong in the first six months of 2013 due to a 27-percent decline in propane costs from lower propane wholesale prices in late 2012 and early 2013, which significantly outpaced a slight decline in retail prices. The propane retail price per gallon is subject to various market conditions, including competition with other propane suppliers and the availability and price of alternative energy sources. The propane retail price per gallon may fluctuate based on changes in demand, supply and other energy commodity prices. Other Operating Expenses The increase in other operating expenses was due primarily to: (a) $905,000 in additional expenses incurred by the entities acquired in 2013; (b) $857,000 in higher payroll expense due to increased seasonal overtime and additional resources to support growth; and (c) $256,000 in increased accruals for incentive bonuses as a result of strong financial performance on a year-to-date basis. Other



For the quarter ended June 30, 2014 compared to 2013

Three Months Ended June 30, Increase 2014 2013 (decrease) (in thousands) Revenue $ 4,530$ 2,905$ 1,625 Cost of sales 2,422 839 1,583 Gross margin 2,108 2,066 42 Operations & maintenance 1,941 1,640 301 Depreciation & amortization 127 113 14 Other taxes 251 227 24 Other operating expenses 2,319 1,980 339 Operating Income (Loss) $ (211 )$ 86$ (297 )



The "Other" segment, which consists primarily of BravePoint, reported an operating loss of $211,000 for the quarter ended June 30, 2014, compared to operating income of $86,000 in the same quarter in 2013. This increased loss resulted from a $339,000 increase

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in operating expenses partially offset by a $42,000 increase in gross margin. The increased operating expenses were due primarily to augmented sales resources for BravePoint.



For the six months ended June 30, 2014 compared to 2013

Six Months Ended June 30, Increase 2014 2013 (decrease) (in thousands) Revenue $ 8,728$ 7,075$ 1,653 Cost of sales 4,587 3,120 1,467 Gross margin 4,141 3,955 186 Operations & maintenance 3,890 3,263 627 Depreciation & amortization 255 223 32 Other taxes 534 508 26 Other operating expenses 4,679 3,994 685 Operating Loss $ (538 )$ (39 )$ (499 ) The "Other" segment reported an operating loss of $538,000 and $39,000 for the six months ended June 30, 2014 and 2013, respectively. BravePoint's gross margin increased by $240,000 as a result of higher consulting revenues, while its other operating expenses increased by $725,000 as a result of higher payroll due primarily to the addition of sales resources and benefits expenses.



Interest Charges

For the quarter ended June 30, 2014 compared to 2013 Interest charges for the three months ended June 30, 2014 increased by approximately $287,000, or 14 percent, compared to the same quarter in 2013. The increase in interest charges is attributable primarily to an increase of $225,000 in long-term interest charges as a result of the Notes issued in 2013 and 2014, partially offset by a decrease in interest charges as a result of scheduled principal payments. For the six months ended June 30, 2014 compared to 2013 Interest charges for the six months ended June 30, 2014 increased by approximately $371,000, or nine percent, compared to the same period in 2013. The increase in interest charges is attributable primarily to higher short-term and long-term debt balances during 2014 as a result of funding capital expenditures and the issuance of the Notes in 2013 and 2014.



Income Taxes

For the quarter ended June 30, 2014 compared to 2013 Income tax expense was $3.4 million in the second quarter of 2014, compared to $2.8 million in the same quarter in 2013. The increase in income tax expense was due to higher taxable income. Our effective income tax rate was 40.0 percent and 39.2 percent for the second quarters of 2014 and 2013, respectively. For the six months ended June 30, 2014 compared to 2013 Income tax expense was $15.2 million for the six months ended June 30, 2014, compared to $12.7 million in the same period in 2013. The increase in income tax expense was due to higher taxable income. Our effective income tax rate was 40.0 percent and 39.8 percent for the first six months of 2014 and 2013, respectively. - 40



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FINANCIAL POSITION, LIQUIDITY AND CAPITAL RESOURCES Our capital requirements reflect the capital-intensive and seasonal nature of our business and are principally attributable to investment in new plant and equipment, retirement of outstanding debt and seasonal variability in working capital. We rely on cash generated from operations, short-term borrowings, and other sources to meet normal working capital requirements and to finance capital expenditures. Our energy businesses are weather-sensitive and seasonal. We normally generate a large portion of our annual net income and subsequent increases in our accounts receivable in the first and fourth quarters of each year due to significant volumes of natural gas, electricity, and propane delivered to customers during the peak heating season. In addition, our natural gas and propane inventories, which usually peak in the fall months, are largely depleted in the heating season and provide a source of cash as the inventory is used to satisfy winter sales demand. Capital expenditures, which are our investments in new or acquired plant and equipment, are our largest capital requirements. We originally budgeted $110.9 million for capital expenditures during 2014. Our current projection of capital expenditures during 2014 is $145.9 million. The following table shows the projected 2014 capital expenditure by segment: (dollars in thousands) Regulated Energy: Natural gas distribution $ 63,985 Natural gas transmission 51,442 Electric distribution 7,867 Total Regulated Energy 123,294 Unregulated Energy: Propane distribution 8,774 Other unregulated energy 3,946 Total Unregulated Energy 12,720 Other Advanced information services 898 Other 9,034 Total Other 9,932



Total 2014 projected capital expenditures $ 145,946

We expect to fund the 2014 capital expenditures from short-term borrowings, cash provided by operating activities, and other sources. In addition, as further discussed in the Capital Structure section below, we issued $50.0 million of our Series B Notes in May 2014. The capital expenditures projection is subject to continuous review and modification. Actual capital requirements may vary from the above estimates due to a number of factors, including changing economic conditions, customer growth in existing areas, regulation, new growth or acquisition opportunities and availability of capital. Historically, actual capital expenditures have typically lagged behind the projected amounts. - 41



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Capital Structure We are committed to maintaining a sound capital structure and strong credit ratings to provide the financial flexibility needed to access capital markets when required. This commitment, along with adequate and timely rate relief for our regulated operations, is intended to ensure our ability to attract capital from outside sources at a reasonable cost. We believe that the achievement of these objectives will provide benefits to our customers, creditors and investors. The following presents our capitalization, excluding and including short-term borrowings, as of June 30, 2014 and December 31, 2013: June 30, 2014 December 31, 2013 (in thousands) Long-term debt, net of current maturities $ 165,370 36 % $ 117,592 30 % Stockholders' equity 296,223 64 % 278,773 70 % Total capitalization, excluding short-term debt $ 461,593 100 % $ 396,365 100 % June 30, 2014 December 31, 2013 (in thousands) Short-term debt $ 47,870 9 % $ 105,666 21 % Long-term debt, including current maturities 176,487 34 % 128,945 25 % Stockholders' equity 296,223 57 %



278,773 54 % Total capitalization, including short - term debt $ 520,580 100 % $ 513,384 100 %

In September 2013, we entered into the Note agreement with the Note Holders to issue $70.0 million of Notes. We issued $20.0 million in Series A Notes in December 2013 and $50.0 million in Series B Notes in May 2014. The proceeds from these issuances were used to reduce our short-term borrowings and fund capital expenditures. Included in the long-term debt balances at June 30, 2014 and December 31, 2013, was a capital lease obligation associated with Sandpiper's capacity, supply and operating agreement ($5.5 million and $6.1 million, respectively, net of current maturities and $6.8 million and $7.0 million, respectively, including current maturities). Sandpiper entered into this six-year agreement at the closing of the ESG acquisition in May 2013. The capacity portion of this agreement is accounted for as a capital lease. Short-term Borrowings Our outstanding short-term borrowings at June 30, 2014 and December 31, 2013 were $47.9 million and $105.7 million, respectively, at weighted average interest rates of 1.18 percent and 1.25 percent, respectively. As of June 30, 2014, we had five unsecured short-term credit facilities with two financial institutions for a total of $165.0 million. Two of these unsecured bank lines, totaling $85.0 million, are available under committed lines of credit. Advances offered under the uncommitted lines of credit, totaling $40.0 million, are subject to the discretion of the banks. None of these unsecured bank lines of credit requires compensating balances. The remaining $40.0 million of our short-term credit facilities is structured in the form of a revolving credit note. Cash Flows The following table provides a summary of our operating, investing and financing cash flows for the six months ended June 30, 2014 and 2013: Six Months Ended June 30, 2014 2013 (in thousands) Net cash provided by (used in): Operating activities $ 58,222$ 54,063 Investing activities (42,373 ) (60,925 ) Financing activities (16,676 ) 5,711 Net decrease in cash and cash equivalents (827 ) (1,151 )



Cash and cash equivalents-beginning of period 3,356 3,361 Cash and cash equivalents-end of period $ 2,529$ 2,210

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Cash Flows Provided By Operating Activities Changes in our cash flows from operating activities are attributable primarily to changes in net income, non-cash adjustments for depreciation and deferred income taxes and working capital. Changes in working capital are determined by a variety of factors, including weather, the prices of natural gas, electricity and propane, the timing of customer collections, payments for purchases of natural gas, electricity and propane, and deferred fuel cost recoveries. We normally generate a large portion of our annual net income and subsequent increases in our accounts receivable in the first and fourth quarters of each year due to significant volumes of natural gas and propane delivered by our natural gas and propane distribution operations to customers during the peak heating season. In addition, our natural gas and propane inventories, which usually peak in the fall months, are largely drawn down in the heating season and provide a source of cash as the inventory is used to satisfy winter sales demand. During the six months ended June 30, 2014 and 2013, net cash provided by operating activities was $58.2 million and $54.1 million, respectively, resulting in an increase in cash flows of $4.2 million. Significant operating activities generating the cash flow change were as follows: The changes in net accounts receivable and payable increased cash flows by $12.4 million, due primarily to the timing of the collections and payments associated with trading contracts entered into by our propane wholesale marketing subsidiary; The changes in net regulatory assets and liabilities



decreased cash

flows by $10.8 million, due primarily to a change in fuel costs collected through fuel cost recovery; Net cash flows from changes in propane and natural gas inventories increased by approximately $3.9 million, compared to 2013, as a result of the higher levels of propane and natural gas usage, which decreases the levels of our inventory; Higher net income taxes paid decreased the cash flows by $3.3 million, due primarily to the absence of a bonus depreciation deduction in 2014, versus 2013.



Lower refunds of customer deposits increased cash flows by $1.3 million.

Cash Flows Used in Investing Activities Net cash used in investing activities totaled $42.4 million and $60.9 million during the six months ended June 30, 2014 and 2013, respectively, resulting in an increase in cash flows of $18.5 million. Significant investing activities generating the cash flow change were as follows: Net cash of $19.5 million was used to acquire Glades,



Sandpiper, and

Austin Cox during the first six months of 2013; there were no corresponding transactions during the same period in 2014; Cash paid for capital expenditures increased by $1.6 million to $42.8 million for the first six months of 2014, compared to $41.2 million for the same period in 2013. Cash Flows Used by Financing Activities Net cash used in financing activities totaled $16.7 million in the first six months of 2014, compared to net cash of $5.7 million provided by financing activities in the same period in 2013. This resulted in a decrease of $22.4 million in cash flows. Significant financing activities generating the cash flow change were as follows: During the six months ended June 30, 2014, we received $50.0 million in cash proceeds from a long-term issuance of Series B Notes and paid $1.7 million for scheduled principal payments. During the first six months ended June 30, 2013, we issued $7.0 million in



long-term

debt to refinance $8.5 million of existing secured long-term bonds. These long-term debt activities increased cash flows by $49.8 million. Net repayments of $57.0 million under our lines of credit



during the

six months ended June 30, 2014, compared to net borrowings of $15.5 million in the same period in 2013, decreased cash flows by $72.5 million. The proceeds from the long-term debt issuance during the first six months of 2014 were used to repay borrowings under our lines of credit. Off-Balance Sheet Arrangements We have issued corporate guarantees to certain vendors of our subsidiaries, primarily our propane wholesale marketing subsidiary and natural gas marketing subsidiary. These corporate guarantees provide for the payment of propane and natural gas purchases in the event of the respective subsidiary's default. None of these subsidiaries has ever defaulted on its obligations to pay its suppliers. The liabilities for these purchases are recorded in our financial statements when incurred. The aggregate amount guaranteed at June 30, 2014 was $31.6 million, with the guarantees expiring on various dates through June 2015. - 43



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In addition to the corporate guarantees, we have issued a letter of credit for $1.0 million, which was renewed through September 12, 2014, related to the electric transmission services for FPU's northwest electric division. We have also issued a letter of credit to our current primary insurance company for $1.1 million, which expires on December 2, 2014, as security to satisfy the deductibles under our various insurance policies. As a result of a change in our primary insurance company in 2010, we renewed and decreased the letter of credit for $304,000 to our former primary insurance company, which will expire on June 1, 2015. There have been no draws on these letters of credit as of June 30, 2014. We do not anticipate that the letters of credit will be drawn upon by the counterparties, and we expect that the letters of credit will be renewed to the extent necessary in the future. We provided a letter of credit for $2.3 million to TETLP related to the firm transportation service agreement between our Delaware and Maryland divisions and TETLP. On July 25, 2014, we provided a letter to the Florida PSC guaranteeing potential refunds from interim rates to be charged by our Florida electric operation. The interim rates, which provide a rate relief of approximately $2.2 million of revenue on an annual basis, were approved by the Florida PSC in July 2014 in connection with the base rate proceeding currently underway. This guarantee will expire upon the release by the Florida PSC at the conclusion of the base rate proceeding. See Note 4, Rates and Other Regulatory Activities, to the condensed consolidated financial statements for further details on the base rate proceeding involving the Florida electric operation. Contractual Obligations There has not been any material change in the contractual obligations presented in our 2013 Annual Report on Form 10-K, except for commodity purchase obligations and forward contracts entered into in the ordinary course of our business. The following table summarizes the commodity and forward contract obligations at June 30, 2014. Payments Due by Period Purchase Obligations Less than 1 year 1 - 3 years 3 - 5 years More than 5 years Total (in thousands) Commodities (1) $ 10,917 $ 621 $ - $ - $ 11,538 Propane 27,958 18,639 3,610 - 50,207 Total Purchase Obligations $ 38,875 $ 19,260$ 3,610 $ - $ 61,745



(1) In addition to the obligations noted above, the natural gas, electric and

propane distribution operations have agreements with commodity suppliers

that have provisions with no minimum purchase requirements. There are no

monetary penalties for reducing the amounts purchased; however, the

propane contracts allow the suppliers to reduce the amounts available in

the winter season if we do not purchase specified amounts during the

summer season. Under these contracts, the commodity prices will fluctuate

as market prices fluctuate.

Rates and Regulatory Matters Our natural gas distribution operations in Delaware, Maryland and Florida and electric distribution operation in Florida are subject to regulation by the respective state PSC; Eastern Shore is subject to regulation by the FERC; and Peninsula Pipeline is subject to regulation by the Florida PSC. At June 30, 2014, we were involved in rate filings and/or regulatory matters in each of the jurisdictions in which we operate. Each of these rate filings and/or regulatory matters is fully described in Note 4, Rates and Other Regulatory Activities, to the unaudited condensed consolidated financial statements in this Quarterly Report on Form 10-Q. OnApril 28, 2014, FPU filed a base rate proceeding for its electric distribution operation. FPU requested interim rate relief of approximately $2.4 million and final rate relief of approximately $5.9 million. The interim rate relief requested is based on the twelve-month period ended September 30, 2013. At the July 10, 2014Agenda Conference, the Florida PSC approved interim rate relief of approximately $2.2 million, as recommended by the Florida PSC staff. The interim rates are effective for meter readings on or after August 10, 2014. Any increase to our rates as a result of this interim rate relief may be subject to refund, depending on the outcome of the final rate relief request. The base rate proceeding hearing is currently scheduled for September 15-18, 2014. The revenue requirement will be determined at the Agenda Conference, currently scheduled for November 25, 2014, and final rates will be determined at the Agenda Conference, currently scheduled for December 16, 2014. Final rates are expected to be effective in January 2015. - 44



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Recent Authoritative Pronouncements on Financial Reporting and Accounting Recent accounting developments applicable to us and their impact on our financial position, results of operations and cash flows are described in Note 1, Summary of Accounting Policies, to the unaudited condensed consolidated financial statements in this Quarterly Report on Form 10-Q. Item 3. Quantitative and Qualitative Disclosures about Market Risk Market risk represents the potential loss arising from adverse changes in market rates and prices. Long-term debt is subject to potential losses based on changes in interest rates. Our long-term debt consists of fixed-rate senior notes and secured debt. All of our long-term debt, excluding a capital lease obligation, is fixed-rate debt and was not entered into for trading purposes. The carrying value of our long-term debt, including current maturities, but excluding a capital lease obligation, was $169.7 million at June 30, 2014, as compared to a fair value of $188.0 million, using a discounted cash flow methodology that incorporates a market interest rate based on published corporate borrowing rates for debt instruments with similar terms and average maturities, with adjustments for duration, optionality, credit risk, and risk profile. We evaluate whether to refinance existing debt or permanently refinance existing short-term borrowing, based in part on the fluctuation in interest rates. Our propane distribution business is exposed to market risk as a result of propane storage activities and entering into fixed price contracts for supply. We can store up to approximately 6.1 million gallons of propane (including leased storage and rail cars) during the winter season to meet our customers' peak requirements and to serve metered customers. Decreases in the wholesale price of propane may cause the value of stored propane to decline. To mitigate the impact of price fluctuations, we have adopted a Risk Management Policy that allows the propane distribution operation to enter into fair value hedges or other economic hedges of our inventory. Our propane wholesale marketing operation is a party to natural gas liquids (primarily propane) forward contracts, with various third parties, which require that the propane wholesale marketing operation purchase or sell natural gas liquids at a fixed price at fixed future dates. At expiration, the contracts are typically settled financially without taking physical delivery of propane. The propane wholesale marketing operation also enters into futures contracts that are traded on the IntercontinentalExchange. In certain cases, the futures contracts are settled by the payment or receipt of a net amount equal to the difference between the current market price of the futures contract and the original contract price; however, they may also be settled by physical receipt or delivery of propane. The forward and futures contracts are entered into for trading and wholesale marketing purposes. The propane wholesale marketing business is subject to commodity price risk on its open positions to the extent that market prices for natural gas liquids deviate from fixed contract settlement prices. Market risk associated with the trading of futures and forward contracts is monitored daily for compliance with our Risk Management Policy, which includes volumetric limits for open positions. To manage exposures to changing market prices, open positions are marked up or down to market prices and reviewed daily by our oversight officials. In addition, the Risk Management Committee reviews periodic reports on markets and the credit risk of counter-parties, approves any exceptions to the Risk Management Policy (within limits established by the Board of Directors) and authorizes the use of any new types of contracts. Quantitative information on forward and future contracts at June 30, 2014 is presented in the following table. Quantity in Estimated Market Weighted Average At June 30, 2014 Gallons Prices Contract Prices Forward Contracts Sale 630,000 $1.1400 $ 1.1400 Purchase 631,000 $1.1300 - $1.3176 $ 1.1302



Estimated market prices and weighted average contract prices are in dollars per gallon. All contracts expire by the end of the fourth quarter of 2014

Our natural gas distribution, electric distribution and natural gas marketing operations have entered into agreements with various suppliers to purchase natural gas, electricity and propane for resale to their customers. Purchases under these contracts either do not meet the definition of derivatives or are considered "normal purchases and sales" and are accounted for on an accrual basis.



At June 30, 2014 and December 31, 2013, we marked these forward and other contracts to market, using market transactions in either the listed or OTC markets, which resulted in the following assets and liabilities:

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(in thousands) June 30, 2014 December 31, 2013 Mark-to-market energy assets, including call options $ 136 $ 385 Mark-to-market energy liabilities, including swap agreements $ 32 $ 127


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