Environmental Commitments and Contingencies

9 Months Ended

Sep. 30, 2011

Environmental Commitments and Contingencies [Abstract]

Environmental Commitments and Contingencies

4. Environmental Commitments and Contingencies

We are subject to federal, state and local laws and regulations governing environmental quality and pollution control. These laws and regulations require us to remove or remedy at current and former operating sites the effect on the environment of the disposal or release of specified substances.

We have participated in the investigation, assessment or remediation, and have certain exposures at six former Manufactured Gas Plant (“MGP”) sites. Those sites are located in Salisbury, Maryland, and Winter Haven, Key West, Pensacola, Sanford and West Palm Beach, Florida. We have also been in discussions with the Maryland Department of the Environment (“MDE”) regarding a seventh former MGP site located in Cambridge, Maryland.

As of September 30, 2011, we had approximately $11.1 million in environmental liabilities related to all of FPU’s MGP sites in Florida, which include the Key West, Pensacola, Sanford and West Palm Beach sites, representing our estimate of the future costs associated with those sites. FPU has approval to recover up to $14.0 million of its environmental costs related to all of its MGP sites from insurance and from customers through rates. Approximately $8.2 million of FPU’s expected environmental costs have been recovered from insurance and customers through rates as of September 30, 2011. We also had approximately $5.8 million in regulatory assets for future recovery of environmental costs from FPU’s customers.

West Palm Beach, Florida

Remedial options are being evaluated to respond to environmental impacts to soil and groundwater at and in the immediate vicinity of a parcel of property owned by FPU in West Palm Beach, Florida, where FPU previously operated an MGP. Pursuant to a Consent Order between FPU and the Florida Department of Environmental Protection (“FDEP”), effective April 8, 1991, FPU is required to complete the delineation of soil and groundwater impacts at the site, and implement an effective remedy.

On June 30, 2008, FPU transmitted to the FDEP a revised feasibility study, evaluating appropriate remedies for the site. This revised feasibility study evaluated a wide range of remedial alternatives based on criteria provided by applicable laws and regulations. On April 30, 2009, the FDEP issued a remedial action order, which it subsequently withdrew. In response to the Order and as a condition to its withdrawal, FPU committed to perform additional field work in 2009 and complete an additional engineering evaluation of certain remedial alternatives. The scope of this work has increased in response to FDEP’s requests for additional information.

FPU performed additional field work in August 2010, which included the installation of additional groundwater monitoring wells and performance of a comprehensive groundwater sampling event. FPU also performed vapor intrusion sampling in October 2010. The results of the field work were submitted to FDEP for their review and comment in October 2010. On November 4, 2010, FDEP issued its comments on the feasibility study and the proposed remedy.

On November 16, 2010, FPU presented to FDEP a new remedial action plan for the site, and FDEP agreed with FPU’s proposal to implement a phased approach to remediation. On December 22, 2010, FPU submitted to FDEP an interim Remedial Action Plan (“RAP”) to remediate the east parcel of the site, which FDEP conditionally approved on February 4, 2011. Subsequent modifications to the interim RAP, dated March 12, 2011 and April 18, 2011, were submitted to address potential concerns raised by FDEP. An Approval Order for the interim RAP was issued by FDEP on May 2, 2011, and subsequently modified by FDEP on May 18, 2011.

FPU is currently implementing the interim RAP for the east parcel of the West Palm Beach site, including the incorporation of FDEP’s conditions for approval. The operations on the east parcel have been relocated, and the structures removed. New monitoring wells and Air Sparging and Soil-Vapor Extraction (“AS/SVE”) test wells were installed on the east parcel in May 2011. The initial round of SVE and sparging pilot testing was conducted in June 2011, and a subsequent round of testing was conducted in July of 2011. A supplement to the interim RAP is being prepared to present to FDEP the findings of the pilot testing and proposed design details for a full-scale remediation system.

Estimated costs of remediation for the West Palm Beach site range from approximately $4.7 million to $15.8 million. We have revised our estimated maximum cost of $13.1 million to $15.8 million to include costs associated with relocation of FPU’s operations at this site, which may be necessary to implement the remedial plan, and any potential costs associated with future redevelopment of the properties.

We continue to expect that all costs related to these activities will be recoverable from customers through rates.

Sanford, Florida

FPU is the current owner of property in Sanford, Florida, which was a former MGP site that was operated by several other entities before FPU acquired the property. FPU was never an owner or an operator of the MGP. In late September 2006, the United States Environmental Protection Agency (“EPA”) sent a Special Notice Letter, notifying FPU, and the other responsible parties at the site (Florida Power Corporation, Florida Power & Light Company, Atlanta Gas Light Company, and the city of Sanford, Florida, collectively with FPU, “the Sanford Group”), of EPA’s selection of a final remedy for OU1 (soils), OU2 (groundwater), and OU3 (sediments) for the site. The EPA projected the total estimated remediation costs for this site to be approximately $12.9 million.

In January 2007, FPU and other members of the Sanford Group signed a Third Participation Agreement, which provides for funding the final remedy approved by EPA for the site. FPU’s share of remediation costs under the Third Participation Agreement is set at five percent of a maximum of $13 million, or $650,000. As of September 30, 2011, FPU has paid $650,000 to the Sanford Group escrow account for its share of the funding requirements.

The Sanford Group, EPA and the U.S. Department of Justice agreed to a Consent Decree in March 2008, which was entered by the Federal Court in Orlando, Florida on January 15, 2009. The Consent Decree obligates the Sanford Group to implement the remedy approved by EPA for the site. The total cost of the final remedy is now estimated at approximately $18 million. FPU has advised the other members of the Sanford Group that it is unwilling at this time to agree to pay any sum in excess of the $650,000 committed by FPU in the Third Participation Agreement.

Several members of the Sanford Group have concluded negotiations with two adjacent property owners to resolve damages that the property owners allege they have and will incur as a result of the implementation of the EPA-approved remediation. In settlement of these claims, members of the Sanford Group, which in this instance does not include FPU, have agreed to pay specified sums of money to the parties. FPU has refused to participate in the funding of the third-party settlement agreements based on its contention that it did not contribute to the release of hazardous substances at the site giving rise to the third-party claims.

As of September 30, 2011, FPU’s remaining share of remediation expenses, including attorneys’ fees and costs, is estimated to be $24,000. However, we are unable to determine, to a reasonable degree of certainty, whether the other members of the Sanford Group will accept FPU’s asserted defense to liability for costs exceeding $13.0 million to implement the final remedy for this site or will pursue a claim against FPU for a sum in excess of the $650,000 that FPU has paid under the Third Participation Agreement. No such claims have been made as of September 30, 2011.

Key West, Florida

FPU formerly owned and operated an MGP in Key West, Florida. Field investigations performed in the 1990s identified limited environmental impacts at the site, which is currently owned by an unrelated third party. In September 2010, FDEP issued a Preliminary Contamination Assessment Report, for additional soil and groundwater investigation work that was undertaken by FDEP in November 2009 and January 2010, after 17 years of regulatory inactivity. Because FDEP observed that some soil and groundwater standards were exceeded, FDEP is requesting implementation of additional fieldwork which FDEP believes is warranted for the site.

FPU and the current site owner have had several discussions regarding the approach to be taken with FDEP and the proposed scope of work. Representatives of FPU, FDEP and the current site owner participated in a teleconference on July 7, 2011. During that call, the scope of work was tentatively agreed upon, and FDEP agreed to proceed without using a consent order. FPU and the current site owner submitted a work plan and schedule to FDEP on September 30, 2011. Potential costs for investigation and remediation are projected to be $118,000.

Pensacola, Florida

FPU formerly owned and operated an MGP in Pensacola, Florida, which was subsequently owned by Gulf Power. Portions of the site are now owned by the City of Pensacola and the Florida Department of Transportation (“FDOT”). In October 2009, FDEP informed Gulf Power that FDEP would approve a conditional No Further Action (“NFA”) determination for the site, which must include a requirement for institutional and engineering controls. On November 9, 2010, an NFA Proposal was submitted to FDEP, along with a draft restrictive covenant for that portion of the property currently owned by FDOT. FPU, FDOT and the City of Pensacola are working together to obtain a restrictive covenant that is acceptable to FDEP to complete closure of the site, and it is anticipated that no further monitoring will be required on the site. FPU’s total remaining consulting and remediation costs for this site are projected to be $7,000.

In addition, we had $284,000 in environmental liabilities at September 30, 2011, related to Chesapeake’s MGP sites in Maryland and Florida, representing our estimate of future costs associated with these sites. As of September 30, 2011, we had approximately $1.1 million in regulatory and other assets for future recovery through rates. The following discussion provides details on MGP sites for Chesapeake’s Maryland and Florida divisions:

Salisbury, Maryland

We have substantially completed remediation of a site in Salisbury, Maryland, where it was determined that a former MGP caused localized ground-water contamination. During 1996, we completed construction of an AS/SVE system and began remediation procedures. We have reported the remediation and monitoring results to the MDE on an ongoing basis since 1996. In February 2002, the MDE granted permission to permanently decommission the AS/SVE system and to discontinue all on-site and off-site well monitoring, except for one well, which is being maintained for periodic product monitoring and recovery.

Through September 30, 2011, we have incurred and paid approximately $2.9 million for remedial actions and environmental studies related to this site. We have recovered approximately $2.3 million through insurance proceeds or in rates, and $580,000 is expected to be recovered through future rates.

Winter Haven, Florida

The Winter Haven site is located on the eastern shoreline of Lake Shipp, in Winter Haven, Florida. Pursuant to a Consent Order entered into with the FDEP, we are obligated to assess and remediate environmental impacts at this former MGP site. In 2001, FDEP approved a RAP requiring construction and operation of a Bio-Sparging and Soil/Vapor Extraction (“BS/SVE”) treatment system to address soil and groundwater impacts at a portion of the site. The BS/SVE treatment system has been in operation since October 2002. Modifications and upgrades to the BS/SVE treatment system were completed in October 2009. The Seventeenth Semi-Annual RAP Implementation Status Report was submitted to FDEP in June 2011. The groundwater sampling results through June 2011 show a continuing reduction in contaminant concentrations and indicate that the recent treatment system modifications and upgrades have had a beneficial impact on the rate of reduction. At present, we predict that remedial action objectives could be met in approximately two to three years for the area being treated by the BS/SVE treatment system. The total expected cost of operating and monitoring the system is approximately $46,000.

The BS/SVE treatment system at the Winter Haven site does not address impacted soils in the southwest corner of the site. On April 16, 2010, a soil excavation interim RAP describing the proposed excavation of approximately 4,000 cubic yards of impacted soils from the southwest corner of the site was submitted to FDEP for review. On June 24, 2010, FDEP provided comments on the soil excavation interim RAP by letter, to which we responded, and a subsequent conditional approval letter was issued by FDEP on August 27, 2010. The cost to implement this excavation plan has been estimated at $250,000; however, this estimate does not include costs associated with dewatering or shoreline stabilization, which would be required to complete the excavation. Because the costs associated with shoreline stabilization and dewatering (including treatment and discharge of the pumped water) are likely to be substantial, alternatives to this excavation plan are being evaluated. One alternative currently being evaluated involves sparging into the southwest portion of the property to treat soils rather than excavating the soils. Two new sparge points were installed in the southwest portion of the property in February of 2011. Sparging into these points has been initiated and operational and monitoring data over the next few quarters should provide the information needed to make this evaluation.

FDEP has indicated that we may be required to remediate sediments along the shoreline of Lake Shipp, immediately west of the site. Based on studies performed to date, we object to FDEP’s suggestion that the sediments have been adversely impacted by the former operations of the MGP. Our early estimates indicate that some of the corrective measures discussed by FDEP could cost as much as $1.0 million. We believe that corrective measures for the sediments are not warranted and intend to oppose any requirement that we undertake corrective measures in the offshore sediments. We have not recorded a liability for sediment remediation, as the final resolution of this matter cannot be predicted at this time.

Through September 30, 2011, we have incurred and paid approximately $1.7 million for remedial activities at this site, and we have estimated and accrued for additional future costs of $284,000. We have recovered through rates $1.5 million of the costs to remediate the Winter Haven site and continue to expect that the remaining $481,000, which is included in regulatory assets, will be recoverable from customers through our approved rates.

Other

We are in discussions with the MDE regarding a former MGP site located in Cambridge, Maryland. The outcome of this matter cannot be determined at this time; therefore, we have not recorded an environmental liability for this location.