RATES AND OTHER REGULATORY ACTIVITIES

Our natural gas and electric distribution operations in Delaware, Maryland and Florida are subject to regulation by their respective PSC; Eastern Shore, our natural gas transmission subsidiary, is subject to regulation by the FERC; and Peninsula Pipeline, our intrastate pipeline subsidiary, is subject to regulation by the Florida PSC. Chesapeake’s Florida natural gas distribution division and FPU’s natural gas and electric operations continue to be subject to regulation by the Florida PSC as separate entities.

Delaware

Natural Gas Expansion Service Offerings: On November 5, 2013, the Delaware PSC approved a settlement agreement, which incorporated comments from the DPA, the Delaware PSC staff and us, in regards to increasing our natural gas expansion service offerings to facilitate conversions to natural gas within our Delaware service areas. Under the settlement agreement, the Delaware division is authorized to:


(i)	charge a monthly fixed charge to customers in portions of eastern Sussex County, Delaware, which will enable us to extend our distribution system to provide natural gas service to these customers economically without upfront contributions from these customers; and


(ii)	offer optional service choices to customers to facilitate conversions to natural gas, including a conversion finance service to help customers manage their cost of conversion equipment.

Maryland

ESG Acquisition: On September 7, 2012, we filed an application with the Maryland PSC for approval of the acquisition of the ESG operating assets and the transfer of the ESG franchises to Chesapeake (see Note 4, Acquisitions, for additional information on the ESG acquisition). In this application, we also requested that the Maryland PSC approve the overall regulatory framework we proposed for Sandpiper in Worcester County. The proposed regulatory framework included: (i) a new gas service tariff and rates applicable to natural gas and propane distribution customers in Worcester County, including the customers that were being served by ESG; (ii) the capacity, supply and operating agreement with ESG for the supply and storage of propane, which will be utilized to serve the ESG customers; and (iii) the accounting treatment for certain purchased assets.

On April 8, 2013, the parties finalized a settlement agreement, which was approved by the Maryland PSC in its order effective May 29, 2013. The Maryland PSC granted approval of: (i) the ESG acquisition; (ii) the overall regulatory framework requested; and (iii) recovery of the cost of the capacity, supply and operating agreement with ESG. In addition, the Maryland PSC's order requires us to file a depreciation study within the first year after the acquisition, at which point, the proper amount of the accumulated depreciation associated with the purchased assets in the rate base and the depreciation rates on those assets will be determined and then applied prospectively. The order also requires us to file a base rate case within two and a half years of Sandpiper's new service in Worcester County. The acquisition of the ESG operating assets was completed on May 31, 2013.

On July 31, 2013, Sandpiper filed an application with the Maryland PSC to revise its tariff to allow, on a temporary basis until the next base rate case, negotiated contract rates for a discrete subset of commercial customers receiving propane service who: (i) experienced rate increases on June 1, 2013, when Sandpiper’s tariff took effect in Worcester County, and (ii) do not meet the minimum usage requirement for eligibility for negotiated contract rates under the current tariff. On August 14, 2013, the Maryland PSC considered the application and accepted the proposed tariff revisions, effective August 14, 2013.

Florida

Marianna Franchise: On July 7, 2009, the Marianna Commission adopted the Franchise Agreement. The Franchise Agreement required FPU to develop and implement new TOU and interruptible electric power rates, or other similar rates, mutually agreeable to FPU and the City of Marianna, effective by February 17, 2011, and available to all customers within FPU’s northwest division, which includes the City of Marianna. If the rates were not in effect by February 17, 2011, the City of Marianna had the right to give notice to FPU of its intent to exercise its option in the Franchise Agreement to purchase FPU’s property (consisting of the electric distribution assets) within the City of Marianna. Any such purchase was subject to approval by the Marianna Commission, which needed to approve the presentation of a referendum to voters in the City of Marianna for the approval of the purchase and the operation by the City of Marianna of an electric distribution facility.

FPU developed TOU and interruptible rates. On December 14, 2010, FPU filed a petition with the Florida PSC for authority to implement such proposed TOU and interruptible rates on or before February 17, 2011. On January 26, 2011, FPU filed a petition with the Florida PSC for approval of an amendment to FPU’s Generation Services Agreement between FPU and Gulf Power. The amendment provides for a reduction in the capacity demand quantity, which generates the savings necessary to support the TOU and interruptible rates approved by the Florida PSC. The amendment also extended the current agreement by two years, with a new expiration date of December 31, 2019.

On February 11, 2011, the Florida PSC approved FPU’s petition for authority to implement the proposed TOU and interruptible rates, effective as of February 8, 2011. The City of Marianna objected to the proposed rates and filed a petition protesting the entry of the Florida PSC’s order. On June 21, 2011, the Florida PSC issued an order approving the amendment to FPU's Generation Services Agreement. On July 12, 2011, the City of Marianna filed a protest of this decision and requested a hearing on the amendment. On January 24, 2012, the Florida PSC dismissed with prejudice the protests by the City of Marianna regarding both the TOU and interruptible rates and the amendment to the Generation Services Agreement.

The City of Marianna filed an appeal with the Florida Supreme Court on March 7, 2012 and with the Florida PSC on March 19, 2012, seeking an appellate review of both of the decisions by the Florida PSC with respect to the protests by the City of Marianna.

As more fully disclosed in Note 20, Other Commitments and Contingencies, on March 2, 2011, the City of Marianna filed a complaint against FPU in the Circuit Court of the Fourteenth Judicial Circuit in and for Jackson County, Florida, alleging breaches of the Franchise Agreement by FPU and seeking a declaratory judgment that the City of Marianna has the right to exercise its option to purchase FPU’s property in the City of Marianna in accordance with the terms of the Franchise Agreement. Prior to the scheduled trial date, FPU and the City of Marianna reached an agreement in principle to resolve their dispute, which resulted in the City of Marianna dismissing its legal action with prejudice on February 11, 2013. Subsequently, FPU and the City of Marianna entered into a settlement agreement, which contemplated, among other items, the City of Marianna proceeding with a referendum on the purchase of FPU’s facilities. On April 9, 2013, the referendum took place, and the citizens of the City of Marianna voted, by a wide margin, to reject the purchase of FPU's facilities by the City of Marianna. As a result of the outcome of the referendum and pursuant to the terms of the settlement agreement, FPU’s franchise with the City of Marianna was extended by ten years. Also pursuant to the settlement agreement, the City of Marianna withdrew before the Florida Supreme Court its appeals related to the Florida PSC’s orders regarding the implementation of TOU and interruptible rates and the amendment to the Generation Services Agreement between FPU and Gulf Power.

FPU has incurred approximately $1.9 million of expenses associated with the City of Marianna litigation. In seeking regulatory recovery of these extraordinary expenses, FPU filed a petition with the Florida PSC on August 27, 2012, for approval to: (i) defer, as a regulatory asset, the expenses associated with the litigation initiated by the City of Marianna; and (ii) amortize over five years, beginning in January 2013, previously expensed as well as future litigation expenses. Although this petition did not request recovery of these expenses, FPU sought deferral treatment of the expenses for regulatory purposes, which could allow future recovery of those expenses. On December 3, 2012, the Florida PSC approved FPU's request. Since this order did not provide specific recovery of these costs, we did not defer these costs as a regulatory asset at that point until further assurance of recovery could be obtained. Subsequent discussions with the Office of Public Counsel resulted in a settlement agreement on October 11, 2013. Under this settlement agreement, FPU will recover approximately $1.8 million of the total expenses associated with the City of Marianna litigation by retaining the $1.8 million refund received from Gulf Power. This refund represented the higher fuel cost paid by FPU during the City of Marianna franchise dispute as a result of the delay in implementing the amendment to the Generation Service Agreement. Upon reinstatement of the amendment, Gulf Power refunded this amount to FPU pursuant to the terms of the amendment. The remaining litigation expenses will be amortized over the five -year period beginning in January 2013, as previously approved by the Florida PSC. The Florida PSC approved the settlement agreement on October 24, 2013.

Pursuant to the settlement agreement we established a regulatory asset of approximately $1.9 million by reversing approximately $1.5 million of expenses recognized in 2012 and 2011 and deferring $376,000 of expenses in 2013. The refund of $1.8 million received from Gulf Power was reflected as a regulatory liability, which was used to offset the regulatory asset.

Other Matters: We also had developments in the following regulatory matters in Florida:

On September 28, 2012, FPU provided a letter to the Florida PSC stating its intent to request approval of a $746,000 acquisition adjustment associated with FPU’s purchase of the operating assets of IGC in 2010. In this letter, FPU also acknowledged the jurisdiction of the Florida PSC to calculate and dispose of prospective overearnings, if any, occurring after October 1, 2012, as the Florida PSC may determine at the conclusion of the acquisition adjustment proceeding. On December 11, 2012, FPU filed a petition to request approval of this acquisition adjustment associated with FPU’s purchase of IGC’s assets. The Florida PSC, at its December 17, 2013 meeting, approved the acquisition adjustment and determined there were no over earnings in 2012.

On December 14, 2012, Peninsula Pipeline filed a petition with the Florida PSC, asking for approval of a transportation service agreement with FPU. The agreement provides for an upstream interconnection of Peninsula Pipeline’s facilities with the FGT system and a downstream interconnection with FPU’s facilities. At the agenda conference on July 30, 2013, the Florida PSC approved this agreement.

On July 2, 2013, FPU filed a petition with the Florida PSC for recognition of a regulatory liability for a one-time curtailment gain associated with a change in the FPU Medical Plan. The change in the FPU Medical Plan was implemented effective January 1, 2012 in an effort to conform the benefits offered to FPU's employees to those offered by Chesapeake. The change in the FPU Medical Plan resulted in a total curtailment gain of $892,000, of which $722,000 was allocated to FPU's regulated operations. Since this gain resulted from the merger integration effort, FPU believes that the treatment most consistent with prior regulatory practice would be to record the gain allocated to the regulated operations as a regulatory liability and amortize that amount over a specified period. This treatment is similar to how merger-related costs and a one-time tax contingency gain were treated. FPU requested approval to record regulatory liabilities of $464,000 and $258,000, respectively, in its natural gas and electric operations. FPU also sought permission to amortize the proposed regulatory liabilities over a 34-month period, beginning January 1, 2012, and ending October 30, 2014. The Florida PSC approved this petition on October 24, 2013. We recorded $510,000 of the amortization of this regulatory liability in 2013, including immediate recognition in current period earnings of the amortization related to the period prior to the Florida PSC's approval, which reduced depreciation and amortization expense.

Eastern Shore

The following are regulatory activities involving FERC orders applicable to Eastern Shore and the expansions of Eastern Shore’s transmission system:

Mainline Expansion Project: On May 14, 2012, Eastern Shore submitted to the FERC an application for a CP for approval to construct the facilities necessary to deliver additional firm service of 15,040 Dts/d to an existing electric power generation customer and to Chesapeake’s Delaware and Maryland divisions. The estimated capital cost of the project is approximately $16.3 million. The filing was publicly noticed on May 25, 2012. Two of Eastern Shore’s existing customers and Chesapeake’s Delaware and Maryland divisions filed motions to intervene in support of the project. One existing customer filed a motion to intervene and protest. On June 28, 2012, Eastern Shore submitted a response to the protest, and on August 31, 2012, the protesting customer filed a reply to Eastern Shore’s response. On October 3, 2012, the US Department of the Interior submitted comments on the FERC’s environmental assessment regarding Eastern Shore’s re-vegetation plan. On October 9, 2012, a non-profit organization also submitted comments on the FERC’s environmental assessment, asserting that the environmental assessment was deficient and requesting the FERC to extend the comment period by 60 days. In February 2013, the FERC approved Eastern Shore’s application and issued a CP. On March 11, 2013, Eastern Shore accepted this CP and filed its environmental compliance plan. On March 21, 2013, the FERC issued a notice to proceed with construction. On November 1, 2013, Eastern Shore commenced service upon completion of construction.

Daleville Compressor Station Upgrade Filing: On October 12, 2012, Eastern Shore submitted to the FERC an application for a CP, seeking authorization to construct a new gas-fired compressor unit at its existing Daleville Compressor Station located in Chester County, Pennsylvania. The new unit will provide 17,500 Dts/d of additional firm transportation service to two of Eastern Shore’s existing customers. In this application, Eastern Shore also included a description of a second new gas fired compressor unit to be installed at the Daleville Compressor Station, which will replace the three existing compressors that serve as back-up units to existing primary compressor units. Eastern Shore also plans to replace the engine exhaust devices of the existing primary compressor units with air emissions control equipment to comply with new environmental regulations. The replacement compressor unit and new engine exhaust devices will result in improved air emissions, reliability and flexibility on Eastern Shore’s system. Eastern Shore does not need specific FERC approval to construct the replacement compressor unit or emission controls; however, Eastern Shore wanted the FERC to be fully advised of these improvement efforts. The estimated capital costs of the project were approximately $12.1 million. On March 4, 2013, the FERC approved this application. On April 19, 2013, the FERC issued a notice to proceed with construction. On November 1, 2013, Eastern Shore commenced service upon completion of construction.

White Oak Lateral Project Filing: On June 13, 2013, Eastern Shore submitted to the FERC an application for a CP, seeking authorization to construct the White Oak lateral project located in Kent County, Delaware. The project consists of installing approximately 5.5 miles of 16-inch diameter pipeline, metering facilities and miscellaneous appurtenances extending from Eastern Shore's mainline system near its North Dover City Gate Station to the Garrison Oak Technical Park, all located in Dover, Delaware. This project is designed to provide 55,200 Dts/d of delivery lateral firm transportation service to Calpine for its proposed 309 megawatt combined-cycle power plant under development. The total cost of the project is estimated to be approximately $11.2 million.

On August 9, 2013, the FERC issued a notice of intent to prepare an environmental assessment for the project. The comment period concluded on September 9, 2013 with no comments being filed in the docket. The environmental assessment was issued on October 4, 2013 and FERC staff recommended a finding of no significant impact. Eastern Shore filed the implementation plan and acceptance of conditions stating that it will comply with all environmental conditions as set forth in the order. On November 27, 2013, the FERC issued a CP for this project. On January 17, 2014, the FERC issued its notice to allow Eastern Shore to proceed with the construction. Eastern Shore began construction activities for this project on January 22, 2014 for an in-service date of January 1, 2015.

Other matters: Eastern Shore also had developments in the following FERC matters:

On May 31, 2013, Eastern Shore submitted to the FERC a combined filing of its FRP and Cash-Out Refund for a twelve-month period beginning April 2012 and ending March 2013. In this filing, Eastern Shore proposed an FRP rate of 0.24 percent and continuation of its existing zero percent rate for the Cash-Out Surcharge. During the period, Eastern Shore experienced an under-recovery of $285,000 in its Deferred Gas Required for Operations costs and an over-recovery of $146,000 in its Deferred Cash-Out costs. Eastern Shore proposed to incorporate the Cash-Out Refund into its FRP to mitigate the effect of the increase in the FRP to its customers. On June 27, 2013, the FERC issued an order accepting Eastern Shore's submittal of a combined filing to update both its FRP and Cash-Out Refund mechanisms, effective July 1, 2013.