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.

Delaware

Underserved Area Rates: In December 2017, we filed an application requesting authorization to utilize existing expansion area tariff rates to serve customers located outside of the current Sussex County, Delaware expansion area boundaries that cannot be economically served under the regular tariff rates. In June 2018, we reached a settlement agreement with the relevant parties, which allows us to utilize higher rates for areas outside of our existing expansion area. The Delaware PSC unanimously approved the settlement at its public meeting on July 10, 2018. The new rate schedule became effective on August 1, 2018.

CGS: In June 2018, we filed with the Delaware PSC an application requesting approval of the acquisition, and subsequent conversion to natural gas of certain CGS located within our service territory. We requested the establishment of regulatory accounting treatment and valuation of the proposed acquisition, approval of a methodology to set new distribution rates for CGS customers and approval of a new system-wide tariff rate that will recover CGS conversion costs. The application included a request that the Delaware PSC regulate the propane CGS systems after their acquisition but before conversion to natural gas. In late 2018, the Delaware PSC ruled that it did not have jurisdiction over these propane CGS systems and could not approve the methodology given the lack of jurisdiction. We are considering proposing legislation to clarify the Delaware PSC jurisdiction or we may redesign the application and re-file.

Effect of the TCJA on customers: The Delaware PSC issued an order requiring all rate-regulated utilities to: (i) file estimates of the impact of the TCJA on their cost of service for the most recent test year available (including new rate schedules), and (ii) propose procedures for changing rates to reflect those impacts on or before March 31, 2018. In addition, on February 1, 2018, the Delaware PSC issued an order requiring Delaware rate-regulated public utilities to accrue regulatory liabilities reflecting the impacts of changes in the federal corporate income tax laws. In compliance with the Delaware PSC order, we have established a regulatory liability to reflect the estimated impacts of the changes in the federal corporate income tax rate. On May 31, 2018, our Delaware Division filed the information requested by the PSC, including an updated report reflecting the impact of the TCJA. On January 31, 2019, the Delaware PSC approved the as-filed Delaware Division Delivery Service Rates reflecting the impact of the TCJA. The new rates will go into effect March 1, 2019, and the Company will have to complete refunds back to February 2018, per the Commission’s previous order, by June 30, 2019. The order also provides for a line item billing credit to go into effect on April 1, 2019, for the return of the excess deferred income taxes. Additional information on the TCJA impact is included in the table at the end of this Note 19, Rates and Other Regulatory Activities.

Maryland

Effect of the TCJA on customers: In April 2018, the Maryland PSC issued orders related to the TCJA impact on both the Maryland Division and Sandpiper operations. Please see the actions taken in conjunction with these orders in the TCJA table at the end of this Note 19, Rates and Other Regulatory Activities. Additionally, if in the future the Maryland Division or Sandpiper identifies any additional tax savings, we must submit an additional filing to the Maryland PSC in order to return those savings to customers as soon as possible.

Florida

Florida Electric Reliability/Modernization Pilot Program: In July 2017, our Florida electric operations filed a petition with the Florida PSC requesting approval to include $15.2 million of certain capital project expenditures in its rate base and to adjust its base rates accordingly. These expenditures are designed to improve the stability and safety of the electric system, while enhancing the capability of our electrical grid. In December 2017, the Florida PSC approved this petition, effective January 1, 2018. The settlement agreement prescribed the methodology for adjusting the new rates based on the lower federal income tax rate and the process and methodology regarding the refund of deferred income taxes, reclassified as a regulatory liability, as a result of the TCJA. More details about this methodology are included in the table at the end of this Note 19, Rates and Other Regulatory Activities.

Electric Limited Proceeding-Storm Recovery: In February 2018, FPU filed a petition with the Florida PSC, requesting recovery of incremental storm restoration costs related to several hurricanes and tropical storms, along with the replenishment of the storm reserve to its pre-storm level of $1.5 million. As a result of these hurricanes and tropical storms, FPU’s storm reserve was depleted and, at the time of this filing, had a deficit of $779,000. We requested approval of a surcharge of $1.82 per kilowatt hour for two years to recover storm-related costs and replenish the storm reserve. FPU filed written testimony on this matter in August 2018. This matter was heard before the Florida PSC in December 2018, final legal briefs were submitted and, on January 14, 2019, and is scheduled for approval at Agenda on March 5, 2019.

In October 2018, Hurricane Michael passed through Florida Public Utilities Company's (“FPU”) electric distribution operation's service territory in Northwest Florida. The hurricane caused widespread and severe damage to FPU's infrastructure resulting in 100 percent of its customers losing electrical service. FPU has restored service to those customers who were able to accept service following Hurricane Michael after a significant hurricane restoration effort. In conjunction with restoring these services, FPU expended over $60.0 million to restore service, which has been recorded as new plant and equipment or charged against FPU’s storm reserve. We are preparing the necessary regulatory filings to seek recovery for the costs incurred, including replenishment of FPU's storm reserve. In conjunction with the hurricane-related expenditures, we executed two 13-month unsecured term loans as temporary financing, each in the amount of $30.0 million. The interest cost associated with these loans is LIBOR plus 75 basis points. One of the term loans was executed in December 2018 and the other was executed in January 2019. The storm did not have a material impact on the Company’s financial results in 2018, and is not expected to have a significant impact going forward assuming reasonable regulatory treatment.

Effect of the TCJA on customers: In February 2018, the Florida PSC opened dockets to consider the impacts associated with the TCJA. In May 2018, FPU’s natural gas division filed petitions and supporting testimony regarding the disposition of the related impacts of the TCJA. Hearings on this matter took place in November 2018, The Florida PSC approved staff’s recommendations on February 5, 2019. Final orders were issued on February 25, 2019, and are subject to a 30-day appeal period. Staff’s recommendations are summarized in the table at the end of this Note 19, Rates and Other Regulatory Activities.

Eastern Shore

2017 Expansion Project: In October 2017, the FERC issued a Certificate of Public Convenience and Necessity authorizing Eastern Shore to construct this project, the largest expansion in Eastern Shore's history. The facilities include approximately 23 miles of pipeline looping in Pennsylvania, Maryland and Delaware; upgrades to existing metering facilities in Lancaster County, Pennsylvania; installation of an additional compressor unit at Eastern Shore’s existing Daleville compressor station in Chester County, Pennsylvania; and approximately 17 miles of new mainline extension and two pressure control stations in Sussex County, Delaware. Eastern Shore entered into precedent agreements with seven existing customers, including three affiliates of Chesapeake Utilities, for a total of 61,162 Dts/d of additional firm natural gas transportation service on Eastern Shore’s pipeline system and an additional 52,500 Dts/d of firm transportation service at certain Eastern Shore receipt facilities.

The first phase of the project was placed into service in December 2017 and, as of December 31, 2018, we have substantially completed construction. The TETLP interconnect upgrade was placed into service in December 2017, and the Fair Hill Loop, the Jennersville Loop, the Daleville Compressor Station, the Seaford-Millsboro Connector, and the Millsboro Pressure Control Station were placed into service at various dates in 2018. The Parkesburg Loop was placed into service in January 2019. The few remaining segments are expected to be placed into service in various phases during the first half of 2019.

2017 Rate Case Filing: In January 2017, Eastern Shore filed a base rate proceeding with the FERC. In August 2017, Eastern Shore implemented the proposed new rates, subject to refund, based on the outcome of the rate proceeding. Eastern Shore recorded incremental revenue of approximately $3.7 million for the year ended December 31, 2017, and established a regulatory liability to reserve a portion of the total incremental revenues generated by the new rates pending FERC approval of a settlement agreement and refunds to customers according to the terms of the settlement. The FERC approved the settlement agreement in February 2018, and it became final in March 2018. In April 2018, Eastern Shore refunded to its customers, with interest, the difference between the proposed rates and the settlement rates. Exclusive of the TCJA impact, which is discussed below, base rates increased, on an annual basis, by approximately $9.8 million.

Effect of the TCJA on customers: In March 2018, Eastern Shore filed with the FERC its revised base rates, reflecting the reduction in its federal corporate income tax rate. These adjusted base rates became effective January 1, 2018 and will generate approximately $6.6 million in incremental margin, on an annual basis. Other information about the impact of the TCJA on ESNG has been included in the table at the end of this Note 19, Rates and Other Regulatory Activities.

In October 2018, the FERC issued an order granting a waiver to Eastern Shore. In April 2018, Eastern Shore consummated a filing, which included its comments associated with the United Airlines, Inc. vs. FERC proceeding and requested confirmation from the FERC that Eastern Shore is not required to provide an informational filing because of its implementation of lower rates in accordance with the 2017 rate case settlement agreement.

Del-Mar Energy Pathway Project: In September 2018, Eastern Shore filed a Certificate Application with the FERC, requesting authorization to construct and operate the Del-Mar Energy Pathway project, which will provide an additional 14,300 Dts/d of capacity to four customers. Facilities to be constructed include six miles of pipeline looping in Delaware; 13 miles of new mainline extension in Sussex County, Delaware and Somerset County, Maryland; and new pressure control and delivery stations in these counties. The benefits of this project include: (i) further natural gas transmission pipeline infrastructure in eastern Sussex County, Delaware, and (ii) extension of Eastern Shore’s pipeline system, for the first time, into Somerset County, Maryland. During the fourth quarter of 2018, the FERC held a full project area scoping meeting in Sussex County, Delaware and issued a Notice of Schedule for Environmental Review, indicating issuance of its Environmental Assessment for the Del-Mar Energy Pathway project by April 1, 2019.

Summary TCJA Table



	Regulatory Liabilities related to Excess Accumulated Deferred Income Taxes ("ADIT")		Status of Customer Rate impact related to 35 percent to 21 percent rate change
Operation and Regulatory Jurisdiction	Amount (in thousands)	Status
Eastern Shore (FERC)	$34,190	Will be addressed in Eastern Shore's next rate case filing	Implemented one-time bill credit (totaling $900,000) in April 2018 - Customer rates adjusted in April, 2018
Delaware Division (Delaware PSC)	$13,262	In January 2019, PSC approved amortization of ADIT and corresponding customer rate reductions effective March 1, 2019.	Customer rates to be adjusted March 1, 2019. One-time bill credit to be implemented during the second quarter.
Maryland Division (Maryland PSC)	$4,211	In May 2018, PSC approved amortization of ADIT and corresponding customer rate reductions commenced	Implemented one-time bill credit (totaling $365,000) in July 2018 - Customer rates adjusted effective May 1, 2018
Sandpiper Energy (Maryland PSC)	$3,815	In May 2018, PSC approved amortization of ADIT and corresponding customer rate reductions commenced	Implemented one-time bill credit (totaling $608,000) in July 2018 - Customer rates adjusted effective May 1, 2018
Chesapeake Florida Gas Division/Central Florida Gas (Florida PSC)	$8,471	PSC Staff recommendation issued on January 24, 2019; final order was issued on February 25, 2019	PSC Staff recommendation issued on January 24, 2019; final order was issued on February 25, 2019
		The order states that the net ADIT liability would be amortized and retained by the Company pursuant to the prescribed schedule	No one-time bill credit or adjustment in rates would be applied; the tax savings arising from the TCJA rate reduction would be retained
FPU Natural Gas (includes FPU, Fort Meade, and Indiantown) (Florida PSC)	$19,505	PSC Staff recommendation issued on January 24, 2019; final order was issued on February 25, 2019	PSC Staff recommendation issued on January 24, 2019; final order was issued on February 25, 2019
		The order states that the net ADIT liability would be amortized and retained by the Company pursuant to the prescribed schedule	No one-time bill credit or adjustment in rates would be applied; the tax savings arising from the TCJA rate reduction would be retained
FPU Electric (Florida PSC)	$5,995	In January 2019, PSC approved amortization of ADIT through purchased power cost recovery, storm reserve and rates.	TCJA benefit will flow back to its customers through a combination of reductions to the fuel cost recovery rate, base rates, as well as application to the storm reserve over the next several years

Regulatory Assets and Liabilities

At December 31, 2018 and 2017, our regulated utility operations had recorded the following regulatory assets and liabilities included in our consolidated balance sheets. These assets and liabilities will be recognized as revenues and expenses in future periods as they are reflected in customers’ rates.



	As of December 31,
	2018		2017
(in thousands)
Regulatory Assets
Under-recovered purchased fuel and conservation cost recovery ⁽¹⁾	$	4,631	$	9,869
Under-recovered GRIP revenue ⁽²⁾	165		164
Deferred postretirement benefits ⁽³⁾	15,517		15,498
Deferred conversion and development costs ⁽¹⁾	16,727		11,735
Environmental regulatory assets and expenditures ⁽⁴⁾	2,731		3,222
Acquisition adjustment ⁽⁵⁾	33,255		39,992
Loss on reacquired debt ⁽⁶⁾	942		1,031
Other	3,250		4,994
Total Regulatory Assets	$	77,218	$	86,505


Regulatory Liabilities
Self-insurance ⁽⁷⁾	$	947	$	1,013
Over-recovered purchased fuel and conservation cost recovery ⁽¹⁾	5,443		2,048
Over-recovered GRIP revenue ⁽²⁾	1,563		2,245
Storm reserve ⁽⁷⁾	677		669
Accrued asset removal cost ⁽⁸⁾	42,401		40,948
Deferred income taxes due to rate change ⁽⁹⁾	91,162		98,492
Other	729		2,048
Total Regulatory Liabilities	$	142,922	$	147,463

⁽¹⁾ We are allowed to recover the asset or are required to pay the liability in rates. We do not earn an overall rate of return on these assets.

⁽²⁾ The Florida PSC allowed us to recover through a surcharge, capital and other program-related-costs, inclusive of an appropriate return on investment, associated with accelerating the replacement of qualifying distribution mains and services (defined as any material other than coated steel or plastic) in FPU’s natural gas distribution, Fort Meade division and Chesapeake Utilities’ Central Florida Gas division. We are allowed to recover the asset or are required to pay the liability in rates related to GRIP.

⁽³⁾ The Florida PSC allowed FPU to treat as a regulatory asset the portion of the unrecognized costs pursuant to ASC Topic 715, Compensation - Retirement Benefits, related to its regulated operations. See Note 17, Employee Benefit Plans, for additional information.

⁽⁴⁾ All of our environmental expenditures incurred to date and our current estimate of future environmental expenditures have been approved by various PSCs for recovery. See Note 20, Environmental Commitments and Contingencies, for additional information on our environmental contingencies.

⁽⁵⁾We are allowed to include the premiums paid in various natural gas utility acquisitions in Florida in our rate bases and recover them over a specific time period pursuant to the Florida PSC approvals. Included in these amounts are $543,000 of the premium paid by FPU, $34.2 million of the premium paid by us in 2009, including a gross up for income tax, because it is not tax deductible, and $746,000 of the premium paid by FPU in 2010.

⁽⁶⁾ Gains and losses resulting from the reacquisition of long-term debt are amortized over future periods as adjustments to interest expense in accordance with established regulatory practice.

⁽⁷⁾ We have self-insurance and storm reserves in our Florida regulated energy operations that allow us to collect through rates amounts to be used against general claims, storm restoration costs and other losses as they are incurred.

⁽⁸⁾ See Note 1, Summary of Significant Accounting Policies, for additional information on our asset removal cost policies.

⁽⁹⁾We recorded a regulatory liability for our regulated businesses related to the revaluation of accumulated deferred tax assets/liabilities as a result of the TCJA. Based upon the regulatory proceedings, we will pass back the respective portion of the excess accumulated deferred taxes to rate payers. See Note 12, Income Taxes, for additional information.