10-K 1 cpk1231201810-k.htm 10-K Document

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-K
 
(Mark One)
ý ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended: December 31, 2018
¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 

Commission File Number: 001-11590 
 
 
 
CHESAPEAKE UTILITIES CORPORATION
(Exact name of registrant as specified in its charter)
 
 
 
State of Delaware
 
51-0064146
(State or other jurisdiction of
 
(I.R.S. Employer
incorporation or organization)
 
Identification No.)
909 Silver Lake Boulevard, Dover, Delaware 19904
(Address of principal executive offices, including zip code)
302-734-6799
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
 
Name of each exchange on which registered
Common Stock—par value per share $0.4867
 
New York Stock Exchange, Inc.
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    Yes ý    No ¨
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.    Yes ¨     No ý
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes ý    No ¨
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes ý    No ¨
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  ý
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer
 
ý
  
Accelerated filer
 
¨

 
 
 
 
Non-accelerated filer
 
¨
 
Smaller reporting company
 
¨
 
 
 
 
Emerging growth company
 
¨
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
Indicate by a check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).    Yes ¨    No ý



The aggregate market value of the common shares held by non-affiliates of Chesapeake Utilities Corporation as of June 30, 2018, the last business day of its most recently completed second fiscal quarter, based on the last sale price on that date, as reported by the New York Stock Exchange, was approximately $1.3 billion.
The number of shares of Chesapeake Utilities Corporation's common stock outstanding as of February 15, 2019 was 16,378,821.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement for the 2019 Annual Meeting of Stockholders are incorporated by reference in Part II and Part III, which Proxy Statement shall be filed with the Securities and Exchange Commission within 120 days after the end of registrant's fiscal year ended December 31, 2018.



CHESAPEAKE UTILITIES CORPORATION
FORM 10-K
YEAR ENDED DECEMBER 31, 2018
TABLE OF CONTENTS
 
 
Page



GLOSSARY OF DEFINITIONS
ASC: Accounting Standards Codification
ASU: Accounting Standards Update
CDD: Cooling Degree-Day
Chesapeake or Chesapeake Utilities: Chesapeake Utilities Corporation, its divisions and subsidiaries, as appropriate in the context of the disclosure
CHP: Combined Heat and Power Plant
Company: Chesapeake Utilities Corporation, its divisions and subsidiaries, as appropriate in the context of the disclosure
Degree-day: A degree-day is the measure of the variation in the weather based on the extent to which the average daily temperature (from 10:00 am to 10:00 am) falls above or below 65 degrees Fahrenheit
Delmarva Peninsula: A peninsula on the east coast of the U. S. occupied by Delaware and portions of Maryland and Virginia
Dt(s): Dekatherm(s), which is a natural gas unit of measurement that includes a standard measure for heating value
Dts/d: Dekatherms per day
Eastern Shore: Eastern Shore Natural Gas Company, a wholly-owned subsidiary of Chesapeake Utilities
Eight Flags: Eight Flags Energy, LLC, a subsidiary of Chesapeake's OnSight Services, LLC
FASB: Financial Accounting Standards Board
FERC: Federal Energy Regulatory Commission
FGT: Florida Gas Transmission Company
Flo-gas: Flo-gas Corporation, a wholly-owned subsidiary of Chesapeake Utilities
FPL: Florida Power & Light Company, an unaffiliated electric company that supplies electricity to FPU
FPU: Florida Public Utilities Company, a wholly-owned subsidiary of Chesapeake Utilities
GAAP: Generally Accepted Accounting Principles
GRIP: Gas Reliability Infrastructure Program
Gross Margin: a non-GAAP measure defined as operating revenues less the cost of sales. The Company's cost of sales includes purchased fuel cost for natural gas, electricity and propane and the cost of labor spent on direct revenue-producing activities and excludes depreciation, amortization and accretion
Gulfstream: Gulfstream Natural Gas System, LLC, an unaffiliated pipeline network that supplies natural gas to FPU
HDD: Heating Degree Day
MetLife: MetLife Investment Advisors, an institutional debt investment management firm, with which Chesapeake Utilities has entered into a Shelf Agreement
MGP: Manufactured gas plant, which is a site where coal was previously used to manufacture gaseous fuel for industrial, commercial and residential use
MTM: Mark-to-Market (fair value accounting)
MW: Megawatt, which is a unit of measurement for electric base load power or capacity
NYL: New York Life Investors LLC, an institutional debt investment management firm, with which Chesapeake Utilities has entered into a Shelf Agreement and issued Shelf Notes
Peninsula Pipeline: Peninsula Pipeline Company, Inc., a wholly-owned subsidiary of Chesapeake Utilities



PESCO: Peninsula Energy Services Company, Inc., a wholly-owned subsidiary of Chesapeake Utilities
Prudential: Prudential Investment Management Inc., an institutional investment management firm, with which Chesapeake Utilities has entered into a Shelf Agreement and issued Shelf Notes
PSC: Public Service Commission, which is the state agency that regulates utility rates and/or services in certain of our jurisdictions
Rayonier: Rayonier Performance Fibers, LLC, the company that owns the property on which Eight Flags' CHP plant is located and a customer of the steam generated by the CHP plant
Revolver: Our unsecured revolving credit facility with certain lenders
Sandpiper: Sandpiper Energy, Inc., a wholly-owned subsidiary of Chesapeake Utilities
SEC: Securities and Exchange Commission
Senior Notes: Our unsecured long-term debt issued primarily to insurance companies on various dates
Sharp: Sharp Energy, Inc., a wholly-owned subsidiary of Chesapeake Utilities
Shelf Agreement: An agreement entered into by Chesapeake Utilities and a counterparty pursuant to which Chesapeake Utilities may request that the counterparty purchase our unsecured senior debt with a fixed interest rate and a maturity date not to exceed 20 years from the date of issuance
Shelf Notes: Unsecured senior promissory notes issuable under the Shelf Agreement executed with various counterparties
SICP: 2013 Stock and Incentive Compensation Plan
TCJA: Tax Cuts and Jobs Act enacted on December 22, 2017
TETLP: Texas Eastern Transmission, LP
U.S.: The United States of America
Xeron: Xeron, Inc., an inactive subsidiary of Chesapeake Utilities




PART I
References in this document to “Chesapeake,” “Chesapeake Utilities,” the “Company,” “we,” “us” and “our” mean Chesapeake Utilities Corporation, its divisions and/or its wholly-owned subsidiaries, as appropriate in the context of the disclosure.
Safe Harbor for Forward-Looking Statements
We make statements in this Annual Report on Form 10-K that do not directly or exclusively relate to historical facts. Such statements are “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, Section 21E of the Securities Exchange Act of 1934, as amended, and 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. Forward-looking statements speak only as of the date they are made or as of the date indicated and we do not undertake any obligation to update forward-looking statements as a result of new information, future events or otherwise. These statements are subject to many risks and uncertainties. In addition to the risk factors described under Item 1A, Risk Factors, the following important factors, among others, could cause actual future results to differ materially from those expressed in the forward-looking statements:
state and federal legislative and regulatory initiatives that affect cost and investment recovery, have an impact on rate structures, and affect the speed and the degree to which competition enters the electric and natural gas industries;
the outcomes of regulatory, environmental and legal matters, including whether pending matters are resolved within current estimates and whether the related costs are adequately covered by insurance or recoverable in rates;
the impact of significant changes to current tax regulations and rates;
the timing of certification authorizations associated with new capital projects and the ability to construct facilities at or below estimated costs;
changes in environmental and other laws and regulations to which we are subject and environmental conditions of property that we now, or may in the future, own or operate;
possible increased federal, state and local regulation of the safety of our operations;
the economy in our service territories or markets, the nation, and worldwide, including the impact of economic conditions (which we do not control ) on demand for electricity, natural gas, propane or other fuels;
risks related to cyber-attacks or cyber-terrorism that could disrupt our business operations or result in failure of information technology systems;
the weather and other natural phenomena, including the economic, operational and other effects of hurricanes, ice storms and other damaging weather events;
customers' preferred energy sources;
industrial, commercial and residential growth or contraction in our markets or service territories;
the effect of competition on our businesses;
the timing and extent of changes in commodity prices and interest rates;
the effect of spot, forward and future market prices on our various energy businesses;
the extent of our success in connecting natural gas and electric supplies to transmission systems, establishing and maintaining key supply sources; and expanding natural gas and electric markets;
the creditworthiness of counterparties with which we are engaged in transactions;
the capital-intensive nature of our regulated energy businesses;
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 ability to successfully execute, manage and integrate a merger, acquisition or divestiture of assets or businesses and the related regulatory or other conditions associated with the merger, acquisition or divestiture;
the impact on our costs and funding obligations, under our pension and other post-retirement benefit plans, of potential downturns in the financial markets, lower discount rates, and costs associated with health care legislation and regulation;
the ability to continue to hire, train and retain appropriately qualified personnel; and
the effect of accounting pronouncements issued periodically by accounting standard-setting bodies.


Chesapeake Utilities Corporation 2018 Form 10-K Page 1


ITEM 1. Business.
Corporate Overview and Strategy
Chesapeake Utilities Corporation is a Delaware corporation formed in 1947 with operations primarily in the Mid-Atlantic region and in Florida, Pennsylvania and Ohio. We are an energy delivery company engaged in the distribution of natural gas, propane and electricity; the transmission of natural gas; the generation of electricity and steam, and in providing related services to our customers.
Our strategy is to consistently produce industry leading total shareholder return by profitably investing capital into opportunities that leverage our skills and expertise in energy distribution and transmission to achieve high levels of service and growth. The key elements of our strategy include:
capital investment in growth opportunities that generate our target returns;
expanding our energy distribution and transmission operations within our existing service areas as well as into new geographic areas;
providing new services in our current service areas;
expanding our footprint in potential growth markets through strategic acquisitions;
entering new energy markets and businesses that complement our existing operations and growth strategy; and
operating as a customer-centric full-service energy supplier/partner/provider, while providing safe and reliable service.
Our employees strive to build meaningful connections that generate opportunities to grow our businesses, develop new markets, and enrich the communities in which we live, work and serve.
Operating Segments
We operate within two reportable segments: Regulated Energy and Unregulated Energy. The remainder of our operations is presented as “Other businesses and eliminations." These segments are described below in detail.    

Regulated Energy
Our regulated energy businesses are comprised of natural gas and electric distribution as well as natural gas transmission services. The following table presents net income for the year ended December 31, 2018 and total assets as of December 31, 2018, for the Regulated Energy segment by operation and area served:
 
 
 
 
 
 
 
Operations
 
Areas Served
 
Net Income
 
Total Assets
(in thousands)
 
 
 
 
 
 
Natural Gas Distribution
 
 
 
 
 
 
Delmarva Natural Gas (Delaware division, Maryland division and Sandpiper Energy)
 
Delaware/Maryland
 
$
11,390

 
$
211,458

Central Florida Gas and FPU
 
Florida
 
11,754

 
312,769

Natural Gas Transmission
 
 
 
 
 
 
Eastern Shore
 
Delaware/Maryland/
Pennsylvania
 
17,460

 
262,918

  Peninsula Pipeline
 
Florida
 
4,303

 
20,493

Electric Distribution
 
 
 
 
 
 
FPU
 
Florida
 
2,249

 
123,863

Total Regulated Energy
 
 
 
$
47,156

 
$
931,501

Revenues in this operating segment are based on rates regulated by the PSC in the states in which we operate or, in the case of Eastern Shore, which is an interstate business, by the FERC. The rates are designed to generate revenues to recover all prudent operating and financing costs and provide a reasonable return for our stockholders. Each of our distribution and transmission operations has a rate base, which generally consists of the original cost of the operation's plant, less accumulated depreciation, working capital and other assets. For Delmarva Natural Gas and Eastern Shore, rate base also includes deferred income tax liabilities and other additions or deductions. Our Regulated Energy operations in Florida do not include deferred income tax liabilities in their rate base.

Chesapeake Utilities Corporation 2018 Form 10-K Page 2


Our natural gas and electric distribution operations bill customers at standard rates approved by their respective state PSC. Each state PSC allows us to negotiate rates, based on approved methodologies, for large customers that can switch to other fuels. Some of our customers in Maryland receive propane through our underground distribution system in Worcester County, which we are in the process of converting to natural gas. We bill these customers under PSC-approved rates and include them in the natural gas distribution results and customer statistics.
Our natural gas and electric distribution operations earn profits on the delivery of natural gas or electricity to customers. The cost of natural gas or electricity that we deliver is passed through to customers under PSC-approved fuel cost recovery mechanisms. The mechanisms allow us to adjust our rates on an ongoing basis without filing a rate case to recover changes in the cost of the natural gas and electricity that we purchase for customers. Therefore, while our distribution operating revenues fluctuate with the cost of natural gas or electricity we purchase, our distribution margin (which we define as operating revenues less purchased gas or electric cost) is generally not impacted by fluctuations in the cost of natural gas or electricity.
Our natural gas transmission operations bill customers under rate schedules approved by the FERC or at rates negotiated with customers.
Operational Highlights
The following table presents operating revenues, volumes and the average number of customers by customer class for our natural gas and electric distribution operations for the year ended December 31, 2018:
 
 
 
 
 
 
Delmarva
Natural Gas Distribution
 
Florida
Natural Gas Distribution (2)
 
FPU
Electric
Distribution
Operating Revenues (in thousands)
 
 
 
 
 
 
 
 
 
  Residential
 
$
70,466

60
%
 
$
35,420

34
%
 
$
44,788

56
 %
  Commercial
 
36,916

32
%
 
33,229

31
%
 
39,442

49
 %
  Industrial
 
8,289

7
%
 
33,207

31
%
 
1,543

2
 %
  Other (1)
 
928

1
%
 
4,602

4
%
 
(5,970
)
(7
)%
Total Operating Revenues
 
$
116,599

100
%
 
$
106,458

100
%
 
$
79,803

100
 %
 
 
 
 
 
 
 
 
 
 
Volumes (in Dts for natural gas/KW Hours for electric)
 
 
 
 
 
 
 
 
 
  Residential
 
4,142,567

31
%
 
1,762,852

5
%
 
307,269

49
 %
  Commercial
 
3,792,220

28
%
 
6,441,806

18
%
 
302,687

48
 %
  Industrial
 
5,549,387

40
%
 
24,759,334

70
%
 
15,160

2
 %
  Other
 
80,254

1
%
 
2,338,815

7
%
 
7,402

1
 %
Total Volumes
 
13,564,428

100
%
 
35,302,807

100
%
 
632,518

100
 %
 
 
 
 
 
 
 
 
 
 
Average Number of Customers (3)
 
 
 
 
 
 
 
 
 
  Residential
 
71,322

91
%
 
72,151

90
%
 
24,686

77
 %
  Commercial
 
6,979

9
%
 
5,434

7
%
 
7,497

23
 %
  Industrial
 
157

<1%

 
2,328

3
%
 
2

<1%

  Other
 
5

<1%

 
11

<1%

 

 %
Total Average Number of Customers
 
78,463

100
%
 
79,924

100
%
 
32,185

100
 %
(1) Operating Revenues from "Other" sources include revenue, unbilled revenue, under (over) recoveries of fuel cost, conservation revenue, other miscellaneous charges, fees for billing services provided to third parties, and adjustments for pass-through taxes.
(2) Florida natural gas distribution includes Chesapeake Utilities' Central Florida Gas division, FPU and FPU's Indiantown and Fort Meade divisions.
(3) Average number of customers is based on the twelve-month average for the year ended December 31, 2018.


Chesapeake Utilities Corporation 2018 Form 10-K     Page 3


The following table presents operating revenues, by customer type, for Eastern Shore and Peninsula Pipeline for the year ended December 31, 2018, and contracted firm transportation capacity, by customer type, as well as design day capacity at December 31, 2018:
 
Eastern Shore
 
Peninsula Pipeline
Operating Revenues (in thousands)
 
 
 
 
 
Local distribution companies - affiliated (1)
$
19,725

31
 %
 
$
9,478

80
%
Local distribution companies - non-affiliated
23,975

37
 %
 
840

7
%
Commercial and industrial - affiliated

 %
 
1,120

9
%
Commercial and industrial - non-affiliated
21,748

34
 %
 
490

4
%
Other (2)
(1,200
)
(2
)%
 

%
Total Operating Revenues
$
64,248

100
 %
 
$
11,928

100
%
 
 
 
 
 
 
Contracted firm transportation capacity (in Dts/d)
 
 
 
 
 
Local distribution companies - affiliated
122,652

42
 %
 
143,500

93
%
Local distribution companies - non-affiliated
76,619

26
 %
 
4,825

3
%
Commercial and industrial - affiliated

 %
 
1,500

1
%
Commercial and industrial - non-affiliated
95,648

32
 %
 
5,100

3
%
Total Contracted firm transportation capacity
294,919

100
 %
 
154,925

100
%
 
 
 
 
 
 
Design day capacity (in Dts/d)
294,919

100
 %
 
154,925

100
%
(1) Eastern Shore's and Peninsula Pipeline's service to our local distribution affiliates is based on the respective regulator's approved rates and is an integral component of the cost associated with providing natural gas supplies for those affiliates. We eliminate operating revenues of these entities against the cost of sales of those affiliates in our consolidated financial information; however, our local distribution affiliates include this amount in their purchased fuel cost and recover it through fuel cost recovery mechanisms.
(2) Operating revenues from "Other" sources are from the rental of gas properties and reserve for rate case refund.
Regulatory Overview
The following table highlights key regulatory information for each of our principal Regulated Energy operations. The table reflects rate increases and rates of return approved prior to the enactment of the TCJA on December 22, 2017. See Item 8, Financial Statements and Supplementary Data (Note 19, Rates and Other Regulatory Activities and Note 12, Income Taxes in the consolidated financial statements) for further discussion on the impact of this legislation on our regulated businesses. Peninsula Pipeline is not regulated with regard to cost of service by either the Florida PSC or FERC and is therefore excluded from the table.
 
Natural Gas Distribution
Electric Distribution
Natural Gas Transmission
 
Delmarva
Florida
Electric Distribution
Natural Gas Transmission
Operation/Division
Delaware
Maryland
Sandpiper
Chesapeake's Florida natural gas division
FPU
FPU
Eastern Shore
Regulatory Agency
Delaware PSC
Maryland PSC
Maryland PSC
Florida PSC
Florida PSC
Florida PSC
FERC
Effective date - Last Rate Order
01/01/2017
5/1/2018(7)
12/01/2018
01/14/2010
01/14/2010(1)
01/03/2018
08/01/2017
Rate Base (in Rates)
Not stated
Not stated
Not stated
$46,680,000
$68,940,000
$11,850,000
Not stated
Annual Rate Increase Approved
$2,250,000
N/A(7)
N/A(2)
$2,540,000
$7,970,000
$1,560,000
$9,800,000
Capital Structure (in rates)(3)*
Not stated
LTD: 42.00% STD: 5.00% Equity: 53.00%
Not stated
LTD: 30.63% STD: 6.26% Equity: 43.49% Other: 19.62%
LTD: 30.75% Equity: 46.67% Other: 22.58%
LTD: 21.91% STD: 23.50% Equity: 54.59%
Not stated
Allowed Return on Equity
9.75% (4)
10.75%(4)
Not Stated (5)
10.80%(4)
10.85%(4)
10.25%(4), (6)
Not Stated
TJCA Refund Status associated with customer rates
Reserved
Refunded
Refunded
Reserved
Reserved
Reserved
Refunded
(1) The effective date of the order approving the settlement agreement, which adjusted the rates originally approved on June 4, 2009.

Chesapeake Utilities Corporation 2018 Form 10-K Page 4


(2)The Maryland PSC approved a declining return on equity that will result in a decline in our rates.
(3)Other components of capital structure include customer deposits, deferred income taxes and tax credits.
(4) Allowed after-tax return on equity.
(5) The terms of the agreement include revenue neutral rates for the first year (December 1, 2016 through November 30, 2017), followed by a schedule of rate reductions in subsequent years based upon the projected rate of propane to natural gas conversions.
(6) The terms of the settlement agreement for the FPU electric division limited proceeding with the Florida PSC prescribed an authorized return on equity range of 9.25 to 11.25 percent, with a mid-point of 10.25 percent. The FPU electric division cannot file for a base rate increase prior to December 2019, unless its allowed return on equity is below the authorized range and it experiences an unanticipated and unforeseen event that impacts the annual revenue requirement in excess of $800,000 within any contiguous four-month period.
(7) The Maryland PSC approved a rate reduction for Maryland division effective May 1, 2018, related to the enactment of the TJCA.
* LTD-Long-term debt; STD-Short-term debt

The following table presents surcharge and other mechanisms that have been approved by the respective PSC for our regulated energy distribution businesses. These include Delaware’s surcharge to expand natural gas service in eastern Sussex County; Maryland's surcharge to fund natural gas conversions and system improvement in Worcester County; Florida’s GRIP surcharge which provides accelerated recovery of the costs of replacing older portions of the natural gas distribution system to improve safety and reliability and Florida electric distribution operation's limited proceeding.
Operation(s)/Division(s)
 
Jurisdiction
 
Infrastructure mechanism
 
Revenue normalization
Delaware division
 
Delaware
 
No
 
No
Maryland division
 
Maryland
 
No
 
Yes
Sandpiper Energy
 
Maryland
 
Yes
 
Yes
FPU and Central Florida Gas natural gas divisions
 
Florida
 
Yes
 
No
FPU electric division
 
Florida
 
Yes
 
No
Weather
Weather variations directly influence the volume of natural gas and electricity sold and delivered to residential and commercial customers for heating and cooling and changes in volumes delivered impact the revenue generated from these customers. Natural gas volumes are highest during the winter months, when residential and commercial customers use more natural gas for heating. Demand for electricity is highest during the summer months, when more electricity is used for cooling. We measure the relative impact of weather using degree-days. A degree-day is the measure of the variation in the weather based on the extent to which the average daily temperature falls above or below 65 degrees Fahrenheit. Each degree of temperature below 65 degrees Fahrenheit is counted as one heating degree-day, and each degree of temperature above 65 degrees Fahrenheit is counted as one cooling degree-day. Normal heating and cooling degree-days are based on the most recent 10-year average.
Competition
Natural Gas Distribution
While our natural gas distribution operations do not compete directly with other distributors of natural gas for residential and commercial customers in our service areas, we do compete with other natural gas suppliers and alternative fuel providers for sales to industrial customers. Large customers could bypass our natural gas distribution systems and connect directly to interstate transmission pipelines, and we compete in all aspects of our natural gas business with alternative energy sources, including electricity, oil, propane and renewables. The most effective means to compete against alternative fuels are lower prices, superior reliability and flexibility of service. Natural gas historically has maintained a price advantage in the residential, commercial and industrial markets, and reliability of natural gas supply and service has been excellent. In addition, we provide flexible pricing to our large customers to minimize fuel switching and protect these volumes and their contributions to the profitability of our natural gas distribution operations.
Natural Gas Transmission
Our natural gas transmission business competes with other pipeline companies to provide service to large industrial, generating and distribution customers, primarily in the northern portion of Delmarva and in Florida.

Chesapeake Utilities Corporation 2018 Form 10-K     Page 5


Electric Distribution
While our electric distribution operations do not compete directly with other distributors of electricity for residential and commercial customers in our service areas, we do compete with other electricity suppliers and alternative fuel providers for sales to industrial customers. Some of our large industrial customers may be capable of generating their own electricity, and we structure rates, flexibility and service offerings to retain these customers in order to retain their business and contributions to the profitability of our electric distribution operations.
Supplies, Transmission and Storage
Natural Gas Distribution
Our natural gas distribution operations purchase natural gas from marketers and producers and maintain contracts for transportation and storage with several interstate pipeline companies to meet projected customer demand requirements. We believe that our supply and capacity strategy will adequately meet our customers’ needs over the next several years.
The Delmarva natural gas distribution systems are directly connected to Eastern Shore’s pipeline, which has connections to the other pipelines that provide us with transportation and storage. These operations can also use propane-air and liquefied natural gas peak-shaving equipment to serve customers. Our Delmarva operations receive a fee, which we share with our customers, from our natural gas marketing subsidiary, PESCO, who optimizes the transportation, storage and natural gas supply for these operations under a three-year contract.
We have a contract with an unaffiliated party to supply propane for customers of our Sandpiper system in Maryland who have not yet converted to natural gas. Under the contract, we are committed to purchase approximately 932,000 gallons of propane annually at either a fixed per-gallon or a local indexed-index-based price. The contract expires in May 2019, at which time, we can purchase the propane from our propane subsidiary or the external markets directly.
Our Florida natural gas distribution operation uses Peninsula Pipeline and the Peoples Gas System division of Tampa Electric Company ("Peoples Gas") to transport natural gas where there is no direct connection with FGT.
A summary of our pipeline capacity contracts follows:
 
 
 
 
Maximum Daily Firm Transportation Capacity (Dts)
 
Contract Expiration Date
Division
 
Pipeline
 
 
Delmarva Natural Gas Distribution
 
Eastern Shore
 
122,652
 
2019-2028
 
 
Columbia Gas(1)
 
15,160
 
2020-2024
 
 
Transco(1)
 
27,551
 
2019-2028
 
 
TETLP(1)
 
50,000
 
2027
 
 
 
 
 
 
 
Florida Natural Gas Distribution
 
Gulfstream(2)
 
10,000
 
2022
 
 
FGT
 
41,909 - 73,317
 
2020-2041
 
 
Peninsula Pipeline
 
137,500
 
2033-2048
 
 
Peoples Gas
 
2,660
 
2024-2035
(1) Transcontinental Gas Pipe Line Company, LLC ("Transco"), Columbia Gas Transmission, LLC ("Columbia Gas") and Texas Eastern Transmission, LP ("TETLP") are interstate pipelines interconnected with Eastern Shore's pipeline
(2) Pursuant to a capacity release program approved by the Florida PSC, all of the capacity under this agreement has been released to various third parties, including PESCO. Under the terms of these capacity release agreements, Chesapeake Utilities is contingently liable to Gulfstream should any party, that acquired the capacity through release, fail to pay the capacity charge.
Eastern Shore has three agreements with Transco for a total of 7,292 Dts/d of firm daily storage injection and withdrawal entitlements and total storage capacity of 288,003 Dts. These agreements expire on various dates between 2019 and 2023. Eastern Shore retains these firm storage services in order to provide swing transportation service and firm storage service to customers requesting such services.
Electric Distribution
Our Florida electric distribution operation purchases wholesale electricity under the power supply contracts summarized below:

Chesapeake Utilities Corporation 2018 Form 10-K Page 6


Counterparty
Area Served by Contract
Contracted Amount (MW)
Contract Expiration Date
Gulf Power Company
Northwest Florida
Full Requirement*
2019
FPL
Northeast Florida
Full Requirement*
2024
Eight Flags
Northeast Florida
21.0
2036
Rayonier
Northeast Florida
1.7 to 3.0
2036
WestRock Company
Northwest Florida
As-available
N/A
*The counter party is obligated to provide us with the electricity to meet our customers’ demand, which may vary.
Unregulated Energy
The following table presents net income for the year ended December 31, 2018 and total assets as of December 31, 2018, for our Unregulated Energy segment by operation and area served:
Operations
Area Served
Net Income
 
Total Assets
(in thousands)
 
 
 
 
Propane Operations (Sharp, FPU and Flo-gas)
Delaware, Maryland, Virginia,
Pennsylvania, Florida
$
6,443

 
$
86,989

Energy Transmission (Aspire Energy)
Ohio
3,620

 
85,733

Energy Generation (Eight Flags)
Florida
1,657

 
10,895

Energy Services (PESCO)
Appalachian Basin, Mid-Atlantic,
Southeast, Western Pennsylvania
(1,288
)
 
55,021

Marlin Gas Services (1)
Southeast and Midwest
(186
)
 
14,046

Other
Other
393

 
2,884

Total
 
$
10,639

 
$
255,568

(1) In December 2018, Marlin Gas Services, LLC (“Marlin Gas Services”), our newly created subsidiary, acquired the assets of Marlin Gas Transport, Inc. ("Marlin Gas Transport"). The net loss reported is a result of the costs of consummating the acquisition exceeding the margin generated for approximately half of December 2018.
Propane Operations
Our propane operations sell propane to residential, commercial/industrial, wholesale and AutoGas customers, in the Mid-Atlantic region, through Sharp Energy, Inc. and Sharpgas, Inc., and in Florida through FPU and Flo-gas. We deliver to and bill our propane customers based on two primary customer types: bulk delivery customers and metered customers. Bulk delivery customers receive deliveries into tanks at their location. We invoice and record revenues for these customers at the time of delivery. Metered customers are either part of an underground propane distribution system or have a meter installed on the tank at their location. We invoice and recognize revenue for these customers based on their consumption as dictated by scheduled meter reads. As a member of AutoGas Alliance, we install and support propane vehicle conversion systems for vehicle fleets and provide onsite fueling infrastructure.

Chesapeake Utilities Corporation 2018 Form 10-K     Page 7


Propane Operations - Operational Highlights
For the year ended December 31, 2018, operating revenues, volumes sold and average number of customers by customer class for our Mid-Atlantic and Florida propane operations were as follows:
 
 
Operating Revenues (in thousands)
 
Volumes (in thousands of gallons)
 
Average Number of Customers (2)
 
 
Mid-Atlantic
 
Florida
 
Mid-Atlantic
 
Florida
 
Mid-Atlantic
 
Florida
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
  Residential bulk
 
$
27,090

 
26
%
 
$
6,799

 
32
%
 
10,483

 
17
%
 
1,547

 
23
%
 
25,870

 
66
%
 
10,312

 
59
%
  Residential metered
 
9,933

 
10
%
 
5,037

 
24
%
 
4,157

 
7
%
 
905

 
13
%
 
9,123

 
23
%
 
6,034

 
34
%
  Commercial bulk
 
23,431

 
23
%
 
5,393

 
25
%
 
14,360

 
24
%
 
2,550

 
38
%
 
4,201

 
11
%
 
971

 
6
%
  Commercial metered
 

 
%
 
2,127

 
10
%
 

 
%
 
820

 
12
%
 

 
%
 
280

 
1
%
  Wholesale
 
31,469

 
31
%
 
1,165

 
5
%
 
28,680

 
47
%
 
944

 
14
%
 
31

 
<1%

 
8

 
<1%

  AutoGas
 
4,238

 
4
%
 

 
%
 
3,104

 
5
%
 

 
%
 
85

 
<1%

 

 
%
  Other (1)
 
6,160

 
6
%
 
761

 
4
%
 

 
%
 

 
%
 

 
%
 

 
%
Total
 
$
102,321

 
100
%
 
$
21,282

 
100
%
 
60,784

 
100
%
 
6,766

 
100
%
 
39,310

 
100
%
 
17,605

 
100
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(1) Operating revenues from "Other" sources include revenues from customer loyalty programs; delivery, service and appliance fees; and unbilled revenues.
(2) Average number of customers is based on a twelve-month average for the year ended December 31, 2018.
Competition
Our propane operations compete with national and local independent companies primarily on the basis of price and service. Propane is generally a cheaper fuel for home heating than oil and electricity but more expensive than natural gas. Our propane operations are largely concentrated in areas that are not currently served by natural gas distribution systems.
Supplies, Transportation and Storage
We purchase propane from major oil companies and independent natural gas liquids producers. Propane is transported by truck and rail to our bulk storage facilities in Delaware, Maryland, Florida, Pennsylvania and Virginia, which have a total storage capacity of 7.1 million gallons. Deliveries are made from these facilities by truck to tanks located on customers’ premises or to central storage tanks that feed our underground propane distribution systems. While propane supply has traditionally been adequate, significant fluctuations in weather, closing of refineries and disruption in supply chains, could cause temporary reductions in available supplies.
Weather
Propane revenues are affected by seasonal variations in temperature and weather conditions, which directly influence the volume of propane used by our customers. Our propane revenues are typically highest during the winter months when propane is used for heating. Sustained warmer-than-normal temperatures will tend to reduce propane use, while sustained colder-than-normal temperatures will tend to increase consumption.
Unregulated Energy Transmission (Aspire Energy)
Aspire Energy owns approximately 2,700 miles of natural gas pipeline systems in 40 counties in Ohio. The majority of Aspire Energy’s revenues are derived from long-term supply agreements with Columbia Gas of Ohio and Consumers Gas Cooperative ("CGC"), which together serve more than 21,000 end-use customers. Aspire Energy purchases natural gas to serve these customers from conventional producers in the Marcellus and Utica natural gas production areas. In addition, Aspire Energy earns revenue by gathering and processing natural gas for customers.

Chesapeake Utilities Corporation 2018 Form 10-K Page 8


For the twelve-month period ended December 31, 2018, Aspire Energy's operating revenues and deliveries by customer type were as follows:
 
Operating revenues
 
Deliveries
 
(in thousands)
 
% of Total
 
(in thousands Dts)
 
 % of Total
Supply to Columbia Gas of Ohio
$
13,429

 
38
%
 
2,538

 
38
%
Supply to CGC
12,530

 
35
%
 
1,611

 
25
%
Supply to Marketers - affiliated
2,654

 
8
%
 
1,013

 
15
%
Supply to Marketers - unaffiliated
3,918

 
11
%
 
1,328

 
20
%
Other (including natural gas gathering and processing)
2,876

 
8
%
 
141

 
2
%
Total
$
35,407

 
100
%
 
6,631

 
100
%
Energy Generation (Eight Flags)
Eight Flags generates electricity and steam at its CHP plant located on Amelia Island, Florida. The plant is powered by natural gas transported by Peninsula Pipeline and our Florida natural gas distribution operation and produces approximately 21 MW of electricity and 75,000 pounds per hour of steam. Eight Flags sells the electricity generated from the plant to our Florida electric distribution operation and sells the steam to the customer who owns the site on which the plant is located both under separate 20-year contracts.
Energy Services (PESCO)
PESCO competes with utilities and third-party marketers to sell natural gas and related services directly to commercial and industrial customers. PESCO delivers the natural gas it sells to customers through affiliated and non-affiliated natural gas distribution systems and pipelines and bills customers directly or through the billing services of the natural gas distribution utility that delivers the gas to PESCO’s customer. PESCO manages a portion of the natural gas transportation and storage capacity for our Delmarva natural gas distribution operations under three-year asset management agreements that expire on March 31, 2020.

The following table summarizes PESCO's operating revenues by region in 2018:
 
 
Operating Revenues
 
 
(in thousands)
 
% of Total
Appalachian Basin
 
$
34,713

 
13
%
Mid-Atlantic
 
127,148

 
49
%
Southeast
 
59,077

 
23
%
Western Pennsylvania
 
37,775

 
15
%
Total
 
$
258,713

 
100
%
Marlin Gas Services
In December 2018, Marlin Gas Services, our newly created subsidiary, acquired certain operating assets of Marlin Gas Transport, a supplier of mobile compressed natural gas utility and pipeline solutions. Marlin Gas Services provides a temporary solution for gas pipeline and gas distribution systems while safety and integrity work is being performed. The assets purchased have the capacity to transport more than 7 billion cubic feet of natural gas annually using one of the largest fleets of tube trailers dedicated to the transportation of compressed natural gas (“CNG”). The acquisition will allow us to offer solutions to address supply interruption scenarios and provide other unique applications where pipeline supplies are not available or cannot meet customer requirements. Operating revenues and net income generated from the date of acquisition through the year ended December 31, 2018 were immaterial.
 

Chesapeake Utilities Corporation 2018 Form 10-K     Page 9


Other Businesses and Eliminations
Other businesses and eliminations consists primarily of subsidiaries that own real estate leased to affiliates, eliminations of inter-segment revenue and corporate costs which are not directly attributable to a specific business unit. See Item 8, Financial Statements and Supplementary Data (Note 6, Segment Information, in the consolidated financial statements) for more information.
Environmental Matters
See Item 8, Financial Statements and Supplementary Data (see Note 20, Environmental Commitments and Contingencies, in the consolidated financial statements).
Employees
As of December 31, 2018, we had a total of 983 employees, 119 of whom are union employees represented by two labor unions: the International Brotherhood of Electrical Workers and the United Food and Commercial Workers Union. The collective bargaining agreements with these labor unions expire in 2019.
Executive Officers
Set forth below are the names, ages, and positions of our executive officers with their recent business experience. The age of each officer is as of the filing date of this report.
Name
 
Age
 
Officer Since
 
Offices Held During the Past Five Years
Jeffry M. Householder
 
61
 
2010
 
President (January 1, 2019 - present) Chief Executive Officer (January 1, 2019 - present) Director (January 1, 2019 - present)
President of FPU (June 2010 - February 26, 2019)
Beth W. Cooper
 
52
 
2005
 
Executive Vice President (Beginning February 26, 2019)
Chief Financial Officer (September 2008 - present)
Senior Vice President (September 2008 - February 26, 2019)
Assistant Corporate Secretary (March 2015 - present) Corporate Secretary (June 2005 - March 2015)
James F. Moriarty
 
61
 
2015
 
Executive Vice President (Beginning February 26, 2019) General Counsel & Corporate Secretary (March 2015 - present) Chief Policy and Risk Officer (Beginning February 26, 2019)
Senior Vice President (February 2017 - February 26, 2019) Vice President (March 2015 - February 2017)
Stephen C. Thompson
 
58
 
1997
 
Senior Vice President (September 2004 - present)
President, Eastern Shore (January 1997 - present) President and Chief Operating Officer, Sandpiper (May 2014 - present)
Vice President (May 1997 - September 2004)
Available Information on Corporate Governance Documents
Our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and other reports and amendments to these reports that we file with or furnish to the SEC are available free of charge at our website, www.chpk.com, as soon as reasonably practicable after we electronically file these reports with, or furnish these reports to the SEC. The content of this website is not part of this report.

In addition, the following documents are available free of charge on our website, www.chpk.com:
Business Code of Ethics and Conduct applicable to all employees, officers and directors;
Code of Ethics for Financial Officers;
Corporate Governance Guidelines;
Charters for the Audit Committee, Compensation Committee, Investment Committee, and Corporate Governance Committee of the Board of Directors; and
Corporate Governance Guidelines on Director Independence.


Chesapeake Utilities Corporation 2018 Form 10-K Page 10


Any of these reports or documents may also be obtained by writing to: Corporate Secretary; c/o Chesapeake Utilities Corporation, 909 Silver Lake Boulevard, Dover, DE 19904.

ITEM 1A. RISK FACTORS.
The following is a discussion of the primary factors that may affect the operations and/or financial performance of our regulated and unregulated energy businesses. Refer to the section entitled Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations of this report for an additional discussion of these and other related factors that affect our operations and/or financial performance.
FINANCIAL RISKS
Instability and volatility in the financial markets could negatively impact access to capital at competitive rates, which could affect our ability to implement our strategic plan, undertake improvements and make other investments required for our future growth.
Our business strategy includes the continued pursuit of growth and requires capital investment in excess of cash flow from operations. As a result, the successful execution of our strategy is dependent upon access to equity and debt at reasonable costs. Our ability to issue new debt and equity capital and the cost of equity and debt are greatly affected by our financial performance and the conditions of the financial markets. In addition, our ability to obtain adequate and cost-effective debt depends on our credit ratings. A downgrade in our current credit ratings could negatively impact our access to and cost of debt. If we are not able to access capital at competitive rates, our ability to implement our strategic plan, undertake improvements and make other investments required for our future growth may be limited.
PESCO is exposed to market risks beyond our control, which could adversely affect our financial results and capital requirements.
PESCO is subject to market risks beyond our control, including market liquidity and commodity price volatility. Although we maintain a risk management policy, we may not be able to offset completely the price risk associated with volatile commodity prices, which could lead to volatility in earnings. Physical trading also has price risk on any net open positions at the end of each trading day, as well as volatility resulting from (i) intra-day fluctuations of natural gas prices, and (ii) daily price movements between the time natural gas is purchased or sold for future delivery and the time the related purchase or sale is economically hedged. The determination of our net open position at the end of any trading day requires us to make assumptions as to future circumstances, including the use of natural gas by our customers in relation to anticipated market positions. Because the price risk associated with any net open position at the end of such day may increase if the assumptions are not realized, we review these assumptions daily. Net open positions may increase volatility in our financial condition or results of operations if market prices move in a significantly favorable or unfavorable manner, because the changes in fair value of trading contracts are immediately recognized as profits or losses for financial accounting purposes. This volatility may occur, with a resulting increase or decrease in earnings or losses, even though the expected profit margin is essentially unchanged from the date the transactions were consummated.
PESCO is exposed to the credit risk of its counterparties.
PESCO extends credit to counterparties and continually monitors and manages collections aggressively. There is risk that PESCO may not be able to collect amounts owed to it. If the counterparty to such a transaction fails to perform, and any underlying collateral is inadequate, we could experience financial losses, which would negatively impact our results of operations.
PESCO is dependent upon the availability of credit to successfully operate its business.
PESCO depends upon credit to buy natural gas for resale or to trade. If financial market conditions or the financial condition of our Company declines, then the cost of credit could increase or become unavailable, which might adversely affect our results of operations, cash flows and financial condition.

Fluctuations in propane gas prices could negatively affect results of operations.
We adjust the price of the propane we sell based on changes in our cost of purchasing propane. However, if the market does not allow us to increase propane sales prices to compensate fully for fluctuations in purchased gas costs, our results of operations and earnings could be negatively affected.


Chesapeake Utilities Corporation 2018 Form 10-K     Page 11


If we fail to comply with our debt covenant obligations, we could experience adverse financial consequences that could affect our liquidity and ability to borrow funds.
Our long-term debt obligations, term loans, the Revolver and our committed short-term lines of credit contain financial covenants related to debt-to-capital ratios and interest-coverage ratios. Failure to comply with any of these covenants could result in an event of default which, if not cured or waived, could result in the acceleration of outstanding debt obligations or the inability to borrow under certain credit agreements. Any such acceleration could cause a material adverse change in our financial condition.

Increases in interest rates may adversely affect our results of operations and cash flows.
Increases in interest rates could increase the cost of future debt issuances. Absent recovery of the higher debt cost in the rates we charge our utility customers, our earnings could be adversely affected. Increases in short-term interest rates could negatively affect our results of operations, which depend on short-term lines of credit to finance accounts receivable and storage gas inventories and to temporarily finance capital expenditures. Reference should be made to Item 7A, Quantitative and Qualitative Disclosures about Market Risk for additional information.

Current market conditions could adversely impact the return on plan assets for our pension plans, which may require significant additional funding.
Our pension plans are closed to new employees, and the future benefits are frozen. The costs of providing benefits and related funding requirements of these plans are subject to changes in the market value of the assets that fund the plans and the discount rates used to estimate the pension benefit obligations. The funded status of the plans and the related costs reflected in our financial statements are affected by various factors that are subject to an inherent degree of uncertainty, particularly in the current economic environment. Future losses of asset values and further declines in discount rates may necessitate accelerated funding of the plans to meet minimum federal government requirements and may result in higher pension expense in future years. Adverse changes in the benefit obligations of our pension plans may require us to record higher pension expense and fund obligations earlier than originally planned, which would have an adverse impact on our cash flows from operations, decrease borrowing capacity and increase interest expense.

OPERATIONAL RISKS
We are dependent upon construction of new facilities to support future growth in earnings in our natural gas and electric distribution and natural gas transmission operations.
Construction of new facilities required to support future growth is subject to various regulatory and developmental risks, including but not limited to: (i) our ability to obtain timely certificate authorizations, necessary approvals and permits from regulatory agencies and on terms that are acceptable to us; (ii) potential changes in federal, state and local statutes and regulations, including environmental requirements, that prevent a project from proceeding or increase the anticipated cost of the project; (iii) our inability to acquire rights-of-way or land rights on a timely basis on terms that are acceptable to us; (iv) lack of anticipated future growth in available natural gas and electricity supply; (v) insufficient customer throughput commitments; and (vi) lack of available and qualified third-party contractors which could impact the timely construction of new facilities.
We operate in a competitive environment, and we may lose customers to competitors.
Natural Gas. Our natural gas transmission and distribution operations compete with interstate pipelines when our customers are located close enough to a competing pipeline to make direct connections economically feasible. Our natural gas marketing operations compete with third-party suppliers to sell natural gas to commercial and industrial customers. Customers also have the option to switch to alternative fuels, including renewable energy sources. Failure to retain and grow our natural gas customer base would have an adverse effect on our financial condition, cash flows and results of operations.
Electric. Our Florida electric distribution business has remained substantially free from direct competition from other electric service providers but does face competition from other energy sources. Changes in the competitive environment caused by legislation, regulation, market conditions, or initiatives of other electric power providers, particularly with respect to retail electric competition, could adversely affect our results of operations, cash flows and financial condition.
Propane. Our propane operations compete with other propane distributors, primarily on the basis of service and price. Some of our competitors have significantly greater resources. Our ability to grow the propane operations business is contingent upon capturing additional market share, expanding into new markets, and successfully utilizing pricing programs that retain and grow

Chesapeake Utilities Corporation 2018 Form 10-K Page 12


our customer base. Failure to retain and grow our customer base in our propane operations would have an adverse effect on our results of operations, cash flows and financial condition.
Fluctuations in weather may cause a significant variance in our earnings.
Our natural gas distribution, propane operations and natural gas transmission operations, are sensitive to fluctuations in weather conditions, which directly influence the volume of natural gas and propane we transport, sell and deliver to our customers. A significant portion of our natural gas distribution, propane operations and natural gas transmission revenue is derived from the sales and deliveries to residential, commercial and industrial heating customers during the five-month peak heating season (November through March). Other than our Maryland division and Sandpiper Energy which have revenue normalization mechanisms, if the weather is warmer than normal, we sell and deliver less natural gas and propane to customers, and earn less revenue, which could adversely affect our results of operations, cash flows and financial condition. Likewise, if the weather is colder than normal, we sell and deliver more natural gas and propane to customers, and earn more revenue, which could positively affect our results of operations, cash flows and financial condition. Variations in weather from year to year can cause our results of operations, cash flows and financial condition to vary accordingly.
Our electric distribution operation is also affected by variations in weather conditions generally and unusually severe weather conditions. However, electricity consumption is generally less seasonal than natural gas and propane because it is used for both heating and cooling in our service areas.

Natural disasters, severe weather (such as a major hurricane) and acts of terrorism could adversely impact earnings.
Inherent in energy transmission and distribution activities are a variety of hazards and operational risks, such as leaks, ruptures, fires, explosions, sabotage and mechanical problems. Natural disasters and severe weather may damage our assets, cause operational interruptions and result in the loss of human life, all of which could negatively affect our earnings, financial condition and results of operations. Acts of terrorism and the impact of retaliatory military and other action by the United States and its allies may lead to increased political, economic and financial market instability and volatility in the price of natural gas, electricity and propane that could negatively affect our operations. Companies in the energy industry may face a heightened risk of exposure to acts of terrorism, which could affect our earnings, financial condition and results of operations. The insurance industry may also be affected by natural disasters, severe weather and acts of terrorism; as a result, the availability of insurance covering risks against which we and our competitors typically insure may be limited. In addition, the insurance we are able to obtain may have higher deductibles, higher premiums and more restrictive policy terms, which could adversely affect our results of operations, financial condition and cash flows.
Operating events affecting public safety and the reliability of our natural gas and electric distribution and transmission systems could adversely affect our operations and increase our costs.
Our natural gas and electric operations are exposed to operational events and risks, such as major leaks, outages, mechanical failures and breakdown, operations below the expected level of performance or efficiency, and accidents that could affect public safety and the reliability of our distribution and transmission systems, significantly increase costs and cause loss of customer confidence. If we are unable to recover all or some of these costs from insurance and/or customers through the regulatory process, our results of operations, financial condition and cash flows could be adversely affected.
A security breach disrupting our operating systems and facilities or exposing confidential information may adversely affect our reputation, disrupt our operations and increase our costs.
Security breaches of our information technology infrastructure, including cyber-attacks and cyber-terrorism, could lead to system disruptions or cause facility shutdowns. If such an attack or security breach were to occur, our business, our earnings, results of operation and financial condition could be adversely affected. In addition, the protection of customer, employee and Company data is crucial to our operational security. A breach or breakdown of our systems that results in the unauthorized release of individually identifiable customer or other sensitive data could have an adverse effect on our reputation, results of operations and financial condition and could also materially increase our costs of maintaining our system and protecting it against future breakdowns or breaches. We take reasonable precautions to safeguard our information systems from cyber-attacks and security breaches; however, there is no guarantee that the procedures implemented to protect against unauthorized access to our information systems are adequate to safeguard against all attacks and breaches.

Chesapeake Utilities Corporation 2018 Form 10-K     Page 13


Failure to attract and retain an appropriately qualified employee workforce could adversely affect operations.
Our ability to implement our business strategy and serve our customers depends upon our continuing ability to attract, develop and retain talented professionals and a technically skilled workforce, and transfer the knowledge and expertise of our workforce to new employees as our existing employees retire. Failure to hire and adequately train replacement employees, including the transfer of significant internal historical knowledge and expertise to new employees, or the future availability and cost of contract labor could adversely affect our ability to manage and operate our business. If we were unable to hire, train and retain appropriately qualified personnel, our results of operations could be adversely affected.
A strike, work stoppage or a labor dispute could adversely affect our operations.
We are party to collective bargaining agreements with labor unions at some of our Florida operations. A strike, work stoppage or a labor dispute with a union or employees represented by a union could cause interruption to our operations and our results could be adversely affected.
Our businesses are capital-intensive, and the increased costs and/or delays of capital projects may adversely affect our future earnings.
Our businesses are capital-intensive and require significant investments in ongoing infrastructure projects. Our ability to complete our infrastructure projects on a timely basis and manage the overall cost of those projects may be affected by the availability of the necessary materials and qualified vendors. Our future earnings could be adversely affected if we are unable to manage such capital projects effectively, or if full recovery of such capital costs is not permitted in future regulatory proceedings.
Our regulated energy business may be at risk if franchise agreements are not renewed, or new franchise agreements are not obtained, which could adversely affect our future results or operating cash flows and financial condition.
Our regulated natural gas and electric distribution operations hold franchises in each of the incorporated municipalities that require franchise agreements in order to provide natural gas and electricity. Ongoing financial results would be adversely impacted in the event that franchise agreements were not renewed. If we are unable to obtain franchise agreements for new service areas, growth in our future earnings could be negatively impacted.
Slowdowns in customer growth may adversely affect earnings and cash flows.
Our ability to increase gross margins in our natural gas, propane and electric distribution businesses is dependent upon growth in the residential construction market, adding new commercial and industrial customers and conversion of customers to natural gas, electricity or propane from other energy sources. Slowdowns in growth may adversely affect our gross margin, earnings and cash flows.
Energy conservation could lower energy consumption, which would adversely affect our earnings.
Federal and state legislative and regulatory initiatives to promote energy efficiency and conservation could lower energy consumption by our customers. In addition, higher costs of natural gas, propane and electricity may cause customers to conserve fuel. To the extent a PSC or FERC does not allow the recovery through customer rates of the costs or lower consumption from energy efficiency or conservation, and our propane margins cannot be increased due to market conditions, our results of operations, cash flows and financial condition may be adversely affected.
Commodity price increases may adversely affect the operating costs and competitive positions of our natural gas, electric and propane operations, which may adversely affect our results of operations, cash flows and financial condition.
Natural Gas/Electricity. Higher natural gas prices can significantly increase the cost of gas billed to our natural gas customers. Increases in the cost of natural gas and other fuels used to generate electricity can significantly increase the cost of electricity billed to our electric customers. Damage to the production or transportation facilities of our suppliers, which decreases their supply of natural gas and electricity, could result in increased supply costs and higher prices for our customers. Such cost increases generally have no immediate effect on our revenues and net income because of our regulated fuel cost recovery mechanisms. However, our net income may be reduced by higher expenses that we may incur for uncollectible customer accounts and by lower volumes of natural gas and electricity deliveries when customers reduce their consumption. Therefore, increases in the price of natural gas and other fuels can adversely affect our operating cash flows, results of operations and financial condition, as well as the competitiveness of natural gas and electricity as energy sources.
Propane. Propane costs are subject to changes as a result of product supply or other market conditions, including weather, economic and political factors affecting crude oil and natural gas supply or pricing. For example, weather conditions could damage production

Chesapeake Utilities Corporation 2018 Form 10-K Page 14


or transportation facilities, which could result in decreased supplies of propane, increased supply costs and higher prices for customers. Such increases in costs can occur rapidly and can negatively affect profitability. There is no assurance that we will be able to pass on propane cost increases fully or immediately, particularly when propane costs increase rapidly. Therefore, average retail sales prices can vary significantly from year-to-year as product costs fluctuate in response to propane, fuel oil, crude oil and natural gas commodity market conditions. In addition, in periods of sustained higher commodity prices, declines in retail sales volumes due to reduced consumption and increased amounts of uncollectible accounts may adversely affect net income.
Refer to Item 7A, Quantitative and Qualitative Disclosures about Market Risk for additional information.
A substantial disruption or lack of growth in interstate natural gas pipeline transmission and storage capacity or electric transmission capacity may impair our ability to meet customers’ existing and future requirements.
In order to meet existing and future customer demands for natural gas and electricity, we must acquire sufficient supplies of natural gas and electricity, interstate pipeline transmission and storage capacity, and electric transmission capacity to serve such requirements. We must contract for reliable and adequate upstream transmission capacity for our distribution systems while considering the dynamics of the interstate pipeline and storage and electric transmission markets, our own on-system resources, as well as the characteristics of our markets. Our financial condition and results of operations would be materially and adversely affected if the future availability of these capacities were insufficient to meet future customer demands for natural gas and electricity. Currently, our Florida natural gas operation relies primarily on one pipeline system, FGT, for most of its natural gas supply and transmission. Our Florida electric operation secures electricity from external parties. Any continued interruption of service from these suppliers could adversely affect our ability to meet the demands of our customers, which could negatively impact our earnings, financial condition and results of operations.
Our use of derivative instruments may adversely affect our results of operations.
Fluctuating commodity prices may affect our earnings and financing costs because our propane operations and PESCO use derivative instruments, including forwards, futures, swaps, puts, and calls, to hedge price risk. While we have risk management policies and operating procedures in place to control our exposure to risk, if we purchase derivative instruments that are not properly matched to our exposure, our results of operations, cash flows, and financial condition may be adversely affected.
PESCO's earnings and operating cash flows are dependent upon optimization of physical assets.
PESCO’s earnings and cash flows are based, in part, on its ability to optimize its portfolio of contractual rights to utilize natural gas storage and pipeline assets. The optimization strategy involves utilizing its physical assets to take advantage of differences in natural gas prices between geographic locations and/or time periods. Any change among various pricing points could affect those differentials. In addition, significant increases in the supply of natural gas for PESCO's market areas can reduce its ability to take advantage of pricing fluctuations in the future. Changes in pricing dynamics and supply could have an adverse impact on its optimization activities, earnings and cash flows. PESCO incurs fixed demand fees to acquire its contractual rights to storage and transportation assets. Should commodity prices at various locations or time periods change in such a way that PESCO is not able to recoup these costs from customers, the cash flows and earnings of PESCO and ultimately, the Company, could be adversely impacted.
REGULATORY, LEGAL AND ENVIRONMENTAL RISKS
Regulation of our businesses, including changes in the regulatory environment, may adversely affect our results of operations, cash flows and financial condition.
The Delaware, Maryland and Florida PSCs regulate our utility operations in those states. Eastern Shore is regulated by the FERC. The PSCs and the FERC set the rates that we can charge customers for services subject to their regulatory jurisdiction. Our ability to obtain timely future rate increases and rate supplements to maintain current rates of return depends on regulatory approvals, and there can be no assurance that our regulated operations will be able to obtain such approvals or maintain currently authorized rates of return. When earnings from our regulated utilities exceed the authorized rate of return, the respective regulatory authority may require us to reduce our rates charged to customers in the future.
We may face certain regulatory and financial risks related to pipeline safety legislation.
We are subject to a number of legislative proposals at the federal and state level to implement increased oversight over natural gas pipeline operations and facilities to inspect pipeline facilities, upgrade pipeline facilities, or control the impact of a breach of such facilities. Additional operating expenses and capital expenditures may be necessary to remain in compliance. If new legislation is adopted and we incur additional expenses and expenditures, our financial condition, results of operations and cash flows could

Chesapeake Utilities Corporation 2018 Form 10-K     Page 15


be adversely affected, particularly if we are not authorized through the regulatory process to recover from customers some or all of these costs and our authorized rate of return.
We are subject to operating and litigation risks that may not be fully covered by insurance.
Our operations are subject to the operating hazards and risks normally incidental to handling, storing, transporting, transmitting and delivering natural gas, electricity and propane to end users. From time to time, we are a defendant in legal proceedings arising in the ordinary course of business. We maintain insurance coverage for our general liabilities in the amount of $51 million, which we believe is reasonable and prudent. However, there can be no assurance that such insurance will be adequate to protect us from all material expenses related to potential future claims for personal injury and property damage or that such levels of insurance will be available in the future at economical prices.
Costs of compliance with environmental laws may be significant.
We are subject to federal, state and local laws and regulations governing environmental quality and pollution control. These evolving laws and regulations may require expenditures over a long period of time to control environmental effects at our current and former operating sites, especially former MGP sites. To date, we have been able to recover, through regulatory rate mechanisms, the costs associated with the remediation of former MGP sites. However, there is no guarantee that we will be able to recover future remediation costs in the same manner or at all. A change in our approved rate mechanisms for recovery of environmental remediation costs at former MGP sites could adversely affect our results of operations, cash flows and financial condition.
Further, existing environmental laws and regulations may be revised, or new laws and regulations seeking to protect the environment may be adopted and be applicable to us. Revised or additional laws and regulations could result in additional operating restrictions on our facilities or increased compliance costs, which may not be fully recoverable. Any such increase in compliance costs could adversely affect our financial condition and results of operations. Compliance with these legal obligations requires us to commit capital. If we fail to comply with environmental laws and regulations, even if such failure is caused by factors beyond our control, we may be assessed civil or criminal penalties and fines, which could impact our financial condition and results of operations. See Item 8, Financial Statements and Supplementary Data (see Note 20, Environmental Commitments and Contingencies, in the consolidated financial statements).

Unanticipated changes in our tax provisions or exposure to additional tax liabilities could affect our profitability and cash flow.
We are subject to income and other taxes in the U.S. Changes in applicable U.S. tax laws and regulations, or their interpretation and application, including the possibility of retroactive effect, could affect our tax expense and profitability. In addition, the final determination of any tax audits or related litigation could be materially different from our historical income tax provisions and accruals. Changes in our tax provision or an increase in our tax liabilities, due to changes in applicable law and regulations, the interpretation or application thereof, future changes in the tax rate or a final determination of tax audits or litigation, could have a material adverse effect on our financial position, results of operations or cash flows.
Our business may be subject in the future to additional regulatory and financial risks associated with global warming and climate change.
There have been a number of federal and state legislative and regulatory initiatives proposed in recent years in an attempt to control or limit the effects of global warming and overall climate change, including greenhouse gas emissions, such as carbon dioxide. The direction of future U.S. climate change regulation is difficult to predict given the potential for policy changes under different Presidential administrations and Congressional leadership. The EPA may or may not continue developing regulations to reduce greenhouse gas emissions. Even if federal efforts in this area slow, states may continue pursuing climate regulations. Any laws or regulations that may be adopted to restrict or reduce emissions of greenhouse gases could require us to incur additional operating costs, such as costs to purchase and operate emissions controls, to obtain emission allowances or to pay emission taxes, and reduce demand for our products. Federal or state legislative initiatives to implement renewable portfolio standards or to further subsidize the cost of solar, wind and other renewable power sources may change the demand for natural gas. We cannot predict the potential impact that such laws or regulations, if adopted, may have on our future business, financial condition or financial results.
Climate changes may impact the demand for our services in the future and could result in more frequent and more severe weather events, which ultimately could adversely affect our financial results.
Significant climatic change creates physical and financial risks for us. Our customers' energy needs vary with weather conditions, primarily temperature and humidity. For residential customers, heating and cooling represent their largest energy use. To the extent weather conditions may be affected by climate change, customers' energy use could increase or decrease depending on the duration and magnitude of any changes. Changes in energy use due to weather variations may affect our financial condition

Chesapeake Utilities Corporation 2018 Form 10-K Page 16


through volatility and/or decreased revenues and cash flows. Extreme weather conditions require more system backups and can increase costs and system stresses, including service interruptions. Severe weather impacts our operating territories primarily through thunderstorms, tornadoes, hurricanes, and snow or ice storms. Weather conditions outside of our operating territories could also have an impact on our revenues and cash flows by affecting natural gas prices. To the extent the frequency of extreme weather events increases, this could increase our costs of providing services. We may not be able to pass on the higher costs to our customers or recover all the costs related to mitigating these physical risks. To the extent financial markets view climate change and emissions of greenhouse gases as a financial risk, this could adversely affect our ability to access capital markets or cause us to receive less favorable terms and conditions in future financings. Our business could be affected by the potential for lawsuits related to or against greenhouse gas emitters based on the claimed connection between greenhouse gas emissions and climate change, which could impact adversely our business, results of operations and cash flows.
Our certificate of incorporation and bylaws may delay or prevent a transaction that stockholders would view as favorable.
Our certificate of incorporation and bylaws, as well as Delaware law, contain provisions that could delay, defer or prevent an unsolicited change in control of Chesapeake Utilities, which may negatively affect the market price of our common stock or the ability of stockholders to participate in a transaction in which they might otherwise receive a premium for their shares over the then current market price. These provisions may also prevent changes in management. In addition, our Board of Directors is authorized to issue preferred stock without stockholder approval on such terms as our Board of Directors may determine. Our common stockholders will be subject to, and may be negatively affected by, the rights of any preferred stock that may be issued in the future.

ITEM 1B. UNRESOLVED STAFF COMMENTS.
None.

ITEM 2. Properties.
Offices and other operational facilities
We own or lease offices and other operational facilities in the following locations: Anne Arundel, Cecil, Dorchester, Somerset, Talbot, Wicomico, and Worcester Counties, Maryland; Kent, New Castle and Sussex Counties, Delaware; Accomack County, Virginia; Alachua, Brevard, Broward, Hendry, Jackson, Levy, Martin, Nassau, Okeechobee, Palm Beach, Polk and Volusia Counties, Florida; Orrville and Athens, Ohio; and Pittsburgh, Pennsylvania.
Regulated Energy Segment
We own approximately 1,594 miles of natural gas distribution mains (together with related service lines, meters and regulators) in Kent, New Castle and Sussex Counties, Delaware; and Caroline, Cecil, Dorchester, Wicomico and Worcester Counties, Maryland. We own approximately 2,862 miles of natural gas distribution mains (and related equipment) in Brevard, Broward, Citrus, Clay, DeSoto, Escambia, Gadsden, Gilchrist, Hernando, Hillsborough, Holmes, Indian River, Jackson, Liberty, Marion, Martin, Nassau, Okeechobee, Osceola, Palm Beach, Polk, Seminole, Suwannee, Union, Volusia and Washington Counties, Florida. In addition, we have adequate gate stations to handle receipt of the gas into each of the distribution systems. We also own approximately 97 miles of underground propane distribution mains in Worcester County, Maryland and facilities in Delaware and Maryland, which we use for propane-air injection during periods of peak demand.
We own and operate approximately 486 miles of natural gas transmission pipeline, extending from interconnects at Daleville, Honey Brook and Parkesburg, Pennsylvania; and Hockessin, Delaware, to 96 delivery points in southeastern Pennsylvania, Delaware and the eastern shore of Maryland and approximately 86 miles of natural gas transmission pipeline in Escambia, Indian River, Palm Beach, Pensacola, Polk, Suwannee and Volusia Counties, Florida. We also own approximately 45 percent of the 16-mile natural gas pipeline extending from the Duval/Nassau County line to Amelia Island in Nassau County, Florida. The remaining 55 percent of the natural gas pipeline is owned by Peoples Gas.
We own and operate approximately 16 miles of electric transmission line located in Nassau County, Florida and approximately 905 miles of electric distribution line in Calhoun, Jackson, Liberty and Nassau Counties, Florida.
Unregulated Energy Segment
We own bulk propane storage facilities, with an aggregate capacity of approximately 7.1 million gallons, in Delaware, Maryland, Virginia, Pennsylvania, and Florida. These facilities are located on real estate that is either owned or leased by us.

Chesapeake Utilities Corporation 2018 Form 10-K     Page 17


We own approximately 204 miles of underground propane distribution mains in Delaware; Dorchester, Princess Anne, Queen Anne's, Somerset, Talbot, Wicomico and Worcester Counties, Maryland; Chester and Delaware Counties, Pennsylvania; and Alachua, Brevard, Broward, Citrus, Duval, Hillsborough, Marion, Nassau, Orange, Palm Beach, Polk, Seminole, St. Johns and Volusia Counties, Florida.
We own 16 natural gas gathering systems and approximately 2,700 miles of pipeline in central and eastern Ohio.
Florida liens
All of the assets owned by FPU are subject to a lien in favor of the holders of its first mortgage bond securing its indebtedness under its Mortgage Indenture and Deed of Trust. These assets are not subject to any other lien as all other debt is unsecured. FPU owns offices and facilities in the following locations: Alachua, Brevard, Broward, Citrus, Hendry, Jackson, Nassau, Okeechobee, Palm Beach and Volusia Counties, Florida. The FPU assets subject to the lien also include: 1,980 miles of natural gas distribution mains (and related equipment) in its service areas; 16 miles of electric transmission line located in Nassau County, Florida; 905 miles of electric distribution line located in Calhoun, Jackson, Liberty and Nassau Counties in Florida; propane storage facilities with a total capacity of 1.1 million gallons, located in south, central and north Florida; and 76 miles of underground propane distribution mains in Alachua, Brevard, Broward, Citrus, Duval, Hillsborough, Indian River, Marion, Martin, Nassau, Orange, Palm Beach, Polk, Seminole, St. Johns and Volusia Counties, Florida.

ITEM 3. Legal Proceedings.
See Note 21, Other Commitments and Contingencies to the Consolidated Financial Statements, which is incorporated into Item 3 by reference.

ITEM 4. Mine Safety Disclosures.
Not applicable.


PART II
ITEM 5. Market for the Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.
Common Stock Dividends and Stockholder Information:
Chesapeake Utilities common stock is traded on the New York Stock Exchange ("NYSE") under the ticker symbol CPK. As of February 15, 2019, we had 2,253 holders of record of our common stock. We declared quarterly cash dividends on our common stock totaling $1.4350 per share in 2018 and $1.2800 per share in 2017, and have paid a cash dividend to our common stock stockholders for 58 consecutive years. Future dividend payments and amounts are at the discretion of our Board of Directors and will depend on our financial condition, results of operations, capital requirements, and other factors.
Indentures to our long-term debt contain various restrictions which limit our ability to pay dividends. FPU’s first mortgage bonds, which are due in 2022, contain a similar restriction that limits the payment of dividends by FPU. Refer to Item 8, Financial Statements and Supplementary Data (see Note 13, Long-Term Debt, in the consolidated financial statements) for additional information.
Purchases of Equity Securities by the Issuer
The following table sets forth information on purchases by us or on our behalf of shares of our common stock during the quarter ended December 31, 2018.
 

Chesapeake Utilities Corporation 2018 Form 10-K Page 18


 
Total
Number
of Shares
Purchased
 
Average
Price Paid
per Share
 
Total Number of Shares
Purchased as Part of
Publicly Announced Plans
or Programs (2)
 
Maximum Number of
Shares That May Yet Be
Purchased Under the Plans
or Programs (2)
Period
 
 
 
 
 
 
 
October 1, 2018 through October 31, 2018 (1)
430

 
$
83.03

 

 

November 1, 2018 through November 30, 2018

 

 

 

December 1, 2018 through December 31, 2018

 

 

 

Total
430

 
$
83.03

 

 

(1) In October 2018, we purchased shares of common stock on the open market for the purpose of reinvesting the dividend on shares held in the Rabbi Trust accounts for certain Directors and Senior Executives under the Non-Qualified Deferred Compensation Plan. The Non-Qualified Deferred Compensation Plan is discussed in detail in Item 8, Financial Statements and Supplementary Data (see Note 17, Employee Benefit Plans, in the consolidated financial statements). During the quarter, 430 shares were purchased through the reinvestment of dividends.
(2) Except for the purpose described in footnote (1), we have no publicly announced plans or programs to repurchase our shares.
Discussion of our compensation plans, for which shares of our common stock are authorized for issuance, is included in the section of our Proxy Statement captioned “Equity Compensation Plan Information” and is incorporated herein by reference.

Chesapeake Utilities Corporation 2018 Form 10-K     Page 19


Common Stock Performance Graph
The stock performance graph and table below compares cumulative total stockholder return on our common stock during the five fiscal years ended December 31, 2018, with the cumulative total stockholder return of the Standard & Poor’s 500 Index and the cumulative total stockholder return of select peers, which include the following companies: Atmos Energy Corporation; Black Hills Corporation; New Jersey Resources Corporation; NiSource Inc.; Northwest Natural Holding Company; NorthWestern Corporation; ONE Gas Inc.; RGC Resources, Inc.; South Jersey Industries, Inc.; Spire Inc.; Unitil Corporation; and Vectren Corporation.
The comparison assumes $100 was invested on December 31, 2013 in our common stock and in each of the foregoing indices and assumes reinvested dividends. The comparisons in the graph below are based on historical data and are not intended to forecast the possible future performance of our common stock.
chart-c3f7df7a2f33579f8bf.jpg

 
2013
 
2014
 
2015
 
2016
 
2017
 
2018
Chesapeake Utilities
$
100

 
$
127

 
$
149

 
$
179

 
$
213

 
$
225

Industry Index
$
100

 
$
121

 
$
135

 
$
158

 
$
189

 
$
202

S&P 500 Index
$
100

 
$
114

 
$
115

 
$
129

 
$
157

 
$
150



Chesapeake Utilities Corporation 2018 Form 10-K Page 20


ITEM 6. SELECTED FINANCIAL DATA

 
For the Year Ended December 31,
 
2018
 
2017
 
2016
 
2015
 
2014
Operating
 
 
 
 
 
 
 
 
 
(in thousands)
 
 
 
 
 
 
 
 
 
Revenues
 
 
 
 
 
 
 
 
 
Regulated Energy
$
345,281

 
$
326,310

 
$
305,689

 
$
301,902

 
$
300,442

Unregulated Energy
420,617

 
324,595

 
203,778

 
162,108

 
184,961

Other businesses and eliminations
(48,409
)
 
(33,322
)
 
(10,607
)
 
(4,766
)
 
13,431

Total revenues
$
717,489

 
$
617,583

 
$
498,860

 
$
459,244

 
$
498,834

Operating income(1)
 
 
 
 
 
 
 
 
 
Regulated Energy
$
79,215

 
$
74,584

 
$
71,515

 
$
62,137

 
$
51,173

Unregulated Energy
16,901

 
12,631

 
14,066

 
16,437

 
11,686

Other businesses and eliminations
(1,496
)
 
205

 
402

 
418

 
104

Total operating income
$
94,620

 
$
87,420

 
$
85,983

 
$
78,992

 
$
62,963

Net income from continuing operations
$
56,580

 
$
58,124

 
$
44,675

 
$
41,140

 
$
36,092

Assets
 
 
 
 
 
 
 
 
 
(in thousands)
 
 
 
 
 
 
 
 
 
Gross property, plant and equipment
$
1,569,683

 
$
1,312,117

 
$
1,175,595

 
$
1,007,489

 
$
870,125

Net property, plant and equipment
$
1,383,972

 
$
1,126,027

 
$
986,664

 
$
854,950

 
$
689,762

Total assets
$
1,693,671

 
$
1,414,934

 
$
1,229,219

 
$
1,067,421

 
$
904,469

Capital expenditures
$
282,976

 
$
191,103

 
$
169,376

 
$
195,261

 
$
98,057

Capitalization
 
 
 
 
 
 
 
 
 
(in thousands)
 
 
 
 
 
 
 
 
 
Stockholders’ equity
$
518,439

 
$
486,294

 
$
446,086

 
$
358,138

 
$
300,322

Long-term debt, net of current maturities
316,020

 
197,395

 
136,954

 
149,006

 
158,486

Total capitalization
$
834,459

 
$
683,689

 
$
583,040

 
$
507,144

 
$
458,808

Current portion of long-term debt
11,935

 
9,421

 
12,099

 
9,151

 
9,109

Short-term debt
294,458

 
250,969

 
209,871

 
173,397

 
88,231

Total capitalization and short-term financing
$
1,140,852

 
$
944,079

 
$
805,010

 
$
689,692

 
$
556,148

(1) During the first quarter of 2018, we adopted amended FASB guidance on the presentation of net periodic and postretirement benefit cost ("net benefit cost"). As a result, the components of net benefit cost other than the service component are presented below the subtotal of Operating Income in the consolidated statements of income. All prior periods have been recast to conform to this presentation.




Chesapeake Utilities Corporation 2018 Form 10-K     Page 21


 
For the Year Ended December 31,
 
2018
 
2017
 
2016
 
2015
 
2014
Common Stock Data and Ratios
 
 
 
 
 
 
 
 
 
Basic earnings per share
$
3.46

 
$
3.56

 
$
2.87

 
$
2.73

 
$
2.48

Diluted earnings per share
$
3.45

 
$
3.55

 
$
2.86

 
$
2.72

 
$
2.47

Diluted earnings per share growth - 1 year
(2.8
)%
 
24.1
%
 
5.1
%
 
10.1
%
 
9.3
%
Diluted earnings per share growth - 5 year
8.8
 %
 
12.3
%
 
8.4
%
 
8.4
%
 
11.6
%
Diluted earnings per share growth - 10 year
10.1
 %
 
10.7
%
 
9.3
%
 
8.4
%
 
8.5
%
Return on average equity
11.2
 %
 
12.6
%
 
11.3
%
 
12.1
%
 
12.2
%
Common equity / total capitalization
62.1
 %
 
71.1
%
 
76.5
%
 
70.6
%
 
65.5
%
Common equity / total capitalization and short-term financing
45.4
 %
 
51.5
%
 
55.4
%
 
51.9
%
 
54.0
%
Capital expenditures / average total capitalization
37.3
 %
 
30.2
%
 
31.1
%
 
29.5
%
 
22.9
%
Book value per share (1)
$
31.65

 
$
29.75

 
$
27.36

 
$
23.45

 
$
20.59

Weighted average number of shares outstanding (1)
16,369,616

 
16,336,789

 
15,570,539

 
15,094,423

 
14,551,308

Shares outstanding at year-end (1)
16,378,545

 
16,344,442

 
16,303,499

 
15,270,659

 
14,588,711

Cash dividends declared per share (1)
$
1.44

 
$
1.28

 
$
1.20

 
$
1.13

 
$
1.07

Dividend yield (annualized) (2)
1.8
 %
 
1.7
%
 
1.8
%
 
2.0
%
 
2.2
%
Book yield (3)
4.7
 %
 
4.5
%
 
4.7
%
 
5.1
%
 
5.4
%
Payout ratio (4)
41.6
 %
 
36.0
%
 
41.8
%
 
41.5
%
 
43.0
%
Additional Data
 
 
 
 
 
 
 
 
 
Customers
 
 
 
 
 
 
 
 
 
Natural gas distribution
158,387

 
153,537

 
149,179

 
144,872

 
141,227

Electric distribution
32,185

 
32,026

 
31,695

 
31,430

 
31,272

Propane operations
56,915

 
54,760

 
54,947

 
53,682

 
53,272

Total employees
983

 
945

 
903

 
832

 
753


(1) Shares and per share amounts for all periods presented reflect the three-for-two stock split declared on July 2, 2014, effected in the form of a stock dividend, and distributed on September 8, 2014.
(2) Dividend yield (annualized) is calculated by multiplying the fourth quarter dividend by four (4), then dividing that amount by the closing common stock price at December 31.
(3) The book yield is calculated by dividing cash dividends declared per share (for the year) by average book value per share (for the year).
(4) The payout ratio is calculated by dividing cash dividends declared per share (for the year) by basic earnings per share.




 



 

Chesapeake Utilities Corporation 2018 Form 10-K Page 22


ITEM 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
This section provides management’s discussion of Chesapeake Utilities and its consolidated subsidiaries, with specific information on results of operations, liquidity and capital resources, as well as discussion of how certain accounting principles affect our financial statements. It includes management’s interpretation of our financial results and our operating segments, the factors affecting these results, the major factors expected to affect future operating results as well as investment and financing plans. This discussion should be read in conjunction with our consolidated financial statements and notes thereto in Item 8, Financial Statements and Supplementary Data.
Several factors exist that could influence our future financial performance, some of which are described in Item 1A, Risk Factors. They should be considered in connection with forward-looking statements contained in this report, or otherwise made by or on behalf of us, since these factors could cause actual results and conditions to differ materially from those set out in such forward-looking statements.
The following discussions and those later in the document on operating income and segment results include the use of the term “gross margin," which 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, and excludes depreciation, amortization and accretion. Gross margin should not be considered an alternative to operating income or net income, which are 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 structures for unregulated energy operations. 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.
Earnings per share information is presented on a diluted basis, unless otherwise noted.


OVERVIEW AND HIGHLIGHTS
(in thousands except per share data)
 
 
 
 
Increase
 
 
 
 
 
Increase
For the Year Ended December 31,
2018
 
2017
 
(decrease)
 
2017
 
2016
 
(decrease)
Operating Income:
 
 
 
 
 
 
 
 
 
 
 
Regulated Energy
$
79,215

 
$
74,584

 
$
4,631

 
$
74,584

 
$
71,515

 
$
3,069

Unregulated Energy
16,901

 
12,631

 
4,270

 
12,631

 
14,066

 
(1,435
)
Other businesses and eliminations
(1,496
)
 
205

 
(1,701
)
 
205

 
402

 
(197
)
Total Operating Income
94,620

 
87,420

 
7,200

 
87,420

 
85,983

 
1,437

Other expense
(615
)
 
(2,342
)
 
1,727

 
(2,342
)
 
(2,328
)
 
(14
)
Interest charges
16,431

 
12,645

 
3,786

 
12,645

 
10,639

 
2,006

Income Before Income Taxes
77,574

 
72,433

 
5,141

 
72,433

 
73,016

 
(583
)
Income taxes
20,994

 
14,309

 
6,685

 
14,309

 
28,341

 
(14,032
)
Net Income
$
56,580

 
$
58,124

 
$
(1,544
)
 
$
58,124

 
$
44,675

 
$
13,449

Earnings Per Share of Common Stock:
 
 
 
 
 
 
 
 
 
 
 
Basic
$
3.46

 
$
3.56

 
$
(0.10
)
 
$
3.56

 
$
2.87

 
$
0.69

Diluted
$
3.45

 
$
3.55

 
$
(0.10
)
 
$
3.55

 
$
2.86

 
$
0.69


Chesapeake Utilities Corporation 2018 Form 10-K     Page 23


2018 compared to 2017
Our net income decreased by approximately $1.5 million or $0.10 per share in 2018, compared to 2017. Key variances included:
(in thousands, except per share data)
 
Pre-tax
Income
 
Net
Income
 
Earnings
Per Share
Year ended December 31, 2017 Reported Results
 
$
72,433

 
$
58,124

 
$
3.55

Adjusting for unusual items:
 
 
 
 
 
 
Absence of the 2017 deferred tax revaluation benefit associated with the TCJA
 

 
(14,299
)
 
(0.87
)
Net impact of PESCO's MTM activity
 
10,423

 
7,602

 
0.46

One-time separation expenses associated with a former executive
 
(1,548
)
 
(1,421
)
 
(0.09
)
Absence of Xeron expenses, including 2017 wind-down expenses
 
829

 
605

 
0.04

 
 
9,704

 
(7,513
)
 
(0.46
)
Increased (Decreased) Gross Margins:
 
 
 
 
 
 
Eastern Shore and Peninsula Pipeline service expansions*
 
9,709

 
7,082

 
0.43

Pass-through of lower taxes to regulated energy customers(1)
 
(9,562
)
 
(6,975
)
 
(0.42
)
Natural gas growth (excluding service expansions)
 
5,911

 
4,311

 
0.26

Implementation of Eastern Shore settled rates*(2)
 
5,803

 
4,233

 
0.26

Impact on PESCO from Bomb Cyclone and pipeline capacity constraints
 
(5,545
)
 
(4,044
)
 
(0.25
)
Colder weather
 
5,046

 
3,680

 
0.22

Unregulated Energy growth, excluding PESCO
 
3,140

 
2,290

 
0.14

Florida electric reliability/modernization program*
 
1,516

 
1,106

 
0.07

Florida GRIP*
 
1,277

 
932

 
0.06

Other margin for PESCO operations (net)
 
(489
)
 
(357
)
 
(0.02
)
 
 
16,806

 
12,258

 
0.75

Decreased (Increased) Other Operating Expenses(3):
 
 
 
 
 
 
Depreciation, asset removal and property taxes
 
(4,779
)
 
(3,486
)
 
(0.21
)
Payroll expense (increased staffing and annual salary increases)
 
(4,349
)
 
(3,172
)
 
(0.19
)
Facilities maintenance costs
 
(2,687
)
 
(1,960
)
 
(0.12
)
Operating expenses to increase staffing, infrastructure and risk management systems necessary to support growth for PESCO(3)
 
(2,665
)
 
(1,944
)
 
(0.12
)
Outside services
 
(2,182
)
 
(1,592
)
 
(0.10
)
Vehicle, other taxes and credit collections
 
(1,551
)
 
(1,131
)
 
(0.07
)
Other employee-related expenses
 
(1,100
)
 
(802
)
 
(0.05
)
Incentive compensation costs
 
734

 
535

 
0.03

Outside regulatory costs
 
661

 
482

 
0.03

Early termination of facility lease due to consolidation of operations facilities
 
(423
)
 
(309
)
 
(0.02
)
 
 
(18,341
)
 
(13,379
)
 
(0.82
)
Interest charges
 
(3,786
)
 
(2,762
)
 
(0.17
)
Income taxes - Regulated Energy (1)
 

 
6,975

 
0.42

Other income tax effects - primarily the impact of income rate tax changes on Unregulated businesses
 

 
2,323

 
0.14

Net Other changes
 
758

 
554

 
0.04

Year ended December 31, 2018 Reported Results
 
$
77,574

 
$
56,580

 
$
3.45


(1) "Pass-through of lower taxes to regulated customers" represents the amounts that have already been refunded to customers or reserves established for future refunds and/or reduced rates to customers in 2018 as a result of lower taxes due to the TCJA. Refunds made to customers are offset by the corresponding decrease in federal income taxes expense and are expected to have no net impact on net income.
(2) Excluding amounts refunded to customers associated with the TCJA, which are broken out separately and discussed in footnote 1.
(3)As a result of increased staffing, infrastructure and risk management systems to support growth for PESCO, operating expenses for PESCO are presented separately.
* See the Major Projects and Initiatives table.


Chesapeake Utilities Corporation 2018 Form 10-K Page 24



2017 compared to 2016
Our net income increased by approximately $13.4 million or $0.69 per share (diluted) in 2017, compared to 2016. Key variances included:
(in thousands, except per share data)
 
Pre-tax
Income
 
Net
Income
 
Earnings
Per Share
Year ended December 31, 2016 Reported Results
 
$
73,016

 
$
44,675

 
$
2.86

Adjusting for unusual items:
 
 
 
 
 
 
Deferred tax revaluation benefit associated with the TCJA
 

 
14,299

 
0.87

Net impact of PESCO's MTM activity
 
(5,783
)
 
(3,499
)
 
(0.21
)
        Impact of winding down of Xeron operations and absence of 2016 loss
 
745

 
451

 
0.03

 
 
(5,038
)
 
11,251

 
0.69

Increased (Decreased) Gross Margins:
 
 
 
 
 
 
Eight Flags' CHP plant
 
4,901

 
2,965

 
0.19

Implementation of new base rates for Eastern Shore*
 
3,693

 
2,234

 
0.14

PESCO - margin from operations
 
3,365

 
2,036

 
0.13

Natural gas growth (excluding service expansions)
 
2,818

 
1,705

 
0.11

Service expansions*
 
2,062

 
1,248

 
0.08

Florida GRIP*
 
1,902

 
1,151

 
0.07

Aspire Energy rates and management fees
 
1,125

 
680

 
0.04

Customer consumption (non-weather)
 
721

 
436

 
0.03

Implementation of Delaware Division settled rates
 
831

 
503

 
0.03

Wholesale propane sales and margins
 
678

 
410

 
0.03

Retail propane margins
 
645

 
390

 
0.02

     Weather impact
 
578

 
350

 
0.02

Margin from Sandpiper System Improvement Rate
 
291

 
176

 
0.01

 
 
23,610

 
14,284

 
0.90

(Increased) Decreased Other Operating Expenses:
 
 
 
 
 
 
Payroll expense
 
(6,487
)
 
(3,925
)
 
(0.25
)
Depreciation, asset removal and property tax costs due to new capital investments
 
(5,120
)
 
(3,098
)
 
(0.20
)
Eight Flags' operating expenses
 
(2,920
)
 
(1,767
)
 
(0.11
)
Benefit and other employee-related expenses
 
(1,485
)
 
(899
)
 
(0.06
)
Regulatory expenses associated with rate filings
 
(1,005
)
 
(608
)
 
(0.04
)
Taxes other than property and income
 
(739
)
 
(447
)
 
(0.03
)
Credit, collections & customer service expenses
 
515

 
311

 
0.02

Outside services and facilities maintenance costs
 
417

 
252

 
0.02

Vehicle expenses
 
(372
)
 
(225
)
 
(0.01
)
Sales and advertising expenses
 
(259
)
 
(157
)
 
(0.01
)
 
 
(17,455
)
 
(10,563
)
 
(0.67
)
Increase in outstanding shares from the September 2016 public offering
 

 

 
(0.16
)
Interest charges
 
(2,006
)
 
(1,214
)
 
(0.08
)
Change in other expense
 
(191
)
 
(115
)
 
(0.01
)
Change in effective tax rate prior to tax reform
 

 
(500
)
 
(0.03
)
Net other changes
 
497

 
306

 
0.05

Year ended December 31, 2017 Reported Results
 
$
72,433

 
$
58,124

 
$
3.55

* See the Major Projects and Initiatives table.


Chesapeake Utilities Corporation 2018 Form 10-K     Page 25


SUMMARY OF KEY FACTORS
Recently Completed and Ongoing Major Projects and Initiatives
We constantly seek and develop additional projects and initiatives in order to increase shareholder value and serve our customers. The following table represents the major projects recently completed and currently underway. In the future, we will add new projects to this table as such projects are initiated:
 
 
Gross Margin for the Period
 
 
Year Ended December 31,
 
Estimate for Fiscal
Project / Initiative
 
2016
 
2017
 
2018
 
2019
(in thousands)
 
 
 
 
 
 
 
 
Florida GRIP
 
$
11,552

 
$
13,454

 
$
14,731

 
$
16,276

Eastern Shore Rate Case (1)
 

 
3,693

 
9,496

 
9,800

Florida Electric Reliability/Modernization Pilot Program