CHESAPEAKE UTILITIES CORP - FORM 10-K

CHESAPEAKE UTILITIES CORP - FORM 10-K - February 27, 2017

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EX-32.2 - EXHIBIT 32.2 - CHESAPEAKE UTILITIES CORP	cpk12312016ex-322.htm
EX-32.1 - EXHIBIT 32.1 - CHESAPEAKE UTILITIES CORP	cpk12312016ex-321.htm
EX-31.2 - EXHIBIT 31.2 - CHESAPEAKE UTILITIES CORP	cpk12312016ex-312.htm
EX-31.1 - EXHIBIT 31.1 - CHESAPEAKE UTILITIES CORP	cpk12302016ex-311.htm
EX-23.1 - EXHIBIT 23.1 - CHESAPEAKE UTILITIES CORP	cpk12312016ex-231.htm
EX-21 - EXHIBIT 21 - CHESAPEAKE UTILITIES CORP	cpk12312016ex-21.htm
EX-12 - EXHIBIT 12 - CHESAPEAKE UTILITIES CORP	cpk12312016ex-12.htm

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF

THE SECURITIES EXCHANGE ACT OF 1934

For the Fiscal Year Ended: December 31, 2016

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 ¨.. No ý

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 and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post 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 amendments to this Form 10-K. ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “accelerated filer,” “large accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

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, 2016, the last business day of its most recently completed second fiscal quarter, based on the last trade price on that date, as reported by the New York Stock Exchange, was approximately $975.6 million.

The number of shares of Chesapeake Utilities Corporation's common stock outstanding as of February 20, 2017 was 16,308,449.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Proxy Statement for the 2017 Annual Meeting of Stockholders are incorporated by reference in Part II and Part III.

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CHESAPEAKE UTILITIES CORPORATION

FORM 10-K

YEAR ENDED DECEMBER 31, 2016

TABLE OF CONTENTS



	Page
Part I	1
Item 1. Business	2
Item 1A. Risk Factors	12
Item 1B. Unresolved Staff Comments	19
Item 2. Properties	19
Item 3. Legal Proceedings	20
Item 4. Mine Safety Disclosures	20
Part II	21
Item 5. Market for the Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities	21
Item 6. Selected Financial Data	24
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations	28
Item 7A. Quantitative and Qualitative Disclosures About Market Risk	51
Item 8. Financial Statements and Supplementary Data	53
Item 9. Changes In and Disagreements With Accountants on Accounting and Financial Disclosure	102
Item 9A. Controls and Procedures	102
Item 9B. Other Information	104
Part III	104
Item 10. Directors, Executive Officers of the Registrant and Corporate Governance	104
Item 11. Executive Compensation	104
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters	104
Item 13. Certain Relationships and Related Transactions, and Director Independence	104
Item 14. Principal Accounting Fees and Services	104
Part IV	104
Item 15. Exhibits, Financial Statement Schedules	104
Signatures	109

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GLOSSARY OF DEFINITIONS

AFUDC: Allowance for funds used during construction

ASC: Accounting Standards Codification

ASU: Accounting Standards Update

Aspire Energy: Aspire Energy of Ohio, LLC, a wholly-owned subsidiary of Chesapeake Utilities, into which Gatherco merged on April 1, 2015

BravePoint: BravePoint, Inc., the formerly owned advanced information services subsidiary of Chesapeake Utilities, which was sold on October 1, 2014

CDD: Cooling degree-day, which is the measure of the variation in weather based on the extent to which the daily average temperature (from 10:00 am to 10:00 am) is above 65 degrees Fahrenheit

Chesapeake or Chesapeake Utilities: Chesapeake Utilities Corporation, its divisions and subsidiaries, as appropriate in the context of the disclosure

Chesapeake Pension Plan: A defined benefit pension plan sponsored by Chesapeake Utilities

Chesapeake Postretirement Plan: An unfunded postretirement health care and life insurance plan sponsored by Chesapeake Utilities

Chesapeake SERP: An unfunded supplemental executive retirement pension plan sponsored by Chesapeake Utilities

Chesapeake Service Company: Chesapeake Service Company, a wholly-owned subsidiary of Chesapeake Utilities and the parent company of Skipjack, CIC and ESRE

CGC: Consumer Gas Cooperative, an Ohio natural gas cooperative

CHP: Combined heat and power plant

CIC: Chesapeake Investment Company, a wholly-owned subsidiary of Chesapeake Service Company, which is an investment company incorporated in Delaware

Columbia Gas: Columbia Gas Transmission, LLC, an unaffiliated interstate pipeline interconnected with Eastern Shore's pipeline

Columbia Gas of Ohio: An unaffiliated local distribution company based in Ohio

Company: Chesapeake Utilities Corporation, its divisions and subsidiaries, as appropriate in the context of the disclosure

Credit Agreement: The Credit Agreement dated October 8, 2015, among Chesapeake Utilities and the Lenders related to the Revolver

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.

Delaware Division: Chesapeake Utilities' natural gas distribution operation serving customers in Delaware

Delmarva Peninsula: A peninsula on the east coast of the United States of America occupied by Delaware and portions of Maryland and Virginia

Dodd-Frank Act: The Dodd-Frank Wall Street Reform and Consumer Protection Act

DNREC: Delaware Department of Natural Resources and Environmental Control

Dt: Dekatherm, 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 interstate natural gas transmission subsidiary of Chesapeake Utilities

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EGWIC: Eastern Gas & Water Investment Company, LLC, an affiliate of Eastern Shore Gas Company

Eight Flags: Eight Flags Energy, LLC, a subsidiary of Chesapeake Onsight Services, which owns a CHP plant on Amelia Island, Florida

EPA: United States Environmental Protection Agency

ESG: Eastern Shore Gas Company and its affiliates

ESRE: Eastern Shore Real Estate, Inc., a wholly-owned subsidiary of Chesapeake Utilities that owns and leases office buildings in Delaware and Maryland to divisions and subsidiaries of Chesapeake Utilities

FASB: Financial Accounting Standards Board

FERC: Federal Energy Regulatory Commission, an independent agency of the United States government that regulates the interstate transmission of electricity, natural gas, and oil

FDEP: Florida Department of Environmental Protection

FDOT: Florida Department of Transportation

FGT: Florida Gas Transmission Company

Flo-gas: Flo-gas Corporation, a wholly-owned subsidiary of FPU

Fort Meade: Fort Meade natural gas division of FPU

FPU: Florida Public Utilities Company, a wholly-owned subsidiary of Chesapeake Utilities

FPU Medical Plan: A separate unfunded postretirement medical plan for FPU sponsored by Chesapeake Utilities

FPU Pension Plan: A separate defined benefit pension plan for FPU sponsored by Chesapeake Utilities

GAAP: Accounting principles generally accepted in the United States of America

Gatherco: Gatherco, Inc., a corporation that merged with and into Aspire Energy on April 1, 2015

GRIP: The Gas Reliability Infrastructure Program, a natural gas pipeline replacement program in Florida, pursuant to which we collect a surcharge from certain of our Florida customers to recover capital and other program-related costs associated with the replacement of qualifying distribution mains and services in Florida

GSR: Gas Service Rates

Gulf Power: Gulf Power Company, an unaffiliated electric company which supplies electricity to FPU

Gulfstream: Gulfstream Natural Gas System, LLC, an unaffiliated pipeline network that supplies natural gas to FPU

HDD: Heating degree-day, which is a measure of the variation in weather based on the extent to which the daily average temperature (from 10:00 am to 10:00 am) is below 65 degrees Fahrenheit

IGC: Indiantown Gas Company, a division of FPU

IRS: Internal Revenue Service

JEA: The unaffiliated community-owned utility located in Jacksonville, Florida, formerly known as Jacksonville Electric Authority

Lenders: PNC, Bank of America, N.A., Citizens Bank N.A., Royal Bank of Canada, and Wells Fargo Bank, National Association, which are collectively the lenders that entered into the Credit Agreement with Chesapeake Utilities on October 8, 2015

MDE: Maryland Department of Environment

MGP: Manufactured gas plant, which is a site where coal was previously used to manufacture gaseous fuel for industrial, commercial and residential use

MWH: Megawatt hour, which is a unit of measurement for electricity

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Non-Qualified Deferred Compensation Plan: A non-qualified, deferred compensation arrangement under which certain of our executives and members of the Board of Directors are able to defer payment of all or a part of certain specified types of compensation, including executive base compensation, executive cash bonuses, executive performance shares, and directors’ retainers and fees

NYSE: New York Stock Exchange

OPT ≤ 90 Service: Off Peak ≤ 90 Firm Transportation Service, a tariff associated with Eastern Shore's firm transportation service that enables Eastern Shore to forgo scheduling service for up to 90 days during the peak months of November through April each year

OTC: Over-the-counter

Peninsula Pipeline: Peninsula Pipeline Company, Inc., Chesapeake Utilities' wholly-owned Florida intrastate pipeline subsidiary

Peoples Gas: The Peoples Gas System division of Tampa Electric Company, an unaffiliated utility in Florida that has a joint pipeline with Peninsula Pipeline

PESCO: Peninsula Energy Services Company, Inc., Chesapeake Utilities' wholly-owned natural gas marketing subsidiary

PNC: PNC Bank, National Association, the administrative agent and primary lender for our Revolver

Proxy Statement: Chesapeake Utilities’ definitive Proxy Statement to be filed no later than March 31, 2017, in connection with our Annual Meeting to be held on or about May 3, 2017

Prudential: Prudential Investment Management Inc., an institutional investment management firm, with which we have entered into the Shelf Agreement for the future purchase of our Shelf Notes

PSC: Public Service Commission, which is the state agency that regulates the rates and services of Chesapeake Utilities' natural gas and electric distribution operations in Delaware, Maryland and Florida and Peninsula Pipeline in Florida

RAP: Remedial Action Plan, which is a plan that outlines the procedures taken or being considered in removing contaminants from a MGP formerly owned by Chesapeake Utilities or FPU

Rayonier: Rayonier Performance Fibers, LLC, a materials company that supplies electricity to FPU. Eight Flags' CHP plant is located at the Rayonier facility. Eight Flags also sells steam to Rayonier.

Retirement Savings Plan: Chesapeake Utilities' qualified 401(k) retirement savings plan

Revolver: The unsecured revolving credit facility issued to us by the Lenders

Rights Plan: A plan designed to protect against abusive or coercive takeover tactics that are contrary to the best interests of Chesapeake Utilities stockholders

Sandpiper: Sandpiper Energy, Inc., a wholly-owned subsidiary of Chesapeake Utilities, providing a tariff-based distribution service to customers in Worcester County, Maryland

Sanford Group: FPU and other responsible parties involved with the Sanford environmental site

SCO: Standard Choice Offer, a program offered by Columbia Gas of Ohio in which PESCO was selected as a natural gas supplier pursuant to a competitive auction to serve a pool of customers within Columbia Gas of Ohio's service territory from April 2016 through March 2017

SEC: Securities and Exchange Commission

Senior Notes: Our unsecured long-term debt issued primarily to insurance companies on various dates

Sharp: Sharp Energy, Inc., Chesapeake Utilities' wholly-owned propane distribution subsidiary

Sharpgas: Sharpgas, Inc., a subsidiary of Sharp

Shelf Agreement: An agreement entered into between Chesapeake Utilities and Prudential pursuant to which we may request that Prudential purchase, through October 7, 2018, up to $150.0 million of Shelf Notes at a fixed interest rate and with a maturity date not to exceed twenty years from the date of issuance

Shelf Notes: Unsecured senior promissory notes that we may request Prudential to purchase under the Shelf Agreement

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SICP: 2013 Stock and Incentive Compensation Plan

SIR: A system improvement rate adder designed to fund system expansion costs within the city limits of Ocean City, Maryland

Skipjack: Skipjack, Inc., a wholly-owned subsidiary of Chesapeake Service Company that owns and leases office buildings in Delaware and Maryland to affiliates of Chesapeake Utilities

S&P 500 Index: Standard & Poor’s 500 Index, a stock market index based on the market capitalization of 500 companies leading companies

TETLP: Texas Eastern Transmission, LP, an interstate pipeline interconnected with Eastern Shore's pipeline

Transco: Transcontinental Gas Pipe Line Company, LLC, an interstate pipeline interconnected with Eastern Shore's pipeline

Xeron: Xeron, Inc., Chesapeake Utilities' wholly-owned propane and crude oil wholesale marketing subsidiary, based in Houston, Texas

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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 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. 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 (including deregulation) 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, tax, environmental and legal matters, including whether pending matters are resolved within current estimates and whether the costs associated with such matters are adequately covered by insurance or recoverable in rates;


•	the timing of certification authorizations associated with new capital projects;


•	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;


•	general economic conditions, including any potential effects arising from terrorist attacks and any hostilities or other external factors over which we have no control;


•	industrial, commercial and residential growth or contraction in our markets or service territories;


•	the weather and other natural phenomena, including the economic, operational and other effects of hurricanes, ice storms and other damaging weather events;


•	the timing and extent of changes in commodity prices and interest rates;


•	the ability to establish and maintain new key supply sources;


•	the effect of spot, forward and future market prices on our various energy businesses;


•	the effect of competition on our businesses;


•	the capital-intensive nature of our regulated energy businesses;


•	the extent of our success in connecting natural gas and electric supplies to transmission systems and in expanding natural gas and electric markets;


•	the ability to construct facilities at or below estimated costs;


•	the creditworthiness of counterparties with which we are engaged in transactions;


•	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 merger, acquisition or divestiture plans; regulatory or other limitations imposed as a result of a merger; acquisition or divestiture, and the success of the business following a merger, acquisition or divestiture;


•	the 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 the Patient Protection and Affordable Care Act;


•	the ability to continue to hire, train and retain appropriately qualified personnel;


•	the effect of accounting pronouncements issued periodically by accounting standard-setting bodies;


•	the timing and success of technological improvements;


•	risks related to cyber-attacks or cyber-terrorism that could disrupt our business operations or result in failure of information technology systems; and


•	the impact of significant changes to current tax regulations and rates.

Chesapeake Utilities Corporation 2016 Form 10-K Page 1

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ITEM 1. BUSINESS.

CORPORATE OVERVIEW

Chesapeake Utilities Corporation is a Delaware corporation formed in 1947. We are a diversified energy company engaged, through our operating divisions and subsidiaries, in various energy and other businesses. We operate primarily on the Delmarva Peninsula and in Florida, Pennsylvania and Ohio and provide natural gas distribution, transmission, supply, gathering, processing and marketing; electric distribution and generation; propane distribution; propane and crude oil wholesale marketing; steam generation; and other energy-related services.

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."

The following chart shows our principal business structure by segment and other businesses:

The following table shows operating income for the year ended December 31, 2016, and total assets as of December 31, 2016, for our operating segments and other businesses and eliminations:



(dollars in thousands)	Operating Income		Total Assets
Regulated Energy	$	69,851	$	986,752
Unregulated Energy	13,844		226,368
Other businesses and eliminations	401		16,099
Total	$	84,096	$	1,229,219

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Additional financial information by business segment is set forth in Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operation, and Item 8, Financial Statements and Supplementary Data (see Note 5, Segment Information, in the consolidated financial statements).

The following charts present operating income by type of energy delivered and areas served for the year ended December 31, 2016 and average investment by type of energy delivered and areas served as of December 31, 2016.

REGULATED ENERGY

Regulated Energy is our largest segment and consists of: (i) our natural gas distribution operations in Delaware, Maryland and Florida; (ii) our electric distribution operations in Florida; and (iii) our natural gas transmission operations on the Delmarva Peninsula and in Florida. All operations in this segment are regulated, as to their rates and service, by the PSC having jurisdiction in each state in which we operate or by the FERC in the case of Eastern Shore. Our natural gas and electric distribution operations are local distribution utilities and generate revenues based on tariff rates approved by the PSC of each state in which we operate. The PSCs have also authorized our utilities to negotiate rates, based on approved methodologies, with customers that have competitive alternatives. Some of our customers in Maryland are, and will continue to be, served with propane through our underground propane distribution system under PSC-approved tariff rates until we complete the conversion of the system and these customers to natural gas. These customers are included in the Delmarva natural gas distribution operation's results and customer statistics.

Eastern Shore generates revenues based upon the FERC-approved tariff rates. Eastern Shore is also authorized by the FERC to negotiate rates with its customers above or below the FERC-approved tariff rates. Peninsula Pipeline, our Florida intrastate pipeline subsidiary, is subject to regulation by the Florida PSC and has negotiated contracts with customers, including certain affiliates. Our rates are designed to provide the opportunity to generate revenues to recover all prudently incurred costs and provide a return

Chesapeake Utilities Corporation 2016 Form 10-K Page 3

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on our rate base that is sufficient to pay interest on debt and a reasonable return for our stockholders. Each of our utilities has a rate base, which generally consists of the original cost of the utility's plant less related accumulated depreciation, working capital and certain other assets. In certain jurisdictions, the rate base may also include deferred income tax liabilities and other additions or deductions.

The natural gas commodity market for Chesapeake Utilities' Florida division and FPU’s Indiantown division is deregulated. Accordingly, marketers, rather than a traditional utility, sell natural gas to end-use customers in those jurisdictions. For all of our other local distribution utilities, we have fuel cost recovery mechanisms authorized by the PSCs that allow us to periodically adjust fuel rates to reflect changes in the wholesale cost of natural gas and electricity and to ensure we recover all of the costs prudently incurred in purchasing natural gas and electricity for our 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, 2016:




	Delmarva Natural Gas Distribution⁽²⁾				Florida Natural Gas Distribution ⁽³⁾				FPU Electric Distribution
Operating Revenues (in thousands)
Residential	$	49,841	57	%	$	33,329	35	%	$	46,459		55	%
Commercial	27,274		32	%	33,740		35	%	41,704			50	%
Industrial	7,420		9	%	27,057		28	%	3,497			4	%
Other ⁽¹⁾	1,409		2	%	1,438		2	%	(7,505		)	(9	)%
Total Operating revenues	$	85,944	100	%	$	95,564	100	%	$	84,155		100	%

Volumes (in Dts for natural gas/MWHs for electric)
Residential	3,227,594		27	%	1,651,870		7	%	303,654			47	%
Commercial	3,407,184		29	%	8,194,310		33	%	304,458			47	%
Industrial	5,032,872		43	%	15,296,206		60	%	29,700			5	%
Other	92,807		1	%	—		—	%	8,484			1	%
Total Volumes	11,760,457		100	%	25,142,386		100	%	646,296			100	%

Average Number of Customers⁽⁴⁾
Residential	66,175		91	%	68,640		91	%	24,289			77	%
Commercial	6,746		9	%	5,629		7	%	7,404			23	%
Industrial	125		—	%	1,859		2	%	2			—	%
Other	5		—	%	—		—	%	—			—	%
Total Average Customers	73,051		100	%	76,128		100	%	31,695			100	%

⁽¹⁾ Operating Revenues from "Other" sources include 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⁾ Delmarva natural gas distribution includes Chesapeake Utilities' Delaware and Maryland divisions in addition to Sandpiper.

⁽³⁾ Florida natural gas distribution includes Chesapeake Utilities' Florida division, FPU and FPU's Indiantown and Fort Meade divisions.

⁽⁴⁾Average number of customers is based on twelve-month average for the year ended December 31, 2016.

The following table presents operating revenues and design day capacity for Eastern Shore for the year ended December 31, 2016 and contracted firm transportation capacity at December 31, 2016:

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	Eastern Shore
Operating Revenues (in thousands)
Local distribution companies - affiliated ⁽¹⁾	$	15,476	29	%
Local distribution companies - non-affiliated	20,826		39	%
Commercial and industrial	16,521		31	%
Other ⁽²⁾	83		1	%
Total Operating Revenues	$	52,906	100	%

Contracted firm transportation capacity (in Dts/d)
Local distribution companies - affiliated	102,902		43	%
Local distribution companies - non-affiliated	66,182		28	%
Commercial and industrial	67,923		29	%
Total	237,007		100	%

Design day capacity (in Dts/d)	237,007		100	%

⁽¹⁾Eastern Shore's service to our local distribution affiliates is based on FERC-approved rates and is an integral component of the cost associated with providing natural gas supplies for those affiliates. We eliminate operating revenues of Eastern Shore 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.

Peninsula Pipeline contracts with both affiliated and non-affiliated customers to provide firm transportation service. For the year ended December 31, 2016, operating revenues of Peninsula Pipeline were $6.8 million, of which $4.5 million was related to service to our affiliates, FPU and Eight Flags, under contracts which were previously approved by the Florida PSC. Peninsula Pipeline's operating revenues from FPU and Eight Flags are eliminated against the cost of sales in our consolidated financial information; however, FPU includes this amount in its purchased fuel cost and recovers it through the fuel cost recovery mechanism.

As of December 31, 2016, our investments in our regulated operations were as follows: $126.1 million for Delmarva natural gas distribution; $290.4 million for Florida natural gas and electric distribution; and $186.5 million for natural gas transmission.

Weather

Revenues from our residential and commercial sales are affected by seasonal variations in weather conditions, which directly influence the volume of natural gas and electricity sold and delivered. Specifically, customer demand substantially increases during the winter months, when natural gas and electricity are used for heating. For electricity, customer demand also increases during the summer months, when electricity is used for cooling. We measure the relative impact of weather by using a degree-day methodology accepted by the utility industry. Degree-day data is used to estimate amounts of energy required to maintain comfortable indoor temperature levels based on each day’s average temperature. Normal heating and cooling degree-days are based on the most recent 10-year average.

Our Maryland division’s rates include a weather normalization adjustment for residential heating and smaller commercial heating customers. A weather normalization adjustment is a billing adjustment mechanism (or "decoupled" rate mechanism) that is designed to eliminate the effect of deviations from average seasonal temperatures on utility net revenues. In 2016, Sandpiper received approval from the Maryland PSC to include in its rates a weather normalization adjustment for residential heating and smaller commercial heating customers. See Item 8, Financial Statements and Supplementary Data (Note 18, Rates and Other Regulatory Activities, in the consolidated financial statements) for more information.

We do not currently have any weather normalization or “decoupled” rate mechanisms for our other local distribution utilities.

Regulatory Matters

The following table identifies the key regulatory agencies and highlights the most recent base rate proceeding information for each of our major utilities:

Chesapeake Utilities Corporation 2016 Form 10-K Page 5

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	Chesapeake Utilities - Delaware Division	Chesapeake Utilities - Florida Division	FPU Natural Gas	FPU Electric	Chesapeake Utilities - Maryland Division	Eastern Shore	Sandpiper
Regulatory Agency:	Delaware PSC	Florida PSC	Florida PSC	Florida PSC	Maryland PSC	FERC	Maryland PSC
Commission Structure:	5 commissioners	5 commissioners	5 commissioners	5 commissioners	5 commissioners	5 commissioners	5 commissioners
	Part-Time	Full-Time	Full-Time	Full-Time	Full-Time	Full-Time	Full-Time
	Gubernatorial Appointment	Gubernatorial Appointment	Gubernatorial Appointment	Gubernatorial Appointment	Gubernatorial Appointment	Presidential Appointment	Gubernatorial Appointment
Base Rate Proceeding:
Delay in collection of rates subsequent to filing application	60 days	90 days	90 days	90 days	180 days	Up to 180 days	180 days
Application date associated with the most recent permanent rates	12/21/2015	7/14/2009	12/17/2008	4/28/2014	5/1/2006	12/30/2010 ⁽²⁾	12/2/2015
Effective date of permanent rates	01/01/2017	1/14/2010	1/14/2010⁽¹⁾	11/1/2014	12/1/2007	7/29/2011 ⁽²⁾	12/1/2016
Rate increase approved	$2,250,000	$2,536,300	$7,969,000	$3,750,000	$648,000	$805,000 ⁽²⁾	$—
Rate of return approved	9.75% ⁽³⁾	10.80%⁽³⁾	10.85%⁽³⁾	10.25%^{(3), (4)}	10.75%⁽³⁾	13.90% ^(2),(5)	Not Stated ⁽⁶⁾

⁽¹⁾The effective date of the order approving the settlement agreement, which adjusted the rates originally approved on June 4, 2009.

⁽²⁾We filed base rate proceedings for Eastern Shore on January 27, 2017. See Item 8, Financial Statements and Supplementary Data (Note 18, Rates and Other Regulatory Activities, in the consolidated financial statements) for more information.

⁽³⁾Allowed after-tax return on equity.

⁽⁴⁾ The terms of the settlement agreement for the FPU electric division rate case 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 was not allowed to file for a base rate increase prior to December 2016, unless its allowed return on equity fell below the authorized range. If the allowed return on equity exceeded the authorized range, the Office of the Public Counsel could seek a rate decrease.

⁽⁵⁾Allowed pre-tax, pre-interest rate of return.

⁽⁶⁾The terms of the agreement include revenue neutral rates for the first year, followed by a schedule of rate reductions in subsequent years based upon the projected rate of propane to natural gas conversions.

In addition to the base rates approved by the PSCs, certain of our local distribution utilities have additional surcharge mechanisms which were separately approved by their respective PSC. The most notable surcharge mechanisms include Delaware’s surcharge to increase the availability of natural gas in portions of eastern Sussex County, Delaware; Maryland's surcharge designed to recover the costs associated with conversions to natural gas and to improve infrastructure in Worcester County, Maryland; and Florida’s GRIP surcharge designed to recover capital and other costs, inclusive of an appropriate return on investment, associated with accelerating the replacement of qualifying distribution mains.

In February, 2017, FPU’s electric division filed a petition with the Florida PSC, requesting a temporary surcharge mechanism to recover costs, inclusive of an appropriate return on investment, associated with an essential reliability and modernization project on its electric distribution system. We are seeking approval to invest approximately $59.8 million, over a five-year period associated with this project. In February, 2017, the Office of Public Counsel intervened in this petition. The outcome of our petition is not known at this time.

See Item 8, Financial Statements and Supplementary Data (Note 18, Rates and Other Regulatory Activities in the consolidated financial statements) for more information.

Competition

Our natural gas and electric distribution operations and our natural gas transmission operations compete with other forms of energy, including oil, propane and other sources of energy. The principal competitive factors are price and, to a lesser extent, accessibility. Our natural gas distribution operations have several large industrial customers that are able to use fuel oil or propane as an alternative to natural gas. When oil or propane prices decline, these interruptible customers may convert to an alternative fuel source to satisfy their fuel requirements and our sales volumes may decline. To address the uncertainty of alternative fuel prices, we use flexible pricing arrangements on both the supply and sales sides of our business to compete with alternative fuel price fluctuations.

Large industrial natural gas customers may be able to bypass our distribution and transmission systems and make direct connections with “upstream” interstate transmission pipelines when such connections are economically feasible. Certain large industrial electric customers may be capable of generating electricity for their own consumption. Although the risk of bypassing our systems is not considered significant, we may adjust services and rates for these customers to retain their business in certain situations.

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Supplies, Transmission and Storage

Our Delaware and Maryland divisions use their firm transportation resources, summarized in the table below, to meet a significant percentage of their projected demand requirements. They purchase firm natural gas supplies to meet those projected requirements with purchases of base load, daily spot supplies and storage service. They have both firm and interruptible transportation service contracts with four interstate “open access” pipeline companies (Eastern Shore, Transco, Columbia Gas and TETLP) in order to meet customer demand. Their distribution system is directly interconnected with Eastern Shore’s pipeline, which is directly interconnected with the upstream pipelines of Transco, Columbia Gas and TETLP.



		Maximum Daily Firm Transportation Capacity (Dts)	Contract Expiration Date
Division	Counterparty	Maximum Daily Firm Transportation Capacity (Dts)	Contract Expiration Date
Delaware	Eastern Shore	73,779	2017 - 2028
	Columbia Gas	10,960	2017 - 2020
	Transco	21,423	2017 - 2028
	TETLP	34,100	2027

Maryland	Eastern Shore	26,673	2017 - 2027
	Columbia Gas	4,200	2017 - 2019
	Transco	6,188	2017 - 2019
	TETLP	15,900	2027

The Delaware and Maryland divisions also have the capability to use propane-air and liquefied natural gas peak-shaving equipment to supplement or displace natural gas purchases.

Our Delaware and Maryland divisions contract with an unaffiliated energy marketing and risk management company through an asset management agreement to optimize their transportation and storage capacity and secure an adequate supply of natural gas. Pursuant to the asset management agreement, the asset manager pays our divisions a fee, which our divisions share with their customers. The current asset management agreement expires in March 2017. Our Delaware and Maryland divisions are currently negotiating an asset management agreement with PESCO and anticipate executing a three-year agreement by the end of the first quarter of 2017. The Delaware PSC has approved PESCO serving as Asset Manager.

Sandpiper is a party to a capacity, supply and operating agreement with EGWIC to purchase propane, with a contract ending in May 2019. Sandpiper's current annual commitment is estimated at approximately 3.4 million gallons. Sandpiper has the option to enter into either a fixed per-gallon price for some or all of the propane purchases or a market-based price utilizing one of two local propane pricing indices. Sandpiper also has 2,450 Dts of maximum daily firm transportation capacity available from Eastern Shore through contracts expiring on various dates between 2017 and 2027.

Our Florida division has a firm transportation service agreement with Gulfstream for firm transportation capacity of 10,000 Dts/d until May 2022. Pursuant to a program approved by the Florida PSC, the capacity under this agreement has been released to various third parties, including PESCO. Under the terms of these capacity release agreements, we are contingently liable to Gulfstream if any party that acquired the capacity through release fails to pay the capacity charge.

FPU has firm transportation service agreements with FGT, Florida City Gas and Peninsula Pipeline, ranging from 56,455 to 97,277 Dts/d. These agreements expire on various dates between 2017 and 2035. FPU uses gas marketers and producers to procure all of its gas supplies to meet projected requirements. FPU also uses Peoples Gas to provide wholesale gas sales service in areas far from FPU's interconnections with FGT.

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 2018 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.

FPU currently purchases its wholesale electricity primarily from two suppliers, JEA and Gulf Power, under full requirements contracts expiring in December 2017 and 2019, respectively. The JEA contract provides generation and transmission service to northeast Florida. The Gulf Power contract provides generation and transmission service to northwest Florida. FPU has a renewable energy purchase agreement with Rayonier to purchase between 1.7 MWH and 3.0 MWH of electricity annually through 2036. FPU also has an agreement to purchase up to 20 MWH of electricity from its affiliate, Eight Flags. The electricity purchased from Rayonier and Eight Flags serves a portion of FPU's electric distribution customers' base load in northeast Florida.

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UNREGULATED ENERGY

Our Unregulated Energy segment provides: (i) propane distribution; (ii) propane and crude oil wholesale marketing; (iii) natural gas marketing; (iv) unregulated natural gas supply, gathering and processing; (v) electricity and steam generation; and (vi) other unregulated energy-related services to customers. Revenues generated from this segment are not subject to any federal, state or local pricing regulations. Our businesses in this segment typically complement our regulated energy businesses based on the products and services they sell.

Propane Distribution

Our propane distribution operations sell propane primarily to residential, commercial/industrial and wholesale customers in Delaware, Maryland, Virginia and southeastern Pennsylvania, through Sharp and Sharpgas, and in Florida through FPU and Flo-gas. Many of our propane distribution customers are “bulk delivery” customers. We make deliveries of propane to the bulk delivery customers as needed, based on the level of propane remaining in the tank located at the customer’s premises. We invoice and record revenues for our bulk delivery service customers at the time of delivery, rather than upon customers’ actual usage, since the customers typically own the propane gas in the tanks on their premises. We also have underground propane distribution systems serving various neighborhoods and communities. Such customers are billed monthly based on actual consumption, which is measured by meters installed on their premises. In Florida, we also offer metered propane distribution service to residential and commercial customers. We read the meters on such customers' tanks and bill the customers once a month.

Propane Distribution - Operational Highlights

For the year ended December 31, 2016, operating revenues, volumes sold and average number of customers by customer class for our Delmarva Peninsula and Pennsylvania and Florida propane distribution operations were as follows:



	Delmarva Peninsula and Pennsylvania				Florida
Operating Revenues (in thousands)
Residential bulk	$	19,309	34	%	$	5,427	31	%
Residential metered	6,347		11	%	4,602		27	%
Commercial bulk	11,679		20	%	4,354		25	%
Commercial metered	—		—	%	1,913		11	%
Wholesale	15,914		28	%	736		4	%
Other ⁽¹⁾	4,186		7	%	361		2	%
Total Operating Revenues	$	57,435	100	%	$	17,393	100	%

Volumes (in thousands of gallons)
Residential bulk	8,940		20	%	1,331		22	%
Residential metered	3,222		6	%	927		15	%
Commercial bulk	9,432		21	%	2,311		37	%
Commercial metered	—		—	%	824		13	%
Wholesale	20,834		46	%	818		13	%
Other	3,351		7	%	—		—	%
Total Volumes	45,779		100	%	6,211		100	%

Average Number of Customers ⁽²⁾
Residential bulk	26,007		67	%	8,918		55	%
Residential metered	8,421		22	%	6,175		38	%
Commercial bulk	4,153		11	%	920		6	%
Commercial metered	38		—	%	274		1	%
Wholesale	35		—	%	6		—	%
Total Average Customers	38,654		100	%	16,293		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 customer is based on twelve-month average for the year ended December 31, 2016.

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Propane Distribution - Competition

We compete with several other propane distributors in our geographic markets, primarily on the basis of price and service. Our competitors generally include local outlets of national distributors and local independent distributors, whose proximity to customers entails lower costs to provide service. As an energy source, propane competes with home heating oil and electricity, which are typically more expensive (based on equivalent unit of heat value). Since natural gas has historically been less expensive than propane, propane is generally not distributed in geographic areas served by natural gas pipelines or distribution systems.

Propane Distribution - Supplies, Transportation and Storage

We purchase propane for our propane distribution operations primarily from suppliers, including major oil companies, and independent producers of natural gas liquids. Although supplies of propane from these and other sources are generally readily available for purchase, extreme market conditions, such as significant fluctuations in weather, closing of refineries and disruption in supply chains, could result in a reduction in available supplies.

Propane is transported by trucks and railroad cars from refineries, natural gas processing plants or pipeline terminals to bulk propane storage facilities that we own in Delaware, Maryland, Pennsylvania, Virginia and Florida. These bulk storage facilities have an aggregate capacity of approximately 6.2 million gallons. We then deliver propane from these storage facilities by truck to tanks located on our customers’ premises.

Propane Distribution Weather

Revenues from our propane distribution sales activities are affected by seasonal variations in temperature and weather conditions. Weather conditions and their severity directly influence the volume of propane used by our metered customers or sold and delivered to our bulk customers, with demand increasing substantially 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.

Propane and Crude Oil Wholesale Marketing

Xeron trades in short-term natural gas liquids and crude oil forward and futures contracts on the InterContinentalExchange, Inc. Xeron settles its purchases and sales financially, without taking physical delivery of the propane or crude oil. The level and profitability of the propane and crude oil wholesale trading activity are affected by both propane and crude oil wholesale price volatility and liquidity in the wholesale market. At December 31, 2016, Xeron did not have any open futures or forward contracts.

Natural Gas Marketing

We provide natural gas supply and supply management services through PESCO to residential, commercial, industrial and wholesale customers. PESCO operates primarily in Florida, on the Delmarva Peninsula, and in Ohio. In 2016, PESCO had operating revenues of $58.0 million in Florida, $15.7 million from customers located on the Delmarva Peninsula, $9.8 million from customers located in Ohio, and $11.9 million from customers located in other states. PESCO competes with regulated utilities and other unregulated third-party marketers to sell natural gas supplies directly to commercial and industrial customers through competitively-priced contracts. PESCO does not currently own or operate any natural gas transmission or distribution assets. The gas that PESCO sells is delivered to retail or wholesale customers through affiliated and non-affiliated local distribution company systems and transmission pipelines. PESCO bills its customers directly or through the billing services of the regulated utilities that deliver the gas. PESCO is currently negotiating an asset management agreement with our Delaware and Maryland divisions and anticipates executing a three-year agreement by the end of the first quarter of 2017.

In January 2016, PESCO entered into a SCO supplier agreement with Columbia Gas of Ohio to provide natural gas supply for one of its local distribution customer pools. PESCO also assumed the obligation to store natural gas inventory to satisfy its obligations under the SCO supplier agreement, which terminates on March 31, 2017.

In conjunction with the SCO supplier agreement, PESCO entered into natural gas futures contracts during the second quarter of 2016 in order to protect its natural gas inventory against market price fluctuations. The contracts expire in March 31, 2017. We initially accounted for these contracts as fair value hedges with any ineffective portion being reported directly in earnings and offset by any associated gain (loss) on the inventory value being hedged. During the third quarter of 2016, we de-designated the hedges as they were no longer deemed to be highly effective. We are now accounting for them as derivatives on a mark-to-market basis, with the change in fair value reflected as unrealized gain (loss) in current period earnings, and these are no longer offset by any associated gain (loss) in the value of the inventory previously hedged.

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Unregulated Natural Gas Infrastructure Services

Aspire Energy is an unregulated natural gas infrastructure company that owns approximately 2,600 miles of pipeline systems in 40 counties throughout Ohio. The majority of Aspire Energy’s margin is derived from long-term supply agreements with Columbia Gas of Ohio and CGC, which together serve more than 20,000 end-use customers. Aspire Energy primarily sources gas from 300 conventional producers and also provides gathering and processing services so that it can maintain quality and reliability for its wholesale markets.

For the twelve-months period ended December 31, 2016, Aspire Energy's operating revenues and deliveries by customer type were as follows:



	Operating revenues		Deliveries
	(in thousands)		(in Dts)
Supply to Columbia Gas of Ohio	$	9,429	2,197
Supply to CGC	8,037		1,238
Supply to Marketers - affiliated	3,544		1,604
Supply to Marketers - unaffiliated	3,230		1,266
Other (including natural gas gathering and processing)	2,313		1,797
Total	$	26,553	8,102

Eight Flags

Eight Flags provides electricity and steam generation services through its CHP plant located on Amelia Island, Florida. The construction of the CHP plant was completed in June 2016. The CHP plant, which consists of a natural-gas-fired turbine and associated electric generator, produces approximately 20 MWH of base load power and includes a heat recovery steam generator capable of providing approximately 75,000 pounds per hour of residual steam. In June 2016, Eight Flags began selling power generated from the CHP plant to FPU pursuant to a 20-year power purchase agreement for distribution to its retail electric customers. In July 2016, it also started selling steam to Rayonier pursuant to a separate 20-year contract. The CHP plant is powered by natural gas transported by FPU through its distribution system. During the second half of 2016, Eight Flags generated $7.0 million in operating revenues from the sale of electricity to FPU and $1.3 million from the sale of steam to Rayonier.

Other Unregulated Energy-Related Businesses

FPU sells energy-related merchandise in Florida. Operating revenues in 2016 from these other unregulated businesses totaled $2.8 million.

OTHER BUSINESSES AND ELIMINATIONS

Overview

Other businesses and eliminations consists primarily of other unregulated subsidiaries, including Skipjack and ESRE, that own real estate leased to affiliates, eliminations of inter-segment revenue and certain unallocated corporate costs which are not directly attributable to a specific business unit. Skipjack and ESRE own and lease office buildings in Delaware and Maryland to divisions and other subsidiaries of Chesapeake Utilities. See Item 8, Financial Statements and Supplementary Data (Note 5, Segment Information, in the consolidated financial statements) for more information.

Prior to September 30, 2014, our business included a third segment, “Other,” which consisted primarily of BravePoint, our former advanced information services subsidiary.

ENVIRONMENTAL COMPLIANCE

We are subject to federal, state and local laws and regulations governing environmental quality and pollution control. These laws and regulations require us to remove or remediate the effect on the environment of the disposal or release of specified substances at current and former operating sites. We have participated in the investigation, assessment or remediation, and have exposures at seven former MGP sites.

For additional information on each site, refer to Item 8, Financial Statements and Supplementary Data (see Note 19, Environmental Commitments and Contingencies in the consolidated financial statements).

EMPLOYEES

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As of December 31, 2016, we had a total of 903 employees, 117 of whom are union employees represented by two labor unions: the International Brotherhood of Electrical Workers 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	Position
Michael P. McMasters	58	President (March 2010 - present) Chief Executive Officer (January 2011 - present) Director (March 2010 - present) Executive Vice President (September 2008 - February 2010) Chief Operating Officer (September 2008 - December 2010) Chief Financial Officer (January 1997 - September 2008) Mr. McMasters also previously served as Senior Vice President, Vice President, Treasurer, Director of Accounting and Rates and Controller.
Beth W. Cooper	50	Senior Vice President (September 2008 - present) Chief Financial Officer (September 2008 - present) Assistant Secretary (March 2015-present) Corporate Secretary (June 2005 - March 2015) Vice President (June 2005 - September 2008) Treasurer (March 2003 - May 2012) Ms. Cooper also previously served as Assistant Vice President, Assistant Treasurer, Director of Internal Audit and Director of Strategic Planning.
Elaine B. Bittner	47	Senior Vice President of Strategic Development (May 2013 - present) Chief Operating Officer - Sharp, Aspire Energy, PESCO and Xeron (May 2014 - Present) Vice President of Strategic Development (June 2010 - May 2013) Vice President, Eastern Shore (May 2005 - June 2010) Ms. Bittner also previously served as Director of Eastern Shore, Director of Customer Services and Regulatory Affairs for Eastern Shore and Director of Environmental Affairs and Environmental Engineer.
Stephen C. Thompson	56	Senior Vice President (September 2004 - present) President, Eastern Shore (January 1997 - present) Vice President (May 1997 - September 2004) Mr. Thompson also previously served as Director of Gas Supply and Marketing for Eastern Shore, Superintendent of Eastern Shore and Regional Manager for Florida distribution operations.
Jeffry M. Householder	59	President of Florida Public Utilities Company (June 2010 - present) Prior to joining Chesapeake Utilities, Mr. Householder operated a consulting practice that provided business development and regulatory services to utilities, propane retailers and industrial clients.
James F. Moriarty	59	Senior Vice President (Effective February 2017) General Counsel & Corporate Secretary (March 2015 - present) Vice President (March 2015 - February 2017) Prior to joining Chesapeake Utilities, Mr. Moriarty was a Partner at Locke Lord LLP and Fulbright & Jaworski, LLP, both international law firms with offices in Washington, D.C.

AVAILABLE INFORMATION AND CORPORATE GOVERNANCE DOCUMENTS

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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 the SEC website http://www.sec.gov and 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 and Corporate Governance Committee of the Board of Directors; and

•Corporate Governance Guidelines on Director Independence.

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.

CERTIFICATION TO THE NYSE

Our Chief Executive Officer certified to the NYSE on May 12, 2016 that, as of that date, he was unaware of any violation by Chesapeake Utilities of the NYSE’s corporate governance listing standards.

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 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 our ability to access 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, both organically and through acquisitions. To the extent that we do not generate sufficient cash flow from operations, we may incur additional indebtedness to finance our growth. We rely on access to both short-term and long-term capital markets as a significant source of liquidity for capital requirements not satisfied by the cash flows from our operations.

In addition, our ability to obtain adequate and cost-effective capital depends on our credit ratings, which are greatly affected by our financial performance and the liquidity of financial markets. A downgrade in our current credit ratings could adversely affect our access to capital markets, as well as our cost of capital. 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.

Our energy marketing subsidiaries are exposed to market risks beyond our control, which could adversely affect our financial results and capital requirements.

Our energy marketing subsidiaries are subject to market risks beyond our control, including market liquidity and commodity price volatility. Although we maintain risk management policies, 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 and/or propane prices, and (ii) daily price movements between the time natural gas and/or propane 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 and/or propane 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.

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Our energy marketing subsidiaries are exposed to credit risk of their counterparties.

Our energy marketing subsidiaries extend credit to counterparties and continually monitor and manage collections aggressively. Each of these subsidiaries is exposed to the risk that it 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.

Our energy marketing subsidiaries are dependent upon the availability of credit to successfully operate their businesses.

Our energy marketing subsidiaries are dependent upon the availability of credit to buy propane and natural gas for resale or to trade. If financial market conditions decline generally, or the financial condition of these subsidiaries or of our Company declines, then the cost of credit available to these subsidiaries could increase. If credit is not available, or if credit is more costly, our results of operations, cash flows and financial condition may be adversely affected.

Fluctuations in propane gas prices could negatively affect results or operations.

To compensate for fluctuations in propane gas prices, we adjust our propane selling prices to the extent allowed by the market. There can be no assurance, however, that we will be able to increase propane sales prices sufficiently to compensate fully for such fluctuations in the cost of propane gas to us. If we are unable to increase propane sales prices sufficiently to compensate fully for such fluctuations, our earnings could be negatively affected, which would adversely impact our results of operations.

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, 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, a downgrade in our credit rating or the inability to borrow under certain credit agreements. Any such acceleration could cause a material adverse change in our financial condition.

An increase in interest rates may adversely affect our results of operations and cash flows.

An increase in interest rates, without the recovery of the higher cost of debt in the sales and/or transportation rates we charge our utility customers, could adversely affect future earnings. An increase 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 in the future to meet minimum federal government requirements as well as higher pension expense to be recorded in future years. Adverse changes in the asset values and 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) 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

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in available natural gas and electricity supply; (v) insufficient customer throughput commitments; and (vi) lack of available and qualified third party contractors could impact timely construction of new facilities.

We operate in a competitive environment, and we may lose customers to competitors.

Natural Gas. Our natural gas marketing operations compete with third-party suppliers to sell natural gas to commercial and industrial customers. Our natural gas transmission and distribution operations compete with interstate pipelines when our transmission and/or distribution customers are located close enough to a competing pipeline to make direct connections economically feasible. 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. While there is active wholesale power sales competition in Florida, our retail electric business through FPU has remained substantially free from direct competition from other electric service providers. Generally, however, our retail electric business through FPU remains subject to 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 competition, could adversely affect our results of operations, cash flows and financial condition.

Propane. Our propane distribution 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 distribution business is contingent upon capturing additional market share, expanding into new markets, and successfully utilizing pricing programs that retain and grow our customer base. Failure to retain and grow our customer base in our propane distribution operations would have an adverse effect on our results of operations, cash flows and financial condition.

Our propane and crude oil wholesale marketing operation competes with various marketers, many of which have significantly greater resources and are able to obtain price or volumetric advantages. Failure to effectively compete with these marketers 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 distribution and natural gas supply, gathering and processing operations, are sensitive to fluctuations in weather conditions, which directly influence the volume of natural gas and propane we sell and deliver to our customers. A significant portion of our natural gas and propane distribution revenue is derived from the sales and deliveries to residential and commercial heating customers during the five-month peak heating season (November through March). 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. A significant portion of our Ohio natural gas supply, gathering and processing services revenue is also generated during the five-month peak heating season (November through March) as a result of the natural gas requirements of its key customers, including Columbia Gas of Ohio, various regional marketers, and the CGC.

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.

Accidents, 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.

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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 customers through the regulatory process, our authorized rate of return, 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, results of operations 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.

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 is dependent upon our continuing ability to attract and retain talented professionals and technically skilled workforce, and being able to transfer the knowledge and expertise of our workforce to new employees as our aging employees retire. Failure to hire and adequately train replacement employees, including the transfer of significant internal historical knowledge and expertise to the 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. If a strike, work stoppage or other labor dispute were to occur, 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 limited 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. Our natural gas and electric distribution operations are currently in negotiations for franchises with certain municipalities for new service areas and renewal of some existing franchises. Ongoing financial results would be adversely impacted from the loss of service to certain operating areas within our electric or natural gas territories 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 regulated energy, unregulated propane distribution and our other unregulated natural gas services 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.

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Energy conservation could lower energy consumption, which would adversely affect our earnings.

We have seen various legislative and regulatory initiatives to promote energy efficiency and conservation at both the federal and state levels. In response to the initiatives in the states in which we operate, we have implemented programs to promote energy efficiency by our current and potential customers. To the extent a PSC allows us to recover the cost of such energy efficiency programs, funding for such programs is recovered through the rates we charge to our regulated customers. However, lower energy consumption as a result of energy efficiency and conservation by current and potential customers may adversely affect our results of operations, cash flows and financial condition.

Commodity price increases may adversely affect the operating costs and competitive positions of our natural gas, electric and propane distribution 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 coal, 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, coal 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 volatile 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 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 relies primarily on two suppliers, Gulf Power for the northwest service territory and JEA for the northeast service territory. Any continued interruption of service on these systems could adversely affect our ability to meet the demands of FPU’s customers, which could negatively impact our earnings, financial condition and results of operations.

The amount and availability of natural gas, propane and electricity supplies are difficult to predict; a substantial reduction in available supplies could reduce our earnings in those segments.

Natural gas, propane and electricity production can be affected by factors beyond our control, which may affect our ability to obtain sufficient supplies to meet demand and may adversely impact the financial results in those businesses. Any disruption in the availability of supplies of natural gas, propane and electricity could result in increased supply costs and higher prices for customers, which could also adversely affect our financial condition and results of operations.

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We rely on a limited number of natural gas, propane and electricity suppliers and producers, the loss of which could have a material adverse effect on our financial condition and results of operations.

We have entered into various agreements with suppliers and producers to purchase natural gas, propane and electricity to serve our customers. The loss of any significant suppliers and/or producers or our inability to renew these contracts at favorable terms upon their expiration could significantly affect our ability to serve our customers and have a material adverse impact on our 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 distribution, wholesale marketing and natural gas marketing operations 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.

Our propane inventory is subject to inventory valuation risk, which may result in a write-down of inventory.

Our propane distribution operations own or lease bulk propane storage facilities, with an aggregate capacity of approximately 6.2 million gallons. We purchase and store propane based on several factors, including inventory levels and the price outlook. We may purchase large volumes of propane at current market prices during periods of low demand and low prices, which generally occur during the summer months. Propane is a commodity, and as such, its price is subject to volatile fluctuations in response to changes in supply or other market conditions. We have no control over these market conditions. Consequently, the wholesale purchase price can change rapidly over a short period of time. The retail market price for propane could fall below the price at which we made the purchases, which would adversely affect our profits or cause sales from that inventory to be unprofitable. In addition, falling propane prices may result in inventory write-downs, as required by GAAP, if the market price of propane falls below our weighted average cost of inventory, which could adversely affect net income.

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 PSC, or the FERC in the case of Eastern Shore, 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 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 with the increased federal oversight that may result from such proposals. If such legislation is adopted and we incur additional expenses and expenditures, our financial condition, results of operations and cash flows could 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.

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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.

Derivatives legislation and the implementation of related rules could have an adverse impact on our ability to hedge risks associated with our business.

The Dodd-Frank Act regulates derivative transactions, which include certain instruments used in our risk management activities. The Dodd-Frank Act contemplates that most swaps will be required to be cleared through a registered clearing facility and traded on a designated exchange or swap execution facility, subject to certain exceptions for entities that use swaps to hedge or mitigate commercial risk. Although the Dodd-Frank Act includes significant new provisions regarding the regulation of derivatives, the impact of those requirements will not be known definitively until regulations have been adopted and fully implemented by both the SEC and the Commodities Futures Trading Commission, and market participants establish registered clearing facilities under those regulations. Although we may qualify for exceptions, our derivatives counterparties may be subject to new capital, margin and business conduct requirements imposed as a result of the Dodd-Frank Act, which may increase our transaction costs, make it more difficult for us to enter into hedging transactions on favorable terms or affect the number and/or creditworthiness of available counterparties. Our inability to enter into hedging transactions on favorable terms, or at all, could increase operating expenses and increase exposure to risks of adverse changes in commodity prices, which could adversely affect the predictability of cash flows.

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, 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 adoption of this type of legislation by Congress, or similar legislation by states, or the adoption of related regulations by federal or state governments mandating a substantial reduction in greenhouse gas emissions in the future could have far-reaching and significant impacts on the energy industry. Such new legislation or regulations could result in increased compliance costs for us or additional operating restrictions on our business, affect the demand for natural gas and propane or impact the prices we charge to our customers. At this time, we cannot predict the potential impact of such laws or regulations that may be adopted 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.

There is a growing believe that emissions of greenhouse gases may be linked to global climate change. Climate 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. A decrease in energy use due to weather changes may affect our financial condition through decreased revenues and cash flows. Extreme weather conditions in general require more system backups, adding to costs, and can contribute to increased system

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stresses, including service interruptions. Weather conditions outside of our operating territories could also have an impact on our revenues and cash flows by affecting natural gas prices. Severe weather impacts our operating territories primarily through thunderstorms, tornadoes, hurricanes, and snow or ice storms. 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 Rights Plan, certificate of incorporation and bylaws may delay or prevent a transaction that stockholders would view as favorable.

Our Rights Plan, 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.

Key Properties

We own approximately 1,459 miles of natural gas distribution mains (together with related service lines, meters and regulators) located in New Castle, Kent and Sussex Counties, Delaware; and Cecil, Caroline, Dorchester, Wicomico and Worcester Counties, Maryland. We own approximately 2,841 miles of natural gas distribution mains (and related equipment) in Nassau, Polk, Osceola, Citrus, DeSoto, Liberty, Hillsborough, Holmes, Jackson, Gadsden, Gilchrist, Union, Washington, Pasco, Suwannee, Palm Beach, Broward, Martin, Marion, Seminole and Volusia Counties, Florida. In addition, we have adequate gate stations to handle receipt of the gas into each of the distribution systems. We also own facilities in Delaware and Maryland, which we use for propane-air injection during periods of peak demand.

Through Eastern Shore, we own and operate approximately 448 miles of natural gas transmission pipeline, extending from supply interconnects at Parkesburg, Daleville and Honey Brook, Pennsylvania; and Hockessin, Delaware, to 96 delivery points in southeastern Pennsylvania, Delaware and the eastern shore of Maryland. Through Peninsula Pipeline, we own and operate approximately 44 miles of natural gas transmission pipeline in Suwannee, Indian River, Palm Beach and Polk 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.

Through FPU, we own and operate approximately 20 miles of electric transmission line located in Nassau County, Florida and approximately 890 miles of electric distribution line in Jackson, Liberty, Calhoun and Nassau Counties, Florida.

We own approximately 343 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 bulk propane storage facilities, with an aggregate capacity of approximately 5.2 million gallons, in Delaware, Maryland, Pennsylvania and Virginia, located on real estate that is either owned or leased by us. In Florida, we own bulk propane storage facilities with an aggregate capacity of approximately 1.0 million gallons. Xeron does not own physical storage facilities or equipment to transport propane.

Through Aspire Energy, we own 16 natural gas gathering systems and approximately 2,600 miles of pipeline in Central and Eastern Ohio.

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We own or lease offices and other operational facilities in the following locations: Anne Arundel, Worcester, Wicomico, Dorchester, Talbot, Cecil and Somerset Counties, Maryland; New Castle, Kent and Sussex Counties, Delaware; Accomack County, Virginia; Palm Beach, Volusia, Levy, Martin, Jackson, Broward, Nassau, Brevard, Alachua, Hendry, Okeechobee, and Polk Counties, Florida; and Orrville, Ohio.

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: Palm Beach, Volusia, Levy, Martin, Jackson, Broward, Nassau, Brevard, Alachua, Hendry and Okeechobee Counties, Florida. The FPU assets subject to the lien also include: 1,924 miles of natural gas distribution mains (and related equipment) in its service areas; 20 miles of electric transmission line located in Nassau County, Florida; 890 miles of electric distribution line located in Jackson, Liberty, Calhoun and Nassau Counties in Florida; propane storage facilities with a total capacity of 1.0 million gallons, located in south and central Florida; and 59 miles of underground propane distribution mains in Alachua, Brevard, Broward, Citrus, Duval, Hillsborough, Marion, Nassau, Orange, Palm Beach, Polk, Seminole, St. Johns and Volusia Counties, Florida.

ITEM 3. LEGAL PROCEEDINGS.

LEGAL PROCEEDINGS

As disclosed in Item 8, Financial Statements and Supplementary Data (see Note 20, Other Commitments and Contingencies, in the consolidated financial statements), we are involved in various legal actions and claims arising in the normal course of business. We are also involved in certain administrative proceedings before various governmental or regulatory agencies concerning rates. In the opinion of management, the ultimate disposition of these current proceedings will not have a material effect on our consolidated financial position, results of operations or cash flows.

ITEM 4. MINE SAFETY DISCLOSURES.

Not applicable.

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PART II

ITEM 5. MARKET FOR THE REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES.

COMMON STOCK PRICE RANGES, COMMON STOCK DIVIDENDS AND STOCKHOLDER INFORMATION:

At February 20, 2017, there were 2,381 holders of record of our common stock. The high, low and closing prices of our common stock and dividends declared per share for each calendar quarter during 2016 and 2015 are included in the below table.



	Quarter Ended	High		Low		Close		Dividends Declared Per Share
2016
	March 31	$	67.36	$	52.25	$	62.97	$	0.2875
	June 30	$	66.19	$	56.56	$	66.18	$	0.3050
	September 30	$	67.88	$	59.12	$	61.06	$	0.3050
	December 31	$	70.00	$	57.63	$	66.95	$	0.3050

2015
	March 31	$	52.22	$	44.83	$	50.61	$	0.2700
	June 30	$	55.72	$	44.37	$	53.85	$	0.2875
	September 30	$	56.15	$	45.25	$	53.08	$	0.2875
	December 31	$	61.13	$	49.50	$	56.75	$	0.2875

We have paid a cash dividend to our common stock stockholders for 56 consecutive years. Dividends are payable at the discretion of our Board of Directors. Future payment of dividends, and the amount of these dividends, will depend on our financial condition, results of operations, capital requirements, and other factors. We declared quarterly cash dividends on our common stock in 2016 and 2015, totaling $1.2025 per share and $1.1325 per share, respectively.

Indentures to our long-term debt contain various restrictions which limit our ability to pay dividends. Refer to Item 8, Financial Statements and Supplementary Data (see Note 12, Long-Term Debt, in the consolidated financial statements) for additional information.

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 12, Long-Term Debt, in the consolidated financial statements) for additional information.

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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, 2016.



	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, 2016 through October 31, 2016 ⁽¹⁾	418	$	58.33	—	—
November 1, 2016 through November 30, 2016	—	—		—	—
December 1, 2016 through December 31, 2016	—	—		—	—
Total	418	$	58.33	—	—

⁽¹⁾

In October 2016, 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 16, Employee Benefit Plans, in the consolidated financial statements). During the quarter, 418 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 the section of our Proxy Statement captioned “Equity Compensation Plan Information” and is incorporated herein by reference.

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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, 2016, with the cumulative total stockholder return of the S&P 500 Index and the cumulative total stockholder return of select peers, which include the following companies: Atmos Energy Corporation, Delta Natural Gas Company, Inc., Spire, Inc., New Jersey Resources Corporation, Northwest Natural Gas Company, RGC Resources, Inc., South Jersey Industries, Inc., and WGL Holdings, Inc.

The comparison assumes $100 was invested on December 31, 2011 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.



	2011		2012		2013		2014		2015		2016
Chesapeake Utilities	$	100	$	108	$	146	$	186	$	216	$	260
Industry Index	$	100	$	102	$	123	$	158	$	180	$	216
S&P 500 Index	$	100	$	116	$	153	$	174	$	176	$	197

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ITEM 6. SELECTED FINANCIAL DATA



	For the Year Ended December 31,
	2016			2015			2014
Operating ⁽¹⁾
(in thousands)
Revenues
Regulated Energy	$	305,689		$	301,902		$	300,442
Unregulated Energy	203,778			162,108			184,961
Other businesses and eliminations	(10,607		)	(4,766		)	13,431
Total revenues	$	498,860		$	459,244		$	498,834
Operating income
Regulated Energy	$	69,851		$	60,985		$	50,451
Unregulated Energy	13,844			16,355			11,723
Other businesses and eliminations	401			418			105
Total operating income	$	84,096		$	77,758		$	62,279
Net income from continuing operations	$	44,675		$	41,140		$	36,092
Assets
(in thousands)
Gross property, plant and equipment	$	1,175,595		1,007,489			$	870,125
Net property, plant and equipment	$	986,664		$	854,950		$	689,762
Total assets	$	1,229,219		$	1,067,421		$	904,469
Capital expenditures ⁽¹⁾	$	169,376		$	142,713		$	98,057
Capitalization
(in thousands)
Stockholders’ equity	$	446,086		$	358,138		$	300,322
Long-term debt, net of current maturities	136,954			149,006			158,486
Total capitalization	$	583,040		$	507,144		$	458,808
Current portion of long-term debt	12,099			9,151			9,109
Short-term debt	209,871			173,397			88,231
Total capitalization and short-term financing	$	805,010		$	689,692		$	556,148


⁽¹⁾	These amounts exclude the results of distributed energy due to their reclassification to discontinued operations. We closed our distributed energy operation in 2007. These amounts also include accruals for capital expenditures that we have incurred for each reporting period.


⁽²⁾	These amounts include the financial position and results of operation of FPU for the period from the merger (October 28, 2009) to December 31, 2009. These amounts also include the effects of acquisition accounting and issuance of our common shares as a result of the merger.

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For the Year Ended December 31,
2013		2012		2011		2010		2009⁽²⁾			2008		2007



$	264,637	$	246,208	$	256,226	$	269,438	$	138,671		$	116,123	$	128,566
166,723		133,049		149,586		146,793		119,973			161,290		115,190
12,946		13,245		12,215		11,315		10,141			14,030		14,530
$	444,306	$	392,502	$	418,027	$	427,546	$	268,785		$	291,443	$	258,286

$	50,084	$	46,999	$	43,911	$	43,267	$	26,668		$	23,833	$	21,739
12,353		8,355		9,619		8,150		8,390			3,600		5,244
297		1,281		175		513		(1,322		)	1,046		1,131
$	62,734	$	56,635	$	53,705	$	51,930	$	33,736		$	28,479	$	28,114
$	32,787	$	28,863	$	27,622	$	26,056	$	15,897		$	13,607	$	13,218


$	805,394	$	697,159	$	625,488	$	584,385	$	543,905		$	381,689	$	352,838
$	631,246	$	541,781	$	487,704	$	462,757	$	436,587		$	280,671	$	260,423
$	837,522	$	733,746	$	709,066	$	670,993	$	615,811		$	385,795	$	381,557
$	108,039	$	78,210	$	44,431	$	46,955	$	26,294		$	30,844	$	30,142


$	278,773	$	256,598	$	240,780	$	226,239	$	209,781		$	123,073	$	119,576
117,592		101,907		110,285		89,642		98,814			86,422		63,256
$	396,365	$	358,505	$	351,065	$	315,881	$	308,595		$	209,495	$	182,832
11,353		8,196		8,196		9,216		35,299			6,656		7,656
105,666		61,199		34,707		63,958		30,023			33,000		45,664
$	513,384	$	427,900	$	393,968	$	389,055	$	373,917		$	249,151	$	236,152

Chesapeake Utilities Corporation 2016 Form 10-K Page 25

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	For the Year Ended December 31,
	2016			2015			2014
Common Stock Data and Ratios
Basic earnings per share from continuing operations ^{(1) (3)}	$	2.87		$	2.73		$	2.48
Diluted earnings per share from continuing operations ^{(1) (3)}	$	2.86		$	2.72		$	2.47
Diluted earnings per share growth - 1 year	5.1		%	10.1		%	9.3		%
Diluted earnings per share growth - 5 year	8.4		%	8.4		%	11.6		%
Diluted earnings per share growth - 10 year	9.3		%	8.4		%	8.5		%
Return on average equity from continuing operations ⁽¹⁾	11.3		%	12.1		%	12.2		%
Common equity / total capitalization	76.5		%	70.6		%	65.5		%
Common equity / total capitalization and short-term financing	55.4		%	51.9		%	54.0		%
Capital expenditures / average total capitalization	31.1		%	29.5		%	22.9		%
Book value per share ⁽³⁾	$	27.36		$	23.45		$	20.59
Market price:
High	$	70.000		$	61.130		$	52.660
Low	$	52.250		$	44.370		$	37.493
Close	$	66.950		$	56.750		$	49.660
Weighted average number of shares outstanding ⁽³⁾	15,570,539			15,094,423			14,551,308
Shares outstanding at year-end ⁽³⁾	16,303,499			15,270,659			14,588,711
Registered common shareholders	2,373			2,396			2,329
Cash dividends declared per share ⁽³⁾	$	1.20		$	1.13		$	1.07
Dividend yield (annualized) ⁽⁴⁾	1.8		%	2.0		%	2.2		%
Book yield	4.7		%	5.1		%	5.4		%
Payout ratio from continuing operations ^{(1) (5)}	41.8		%	41.5		%	43.0		%
Additional Data
Customers
Natural gas distribution	149,179			144,872			141,227
Electric distribution	31,695			31,430			31,272
Propane distribution	54,947			53,682			53,272
Total employees	903			832			753


⁽¹⁾	These amounts exclude the results of a former distributed energy subsidiary due to its reclassification to discontinued operations in 2007.


⁽²⁾	These amounts include the financial position and results of operation of FPU for the period from the merger closing (October 28, 2009) to December 31, 2009.


⁽³⁾	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.


⁽⁴⁾	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.


⁽⁵⁾	The payout ratio from continuing operations is calculated by dividing cash dividends declared per share (for the year) by basic earnings per share from continuing operations.

Chesapeake Utilities Corporation 2016 Form 10-K Page 26

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For the Year Ended December 31,
2013			2012			2011			2010			2009⁽²⁾			2008			2007

$	2.27		$	2.01		$	1.93		$	1.83		$	1.45		$	1.33		$	1.31
$	2.26		$	1.99		$	1.91		$	1.82		$	1.43		$	1.32		$	1.29
13.6		%	4.2		%	4.9		%	27.3		%	8.3		%	2.3		%	10.3		%
11.4		%	9.1		%	10.3		%	8.5		%	5.6		%	2.4		%	7.2		%
6.8		%	8.1		%	7.8		%	6.7		%	3.0		%	6.7		%	5.3		%
12.2		%	11.6		%	11.6		%	11.6		%	11.2		%	11.2		%	11.5		%
70.3		%	71.6		%	68.6		%	71.6		%	68.0		%	58.7		%	65.4		%
54.3		%	60.0		%	61.1		%	58.2		%	56.1		%	49.4		%	50.6		%
28.6		%	22.0		%	13.3		%	15.0		%	10.2		%	15.7		%	16.5		%
$	19.28		$	17.82		$	16.78		$	15.84		$	14.89		$	12.02		$	11.76

$	40.780		$	32.613		$	29.687		$	28.133		$	23.333		$	23.227		$	24.833
$	30.560		$	26.593		$	24.000		$	18.673		$	14.680		$	14.620		$	18.667
$	40.013		$	30.267		$	28.900		$	27.680		$	21.367		$	20.987		$	21.233
14,430,962			14,379,216			14,333,699			14,211,831			10,969,980			10,217,772			10,114,562
14,457,345			14,396,248			14,350,959			14,286,293			14,091,471			10,240,682			10,166,115
2,345			2,396			2,481			2,482			2,670			1,914			1,920
$	1.01		$	0.96		$	0.91		$	0.87		$	0.83		$	0.81		$	0.78
2.6		%	3.2		%	3.2		%	3.2		%	3.9		%	3.9		%	3.7		%
5.4		%	5.5		%	5.6		%	5.7		%	6.2		%	6.8		%	6.8		%
44.6		%	47.8		%	47.4		%	47.6		%	57.6		%	60.5		%	60.2		%


138,210			124,015			121,934			120,230			117,887			65,201			62,884
31,151			31,066			30,986			30,966			31,030			—			—
51,988			49,312			48,824			48,100			48,680			34,981			34,143
842			738			711			734			757			448			445

Chesapeake Utilities Corporation 2016 Form 10-K Page 27

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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 structure for non-regulated segments. Our management uses gross margin in measuring our business units’ performance and has historically analyzed and reported gross margin information publicly. Other companies may calculate gross margin in a different manner.

Unless otherwise noted, earnings per share information is presented on a diluted basis.

INTRODUCTION

We are a diversified energy company engaged, directly or through our various operating divisions and subsidiaries, in regulated and unregulated energy businesses.

Our strategy is focused on growing earnings from a stable utility foundation and investing in related businesses and services that provide opportunities for returns greater than traditional utility returns. We are focused on identifying and developing opportunities across the energy value chain, with emphasis on midstream and downstream investments that are accretive to earnings per share and consistent with our long-term growth strategy.

The key elements of this strategy include:


•	executing a capital investment program in pursuit of growth opportunities that generate returns equal to or greater than our cost of capital;


•	expanding our energy distribution and transmission businesses organically as well as into new geographic areas;


•	providing new services in our current service territories;


•	expanding our footprint in potential growth markets through strategic acquisitions;


•	entering new unregulated energy markets and business lines that will complement our existing operating units and growth strategy while capitalizing on opportunities across the energy value chain; and


•	differentiating the Company as a full-service energy supplier/partner/provider through a customer-centric model.

Given our strong utility foundation and the growth that Eastern Shore has cultivated for the Company, we will continue to seek out opportunities like Aspire Energy, building on our existing midstream capabilities and pursuing additional midstream assets. In this regard, we will seek to leverage our pipeline capabilities, skill sets and assets and be a preferred owner and operator of pipeline systems to serve high growth markets within and beyond our existing footprint.

Chesapeake Utilities Corporation 2016 Form 10-K Page 28

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OVERVIEW AND HIGHLIGHTS



(in thousands except per share data)				Increase			Increase
For the Year Ended December 31,	2016		2015	(decrease)	2015	2014	(decrease)
Operating Income:
Regulated Energy	$	69,85

Large accelerated filer

Accelerated filer

Non-accelerated filer

Smaller Reporting Company