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Item 2. Management’s Discussion and Analysis

2021-05-04 compared with 2020-11-05 · 240 added, 505 removed, 329 unchanged (69% of the section changed)

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This discussion and analysis should be read in conjunction with the attached unaudited condensed consolidated financial statements and notes thereto and our Annual Report on Form 10-K for the year ended December 31, 2020, including the audited consolidated financial statements and notes thereto.

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Safe Harbor for Forward-Looking Statements

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These statements are subject to many risks, uncertainties and other important factors that could cause actual future results to differ materially from those expressed in the forward-looking statements.

In addition to the risk factors described under Item 1A, Risk Factors in our 2019 Annual Report on Form 10-K, and Item 1A, Risk Factors, in the Quarterly Report on Form 10-Q for the quarter ended March 31, 2020, such factors include, but are not limited to:

In addition to the risk factors described under Item 1A, Risk Factors in our 2020 Annual Report on Form 10-K, such factors include, but are not limited to:

• state and federal legislative and regulatory initiatives that affect cost and investment recovery, have an impact on rate structures, and affect the speed and the degree to which competition enters the electric and natural gas industries;

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• possible increased federal, state and local regulation of the safety of our operations;

• the inherent hazards and risks involved in transporting and distributing natural gas and electricity;

• the economy in our service territories or markets, the nation, and worldwide, including the impact of economic conditions (which we do not control ) on demand for electricity, natural gas, propane or other fuels;

• the inherent hazards and risks involved in transporting and distributing natural gas, electricity, and propane;

• the economy in our service territories or markets, the nation, and worldwide, including the impact of economic conditions (which we do not control ) on demand for natural gas, electricity, propane or other fuels;

• risks related to cyber-attacks or cyber-terrorism that could disrupt our business operations or result in failure of information technology systems or result in the loss or exposure of confidential or sensitive customer, employee or Company information;

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

• the extent of our success in connecting natural gas and electric supplies to transmission systems, establishing and maintaining key supply sources;

and expanding natural gas and electric markets;

• the extent of our success in connecting natural gas and electric supplies to our transmission systems, establishing and maintaining key supply sources, and expanding natural gas and electric markets;

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

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• risks related to the outbreak of a pandemic, including the duration and scope of the pandemic and the corresponding impact on our supply chains, our personnel, our contract counterparties, general economic conditions and growth, and the financial markets.

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We are an energy delivery company engaged in the distribution of natural gas, propane and electricity;

We are an energy delivery company engaged in the distribution of natural gas, electricity, and propane;

the transmission of natural gas;

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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.

Our strategy is to consistently produce industry-leading total shareholder return by profitably investing capital into opportunities that leverage our skills and expertise in energy distribution and transmission to achieve high levels of service and growth.

The key elements of our strategy include:

• capital investment in growth opportunities that generate our target returns;

• expanding our energy delivery businesses within our existing service areas as well as into new geographic areas;

• providing new services in our current service areas;

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

• entering new energy markets and businesses that complement our existing operations and growth strategy;

• operating as a customer-centric full-service energy supplier/partner/provider, while providing safe and reliable service.

Our employees strive to build meaningful connections that generate opportunities to grow our businesses, develop new markets, and enrich the communities in which we live, work and serve.

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, consistent with our long-term growth strategy and create opportunities to continue our record of top tier returns on equity relative to our peer group.

Currently, our growth strategy is focused on the following platforms, including:

• Optimizing the earnings growth in our existing businesses, which includes organic growth, territory expansions, and new products and services as well as increased opportunities for collaboration and efficiencies across the organization.

• Growth of Marlin Gas Services’ CNG transport business and expansion into LNG and RNG transport services as well as methane capture.

• Identifying and undertaking additional strategic propane acquisitions that provide a larger foundation in current markets and expand our brand and presence into new strategic growth markets.

• Pursuit of growth opportunities that enable us to utilize our integrated set of energy delivery businesses to participate in renewable energy opportunities.

Due to the seasonality of our business, results for interim periods are not necessarily indicative of results for the entire fiscal year.

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Earnings per share information is presented for continuing operations on a diluted basis, unless otherwise noted.

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Results of Operations for the Three and Nine Ended September 30, 2020

Results of Operations for the Three months Ended March 31, 2021

Chesapeake Utilities is a Delaware corporation formed in 1947.

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and other energy-related services.

In the fourth quarter of 2019, we completed the sale of the assets and contracts of PESCO.

As a result, PESCO’s results for all periods presented have been separately reported as discontinued operations.

In March 2020, the CDC declared a national emergency due to the rapidly growing outbreak of COVID-19.

In response to this declaration and the rapid spread of COVID-19 within the United States, federal, state and local governments throughout the country imposed varying degrees of restrictions on social and commercial activity to promote social distancing in an effort to slow the spread of the illness.

These restrictions have continued to significantly impact economic conditions in the United States.

Chesapeake Utilities is considered an “essential business,” which allows us to continue its operational activities and construction projects while the social distancing restrictions remain in place.

These restrictions significantly impacted economic conditions in the United States in 2020 and continued into 2021.

At this time, restrictions continue to lift as vaccines have become more available in the United States.

Regardless, Chesapeake Utilities is considered an “essential business,” which has allowed us to continue operational activities and construction projects despite any social distancing restrictions that are in place.

In response to the COVID-19 pandemic and related restrictions, we implemented our pandemic response plan, which includes having all employees who can work remotely do so in order to promote social distancing and providing personal protective equipment to field employees to reduce the spread of COVID-19.

For the three and nine months ended September 30, 2020, the estimated impacts that COVID-19 had on our earnings were approximately $0.7 million and $1.9 million, respectively, primarily driven by reduced consumption of energy largely in the commercial and industrial sectors, higher bad debt expenses and incremental expenses associated with COVID-19, including protective personal equipment and premium pay for field personnel.

Impacts from the restrictions imposed in our service territories and the implementation of our pandemic response plan, included reduced consumption of energy largely in the commercial and industrial sectors, higher bad debt expenses and incremental expenses associated with COVID-19, including personal protective equipment and premium pay for field personnel.

The additional operating expenses we incurred support the ongoing delivery of our essential services during these unprecedented times.

As the COVID-19 pandemic is still ongoing, we are continuing to assess recoverability and to date, have not established regulatory assets associated with the incremental expense impacts, as currently authorized by the Delaware, Maryland and Florida PSCs.

We are committed to communicating timely updates and will continue to monitor developments affecting our employees, customers, suppliers, stockholders and take additional precautions as warranted to operate safely and to comply with the CDC, Occupational Safety and Health Administration, state and local requirements in order to protect its employees, customers and the communities.

Refer to Note 5, Rates and Other Regulatory Activities , for further information on the potential deferral of incremental expenses associated with COVID-19.

In the fourth quarter of 2020, we began recording regulatory assets, as currently authorized by the Delaware and Maryland PSCs and as initially provided for by the Florida PSC, associated with the incremental expenses incurred by our natural gas and electric distribution businesses as a result of the pandemic.

Despite the early changes in restrictions, we continue to operate under our pandemic response plan, monitor developments affecting employees, customers, suppliers, stockholders and take all precautions warranted to operate safely and to comply with the CDC, Occupational Safety and Health Administration, and state and local requirements in order to protect our employees, customers and the communities.

Refer to Note 5 , Rates and Other Regulatory Activities , for further information on the regulated assets established as a result of the incremental expenses incurred associated with COVID-19

Operational Highlights

Our net income for the three months ended September 30, 2020 was $9.3 million, or $0.56 per share, compared to $5.6 million, or $0.34 per share, for the same quarter of 2019.

Our income from continuing operations for the three months ended September 30, 2020 was $9.3 million, or $0.56 per share, compared to $6.3 million, or $0.38 per share for the same quarter of 2019.

Operating income for the three months ended September 30, 2020 increased by $3.0 million, or 21.2 percent, compared to the same period in 2019.

The increase in operating income was largely driven by the settlement of the Hurricane Michael regulatory proceeding which improved operating income by $2.9 million, including $1.9 million in operating income that was previously billed under interim rates during the first half of 2020.

Operating income for the quarter was reduced by an estimated $1.9 million due to unfavorable impacts of COVID-19.

For additional details on the Hurricane Michael regulatory proceeding, see the Major Projects and Initiatives discussion below.

Further contributing to the improved performance for the quarter was margin growth from our organic growth projects, increased margins from investments in Florida GRIP and increased demand for Marlin Gas Services' CNG transportation services.

These increases were partially offset by higher operating expenses related to growth initiatives.

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Our income from continuing operations for the three months ended March 31, 2021 was $34.5 million, or $1.96 per share, compared to $29.0 million, or $1.77 per share, for the same quarter of 2020.

Operating income for the three months ended March 31, 2021 increased by $9.5 million, or 22.5 percent, over the same period in 2020.

Higher earnings for the first quarter of 2021 reflected a return to more normal weather compared to weather in the first quarter of 2020 that was 20.4 percent warmer than normal.

Our earnings also increased from pipeline expansion projects, favorable regulatory initiatives and contributions from the 2020 acquisitions of Elkton Gas and Western Natural Gas.

Increased retail propane margins per gallon, organic growth in the natural gas distribution operations and increased margin from Marlin Gas Services, also generated additional earnings .

Three Months Ended

September 30, Increase /

March 31, Increase

2021 2020 (decrease)

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Diluted Earnings Per Share of Common Stock $ 1.96 $ 1.76 $ 0.20

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Key variances in continuing operations, between the third quarter of 2020 and the third quarter of 2019, included:

(in thousands, except per share data) Pre-tax

Income Earnings

Third Quarter of 2019 Reported Results from Continuing Operations $ 8,603 $ 6,251 $ 0.38

Adjusting for Unusual Items:

Hurricane Michael (net impact of the first and second quarter of 2020) (1)

2,705 1,964 0.12

Unfavorable COVID-19 impacts

(1,023) (742) (0.04)

Decreased customer consumption - primarily weather related (1,005) (729) (0.05)

Increased (Decreased) Gross Margins:

Margin contribution from the Hurricane Michael regulatory proceeding settlement* 2,754 1,999 0.12

Eastern Shore and Peninsula Pipeline service expansions* 2,677 1,943 0.12

Natural gas growth (excluding service expansions) 797 578 0.03

Florida GRIP* 685 498 0.03

Margin contributions from Boulden and Elkton Gas acquisitions (completed July 2020 and December 2019, respectively)* 684 496 0.03

Increased demand for CNG services for Marlin Gas Services* 599 435 0.03

8,196 5,949 0.36

(Increased) Decreased Operating Expenses (Excluding Cost of Sales):

Depreciation and amortization associated with Hurricane Michael regulatory proceeding settlement (1,781) (1,293) (0.08)

Depreciation, amortization and property tax costs due to new capital investments (1,312) (952) (0.06)

Operating expenses from Elkton Gas and Boulden acquisitions (completed July 2020 and December 2019, respectively) (867) (630) (0.04)

Facilities, maintenance and outside services costs (414) (301) (0.02)

Insurance expense (non-health) - both insured and self-insured (323) (234) (0.01)

(4,697) (3,410) (0.21)

Interest charges (841) (611) (0.04)

Lower pension expense 388 282 0.02

Net other changes 456 326 0.02

Third Quarter of 2020 Reported Results from Continuing Operations $ 12,782 $ 9,280 $ 0.56

*See the Major Projects and Initiatives tabl e.

(1) Includes amortization of regulatory liability associated with interest expense of $0.8 million related to the Hurricane Michael regulatory proceeding settlement.

Our net income for the nine months ended September 30, 2020 was $49.1 million, or $2.97 per share, compared to $42.6 million, or $2.59 per share for the same period of 2019.

Our net income from continuing operations for the nine months ended September 30, 2020 was $49.0 million, or $2.96 per share compared to $44.0 million, or $2.67 per share, for the same period of 2019.

Operating income for the nine months ended September 30, 2020 increased by $0.9 million compared to the same period in 2019.

Operating income for the period was reduced by an estimated $6.7 million due to unfavorable impacts of COVID-19, inclusive of an increase in bad debt expense of $1.9 million compared to the same period in 2019.

Excluding this impact, operating income for the quarter increased by $7.6 million which included operating income of $2.9 million from the settlement of the Hurricane Michael regulatory proceeding, higher operating income from organic growth projects, gross margin contributions from the Boulden and Elkton Gas asset acquisitions completed in December 2019 and July 2020,

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respectively, and higher retail propane margins per gallon, partially offset by decreased margin from customer consumption associated with milder weather during 2020.

Nine Months Ended

September 30, Increase

2020 2019 (decrease)

(in thousands except per share)

Regulated Energy segment $ 191,745 $ 177,149 $ 14,596

Unregulated Energy segment 61,883 59,340 2,543

Other businesses and eliminations (210) (286) 76

Total Gross Margin $ 253,418 $ 236,203 $ 17,215

Operating Income

Regulated Energy segment $ 66,376 $ 65,310 $ 1,066

Unregulated Energy segment 11,050 11,317 (267)

Other businesses and eliminations 92 18 74

Total Operating Income 77,518 76,645 873

Other income (expense), net 2,997 (731) 3,728

Interest charges 15,452 16,583 (1,131)

Income from Continuing Operations Before Income Taxes 65,063 59,331 5,732

Income taxes on Continuing Operations 16,082 15,354 728

Income from Continuing operations 48,981 43,977 5,004

Income (loss) from Discontinued Operations 165 (1,388) 1,553

Net Income $ 49,146 $ 42,589 $ 6,557

Basic Earnings Per Share of Common Stock

Earnings from Continuing Operations $ 2.97 $ 2.68 $ 0.29

Earnings (loss) from Discontinued Operations 0.01 (0.08) 0.09

Basic Earnings Per Share of Common Stock $ 2.98 $ 2.60 $ 0.38

Diluted Earnings Per Share of Common Stock

Earnings from Continuing Operations $ 2.96 $ 2.67 $ 0.29

Earnings (loss) from Discontinued Operations 0.01 (0.08) 0.09

Diluted Earnings Per Share of Common Stock $ 2.97 $ 2.59 $ 0.38

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Key variances in continuing operations, between the nine months ended 2020 and the nine months ended 2019, included:

Key variances in continuing operations, between the first quarter of 2021 and the first quarter of 2020, included:

(in thousands, except per share data) Pre-tax

Income Earnings

Nine Months Ended September 30, 2019 Reported Results from Continuing Operations:

$ 59,331 $ 43,977 $ 2.67

First Quarter of 2020 Reported Results from Continuing Operations $ 39,639 $ 29,041 $ 1.77

Adjusting for Unusual Items:

Unfavorable COVID-19 impacts (4,933) (3,587) (0.22)

Decreased customer consumption - primarily weather related (3,090) (2,247) (0.14)

Absence of Florida tax savings (net of GRIP refunds) recorded in first quarter of 2019 for 2018 (910) (667) (0.04)

Gains from sales of assets 3,162 2,317 0.14

Favorable income tax impact associated with net operating loss carryback — 1,669 0.10

(5,771) (2,515) (0.16)

Gain from sales of assets in the first quarter of 2020 (3,162) (2,317) (0.14)

Increased (Decreased) Gross Margins:

Margin contribution from the Hurricane Michael regulatory proceeding settlement* 8,261 6,007 0.36

Increased customer consumption - primarily weather related 6,430 4,728 0.26

Eastern Shore and Peninsula Pipeline service expansions* 2,749 2,022 0.11

Margin contribution from Elkton Gas and Boulden acquisitions (completed July 2020 and December 2019, respectively)* 3,120 2,269 0.14

Natural gas growth (excluding service expansions) 2,497 1,816 0.11

Hurricane Michael Settlement margin impact * 2,575 1,894 0.11

Margin contributions from Elkton Gas and Western Natural Gas* 1,862 1,369 0.08

Increased retail propane margins per gallon 1,340 986 0.06

Eastern Shore margin from capital improvements and non-service expansion projects 793 576 0.04

Increased demand for CNG services for Marlin Gas Services* 694 505 0.03

Natural gas growth (excluding service expansions) 939 691 0.04

Increased gross margin from demand for Marlin Gas Services * 731 537 0.03

Florida GRIP* 370 272 0.02

Aspire Energy rate increases 443 322 0.02

16,996 12,499 0.71

(Increased) Decreased Operating Expenses (Excluding Cost of Sales):

Depreciation and amortization associated with Hurricane Michael regulatory proceeding settlement (5,355) (3,894) (0.24)

Payroll, Benefits and other employee-related expenses due to growth (1,995) (1,467) (0.08)

Hurricane Michael settlement agreement - depreciation and amortization impact (1,776) (1,306) (0.07)

Depreciation, amortization and property tax costs due to new capital investments (1,733) (1,274) (0.07)

Insurance expense (non-health) - both insured and self-insured (1,900) (1,382) (0.08)

Operating expenses from Elkton Gas and Boulden acquisitions (completed July 2020 and December 2019, respectively) (1,900) (1,382) (0.08)

Facilities, maintenance and outside services costs (1,130) (831) (0.05)

Operating expenses for Elkton Gas and Western Natural Gas acquisitions (1,029) (757) (0.04)

(7,663) (5,635) (0.31)

Other income tax effects — (914) (0.06)

Interest charges (1)

(852) (620) (0.04)

Lower pension expense 1,131 822 0.05

Net other changes 358 363 0.02

Change in shares outstanding due to 2020 and 2021 equity offerings — — (0.12)

1,067 884 (0.07)

Nine Months Ended September 30, 2020 Reported Results from Continuing Operations $ 65,063 $ 48,981 $ 2.96

First Quarter of 2021 Reported Results from Continuing Operations $ 46,877 $ 34,472 $ 1.96

*See the Major Projects and Initiatives tabl e.

(1) Interest charges includes amortization of a regulatory liability of $0.3 million related to the Hurricane Michael regulatory proceeding settlement.

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Summary of Key Factors

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We constantly pursue and develop additional projects and initiatives to serve existing and new customers, and to further grow our businesses and earnings, with the intention to increase shareholder value.

The following represent the major projects/initiatives recently completed and currently underway.

The following summary represents the major projects/initiatives recently completed and currently underway.

Major projects and initiatives that have generated consistent year-over-year margin contributions are removed from the table.

In the future, we will add new projects and initiatives to this table once negotiations are substantially final and the associated earnings can be estimated.

In the future, we will add new projects and initiatives to this table once negotiations are substantially completed and the associated earnings can be estimated.

Gross Margin for the Period

Three Months Ended Nine Months Ended Year Ended Estimate for

September 30, September 30, December 31, Fiscal

Three Months Ended Year Ended Estimate for

March 31, December 31, Fiscal

in thousands 2021 2020 2020 2021 2022

Pipeline Expansions:

Regulated Energy

West Palm Beach County, Florida Expansion (1)

Western Palm Beach County, Florida Expansion (1)

$ 1,167 $ 1,000 $ 4,167 $ 4,984 $ 5,227

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884 189 2,462 4,134 6,708

170 113 509 113 283 679 679

Callahan Intrastate Pipeline (including related natural gas distribution services)

Callahan Intrastate Pipeline (2)

1,887 — 3,851 7,564 7,598

Guernsey Power Station 47 — — 514 1,486

— — — — — — 514

Total Pipeline Expansions 3,985 1,189 10,480 17,196 21,019

Virtual Pipeline Growth:

Compressed Natural Gas Transportation

1,592 993 5,047 4,353 5,410 7,000 8,000

Renewable Natural Gas Transportation

— — — — — — 1,000

Total Virtual Pipeline Growth 1,592 993 5,047 4,353 5,410 7,000 9,000

CNG Transportation 2,077 1,347 7,231 7,900 8,500

RNG Transportation — — — 150 1,000

Acquisitions:

Boulden Propane 327 — 2,763 — 329 4,000 4,200

Elkton Gas 1,312 — 1,344 3,992 4,200

Western Natural Gas Company — — — — — 250 1,800

Western Natural Gas 550 — 389 1,800 1,854

Total Acquisitions 1,862 — 1,733 5,792 6,054

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Hurricane Michael regulatory proceeding 2,575 — 10,864 11,014 11,014

8,261 — 8,261 — — 11,014 11,014

Capital Cost Surcharge Programs 136 133 523 1,350 2,350

Total Regulatory Initiatives 6,776 3,828 26,565 29,103 31,076

Total $ 14,700 $ 6,364 $ 46,009 $ 60,141 $ 67,649

(1) Includes margin generated from interim services.

(2) This amount includes $5.5 million of gross margin previously invoiced under interim rates that was not recognized in revenue during the first and second quarters of 2020.

(1) Includes gross margin generated from interim services.

(2) Includes gross margin from natural gas distribution services.

Detailed Discussion of Major Projects and Initiatives

Pipeline Expansions - Regulated Energy

Pipeline Expansions

West Palm Beach County, Florida Expansion

Peninsula Pipeline is constructing four transmission lines to bring additional natural gas to our distribution system in West Palm Beach, Florida.

The first phase of this project was placed into service in December 2018 and generated $0.3 million and $1.9 million in additional gross margin for the three and nine months ended September 30, 2020 compared to 2019,

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respectively.

We expect to complete the remainder of the project in phases through the second quarter of 2021, and estimate that the project will generate gross margin of $4.1 million in 2020 and $5.0 million annually thereafter.

The first phase of this project was placed into service in December 2018 and generated incremental gross margin of $0.2 million for the three months ended March 31, 2021 compared to 2020.

We expect to complete the remainder of the project in phases through the third quarter of 2021, and estimate that the project will generate annual gross margin of $5.0 million in 2021 and $5.2 million in 2022.

Del-Mar Energy Pathway

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The new facilities will:

(i) ensure an additional 14,300 Dts/d of firm service to four customers, (ii) provide additional natural gas transmission pipeline infrastructure in eastern Sussex County, Delaware, and (iii) represent the first extension of Eastern Shore’s pipeline system into Somerset County, Maryland.

Construction of the project began in January 2020, and interim services in advance of this project generated $0.9 million and $1.6 million for the three and nine months ended September 30, 2020, respectively.

The estimated gross margin from this project is approximately $2.4 million in 2020, $4.1 million in 2021 and $5.1 million annually thereafter.

In August 2019, the Florida PSC approved Peninsula Pipeline's Transportation Service Agreement with the Florida Division of Chesapeake Utilities.

Peninsula Pipeline purchased an existing pipeline owned by the Florida Division of Chesapeake Utilities and Calpine, and has completed the construction of pipeline facilities in Polk County, Florida.

Peninsula Pipeline provides transportation service to the Florida Division of Chesapeake Utilities increasing both delivery capacity and downstream pressure as well as introducing a secondary source of natural gas for the Florida Division of Chesapeake Utilities' distribution system.

Peninsula Pipeline generated additional gross margin from this project of $0.2 million and $0.5 million for the three and nine months ended September 30, 2020, respectively, and expects to generate annual gross margin of $0.7 million in 2020 and beyond.

(i) ensure an additional 14,300 Dts/d of firm service to four customers, (ii) provide additional natural gas transmission pipeline

infrastructure in eastern Sussex County, Delaware, and (iii) represent the first extension of Eastern Shore’s pipeline system into Somerset County, Maryland.

Construction of the project began in January 2020, and interim services in advance of this project generated additional gross margin of $0.7 million for the three months ended March 31, 2021.

The estimated annual gross margin from this project including natural gas distribution service in Somerset County, Maryland, is approximately $4.1 million in 2021 and $6.7 million annually thereafter.

Callahan Intrastate Pipeline

In May 2018, Peninsula Pipeline announced a plan to construct a jointly owned intrastate transmission pipeline with Seacoast Gas Transmission in Nassau County, Florida .

The 26-mile pipeline will serve growing demand in both Nassau and Duval Counties.

This project was placed in service in June 2020, one month earlier than initially forecasted, and generated $1.6 million and $2.1 million in additional gross for the three and nine months ended September 30, 2020, respectively.

Peninsula Pipeline expects to generate gross margin of $4.0 million in 2020 and $6.4 million annually thereafter.

Pipeline Expansions - Unregulated Energy

Peninsula Pipeline completed the construction of a jointly owned intrastate transmission pipeline with Seacoast Gas Transmission in Nassau County, Florida in June 2020.

The 26-mile pipeline serves growing demand for energy in both Nassau and Duval Counties.

For the three months ended March 31, 2021, the project generated $1.9 million in additional gross margin, which includes margin from natural gas distribution service.

The estimated annual gross margin from this project including natural gas distribution service is approximately $7.6 million in 2021 and beyond.

Guernsey Power Station

Guernsey Power Station, LLC ("Guernsey Power Station") and our affiliate, Aspire Energy Express, entered into a precedent firm transportation capacity agreement whereby Guernsey Power Station will construct a power generation facility and Aspire Energy Express will provide firm natural gas transportation service to this facility.

Guernsey Power Station and our affiliate, Aspire Energy Express, entered into a precedent firm transportation capacity agreement whereby Guernsey Power Station will construct a power generation facility and Aspire Energy Express will provide firm natural gas transportation service to this facility.

Guernsey Power Station commenced construction of the project in October 2019.

Aspire Energy Express is expected to commence construction of the gas transmission facilities to provide the firm transportation service to the power generation facility in the fourth quarter of 2021.

This project is expected to produce gross margin of approximately $0.5 million in 2021 and $1.5 million in 2022 and beyond.

Virtual Pipeline Growth

In the second quarter of 2021, Aspire Energy Express commenced construction of the gas transmission facilities to provide the firm transportation service to the power generation facility.

For the three months ended March 31, 2021, we received approximately $47,000 related to the construction delay of the in-service date of the project.

The project is expected to be in service in the fourth quarter of 2021, and produce gross margin of approximately $0.5 million in 2021 and $1.5 million in 2022 and beyond.

CNG Transportation

Marlin Gas Services provides CNG temporary hold services, contracted pipeline integrity services, emergency services for damaged pipelines and specialized gas services for customers who have unique requirements.

For the three and nine months ended September 30, 2020, Marlin Gas Services generated additional gross margin of $0.6 million and $0.7 million, respectively.

We estimate that Marlin Gas Services will generate annual gross margin of approximately $7.0 million in 2020 and $8.0 million in 2021, with potential for additional growth in future years.

Marlin Gas Services continues to actively expand the territories it serves, as well as leverage its patented technology to serve other markets, including pursuing liquefied natural gas transportation opportunities and most recently, announcing its expansion into the transportation of renewable natural gas from diverse supply sources to various pipeline interconnection points, as further outlined below.

Renewable Natural Gas Transportation

For the three months ended March 31, 2021, Marlin Gas Services generated additional gross margin of $0.7 million.

We estimate that Marlin Gas Services will generate annual gross margin of approximately $7.9 million in 2021 and $8.5 million in 2022, with the potential for additional growth in future years.

Marlin Gas Services continues to actively expand the territories it serves, as well as leverage its patented technology to serve other markets, including pursuing liquefied natural gas transportation opportunities and renewable natural gas transportation opportunities from diverse supply sources to various pipeline interconnection points, as further outlined below.

RNG Transportation

Noble Road Landfill RNG Project

In September 2020, Fortistar and Rumpke Waste & Recycling announced commencement of construction of the Noble Road Landfill RNG Project in Shiloh, Ohio.

The project includes the construction of a new state-of-the-art facility that will utilize advanced, patented technology to treat landfill gas by removing carbon dioxide and other components to purify the gas and produce pipeline quality RNG.

Aspire Energy will utilize its existing natural gas gathering assets to inject the RNG from this project to its system for distribution to end use customers.

Once flowing, the RNG volume will represent nearly 10 percent of Aspire Energy’s gas gathering volumes.

Bioenergy DevCo

In June 2020, our Delmarva natural gas operations and Bioenergy Devco (“BDC”), a developer of anaerobic digestion facilities that create renewable energy and healthy soil products from organic material, entered into an agreement related to a project to remove excess organics from poultry waste and convert it into renewable natural gas.

BDC and our affiliates are

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collaborating on this project in addition to several other project sites where organic waste can be converted into a carbon-negative energy source.

This project provides us the opportunity to maintain the green attributes of renewable natural gas as the gas is distributed to natural gas distribution customers.

The resources generated from organic material at BDC's anaerobic digestion facilities in Delaware, will be processed by our Delmarva natural gas operations and Eastern Shore, and Marlin Gas Services will facilitate the transportation and receipt of renewable natural gas for multiple suppliers through its interconnect facility and equipment.

Marlin Gas Services will transport the sustainable fuel to Eastern Shore, where it will be introduced to our distribution system and ultimately distributed to our natural gas customers.

In June 2020, our Delmarva natural gas operations and Bioenergy DevCo (“BDC”), a developer of anaerobic digestion facilities that create renewable energy and healthy soil products from organic material, entered into an agreement related to a project to extract renewable natural gas from poultry production waste.

BDC and our affiliates are collaborating on this project in addition to several other project sites where organic waste can be converted into a carbon-negative energy source.

The renewable natural gas resource created from organic material at BDC's anaerobic digestion facilities in Delaware, will be processed for use by our Delmarva natural gas operations.

Marlin Gas Services will transport the sustainable fuel from the BDC facility to an Eastern Shore interconnection, where it will be introduced to the distribution system and ultimately distributed to our natural gas customers.

CleanBay Project

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("CleanBay") announced a new partnership to bring renewable natural gas to our operations.

As part of this partnership, we will transport the renewable natural gas produced at CleanBay's planned Westover, Maryland bio-refinery, to our natural gas infrastructure in the Delmarva Peninsula region.

As part of this partnership, we will transport the renewable natural gas produced at CleanBay's planned Westover, Maryland bio-refinery, to our natural gas infrastructure in the Delmarva Peninsula

Eastern Shore and Marlin Gas Services, will transport the renewable natural gas from CleanBay to our Delmarva natural gas distribution system where it is ultimately delivered to the Delmarva natural gas distribution end use customers.

At the present time, we have disclosed that we expect to generate $1.0 million in 2021 in incremental margin from renewable natural gas transportation beginning in 2021.

We continue to finalize contract terms associated with some of these projects.

Additional information will be provided regarding incremental margin on these projects at a future time, as contracts are finalized.

Boulden Propane

In December 2019, Sharp acquired certain propane customers and operating assets of Boulden, which provides propane distribution service to approximately 5,200 customers in Delaware, Maryland and Pennsylvania.

The customers and assets acquired from Boulden have been assimilated into Sharp.

The operations acquired from Boulden generated $0.3 million and $2.8 million of incremental gross margin for the three and nine months ended September 30, 2020, respectively.

We estimate that this acquisition will generate annual gross margin of approximately $4.0 million in 2020, and $4.2 million in 2021, with the potential for additional growth in future years.

At the present time, we expect to generate $0.2 million in 2021 in incremental margin from these renewable natural gas transportation projects beginning in 2021.

Timing of incremental margin from RNG transportation projects is dependent upon the construction schedules of each project.

As we continue to finalize contract terms and complete the necessary permitting associated with each of these projects, additional information will be provided regarding incremental margin at a future time.

Western Natural Gas

In October 2020, Sharp acquired certain propane operating assets of Western Natural Gas, which provides propane distribution service throughout Jacksonville, Florida and the surrounding communities, for approximately $6.7 million, net of cash acquired.

The acquisition was accounted for as a business combination within our Unregulated Energy Segment in the fourth quarter of 2020.

We generated $0.6 million in additional gross margin from Western Natural Gas in 2020 and we estimate that this acquisition will generate gross margin of approximately $1.8 million in 2021 with additional opportunities for growth.

In July 2020, we closed on the acquisition of Elkton Gas, which provides natural gas distribution service to approximately 7,000 residential and commercial customers within a franchised area of Cecil County, Maryland.

The purchase price is approximately $15.6 million, which included $0.6 million of working capital.

The purchase price was approximately $15.6 million, which included $0.6 million of working capital.

Elkton Gas’ territory is contiguous to our franchised service territory in Cecil County, Maryland.

We generated $1.3 million in additional gross margin from Elkton Gas and estimate that this acquisition will generate gross margin of approximately $4.0 million in 2021 and $4.2 million in 2022.

Western Natural Gas Company

In October 2020, Sharp acquired certain propane operating assets of Western Natural Gas Company, which provides propane distribution service throughout Jacksonville, Florida and the surrounding communities, for approximately $6.7 million, net of cash acquired.

The acquisition will be accounted for as a business combination within our Unregulated Energy Segment beginning in the fourth quarter of 2020.

We estimate that this acquisition will generate gross margin of approximately of $0.3 million in 2020 and $1.8 million in 2021.

Regulatory Initiatives

Florida GRIP is a natural gas pipe replacement program approved by the Florida PSC that allows automatic recovery, through rates, of costs associated with the replacement of mains and services.

Since the program's inception in August 2012, we have invested $160.1 million of capital expenditures to replace 322 miles of qualifying distribution mains, including $16.1 million of new pipes during the first nine months of 2020.

Since the program's inception in August 2012, we have invested $173.9 million of capital expenditures to replace 333 miles of qualifying distribution mains, including $8.0 million of new pipes during the first three months of 2021.

We expect to generate annual gross margin of approximately $16.7 million in 2021, and $17.7 million in 2022.

Hurricane Michael

In October 2018, Hurricane Michael passed through FPU's electric distribution operation's service territory in Northwest Florida and caused widespread and severe damage to FPU's infrastructure resulting in 100 percent of its customers in the Northwest Florida service territory losing electrical service.

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In October 2018, Hurricane Michael passed through FPU's electric distribution operation's service territory in Northwest Florida.

The hurricane caused widespread and severe damage to FPU's infrastructure resulting in 100 percent of its customers in the Northwest Florida service territory losing electrical service.

In August 2019, FPU filed a limited proceeding requesting recovery of storm-related costs associated with Hurricane Michael (capital and expenses) through a change in base rates.

FPU also requested treatment and recovery of certain storm-related costs as regulatory assets for items currently not allowed to be recovered through the storm reserve as well as the recovery of capital replaced as a result of the storm.

Recovery of these costs included a component of an overall return on capital additions and regulatory assets.

In March 2020, we filed an update to our original filing to account for actual charges incurred through December 2019, revised the amortization period of the storm-related costs from 30 years as originally requested, to 10 years, and included costs related to Hurricane Dorian of approximately $1.2 million in this filing.

In September 2019, FPU filed a petition with the Florida PSC, for approval of its consolidated electric depreciation rates.

The petition was joined to the Hurricane Michael docket, and was approved at the Florida PSC Agenda on September 21, 2020.

The approved rates were retroactively effective January 1, 2020.

The petition was joined to the Hurricane Michael docket.

The approved rates, which were part of the settlement agreement in September 2020 that is described below, were retroactively applied effective January 1, 2020.

In September 2020, the Florida PSC approved a settlement agreement between FPU and the Office of the Public Counsel regarding final cost recovery and rates associated with Hurricane Michael.

Previously, the Florida PSC approved an interim rate increase, subject to refund, effective January 1, 2020, associated with the restoration effort following Hurricane Michael.

Previously, in late 2019, the Florida PSC approved an interim rate increase, subject to refund, effective January 1, 2020, associated with the restoration effort following Hurricane Michael.

We fully reserved these interim rates, pending a final resolution and settlement of the limited proceeding.

The settlement agreement allowed us to:

(a) record regulatory assets for storm costs in the amount of $45.8 million including interest which will be amortized over six years;

(b) recover these storm costs through a surcharge for a total of $7.7 million annually;

(c) collect an annual increase in revenue of $3.3 million to recover capital costs associated with new plant and regulatory asset for cost of removal and undepreciated plant.

(a) refund the over-collection of interim rates through the fuel clause;

(b) record regulatory assets for storm costs in the amount of $45.8 million including interest which will be amortized over six years;

and (d) collect an annual increase in revenue of $3.3 million to recover capital costs associated with new plant investments and a regulatory asset for the cost of removal and undepreciated plant.

The new base rates and storm surcharge were effective on November 1, 2020.

The following table summarizes the impact of Hurricane Michael regulatory proceeding for the three and nine months ended September 30, 2020:

Three Months Ended Nine Months Ended

(in thousands) September 30, 2020 (1)

September 30, 2020

The following table summarizes the impact of Hurricane Michael regulatory proceeding for the three months ended March 31, 2021:

Three Months Ended

(in thousands) March 31, 2021

Gross Margin $ 2,575

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Net income $ 828

(1) The Hurricane Michael impact for three months ended September 30, 2020, is presented for comparison purposes.

Capital Cost Surcharge Programs

In December 2019, the FERC approved Eastern Shore’s capital cost surcharge which became effective January 1, 2020.

The surcharge, an approved item in the settlement of Eastern Shore’s last general rate case, allows Eastern Shore to recover capital costs associated with mandated highway or railroad relocation projects that required the replacement of existing Eastern Shore facilities.

Eastern Shore expects to produce gross margin of approximately $1.4 million in 2021 and $2.4 million in 2022 from relocation projects and is dependent upon the completion of capital projects and timing of filings.

Other major factors influencing gross margin

Weather and Consumption

Weather conditions accounted for a $1.0 million decrease in gross margin during the third quarter of 2020, compared to the same period in 2019, due to a 17 percent decrease in CDDs in Florida that resulted in reduced customer consumption for our electric operations.

Compared to normal temperatures, as detailed below, gross margin was lower by $0.5 million.

For the nine-month period, overall milder temperatures decreased gross margin by $3.1 million compared to the same period in 2019 and $3.2 million compared to normal temperatures.

The following table summarizes HDD and CDD variances from the 10-year average HDD/CDD ("Normal") for the three and nine months ended September 30, 2020 and 2019.

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The following table summarizes HDD and CDD variances from the 10-year average HDD/CDD ("Normal") for the three and nine months ended September 30, 2020 and 2019.

Three Months Ended Nine Months Ended

September 30, September 30,

2020 2019 Variance 2020 2019 Variance

Weather conditions accounted for a $6.4 million increase in gross margin during the first quarter of 2021, compared to the same period in 2020, primarily due to a 13.8 percent increase in HDDs in the Delmarva Peninsula and Ohio that resulted in increased customer consumption.

Compared to normal temperatures, as detailed below, gross margin was higher by $1.3 million.

The following table summarizes HDD and CDD variances from the 10-year average HDD/CDD ("Normal") the three months ended March 31, 2021 and 2020.

Three Months Ended

2021 2020 Variance

Delmarva Peninsula

Actual HDD 2,186 1,859 327

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Natural Gas Distribution Margin Growth

Customer growth for our natural gas distribution operations, as a result of the addition of new customers and the conversion of customers from alternative fuel sources to natural gas service, generated $0.8 million and $2.5 million of the three and nine months ended September 30, 2020, respectively.

The average number of residential customers served on the Delmarva Peninsula and in Florida increased by 4.9 percent and 3.9 percent, respectively, during the third quarter of 2020 and 4.0 percent and 3.8 percent, respectively, for the nine months ended September 30, 2020.

On the Delmarva Peninsula, a larger percentage of the margin growth is generated from residential growth given the expansion of gas into new communities and conversions to natural gas as our distribution infrastructure continues to build out, while in Florida, as gas heating is not a significant portion of residential use, a greater portion of the margin growth occurred in the commercial and industrial sectors.

The details for the three and nine months ended September 30, 2020 are provided in the following table:

Three Months Ended Nine Months Ended

September 30, 2020 September 30, 2020

(in thousands) Delmarva Peninsula Florida Delmarva Peninsula Florida

Customer growth for our natural gas distribution operations, as a result of the addition of new customers and the conversion of customers from alternative fuel sources to natural gas service, generated $0.9 million of additional margin for the three months ended March 31, 2021.

The average number of residential customers served on the Delmarva Peninsula and in Florida increased

by 4.5 percent and 5.0 percent, respectively, during the first quarter of 2021.

A larger percentage of the margin growth was generated from residential growth given the expansion of natural gas into new housing communities and conversions to natural gas as the Company's distribution infrastructure continues to build out.

In addition, as new communities continue to build out due to population growth and infrastructure is added to support the growth, there is also increased load from new commercial and industrial customers.

The details for the three months ended March 31, 2021 are provided in the following table:

Three Months Ended

March 31, 2021

(in thousands) Delmarva Peninsula Florida

Customer Growth:

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Total Customer Growth $ 560 $ 379

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Regulated Energy Segment

For the quarter ended September 30, 2020, compared to the quarter ended September 30, 2019:

For the quarter ended March 31, 2021, compared to the quarter ended March 31, 2020:

Three Months Ended

September 30, Increase

March 31, Increase

2021 2020 (decrease)

8 unchanged sentences

Operating income $ 32,864 $ 27,888 $ 4,976

Operating income for the Regulated Energy segment increased by $2.9 million for the three months ended September 30, 2020 compared to 2019, or 16.8 percent.

Higher operating income was a result of the settlement of the Hurricane Michael regulatory proceeding, which included recognizing the first and second quarter rate impacts associated with the settlement, expansion projects completed and underway by Eastern Shore and Peninsula Pipeline, organic growth in our natural gas distribution businesses, margin from increased investments in Florida GRIP and the gross margin generated from the acquisition of Elkton Gas.

These increases were partially offset by higher depreciation, amortization and property taxes including amortization of the regulatory asset associated with the Hurricane Michael regulatory proceeding settlement and higher other operating expenses.

Operating income for the quarter was reduced by an estimated $1.5 million due to unfavorable impacts of COVID-19, which included an increase in bad debt expense of $1.3 million compared to the third quarter 2019.

Operating income for the Regulated Energy segment for the first quarter of 2021 was $32.9 million, an increase of $5.0 million or 17.8 percent for the three months ended March 31, 2021 over the same period in 2020.

Higher operating income reflects increased consumption driven primarily by colder weather compared to the first quarter of 2020, continued pipeline expansions by Eastern Shore and Peninsula Pipeline, contributions from the Hurricane Michael regulatory proceeding settlement, organic growth in the Company's natural gas distribution businesses and operating results from the Elkton Gas acquisition completed in the third quarter of 2020.

These increases were offset by higher depreciation, amortization and property taxes, including amortization of the regulatory asset associated with the Hurricane Michael regulatory proceeding settlement, new expenses associated with Elkton Gas, and higher other operating expenses.

Items contributing to the quarter-over-quarter increase in gross margin are listed in the following table:

(in thousands)

Margin contribution from Hurricane Michael regulatory proceeding settlement (1)

Eastern Shore and Peninsula Pipeline service expansions $ 2,749

Margin contribution from Hurricane Michael regulatory proceeding settlement 2,575

Increased customer consumption - primarily weather related 1,641

Margin contribution from the Elkton Gas acquisition (completed in July 2020) 1,312

Natural gas growth (excluding service expansions) 939

Florida GRIP 370

Margin contribution from Elkton Gas (acquisition completed in July 2020) 357

Decreased customer consumption - weather related (1,013)

Other variances 445

Quarter-over-quarter increase in gross margin $ 10,031

(1) This amount includes $5.5 million of gross margin previously invoiced under interim rates that was not recognized in revenue during the first and second quarter of 2020.

The following is a narrative discussion of the significant items in the foregoing table, which we believe is necessary to understand the information disclosed in the table.

Margin Contribution from Hurricane Michael Regulatory Proceeding Settlement

We generated $8.3 million in additional gross margin in the third quarter of 2020 as a result of the settlement of the Hurricane Michael regulatory proceeding which included $5.5 million of gross margin previously invoiced under interim rates that were not recognized in revenue during the first and second quarters.

Refer to Note 5, Rates and Other Regulatory Activities , in the condensed consolidated financial statements for additional information.

Eastern Shore and Peninsula Pipeline Service Expansions

We generated additional gross margin of $1.9 million from Peninsula Pipeline's Western Palm Beach County, Auburndale and Callahan projects and $0.7 million from Eastern Shore's Del-Mar Energy Pathway project.

Natural Gas Distribution Customer Growth

We generated additional gross margin of $0.8 million from natural gas customer growth.

Gross margin increased by $0.4 million in Florida and $0.4 million on the Delmarva Peninsula for the three months ended September 30, 2020, as compared to the same period in 2019, due primarily to residential customer growth of 4.9 percent and 3.9 percent on the Delmarva Peninsula

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and in Florida, respectively.

On the Delmarva Peninsula, a larger percentage of the margin growth was generated from residential growth given the expansion of gas into new communities and conversions, while in Florida, as gas heating is not a significant portion of residential use, a greater portion of the margin growth occurred in the commercial and industrial sectors.

Continued investment in the Florida GRIP generated additional gross margin of $0.7 million in 2020 compared to 2019.

Gross margin increased by $0.4 million due to the margin generated by Elkton Gas which was acquired in July 2020.

Decreased Customer Consumption - Weather Related

Gross margin decreased by $1.0 million for the for the three months ended September 30, 2020, compared to the same period in 2019, primarily due to a 17 percent decrease in CDDs in Florida that resulted in reduced customer consumption for our electric operations.

Other Operating Expenses

Items contributing to the quarter-over-quarter increase in other operating expenses are listed in the following table:

(in thousands)

Hurricane Michael regulatory proceeding settlement - depreciation and amortization impact (1)

Unfavorable COVID-19 impacts (primarily bad debt expense) 1,334

Depreciation, asset removal and property tax costs due to new capital investments 1,187

Payroll, Benefits and other employee-related expenses 447

Operating expenses from Elkton Gas acquisition (completed July 2020) 276

Other variances (11)

Quarter-over-quarter increase in other operating expenses $ 8,588

(1) This amount includes $3.6 million of depreciation and amortization for the first and second quarter of 2020.

For the nine months ended September 30, 2020, compared to the nine months ended September 30, 2019:

Nine Months Ended

September 30, Increase

2020 2019 (decrease)

(in thousands)

Revenue $ 259,235 $ 251,601 $ 7,634

Cost of sales 67,490 74,452 (6,962)

Gross margin 191,745 177,149 14,596

Operations & maintenance 78,062 73,071 4,991

Depreciation & amortization 33,979 26,099 7,880

Other taxes 13,328 12,669 659

Total operating expenses 125,369 111,839 13,530

Operating income $ 66,376 $ 65,310 $ 1,066

Operating income for the Regulated Energy segment for the nine months ended September 30, 2020 was $66.4 million, an increase of $1.1 million, compared to the same period in 2019.

Excluding the estimated unfavorable COVID-19 impacts of $4.8 million, which included an increase in bad debt expense of $1.9 million, operating income increased $5.9 million as a result of the Hurricane Michael regulatory proceeding settlement, higher gross margin from expansion projects completed by Eastern Shore and Peninsula Pipeline and organic growth in our natural gas distribution businesses.

Items contributing to the period-over-period increase in gross margin are listed in the following table:

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(in thousands)

Margin Contribution from Hurricane Michael regulatory proceeding settlement $ 8,261

The following narrative discussion provides further detail and analysis of the significant items in the foregoing table.

Eastern Shore and Peninsula Pipeline Service Expansions

Natural gas distribution - customer growth (excluding service expansions) 2,497

Eastern Shore margin from capital improvements and non-service expansion projects 793

Florida GRIP 678

Margin contribution from Elkton Gas acquisition (completed July 2020) 357

Unfavorable COVID-19 impacts on gross margin (2,634)

Absence of Florida tax savings (net of GRIP refunds) recorded in the first quarter of 2019 for 2018 (910)

Decreased customer consumption - weather related (863)

Other variances 932

Period-over-period increase in gross margin $ 14,596

The following is a narrative discussion of the significant items in the foregoing table, which we believe is necessary to understand the information disclosed in the table.

We generated additional gross margin of $2.1 million from Peninsula Pipeline's Western Palm Beach County and Callahan projects and $0.7 million from Eastern Shore's Del-Mar Energy Pathway project.

Margin Contribution from Hurricane Michael Regulatory Proceeding Settlement

We generated $8.3 million in additional gross margin related as a result of the settlement of the Hurricane Michael regulatory proceeding.

We generated $2.6 million in additional gross margin as a result of the settlement of the Hurricane Michael regulatory proceeding.

Refer to Note 5, Rates and Other Regulatory Activities , in the condensed consolidated financial statements for additional information.

Eastern Shore and Peninsula Pipeline Service Expansions

We generated additional gross margin of $4.5 million from Peninsula Pipeline's Western Palm Beach County, Auburndale and Callahan projects and $1.0 million from Eastern Shore's Del-Mar Energy Pathway project.

Increased Customer Consumption - Primarily Weather Related

Gross margin increased by $1.6 million for the for the three months ended March 31, 2021, compared to the same period in 2020, primarily due to an 18 percent increase in HDDs on the Delmarva Peninsula and a 36 percent increase in HDDs in Florida that resulted in increased customer consumption of energy.

Gross margin increased by $1.3 million due to margin contributed from Elkton Gas which was acquired in July 2020.

Natural Gas Distribution Customer Growth

We generated additional gross margin of $0.9 million from natural gas customer growth.

Gross margin increased by $1.1 million in Florida and $1.4 million on the Delmarva Peninsula for the nine months ended September 30, 2020, as compared to the same period in 2019, due primarily to residential customer growth of 4.0 percent on the Delmarva Peninsula and 3.8 percent in Florida.

Eastern Shore margin from capital improvements and non-service expansion projects

We generated additional gross margin of $0.8 million from Eastern Shore's surcharge on capital spent on several relocation projects and non-service expansion projects.

Continued investment in the Florida GRIP generated additional gross margin of $0.7 million in 2020 compared to 2019.

Gross margin increased by $0.4 million due to the margin generated by Elkton Gas which we acquired in July 2020.

Unfavorable COVID-19 Impacts

Gross margin decreased by $2.6 million for the nine months ended September 30, 2020, as compared to the same period in 2019, as a result of the lower customer consumption, which was caused by the slowing of economic activities in our service territories as a result of restrictions imposed to promote social distancing and slow down the spread of COVID-19.

Absence of Florida Tax Savings Recorded in the First Quarter of 2019

Gross margin decreased by $0.9 million for the nine months ended September 30, 2020, as compared to the same period in 2019, due primarily to the absence of TCJA related tax savings from 2018 that the Florida PSC allowed us to retain during the first quarter of 2019.

In February 2019, the Florida PSC issued a final order regarding the treatment of the TCJA impact, allowing us to retain the savings associated with lower federal tax rates for certain of our natural gas distribution operations.

As a result, refunds to GRIP customers and reserves for customer refunds, recorded in 2018 were reversed in the first quarter of 2019.

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Decreased Customer Consumption - Weather Related

Gross margin decreased by $0.9 million due to weather and other consumption on the Delmarva Peninsula and in Florida during the first nine months of 2020 compared to the same period in 2019.

Other Operating Expenses

Items contributing to the period-over-period increase in other operating expenses are listed in the following table:

Gross margin increased by $0.4 million in Florida and $0.5 million on the Delmarva Peninsula for the three months ended March 31, 2021, as compared to the same period in 2020, due primarily to residential customer growth of 4.5 percent and 5.0 percent on the Delmarva Peninsula and in Florida, respectively.

Continued investment in the Florida GRIP generated additional gross margin of $0.4 million in first quarter of 2021 compared to the same period in 2020.

Operating Expenses

Items contributing to the quarter-over-quarter increase in operating expenses are listed in the following table:

(in thousands)

Hurricane Michael settlement agreement - depreciation and amortization impact $ 5,355

Hurricane Michael regulatory proceeding settlement - depreciation and amortization impact $ 1,776

Depreciation, asset removal and property tax costs due to new capital investments 1,390

Unfavorable COVID-19 impacts (largely higher bad debt expense) 2,194

Insurance expense (non-health) - both insured and self-insured 1,377

Payroll, benefits and other employee-related expenses 1,029

Facilities maintenance and outside services costs 777

Operating expenses from Elkton acquisition (completed July 2020) 276

Facilities and maintenance costs and outside services 885

Payroll, benefits and other employee-related expenses due to growth 802

Operating expenses from the Elkton Gas acquisition 524

Other variances (322)

Period-over-period increase in other operating expenses $ 13,530

Quarter-over-quarter increase in operating expenses $ 5,055

Unregulated Energy Segment

For the quarter ended September 30, 2020, compared to the quarter ended September 30, 2019:

For the quarter ended March 31, 2021, compared to the quarter ended March 31, 2020:

Three Months Ended

September 30, Increase

March 31, Increase

2021 2020 (decrease)

7 unchanged sentences

Total operating expenses 19,671 17,920 1,751

Operating loss $ (3,092) $ (3,169) $ 77

Operating results for the Unregulated Energy segment increased by $0.1 million for the third quarter, as compared to the third quarter of 2019.

Excluding the estimated COVID-19 impacts of $0.3 million, operating income increased $0.4 million driven by margin growth from Marlin Gas Services and incremental margin from the Boulden assets.

These increases were partially offset by higher depreciation, amortization and property taxes and higher other operating expense s.

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Operating income $ 19,105 $ 13,862 $ 5,243

Operating income for the Unregulated Energy segment for the first quarter of 2021 was $19.1 million, an increase of $5.2 million or 37.8 percent, over the same period in 2020.

Higher operating income reflects increased consumption driven primarily by colder weather compared to the first quarter of 2020, higher retail propane margins per gallon, contribution from the acquisition of the Western Natural Gas propane assets and increased demand for Marlin Gas Services' CNG transportation services.

These increases were partially offset by higher depreciation, amortization and property taxes related to recent capital investments and new expenses associated with Western Natural Gas and higher other operating expenses.

Items contributing to the quarter-over-quarter increase in gross margin are listed in the following table:

(in thousands) Margin Impact

Marlin Gas Services - increased gross margin from demand for CNG transportation services $ 599

Boulden acquisition (assets acquired in December 2019) 327

Unfavorable COVID-19 impacts on gross margin (399)

Other variances 123

Quarter-over-quarter increase in gross margin $ 650

The following is a narrative discussion of the significant items in the foregoing table, which we believe is necessary to understand the information disclosed in the table.

Marlin Gas Services

• Gross margin increased by $0.6 million in the third quarter of 2020, as compared to the same period in the prior year due to higher demand for compressed natural gas hold services.

Boulden acquisition

• Gross margin increased by $0.3 million due to the margin generated from Boulden, which was acquired by Sharp in December 2019.

Unfavorable COVID-19 Impacts

• Gross margin decreased by $0.4 million as a result of the lower customer consumption, which was caused by the slowing of economic activities in our service territories as a result of restrictions imposed to promote social distancing and slow down the spread of COVID-19.

Other Operating Expenses

Items contributing to the quarter-over-quarter increase in other operating expenses are listed in the following table:

(in thousands)

Depreciation, amortization and property tax costs due to new capital investments $ 425

Operating expenses from Boulden acquisition (completed December 2019) 290

Payroll, Benefits and other employee-related expenses (202)

Other variances 60

Quarter-over-quarter increase in other operating expenses $ 573

For the nine months ended September 30, 2020, compared to the nine months ended September 30, 2019:

Nine Months Ended

September 30, Increase

2020 2019 (decrease)

(in thousands)

Revenue $ 104,466 $ 108,985 $ (4,519)

Cost of sales 42,583 49,645 (7,062)

Gross margin 61,883 59,340 2,543

Operations & maintenance 39,408 37,965 1,443

Depreciation & amortization 8,774 7,462 1,312

Other taxes 2,651 2,596 55

Total operating expenses 50,833 48,023 2,810

Operating income $ 11,050 $ 11,317 $ (267)

Operating income for the Unregulated Energy segment decreased by $0.3 million for the nine months ended September 30, 2020, compared to the same period in 2019.

Excluding the estimated COVID-19 impacts of $1.6 million, operating income

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increased $1.3 million as a result of incremental gross margin from the acquisition of the Boulden propane assets, higher retail propane margins per gallon and increased demand for Marlin Gas Services' CNG transportation services.

These increases were partially offset by reduced gross margins from overall warmer temperatures, expenses associated with recent acquisitions, and increased insurance expense .

Items contributing to the period-over-period increase in gross margin are listed in the following table:

(in thousands)

Propane Operations

Boulden acquisition (assets acquired in December 2019) $ 2,763

Increased retail propane margins per gallon driven by favorable market conditions and supply management 1,892

Decreased customer consumption - primarily weather related (1,540)

Increased customer consumption - primarily weather related $ 3,847

Increased retail propane margins per gallon driven by favorable supply costs 1,340

Western Natural Gas acquisition (completed in October 2020) 550

Marlin Gas Services

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Aspire Energy

Decreased customer consumption - primarily weather related (687)

Higher margins from negotiated rate increases 443

Unfavorable COVID-19 impacts on gross margin (1,145)

Increased customer consumption - primarily weather related 942

Other variances (416)

Period-over-period increase in gross margin $ 2,543

The following is a narrative discussion of the significant items in the foregoing table, which we believe is necessary to understand the information disclosed in the table.

Quarter-over-quarter increase in gross margin $ 6,994

The following narrative discussion provides further detail and analysis of the significant items in the foregoing table.

Propane Operations

• Propane Operations - Boulden - Gross margin increased by $2.8 million due to the margin generated from Boulden, which was acquired by Sharp in December 2019.

• Increased Retail Propane Margins - Gross margin increased by $1.9 million, for the nine months ended September 30, 2020 as compared to the same period in the prior year, due to lower propane inventory costs and favorable market conditions.

These market conditions, which include market pricing and competition with other propane suppliers, as well as the availability and price of alternative energy sources, may fluctuate based on changes in demand, supply and other energy commodity prices.

• Decreased Customer Consumption Primarily Driven by Weather - Gross margin decreased by $1.5 million primarily from the Mid-Atlantic propane operations as weather on the Delmarva Peninsula was 6 percent warmer for the nine months ended September 30, 2020 compared to the same period in 2019.

• Increased Customer Consumption Primarily Weather Related - Gross margin increased by $3.8 million, as weather on the Delmarva Peninsula was 18 percent colder during the first quarter of 2021 compared to the same period in 2020.

• Increased Retail Propane Margins - Gross margin increased by $1.3 million, due to lower propane inventory costs and favorable market conditions.

These market conditions, which include competition with other propane suppliers, as well as the availability and price of alternative energy sources, may fluctuate based on changes in demand, supply and other energy commodity prices.

• Western Natural Gas - Gross margin increased by $0.6 million due to the margin generated from Western Natural Gas, which was acquired by Sharp in October 2020.

Marlin Gas Services

• Gross margin increased by $0.7 million for the nine months ended September 30, 2020, as compared to the same period in the prior year due to higher demand for compressed natural gas hold services.

• Gross margin increased by $0.7 million during the first quarter of 2021, as compared to the same period in the prior year due to higher demand for CNG hold services.

Aspire Energy

• Decreased Customer Consumption Primarily Driven by Weather - Gross margin decreased by $0.7 million due to lower consumption as weather in Ohio was approximately 4 percent warmer for the nine months ended September 30, 2020 compared to the same period in 2019.

• Increased Margin Driven by Changes in Rates - Gross margin increased by $0.4 million in 2020, as compared to the prior year, due primarily to higher margins from negotiated rate increases.

Unfavorable COVID-19 Impacts

• Gross margin decreased by $1.1 million as a result of lower customer consumption, which was caused by the slowing of economic activities in our service territories as a result of restrictions imposed to promote social distancing and to slow down the spread of COVID-19.

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• Increased Customer Consumption Primarily Weather Related - Gross margin increased by $0.9 million due to higher consumption of gas as weather in Ohio was approximately 11 percent colder during the first quarter of 2021 over the same period in 2020.

Other Operating Expenses

Items contributing to the period-over-period increase in other operating expenses are listed in the following table:

Items contributing to the quarter-over-quarter increase in operating expenses are listed in the following table:

(in thousands)

Depreciation, amortization and property tax costs due to new capital investments $ 529

Operating expenses from Boulden acquisition (completed in December 2019) 939

Insurance expense (non-health) - both insured and self-insured 523

Unfavorable COVID-19 impacts (higher operating and bad debt expenses) 417

Payroll, benefits and other employee-related expenses due to growth 506

Operating expenses from the Western Natural Gas acquisition 338

Facilities and maintenance costs 251

Other variances 127

Period-over-period increase in other operating expenses $ 2,810

Divestiture of PESCO

As discussed in Note 3, Acquisitions and Divestitures , during the fourth quarter of 2019, we sold PESCO's assets and contracts and accordingly have exited the natural gas marketing business.

This was done in an effort to enable us to focus on the strategies that support our core energy delivery business.

As a result, we began to report PESCO as discontinued operations during the third quarter of 2019 and excluded PESCO's performance f rom continuing operations for all periods presented and classified its assets and liabilities as held for sale, where applicable.

Quarter-over-quarter increase in operating expenses $ 1,751

OTHER EXPENSE, NET

For the quarter ended September 30, 2020 compared to the quarter ended September 30, 2019

Other expense, net, which includes non-operating investment income (expense), interest income, late fees charged to customers, gains or losses from the sale of assets and pension and other benefits expense, increased by $0.3 million in the third quarter of 2020, compared to the same period in 2019.

The increase was primarily due to lower pension expense.

For the nine months ended September 30, 2020 compared to for the nine months ended September 30, 2019

Other expense, net, which includes non-operating investment income (expense), interest income, late fees charged to customers, gains or losses from the sale of assets and pension and other benefits expense, increased by $3.7 million for the first nine months of 2020, compared to the same period in 2019.

The increase was primarily due to gains from the sale of two properties as well as lower pension expense.

The property sales were made possible due to changes in the consolidation of certain operations.

For the quarter ended March 31, 2021 compared to the quarter ended March 31, 2020

Other expense, net, which includes non-operating investment income (expense), interest income, late fees charged to customers, gains or losses from the sale of assets and pension and other benefits expense, decreased by $2.9 million in the first quarter of 2021, compared to the same period in 2020.

The decrease was primarily due to gains on two property sales which were completed in the first quarter of 2020.

I NTEREST CHARGES

For the quarter ended September 30, 2020 compared to the quarter ended September 30, 2019

Interest charges for the quarter ended September 30, 2020 decreased by $0.8 million, compared to the same period in 2019, attributable primarily to $1.1 million in amortization expense associated with a regulatory liability that was established in connection with the Hurricane Michael regulatory proceeding settlement offset by $0.2 million in lower capitalized interest associated with growth projects.

Higher interest expense from long-term debt offset the decreased interest from short-term borrowings as we consummated several refinancing of short-term debt to long-term debt in mid-2019 and earlier this year.

For the nine months ended September 30, 2020 compared to for the nine months ended September 30, 2019

Interest charges for the nine months ended September 30, 2020 decreased by $1.1 million, compared to the same period in 2019, attributable primarily to a decrease of $3.6 million in interest expense primarily on lower levels outstanding under our revolving credit facilities and lower interest rates on short-term borrowings, $1.1 million in amortization expense associated with a regulatory liability that was established in connection with the Hurricane Michael regulatory proceeding settlement, and $0.3 million in higher capitalized interest associated with growth projects.

This decrease was offset by an increase of $3.9 million in interest expense on long-term debt as a result of several long-term debt placements in 2019 and 2020.

For the quarter ended September 30, 2020 compared to the quarter ended September 30, 2019

Income tax expense was $3.5 million for the quarter ended September 30, 2020, compared to $2.4 million for the quarter ended September 30, 2019.

Our effective income tax rate was 27.4 percent and 27.3 percent, for the three months ended September 30, 2020 and 2019, respectively.

For the nine months ended September 30, 2020 compared to for the nine months ended September 30, 2019

Income tax expense was $16.1 million for the nine months ended September 30, 2020, compared to $15.4 million in the same period in 2019.

Our effective income tax rate was 24.7 percent and 25.9 percent for the nine months ended September 30, 2020

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and 2019, respectively.

During the nine months ended September 30, 2020, we implemented certain provisions of the CARES Act that allowed us to carryback net operating losses from 2018 and 2019 into prior year periods where the federal income tax rate was higher.

As a result, we recognized a $1.7 million reduction in tax expense for the nine months ended September 30, 2020.

Excluding this impact of the CARES Act, our effective tax rate for the nine months ended September 30, 2020 was 27.3 percent.

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For the quarter ended March 31, 2021 compared to the quarter ended March 31, 2020

Interest charges for the quarter ended March 31, 2021 decreased by $0.7 million, compared to the same period in 2020, attributable primarily to a decrease of $0.7 million in lower interest expense from lower levels outstanding under our revolving credit facilities, and $0.3 million of an amortization credit/reduction in interest expense associated with a regulatory liability that was established in connection with the Hurricane Michael regulatory proceeding settlement.

Partially offsetting the interest savings was an increase of $0.2 million in interest expense as a result of several long-term debt placements in 2020.

For the quarter ended March 31, 2021 compared to the quarter ended March 31, 2020

Income tax expense was $12.4 million for the quarter ended March 31, 2021, compared to $10.6 million for the quarter ended March 31, 2021.

Our effective income tax rate was 26.5 percent and 26.7 percent, for the three months ended March 31, 2021 and 2020, respectively.

F INANCIAL P OSITION , L IQUIDITY AND C APITAL R ESOURCES

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We rely on cash generated from operations, short-term borrowings, and other sources to meet normal working capital requirements and to temporarily finance capital expenditures.

We may also issue long-term debt and equity to fund capital expenditures and to more closely align our capital structure with our target capital structure.

We may also issue long-term debt and equity to fund capital expenditures and to maintain our capital structure within our target capital structure range.

We maintain an effective shelf registration statement with the SEC for the issuance of shares of common stock in various types of equity offerings, including shares of common stock under our ATM equity program, as well as an effective registration statement with respect to the DRIP.

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Capital expenditures for investments in new or acquired plant and equipment are our largest capital requirements.

Our capital expenditures were $143.9 million for the nine months ended September 30, 2020.

The following table shows a range of the expected 2020 capital expenditures by segment and by business line:

Our capital expenditures were $48.7 million for the three months ended March 31, 2021.

In the table below, we have provided a range of our forecasted capital expenditures for 2021:

(dollars in thousands) Low High

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Propane distribution

14,000 16,000

Energy transmission

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Other unregulated energy

12,000 14,000

Total Unregulated Energy

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Corporate and other businesses

Total 2020 Expected Capital Expenditures $ 195,000 $ 215,000

The 2020 budget includes:

Eastern Shore's Del-Mar Energy Pathway, Florida's Callahan and West Palm Beach County Expansions and other potential pipeline projects, continued expenditures under Florida GRIP, further expansions of our natural gas distribution and transmission systems, continued natural gas infrastructure improvement activities, information technology systems, and other strategic initiatives and investments.

Total 2021 Forecasted Capital Expenditures $ 175,000 $ 200,000

The 2021 forecast, which excludes any potential acquisitions, includes capital expenditures associated with the following projects:

Delmarva Natural Gas distribution's Somerset County expansion and the Bioenergy Devco RNG Project, Eastern Shore's Del-Mar Energy Pathway and the CleanBay RNG project, Florida's Western Palm Beach County expansion and other potential pipeline projects, continued expenditures under the Florida GRIP, further expansions of our natural gas distribution and transmission systems, continued natural gas and electric system infrastructure improvement activities, facilities to support Marlin Gas Services' CNG transport growth and expansion into RNG and LNG transport, information technology systems, and other strategic initiatives and investments.

The capital expenditure projection is subject to continuous review and modification.

Actual capital requirements may vary from the above estimates due to a number of factors, including changing economic conditions, capital delays because of COVID-19 that are greater than currently anticipated, customer growth in existing areas, regulation, new growth or acquisition opportunities and availability of capital.

Actual capital requirements may vary from the above estimates due to a number of factors, including changing economic conditions, capital delays due to COVID-19 that are greater than currently anticipated, customer growth in existing areas, regulation, new growth or acquisition opportunities and availability of capital.

Historically, actual capital expenditures have typically lagged behind the budgeted amounts.

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The timing of capital expenditures can vary based on delays in regulatory approvals, securing environmental approvals and other permits.

The regulatory application and approval process has lengthened in the past few years, and we expect this trend to continue.

Capital Structure

We are committed to maintaining a sound capital structure and strong credit ratings to provide the financial flexibility needed to access capital markets when required.

We are committed to maintaining a sound capital structure and strong credit ratings.

This commitment, along with adequate and timely rate relief for our regulated energy operations, is intended to ensure our ability to attract capital from outside sources at a reasonable cost, which will benefit our customers, creditors, employees and stockholders.

The following table presents our capitalization, excluding and including short-term borrowings, as of September 30, 2020 and December 31, 2019:

September 30, 2020 December 31, 2019

The following table presents our capitalization, excluding and including short-term borrowings, as of March 31, 2021 and December 31, 2020:

March 31, 2021 December 31, 2020

(in thousands)

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Total capitalization, excluding short-term debt $ 1,234,913 100 % $ 1,205,584 100 %

September 30, 2020 December 31, 2019

March 31, 2021 December 31, 2020

(in thousands)

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Our target ratio of equity to total capitalization, including short-term borrowings, is between 50 and 60 percent.

Our equity to total capitalization ratio, including short-term borrowings, was 52 percent as of March 31, 2021.

We seek to align permanent financing with the in-service dates of our capital projects.

We may utilize more temporary short-term debt when the financing cost is attractive as a bridge to the permanent long-term financing or if the equity markets are volatile.

Our equity to total capitalization ratio, including short-term borrowings, was 45 percent as of September 30, 2020.

As a result of issuing additional equity in October 2020, as described below, our equity to total capitalization ratio including short-term borrowings was approximately 50 percent at October 31, 2020.

In September 2020, we issued 0.2 million shares of common stock through our DRIP and the ATM programs and received net proceeds of approximately $19.2 million which were added to our general funds.

In October 2020, we issued an additional 0.7 million shares of common stock through the same programs and received approximately $63.8 million in net proceeds, for the DRIP and ATM issuances.

In the third and fourth quarters of 2020, we issued 1.0 million shares of common stock through our DRIP and the ATM programs and received net proceeds of approximately $83.0 million which were added to the general funds.

In the first quarter of 2021 we issued less than 0.1 million shares at an average price per share of $109.05 and received net proceeds of $1.9 million under the DRIP.

In April 2021, we also issued less than 0.1 million shares at an average price per share of $115.35 and received net proceeds of $1.0 million under the DRIP.

See Note 9, Stockholders’ Equity , in the condensed consolidated financial statements for additional information on commissions and fees paid in connection with these issuances.

In January 2019, we issued a $30.0 million unsecured term note through Branch Banking and Trust Company, with a maturity date of February 28, 2020.

This note was paid in full in February 2020 utilizing our short-term borrowing facilities.

We used the net proceeds from the ATM equity program and the DRIP, after deducting the commissions or other fees and related offering expenses payable by us, for general corporate purposes, including, but not limited to, financing of capital expenditures, repayment of short-term debt, financing acquisitions, investing in subsidiaries, and general working capital purposes.

Shelf Agreements

We have entered into Shelf Agreements with Prudential, MetLife and NYL, whom are under no obligation to purchase any unsecured debt.

The following table summarizes our Shelf Agreements at September 30, 2020:

The following table summarizes our Shelf Agreements at March 31, 2021:

(in thousands) Total Borrowing Capacity Less:

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150,000 (140,000) — 10,000

Total Shelf Agreements as of September 30, 2020 $ 670,000 $ (360,000) $ — $ 310,000

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(1) In January 2020, we requested and Prudential accepted our request to purchase $50.0 million of our unsecured debt.

We issued the Shelf Notes in July 2020 at the rate of 3.00 percent per annum.

(2) In April 2020, the Prudential Shelf Agreement was amended to increase the available borrowing capacity to $150.0 million.

The Shelf Agreement expires in April 2023.

(3) In May 2020, we reached into an agreement with MetLife to provide a new $150.0 million MetLife Shelf Agreement for a three-year term ending May 2023.

(4) In February 2020, we requested and NYL accepted our request to purchase $40.0 million of our unsecured debt.

The Shelf Notes were issued in August 2020 at the rate of 2.96 percent per annum.

The Shelf Agreement expires in November 2021.

The Uncollateralized Senior Notes, Shelf Agreements or Shelf Notes set forth certain business covenants to which we are subject when any note is outstanding, including covenants that limit or restrict our ability, and the ability of our subsidiaries, to incur indebtedness, or place or permit liens and encumbrances on any of our property or the property of our subsidiaries.

Total Shelf Agreements as of March 31, 2021 $ 670,000 $ (360,000) $ — $ 310,000

(1) The Prudential, MetLife and NYL Shelf Agreements expire in April 2023, May 2023 and November 2021, respectively.

The Senior Notes, Shelf Agreements or Shelf Notes set forth certain business covenants to which we are subject when any note is outstanding, including covenants that limit or restrict our ability, and the ability of our subsidiaries, to incur indebtedness, or place or permit liens and encumbrances on any of our property or the property of our subsidiaries.

Short-term Borrowings

We are authorized by our Board of Directors to borrow up to $375.0 million of short-term debt, as required, from among our various short-term debt facilities.

We utilize bank lines of credit to provide funds for our short-term cash needs to meet seasonal working capital requirements and to temporarily fund portions of the capital expenditure program.

In the second quarter of 2020, we entered into interest rate swaps with notional amounts totaling $100.0 million associated with three of our short-term lines of credit through October 2020.

The interest rate swaps were entered to hedge the variability in cash flows attributable to changes in the short-term borrowing rates during this period.

The fixed swap rates ranged between 0.2615 and 0.3875 percent for the period.

Our short-term borrowing is based on the 30-day LIBOR rate.

The interest swap is cash settled monthly as the counter-party pays us the 30-day LIBOR rate less the fixed rate.

In September 2020, we entered into a new $375.0 million syndicated revolving line of credit, the Revolver, with six participating lenders.

The Revolver expires on September 29, 2021 and has a commitment fee of 0.175 percent and an interest rate of 1.125 percent over LIBOR.

As a result of entering into the Revolver, in September 2020, we terminated and paid the outstanding balances for all of our previously existing bilateral lines of credit and the previous revolving credit facility.

Our available credit under the new Revolver at September 30, 2020 was $154.7 million.

Our book overdrafts were $0.9 million and $3.2 million at September 30, 2020 and December 31, 2019, respectively.

If presented, the book overdrafts would be funded through the Revolver.

At March 31, 2021 and December 31, 2020, we had $156.1 million and $175.6 million, respectively, of short-term borrowings outstanding at a weighted average interest rate of 1.11 percent and 1.28 percent, respectively.

Included in the March 31, 2021 balance is $100.0 million in short-term debt for which we have entered into interest rate swap agreements.

In September 2020, we entered into a $375.0 million syndicated Revolver with six participating lenders.

As a result of entering into the Revolver, in September 2020, we terminated and paid all outstanding balances under the previously existing bilateral lines of credit and the previous revolving credit facility.

The availability of funds under the Revolver is subject to conditions specified in the credit agreement, all of which we currently satisfy.

These conditions include our compliance with financial covenants and the continued accuracy of representations and warranties contained in the agreement.

We are required by the financial covenants our Revolver to maintain, at the end of each fiscal year, a funded indebtedness ratio of no greater than 65 percent.

As of September 30, 2020, we are in compliance with all of our debt covenants.

The following table provides a summary of our operating, investing and financing cash flows for the nine months ended September 30, 2020 and 2019:

Nine Months Ended

September 30,

These conditions include our compliance with financial covenants and the continued accuracy of representations and warranties contained in these agreements.

We are required by the financial covenants in the Revolver to maintain, at the end of each fiscal year, a funded indebtedness ratio of no greater than 65 percent.

As of March 31, 2021, we are in compliance with this covenant.

The Revolver expires on September 29, 2021 and is available to provide funds for our short-term cash needs to meet seasonal working capital requirements and to temporarily fund portions of our capital expenditures.

Borrowings under the Revolver are subject to a pricing grid, including the commitment fee and the interest rate charged.

Our pricing is adjusted each quarter based upon our total indebtedness to total capitalization ratio.

As of March 31, 2021, the pricing under the Revolver included an unused commitment fee of 0.15 percent and an interest rate of 1.0 percent over LIBOR.

Our available credit under the new Revolver at March 31, 2021 was $214.1 million.

As of March 31, 2021, we had issued $4.8 million in letters of credit to various counterparties under the syndicated Revolver.

Although the letters of credit are not included in the outstanding short-term borrowings and we do not anticipate they will be drawn upon by the counterparties, the letters of credit reduce the available borrowings under our syndicated Revolver.

In the fourth quarter of 2020, we entered into interest rate swaps with a notional amount of $60.0 million through December 2021 with pricing of 0.20 and 0.205 percent for the period associated with our outstanding borrowing under the Revolver.

In February 2021, we entered into an additional interest rate swap with a notional amount of $40.0 million through December 2021 with pricing of 0.17 percent.

Our short-term borrowing is based on the 30-day LIBOR rate.

The interest rate swaps are cash settled monthly as the counter-party pays us the 30-day LIBOR rate less the fixed rate.

We are authorized by our Board of Directors to borrow up to $375 million of short-term debt, as required.

The following table provides a summary of our operating, investing and financing cash flows for the three months ended March 31, 2021 and 2020:

Three Months Ended

(in thousands) 2021 2020

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Financing activities (26,459) (30,313)

Net decrease in cash and cash equivalents (3,929) (1,769)

Net increase (decrease) in cash and cash equivalents 2,076 (3,003)

Cash and cash equivalents—beginning of period 3,499 6,985

Cash and cash equivalents—end of period $ 5,575 $ 3,982

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Cash Flows Provided By Operating Activities

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Changes in working capital are determined by a variety of factors, including weather, the prices of natural gas, electricity and propane, the timing of customer collections, payments for purchases of natural gas, electricity and propane, and deferred fuel cost recoveries.

During the nine months ended September 30, 2020 and 2019, net cash provided by operating activities was $115.9 million and $103.9 million, respectively, resulting in an increase in cash flows of $12.0 million.

During the three months ended March 31, 2021 and 2020, net cash provided by operating activities was $80.4 million and $58.8 million, respectively, resulting in an increase in cash flows of $21.6 million.

Significant operating activities generating the cash flows change were as follows:

• Net income, adjusted for non-cash adjustments and reconciling activities, increased cash flows by $26.2 million, due primarily to deferred income taxes and depreciation and amortization, offset by realized gain on commodity contracts and sale of assets;

• Changes in net accounts receivable and accrued revenue and accounts payable and accrued liabilities increased cash flows by $8.9 million, due in part to the timing and receipt of payments and the absence of PESCO, whose assets and contracts were sold in the fourth quarter of 2019;

• Changes in net prepaid expenses and other current assets, customer deposits and refunds, accrued compensation and other net assets and liabilities, increased cash flows by $10.5 million;

• Net income, adjusted for non-cash adjustments and reconciling activities, increased cash flows by $9.1 million, due primarily to higher net income, depreciation and amortization and gain on sale of assets;

• Changes in net regulatory assets and liabilities increased cash flows by $6.8 million due primarily to the change in fuel costs collected through the various cost recovery mechanisms;

• Net cash flows from income taxes receivable decreased by $11.0 million due primarily to the implementation of the federal tax law associated with the CARES Act;

• Changes in net prepaid expenses and other current assets, customer deposits and refunds, accrued compensation and other net assets and liabilities, decreased cash flows by $11.8 million;

• Changes in net accounts receivable and accrued revenue and accounts payable and accrued liabilities decreased cash flows by $3.6 million;

• Net cash flows from changes in propane inventory, storage gas and other inventories decreased by approximately $2.6 million;

• Net cash flows from income taxes receivable increased by $1.3 million.

Cash Flows Used in Investing Activities

Net cash used in investing activities totaled $136.6 million and $139.9 million during the nine months ended September 30, 2020 and 2019, respectively, resulting in an increase in cash flows of $3.3 million.

Cash paid for capital expenditures was $123.4 million for the first nine months of 2020, compared to $139.3 million for the same period in 2019, resulting in increased cash flows of $15.9 million, and was offset by cash paid for the acquisition of Elkton Gas of $15.6 million.

Cash Flows Provided by Financing Activities

Net cash used by financing activities totaled $16.7 million during the nine months ended September 30, 2020 compared to $34.2 million of net cash provided by financing activities during the prior year period resulting in a decrease in cash flows of $17.5 million.

The decrease in net cash provided by financing activities resulted primarily from the following:

• Decreased cash flows of $40.0 million associated with issuance of long-term debt.

For the nine months ended September 30, 2020, we received $89.8 million from the issuance of Prudential Shelf Notes in July 2020 and NYL Shelf Notes in August 2020.

For the nine months ended September 30, 2019, we received $129.8 million from the issuance of the Prudential Shelf Notes in August 2019 and term notes in January 2019;

• Decreased cash flows of $33.7 million from repayments of long-term debt;

Net cash used in investing activities totaled $51.8 million and $31.5 million during the three months ended March 31, 2021 and 2020, respectively, resulting in a decrease in cash flows of $20.3 million.

Cash paid for capital expenditures was $52.0 million for the first three months of 2021, compared to $35.2 million for the same period in 2020, resulting in decreased cash flows of $16.8 million.

Cash Flows Used in Financing Activities

Net cash used in financing activities totaled $26.5 million during the three months ended March 31, 2021 compared to $30.3 million of net cash used in financing activities over the same period in 2020, resulting in an increase in cash flows of $3.8 million.

The increase in net cash provided by financing activities resulted primarily from the following:

• Increased cash flows of $30.0 million from the absence of repayments of long-term debt;

• Increased cash flows of $1.8 million as a result of changes in cash overdrafts in 2021;

• Cash dividends of $20.0 million paid during the nine months ended September 30, 2020, compared to $18.2 million for the nine months ended September 30, 2019;

• Increased cash flows from short-term borrowing of $37.9 million under our line of credit arrangements;

• Increased cash flows of $20.3 million as a result of issuing stock under the DRIP and the ATM equity program.

• Cash dividends of $7.5 million paid during the three months ended March 31, 2021, compared to $6.5 million for the three months ended March 31, 2020;

• Decreased cash flows from short-term borrowing of $28.2 million under our line of credit arrangements;

• Increased cash flows of $1.9 million as a result of issuing shares of our common stock under the DRIP program.

Off-Balance Sheet Arrangements

We have issued corporate guarantees to certain vendors of our subsidiaries that provide for the payment of propane and natural gas purchases in the event of the subsidiary’s default.

The liabilities for these purchases are recorded in our financial statements when incurred.

The aggregate amount guaranteed at September 30, 2020 was $7.9 million, with the guarantees expiring on various dates through September 24, 2021.

The amounts related to PESCO were immaterial and were fully terminated in October 2020.

See Note 3, Acquisitions and Divestitures , in the condensed consolidated financial statements for additional details on the sale of assets and contracts for PESCO.

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As of September 30, 2020, we have issued letters of credit totaling approximately $4.8 million related to the electric transmission services for FPU's electric division, the firm transportation service agreement between TETLP and our Delaware and Maryland divisions, to our current and previous primary insurance carriers.

The Board of Directors has authorized us to issue corporate guarantees securing obligations of our subsidiaries and to obtain letters of credit securing our subsidiaries' obligations.

The maximum authorized liability under such guarantees and letters of credit as of March 31, 2021 was $20.0 million.

The aggregate amount guaranteed at March 31, 2021 was $8.3 million, with the guarantees expiring on various dates through March 30, 2022.

As of March 31, 2021, we have issued letters of credit totaling approximately $4.8 million related to the electric transmission services for FPU's electric division, the firm transportation service agreement between TETLP and our Delaware and Maryland divisions, to our current and previous primary insurance carriers.

These letters of credit have various expiration dates through October 5, 2021.

There have been no draws on these letters of credit as of September 30, 2020.

We do not anticipate that the counterparties will draw upon these letters of credit, and we expect that they will be renewed to the extent necessary in the future.

We have not drawn upon these letters of credit as of March 31, 2021 and do not anticipate that the counterparties will draw upon these letters of credit.

We expect that they will be renewed to the extent necessary in the future.

Additional information is presented in Note 7 , Other Commitments and Contingencies, in the condensed consolidated financial statements.

At September 30, 2020, letters of credit associated with PESCO were fully terminated.

See Note 3, Acquisitions and Divestitures , in the condensed consolidated financial statements for additional details on the sale of PESCO.

Contractual Obligations

There has been no material change in the contractual obligations presented in our 2020 Annual Report on Form 10-K, except for commodity purchase obligations entered into in the ordinary course of our business.

The following table summarizes commodity purchase contract obligations at September 30, 2020:

The following table summarizes commodity purchase contract obligations at March 31, 2021:

Payments Due by Period

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and Peninsula Pipeline is subject to regulation by the Florida PSC.

At September 30, 2020, we were involved in regulatory matters in each of the jurisdictions in which we operate.

At March 31, 2021, we were involved in regulatory matters in each of the jurisdictions in which we operate.

Our significant regulatory matters are fully described in Note 5 , Rates and Other Regulatory Activities , to the condensed consolidated financial statements in this Quarterly Report on Form 10-Q.

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Recent accounting developments applicable to us and their impact on our financial position, results of operations and cash flows are described in Note 1 , Summary of Accounting Policies , to the condensed consolidated financial statements in this Quarterly Report on Form 10-Q.

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 2. Management’s Discussion and Analysis