CHESAPEAKE UTILITIES CORP 10-Q

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations Management’s Discussion and Analysis of Financial Condition and Results of Operations is designed to provide a reader of the financial statements with a narrative report on our financial condition, results of operations and liquidity. 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. Safe Harbor for Forward-Looking Statements We make statements in this Quarterly Report on Form 10-Q that do not directly or exclusively relate to historical facts. Such statements are “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. One can typically identify forward-looking statements by the use of forward-looking words, such as “project,” “believe,” “expect,” “anticipate,” “intend,” “plan,” “estimate,” “continue,” “potential,” “forecast” or other similar words, or future or conditional verbs such as “may,” “will,” “should,” “would” or “could.” These statements represent our intentions, plans, expectations, assumptions and beliefs about future financial performance, business strategy, projected plans and objectives of the Company. Forward-looking statements speak only as of the date they are made or as of the date indicated and we do not undertake any obligation to update forward-looking statements as a result of new information, future events or otherwise. These statements are subject to many risks, 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 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; • the outcomes of regulatory, environmental and legal matters, including whether pending matters are resolved within current estimates and whether the related costs are adequately covered by insurance or recoverable in rates; • the impact of climate change, including the impact of greenhouse gas emissions or other legislation or regulations intended to address climate change; • the impact of significant changes to current tax regulations and rates; • the timing of certification authorizations associated with new capital projects and the ability to construct facilities at or below estimated costs; • changes in environmental and other laws and regulations to which we are subject and environmental conditions of property that we now, or may in the future, own or operate; • possible increased federal, state and local regulation of the safety of our operations; • the 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; • adverse weather conditions, including the effects of hurricanes, ice storms and other damaging weather events; • customers' preferred energy sources; • industrial, commercial and residential growth or contraction in our markets or service territories; • the effect of competition on our businesses from other energy suppliers and alternative forms of energy; • the timing and extent of changes in commodity prices and interest rates; • the effect of spot, forward and future market prices on our various energy businesses; • the extent of our success in connecting natural gas and electric supplies to 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; • the capital-intensive nature of our regulated energy businesses; • our ability to access the credit and capital markets to execute our business strategy, including our ability to obtain financing on favorable terms, which can be affected by various factors, including credit ratings and general economic conditions; • the ability to successfully execute, manage and integrate a merger, acquisition or divestiture of assets or businesses and the related regulatory or other conditions associated with the merger, acquisition or divestiture; • the impact on our costs and funding obligations, under our pension and other post-retirement benefit plans, of potential downturns in the financial markets, lower discount rates, and costs associated with health care legislation and regulation; • the ability to continue to hire, train and retain appropriately qualified personnel; • the effect of accounting pronouncements issued periodically by accounting standard-setting bodies; and 29 Table of Contents • 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. Introduction We are an energy delivery company engaged in the distribution of natural gas, electricity, and propane; the transmission of natural gas; the generation of electricity and steam, and in providing related services to our customers. Our strategy is focused on growing earnings from a stable utility foundation and investing in related businesses and services that provide opportunities for returns greater than traditional utility returns. We are focused on identifying and developing opportunities across the energy value chain, with emphasis on midstream and downstream investments that are accretive to earnings per share, 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. Revenue and earnings are typically greater during the first and fourth quarters, when consumption of energy is normally highest due to colder temperatures. The following discussions and those later in the document on operating income and segment results include the use of the term “gross margin," which is determined by deducting the cost of sales from operating revenue. Cost of sales includes the purchased cost of natural gas, electricity and propane and the cost of labor spent on direct revenue-producing activities, and excludes depreciation, amortization and accretion. Gross margin should not be considered an alternative to operating income or net income, which are determined in accordance with GAAP. We believe that gross margin, although a non-GAAP measure, is useful and meaningful to investors as a basis for making investment decisions. It provides investors with information that demonstrates the profitability achieved by us under our allowed rates for regulated energy operations and under our competitive pricing structures for unregulated energy operations. Our management uses gross margin in measuring our business units’ performance and has historically analyzed and reported gross margin information publicly. Other companies may calculate gross margin in a different manner. Earnings per share information is presented for continuing operations on a diluted basis, unless otherwise noted. 30 Table of Contents Results of Operations for the Three months Ended March 31, 2021 Overview Chesapeake Utilities is a Delaware corporation formed in 1947. We are a diversified energy company engaged, through our operating divisions and subsidiaries, in regulated energy, unregulated energy and other businesses. We operate primarily on the Delmarva Peninsula and in Florida, Pennsylvania and Ohio and provide natural gas distribution and transmission; electric distribution and generation; propane gas distribution; mobile compressed natural gas services; steam generation; and other energy-related services. 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 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. 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. 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 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 . 31 Table of Contents Three Months Ended March 31, Increase 2021 2020 (decrease) (in thousands except per share) Gross Margin Regulated Energy segment $ 78,154 $ 68,123 $ 10,031 Unregulated Energy segment 38,776 31,782 6,994 Other businesses and eliminations (40) (85) 45 Total Gross Margin $ 116,890 $ 99,820 $ 17,070 Operating Income Regulated Energy segment $ 32,864 $ 27,888 $ 4,976 Unregulated Energy segment 19,105 13,862 5,243 Other businesses and eliminations (372) 384 (756) Total Operating Income 51,597 42,134 9,463 Other expense, net 385 3,319 (2,934) Interest charges 5,105 5,814 (709) Income from Continuing Operations Before Income Taxes 46,877 39,639 7,238 Income Taxes on Continuing Operations 12,405 10,598 1,807 Income from Continuing operations 34,472 29,041 5,431 Loss from Discontinued Operations (6) (111) 105 Net Income $ 34,466 $ 28,930 $ 5,536 Basic Earnings Per Share of Common Stock Earnings from Continuing Operations $ 1.97 $ 1.77 $ 0.20 Loss from Discontinued Operations — (0.01) 0.01 Basic Earnings Per Share of Common Stock $ 1.97 $ 1.76 $ 0.21 Diluted Earnings Per Share of Common Stock Earnings from Continuing Operations $ 1.96 $ 1.77 $ 0.19 Loss from Discontinued Operations — (0.01) 0.01 Diluted Earnings Per Share of Common Stock $ 1.96 $ 1.76 $ 0.20 32 Table of Contents 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 Net Income Earnings Per Share First Quarter of 2020 Reported Results from Continuing Operations $ 39,639 $ 29,041 $ 1.77 Adjusting for Unusual Items: Gain from sales of assets in the first quarter of 2020 (3,162) (2,317) (0.14) Increased (Decreased) Gross Margins: 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 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 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 16,996 12,499 0.71 (Increased) Decreased Operating Expenses (Excluding Cost of Sales): 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) 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) Interest charges (1) 709 521 0.03 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) 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. 33 Table of Contents Summary of Key Factors Recently Completed and Ongoing Major Projects and Initiatives 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 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 completed and the associated earnings can be estimated. Gross Margin for the Period Three Months Ended Year Ended Estimate for March 31, December 31, Fiscal in thousands 2021 2020 2020 2021 2022 Pipeline Expansions: Western Palm Beach County, Florida Expansion (1) $ 1,167 $ 1,000 $ 4,167 $ 4,984 $ 5,227 Del-Mar Energy Pathway (1) (2) 884 189 2,462 4,134 6,708 Callahan Intrastate Pipeline (2) 1,887 — 3,851 7,564 7,598 Guernsey Power Station 47 — — 514 1,486 Total Pipeline Expansions 3,985 1,189 10,480 17,196 21,019 CNG Transportation 2,077 1,347 7,231 7,900 8,500 RNG Transportation — — — 150 1,000 Acquisitions: Elkton Gas 1,312 — 1,344 3,992 4,200 Western Natural Gas 550 — 389 1,800 1,854 Total Acquisitions 1,862 — 1,733 5,792 6,054 Regulatory Initiatives: Florida GRIP 4,065 3,695 15,178 16,739 17,712 Hurricane Michael regulatory proceeding 2,575 — 10,864 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 gross margin generated from interim services. (2) Includes gross margin from natural gas distribution services. Detailed Discussion of Major Projects and Initiatives 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 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 In December 2019, the FERC issued an order approving the construction of the Del-Mar Energy Pathway project. Eastern Shore anticipates that this project will be fully in-service by the beginning of the fourth quarter of 2021. 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 34 Table of Contents 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 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 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. 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 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 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 In July 2020, our Delmarva natural gas operations and CleanBay Renewables Inc. ("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 35 Table of Contents region. 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 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. Acquisitions 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. Elkton Gas 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 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. Regulatory Initiatives Florida GRIP 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 $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. 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. 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. 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, 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) 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; (c) recover these storm costs through a surcharge for a total of $7.7 million annually; 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 months ended March 31, 2021: 36 Table of Contents Three Months Ended (in thousands) March 31, 2021 Gross Margin $ 2,575 Depreciation (303) Amortization of regulatory assets 2,079 Operating income 799 Amortization of liability associated with interest expense (327) Pre-tax income 1,126 Income tax expense 298 Net income $ 828 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 $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 March 31, 2021 2020 Variance Delmarva Peninsula Actual HDD 2,186 1,859 327 10-Year Average HDD ("Normal") 2,280 2,349 (69) Variance from Normal (94) (490) Florida Actual HDD 503 369 134 10-Year Average HDD ("Normal") 506 570 (64) Variance from Normal (3) (201) Ohio Actual HDD 2,772 2,496 276 10-Year Average HDD ("Normal") 2,959 3,019 (60) Variance from Normal (187) (523) Florida Actual CDD 184 323 (139) 10-Year Average CDD ("Normal") 195 168 27 Variance from Normal (11) 155 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 $0.9 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 37 Table of Contents 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: Residential $ 490 $ 307 Commercial and industrial 70 72 Total Customer Growth $ 560 $ 379 Regulated Energy Segment For the quarter ended March 31, 2021, compared to the quarter ended March 31, 2020: Three Months Ended March 31, Increase 2021 2020 (decrease) (in thousands) Revenue $ 121,197 $ 102,955 $ 18,242 Cost of sales 43,043 34,832 8,211 Gross margin 78,154 68,123 10,031 Operations & maintenance 28,006 26,241 1,765 Depreciation & amortization 12,030 9,319 2,711 Other taxes 5,254 4,675 579 Total operating expenses 45,290 40,235 5,055 Operating income $ 32,864 $ 27,888 $ 4,976 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) 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 Other variances 445 Quarter-over-quarter increase in gross margin $ 10,031 38 Table of Contents The following narrative discussion provides further detail and analysis of the significant items in the foregoing table. Eastern Shore and Peninsula Pipeline Service Expansions 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 $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. 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. Elkton Gas 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 $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. Florida GRIP 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 regulatory proceeding settlement - depreciation and amortization impact $ 1,776 Depreciation, asset removal and property tax costs due to new capital investments 1,390 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) Quarter-over-quarter increase in operating expenses $ 5,055 39 Table of Contents Unregulated Energy Segment For the quarter ended March 31, 2021, compared to the quarter ended March 31, 2020: Three Months Ended March 31, Increase 2021 2020 (decrease) (in thousands) Revenue $ 74,759 $ 54,011 $ 20,748 Cost of sales 35,983 22,229 13,754 Gross margin 38,776 31,782 6,994 Operations & maintenance 15,162 14,034 1,128 Depreciation & amortization 3,323 2,918 405 Other taxes 1,186 968 218 Total operating expenses 19,671 17,920 1,751 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. Gross Margin Items contributing to the quarter-over-quarter increase in gross margin are listed in the following table: (in thousands) Margin Impact Propane Operations 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 Increased demand for CNG services 731 Aspire Energy Increased customer consumption - primarily weather related 942 Other variances (416) 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 • 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 40 Table of Contents • 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 • 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 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 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 Quarter-over-quarter increase in operating expenses $ 1,751 OTHER EXPENSE, NET 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 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. INCOME TAXES 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. 41 Table of Contents F INANCIAL P OSITION , L IQUIDITY AND C APITAL R ESOURCES Our capital requirements reflect the capital-intensive and seasonal nature of our business and are principally attributable to investment in new plant and equipment, retirement of outstanding debt and seasonal variability in working capital. 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 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. Depending on our capital needs and subject to market conditions, in addition to other possible debt and equity offerings, we may consider issuing additional shares under the direct share purchase component of the DRIP and/or under the ATM equity program. Beginning in the third quarter of 2020, we issued shares of common stock under both the DRIP and the ATM equity program. Our energy businesses are weather-sensitive and seasonal. We normally generate a large portion of our annual net income and subsequent increases in our accounts receivable in the first and fourth quarters of each year due to significant volumes of natural gas, electricity, and propane delivered by our distribution operations, and our natural gas transmission operations to customers during the peak heating season. In addition, our natural gas and propane inventories, which usually peak in the fall months, are largely drawn down in the heating season and provide a source of cash as the inventory is used to satisfy winter sales demand. Capital expenditures for investments in new or acquired plant and equipment are our largest capital requirements. 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: 2021 (dollars in thousands) Low High Regulated Energy: Natural gas distribution $ 79,000 $ 85,000 Natural gas transmission 55,000 60,000 Electric distribution 9,000 13,000 Total Regulated Energy 143,000 158,000 Unregulated Energy: Propane distribution 9,000 12,000 Energy transmission 14,000 15,000 Other unregulated energy 8,000 12,000 Total Unregulated Energy 31,000 39,000 Other: Corporate and other businesses 1,000 3,000 Total Other 1,000 3,000 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 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. 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. 42 Table of Contents Capital Structure 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 March 31, 2021 and December 31, 2020: March 31, 2021 December 31, 2020 (in thousands) Long-term debt, net of current maturities $ 508,525 41 % $ 508,499 42 % Stockholders’ equity 726,388 59 % 697,085 58 % Total capitalization, excluding short-term debt $ 1,234,913 100 % $ 1,205,584 100 % March 31, 2021 December 31, 2020 (in thousands) Short-term debt $ 156,123 11 % $ 175,644 13 % Long-term debt, including current maturities 522,125 37 % 522,099 37 % Stockholders’ equity 726,388 52 % 697,085 50 % Total capitalization, including short-term debt $ 1,404,636 100 % $ 1,394,828 100 % 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. 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. 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 March 31, 2021: (in thousands) Total Borrowing Capacity Less: Amount of Debt Issued Less: Unfunded Commitments Remaining Borrowing Capacity Shelf Agreement Prudential Shelf Agreement (1) $ 370,000 $ (220,000) $ — $ 150,000 MetLife Shelf Agreement (1) 150,000 — — 150,000 NYL Shelf Agreement (1) 150,000 (140,000) — 10,000 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. 43 Table of Contents Short-term Borrowings 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 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. Cash Flows 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 March 31, (in thousands) 2021 2020 Net cash provided by (used in): Operating activities $ 80,382 $ 58,808 Investing activities (51,847) (31,498) Financing activities (26,459) (30,313) 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 44 Table of Contents Cash Flows Provided By Operating Activities Changes in our cash flows from operating activities are attributable primarily to changes in net income, adjusted for non-cash items such as depreciation and changes in deferred income taxes, and working capital. 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 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: • 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; • 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; and • 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 $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 $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; and • 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 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. 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. 45 Table of Contents 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 March 31, 2021: Payments Due by Period Less than 1 year 1 - 3 years 3 - 5 years More than 5 years Total (in thousands) Purchase obligations - Commodity (1) $ 23,190 $ 16,546 $ — $ — $ 39,736 Total $ 23,190 $ 16,546 $ — $ — $ 39,736 (1) In addition to the obligations noted above, we have agreements with commodity suppliers that have provisions with no minimum purchase requirements. There are no monetary penalties for reducing the amounts purchased; however, the propane contracts allow the suppliers to reduce the amounts available in the winter season if we do not purchase specified amounts during the summer season. Under these contracts, the commodity prices will fluctuate as market prices fluctuate. Rates and Regulatory Matters Our natural gas distribution operations in Delaware, Maryland and Florida and electric distribution operation in Florida are subject to regulation by the respective state PSC; Eastern Shore is subject to regulation by the FERC; and Peninsula Pipeline is subject to regulation by the Florida PSC. 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. Recent Authoritative Pronouncements on Financial Reporting and Accounting 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. 46 Table of Contents