CHESAPEAKE UTILITIES CORP 10-Q

Item 1. Financial Statements Chesapeake Utilities Corporation and Subsidiaries Condensed Consolidated Statements of Income (Unaudited) Three Months Ended March 31, 2022 2021 (in thousands, except shares and per share data) Operating Revenues Regulated Energy $ 127,891 $ 121,197 Unregulated Energy and other 94,989 69,990 Total Operating Revenues 222,880 191,187 Operating Expenses Regulated natural gas and electric costs 45,442 43,043 Unregulated propane and natural gas costs 51,738 31,254 Operations 42,794 39,437 Maintenance 4,264 4,042 Depreciation and amortization 16,977 15,365 Other taxes 6,800 6,449 Total Operating Expenses 168,015 139,590 Operating Income 54,865 51,597 Other income, net 913 375 Interest charges 5,339 5,105 Income Before Income Taxes 50,439 46,867 Income Taxes 13,506 12,401 Net Income $ 36,933 $ 34,466 Weighted Average Common Shares Outstanding: Basic 17,678,060 17,485,866 Diluted 17,761,119 17,553,167 Earnings Per Share of Common Stock: Basic $ 2.09 $ 1.97 Diluted $ 2.08 $ 1.96 The accompanying notes are an integral part of these financial statements. 1 Table of Contents Chesapeake Utilities Corporation and Subsidiaries Condensed Consolidated Statements of Comprehensive Income (Unaudited) Three Months Ended March 31, 2022 2021 (in thousands) Net Income $ 36,933 $ 34,466 Other Comprehensive Income (Loss), net of tax: Employee Benefits, net of tax: Amortization of prior service cost, net of tax of $(5) and $(5), respectively ( 14 ) ( 14 ) Net gain, net of tax of $11 and $27, respectively 32 77 Cash Flow Hedges, net of tax: Unrealized gain on commodity contract cash flow hedges, net of tax of $185 and $63, respectively 529 166 Unrealized loss on interest rate swap cash flow hedges, net of tax of $(1) — ( 2 ) Total Other Comprehensive Income, net of tax 547 227 Comprehensive Income $ 37,480 $ 34,693 The accompanying notes are an integral part of these financial statements. 2 Table of Contents Chesapeake Utilities Corporation and Subsidiaries Condensed Consolidated Balance Sheets (Unaudited) Assets March 31, 2022 December 31, 2021 (in thousands, except shares and per share data) Property, Plant and Equipment Regulated Energy $ 1,741,731 $ 1,720,287 Unregulated Energy 376,468 357,259 Other businesses and eliminations 34,692 35,418 Total property, plant and equipment 2,152,891 2,112,964 Less: Accumulated depreciation and amortization ( 427,998 ) ( 417,479 ) Plus: Construction work in progress 30,487 49,393 Net property, plant and equipment 1,755,380 1,744,878 Current Assets Cash and cash equivalents 5,208 4,976 Trade and other receivables 54,683 61,623 Less: Allowance for credit losses ( 2,842 ) ( 3,141 ) Trade and other receivables, net 51,841 58,482 Accrued revenue 21,532 22,513 Propane inventory, at average cost 9,772 11,644 Other inventory, at average cost 10,228 9,345 Regulatory assets 20,438 19,794 Storage gas prepayments 650 3,691 Income taxes receivable 11,326 17,460 Prepaid expenses 13,754 17,121 Derivative assets, at fair value 7,516 7,076 Other current assets 703 1,033 Total current assets 152,968 173,135 Deferred Charges and Other Assets Goodwill 44,708 44,708 Other intangible assets, net 12,832 13,192 Investments, at fair value 11,561 12,095 Operating lease right-of-use assets 16,231 10,139 Regulatory assets 101,611 104,173 Receivables and other deferred charges 14,338 12,549 Total deferred charges and other assets 201,281 196,856 Total Assets $ 2,109,629 $ 2,114,869 The accompanying notes are an integral part of these financial statements. 3 Table of Contents Chesapeake Utilities Corporation and Subsidiaries Condensed Consolidated Balance Sheets (Unaudited) Capitalization and Liabilities March 31, 2022 December 31, 2021 (in thousands, except shares and per share data) Capitalization Stockholders’ equity Preferred stock, par value $0.01 per share (authorized 2,000,000 shares), no shares issued and outstanding $ — $ — Common stock, par value $0.4867 per share (authorized 50,000,000 shares) 8,624 8,593 Additional paid-in capital 373,694 371,162 Retained earnings 421,344 393,072 Accumulated other comprehensive income 1,850 1,303 Deferred compensation obligation 6,477 7,240 Treasury stock ( 6,477 ) ( 7,240 ) Total stockholders’ equity 805,512 774,130 Long-term debt, net of current maturities 597,878 549,903 Total capitalization 1,403,390 1,324,033 Current Liabilities Current portion of long-term debt 19,717 17,962 Short-term borrowing 140,865 221,634 Accounts payable 30,259 52,628 Customer deposits and refunds 33,374 36,488 Accrued interest 4,950 2,775 Dividends payable 8,504 8,466 Accrued compensation 9,270 15,505 Regulatory liabilities 9,427 2,312 Derivative liabilities, at fair value 484 743 Other accrued liabilities 22,863 17,920 Total current liabilities 279,713 376,433 Deferred Credits and Other Liabilities Deferred income taxes 241,132 233,550 Regulatory liabilities 142,807 142,488 Environmental liabilities 3,271 3,538 Other pension and benefit costs 23,073 24,120 Operating lease - liabilities 14,161 8,571 Deferred investment tax credits and other liabilities 2,082 2,136 Total deferred credits and other liabilities 426,526 414,403 Environmental and other commitments and contingencies (Notes 6 and 7) Total Capitalization and Liabilities $ 2,109,629 $ 2,114,869 The accompanying notes are an integral part of these financial statements. 4 Table of Contents Chesapeake Utilities Corporation and Subsidiaries Condensed Consolidated Statements of Cash Flows (Unaudited) Three Months Ended March 31, 2022 2021 (in thousands) Operating Activities Net income $ 36,933 $ 34,466 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 16,977 15,365 Depreciation and accretion included in other costs 2,744 2,568 Deferred income taxes 7,398 6,334 Realized gain on commodity contracts and sale of assets ( 4,274 ) ( 3,514 ) Unrealized loss (gain) on investments/commodity contracts 541 ( 389 ) Employee benefits and compensation ( 260 ) ( 173 ) Share-based compensation 2,213 1,876 Changes in assets and liabilities: Accounts receivable and accrued revenue 7,532 ( 484 ) Propane inventory, storage gas and other inventory 4,031 1,371 Regulatory assets/liabilities, net 5,774 14,123 Prepaid expenses and other current assets 6,626 4,171 Accounts payable and other accrued liabilities ( 12,918 ) 766 Income taxes (payable) receivable 6,134 6,093 Customer deposits and refunds ( 3,114 ) ( 847 ) Accrued compensation ( 6,392 ) ( 5,105 ) Other assets and liabilities, net ( 825 ) 3,761 Net cash provided by operating activities 69,120 80,382 Investing Activities Property, plant and equipment expenditures ( 29,887 ) ( 51,994 ) Proceeds from sale of assets 219 394 Environmental expenditures ( 267 ) ( 247 ) Net cash used in investing activities ( 29,935 ) ( 51,847 ) Financing Activities Common stock dividends ( 8,274 ) ( 7,513 ) Issuance of stock under the Dividend Reinvestment Plan, net of offering fees 3,242 2,053 Tax withholding payments related to net settled stock compensation ( 2,838 ) ( 1,478 ) Change in cash overdrafts due to outstanding checks 1,223 7 Net advances (repayments) under line of credit agreements ( 82,008 ) ( 19,528 ) Proceeds from long-term debt, net of offering fees 49,915 — Repayment of long-term debt ( 213 ) — Net cash used in financing activities ( 38,953 ) ( 26,459 ) Net Increase in Cash and Cash Equivalents 232 2,076 Cash and Cash Equivalents—Beginning of Period 4,976 3,499 Cash and Cash Equivalents—End of Period $ 5,208 $ 5,575 The accompanying notes are an integral part of these financial statements. 5 Table of Contents Chesapeake Utilities Corporation and Subsidiaries Condensed Consolidated Statements of Stockholders’ Equity (Unaudited) Common Stock (1) (in thousands, except shares and per share data) Number of Shares (2) Par Value Additional Paid-In Capital Retained Earnings Accumulated Other Comprehensive Income/(Loss) Deferred Compensation Treasury Stock Total Balance at December 31, 2020 17,461,841 $ 8,499 $ 348,482 $ 342,969 $ ( 2,865 ) $ 5,679 $ ( 5,679 ) $ 697,085 Net income — — — 34,466 — — — 34,466 Other comprehensive income — — — — 227 — — 227 Dividends declared ($0.440 per share) — — — ( 7,812 ) — — — ( 7,812 ) Dividend reinvestment plan 20,511 10 2,204 — — — — 2,214 Share-based compensation and tax benefit (3) (4) 39,141 19 189 — — — — 208 Treasury stock activities — — — — — 1,313 ( 1,313 ) — Balance at March 31, 2021 17,521,493 $ 8,528 $ 350,875 $ 369,623 $ ( 2,638 ) $ 6,992 $ ( 6,992 ) $ 726,388 Balance at December 31, 2021 17,655,410 $ 8,593 $ 371,162 $ 393,072 $ 1,303 $ 7,240 $ ( 7,240 ) $ 774,130 Net income — — — 36,933 — — — 36,933 Other comprehensive income — — — — 547 — — 547 Dividends declared ($0.480 per share) — — — ( 8,661 ) — — — ( 8,661 ) Issuance under various plans (5) 24,960 12 3,410 — — — — 3,422 Share-based compensation and tax benefit (3) (4) 39,018 19 ( 878 ) — — — — ( 859 ) Treasury stock activities — — — — — ( 763 ) 763 — Balance at March 31, 2022 17,719,388 $ 8,624 $ 373,694 $ 421,344 $ 1,850 $ 6,477 $ ( 6,477 ) $ 805,512 (1) 2,000,000 shares of preferred stock at $ 0.01 par value have been authorized. No shares have been issued or are outstanding; accordingly, no information has been included in the statements of stockholders’ equity. (2) Includes 107,518 , 116,238 , 116,751 , and 105,087 shares at March 31, 2022, December 31, 2021, March 31, 2021 and December 31, 2020, respectively, held in a Rabbi Trust related to our Non-Qualified Deferred Compensation Plan. (3) Includes amounts for shares issued for directors’ compensation. (4) The shares issued under the SICP are net of shares withheld for employee taxes. For the three months ended March 31, 2022 and 2021, we withheld 21,832 and 14,020 shares, respectively, for employee taxes. (5) Includes the Retirement Savings Plan, DRIP and ATM equity issuances. The accompanying notes are an integral part of these financial statements. 6 Table of Contents N OTES TO C ONDENSED C ONSOLIDATED F INANCIAL S TATEMENTS (U NAUDITED) 7 Table of Contents 1. Summary of Accounting Policies Basis of Presentation References in this document to the “Company,” “Chesapeake Utilities,” “we,” “us” and “our” are intended to mean Chesapeake Utilities Corporation, its divisions and/or its subsidiaries, as appropriate in the context of the disclosure. The accompanying unaudited condensed consolidated financial statements have been prepared in compliance with the rules and regulations of the SEC and GAAP. In accordance with these rules and regulations, certain information and disclosures normally required for audited financial statements have been condensed or omitted. These financial statements should be read in conjunction with the consolidated financial statements and notes thereto, included in our latest Annual Report on Form 10-K for the year ended December 31, 2021. In the opinion of management, these financial statements reflect all adjustments that are necessary for a fair presentation of our results of operations, financial position and cash flows for the interim periods presented. Where necessary to improve comparability, prior period amounts have been changed to conform to current period presentation. 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 highest due to colder temperatures. Effects of COVID-19 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 beginning in 2020 and to a lesser extent have continued into 2022. Chesapeake Utilities is considered an “essential business,” which allowed us to continue operational activities and construction projects while social distancing restrictions were in place. At this time, restrictions have predominantly been lifted as vaccines have become widely available in the United States. Previously existing states of emergency in all of our service territories expired during the second and third quarters of 2021 eliminating a majority of restrictions initially implemented to slow the spread of the virus. The expiration of the states of emergency along with the settlement of our limited proceeding in Florida, has concluded our ability to defer incremental pandemic related costs for consideration through the applicable regulatory process. We have adjusted our operating practices accordingly to ensure the safety of our operations and will take the necessary actions to comply with the CDC, and the Occupational and Safety and Health Administration, as new developments occur. Refer to Note 5, Rates and Other Regulatory Activities , for further information on the regulated assets established as a result of the incremental expenses associated with COVID-19. Recent Accounting Standards Yet to be Adopted Reference Rate Reform - (ASC 848) - In March 2020, the FASB issued ASU 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting , which was subsequently amended by ASU 2021-01. The standard provides relief for companies preparing for the discontinuation of interest rates, such as LIBOR, and allows optional expedients and exceptions for applying GAAP to contracts, hedging relationships and other transactions affected by reference rate reform. The amendments included in this ASU are to be applied prospectively, and are not expected to have a material impact on our financial position or results of operations. 8 Table of Contents 2. Calculation of Earnings Per Share Three Months Ended March 31, 2022 2021 (in thousands, except shares and per share data) Calculation of Basic Earnings Per Share: Net Income $ 36,933 $ 34,466 Weighted average shares outstanding 17,678,060 17,485,866 Basic Earnings Per Share $ 2.09 $ 1.97 Calculation of Diluted Earnings Per Share: Net Income $ 36,933 $ 34,466 Reconciliation of Denominator: Weighted shares outstanding—Basic 17,678,060 17,485,866 Effect of dilutive securities—Share-based compensation 83,059 67,301 Adjusted denominator—Diluted 17,761,119 17,553,167 Diluted Earnings Per Share $ 2.08 $ 1.96 3. Acquisitions Acquisition of Diversified Energy On December 15, 2021, Sharp acquired the propane operating assets of Diversified Energy for approximately $ 37.5 million, net of cash acquired. In connection with this acquisition, we recorded a $ 2.1 million liability which is subject to the seller's adherence to various provisions contained in the purchase agreement through the first anniversary of the transaction closing. Included with the acquisition, was approximately $ 1.7 million of working capital from the Seller consisting predominantly of accounts receivable and propane inventory. We accounted for this acquisition as a business combination within our Unregulated Energy Segment beginning in the fourth quarter of 2021. In January 2022, we recorded a post-closing true-up of $ 0.8 million related to the provision for working capital valuation at the time of closing. There were multiple strategic benefits to this acquisition including it: (i) expands our propane service territory into North Carolina and South Carolina (ii) builds upon our existing propane presence in Virginia and Pennsylvania, and (iii) includes an established customer base with opportunities for future growth. Through this acquisition, the Company added approximately 19,000 residential, commercial and agricultural customers, along with expected distribution of approximately 10.0 million gallons of propane annually. In connection with this acquisition, we recorded $ 23.1 million in property plant and equipment, $ 6.2 million in intangible assets associated with customer relationships and non-compete agreements and $ 5.9 million in goodwill, all of which is deductible for income tax purposes. The amounts recorded in conjunction with the acquisition are preliminary, and subject to adjustment based on contractual provisions and finalization prior to the first anniversary of the transaction closing. For the three months ended March 31, 2022, Diversified Energy generated operating revenue and operating income of $ 10.4 million and $ 1.5 million, respectively. 4. Revenue Recognition We recognize revenue when our performance obligations under contracts with customers have been satisfied, which generally occurs when our businesses have delivered or transported natural gas, electricity or propane to customers. We exclude sales taxes and other similar taxes from the transaction price. Typically, our customers pay for the goods and/or services we provide in the month following the satisfaction of our performance obligation. The following table displays our revenue by major source based on product and service type for the three months ended March 31, 2022 and 2021: 9 Table of Contents Three months ended March 31, 2022 Three months ended March 31, 2021 (in thousands) Regulated Energy Unregulated Energy Other and Eliminations Total Regulated Energy Unregulated Energy Other and Eliminations Total Energy distribution Delaware natural gas division $ 34,481 $ — $ — $ 34,481 $ 33,272 $ — $ — $ 33,272 Florida natural gas division 10,266 — — 10,266 8,956 — — 8,956 FPU electric distribution 19,089 — — 19,089 18,551 — — 18,551 FPU natural gas distribution 30,020 — — 30,020 26,861 — — 26,861 Maryland natural gas division 10,464 — — 10,464 10,466 — — 10,466 Sandpiper natural gas/propane operations 7,636 — — 7,636 8,071 — — 8,071 Elkton Gas 3,366 — — 3,366 2,635 — — 2,635 Total energy distribution 115,322 — — 115,322 108,812 — — 108,812 Energy transmission Aspire Energy — 18,036 — 18,036 — 12,905 — 12,905 Aspire Energy Express 263 — — 263 47 — — 47 Eastern Shore 20,321 — — 20,321 19,972 — — 19,972 Peninsula Pipeline 6,772 — — 6,772 6,467 — — 6,467 Total energy transmission 27,356 18,036 — 45,392 26,486 12,905 — 39,391 Energy generation Eight Flags — 5,539 — 5,539 — 4,329 — 4,329 Propane operations Propane delivery operations — 75,606 — 75,606 — 55,264 — 55,264 Compressed Natural Gas Services Marlin Gas Services — 2,209 — 2,209 — 2,352 — 2,352 Other and eliminations Eliminations ( 14,787 ) ( 98 ) ( 6,435 ) ( 21,320 ) ( 14,101 ) ( 91 ) ( 4,901 ) ( 19,093 ) Other — — 132 132 — — 132 132 Total other and eliminations ( 14,787 ) ( 98 ) ( 6,303 ) ( 21,188 ) ( 14,101 ) ( 91 ) ( 4,769 ) ( 18,961 ) Total operating revenues (1) $ 127,891 $ 101,292 $ ( 6,303 ) $ 222,880 $ 121,197 $ 74,759 $ ( 4,769 ) $ 191,187 (1) Total operating revenues for the three months ended March 31, 2022, include other revenue (revenues from sources other than contracts with customers) of $ 0.1 million for both Regulated and Unregulated Energy segments, respectively, and $( 0.3 ) million and $ 0.1 million for our Regulated and Unregulated Energy segments, respectively, for the three months ended March 31, 2021. The sources of other revenues include revenue from alternative revenue programs related to revenue normalization for the Maryland division and Sandpiper Energy and late fees. 10 Table of Contents Contract balances The timing of revenue recognition, customer billings and cash collections results in trade receivables, unbilled receivables (contract assets), and customer advances (contract liabilities) in our condensed consolidated balance sheets. The balances of our trade receivables, contract assets, and contract liabilities as of March 31, 2022 and December 31, 2021 were as follows: Trade Receivables Contract Assets (Current) Contract Assets (Non-current) Contract Liabilities (Current) (in thousands) Balance at 12/31/2021 $ 56,277 $ 18 $ 4,806 $ 747 Balance at 3/31/2022 50,440 18 4,743 504 Increase (decrease) $ ( 5,837 ) $ — $ ( 63 ) $ ( 243 ) Our trade receivables are included in trade and other receivables in the condensed consolidated balance sheets. Our current contract assets are included in other current assets in the condensed consolidated balance sheet. Our non-current contract assets are included in other assets in the condensed consolidated balance sheet and primarily relate to operations and maintenance costs incurred by Eight Flags that have not yet been recovered through rates for the sale of electricity to our electric distribution operation pursuant to a long-term service agreement. At times, we receive advances or deposits from our customers before we satisfy our performance obligation, resulting in contract liabilities. Contract liabilities are included in other accrued liabilities in the condensed consolidated balance sheets and relate to non-refundable prepaid fixed fees for our Mid-Atlantic propane delivery operation's retail offerings. Our performance obligation is satisfied over the term of the respective customer retail program on a ratable basis. For the three months ended March 31, 2022 and 2021, we recognized revenue of $ 0.4 million. Remaining performance obligations Our businesses have long-term fixed fee contracts with customers in which revenues are recognized when performance obligations are satisfied over the contract term. Revenue for these businesses for the remaining performance obligations, at March 31, 2022, are expected to be recognized as follows: (in thousands) 2022 2023 2024 2025 2026 2027 2028 and thereafter Eastern Shore and Peninsula Pipeline $ 35,359 $ 44,475 $ 39,677 $ 33,050 $ 29,467 $ 25,228 $ 179,247 Natural gas distribution operations 5,010 5,681 5,458 4,928 4,745 4,406 27,089 FPU electric distribution 489 652 652 275 275 275 275 Total revenue contracts with remaining performance obligations $ 40,858 $ 50,808 $ 45,787 $ 38,253 $ 34,487 $ 29,909 $ 206,611 5. Rates and Other Regulatory Activities Our natural gas and electric distribution operations in Delaware, Maryland and Florida are subject to regulation by their respective PSC; Eastern Shore, our natural gas transmission subsidiary, is subject to regulation by the FERC; and Peninsula Pipeline and Aspire Energy Express, our intrastate pipeline subsidiaries, are subject to regulation (excluding cost of service) by the Florida PSC and Public Utilities Commission of Ohio, respectively. Delaware See the discussion below under COVID-19 impact . Maryland Ocean City Maryland Reinforcement: In March 2022, we filed a Section 7(f) - Request for Service Area Determination with the FERC regarding plans to extend our natural gas facilities across the Delaware/Maryland state line from 11 Table of Contents Sussex County, Delaware, to Worcester County, Maryland, to provide a secondary feed to Sandpiper Energy, Inc.'s (Sandpiper) system. We anticipate resolution of this filing in the second quarter of 2022. Strategic Infrastructure Development and Enhancement (“STRIDE”) Plan: In March 2021, Elkton Gas filed a strategic infrastructure development and enhancement plan with the Maryland PSC. The STRIDE plan accelerates Elkton Gas' Aldyl-A pipeline replacement program as costs of the plan are recovered through a fixed charge rider which is effective for five years. Under Elkton Gas’ STRIDE plan, the Aldyl-A pipelines will be fully replaced by 2023. In July 2021, Elkton Gas reached a settlement with the Maryland PSC Staff and the Maryland Office of Public Counsel that approved Elkton Gas’ STRIDE plan. The STRIDE plan allows for recovery of the associated revenue requirement through a monthly surcharge, which was implemented effective September 2021. Florida Winter Haven Expansion Project: In May 2021, Peninsula Pipeline filed a petition with the Florida PSC for approval of its Transportation Service Agreement with CFG for an incremental 6,800 Dts/d of firm service in the Winter Haven, Florida area. As part of this agreement, Peninsula Pipeline will construct a new interconnect with FGT and a new regulator station for CFG. CFG will use the additional firm service to support new incremental load due to growth, including providing service to a new can manufacturing facility, as well as provide reliability and operational benefits to CFG’s existing distribution system in the area. In connection with Peninsula Pipeline’s new regulator station, CFG is also extending its distribution system to connect to the new station. The Transportation Service Agreement was approved by the Florida PSC in September 2021. Construction commenced in February 2021 and the expected in-service date is the second quarter of 2022. Beachside Pipeline Extension: In June 2021, Peninsula Pipeline and Florida City Gas entered into a Transportation Service Agreement for an incremental 10,176 Dts/d of firm service in Indian River County, Florida, to support Florida City Gas’ growth along the Indian River's barrier island. As part of this agreement, Peninsula Pipeline will construct 11.3 miles of pipeline from its existing pipeline in the Sebastian, Florida area, which will travel east under the Intercoastal Waterway ("ICW") and southward on the barrier island. As required by Peninsula Pipeline’s tariff and Florida Statutes, Peninsula Pipeline filed the required company and customer affidavits with the Florida PSC in June 2021. Construction commenced in June 2021 and the expected in-service date is early 2023. Eastern Shore Southern Expansion Project: In January 2022, Eastern Shore submitted a prior notice filing with the FERC pursuant to blanket certificate procedures, regarding its proposal to install an additional compressor unit and related facilities at Eastern Shore's existing compressor station in Bridgeville, Sussex County, Delaware. The project will enable Eastern Shore to provide additional firm natural gas transportation service to an existing shipper on Eastern Shore's pipeline system, with a projected in-service date by November 2022. We are currently in the midst of the comment and protest phase of the filing of the application process. Capital Cost Surcharge : In June 2021, Eastern Shore submitted a filing with the FERC regarding a capital cost surcharge to recover capital costs associated with two mandated highway relocate projects that required the replacement of existing Eastern Shore facilities. The capital cost surcharge was an approved item in Eastern Shore’s last rate case. In conjunction with the filing of this surcharge, pursuant to the settlement agreement, a cumulative adjustment to the existing surcharge to reflect additional depreciation was included in this filing. The FERC issued an order approving the surcharge as filed on July 7, 2021. The combined revised surcharge became effective July 15, 2021. COVID-19 Impact 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 to impact economic conditions, to a lesser extent, through 2021. Chesapeake Utilities is considered an “essential business,” which allowed us to continue operational activities and construction projects with appropriate safety precautions and personal protective equipment, while being mindful of the social distancing restrictions that were in place. In response to the COVID-19 pandemic and related restrictions, we experienced reduced consumption of energy largely in the commercial and industrial sectors, higher bad debt expenses and incremental expenses associated with COVID-19, including expenditures associated with personal protective equipment and premium pay for field 12 Table of Contents personnel. The additional operating expenses we incurred supported the ongoing delivery of our essential services during these unprecedented times. In April and May 2020, we were authorized by the Maryland and Delaware PSCs, respectively, to record regulatory assets for COVID-19 related costs which offers us the ability to seek recovery of those costs. In July 2021, the Florida PSC issued an order that approved incremental expenses we incurred due to COVID-19. The order allowed us to establish a regulatory asset in a total amount of $ 2.1 million as of June 30, 2021 for natural gas and electric distribution operations. The regulatory asset is amortized over two years and is recovered through the Purchased Gas Adjustment and Swing Service mechanisms for our natural gas distribution businesses and through the Fuel Purchased Power Cost Recovery clause for our electric division. As of March 31, 2022 and December 31, 2021, our total COVID-19 regulatory asset balance was $ 2.0 million and $ 2.3 million, respectively. In 2021 and 2022, restrictions were gradually lifted as vaccines became widely available in the United States. The various state of emergencies associated with the COVID-19 pandemic that were previously declared in our service territories have been terminated and we have adjusted our operating practices accordingly to ensure the safety of our operations and will take the necessary actions to comply with the CDC, and the Occupational Safety and Health Administration, as new developments occur. Summary TCJA Table Customer rates for our regulated businesses were adjusted as approved by the regulators, prior to 2020 with the exception of Elkton Gas, which implemented a one-time bill credit in May 2020. The following table summarizes the regulatory liabilities related to accumulated deferred taxes ("ADIT") associated with TCJA for our regulated businesses as of March 31, 2022 and December 31, 2021: Amount (in thousands) Operation and Regulatory Jurisdiction March 31, 2022 December 31, 2021 Status Eastern Shore (FERC) $ 34,190 $ 34,190 Will be addressed in Eastern Shore's next rate case filing. Delaware Division (Delaware PSC) $ 12,551 $ 12,591 PSC approved amortization of ADIT in January 2019. Maryland Division (Maryland PSC) $ 3,806 $ 3,840 PSC approved amortization of ADIT in May 2018. Sandpiper Energy (Maryland PSC) $ 3,641 $ 3,656 PSC approved amortization of ADIT in May 2018. Chesapeake Florida Gas Division/Central Florida Gas (Florida PSC) $ 7,986 $ 8,032 PSC issued order authorizing amortization and retention of net ADIT liability by the Company in February 2019. FPU Natural Gas (excludes Fort Meade and Indiantown) (Florida PSC) $ 19,086 $ 19,189 Same treatment on a net basis as Chesapeake Florida Gas Division (above). FPU Fort Meade and Indiantown Divisions (Florida PSC) $ 268 $ 271 Same treatment on a net basis as Chesapeake Florida Gas Division (above). FPU Electric (Florida PSC) $ 5,176 $ 5,237 In January 2019, PSC issued order approving amortization of ADIT through purchased power cost recovery, storm reserve and rates. Elkton Gas (Maryland PSC) $ 1,091 $ 1,091 PSC approved amortization of ADIT in March 2018. 6. Environmental Commitments and Contingencies We are subject to federal, state and local laws and regulations governing environmental quality and pollution control. These laws and regulations require us to remove or remediate, at current and former operating sites, the effect on the environment of the disposal or release of specified substances. MGP Sites 13 Table of Contents We have participated in the investigation, assessment or remediation of, and have exposures at, seven former MGP sites. We have received approval for recovery of clean-up costs in rates for sites located in Salisbury, Maryland; Seaford, Delaware; and Winter Haven, Key West, Pensacola, Sanford and West Palm Beach, Florida. As of March 31, 2022 and December 31, 2021, we had approximately $ 4.9 million and $ 5.2 million, respectively, in environmental liabilities related to the former MGP sites. As of March 31, 2022 and December 31, 2021, we have cumulative regulatory assets of $ 1.1 million and $ 1.3 million, respectively, in regulatory assets for future recovery of environmental costs for customers. Specific to FPU’s four MGP sites in Key West, Pensacola, Sanford and West Palm Beach. FPU has approval to recover, from insurance and through customer rates, up to $ 14.0 million of its environmental costs related to its MGP sites. As of March 31, 2022 and December 31, 2021, we had recovered approximately $ 13.0 million and $ 12.9 million, respectively, leaving approximately $ 1.0 million and $ 1.1 million, respectively, in regulatory assets for future recovery of environmental costs from FPU’s customers. Environmental liabilities for our MGP sites are recorded on an undiscounted basis based on the estimate of future costs provided by independent consultants. We continue to expect that all costs related to environmental remediation and related activities, including any potential future remediation costs for which we do not currently have approval for regulatory recovery, will be recoverable from customers through rates. Remediation is ongoing for the MGPs in Winter Haven and Key West in Florida and in Seaford, Delaware and the remaining clean-up costs are estimated to be between $ 0.3 million to $ 0.9 million for these three sites. The Environmental Protection Agency has approved a "site-wide ready for anticipated use" status for the Sanford, Florida MGP site, which is the final step before delisting a site. The remaining remediation expenses for the Sanford MGP site are immaterial. The following is a summary of our remediation status and estimated costs to implement clean-up of our West Palm Beach Florida site: Status Estimated Clean-Up Costs Remedial actions approved by the Florida Department of Environmental Protection have been implemented on the east parcel of the site. Similar remedial actions have been initiated on the site's west parcel, and construction of active remedial systems are expected be completed in 2022. Between $3.3 million to $14.2 million, including costs associated with the relocation of FPU’s operations at this site, and any potential costs associated with future redevelopment of the properties. 7. Other Commitments and Contingencies Natural Gas, Electric and Propane Supply In March 2020, our Delmarva Peninsula natural gas distribution operations entered into asset management agreements with a third party to manage their natural gas transportation and storage capacity. The agreements were effective as of April 1, 2020 and expire in March 2023. FPU natural gas distribution operations and Eight Flags have separate asset management agreements with Emera Energy Services, Inc. to manage their natural gas transportation capacity. These agreements are for a 10 -year term that commenced in November 2020 and expire in October 2030. Chesapeake Utilities' Florida Division has firm transportation service contracts with FGT and Gulfstream. Pursuant to a capacity release program approved by the Florida PSC, all of the capacity under these agreements has been released to various third parties. Under the terms of these capacity release agreements, Chesapeake Utilities is contingently liable to FGT and Gulfstream should any party, that acquired the capacity through release, fail to pay the capacity charge. To date, Chesapeake Utilities has not been required to make a payment resulting from this contingency. FPU’s electric supply contracts require FPU to maintain an acceptable standard of creditworthiness based on specific financial ratios. FPU’s agreement with Florida Power & Light Company requires FPU to meet or exceed a debt service coverage ratio of 1.25 times based on the results of the prior 12 months. If FPU fails to meet this ratio, it must provide an irrevocable letter of credit or pay all amounts outstanding under the agreement within five business days. FPU’s electric supply agreement with Gulf Power requires FPU to meet the following ratios based on the average of the prior 14 Table of Contents six quarters: (a) funds from operations interest coverage ratio (minimum of two times), and (b) total debt to total capital (maximum of 65 percent). If FPU fails to meet the requirements, it has to provide the supplier a written explanation of actions taken, or proposed to be taken, to become compliant. Failure to comply with the ratios specified in the Gulf Power agreement could also result in FPU having to provide an irrevocable letter of credit. As of March 31, 2022, FPU was in compliance with all of the requirements of its fuel supply contracts. Eight Flags provides electricity and steam generation services through its CHP plant located on Amelia Island, Florida. In June 2016, Eight Flags began selling power generated from the CHP plant to FPU pursuant to a 20 -year power purchase agreement for distribution to our electric customers. In July 2016, Eight Flags also started selling steam, pursuant to a separate 20 -year contract, to the landowner on which the CHP plant is located. The CHP plant is powered by natural gas transported by FPU through its distribution system and Peninsula Pipeline through its intrastate pipeline. Corporate Guarantees 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, 2022 was $ 20.0 million. The aggregate amount guaranteed at March 31, 2022 was approximately $ 13.1 million with the guarantees expiring on various dates through March 30, 2023. As of March 31, 2022, we have issued letters of credit totaling approximately $ 5.3 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, the capacity agreement between NEXUS and Aspire, and our current and previous primary insurance carriers. These letters of credit have various expiration dates through October 25, 2022. There have been no draws on these letters of credit as of March 31, 2022. 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. 8. Segment Information We use the management approach to identify operating segments. We organize our business around differences in regulatory environment and the operating results of each segment are regularly reviewed by the chief operating decision maker, our Chief Executive Officer, in order to make decisions about resources and to assess performance. Our operations are entirely domestic and are comprised of two reportable segments: • Regulated Energy . Includes energy distribution and transmission services (natural gas distribution, natural gas transmission and electric distribution operations). All operations in this segment are regulated, as to their rates and services, by the PSC having jurisdiction in each operating territory or by the FERC in the case of Eastern Shore. • Unregulated Energy. Includes energy transmission, energy generation (the operations of our Eight Flags' CHP plant), propane operations, and mobile compressed natural gas distribution and pipeline solutions subsidiary. Also included in this segment are other unregulated energy services, such as energy-related merchandise sales and heating, ventilation and air conditioning, plumbing and electrical services. These operations are unregulated as to their rates and services. The remainder of our operations is presented as “Other businesses and eliminations,” which consists of unregulated subsidiaries that own real estate leased to Chesapeake Utilities, as well as certain corporate costs not allocated to other operations. The following table presents financial information about our reportable segments: 15 Table of Contents Three Months Ended March 31, 2022 2021 (in thousands) Operating Revenues, Unaffiliated Customers Regulated Energy $ 124,058 $ 120,721 Unregulated Energy 98,822 70,466 Total operating revenues, unaffiliated customers $ 222,880 $ 191,187 Intersegment Revenues (1) Regulated Energy $ 3,833 $ 476 Unregulated Energy 1,996 4,293 Other businesses 606 132 Total intersegment revenues $ 6,435 $ 4,901 Operating Income Regulated Energy $ 34,681 $ 32,637 Unregulated Energy 20,046 18,983 Other businesses and eliminations 138 ( 23 ) Operating income 54,865 51,597 Other income (expense), net 913 375 Interest charges 5,339 5,105 Income before Income Taxes 50,439 46,867 Income Taxes 13,506 12,401 Net Income $ 36,933 $ 34,466 (1) All significant intersegment revenues are billed at market rates and have been eliminated from consolidated operating revenues. (in thousands) March 31, 2022 December 31, 2021 Identifiable Assets Regulated Energy segment $ 1,620,209 $ 1,629,191 Unregulated Energy segment 440,936 439,114 Other businesses and eliminations 48,484 46,564 Total identifiable assets $ 2,109,629 $ 2,114,869 16 Table of Contents 9. Stockholders' Equity Common Stock Issuances In June 2020, we filed a shelf registration statement with the SEC to facilitate the issuance of our common stock from time to time. In August 2020, we filed a prospectus supplement under the shelf registration statement for an ATM equity program under which we may issue and sell shares of our common stock up to an aggregate offering price of $ 75.0 million. We maintain an effective shelf registration statement with the SEC for the issuance of shares under our DRIP. Depending on our capital needs and subject to market conditions, in addition to other possible debt and equity offerings, we may issue additional shares under the direct stock purchase component of the DRIP. In 2021, we issued just over 0.1 million shares at an average price per share of $ 125.71 and received net proceeds of $ 15.2 million under the DRIP. In the first three months of 2022, we issued less than 0.1 million shares at an average price per share of $ 137.45 and received net proceeds of $ 3.2 million under the DRIP. We used the net proceeds, after fees, 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. Accumulated Other Comprehensive Gain (Loss) Defined benefit pension and postretirement plan items, unrealized gains (losses) of our propane swap agreements designated as commodity contracts cash flow hedges, and the unrealized gains (losses) of our interest rate swap agreements designated as cash flow hedges are the components of our accumulated other comprehensive income (loss). The following tables present the changes in the balance of accumulated other comprehensive gain (loss) as of March 31, 2022 and 2021. All amounts in the following tables are presented net of tax. Defined Benefit Commodity Interest Rate Pension and Contracts Swap Postretirement Cash Flow Cash Flow Plan Items Hedges Hedges (1) Total (in thousands) As of December 31, 2021 $ ( 3,268 ) $ 4,571 $ — $ 1,303 Other comprehensive income before reclassifications — 2,498 — 2,498 Amounts reclassified from accumulated other comprehensive income/(loss) 18 ( 1,969 ) — ( 1,951 ) Net current-period other comprehensive income 18 529 — 547 As of March 31, 2022 $ ( 3,250 ) $ 5,100 $ — $ 1,850 (in thousands) As of December 31, 2020 $ ( 5,146 ) $ 2,309 $ ( 28 ) $ ( 2,865 ) Other comprehensive income before reclassifications — 2,371 1 2,372 Amounts reclassified from accumulated other comprehensive income/(loss) 63 ( 2,205 ) ( 3 ) ( 2,145 ) Net prior-period other comprehensive income/(loss) 63 166 ( 2 ) 227 As of March 31, 2021 $ ( 5,083 ) $ 2,475 $ ( 30 ) $ ( 2,638 ) ( 1) All of our interest rate swaps expired at December 31, 2021 . The following table presents amounts reclassified out of accumulated other comprehensive income (loss) for the three months ended March 31, 2022 and 2021. Deferred gains or losses for our commodity contracts and interest rate swap cash flow hedges are recognized in earnings upon settlement. 17 Table of Contents Three Months Ended March 31, 2022 2021 (in thousands) Amortization of defined benefit pension and postretirement plan items: Prior service credit (1) $ 19 $ 19 Net loss (1) ( 43 ) ( 104 ) Total before income taxes ( 24 ) ( 85 ) Income tax benefit 6 22 Net of tax $ ( 18 ) $ ( 63 ) Gains on commodity contracts cash flow hedges: Propane swap agreements (2) $ 2,721 $ 3,047 Income tax expense ( 752 ) ( 842 ) Net of tax $ 1,969 $ 2,205 Gains on interest rate swap cash flow hedges: Interest rate swap agreements $ — $ 4 Income tax expense — ( 1 ) Net of tax $ — $ 3 Total reclassifications for the period $ 1,951 $ 2,145 (1) These amounts are included in the computation of net periodic costs (benefits). See Note 10 , Employee Benefit Plans , for additional details. (2) These amounts are included in the effects of gains and losses from derivative instruments. See Note 13, Derivative Instruments , for additional details. Amortization of defined benefit pension and postretirement plan items are included in other expense, net gains and losses on propane swap agreements contracts are included in cost of sales, the realized gain or loss on interest rate swap agreements is recognized as a component of interest charges in the accompanying condensed consolidated statements of income. The income tax benefit is included in income tax expense in the accompanying condensed consolidated statements of income. 18 Table of Contents 10. Employee Benefit Plans Net periodic benefit costs for our pension and post-retirement benefits plans for the three months ended March 31, 2022 and 2021 are set forth in the following tables: Chesapeake Pension Plan FPU Pension Plan Chesapeake SERP Chesapeake Postretirement Plan FPU Medical Plan For the Three Months Ended March 31, 2022 2021 2022 2021 2022 2021 2022 2021 2022 2021 (in thousands) Interest cost $ — $ 34 $ 449 $ 429 $ 13 $ 12 $ 6 $ 6 $ 6 $ 6 Expected return on plan assets — ( 40 ) ( 857 ) ( 830 ) — — — — — — Amortization of prior service credit — — — — — — ( 19 ) ( 19 ) — — Amortization of net (gain) loss — 60 124 155 7 7 12 8 — ( 2 ) Total periodic cost (benefit) $ — $ 54 $ ( 284 ) $ ( 246 ) $ 20 $ 19 $ ( 1 ) $ ( 5 ) $ 6 $ 4 In 2019, we began executing a de-risking strategy for the Chesapeake Pension Plan. In line with this strategy, we fully terminated the Chesapeake Pension Plan during the fourth quarter of 2021, and as of December 31, 2021, there were no remaining assets in the Chesapeake Pension Plan. Accordingly, a portion of the pension settlement expense associated with the termination was allocated to our Regulated Energy operations and was recorded as regulatory assets, previously approved in all of the impacted jurisdictions. The remaining portion of the pension settlement expense totaling $ 0.6 million was recorded in other expense in our consolidated statement of income in the fourth quarter 2021 which reflected the amount allocated to our Unregulated Energy operations or was deemed not recoverable through the regulatory process. The components of our net periodic costs have been recorded or reclassified to other expense, net in the condensed consolidated statements of income. Pursuant to their respective regulatory orders, FPU and Chesapeake Utilities continue to record, as a regulatory asset, a portion of their unrecognized postretirement benefit costs related to their regulated operations. The portion of the unrecognized pension and postretirement benefit costs related to FPU’s unregulated operations and Chesapeake Utilities' operations is recorded to accumulated other comprehensive income. The following tables present the amounts included in the regulatory asset and accumulated other comprehensive income that were recognized as components of net periodic benefit cost during the three months ended March 31, 2022 and 2021: For the Three Months Ended March 31, 2022 Chesapeake Pension Plan FPU Pension Plan Chesapeake SERP Chesapeake Postretirement Plan FPU Medical Plan Total (in thousands) Prior service credit $ — $ — $ — $ ( 19 ) $ — $ ( 19 ) Net loss — 124 7 12 — 143 Total recognized in net periodic benefit cost — 124 7 ( 7 ) — 124 Recognized from accumulated other comprehensive (income)/loss (1) — 24 7 ( 7 ) — 24 Recognized from regulatory asset — 100 — — — 100 Total $ — $ 124 $ 7 $ ( 7 ) $ — $ 124 19 Table of Contents For the Three Months Ended March 31, 2021 Chesapeake Pension Plan FPU Pension Plan Chesapeake SERP Chesapeake Postretirement Plan FPU Medical Plan Total (in thousands) Prior service credit $ — $ — $ — $ ( 19 ) $ — $ ( 19 ) Net loss 60 155 7 8 ( 2 ) 228 Total recognized in net periodic benefit cost 60 155 7 ( 11 ) ( 2 ) 209 Recognized from accumulated other comprehensive (income)/loss (1) 60 29 7 ( 11 ) — 85 Recognized from regulatory asset — 126 — — ( 2 ) 124 Total $ 60 $ 155 $ 7 $ ( 11 ) $ ( 2 ) $ 209 (1) See Note 9 , Stockholders' Equity . During the three months ended March 31, 2022, we did not contribute to the FPU Pension Plan. We expect to contribute approximately $ 0.3 million to the FPU Pension Plan during 2022, which represents the minimum annual contribution payments required. The Chesapeake SERP, the Chesapeake Postretirement Plan and the FPU Medical Plan are unfunded and are expected to be paid out of our general funds. Cash benefits paid under the Chesapeake SERP for the three months ended March 31, 2022 were immaterial. We expect to pay total cash benefits of approximately $ 0.2 million under the Chesapeake SERP in 2022. Cash benefits paid under the Chesapeake Postretirement Plan, primarily for medical claims for the three months ended March 31, 2022 were $ 0.1 million. We estimate that approximately $ 0.1 million will be paid for such benefits under the Chesapeake Postretirement Plan in 2022. Cash benefits paid under the FPU Medical Plan, primarily for medical claims for the three months ended March 31, 2022, were immaterial. We estimate that approximately $ 0.1 million will be paid for such benefits under the FPU Medical Plan in 2022. 11. Investments The investment balances at March 31, 2022 and December 31, 2021, consisted of the following: (in thousands) March 31, 2022 December 31, 2021 Rabbi trust (associated with the Non-Qualified Deferred Compensation Plan) $ 11,534 $ 12,069 Investments in equity securities 27 26 Total $ 11,561 $ 12,095 We classify these investments as trading securities and report them at their fair value. For the three months ended March 31, 2022 and 2021, we recorded a net unrealized loss of $ 0.5 million and a net unrealized gain of $ 0.4 million, respectively, in other income, net in the condensed consolidated statements of income related to these investments. For the investment in the Rabbi Trust, we also have recorded an associated liability, which is included in other pension and benefit costs in the consolidated balance sheets and is adjusted each period for the gains and losses incurred by the investments in the Rabbi Trust. 12. Share-Based Compensation Our non-employee directors and key employees are granted share-based awards through our SICP. We record these share-based awards as compensation costs over the respective service period for which services are received in exchange for an award of equity or equity-based compensation. The compensation cost is based primarily on the fair value of the shares awarded, using the estimated fair value of each share on the date it was granted and the number of shares to be issued at the end of the service period. The table below presents the amounts included in net income related to share-based compensation expense for the three months ended March 31, 2022 and 2021: 20 Table of Contents Three Months Ended March 31, 2022 2021 (in thousands) Awards to non-employee directors $ 234 $ 188 Awards to key employees 1,979 1,688 Total compensation expense 2,213 1,876 Less: tax benefit ( 571 ) ( 487 ) Share-based compensation amounts included in net income $ 1,642 $ 1,389 Non-employee Directors Shares granted to non-employee directors are issued in advance of the directors’ service periods and are fully vested as of the grant date. We record a deferred expense equal to the fair value of the shares issued and amortize the expense equally over a service period of one year. In May 2021, after the most recent election of directors, each of our non-employee directors received an annual retainer of 683 shares of common stock under the SICP for service as a director through the 2022 Annual Meeting of Stockholders; accordingly, 6,830 shares, with a weighted average fair value of $ 117.11 per share, were issued and vested in 2021. On October 15, 2021, a newly appointed member of the Board of Directors received a pro-rated retainer of 342 shares of common stock under the SICP to serve as a non-employee director through the 2022 Annual Meeting of Stockholders. These shares vested immediately upon issuance in October 2021, had a weighted average fair value of $ 129.09 per share, and will be expensed over the remaining service period ending on the date of the 2022 Annual Meeting of Stockholders. At March 31, 2022, there was approximately $ 0.1 million of unrecognized compensation expense related to shares granted to non-employee directors. This expense will be recognized over the remaining service period ending in May of 2022. Key Employees The table below presents the summary of the stock activity for awards to key employees for the three months ended March 31, 2022: Number of Shares Weighted Average Fair Value Outstanding—December 31, 2021 197,398 $ 94.15 Granted 63,382 $ 123.68 Vested ( 60,850 ) $ 90.60 Expired 557 $ 91.42 Outstanding—March 31, 2022 200,487 $ 105.32 During the three months ended March 31, 2022, we granted awards of 63,382 shares of common stock to key employees under the SICP, including awards granted in February 2022 and to key employees appointed in officer positions. The shares granted are multi-year awards that will vest no later than the three-year service period ending December 31, 2024. All of these stock awards are earned based upon the successful achievement of long-term financial results, which are comprised of market-based and performance-based conditions or targets. The fair value of each performance-based condition or target is equal to the market price of our common stock on the grant date of each award. For the market-based conditions, we used the Monte Carlo valuation to estimate the fair value of each market-based award granted. In March 2022, upon the election by certain of our executive officers, we withheld shares with a value at least equivalent to each such executive officer’s minimum statutory obligation for applicable income and other employment taxes related to shares that vested and were paid in February 2022 for the performance period ended December 31, 2021, paid the balance of such awarded shares to each such executive officer net cash remitted to the appropriate taxing authorities. We withheld 21,832 shares, based on the value of the shares on their award date. Total combined payments for the employees’ tax obligations to the taxing authorities were approximately $ 2.8 million. 21 Table of Contents At March 31, 2022, the aggregate intrinsic value of the SICP awards granted to key employees was approximately $ 27.6 million. At March 31, 2022, there was approximately $ 9.4 million of unrecognized compensation cost related to these awards, which will be recognized through 2024. Stock Options There were no stock options outstanding or issued during the three months ended March 31, 2022 and 2021. 13. Derivative Instruments We use derivative and non-derivative contracts to manage risks related to obtaining adequate supplies and the price fluctuations of natural gas, electricity and propane and to mitigate interest rate risk. Our natural gas, electric and propane distribution operations have entered into agreements with suppliers to purchase natural gas, electricity and propane for resale to our customers. Our natural gas gathering and transmission company has entered into contracts with producers to secure natural gas to meet its obligations. Purchases under these contracts typically either do not meet the definition of derivatives or are considered “normal purchases and normal sales” and are accounted for on an accrual basis. Our propane distribution operations may also enter into fair value hedges of their inventory or cash flow hedges of their future purchase commitments in order to mitigate the impact of wholesale price fluctuations. Occasionally, we may enter into interest rate swap agreements to mitigate risk associated with changes in short-term borrowing rates. As of March 31, 2022, our natural gas and electric distribution operations did not have any outstanding derivative contracts. Volume of Derivative Activity As of March 31, 2022, the volume of our commodity derivative contracts were as follows: Business unit Commodity Contract Type Quantity hedged (in millions) Designation Longest Expiration date of hedge Sharp Propane (gallons) Purchases 15.5 Cash flows hedges June 2024 Sharp Propane (gallons) Sales 3.8 Cash flows hedges March 2023 Sharp entered into futures and swap agreements to mitigate the risk of fluctuations in wholesale propane index prices associated with the propane volumes that are expected to be purchased and/or sold during the heating season. Under the futures and swap agreements, Sharp will receive the difference between (i) the index prices (Mont Belvieu prices in March 2022 through June 2024) and (ii) the per gallon propane swap prices, to the extent the index prices exceed the contracted prices. If the index prices are lower than the contract prices, Sharp will pay the difference. We designated and accounted for the propane swaps as cash flows hedges. The change in the fair value of the swap agreements is recorded as unrealized gain (loss) in other comprehensive income (loss) and later recognized in the statement of income in the same period and in the same line item as the hedged transaction. We expect to reclassify approximately $ 4.3 million from accumulated other comprehensive income to earnings during the next 12 -month period ended March 31, 2023. Interest Rate Swap Activities We manage interest rate risk by entering into derivative contracts to hedge the variability in cash flows attributable to changes in the short-term borrowing rates. In the fourth quarter of 2020, we entered into two $ 30.0 million interest rate swaps with a total notional amount of $ 60.0 million through September and December 2021 with pricing of 0.205 and 0.20 percent, respectively, 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 swaps were cash settled monthly as the counter-party pays us the 30-day LIBOR rate less the fixed rate. At December 31, 2021 all of our interest rate swaps had expired and we have not entered into any new derivative contracts associated with our outstanding short-term borrowings. We designated and accounted for interest rate swaps as cash flows hedges. Accordingly, unrealized gains and losses associated with the interest rate swaps were recorded as a component of accumulated other comprehensive income 22 Table of Contents (loss). When the interest rate swaps settled, the realized gain or loss were recorded in the income statement and recognized as a component of interest charges. Broker Margin Futures exchanges have contract specific margin requirements that require the posting of cash or cash equivalents relating to traded contracts. Margin requirements consist of initial margin that is posted upon the initiation of a position, maintenance margin that is usually expressed as a percent of initial margin, and variation margin that fluctuates based on the daily mark-to-market relative to maintenance margin requirements. We currently maintain a broker margin account for Sharp as follows: (in thousands) Balance Sheet Location March 31, 2022 December 31, 2021 Sharp Other Accrued Liabilities $ 3,669 $ 4,081 Financial Statements Presentation The following tables present information about the fair value and related gains and losses of our derivative contracts. We did not have any derivative contracts with a credit-risk-related contingency. Fair values of the derivative contracts recorded in the consolidated balance sheets as of March 31, 2022 and December 31, 2021, are as follows: Derivative Assets Fair Value As Of (in thousands) Balance Sheet Location March 31, 2022 December 31, 2021 Derivatives not designated as hedging instruments Propane swap agreements Derivative assets, at fair value $ — $ 16 Derivatives designated as cash flow hedges Propane swap agreements Derivative assets, at fair value 7,516 7,060 Total Derivative Assets $ 7,516 $ 7,076 Derivative Liabilities Fair Value As Of (in thousands) Balance Sheet Location March 31, 2022 December 31, 2021 Derivatives designated as cash flow hedges Propane swap agreements Derivative liabilities, at fair value $ 484 $ 743 23 Table of Contents The effects of gains and losses from derivative instruments on the condensed consolidated financial statements are as follows: Amount of Gain (Loss) on Derivatives: Location of Gain For the Three Months Ended March 31, (in thousands) (Loss) on Derivatives 2022 2021 Derivatives not designated as hedging instruments Propane swap agreements Unregulated propane and natural gas costs $ 56 $ — Derivatives designated as fair value hedges Propane put options Unregulated propane and natural gas costs — ( 24 ) Derivatives designated as cash flow hedges Propane swap agreements Revenues ( 826 ) — Propane swap agreements Unregulated propane and natural gas costs 3,547 3,047 Propane swap agreements Other comprehensive income (loss) 714 229 Interest rate swap agreements Interest expense — 4 Interest rate swap agreements Other comprehensive income (loss) — ( 3 ) Total $ 3,491 $ 3,253 24 Table of Contents 14. Fair Value of Financial Instruments GAAP establishes a fair value hierarchy that prioritizes the inputs to valuation methods used to measure fair value. The three levels of the fair value hierarchy are the following: Fair Value Hierarchy Description of Fair Value Level Fair Value Technique Utilized Level 1 Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities Investments - equity securities - The fair values of these trading securities are recorded at fair value based on unadjusted quoted prices in active markets for identical securities. Investments - mutual funds and other - The fair values of these investments, comprised of money market and mutual funds, are recorded at fair value based on quoted net asset values of the shares. Level 2 Quoted prices in markets that are not active, or inputs which are observable, either directly or indirectly, for substantially the full term of the asset or liability Derivative assets and liabilities - The fair value of the propane put/call options, propane and interest rate swap agreements are measured using market transactions for similar assets and liabilities in either the listed or over-the-counter markets. Level 3 Prices or valuation techniques requiring inputs that are both significant to the fair value measurement and unobservable (i.e. supported by little or no market activity) Investments - guaranteed income fund - The fair values of these investments are recorded at the contract value, which approximates their fair value. Financial Assets and Liabilities Measured at Fair Value The following tables summarize our financial assets and liabilities that are measured at fair value on a recurring basis and the fair value measurements, by level, within the fair value hierarchy as of March 31, 2022 and December 31, 2021: Fair Value Measurements Using: As of March 31, 2022 Fair Value Quoted Prices in Active Markets (Level 1) Significant Other Observable Inputs (Level 2) Significant Unobservable Inputs (Level 3) (in thousands) Assets: Investments—equity securities $ 27 $ 27 $ — $ — Investments—guaranteed income fund 2,104 — — 2,104 Investments—mutual funds and other 9,430 9,430 — — Total investments 11,561 9,457 — 2,104 Derivative assets 7,516 — 7,516 — Total assets $ 19,077 $ 9,457 $ 7,516 $ 2,104 Liabilities: Derivative liabilities $ 484 $ — $ 484 $ — 25 Table of Contents Fair Value Measurements Using: As of December 31, 2021 Fair Value Quoted Prices in Active Markets (Level 1) Significant Other Observable Inputs (Level 2) Significant Unobservable Inputs (Level 3) (in thousands) Assets: Investments—equity securities $ 26 $ 26 $ — $ — Investments—guaranteed income fund 2,036 — — 2,036 Investments—mutual funds and other 10,033 10,033 — — Total investments 12,095 10,059 — 2,036 Derivative assets 7,076 — 7,076 — Total assets $ 19,171 $ 10,059 $ 7,076 $ 2,036 Liabilities: Derivative liabilities $ 743 $ — $ 743 $ — The following table sets forth the summary of the changes in the fair value of Level 3 investments for the three months ended March 31, 2022 and 2021: Three months ended March 31, 2022 2021 (in thousands) Beginning Balance $ 2,036 $ 2,156 Purchases and adjustments 131 22 Transfers — — Distribution ( 71 ) ( 38 ) Investment income 8 8 Ending Balance $ 2,104 $ 2,148 Investment income from the Level 3 investments is reflected in other expense, (net) in the condensed consolidated statements of income. At March 31, 2022, there were no non-financial assets or liabilities required to be reported at fair value. We review our non-financial assets for impairment at least on an annual basis, as required. Other Financial Assets and Liabilities Financial assets with carrying values approximating fair value include cash and cash equivalents and accounts receivable. Financial liabilities with carrying values approximating fair value include accounts payable and other accrued liabilities and short-term debt. The fair value of cash and cash equivalents is measured using the comparable value in the active market and approximates its carrying value (Level 1 measurement). The fair value of short-term debt approximates the carrying value due to its near-term maturities and because interest rates approximate current market rates (Level 3 measurement). At March 31, 2022, long-term debt, which includes current maturities but excludes debt issuance costs, had a carrying value of approximately $ 618.6 million, compared to the estimated fair value of $ 584.2 million. At December 31, 2021, long-term debt, which includes the current maturities but excludes debt issuance costs, had a carrying value of approximately $ 568.8 million, compared to a fair value of approximately $ 597.2 million. The fair value was calculated using a discounted cash flow methodology that incorporates a market interest rate based on published corporate borrowing rates for debt instruments with similar terms and average maturities, and with adjustments for duration, optionality, and risk profile. The valuation technique used to estimate the fair value of long-term debt would be considered a Level 3 measurement. 26 Table of Contents 15. Long-Term Debt Our outstanding long-term debt is shown below: March 31, December 31, (in thousands) 2022 2021 Uncollateralized senior notes: 5.93% note, due October 31, 2023 $ 6,000 $ 6,000 5.68% note, due June 30, 2026 14,500 14,500 6.43% note, due May 2, 2028 4,900 4,900 3.73% note, due December 16, 2028 14,000 14,000 3.88% note, due May 15, 2029 40,000 40,000 3.25% note, due April 30, 2032 70,000 70,000 3.48% note, due May 31, 2038 50,000 50,000 3.58% note, due November 30, 2038 50,000 50,000 3.98% note, due August 20, 2039 100,000 100,000 2.98% note, due December 20, 2034 70,000 70,000 3.00% note, due July 15, 2035 50,000 50,000 2.96% note, due August 15, 2035 40,000 40,000 2.49% notes Due January 25, 2037 50,000 50,000 2.95% notes Due March 15, 2042 50,000 — Equipment security note 2.46% note, due September 24, 2031 9,165 9,378 Less: debt issuance costs ( 970 ) ( 913 ) Total long-term debt 617,595 567,865 Less: current maturities ( 19,717 ) ( 17,962 ) Total long-term debt, net of current maturities $ 597,878 $ 549,903 Notes Purchase Agreement On March 15, 2022 we issued 2.95 percent Senior Notes due March 15, 2042 to MetLife in the aggregate principal amount of $ 50 million. We used the proceeds received from the issuances of the Senior Notes to reduce short-term borrowings under the revolving credit facility and to fund capital expenditures. These Senior Notes have similar covenants and default provisions as the existing senior notes, and have an annual principal payment beginning in the eleventh year after the issuance. Equipment Security Note On September 24, 2021, we entered into an Equipment Financing Agreement with Banc of America Leasing & Capital, LLC to issue $ 9.6 million in sustainable financing to finance the purchase of equipment by our subsidiary, Marlin Gas Services. The equipment security note bears a 2.46 percent interest rate and has a term of ten years. Under the terms of the agreement, we granted a security interest in the equipment to the lender, to serve as collateral. Shelf Agreements We have entered into Shelf Agreements with Prudential and MetLife, whom are under no obligation to purchase any unsecured debt. The following table summarizes our Shelf Agreements at March 31, 2022: 27 Table of Contents (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 ( 50,000 ) — 100,000 Total Shelf Agreements as of March 31, 2022 $ 520,000 $ ( 270,000 ) $ — $ 250,000 (1) The Prudential and MetLife Shelf Agreements expire in April 2023 and May 2023, respectively. 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. 16. Short-Term Borrowings We are authorized by our Board of Directors to borrow up to $ 400.0 million of short-term debt, as required. At March 31, 2022 and December 31, 2021, we had $ 140.9 million and $ 221.6 million, respectively, of short-term borrowings outstanding at a weighted average interest rate of 1.17 percent and 0.83 percent, respectively. In August 2021, we amended and restated our Revolver into a multi-tranche facility totaling $ 400.0 million with multiple participating lenders. The two tranches of the facility consist of a $ 200.0 million 364-day short-term debt tranche and a $ 200.0 million five-year tranche, both of which have three (3) one-year extension options, which can be authorized by our Chief Financial Officer. We are eligible to establish the repayment term for individual borrowings under the five year tranche of the facility and to the extent that an individual loan under the revolver exceeded 12 months, the outstanding balance would be classified as a component of long-term debt. 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, 2022, we are in compliance with this covenant. The 364-day tranche of the Revolver expires in August 2022 and the five-year tranche expires in August 2026 both are 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 both tranches of 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 a total indebtedness to total capitalization ratio. As of March 31, 2022, the pricing under the 364-day tranche of the Revolver does not include an unused commitment fee and maintains an interest rate of 0.70 percent over LIBOR. As of March 31, 2022, the pricing under the five-year tranche of the Revolver included an unused commitment fee of 0.09 percent and an interest rate of 0.95 percent over LIBOR. Our total available credit under the Revolver at March 31, 2022 was $ 256.3 million. As of March 31, 2022, we had issued $ 5.3 million in letters of credit to various counterparties under the syndicated Revolvers. These letters of credit are not included in the outstanding short-term borrowings and we do not anticipate that 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 two $ 30.0 million interest rate swaps with a notional amount of $ 60.0 million through September and December 2021 at a pricing of 0.205 and 0.20 percent, respectively. 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. At December 31, 2021, all of our interest rate swaps had expired and we have not entered into any new derivative contracts associated with our outstanding short-term borrowings. 17. Leases We have entered into lease arrangements for office space, land, equipment, pipeline facilities and warehouses. These lease arrangements enable us to better conduct business operations in the regions in which we operate. Office space is 28 Table of Contents leased to provide adequate workspace for our employees in several locations throughout our service territories. We lease land at various locations throughout our service territories to enable us to inject natural gas into underground storage and distribution systems, for bulk storage capacity, for our propane operations and for storage of equipment used in repairs and maintenance of our infrastructure. We lease natural gas compressors to ensure timely and reliable transportation of natural gas to our customers. Additionally, we lease a pipeline to deliver natural gas to an industrial customer in Polk County, Florida. We also lease warehouses to store equipment and materials used in repairs and maintenance for our businesses. Some of our leases are subject to annual changes in the Consumer Price Index (“CPI”). While lease liabilities are not re-measured as a result of changes to the CPI, changes to the CPI are treated as variable lease payments and recognized in the period in which the obligation for those payments was incurred. A 100-basis-point increase in CPI would not have resulted in material additional annual lease costs. Most of our leases include options to renew, with renewal terms that can extend the lease term from one to 25 years or more. The exercise of lease renewal options is at our sole discretion. The amounts disclosed in our consolidated balance sheet at March 31, 2022, pertaining to the right-of-use assets and lease liabilities, are measured based on our current expectations of exercising our available renewal options. Our existing leases are not subject to any restrictions or covenants that would preclude our ability to pay dividends, obtain financing or enter into additional leases. As of March 31, 2022, we have not entered into any leases, which have not yet commenced, that would entitle us to significant rights or create additional obligations. The following table presents information related to our total lease cost included in our consolidated statements of income: Three Months Ended March 31, ( in thousands) Classification 2022 2021 Operating lease cost (1) Operations expense $ 651 $ 523 (1) Includes short-term leases and variable lease costs, which are immaterial . The following table presents the balance and classifications of our right of use assets and lease liabilities included in our condensed consolidated balance sheet at March 31, 2022 and December 31, 2021: (in thousands) Balance sheet classification March 31, 2022 December 31, 2021 Assets Operating lease assets Operating lease right-of-use assets $ 16,231 $ 10,139 Liabilities Current Operating lease liabilities Other accrued liabilities $ 2,552 $ 1,996 Noncurrent Operating lease liabilities Operating lease - liabilities 14,161 8,571 Total lease liabilities $ 16,713 $ 10,567 29 Table of Contents The following table presents our weighted-average remaining lease terms and weighted-average discount rates for our operating and financing leases at March 31, 2022 and December 31, 2021: March 31, 2022 December 31, 2021 Weighted-average remaining lease term ( in years ) Operating leases 8.76 8.10 Weighted-average discount rate Operating leases 3.4 % 3.6 % The following table presents additional information related to cash paid for amounts included in the measurement of lease liabilities included in our condensed consolidated statements of cash flows as of March 31, 2022 and 2021: Three Months Ended March 31, (in thousands) 2022 2021 Operating cash flows from operating leases $ 609 $ 471 The following table presents the future undiscounted maturities of our operating and financing leases at March 31, 2022 and for each of the next five years and thereafter: (in thousands) Operating Leases (1) Remainder of 2022 $ 2,195 2023 2,804 2024 2,592 2025 2,265 2026 1,758 2027 1,509 Thereafter 6,080 Total lease payments 19,203 Less: Interest ( 2,490 ) Present value of lease liabilities $ 16,713 (1) Operating lease payments include $ 2.1 million related to options to extend lease terms that are reasonably certain of being exercised. 30 Table of Contents