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, 2021, 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 (this " Quarterly Report") that do not directly or exclusively relate to historical facts. Such statements are “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, Section 21E of the Securities Exchange Act of 1934, as amended, and the Private Securities Litigation Reform Act of 1995. One can typically identify forward-looking statements by the use of forward-looking words, such as “project,” “believe,” “expect,” “anticipate,” “intend,” “plan,” “estimate,” “continue,” “potential,” “forecast” or other similar words, or future or conditional verbs such as “may,” “will,” “should,” “would” or “could.” These statements represent our intentions, plans, expectations, assumptions and beliefs about future financial performance, business strategy, projected plans and objectives of the Company. Forward-looking statements speak only as of the date they are made or as of the date indicated and we do not undertake any obligation to update forward-looking statements as a result of new information, future events or otherwise. These statements are subject to many risks and uncertainties. In addition to the risk factors described under Item 1A, Risk Factors in our 2021 Annual Report on Form 10-K, the following important factors, among others, could cause actual future results to differ materially from those expressed in the forward-looking statements: • state and federal legislative and regulatory initiatives that affect cost and investment recovery, have an impact on rate structures, and affect the speed and the degree to which competition enters the electric and natural gas industries; • the outcomes of regulatory, environmental and legal matters, including whether pending matters are resolved within current estimates and whether the related costs are adequately covered by insurance or recoverable in rates; • the impact of 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; 31 Table of Contents • the availability of, and competition for, qualified personnel supporting our natural gas, electricity and propane businesses; • the effect of accounting pronouncements issued periodically by accounting standard-setting bodies; and • the impacts associated with the outbreak of a pandemic, including the duration and scope of the pandemic the corresponding impact on our supply chains, our personnel, our contract counterparties, general economic conditions and growth, the financial markets and any costs to comply with governmental mandates. 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 regulated energy delivery foundation and investing in related businesses and services that provide opportunities for returns greater than traditional utility returns. We seek to identify and develop 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 to transform the Company with a focus on people, process, technology and organizational structure. • Identification and pursuit of additional pipeline expansions, including new interstate and intrastate transmission projects. • 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 sustainable 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. Earnings per share information is presented on a diluted basis, unless otherwise noted. The following discussions and those later in the document on operating income and segment results include the use of the term Adjusted Gross Margin which is a non-GAAP measure throughout our discussion on operating results. Adjusted Gross Margin is calculated by deducting the purchased cost of natural gas, propane and electricity and the cost of labor spent on direct revenue-producing activities from operating revenues. The costs included in Adjusted Gross Margin exclude depreciation and amortization and certain costs presented in operations and maintenance expenses in accordance with regulatory requirements. Adjusted Gross Margin should not be considered an alternative to Gross Margin under U.S. GAAP which is defined as the excess of sales over cost of goods sold. We believe that Adjusted 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 our unregulated energy operations. Our management uses Adjusted Gross Margin as one of the financial measures in assessing our business units’ performance. Other companies may calculate Adjusted Gross Margin in a different manner. The below tables reconcile Gross Margin as defined under GAAP to our non-GAAP measure of Adjusted Gross Margin for the three months ended March 31, 2022 and 2021: 32 Table of Contents For the Three Months Ended March 31, 2022 (in thousands) Regulated Energy Unregulated Energy Other and Eliminations Total Operating Revenues $ 127,891 $ 101,292 $ (6,303) $ 222,880 Cost of Sales: Natural gas, propane and electric costs (45,442) (58,008) 6,270 (97,180) Depreciation & amortization (13,086) (3,881) (10) (16,977) Operations & maintenance expense (1) (8,176) (7,063) (401) (15,640) Gross Margin (GAAP) 61,187 32,340 (444) 93,083 Operations & maintenance expense (1) 8,176 7,063 401 15,640 Depreciation & amortization 13,086 3,881 10 16,977 Adjusted Gross Margin (Non-GAAP) $ 82,449 $ 43,284 $ (33) $ 125,700 For the Three Months Ended March 31, 2021 (in thousands) Regulated Energy Unregulated Energy Other and Eliminations Total Operating Revenues $ 121,197 $ 74,759 $ (4,769) $ 191,187 Cost of Sales: Natural gas, propane and electric costs (43,043) (35,983) 4,729 (74,297) Depreciation & amortization (12,030) (3,323) (12) (15,365) Operations & maintenance expense (1) (8,335) (6,371) 352 (14,354) Gross Margin (GAAP) 57,789 29,082 300 87,171 Operations & maintenance expense (1) 8,335 6,371 (352) 14,354 Depreciation & amortization 12,030 3,323 12 15,365 Adjusted Gross Margin (Non-GAAP) $ 78,154 $ 38,776 $ (40) $ 116,890 (1) Operations & maintenance expenses within the Consolidated Statements of Income are presented in accordance with regulatory requirements and to provide comparability within the industry. Operations & maintenance expenses which are deemed to be directly attributable to revenue producing activities have been separately presented above in order to calculate Gross Margin as defined under U.S. GAAP. 2022 to 2021 Gross Margin (GAAP) Variance – Regulated Energy Gross Margin (GAAP) for the Regulated Energy segment for the first quarter of 2022 was $61.2 million, an increase of $3.4 million, or 5.9 percent, compared to the first quarter of 2021. Higher gross margin reflects continued pipeline expansions by Eastern Shore and Peninsula Pipeline, contributions from the new Guernsey pipeline, organic growth in the natural gas distribution businesses and operating results from the 2021 Escambia Meter acquisition. These increases were partially offset by higher depreciation and amortization related to recent capital investments and acquisitions as well as, increased payroll, benefits and other employee related costs. 2022 to 2021 Gross Margin (GAAP) Variance – Unregulated Energy Gross Margin (GAAP) for the Unregulated Energy segment for the first quarter of 2022 was $32.3 million, an increase of $3.3 million, or 11.2 percent, compared to the first quarter of 2021. Higher gross margin is a result of contributions from the propane acquisition of Diversified Energy completed in 2021, increased propane margins per gallon and service fees, along with higher rates for Aspire Energy. These increases were partially offset by higher depreciation, amortization and property taxes related to recent capital investments and acquisitions, increased payroll, benefits and employee related costs and higher vehicle expenses primarily driven by increased fuel costs. 33 Table of Contents Results of Operations for the Three Months Ended March 31, 2022 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 east coast of the United States 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 beginning in 2020 and persisted throughout 2021, though to a lesser extent. Chesapeake Utilities is considered an “essential business,” which allowed us to continue operational activities and construction projects while social distancing restrictions were in place. As of March 31, 2022, these 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 Safety and Health Administration, as new developments occur. Environmental, Social and Governance Initiatives ESG initiatives are at the core of our well-established culture, guiding our strategy and informing our ongoing business decisions. In February 2022, Chesapeake Utilities published its inaugural sustainability report. In the report, we outline our ESG commitments: • Chesapeake Utilities will be a leader in the transition to a lower carbon future. • We will continue to promote a diverse and inclusive workplace and further the sustainability of the communities we serve. • Our businesses will be operated with integrity and the highest ethical standards. These commitments guide our mission to deliver energy that makes life better for the people and communities we serve. They impact every aspect of our company and the relationships we have with our stakeholders. We encourage our investors to review the report and welcome feedback as we continue to enhance our ESG disclosures. During the first quarter, some of our most recent ESG advancements included: Environmental: • Successfully completed first test of hydrogen and natural gas blend to fuel our Eight Flags' CHP • Marlin Gas Services opened its first CNG fueling station near the Port of Savannah, capable of distributing RNG for fleet vehicles Social: • Named a 2022 Top Workplaces USA award recipient for mid-sized companies for the second consecutive year • Initiated two new Employee Resource Groups within the Company Governance: • Increased transparency with the enhancement of our director skills matrix in the Proxy Statement distributed to shareholders in March 2022 • In April 2022, we joined governance leaders as a member of the Advisory Board for the John L. Weinberg Center for Corporate Governance Additionally, we established our Environmental Sustainability Office ("ESO") and ESG Committee ("ESGC") during the first quarter of 2022. The ESO was established to identify and manage emission-reducing projects both internally, as well as those 34 Table of Contents that support our customers’ sustainability goals. The ESGC was established to bring together a cross-functional team of leaders across the organization to identify, assess, execute and advance the Company’s strategic ESG initiatives. We look forward to highlighting the progress of these initiatives in future sustainability reports. 35 Table of Contents Operational Highlights Our net income for the three months ended March 31, 2022 was $36.9 million, or $2.08 per share, compared to $34.5 million, or $1.96 per share, for the same quarter of 2021. Operating income for the three months ended March 31, 2022 increased by $3.3 million, or 6.3 percent, over the same period in 2021. Higher performance in the first quarter of 2022 was generated from the 2021 acquisitions of Diversified Energy and the Escambia Meter Station, continued pipeline expansion projects, increased investment in various regulated infrastructure programs, natural gas distribution growth, contributions from increased margins and fees from our propane distribution business and Aspire Energy. These increases were partially offset by reduced consumption in our propane operations in the first quarter compared to the same period in 2021. We recorded higher depreciation, amortization and property taxes related to recent capital investments and higher operating expenses associated primarily with growth initiatives and recent acquisitions including payroll, benefits and other employee-related expenses. Three Months Ended March 31, Increase 2022 2021 (decrease) (in thousands except per share) Adjusted Gross Margin Regulated Energy segment $ 82,449 $ 78,154 $ 4,295 Unregulated Energy segment 43,284 38,776 4,508 Other businesses and eliminations (33) (40) 7 Total Adjusted Gross Margin $ 125,700 $ 116,890 $ 8,810 Operating Income Regulated Energy segment $ 34,681 $ 32,637 $ 2,044 Unregulated Energy segment 20,046 18,983 1,063 Other businesses and eliminations 138 (23) 161 Total Operating Income 54,865 51,597 3,268 Other income, net 913 375 538 Interest charges 5,339 5,105 234 Income from Before Income Taxes 50,439 46,867 3,572 Income Taxes 13,506 12,401 1,105 Net Income $ 36,933 $ 34,466 $ 2,467 Basic Earnings Per Share of Common Stock $ 2.09 $ 1.97 $ 0.12 Diluted Earnings Per Share of Common Stock $ 2.08 $ 1.96 $ 0.12 36 Table of Contents Key variances between the first quarter of 2022 and the first quarter of 2021, included: (in thousands, except per share data) Pre-tax Income Net Income Earnings Per Share First Quarter of 2021 Reported Results $ 46,867 $ 34,466 $ 1.96 Increased (Decreased) Adjusted Gross Margins: Contributions from 2021 acquisitions* 4,225 3,093 0.17 Natural gas transmission service expansions* 1,227 899 0.05 Natural gas growth (excluding service expansions) 1,194 874 0.05 Higher operating results from Aspire Energy 929 680 0.04 Contributions from regulated infrastructure programs * 924 677 0.04 Increased propane margins and fees 722 529 0.03 Reduced customer consumption - primarily weather related (435) (318) (0.02) 8,786 6,434 0.36 (Increased) Decreased Operating Expenses (Excluding Natural Gas, Propane, and Electric Costs): Operating expenses from recent acquisitions (2,450) (1,794) (0.10) Depreciation, amortization and property tax costs (1,607) (1,176) (0.07) Payroll, benefits and other employee-related expenses (846) (620) (0.04) Vehicle expenses (255) (187) (0.01) (5,158) (3,777) (0.22) Interest charges (234) (172) (0.01) Net other changes 178 (18) 0.01 Change in shares outstanding due to 2021 and 2022 equity offerings — — (0.02) (56) (190) (0.02) First Quarter of 2022 Reported Results $ 50,439 $ 36,933 $ 2.08 *See the Major Projects and Initiatives tabl e. 37 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 table includes 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. Adjusted Gross Margin Three Months Ended Year Ended Estimate for March 31, December 31, Fiscal in thousands 2022 2021 2021 2022 2023 Pipeline Expansions: Western Palm Beach County, Florida Expansion (1) $ 1,307 1,167 $ 4,729 $ 5,227 $ 5,227 Del-Mar Energy Pathway (1) (2) 1,722 884 4,584 6,980 6,867 Guernsey Power Station 263 47 187 1,380 1,486 Southern Expansion — — — 375 2,344 Winter Haven Expansion 33 — — 401 976 Beachside Pipeline Expansion — — — — 1,825 North Ocean City Connector — — — — 400 Total Pipeline Expansions 3,325 2,098 9,500 14,363 19,125 Virtual Pipeline Solutions (CNG/RNG/LNG) 2,142 2,077 7,566 8,500 9,500 RNG Infrastructure 91 — — 1,000 1,000 Acquisitions: Diversified Energy 3,975 — 603 11,300 12,000 Escambia Meter Station 250 — 583 1,000 1,000 Total Acquisitions 4,225 — 1,186 12,300 13,000 Regulatory Initiatives: Florida GRIP 4,851 4,065 16,995 18,797 19,475 Capital Cost Surcharge Programs 517 136 1,199 2,018 1,936 Elkton Gas STRIDE Plan 74 — 26 241 354 Total Regulatory Initiatives 5,442 4,201 18,220 21,056 21,765 Total $ 15,225 $ 8,376 $ 36,472 $ 57,219 $ 64,390 (1) Includes adjusted gross margin generated from interim services. (2) Includes adjusted 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 with multiple phases placed into service leading up to the project's final completion in the fourth quarter of 2021. The project generated incremental adjusted gross margin of $0.1 million during the first quarter 2022 compared to the first quarter 2021. We estimate that the project will generate annual adjusted gross margin of $5.2 million in 2022 and beyond. Del-Mar Energy Pathway In December 2019, the FERC issued an order approving the construction of the Del-Mar Energy Pathway project. The project was placed into service in the fourth quarter of 2021. The new facilities: (i) include an additional 14,300 Dts/d of firm service to 38 Table of Contents four customers, (ii) provide additional natural gas transmission pipeline infrastructure in eastern Sussex County, Delaware, and (iii) represent the first extension of Eastern Shore’s pipeline system into Somerset County, Maryland. Including interim services in advance of completion, the project generated additional adjusted gross margin of $0.8 million for the three months ended March 31, 2022. The estimated annual adjusted gross margin from this project, including natural gas distribution service in Somerset County, Maryland, is approximately $7.0 million in 2022 and growing each year thereafter, as the distribution system serving Somerset County further expands to meet demand. Guernsey Power Station Guernsey Power Station and the Company's affiliate, Aspire Energy Express, entered into a precedent agreement for firm transportation capacity whereby Guernsey Power Station will construct a power generation facility and Aspire Energy Express will provide firm natural gas transportation service to this facility. Guernsey Power Station commenced construction of the project in October 2019. Aspire Energy Express completed construction of the gas transmission facilities in the fourth quarter of 2021. This project added $0.2 million of adjusted gross margin in the first quarter and is expected to produce adjusted gross margin of approximately $1.4 million in 2022 and $1.5 million in 2023 and beyond. Southern Expansion Pending FERC authorization, Eastern Shore plans to install a new natural gas driven compressor skid unit at its existing Bridgeville, Delaware compressor station that will provide 7,300 Dts of incremental firm transportation pipeline capacity. The project is currently estimated to go into service in the fourth quarter of 2022. Eastern Shore expects the Southern Expansion project to generate annual adjusted gross margin of $0.4 million in 2022 and $2.3 million in 2023 and thereafter. Winter Haven Expansion 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. The additional firm service will be used to support new incremental load due to growth in the area, including providing service, most immediately, to a new can manufacturing facility, as well as 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. We expect this expansion to generate additional adjusted gross margin of $0.4 million in 2022 and $1.0 million in 2023 and thereafter. Beachside Pipeline Expansion 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 approximately 11.3 miles of pipeline from its existing pipeline in the Sebastian, Florida, area east under the Intercoastal Waterway and southward on the barrier island. We expect this extension to generate additional annual adjusted gross margin of $1.8 million in 2023 and $2.5 million thereafter. North Ocean City Connector Pending receipt of the remaining permits, we expect to begin construction beginning in the second quarter of 2022 of an extension of service into North Ocean City, Maryland. The Delaware Division and Sandpiper plan to install approximately 5.7 miles of pipeline across southern Sussex County, Delaware to Fenwick Island, Delaware and Worcester County, Maryland. The project will produce additional capacity to serve new customers and reinforce our existing system in Ocean City, Maryland. We expect this expansion to generate additional annual adjusted gross margin of $0.4 million in 2023 and beyond. Virtual Pipeline Solutions (CNG, RNG & LNG) Marlin Gas Services provides CNG , RNG and liquefied natural gas (“LNG”) temporary hold services, contracted pipeline integrity services, emergency services for damaged pipelines and specialized gas services for customers who have unique requirements. For the quarter ended March 31, 2022, Marlin Gas Services generated additional adjusted gross margin of $0.1 million compared to the quarter ended March 31, 2021. We estimate that Marlin Gas Services will generate annual adjusted gross margin of approximately $8.5 million in 2022, and $9.5 million in 2023, with potential for additional growth in future years. Marlin Gas Services continues to actively expand the territories it serves, as well as leverage its patented technology to serve other markets, including pursuing liquefied natural gas transportation opportunities and renewable natural gas transportation opportunities from diverse supply sources to various pipeline interconnection points, as further outlined below. 39 Table of Contents RNG Infrastructure Noble Road Landfill RNG Project In October 2021, Aspire Energy completed construction of its Noble Road Landfill RNG pipeline project, a 33.1-mile pipeline, which transports RNG generated from the Noble Road landfill to Aspire Energy’s pipeline system, displacing conventionally produced natural gas. In conjunction with this expansion, Aspire Energy also upgraded an existing compressor station and installed two new metering and regulation sites. The RNG volume is expected to 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 RNG 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. Marlin Gas Services will transport the RNG created from the organic waste from the BDC facility to an Eastern Shore interconnection, where the sustainable fuel will be introduced into our transmission 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 RNG to our operations. As part of this partnership, we will transport the RNG produced at CleanBay's planned Westover, Maryland bio-refinery, to our natural gas infrastructure in the Delmarva Peninsula region. Eastern Shore and Marlin Gas Services, will transport the RNG 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 adjusted gross margin of $1.0 million in 2022 and beyond from renewable natural gas transportation. As we continue to finalize contract terms associated with some of these projects, additional information will be provided regarding incremental margin at a future time. Acquisitions Diversified Energy On December 15, 2021, Sharp Energy acquired the propane operating assets of Diversified Energy Company for approximately $37.5 million net of cash acquired. There are multiple strategic benefits to this acquisition including it: (i) expands the Company's propane territory into North Carolina and South Carolina while also expanding our existing footprint in Pennsylvania and Virginia, and (ii) 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 distribution of approximately 10.0 million gallons of propane annually. For the three months ended March 31, 2022, Diversified Energy contributed $4.0 million in adjusted gross margin and is expected to generate $11.3 million of additional adjusted gross margin in 2022 and $12.0 million in 2023. Escambia Meter Station In June 2021, Peninsula Pipeline purchased the Escambia Meter Station from Florida Power and Light and entered into a Transportation Service Agreement with Gulf Power Company to provide up to 530,000 Dts/d of firm service from an interconnect with FGT to Florida Power & Light’s Crist Lateral pipeline. The Florida Power & Light Crist Lateral provides gas supply to their natural gas fired power plant owned by Florida Power & Light in Pensacola, Florida. The Company generated $0.3 million in additional adjusted gross margin for the three months ended March 31, 2022 and estimates that this acquisition will generate adjusted gross margin of approximately $1.0 million in 2022 and beyond. 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, the Company has invested $189.5 million of capital expenditures to replace 348 miles of qualifying distribution mains, including $23.6 million of new pipes during 2021. GRIP generated additional gross margin of $0.8 million for the quarter ended March 31, 2022 compared to March 31, 2021. We are currently projecting to complete this program in 2022 and expect to generate adjusted gross margin of $18.8 million and $19.5 million in 2022 and 2023, respectively. The adjusted gross margin 40 Table of Contents on GRIP investments will continue until the Company requests the remaining net GRIP investment, and the associated expenses, be included in its next base rate proceeding. Capital Cost Surcharge Programs In December 2019, the FERC approved Eastern Shore’s capital cost surcharge to become 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. For the first quarter of 2022, there was $0.4 million of adjusted gross margin generated pursuant to the program. Eastern Shore expects to produce adjusted gross margin of approximately $2.0 million in 2022 and 2023 from relocation projects, which is ultimately dependent upon the timing of filings and the completion of construction. Elkton Gas STRIDE Plan In June 2021, we reached a settlement with the Maryland PSC Staff and the Maryland Office of the Peoples Counsel regarding a five-year plan to replace Aldyl-A pipelines and recover the associated costs of those replacements through a fixed charge rider.The STRIDE plan went into service in September 2021 and is expected to generate $0.2 million of adjusted gross margin in 2022 and $0.4 million annually thereafter. COVID-19 Regulatory Proceeding In October 2020, the Florida PSC approved a joint petition of our natural gas and electric distribution utilities in Florida to establish a regulatory asset to record incremental expenses incurred due to COVID-19. The regulatory asset will allow us to seek recovery of these costs in the next base rate proceedings. In November 2020, the Office of Public Counsel filed a protest to the order approving the establishment of this regulatory asset treatment. The Company’s Florida regulated business units reached a settlement with the Florida OPC in June 2021. The settlement allowed the business units to establish a regulatory asset of $2.1 million. This amount includes COVID-19 related incremental expenses for bad debt write-offs, personnel protective equipment, cleaning and business information services for remote work. Our Florida regulated business units will amortize the amount over two years beginning January 1, 2022 and recover the regulatory asset through the Purchased Gas Adjustment and Swing Service mechanisms for the natural gas business units and through the Fuel Purchased Power Cost Recovery clause for the electric division. This results in annual additional adjusted gross margin of $1.0 million that will be offset by a corresponding amortization of regulatory asset expense for both 2022 and 2023 . Florida Natural Gas Base Rate Proceeding On March 24, 2022, our Florida natural gas distribution business units, FPU, the Florida Division of Chesapeake Utilities, FPU – Indiantown Division, and FPU – Fort Meade (jointly, “the Florida Natural Gas Companies”), filed a joint notification with the Florida PSC, stating their intent to file a consolidated natural gas base rate proceeding and request consolidation of the Florida distribution operations under FPU for all Florida regulatory purposes. Our Florida Natural Gas Companies anticipates filing the consolidated base rate case as soon as practicable after the expiration of the notification period, but not before May 24, 2022. We estimate that an increase in the revenue requirement of $18 million to $21 million is necessary to produce sufficient revenues to allow the Florida Natural Gas Companies, once consolidated, to continue to provide the safe and reliable natural gas service our customers deserve and have come to expect, while continuing to invest in the safety of our employees, customers, and communities, as well as the natural gas distribution system itself. Our request will seek an effective date for new rates of January 1, 2023. We will also be requesting interim rate relief, subject to refund, in accordance with the applicable statute using the period January 1, 2021 through December 31, 2021, as the test period. We currently cannot estimate the ultimate outcome of the consolidated base rate proceeding. Other major factors influencing adjusted gross margin Weather Impact For the three months ended March 31, 2022, weather conditions accounted for $0.4 million of decreased adjusted gross margin compared to the same period in 2021. Assuming normal temperatures, as detailed below, adjusted gross margin would have been higher by $0.9 million. The following table summarizes HDD and CDD variances from the 10-year average HDD/CDD ("Normal") for the three months ended March 31, 2022 and 2021. 41 Table of Contents 42 Table of Contents Three Months Ended March 31, 2022 2021 Variance Delmarva Peninsula Actual HDD 2,181 2,186 (5) 10-Year Average HDD ("Normal") 2,255 2,280 (25) Variance from Normal (74) (94) Florida Actual HDD 497 503 (6) 10-Year Average HDD ("Normal") 497 506 (9) Variance from Normal — (3) Ohio Actual HDD 2,926 2,772 154 10-Year Average HDD ("Normal") 2,912 2,959 (47) Variance from Normal 14 (187) Florida Actual CDD 195 184 11 10-Year Average CDD ("Normal") 197 195 2 Variance from Normal (2) (11) Natural Gas Distribution Adjusted Gross 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 $1.2 million of additional adjusted gross margin for the three months ended March 31, 2022. The average number of residential customers served on the Delmarva Peninsula increased by 5.3 percent for the three months ended March 31, 2022, while Florida customers increased by 4.0 percent, for the same period. A larger percentage of the adjusted gross margin growth was generated from residential growth given the expansion of natural gas into new housing communities and conversions to natural gas as our distribution infrastructure continues to build out. We anticipate continued customer growth, as new communities continue to build out due to population growth and additional infrastructure is added to support the growth. The details for the three months ended March 31, 2022 are provided in the following table: Three Months Ended March 31, 2022 (in thousands) Delmarva Peninsula Florida Customer Growth: Residential $ 760 $ 375 Commercial and industrial — 59 Total Customer Growth $ 760 $ 434 Regulated Energy Segment For the quarter ended March 31, 2022, compared to the quarter ended March 31, 2021: 43 Table of Contents Three Months Ended March 31, Increase 2022 2021 (decrease) (in thousands) Revenue $ 127,891 $ 121,197 $ 6,694 Regulated natural gas and electric costs 45,442 43,043 2,399 Adjusted gross margin (1) 82,449 78,154 4,295 Operations & maintenance 29,149 28,233 916 Depreciation & amortization 13,086 12,030 1,056 Other taxes 5,533 5,254 279 Total operating expenses 47,768 45,517 2,251 Operating income $ 34,681 $ 32,637 $ 2,044 (1) Adjusted Gross Margin is a non-GAAP measure utilized by Management to review business unit performance. For a more detailed discussion on the differences between Gross Margin (GAAP) and Adjusted Gross Margin, see the Reconciliation of GAAP to Non-GAAP Measures presented above. Operating income for the Regulated Energy segment for the first quarter of 2022 was $34.7 million, an increase of $2.0 million, or 6.3 percent, over the same period in 2021. Higher operating income reflects continued pipeline expansions by Eastern Shore and Peninsula Pipeline, organic growth in our natural gas distribution businesses, incremental contributions from regulated infrastructure programs, and operating results from the Escambia Meter Station acquisition completed in 2021. Operating expenses increased by $2.3 million compared to the prior year quarter due to higher depreciation, amortization and property taxes, payroll, benefits and other employee related expenses. Items contributing to the quarter-over-quarter increase in adjusted gross margin are listed in the following table: (in thousands) Natural gas transmission service expansions $ 1,227 Natural gas growth (excluding service expansions) 1,194 Contributions from regulated infrastructure programs 924 Escambia Meter Station acquisition 250 Other variances 700 Quarter-over-quarter increase in adjusted gross margin $ 4,295 The following narrative discussion provides further detail and analysis of the significant items in the foregoing table. Natural Gas Transmission Service Expansions We generated increased adjusted gross margin of $1.2 million from natural gas transmission service expansions including, Peninsula Pipeline's Western Palm Beach County project, Eastern Shore's Del-Mar Energy Pathway project and the Guernsey pipeline expansion for the three months ended March 31, 2022 Natural Gas Distribution Customer Growth We generated additional adjusted gross margin of $1.2 million from natural gas customer growth. Adjusted gross margin increased by $0.4 million in Florida and $0.8 million on the Delmarva Peninsula for the three months ended March 31, 2022, as compared to the same period in 2021, due primarily to residential customer growth of 5.3 percent and 4.0 percent on the Delmarva Peninsula and in Florida, respectively. Contributions from Regulated Infrastructure Programs Contributions from regulated infrastructure programs generated incremental adjusted gross margin of $0.9 million in the first quarter of 2022 The increase in adjusted gross margin was primarily related to continued investment in the Florida GRIP, Eastern Shore's capital surcharge program and the Elkton Gas STRIDE Plan. Refer to Note 5, Rates and Other Regulatory Activities , in the condensed consolidated financial statements for additional information. Acquisitions Adjusted gross margin increased by $0.3 million due to the acquisition of the Escambia Meter Station which was consummated in June 2021. 44 Table of Contents 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 taxes $ 1,403 Payroll, benefits and other employee related costs 485 Other variances 363 Quarter-over-quarter increase in operating expenses $ 2,251 45 Table of Contents Unregulated Energy Segment For the quarter ended March 31, 2022, compared to the quarter ended March 31, 2021: Three Months Ended March 31, Increase 2022 2021 (decrease) (in thousands) Revenue $ 101,292 $ 74,759 $ 26,533 Unregulated propane and natural gas costs 58,008 35,983 22,025 Adjusted gross margin (1) 43,284 38,776 4,508 Operations & maintenance 18,090 15,284 2,806 Depreciation & amortization 3,881 3,323 558 Other taxes 1,267 1,186 81 Total operating expenses 23,238 19,793 3,445 Operating Income $ 20,046 $ 18,983 $ 1,063 (1) Adjusted Gross Margin is a non-GAAP measure utilized by Management to review business unit performance. For a more detailed discussion on the differences between Gross Margin (GAAP) and Adjusted Gross Margin, see the Reconciliation of GAAP to Non-GAAP Measures presented above. Operating results for the Unregulated Energy segment for the first quarter of 2022 increased by $1.1 million or, 5.6 percent compared to the same period in 2021. Higher operating results during the first quarter were driven by contributions from the acquisition of Diversified Energy, margin improvement from Aspire Energy and increased propane margins including higher service fees. These increases were partially offset by reduced consumption in our propane operations. Additionally, we experienced increased operating expenses associated with the acquisition of Diversified Energy as well as increased employee related expenses, depreciation, amortization and property taxes, and increased vehicle expenses due to rising fuel costs. Items contributing to the quarter-over-quarter increase in adjusted gross margin are listed in the following table: (in thousands) Propane Operations Diversified Energy acquisition (completed in December 2021) $ 3,975 Increased propane margins and service fees 722 Decreased customer consumption - intra-quarter weather volatility (649) Decreased customer consumption due to conversion of customers to our natural gas system (351) Aspire Energy Increased margins - rate changes and natural gas liquid processing 929 Increased customer consumption - primarily weather related 403 Other variances (521) Quarter-over-quarter increase in adjusted gross margin $ 4,508 The following narrative discussion provides further detail and analysis of the significant items in the foregoing table. Propane Operations • Acquisition of Diversified Energy - Adjusted gross margin increased by $4.0 million due to the acquisition of Diversified Energy, which was acquired by Sharp in December 2021. • Increased Retail Propane Margins and Service Fees - Adjusted g ross margin increased by $0.7 million for the three months ended March 31, 2022, mainly due to increased customary service fees. Propane margins also increased due to gains with our SWAP agreements. These market conditions, which include market pricing and competition with other propane suppliers, as well as the availability and price of alternative energy sources, may fluctuate based on changes in demand, supply and other energy commodity prices. • Decreased Customer Consumption due to weather - Adjusted g ross margin decreased by $0.6 million due to reduced 46 Table of Contents customer consumption during the first quarter of 2022 compared to the same period in 2021 due to intra-quarter weather volatility. • Decreased customer consumption due to conversion of customers to natural gas - Adjusted gross margin decreased by $0.4 million as more customers converted from propane to natural gas. Aspire Energy • Increased Margins - Adjusted g ross margin increased by $0.9 million during the first quarter of 2022 over the same period in 2021, including rate changes and improvements from natural gas liquid processing. • Increased Customer Consumption Primarily Weather Related - Adjusted gross margin increased by $0.4 million due to higher consumption of gas as weather in Ohio was approximately 6 percent colder during the first quarter of 2022 over the same period in 2021. Operating Expenses Items contributing to the quarter-over-quarter increase in operating expenses are listed in the following table: (in thousands) Operating expenses from the Diversified Energy acquisition $ 2,450 Increased payroll, benefits and other employee-related expenses 396 Increased depreciation, amortization and property tax costs 212 Increased vehicle expenses due to higher fuel costs 186 Other variances 201 Quarter-over-quarter increase in operating expenses $ 3,445 OTHER INCOME, NET For the quarter ended March 31, 2022 compared to the quarter ended March 31, 2021 Other income, net, which includes non-operating investment income, interest income, late fees charged to customers, gains or losses from the sale of assets and pension and other benefits expense, increased by $0.5 million in the first quarter of 2022, compared to the same period in 2021. I NTEREST CHARGES For the quarter ended March 31, 2022 compared to the quarter ended March 31, 2021 Interest charges for the three months ended March 31, 2022 increased by $0.2 million, compared to the same period in 2021, attributable primarily to an increase of $0.3 million in interest expense as a result of a long-term debt placement in 2022 and $0.1 million of an amortization credit/increase in interest expense associated with a regulatory liability that was established in connection with the Hurricane Michael regulatory proceeding settlement in 2020. Partially offsetting the interest charges was a $0.2 million decrease in lower interest expense from lower levels of outstanding borrowings under our revolving credit facilities. During the first quarter of 2022, the interest rate associated with our Revolver increased by 0.34 percent as a result of Federal Reserve raising interest rates. Any additional increases in interest rates by the Federal Reserve would have a corresponding increase in the interest rates charged under our Revolver. INCOME TAXES For the quarter ended March 31, 2022 compared to the quarter ended March 31, 2021 Income tax expense was $13.5 million for the quarter ended March 31, 2022, compared to $12.4 million for the quarter ended March 31, 2021. Our effective income tax rate was 26.8 percent and 26.5 percent, for the three months ended March 31, 2022 and 2021, respectively. 47 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. 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 $25.6 million for the three months ended March 31, 2022. In the table below, we have provided an updated range of our forecasted capital expenditures for 2022: 2022 (dollars in thousands) Low High Regulated Energy: Natural gas distribution $ 87,000 $ 92,000 Natural gas transmission 60,000 67,000 Electric distribution 7,000 12,000 Total Regulated Energy 154,000 171,000 Unregulated Energy: Propane distribution 10,000 14,000 Energy transmission 5,000 6,000 Other unregulated energy 4,000 5,000 Total Unregulated Energy 19,000 25,000 Other: Corporate and other businesses 2,000 4,000 Total Other 2,000 4,000 Total 2022 Forecasted Capital Expenditures $ 175,000 $ 200,000 The 2022 forecast, excluding acquisitions, includes capital expenditures associated with the following: Pipeline expansions related to the Eastern Shore Southern Expansion project and the Florida Beachside Pipeline as well as amounts for the expansion into Somerset County, Maryland. Furthermore, the 2022 forecast includes continued expenditures under the Florida GRIP, the capital cost surcharge program and the Elkton Gas STRIDE program as well as further expansion of our natural gas distribution and transmission systems, 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 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. 48 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, 2022 and December 31, 2021: March 31, 2022 December 31, 2021 (in thousands) Long-term debt, net of current maturities $ 597,878 43 % $ 549,903 42 % Stockholders’ equity 805,512 57 % 774,130 58 % Total capitalization, excluding short-term debt $ 1,403,390 100 % $ 1,324,033 100 % March 31, 2022 December 31, 2021 (in thousands) Short-term debt $ 140,865 9 % $ 221,634 14 % Long-term debt, including current maturities 617,595 39 % 567,865 36 % Stockholders’ equity 805,512 52 % 774,130 50 % Total capitalization, including short-term debt $ 1,563,972 100 % $ 1,563,629 100 % 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, 2022. 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 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. See Note 9, Stockholders’ Equity , in the condensed consolidated financial statements for additional information on commissions and fees paid in connection with these issuances. 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: (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. 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. 49 Table of Contents 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 one $200.0 million 364-day short-term debt tranche and a $200.0 million five-year tranche, both of which have three one-year extension options, which can be authorized by the 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 tranches 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 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, the Company entered into two $30.0 million interest rate swaps with a total notional amount of $60.0 million through December 2021 with 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. Long-Term Debt On March 15, 2022 we issued $50 million of 2.95 percent Senior Notes due March 15, 2042 to MetLife. We used the proceeds received from the issuances of the Senior Notes to reduce short-term borrowings under our 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. Cash Flows The following table provides a summary of our operating, investing and financing cash flows for the three months ended March 31, 2022 and 2021: Three Months Ended March 31, (in thousands) 2022 2021 Net cash provided by (used in): Operating activities $ 69,120 $ 80,382 Investing activities (29,935) (51,847) 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 50 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. Working capital requirements 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, 2022, net cash provided by operating activities was $69.1 million. Operating cash flows were primarily impacted by the following: • Net income, adjusted for non-cash adjustments, provided a $58.9 million source of cash; • An increased level of deferred taxes associated with incremental tax depreciation from growth investments resulted in a source of cash of $7.4 million; • Changes in net regulatory assets and liabilities due primarily to the change in fuel costs collected through the various cost recovery mechanisms generated a $5.8 million inflow of cash; • Working capital changes, impacted primarily by propane inventory purchases and hedging activities, resulted in a $9.1 million use of cash; and • An increase in income tax receivables reduced cash inflows by $6.1 million. Cash Flows Used in Investing Activities Net cash used in investing activities totaled $29.9 million during the three months ended March 31, 2022. Key investing activities included: • Cash used to pay for capital expenditures was $29.9 million. Cash Flows Used in Financing Activities Net cash used in financing activities totaled $39.0 million during the three months ended March 31, 2022. Net cash used in financing activities: • Repayments under lines of credit resulted in a use of cash of $82.0 million; • Net increase in long-term debt borrowings resulted in a source of cash of $49.7 million to permanently finance investment in growth initiatives; • Source of cash of $3.2 million from issuance of stock under the DRIP; and • A use of cash of $8.3 million for dividend payments in 2021. 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, 2022 was $20.0 million. The aggregate amount guaranteed at March 31, 2022 was $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, to our current and previous primary insurance carriers. These letters of credit have various expiration dates through October 25, 2022. We have not drawn upon these letters of credit as of March 31, 2022 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. Contractual Obligations There has been no material change in the contractual obligations presented in our 2021 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, 2022: 51 Table of Contents 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) $ 26,157 $ 16,848 $ — $ — $ 43,005 Total $ 26,157 $ 16,848 $ — $ — $ 43,005 (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 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. We regularly are 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. 52 Table of Contents