What changed in this filing

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Item 2. Management’s Discussion and Analysis

2022-08-03 compared with 2022-05-03 · 418 added, 155 removed, 475 unchanged (55% of the section changed)

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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:

For the Three Months Ended March 31, 2022

The below tables reconcile Gross Margin as defined under GAAP to our non-GAAP measure of Adjusted Gross Margin for the three and six months ended June 30, 2022 and 2021:

For the Three Months Ended June 30, 2022

(in thousands) Regulated Energy Unregulated Energy Other and Eliminations Total

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Adjusted Gross Margin (Non-GAAP) $ 70,620 $ 21,762 $ (28) $ 92,354

For the Three Months Ended March 31, 2021

For the Three Months Ended June 30, 2021

(in thousands) Regulated Energy Unregulated Energy Other and Eliminations Total

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Adjusted Gross Margin (Non-GAAP) $ 66,463 $ 17,952 $ (34) $ 84,381

For the Six Months Ended June 30, 2022

(in thousands) Regulated Energy Unregulated Energy Other and Eliminations Total

Operating Revenues $ 220,084 $ 154,754 $ (12,488) $ 362,350

Cost of Sales:

Natural gas, propane and electric costs (67,016) (89,708) 12,427 (144,297)

Depreciation & amortization (26,225) (7,954) (14) (34,193)

Operations & maintenance expense (1)

(16,485) (13,756) (944) (31,185)

Gross Margin (GAAP) 110,358 43,336 (1,019) 152,675

Operations & maintenance expense (1)

16,485 13,756 944 31,185

Depreciation & amortization 26,225 7,954 14 34,193

Adjusted Gross Margin (Non-GAAP) $ 153,068 $ 65,046 $ (61) $ 218,053

For the Six Months Ended June 30, 2021

(in thousands) Regulated Energy Unregulated Energy Other and Eliminations Total

Operating Revenues $ 202,107 $ 109,532 $ (9,371) $ 302,268

Cost of Sales:

Natural gas, propane and electric costs (57,491) (52,804) 9,298 (100,997)

Depreciation & amortization (23,860) (6,780) (22) (30,662)

Operations & maintenance expense (1)

(16,585) (12,120) 292 (28,413)

Gross Margin (GAAP) 104,171 37,828 197 142,196

Operations & maintenance expense (1)

16,585 12,120 (292) 28,413

Depreciation & amortization 23,860 6,780 22 30,662

Adjusted Gross Margin (Non-GAAP) $ 144,616 $ 56,728 $ (73) $ 201,271

(1) Operations & maintenance expenses within the Consolidated Statements of Income are presented in accordance with regulatory requirements and to provide comparability within the industry.

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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.

Gross Margin (GAAP) for the Regulated Energy segment for the quarter ended June 30, 2022 was $49.2 million, an increase of $2.8 million, or 6.1 percent, compared to the same period in 2021.

Higher gross margin reflects continued pipeline expansions by Eastern Shore, Peninsula Pipeline, and Aspire Energy Express through 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.

Gross Margin (GAAP) for the Regulated Energy segment for the six months ended June 30, 2022 was $110.4 million, an increase of $6.2 million, or 5.9 percent, compared to the same period in 2021.

These increases were partially offset by higher depreciation and amortization related to recent capital investments

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.

Gross Margin (GAAP) for the Unregulated Energy segment for the quarter ended June 30, 2022 was $11.0 million, an increase of $2.3 million, or 26.5 percent, compared to the same period in 2021.

Higher gross margin is a result of increased propane margins per gallon and service fees, along with improved performance in our other unregulated businesses.

These increases were partially offset by higher depreciation, amortization and property taxes related to recent capital investments and acquisitions and higher vehicle expenses primarily driven by increased fuel costs.

Gross Margin (GAAP) for the Unregulated Energy segment for the six months ended June 30, 2022 was $43.3 million, an increase of $5.5 million, or 14.6 percent, compared to the same period in 2021.

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.

Results of Operations for the Three Months Ended March 31, 2022

Results of Operations for the Three and Six Months Ended June 30, 2022

Chesapeake Utilities is a Delaware corporation formed in 1947.

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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.

As of June 30, 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.

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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:

Some of our most recent ESG advancements include the following:

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

• 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

• 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.

• We were joined by the Governor of the state of Maryland to celebrate the public-private partnership resulting from the extension of natural gas transmission and distribution pipeline into Somerset County, MD, enabling conversion for two state-funded entities to natural gas, improving their facilities’ environmental profile.

• In our Florida operating area, we participated in an event that showcases model homes filled with the latest designs and technologies for energy conservation.

• We announced Sharon Grant's appointment as our new assistant vice president and diversity officer;

Grant will have direct oversight responsibilities for our equity, diversity, and inclusion (EDI) strategy and will collaborate across the organization with the teams responsible for the enterprise-wide environmental, social, and governance plan.

• We participated in events and made donations to organizations and fundraising initiatives within our local communities through our Employee Resource Groups and company community giving programs.

• In July 2022, we announced the appointment of Stephanie N.

Gary and Sheree M.

Petrone to serve as members of our Board of Directors as part of an ongoing succession planning strategy.

that is aligned with our EDI commitments.

• We recently 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

that support our customers’ sustainability goals.

• We were recognized for the Best Corporate Governance in the U.S.

for 2022 by World Finance magazine.

Earlier this year, we established our Environmental Sustainability Office ("ESO") and ESG Committee ("ESGC").

The ESO was established to identify and manage emission-reducing projects both internally, as well as those 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.

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.

Our net income for the three months ended June 30, 2022 was $17.1 million, or $0.96 per share, compared to $13.8 million, or $0.78 per share, for the same quarter of 2021.

Operating income for the three months ended June 30, 2022 increased by $3.9 million, or 17.2 percent, over the same period in 2021.

Higher performance in the second quarter of 2022 was generated primarily from continued pipeline expansion projects, increased propane margins per gallon and fees, incremental contributions associated with regulated infrastructure programs, organic growth in our natural gas distribution businesses, increased customer consumption, and improved performance in our other unregulated businesses.

We recorded higher depreciation, amortization and property taxes related to recent capital investments and higher operating expenses associated primarily with growth initiatives.

We closely managed our operating expense increases, given anticipated future interest and other inflationary expense increases.

Three Months Ended

March 31, Increase

June 30, Increase

2022 2021 (decrease)

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Diluted Earnings Per Share of Common Stock $ 0.96 $ 0.78 $ 0.18

Key variances between the first quarter of 2022 and the first quarter of 2021, included:

Key variances between the second quarter of 2022 and the second quarter of 2021, included:

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

Income Earnings

First Quarter of 2021 Reported Results $ 46,867 $ 34,466 $ 1.96

Second Quarter of 2021 Reported Results

$ 18,977 $ 13,813 $ 0.78

Adjusting for Unusual Items:

Gain from sales of assets 1,902 1,396 0.08

1,902 1,396 0.08

Increased (Decreased) Adjusted Gross Margins:

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Natural gas transmission service expansions* 1,291 948 0.05

Increased propane margins and fees 1,104 810 0.05

Contributions from regulated infrastructure programs * 1,080 793 0.04

Natural gas growth (excluding service expansions) 938 689 0.04

Increased customer consumption - Inclusive of weather 773 567 0.03

Increased margins related to demand for Marlin Gas Services* 547 402 0.02

Higher operating results from Aspire Energy 203 149 0.01

7,593 5,574 0.31

(Increased) Decreased Operating Expenses (Excluding Natural Gas, Propane, and Electric Costs):

Operating expenses from recent acquisitions (2,258) (1,657) (0.09)

Depreciation, amortization and property taxes (1,899) (1,394) (0.08)

Vehicle expenses (407) (299) (0.02)

Customer service related costs (200) (147) (0.01)

Facilities expenses, maintenance costs and outside services 559 410 0.02

Payroll, benefits and other employee-related expenses 343 252 0.01

(3,862) (2,835) (0.17)

Interest charges (771) (566) (0.03)

Net other changes (611) (331) (0.01)

(1,382) (897) (0.04)

Second Quarter of 2022 Reported Results

$ 23,228 $ 17,051 $ 0.96

*See the Major Projects and Initiatives tabl e.

Our net income for the six months ended June 30, 2022 was $54.0 million, or $3.04 per share, compared to $48.3 million, or $2.75 per share, for the same period of 2021.

Operating income for the six months ended June 30, 2022 increased by $7.2 million, or 9.7 percent, over the same period in 2021.

Higher performance in the first six months of 2022 was generated from propane and natural gas acquisitions completed in 2021, continued pipeline expansion projects, organic growth in our natural gas distribution businesses, incremental contributions associated with regulated infrastructure programs, increased propane margins per gallon and fees and improved performance in our other unregulated businesses.

We recorded higher depreciation, amortization and property taxes related to recent capital investments and operating expenses associated primarily with growth initiatives, as well as increased vehicle expenses due to higher fuel costs.

Six Months Ended

June 30, Increase

2022 2021 (decrease)

(in thousands except per share)

Adjusted Gross Margin

Regulated Energy segment $ 153,068 $ 144,616 $ 8,452

Unregulated Energy segment 65,046 56,728 8,318

Other businesses and eliminations (61) (73) 12

Total Adjusted Gross Margin $ 218,053 $ 201,271 $ 16,782

Operating Income

Regulated Energy segment $ 60,539 $ 55,466 $ 5,073

Unregulated Energy segment 20,613 18,575 2,038

Other businesses and eliminations 182 134 48

Total Operating Income 81,334 74,175 7,159

Other income, net 3,498 1,828 1,670

Interest charges 11,164 10,159 1,005

Income from Before Income Taxes 73,668 65,844 7,824

Income Taxes 19,683 17,565 2,118

Net Income $ 53,985 $ 48,279 $ 5,706

Basic Earnings Per Share of Common Stock $ 3.05 $ 2.76 $ 0.29

Diluted Earnings Per Share of Common Stock $ 3.04 $ 2.75 $ 0.29

Key variances between the six months ended June 30, 2022 and the six months ended June 30, 2021, included:

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

Income Earnings

Six Months Ended June 30, 2021 Reported Results

$ 65,844 $ 48,279 $ 2.75

Adjusting for Unusual Items:

Gain from sales of assets 1,902 1,394 0.08

1,902 1,394 0.08

Increased (Decreased) Adjusted Gross Margins:

Contributions from acquisitions* 5,882 4,312 0.24

Natural gas transmission service expansions* 2,518 1,846 0.10

Natural gas growth (excluding service expansions) 2,132 1,563 0.09

Contributions from regulated infrastructure programs * 2,004 1,469 0.08

Increased propane margins and fees 1,823 1,336 0.08

Reduced customer consumption - primarily weather related (435) (318) (0.02)

Higher operating results from Aspire Energy 1,131 829 0.05

Increased margins related to demand for Marlin Gas Services* 612 448 0.03

Increased customer consumption - Inclusive of weather 337 247 0.01

16,439 12,050 0.68

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Depreciation, amortization and property tax costs (3,436) (2,519) (0.14)

Payroll, benefits and other employee-related expenses (846) (620) (0.04)

Vehicle expenses (662) (485) (0.03)

Payroll, benefits and other employee-related expenses (503) (369) (0.02)

Facilities expenses, maintenance costs and outside services 615 451 0.03

(8,694) (6,373) (0.35)

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(1,823) (1,365) (0.12)

First Quarter of 2022 Reported Results $ 50,439 $ 36,933 $ 2.08

Six Months Ended June 30, 2022 Reported Results

$ 73,668 $ 53,985 $ 3.04

*See the Major Projects and Initiatives tabl e.

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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.

Major projects and initiatives that have generated consistent year-over-year adjusted gross 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

Three Months Ended Six Months Ended Year Ended Estimate for

June 30, June 30, December 31, Fiscal

in thousands 2022 2021 2022 2021 2021 2022 2023

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North Ocean City Connector — — — — — — 400

Cloud / Twin Lakes Expansion — — — — — — 584

Total Pipeline Expansions 3,431 2,140 6,757 4,239 9,500 13,988 18,064

Virtual Pipeline Solutions (CNG/RNG/LNG) 2,142 2,077 7,566 8,500 9,500

RNG Infrastructure 91 — — 1,000 1,000

CNG/RNG/LNG Transportation and Infrastructure 2,427 1,708 4,660 3,785 7,566 9,500 10,500

Acquisitions:

Diversified Energy 3,975 — 603 11,300 12,000

Propane Acquisitions 1,491 — 5,466 — 603 11,300 12,000

Escambia Meter Station 249 83 499 83 583 1,000 1,000

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Elkton Gas STRIDE Plan 66 — 140 — 26 241 354

Florida Rate Case Proceeding (3)

— — — — — TBD TBD

Total Regulatory Initiatives 5,513 4,301 10,956 8,493 18,220 21,056 21,765

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

(3) Subject to approval from the Florida PSC.

Detailed Discussion of Major Projects and Initiatives

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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.

Peninsula Pipeline has constructed 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.

The project generated incremental adjusted gross margin for the three and six months ended June 30, 2022 of $0.1 million and $0.3 million, respectively, compared to 2021.

We estimate that the project will generate annual adjusted gross margin of $5.2 million in 2022 and beyond.

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The new facilities:

(i) include an additional 14,300 Dts/d of firm service to

four customers, (ii) provide additional natural gas transmission pipeline infrastructure in eastern Sussex County, Delaware, and (iii) represent the first extension of Eastern Shore’s pipeline system into Somerset County, Maryland.

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.

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

Including interim services in advance of completion, the project generated additional adjusted gross margin for the three and six months ended June 30, 2022 of $0.8 million and $1.6 million, respectively.

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 beyond.

Guernsey Power Station

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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.

This project added $0.3 million and $0.5 million of adjusted gross margin for the three and six months ended June 30, 2022, respectively, 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

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The project is currently estimated to go into service in the fourth quarter of 2023.

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.

Eastern Shore expects the Southern Expansion project to generate annual adjusted gross margin of $0.6 million in 2023 and annual adjusted gross margin of $2.3 million in 2024 and thereafter.

Winter Haven Expansion

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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.

We expect this expansion to be in service in the third quarter of 2022 and expect to generate adjusted gross margin of $0.4 million in 2022 once complete and $1.0 million in 2023 and thereafter.

Beachside Pipeline Expansion

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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.

Construction is underway and is expected to be complete in the second quarter of 2023.

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.

During the second quarter, we began construction of an extension of service into North Ocean City, Maryland.

Our Delaware natural gas 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.

RNG Infrastructure

We expect this expansion to generate additional annual adjusted gross margin of $0.4 million in 2023 and beyond, with additional margin opportunities from incremental growth.

St.Cloud / Twin Lakes Expansion

In July 2022, Peninsula Pipeline filed a petition with the Florida PSC for approval of its Transportation Service Agreement with FPU for an additional 2,400 Dt/day of firm service in the St.

Cloud, Florida area.

As part of this agreement, Peninsula Pipeline will construct a pipeline extension and regulator station for FPU.

The extension will be used to support new incremental load due to growth in the area, including providing service, most immediately, to the residential development Twin Lakes.

The expansion will also improve reliability and operational benefits to FPU’s existing distribution system in the area, supporting future growth in the area.

We expect this expansion to be in service in the first quarter of 2023 and generate adjusted gross margin of $0.6 million in 2023 and thereafter.

CNG/RNG/LNG Transportation and Infrastructure

We have made a commitment to meet customer demand for CNG, RNG and LNG in the markets we serve.

This has included making investments within Marlin Gas Services to be able to transport these products through its virtual pipeline fleet to customers.To date, we have also made an infrastructure investment in Ohio, enabling RNG to fuel a third party landfill fleet and to transport RNG to end use customers off our pipeline system.

Similarly, we announced in March 2022, the opening of a high-capacity CNG truck and tube trailer fueling station in Port Wentworth, Georgia.

As one of the largest public access CNG stations on the East Coast, it will offer a RNG option to customers in the near future.

We constructed the station in partnership with Atlanta Gas Light, a subsidiary of Southern Company Gas.

In 2020, Atlanta Gas Light announced that Chesapeake Utilities would be constructing, maintaining the station and ensuring access to CNG and RNG for the many customers expected to fuel at the station.

We are also involved in various other projects, all at various stages and all with different opportunities to participate across the energy value chain.

In many of these projects, Marlin will play a key role in ensuring the RNG is transported to one of our many pipeline systems where it will be injected.

Accordingly, given the overlapping role of Marlin in many of these projects, we have combined our transportation services and infrastructure adjusted gross margin discussion into one section.

For the three and six months ended June 30, 2022, the Company generated $0.7 million and $0.9 million in additional adjusted gross margin associated with the transportation of CNG and RNG by Marlin’s virtual pipeline and Aspire Energy’s Noble Road RNG pipeline.

The Company estimates annual adjusted gross margin of approximately $9.5 million in 2022, and $10.5 million in 2023 for these transportation related services, with potential for additional growth in future years.

Discussed below are some of the recently completed projects as well as a sample of the growth projects in which we are currently involved.

As new projects are solidified, we will provide additional detail on those projects at that time.

Noble Road Landfill RNG Project

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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.

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.

Propane Acquisitions

On December 15, 2021, Sharp Energy acquired the propane operating assets of Diversified Energy 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.

(i) expanded the Company's propane territory into North Carolina and South Carolina while also expanding our existing footprint in Pennsylvania and Virginia, and (ii) included 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.

On June 13, 2022, Sharp acquired the propane operating assets of Davenport Energy's Siler City propane division for approximately $2.0 million.

Through this acquisition, the Company expands its operating footprint further into North Carolina, where customers will be served by Sharp Energy’s Diversified Energy division.

The acquisition adds approximately 850 customers and distribution of approximately 406,000 gallons of propane annually to Sharp Energy’s territory.

For the three and six months ended June 30, 2022, these acquisitions contributed $1.5 million and $5.5 million , respectively, in adjusted gross margin and are expected to generate $11.3 million of additional adjusted gross margin in 2022 and $12.0 million in 2023.

Escambia Meter Station

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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.

The Company generated $0.2 million and $0.4 million, respectively, in additional adjusted gross margin for the three and six months ended June 30, 2022 and estimates that this acquisition will generate adjusted gross margin of approximately $1.0 million in 2022 and beyond.

Regulatory Initiatives

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

Since the program's inception in August 2012, 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.

Since the program's inception in August 2012, the Company has invested $198.7 million of capital expenditures to replace 351 miles of qualifying distribution mains, including $9.2 million of new pipes during the first six month of 2022.

GRIP generated additional gross margin of $0.8 million and $1.6 million, respectively, for the three and six months ended June 30, 2022 compared to 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

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.

The adjusted gross margin on GRIP investments will continue to be generated as we have included the investments, and the associated expenses, in the base rate proceeding that was filed in May 2022.

Capital Cost Surcharge Programs

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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.

For t he three and six months ended June 30, 2022 , there was $0.4 million and $0.8 million, respectively, 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 $1.9 million in 2023 from relocation projects, which is ultimately dependent upon the timing of filings and the completion of construction.

Elkton Gas STRIDE Plan

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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.

The regulatory asset allows 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.

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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.

Our Florida regulated business units are amortizing the amount over two years effective 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.

In May 2022, our natural gas distribution businesses in Florida, FPU, FPU-Indiantown division, FPU-Fort Meade division and Chesapeake Utilities CFG division (collectively, “Florida natural gas distribution businesses”) filed a consolidated natural gas rate case with the Florida PSC.

In connection with the application, the Company is seeking approval of the following:

(i) interim rate relief of approximately $7.2 million on an annualized basis, subject to refund, pending the outcome of the rate case proceeding;

(ii) a permanent rate relief of approximately $24.1 million, effective January 1, 2023, (iii) a depreciation study also submitted with filing;

(iv) authorization to make certain changes to tariffs to include the consolidation of rates and rate structure across the businesses and to unify the Florida natural gas distribution businesses under FPU;

(v) authorization to retain acquisition adjustment in the revenue requirement;

and (vi) authorization to establish an environmental remediation surcharge for the purposes of addressing future expected remediation costs for manufactured gas plant sites.

In August 2022, interim rates were approved by the Florida PSC in the amount of approximately $7.7 million on an annualized basis, effective for all meter readings in September 2022.

The interim rates are subject to refund pending the final outcome of the rate case proceeding.

The discovery process has commenced and hearing for the proceeding has been scheduled for October 2022.

The outcome of the application is subject to review and approval by the Florida PSC.

Storm Protection Plan

In 2020, the Florida PSC implemented the SPP and SPPCR rules, which require electric utilities to petition the Florida PSC for approval of a Transmission and Distribution Storm Protection Plan that covers the utility’s immediate 10-year planning period with updates to the plan at least every 3 years.

The SPPCR rules allow the utility to file for recovery of associated costs related to its SPP.

The Company’s SPP plan was filed in April 2022, with hearings scheduled for early August 2022.

The SPPCRC was filed in May 2022 with requested rates effective January 1, 2023.

The SPPCRC hearing is scheduled for November 2022.

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.

Three Months Ended

2022 2021 Variance

Weather was not a significant factor during the second quarter and the first half of 2022.

The following table summarizes HDD and CDD variances from the 10-year average HDD/CDD ("Normal") for the three and six months ended June 30, 2022 and 2021.

Three Months Ended Six Months Ended

June 30, June 30,

2022 2021 Variance 2022 2021 Variance

Delmarva Peninsula

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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.

Customer growth for our natural gas distribution operations, as a result of the addition of new customers and the conversion of customers from alternative fuel sources to natural gas service, generated $0.9 million and $2.1 million of additional adjusted gross margin for the three and six months ended June 30, 2022.

The average number of residential customers served on the

Delmarva Peninsula increased by 5.7 percent and 5.5 percent for the three and six months ended June 30, 2022, while Florida customers increased by 4.1 percent for both the three and six month periods.

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

The details for the three and six months ended June 30, 2022 are provided in the following table:

Three Months Ended Six Months Ended

June 30, 2022 June 30, 2022

(in thousands) Delmarva Peninsula Florida Delmarva Peninsula Florida

Customer Growth:

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Regulated Energy Segment

For the quarter ended March 31, 2022, compared to the quarter ended March 31, 2021:

For the quarter ended June 30, 2022, compared to the quarter ended June 30, 2021:

Three Months Ended

March 31, Increase

June 30, Increase

2022 2021 (decrease)

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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.

Operating income for the Regulated Energy segment for the second quarter of 2022 was $25.8 million, an increase of $3.1 million, or 13.5 percent, over the same period in 2021.

Higher operating income reflects continued pipeline expansions by Eastern Shore, Peninsula Pipeline and Aspire Energy Express, incremental contributions from regulated infrastructure programs, organic growth in our natural gas distribution businesses, increased customer consumption, and operating results from the Escambia Meter Station acquisition completed in 2021.

Operating expenses increased by $1.1 million compared to the prior year quarter due to higher depreciation, amortization and property taxes and increased vehicle expense resulting from higher fuel costs.

The increase was partially offset by reductions in various areas including facilities, maintenance and outside services costs, as well as a lower level of payroll and benefits expenses.

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

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Natural gas transmission service expansions $ 1,291

Natural gas growth (excluding service expansions) 1,194

Contributions from regulated infrastructure programs 1,080

Natural gas growth (excluding service expansions) 938

Changes in customer consumption 636

Escambia Meter Station acquisition 166

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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.

We generated increased adjusted gross margin of $1.3 million for the three months ended June 30, 2022 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.

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.

Contributions from regulated infrastructure programs generated incremental adjusted gross margin of $1.1 million in the second 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.

Natural Gas Distribution Customer Growth

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

Adjusted gross margin increased by $0.3 million in Florida and $0.6 million on the Delmarva Peninsula for the three months ended June 30, 2022, as compared to the same period in 2021, due primarily to residential customer growth of 4.1 percent and 5.7 percent in Florida and on the Delmarva Peninsula, respectively.

Changes in Customer Consumption

Increased customer consumption contributed additional adjusted gross margin of $0.6 million in the second quarter of 2022.

Adjusted gross margin increased by $0.2 million due to the acquisition of the Escambia Meter Station which was consummated in June 2021.

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Depreciation, amortization and property taxes $ 1,643

Vehicle expenses 207

Facilities maintenance costs and outside services (635)

Payroll, benefits and other employee related costs (506)

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Quarter-over-quarter increase in operating expenses $ 1,076

For the six months ended June 30, 2022, compared to the six months ended June 30, 2021:

Six Months Ended

June 30, Increase

2022 2021 (decrease)

(in thousands)

Revenue $ 220,084 $ 202,107 $ 17,977

Regulated natural gas and electric costs 67,016 57,491 9,525

Adjusted gross margin (1)

153,068 144,616 8,452

Operations & maintenance 55,621 55,093 528

Depreciation & amortization 26,225 23,860 2,365

Other taxes 10,683 10,197 486

Total operating expenses 92,529 89,150 3,379

Operating income $ 60,539 $ 55,466 $ 5,073

(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 six months ended June 30, 2022 was $60.5 million, an increase of $5.1 million, or 9.1 percent, over the same period in 2021.

Higher operating income reflects continued pipeline expansions by Eastern Shore, Peninsula Pipeline and Aspire Energy Express, organic growth in our natural gas distribution businesses, incremental contributions from regulated infrastructure programs, increased customer consumption, and operating results from the Escambia Meter Station acquisition completed in 2021.

Operating expenses increased by $3.4 million compared to the prior year due to higher depreciation, amortization and property taxes, payroll, benefits and other employee related expenses.

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

(in thousands)

Natural gas transmission service expansions $ 2,518

Natural gas growth (excluding service expansions) 2,132

Contributions from regulated infrastructure programs 2,004

Changes in customer consumption 449

Escambia Meter Station acquisition 416

Other variances 933

Period-over-period increase in adjusted gross margin $ 8,452

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 $2.5 million for the six months ended June 30, 2022 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.

Natural Gas Distribution Customer Growth

We generated additional adjusted gross margin of $2.1 million from natural gas customer growth.

Adjusted gross margin increased by $0.7 million in Florida and $1.4 million on the Delmarva Peninsula for the six months ended June 30, 2022, as compared to the same period in 2021, due primarily to residential customer growth of 4.1 percent and 5.5 percent in Florida and on the Delmarva Peninsula, respectively.

Contributions from Regulated Infrastructure Programs

Contributions from regulated infrastructure programs generated incremental adjusted gross margin of $2.0 million for the six months ended June 30, 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.

Changes in Customer Consumption

Increased customer consumption contributed additional adjusted gross margin of $0.4 million for the six months ended June 30, 2022.

Adjusted gross margin increased by $0.4 million due to the acquisition of the Escambia Meter Station which was consummated in June 2021.

Operating Expenses

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

(in thousands)

Depreciation, amortization and property taxes $ 2,977

Customer service related costs 414

Payroll, benefits and other employee-related expenses 188

Other variances (200)

Period-over-period increase in operating expenses $ 3,379

Unregulated Energy Segment

For the quarter ended March 31, 2022, compared to the quarter ended March 31, 2021:

For the quarter ended June 30, 2022, compared to the quarter ended June 30, 2021:

Three Months Ended

March 31, Increase

June 30, Increase

2022 2021 (decrease)

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Total operating expenses 21,202 18,417 2,785

Operating Income (loss) $ 560 $ (465) $ 1,025

(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 second quarter of 2022 increased by $1.0 million compared to the same period in 2021.

The operating results for this segment typically are impacted by seasonal variances, with the first and fourth quarters generating a significantly larger portion of adjusted gross margin as a result of colder temperatures generally contributing to higher customer demand.

Operating results for the second and third quarters historically have been lower due to reduced customer demand during the warmer periods of the year.

The impact to operating income may not align with the seasonal variations as many of the operating expenses are recognized ratably over the course of the year.

Higher operating results during the second quarter were driven by contributions from the acquisition of Diversified Energy, increased propane margins including higher service fees, increased demand for CNG from Marlin Gas Services and margin improvement from Aspire Energy.

Additionally, we experienced increased operating expenses associated with the acquisition of Diversified Energy as well as 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) $ 1,491

Increased propane margins and service fees 1,104

Marlin Gas Services

Increased demand for CNG services 547

Aspire Energy

Increased margins - rate changes and natural gas liquid processing 203

Other variances 465

Quarter-over-quarter increase in adjusted gross margin $ 3,810

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 $1.5 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 $1.1 million for the three months ended June 30, 2022, mainly due to increased customer 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.

Marlin Gas Services

• Increased demand for CNG services - Adjusted gross margin increased by $0.5 million during the second quarter as compared to the same period in the prior year due to higher demand for CNG hold services.

Aspire Energy

• Increased Margins - Adjusted g ross margin increased by $0.2 million during the second quarter of 2022 over the same period in 2021, including rate changes and improvements from natural gas liquid processing.

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 $ 2,258

Increased depreciation, amortization and property tax costs 264

Increased vehicle expenses due to higher fuel costs 199

Other variances 64

Quarter-over-quarter increase in operating expenses $ 2,785

Diversified Energy's operating results reflected lower adjusted gross margins during the second quarter of 2022 which is in line with the seasonality typically experienced during the second and third quarters by our legacy propane distribution businesses.

For the six months ended June 30, 2022, compared to the six months ended June 30, 2021:

Six Months Ended

June 30, Increase

2022 2021 (decrease)

(in thousands)

Revenue $ 154,754 $ 109,532 $ 45,222

Unregulated propane and natural gas costs 89,708 52,804 36,904

Adjusted gross margin (1)

65,046 56,728 8,318

Operations & maintenance 34,211 29,263 4,948

Depreciation & amortization 7,954 6,780 1,174

Other taxes 2,268 2,110 158

Total operating expenses 44,433 38,153 6,280

Operating Income $ 20,613 $ 18,575 $ 2,038

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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.

Operating results for the Unregulated Energy segment for the for the six months ended June 30, 2022 increased by $2.0 million or, 11.0 percent compared to the same period in 2021.

Higher operating results during the first half of 2022 were driven by contributions from the acquisition of Diversified Energy, increased propane margins including higher service fees margin, increased demand for CNG from Marlin Gas Services and margin improvement from Aspire Energy.

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:

Additionally, we experienced increased operating expenses associated with the acquisition of Diversified Energy as well as increased payroll, benefits and employee related expenses, depreciation, amortization and property taxes, and increased vehicle expenses due to rising fuel costs.

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

(in thousands)

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Decreased customer consumption due to conversion of customers to our natural gas system (478)

Marlin Gas Services

Increased demand for CNG services 612

Aspire Energy

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Other variances (124)

Quarter-over-quarter increase in adjusted gross margin $ 4,508

Period-over-period increase in adjusted gross margin $ 8,318

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

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• Acquisition of Diversified Energy - Adjusted gross margin increased by $5.5 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.

• Increased Retail Propane Margins and Service Fees - Adjusted g ross margin increased by $1.8 million for the six months ended June 30, 2022, mainly due to increased customer 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

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 weather - Adjusted g ross margin decreased by $0.6 million due to reduced 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 $0.5 million as more customers converted from propane to natural gas.

Marlin Gas Services

• Increased demand for CNG services - Adjusted gross margin increased by $0.6 million during the second quarter as compared to the same period in the prior year due to higher demand for CNG hold services.

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.

• Increased Margins - Adjusted g ross margin increased by $1.1 million during the second 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 $0.5 million due to higher consumption of gas as weather in Ohio was approximately 2 percent colder for the six months ended June 30, 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:

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

(in thousands)

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Other variances 104

Quarter-over-quarter increase in operating expenses $ 3,445

Period-over-period increase in operating expenses $ 6,280

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.

For the quarter ended June 30, 2022 compared to the quarter ended June 30, 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 $1.1 million in the second quarter of 2022, compared to the same period in 2021.

The increase was primarily due to gains recognized on the sale of assets.

For the six months ended June 30, 2022 compared to the six months ended June 30, 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 $1.7 million in the six months of 2022, compared to the same period in 2021.

The increase was primarily due to gains recognized on the sale of assets.

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.

For the quarter ended June 30, 2022 compared to the quarter ended June 30, 2021

Interest charges for the three months ended June 30, 2022 increased by $0.8 million, compared to the same period in 2021, attributable primarily to an increase of $0.6 million in interest expense as a result of a long-term debt placement in 2022, $0.1 million due to lower capitalized interest associated with growth projects, $0.1 million related to amounts assessed by state and local taxing authorities, 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 $0.1 million decrease in lower interest expense from lower levels of outstanding borrowings under our Revolver.

During the second quarter of 2022, the interest rate associated with our Revolver increased by 1.22 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.

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.

For the six months ended June 30, 2022 compared to the six months ended June 30, 2021

Interest charges for the six months ended June 30, 2022 increased by $1.0 million, compared to the same period in 2021, attributable primarily to an increase of $0.9 million in interest expense as a result of a long-term debt placement in 2022, $0.2 million due to lower capitalized interest associated with growth projects, $0.1 million related to amounts assessed by state and local taxing authorities, 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 $0.3 million decrease in lower interest expense from lower levels of outstanding borrowings under our Revolver.

During the first six months of 2022, the interest rate associated with our Revolver increased by 1.56 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.

For the quarter ended June 30, 2022 compared to the quarter ended June 30, 2021

Income tax expense was $6.2 million for the quarter ended June 30, 2022, compared to $5.2 million for the quarter ended June 30, 2021.

Our effective income tax rate was 26.6 percent and 27.2 percent, for the three months ended June 30, 2022 and 2021, respectively.

For the six months ended June 30, 2022 compared to the six months ended June 30, 2021

Income tax expense was $19.7 million for the six months ended June 30, 2022, compared to $17.6 million for the six months ended June 30, 2021.

Our effective income tax rate was 26.7 percent for both the six months ended June 30, 2022 and 2021, respectively.

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

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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.

Our capital expenditures were $61.0 million for the six months ended June 30, 2022.

In the table below, we have provided an updated range of our forecasted capital expenditures for 2022:

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Other unregulated energy

10,000 18,000

Total Unregulated Energy

6 unchanged sentences

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.

During the first half of 2022, the Company experienced a reduced level of new capital investments due to regulatory delays and supply chain disruptions.

As a result, the Company is decreasing its capital expenditure guidance range to $140 million to $175 million for 2022.

The Company expects these delays in timing to be temporary.Actual capital requirements may vary from the above estimates due to a number of factors, including changing economic conditions, supply chain disruptions, 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.

4 unchanged sentences

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

The following table presents our capitalization, excluding and including short-term borrowings, as of June 30, 2022 and December 31, 2021:

June 30, 2022 December 31, 2021

(in thousands)

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Total capitalization, excluding short-term debt $ 1,401,506 100 % $ 1,324,033 100 %

March 31, 2022 December 31, 2021

June 30, 2022 December 31, 2021

(in thousands)

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

Our equity to total capitalization ratio, including short-term borrowings, was 52 percent as of March 31, 2022.

Our equity to total capitalization ratio, including short-term borrowings, was 52 percent as of June 30, 2022.

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

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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:

The following table summarizes our Shelf Agreements at June 30, 2022:

(in thousands) Total Borrowing Capacity Less:

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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.

At June 30, 2022 and December 31, 2021, we had $137.0 million and $221.6 million, respectively, of short-term borrowings outstanding at a weighted average interest rate of 2.38 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.

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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.

As of June 30, 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.

Both tranches are available to fund 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.

As of June 30, 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 June 30, 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.

We are currently in discussions with the various lending institutions regarding the renewal of the 364-day tranche.

At that time, the reference interest rate for the 364-day and five-year tranche will transition from LIBOR which is being retired by financial institutions to the Standard Overnight Financing Rate ("SOFR").

We do not expect this transition to have a material impact on our financial condition.

Our total available credit under the Revolver at June 30, 2022 was $257.7 million.

As of June 30, 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 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 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.

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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.

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 our Revolver 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.

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

The following table provides a summary of our operating, investing and financing cash flows for the six months ended June 30, 2022 and 2021:

Six Months Ended

(in thousands) 2022 2021

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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.

During the six months ended June 30, 2022, net cash provided by operating activities was $123.8 million.

Operating cash flows were primarily impacted by the following:

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• An increased level of deferred taxes associated with incremental tax depreciation from growth investments resulted in a source of cash of $11.4 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;

• An increase in income tax receivables reduced cash inflows by $6.1 million.

• Changes in net regulatory assets and liabilities due primarily to the change in fuel costs collected through the various cost recovery mechanisms resulted in a $6.4 million outflow of cash;

• Other working capital changes, impacted primarily by propane inventory purchases and hedging activities, resulted in a $21.7 million use of cash;

• A decrease in income tax receivables increased cash inflows by $5.1 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.

Net cash used in investing activities totaled $64.2 million during the six months ended June 30, 2022, largely driven by $65.1 million for new capital expenditures.

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 totaled $60.4 million during the six months ended June 30, 2022.

Net cash used in financing activities:

• Repayments under lines of credit resulted in a use of cash of $83.4 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;

• Net increase in long-term debt borrowings resulted in a source of cash of $39.4 million to permanently finance investment in growth initiatives, $49.9 million, offset by long-term repayments of $10.5 million;

• Source of cash of $4.3 million from issuance of stock under the DRIP;

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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.

The maximum authorized liability under such guarantees and letters of credit as of June 30, 2022 was $20.0 million.

The aggregate amount guaranteed related to our subsidiaries at June 30, 2022 was $11.4 million, with the guarantees expiring on various dates through May 22, 2023.

In addition, the Board has authorized us to issue specific

purpose corporate guarantees.

The amount of specific purpose guarantees outstanding at June 30, 2022 was $2.0 million.

In July 2022, in connection with the Florida rate case, we entered into a guarantee in the amount of $7.1 million with the Florida PSC.

As of June 30, 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 have not drawn upon these letters of credit as of June 30, 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.

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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:

The following table summarizes commodity purchase contract obligations at June 30, 2022:

Payments Due by Period

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

What changed 10-Q

Item 2. Management’s Discussion and Analysis