CHESAPEAKE UTILITIES CORP 10-Q

Item 1. Financial Statements Chesapeake Utilities Corporation and Subsidiaries Condensed Consolidated Statements of Income (Unaudited) Three Months Ended March 31, 2023 2022 (in thousands, except shares and per share data) Operating Revenues Regulated Energy $ 142,270 $ 127,891 Unregulated Energy and other 75,859 94,989 Total Operating Revenues 218,129 222,880 Operating Expenses Natural gas and electric costs 55,288 45,442 Propane and natural gas costs 33,301 51,739 Operations 44,767 42,793 Maintenance 5,104 4,264 Depreciation and amortization 17,183 16,977 Other taxes 7,571 6,800 Total Operating Expenses 163,214 168,015 Operating Income 54,915 54,865 Other income, net 276 913 Interest charges 7,232 5,339 Income Before Income Taxes 47,959 50,439 Income Taxes 11,615 13,506 Net Income $ 36,344 $ 36,933 Weighted Average Common Shares Outstanding: Basic 17,759,896 17,678,060 Diluted 17,831,772 17,761,119 Earnings Per Share of Common Stock: Basic $ 2.05 $ 2.09 Diluted $ 2.04 $ 2.08 The accompanying notes are an integral part of these condensed consolidated financial statements. 1 Table of Contents Chesapeake Utilities Corporation and Subsidiaries Condensed Consolidated Statements of Comprehensive Income (Unaudited) Three Months Ended March 31, 2023 2022 (in thousands) Net Income $ 36,344 $ 36,933 Other Comprehensive Income (Loss), net of tax: Employee Benefits, net of tax: Reclassifications of amortization of prior service credit and actuarial loss, net of tax of $3 and $6, respectively 10 18 Cash Flow Hedges, net of tax: Net gain on commodity contract cash flow hedges, net of tax of $7 and $937, respectively 22 2,498 Reclassifications of net (gain) on commodity contract cash flow hedges, net of tax $(166) and $(752), respectively ( 440 ) ( 1,969 ) Net (loss) on interest rate swap cash flow hedges, net of tax of $(52) and $0, respectively ( 148 ) — Reclassifications of net (gain) on interest rate swap cash flow hedges, net of tax of $(17) and $0, respectively ( 48 ) — Total Other Comprehensive Income (Loss), net of tax ( 604 ) 547 Comprehensive Income $ 35,740 $ 37,480 The accompanying notes are an integral part of these condensed consolidated financial statements. 2 Table of Contents Chesapeake Utilities Corporation and Subsidiaries Condensed Consolidated Balance Sheets (Unaudited) Assets March 31, 2023 December 31, 2022 (in thousands, except shares and per share data) Property, Plant and Equipment Regulated Energy $ 1,835,261 $ 1,802,999 Unregulated Energy 395,052 393,215 Other businesses and eliminations 29,695 29,890 Total property, plant and equipment 2,260,008 2,226,104 Less: Accumulated depreciation and amortization ( 476,407 ) ( 462,926 ) Plus: Construction work in progress 53,094 47,295 Net property, plant and equipment 1,836,695 1,810,473 Current Assets Cash and cash equivalents 3,065 6,204 Trade and other receivables 65,130 65,758 Less: Allowance for credit losses ( 2,820 ) ( 2,877 ) Trade and other receivables, net 62,310 62,881 Accrued revenue 24,135 29,206 Propane inventory, at average cost 8,505 9,365 Other inventory, at average cost 17,520 16,896 Regulatory assets 27,874 41,439 Storage gas prepayments 1,228 6,364 Income taxes receivable — 2,541 Prepaid expenses 12,990 15,865 Derivative assets, at fair value 1,248 2,787 Other current assets 629 428 Total current assets 159,504 193,976 Deferred Charges and Other Assets Goodwill 46,213 46,213 Other intangible assets, net 17,412 17,859 Investments, at fair value 10,866 10,576 Derivative assets, at fair value 898 982 Operating lease right-of-use assets 14,272 14,421 Regulatory assets 99,379 108,214 Receivables and other deferred charges 12,312 12,323 Total deferred charges and other assets 201,352 210,588 Total Assets $ 2,197,551 $ 2,215,037 The accompanying notes are an integral part of these condensed consolidated financial statements. 3 Table of Contents Chesapeake Utilities Corporation and Subsidiaries Condensed Consolidated Balance Sheets (Unaudited) Capitalization and Liabilities March 31, 2023 December 31, 2022 (in thousands, except shares and per share data) Capitalization Stockholders’ equity Preferred stock, par value $0.01 per share (authorized 2,000,000 shares), no shares issued and outstanding $ — $ — Common stock, par value $0.4867 per share (authorized 50,000,000 shares) 8,659 8,635 Additional paid-in capital 379,703 380,036 Retained earnings 472,209 445,509 Accumulated other comprehensive income (loss) ( 1,983 ) ( 1,379 ) Deferred compensation obligation 8,816 7,060 Treasury stock ( 8,816 ) ( 7,060 ) Total stockholders’ equity 858,588 832,801 Long-term debt, net of current maturities 656,284 578,388 Total capitalization 1,514,872 1,411,189 Current Liabilities Current portion of long-term debt 21,489 21,483 Short-term borrowing 94,079 202,157 Accounts payable 38,193 61,496 Customer deposits and refunds 36,676 37,152 Accrued interest 4,849 3,349 Dividends payable 9,518 9,492 Accrued compensation 6,350 14,660 Regulatory liabilities 10,556 5,031 Income taxes payable 7,554 — Derivative liabilities, at fair value 798 585 Other accrued liabilities 16,717 13,618 Total current liabilities 246,779 369,023 Deferred Credits and Other Liabilities Deferred income taxes 258,399 256,167 Regulatory liabilities 143,642 142,989 Environmental liabilities 2,530 3,272 Other pension and benefit costs 17,190 16,965 Derivative liabilities, at fair value 636 1,630 Operating lease - liabilities 12,110 12,392 Deferred investment tax credits and other liabilities 1,393 1,410 Total deferred credits and other liabilities 435,900 434,825 Environmental and other commitments and contingencies (Notes 6 and 7) Total Capitalization and Liabilities $ 2,197,551 $ 2,215,037 The accompanying notes are an integral part of these condensed consolidated financial statements. 4 Table of Contents Chesapeake Utilities Corporation and Subsidiaries Condensed Consolidated Statements of Cash Flows (Unaudited) Three Months Ended March 31, 2023 2022 (in thousands) Operating Activities Net income $ 36,344 $ 36,933 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 17,183 16,977 Depreciation and accretion included in other costs 2,834 2,744 Deferred income taxes 2,453 7,398 Realized gain on commodity contracts and sale of assets ( 284 ) ( 4,274 ) Unrealized loss (gain) on investments/commodity contracts ( 551 ) 541 Employee benefits and compensation 119 ( 260 ) Share-based compensation 2,408 2,213 Changes in assets and liabilities: Accounts receivable and accrued revenue 5,641 7,532 Propane inventory, storage gas and other inventory 5,373 4,031 Regulatory assets/liabilities, net 24,607 5,774 Prepaid expenses and other current assets 3,985 6,626 Accounts payable and other accrued liabilities ( 21,166 ) ( 12,918 ) Income taxes receivable/payable 10,095 6,134 Customer deposits and refunds ( 476 ) ( 3,114 ) Accrued compensation ( 8,436 ) ( 6,392 ) Other assets and liabilities, net 1,538 ( 825 ) Net cash provided by operating activities 81,667 69,120 Investing Activities Property, plant and equipment expenditures ( 42,418 ) ( 29,887 ) Proceeds from sale of assets 506 219 Environmental expenditures ( 742 ) ( 267 ) Net cash used in investing activities ( 42,654 ) ( 29,935 ) Financing Activities Common stock dividends ( 9,492 ) ( 8,274 ) Issuance of stock under the Dividend Reinvestment Plan, net of offering fees — 3,242 Tax withholding payments related to net settled stock compensation ( 2,455 ) ( 2,838 ) Change in cash overdrafts due to outstanding checks ( 323 ) 1,223 Net repayments under line of credit agreements ( 107,755 ) ( 82,008 ) Proceeds from long-term debt, net of offering fees 79,840 49,915 Repayment of long-term debt ( 1,967 ) ( 213 ) Net cash used in financing activities ( 42,152 ) ( 38,953 ) Net Increase (Decrease) in Cash and Cash Equivalents ( 3,139 ) 232 Cash and Cash Equivalents—Beginning of Period 6,204 4,976 Cash and Cash Equivalents—End of Period $ 3,065 $ 5,208 The accompanying notes are an integral part of these condensed consolidated financial statements. 5 Table of Contents Chesapeake Utilities Corporation and Subsidiaries Condensed Consolidated Statements of Stockholders’ Equity (Unaudited) Common Stock (1) (in thousands, except shares and per share data) Number of Shares (2) Par Value Additional Paid-In Capital Retained Earnings Accumulated Other Comprehensive Income (Loss) Deferred Compensation Treasury Stock Total Balance at December 31, 2021 17,655,410 $ 8,593 $ 371,162 $ 393,072 $ 1,303 $ 7,240 $ ( 7,240 ) $ 774,130 Net income — — — 36,933 — — — 36,933 Other comprehensive income — — — — 547 — — 547 Dividends declared ($0.480 per share) — — — ( 8,661 ) — — — ( 8,661 ) Issuance under various plans (5) 24,960 12 3,410 — — — — 3,422 Share-based compensation and tax benefit (3) (4) 39,018 19 ( 878 ) — — — — ( 859 ) Treasury stock activities — — — — — ( 763 ) 763 — Balance at March 31, 2022 17,719,388 $ 8,624 $ 373,694 $ 421,344 $ 1,850 $ 6,477 $ ( 6,477 ) $ 805,512 Balance at December 31, 2022 17,741,418 $ 8,635 $ 380,036 $ 445,509 $ ( 1,379 ) $ 7,060 $ ( 7,060 ) $ 832,801 Net income — — — 36,344 — — — 36,344 Other comprehensive loss — — — — ( 604 ) — — ( 604 ) Dividends declared ($0.535 per share) — — — ( 9,644 ) — — — ( 9,644 ) Issuance under various plans (5) — — ( 11 ) — — — — ( 11 ) Share-based compensation and tax benefit (3) (4) 48,438 24 ( 322 ) — — — — ( 298 ) Treasury stock activities — — — — — 1,756 ( 1,756 ) — Balance at March 31, 2023 17,789,856 $ 8,659 $ 379,703 $ 472,209 $ ( 1,983 ) $ 8,816 $ ( 8,816 ) $ 858,588 (1) 2,000,000 shares of preferred stock at $ 0.01 par value have been authorized. No shares have been issued or are outstanding; accordingly, no information has been included in the statements of stockholders’ equity. (2) Includes 109,687 , 108,143 , 107,518 , and 116,238 shares at March 31, 2023, December 31, 2022, March 31, 2022 and December 31, 2021, respectively, held in a Rabbi Trust related to our Non-Qualified Deferred Compensation Plan. (3) Includes amounts for shares issued for directors’ compensation. (4) The shares issued under the SICP are net of shares withheld for employee taxes. For the three months ended March 31, 2023 and 2022, we withheld 19,859 and 21,832 shares, respectively, for employee taxes. (5) Can include shares issued under the Retirement Savings Plan, DRIP and ATM equity issuances. The accompanying notes are an integral part of these condensed consolidated financial statements. 6 Table of Contents N OTES TO C ONDENSED C ONSOLIDATED F INANCIAL S TATEMENTS (U NAUDITED) 1. Summary of Accounting Policies Basis of Presentation References in this document to the “Company,” “Chesapeake Utilities,” “we,” “us” and “our” are intended to mean Chesapeake Utilities Corporation, its divisions and/or its subsidiaries, as appropriate in the context of the disclosure. The accompanying unaudited condensed consolidated financial statements have been prepared in compliance with the rules and regulations of the SEC and GAAP. In accordance with these rules and regulations, certain information and disclosures normally required for audited financial statements have been condensed or omitted. These financial statements should be read in conjunction with the consolidated financial statements and notes thereto, included in our latest Annual Report on Form 10-K for the year ended December 31, 2022. In the opinion of management, these financial statements reflect all adjustments that are necessary for a fair presentation of our results of operations, financial position and cash flows for the interim periods presented. Where necessary to improve comparability, prior period amounts have been changed to conform to current period presentation. Due to the seasonality of our business, results for interim periods are not necessarily indicative of results for the entire fiscal year. Revenue and earnings are typically greater during the first and fourth quarters, when consumption of energy is highest due to colder temperatures. FASB Statements and Other Authoritative Pronouncements Recent Accounting Standards There are no pending or recently effective accounting standards which have had, or are expected to have, a material impact to our consolidated financial statements or disclosures. 2. Calculation of Earnings Per Share Three Months Ended March 31, 2023 2022 (in thousands, except shares and per share data) Calculation of Basic Earnings Per Share: Net Income $ 36,344 $ 36,933 Weighted average shares outstanding 17,759,896 17,678,060 Basic Earnings Per Share $ 2.05 $ 2.09 Calculation of Diluted Earnings Per Share: Net Income $ 36,344 $ 36,933 Reconciliation of Denominator: Weighted shares outstanding—Basic 17,759,896 17,678,060 Effect of dilutive securities—Share-based compensation 71,876 83,059 Adjusted denominator—Diluted 17,831,772 17,761,119 Diluted Earnings Per Share $ 2.04 $ 2.08 3. Acquisitions Acquisition of Davenport Energy In June 2022, Sharp acquired the propane operating assets of Davenport Energy's Siler City, North Carolina propane division for approximately $ 2.0 million. Through this acquisition, we expanded our operating footprint further into North Carolina, where customers are served by Sharp Energy’s Diversified Energy division. Sharp added 7 Table of Contents approximately 850 customers, along with distribution of approximately 0.4 million gallons of propane annually. We recorded $ 1.5 million in property plant and equipment, $ 0.5 million in goodwill, and immaterial amounts associated with customer relationships and non-compete agreements, all of which are deductible for income tax purposes. The amounts recorded in conjunction with the acquisition are preliminary, and subject to adjustment based on contractual provisions and finalization prior to the first anniversary of the transaction closing. The financial results associated with this acquisition are included within our propane distribution operations within our Unregulated Energy segment. Acquisition of Planet Found Energy Development In October 2022, we acquired Planet Found Energy Development, LLC ("Planet Found") for $ 9.5 million. In connection with this acquisition, we recorded a $ 0.9 million liability which is subject to the seller's adherence to various provisions contained in the purchase agreement through the first anniversary of the transaction closing. We accounted for this acquisition as a business combination within our Unregulated Energy segment beginning in the fourth quarter of 2022. Planet Found's farm scale anaerobic digestion pilot system and technology produces biogas from 1,200 tons of poultry litter annually, which can be used to create renewable energy in the form of electricity or upgraded to renewable natural gas. The transaction will accelerate our efforts in converting poultry waste to renewable, sustainable energy while simultaneously improving the local environments in our service territories. The operating revenues and operating income of Planet Found were not material to our consolidated results for the three months ended March 31, 2023. In connection with this acquisition, we recorded $ 4.4 million in intangible assets associated primarily with intellectual property and non-compete agreements, $ 4.0 million in property plant and equipment, $ 1.1 million in goodwill, and less than $ 0.1 million in working capital, all of which are deductible for income tax purposes. The amounts recorded in conjunction with the acquisition are preliminary, and subject to adjustment based on contractual provisions and finalization prior to the first anniversary of the transaction closing. 4. Revenue Recognition We recognize revenue when our performance obligations under contracts with customers have been satisfied, which generally occurs when our businesses have delivered or transported natural gas, electricity or propane to customers. We exclude sales taxes and other similar taxes from the transaction price. Typically, our customers pay for the goods and/or services we provide in the month following the satisfaction of our performance obligation. The following table displays our revenue by major source based on product and service type for the three months ended March 31, 2023 and 2022: 8 Table of Contents Three Months Ended March 31, 2023 Three Months Ended March 31, 2022 (in thousands) Regulated Energy Unregulated Energy Other and Eliminations Total Regulated Energy Unregulated Energy Other and Eliminations Total Energy distribution Delaware natural gas division $ 36,907 $ — $ — $ 36,907 $ 34,481 $ — $ — $ 34,481 Florida natural gas distribution (1) 46,358 — — 46,358 40,286 — — 40,286 FPU electric distribution 22,737 — — 22,737 19,089 — — 19,089 Maryland natural gas division 12,263 — — 12,263 10,464 — — 10,464 Sandpiper natural gas/propane operations 7,082 — — 7,082 7,636 — — 7,636 Elkton Gas 4,141 — — 4,141 3,366 — — 3,366 Total energy distribution 129,488 — — 129,488 115,322 — — 115,322 Energy transmission Aspire Energy — 13,954 — 13,954 — 18,036 — 18,036 Aspire Energy Express 364 — — 364 263 — — 263 Eastern Shore 20,670 — — 20,670 20,321 — — 20,321 Peninsula Pipeline 6,911 — — 6,911 6,772 — — 6,772 Total energy transmission 27,945 13,954 — 41,899 27,356 18,036 — 45,392 Energy generation Eight Flags — 5,300 — 5,300 — 5,539 — 5,539 Propane operations Propane delivery operations — 59,980 — 59,980 — 75,606 — 75,606 Compressed Natural Gas Services Marlin Gas Services — 4,001 — 4,001 — 2,209 — 2,209 Other and eliminations Eliminations ( 15,163 ) ( 69 ) ( 7,352 ) ( 22,584 ) ( 14,787 ) ( 98 ) ( 6,435 ) ( 21,320 ) Other — — 45 45 — — 132 132 Total other and eliminations ( 15,163 ) ( 69 ) ( 7,307 ) ( 22,539 ) ( 14,787 ) ( 98 ) ( 6,303 ) ( 21,188 ) Total operating revenues (2) $ 142,270 $ 83,166 $ ( 7,307 ) $ 218,129 $ 127,891 $ 101,292 $ ( 6,303 ) $ 222,880 (1) In accordance with the Florida PSC approval of our natural gas base rate proceeding, effective March 1, 2023, 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”) have been consolidated for rate-making purposes and amounts above are now being presented on a consolidated basis consistent with the final rate order. (2) Total operating revenues for the three months ended March 31, 2023 include other revenue (revenues from sources other than contracts with customers) of $ 0.6 million and $ 0.1 million for our Regulated and Unregulated Energy segments, respectively and $ 0.1 million for both our Regulated and Unregulated Energy segments, respectively, for the three months ended March 31, 2022. The sources of other revenues include revenue from alternative revenue programs related to revenue normalization for the Maryland division and Sandpiper Energy and late fees. 9 Table of Contents Contract Balances The timing of revenue recognition, customer billings and cash collections results in trade receivables, unbilled receivables (contract assets), and customer advances (contract liabilities) in our condensed consolidated balance sheets. The balances of our trade receivables, contract assets, and contract liabilities as of March 31, 2023 and December 31, 2022 were as follows: Trade Receivables Contract Assets (Current) Contract Assets (Non-current) Contract Liabilities (Current) (in thousands) Balance at 12/31/2022 $ 61,687 $ 18 $ 4,321 $ 983 Balance at 3/31/2023 58,514 18 4,174 682 Decrease $ ( 3,173 ) $ — $ ( 147 ) $ ( 301 ) Our trade receivables are included in trade and other receivables in the condensed consolidated balance sheets. Our current contract assets are included in other current assets in the condensed consolidated balance sheet. Our non-current contract assets are included in other assets in the condensed consolidated balance sheet and primarily relate to operations and maintenance costs incurred by Eight Flags that have not yet been recovered through rates for the sale of electricity to our electric distribution operation pursuant to a long-term service agreement. At times, we receive advances or deposits from our customers before we satisfy our performance obligation, resulting in contract liabilities. Contract liabilities are included in other accrued liabilities in the condensed consolidated balance sheets and relate to non-refundable prepaid fixed fees for our Mid-Atlantic and North Carolina propane delivery operation's retail offerings. Our performance obligation is satisfied over the term of the respective customer retail program on a ratable basis. For the three months ended March 31, 2023 and 2022, we recognized revenue of $ 0.2 million and $ 0.4 million, respectively. Remaining Performance Obligations Our businesses have long-term fixed fee contracts with customers in which revenues are recognized when performance obligations are satisfied over the contract term. Revenue for these businesses for the remaining performance obligations, at March 31, 2023, are expected to be recognized as follows: (in thousands) 2023 2024 2025 2026 2027 2028 2029 and thereafter Eastern Shore and Peninsula Pipeline $ 29,497 $ 37,006 $ 30,613 $ 27,138 $ 24,163 $ 23,398 $ 188,498 Natural gas distribution operations 5,474 7,115 6,757 6,527 5,942 4,742 28,371 FPU electric distribution 489 652 275 275 275 275 — Total revenue contracts with remaining performance obligations $ 35,460 $ 44,773 $ 37,645 $ 33,940 $ 30,380 $ 28,415 $ 216,869 5. Rates and Other Regulatory Activities Our natural gas and electric distribution operations in Delaware, Maryland and Florida are subject to regulation by their respective PSC; Eastern Shore, our natural gas transmission subsidiary, is subject to regulation by the FERC; and Peninsula Pipeline and Aspire Energy Express, our intrastate pipeline subsidiaries, are subject to regulation (excluding cost of service) by the Florida PSC and Public Utilities Commission of Ohio, respectively. Delaware Refer to the below discussion pertaining to the COVID-19 impact and Customer Information System Regulatory Asset Petition. 10 Table of Contents Maryland Customer Information System Regulatory Asset Petition: In July 2022, we filed a joint petition for our natural gas divisions in Maryland (Maryland Division, Sandpiper, and Elkton Gas) for the approval to establish a regulatory asset for non-capitalizable expenses related to the initial development and implementation of our new Customer Information System ("CIS") system. The petition was approved by the Maryland PSC in August 2022. A similar petition for our Florida Regulated Energy businesses was filed during the same time frame and was initially denied. The Florida PSC subsequently approved capitalization of these expenses. Additionally, our Delaware Division has the ability to defer these costs as a regulatory asset. We have completed the system selection process and the CIS implementation began during the first quarter of 2023. Ocean City Maryland Reinforcement: In March 2022, we filed a Section 7(f) - Request for Service Area Determination with the FERC regarding plans to extend our natural gas facilities across the Delaware/Maryland state line from Sussex County, Delaware, to Worcester County, Maryland, to provide a secondary feed to Sandpiper Energy. The FERC approved the Section 7(f) request on August 29, 2022. The project will increase the reliability of the existing distribution system in those areas while also expanding infrastructure to serve new customers. Construction has been initiated with estimated completion in the first half of 2023. Florida Wildlight Expansion: In August 2022, Peninsula Pipeline and FPU filed a joint petition with the Florida PSC for approval of its Transportation Service Agreement associated with the Wildlight planned community located in Nassau County, Florida. The project enables us to meet the significant growing demand for service in Yulee, Florida. The agreement will enable us to construct the project during the build-out of the community, and charge the reservation rate as each phase of the project goes into service. Construction of the pipeline facilities will occur in two separate phases. Phase one consists of three extensions with associated facilities, and a gas injection interconnect with associated facilities. Phase two will consist of two additional pipeline extensions. The various phases of the project commenced in the first quarter of 2023, with construction on the overall project continuing through 2025. The petition was approved by the Florida PSC in November 2022. Natural Gas Rate Case: In May 2022, our natural gas distribution businesses in Florida filed a consolidated natural gas rate case with the Florida PSC. The application included a request for the following: (i) permanent rate relief of approximately $ 24.1 million, effective January 1, 2023, (ii) a depreciation study also submitted with filing; (iii) 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; (iv) authorization to retain the acquisition adjustment recorded at the time of the FPU merger in our revenue requirement; and (v) authorization to establish an environmental remediation surcharge for the purposes of addressing future expected remediation costs for FPU MGP 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 discovery process and subsequent hearings were concluded during the fourth quarter of 2022 and briefs were submitted during the same quarter of 2022. In January 2023, the Florida PSC approved the application for consolidation and permanent rate relief of approximately $ 17.2 million on an annual basis. Actual rates in connection with the rate relief were approved by the Florida PSC in February 2023 with an effective date of March 1, 2023. Beachside Pipeline Extension: In June 2021, Peninsula Pipeline and Florida City Gas entered into a Transportation Service Agreement for an incremental 10,176 Dts/d of firm service in Indian River County, Florida, to support Florida City Gas’ growth along the Indian River's barrier island. As part of this agreement, Peninsula Pipeline constructed 11.3 miles of pipeline from its existing pipeline in the Sebastian, Florida area, traveling east under the Intercoastal Waterway and southward on the barrier island. The project was placed in-service during April 2023. 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/d 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 provide operational benefits to FPU's existing distribution system in the area, supporting future growth. The petition was approved by the Florida PSC on October 4, 2022. We expect this expansion to be in service by the second quarter of 2023. 11 Table of Contents Storm Protection Plan: In 2020, the Florida PSC implemented the Storm Protection Plan ("SPP") and Storm Protection Plan Cost Recovery Clause ("SPPCRC") 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 SPPCRC rules allow the utility to file for recovery of associated costs for the SPP. Our Florida electric distribution operation’s SPP plan was filed during the first quarter of 2022 and approved in the fourth quarter of 2022 with modifications, by the Florida PSC. Rates associated with this initiative were effective in January 2023. Lake Wales Pipeline Acquisition : In February 2022, Peninsula Pipeline filed a petition with the Florida PSC for approval of its Transportation Service Agreement with FPU for an additional 9,000 Dt/d of firm service in the Lake Wales, Florida area. Approval of the agreement by the Florida PSC will enable Peninsula Pipeline to begin executing on the acquisition of an existing pipeline in the area that will be utilized to serve our current natural gas customers as well as new customers. The Commission approved the petition in April 2023. GUARD : In February 2023, FPU filed a petition with the Florida PSC for approval of the GUARD program. GUARD is a proposed ten-year program to enhance the safety, reliability and accessibility of portions of our natural gas distribution system. FPU has identified various categories of eligible projects to be included in GUARD, which includes the relocation of mains and service lines located in rear easements and other difficult to access areas to the front of the street; the replacement of problematic distribution mains, service lines and M&R equipment; and system reliability projects. The petition is currently under review by the Florida PSC. Eastern Shore Southern Expansion Project: In January 2022, Eastern Shore submitted a prior notice filing with the FERC pursuant to blanket certificate procedures, regarding its proposal to install an additional compressor unit and related facilities at Eastern Shore's compressor station in Bridgeville, Sussex County, Delaware. The project will enable Eastern Shore to provide additional firm natural gas transportation service to an existing shipper on its pipeline system. The project obtained FERC approval in December 2022, and is under construction, estimated to go into service in the fourth quarter of 2023. Capital Cost Surcharge : In December 2022, Eastern Shore submitted a filing with the FERC regarding a capital cost surcharge to recover capital costs associated with the replacement of existing Eastern Shore facilities as a result of mandated highway relocation projects as well as compliance with a Pipeline and Hazardous Materials Safety Administration ("PHMSA") regulation. The capital cost surcharge mechanism was approved in Eastern Shore’s last rate case. In conjunction with the filing of this surcharge, a cumulative adjustment to the existing surcharge to reflect additional depreciation was included. The FERC issued an order approving the surcharge as filed on December 19, 2022. The combined revised surcharge became effective January 1, 2023. COVID-19 Impact In March 2020, the CDC declared a national emergency due to the rapidly growing outbreak of COVID-19. In response to this declaration and the rapid spread of COVID-19 within the United States, federal, state and local governments throughout the country imposed varying degrees of restrictions on social and commercial activity to promote social distancing in an effort to slow the spread of the illness. These restrictions significantly impacted economic conditions in the United States in 2020 and continued to impact economic conditions, to a lesser extent, through 2021 and 2022. Chesapeake Utilities is considered an “essential business,” which allowed us to continue operational activities and construction projects with appropriate safety precautions and personal protective equipment, while being mindful of the social distancing restrictions that were in place. In response to the COVID-19 pandemic and related restrictions, we experienced reduced consumption of energy largely in the commercial and industrial sectors, higher bad debt expenses and incremental expenses associated with COVID-19, including expenditures associated with personal protective equipment and premium pay for field personnel. The additional operating expenses we incurred supported the ongoing delivery of our essential services during the height of the pandemic. In April and May 2020, we were authorized by the Maryland and Delaware PSCs, respectively, to record regulatory assets for COVID-19 related costs which offered us the ability to seek recovery of those costs. In July 2021, the Florida PSC issued an order that approved incremental expenses we incurred due to COVID-19. The order allowed us to establish a regulatory asset in a total amount of $ 2.1 million as of June 30, 2021 for natural gas and electric distribution operations. The regulatory asset is being amortized over two years and is 12 Table of Contents recovered through the Purchased Gas Adjustment and Swing Service mechanisms for our natural gas distribution businesses and through the Fuel Purchased Power Cost Recovery clause for our electric division. As of March 31, 2023 and December 31, 2022, our total COVID-19 regulatory asset balance was $ 1.0 million and $ 1.2 million, respectively. In 2021 and 2022, restrictions were gradually lifted as vaccines became widely available in the United States. The various state of emergencies associated with the COVID-19 pandemic that were previously declared in our service territories have been terminated and we have adjusted our operating practices accordingly to ensure the safety of our operations and will take the necessary actions to comply with the CDC, and the Occupational Safety and Health Administration, as new developments may occur. Summary TCJA Table Customer rates for our regulated businesses were adjusted, as approved by the regulators, prior to 2020 with the exception of Elkton Gas, which implemented a one-time bill credit in May 2020. The following table summarizes the regulatory liabilities related to accumulated deferred taxes ("ADIT") associated with TCJA for our regulated businesses as of March 31, 2023 and December 31, 2022: Amount (in thousands) Operation and Regulatory Jurisdiction March 31, 2023 December 31, 2022 Status Eastern Shore (FERC) $ 34,190 $ 34,190 Will be addressed in Eastern Shore's next rate case filing. Chesapeake Delaware natural gas division (Delaware PSC) $ 12,182 $ 12,230 PSC approved amortization of ADIT in January 2019. Chesapeake Maryland natural gas division (Maryland PSC) $ 3,674 $ 3,703 PSC approved amortization of ADIT in May 2018. Sandpiper Energy (Maryland PSC) $ 3,570 $ 3,597 PSC approved amortization of ADIT in May 2018. Florida natural gas distribution (Florida PSC) (1) $ 26,999 $ 27,179 PSC issued order authorizing amortization and retention of net ADIT liability by the Company in February 2019. FPU electric division (Florida PSC) $ 4,934 $ 4,993 In January 2019, PSC issued order approving amortization of ADIT through purchased power cost recovery, storm reserve and rates. Elkton Gas (Maryland PSC) $ 1,051 $ 1,059 PSC approved amortization of ADIT in March 2018. (1) In accordance with the Florida PSC approval of our natural gas base rate proceeding, effective March 1, 2023, our natural gas distribution businesses in Florida have been consolidated for rate-making purposes and amounts above are now being presented on a consolidated basis consistent with the final rate order. 6. Environmental Commitments and Contingencies We are subject to federal, state and local laws and regulations governing environmental quality and pollution control. These laws and regulations require us to remove or remediate, at current and former operating sites, the effect on the environment of the disposal or release of specified substances. MGP Sites We have participated in the investigation, assessment or remediation of, and have exposures at, seven former MGP sites. We have received approval for recovery of clean-up costs in rates for sites located in Salisbury, Maryland; Seaford, Delaware; and Winter Haven, Key West, Pensacola, Sanford and West Palm Beach, Florida. 13 Table of Contents As of March 31, 2023 and December 31, 2022, we had approximately $ 3.5 million and $ 4.3 million, respectively, in environmental liabilities related to the former MGP sites. As of March 31, 2023 and December 31, 2022, we have cumulative regulatory assets of $ 0.5 million and $ 0.8 million, respectively, for future recovery of environmental costs for customers. Specific to FPU’s four MGP sites in Key West, Pensacola, Sanford and West Palm Beach, FPU has approval to recover, from insurance and through customer rates, up to $ 14.0 million of its environmental costs related to its MGP sites. The total $ 14.0 million was fully recovered as of March 31, 2023. Environmental liabilities for our MGP sites are recorded on an undiscounted basis based on the estimate of future costs provided by independent consultants. We continue to expect that all costs related to environmental remediation and related activities, including any potential future remediation costs for which we do not currently have approval for regulatory recovery, will be recoverable from customers through rates. Remediation is ongoing for the MGPs in Winter Haven and Key West in Florida and in Seaford, Delaware and the remaining clean-up costs are estimated to be between $ 0.3 million to $ 0.9 million for these three sites. The Environmental Protection Agency has approved a "site-wide ready for anticipated use" status for the Sanford, Florida MGP site, which is the final step before delisting a site. The remaining remediation expenses for the Sanford MGP site are immaterial. The remedial actions approved by the Florida Department of Environmental Protection have been implemented on the east parcel of our West Palm Beach Florida site. Similar remedial actions have been initiated on the site's west parcel, and construction of active remedial systems are expected to be completed later in 2023. 7. Other Commitments and Contingencies Natural Gas, Electric and Propane Supply In March 2023, our Delmarva Peninsula natural gas distribution operations entered into asset management agreements with a third party to manage their natural gas transportation and storage capacity. The agreements were effective as of April 1, 2023 and expire in March 2026. Our Florida natural gas distribution operations and Eight Flags have separate asset management agreements with Emera Energy Services, Inc. to manage their natural gas transportation capacity. These agreements are for a 10 -year term that commenced in November 2020 and expire in October 2030. Additionally, our Florida natural gas distribution operations have firm transportation service contracts with FGT and Gulfstream. Pursuant to a capacity release program approved by the Florida PSC, all of the capacity under these agreements has been released to various third parties. Under the terms of these capacity release agreements, Chesapeake Utilities is contingently liable to FGT and Gulfstream should any party, that acquired the capacity through release, fail to pay the capacity charge. To date, Chesapeake Utilities has not been required to make a payment resulting from this contingency. FPU’s electric supply contracts require FPU to maintain an acceptable standard of creditworthiness based on specific financial ratios. FPU’s agreement with Florida Power & Light Company requires FPU to meet or exceed a debt service coverage ratio of 1.25 times based on the results of the prior 12 months. If FPU fails to meet this ratio, it must provide an irrevocable letter of credit or pay all amounts outstanding under the agreement within five business days. FPU’s electric supply agreement with Gulf Power requires FPU to meet the following ratios based on the average of the prior six quarters: (a) funds from operations interest coverage ratio (minimum of two times), and (b) total debt to total capital (maximum of 65 percent). If FPU fails to meet the requirements, it has to provide the supplier a written explanation of actions taken, or proposed to be taken, to become compliant. Failure to comply with the ratios specified in the Gulf Power agreement could also result in FPU having to provide an irrevocable letter of credit. As of March 31, 2023, FPU was in compliance with all of the requirements of its fuel supply contracts. Eight Flags provides electricity and steam generation services through its CHP plant located on Amelia Island, Florida. In June 2016, Eight Flags began selling power generated from the CHP plant to FPU pursuant to a 20 -year power purchase agreement for distribution to our electric customers. In July 2016, Eight Flags also started selling steam, pursuant to a separate 20 -year contract, to the landowner on which the CHP plant is located. The CHP plant is powered by natural gas transported by FPU through its distribution system and Peninsula Pipeline through its intrastate pipeline. 14 Table of Contents Corporate Guarantees The Board of Directors has authorized us to issue corporate guarantees securing obligations of our subsidiaries and to obtain letters of credit securing our subsidiaries' obligations. The maximum authorized liability under such guarantees and letters of credit as of March 31, 2023 was $ 20.0 million. The aggregate amount guaranteed related to our subsidiaries at March 31, 2023 was approximately $ 14.2 million with the guarantees expiring on various dates through March 30, 2024. In addition, the Board has authorized us to issue specific purpose corporate guarantees. The amount of specific purpose guarantees outstanding at March 31, 2023 was $ 4.0 million. As of March 31, 2023, we have issued letters of credit totaling approximately $ 5.8 million related to the electric transmission services for FPU's electric division, the firm transportation service agreement between TETLP and our Delaware and Maryland divisions, the capacity agreement between NEXUS and Aspire, and our current and previous primary insurance carriers. These letters of credit have various expiration dates through October 25, 2023 and to date, none have been used. We do not anticipate that the counterparties will draw upon these letters of credit, and we expect that they will be renewed to the extent necessary in the future. 8. Segment Information We use the management approach to identify operating segments. We organize our business around differences in regulatory environment and the operating results of each segment are regularly reviewed by the chief operating decision maker, our Chief Executive Officer, in order to make decisions about resources and to assess performance. Our operations are entirely domestic and are comprised of two reportable segments: • Regulated Energy . Includes energy distribution and transmission services (natural gas distribution, natural gas transmission and electric distribution operations). All operations in this segment are regulated, as to their rates and services, by the PSC having jurisdiction in each operating territory or by the FERC in the case of Eastern Shore. • Unregulated Energy. Includes energy transmission, energy generation (the operations of our Eight Flags' CHP plant), propane distribution operations, mobile compressed natural gas distribution and pipeline solutions operations, and project development activities related to our sustainable energy initiatives. Also included in this segment are other unregulated energy services, such as energy-related merchandise sales and heating, ventilation and air conditioning, plumbing and electrical services. These operations are unregulated as to their rates and services. The remainder of our operations is presented as “Other businesses and eliminations,” which consists of unregulated subsidiaries that own real estate leased to Chesapeake Utilities, as well as certain corporate costs not allocated to other operations. The following table presents financial information about our reportable segments: 15 Table of Contents Three Months Ended March 31, 2023 2022 (in thousands) Operating Revenues, Unaffiliated Customers Regulated Energy $ 141,621 $ 124,058 Unregulated Energy 76,508 98,822 Total operating revenues, unaffiliated customers $ 218,129 $ 222,880 Intersegment Revenues (1) Regulated Energy $ 649 $ 3,833 Unregulated Energy 6,657 1,996 Other businesses 45 606 Total intersegment revenues $ 7,351 $ 6,435 Operating Income Regulated Energy $ 37,625 $ 34,681 Unregulated Energy 17,245 20,046 Other businesses and eliminations 45 138 Operating income 54,915 54,865 Other income, net 276 913 Interest charges 7,232 5,339 Income Before Income Taxes 47,959 50,439 Income Taxes 11,615 13,506 Net Income $ 36,344 $ 36,933 (1) All significant intersegment revenues are billed at market rates and have been eliminated from consolidated operating revenues. (in thousands) March 31, 2023 December 31, 2022 Identifiable Assets Regulated Energy segment $ 1,713,149 $ 1,716,255 Unregulated Energy segment 441,261 463,239 Other businesses and eliminations 43,141 35,543 Total Identifiable Assets $ 2,197,551 $ 2,215,037 16 Table of Contents 9. Stockholders' Equity Common Stock Issuances We maintain an effective shelf registration statement with the SEC for the issuance of shares under our DRIP and ATM programs. Depending on our capital needs and subject to market conditions, in addition to other possible debt and equity offerings, we may issue additional shares under the direct stock purchase component of the DRIP. Under our current ATM equity program we may issue and sell shares of our common stock up to an aggregate offering price of $ 75.0 million through June 2023. In 2022, we issued less than 0.1 million shares at an average price per share of $ 136.26 and received net proceeds of $ 4.5 million under the DRIP. In the first three months of 2023, there were no issuances under the DRIP. We use the net proceeds from our share issuances, after fees, for general corporate purposes, including, but not limited to, financing of capital expenditures, repayment of short-term debt, financing acquisitions, investing in subsidiaries, and general working capital purposes. Accumulated Other Comprehensive Income (Loss) Defined benefit pension and postretirement plan items, unrealized gains (losses) of our propane swap agreements designated as commodity contracts cash flow hedges, and the unrealized gains (losses) of our interest rate swap agreements designated as cash flow hedges are the components of our accumulated other comprehensive income (loss). The following tables present the changes in the balance of accumulated other comprehensive gain (loss) as of March 31, 2023 and 2022. All amounts in the following tables are presented net of tax. Defined Benefit Commodity Interest Rate Pension and Contracts Swap Postretirement Cash Flow Cash Flow Plan Items Hedges Hedges Total (in thousands) As of December 31, 2022 $ ( 2,506 ) $ 1,092 $ 35 $ ( 1,379 ) Other comprehensive income (loss) before reclassifications — 22 ( 148 ) ( 126 ) Amounts reclassified from accumulated other comprehensive income (loss) 10 ( 440 ) ( 48 ) ( 478 ) Net current-period other comprehensive income (loss) 10 ( 418 ) ( 196 ) ( 604 ) As of March 31, 2023 $ ( 2,496 ) $ 674 $ ( 161 ) $ ( 1,983 ) As of December 31, 2021 $ ( 3,268 ) $ 4,571 $ — $ 1,303 Other comprehensive income before reclassifications — 2,498 — 2,498 Amounts reclassified from accumulated other comprehensive income (loss) 18 ( 1,969 ) — ( 1,951 ) Net prior-period other comprehensive income 18 529 — 547 As of March 31, 2022 $ ( 3,250 ) $ 5,100 $ — $ 1,850 Deferred gains or losses for our commodity contracts and interest rate swap cash flow hedges are recognized in earnings upon settlement. Prior service credit and net loss related to the defined benefit pension plan and postretirement plans are included in the computation of net periodic costs (benefits). See Note 10, Employee Benefit Plans , for additional details. Gains on commodity contracts classified as cash flow hedges related to our propane swaps are included in the effects of gains and losses from derivative instruments. See Note 12, Derivative Instruments , for additional details. Amortization of defined benefit pension and postretirement plan items are included in other expense, net gains and losses on propane swap agreements contracts are included in revenue and unregulated propane and natural gas, the 17 Table of Contents realized gain or loss on interest rate swap agreements is recognized as a component of interest charges in the accompanying condensed consolidated statements of income. The income tax benefit is included in income tax expense in the accompanying condensed consolidated statements of income. 10. Employee Benefit Plans Net periodic benefit costs for the FPU Pension Plan for the three months ended March 31, 2023 and 2022 is set forth in the following table: FPU Pension Plan For the Three Months Ended March 31, 2023 2022 (in thousands) Interest cost $ 633 $ 449 Expected return on plan assets ( 668 ) ( 857 ) Amortization of net (gain) loss 110 124 Total periodic cost (benefit) $ 75 $ ( 284 ) The following table presents the amounts included in the regulatory asset and accumulated other comprehensive income that were recognized as components of the FPU Pension Plan's net periodic benefit cost during the three months ended March 31, 2023 and 2022: FPU Pension Plan For the Three Months Ended March 31, 2023 2022 (in thousands) Net loss $ 110 $ 124 Total recognized in net periodic benefit cost 110 124 Recognized from accumulated other comprehensive (income) loss (1) 21 24 Recognized from regulatory asset 89 100 Total $ 110 $ 124 (1) See Note 9 , Stockholders' Equity . Net periodic benefit cost for our other pension and post-retirement benefit plans were not material for the three months ended March 31, 2023 and 2022. The components of our net periodic costs have been recorded or reclassified to other expense, net in the condensed consolidated statements of income. Pursuant to their respective regulatory orders, FPU and Chesapeake Utilities continue to record, as a regulatory asset, a portion of their unrecognized postretirement benefit costs related to their regulated operations. The portion of the unrecognized pension and postretirement benefit costs related to FPU’s unregulated operations and Chesapeake Utilities' operations is recorded to accumulated other comprehensive income. During the three months ended March 31, 2023, there were no contributions to the FPU Pension Plan and we do not expect to contribute to the FPU Pension Plan during 2023. The Chesapeake SERP, the Chesapeake Postretirement Plan and the FPU Medical Plan are unfunded and are expected to be paid out of our general funds. Cash benefits paid under these other post retirement benefit plans for the three months ended March 31, 2023 were immaterial. We expect to pay total cash benefits of approximately $ 0.2 million for the Chesapeake SERP, approximately $ 0.1 million for the Chesapeake Postretirement Plan, and approximately $ 0.1 million under the FPU Medical Plan in 2023. Non-Qualified Deferred Compensation Plan Members of our Board of Directors and officers of the Company are eligible to participate in the Non-Qualified Deferred Compensation Plan. Directors can elect to defer any portion of their cash or stock compensation and officers 18 Table of Contents can defer up to 80 percent of their base compensation, cash bonuses or any amount of their stock bonuses (net of required withholdings). Officers may receive a matching contribution on their cash compensation deferrals up to 6 percent of their compensation, provided it does not duplicate a match they receive in the Retirement Savings Plan. All obligations arising under the Non-Qualified Deferred Compensation Plan are payable from our general assets, although we have established a Rabbi Trust to informally fund the plan. Deferrals of cash compensation may be invested by the participants in various mutual funds (the same options that are available in the Retirement Savings Plan). The participants are credited with gains or losses on those investments. Assets held in the Rabbi Trust, recorded as Investments on the consolidated balance sheet, had a fair value of $ 10.8 million at March 31, 2023 and $ 10.6 million at December 31, 2022. The assets of the Rabbi Trust are at all times subject to the claims of our general creditors. 11. Share-Based Compensation Our non-employee directors and key employees have been granted share-based awards through our SICP. We record these share-based awards as compensation costs over the respective service period for which services are received in exchange for an award of equity or equity-based compensation. The compensation cost is based primarily on the fair value of the shares awarded, using the estimated fair value of each share on the date it was granted, and the number of shares to be issued at the end of the service period. The table below presents the amounts included in net income related to share-based compensation expense for the three months ended March 31, 2023 and 2022: Three Months Ended March 31, 2023 2022 (in thousands) Awards to key employees $ 2,156 $ 1,979 Awards to non-employee directors 252 234 Total compensation expense 2,408 2,213 Less: tax benefit ( 622 ) ( 571 ) Share-based compensation amounts included in net income $ 1,786 $ 1,642 Officers and Key Employees Our Compensation Committee is authorized to grant our key employees the right to receive awards of shares of our common stock, contingent upon the achievement of established performance goals and subject to SEC transfer restrictions once awarded. Our President and CEO has the right to issue awards of shares of our common stock, to other officers of the Company, contingent upon various performance goals and subject to SEC transfer restrictions. We currently have several outstanding multi-year performance plans, which are based upon the successful achievement of long-term goals, growth and financial results and comprise both market-based and performance-based conditions and targets. The fair value per share, tied to a performance-based condition or target, is equal to the market price per share on the grant date. For the market-based conditions, we used the Monte Carlo valuation to estimate the fair value of each share granted. The table below presents the summary of the stock activity for awards to key employees for the three months ended March 31, 2023: Number of Shares Weighted Average Fair Value Outstanding—December 31, 2022 204,149 $ 103.17 Granted 80,551 $ 128.01 Vested ( 68,302 ) $ 91.59 Expired ( 2,053 ) $ 94.64 Outstanding—March 31, 2023 214,345 $ 117.23 19 Table of Contents During the three months ended March 31, 2023, we granted awards of 80,551 shares of common stock to key employees under the SICP, including awards granted in February 2023 to key employees appointed in officer positions. The shares granted are multi-year awards that will vest no later than the three-year service period ending December 31, 2025. All of these stock awards are earned based upon the successful achievement of long-term financial results, which are comprised of market-based and performance-based conditions or targets. The fair value of each performance-based condition or target is equal to the market price of our common stock on the grant date of each award. For the market-based conditions, we used the Monte Carlo valuation to estimate the fair value of each market-based award granted. In March 2023, upon the election by certain of our executive officers, we withheld shares with a value at least equivalent to each such executive officer’s minimum statutory obligation for applicable income and other employment taxes related to shares that vested and were paid in March 2023 for the performance period ended December 31, 2022. We paid the balance of such awarded shares to each such executive officer and remitted cash equivalent to the withheld shares to the appropriate taxing authorities. We withheld 19,859 shares, based on the value of the shares on their award date. Total combined payments for the employees’ tax obligations to the taxing authorities were approximately $ 2.5 million. At March 31, 2023, the aggregate intrinsic value of the SICP awards granted to key employees was approximately $ 27.4 million. At March 31, 2023, there was approximately $ 11.1 million of unrecognized compensation cost related to these awards, which will be recognized through 2025. Non-employee Directors Shares granted to non-employee directors are issued in advance of the directors’ service periods and are fully vested as of the grant date. We record a deferred expense equal to the fair value of the shares issued and amortize the expense equally over a service period of one year or less. Our directors receive an annual retainer of shares of common stock under the SICP for services rendered through the subsequent Annual Meeting of Shareholders. Accordingly, our directors that served on the Board as of May 2022 each received 652 shares of common stock, respectively, with a weighted average fair value of $ 130.36 per share. In July 2022, we announced the appointment of two new non-employee directors to our Board. These newly appointed directors were each granted a prorated share-based award of 526 shares through the SICP in accordance with the beginning of their service period. The associated expense is being recognized consistent with the methodology described above. At March 31, 2023, there was approximately $ 0.1 million of unrecognized compensation expense related to shares granted to non-employee directors. This expense will be recognized over the remaining service period ending in May 2023. 12. Derivative Instruments We use derivative and non-derivative contracts to manage risks related to obtaining adequate supplies and the price fluctuations of natural gas, electricity and propane and to mitigate interest rate risk. Our natural gas, electric and propane distribution operations have entered into agreements with suppliers to purchase natural gas, electricity and propane for resale to our customers. Our natural gas gathering and transmission company has entered into contracts with producers to secure natural gas to meet its obligations. Purchases under these contracts typically either do not meet the definition of derivatives or are considered “normal purchases and normal sales” and are accounted for on an accrual basis. Our propane distribution operations may also enter into fair value hedges of their inventory or cash flow hedges of their future purchase commitments in order to mitigate the impact of wholesale price fluctuations. Occasionally, we may enter into interest rate swap agreements to mitigate risk associated with changes in short-term borrowing rates. As of March 31, 2023, our natural gas and electric distribution operations did not have any outstanding derivative contracts. 20 Table of Contents Volume of Derivative Activity As of March 31, 2023, the volume of our commodity derivative contracts were as follows: Business unit Commodity Contract Type Quantity hedged (in millions) Designation Longest Expiration date of hedge Sharp Propane (gallons) Purchases 13.5 Cash flow hedges August 2025 Sharp Propane (gallons) Sales 3.2 Cash flow hedges December 2023 Sharp entered into futures and swap agreements to mitigate the risk of fluctuations in wholesale propane index prices associated with the propane volumes that are expected to be purchased and/or sold during the heating season. Under the futures and swap agreements, Sharp will receive the difference between (i) the index prices (Mont Belvieu prices in March 2023 through August 2025) and (ii) the per gallon propane swap prices, to the extent the index prices exceed the contracted prices. If the index prices are lower than the contract prices, Sharp will pay the difference. We designated and accounted for the propane swaps as cash flow hedges. The change in the fair value of the swap agreements is recorded as unrealized gain (loss) in other comprehensive income (loss) and later recognized in the statement of income in the same period and in the same line item as the hedged transaction. We expect to reclassify approximately $ 1.0 million from accumulated other comprehensive income (loss) related to our commodity cash flow hedges to earnings during the next 12 -month period ended March 31, 2024. Interest Rate Swap Activities We manage interest rate risk by entering into derivative contracts to hedge the variability in cash flows attributable to changes in the short-term borrowing rates. In September 2022, we entered into an interest rate swap with a notional amount of $ 50.0 million through September 2025, with pricing of 3.98 percent. Prior to August 2022, our short-term borrowing was based on the 30-day LIBOR rate. In August 2022, we amended and restated our revolver and transitioned the benchmark interest rate to the 30-day SOFR as a result of the impending expiration of LIBOR. Our prior interest rate swaps were cash settled monthly as the counter-party paid us the 30-day LIBOR rate less the fixed rate. Our interest rate swap is cash settled monthly as the counter-party pays us the 30-day SOFR rate less the fixed rate. We designate and account for interest rate swaps as cash flow hedges. Accordingly, unrealized gains and losses associated with the interest rate swap are recorded as a component of accumulated other comprehensive income (loss). When the interest rate swap settles, the realized gain or loss is recorded in the income statement and is recognized as a component of interest charges. Broker Margin Futures exchanges have contract specific margin requirements that require the posting of cash or cash equivalents relating to traded contracts. Margin requirements consist of initial margin that is posted upon the initiation of a position, maintenance margin that is usually expressed as a percent of initial margin, and variation margin that fluctuates based on the daily mark-to-market relative to maintenance margin requirements. We currently maintain a broker margin account for Sharp which was classified within our Other Current Assets on the consolidated balance sheet with a balance of $ 0.1 million as of March 31, 2023. At December 31, 2022, $ 0.1 million was classified in Other Current Liabilities on the consolidated balance sheet. 21 Table of Contents Financial Statements Presentation The following tables present information about the fair value and related gains and losses of our derivative contracts. We did not have any derivative contracts with a credit-risk-related contingency. Fair values of the derivative contracts recorded in the consolidated balance sheets as of March 31, 2023 and December 31, 2022, are as follows: Derivative Assets Fair Value As Of (in thousands) Balance Sheet Location March 31, 2023 December 31, 2022 Derivatives designated as cash flow hedges Propane swap agreements Derivative assets, at fair value $ 1,801 $ 3,317 Interest rate swap agreements Derivative assets, at fair value 345 452 Total Derivative Assets (1) $ 2,146 $ 3,769 (1) Derivative assets, at fair value include $ 1.2 million and $ 2.8 million in current assets in the condensed consolidated balance sheet at March 31, 2023 and December 31, 2022, respectively, with the remainder of the balance classified as long-term. Derivative Liabilities Fair Value As Of (in thousands) Balance Sheet Location March 31, 2023 December 31, 2022 Derivatives designated as cash flow hedges Propane swap agreements Derivative liabilities, at fair value $ 871 $ 1,810 Interest rate swap agreements Derivative liabilities, at fair value 563 405 Total Derivative Liabilities (1) $ 1,434 $ 2,215 (1) Derivative liabilities, at fair value include $ 0.8 million and $ 0.6 million in current liabilities in the condensed consolidated balance sheet at March 31, 2023 and December 31, 2022, respectively, with the remainder of the balance classified as long-term. The effects of gains and losses from derivative instruments on the condensed consolidated financial statements are as follows: Amount of Gain (Loss) on Derivatives Location of Gain For the Three Months Ended March 31, (in thousands) (Loss) on Derivatives 2023 2022 Derivatives not designated as hedging instruments Propane swap agreements Unregulated propane and natural gas costs $ — $ 56 Derivatives designated as cash flow hedges Propane swap agreements Revenues 733 ( 826 ) Propane swap agreements Unregulated propane and natural gas costs ( 127 ) 3,547 Propane swap agreements Other comprehensive income (loss) ( 577 ) 714 Interest rate swap agreements Interest expense 65 — Interest rate swap agreements Other comprehensive income (loss) ( 265 ) — Total $ ( 171 ) $ 3,491 22 Table of Contents 13. Fair Value of Financial Instruments GAAP establishes a fair value hierarchy that prioritizes the inputs to valuation methods used to measure fair value. The three levels of the fair value hierarchy are the following: Fair Value Hierarchy Description of Fair Value Level Fair Value Technique Utilized Level 1 Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities Investments - equity securities - The fair values of these trading securities are recorded at fair value based on unadjusted quoted prices in active markets for identical securities. Investments - mutual funds and other - The fair values of these investments, comprised of money market and mutual funds, are recorded at fair value based on quoted net asset values of the shares. Level 2 Quoted prices in markets that are not active, or inputs which are observable, either directly or indirectly, for substantially the full term of the asset or liability Derivative assets and liabilities - The fair value of the propane put/call options, propane and interest rate swap agreements are measured using market transactions for similar assets and liabilities in either the listed or over-the-counter markets. Level 3 Prices or valuation techniques requiring inputs that are both significant to the fair value measurement and unobservable (i.e. supported by little or no market activity) Investments - guaranteed income fund - The fair values of these investments are recorded at the contract value, which approximates their fair value. Financial Assets and Liabilities Measured at Fair Value The following tables summarize our financial assets and liabilities that are measured at fair value on a recurring basis and the fair value measurements, by level, within the fair value hierarchy as of March 31, 2023 and December 31, 2022: Fair Value Measurements Using: As of March 31, 2023 Fair Value Quoted Prices in Active Markets (Level 1) Significant Other Observable Inputs (Level 2) Significant Unobservable Inputs (Level 3) (in thousands) Assets: Investments—equity securities $ 24 $ 24 $ — $ — Investments—guaranteed income fund 1,781 — — 1,781 Investments—mutual funds and other 9,061 9,061 — — Total investments 10,866 9,085 — 1,781 Derivative assets 2,146 — 2,146 — Total assets $ 13,012 $ 9,085 $ 2,146 $ 1,781 Liabilities: Derivative liabilities $ 1,434 $ — $ 1,434 $ — 23 Table of Contents Fair Value Measurements Using: As of December 31, 2022 Fair Value Quoted Prices in Active Markets (Level 1) Significant Other Observable Inputs (Level 2) Significant Unobservable Inputs (Level 3) (in thousands) Assets: Investments—equity securities $ 24 $ 24 $ — $ — Investments—guaranteed income fund 1,853 — — 1,853 Investments—mutual funds and other 8,699 8,699 — — Total investments 10,576 8,723 — 1,853 Derivative assets 3,769 — 3,769 — Total assets $ 14,345 $ 8,723 $ 3,769 $ 1,853 Liabilities: Derivative liabilities $ 2,215 $ — $ 2,215 $ — The following table sets forth the summary of the changes in the fair value of Level 3 investments for the three months ended March 31, 2023 and 2022: Three Months Ended March 31, 2023 2022 (in thousands) Beginning Balance $ 1,853 $ 2,036 Purchases and adjustments — 131 Transfers — — Distribution ( 81 ) ( 71 ) Investment income 9 8 Ending Balance $ 1,781 $ 2,104 Investment income from the Level 3 investments is reflected in other income, (net) in the condensed consolidated statements of income. At March 31, 2023, there were no non-financial assets or liabilities required to be reported at fair value. We review our non-financial assets for impairment at least on an annual basis, as required. Other Financial Assets and Liabilities Financial assets with carrying values approximating fair value include cash and cash equivalents and accounts receivable. Financial liabilities with carrying values approximating fair value include accounts payable and other accrued liabilities and short-term debt. The fair value of cash and cash equivalents is measured using the comparable value in the active market and approximates its carrying value (Level 1 measurement). The fair value of short-term debt approximates the carrying value due to its near-term maturities and because interest rates approximate current market rates (Level 2 measurement). At March 31, 2023, long-term debt, which includes current maturities but excludes debt issuance costs, had a carrying value of approximately $ 678.8 million, compared to the estimated fair value of $ 597.5 million. At December 31, 2022, long-term debt, which includes the current maturities but excludes debt issuance costs, had a carrying value of approximately $ 600.8 million, compared to a fair value of approximately $ 505.0 million. The fair value was calculated using a discounted cash flow methodology that incorporates a market interest rate based on published corporate borrowing rates for debt instruments with similar terms and average maturities, and with adjustments for duration, optionality, and risk profile. The valuation technique used to estimate the fair value of long-term debt would be considered a Level 2 measurement. 24 Table of Contents 14. Long-Term Debt Our outstanding long-term debt is shown below: March 31, December 31, (in thousands) 2023 2022 Uncollateralized senior notes: 5.93% note, due October 31, 2023 $ 3,000 $ 3,000 5.68% note, due June 30, 2026 11,600 11,600 6.43% note, due May 2, 2028 4,200 4,200 3.73% note, due December 16, 2028 12,000 12,000 3.88% note, due May 15, 2029 35,000 35,000 3.25% note, due April 30, 2032 64,750 66,500 3.48% note, due May 31, 2038 50,000 50,000 3.58% note, due November 30, 2038 50,000 50,000 3.98% note, due August 20, 2039 100,000 100,000 2.98% note, due December 20, 2034 70,000 70,000 3.00% note, due July 15, 2035 50,000 50,000 2.96% note, due August 15, 2035 40,000 40,000 2.49% notes Due January 25, 2037 50,000 50,000 2.95% notes Due March 15, 2042 50,000 50,000 5.43% notes Due March 14, 2038 80,000 — Equipment security note 2.46% note, due September 24, 2031 8,298 8,517 Less: debt issuance costs ( 1,075 ) ( 946 ) Total long-term debt 677,773 599,871 Less: current maturities ( 21,489 ) ( 21,483 ) Total long-term debt, net of current maturities $ 656,284 $ 578,388 Note Purchase Agreements On March 15, 2022 we issued 2.95 percent Senior Notes due March 15, 2042 to MetLife in the aggregate principal amount of $ 50.0 million. We used the proceeds received from the issuances of the Senior Notes to reduce short-term borrowings under the Revolver and to fund capital expenditures. These Senior Notes have similar covenants and default provisions as our other Senior Notes, and have an annual principal payment beginning in the eleventh year after the issuance. On March 14, 2023 we issued 5.43 percent Senior Notes due March 14, 2038 in the aggregate principal amount of $ 80.0 million and used the proceeds received from the issuances of the Senior Notes to reduce short-term borrowings under our Revolver credit facility and to fund capital expenditures. These Senior Notes have similar covenants and default provisions as our other Senior Notes, and have an annual principal payment beginning in the sixth year after the issuance. Shelf Agreements We have entered into Shelf Agreements with Prudential and MetLife, whom are under no obligation to purchase any unsecured debt. In February 2023, we amended our Shelf Agreements with Prudential and MetLife. The amended agreements expand the total borrowing capacity and extend the term of the agreements for an additional three years from the effective dates. The following table summarizes the current available capacity under our Shelf Agreements at March 31, 2023: 25 Table of Contents (in thousands) Total Borrowing Capacity Less: Amount of Debt Issued Less: Unfunded Commitments Remaining Borrowing Capacity Shelf Agreements (1) Prudential Shelf Agreement $ 405,000 $ ( 300,000 ) $ — $ 105,000 MetLife Shelf Agreement 200,000 ( 50,000 ) — 150,000 Total Shelf Agreements as of March 31, 2023 $ 605,000 $ ( 350,000 ) $ — $ 255,000 (1) The Prudential and MetLife Shelf Agreements both expire in February 2026. The Uncollateralized Senior 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. 15. 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, 2023 and December 31, 2022, we had $ 94.1 million and $ 202.2 million, respectively, of short-term borrowings outstanding at a weighted average interest rate of 5.17 percent and 5.04 percent, respectively. In August 2022, we amended both tranches of our Revolver, which now bear interest using SOFR as the benchmark interest rate, plus a 10-basis point SOFR adjustment, in lieu of LIBOR which is being retired by financial institutions. In addition, the 364-day tranche was extended for the current year, expiring in August 2023. As part of these amendments, the parties agreed to eliminate the previous covenant capping the aggregate investments limit at $ 150.0 million where we maintain an ownership interest less than 50 percent. Additionally the 364-day tranche of the facility now offers a reduced interest margin similar to the five-year tranche for amounts borrowed in connection with new sustainable investments. All other terms and conditions remain unchanged. Borrowings outstanding under the sustainable investment sublimit of the 364-day tranche amounted to $ 9.4 million at March 31, 2023. The availability of funds under the Revolver is subject to conditions specified in the credit agreement, all of which we currently satisfy. These conditions include our compliance with financial covenants and the continued accuracy of representations and warranties contained in the Revolver's loan documents. 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, 2023, we are in compliance with this covenant. The 364-day tranche of the Revolver expires in August 2023 and the five-year tranche expires in August 2026, both of which 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 based upon our total indebtedness to total capitalization ratio for the prior quarter. As of March 31, 2023, the pricing under the 364-day tranche of the Revolver included an unused commitment fee of 9 basis points and maintains an interest rate of 70 basis points over SOFR plus a 10 basis point SOFR adjustment. As of March 31, 2023, the pricing under the five-year tranche of the Revolver included an unused commitment fee of 9 basis points and an interest rate of 95 basis points over SOFR plus a 10 basis point SOFR adjustment. Our total available credit under the Revolver at March 31, 2023 was $ 300.1 million. As of March 31, 2023, we had issued $ 5.8 million in letters of credit to various counterparties under the Revolver. 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 the Revolver. For additional information on interest rate swaps related to our short-term borrowings, see Note 12, Derivative Instruments . 26 Table of Contents 16. Leases We have entered into lease arrangements for office space, land, equipment, pipeline facilities and warehouses. These lease arrangements enable us to better conduct business operations in the regions in which we operate. Office space is leased to provide adequate workspace for our employees in several locations throughout our service territories. We lease land at various locations throughout our service territories to enable us to inject natural gas into underground storage and distribution systems, for bulk storage capacity, for our propane operations and for storage of equipment used in repairs and maintenance of our infrastructure. We lease natural gas compressors to ensure timely and reliable transportation of natural gas to our customers. Additionally, we lease a pipeline to deliver natural gas to an industrial customer in Polk County, Florida. We also lease warehouses to store equipment and materials used in repairs and maintenance for our businesses. Some of our leases are subject to annual changes in the Consumer Price Index (“CPI”). While lease liabilities are not re-measured as a result of changes to the CPI, changes to the CPI are treated as variable lease payments and recognized in the period in which the obligation for those payments was incurred. A 100-basis-point increase in CPI would not have resulted in material additional annual lease costs. Most of our leases include options to renew, with renewal terms that can extend the lease term from one to 25 years or more. The exercise of lease renewal options is at our sole discretion. The amounts disclosed in our consolidated balance sheet at March 31, 2023, pertaining to the right-of-use assets and lease liabilities, are measured based on our current expectations of exercising our available renewal options. Our existing leases are not subject to any restrictions or covenants that would preclude our ability to pay dividends, obtain financing or enter into additional leases. As of March 31, 2023, we have not entered into any leases, which have not yet commenced, that would entitle us to significant rights or create additional obligations. The following table presents information related to our total lease cost included in our consolidated statements of income: Three Months Ended March 31, ( in thousands) Classification 2023 2022 Operating lease cost (1) Operations expense $ 788 $ 651 (1) Includes short-term leases and variable lease costs, which are immaterial . The following table presents the balance and classifications of our right of use assets and lease liabilities included in our condensed consolidated balance sheet at March 31, 2023 and December 31, 2022: (in thousands) Balance sheet classification March 31, 2023 December 31, 2022 Assets Operating lease assets Operating lease right-of-use assets $ 14,272 $ 14,421 Liabilities Current Operating lease liabilities Other accrued liabilities $ 2,562 $ 2,552 Noncurrent Operating lease liabilities Operating lease - liabilities 12,110 12,392 Total lease liabilities $ 14,672 $ 14,944 27 Table of Contents The following table presents our weighted-average remaining lease terms and weighted-average discount rates for our operating leases at March 31, 2023 and December 31, 2022: March 31, 2023 December 31, 2022 Weighted-average remaining lease term ( in years ) Operating leases 8.40 8.54 Weighted-average discount rate Operating leases 3.5 % 3.4 % The following table presents additional information related to cash paid for amounts included in the measurement of lease liabilities included in our condensed consolidated statements of cash flows as of March 31, 2023 and 2022: Three Months Ended March 31, (in thousands) 2023 2022 Operating cash flows from operating leases $ 722 $ 609 The following table presents the future undiscounted maturities of our operating and financing leases at March 31, 2023 and for each of the next five years and thereafter: (in thousands) Operating Leases (1) Remainder of 2023 $ 2,296 2024 2,623 2025 2,236 2026 1,725 2027 1,571 2028 1,192 Thereafter 5,243 Total lease payments 16,886 Less: Interest ( 2,214 ) Present value of lease liabilities $ 14,672 (1) Operating lease payments include $ 2.1 million related to options to extend lease terms that are reasonably certain of being exercised. 28 Table of Contents