What changed in this filing

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Item 2. Management’s Discussion and Analysis

2023-08-03 compared with 2023-05-03 · 375 added, 153 removed, 499 unchanged (51% 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, 2023 and 2022:

For the Three Months Ended March 31, 2023

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, 2023 and 2022:

For the Three Months Ended June 30, 2023

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

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Adjusted Gross Margin (Non-GAAP) $ 77,255 $ 22,635 $ (90) $ 99,800

For the Three Months Ended March 31, 2022

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 Six months ended June 30, 2023

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

Operating Revenues $ 243,411 $ 123,916 $ (13,605) $ 353,722

Cost of Sales:

Natural gas, propane and electric costs (79,174) (58,687) 13,479 (124,382)

Depreciation & amortization (25,987) (8,503) 4 (34,486)

Operations & maintenance expense (1)

(18,527) (15,996) 3 (34,520)

Gross Margin (GAAP) 119,723 40,730 (119) 160,334

Operations & maintenance expense (1)

18,527 15,996 (3) 34,520

Depreciation & amortization 25,987 8,503 (4) 34,486

Adjusted Gross Margin (Non-GAAP) $ 164,237 $ 65,229 $ (126) $ 229,340

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

(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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2023 to 2022 Gross Margin (GAAP) Variance – Regulated Energy

Gross Margin (GAAP) for the Regulated Energy segment for the quarter ended March 31, 2023 was $64.7 million, an increase of $3.6 million, or 5.8 percent, compared to the same period in 2022.

Higher gross margin was driven by contributions from our Florida natural gas base rate proceeding, organic growth in the natural gas distribution businesses, incremental contributions associated with regulated infrastructure programs, and continued pipeline expansion projects.

These increases were partially offset by changes in customer consumption due to significantly warmer weather during the first quarter of 2023, higher depreciation and amortization related to recent capital investments and higher facilities, maintenance and outside services costs.

Gross Margin (GAAP) for the Regulated Energy segment for the quarter ended June 30, 2023 was $55.0 million, an increase of $5.8 million, or 11.8 percent, compared to the same period in 2022.

Higher gross margin reflects contributions from our Florida natural gas base rate proceeding, organic growth in our natural gas distribution businesses, continued pipeline expansion projects and incremental contributions associated with regulated infrastructure programs.

These increases were partially offset by changes in customer consumption largely related to continued warmer weather during the quarter, increased employee costs driven by growth initiatives, the ongoing competitive labor market and higher benefits costs compared to the prior-year period, higher property taxes, and increased facilities, maintenance and outside services costs.

Gross Margin (GAAP) for the Regulated Energy segment for the six months ended June 30, 2023 was $119.7 million, an increase of $9.4 million, or 8.5 percent, compared to the same period in 2022.

The increase in gross margin for the period reflects contributions from our Florida natural gas base rate proceeding, organic growth in our natural gas distribution businesses, continued pipeline expansion projects and incremental contributions associated with regulated infrastructure programs.

These increases were partially offset by changes in customer consumption due to significantly warmer weather experienced in the first half of 2023.

Higher operating expenses also contributed to the offset driven by increased employee costs driven by growth initiatives, the ongoing competitive labor market and higher benefits costs, increased facilities, maintenance and outside services costs, and higher property taxes compared to the prior-year period.

2023 to 2022 Gross Margin (GAAP) Variance – Unregulated Energy

Gross Margin (GAAP) for the Unregulated Energy segment for the quarter ended March 31, 2023 was $29.9 million, compared to $32.3 million for the same period in 2022.

Primary drivers of the change in gross margin included changes in customer consumption due to significantly warmer weather during the first quarter of 2023, higher depreciation, amortization and property taxes related to recent capital investments and increased payroll, benefits and employee related expenses.

These factors were partially offset by increased propane margins and fees and increased demand for our CNG, RNG and LNG services.

Results of Operations for the Three Months Ended March 31, 2023

Gross Margin (GAAP) for the Unregulated Energy segment for the quarter ended June 30, 2023 was $10.8 million, compared to $11.0 million for the same period in 2022.

Gross margin was impacted by reduced customer consumption due in part to the conversion of propane customers to our natural gas distribution service and to a lesser extent, continued warmer weather in our Mid-Atlantic service territories.

Additionally, we experienced increased operating expenses associated with employee costs driven by the ongoing competitive labor market and higher benefits costs, increased property taxes and higher facilities, maintenance and outside services costs.

These factors were partially offset by higher propane margins and fees and increased demand for CNG, RNG and LNG services.

Gross Margin (GAAP) for the Unregulated Energy segment for the six months ended June 30, 2023 was $40.7 million, compared to $43.3 million for the same period in 2022.

Gross margin during the first half of 2023 was impacted by changes in customer consumption due to significantly warmer weather in our Mid-Atlantic service territories primarily during the first quarter, as well as the ongoing conversion of propane customers to our natural gas distribution service.

These factors were partially offset by expanded propane margins and fees and increased demand for CNG, RNG and LNG services.

Results of Operations for the Three and Six Months Ended June 30, 2023

Chesapeake Utilities is a Delaware corporation formed in 1947.

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Sustainability Initiatives

In February 2022, we published our inaugural sustainability report, and are actively working on an updated report to be published in 2023.

We continue to remain steadfast in regard to our commitments, including the following:

In May 2023, we published our most recent annual sustainability report, and continue to remain steadfast in regards to our commitments, including the following:

• Maintaining a leading role in the journey to a lower carbon future in our service areas.

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Operational Highlights

Our net income for the three months ended March 31, 2023 was $36.3 million, or $2.04 per share, compared to $36.9 million, or $2.08 per share, for the same quarter of 2022.

Operating income for the first quarter of 2023 was $54.9 million, which was relatively consistent with the same period in 2022, despite significantly warmer temperatures in our northern service territories in 2023.

Adjusted gross margin in the first quarter of 2023 was positively impacted by contributions from our Florida natural gas base rate proceeding, increased propane margins and fees, organic growth in the our natural gas distribution businesses, increased demand for CNG, RNG and LNG services, incremental contributions associated with regulated infrastructure programs, and continued pipeline expansion projects.

These increases in adjusted gross margin were partially offset by reduced consumption experienced during the first quarter of 2023 as a result of unprecedented temperatures in our northern service territories.

We recorded higher depreciation, amortization and property taxes related to continued capital investments, higher operating expenses associated primarily with growth initiatives, and increased payroll, benefits and employee expenses driven by the ongoing competitive labor market.

We continued to actively manage our operating expenses to mitigate ongoing interest and other inflationary expense increases.

Our net income for the three months ended June 30, 2023 was $16.1 million, or $0.90 per share, compared to $17.1 million, or $0.96 per share, for the same quarter of 2022.

Net income for the second quarter of 2022 included a non-recurring after-tax gain of $1.4 million related to a building sale.

Operating income for the second quarter of 2023 was $28.3 million, an increase of $1.9 million or 7.1 percent compared to the same period in 2022.

Adjusted gross margin in the second quarter of 2023 was positively impacted by contributions from the Florida natural gas base rate proceeding, organic growth in our natural gas distribution businesses, increased propane margins and fees, continued pipeline expansion projects, increased demand for CNG, RNG and LNG services and incremental contributions associated with regulated infrastructure programs.

These increases in adjusted gross margin were partially offset by reduced consumption, including the continued effects of warmer temperatures experienced during the second quarter of 2023, and higher operating expenses which were largely associated with increased employee costs driven by growth initiatives, the ongoing competitive labor market and higher benefits costs compared to the prior-year period.

Operating income was also impacted by higher property taxes during the second quarter of 2023.

Three Months Ended

March 31, Increase

June 30, Increase

2023 2022 (Decrease)

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Total Adjusted Gross Margin $ 99,800 $ 92,354 $ 7,446

Operating Income (Loss)

Regulated Energy segment $ 29,291 $ 25,841 $ 3,450

Unregulated Energy segment (993) 560 (1,553)

Other businesses and eliminations 48 68 (20)

Total Operating Income 28,346 26,469 1,877

Other income, net 831 2,584 (1,753)

Interest charges 6,964 5,825 1,139

Income from Before Income Taxes 22,213 23,228 (1,015)

Income Taxes 6,080 6,177 (97)

Net Income $ 16,133 $ 17,051 $ (918)

Basic Earnings Per Share of Common Stock $ 0.91 $ 0.96 $ (0.05)

Diluted Earnings Per Share of Common Stock $ 0.90 $ 0.96 $ (0.06)

Key variances between the second quarter of 2022 and the second quarter of 2023 included:

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

Income Earnings

Second Quarter of 2022 Reported Results

$ 23,228 $ 17,051 $ 0.96

Adjusting for Non-recurring Items:

Absence of gain from sales of assets (1,902) (1,382) (0.08)

(1,902) (1,382) (0.08)

Increased (Decreased) Adjusted Gross Margins:

Contribution from rates associated with Florida natural gas base rate proceeding* 3,873 2,813 0.16

Natural gas growth including conversions (excluding service expansions) 1,844 1,339 0.08

Increased propane margins and service fees 1,512 1,098 0.06

Natural gas transmission service expansions* 1,113 809 0.05

Increased adjusted gross margin from off-system natural gas capacity sales 637 463 0.03

Increased margins related to demand for CNG/RNG/LNG services* 478 347 0.02

Contributions from regulated infrastructure programs* 395 287 0.02

Customer consumption - primarily resulting from weather (2,165) (1,572) (0.09)

7,687 5,584 0.33

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

Increased payroll, benefits and other employee-related expenses (3,124) (2,269) (0.13)

Increased facilities expenses, maintenance costs and outside services (1,008) (732) (0.04)

Depreciation, amortization and property taxes (774) (562) (0.03)

(4,906) (3,563) (0.20)

Interest charges (1,139) (827) (0.05)

Net other changes (755) (730) (0.06)

(1,894) (1,557) (0.11)

Second Quarter of 2023 Reported Results

$ 22,213 $ 16,133 $ 0.90

* See the Major Projects and Initiatives table.

Our net income for the six months ended June 30, 2023 was $52.5 million, or $2.94 per share, compared to $54.0 million, or $3.04 per share, for the same period of 2022.

Net income for the six months ended June 30, 2023 included a one-time tax benefit of $1.3 million associated with a reduction in state tax rate, while the prior-year included a non-recurring after-tax gain of $1.4 million related to a building sale.

Operating income for the six months ended June 30, 2023 was $83.3 million, an increase of $1.9 million or 2.4 percent compared to the same period in 2022, despite significantly warmer temperatures in our northern service territories during the first half of 2023.

Adjusted gross margin for the first half of 2023 was positively impacted by contributions from the Florida natural gas base rate proceeding, increased propane margins and fees, organic growth in our natural gas distribution businesses, increased demand for CNG, RNG and LNG services, continued pipeline expansion projects and incremental contributions associated with regulated infrastructure programs.

These increases in adjusted gross margin were significantly offset by reduced consumption experienced during the first half of 2023 from warmer weather in our northern service territories.

We recorded higher employee costs driven by growth initiatives, the ongoing competitive labor market and higher benefits costs compared to the prior-year period, increased costs related to our facilities, maintenance and outside services, and higher property taxes.

Six Months Ended

June 30, Increase

2023 2022 (Decrease)

(in thousands, except per share data)

Adjusted Gross Margin

Regulated Energy segment $ 164,237 $ 153,068 $ 11,169

Unregulated Energy segment 65,229 65,046 183

Other businesses and eliminations (126) (61) (65)

Total Adjusted Gross Margin $ 229,340 $ 218,053 $ 11,287

Operating Income

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Diluted Earnings Per Share of Common Stock $ 2.94 $ 3.04 $ (0.10)

Key variances between the first quarter of 2023 and 2022, included:

Key variances between the six months ended June 30, 2022 and the six months ended June 30, 2023 included:

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

Income Earnings

First Quarter of 2022 Reported Results

Six months ended June 30, 2022 Reported Results

$ 73,668 $ 53,985 $ 3.04

Adjusting for Unusual Items:

Adjusting for Non-recurring Items:

Absence of gain from sales of assets (1,902) (1,423) (0.08)

One-time benefit associated with reduction in state tax rate — 1,284 0.07

(1,902) (139) (0.01)

Increased (Decreased) Adjusted Gross Margins:

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Increased margins related to demand for CNG/RNG/LNG services* 1,766 1,321 0.07

Contributions from regulated infrastructure programs* 798 605 0.03

Natural gas transmission service expansions* 1,594 1,192 0.07

Contributions from regulated infrastructure programs* 1,193 892 0.05

Eastern Shore contracted rate adjustments (285) (213) (0.01)

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Increased payroll, benefits and other employee-related expenses (4,267) (3,191) (0.18)

Depreciation, amortization and property taxes (1,125) (852) (0.05)

Increased facilities expenses, maintenance costs and outside services (2,069) (1,548) (0.09)

Depreciation, amortization and property taxes (1,700) (1,272) (0.07)

(8,036) (6,011) (0.34)

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(4,657) (3,661) (0.21)

First Quarter of 2023 Reported Results

Six months ended June 30, 2023 Reported Results

$ 70,172 $ 52,477 $ 2.94

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Recently Completed and Ongoing Major Projects and Initiatives

We constantly pursue and develop additional projects and initiatives to serve existing and new customers, and to further grow our businesses and earnings, with the intention to increase shareholder value.

We constantly pursue and develop additional projects and initiatives to serve existing and new customers, further grow our businesses and earnings, and increase shareholder value.

The following table includes the major projects/initiatives recently completed and currently underway.

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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) 2023 2022 2023 2022 2022 2023 2024

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Wildlight 67 — 93 — — 528 2,000

Lake Wales — — — TBD TBD

Lake Wales 38 — 38 — — 265 454

Newberry — — — — — TBD TBD

Total Pipeline Expansions 1,509 396 2,286 692 1,763 6,543 11,150

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Regulatory Initiatives:

Florida GUARD program — — — TBD TBD

Florida GUARD program — — — — — 37 1,412

Capital Cost Surcharge Programs 703 497 1,423 1,014 2,001 2,811 3,558

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(1) Includes adjusted gross margin generated from interim services.

(2) Includes adjusted gross margin during the first quarter of 2023 comprised of both interim rates and permanent base rates.

(2) Includes adjusted gross margin during 2023 comprised of both interim rates and permanent base rates which became effective in March 2023.

Detailed Discussion of Major Projects and Initiatives

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Guernsey Power Station commenced construction of the project in October 2019, Aspire Energy Express completed construction of the gas transmission facilities in the fourth quarter of 2021, and the facility went into service during the first quarter of 2023.

The project generated additional adjusted gross margin of $0.1 million for the three months ended March 31, 2023, and is expected to produce adjusted gross margin of approximately $1.5 million in 2023 and beyond.

The project generated additional adjusted gross margin of $0.1 million for the six months ended June 30, 2023, and is expected to produce adjusted gross margin of approximately $1.5 million in 2023 and beyond.

Southern Expansion

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This expansion was placed in service in the third quarter of 2022.

The project generated additional adjusted gross margin of approximately $0.1 million in the first quarter and is expected to produce adjusted gross margin of approximately $0.6 million in 2023 and beyond.

The project generated additional adjusted gross margin of $0.1 million and $0.2 million for the three and six months ended June 30, 2023, respectively, and is expected to produce adjusted gross margin of approximately $0.6 million in 2023 and thereafter.

Beachside Pipeline Expansion

In June 2021, Peninsula Pipeline and Florida City Gas entered into a Transportation Service Agreement for an incremental 10,176 Dts/d of firm service in Indian River County, Florida, to support Florida City Gas’ growth along the Indian River's barrier island.

As part of this agreement, Peninsula Pipeline has constructed 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.

As part of this agreement, Peninsula Pipeline constructed 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 was completed and the project went into service in April 2023.

The project generated additional adjusted gross margin of $0.6 million for the three and six months ended June 30, 2023.

We expect this extension to generate additional annual adjusted gross margin of $1.8 million in 2023 and $2.5 million thereafter.

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During the second quarter of 2022, we began construction of an extension of service into North Ocean City, Maryland.

Our Delaware natural gas division and Sandpiper are installing approximately 5.7 miles of pipeline across southern Sussex County, Delaware to Fenwick Island, Delaware and Worcester County, Maryland.

The project will reinforce our existing system in Ocean City, Maryland and allow for incremental growth along the pipeline.

Our Delaware natural gas division and Sandpiper installed approximately 5.7 miles of pipeline across southern Sussex County, Delaware to Fenwick Island, Delaware and Worcester County, Maryland.

The project reinforces our existing system in Ocean City, Maryland and enables incremental growth along the pipeline.

Construction of this project was completed in the second quarter 2023.

Adjusted gross margin in connection with this project is expected to be recognized contingent upon the completion and approval of our next rate case in Maryland.

We expect this expansion to generate annual adjusted gross margin of $0.2 million beginning in 2024, with additional margin opportunities from incremental growth.

As a result, we expect this expansion to generate annual adjusted gross margin of approximately $0.2 million beginning in 2024, with additional margin opportunities from incremental growth.

St.Cloud / Twin Lakes Expansion

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

We expect this expansion to be in service in the second quarter of 2023 and generate adjusted gross margin of $0.3 million in 2023 and $0.6 million thereafter.

We expect this expansion to be placed in service during the third quarter of 2023 and generate adjusted gross margin of $0.3 million in 2023 and $0.6 million thereafter.

Clean Energy Expansion

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Our subsidiary, Marlin Gas Services, is providing interim services to Clean Energy during the construction phase of the project.

The project generated adjusted gross margin of approximately $0.2 million in the first quarter and is expected to produce adjusted gross margin of approximately $1.0 million in 2023 and beyond.

The project generated additional adjusted gross margin of $0.3 million and $0.5 million for the three and six months ended June 30, 2023, respectively, and is expected to produce adjusted gross margin of approximately $1.0 million in 2023 and beyond.

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 build the project during

the construction and build-out of the community, and charge the reservation rate as each phase of the project goes into service.

The project enables us

to meet the significant growing demand for service in Yulee, Florida.

The agreement will enable us to build the project during the construction and 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.

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Various phases of the project commenced in the first quarter of 2023, with construction on the overall project continuing through 2025.

This project is expected to contribute adjusted gross margin of approximately $0.5 million in 2023 and $2.0 million in 2024 and beyond.

The project generated adjusted gross margin of less than $0.1 million for both the three and six months ended June 30, 2023.

We expect this project to contribute adjusted gross margin of approximately $0.5 million in 2023 and $2.0 million in 2024 and beyond.

Lake Wales Expansion

In February 2023, Peninsula Pipeline filed a petition with the Florida PSC for approval of its Transportation Service Agreement with our Florida natural gas division, 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 Florida PSC approved the petition in April 2023.

The PSC approved the petition in April 2023.

Approval of the agreement enabled Peninsula Pipeline to complete the acquisition of an existing pipeline in May 2023 that is being utilized to serve our current natural gas customers as well as enable us to serve new customers.

During the three and six months ended June 30, 2023 the project generated adjusted gross margin of less than $0.1 million.

The project is expected to contribute adjusted gross margin of approximately $0.3 million in 2023 and $0.5 million in 2024 and beyond.

Newberry Expansion

In April 2023, Peninsula Pipeline filed a petition with the Florida PSC for approval of its Transportation Service Agreement with FPU for an additional 8,000 Dt/d of firm service in the Newberry, Florida area.

In July 2023, the Florida PSC approved the Company's recommendation to proceed with this project.

Peninsula Pipeline will construct a pipeline extension which will be used by FPU to support the development of a natural gas distribution system to provide gas service to the City of Newberry.

CNG/RNG/LNG Transportation and Infrastructure

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We include our RNG transportation services and infrastructure related adjusted gross margin from across the organization in combination with our CNG and LNG projects.

For the three months ended March 31, 2023, we generated $1.3 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.

For the three and six months ended June 30, 2023, we generated $0.5 million and $1.8 million, respectively, 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.

We estimate annual adjusted gross margin of approximately $12.6 million in 2023, and $12.3 million in 2024 for these transportation related services, with potential for additional growth in future years.

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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.

In addition to generating biogas, Planet Found’s nutrient capture system plays a major role in converting digestate into a nutrient-rich soil conditioner, which is distributed to bulk and retail markets under the brand Element Soil.

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 expertise, technologies and know-how can be leveraged for various scale projects across our geographic footprint.

In addition to generating biogas, Planet Found’s nutrient capture system converts digestate into a nutrient-rich soil conditioner, which is distributed to bulk and retail markets under the brand Element Soil.

The transaction accelerated our access to renewable, sustainable energy generated from poultry waste while continuing to enhance the local environments in our service territories.

Noble Road Landfill RNG Project

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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.

We have 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.

GUARD is a ten-year program to enhance the safety, reliability, and accessibility of portions of our natural gas distribution system.

We have identified various categories of projects to be included in GUARD, which include 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.

In August 2023, the Florida PSC approved the GUARD program, with the exception of reliability projects with an approximate value of $10 million.

The remainder of the program was approved as filed, which included $205 million of capital expenditures projected to be spent over a 10-year period.

The program is expected to generate less than $0.1 million of additional adjusted gross margin in 2023 and $1.4 million in 2024.

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 t he three months ended March 31, 2023 , there was $0.2 million of incremental adjusted gross margin generated pursuant to the program.

For t he three and six months ended June 30, 2023 , there was $0.2 million and $0.4 million, respectively, of incremental adjusted gross margin generated pursuant to the program.

Eastern Shore expects to produce adjusted gross margin of approximately $2.8 million in 2023 and $3.6 million in 2024 from relocation projects, which is ultimately dependent upon the timing of filings and the completion of construction.

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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.

For the three months ended March 31, 2023, this proceeding generated adjusted gross margin of approximately $4.1 million and is expected to generate $16.3 million of additional adjusted gross margin in 2023 and $17.2 million in 2024.

For the three and six months ended June 30, 2023, this proceeding generated adjusted gross margin of approximately $3.9 million and $8.0 million, respectively, and is expected to generate $16.3 million of additional adjusted gross margin in 2023 and $17.2 million in 2024.

Storm Protection Plan

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Our Florida electric distribution operation's SPP and SPP CRC wer e filed d uring the first quarter of 2022 and approved in the fourth quarter of 2022 with modifications, by the Florida PSC.

For the three months ended March 31, 2023, this initiative generated adjusted gross margin of approximately $0.2 million and is expected to generate $1.7 million of additional adjusted gross margin in 2023 and $3.0 million in 2024.

For the three and six months ended June 30, 2023, this initiative generated adjusted gross margin of approximately $0.4 million and $0.6 million and is expected to generate $1.0 million of additional adjusted gross margin in 2023 and $2.4 million in 2024.

We expect continued investment under the SPP going forward.

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The regulatory asset allows us to obtain recovery of these costs in the next base rate proceedings.

Our Florida regulated business units reached a settlement with the Florida OPC in June 2021, enabling the business units to establish a regulatory asset of $2.1 million.

Our Florida regulated business units reached a settlement with the

Florida OPC in June 2021, enabling the business units to establish a regulatory asset of $2.1 million.

This amount includes COVID-19 related incremental expenses for bad debt write-offs, personnel protective equipment, cleaning and business information services for remote work.

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Weather Impact

For the first quarter of 2023, lower consumption driven primarily by weather resulted in a $6.9 million decrease in adjusted gross margin compared to the same period in 2022.

The impact to adjusted gross margin was largely the result of unprecedented temperatures in our northern service territories that were more than 20 percent higher than historical averages .

Assuming normal temperatures, as detailed below, gross margin would have been higher by $5.4 million.

The following table summarizes HDD and CDD variances from the 10-year average HDD/CDD ("Normal") for the three months ended March 31, 2023 and 2022.

Three Months Ended

2023 2022 Variance

For the first half of 2023, lower consumption driven by weather experienced primarily during the first quarter resulted in a $9.1 million decrease in adjusted gross margin compared to the same period in 2022.

The impact to adjusted gross margin was largely the result of unprecedented temperatures in the Company's northern service territories that were more than 20 percent higher than historical averages.

Assuming normal temperatures, as detailed below, adjusted gross margin would have been higher by $10.3 million.

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, 2023 and 2022.

Three Months Ended Six Months Ended

June 30, June 30,

2023 2022 Variance 2023 2022 Variance

Delmarva Peninsula

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Natural Gas Distribution Adjusted Gross Margin Growth

The average number of residential customers served on the Delmarva Peninsula and in Florida increased by approximately 5.8 percent and 4.4 percent, respectively, during 2023.

The average number of residential customers served on the Delmarva Peninsula increased by approximately 5.5 percent and 5.7 percent, respectively, for the three and six months ended June 30, 2023, while Florida customers increased by 4.0 percent and 4.2 percent, respectively, for the three and six month periods.

On the Delmarva Peninsula, a larger percentage of the adjusted gross margin growth was generated from residential growth given the expansion of gas into new housing communities and conversions to natural gas as our distribution infrastructure continues to build out.

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The details are provided in the following table:

Three Months Ended

March 31, 2023

(in thousands) Delmarva Peninsula Florida

Three Months Ended Six Months Ended

June 30, 2023 June 30, 2023

(in thousands) Delmarva Peninsula Florida Delmarva Peninsula Florida

Customer Growth:

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Total Customer Growth (1)

$ 717 $ 1,127 $ 1,539 $ 1,827

(1) Customer growth amounts for Florida include the effects of revised rates associated with our natural gas base rate proceeding.

Regulated Energy Segment

For the quarter ended March 31, 2023, compared to the quarter ended March 31, 2022:

For the quarter ended June 30, 2023, compared to the quarter ended June 30, 2022:

Three Months Ended

March 31, Increase

June 30, Increase

2023 2022 (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 2023 was $37.6 million, an increase of $2.9 million, or 8.5 percent, over the same period in 2022.

Operating income for the Regulated Energy segment for the second quarter of 2023 was $29.3 million, an increase of $3.5 million, or 13.4 percent, over the same period in 2022.

Higher operating income reflects contributions from our Florida natural gas base rate proceeding, organic growth in our natural gas distribution businesses, incremental contributions associated with regulated infrastructure programs, and continued pipeline expansion projects.

These increases were partially offset by changes in customer consumption due to significantly warmer weather during the first quarter of 2023.

Operating expenses increased by $1.6 million compared to the prior year quarter primarily due to higher depreciation and amortization related to recent capital investments and higher facilities, maintenance and outside services costs.

These increases were partially offset by changes in customer consumption due to the continued effects of warmer weather during the quarter.

Operating expenses increased by $3.2 million compared to the prior year quarter related to employee costs driven by growth initiatives, the ongoing competitive labor market and higher benefits costs, higher facilities, maintenance and outside services costs and increased property taxes.

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

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Natural gas growth including conversions (excluding service expansions) 1,844

Natural gas transmission service expansions 1,113

Increased adjusted gross margin from off-system natural gas capacity sales 637

Contributions from regulated infrastructure programs 395

Changes in customer consumption - primarily related to weather (1,148)

Other variances (79)

Quarter-over-quarter increase in adjusted gross margin** $ 6,635

(1) Includes adjusted gross margin contributions from permanent base rates that became effective in March 2023.

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

Rate Changes Associated with the Florida Natural Gas Base Rate Proceeding

In March 2023, we obtained a final rate order in connection with the Florida natural gas base rate proceeding with permanent rates effective on March 1, 2023.

These permanent rates contributed additional adjusted gross margin of $3.9 million for the three months ended June 30, 2023.

Please 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 $1.8 million from natural gas customer growth.

Adjusted gross margin increased by $1.1 million in Florida and $0.7 million on the Delmarva Peninsula for the three months ended June 30, 2023, as compared to the same period in 2022, due primarily to residential customer growth of 4.0 percent and 5.5 percent in Florida and on the Delmarva Peninsula, respectively.

Natural Gas Transmission Service Expansions

We generated increased adjusted gross margin of $1.1 million for the three months ended June 30, 2023 from natural gas transmission service expansions including, Peninsula Pipeline's Wildlight, Lake Wales, Winter Haven, and Beachside projects, FPU natural gas' Clean Energy project and Aspire Energy Express' Guernsey pipeline expansion.

Contributions from Off-System Natural Gas Sales

We generated additional adjusted gross margin of $0.6 million related to off-system natural gas capacity sales for the three months ended June 30, 2023.

Contributions from Regulated Infrastructure Programs

Contributions from regulated infrastructure programs generated incremental adjusted gross margin of $0.4 million in the second quarter of 2023.

The increase in adjusted gross margin was primarily related to continued investment in the Eastern Shore's capital surcharge program and FPU Electric's storm protection plan.

Refer to Note 5, Rates and Other Regulatory Activities , in the condensed consolidated financial statements for additional information.

Changes in Customer Consumption

The continued effects of warmer weather in the second quarter of 2023 contributed to changes in weather-related consumption resulting in reduced adjusted gross margin of $1.1 million.

Operating Expenses

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

(in thousands)

Increased payroll, benefits and other employee-related expenses $ 1,305

Increased facilities expenses, maintenance costs and outside services 682

Depreciation, amortization and property taxes 474

Increased costs related to credit and collections 345

Other variances 379

Quarter-over-quarter increase in operating expenses $ 3,185

For the six months ended June 30, 2023, compared to the six months ended June 30, 2022:

Six Months Ended

June 30, Increase

2023 2022 (Decrease)

(in thousands)

Revenue $ 243,411 $ 220,084 $ 23,327

Regulated natural gas and electric costs 79,174 67,016 12,158

Adjusted gross margin (1)

164,237 153,068 11,169

Operations & maintenance 59,698 55,621 4,077

Depreciation & amortization 25,987 26,225 (238)

Other taxes 11,636 10,683 953

Total operating expenses 97,321 92,529 4,792

Operating income $ 66,916 $ 60,539 $ 6,377

(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, 2023 was $66.9 million, an increase of $6.4 million, or 10.5 percent, over the same period in 2022.

Higher operating income reflects contributions from our Florida natural gas base rate proceeding, organic growth in our natural gas distribution businesses, continued pipeline expansion projects and incremental contributions associated with regulated infrastructure programs.

These increases were partially offset by changes in customer consumption due to significantly warmer weather during the first half of 2023.

Operating expenses increased by $4.8 million compared to the prior year related to employee costs driven by growth initiatives, the ongoing competitive labor market and higher benefits costs, higher facilities, maintenance and outside services costs and increased property taxes.

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

(in thousands)

Rate changes associated with the Florida natural gas base rate proceeding (1)

Natural gas growth including conversions (excluding service expansions) 3,366

Natural gas transmission service expansions 1,594

Contributions from regulated infrastructure programs 1,193

Changes in customer consumption - primarily related to weather (3,013)

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Other variances 344

Quarter-over-quarter increase in adjusted gross margin** $ 4,533

Period-over-period increase in adjusted gross margin** $ 11,169

(1) Includes adjusted gross margin comprised of both interim rates and permanent base rates that became effective in March 2023.

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We generated additional adjusted gross margin of $3.4 million from natural gas customer growth.

Adjusted gross margin increased by $0.7 million in Florida and $0.8 million on the Delmarva Peninsula for the three months ended March 31, 2023, as compared to the same period in 2022, due primarily to residential customer growth of 4.4 percent and 5.8 percent in Florida and on the Delmarva Peninsula, respectively.

Adjusted gross margin increased by $1.8 million in Florida and $1.6 million on the Delmarva Peninsula for the six months ended June 30, 2023, as compared to the same period in 2022, due primarily to residential customer growth of 4.2 percent and 5.7 percent in Florida and on the Delmarva Peninsula, respectively.

Natural Gas Transmission Service Expansions

We generated increased adjusted gross margin of $1.6 million for the six months ended June 30, 2023 from natural gas transmission service expansions including, Peninsula Pipeline's Wildlight, Lake Wales, Winter Haven, and Beachside projects, FPU natural gas' Clean Energy project and Aspire Energy Express' Guernsey pipeline expansion.

Contributions from Regulated Infrastructure Programs

Contributions from regulated infrastructure programs generated incremental adjusted gross margin of $0.8 million in the first quarter of 2023.

The increase in adjusted gross margin was primarily related to continued investment in the Florida Gas Reliability Infrastructure Program, Eastern Shore's capital surcharge program, FPU Electric's storm protection plan, and the Elkton Gas STRIDE Plan.

Contributions from regulated infrastructure programs generated incremental adjusted gross margin of $1.2 million for the six months ended June 30, 2023.

The increase in adjusted gross margin was primarily related to Eastern Shore's capital surcharge program, and FPU Electric's storm protection plan.

Refer to Note 5, Rates and Other Regulatory Activities , in the condensed consolidated financial statements for additional information.

Natural Gas Transmission Service Expansions

We generated increased adjusted gross margin of $0.5 million for the three months ended March 31, 2023 from natural gas transmission service expansions including, Peninsula Pipeline's Twin Lakes and Winter Haven projects, FPU natural gas' Clean Energy project and Aspire Energy Express' Guernsey pipeline expansion.

Changes in Customer Consumption

Significantly warmer weather contributed to changes in weather-related consumption resulting in reduced adjusted gross margin of $1.9 million in the first quarter of 2023.

The Delmarva Peninsula and Florida were warmer by approximately 19 percent and 31 percent, respectively, for the three months ended March 31, 2023 compared to the same period in 2022.

Significantly warmer weather experienced during the first half of 2023 contributed to changes in weather-related consumption resulting in reduced adjusted gross margin of $3.0 million for the six months ended June 30, 2023.

The Delmarva Peninsula and Florida were warmer by approximately 20 percent and 31 percent, respectively, for the six months ended June 30, 2023 compared to the same period in 2022.

Eastern Shore Contracted Rate Adjustments

Adjustments to contracted rates charged to various Eastern Shore customers resulted in reduced adjusted gross margin of $0.3 million during the first quarter of 2023.

Adjustments to contracted rates charged to various Eastern Shore customers resulted in reduced adjusted gross margin of $0.3 million for the six months ended June 30, 2023 compared to the same period in 2022.

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)

Depreciation, amortization and property taxes $ 550

Payroll, benefits and other employee-related expenses $ 1,598

Increased facilities expenses, maintenance costs and outside services 1,064

Increased payroll, benefits and other employee-related expenses 293

Depreciation, amortization and property tax costs due to new capital investments 893

Increased costs related to credit and collections 426

Other variances 811

Quarter-over-quarter increase in operating expenses $ 1,589

Period-over-period increase in operating expenses $ 4,792

Unregulated Energy Segment

For the quarter ended March 31, 2023, compared to the quarter ended March 31, 2022:

For the quarter ended June 30, 2023, compared to the quarter ended June 30, 2022:

Three Months Ended

March 31, Increase

June 30, Increase

2023 2022 (Decrease)

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Total operating expenses 23,628 21,202 2,426

Operating Income $ 17,245 $ 20,046 $ (2,801)

Operating Income (Loss) $ (993) $ 560 $ (1,553)

(1) Adjusted Gross Margin is a non-GAAP measure utilized by Management to review business unit performance.

For a more detailed discussion on the differences between Gross Margin (GAAP) and Adjusted Gross Margin, see the Reconciliation of GAAP to Non-GAAP Measures presented above.

Operating results for the Unregulated Energy segment for the first quarter of 2023 experienced a reduction of $2.8 million compared to the same period in 2022.

Adjusted gross margin in the Unregulated Energy segment during the first quarter was impacted by changes in customer consumption due to significantly warmer weather in our Mid-Atlantic service territories.

Additionally, we experienced increased operating expenses associated with higher payroll, benefits and employee related expenses driven by the continued competition in the current labor market, depreciation, amortization and property taxes and increased costs for facilities, maintenance, and outside services.

These factors were partially offset by expanded propane margins and fees and increased demand for CNG, RNG and LNG services.

Operating results for the Unregulated Energy segment for the second quarter of 2023 experienced a reduction of $1.6 million compared to the same period in 2022.

Adjusted gross margin in the Unregulated Energy segment during the second quarter was impacted by changes in customer consumption due to continued warmer weather in our Mid-Atlantic service territories and the conversion of propane customers to our natural gas distribution service.

Additionally, we experienced increased operating expenses associated with higher employee costs driven by the continued competition in the current labor market and increased benefit costs, increased property taxes and higher costs related to facilities, maintenance, and outside services.

These factors were partially offset by increased propane margins and fees and continued demand for CNG, RNG and LNG services.

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

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Propane Operations

Increased propane margins and service fees $ 1,512

Reduced customer consumption due to conversion of customers to our natural gas system (591)

Propane customer consumption - primarily weather related (381)

CNG/RNG/LNG Transportation and Infrastructure

Increased demand for CNG/RNG/LNG Services 478

Aspire Energy

Reduced customer consumption - primarily weather related (45)

Other variances (100)

Quarter-over-quarter increase in adjusted gross margin $ 873

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

Propane Operations

• Increased Propane Margins and Service Fees - Adjusted g ross margin increased by $1.5 million for the three months ended June 30, 2023, mainly due to increased margins and customer service fees.

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.

• Reduced customer consumption due to conversion of customers to our natural gas system - Adjusted gross margin decreased by $0.6 million as more customers converted from propane to our natural gas distribution service.

• Propane customer consumption - Adjusted gross margin decreased by $0.4 million due to reduced customer consumption as weather mainly on the Delmarva Peninsula continued to remain significantly warmer relative to the

CNG/RNG/LNG Transportation and Infrastructure

• Increased demand for CNG/RNG/LNG services - Adjusted gross margin increased by $0.5 million during the second quarter of 2023 as compared to the same period in the prior year due to higher demand for CNG hold services and contributions from the Aspire Noble Road RNG project .

Aspire Energy

• Reduced Customer Consumption - Adjusted gross margin was reduced by less than $0.1 million due to reduced demand as weather in Ohio remained warmer compared to the same period in the prior year.

Operating Expenses

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

(in thousands)

Increased payroll, benefits and other employee-related expenses $ 1,908

Increased depreciation, amortization and property tax costs 311

Increased facilities expenses, maintenance costs and outside services 291

Other variances (84)

Quarter-over-quarter increase in operating expenses $ 2,426

For the six months ended June 30, 2023, compared to the six months ended June 30, 2022:

Six Months Ended

June 30, Increase

2023 2022 (Decrease)

(in thousands)

Revenue $ 123,916 $ 154,754 $ (30,838)

Unregulated propane and natural gas costs 58,687 89,708 (31,021)

Adjusted gross margin (1)

65,229 65,046 183

Operations & maintenance 37,810 34,211 3,599

Depreciation & amortization 8,503 7,954 549

Other taxes 2,664 2,268 396

Total operating expenses 48,977 44,433 4,544

Operating Income $ 16,252 $ 20,613 $ (4,361)

Operating results for the Unregulated Energy segment for the six months ended June 30, 2023 decreased by $4.4 million compared to the same period in 2022.

Operating results during the first half of 2023 were impacted by changes in customer consumption due to significantly warmer weather in our Mid-Atlantic service territories as well as the conversion of propane customers to our natural gas distribution service.

Additionally, we experienced increased operating expenses associated with higher employee related expenses driven by the continued competition in the current labor market and higher benefit costs, increased costs for facilities, maintenance, and outside services and higher property taxes.

These factors were partially offset by increased propane margins and fees and continued demand for CNG, RNG and LNG services.

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

(in thousands)

Propane Operations

Propane customer consumption - primarily weather related $ (4,924)

Increased propane margins and service fees 4,576

Decreased customer consumption due to conversion of customers to our natural gas system (591)

CNG/RNG/LNG Transportation and Infrastructure

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Other variances (91)

Quarter-over-quarter decrease in adjusted gross margin $ (690)

Period-over-period increase in adjusted gross margin $ 183

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

Propane Operations

• Propane customer consumption - Adjusted gross margin fell by $4.5 million due to reduced customer consumption as weather on the Delmarva Peninsula and in Florida was approximately 19 and 31 percent, warmer relative to the prior year.

• Increased Propane Margins and Service Fees - Adjusted g ross margin increased by $3.1 million for the three months ended March 31, 2023, mainly due to increased margins and customer service fees.

Propane margins also increased due to gains with our SWAP agreements.

• Propane customer consumption - Adjusted gross margin fell by $4.9 million as a result of reduced customer consumption driven by significantly warmer weather in our Mid-Atlantic and North Carolina service areas experienced primarily during the first quarter which continued to a lesser extent through the second quarter.

• Increased Propane Margins and Service Fees - Adjusted g ross margin increased by $4.6 million for the six months ended June 30, 2023, mainly due to increased margins and customer service fees.

Propane margins also increased due to gains associated with our SWAP agreements.

• Reduced customer consumption due to conversion of customers to our natural gas system - Adjusted gross margin fell by $0.6 million as more customers converted from propane to our natural gas distribution service.

CNG/RNG/LNG Transportation and Infrastructure

• Increased demand for CNG/RNG/LNG services - Adjusted gross margin increased by $1.3 million during the first quarter as compared to the same period in the prior year due to higher demand for CNG hold services and contributions from an Aspire RNG project .

• Increased demand for CNG/RNG/LNG services - Adjusted gross margin increased by $1.8 million during the first half of the year as compared to the same period in the prior year due to higher demand for CNG hold services and contributions from the Aspire Noble Road RNG project.

Aspire Energy

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Other variances 86

Quarter-over-quarter increase in operating expenses $ 2,111

Period-over-period increase in operating expenses $ 4,544

O THER I NCOME , N ET

For the quarter ended March 31, 2023 compared to the quarter ended March 31, 2022

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, decreased by $0.6 million in the first quarter of 2023.

This was primarily driven by increased pension related expenses and a reduced volume of asset sales, compared to the same period in 2022.

For the quarter ended June 30, 2023 compared to the quarter ended June 30, 2022

This was primarily attributable to lower gains on asset sales, including the absence of a one-time gain of $1.9 million related to a building sale during the second quarter of 2022, and higher pension related expenses compared to the same period in 2022.

For the six months ended June 30, 2023 compared to the six months ended June 30, 2022

This was primarily attributable to lower gains on asset sales, including the absence of a one-time gain referred to above, and higher pension related expenses compared to the same period in 2022.

I NTEREST C HARGES

For the quarter ended March 31, 2023 compared to the quarter ended March 31, 2022

Interest charges for the three months ended March 31, 2023 increased by $1.9 million, compared to the same period in 2022, attributable primarily to higher interest rates on outstanding borrowings under our Revolver and $0.3 million in interest expense as a result of a long-term debt placement in 2022.

These factors were partially offset by $0.4 million related to higher capitalized interest associated with growth projects.

The weighted-average interest rate on our Revolver borrowings was 5.17 percent during the first quarter of 2023 compared to 1.17 percent during the prior-year period as a result of the Federal Reserve raising interest rates throughout 2022 and during the first quarter of 2023.

As a result, the interest rates associated with our Revolver have increased 446 basis points since March 31, 2022.

For the quarter ended June 30, 2023 compared to the quarter ended June 30, 2022

Interest charges for the three months ended June 30, 2023 increased by $1.1 million, compared to the same period in 2022, attributable primarily to $0.9 million in interest expense as a result of a long-term debt placement in 2023 and $0.7 million in higher interest rates on outstanding borrowings under our Revolver.

These factors were partially offset by higher capitalized interest of $0.4 million associated with growth projects.

The weighted-average interest rate on our Revolver borrowings was 5.25 percent during the second quarter of 2023 compared to 1.52 percent during the prior-year period as a result of the Federal Reserve raising interest rates throughout 2022 and through the second quarter of 2023.

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 six months ended June 30, 2023 compared to the six months ended June 30, 2022

Interest charges for the six months ended June 30, 2023 increased by $3.0 million, compared to the same period in 2022, attributable to $2.6 million primarily related to higher interest rates on outstanding borrowings under our Revolver and $1.1 million in interest expense as a result of a long-term debt placement in 2022 and 2023.

These factors were partially offset by higher capitalized interest of $0.8 million associated with growth projects.

The weighted-average interest rate on our Revolver borrowings was 5.18 percent during the six months ended June 30, 2023 compared to 1.12 percent during the prior-year period as a result of the Federal Reserve raising interest rates throughout 2022 and during the six months ended June 30, 2023.

Any additional increases in interest rates by the Federal Reserve would have a corresponding increase in the interest rates charged under our Revolver.

I NCOME T AXES

For the quarter ended March 31, 2023 compared to the quarter ended March 31, 2022

Income tax expense was $11.6 million for the quarter ended March 31, 2023, compared to $13.5 million for the quarter ended March 31, 2022.

Our effective income tax rate was 24.2 percent and 26.8 percent, for the three months ended March 31, 2023 and 2022, respectively.

Income tax expense for the quarter ended March 31, 2023 includes a $1.3 million benefit in deferred tax expense resulting from a reduction in the Pennsylvania state income tax rate.

Excluding this change, our effective income tax rate was 26.9 percent for the quarter ended March 31, 2023.

For the quarter ended June 30, 2023 compared to the quarter ended June 30, 2022

Income tax expense was $6.1 million for the quarter ended June 30, 2023, compared to $6.2 million for the quarter ended June 30, 2022.

Our effective income tax rate was 27.4 percent and 26.6 percent, for the three months ended June 30, 2023 and 2022, respectively.

For the six months ended June 30, 2023 compared to the six months ended June 30, 2022

Income tax expense was $17.7 million for the six months ended June 30, 2023, compared to $19.7 million for the six months ended June 30, 2022.

Our effective income tax rate was 25.2 percent and 26.7 percent, for the six months ended June 30, 2023 and 2022, respectively.

Income tax expense for the six months ended June 30, 2023 includes a $1.3 million benefit in deferred tax expense resulting from a reduction in the Pennsylvania state income tax rate.

Excluding this change, our effective income tax rate was 27.0 percent for the six months ended June 30, 2023.

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

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We may also issue long-term debt and equity to fund capital expenditures and to maintain our capital structure within our target capital structure range.

We maintain an effective shelf registration statement with the SEC for the issuance of shares of common stock in various types of equity offerings, including shares of common stock under our ATM equity program, as well as an effective registration statement with respect to the DRIP.

Depending on our capital needs and subject to market conditions, in addition to other possible debt and equity offerings, we may consider issuing additional shares under the direct share purchase component of the DRIP and/or under the ATM equity program.

We maintain an effective shelf registration statement with the SEC for the issuance of shares of common stock in various types of equity offerings, including shares of common stock under an ATM equity program, as well as an effective registration statement with respect to the DRIP.

Our energy businesses are weather-sensitive and seasonal.

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Capital expenditures for investments in new or acquired plant and equipment are our largest capital requirements.

Our capital expenditures were $41.8 million for the three months ended March 31, 2023.

Our capital expenditures were $91.9 million for the six months ended June 30, 2023.

In the table below, we have provided the range of our forecasted capital expenditures for 2023:

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The 2023 forecast, excluding acquisitions, includes capital expenditures associated with the following:

Pipeline expansions related to the Eastern Shore Southern Expansion project and the Florida Beachside Pipeline, the Wildlight pipeline expansion, other small pipeline expansion opportunities, continued distribution system expansions including the Wildlight development in Florida.

Pipeline expansions related to the Eastern Shore Southern Expansion project, the Florida Beachside Pipeline, the Wildlight pipeline expansion, other small pipeline expansion opportunities and continued distribution system expansions including the Wildlight development in Florida.

Furthermore, the 2023 forecast includes continued expenditures under, the capital cost surcharge program as well as information technology system enhancements, and other strategic initiatives and investments.

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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, 2023 and December 31, 2022:

March 31, 2023 December 31, 2022

The following table presents our capitalization, excluding and including short-term borrowings, as of June 30, 2023 and December 31, 2022:

June 30, 2023 December 31, 2022

(in thousands)

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Total capitalization, excluding short-term debt $ 1,509,970 100 % $ 1,411,189 100 %

March 31, 2023 December 31, 2022

June 30, 2023 December 31, 2022

(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 53 percent as of March 31, 2023.

Our equity to total capitalization ratio, including short-term borrowings, was 53 percent as of June 30, 2023.

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

We may utilize more temporary short-term debt when the financing cost is attractive as a bridge to the permanent long-term financing or if the equity markets are volatile.

In the first three months of 2023, there were no issuances under the DRIP.

During the first half of 2023, there were no issuances under the DRIP.

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.

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In February 2023, we amended our Shelf Agreements with Prudential and MetLife.

The amended agreements now provide for total borrowing capacity of up to $405.0 million under the Prudential Shelf Agreement and $200.0 million under the MetLife Shelf Agreement.

Additionally, the amendments extend the term of the agreements for an additional three years from the effective dates.

The following table summarizes our Shelf Agreements at March 31, 2023:

The amended agreements expanded the total borrowing capacity and extended the term of the agreements for an additional three years from the effective date.

The following table summarizes our Shelf Agreements at June 30, 2023:

(in thousands) Total Borrowing Capacity Less:

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MetLife Shelf Agreement 200,000 (50,000) — 150,000

Total Shelf Agreements as of March 31, 2023 $ 605,000 $ (350,000) $ — $ 255,000

Total Shelf Agreements as of June 30, 2023 $ 605,000 $ (350,000) $ — $ 255,000

(1) The Prudential and MetLife Shelf Agreements both expire in February 2026.

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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, 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 the 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 upcoming year, expiring in August 2023.

As part of these amendments, the parties agreed to eliminate the previous covenant capping the aggregate investments at $150.0 million where we maintain an ownership interest less than 50 percent.

At June 30, 2023 and December 31, 2022, we had $95.8 million and $202.2 million, respectively, of short-term borrowings outstanding at a weighted average interest rate of 5.33 percent and 5.04 percent respectively.

In August 2022, we amended both tranches of the Revolver, which now bear interest using SOFR as the benchmark interest rate, plus a 10-basis point SOFR adjustment.

In addition, the 364-day tranche was extended through August 2023.

We expect to renew the 364-day tranche of the Revolver upon its current expiration.

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 remained unchanged.

Borrowings outstanding under the sustainable investment sublimit of the 364-day tranche amounted to $9.4 million at March 31, 2023.

Borrowings outstanding under the sustainable investment sublimit of the 364-day tranche amounted to $9.4 million at June 30, 2023.

The availability of funds under the Revolver is subject to conditions specified in the credit agreement, all of which we currently satisfy.

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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, 2023, we are in compliance with this covenant.

As of June 30, 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.

As of June 30, 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 June 30, 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 June 30, 2023 was $298.3 million.

As of June 30, 2023, we had issued $5.9 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.

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Long-Term Debt

On March 15, 2022, we issued 2.95 percent Senior Notes due March 15, 2042 to MetLife in the aggregate principal amount of $50 million.

We used the proceeds received from the issuances of the Senior Notes to reduce short-term borrowings under the 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.

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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.

The following table provides a summary of our operating, investing and financing cash flows for the three months ended March 31, 2023 and 2022:

Three Months Ended

The following table provides a summary of our operating, investing and financing cash flows for the six months ended June 30, 2023 and 2022:

Six Months Ended

(in thousands) 2023 2022

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Cash Flows Provided by Operating Activities

Changes in our cash flows from operating activities are attributable primarily to changes in net income, adjusted for non-cash items such as depreciation and changes in deferred income taxes, and working capital.

Changes in our cash flows from operating activities are attributable primarily to changes in net income, adjusted for non-cash items such as depreciation and amortization, changes in deferred income taxes, share-based compensation expense and working capital.

Working capital requirements are determined by a variety of factors, including weather, the prices of natural gas, electricity and propane, the timing of customer collections, payments for purchases of natural gas, electricity and propane, and deferred fuel cost recoveries.

During the three months ended March 31, 2023, net cash provided by operating activities was $81.7 million.

During the six months ended June 30, 2023, net cash provided by operating activities was $149.0 million.

Operating cash flows were primarily impacted by the following:

• Net income, adjusted for non-cash adjustments, provided a $93.7 million source of cash;

• 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 $24.6 million inflow of cash;

• A net increase in income tax payable increased cash inflows by $10.1 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 $28.8 million source of cash;

• Other working capital changes, impacted primarily by a reduction in net receivables and propane inventory levels, resulted in a $19.6 million source of cash;

• An increased level of deferred taxes associated with incremental tax depreciation from growth investments resulted in a source of cash of $5.7 million.

• Other working capital changes, impacted primarily by propane inventory purchases and hedging activities, resulted in a $13.5 million use of cash.

Cash Flows Used in Investing Activities

Net cash used in investing activities totaled $42.7 million during the three months ended March 31, 2023, largely driven by $42.4 million for new capital expenditures.

Net cash used in investing activities totaled $89.0 million during the six months ended June 30, 2023, largely driven by $90.3 million for new capital expenditures.

Cash Flows Used in Financing Activities

Net cash used in financing activities totaled $42.2 million during the three months ended March 31, 2023 and included the following:

Net cash used in financing activities totaled $62.0 million during the six months ended June 30, 2023 and included the following:

• Net repayments under the Revolver of $104.2 million;

• Net increase in long-term debt borrowings resulted in a source of cash of $77.9 million to permanently finance investment in growth initiatives;

• A use of cash of $19.0 million for dividend payments in 2023;

partially offset by

• A net increase in long-term debt borrowings of $65.8 million to permanently finance investment in growth initiatives.

Off-Balance Sheet Arrangements

The Board of Directors has authorized us to issue corporate guarantees securing obligations of our subsidiaries and to obtain letters of credit securing our subsidiaries' obligations.

The maximum authorized liability under such guarantees and letters of credit as of March 31, 2023 was $20.0 million.

The aggregate amount guaranteed related to our subsidiaries at March 31, 2023 was $14.2 million, with the guarantees expiring on various dates through March 30, 2024.

The maximum authorized liability under such guarantees and letters of credit as of June 30, 2023 was $20.0 million.

The aggregate amount guaranteed related to our subsidiaries at June 30, 2023 was $14.2 million, with the guarantees expiring on various dates through May 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, to our current and previous primary insurance carriers.

These letters of credit have various expiration dates through October 25, 2023.

We have not drawn upon these letters of credit as of March 31, 2023 and do not anticipate that the counterparties will draw upon these letters of credit.

The amount of specific purpose guarantees outstanding at June 30, 2023 was $4.0 million.

As of June 30, 2023, we have issued letters of credit totaling approximately $5.9 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 April

We have not drawn upon these letters of credit as of June 30, 2023 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 2022 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, 2023:

The following table summarizes commodity purchase contract obligations at June 30, 2023:

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