Chesapeake Utilities(CPK) - 2022 Q1 - Quarterly Report

FORM 10-Q Details This section provides an overview of the company's quarterly report filing, including its period and SEC classification Filing Information This section details the company's quarterly report filing status, confirming SEC compliance and its classification as a large accelerated filer - The registrant is filing a Quarterly Report on Form 10-Q for the period ended March 31, 2022[2] - The company has filed all required reports in the preceding 12 months and met filing requirements for the past 90 days[3] - The registrant is classified as a Large accelerated filer[4] Glossary of Definitions This section provides definitions for key terms and acronyms used throughout the financial report Key Terms and Acronyms This section defines financial measures, company subsidiaries, regulatory bodies, and industry-specific terms used in the report - Adjusted Gross Margin is a non-GAAP measure, excluding depreciation, amortization, and certain O&M expenses from operating revenues[8] - Key subsidiaries include Aspire Energy, Eastern Shore Natural Gas Company, Florida Public Utilities Company (FPU), Marlin Gas Services, Peninsula Pipeline Company, and Sharp Energy, Inc[8][9] - Regulatory bodies include FASB, FERC, and PSC[8][9] PART I—FINANCIAL INFORMATION This part presents the company's unaudited condensed consolidated financial statements and related disclosures ITEM 1. FINANCIAL STATEMENTS This section presents unaudited condensed consolidated financial statements, including income, comprehensive income, balance sheets, cash flows, and equity, with detailed notes Condensed Consolidated Statements of Income (Unaudited) This statement provides a summary of the company's revenues, expenses, and net income for the reported periods Condensed Consolidated Statements of Income (Unaudited) | Metric (in thousands) | March 31, 2022 | March 31, 2021 | | :-------------------- | :------------- | :------------- | | Total Operating Revenues | $222,880 | $191,187 | | Total Operating Expenses | $168,015 | $139,590 | | Operating Income | $54,865 | $51,597 | | Net Income | $36,933 | $34,466 | | Basic EPS | $2.09 | $1.97 | | Diluted EPS | $2.08 | $1.96 | - Net Income increased by $2.467 million (7.16%) from $34.466 million in Q1 2021 to $36.933 million in Q1 2022[13] - Diluted Earnings Per Share increased by $0.12 (6.12%) from $1.96 in Q1 2021 to $2.08 in Q1 2022[13] Condensed Consolidated Statements of Comprehensive Income (Unaudited) This statement presents net income and other comprehensive income components, leading to total comprehensive income Condensed Consolidated Statements of Comprehensive Income (Unaudited) | Metric (in thousands) | March 31, 2022 | March 31, 2021 | | :-------------------- | :------------- | :------------- | | Net Income | $36,933 | $34,466 | | Total Other Comprehensive Income, net of tax | $547 | $227 | | Comprehensive Income | $37,480 | $34,693 | - Total Other Comprehensive Income, net of tax, more than doubled from $227 thousand in Q1 2021 to $547 thousand in Q1 2022, driven by higher unrealized gains on commodity contract cash flow hedges[15] Condensed Consolidated Balance Sheets (Unaudited) This statement provides a snapshot of the company's assets, liabilities, and equity at specific points in time Condensed Consolidated Balance Sheets (Unaudited) | Metric (in thousands) | March 31, 2022 | December 31, 2021 | | :-------------------- | :------------- | :---------------- | | Total Assets | $2,109,629 | $2,114,869 | | Total Stockholders' Equity | $805,512 | $774,130 | | Long-term debt, net of current maturities | $597,878 | $549,903 | | Total Capitalization | $1,403,390 | $1,324,033 | | Total Current Liabilities | $279,713 | $376,433 | - Total Stockholders' Equity increased by $31.382 million (4.05%) from December 31, 2021, to March 31, 2022[25] - Total Current Liabilities decreased significantly by $96.720 million (25.7%) from December 31, 2021, to March 31, 2022, mainly due to reduced short-term borrowings[25] Condensed Consolidated Statements of Cash Flows (Unaudited) This statement details the cash inflows and outflows from operating, investing, and financing activities Condensed Consolidated Statements of Cash Flows (Unaudited) | Metric (in thousands) | March 31, 2022 | March 31, 2021 | | :-------------------- | :------------- | :------------- | | Net cash provided by operating activities | $69,120 | $80,382 | | Net cash used in investing activities | $(29,935) | $(51,847) | | Net cash used in financing activities | $(38,953) | $(26,459) | | Net Increase in Cash and Cash Equivalents | $232 | $2,076 | - Net cash provided by operating activities decreased by $11.262 million (14.01%) year-over-year[29] - Net cash used in investing activities decreased by $21.912 million (42.26%) year-over-year, mainly due to lower property, plant, and equipment expenditures[29] Condensed Consolidated Statements of Stockholders' Equity (Unaudited) This statement outlines changes in the company's equity accounts, including retained earnings and comprehensive income Condensed Consolidated Statements of Stockholders' Equity (Unaudited) | Metric (in thousands) | March 31, 2022 | December 31, 2021 | | :-------------------- | :------------- | :---------------- | | Total Stockholders' Equity | $805,512 | $774,130 | | Retained Earnings | $421,344 | $393,072 | | Accumulated Other Comprehensive Income | $1,850 | $1,303 | - Retained earnings increased by $28.272 million, driven by net income of $36.933 million, partially offset by dividends declared of $8.661 million[32] NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) This section provides detailed explanations and disclosures supporting the condensed consolidated financial statements 1. Summary of Accounting Policies This note outlines the basis of financial statement presentation, COVID-19 impact, and recent accounting standards - The financial statements comply with SEC rules and GAAP, with certain information condensed for interim periods[41] - COVID-19 restrictions have largely lifted, ending the deferral of pandemic-related costs for regulatory recovery[43] - ASU 2020-04 (Reference Rate Reform) is not expected to materially impact financial position or results[45] 2. Earnings Per Share This note details the calculation of basic and diluted earnings per share for the reported periods Earnings Per Share Calculation | Metric | March 31, 2022 | March 31, 2021 | | :----- | :------------- | :------------- | | Net Income | $36,933 | $34,466 | | Basic EPS | $2.09 | $1.97 | | Diluted EPS | $2.08 | $1.96 | | Weighted average shares outstanding (Basic) | 17,678,060 | 17,485,866 | | Adjusted denominator (Diluted) | 17,761,119 | 17,553,167 | 3. Acquisitions This note details the December 2021 acquisition of Diversified Energy's propane assets, outlining its strategic benefits and financial impact - Sharp Energy acquired Diversified Energy's propane assets for approximately $37.5 million, expanding into North and South Carolina[47] - The acquisition added approximately 19,000 customers and is expected to distribute 10.0 million gallons of propane annually[47] Diversified Energy Financial Contribution (Q1 2022) | Metric | Amount (in thousands) | | :-------------- | :-------------------- | | Operating Revenue | $10,400 | | Operating Income | $1,500 | 4. Revenue Recognition This note explains revenue recognition policies, presenting revenue by major source, contract balances, and remaining performance obligations - Revenue is recognized upon satisfaction of performance obligations, typically delivery or transportation of energy products[49] Total Operating Revenues by Segment (in thousands) | Segment | March 31, 2022 | March 31, 2021 | | :------ | :------------- | :------------- | | Regulated Energy | $127,891 | $121,197 | | Unregulated Energy | $101,292 | $74,759 | | Other and Eliminations | $(6,303) | $(4,769) | | Total Operating Revenues | $222,880 | $191,187 | Remaining Performance Obligations (in thousands) | Year | Eastern Shore and Peninsula Pipeline | Natural gas distribution operations | FPU electric distribution | Total | | :--- | :----------------------------------- | :---------------------------------- | :------------------------ | :---- | | 2022 | $35,359 | $5,010 | $489 | $40,858 | | 2023 | $44,475 | $5,681 | $652 | $50,808 | | 2024 | $39,677 | $5,458 | $652 | $45,787 | | 2025 | $33,050 | $4,928 | $275 | $38,253 | | 2026 | $29,467 | $4,745 | $275 | $34,487 | | 2027 | $25,228 | $4,406 | $275 | $29,909 | | 2028 and thereafter | $179,247 | $27,089 | $275 | $206,611 | 5. Rates and Other Regulatory Activities This note details regulatory oversight, recent activities, pipeline expansions, infrastructure plans, and COVID-19 cost recovery resolution - The company's operations are regulated by state PSCs (Delaware, Maryland, Florida) and FERC (Eastern Shore)[58] - Key regulatory projects include Ocean City Maryland Reinforcement, Elkton Gas' STRIDE plan, Peninsula Pipeline's Winter Haven Expansion and Beachside Pipeline Extension, and Eastern Shore's Southern Expansion[60][62][63][64][65] - The total COVID-19 regulatory asset balance was $2.0 million as of March 31, 2022, with recovery over two years[69] 6. Environmental Commitments and Contingencies This note addresses environmental liabilities from former MGP sites, detailing investigation, assessment, remediation efforts, and cost recovery mechanisms - The company has environmental liabilities of approximately $4.9 million as of March 31, 2022, related to seven former MGP sites[73] - Regulatory assets for future environmental cost recovery totaled $1.1 million as of March 31, 2022[73] - Remediation is ongoing for MGPs in Winter Haven, Key West, and Seaford, with estimated remaining clean-up costs between $0.3 million to $0.9 million[73] 7. Other Commitments and Contingencies This note outlines contractual commitments, including energy supply agreements and corporate guarantees for subsidiary obligations - The company has asset management agreements for natural gas transportation and storage, with some capacity released to third parties, creating contingent liabilities[74][75][76] - FPU's electric supply contracts require maintaining specific creditworthiness ratios, which FPU complied with as of March 31, 2022[77][79] - Corporate guarantees for subsidiary obligations totaled approximately $13.1 million as of March 31, 2022, with an authorized maximum liability of $20.0 million[80] 8. Segment Information This note describes the company's Regulated Energy and Unregulated Energy segments, providing financial information for each - The company operates in two segments: Regulated Energy (natural gas/electric distribution and transmission) and Unregulated Energy (transmission, generation, propane, CNG distribution)[82] Segment Operating Revenues and Income (in thousands) | Metric | Regulated Energy (2022) | Unregulated Energy (2022) | Other & Eliminations (2022) | Regulated Energy (2021) | Unregulated Energy (2021) | Other & Eliminations (2021) | | :----- | :---------------------- | :------------------------ | :-------------------------- | :---------------------- | :------------------------ | :-------------------------- | | Operating Revenues, Unaffiliated Customers | $124,058 | $98,822 | - | $120,721 | $70,466 | - | | Operating Income | $34,681 | $20,046 | $138 | $32,637 | $18,983 | $(23) | Identifiable Assets by Segment (in thousands) | Segment | March 31, 2022 | December 31, 2021 | | :------ | :------------- | :---------------- | | Regulated Energy | $1,620,209 | $1,629,191 | | Unregulated Energy | $440,936 | $439,114 | | Other businesses and eliminations | $48,484 | $46,564 | | Total identifiable assets | $2,109,629 | $2,114,869 | 9. Stockholders' Equity This note details common stock issuances via ATM and DRIP, and breaks down accumulated other comprehensive gain (loss) components - In Q1 2022, the company issued less than 0.1 million shares at an average price of $137.45, generating $3.2 million in net proceeds under the DRIP[88] - Accumulated other comprehensive income increased from $1.303 million to $1.850 million, primarily due to $547 thousand in net current-period other comprehensive income[91] Reclassifications Out of Accumulated Other Comprehensive Income (Loss) (in thousands) | Item | March 31, 2022 | March 31, 2021 | | :--- | :------------- | :------------- | | Amortization of defined benefit pension and postretirement plan items (net of tax) | $(18) | $(63) | | Gains on commodity contracts cash flow hedges (net of tax) | $1,969 | $2,205 | | Gains on interest rate swap cash flow hedges (net of tax) | $0 | $3 | | Total reclassifications for the period | $1,951 | $2,145 | 10. Employee Benefit Plans This note details net periodic benefit costs for pension and post-retirement plans, the Chesapeake Pension Plan termination, and benefit cost recognition - The Chesapeake Pension Plan was fully terminated in Q4 2021, with a portion of settlement expense recorded as regulatory assets and $0.6 million allocated to Unregulated Energy[97] Total Recognized in Net Periodic Benefit Cost (in thousands) | Plan | March 31, 2022 | March 31, 2021 | | :--- | :------------- | :------------- | | Chesapeake Pension Plan | $0 | $60 | | FPU Pension Plan | $124 | $155 | | Chesapeake SERP | $7 | $7 | | Chesapeake Postretirement Plan | $(7) | $(11) | | FPU Medical Plan | $0 | $(2) | | Total | $124 | $209 | - The company expects to contribute approximately $0.3 million to the FPU Pension Plan in 2022 and pay $0.2 million in cash benefits under the Chesapeake SERP[101][102] 11. Investments This note summarizes investment balances in Rabbi trusts and equity securities, and the recognition of unrealized gains or losses Investment Balances (in thousands) | Investment Type | March 31, 2022 | December 31, 2021 | | :-------------- | :------------- | :---------------- | | Rabbi trust | $11,534 | $12,069 | | Equity securities | $27 | $26 | | Total | $11,561 | $12,095 | - A net unrealized loss of $0.5 million was recorded in Q1 2022, compared to a net unrealized gain of $0.4 million in Q1 2021, related to these investments[103] 12. Share-Based Compensation This note details share-based compensation expense for directors and key employees, including stock activity and unrecognized costs Share-Based Compensation Expense (in thousands) | Category | March 31, 2022 | March 31, 2021 | | :------- | :------------- | :------------- | | Awards to non-employee directors | $234 | $188 | | Awards to key employees | $1,979 | $1,688 | | Total compensation expense | $2,213 | $1,876 | - Total compensation expense increased by $337 thousand (17.96%) year-over-year[106] - As of March 31, 2022, approximately $9.4 million of unrecognized compensation cost for key employee awards remains, to be recognized through 2024[113] 13. Derivative Instruments This note describes the company's use of derivative contracts to manage commodity price and interest rate risks, including propane swaps and expired interest rate swaps - The company uses derivative contracts to manage risks from natural gas, electricity, and propane price fluctuations, and interest rate risk[115] - Sharp Energy uses propane futures and swap agreements as cash flow hedges to mitigate wholesale propane price fluctuations, with $4.3 million expected to be reclassified to earnings in the next 12 months[116] - All interest rate swap agreements expired at December 31, 2021, with no new derivative contracts for short-term borrowings[117] 14. Fair Value of Financial Instruments This note outlines the fair value hierarchy and summarizes fair value measurements for financial assets and liabilities, including investments and derivatives - The fair value hierarchy categorizes inputs into Level 1 (quoted prices), Level 2 (observable inputs), and Level 3 (unobservable inputs)[127] Fair Value of Financial Assets and Liabilities (in thousands) | Category | March 31, 2022 (Total Fair Value) | December 31, 2021 (Total Fair Value) | | :------- | :-------------------------------- | :----------------------------------- | | Total Assets | $19,077 | $19,171 | | Total Liabilities | $484 | $743 | - Long-term debt had a carrying value of approximately $618.6 million and an estimated fair value of $584.2 million as of March 31, 2022, calculated using a Level 3 discounted cash flow methodology[130] 15. Long-Term Debt This note details outstanding long-term debt, including senior notes, an equipment security note, and available shelf agreement capacity Total Long-Term Debt (in thousands) | Metric | March 31, 2022 | December 31, 2021 | | :----- | :------------- | :---------------- | | Total long-term debt | $617,595 | $567,865 | | Less: current maturities | $(19,717) | $(17,962) | | Total long-term debt, net of current maturities | $597,878 | $549,903 | - On March 15, 2022, the company issued $50 million of 2.95% Senior Notes due March 15, 2042, to MetLife, for reducing short-term borrowings and funding capital expenditures[133] Remaining Borrowing Capacity Under Shelf Agreements (in thousands) | Shelf Agreement | Total Borrowing Capacity | Amount of Debt Issued | Remaining Borrowing Capacity | | :-------------- | :----------------------- | :-------------------- | :--------------------------- | | Prudential | $370,000 | $(220,000) | $150,000 | | MetLife | $150,000 | $(50,000) | $100,000 | | Total | $520,000 | $(270,000) | $250,000 | 16. Short-Term Borrowings This note details short-term borrowings, including outstanding amounts, interest rates, and the multi-tranche revolving credit facility - Short-term borrowings decreased from $221.6 million to $140.9 million with a weighted average interest rate of 1.17%[137] - The $400.0 million Revolver facility includes a $200.0 million 364-day tranche (expires August 2022) and a $200.0 million five-year tranche (expires August 2026)[138][141] - Total available credit under the Revolver was $256.3 million at March 31, 2022, after accounting for $5.3 million in issued letters of credit[141] 17. Leases This note describes lease arrangements for assets like office space and equipment, presenting lease costs, right-of-use assets, and future maturities - The company leases office space, land, equipment, pipeline facilities, and warehouses to support operations[143][144] Operating Lease Financial Information (in thousands) | Metric | March 31, 2022 | December 31, 2021 | | :----- | :------------- | :---------------- | | Operating lease cost (Q1) | $651 | $523 | | Operating lease right-of-use assets | $16,231 | $10,139 | | Total lease liabilities | $16,713 | $10,567 | - The weighted-average remaining lease term for operating leases was 8.76 years with a weighted-average discount rate of 3.4% as of March 31, 2022[147] ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS This section analyzes the company's financial condition, operations, and liquidity for Q1 2022, discussing performance drivers, strategic initiatives, and outlook Safe Harbor for Forward-Looking Statements This section highlights that the report contains forward-looking statements subject to various risks and uncertainties - The report contains forward-looking statements subject to risks and uncertainties, including regulatory changes, market conditions, and operational hazards[151] - Key risk factors include legislative and regulatory initiatives, legal outcomes, climate change impact, project authorization timing, and cybersecurity risks[151] Introduction This introduction outlines Chesapeake Utilities' business model as a diversified energy delivery company and its growth strategy - Chesapeake Utilities is a diversified energy delivery company focused on growing regulated energy earnings and investing in higher-return businesses[154][155] - Growth strategy platforms include optimizing existing businesses, pipeline expansions, Marlin Gas Services growth, strategic propane acquisitions, and sustainable energy opportunities[156] - Adjusted Gross Margin, a non-GAAP measure, is used to assess business unit performance and profitability under regulated rates and competitive pricing[159] 2022 to 2021 Gross Margin (GAAP) Variance – Regulated Energy This section analyzes the GAAP Gross Margin variance for the Regulated Energy segment between Q1 2022 and Q1 2021 - Gross Margin (GAAP) for the Regulated Energy segment increased by $3.4 million (5.9%) to $61.2 million in Q1 2022[163] - The increase was driven by pipeline expansions (Eastern Shore, Peninsula Pipeline), Guernsey pipeline contributions, natural gas distribution growth, and the Escambia Meter acquisition[163] - These gains were partially offset by higher depreciation, amortization, payroll, and employee-related costs[163] 2022 to 2021 Gross Margin (GAAP) Variance – Unregulated Energy This section analyzes the GAAP Gross Margin variance for the Unregulated Energy segment between Q1 2022 and Q1 2021 - Gross Margin (GAAP) for the Unregulated Energy segment increased by $3.3 million (11.2%) to $32.3 million in Q1 2022[164] - Growth was attributed to the Diversified Energy acquisition, increased propane margins and service fees, and higher rates for Aspire Energy[164] - Increased depreciation, amortization, property taxes, payroll, and vehicle expenses (due to higher fuel costs) partially offset these increases[164] Results of Operations for the Three Months Ended March 31, 2022 This section provides a comprehensive overview of the company's operational performance for the first quarter of 2022 Overview This overview reiterates the company's diversified energy business model and updates on lifted COVID-19 restrictions and cost deferrals - Chesapeake Utilities is a diversified energy company providing natural gas, electricity, propane distribution, transmission, and other energy services[166] - COVID-19 restrictions have largely lifted, concluding the company's ability to defer incremental pandemic-related costs for regulatory consideration[168] Environmental, Social and Governance Initiatives This section highlights the company's ESG commitment, including its inaugural sustainability report and recent advancements in environmental, social, and governance areas - Chesapeake Utilities published its inaugural sustainability report in February 2022, outlining commitments to a lower carbon future, diverse workplace, community sustainability, and ethical operations[169] - Recent environmental advancements include the first test of hydrogen and natural gas blend for power generation and Marlin Gas Services' first CNG fueling station distributing RNG[171] - The company established an Environmental Sustainability Office (ESO) and an ESG Committee (ESGC) in Q1 2022 to advance strategic ESG initiatives[171][173] Operational Highlights This section summarizes Q1 2022 financial performance, detailing drivers of increased net income and operating income, and offsetting factors Q1 2022 Operational Highlights (in thousands, except per share) | Metric | March 31, 2022 | March 31, 2021 | Increase (decrease) | | :----- | :------------- | :------------- | :------------------ | | Total Adjusted Gross Margin | $125,700 | $116,890 | $8,810 | | Total Operating Income | $54,865 | $51,597 | $3,268 | | Net Income | $36,933 | $34,466 | $2,467 | | Diluted Earnings Per Share | $2.08 | $1.96 | $0.12 | - Higher performance was driven by 2021 acquisitions (Diversified Energy, Escambia Meter Station), pipeline expansion projects, regulated infrastructure investments, natural gas distribution growth, and increased margins/fees from propane and Aspire Energy[175] - Offsetting factors included reduced propane consumption, higher depreciation, amortization, property taxes, and increased operating expenses from growth initiatives and acquisitions[175] Summary of Key Factors This section summarizes the key factors influencing the company's financial performance, including major projects and other drivers Recently Completed and Ongoing Major Projects and Initiatives This section outlines adjusted gross margin contributions from pipeline expansions, virtual pipeline solutions, RNG infrastructure, acquisitions, and regulatory initiatives Adjusted Gross Margin from Major Projects and Initiatives (in thousands) | Category | Q1 2022 | Q1 2021 | FY 2021 | FY 2022 Estimate | FY 2023 Estimate | | :------- | :------ | :------ | :------ | :--------------- | :--------------- | | Pipeline Expansions | $3,325 | $2,098 | $9,500 | $14,363 | $19,125 | | Virtual Pipeline Solutions (CNG/RNG/LNG) | $2,142 | $2,077 | $7,566 | $8,500 | $9,500 | | RNG Infrastructure | $91 | $0 | $0 | $1,000 | $1,000 | | Acquisitions | $4,225 | $0 | $1,186 | $12,300 | $13,000 | | Regulatory Initiatives | $5,442 | $4,201 | $18,220 | $21,056 | $21,765 | | Total | $15,225 | $8,376 | $36,472 | $57,219 | $64,390 | - The Del-Mar Energy Pathway project, placed into service in Q4 2021, generated an additional $0.8 million in adjusted gross margin for Q1 2022 and is estimated to generate $7.0 million annually in 2022[183][184] - The Diversified Energy acquisition contributed $4.0 million in adjusted gross margin in Q1 2022 and is expected to generate $11.3 million in 2022 and $12.0 million in 2023[197] Other major factors influencing adjusted gross margin This section discusses the impact of weather conditions and natural gas distribution customer growth on adjusted gross margin - Weather conditions resulted in a $0.4 million decrease in adjusted gross margin for Q1 2022 compared to Q1 2021[207] - Natural gas distribution customer growth generated $1.2 million of additional adjusted gross margin in Q1 2022, driven by residential growth of 5.3% on the Delmarva Peninsula and 4.0% in Florida[211] Customer Growth Adjusted Gross Margin (in thousands) | Region | Residential | Commercial and industrial | Total Customer Growth | | :----- | :---------- | :------------------------ | :-------------------- | | Delmarva Peninsula | $760 | $0 | $760 | | Florida | $375 | $59 | $434 | Regulated Energy Segment This section analyzes the financial performance of the Regulated Energy segment, including revenue, adjusted gross margin, and operating income Regulated Energy Segment Performance (in thousands) | Metric | March 31, 2022 | March 31, 2021 | Increase (decrease) | | :----- | :------------- | :------------- | :------------------ | | Revenue | $127,891 | $121,197 | $6,694 | | Adjusted gross margin | $82,449 | $78,154 | $4,295 | | Operating income | $34,681 | $32,637 | $2,044 | - Operating income increased by $2.0 million (6.3%) due to pipeline expansions, natural gas distribution growth, regulated infrastructure programs, and the Escambia Meter Station acquisition[214] - Operating expenses increased by $2.3 million, primarily from higher depreciation, amortization, property taxes, payroll, and employee-related expenses[214][220] Unregulated Energy Segment This section analyzes the financial performance of the Unregulated Energy segment, including revenue, adjusted gross margin, and operating income Unregulated Energy Segment Performance (in thousands) | Metric | March 31, 2022 | March 31, 2021 | Increase (decrease) | | :----- | :------------- | :------------- | :------------------ | | Revenue | $101,292 | $74,759 | $26,533 | | Adjusted gross margin | $43,284 | $38,776 | $4,508 | | Operating Income | $20,046 | $18,983 | $1,063 | - Operating results increased by $1.1 million (5.6%) driven by the Diversified Energy acquisition, margin improvement from Aspire Energy, and increased propane margins and service fees[223][224] - Offsetting factors included reduced propane consumption and increased operating expenses from the acquisition, employee-related costs, depreciation, and vehicle expenses due to rising fuel costs[224][228] OTHER INCOME, NET This section details the components and changes in other income, net, for the reported period - Other income, net, increased by $0.5 million in Q1 2022 compared to Q1 2021, including non-operating investment income, interest income, late fees, and gains/losses from asset sales and pension expenses[229] INTEREST CHARGES This section analyzes the changes in interest charges, identifying key drivers such as new debt and short-term borrowing fluctuations - Interest charges increased by $0.2 million in Q1 2022, primarily due to a $0.3 million increase from a 2022 long-term debt placement and a $0.1 million amortization credit/increase from a regulatory liability[230] - A $0.2 million decrease in interest expense from lower outstanding short-term borrowings partially offset the increase[230] - The interest rate on the Revolver increased by 0.34% due to Federal Reserve rate hikes, indicating potential future increases in interest charges[230] INCOME TAXES This section provides an overview of the company's income tax expense and effective tax rate for the period - Income tax expense was $13.5 million in Q1 2022, up from $12.4 million in Q1 2021[231] - The effective income tax rate was 26.8% for Q1 2022, compared to 26.5% for Q1 2021[231] FINANCIAL POSITION, LIQUIDITY AND CAPITAL RESOURCES This section analyzes the company's financial position, liquidity, and capital resources, including funding strategies and capital expenditures Capital Requirements and Funding This section discusses capital requirements for plant and equipment, and funding sources like cash from operations, short-term borrowings, and debt/equity issuances - Capital requirements are driven by investments in new plant and equipment, debt retirement, and seasonal working capital needs[233] - Funding sources include cash from operations, short-term borrowings, and potential long-term debt and equity issuances (e.g., ATM equity program, DRIP)[233] - Capital expenditures for Q1 2022 were $25.6 million, with a full-year 2022 forecast between $175 million and $200 million[235][236] Capital Structure This section details the company's capital structure, including the equity to total capitalization ratio, and its financial strategy - The company aims to maintain an equity to total capitalization ratio (including short-term borrowings) between 50% and 60%[240] - As of March 31, 2022, the equity to total capitalization ratio (including short-term borrowings) was 52%[240] Capitalization (in thousands) | Metric | March 31, 2022 | December 31, 2021 | | :----- | :------------- | :---------------- | | Long-term debt, net of current maturities | $597,878 (43%) | $549,903 (42%) | | Stockholders' equity | $805,512 (57%) | $774,130 (58%) | | Total capitalization, excluding short-term debt | $1,403,390 (100%) | $1,324,033 (100%) | | Short-term debt | $140,865 (9%) | $221,634 (14%) | | Long-term debt, including current maturities | $617,595 (39%) | $567,865 (36%) | | Stockholders' equity | $805,512 (52%) | $774,130 (50%) | | Total capitalization, including short-term debt | $1,563,972 (100%) | $1,563,629 (100%) | Shelf Agreements This section summarizes the company's shelf agreements with Prudential and MetLife, detailing borrowing capacity and available funds Shelf Agreements Summary (in thousands) | Shelf Agreement | Total Borrowing Capacity | Amount of Debt Issued | Remaining Borrowing Capacity | | :-------------- | :----------------------- | :-------------------- | :--------------------------- | | Prudential | $370,000 | $(220,000) | $150,000 | | MetLife | $150,000 | $(50,000) | $100,000 | | Total | $520,000 | $(270,000) | $250,000 | - The Prudential and MetLife Shelf Agreements expire in April 2023 and May 2023, respectively[242] Short-term Borrowings This section updates on short-term borrowings, including outstanding amounts, revolving credit facility structure, and financial covenant compliance - Short-term borrowings decreased from $221.6 million to $140.9 million with a weighted average interest rate of 1.17%[245] - The $400.0 million Revolver facility includes a $200.0 million 364-day tranche (expires August 2022) and a $200.0 million five-year tranche (expires August 2026)[246][248] - The company complied with its financial covenant to maintain a funded indebtedness ratio of no greater than 65% as of March 31, 2022[247] Long-Term Debt This section details the issuance of new long-term debt in March 2022 and the allocation of its proceeds - On March 15, 2022, the company issued $50 million of 2.95% Senior Notes due March 15, 2042, to MetLife[251] - Proceeds from the Senior Notes issuance were used to reduce short-term borrowings and fund capital expenditures[251] Cash Flows This section summarizes and analyzes cash flows from operating, investing, and financing activities for Q1 2022 Summary of Cash Flows (in thousands) | Activity | March 31, 2022 | March 31, 2021 | | :------- | :------------- | :------------- | | Net cash provided by operating activities | $69,120 | $80,382 | | Net cash used in investing activities | $(29,935) | $(51,847) | | Net cash used in financing activities | $(38,953) | $(26,459) | | Net increase in cash and cash equivalents | $232 | $2,076 | - Operating cash flows were primarily impacted by net income (adjusted for non-cash items), deferred taxes, changes in regulatory assets/liabilities, and working capital changes[254][255] - Financing activities included $82.0 million in repayments under lines of credit, $49.7 million from long-term debt, $3.2 million from stock issuance under DRIP, and $8.3 million for dividend payments[257] Off-Balance Sheet Arrangements This section describes the company's off-balance sheet arrangements, including corporate guarantees and letters of credit - The maximum authorized liability for corporate guarantees and letters of credit was $20.0 million as of March 31, 2022[258] - The aggregate guaranteed amount was approximately $13.1 million, expiring through March 30, 2023[258] - Letters of credit totaling approximately $5.3 million were issued, with no draws as of March 31, 2022, and expected renewals[259] Contractual Obligations This section summarizes commodity purchase contract obligations, noting no material changes from the prior annual report - No material change in contractual obligations from the 2021 Annual Report on Form 10-K, except for commodity purchase obligations[260] Commodity Purchase Contract Obligations (in thousands) | Period | Less than 1 year | 1 - 3 years | Total | | :----- | :--------------- | :---------- | :---- | | Purchase obligations - Commodity | $26,157 | $16,848 | $43,005 | Rates and Regulatory Matters This section refers to Note 5 for detailed information on the company's regulatory matters across its various regulated operations - The company's natural gas and electric distribution operations are regulated by state PSCs, and its transmission subsidiaries by FERC or state commissions[262] - Significant regulatory matters are fully described in Note 5 to the condensed consolidated financial statements[262] Recent Authoritative Pronouncements on Financial Reporting and Accounting This section directs readers to Note 1 for information on recent accounting developments and their financial statement impact - Recent accounting developments and their impact on financial position, results of operations, and cash flows are described in Note 1, Summary of Accounting Policies[263] ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK This section discusses the company's exposure to market risks, including interest rate, commodity price, wholesale credit, and inflation impacts INTEREST RATE RISK This section addresses the company's exposure to interest rate fluctuations and its strategies for mitigation - Long-term debt exposes the company to potential losses from changes in interest rates, influencing refinancing decisions and financing costs[267] - Interest rate swap agreements are utilized to mitigate short-term borrowing rate risk[267] COMMODITY PRICE RISK This section discusses the company's exposure to commodity price fluctuations across its regulated and unregulated segments - Regulated energy distribution businesses have limited commodity price risk due to fuel cost recovery mechanisms[268] - Unregulated propane operations face commodity price risk, mitigated by propane storage and forward contracts, guided by a Risk Management Policy[269][270] - Aspire Energy faces commodity price risk, primarily in winter, if natural gas purchases and sales are unbalanced, mitigated by procuring firm capacity and seeking new producers[271] WHOLESALE CREDIT RISK This section addresses the credit risks associated with counterparties to commodity derivative contracts - The Risk Management Committee reviews credit risks associated with counterparties to commodity derivative contracts[274] INFLATION This section discusses the impact of inflation on the company's costs and its strategies for mitigation - Inflation affects costs of supply, labor, products, and services[275] - Mitigation strategies include seeking periodic rate increases for regulated operations and adjusting propane sales prices[275] ITEM 4. CONTROLS AND PROCEDURES This section confirms the effectiveness of disclosure controls and procedures and reports no material changes in internal control over financial reporting - The CEO and CFO concluded that disclosure controls and procedures were effective as of March 31, 2022[276] - There were no material changes in internal control over financial reporting during the quarter ended March 31, 2022[277] PART II—OTHER INFORMATION This part contains additional information not included in the financial statements, such as legal proceedings and exhibits ITEM 1. LEGAL PROCEEDINGS This section states the company's involvement in legal and regulatory proceedings, with management believing no material financial impact - The company is involved in legal actions and claims arising in the normal course of business, and regulatory proceedings concerning rates[279] - Management believes the ultimate disposition of these proceedings and claims will not materially affect the company's financial position, results of operations, or cash flows[279] ITEM 1A. RISK FACTORS This section refers readers to the Annual Report on Form 10-K for a comprehensive discussion of risk factors affecting the business - Readers should consider the risk factors described in Part I, 'Item 1A. Risk Factors' of the 2021 Annual Report on Form 10-K[280] ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS This section reports on shares purchased for dividend reinvestment in Rabbi Trust accounts and confirms no publicly announced share repurchase plans - 390 shares were purchased on the open market in January 2022 at an average price of $142.49 per share for dividend reinvestment in Rabbi Trust accounts[282] - The company has no publicly announced plans or programs to repurchase its shares, other than for the purposes described[282] ITEM 3. DEFAULTS UPON SENIOR SECURITIES This section confirms that there were no defaults upon senior securities during the reporting period - There were no defaults upon senior securities[282] ITEM 5. OTHER INFORMATION This section indicates that no other information is reported - No other information is reported in this section[283] ITEM 6. EXHIBITS This section lists all exhibits filed with the Quarterly Report, including CEO/CFO certifications and XBRL documents - Exhibits include certifications from the Chief Executive Officer and Chief Financial Officer pursuant to Rule 13a-14(a) and 18 U.S.C. Section 1350[286][287] - XBRL Instance Document and Taxonomy Extension documents (Schema, Calculation, Definition, Label, Presentation Linkbase) are filed[286][288] SIGNATURES This section contains the official signatures certifying the accuracy and completeness of the report Report Signature This section contains the signature of Beth W. Cooper, Executive Vice President, CFO, Treasurer, and Assistant Corporate Secretary, certifying the report filing - The report is signed by Beth W. Cooper, Executive Vice President, Chief Financial Officer, Treasurer and Assistant Corporate Secretary, on May 3, 2022[292]