# CHESAPEAKE UTILITIES CORP (CPK) FY 2021 MD&A

Verbatim Item 7 Management's Discussion and Analysis from CHESAPEAKE UTILITIES CORP's 10-K for fiscal year 2021.

SEC filing source: https://www.sec.gov/Archives/edgar/data/19745/000162828022003530/cpk-20211231.htm
Accession: 0001628280-22-003530
Filing date: 2022-02-23
Report date: 2021-12-31
Extracted structurally from real Item 7 body heading to real Item 7A/8 boundary.
Confidence: high

Company profile: /company/CPK/
All MD&A years: /company/CPK/mda/
Next year: /company/CPK/mda/fy2022/ (FY 2022)

ITEM 7. Management's Discussion and Analysis of Financial Condition and Results of Operations

This section provides management’s discussion of Chesapeake Utilities and its consolidated subsidiaries, with specific information on results of operations, liquidity and capital resources, as well as discussion of how certain accounting principles affect our financial statements. It includes management’s interpretation of our financial results and our operating segments, the factors affecting these results, the major factors expected to affect future operating results as well as investment and financing plans. This discussion should be read in conjunction with our consolidated financial statements and notes thereto in Item 8, Financial Statements and Supplementary Data.

Several factors exist that could influence our future financial performance, some of which are described in Item 1A, Risk Factors. They should be considered in connection with forward-looking statements contained in this Annual Report, or otherwise made by or on behalf of us, since these factors could cause actual results and conditions to differ materially from those set out in such forward-looking statements.

In March 2020, the CDC declared a national emergency due to the rapidly growing outbreak of COVID-19. In response to this declaration and the rapid spread of COVID-19 within the United States, federal, state and local governments throughout the country imposed varying degrees of restrictions on social and commercial activity to promote social distancing in an effort to slow the spread of the illness. These restrictions significantly impacted economic conditions in the United States in 2020 and continued in some capacity throughout all of 2021. Chesapeake Utilities is considered an “essential business,” which has allowed us to continue operational activities and construction projects while adhering to the social distancing restrictions that were in place.

Throughout 2021, restrictions continued to be lifted as vaccines have become widely available in the United States. For example, the state of emergency in Florida was terminated in May 2021 followed by Delaware and Maryland in July 2021, resulting in reduced restrictions. The expiration of the states of emergency in our service territories, along with the settlement of our limited proceeding in Florida, has concluded our ability to defer incremental pandemic related costs for consideration through the applicable regulatory process.

We have been closely following the legal process related to the Occupational Safety and Health Administration (OSHA) Emergency Temporary Standard (ETS) mandating that all employers, with 100 or more employees, require COVID-19 vaccinations or weekly testing, which made its way to the United States Supreme Court. While OSHA has withdrawn the ETS as a temporary standard following the Supreme Court’s ruling, we will continue to monitor its status as a proposed rule. In light of the continued emergence and growing prevalence of the new variants of COVID-19, such as the Omicron variant, we continue to operate under our pandemic response plan, monitor developments affecting employees, customers, suppliers, and stockholders and take all precautions warranted to operate safely and to comply with the CDC and OSHA standards, in order to protect our employees, customers and the communities we serve. Refer to Item 8, Financial Statements and Supplementary Data, Note 19, Rates and Other Regulatory Activities, for further information on the potential deferral of incremental expenses associated with COVID-19.

Earnings per share information is presented on a diluted basis, unless otherwise noted.

The following discussions and those later in the document on operating income and segment results include the use of the term Adjusted Gross Margin which is a non-GAAP measure throughout our discussion on operating results. Adjusted Gross Margin is calculated by deducting the purchased cost of natural gas, propane and electricity and the cost of labor spent on direct revenue-producing activities from operating revenues. The costs included in Adjusted Gross Margin exclude depreciation and amortization and certain costs presented in operations and maintenance expenses in accordance with regulatory requirements. Adjusted Gross Margin should not be considered an alternative to Gross Margin under U.S. GAAP which is defined as the excess of sales over cost of goods sold. We believe that Adjusted Gross Margin, although a non-GAAP measure, is useful and meaningful to investors as a basis for making investment decisions. It provides investors with information that demonstrates the profitability achieved by us under our allowed rates for regulated energy operations and under our competitive pricing structures for our unregulated energy operations. Our management uses Adjusted Gross Margin as one of the financial measures in assessing our business units’ performance. Other companies may calculate Adjusted Gross Margin in a different manner.

The below tables reconcile Gross Margin as defined under GAAP to our non-GAAP measure of Adjusted Gross Margin for the years ended December 31, 2021, 2020 and 2019:

Chesapeake Utilities Corporation 2021 Form 10-K Page 27

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[[GREPCENT_TABLE]]
[["","","For the Year Ended December 31, 2021"],["(in thousands)","","Regulated Energy","","Unregulated Energy","","Other and Eliminations","","Total"],["Operating Revenues","","$","383,920","","","$","206,869","","","$","(20,821)","","","$","569,968"],["Cost of Sales:"],["Natural gas, propane and electric costs","","(100,737)","","","(106,900)","","","20,686","","","(186,951)"],["Depreciation & amortization","","(48,748)","","","(13,869)","","","(44)","","","(62,661)"],["Operations & maintenance expense (1)","","(32,890)","","","(24,168)","","","334","","","(56,724)"],["Gross Margin (GAAP)","","201,545","","","61,932","","","155","","","263,632"],["Operations & maintenance expense (1)","","32,890","","","24,168","","","(334)","","","56,724"],["Depreciation & amortization","","48,748","","","13,869","","","44","","","62,661"],["Adjusted Gross Margin (Non-GAAP)","","$","283,183","","","$","99,969","","","$","(135)","","","$","383,017"]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","","For the Year Ended December 31, 2020"],["(in thousands)","","Regulated Energy","","Unregulated Energy","","Other and Eliminations","","Total"],["Operating Revenues","","$","352,746","","","$","152,526","","","$","(17,074)","","","$","488,198"],["Cost of Sales:"],["Natural gas, propane and electric costs","","(91,994)","","","(62,780)","","","16,836","","","(137,938)"],["Depreciation & amortization","","(46,079)","","","(11,988)","","","(50)","","","(58,117)"],["Operations & maintenance expense (1)","","(31,237)","","","(22,914)","","","298","","","(53,853)"],["Gross Margin (GAAP)","","183,436","","","54,844","","","10","","","238,290"],["Operations & maintenance expense (1)","","31,237","","","22,914","","","(298)","","","53,853"],["Depreciation & amortization","","46,079","","11,988","","50","","","58,117"],["Adjusted Gross Margin (Non-GAAP)","","$","260,752","","","$","89,746","","","$","(238)","","","$","350,260"]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","","For the Year Ended December 31, 2019"],["(in thousands)","","Regulated Energy","","Unregulated Energy","","Other and Eliminations","","Total"],["Operating Revenues","","$","343,006","","","$","154,150","","","$","(17,551)","","","$","479,605"],["Cost of Sales:"],["Natural gas, propane and electric costs","","(102,803)","","","(68,885)","","","17,187","","","(154,501)"],["Depreciation & amortization","","(35,227)","","","(10,130)","","","(67)","","","(45,424)"],["Operations & maintenance expense (1)","","(30,219)","","","(22,025)","","","334","","","(51,910)"],["Gross Margin (GAAP)","","174,757","","","53,110","","","(97)","","","227,770"],["Operations & maintenance expense (1)","","30,219","","","22,025","","","(334)","","","51,910"],["Depreciation & amortization","","35,227","","10,130","","67","","","45,424"],["Adjusted Gross Margin (Non-GAAP)","","$","240,203","","","$","85,265","","","$","(364)","","","$","325,104"]]
[[/GREPCENT_TABLE]]

(1) Operations & maintenance expenses within the Consolidated Statements of Income are presented in accordance with regulatory requirements and to provide comparability within the industry. Operations & maintenance expenses which are deemed to be directly attributable to revenue producing activities have been separately presented above in order to calculate Gross Margin as defined under U.S. GAAP.

Chesapeake Utilities Corporation 2021 Form 10-K     Page 28

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2021 to 2020 Gross Margin (GAAP) Variance – Regulated Energy

Gross Margin (GAAP) for the Regulated Energy segment for 2021 was $201.5 million, an increase of $18.1 million, or 9.9 percent, compared to 2020. Higher operating gross margin reflects continued pipeline expansions by Eastern Shore and Peninsula Pipeline, organic growth in the natural gas distribution businesses, increased consumption from a return toward pre-pandemic consumption levels and operating results from 2020 and 2021 acquisitions. These increases were partially offset by higher depreciation, amortization related to recent capital investments and acquisitions, increased payroll and benefits costs as well as operating expenses associated with a return toward pre-pandemic conditions.

2020 to 2019 Gross Margin (GAAP) Variance – Regulated Energy

Gross Margin (GAAP) for the Regulated Energy segment for 2020 was $183.4 million, an increase of $8.7 million, or 5.0 percent, compared to 2019. In the fourth quarter of 2020, we established $1.9 million of regulatory assets based on the estimated net incremental expense resulting from the COVID-19 pandemic for our natural gas distribution and electric businesses as currently authorized by the Delaware, Maryland and Florida PSCs. Excluding the estimated unfavorable COVID-19 impacts of $4.2 million for the year, Gross Margin (GAAP) increased $12.9 million as a result of the Hurricane Michael regulatory proceeding settlement, operating results from expansion projects completed by Eastern Shore and Peninsula Pipeline, organic growth in our natural gas distribution businesses, contribution from the Elkton Gas acquisition and additional GRIP investments. These increases were offset by lower customer consumption driven primarily by milder weather; higher depreciation and amortization, including amortization of the regulatory asset associated with the Hurricane Michael regulatory proceeding settlement, new expenses associated with the acquisition of Elkton Gas, and higher other operating expenses.

2021 to 2020 Gross Margin (GAAP) Variance – Unregulated Energy

Gross Margin (GAAP) for the Unregulated Energy segment for 2021 was $61.9 million, an increase of $7.1 million compared to 2020. Higher gross margin is a result of weather that was colder than 2020, higher retail propane margins per gallon and service fees, contributions from the propane acquisitions completed in 2020 and 2021, increased demand for Marlin Gas Services' CNG transportation services and increased customer consumption along with higher rates for Aspire Energy. These increases were partially offset by higher depreciation, amortization and property taxes related to recent capital investments and acquisitions,a return toward pre-pandemic conditions and a general increase in operating expenses to support growth in the business.

2020 to 2019 Gross Margin (GAAP) Variance – Unregulated Energy

Gross Margin (GAAP) for the Unregulated Energy segment for 2020 was $54.8 million, an increase of $1.7 million compared to 2019. Excluding the estimated COVID-19 impacts of $1.7 million, Gross Margin (GAAP) increased $3.4 million due to the acquisitions of the Boulden and Western Natural Gas propane assets, higher retail propane volumes and fees, increased demand for Marlin Gas Services’ CNG transportation services and higher rates for Aspire Energy. These increases were partially offset by reduced volumes from overall warmer temperatures and higher depreciation and amortization expenses associated with recent acquisitions.

Chesapeake Utilities Corporation 2021 Form 10-K Page 29

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OVERVIEW AND HIGHLIGHTS

[[GREPCENT_TABLE]]
[["(in thousands except per share data)","","","","","Increase","","","","","","Increase"],["For the Year Ended December 31,","2021","","2020","","(decrease)","","2020","","2019","","(decrease)"],["Business Segment:"],["Regulated Energy","$","106,064","","","$","92,124","","","$","13,940","","","$","92,124","","","$","86,584","","","$","5,540"],["Unregulated Energy","24,382","","","20,664","","","3,718","","","20,664","","","19,938","","","726"],["Other businesses and eliminations","666","","","(65)","","","731","","","(65)","","","(237)","","","172"],["Operating Income","131,112","","","112,723","","","18,389","","","112,723","","","106,285","","","6,438"],["Other income (expense), net","1,721","","","3,222","","","(1,501)","","","3,222","","","(1,847)","","","5,069"],["Interest charges","20,135","","","21,765","","","(1,630)","","","21,765","","","22,224","","","(459)"],["Income from Continuing Operations Before Income Taxes","112,698","","","94,180","","","18,518","","","94,180","","","82,214","","","11,966"],["Income Taxes on Continuing Operations","29,231","","","23,538","","","5,693","","","23,538","","","21,114","","","2,424"],["Income from Continuing Operations","83,467","","","70,642","","","12,825","","","70,642","","","61,100","","","9,542"],["Income (loss) from Discontinued Operations, Net of Tax","(1)","","","686","","","(687)","","","686","","","(1,349)","","","2,035"],["Gain on sale of Discontinued Operations, Net of tax","\u2014","","","170","","","(170)","","","170","","","5,402","","","(5,232)"],["Net Income","$","83,466","","","$","71,498","","","$","11,968","","","$","71,498","","","$","65,153","","","$","6,345"],["Basic Earnings Per Share of Common Stock"],["Earnings Per Share from Continuing Operations","$","4.75","","","$","4.23","","","$","0.52","","","$","4.23","","","$","3.73","","","$","0.50"],["Earnings/ Per Share from Discontinued Operations","\u2014","","","0.05","","","(0.05)","","","0.05","","","0.24","","","(0.19)"],["Basic Earnings Per Share of Common Stock","$","4.75","","","$","4.28","","","$","0.47","","","$","4.28","","","$","3.97","","","$","0.31"],["Diluted Earnings Per Share of Common Stock:"],["Earnings Per Share from Continuing Operations","$","4.73","","","$","4.21","","","$","0.52","","","$","4.21","","","$","3.72","","","$","0.49"],["Earnings Per Share from Discontinued Operations","\u2014","","","0.05","","","(0.05)","","","0.05","","","0.24","","","(0.19)"],["Diluted Earnings Per Share of Common Stock","$","4.73","","","$","4.26","","","$","0.47","","","$","4.26","","","$","3.96","","","$","0.30"]]
[[/GREPCENT_TABLE]]

Chesapeake Utilities Corporation 2021 Form 10-K     Page 30

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2021 compared to 2020

Key variances in continuing operations between 2021 and 2020 included:

[[GREPCENT_TABLE]]
[["(in thousands, except per share data)","","Pre-tax Income","","Net Income","","Earnings Per Share"],["Year ended December 31, 2020 Reported Results from Continuing Operations","","$","94,180","","","$","70,642","","","$","4.21"],["Adjusting for unusual items:"],["Gains from sales of assets","","(989)","","","(724)","","","(0.04)"],["Net impact of NOL Carryback related to implementation of the CARES Act","","\u2014","","","(919)","","","(0.05)"],["Reduced interest expense related to early extinguishment of FPU mortgage bonds","","961","","","704","","","0.04"],["Regulatory deferral of COVID-19 expenses per PSCs orders","","2,377","","","1,741","","","0.10"],["","","2,349","","","802","","","0.05"],["Increased (Decreased) Adjusted Gross Margins:"],["Eastern Shore and Peninsula Pipeline service expansions*","","7,168","","","5,250","","","0.30"],["Increased customer consumption - primarily weather related","","5,519","","","4,043","","","0.23"],["Contributions from 2020 and 2021 acquisitions*","","4,773","","","3,496","","","0.20"],["Increased propane margins per gallon and fees","","3,638","","","2,664","","","0.15"],["Increased customer consumption - primarily due to return to pre-pandemic consumption","","3,418","","","2,504","","","0.14"],["Contributions from regulated infrastructure programs *","","3,158","","","2,313","","","0.13"],["Natural gas growth (excluding service expansions)","","3,084","","","2,259","","","0.13"],["Improved performance from electric operations","","1,015","","","743","","","0.04"],["Higher results from Aspire Energy","","325","","","238","","","0.01"],["","","32,098","","","23,510","","","1.33"],["(Increased) Decreased Other Operating Expenses (Excluding Natural Gas, Electricity and Propane Costs):"],["Depreciation, amortization and property tax costs due to new capital investments","","(5,995)","","","(4,391)","","","(0.25)"],["Outside services due to growth and a return toward pre-pandemic conditions","","(3,403)","","","(2,493)","","","(0.14)"],["Operating expenses from recent acquisitions","","(2,914)","","","(2,134)","","","(0.12)"],["Payroll, benefits and other employee-related expenses","","(1,756)","","","(1,286)","","","(0.07)"],["Increased facilities and maintenance costs","","(1,130)","","","(828)","","","(0.05)"],["","","(15,198)","","","(11,132)","","","(0.63)"],["Change in shares outstanding due to 2020 and 2021 equity offerings","","\u2014","","","\u2014","","","(0.21)"],["Net Other Changes","","(731)","","","(355)","","","(0.02)"],["Year ended December 31, 2021 Reported Results from Continuing Operations","","$","112,698","","","$","83,467","","","$","4.73"]]
[[/GREPCENT_TABLE]]

* See the Major Projects and Initiatives table.

Chesapeake Utilities Corporation 2021 Form 10-K Page 31

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SUMMARY OF KEY FACTORS

Recently Completed and Ongoing Major Projects and Initiatives

We constantly pursue and develop additional projects and initiatives to serve existing and new customers, further grow our businesses and earnings, with the intention of increasing shareholder value. The following represent the major projects/initiatives recently completed and currently underway. In the future, we will add new projects and initiatives to this table once substantially finalized and the associated earnings can be estimated.

[[GREPCENT_TABLE]]
[["","","Adjusted Gross Margin"],["","","Year Ended December 31,","","Estimate for Fiscal"],["(in thousands)","","2019","","2020","","2021","","2022","","2023"],["Pipeline Expansions:"],["Western Palm Beach County, Florida Expansion (1)","","$","2,139","","","$","4,167","","","$","4,729","","","$","5,227","","","$","5,227"],["Del-Mar Energy Pathway (1) (2)","","731","","","2,462","","","4,584","","","6,867","","","6,890"],["Callahan Intrastate Pipeline (2) (3)","","\u2014","","","3,080","","","7,564","","","7,564","","","7,564"],["Guernsey Power Station","","\u2014","","","\u2014","","","187","","","1,380","","","1,486"],["Southern Expansion","","\u2014","","","\u2014","","","\u2014","","","586","","","2,344"],["Winter Haven Expansion","","\u2014","","","\u2014","","","\u2014","","","759","","","976"],["Beachside Pipeline Expansions","","\u2014","","","\u2014","","","\u2014","","","\u2014","","","2,451"],["Total Pipeline Expansions","","2,870","","","9,709","","","17,064","","","22,383","","","26,938"],["CNG Transportation","","5,410","","","7,231","","","7,566","","","8,500","","","9,500"],["RNG Transportation","","\u2014","","","\u2014","","","\u2014","","","1,000","","","1,000"],["Acquisitions:"],["Diversified Energy","","\u2014","","","\u2014","","","603","","","11,300","","","12,000"],["Elkton Gas","","\u2014","","","1,344","","","3,548","","","3,720","","","3,743"],["Western Natural Gas","","\u2014","","","389","","","1,772","","","2,001","","","2,061"],["Escambia Meter Station","","\u2014","","","\u2014","","","583","","","1,000","","","1,000"],["Total Acquisitions","","\u2014","","","1,733","","","6,506","","","18,021","","","18,804"],["Regulatory Initiatives:"],["Florida GRIP","","13,939","","","15,178","","","16,995","","","18,797","","","19,475"],["Hurricane Michael Regulatory Proceeding","","\u2014","","","10,864","","","11,492","","","11,704","","","11,818"],["Capital Cost Surcharge Programs","","\u2014","","","523","","","1,199","","","2,002","","","1,961"],["Elkton STRIDE Plan","","\u2014","","","\u2014","","","26","","","299","","","354"],["Total Regulatory Initiatives","","13,939","","","26,565","","","29,712","","","32,802","","","33,608"],["Total","","$","22,219","","","$","45,238","","","$","60,848","","","$","82,706","","","$","89,850"]]
[[/GREPCENT_TABLE]]

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

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

(3) Prior year amounts have been revised to conform to the current period presentation.

Chesapeake Utilities Corporation 2021 Form 10-K     Page 32

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Detailed Discussion of Major Projects and Initiatives

Pipeline Expansions

Western Palm Beach County, Florida Expansion

Peninsula Pipeline is constructing four transmission lines to bring additional natural gas to our distribution system in West Palm Beach, Florida. The first phase of this project was placed into service in December 2018 and generated incremental adjusted gross margin of $0.6 million during 2021 compared to 2020. The remainder of the project was completed in the fourth quarter of 2021. We estimate that the project will generate annual adjusted gross margin of $5.2 million in 2022 and beyond.

Del-Mar Energy Pathway

In December 2019, the FERC issued an order approving the construction of the Del-Mar Energy Pathway project. The project was placed into service in the fourth quarter of 2021. The new facilities: (i) include an additional 14,300 Dts/d of firm service to four customers, (ii) provide additional natural gas transmission pipeline infrastructure in eastern Sussex County, Delaware, and (iii) represent the first extension of Eastern Shore’s pipeline system into Somerset County, Maryland. Construction of the project began in January 2020; including interim services in advance of construction completion, the project generated additional adjusted gross margin of $2.1 million for the year ended December 31, 2021. The estimated annual adjusted gross margin from this project, including natural gas distribution service in Somerset County, Maryland, is approximately $6.9 million in 2022 and growing each year thereafter, as the distribution system serving Somerset County further expands to meet demand.

Callahan Intrastate Pipeline

In May 2018, Peninsula Pipeline announced a plan to construct a jointly owned 26-mile intrastate transmission pipeline with Seacoast Gas Transmission in Nassau County, Florida to serve the growing demand in both Nassau and Duval Counties. This project was placed in service in June 2020 and generated $4.5 million in additional adjusted gross margin for the year ended December 31, 2021 including margin from natural gas distribution service. The pipeline is expected to generate $7.6 million annually in adjusted gross margin in 2022 and beyond.

Guernsey Power Station

Guernsey Power Station and the Company's affiliate, Aspire Energy Express, entered into a precedent agreement for firm transportation capacity whereby Guernsey Power Station will construct a power generation facility and Aspire Energy Express will provide firm natural gas transportation service to this facility. Guernsey Power Station commenced construction of the project in October 2019. Aspire Energy Express completed construction of the gas transmission facilities to provide the firm transportation service to the power generation facility in the fourth quarter of 2021. This project is expected to produce adjusted gross margin of approximately $1.4 million in 2022 and $1.5 million in 2023 and beyond.

Southern Expansion

Pending FERC authorization, Eastern Shore plans to install a new natural gas driven compressor skid unit at its existing Bridgeville, Delaware compressor station that will provide 7,300 Dts of incremental firm transportation pipeline capacity. The project is currently estimated to go into service in the fourth quarter of 2022. Eastern Shore expects the Southern Expansion project to generate annual adjusted gross margin of $0.6 million in 2022 and $2.3 million in 2023 and thereafter.

Winter Haven Expansion

In May 2021, Peninsula Pipeline filed a petition with the Florida PSC for approval of its Transportation Service Agreement with CFG for an incremental 6,800 Dts/d of firm service in the Winter Haven, Florida area. As part of this agreement, Peninsula Pipeline will construct a new interconnect with FGT and a new regulator station for CFG. CFG will use the additional firm service to support new incremental load due to growth in the area, including providing service, most immediately, to a new can manufacturing facility, as well as reliability and operational benefits to CFG’s existing distribution system in the area. In connection with Peninsula Pipeline’s new regulator station, CFG is also extending its distribution system to connect to the new station. We expect this expansion to generate additional adjusted gross margin of $0.8 million beginning in 2022 and $1.0 million in 2023 and beyond.

Beachside Pipeline Expansion

In June 2021, Peninsula Pipeline and Florida City Gas entered into a Transportation Service Agreement for an incremental 10,176 Dts/d of firm service in Indian River County, Florida, to support Florida City Gas’ growth along the Indian River's barrier island. As part of this agreement, Peninsula Pipeline will construct approximately 11.3 miles of pipeline from its existing pipeline in the Sebastian, Florida, area east under the ICW and southward on the barrier island. We expect this expansion to generate additional annual adjusted gross margin of $2.5 million in 2023 and beyond.

Chesapeake Utilities Corporation 2021 Form 10-K Page 33

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CNG Transportation

Marlin Gas Services provides CNG temporary hold services, contracted pipeline integrity services, emergency services for damaged pipelines and specialized gas services for customers who have unique requirements. For the year ended December 31, 2021, Marlin Gas Services generated additional adjusted gross margin of $0.3 million compared to the year ended December 31, 2020. We estimate that Marlin Gas Services will generate annual adjusted gross margin of approximately $8.5 million in 2022, and $9.5 million in 2023, with potential for additional growth in future years. Marlin Gas Services continues to actively expand the territories it serves, as well as leverage its patented technology to serve other markets, including pursuing liquefied natural gas transportation opportunities and renewable natural gas transportation opportunities from diverse supply sources to various pipeline interconnection points, as further outlined below.

RNG Transportation

Noble Road Landfill RNG Project

In September 2020, Fortistar and Rumpke Waste & Recycling announced commencement of construction of the Noble Road Landfill RNG Project in Shiloh, Ohio. The project includes the construction of a new state-of-the-art facility that will utilize advanced, patented technology to treat landfill gas by removing carbon dioxide and other components to purify the gas and produce pipeline quality RNG. In October 2021, we announced that Aspire Energy had completed construction of its Noble Road Landfill RNG pipeline project, a 33.1-mile pipeline, which will transport RNG generated from the landfill to Aspire Energy’s pipeline system, displacing conventionally produced natural gas. In conjunction with this expansion, Aspire Energy also upgraded an existing compressor station and installed two new metering and regulation sites. Once flowing, the RNG volume will represent nearly 10 percent of Aspire Energy’s gas gathering volumes.

Bioenergy Devco

In June 2020, our Delmarva natural gas operations and Bioenergy DevCo (“BDC”), a developer of anaerobic digestion facilities that create renewable energy and healthy soil products from organic material, entered into an agreement related to a project to extract RNG from poultry production waste. BDC and our affiliates are collaborating on this project in addition to several other project sites where organic waste can be converted into a carbon-negative energy source.

Marlin Gas Services will transport the RNG created from the organic waste from the BDC facility to an Eastern Shore interconnection, where the sustainable fuel will be introduced into our transmission system and ultimately distributed to our natural gas customers.

CleanBay Project

In July 2020, our Delmarva natural gas operations and CleanBay Renewables Inc. ("CleanBay") announced a new partnership to bring RNG to our operations. As part of this partnership, we will transport the RNG produced at CleanBay's planned Westover, Maryland bio-refinery, to our natural gas infrastructure in the Delmarva Peninsula region. Eastern Shore and Marlin Gas Services, will transport the RNG from CleanBay to our Delmarva natural gas distribution system where it is ultimately delivered to the Delmarva natural gas distribution end use customers.

At the present time, we expect to generate adjusted gross margin of $1.0 million in 2022 and beyond from renewable natural gas transportation. As we continue to finalize contract terms associated with some of these projects, additional information will be provided regarding incremental margin at a future time.

Acquisitions

Diversified Energy

On December 15, 2021, Sharp Energy acquired the propane operating assets of Diversified Energy Company for approximately $37.5 million net of cash acquired. There are multiple strategic benefits to this acquisition including it: (i) expands the Company's propane territory into North Carolina and South Carolina while also expanding our existing footprint in Pennsylvania and Virginia, and (ii) includes an established customer base with opportunities for future growth. Through this acquisition, the Company adds approximately 19,000 residential, commercial and agricultural customers, along with distribution of approximately 10.0 million gallons of propane annually. For the year ended December 31, 2021, Diversified Energy contributed $0.6 million in adjusted gross margin and is expected to generate $11.3 million of additional adjusted gross margin in 2022 and $12.0 million in 2023.

Elkton Gas

Chesapeake Utilities Corporation 2021 Form 10-K     Page 34

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In July 2020, we closed on the acquisition of Elkton Gas, which provides natural gas distribution service to approximately 7,000 residential and commercial customers within a franchised area of Cecil County, Maryland. The purchase price was approximately $15.6 million, which included $0.6 million of working capital. Elkton Gas’ territory is contiguous to our franchised service territory in Cecil County, Maryland. We generated $2.2 million in additional adjusted gross margin from Elkton Gas for the year ended December 31, 2021 and estimates that this acquisition will generate adjusted gross margin of approximately $3.7 million in 2022 and growing each year thereafter, as the distribution system serving Cecil County further expands to meet demand.

Western Natural Gas

In October 2020, Sharp acquired certain propane operating assets of Western Natural Gas, which provides propane distribution service throughout Jacksonville, Florida and the surrounding communities, for approximately $6.7 million, net of cash acquired The Company generated $1.4 million in additional adjusted gross margin from Western Natural Gas in 2021 and estimates that this acquisition will generate adjusted gross margin of approximately $2.0 million in 2022 with additional margin growth expected in future years as we further expand our presence.

Escambia Meter Station

In June 2021, Peninsula Pipeline purchased the Escambia Meter Station from Florida Power and Light and entered into a Transportation Service Agreement with Gulf Power Company to provide up to 530,000 Dts/d of firm service from an interconnect with FGT to Florida Power & Light’s Crist Lateral pipeline. The Florida Power & Light Crist Lateral provides gas supply to their natural gas fired power plant owned by Florida Power & Light in Pensacola, Florida. The Company generated $0.6 million in additional adjusted gross margin in 2021 and estimates that this acquisition will generate adjusted gross margin of approximately $1.0 million in 2022 and beyond.

Regulatory Initiatives

Florida GRIP

Florida GRIP is a natural gas pipe replacement program approved by the Florida PSC that allows automatic recovery, through rates, of costs associated with the replacement of mains and services. Since the program's inception in August 2012, the Company has invested $189.5 million of capital expenditures to replace 348 miles of qualifying distribution mains, including $23.6 million and $21.0 million of new pipes during 2021 and 2020, respectively. GRIP generated additional gross margin of $1.8 million for the year ended 2021 compared to 2020. We are currently projecting to complete this program in 2022 and expect to generate adjusted gross margin of $18.8 million and $19.5 million in 2022 and 2023, respectively. The adjusted gross margin on GRIP investments will continue until the Company requests the remaining net GRIP investment, and the associated expenses, be included in its next base rate proceeding.

Hurricane Michael

In October 2018, Hurricane Michael passed through FPU's electric distribution operation's service territory in Northwest Florida and caused widespread and severe damage to FPU's infrastructure resulting in 100 percent of its customers in the Northwest Florida service territory losing electrical service.

In September 2020, the Florida PSC approved a settlement agreement between FPU and the Office of the Public Counsel regarding final cost recovery and rates associated with Hurricane Michael. Previously, in late 2019, the Florida PSC approved an interim rate increase, subject to refund, effective January 1, 2020, associated with the restoration effort following Hurricane Michael. The Company fully reserved these interim rates, pending a final resolution and settlement of the limited proceeding. The settlement agreement allowed us to: (a) refund the over-collection of interim rates through the fuel clause; (b) record regulatory assets for storm costs in the amount of $45.8 million including interest which will be amortized over six years; (c) recover these storm costs through a surcharge for a total of $7.7 million annually; and (d) collect an annual increase in revenue of $3.3 million to recover capital costs associated with new plant investments and a regulatory asset for the cost of removal and unrecovered plant costs. The new base rates and storm surcharge were effective on November 1, 2020. The following table summarizes the impact of Hurricane Michael regulatory proceeding for the years ended December 31, 2021 and 2020:

Chesapeake Utilities Corporation 2021 Form 10-K Page 35

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[[GREPCENT_TABLE]]
[["","For the Year Ended December 31,","","For the Year Ended December 31,"],["(in thousands)","2021","","2020"],["Adjusted Gross Margin","$","11,492","","","$","10,864"],["Depreciation","1,218","","","1,184"],["Amortization of regulatory assets","(8,317)","","","(8,317)"],["Operating income","4,393","","","3,731"],["Amortization of liability associated with interest expense","1,207","","","1,475"],["Pre-tax income","5,600","","","5,206"],["Income tax expense","(1,484)","","","(1,403)"],["Net income","$","4,116","","","$","3,803"]]
[[/GREPCENT_TABLE]]

Capital Cost Surcharge Programs

In December 2019, the FERC approved Eastern Shore’s capital cost surcharge to become effective January 1, 2020. The surcharge, an approved item in the settlement of Eastern Shore’s last general rate case, allows Eastern Shore to recover capital costs associated with mandated highway or railroad relocation projects that required the replacement of existing Eastern Shore facilities. In 2021 there was $0.7 million of adjusted gross margin was added pursuant to the program. Eastern Shore expects to produce adjusted gross margin of approximately $2.0 million in 2022 and 2023 from relocation projects, which is ultimately dependent upon the timing of filings and the completion of construction.

Elkton Gas STRIDE Plan

In March 2021, Elkton Gas filed a STRIDE plan with the Maryland PSC. The STRIDE plan proposes to increase the speed of Elkton Gas' Aldyl-A pipeline replacement program and to recover the costs of the plan in the form of a fixed charge rider through a proposed 5-year surcharge. Under Elkton Gas’ proposed STRIDE plan, the Aldyl-A pipelines would be replaced by 2023. In June 2021, we reached a settlement with the Maryland PSC Staff and the Maryland Office of the Peoples Counsel. The STRIDE plan went into service in September 2021 and is expected to generate $0.3 million of additional adjusted gross margin in 2022 and $0.4 million annually thereafter.

COVID-19 Regulatory Proceeding

In October 2020, the Florida PSC approved a joint petition of our natural gas and electric distribution utilities in Florida to establish a regulatory asset to record incremental expenses incurred due to COVID-19. The regulatory asset will allow us to seek recovery of these costs in the next base rate proceedings. In November 2020, the Office of Public Counsel filed a protest to the order approving the establishment of this regulatory asset treatment. The Company’s Florida regulated business units reached a settlement with Office of Public Counsel in June 2021. The settlement allowed the business units to establish a regulatory asset of $2.1 million. This amount includes COVID-19 related incremental expenses for bad debt write-offs, personnel protective equipment, cleaning and business information services for remote work. Our Florida regulated business units will amortize the amount over two years beginning January 1, 2022 and recover the regulatory asset through the Purchased Gas Adjustment and Swing Service mechanisms for the natural gas business units and through the Fuel Purchased Power Cost Recovery clause for the electric division. This results in annual additional adjusted gross margin of $1.0 million that will be offset by a corresponding amortization of regulatory asset expense for both 2022 and 2023.

Other Major Factors Influencing Adjusted Gross Margin

Weather and Consumption

Weather conditions accounted for increased adjusted gross margin of $5.5 million in 2021 compared to 2020. Assuming normal temperatures, as detailed below, adjusted gross margin would have been higher by $2.2 million. The following table summarizes heating degree day ("HDD") and cooling degree day (“CDD”) variances from the 10-year average HDD/CDD ("Normal") for the years ended December 31, 2021 compared to 2020 and December 31, 2020 compared to 2019.

Chesapeake Utilities Corporation 2021 Form 10-K     Page 36

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HDD and CDD Information

[[GREPCENT_TABLE]]
[["","For the Years Ended December 31,"],["","2021","","2020","","Variance","","2020","","2019","","Variance"],["Delmarva"],["Actual HDD","3,849","","","3,716","","","133","","","3,716","","","4,089","","","(373)"],["10-Year Average HDD (\"Normal\")","4,182","","","4,294","","","(112)","","","4,294","","","4,379","","","(85)"],["Variance from Normal","(333)","","","(578)","","","","","(578)","","","(290)"],["Florida (1)"],["Actual HDD","829","","","745","","","84","","","745","","","740","","","5"],["10-Year Average HDD (\"Normal\")","839","","","933","","","(94)","","","933","","","967","","","(34)"],["Variance from Normal","(10)","","","(188)","","","","","(188)","","","(227)"],["Ohio"],["Actual HDD","5,138","","","5,218","","","(80)","","","5,218","","","5,500","","","(282)"],["10-Year Average HDD (\"Normal\")","5,621","","","5,701","","","(80)","","","5,701","","","5,983","","","(282)"],["Variance from Normal","(483)","","","(483)","","","","","(483)","","","(483)"],["Florida (1)"],["Actual CDD","2,687","","","3,078","","","(391)","","","3,078","","","3,194","","","(116)"],["10-Year Average CDD (\"Normal\")","2,952","","","2,931","","","21","","","2,931","","","2,889","","","42"],["Variance from Normal","(265)","","","147","","","","","147","","","305"]]
[[/GREPCENT_TABLE]]

(1) Prior year amounts have been revised to conform to the current period presentation.

Natural Gas Distribution Growth

Customer growth for our natural gas distribution operations, as a result of the addition of new customers and the conversion of customers from alternative fuel sources to natural gas service, generated $3.1 million of additional adjusted gross margin in 2021. The average number of residential customers served on the Delmarva Peninsula and Florida increased by approximately 4.5 percent and 4.7 percent, respectively, during 2021. 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. In Florida, as new communities continue to build out due to population growth and infrastructure is added to support the growth, there is increased load from both residential customers as well as new commercial and industrial customers. The details are provided in the following table:

[[GREPCENT_TABLE]]
[["","","Adjusted Gross Margin increase"],["","","For the Year Ended December 31, 2021"],["(in thousands)","","Delmarva Peninsula","","Florida"],["Customer growth:"],["Residential","","$","1,468","","","$","1,010"],["Commercial and industrial","","278","","","328"],["Total customer growth","","$","1,746","","","$","1,338"]]
[[/GREPCENT_TABLE]]

Chesapeake Utilities Corporation 2021 Form 10-K Page 37

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REGULATED ENERGY

[[GREPCENT_TABLE]]
[["","","","","","Increase","","","","","","Increase"],["For the Year Ended December","2021","","2020","","(decrease)","","2020","","2019","","(decrease)"],["(in thousands)"],["Revenue","$","383,920","","","$","352,746","","","$","31,174","","","$","352,746","","","$","343,006","","","$","9,740"],["Natural gas and electric costs","100,737","","","91,994","","","8,743","","","91,994","","","102,803","","","(10,809)"],["Adjusted gross margin (1)","283,183","","","260,752","","","22,431","","","260,752","","","240,203","","","20,549"],["Operations & maintenance","108,300","","","104,379","","","3,921","","","104,379","","","102,099","","","2,280"],["Gain from a settlement","\u2014","","","(130)","","","130","","","(130)","","","(130)","","","\u2014"],["Depreciation & amortization","48,748","","","46,079","","","2,669","","","46,079","","","35,227","","","10,852"],["Other taxes","20,071","","","18,300","","","1,771","","","18,300","","","16,423","","","1,877"],["Other operating expenses","177,119","","","168,628","","","8,491","","","168,628","","","153,619","","","15,009"],["Operating Income","$","106,064","","","$","92,124","","","$","13,940","","","$","92,124","","","$","86,584","","","$","5,540"]]
[[/GREPCENT_TABLE]]

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.

2021 compared to 2020

Operating income for the Regulated Energy segment for 2021 was $106.1 million, an increase of $13.9 million, or 15.1 percent, compared to 2020. Higher operating income reflects continued pipeline expansions by Eastern Shore and Peninsula Pipeline, organic growth in the natural gas distribution businesses, increased consumption from a return toward pre-pandemic consumption levels and operating results from 2020 and 2021 acquisitions. We recorded higher depreciation, amortization and property taxes of $4.3 million related to recent capital investments and net operating expenses of $4.2 million. The increase was associated primarily with an increase in outside services, employee related costs and increased spending with the 2020 and 2021 acquisitions. In addition to these growth drivers, the increase in other operating expenses was also attributable to operations returning towards pre-pandemic conditions. Partially offsetting the increase was the establishment of regulatory assets for COVID-19 expenses approved by the various state PSCs of approximately $2.4 million.

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

[[GREPCENT_TABLE]]
[["(in thousands)"],["Eastern Shore and Peninsula Pipeline service expansions","$","7,168"],["Natural gas distribution customer growth (excluding service expansions)","3,084"],["Increased customer consumption - primarily due to return to pre-pandemic consumption","3,027"],["Contributions from 2020 and 2021 acquisitions","2,787"],["Florida GRIP","1,817"],["Increased customer consumption - primarily weather related","1,159"],["Improved results from electric operations","1,015"],["Eastern Shore capital relocation and non-service expansion projects","676"],["Sandpiper infrastructure rider associated with conversions","665"],["Other","1,033"],["Year-over-year increase in adjusted gross margin","$","22,431"]]
[[/GREPCENT_TABLE]]

The following narrative discussion provides further detail and analysis of the significant variances in adjusted gross margin detailed above.

Eastern Shore and Peninsula Pipeline Service Expansions

We generated increased earnings of $5.1 million from Peninsula Pipeline's Western Palm Beach County and Callahan projects and $2.1 million from Eastern Shore's Del-Mar Energy Pathway project.

Chesapeake Utilities Corporation 2021 Form 10-K     Page 38

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Natural Gas Distribution Customer Growth

Organic growth within our natural gas distribution businesses improved operating results compared to the full year 2020. Residential customer growth was 4.5 percent on the Delmarva Peninsula and 4.7 percent in Florida compared to the prior year. On the Delmarva Peninsula, a larger percentage of our results was generated from residential growth given the expansion of gas into new communities and conversions, while in Florida, as gas heating is not a significant portion of residential use, a greater portion occurred in the commercial and industrial sectors.

Consumption Increase – Return Towards Pre-pandemic Conditions

Increased customer consumption, which reflects the ongoing return toward pre-pandemic conditions in our service territories as a result of the expiration of restrictions imposed to slow down the spread of COVID-19 increased adjusted gross margin by $3.0 million.

Contribution from Acquisitions

The acquisition of Elkton Gas in July 2020 and the Escambia meter station in June 2021 increased adjusted gross margin by $2.8 million.

Florida GRIP

Continued investment in the Florida GRIP generated additional adjusted gross margin of $1.8 million.

Increased Customer Consumption - Weather Related

Adjusted gross margin increased by $1.2 million due to colder weather and higher other consumption on the Delmarva Peninsula and in Florida in 2021 compared to 2020. The weather on the Delmarva Peninsula was 4 percent cooler in 2021 compared to 2020.

Improved Results from Electric Operations

Our electric operations generated additional adjusted gross margin of $1.0 million due to increased consumption and growth.

Eastern Shore Capital Relocation and Non-service Expansion Projects

We generated additional adjusted gross margin of $0.7 million from Eastern Shore's surcharge on capital spent on several governmental-mandated relocation and non-service expansion projects.

Sandpiper Energy Infrastructure Rider Associated with Conversions

Conversion of Sandpiper Energy's propane customers to natural gas customers generated additional adjusted gross margin of $0.7 million.

The major components of the increase in other operating expenses are as follows:

[[GREPCENT_TABLE]]
[["(in thousands)"],["Depreciation, amortization and property tax costs due to new capital investments","$","4,323"],["Outside services due to growth and a return toward pre-pandemic conditions","3,102"],["Payroll, benefits and other employee-related expenses","1,489"],["Operating expenses from the Elkton Gas acquisition","1,370"],["Regulatory deferral of COVID-19 expenses per PSCs orders","(2,377)"],["Other variances","584"],["Period-over-period increase in other operating expenses","$","8,491"]]
[[/GREPCENT_TABLE]]

2020 compared to 2019

The results for the Regulated Energy segment for the year ended December 31, 2020 compared to 2019 are described in Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations of our Annual Report on Form 10-K for the year ended December 31, 2020, which is incorporated herein by reference.

Chesapeake Utilities Corporation 2021 Form 10-K Page 39

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UNREGULATED ENERGY

[[GREPCENT_TABLE]]
[["","","","","","Increase","","","","","","Increase"],["For the Year Ended December 31,","2021","","2020","","(decrease)","","2020","","2019","","(decrease)"],["(in thousands)"],["Revenue","$","206,869","","","$","152,526","","","$","54,343","","","$","152,526","","","$","154,150","","","$","(1,624)"],["Propane and natural gas costs","106,900","","","62,780","","","44,120","","","62,780","","","68,884","","","(6,104)"],["Adjusted gross margin (1)","99,969","","","89,746","","","10,223","","","89,746","","","85,266","","","4,480"],["Operations & maintenance","57,950","","","53,839","","","4,111","","","53,839","","","52,028","","","1,811"],["Depreciation & amortization","13,869","","","11,988","","","1,881","","","11,988","","","10,130","","","1,858"],["Other taxes","3,768","","","3,255","","","513","","","3,255","","","3,170","","","85"],["Other operating expenses","75,587","","","69,082","","","6,505","","","69,082","","","65,328","","","3,754"],["Operating Income","$","24,382","","","$","20,664","","","$","3,718","","","$","20,664","","","$","19,938","","","$","726"]]
[[/GREPCENT_TABLE]]

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.

2021 Compared to 2020

Operating income for the Unregulated Energy segment for 2021 was $24.4 million, an increase of $3.7 million compared to 2020. The higher operating income is a result of weather that was colder than 2020, higher retail propane margins per gallon and service fees, incremental adjusted gross margin from the propane acquisitions completed in 2020 and 2021, increased demand for Marlin Gas Services' CNG transportation services and increased customer consumption along with higher rates for Aspire Energy. These adjusted gross margin increases were partially offset by higher depreciation, amortization and property taxes related to recent capital investments and acquisitions,a return toward pre-pandemic conditions and a general increase in operating expenses to support growth in the business.

Adjusted Gross Margin

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

[[GREPCENT_TABLE]]
[["(in thousands)"],["Propane Operations"],["Increased customer consumption - primarily weather related","","$","3,603"],["Increased retail propane margins per gallon and service fees","","3,250"],["Acquisitions of Western Natural Gas and Diversified Energy (completed October 2020 and December 2021)","","1,986"],["Increased wholesale propane margins per gallon","","388"],["Marlin Gas Services"],["Increased demand for CNG services","","334"],["Aspire Energy"],["Increased customer consumption - primarily weather related","","757"],["Higher overall rates inclusive of natural gas liquid processing","","325"],["Other variances","","(420)"],["Year-over-year increase in adjusted gross margin","","$","10,223"]]
[[/GREPCENT_TABLE]]

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

Propane Operations

•Increased Customer Consumption Primarily Weather Related - Adjusted gross margin increased by $3.6 million for the Mid-Atlantic propane operations as weather on the Delmarva Peninsula was 4 percent colder in 2021 compared to 2020.

•Increased Retail Propane Margins Per Gallon and Service Fees - Adjusted gross margin increased by $3.2 million, due to lower propane inventory costs and favorable market conditions as well as resuming the assessment of our customary service fees. These market conditions, which include 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.

Chesapeake Utilities Corporation 2021 Form 10-K     Page 40

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•Acquisitions of Western Natural Gas and Diversified Energy - We generated adjusted gross margin of $1.4 million from Western Natural Gas which was acquired by Sharp in October 2020 and $0.6 million from Diversified Energy which was acquired by Sharp in December 2021.

•Increased Wholesale Propane Margins per Gallon - Adjusted gross margin increased by $0.4 million during 2021 over the same period in 2020, due to lower propane inventory costs and favorable market conditions. These conditions tend to fluctuate based on changes in demand, supply and other energy commodity prices.

Marlin Gas Services

•Increased demand for Marlin Gas Services’ CNG hold services improved operating results compared to 2020.

Aspire Energy

•Increased Customer Consumption Primarily Weather Related - Adjusted gross margin increased by $0.8 million due to higher consumption related to weather as compared to the prior year.

•Improved Performance From Natural Gas Liquid Processing - Adjusted gross margin increased by $0.3 million, from natural gas liquid processing activities compared to 2020.

Other Operating Expenses

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

[[GREPCENT_TABLE]]
[["(in thousands)"],["Depreciation, amortization and property tax costs due to new capital investments","$","1,985"],["Operating expenses from Western Natural Gas and Diversified Energy acquisitions","1,130"],["Increased facilities and maintenance costs","1,036"],["Increased vehicle expenses","417"],["Insurance related costs (non-health)","395"],["Outside services due to growth and a return toward pre-pandemic conditions","364"],["Payroll, benefits and other employee-related expenses due to growth","311"],["Other variances","867"],["Period-over-period increase in other operating expenses","$","6,505"]]
[[/GREPCENT_TABLE]]

2020 compared to 2019

The results for the Unregulated Energy segment for the year ended December 31, 2020 compared to 2019 are described in Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations of our Annual Report on Form 10-K for the year ended December 31, 2020, which is incorporated by reference.

Divestiture of PESCO

During the fourth quarter of 2019, we sold PESCO's assets and contracts and accordingly have exited the natural gas marketing business. This was done in an effort to enable us to focus on the strategies that support our core energy delivery business. As a result, we began to report PESCO as discontinued operations during the third quarter of 2019 and excluded PESCO's performance from continuing operations for all periods presented and classified its assets and liabilities as held for sale, where applicable.

Chesapeake Utilities Corporation 2021 Form 10-K Page 41

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OTHER INCOME (EXPENSE), NET

Other income (expense), net was $1.7 million and $3.2 million for 2021 and 2020, respectively. Other income (expense), net includes non-operating investment income (expense), interest income, late fees charged to customers, gains or losses from the sale of assets for our unregulated businesses and pension and other benefits expense. The decrease was primarily due to a higher level of asset sales in 2020 compared to 2021.

INTEREST CHARGES

2021 Compared to 2020

Interest charges for 2021 decreased by $1.6 million, compared to the same period in 2020. In the fourth quarter of 2020, the 9.08% FPU secured first mortgage bonds were terminated resulting in $1.0 million in interest and fees associated with the early payoff. Interest expense, which included the expense associated with the bonds decreased by $0.6 million due primarily to lower levels outstanding under our revolving credit facilities and lower interest rates on short-term borrowings. This decrease was offset by an increase of $0.5 million primarily due to lower capitalized interest associated with growth projects and $0.3 million of an amortization credit/reduction in interest expense associated with a regulatory liability that was established in connection with the Hurricane Michael regulatory proceeding settlement.

INCOME TAXES

2021 Compared to 2020

Income tax expense from continuing operations was $29.2 million for 2021 compared to $23.5 million for 2020. Our effective income tax rates were 25.9 percent and 25.0 percent for the year ended December 31, 2021 and 2020, respectively. During the years ended December 31, 2021 and 2020 we implemented certain provisions of the CARES Act that allowed us to carryback net operating losses into prior year periods where the federal income tax rate was higher. As a result, we recognized a $0.9 million reduction in tax expense for the twelve months ended December 31, 2021 and a $1.8 million reduction for the twelve months ended December 31, 2020. Excluding this impact of the CARES Act, our effective` tax rates for the years ended December 31, 2021 and 2020 were 26.8 percent and 26.9 percent, respectively.

LIQUIDITY AND CAPITAL RESOURCES

Our capital requirements reflect the capital-intensive and seasonal nature of our business and are principally attributable to investment in new plant and equipment, retirement of outstanding debt and seasonal variability in working capital. We rely on cash generated from operations, short-term borrowings, and other sources to meet normal working capital requirements and to temporarily finance capital expenditures. We may also issue long-term debt and equity to fund capital expenditures and to maintain our capital structure within our target capital structure range. We maintain an effective shelf registration statement with the SEC for the issuance of shares of common stock under 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. Beginning in the third quarter of 2020, we issued shares of common stock under both the DRIP and the ATM equity program.

Our energy businesses are weather-sensitive and seasonal. We normally generate a large portion of our annual net income and subsequent increases in our accounts receivable in the first and fourth quarters of each year due to significant volumes of natural gas, electricity, and propane delivered by our distribution operations, and our natural gas transmission operations to customers during the peak heating season. In addition, our natural gas and propane inventories, which usually peak in the fall months, are largely drawn down in the heating season and provide a source of cash as the inventory is used to satisfy winter sales demand.

Capital expenditures for investments in new or acquired plant and equipment are our largest capital requirements. Our capital expenditures were $227.8 million in 2021.

Chesapeake Utilities Corporation 2021 Form 10-K     Page 42

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The following table shows total capital expenditures for the year ended December 31, 2021 by segment and by business line:

[[GREPCENT_TABLE]]
[["","","For the Year Ended December 31, 2021"],["(dollars in thousands)"],["Regulated Energy:"],["Natural gas distribution","","$","78,084"],["Natural gas transmission","","55,149"],["Electric distribution","","6,500"],["Total Regulated Energy","","139,733"],["Unregulated Energy:"],["Propane distribution","","46,023"],["Energy transmission","","20,101"],["Other unregulated energy","","15,527"],["Total Unregulated Energy","","81,651"],["Other:"],["Corporate and other businesses","","6,425"],["Total Other","","6,425"],["Total 2021 Capital Expenditures","","$","227,809"]]
[[/GREPCENT_TABLE]]

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

[[GREPCENT_TABLE]]
[["","Estimate for Fiscal 2022"],["(dollars in thousands)","Low","","High"],["Regulated Energy:"],["Natural gas distribution","$","87,000","","","$","92,000"],["Natural gas transmission","60,000","","","67,000"],["Electric distribution","7,000","","","12,000"],["Total Regulated Energy","154,000","","","171,000"],["Unregulated Energy:"],["Propane distribution","10,000","","","14,000"],["Energy transmission","5,000","","","6,000"],["Other unregulated energy","4,000","","","5,000"],["Total Unregulated Energy","19,000","","","25,000"],["Other:"],["Corporate and other businesses","2,000","","","4,000"],["Total Other","2,000","","","4,000"],["Total 2022 Forecasted Capital Expenditures","$","175,000","","","$","200,000"]]
[[/GREPCENT_TABLE]]

The 2022 forecast, excluding acquisitions, includes capital expenditures for the following: Pipeline expansions related to the Eastern Shore Southern expansion and the Florida Beachside Pipeline as well as amounts for the expansion into Somerset County, Maryland. Furthermore, the 2022 forecast includes continued expenditures under the Florida GRIP, the capital cost surcharge program and the Elkton Gas STRIDE program as well as further expansion of our natural gas distribution and transmission systems, information technology systems and other strategic initiatives and investments.

The capital expenditure projection is subject to continuous review and modification. Actual capital requirements may vary from the above estimates due to a number of factors, including changing economic conditions, capital delays because of COVID-19 that are greater than currently anticipated, customer growth in existing areas, regulation, new growth or acquisition opportunities, availability of capital and other factors discussed in Item 1A. Risk Factors. Historically, actual capital expenditures have typically lagged behind the budgeted amounts.

Chesapeake Utilities Corporation 2021 Form 10-K Page 43

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The timing of capital expenditures can vary based on delays in regulatory approvals, securing environmental approvals and other permits. The regulatory application and approval process has lengthened in the past few years, and we expect this trend to continue.

Capital Structure

We are committed to maintaining a sound capital structure and strong credit ratings. This commitment, along with adequate and timely rate relief for our regulated energy operations, is intended to ensure our ability to attract capital from outside sources at a reasonable cost, which will benefit our customers, creditors, employees and stockholders.

The following tables present our capitalization, excluding and including short-term borrowings, as of December 31, 2021 and 2020 follows:

[[GREPCENT_TABLE]]
[["","December 31, 2021","","December 31, 2020"],["(in thousands)"],["Long-term debt, net of current maturities","$","549,903","","","42","%","","$","508,499","","","42","%"],["Stockholders\u2019 equity","774,130","","","58","%","","697,085","","","58","%"],["Total capitalization, excluding short-term borrowings","$","1,324,033","","","100","%","","$","1,205,584","","","100","%"]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","December 31, 2021","","December 31, 2020"],["(in thousands)"],["Short-term debt","$","221,634","","","14","%","","$","175,644","","","13","%"],["Long-term debt, including current maturities","567,866","","","36","%","","522,099","","","37","%"],["Stockholders\u2019 equity","774,130","","","50","%","","697,085","","","50","%"],["Total capitalization, including short-term borrowings","$","1,563,630","","","100","%","","$","1,394,828","","","100","%"]]
[[/GREPCENT_TABLE]]

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 approximately 50 percent as of December 31, 2021. We seek to align permanent financing with the in-service dates of 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 2021, we issued just over 0.1 million shares at an average price per share of $125.71 and received net proceeds of $15.2 million under the DRIP. In the third and fourth quarters of 2020, we issued 1.0 million shares of common stock through our DRIP and the ATM programs and received net proceeds of approximately $83.0 million which were added to the general funds and then used to pay down short-term borrowing. See Note 16, Stockholders’ Equity, in the consolidated financial statements for additional information on commissions and fees paid in connection with these issuances.

Uncollateralized Senior Notes

All of our Senior Notes require periodic principal and interest payments as specified in each note. They also contain various restrictions. The most stringent restrictions state that we must maintain equity of at least 40 percent of total capitalization (including short-term borrowings), and the fixed charge coverage ratio must be at least 1.2 times. The most recent Senior Notes issued since September 2013 also contain a restriction that we must maintain an aggregate net book value in our regulated business assets of at least 50 percent of our consolidated total assets. Failure to comply with those covenants could result in accelerated due dates and/or termination of the Senior Note agreements.

Certain Uncollateralized Senior Notes contain a “restricted payments” covenant as defined in the respective note agreements. The most restrictive covenants of this type are included within the 5.93 percent Senior Note, due October 31, 2023. The covenant provides that we cannot pay or declare any dividends or make any other restricted payments in excess of the sum of $10.0 million, plus our consolidated net income accrued on and after January 1, 2003. As of December 31, 2021, the cumulative consolidated net income base was $664.5 million, offset by restricted payments of $289.4 million, leaving $375.1 million of cumulative net income free of restrictions.

Shelf Agreements

We have entered into Shelf Agreements with Prudential and MetLife, whom are under no obligation to purchase any unsecured debt. The following table summarizes our Shelf Agreements at December 31, 2021:

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[[GREPCENT_TABLE]]
[["","","Total Borrowing Capacity","","Less: Amount of Debt Issued","","Less: Unfunded Commitments","","Remaining Borrowing Capacity"],["Shelf Agreement"],["(in thousands)"],["Prudential Shelf Agreement (1)","","$","370,000","","","$","(220,000)","","","\u2014","","","$","150,000"],["MetLife Shelf Agreement (2)","","150,000","","","\u2014","","","(50,000)","","","100,000"],["Total","","$","520,000","","","$","(220,000)","","","$","(50,000)","","","$","250,000"]]
[[/GREPCENT_TABLE]]

(1) The Prudential and MetLife Shelf Agreements expire in April 2023 and May 2023, respectively.

(2) Unfunded commitments of $50 million reflects Senior Notes expected to be issued on or before March 15, 2022.

The Senior Notes, Shelf Agreements and Shelf Notes set forth certain business covenants to which we are subject when any note is outstanding, including covenants that limit or restrict our ability, and the ability of our subsidiaries, to incur indebtedness, or place or permit liens and encumbrances on any of our property or the property of our subsidiaries.

Short-Term Borrowings

We are authorized by our Board of Directors to borrow up to $400.0 million of short-term debt, as required. At December 31, 2021 and 2020, we had $221.6 million and $175.6 million, respectively, of short-term borrowings outstanding at a weighted average interest rate of 0.83 percent and 1.28 percent, respectively.

In August 2021, we amended and restated our Revolver into a multi-tranche facility totaling $400.0 million with multiple participating lenders. The two tranches of the facility consist of a $200.0 million 364-day short-term debt tranche and a $200.0 million five-year tranche, both of which have three one-year extension options, which can be authorized by our Chief Financial Officer. We are eligible to establish the repayment term for individual borrowings under the five year tranche of the facility and to the extent that an individual loan under the revolver exceeded 12 months, the outstanding balance would be classified as a component of long-term debt.

The availability of funds under the Revolver is subject to conditions specified in the credit agreement, all of which we currently satisfy. These conditions include our compliance with financial covenants and the continued accuracy of representations and warranties contained in these agreements. We are required by the financial covenants in the Revolver to maintain, at the end of each fiscal year, a funded indebtedness ratio of no greater than 65 percent. As of December 31, 2021, we are in compliance with this covenant.

The 364-day tranche of the Revolver expires in August 2022 and the five-year tranche expires in August 2026. Both tranches are available to provide funds for our short-term cash needs to meet seasonal working capital requirements and to temporarily fund portions of our capital expenditures. Borrowings under both tranches of the Revolver are subject to a pricing grid, including the commitment fee and the interest rate charged. Our pricing is adjusted each quarter based upon a total indebtedness to total capitalization ratio. As of December 31, 2021, the pricing under the 364-day tranche of the Revolver does not include an unused commitment fee and maintains an interest rate of 0.70 percent over LIBOR. As of December 31, 2021, the pricing under the five-year tranche of the Revolver included an unused commitment fee of 0.09 percent and an interest rate of 0.95 percent over LIBOR.

Our total available credit under the Revolver at December 31, 2021 was $173.1 million. As of December 31, 2021, we had issued $5.3 million in letters of credit to various counterparties under the syndicated Revolver. These letters of credit are not included in the outstanding short-term borrowings and we do not anticipate they will be drawn upon by the counterparties. The letters of credit reduce the available borrowings under our syndicated Revolver.

In the fourth quarter of 2020, we entered into two $30.0 million interest rate swaps with a total notional amount of $60.0 million through December 2021 with pricing of 0.20 percent and 0.205 percent for the period associated with our outstanding borrowing under the Revolver. In February 2021, we entered into an additional interest rate swap with a notional amount of $40.0 million through December 2021 with pricing of 0.17 percent. As of December 31, 2021 all of our interests rate swaps had expired and we had not entered into any new swaps.

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Key statistics regarding our unsecured short-term credit facilities (our Revolver and previous bilateral lines of credit and revolving credit facility) for the years ended December 31, 2021, 2020 and 2019 are as follows:

[[GREPCENT_TABLE]]
[["(in thousands)","2021","","2020","","2019"],["Average borrowings during the year","$","182,305","","","$","230,526","","","$","257,587"],["Weighted average interest rate for the year","1.03","%","","1.50","%","","3.11","%"],["Maximum month-end borrowings","$","226,097","","","$","284,914","","","$","302,379"]]
[[/GREPCENT_TABLE]]

Cash Flows

The following table provides a summary of our operating, investing and financing cash flows for the years ended December 31, 2021, 2020 and 2019:

[[GREPCENT_TABLE]]
[["","For the Year Ended December 31,"],["","2021","","2020","","2019"],["(in thousands)"],["Net cash provided by (used in):"],["Operating activities","$","150,504","","","$","158,916","","","$","102,964"],["Investing activities","(223,023)","","","(181,631)","","","(186,587)"],["Financing activities","73,996","","","19,229","","","84,519"],["Net (decrease) increase in cash and cash equivalents","1,477","","","(3,486)","","","896"],["Cash and cash equivalents\u2014beginning of period","3,499","","","6,985","","","6,089"],["Cash and cash equivalents\u2014end of period","$","4,976","","","$","3,499","","","$","6,985"]]
[[/GREPCENT_TABLE]]

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 changes in 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.

We normally generate a large portion of our annual net income and related increases in our accounts receivable in the first and fourth quarters of each year due to significant volumes of natural gas and propane delivered to customers during the peak heating season by our natural gas and propane operations and our natural gas supply, gathering and processing operation. In addition, our natural gas and propane inventories, which usually peak in the fall months, are largely drawn down in the heating season and provide a source of cash as the inventory is used to satisfy winter sales demand.

During 2021, net cash provided by operating activities was $150.5 million. Operating cash flows were primarily impacted by the following:

•Net income, adjusted for non-cash adjustments, provided a $162.3 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 $26.7 million;

•Changes in net regulatory assets and liabilities due primarily to the change in fuel costs collected through the various cost recovery mechanisms generated an $18.5 million use of cash;

•Working capital changes, impacted primarily by propane inventory purchases and hedging activities, resulted in a $15.4 million use of cash; and

•An increase in income tax receivables reduced cash inflows by $4.6 million.

Cash Flows Used in Investing Activities

Net cash used in investing activities totaled $223.0 million during the year ended December 31, 2021. Key investing activities contributing to the cash flow change included:

•Cash used to pay for capital expenditures was $186.9 million for 2021; and

•Net cash of $36.4 million was used to acquire certain propane operating assets of Diversified Energy in 2021.

Cash Flows Provided by Financing Activities

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Net cash provided by financing activities totaled $74.0 million for the year ended December 31, 2021. Net cash provided by financing activities:

•Net increase in borrowings under lines of credit of $46.6 million to support working capital needs and short-term capital spending;

•Net increase in long-term debt borrowings resulted in a source of cash of $45.7 million to permanently finance investment in growth initiatives;

•Source of cash of $15.9 million from issuance of stock under the DRIP; and

•A use of cash of $31.5 million for dividend payments in 2021.

CONTRACTUAL OBLIGATIONS

We have the following contractual obligations and other commercial commitments as of December 31, 2021:

[[GREPCENT_TABLE]]
[["","Payments Due by Period"],["Contractual Obligations","2022","","2023-2024","","2025-2026","","After 2026","","Total"],["(in thousands)"],["Long-term debt (1)","$","17,962","","","$","39,988","","","$","60,078","","","$","450,750","","","$","568,778"],["Operating leases (2)","2,019","","","3,574","","","2,226","","","3,668","","","11,487"],["Purchase obligations (3)"],["Transmission capacity","35,368","","","68,183","","","56,566","","","147,899","","","308,016"],["Storage capacity","2,741","","","1,391","","","612","","","383","","","5,127"],["Commodities","45,066","","","\u2014","","","\u2014","","","\u2014","","","45,066"],["Electric supply","6,382","","","12,838","","","12,936","","","25,921","","","58,077"],["Unfunded benefits (4)","315","","","611","","","583","","","1,265","","","2,774"],["Funded benefits (5)","2,104","","","3,607","","","3,607","","","3,052","","","12,370"],["Total Contractual Obligations","$","111,957","","","$","130,192","","","$","136,608","","","$","632,938","","","$","1,011,695"]]
[[/GREPCENT_TABLE]]

(1) This represents principal payments on long-term debt. See Item 8, Financial Statements and Supplementary Data, Note 13, Long-Term Debt, for additional information. The expected interest payments on long-term debt are $18.8 million, $36.0 million, $32.8 million and $90.2 million, respectively, for the periods indicated above. Expected interest payments for all periods total $177.8 million.

(2) See Item 8, Financial Statements and Supplementary Data, Note 15, Leases, for additional information.

(3) See Item 8, Financial Statements and Supplementary Data, Note 21, Other Commitments and Contingencies, for additional information.

(4) These amounts associated with our unfunded post-employment and post-retirement benefit plans are based on expected payments to current retirees and assume a retirement age of 62 for currently active employees. There are many factors that would cause actual payments to differ from these amounts, including early retirement, future health care costs that differ from past experience and discount rates implicit in calculations. See Item 8, Financial Statements and Supplementary Data, Note 17, Employee Benefit Plans, for additional information on the plans.

(5) We have recorded long-term liabilities of $8.3 million at December 31, 2021 for the FPU qualified, defined benefit pension plan. The assets funding this plan is in a separate trust and is not considered assets of ours or included in our balance sheets. The Contractual Obligations table above includes $0.3 million, reflecting the payments we expect to make to the trust funds in 2022. Additional contributions may be required in future years based on the actual return earned by the plan assets and other actuarial assumptions, such as the discount rate and long-term expected rate of return on plan assets. See Item 8, Financial Statements and Supplementary Data, Note 17, Employee Benefit Plans, for further information on the plans. Additionally, the Contractual Obligations table above includes deferred compensation obligations totaling $12.1 million, funded with Rabbi Trust assets in the same amount. The Rabbi Trust assets are recorded under Investments on the consolidated balance sheets. We assume a retirement age of 65 for purposes of distribution from this trust.

OFF-BALANCE SHEET ARRANGEMENTS

Our 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 December 31, 2021 was $20.0 million. The aggregate amount guaranteed at December 31, 2021 was $13.1 million, with the guarantees expiring on various dates through December 1, 2022.

As of December 31, 2021, we have issued letters of credit totaling approximately $5.3 million related to the electric transmission services for FPU's electric division, the firm transportation service agreement between TETLP and our Delaware and Maryland divisions, the capacity agreement between NEXUS and Aspire, and our current and previous primary insurance carriers. These letters of credit have various expiration dates through October 25, 2022. There have been no draws on these letters of credit as of December 31, 2021. We do not anticipate that the counterparties will draw upon these letters of credit, and we expect that they will be renewed to the extent necessary in the future. Additional information is presented in Item 8, Financial Statements and Supplementary Data, Note 21, Other Commitments and Contingencies in the consolidated financial statements.

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CRITICAL ACCOUNTING ESTIMATES

We prepare our financial statements in accordance with GAAP. Application of these accounting principles requires the use of estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosures of contingencies during the reporting period. We base our estimates on historical experience and on various assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Since a significant portion of our businesses are regulated and the accounting methods used by these businesses must comply with the requirements of the regulatory bodies, the choices available are limited by these regulatory requirements. In the normal course of business, estimated amounts are subsequently adjusted to actual results that may differ from the estimates.

Regulatory Assets and Liabilities

As a result of the ratemaking process, we record certain assets and liabilities in accordance with ASC Topic 980, Regulated Operations, and consequently, the accounting principles applied by our regulated energy businesses differ in certain respects from those applied by the unregulated businesses. Amounts are deferred as regulatory assets and liabilities when there is a probable expectation that they will be recovered in future revenues or refunded to customers as a result of the regulatory process. This is more fully described in Item 8, Financial Statements and Supplementary Data, Note 2, Summary of Significant Accounting Policies, in the consolidated financial statements. If we were required to terminate the application of ASC Topic 980, we would be required to recognize all such deferred amounts as a charge or a credit to earnings, net of applicable income taxes. Such an adjustment could have a material effect on our results of operations.

Valuation of Environmental Liabilities and Related Regulatory Assets

As more fully described in Item 8, Financial Statements and Supplementary Data, Note 20, Environmental Commitments and Contingencies, in the consolidated financial statements, we are currently participating in the investigation, assessment or remediation of former MGP sites for which we have sought or will seek regulatory approval to recover through rates the estimated costs of remediation and related activities. Amounts have been recorded as environmental liabilities based on estimates of future costs to remediate these sites, which are provided by independent consultants.

Financial Instruments

We utilize financial instruments to mitigate commodity price risk associated with fluctuations of natural gas, electricity and propane and to mitigate interest rate risk. We continually monitor the use of these instruments to ensure compliance with our risk management policies and account for them in accordance with GAAP, such that every derivative instrument is recorded as either an asset or a liability measured at its fair value. It also requires that changes in the derivatives' fair value are recognized in the current period earnings unless specific hedge accounting criteria are met. If these instruments do not meet the definition of derivatives or are considered “normal purchases and normal sales,” they are accounted for on an accrual basis of accounting.

Additionally, GAAP also requires us to classify the derivative assets and liabilities based on the lowest level of input that is significant to the fair value measurement. Our assessment of the significance of a particular input to the fair value measurement requires judgment and may affect the fair value of the assets and liabilities and their placement within the fair value hierarchy.

We determined that certain propane put options, call options, swap agreements and interest rate swap agreements met the specific hedge accounting criteria. We also determined that most of our contracts for the purchase or sale of natural gas, electricity and propane either: (i) did not meet the definition of derivatives because they did not have a minimum purchase/sell requirement, or (ii) were considered “normal purchases and normal sales” because the contracts provided for the purchase or sale of natural gas, electricity or propane to be delivered in quantities that we expect to use or sell over a reasonable period of time in the normal course of business. Accordingly, these contracts were accounted for on an accrual basis of accounting.

Additional information about our derivative instruments is disclosed in Item 8, Financial Statements and Supplementary Data, Note 8, Derivative Instruments, in the consolidated financial statements.

Operating Revenues

Revenues for our natural gas and electric distribution operations are based on rates approved by the PSC of each state in which we operate. Customers’ base rates may not be changed without formal approval by these PSCs. However, the PSCs authorized our regulated operations to negotiate rates, based on approved methodologies, with customers that have competitive alternatives. Eastern Shore’s revenues are based on rates approved by the FERC. The FERC has also authorized Eastern Shore to negotiate rates above or below the FERC-approved maximum rates, which customers can elect as an alternative to negotiated rates.

Peninsula Pipeline, our Florida intrastate pipeline subsidiary that is subject to regulation by the Florida PSC, has negotiated firm transportation service contracts with third-party customers and with certain affiliates.

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For regulated deliveries of natural gas, electricity and propane, we read meters and bill customers on monthly cycles that do not coincide with the accounting periods used for financial reporting purposes. We accrue unbilled revenues for natural gas and electricity that have been delivered, but not yet billed, at the end of an accounting period to the extent that they do not coincide. We estimate the amount of the unbilled revenue by jurisdiction and customer class. A similar computation is made to accrue unbilled revenues for propane customers with meters, such as community gas system customers, whose billing cycles do not coincide with the accounting periods.

Our Ohio natural gas transmission/supply operation recognizes revenues based on actual volumes of natural gas shipped, using contractual rates, which are based upon index prices that are published monthly.

Eight Flags records revenues based on the amount of electricity and steam generated and sold to its customers.

Our mobile compressed natural gas operation recognizes revenue for CNG services at the end of each calendar month for services provided during the month based on agreed upon rates for labor, equipment utilized, costs incurred for natural gas compression, miles driven, mobilization and demobilization fees.

Each of our natural gas distribution operations in Delaware and Maryland, our bundled natural gas distribution service in Florida and our electric distribution operation in Florida has a fuel cost recovery mechanism. This mechanism provides a method of adjusting billing rates to reflect changes in the cost of purchased fuel. The difference between the current cost of fuel purchased and the cost of fuel recovered in billed rates is deferred and accounted for as either unrecovered fuel cost or amounts payable to customers. Generally, these deferred amounts are recovered or refunded within one year.

We charge flexible rates to industrial interruptible customers on our natural gas distribution systems to compete with the price of alternative fuel that they can use. Neither we, nor any of our interruptible customers, are contractually obligated to deliver or receive natural gas on a firm service basis.

Allowance for Credit Losses

An allowance for expected credit losses is recorded against amounts due to reduce the net receivable balance to the amount we reasonably expect to collect based upon our collections experience, the condition of the overall economy and our assessment of our customers’ inability or reluctance to pay. If circumstances change, however, our estimate of the recoverability of accounts receivable may also change. Circumstances which could affect our estimates include, but are not limited to, customer credit issues, the level of natural gas, electricity and propane prices, impacts from pandemics and general economic conditions. Accounts are written off once they are deemed to be uncollectible.

Goodwill and Other Intangible Assets

We test goodwill for impairment at least annually in December. The annual impairment testing for 2021 indicated no impairment of goodwill. Additional information is presented in Item 8, Financial Statements and Supplementary Data, Note 11, Goodwill and Other Intangible Assets, in the consolidated financial statements.

Other Assets Impairment Evaluations

We periodically evaluate whether events or circumstances have occurred which indicate that long-lived assets may not be recoverable. When events or circumstances indicate that an impairment is present, we record an impairment loss equal to the excess of the asset's carrying value over its fair value, if any.

Pension and Other Postretirement Benefits

Pension and other postretirement plan costs and liabilities are determined on an actuarial basis and are affected by numerous assumptions and estimates including the market value of plan assets, estimates of the expected returns on plan assets, assumed discount rates, the level of contributions made to the plans, and current demographic and actuarial mortality data. The assumed discount rates and the expected returns on plan assets are the assumptions that generally have the most significant impact on the pension costs and liabilities. The assumed discount rates, the assumed health care cost trend rates and the assumed rates of retirement generally have the most significant impact on our postretirement plan costs and liabilities. Additional information is presented in Item 8, Financial Statements and Supplementary Data, Note 17, Employee Benefit Plans, in the consolidated financial statements, including plan asset investment allocation, estimated future benefit payments, general descriptions of the plans, significant assumptions, the impact of certain changes in assumptions, and significant changes in estimates.

During the fourth quarter of 2021, we formally terminated the Chesapeake Utilities Pension Plan. For 2021, actuarial assumptions include expected long-term rates of return on plan assets for FPU's pension plan of 6.00 percent and a discount rate of 2.75 percent. The discount rate was determined by management considering high-quality corporate bond rates, such as the

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Prudential curve index and the FTSE Index, changes in those rates from the prior year and other pertinent factors, including the expected lives of the plans and the availability of the lump-sum payment option. A 0.25 percent decrease in the discount rate could decrease our annual pension and postretirement costs by an immaterial amount, and a 0.25 percent increase could increase our annual pension and postretirement costs by an immaterial amount.

Actual changes in the fair value of plan assets and the differences between the actual return on plan assets and the expected return on plan assets could have a material effect on the amount of pension benefit costs that we ultimately recognize. A 0.25 percent change in the rate of return could change our annual pension cost by approximately $0.1 million and would not have an impact on the postretirement and Chesapeake Utilities supplemental executive retirement pension plan ("Chesapeake SERP") because these plans are not funded.

Tax-Related Contingency

We account for uncertainty in income taxes in the consolidated financial statements only if it is more likely than not that an uncertain tax position is sustainable based on its technical merits. Recognizable tax positions are then measured to determine the amount of benefit recognized in the consolidated financial statements. We recognize penalties and interest related to unrecognized tax benefits as a component of other income.

We account for contingencies associated with taxes other than income when the likelihood of a loss is both probable and quantifiable. In assessing the likelihood of a loss, we do not consider the existence of current inquiries, or the likelihood of future inquiries, by tax authorities as a factor. Our assessment is based solely on our application of the appropriate statutes and the likelihood of a loss, assuming the proper inquiries are made by tax authorities.