Chesapeake Utilities Corporation

Hi and welcome to the Chesapeake Utilities Corporation results for fourth quarter and full year 2021. During presentation, all participants will be in a listen-only mode. Afterwards, we will conduct a question and answer session. At that time, if you have a question, please press the 1 followed by the 4 on your telephone. If at any time during the conference you need to reach an operator, please press star 0. The conference is being recorded Thursday, February 24th, 2022. And now I would like to turn the conference over to Alex Whitman, Head of the Investor Relations. Please go ahead.

Thank you, Scott, and good afternoon, everyone. We know it's late in the day, and we appreciate you joining us. We're excited to present TechSpeak Utilities' results for the fourth quarter and full year of 2021. As you saw in the press release issued yesterday, the company reported record financial performance for the year, demonstrating our continued ability to deliver long-term sustainable growth for our stakeholders. As shown on slide two, participating with me on the call today are Jeff Householder, President and Chief Executive Officer, Beth Cooper, Executive Vice President, Chief Financial Officer, and Assistant Corporate Secretary, and Jim Moriarty, Executive Vice President, General Counsel, Corporate Secretary, and Chief Policy and Risk Officer. We also have other members of our management team joining us virtually. Today's presentation can be accessed on our website under the Investors page and the Events and Presentations subsection. After our prepared remarks, we'll open the call-up for questions. Moving to slide three, I'd like to remind you that matters discussed in this conference call may include forward-looking statements that involve risks and uncertainties. Forward-looking statements and projections could differ materially from our actual results. The Safe Harbor for Forward-Looking Statements section of the company's 2021 Form 10-K provides further information on the factors that could cause such statements to differ from our actual results. Additionally, the company has refined its disclosures to report adjusted gross margin in accordance with the SEC's Regulation G. A reconciliation of GAAP gross margin to a projected gross margin is provided in the appendix of this presentation and in our earnings release. Now we'll turn the call over to Jeff to provide some opening remarks on the company's results and the key drivers of our performance. Jeff?

Thank you, Alex. Good afternoon, and thank you all for joining our call today. Let me start out by thanking all of my colleagues across the company for their hard work and dedication. Despite another rollercoaster year with multiple COVID variants, supply chain disruptions, and other challenges in the marketplace, our team came together and once again delivered record financial results. Our performance speaks for the strong and unique culture we have at Chesapeake, a culture that I'm very proud to be part of. I want to also recognize the newest members of the Chesapeake family, the employees working in our recently acquired diversified energy propane distribution operation in the Carolinas and up in Pennsylvania. As usual, Beth will provide a more detailed overview of our financial results in just a moment. But on slide four, I wanted to highlight a few of the key accomplishments our team achieved this year. Compared to 2020, diluted earnings per share from continuing operations increased by an impressive 12.4% to $4.73. This marked our 15th consecutive year with earnings growth. And in fact, in just the last six years, we've doubled our net income to $83 million in 2021. And our business earnings growth is driven primarily by the ability to prudently invest capital and marketing producing projects. 2021 continued our long history of growth investments. We deployed $228 million in capital last year, our largest annual capital investment of all other than 2018, which included the electric system rebuild after Hurricane Michael. Over the last 10 years, we've invested approximately $1.75 billion to expand and improve our systems. These investments have consistently produced incremental margins that support attractive returns. In 2021, our adjusted gross margin increased by more than $33 million. A significant percentage of our investments support upgrades and expansions in our regulated transmission and distribution operations. As Jim Moriarty likes to say, we are the beneficiaries of our geography. Our service areas continue to experience above national average customer growth. In our natural gas distribution businesses, we saw year-over-year average customer growth increase by more than 4%. The growth in distribution customers has also contributed to expansions of our upstream gas transmission businesses. Our Delmarva and Florida service territories are in highly desirable locations, and our capital investments are supporting the infrastructure to meet the continued customer demand for natural gas. We've also added more than 20,000 customers to our propane operations through the diversified energy acquisition and the organic growth of our propane business. We produced solid results for our shareholders in 2021. In January, we achieved our 61st consecutive year of paying a dividend. We're proud of this long track record. and we're excited with the runway we have to continue increasing dividends given our current payout level and our earnings performance. 2021 was the 18th consecutive year we've increased our dividends, and for the past five years, we've been growing the dividend an average of 9.5% per year. We've also achieved significant returns for our investors. In 2021, total shareholder return was 37%. We've been in the top quartile in our industry for shareholder returns for the past 1, 3, 5, 10, and 20-year period. And in fact, we've been at the 90% plus level over that entire period. I mentioned before in these calls that our investments extend beyond pipes and wire and tanks to ensure that we can continue to support our growing energy delivery businesses Over the past several years, we've been investing in our people, processes, and technology. We continue to enhance our safety culture. The Dover Safety Town Training Facility opened last year, and we're budgeted to build a Florida operational training facility starting this year. Our pipeline safety management system implementation continues on track. We've initiated a comprehensive employee engagement process to strengthen the connection between each employee and our long-term strategy and objectives. We improved our employee communications capabilities with new technology. We expanded our equity, diversity, and inclusion initiatives. I hold the belief that our EDI actions are not only the right moral choice, but ensuring diverse thinking in an inclusive environment produces better overall business results. Given the magnitude of our capital investments, we're progressively improving our project assessment and project management practices. And we took a big step last year in establishing a roadmap that will guide our technology replacements and upgrades over the next several years. Our business transformation process is a series of intentional, considered steps that prepare us now for the company we will become over the next several years. All in all, a number of impressive achievements for the year by our team. On slide five, I want to touch on our five growth pillars and recent accomplishments for each. First, as I just mentioned, the organic growth in our existing businesses continues to drive investment opportunities. Our teams are working hard to extend our transmission and distribution systems, partner with developers, and attract new customers to our systems. We're closely watching inflation, interest rate, and energy price impacts to the building construction industry. At this point, we are not observing significant development changes in either of our Delmarva or Florida distribution service areas. Second, we continue to invest in our transmission pipelines, primarily to support customer growth in our gas distribution systems. In the fourth quarter, the Delmar Energy Pathway pipeline was put into service, bringing natural gas to underserved communities in Somerset County, Maryland, for the first time. With the completion of this project, we see numerous opportunities to reduce the use of more carbon-intensive fuels, such as fuel oil and wood chips. We also completed our first transmission project in Ohio, bringing gas to the Guernsey Power Station, a state-of-the-art, highly efficient generating facility. In 2021, we also announced significant transmission expansion projects, including the Winter Haven, Beachside, and Southern expansions. Our propane distribution business continues to grow through strategic acquisitions. As I mentioned, and we'll discuss in more detail in just a moment, the diversified energy propane acquisition nicely complements our existing propane business and allowed us to expand our service territories into the Carolinas. With this acquisition, Chesapeake has closed a propane acquisition each year since 2017. Marlin Gas Services continues to provide growth opportunities through the expansion of our virtual pipeline services. As the renewable gas market matures and grows, we see significant opportunities to connect R&G production facilities to gas transmission and distribution facilities, providing an economic means to physically deliver renewable gas to market. Later this year, Marlin will also enter the carbon capture business. We will deploy large mobile compressors to support our C&G tanker fleet capable of collecting natural gas from pipelines when the pipe is out of service for maintenance. We'll capture the methane and transport it for reinjection into another segment of a pipeline system, avoiding its release into the atmosphere. Marlin was also instrumental in transporting hydrogen to our eight-flag combined heat and power facility to support our hydrogen-natural gas-bunded fuel sets. We also continue to develop our sustainable energy investment business, On slide six, take a deeper look into some of the current sustainable energy and expansion projects. In September, our Aspire energy business completed a 33-mile pipeline, which is now transporting RNG generated at the Noble Road landfill in Shiloh, Ohio, to Aspire's existing infrastructure in the region. The RNG is displacing conventionally produced natural gas to serve both residential and commercial customers, along with fueling CNG vehicles. The Noble Road landfill RNG project is expected to capture and transport quantities of RNG that are equivalent to 6.9 million gasoline gas equivalents per year and generate numerous economic benefits in the region. The $37.5 million acquisition of Diversified Energy's propane assets allowed us to strategically expand our operating footprint in the North and South Carolina. while also increasing our market share in Virginia and Pennsylvania. With this acquisition, we added more than 19,000 customers and approximately 10 million additional gallons of propane distribution. Diversified is expected to generate $11.3 million in adjusted gross margin annually. Through this expansion, we're excited to offer more school districts, municipalities, and commercial customers our propane autogas service, providing fleet vehicles a cleaner fuel solution. In Georgia, we're in the final stages of opening our CNG fueling station at the Port of Savannah. With this station, we are ideally positioned to support the increasing demand for CNG fuel vehicles at the port and the cargo transport trucking fleets that service the port and travel along the I-95 corridor. The station was also built to provide a logistics center location for Marlin Gas Services to support Marlin's expansion in the Georgia and Carolina areas. We will also be able to deliver RNG to the station, which is becoming an increasingly attractive fuel choice for long-haul trucks and port service vehicles. And in January, we successfully completed our first hydrogen test at the Eight Flags Combined Heat and Power Plant on Amelia Island, Florida. This was an important first step in demonstrating that hydrogen can play a significant role in providing lower carbon energy options to industrial customers. To support the effort, Marlin Gas Services converted existing C&G transport trailers to carry hydrogen to the Eight Flags site. We constructed an interconnect point on our existing dedicated gas distribution station that serves Eight Flags. We blended 4% conventionally produced hydrogen into the natural gas stream and delivered it to our gas turbine. The test was operationally successful, and we recorded a reduction in measured emissions from the turbine. Looking forward, we have a regularly scheduled replacement of our gas turbine later this year. The new turbine design will accommodate greater hydrogen percentages, up to approximately 20%. We will continue our testing and ultimately introduce green hydrogen for this biorenewable electricity. Our intention is to provide an opportunity for large volume commercial industrial gas users to observe an operational hydrogen blend fuel in use. We believe there are numerous opportunities to provide hydrogen to assist customers in their emission reduction efforts. Turning to slide seven, over the last several months, we've taken numerous steps to establish internal processes and improve disclosure around the work our teams are doing across the organization when it comes to environmental, social, and governance initiatives. Today, we made two important announcements that support these efforts. First, we published our inaugural sustainability report. Our team worked tirelessly to bring this support together and deliver what I believe is a great story, providing meaningful data for our stakeholders to measure our success. At Chesapeake, we're committed to being a leader in the transition to a lower-carbon future. We're also committed to doing the right thing for our employees, stakeholders, and the communities we serve. I encourage you to read our report at cpk.com backslash sustainability report, and we would welcome your feedback. While we're proud to publish this first report, our work is far from over. On this front, we also announced today that we've established an environmental sustainability office led by Vice President Shane Brakey and a cross-functional ESG committee led by Amanda Chai and Alex within our investor relations team. Together, this committee will drive our ESG strategy and further reduce our internal vendor and customer emissions. Slide 8 provides a historic look at our capital investment over the past several years. We've made approximately $1.75 billion in capital investments over the last 10 years alone and approximately $2 billion since the acquisition of Florida Public Utilities. Our capital investments are not only enhancing our earnings, but they're also helping to reduce our internal emissions. Investments in pipeline system replacements, CNG and propane vehicles, energy-efficient buildings, and numerous other modernization efforts across our systems is helping drive our sustainable growth. Slide 9 summarizes our historical earnings and associated dividend growth over a sustained period of time. Since 2016, we've delivered compound annual growth rates for earnings per share and dividends per share at 11.3% and 9.5% respectively. For 2021 alone, we achieved 12.4% EPS growth and 9.1% dividend growth. Our track record is proven, and we are steadfast in our approach to continue this level of earnings and dividend growth. Earnings growth is also driving sustained levels of industry-leading returns. On slide 10, you'll see that 2021 marked the 17th year with a return on equity at or above 11%, well above our peer group. A solid foundation of regulated utilities supplemented by our complimentary set of unregulated businesses is poised to continue delivering significant returns for investors well into the future. With that, I'll turn it over to Beth to discuss our results and more depth. Beth?

Thank you, Jeff, and good afternoon, everyone. It's certainly great to be with all of you today. I'd first like to begin and reiterate Jeff's recognition for our teams and also welcome our new diversified energy teammates. In 2021, we experienced record growth because of the tremendous work from everyone across the organization. As you'll see on slide 11, we achieved 12.4% earnings growth for the year. As Jeff mentioned, this marked the 15th consecutive year of earnings growth, something we are all truly proud of. Some of the key margin drivers for the year included pipeline expansion projects and organic growth in our natural gas distribution systems. Increased consumption as pre-pandemic conditions return, along with more advantageous weather conditions in the first half of the year. Contributions from the acquisitions of Elston Gas, Western Natural Gas, the Escandia Meter Station, and Diversified Energy. Higher performance within our protein businesses. Regulated infrastructure programs, including the pipeline replacement programs in Florida and Maryland. as well as Eastern Shore's capital cost surcharge program, increased performance from our Espio Energy and Marlin subsidiaries, along with increased performance from our electric utility. To put it simply, Chesapeake Utilities executed on all fronts in 2021, with each of our business units adding to the company's overall growth. Turning to slide 12, what you will see is that our adjusted gross margin increased $1.9 million, and $32.8 million for the fourth quarter and full year respectively. Net income for the fourth quarter was $22.7 million. For the full year, net income increased by 16.7% over 2020 to $83.5 million. The EPS growth rate compared to the net income growth rate for both the quarter and year-to-date reflect the large issuance of stock in the latter half of 2020 as we rebalanced our capital structure to achieve our target capitalization rate. As Jeff highlighted, the company's net income has more than doubled since 2015, remarkable growth over a short period of time. Let me provide some additional color on the factors driving earnings growth for the quarter and the full year period. On slide 13, we highlighted the key contributors to earnings growth for the fourth quarter. Let me provide some additional detail. The first two are non-typical items with the absence of regulatory deferral of COVID-19 expenses and reduced interest expense related to early extinguishment of FQ first mortgage funds. Fuel efficiency represented a two-cent headwind. Contributions from the acquisition of natural gas and diversified energy, in addition to the Escambia meter station, generated an incremental three cents in earnings for the quarter. Our core businesses delivered additional margin contributions that increased earnings by 19 cents per share over the prior year's fourth quarter. This includes higher operating income from organic growth, higher mass and protein usage as demand returns closer to pre-pandemic conditions, higher performance in our protein operations, along with additional income from our regulated infrastructure program. All studying this growth was a four-step headwind tied to warmer weather throughout the fourth quarter compared to the same period last year. Higher depreciation, amortization, and property tax costs associated with new capital investments represented 4 cents. Operating expenses tied to the acquisition were 2 cents, and then also operating expenses tied to growth in our core business were net 2 cents higher as well. Changes in shares outstanding due to our equity offerings, again, that I mentioned from last year and this year, helped us align with our target capital structure, but were a six-cent headwind. And finally, other items, including other income tax and other changes, added back two cents. On slide 14, you can see the same bridge for the year-to-date increase of 52 cents in earnings per share. The key drivers for this growth were as follows. First, unusual items, including the gains from sales of assets booked in 2020 and the net impact of the CARES Act, were a combined $0.09 headwind. The deferral of COVID-19 expenses for the year was $0.10. Reduced interest expense, again related to that early extinguishment of the FPU mortgage bonds, added $0.04. The acquisitions we consummated in 2020 and 2021 generated 20 cents in earnings per share for the year. Our core businesses generated an incremental $1.13 in ETFs, and depreciation, amortization, and property taxes associated with new capital investments offset the growth by 25 cents. Additional operating expenses tied to the acquisitions were 12 cents, and expenses in our core businesses due to growth were another $0.26 impact. An increase in shares outstanding resulted in a $0.21 impact for the year-to-date period. And finally, again, other items were a $0.02 headwind. On the next two slides, we look at Chesapeake Utilities' operating segments. Starting with the regulated energy segment on slide 15, adjusted growth margin was up 8.6% year-over-year. Operating income was up 15.1% and driven primarily by pipeline expansion, organic growth, our regulated acquisitions including Elston Gas and the Escambia Meter Station, as well as those infrastructure programs I mentioned previously. In addition, our business transformation efforts, you heard Jeff talk about that a little bit earlier, continue to enable us to better scale our organization and reduce our operating costs as a percent of adjusted gross margin for the third year in a row. Next on slide 16, our unregulated energy segment also had a strong year. Adjusted gross margin was up 11.4% year over year, while operating income was up an impressive 18%. and driven primarily by colder temperatures I mentioned earlier, improved performance in our protein business, again, the acquisitions of Western natural gas and diversified energy, increased demand for our virtual pipeline services, and overall higher performance for Marlin and Aspire. Like our regulated energy segment, our business transformation focus is also generating positive impacts to our bottom line while enabling us to better position ourselves for continued future growth. Recent organizational changes that we announced in December are another pivotal step in these efforts. Again, just solid results across both of our segments. Moving to slide 17, we deployed just under $228 million on capital expenditures during the year. As Jeff mentioned, this was our highest level of capital investments outside of 2018, when we deployed $62 million on system restoration investments following Hurricane Michael. This level of capital expenditures nicely supported our long-term guidance range of $750 million to $1 billion from 2021 through 2025. For 2022, we are excited to introduce annual capital expenditure guidance of $175 million to $200 million based upon projects that are underway or already in the queue. On slide 18, I'll touch on a few balance sheet highlights. In 2021, we strengthened our balance sheet with sufficient competitively priced capital and expanded our future capacity to support our growth. At year-end, total capitalization was $1.6 billion, comprised of approximately 49.5% stockholders' equity, which is now $774 million. $35.2 million of long-term debt at an average fixed rate of 3.45%, and $222 million in short-term debt under our revolver at average interest rate of just under 1%. We are shy of our target capitalization range at the end of the year, largely because of the acquisition of Diversified Energy's propane assets in December. In 2022, you should expect the company to migrate back within that target equity to total capitalization range. During the year, we executed on three financing strategies, which continue to facilitate both our short-term and long-term capital needs. In order to continue meeting our short-term capital needs, we replaced our 375,364-day syndicated revolving credit facility with a new multi-tranche 400 million syndicated revolving line of credit with multiple participating lenders. The two tranches of the facility consist of a 200,364-day short-term debt tranche and a $200 million five-year tranche, both of which have three one-year extension options. In regards to long-term debt capital, on August 25th, the company entered into a note purchase agreement with multiple lenders to issue $50 million in uncollateralized senior notes. Under the note agreement, the company placed the senior notes on December 20th at a rate of 2.49% for a 15-year term. Additionally, given the diversified protein asset acquisition and projects recently completed, on December 16th, we also entered into a commitment for an additional $50 million of new long-term debt for 20 years at a coupon rate of 2.95%. These notes will be issued on or before March 15th of this year. During the third quarter of 2021, we were also excited to announce that we secured $9.6 million of sustainability financing. This new facility was used to support continued investments in our Marlin Gas Services business, which is one of the country's leading providers of virtual pipeline services. In addition to providing its customers with highly specific, complex C&G and L&G solutions, the company is poised to help its customers achieve their sustainability goals through the transport of renewable natural gas. This lending was financed through Bank of America as part of their broader sustainability financing portfolio. In terms of new equity, we continue to utilize our traditional equity plans, this year to issue $18.3 million of stock and increase equity beyond our earnings retained and reinvested in the business. We retain capacity under these plans, as well as our HGM program, to provide additional equity as needed for permanent financing. We remain focused on increasing shareholder value by making prudent, strategic capital investments that drive our earnings growth. Our capital capacity and balance sheet posits well to achieve these objectives, including achieving our long-term guidance, which Jeff will touch on in just a moment. On slide 19, we highlight a few of the major projects and initiatives that will drive our growth over the coming years, including pipeline expansions, CNG, LNG, and RNG transportation, acquisitions, and strategic regulatory initiatives. As we frequently remind you, this table does not include organic growth, and it is not indicative of all the projects that we are evaluating and pursuing. I continue to be excited by the level of opportunities we see. With the recent organizational changes we made in January, we are deploying additional resources in our business development group to keep pace with the number of legacy and renewable energy opportunities we are pursuing across our footprint. In terms of what is already underway for the year, adjusted gross margin from the project increased by an incremental $15.6 million to $60.8 million. Looking forward, these projects are anticipated to add an incremental $21.9 million and $7.1 million in 2022 and 2023, respectively. Over the three-year period, that represents cumulative incremental adjusted gross margin of $44.6 million. Slide 20 shows the investment of approximately $163.2 million in recent and planned pipeline expansions through 2023. The annual cumulative growth margin contribution is estimated to be $27 million when these projects are fully in service. These expansions are just one category of the various growth initiatives we highlighted on slide 19. One addition to this table since our last earnings call is the southern expansion project initiated by our Eastern Shore Transition System. Pending FERC authorization, Eastern Shore plans to install a new natural gas-driven compressor at its existing Bridgeville, Delaware, compressor space, increasing pipeline capacity by 7,300 deciferms. This project is expected to go into service towards the end of 2022. On a go-forward basis, the expansion will add an additional $2.3 million in margin annually. With that, I will now pass the call off to Jim Moriarty to discuss our regulatory FD update. Jim?

Well, thank you, Beth, and good afternoon. It's good to be with you all. Slide 21 lists some of our recent regulatory initiatives where we have proactively worked with our various public service commissions to secure recovery of key replacement and infrastructure investments in our businesses, while further supporting safe, reliable, and economical energy to our customers. Florida Public Utilities continues to make significant progress with the gas reliability infrastructure program that began in 2012. Through the end of 2021, we have invested nearly $190 million to upgrade approximately 348 miles of distribution lanes, increasing the safety and reliability of our systems for many Floridians. We expect to complete this program by the end of 2023 at the latest. In Elkton, Maryland, we continue to invest in the system's integrity by upgrading pipeline. The program went into service towards the end of 2021, and going forward, we expect the project will generate $300,000 and $400,000 in adjusted gross margin in 2022 and 2023, respectfully. Finally, our Eastern Shore Natural Gas Interstate Transmission Unit has authority to recover capital costs associated with mandated highway or railroad relocation projects. For the year, we generated $1.2 million in additional margin and expect $2 million in additional margin in 2022 and 2023. Moving to slide 22, I want to echo Jeff's comments about the sustainability report we published earlier today. We are proud of the report and appreciate the tireless work from the cross-functional teams that came together to gather the data to help tell Chesapeake's story and our unwavering commitment to environmental, social, and governance matters. I would like to acknowledge the significant efforts of our corporate governance team, particularly Stacey Roberts and Brenna Smith, who developed the initial game plan and pulled together the information and metrics on which we relied. I would also like to thank our communications team, led by Daniel Mulligan, and our other dedicated colleagues from across the company who helped to bring together our final report. I encourage all of you to review the report. A key takeaway is that our journey continues. Our focus on environmental, social, and governance topics is longstanding. We are committed to being stewards for our environment, our colleagues, our customers, the communities we serve, and all of our valued stakeholders. We have made significant steps along our journey, with many of those recognized in this first report. As Jeff mentioned, our journey continues. We continue to make numerous steps to improve our ESU programs, including the announcements made today that we have established an Environmental Sustainability Office and an internal ESG committee. The intent of these organizational changes is to better advance our ESG strategy. We will be streamlining our data collection processes, identifying projects to reduce emissions generated by both our direct operations and our end-use customers. We also remain focused on advancing our safety program, community engagement activities, employee and EDI efforts, as well as our governance and enterprise risk management practices. We are excited about the opportunities ahead to enhance our company's ESG profile and look forward to reporting the work of these teams in future reports. Turning to slide 23, We are also very proud of the culture we have at Chesapeake Utilities and the recognitions we have recently received. Earlier this month, we were excited to announce that Chesapeake has been named a top workplace in the United States for the second year in a row. Over 42,000 organizations were invited to participate in the top workplace survey. So we were honored to be selected as a leading midsize company. The award is based solely on employee feedback, so it was humbling to be recognized for our people-focused culture, which continues to be the backbone of our success. Highlighted in our sustainability report, you'll see that we have taken numerous steps over the last few years to enhance employee engagement by expanding our employee resource groups, and further developing our equity, diversity, and inclusion initiatives. We continue to make progress in these foundational areas and will be adding two more ERGs in 2022 to the six you see on this slide. With that, I appreciate very much being with you all today. I will now turn the call back to Jeff for some closing comments. Jeff?

Thank you, Jim. On slide 24, We continue to reaffirm our long-term earnings and capital expenditure guidance. In 2025, we expect to deliver diluted earnings per share in the range of $6.05 to $6.25. This represents a compound annual growth rate of 9.1% to 9.5% over the five-year period. We also continue to expect to deploy $750 million to $1 billion in capital expenditures during the same period. 2021 provides a strong start to achieving that goal. And in 2022, we expect another $175 to $200 million toward that target. Before I finish with our usual investment proposition slide, I wanted to reiterate the company's mission, vision, and values as displayed on slide 25. 2021 was a critical year for our company as we revamped and updated these statements to align with where we want to go in the future and how we want to operate as a company. Our mission is straightforward. We're an energy delivery company, and we plan to stay an energy delivery company. As the world moves toward a lower-carbon future, we see great opportunity to contribute to that transition in a way that continues to provide benefits to all our stakeholders. Our vision of Chesapeake's future is also straightforward. We'll be a leader in delivering energy that contributes to a sustainable future. And the values we espouse, caring, integrity, and excellence, clearly describe how we plan to run our business. I think it's important that we both internally and publicly declare our purpose, intentions, and our values. They guide our strategy and every decision we make. That said, on slide 26, we believe that natural gas will remain a key component of the country's long-term energy strategy. We're capitalizing on new projects that will contribute to a future with cleaner, more sustainable energy. We're committed to our growth strategy and focused on continuing to deliver top quartile performance, including shareholder return, which have exceeded 16% compound annual growth for each period 1, 3, 5, 10, and 20 years through 2021. When we've said we'll do something, we've typically done it. Earning that credibility with our stakeholders has been critically important for our success. So we appreciate your confidence that we'll be successful in the lower carbon energy transition. We'll be successful in achieving RESG objectives and ultimately successful in delivering continued financial performance. We're excited about where we've been and what we've accomplished. We are equally, if not more, excited about where we're going. Future HFT utilities is bright, and we're proud of the record results we delivered today. With that, Alex, why don't we open it up for questions?

Excellent. Scott, please open the line for the Q&A session.

Thank you. If you'd like to register a question, please press the 1 followed by the 4 on your telephone. You will hear a three-tone prompt to acknowledge your request. If your question has been answered and you would like to withdraw your registration, please press the 1 followed by the 3. And if you are using a speakerphone, please lift your handset before entering your request. Once again, that's 1-4 to register for a question or respond to a question. And we have a question from Delaney Tate Sullivan with Maxim Group. Please go ahead, Delaney.

Thank you. Good afternoon, and thank you for the details. And if I may, starting at slide 6, Jeff, where you detail many of your investments across the East Coast below Pennsylvania, Can you just talk a little bit about the return profile on the unregulated investments in multiple states? I mean, I imagine it starts at a negative return in the initial year on things like the TNB fueling system and hydrogen testing, and then accelerates thereafter. How should we look at the time that returns on these investments, please?

Well, we have traditionally and historically tried to make sure that we make investments that are both accretive in year one and that have a reasonable return. They don't always, as you correctly indicate, hit our target return levels in year one. But we typically have not invested in too many things that drag those returns out over multiple years. And so I would tell you, and Beth can certainly back this up with greater detail, I think most of the investments that we will be making, the propane acquisition, for example, the CNG fueling station in Savannah and a number of other things that we're looking at, will bring us solid returns in a fairly short period of time. The hydrogen test is a different story. We have the ability to recover those costs immediately through the contract that Eight Flags has with our electric utility, blessed by the Florida Public Service Commission. And so those sorts of things, I think, are in a little different category than an acquisition on the propane side or the fueling station in Savannah or some of the other non-regulated actions that you might be taking. Beth, do you want to illuminate that a little bit?

Well, actually, you just hit most of the points there, but I would really echo the point on the return side, Kate. I mean, one of the things that we do as an organization, as we evaluate projects and as our task committee reviews them, you know, we're looking at what projects are going to contribute. We're adding them in. factoring them into the consolidated organization, you know, with a view and an eye towards wanting to maintain a strong ROE and always, as Jeff said, for them to be accretive to earnings per share coming out of the gate. And so, you know, that's actually caused us to walk away from a lot of deals. So the projects that we undertake, we feel in relatively short order that they're going to be able to achieve the targets that we're looking for.

Thank you, Beth, and following up, Jeff, on your comments about the hydrogen, I was not aware. So the testing that you were doing is being recovered by the customer on the regulatory side. Is that correct?

Yeah, the testing program that we began a month or so ago and that will kind of intermittently run as we change out to a new program and test higher percentages as we transition over into green hydrogen. Virtually all of those costs are running through a fuel recovery clause in the contract that we have between eight flags and our electric utility. And so it's part of a recoverable cost structure.

Okay. Thank you all. Thank you all. Mm-hmm.

And as a reminder to register for a question, please press 1-4 on your telephone. We do have a question from Brian Russo with Fidelity. Please go ahead, your line is open.

Yeah, hi. Good afternoon. Hey, so just quickly, just to follow up on the hydrogen blending, I mean, you know, what type of capital investment ultimately do you think this could lead to? Um, you know, is it, is it utility investment or is it really, you know, uh, you know, expansion of the Marlin sleep, et cetera?

I think potentially it's both. We did not invest in what I would call significant capital, uh, in the test process. We modified an existing, you know, regular measurement station. We already had existing stainless steel pipe, for example, that runs from that station. into the Eight Flags turbine area, and we modified a handful of our existing Marlin tankers so that they could be certified to operate with hydrogen. So the expenses that we had were relatively modest in this first test process. As we expand to include greater levels of hydrogen at that facility, we'll take some additional steps. But the significant investment would be in the turbine itself, and we're already in the process, as I mentioned, of a regular turbine replacement this year, just a standard 30,000-hour replacement. And so that turbine, coming from solar turbines, will be equipped to accommodate greater percentages of hydrogen. So generally speaking, we have relatively... minimal cost associated with putting this hydrogen blend together at AQUAGS. What we're trying to do, as I indicated, is to provide an observable operational hydrogen blend in an industrial setting because we have a number of customers that we think can benefit from that on their own. I think we could show them a way to do this that is not prohibitively, you know, costly, at least on the equipment side. Now, paying for the hydrogen is another issue, right? I mean, hydrogen is not cheap at this point, especially green hydrogen produced with renewable electricity. And so, you know, we'll see where that goes as that market evolves over the next several years. We're already seeing changes in the hydrogen market as people are taking advantage of that as a fuel-bending source.

Okay, got it. And then the 2022 CapEx, $175 million to $200 million, is there going to be kind of a rough breakdown, you know, in terms of the types of investments that CapEx supports, you know, whether it's REG or UNREG or, you know, R&G and hydrogen or, you know, Marlin, et cetera?

Thank you, Brian. We have not, other than denoting the typical on the utility side, you know, the southern expansion, we just talked about that briefly, the beachside expansion that's out there as well. So some of our pipeline expansions, also our traditional organic growth. As Jeff said, there's been no significant projects announced in regards to hydrogens. If Marlin were to undertake some minor investments associated with being able to support those hydrogen projects, that would be potentially incorporated in the unregulated. But it's more the traditional growth coupled with the projects that we've already announced. And so anything above and beyond that would certainly be additional dollars that would come into play later in the year.

Okay, and I apologize, but I might have missed this earlier, but what was the impact of weather in the fourth quarter and also the full year versus normal?

Sure. So for the full year versus normal, it ended up being about $2.2 million. For the fourth quarter, it was interesting because relative to normal, where you had the most significant variant was in Ohio, You had a little bit on the Delmarva Peninsula, but that was the biggest piece that was in Ohio, and that was, you know, several hundred thousand dollars. So it wasn't substantial, but it particularly, again, on Delmarva weren't Florida, but mostly in Ohio.

Okay, got it. And then lastly, the three RNG projects you have – Under development, still showing, you know, just a million dollars of margin in your large project table. I was just wondering if there was any update there.

Well, they're all in various stages. They continue to be, and as we talked on previous calls, Some of them, they take a little bit longer in terms of going through and getting the various permits or securing the necessary financing, but each of those projects are still underway when you think about the bioenergy dev code. They're in the permitting phase. In the case of the cleaning bay project, they're in the process of securing the financing, so Again, all continue to look favorable. It's just as we've talked about, some of them take a little bit longer to get to where they're ready to be fully constructed and in service. But there's a lot of projects like that, both on Delmarva and in Florida, that we're actively looking at and evaluating.

Okay, great. Thank you very much.

Thank you.

And we have a follow-up question from Tate Sullivan with Maximum Group. Please go ahead.

Your line is open. Thank you. On the Southern Expansion Project with the $2.3 million, I think, proposed adjusted gross margin in 2023, have you talked about that project before, and is that related to a previous pipeline expansion project? Please.

That particular project is new in this quarter, Kate. As we had mentioned, that's adding additional compression for us to be able to expand our capacity. We have a filing process. related to that project. And so you have not seen that before. That's something that came about as a result of Eastern Shore's most recent open season process. And so we're pretty excited by that. That's largely driven by our continued growth on the distribution end and so to support that growth. So we're excited about constructing that, moving forward with that, and continuing to expand in the southern portion of our service territory on the peninsula.

Thank you.

And there are no further questions at this time. I will now hand the call back to Jeff Halfholder.

Thanks. Thanks for joining us today. I know it's the end of the day in the midst of a heavy earnings reporting week. We value your support and we look forward to engaging with you throughout the year. And hopefully we can do some of that in person as time goes forward. Stay safe and have a great day. Goodbye.