Chesapeake Utilities Corporation

If you're standing by, welcome to the Chesapeake Utilities Corporation 2022 3rd Quarter Financial Results Conference Call. During the presentation, all participants will be in a listening mode. Afterwards, we'll 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. This conference is being recorded Thursday, November 3rd, 2022. And now I'd like to turn the conference over to Alex Whitelands, Head of Investor Relations. Please go ahead.

Thank you, Scott, and good afternoon, everyone. As always, we appreciate everyone joining, especially so late in the day. We'll be highlighting Chesapeake Utilities' results for the third quarter and for the first nine months of 2022. As you saw in our press release issued yesterday, the company continues to drive solid financial performance in 2022, despite a challenging economic environment. That speaker remains well-positioned to deliver solid earnings growth for the year, which speaks to our proven growth strategy and very talented workforce. 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, Treasurer, 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 manager team joining us virtually. Today's presentation can be accessed on our website under the Investors page and 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 uncertainty. 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 evaluates its performance based on non-GAAP adjusted gross margins and it provides the appropriate disclosures in accordance with the SEC's Regulation G. A reconciliation of GAAP gross margin to non-GAAP adjusted gross margin is provided in the appendix of this presentation and in our earnings release. Now I'll turn the call over to Jeff to provide some opening remarks on the company's financial results and the key drivers of our performance.

Jeff? Thank you, Alex. Good afternoon, and thank you for joining our call today. Starting on slide four, I'd like to take a moment and thank all of my colleagues for their continued hard work and dedication to our mission. I was especially proud of our team for their preparation and response to Hurricane Ian in late September, which impacted much of Southwest Florida. Our service territory, somewhat miraculously, were largely spared. In those areas that were affected, we were able to quickly restore service. We recognized that we were very lucky. And just last week we announced a $100,000 donation to three different Florida organizations who are responding with needed food, shelter, and other resources to those who are impacted by the storm. Just a really outstanding job by our folks in Florida. And I thank all of our employees who continue to put our customers at the forefront of all that they do. I'd also like to thank the team for their tremendous efforts throughout the quarter. Obviously, this was a quarter where we saw impacts from the significant inflationary environment we faced, along with ever-increasing interest rates. In spite of those impacts, our team delivered solid promise in the third quarter. As you'll recall from previous discussions, the third quarter typically reflects the least seasonal margin production for us, and one where the marketing contribution does not fully offset our quarterly fixed operating costs. This is particularly the case in our propane business. And certainly now that we've grown that business through acquisition over the past few years, that impact is magnified. Even with the seasonal impact, the inflationary pressures and the significant interest expense increases, we're pleased with the results we delivered in the quarter and certainly through the first nine months of the year. And I'm confident we will finish 2022 with yet another year of strong performance. Adjusted gross margin grew by an incremental $6.9 million in the third quarter. which, just to say it again, is seasonally the least impacted by weather. This growth was driven largely by our recent acquisitions, transmission service expansions, pipeline replacement programs, and strong natural gas distribution customer growth in both our Delmarva and Florida service territories. We also saw increased demand for services in our other businesses. Earnings growth in the quarter, however, was impacted by one-time non-recurring items, both this year and last. These included the absence of the regulatory deferral of COVID-19 expenses and a favorable income tax impact associated with the CARES Act, which benefited EPS in last year's third quarter by $0.13. In this year's third quarter, we received interest income from a federal income tax refund, which added $0.03. Combined, these unusual items led to a $0.10 negative EPS impact for the quarter. On a year-to-date basis, non-recurring items, including the ones I just mentioned, and the gain on sale of assets in the second quarter, netted to a four-step negative impact. Along with these unusual items, increased interest expects also had a year-over-year negative impact to earnings as interest rates continued to rise in this inflationary environment. We took multiple steps in the quarter to mitigate our exposure to rising interest rates. including securing $80 million in long-term debt to add further strength to our balance sheet and better align the company for future growth. We also entered into interest rate swaps for a portion of our short-term debt, and Beth will touch upon all of that in just a few minutes. EPS grew by 3.8% on a year-to-date basis compared to the same period last year. Non-recurring items and higher interest expenses were key drivers on a year-to-date basis. As for the one-time non-recurring items in both years, operating income increased by 9% year-to-date. We still project EPS growth for the year to be in line with our long-term expected growth rates. Additionally, the high levels of customer growth we're experiencing in our service territories are providing significant opportunities to deploy capital to expand both our transmission and distribution systems. Customer growth in both our Delmarva and Florida service territories was exceptional in the third quarter. As we discussed in our last call, our businesses also continue to manage supply chain and regulatory challenges that are resulting in delays for our capital projects. That said, we expect more investment in the fourth quarter, allowing us to reach our updated guidance range of $140 million to $175 million for the year. Earlier today, we previewed our 2023-2027 capital budget with our board. It's exciting in that we continue to see capital investment opportunities across our growth platforms that will bode well for the next five years. And as a result, we continue to reaffirm both long-term capital expenditure and EPS guidance for 2025. Turning to slide five, one of the capital opportunities that has been in our business development fall just came to fruition. Yesterday, we announced the acquisition of Planet Found Energy Development. And turning to slide five, I'd like to provide some highlights. PlanetFound nicely complements and accelerates our renewable energy delivery solutions portfolio, focused on poultry waste to energy production. Located in Eastern Shore, Maryland, PlanetFound provides three fundamental benefits to our renewable energy investment objectives. First, the acquisition provides internal technology expertise, especially related to organic fertilizer production, which is an important economic component in poultry waste biogas. They already have a high-quality nutrient-rich soil conditioner that's being marketed on the Delmarva Peninsula under the brand name Element Soil. Second Planet Found operates a small poultry biogas facility in Maryland that we'll primarily use as a test facility that will help us verify waste stream and fertilizer chemistry on future projects, useful in both financial projections and potential radiatory treatments. And third, PlanetFound is currently developing a biogas site in Maryland that we can expand and complete. And if I had a fourth point, it would be that the PlanetFound technology and processes are scalable for growth going forward. On slide six, I'd like to dive in just a little deeper into our strategy behind this transaction. Utilizing PlanetFound's knowledge, expertise, and patent-pending technology, which combines anaerobic digestion and nutrient capture, They will allow us to accelerate our RNG strategy, as we'll be less dependent on developers and the projects we're exploring. Not only can this model be replicated across the Delmarva Peninsula, but this transaction will accelerate Chesapeake Utilities' efforts in converting poultry waste to renewable, sustainable energy off of Delmarva as well. Joining the Chesapeake team are two employees who are experts in the field and will significantly contribute to our sustainable investment strategy going forward. Further, PlantFound will help us drive even stronger relationships with stakeholders who are integrated into the Delmarva region's robust poultry farming sector and who may benefit from the use of this technology. The acquisition is also located in Somerset County, Maryland. You may recall that we recently completed an extension of our gas transmission system and are currently building natural gas distribution systems in Somerset County. And we're committed to providing safe affordable energy and to continue to support economic development and job creation in this county. And of significant importance, which originated out of the University of Maryland's Eastern Shore or UNES campus allows us to work with partners, including UNES, across the region to mitigate the environmental challenges associated with poultry waste. And as we've said before, this has been a driving factor in our support of R&G production on Delmarva and along the East Coast. Let me now turn to our five growth platforms on slide seven. Again, we continue to experience exceptional organic growth in our natural gas distribution businesses across both of our service territories. Third quarter customer growth was 5.8% on Delmarva and 4.4% in Florida, which continues to be well above the national average. Despite increased inflationary pressures and rising mortgage rates impacting the national housing market, the level of population growth we're experiencing shows the highly attractive nature of our service territories, especially along the Delaware beaches and across much of Florida. While we expect customer growth levels to fluctuate somewhat in the future, we continue to see sustained demand over the long term as our builders are reporting strong backlogs with natural gas and propane being the energy sources of choice for home buyers. As we've discussed, the high levels of customer growth we're experiencing in our distribution business also drives the need for additional capacity in our transmission systems as well. We remain on track with the Beachside Transmission Pipeline project, along with the Winter Haven and St. Cloud Twin Lakes expansions in Florida. Yesterday, we received final approval from the Florida Public Service Commission on a 24 million phased-in peninsula pipeline expansion to serve additional growth in Nassau County, Florida. On Delmarva, the eastern shore southern expansion compressor upgrade and North Ocean City connector projects also remain on track. Following completion, these projects will deliver significant margin growth, and Beth will speak to these projects more in just a moment. We also continue to drive nice growth in our propane business. During the quarter, we introduced our autogas offering in North Carolina, opening the first fueling station in Dunn, North Carolina. This service brings a cleaner burning alternative vehicle fuel to the region. Autogas substantially reduces greenhouse gases and other harmful emissions compared to the use of gasoline and diesel fuel. The fuel autogas service follows our recent expansion into the Carolinas through the acquisition of diversified energy. and the subsequent acquisition of Davenport Energy's Silo City Propane Division. Through the first five months of the year, these acquisitions have driven more than $7 million of incremental adjusted gross margin. We've spent considerable time integrating these acquisitions into the sharp propane family of businesses. During the quarter, we also secured approximately 90,000 gallons of renewable propane, which is being used to fuel our own fleet. and lower Chesapeake's overall emissions. Renewable propane is produced from 100% renewable raw materials, such as fats and oils. While the availability of renewable propane is limited, we'll continue working to procure the sustainable fuel and reduce the carbon emissions of our fleet, serving our propane businesses, which largely have been converted to auto gas already. Propane remains a core component of our growth strategy as a highly complementary energy source, allowing us to reach customers where natural gas is not available. And as you can see, our propane business not only allows us to drive higher financial performance, but it also allows us to do the right thing for our customers and communities by lowering greenhouse gas emissions. Marlin Gas Services also continues to add value for the organization, adding $1.2 million and $2.1 billion in adjusted gross margin during the quarter and through the first nine months of the year, respectively. Like many mobile transportation companies, Marlin is working to overcome higher transportation costs and labor shortages, especially with respect to our highly trained transport drivers and compressor operators. Despite these challenges, Marlin continues to identify and capitalize on opportunities that leverage its virtual pipeline solutions, and we're excited for some of those opportunities to come to fruition. And on the sustainable investments front, while the planet-found acquisition is an important step forward to expand our sustainable energy business, We continue to pursue a number of RNG opportunities throughout Delmarva and along the East Coast that will allow us to meet the sustainability needs of our customers and also make a positive impact for our local communities. We've also recently completed a scheduled replacement of our natural gas turbine in the Eight Flags CHP facility on Amelia Island in Northeast Florida. The new turbine will allow us to continue testing hydrogen with higher concentrated winds in the combined heat and power plant. Our next phase of hydrogen testing is currently planned for the first quarter of 2023, and we look forward to delivering the results of this testing and furthering our hydrogen emissions. And with that, I'll turn the call over to Beth to discuss our results in more depth. Beth?