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?

Thank you, Jeff, and good afternoon, everyone. I'd also like to recognize our team for their incredible response to Hurricane Ian. I'm continually amazed by the work of our team as they make positive impacts for our customers and the communities we serve. I'm equally impressed by the perseverance shown by our team as we continue to manage through a challenging economic environment while still achieving solid financial results during the quarter and on a year-to-date basis. Let me provide some additional details on our recent performance. As you'll see on slide 8, diluted earnings per share were $3.58 per share through the first nine months of the year. This represents a 3.8% increase over the same period in 2021. Keep in mind this reflects only one month of interim rates associated with the Florida rate case and also a 15% increase in interest expense. More specifically, some of the key margin drivers here to date included contributions from the acquisitions of Diversified Energy, Davenport, and the Escambia Meter Station, continued pipeline expansions and strong organic customer growth in our natural gas distribution businesses, additional growth from the various regulated infrastructure programs and recovery mechanisms in our Florida, Elston, and Eastern Shore business units, increased demand for Marlin CNG, RNG, and LNG services, higher margins per gallon in our legacy protein businesses, and finally, increased margins at our Aspire Energy business in Ohio. On slide 9, our financial summary shows adjusted gross margins increased $6.9 million year-over-year for the third quarter and $23.7 million year-to-date through September 30th compared to the prior year period. I'll discuss the one-time non-recurring items that impacted operating income growth for the quarter, but as you can see, higher interest charges of 25% as a result of rising rates impacted earnings growth in the quarter. Through the first nine months of the year, operating income was just shy of $100 million, up 6%, and again, EPS grew by 3.8% over the same period in 2021. On slide 10, we provide a more granular look at the contributing factors that impacted EPS during the quarter. Let me go over some of those additional details. First, as you'll recall, in the third quarter of 2021, we recognized the one-time benefits of eight steps per share tied to the regulatory deferral of certain COVID expenses. We also recognized a five-step favorable tax gain from the CARES Act in the same quarter. The absence of these benefits, partially offset by $0.03, as Jeff mentioned, tied to interest income received from the IRS for a federal tax refund, meant that unusual items netted to a $0.10 negative impact to ETFs in the quarter. Contributions from the acquisitions of Diversified Energy and Davenport Energy's Styler City Protein Division generated an incremental $0.06 in earnings for the quarter. Our core businesses delivered additional margin contributions that increased earnings by 22 cents per share. This includes higher adjusted growth margins from transmission expansion projects, natural gas distribution, organic growth, increased margins from our Marlin business, higher performance from our protein and Aspire operations, along with additional income from our regulated infrastructure programs and recovery mechanisms. Operating expenses tied to the protein acquisitions were 10 cents per share. As a reminder, we generate significantly more margin in the protein business during the first and fourth quarters, while the business has a normalized level of operating expenses that occur more evenly over the year. These increased expenses can lead to operating losses during the second and third quarters, largely dependent upon whether we get colder weather in some of the colder months. There has also been additional spending to align our acquisitions with test-of-peak operating and safety standards. These investments are poised to deliver long-term success for the business. In our core businesses, higher expenses drove an 8-cent impact, which speaks to our team's ability to manage costs across the business. Higher depreciation, amortization, and property tax costs associated with new capital investments were a 7-cent headwind. As we've been discussing, interest and other expenses were a significant 9-cent negative impact to earnings for the quarter. Finally, change in share count due to recent equity offerings added a 1-cent headwind. On slide 11, we portray a similar bridge, so I won't walk through all the details. But as you can see, we generated solid growth from our acquisitions, and our core businesses continue to grow exceptionally well, while higher interest and other expenses weighed on overall performance. I'd like to add that we appreciate the more complex than usual nature of the quarter and the year-to-date period. There are a number of moving parts, but when we took a step back, we were pleased with the results. Let me touch on Chesapeake Utilities operating segments on the next two slides. On slide 12, you'll see adjusted gross margin was up 7.1% for the quarter, and 6.2% year-over-year for our regulated energy segment. Year-to-date operating income growth was driven primarily by pipeline expansions from our transmission pipeline, organic growth in our natural gas distribution systems, incremental contributions from our various infrastructure programs, one month of interim rates associated with the Florida Natural Gas Base Rate Proceeding, and contributions from the Escambia Meter Station acquisitions. Higher operating expenses largely tied to facilities, maintenance, and outside expenses contributed to operating income growth of 1.3% for the quarter. For the year-to-date period, operating income increased by 6.8% over the first nine months of 2021. This included a $2.5 million reduction in other operating expenses, resulting from that regulatory deferral of certain costs associated with the COVID-19 pandemic. Absent this benefit in 2021, operating income increased $7.9 million, or over 10%. Turning to slide 13, our unregulated segment drove impressive year-over-year adjusted gross margin growth of 15.1% and 14.8% for the third quarter and year-to-date periods, respectively. This margin growth was driven primarily by contributions from Diversified Energy and Davenport, increased margins for our protein distribution business, increased demand for Marlin Services, and improved performance at Aspire Energy. That said, the seasonality aspect of the business, higher costs from transportation, fuels, labor, and other rising costs impacted the unregulated segment more significantly. On slide 14, I'll mention a few updates on the balance sheet and also discuss the actions we took in the quarter to mitigate some of the risks associated with rising interest rates. In September, we announced our commitment to issue $80 million of 15-year senior notes with an average 10-year life to credential at a coupon of 5.3%. The notes are expected to be issued in March 2023. Additionally, we also entered into three-year interest rate swap agreements for $50 million of our short-term debt at a fixed rate of 3.98%. These transactions complement the $50 million of long-term debt we placed at a coupon less than 3% earlier this year. Year-to-date interest expense has been an incremental $2.3 million over 2021. Additionally, as we look at the forward curve, we expect interest rates to remain higher over an extended period of time. This will continue to add pressure on our financial performance, but we factor that into our projections and seek to overcome this impact through other mitigating strategies, including cost management, additional hedging, alternative financing, and regulatory mechanisms. At the end of the third quarter, total capitalization represented approximately $1.6 billion. This included 51.3% of stockholders' equity, which is now $814 million and within our target capital range, 36.8% of long-term debt at an average fixed rate of 3.38%, and short-term debt decreased from $222 million at year-end to $167 million, with $50 million attributable to the long-term debt financing in March. As a result of the actions we took this quarter, our balance sheet remains strong and well-positioned to support our capital investments, which drive our earnings growth and further enhances shareholder value. Moving to slide 15, we highlight the pipeline expansions, the CNG, LNG, and RNG transportation projects, acquisitions, and strategic regulatory initiatives that will drive our growth through 2023. As always, we remind you that this table does not include organic growth, and it is not indicative of all the projects that we are evaluating and pursuing. As Jeff mentioned, we continue to be excited about the projects we have in our pipeline of growth opportunities. These projects and others not yet announced are poised to deliver higher margin growth across our businesses. Further opportunities like Planet Sound and others we're pursuing on the sustainable investment front provide a path for long-term sustainable growth. We look forward to bringing these projects to fruition. We'll continue to share details on these projects as they become available. One other item to call out on this slide is the interim rates for the month of September that we recorded in quarter three. Interim rates are subject to refunds pending the final outcome of the Florida natural gas state rate proceeding. So we kept placeholders for the full year impacts of 2022 and 2023. Jim will provide additional details on this in just a moment. Absent any interim rates from the Florida rate case, we expect the projects that are already underway will add more than $21 million this year and approximately $6 million in additional margin in 2023. At a minimum, if our rate case is not settled, we will record three months of interim rates during the fourth quarter. Finally, as a reminder, as new projects or initiatives are announced or finalized, we will add them to this table. Moving to slide 16, we highlight our key pipeline expansion projects. With an investment of approximately $140 million, these projects are expected to contribute more than $20 million in adjusted gross margin. With that, I would like to close with a few final thoughts as we push towards year end. We believe we are positioned to generate overall solid earnings growth for 2022. We have strong organic growth that is continuing, pipeline expansion opportunities, additive regulatory activities, including the Florida rate case, and opportunities within our unregulated businesses. We will work hard, as we always do, to deliver our 16th year of consecutive earnings growth. And with that, I will now pass the call off to Jim Moriarty to discuss our regulatory and ESG updates. Jim?

Yes, good afternoon, Beth, and good afternoon, everyone. I am just trying, believe it or not, to get my script here. I apologize. I clicked on an earlier one. One second, please. Okay, here we are. On slides 17 and 18, we list our ongoing regulatory initiatives, including details on the natural gas-based rate case proceeding in Florida. The company is seeking approval for an approximate $24.1 million permanent increase. In August, the Florida TSC approved an interim rate of approximately $7.7 million on an annualized basis. The interim rates went into effect for all meter readings starting in September of this year. As Beth mentioned, the interim rates are subject to refund pending the final outcome of the rate case. The discovery process concluded in early October with the hearings just completed. As part of the hearings, over 15 team members testified as experts in their respective areas. I would like to commend each of those folks for the fine jobs that were done. We are very proud of the team and the case that was presented and look forward to the Florida Public Utilities, the Florida Commission issuing its decision shortly. Florida Public Utilities electric business recently filed its storm protection plan and Storm Protection Plan course recovery mechanisms with the PSD. These plans allow for the recovery of investments to further protect our electric system in the event of a storm and prevent loss of service. Hearings for the Storm Protection Plan concluded in August and modified approval was provided in October. Hearings for the Storm Protection Plan course recovery are scheduled for the coming week. with rates to go into effect starting in January of 2023. Additionally, Florida Public Utilities continues to make significant progress with the gas reliability infrastructure program that began in 2012. Through the end of the third quarter, we have invested more than $200 million to replace approximately 351 miles of qualified distribution names. increasing the safety and reliability of our systems for many Floridians. In Elkton, Maryland, we continue to invest in the system's integrity by upgrading our Adelaide pipeline. The program went into service toward the end of 2021, and going forward, we expect the project will generate $200,000 in adjusted gross margin in 2022 and $400,000 in 2023. Finally, our Eastern Shore Natural Gas Interstate Transmission Unit has authority to recover capital costs associated with mandated highway and railroad relocation projects, along with PHMSA required safety upgrades. We expect that this program will generate $2 million in additional adjusted gross margin in 2022 and 2023. Turn into slide 19. I'd like to highlight our strong culture at Chesapeake. As noted in prior calls, our employee resource groups drive strong employee engagement across the organization. Each of our ERGs make significant contributions aligned with their mission, not only within Chesapeake, but also within the communities we serve. We are very grateful for all our Chesapeake colleagues who participate in these important groups that promote our special culture both inside and outside of our organization. I'd also like to highlight a few of the company's recent awards. In addition to the awards we discussed in our last call, Chesapeake Utilities and Sharp Energy were recognized as stars of Delaware, being named best company with over 50 people and best propane company, respectfully. Additionally, Marlin Compression and the Port Fuel Center in Savannah, Georgia, received a CNG Implementation Energy Matters Award. This award was presented by Georgia TSC Vice Chairman Tim Eccles at Savannah State University and recognizes environmental excellence from individuals, businesses, and communities throughout the state of Georgia. Finally, we were named Best in Corporate Governance in the United States for 2022 by World News Meeting. Congratulations and thanks to all those across Chesapeake Utilities who helped make our company so successful. On slide 20, I'd also like to take a moment to thank and recognize all of our colleagues on the front line and back offices who prepared for and responded to Hurricane Ian. As one of the strongest storms to make landfall in the state of Florida, Ian brought devastation to much of the state. In preparation, our teams cleared debris that might pose a hazard and ensured our gate stations were protected. In flood-prone areas, we installed vent snorkel tubes that allowed the gate station regulators to continue to breathe despite rising waters. Two days prior to landfall, employee groups gathered, volunteer lists were shared, and management update calls occurred at least twice daily. Our customers who lost power experienced only temporary outages, and no employee injuries were reported. As Jeff mentioned, the storm's damage, somewhat miraculously, largely bypassed our system. For that, we are fortunate, as many others in Florida experienced devastating outcomes. To assist in the state's recovery, we donated $100,000 to four separate charitable organizations, including the American Red Cross, Feed Florida, Volunteer Florida, and the Florida Farm Bureau. With that, it was great to be with you all today. I will now turn the call back to Jeff for closing comments.

Thank you, Jim. Turning to slide 21, let me reiterate the comments I made in my opening remarks. Despite the challenges we and many companies are experiencing in this dynamic economic environment, We continue to have a strong, positive outlook for 2022 and the future. And that's why we are reaffirming 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 compounded annual growth rate of 9.1% to 9.5% over the five-year period. While we may see short-term pressure as we experienced in the third quarter, we maintain our position that the projects in our pipeline of opportunities will deliver strong earnings growth. Given that pipeline of projects, we also continue to expect to deploy $750 million to $1 billion in capital expenditures during the same period. While we've experienced some project delay resulting from supply chain disruptions and radiatory timing, we have strong conviction in our ability to get these projects across the finish line. Our wildlife transmission pipeline project mentioned earlier is a good example of significant projects gaining approval where construction will commence very soon. In the third quarter, excuse me, pardon me, In the third quarter, our pace of capital expenditures picked up. Through September the 30th, we've deployed more than $95 million on capital expenditures. Given this momentum and the projects we have slated through the end of the year, we continue to expect to invest between $140 million and $175 million on capital projects in 2022. To conclude, we remain well positioned to deliver a strong earnings growth in 2022 and beyond. Chesapeake Utilities has a long history of weathering volatile economic cycles. We've always emerged as a stronger company each time. Our strategy and business model are proven, and we have a strong balance sheet that positions us well to capitalize on future growth opportunities, both within our regulated footprint and our unregulated complementary businesses. While challenges remain on the horizon, our focus on delivering top quartile financial performance never wavers. And with that, Alex, why don't we open it up for questions? Thanks, Jim.

Scott, why don't we open it up for questions?

Thank you. If you'd like to register your 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. 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. One brief moment for the first question. Our first question is from the line of Tate Sullivan with Maximum Group. Please go ahead, your line is now open.

Hi, thank you. Good afternoon. And first on the planet, sound acquisition, please, and and the CNG, RNG, and LNG transportation infrastructure gross margin forecast for U.S. in 2022 for $9.5 million and 2023 for $10.5 million. Does that, and it was unchanged, I believe, from the prior quarter, were there some moving parts in that forecast for gross margins, and does that not include PlanetFound2?

So thank you, Kate. I'll start this off, and then, you know, I'll ask Jeff to add any additional commentary. So with PlanetFound, the real purpose in buying that business, as Jeff talked about, was the technology and the capabilities that they bring to the table and something that we can use to scale future projects. It is not a very large current – it doesn't have a very large business profile at the present time. So given the size that it currently is and the runway that we have before, you know, we deploy that in our next project, we did not want to stand up any estimates at this time, certainly for 2022 projects. We'll be taking a closer look at 2023 and the projects that we have on the horizon and see if there's any adjustments that we need to do in time for our year-end release that will come out in February. And, Jeff, I don't know if there's anything you'd like to add.

No, I think that covers it. Again, Planet Mound has a project site under development and will continue. obviously take that over and take that on and work toward constructing the project that they're working through permitting right now. But I think that summarizes it. This is a relatively small acquisition. It comes with technology that we think is useful to continue to expand our RNG footprint, especially in the poultry business. And it also, again, as we mentioned, comes with a nice test facility and the opportunity to continue to develop the project that they have underway and to expand our business profile or footprint in the Somerset County, Maryland.

Okay, thank you. And on slide, I believe it is slide 10, where you detail a year-over-year VPS change, and the 10 cents tied to recent acquisitions, and Beth, you gave good detail on that. Do you, I mean, was this out of, I mean, I think it was a large propane acquisition from last December, Diversified Energy Group. Did you experience more expenses than normal integrating that, or, I mean, was it just the timing that you decided to incur those expenses, integrating their system? Can you provide more detail on that integration, and maybe did you even consider excluding those expenses? That may be one time in nature, too.

Well, certainly, I mean, one of the things that's exciting about this acquisition, Kate, is that, you know, for us, it fills in when you look at our footprint, right? We were primarily south all the way to Virginia. If you think about that, Pennsylvania, Delaware. that service area, and then you look at, you know, Florida, and there's some things that we do kind of going into Georgia with Marlins Opportunities and our new, you know, C&D station that we're servicing there. So this acquisition, you know, enabled us to come into North Carolina and South Carolina, but when you do that right, you're standing up a brand new presence in new states, which is very different than if you look at the acquisitions that we've recently done, right? If you turn the clock back and you look at old, that was in Pennsylvania. If you look at bolden, that was in the Elkton, Cecil County, Maryland, and into Delaware. So it overlapped with us, right? And if you look at Western Natural Gas, which, you know, we announced previously as well, that was in Florida. All opportunities that we were able to capitalize on our presence, right, we already had operations there. We could leverage the way that we're doing business. So as we brought diversified in, you know, it's working together to adopt the practices that SHARP has, you know, had in place for many years. And so that includes programs. It includes the way we operate. It includes operational safety standards, et cetera. So, you know, there's going to be incremental costs that are associated with that. And then as we look to branch out, even from that footprint, right, there's going to be additional costs. So those costs were expected, but they do impact, particularly when you are looking at a quarter that does not have a lot of margin contribution. The third quarter is our lowest margin contribution for that particular part of our business.

Okay, that's great. Thank you, Beth. And last, if I may, in terms of the RNG opportunities, I think it was last month that BP announced an acquisition of RNG producer Archaea. This interest from large oil companies in RNG, does it create more competition for RNG projects, or is it good for your existing RNG projects? Can you explain?

I think there's two things to be said about that. One is the R&D projects that we're principally interested in and certainly the ones that we're pursuing from a developmental perspective. One are primarily in our backyard. They require some support from our pipeline systems to provide market paths. They are working with a variety of customers and politicians and regulators and others that we know quite well and most of them almost not quite all of them but most of them are focused on poultry waste and poultry waste is a tricky thing to deal with and we think we're a long way up the curve beyond where virtually anyone else is figuring out how to produce biogas and renewable natural gas from poultry waste, and as importantly to the economics of those projects, deal with the organic fertilizer coming out the other side of the plant. And so there are some competitive barriers that exist that we like and that give us, I think, a leg up. And that's one of the reasons we were interested in the PlanetFound acquisition. because we think that, again, moves us a little bit farther up the curve on the technology side with some people that understand how all of that works that now are working for us directly. And so we don't see the VPs and the Shells and the other folks that are actively engaging in biogas projects as a significant source of competition at this point. And, in fact, we're working with a number of those folks and their energy marketing arms to make sure that we get the energy that we ultimately will produce into the marketplace at an appropriate economic point. And so with that going into California or going into the federal programs or up into Canada or wherever it may be going, we find that those large fuel marketing groups, many of them attached to the large oil and gas companies that you're describing, are quite helpful in taking a lot of the risk out of those projects, frankly, on the downstream commodity side.

Thank you very much for commenting on that, Jeff, and thanks all.

Sure. Our next question is from Brian Russo with Sedoti. Please go ahead, your line is now open. Hi, good afternoon.

Hi, Brian. Hello. Just a follow-up on Planet Bound. Seems like a nice foundation for growth. I mean, how quickly do you think you can, you know, deploy capital and leverage that, you know, over the next several years? Would it start to be more of a meaningful project contributor?

Well, we've already got the technical expertise of the folks that are, you know, principals in that company. And as we mentioned in the remarks, a couple of them are actually becoming employees of ours. And others that are on the sort of academic science side will certainly continue to contribute, I think, on a consulting basis going forward. So there's a pretty much an immediate contribution helping us evaluate and design some of the other projects that we're looking to develop. And so I think that happens pretty quickly. We're looking now at, you know, how quickly we might be able to move forward with the relatively small site in Maryland that they have under development. and whether we have opportunities to expand that a little bit, and we probably do. And so I think you'll be hearing about that, you know, over the next several months as we get a little farther down the road to think about, you know, when we might be able to actually bring that before the board and suddenly get approval and then move forward with construction.

Okay, great. And then just on that, The interest rate sensitivity, you mentioned the interest rate swaps before and then the $80 million you're going to turn out. How much of the short-term debt kind of is left and exposed in a rising interest rate environment? And is that roughly $6.2 million of interest expense reported in the third quarter, is that kind of considered a run rate with this current level of debt?

Sure. So, you know, if you look at where, you know, Brian, we ended the quarter as of, you know, the end of September, we had about $167 million in short-term debt at that time. So, you know, that $80 and that $50, we've taken a big chunk of that short-term debt, and either through long-term debt or through the slots that we've entered into that leaves about $30 million. You know, a little bit more than $30 million that's still variable at this point. And so, you know, we're continuing to evaluate, and we'll do so on an ongoing basis. Certainly with where interest rates are and, you know, our target capital structure, we'll evaluate what type of financing should be utilized for that. We have certainly a lot of options. So, again, you know, we've taken a big chunk of it. We've placed it long-term, I think. Hopefully that will help if you think about our interest costs and project those out into next year, what kinds of, you know, interest expense increases, you know, that, you know, will be expected. The offset to some of that, though, certainly is as we went into our rate case in Florida. we were using and looking at what the forward rates were at the time. And so that, you know, also goes to my comment about, you know, we look at things like rate cases that we're involved in and other mechanisms to try to also offset some of that cost.

Yeah, and that was actually my next question was can some of this inflationary environment as well as the rising interest rate environment be captured in this Florida rate case? So it seems as if, can you address what's currently filed or it was at that specific, you know, point in time that you looked at the forward curve?

It was certainly at the time that we looked at it. But as our team has been in over the last week participating in the hearings, that is certainly something that is discussed. We certainly looked out, you know, as best we could at the time that we made our filings and then have, you know, included in some of our comments where those costs have gone. But, you know, some of that was reflected in the filing that we made. Not all of it, but certainly some of it was. And so we try to do that with all of our expenses as we look out. So, again, some of it will be captured. Some of it will be exposed. But, you know, that case isn't settled yet. And so, you know, we'll have to wait and see, you know, where the ultimate outcome is. But, again, some of it will be captured there.

Okay, great. And then lastly, just, you know, on the year-to-date CapEx of $95 million and the target for the full year, you know, it implies kind of 55, I think, to 85 or 80 million of CapEx in 2021. the fourth quarter, and I'm just wondering, you know, what's the profile of that cap? Are those new projects that were delayed last quarter that are going to ramp up, or is that, you know, already projects that are well along, you know, in their, you know, spending profiles?

It would primarily be, Brian, those projects that, you know, like Jeff talked a little bit about, the North Ocean City Connector Project. That's a project that, you know, we're for the most part going to be finishing that up by the end of this year. So, you know, that will be out there to finish. We also have some other projects that are underway, some of the pipelines. line expansions that are already in motion. They may not finish until next year, but there's parts of those that we'll be working on So, you know, it could be, you know, not to say, you know, in the past we've had some small transactions that we've announced. Last year there was a big one right at the end of the year that really added to our capex. But, you know, most of what's inherent in that capital forecast are going to be things that are moving along. And, again, we feel pretty confident about that, you know, those capital expenditures are already in the queue.

Great. Thank you very much.

Thank you, Brian.

Once again, if you'd like to register for a question, please press 1-4 on your telephone. And we have a question from John Bartlett with Reeves Asset Management. Please go ahead. The line is open.

Hi. Good afternoon. Question for Beth and a question for Jeff. Just to go back to Brian's question for a second, I don't mean to belabor this, but I guess I will. Just on the question of, you know, run rate, exit rate, whatever you want to call it, clearly those swaps, which I'm sure you're pleased with now, were done at some point during the quarter. And as a consequence, some of the impact is going to be felt in the future. Can you give us a little bit more color on that?

Sure. I mean, we're constantly, John, looking at different projects, et cetera, that are going on and initiatives that are underway. And so determining when the appropriate time to pull some of that down and lock in, I mean, it was evaluated as we started this year and just with the things that we were evaluating earlier. throughout the organization. And so it really for us became an opportunity, you know, when we came into the third quarter looking at some of the projects that were out there, et cetera, and some of the financing that we were looking to do, it was the optimum time for us to lock both of those in. And, you know, we had incorporated, as I mentioned, some of that into our rate case proceeding. So at the same time, you know, we've worked pretty aggressively on our revolvers to get our pricing even more competitive. So we saw some of that come through in our most, you know, negotiated pricing that we did on the revolver. And then lastly, I would say, you know, We also had a placement earlier in the year that was done at well under 3%. So, you know, overall, I'm pleased. Our overall long-term debt rate is sitting at about less than a 3.5% average rate. You know, certainly the short-term, could we have locked it in earlier? Yes, but we were, you know, looking at several different things across our business, and it did not align for us to lock in earlier in the year.

Oh, no, I understand that, but I'm sorry. Just kind of where I'm going is it sounds like most of the activity was sort of front-end loaded into the quarter. And so the net impact of it.

Yes. Well, it was, but I will tell you, you know, John, what really happened is even if you set that aside, frankly, because we don't have the long-term placement until March of next year and the swaps were done on September 30th, it was really the fact that we've gone to, you know, from a short-term debt perspective, you see short-term interest rates move almost 400 basis points a year, right? So we started the year off. well under 1%. They're now, you know, not quite 400 basis points above that, but there's been such a move. That's really the headwind that you saw in the third quarter, not so much the cost of what we did in these first recent two placements.

Yeah, right. No, no, I understand that you pulled the ripcord of the slots, but what you're telling me is, in essence, that that happened fairly early in the quarter and The placement is going to be placed when it is, and it's been swapped. Correct. So, other than that, you know, it seems like what you did this quarter is a reasonable expectation, absent incremental, you know, spending, of course. It's a pretty good replication of what we're going to get next quarter. That is, you felt the pain in the numbers, plus or minus what the Fed does.

That's correct. That is absolutely right.

Okay, that's all I was trying to get at. Okay, no, terrific, Jeff. Thank you. And then, Jeff, just for you, I guess a question that's a little bit more challenging, but I just really want a high-level answer. I don't want to drill down too far. But you've obviously, everybody in corporate America has felt cost creep across their businesses, and you naturally are feeling it this quarter. and presumably in previous periods, how would you term the momentum of that, the first derivative? Is it accelerating? Is it slowing down? Is it staying roughly the same? What's your sort of view of your fleet of businesses on that front?

Well, I think obviously, and this is clearly obvious, if you look at expenses other than O&M expenses, the ones that Beth is talking about relative to interest rates and whatnot, we continue to see those increasing. We thought they would flatten out some next year. I'm not too sure that's true at this point. I guess we'll see. On the O&M side, we've actually, over the last several years, we've been tracking those O&M expenses down as a percentage of gross margin, for example. And so we've got a decent handle on that. I will be the first to tell you that some of that is not intentional because we've had the same difficulties hiring and retaining staff as you hear about every day for companies across this country. We've done, I think, a nice job recruiting and replacing folks that have left. and people that have retired, especially those that, you know, had had enough during COVID and were old enough to take the package and go. And so we've been able to maneuver around some of the other supply chain cost increases and certainly some of the inflationary increases that we're seeing. But I don't see much of that flattening with a couple of exceptions. Our fuel costs have, in fact, come back a little bit, and we'll see where that goes over the next few months. but they skyrocketed on us, and then they flattened out, and they actually came down some. So there are a few things like that that, you know, I feel at least half way good about. Our employee expenses will, I believe, continue to go up. There's a lot of inflationary pressure related to the types of annual, you know, merit increases that we would normally provide to employees and what those look like. So I don't think you're going to see any significant, you know, fallback in expenses anytime soon. And I am of the opinion that we're going to continue to see increased pressure on those costs. You know, the same is happening. in our capital projects. And so, you know, steel is moving around. The price of labor to install that steel has really increased significantly. That's not, you know, the world's most optimistic forecast, but I think that that's probably what we are facing, and it's certainly what we're planning for. That's terrific, Jeff.

Thank you so much. I really appreciate it.

Sure.

That's all the questions we have for today, and I'll turn it back over to Jeff Householder.

Well, thanks for joining us today. I want to probably sound like a broken record, but I want to say this one more time. You know, we really do believe that we're well positioned, and we're very confident that we can continue to deliver strong earnings growth in 2022 and beyond. See you on Thanksgiving. Well, that's a little bit early, I guess, in November, but I want to express my gratitude and the company's gratitude to all of our stakeholders, including those of you on the phone today. We appreciate your time, and we appreciate your continued interest in our company. Goodbye.