Chesapeake Utilities Corporation

Welcome to the Chesapeake Utilities Second Quarter 2023 Earnings Conference Call. At this time, all participants have been placed on a listen-only mode, and the floor will be open for your questions following the presentation. If you would like to ask a question at that time, please press star 1 on your telephone keypad. If at any point your question has been answered, you may remove yourself from the queue by pressing star 2. so that others can hear your questions clearly, we ask that you pick up your handset for best sound quality. Lastly, if you should require operator assistance, please press star zero. I would now like to turn the call over to Beth Cooper, Executive Vice President, Chief Financial Officer, Treasurer, and Assistant Corporate Secretary. Please go ahead.

Thank you and good morning, everyone. We appreciate you joining us today for Chesapeake Utilities' second quarter 2023 earnings call. As you saw in our press release issued yesterday, the company delivered solid performance in both the quarter and year-to-date periods in 2023, despite the continued effects of warmer temperatures into the first half of the year across our operating footprint. current quarter results also exclude the impact of a non-recurring pre-tax gain recognized in the second quarter of 2022 amounting to 1.9 million dollars or eight cents per share on a diluted basis we will touch on the financial results in more detail in just a few minutes but chesapeake utilities remains committed to delivering another year of record performance on its growth strategy and driving long-term increased shareholder value. As shown on slide two, participating with me on the call today are Jeff Householder, Chairman, President, and Chief Executive Officer, 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 Events and Presentations subsection. After our prepared remarks, as we typically do, we will open the call up for questions. Moving to slide three, I would 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 2022 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 margin and has provided 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, including on the company's second quarter and the key drivers of our performance. Jeff?

Thank you, Beth. Good morning, and thank you for joining our call today. We are reporting earnings per share of $0.90 for the second quarter and $2.94 for 2023 year to date. Warmer weather was a significant impact, $0.38 on a year to date basis, including $0.09 for the second quarter. In spite of the warm weather and continued interest rate hikes, our team went to work looking for cost savings, margin acceleration, and other opportunities to overcome a significant impact of several million dollars. To date, we've recovered all the 10 cents per share. Keep in mind, we also recognize the non-recurring gain during the prior period related to a real estate transaction that represented an 8 cent per share gain in 2022. Despite the challenges thus far during 2023, our fundamental growth strategy, driven by the dedication and efforts of the Chesapeake team, continue to be successful. As a result, our adjusted gross margin increased by $7.4 million over the last year's second quarter. We've also initiated several new investment projects that meet the continued strong customer demand for our energy delivery services. In addition, we finalized several significant regulatory initiatives that are adding to margins and paving the way forward for substantial system investments over the coming years. During the second quarter, we deployed approximately $50 million in new capital investments, bringing our total spend during the first half of the year to just under $92 million. We continue to support the previously communicated 2023 capital expenditure guidance range of $200 million to $230 million. As an example of our continued investment growth opportunities, this week we received Florida Public Service Commission approval for our newest pipeline expansion to bring gas to the city of Newberry, Florida. We also began to recognize margin from two recently completed pipeline projects, the Beachside and Lake Wales extensions. Numerous other projects are underway, including the Eastern Shore natural gas southern expansion on Delmarva and an expansion in the wildlife development in Nassau County, Florida, which we'll highlight later. In addition to the Newberry expansion, the Florida PSC recently approved our GARD program, which is the second phase of our comprehensive pipeline replacement program in Florida. GARD will enable us to improve safety and deliverability for our Florida distribution systems through the relocation of mains located in rear easements to street side locations in front of customer premises. It will also allow us to replace and upgrade other system facilities. And Jim will provide more details on the guard program a little later in the call. Our long-term growth initiatives have provided an earnings foundation that served to offset most of the volumetric impact of weather and the other cost pressures presented by the current economic environment, as well as overcoming the effect of the previously mentioned non-recurring gain in 2022. While weather has been a distraction, it has not tempered or dampened our expectations in regards to achieving another strong year of performance. On slide five, we wanted to provide some additional color on weather, given its significant impact on volumes for the quarter and year-to-date periods. As you can see, each of our primary service territories experienced temperatures that were notably warmer, not just compared to last year, but were unseasonably warmer compared to the last 10 years. In the Delmarva service area, heating degree days were 20% lower compared to the first six months of 2022, and 24% lower compared to normal levels. In Ohio, temperatures were also more than 13% and 15% lower than year-to-date 2022 and normal levels, respectively. And while we're not as dependent on heat load in Florida, heating degree days were down by over 30% in the year-over-year and 10-year normal comparisons. Again, the team did an excellent job to overcome these warmer temperatures by remaining focused on our growth initiatives and cost mitigation efforts. These efforts will continue through the remainder of the year with a focus to restore as much as possible of these earnings. Significantly colder temperatures later in the year would certainly be a big help. Turning to slide six, let me provide some updates on our key growth drivers. First, we continue to experience organic growth in our natural gas distribution businesses that far outpaces the national average. Across both of our Delmarva and Florida service territories, customers continue to select natural gas as their preferred energy choice. For the quarter, we saw a 5.5% increase for our Delmarva service territories and a 4% increase in Florida. This continues to highlight the attractive nature of the communities we serve. Given the magnitude of questions we get around the growth rates we achieve and the runway for continued growth, I'm going to highlight just two of the many areas driving our customer growth rates, Middletown, Delaware, and Wildlife in Nassau County, Florida. The magnitude of the customer growth in our distribution businesses is also continuing to drive the need for additional investment in our transmission systems. As I mentioned previously, several of our pipeline projects generated margin for the first time in the second quarter. We also continue to make headway with other projects, including our wildlife expansion, and we added the Newberry project to our major projects table this quarter. These projects and others will deliver significant margin growth in 2023 and beyond. And while warmer temperatures impacted volumes in our propane business into the second quarter, Our SHARP team did an excellent job managing margins and service fees, especially in our northern service territories. Beyond the customer growth we are securing with natural gas, we continue to add new propane community gas systems where natural gas is not yet available. As a highly desirable energy choice for our customers where natural gas isn't available, propane remains a core component of our growth strategy. Marlin Gas Services continues to drive solid growth for the company. As our virtual pipeline solution, Marlin serves our customers with gas transportation services that solve unique and complex challenges, including service to clean energy in Florida that we mentioned on our last call. Marlin's virtual pipeline solution is delivering compressed natural gas to their fueling station. Finally, we continue to advance several sustainable investment projects. We're being disciplined and cautious in our approach. We recognize the evolving nature of the renewable natural gas market and the regulatory constructs. We have initiated construction on our first full-scale renewable natural gas facility at the Full Circle Dairy Farm in Madison County, Florida, and we remain on track for that unit to go into service in the first half of 2024. On our last call, we also discussed our participation on a collective team comprised of commercial, governmental, and educational institutions that submitted the proposal for the Mach 2 hydrogen hub in the Delaware, Philadelphia, and southern New Jersey region. Just several weeks ago, we participated alongside some of our team members in an interview with the Department of Energy. Our proposed hub is one of 11 finalists vying for funding to promote hydrogen development and deployment across multiple uses. We're excited to work with these partners in furtherance of our mission to deliver energy that supports a more sustainable future. Back in May, we unveiled some drone footage of the growth within our service territories on the Delmarva and in Florida. This footage has been well received and clearly demonstrates the current and future runway of growth that our service territories provide. We recognize, though, that we need to spend more time showcasing our service areas and future potential. Today I'm going to highlight one such area in Delaware and one in Florida. These are only a few of the many areas that are experiencing high levels of growth. Middletown, Delaware was recently ranked by Fortune.com as the fifth best town in the U.S. for families. Housing developments, commercial growth, and related infrastructure continue to build out at a fast pace, with nine schools, for example, being built in the last 10 years. More recently, this town was selected for a new pharmaceutical manufacturing facility that will drive hundreds of jobs. This is the company's second facility in the United States. As part of their manufacturing process, we will provide natural gas service to their plant. The expectation is for the facility to begin operations sometime in 2025. While we tend to talk about residential developments comprising hundreds, maybe thousands of homes, you need to think about growth at a mass scale when we talk about wildlife. Located 20 minutes from the beaches of Amelia Island in Jacksonville, Wildlife is expected to be constructed over the next 10 to 20 years and will comprise approximately 22,000 homes. Our FPU distribution system is positioned to meet the growth from these residential customers, as well as from the surrounding commercial infrastructure that's being constructed, including schools, businesses, medical facilities, and so many more. To meet the natural gas distribution, Peninsula Pipeline also had to construct additional facilities to serve demand on the distribution system. Before I turn it over to Beth, on slide 8 I wanted to highlight several examples of pipeline expansions driven by distribution system growth. On the Delmarva, one such example is the southern expansion. We're installing a new natural gas compressor skid at our existing Bridgeville facility that will provide additional transportation capacity to support our own distribution system demand as a result of the significant growth in southern Delaware. This will go into service in the fourth quarter and generate $2.3 million of adjusted gross margin on an annual basis beginning in 2024. Next, I just mentioned the wildlife pipeline expansion, which supports the distribution system growth we covered on the preceding page. Another key Florida pipeline expansion project is the proposed $18.1 million expansion in Newberry, which brings natural gas to this town in central Florida. In addition to capturing new natural gas growth from residential and commercial customers, we'll be converting the town from propane to natural gas service. There are other commercial and industrial opportunities that we're also exploring, which would add incremental adjusted gross margin beyond our current annualized estimate of $2.9 million once fully in service. And with that, I'll turn the call over to Beth to discuss our results and more depth. Beth?