Chesapeake Utilities Corporation

Welcome to the Chesapeake Utilities 3rd 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 others can hear your questions clearly, we ask that you please pick up your handset for best sound quality. Lastly, if you should need 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 begin.

Thank you and good morning, everyone. We appreciate you joining us today for Chesapeake Utilities' third quarter 2023 earnings call. As you saw in our press release issued yesterday, the company delivered solid performance for the third quarter of 2023. Our performance on a year-to-date basis has offset consumption impacts from warmer temperatures in the first half of the year across our service territories. These items are detailed within the financial results that we will cover in just a few minutes. Also, we continue to be very excited about the acquisition of Florida City Gas that we announced in September. We will be providing more details on the status of the transaction later in the call, but it's important to note that current year results have been adjusted to exclude transaction related expenses that were incurred during the third quarter 2023 related to the transaction. A reconciliation between our adjusted results and the comparable GAAP metrics can be found in our earnings release and the appendix of the earnings call presentation. 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 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 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 certain non-GAAP measures, including adjusted gross margin, adjusted net income, and adjusted earnings per share. And the accompanying information includes the appropriate disclosures in accordance with the SEC's Regulation G. A reconciliation of these non-GAAP measures to the related GAAP measures have been provided in the appendix of this presentation, our earnings release, and our quarterly report on Form 10-Q for the third quarter. Now I'll turn the call over to Jeff to provide some opening remarks, including on the company's third quarter results, the status of the Florida City Gas acquisition, and the key drivers of our performance. Jeff?

Thank you, Beth. Good morning, and thank you for joining our call today. As you saw in our earnings press release, we reported adjusted earnings per share of 69 cents and $3.63 on a quarter and year-to-date basis, respectively, for 2023. As we've noted, warmer weather had a significant impact on our results. particularly throughout the first half of the year, negatively impacting us at approximately 41 cents per share through the month of September. And we also dealt with continued pressure from a rising interest rate environment. However, our team remained focused on executing our growth initiatives, pursuing multiple strategic regulatory filings, identifying cost savings, and capturing opportunities to accelerate margins. Our team's efforts more than reversed the reduced earnings reported last quarter. As a result, we have overcome the negative weather impact of almost $10 million and achieved accretive third quarter results versus 2022. Our fundamental growth strategy and strong execution continue to deliver success. Our adjusted gross margin increased by $7.6 million over last year's third quarter. We've also initiated several new investment projects, to support the continued strong customer demand for our energy delivery services. In addition, we continue to make significant progress on several regulatory initiatives that will deliver incremental margins and provide a foundation for substantial system investment over the coming years. We also significantly advanced our growth strategy with our agreement to acquire Florida City Gas for $923 million. We're incredibly excited about this transaction and the opportunities for growth investment it will provide in the coming years. Turning now to slide five, Florida City Gas will substantially expand our presence in Florida, a premier utility jurisdiction and the second fastest growing state in the U.S. With the acquisition, we will immediately more than double our regulated natural gas distribution business in Florida. On a pro forma basis, we expect to have approximately 211,000 customers combined. As a result of the transaction, we foresee attractive growth opportunities across our five growth platforms, especially our conventional pipeline company. It's exciting to contemplate the increased opportunities to deploy capital to improve system reliability and meet the substantive customer demand for natural gas in underserved and unserved communities in Florida. A larger footprint in Florida also brings scale benefits, and we'll be able to leverage the core competencies, expertise, and community relationships that we've built throughout the state to operate more efficiently and effectively. We will be well positioned to generate meaningful earnings growth by applying our operational and regulatory expertise on a much broader scale, and with the addition of the Florida City Gas Team, our consolidated operation will be even stronger. This transaction also supports and extends our EPS growth rate expectation of at least 8% and should drive long-term dividend growth. As a result of the expanded investment opportunities available to us, both as a result of the Florida City Gas acquisition and the expanded opportunities in our legacy businesses, we increased our capital investment plan by approximately 65%. to $1.5 to $1.8 billion for the five years ending 2028. And as always, we remain focused on cost management opportunities and efficient growth. I'll touch on this guidance later in the presentation. We have a disciplined approach to M&A, and with Florida City Gas, we expect to build on our track record of success. We'll apply the same operating philosophy, rigor, and discipline that drove success with the Florida Public Utilities, Sand Poplar Energy, and Elton Gas acquisitions as we integrate Florida City Gas post-closing. Let me take a few minutes now to update you on our closing progress. As you can see on slide six, we continue to expect the transaction to close before year-end. Transition teams for both Chesapeake Utilities and Florida City Gas have been formed. We're actively planning to ensure a seamless transition for both employees and customers upon the approval and closing of the transaction. We plan to be able to provide more detail on the integration progress on our year-end call. From a regulatory approval standpoint, the Hart-Scott-Ravino waiting period expires on November the 6th. We received approval from the Delaware Public Service Commission on October 25th and from the Maryland Public Service Commission on November 1st. Finally, while the transaction does not require approval from the Florida Public Service Commission, we've been regularly communicating with them on this transaction and our progress. Turning now to financing. As you know, recent market dynamics have been, to say the least, somewhat challenging. As we develop our transaction financing plan, our top priority is to maintain a strong balance sheet. We are continuing to actively and closely evaluate the evolving market dynamics as part of our financial risk mitigation efforts. We have significant flexibility, both in terms of timing and forms of permanent capital. We remain steadfast that our long term financing plan will reflect an investment growing balance sheet for Chesapeake. In addition to the announced Florida city gas acquisition, there are several other notable accomplishments since our second quarter earnings call. Let me mention just a couple of these accomplishments. In October, we announced the Worcester Resiliency Upgrade Project, the approximate $80 million project consisting of a liquefied natural gas storage facility in Bishopville, Maryland, and will allow Eastern Shore Natural Gas to provide critical energy delivery service during the peak winter heating season, particularly to our growing distribution utilities on the Delmarva Peninsula. Also in October, we announced our role as a project partner in the Mach 2 Hydrogen Hub. The project is slated to receive a share of the $7 billion in Black Partisan Infrastructure Law funding, which will accelerate the market for hydrogen in the United States. We're proud to be a partner on this project, which will bring affordable and realistic environmentally responsible solutions to customers. These investment opportunities, coupled with the ongoing and recently completed expansions of our existing pipeline systems, demonstrate the growing demand for energy delivery services in our territories. With that, I'll turn the call back to Beth to discuss our results for the third quarter. Beth?

Thank you, Jeff. Before I discuss our financial results for the quarter and year to date, I would just like to add a few opening comments about the Florida City Gas acquisition. As Jeff indicated, we remain extremely excited about the transaction and the expected long-term value creation it affords. We are proceeding on schedule on all fronts and remain positioned to achieve our 2025 guidance as previously indicated, even in light of the challenging and volatile financial markets. And now turning to slide eight, I'd like to first begin and thank the collective Chesapeake team. I am proud of the things that we continue to accomplish as an organization and our longstanding track record. Working together, we continue to achieve new milestones. Now I'll talk about some additional details on our results for the third quarter and first nine months. As Jeff mentioned, adjusted diluted earnings per share for the third quarter of 2023 was 69 cents compared to 54 cents during the prior year. This strong performance during the third quarter brought our year-to-date adjusted EPS to $3.63, or 5 cents greater than the prior year period. The key factors shaping the growth of our adjusted gross margin included contributions from new permanent base rates that went into effect for our Florida natural gas distribution business in March, along with incremental contributions associated with regulated infrastructure programs, organic growth in our natural gas distribution businesses, higher fees and margins per gallon in our propane business, and lastly, new pipeline expansion projects. As we've talked about throughout 2023, our current year results reflect a margin impact of approximately 41 cents attributable to the significantly warmer weather that was experienced primarily through the first half of the year. Our team remains focused on our fundamental growth strategies and we're excited that we were able to overcome this impact with the growth we realized in the third quarter. On slide 9, our financial summary shows that adjusted gross margin increased $7.6 million and operating income increased $1.6 million for the quarter. Excluding transaction-related expenses associated with Florida City Gas, our operating income increased 29%. interest expense was over 13 percent higher during the quarter and more than 22 percent higher relative to the prior year period as the effects of the ongoing rising rate environment experienced in the latter half of 2022 have also continued at full force into this year Again, despite these impacts, adjusted EPS for the third quarter improved by $0.15 per share over last year and by $0.05 on a year-to-date basis. Moving to slide 10, let me provide some additional insight on our adjusted EPS walk for the quarter. Our core businesses, excluding the continued impact of weather and other changes in consumption, provided additional margin contributions that increased adjusted earnings by 33 cents per share. We previously touched on the key drivers of this growth. The third quarter of 2022 included interest income on a federal income tax refund, so current period earnings exclude the 3 cent impact from this item. We had a $0.03 offset related to reduced bargains for the quarter. Higher operating expenses tied to our core business drove a $0.06 impact as we've continued to manage costs to offset warmer temperatures. Higher depreciation, amortization, and property taxes resulted in a $0.03 impact. And finally, increased interest expense and other changes together resulted in a 3 cent impact compared to the same quarter last year. On slide 11, we provide a similar bridge related to our year-to-date performance. The primary drivers are largely the same as what we just covered for the quarter, so I won't walk through all of the details. But I did want to note a few key items. The year-to-date period includes a four-cent decrease attributable to effects of non-recurring items. The absence of the interest income related to a federal tax refund and the real estate gain from the prior year period was partially offset by the one-time benefit associated with a decrease in one of our state tax rates for the current year. As we've noted, weather was much more impactful on our year-to-date performance. The historic temperatures experienced during the first quarter, along with the continuation of warmer temperatures into the second quarter, have impacted our results, again, by that $0.41 per share relative to the prior year. As you can see on this slide, the weather impact cut into the core business growth contribution of $1.22 per share by approximately one-third. So with that said, we were pleased with the adjusted EPS improvement of $0.05 per share compared to the prior year. Moving to the next two slides, let me touch on Chesapeake Utilities operating segments. As you can see on slide 12, adjusted gross margin was up 8.8% for the quarter and 7.8% year-over-year for our regulated energy segments. Operating income was also higher in both periods, up 5.3% and 9.1% respectively, and driven primarily by new rates associated with our Florida natural gas base rate proceeding, organic growth in our natural gas distribution system, transmission pipeline expansion, and incremental contributions from our various infrastructure programs. Ascent to transaction-related expenses operating income was up 21.8% and 13.3% for the three and nine-month period. Turning to slide 13, adjusted gross margin for the unregulated segment increased 8.4% for the quarter and reflects a 2% increase over the prior year-to-date period. At the operating income level, the third quarter results were largely consistent with the prior year, but on a year-to-date basis, the combination of the significantly warmer temperatures experienced and the fixed operating expenses that are inherent in our unregulated businesses resulted in a decrease of $4 million compared to the prior year. Given our planned capital investments over the next couple of months, including the Florida City Gas acquisition, I'd like to highlight some of the details on our balance sheet position. At the end of the period, total capitalization was approximately $1.65 billion. This included 52.6% stockholders' equity, which is approximately $867 million and continues to be within our target capital range. 40.3% long-term debt and an average fixed rate of 3.89%, and only 7.1% of short-term debt, reflecting the long-term debt financing that was executed earlier this year. As shown on slide 14, the $80 million of 15-year senior notes that we issued in March allowed us to reduce short-term borrowings considerably. With a short-term debt balance of approximately $120 million, we've been able to mitigate some of the continued effects of the rising interest rate environment that began in 2022. We locked in the interest rate for $50 million of this short-term debt balance, utilizing a three-year swap that we executed through September 2025. We have additional capacity under our revolving credit agreement and shelf agreements in place with Prudential and MetLife. We also have the ability to issue equity under our various plans in the future. On slide 15, we detail the key drivers of our future growth. First, we continue to deliver 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. In 2023, we've had a 5.6% increase for our Delmarva service territories and a 4% increase in Florida. This illustrates, again, the attractiveness of the communities we serve. 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 third quarter. We added the Newberry project to our major projects table this quarter and also continue to make headway with other initiatives, including our wildlife expansion. These projects and others will deliver significant margin growth in 2023 and beyond. And while weather was a headwind, 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. Propane remains a core component of our growth strategy as a highly desirable energy source for our customers where natural gas is not available. As our virtual pipeline solution, Marlin serves our customers with gas transportation services that solve unique and complex challenges, including clean energy, which we mentioned on our last call. Marlin's virtual pipeline solution is delivering compressed natural gas to their fueling station in Florida. Finally, we continue to advance several sustainable investment projects. We are disciplined and cautious in our approach, recognizing the evolving maturation of these markets and 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 earnings call, we also discussed our participation on a collective team comprised of commercial, governmental, and educational institutions that submitted a proposal for the Mach 2 hydrogen hub in the Delaware, Philadelphia, and the southern New Jersey region. As Jeff mentioned previously, the selection of MOT2 presents significant opportunities for us and our fellow partners to promote hydrogen development and deployment across multiple uses. We are excited to work with these partners in furtherance of our mission to deliver hydrogen-based solutions that support a more sustainable future. Moving to slide 16, we highlight our major projects, including the pipeline expansions, CNG, LNG, and RNG transportation projects, and strategic regulatory initiatives, which will drive our adjusted gross margin growth this year and next. 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. We continue to be encouraged by the opportunities that are presented by our business development team and look forward to announcing other projects in the future. As new projects or initiatives are announced or finalized, we will add them to this table. In closing, our performance for the quarter and year to date demonstrate the perseverance and dedication of our team and that the fundamental growth strategies that have contributed to our past success are delivering results that will also drive future long-term earnings growth. I'll now pass the call to Jim to discuss our regulatory and company culture updates. Jim?

Thank you, Beth, and good morning. It's great to be with you all. I would like to first discuss our comprehensive rate case initiatives, which are significant both financially and from a business simplification standpoint. We now have two full quarters of earnings associated with the permanent rates from our recent Florida rate case. we expect to recognize close to $17.2 million in 2024. And by consolidating our four natural gas distribution entities into one, we are able to simplify our business. Building off of the process we followed in Florida, we are preparing for our upcoming Maryland filings. We are required to file a rate case in early 2024 for our Maryland Division and Sandpiper Energy. We will look to build on these regulatory strategies and lessons learned as we prepare these filings. Our infrastructure program initiatives contribute to maintaining safe and reliable service and contribute to margin growth. As mentioned previously, our Guard program was approved by the Florida PFC in August 2023. The 10-year program, which enhances the safety, reliability, and accessibility of portions of our natural gas distribution system, is expected to contribute $205 million in capital investment. Our storm protection plan and cost recovery mechanisms approved by the Florida PSE in the fourth quarter of 2022, are expected to contribute approximately $8 million in capital investment in 2023. And our Eastern Shore Capital Cost Surcharge Program continues to play a key role in rate recovery for otherwise non-revenue producing projects for Eastern Shore. This program allows for the recovery of capital investment costs associated with mandated highway or railroad relocation projects, as well as capital costs related to compliance with certain new FINSA regulations. Turning to Florida, one of the key reasons that the Florida city gas transaction is so attractive is the state's constructive and supportive regulatory environment. We know this state very well, and we value our relationships with customers, regulators, legislators, and the communities. We look forward to expanding those opportunities to serve. Florida City Gas and Florida Public Utilities have very similar regulatory profiles. Both completed rate cases in 2023, and both have similar infrastructure replacement programs. Upon closing of the acquisition, our combined Florida natural gas distribution entities will realize a $40.5 million increase in 2024 margin due to the 2023 rate K settlements. And pending approval of Florida City Gas' investment schedule later this year, we expect $410 million in capital investment over the next 10 years associated with the Guard and SAFE programs. Turning to slide 18, let me mention just some of our recent recognitions. For the fourth consecutive year, two of our subsidiaries received Stars of Delaware awards, as nominated and voted on by the readers of the Delaware State News. We were also recognized as the best energy provider and best propane company. We are also proud to have our 2022 sustainability report receive four awards in this year's MERCOM annual report competition. And most recently, we announced our designation as a 2023 champion of board diversity by the Forum of Executive Women. which honor the top public companies in the Philadelphia region that have 30% or more women on their respective boards. With that, it was great to be with you all today. I will now turn the call back to Jeff for some closing comments. Jeff.

Thank you, Jim. Turning to slide 19, I'd like to reinforce my earlier comments on our capital expenditure guidance. As you will recall, we updated and expanded our capital projections when we announced the Florida City Gas acquisition. Our five-year capital expenditure guidance is projected at $1.5 billion to $1.8 billion for the 2024 to 2028 period, exclusive of the FCG transaction investments. Post-transaction investments associated with Florida City Gas represent approximately $500 million of the total guidance range. Drivers of the increased CapEx plan include investments in a few key areas, including natural gas distribution system investments to accommodate a growing Florida customer base, and investments to enhance system safety and reliability through the existing guard program for FPU and SAFE program for Florida City Gas. Infrastructure, including gas transmission expansions to support the utility system's growth, and increases in capital investment for Chesapeake's legacy businesses, as well as the company's technology plan that includes enhancements in billing systems, the financial or ERP system, and many other ancillary systems. Following the close of the Florida City Gas acquisition, we expect our capital investment run rate to be in the range of $300 to $360 million annually. We're reaffirming our 2028 diluted EPS guidance range of $7.75 to $8. This implies an EPS growth range of approximately 8% from the 2025 EPS guidance range. and an 8.5% annual growth rate for the 2018 through 2028 period. We also reaffirmed our 2025 guidance of $6.15 to $6.35 per share based upon the growth opportunities with our expanded footprint and considering the sizable integration of Florida city gas. To conclude on slide 22, we realize we earn the trust of our shareholders because of the performance we achieve. And our achievements are only possible because By 22, we realize we earn the trust of our shareholders because of the performance we achieve. And our achievements are only possible because of the expertise and dedication