Chesapeake Utilities Corporation

Good day and welcome to the Chesapeake Utilities fourth quarter and full year 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 one on your telephone keypad. If at any point your question has been answered, you may remove yourself from the queue by pressing star two. So 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. I'm Beth Cooper, executive vice president, chief financial officer, treasurer, and assistant corporate secretary of Chesapeake Utilities. We appreciate you joining us today for our fourth quarter and full year 2023 earnings call. Today's presentation can be accessed on our website under the investors page and events and presentation subsection. After our prepared remarks, as we typically do, we will open the call up for questions. As you saw in our press release, we delivered excellent performance in 2023. Our incremental earnings from regulatory initiatives and growth investments, including one month of results from Florida city gas, more than offset lower energy consumption due to warmer temperatures across our service territories, along with the year's significant increase in interest costs. These items are detailed within the financial results that we will cover in just a few minutes. With me today are Jeff Householder, chairman of the board, president and chief executive officer, and Jim Moriarty, executive vice president, general counsel, corporate secretary, and chief policy and risk officer, as well as other members of our management team who are joining us remotely. On slide three, we have our typical disclaimer. 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 statement section of the company's 2023 annual report on form 10k 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 disclosure in accordance with the SEC's regulation of the A reconciliation of these non-GAAP measures to the related GAAP measures has been provided in the appendix of this presentation, our earnings release, and our 2023 form 10k. Now I'd like to turn the call to Jeff. Jeff?

Thank you, Beth. Good morning, and thank you for joining our call today. I'll begin with slide four, our financial highlights for the year. In 2023, our team executed successfully on all fronts, leading to our 17th year of increased earnings, excluding the Florida city gas transaction costs. We also had a milestone 20th consecutive year of increased annual dividends. In spite of significantly warmer temperatures and rising interest rates, we generated adjusted EPS of $25.31, representing .4% growth over 2022, largely driven by incremental gross margins of $33.9 million. The team's collective efforts drove this performance while successfully consummating the largest acquisition in our history, closing the transaction in record time. Our legacy businesses continued their impressive growth trajectory as we invested $211 million in capital projects, advanced our regulatory initiatives, and prudently managed expenses. We continued expanding our footprint with strong customer gains in our regulated natural gas distribution businesses, with an impressive 5.4 average residential customer growth rate for our combined Del Marva service territories and nearly 4% in Florida. We also delivered on several opportunities to expand our natural gas transmission systems, and we're not slowing down. Currently, Peninsula Pipeline has four projects before the Florida Public Service Commission for approval. These projects include over 35 miles of transmission infrastructure designed to meet growing customer demand in our gas distribution systems. Additionally, Eastern Shore Natural Gas's Worcester Resiliency Upgrade project is progressing well. We'll discuss these expansion projects in more detail later in the presentation. Of course, our most significant growth effort in 2023 was the successful completion of the Florida City Gas acquisition. It was a strategic move for us, more than doubling our footprint, and a very attractive market where we have already operated for 40 years. We expect the transaction to drive significant incremental earnings growth well into the future as we deploy our operational and regulatory expertise on a much broader scale. Late in the fourth quarter of 2023, we began the process of integrating our Florida natural gas businesses, which we'll discuss in a moment. But I'd like to note that we're already executing on projects that demonstrate the value of the strategic acquisition. For example, we are finishing the regulatory applications for new capital projects to connect three landfill RNG sites to FCG's distribution system. We expect these filings to be submitted before the end of the month. In December, we also once again expanded our propane footprint in North Carolina, adding 3,000 new customers with the acquisition of JT Lee & Sons propane assets. This acquisition allows us to expand within growth areas in North Carolina and capture synergies with our prior acquisitions in the state. Our performance in 2023, along with our expectations for FCG's contributions, validates our strategic growth models and reinforces our commitment to achieving our earnings and capital guidance. Today, we are reaffirming our outlook for $6.15 to $6.35 per share in 2025, and $7.75 to $8 in 2028, as well as our 25-year capital expenditure guidance of $1.5 billion to $1.8 billion by 2028. We're looking at 2024 as a transition year as we continue the FCG integration and execute on the organic opportunities across our combined businesses. For this reason, we're providing 2024 EPS guidance of $5.33 to $5.45 per share to give you more clarity on our pathway to 2028. We're now to slide five where we provide details on the growth drivers behind the $33.9 million of incremental margin that we achieved. You can see that we were able to more than offset the impact of the warmer weather and interest rate increases. The key drivers of growth in 2023 were our regulated infrastructure replacement programs and approved cost recovery mechanisms, rate changes resulting from the recent Florida natural gas base rate proceeding, our pipeline expansions and natural gas distribution organic growth, and increased fees and margins per gallon in our propane business. In addition, FCG contributed $8.7 million in December after the completion of the transaction. On slide six, we break down our capital investments capital investments, which surpassed $211 million. Approximately 80% of the capital investment in our legacy businesses was in our regulated energy segment. I'd like to take a moment to highlight just a couple of the capital projects that we completed in 2023 and that will contribute to incremental margin in 2024. Eastern Shore natural gas completed its southern expansion project in the fourth quarter of 2023, which will produce adjusted gross margin of $2.3 million in 2024 and beyond. Peninsula pipeline completed its beachside pipeline expansion early in the second quarter of 2023. That project contributed $1.8 million to our gross margin in 2023 and will continue to contribute approximately $2.4 million in future years. Our regulated investments in safety and reliability under our approved infrastructure programs will also continue, including programs like Guard and SAFE in Florida, where we're able to recognize timely cost recovery in these investments. Last year, we also launched the largest business transformation and technology improvement initiative in the company's history. The first step in the five-year initiative is the implementation of our SAP customer service application, which is intended to improve the customer experience of our regulated utilities, standardized processes across our distribution systems, and drive operational efficiencies. We currently have regulatory approval to defer to the cost of the CIS technology implementation and will seek permanent rate recovery of these technology improvements as appropriate in upcoming rate cases or limited proceedings. Slide 7 shows the impressive customer growth in our regulated natural gas distribution utilities. Our average annual residential customer additions far outpaces the national average, and this trend is expected to continue. You can also see the step change that the FCG acquisition brings in terms of incremental customers. Looking ahead, our customer base is projected to grow annually by approximately 3% in Florida and 4% on Delmarva over the next five years. These projections are driven by expected customer demand in our surplus territories, which have very attractive demographics, as well as our backlog of open lots in existing communities. We have continued to see strong residential customer growth, even with the increases in mortgage rates over the past year. Our disciplined capital investments will drive earnings growth well into the future. Slide 8 shows our major projects and initiatives that will drive incremental margin of approximately $15 million and $11 million in 2024 and 2025, respectively. I'll take a brief moment to highlight a few of the new projects shown here. Our Worcester Resiliency Upgrade Project, which Jim will speak about shortly, is an $80 million capital investment currently pending the forefork. We also recently filed four Peninsula Pipeline projects with the Florida Public Service Commission. These transmission projects are designed to increase supply capacity and enhance system reliability primarily for our distribution operations. We continue to expand our systems in Florida to meet customer demand. Once approved, we will begin construction immediately and expect to begin generating margins in late 2024 or early 2025. As I mentioned earlier, we are also finalizing the regulatory filings for three RNG transmission projects that will provide pathways for produced RNG to get to market via the Florida City Gas Distribution Systems. These new projects are also expected to begin generating margin at the end of 2024 and into early 2025. As shown on slide 9, on November 30, 2023, we successfully completed the FCG acquisition in record time thanks to the dedication and enthusiasm of our team. Any organization is only as good as its people and we were thrilled to officially welcome Florida City Gas employees for the Chesapeake Utilities family late last year. We're lucky to have such a great group joining our team. Culturally, there's a strong fit which certainly helps keep our integration and growth plans on track and on time. Strategically, Florida City Gas also meshes well with our legacy businesses with significant opportunities to drive growth, identify operational synergies, and begin to pursue recovery of the transaction premium. We'll begin the integration process with purpose in December and Beth will discuss our plans in more detail shortly. I'll discuss a few of the broader areas now. One, there are one-time transaction synergies. For example, several FCG management employees return to their former next era positions and we've been able to absorb these jobs within our existing management team. Two, we are pursuing operating efficiencies across the Florida natural gas businesses as well as our entire enterprise. Again, as an example, we will jointly administer both the FPU and FCG infrastructure replacement programs and find operational efficiencies as a result. Three, we are executing proactive regulatory initiatives. For example, we will begin the work to consolidate various tariff provisions as we did previously with our other gas utilities along with the initial efforts to address the goodwill related to the FCG transaction. And four, we will make prudent capital investments on a much broader scale. I've already mentioned a couple of times the R&G transmission project filings that we're preparing and we have previously noted the significant expected capital investments over the next five years for FCG infrastructure replacement and to meet FCG customer demand. The key takeaway here is that the FCG acquisition along with continued robust investment in our legacy businesses supports our goal of delivering top quartile performance for years to come. Moving to slide 10, in December, FSHARP added to its propane footprint by acquiring operating assets from JT Lee & Sons in Cape Fear, North Carolina. We added 3,000 customers, about 800,000 gallons of annual propane distribution and 60,000 gallons of propane storage and we were happy to welcome their talented team. As we said last year, we're not pursuing additional large transformational deals like FCG but may undertake smaller bolt on transactions like this one that provides scale and operating efficiencies. With that, I'll turn the call back to Beth.

Thanks, Jeff. I'll begin with slide 11, which shows the key drivers of our 2023 performance. Our core businesses continue to generate strong performance, delivering $1.50 of incremental EPS this year. And this was in the face of headwinds and strong winds, some significantly warmer weather that lowered customer consumption and impacted earnings by 54 cents. Higher operating expenses linked to growth in our core business resulted in a 47 cent impact, representing only 48.1 percent of the incremental margin. We were diligent about managing our costs to offset warmer temperatures. The company was not immune to the challenging economic environment and the impact that had on interest rates. Those higher rates drove a 45 cent offset. One month of incremental earnings from the Florida City Gas Acquisition generated an 18 cent uplift. As Jeff said, these results are exclusive of the contribution from Florida City Gas's $25 million reserve surplus amortization mechanism for RSAM, which was approved by the Florida Public Service Commission in June 2023. The RSAM is recorded as an increase or decrease to approved removal costs on the balance sheet, with a corresponding increase or decrease to depreciation and amortization expense. The RSAM provided a $5.1 million pre-tax or 20 cents per share reduction to depreciation expense in 2023. On slide 12, you can see that adjusted gross margin for 2023 increased $33.9 million and operating income increased $7.9 million or 5.5 percent for the year. Excluding Florida City Gas and the $5.9 million our operating income increased $18.2 million or 12.8 percent. Interest charges were over 50 percent higher this year, as the effects of the ongoing rising rate environment continued throughout the end of the year and we incurred additional financing costs associated with Florida City Gas. Again, despite these impacts, adjusted EPS for the year improved by 27 cents per share, representing 5.4 percent growth. Moving to slide 13, adjusted gross margin for our regulated energy segment was up 10.4 percent over last year. Operating income also increased, delivering 18.4 percent growth as adjusted, driven primarily by, first, permanent rate changes associated with the Florida Natural Gas Base Rate Proceeding. Second, Florida City Gas earnings contribution for December. Third, continued strong customer growth and natural gas distribution operations, including propane CGS conversions. Fourth, additional pipeline expansions in our natural gas transmission entities and, finally, incremental margin from our regulated infrastructure program. These factors were partially offset by the weather-related reductions in customer consumption as discussed earlier. Adjusted gross margin for the unregulated energy segment increased 2.2 percent over last year, as you can see on slide 14. While at the operating income level, our results were down by 10.7 percent versus last year. Lower consumption largely from weather drove the performance, although we partially mitigated this through rate and fee management within propane and Aspire Energy. Slide 15 shows our history of strong dividend growth and specifically the approximate 9 percent dividend compounded annual growth rate that we have delivered over the last 10 years. This dividend growth has been a key component of the more than 12 percent compound annual shareholder return over the same period. We are proud of this history and are committed to continuing our track record of driving value and returns for our shareholders. Our philosophy remains grounded in the pursuit of top quartile earnings growth, which drives top tier dividend growth, as well as continued reinvestment of 45 to 50 percent of our earnings back into the business to support continued capital investment. Slide 16 shows our earnings outlook, including our diluted EPS outlook for 2024, 2025, and 2028. As you know, we typically provide a medium and longer term earnings outlook, which aligns with our long term strategic plan and outlook, as well as our investment plans and expected returns. We recognize that we are now a larger company with a markedly larger footprint and more significant growth opportunities. We are also integrating a company that was a subsidiary of a much larger entity, but which is complementary to our existing operations. Therefore, this year we are providing current year guidance as an exception. Our outlook includes our expectations for integration synergies and efficiencies, as well as some of the scale opportunities that come from deploying our expertise across a broader enterprise. It also reflects the delay in margin ramp from new capital projects that we have identified given our expected timelines for the required approvals and construction. On slide 17, we have outlined a pathway to our 2024 guidance. Importantly, we continue to expect strong contributions from our legacy assets as well as Florida City gas. Our legacy businesses are expected to generate approximately 40 to 50 cents per share of incremental earnings. Florida City gas is projected to add about 35 to 45 cents of earnings per share, which includes the interest costs associated with financing the acquisition. We see incremental opportunities to add an additional approximately 20 to 30 cents per share across the enterprise as we continue the integration. And finally, the shares issued to finance Florida City gas will result in an impact of about a dollar per share, as shown on this slide. We are providing these incremental ranges to give you an indication of the relative size of the contributing factors, and we expect to be able to tighten the incremental ranges over the year as we implement our plan to get us to 533 to 545 per share. So let me touch on some of these initiatives and the levers we are pulling to achieve our targets. First, we have cost savings or synergies. This is the broadest category with the largest expected impact for 2024. This bucket includes immediate opportunities from one-off transaction synergies, as Jeff mentioned, as well as additional savings we have identified. Already we have realized cost savings by eliminating some duplicative roles, including several leadership positions where SCG team members remained with NextEra. We also achieved synergies from the absence of certain corporate and shared service costs that NextEra had allocated to this business. Offsetting a portion of these synergies, though, are some transition costs we are paying to NextEra until we convert over their systems. Additionally, we will also incur some incremental corporate expenses in such areas as audit fees and insurance. In addition, as you know, we have spent considerable time working to optimize our operations while fostering the culture that has underscored our success. We have worked to eliminate operational silos by simplifying our organizational structure, moving toward greater standardization of our processes, improving technology, and increasing collaboration across our businesses. We are continuing these efforts, recognizing we have additional opportunities for these types of improvements across our now larger enterprise. Finally, we will continue to be laser focused on managing our payroll and T&E expenses in the same way and following the same approach we have exhibited over the last several years in managing our costs. As you can see on this slide in green, we also have a number of key levers that we are managing in order to achieve our near-term guidance that provide a pathway to achieving our long-term guidance. While we have shown some of them as equal pieces, the reality is that some of these may contribute more to our earnings in 2024 as a percentage than in 2025. And some of these areas will have a longer ramp but a more significant ongoing impact. For example, we are evaluating a number of proactive regulatory initiatives including considering the timing of a recovery of a portion of the goodwill and consolidating best practices among the two natural gas utilities in regards to many of the various recovery mechanisms. These are just two of the many regulatory items we are evaluating. We do know that we will continue to utilize the $25 million RSAM that we mentioned earlier to enable Florida City Gas to achieve its allowed return. On the technology front, we are already underway in the planning for the Florida City Gas billing system to convert to our new billing system. We have begun dedicating some of the Florida City Gas team members to this effort which will continue to ramp throughout the year. We also expect to generate savings as we more broadly integrate them to our various systems. The next area, asset optimization or utilization, has become another common phrase within the Chesapeake organization. We continuously look at our facilities and assets with an eye towards streamlining our operations. As we look across our larger organizations, we see opportunities to eliminate duplicative or underutilized facilities and assets. We also have more strategic initiatives which provide the greatest upside when we think about the next five years. Chesapeake has consistently identified and executed upon opportunities across its value chain to generate incremental margin growth. Already Marlin has contracted with Florida City Gas to provide backup service in their highly concentrated but growing markets. Additionally, we are considering multiple opportunities to utilize our intrastate pipeline operations to support growth opportunities across the system. These are just some of the many similar opportunities that we are pursuing. And in terms of new capital investments, our earnings growth has been driven by the execution of prudent capital investment plans. We talked about similar plans for Florida City Gas when we announced the deal. And we are really excited about the expected capital investment opportunities created through these new service territories. In the near term, you will see us accelerate both the safe and guard replacement programs. As Jeff mentioned earlier, we also expect to file very soon and announce the financial economics associated with three capital projects where we will connect RNG to Florida City Gas's system. We are also well underway on multiple intrastate pipeline projects that we hope to announce later this year. Again, while we will begin to see an impact from opportunities to accelerate infrastructure replacement programs and new projects in 2024, these will really pay off more over time and are a key driver of our 2025 and longer term 2028 outlook. As I mentioned and as shown to the right, we've already recognized benefits from the transaction in just three short months. We are committed to achieving the guidance we have established for 2024, 2025, and the longer term and look forward to updating you on our progress throughout the year. Turning to slide 19, we show our forecasted 2024 to 2028 capital investment. And as you can see, we are reaffirming our previous capital investment guidance of 1.5 to 1.8 billion dollars by 2028. And we continue to expect an approximate run rate of 300 to 360 million dollars per year, including for 2024. On slide 20, we show more detail on this projected capital expenditure spend for the five year period. As you can see, with Florida City Gas, we are more heavily weighted toward our regulated energy segment, with almost 90% of our capital expenditure plan dedicated to our regulated asset base. These investments will drive continued regulated customer growth, bolster the safety and reliability of our systems, and by investing in pipelines and interconnects, create additional pathways to market for sustainable fuels. More specifically, we expect to invest between 600 and 645 million dollars in regulated distribution growth, 435 to 590 million in regulated transmission growth, 300 to 340 million in regulated infrastructure programs, 140 million to 165 million in investments in our unregulated businesses, and 70 to 90 million dollars in support of our five year technology roadmap. Turning to slide 21, with our SCG financing plan, our top priority was to maintain a strong balance sheet, and we executed a financing plan consistent with an investment grade ratings profile. As this slide shows, we accomplished our financing objectives achieving an equity to total capitalization ratio of 47% at the end of 2023. On October 31, we priced a 550 million dollar private placement with a weighted coupon rate of 6.54%. In early November, we raised about 380 million dollars in gross proceeds post-Greenshoe in an equity offering. As a result, we issued 4.4 million shares, resulting in 22.2 million shares outstanding at year end. For the year, stockholders' equity increased by 413 million, or approximately 50%, primarily driven by our equity financing for the Florida City Gas Acquisition, our strong net income performance, and issuances through our dividend reinvestment and stock compensation plan. This was partially offset by dividend payments of approximately 44 million dollars. We are also reinvesting about 55% or greater of our earnings back into our business to fund future capital investments. Historically, we have also dribbled out smaller amounts of equity over time to manage to our target capital structure. We will continue to follow this strategy as we carry out our five-year capital plans. As you can see on slide 22, we have a long-term debt profile that has minimal maturities over the next two years. This gives us the flexibility to execute on our robust capital plan while making progress on the integration and navigating through the uncertain economic environment. Now I would like to touch on our financing capacity and requirements, which are highlighted on slide 23. The strength of our balance sheet and our liquidity position supports our investment plan. We have remaining capacity on our shelf agreements and revolving credit facility, which provides more immediate access to debt capital. From 2024 through 2028, we anticipate securing additional permanent financing to support our capital projection, which we will do for an appropriate mix of equity and debt with a target to achieve an equity to total capitalization ratio of 50 percent by 2028. Finally, as promised last quarter post-acquisition, we will be pursuing a credit rating. With that, I will now turn the call over to Jim. Jim?

Thank you, Beth, and good morning. It's great to be with you all today. Moving to slide 24, we provide an overview of key regulatory initiatives that were recently completed or are well underway. In Florida, we have three full quarters of earnings associated with the permanent rate changes from our recent Florida rate case, and we expect to recognize close to $17.2 million in 2024. Florida City gas rates became effective on May 1, 2023, with an incremental $14.1 million rate increase and an allowed ROE of 8.5 percent to 10.5 percent. On January 30, 2024, we filed a rate case for our Maryland Division Sandpiper Energy and Elkin Gas, which I will cover in more detail on the next slide. Our proposal to consolidate the three entities fills off of the process that we followed in Florida. While each jurisdiction is different, we are looking forward to a similarly constructed process environment. On the infrastructure side, we have a number of program initiatives underway, including the Guard and SAFE programs in Florida. These programs are contributing to our ability to maintain safe and reliable service for our customers, which also contribute to margin growth over the next 10 years. Let me spend a few minutes highlighting our Maryland rate case shown on slide 25. As I mentioned, we proposed consolidating our three Maryland distribution companies into one legal entity, required to come back pursuant to a previous regulatory filing for Sandpiper Energy. We are proposing a $6.9 million rate increase, which is the first rate increase we have sought in 16 years. Inclusive in the filing are other tariff changes, including a new technology cost recovery rider, a proposed underserved area rate, which will enable expansion to meet demand, as well as a program for evaluating extensions to multi-family projects. On slide 26, we highlight another significant project well underway, the Worcester Resiliency Upgrade, an approximately $80 million project for a liquefied natural gas storage project in Maryland. This facility, which consists of five low-profile and horizontal storage tanks, will allow Eastern Shore natural gas and provide critical energy service during the peak winter heating season, particularly to our growing distribution utilities on the Delmarva Peninsula. The FERC held a public scoping session for the local community in December, and it was rewarding to hear all attendees speak in favor of the project. Eastern Shore continues to execute its robust public outreach and agree and engagement program, most recently holding update meetings with officials representing the project area and also conducting emergency response training with first responders. The FERC's environmental assessment is the next major milestone, which is anticipated to be issued in April of 2024. I would like to spend a moment to review the hydrogen initiatives we have underway to help advance hydrogen's potential as a common fuel source. In the near term, as shown on slide 27, we are helping to foster a productive and supportive landscape with dedicated initiatives related to safety, awareness, training, education, and community involvement, as well as conducting real-world testing. The work is laying the foundation for eventual hydrogen production and delivery to end users or for industrial processes through service contracts. As a partner on the Mach 2 hydrogen hub project, we are working to bring affordable and environmentally responsible solutions to customers in Delaware, southern New Jersey, and southeastern Pennsylvania. Beyond Mach 2, we have made Marlin fleet investments and have conducted tests at eight flags to demonstrate hydrogen's potential as a viable option for industrial gas users. We are also working on other sustainable energy initiatives and look forward to updating you at the appropriate time. As we have highlighted many times, our company culture is firmly rooted in the safety of our teams and communities. In line with our culture, we implemented our safety data management system in 2023 and then unveiled the system to our employees at the beginning of 2024. In addition, we broke ground on our second safety town located in DeVere, Florida on January 31, 2024. We will share more detail on our dedicated safety programs in our inaugural safety and reliability report, which will be published soon. We are transitioning this year from a single large sustainability report to three smaller focused topical reports as well as through investor focus tables. This enhanced reporting approach will drive more routine reporting that ensures a steadier release of fresh information throughout the year through these reports and we will share the data widely through our microsite, press releases, and social media. Finally, I would like to showcase a recent achievement that really demonstrates the entrepreneurial, innovative, and competitive market mindset embedded throughout our entire enterprise. Recently, at our first Dairy Menor R&G facility at Full Circle Dairy in Florida, we introduced a groundbreaking new technology, a fully self-contained CNG R&G fueled farm irrigation and waste pumping unit. This unit, which will be delivered in March of 2024, opens future opportunities for farms to convert equipment to CNG R&G fuel. I would like to congratulate this team and all of our teams that work hard every day on equally impressive projects. With that, I will turn the call back to Jeff.

Jeff? Thank you, Jim. In summary, we remain committed to delivering on the attractive opportunities across our growth platforms. That includes executing on the incremental opportunities provided by the FCG acquisition and achieving returns that deliver value to our stakeholders. We believe that our disciplined investments will continue to drive top quartile earnings performance into the future. In addition to the transformative projects we initiated and completed in 2023, we continue to take a customer centric view of our energy delivering mission and are excited about our initiatives to enhance the customer experience. All together, Chesapeake Utilities is an attractive investment opportunity. Our shareholders benefit from an energized team and is focused on customers and investments to serve those customers in growing service areas. We are very committed to continuing our long-term history of superior performance. With that, we'll take your questions. Thank you.

Operator? The floor is now open for questions. At this time, if you have a question or comment, please press star one on your telephone keypad. If at any point your question is answered, you may remove yourself from the queue by pressing star two. Again, we ask that you pick up your handset when posing your questions to provide optimal sound quality. Thank you. Our first question comes from Paul Fremont with Lattenberg. Please go ahead.

Thank you very much and congratulations on a great quarter. I guess my first question is do you have a sense of when you would file a full general rate case in Florida?

Well, I can start that off and then Jeff and Jim, feel free to add any additional comments. You know, Paul, both of the Florida natural gas units, both our own FPU and Florida city gas, were just in last year and received rate increases. And so, you know, as we talked about on the phone, particularly in the case of Florida city gas, the RSAM mechanism that they have available to them, you know, enables them to achieve the approved ROE ban that, you know, the PSD authorized and that they're allowed to earn. And so, really for us, our focus on right now is trying to evaluate when will be the appropriate time that we may seek to go in and actually try to get a portion of the goodwill as an acquisition premium for recovery there. And so, that's really the focus right now and integrating the operations. So, we've not really focused on the requirement for a rate increase at this point. And as we've talked about a lot on the call, one of the things that we are really excited about by this transaction are the opportunities that we see in terms of new investments. So, out of the gate, that's our focus. And those are the areas on the regulatory side that we're really focused on as well. Jeff, I don't know if you want to add anything or Jim?

I would add a comment that we are taking a look at rates on our electric operation in Florida. It's been a while since we've been in. We've made some fairly significant investments in that system. And so, that might be the next likely candidate. As Beth said, the gas units were in very recently.

Great. And then, if I look at slide 17, the identified additional opportunities of the 20 to 30 cents, does that primarily represent cost-saving synergies in Florida or is that something else?

That really, Paul, that really encompasses when you look at slide 18 and you look at, I'll call it the donut, of things that we see across the enterprise. It is some combination of those six areas with the biggest portion that we've identified in 2024 will certainly come out of that cost and operating synergies and efficiencies. As we move forward, that's where I talked a little bit about, right, as you get into next year and the year after, certainly those pieces of the pie that are focused on new capital investments, infrastructure programs, margins from the value chain, as well as regulatory strategies will be a bigger piece. But all of them will play some piece in achieving that 20 to 30 cents that's included on slide 17.

Last question for me, can you just give us an update on where the propane business stands so far in 2024?

Well, we haven't really put any information out on that. I know certainly with some of the reports that have been out on temperatures, temperatures this year relative to last year were certainly colder, relative to the long term normal. I think the reports that you see, and I don't think it's inconsistent in our service areas overall, still not going back to some of those 10 year normal temperatures that we expect, but again, year over year coming out of the gate colder than the prior year.

Thank you very much.

Thank you, Paul. We appreciate your feedback and questions.

Thank you. As a reminder, if you would like to ask a question, please press star one at this time. Our next question comes from Brian Russo with Sudoti. Please go ahead.

Hi, good morning.

Good morning.

Thanks for all the additional detail. Just a follow up on the focus on the acquisition premium adjustment or recovery in Florida. What's the next step? I assume that's not included in your 2025 and 2028 earnings guidance?

So, you know, Brian, as we mentioned, we're about three, you know, right now about three months into the acquisition. And I think certainly in the near term, as we think about 2024 and 2025, we are evaluating an appropriate time to go back for a portion of that. I would not at this point, we've not heavily factored that in, at least in the near term. But it is something if we have that opportunity, I think certainly Jeff, Cheryl, and the team, Jim and the team, we would certainly pursue at the right time. But right now, again, we're focused on getting the business integrated. We've got the synergies that we've talked about. We've got the capital investments that Jeff spoke to. You're going to hear about three of those coming here in the near future, getting those off and running. And then, you know, there are some things on the regulatory side, particularly from a best practices perspective that we're going to be focused on out of the gate. Jeff and Jim, feel free, any additional comments you both might want to add.

No, I think that covered it, Beth. I mean, I would remind folks that it took us a little while to gather the savings data that's really necessary in Florida to meet the five factor test for demonstrating that we can recover parts and pieces of the premium without adversely impacting the rate payers. So that's usually, you know, a year long process. And then we would likely look to recover something or begin a filing process potentially next year. There may be some other sort of small scale things we can do along the way. But our primary focus, frankly, is growing through all of that. And we think we've got a pretty good plan place to do it.

Okay, great. And then just to clarify, the CAPEX multi-year table that you've laid out, is that all accounted for in terms of investments and projects? You know, and that triangulates with the longer term guidance. So, for example, if you were to announce another propane acquisition, is that incremental to the existing capital budget that you've laid out?

That's a great question, Brian. What I would say is, given SHARP's history, they will do some, you know, they've done some small acquisitions. And then on the propane side, our five-year projection that we've given you on the capital would include some potential very, very small, you know, small propane type transactions. Certainly not the larger one that we did a couple years ago. We don't factor those types of things in. But our track record and knowing the service territories and the small opportunities that may be out there now with our expanded footprint, that would be something that we might be, you know, comfortable including because they're very small. Beyond that, the projects that we have in here, you know, you're familiar with our strategic planning process that we've talked about many times in the past. But we take a look at all the different projects that we're working on. Some of them, certainly five years out, you haven't locked in. But what you look at are the opportunities that are out there. You look at the run rate of the projects that you've achieved. You look at what, you know, capacity needs are going to be in each of our service territories. And, you know, we have a good handle on that now, you know, certainly with Delmarva and FPU, but now with Florida City Guides. And so that gives us real comfort into some of the dollars that we're putting out there and the things that we're thinking about, particularly on the regulation side.

Okay, great. And then just lastly, your outlook for distribution customer growth in Delmarva and Florida, it seemed as if it's below what the trailing 12 months was. It looks like you're forecasting 3% in Florida versus 4% in 2023. And the same with Delmarva, 4% over the next five years versus, you know, the 5% that you reported in 2023. Just can give a little bit more insight while still, you know, well above the national average and clearly, you know, a differentiator. Just curious what you're seeing there.

Sure. Great question, Brian. We came up with those estimates based upon what is in our current backlog and what we've signed up. So what we've not included in our numbers are, for example, potential developments that might utilize natural gas that we're talking with, but they're not under contract. So you're absolutely right going to a place of could there be a higher growth rate? Absolutely. If we sign up additional developments and they become part of our backlog. But we don't, you know, what we don't want to do is come out and speculate on things that are not under contract. The other thing that I would point out is in particular, if you look at that information that we have around natural gas distribution margin growth, that core growth, particularly in Florida, what you see is there's a very significant portion that's also being driven by commercial and industrial growth. And so, you know, that's another key component here that should stay strong as well. But we, you know, what we tried to do was build our ranges based on what we've signed and what we know is out there in terms of development where, you know, service can still be connected.

I would add, Diane, that we have been trying to be relatively conservative in some of these estimates, as is not unusual for us. And, you know, thinking about the mortgage interest rate increases that have occurred that haven't really dampened construction activity in our service areas, but we keep expecting that it might it might. We haven't seen much of that yet, but I think, you know, from our perspective, forecasting on the conservative side is the right way to go. We may, if construction continues at the levels that we've seen over the last several years, we might well exceed those numbers.

Okay, great. Thank

you very much.

Thank you.

Thank you. Our next question comes from Chris Ellinghouse with Siebert Williams Schenck. Please go ahead.

Hey, everybody. How are you?

Good morning.

Good morning. In the margin uplift slide, the uplift for the Florida rate case kind of seems on the small side relative to the way I would typically think about seasonality for you. Can you just sort of talk about what leads you to your margin expectation for the first quarter?

In terms of from Florida city gas

or From the rate case for the stub part in the first quarter?

Well, keep in mind that for us, we did not have a full year of, you know, permanent rates at the rate increase level. So that's why we have that incremental amount that's factoring in and actually moving up from 14 million to over 17 million in 2024. So that's the additional piece that you're seeing come through.

Following up on the customer growth question, it sort of looks like in the fourth quarter, there was a little bit of a slowing in customer growth. Is that an economic, you know, slowdown that you're seeing at all?

I think that, you know, that goes to what Jeff mentioned is that we've continued to expect just given where mortgage rates have been that, you know, there might be more of a dampening. I know when we look at our backlogs and the number of customers that are in there, you know, it certainly seems like growth is going to continue, but there could be some of that that causes it to back off a little bit if that does pick up. Jeff, I don't know if there's anything else you might want to add to that.

No, I mean we have a general downturn in many of our service territories as you kind of come into the winter anyway. And so there are some limitations, frankly, in some of the towns that we serve on being able to operate, you know, construct service lines and those sorts of things during the winter period. So there are usually a little bit of a downturn, but I think the economy has had something to do with that as well, Jeff indicated.

Okay. On page 14 of the press release, you identify reduced demand for CNG, LNG, RNG of a nickel for the fourth quarter. Are you not ascribing that to weather effects?

No, that actually had to do, Chris, with you know, on it. If you look at the year, so to speak, the year was pretty flat, but there was some certain quarters year over year were higher than others. So there's not really a change from a demand perspective. It's more the timing of some of the contracts that Marlin had entered into. And so Marlin continues to have high utilization that hasn't changed. Again, it's just the timing of when some of the contracts, you

know,

basically came to an end.

Okay. And you did mention that Marlin has acquired some hydrogen trailers. You know, as you do some of these projects like the Boynton Beach project or whatever on the distribution side, is there any capital included in those projects for anything in preparation of hydrogen? Or is it too early for that?

On the...

Yeah, it's probably a little early, although we are in fact thinking about that. You know, one of the issues that we find in our systems, especially those on Delmarva, but certainly in the new construction activity and the developments in Florida, most of that's plastic. And so we're in decent shape there, should we find ourselves down the road in a situation where we're blending hydrogen into natural gas streams. You know, some of the metal steel facilities that we have, we're going to have to think a little bit about what that looks like as we keep going.

Okay, great. Thanks for the details. Appreciate it.

Thank you.

Once again, if you would like to ask a question, please press star one at this time. We'll pause just a moment to allow any further questions to queue. We have no further questions at this time. I'll now turn the call back to Jeff Householder for any additional or closing remarks.

Well, thank you. We appreciate very much your participation in our call this morning. We believe we have a solid plan in place to achieve our 2024 guidance, a plan that also lays the groundwork for 2025 and beyond. As always, thank you for your interest in Chesapeake Utilities, and goodbye.

Thank you. This does conclude today's Chesapeake Utilities fourth quarter and full year 2023 earnings conference call. Please disconnect your line at this time.