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 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 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 Presentations 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 disclaimers. 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 2023 annual report on 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 has been provided in the appendix of this presentation, our earnings release, and our 2023 Form 10-K. Now, I'd like to turn the call to 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 $5.31, representing 5.4% 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 Delmarva 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' 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 in 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 part of 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 this 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 J.T. 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 five-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. Starting 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 2023 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 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. And 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 on 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 in our regulated utilities, standardize 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 service 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 before FERC. 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 to the Chesapeake Utilities family late last year. We're lucky to have such a great group join 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 began 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 returned to their former NextEra 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 RNG transmission project filings that we're preparing, and we have previously noted the significant expected capital investments over the next five years for SCG infrastructure replacement and to meet SCG customer demands. 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, Sharp 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 are not pursuing additional large transformational deals like FCG, but may undertake smaller bolt-on transactions like this one that provide scale and operating efficiencies. With that, I'll turn the call back to Beth. Beth?