Chesapeake Utilities Q3 2023 Earnings Call Transcript

Quartr
Provided by Quartr
November 3, 2023

There are 7 speakers on the call.

Operator

Welcome to the Chesapeake Utilities Third Quarter 2023 Earnings Conference Call. 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.

Speaker 1

Thank you, and good morning, everyone. We appreciate you joining us today for Chesapeake Utilities' Q3 2023 Earnings Call. As you saw in our press release issued yesterday, set 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.

Speaker 1

We will be providing more details on the status of 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 Q3 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 2, participating with me on the call today RCF 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, an Events and Presentations subsection.

Speaker 1

After our prepared remarks, as we typically do, we will open the call up for questions. Moving to Slide 3, I would like to remind you that matters discussed in this conference call may include forward looking statements that involve risks and uncertainties. Section of the company's 2022 Form 10 ks 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, 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 Q3.

Speaker 1

Now I'll turn the call over to Jeff to provide some opening remarks, including on the company's 3rd quarter results,

Speaker 2

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 $0.69 $3.63 on a quarter 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 $0.41 per share through the month of September. And we also dealt with continued pressure from our rising interest trade environment.

Speaker 2

However, our team remain focused on executing our growth initiatives, pursuing multiple strategic regulatory filings, identifying cost savings and capturing opportunities to accelerate margin. 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 $10,000,000 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 $7,600,000 over last year's Q3.

Speaker 2

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 inventory initiatives that will deliver incremental margins and provide a foundation for a substantial system investment over the coming years. We also significantly advanced our growth strategy with our agreement to acquire Florida City Gas for $923,000,000 We're incredibly excited about this transaction and the opportunities for growth investment it will provide in the coming years. Turning now to Slide 5. Florida City Gas will substantially expand our presence in Florida, a premier utility jurisdiction and the 2nd fastest growing state in the U.

Speaker 2

S. With the acquisition, we will immediately more than double our regulated natural gas distribution business in Florida. On a pro form a basis, we expect to have approximately 211,000 customers combined. As a result of the transaction. We foresee attractive growth opportunities across our 5 growth platforms, especially our conventional pipeline company.

Speaker 2

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 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 Synagas 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.

Speaker 2

We increased our capital investment plan by approximately 65% management opportunities and efficient growth. I'll touch on this guidance later in the presentation. We have a disciplined approach The rigor and discipline that drove success with the Florida Public Utilities, Sand Papa Energy and Elkton 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 6, we continue to expect the transaction to close before year end.

Speaker 2

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 Raveno waiting period expires on November 6. We received approval from the Delaware Public Service Commission on October 25 and from the Maryland Public Service Commission on November 1.

Speaker 2

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.

Speaker 2

We remain steadfast that our long term financing plan will reflect an investment grade balance sheet for Chesapeake. In addition to the announced Florida City Gas acquisition, There are several other notable accomplishments since our Q2 earnings call. Let me mention just a couple of these accomplishments. In October, we announced the Forrester Resiliency Upgrade Project, the approximate $80,000,000 project consists of liquefied natural gas storage facility in 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 II Hydrogen Hub.

Speaker 2

The project is slated to receive a share of the $7,000,000,000 in Black Horizon 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 These investment opportunities coupled with the ongoing and recently completed expansions of our existing pipeline systems demonstrates 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 Q3.

Speaker 1

Thank you, Jeff. Before I discuss our financial results for the quarter 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 8, I'd like To first begin and thank the collective Chesapeake team.

Speaker 1

I am proud of the things that we continue to accomplish as an organization and our long standing track record. Working together, we continue to achieve new milestones. Now I'll talk about some additional details on our results for the Q3 and 1st 9 months. As Jeff mentioned, adjusted diluted earnings per share for the Q3 of 2023 was $0.69 compared to $0.54 during the prior year. This strong performance during the Q3 brought our year to date adjusted EPS to 3 point or $0.05 greater than the prior year period.

Speaker 1

The key factors shaping the growth of our adjusted gross margin included contributions from new permanent base rate that went into effect for our Florida natural gas distribution business in March, in our natural gas distribution businesses, higher fees and margins per gallon in our propane business And lastly, new pipeline expansion projects. As we talked about throughout 2023, our current year results reflect a margin impact of approximately $0.41 attributable to the significantly warmer weather strategies and we're excited that we were able to overcome this impact with the growth we realized in the Q3. On Slide 9, our financial summary shows that adjusted gross margin increased $7,600,000 and operating income increased $1,600,000 for the quarter. Excluding transaction related expenses associated with Florida City Gas, our operating income increased 29%. Interest expense was over 13% higher during the quarter and more than 22% higher relative to the prior year period.

Speaker 1

As the effects of the ongoing rising rate environment experienced in the latter half of twenty twenty two have also continued at full force into this year. Again, despite these impacts, adjusted EPS for the Q3 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. Institution that increased adjusted earnings by $0.33 per share. We previously touched on the key drivers of this growth.

Speaker 1

Period earnings exclude the $0.03 impact from this item. We had a $0.03 offset related to reduced volumes 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 $0.03 impact compared to the same quarter last year. On Slide 11, we provide a similar bridge related to our year to date performance.

Speaker 1

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 $0.04 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 benefit associated with a decrease in one of our state tax rates for the current year. As we've noted, weather much more impactful on our year to date performance. The historic temperatures experienced during the Q1, prior year.

Speaker 1

As you can see on this slide, the weather impact cut into the core business growth contribution of $1.22 per share by approximately 1 third. So with that said, we were pleased with the adjusted EPS improvement $0.05 per share compared to the prior year. Moving to the next two slides, let me touch on Chesapeake Utilities operating 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 segment. Operating income was also higher in both periods, up 5 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. And since the transaction related expenses, operating income was up 21.8% and 13.3 percent for the 3 9 month period.

Speaker 1

Turning to Slide 13, 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 $4,000,000 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 $1,650,000,000 This included 52.6 percent stockholders' equity, which is approximately $867,000,000 and continues to be within our target capital range. 40.3 percent long term debt and an average fixed rate of 3.89% and only 7.1 percent of short term debt, reflecting the long term debt financing that was executed earlier this year. As considerably.

Speaker 1

With a short term debt balance of approximately $120,000,000 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 $50,000,000 the short term debt balance utilizing a 3 year swap that we executed through September 2025. We have additional capacity under revolving credit agreement and shelf agreements in place with Prudential and MetLife. We also have the ability to issue equities under our various plans in the future. On Slide 15, we detail the key drivers of our future growth.

Speaker 1

1st, 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 system.

Speaker 1

As I mentioned previously, several of our pipeline projects generated margin for the first time in the Q3. We added the Newberry projects to our major projects table this quarter and also continue to make headway with other initiatives, including our Wildlight expansion. These projects and others will deliver significant margin growth in 2023 and beyond. And while weather was a headwind, segments. Our Sharp team did an excellent job managing margins and service fees, especially in our northern service territories.

Speaker 1

Beyond the customer growth we are securing with natural gas, we continue to add new propane community gas system 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 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.

Speaker 1

We are disciplined and cautious in our approach, Recognizing the evolving maturation of these markets and regulatory constructs, we have initiated construction on our 1st 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 twenty twenty four. 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 MOP-two 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 project and strategic regulatory initiatives, which will drive our adjusted gross margin growth this year and next.

Speaker 1

Team and look forward to announcing other projects in the future. As new projects or initiatives are announced or finalized, perseverance and dedication of our team and that the fundamental growth strategies that have contributed to our past success for delivering results that will also drive future long term earnings growth. I'll now pass the call to

Speaker 3

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 2 full quarters of earnings associated with the permanent rates from our recent Florida rate case. We expect to recognize close to $17,200,000 in 2024.

Speaker 3

And by consolidating our 4 natural gas distribution entities into 1, 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.

Speaker 3

As mentioned previously, Our GARD program was approved by the Florida PSC 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 $205,000,000 in capital investment. Our storm protection plan and cost recovery mechanisms approved by the Florida PSC in the Q4 of 2022 are expected to contribute approximately $8,000,000 in capital investment in 2023. Or 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 PHMSA regulations.

Speaker 3

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.

Speaker 3

Upon closing of the acquisition, our combined Florida Natural Gas pending approval of Florida City Gas' investment schedule later this year, we expect $410,000,000 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 4th consecutive year, 2 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 received 4 awards in this year's Mercom Annual Report Competition.

Speaker 3

And most recently, we announced our designation as a 2023 Champion of Board Diversity by the Forum of Executive Women, which honors the top public companies in the Philadelphia region that have 30% or more women

Speaker 2

Our 5 year capital expenditure guidance is projected at $1,500,000,000 to $1,800,000,000 for the 20 24 to 2028 period, exclusive of the FCG transaction investment. Both transaction investments associated with Florida City Gas represent approximately $500,000,000 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 systems 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, financial or ERP system and many other ancillary systems. Following the close of the Forest City Gas acquisition, We expect our capital investment run rate to be in the range of $300,000,000 to $360,000,000 annually.

Speaker 2

This implies an EPS growth range of approximately 8% from the 2025 EPS guidance range 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 of the expertise and dedication of our team. We continue to be energized by our prospects and are well positioned to deliver on our strategy.

Speaker 2

We remain intently focused on disciplined cost management for our capital investments and ongoing operations. List across our 5 growth platforms. In short, we are deeply committed to achieving the performance levels our shareholders have come to expect. And with that, why don't we open it up for questions?

Operator

The floor is now open for questions. And our first question will come from Chris Ellinghaus with Seabury William Schenck. Your line is open.

Speaker 4

Hey, good morning, everybody. Beth, it looks like O and M was pretty controlled in the Q3 and I'm looking at Page 4 of the press release. Is that a function of your efforts to mitigate the $0.41 of weather? And can you Give us some sense of the $0.41 of weather, how much have you sort of directly influenced offsetting from cost

Speaker 1

to the $0.41 of weather really comes on the margin side and it comes from our ability to be able to manage margins and retail prices to customers. So of that $0.41 weather impact, you You also see a corresponding significant increase in our basically our propane prices to customers as well as some of the fees that we've been charging for our different programs. But you're absolutely right. You heard Jeff talk quite a bit about it. We as an organization continue to focus on cost management.

Speaker 1

Naturally, given the warmer temperatures. You don't have a lot of the same overtime of drivers. And so we're able to basically manage the part time drivers that were Onboarding as well as the overtime costs that would have been paid if you had a colder than normal weather season. And so we're able to do that. The other thing that we've been able to do is to look across our organization.

Speaker 1

And as we've continued to bring our Operations together from a geographic perspective and under one leader, our COO. We've also found efficiencies in the way we've been able to manage the business. So, you'll continue to see us focus on cost management. That's something we spend a lot of time on and you'll see us continue to do that at all levels of the organization.

Speaker 4

Okay, great. Thanks. As far as the MACH II partnership goes, can you give us any sense of timing of potential investments or any kind of tangible Thoughts about what that really means for you guys?

Speaker 1

Sure. Jeff, do you want to kick it off or you want me to start And you add.

Speaker 2

Go ahead, Beth.

Speaker 1

Sure. So there's we're working, Chris, as part of I mean, it's part of a global team across the 3 specific geographic areas. And so there's some commercial applications that are being looked at. For us specifically, one of the areas that we feel we can play a big part in is on the training and on certainly on the transportation fuel side of those particular endeavors. And so opportunities as we start to think about hydrogen and its utilization again on the transportation side.

Speaker 1

I don't have a clear time screen in terms of when all the initiatives are layered in. I know the partners are meeting. Once that was awarded. I know there's been several meetings and we can provide more particulars on expected timing.

Speaker 4

Okay, great. The finance the long term financing for Florida City Gas. One of your peers had some issues not terming out some long term financing that Obviously, the last couple of years hasn't played out very well. Have you got any thoughts on Whether you'd want to be very proactive or do you have an outlook for rates that would make you want to be more patient?

Speaker 1

Great question. Chris, I would say, as Jeff indicated and I echo, We're continuing to look at the market. Certainly, as when we decided to pursue this transaction, We were already in an environment of significantly rising interest rate. And so we knew the market that we were entering into and our models will run with that in mind. And then secondly, right, we run sensitivities on those models.

Speaker 1

And so we are still at the same place as Jeff echoed on the call. We still feel very good about this opportunity. We still feel good about our ability to hit our 2025 guidance that's financing, but we've had a lot of investor interest overall just with the transaction. And so we still feel like we're in a very great place.

Operator

Our next question will come from Dylan Lipner with Ladenburg Thalmann. Your line is open.

Speaker 1

Good morning, Dylan.

Speaker 5

The question I have is regarding to the regulatory approvals for Florida City Gas. 1, are you expecting the hotspot Rodino to be resolved? They're closing this month. And then are there any other

Speaker 1

Sure. I can Jim, would you like to start it off and I can add?

Speaker 3

Sure. Thank you, Beth, and good morning, Dylan. The waiting period under Scott Hart Scott Rodino is expected to expire At midnight on Monday. As you know, if we were to receive a second request from the antitrust division that would not happen. But we're one day away from the period expiring.

Speaker 3

And then that would be the last of the regulatory clearances we would need.

Speaker 5

Okay, great. And then going back to the acquisition as well, Describe any type of synergies that you potentially see with the transaction and any further timing of these synergies occurring?

Speaker 1

So I'll start this off and then Jeff can add anything I missed there. But I would say number 1, Dylan first, We as we indicated on our last call when we announced the transaction in regards to 20 24. I think we still feel like there'll be a lot more clarity that can be provided in February as part of our year end earnings call. We've been really focused and I think have had excellent results in regards to getting the regulatory approvals behind us. So that's really been a focus of ours.

Speaker 1

Certainly, the transition and the integration and beginning plan that has been a top focus for our team, given the relatively short timeframe that we're talking about. And Certainly as part of that, we're digging in and understanding some of and actually gaining confirmation and affirmation about some of the assumptions we had made in regards to our model, but the specifics will there'll be more that to come in February. Right now, we're really focused on getting the transaction to a place where we can close in the Q4 as we had originally indicated. Jeff, I don't know if there's anything you want to add to that.

Speaker 2

Maybe just a couple of things. I think it was very Clear to us the goodwill impacts of this transaction going into the deal. I mean, we went in eyes wide open. We understood the need to identify synergies in City Gas. We also understood the need to think More broadly than that across our larger enterprise.

Speaker 2

And we understood the opportunities, I think, to accelerate certain capital projects and generate margins quicker than we might otherwise have anticipated. Also the regulatory actions that would likely be required or desired over the next couple of years to overcome some of the goodwill impact. We also, as Beth indicated, modeled several different scenarios and tested a number of different sensitivities. Anticipate, we did not we were hoping that the market would do what it did, but we did have some anticipatory analytics, looking at potential market downturns. And so I think we've gone into this understanding what we need to do and I think we're prepared to do that.

Speaker 2

And as Beth indicated, the specifics of those synergies and the specifics of the incremental opportunities that across the organization are something that we're getting a good handle on and we'll report in February.

Speaker 5

Okay, great. Thank you for that. And then lastly here, where are you guys year to date on your propane business and whether you think you'll and a year on propane.

Speaker 1

Well, I think as to Chris' first question that he asked, the most I would say the biggest downside for that business this year has been the weather. We've had strong as I also indicated strong retail margins and service fees, adding customers, adding community gas systems. We can that business continues to do very well. And even though on a year to date basis, weather has been a factor. Dylan, as we've talked about several times, this business even in a year like this year will generate a higher than traditional utility returns.

Speaker 1

So the business is doing well. The Q4 will certainly be impacted by the weather. We're having some great weather right now. So we're hoping that continues. And again, the business will do well even in spite of the weather for the year.

Operator

Our next question will come from Tate Sullivan with Maxim Group. Your line is open.

Speaker 3

Can you go into some more detail on the $80,000,000 liquefied natural gas peaking storage facility. Jeff, how long was that under planned? And are there riders associated with that or most of the gross margin will come after construction is finished in 2025. Is that the case?

Speaker 2

Yes, the margin really is targeted at that We've been looking at our growth on the Delmarva Peninsula, frankly, with some amazement for the last decade. As we've indicated a number of times before, we're seeing growth rates, customer growth rates in those distribution systems Exceed 5% per year and we have been planning our gas supply activities accordingly. And so if you project out the next few years of growth that continues at those levels and even in an environment where the mortgage rates have increased significantly. We're still seeing substantial customer growth there projected by the dealers on that peninsula for a number of years to come. And so we started looking at our peak delivery capabilities over time and our modeling would indicate that at some point in the future, we need to do something, either add additional upstream pipeline capacity or find market area supply capabilities and the LNG project turned into frankly the most economic for rate payers option that we have available.

Speaker 2

And it provides that sort of winter time peak demand peaking service that will allow us to continue to expand our distribution delivery services for a number of years to come. It won't fix everything forever, but it's a nice addition to the other peaking service capabilities that we have on the peninsula. We don't have a baseload capacity issue there. This is primarily intended to deal with those significant weather related winter peaks.

Speaker 3

Okay. And then is it based on the winter peaks, there's no need for an LNG duplication facility in Florida, is that the case?

Speaker 2

No, no. We actually have a significant amount of pipeline capacity for our legacy system for the public utilities. We could always use more. I mean, there are constraints on the pipeline systems in Florida, especially going into South Florida. And in fact, as you may know, the Florida City Gas folks have activated an LNG storage facility down in Miami, a little bit south of Miami actually to provide peaking services for that system.

Speaker 2

So we will inherit an LNG peaking storage facility in Miami And we'll build 1 in Maryland that will provide services to the customers on the Delmarva Peninsula. So there are issues there and I'll just add to that. One of the things that's intriguing about the Florida City Gas opportunity is the pipeline transmission investment opportunity to add to the interstate capacity going into South Florida. And so we think there are significant opportunities to help increase the capacity levels into our Palm Beach service territory on the PU and then further south into Florida City Gas' Miami service areas.

Operator

And our next question comes from Brian Russo with Sidoti. Your line is open.

Speaker 6

Hi, good morning. Good

Speaker 2

morning. Good morning.

Speaker 6

I'm just curious, when we look to the Q4 of 2023, clearly you demonstrated some very strong 3rd quarter margin and earnings growth. Is there any reason not to expect that type of trend In the Q4 of 2023, are there costs that you helped to mitigate weather earlier in the year That will kind of reverse in the Q4 or just any insight there would be helpful.

Speaker 1

I think, Brian, some of what you saw both in terms of the margin expansion within the quarter as well as we did have some cost increases in areas like facilities and maintenance and also on the employee side as well. And my expectation is You would expect those costs to continue to increase as we're coming into the Q4. And what I would say is, At the same time, we are managing our costs very tightly as Jeff and I both have talked about. So both of those would be natural gas rate case. And so you'll have another piece of that that will hit in the Q4.

Speaker 1

We've kind of put some estimates in our gross margin table. We've tried to lay out that impact. And then I think the remaining factor will be the weather and what happens. The Q4 is our 2nd highest from a weather contribution quarter. And so weather will be warmer, colder or normal will have a significant impact on our results for the year.

Speaker 6

Okay, great. And then you mentioned the residential customer growth Both at FPU and Delmarva, how does that compare with Florida City Gas' customer growth?

Speaker 2

Well, All right. 1 of us needs to talk. We've seen customer growth rates at City Gas that are generally comparable to what we've experienced at And we've been near close to 4% or lower 4% typically at Florida Public Utilities. I continue to mention that One of the things that NextEra did while they own the system and obviously they still do is they doubled the rate base in the 5 years that they owned it. Activities there, but a lot of that investment went to expanding their systems and serving new customers.

Speaker 2

So we think that it folds Right into what we've been doing at Florida Public Utilities for the last several years.

Speaker 6

Okay. Got it. And then with the understanding the permanent financing for Florida City Gas is still pending to be determined. Your $118,000,000 of short term debt balance, dollars 50,000,000 of it is hedged, right? But is $118,000,000 is that kind of what we should consider normalized going forward Until the SCG transaction is a permanent financing is complete?

Speaker 1

Well, I think from a financing perspective for Chesapeake's legacy business, we've put Brian Our guidance in regards to CapEx for the year, and where we've reaffirmed that for ourselves, ignoring the FCG transaction to be about $200,000,000 to $230,000,000 So that's the biggest piece that would have an impact on our legacy business as you think about the rest of the year and where we would land there.

Speaker 6

Okay, great. And then just lastly, Bigger picture strategically, obviously FCG significantly enhances your scale In Florida and just your overall utility footprint approaching 90% of the business. Could you just talk about outside of the LNG project you announced maybe some longer hydrogen opportunities. Can you just talk more about any growth projects That might be in the pipeline. And then maybe just as important is your strategy around propane.

Speaker 6

You've done several Very accretive acquisitions over the last several years. And I'm wondering, is expansion through bolt ons still part of the strategy or are you going to focus on integrating FCG over the next 12 to 18 months?

Speaker 2

I'll start with the propane question. I think as Beth indicated a moment ago, we're still pretty bullish on the propane business. We see opportunities to continue to grow and expand that business. Some of those certainly could come through relatively small scale acquisitions. I don't think we're interested in the large acquisition opportunities that might come down the pike, but trying to bolt on, as you say, another propane opportunity in any of our existing service areas.

Speaker 2

It's certainly something that's appealing to us. And so we'll continue to look to grow that business. There's not a specific business mix split between non regulated and regulated that we're striving to achieve. And we look for opportunities that make sense and we execute on the ones that are strategically viable and that are financially attractive to us. And so we'll continue to do that for the propane operations as well as our other non regulated operations.

Speaker 2

The larger question on, I I think the opportunities related to City Gas and other capital opportunities across the enterprise, We've indicated that as part of the Florida City Gas acquisition, we see an additional $500,000,000 capital in City Gas and their core operational areas and surrounding City Gas. I mentioned a moment ago opportunities to deliver additional pipeline capacity into South Florida to expand to serve underserved and unserved areas. All those things create, we think, some very real opportunities for our Peninsula Pipeline intrastate transmission business in Florida. And so we're pretty excited about that. I would also mention that City Gas has an expansion of their pipeline replacement regulated program in front of the Public First Commission and we're anticipating a resolution of that, an order coming out of the commission sometime later this month, I believe.

Speaker 2

And so that would start them down a $200,000,000 investment path over the next 10 years, $20,000,000 a year in pipeline replacement. We have a similar program that's already up and running at Florida Public Utilities at about the same investment level, about $20,000,000 a year for the next 10 years. So significant pipeline replacement opportunities in Florida, consolidated about $40,000,000 a year going forward. And so we see those kinds of investment opportunities. It's obviously a driving force and why we're interested in City Gas in the first place.

Speaker 6

Okay, great. Thank you very much. Appreciate it.

Operator

And at this time, there are no further questions. So I'd I'd like to turn the floor back over to Jeff Halsholder for any additional or closing remarks.

Speaker 2

Well, thank you. And I want to thank everyone for joining us this morning. We appreciate your time and your continued interest in the company. We look forward to speaking with you on our next earnings call in February. And while it's just a few weeks early, we wish everyone happy Thanksgiving.

Speaker 2

Goodbye.

Operator

Thank you. This concludes today's Chesapeake Utilities Third Quarter 2023 Earnings Conference Call.

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Key Takeaways

  • Chesapeake reported $0.69 adjusted EPS in Q3 (up from $0.54 a year ago) and $3.63 YTD, having overcome a $0.41 per-share weather headwind through a $7.6 million gross margin increase.
  • The company signed a definitive agreement to acquire Florida City Gas for $923 million, doubling its Florida customer base to ~211,000, expected to close by year-end and drive ≥8% EPS growth plus long-term dividend increases.
  • Key growth investments include an <$80 million LNG peaking facility in Maryland, participation in the $7 billion MACH II Hydrogen Hub and the first full-scale renewable natural gas project at a Florida dairy farm.
  • Regulatory progress features new permanent base rates in Florida, upcoming Maryland rate filings in early 2024, and approval of Florida’s GARD and SAFE system replacement programs (totaling ~$615 million over 10 years).
  • 2024–28 capital expenditure guidance was raised to $1.5–$1.8 billion (excluding Florida City Gas), with pro forma annual CapEx of $300–$360 million and a balanced capital structure (52.6% equity, 3.89% avg. long-term debt) to maintain investment-grade status.
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Earnings Conference Call
Chesapeake Utilities Q3 2023
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