Q2 2020 Chesapeake Utilities Corp Earnings Call
Ladies and gentlemen, T. sound bite the conference will be good momentarily. Thank you for your patience Matthijs you mean online.
[music].
Welcome to Chesapeake Utilities Corp, second quarter Twentytwenty earnings conference call. During the presentation, all participants will be no listen only mode. Afterwards, we will conduct a question answer session at that time, if you have.
Question. Please press the one it's all part of for on the telephone.
He found during the conference you need which not there. Please press star Zero as a reminder, this conference is being recorded Thursday August six 2020.
And now we could turn costs are two Beth Cooper SVP and CFO. Please go ahead.
Thank you and good afternoon, everyone. It it's great to be with all of you today.
We appreciate you joining us today to review, our second quarter and year to date resolved. We trust that you and your families are doing well and staying safe as shown on slide two participating with me on the call today, our Jeff householder president and CEO and Jim Moriarty Executive Vice President General.
Alcohol, corporate Secretary and Chief risk and compliance officer. We also have other members of our management team joining us virtually.
Today's presentation can be accessed on our website under the Investor section and events, then webcasts subsection or via our IR.
After our prepared remarks, we will be happy to take your question.
Our focus for the call is to provide insight into our second quarter and year to date result.
The expected impact of Cobot 19 on our business today, our progress on numerous key strategic initiatives and our outlook for the future.
Moving to slide three I would like to remind you that matters discussed in this conference call May include forward looking statements that involve risks and uncertainties forward looking statements and projections could differ materially from our actual results. The safe Harbor for forward looking statements section of the company 2019.
Annual report on form 10-K, and our 2020 quarterly reports on form 10-Q provide further information on factors, including the risks and uncertainties related to the Kobin 19 pandemic that could cause such statements to differ from our actual results.
Now I'll turn the call over to Jeff you provide opening remarks on our second quarter performance more details on our cobot 19 response, and some insight again on our outlook going forward Jeff.
Thank you Beth good afternoon, and fight Golden for joining our call for the second quarter 2020.
We achieved shallow children core results with GAAP earnings per share 66 cents 16 cents above our 2019 second quarter results.
Here later in the coal we didn't to scrape the impacts of weather or cobot 19 over the first half a year.
We didn't find ways to overcome those impacts our entire team of employees has worked hard to not only Pete meeting customer expectations for reliable source.
It also to keep growing our energy delivered businesses.
The American want a testament to the dedication drop of our employees contractors and suppliers.
In the face of the code 19 pandemic.
Our results remain strong and we continue on target with growth projects that will contribute to future lines.
Let me spend a couple of minutes updating you on companies come at 19 experience as highlighted on slide four.
You may recall from our Q1 call. We've again pandemic preparations are like February.
Before activation of our response actions in March.
In March we had about 500 of our thousand employees working remotely.
Justin technology procedure and controls supporting our virtual office processes.
We're also working hard to secure a p. before a field personnel and refining the protocols for various field service functions.
Just how we would enter an occupied building where the occupancy might be sick.
We did not see significant expense increases or margin reductions in March the virus began to spread.
Well first quarter results were impacted more by the lack of weather.
So with 19.
That has not been the case and the second quarter health one of ours related expenses have increased and as business is close during a walk down period or margins have been negatively impacted.
That's been especially true in our Florida gas distribution businesses, which serve numerous hotel restaurant and other hospitality industry customers.
That were for the most park close during the second core.
We saw coming and responded accordingly, given the weather impacts in the first quarter, we were already looking up more aggressive management of our expenses.
So with 19, [noise] excuse me elevated those cost reduction initiatives and while we've achieved significant cost reductions I assure you we have not caught one dollar out of our safety and operational compliance programs.
All of our inspection maintenance and replacement activities remain unchanged in fact, we've been able to accelerate many of these activities along with the construction of our new safety town gas operations training Center in Dover.
As I reflect on this quarter I'm truly thankful for the contributions on the positive can do attitude of our team to keep Chesapeake utilities moving forward and these unprecedented times.
I also want to acknowledge our employees families.
Provided unconditional support for the Chesapeake team as we continued to deliver a central energy services.
We all know that this pandemic has not been easy, especially for parents are grandparents did.
Addition to a day time job in the usual scraps of running a home. We're also teacher they care at work for recreational coordinator and all the other child care function for acquired the normal activities are suspended.
As our economy begins to reopen and school districts contemplate what education looks like going forward, we're working to structure flexible work schedule for employees with children, the better accommodate their educational child care needs.
I'm often asked one lets say on that one when we get back to normal.
We've been sending the message to our team the Chesapeakes normal has always been a little different than many of our peers a little more entrepreneurial more interested in digging harder to find the opportunities that many overlooked.
We're focused on starting with the customers interested in March solving customer problems and then finding a way to turn a profit on the deal.
Sneak frequently door employs about applying the same perspective to our pandemic response.
So I don't know when this will end we're planning on continuing our continuing our current work environment at least through the end of this year.
I will likely extend into 2021.
Hi, I'm fairly certain that Chesapeake will emerge from this pandemic is a strong of a company operationally than we were before we ever heard of covered 19.
In fact before the pandemic again, we had a business transformation initiative underway to consider the organizational structure of the process standardization needed and business simplification required for us to continue to grow and pegs with our historic rates and consistent with our recently updated capital and earnings guidance.
In many ways the cold at 19 pandemic has accelerated this process.
Moving forward on many fronts to improve our technology communications with employees the collaboration across our business units employee training and development and working for greater standardization of business an operational processes.
We've also continued our enhanced focus on safety.
Entering the process of developing a formal safety management system across the company.
A couple of years ago, we began a concerted effort to address gender diversity at Chesapeake.
Women and energy chapter is very active and we have numerous female team members that have moved into leadership positions. We've expanded that effort to provide greater focus on addressing diversity of rice and other issues that affect inclusion and a quality in the workplace.
We've also continued to support the communities, where we live in the work Chesapeake utilities was one of the first energy delivery companies to suspend customer service disconnects late things, we continue to work with customers to offer delayed payment options and budget payment plans as a result of their financial situation.
And we'll continue to work with our state regulatory commissions on the timing and process to reinstitute more traditional disconnect procedure.
We're also continuing to address the needs of our communities through philanthropy and volunteerism.
We've made over $250000 and contributions to local organizations to aid in the fight against the covert 19 impact.
And Chesapeake has also established a matching program for employee donations to local community organizations.
At least contributions are above and beyond our normal giving wall.
As I noted earlier in the midst of the pandemic, we've continued to execute our growth strategy, including pipeline and distribution system expansion projects as well as our business development activities.
Slide five highlight several of the accomplishments.
That are contributing to both solid quarterly earnings and future growth.
Recently completed the acquisition of Elton gas from South Jersey industries, adding about 7000, new customers and expanding with Chesapeake footprint and Cecil County, Maryland.
Our eastern shore natural gas pipeline construction project in Maryland is underway and we recently placed our Florida Callahan pipelines and service a month ahead of schedule.
Our gas distribution systems continue to add customers at a rate that's significantly above the average growth rate across the country.
We announced two new where you renewable natural gas projects that will support local communities and resolving the long term challenging poultry waste disposal and the impact on local waterways and Delmarva.
Despite the unique operating circumstance for any about cobot 19, all of our business units remain focused on growth.
And at the same time or walking to manage expenses as a partial offset to cover 19 impacts.
All these initiatives enabled us to generate strong second quarter performance and to reaffirm our commitment to our 2022 capital and he'd be EPS guidance.
Later in our presentation will discuss our major project margin contributions table, which now estimate $38 million and 2020.
And $52 million and 2021, given our announced projects today.
Turning to slide six.
Second quarter earnings per share as I mentioned 66 cents per share a 16 cents increase compared to the same period last year.
On a year to date basis, EPS increased 17 cents a share. Despite covet 19, we've grown the company, while managing cost associated with go that 19 and seeking cost efficiencies on an ongoing basis further because of Cowen 19, and the federal care that Chesapeake was able to generate a favorable way.
1.7 million dollar net income tax benefit due to the carry back of tax when a wells two years pre T.C.D.C.G.A.
Before the carriers Act all taxol generated primarily from bonus depreciation and tax versus book timing differences were required to be carried forward.
My colleague Beth Cooper likes to say, we are pushing buttons and pulling leveraged by what she means we are working to manage our cost taking advantage of favorable tax and regulatory opportunities restructuring debt to find lower interest rates closing sales on on the property driving margins where possible and taking many.
The other actions to continue to deliver both short and long term shareholder value.
Let me turn the call back to back now to discuss in more detail our second quarter results, though.
Thanks, Yeah.
Turning to slide seven net income for the quarter was $11 million compared to $8.3 million for the same quarter last year, representing 32% gross.
The provisional tax rate was 16% this year as a result of the cares that for the quarter compared to 27% last year.
To date earnings were $39.9 million compared to $37 million in 2019, representing growth of 7.9%.
The care that as Jeff mentioned allowed us to carry back net operating losses in years with higher federal income tax rate, resulting in a benefit of $1.7 million before the carrier that again, all tax so I know well generated primarily from bonus depreciation and tax first.
But timing differences were required to be carries forward.
In terms of continuing operations, our EPS for the quarter grew by 10 cents per share while our year to date EPS grew by 11 cents per share.
Increases and EPS included the negative impact from Cove ignite team that we will discuss later on in the presentation.
A lot of the same factors driving our quarterly increase also drove our year to date performance whether was one deviating factor on a year to date basis. We've had overall warmer temperatures driven primarily by the first quarter colder temperatures in the second quarter helped to mitigate some of the volume metric.
The options experienced in the first quarter, thereby reducing the negative impact on our year to date resolved.
During the first quarter, we also recognized gains from several non essential property sales that offset the weather impact.
Slide eight summarizes the key drivers of our performance for the quarter as described in detail and our earnings release issued at the end of the day yesterday.
Gross margin increased 5.1 million three pipeline expansion, the West Palm Beach County, Florida expansion project, the Callahan intrastate pipeline and the del Mar energy pathway projects, primarily contributed $1.8 million.
Demand for Marlin gas services increased gross margin by $1.1 million.
Favorable retail propane margins, given local market conditions and as we manage propane supply supply costs increased gross margin by 900000.
Natural gas growth from initiating service to new customers added 800000, what's interesting is our organic customer growth rates remain significantly above the national average our incremental margin growth also for the second quarter closely approximated the incremental margin for the second quarter of two.
2019.
Additional margin from the bolt on acquisition also finally added another half a million dollars.
<unk> expense management resulted in costs, increasing just 57% of margin gains while growing our businesses and this new normal.
Increased customer consumption due primarily to colder weather during the quarter added $2 million and finally, the estimated negative cobot impact for the quarter was $3.6 million on a pretax basis. However, the care that tax adjustment allowed for a net operating loss carry back there.
Earlier periods with higher statutory rate and thereby providing a 1.7 million dollar benefit to net income this quarter.
Moving to slide nine gross margin decreased 2.5 million during the second quarter due to cobot 19 reduce consumption largely in the commercial and industrial sectors as businesses had to shut down or scale back operations and each of our service territory.
Operating expenses increased $1.8 million in the quarter due to cost for personal protective equipment and a paid premium of up to 25% of wages through the end of June where our field teams that were essential and front facing with our customers.
Today, we have not recorded any regulatory assets for the net kovac 19 expense impact for our Delaware or Marilyn regulated operations, nor have we approach for Florida Public Service Commission regarding a similar request.
We are evaluating the fluidity of the situation the current estimates and projected impact to determine the back half the best path forward.
Slide 10 presents more detail on the financial impact of Cobot 19 for the quarter and year to date.
The timing of the virus and subsequent slowdown in economic activity in business operations were largely felt in this quarter as mentioned on the previous slide our gross margin declined $2.5 million with $2.2 million of the decline coming from our regulated energy.
Segment.
The impact on natural gas transmission and electric distribution operations was minimal.
And our natural gas distribution businesses, we saw volume decline of 6% to 8% for Delmarva natural gas distribution commercial and industrial customers and 10% to 12% for Florida natural gas distribution commercial and industrial customers.
On a net basis after the benefit of the care that and lower rates on our short term borrowings driven by the federal reserve actions. We have estimated the cobot 19 impact for the quarter was five cents per share and on a year to date basis, approximately seven cents per share as we've continued to add.
Analyze the covert 19 impacts weather impacts and consumption changes for the first and second quarter. We did identify some declines in margin for the first quarter that we now associate with coded 19.
We are continuing to look at our projections as to what the cobot 19 impact could represent in the upcoming six month in regards to reduce consumption as well as reduced expenses, we will provide refined estimates and future updates as we move through the year, we know that there will be no future and.
Packed on attack side from the care that in any financing implications will ultimately depend on the feds action.
Like all Americans, we are hoping a vaccine can be developed to prevent the spread of covered 19 and allow the people of this country to return to a more normal way of life.
We thought the new normal would last through the ended the first quarter and warmer weather would diminish the virus now we're planning on continuing as we are just as Jeff mentioned at least through the end of 2020 safety and security for employees and customers as a driving factor in how we run the business and will result in higher.
Operating expenses in delivering our east Central services for the better we found out that most of our staff can telework efficiently and we can delay, bringing folks back to the office, reducing travel costs and conference call.
This remote work phenomenon may continue for some teams into 2021, either part time, some other time or full time.
On slide 11, we highlight those expenses that we see increasing through the remainder of the year and those that we expect to decline year over year.
Today, we have done a great job of managing our expenses and that will continue as Jeff mentioned, we were already underway in terms of looking at our business processes and how we could collaborate across the organization to become more efficient and scalable overall.
Over 19 has allowed us to accelerate our efforts in this regard.
The forecast for 2020 capital expenditures remains on target.
For approximately $200 million and that's really just the average of the range. That's shown on slide 12 of $185 million to $215 million. The majority of investment will be in regulated natural gas transmission and distribution project.
On a year to date bases, we have invested $88.4 million, we will continue to monitor our investment progress and update our year end projection after the third quarter.
But we believe we are all well on track and any variation with lumpy largely attributable to construction timing and be carried over to next year.
As you can see on slide 13 as of June Thirtyth 2020, total capitalization was $1.3 billion comprised of 45% stockholders' equity, 32% long term debt at fixed rate and 23% short term debt, including bank lines of credit.
And the current portion of long term debt.
Chesapeake has 465 million in bank lines of credit and we'll have funded $90 million of new long term debt. This summer at an average rate of 2.98%.
The company has 300 million of availability under recently renewed private placement shelf facilities for the next three years.
We have utilized our traditional equity plans this year to issue stock and increase our equity beyond our retained earnings through our incentive plans before one k. supplemental retirement plan contribution and the dividend reinvestment and stock purchase plan.
Over time, we have indicated we will move back closer to our target capital structure. Our actions year to date are in line with it I would now like to turn the call back to Jack to discuss our current and future growth opportunities.
Thank you Bill.
Turning to slide 14.
Our strategic planning process has long been interval to our growth in many ways. Our current plan for the 2020 through 2022 very.
Mirror the plans we've executed over the past decade.
Of course, the level of our growth expectations are somewhat greater these days and they weren't 20, Tim well, we have the same confidence that we can execute on investments that are consistent with our long term strategy.
That's strategy is fairly straightforward our regulated businesses provide stable predictable earnings if we manage them correctly and we've been able to do that over a long period of time, we look for non regulated investments to augment our regulated earnings that meet three fundamental criteria. We're interested in investments that are related to our CFO.
Core energy businesses that meet our return targets and that exhibit risk profiles consistent with our existing non regulated businesses.
We're disciplined in our approach we walk past more deals when we execute.
One other ways, we've mitigated our non regulated risk over the years as to link the nonregulated operations to a regulated business spire energy as a good example, spyros a nonregulated gathering system, but its primary customers our natural gas distribution operations that we serve under long term supply agreements that signal.
Currently lower as far as risk profile.
Over the past couple of years, we've also considered hell future investments may contribute to our overall sustainability any this GE objectives.
You've seen us acquire more on a company that's working among other things through the move renewable natural gas from bio gas production sources to a pipeline or distribution system.
And our recent RMG announcements on Delmarva cigar interested in investing in bio gas production and processing. In addition to Marlin fuel transportation opportunities.
We have long sought to provide total shareholder value in the upper quartile of our peers in both short and long term performance.
Mark of earnings dividend growth driven by capital projects that can achieve an adequate return on investments that are prescribed targets.
As Jeff noted our 2020 capital forecast indicates we are still primarily investing in regulated businesses, most notably transmission pipelines and distribution mains and services to new customers and existing or expanding geographic areas.
We're also comfortable with strategic investments in our unregulated businesses propane distribution oil and gas services CHP business. Thus far that have many similar characteristics as I said do a regulated utility, but that can and have consistently generate increased returns above allowed regulated Utah.
Realty returns.
I know, there's a considerable dialogue by several utility companies about divestiture of their nonregulated or midstream regulated assets, but for us our non regulated businesses are core to who we are and what we do.
They are the means we're achieving our higher than regulated ROE ease and also our EPS growth track record.
Frankly, our projected EPS growth profile.
Our largest investment dollars have been dedicated to new pipeline infrastructure on Florida, and Delaware on Slide 15, we highlight both recent pipeline expansions completed and those in flight.
The projects recently completed include eastern shore largest transmission project and the northwest, Florida expansion, which expanded Chesapeakes natural gas transmission business to the Florida Panhandle for the first time.
Projects underway are progressing nicely as I mentioned earlier earlier, we initiated service in June for the Callahan project, a joint venture in Florida with a mirror energy to serve gas needs and then I saw and do all counties. The Delmore energy pathway project will expand services in Delaware and Maryland, most important.
Okay, bringing natural gas to Somerset County for the first time.
Last year, we announced the Guernsey power plant pipeline expansion, both the power plant and our pipeline. The first major expansion of pipeline services in Ohio are proceeding on schedule.
Turning to slide 16 last December we announced that the company had entered into an agreement with South Jersey industries to acquire.
Subsidiary, Elton gas, which operates and Cecil County, Maryland.
We recently received regulatory approval for the acquisition and as I mentioned earlier that transaction was completed on July 31st.
Acquisition complements our existing portfolio and enables us to expand and grow within our existing business on Delmarva Peninsula.
I'd like to take this opportunity the public to walk in the team at Elk and gas to the Chesapeake utilities family acquiring Elton gas is a natural fit for our company that we're excited about prospects, where natural gas distribution expansion in this growing area along I 95.
Turning to slide 17, let me highlight a couple of our recent regulatory initiatives. The Delaware Public Service Commission has approved the sale of our shore propane community gas systems toward the end gene natural gas distribution unit at the assets current replacement value as opposed to book value.
Poisoned by will become the basis for the Angies rate base additions.
And we continue to work with the Florida Public Service Commission on the Hurricane Michael Limited proceeding.
We requested a change in base rates to earn a return on the storm related planned investments we made.
We're also seeking a return on anoro recovery of other regulators costs incurred as a result of the hurricane.
We expect this proceeding to be finalized by the end of the year than potentially as early as the third quarter of this year given the current proceeding timeline.
Interim rates were established in January but we fully reserved all revenue until final resolution of the proceedings.
Slide 18 includes a table of our current key project key projects and initiatives for this quarter's presentation. The team has identified key projects for pipeline expansions virtual pipeline growth via moral acquisitions and regulatory initiatives.
You have somebody to keep projects are expected to generate $38.2 million and $52 million for the years 2020 and 2021, respectively.
The estimated margin represents an increase of $1.6 million in 2000 $27.9 million and 2021 compared to the estimate we provided at the end of the first quarter.
In total the incremental margin growth from these key projects and initiatives represents 15.5 million for 2020 and 13.7 million for 2021.
We know the additional margin estimates of 1 million in 2021 for renewable natural gas transportation and the margin of 1.2 million in 2020, and 4 million for 2021.
Included four Elton gas.
We've not yet provided margin estimates for the hurricane Michael regulatory proceedings, which will increase these margin a mouse once that proceeding has been finalized.
And then what the spend just a couple of minutes talking about our way. This project announcements both of which are in the renewable natural gas space.
Slide 19 outlines the relationship between Chesapeake utilities, and bio energy Devco, a leading global developer of anaerobic digestion facilities that create renewable energy and healthy you Sorel products from organic material.
The project involves removing excess organics and poultry waste and converting it into renewable natural gas.
The resources.
Generally excuse me generated from organic waste that bio devcos anaerobic digestion facilities, and Delaware will become utility quality RMG. Once this process by a $6 million gas processing plant Chesapeake Utilities Corporation will bill.
Sure sure natural gas company and Marlin gas services will also make incremental investments associated with the transport and receipt of orangey for multiple suppliers totaling approximately $7 million.
These investments include an interconnect facility and additional transport equipment. The Orange you will ultimately be delivered through Chesapeake utilities distribution systems to its natural gas customers.
The second project, we announced as a new relationship with clean Bay renewables and environment Tech company focused on the production of sustainable renewable natural gas, which will generate greenhouse gas credits aimed at the vehicle fuel market and provide chesapeake utilities, the opportunity to bring additional renewable natural gas.
So its delmarva operations.
Under the arrangement Chesapeake utilities cooperation will transport the renewable natural gas produced a clean days planned Westover, Maryland bio refinery, the Chesapeake utilities natural gas infrastructure and Delmarva.
Good I'm always encouraged when we identified projects that include opportunities for multiple Chesapeake business units in this case more oil and gas services eastern shore natural gas transmission and our Delmarva LDC as we show on slide 20.
It's great to see these units collaborate to serve customers needs and further we're excited to support the critical agribusiness industry poultry production pull through processing and grain farmers on Delmarva.
While enhancing the environmental sustainability of the Chesapeake Bay.
Our namesake Ken origin of service. We believe these type projects have further growth opportunities on delmarva as well as potentially being replicated and other service territories as we move to become one of the industry early leaders and transporting renewable natural gas.
These projects were also a supportive of our commitment to environmental sustainability.
Turn the call over to Jim we already for a few minutes to touch on many of our yesterday efforts Jim.
Thank you, Jeff and good afternoon, everyone.
It is a pleasure to be with you again today.
As shown on slide 21, Chesapeake utilities is strongly committed to sound governance principles and the highest standards of ethical conduct.
Hi, all our team members.
This is how we work every day.
Our responsibility to operate in a safe and environmentally friendly manner that furthers, our stewardship and facilitates sustainable practices.
Is that the center of who we are.
Active and informed engagement, which is embedded in our people beginning with our board of directors and extending throughout the company could not be more important as we together chart. The road ahead.
Our diverse cross functional teams closely collaborate on advancing our increasingly vibrant SG platform.
As highlighted on slide 22.
And continuing our bedrock commitment to equity diversity and inclusion we have formed the equity diversity and inclusion or.
Council.
Our vision for the council is for all our employees to embrace and share their diverse experiences and backgrounds with the mission to help improve the communities we serve.
And to make us a better company.
The council essential who we are and who we want to be.
And we will further enhance the collaboration around our workplace culture that is the engine driving our business.
In keeping with our commitments during the second quarter, Chesapeake utilities presented a virtual webinars entitled Women and utilities, the extraordinary everyday by demonstrating diversity.
Which was hosted by CS week, the largest utility customer service conference in the United States.
We support and take pride in recognizing the significant and important contributions of each of our team members.
As another example on July 10.
We had the special opportunity to virtually join together to celebrate national line worker appreciation day.
And to say, thank you to those who respond around the clock.
And in some of the most challenging conditions to provide essential energy services to our communities.
We work hard every day to ensure that the communities. We serve continue receiving the value and benefits of clean plentiful and affordable energy delivery services. So that no one is less behind.
As Jeff mentioned earlier, our teams are building several environmentally responsible projects.
Including extending our system to deliver energy for the first time to Somerset County, Maryland.
The FERC approved infrastructure project will displace wood chips and fuel oil now being used and extend the environmental benefits and prove and economic potential to a new county in Maryland.
We're also pursuing our partnerships with clean Bay renewables and bio energy Devco on various our LNG projects.
We were gratified by a recent study issued by the University of Delaware that explored additional policy considerations for the promotion of our LNG development.
We are pursuing several other RMG opportunities and look forward to unveiling several new projects as the terms and conditions are finalized.
We are excited about the projects underway by our diverse and engaged teams.
To reduce the carbon footprint of the communities we serve.
Our commitment remains steadfast to take the steps necessary.
Deliver energy, where and when it is needed while continuing to advance our environmental stewardship.
I appreciate being with you all today and turn the call back to Jeff for some closing comments.
Jeff.
Thanks, Jim just a couple of final comments.
Team is continuing to focus on safety employee engagement growth as we deliver the central services to customers.
And the communities, where we work in live we reaffirm our five year capital expenditure guidance of 750 million to a billion dollars for the years 2018 through 2022, as our strategic planning initiatives the initiatives come into view for us.
As we've outlined on slide 23.
We also reaffirm our 2022 earnings guidance $4.70 to $4, a 90 cents as we show on slide 24.
Compound average growth rate of 8.1% to 9.6% form earnings from continuing operations for the three years, we believe those growth rates can be achieved in the near term annual results based on our key projects coming online continued customer growth and operational efficiencies.
As you can see we remain well positioned to achieve our 2022 financial targets. This growth is underpinned by our five year capital investment plans.
With approximately 80% of our investments in utility infrastructure and cleaner energy solutions like RMG.
This growth is also supported by the continuation of our strategic and sustainable growth and our nonutility businesses. We will continue our track record of delivering for our investors, while maintaining a strong balance sheet.
Our financial discipline.
While the future through 2022 looks bright we're staying focused on achieving strong results for this year. Despite the unique circumstances, we find ourselves.
So in closing let me just thank all of you for a participating in our call I want to thank all of our Chesapeake utilities employees for their ongoing commitment to serving our customers growing the company.
We will be happy now to address any questions you may have.
Thank you if you like to register question. Please press the one top line of four on your telephone you'll hear three to opt to fall to request. If your question has been answered and you will like to with dry or the station. Please press the one top artist suite.
For the first question.
Our first question comes from line of Pete Tobin with Maxim. Please proceed with your question.
Great. Thank you all and thank you for all the details and I thought I'd start with the gross margin contribution that you that you discussed in slide 18, and and the besides the R&D opportunity in you introduced the gross smart incremental gross margin for 21, other 1 million what change with Marlin.
Since we last heard from you on it looks like the gross margin if I looked at a correctly might have doubled from the year ago says it more states or or am I looking at that correctly.
So.
In terms of pay in terms of how you're looking at that the second quarter. When you look at Marlin resolve the year every year. The second quarter of this year tended to be a higher quarter than the second quarter of last year and that's driven.
Really from several things one is marlin.
Since we've acquired that business.
We've been moving down a path to convert more of their services to where there is aligned with a contract we're still providing emergency services, but a greater part of that business has shifted to wear.
We're contracted to provide service and there is that a retain our type level of.
The.
That's being charged and so that's one of the things that happen for Marlin as well as Justin uptick in the emergency type services. If you. If you look at it kind of on a year to date basis. What you can see from Marlins businesses that last year, the first quarter with strong coming in and that's because we had a lot of.
Emergency services in their first quarter of last year.
Marlin is continuing to look for new opportunities in the existing CNG space that it operates in its also as Jeff and Jim both talked about.
Now these new contracts, where marlins margin going to be expanding and our NJ space and those are two of the projects. We also have some other projects that were working on in both CNG and also in Orange County, and we've also mentioned in the past that we'll be looking for marlin to expand into.
To be LNG arena, hopefully at some point here and so we're really kicking on all cylinders, we're kicking within our own footprint as well as a little bit beyond and you'll see that Marlin has the capacity to continue to expand into all of those areas. Jeff I don't know if there's anything you'd like to add.
No I think that covered it pretty well I would say that we certainly as you indicated haven't interest and focusing on long term commitments with pipelines and utilities, principally engaged and pipeline integrity work on their maintenance work and so that that provide.
As an opportunity for us to have a more stable revenue stream of this business and we're seeing some pretty significant opportunities come our way and I think some of the margin increase that you're seeing here.
Is reflective of the marketing work that we've been doing especially in the southeast and the mid Atlantic with utilities that we know quite well.
Okay, great. Yeah, I mean that that was one very notable theme and many others Marlin strength, given everything else going on to and.
But within two Q and the operating income margin than unregulated. Besides Marlin were there other was propane a positive country contributor or were there other because I think it with your highest to Q operating income margin in unregulated.
And quite a while yeah there.
Yes, you're absolutely looking at it correctly I mean, it wasn't strong quarter I mean first off if you just look out even the covin impact.
On that particular segment relative to the overall co that gross margin impact out of the $2.5 million of Cove. It impacts. The unregulated segment was negatively impacted by about 300000 and really their case, if you dig down and our where to look at under that.
For the cover so to speak what you would see is that it was a pretty small amount in each of the unregulated key unregulated businesses that being sharp.
Being our Florida propane operation aspire, so they were pretty much able to overcome the covance 19 impact and the case of sharpening our Florida propane operation retail margins have stayed strong that's been driven partly coming out of the first quarter and the weather.
Impact and.
Being able to keep those up coupled with supply and what we've been able to do there. The other thing that happened for US is you'll recall, we did we consummated the bolden acquisition at the ended the year and so bold and continue to add very strongly during the quarter and so those were big driver some of the bigger drivers.
There were some others that were smaller but overall unregulated performed very well.
Certainly the weather and April contributed.
With a lot of people being at home you think continuing to U.S GAAP and so overall unregulated fared very well again during the quarter.
Yeah, and just before I jump back in queue, just looking at Ray on the regulated side and the customer growth figures sweatshop I mean, I don't there shouldn't be any concern, but it seemed very high for the Delmarva natural gas distribution, that's 5% year over year is that including some of the convert.
Good propane customers are a meaningful portion or is that on an organic number.
There there is some customer conversion activity in there, but it is not a significant it's not a significant part of it I mean, we continue to see a lot of expansion as new developments are being you know are basically in the pathway of our distribution system as it is expanding and.
Beach areas.
Areas that are north of Dover, Delaware, which I know, but yes, there are bedroom communities of Wilmington, Delaware like the Middletown area continues to grow and expand and so it's continued to be very strong growth in our Delaware area and principally those two markets.
So it's driven more by the growth that's happening there then as much as customer conversions. There are some of those but that's not the driver.
Okay. We're also continuing to see significant growth on the systems in Florida, There's a lot of activity and the Palm Beach area Weve extended as you may recall for small pipeline segments potential pipeline out to reach the emerging growth its west of the.
Existing city limits west of on any thought.
So things are popping in Florida as well I might also just take a second point out we mentioned the regulatory action on the propane size what we are.
Voting the community gas systems, the underground propane systems over to natural gas, that's not going to all happen. It wants that we have a number of those systems are scattered across delmarva, serving almost 10000 accounts at this point so you're looking at that multiple years before we will get gas natural gas service and fraud.
Of all of those developments and start converting them. So you'll see some propane margin erosion as we convert those are natural gas increases and we are working very hard to obviously, we'll place that propane loss with additional community gas systems on Delmarva as well as providing growth in other places.
Part of that was the bolt on acquisition that Beth mentioned among others.
Okay. Thank you I'll jump back in Q.
Thank you Kate.
Our next question comes from the line of Brining So with Sidoti. Please proceed with your question.
Hi, good afternoon.
Good afternoon, Brian.
Hey.
Just on the RMG million dollar gross margin contribution put specific investment per project is that tie to.
And with bio energy or clean Bay.
With that right now is associated with its partially associated with the first project that we announced but.
All contracts for both projects are not completely Don and so that is our preliminary estimate of the margin impact that will likely we will come out with a more refined higher estimate from for all of those contracts once everything is finalized.
Okay got it and then its a.
I'll just add one thing it's a combination of things of that said and where as you said working to refine these contract agreements. We've made as we mentioned earlier, we're making an investment on the gas processing equipment at that bio energy Devco facility and so there are margins associated with that and we're also.
Transporting the gas through more oil and gas services there'll be some investment for new equipment, there and again associated margins.
To support those transportation activities.
Okay. So just back of the envelope should we just assume kind of an 11 and 12.
12% or are we to back into what type of.
Dollar investment amount.
Yields and when I would answer that question that Theyve always gets mad at me when I do so thats one off.
[laughter] faster.
Well, what I, what I would say at this point, Brian as you know you as all Asia should know that yes, I mean, we're going to be targeting a return that's above a regulated LDC return for that business.
We've not done yet because as I mentioned and Jeff will also mentioned as some of that contracts are still underway. So we've included some estimates out on some of the investment dollars.
So what I would do is look at what information is out there make a return assumption like you are at a bobbing utility return and then as we continue to disclose additional investment dollars that are associated with these projects you can adjust from there.
Okay, great understood and in terms of Marlin gas has has.
That.
Have those services been dispatched in response to the tropical storm.
I don't believe that we have discuss anything directly as a result of that but I know a we had zero auction same zero, but virtually no impact on any gas system in Florida, and then obviously is that storm what four.
The north to Delmarva, we've had no issues that we know of on the Delmarva Peninsula, that's certainly not in our distribution and transmission systems.
And so my knowledge weve not dispatched marlin for any repair or whole purposes to any utility elevated.
Okay. I was just curious show in the mid Atlantic or.
In the southeast Yeah.
We just we really haven't seen anything substantive damage to any of the gas systems that will require it will marlin to actually dispatch.
Right.
Okay.
Understood and I'm curious why haven't you filed for.
Deferral of to covert expenses is it because you've done such a good job of offsetting that.
The carriers.
Benefits and.
And elsewhere is kind of it.
A net.
Expense impact so you're offsetting that just curious.
Jeff do you want me to take that or would you like yes, you're going to.
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From our standpoint, right now Brian.
Relation as we talked about has continued to evolve I think everybody. Initially thought okay. This pandemic, where it's going to be this amount of time and that everybody will be back to normal and so what we don't well what we want to do is really be able to evaluate the magnitude we're continuing to work on our for.
Actions, we are looking at the organization overall, we're considering the other regulatory filings that are already underway as well as.
Other potential changes that might come about as a result of future stimulus packages and so.
We don't want to be quick to the gate, we want to make sure that weren't deliberate we evaluate what we think the impact is going to be and then we'll make the necessary filing and so.
Again, it's just a valuation analysis and and looking at the situation overall and as it continues to evolve.
Understood and certainly as you as you indicated a reasonable expectation to believe that regulatory agencies will be looking for a net number.
And so.
We need to figure out as do many of our colleagues and utilities across the country. What that net is what's different thats just due to covert.
Versus impacts from weather or are there other effects.
But.
On the Hurricane Michael proceedings in Florida is it on schedule.
What gives you confidence that conclusion can occur.
But third quarter.
Well, we have a September it is on schedule. We have all September hearing date as if the commission has established so theres a conversation going on now between our staff that public Service Commission staff and they all of US a public council to see if we can reach any sort of settlement agreement that would allow.
The need for that hearing.
I don't know that we will get there, but we're getting close to the point, where we'll begin to prepare for the hearing and just moved down the usual track to deal with this issue.
Okay, Great and then just just taking the quick look it at the.
The balance sheet cash flow statement are you.
Retiring long term debt.
Yes.
Lower interest rate short term debt is that part of the balance sheet management plan that you mentioned briefly earlier.
Well I mean heavy expense that I mean as long term data is getting retired it's either getting funded through.
So to speak one our balance sheet comes together either through it as you said current short term borrowings that are growing but also at the same time, we're using.
Stock through through our normal channels to also financing. So ultimately at the end of the today, what I would say Brian is there are several different levers that are happening we have long term debt thats being retired we have short term debt that we're using were also issuing $90 million of long term that this year and then we finished.
Doing some equity that's also moved our equity to total capitalization up.
Since the beginning of the year.
So it's all of that.
Great and then one last question when you look at the updated gross margin charge.
The projects under development and near completion and of course.
The pipeline of potential RMG.
Projects.
It seems as if you're already pushing towards the high end of that.
EPS CAGR from 2022, so just curious on your thoughts there and then when we might get.
When might you roll over 2023.
Well I'll start and then I know, Jeff and Jim can certainly add.
Some further color around this but.
What I would say is we typically will review, we're going through our strategic planning process coming up here as we commented thus far and so part of that review will include looking at what our capital investment plan looks like over the next five years looking at what our earnings growth trajectory looks like over the.
Next five years and so what we will likely do is at some point.
Look too.
Put out new guidance, but I would not expect Chesapeake to go to kind of an annual guidance I think we want to look out at more from kind of a longer term perspective.
We've not yet decided what that one that will be but we are certainly going to be looking at data is were coming in this next strategic planning cycle coming up here in the fall.
Okay, great. Thank you very much.
Thank you.
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Our next question is a follow on the line and pay television with Maxim. Please proceed with request.
Hi, Thank you for taking my follow up.
On renewable natural gas so with the two that you've announced bio energy and clean day.
And does it do both those deals in the 1 million to gross margin represent multiple bio digester facilities or is it one bile ducts can you just frame what those two current agreements are.
Sure and we are as Bill said, we're working to actually finalize the contract agreements with ball energy Devco for the facility achieved for it we have.
Executed letters of intent that lays out most of the terms of that deal.
We're still working through some of the details.
Yeah.
The the million dollar as a.
Get back we'll get Mad at me for saying as it's almost a place holder for what we believe will be margins coming from a variety of different sources.
We are building gas processing equipment as I said Thats about energy Devco facility.
$6 million an investment.
We are ultimately will build the interconnect on eastern shore.
I mentioned $7 million investment that will bring gas into eastern shore that those margins are not included in that million dollars will be in eastern shore.
We have more marlin investing in a variety of equipment to support the transportation of the Bob ethane, that's coming through the processing equipment to that interconnect physician and ultimately into our distribution systems on Delmarva.
With clean energy that deal at this point.
Is a fairly significant.
I mean, they excuse me as a script fairly significant Marlin transport operation, but we will be making investments in equipment.
That will transport that gas those margins are really not in that million dollars either and so again, we're working to finalize a number of agreements that we wanted to put something out there to indicate.
On the order of magnitude of where we're going with us the that represents essentially the bio energy Devco facility Theres the up the clean day facility in West over Maryland, and then there or potentially a number of other facilities that clean day and bio energy Dove.
Our trying to finalize across the Delmarva peninsula, So we see a pretty interesting.
Opportunity in front of us investing and potentially gas processing equipment.
Vesting in transportation, either by fuel truck with Marlin orbit pipelines that probably eastern shore natural gas will install at a number of facilities over a number of years and we're just not quite at the point to give you more definitive margin numbers at this point, but I think that will call last year.
Really quickly and certainly over the next couple of months I would expect we'll be able to give you a little more definitive information.
Okay. All the details great and just one follow up on the community gas system, what was the regulatory or was it something that happened. The last month that you received regulatory approval to put that yes, we forget the Delaware Public Service Commission one of the issues when you have an underground.
We have any assets as being acquired by utility is how do you actually bring that asset value into rate base into the utility and one of those things. It's always been appointed contention everywhere I've ever worked frankly, and then it every state I've ever worked.
As the purchase of an underground propane asset by a regulated natural gas utility in the conversion of those customers and it's been sort of a long standing tradition that those assets would come in at the depreciated book value.
The the propane system and you would basically and are those into the you the natural gas rate base and you'd begin earning on that level of rate base and of course, what actually happens is if you're buying those assets acquiring them for propane company, you're going to pay something closer to a market value for the assets. So you want to be able to.
During those assets forward into rate base at that.
Market value if you, possibly can it what we were able to negotiate.
Get approved the Delaware as it would bring that asset in at the replacement value. If we were building a new natural gas distribution system. So significantly increases the value of the assets that were able to put into rate base and ultimately earn on let's say, it's a pretty significant accomplishment frankly.
Great. Okay. Thank you have a good restaurant.
Thank you.
As a reminder, which was tougher question plus a one top line of core.
Mr household or there are no further questions at this time I will now turn the call back to you. Please continue with the closing remark.
Thank you and just thank you again for joining us this afternoon and hanging in there off this time, we appreciate your interest in Chesapeake utilities as always and we look forward to speaking with you again soon.
Good bye.
That does conclude the conference call for today, we thank you for your participation assay pieces Thats your line.
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