Q3 2020 Chesapeake Utilities Corp Earnings Call
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Welcome to the conference expenses might have your first and last name. Please.
Yes, first names Conner CEO and our.
Last name Mcdaid M.C.D.A.D.
And man of your company name please.
Yes, its era A.I.E.R.A.
Thank you. Please your line read through.
Thank you.
Drive of our employees or contractors and suppliers.
In the face of the COVID-19 pandemic. Our results are strong and we continue executing on growth projects that will contribute to future earnings.
Speaking for a moment of Carbonite team for the three and nine months ended September Thirtyth, forming 20, the estimated impacts. It grew at 19 had on the company's net earnings was 700001 point $9 million respectively.
It was impacts are primarily driven by reduced consumption of energy largely on the commercial and industrial sectors higher bad debt expense incremental expenses associated with COVID-19, including personal protective equipment and putting in pay for our front line operations personnel.
The additional operating expenses the company as incurred support the ongoing delivery of our central services. During these unprecedented times the negative impact of these cost was partially offset by reduced operating expenses related to remote work conditions restricted travel and other COVID-19 related cost reductions.
Lower federal income tax expenses due to the cares act and lower financing costs as a result of the fed's actions of simultaneously help the bottom line.
The COVID-19 pandemic is still ongoing the company has not established regulatory assets associated with incremental net expenses impacts.
We do however have the regulatory authority, and Delaware, Maryland, and Florida to establish these regulatory assets, we will communicate on a timely basis updates on the full recovery of our net COVID-19 expense impacts as we determine the timing and scope of any regulatory act.
Yes.
I'll turn the call back to Beth and discuss in more detail our second quarter results Beth.
Thanks, Jeff.
Turning to slide nine.
Net income for the quarter was $9.3 million compared to five point.
In dollars for the same quarter last year.
Okay.
$49.1 million compared to $42.6 million and 2019, the tax rate was 24%. This year as a result of the care that compared to 26% last year.
He cares act enabled us to carry back net operating losses in years with higher federal income tax rate, resulting in a year to date benefit of $1.7 million recorded in the second quarter.
In terms of continuing operations, our EPS for the third quarter compared to the third quarter last year grew by 18 cents to 56 cents per share of 38 cents.
While year to date EPS compared to the same period last year grew by 29 cents to $2.96 per share.
Slide seven summarizes the key drivers of our performance for the third quarter as described in detail in our earnings release issued yesterday after the market closed.
Gross margin increased $8.2 million, we recognized $2.8 million from the hurricane Michael for seating settlement.
That happened shortly after the end of the third quarter.
Pipeline expansions contributed $2.7 million, we generated additional gross margin up $2 million from peninsula pipelines, Western Palm Beach County, Auburndale, and Callahan projects and $700000 from Eastern Shore del Mar Energy pathway project.
Natural gas rose from initiating service to new customers added $800000 again this quarter, our organic customer growth rates remain significantly above the national average and for example, our delmarva residential customer growth reached 4.9%.
For the quarter.
Our Florida grip or gas reliability infrastructure program generated 700000 in additional gross margin this quarter and has contributed over $11 million since inception.
Holden and EPS in gas acquisitions contributed $700000 in gross margin as well and lastly, Marlin gas services increased gross margin by $600000 as the demand for its traditional CNG services resulted in several new contracts.
Management of operating expenses resulted in cost increasing 57% of gross margin gain while managing our businesses and this new normal see increased operating expenses were driven mostly.
Growth in our business depreciation associated with new growth projects and amortization associated with the hurricane Michael favorable settlement if.
If you exclude those expenses tied to new acquisitions as well as depreciation and amortization you can see that our increase in operating expenses was not material.
Unusual items resulted in increased gross margin of 700000, we recognized a $2.7 million net benefit this quarter for the first and second quarters associated with the Hurricane Michael settlement.
Interim rates for previously accrued and reserves in the first and second quarter.
Increased customer consumption and the unfavorable impact of COVID-19 reduced gross margin $2 million.
Moving to slide eight we continue to operate our business in this new normal with adherents to recommendations of the center for disease control or CDC, and our unwavering focus on protecting our employees and customers, including social distancing, Matt remote and May.
Ministry to services and continued utilization of personal protective equipment.
Projects are continuing on schedule without any significant interruption from Cove at 19, we do not expect to establish onsite offices for the administrative team until 2021, and then expect a hybrid solution of onsite and remote work operations for the remainder.
Her of 2021 and potentially thereafter.
The operating income impact from COVID-19 for the three and nine months ended September Thirtyth was a negative $1.9 million and $6.7 million, respectively. Bad debt reserves have increased $1.9 million during the pandemic given governmental restrictions.
Long collection and services genuine for non payment.
Year to date net income was reduced $1.9 million or 12 cents per share.
Today as Jeff mentioned earlier, we have not recorded any regulatory assets for the net COVID-19 expense impact as authorized by the three regulatory jurisdictions, where our distribution businesses.
We have looked at various analyses and projections related to this impact and continue to assess recoverability. We will provide further updates as we complete our assessment.
The forecast for 2020 capital expenditures remains on target.
Probably 200 million our band has really narrowed as shown on slide nine and now represents a $195 million to $215 million you will notice that we moved the lower end of our estimated 2020 capital expenditures from $185 million to 100.
$95 million, given our capital spending to date and our projections for the remainder of the year. So.
The majority of investment over 75% remains in our regulated transmission and distribution businesses on.
On a year to date basis, we have invested just under $144 million.
We are well on track to achieve this capital for cat and any variations would be largely attributable to construction timing and would be carried over to next year.
As you can see on slide 10 as of September Thirtyth total capitalization was $1.37 billion comprised of 45% stockholders' equity, 38% long term debt at fixed rate and 17% short term debt, including outstanding borrowing.
Under our short term revolver and the current portion of long term debt.
Our recent equity issuances have moved up to approximately 50% of total capitalization on a pro forma basis recall that the low end of our target equity to total capitalization range began at 50%. We had indicated that we would be migrating back to our target equity.
Ratio and we were able to make significant strides in that regard.
We continue to utilize our traditional equity plans this year to issue stock and increased equity beyond our earnings that we reinvested back in the business, we stood up to 75 million ATM on August 17.
Successfully utilized the ATM in late September into early October issued $62.5 million of new equity as detailed on the following slide.
Slide 11 shows that being prepared with the ATM program was a tremendous benefit for the company in regards to raising new equity capital, we expected to use the ATM at our discretion over time that was a good plan until Cpk Chesapeake was added to the EPS.
S&P Smallcap 600 index effective October Onest.
The S&P Smallcap 600 index is considered the benchmark for small companies with a market cap similar to us.
In addition to the index case significant momentum to Chesapeake volume as investors sought to add or stock to their index portfolio holdings.
Chesapeake traded volume was about 5 million shares over the last three days of September compared to volume of 58900. The day before the index ads given the equity we were able to issue under the ATM and our dividend reinvestment and direct stock purchase plan are back.
When she is now better positioned to support additional growth opportunities. We are pursuing for 2021 and beyond I'll now turn the call back to Jeff to discuss our current and future prospects for growth Jeff.
Thanks, Beth Slide 12 shows the growth platforms associated with our strategic plan that we update every year right.
Our strategy is fairly straightforward, we manager to regulated businesses to provide stable predictable earnings solid foundation over the long term and continually seek opportunities to expand their footprint. We look for non regulated investments that meet three fundamental criteria investments that are one strategically relevant.
And related to our core energy businesses.
That meet our return targets and three that exhibit risk profiles that are consistent with our existing non regulated businesses. We.
We seek to provide total shareholder return in the upper quartile of our peers in both short and long term performance.
Mark of earnings and dividend growth driven by capital projects are going to achieve an adequate return on investment and our prescriber targets on this slide we've identified the primary drivers of growth that we are constantly pursuing.
Okay envision us expanding this diagram further next year, if we pursue all opportunities across the value chain for CNG or LNG and eventually LNG.
Projects completed or underway are highlighted on slide 13, as Jeff noted in regards to our capital forecast for 2020, we so primarily investing regulated businesses, most notably transmission pipelines and distribution mains to add services to new customers and existing more expanding geographic.
Yes.
We're also comfortable with strategic investments in our unregulated businesses propane distribution acquisitions like Bolden Western natural gas.
Borrowing gas services eight flags aspire all have similar characteristics to our regulated utility but have consistently generated increased returns above the allowable regulated utility returns.
For us our nonregulated businesses, our core to who we are and what we do the means for achieving our higher than regulated or leads and also support our EPS growth track record and projected EPS growth profile.
As shown on the slide we've been able to complete numerous projects and acquisitions and successfully integrate them into the Chesapeake family.
Were actively engaged with many other projects that we believe position us for future growth.
Pipeline investments in particular, given the opportunity to expand local gas distribution for new customers.
Support renewable natural gas.
Let me provide a little more detail on our most recent propane acquisition.
Slide 14.
Well October 26, we completed the acquisition of Western natural gas a family owned business founded in the 19 forties.
What's your natural and Jacksonville, Florida area adjacent to our northeast, Florida Service territory and Nassau County in automobiles are on the business will operate under the shark brands with current volume of about a million gallons annually serves approximately 4000 customers.
The commitment of shark than the legacy Western natural gas team provide quality service will be had managed to increase the customer base as that important market continues to grow. We're also excited about the opportunities to market, our auto gas offering and leverage other programs and services that have been key to sharp success.
As shown on slide 15, our regulatory team successfully settled with before a public service Commission on the Hurricane Michael Limited proceeding in September.
Our PSC approved the proposed settlement to recover the costs in rates associated with our restoration of the electric distribution services and in Northwest, Florida Division.
We recorded strong cost of 45.8 million as a regulatory asset including interest to be amortized over six years.
That resulted in a surcharge of $7.7 million annually.
In addition to that we're also collecting an annual increase in base revenue of 3.3 million to cover the rate base related capital costs associated with hurricane.
On slide 16 for the table, we included in our third quarter press release.
Given the various components with the settlement, we thought it would be useful to lay out the details as you can see the operating income generated from the settlement approximates the net income impact for both the quarter and year to date.
We note the gross margin year to date of 8.3 million and projected for the year of $11 million and the following key projects table.
Our latest key projects and initiatives table as shown on slide 17, including platform expansions virtual pipeline growth acquisitions and various regulatory initiatives.
Projects are expected to generate approximately 50 million and 63 million for the year is 2020 2021, respectively.
A key addition on this table is the hurricane Michael proceeding settlement accounting for $11 million and incremental gross margin.
We particularly note the margin estimates of $1 million in 2021 for renewable natural gas transportation, the $1.2 million in 2020, and 40 million for 2021 for open gas and 300001 point 8 million for Western natural gas and 2020 and 2021, respectively.
In total the incremental margin growth from these key projects and initiatives represents approximately $27 million or 2020, and 14 million for 2021.
As a reminder, we only include definitive projects in this table until projects reach maturity and we just don't include organic margin growth from distribution customer additions today. This organic growth has represented $2.5 million with Delmarva, representing 1.4 million and Florida, representing 1.1.
Yes.
Residential growth has generated over 75% of the margin on Delmarva, while that growth has been fairly evenly, Florida between residential and commercial and industrial growth.
And we've added approximately 2500 natural gas customers in the nine months ended September Thirtyth 2020.
Let me turn the call over to Jim now to discuss the.
Thanks exciting R&D projects, we are developing and how they fit with our overall strategy to support environmental sustainability Jim.
Hi, Thank you, Jeff and good afternoon, everyone.
We are excited to be ushering in an error here at Chesapeake utilities.
There are several R&D projects are being launch ready for launch.
These projects are indicative of our commitment to sustainability.
We are working to reduce the carbon footprint of the communities, we serve by lowering greenhouse gas emissions.
First opportunity I would like to discuss is our relationship with bio energy Teppco a.
A leading global developer of anaerobic digestion facilities.
That produces renewable energy and healthy soil products from organic material.
The project involves removing excess organics from poultry waste and converting it into our end Jake.
The resources generated from organic waste at this digestion facility in Delaware.
We'll be calm utility quality are in GB. Once this process by a $6 million gas processing plant.
This new plant will be built owned and operated by Chesapeake utilities.
Eastern shore natural gas company and Marlin gas services will also make incremental investments associated with the transport and receipt of RMG totaling $7 million.
The RMG will ultimately be delivered through Chesapeake utilities distribution system.
For use by our natural gas customers.
The second project includes our partnership with clean day Renewables and then biotech company focused on the production of sustainable renewable natural gas.
Which will generate greenhouse gas credits.
So see any with the hit dealer usage.
And provide Chesapeake utilities second the opportunity to bring additional renewable natural gas to our Delmarva operations.
Our newest RMG project represents a partnership with Forrester.
And rocky waste and recycling.
Generate renewable natural gas in Ohio.
This project will extra extracts and capture waste messaging.
On the landfill in Ohio, and transform it into renewable natural gas.
The RMG will be distributed through our aspire energy pipelines.
The fuel will be dispensed in fueling stations for natural gas vehicles via the trust our energy Forster portfolio company.
This project will capture 20000 tons of methane emissions the equivalent of 50000 tons of carbon dioxide per year in the production of the oranges.
This is how we work everyday.
Ah recognition as a top workplace.
The ninth consecutive year speaks volumes about our diverse and inclusive culture.
One which continues to promote the growth and development of our employees and the active engagement of our communities.
Strong corporate governance has been essential to creating long term value and safeguarding our commitments to all stakeholders.
Our board and its committees have adopted guidelines and other policies that I've provided a framework for ongoing effective governance.
Active and informed engagement.
Which is embedded in our people beginning with our board of directors and extending throughout the company cannot be more important as we continue together to chart. The road ahead.
We take very seriously our responsibility to operate in a safe and environmentally friendly matter that furthers, our stewardship and facilitate sustainable practices across our organization.
Our team with input from the board of Directors discusses key risks and mitigating factors identified as part of our vibrant enterprise risk management program.
Embedded with R. E. R. N program R E S G related focus areas and emerging risks.
In regards to safety, we are committed to providing a safe workplace for employees and to make safety a priority in our interactions with each other our customers and the communities we serve.
The achievement of Superior safety performance is an important strategic initiative, both in the short term and the long term.
Safety is not only our top priority and our first strategic objective. It is the center of who we are.
We are committed to providing a work environment that values diversity and background experiences and skill sets.
All of our employees was highlighted on slide 21.
And continuing our bedrock commitment to equity diversity and inclusion.
Our newly formed E. D. I Council is very engaged in instrumental in helping to guide a path forward.
The vision of R. E D. I 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.
E D. I Council is central to who we are and who we want to be and will further enhance the collaboration around our workplace culture that is the engine driving our businesses.
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 has left behind.
Whether it is ceasing non pay discounts working with our customers to craft payment plans that enable them to bring their accounts current.
Our capital expenditure guidance of up to $1 billion for the years 2018 through 2022 as depicted on slide 22.
We also reaffirm our 2022, earning guidance of $4.70 to $4.90 shown on slide 23, which is in line with our EPS growth expectation of 7.75% to 9.5%.
We're poised to achieve our 2022 financial targets.
Growth that represents that is underpinned by our five year capital investment plan to invest in utility infrastructure complementary opportunities and regulated businesses and sustainable energy solutions like R&D.
We'll continue our longstanding track record of delivering top returns for investors and we will maintain a strong balance sheet that ensures access to capital for growth.
On slide 24, our annual shareholder return for the periods ending October 31, 2020, as compared to our peers. As you can see we've generated top quartile shareholder return Chesapeake utilities like other gas LDC cities was not immune to the recent market volatility.
Fortunately our stock prices rebounded nicely, particularly since we joined the S&P Smallcap 600 index.
We are currently trading near our all time high we believe that this recent price appreciation reflects investors' understanding of our strategy.
But we have a strong utility foundation, we consistently stay true investments and unregulated businesses that are complimentary to our regulated business and then enable us to consistently generate above utility returns. We believe natural gas is a key component to the country's long term energy strategy. We also believe that the mark.
It's we serve value the energy services, we deliver whether those are natural gas or propane.
Our customers have spoken quite loudly in this regard.
At the same time, we have opportunities given our business mix expertise and strategic approach to capitalize on new opportunities like R&D that provide a bridge from the here and now to a more sustainable future.
Well continue to pursue new growth opportunities like RMG, but we are anchored in our foundation and believe.
As changes create new opportunities.
And sometimes that may be challenging but.
But we believe the market.
Really is ripe with opportunity for us we stand prepared to continue executing on our strategy and delivering top quartile shareholder returns.
On slide 25, we have a graph of stock price and market capitalization.
Our stock prices at an all time high today on November 5th moving our market capitalization for time at least to a not so small $1.8 billion.
Im very proud of our employees they've done so much to generate our strong results to date for 2020, and the set us up well for the rest of the year, but.
When I think about everything we've done during the third quarter quarter, which typically is fairly non eventful. It's truly remarkable achieving all of this in normal circumstances will be difficult enough, but adding on a pandemic. It represents a special accomplishment.
In closing let me thank all of our dedicated Chesapeake utilities employees again, I take great Pride in the worked on the front lines and their ongoing commitment to identifying and delivering innovative solutions for the delivery of clean reliable and safe energy to our customers is next to none thank.
Thank you and we will be happy to address any questions that you may have.
Thank you if you would like to maybe sort of question you press the one topline upon new telephone <unk> three times.
Now to your question.
A question asked but.
Than you would like to withdraw your legislation is passed away.
I know.
Question.
Our first question comes from your line of Brian.
Sidoti. Please proceed.
And with your question.
Hi, good afternoon.
Good afternoon.
Hey, just curious.
Curious what that looks like 65 million out of the 75 million.
Tim program accomplished.
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Are you just going to Opportunistically, possibly.
Look to.
Issue that remaining 10 million or is it really not even necessary given where you are on the equity capitalization.
Sure maybe.
Just a highlight.
We did 62.
Dollars.
Program in total for.
In October we actually issued a total though closer to about $75 million and that's inclusive of shares that were issued under our dividend reinvestment and direct stock purchase plan.
Brian as I mentioned in my comments it enabled us to move back closer to the low end of our target range.
So I think you will continue to see us try to make sure that we stay close to our target and as we continue to undertake new opportunities from time to time is appropriate we'll adjust our capital structure. So that we can say around that target range.
Where they are right now, but that doesn't mean from time to time, we may not consider issuing both debt and equity capital to make sure that our capital structure same balance.
Okay, Great and then just to follow up on on the.
It seems that now you have a little bit flexibility to pursue growth opportunities in 2021.
Flexibilities is from a size perspective.
Relative to what you've done recently Andrew.
Andrew maybe you could just talk more specifically on the regulated expansion.
Projects versus unregulated opportunities in our in G., maybe with your existing.
Relationships you discussed earlier.
I'll begin and then I would just ask you noticed after that.
And Jonathan if any if there's anything he wants to add but what I would say.
When you look at us consistently year after year.
We continue to have opportunities to grow our regulated businesses and I think with some other projects that we've included in our.
Table, you will see that regulated and unregulated grows that's going to continue to happen throughout the company and we're fortunate in that regard.
I don't see Brian when you look out over time I think you can expect we're going to continue to have organic growth. We're going to continue to have distribution system expansion. We've got some pipeline projects that are.
We're going to finish up Theres, new pipeline projects that we're looking at.
Does that mean that there's not going to be opportunities simultaneously on the propane side potentially acquisitions. There's also core growth that's going on in that business because of the startup. We've done we're also expanding Marlin services, but at the end of all of that you get.
Well that you're not going to see because of our utility foundation and because of the opportunities that we have you are going to continue to see kind of the same level of mix.
From a capital investment similar to what we've experienced over time, we've been anywhere from.
Indeed, 90% regulated investment every year, so that's not going to be changing.
Yes, there is anything you want to add.
No that covered it pretty effectively.
Great Great. Thanks, and then just on the forest or.
Have you identified an opportunity to expand in Florida. Please.
Well sure it it's a really fairly straight forward or just business is closely aligned with our other four or opportunities or other pharma operations.
You know, we're serving somewhere in the neighborhood of 17000 or so growth in customers in Florida.
That's in addition to the.
Customers that we serve and our sharp operations and so we're actually folding this 4000 customers into sharp and we'll branded as such a it serves a different kind of discrete market area around Jacksonville, and they do all in St. John's County areas from what we're doing as our flow the ESOP.
Operation.
Mmm.
Thank you.
Our next question comes from the line of Roger Lindo, It's clear Harbor asset management. He's cause he was a question.
Yeah. Good afternoon I wanted to continue.
R N G project discussion.
It's obviously commendable, there's no question about that but [noise].
The company.
Is at.
Some risk of Greenwash and being viewed as greenwashing.
If that's not.
Of sufficient scale.
To make a a difference however that is to find I mean, a real difference.
Can you lay out your strategic thinking in terms of what percent.
In take or of gas supply.
Could you foresee looking out over or whatever time period, you choose what.
<unk> what is your view on the.
On the renewable green gas as a percent.
Well, let me let me.
Back up to stepdaughter and answer that in this way.
We became interested Orangy project, so, especially on the Delmarva Peninsula, but also in Ohio, and we're looking at a fever in Florida as well as you might imagine primarily because of the waste clean up environmental benefit it wasn't really the production of Orangey that <unk>.
<unk> down this path initially you know the Orangy was a nice thing to get out of the back end of these projects, but we thought the Regal environmental benefit was on protecting watersheds and the Delmarva for example.
And Ah collecting in accumulating chicken waste and processing. It so that the methane was not released and that you know it wasn't running off for being used as fertilizer and running into some of the waterways and so that was our first interest and frankly was kind of the state so the Maryland and Delaware his first interest.
The second thing, we looked at and not not to be [laughter] crass, there I guess, but the second thing we looked at was the opportunity.
For a profit taking on those facilities was it an investment that would meet our criteria.
However, we ultimately decided to invest in these projects yeah right now we've looked at and announced things like Marlon hauling gas from the projects into our distribution facility through eastern shore, and we've announced in eastern shore interconnect that will be dedicated to the receipt of <unk>.
LNG from any source and so those are all profitable ventures for US. We've also looked at the gas coming into our distribution system to get to your question.
Specifically and there's a couple of ways to look at that first of all in some of these instances would be green attribute sort of the fuel are being sold into the California, low carbon fuels standard vehicle market and so what you're ending up with his gas distributors and vehicles dry.
Living in California paying for the creation of these facilities and the Delmarva.
Which is an interesting thing to contemplate and what we ended up getting as a local production of methane that's not frakt and it's not fossil fuel and we're putting that into our pipeline and selling at the customers and we're getting that fuel at a price for Decca therm that is pretty close to.
What we're buying in a traditional fuel supply for and so again I didn't mean to go around the barn three times, but the answer your specific question you know how much gas is that we think that over time.
We could see sufficient quantities of gas on the Delmarva just in that production area.
That would essentially supplant traditional fuel supplies on our distribution system for every residential customer that we serve and so I think you know I think that's a significant we may not it may maybe it doesn't get allocated that way we'll.
We'll see how that works, but it would be equal to the essentially the full of.
Demand requirements of our residential accounts and then some Franklin.
[laughter].
That's very interesting.
Yep I appreciate the texture and that answer and I'm sure I'll have other questions in future calls.
Sure.
Sure.
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