Q4 2020 Chesapeake Utilities Corp Earnings Call
Ladies and gentlemen, please standby the conference will begin momentarily. We thank you for your patience and I said, you're pleased I mean on the line.
[music].
Greetings and welcome to the Chesapeake Utilities Corp, fourth quarter and annual 'twenty 'twenty financial results.
During the presentation, all participants will be in a listen only mode. Afterwards, we will conduct a question and answer session at that time. If you have a question you May press one four on your telephone.
If at any time during the conference you need to reach an operator. Please press star Zero as a reminder, this conference is being recorded Thursday February 25th 'twenty 'twenty, one I would now like to turn the conference over to Beth Cooper Executive Vice President and Chief Financial Officer. Please go ahead.
Thank you and good afternoon, everyone. We appreciate you joining us today to review, our fourth quarter and annual 2020 rethought.
At Chesapeake utilities continue to operate effectively in this new normal serving our customers and keeping employees as safe as possible.
We await the full availability of the COVID-19 vaccination in the coming months.
As shown on slide two participating with me on the call today are Jeff householder President and Chief Executive Officer, and Jim Moriarty Executive Vice President General Counsel, corporate Secretary and Chief risk and compliance Officer. We also have other members of our management team joining us virtually.
Lee.
Today's presentation can be accessed on our website under the investors section and events and webcast subsection. After our prepared remarks, we will open the call up for questions.
Our objective today is to provide insight into our fourth quarter and annual 'twenty 'twenty results review the estimated impact of COVID-19 on our business in 2020 as well as update you on our progress on key strategic initiatives and our outlook for the future in regards to new.
Opportunities.
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 rethought.
The safe Harbor for forward looking statements section of the company's Twenty-twenty annual report on form 10-K provides further information on the factors that could cause such statements to differ from our actual results now I'll turn the call over to Jack to provide opening remarks on the company's two.
120 per format and the key contributing drivers to our results Jeff.
Good afternoon, and thank you for joining our year end 2020 earnings call.
We have a very strong year in 2020 as shown on slide four earnings growth from continuing operations increased 13, 2%.
Resulting in our 14th year in a row of record earnings.
<unk> achieved a consolidated return on equity above 11%, which is something we've done each year since 2005.
Our consistent earnings track record is a significant accomplishment and represents top quartile performance among our peer group over an extended period.
I note that we achieved the financial results in a year, where our total capital investments once again approached $200 million, representing 18% of total capitalization.
This has been an extraordinary year.
Testament to the dedication of our employee team that we were able to identify safety and operating procedures and enabled us to continue throughout the year uninterrupted delivery of the central energy services Chesapeake provides.
One of the significant concerns I had as the pandemic intensified.
As the potential loss of momentum in the completion of our capital growth projects.
That didn't happen.
Our teams were able to find ways to safely keep projects on schedule.
Our investments in 2020 will deliver strong margin and earnings growth for years to come.
Our stock also proved to be resilient during the pandemic related market downturn.
Maintaining significant value relative to the losses in the broader utility market for.
Towards the end of the year subsequent to our inclusion in the S&P 600, small cap index and reflecting our strong consistent financial performance the Chesapeake stock price increased above pre COVID-19 levels.
A key part of our total shareholder return as a strong dividend cash.
The Big Board, followed our longstanding practice of closely correlating annualized dividend growth to our earnings growth and declared an annualized dividend of $1 76 per share an eight 6% increase.
The 17th consecutive year of increased dividends.
We've now doubled our annualized dividend per share over the past 10 years.
At the same time, we've been able to reinvest a significant portion of our earnings back into the business to propel future earnings from additional capital investments as shown on slide five at year end, the Chesapeake utilities total shareholder return exceeded 15% the pop.
Top level of performance among a whole gas utilities for the year.
Our total shareholder return was strong for 2020 I believe it is equally important to consider longer term value creation as well.
Moving 'twenty 'twenty, our total shareholder return compounded annual growth rate over 135, 10, and 20 year historic periods.
<unk>, 13% for each period.
Representing long term upper quartile performance compared to our peer group in fact, we were at a 100 percentile among our peers for all periods.
Slide six highlights the significant growth experienced by the company over the past decade.
We've doubled our market capitalization twice over the past 10 years from 2020 was another step down from a path to continue growing our business. We ended the year with Chesapeake utilities market capitalization at $1.9 billion more than doubling from 2015.
Net income for 2020 was $71 5 million or $4 28 per share compared to $65 2 million.
And $3 96 per share for 2019.
Shown on slide seven the company's net income from continuing operations for 2020 with $76 million or $4.21 per diluted earnings per share. This represents an increase of $9 5 million or <unk> 49, a share above 2019 results.
We had significant margin growth in 2020 totaling over $25 million or margin results would've been even higher but they were partially offset by a $4 3 million in lower gross margins due to a decline in customer consumption driven primarily by weather unfavorable net impact of the COVID-19.
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He doesn't get margin impact, resulting from our policy to provide assistance to customers during the pandemic and stop non pay service disconnects.
Olive received authorization from each of our regulated jurisdictions to create regulatory assets to the FERC COVID-19 related net expenses.
In 2020, we deferred a total of $1 $9 billion in distribution utility expenses. The after tax impact of COVID-19, and taught me 20 was approximately $1 million or <unk> <unk> per share.
Continuing to review the various cost impacts associated with Covid, and we'll adjust as necessary. These estimates in the future.
Our growth strategy is fairly straightforward, we manage our regulated businesses to provide stable predictable earnings or a foundation as we like to say internally over the long term and continually seek opportunities to expand our footprint.
We look for non regulated investments that can augment these totally results and which meet three fundamental criteria.
Once that are one related to our core energy businesses to meet our higher than utility return targets and three exhibit risk profiles consistent with our existing nonregulated businesses.
We seek to provide a total shareholder return in the upper quartile of our peers in both short and long term performance.
A lot of earnings and dividend growth driven by capital projects that can achieve an adequate return on investment.
There are prescribed targets.
Slide eight we've identified the primary drivers of growth that we have been constantly pursuing.
We had significant noteworthy activity of almost all of these areas in 2020.
Slide nine outlines some of our key business accomplishments last year, let me highlight a few of those accomplishments.
We continue to make progress on our business transformation initiative at the beginning of 2019 with a market capitalization of approximately $1 3 billion. We started an aggressive internal goal to double the size of our company in five years that may seem ambitious, but we had already achieved that level of growth twice over the previous two.
10 years to.
To do it again, we needed to make sure our organizational structure our processes, our employee skills diversity technology, we're able to keep pace with our growth objectives.
Taken significant actions toward this goal simplifying our organization and business unit management structure.
It's even greater process standardization across our units.
I don't think you can underestimate the impact of COVID-19 from our business.
And then there's been a tragic and painful experience across the planet. However, responding to the challenges has forced us to identify and address weaknesses in our safety practices, our processes, our technology, our training and our organizational structure COVID-19.
COVID-19 has significantly accelerated our business transformation process and introduced several new elements such as remote work facility design into our planning.
Strengthening our operational and business practices, we know that it's important to hold on to the culture and traditions that are at the core of our success.
Made this company a special place for all of Us to work.
Chesapeake utilities was once again recognized as a top workplace in Delaware and Florida and earn the inaugural 2021 top workplaces USA Award for midsized companies we.
We appreciate this national recognition awarded by a third party based on feedback and survey results around boys.
We saw solid earnings contributions from all of our business units last year. Our results reflect increased earnings from the Hurricane Michael regulatory settlement.
Pipeline expansion projects, the acquisitions of Bolton Western natural propane operations and the Alton gas natural gas distribution system.
Organic growth in our natural gas distribution operations continued pipeline replacement increased margin from Marlin gas services higher retail propane margins increased rates for aspire energy. We also had gains on property sales that helped offset some of the pandemic cost increases.
As I mentioned earlier, we continued our strong record of investment growth in 2020 capital expenditures totaled $196 million, we advanced multiple pipeline expansion projects, most notably the Callahan pipeline in Florida went into service early and under budget, producing $3 9 million.
And the incremental margin in 2020.
Customers in our service territories continue to prefer natural gas as their energy of choice in our regulated natural gas customer growth in both Florida and the Delmarva Peninsula. As a result continues to be more than twice the national average.
We also completed the acquisitions of the two propane company as I mentioned earlier, a bold and propane in Delaware and Western natural gas in Florida.
Natural gas system in Maryland, the integrations of the these acquisitions were completed seamlessly and they all contributed to our bottom line in 2020.
We worked hard last year to rebalance, our capital structure and achieve our 50% equity target.
We have taken to $89 $7 million of new equity from our ATM program and various stock plans, which was certainly helpful really helpful. On Chesapeake utilities don't line. The S&P 600 small cap index in September.
We also retained $42 $4 million of earnings in 'twenty, and 'twenty, increasing stockholders' equity to $697 $1 million and achieving the 50% of total capitalization.
I'll turn the call back to Beth to discuss our 2020 results in more detail.
Thanks, Jeff turning to slide 10, net income for the quarter was $22 $4 million compared to the same quarter of last year.
As I'm sure you all recall during the fourth quarter of 2019, we exited the natural gas marketing business and recognized gains on the sales associated with that exit.
As a result, I will focus our discussion today largely on continuing operations, although our consolidated earnings for the quarter and annually in 2020 were strong despite the absence of any one time gain.
In terms of continuing operations for the quarter, our income from continuing operations grew by $4 $5 million or 27%.
EPS for the fourth quarter compared to the fourth quarter last year grew by 20 to $1 24 per share from a dollar four representing growth of 19% because of the equity issued in the fourth quarter of 2020.
Net income for 2020 for the year was 71 $5 million or $4.26 per share compared to $65 2 million or $3.96 per share for 2019.
The company's net income from continuing operations for 2020 was $70 6 million or $4 21 per share. This represents an increase of $9 $5 million or <unk> 49 per share above 2019 results of $3.72.
Or 13, 2% growth.
Higher income was the result of increased performance across the enterprise as Jeff highlighted earlier, coupled with expense management.
Chesapeake utilities has committed to gross margin growth through new project development and efficient operations as shown on slide 11 for 2020 gross margin increased seven 7%, while operating other operating expenses were up less than half of that growth at two point.
Seven per cent keep in mind, a seven 7% increase in gross margin is inclusive of $4 $3 million of milder weather that we experienced and $5 $3 million of lower margin associated with COVID-19.
Excluding the COVID-19 impact our operating income growth would have been on a consolidated basis 12, 2% versus reported $6 one per cent for our regulated energy segment 11, 3% versus reported a $6 four per ton.
And for our unregulated energy segment 12, 1% versus three six per cent.
In terms of expense growth I mentioned are laser focused on managing expenses in the midst of the pandemic and in support of our continued collaboration across the company.
Excluding the incremental expenses associated with new acquisitions, where there was also a corresponding margin growth or other operating expense growth was one 3% on a consolidated basis, one six percentage for our regulated energy segment and 8% for our unregulated.
Energy segment.
All of this remaining increase is attributable to higher insurance costs overall, our effective cost management helped to offset unfavorable expense impacts of COVID-19, and keep our operating costs flat taking into consideration the acquisitions on the insurance.
Finally, depreciation and amortization and property tax increased $14 5 million associated with our continued property expansions and new investment related to our growth initiatives.
We share the key drivers of gross margin and expenses for 2020 compared to 2019 on slide 12, and this is a new presentation for us and what you can see is that excluding weather and the negative impacts of COVID-19, gross margin increased $34 9 million or $1 52.
<unk> per share however, there's some offsetting impacts of expenses.
She added with the acquisition and also associated with Hurricane Michael.
Higher earnings for 2020 reflect increased earnings from the Hurricane Michael regulatory settlement reached with the Florida, PSC and that's 23 per share after associated depreciation and amortization of regulatory assets pipeline expansion projects added 35 per share.
Contributions from the acquisitions of Baldwin Allison and Western natural gas added nine cents per share net of their incremental expenses organic growth in the natural gas distribution operations added 15 cents per share Marlin had increased margin net added an additional eight.
Per share our propane distribution operations generated higher retail propane margins that contributed eight cents per share rate increases for aspire added six and we had incremental margin from our Florida grip program that included five cents per share and lastly.
Margins from some of eastern shore capital improvements and non service expansion projects also added five cents per share.
These increases were offset by lower gross margin again due to a decline in customer consumption driven primarily by weather 19 cents per share and a net unfavorable impact of the COVID-19 pandemic or six cents per share.
The estimated consolidated net impact that Covid had on our earnings reflects the establishment of regulatory assets in the fourth quarter sales.
The weighted with the net incremental expense incurred by our natural gas and electric distribution businesses to continue to provide our essential services as well as per tax benefits that resulted from implementing the cares Act.
Slide 13 is a table we highlighted in our third quarter press release and are including again for the fourth quarter, given the various components and the magnitude of the settlement on our results for the year, we thought it would be useful to lay out the details.
The settlement agreement allowed F. P. U two first refund the over collection of interim rates three industrial charge.
Record regulatory assets for storm costs in the amount of $45 $8 million, including interest, which will be amortized over six years.
<unk> recover those storm costs through a surcharge for a total of $7 7 million annually and finally collect an annual increase in revenue of $3 $3 million to recover capital costs associated with new plant and a regulatory assets for the cost of removal and underappreciated.
Lance.
The new base rates in storm surcharge were effective November one 2020 on an annual basis. The settlement contributed $3 $8 million and net income after tax or <unk> 23 per share as I mentioned previously.
I'd like to spend a few moments highlighting our capital spending in 2020 and our initial forecast for 2021.
As you can see on slide 14 spending in 2020 totaled $196 million within the guidance that we provided for the year, we continue to invest in growth projects and opportunities in the normal course, as we work within the guidelines of COVID-19 safety requirement.
Our regulated distribution and transmission businesses represented 75% of new capital additions in 2020.
The initial forecast for 2021 capital expenditures remains at similar levels, ranging between $175 million and $200 million.
Again, the investment is concentrated with about 80% budgeted and new regulated energy assets.
For the five years ended December 31, 2020 capital expenditures totaled $1 billion in terms of guidance through 2022 of $750 million to $1 billion, we are expecting to invest over $850 million by the end of 2021 exceeding our lower.
And estimate of $750 million and already reaching 85% of the $1 billion higher end of the range, Jeff will touch on our expanded guidance through 2025, and just a few minutes.
Slide 15 represents recent pipeline investments completed in 2020 or scheduled for completion in 2021. These projects in tandem tandem with the associated distribution system expansions are one of the largest drivers of our capital spending in 2020 and projected in <unk>.
21, these pipeline expansions, representing $116 million and span our footprint, including in Florida, Ohio and on Delmarva.
Incremental gross margin is estimated to be $21 $7 million. Once these projects are fully in service by the fourth quarter of 2021 further pipeline expansion will continue to be a growth driver as we undertake economically viable expansions that enable our distribution system.
To continue to capitalize on the increasing demand for new natural gas services to residential and commercial customers.
Our latest projects and initiatives payable is shown on slide 16, and I think you all are pretty familiar with that and it shows our pipeline expansion, the yanji and RMG trance transportation acquisitions and regulatory initiatives.
Key projects are expected to generate approximately $66 million and $73 million for the years 'twenty 'twenty, one and 'twenty 'twenty two respectively.
Pipeline expansions are expected to generate $7 million in incremental margin in 2021 shy by $1 million of the incremental $8 million added in 2020.
Hurricane Michael preceding settlement accounted for $11 million in incremental margin in 2020 and remains at that level for 2021 and 2022.
We particularly like the margin estimates of $10 $5 million for 2022 from the recent acquisitions of Bolton Allison and Western natural gas approximately double the 2020 gross margin contribution.
In total the incremental margin growth from these projects and initiatives represents approximately $27 million for 2020 $16 million for 2021 and $7 million for 2022.
As a reminder, we only include definitive projects in this table once they reach maturity and do not include organic margin growth from distribution customer additions rate adjustments in our unregulated businesses et cetera. Accordingly, the RMG transportation margin for example will be adjusted as new.
New projects are a definitive and announced.
Just before the growth we've experienced and ensure we have the capital capacity to fuel our future growth, we maintain a strong balance sheet with access to sufficient competitively price capital as you can see on slide 17 as of the end of the year total capitalization was one four.
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Comprised of 50% stockholders equity 31, 36% long term debt at fixed rate and 14% short term debt, including outstanding borrowings under our revolver and the current portion of long term debt.
During 2020, we added a net incremental $204 million of permanent capital, including in our stockholders equity and long term debt.
Our recent equity issuance moved up to our target equity to total capitalization range beginning at 50%. We continued to utilize our traditional equity plans in 2020 to issue stock and increased equity beyond our earnings retained and reinvested in the business, we successfully utilized our first aid.
T M program and various stock plans to raised just under $90 million in new equity gross proceeds and issued $90 million in new long term debt at an average rate of 298%.
We also restructured and enhanced our short term debt facilities to provide additional capacity while also streamlining the administration of this funding source.
We will continue to add capacity that supports our strategic growth plan and look forward to updating you on our progress I would now like to turn the call back to Jeff to talk about our future prospects for growth and our corresponding extension of guidance Jeff.
Thanks.
At the end of 2020, we completed our latest annual strategic plan update.
I have been telling our employers that this is a fantastic time to be in the energy delivery business.
Part of Chesapeake utilities, Theres, certainly no denying that we are in extraordinary times with the energy industry transitioning to a lower carbon world.
Face many challenges raised by opponents to fossil fuels those challenges will require that we respond effectively finding ways to meaningfully reduce our carbon footprint.
Same time, we need to meet customer demands for cleaner energy and continue to contribute to the economic well being of the communities we serve.
We believe that far from limiting our growth potential these challenges present significant opportunities for growth and expansion.
On slide 18.
Highlighted our key strategic platforms for growth.
These are the principal areas of investment focus that will drive our growth over the next few years.
First is we want to optimize the earnings growth in our existing businesses through organic growth regulatory initiatives and increased opportunities for collaboration and efficiency across our operating units are.
Recent strategic plan update identified hundreds of millions of dollars of investment opportunities within our existing users.
These opportunities represent organic growth without significant acquisition.
Second we continue to see opportunities for Interstate and intrastate pipeline projects across Delmarva, Florida, Ohio, and other states. Many of these pipelines will increase capacity to meet the growing demand for natural gas is out of our distribution systems continue to expand our service.
Areas have experienced tremendous growth during the pandemic.
Third we think further growth in our propane gas business is likely primarily through acquisitions in the mid Atlantic and southeast along with the expansion of our propane auto gas business.
And fourth we continue to expand Marlin gas services core CMG offerings to a larger market area.
Additionally, we are aggressively pursuing RMG transport opportunities across the U S. And recently, we added several LNG tanker store CMG fleet to increase our transport capacity capabilities.
Tomorrow and offers a unique opportunity to pursue R&D transport agreements and at the same time help us identify potential renewable investment opportunities.
Our fifth platform for growth as renewable energy investments, which we discussed on slide 19.
Over the past year, we've announced our participation in several renewable energy projects.
Each of these projects is advancing and we're actively working to finalize the scope and extent of our investment in participation levels.
Let me update you on our progress and describe some of our monitoring projects.
On the Delmarva Peninsula, we're working with bioenergy Dev co and cleaned by renewables on several poultry waste to energy of R&D projects.
Two projects that are farthest along the bioenergy Dev co Georgetown, Delaware facility, and cleans day as West over Maryland project.
As the developer is complete final design and financing land use permitting activities before construction begins we have various agreements in place at the respective plants for gas processing fuel offtake Marlin transport pipeline construction to takeaway RMG and deliver a thermal gas flow organic fertilizer production.
The development of solar photovoltaic systems to provide renewable power with one of them.
The site's potential construction of a renewable gas CHP at one site and other potential investment opportunities most of the Chesapeake investment opportunities included in that list are currently either under contract or we have an LOI in place and are negotiating final terms.
In Florida, we're working with the solar turbines to investigating the opportunity to utilize a blend of RMG and hydrogen to operate our eight flags combined heat and power plant on Amelia Island.
In fact yesterday, we executed a letter of support with solar turbines to participate in our hydrogen research and development projects.
Our goal is to utilize a significant percentage of hydrogen fuel that turbine within the next few years.
Our <unk> vehicle fueling station outside the port of Savannah, Georgia is under construction.
We're working on several landfill gas processing sites that would enable us to transport RMG to the site of use as a renewable vehicle fuel.
<unk> offers an attractive vehicle fuel choice, but the opportunity to provide renewable CMG, we will support premium fuel margins and is increasingly of interest to the trucking and marine important vehicle markets.
We announced an agreement with forest hard to construct a pipeline in Ohio, connecting a landfill orangey gas processor to our aspire gathering system construction on the pipeline is scheduled to begin soon.
In service is scheduled for later this year.
We're also working on a host of other renewable investment projects. They are not quite at the stage of public announcement. These projects include several additional landfill gas processing facilities additional agricultural waste R&D projects solar generation for our electric system and other opportunities.
Forward to updating you as the details are finalized.
I should note that our renewable energy investment strategy.
Your line with the same strategic objectives and financial discipline that we've applied to all of our investment opportunities over many years. We are looking for investments that are linked to our core businesses align with our financial targets and meet our tolerance for risk.
Not simply seeking renewable investments for the sake of having a renewable investment.
Our current capital and earnings investment guidance was originally issued for the five year period 2018 through 2022.
Given our updated strategic plan and the margin growth already announced and included in our major projects table yesterday, we announced an extension of our capital and EPS guidance.
As you can see on slide 20, we are resetting our five year capital guidance for the period 2021 to 2025 to 750 to a $1 billion.
Im excited that our latest strategic plan update gives us a higher degree of confidence that we have significant investment opportunities ahead of us.
On slide 21, we're also extending our EPS guidance for an additional three year period through 2025.
Our projected diluted earnings per share range in 2025 is $6.05 to $6.25.
2025 guidance range represents an average EPS growth of approximately 10% from our initiation of guidance at the end of 2017.
I'd now like to turn the call over to Jim to update you on our ESG practices and plans.
Yeah.
Thank you, Jeff and good afternoon, everyone.
As shown on slide 22, Chesapeake utilities continues to build on our bedrock commitment to ESG.
Focus on environmental stewardship.
Dedication to social justice and to sound governance principles.
This is how we work every day.
Our recognition as a top workplace for the ninth consecutive year in the areas we serve.
As well as our record net income recognition in the top workplace inaugural USA Awards.
Volumes about our diverse and inclusive culture.
One which continues to promote the growth and development and engagement of our employees and our communities.
Our vibrant and inclusive culture could not have been any more evident than in 2020.
When we collectively responded to the challenges presented by the COVID-19 pandemic.
And to the opportunities that were presented for social Justice actions.
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.
Abided a framework for ongoing effective governance.
Active and informed engagement, which is critical to our people beginning with our board and extending throughout the company.
Could not be more important as we continue together to chart. The road ahead.
Our responsibility to operate in a safe and environmentally friendly manner furthers our stewardship.
And facilitates sustainable practices across our organization.
Our team with input from the board of Directors discusses key risks and mitigating factors identified.
Identified as part of our vibrant enterprise risk management program.
Embedded within our E. R M program, our ESG related areas and emerging risks.
In regards to safety, we are committed to providing a safe workplace for our employees and to make safety a priority and our interactions with each other our customers and the communities we serve it.
It is part of our culture and an important strategic initiatives both in the short term and the long term.
Safety is not only our top priority. It is also the center of who we are.
One of the latest accomplishments in this regard is the completion of our safety town facility in Dover Delaware.
To provide both hands on in classroom training for our operations technicians.
We are also excited about our inaugural sustainability report.
Which will be provided later this year and as the next step in our longstanding ESG stewardship, highlighting the unwavering dedication and commitment of the Chesapeake team.
We are committed to providing a work environment that values diversity and background experience and skill sets as highlighted on slide 23.
And continuing our bedrock commitment to equity diversity and inclusion.
Our newly formed equity diversity, and inclusion or E D I counsel.
Is instrumental to helping guide our path forward.
The vision of R. E D. I counsel is for all employees to embrace can 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 is central to who we are and who we want to be in.
We will further enhance the collaboration around our workplace culture that is the engine driving our business.
The Adi counsel continue to be busy in 2020, fostering the rollout of employee resource groups throughout the company.
The talent skills and ideas that these groups have brought to the forefront has been inspiring and.
And provide the place for our employees.
Do these to feel that they are supported by each other and by the company.
We work hard every day to also help ensure that the communities we serve.
<unk>, receiving the value and benefits of clean plentiful and affordable energy delivery services. So that no one is left behind.
Whether it is ceasing non pay disconnects working with our customers to craft payment plans that enable them to bring their accounts current.
Providing funds for local community aid organizations to help in the midst of the pandemic we are doing our part.
In addition, we have donated record levels to aid local organizations.
We are very 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 to deliver energy, where and when it is needed while continuing to advance our environmental stewardship.
Our announced projects in R&D are just the beginning.
These are examples of how we are doing our part to help build a more sustainable future from the communities. We serve you will see us pursuing many more of these opportunities in the future.
I appreciate being with you all today and we'll now turn the call back to Jeff for some closing comments Jeff.
Thanks, Jim.
Believe natural gas is a key component to the country's long term energy strategy. We also believe that the markets. We serve value of the energy services, we deliver natural gas propane or electricity.
<unk> spoken a wildly in this regard at.
At the same time, we have opportunities given our business mix expertise and strategic approach to capitalize on new opportunities like Orangey line.
Provided the bridge from the here and now to a more sustainable future.
We will continue to execute our strategy focused on delivering top quartile performance and significant shareholder returns.
In closing let me thank all of our dedicated Chesapeake to all the employees all of US take great Pride in the work that we do and we are committed to identifying and delivering innovative solutions for the delivery of clean reliable safe energy to our customers.
Thanks for joining us this afternoon, and we'd be happy to address any questions you might have.
Yeah.
Thank you.
Ladies and gentlemen on the phone lines. If you would like to register for a question. Please press. The one followed by the four on your telephone you will hear a three ton from technology request. If your question has been answered and I would like to withdraw your registration you May press, one followed by the three once again, ladies and gentlemen, you can press one for.
Total question.
Our first phone question is from.
Sullivan with Maxim Group. Please go ahead. Your line is now open.
Oh. Thank you good afternoon, everyone and appreciate all the comments.
I thought I'd start with the Capex comments on slide 14 on electric distribution, you indicate increasing capex from 3, million% to 9% to $30 million next year can you and then I think you mentioned a solar project can you can you mentioned more detail what's behind that for your electric business. Please.
A very large percentage of it is the required storm hardening.
Okay.
Related to that.
Two the standard in Florida, Fortunately there is a recovery mechanism there is some.
More towards grip program on the natural gas side that will enable us to recover those dollars.
That's the biggest part of it including additional typical capital that we have four.
Yes.
Bob.
Serving new customers and a couple of substation improvements are reported.
The bulk of it total storm hardening.
Okay. Thank you and then you also noted separately.
Here rates for aspire can you just remind me are those tariffs schedules for your aspire business or how do you usually secure higher rates in that business.
They are negotiated rates or basketball ahead. Please note. Please go ahead Jeff.
Thank you Beth.
We have contracts with the cooperative and also with the contracts.
Contracts in place with Colombia about how high.
So, particularly with the co op.
You know we have opportunities to renegotiate those rates from time to time.
Okay.
And then yeah.
You mentioned.
Potential propane acquisitions I heard the mid Atlantic I think you mentioned another area can you can you give some background from what you need to see I know there are many smaller propane companies out there, but what do you need to see to.
We decided to acquire protein companies or can you just take an example from your most recent sales. So it was attractive about those deals. Please.
So I can start off and then I'll have Jeff can add so you know the acquisitions that we've done if you take a look at.
If you go all the way back even a couple of years ago, you saw us do a transaction that we call the old and that was up in Pennsylvania, and it was a nice full day and it gave us a little bit more of a foundation in that market that's pretty similar to what also happened in the case of Bolton on Bolden had some overlap with our existing sharp operation.
But they had a real strong foot print off around the Cecil County area, and if Youll recall K one of the great benefits of doing that transaction was it was a nice overlay with often so you know we had an opportunity to build on our growing natural gas presence, but we also had with the bolt on acquisition of stronger footprint.
Particularly up there and in other areas in Maryland and even.
Here on the eastern shore, where we have a presence, but we're not necessarily the largest player. So bold and again gave us that and then also when you look at the Western natural gas acquisition again, we serve parts of Florida, but that particular acquisition gave us a real strong foothold in the Jacksonville area.
So you know we're looking at those types of opportunities. We're also looking at opportunities to expand in contiguous markets.
We've done some startups in contiguous markets, but we would also we're interested in acquisitions that help expand our footprint, Jeff I don't know if theres anything else you might want to add there.
No that covers it thanks.
Okay. Thank you all for those comments. Thank you. Thanks Tate.
Thank you.
Thank you and our next question is from the line of Brian Russo with Sidoti. Please go ahead. Your line is open.
Hi, good afternoon.
Hi, Brian.
Hey.
We've been seeing.
Seem a lot of announcements from other utilities in terms of R&D projects both from the mid.
Mid Atlantic and around the country.
Just wondering if you could just elaborate.
On Chesapeake utilities competitive advantages.
To sign contracts.
Whats the competitive landscape like and is that impacting returns.
I can I can start that.
One of the advantages that we have is geography.
So the two projects that I mentioned specifically.
Our energy desk, a project and clean day or deep in the middle of our service territories on the Delmarva Peninsula.
Have other projects are similar in nature and in other jurisdictions in Florida.
Southern Ohio, even that we feel pretty confident that the off take agreements for the gas regardless of whether they come with degree of attribute to not they made and somebody else may market those green attributes to the California vehicle market for example, but the optics.
For the actual production the physical production yes.
And we believe that we obviously have a significant advantage if where the pipeline.
Or a distributor in the area. The other thing I think that gives us.
An interesting advantage in these projects as more of them as I mentioned a moment ago.
Frequently it's not economically viable to build a pipeline to connect these production facilities that LNG production facilities.
Two a distributional transmission system, and so you know Marlin and get to look at a lot of projects that all.
Also give us another look at potential investments and so we'll see how that plays out over the coming years, but I think where we're getting we're getting a first look at many things because people development projects or trying to find a way to get their gas to market and more offers that opportunity.
Also seeing as I mentioned opportunities to do things that are so kind of surround these projects are associated with the projects that they are not necessarily part of the anaerobic digestion or even necessarily part of the gas processing facilities things like solar photovoltaic electric generation.
That provide electricity to the production facility and really improve the carbon intensity score, which has the effect of significantly improving project economics, because the gas the green attributes of the gas at least are worth significantly significantly more and so those are the kinds of things.
We're looking at many of these projects also mentioned this in passing probably pretty quickly, but many of these projects, including the ones in Delaware and Maryland that I've mentioned.
Have organic fertilizer production capabilities, and there's usually a thermal gas requirement for that they're not using the R&D to produce that organic fertilizer. So there's another opportunity for us to provide not only takeaway services offtake services MRO and transport services pipe.
Line services.
We'll also provide total gas back to the project to essentially drive the fertilizer. So.
So we think there are a lot of opportunities for us.
Okay, Great appreciate that and then.
To say weighted to tomorrow and gas services.
Are you seeing incremental opportunities.
Given the.
The situation in Texas and in it.
The south.
The recent winter storms.
The hurricanes that we saw.
In the fall is there an increased market opportunity from oil and gas for that.
And how does that maybe some of them I don't think I don't know.
Yeah, I don't know that we've seen a lot certainly not related to the Texas situation.
What we do see are significant opportunities for kind of the classic model and see energy delivery.
That are not emergency based services.
But there are opportunities for us to have a more predictable revenue stream by executing agreements with pipelines from distribution companies that are taking facilities out of service on a routine basis for maintenance and so those are the kinds of opportunities that we're looking for rather than leaving a.
<unk> fleet.
Okay cool trucks sitting in a parking lot somewhere waiting for the phone away from for an emergency we're trying to establish a more regular revenue stream out of that business. So we've been making some significant progress down that path.
So yes, there might be from time to time emergency services, we certainly are continuing to respond and we hold back up.
Some portion of our of our fleet to make sure that we can respond.
But more and more of what we're looking for are those longer term agreements, where we have some predictable and understandable schedule book revenue streams.
Okay understood and then just on your updated guidance through.
2025.
And in the five year Capex relative to the earnings outlook in 2025 can you give us a sense of the.
The mix of business and how that might evolve it looks like 80, roughly 80 plus percent the 2021 capex is regulated.
Should we assume that's kind of the profile for the five year Capex and the mix will be approximately 80 20.
In 2025.
Yes.
Again, I wouldn't tell you. It was exactly 80 per se that may move around that number but that's generally speaking a pretty good target Beth I don't know if you went up from.
Comment on that.
I know I wholeheartedly agree with Jeff I think you know, we we built our guidance based on looking at as Jeff mentioned, our updated strategic plan and its so its opportunities that have a high probability of occurring and there are opportunities that you know that where are our groups are looking at and have a day.
<unk> so yeah it could.
Jeff mentioned, it could be a little less it could be a little bit more but that's generally about where we've been over time.
Okay, Great and then just lastly on the gross margin slide I see under the regulatory initiatives cash.
Capital cost surcharge programs and I know you discussed it in the press release could you just maybe discuss it again.
What's driving that and.
And is that something that should should remain as a gross margin driver going forward.
Sure I can I can respond to that so you know our pipeline from time to time, we'll have mandatory relocation and enhancements that it needs to do based on projects that are underway and so it's not something Brian that you should say I you know I'm going to factor. This in so my feet here.
We have specific projects that we know that we're going to undertake.
And we know what theyre going to be generating in terms of incremental margins similar to like our grip program. We will announce those and include those in our margin table.
Okay, Great and then lastly, your ability to.
Manage operating cost are flat is quite impressive is there.
Is some of that sustainable or is it <unk>.
Temporary.
You should see some normal cost inflation going forward.
Well I'll take the first pass at that Beth I mean, we have.
Net interest and.
As part of our business transformation that we mentioned earlier looking at efficiencies across the organization.
As.
As many of these smaller companies that are getting larger.
<unk> grew up with a set of Siloed business units and we're in the process of merging many of those together into similar areas.
Areas of function.
As we do that we find a variety of overlapping.
Activities in those areas.
But we will find that over time, we will find some efficiencies there and we can continue to effectively manage those costs and we're also deploying technology in a much different way than we were a couple of years ago and again those are the kinds of things that we're finding meaningful differences in.
On the cost structure of these businesses were not absolutely out to drive costs down by seven percentage, but as it comes along we're harvesting it and taking advantage of that.
Okay, great. Thank you very much.
Thank you Brian.
Thank you. Our next question is from Michael Gaugler with Janney Montgomery Scott. Please go ahead. Your line is open.
Good afternoon, everyone.
Hey, Mike Good afternoon, Hey, Mike.
In the presentation, you mentioned on slide 18.
Transmission opportunities and I know that's been a part of the thought process for a while but I'm.
I'm just wondering how youre thinking about these days with the updated capex.
With these be new builds are for potentially acquisitions and.
What geographic regions look attractive.
Primarily these are new builds and.
And we're looking at a number of projects in Florida.
Where we've had a long history of being able to bill intrastate pipelines.
We have a couple one I mentioned.
The pipeline in Ohio, and actually it was another pipeline out there.
To a power plant that will bring in this year and so we see these opportunities might for a relatively small scale piping.
Pipeline projects and I think they'll continue.
Without too much of an issue in the jurisdictions that we just described.
To be some opportunities for expansion on all these for sure on the Delmarva Peninsula as well I mean, we're seeing as I mentioned in the.
The text here.
Growth rates, both in Florida, and on Delmarva that are significantly in excess of national averages more than double.
So we're going to have a continuing need for additional gas supply both in Florida and.
Until more of a for the next several years.
And then just one final on Marlin I know in the past.
You had mentioned that.
There was some difficulty getting equipment in a timely manner and I'm wondering if that's still the case or if you are able to get all the equipment you need when you need it.
Yeah it.
That situation has dramatically improved.
And in some respects because we've changed to some extent the technology of the equipment that we're using and the suppliers that that historically, providing the equipment.
So we're seeing opportunities to bring equipment.
Months and months.
Less than we were seeing when we originally acquired the business.
Okay.
Yes.
Alright.
That's all I had thank you.
Thank you Mike.
Thanks, Mike.
Thank you and our next question is from Roger Liddell with clear Harbor asset management. Please go ahead. Your line is open.
Yes, good afternoon.
Hi, Roger.
I'm focusing on your comments they were brief.
Regarding hydrogen issues.
And.
Uh huh.
Given that this could be a bull work against high carbon fuel restrictions.
It's enormously important even though early in the whole.
In the whole planning and build out and so forth book.
I'd be interested in any specific things that you can refer to.
Example would be in a prior call or calls you spoke of the eye.
I think it's more than the aspiration, but the.
The desire to have renewable gas.
Being sufficient to power.
The rest of the sector.
And that's that's very powerful and.
And that's the.
Specificity there.
Now youre fortunate enough. Unlike many other service territories to be.
Right.
Sure line setting there are four offshore wind.
And the <unk>.
Possibility of powering Electrolyze yours.
With offshore wind opens up at least an opportunity for you.
How do you see yourself.
Participating in may be helping to shape some of that development.
Well that's good.
There's a lot of questions there Ryan let me, let me go back to Oh, I will just flow at the beginning.
We definitely have an interest in hydrogen.
We believe that our eight flags gas turbine sitting on Amelia Island.
<unk> is an interesting opportunity for us to find out a little more about how hydrogen.
Impact both our pipeline systems.
And the equipment.
Gas systems are actually feeding and so we are as I mentioned early in the process, but going to participate with the solar turbines folks.
Actual federal D O E project to do some research and development on hydrogen, especially related to the turbine.
We also believe that given the fact that we have moral and we'd have an opportunity to be able to deliver hydrogen transport truck to that facility as well as R&D and we have it set up so that we can isolate the gas stream to eight flags without impacting other cup.
And so to make a long story short we see it as a great test case.
To see what happens.
A number of respects and again, primarily the impact on our pipe systems and the impact on our measurement equipment impact all of the turbine blades.
Things that we need to understand better.
We're committed to going down this path on the hydrogen side, we are looking for other industrial customers, who may have a similar interest.
And that are similarly isolated on a pipeline system, so that we could potentially run.
Another type of test.
So obviously you know this this is an emerging market and it's going to be a while before it's anybody's ready to inject significant amounts of hydrogen into their distribution system. Although I think at that time, they actually come quicker than we think.
As far as actually producing the hydrogen and ensuring that we have green hydrogen as opposed to Bluebird day after.
Put it in those pipelines and feed that and whether that comes from wind generated energy or solar. We're also quite interested in taking a look at that and so some of those solar facilities that I mentioned, a moment ago potentially.
Potentially it could form the power generation basis for some small scale hydrogen green hydrogen production facilities.
We've got we're not really at a point, where we can talk a lot about it right now, but there are a couple of things going on in our company.
With other firms, where we are looking at the possibility of doing something like that.
As time goes by here over the next few months and they will be able to say a little more about it.
We're definitely engaged in looking at hydrogen we have as I said, a couple of opportunities one of the value for <unk> and some others that we're looking at where we can do specific testing.
So that we are gaining a better understanding of the performance of hydrogen both in our systems.
From a appliances are equivalent.
So that.
Very interesting I'm, sorry didn't mean to cut you off.
No we didn't post just hoping that I answered your question.
Yep, well are an important part of it and I got to save some for another call.
Okay.
Good day, thank you.
Encouraged.
Looking forward to hearing further developments in this avenue.
Sure.
Thank you Roger Thank you Roger.
Thank you and at this moment there are no further questions I will turn the call back over to you Mr household or if any closing remarks.
Nope I appreciate everyone's participation and a lot of great questions today.
We look forward very much to talking to you next quarter. Thank you very much.
Net.
Thank you, ladies and gentlemen that does conclude today's call. We thank you for your participation and ask that you. Please disconnect your lines.
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