Q3 2022 Chesapeake Utilities Corp Earnings Call
Yeah.
Greetings and thank you for standing by and welcome to the Chesapeake Utilities Corporation 2022 third quarter financial results Conference call. 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. Please press the one followed by the four and your telephone.
If at any time during the conference you need to reach an operator. Please press Star Zero. This conference is being recorded Thursday November three 2022.
And now I'd like to turn the conference over to Alex Waveland head of Investor Relations. Please go ahead.
Thank you Scott and good afternoon, everyone as always we appreciate everyone joining especially so late in the day will be highlighting Chesapeake utilities results for the third quarter and through the first nine months of 2022.
As you saw in our press release issued yesterday. The company continues to drive solid financial performance in 2022, despite a challenging economic environment that speak remains well positioned to deliver solid earnings growth for the year, which speaks to our proven growth strategy and very talented workforce.
As shown on slide two participating with me on the call today are Jeff householder president and Chief Executive Officer.
Beth Cooper Executive Vice President and Chief Financial Officer, Treasurer, and assistant Corporate Secretary and Jim Moriarty Executive Vice President General Counsel, corporate Secretary and Chief policy and risk Officer. We also have other members of our management team joining us virtually.
Today's presentation can be accessed on our website under the investors page and events and presentations subsection. After our prepared remarks, we'll open the call up for questions.
Moving to slide three I'd 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.
Safe Harbor for forward looking statements section of the company's 'twenty 'twenty. One Form 10-K provides further information on the factors that could cause such statements to differ from our actual results.
Additionally, the company evaluates its performance based on non-GAAP adjusted gross margin in it for them.
The appropriate disclosures in accordance with the SEC's regulation G. A regulate a reconciliation of GAAP gross margin to non-GAAP . Adjusted gross margins is provided in the appendix of this presentation and in our earnings release now.
Now I'll turn the call over to Jeff to provide some opening remarks on the company's financial results and the key drivers of our performance Jeff.
Thank you Alex good afternoon, and thank you for joining our call today.
Start on slide four I'd like to take a moment and thank all of my colleagues for their continued hard work and dedication of our mission.
Especially proud of our team for their preparation and response to hurricane in late September which impacted much of the southwest, Florida. Our service territory somewhat miraculously were largely spared in those areas that were affected we were able to quickly restore service.
Guys that we were very lucky and just last week, we announced $800000 donation to three different for organizations who are we.
Responding with limited food shelter and other resources to those who were impacted by the storm just a really outstanding job by our focus on Florida and I. Thank all of our employees, who continue to put our customers at the forefront of all we do.
I'd also like to thank the team for their tremendous efforts throughout the quarter. Obviously this was a quarter, where we saw impacts from the significant inflationary environment, we face along with ever increasing interest rates in spite of those impacts our team delivered solid performance in the third quarter as Youll recall from previous discussions the third quarter.
Typically reflects the seasonal margin production for us and one where the margin contribution does not fully offset our quarterly fixed operating costs.
This is particularly the case in our propane business and certainly now that we've grown that business through acquisition over the past few years.
Is magnified.
Even with the seasonal impact inflationary pressures and the significant interest expense increases were pleased with the results we delivered in the quarter and certainly through the first nine months of the year.
I am confident we will finish 2022 with yet another year of strong performance.
Adjusted gross margin grew by an incremental $6 9 million in the third quarter, which just to say it again as seasonally the least impacted by weather. This growth was driven largely by our recent acquisitions transmission service expansions pipe replacement programs and strong natural gas distribution customer growth and <unk>.
Our Delmarva and Florida service territories. We also saw increased demand for services and our other businesses.
This growth in our core however was impacted by one time nonrecurring items. Both this year at West. These included the absence of the regulatory deferral of COVID-19 expenses and a favorable income tax impact associated with the cares Act, which benefited EPS in last year's third quarter by 13 incentives.
In this year's third quarter, we received interest income from a federal income tax refund, which added three.
Combine these unusual items netted to a negative EPS impact for the quarter on a year to date basis nonrecurring items, including the ones I, just mentioned and the gain on sale of assets in the second quarter netted to a four cent negative impact along with these unusual items increased interest expense also had a.
Year over year negative impact to earnings as interest rates continue to rise in this inflationary environment, we took multiple steps in the quarter to mitigate our exposure to rising interest rates, including securing $80 million in long term debt.
Further the strength of our balance sheet and better align the company for future growth.
So we entered into interest rate swaps for a portion of our long term debt of our short term debt excuse me and Beth will touch upon all of that in just a few minutes.
EPS grew by three 8% on a year to date basis compared to the same period last year nonrecurring items and higher interest expenses were key drivers on a year to year on a year to date basis.
Absent the onetime nonrecurring items in both years operating income increased by 9% year to date, we still protect EPS growth for the year to be in line with our long term expected growth rates.
Additionally, the higher levels of customer growth, we're experiencing our service territories are providing significant opportunities to deploy capital to expand both our transmission and distribution systems customer growth in both our Delmarva and Florida service territories was exceptional in the third quarter.
As we discussed on our last call. Our business has also continued to manage supply chain and regulatory challenges that have risen.
<unk> and delays for our capital projects that said, we expect more investment in the fourth quarter, allowing us to reach our updated guidance range of $140 million to 175 million for the year.
Earlier today, we previewed our 'twenty to 'twenty, three 'twenty 'twenty southern capital budget with our board.
It's exciting and that we continue to see capital investment opportunities across our growth platforms that will bode well for the next five years and as a result, we continue to reaffirm both long term capital expenditure and EPS guidance for 2025.
Turning to slide five one of the key.
Couple opportunities than it's been in our business development fall just came to fruition yesterday, we announced the acquisition of planet found energy development.
Turning to slide five I'd like to provide some highlights.
Nicely complements panic celebrates our renewable energy to delivery solutions portfolio focused on poultry waste to energy production.
Located in eastern shore of Maryland climate found provides three fundamental benefits to our renewable energy investment objectives first the acquisition provides internal technology expertise, especially related to organic fertilizer production, which is unimportant economic component and poultry waste biogas.
They already have a high quality nutrient rich soil conditioner, that's being marketed on the Delmarva Peninsula under the brand name element soil. So I've got pilot found operates a small poultry biogas facility in Maryland that will primarily use of the test facility that will help us verify waste stream and fertilizer chemistry on future projects.
Useful in both financial projections and potential regulatory treatments.
Our pilot found is currently developing a biogas side in Maryland that we can expand and complete.
The fourth point that would be that the planet found technology and processes are scalable for growth going forward.
On slide six I'd like to dive, even just a little deeper into our strategy behind this transaction utilized.
Utilizing planet founds knowledge expertise and patent pending technology, which combines anaerobic digestion that nutrient capture they will allow us to accelerate our R&D strategy as will be less dependent on developers and the projects. We're exploring not only can this model will be replicated across the Delmarva peninsula with this transaction.
<unk> will accelerate Chesapeake utilities efforts and converting poultry wise to renewable sustainable energy off a dull Moreover, as well.
Joining the Chesapeake team or to employees, who are experts in the field and will significantly contribute to our sustainable investment strategy going forward.
Other products that will help us drive even stronger relationships with stakeholders, who are integrated into the delmarva regions robust poultry farming sector and who might benefit from the use of this technology. The acquisition is also located in Somerset County, Maryland, you May recall that we recently completed an extension of our gas.
Mission systems and are currently building natural gas distribution systems in Somerset County, and we're committed to providing safe affordable energy and are continuing to support economic development and job creation in this county.
And a significant and important aspire found which originated out of the university of Maryland's Eastern shore or are you in the yes campus allows us to work with partners, including U S across the region to mitigate environmental challenges associated with poultry waste and as we've said before this has been a driving factor in our support of <unk>.
LNG production on Delmarva and along the East coast.
Let me now turn to our five growth platforms on slide seven.
We continue to experience exceptional organic growth in our natural gas distribution businesses across both of our service territories third quarter customer growth was five 8% on Delmarva and four 4% of the Florida, which continue to be well above the national average despite increased inflationary pressures and rise.
Mortgage rates impacting the national housing market the level of population growth. We're experiencing shows the highly attractive nature of our service territories, especially along the Delaware beaches and across much of Florida, while we.
We expect customer growth levels to fluctuate somewhat on the future. We continue to see sustained demand over the long term as our builders are reporting strong backlogs with natural gas and propane being the energy sources of choice for homebuyers as.
As we've discussed the high levels of customer growth, we're experiencing in our distribution business also drives the need for additional capacity in our transmission systems as well we remain on track with the beachside transmission pipeline project, along with the Winter Haven and the St Cloud Twin Lakes expansions in Florida and yesterday, we received final approval for.
The Florida Public Service Commission on a 24 million phased in peninsula pipeline expansion to serve additional growth in Nassau County, Florida on Delmarva Eastern shore Southern expansion compressor upgrades and the North Ocean City connector projects also remain on track following completion of these projects will deliver.
Significant margin growth and Beth will speak to these projects more in just a moment.
We also continue to drive nice growth in our propane business during the quarter, we introduced our auto gas offering in North Carolina opening the first fueling station and done North Carolina. This service brings a cleaner burning alternative vehicular fuel to the region auto gas substantially reduces greenhouse gases and other harmful emissions <unk>.
Fair to the use of gasoline and diesel fuel this new auto gas service follows our recent expansion into the Carolinas through the acquisition of diversified energy and the subsequent acquisition of Davenport Energy Siler City propane division through the first nine months of the year for these acquisitions have driven more than $7 million of incremental <unk>.
<unk> gross margin we've spent considerable time integrating these acquisitions into the sharp.
Propane family of businesses.
During the quarter. We also also secured approximately 90000 gallons of renewable propane, which is being used to fuel our own fleet and lower Chesapeake overall emissions renewable propane is produced from a 100% renewable raw materials, such as fats and oils, while the availability of our global propane is limited we will.
New working to procure the sustainable fuel that reduce the carbon emissions of our fleet, serving our propane businesses, which largely has been converted to auto gas already.
<unk> remains a core component of our growth strategy is a highly complementary energy source, allowing us to reach customers, where natural gas is now available.
And as you can see our propane business not only allows us to drive higher financial performance, but it also allows us to do the right thing for our customers and communities by lowering greenhouse gas submissions Marlin gas services also continues to add value for the organization, adding $1 2 million and $2 1 billion and adjust.
Gross margin during the quarter and through the first nine months of the year respectively.
Many mobile transportation companies Marlin is working to overcome higher transportation costs and labor shortages, especially with respect to our highly trained transport drivers and compressor operators. Despite these challenges Marlin continues to identify and capitalize on opportunities that leverage its virtual pipeline solutions.
We're excited for some of those opportunities to come to fruition.
And on the sustainable investments front, while the planet found acquisition is an important step forward to expand our sustainable energy business. We continue to pursue a number of R&D opportunities throughout Delmarva and along the east coast that will allow us to meet the sustainability needs of our customers and also make a positive impact for our local communities.
<unk>.
We've also recently completed the scheduled replacement of our natural gas turbine and the eight flags CHP facility on Amelia Island in northeast, Florida.
New turbine will allow us to continue testing hydrogen with higher concentrated wins in the combined heat and power plant. Our next phase of hydrogen testing is currently planned for the first quarter of 2023, and we look forward to delivering the results of this testing and furthering our hydrogen initiatives.
And with that I'll turn the call over to Beth to discuss our results in more depth Beth.
Thank you, Jeff and good afternoon, everyone. I'd also like to recognize our team for their incredible response to hurricane and I am continually amazed by the work of our team as they make positive impacts for our customers and the communities we serve.
I'm equally impressed by the perseverance shown by our team as we continue to manage through a challenging economic environment, while still achieving solid financial results during the quarter and on a year to date.
Let me provide some additional details on our recent performance.
You'll see on slide eight diluted earnings per share were $3 58.
Sure through the first nine months of the year.
A three 8% increase over the same period in 2021 keep in mind. This reflects only one month of interim rates associated with the Florida rate case, and also a 15% increase in interest expense.
More specifically some of the key margin drivers year to date included contributions from the acquisitions of diversified energy Davenport Escambia meter station continued pipeline expansions and strong organic customer growth in our natural gas distribution businesses.
Additional growth from the various regulated infrastructure programs and recovery mechanism in our Florida, Allison and eastern shore business unit.
Increased demand for Marlin PNG R&D in LNG services.
Margins per gallon in our legacy protein businesses, and finally increased margins at our aspire energy business in Ohio.
On slide nine our financial summary shows adjusted gross margin increased $6 $9 million year over year for the third quarter and $23.7 million year to date through September 30th compared to the prior year period.
Discuss the one time nonrecurring items that impacted operating income growth for the quarter, but as you can see higher interest charges of 25% as a result of rising rates impacted earnings growth in the quarter.
Through the first nine months of the year operating income was just shy of $100 million up 6% and again EPS grew by three 8% over the same period in 2021.
On slide 10, we provide a more granular look at the contributing factors that impacted EPS during the quarter. Let me go over some of those additional detail.
First as you'll recall in the third quarter of 2021, we recognized the onetime benefit of eight cents per share tied to the regulatory deferral of certain Covid expenses. We also recognized a five cent.
Favorable tax.
From the cares act in the same quarter.
Yes.
Benefit partially offset by three cents as Jeff mentioned tied to interest income received from the IRS for a federal tax refund net that unusual items netted to a <unk> 10 negative impact to EPS in the quarter.
Contribution from the acquisitions of diversified energy in Davenport Energy Siler City propane division generated an incremental six cents in earnings for the quarter.
Our core businesses delivered additional margin contribution that increased earnings by 22 per share. This includes higher adjusted gross margin from transmission expansion projects natural gas distribution organic growth increase margins from our Marlin business higher performance from our propane.
And aspire operation along with additional income from our regulated infrastructure programs and recovery mechanism.
Operating expenses tied to the propane acquisition were 10 cents per share as a reminder, we generate significantly more margin in the propane business during the first and fourth quarters, while the business has a normalized level of operating expenses that occur more evenly over the year. These increased expenses.
Can lead to operating losses during the second and third quarters largely dependent upon whether we get colder weather in some of the shoulder months.
Theres also been additional spending to align our acquisition with Chesapeake operating and safety standards. These investments are poised to deliver long term success for the business.
In our core businesses higher expenses drove an 8% impact which speaks to our team's ability to manage costs across the business.
Higher depreciation and amortization and property tax cost associated with new capital investment, whereas seven headwind.
As we've been discussing interest and other expenses were a significant nine that negative impact to earnings for the quarter.
Finally change in share count due to recent equity offering added a one headwind.
Slide 11, we portray a similar bridge so I wont walk through all the details, but as you can see we generated solid growth from our acquisitions and our core businesses continue to grow exceptionally well, while higher interest and other expenses weighed on overall performance.
Just to add that we appreciate the more complex the unusual nature of the quarter and the year to date period. There are a number of moving parts, but when we took a step back we were pleased with our results.
Let me touch on Chesapeake utilities operating segments on the next two slides.
On slide 12, you'll see adjusted gross margin was up seven 1% for the quarter and six 2% year over year for our regulated energy segment year to date operating income growth was driven primarily by pipeline expansions from our transmission pipeline organic growth in our natural gas Mister.
Abuse and system incremental contributions from our various infrastructure program, one month of interim rates associated with the Florida natural gas base rate proceeding and contributions from the F. D M B a meter station acquisition.
Higher operating expenses, largely tied to facilities maintenance and outside expenses contributed to operating income growth of one 3% for the quarter.
For the year to date period operating income increased by six 8% over the first nine months of 2021.
This included a $2 $5 million reduction in other operating expenses, resulting from that regulatory deferral of certain costs associated with the COVID-19 pandemic absent. This benefit in 2021 operating income increased seven 9 million or over 10%.
Yeah.
Turning to slide 13, our unregulated segment drove impressive year over year adjusted gross margin growth of 15, 1% and 14, 8% for the third quarter and year to date periods respectively.
This margin growth was driven primarily by contributions from diversified energy and Davenport.
Margins for our propane distribution business increased demand for Marlin services and improved performance at aspire energy that said the seasonality aspect of the business higher costs from transportation fuel labor and other rising costs impacted the unregulated.
Segment more significantly.
On slide 14, I'll mention a few updates on the balance sheet and also discuss the actions we took in the quarter to mitigate some of the risk associated with rising interest rates.
September we announced our commitment to issue $80 million of 15 year senior notes with an average 10 year life.
Sure at a coupon of five 3%.
The notes are expected to be issued in March 2023.
Initially we also entered into three year interest rate swap agreements for $50 million of our short term debt at a fixed rate of 398%. These.
These transactions complement the $50 million of long term debt, we placed at a coupon less than 3% earlier this year.
Year to date interest expense has been an incremental $2 3 million over 'twenty 'twenty. One. Additionally, as we look at the forward curve.
Interest rates to remain higher over an extended period of time.
This will continue to add pressure on our financial performance, but we factor that into our projections and seek to overcome the impact through other mitigating strategies, including cost management additional hedging alternative financing and regulatory mechanism at the end of the third quarter total.
Capitalization represented approximately one $6 billion. This included 51, 3% of stockholders equity, which is now 814 million and within our target capital range 36, 8% of long term debt at an average fixed rate.
3.38% and short term debt decreased from 222 million at year end.
$67 million with $50 million attributable to the long term debt financing in March as a result of the actions. We took this quarter our balance sheet remains strong and well positioned to support our capital investment, which drive our earnings growth and further enhances shareholder value.
Moving to slide 15, we highlight the pipeline expansion the PNG LNG and R&D transportation project acquisitions, and strategic regulatory initiatives that will drive our growth through 2023.
Always we remind you that this table does not include organic growth and it is not indicative of all the projects that we are evaluating and pursuing.
Jeff mentioned, we continue to be excited about the project, we have in our pipeline of growth opportunities.
These projects and others, not yet and now are poised to deliver higher margin growth across our businesses.
Further opportunities like planet found and others, we're pursuing on the sustainable investment front provide a path for long term sustainable growth. We look forward to bringing these projects to fruition, we'll continue to share details on these projects as they become available.
One other item to call out on this slide is the interim rates for the month of September that we recorder recorded in quarter three interim rates are subject to refund pending the final outcome of the Florida natural gas base rate proceeding. So we kept placeholders for the full year impact of 'twenty.
22, and 2023, Jim will provide additional details on this in just a moment.
Absent any interim rates from the Florida rate case, we expect the projects that are already underway will add more than $21 million this year and approximately $6 million in additional margin in 2023.
At a minimum if our rate cases, not settled we will record three months of interim rate during the fourth quarter. Finally, as a reminder, as new projects or initiatives are announced or finalized we will add them to the table.
Moving to slide 16, we highlight our key pipeline expansion project with an investment of approximately $140 million. These projects are expected to contribute more than $20 million and adjusted gross margin.
With that I would like to close with a few final thoughts as we push towards year end.
We believe we are positioned to generate overall solid earnings growth for 2022, we have strong organic growth that is continuing pipeline expansion opportunities attitude regulatory activities, including the Florida rate case and opportunities within our unregulated businesses.
We will work hard as we always do to deliver our 16th year of consecutive earnings growth and with that I will now pass the call off to Jim Moriarty to discuss our regulatory and ESG update Jim.
Yes, good afternoon Beth.
Good afternoon, everyone.
I am just trying believe it or not.
To get my script here I apologize.
But on an earlier one.
One second please.
Okay here, we are on slide 17 and 18.
We list, our ongoing regulatory initiatives, including details on the natural gas base rate case proceeding in Florida.
The company is seeking approval for an approximate $24 $1 million permanent increase.
In August the Florida, PSC approved an interim rates of approximately $7 $7 million.
On an annualized basis.
The interim rates went into effect for all meter reading starting in September of this year.
As Beth mentioned, the interim rates are subject to refund pending the final outcome of the rate case.
The discovery process concluded in early October with the hearings just completed.
As part of the hearings over 15 team members testified as experts in their respective areas I would like to commend each of those folks for the high end jobs that were done.
We are very proud of the team and the case that was presented and look forward to be.
Florida public utilities had the Florida condition is.
It's a decision shortly.
For Florida public utilities electric business recently filed its storm protection plan.
And storm protection plan cost recovery mechanisms with the PSC.
These plans allow for the recovery of investments to further protect our electric system.
In the event of a storm and prevent loss of service.
Hearings for the storm protection plan concluded in August .
Modified approval was provided in October .
Hearings for the storm protection plan cost recovery are scheduled for the coming weeks.
With rates to go into effect starting in January of 2023.
Additionally, Florida public utilities continues to make significant progress with the gas reliability infrastructure program.
It began in 2012.
Through the end of the third quarter, we have invested more than $200 million to replace approximately 351 miles.
Qualified distribution means increasing the safety and reliability of our systems for many floridians.
In Maryland, we continue to invest in the systems integrity.
By upgrading our ally.
Pipeline.
Program went into service towards the end of 2021 and going forward. We expect the project will generate $200000 in adjusted gross margin in 2022 and $400000 in 2023.
Finally, our eastern shore natural gas Interstate transmission unit.
Its authority to recover capital costs associated with mandated highway and railroad relocation projects.
Along with things are required safety upgrades.
We expect that this program will generate $2 million in additional adjusted gross margin in 2022 and 2023.
Turning to slide 19, I'd like to highlight our strong culture at Chesapeake.
As noted in prior calls our employee resource groups drive strong employee engagement across the organization.
Each of our E R. Gs make significant contributions aligned with their missions not only within Chesapeake, but also within the communities we serve.
We are very grateful for all of our Chesapeake colleagues, who participate in these important groups that promote our special culture, both inside and outside of our organization.
I'd also like to highlight a few of the company's recent awards and.
In addition to the awards, we discussed on our last call Chesapeake utilities and sharp energy were recognized the stars of Delaware being named Best company with over 50 people and best propane company respectfully. Additionally.
Additionally, marlin compression and the Port fuel center in Savannah, Georgia.
C J C N G implementation energy matters Award.
This is a more award was presented by Georgia, PSC, Vice Chairman, Tim Echols that Savannah State University.
And recognizes environmental excellence from individuals businesses and communities throughout the state of Georgia.
Finally, we were named best in corporate governance in the United States for 2022 by World News media.
Congratulations and thanks to all of those across Chesapeake utilities, who help make our company so successful.
To continue to breathe despite rising waters.
Two days prior to landfall employee groups gathered volunteer lists were shared and management update calls occurred at least twice daily.
Customers, who lost power experienced only temporary outages.
And no employee injuries were reported.
As Jeff mentioned, the storms damage somewhat miraculously largely bypassed our systems.
For that we are fortunate.
Many others in Florida experienced devastating outcomes.
To assist in the states recovery, we donated $100000 to four separate charitable organizations, including the American Red Cross.
He'd, Florida Volunteer, Florida, and the Florida Farm Bureau.
With that it was great to be with you all today I will now turn the call back to Jeff for closing comments.
Thank you Jim trying to slide 21, let me reiterate the comments I made in my opening remarks, despite the challenges we and many companies are experiencing in this dynamic economic environment. We continue to have a strong positive outlook for 2022 and the future and.
That's why we are reaffirming our long term earnings and capital expenditure guidance.
In 2025, we expect to deliver diluted earnings per share in the range of $6.05 to $6.25.
This represents a compound annual growth rate of 9.1% to 9.5% over the five year period.
While we may see short term pressure as we experienced the third corps, we maintain our position that the projects on our pipeline of opportunities will deliver a strong earnings growth.
Given that pipeline [noise] given that pipeline of projects. We also continue to expect to deploy 750 million to $1 billion in capital expenditures during the same period.
We've experienced some project delay resolving from supply chain disruptions and regulatory timing, we have strong conviction and our ability to get these projects across the finish line or wildlife transmission pipeline project mentioned earlier is a good example of significant projects gaining approval or construction.
Is.
Will commence very soon.
And the third quarter.
[noise] excuse me [noise] pardon me the third corps, our pace of capital expenditures picked up through September the 30th we've.
We've deployed more than $95 million on capital expenditures.
Given this momentum and the projects we have slated through the end of the year. We continue to expect to invest between 140 million and $175 million on capital projects in 2022.
To conclude we remain well position to deliver a strong earnings growth in 2022 and beyond Chesapeake utilities has a long history of weathering volatile economic cycles, we've always emerged stronger company each time, our strategy and business model of proven when we have a strong balance sheet that position.
<unk> as well to capitalize on the future growth opportunities both within our regulators footprint and are unregulated complimentary businesses while.
Challenges remain on the horizon, our focus on delivering top quartile financial performance never wavers.
And with that Alex why don't we open it up for questions.
Thanks Dance Scott one we open up for questions.
Thank you if you'd like to register a question. Please press the one followed by the foreign your telephone you'll hear a three tone prompt to acknowledge request. If your question has been answered and you would like to withdraw your registration. Please press. The one followed by the three if you're using a speaker phone. Please lift your handset before entering your request once again, that's one four to register for question one brief moment.
The first question.
Our first question is from the amount of tape Sullivan with maximum group. Please go ahead your lines now open.
Hi, Thank you good afternoon and person on the planet found acquisition, please and and the C. N G. RMG in LNG transportation and infrastructure gross margin forecaster, you had it in 2022 for $9.5 million and 23 for $10.5 million does that and it was on.
Change and I believe from the prior quarter.
There's some moving parts in that forecast for gross margins.
And does that include planet found.
Okay. Thank you paid I'll start this off and then.
Jack to add any additional commentary so with planet found the real purpose and buying that business as Jeff Parker about.
The technology and the capabilities that they bring to the table and something that we can use to scale future projects. It is not a very large current it doesn't have a very large business profile at the present time.
When the size that it currently is in and that runway that we had before.
Boy that in our next project, we we did not want to stand up any estimates at this time certainly for 2022, we'll be taking a closer look at 2023 and the project that we have on the horizon and see if there's any adjustment that we need to do in time for our year round relief that will come out in February .
I don't know if there's anything you'd like to add.
No I think I think that covers it again part of town has a project site under development and will.
Obviously take that over and take that on in and work toward constructing.
The project that they that they are working through permitting right now.
But I think that summarizes it this is a relatively small acquisition. It comes with the technology that we think is call useful to continuing to expand.
Our orangy footprint, especially in a poll for business and it also again as we mentioned comes with a nice test facility and the opportunity to continue to develop.
The project that they have under way and to expand our business profile or footprint in the Somerset County, Maryland.
Okay. Thank you and and on Slide I believe it has flags 10, where you detailed a year over year EPS change and and the 10 cents tied to recent acquisitions and Beth you get good detail on that to you. I mean was this out of I mean, I think it was a large propane acquisition from last December diversified energy group.
Did you experience more expensive than normal integrating that or.
Was it just the timing that you decided to incur those expenses integrating their systems can you provide more detail on on that integration and maybe did you even consider excluding notes expenses that may be one time in nature too.
Well certainly I mean, one of the things that's exciting about this acquisition T is that you know for us it filled in when you look at our footprint right. We were primarily south all the way to Virginia. If you think about that Pennsylvania, Delaware, Maryland, and Virginia Service area and then you look at you know.
Florida, and there's some things that we do kind of going into Georgia with Marlins opportunities in our new venue you know C. N G station that we're servicing there. So this acquisition Leno enabled us to come in to North Carolina, South Carolina, but when you do that right you're standing up a brand new president and new.
<unk>, which is very different than if you look at the acquisitions that we've recently downright if you turn the clock back and you look at all that was in Pennsylvania, you look at Folden that within the Elkton, Uhm, Cecil County, Maryland and into Delaware. So it overlapped with US right and if you look at western natural gas, which we announced previously.
<unk> uhm as well that was in Florida, all opportunities that we were able to capitalize on our presence right. We already had operations there we could leverage the way that we're doing business. So as we brought diversified in you know it's working together to adopt the practices that sharp has you know had in place.
Yes, and so that includes programs. It includes the way we operate in please operational safety standards et cetera.
You know, there's going to be incremental costs that are associated with that and then as we look to branch out even from that footprint, there's gonna be additional costs. So those cough were expected but.
Particularly when you are looking at a quarter that does not have a lot of March and conservation of third quarter is our lowest margin contribution for that particular part of our business.
Okay, great. Thank thank you Beth and last if I made you have <unk> in terms of the Orangey opportunities I I <unk> I think it was last month at B P announced an acquisition of RMG producer or chaos.
Just get it this interest from large oil companies and Orange G does it does it.
More competition to secure Orangey projects or is it good for your existing RMG projects.
If you if you can I think there is a thousand two things to be said about that one is the orangy projects that were principally interested it and certainly the ones that were pursuing from a developmental perspective.
One are primarily in our backyard they require some support from our pipeline systems to provide market past they are working with a variety of customers and politicians and regular.
<unk> and others that we know quite well and most of them almost not quite all of them, but most of them are focused on poultry waste and poulter. What is a is a tricky thing to deal with and we think we're a long way up the curve.
Beyond where virtually anyone else's figuring out how to.
Produce bio gas and renewable natural gas from poultry waste and as importantly to the economics of those projects deal with the organic fertilizer coming out the other side of the plan and so there are some competitive barriers that exist that we like [laughter] and that give.
I think a leg up and that's one of the reasons. We were interested in the appointment found acquisition, because we think that again moves us a little bit farther up the curve on the technology side. It was some people that understand how all that works.
Now are working for us directly and so we don't see the V PS and the shells and the other folks that are actively engaging in biogas projects as a significant source of competition at this point and in fact, we're working with a number of those folks <unk>.
Their energy marketing.
Arms to make sure that we get the Orangy that we ultimately will produce into the marketplace at an appropriate to economic point and so was it that's going into California are going into the federal programs are up into Canada wherever it may be going we find that those large fuel marketing group.
Many of them attached to the large oil and gas companies that you're describing are.
Quite helpful and and taking a lot of the risk of those projects frankly on the downstroke commodity side.
Thank you. Thank you very much for coming on that gentlemen, thanks. Thanks doll.
Sure.
Our next question is from Brian Russo was Cenote. Please go ahead your lines now open.
Yeah, Hi, good afternoon.
Maybe just a blue just to follow up on a planet found seems like a nice.
Foundation for growth I mean, how quickly do you think you can you know.
Deploy.
Capital and leverage that you know over the next several years.
It's supposed to be more of a meaningful project contributor.
Well, we've already got the technical expertise of the folks that are principles of that company.
And as I mentioned in the in the remarks, a couple of them are actually becoming employees of ours and others that are on the sort of academic science side will certainly continue to contribute I think on a consulting basis are going for so there's a pretty much an immediate contribution.
Helping us evaluate and design some of the other projects that we're looking to develop.
So I think I think that happens pretty quickly. We're looking now at you know how quickly we might be able to move forward.
With a relatively small side in Maryland that they had under development and whether we have opportunities to expand that a little bit then we probably do and so I think you'll be hearing about that you know over the next several months as we we get a little farther down the road to think about you know when they might be able to actually.
<unk> bring that before overboard in southern we'd get approval then the move forward with construction.
Okay, Great and then just on.
The interest rate sensitivity you mentioned the interest rate swaps before and then the 80 million you're gonna turn amount how much of the short term that kind of is left and exposed in a in a rising interest rate environment and is that roughly 6.2 million of interest you.
<unk> reported in the third quarter.
Is that kind of you know.
Considered a run rate you know.
At this current level of debt.
Sure. So you know if you look at where you know Bryan.
Where as of the end of.
September we had about 167 million in short term debt at that time. So you know that 80 and that 50, we've taken a big chunk of that short term that and either through long term debt or through the swamps that we've entered it into that leaves about 30.
You know a little bit more than 30 million, that's still variable at this point and so you know, we're continuing to evaluate and will and will do so on an ongoing basis, certainly with where interest rates are in target capital structure will evaluate what type of financing should be utilized for that we I'm certainly a lot of options.
So again, you know we've taken a big chunk of it we place it longterm I think hopefully that will help if you think about our interest costs on project those out into next year, what kinds of you know interest expense increases you know that you know will be expected you're all set to some of that those certainly is asthma.
Went into a rate case in Florida, we were using and looking at what the forward rate for at the time. So that you know also goes to my comment about you know we look at things like rape cases that were involved in in other mechanisms to try to also all set some of that cost.
Mmm, Yeah that was actually my next question would it be okay and somebody that's inflationary environment.
As well as the rising interest rate environment be captured in this Florida right case. So it seems as if can you would just what's currently filed or it was at that specific point in time that you looked at the forward curve.
It was certainly at the time that we looked at it but as our team has been in over the last week participating in the hearings that is certainly something that is discussed we certainly looked out you know as best we could at the time that we made our filings and then have you know included in some of our comments where the.
<unk>, but you know some of that was reflected in the filing that we may not all of it but certainly some of it was and so we try to do that with all of our expenses as we walk out. So again some of it will be captured some of it will be exposed, but you know that case isn't saddled, yet and so you know what.
Have to wait and see you know where the ultimate outcome is but again some of it will be captured there.
Okay, Great and then lastly, just you know in the year to date Capex of 95 million in a target [laughter] for for the full year you know it implies kind of 55 I see to 85.
<unk>.
80 million of Capex in.
The fourth quarter and I'm I'm, just wondering you know, which the profile that capex are those new projects that were delayed last quarter that are going to ramp up or is that you know already projects that are well along in there you know spending profile.
It was primarily be Brian those project that you know like Jeff talked a little bit about the North Ocean City connector project. That's a project that you know where where for the most part gonna be finishing that up by the end of this year. So you know that that will be out there to finish we also have some.
Other projects that are underway some of the pipeline expansions that are already in motion uhm. They may not finish until next year, but there's parts of those that will be working on so you know it could be you know not to say you know in the past we've had some small transactions that we've been out last year. There was a big one [laughter] right at the end of the.
Here that really added to our Capex, but you know most of what's inherent in that capital forecast are going to be things that are moving along and again, we feel pretty confident about that you know those capital expenditures are already in the queue.
Okay, great. Thank you very much.
Thank you Brian .
Alright.
Once again, if you'd like to register for a question. Please press one four on your telephone.
And we have a question from John Bartlett with Reeves asset management. Please go ahead your lines open.
Hi, Good afternoon question for Beth My question for for Jeff Beth just to go back to Brian's question for a second I don't I don't mean to belabor. This looked at I I guess I will just.
On the question of you know run right exit right whatever you Wanna call. It clearly those swaps, which I'm sure you're pleased with now we're done at some point during the quarter and as a consequence some of the impact is going to be felt in the future can you give us a little bit more color on that.
Sure I mean, we you know we're constantly looking at different projects et cetera that are going on and initiatives that are underway and so determining when the appropriate time to pull some of that down and log in I mean, it was it was evaluated as we started this year and just with the things that where you are a valued.
Waiting throughout the organization and so it really for US became an opportunity you know when we came into the third quarter looking at some of the projects that were out there. It sat around some of the financing that we were looking to do it what is the optimum time for US a lot both of those in and you know we have incorporated.
I mentioned some of that into into our rate case proceedings. So uhm at the same time, you know we work pretty aggressively on our revolvers to get our pricing even more competitive. So you saw some of that come through and are most.
Negotiated pricing that we did on the revolver and then lastly, I would say you know we also had a placement earlier in the year that was done while under 3%. So you know overall I'm I'm pleased our overall longterm that rate is sitting at about three in less than a 3.5% average rate.
You know certainly the short term could we have locked it in earlier, yes, but we were you know looking at several different things across our business and it did not a line for us to lock in earlier in the year.
Oh, no I I understand it but I I'm, sorry, it just kind of where I'm going as it sounds like most of the activity what sort of front end loaded into the corner and so.
<unk>.
Yeah, well it was but I will tell you you know John what really happened is even if you set that aside frankly, because we don't have the longterm placement until March of next year and the swap for Dawn on September 30th It was really the fact that we've gone too you know from a short term debt.
<unk>, you've seen short term interest rate move almost 400 basis points in a year right. So we started the euro well under 1%. There now you know you know not quite 400 basis points above that but there's been such a move that's really the headwinds that you saw in the third quarter or not so.
Much of the cost of what we did in the most recent two placement.
Yeah, right I don't know I understand that you you you pulled the report.
The swaps, but that that is what you're telling me is in essence that that happened fairly early in the corner.
The placement is gonna be placed when it is and it's been sworn yeah. So.
Other than that you know it seems like what what you did this quarter is a reasonable expectation absent incremental spending of course, it's a pretty good reputation what we're going to get an extra order of <unk> that is you felt the pain and the number is plus or minus one yep that does.
That's correct that is up yeah. Okay. That's that's that's all I was trying to get at Okay. Terrific. Thank you and then just just for you.
I guess it's.
A question is a little bit more challenging, but I, just really want a high level answer or not.
I want a drill down too far, but you've you've obviously.
Buddy in corporate America has felt <unk> caused grief.
Across their businesses and you naturally a feeling at this quarter and presumably in in in in previous periods how.
How would you term.
The momentum of that the first derivative. The is it accelerating is it is it is it slowing down as it staying roughly the same how what's your sort of view of your sweet of businesses on that front.
Well I think you know obviously.
Is clearly obvious if you look at expenses other than all of them expensive as the ones that Beth is talking about relative to interest rates and whatnot.
We continue to see those increasingly thought they would flatten out some next year I'm not so sure. That's true at this point. So I guess, we'll see on the O&M side, we've actually over the last several years, we've been tracking those O&M expenses down as a percentage of gross margin for example.
And so we've got a decent handle on that I would be the first to tell you that some of that is not intentional because we've had the same.
Difficulties hiring and retaining staff.
As you hear about every day for companies across this country.
We've done a nice job recruiting and replacing folks that have left and people that have retired, especially those that I'd had enough during COVID-19 and we're old enough to to take the packaging go and so we've been able to maneuver around some of the other supply chain cost increases and certainly some of.
The inflationary increases that were saying, but I don't see much of that flattening with a couple of exceptions are fuel costs have in fact come back a little bit and I will see where that goes over the next few months with a sky rocketed on US then they flattened out and they actually came down some so there are a few.
Things like that that you know.
At least halfway good about our employ expenses well I believe continue to go up there's a lot of inflationary pressure.
Related to the types of annual.
Merit increases that we would normally provide due to the employees and what those look like so I don't think you're going to see any significant it'll fall back and expenses anytime soon and.
The opinion that we're gonna continue to see increased pressure on those costs. The same is happening and a capital projects and so you know the price of steel is moving around the price of labor to install that steel has really increased significantly.
That's not.
The world's most optimistic forecasts, but I think that that's probably what we are facing and it certainly what we're planning for.
That's terrific. Thank you so much I really appreciate it.
Sure.
Those are all the questions we have for today, and then I'll turn it back over to Jeff householder.
Well, thanks for joining us today, I Wanna, [laughter], probably sound like a broken record, but I wanted to say this one more time you know, we really do believe that we're well positioned and we're very confident that we can continue to deliver strong earnings growth in 2022 and beyond.
And this season of Thanksgiving well, that's a little bit early I guess [laughter] in November , but I want to express my.
My gratitude and the company of gratitude to all of our stakeholders, including those of you on the phone today.
We appreciate your time and we appreciate your continued interest in our company.
Goodbye.
That concludes the call for today well. Thank you for your participation. Please disconnect your lines.
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