Chesapeake Utilities Corporation Q1 2023 Earnings Call

Okay.

[music].

Welcome to the Chesapeake Utilities first quarter 2023 earnings conference call. At this time, all participants have been placed on a listen only mode and the floor will be open for your questions. Following the pre.

Dentation if he would like to ask a question at that time. Please press star one on your telephone keypad.

Any point. Your question has been answered you may remove yourself from the queue by pressing star too. So others can hear your questions. Clearly we ask that you pick up your handset for best sound quality. Lastly, if you should require operator assistance. Please press star Zero I would now like to turn the call over to Alex <unk> head of Investor Relations.

Thank you and good morning, everyone. We appreciate you joining today for Chesapeake utilities first quarter earnings call.

As you saw on our press release issued yesterday the company delivered solid performance in the quarter, despite extraordinarily warmer temperatures across our operating footprint.

I speak utilities continues to execute on its growth strategy and is committed to driving long term increase shareholder value.

As shown on slide two participating with me on the call today are Jeff householder chairman of the board President and Chief Executive Officer, Beth Cooper Executive Vice President 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 under events and presentations subsection. After our prepared remarks, we will open the call up for questions.

Moving to slide three I would like to remind you that matters discussed in this conference call May include forward looking statements that involve risks and uncertainties.

Forward looking statements and projections could differ materially from our actual results.

The safe Harbor for forward looking statements section of the company's 2022 Form 10-K provides further information on the factors that could cause such statements to differ from our actual results.

Additionally, the company evaluated its performance based on non-GAAP adjusted gross margin and has provided the appropriate disclosure in accordance with the SEC's regulation G. A reconciliation of GAAP gross margin to non-GAAP . Adjusted gross margins is provided in the appendix of this presentation and our earnings release now I'll turn the call over to Jeff to provide some opening remarks on the company's first.

Quarter results, including the key drivers of our continued growth Jeff.

Thank you Alex good morning, and thank you for joining our call today I.

I'd like to start by recognizing the entire Chesapeake utilities team for their continued dedication to our mission.

I appreciative of their collective efforts as we managed well through what turned out to be a tricky quarter.

I can't stress enough, how impressed I am with the talent of our team and what we continue to accomplish together.

Jim will touch on this in a moment, but we were recently recognized as a top workplace in the United States for the third year in a row.

This award is one we're very proud of because it highlights the great work of our team and our special culture, which we remain focused on preserving as we continue to grow.

This recognition of three years in a row is not something the team takes lightly.

Now onto our results beginning on slide four in the first quarter. The company continued to realize incremental contributions from our expansion initiatives organic growth and regulatory actions. However in the first quarter. We also experienced record mild temperatures, which reduced customer volumes and partially offset.

The meaningful contributions from growth and cost management.

I will touch on this in a moment, but temperatures relative to normal weather or 20% warmer or greater and all of our service territories.

From an earnings perspective weather had a 29 per share negative impact.

But even with the exceptionally warm weather adjusted gross margin increased by $3 $8 million over last year's first quarter.

The Chesapeake team continues to execute our long term growth plan, we achieved first quarter earnings that overcame much of the weather impact on our volumetric sales. This performance reflects the diverse nature of our operations, our ability to manage cost and regulatory actions to establish weather normalization mechanisms and <unk>.

<unk> fixed charges in our regulated distribution systems we.

We will continue to drive growth and manage costs throughout the year to work back toward our internal earnings targets, but the weather has certainly created a gap.

Despite this challenge we remain committed to our long standing track record of delivering year over year EPS growth.

During the quarter, we invested approximately $42 million in capital for system expansion organic customer growth and technology improvements with this level of investment in the larger projects planned over the balance of the year, we reiterate our 2023 capital expenditure guidance range of 200 million.

$230 million.

On the regulatory front, we completed our Florida natural gas base rate case, with a fair and favorable outcome, Jim will provide more details on this in a few minutes, but I'd like to extend a special. Thank you to everyone who worked on the rate case. It was a significant effort and in fact, the largest rate case.

The company's history.

In March we issued $80 million and competitively priced long term debt, which reduced our exposure to the continued rising interest rate environment, and finally yesterday, the board announced a 10, 3% increase to our annualized dividend rate.

This is mark the 20th year in a row with increased dividends or dividend strategy remains focused on aligning our earnings growth with dividend growth and working towards a 45% payout ratio.

On slide five we wanted to provide some additional color on whether given us significant impact on volumes for the quarter.

As you can see each of our primary service territories experienced temperatures that were notably higher not just compared to last year, but were unseasonably warmer compared to the last 10 years.

Things into perspective, we looked at historical weather data over the last 30 years and we found the January and February where some of the warmest month on record both in Delmarva and Ohio.

In our Delmarva, and Ohio service areas, where heat load drives much of our consumption for the year heating degree days were 19% lower compared to the prior year's first quarter and more than 20% lower compared to normal levels.

And while we're not as dependent on heat load in Florida heating degree days were down by over 30% in the year over year and 10 year normal comparisons.

Again, the team did an excellent job to overcome significantly warmer temperature impacts by remaining focused on our growth initiatives and cost mitigation efforts.

These efforts will continue through the remainder of the year, but it is important to note that this margin one entirely be reclaimed without significantly colder temperatures later in the year.

Turning to slide six let me provide some updates on our five platforms for growth.

We continue to experience organic growth in our natural gas distribution businesses that far outpaces the national average.

Across both of our Delmarva and Florida service territories customers continued to select natural gas as their preferred energy choice for the quarter. We saw a five 8% increase for our Delmarva service territories.

Four 4% increase in Florida. This continues to highlight the attractive growth opportunities in our distribution system service territories.

As we've discussed the customer growth in our distribution businesses continues to drive the need for additional investment in our transmission systems I'll provide additional detail on the next slide but we were pleased to announce the completion of our beach side expansion project in the first quarter. This project was completed early and under.

Budget.

We also continue to make headway with other projects, including two peninsula pipeline expansions the wildlife project in Florida, and we've added the PPC like Wells pipeline project also on Florida to our major projects table this quarter.

These projects and others will deliver significant margin growth.

Our propane business is more weather sensitive than our regulated natural gas distribution and transmission systems.

While the warmer temperatures had a significant impact on our propane business. The sharp team did an excellent job managing margins and service fees, especially in our Northern service territories. We also continued to expand sharp's pricing programs to customers added through our recent acquisitions, adding margin and delivering greater returns.

A highly desirable energy source for our customers, where natural gas is not available propane.

To drive strong performance for the company and remains a core component of our growth strategy.

Borrowing gas services continues to drive solid growth for the company as well generating an incremental $1 $2 million and adjusted gross margin during the quarter.

As our virtual pipeline solution Marlin serves our customers with gas transportation services that solve unique and complex challenges as an example, and one we highlighted in our last call borrowing is currently providing interim service for clean energy delivering compressed natural gas or they are fueling station in Florida.

We continue to seek opportunities like these to leverage the integration of our businesses and play a more meaningful role in the nation's energy transition.

Finally, our sustainable investments platform continues to mature nicely. Following our last call. We broke ground on our first full scale renewable natural gas facility at the full circle dairy farm in Madison County, Florida construction is underway and we remain on track for that unit to go in service in mid 2020.

Four.

More recently, we participated with a group of commercial governmental and educational institutions that submitted a proposal to the U S Department of energy seeking almost $1 billion in funding support to develop a hydrogen hub in the Delaware, Philadelphia, and Southern New Jersey region.

We believe the Delaware based hub offers many opportunities for Chesapeake to expand our hydrogen capabilities and identify multiple end use applications.

We will provide additional updates as decisions are made and more details come together.

Before I turn it over to Beth on slide seven I wanted to provide some additional detail on the <unk> pipeline expansion project, which we recently completed on time and within budget.

The 11 mile pipeline connects from an existing peninsula pipeline interconnect and bring service to multiple communities in the growing Vero Beach area Peninsula pipeline invested approximately $10 5 million in the project.

And it is expected to generate additional adjusted growth gross margin of $1 $8 million in 2023, and $2 $5 million in 2024 and going forward. This project highlights the growth and opportunity we continue to see in Florida.

With that I'll turn the call over to Beth to discuss our results in more depth. Thank.

Thank you, Jeff and good morning, everyone. I'd also like to share my gratitude for the hard work and dedication of our team.

Jeff mentioned, our team did an incredible job in the face of a challenging backdrop during the quarter with uncooperative weather and an ongoing inflationary environment. Let me provide some additional details on the quarter on slide eight.

EPS for the first quarter of 2023 with $2 four sacks, again slightly below last year's results.

From a topline perspective regulated infrastructure programs and recovery mechanisms, including the Florida rate case, where the greatest contributor to our adjusted gross margin growth.

Higher fees and margins per gallon in our protein business, along with pipeline expansions organic growth and increased demand for our virtual pipeline services contributed a combined $6 $4 million in incremental adjusted gross margin.

Offsetting this growth lower consumption tied to warmer weather conditions was the main driver.

On slide nine our financial summary shows adjusted gross margin increased $3 8 million and operating income increased slightly.

Expected interest expense was notably higher in quarter, one compared to the same period last year as higher interest rates didn't fully materialize until later in 2022.

These challenges earnings per share came in just for slower than the last year's first quarter, where weather was significantly colder.

From our perspective. These results were truly a testament to our team's continued ability to navigate well through unprecedented weather, while continuing to drive our long term growth initiatives forward.

On Slide 10, let me go through our EPS walk for the quarter.

We recognized a 7% gain from the reset of deferred income taxes associated with a reduction in Pennsylvania State income tax. This is a one time nonrecurring item and should be considered as such going forward.

Our core businesses absent the weather impact delivered additional margin contributions that increased earnings by 45 per share again really nice growth in our core business. This includes higher adjusted gross margin from regulatory initiatives transmission expansion projects.

Natural gas distribution organic customer growth increased margin from our CMG RMG in LNG services, and higher fees and margins per gallon from our propane operations.

Partially offsetting this growth was reduced volumes driven primarily by warmer weather, which came in at 29 cent negative impact.

Higher operating expenses tied to our core business drove a <unk> 10 impact keep in mind had weather been less of a headwind operating expenses would have been higher as an example of this sharp would've paid additional drivers to deliver more protein I just want to be clear that had normal weather.

Occurred incremental volumes would have resulted in higher expenses. So the 29% reduction in earnings doesn't translate to a one for one increase should temperatures normalize.

Higher depreciation and amortization and property tax cost associated with new capital investments were a <unk> expense impact finally interest and other changes were a <unk> 12 negative impact compared to last year's first quarter.

Moving to the next two slides, let me touch on Chesapeake utilities operating segments.

On slide 11, Youll see adjusted gross margin for the regulated energy segment was up five 5% for the quarter.

Operating income increased eight 5% again, an impressive level given the backdrop, we have been discussing.

Turning to slide 12, adjusted gross margin for the unregulated segment was down just one 6% with warmer temperatures impacting margins more in a meaningful way for our sharp and aspire businesses. Fortunately organic growth initiatives helped counteract the weather impact.

For example, Marlin drove nice margin growth with increased demand for their virtual pipeline solutions. Despite.

Despite all the positive margin drivers overall operating income for the segment was down 14%.

On slide 13, I'll provide some highlights of our strong balance sheet position.

In March we issued the previously announced $80 million of 15 year senior notes to Prudential with a 10 year average life and at a coupon of 543%. This is the primary driver that reduced our short term debt to $94 million mitigating our exposure.

Her to continued rising interest rates, we will continue to take appropriate steps to manage interest expense.

At the end of the quarter total capitalization represented approximately $163 billion. This included 52, 7% stockholders equity, which is now $859 million and within our target capital range of 43% of long term debt.

At an average fixed rate of 389% and only 7% short term debt given the long term debt financing I just mentioned.

Moving to slide 14, we highlight our major projects, including the pipeline expansion PNG, LNG and R&D transportation projects and strategic regulatory initiatives, which will drive our adjusted gross margin growth. This year and next as 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.

We continue to be encouraged with the opportunities that are presented by our business development team and look forward to announcing other projects in the future combined these initiatives are expected to add more than $21 million in 2023, and approximately $7 $2 million and additional.

Margin for 2024, as new projects or initiatives are announced are finalized we will add them to this table as you can see we are placeholders to add the incremental margin estimates for the Lake Wales expansion and the latest Florida infrastructure program, which we have now labeled.

As guard.

Moving to slide 15, we highlight our key pipeline expansion project and the increased level of activity in 2023 with an investment of approximately $65 million. These projects are expected to contribute more than $10 million and adjusted gross margin per year.

Year once completed.

With that I would like to finish by reiterating my opening comments about the effort of our team to remain focused on our organizational imperatives. During the first quarter, which includes safety team service improve and grow while the weather prevented us from delivering EPS growth.

<unk> to the first quarter of last year, we remain committed to achieving our long running track record of year over year earnings per share growth and delivering industry leading performance.

The diversity of our operations strong organic growth our pipeline of investment growth opportunities regulatory innovate innovation and our talented workforce will continue to drive long term earnings performance for our stakeholders I will now pass the call to Jim Moriarty to discuss our <unk>.

Inventory and company culture updates Jim.

Thank you Beth and good morning.

It's good to be with you all.

On slide 16, we wanted to take a moment to recognize John Shen Titus Cal Morgan and Dianna Morgan, who retired from our board yesterday.

Collectively they have helped to lead the company's strategic direction and strong corporate governance.

Their contributions to Chesapeake growth and success are measurable.

We thank them for their long standing dedication to our mission, which has enabled us to deliver peer leading shareholder value over the long term.

I know John Callen, Diana are listening and so on behalf of our entire organization and many friends and colleagues. Thank you.

The new unit into our existing business. So I think we'll we'll continue to be active we'll see what.

As you well know there are a number of expense items in our businesses that can move around from a timing perspective, various maintenance items or other other types of expenses Beth mentioned some of the hirings.

Other.

We haven't done as much of it by any any stretch in Florida. We have a couple of systems that we're planning to convert over time, but most of what we see in Florida.