Q3 2023 Chesapeake Utilities Corporation Earnings Call
[music].
Okay.
Welcome to the Chesapeake utilities third quarter 2023 earnings conference call.
At this time, all participants have been placed on a listen only mode and the floor will be opened for your questions. Following the presentation.
If you would like to ask a question at that time. Please press star one on your telephone keypad.
If at any point. Your question has been answered you may remove yourself from the queue by pressing star Q.
So others can hear your questions clearly we ask that you. Please pickup your handset for best style quality.
Lastly, if you should need operator assistance, Please press star zero.
I would now like to turn the call over to Beth Cooper Executive Vice President Chief Financial Officer, Treasurer, and assistant corporate Secretary.
Please begin.
Thank you and good morning, everyone. We appreciate you joining us today for Chesapeake utilities third quarter 2023 earnings call. Thank.
As you saw in our press release issued yesterday the company delivered solid performance for the third quarter of 2023.
Performance on a year to date basis has offset consumption impacts from warmer temperatures in the first half of the year across our service territory.
These items are detailed within the financial results that we will cover in just a few minutes.
Also we continue to be very excited about the acquisition of Florida City gas that we announced in September we will be providing more details on the status of the transaction later in the call, but it's important to note that current year results have been adjusted to exclude transaction related expense.
It says that were incurred during the third quarter 2023 related to the transaction.
A reconciliation between our adjusted results and the comparable GAAP metrics can be found in our earnings release and the appendix of the earnings call presentation.
As shown on slide two participating with me on the call today are Jeff householder chairman, President and Chief Executive Officer.
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 presentation subsection. After our prepared remarks as we typically do 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.
Safe Harbor for forward looking statements section of the company's 'twenty 'twenty. Two Form 10-K provides further information on the factors that could cause such statements to differ from our actual results.
Additionally, the company evaluate its performance based on certain non-GAAP measures, including adjusted gross margin adjusted net income and adjusted earnings per share in the year.
Accompanying information includes the appropriate disclosures in accordance with the Sec's regulation G.
A reconciliation of these non-GAAP measures to the related GAAP measures have been provided in the appendix of this presentation our earnings release and our quarterly report on Form 10-Q for the third quarter.
Now I'll turn the call over to Jeff to provide some opening remarks, including on the company's third quarter results.
Dallas of the Florida City gas acquisition and the key drivers of our performance Jeff.
Thank you Beth good morning, and thank you for joining our call today.
As you saw in our earnings press release, we reported adjusted earnings per share of 69 cents and $3.63 on a quarter and year to date basis, respectively. For 2023, as we've noted warmer weather had a significant impact on our results, particularly throughout the first half of the year.
Negative really impacting us at approximately 41 cents per share for the month of September.
And we also dealt with continued pressure from a rising interest rate environment.
However, our team remains focused on executing operations growth initiatives pursuing multiple strategic regulatory filings identifying cost savings and capturing opportunities to accelerate margin.
Our team's efforts more than my burst the reduced earnings reported last quarter.
As a result, we have overcome the negative weather impact of almost $10 million and achieved accretive third quarter, our results versus 2020 to.
Our fundamental growth strategy and strong execution continued to deliver success, our adjusted gross margin increased by $7 $6 million over last year's third quarter.
<unk> also initiated several new investment projects to support the continued strong customer demand for our energy delivery services.
In addition, we continue to make significant progress on several regulatory initiatives that will deliver incremental margins and provide a foundation for substantial system investment over the coming years.
We also significantly advanced our growth strategy is our agreement to acquire Florida city gas for $923 million.
We're incredibly excited about this transaction and the opportunities for growth and that's what it will provide in the coming years.
Turning now to slide five.
Forest City gas will substantially expand our presence in Florida.
Eric utility jurisdiction and the second fastest growing state in the U S. With the acquisition, we will immediately more than double our regulated natural gas distribution business in Florida on a pro forma basis, we expect to have approximately 211000 customers combined.
As a result of this transaction, we foresee attractive growth opportunities across our five growth platforms, especially our peninsula pipeline company.
Exciting to contemplate the increased opportunities to deploy capital to improve system reliability and meet the substantive customer demand for natural gas and underserved or unserved communities in Florida.
A larger footprint in Florida also brings scale benefits and won't be able to leverage the core competencies.
Expertise and community relationships that we've built throughout the state to operate more efficiently and effectively.
We will be well positioned to generate meaningful earnings growth by applying our operational and regulatory expertise on a much broader scale and with the addition of the Florida City gas team, our consolidated operation will be even stronger.
<unk> also supports extends our EPS growth rate expectation at.
At least 8% and should drive long term dividend growth.
As a result of the expanded investment opportunities available to us both as a result of the Florida City gas acquisition and the expanded opportunities in our legacy businesses, we increased our capital investment plan by approximately 65% to one five to $1 $8 billion for the five years.
Ending 2028.
And as always we remain focused on cost management opportunities as efficient growth.
I'll touch on this guidance later in the presentation.
We have a disciplined approach to M&A and with Florida City gas, we expect to build on our track record of success. We will apply the same operating philosophy rigor and discipline that drove success with the Florida public utilities, Sandpiper energy and Elkton gas.
Acquisitions, as we integrate Florida city gas post closing.
Let me take a few minutes now to update you on our clothing progress.
As you can see on slide six we continue to expect the transaction to close before year end.
In addition teams for both Chesapeake utilities in Florida City gas have been formed.
We actively planning to ensure a seamless transition for both employees and customers are following the approval and closing of the transaction the.
We plan to be able to provide more detail on the integration progress on our year end call.
From a regulatory approval standpoint, the Hart Scott Rodino waiting period expires on November the sixth we received approval from the Delaware Public Service Commission on October 25th and from the Maryland Public Service Commission on November 1st.
Finally, while the transaction does not require approval from the Florida Public Service Commission, we've been regularly communicating with them on this transaction and our progress.
Turning now to financing as you know recent market dynamics have been to say, the least somewhat challenging as well.
We develop our.
Transaction financing plan.
Priority is to maintain a strong balance sheet, we are continuing to actively and closely evaluate the evolving market dynamics as part of our financial risk mitigation efforts.
We have significant flexibility both in terms of timing and forms of permanent capital. We remain steadfast in our long term financing plan will reflect an investment grade balance sheet for Chesapeake.
Okay.
In addition to the announced Florida City gas acquisition. There are several other notable accomplishments since our second quarter earnings call. Let me mention just a couple of these accomplishments in October we announced the worst are resilient to fully upgrade project. The approximate $80 million project consist of liquefied natural gas.
<unk> facility ambitious Bill, Maryland, and will allow eastern shore natural gas to provide critical energy delivery service during the peak winter heating season, particularly to our growing distribution utilities on the Delmarva Peninsula.
Also in October we announced our role as a project partner and the Mark to hydrogen hub project is slated to receive a share of the $7 billion and black cars and infrastructure law funding, which will accelerate the market for hydrogen in the United States.
We're proud to be a partner on this project, which will bring affordable and realistic environmentally responsible solutions to customers.
Investment opportunities coupled with the ongoing and recently completed expansions of our existing pipeline systems demonstrates the growing demand for energy delivery services in our territories.
With that I'll turn the call back to back to discuss our results for the third quarter Beth.
Thank you, Jeff before I discuss our financial results for the quarter and year to date I would just like to add a few opening comments about in Florida City gas acquisition.
As Jeff indicated we remain extremely excited about the transaction and the expected long term value creation. It affords we are proceeding on schedule on all fronts and remain positioned to achieve our 2025 guidance as previously indicated even in light.
Of the challenging and volatile financial markets and now turning to slide eight I'd like.
Well first begin and thank the collective Chesapeake team I am proud of the things that we continue to accomplish as an organization and our long standing track record working together, we continue to achieve new milestones.
Now I'll talk about some additional detail on our results for the third quarter and first nine months.
As Jeff mentioned adjusted diluted earnings per share for the third quarter of 2023 was 69 compared to 54 during the prior year.
This strong performance during the third quarter brought our year to date adjusted EPS to $3 63.
Or five that's greater than the prior year period.
The key factors shaping the growth of our adjusted gross margin included.
Contributions from new permanent base rates that went into effect for our Florida natural gas distribution business in March along with incremental contributions associated with regulated infrastructure programs.
Organic growth in our natural gas distribution businesses.
Higher fees and margins per gallon and our propane business and lastly, new pipeline expansion project.
We've talked about throughout 2023.
Our current year results reflect a margin impact of approximately 41.
Attributable to the significantly warmer weather that was experienced primarily through the first half of the year are.
Our team remains focused on our fundamental growth strategy and we're excited that we were able to overcome this impact with the growth we realized in the third quarter.
On slide nine our financial summary shows that adjusted gross margin increased seven 6 million and operating income increased one 6 million for the quarter.
Excluding transaction related expenses associated with Florida City gas, our operating income increased 29%.
Interest expense was over 13% higher during the quarter and more than 22% higher relative to the prior year period.
The effects of the ongoing rising rate environment experienced in the latter half of 2022 have also continued at full force into this year.
Again, despite these impacts adjusted EPS for the third quarter improved by 15 cents per share over last year and by five on a year to date basis.
Moving to slide 10, let me provide some additional insight on our adjusted EPS for the quarter.
Our core businesses, excluding the continued impact of weather and other changes in consumption provided additional margin contribution that increased adjusted earnings by 33 cents per share.
We previously touched on the key drivers of this growth.
Third quarter of 2022 included interest income on a federal income tax refund.
Period earnings exclude the three that impact from this item.
We added three stacked offset related to reduced volumes for the quarter.
Higher operating expenses tied to our core business drove a 6% impact as we've continued to manage costs to offset warmer temperatures.
Higher depreciation and amortization and property taxes resulted in a <unk> <unk> impact and finally increased interest expense and other changes together resulted in a 3% impact compared to the same quarter last year.
On slide 11, we provide a similar bridge related to our year to date performance.
Primary drivers are largely the same as what we just covered for the quarter. So I won't walk through all of the details, but I did want to note a few key items.
The year to date period includes a four cent decrease attributable to the effects of nonrecurring items.
The absence of the interest income related to a federal tax refund and the real estate gain from the prior year period was partially offset by the one time benefit associated with a decrease in one of our state tax rate for the current year.
As we've noted weather was much more impactful on our year to date performance that historic temperatures experienced during the first quarter along with the continuation of warmer temperatures into the second quarter have impacted our results again by about 41 per share relative to the prior year.
As you can see on this slide the weather impact cut into the core business growth contribution of $1 22 per share by approximately one third.
So with that said we were pleased with the adjusted EPS improvement of <unk> five per share compared to the prior year moving.
Moving to the next two slides, let me touch on Chesapeake utilities operating segment.
You can see on slide 12, adjusted gross margin was up eight 8% for the quarter and seven 8% year over year for our regulated energy segment.
Operating income was also higher in both periods up five 3% and nine 1%, respectively, and driven primarily by new rates associated with our Florida natural gas base rate base rate proceeding.
Organic growth in our natural gas distribution system.
Michigan pipeline expansion and incremental contributions from our various infrastructure programs.
Absent the transaction related expenses operating income was up 21, 8% and 13, 3% for the three and nine month periods.
Turning to slide 13, adjusted gross margin for the unregulated segment increased eight 4% for the quarter and reflects a 2% increase over the prior year to date period.
At the operating income level, the third quarter results were largely consistent with the prior year, but on a year to date basis. The combination of the significantly warmer temperatures experienced in the fixed operating expenses that are inherent in our unregulated businesses resulted in a decrease of $4 million compared.
<unk> to the prior year.
Given our planned capital investments over the next couple of months, including the Florida City gas acquisition I'd like to highlight some of the details on our balance sheet position at.
At the end of the period total capitalization was approximately $165 billion. This included 52, 6% stockholders equity, which is approximately $867 million.
<unk> to be within our target capital range.
43% long term debt at an average fixed rate of 389% and only seven 1% of short term debt, reflecting our long term debt financing that was executed earlier this year.
As shown on slide 14, the $80 million of 15 year senior notes that we issued in March allowed us to reduce short term borrowings considerably with a short term debt balance of approximately $120 million, we've been able to mitigate some of the continued effects of the rising interest.
Rate environment that began in 2022, we locked in the interest rate for $50 million of the short term debt balance utilizing a three year swap that we executed through September 2025.
We have additional capacity under our revolving credit agreement and shelf agreements in place with Prudential and met life. We also have the ability to issue equity under our various plans in the future.
On slide 15, we detail the key drivers of our future growth.
First we continued to deliver 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 collect natural gas as their preferred NRG choice.
In 2023, we'd had a five 6% increase for our Delmarva service territories, and a 4% increase in Florida. This illustrates again the attractiveness of the communities we serve.
The magnitude of the customer growth in our distribution businesses is also continuing to drive the need for additional investment in our transmission systems as I mentioned previously several of our pipeline projects generated margin for the first time in the third quarter.
We added the Newberry project through our major projects cable this quarter and also continue to make headway with other initiatives, including our wildlife expansion. These projects and others will deliver significant margin growth in 2023 and beyond.
And while weather was a headwind our sharp team did an excellent job managing margins and service fees, especially in our northern service territory.
Beyond the customer growth, we are securing with natural gas, we continue to add new propane community gas system, where natural gas is not yet available.
Propane remains a core component of our growth strategy as a highly desirable energy source for our customers where natural gas is not available.
As our virtual pipeline solution Marlin serves our customers with gas transportation services that solve unique and complex challenges, including clean energy, which we mentioned on our last call Marlins virtual pipeline solution is delivering compressed natural gas to their fueling station in Florida.
Yeah.
Finally, we continued to advance several sustainable investment project, we are disciplined and cautious in our approach recognizing the evolving maturation of these markets and regulatory construct we have initiated construction on our first full scale renewable natural gas.
<unk> facility at the full circle dairy farm in Madison County, Florida, and we remain on track for that unit to go into service in the first half of 'twenty 'twenty four on <unk>.
Our last earnings call. We also discussed our participation on a collective team comprised of commercial governmental and educational institutions that submitted a proposal for the mark to hydrogen hub in the Delaware, Philadelphia, and Southern New Jersey region as Jack mentioned.
<unk> previously the selection of Mark too.
Significant opportunities for us and our fellow partners to promote hydrogen development and deployment across multiple uses we are excited to work with these partners in furtherance of our mission to deliver hydrogen based solutions that support a more sustainable future.
Moving to slide 16, we highlight our major project, including a pipeline expansion.
Angie LNG in 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.
Pursuing.
We continue to be encouraged by the opportunities that are presented by our business development team and look forward to announcing other projects in the future as new projects or initiatives are announced or finalized we will add them to the table.
In closing our performance for the quarter and year to date demonstrate the perseverance and dedication of our team and that's the fundamental growth strategies that have contributed to our past success are delivering results that will also drive future long term earnings growth I'll now pass the call to <unk>.
Jim to discuss our regulatory and company culture update Jim.
Thank you Beth and good morning, it's great to be with you all.
I would like to first discuss our comprehensive rate case initiatives.
Which are significant both financially and from a business simplification standpoint.
We now have two full quarters of earnings associated with the permanent rates from our recent Florida rate case.
We expect to recognize close to $17 $2 million in 2024.
And by consolidating our four natural gas distribution entities into one we were able to simplify our business.
Building off of the process, we followed in Florida, we are preparing for upcoming Maryland.
We are required to file a rate case in early 2024 for our Maryland Division and Sandpiper energy.
We will look to build on these regulatory strategies and lessons learned as we prepare these filings.
Our infrastructure program initiatives contribute to maintaining safe and reliable service and contribute to margin growth.
As mentioned previously our guard program was approved by the Florida PSC in August 2023.
The 10 year program, which enhances the safety reliability and accessibility of portions of our natural gas distribution system is expected to contribute $205 million in capital investment.
Our storm protection plan.
Cost recovery mechanisms approved.
Approved by the Florida PSC in the fourth quarter of 2022 are expected to contribute approximately $8 million in capital investment in 2023.
And our eastern shore capital cost surcharge program continues to play a key role and rate recovery for otherwise non revenue producing projects for eastern shore.
This program allows for the recovery of capital investment costs associated with mandated highway.
Railroad relocation projects.
As well as capital costs related to compliance with certain new FINRA regulations.
Turning to Florida, one of the key reasons that the Florida City gas transaction.
So attractive is the state's constructive and supportive regulatory environment environment.
We know this stayed very well and we value our relationships with customers regulators legislators and the communities.
We look forward to expanding those opportunities to serve.
Florida City gas and Florida public utilities.
Very similar regulatory profiles.
Both completed rate cases in 2023, and both have similar infrastructure replacement programs.
Upon closing of the acquisition combined Florida natural gas distribution entities will realize a $45 million increase in 2024 margin due to the 2023 rate case settlements.
And pending approval of Florida City gas investments schedule. Later this year, we expect $410 million in capital investment over the next 10 years.
Proceeded with the guard and safe programs.
Turning to slide 18, let me mention just some of our recent recognitions.
For the fourth consecutive year two of our subsidiaries receive stars at Delaware Awards has nominated and voted on by the readers of the Delaware State News.
Were also recognized as the best energy provider and best propane company.
We're also proud to have our 2022 sustainability report.
See for awards in this year as Merck Com annual.
Report competition.
And most recently, we announced our designation as a 2023 champion of board diversity by the form of executive women, which a 100 of the top public companies in the Philadelphia region that have 30% or more women on their respective boards.
With that it was great to be with you all today I will now turn the call back to Jeff for some closing comments Jeff.
Thank you Jim.
Turning to slide 19, I'd like to reinforce my earlier comments on our capital expenditure guidance.
As you will recall, we updated and expanded our capital projections, when we announced the Florida City gas acquisition.
Five year capital expenditure guidance is projected at $1 5 billion to $1 $8 billion for the 2024 to 2028 period exclusive of the FCB transaction investment co.
The transaction investments associated with Florida city gas represent approximately $500 million.
Total guidance range.
Drivers of the increased Capex plan includes investments in a few key areas, including.
Natural gas distribution system investments to accommodate a growing Florida customer base and investments to enhance system safety and reliability to the existing guard program for FP U and safe program for Florida City gas infrastructure.
Infrastructure, including gas transmission expansions to support the utility systems growth.
Increases in capital investment for Chesapeake as legacy businesses as well as the company's technology plan that includes enhancements and billing systems, the financial or ERP system.
Any other ancillary systems.
Following the close of Forest City gas acquisition, we expect our capital investment run rate to be in the range of $300 million to $360 million annually.
We're reaffirming our 2028 diluted EPS guidance range of $7.75 to $8.
This implies an EPS growth range of approximately 8% from the 2025 EPS guidance range.
And at eight 5% annual growth rate for the 2018 through 2028 periods.
We also reaffirmed our 2025 guidance of $6 15 to $6 35 per share based upon the growth opportunities with our expanded footprint and considering the sizable integration of Florida City gas.
To conclude on slide 22, we realize we earn the trust of our shareholders because of the performance we achieved in <unk>.
Our achievements are only possible because of the expertise and dedication of our team.
We continue to begin energized by our prospects and are well positioned to deliver on our strategy.
We remain intently focused on disciplined cost management for our capital investments and ongoing operations.
The same time, we're confident in our ability to deliver growth and value by executing steady return oriented capital investments across our five growth platforms.
In short we are deeply committed to achieving the performance levels, our shareholders have come to expect.
And with that why don't we open it up for questions.
Yeah.
The floor is now open for questions. At this time, if you have a question or comment. Please press star one on your telephone keypad.
If at any point. Your question is answered you may remove yourself from the queue by pressing star Q.
Again, we ask that you. Please pickup your handset with posing your questions to provide optical south quality.
Thank you.
And our first question will come from Chris <unk> with Siebert Williams check your line is open.
Good morning, everybody.
Hmm.
That's it looks like O&M.
<unk> was pretty controlled in the third quarter and I'm looking at page four of the press release.
That a function of your efforts to mitigate the 41 cents of weather and can you give us some sense of.
The 41 sense of whether how much have you sort of directly influenced offsetting from cost or other efforts.
Sure Great question, Chris So number one I would say the first the biggest offset to the 41 cents.
They're really comes on the margin side and it comes from our ability to be able to manage margins and retail prices to customers. So of that 41 weather impact you also see a corresponding significant increase you know in our basically.
Our propane prices to customers as well as some of the fees.
That that we've been charging for our different programs, but you're absolutely right.
Heard Jeff talk quite a bit about it we as an organization continue to focus on cost management naturally given the warmer temperatures you don't have a lot of the same over time of drivers and so we're able to basically manage the part time drivers that were on Onboarding as well as you know the overtime.
Of course that would have been paid if you had a colder than normal weather season, and so we're able to do that the other thing that we've been able to do is to look across our organization and you know as we've continued to bring our operations together from a geographic perspective, and under one leader or C O.
Oh, you know we've also found efficiencies in the way, we've been able to manage the business. So.
You'll continue to see a focus on cost management, that's something we spend a lot of time on and Youll see us continue to do that at all levels of the organization.
Okay, great. Thanks.
As far as the Mark to partnership goes can you give us any sense of timing of potential investments or any kind of tangible thoughts about what that really means for you guys.
Sure, Jeff do you want to kick it off or you want me to start and you add.
Oh go ahead Beth.
Sure. So you know there's been.
We're working Chris as part of I mean, it's part of our global team across the three specific geographic areas and so you know there are some commercial applications that are being looked at you know for US specifically one of the areas that we feel we can you know we can play a big part in it.
Is on the training and certainly on the transportation fuels side of all of those particular endeavors and so we see opportunities around training associated with hydrogen given our safety town facility. We also see opportunities as we start to think about hydrogen in its utilization.
On the transportation side.
Don't have a clear timeframe in terms of when all the initiatives are layered in I know the partners are meeting.
You know what that was awarded I know theres been several meetings and we can provide more particulars on expected timing.
Okay great.
Yeah.
Finance, it's a long term financing for Florida City gas.
<unk>.
One of your peers had some issues not terming out some long term financing thats. Obviously the last couple of years has played out.
Very well.
<unk>.
Have you got any thoughts on whether you'd want to be very proactive or do you have an outlook for.
Rates that would make you want to be more patient.
Sure Great question, you know, Chris I would say you know as Jeff indicated and you know I Echo you know, we're continuing to look at the market certainly as when we when we decided to pursue this transaction we were already in an environment of significantly rising into.
Her straight and so we knew the market that we were entering into and you know our models were wrong with that in line and then secondly, right. We run sensitivities on those models and so you know we are still at the same place as Jack Jeff echoed on the call we still feel very good about this opportunity.
<unk>, we still feel good about our ability to hit our 2025.
<unk> that's out there and so youre going to see US evaluate one is the right time to.
Enter into the permanent financing, but we've had a lot of investor interest overall, just you know with the transaction and so we still feel like we're in a very great place.
Okay. Thanks for details I appreciate it.
Thank you Chris.
Austin.
Thank you.
Our next question will come from Dylan <unk> with Ladenburg Thalmann. Your line is open.
Good morning Dillon.
Good morning, how is everybody.
Yeah.
Good day.
The question I have is regarding to the regulatory approvals for Florida City gas.
One are you expecting the Hart Scott Rodino to be resolved that are closing this month and then are there any other regulatory approvals that are needed beyond the three that we mentioned.
Sure I can start that offer a Jim would you like to start it off and I can add.
Sure.
You bet and good morning Dillon.
The waiting period under Scott Hart, Scott Rodino is expected to expire.
At midnight on Monday.
As you know if we were to receive a second request.
From the <unk>.
Antitrust division that would not happen.
But we're one day away from the.
Period expiring.
And then that would be the last of the regulatory clearances, we would need.
Okay, Great and then.
Going back to the App.
Physician as well.
Describe any type of synergies that you potentially see with the transaction and any further timing of these synergies occurring.
So I'll start this off and then you know Jeff can add anything I missed there, but I would say number one bill you know Jill and first you know we as we indicated on our last call when we announced the transaction in regards to 'twenty 'twenty four I think we still feel like.
There'll be a lot more clarity that can be provided in February as part of our year end earnings call.
We've been really focused and and I think you know have had excellent results.
In regards to getting the regulatory approvals behind us. So that's really been a focus of ours.
Certainly you know the transition and the integration and beginning to plan that has been a top focus for our teams.
Given the relatively short timeframe that we're talking about and so you know certainly as part of that we're digging in and understanding summer and and actually you know gaining confirmation and affirmation about some of the you know the assumptions. We had made in regards to our model, but the specifics well there'll be more of that.
To come in February right now, we're really focused on getting the you know getting the transaction to a place where.
We can close you know in the fourth quarter you know as we had originally indicated.
Jeff I don't know if there's anything you want to add to that.
Maybe just a couple of things. So I think it was it was very clear to us the goodwill impacts of this transaction going into the deal I mean, we went in eyes wide open.
We understood the need to identify synergies.
So he gas we also understood the need to think more broadly than that across our larger enterprise.
And we understood the opportunities I think to accelerate certain capital projects and generate margins quicker than we might otherwise have anticipated.
Also the regulatory actions that would likely be.
Required or or desired over the next couple of years to overcome some of the goodwill impact we also as Beth indicated.
Modeled several different scenarios and tested a number of different sensitivities.
We anticipate we did not we.
We were hoping that the market will do what it did but we did have some anticipatory.
Analytics are looking at a potential market downturns and so I think we've gone into this understanding what we need to do and I think we're prepared to do that.
As Beth indicated the specifics of those synergies and the specifics of the incremental opportunities that we see across the organization.
Something we're getting a good handle on and we'll report in February.
Okay, great. Thank you for that and then lastly, here, where you guys year to date on your protein business and where do you think you'll end the year on propane.
Well I think you know as to Christmas first question that he asked you know the the most I would say the biggest you know downside for that business. This year has been the weather we've had strong as I also indicated strong retail margins and.
Service fees, adding customers, adding community gas system. You know, we can that business continues to do very well and even though on a year to date basis. You know weather has been a factor you know Dylan as as we've talked about several times this business even in a year like this year will gen.
<unk> had a higher than traditional utility return. So the business is doing well you know the fourth quarter will certainly be impacted by the weather.
We're having some great weather right now so we're hoping that continues and you know again the business will do well even in spite of the weather for the year.
Okay, great. Thank you very much for that but that's all for me. Thanks guys.
Thank you.
Thank you.
Our next question will come from Tate Sullivan with Maxim Group. Your line is open.
Hi, Thank you can you go into some more detail on the <unk>.
$80 million liquefied natural gas, peaking storage facility.
How long was that under plan and are there riders associated with that or most of the gross margin will come after.
Instructions finished in 2025 is that the case.
Yeah. The margin really is targeted at that are in service day periods, we've been looking at our growth on the Delmarva Peninsula.
Frankly, with some amazement for the last decade.
As we've indicated a number of times before we're seeing growth rate its customer growth rates in those distribution systems that exceed 5% per year.
We have been planning our.
Our gas supply.
Activities Accordingly, and so if you project out the next few years of growth that continues at those levels.
And even in the <unk>.
Environment, where the mortgage rates have increased significantly we're still seeing substantial customer growth there.
Rejected by the doors on that peninsula for a number of years to come and so we started looking at our.
Our peak delivery capabilities over time.
And our modeling would indicate that at some point in the future we need to do something either add additional upstream pipeline capacity or find market area supply capabilities and the LNG project turned into frankly, the most economic for ratepayers of options we have available.
And it provides that sort of winter.
Peak demand, peaking service.
It will allow us to continue to expand our distribution delivery services for a number of years to come it will fix everything forever.
It's a nice addition.
Addition to the other peaking service capabilities that we have.
The peninsula.
Don't have a baseload capacity issue there.
Is primarily intended to deal with those significant weather related winter peaks.
Okay, and then is it.
Based on the winter peaks there is no need for an LNG duplicate people education facility in Florida.
No no we actually have a significant amount of pipeline capacity for our legacy system, The Florida public utilities, we could always use more I mean, there are constraints on the pipeline systems.
Florida, especially going into South, Florida and in fact, as you May know, the Florida city gas folks of.
Activated and LNG storage facility down in Miami, South of Miami actually.
To provide peaking services for that system. So we will inherit in LNG, peaking storage facility in Miami.
We will build one in Maryland that will provide services to the customers on the Delmarva Peninsula. So there are if there are issues there and I'll just add to that one of the things Thats intriguing about the Florida city gas opportunity.
Is the pipeline transmission investment opportunity to add to that.
The interstate capacity going into South, Florida, and so we think there are significant opportunities to help them.
Increase the capacity.
Then through our Palm Beach service territory on this to you and then further south into Florida City gas is Miami service areas.
Thank you Jeff.
Thank you.
As a reminder, that is star one to ask a question.
And our next question comes from Brian Russo with Sidoti Your line is open.
Hi, good morning.
Good morning, Brian.
I'm just curious when we look to the fourth quarter of 2023, clearly you've demonstrated some very strong.
Third quarter margin and earnings growth.
Is there any reason not to expect that type of trend in the fourth quarter of 2023.
Where there are there costs that you helped to mitigate weather earlier in the year.
That will kind of reverse in the fourth quarter or just any insight there would be helpful.
You know I think Brian some of what you saw both in the.
In terms of the margin expansion within the quarter.
As well as you know we did have some some cost increases in areas like you know facilities and maintenance and also on the employee side, you know as well and I. My expectation is you would you would expect those costs to continue to.
The increases were coming into the fourth quarter.
And what I would say is you know at the same time, where we are managing our costs very tightly as Jeff and I both have talked about.
So both of those would be a factor one of the biggest drivers on the margin side. It also as you know is the impact of our natural gas rate case, and so you'll have another piece of that that will hit in the fourth quarter.
We've kind of put some estimates in our gross margin table. So you know we've tried to lay out that impact and then I think the remaining factor will be the weather and what happens you know the fourth quarter as our second half.
Fierce from a weather contribution quarter, and so whether will be warmer colder or normal will have a significant impact on our results for the year.
Okay, Great and then you mentioned <unk> you mentioned.
The residential customer growth, both at <unk> and Delmarva, how does that compare with Florida city gas as customer growth.
Well see.
Go ahead, Oh go ahead no no.
No.
[laughter] alright, one of us needs to talk.
We've seen the customer growth rates that city gas that are generally comparable to what we've experienced is that for you and we've been you know close to 4% a little over 4% typically at Florida public utilities.
I continue to mention that one of the things that Nextera dead, while they own the system and obviously, they still do cause a double the rate base and the five years that they owned it and those dollars were spent.
Hooking up new customers, primarily certainly some pipeline replacement activities, there, but but a lot of that investment went to expanding their systems and serving new customers. So we think that it falls right into what we've been doing.
At Florida public utilities for the last several years.
Okay got it and then with the understanding.
Permanent financing for Florida City gas is still pending to be determined.
Youre $118 million of short term debt balance 50.
$50 million of it is hedged rate, but it is $118 million is that kind of what we should consider normalized going going forward.
<unk>.
The FCB transaction is.
Permanent financing is complete.
Well I think you know from a financing perspective for Chesapeake legacy business.
We've put Brian out our guidance in regards to Capex for the year.
And where we've reaffirmed that for ourselves you know ignoring the BG transaction to be about you know $200 million to $230 million. So that's the biggest piece that would have an impact on our legacy business. As you think about the rest of the year and where we would land there.
Okay, Great and then just lastly, big bigger picture strategically.
Obviously F C G.
Significantly enhances your scale in Florida, and just your overall utility footprint approaching 90% did the business.
Could you just talk about outside of the LNG project, you announced and maybe some longer hydrogen opportunities.
Can you just talk more about.
Any growth projects that might be in the pipeline and then maybe just as important as is your strategy around propane you've done several.
Very accretive acquisitions over the last several years and I'm wondering.
As expansion through bolt ons still part of the strategy or are you going to focus on integrating <unk> and over the next 12 to 18 months.
Well, let's start with the propane question I think as Beth indicated a moment ago.
Still a pretty bullish on the propane business.
We see opportunities to continue to grow and expand that business.
Some of those certainly could come through relatively small scale acquisitions I don't think we're interested in the large acquisition opportunities that might come down the pike.
But trying to bolt on as you say.
Other propane opportunity in any of our existing service areas is certainly something that's appealing to us.
And so we'll continue to look to grow that because theres not a specific business mix split between nonregulated regulated that we're striving to achieve we look for opportunities that make sense and we execute on the ones that are strategically viable and that are financially attractive to us and so.
We will continue to do that for the propane operations as well as a whole are nonregulated operations.
The larger question on.
I think all the opportunities related to city gas and other.
Capital opportunities across the enterprise.
We've indicated that as part of the Florida City gas acquisition, we see an additional $500 billion in capital.
And city gas in their core operational areas and surrounding city gas I mentioned, a moment ago opportunities to deliver additional pipeline capacity into south, Florida to expand to serve underserved or unserved areas.
All of those things create we think some very real opportunities for peninsula pipeline intrastate transmission business in Florida, and so we're pretty excited about that but I would also mention that city gas has a expansion of their pipeline replacement regulated program in front of the public Service Commission and we were anticipating.
<unk>.
Resolution of that are on the water coming.
Coming out of the commission sometime later this month I believe and so that would start to come down a 200 million dollar investment path over the next 10 years $20 million a year in pipeline replacement, we have a similar program that's already.
<unk> been running at Florida public utilities at about the same investment level about $20 million a year for the next 10 years, so significant pipeline.
Replacement opportunities in Florida, consolidated about $40 million, a year going forward and so we see those kinds of industrial opportunities is obviously, a driving force in why we're interested in sort of gas in the first place.
Okay, great. Thank you very much I appreciate it.
Okay.
Thank you.
At this time there are no further questions. So I'd like to turn the floor back over to Jeff householder for any additional or closing remarks.
Well, thank you and I want to thank everyone for joining us. This morning. We appreciate your time and your continued interest in the company.
We look forward to speaking with you on our next earnings call in February.
And just a few weeks early wish everyone a happy Thanksgiving.
Goodbye.
Okay.
Thank you. This concludes today's Chesapeake Utilities' third quarter 2023 earnings conference call.
These disconnect your line at this time and have a wonderful day.
Hum.
[music].
Uh-huh.
[music].
Uh huh.