Q2 2019 Earnings Call
At this time all night, you're welcome everyone to the Chesapeake utilities second for Church <unk> earnings Conference call.
Paul I should've been placed on mute to prevent any background noise.
After the speakers remarks, there will be a question and answer session.
If you like to ask a question. During this time seem to press Star then the number one on your telephone keypad and if you would like to read all your question first about key thank you.
I would know like to turn the call over to Mary Beth Cooper you May begin your conference.
Joining me on the phone today are Jeff householder president and CEO and Jim Moriarty Executive Vice President General Counsel, and Chief risk and compliance officer, we have other members of the management team and a rental.
Today's call is being held at our energy line complex in Dover Delaware.
Our presentation will focus on our quarterly and year to date results as well as opportunities looking forward.
Turning to slide two I know most of you are familiar with this slide but it includes our normal disclosures related to forward looking statements concerning the companys future performance.
Again, we refer you to our 2018 annual report for a list of factors that could cause our results to differ from that forward looking information. We've included in today's presentation.
Today's discussion will also include certain non-GAAP measures such as gross margin and adjusted EPS I will now turn the call over to Jeff.
Good morning, and thanks for joining us good to speak with you today to deliver the company's second quarter results.
I'm happy to report that just speak utility incentives has continued its long history generating strong financial and operational results in the second quarter.
Earnings per share of course, 50 cents representing growth of 8.7% compared to last year in terms of adjusted earnings per share.
And as always we continue to.
I'll be very thankful for dedicated employee group continued to identify and execute a combination of strategic growth and regulatory initiatives ill talk about several of those today.
Or what are you going to your second quarter results reflect a positive impact on natural gas expansions in both Delmarva and Florida.
We also saw lower operating expenses are about 14 cents a share.
Oh, so another nine cents reduction in earnings per share to some significantly warmer weather, we experienced in Delmarva and Ohio in the spring.
Oh, you can see I think on the chart on page three of those were weather differences compared to normal and through last year and they're fairly significant.
Turning to slide four.
Just the highlights from the first half and 49 gene.
Oh, we have a long history as you all know when this company of generating shareholder return.
That or above at least 15%.
We've continued that.
On the first half of 29 gene with a 17.7% growth through 2018, adjusted the P. House, we've also increased the dividend by 9.5%.
In may of last year, which represents over a five year dividend growth of 8.4%.
The growth across the businesses are really is a reflection of the margin that we've driven through the projects that we've been able to execute on new pipeline projects in service about $8.1 million natural gas distribution growth, including our grip pipeline replacement projects in Florida, and a variety of conversions about 3.4 million.
Oh and happy news Whats, the Maryland acquisition, we've generated about 3.4 million.
In margin today, what Marlin.
The other thing Weve been quite successful doing as I mentioned earlier is pursuing a variety of regulatory initiatives and one of those.
We're very happy with is the ability to retain a portion of them are PC jewelry tax savings in certain of our Florida natural gas distribution operations that has added about 2.3 million in margin year to date.
To our results.
The other thing I think that's not worth noting is this week, we filed with the Florida Public Service Commission for recovery of the cost incurred associated with Hurricane Michael.
Let's go to forms filing there's like a piece of the recoveries that will be a permanent rate adjustments along with the remaining piece in our scan recovery leader.
Turning over to slide five just to continue some of the earnings summary.
For the first half of my team as I mentioned earlier, 17.7% growth over prior year and adjusted earnings per share Oh, you can see the again the weather variances Oh, yeah, we have a.
Experienced a fairly significant decrease in customer consumption due to weather and Delmarva in Ohio and that actually went over the course of the first two quarters reduced earnings by about 19 cents.
Turning to slide six.
Earnings per share growth.
Average, 7.9% to 9.6% for the past five and 10 years ended December 31st.
Oh.
We believe that we're well positioned and 2019 to continue that trend we have provided some our earnings growth.
Guidance too do you guys over the last couple of years basically takes our investment capabilities from a 2018 to 2022 up to almost a billion dollars and we are providing guidance on our dps growth at 7.75% to 9.5% you see those numbers are reflected in the forecast of our 2022 <unk> earnings per share numbers on the chart.
I think we are in good shape to achieve loans, our forecast numbers, we have a number of expansion projects underway, we see significant organic growth occurring on literally every one of our operating areas and we've been very successful as I indicated earlier.
Our regulatory initiatives that have continued to add a significant margin for the company.
And we'll continue to drive for efficiency savings.
You know we indicated about a 14 cents per share cost savings will see sort of that continue over the next few years, there's not a substantial effort underway to simply slash cost here, but we are looking at a variety of ways to improve efficiencies and to look for synergies as we.
We continue to find operational oh opportunities between our business units.
On page seven.
[noise]. Please I'm turning this back to you, but yes, thanks, Jeff and as mentioned earlier, we recorded GAAP earnings per share of 50 cents for the second quarter and the key drivers of our gross margin gross are identified on slide seven and agile see added about 22 cents in earnings per share.
Margin increases and natural gas transmission service expansion projects, coupled with the associated natural gas distribution expansions in Delmarva, and Florida added $3.7 million in pre tax income or about 16 cents per share as shown on the slide.
Natural gas distribution customer growth and sandpiper conversions added 1.1 million and gross margin were five cents per share.
The unregulated energy segment gross margin was positively impacted by 1.1 million from Marlin gas services and the old propane assets that we acquired late in 2018.
Lower operating expenses related to outside services facilities costs and payroll related expenses did offset the warmer weather experienced during the quarter.
The higher level of depreciation and amortization and taxes are reflective of our investment in continuing to expand our footprint in our service territory.
Interest expense related to our growth and fully funding her team Michael restoration costs increased $1.8 million.
I'm going to talk about that further on the next slide.
Before moving to the next slide, though I did want to comment about two key factors that negatively impacted the quarter, even though our results were still very strong.
First to elaborate on a point that Jeff mentioned earlier the weather in the second quarter was significantly warmer compared to both the second quarter of 2018, and a 10 year average for the quarter as a result, our earnings potential was 15% lower or nine cents per share.
Secondly, half down year over year reported result.
Those negatively impacted EPS by nine cents per share we are working with a passcode team to implement strategies that restore profitability as quickly as possible.
Turning to slide eight we thought it would be beneficial to shows a breakdown of the year to date increase of 3.8 million interest expense.
Average borrowing with year to date, approximately $200 million compared to the first half of last year as we financed our record capital investment program with both long term debt and short term debt.
Short term borrowing rates were 75 basis points higher than last year as LIBOR rates moved up beginning in the second half of 2018 and continued higher for the first half of 2019.
Last year's Hurricane Michael devastated after use electric distribution operation and the Florida Panhandle are tremendous restoration efforts also required the issuance of $60 million in intermediates that due in early twenties wanting the loan rates are attractive at LIBOR, plus 75 basis points.
Please note the interest costs have not been recovered yet and are included in the filing we made on Wednesday with the Florida, Yes see year to date, a portion of the interest costs had been expensed and reduced EPS by four cents per share.
The $100 million 20, or 3.53% private placement notes placed with New York Life were funded in May and November 2018, and accordingly, we're fully outstanding in the first half of 2019.
Slide nine shows our capital structure for the last four fiscal years and as of June Thirtyth 2019.
At June Thirtyth, our equity to total capitalization ratio represented 45.5%.
Excluding hurricane Michael which was not in our initial capital financing plan equity to total capitalization represented 48% at the end of June .
On this coming Monday, we are funding a $100 million of 3.98% private placement notes due 2039 that we previously circle last August with Prudential.
We expect to finance the $60 million intermediate term notes due in 20, Twond, which are included today in the current portion of long term debt by the end of this year to match the liability maturities with the newly replaced asset life.
We are reviewing our capital structure and financing plans for debt and equity in conjunction with the timing of our capital spending an in service date for growth projects, we expect to migrate back closer to our target structure as we move through the latter part of this year and into 21.
In May the board of directors voted to increase our 2019 annualized dividend, 9.5% or 14 cents per share from $1.48 just $1.62 as Sean shown on slide 10.
The dividend increase the lines are five your earnings growth rate on a GAAP basis of 8.8% with our five year dividend growth rate of 8.4%.
Chesapeake has paid dividends for 58 consecutive years and run the dividend in each of the past 15.
Our goal is to provide above average dividend growth and shareholder return driven by our disciplined approach to investment opportunities and the resulting growth in earnings per share.
Our lower dividend payout ratio of 47% is indicative of reinvesting retained earnings given our investment process, while providing flexibility to continue future dividend growth above the industry.
Slide 11 reflects our updated capital expenditure forecast for 2019 of approximately a $178 million, including 77% for projects in our regulated energy segment and associated with natural gas distribution transmission and electric distribution projects.
The forecast increased $9 million from our budget, primarily for growth projects associated with Marlin gas services.
Jeff will talk later about the opportunities we see for Marlin in the near and longer term.
As we progress through the year, we will continue to evaluate additional strategic growth opportunities that could add to our capital spending plans.
Slide 12 shows our performance quadrant, which many of you have seen in our earlier presentation.
Once again Chesapeake stands out among amidst a while a wide range of gasoline combined gas and electric pure companies with capital expenditures to total capitalization at approximately 26% and are we at 11.9%.
The three years ended March 31st 2019, given the capital investments, we have made and the returns we have achieved on those investments.
This performance continues to place us in the top right hand quadrant high investment high return.
We also show that Chesapeake performance is above the 70 fiveth percentile in each of the key finance financial metrics, we monitor for the most recent three year period compared to our traditional gas company peers.
And that doesn't include as I mentioned, the Capex the RSV F growth of 10.5% dividend growth of 8.8 and total shareholder return just about 15.
I am now going to turn the call back to Jeff to provide further details on our recently completed and future growth projects as well as regulatory initiatives.
Thank you Bill on Slide 13, we provide a snapshot of major projects and initiatives. We use the table on slide 13 to highlight the growth projects that are either underway or completed as well as their margin contribution.
For 2019, we expect margin growth of approximately $21 million, which includes 15 million achieved in the first half of this year.
2020 were currently anticipating $9 billion, an incremental gross margin as projects are completed will partially put in service next year.
And obviously, we continue to seek out new projects that would add to that margin growth trajectory of 2020 and beyond.
As you can see the table does not include new projects under development. Once those projects have been approved will include them in our forecast a margin for 2019 2024 beyond depending on the actual in service states. It's important to note that we received approval on Wednesday for another natural gas pipeline expansion in Florida, what we call. The Auburndale expansion project, which will go into service this month and that incremental margin of approximately $300000 in 2019 and annual margin of approximately 700000, who will provide more details about project at our next quarterly Furrowing Oh It was a.
A relatively.
Complicated project to put together and we are very happy to report that were able to acquire a gas station interconnect from Oh, Calpine actually on the Gulfstream pipeline and some point that's already interconnected into our distribution system, which we will operate through potential pipeline, providing us another interconnect into the central Florida gas system.
We have a project that we took quite a bit of time to develop I'm very happy to see that is actually a came to fruition.
Turning to slide 14.
Again, we are indicating a here and we're providing a list of recently completed projects that are underway and our natural gas system. Most of these projects are either on the Delmarva eastern shore natural gas or in Florida Peninsula Party bond. They represent a combined investment of $280 million with an estimated margin of 32 million going into 2020, and 38 million a thereafter.
[noise], probably worth making a fourth year, we're updating at this time, our five year plan for strategic growth initiatives capital spending and earnings targets. We've had a long history of taking a very disciplined approach to our strategic investments. That's led to above average earnings per share growth and return on equity over the past five years, we expect to continue that trend going forward.
Our initial plans as best as I indicated a call for capital spending between 750 million to a billion dollars with an earnings per share growth rate of 7.75% to 9.5% over the five year period ending 2022.
Certainly ambitious targets that they reflect our recent growth history, and we believe that they are in fact achievable.
Our strategic planning process involves our business leadership team working collaboratively to identify future growth opportunities for our business. The strategic plan serves as a roadmap for the future based on what we do best growth. There is a high priority must planning process, we have an equal attention paid to safety. The communities, we serve environmental stewardship employee development and cost efficiency.
Just a quick update now on a few of the major projects turning to slide 16.
The eastern shore natural gas Delmore energy halfway project is under development.
As you may recall from.
[noise]. Prior calls this product is intended to provide an additional 14300 backup last per day of capacity to four anchor customers with additional distribution system growth to fall as we build out the distribution system on the pension stay on Merrell area.
As shown on slide 15, the project will expand capacity into the high growth areas of Eastern Sussex County, Delaware and then extend capacity for the first time too far South County in Maryland.
Estimated gross margin for the project was $3 million and 2020 5.1 million going forward once fully on service in the second quarter of 2021.
We as you may recall from the prior quarter ever following and formal FERC, our environmental approvals are in place and we believe that we will receive a full FERC approval to proceed with this project by the third quarter of this year.
Turning to slide 16 Peninsula pipeline is constructing for transmission projects to expand the company's natural gas system in West Palm Beach, Florida.
We received formal PFC approval on a multiphase multiyear community project early this week first phase of the project was placed into service in December 2018 generated $8.2 million in point Threemillion on additional gross margin for the three and six months ended June 30.
2019, respectively.
Company expects to complete the remainder of this project and phases to growing 20, Twond and estimates and that will generate gross margin of approximately 8.7 million in 2019, and 4.6 million annually thereafter.
On slide 17.
The Callahan pipeline project, we announced in May of 2018 that potential pipeline plan to construct a $65 million jointly owned intrastate transmission pipeline.
Cecos gas transmission.
A mirror of filling up.
So its a 26 mile pipeline with an initial capacity of 148000 backup Boes per day. It is intended to serve growing demand both in our distribution systems.
In Nassau County, and then be a mirror peoples gas system, and Duvall County, Florida.
Working together, we were able to develop a project that was economically and environmentally beneficial for these growing market areas and.
We are expecting that project to our to go in service in the third quarter of 2020.
It will ultimately generate gross margin for principal pipeline of 2.3 million and 2020 and 6 million annually thereafter.
Turning to slide 18, more oil and gas services, the compressed natural gas service transportation business that we acquired in December 2018.
More delighted to report that we have achieved a performance significantly above our pro forma expectations and it's really been outstanding we've generated 3.4 million and gross margin year to date.
Given our initial success and the forecast of our business plan for the remainder of the year and we've increased our margin contribution estimates for 2019.
Total 5.4 million that we expect margin to grow beyond that to approximately 6.3 million and 2020.
There are numerous opportunities we believe to expand more on service areas that has traditionally provided service.
We also believe we can leverage the patented delivery technology and our ability to deliver compressed natural gas into a couple of different areas. One of those would be the liquefied natural gas transportation area and the second would be the renewable natural gas transportation area, we see those as a significant emerging markets.
And we're going to pursue them aggressively.
The opportunities for renewable natural gas along quite well with our commitment to the SG I'd like to turn the conversation over to Jim and he will talk a little bit about that.
Well, thank you, Jeff and good morning, everyone.
It is a pleasure to be back with you again today.
Talk about SSG.
Which has been and continues to be fully and firmly ingrained in our DNA.
For Chesapeake utilities, our approach to TSG reflects our clear strategic focus.
Our dedicated and engaged employees.
And our innovative and creative approaches that are laser focused on meeting the needs of our customers.
Slides 19, and 20 highlight just a few of our most recent TSG accomplishments.
And our focus areas of corporate governance.
The foundation of our processes and our decision making.
Our employee centric company and culture, which are the core of who we are.
And our strong and enduring connections with our customers and the communities we serve.
We have a longstanding history of BSG practices here at Chesapeake utilities.
And our internal working group has been reviewing industry practices.
And those of our peers.
And communicating with stakeholders.
To help inform our path forward to ensure we provide the most relevant information on SSG.
Every day, our employees rely on their entrepreneurial spirit.
To identify energy efficient solutions.
Generate savings for our customers.
And reduce carbon emissions in our territories.
In each of these actions, we all have an unwavering commitment to safety.
In June two of our subsidiaries ft, you and aspire energy.
Earned National Safety Achievement Awards from the AG.
Based on criteria that included professional and personal commitment and dedication to improving the operations.
And engineering sectors of the national of the natural gas industry.
Three safety accident prevention and research.
Our employees not only participate in community events. They also hold leadership roles in these important organizations.
One example of these employees as mentioned on this slide.
But there are others, many others here at our company.
Finally, our board embraces the same guiding principles.
And we are gratified to recognize there are many efforts that promote our SG practices.
We are proud of their extraordinary accomplishments.
Including those at two of our directors Diana Morgan in Cal Morgan.
Which are highlighted.
Here.
On slide 19.
Thank you for your time I will turn the floor back to Jeff for closing remarks.
Thanks, Jim just turning to slide 21.
Summarizing really our investment proposition and our commitment to continuing to deliver superior performance. We believe we've laid a very strong foundation over the last early several decades was certainly in the last several years.
It's going to.
Provide an opportunity for us to deliver significant returns to our shareholders and provide energy efficient solutions for our customers and conduct business as Jim indicated them in the right way with environmental responsibility.
Oh $1.7 billion now in assets in this company and our average return on equity for the past five years through the end of 18 was 11.9%.
A strong balance sheet.
We have a high retention rate reinvestment and we are in fact reinvesting those dollars into projects that are generating significant margins and significant returns.
We talked already about the total return on the company I think it's fairly impressive.
We have a group of very energized dedicated employees that are driving this business forward I continue to be quite enthusiastic.
And moving us down a path.
I think we're positioned well for continued growth of $178 million in capital spending forecast for this year of something in the range of 752 billion as best as indicated on several occasions targeted spending over the five year period 2018 to 2022, and we're on track for annualized EPS growth in that 7.75% to 9.95% range.
I think it's important to reemphasize that our corporate culture is based on a strong foundation of strategic focus.
Engaged employees seeking innovative and safe ways to improve our business to serve our customers in a sustainable and environmentally friendly way and certainly while keeping our eye on on the answering value to shareholders. We appreciate your interest in Chesapeake and your time this morning.
Jim and I would be happy to address any questions that you may have.
At this time I would like to remind everyone in order to ask a question.
Please press Star then the number one on your telephone keypad.
Again that is star one on your telephone keypad, and we'll pause for just a moment to comprise acuity roster.
Your first question comes from the line of Tate Sullivan from Maxim Group.
Your line is now open.
Hi, Thank you good good morning.
Good morning.
Good morning.
A couple of quick questions and maybe I'll ask some follow up to his.
And on the Capex table best that you normally put into to the other unregulated energy spending up 11 million is that fair to link that mostly to Marlin spending it about 90% of that is associated with Marlin, yes, and the initiatives that we're looking at there there's a lot of.
Small he's done there for us.
Some projects that a fire is also working on but 90% of it is related to Marlin.
Okay and is that I see on this slide is that I mean is that trailer, adding additional trailers to the fleet or is it other infrastructure related costs for Marlin as well. It is it is primarily adding to the fleet and Jeff talked about we're looking at ways that we can serve some of those other markets and the and the facilities and equipment that we'll be able to help us access and Kevin whatever is on the line with us as well as you know and joining US Kevin is there anything you would like to add about that.
I think you're exactly right. It sees is the tankers and it's more compression and more unload rig stations, but it is all equipment to pursue those new activities.
Okay, and as a follow up to that can you give us.
Can you give a specific example of a job Marlin has recently worked on.
Well there are an awful lot of jobs at models recently worked on we have a one one of the most recent ones as they may hold for 15000 customers in South Florida worldwide was hit by a contractor and it was at risk of all of those customers going out having to be shut off and turn it back on.
And so we were able to get into that into that area book tankers up and maintain the system. So that they did not lose those customers.
Great. Thank you and and Jeff on the Callahan pipeline real quickly.
How long is a project like that under development. When did you start looking at it in the approval process and teaming up with a partner on that project all day.
The actual development time, probably dates back a decade, we've been looking at opportunities to build a pipe off of the seller natural transmission pipe that comes down through Georgia, Savannah literally for 10 years or so of the original pipeline that moved gas from Duvall County through the peoples gas system going into Nassau County is obviously still active this gives us the ability to actually reverse the flow of gas come off of the solar national pipe with a significantly greater volume and pressure than we're able to get through FTC and into the People's Duvall County system. So it yeah.
The real development.
With.
With a mirror has probably gone for the last two years before we put a shovel in the ground, but we've been looking at this project for literally a decade.
Okay. Thank you. Thank you for that I'll get back in line.
Thanks.
Again, if you would like to ask a question. Please press star one on your telephone keypad.
We do have a follow up question from Tate Sullivan. Your line is now open.
Thanks, Sorry, I should <unk> and then real quickly I saw in the customer count electric customers dropped slightly in Florida, and I think that was the case the previous quarter what are the dynamics there and.
It's it's not hurricane.
Okay customer that really didnt come back on because there is no house there anymore in our northwest Division and that really is the largest.
Indicator largest issue there.
Okay. Okay, and then the approval process regulatory for Callahan is it is it much faster.
In terms of building interest to intrastate natural gas pipeline, the Florida than Delaware for instance, or is it about is it a similar regulatory backdrop.
It is different or the so called intrastate pipes that we build and Delaware are coming off of the eastern shore FERC regulated pipeline and the peninsula pipeline in Florida Intrastate transmission pipe is regulated by the commission in Florida as opposed to firm. So there is a a significant layer of regulatory.
Okay delicately put this oversight there or time requirements to go through the FERC process that you don't see in Florida for Internet Intrastate point.
Okay I ask because it just seems seems fast in terms of you getting the regulatory approval and then finishing the Callahan project too and Thats real quick on accounting for that because its a 50 50 partnership there's no. So it's the net margin as the net margin. There is no no slight south for minority interest that's right. That's correct. This is not this is we both jointly on the project. It is not that it is a joint venture in it.
Hi, Liana. So it is accounted for not unlike Kate we have another project in the past that we have done and we account for our and our investment and our margins shows up as ours in our financial statement.
Okay. Thank you and then the last from me is on can you give an update on sorry, if I missed it on the community gas system propane strategy are you still seeing higher growth in that strategy than than the rest the propane business. If you. If you can bifurcate that please.
So I mean, we are continuing to see growth in our community gas system. Both in our legacy service areas as well as we are having opportunities to evaluate projects even outside of our core service territory because of the relationship that we felt so.
When you look at our protein business today, there's really it's a multi pronged growth.
Strategy, that's happening within that business as well you have the CGS, which is continuing to grow you have the start up that were initiated several years, where you're still having organic growth. That's occurring you have us moving to new locations. We're opening we'll be opening up a startup in the in Baltimore area.
And that's being driven by our auto gas business, which is also growing both here on the peninsula and beyond into Pennsylvania and into Florida, and also on that Western shore, Maryland, So there's a lot of opportunities for growth here and even beyond.
Okay in that business I think it's worth mentioning to that's the strategy that was put in place relative to CGS being the kind of a first mover into an area, where you couldn't get natural gas.
It is working quite well I mean, we're seeing now significant opportunities down toward the beach.
In Delaware to convert a number of our existing CGS propane system over to natural gas as part of the expansions that we've had in those areas and so thats exactly what we hope we would see a dozen years ago or so when we started down this path.
And obviously that then moves us down a path to five more CGS and do the same thing over the next several years, which is exactly what our program business is doing so that's it's nice when appointment comes together and that strategy is working out pretty much perfectly at this point.
Okay has always thank you. Thank you very much for all the updates over the rest of the day.
Thanks Kate.
And there are no further questions at this time I would now like to turn back to pull over to the CEO of Chesapeake Utilities Corporation.
Mr., Jeff So you may continue.
Thank you all I want to do is tell you how much again I. Appreciate you joining us today, we had a nice quarter, we look forward to.
A good report in the third quarter and if there are no other questions.
We appreciate your time today.
Thank you. Thank you.
Thank you.
This concludes today's conference call you may now disconnect.