Chesapeake Utilities : 2021 Q1 Earnings Conference Call Transcript

2021 First Quarter Results

Earnings Call Transcript

May 5, 2021

2021 First Quarter Results Earnings Call

Company Participants

• Beth W. Cooper, Executive Vice President, Chief Financial Officer & Assistant Secretary
• Jeffry M. Householder, President & Chief Executive Officer
• James F. Moriarty, Executive Vice President, General Counsel, Corporate Secretary and Chief Policy and Risk Officer

Other Participants

• Tate Sullivan
• Brian Russo
• Michael Gaugler

Operator:	Greetings, and welcome to the Chesapeake Utilities Corporation's first quarter results conference call.
	During the presentation, all participants will be in a listen-only mode. Afterwards, we will conduct a
	question-and-answer session. At that time if you have a question, please press the 1 followed by the 4
	on the telephone. If at any time during the conference, you need to reach an operator, please press star
	0. As a reminder, this conference is being recorded Wednesday, May 5, 2021. I would now like to turn
	the conference over to Beth Cooper, Executive Vice President and Chief Financial Officer. Please go
	ahead.
Beth Cooper:	Thank you, and good afternoon, everyone. We appreciate you joining us today to review our first quarter
	2021 results. We announced our financial results for the quarter yesterday. As you saw, our strong
	financial results indicate we continue growing and operating effectively, serving our customers, identifying
	and finalizing new investment projects and keeping our employees as safe as possible.
	As shown on slide 2, participating with me on the call today are Jeff Householder, President and Chief
	Executive Officer and Jim Moriarty, Executive Vice President, General Counsel, Corporate Secretary and
	Chief Policy and Risk Officer. We also have other members of our management team joining us virtually.
	Today's presentation can be accessed on our web site under the Investors section and "Events and
	Webcasts" sub-section. After our prepared remarks, we will open the call up for questions.
	Moving to Slide 3, 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 2020 Annual Report on Form 10-K provides further information on
	the factors that could cause such statements to differ from our actual results.
	Now I'll turn the call over to Jeff to provide opening remarks on the Company's first quarter 2021
	performance and the key contributing drivers to our results. Jeff?
Jeff Householder:	Thank you, Beth. Good afternoon and thank you all for joining our call today.
	We had a very strong start to 2021 with continued profitable growth initiatives across our business units.
	As shown on slide 4, earnings per share from continuing operations was $1.96, an increase of $0.19 or
	10.7% compared to our first quarter 2020 earnings per share of $1.77. Gross margin increased more
	than $17 million over the first quarter of 2020.
	Our results were driven by growth across the Company. We also experienced increased consumer
	consumption resulting from weather that more closely resembled normal temperatures. Some of the key
	margin drivers included pipeline expansion projects, the Hurricane Michael regulatory settlement, organic
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2021 First Quarter Results

Earnings Call Transcript

May 5, 2021

natural gas distribution customer growth, contributions from Elkton Gas and Western Natural Gas, increased retail propane margins per gallon and increased business at Marlin Gas Services.

As our General Counsel, Jim Moriarty, is fond of saying, "We are the beneficiaries of geography". We are fortunate to provide energy delivery services to communities that are experiencing significant growth. That growth has resulted in significant residential and small commercial construction activity. We are also fortunate to serve communities that appreciate and value the energy we deliver. Jim will highlight a couple of recent successful legislative initiatives that support continued expansion of our systems in Florida. In all of our service areas, the demand for natural gas, propane and electricity has never been higher. We continue to see customer additions at a rate that is more than twice the national average. In the past year, our utility distribution customer count increased by 7.4%. Growth opportunities to serve new customers was the primary driver of our capital investment in the first quarter. We have projected capital investment for 2021 at approximately $200M and we are on track to achieve that target. Our first quarter capital investment totaled just under $49 million.

Earlier today, our Board of Directors approved an annualized dividend payment of $1.92 per share, a $0.16 per share or 9.1% dividend increase. The $0.16 per share increase in the annualized dividend closely aligns our five-year earnings growth rate of 9.4% through December 31, 2020, with our five-year dividend growth rate of 9.5%, as shown on Slide 5, including this most recent increase. The Board's decision to raise the dividend reflects the Company's on-going commitment to dividend growth that is supported by earnings growth, while maintaining a payout ratio that enables a healthy reinvestment of earnings for growth and ensures liquidity to fund operations. Chesapeake Utilities has paid dividends to its shareholders without interruption for 60 years and has increased its annualized dividend every year since 2004.

I'll add more about our continued growth initiatives and capital investment projects across our business units in just a few minutes, but let me turn the call back over to Beth for further discussion of our first quarter results.

Beth Cooper: Thanks, Jeff. Turning to slide 6, net income from continuing operations for the quarter was $34.5 million compared to $29.0 million for the same quarter of last year. This represents a growth in net income of $5.5 million, or approximately 19%. As I am sure you all recall, during the fourth quarter of 2019, we exited the natural gas marketing business and recognized gains on the sales associated with that exit. There were some minor lingering impacts associated with the sales of this business both in 2020 and 2021. As a result, I will focus our discussion today largely on continuing operations. EPS from continuing operations for the first quarter compared to the first quarter last year, grew by $0.19 to $1.96 per share from $1.77, representing growth of just under 11%. Growth initiatives and customer consumption drove the growth rate in net income by 19% while the EPS growth rate of 11% is a result of the significant amount of equity we successfully issued in the third and fourth quarters of 2020 via the ATM and our other various stock plans.

Higher income was the result of increased performance across the enterprise, as Jeff mentioned earlier, coupled with continued expense management, business efficiencies and standardization and collaboration across the Company.

Gross margin increased 17.1% compared to the first quarter last year while operating income

grew because of these impacts by 22.5%. As Slide 7 also highlights, the growth in operating income was fairly split between the two segments, regulated energy and unregulated energy, for the quarter. The key drivers of gross margin and expenses for quarter one compared to quarter one of last year are highlighted on Slide 8. Gross margin, net of specific expense attributes, grew $0.65 per share after tax.

Higher earnings for the quarter reflect increased earnings across the business from first, customer consumption, as Jeff mentioned primarily weather focused, was $0.26 per share. Pipeline expansion projects was another $0.11 per share. Higher retail propane margins per gallon increased margin by $0.06 per share. Organic growth in our natural gas distribution operations added $0.04 per share.

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Contributions from recent acquisitions, including Elkton Gas and Western Natural Gas, added $0.04 per share. The Hurricane Michael regulatory settlement also added $0.04 per share after associated depreciation and amortization of associated regulatory assets. And margin from Marlin increased by $0.03 per share. Lastly from our Florida GRIP Reliability and Infrastructure Program, we added

$0.02 per share.

These increases were offset by the absence of property sales that occurred in the first quarter of last year, which represented $0.14 per share and the increased shares we added that I just referred

to another $0.12 per share given our opportunistic equity issuances over the past 12 months to take advantage of our strong equity market position. Finally depreciation, payroll and facilities expenses basically drove our earnings per share down by $0.20 per share because of the growth in our business.

I would like to spend a few minutes highlighting our capital spending thus far in 2021. As you can see though first on Slide 9, the forecast for 2021 capital expenditures remains at our previously-announced guidance of $175 million to $200 million. Again, the investment is concentrated with approximately 80% budgeted in new regulated energy assets. Year-to-date, as Jeff mentioned, we've invested just under $49 million in new capital investments.

So, what are some of the key 2021 projects? They include our Delmarva Natural Gas Distribution expansion into Somerset County, Eastern Shore's Del-Mar Energy Pathway project, which is well under way, Florida's Western Palm Beach County Florida expansion, our Florida GRIP program and other natural gas distribution and transmission system projects.

In addition we have expenditures for natural gas and electric system infrastructure improvement activities, Marlin Gas Services, expansion of their CNG transport and also their expansion into RNG and LNG and technology systems in support of our business transformation and other strategic initiatives and investments.

To support the growth we have experienced and ensure we have the capital capacity to fuel our future growth, we maintain a strong balance sheet with access to sufficient competitively-priced capital. As you can see on Slide 10, as of the end of March total capitalization was $1.4 billion, comprised

of approximately 52% stockholders' equity, which is now $726 million. We had 37% in long-term debt at an average fixed rate of 3.62% and $156 million in short-term debt under our revolver at an average interest rate of 1.2%.

Our recent equity issuance moved us further along within our target equity to total capitalization range. We continue to utilize our traditional equity plans this year to issue stock and increase equity beyond our earnings retained and reinvested in the business. Chesapeake Utilities' current market capitalization is approximately $2 billion.

I would now like to turn the call back to Jeff to talk about our future prospects for growth and our recent extension of guidance and conviction to investment, earnings and dividend growth. Jeff?

Jeff Householder: Thanks, Beth. As Beth noted, our capital capacity and the strength of our balance sheet continues to support growth. We're very comfortable that our previously updated capital guidance remains on target. Slide 11 is a reminder from earlier earnings calls of the key strategic initiatives that focus our project development and transaction interest. As I noted a moment ago, we continue to experience significant demand for the energy services provided by our existing business units.

Let me highlight a few of our major initiatives on Slide 12. A significant portion of projected capital investment is devoted to expanding our existing core businesses. We also have several relatively small- scale transmission pipeline projects under development that will potentially increase investment in this area. Our propane business continues to grow and we will keep looking for acquisition opportunities in the Mid-Atlantic and Southeast. And we see growth at Marlin Gas Services and in the rapidly developing renewable natural gas market that I'll discuss in greater detail in a few moments.

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2021 First Quarter Results

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Our latest margin table showing key projects and initiatives is shown on Slide 13, including pipeline expansion, CNG and RNG transportation, acquisitions and regulatory initiatives.

Key projects are expected to generate approximately $60 million and $67 million in gross margin for the years 2021 and 2022, respectively. Pipeline expansions are expected to generate $6.7 million in incremental margin in 2021.The Hurricane Michael proceeding settlement will again generate $11 million in gross margin in 2021. It remains at that level in 2022.

We're particularly pleased with the full integration of margin estimates of $5.8 million and $6.1 million for 2021 and 2022, respectively, from the acquisitions of Elkton Gas and Western Natural Gas. In total, the incremental margin growth from these key projects and initiatives represents approximately $14.1 million for 2021 and $7.5 million for 2022.

As a reminder, we only include definitive projects in this table once they reach maturity and do not include organic margin growth from our traditional distribution customer additions, rate adjustments in our unregulated businesses, et cetera.

Accordingly the RNG transportation margin, for example, will be adjusted as new projects are definitive and announced. I realize that we've included a $1 million placeholder for RNG transportation on the slide for a couple of quarters and have not yet disclosed the extent of anticipated RNG production- related investments.These projects take considerable time to develop, especially related to securing full project financing. That reminds me of the early days of solar and wind project financing.

However, there is positive movement on RNG project financing as interest increases among both financial and strategic participants. And we're hopeful that more details of the projects we're involved in can be made public over the next several weeks.

As a final note, the Auburndale Pipeline, $679,000, and Boulden acquisition $3.9 million, became fully in service in 2020. So these ongoing mature projects have been removed from this table.

Over the past several quarters, we've outlined a number of renewable natural gas initiatives. To begin, Slide 14 outlines the types of projects and ownership structures that we are actively assessing. Let me provide an update on our progress for several of these initiatives.

We continue to work with CleanBay Renewables on two utility scale poultry waste, RNG and organic fertilizer production facilities on the Delmarva Peninsula. We previously described our existing agreement with CleanBay to own the gas processing equipment at the Westover Maryland facility with an option to convert the equipment investment to equity of its old plant.

Last month our Board Investment Committee authorized management to negotiate economic and governance terms with CleanBay with Chesapeake's equity participation in the project. We hope to finalize an agreement with CleanBay and other equity providers over the coming weeks and ensure that the anticipated project in-service date of Q4 2023 remains viable.

In addition to the Westover RNG facility, we're in discussions with CleanBay and other potential investors on a second Delmarva RNG facility, which is under development in Sussex County, Delaware. Similar to the Westover plant, the Sussex facility will produce RNG at a utility scale along with organic fertilizer. The property for the Sussex plant has been acquired and most land use permits have been approved. Upon completion, the Westover and Sussex plants will be among the largest RNG facilities in the country.

As you may recall, we have several additional investments either under contract or in final negotiations associated with the Westover plant. The Marlin Gas transport agreement is in place, an interconnect

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2021 First Quarter Results

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agreement with our Eastern Shore Natural Gas transmission pipeline has been finalized and the interconnect is scheduled for construction in conjunction with the in-service date of the Westover plant.

Our Delmarva distribution business has finalized an agreement for off-take of the blue gas RNG from Westover to purchase non-fracked,non-fossil RNG molecules for distributions to our - distribution, excuse me, to our customers.

In addition to purchasing RNG from Westover's production, our Delmarva distribution operations will provide conventional gas supply service to Westover to support drying the organic fertilizer produced by the plant. It's a lot of fertilizer and a lot of natural gas. Westover will likely become our largest Maryland gas distribution customer.

The Eastern Shore Natural Gas Del-Mar Energy Pathway Expansion Project currently under construction and our related distribution system expansion will bring our pipelines to within 1.5 mile of the Westover plant and we will extend the distribution system to provide service. We anticipate providing similar Marlin and conventional gas distribution services to the CleanBay Sussex site.

Chesapeake is exploring opportunities to develop renewable electric micro-grids at both the Westover and Sussex RNG sites. We're working with a third party to potentially develop solar photovoltaic generation systems to serve the electric needs of the RNG facilities. Property suitable for solar PV installation is owned respectively by the third-party in close proximity to the Westover site and similarly by Chesapeake close to the Sussex site.

Chesapeake has engaged Southern Company Energy Services and Southern's PowerSecure Company to assist in preliminary design and engineering of the solar PV systems, battery storage, protection protocols for the plants and related facilities to support in renewable electric micro-grid at each facility.

On Delmarva, we continue to work with the Bioenergy DevCo Company as they also move forward on development of a poultry waste RNG facility in Sussex County, Delaware. The County Commission has recently approved the Bioenergy DevCo conditional land use permit.

Chesapeake will own and operate the gas processing equipment at the plant site. We've ordered the processor from (AirLockie), retained an EPC contractor and are in the process of finalizing design on various other components. Our investment in the project is estimated at approximately $12 million, with in-service anticipated in late 2022.

Construction of our Savannah public compressed natural gas vehicle fueling and Marlin staging facility continues to proceed on schedule for an October 2021 in-service. The station will be the largest CNG fueling facility on the East Coast with capacity to fuel approximately 185 semi-trucks per day.

We've recently held a meeting with representatives of several Georgia-based trucking firms where interest in CNG was high and interest in the potential of providing renewable CNG at the facility was even higher. We're working with several RNG marketers along with exploring opportunities to develop regional CNG production to serve the Savannah station.

Speaking of Marlin, we're just wrapping up an eight month deployment to serve the City of Miami transit bus fleet. At peak we were fueling 160 CNG buses a day before the permanent pipeline and CNG fueling facilities were put in place. Marlin CNG Service enabled early delivery of the buses and an earlier than anticipated significant reduction in diesel emissions.

Marlin has also taken delivery of its new ANSI four stage compressor unit. The compressor enables Marlin to offer a methane capture service to pipelines and utilities that need to remove a pipeline segment from service to provide maintenance or system integrity work.

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