Welcome to Chesapeake Utilities Corp. Second Quarter 2020 Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded, Thursday, August 6, 2020. I would now like to turn the conference over to Beth Cooper, EVP and CFO. Please go ahead.

Thank you, and good afternoon, everyone. It is great to be with all of you today. We appreciate you joining us today to review our second quarter and year-to-date results. We trust that you and your families are doing well and staying safe. As shown on Slide 2, participating with me on the call today are Jeff Householder, President and CEO; and Jim Moriarty, Executive Vice President, General Counsel, Corporate Secretary and Chief Risk and Compliance 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 section and Events and Webcast subsection or via our IR app. After our prepared remarks, we will be happy to take your questions. Our focus for the call is to provide insight into our second quarter and year-to-date results, the expected impact of COVID-19 on our business to date, our progress on numerous key strategic initiatives and our outlook for the future. 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 2019 annual report on Form 10-K and our 2020 quarterly reports on Form 10-Q provide further information on the factors, including the risks and uncertainties related to the COVID-19 pandemic, 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 our second quarter performance, more details on our COVID-19 response and some insights again on our outlook going forward. Jeff?

Thank you, Beth. Good afternoon, and thank all of you for joining our call for the second quarter of 2020. We achieved solid second quarter results, with GAAP earnings per share of $0.66, $0.16 above our 2019 second quarter results. As you'll hear later in the call, we didn't escape the impacts of weather or COVID-19 over the first half of the year, but we did find ways to overcome those impacts. Our entire team of employees has worked hard to not only keep meeting customer expectations for reliable service, but also to keep growing our energy delivery businesses. It's remarkable and a testament to the dedication and drive of our employees, contractors and suppliers that in the face of the COVID-19 pandemic our results remain strong and we continue on target with growth projects that will contribute to future earnings. Let me spend a couple of minutes updating you on our company's COVID-19 experience, as highlighted on Slide 4. You may recall from our Q1 call, we began pandemic preparations in late February, with full activation of our response actions in March. By the end of March, we had about 500 of our 1,000 employees working remotely, with adjusted technology, procedures and controls supporting our virtual office processes. We were also working hard to secure PPE for our field personnel and refining the protocols for various field service functions, such as how we would enter an occupied building where the occupants might be sick. We did not see significant expense increases or margin reductions in March as the virus began to spread. Our first quarter results were impacted more by the lack of weather than COVID-19. That has not been the case in the second quarter. Our coronavirus-related expenses have increased, and as businesses closed during the lockdown period,…

Thanks, Jeff. Turning to Slide 7. Net income for the quarter was $11 million compared to $8.3 million for the same quarter of last year, representing 32% growth. The provisional tax rate was 16% this year as a result of the CARES Act for the quarter compared to 27% last year. Year-to-date earnings were $39.9 million compared to $37 million in 2019, representing growth of 7.9%. The CARES Act, as Jeff mentioned, allowed us to carryback net operating losses in years with higher federal income tax rate, resulting in a benefit of $1.7 million. Before the CARES Act, again, all tax NOLs generated primarily from bonus depreciation and tax versus book timing differences were required to be carried forward. In terms of continuing operations, our EPS for the quarter grew by $0.10 per share, while our year-to-date EPS grew by $0.11 per share. These increases in EPS included the negative impact from COVID-19 that we will discuss later on in the presentation. A lot of the same factors driving our quarterly increase also drove our year-to-date performance. Weather was one deviating factor. On a year-to-date basis, we've had overall warmer temperatures driven primarily by the first quarter. Colder temperatures in the second quarter helped to mitigate some of the volumetric reductions experienced in the first quarter, thereby reducing the negative impact on our year-to-date results. During the first quarter, we also recognized gains from several nonessential property sales that offset the weather impact. Slide 8 summarizes the key drivers of our performance for the quarter, as described in detail in our earnings release issued at the end of the day yesterday. Gross margin increased $5.1 million. Three pipeline expansions, the West Palm Beach County, Florida expansion project, the Callahan Intrastate Pipeline and the Del-Mar Energy Pathway project primarily contributed $1.8…

Thank you, Beth. Turning to Slide 14. Our strategic planning process has long been integral for our growth. In many ways, our current plan for the 2020 through 2022 period mirror the plans we've executed over the past decade. Of course, the level of our growth expectations are somewhat greater these days than they were in 2010, but we have the same confidence that we can execute on investments that are consistent with our long-term strategy. That strategy is fairly straightforward. Our regulated businesses provide stable, predictable earnings if we manage them correctly, and we've been able to do that over a long period of time. We look for nonregulated investments to augment our regulated earnings that meet 3 fundamental criteria: We're interested in investments that are related to our core energy businesses, that meet our return targets and that exhibit risk profiles consistent with our existing nonregulated businesses. We're disciplined in our approach. We walk past more deals than we execute. One of the ways we've mitigated our nonregulated risk over the years is to link the nonregulated operations to a regulated business. Aspire Energy is a good example. Aspire is a nonregulated gathering system, but its primary customers are natural gas distribution operations that we serve under long-term supply agreements that significantly lower Aspire's risk profile. Over the past couple of years, we've also considered how future investments may contribute to our overall sustainability and ESG objectives. You've seen us acquire Marlin, a company that's working, among other things, to move renewable natural gas from biogas production sources to a pipeline or distribution system. And our recent RNG announcements on Delmarva signal our interest in investing in biogas production and processing, in addition to Marlin fuel transportation opportunities. We've long sought to provide total shareholder value in the…

Thank you, Jeff, and good afternoon, everyone. It is a pleasure to be with you again today. As shown on Slide 21, Chesapeake Utilities is strongly committed to sound governance principles and the highest standards of ethical conduct by all our team members. This is how we work every day. Our responsibility to operate in a safe and environmentally friendly manner that furthers our stewardship and facilitates sustainable practices is at the center of who we are. Active and informed engagement, which is embedded in our people, beginning with our Board of Directors and extending throughout the company, could not be more important as we together chart the road ahead. Our diverse cross-functional teams closely collaborate on advancing our increasingly vibrant ESG platform, as highlighted on Slide 22. In continuing our bedrock commitment to equity, diversity and inclusion, we have formed the Equity, Diversity and Inclusion, or EDI Council. Our vision for the EDI Council is for all our employees to embrace and share their diverse experiences and backgrounds with the mission to help improve the communities we serve and to make us a better company. The EDI Council is central to who we are and who we want to be and will further enhance the collaboration around our workplace culture that is the engine driving our business. In keeping with our commitments, during the second quarter, Chesapeake Utilities presented a virtual webinar entitled Women in Utilities, "Be Extraordinary Everyday by Demonstrating Diversity," which was hosted by CS Week, the largest utility customer service conference in the United States. We support and take pride in recognizing the significant and important contributions of each of our team members. As another example, on July 10th, we had the special opportunity to virtually join together to celebrate National Lineworker Appreciation Day, and to…

Thanks, Jim. Just a couple of final comments. Our team is continuing to focus on safety, employee engagement and growth as we deliver potential services to customers and the communities where we work and live with. We reaffirm our five year capital expenditure guidance of $750 million to $1 billion for the years 2018 through 2022 as our strategic planning initiatives come into view for us and as we've outlined on Slide 23. We also reaffirm our 2022 earnings guidance of $4.70 to $4.90 as we show on Slide 24. The compound average growth rate of 8.1% to 9.6% from earnings from continuing operations for the three years. We believe those growth rates can be achieved in the near-term annual results based on our key projects coming online, continued customer growth and operational efficiencies. As you can see, we remain well positioned to achieve our 2022 financial targets. This growth is underpinned by our five year capital investment plan with approximately 80% of our investments in utility infrastructure and cleaner energy solutions like RNG. This growth is also supported by the continuation of our strategic and sustainable growth in our nonutility businesses. We will continue our track record of delivering for our investors while maintaining a strong balance sheet, ensuring access to capital for growth and our financial discipline. While the future through 2022 looks bright, we're staying focused on achieving strong results for this year despite the unique circumstances we find ourselves in. So in closing, let me just thank all of you for participating in our call. And I want to thank all of our Chesapeake Utilities' employees for their ongoing commitment to serving our customers and growing our company. We will be happy now to address any questions you may have.

[Operator Instructions] Our first question comes from the line of Tate Sullivan with Maxim.

Great. Thank you all, and thank you for all the details, and I thought I'd start with the gross margin contribution that you discussed in Slide 18. And besides the RNG opportunity and you introduced the gross, incremental gross margin for '21 of $1 million, what changed with Marlin since we last heard from you? I mean it looks like the gross margin, if I looked at it correctly, you might have doubled from the year ago. So there are more states here or am I looking at that correctly?

So in terms of, Tate, in terms of how you're looking at that, the second quarter, when you look at Marlin's results year-over-year, the second quarter of this year tended to be a higher quarter than the second quarter of last year and that's driven really from several things. One is Marlin, since we've acquired that business, we've been moving down a path to convert more of their services to where it's aligned with a contract. We're still providing emergency services, but a greater part of that business has shifted to where we're contracted to provide service and there's a retainer type level of fee that's being charged. And so that's one of the things that happened for Marlin as well as just an uptick in the emergency-type services. If you look at it kind of on a year-to-date basis, what you can see from Marlin's business is that last year, the first quarter was strong coming in, and that's because we had a lot of emergency services in the first quarter of last year. Marlin is continuing to look for new opportunities in the existing CNG space that it operates in. It's also, as Jeff and Jim both talked about, we've announced these new contracts where Marlin's margin is going to be expanding in the RNG space, and those are 2 of the projects. We also have some other projects that we're working on in both CNG and also in RNG. And we've also mentioned in the past that we'll be looking for Marlin to expand into the LNG arena, hopefully, at some point here. And so we're really kicking on all cylinders. We're kicking within our own footprint as well as a little bit beyond. And you'll see that Marlin has the capacity to continue to expand into all of those areas. Jeff, I don't know if there's anything you'd like to add.

Well, I think that covered it pretty well. I would say that we certainly, as you indicated, have an interest in focusing on long-term commitments with pipelines and utilities principally engaged in the pipeline integrity work and then maintenance work. And so that provides an opportunity for us to have a more stable revenue stream in this business. And we're seeing some pretty significant opportunities come our way. And I think some of the margin increase that you're seeing here is reflective of the marketing work that we've been doing, especially in the Southeast and the Mid-Atlantic with utilities that we know quite well.

Okay. Great. Yes. I mean that was one very notable thing, among many others, Marlin's strength given everything else going on, too. And both within 2Q and the operating income margin in unregulated besides Marlin, were there other -- was propane a positive contributor? Were there other? Because I think it was your highest 2Q operating income margin in unregulated in quite a while.

Yes. You're absolutely looking at it correctly. I mean, it was a strong quarter. I mean, first off, if you just look at even the COVID impact on that particular segment relative to the overall COVID gross margin impact, out of the $2.5 million of COVID impact, the unregulated segment was negatively impacted by about $300,000. And really, there, Tate, if you dig down and I -- were to look at under the -- under the cover, so to speak, what you would see is that it was a pretty small amount in each of the unregulated -- key unregulated businesses, that being Sharp, being our Florida propane operation and Aspire. So they were pretty much able to overcome the COVID-19 impact. In the case of Sharp and in our Florida propane operation, retail margins have stayed strong. That's been driven partly coming out of the first quarter and the weather impact and being able to keep those up coupled with supply and what we've been able to do there. The other thing that happened for us is, you'll recall, we consummated the Boulden acquisition at the end of the year. And so Boulden continued to add very strongly during the quarter. And so those were big drivers, some of the bigger drivers. There were some others that were smaller, but overall unregulated performed very well. Certainly, the weather in April contributed, with a lot of people being at home, using -- continuing to use gas. And so overall, unregulated fared very well again during the quarter.

Yes. And just before I jump back in queue, just looking at -- on the regulated side and the customer growth figures, which I mean, I don't -- there shouldn't be any concern on all that, but it seemed very high for the Delmarva natural gas distribution, that 5% year-over-year. Is that including some of the converted propane customers or a meaningful portion? Or is that an organic number?

There is some customer conversion activity in there, but it is not a significant -- it's not a significant part of it. I mean, we continue to see a lot of expansion. As new developments are being -- are basically in the pathway of our distribution system, as it's expanding in the beach areas, areas that are north of Dover, Delaware, which I know. But the bedroom communities of Wilmington, Delaware, like the Middletown area continues to grow and expand. And so it's continued to be very strong growth in our Delaware area and principally those two markets. And so it's driven more by the growth that's happening there than as much as customer conversions. There are some of those, but that's not the driver.

We're also continuing to see significant growth on the systems in Florida. There's a lot of activity in the Palm Beach area. We've extended, as you may recall, four small pipeline segments, the Peninsula pipeline out to reach the emerging growth. It's west of the existing city limits, west of I-95. So things are hopping in Florida as well. I might also just take a second and point out, we mentioned the regulatory action on the propane side, that we are converting the community gas systems, the underground propane systems over to natural gas. That's not going to all happen at once. But we have a number of those systems scattered across Delmarva serving almost 10,000 accounts at this point. So you're looking at multiple years before we will get gas, natural gas service in front of all of those developments and start converting them. So you'll see some propane margin erosion as we convert those and natural gas increases. And we are working very hard to obviously replace that propane loss with additional community gas systems on Delmarva as well as propane growth in other places. And part of that was the Boulden acquisition that Beth mentioned a moment ago.

Our next question comes from the line of Brian Russo with Sidoti.

Just on the RNG $1 million gross margin contribution, what specific investment or project is that tied to with Bioenergy or CleanBay?

That right now is associated with, is partially associated with the first project that we announced, but all contracts for both projects are not completely done. And so that is a preliminary estimate of the margin impact that will likely, we will come out with a more refined, higher estimates for all of those contracts once everything is finalized.

Okay. Got it. And then...

It's a, I'll just add one thing. It's a combination of things, as Beth said, and we're, as she said, working to refine these contract agreements. We've made, as we mentioned earlier, and we're making an investment in the gas processing equipment at that Bioenergy DevCo facility. And so there are margins associated with that. And we're also transporting the gas through Marlin Gas Services. There will be some investment for new equipment there and again associated margins to support those transportation activities.

Okay. So just back into the envelope, should we just assume kind of an 11.5% or 12% ROE to back into what type of, what dollar investment amount using...

I would answer that question, but Beth always gets mad at me when I do. So Beth, why don't you.

Well, what I would say at this point, Brian, is you, as always, should know that, yes, I mean, we're going to be targeting a return that's above a regulated LDC return for that business. But what we've not done yet, because as I mentioned and Jeff also mentioned it, some of the contracts are still underway. So we've included some estimates out on some of the investment dollars. And so what I would do is look at what information is out there, make a return assumption like you are at above a utility return. And then as we continue to disclose additional investment dollars that are associated with these projects, you can adjust from there.

Okay. Great. Understood. And in terms of Marlin Gas, has that, have those services been dispatched in response to the tropical storm?

I don't believe that we have discussed anything directly as a result of that, but I know we had 0, I shouldn't say 0, but virtually no impact on any gas system in Florida. And then obviously, if that storm went further north in Delmarva, we've had no issues that we know of on the Delmarva Peninsula and certainly not in our distribution or transmission systems. And to my knowledge, we've not dispatched Marlin for any repair or hold purposes to any utilities either.

Okay. I was just curious in the mid-Atlantic or in the Southeast.

Yes. We just, we really haven't seen any substantive damage to any of the gas systems that will require Marlin to actually dispatch.

Okay. Understood. And I'm curious, why haven't you filed for deferral of the COVID expenses? Is it because you've done such a good job of offsetting that with the CARES tax benefits and elsewhere? Is it kind of a you file a net expense impact, so you're offsetting that? Just curious.

Jeff, do you want me to take that or would you like to ?

Yes, sure. Go ahead.

From our standpoint right now, Brian, the situation, as we talked about, has continued to evolve. I think everybody initially thought, okay, this pandemic, it's going to be this amount of time and then everybody will be back to normal. And so what we don't, what we want to do is really be able to evaluate the magnitude. We're continuing to work on our projections. We are looking at the organization overall. We're considering the other regulatory filings that are already underway as well as other potential changes that might come about as a result of future stimulus packages. And so we don't want to be quick to the gate. We want to make sure that we're deliberate, we evaluate what we think the impact is going to be and then we'll make the necessary filings. And so again, it's just evaluation, analysis and looking at the situation overall and as it continues to evolve.

And it certainly, as you indicated, it's a reasonable expectation to believe that regulatory agencies will be looking for a net number. And so we need to figure out, as do many of our colleagues in [indiscernible] across the country what that net is. What's different that's just due to COVID versus impacts from weather or other effects.

On the Hurricane Michael proceedings in Florida, is it on schedule? And what gives you confidence that the conclusion can occur by the third quarter?

Well, we have, it is on schedule. We have a September hearing date that the commission has established. And so there's a conversation going on now between our staff, the Public Service Commission staff and the Office of Public Counsel to see if we can reach any sort of settlement agreement that would eliminate the need for that hearing. I don't know that we will get there, but we're getting close to the point where we'll begin to prepare for the hearing and just move down the usual track to deal with this issue.

Okay. Great. And then just taking a quick look at the balance sheet or the cash flow statement, are you retiring long-term debt with lower interest rate, short-term debt? Is that part of the balance sheet management plan that you mentioned briefly earlier?

Well, I mean, to the extent that -- I mean, as long-term debt is getting retired, it's either getting funded through -- so to speak, when our balance sheet comes together, either through -- as you said, current short-term borrowings that are growing, but also at the same time, we're using stock through our normal channels to also fund things. So ultimately, at the end of the day, what I would say, Brian, is there's several different levers that are happening. We have long-term debt that's being retired. We have short-term debt that we're using. We're also issuing $90 million of long-term debt this year. And then we've been issuing some equity that's also moved our equity to total capitalization up since the beginning of the year. So it's all of that.

Great. And then one last question. When you look at the updated gross margin charts, the projects under development and near completion, then of course the pipeline of potential RNG projects, it seems as if you're already pushing towards the high end of that EPS CAGR through 2022. So curious on your thoughts there. And then when we might get -- when might you roll over to 2023?

Well, I'll start, and then I know Jeff and Jim can certainly add some further color around this. But what I would say is we typically will review -- we're going through our strategic planning process coming up here as we come into the fall. And so part of that review will include looking at what our capital investment plan looks like over the next 5 years, looking at what our earnings growth trajectory looks like over the next 5 years. And so what we will likely do is, at some point, look to -- put out new guidance, but I would not expect Chesapeake to go to kind of an annual guidance. I think we want to look at it more from kind of a longer-term perspective. But we've not yet decided what that -- when that will be, but we are certainly going to be looking at that as we're coming in this next strategic planning cycle coming up here in the fall.

Our next question is a follow-up from the line of Tate Sullivan with Maxim. Please proceed with your question.

Hi. Thank you for taking my follow up. On renewable natural gas, so with the 2 that you've announced, Bioenergy and CleanBay, and does it -- both those deals in the $1 million of gross margin represent multiple biodigester facilities? Or is it 1 biodigester? Can you just frame what those two current agreements are?

Sure. And we are, as Beth said, we're working to actually finalize the contract agreements with Bioenergy DevCo for the facility at Seaford. We have a executed letter of intent that lays out most of the terms of that deal, but we're still working through some of the details. The $1 million is a -- again, Beth will get mad at me for saying. So it's almost a placeholder for what we believe will be margins coming from a variety of different sources. We are building a gas processing equipment, as I said, at the Bioenergy DevCo facility, $6 million of investment. We are, ultimately will build the interconnect on Eastern Shore that we mentioned, $7 million of investment, that will bring gas into Eastern Shore that, those margins are not included in that $1 million that will be in Eastern Shore. We have Marlin investing in a variety of equipment to support the transportation of the biomethane that's come through the processing equipment to that interconnect position and then ultimately into our distribution systems on Delmarva. With Clean Energy, that deal at this point is a fairly significant, CleanBay, excuse me, is a fairly significant Marlin transport operation, but we will be making investments in equipment that will transport that gas. Those margins are really not in that $1 million either. And so again, we're working to finalize a number of agreements. We wanted to put something out there to indicate kind of an order of magnitude of where we're going with this. But that represents essentially the Bioenergy Devco facility. There's the CleanBay facility in west of the Maryland. And then there are potentially a number of other facilities that CleanBay and Bioenergy Devco are trying to finalize across the Delmarva peninsula. So we see a pretty interesting opportunity in front of us investing in potentially gas processing equipment, investing in transportation, either by fuel truck with Marlin or by pipelines that probably use to ensure natural gas we install at a number of facilities over a number of years. And we're just not quite at the point to give you more definitive margin numbers at this point. But I think that will coalesce here fairly quickly. And certainly, over the next couple of months, I would expect to be able to give you a little more definitive information.

Okay. No. All the detail is great. And just one follow-up on the community gas systems. Jeff, what was the regulatory, was it something that happened the last month that you received regulatory approval to put that in?

Yes. We, the Delaware Public Service Commission, one of the issues when you have an underground, well, when any asset that's being acquired by utility is, how do you actually bring that asset value into rate base into the utility. And one of the things that's always been a point of contention, everywhere I've ever worked, frankly, and every state I've ever worked in, is the purchase of an underground propane asset by a regulated natural gas utility and the conversion of those customers. And it's been sort of a long-standing position that those assets would come in at the depreciated book value of the propane system. And you basically enter those into natural gas rate base and you begin earning on that level of rate base. And of course, what actually happens is if you're buying those assets, acquiring it from a propane company, you're going to pay something closer to a market value for the assets. So you want to be able to bring those assets forward into rate base at that market value if you possibly can. And what we were able to negotiate, get approved in Delaware is it would bring that asset in at the replacement value if we were building a new natural gas distribution system. So it significantly increases the value of the assets that we're able to put into rate base and ultimately earn on. It's a pretty significant accomplishment, frankly.

[Operator Instructions] Mr. Householder, there are no further questions at this time. I will now turn the call back to you, please continue with your closing remarks.

Thank you. And just thank you again for joining us this afternoon and hanging in there all this time. We appreciate your interest in Chesapeake Utilities as always, and we look forward to speaking with you again soon. Goodbye.

That does conclude the conference call for today. We thank you for your participation, and ask you please disconnect your lines.