Good day, and welcome to the Chesapeake Utilities' Fourth Quarter and Full Year 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. [Operator Instructions] I would now like to turn the call over to Beth Cooper, Executive Vice President, Chief Financial Officer, Treasurer and Assistant Corporate Secretary. Please go ahead.

Thank you, and good morning, everyone. I'm Beth Cooper, Executive Vice President, Chief Financial Officer, Treasurer and Assistant Corporate Secretary of Chesapeake Utilities. We appreciate you joining us today for our fourth quarter and full year 2023 earnings call. 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. As you saw in our press release, we delivered excellent performance in 2023. Our incremental earnings from regulatory initiatives and growth investments, including one month of results from Florida City Gas, more than offset lower energy consumption due to warmer temperatures across our service territories, along with the year's significant increase in interest costs. These items are detailed within the financial results that we will cover in just a few minutes. With me today are Jeff Householder, Chairman of the Board, President and Chief Executive Officer; and Jim Moriarty, Executive Vice President, General Counsel, Corporate Secretary and Chief Policy and Risk Officer; as well as other members of our management team who are joining us remotely. On Slide 3, we have our typical disclaimers. 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 2023 annual report on Form 10-K provides further information on the factors that could cause such statements to differ from our actual results. Additionally, the company evaluates its performance based on certain non-GAAP measures, including adjusted gross margin, adjusted net income and adjusted earnings per share, and the 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 has been provided in the appendix of this presentation, our earnings release and our 2023 Form 10-K. Now I'd like to turn the call to Jeff. Jeff?

Thank you, Beth. Good morning, and thank you for joining our call today. I'll begin with Slide 4, our financial highlights for the year. In 2023, our team executed successfully on all fronts, leading to our 17th year of increased earnings, excluding the Florida City Gas transaction costs. We also had a milestone 20th consecutive year of increased annual dividends. In spite of significantly warmer temperatures and rising interest rates, we generated adjusted EPS of $5.31, representing 5.4% growth over 2022, largely driven by incremental gross margins of $33.9 million. The team's collective efforts drove this performance while successfully consummating the largest acquisition in our history, closing the transaction in record time. Our legacy businesses continued their impressive growth trajectory as we invested $211 million in capital projects, advanced our regulatory initiatives, and prudently managed expenses. We continued expanding our footprint with strong customer gains in our regulated natural gas distribution businesses, with an impressive 5.4% average residential customer growth rate for our combined Delmarva service territories and nearly 4% in Florida. We also delivered on several opportunities to expand our natural gas transmission systems, and we're not slowing down. Currently, Peninsula Pipeline has four projects before the Florida Public Service Commission for approval. These projects include over 35 miles transmission infrastructure designed to meet growing customer demand in our gas distribution systems. Additionally, Eastern Shore Natural Gas's Worcester Resiliency upgrade project is progressing well. We'll discuss these expansion projects in more detail later in the presentation. Of course, our most significant growth effort in 2023 was the successful completion of the Florida City Gas acquisition. It was a strategic move for us, more than doubling our footprint in a very attractive market where we have already operated for 40 years. We expect the transaction to drive significant incremental earnings…

Thanks, Jeff. I'll begin with Slide 11, which shows the key drivers of our 2023 performance. Our core businesses continued to generate strong performance, delivering $1.50 of incremental EPS this year. And this was in the face of headwinds from significantly warmer weather that lowered customer consumption and impacted earnings by $0.54. Higher operating expenses linked to growth in our core business resulted in a $0.47 impact, representing only 48.1% of the incremental margin. We were diligent about managing cost to offset warmer temperatures. The company was not immune to the challenging economic environment and the impact that had on interest rates. Those higher rates drove a $0.45 offset. One month of incremental earnings from the Florida City Gas acquisition generated an $0.18 uplift. As Jeff said, these results are exclusive of the contribution from Florida City Gas' $25 million reserve surplus amortization mechanism or RSAM, which was approved by the Florida Public Service Commission in June 2023. The RSAM is recorded as an increase or decrease to accrued removal costs on the balance sheet with a corresponding increase or decrease to depreciation and amortization expense. The RSAM provided a $5.1 million pretax or $0.20 per share reduction to depreciation expense in 2023. On Slide 12, you can see that adjusted gross margin for 2023 increased $33.9 million and operating income increased $7.9 million or 5.5% for the year. Excluding Florida City Gas transaction-related expenses, our operating income increased $18.2 million or 12.8%. Interest charges were over 50% higher this year as the effects of the ongoing rising rate environment continued throughout the end of the year, and we incurred additional financing costs associated with Florida City Gas. Again, despite these impacts, adjusted EPS for the year improved by $0.27 per share, representing 5.4% growth. Moving to Slide 13. Adjusted…

Thank you, Beth and good morning. It’s great to be with you all today. Moving to Slide 24, we provide an overview of key regulatory initiatives that were recently completed or are well underway. In Florida, we have three full quarters of earnings associated with the permanent rate changes from our recent Florida rate case and we expect to recognize close to $17.2 million in 2024. Florida City Gas rates became effective on May 1, 2023 with an incremental $14.1 million rate increase and an allowed ROE of 8.5% to 10.5%. On January 30, 2024, we filed a rate case for our Maryland division, Sandpiper Energy and Elkton Gas, which I will cover in more detail on the next slide. Our proposal to consolidate the three entities builds off of the process that we followed in Florida. While each jurisdiction is different we are looking forward to a similarly constructive process in Maryland. On the infrastructure side, we have a number of program initiatives underway, including the GUARD and SAFE programs in Florida. These programs are contributing to our ability to maintain safe and reliable service for our customers, which also contribute to margin growth over the next 10 years. Let me spend a few minutes highlighting our Maryland rate case shown on Slide 25. As I mentioned, we proposed consolidating our three Maryland distribution companies into one legal entity required to come back pursuant to a previous regulatory filing for Sandpiper Energy, we are proposing a $6.9 million rate increase, which is the first rate increase we have sought in 16 years. Inclusive in the filing are other tariff changes, including a new technology cost recovery rider, a proposed underserved area rate which will enable expansions to meet demand, as well as a program for evaluating extensions to multifamily…

Thank you, Jim. In summary, we remain committed to delivering on the attractive opportunities across our growth platforms. That includes executing on the incremental opportunities provided by the FCG acquisition and achieving returns that deliver value to our stakeholders. We believe that our disciplined investments will continue to drive top quartile earnings performance into the future. In addition to the transformative projects we initiated and completed in 2023, we continue to take a customer-centric view of our energy delivery mission and are excited about our initiatives to enhance the customer experience. Altogether, Chesapeake Utilities is an attractive investment opportunity. Our shareholders benefit from an energized team that is focused on customers and investments to serve those customers in growing service areas. We are very committed to continuing our long-term history of superior performance. With that, we'll take your questions. Thank you. Operator?

The floor is now open for questions. [Operator Instructions] Our first question comes from Paul Fremont with Ladenburg. Please go ahead.

Thank you very much and congratulations on a great quarter. I guess my first question is, do you have a sense of when you would file a full general rate case in Florida?

Well, I can start that off and then Jeff, and Jim feel free to add any additional comments. Paul, both of the Florida natural gas units, both our own FPU and Florida City Gas. And we just in last year and received rate increases. And so, as we talked about on the phone, particularly in the case of Florida City Gas. The RSAM mechanism that they have available to them. It enables them to achieve the approved ROE bands that the PSC authorized and that they are allowed to earn. And so really for us, our focus on right now is trying to evaluate when will be the appropriate time that we may seek to go in and actually tried to get a portion of the goodwill as an acquisition premium full recovery there. And so that's really the focus right now and integrating the operations. So we've not really focused on the requirement for rate increase at this point. And as we've talked about a lot on the call. One of the things that we are really excited about by this transaction are the opportunities that we see in terms of new investments so out of the gate, that's our focus. And those are the areas on the regulatory side that we're really focused on as well. Jeff, I don't know if you want to add anything or Jim?

I would add a comment that we are taking a look at the rates on our electric operation in Florida. Well, it's been a while since we've been, and we've made some fairly significant investments in the system. And so that might be the next likely Canada to best serve the gas unit. So we're in very recently.

Great. And then if I look at Slide 17, identified additional opportunities of that $0.20 to $0.30, does that primarily represent cost savings synergies in Florida or is that something else?

That really – Paul, that really encompasses when you look at Slide 18 and you look at I'll call it the doughnut of things that we see across the enterprise. It is some combination of those six areas with the biggest portion that we've identified in 2024 will certainly come out of that cost and operating synergies and efficiencies. As we move forward that's where I talked a little bit about right as you get into next year and the year after certainly, those pieces of the pie that are focused on new – in a new capital investment infrastructure programs, margin from the value chain as well as regulatory strategy will be a bigger piece. But all of them will play some piece in achieving that $0.20 to $0.30. That's included on Slide 17.

Great. And last question for me, can you just give us an update on where the propane business stands so far in 2024?

Well, we haven't really put any information out on that. I know, certainly with some of the reports that have been out on temperatures this year relative to last year were certainly colder on relative to the long-term normal. I think, the reports that you see and I don't think it's inconsistent in our service areas overall, still not going back to some of those 10-year normal temperatures that we expect. But again, year-over-year coming out of the gate colder than the prior year.

Great. Thank you very much.

Thank you, Paul, appreciate your feedback and questions.

Thank you. [Operator Instructions] Our next question comes from Brian Russo with Sidoti.

Hi, good morning.

Good morning.

Thanks for all the additional detail. But just to follow up on the focus on the acquisition, premium adjustment of recovery in Florida. When – what's the next step? And I assume that's not included in your 2025 and 2028 earnings guidance?

So Brian, as we mentioned, we're about three – right now about three months into the acquisition. And I think certainly in the near term, as we think about 2024 and 2025, we are evaluating an appropriate time to go back for a portion of that. I would not – at this point, we've not heavily factored that in at least in the near term, but it is something if we have that opportunity. I think certainly, Jeff, Cheryl [ph] and the team, Jim and the team, we would certainly pursue at the right time, but right now, again, we're focused on getting the business integrated. We've got the synergies that we've talked about. We've got the capital investments that Jeff spoke to. You're going to hear about three of those coming here in the near future, getting those off and running. And then there are some things on the regulatory side, particularly from a best practices perspective that we're going to be focused on out of the gate. Jeff and Jim, feel free. Any additional comments you both might want to add?

No, I think that covered it, Beth. I mean, I would remind folks that it took us a little while to gather the savings data that's really necessary in Florida to meet the FIVE factor tests or demonstrating that we can recover parts and pieces of the premium without adversely impacting rate payers. So that's usually a year-long process, and then we would likely look to recover something, we'll begin a filing process potentially next year. There may be some other sort of small-scale things we can do along the way. But our primary focus, frankly, is growing through all of that, and we think we've got a pretty good plan in place to do it.

Okay. Great. And then just to clarify, the CapEx multiyear table that you've laid out, is that all accounted for in terms of investments and projects that triangulates with the longer-term guidance? So for example, if you were to announce another propane acquisition, is that incremental to the existing capital budget that you've laid out?

That's a great question, Brian. What I would say is given Sharp's history, they will do some – they've done some small acquisitions. And then on the propane side, our five-year projection that we've given you on the capital would include some potential very, very small propane type transaction, certainly not the larger one that we did a couple of years ago. We don't factor those types of things. But our track record and knowing the service territories and the small opportunities that may be out there now with our expanded footprint, that would be something that we might be comfortable including because they're very small. Beyond that, the projects that we have in here, you're familiar with our strategic planning process that we've talked about many times in the past. But we take a look at all the different projects that we're working on. Some of them certainly five years out, you haven't locked in. But what you look at are the opportunities that are out there, you look at the run rate of the projects that you've achieved. You look at what capacity needs are going to be in each of our service territories. And we have a good handle on that now, certainly with Delmarva and FPU, but now with Florida City gas. And so that gives us real comfort into some of the dollars that we're putting out there and the things that we're thinking about, particularly on the regulated side.

Okay. Great. And then just lastly, your outlook for distribution customer growth in Delmarva and Florida, it seems as if it's below what, I guess, the trailing 12 months was. It looks like you're forecasting 3% in Florida versus 4% in 2023, and the same with Delmarva, 4% over the next five years versus the 5% that you reported in 2023. Just can you give a little bit more insight while still well above the national average and clearly a differentiator? Just curious what you're seeing there?

Sure. Sure. Great question, Brian, we came up with those estimates based upon what is in our current backlog and what we've signed up. So what we've not included in our numbers are, for example, potential developments that might utilize natural gas that we're talking with, but they're not under contract. So you're absolutely right, going to a place of could there be a higher growth rate? Absolutely, if we sign-up additional developments and may become part of our backlog. But we don't – what we don't want to do is come out and speculate on things that are not under contract. The other thing that I would point out is, in particular, if you look at that information that we have around natural gas distribution margin growth, that core growth, particularly in Florida, what you see is there's a very significant portion that's also being driven by commercial and industrial growth. And so that's another key component here that should stay strong as well. But what we tried to do is build our ranges based on what we've signed and what we know is out there in terms of development where service can still be connected.

I would add, Brian that we have been trying to be relatively conservative in some of these estimates as is not unusual for us. And thinking about the mortgage interest rate increases that have occurred that haven't really dampened construction activity in our service areas, but we keep expecting that it might – it might, we haven't seen much of that yet. But I think from our perspective, forecasting on the conservative side is the right way to go. We may – if construction continues at the levels that we've seen over the last several years, we might well exceed those numbers.

Okay. Great. Thank you very much.

Thank you.

Thank you. Our next question comes from Chris Ellinghaus with Siebert Williams Shank. Please go ahead.

Hey everybody. How are you?

Good morning.

Good morning. In the margin uplift slide, the uplift for the Florida rate case kind of seems on the small side relative to the way I would typically think about seasonality for you. Can you just sort of talk about what leads you to your margin expectation for the first quarter?

In terms of from Florida City Gas or?

From the rate case for the stub part in the first quarter.

Well, keep in mind that for us, we did not have a full year of permanent rates at the rate increase level. So that's why we have that incremental amount that's factoring in and actually moving up from $14 million to over $17 million in 2024. So that's the additional piece that you're seeing come through.

Okay. Following up on the customer growth question. It sort of looks like in the fourth quarter, there was a little bit of a slowing in customer growth. Is that an economic slowdown that you're seeing at all?

I think that goes to what Jeff mentioned, is that we've continued to expect just given where mortgage rates have been that there might be more of a dampening. I know when we look at our backlogs and the number of customers that are in there, it certainly seems like growth is going to continue, but there could be some of that, that causes it to back off a little bit if that does pick up. Jeff, I don't know if there's anything else you might want to add to that, but…

No. I mean we have a general downturn in many of our service territories as you kind of come into the winter anyway. And so there are some limitations, frankly, in some of the towns that we serve on being able to operate, to construct service lines and those sorts of things during the winter period. So they're hugely a little bit of a downturn, but I think the economies has something to do with that as well, as Beth indicated.

Okay. On Page 14 of the press release, you identified reduced demand for CNG, LNG, RNG of a nickel for the fourth quarter. Are you not ascribing that to weather effects?

No, that actually had to do, Chris, with on a – if you look at the year, so to speak, the year was pretty flat, but there was some certain quarters year-over-year were higher than others. So there's not really a change from a demand perspective. It's more the timing of some of the contracts that Marlin had entered into. And so Marlin continues to have high utilization that hasn't changed. Again, it's just the timing of when some of the contracts basically came to an end.

Okay. And you did mention that Marlin has acquired some hydrogen trailers. As you do some of these projects like the Boynton Beach project or whatever on the distribution side, is there any capital included in those projects for anything in preparation of hydrogen, or is it too early for that?

Yes, it's probably a little early, although we are, in fact, thinking about that. One of the issues that we find in our systems, especially those on Delmarva, but certainly in the new construction activity and the developments in Florida. Most of that is plastic. And so we're in decent shape there. Should we find ourselves down the road in a situation where we're blending hydrogen into the natural gas streams. Some of the metal steel facilities that we have, we're going to have to think a little bit about what that looks like as we keep going.

Okay, great. Thanks for the details. Appreciate it.

Thank you.

[Operator Instructions] We have no further questions at this time. I'll now turn the call back to Jeff Householder for any additional or closing remarks.

Well, thank you. We appreciate very much your participation in our call this morning. We believe we have a solid plan in place to achieve our 2024 guidance, the plan that also lays the groundwork for 2025 and beyond. As always, thank you for your interest in Chesapeake Utilities, and goodbye.

Thank you. This does conclude today's Chesapeake Utilities Fourth Quarter and Full Year 2023 Earnings Conference Call. Please disconnect your line at this time.