Welcome to the Chesapeake Utilities Third Quarter 2023 Earnings Conference Call. At this time, all participants have been placed in a listen-only mode and the floor will be open for your questions following the presentation.

Thank you, and good morning, everyone. We appreciate you joining us today for Chesapeake Utilities' third quarter earnings call. As you saw in our press release issued yesterday, the Company delivered solid performance for the third quarter of 2023. Our performance on a year-to-date basis has offset consumption impacts from warmer temperatures in the first half of the year across our service territories. These items are detailed within the financial results that we will cover in just a few minutes. Also, we continue to be very excited about the acquisition of Florida City Gas that we announced in September. We will be providing more details on the status of the transaction later in the call, but it's important to note that current year results have been adjusted to exclude transaction related expenses that were incurred during the third quarter of 2023 related to the transaction. A reconciliation between our adjusted results and the comparable GAAP metrics can be found in our earnings release and the appendix of the earnings call presentation. As shown on Slide 2, participating with me on the call today are Jeff Householder, Chairman, President and Chief Executive Officer; and Jim Moriarty, Executive Vice President, General Counsel, Corporate Secretary and Chief Policy and Risk Officer. We also have other members of our management team joining us virtually. Today's presentation can be accessed on our website under the Investors Page in the Events and Presentations subsection. After our prepared remarks as we typically do, we will open the call up for questions. Moving to Slide 3, I would like to remind you 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 2022 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 quarterly report on Form 10-Q for the third quarter. Now, I'll turn the call over to Jeff to provide some opening remarks, including on the Company's third quarter results, the status of the Florida City Gas acquisition, and the key drivers of our performance. Jeff?

Thank you, Beth. Good morning and thank you for joining our call today. As you saw in our earnings press release, we reported adjusted earnings per share of $0.69 and $3.63 on a quarter year-to-date basis, respectively for 2023. As we've noted, warmer weather had a significant impact on our results, particularly throughout the first half of the year, negatively impacting us at approximately $0.41 per share through the month of September. And we also dealt with continued pressure from our rising interest rate environment. However, our team remains focused on executing our growth initiatives, pursuing multiple strategic regulatory filings, identifying cost savings and capturing opportunities to accelerate margin. Our team's efforts more than reversed the reduced earnings reported last quarter. As a result, we have overcome the negative weather impact of almost $10 million and achieved accretive third quarter results versus 2022. Our fundamental growth strategy and strong execution continue to deliver success. Our adjusted gross margin increased by $7.6 million over last year's third quarter. We've also initiated several new investment projects to support the continued strong customer demand for our energy delivery services. In addition, we continue to make significant progress on several regulatory initiatives that will deliver incremental margins and provide a foundation for substantial system investment over the coming years. We also significantly advanced our growth strategy with our agreement to acquire Florida City Gas for $923 million. We're incredibly excited about this transaction and the opportunities for growth investment that it will provide in the coming years. Turning now to Slide 5, Florida City Gas will substantially expand our presence in Florida, a premier utility jurisdiction and the second fastest growing state in the U.S. With the acquisition, we will immediately more than double our regulated natural gas distribution business in Florida. On a pro forma basis, we expect to have approximately 211,000 customers combined. As a result of the transaction, we foresee attractive growth opportunities across our five growth platforms, especially our conventional pipeline company. It's exciting to contemplate the increased opportunities to deploy capital to improve system reliability and meet the substantive customer demand for natural gas in underserved and unserved communities in Florida. A larger footprint in Florida also brings scale benefits, and we'll be able to leverage the core competencies, expertise, and community relationships that we've built throughout the state to operate more efficiently and effectively. We will be well positioned to generate meaningful earnings growth by applying our operational and regulatory expertise on a much broader scale. And with the addition of the Florida City Gas team, our consolidated operation will be even stronger. This transaction also supports and extends our EPS growth rate expectation of at least 8% and should drive long-term dividend growth. As a result of the expanded investment opportunities available to us both as a result of the Florida City Gas acquisition and expanded opportunities in our legacy businesses, we increased our capital investment plan by approximately 65% to $1.5 billion to $1.8 billion for the five years ending in 2028, and as always, we remain focused on cost management opportunities and efficient growth. I'll touch on this guidance later in the presentation. We have a disciplined approach to M&A. And with Florida City Gas, we expect to build on our track record of success. We'll apply the same operating philosophy, rigor, and discipline that drove success with the Florida Public Utilities, Sand Power Energy, and Elkton Gas acquisitions as we integrate Florida City Gas post closing. Let me take a few minutes now to update you on our closing progress. As you can see on Slide 6, we continue to expect the transaction to close before year-end. Transition teams for both Chesapeake Utilities and Florida City Gas have been formed. We're actively planning to ensure a seamless transition for both employees and customers upon the approval and closing of the transaction. We plan to be able to provide more detail on the integration progress on our year-end call. From a regulatory approval standpoint, the Hart-Scott-Rodino waiting period expires on November 6th. We received approval from the Delaware Public Service Commission on October 25th and from the Maryland Public Service Commission on November 1st. Finally, while the transaction does not require approval from the Florida Public Service Commission, we've been regularly communicating with them on this transaction and our progress. Turning now to financing. As you know, recent market dynamics have been, to say the least, somewhat challenging. As we develop our transaction financing plan, our top priority is to maintain a strong balance sheet. We are continuing to actively and closely evaluate the evolving market dynamics as part of our financial risk mitigation efforts. We have significant flexibility both in terms of timing and forms of permanent capital. We remain steadfast that our long-term financing plan will reflect an investment grade balance sheet for Chesapeake. In addition to the announced Florida City Gas acquisition, there are several other notable accomplishments since our second quarter earnings call. Let me mention just a couple of these accomplishments. In October, we announced the Worcester Resiliency upgrade project, the approximate $80 million project consistent with liquefied natural gas storage facility in Bishopville, Maryland and will allow Eastern Shore Natural Gas to provide critical energy delivery service during the peak winter heating season, particularly to our growing distribution utilities on the Delmarva Peninsula. Also in October, we announced our role as a project partner in the MACH2 Hydrogen Hub. The project is slated to receive a share of the $7 billion in Bipartisan Infrastructure Law funding, which will accelerate the market for hydrogen in the United States. We're proud to be a partner on this project, which will bring affordable and realistic environmentally responsible solutions to customers. These investment opportunities coupled with the ongoing and recently completed expansions of our existing pipeline systems demonstrates the growing demand for energy delivery services in our territories. With that, I'll turn the call back to Beth to discuss our results for the third quarter.

Thank you, Jeff. Before I discuss our financial results for the quarter and year-to-date, I would just like to add a few opening comments about the Florida City Gas acquisition. As Jeff indicated, we remain extremely excited about the transaction and the expected long-term value creation it affords. We are proceeding on schedule on all fronts and remain positioned to achieve our 2025 guidance as previously indicated even in light of the challenging and volatile financial markets. And now turning to Slide 8, I would like to first begin and thank the collective Chesapeake team. I am proud of the things that we continue to accomplish as an organization and our long standing track record. Working together, we continue to achieve new milestones. Now I'll talk about some additional details on our results for the third quarter and first nine months. As Jeff mentioned, adjusted diluted earnings per share for the third quarter of 2023 was $0.69 compared to $0.54 during the prior year. This strong performance during the third quarter brought our year-to-date adjusted EPS to $3.63 or $0.05 greater than the prior year period. The key factors shaping the growth of our adjusted gross margin included contributions from new permanent base rates that went into effect for our Florida natural gas distribution business in March along with incremental contributions associated with regulated infrastructure programs, organic growth in our natural gas distribution businesses, higher fees and margins per gallon in our propane business, and lastly new pipeline expansion projects. As we talked about throughout 2023, our current year results reflect a margin impact of approximately $0.41 attributable to the significantly warmer weather that was experienced primarily through the first half of the year. Our team remains focused on our fundamental growth strategies, and we're excited that we were able to overcome this impact with the growth we realized in the third quarter. On Slide 9, our financial summary shows that adjusted gross margin increased 7.6 million and operating income increased 1.6 million for the quarter. Excluding transaction related expenses associated with Florida City Gas, our operating income increased 29%. Interest expense was over 13% higher during the quarter and more than 22% higher relative to the prior year period, as the effects of the ongoing rising rate environment experienced in the latter half of 2022 have also continued at full force into this year, again despite these impacts, adjusted EPS for the third quarter improved by $0.15 per share over last year and by $0.05 on a year-to-date basis. Moving to Slide 10, let me provide some additional insight on our adjusted EPS walk for the quarter. Our core businesses excluding the continued impact of weather and other changes in consumption provided additional margin contribution that increased adjusted earnings by $0.33 per share. We previously touched on the key drivers of this growth, the third quarter of 2022 included interest income on a federal income tax refund. The current period earnings exclude the $0.03 impact from this item. We had a $0.03 offset related to reduced volumes for the quarter. Higher operating expenses tied to our core business drove a $0.06 impact as we continue to manage cost to offset warmer temperatures. Higher depreciation, amortization and property taxes resulted in a $0.03 impact and finally increased interest expense and other changes together resulted in a $0.03 impact compared to the same quarter last year. On Slide 11, we provide a similar bridge related to our year-to-date performance. The primary drivers are largely the same as what we just covered for the quarter, so I won't walk through all of the details, but I did want to note a few key items. The year-to-date period includes a $0.04 decrease attributable to effects of non-recurring items. The absence of the interest income related to a federal tax refund and the real estate gain from the prior year period were partially offset by the one-time benefit associated with the decrease in one of our state tax rates for the current year. As we've noted, weather was much more impactful on our year-to-date performance. The historic temperatures experienced during the first quarter along with the continuation of warmer temperatures into the second quarter have impacted our results again by that $0.41 per share relative to the prior year. As you can see on this slide, the weather impact cut into the core business growth contribution of $1.22 per share by approximately one third. So with that said, we were pleased with the adjusted EPS improvement of $0.05 per share compared to the prior year. Moving to the next two slides, let me touch on Chesapeake Utilities operating segment. As you can see on Slide 12, adjusted gross margin was up 8.8% for the quarter and 7.8% year-over-year for our regulated energy segment. Operating income was also higher in both periods, up 5.3% and 9.1% respectively and driven primarily by new rates associated with our Florida natural gas base rate proceedings, organic growth in our natural gas distribution systems, transmission pipeline expansion and incremental contributions from our various infrastructure programs. Absent the transaction related expenses, operating income was up 21.8% and 13.3% for the three and nine month period. Turning to Slide 13, adjusted gross margin for the unregulated segment increased 8.4% for the quarter and reflects a 2% increase over the prior year-to-date period. At the operating income level, the third quarter results were largely consistent with the prior year, but on a year-to-date basis, the combination of the significantly warmer temperatures experienced and the fixed operating expenses that are inherent in our unregulated businesses resulted in a decrease of $4 million compared to the prior year. Given our planned capital investments over the next couple of months, including the Florida City Gas acquisition, I'd like to highlight some of the details on our balance sheet position. At the end of the period, total capitalization was approximately $1.65 billion. This included 52.6% stockholders' equity, which is approximately $867 million and continues to be within our target capital range. 40.3% long-term debt at an average fixed rate of 3.89% and only 7.1% of short-term debt reflecting the long-term debt financing that was executed earlier this year. As shown on Slide 14, the $80 million of 15-year senior notes that we issued in March allowed us to reduce short-term borrowings considerably. With a short-term debt balance of approximately $120 million, we've been able to mitigate continued effects of the rising interest rate environment that began in 2022. We locked in the interest rate for $50 million of this short-term debt balance utilizing a three-year swap that we executed through September 2025. We have additional capacity under our revolving credit agreement and shelf agreements in place with Prudential and MetLife. We also have the ability to issue equity under our various plans in the future. On Slide 15, we detail the key drivers of our future growth. First, we continue to deliver organic growth in our natural gas distribution businesses that far outpaces the national average. Across both of our Delmarva and Florida service territories customers continue to select natural gas as their preferred energy choice. In 2023, we've had a 5.6% increase for our Delmarva service territories and a 4% increase in Florida. This illustrates again the attractiveness of the communities we serve. The magnitude of the customer growth and our distribution businesses is also continuing to drive the need for additional investment in our transmission system. As I mentioned previously, several of our pipeline projects generated margin for the first time in the third quarter. We added the Newberry project to our major project table this quarter and also continue to make headway with other initiatives including our Wildlight expansion. These projects and others will deliver significant margin growth in 2023 and beyond. And while weather was a headwind, our Sharp team did an excellent job managing margins and service fees, especially in our northern service territories. Beyond the customer growth we are securing with natural gas, we continue to add new propane community gas systems where natural gas is not yet available. Propane remains a core component of our growth strategy as a highly desirable energy source for our customers where natural gas is not available. Our virtual pipeline solution, Marlin, serves our customers with gas transportation services that solve unique and complex challenges, including clean energy, which we mentioned on our last call. Marlin's virtual pipeline solution is delivering compressed natural gas to their fueling station in Florida. Finally, we continue to advance several sustainable investment projects. We are disciplined and cautious in our approach, recognizing the evolving maturation of these markets and regulatory constructs. We have initiated construction on our first full scale renewable natural gas facility at the Full Circle Dairy Farm in Madison County, Florida, and we remain on track for that unit to go into service in the first half of 2024. On our last earnings call, we also our participation on a collective team comprised of commercial, governmental and educational institutions that submitted a proposal for the MACH2 Hydrogen Hub in the Delaware, Philadelphia, and the Southern New Jersey region. As Jeff mentioned previously, the selection of MACH2 presents significant opportunities for us and our fellow partners to promote hydrogen development and deployment across multiple uses. We are excited to work with these partners in furtherance of our mission to deliver hydrogen-based solutions that support a more sustainable future. Moving to Slide 16, we highlight our major projects including the pipeline expansion, CNG, LNG and RNG transportation projects, and strategic regulatory initiative, which will drive our adjusted gross margin growth this year and next. As always, we remind that this table does not include organic growth and it is not indicative of all the projects that we are evaluating and pursuing. We continue to be encouraged by the opportunities that are presented by our business development team and look forward to announcing other projects in the future. In closing, our performance for the quarter and year-to-date demonstrates the perseverance and dedication of our team and that the fundamental growth strategies that have contributed to our past success are delivering results that will also drive future long-term earnings growth. I'll now pass the call to Jim to discuss our regulatory and company culture update.

Thank you, Beth, and good morning. It's great to be with you all. I would like to first discuss our comprehensive rate case initiatives which are significant both financially and from a business simplification standpoint. We now have two full quarters of earnings associated with the permanent rates from our recent Florida rate case. We expect to recognize close to $17.2 million in 2024. And by consolidating our four natural gas distribution entities into one, we are able to simplify our business. Building off of the process we followed in Florida, we are preparing for our upcoming Maryland filing. We are required to file a rate case in early 2024 for our Maryland division and Sandpiper Energy. We will look to build on these regulatory strategies and lessons learned as we prepare these filings. Our infrastructure program initiatives contribute to maintaining safe and reliable service and contribute to margin growth. As mentioned previously, our GUARD program was approved by the Florida PSC in August 2023, the 10-year program which enhances the safety, reliability, and accessibility of portions of our natural gas distribution system is expected to contribute $205 million in capital investment. Our Storm Protection Plan and Cost Recovery mechanisms approved by the Florida PSC in the fourth quarter of 2022 are expected to contribute approximately $8 million capital investment in 2023. And our Eastern Shore Capital Cost Surcharge program continues to play a key role in rate recovery for otherwise non-revenue producing projects for Eastern Shore. This program allows for the recovery of capital investment costs associated with mandated highway or railroad relocation projects as well as capital costs related to compliance with certain new PHMSA regulation. Turning to Florida, one of the key reasons that the Florida City Gas transaction is so attractive is the state's constructive and supportive regulatory environment. We know this state very well, and we value our relationships with customers, regulators, legislators, and the communities. We look forward to expanding those opportunities to serve. Florida City Gas and Florida Public Utilities have very similar regulatory profiles, both completed rate cases in 2023 and both have similar infrastructure replacement programs. Upon closing of the acquisition, our combined Florida natural gas distribution entities will realize a $40.5 million increase in 2024 margin due to the 2023 rate case settlements, and pending approval of Florida City Gas' investment schedule later this year. We expect $410 million in capital investment over the next 10 years associated with the GUARD and SAFE programs.

Thank you, Jim. Turning to Slide 19, I'd like to reinforce my earlier comments on our capital expenditure guidance. As you will recall, we updated and expanded our capital projections when we announced the Florida City Gas acquisition. Our five-year capital expenditure guidance is projected at $1.5 billion to $1.8 billion for the 2024 to 2028 period, exclusive of the FCG transaction investment. Both transaction investments associated with Florida City Gas represent approximately $500 million of the total guidance range. Drivers of the increased CapEx plan include investments in a few key areas, including natural gas distribution system investments to accommodate a growing Florida customer base and investments to enhance system safety and reliability through the existing GUARD program for FPU and SAFE program for Florida City Gas. Infrastructure including gas transmission expansions to support the utility systems growth and increases in capital investment for Chesapeake's legacy businesses as well as the Company's technology plan that includes enhancements of billing systems, financial ERP system, and many other ancillary systems. Following the close of the Florida City Gas acquisition, we expect that our capital investment run rate to be in the range of $300 million to $360 million annually. We're reaffirming our 2028 diluted EPS guidance range of $7.75 to $8. This implies an EPS growth range of approximately 8% from the 2025 EPS guidance range and an 8.5% annual growth rate for the 2018 through 2028 period. We also reaffirmed our 2025 guidance of $6.15 to $6.35 per share based upon the growth opportunities with our expanded footprint and considering the sizable integration of Florida City Gas. To conclude on Slide 22, we realize we earned the trust of our shareholders because of the performance we achieved, and our achievements are only possible because of the expertise and dedication of our team. We continue to be energized by our prospects and are well positioned to deliver on our strategy. We remain intently focused on disciplined cost management for our capital investments and ongoing operations. At the same time, we're confident in our ability to deliver growth and value by executing steady, return-oriented capital investments across our five growth platforms. In short, we are deeply committed to achieving the performance levels our shareholders have come to expect. And with that, why don't we open it up for questions?

And our first question will come from Chris Ellinghaus with Siebert Williams Shank. Your line is open.

Beth, it looks like O&M was pretty controlled in the third quarter and I'm looking at Page 4 of the press release. Is that a function of your efforts to mitigate the $0.41 of weather? And can you give us some sense of the $0.41 of weather? How much have you sort of directly influenced offsetting from the cost or other efforts?

Sure, great question, Chris. So number one, I would say the first, the biggest offset to the $0.41 of weather really comes on the margin side and it comes from our ability to be able to manage margins and retail prices to customers. So, of that $0.41 weather impact you also see a corresponding significant increase in our, basically our propane prices to customers as well as some of the fees that we've been charging for our different programs. So, you are absolutely right. You heard Jeff talk quite a bit about it. We as an organization continue to focus on cost management. Naturally, given the warmer temperatures, you don't have a lot of the same overtime drivers, and so we're able to manage the part-time drivers that were on-boarding as well as the overtime costs that would have been paid if you had a colder than normal weather season. And so, we're able to do that. The other thing that we've been able to do is to look across our organization and as we've continued to bring our operations together from a geographic perspective and under one leader, our COO, we've also found efficiencies in the way we've been able to manage the business. So, you'll continue to see us focus on cost management. That's something we spend a lot of time on, and you'll see us continue to do that at all levels of the organization.

As far as the MACH2 partnership goes, can you give us any sense of timing of potential investments or any kind of tangible thoughts about what that really means for you guys?

Sure. Jeff, do you want to kick it off or you want me to start and you add?

Go ahead, Beth.

Sure. We're working as part of a global team across three specific geographic areas. Some commercial applications are being explored. Specifically, we believe we can significantly contribute to training and transportation fuel aspects of these initiatives. We see opportunities related to training with hydrogen, given our safety town facility, and we also recognize potential in hydrogen utilization on the transportation side. I don't have a precise timeframe for when all the initiatives will come together, but I know the partners are meeting regularly since the award was given, and we can provide more details on expected timing.

The long-term financing for Florida City Gas, one of your peers, encountered challenges in securing some long-term financing that hasn't performed well over the past couple of years. Do you have any thoughts on whether you would prefer to take a proactive approach? Or do you have a perspective on rates that would lead you to be more patient?

Chris, I would say, as Jeff indicated and I echo. We're continuing to look at the market. Certainly, as when we decided to pursue this transaction, we were already in an environment of significantly rising interest rates. And so, we knew the market that we were entering into and our models will run with that in line. And then secondly, right, we run sensitivities on those models. And so, we are still at the same place as Jeff echoed on the call. We still feel very good about this opportunity. We still feel good about our ability to hit our 2025 guidance, that's out there. And so, you're going to see us evaluate when is the right time to enter into the permanent financing, but we've had a lot of investor interest overall just with the transaction and so we still feel like we're in a very great place.

Our next question will come from Dylan Lipner with Ladenburg Thalmann.

The question I have is regarding the regulatory approvals for Florida City Gas. One, are you expecting the Hart-Scott-Rodino to be resolved, they're closing this month? And then, are there any other regulatory approvals that are needed beyond the three that were mentioned?

Sure, I can start that off or Jim would you like to start it off and I can add?

Sure. Thank you, Beth, and good morning, Dylan. The waiting period under Hart-Scott-Rodino is to expire at midnight on Monday. As you know, if we were to receive a second request from the Antitrust Division, that would not happen. But we're one day away from the period expiring. And then that would be the last of the regulatory clearances as we would need.

Okay. Great. And then going back to the acquisition as well, describe any type of synergies that you potentially see with the transaction and any further timing of these synergies occurring?

I will begin and then Jeff can add anything I may have overlooked. Firstly, Dylan, as we mentioned during our last call when we announced the transaction regarding 2024, we believe we will have a lot more clarity to share in February at our year-end earnings call. We have been focused on obtaining the necessary regulatory approvals and have achieved strong results in that area. The transition, integration, and planning have also been significant priorities for our teams, especially given the relatively short timeframe. We are actively working to confirm some of the assumptions we've made regarding our model, but we will provide more details in February. Currently, we are focused on finalizing the transaction so that we can close in the fourth quarter as previously indicated. Jeff, do you have anything to add?

Maybe just a couple of things. So, I think it was very clear to us the goodwill impacts of this transaction going into the deal. I mean, we went in eyes wide open. We understood the need to identify synergies in City Gas. We also understood that we need to think more broadly than that across our larger enterprise, and we understood the opportunities, I think to accelerate certain capital projects and generate margins quicker than we might otherwise have anticipated. And also the regulatory actions that would likely be required or desired over the next couple of years to overcome some of the goodwill impact. We also, as Beth indicated, modeled several different scenarios and tested a number of different sensitivities. Anticipatory, we did not, we were hoping that the market would do what it did, but we did have some anticipatory analytics looking at potential market downturns. And so, I think we've gone into this understanding what we need to do, and I think we're prepared to do that. As Beth indicated, the specifics of those synergies and the specifics of the incremental opportunities that we see across the organization are something that we're getting a good handle on and will report in February.

Okay. Great. Thank you for that. And then lastly here, where are you guys year-to-date on your propane business and whether you think you'll end the year on propane?

Well, I think as to Chris' first question that he guessed, the most I would say, the biggest downside for that business this year has been the weather. We've had strong, as I also indicated, strong retail margins and service fees, adding customers, adding community gas systems. We can see business continues to do very well and even though on a year-to-date basis weather has been a factor, Dylan, as we've talked about several times, this business even in a year like this year will generate a higher than traditional utility returns. So, the business is doing well. The fourth quarter will certainly be impacted by the weather. We're having some great weather right now, so we're hoping that continues. And again, the business will do well even in spite of the weather for the year.

Our next question will come from Tate Sullivan with Maxim Group. Your line is open.

Can you go into some more detail on that $80 million liquefied natural gas keeping storage facility? Jeff, how long was that under planned? And are there riders associated with that or most of the gross margin will come after construction is finished in 2025? Is that the case?

Yes. The margin really is targeted at that in service date period. We've been looking at our growth on the Delmarva Peninsula. Frankly, there was some amazement for the last decade. As we've indicated a number of times before we're seeing growth rates customer growth rates in evolution systems that exceed 5% per year, and we have been planning our gas supply activities accordingly. And so, if you project out the next few years of growth that continues at those levels and even in an environment where the mortgage rates have increased significantly, we're still seeing substantial customer growth there projected by the dealers on that Peninsula for a number of years to come. And so, we started looking at our peak delivery capabilities over time, and our modeling would indicate that at some point in future, we need to do something, either add additional upstream pipeline capacity or find market area supply capabilities. And the LNG project turned into frankly the most economic for rate payers option that we have available, and it provides that sort of wintertime peak demand peaking service that will allow us to continue to expand our distribution delivery services for a number of years to come? It will fix everything forever, but it's a nice addition to the other peaking service capabilities that we have on the Peninsula. We don't have a base load capacity issue there. This is primarily intended to deal with those significant weather related winter peaks.

And then, is it based on the winter peaks? There's no need for an LNG duplication facility in Florida? Is that the case?

No, we actually have a significant amount of pipeline capacity for our legacy system for the public utilities. We could always use more. I mean, there are constraints on the pipeline systems in Florida, especially going into South Florida. And in fact, as you may know, the Florida City Gas folks have activated an LNG storage facility down in Miami, South of Miami actually, to provide peaking services for that system. So, we will inherit an LNG peaking storage facility in Miami, and we'll build one in Maryland that will provide is to the customers of the Delmarva Peninsula. So, there are issues there, and I'll just add to that. One of the things that’s intriguing about the Florida City Gas opportunity is the pipeline transmission investment opportunity to add to the interstate capacity going into South Florida. And so, we think there are significant opportunities to help increase the capacity levels into our Palm Beach service territory on FPU and then further south into Florida City Gas' Miami service areas.

And our next question comes from Brian Russo with Sidoti. Your line is open.

I'm just curious, when we look to the fourth quarter of 2023, clearly, you demonstrated very strong third quarter margin and earnings growth. Is there any reason not to expect that type of trend in the fourth quarter of 2023? Are there costs that you hope to mitigate weather earlier in the year that will kind of reverse in the fourth quarter? Or just any insight there would be helpful?

I think, Brian, some of what you saw both in terms of the margin expansion within the quarter as well as, we did have some cost increases in areas like facilities and maintenance and also on the employee side as well, and my expectation is you would expect those costs to continue to increase as we're coming into the fourth quarter. And what I would say is, at the same, we are managing our costs very tightly, as Jeff and I both have talked about, so both of those would be a factor. One of the biggest drivers on the margin side also, as you know, is the impact of our natural gas rate case. And so, you'll have another piece of that that will hit in the fourth quarter. We've kind of put some estimates in our gross margin table. So, we've tried to lay out that impact. And then I think the remaining factor will be the weather and what happens. The fourth quarter is our second highest from a weather contribution quarter. And so, weather will be warmer, colder or normal will have a significant impact on our results for the year.

You mentioned FPU and the growth of residential customers at both FPU and Delmarva. How does that growth compare to that of Florida City Gas?

We've seen customer growth rates at City Gas that are generally comparable to what we've experienced at FPU, and we've been near close to 4% or lower 4% typically at Florida Public Utilities. I continue to mention that one of the things that NextEra did while they owned the system, and obviously, they still do, is they doubled the rate base in the five years that they owned it. And those dollars were spent on hooking up new customers primarily, certainly some pipeline replacement activities there. But a lot of that investment went to expanding their systems and serving new customers. So, we think that it folds right into what we've been doing at Florida Public Utilities for the last several years.

And then with the understanding with the permanent financing for Florida City Gas still pending to be determined. Your $118 million of short term debt balance, $50 million is hedged, right? But is $118 million is that kind of what we should consider normalized going forward until the FCG transaction is the permanent financing is complete?

Well, I think from a financing perspective for Chesapeake's legacy business, we've put out our guidance in regards to CapEx for the year, and where we've reaffirmed that for ourselves, ignoring the FCG transaction to be about $200 million to $230 million. So, that's the biggest piece that would have an impact on our legacy business as you think about the rest of the year and where we would land there.

And then just lastly, bigger picture strategically. Obviously, FCG significantly enhances your scale in Florida and just your overall utility footprint approaching 90% of the business. Could you just talk about outside of the LNG project? You announced maybe some longer hydrogen opportunities. Can you just talk more about any growth projects that might be in the pipeline? And then maybe just as important is your strategy around propane? You've done several very accretive acquisitions over the last several years. And I'm wondering, is expansion through bolt-on still part of the strategy? Or we're going to focus on integrating FCG over the next 12 to 18 months?

Let's start with the propane question. As Beth mentioned earlier, we remain optimistic about the propane business and see opportunities for growth and expansion. Some of these may come through smaller acquisitions, as we're not particularly interested in larger opportunities that might arise. We are looking to add another propane opportunity in our existing service areas, which is appealing to us, and we will continue to pursue growth in that business. We aren’t targeting a specific split between non-regulated and regulated business; instead, we focus on opportunities that make sense and are strategically viable and financially attractive. This approach applies to both our propane and other non-regulated operations. Regarding opportunities with City Gas and other capital projects in our enterprise, we noted that through the Florida City Gas acquisition, we anticipate an additional $500 million in capital for City Gas and its core operational areas. There are opportunities to enhance pipeline capacity in South Florida to serve unserved and underserved areas, which creates significant prospects for Peninsula Pipeline's intrastate transmission business in Florida. We’re excited about this. Additionally, City Gas is advancing its pipeline replacement regulated program, and we expect a decision from the commission soon, which would initiate a $200 million investment over the next 10 years at $20 million annually for pipeline replacement. We have a comparable program running at Florida Public Utilities, also at around $20 million a year for the next decade. Therefore, we see substantial pipeline replacement opportunities in Florida totaling about $40 million per year going forward, which underscores why we are interested in City Gas.

And our next question comes from Brian Russo with Sidoti. Your line is open.

Well, thank you. And I want to thank everyone for joining us this morning. We appreciate your time and your continued interest in the Company. We look forward to speaking with you on our next earnings call in February. And while it's just a few weeks early, wish everyone a Happy Thanksgiving. Goodbye.

Thank you. This concludes today's Chesapeake Utilities third quarter 2023 earnings conference call. Please disconnect your line at this time and have a wonderful day.