Welcome to the Chesapeake Utilities Corporation's First Quarter 2024 Earnings Conference Call. I would now like to turn the call over to Lucia Dempsey, Head of Investor Relations.

Thank you, and good morning, everyone. My name is Lucia Dempsey, and I'm thrilled to have joined Chesapeake Utilities Corporation last month as the new Head of Investor Relations. I'm looking forward to meeting many of you at AGA next week or at other opportunities in the coming weeks and months. Today's presentation can be accessed on our website under the Investors page and Events & Presentation subsection. After our prepared remarks, we will open up the call for questions. With me today are Jeff Householder, Chair of the Board, President and Chief Executive Officer; Beth Cooper, Executive Vice President, Chief Financial Officer, Treasurer and Assistant Corporate Secretary; and Jim Moriarty, Executive Vice President, General Counsel, Corporate Secretary and Chief Policy and Risk Officer. On Slide 3, we show our typical disclaimers while I 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 our 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 first quarter Form 10-Q. Now, it is my distinct pleasure to turn the call over to Jeff.

Thank you, Lucia. Good morning, and thanks to all of you for joining our call today. I'll begin with Slide 4. This quarter, our team once again executed on our long-standing strategic growth plan. Over the past several years, we've been focused on three fundamental drivers to support earnings growth. First, we work hard to identify and prudently deploy investment capital that meets the service demands created by significant customer growth. Our geographic footprint is an advantage here. Our service territories continue to experience a customer growth rate that is more than double the industry average. Second, we proactively manage our regulatory agenda to support the approval and cost recovery of our capital projects. You'll hear us describe in a moment several projects currently in front of state and federal regulators with total investment well over $200 million. And the third and perhaps most important of our strategic growth drivers, is the continued business transformation of our company, which is focused on our people, processes, technology, and organizational structure. Our continuous improvement initiatives enable us to manage an ever-expanding business. Turning to Slide 5, this morning, you will hear us touch on service delivery to customers and other operational accomplishments, the Florida City Gas acquisition integration process, capital project execution, regulatory advances and a number of efficiency improvements. I'm happy to report that two of the more significant concerns facing our company and our industry, weather and interest rates have been, at least through the first quarter, far less impactful to earnings than what we experienced in 2023. While the 2024 winter was warmer than normal in our service areas, we've been able to manage through it. Customer consumption increased in the first quarter compared to Q1 of 2023. And as we all know, interest rates appear to have at least stabilized with no increase so far this year. Our regulated natural gas transmission and distribution businesses continue to grow. We will mention today several system expansions, which are in various stages of approval, permitting or construction. In our nonregulated businesses, we realized contributions from increased propane consumption, as well as increased propane margin and service fees. This served to offset much of the warmer-than-normal weather impact. Our Florida City Gas integration plan is on track and on schedule. Importantly, our Florida City Gas business delivered incremental margin in line with our expectations. This quarter, we immediately recognized the positive impact from our integration efforts and didn't miss a beat with our accelerated capital investment plans across our larger footprint. We're now even more confident about our opportunities to propel future earnings growth in Florida, including through four projects and an expansion of the SAFE program, which are all currently filed for approval with the Florida Public Service Commission. Across our enterprise, we are steadily advancing the capital investment projects, regulatory filings and business transformation initiatives that will support future growth and optimize our operations within our larger footprint. We are particularly pleased to have just received approval from the Florida Public Service Commission on Tuesday for three new transmission expansion projects that support increased customer demand. We remain confident in our ability to achieve our 2024 adjusted EPS guidance of $5.33 to $5.45 and our longer-term outlook for 2025 and 2028 as we continue to drive shareholder value by delivering on the attractive opportunities throughout our businesses. I will now turn to Slide 6, which covers results for the quarter. Adjusted earnings per share was $2.10 in the first quarter of this year. We also generated adjusted gross margin of $165 million, a $35 million increase over the first quarter of last year. Florida City Gas represented $25 million in adjusted gross margin in Q1. This was driven by an incremental contribution from the 2023 rate case as well as continued customer growth. Our legacy businesses contributed another $10 million of adjusted gross margin growth, driven by contributions from incremental transmission expansion projects and organic growth in our natural gas distribution businesses, contributions from our regulated infrastructure programs and Florida natural gas base rate proceeding, higher customer consumption, increases in Aspire Energy gathering fees, and higher propane consumption margins per gallon and fees.

Thanks, Jeff, and good morning, everyone. It is great to catch up with you today. We had another successful quarter with adjusted EPS of $2.10 per share, $0.06 higher than the first quarter of last year, driven by solid performance across all our businesses. As you can see on Slide 10, our recent acquisitions, largely Florida City Gas, contributed $0.84 in adjusted EPS. Our Florida City Gas unit achieved solid customer growth and benefited from its 2023 rate case outcome. Our legacy businesses also generated strong earnings, delivering $0.26 of incremental EPS this year, and we had $0.06 of contribution from increased customer consumption due to colder weather. I want to point out that while temperatures were colder than last year, they were still about 10% to 12% warmer than the normal temperatures, calculated using a 10-year average in both our Delmarva and Ohio service territories. As always, we are prudently managing expenses, especially our payroll and travel and entertainment expenses, and optimizing our operations, which drove an $0.08 benefit to adjusted EPS this quarter. These gains were balanced by a few factors: a $0.05 offset from depreciation, amortization and property tax, a $0.34 offset from acquisition-related expenses and an approximate $0.73 offset related to the Florida City Gas financing costs. Turning now to Slide 11. Adjusted gross margin increased by 27% to approximately $165 million. Operating income increased by $25 million or 45% to approximately $80 million. Excluding transaction and transition-related expenses, operating income increased by $26 million or 47%. We are proud of this strong gross margin improvement and, most importantly, almost all of this improvement fell to net income. As a result, our adjusted net income improved by 29% to $47 million. This is a significant accomplishment and demonstrates the diligence of our team as we continue to optimize our operations, increase collaboration across our businesses and drive efficiencies.

Thank you, Beth, and good morning, everyone. I'll begin with Slide 19, where we present our rate case initiatives and infrastructure programs. In Florida, we've been operating at our new effective rates for nearly a year in our Florida Public Utilities and Florida City Gas jurisdictions with allowed ROEs of 10.25% and between 8.5% and 10.5%, respectively. 2024 will be our first full year with these increased rates. As we discussed on our last call, we filed a joint application for a natural gas rate case with the Maryland PSC in January 2024. Our application seeks approval for tariff changes, including a new technology cost recovery rider, a proposed underserved area rate, which will enable expansions to meet demand, as well as the program for evaluating extensions to multifamily projects. We also filed a separate depreciation study associated with our Maryland utilities. We are continuing to have a productive engagement with our regulators and are optimistic about our continued path to a constructive outcome. As Jeff mentioned, we are making significant headway with our infrastructure programs in Florida, which are designed to continually improve the safety and reliability of service.

First, to follow up on the comments on the liquefied natural gas storage facility in Maryland, is that not yet in your incremental gross margin table? This is my first question.

That is correct, Tate. We're waiting for the final approval. And then at that point in time, we will include a gross margin estimate. But as we indicated in the update, as you heard, we're really pleased we're on schedule, most recently with the environmental assessment being issued.

And has site work started on that project? Or will construction start upon the FERC order and its construction timeline estimated based on a table about 9 months? It seems sort of fast.

That's correct. We have already begun preparing for the site by having some of the work done related to the tank manufacturing. So, that is well underway. We've also basically contracted for the purchase of the land once we get the appropriate approval. So, that's why once the final approval for the project is received, we can work pretty quickly to get everything constructed and be ready to go next year.

And last for me is for Florida City Gas customer growth. Is it still expected to be similar to your natural gas operations that you had before Florida City Gas?

It's a little bit more in metropolitan area. So, the growth relative to somewhere like in the Jacksonville area may not be quite as high, but still it's relatively good, strong customer growth that we continue to experience there as well.

Congratulations on a great quarter. You talk about sort of margin improvement in propane and gathering, can you tell us where the margins are today and what they were previously?

Sure. I mean, we don't typically disclose the actual margin level itself. But certainly, as you're coming through, Paul, the first quarter, there's a lot of volume that happens primarily in that first quarter. And some of the margin expansion that we saw was a result of weather still staying above normal. And so, we've provided a calculation where we talk about the weather impact to the tune of about $1.5 million or $0.05 per share in terms of what our results would have been if weather had been normal. I can tell you, in the propane business, we've had the benefit for the last several years, 5 years plus where in periods where we have experienced warmer-than-normal temperatures, the rate increases, the margin increases have been somewhat of a natural hedge. I can also tell you that as we've come out of the first quarter, margins have stayed a little higher than normal. But keep in mind, our volumes cut down significantly in the second and third quarters because you're not in those heating seasons. On the Aspire side, we've worked really hard in terms of our rate design. And so, you've seen us be able to adjust our rates to also compensate for some of the weather impact. And so that's what you're also seeing come through the numbers in the first quarter.

And are you in a position yet to sort of indicate what type of cost savings you're expecting in Florida post acquisition?

We are not at this point coming out with specific dollar amounts. I mean, you can see that if you look at our results for the quarter, and we've talked about in the past, our operating expenses, exclusive of depreciation, amortization and property taxes as a percentage of gross margin. And relative to what we looked at in 2023, there is certainly an improvement in that metric. And we're going to continue to fully integrate the business, make sure that we're accomplishing everything that we set out to do. I think if you looked at us, we've evaluated ourselves in the past relative to our peers. We've had a real focus on cost management, and that's going to continue. But the real story around Florida City Gas for us is not so much just cost management, but it's also the opportunity to capitalize on the growth opportunities and more so some various regulatory strategies that we think we can deploy there. And so, right out of the gate, and hopefully this came through in the slides, we were pretty happy to report, that we've got 7 projects that we've gotten approval for. Not all of those, we have margin estimates out for because 3 just got approved this week in Florida. We've got another 4 in the pipeline that you'll hear more about in the future, 3 of which are projects for Florida City Gas. One is also an asset project associated with them. So, there's a lot going on, Paul. We've actually stepped up as we had anticipated, and you see that ramp. And so, that's really exciting to us and what we can do there and then again, the regulatory strategy. So, we're down a path on all of those. And again, if you look at that metric, I think that will give you some comfort that we are achieving synergies. We're just not coming out with a lot of specifics because, again, we're 1 quarter in. We're trying to accomplish a lot of different things on many fronts. But stay tuned. Hopefully, again, like you said, things continue as planned. It started out great again for the first quarter.

And then last question. You've given us sort of an equity to total capitalization target of sort of 45% to 50% sort of near term. What does that equate to potentially in terms of FFO to debt? And can you give us any insight into planned equity issuance over the course of your forecast period?

Our target equity to total capitalization is actually 50% to 60%. And we're actually at about 48% as of the end of the first quarter, slightly ahead of where we thought we might be in some of our projections. But over the next five years, you're going to see us move back to our target capital structure of 50% to 60% equity. What you also heard us talk about was the fact that we are reinvesting back into the business somewhere between 50% to 55% of our earnings. Right now, our dividend payout is in the upper 40s. And so, that enables us to put a strong amount of earnings back into the business and infused equity that's very competitively priced. And so, for the quarter, you actually saw suggest about $35 million into our equity from retained earnings. As we look out, certainly, we're looking at FFO to debt. We don't put a lot of metrics out on that. But as we did the transaction, we wanted to make sure we stayed at an investment-grade level. That was important to us. And so, you're going to see us be well into the teens on our FFO to debt, mid-teens to upper teens as we look at it. And then finally, from a financing perspective, we will access the capital markets as needed. We have historically dribbled out equity over time. I think with the strong cash flow that's coming from our larger enterprise and looking at the cash flow, certainly, for the first quarter, you can see it. We will need some small equity infusions, but there's a lot of cash that's going to be able to be reinvested back into the business. You'll see us doing some debt refinancings at the appropriate time. But you won't see any heavy equity lift, certainly like you would have seen with the transaction or anything like that, small dribbling amount over time. And if I missed anything, please let me know, Paul.

Thank you again for joining today's call. We are very pleased with our first quarter performance, including the many capital projects that we've initiated. We look forward to seeing many of you at the AGA Financial Forum that's coming up. Goodbye.

This concludes Chesapeake Utilities Corporation's First Quarter 2024 Earnings Conference Call. Please disconnect your line at this time, and have a wonderful day.