Chesapeake Utilities Corporation (CPK) on Q1 2021 Results - Earnings Call Transcript
Operator: Greetings and welcome to the Chesapeake Utilities Corporation's First Quarter Results Conference Call. During the presentation all participants will be in a listen-only mode. Afterwards we will conduct a question-and-answer session. . As a reminder, this conference is being recorded Wednesday, May 5, 2021. I would now like to turn the conference over to Beth Cooper, Executive Vice President and Chief Financial Officer. Please go ahead.
Beth W. Cooper: Thank you and good afternoon, everyone. We appreciate you joining us today to review our first quarter 2021 results. We announced our financial results for the quarter yesterday. As you saw, our strong financial results indicate we continued growing and operating effectively, serving our customers, identifying and finalizing new investment projects, and keeping our employees as safe as possible.
Jeff M. Householder: Thank you, Beth. Good afternoon, and thank you all for joining our call today. We've had a very strong start to 2021 with continued profitable growth initiatives across our business units. As shown on Slide 4, earnings per share from continuing operations was $1.96, an increase of $0.19 or 10.7% compared to our first quarter 2020 earnings per share of $1.77. Gross margin increased more than $17 million over the first quarter of 2020. Our results were driven by growth across the company. We also experienced increased consumer consumption resulting from weather that more closely resembled normal temperatures. Some of the key margin drivers included pipeline expansion projects, the Hurricane Michael regulatory settlement, organic natural gas distribution customer growth, contributions from Elkton Gas and Western Natural Gas, increased retail propane margins per gallon, and increased business in Marlin Gas Services. As our General Counsel, Jim Moriarty, is fond of saying, we are the beneficiaries of geography. We're fortunate to provide energy delivery services to communities that are experiencing significant growth initiatives that signal support for continued expansion of our systems in Florida. In all of our service areas, the demand for natural gas, propane, and electricity has never been higher. We continued to see customer additions at a rate that's more than twice the national average. In the past year, our utility distribution customer count increased by 7.4%. Growth opportunities to serve new customers was the primary driver of our capital investment in the first quarter. We projected capital investments for 2021 at approximately $200 million, and we're on track to achieve that target. Our first quarter capital investment totaled just under $49 million. Earlier today, our Board of Directors have approved an annualized dividend payment of $1.92 per share, a $0.16 per share or 9.1% dividend increase. The $0.16 per share increase in the annualized dividend closely aligns our five-year earnings growth rate of 9.4% through December 31, 2020, with our five-year dividend growth rate of 9.5%, as shown on Slide 5, including this most recent increase.
Beth W. Cooper: Thanks, Jeff. Turning to Slide 6, net income from continuing operations for the quarter was $34.5 million compared to $29 million for the same quarter of last year. This represents a growth in net income of $5.5 million or approximately 19%. As I'm sure you all recall, during the fourth quarter of 2019, we exited the natural gas marketing business and recognized gains on the sales associated with that exit. There were some minor lingering impacts associated with the sales of this business both in 2020 and also the first quarter of 2021. As a result, I will focus our discussion today largely on continuing operations. EPS from continuing operations for the first quarter compared to the first quarter last year grew by $0.19 to $1.96 per share from $1.77, representing growth of just under 11%. Growth initiatives and customer consumption drove the growth rate and net income by 19%, while the EPS growth rate of 11% is a result of the significant amount of equity we successfully issued in the third and fourth quarters of 2020 via the ATM program and our various stock plans. Higher income was the result of increased performance across the enterprise, as Jeff mentioned earlier, coupled with continued expense management, business efficiencies, and standardization and collaboration across the Company. Gross margin increased 17.1% compared to the first quarter last year, while operating income grew, because of these impacts, by 22.5%. As Slide 7 also highlights, the growth in operating income was fairly split between the two segments, Regulated Energy and Unregulated Energy, for the quarter. The key drivers of gross margin and expenses for quarter one compared to quarter one of last year are highlighted on Slide 8. Gross margin net of specific expense attributes grew $0.65 per share after tax. Higher earnings for the quarter reflect increased earnings across the business from first, customer consumption, as Jeff mentioned primarily weather focused, was $0.26 per share; pipeline expansion projects another $0.11 per share; higher retail propane margins per gallon increased margin by $0.06 per share; organic growth in our natural gas distribution operations added $0.04 per share; contributions from recent acquisitions, including Elkton Gas and Western Natural Gas added $0.04 per share; the Hurricane Michael regulatory settlement also added $0.04 per share after associated depreciation and amortization of associated regulatory assets; and margin from Marlin increased by $0.03 per share; lastly, from our Florida GRIP Reliability and Infrastructure Program, we added $0.02 per share. These increases were offset by the absence of property sales that occurred in the first quarter of last year, which represented $0.14 per share and the increased shares we added, that I just referred to, another $0.12 per share. Given our opportunistic equity issuances over the past 12 months to take advantage of our strong equity market position. Finally, depreciation, payroll, and facilities expenses basically drove our earnings per share down by $0.20 per share because of the growth in our business.
Jeff M. Householder: Thanks, Beth. As Beth noted, our capital capacity and the strength of our balance sheet continues to support growth. We're very comfortable that our previously updated capital guidance remains on target. Slide 11 is a reminder from earlier earnings calls of the key strategic initiatives that focus our project development and transaction interest. As I noted a moment ago, we continue to experience significant demand for the energy services, provided by our existing business units. Let me highlight a few of our major initiatives on Slide 12. A significant portion of projected capital investment is devoted to expanding our existing core businesses. We also have several relatively small-scale transmission pipeline projects under development that will potentially increase investment in this area. Our propane business continues to grow and we will keep looking for acquisition opportunities in the Mid-Atlantic and Southeast. And we see growth at Marlin Gas Services and in the rapidly developing renewable natural gas market that I'll discuss in greater detail in a few moments.
James F. Moriarty: Thank you, Jeff. Good afternoon, everyone. It is great to be with you today. I would like to begin by providing an update on certain legislative actions in Florida. As shown on Slide 15, the Energy Pre-Emption Bill is key legislation that maintains consumer choice and ensures the ongoing availability and use of natural gas as an affordable, reliable, and resilient energy resource. Natural gas will be available to meet increasing customer demand. In addition, we sponsored a Renewable Energy Bill, which has cleared both chambers of the Florida Legislature and is before the Governor for signature. This Bill defines biogas and renewable natural gas. It supports RNG's use in transportation, electric generation, and injection into gas distribution systems. The Bill also authorizes the PSC to approve cost recovery for RNG contracts that exceed market rates under certain conditions. When signed by the Governor, Florida will join a dozen other states that have endorsed the vibrant role of natural gas in meeting the growing energy needs of this nation. We are proud of our governmental affairs team for driving and supporting such important legislation within the State of Florida to ensure natural gas is available to meet customer demand first and foremost, and to provide a mechanism for renewable natural gas via viable part of the natural gas portfolio throughout the state. We're also at various stages in regards to working on similar legislation in our other jurisdictions, and we'll keep you apprised of future activities. As shown on Slide 16, Chesapeake Utilities continues to build on our bedrock commitment to ESG, a focus on environmental stewardship, dedication to social justice, and sound governance principles. Our recognition as a top workplace for the ninth consecutive year in the areas we serve, as well as our recognition in the top workplace inaugural awards, speaks volumes about our diverse and inclusive culture, one which continues to promote the growth and development of our employees and the active engagement of our communities. Strong corporate governance has been essential to creating long-term value and safeguarding our commitments to all stakeholders. Our Board and its committees have adopted guidelines and other policies that have provided a framework for ongoing effective governance. 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 continue together to chart the road ahead. Strong corporate governance also includes listening to our stockholders and monitoring the vote results annually. Based on this year's results, over 90% of the shares voted were in favor of the proposals presented before them. This demonstrates our stockholders' continuing strong support of the performance of the Company and our future strategy. Our responsibility to operate in a safe and environmentally friendly manner furthers our stewardship and facilitates sustainable practices across our organization. Our team, with input from the Board of Directors, discusses key risks and mitigating factors identified as part of our comprehensive Enterprise Risk Management program. Embedded within our ERM program, our ESG-related focus areas and emerging risks. Turning to Slide 17, in regards to safety we are committed to providing a safe workplace for employees and to making safety a priority in our interactions with each other, our customers, and the communities we serve. The achievement of superior safety performance is an important strategic initiative, both in the short-term and the long term. Safety is not only our top priority and our first strategic objective, it is at the center of who we are. One of our latest accomplishments in this regard is the completion of our safety town facility in Dover, Delaware to provide both hands-on and classroom training for our operations technicians. We are also diligently working on our inaugural Corporate Responsibility and Sustainability report, which will be made available during 2021. There, we will be providing additional information and insights on our long-standing ESG stewardship. We are committed to providing a work environment that values diversity in background, experiences, and skillset of all our employees as highlighted on Slide 18. In continuing our Bedrock commitment to equity, diversity and inclusion, our Equity, Diversity and Inclusion, or EDI Council supports all our employees, embracing and sharing 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 we will further enhance the collaboration around our workplace culture that is the engine driving our business. The EDI Council was extremely busy in 2020, fostering the rollout of five employee resource groups throughout the Company, as shown on Slide 18. We are excited about what these teams have done in just a short amount of time and look forward to their increasing role as well as the creation of other ERGs. The talent, skills and ideas that these groups have brought to the forefront have been inspiring and provide channels for our employees to feel inclusive and supported by the Company. We work hard every day to also ensure that the communities we serve continue receiving the value and benefits of clean, plentiful, affordable, and resilient energy delivery services, so that no one is left behind. We continue to undertake various internal actions to reduce greenhouse gas emissions, including completion of our pipeline replacement program and improved detection technology at our compressor stations. We are also working with our suppliers and contractors to encourage their environmental efforts. We are also excited about the projects under way by our diverse and engaged teams to reduce the carbon footprint of the communities we serve, including conservation programs that promote high efficiency appliances and technical assistance for large volume customers to identify emission reduction opportunities. Our commitment remains steadfast to take the steps necessary to deliver energy where and when it is needed while continuing to advance our environmental stewardship. Our announced projects in RNG are just the beginning. They are a very clear example of the lowering of the carbon footprint and also ensuring we do our best to ensure a more sustainable future for our local communities. I appreciate being with you all today, and we'll now turn the call back to Jeff for some closing comments.
Jeff M. Householder: Thanks, Jim. While we're beginning fiscal year of 2021 with very positive financial performance, as indicated by our earnings-per-share growth, capital investments, key projects and initiatives, and our dividend growth. As you can see on Slides 19 and 20, we're affirming our five-year capital guidance for the period of 2021 to 2025 at $750 million to $1 billion. I'm excited that our latest strategic plan update gives us a high degree of confidence that we have significant investment opportunities ahead of us. That confidence in our growth opportunities has enabled us to extend and expand our capital guidance. Our 2025 EPS guidance range of $6.05 to $6.25 per share represents an average EPS growth of approximately 10% from our initiation of guidance at the end of 2017. We believe natural gas is a key component to the country's long-term energy strategy. We also believe that the markets we serve value the energy services we deliver; whether natural gas or propane or electricity, our customers have spoken loudly in this regard. At the same time, we have opportunities given our business mix expertise and strategic approach to capitalize on new renewable energy opportunities that advance us toward a more sustainable future. We're committed to our growth strategy, focused on delivering top quartile performance, including shareholder return which has exceeded 16% compound annual growth for each period, one, three, five, 10 and 20 years through April 30, 2021. Our investment proposition is based upon a commitment to superior performance and we outlined that on Slide 21. Our foundation, our financial objectives and targets, as well as the initiatives and strategies we pursue are in support of achieving this level of performance. In closing, I want to take a moment to thank all of our dedicated Chesapeake Utilities' employees. We take great pride in the work done on the front lines and our ongoing commitment to identifying and delivering innovative solutions for the delivery of clean, reliable and safe energy to our customers. Thank you. And we can now address any questions you may have.
Operator: Thank you. . One moment please for the first question, which comes from the line of Tate Sullivan with Maxim Group. Please go ahead.
Tate Sullivan: Hi, thank you. Starting on CleanBay, please. You mentioned the option to convert to an equity participation, that -- is this equity-type of equity investment something new in the history of Chesapeake, or you've done that type of equity participation in other unregulated projects before?
Beth W. Cooper: Thank you and good afternoon, Tate. No, this could be something new from Chesapeake standpoint. It is not something that we historically done in the past.
Tate Sullivan: Okay. Thank you. And just you mentioned, is that a potential or is that already in place, or it was just approved by the Board to convert that to equity?
Jeff M. Householder: Well, what we got Tate, was approval to basically pursue a negotiation with CleanBay to see if we can structure economic and governance terms that would enable us to feel comfortable making an equity infusion into the project. We have the ability to do the gas processor. The equity that we're looking at would be of a similar size as what we assumed we would put into the processing unit.
Tate Sullivan: Okay. Thank you. Sticking with Unregulated Energy, I mean, the operating margin, I know I can look at it on the gross margin side as well, was down just slightly year-over-year and you noted some impacts from capital investments in the sector, was that partly the LNG tankers, or would you call out something else with that margin, please?
Beth W. Cooper: Would you mind, Tate, just repeating your question because when you look at the margin in the unregulated businesses for the quarter were actually up, both from an operating income as well as the margin. So, could you -- would you mind just repeating your question there.
Tate Sullivan: Okay. No, I'll check my calc -- I thought the operating margin was 27% down slightly from the prior year. Okay. I'll recheck that. And then, organic customer growth, sorry, if I missed it in the slides, in Delmarva, excluding Elkton, did you put that in there, can you comment on organic growth excluding Elkton that you've seen recently?
Beth W. Cooper: Sure. So, the organic growth continues to be very strong on a run rate relative to quarter-over-quarter. In total, it's very close to what it was for the first quarter of last year. We did see a little bit of movement among the customer classes, where in Florida, we've actually had a pickup in terms of the residential margin relative to the total margin that's coming from there, but both still very strong, still significantly double, more than what the industry average is and growth remains very strong, and looks -- and appears to be the same for the foreseeable future. We're not seeing any slowing in our service territories.
Tate Sullivan: Great. Okay. That's it for me. Thank you for the detail.
Beth W. Cooper: Thank you, Tate.
Operator: Your next question comes from the line of Brian Russo with Sidoti. Please go ahead.
Brian Russo: Yeah. Hi, good afternoon.
Beth W. Cooper: Good afternoon. How are you?
Brian Russo: Good. Thank you. So, just to follow-up on the CleanBay equity investment, is that something that you expect to be finalized in the near term and you'd be able to quantify that? And if I recall correctly, you mentioned fourth quarter 2023 kind of contribution to Chesapeake from that investment, is that accurate?
Jeff M. Householder: It's accurate to the extent that we can complete the negotiations and come to some conclusion about what that looks like. And that's really what we're in the middle of right now, trying to figure out exactly what the economics and governance provisions will be, and decide then if those support an actual equity infusion into the whole project as opposed to ownership of just one piece of it in the gas processing facility.
Brian Russo: Okay. Understood. And then just on the first quarter 2021 unregulated drivers, it looks like the propane operations were probably two-thirds of the gross margin driver, and I see you have where is the propane customer growth within those three box? And then my next question will be, what's driving the increased propane margins, which you guys tend to kind of quarter as a nice driver to the unregulated margins?
Beth W. Cooper: So, a couple of things in terms of your questions there, Brian. So, there continues to be customer growth in the propane operations. You know that we've done several different start-ups and so as those start-ups continue to build out and they continue to expand over time for example, in Virginia, we done several in the Pennsylvania area and then also with what we've been able to do with the acquisition of Boulden and that continuing to grow. So, there is ongoing growth in those operations as well. You'll see a little bit -- it becomes -- it can be somewhat difficult to break out the consumption piece that whether there is no -- it's an art, rather than a science in the propane business when you try to look at the amount that's attributable to weather, it's not as defined. That's what it is in the regulated business. But there can be a little bit of the consumption piece that may be sitting in that $3.8 million and then there can also be growth that may be netted in with those other variances, there can be some negatives and some positives. We don't tend to break that out specifically on the propane side, but there is some growth in there as well.
Brian Russo: Okay, great. And I think you mentioned on the last quarter, you had a strategy to grow the propane businesses, I think, maybe near the Western Natural Gas Service territory in Florida or elsewhere. I was just curious if there was any update there?
Jeff M. Householder: Well, we are always interested in growing the propane business in the Mid-Atlantic and Southeast. And so we're always looking for potential acquisition opportunities, but we're also interested in just organically growing the business much in the way that Beth was describing a second ago. And so whether that is our customer growth opportunities or the auto gas opportunities, we see all of that continuing to move forward. And if we can enhance that with an acquisition here or there, then we're certainly interested in doing that.
Brian Russo: Okay. And then lastly, it seems like you have a lot of exciting RNG projects in the pipeline with existing partners like -- etc. or maybe even some new partnerships, should we just assume that any incremental investment is captured in that FX forecast through 2025?
Beth W. Cooper: We have -- typically what we will do as we've talked about in the past is we will try to include in our estimates what we feel has a very strong probability of occurring, and that's typically going to be about 80% or higher. There is a small amount of capital that may be below that amount, but the significant amount of capital that's in that estimate relates to projects that we can see and feel pretty concretely that they're going to happen. So, the potential to undertake some of these opportunities that Jeff has talked about, it will be whether or not at the time from a probability perspective they were high enough. If they were, a portion of them could be included, but then there could be a portion, Brian, that are sitting outside of that. And so, there is an opportunity for that range to continue to move, but there is a base level that's been factored in from the investments that we feel very strongly about.
Jeff M. Householder: I would add to that. In the capital guidance that we provided $750 million to $1 billion, we were quite comfortable that we had the preponderance of that investment forecast associated with the existing businesses that we currently own. And so, we were not depending especially to get to the bottom of that range, was not heavily dependent on any of the incremental R&D facilities that we're pursuing.
Brian Russo: Okay. Understood. Thank you very much.
Beth W. Cooper: Thank you.
Operator: Your next question comes from the line of Michael Gaugler with Janney Montgomery Scott. Please go ahead.
Michael Gaugler: Good afternoon, everyone.
Beth W. Cooper: Good afternoon.
Michael Gaugler: Two questions. First RNG, on Slide 14, I see Virginia and Georgia as targeted areas for investment. Would you be using transport to your distribution networks from those states?
Jeff M. Householder: Well, what we would probably be doing is transporting either by Marlin truck or by pipeline if we found it economically advantageous to build a pipeline into a nearby transmission system, potentially a distribution system. And if we wanted to move that gas into one of our distribution facilities, we would probably do it by displacement. Much the same way that California collects the green attributes of RNG developed in Delaware, developed in New York or wherever, and getting that green attribute into the California market. So I think, we can do that in that manner if we chose to.
Michael Gaugler: Okay. And then taking into account the Energy Pre-Emption Bill in Florida, seems like Florida is a very friendly place for pipelines these days. Should we assume that that's more of a focus for future pipeline opportunities?
Jeff M. Householder: Well, I think yeah, I think you can assume that we are actively engaged and trying to expand our pipeline presence in Florida. And you're right, Michael, I mean, there -- it is a friendly environment, and we are looking for opportunities to build pipe down there all the time. And as you know, we found a number of those over the years, especially with our Peninsula pipeline operation.
Michael Gaugler: Yeah. The reason for the question is, I know you've got a lot of pipeline assets up in Delmarva, and you put a lot of capital to work through the years. But just trying to get a kind of a feel for the changing landscape of things, and thinking that perhaps Florida might represent greener pastures at the moment than say, the Mid-Atlantic or the Northeast.
Jeff M. Householder: I think that's fair to say. It's not just a favorable business environment issue. As you say, we've put a lot of money to work on the Delmarva Peninsula. And so there is an inherent demand pull on those projects without looking at significant demand increases. We're in a pretty good position relative to capacity on the pipeline on the Delmarva. And now we're continuing to grow, as Beth said and as I mentioned earlier, and certainly to the extent that anyone came in with an industrial facility or new electric generation or whatever it might be, we would be interested in pursuing that opportunity from our transmission business. But after that, with the typical residential commercial growth, although it's substantial, those volumes are relatively small, we've got some growth opportunities remaining in the pipe at this point.
James F. Moriarty: The only thing I would add, Mike, is that we've had a very strong supporting environment in both Maryland and Delaware, and that's from the Governor and others. And the most recent example of that is our Somerset project where we expanded service into Somerset County for the first time in Maryland, and over some opposition, we got that done unanimously. And that was the communities, it was the political, it was the economic. So, we have very strong support on the Delmarva as well.
Jeff M. Householder: And we're not finished expanding the pipe. I mean, I think there will be significant opportunities yet to come on the Delmarva Peninsula. I mean, it remains to be seen as growth continues.
Michael Gaugler: Yeah. You seem to have a lot of growth there. I see it. Appreciate your time. Thank you.
Jeff M. Householder: Thank you.
James F. Moriarty: Thank you, Michael.
Beth W. Cooper: Thank you, Michael.
Operator: . There are no further questions at this time. I will now turn the call back to you. Please continue with the presentation and/or closing remarks.
Jeff M. Householder: Well, thanks. We appreciate all of you connecting with us this afternoon for our first quarter report. I'm sure for several of you, this was the end of a long day of these earnings call. So, thank you very much. And as always, if there is any additional information that we can provide, please feel free to reach out to one of us. Thank you. Goodbye.
Operator: That does conclude the conference call for today. We thank you for your participation and ask that you please disconnect your lines.
