Chesapeake Utilities Corporation (CPK) Earnings Call Transcript & Summary

Welcome to Chesapeake Utilities Corporation's Second Quarter 2026 Earnings Conference Call. [Operator Instructions] I would now like to turn the call over to Lucia Dempsey, Head of Investor Relations. Please go ahead.

Thank you, and good morning, everyone. Today's presentation can be accessed on our website under the Investors page and Events and Presentations subsection. After our prepared remarks, we will open up the call for questions. On Slide 2, we show our typical disclaimers, while I remind you that matters discussed on 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 2025 annual report on Form 10-K and in our second quarter Form 10-Q provide 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 information presented today includes the appropriate disclosures in accordance with the SEC's Regulation G. A reconciliation of these non-GAAP measures to the related GAAP measures have been provided in the appendix of this presentation in our earnings release and our second quarter Form 10-Q. Here at Chesapeake Utilities, safety is our first priority. We start all meetings with a safety moment, and we'll do so here as highlighted on Slide 3. Given the impact that wildfires have caused across the country lately, today's safety moment focuses on wildfire smoke. Wildfire smoke contains fine particles and harmful gases that can irritate the eyes and lungs, worsen asthma or heart conditions and reduce air quality even far from the fire itself. When smoke levels are elevated, limit time outdoors, keep windows and doors closed and use air conditioning or air purifiers as available. I'll now introduce our presenters today. Jeffry Householder, Chair of the Board, President and Chief Executive Officer, will provide an update on this quarter's key accomplishments and our capital growth program. James Moriarty, Executive Vice President, General Counsel, Corporate Secretary and Chief Policy and Risk Officer, will discuss the Florida City Gas rate case and stakeholder engagement. And then Jeffrey Sylvester, Senior Vice President and Chief Financial Officer, will discuss our financial results in more detail. With that, it's my pleasure to turn the call over to Jeff Householder.

Thank you, Lucia, and good morning, everybody. I'll start with Slide 5. Our growth trajectory has continued through the second quarter as we reported a 5% increase in adjusted net income, driving an 8% increase in adjusted earnings per share through the first six months of this year. In the second quarter, we generated an incremental $10 million of margin related to growth in our transmission, infrastructure and distribution systems. We also invested $140 million of capital in the second quarter, bringing our total year-to-date investment to $262 million while continuing to advance our regulatory filings. Moving to Slide 6. We continued to report another quarter of solid commercial customer growth and above-average residential customer growth, 3% in Delmarva, 2.1% for Florida Public Utilities and 1.8% for Florida City Gas. Increasing demand for natural gas remains core to our long-term growth strategy. We are fortunate to continue seeing above-average growth in our attractive service areas. In our Delmarva region, Spotlight Delaware states that Delaware has consistently ranked top 10 in percentage population growth during recent U.S. Census Bureau Studies. We continue to see strong demand for natural gas and new apartment complexes and housing developments as well as for large commercial and industrial customers. Complementing this, the latest study from the Florida Office of Economic and Demographic Research projects annual state population growth to average nearly 300,000 net new residents. That's like adding a city nearly the size of Orlando every year. This growth will continue to drive increased natural gas demand for years to come. Slide 7 highlights the Florida Energy Pathway Project, or FEP, which we just announced last month. This project is designed to address significant transmission capacity constraints and substantial natural gas demand increases in South Florida. FEP is a 97-mile intrastate natural gas transmission infrastructure project that will run from Palm Beach County to Miami-Dade County in Florida. This is the largest single project in our company's history, representing total investment of approximately $1.2 billion. Our subsidiary, Peninsula Pipeline Company, or PPC, will construct and operate the line and will fund and own at least 51%. We've been working with potential partners that may fund and own up to 49% of the project, and we expect to share more details soon. FEP is expected to be in service in 2030 and is anchored by multiple investment-grade shippers who've committed to nearly 250,000 dekatherms per day of capacity. We are also accepting binding commitments with additional shippers. This project is a valuable long-term regulated growth opportunity for the company. It also aligns strategically with our natural gas transportation construction expertise, above-average growth expectations and increased presence in South Florida following the FCG acquisition. Now let's shift to Slide 8, which summarizes our 2026 capital program. Given our strong start to the year and increased expectations for additional capital expenditures in the second half of the year, we're increasing our full year 2026 capital guidance by $100 million, resulting in an updated range of $550 million to $600 million. This is driven primarily by initial spending for FEP as well as increases in regulated distribution and infrastructure investments. Slide 9 shows additional detail on our transmission projects that are supporting natural gas demand in our service areas. We forecast these projects to contribute approximately $33 million of gross margin in 2026 and an additional $51 million in 2027. The largest project on this table yet to come online is the Worcester Resiliency Upgrade, or WRU, our LNG storage facility. Slide 10 summarizes the latest updates on this project. Site and facility construction remain on schedule, and I'm pleased with our progress overall. WRU is a substantial complex project that will deliver significant peak day service capabilities and serve natural gas expansion at the southern end of our system. We look forward to bringing full project online early next year. I'll now shift to Slide 11 to address our longer-term capital program. As we've discussed before, there are a number of expansion opportunities under development that may provide significant growth potential as we serve increasing demand across our service areas. Our Delmarva regional enhancement project continues to move forward with permitting underway and construction expected to start next year. We're also making progress with the Accomack County Exploration project as we continue to assess opportunities to serve customers on Virginia's Eastern Shore. We continue to engage with partners in the community at the Cape and Port of Canaveral to explore potential opportunities for LNG transportation and storage. Given the growth in our capital program since 2024, we now expect to exceed capital investment of $1.4 billion through the end of this year, which is nearly at the bottom end of our initial five-year capital range. As a result, we are updating that range to share that we now expect to exceed $2.2 billion of capital investment from 2024 through 2028. In addition, we recognize that the progress we're making on our investment opportunities, particularly with the announcement of FEP, will necessitate a more fulsome update of our long-term performance expectations. Therefore, we now expect to provide the following guidance on our full year 2026 earnings call this coming February, 2027 through 2031 capital expenditure guidance and 2027 through 2031 earnings growth rate. We believe these disclosures will reflect and support our industry-leading long-term growth opportunities that will drive stakeholder value for years to come. With that, I'll turn it to Jim.

Thank you, Jeff, and good to be with all of you today. I'll start with Slide 12. Earlier this year, we filed a rate case for our Florida City Gas business, requesting a base rate adjustment of approximately $47 million and an ROE of 11.25%. This request updates our returns and includes cost recovery for a number of key areas, including technology, insurance, depreciation and property taxes. We were pleased to have our request for $16 million of annualized interim rate adjustment approved by the Florida Commission in late July. This will generate over $6 million of increased revenue in 2026. We are thrilled that our FCG teammates and customers are part of the Chesapeake family and value the exciting opportunity to serve this growing region. We will continue to work closely with the Florida PSC staff and the Office of Public Counsel to achieve a constructive outcome. I'll now turn to Slide 13 to provide an update on our stakeholder engagement. In April, we launched Spring Impact Days, a company-wide volunteer initiative that brought employees together to continue to support the communities we serve. With more than 30 volunteer events across our service areas, Impact Days brought out our purpose-led mission to life. From environmental cleanups to serving at food banks and supporting animal shelters, walks, and bills, these days were all about connection, compassion and community. Impact Days are set to become a tradition and cornerstone of our company's commitment to stakeholder engagement. Through the six months of the year, over 500 team members have participated in a volunteer event, and the company has contributed nearly $1 million in charitable donations, community partnerships and sponsorships. Stakeholder engagement remains central to who we are and to our success. We are powered by people and guided by a commitment to inclusive progress so that no one is left behind. With that, I am very pleased to turn the call to Jeff Sylvester, who will discuss our financial results in more detail.

Thanks, Jim, and good morning, everyone. Slide 14 provides an overview of our business transformation. We are building a stronger foundation for growth with our ERP implementation serving as a critical enabler of that strategy. We are making a substantial progress on our ERP project. Last month, we successfully transitioned into the realized build phase, and we remain on track for our planned 2027 go-live. I'm proud of what the team has accomplished to reach this important milestone. This investment will strengthen enterprise capabilities, improve data analytics and provide a scalable platform to support future growth and create long-term value for our shareholders. Now shifting to Slide 15 to discuss our financial results for the quarter. We continue to demonstrate strong performance and growth across all metrics. Adjusted gross margin was approximately $150 million, up 5% and adjusted net income was approximately $25 million, also up 5% from the second quarter of 2025. Adjusted earnings per share were $1.05 this quarter, representing a 1% increase over the second quarter of 2025 and is reflective of the shares we've issued throughout the last year as we return to our target capital structure. Slide 16 provides additional detail on the key drivers of our second quarter performance. Ongoing and recently completed natural gas transmission expansion projects contributed $0.15 of adjusted earnings per share this quarter. Margin from our infrastructure program investments accounted for an additional $0.10 per share. Continued demand for natural gas distribution drove $0.06 of incremental adjusted EPS, and we benefited from an additional $0.06 of improved propane and Aspire performance in the quarter as well. These gains were partially offset by a few factors, including $0.04 related to consumption, quarterly timing differences and other items and $0.04 from decreased CNG, RNG and LNG services. We also had $0.11 of increased depreciation, amortization and property tax expenses driven by increasing levels of capital investment, $0.05 of increased facility, vehicle and insurance expenses, $0.04 of higher credit collections and customer service costs and $0.03 of increased payroll and benefit expenses. Lastly, financing activity, including debt and equity issuances over the last 12 months reduced adjusted EPS by $0.05. Shifting to Slide 17. Adjusted gross margin for our regulated segment was approximately $125 million this quarter, up 6% from the second quarter of last year. Regulated operating income saw similar growth, up 7% to approximately $55 million in the second quarter of 2026. Our unregulated Energy segment also demonstrated continued growth with adjusted gross margin up 2% to approximately $25 million in the second quarter of 2026. Our overall growth is supported by our sustained focus on managing our expenses. For the first half of the year, our operational expenses represented only 45% of gross margin, which is our lowest point to date. This reinforces our long-term progress towards efficiency and value realization as we grow the business. I'll now move to Slide 18 to review our capital structure and financing activities. At June 30, our equity capitalization remained at 50%. We also continue to maintain strong liquidity and sufficient capacity to support growth with 70% of our total debt capacity of $798 million available as of June 30, 2026. In the last few days, we have just completed an amendment of our revolving credit agreement, bringing the total borrowing capacity under the revolver to $650 million, an increase of $200 million. This includes $250 million available under a 364-day tranche and $400 million available under a five-year tranche expiring August 2031. Moving on to Slide 19. Alongside our equity and debt plans, our dividend policy continues to be a key component of our capital allocation strategy as we fund growth investments to drive overall total shareholder return. Our most recent annual dividend increase of 7.3% and our next dividend payment of $0.74 per share align with our Board-approved dividend payout target range of 45% to 50%. This enables us to retain 50% to 55% of earnings to support our robust capital program and reduce external financing needs. Slide 20 demonstrates our track record of strong and consistent earnings growth over the last 19 years. We remain committed to delivering industry-leading long-term earnings per share growth by reaffirming our 2028 earnings per share guidance of $7.75 to $8. And as Jeff mentioned earlier, we expect to provide a five-year capital guidance and earnings growth rate on our full year earnings call in February of next year. I'd like to end by summarizing our value proposition, which is shown on Slide 21. Our track record reflects a long-standing commitment to executing on our promises and creating value for stakeholders. Through decades of consistent growth, we have demonstrated both resilience and discipline, and I remain highly confident in our ability to continue delivering strong results. Through our three growth pillars of disciplined capital investment, effective regulatory engagement and a relentless focus on continuous improvement, we will strengthen our business and position it for sustained long-term growth. As Jim discussed, we remain powered by people. We are fueled by our teammates who are committed to delivering high-quality service to our customers. We are active participants within our communities and remain focused on delivering value for all shareholders. With that, we'll take your questions. Operator?

[Operator Instructions] We'll take our first question from Constantine Lednev with Wells Fargo.

Maybe starting off on the Florida Energy Pathway. Just curious on the regulatory and permit path here and how the commercial interest is shaping up anchors for the project. Is there still an opportunity to upsize or would that more rely on future laterals? And just maybe a little bit of a sense on how this project could fit into the bigger update at year-end.

Constantine, this is Jeff Sylvester. I mean, as you know, we've probably disclosed the size of the project and the, I guess, the shippers we haven't disclosed, but certainly, the volumes in there are meaningful to us. We also disclosed that we're interested in looking at additional potential load, which we're obviously working on and expect to be an interesting part of that project. And again, we do expect there's growth in that potential project. In terms of the update in February. I think it is a meaningful part of that update. And so we're, as you would expect, maybe thinking about how that plays out over the next five years. We expect to provide some of that in February. But still a lot of questions as we work towards the partnership, we expect to have that sort of aligned here in the quarter. And that will give us a little bit more clarity around all kinds of things relative to financing and partnership specifically. So obviously, it's an exciting project for us. It's quite meaningful, and we look forward to sharing more as we can.

Constantine, this is Jeff Householder. From a regulatory and permitting perspective, this is an intrastate pipeline project. operating under primarily our Peninsula Pipeline company. It is jurisdictional to the Florida Public Service Commission. And we will, at the appropriate times, be filing various documents with the PSC and disclosing contracts and those sorts of things. To the extent that we are providing some service to ourselves to one of our affiliates, which is frankly a fairly small part of this project, but it's meaningful to us, then we'll file an affiliate transaction petition with the commission as we typically do with PPC projects. The permitting process is about to begin in earnest. We've had many, many conversations, as you might imagine, with folks like the Florida Department of Environmental Protection and the Florida Department of Transportation and others. This is a project that goes through three southern counties. We will be largely in the public right of way here. And so there's not a tremendous amount of land acquisition required, and we expect the permitting process to go relatively smoothly for a project of this size.

Excellent. I appreciate that. And maybe a quick follow-up there, noting the partnership structure kind of what's driving the rationale there? And we've obviously seen a lot of different project equity, pref equity type structures, kind of maybe kind of how is that contemplated within the funding plan?

Well, I think part of that for us is trying to maintain a reasonable balance on the risk associated with any investment of this size. Good to share some of those risks with a partner. It's also reflective, I think, of the impact of a project of this magnitude on our earnings profile over the next several years as we build capital up to about $600 million on our side of the project, and look to initiate revenue from that project in 2030. So we've got some things to manage in the ensuing years as we construct the project. And there are several ways to do that. We've obviously contemplated that as part of our ongoing guidance for earnings and the thoughts of what we will provide to you in February of '27 looking forward. So I think we're in pretty good shape there, but it was a manageable amount of capital over an extended period of time that we felt comfortable with. And frankly, that's kind of how we got to the point of being interested in taking on a partner for the project.

Yes. And I'll add that there. We've talked about other potential projects out there for us. And this thinking about timing related to those, obviously, we want to continue to do projects that are meaningful to us in our service areas. And so we're thinking about all of those things, making sure we've got the capacity to do more.

Excellent. And maybe just one housekeeping item on the '28 CapEx kind of step-up, given the difference versus the prior plan, does that kind of push you to the top end of the range? And if we look at kind of that implied $400 million run rate for '27, '28, is that something that's sustainable into the five-year update?

Yes. I think that what we're signaling with the update through '28 is obviously, we're pushing up against the bottom of what we have provided. Obviously, FEP has an impact there, but we're also seeing other opportunities that are going to push us beyond it. And so again, we believe we've got lots of opportunities in our service territories and certainly looking beyond the '28 plan, you'll expect to see an update in February that will likely signal the right things relative to growth.

Our next question comes from Nicholas Campanella with Barclays.

This is Michael on for Nicolas Capital. My first question is there a common ground for a settlement in the FCG rate case?

Well, I mean, we always like to think that, that might occur. We'll see where all of this goes. The Office of Public Counsel, as you probably have seen, has staked out a position completely opposite to what we've filed. That's not been that unusual. And certainly, people will take positions in these filings as they feel are necessary. I don't know that we will get to a settlement on this particular filing, and we're certainly prepared to fully litigate it if we need to. And so we'll see where it goes.

The next question is, do you plan on, I know you plan on giving a growth rate in the February update. What about EPS guidance for 2027 and also beyond 2028? I know given EPS guidance for 2028.

Yes. I mean we've been chatting about that. I know there is some desire for us to do that. We're not signaling it here, but we certainly are signaling that we're going to provide more clarity around the five-year growth rate and the capital associated with it, and we'll see where that goes.

Our next question comes from Tate Sullivan with Maxim Group.

Just one follow-up on FEP. Jeff, how long, if you can share, have you been evaluating this project and at the scale, I mean, was it when you saw Energy Transfer go forward with the Phase IX project? Or how is the timing, if you can give some background on the project evaluation timing, please?

Back in the mid-'90s, I actually worked for NUI that owned Florida City Gas. And we recognized at that time, and I'm not kidding, recognized at that time that we had significant capacity shortfalls into the South Florida area. One of the things that we thought was attractive, frankly, about the Florida City Gas acquisition was an opportunity to play a more direct role in trying to resolve some of those capacity issues. And I think, obviously, you've seen others in that market area having the same issues. The Phase IX expansion on FGT was certainly a significant opportunity to think about moving additional upstream interstate pipeline capacity down towards South Florida. And then the issue is how does it get further down into the market area. And so we were fortunate to be able to cobble together an arrangement with Florida Gas Transmission and with Florida Power & Light. And we're pretty excited about the project. I mean it helps service reliability in that area. I think there's a lot to be said about service resilience. It allows us to continue to grow and expand and meet customer demand in that area. And I think it does the same thing on the electric service side. So it's a great project. A lot of people holding hands to get it done. And I think we'll see finally after all these years, the opportunity to bring additional gas capacity into South Florida.

Being an intrastate project, will this be your first partnership intrastate pipeline project? I believe it will be in terms of financing with them.