Chesapeake Utilities (NYSE:CPK) Q3 2026 Earnings Call

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4:17 . . . Welcome to Chesapeake Utilities Corporation's third quarter 2026 earnings conference call.

5:07 At this time, all participants have been placed on a listen-only mode, and the floor will be open for your questions following the presentation. If you would like to ask a question at that time, please press star 1 on your telephone keypad. If at any point your question has been answered, you may remove yourself from the queue by pressing star 2. Though others can hear your questions clearly, we ask that you pick up your handset for best sound quality. Lastly, if you should require operator assistance, please press star 0. I would now like to turn the call over to Lucia Dempsey, Head of Investor Relations.

5:44 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 two, 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 third quarter, Form 10-Q, 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.

6:34 And the information presented today includes the appropriate disclosures in accordance with the SEC's Regulation G. A reconciliation of these non-GAP measures to the related GAP measures has been provided in the appendix of this presentation, our earnings release, and in our third quarter Form 10Q. 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 three. With colder weather approaching, today's moment focuses on winter preparedness. Taking a few simple steps now can help keep ourselves, our families, and our communities safe. Remember to test smoke and carbon monoxide detectors, inspect heating equipment, clean fireplaces, prepare vehicles for winter conditions, and winterize your vehicle emergency kit. These preparations can help reduce risk and ensure we're ready when winter weather arrives.

7:25 I'll now introduce our presenters today. Jeff 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. Demoyarty, Executive Vice President, General Counsel, Corporate Secretary, and Chief Policy and Risk Officer will discuss the Florida City Gas rate case and stakeholder engagement. Finally, Jeff Sylvester, Senior Vice President and Chief Financial Officer will then discuss our business transformation efforts and financial results in more detail. With that, it is my pleasure to turn the call over to Jeff Householder.

8:01 Thank you, Lucia, and good morning, everyone. I'll start with slide five. I'm pleased that our growth trajectory has continued through the third quarter, enabling us to report a 12% increase in adjusted net income and an 8% increase in adjusted earnings per share through the first nine months of this year relative to the same period last year. Our system growth and reliability investments continue to drive returns. In the third quarter, we generated an incremental $4.8 million from our transmission and distribution systems and an incremental $2.8 million of margin related to our infrastructure programs that strengthen the safety and resilience of our systems. We recognize $2.7 million of interim rates for our FCG rate case in the third quarter and look forward to a final rate decision by the end of this year.

8:54 We also invested $151 million of capital in the third quarter, bringing our year-to-date investment to $413 million, on track to meet our full-year guidance of $550 to $600 million of capital investment. Moving to slide six, customer demand for natural gas remains core to our long-term growth strategy. We've had another quarter of solid customer growth across all customer classes, including year-to-date residential customer growth of 2.7% in Delmarva, 2% for Florida Public Utilities, and 1.7% for Florida City Gas. To highlight our Delmarva region in particular this quarter, we continue to execute developer and builder agreements for new residential communities.

9:42 Thus far in 2026, our sales teams have signed 18 new projects across Sussex, New Castle, and Kent Counties. expected to receive service over the next several years. We're also seeing opportunities to support larger community projects that are choosing natural gas. As one example, in Sussex County, Delaware, we were selected to serve the Sussex Technical High School, the largest local school project in the state's history. We're converting the campus from oil and propane to natural gas, which will reduce emissions while providing a cost-effective and reliable energy solution. This project is a great example of how our natural gas infrastructure investments can support the growing needs of the communities we serve.

10:29 Now let's shift to slide seven, which summarizes our 2026 capital program. Last quarter, we increased our full year 2026 capital guidance by $100 million, resulting in an updated range of $550 to $600 million. Our year-to-date investment of $413 million keeps us firmly on track to achieve our annual capital guidance. We continue to execute with discipline, strategically deploying capital to strengthen the business and support our long-term growth objectives. Slide 8 highlights the Florida Energy Pathway Project, or FEP, our $1.2 billion gas transmission project in South Florida.

11:14 The project represents a significant regulated infrastructure investment designed to address supply constraints, expand natural gas transportation capacity, and enhance energy reliability as we serve growing demand across the South Florida region. We most recently announced NextEra Energy Resources, or NEER, as our strategic joint venture partner. Under the agreement, PPC will retain a 51% ownership, with near acquiring the remaining 49% minority interest. We believe their project execution expertise and strong local relationships will drive value through the design, permitting, and construction phases of the project. The three anchor shippers, FPNL and our natural gas distribution businesses, Florida Public Utilities and Florida City Gas, have contracted for capacity quantities of 250,000 decatherms per day.

12:10 The opportunity exists to explore further expansion beyond the current contract quantities to meet any additional shipper demand that may arise. We've made substantial progress on the engineering and design work for the project to date and have begun preparations for the permitting phase. We expect permitting to take 12 to 18 months with construction to begin directly after. We continue to expect the project to come online in 2030 and will provide incremental updates each quarter. Slide 9 summarizes the latest updates on Worcester Resiliency Upgrade, our LNG storage facility on the eastern shore of Maryland. Mechanical and electrical systems construction is now essentially complete and pre-commissioning work is underway. Recent FERC inspections have gone well and we're preparing to file for the first of a series of commissioning-related notice-to-proceed permits.

13:07 Based on the updates of the project timeline during this year, we now expect total capital investment to be approximately $125 million, an increase of $25 million over prior estimates. To address our updated capital expectations, we requested FERC approval of updated rates and are pleased to receive approval just this week. Therefore, we now expect WRU's full-year margin contribution to be $19.7 million. We continue to expect WRU to come online within the first quarter of next year, subject to the completion of all FERC commissioning work. Our margin expectation for 2027 remains relatively consistent at $17.2 million.

13:54 According to slide 10, we provide our summarization of gas transmission projects. Collectively, these projects represent nearly $33 million of adjusted gross margin this year and over $50 million in 2027, demonstrating the growing transmission-related earnings contribution, resulting in large part from the continued demand increases in our distribution businesses. I'll now shift to slide 11, which addresses our longer-term capital programs. For our current five-year capital guidance program, we continue to expect capital expenditures to exceed $2.2 billion. We also intend to provide the following metrics on our fourth quarter and full-year earnings call in February of next year, 2027 capital guidance, 2027 through 2031 capital guidance, and a 2027 through 2031 EPS growth rate. With that, I'll turn it to Jim.

14:58 Thank you, Jeff, and good to be with all of you today. I'll start with slide 12. We are in the final stages of our rate case for Florida City Gas, which seeks recovery of our investments in infrastructure and technology that are enhancing safety, reliability, and service for customers. Interim rates were approved in July and became effective in August, contributing $2.7 million of margin in the third quarter. We continue to work through the remaining steps in the regulatory process. Florida TSC staff recommendations are expected on November 18th, followed by revenue requirement and rate conferences in early to mid-December.

15:47 We remain focused on achieving a constructive outcome and expect the final commission order in early January 2027. I'll now turn to slide 13 to provide an update on our stakeholder engagement initiatives. Through the first nine months of the year, over 600 team members have participated in a volunteer event and the company has contributed nearly $1.2 million in charitable donations, community partnerships and sponsorships. For the seventh consecutive year, Sharp Energy has been recognized by the Stars of Delaware Awards. This recognition is especially meaningful because it comes directly from the communities we serve and reflects our teammates' continued commitment to providing safe, reliable, and affordable energy while delivering exceptional service to our communities and customers every day.

16:51 As our people remain at the heart of who we are, we are thrilled to recognize four teammates as the inaugural recipients of the Spirit of Chesapeake Award, our highest recognition for values driven excellence. Amy Shea, Juan Roman, Rick Shelby, and Eddie McGowan were honored for demonstrating our values of care, integrity, and excellence. and for putting these values into action through their commitment to customers, colleagues and communities. This recognition celebrates not only their individual contributions, but also the culture we continue to build across Chesapeake Utilities as one company.

17:37 We're also very proud that Cheryl Martin, Senior Vice President of Regulatory and External Affairs was recently honored as a distinguished woman in Florida at the 2026 Above and Beyond Awards. Throughout her four decades of service, Cheryl has demonstrated outstanding leadership across our business and the energy industry while remaining deeply committed to mentoring and developing teammates and supporting the communities we serve. Her recognition reflects the impact of her leadership and the values that continue to define who we are at Chesapeake Utilities. With that, I am pleased to turn the call to Jeff Sylvester, who will discuss our business transformation progress and financial results in more detail.

18:30 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. Last month, we successfully transitioned into the testing phase and we remain on track for our planned Q2 2027 go-live. I'm proud of what the team has accomplished to reach this important milestone and look forward to their commitment to transforming our operating processes as we enter the final stages of the project. Now shifting to slide 15 to discuss our financial results for the quarter, we continue to demonstrate strong performance and growth across all metrics.

19:20 Adjusted gross margin was approximately $149 million, up 9%, and adjusted net income was approximately $22 million, up 11% from the third quarter of 2025. Adjusted earnings per share were 89 cents this quarter, representing a strong 9% increase over the third quarter of 2025. Slide 16 provides additional detail on the key drivers of our third quarter performance. Our natural gas transmission expansion projects contributed an additional 9 cents of adjusted earnings per share this quarter. The Florida City Gas interim rates that went into effect in August along with minor increases from last year's rate cases added $0.09 per share this quarter. Margin from our infrastructure program investments accounted for an additional $0.08 per share this quarter.

20:18 Continued demand for natural gas distribution drove $0.06 of incremental earnings per share and we benefited from an additional $0.03 of improved propane margins and fees. Changes in consumption and other miscellaneous items contributed two cents, along with another two cents of increased other unregulated performance. These gains were partially offset by a few factors, including 12 cents of increased payroll and benefit costs, and nine cents of higher O&M expenses, We also had six cents of increased depreciation, amortization, and property tax expenses driven by increased levels of capital investment.

21:03 Lastly, financing activity included debt and equity issuances over the last 12 months, reduced adjusted earnings per share by five cents. Shifting to slide 17, adjusted gross margin for our regulated segment was approximately $126 million this quarter, up 10% from the third quarter of last year. Regulated operating income saw similar growth, up 13% to approximately $56 million in the third quarter of 2026. Our unregulated energy segment also demonstrated strong performance with adjusted gross margin of approximately $22 million in the third quarter of 2026.

21:50 Our overall growth is supported by our sustained focus on managing expenses. Although we encountered costs associated with healthcare claims that were much higher than we had typically experienced, we remain focused on managing our costs across the business to drive sustained bottom line growth. I'll now move to slide 18 to review our capital structure and financing activities. As of September 30, we have maintained equity capitalization of 49% and have issued nearly $37 million of equity through the first nine months of the year. We also continue to maintain financial flexibility to support our capital growth program with 67% of our total funding capacity available as of September 30, 2026.

22:41 In August, we amended 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 a $400 million available under a five-year tranche expiring August 2031. In the fourth quarter, we expect to issue $250 million in long-term debt, with a portion of the proceeds being used to refinance $100 million of debt maturing this December. Moving 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.

23:32 Our most recent annual dividend increase of 7.3% and our next dividend payment of 74 cents per share, aligned with our 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. I'd like to end by summarizing our value proposition, which is shown on slide 21.

24:22 Our history of consistent performance demonstrates our ability to execute with discipline, navigate changing conditions, and deliver on our commitments. That track record provides a strong foundation for the future and reinforces our confidence in our ability to continue creating long-term value. Our strategy remains centered on three core growth pillars, disciplined capital investment, effective regulatory engagement, and continuous improvement. Together, these priorities strengthen our business, support our growth objectives, and position us to deliver sustainable results over the long term. As Jim highlighted, we are powered by our people. The dedication of our teammates drives the service we provide to our customers, the partnerships we build within our communities, and the value we deliver to our shareholders.

25:16 With that, we'll take your questions. Operator? Thank you. The floor is now open for questions. At this time, if you have a question or comment, please press star 1 on your telephone keypad. If at any point your question is answered, you may remove yourself from the queue by pressing star 2. Again, we ask that you pick up your handset when posing your questions to provide optimal sound quality. Thank you. Our first question today comes from Alex Kenia with U.S. Bancorp BTIG. Your line is now open.

25:55 Hi there. Good morning. One question that was talked about on the prepared remarks was just any opportunities for incremental contracting on the pipeline announced. Just kind of wondering maybe potentially where those demand centers might be. Would it just be with the existing shippers? Could it be a tie-in with some of the other projects that Chesapeake is working on in Florida? I'm just kind of curious where that direction might be.

26:26 Good morning. This is Jeff Householder. It's probably all those things. I mean, we built this pipe with the view that South Florida and that regional area is going to continue to grow. And I think you'll see that with manufacturers moving back in and the residential construction that continues to astound us in some respects down in that area. And I think there's always the opportunity long term for additional electric load growth. So it's all of those things. We, I think, are in good position or will be when the pipe goes into service to expand the capacity capabilities on that pipeline with compression. And so we could ultimately expand it without a substantial amount of additional capital and certainly not too much additional pipe. So that's always, I think, a good thing.

27:23 So again, we are putting this pipe in the ground with the idea that there will be additional upstream resources at some point and that we would be able to deliver those into South Florida as needed.

27:38 Great. Thanks for that. And then maybe just some thoughts on the propane markets and what impacts. I guess propane prices are up a little bit. So far this fall, just what that might mean for kind of margin dynamics on your side.

27:55 You're right. They are up a little bit. We haven't seen any substantive margin erosion on our systems at this point. I mean, we watch, as you might imagine, the fluctuation in wholesale pricing pretty carefully. And we have, especially in our Delmarva operating regions, A substantial amount of storage, millions of gallons up there. And so we have a little bit of a natural hedge with our storage volumes on pricing fluctuations going into the winter. We also have a significant amount of volumes that are hedged with customers, even our residential customers through the price cap programs that we offer. And so we're not completely insulated from volatility in the market, but we do our best to be marginally impacted by that, which I think we are at this point.

28:48 Great. Thanks very much. Thank you. We'll go next to Juan Carlos Fidelis with Leidenberg Thalmann. Your line is now open.

28:59 Hey, good morning, team. How's everyone? Good morning. Just quick on kind of the further growth opportunities. Could you give us sort of an update on SpaceX filings to construct the pipeline for their operations? And I guess what would be the path for you all to potentially either be included on a deal or sort of a joint developer on that project?

29:22 Well, as you know, SpaceX, or at least a subsidiary company, had filed for I'll be blunt, we've never considered SpaceX to be a principal customer opportunity for us in moving into the spaceport in Florida and certainly doesn't have much of an impact on our interest in trying to serve cruise ships out of the Port of Canaveral. SpaceX is clearly capable of building a pipeline if they want to do that. They've done it other places. But I don't think it has a lot of bearing on what we're trying to do over there.

30:08 We have an existing pipeline, as you know, that runs into the spaceport. We're in the process of upgrading that. Thank you. Thank you.

30:49 All right, and I mean, is there any, I guess, way that the Florida Commission would potentially look at UAL's pipeline being relatively close, if not, I believe, almost parallel to the proposed one, given you already have rights-of-way?

31:05 Well, it is an interesting question. I think they probably at least considered that in the approval process. At this point, SpaceX is talking about serving just SpaceX. which you know again is certainly possible and there are other large industrial users in Florida that do the same thing with with pipelines that they've constructed themselves. The right-of-way that you mentioned especially coming across the causeway into the NASA property is not a state issue that's a federal right-of-way and so that's a conversation for someone other than the Florida Public Service Commission. It's certainly potentially congested, and there are not that many more pipes that are going to be able to go in that right away, and maybe only SpaceX and us would be there ultimately.

31:56 So yeah, we're certainly aware of that and have looked at it, and I think the regulators also understand that.

32:03 Awesome. Great. And then kind of going off that region, in regards to the LNG project that you've sort of mentioned, for both the space exploration and cruise ships out of Cape Canaveral. If that project goes through, how many MCPA are expected of production on an annual basis? I believe like the really large ones are about two to four million. Would this be sort of in that range or would it be a much smaller project? And I guess what would be the timeframe on construction for a facility like this to go from sort of an FID to commercial operation?

32:40 Well, I'll probably hold off being specific on the volume projections, probably a little smaller than the one that you just talked about. I think if we can gather together what we're trying to gather, which is the load from either space and or the cruise ships, which is our principal interest here, we would hopefully be able to put a facility together on the ground in the same kind of timeframe that we've been looking at with the WRU facility. And again, we're not liquefying at WRU, and so there's a little bit of additional time required there. But I think somewhere in the two to three year time period is about right.

33:33 Great. And then just one quick follow-up. In regards to the WRU project, what's the O&M associated with an LNG storage committee like that?

33:48 Let me get back to you with that. I'm trying to think if I can even – let me get back to you on that. I'll check their number. I can spit out a number that's in my head, and it's probably pretty close, but I can tie that out for you specifically.

34:08 Great. And then just, if I can, one last quick one. In regards to siting in Florida, where do you all stand? I believe before you had mentioned that there was one site that was looking promising, and then I think there was probably something got derailed. But as of now, where do you stand?

34:25 This is on the LNG facility at Cape Canaveral?

34:28 Yes, correct.

34:30 Yeah, we've looked now, I think we're on site 15 that we've looked up and down the intercoastal. There are a number of sites that are attractive if you're trucking the LNG or railing it. If you're trying to put it on a fueling barge and you need access to the intercoastal, especially to get into the port of Canaveral, then you've got to find a place on the water that's big enough and Thank you for joining us. We had identified, as you mentioned, a parcel of land that we frankly didn't hold out a whole lot of hope for because the Port of Canaveral wanted to turn it into a cruise ship parking lot, which you can understand.

35:40 And it was literally within less than a mile on a barge canal to access the port. That would have been certainly an ideal, low-cost project for us. They wanted to use the property for something else, and so we continued to work with the board and with the Space Florida folks to try to identify appropriate places that we could locate the facility.

36:08 Great. Well, thank you. I'll see you guys in a couple days here. Yeah, good. Thank you. We'll go next to Dylan Lipner with Mizzouho. Your line is now open.

36:22 Hey everyone, congrats on a good quarter. Just had one quick one. You guys called out $0.12 in increased payroll and benefits on the earnings waterfall. You guys mentioned in the March cost of healthcare claims were higher than normal in the quarter. Is this something that was more one time in nature or it might bleed into 4Q and potentially into next year?

36:46 Yeah, thank you, Dylan. This is, as we indicated, there was some additional expenses that showed up that were not really predicted. And we're taking a hard look at those to see if there's either one, ways to deal with them, or two, are they something that we should be kind of baking into the go-forward case? I would probably lean towards this is an anomaly in that quarter and we're always looking to manage our costs appropriately and certainly prudently. This one I think provides a little bit more interest in terms of thinking about the folks that we're insuring and making sure that we're healthy and getting beyond sort of the cost elements but yeah it was a little bit of a little bit of a surprise there in the third quarter that we're going to manage through.

37:43 Okay cool and then just quick one you know on the multi-year ERP project just want to know how that's progressing if we're going to see any more O&M as you go into you know 4Q and into 1Q as this plan to go live in Q2 of 27.

38:02 If you're just thinking about O&M, you probably won't see any additional O&M until 28. We'll get through in-service there in the April-May timeframe, and we'll be in some sort of hypercare for pretty much the rest of 27. And at that point in time, we'll be updating, obviously, the impacts to 28. But we've been making investments like this for the last few years. We haven't really talked a lot about the O&M benefits to those investments. And so there would be a time here in the not too distant future that we'll be able to give you a better view of what our O&M levels will look like really beyond ERP.

38:51 But there are also things that I think are are coming to fruition in terms of investments around our customer and obviously the ERP that are having impacts to how we're operating on a day-to-day basis. So that's all in front of us. Again, probably a little bit more color beyond our February update that we'll give you.

39:17 Gotcha. Cool. And then just last one, if I could, for the FCG rate case, are prospects for settlements still on the table or just looking like it's going to be fully litigated through the end of December and new rates in January?

39:30 Well, I think we're always open to a discussion. I don't think that that's likely here. My expectations are that we'll see a staff recommendation coming out, I think, as Jeff indicated, on the 18th, I believe it is, of this month. and then we'll move toward a final commission decision in early December. And so we'll see where that goes. We're still pretty optimistic that we'll get a reasonable result with that case and be able to move forward. But I don't know that we'll see any activity relative to settling the case here. Great. I appreciate the call, guys. Thank you. Have a good one. You too.

40:16 Thank you. We'll go next to Chris Ellinghaus with Siebert William Schenk. Your line is now open.

40:22 Chris Ellinghaus Hey, good morning, everybody. How are you? Jeff, you referenced the FERC increase relative to the capital increase for Worcester. Was that what was filed yesterday? I didn't get to look at that yet.

40:39 Chris Ellinghaus That's what, yeah, we filed it, but yesterday was the actual approval.

40:44 Okay. And Jeff, you sort of talked about upside the pathway in the future. There are some data centers sort of in the at least vague vicinity of the pipe. Is that one of the things that you're thinking about as potential?

41:07 Actually, it's not. I certainly can't speak to the electric load requirements and how those will be met, but our relationship for that pipeline is with Ford Power and Light on the electric side, with our distribution businesses that are not actually chasing data center loads. If a data center came to us looking for And lastly, the CAPEX slide for this year sort of suggests a pretty substantial

42:09 We've got a little bit of the FEP capital showing up there

42:38 I mean, we actually feel pretty good about the range that we're in, in terms of, where do we say, some more, yeah, just trying to get the, some additional potential pipeline, Miami Loop investments, fairly robust.

43:00 Thank you for joining us today. It could be. I mean, to be perfectly blunt, we're tracking steel prices and thinking about when we commit to the first substantive obligation on steel for that pipeline. Whether that's before the end of this year or sometime probably in Q1 of next year, I think it's still up in the air depending on what we see pricing going or where we see it going.

43:49 Okay, that helps. Appreciate it. See you next week.

43:52 Yeah, take care. Thank you. At this time, there are no further questions in queue. I will now turn the meeting back to Jeff Householder for any additional or closing remarks.

44:05 Well, thanks. And thanks to all of you for joining us this morning. We hope to see many of you at the EEI Financial Forum out in Phoenix next week. And as always, we appreciate your continued interest in Chesapeake Utilities. Goodbye. Thank you. This concludes Chesapeake Utilities Corporation's third quarter 2026 earnings conference call. Please disconnect your line at this time and have a wonderful day.