Greetings, and welcome to the Chesapeake Utilities Corp Fourth Quarter and Annual 2020 Financial Results. During the presentation all participants will be in a listen-only mode. [Operator Instructions] As a reminder, this conference is being recorded, Thursday, February 25, 2021. I would now like to turn the conference over to Beth Cooper, Executive Vice President and Chief Financial Officer. Please go ahead.

Thank you, and good afternoon, everyone. We appreciate you joining us today to review our fourth quarter and annual 2020 results. We at Chesapeake Utilities continue to operate effectively in this new normal, serving our customers and keeping employees as safe as possible as we await the full availability of the COVID-19 vaccination in the coming months. As shown on Slide 2, participating with me on the call today are Jeff Householder, President and Chief Executive Officer; and Jim Moriarty, Executive Vice President, General Counsel, Corporate Secretary and Chief Risk and Compliance Officer. We also have other members of our management team joining us virtually. Today’s presentation can be accessed on our website under the Investors section and Events & Webcasts subsection. After our prepared remarks, we will open the call up for questions. Our objective today is to provide insight into our fourth quarter and annual 2020 results, review the estimated impact of COVID-19 on our business in 2020 as well as update you on our progress on key strategic initiatives and our outlook for the future in regards to new opportunities. Moving to Slide 3, I would like to 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 the company’s 2020 Annual Report on Form 10-K provides further information on the factors that could cause such statements to differ from our actual results. Now, I’ll turn the call over to Jeff to provide opening remarks on the company’s 2020 performance and the key contributing drivers to our results. Jeff?

Good afternoon, and thank you for joining our year-end 2020 earnings call. We had a very strong year in 2020. And as shown on Slide 4, earnings growth from continuing operations increased 13.2%, resulting in our 14th year in a row of record earnings. We also achieved a consolidated return on equity above 11%, which is something we’ve done each year since 2005. Our consistent earnings track record is a significant accomplishment and represents top quartile performance among our peer group over an extended period. I’d note that we achieved these financial results in a year where our total capital investments once again approached $200 million, representing 18% of total capitalization. This has been an extraordinary year. It’s a testament to the dedication of our employee team that we were able to identify safety and operating procedures that enabled us to continue throughout the year uninterrupted delivery of the essential energy services Chesapeake provides. One of the significant concerns I had as the pandemic intensified was the potential loss of momentum in the completion of our capital growth projects. That didn’t happen. Our team was able to find ways to safely keep projects on schedule. And our investments in 2020 will deliver strong margin and earnings growth for years to come. Our stock also proved to be resilient during the pandemic-related market downturn. We maintained significant value relative to the losses in the broader utility market. Toward the end of the year, subsequent to our inclusion in the S&P 600 SmallCap index and reflecting our strong, consistent financial performance, the Chesapeake stock price increased above pre-COVID-19 levels. A key part of our total shareholder return is our strong dividend. Chesapeake Board followed our long-standing practice of closely correlating annualized dividend growth to our earnings growth and declared an annualized dividend…

Thanks, Jeff. Turning to Slide 10. Net income for the quarter was $22.4 million compared to the same quarter of last year. 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. As a result, I will focus our discussion today largely on continuing operations, although our consolidated earnings both for the quarter and annually in 2020 were strong despite the absence of any one-time gain. In terms of continuing operations for the quarter, our income from continuing operations grew by $4.5 million or 27%. EPS for the fourth quarter compared to the fourth quarter last year grew by $0.20 to $1.24 per share from $1.04, representing growth of 19% because of the equity issued in the fourth quarter of 2020. Net income for 2020 for the year was $71.5 million or $4.26 per share compared to $65.2 million or $3.96 per share for 2019. The company’s net income from continuing operations for 2020 was $70.6 million or $4.21 per share. This represents an increase of $9.5 million or $0.49 per share above 2019 results of $3.72 or 13.2% growth. Higher income was the result of increased performance across the enterprise, as Jeff highlighted earlier, coupled with expense management. Chesapeake Utilities is committed to gross margin growth through new project development and efficient operations, as shown on Slide 11. For 2020, gross margin increased 7.7% while operating – other operating expenses were up less than half of that growth at 2.7%. Keep in mind, the 7.7% increase in gross margin is inclusive of $4.3 million of milder weather that we experienced and $5.3 million of lower margin associated with COVID-19. If you exclude the COVID-19 impact, our operating income growth would…

Thanks, Beth. At the end of 2020, we completed our latest annual strategic plan update. I’ve been telling our employees that this is a fantastic time to be in the energy delivery business and to be part of Chesapeake Utilities. There’s certainly no denying that we are in extraordinary times with the energy industry transitioning to a lower carbon world. We faced many challenges raised by opponents to fossil fuels. Those challenges will require that we respond effectively, finding ways to meaningfully reduce our carbon footprint. At the same time, we need to meet customer demands for cleaner energy and continue to contribute to the economic well-being of the communities we serve. We believe that far from limiting our growth potential, these challenges present significant opportunities for investment and expansion. On Slide 18, we’ve highlighted our key strategic platforms for growth. These are the principal areas of investment focus that will drive our growth over the next few years. First is we want to optimize the earnings growth in our existing businesses through organic growth, regulatory initiatives and increased opportunities for collaboration and efficiency across our operating units. Our recent strategic plan update identified hundreds of millions of dollars of investment opportunities within our existing units. These opportunities represent organic growth without significant acquisition. Second, we continue to see opportunities for interstate and intrastate pipeline projects across Delmarva, Florida, Ohio and other states. Many of these pipelines will increase capacity to meet the growing demand for natural gas as our distribution systems continue to expand. Our service areas have experienced tremendous growth during the pandemic. Third, we think further growth in our propane gas business is likely, primarily through acquisitions in the Mid-Atlantic and Southeast, along with the expansion of our propane AutoGas business. And fourth, we continue to expand…

Thank you, Jeff, and good afternoon, everyone. As shown on Slide 22, Chesapeake Utilities continues to build on our bedrock commitment to ESG, a focus on environmental stewardship, dedication to social justice and to sound governance principles. This is how we work every day. 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 USA awards, speaks volumes about our diverse and inclusive culture, one which continues to promote the growth and development and engagement of our employees and our communities. Our vibrant and inclusive culture could not have been any more evident than in 2020, when we collectively responded to the challenges presented by the COVID-19 pandemic and to the opportunities that were presented for social justice actions. 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 critical to our people, beginning with our Board and extending throughout the company could not be more important as we continue together to chart the road ahead. 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 vibrant enterprise risk management program. Embedded within our ERM program are ESG-related areas and emerging risks. In regards to safety, we are committed to providing a safe workplace for our employees and to make safety a priority in our interactions with each other, our customers and the communities we serve. It is part of…

Thanks, Jim. 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, propane or electricity. And 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 opportunities like RNG that provide the bridge from the here and now to a more sustainable future. We’ll continue to execute our strategy, focused on delivering top quartile performance and significant shareholder return. In closing, let me thank all of our dedicated Chesapeake Utilities employees, who always take great pride in the work that we do. And we are committed to identifying and delivering innovative solutions for the delivery of clean, reliable and safe energy to our customers. Thanks for joining us this afternoon, and we’d be happy to address any questions you might have.

Thank you. [Operator Instructions] Our first phone question is from Tate Sullivan with Maxim Group. Please go ahead. Your line is now open.

Thank you. Good afternoon everyone and appreciate all the comments. And I thought I’d start with the CapEx comment on Slide 14. On electric distribution, you indicate increasing CapEx from $3 million to $9 million to $13 million next year. Can you – and then I think you mentioned a solar project. Can you mention more detail what’s behind that for your electric business, please?

A very large percentage of it is the required storm hardening that we are obligated to invest in, in Florida. Fortunately, there’s a recovery mechanism very similar to our GRIP program on the natural gas side that will enable us to recover those dollars. But it’s – that’s the biggest part of it, including additional typical capital that we have for serving new customers and a couple of substation improvements that we’re planning. The bulk of it go to storm hardening.

Okay. And then you also noted higher rates for Aspire. Can you just remind me, are those tariff schedules for your Aspire business? Or how do you usually secure higher rates in that business?

They are negotiated rates. Beth, go ahead, please.

No. Please go ahead, Jeff.

No, take it, Beth.

We have contracts with the cooperative and also with – contracts in place with Columbia, Ohio. So particularly, with the co-op, we have opportunities to renegotiate those rates from time to time.

Okay. And then you mentioned potential propane acquisitions. I heard the Mid-Atlantic. I think you mentioned another area. Can you give some background, what do you need to see? I know there are many smaller propane companies out there. But what do you need to see to decide to acquire propane companies? Or can you cite an example from your most recent deals? What’s attractive about those deals, please?

So I can start off and then Jeff can add. So the acquisitions that we’ve done, if you take a look at them, if you go all the way back, even a couple of years ago, you saw us do a transaction that we called Ohl. And that was up in Pennsylvania. And it was a nice fold-in. It gave us a little bit more of a foundation in that market. That’s pretty similar to what also happened in the case of Boulden. Boulden had some overlap with our existing Sharp operation, but they had a real strong footprint up around the Cecil County area. And if you’ll recall, Tate, one of the great benefits of doing that transaction was it was a nice overlay with Elkton. So we had an opportunity to build on our growing natural gas presence. But we also had, with the Boulden acquisition, a stronger footprint, particularly up there and in other areas in Maryland, even here on the Eastern Shore, where we have a presence, but we’re not necessarily the largest player. So Boulden again gave us that. And then also when you look at the Western Natural Gas acquisition, again we serve parts of Florida, but that particular acquisition gave us a real strong foothold in the Jacksonville area. So we’re looking at those types of opportunities. We’re also looking at opportunities to expand in contiguous markets. We’ve done some startups in contiguous markets, but we would also – we’re interested in acquisitions that help expand our footprint. Jeff, I don’t know if there’s anything else you might want to add there.

No, that covered it. Thanks.

Okay. Thank you all for those comments.

Thank you. Thanks Tate.

Thank you. And our next question is from the line of Brian Russo with Sidoti. Please go ahead. Your line is open.

Hi, good afternoon.

Hi, Brian.

Hi. I think we’ve been seeing a lot of announcements from other utilities in terms of RNG projects, both in the Mid-Atlantic and around the country. And I was just wondering if you could just elaborate on Chesapeake Utilities’ competitive advantages to sign contracts? Or what’s the competitive landscape like? And is that impacting returns?

Well, I can start that one of the advantages that we have is geography. And so the two projects that I mentioned specifically, the Bioenergy DevCo project and CleanBay, are deep in the middle of our service territories on the Delmarva Peninsula. We have other projects similar in nature in other jurisdictions in Florida, some in Ohio even, that we feel pretty confident that the offtake agreements for the gas, regardless of whether they come with the green attributes or not, we may and somebody else may market those green attributes to the California vehicle market, for example. But the offtakes for the actual production, the physical production of gas, are viable. And we believe that we obviously have a significant advantage if we’re the pipeline or distributor in the area. The other thing, I think, that gives us an interesting advantage in these projects is Marlin, as I mentioned a moment ago. Frequently, it’s not economically viable to build a pipeline to connect these production facilities, the RNG production facilities, to a distribution or transmission system. And so Marlin gets a look at a lot of projects but also give us another look at potential investments. And so we’ll see how that plays out over the coming years. But I think we’re getting a first look at many things because people developing projects are trying to find a way to get their gas to market and offering that opportunity. We’re also seeing, as I mentioned, opportunities to do things that are – kind of surround these projects. They’re associated with the projects, but they’re not necessarily part of the anaerobic digester or even necessarily part of the gas processing facilities, things like solar photovoltaic electric generation that provide electricity to the production facility and really improve the carbon intensity score, which has the effect of significantly improving the project economics. Because the gas, the green attributes of the gas at least are worth significantly more. And so those are the kinds of things that we’re looking at. Many of these projects, I also mentioned this but probably pretty quickly, but many of these projects, including the ones in Delaware and Maryland, I mentioned, have organic fertilizer production capabilities. And there’s usually a thermal gas requirement for that. They’re not using the RNG to produce that organic fertilizer. And so there’s another opportunity for us to provide not only takeaway services, offtake services, Marlin transport services, pipeline services but then also provide thermal gas back to the project to essentially drive the fertilizer. So we think there are a lot of opportunities there for us.

Okay. Great. Appreciate that. And then to segue into Marlin Gas Services, are you seeing the incremental opportunities? Given the situation in Texas and in the South with the recent winter storms and the hurricanes that we saw in the fall, is there an increased market opportunity for Marlin Gas for that?

Maybe so. I don’t know – yes, I don’t know that we’ve seen a lot, certainly not related to the Texas situation. What we do see are significant opportunities for kind of the classic Marlin CNG delivery that are not emergency-based services. There are opportunities for us to have a more predictable revenue stream by executing agreements with pipelines and distribution companies that are taking facilities out of service on a routine basis for maintenance. And so those are the kinds of opportunities that we are looking for rather than leaving a fleet of tanker trucks sitting in a parking lot somewhere waiting for the phone, waiting for an emergency. We’re trying to establish a more regular revenue stream out of that business. And we’ve been making some significant progress down that path. And so yes, there may be from time to time emergency services. We certainly continue to respond and we hold back on some portion of our fleet to make sure that we can respond. But more and more of what we’re looking for are those longer-term agreements, where we have some predictable and understandable, schedulable revenue streams.

Okay. Understood. And then just on your updated guidance through 2025 and the five-year CapEx relative to the earnings outlook in 2025, can you give us a sense of the mix of business and how that might evolve? It looks like roughly 80-plus percent of the 2021 CapEx is regulated. Should we assume that’s kind of the profile for the five-year CapEx and the mix will be approximately 80-20 in 2025?

Yes. And again, I wouldn’t tell you it was exactly 80%. It may move around that number, but that’s generally speaking, a pretty good target. Beth, I don’t know if you want to comment on that.

No, I wholeheartedly agree with Jeff. I think we built our guidance based on looking at, as Jeff mentioned, our updated strategic plan. And so it’s opportunities that have a high probability of occurring, and there are opportunities that were – our groups are looking at and have identified. So it could – as Jeff mentioned, it could be a little less, it could be a little bit more. But that’s generally about where we’ve been over time.

Okay. Great. And then just lastly, on the gross margin slide, I see under the regulatory initiatives, capital cost surcharge programs. And I know you discussed it in the press release. Could you just maybe discuss it again? What’s driving that? And is that something that should remain as a gross margin driver going forward?

Sure. I can respond to that. So our pipeline, from time to time, will have mandatory relocation and enhancements that it needs to do based on projects that are underway. And so it’s not something, Brian, that you should say, "I’m going to factor this in so much each year." But when we have specific projects that we know that we’re going to undertake and we know what they’re going to be generating in terms of incremental margins similar to like our GRIP program, we will announce those and include those in our margin table.

Okay. Great. And then lastly, your ability to manage operating cost of flat is quite impressive. Is there – is some of that sustainable? Or is it temporary that you should see some normal cost inflation going forward?

I’ll take the first pass, Beth. I mean we have an interest in, as part of our business transformation that we mentioned earlier, looking at efficiencies across the organization. And as much as many smaller companies that are getting larger, we grew up with a set of siloed business units, and we’re in the process of merging many of those together into similar areas of function. And as we do that, we find a variety of overlapping activities in those areas. And I think that we will find that, over time, we’ll find some efficiencies there, and we can continue to effectively manage those costs. We’re also deploying technology in a much different way than we were a couple of years ago. And again, those are the kinds of things that we’re finding meaningful differences in the cost structure in these businesses. We’re not absolutely out to drive costs down by some percentage. But as it comes along, we’re harvesting it and taking advantage of that.

Okay, great. Thank you very much.

Thank you, Brian.

Thank you. Our next question is from Michael Gaugler with Janney Montgomery Scott. Please go ahead. Your line is open.

Good afternoon everyone.

Hey, Mike.

Good afternoon.

In the presentation, you mentioned on Slide 18, transmission opportunities. And I know that’s been a part of the thought process for a while. But I’m just wondering how you’re thinking about it these days with the updated CapEx. Would these be newbuilds or potentially acquisitions? And what geographic regions look attractive?

Primarily, these are newbuilds, and we’re looking at a number of projects in Florida, where we’ve had a long history of being able to build intrastate pipelines. We have a couple. One, I mentioned the pipeline in Ohio. And actually, there’s another pipeline out there to a power plant that we’ll bring in this year. And so we see these opportunities, Mike, for a relatively small-scale pipeline projects, and I think they’ll continue without too much of an issue in the jurisdictions that we just described, continue to be some opportunities for expansion on Eastern Shore on the Delmarva Peninsula as well. I mean we’re seeing, as I mentioned in the text here, the growth rates both in Florida and on Delmarva that are significantly in excess to national averages of more than double. And so we’re going to have a continuing need for additional gas supply both in Florida and in Delmarva for the next several years.

And then just one final. On Marlin, I know in the past, you had mentioned that there was some difficulty in getting equipment in a timely manner. And I’m wondering if that’s still the case or if you’re able to get all the equipment you need when you need it.

Yes. That situation has dramatically improved. In some respects, we’ve changed, to some extent, the technology of the equipment that we’re using and the suppliers that were historically providing the equipment. And so we’re seeing opportunities to bring equipment in months and months less than we were seeing when we originally acquired the business.

All right. That’s all I had. Thank you.

Thank you, Mike.

Thank you. And our next question is from Roger Liddell with Clear Harbor Asset Management. Please go ahead. Your line is open.

Yes, good afternoon.

Hey, Roger.

Hi, Roger.

I’m focusing on your comments, they were brief, regarding hydrogen issues. And given that this could be a bulwark against high carbon fuel restrictions, it’s enormously important even though early in the whole planning and build-out and so forth. But I’d be interested in any specific things that you can refer to. An example would be in a prior call or calls, you spoke of the – I think it’s more than aspiration but the desire to have renewable gas being sufficient to power the resi sector. And that’s very powerful and there is specificity there. Now you’re fortunate enough, unlike many other service territories, to be right at shorelines and therefore offshore wind and the possibility of powering electrolyzers with offshore wind opens up at least an opportunity for you. How do you see yourself participating in maybe helping to shape some of that development?

Well, that’s – there’s a lot of questions there, Roger. Let me go back to – I’ll just start at the beginning. We definitely have an interest in hydrogen. We believe that our Eight Flags gas turbine sitting on Amelia Island offers an interesting opportunity for us to find out a little more about how hydrogen might impact both our pipeline systems and the equipment that our gas systems are actually feeding. And so we’re, as I mentioned, early in the process. We’re going to participate with the Solar Turbines folks in an actual federal DOE project to do some research and development on hydrogen, especially related to turbine. We also believe that given the fact that we have Marlin, we have an opportunity to be able to deliver hydrogen by transport truck to that facility as well as RNG. And we have it set up so that we can isolate the gas strain to Eight Flags without impacting other customers. And so to make a long story short, we see it as a great test case to see what happens in a number of respects, and again primarily, the impact on our pipe systems and the impact on our measurement equipment, the impact on the turbine blades and all the things that we need to understand better. And so we’re committed to going down this path on the hydrogen side. We are looking for other industrial customers who may have a similar interest and that are similarly isolated on a pipeline system and so that we could potentially run another type of test. So I think this is – and obviously, this is an emerging market and it’s going to be a while before it’s – anybody is ready to inject significant amounts of hydrogen into their distribution system,…

Very interesting – I’m sorry, didn’t mean to cut you off.

No, I was just hoping that I answered your question.

Yes. Well, an important part of it and I got to save some for another call.

Okay.

Good day. And thank you. And I’m encouraged and looking forward to hearing further developments in this avenue.

Sure.

Thank you, Roger.

Thank you. And at this moment, there are no further questions. I will turn the call back over to you, Mr. Householder, for any closing remarks you have.

No, I appreciate everyone’s participation, a lot of great questions today. And we look forward very much to talking with you next quarter. Thank you very much. Good afternoon.

Thank you, ladies and gentlemen. That does conclude today’s call. We thank you for your participation and ask that you please disconnect your lines.