Welcome to Chesapeake Utilities Corporation's third quarter 2026 earnings conference call. 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 one on your telephone keypad. If at any point your question has been answered, you may remove yourself from the queue by pressing star two. So 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 zero. I would now like to turn the call over to Lucia Dempsey, Head of Investor Relations.
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.
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 has been provided in the appendix of this presentation, our earnings release, and in our third quarter Form 10-Q. Here at Chesapeake Utilities, safety is our first priority. We start all meetings with a safety moment and will 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 community 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. 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. Jim 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. 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.
Thank you, Lucia, and good morning, everyone. I will start with slide five. I am 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 recognized $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.
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 million-$600 million of capital investment. Moving to slide six, customer demand for natural gas remains core to our long-term growth strategy. We have 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. 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 are 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 are 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. Now let us 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 million-$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 eight highlights the Florida Energy Pathway Project, or FEP, our $1.2 billion gas transmission project in South Florida. 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 NEER 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, FPL, and our natural gas distribution businesses, Florida Public Utilities and Florida City Gas, have contracted for capacity quantities of 250,000 dekatherms per day.
The opportunity exists to explore further expansion beyond the current contract quantities to meet any additional shipper demand that may arise. We have 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 12-18 months, with construction to begin directly after. We continue to expect the project to come online in 2030, and we will provide incremental updates each quarter. Slide nine 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 are preparing to file for the first of a series of commissioning-related notice to proceed permits.
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 were 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. Turning 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 will now shift to slide 11, which addresses our longer-term capital program. 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 will turn it to Jim.
Thank you, Jeff, and good to be with all of you today. I will 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 PSC staff recommendations are expected on November 18th, followed by revenue requirement and rate conferences in early to mid-December. We remain focused on achieving a constructive outcome and expect a final commission order in early January 2027. I will 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. 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. We are 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 & 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.
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 am 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. 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 $0.89 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 $0.09 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. 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 $0.02, along with another $0.02 of increased other unregulated performance.
These gains were partially offset by a few factors, including $0.12 of increased payroll and benefit costs and $0.09 of higher O&M expenses. We also had $0.06 of increased depreciation, amortization, and property tax expenses driven by increased levels of capital investment. Lastly, financing activity included debt and equity issuances over the last 12 months, reduced adjusted earnings per share by $0.05. 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. 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. 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 $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. Our most recent annual dividend increase of 7.3% and our next dividend payment of $0.74 per share align with our dividend payout target range of 45%-50%. This enables us to retain 50%-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-$8.00. I would like to end by summarizing our value proposition, which is shown on slide 21. 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. With that, we will 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 one on your telephone keypad. If at any point your question is answered, you may remove yourself from the queue by pressing star two. 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 Kania with BTIG. Your line is now open.
Hi there. Good morning. I just have one question. Lucia 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 existing shippers? Could it be a tie-in with some of the other projects that Chesapeake is working on in Florida? I am just kind of curious where that direction might be.
Good morning. This is Jeff Householder. It's probably all of those things. I mean, we built this pipe with the view that South Florida and that regional area is going to continue to grow. I think you'll see that with the manufacturers moving back in and the residential construction that continues to astound us in some respects down in that area. I think there's always the opportunity long term for additional electric load growth. 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. We could ultimately expand it without a substantial amount of additional capital, and certainly not too much additional pipe. That's always, I think, a good thing.
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.
Great. Thanks for that. Then maybe just some thoughts on the propane markets and kind of 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.
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. We have, especially in our Delmarva operating regions, a substantial amount of storage, millions of gallons up there. 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. 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.
Great. Thanks very much.
Thank you. We'll go next to Juan Carlos Vidales with Ladenburg Thalmann. Your line is now open.
Hey. Good morning, team. How's it going?
Good morning.
Just quick on kind of the further growth opportunities. Could you give us an update on SpaceX filing to construct a pipeline for their operations? I guess, what would be the path for you all to potentially either be included on a deal or a joint developer on that project?
Well, as you know, SpaceX, or at least a subsidiary company, had filed for approval with the Public Service Commission and received that approval to construct an intrastate pipeline. I will be blunt, we have never considered SpaceX to be a principal customer opportunity for us in moving into the spaceport in Florida, and certainly does not 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 have done it in other places. But I do not think it has a lot of bearing on what we are trying to do over there. We have an existing pipeline, as you know, that runs into the spaceport.
We are in the process of upgrading that pipeline and building a little bit of additional pipe on the front side of that pipe that would allow us to meet the capacity requirements that we think make sense without SpaceX. If we can provide service to SpaceX somewhere along the way, that is great. We would love to do it. But they were not a principal part of our thinking going over toward either the Port of Canaveral, certainly, but at the spaceport either.
All right. I mean, is there any, I guess, way that the Florida Commission would potentially look at you all's pipeline being relatively close, if not, I believe, almost parallel to the proposed one, given you already have rights of way?
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, again, is certainly possible, and there are other large industrial users in Florida that do the same thing 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. 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 of way, and maybe only SpaceX and us would be there ultimately. We're certainly aware of that and have looked at it, and I think the regulators also understand that.
Awesome. Great. 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 MTPA are expected of production on an annual basis? I believe the really large ones are about 2 million- 4 million. Would this be sort of in that range, or would it be a much smaller project? I guess, what would be the timeframe on construction for a facility like this to go from sort of an FID to commercial operation?
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 on the ground in the same kind of timeframe that we've been looking at with the WRU facility. 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-year to three-year time period is about right.
Great. Just one quick follow-up. In regards to the WRU project, what's the O&M associated with an LNG storage facility like that?
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 the 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.
Great. 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, then I think there was probably something got derailed. As of now, where do you stand?
This is on the LNG facility at Cape Canaveral?
Yeah, that's correct.
Yeah. We've looked now, I think we're on site 15 that we've looked up and down the Intracoastal. 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 Intracoastal, especially to get into the Port of Canaveral, then you've got to find a place on the water that's big enough and the water deep enough to allow you to do that. That narrows the field quite significantly. There are some parcels of property actually on the very large NASA property area down there around the spaceport that would be quite useful, both for providing services to some of the rocket launches and to the Port of Canaveral. We're still quite interested in those.
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. It was literally within less than one mile on a barge canal to access the port. That would have been certainly an ideal low-cost project for us, but they wanted to use the property for something else. We continue to work with the port and with the Space Florida folks to try to identify appropriate places that we could locate the facility.
Great. Well, thank you. I'll see you guys in a couple days here.
Yeah. Good.
Thank you. We will go next to Dylan Lipner with Mizuho. Your line is now open.
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 remarks, cost of healthcare claims were higher than normal in the quarter. Is this something that was more one-time in nature, or it can might bleed into 4Q and potentially into next year?
Yeah. Thank you, Dylan. As we indicated, there was some additional expenses that showed up that were not really predicted. We are taking a hard look at those to see if there is 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. We are 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 are insuring and making sure that we are healthy and getting beyond sort of the cost elements. But yeah, it was a little bit of a surprise there in the third quarter that we are going to manage through.
Got you. Okay, cool. Just quick one on the multi-year ERP project. Just want to know how that is progressing, if we are going to see any more O&M as you go into 4Q and into 1Q, as this plan to go live in Q2 of 2027.
Yeah. If you are just thinking about O&M, you probably will not see any additional O&M until 2028. We will get through in service there in the April/May timeframe, and we will be in some sort of hypercare for pretty much the rest of 2027. At that point in time, we will be updating, obviously, the impacts to 2028. We have been making investments like this for the last few years. We have not really talked a lot about the O&M benefits to those investments.
There would be a time here in the not-too-distant future that we will be able to give you a better view of what our O&M levels will look like really beyond ERP. There are also things that I think are coming to fruition in terms of investments around our customer and obviously the ERP that are having impacts to how we are operating on a day-to-day basis.
That is all in front of us. Again, probably a little bit more color beyond our February update that we will give you.
Got you. Cool. Just last one, if I could, for the FCG rate case. Are prospects for settlements still on the table, or just looking like it is going to be fully litigated through the end of December and new rates in January?
Well, I think we are always open to a discussion. I do not think that that is likely here. My expectations are that we will see a staff recommendation coming out, I think, as Jeff indicated, on the 18th, I believe it is, of this month. Then we will move toward a final commission decision in early December. We will see where that goes. We are still pretty optimistic that we will get a reasonable result with that case and be able to move forward. I do not know that we will see any activity relative to settling the case here.
Great. All right. Appreciate the call, guys. Thank you. Have a good one.
You too.
Thank you. We will go next to Chris Ellinghaus with Siebert Williams Shank. Your line is now open.
Hey, good morning, everybody. How are you?
Hey.
Jeff, you referenced the FERC increase relative to the capital increase for Worcester. Was that what was filed yesterday? I did not get to look at that yet.
Yeah, we filed it, but yesterday was the actual approval.
Okay.
Yeah.
Jeff, you sort of talked about upside to 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 are thinking about as potential?
Actually, it is not. I certainly cannot speak to the electric load requirements and how those will be met. But our relationship for that pipeline is with Florida Power & 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 a gas service, then we would evaluate that in the same way that we would do any other industrial customer. But that is not really been a key part of either the pipeline design for us at this point or our thoughts on future load.
Okay. Lastly, the CapEx slide for this year suggests a pretty substantial fourth quarter, almost unprecedented levels. What are some of the big items in there that leave you confident of making that implied fourth quarter number?
Fourth quarter of this year?
This year.
Yeah.
Yeah. I mean, obviously the in-service for WRU is one of those chunks. We have a little bit of the FEP capital showing up there. I mean, we actually feel pretty good about the range that we are in terms of, where do we say-
Some more.
Yeah. Just trying to get the-
Some additional Peninsula Pipeline, Miami Loop investments, fairly robust effort in the last quarter on the pipeline replacement programs at SAFE and GUARD. There is some electric storm protection investment. It is just an accumulation of a number of things that kind of add up to the number that we provided.
Okay. It kind of sounds like maybe that initial FEP piece might be fairly material.
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 is still up in the air depending on what we see pricing going or where we see it going.
Okay, that helps. Appreciate it. See you next week.
Yeah.
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.
Well, thanks. Thanks to all of you for joining us this morning. We hope to see many of you at the EEI Financial Conference out in Phoenix next week. 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.