Greetings, and welcome to the Chesapeake Utilities Corporation 2022 Second Quarter Financial Results Conference Call. As a reminder, this conference is being recorded, Thursday, August 4, 2022. I would now like to turn the conference over to Alex Whitelam, Head of Investor Relations. Please go ahead..

Thank you, Kevin. Good afternoon, everyone. We know it's late in the day, and we just appreciate everyone joining us. We're excited to present Chesapeake Utilities' results for the second quarter and first half of 2022.

As you saw in our press release issued yesterday, the company reported solid financial performance in both periods, which is a testament to our continued ability to deliver long-term sustainable growth for our stakeholders, even in the midst of this ever-changing marketplace.

As shown on Slide 2, participating with me on the call today are Jeff Householder, President and Chief Executive Officer; Beth Cooper, Executive Vice President, Chief Financial Officer, Treasurer, and Assistant Corporate Secretary; and Jim Moriarty, Executive Vice President, General Counsel, Corporate Secretary, and Chief Policy and Risk 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 page in the Investors & Presentation subsection. After our prepared remarks, we will open the call up for questions. Moving to Slide 3.

I'd 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 Form 10-K 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 non-GAAP adjusted gross margin and has provided the appropriate disclosures in accordance with the SEC's Regulation G. A reconciliation of GAAP gross margin to non-GAAP adjusted gross margin is provided in the appendix in this presentation and in our earnings release.

Now I'll turn the call over to Jeff to provide some opening remarks on the company's financial results and the key drivers of our performance.

Jeff?.

Thank you, Alex. Good afternoon, and thank you for joining our call today. Now turning to Slide 4, we're pleased to welcome Stephanie Gary and Sheree Petrone to the Chesapeake Utilities Board of Directors.

Jim will speak to this in a moment, but Stephanie and Sheree bring skills, expertise, and an outstanding leadership to our organization, and we're happy to have them on board. On Slide 5, I'd like to thank all of my colleagues across the company.

Through their hard work and continued dedication to providing services to our customers, we were able to deliver solid results in the second quarter. Our team overcame challenges in the quarter, as inflation and supply chain constraints pressured our businesses.

Despite these challenges, we continued to grow earnings per share again, both in the quarter and year to date through June.

For the second quarter, adjusted gross margins grew by $8 million compared to the same period last year, which was largely driven by several recent acquisitions, including Diversified Energy, transmission service expansions, and strong natural gas distribution customer growth in both our Delmarva and Florida service territories.

We also took another step with our real estate rationalization, which resulted in a $1.9 million gain and contributed $0.08 in EPS for the quarter. And finally, our team continued to do an excellent job mitigating higher expenses as we continue our business transformation efforts.

While we've done a good job managing costs and accelerating margins were possible, the inflationary environment we're all experiencing will likely result in additional significant impacts in the third and fourth quarters of 2022 and into 2023.

We're seeing cost increases in virtually every corner of our business, from materials to gasoline to employee costs. The biggest potential future impact, of course, is the Fed's probable continued action to control inflation with additional adjustments to interest rates.

In addition to the expense and interest cost increases, we're also experiencing supply chain and regulatory delays and other issues that are impacting the timing of some of our capital expansion projects. I'll discuss this in greater detail later in the call, but suffice it to say that the in-service dates of several projects have shifted into 2023.

Fortunately, it's a timing issue. We have delayed but certainly not canceled a number of projects, so we're adjusting our capital expenditure expectations for this year. And just to reemphasize the point, we're simply seeing a timing issue on these projects and expect that they will be completed in 2023 and beyond.

I would also reinforce that these timing shifts are not affecting our current 5-year guidance. We remain on track with both our long-term capital expenditure and EPS guidance for 2025.

We continue to see significant opportunities for investment and earnings growth, given the capital projects in our pipeline and the high levels of organic customer growth we're experiencing across our service territories.

I'll discuss this further on the next slide, but our natural gas distribution businesses continue to see customer growth at levels well above the national average.

In our Delmarva territory, we recently surpassed 100,000 customer connections, and we're close to reaching that customer number in our Florida natural gas operations, which speaks again to the great work by our growth and operations teams.

All that said, it was another great quarter with solid financial results and a number of exciting announcements that will positively impact the future.

While we see near-term challenges ahead given the current inflationary environment, future investment opportunities in both our foundational businesses and the sustainable energy projects we're pursuing are substantial, and we're excited for what lies ahead. On Slide 6, let me touch on our 5 growth platforms.

As I mentioned, we continue to see strong organic growth in our natural gas distribution businesses, both in Delmarva and the Florida service territories. In the second quarter, Delmarva customer growth was 5.7%, and Florida saw 4.1% year-over-year growth, which is well above the national average.

While inflationary pressures and a rising interest rate environment appears to be slowing the national demand for housing, homebuilders in our service territories continue to see significant population growth and a solid demand for housing for the foreseeable future.

As an example, some of our builders have confirmed that they have presold units out for 24 months. We continue to see high builder and customer demand for natural gas and propane throughout our service territories.

The growth continues to present investment opportunities not only for our distribution businesses, but it also drives the need for greater capacity on our transmission systems as well.

We're continuing with projects that further expand our natural gas systems, including, for example, the Beachside and Winter Haven expansions in Florida, the Eastern Shore Southern Expansion compressor upgrade and North Ocean City Connector projects on the Delmarva. All of those are projects that we've discussed in the past.

We also submitted a petition for an expansion project that will bring additional capacity needs to support customer growth in the St. Cloud, Florida, area, specifically in the Twin Lakes development. These projects are poised to deliver significant margin growth, once completed.

Our propane business also continues to drive strong results for the company. The Diversified acquisition has driven an incremental $5.5 million of adjusted gross margin through the first half of the year. Given its service locations across the Carolinas, Diversified is opening the door for other opportunities in the region.

One of those opportunities came to fruition in June when we acquired the propane assets of Davenport Energy's Siler City propane division in North Carolina. With the acquisition, we added to our footprint in North Carolina with approximately 850 additional customers.

Propane continues to be an important contributor to our overall portfolio as a highly complementary, nonregulated business, and we see additional opportunities for expansion in the Mid-Atlantic and Southeast. Marlin Gas Services also continues to add value to the organization, adding $0.5 million in adjusted gross margin in the quarter.

Like many mobile transport companies, Marlin is working to overcome higher transportation costs and labor shortages, especially with respect to our highly trained transport driver operators. Despite this challenge, Marlin continues to open doors for our RNG efforts, and we're excited for some of those opportunities to come closer to completion.

And finally, we've been pursuing a number of RNG investments along the East Coast that meet dual objectives, delivering natural gas to meet customer demand, and allowing us to continue our sustainability efforts in our local communities by generating renewable natural gas from agricultural as well as landfill waste.

We're excited to begin finalization of these projects and further build our portfolio of renewable projects. With that, I'll turn it over to Beth to discuss our results in more depth.

Beth?.

Thank you, Jeff, and good afternoon, everyone. I'd also like to thank our team for all they continue to do to ensure the company succeeds, especially in the face of the challenges Jeff mentioned previously. I'm proud of what we continue to accomplish together as a team.

With that said, let me dive into the details of the quarter and the first 6 months of 2022. As you'll see on Slide 7, diluted earnings per share were $0.96 in the quarter and $3.04 year to date through June 30.

Our 10.5% growth on a year-to-date basis is a direct result of our team continuing to provide safe, reliable service, while executing on our growth plan and delivering solid financial performance.

Some of the key margin drivers for the year thus far included contributions from Diversified Energy, which we acquired in December 2021, which Jeff just spoke to; continued pipeline expansions and strong organic customer growth in our natural gas distribution businesses; additional growth from the various regulated infrastructure programs in our Florida, Elkton, and Eastern Shore business units; higher margins per gallon in our legacy propane businesses; increased margins at our Aspire Energy business in Ohio; and finally, increased demand for CNG services within our Marlin Gas Services business.

On Slide 8, our financial summary shows adjusted gross margin increasing by approximately $8 million for the quarter and $16.8 million for the first half of the year.

While our team did an outstanding job managing expenses, higher interest charges as a result of rising rates negatively impacted earnings in the quarter and will have a more significant impact throughout the second half of the year. That said, net income for the second quarter was $17.1 million, and earnings per share were $0.96.

This included that onetime $1.9 million gain on a building sale as we continue to rationalize our real estate. This generated $0.08 of additional EPS, as we mentioned earlier. For the year-to-date period, net income increased by $5.7 million over the same period last year. EPS increased by $0.29 over the same time, which represents a 10.5% increase.

Absent the onetime gain, EPS was up 7.6% through the first 6 months of 2022 compared to the prior year. On Slide 9, we highlight the key contributors to earnings growth for the first quarter as measured on a per-share basis. Let me provide some additional details.

As I just mentioned, that real estate rationalization and subsequent building sale generated an $0.08 gain in the quarter. Contributions from the acquisitions of Diversified Energy and the Escambia Meter Station generated an incremental $0.07 in earnings for the quarter.

Our core businesses delivered additional margin contributions that increased earnings by $0.24 per share.

This includes higher operating income from transmission expansion projects, natural gas distribution organic growth, higher performance from propane and our Aspire operations, along with additional income from our regulated infrastructure program. Operating expenses tied to the acquisitions largely associated with Diversified Energy were $0.09.

As we frequently have to remind ourselves and want to remind those on the call, we generate significantly more margin in the propane business during the first and fourth quarters, while the business has a normalized level of operating expenses that occur more evenly over the year.

This may translate into operating losses during the second and third quarter, largely dependent upon whether we get colder weather in some of the months. Higher depreciation, amortization, and property tax costs associated with new capital investments were an $0.08 headwind.

Again, our team did an excellent job mitigating costs this quarter, so operating expenses tied to growth in our core business were flat. Finally, interest and other expenses were $0.04 higher. On Slide 10, we follow a similar and portray a similar bridge, so I won't walk through all the details.

But as you can see, we generated solid growth from our acquisitions and our core businesses. Let me touch now on Chesapeake Utilities' operating segments on the next 2 slides. On Slide 11, you'll see adjusted gross margin was up 6.3% for the quarter and 5.8% year-over-year for our Regulated Energy segment.

Operating income was higher in both periods, up 13.5% and 9.1%, respectively, and driven primarily by pipeline expansions from our transmission pipeline, organic growth in our natural gas distribution system, incremental contributions from our various infrastructure programs, and contributions from the Escambia Meter Station acquisition.

And as Jeff spoke to in his opening comments, our business transformation efforts continue to drive operational improvements to enable our businesses to scale and capture efficiencies within our regulated operations. This has been extremely beneficial in light of several project delays.

Turning to our Unregulated segment on Slide 12, adjusted gross margin increased an impressive 21.2% compared to last year's second quarter, and 14.7% for the first 6 months of the year compared to the same period last year.

This margin growth was driven primarily by contributions from Diversified Energy and increased margins for our propane distribution business, Marlin Gas Services, and Aspire Energy.

While higher cost from transportation fuel, labor, and other rising costs impacted the Unregulated segment more significantly, operating income increased by more than $1 million in the quarter and $2 million through the first half of the year. On Slide 13, I'll mention just a few updates on the balance sheet.

In March, we issued $50 million in senior notes at a coupon rate of 2.95% with a 15-year average life. Something to note is that while we were pleased to secure capital at this attractive rate, our new long-term debt placement will increase Chesapeake Utilities' annual interest expense by approximately $1 million annually.

Also, with the Fed's actions to date, including the most recent hike, based on our current short-term borrowing, short-term interest expense will increase over $3 million year over year on an annual basis. This does not include other potential future Fed actions.

We continue to evaluate potential means to mitigate these impacts through hedging strategies, alternative financing options, and regulatory mechanisms. At the end of the second quarter, total capitalization totaled approximately $1.6 billion.

This included 52% stockholders' equity, which is now $816 million and within our target capital range, 37.6% long-term debt at an average fixed rate of 3.38%, and short-term debt decreased from $222 million at year-end to $137 million, with $50 million attributable to the long-term debt financing I just mentioned.

Our balance sheet remains strong and well positioned to support our capital investments, which will drive our earnings growth and enhance shareholder value. Moving to Slide 14, we highlight the pipeline expansion, CNG, LNG and RNG transportation projects, acquisitions, and strategic regulatory initiatives that will drive our growth through 2023.

As always, we remind you that this table does not include organic growth, and it is not indicative of all the projects that we are evaluating and pursuing. We continue to be bullish on the projects we have in our pipeline of growth opportunities. These initiatives are driving higher-margin growth and provide a runway for long-term value.

We're also excited with some of the renewable energy projects maturing in the market and look forward to bringing many of them to fruition. But as we've stated, these types of projects take longer to get across the finish line. We'll continue to share details as they become available.

Since our last call, we announced the filing of our rate case in the state of Florida. Jim will provide additional details on this in just a moment, but we added it to our table with placeholders for now.

rates from the Florida rate case, we expect the projects that are already underway will add more than $20 million in 2022 and approximately $6 million additional margin in 2023. Cumulatively, the major projects included in this table are expected to add more than $41 million in adjusted gross margin over 2020 levels.

Moving to Slide 15, we highlight our key pipeline expansion projects. With an investment of approximately $140 million, these projects are expected to contribute close to $21 million in adjusted gross margin. Now with that, I'll pass the call off to Jim Moriarty to discuss our regulatory and ESG updates.

Jim?.

Well, thank you, Beth, and good afternoon to you all. On Slides 16 and 17, we list some of our new and ongoing regulatory initiatives, including details on the base rate case proceeding filed in Florida on May 24. The company is seeking approval for an approximate $24.1 million permanent increase.

The Florida PSC has recently approved interim rates of approximately $7.7 million on an annualized basis, effective for all meter readings in September of this year. The interim rates are subject to refund pending the final outcome of this rate case proceeding.

Florida Public Utilities' electric business recently filed a storm protection plan and storm protection plan cost recovery mechanisms with the PSC. These allow for the recovery of investments to further protect our electric system in the event of a storm and prevent loss of service.

Hearings for the storm protection plan are in progress now, and hearings for the storm protection plan cost recovery are scheduled for November, with rates to go into effect starting in January 2023. Additionally, Florida Public Utilities continues to make significant progress with the Gas Reliability Infrastructure Program that began in 2012.

Through the end of the first quarter, we have invested nearly $200 million to upgrade approximately 351 miles of distribution mains, increasing the safety and reliability of our systems for many Floridians. In Elkton, Maryland, we continue to invest in the systems' integrity by upgrading Aldyl-A pipeline.

The program went into service towards the end of 2021 and going forward. We expect the project will generate $200,000 and $400,000 in adjusted gross margin in 2022 and 2023, respectively.

Finally, our Eastern Shore Natural Gas interstate transmission unit has authority to recover capital costs associated with mandated highway and railroad relocation projects, along with PHMSA-required safety upgrades. We expect that this program will generate $2 million in additional adjusted gross margin in 2022 and $1.9 million in 2023.

Turning to Slide 18, I'd like to describe just a few advancements we have made to enhance our already strong company culture at Chesapeake. We recently established a new employee resource group called HOPE, which stands for Heartfelt, Open, Prayer, and Encouraged. This ERG was established to support our employees' spirituality.

Their mission is to provide prayer, positive affirmations, and knowledge of our employees' personal experiences. HOPE and other ERGs are already making significant strides in driving awareness of their missions and making a meaningful impact within the company and the communities we serve.

We are very grateful for all our colleagues who participate in these important employee resource groups and help carry our culture, both inside and outside of our organization. I'd also like to highlight 2 recent awards we have received. First, our corporate governance team, led by Stacie Roberts, was awarded best corporate governance in the U.S.

for 2022 by World News Media, which will be published in their World Finance magazine. This award recognizes our continuing and unwavering commitment to ethical business practices and the great work of our team and those across the company. Congratulations to all.

Additionally, our Aspire Energy and Eastern Shore Natural Gas businesses were recently recognized by the American Gas Association as top safety performers. This outstanding recognition highlights our unrelenting focus on the safety of our employees and those in the communities we serve. A great job by both of those teams.

As Jeff mentioned earlier, we are very pleased to welcome Stephanie Gary and Sheree Petron to our Board of Directors. Both are thoughtful, experienced, and accomplished leaders who bring valuable perspectives and insights as we navigate the opportunities on the road ahead.

Stephanie is currently Vice President of Finance of Title Health, a Maryland-based health system of hospitals and specialty offices headquartered on Eastern Shore. In her role, Stephanie leads the organization's finance functions, including strategic financial planning and analysis, forecasting, and decision support.

Prior to joining Title Health, Stephanie held various financial management roles at hospital networks across the country. Sheree most recently served as Executive Vice President and Head of Dynegy's retail electricity business. Prior to Dynegy, Sheree served as Vice President of Excellence, Commercial and Retail divisions.

Sheree has also held leadership positions at Trigen Energy and Westinghouse. We extend a very warm welcome to both Stephanie and Sheree, and we look forward to continuing to work with our Board and those across our company on driving sustainable growth. With that, it was great to be with you all today.

I will now turn the call back to Jeff for some closing comments.

Jeff?.

Thanks, Jim. Turning now to Slide 19, as I mentioned in my opening comments, as a result of ongoing short-term supply chain constraints and regulatory delays, we've adjusted our capital expenditures expectations in 2022 to $140 million to $175 million, a temporary shift from our original guidance range of $175 million to $200 million.

To reiterate again, this adjustment does not reflect a negative outlook on the actual projects. Rather, it highlights the challenges that we and many companies are experiencing with securing raw materials, permitting, regulatory approval timing, and the logistics to complete the work, most of which were unforeseen at the beginning of the year.

We look forward to bringing these projects to completion in 2023. We're also projecting that the mix of capital expenditures may shift slightly as some projects accelerate in timing, while others are delayed for the aforementioned reasons.

As an example, our Southern Expansion project was expected to begin construction in the second or third quarter of 2022. The FERC approval has been delayed to accommodate an expanded public comment and review period. We expect to conclude the regulatory proceedings later this year and proceed with construction of the Eastern Shore compressor addition.

The project provides additional pipeline capacity critical to meeting the growing demand for gas service on our Delmarva distribution systems, and we're targeting the project will be fully in service late in 2023.

We've been pleased with some of the recent activities we've been engaged in on the renewable front and now feel comfortable enough with a few projects to add them to our expected mix of investments this year, so you'll likely see our capital deployment and regulated transmission projects come in lower for the year, with our investments in other unregulated projects somewhat higher than what we originally expected.

The net result is that we have a strong mix of opportunities that will continue to drive the long-term sustainability of the company. And that's why we continue to reaffirm our long-term earnings and capital expenditure guidance. In 2025, we expect to deliver diluted earnings per share in the range of $6.05 to $6.25.

This represents a compounded annual growth rate of 9.1% to 9.5% over the 5-year period. And despite the lowered expectations for capital expenditures in 2022, we maintain our expectations for $750 million to $1 billion in capital expenditures during the same period.

To conclude, I just finished to a board meeting today where we discuss the current market environment and our strategic growth plan. We discussed the many opportunities we've seen within our current platforms for growth. We see no shortage of opportunities to pursue, and for us, it becomes frankly a matter of prioritizing some of these opportunities.

We're well positioned to serve our communities' increasing demand for natural gas, and at the same time, we recognize our responsibility to do our part to support the transition to a cleaner and more sustainable energy future.

We'll remain focused to deliver on both of these important objectives while continuing our track record of top quartile financial performance. While there certainly are challenges on the horizon, we continue to see a bright future for Chesapeake Utilities, and we appreciate your support. With that, Alex, why don't we open it up for questions..

Thanks, Jeff. Kevin, please open the line for questions..

First question is from Tate Sullivan with Maxim Group..

First, for the propane distribution business, you mentioned in some of your remarks the higher margins in that business.

Can you go in the background on -- is that -- what are the service fees? And is it related partly to your lower-priced inventory as well?.

It's really -- it's a combination of several things. It's an expansion of our fees, certainly, across some of the newer customers that have joined us associated with the Diversified acquisition. It also becomes -- it's also a part of, as you mentioned, our ability to have a diversified supply portfolio.

And so, at times, based on what the market does, that may translate for us into additional margins, just given the fact that we have that diversified supply portfolio. And then lastly, some of the programs, we just continue to market to our existing customer base some of those programs.

And so, as we get more customers on board, there's some incremental margins as they join those new programs. So it's several different things, not just one thing..

What are the new programs, just new distribution agreements for customers? What are those, please?.

It's some of the programs that we make available to our customers. So as you have new customers sign up, they may sign up for those programs that we have available, and so there's additional fees and margins that we earn on some of those.

And then again, as I mentioned, as we roll some of those programs and services out as a result of acquisitions, we get incremental margin from that as well, in addition to margin from the supply portfolio..

Tate, some of those are just the -- what you would describe as hedging programs. They allow customers to lock in pricing, and there are opportunities for us along the way for those types of services..

Great. And then big picture, and you pointed out your above-average retail natural gas customer growth, which remains impressive.

But are you seeing slower conversions from community gas systems to natural gas, maybe because of where natural gas prices have gone or has that not impacted your organic growth rates relative in propane versus natural gas?.

There is -- I don't think we've seen much of an impact at this point relative to that issue.

We find those conversions are challenging more from just getting homeowners association agreements to come in and make the conversions and ensuring that we have the customers understanding what the responsibilities are relative to actually changing appliances out and making the modifications to those appliances.

It's not a -- it's a semi-intrusive process. I mean, we have to go into homes. We have to adjust appliances or convert them in some cases or change them out in some cases, and so there's all of that to be considered.

There's a seasonality issue here, where many communities are not interested in you being in their neighborhoods doing that kind of work certain times of the year. So it's all of those things that kind of impact the timing and scheduling of those conversions..

And then just real -- another one for me, please, is your auto gas or LPG business, is that not a project-based business that you would include in your major projects in the initiatives table? Or maybe I'm mistaken.

Is that in your combined line item of CNG, RNG, LNG transportation, please?.

Thanks, Tate. It is not in the major projects table because it is extending a service offering to a customer or a set of customers. And those can be one customer, a single commercial enterprise; it can be a fleet, and so we don't typically aggregate that together. It is something we can take a look at.

But to date, because it varies so much, again, the fleet size can be so very different, we've not historically included it there..

The next question is from Brian Russo with Sidoti..

Just on the CapEx reduction for the year, acknowledging our understanding that is timing related, could you break that down between regulated and nonregulated?.

The most significant shifts that you're seeing relate to, Brian, is the pipeline.

So the largest decline, if you were to go back first quarter to where we're currently providing guidance, you would see a decline, a larger decline in the transmission side, and that has to do with some of the things that Jeff mentioned previously with the Southern Expansion.

And there's some slight shift on a couple of other projects that are pipeline projects. There's also some projects that we're working on that are likely -- and have not been announced but are likely to be things that impact future periods.

And just, as we prepare our forecast at the beginning of the year, some of those can come in later than what we anticipated. You might also see a little bit on the distribution side, because what can happen as a result of the transmission side is that we'll have kind of a spiraling impact, in some cases, on the distribution side.

And then as Jeff mentioned, though, kind of offsetting that, if you look on the other unregulated line, what you will see is actually an increase there, with the expectations with where certain projects are at that there will likely be some investments that come in on that line that we had not initially forecasted or projected at the beginning of the year.

So again, some shifts. The fortunate thing is that our upper end is at the lower end of the old guidance. And what we're trying to do, Brian, is just take a look at where things are and what we're seeing in the market, and trying to make sure that we factor in what truly might happen, just given where the projects are at right now in the queue..

Okay. Got it. So the adjustments in CapEx are temporary.

Is that reflected in the adjusted gross margin chart on Slide 14?.

They are. We have factored those in, so you will see several projects. If you look from the first quarter to the second quarter queue, you will see some shifts. And again, in the Southern Expansion, there's a couple of others where there is some slight shifts.

At the same time, you'll see the addition of things like Twin Lakes; you'll see the addition of the Florida rate proceeding, although with a little bit more information hopefully coming in the next quarter regarding interim rates, et cetera. That will be forthcoming. So there's some pullback in the project table to reflect those project delays.

There's also no adjustment in the major project table, because some of those new projects that are coming in the queue will not have a real big impact this year, right? It takes a while for them to be constructed, so you'll see them as they get announced. You'll see us add them in 2023 and then 2024, as we introduce.

So again, just a shift in timing, starting with the project, the CapEx, but also being reflected in that major project table..

Okay. Got it. And obviously, customer growth is a differentiating characteristic of both the Delmarva and Florida service territories.

In Delmarva -- and I appreciate the commentary earlier about the homebuilders, et cetera -- is there any sort of way to break down what is that 5-plus percent year-over-year customer growth, what is conversions versus new connections? Trying to get sensitivity to -- yes, to homebuilding, I guess..

Sure. I would say we can certainly try to think about that for the third quarter, but significantly greater than 50% comes from new home construction. Brian, it's not a large part coming from conversions.

As Jeff mentioned, we're down that path, and that is occurring, but there is a lot of organic growth and new developments and developments that are still building out. So we'll try to provide a little bit more on that going forward.

What you will see is if it is a significant amount, we actually within our disclosures will denote conversions that are declining on the propane side, and so you'll see us recognizing inorganic growth, and there will be an offset of a decline in propane.

And so, because there's not a substantial amount of that in the quarter, rest assured a larger portion is coming from new growth..

Okay. Great. And then on..

I was going to say, obviously, the Florida numbers, it goes without saying, don't reflect any of those conversions. Those are all new homes and additions..

Got it.

And just to be clear on the Florida base rate case, the $7.7 million of interim rates that you'll start collecting in September, just from a accounting perspective, I want to just be clear, will you book the earnings while the final rate is pending? I know there was some unique accounting with your -- with the storm costs from a few years ago, and I just want to understand that better from an income statement perspective..

Sure. And that's a great question, Brian. That is something that we will certainly be evaluating, and we do each time.

Historically, when we've done those assessments, if we could not ascertain there was a high probability of the permanent rates at least being or exceeding what the interim rates were, we took the position that we were going to fully reserve any interim rates that were put into effect.

As we come into the third quarter and we work with our regulatory team under Jim and Cheryl's leadership, we'll make an assessment. If we deem that we have a high probability, then you may likely see some part of interim rates in our third quarter results.

If, again, we should find that we don't see that high probability, then we would handle it the same way we have historically. So we're making that assessment. We're working with the regulatory team, and I would say, stay tuned as we get here further into the third quarter..

Okay. And one last question.

Does a lot of these -- the rider revenues in terms of the Florida grip and the Elkton , does that capture a lot of the raw material and other inflationary pressures that you see? And if not, does the macro environment at all change your regulatory strategy going forward?.

Well, I think, Brian, we are certainly, again, working with the regulatory team, where as you know, we're in the middle of a rate case already.

And certainly, as we could foresee what the Fed was planning from a rate hike, we took that into consideration and worked with the regulatory team in our test-year projections to incorporate as many of those types of inflationary pressures as we could, whether it was Fed hikes, whether it was other costs that we saw.

And then, what I would say is that the regulatory team is very proactive, and so to the extent that we feel like there are opportunities for us to consider mechanisms for some of these inflationary pressures, we'll certainly look at trying to approach that from a regulatory standpoint. But certainly, we are seeing things as it relates to interest.

We're hearing things as it relates to insurance and other kind of employee-related costs that most employers are being challenged right now in terms of wage increases, et cetera. So we're looking at opportunities, and we'll continue to monitor that relative to our performance. Jeff, I don't know if there's anything..

Yes, Brian, you may recall the GRIP program, the pipeline replacement program in Florida is kind of self-adjusting. And so, as those costs change, we have the opportunity to recover them through the cost recovery mechanism that's been in place for a number of years now. It doesn't require an additional rate filing..

No further questions from the phones. I'll turn it back to Jeff for closing remarks..

Well, we appreciate your time today, and we certainly look forward to speaking with you soon to continue discussing Chesapeake's progress and growth. Thank you very much, and goodbye..

And that does conclude our call for today. We thank everyone for participating, and you can now disconnect..